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Arthur F. Burns Papers
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The original documents are located in Box B1, folder "American Bankers Association (1)"
of the Arthur F. Burns Papers at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald R. Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
MONETARY CONFERENCE
THE AMERICAN BANKERS ASSOCIATION 90 PARK AVENUE, NEW YORK, N.Y. 10016
December 22, 1969
The Honorable Arthur Burns
Chairman - Designate
Board of Governors of the
Federal Reserve System
Washington, D.C. 20551
Dear Doctor Burns:
We are delighted that your schedule will permit your
accepting our invitation to attend and participate on the program
of the 1970 American Bankers Association's Monetary Conference to
be held at The Homestead, Hot Springs, Virginia, on May 17-20, 1970.
The Program Committee has designed what we think to be an
outstanding program and will look forward to your remarks at the noon
luncheon on Monday, May 18. The morning session on that day is entitled
"The Battle Against Inflation" and will have as one of the speakers
Doctor Paul McCracken.
During the afternoon following the luncheon and your remarks,
a session entitled "International Liquidity and the Adjustment Mechanism"
will take place.
The conferees consist of the Chief Executive Officers of the
largest 50 banks in the United States, their counterparts from approximately
30 large European banks, central bankers, and high government officials
from major industrial nations.
If there are any questions that you might have, please contact
Roy Terwilliger, The American Bankers Association, 90 Park Avenue, New York,
New York 10016. Full details concerning the entire program will be forth-
coming as the date approaches.
Sincerely yours,
William A. moon
charter commercial fane plane
William H. Moore
Chairman, Conference Committee
lemensive
FORD & LIBRARY 07V830
27
FROM:
f
THE AMERICAN BANKERS ASSOCIATION
Information Office
815 Connecticut Ave., N.W.
Washington, D.C. 20006 '69
STATEMENT OF POLICY ON H.R. 6778
(Adopted by the Federal Legislative Committee of
The American Bankers Association, February 5, 1970.)
H.R. 6778 was passed by the House of Representatives on November
5, 1969, purportedly to extend Federal regulation of bank holding
companies to the approximately 900 companies which own only one bank.
In actual fact, however, the bill went considerably further and attempted
to define the business of banking. This was done by setting forth a list
of activities prohibited for bank holding companies and their subsidiary
banks, combined with strong statements of legislative intent to the
effect that the prohibition on these activities should be applicable to
all banks, whether or not members of holding companies.
There are, of course, certain activities which are not properly
related to banking. Banks and bank holding companies should engage only
in those activities which are financial in nature or are functionally
related to banking or finance. However, the Association is strongly
opposed to any measure which would place rigid limits on the banking
business. Moreover, we are convinced that the rapidly changing economic
environment within which banks operate makes it unrealistic and even
dangerous to attempt to define such limits by statute.
It requires only a few seconds' thought to realize what would
have happened had government attempted to define banking in terms
of, GERAL FORD January
- 2 -
say, the world of 1860. Had this been done, banks would not be in the
deposit business today but would still be issuing circulating notes, for
hand-to-hand currency, and the public would have been deprived of the ease
and convenience of checking account transactions. If such an attempt had
been made in the 1920's, a wide variety of banking activities would not
be available to the public from banks, such as consumer installment loans
or long-term monthly-payment mortgage loans. Even as late as 1960, had
there been an attempt to define the banking business in terms of what was
then being generally offered to the public, banks undoubtedly would be
prevented from offering direct lease financing or issuing multiple-
maturity certificates of deposit.
What is functionally or properly related to the business of banking
can only be determined in the light of existing circumstances and in
reasonable anticipation of future demands on the industry. It cannot
and should not be a matter fixed by statute in some kind of "laundry
list" of permitted or prohibited activities. Responsibility for deter-
mining the scope of bank operations has been placed in the hands of those
bank regulatory agencies charged with safeguarding the public interest.
This has been true of Federal and State legislation for 150 years. To
abandon this principle would be a serious mistake. Accordingly, The
American Bankers Association opposes the adoption of H.R. 6778.
The American Bankers Association at this time endorses five basic
principles which should be determinative in selecting a reasonable
approach to the potentially destructive legislation contemplated by
GERALD FORD LIBRARDY
H.R. 6778.
1. We endorse the principle that serious and thoughtful study of
the nation's financial system by an appropriate commission is an essential
prerequisite to any legislation of the type contemplated by H.R. 6778.
- 3 -
Pending the completion of such a study we believe that the responsible
Federal agencies should prevent the expansion of one-bank holding companies
into inappropriate activities.
We believe that such a study should recognize that it is in the
public interest to have access to broad competition in financial and
functionally related services. It should also recognize the demands
which will be made upon the banking system in the future and the extent
to which banks will require broader access to funds to meet these demands.
Change is proceeding with bewildering rapidity in banking and in
other financial industries. The organization of bank holding companies
is only a reflection of the fundamental forces affecting all financial
institutions, both bank and nonbank. Parallel developments are occurring
in other sectors of the economy, as pressures for diversification and
additional services increase in intensity.
A decade has passed since the last major study of the financial
system, by the Commission on Money and Credit. A new and penetrating
look at the structure, functions, and supervision of financial institu-
tions is long overdue. No better evidence of the complexity of the
problem or of the need for study is found than in the tortuous history
of H.R. 6778, which included long consideration and rejection of numerous
proposals and, ultimately, an attempt to write new legislation on the
floor of the House itself.
2. We endorse the principle that banks and bank holding companies
should be permitted to engage in any activities which are financial in
nature, or are functionally related to banking or finance, and that they
should be limited to such activities.
GERALD ADENCIT ? FORD
We believe that it would be a mistake now, or at any time, to define
the term "banking" or the terms "functionally related to banking or
finance" or "financial in nature" in precise statutory language. We
- 4 -
believe that the Federal regulatory agencies should be authorized to
interpret these terms from time to time in the light of changing conditions
and circumstances.
3. We endorse the principle that whatever regulation is adopted,
temporarily or permanently, for bank holding companies, should apply
equally to all such holding companies whether one-bank or multi-bank.
There are identifiable differences between multi-bank and one-bank
holding companies, some of which go beyond the matter of expansion through
the acquisition of banks. Nevertheless, we believe that here as in other
situations the economy is better served when all competitors -- both
bank and nonbank -- are subject to the same ground rules.
4. We endorse the principle that holding company legislation
whether multi-bank or one-bank should provide only for regulation of
the domestic activities of holding companies.
It has been the practice and policy of the Congress and the States
for many years to regulate banks under the national banking laws and the
state banking laws. It would be a mistake to provide different regulation
for banks owned by holding companies from that provided for other banks.
It would also be a mistake to restrict foreign activities of American
banks or holding companies in any manner which would interfere with their
ability to compete effectively outside the United States.
5. We endorse the principle that any legislation finally adopted
must make reasonable provisions for activities begun in good faith and
in full accordance with existing law and that unfair retroactivity be
avoided.
FORD & GERALD LIBRARY
Paper No. 5
January 23, 1970
ANALYSIS OF H.R. 6778
Data Processing
Present Law
Multi-bank holding companies. Under section 4 (c) (1) (C) of
the Bank Holding Company Act, registered bank holding companies
may invest in a company that furnishes services to or performs
services for the bank holding company or its banking subsidiaries.
And under section 4 (c) (5) a registered bank holding company may
invest in any company in which a national bank may invest subject
to the same restrictions as a national bank. These provisions
contain ample authority for registered bank holding companies to
maintain data processing subsidiaries.
One bank holding companies: None.
National banks. Under 12 U.S.C. 24 (7) national banks may perform
any services that are incidental to the banking business. In accordance
with this authority, the Comptroller of the Currency has ruled that
incidental to its banking services, a national bank may make available
its data processing equipment or perform data processing services on
such equipment for other banks and bank customers, Comptroller's
Manual for National Banks, paragraph 3500.
-
FORD is LIBRARY GERALD
2.
The Bank Service Corporation Act, 76 Stat. 1132, 12 U.S.C.
1861-1865, permits the establishment of separate corporations
by which small banks may combine their resources to purchase data
processing equipment.
State banks. Some states have statutes specifically authorizing
the performance of data processing services, with greater or lesser
restrictions and limitations, while others simply allow state banks
to perform such services under the incidental powers clause of the
state banking codes.
Proposed Law (H.R. 6778 as adopted by the House of Representatives,
November 5, 1969)
All bank holding companies. As enacted by the House of Repre-
sentatives, H.R. 6778 provides that bank holding companies or sub-
sidiaries thereof cannot engage in the business of providing data
processing services except as an incident to banking services such
as the preparation of payrolls, or to the extent necessary to make
economical use of equipment primarily acquired and used for the bank
holding company or its bank subsidiaries.
Banks. While the foregoing language appears to be specifically
directed at bank holding companies and subsidiaries of bank holding
companies, the sponsors of the amendment indicated during the course
of debates that it should also be applicable to banks. Illustrative
statements are:
FORDO & LIBRARY 03RALO
3.
Representative Patman: I want to make it clear
that when the Congress says that the activities
listed in section 4 (f) of the bank holding company
act, as amended by this bill, are neither necessary,
incidental or related to banking we mean just that.
Therefore, the Comptroller of the Currency, the
Federal Reserve Board, the Federal Deposit Insurance
Corporation and the courts should take into considera-
tion this statement of legislative policy when con-
sidering what is incident to banking under the banking
laws.
Representative Blackburn: I think it is going to
be significant in the eyes of the Federal Reserve
Board and other regulating agencies what action this
committee takes and what this House adopts today with
respect to the overall spectrum of banking regulation.
The Data Processing Industry; Bank Activity
It has been only about 25 years since work was started on the
development of the first electronic digital computer. In a recent
appearance before the Federal Communications Commission, the
Department of Justice estimated that as of the early part of 1968
an estimated 60,000 computers were in use with another 25,000 on
order. The Department estimates shipments of computers will amount
to $15 billion a year by 1975. In addition to more than 80 manu-
facturers of central processing units, the computer industry in
1968 included more than 4,000 companies offering a wide range of
related products and services. In addition, there are around 1,000
producers of computers and related hardware as well as over 2,000
organizations in the data processing services field, doing approxi-
- mately $1 billion worth of business.
