Subsidizing the Banks

Back in December 1970, law professor John A. Spanogle sat down and wrote a letter to Hampton Rabon, deputy assistant secretary of the Treasury Department, about a very large subsidy which the Treasury was providing hundreds of banks.

Spanogle, who was working with us at the time, wanted to know why the Treasury was leaving billions of dollars of its tax deposits and other funds, known as tax and loan accounts, in non-interest-bearing demand deposits.

He believed that the banks were reaping a massive windfall at the expense of taxpayers: whose payments should have been earning interest for the Treasury.

Rabon replied. two weeks later:

“I must take exception to your categorical statement that the earning value of balances in tax and loan accounts is much greater than the value of services performed by banks.

“These facts . . . clearly show, in my opinion, that the balances maintained in tax loan accounts with some 12,700 banks throughout the country are not surplus to our needs and, therefore, no part of the balances should be invested.

Spanogle was not satisfied. He pressed on and his cause was taken up in 1971 and 1972 by another law professor, Fairfax Leary, who was on leave with us. Congressman Wright Pat-man, chairman of the House Banking and Currency Committee, renewed his longstanding criticism of this bank subsidy with a staff report in May 1972 that denounced these non-interest bearing accounts.

These accounts are not small. The average tax and loan account balances by the Treasury in banks ranged from $6.9 billion in 1970 to $8.4 billion in 1973.

More than four-fifths of these sums could be invested in short term money market instruments. At present interest rates, the Treasury could be earning more than $600 million a year instead of being a sugar daddy for banks already reporting record profits.

Other voices spoke up against this tax and loan windfall. Sen. Thomas McIntyre, went to the Senate floor in June 1973 calling for Congressional hearings. Congressman John Seiberling, D-Ohio, introduced a bill to require the payments on interest on these balances.

In the meantime, there were stirrings at the Treasury Department. A study was ordered in 1972 and a draft questionnaire was developed for banks to answer about what services they believed they were providing the government.

My associate, attorney Tommy Jacks, submitted detailed suggestions on the inadequacy of this draft questionnaire, some of which were adopted.

Last month, the force of fact and reason prevailed and the Treasury Department changed its mind.

In a public report, the department concluded that the nation’s banks, based on the 1967-1972 average interest rate on 91-day Treasury bills (5.5 percent) reaped a $300 million benefit each year by investing idle tax and loan accounts. At current interest rates the windfall in 1974 will be over $600 million.

That amount of money would have funded in fiscal 1974 all the following federal agencies: the Small Business Administration, Civil Aeronautics Board, Consumer Product Safety Commission, Equal Employment Opportunity Commission, Federal Power Commission, Federal Trade Commission, Occupational Safety and Health Review Commission, Securities and Exchange Commission, and the Selective Service System.

There was one more hurdle to overcome, said the Treasury: “Congress should consider legislation authorizing the Treasury to invest in money market instruments for cash management purposes.” Pending such legislation, the Treasury says it is limited in what it can do to reduce this unjust bank enrichment.

So everyday that the Congress delays, the Treasury is losing almost two million dollars in interest.

Congress has been known to move very quickly in favor of a special interest, such as the present loan guarantee program for banks lending to the cattle industry. If the Treasury is sincere in its desire for congressional authority, its emissaries will move fast on Capitol Hill in cooperation with Rep. Pitman and Sen. McIntyre.

Our experience with this matter, however, indicates that citizens cannot take anything for granted when it comes to Congress and the Treasury actually doing something for the public interest, even when they agree about what should be done. So let them hear from you.