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Hamlin, Charles S., Scrap Book — Volume 156, FRBoard Members 205.001 - Hamlin Charles S Scrap Book - Volume 156 rs Membe FRBoqrd Form F. R. 131 BOARD OF GOVERNORS OF THE - FEDERAL RESERVE SYSTEM Office Correspondence To Files From Ir. Coe Date June 26, 1_941 Subject: After correspondence with Mrs. Hamlin (See letters of May 25 and June 4, 1941) the items attached hereto and listed below, because of their possible confidential character, were taken from Volume 156 of Mr. Hamlin's scrap book and placed in the Board's files: VOLUME 156 Reserve Percentages of Jan. 13, 1926, and Jan. 6, 1926. Page 52 Letter from W.P.G. Harding to C.S. Hamlin regarding memberships on Federal Reserve Board. Page 57 Letters to Committee on Banking and Currency re legislation (X-4507). Page 61 F.R.Bank of San Francisco v. Idaho Grimm Alfalfa Seed Growers Assn. Page 90 Offers of membership on the Board. Page 92 Letter from Carter Glass to C.S.H. in re memberships on Federal Reserve Board. Page 93 Letter from D. F. Houston to C.S.H. in re memberships on Federal Reserve Board. Page 97 Operations of Federal Reserve Clearing System for December 1925. Page X-4521) Proposals to amend Section 9 of the Federal Reserve Act. Page 142 Earnings and Expenses of Federal Reserve Banks. Page 145 Earnings and Expenses of Federal Reserve Banks during 1926. "Mir ;ONFIDENTIAL _Not for publication St. 4807 RESERVE PERCENTAGES OF JANUARY 13, 1926, AND JANUARY 6, 1926. Federal Reserve Bank ioston Tew York ?hiladelphia neveland lichmond ;lanta ago Louis fiinneapolis l a--- City AL. IRatio of total reserves Ratio of reserves in vault Ratio of gold with F. R. Agent and Ratio of gold reserves to F.R. notes Ito deposit and F.R.note and in Gold Settlement Fund in gold redempt ion fu -id to F. R. in actual circulation after setting I liabilities combined to deposits notes in actliR1 circulation aside a 35% reserve against deposits I Jan. 13 Jan. 6 Jan. 13 - - Jan. 6 Jan. 13 - - Jan. 6 Jan. 13 Jan. 6 61.0 63.5 63.6 60.0 58.6 66.8 814.3 89.7 81.8 80.1 70.6 72.3 109.2 98.4 196.8 135.6 76.1 76.4 50.1 49.7 101.2 101.8 115.9 115.7 76.1 74.6 60.1 59.0 87.0 89.3 109.9 106.1 70.3 71.1 52.2 48.6 85.0 89.4 99.0 100.5 59.9 52.7 41.5 47.7 69.3 55.3 72.7 62.1 71.5 63.3 68.6 61.2 77.0 67.5 140.4 117.4 51.5 47.9 56.3 50.7 40.8 41.6 88.1 77.2 76.0 70.3 51.2 48.4 96.2 88.3 109.4 99.3 56.3 42.1 39.7 81.3 77.9 90.8 83.9 59.0 47.4 45.1 45.8 42.b 49.8 48.5 65.1 58.6 75.6 714.14 43.5 42.2 104.6 102.0 112.2 108.2 72.7 70.2 61.4 60.1 _87.8 83.4 123.2 116.3 -IESERVE BOARD DIV ;bION OF BANK OPERATIONS JANUARY 14, 1926. C. 5 Volume 156 Page • W:P. G.HARDING 30 PEARL STREET BOSTON January *G1, 1926. Dear Yr. Hamlin: I have received your letter of the 20th instant and would call your attention to the fact that ori-inally President Wilson offered a membership on the Board to Harry A. Wheeler of Chicago who is, I think, a Republican. As you say, following Delano's resirnation, membership was offered to Mr. Goff, to General Dawes and also to EvansWoolren. This was while Yr. Class wes Secretary of the Treasury and I have heard him say that the place was offered to ten or twelve men before it was finally p-iven Following to ?oehlenpah. No doubt he will give you the names. the resirnation of Albert Strausswho as also a Republican, Secretary Houston was, as I remember it, authorized by the President to offer the vac-,nt position to each of two Republicans in the nhiladelphia district, both of whom declined, and then Yr. Platt was appointed. Yr. Curtiss is feeling better although he is not yet in good shape. He has been coming to the bank every day for some time but under the advice of his doctor, he is making arrangements to le' ve about the first of February for a three weeks trip to sorie place in the West Indies. With kind regards, I am Sincere _ 'on. Charles S. .- 1-1m1in, Federal Res:rve Board, nashinp.ton, D. C. Page 52 Volimle 156 o FEDERAL RESERVE BOARD WASH I NGTON ADDRESS OFFICIAL CORRESPONDENCE TO THE FEDERAL RESERVE BOARD X-4507 January 21, 1926. SUBJECT: Letters to Committee on Banking and Currency re Legislation. Dear Sir: The Federal Reserve Board has recently addressed three letters to the Chairman of the Committee on Banking and Currency of the House of Representatives, conies of Which are enclosed for your information, as follows: (1) Expressing tho Board's views on and recommending certain amendments to H. R. 2, the socal2ed McFadden Bill; (2) Recommending an amendment to Section 13 of the Federal Reserve Act extending the maximum maturity of advances by Federal reserve banks to member banks on their promissory notes when such notes are secured by eligible paper; and (3) Recommending the enactment of le ,.islation to prohibit the use of the words "Federal", "Reserve" and "United States" by banking associations, etc. Very truly yours, Walter L. Eddy, Secretary. (Enclosures) TO CHAIIMIT A1TD C-0 Page 57 Volume 156 OF ALL F. R. BANKS I so 67--4as--. ct ( COPY ) X-4508 January 16, 1926. Dear Mr. McFadden: Reference is made to your letter of October 31st in which it is sua.,ested that the maximum' maturity of advances made by Federal reserve banks to member banks on their nromissory notes be increased from fifteen days to ninety days. After careful consideration of this suggestion, and after consultation with the Federal Reserve Agents and the L'overnors of the several Federal reserve banks, tae Federal Reserve Board is of the or-Anion that an amendment to thelaw increasing the maximum maturity of such notes when secured by paper eligible for rediscount or for purchase by Federal reserve banks should be adopted. The Board does not believe, however, that this increase in maturity of such notes should appl7 when they are secured by bonds or notes of the United States or by bonds of the War Finance Corporation. I am enclosing herewith a draft of an amendment to Section 13 of the Federal Reserve Act which embodies the views of the Federal Reserve Board, which are concurred in by the Federal Reserve Agents and the Governors of the several Federal reserve banks. The pronosed amendment would permit Federal reserve banks to extend credit to their member tanks for any period of time not exceeding ninety days on the security of eligible naper, whereas under the present law the length of the period of any such credit in excess of fifteen days is determined necessarily by the maturity dates of the notes which are offered for discount at the Federal reserve banks. The Federal Reserve Board believes that it would be of distinct advantage to member banks to be able to obtain credit for any desired period up to ninety days, regardless of the maturity dates of the notes in its portfolio. Especially is this true in those sections of the country Where seasonal credit is greatly demanded. It is also believed that the enactment of the amendment proposed will be a means of saving country banks much inconvenience. Member banks' notes with fifteen-day maturities are in many cases frequently renewed and the proposed amendment would eliminate the necessity and inconvenience of such frequent renewals. This would be of especial assistance to those member banks which are so situated that more than one day is necessary for the mails to pass to or from the Federal reserve bank by which they are served. /10 • -2- X-4508 The Federal Reserve Board feels that the incre ase in maturity for member banks' notes should be limited to those notes secured by paper eligible for discount or purchase by Federal reser ve banks because, in the opinion of tho Board, it is unsound banki ng to permit the issue of Federal Reserve Notes against promissory notes secured by Government bonds as collateral. For this reason the Board believes that the present law is safficiently liberal as respe cts advances to member banks on notes secured by Government bonds. Thc foregoing recommendation is made by a majority vote of the Board. Very truly yours, 6 Hon. Louis T. McFadden, Chairmar, Committee on Banking and Currency, Washington, D. C. D. R. Crissinger, Governor. X-4508-a A BILL To Amend Section 13 of the Fcderal Reserve Act and for other purposes. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assedpled, That the seventh paragraph of Section 13 of the Federal Reserve Act as amended be amended and reenacted to read as follows: "Any Fedeyal reserve banl: may makn advances for periods not exceeding fifteen days to its member ban:cs on their promissory notes secured by the deposit or pledge of bonds or notes of the United States or of bonds of the War Finance Corporation, or when authorized by the Federal Reserve Board and sUbject to such conditions, regulations, limitations and restrictions as the said Board may prescribe, may make advances for perioCs not exceedin,7 ninety days to its member banks on their 7)romissory notes secured by such notes, drafts, bills of exchange or bankers' acceptances as are eligible for rediscount or for nurchase by Federal reserve banks under the provisions of this Act. All such advances shall be made at rates of interest to be established by such Federal reserve banks subject to the review and determination of the Federal Reserve Board." ( COPY ) 0 4509 January 16, 1926. Honorable Louis T. McFadden, Chairman, Committee on Banking and Currency, House of Representatives, Washington, D. C. My dear Congressman: The Federal Res, rve Board has received many complaints about the use of the words "Federal" or "Reserve", or a combination of the two as part of the title of banks, corporatio ns and firms other than Federal reserve banks. In most of these insta nces it is obvious that such words have been used in an attem ot to take advantage of the prestige enjoyed by the Federal reserve banks and to arrogate to the firms or corporations using such words part of the benefits accruing from this prestige, and the Board has felt that natonly is this purpose in itself objectionable but also that such use of these words is likely to mislead the public and to cause confusion. Indeed, in several instances it has been found that the use of such words by firms or corporatio ns other than Federal reserve banks actually has led to confusion. The Board has always opposed such use of these words and feels that legis lation to remedy the situation is very badly needed. Under date of September 2, 1922, the Board calle d this matter to your attention with a request that you endeavor to secure the passage of a law which would prevent this objec tionable practice as far as possible; and you introduced at the first session of the 68th Congress a Bill (H.R. 6145) for this purpo se, a copy of which is enclosed herewith. This bill, however, was never retorted out by the Banking and Currency Committee, and the Board desires to renew its recommendation that this bill, or some other bill having substantially the same effect, be enacted into law at the present session of Congress and to express its hope that you will exert your best efforts to this end. It will be noted that the first provi sion of the enclosed bill would prohibit offering for sale as Farm Loan bonds any securities not issued under the terms of the Federal Farm Loan Act. This -9rovision. was included in the bil., at the time it was being prepared, at the request of the Farm Loan Board, but the Federal Reserve Board is not advised whether the Farm Loan Board is still desirous of securing the enactment of such legislatio n. A precedent for the enactment of a law of this kind is found in Section 5243 of the Revised Statu tes which prohibits the X-4509 -2- use of the -7ord "national" as part of the title of any bank not organized under the National Bank Act. While the validity of that