GERALD FORD
4.
The data processing industry has no geographic bounds.
The ability to transmit and receive data over telephone lines
means that access to a computer is theoretically limited only
by accessibility of a telephone. Moreover, the development of
microwaves, satellites and laser beams as methods of transmission
has the potential of enhancing accessibility to a computer, although
there are practical difficulties at the present time.
Government regulation is negligible in the data processing
field. The one area which is becoming an increasing concern is that of
data communications. Computer manufacturers and common carriers have
had lengthy discussions concerning the jurisdiction of the Federal
Communications Commission over data communications.
Significantly, one of the few regulated areas in the computer
business is that which involves commercial banks. Whether computer
services are made available directly by a commercial bank or through
a subsidiary or through a holding company, they come within the
jurisdiction of one of the Federal or state banking agencies. Because
of the wide use of computers by banks, examiners have had special
instructions and training in examining a bank's computer system.
The data processing services industry, to which H.R. 6778 primaril
relates, is not well-defined. In general terms it can be described
as including: (1) software, application programming and consulting
FORD LIBRARY
5.
services, (2) computing equipment time rental, (3) data-bank services.
(4) time-sharing services, (5) automated service bureaus (offering
general business bookkeeping and scientific computer services), and
(6) banks.
Only fragmentary information is available on the number of firms
and the volume of business done in the various categories noted above.
A very rough approximation of the dollar volume of business would be
between $1 billion and $1.5 billion. Bank involvement involves
competition with service bureaus and data centers (both independently
owned and subsidiaries of manufacturers and others), companies offer-
ing time-sharing services, as well as those offering rental of
computer equipment time. Banks also compete with computer software,
application programming and automated service consulting firms, and,
of course, with other banks offering data processing services. It is
roughly estimated that banking's share of the data processing service of
industry was approximately $100 million for the year 1968, or about
7 percent.
Bank participation in the data processing field was threshold
and innovative. It was the banking industry that first recognized the
need for improvements in record keeping in order to provide deposit and
related services, priced at a level that would make these services
available to all who had a valid need. Early in the 1950's the banking
FORD & LIBRARY GERALD
6.
industry made major commitments to research programs undertaken
to solve the problem of rapidly rising labor costs resulting from
a dramatic increase in transaction volume.
The development of MICR (magnetic ink character recognition)
by the banking industry was an outstanding example of industry
wide cooperation among competing firms that led to a sound and
practical solution to a difficult problem. Even though the
estimated annual check volume in the United States has increased
from about 7 billion in 1950 to nearly 13 billion in 1960 to a
current level of about 20 billion, there has been no breakdown in
the performance of the check payments system, because the industry
foresaw and made the required commitments to prevent such an
occurrence.
Commercial data processing, an industry which barely existed
15 years ago, owes an important part of its growth to the expanded
use of electronic equipment for the handling of financial transac-
tions - - a use pioneered by the banking industry, and banking continues
to be active and innovative in the data industry. For example, in 1962
the banking industry organized an ambitious standardization program
for security procedures. Another area in which banking has taken a
leadership position is in pioneering an industry wide standards
program for improved personal identification.
GERALD FORD
7.
The position of banking in the data processing services
industry is shown by the variety of automated customer services
offered by an estimated 3,800 banks. Payroll services were first
offered in 1959, and as of 1969 a survey by The American Bankers
Association showed that of all banks offering computer services or
planning to do so within the next six months, 91.6 percent offered
or intended to offer payroll services. Account reconciliation
services were first offered in 1954 and provide registers showing
the status of customers' checks issued, paid and outstanding; 66.8
percent of banks providing computer services now offer account re-
conciliation. Correspondent bank services utilize computers to provide
automated record keeping services for other banks. Forty-one percent
of the banks with computer services provide automated service for
correspondents, a service which began in the late 1950's.
Specialized services are offered for retailers, wholesalers,
physicians and dentists, and public utilities in the preparation
of periodic billings, maintenance of individual customer account
balances, and preparation of trial balances. Automated accounts
receivable services have been sold by banks since 1959, and are
offered by about one-third of the banks offering computer services.
Other automated customer services provided by banks include: sales
analysis, inventory analysis, freight plan, municipal tax billing,
credit union services, and mortgage loan and share savings services
for savings and loan associations and other lending institutions.
Most of these services have been provided since the late 1950's or
early 1960's.
BERALD FORD LIBRARY
8.
Effect of II.R. 6778 on Banking
The limitations on the offering of data processing services
by banks and by bank holding companies in H.R. 6778 could be ex-
tremely serious to the banking industry. In this connection, not
only is the provision relating to data processing services of
significance, but also that which would prohibit the offering by
banks of "auditing or other professional services in the field of
accounting." The two--i.e., data processing and so-called "account-
ing" services--obviously are closely linked.
In view of the wide range of services which have long been
offered by banking to customers, many of which were pioneered by
the banking industry, it is almost inevitable that the language of
H.R. 6778 will give rise to extensive and protracted litigation.
This will be instituted, of course, by competitors who will view
the provisions of the House-passed bill as an opportunity to insulate
themselves from competition. There are no easy answers to such question
as what would constitute "economical use" of equipment; or what is
included in the so-called "accounting" services, or what limits are
contemplated by the language "equipment primarily acquired and used
for the bank holding company or its bank subsidiaries." Thus perhaps
the single greatest danger which H.R. 6778 holds out to banks is the
prospect that the industry's hands will henceforth be tied in a
competitive area where, ironically, it has thus far been a major,
- innovative force.
GERALD FORD CrBRARY
9.
Even without litigation, the vagueness of the language and
the possibility of restrictive interpretations of the provisions
of H.R. 6778 have the potential of forcing banks out of the data
processing services business. The arbitrary customers often want
all of their computer services done at one location. Thus, to
allow banks to provide payroll services but nothing else, would in
effect mean that those utilizing the computer services of banks
would simply take their business elsewhere. Not only would it
be more expensive and more cumbersome to have services for various
functions performed at different locations and by different computer
servicing companies, but also most customers do not want their
business records scattered at various locations. One of the important
elements of the computer business is the integrity of the data pro-
cessor in protecting the confidentiality of the data furnished to it
by the customer. Obviously, banks are highly regarded in this
context.
Other implications of H.R. 6778 should be mentioned. Banks often
rely upon their automated customer services to make it possible for
them to acquire equipment which can be much more efficient for banking
purposes. If banks are henceforth to be limited to the acquisition
of equipment primarily intended for use of the bank, the prospect
of continued improvements and efficiency will be thwarted.
LIBRARY GERALD R. FORD
10.
The ability of many small or medium-sized banks to remain
competitive with so-called "downtown" banks is dependent upon their
offering data processing services to customers. H.R. 6778 would,
in this circumstance, have a distinct anti-competitive effect by
depriving these banks of an important competitive tool.
In the final analysis, by placing limits on bank participation
in the offering of data processing services, H.R. 6778 strikes at
the very heart of the modern-day industry. The consequences for
banking could well be devastating.
Public Policy Issues
There are two public policy issues of major importance which
relate to the data processing provisions of H.R. 6778--technological
progress and competition. Both are of significance to consumers,
whether individual or business. Of lesser significance is the
matter of possible risk to banks.
Technological progress. From discussion earlier in this paper it
should be quite evident that the banking industry has played a key
role in the development and implementation of data processing services
and of the equipment needed to provide them. H.R. 6778 would sharply
curtail banking's role in. the future. Such a step could only have
adverse consequences for the consuming public.
GERALD FORD LIBRARY
11.
Competition. As is the case with other provisions of H.R.
6778 limiting bank services, banking's competitors claim that
by reducing or eliminating the ability of banks to offer data
processing services the threat of "excessive concentration of economic
power" is avoided. In particular such a claim was advanced during
House hearings by a spokesman for the Association of Data Processing
Service Organizations. The issue, of course, is one which requires
consideration.
The structure of the data processing service industry provides
perhaps the best answer to the charge of concentrated economic power.
According to testimony by the ADPSO witness there are approximately
1,600 non-bank firms in the industry, two-thirds of which gross less
than $300,000 annually. A.B.A. survey data show that in 1969, there
were about 3,800 banks offering automated customer services, of which
3,400 had deposits of less than $100 million. It is difficult--indeed
impossible-- to see how the exclusion of these banks - - the large majority
of medium or small size--would contribute to the public's freedom of
choice among the best services at the best prices.
Also significant is the fact that even though banking pioneered
in the offering of data processing services, it has today only
about 7 percent of the total industry business. If banking in fact
could capitalize on its hypothetical "power" one would scarcely expect
it to occupy such a modest position in the industry.
BERALD FORD LIBRARY
12.
It seems evident that the real issue here is simply the
desire of non-bank firms to reduce the present level of competition
by insulating themselves from bank competition. Such attempts are
purely self-serving and never in the public interest.
Risk. Mention should be made of allegations, again by ADPSO,
that there is undue risk to banking in the offering of data processing
services.
Exposure to liability arising from error is part of the day-to-
day life of the banking business. If banks are to use modern technology
in processing checks, loans, and other activities which most people
agree is a necessary and desirable activity-- how can it be said that
logical extensions of this type of data processing materially increase
the potential liability? Indeed, if potential liability is a regular
problem, and the customer's interest is paramount, is not the banking
industry far better equipped to provide such services because it
regularly faces such liability and has set up internal auditing and
system standards appropriate for such liability and because it is a
highly regulated and monitored industry, and because the services being
offered are backed up by a more comprehensive programming, analytical,
and customer relations support group?
Whether bank shareholders are sufficiently aware of the risk being
undertaken by banks by virtue of their offering data processing service:
can only be appropriately evaluated by an examination of shareholder
reports and other shareholder communications. The central point is tha
shareholders should be told that which is important in evaluating the
GERALD FORD
13.
firm and the major activities should obviously have more coverage
than minor ones. The facts are that data processing services
constitute a relatively minor portion of the total activity of
most banks. A review of recent annual reports suggests that these
activities are being adequately covered when viewed in the context
of their importance to the financial health of the reporting bank.
GERALD FORD LIBRARY
MONETARY CONFERENCE
THE AMERICAN BANKERS ASSOCIATION 815 CONNECTICUT AVENUE, N. W., WASHINGTON, D. C. 20006
February 10, 1970
To All Participants in the A.B.A.'s Seventeenth Annual Monetary
Conference, Hot Springs, Virginia, May 17-20, 1970
Mr. William Moore, Chairman of the 1970 Monetary Conference has asked
me to thank you for your acceptance of his letter of invitation and to tell
you how pleased we are that you will be attending.
Plans for the program are almost complete and as soon as all of the
speakers have been finalized a preliminary copy of the program, including
the list of attendees, will be sent to you. In the meantime, we thought
you might like to have the enclosed outline of the program.
Some additional information on the procedures for the Conference is
listed below. Also enclosed is a questionnaire pertaining to some of these
details, which we would appreciate your completing and returning to me at
your earliest convenience. An extra copy is enclosed for your file.
(1) For those of you who may be arriving in Washington on or
before Saturday, May 16, or would like a reservation in Washington
following the Conference, a block of rooms has been set aside at
the Madison Hotel and we will be glad to make a reservation for you.
(2) A luncheon has been scheduled at the Madison Hotel for
Sunday, May 17, beginning at 12:00 o'clock.
(3) Bus transportation has been arranged from Washington to
The Homestead. The buses will leave from the Madison Hotel at
1:00 p.m.
For the return trip, the buses will leave The Homestead
at 3:00 p.m. and should arrive in Washington approximately 8:00 p.m.
(4) Unless your letter of acceptance indicated otherwise, a room
reservation at The Homestead has been made for you from late after-
noon on Sunday, May 17, through 3:00 p.m. on May 20. You should have
already received a confirmation of this reservation directly from The
Homestead. If you plan to arrive before the 17th or leave after the
20th and have not already notified us of this, please let me know as
soon as possible since facilities at The Homestead must be booked
well in advance.
GERALD FORD LIBRARY
MONETARY CONFERENCE
We look forward to your participation in the Seventeenth Monetary
Conference. Please do not hesitate in letting us know of any assistance
we may be able to provide.
Sincerely,
Roy W. Terwilliger
Deputy Manager
Please address reply or inquiry to:
Mr. Roy W. Terwilliger
The American Bankers Association
815 Connecticut Avenue, N.W.
Washington, D.C. 20006
FORD is LIBRARY GERALD
THE AMERICAN BANKERS ASSOCIATION 90 PARK AVENUE, NEW YORK, N.Y. 10016
WILLIS W. ALEXANDER
EXECUTIVE VICE PRESIDENT
February 27, 1970
Dear Dr. Burns:
On Saturday night, April 18, a cocktail and dinner party
will be held during our Spring Meeting, honoring President
and Mrs. Nat S. Rogers, to which are being invited members
of the Administrative Committee, chairmen of A.B.A. com-
mittees, former presidents, former treasurers, official
guests, and senior staff officers. I hope very much that
you will be able to attend. Wives, of course, are invited.
Cocktails will be served in Chesapeake Hall, on the main
floor of The Greenbrier, starting at 7 p.m., and dinner at
8 p.m., also in Chesapeake Hall. Black tie is customary
at this annual function.
Please let me know if you will attend.
Sincerely yours,
Called
Will
3/3/70
cm
The Honorable Arthur F. Burns, Chairman
Board of Governors of the Federal
Requested
Reserve System
Washington, D. C. 20551
FORD i LIBRARY 9ERALD
1/2/21,
folder
american
Burden
GERALD
FORD
LIBRARY asocc.
MA
THE AMERICAN BANKERS ASSOCIATION 90 PARK AVENUE, NEW YORK, N.Y. 10016
NAT S. ROGERS
March 5, 1970
PRESIDENT
FIRST CITY NATIONAL BANK
HOUSTON, TEXAS 77001
The Honorable Arthur F. Burns
Chairman
Board of Governors of the Federal Reserve System
Federal Reserve Building
Washington, D. C. 20551
Dear Dr. Burns:
In response to the recent conversation between you and Willis Alexander,
Executive Vice President of The American Bankers Association, we have
prepared a memorandum of proposals which we believe will increase the flow
of funds into housing. A recently appointed bankers' task force on housing
is continuing to work diligently on this problem and will be able to advance
further ideas as time goes on.
We would be glad to discuss any of these proposals with you at any
time or to furnish additional information if you desire.
Sincerely, nats Rogers
Nat S. Rogers
Enclosure
FORD & LIBRARY 93RA70
THE AMERICAN BANKERS ASSOCIATION 90 PARK AVENUE, NEW YORK, N.Y. 10016
NAT S. ROGERS
PRESIDENT
March 5, 1970
FIRST CITY NATIONAL BANK
HOUSTON, TEXAS 77001
MEMORANDUM
TO:
Arthur F. Burns, Chairman
Board of Governors of the Federal Reserve System
FROM:
The American Bankers Association
SUBJECT: Proposals to increase the flow of funds into housing
The flow of funds into home mortgages has been inadequate to meet
the stated goals in the Housing Acts of 1968 and 1969. We believe private
enterprise and financing, properly motivated, can do the job. The importance
and seriousness of the housing problem might well require extraordinary
measures. To better enable mortgage lenders to meet home financing require-
ments, The American Bankers Association recommends that the following in-
centive proposals be adopted by the Federal Government:
(1) Permit a deduction for tax purposes of a portion of the interest
earnings on low- and moderately priced housing.
(2) Permit member banks to discount mortgages at the regular, non-
penalty discount rate.
(3) Eliminate or reduce reserve requirements of member banks against
savings invested in residential mortgages.
(4) Amend section 24 of the Federal Reserve Act to allow national
banks to invest the greater of 100 percent of time and savings
deposits (now 70 percent of time and savings deposits) or 100
percent of capital and surplus in real estate mortgages.
FORD & GERALD LIBRARY
- 2 -
(5) Amend section 24 of the Federal Reserve Act to permit national
banks to make 90 percent mortgages for terms up to 30 years,
provided further that the instalment payment provision for all
real estate loans be adequate to liquidate the loan within the
maximum permissable legal term and not by the date of maturity.
(6) Create a secondary market for conventional mortgages in the
Federal National Mortgage Association.
All of these would stimulate the flow of bank funds into housing, but
two of the proposals, (1) and (6), would also apply to other lenders.
Proposals (4)-(6) are either self-explanatory or have been the subject
of considerable discussion in the past. The following provides additional
details on proposals (1), (2) and (3).
Exemption From Income Tax of A Portion of
The Interest Income on Residential Mortgages
In keeping with the recent Adminstration proposals on the Tax Reform
Bill, a certain portion of interest earned on residential mortgages might
be made deductible from the tax base. Eligibility for deductions could be
limited to mortgages on homes valued at less than $25,000 -- and a compar-
able amount per unit of multi-family housing -- to stimulate construction
for middle- and lower-income families. However, the Administration's
proposed 5 percent deduction would not be nearly enough to reduce mortgage
rates on middle- and lower-income housing to reasonable levels on a com-
petitive basis with the after-tax return on alternative investments. By
way of illustration, a 6-1/2 percent mortgage rate with an allowable
deduction of 25 percent for tax purposes would be equivalent to a non-
deductible 8-1/8 percent return at a 50 percent marginal rate of tax.
GERALD R. FORD
- 3 -
Competition would quickly and effectively reduce the rates on mortgages
eligible for deduction. In so doing, private enterprise would have a
suitable incentive to demonstrate its ingenuity and capability.
Such a tax incentive is a much more efficient method of increasing
funds available for housing than direct lending by the Government. It
can be shown that at recent costs of Government financing direct lending
would provide only about a third of the housing volume that could be
supported by a 25 percent tax incentive, involving the same amount of
tax dollars. The attached appendix shows the details of this analysis.
Moreover, under the tax incentive method, the rate charged homeowners
would have built-in flexibility to move downward if prevailing rates on
nondeductible mortgages decline, while a subsidized rate on direct Government
lending would remain fixed until changed by legislation or by administrative
determination.
Permit Member Banks to Discount
Mortgages at the Non-Penalty Rate
Any housing mortgage of good quality should be eligible for discount
at the Federal Reserve window without requiring a penalty discount rate.
We recommend that recognition be given to the special purpose and nature of
making mortgages eligible for rediscounting. Although we do not recommend
a specific term, little would be gained for improving the availability of
home financing if the usual period of borrowing at the discount window is
strictly enforced.
The availability of the discount window together with appreciably
longer terms of borrowing would add a significant degree of liquidity to
mortgages which they do not now have, and would thus encourage mortgage
GERALD FORD LIBRARY
- 4 -
holdings by bank lenders. We recommend further that interim financing
of construction also be included in the list of eligible paper.
Reduced Reserve Requirements Against
Savings Invested in Residential Mortgages
Motivation might also take the form of reducing reserve requirements
of member banks against savings invested in residential mortgages. This
could easily unfreeze a substantial sum for home mortgage use. For
example, a reduction in reserve requirements against time deposits equal to
1 percent of the nearly $35 billion in residential mortgages held by member
banks in December, 1969 would free $350 million for further lending, plus
the additional amounts arising out of the multiplier effects of the frac-
tional reserve system. We recognize that a proposal such as this, particu-
lar the extent to which the multiplier effects will be permitted, must be
consistent with overall monetary policy objectives.
The addition of such housing related credit as construction loans and
loans on mobile homes to the base eligible for reserve requirement reductions
would add measurably to the amount available for new home financing. More-
over, many State statutes tie the reserve requirements for non-member banks
to those of the Federal Reserve.