provision has never been passed u-lon by the courts, it has boon on the statute books since 1873 and its validity has never been auestioned. it is well recognized that the good name or reputation of a bank is one of its most valuable pousessions and it would seem clear that the same is true of any banking system. Any device or scheme the natural result of which would be to cause banks, corporations or firms of questionable standing to be confused with the Federal reserve banks or which is likely to mislead the public into believing that such banks, corporations or firms are affiliated in some way with the Federal Reserve System endangers the good name and reputation of the Federal Reserve by-stem. It is believed, therefore, that the enactment of legislation to prevent such abuses is necessary to protect the Federal reserve banks and the Federal Reserve System. The Supreme Court of the United States has recognized the principle that the power to create national banks carries with it the power to preserve them,(See First National Bank v. Fellows, 244 U.S. 416 and cases cited), and the same must be true to the Federal reserve banks. There would seem to be no doubt, therefore, as to the constitutionality of a bill designed to protect the reputation of the Federal reserve banks. For your information there is also enclosed herewith a copy of a memorandum prepered for the information of the Federal Reserve Board containing a brief statement of the circumstances of each case which has been called to the attention of the Board in which the word "'Federal" or the word "Reserve" or a combination of the two has been used as a part of the name of a bank, corporation or firm other than a Federal reserve bank or in the advertising of such a bank, corporation or firm or where such use of these ' ,lords has been attempted. It is believed that a reading of the facts sOt forth in this memoandum will convince any one of the necessity for some legislation to Prevent such abuses. As you will note from the memorandum, the Board has sought various ways of preventing the objectionable practices, but usually with little success. The Board has several times requested the aid of the Federal Trade Commission in these matters, but as this body is without jurisdiction over banks or insurance companies its Power to render material assistance has necessarily been greativ restricted, The Federal Reserve Board hopes that you will do all that is possible to secure the introduction and enactment into law of a bill which will provide an effective remedy for this situation. If agreeable to you, the Board will be glad to furnish a copy of this letter and the enclosed documents to each member of your committee in order that they may study them at their leisure. Very truly yours, Enclosures WW OMC D. R. Crissinger Governor IN THE' HOUSE OF REPRESENTATIVES. January 24, 19244 Mr. McFadden introduced the following bill; which was referred to the Committee on Banking and Currency and ordered to be printed. A BILL To prohibit offering for sale as Federal farm loan bonds any securiti es not issued under the terms of the Farm Loan Act, to limit the use of the words "Federal", "Uni ted States", or "reserve",or a combination of such words, to proh ibit false advertising, and for other purposes. BE IT ENACTED BY THE SATE AND HOUSE OF REPRESENTATIVES OF THE UNITED STATES OF AMERICA IN CONGRESS ASSEMBLED, That no bank , banking association, trust company, corporation, association, firm , partnership, or person not orga nized unaer the provisions of the Act of July 17, 1916, known as the Federal Farm Loan Act, as amended, shall advertise or represent that it make s Peaeral farm loans or advertise or offer for sale as Federal farm loan bonds ally bond not issued under the provisions of the Federal Farm Loan Act or make use of the word "Federal" or the words "United States" or any other Word or words implying Government ownershi p, Obligation, or supervision in advertis ing or offering for sale any bond, note, mortgage, or other security not issued by the Government of the United States or under the pro visions of the said Federal Farm Loan Act or some other Act of Congress. SEC. 2. That no bank, banking association, trust company, corportation, association, firm, partnership, or person engaged in the banking, loan, building and loan, brokerage, factorage, insuranc e, indemnity, or trust business shall use the word "Federal", the word s "United States", or the word "reserve", or any combination of such words, as a portion of its corporate, firm, or trade name or title or of the name under which it does business: Provided, however, That the provisions of this sect ion shall not apply to the Federal Reserve Board, the Federal Farm Loan Board, the Federal Trade Commissi on, or any other department, bureau or independ ent establishment of the Governme nt of the United States, nor to any Federal reserve bank, Fede ral land bank, or Federal reserve agen t, nor to the Federal Advisory Council, nor to any corporation organize d under the laws of the Unit ed States, Ailir -2- .a X-4509-a 441.40c.v- A ncr to any bank, ban- Ane: association, trust comnany, cornoration, association, firm -73a.-- t.--nk);:s_lin, or person actually engaged in business under such name or title -nrior to the passage of this Act. SEC. 3. That no bank, banking association, or trust company 7;nicn is not a me:aler of the Federal reserve system shall advertise or re-ori.sent in any way that it is a member of such system or publish or display any s*vn, symbol, or advertisement reasonably caleaDAtod to convey the- impression that it is a member of oach system. S:C. 4. That any bank, banking association, trust company, corporation, association, firm or 7;artnership violating any of the provi5rions-of this Act shall be guilty . of a misdemeanor and shall be oaOject to a fine of not exceeding ,,1,000. Any person violating any of thc .:- 1rovisions of this Act, or any officer of any bank, ba.Aking association, trust company, corooration or association, or member of any firm or partnership violating any of the provisions of this Act who participates in, or knowingly acquiesces in, such violation shall be guilty of a misdemeanor and shall be subject to a fine of not exceeding $1,000 or lamrisonment not ‘exceeding oneyear, or both. Any mach. illegal use of such 'lord or words, or any combination of ia&nsTords, or any other violation of any Of the ,-,rovisions of this Act, may be enjoined by the United States district court having jurisdictio::., at the instance of any United States district attorney, any Federal lacid:Jank, joint-stock land bank, Federal reserve bank;. or the Federal Farm Loan Boar0,- or the Pectoral Reserve Board. der• 47 SEC. 5. That if any clausesentence, ! - )aragraT)h, or tart of this Act shall for any reason be adjudged by any court of competent jurisdiction to be invalid, such judgment shall not affect, impair or invalidate the remainder of this Act, but shall be confined in its operation to the cla;77,0, sentence, paragraph, or -, Lert thereof directly invelved in the controversy in vinich such judgment 'shall have been rendered. .1.;it. ' • a• —4 't 'lit 2 9t."41° • .. •e. a X-4500 January 8, 1926. h onorable Louis T. McFadden, Chairman, Committee on Banking and Currency, lIouse of Representatives, 7ashinton, D. C. dear ConExessman: The Federal Reserve Board welcomes the opport unity 'afforded by the request conveyed in your letter of December 11, 1925, to express its oninion on your Bill, H.R. 2, amending the National Bank: Act and the Feder-11 Reserve Lot. The urgentimportance of liberalizing the law so as to enable lational bLa':s to co:frouto more uffsctively 7ith State institutions has long been recoznizea by the Toal.d, and appro-oriate legislation for this purpose has been undex consid eration clarin the last year by a a)ecial comiaitteo of officers of various Pefierol T.L;s )rve tanks -assisted by the Foard l s Division of Reseurcn and Statistics. The el-Anions l_orcwi th submitted arc basecl in lp.re:c alcaolare IZOOli the work of this Committee after consqltatioll wItta the Fsdoral Advisory Counci l. irlany of the nrevicions of the bill as introd uced are an-proved without change, but the Board vantur es to suyest consierable changes in Section 5200 designed in part to clarify that very complicated section and in part to limit certai n somewhat hazardous classes of loans, ehile strono;ly in favor of liberalizing the stati-te, the Loard feels also that it is highly desirable to introduce additional safeguards, es7)ecially in view of the numerous bank failures in recent years. The 3oard, therefore, submits a limited number of suggestions with this object in view. They are designed mainly to seclr.-e ..:ore adequate data regarding the conditions of the banks throug h examination and it is not believed that they would hamper in any way -Le conduct of its luainess by any well managed bank. -2- X-4500 S:CTIOn .A.:1-1IgliED WITHOUT AN: SU&GEbT7D CHANUF3. The Board approves Une following provisions of H.R. 2 in their presant form: Section 2(a), amonding subsection 2 of Se ction 5135 of the ReNisei Statutes so as to give national bank.s indeterminate 6harters in lieu of charters for a term of 99 years. Section 2(b), amending subsection 7 of Section 5136 of the Rrrvised Stqtutos so as to regal': te the safe deposit business and tho busincss of blvine; and selling investment securities when transacted by nr,,tional banks. Section 3, amending SLction 51‘77 of the Revised Statutes so as to permit fie Dln-chase national bans of mach real ostate as shall be nece:3sary for their rco-,mnodation in the 0$_s their baL 4- .:,ss rather than merel Ivada aq may be nece:,sal'y for their immr te U13 Section .1 1, aneJejLig Sectj on 5138 of the Revised S'c,atutes so as to aathorize the chartering of national baLks in outlying sect Dns of large cities with a capital of $100,000. n 5, t l maacnntuas eo ng Sectioa 5142 of the Eevised s exr r essly to autn or i :c to i rcrcaso th eir capital by k dividends. Section 6, amending Section 5150 of the Revised Statutes so as to authorize the board of directo:*s of anational bank to designate a directer in lieu of the president to be chairman of the bcard of directors. Section 13, amending Section 5208 of the Revised Statutes relatin,f to the certification of checks by officers, directors, agents or employees of Federal reserve banks and member banks of the Federal R,)serve System. . Section 14, amendinE Section 5211 of the Revised Statutes so as to permit reports of condition of national b anlc.s to the II Comptroller of tne Currency to be signed by the vice president or assistaat cashier. -3- X-4500 Section 15, amending the fourth paragraph of Section 13 of the Federal Reserve Act so as to permit -bederal reserve bzInks to rediscount for member bunks the eligible paper of any one borrower in an amount ecual to that which may be borrowed lawfully from any national banking association under the terms of Section 5200 of the Revised Statutes as amended. Section 16, amending Section 22 of the Federal Reserve Act, so as to make thefts by any bank examiner or assistant bank examiner from any . member baak of the Federal Reserve System a Federal offense. RL EST,ITE The Board approves of that portion of Section 17 of your Bill which would amend Section 24 of the Federal Reserve Act so as to broaden the power of national banks to make loans on real estate and increase the aggregate amount of such loans which may be made by any national bank from 33 1/3 per cent of its time deposits to 50 per cent of the national bank's savings deposi ts, but the Board is opposed to that portion of this sectio n of the Bill (page 27, lines 4 to 