FORD is GERALD LIBRARY
APPENDIX
Analysis of Net Cost to Government of Direct Lending and the
Amount of Privately Financed Housing Such Cost Would Support
(Assuming 25% of Interest Earned is Deducted from Tax Base)
There is a proposal before the Congress, H.R. 13694, which calls for
Federal Government appropriations of $2.0 billion a year for 5 years (a total
of $10 billion), to finance mortgages on housing for medium-income families.
The money would be used to finance 61/2 percent mortgages of $24,000 or less,
on homes bought by families with annual incomes not greater than $12,000.
After 5 years, the $10 billion appropriated would become a revolving fund for
continued lending out of interest and principal repayments.
As an alternative it is suggested that private lenders be allowed ao
deduction for tax purposes of 25 percent from interest earnings on similar
qualifying housing. The question is how much privately financed housing
could be supported by the cost of the direct subsidy program under H.R. 13694,
if instead the same cost is absorbed by the Government in diminished tax col-
lections.
The $10 billion loaned by the Government would be a capital investment
representing the acquisition of the mortgages as assets. Although treated
as a lending expenditure under the budget concept, its real nature is a
purchase of assets. It is true that a lending expenditure of the Government
requires tax dollars or borrowing. But to compare that expenditure with an
annual tax cost, it is necessary to translate it into a series of yearly
payments.
FORDO is LIBRARY GERALD
In that translation the big cost is, of course, the interest rate on
Government borrowings. In addition there are loss expenses as a result of
defaults and the cost of administering the program. Offsetting these costs
is the 61/2 percent return on the mortgages under H.R. 13694. The net cost --
depending on the Government's borrowing cost -- is shown on the following table:
- 2 -
Cost to Government of Maintaining $10 Billion in Home Mortgages at 61/2%
Average Government Borrowing Rate
7%
8%
(million of dollars)
Annual gross cost of:
Gov't borrowing
$700
$800
Administration (3/8% assumed)
38
38
Losses (1/2% assumed)
50
50
Total
$788
$888
Annual income on 61/2% loans
650
650
Annual net cost
$138
$238
Instead of these net costseeach year, the same amounts in tax losses
could be incurred to support the private financing of eligible mortgages by
allowing a 25 percent deduction from the tax base. At a 50 percent marginal
rate of tax and a 61/2 percent rates of return on these mortgages the totals
that could be supported are shown below:
Amount of Privately Financed Mortgages Supported by Tax Incentives
Equal to the Net Cost of Public Financing 1/
Average Government Borrowing Rate
7%
8%
(millions of dollars)
Total privately financed
mortgages
$16,922
$29,223
Gross annual income at 61/2%
1,100
1,900
25% deduction from income
275
475
Tax loss on deduction (50% tax rate)
138
238
FORD LIBRARY & GERALD
Total housing supported,
assuming loan to price
ratio of 90%
18,800
32,470
1/ Assuming 25% allowable deduction for tax purposes from 61/2 percent interest
on mortgages outstanding.
- 3 -
A further advantage of encouraging private financing through tax
incentives is that if prevailing rates on nonqualifying mortgages decline,
the rates charged on qualifying mortgages would have flexibility to decline
also. This would mean more mortgages that could be supported by the same
amount of net cost to the Government. For example, instead of $16.9 billion
of mortgages based on $138 million in tax loss at a 61/2 percent mortgage rate,
the amount of mortgages at 6 percent would be $18.3 billion, equivalent to
$20.4 billion of housing at a loan to price ratio of 90 percent.
GERALD FORD
CHAIRMAN BURNS
GERAHO FUND LIBRARY
For Information Only
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date April 6, 1970.
To
Board of Governors
Subject:
ABA research paper
From
Office of the Secretary
Attached is a copy of a paper prepared by the ABA's
Department of Economic Research concerning the Monetary Policy
Implications of Increasing the Involvement of Non-Bank Inter-
mediaries in the Payments System. This may be of interest in
view of the several Board discussions of the subject during the
past few months. Copies of the paper were received recently
by Governor Mitchell's office.
FORD is LIBRARY 938670
Monetary Policy Implications of
Increasing the Involvement of
Non-Bank Intermediaries
In the Payments System
Department of Economic Research
American Bankers Association
February 1970
FORD & LIBRARY GERALD
Table of Contents
Introduction
1
Summary of Study
1
Nature of Proposals
3
Significance
7
Impact of Introduction
9
Monetary Powers of Intermediaries
10
The Stability of Claims on Financial Intermediaries
and their Relation to Money
16
Reserve Requirements
21
Conclusions
27
FREE & LIBRARY 07V839
Introduction
In at least four jurisdictions legislators and banking supervisory
authorities are being asked to approve a radical proposal in American
financing --- that of allowing financial intermediaries other than commer-
cial banks to extend their functions to include those of making payments
transactions, an area traditionally reserved to commercial banks. In three
states mutual savings banks are attempting to obtain powers to extend
checking account services to customers. In addition, a proposal has been
made to allow Federal savings and loan associations to provide bill-paying
services for customers.
The issue this paper addresses itself to involves the implications
for monetary policy of such moves. Three aspects are apparent in the
problem of how monetary policy would be affected if financial intormediaries
had the power to furnish payment transactions services to their customers.
Impact of the introduction of checking accounts or
easy transfer of payments at many new intermediaries.
Responsiveness to monetary control of that part of
the money supply furnished by non-bank intermediaries.
Effectiveness of measures such as reserve require-
ments in establishing monetary control over interme-
diaries.
Because there has been almost no experience with the problem in the United
States and foreign experience is not directly relevant, a large part of the
argument must be based on logical analysis. Nevertheless, there are a
number of faets at crucial points in the analysis which have bearing.
FORDO is LIBRARY 077870
Summary of Study
Proposed additions of powers to permit immediate payments by or on
behalf of depositors of mutual savings banks and savings and loan associations
raise questions of whether the degree of monetary control exercised by
the Federal Reserve System may be weakened if the measures are adopted.
In the case of mutual savings banks, a new form of demand deposits outside
the commercial banking sector would be created by the proposals, in effect
producing an additional number of non-member banks. In the case of
savings and loan associations, the addition of a bill paying service through
"non-negotiable transfers" could result in an increase in the turnover of
funds held in savings shares. In both cases the distinction between demand
and time or savings deposits would be blurred if the new powers are granted.
This study first examines the likely impact of the initial intro-
duction of the proposed powers and concludes that the immediate reaction
may be an increase in the money supply or an increase in its velocity of
unknown degree which can only imperfectly be offset by the usual measures
available to the central bank. The measures available to monetary authori-
ties will work more severely on commercial banks than on the intermediaries
causing the problem. The problem is not confined to control of monetary
variables at the introduction of the proposed powers but more importantly
concerns the continuing control any central bank requires over money and
credit creation. The study goes on to review the current place of inter-
mediaries in monetary thought, noting that even with only their present
powers, a major school of thought believes that non-bank intermediaries are
not neutral in a monetary sense. After citing a number of investigations of
the similarity of behavior of intermediary claims and conventional defini-
tions of the money supply, the study proceeds to test, using recent data,
whether the correlation of money and economic activity is improved as deposits
GERALA FORD LIBRARY
of mutual savings banks and savings and loan shares are included in the
definition of money. This is found to be the case. Further confirmation
of the likelyhood of a problem to monetary control arising as a result of
the proposed additions of powers to intermediaries is indicated by reference
to the recent accelerated growth of deposits at non-member banks, since
the effect of the proposals would be to create, in effect, an addition to
this class of financial institution.
The study then examines the allied problem of monetary control over
non-bank intermediaries through reserve requirements. While existing
liquidity requirements on intermediaries are sometimes equated with conven-
tional bank reserve requirements, it is pointed out they do not perform a
monetary control function. Under the proposals the first steps would be
taken to provide intermediaries with multiple credit expansion ability, a
power not previously held by them. This directly affects monetary control
which depends on a direct link between the volume of bank reserves and the
volume of claims serving as means of payment.
The traditional argument that Federal Reserve control is sufficient even
if directly exercised only on a limited base of Federal Reserve member banks
is refuted by reference to the recent behavior of non-member banks, by
expressed Federal Reserve concern over the problem and by logic. The study
concludes that monetary control would be made increasingly difficult if
non-bank financial intermediaries are permitted to provide a means of
payment as is the intent of the proposals.
Nature of the Proposals
The Housing and Urban Development Act of 1968 amended the Home Owners
GERALD FORD FIBRABY
"4"
Loan Act of 1933 to provide that Federal savings and loan associations
may "provide for withdrawal or transfer of savings accounts upon non-
transferable order or authorization". Approximately a year later, August
13, 1969, the Federal Home Loan Bank Board published proposed amendments
to regulations to authorize such instruments. Both the Housing Act and
the HLBB provisions contain wording to the effect that savings accounts
"shall not be subject to check or to withdrawal or transfer on negotiable
or transferable order or authorization to the association". The enabling
regulation as shown in the Federal Register contains the following principal
specifications:
Payments may be made on non-transferable order
periodically or otherwise.
Orders for payments for periodic obligations may
FORD
be honored without specification as to the amount
upon specification of the nature of the obligation.
GERALD
LIBRARY
Order for such payment may be treated as a with-
drawal request or a transfer to a third party's
savings account.
The language of the HLBB amendment specifically mentions utility bills as
a type of obligation that could be handled by non-negotiable transfer but
it does not exclude payments that could be authorized irregularly and at
will by the savings account holder. Thus, at least potentially, the effect
of the HLBB proposal, if followed by state chartering authorities, would be
to convert an unknown part of the $130 billion in savings held at savings
and loan associations into a form close to commercial bank demand deposits
/
1/ A bill (H.R.29) permitting Federal savings and loan associations to
accept demand deposits was introduced early in 1969 by Representative
Wright Patman. This bill provided for 100 percent reserves against
such deposits to be held by the association with the Federal Reserve Bank.
-5-
During 1969 a bill to authorize savings banks in the State of
Connecticut to extend checking account services to depositors was defeated
but the question is to be reconsidered after receipt of recommendations of
a study commission to be made on or before December 1970. A similar
proposal has been brought before the New York Legislature at various times.
One savings bank in Delaware has requested a change in its charter to
permit such a move. The Connecticut bill indicated that demand deposits
held by mutual savings banks would be subject to the same reserve require-
ments as non-member banks. Together, Connecticut and New York account for
almost $40 billion of the $55 billion mutual savings bank deposits.
Citing the desirability of diversification of powers to increase
customer convenience, an inter-industry study group of savings and loan
associations and mutual savings banks recently released a study wherein it
was suggested that the public interest did not require monopolization of
checking accounts by the commercial banking industry. While the author
questioned whether the thrift industry should not take the leap directly
into automated payments system without becoming involved in checks, he
concluded that the uncertainties were such that it would be better to press
for limited checking account privileges. It may be significant that in a
list of 13 specific measures that mutual savings banks and savings and loan
associations could take to improve their position according to the author,
Leo Grebler, The Future of Thrift Institutions, A Study of Diversifica-
tion Versus Specialization, Joint Savings and Loan and Mutual Savings
Bank Exchange Groups, Danville, Illinois; 1969.
GERALD FORD LIBRARY
obtaining authority to extend checking account privileges to customers
was ranked as number three, being exceeded in immediate importance by
authority for consumer lending and steps to increase longer-term and fixed
maturity liability instruments. In an industry beset with problems the
recommendation of this self-study investigation by a prominent author
should not be brushed off.
Of perhaps greater potential threat is the recommendation for limited
checking account privileges by the savings and loan associations made by
Professor Irwin Friend in the summary and recommendations volume of the
major study prepared for the Federal Home. Loan Bank Board at the request
of the Administration and the Congress. Since the study comes fairly
close to the formal status of a White House or Congressional commission
its recommendations probably have more than average weight. Unfortunately,
up to this time only the summary and recommendations are available and
analysis of the case for checking accounts awaits publication of the support-
ing studies.
For purposes of this study we regard as similar cases both the
proposals to allow mutual savings banks to extend checking account
privileges to customers and the proposal. to allow Federal savings and loan
associations to provide bill paying services for customers. Both are
excursions by non-bank institutions into the payments system, heretofore
a field essentially confined to commercial banks. The effect of both can
be regarded as (1) increasing the volume of demand deposits, (2) altering
the division between demand deposits and savings or (3) increasing the
velocity of savings. All the proposals therefore raise questions of the
GERATO FORD LIBRARY
effectiveness of monetary control and can be regarded as the same for
purposes of this paper.
Enough has been said above to point out that the present commercial
banking industry monopoly in providing means of payment is under serious
attack. The expressed rationale for extending such privileges to non-
bank intermediaries so far as we know rests on only one point, that the
long-term growth of such institutions depends on being able to offer a
wider range of services than now available since even the present differ-
ential interest rate on passbook savings accounts in favor of the non-banks
is said to be insufficient, as compared to customer convenience, as a
force to attract funds.
Significance
As Table I indicates, the volume of mutual savings bank deposits and
savings and loan shares in the U.S. is approximately equal to the volume
Table I
Comparisons of Deposits (and savings capital) of
Financial Institutions
December 31, 1968
Millions
Commercial Banks
Demand
204,207
Time
193,068
Mutual Savings Banks
68,871
Savings and Loan Associations
129,722
Source: Annual Report of the F.D.I.C., Combined
Financial Statement, FHLBB
of demand deposits at commercial banks. While no one contends that the
full amount would be "monetized" by conversion to demand deposits, the effect
GERALD LIBRARY
of even the limited privilege would be to increase the ease with which
these assets can become "money" and therefore would be of importance for
monetary control as will be seen.
An additional comparison is perhaps necessary to put the specific
proposals in perspective. As will be noticed in Table II, mutual savings
banks already show minor amounts of demand deposits although the
largest part of this is in escrow accounts and little is in true check-
ing accounts. Only New Jersey, Delaware and Indiana allow mutual savings
banks to freely offer checking accounts although a few other states includ-
ing Connecticut allow limited checking account services under old charters.
Table II
Deposits (and savings capital) of Financial Institutions
in Selected States - December 31, 1968
(Millions of Dollars)
Connecticut
New York
Commercial Banks (Insured)
Demand
2,748
51,640
Time
2,057
30,408
Mutual Savings Banks (Insured)
Demand
37
299
Time
4,483
38,009
Savings and Loan Associations
1,149
8,412
(Insured)
Source: F.D.I.C. and Home Loan Bank Board
In both Connecticut and New York the present liabilities of mutual
savings banks are very large relative to commercial bank deposit liabilities
and, in fact, in Connecticut, savings banks and savings and loan associations
have a greater volume of deposits than commercial banks. The present
FORD LIBRARY
scheme of separating non-bank intermediaries from commercial banks
at least requires a separate physical act to convert savings into demand
deposits. This impediment is reduced or eliminated by the proposals
under examination. Without indicating the precise degree to which the
$197 billion savings and loan and mutual savings bank deposits become
fully comparable with commercial bank demand deposits, it is worthwhile
to consider the effect of such a move on the control of the economy
exhibited by the Federal Reserve System.
Impact of Introduction
In the period of introduction, mutual savings banks and savings and
loan associations obviously hope to attract accounts from commercial
banks but must face the possibility that some of their present savings
deposits may be converted to checking account form either by deliberate
segregation (as in the savings bank scheme) or by direct usage (in the case
of the non-negotiable transfers of the savings and loan associations). In
the long run, of course, the intermediaries hope to gain full household
acceptance as banks as a result of being able to offer the advantages of
"one-stop banking".
There is no way of knowing beforehand how much the liberalization of
non-bank intermediary deposit and payments powers might act to increase the
money supply. Indeed, it might merely increase the velocity of savings
deposits as savers made frequent transfers in and out their interest bearing
accounts in order to maximize earnings on their total balances. The states
now permitting demand deposits at mutuals, Indiana, New Jersey and Delaware,
show only about two percent of total mutual savings bank deposits are in
GERALD, FORD KORABY
demand form. On the other hand, the Connecticut mutuals are likely to be
considerably more aggressive than the mutuals in these states as they bulk
larger in the financial structure and already have strong marketing orienta-
tion towards enlargement of total banking services. It seems reasonable to
believe therefore, that an addition to aggregate demand deposits will occur,
not merely a reduction in commercial bank demand deposits as, and if,
mutuals expand into this area.
How would the Federal Reserve offset such a jump in the money supply
or increase in the velocity of savings? While a quantum jump in bank
reserves as a result of a legal redefinition (such as that in 1959 when
cash in vault was made part of reserves) can be simply offset by either
increases in reserve requirements or sales of securities through open
market operations, the same tactics do not necessarily operate in the case
of an increase in the money supply. Presumably the monetary authority
attempting to offset savings balances that became activated at intermedi-
aries would only have instruments to reduce demand balances at commercial
banks or increase their reserve requirements. This would involve open
market sales with consequent effect on rates on money market instruments
in the commercial bank investment area but only delayed effects on invest-
ment areas served by savings and loan associations or mutual savings banks.
Monetary Powers of Intermediaries
The question of how the Federal Reserve System's present control over
the economy might be altered as a result of new powers granted to non-bank
intermediaries requires some explanation of the current thinking on the
role of intermediaries in the financial system. Are they, under their
GERALD LEBRARY
present powers, neutral in a monetary sense or do they have an impact on
the real economy similar to banks? If mutual savings banks and savings and
loan associations are presently neutral and are given additional powers
which would make them non-neutral, a danger exists that the central bank's
effectiveness would be reduced. If intermediaries are not presently neutral
the granting of further powers might increase the problem the Federal Reserve
faces in controlling the economy. At any rate, a discussion of present
thought on the subject appears essential.
In traditional monetary theory commercial banks are unique in that
their lending and investing activities are carried out by issuing their
own liabilities (deposits) which are accepted as means of payment. Thus, a
check on the First National Bank representing the proceeds of a loan by that
institution will, in the normal procedure, be honored as payment. While the
individual bank is unable to expand credit and therefore the amount of money
beyond the deposits which it can attract (since it must pay out its reserves
to make good its liabilities), the banking system can, if supplied sufficient
reserves, expand the total of its liabilities and therefore the total supply
of money.
It is otherwise for intermediaries since they do not create their own
liabilities which are honored as means of payment. Savings and loan shares
or mutual savings bank passbooks are not good for payment and are not used
to satisfy obligations. Instead, these institutions stand ready to redeem
their obligations and pay out cash or checks drawn against their own accounts
in commercial banks if a depositor wishes to withdraw funds. Thus, the
credit-extending powers of intermediaries through their lending and investing
FORD & LIBRARY
-12-
activities do not result in the creation of new liabilities which are
accepted as means of payment. The necessity to make any and all transactions
with depositors or borrowers through payment of cash or demand deposits at
commercial banks limits both the individual institution and intermediaries
as a group to strictly non-credit creating functions. Guttentag and Lindsay
perhaps have stated it most succinctly.
Banks are indeed uniquely important because, much
more than other intermediaries, they are potentially
a source of cyclical instability
what (does) all
this (have) to do with the fact that only banks create
money (?). The greater credit expansion of banks, it
will be recalled, occurs because banks do not suffer
significant leakages of reserves, when they extend
credit. This in turn stems from the willingness of
non-bank intermediaries to hold their reserves in the
form of claims against banks. And this they do
because banks create money 1/
Orthodox theory, in denying that financial institutions without checking
account privileges have the power to create credit, absolves them essentially
from any need to be responsive to monetary control. By expanding or contract-
ing the money supply and therefore income and savings through control over
the amount of commercial bank reserves, eventually the lending and investing
powers of intermediaries may be affected because their rate of growth of
deposits will change. This is the only control method recognized by orthodox
theory and is deemed by holders of this view to be fully sufficient with
present powers of intermediaries.
1/
Jack M. Guttentag and Robert Lindsay, "The Uniqueness of Commercial Banks",
The Journal of Political Economy, January 1969, PP. 1012-3.