9, inclusive) which would provide that the rate of interest which national banks may pay upon time deposi ts, savings deposits or other deposits shall not exceed the maximu m rate authorized to be paid upon such deposits by State banks or trust companies. CONSOLIDATION OF NATIONAL BANKS. Unon consideration of Section 1 of your Bill, which would amend the Consolidation Act of November 7, 1918, by the addition thereto of a new section simplifying the procedure involved in the consolidation of State banks with national banks, the Board voted to approve all of such proposed new section except that portion thereof which relates to branch banking. SECTION 5200 OF THE REVISED STATUTES. The Board recommends that the following be substituted for Section 11 of your Bill, which would amend and reenact Section 5200 of the Revised Statutes: -4"Suc. 11. ?hat Suction 5200 of the Revised Statutes of the Unitcd States, as amended, be amended to read as follows: 'Section 5200. Thc total direct liabilitios to any national banl:ing association of any nerson, firm, axr:pwly or corporation for moacy borrowed shall at a6 ti:ae exceed 10 per contam of the amount of the capital stcc7. of such association actuall:, paid in and unimpaired c}nd 10 nor ccntum of its unimpnired surplus fund; and tic a!y_roc;ate li.Apilities to any national ban)in:2; association of any --)croon, firm, comoL.ny or corporation, to wit, the direct liabilitios for moneys borrowed and tie indirect liabilities as surety, endorsor or guarantor, where such trurcty, drawer, endorser, or guarantor obtains a loan from, or discounts paner with, or sells pour under uaarantoe to, any such association, shall at no time excced 25 per centam of the amount of the capital stock of such association actually paid in anel. urilzraired, and 25 ner centu.n of its unimpaired surplus fbnd. 'Within the meaning of this section: (a) The liabilities of any company or firm shall include,tho liabilities of the several members thereof; (b) where the majority of the stock of any corporation is owned by any borrower the liabilities of such corporation as surety, drawer, endorser or guarantor shall be considered part of the aggregate liabilities of such borrower; and (c) all liabilities of the actual borro7er on accamodation paper, whetl,er in tae foxm of liabilities as nakcr, acceptor, surety, drawer, eae.orser, or guarantor shall be considered direct liabilities within the meaning of this section. 'Tie 1Laitations proscribed above in the first paragraph of this section shall be subject to the following exceptions: '(1) Liabilities arising out of the discount or -yurchase of the following classes of paper shall be subject to no limitation based upon the amount of such capital and surplus except where both the drawer and drawee, or both the maker and payee, are corporations and one of such corporations is affiliated with, or a subsidiary of,the other - i.e., where a majority of the stock of one of such corporations is owned by the other or by the stockholders thereof: (a) Bills of exchange drawn in good faith acl,:ainst actually existing values. -5- X-4500 (b) Commercial or business paper actually owned by the person, co:anaay, corporation, or firm negotiating the same. (c) Drafts and bills of exchange secured by shinning documents conveying or securing title to goods shinped. '(2) Liabilities arising out of the discount or purdhase of the following classes of paper shall be subject to no limitation based upon the amount of mlch capital and marplus: .(a) Demand obligations which are or have been discounted or purchased for the account of the drawer or endorser and Which are secured b y docaments covering commodities in actual II process of Shipment. (b) Bankers' acceptances of the kinds described in section 13 ofthe:Pederal Reserve Act. (c) Notes secured by not lees than a 11.1 face amount of bonds, notes, or certificates of indebtedness of the United States. 'M In addition to the 10 per centum permitted under the first paragraph of this section, liabilities to any national banr.in3. association may be incurred in an amount ecrao 15 por centum of the paid in aad unimpaired capital and.15-per contum of the unimpaired surplus find of sach national bankirv; association, when such liabilities are evidenced by notes sozared by shipping documents, warehouse receipts, or other mach documents conveying or securing title covering readily marketable nonperishable staples, the actual market value of which is not at any time less than 115 per centum of the face value of mach notes, and which arc fully covered by insurance if it is customary to insure such staples; but this exception shall not apply to liabilities of any person, corporation, firm or company or the several members thereIf arising from the same transactions and secured upon the identical staples for more than six months; Provided, however, That liabilities of this Character may be incurreT for a period of not more than three months in an additional amount equal to 15 per contum of the paid in and unimpaired capital and 15 per centum of the unimpaired sarplus fund of sach national banking association, in addition to tne 10 ner centum permitted und.er the first paragraph of this section and the 15 per cent= hereinbefore permitted under this paragrap h. -6- X-4500 1(4) In addition to the 10 per centum pormitted under the first paragranh of this section, liabilities to any natioml banking association may be incurreS in an amount eaual to 15 per centum of the paid in and unimpaired capital and 15 7Der centum of the unimprired surplus fund of such national banking association, when evidenced by notes secured by docu:aents conveying or securing title to live stock. which is being proparE., ,d for market during- the peiiod of the loan evidenced by such notes,• the market value of which is not at ally time less than 115 per contum of thc face amount of such notes; but this exception s'aall not anply to tho liabilities of any person, corporation, firm, or compan y, or the several memiecrs thereof. for uoro than nine months ; l'rovided hrywv-rer, That exceptions (3) and (4) are aot cumulative but only alternati7e exceptions one of the two shall be available to the same borrow er and not both tA the same time.'" This nronosed revision of Section 5200 is a result of a thorough study which the Board has caused to be made by a committee of officers of the Federal Reserve System aided by the Board's Divisi on of Research and Statistics. The recowendations of this commit tee were also considered by the Federal .P..dvisory Cou4oil. In the opinio n of the Federal Reserve Board, this revision combines the besii featur es of the various drafts of Section 5200 inoorporated in the bills on this r: introduced in Congross, together with certain new provisions Which the Beard believes to be desh'able. Those faatares of this proPosed revision which are tIken from e'rafts heretofore consid ered by Congress require no comment; but I•sLall commen t briefly on certain of the proposed new features. .ii Suldivisions (b) n.nd (c) of the second paragranh of the above draft are new and are intended to bring under tne 10% limitation of the first paragraph the indirect liabilities of affiliated corporations and liabilitios of the bo2rxrer on accomm odaon ti paper. The Board believes this is necessary in order to cover cases where the drawer and drawee or the maker and indorser are in effect a single interest. The first and second exceptions are broadened so as to apply to liabilities arising cut of the purchase of.paper as well as the discount of paper. A provision is also insert ed in the first exception excluding from the benefits of that exception paper on which the drawer and drawee, or the maker and payee, are afflliated corporations. The purpose of this provision is to exclud e some portion of those notes and bills of exchange which are in sabWiace nothing more than the obligations of a single intere st. ..• Certain language is inserted in subdivision (a) of the second exception to exclude the holding of accept ed demand obligations for an indefinite period of time by a bank,-a practi ce which involves making what is substantially an unsecured loan on single name paper. • X-4500 A new subdivision (c) is added to the second exception, excluding from any limitation notes secured by not less than a like face amount of bonds, notes or certificates of indebtedness of the United States. This is based on the theory that, since banks may purcha se unlimited amJunt of these securities, it would seem logical to permit them to make loans in unliLdted':mounts on notes collat eraled by such securities. The third exception, which relates to liabilities on notes secured by shippire; documents, warehoune receip ts, or other such documents conveying or securing titlo,covering readil mbrket y able nonperishable sta:Jes, veuld -6eruit such loa2s to be made in an amount equal to 15 per centum of the bank's ca-oital and surplu s in addition to the basic 10 per cent for periods not in excess of six months, and in aa add onal amount equal to 15 per cent of the bank's capital and • sur-Dlus for a reciod of not more than three months . The provision requiring such staples to be insured is quaed in such • a way as not to to such staples pig iron, lea'd, zinc, etc., which are not customarily insured. Tile above draft of this exception is believed to be a fair compromise between the corresnonding 9rovisions of the various other drafts of this billhave heretofore been introd uced in Congress; and the Board believes that it will enable the banks to sugply all proper financial facilities for the marketing of such staples. The fourth exce7?tion, which relatesto loans on live stock is dhanged so as not to apply to loans on dairy or broode r herds nor to the liabilities of any ona borrower for maPe than nine months. SUGC-ESTED AlENDMENTS DESIGNED TO STRENGTHEN TT.-1-E B AIMS. 'rile Board also desires to recomfaend the followinE; additional amendments to the National Dank Act and the Federal Reserv e Act and requests that these proposed amendments be incoroorated in your bill: 1. That Section 5202 of the Revised Statutes as amende d be further amended by addinE at the end thereof a new paragraph to read as follows; obligations of every nature both direct and indirect arising out of the sale, pledge , or hypothecation of any one of its assets by a national banking association shall be defLlitely recorded upon its books at the time such assets arn sold, pled.zed, or hypothecated . For eadh failure to comply with this r,Jquirement a national banking association shall be subject to a fine of Five Hundred Dollars, to be imposed by tha Comptroller of the Currency." This propos,al. is designed to cover the rather comnon practi ce of the asu...-iptien of obligations by banks in an informal fashion, often in corresondence betweea bank of:ici als. These obligations • X-4500 frequently esca:9e the notice of bank examiners because the7 are not definitely recorded on the books of the banks. 