GERALD FORD LIBRARY
The orthodox view of the monetary powers of intermediaries has been
challenged at numerous points in recent years. Gurley and Shaw have
suggested that intermediaries grant credit in the form of loans or invest-
ments which obviously affect the economy by expanding consumption or
investment. They point to the growth of intermediaries relative to commer-
cial banks and suggest that the intermediary process results in acceleration
FORD
in the velocity of money Thus, those who follow Gurley and Shaw are
concerned that even with no additional powers, intermediaries have the
GERALD
LIBRARY
ability to affect the economy independently of monetary control. James
Tobin of Yale University has carried this thesis one step further and argues
that commercial banks are merely one more intermediary and that no unique
function should be attributed to them because of their power to issue demand
liabilities that are acceptable as means of payment
The battle over whether or not the claims of non-bank intermediaries
are money as claimed by Gurley and Shaw has tended to revolve around various
econometric tests to find if they are complements or substitutes to money.
If the public reduces their demand deposits when they increase mutual savings
bank deposits or savings and loan shares, it is reasoned that the latter
1/ J. G. Gurley and E. S. Shaw, "Financial Aspects of Economic Development",
American Economic Review, September 1955 XLV 515-38 and "Financial Inter-
mediaries and the Saving-Investment: Process", Journal of Finance, May
1956, XI 257-76. The classic refutation of the Gurley-Shaw thesis is
given by J. M. Culbertson in "Intermediaries and Monetary Theory: A Criti-
cism of the Gurley-Shaw Theory", in American Economic Review, March 1958,
XLV III 119-131.
2/
"Commercial banks do not possess, either individually or collectively, a
widow's cruse which guarantees that any expansion of assets will generate
a corresponding expansion of deposit liabilities." See James M. Tobin,
"Commercial Banks and Creators of Money", in Deane Carson ed., Banking
and Monetary Studies, Irwin, 1963, P. 418.
-14-
assets are substitutes for the former, while if they increase them or at
least leave demand deposits undisturbed they are complements. The implica-
tion is, of course, that money substitutes are not neutral and may be a
cause of economic instability unless controlled whereas complements need
not be subject to control.
Unfortunately, the various tests are not conclusive despite the claims
of their authors. Brunner and Meltzer 1/ and Hamburger 2/ have concluded
currency and demand deposits are the best definition of the money supply.
On the other hand, T. H. Lee 3/ and V. K. Chetty 4/ have concluded the
opposite. The latter author, the most recent to examine the evidence, has
concluded that time deposits, mutual savings bank deposits and savings and
loan shares are substitutes for demand deposits in that order.
In an unpublished dissertation for the University of Southern California,
William Rogers Watson attempted an empirical investigation of the "moneyness"
of savings and loan shares and concluded the Gurley-Shaw thesis could not be
1/ Karl Brunner and Allan Meltzer, "Predicting Velocity: Implications for
Theory and Policy", Journal of Finance, 1963.
2/ M. J. Hamburger, "The Household Demand for Financial Assets", Econometrica,
January 1968.
3/ Tong Hun Lee, "Substitutability of Non-Bank Intermediary Liabilities for
Money", Journal of Finance, September 1966.
4/ V. K. Chetty, "On Measuring the Nearness of Near-Moneys", American Economic
Review, June 1969.
GERALD FORD LIBRARY
-15-
rejected. He found
"For changes in initial stocks, the results indicate
that demand deposits and time deposits at commercial
banks are "weak" substitutes, whereas demand deposits
and savings and loan association shares are "weak"
complements. This complementary relationship might
be explained by the hypothesis that savings and loan
associations increase their stock demand for demand
deposits in response to an increase in the initial
stock of their liabilities by more than the other
sectors decrease their stock demand for demand deposits
for an increase in the initial stock of savings and
loan association shares. "
Of greater current interest than either the orthodox view or the
Gurley-Shaw approach is the treatment of financial intermediaries by the
monetarists or Friedman school. Superficially, the approach of this group
follows the orthodox school in that intermediaries are dismissed as depend-
ent upon bank demand deposits to make any credit extended good. Friedman
regards the postwar expansion of savings and loan shares as (1) merely a
manifestation of the velocity increase and (2) predominately at the expense
of assets other than money It is interesting to note that the ambivalent
definition of the money supply of Friedman and his followers has never
encompassed savings deposits of mutual savings banks or savings and loan
shares although his M₂ includes savings deposits at commercial banks (later
modified by some monetarists to exclude large certificates of deposit).
1/ William Rogers Watson, The Interaction Among Financial Intermediaries in
the Money and Capital Markets: A Theoretical and Empirical Study, unpub-
lished dissertation, University of Southern California; 1968, p.406.
2/ Milton Friedman and Anna Schwartz, A Monetary History of the United States,
National Bureau of Economic Research, P. 666-7.
GERALD FORD VIBRARY
-16-
The foregoing summary of current thought on the monetary powers of inter-
mediaries indicates that many economists believe even with only their
present powers these institutions provide some problem for monetary control.
It is worthwile, however, to examine how much the liabilities of these
institutions vary over time and whether they behave in a manner similar
to money. This is the subject of the next section.
The Stability of Claims on Financial Intermediaries
and their Relation to Money
Perhaps Warren Smith summarizes best thinking of a decade ago on
monetary control of intermediaries:
There is no evidence of systematic destabilizing
shifts between demand deposits and claims against other
intermediaries, such as mutual savings banks and savings
and loan associations. However, if such shifts should
raise difficulties in the future, their destabilizing
effects can be eliminated by the application of appropri-
ate legal reserve requirements to these institutions.
This is a straightforward remedy which is entirely
consistent with the traditional concepts of central bank-
ing, and we should be prepared to put it into effect if
necessary. It should be noted, however, that if we impose
the same effective reserve requirements on savings insti-
tutions as are applicable to demand deposits in order to
eliminate destabilizing effects, we also take away the
intermediary status of these institutions, since under
these circumstances, a deposit of current saving in a
savings institution will reduce the lending power of the
banking system as much as it will increase the lending
power of the savings institution
Whether the lack of direct monetary control on all institutions but
Federal Reserve member banks threatens the ability of monetary policy to
influence the economy depends largely on whether the addition of liabilities
Warren L. Smith, "Financial Intermediaries and Monetary Controls"
FORD
Quarterly Journal of Economics, November 1959.
GERALD
LIBRARY
=17-
of these institutions improves the correlation of money supply to income
and production. If the correlation is improved significantly the pre-
sumption is that the claims of intermediaries have significance in the
cyclical process and that monetary control would be reduced by any
measure that adds to the functions of these institutions.
Four bits of evidence exist on which to determine how intermediary
claims should be considered in monetary theory - (1) historical correla-
tions, (2) recent forecasting ability, (3) anology with non-member banks
and (4) recent trends of member and non-member deposits.
As part of one of the major empirical tests of the Friedman explana-
tion of U.S. business cycles in terms of the quantity theory of money,
Timberlake and Fortson tried several definitions of money including an
expanded definition which included, besides the familiar demand deposits
and currency, time deposits at commercial banks and at savings banks.
Table III
/
Simple Correlations of First Differences
of (1) Money Supply plus Commercial Bank Time Deposits (M₂)
and (2) Above Plus Savings Bank Deposits (M3) on Income
M₂
M.
M3
M₂
M₃
3
1897-1908
.890
.820
1933-1938
.766
.865
1903-1913
.788
.813
1938-1953
.006
- -.145
1908-1921
.766
.726
1934-1948
- .009
-.171
1913-1920
.786
.727
1948-1960
.408
.285
1920-1929
.700
.702
1953-1965
.609
.633
1921-1933
.801
.772
1929-1960
.501
.427
1929-1939
.882
.865
1897-1960
.573
.517
LIBRARY
1/ Richard H. Timberlake, Jr. and James Fortson, "Time Deposits in the
Definition of Money", American Economic Review, March 1967, p.192
-18-
Numerous time periods were examined for the years 1897-1965 depending on
the availability of data and periods of roughly similar economic conditions.
In 4 out of the 14 time periods examined, the addition of deposits at
savings banks improved the correlation with income although the increase
was not large. More important, however, was the fact that during the
most recent period 1953-1965 the correlation showed a substantial improve-
ment as a result of the addition of savings bank deposits to the money
supply definitions /
What does more recent evidence show about the movement of intermediary
claims and changes in the economy. For the period from the fourth quarter
of 1961 through the second quarter of 1969, an analysis was made of the
relation between changes in (1) M1, (2) M2, (3) M2 plus mutual savings
bank deposits and (4) M₂ plus mutual savings bank deposits and savings and
loan shares. The latter two variables when added to the previous ones are
known and M3 and M4 for brevity. The results of the stepwise regressions
(in order of importance of the independent variage) are shown in Table IV
for both six and nine month lags of the dependent variable.
Table IV
Coefficients of Determination for Quarterly Changes in
M1, M₂, M3 and M4 Regressed on Quarterly Changes in
Gross National Product Lagged 6 and 9 Months
Six Month Lag
Nine Month Lag
M1
4905
M3
.4250
M₂
did not pass
M1
.4799
M3
F level test
M4
.5348
M4
of 2.0
M2
did not pass F level
test of 2.0
FORD
1/ ibid., pp. 190-193
GERALD
LIBRARY
-19-
This test is a relatively severe one because it involves both short-
term changes and a dependent variable subject to relatively wide fluctua-
tions. Nevertheless, it suggests that both mutual savings bank deposits
and savings and loan shares even under present definitions have properties
similar to money and therefore can be considered part of the means of payment.
There exists a class of financial institutions that are not directly
subject to monetary control but whose liabilities circulate as means
of payment. These are commercial banks that are not members of the
Federal Reserve System. For most of these banks reserve requirements are
less stringent than those imposed on member banks and more types of assets,
including some types of earning assets, are eligible for inclusion. This
importantly includes correspondent bank balances. Hence neither changes
in reserve requirements, borrowing nor open market purchases necessarily
affect non-member banks. The behavior of non-member banks relative to member
banks has some bearing on the degree of monetary control that may or may not
be involved in commissioning a new group of "non-member" banks.