2. That Section 5240 of the Revised Statutes of the United States, as a:aended, be,,further amended by adding- at the end thereof a new paragraph reading as follows: "Whenever in the judgmeat of the Comptroller of the Currency any national banking association is so closely related in management, operation or interest to any other bank, banking association, trust company, secures company or investment comDany that an examination of such national banking association fLils to disclose its true Ondition in the absence of detailed information regarding such other related institution, such nationol bani:ing association shall (a) obtain from such related institution and furnish to the Comptroller of the Currency a copy of a report of an examination of such related institution made by the State authorities simultaneously with an examination of such national banking assS ciation made by examiners arpointed by the Comptroller of tho Gurrenci, or (b) by such other means as may be deemed satisfactory by the Comptroller of the Currency, furnish to the Comptroller of the Currency dotailedinformation regarding the condon and operation of such related institution. In such cases the Comptroller of the Currency may, upon request, furnish the State Sa?ervisor of Banking, or other sirar officers, copies of reports of examination of such related national banking association. If any national banking association shall fail to comply with the requirements of this paragraph after -5-mand for such compliance has been macle Iy the Comptroller of the Currency, the Comptroller shall report the facts in the case to the Federal Reserve Board, which mai, after a hearing, iSSUB an order depriving such national banking association of the privilege of receiving any discounts, advance_lents or accommodations from the Federal reserve bank of which it is a member until it has conplied fully with all demands made by the Comptroller of the Currency pursuant to the provisions of this paragraph. The Federal Reserve Board ghall send a copy of such order by registered mail to such national banking association and a copy to the 'Federal reserve bank of which it is a member, and, after receint of said order, such Federal reserve bank shall nSt rediscount any paper for, or make any loan, advancement, S r other extension of credit to, gach national banking asso tion until said Federal reserve bank has been noed by the Federal Reserve Board that such national banking association has complied fully with the requirements of this paragraph." This proposal is desiuze:to secure adequate information regarding national banks which aro related to other institutions and in particular to afford some check upon certain abuses frequently engaged in by chapis of banks. During the last few years a nuriber of such chains have colTapsed, IP 111 X-4500 and investigation shows that when a national bank is in such a chain an examination of it fails to disclose its true condition, due to the shifting of assets back and forth between the various institutions which make up the chain. 3. That Section 9 of the Federal Reserve Act as amended be fuftlier' amended by insertiac therein, immediately after the sixth paragr aph thereof, a nor: loara:raph reading as follows: "Whenever in the judgment of the Federal Reserve Board ay =--iber bank is so closely related in management, ci)eration and intertIst to any other bank, banking association, trust company, securities company or investment co.2--)any that an examination of such member bank fails to diclese its true condition in the absence of detailed information regarding such other related institution, such member bank shall (a) obtain from such related institution and furnish to the Federal Reserve Board a copy of a report of an examination of such related institution made by the State authorities simultaneously with an examination of such member bank, or (b) by such other means as may be deemed satisfactory by the Federal :).eserve Board, furnish to the Federal Reserve Board detailed information regarding the condition and operations of such related institution. In such cases the Federal Reserve 'Board may, upon request, furnish the State Su2ervisor of Banking, or other similar officers, copies of reports of any examination of such related member bank which has been made by direction of the Federal Reserve Board or of the Federal reserve bank by examiners selected or approved by the Federal Reserve Board. If any member bank shall fail to comply with the requirements of this paragraph after a demand for such compliance has been made by the Federal Reserve Board, said Board may, after a hearing, issue an order depriving such member bank of the .t)rivile3 .e of receiving any discounts, advancements or accommodations from the Federal reserve bank of which it is a member until it has complied fully with all demands made by the Federal Reserve Board pursuant to the previsions of this paragraph. The Federal Reserve 73.ea:c1 shall send a copy of such order by reL;istered mail to such member bank and a copy to the 7ederal roserve bank of which it is a member, and, after receipt of said order, such Federal reserve bank shall not rediscount any paper for, or make any loan, advancement, or other extension of credit to, such member bank until said Federal reserve bank has been notified by the Federal Reserve Board that such member bank has complied fully with the requirements of this paragraph." • This Proposal is similar to the preceding and is intended to ap-qy to Stateb.-..nks and trust comanies which ere members of the Federal Reserve System. At oresent the only penalty for non-con-pliance with any provision of the Federal Reserve A.ct by State member banks is that provided for in the seventh Parara-oh of Section 9 of the Federal Ueserve Act, which authorizes the Federal Reserve Board to expel from the Federal Reserve System any State member bank which fails to corLoly with the nrovisions of that Section. The -penalty suggested above is less drastic but is neverthless thought to be sufficient. 4. That Section 5146 of the Revised Statutes of the United States, as amendcd, be further amended to read. as follows: "Sec.5146. Every director must, during his whole term of service, bc a citiz3n of the United States, and at least three-fourths of the diroctors must have resided in the State, Territory, or District in which the association is located, or within fifty miles of the location of tho office of the association, for at least one year immediately ! - Dreceding their lecII eI tion, and must be residents of such State or within a fiftymile territory of the location of the association during their continilance in office. Every director must own in his own right at leastten shares of the capital stock of the association of which hedirector, unless the capital of the bank shall not exceed $25,000, in Which case he Lust own in his own right at least five shares of such capital stock. Any director who ceases to be the owner of the required nu:-Lber of shares of the stock, or who pledes or hypotliecates the same, or who becomes in any other mannor dis')ualified, shall thereby vacate his place. "No national banking association shall make a loan or loans a;6re,;ating more Ulan Five Hundred Dollars to any salarie-i officer of such national barLing association or to any corporation in which such officer or any dire6tor of such national banking association owns or controls a majority of the stock or of which he is an officer or director, unless (a) suesi loan is fully secured by readily marketable collateral, or (b) sach officer or director has first made available to the board of directors of uuch national banking association by filing with such national ban-!:.ig association in approved form a financial statement of such officer or of such corporation, as the case may be, which financial statement shall accurately show the financial condition of such officer or corporation at the close of the last fiscal or calendar year preceding the loan. A. violation of this provision shall disaualify any such officer or director from serving as such and vacate his 'place." I - 11 - X-4500 This would amend Section 5146 in two respects: (1) The last sentence of that section as it now reLtds. woula be amended so as to disqualify a director who nledges or hypothecat es his stock. This is intended merely to meet an apparent oversight in the law. (2) A new paragraph would be added relating to loans to officers of national banks and to,cor7orations the majority of the stoc k of which is owned or controlled by officers or directors of national banks. 5. That Section 5205 of the Revised Statutes of the United States, as amended, be further amended to read as follows: "Soc.5205. Every association which shall have failed to pay un its capital stock, as required by law, and every cssociEtion whose capital stock shall have become impaired by losses or otherwise, shall , within two months Efter receiving notice tlieroof from the Comptroller of the Currency, nay the deficiency in the capital stock, by assessment upon the shareholde rs pro rata for the amount of canital stock held by each; and the Treasurer of the United States shall withhold the interest upon all bonds held by him in trust for any such association, upon notification from the Comptroller of the Currency, until otherwise notified by him. If any such association shall fail to pay up its capital stock , and shall refuse to go into liouidation, as provided by law, for two months after receiving notice from the Comptrolle r, o receiver may be appointed to close up the business of the association, accordirg to the provisions of section fifty-two hundred and thirty-four: And prov ided, That if any shareholder or shareholders of such ban': shall neglect or refuse, after two months' notice, to pay the asses sment, as -provided in this section, it shall be the duty of the board of directors to cause a sufficient amount of the capital stock of such shareholder or shareholders to be sold at public auction (after thirty days' notice shall be ,?;ive n by postirg such notice of sale in the office of the bank , and by -2ublishing such notice in a newspaper of the city or town in which the bank is located, or in a newspaper publishe d nearest thereto), to make good the deficiency, and the bala nce, if any, shall be returned to such delinquent shareholde r or shareholders; Provided, however, That the Comptroller of the Currency may extend the time for payment of such assessment whenever in his judgmont it may be deemed advisable." The only eff-ct of this amendment would be to shorten from three months to two months the allowed for the payment of assessments to restore the cr,pital of a natio nal bank which has become impaired, with a Provision authoriz ing the Comptroller of the Currency - 12- 111 X-4500 to extend the time for the payment of such assessment when in his judgment it may be deemed advisable. The Board has taken no definite action upon those provisions of your Bill which are not specifically mentioned above , but if it does so I shall advise you promptly of the actio n taken. The Board is also consiering the aavisability of recom mending the enactment of certain other amendments to the Natio nal Bank Act and the Federal Reserve Act, but has not yet taken definite action upon the matter. If it decides to recom mend any further amendments, I shall advise you at a later date. It may be of interest to yaur Committee to know that this letter was considered in detail at a meeti ng of the Federal Reserve Board at which all members except the Secre tary of the Treasury and the Comptroller of the Currency were present and was approved by all those members who were present. If there is anything further that the Board can do to be of any assistance to you in this or in any other matter, please do not hesitate to call =on us. Very truly yours, D. R. Crissinger, Governo r. WW-OMC sad P.S. If you so desire the Board will be glad to furnish you with additional copies of this letter for tae use of the other members of your Committee. 