In an analysis performed for the Commission on Money and Credit, Clark
Warburton found that non-member banks were less responsive than member banks
in response to both tightness and ease in monetary policy although the non-
member banks actually resembled country member banks in loan and investment
trends, the difference in trends largely supplied by the larger banks in
reserve and central reserve cities. Warburton concluded:
"The conclusion to be drawn from the data regarding the
relative importance and comparative rates of expansion
of members and non-member banks is that the presence of
non-member banks has had little impact on the effective-
ness of monetary policy, understood in the sense of
GERALD FORD JERARY
-20-
"quantitive monetary control. The non-member banks hold
too small a proportion of the assets and deposits of all
commercial banks, and their behavior in expanding loans,
or loans and investments, under varying degrees of
monetary restraint or ease has too much similarity to
that of country member banks, to hamper the effectiveness
of monetary policy.
But though this has been true in the past, it might be
otherwise in the future. The experience of the future
may be different if incentives exist, hitherto largely
unused, for member banks to become non-member banks, or
for an accelerated rate of expansion of non-member banks
relative to country member banks" 1/
Warburton's data ended with 1959 and since that time it is relevant
to examine if the warnings Warburton gave were justified. Chart I indicates
Chart I
Deposit Growth of Member and
Non-Member Commercial Banks
Billions
(Semi-Log Scale)
of Dollars
600
Member Bank Deposits
100
Non-Member Bank Deposits
50
:
1965
1966
1967
1968
1969
1/ Clark Warburton, "Non-member Banks and the Effectiveness of Monetary
Policy", in Monetary Management, Commission on Money and Credit,
Prentice Hall, 1963. p.339
GERALD FORD LIBRARY
-21-
the course of all Federal Reserve member and all non-member banks'
deposits since 1965. As may be seen, non-member bank deposits have
expanded at a substantially greater rate of growth than have member bank
deposits. It is interesting to note that non-member deposits now account
for about one-sixth of all commercial bank deposits while mutual savings
bank deposits plus non-member commercial bank deposits constitute nearly
one third of present commercial bank deposits.
Reserve Requirements
Inevitably the question of monetary control brings up the subject
of reserve requirements. The crucial distinction between commercial
banks (member banks) and intermediaries is the presence for the former
institution of rigidly imposed reserve requirements satisfied with
only one type of asset (with the minor exception of vault cash) and the
absence of any but token reserve requirements for the latter type of
institution.
There has been a fairly long history of controversy over reserve
requirements for non-member banks and for financial intermediaries.
While the Banking Act of 1933 contemplated that all insured banks would
become member banks, small banks were exempted by the Banking Act of
1935 and the deadline for the remainder was postponed until it was
finally repealed in 1939. The Commission on Money and Credit in 1961
recommended that all insured banks be required to be members of the
Federal Reserve System citing the belief that the system of non-member
reserve requirements permitted "some escape from the influence of monetary
policy". On the other hand, the Commission found that the increase in
money substitutes from intermediaries had played a role in speeding the
GERALD FORD LIBRARY
rise in money velocity but the contribution to cyclical changes was too
small to warrant extension of direct Federal Reserve control over non-
bank financial institutions
1/
In 1963 the Committee on Financial Institutions consisting of
Cabinet and other government officials, concluded that neither non-
member banks reserve ratios nor the supply of reserves on which they
draw is uniquely determined by the Federal Reserve. Thus, a portion
of the money supply is out of control of the System and while there
had been few important short-term fluctuations from the course of
member bank deposits, the Committee noted non-member banks had grown
faster than member banks and potentially the option of withdrawal from
membership represented a constraint of Federal Reserve actions. While
the Committee found compulsory membership likely to provide needless
controversy, they did conclude that all banks should be subject to
reserve requirements specified by the Federal Reserve.
The Committee found it much more difficult to determine whether
reserve requirements were desirable for savings and loan associations
and mutual savings banks. The problem was approached by examining the
necessity of reserve requirements on time deposits at commercial banks
noting that while reserve requirements at non-bank intermediaries were
not presently essential to monetary policy, they could serve as a
supplement and there were liquidity, equity and supervisory consider-
ations making such a measure useful. Accordingly, a recommendation was
Money and Credit, Report of the Commission on Money and Credit,
Prentice Hall, 1961, pp. 76-81.
GERALD FORD VIBRARY
made for the "introduction of a similar reserve requirement" for shares
at savings and loan associations and deposits at mutual savings banks
It has been contended elsewhere that reserve requirements of existing
types do not place a real limit on the capacity of intermediaries to
extend credit, only the proportion of funds that can be loaned
The recommendation for all banks to be subject to reserve require-
ments (though not through compulsory membership) has been containedúin the
Annual Report of the Board of Governors of the Federal Reserve System for
the years since 1964. As late as April 1968 Governor Andrew Brimmer called
for Federal Reserve authority to set reserve requirements for all banks,
citing the need to strengthen control of the monetary base by the nation's
central bank. According to Governor Brimmer, 21 percent of private demand
deposits were, in 1967, held by non-member banks against 16 percent at the
end of 1956, both weakening the degree of control and making the burden of
monetary restraint to fall heavier on the remaining member banks "since
non-member banks' private demand deposits (which are also part of the total
money supply) do not respond directly to the Federal Reserve's general
instruments of credit control"
1/ Report of the Committee on Financial Institutions to the President of
the United States, U.S. Government Printing Office, April 1963, pp.6-18.
2/ Clay J. Anderson, Recent Trends in Monetary Thought: Implications for
Monetary Policy and Commercial Banking. American Bankers Association,
1969, pp.16-18.
3/ Governor Andrew Brimmer, "The Rationalization of Commercial Bank Reserve
Requirements", paper presented before the 67th Annual Convention of the
National Association of Supervisors of State Banks, 1968.
GERALD FORD TIBRARY
The problem of reserve requirements enters into the present proposals
in Connecticut and by the Home Loan Bank Board because it can be questioned
whether the provision of legally required reserves would make the monetary
policy aspects of checking accounts at non-bank intermediaries unimportant.
The Connecticut proposal would treat mutual savings banks as non-member
banks, allowing them to keep the required reserves at a correspondent bank.
Whereas up to now Connecticut mutual savings banks on making loans could
assume immediate outflow of the entire amount of such loans through checks
cleared through their commercial bank account, with the authorization of
checking accounts, Connecticut mutuals could begin to enjoy in a limited
way multiple credit expansion particularly if deposits could be offered to
other banks and business firms. Since the mutual savings bank system is
virtually as large in Connecticut as the commercial banking system, the
possibilities of an unwanted credit expansion are not inconsiderable. Such
a multiple expansion of deposits might be further encouraged by wide consumer
loan powers on the part of mutuals. We could foresee demand deposits at
intermediaries being important for building firms and construction personnel
particularly if real estate loans were tied to the requirements that a
deposit be created. The leakage process might then not be such an automatic
limitation to credit expansion.
Above all to avoid expansions and contractions of money outside the
control of the monetary authorities, if the new proposals are approved and
implemented, non-banks should be required to keep reserves in the form of
deposits at Federal Reserve banks. The so-called liquidity reserves
presently imposed on savings and loan associations which may be fulfilled
by Treasury or agency securities, do not act to limit the loans such
GERALD FORD VIRRAPY
institutions make, they merely assure a division between desired and less
desired assets. The real limit on intermediaries will still be their
ability to attract deposits, either savings deposits or the new limited
1/
checking accounts.
Since the reserves of non-member banks are held in the form of
deposits in member banks it is sometimes contended that the drift away
from membership in the Federal Reserve (and by analogy, the growth of
non-bank intermediaries) acts to increase the leverage the Federal Reserve
System has on the economy. A given dollar of open market purchases or sales
or a given percentage point change in member bank reserve requirements will
support (or withdraw support from) a greater volume of monetary and near-
money assets than if all banks were Federal Reserve member banks and there
were no non-bank intermediaries. This argument reductio ad absurdum implies
the best monetary control would be obtained if only one bank were a Federal
Reserve member.
We contend the "greater leverage" argument has no real relevance since
neither the volume of reserves nor the percentage change in requirements
has any real cost to the Federal Reserve. Thus, the proper Federal Reserve
move to bring the money supply, credit availability or interest rates into
conformity with current or prospective economic conditions may mean a $50
million or a $500 million increase in bank reserves. To the Federal Reserve
the difference is one of bookkeeping, not of loss of resources that would
be used elsewhere.
1/
Clay J. Anderson, loc. cit.
BERALD FORD LIBRARY
This analysis of reserve requirements suggests then, the availability
of a new source of multiple credit expansion is not a matter that the
monetary authorities can ignore with impunity. As new sources of credit
and payments media appear, the Federal Reserve is reduced to measures that
have a greater impact on commercial banks that are members of the System
since their impact on non-member banks and non-bank intermediaries can only
be at second (and third) hand by affecting the total money available to be
deposited in them and all other depositories. The result is a "stop-go"
policy on those sources of credit furnished directly by commercial banks
which, in turn, means relative instability in money supply growth with
consequent effects on economic growth. This process is made more likely
by the new proposals since they enlarge the area of credit and money not
directly controlled by the Federal Reserve. While commercial banks as
compared with intermediaries are undoubtedly better able to withstand the
effects of changing ability to create credit as monetary policy responds
to economic conditions, an increase in the degree of policy fluctuation
affecting commercial banks (as would be the effect of "monetizing" non-
bank intermeiary claims) will lead to greater variability in the money supply
with consequent harmful effects on the economy. It would also increasingly
make monetary policy the hand maiden of the activities of non-bank intermed-
iaries, forcing all the adjustment to take place in other parts of the
financial system. This would seem to be a particularly unfortunate turn of
events in an area of economic control already suffering from considerable
uncertainty as to policy direction and effects.