44k O O FEDERAL RESERVE BOARD X-4510 WASHINGTON ADDRESS OFFICIAL CORRESPONDENCE TO THE FEDERAL. RESERVE BOARD SUBJECT: January 20, 1926. Federal Reserve Bank of San 'Prancisco v. Idaho Grimm Alfalfa Seed Growers Association. Dear Sir: There is enclosed for your information a ,222.11_521_212_71 ter addressed to the Board -oyjr. Perrin transmitting a copy of the o2inion rendered by the Circuit Court of Anpeals in the above entitled case, which was clecded adversely to the Federal .Reserve Bank by the United States District Court and the Circuit Court of Appeals. After discussing the case at some length, Mr. Perrin states that the Executive Committee of the Federal Reserve Bank of San Francisco feel that the case involves a cuestion of vital importance not only to the Federal Reserve Bank of San Francisco, but to all other Federal reserve banks, and has authorizod the employment of Honorable Newton D. Baker to assist in handling the case before the Suereme Court of the United States. Mr. Perrin suggests that the case be brought to the attention of the other Federal reserve banks and that, if agreeable to them, Mr. Baker's fee be prorated among all of the Federal reserve banks, as has been done in the past in relation to other cases of system-wide interest. The Board understands that Baker actually has been employed by the Federal Reserve Bank of San Francisco and has filed with the Stupreme Court a petition for a writ of certiorari. The Board desires to make no recommendation in this matter, but requests that you advise it whether or not your bank would be willing to bear a pro rata share of the expenses of Mr. Baker's employment in this case. Yours very truly, D. R. Crissinger, Governor TO GOVERNORS OF ALL F.R.BANKS Enclosure. Page 61 Volume 156 X-4464 COPY IN THE UNITED STATES CIRCUIT COURT CF APPEALS For the Ninth Circuit. FEDERAL RESERVE BANK OF SAN FRANCISCO, a corporation, Plaintiff in Error vs. No. 4560 IDAHO GRI: ALFALFA SEED GROWERS ASSOCIATION, a corporation, Defendant in Error. Upon Writ of Error to the United States Dist rict Court for the District of Idaho, Eastern Division. Before GILBERT, HUNT, and RUDKIN, Circ uit Judges. RUDKIN, Circuit Judge: During the period herein mentioned, the Idaho Grimm Alfalfa Seed Growers Asso ciation was a farm marketing association organized under the laws of that State Laid was engaged in the business of cleaning and marketing alfalfa seed produced by its members. When Alfalfa seed was sold, a draft was draw n on the buyer for the purchase price with a bill of lading attached. Up to about a year prior to November 28, 1923, all drafts thus drawn were depo sited with D. W. Standrod and Company Bankers, for collection only, and the Association was not permitted to draw against the amount of the drafts until payment was actually made to the Standrod Bank. But in the fall of 1922 , this arrangement was changed through an agreement between the Associat ion and the Standrod Bank, and thereafter the Association was given imme diate credit for the amount of the • -2- X-4464 drafts when deposited, and was permitted to draw aa.ainst them to the full amount, if it so desired. If a draft was not paid when presented, the amount was charged back to the accaant of the Associ ation, and if paid, the Association was charged with iaterest on the amount s checked out before the draft was.actually paid. On November 23, 1923, the Association drew a sight draft in the sum of $10,648.80 on Teweles and Compan y for the purchse price of a carlII of alfalfa seed shinped to that company. The draft was made payable to the Standrod Bank, had attached theret o a bill of lading for the shipment, and was accompanied by a letter of instru.ction s, stating that payment might be deferred until the arrival of the car. The draft was then forwarded by the Standrod Bank to the Federal Reserve Bank at Salt Lake for discount and was there discounted and the amount placed to the credit of the Standrod Bank. Two similar drafts were drawn by the Associ ation on november 26, 1923, for substantially similar amounts and these drafts took the same courde, It might be said in this connection, however, that the general manaer of the Association neglected to sigh one of the last mentioned drafts and tile defect was not discovered until the draft reached the Federa l Reserve Bank at Salt Lake. The Standrod Bank was then notified of teSeect over the telephone and another draft was sUbstituted in its place. The Standrod Bank was open for the transaction of business for the last time on November 28, 1923, and on November 30, 1923, its affairs were taken over by the Banking Officers of the State. On the latter date the Standrod Bank had an overdraft with the Federa l Reserve Bank in the SUM of $47.96, and the Association had a lalance to its checking accaunt, on the books of the Standrod Bank, in the sam of $32,29 5.20. On December 1, 1923, the Association notified the Banking Officers of the State that the Standrod S -3- X-4464 Bank was insolvent at the time of the receipt of the drafts and that its officers and agents knew or had cause to beli eve that it was so insolvent, and the Association made claim to the draf ts or, if collected, to the proceeds thereof. A copy of this notice was mailed to the Federal Reserve Bank on the some day. The present action was then inst ituted by the Association against the Federal Reserve Bank, the Standrod Bank, and the Banking Officers of the States to recover the amount of the three drafts or their value. The com- plaint contains six causes of action in all, or two causes of action based on each of the three drafts. The causes of action on each of the thre e drafts were identical in form howe ver, so that for persent purposes reference need only be made to the firs t and second causes of action based on the draft of November 23, 1923. Speaking generally, it was alleged in the first caus e of action that for upwards of a year prior to the date of the receipt of the draft in question the Standrod Bank was insolvent; that its directors and managing officers, and the mana ging officers of the Federal Reserve Bank were at all times fully aware of its insolvent condition; that the draf t was forwarded to the Federal Reserve Bank for collection; that the amount thereof was collected by the Federal Reserve Bank after the close of the Stan drod Bank, and that the Federal Reserve Bank refused to account for the proc eeds thereof. In the second caus e of action it was alleged that the draf t was deposited with the Standrod Bank -under an agreement between the Asso ciation and the Bank that the draft and the proceeds thereof should be and remain the property of the Association, and that the title thereto, or to the proc eeds thereof, should not become the property of the Standrod Bank. At the commencement of the trial the Federal Reserve Bank moved the court to require -4- X-4434 the plaintiff to elect whether it would proceed on the first, third and fifth causes of action, which it claimed were of egaitable cognizance, or on the second, fourth and sixth causes of action which it claimed were cognizable at law. This motion was denied. The motion was renewed at the close of the testimony on the pc.rt of the plaintiff but wao again denied. A motion for a nonsuit was then granted to the second, fourth and sixth cuses of action, but denied as to the remaining causes of action. The Federal Reserve Bank then moved the court to discharge the jury and transfer the cause to tho equity side of the mart. The court took this motion under advisement and directed the trial to proceed in the meantime. The catoe was thereafter submitted to the jury under instructions to which no exceptionswere taken, and the jury returnbd a verdict in favor of the plaintiff in the sum of $32,692.12. Some- time after the verdict was returned the court filed a memorandum on the motion to discharge the jury and transfer the cause to the equity side of the court in which it said: "While the point is not entirely free from doubt, upon consideration I have concluded that the complaint was properly entertained upon the law side of the court. "The further question of whether or not, if the verdict be taken as advisory only, it should be approved and adopted, I answer in thc affirmative." The court then added: "Counsel for the plaintiff will prepare a judgment in the ordinary form of a judgment upon the verdict, incorporating therein, at the proper place, the additional clause, in substance, 'which finding of the jury is approved and adopted.'" Judgment was thereafter entered upon the verdict, as directed by the court, after making certain deductions for moneys checked out by the plaintiff before the close of the Standrod Bank. has been braught here for review by writ of error. The juigment thus entered • • -5- X-4464 The first assignment of error is based on the refusal of the court to require the defendant in error to elect Nhether it would proceed on the even or odd numbered causes of acti on. In answer to this assignment we need only say that the granting of the nonsuit as to the even numbered causes of action necessarily compelled the defe ndant in error to proceed on the remaining causes of action and, conceding for the purposes of this case only , that it was error not to requ ire an election at an earlier stage of the tria l, the error was plainly and mani festly without prejudice. Tho next assignment of error is based on the rcfusal of the caurt to discharge the jury and transfer the cause to the equity side of the court after the nonsuit had been gran ted as to the even numbered causes of acti on. Again, if we concede that the action or actions were of equitable cognizan ce, no error can be predicated upon the action of the court in submitting the issues to a jury in an advisory capacity because that practice is always permissible and its adoption is a matter of discretion with the court. And when the court treated the verd ict as advisory only and approved the find ings of the jury it asserted all the powers and assumed all the responsibilities of a Chancellor. This was the utmo st consideration to which the plaintif f in error was entitled and it is in no position to complain of mere matters of procedure resting in the sound discretion of the court. We might say in this connection, however, that it does not appear to us that the defendant in error was seeking to enfo rce a trust or to follow trust funds. It proceeded upon the theory that the dive rsion of the proceeds of the drafts by the Federal Reserve Bank, with knowledg e that the Standrod Bank was insolven t, and with knowledge that the drafts were not the property of the Standrod Bank, was a tort or wrong for whic h a caurt of law has always afforded a full, complete and adeauate remedy. -6- X-4464 Numerous errors have boon assigned on the admission of testimony over objection. The defendant in error offered in evid ence a compilation maee by one of the witnesses from A° book s of the Bank, showing in detail the resources and liabilities of the Bank at the close of business on November 28, 1923. This compilation or gummary was taken from books already in evidence; its correctness was at no time ques tioned and is not questioned now. There was no error in this ruling. San Pedro LulAber Co. v. Reynolds, 53 Pac. 410; Jordan v. 'Warner's Estate, 83 N.W. 946; State v. Brady, 69 N.7. 