FORD LIBRARA
Conclusions
This paper has attempted to demonstrate that non-bank intermediaries,
if granted limited or general powers to make payments transactions services
available to their customers, could increase the volume of demand deposits,
alter the present division between demand and time deposits or could affect
the velocity of savings. It has been demonstrated that the addition of
mutual savings bank deposits and savings and loan shares improves the
correlation of demand deposits of commercial banks to economic activity
lagged nine months. This suggests they have an important causative relation-
ship to the rate of economic activity. Since these institutions are un-
impeded by reserve requirements in the commercial bank sense, the monetary
authorities apparently already lose some of their effectiveness in controlling
the expansion of credit. If these intermediaries gain additional powers
that, in effect, allow them to assume a role in the monetary and payments
system it seems likely that further problems of central bank control will
arise. Accordingly, there are definite monetary policy implications contained
in the proposal. The analysis, hence, suggests that under the existing
regulatory powers, the addition of forms of checking account functions to
mutual savings banks and savings and loan associations cannot be a matter
of indifference to the Federal Reserve System.
GERALD R.FORD VIBRARY
THOMAS J. LENNON
DANIEL H.H. INGALLS
VIRGINIA SPRINGS
PRESIDENT
HOT
CHAIRMAN
THE
HOMESTEAD
HOT SPRINGS, Virginia 24445
TELEPHONE 839-5500
April 28, 1970
The Honorable Arthur Burns
Chairman-Designate
Board of Governors of the Federal
Re: INTERNATIONAL MONETARY CONF.
Reserve System
May 17 - 20
Washington, D. C. 2051
REVISED RESERVATION
Dear Mr. Burns:
We take pleasure in confirming your request for reservation as follows:
Name:
The Honorable Arthur Burns
Arrival:
May 17
Departure:
May 20
Accommodations
Parlor, double room with twin beds and bath
Rate: $21 or $25 daily for parlor; $51.00 daily, American Plan for double room
for single occupancy
Remarks
We note you are to be a guest of the conference
Your account will be charged to them
We appreciate this booking and hope that your forthcoming visit will be most
enjoyable.
Yours sincerely,
tohull THE HOMESTEAD Huish
Robert N. Harris, Jr.
Reservation Manager
FORD & LIBRARY GERALD
pm
CC: Mr. Roy W. Terwilliger
Helpful
Information
THE
HOMESTEAD
HOT SPRINGS, VIRGINIA 24445
TELEPHONE (703) 839-5500
How to find your way
around
For the convenience of our
for women and dinner jack-
guests a panoramic layout
ets for men predominate.
of The Homestead is avail-
able at the front desk. This
shows sports facilities,
shops, function rooms and
Tipping
This is a matter that each
public areas. There is also a
guest decides for himself.
complimentary map of
Most groups who meet at
mountain trails and Cas-
The Homestead arrange to
cades stream for hiking,
have a percentage of the
riding and fishing buffs.
daily American Plan rate
charged to each member's
Dress
account to cover normal
Casual sportwear is recom-
mended for daytime wear.
gratuities.
Walking shorts, mini skirts,
However, individual
slacks and turtleneck shirts
guests do ask occasionally
may be worn in the dining
what is customary at The
room for breakfast and
Homestead and we present
luncheon. Tightfitting and
the following suggestions:
abbreviated attire is not
Dining room waiters: Break-
allowed. Gentlemen must al-
fast 40¢, luncheon 60¢, din-
ways wear jackets while din-
ner $1.00.
ing. Bathing suits are re-
Bellmen: 50¢ for each piece
stricted to the pool area and
of luggage.
guests must wear robes over
suits when passing through
Maids: $1.00 per day per
the hotel. Young ladies can
room.
wear contemporary bathing
Doormen, dining room cap-
suits. Evening Wear: Most of
tains and butter girls, bath
our guests wear formal at-
house attendants, etc., ac-
tire, but this is not required.
cording to the service they
Cocktail or dinner dresses
render.
Activities Facilities
GOLF Three 18-hole courses. Homestead
INDOOR GAMES Ping-Pong, Dance Studio, Billiards
Course with putting green and prac-
Spa Building.
tice fairway near Casino. Cascades
Bridge, Canasta and Backgammon.
Course and Lower Cascades Course
nearby with free bus service to and
from both courses. Golf carts avail-
TELEVISION
Tower Lounge.
able all three courses.
MOVIES Nightly at 8:45, Sunday 9:15.
TENNIS Eight courts, one all-weather court.
DANCING Homestead Club, nightly except
Sunday.
RIDING Horseback and Carriage.
HOMESTEAD GRILLE
A la Carte dining, dinner and sup-
SWIMMING
Indoor and outdoor pools and sun
per, 7:00 P.M. to 1:30 A.M., nightly.
beach. Warm Springs Pools.
(Closed During Winter Season)
SKEET & TRAP Four fields N.S.S.A. specifications.
CHILDREN A supervised playground and indoor
playroom is available for younger
children.
FISHING Cascades Stream open to guests
during Trout Season.
ENTERTAINMENT
Concerts daily. Movies nightly.
Dancing nightly except Sunday.
BOWLING Eight tenpin alleys. Automatic pin
setters.
STENOGRAPHER
Call Operator for services of public
stenographer.
ICE
SKATING
November through March.
PHOTOGRAPHER
Call Operator for services of profes-
sional photographer.
SKIING December through March. Ski lifts,
trails and slopes are right on the
Hotel grounds.
DRUGSTORE Prescription and proprietary drugs.
LAWN BOWLING Adjacent to the Casino.
EXERCISE ROOMS Zander Gymnasium, Spa Building.
CARRIAGE RIDES
HIKING Attractive graded walks and several
Buckboard, fringe topped surrey
miles of paths are accessible to
rides available for your pleasure.
hikers on our 17,000-acre estate.
EQUIPMENT RENTAL
Rental of equipment for all sports,
including jodhpurs, jodhpur boots,
SPA Famous mineral baths and mas-
fishing tackle, swimsuits, ice skates,
sage. Home of Countdown Club.
skiing and golf equipment.
Getting to The Homestead
TRAIN The Chesapeake and Ohio Railway
provides service from principal
cities of the East and Midwest to
Covington, Virginia, our mainline
station. All tickets should read to
Hot Springs, Virginia, and the rail-
road will provide limousine trans-
portation between Covington and
The Homestead at no additional
charge.
AUTOMOBILE
U.S. Route No. 220, a modern high-
speed highway, runs north and
south through Hot Springs. Motor
distance to Hot Springs from some
principal cities is approximately as
follows: New York, 440 miles; Cin-
cinnati, 350; Washington, 200;
Cleveland, 370; and Roanoke, 80
miles.
AIRPLANE Piedmont Airlines now serving In-
galls Field with convenient daily
commercial schedules. Air taxi and
charter service to and from Ingalls
Field easily arranged. Ingalls Field,
located atop Warm Springs Moun-
tain, elevation 3,800 ft., 17 miles
from The Homestead by new paved
access highway, now has a 5,600-
ft. bituminous concrete paved run-
way equipped with medium inten-
sity taxiway and runway lights, 36"
rotating beacon, abbreviated visual
approach slope indicator lights and
runway end identifier lights runway
6-24. Modern terminal facilities, can
now serve most all types of private
and corporate aircraft.
Navigational aids include a 36"
rotating beacon, a new non-direc-
tional radio beacon (H Marker
-224Kc, Identification HSP), Zone
marker beacon (75Mc, Identifica-
tion A) and Unicom (122.8), all op-
erating continuously and located
right on the airport. 80/87, 100/
130 octane aviation gas and type
A-1 turbine fuel available.
THE
HOMESTEAD
TELEPHONE (703) 839-5500
HOT SPRINGS, VIRGINIA 24445
30M—S-2.70
H
LIFE
#803 the DERALD
HOT SPRINGS, VIRGINIA
OL
DIRECT AIR SERVICE
PIEDMONT AIRLINES
Piedmont Airline Service Direct to Hot Springs, Virginia
April 26, 1970
Eastern Daylight Time
FLIGHT 984 (Daily)
FLIGHT 908 (Daily)
YS11 Prop-Jet
YS11 Prop-Jet
Lv Knoxville
7:10 A. M.
Lv Cincinnati
9:45 A. M.
Ar Roanoke
9:28 A. M.
Ar Roanoke
12:20 P. M.
Lv Roanoke
9:50 A. M.
Lv Roanoke
12:43 P. M.
Ar Hot Springs
10:10 A. M.
Ar Hot Springs
1:03 P. M.
Lv Hot Springs
10:20 A. M.
Lv Hot Springs
1:15 P. M.
Ar Washington
11:11 A. M.
Ar Charlottesville
1:42 P.M.
(National Airport)
Lv Charlottesville
1:57 P. M.
Ar Washington
2:32 P. M.
(Limousine leaves for
(National Airport)
Ingalls Field)
9:10 A. M.
(Limousine leaves for
Ingalls Field)
11:45 A.M.
FLIGHT 959 (Daily)
FLIGHT 939 (Daily)
YS11Prop-Jet
YS 11 Prop-Jet
Lv Washington
12:00 Noon
Lv New York(LaGuardia) 7:15 P.M.
Ar Staunton
12:43 P.M.
Ar Washington
8:40 P.M.
Lv Staunton
12:58 P. M.
Lv Washington
8:55 P.M.
Ar Hot Springs
1:23 P. M.
Ar Charlottesville
9:26 P.M.
Lv Hot Springs
1:35 P.M.
Lv Charlottesville
9:40 P.M.
Ar Roanoke
1:57 P. M.
Ar Staunton
9:58 P. M.
Lv Roanoke
2:15 P. M.
Lv Staunton
10:10 P.M.
Ar Cincinnati
4:57 P.M.
Ar Hot Springs
10:35 P. M.
Lv Hot Springs
10:47 P.M.
(Limousine leaves for
Ar Roanoke
11:09 P.M.
Ingalls Field) 12:20 P.M.
(Limousine leaves for
Ingalls Field)
9:45 P. M.
INDEPENDENT LIVERY provides limousine service to all flights.
One passenger
$6.00
Over one passenger, each
3.50
This price includes Baggage.
No charge for children under six years.