290. The liquidating officer of the State, who had charge of the affairs of the Standrod Bank since its clos e, was permitted to give the amount collected or realized from the assets in his charge daring the preceding ten months, and to state whether, in his opinion, any equity remained in the pledged bills receivable of thc Bank after payment of the loans secured by the pledges. As already stated, the witness had been in charge of the affa irs of the Bank for about ten menths; it was his duty to collect aad distribu te the assets in his charge and he had devoted his entire tiolc and attentio n to that object. He had consulted with the collecting aEent of the Fedcral Reserve Bank and was more familiar with the assets of the Bank and their prob able value than any other person, exce pt perhaps the managing officevs of the Bank. He was competent therefore to express an opinion on the questim subm itted, and the fact that his opinion was based on the value of the securities some time after the close of tlie Bank would go to the weight of his testimon y, not to its competency. State v. Cadrell, 44 N.W. 700; Calpbell v. Park, 101 N.W. 861. The plaintiff ia error moved to stri ke the testimony of ono of the witnesses, based on a compilation prepared from the books of the Standrod Bank in evidence, showing the numb er of overdue notes held by the Stan drod -7- S X-4454 *Bank and how long overdue, nEd the deficien cy cr excess of reserve on deposit with the Federal Reserve Baak cm diff erent dates. There was AO error in this ruling for reasons already stated. Under date of November 10, 1923, or eighteen days befo re the close of the Bank, the vice-president and mana ger of the Standrod Bank addressed a letter to the managing officer of the Federal Reserve Bank stating that he had found it necessary to take advantag e of the offer of the latter to handle a note of $10,000; that he was encl osing the note therewith, payable ten days from November 13, adding: "This will tide um over." The manager of the Federal Reserve Bank answered this letter unde r date of November 14, 1923, stating that the discount committee of the Federal Reserve Bank had declined to accept the note for discount, and further that the directors of the Federal Reserve Bank: were of opinion that the Fede ral Reserve branch had advanced a sufficient sum to provide for the ordinary needs of the Standrod Bank, and that considering all the features ente ring into the security pledged as collateral to its obligation now owing to the Federal Reserve Bank, it was only proper that the directors and stockholders of the Stan drod Bank should rrovide funds out of their personal resources of a sufficie nt amaant to prolperly rehabilitate the Bank and furnish it with a larg e enough nmaunt of working ca-oital to have the bank function in a proper manner. Error is assigned in the admission of these two letters, but the assi gnment is without merit. The letters clearly tended to show the desperate conditio n of the Standrod Bank on that date and knowledge of that condition on the part of the Federal Reserve Bank. Under date of SepteMber 9, 1922, the assi stant manager of the Federal Reserve Bank addressed a lett er to the president of the Standrod Bank stating that the harvest season was on; that he desired to impress upon the officers of the bank the necessity of shap ing their affairs so that after the -a- X-4464 period of liquidation was ovcr the bank would show a decided improvement in its condon; that at that time the loms of the institution approximated $1,700,000, while the deposits were less than ohe half that amaant, or in the neighborhood of $785,000; that these fiures spoke for themselves and called fSr no comment; that if the Standrod Baak expecied to continue to receive assistance from by eSeera Reserve Bank, a determined effort must be put forth sSficers to the end that a proiJer ratio betwee n loaas and deposits might be shown; and the president of the Standr od Bank was directed to bring the letter to the attention of the board of directors and furnish the Federal Reserve Bank with a lettor over the signat ure of L.aci.1, outlining what the Federal Reserve Bank might expect in that regard. This letter was answered by the president of the Standrod Bank under date of September 11, 1922. In this letter he stated that they expected to reduce their loans to $1,200,00C that season; that with this reduction there would no doubt be a correspong.ing increase in deposits; that the officers of the Standrod Barak realized that it wauld take another year to put everything in s-Lape, where there would be no borrowed money; that in a great many cases they had loaned money to farmers and stoclunen and it was absolutely necesf. .ary to mnke further advances in order to secure liquidation on their present indebt edness. This letter was answered under date of September 12, by the assist ant manager of Bank, by a second letter, stating that the letter of Standrod Baak was unsatisfactory for two reason s: cation over the signature of each of he -S eIresden Reserve of the First, because a comm eSrectors setting forth what might thenceforth be expected from the bank was not famis hed as requested, and second, while the Federal Reserve Bank was not in a poson to know how great a reduction in loans should be made, it believed that the policy of the Stand rod Bank should be to bring about the gratest possible liquidation, to the ead that it might again resume a position more nearly bordering on the • sound and normal. _9_ • X-4464 These letters were objected to for the like reasons as tho letters already considered, but, in our opinion, they were competent for the same reasons. Theytended to show the condition of the Standrod Bank and knowledge of that condition on the part of the Federal Reserve Bank. True, the letters were written a little more than a year before the bank closed, but other testimony in the case show s that there was no gubstantial change in the condition of the bank from that date until the time it closed, axcopt perhaps for the worse, as the disp arity between loans and deposits was even greater when the bank closed than when these letters were written. It only remains to consider the question of the insolvency of the Standrod Bank; knowledge of that insolven cy on the part of its officers and the officers of the Federal Reserve Bank , and the effect of mlch insolvency and knowledge, if proven. A bank is said to be solvent when it has enough assets to pay, within a reasonable time,all of its liabilities through its own agencies, and is insolvent when unab le to meet its liabilities as they become due in the ordinary course of business , or, in shorter terms, when it cannot Day its deposits on demand in acco rdance with its promise. 7 C.J. 727. Measured by this rule we think the cuur t and jury were amply justified in finding that the bank was insolvent, if inde ed it was not wholly and hopelessly so. When tho Bank closed, its deposits were approximately $500,000, and its loans and discounts approximately $1,300,000. It had borrowed from the plaintiff in error the sum of appr oximately $700,000; from the United States National Bank of Portland apiproxi mately $85,000; and from the National Bank at Pocatello, Idaho, $20,d00. It had pledged with the plaintiff in error, as security for its loan, bills receival le of the face value of approximately $900,000; with the United States Nati onal Bank of Portland bills receivable • X-4464 -10- of the face value of approximately $175,000; and with the bank of Pocatello bills receivable of the face value of approximately $30,000. And we think it fairly appears from the testimony that there was no equity in the bills receivable thus pledged, after the payment of the loans which they were pledged to secure. There was left with the bank to meet its ordinary demands from day to day and to pay its depositors, bills receivable of the face value of approximately $275,000 and a small amount in stocks, bonds, warrants and overdrafts. During the tcn months which had elapsed since the bank closed its doors, the liquidating officer of the State had been able to realize but $40,000 or $50,000 from the assets and resources that came into his hands. In the summer of 1923, the board of directors considered the proposition of forming a holding company to take over three, four, or five hundred thousand dollars in face value of the uncollectible paper of the bank, but the vicepresident and manager did not think that this would suffice. During July and August, 1923, the Pacific Joint Stock Land Bank forwarded two checks to the Standrod Bank aggregating the sum of $11,000, with instructions to obtain releases of liens against property and turn the proceeds over to borrowers from the Joint Stock trIrd Bank. The releases were not returned and several letters passed without satisfaction. A repre- sentative of the Joint Stock Land Bank was then sent to the Standrod Bank to inquire into the matter. He there discovered that the money had been misapplied and was informed by the vim-president and manager that the demands upon the bank were rather large and unusual, and that owing to low reserves he was not in a position to repay the money. time, but this *Is refused. He asked for further Several meetings of the board of directors fol- lowed and finally, about two days later, the representative of the Land Bank received a draft on the Walker Brothers Bank at Salt Lake City for the amount. • -11- 111 X-4464 We have already referred to the refus al of the loan of $10,000 a few days before the close of the bank to tide it over. As against this the only testi- mony offered by the plaintiff in error was some testimony tending to show that the officers of the Standrod Bank had no knowledge of its insolvent condition. While the testimony had that tendency, if credi ted by the court and jury, it likewise had a strong tende ncy to S'clow that the bank: was in fact insolvent. It appeared from the testi mony of one of the directors that nearly all the loans had been outstanding since the close of the war; that there was no money in the country; that the bank was unable to make collections; that its deposits had decreased from a million and a half to about half a million dollars; that the directors of the bank had pledged their personal credit to raise money i'or the bmik, in short, that the condition of the bank was all but desperate. Under these circumstances it is idle to claim that the finding of the court and jury on the question of insolvency was not justified by the testimony. The claim that the directors and manag ing officers of the Standrod Bank had no notice or knowledge of the existing condition is equally unfounded. The directors, called as witnesses, derived their knowledge of the condition of the bank, in most part , ,from reports made to them by other officers of the bank, and it is a signi ficant fact that such other officers were not called as witnesses. True, they might have been called by the de- fendant in error, but officers who receive deposits in an insolvent bank are guilty of a fraud, if not a crime , and a third party who undertakes to prove the fact of insolvency cannot be expected to call the perpetrators of the fraud as witnesses. Furthermore, the insclvent condition of the bank had so long continued and was manif ested in so many different ways, that a finding of knowledge of insolvency onthe part of the managing officers of -12both banks was fully justified. X-4464 If this be true, all the authorities agree that the receipt of a deposit by an insolvent bank is a fraud on the depositor; that title to the deposit does not pass, and that the deposit may be followed so long as it can be identified. A fraud was thus perpetrated on the defendant in error by the officers of the Standrod Bank, and, tingly or unwittingly, the Federal Reserve Bank became a party to the fraud. It is lastly contended that the plaintiff in error is a bona fide purchaser before maturity and that its title cannot be assailed. But the Federal Reserve Bank had notice that the drafts were not the property of the Standrod Bank, in two ways: First, because it was apparent that the Standrod Bank had no funds with which to purchase the drafts; and second, because the applications for discount stated on their face that the drafts were the property of a depositor. With this knowledge, a finding of mala fides on the part of the plaintiff in error was justified, and the plea of bona fide purchaser cannot prevail. The judgment is affirmed. (ENDORSEDO Opinion. Filed Nov. 9, 1925 F. D. Menckton, Clerk, by Paul P. O'Brien, Deguty copY) FEDERAL • X-4464-a RESERVE BANK Of San Francisco John Perrin, Noember 18, 1925. Chairman of the Board and Federal Reserve Agent. Federal Reserve Board Washington, D.C. Sirs: During 1924 the Idaho Grimm Alfalfa Seed Growers Association, an organization of farmers engaged in the production and sale of alfalfa seed, brought an action against the Fede ral Reserve Bank in the state courts of Idaho for the recovery of $32,692, loss alleged to have been sustained through the failure of D. W. Stan drod & Co., Bankers, Blackfoot, Idaho. This case was removed by the Fede ral Reserve Bank from the State Court to the United States District Cour t sitting in Idaho. Plaintiff's claim was predicated upon the following facts: The Seed Growers Association, for some time prior to the failure of the Standrod Bank on Nove mber 30, 1923, had been a depositor in that bank. They had entered into a special arrangement pith the Standrod Bank whereby they were priv ileged to deliver to the Standrod Bank sight drafts drawn to the orde r of the bank, with order bill of lading attached, representing the purchase pric e of seed sold by them to eastern customers, and for these drafts the Stan drod Bank gave the Association full and immediate credit. The Association was then allowed to treat the proceeds as part of their gene ral checking account and to use the funds represented by the drafts without restriction, even before the drafts could possibly have been collected. For some time prior to November, 1923, the Standrod Bank had been in an extended condition and this fact was known to the Federal Reserve Bank and to the officers of the Standrod Bank. During the early part of November, 1923, the condition of the Standrod Bank was such that the Federal Reserve Bank of San Francisco felt that it was not warranted in making any further advances to the Standrod Bank and so notified that bank. During the last week that the bank was open for business, the Seed Growers Associat ion clenosited with the Standrod Bank three sight drafts with bills of lading attached, aggregating over $30,000, receiving immediate credit therefor , and against the credit thus created the Seed Growers Association imme diately commenced to draw. These drafts were negotiable in form and bore no evidence of any attempt on the part of the Association to restrict their negotiation. Immediately upon their receipt by the Standrod Bank, that bank transmitted them to the Salt Lake City Branch of this bank, accompan ied by the usual form of application for discount. Credit of the Associat ion being good, and the paper being eligible and entirely acceptable, the drafts were immediately discounted X-4464-a by this bank and the proceeds thereof passed to the reserve account of the Standrod Lank. That bank immediately procee ded to avail itself of the reserve credit thus established and betwee n the date of the credit and the date on which the bank closed its doors used all of its reserve funds and failed with an overdraft of a small amount. Upon the delivery of the drafts to the Federal Reserve Bank they were immediately ierwarded to the eastern points at which they were 7layabl e for collection. Proceeds from the collections had not come into the posses sion of the Federal Reserve Bc.nk when the Standrod. Bank closed its doors. As soon as the Association received notice that the Standrod Bank had placed its affairs in the hands of the State Commissioner of Financ e, the Association notified the Standrod Bank and the Commissioner of Finance that the drafts had been deposited for collection only, that title theret o hml not passed to the Standrod Bank and that the Association would claim as its own any funds representing the collection of said draft:. The Associ ation also claimed at this time that a fraud had been committed upon it through the receipt of the drafts by the Standrod Bank at a time when it was insolvent and when such insolvency was known to the officers of the Standrod Bank. A copy of this notice was served, upon the Federal Reserve Bank after the Standrod Bank had closed. Subse-Taantly, lone-: after collec tion of the drafts had been - adj;:fl.Tii Association demanded that the Reserve bank reimburse it for •the amount of-l_ts deposit in the Standred Bank at the time of failure, aggregating over $30,000. This demand was refaced and the action above referred to was commenced. The case was tried in the United States District Court at Pocatello before a jury consisting of eleven farmers and one ex-policemaloeq : The complaint consisted of six causes of action, two on each of the drafti involved. The first cause of action as to each draft was predicated upon the theory that the Standrod Bank was insolvent when the drafts were received, that this insolvency was known to its officers and to the Federal Reserve Bank and that the failed bank, as well as the Federa l Reserve Bank, was liable -to the Association for the =used portio n of the deposit representing the face value of the drafts. The second cause of action in each instance was predicated upon the theory that the drafts had been deposited for collection only and that, title having been retained by the Seed Growers Association, no purchaser of the drafts could acquire title good as against the Association. Upon the trial this ban'c contended that there was no evidence to support the theory that the drafts had been deposi ted for collection only and that inasmuch as the Federal Reserve Bank did not know and had no means of knowing the statas of accounts as between the Association and the Standrod Bank, it patently could not be charged as a party to the alleged fraud resulting from the receipt of deposits. The Court granted a motion for nonsuit on the three causes of action, predicated upon the theory that the drafts had been deposited for collection only, but allowed the case to proceed on the insolvency theory. The case was voluntarily dismissed as against the Commissioner of Finance, the Stanarod Bank and the liquidating agent, leaving this bank as the sole defendant. A verdic t was rendered for the fall amount of the drafts, without any allowa nce for the amount thereof actually used by the Association. The Court subsequently required a deduction of the amount checked out by the Associ ation 11\ 41 111Ew,. X-4464-a and entered judgment for the balance. The case was appealed by us to the Circuit Court of Appeals for the Ninth Circuit and was recently argued before that court. The judgment of the lower court was affirroed and it is the present intention of this bank to ask for a rehearing before the Circuit Court of Appeals and if this is denied to take the matter to the Supreme Court of the United States. 0 AI There are many facts in connection with the case, favorable to our position, which it is difficult to set forth in this letter. It may be said, however, that there is absolutely no evidence in the record which even remotely tends to show that the Federal Reserve Bank had any knowledge whatever that the Seed Growers Association had not received a fall, adequate and present consideration from the Standrod Bank for the drafts. No attempt was made to prove that the Reserve Bank knew that the proceeds of the drafts had been left on deposit with the Standrod Bank. It was shown that the Association might have withdrawn the fall amount of the drafts in cash over the counter of the bank, might have accepted exchange on the Standrod Bank's correspondents for the amount thereof, or might have used the proceeds to pay a preexisting indebtedness to the Standrod Bank and that no knowledge of which of these throe co-arses had been followed was brought home to the Federal Reserve Bank. It was further shown that the Association itself was so well acquainted with the condition of the Standrod Bank that about a month prior to the date when it closed the manager of the Association demanded from the Standrod Bank a prerequisite to further deposits that the bank should give the Association a bond to protect its account similar to bonds furnished to indemnify public deposits. The manager of the Association also admitted that he had known the Standrod Bank was in an extended condition for two years prior to its failure. The Directors of the Standrod Bank all testified that they had no knowledge whatever that the bank was insolvent until it was taken in charge by the Commissioner of Finance. Practically the only evidence of insolvency introduced was that gained from an examination of the books of the bank after it had closed and from an appraisal of the value of its assets by the Deputy Commissioner of Finance who took charge of the bank in November, 1923. The existence of a condition of insolvency is predicated solely upon inference and not upon positive testimony. Yesterday the Executive Committee of this bank, feeling that this case involves a question of such vital iolportance not only to this bank but to all other Federal reserve banks and banks generally, authorized the employment of Hon. Newton D. Baker to assist in handling the case before the Supreme Court of the Unitod States, provided Mr. Baker was available. From the brief summary of the facts which I have given it can be plainly seen that if the judgment of the lower court, sustained by the Circuit Court of Appeals, is to stand, neither this bank nor any bank can safely discount for another institution, which it knows or has reason to believe is in an e=tended condition. Banks do not usually discount their customers' paper unless they are in need of funds and the Court has said in effect that if the bank is in that condition, the discounting agency is placed on notice that there may be equities enforceable against innocent third parties purchasing paper for value. The decision of the Circuit Court of Appeals was evidently hastily prepared and is not supported by any citation of authorities. A cony of the opinion prepared by Judge Rudkin •••-•••.• Aki.4.;44, -440.1* IP -4-- 440 X-4464-a is attached. hereto, as well as a cony of our closin g brief. 4t I have taken the liIverty of calling t4s case to your attent not only for the purpos ion, e of acquainting you witktethe sit uation in relation thereto, but also for the •purpose of suggestinglbhat the case and its importance be brought to the -attention of the other Federa l reserve ban4z and, P.71f agreeable to them, that Mr. Baker's fee be,frorat ed among all of the' banks, as has been done in the past in relation to sev eral other cases no more important and of no more universal interest than thi s. I am informed:that cou nsel for the Federal Reserve - Board advised as to progress in has been this case and has been sUpplied with copies of the brieft„. A co-ry of the Oninion of the Cirquit Court of Appeals is beforwallted to Mr. Wyatt. • 'pug:truly yours, 40 ... (signed) JOHN PLUM Chairman of the Board. er Epic (mare. ft# Pf - -41111b..,11111664. 4 • Page 90 Volume 156 Notes of 1dr. Hamlin on offers of membership on Federai Reserve Board. This sheet was glued in and could not be removed. It was defaced. oo` FRANCIS E. WARREN. WYO.. CHAIRMAN REED SMOOT,UTAH LEE 13. OVERMAN, N. C. WESLEY L. JONES, WASH. WILLIAM J. HARRIS. OA. CHARLES CURTIS. KANS. CARTER GLASS. VA. FREDERICK HALE, ME. ANDRIEUS A. JONES, N. MEX. LAWRENCE C. PHIPPS,COLO. KENNETH MC KELLAR. TERN. WILLIAM B. MC KINLEY. ILL. EDWIN S. BROUSSARD. LA. IRVINE L. LENROOT, WIS. THOMAS F. BAYARD, DEL. HENRY W. KEYES, N. H. JOHN B. KENDRICK, WYO. • • SAA-ti# '1112-lifeb Zia-fez Zenale COMMITTEE ON APPROPRIATIONS KENNEDY F. REA. CLERK January 23, 1926. T7y dear Governor Harilin: Responding to yours of January 22nd, with resrect to appointments to the Feueral Reserve Board, my knowledge of these relates only to the time Phen I was at tne Treasury. I recall distinctly that the vacancy created by the resignation of Mr. Delano was held open an unreasonably long time in an effort to get some suitable Republican to accept appointment. The place was offered to Mr. Freaeric Goff, of Cleveland, Mr. Wallace Simmons, of Saint Louis, to Y.r. dooliey, head of the American Radiator' Company, whose home at the time was in Chicago, and by cable to 7/4. Charles G. Dawes, then in France. I have a not too well defined impression that it was again offered to Harry Wheeler of Chicago. After these vain efforts to get a suitable Republican for the position, it was offered three times to Evans Joollen,of Indianapolis, who accented and declined as many times in a single meek. With the President's permission I was on the eve of offerin the place to Lr. Puelichi of Minnesota; but at this point Mr. McAdoo intervenea with a personal appeal to me to designate Mohlenpah. I had met Monienrah once or twice and simrly knew him as one of the few bankers who had favored the passage o/ the Federal Reserve Act aria wno exhiuited the courage alone to advocate it before that meeting of the American Bankers' Association in Boston which unqualifiedly condemned it three weeks betore it became a law. I yielded to Mr. McAdoo's urgent persona/ request and, I may say confidentially, this apnointment ta the Boara is the only one with which I had anything to do of which I did not feel. particularly proud. I have no information as to whom Secretary Houston first tendered the appointment which the President subsequently gave to Platt. I have rood reason to believe that my letters to the President and Secretary Houston in behalf of Platt resulted in his appointment. While he isn't urilliant and sometimes is quite indiscreet, I have never had occasion to regret my action in his case. I wish I could be a little more snecific about these matters; mit all my data relating to them is in a box at my country home. Always with cordial regards, Sincerely yours, th44-„,t/-446/ Hon. C. S. Hamlin, Federal Reserve Board, Washington, D.C. Page 92 Volume 156 • 411 I9 5 B ROADWAY NEW YORK January 27, 1926. Hon. C. S. Hamlin, Federal Reserve Board, Washington, D. C. My dear Hamlin: The copies of my Treasury correspondence are not where I can put my hands on them at present and I have to speak entirely from memory about the offer of Reserve Board positi ons to different men. I cannot recall definitely hether the President authorized me to offer the position to the men whom I sounded, or whether T sounded them with a view subse4uent1y to recommend them to the President. My recollection is that I canvassed the names of the three men with the President and received his sanction. One of the ien was Otto Bannard, of New York, a retired banker of much experience; another was Hulbert, of Chicago; and the third was R. H. Treman, of Ithaca. I am not sure whether all these names came up in connection with the vacancy which Platt filled or not. sounded Treman before Platt was appointed. It seems to me that I Whether I sounded the other two in connection with the vacancy which Platt filled, or the vacancy which Wills filled, or the vacancy left by Wills' resignation, I do not remember. At any rate, two of the men whom I canvassed were very outstanding men, and the failure to get their consent illustrates Page 93 Volume 156 A • -2the difficulty an executive labors under in filling positions as the pulic expects them to be filled. I had this same difficulty when I was tryincr, to fill Leffingwell's place in the Treasury. I sounded Jackson reynolds, now president of the First National Bank in New York, Melvin Traylor, president of the First National Bank of Chicago, I believe, and Buck Hallowell, of Roston. No one of these was available. Gilbert was then appointed and made an excellent Assistant Secretary. After a great deal of hesitation I did decide to publish something. Doubleday, Page and Company will publish a book, prob- ably in the latter part of the year. They were given th,, serial rights to the matter, and the World's Lork is doing the initial serializing. The first installment has already appeared in the February number. Doubleday, Page and Company sold secondary and subsequent serial rights to a number of papers, including those of the Hearst syndicate. The installments will ap ear in these papers after they have appeared in the World's Work. Mrs. Houston had a nice letter from Mrs. Hamlin not long ago. When I was in Washington I called to see you but you were out. With best wishes, Sincerely yours, 06 oe' 4,1r s_a.t. • C ONFIDENTIAL • m 9, Not for publication 1925. OPERATIONS OF THE FERAL REERVE CLEARING SYSTEM DURING DECEMBER Page 1 (Numbers in thousands; amounts in thousands of dollars) items drawn 1 Total Items Items drawn on banks in handled, exon 1 lOwn F.R. district F. R. Bank F. R. Bank U. S. 1 clusive of outside F.R. bank or or Branch 1 duplications branch city and branch cities Treasurer and Numbed Amount Number 1 Amount Numbed AmountINumberi Amount District number HEAD OFFICES 1. Boston 424 1,057,119 5,531 555,670 141 16,421 6,500 1,669,210 2. New York 3,650 5,946,754 6,570 943,125 438 111,641 10,658 7,041,724 3. Philadelphia 1,739 1,670,247 3,475 431,415 152 25,447 5,366 2,127,109 451,919 71 7,188 2,706 637,442 1,900 207,245 4. Cleveland 735 770,294 2,657 6,144 62 160 5. Richmond 389,077 2,435, 375,033 462,425 4,443 660 64,603 46 476 393,783 6. Atlanta 136 1,709,844 449,350 311 53,275 7,725 7. Chicago 1,345 1,207,215 6,069 550,912 472,531 1,570 109,247 113 8,694 2,622 534 E. St. Louis *306,774 *2,150 95,174 199,299 1,734 62 7,592 346 9. Minnearclis 483,18 92 13,914 2,775 410 321,645 2,273 147,619 10. Kansas City 474,193 2,214 240,600 4,782 228,751 2,016 34 160 11. P-411as 671,415 1,306 74 57,451 16,837 819 557,127 12. San Francisco 413 47,339 17,159,441 276,613 1,607 3,716,676 35,272 13,161,473 10,456 TOTAL BRANCHES 262,136 72,246 19 2,993 66o Buffalo 146,897 2. 273 953 *1,4o0 99,324 1,1C9 61 6,97 445,626 276 *555,779 4. Cincinnati 947,560 49 5,131 1,490 413,294 1,339 129,081 Pittsburizh 502 67,153 286,o64 1,00o 381.1557 332 5. Baltimore 55 7,740 1,393 136,149 15 1,-fr9 25,075 292 109,345 6. Birmingham EO 3.87 349,102 625 16 1,612 245,360 506 132,110 Jacksonville 107 466 17 1,560 309 112,590 2-6,627 140 Nashville 166,053 329 23,666 193 36 3,816 138,571 New Orleans 99,483 42 4,671 1,715 505,643 1,104 7. Detroit 609,797 529 84,842 472 27,149 12 1,315 62 4. Little Rock 398 60,373 750 221,472 560 25,071 151 144,864 Louisville 33 3,537 126,629 19,463 13 2,221 106,945 227 115 Memphis 355 1,081 134 10 150 12,800 19,690 24 33,571 Helena ). 134,221 711 496 74,456 192 10. Denver 23 3,579 55,786 222,435 14 3,412 1,689 56,904 1,587 122,119 Oklahoma City 44 3,683 *997 *121,294 31 44,31.6 841 125 73,104 Omaha 35,226 246 16 1,577 13,960 174 19,689 56 11. El Paso 147,343 615 13 1,343 50,256 95,744 516 86 Houston 425,135 70 10,025 3,022 151,122 691 263,588 2,261 12. Los Angeles 107,207 475 3,659 24 20,221 339 112 83,127 Portland 101,912 704 43,137 17 3,466 Salt Lake City 74 55,309 673 88,006 6,120 21,760 31 60,126 334 166 535 Seattle 373. 1,665 11 29,633 16,272 102 258 47,575 Spokane 4,343 4,072,374 15,342 1,294,397 676 65,114 20,413 5,453,9E4 TOTAL 1. 2. 3. 4. 5. 6. 7. 4. 9. 10. 11. 12. COMBINED Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco SYSTEM 82E 3,923 1,739 1,515 492 501 1,874 862 370 815 302 1,553 1,057,119 6,173,655 1,670,247 1,896,408 675,741 999,069 1,712,862 429,114 216,9E9 566,549 344,184 1,389,315 141 16,421 457 114,634 152 25,447 181 21,290 117 13,524 134 13,166 393 57,946 132 15,767 8,673 72 160 24,588 67 7,702 227 41:272 6,500 11,616 5,366 *6,056 4,050 2,471 9,440 4,199 *2,334 *6,172 3,075 6,473 1,669,210 7,303,460 2,127,109 *2,355,25.6 1,151,651 1,257,116 2,3.19,641 1,025,455 *340,345 *951,104 656,762 5,531 7,236 3,475 595,670 1,015,371 4,348 3,441 1,776 435,654 402,180 244,281 543,873 184,970 107,974 36y,840 3.)4,876 1,441,250 309,963 5,011,073 2,233 361,736 67,752 22,613,465 7,173 3,155 1,888 5,197 2,706 4,664 14,839 17,233,856 50,614 431,415 *Includes items drawn on banks in other Federal reserv,:, dietricts, forwarded direct to drawea banhs, .as follows: Cincinnati 12,300 items, $1,900,000; 1.inneapclis 4,000 items, $4,709,000; Omaha 258 items, $191,000. St. 4822. C. Page 97 Volume 156 All ;ONFIDENTIAL Not for publication OPERATIONS &F THE FEDERAL RESERVE CLEARING SYSTEM DURING DECEMBER 1925. .(Numbers in thousands . amounts in thousands of dollars) Page 2. Total items handled, Items forwarded to duplications including F.R.banks orlOther bank, Parent F. R. Bank Amount Number their and in to branches or Branch brandhes own district and 1924 1925 19251 1924 District number Number' Amount Numberf-Amount HEAD OFFICEcz 5. 6. 7. S. 9. 10. 11. 12. C. 610 COMBINED Boston 52 New York Philadelphia 116 Cleveland 232 Richmond 165 Atlanta 30 Chicago 19 St. Louis Minneapolis 3 101 Kansas City 56 Dallas San Francisco 244 SYSTEM 165,783 12,233 129,016 6,256 13,295 2,831 79,436 2,987 357 27,327 43,411 3,317 11,516 5,663 2,706 2,779 759 1,739,636 7,216,316 2,256,125 875,591 863,232 507,612 1,756,049 597,805 331,745 519,J54 490,729 677,266 597,747 51,366 48,643 17,831,982 15,329,504 BRANCHES 21 2. Buffalo 22 4. Cincinnati 4g Pittsburgh 145 5. Baltimore 35 Birmingham 6. 11 Jacksonville 15 Nashville Orleans New 5 4 7. Detroit 8. Little Rock 7 2 Louisville 1 Memphis 2 9. Helena 36 10. Denver 21 Oklahoma City 21 Omaha 9 11. El Paso g Houston 6o 12. Los Angeles 63 Portland Salt Lake City 14 37 Seattle 23 Spokane 1. 2. 3. 4. 6,275 7,642 2,776 5,868* 2,709 24,692 2,275 2,341 25,963 2,893 2,601 10,448 2,328 2,363 1,582 1,367 1,222 TOTAL TOTAL 6,813 70,426 1. Bostcn 2. New Yrk o 3. Philadelphia 4. Cleveland 5. Richmond 6. Atlanta 7. Chicago S. St. Louis 9. Minneapolis 10. Kansas City 11. Dallas 12. San Francisco 1,01S 7,709 4,659 11,153 14,952 97 46 110 206 13,714 20 5,479 2,485 55 g3 816 16 2,145 702 24 183 305 2,601 15,171 12,422 3,75s 1,215 S. 6,719 7,125 2,396 3,575 3,763 129,843 2 10 13,569 6,047 49,826 50,518 21,322 32,189 15,053 1,076 315 481 1,528 2,048 1,744 442 695 564 350 6,879 6,314 1,743 1,177 30o 1 3,317 17,196 77 63 13,592 5,757 48 3,349 20 2,153 20 go 12,159 6,250 12 18 3,854 6,786 21 4,027 17 1,054 232,454 313 17,018 1,641 890 235 26,189 28,454 449 272 39,450 S. 4,899 91 2,215 2,880 132 2S3 41,524 115 9,099 162 32,869 204,597 5,173 830,201 762 357 194 824 1,773 1,o66 275 643 3,162 55o 796 593 411 22,077 283,414 9ss 6 56,485 1,477 1,915 1,008,539 02 447,7 1,713 430 171,185 386,770 496 160,526 410 173,748 315 618,756 1,412 4s3 69,5359 222,832 739 129,234 349 39,489 176 166,53g 774 248,449 1,671 130,8°9 965 264 39,790 151,292 614 444,013 3,631 120,582 527 108,162 67o 103,367 552 360 55,365 20,956 5,866,281 6,813 6,275 13,309 12,504 6,256 5,663 6,407 6,098 4,731 4,497 2,908 2,410 10,060 9,054 4,309 4,347 2,469 2,517 6,555 S. 3,246 3,241 6,879 6,932 73,943 69,599 245,422 521,797 993,877 390,717 151,251 172,335 143,899 172,39s 494,184 96,363 215,796 34,914 36,503 150,800 235,169 106,314 38,145 150,406 473,4o1 96,292 37,102 91,341 43,397 5,193,830 1,739,636 7,500,230 2,256,125 2,450,615 1,310,259 1,399,841 2,374,805 1,039,730 371,234 1,065,200 681,811 1,508,777 23,696,263 20,523,334 Baltimore and NOTE: The number of business days wax 25 at Richmond, branches. and banks Atlanta, and 26 at the remaining (St. 4822) . it4,ir 1!!!!11PR" N T I• A I,441 -• IP it .. t Ifor publication OPI!diATICN OF TI-It .Z.DERAL RESERVE CLEARING SYSTEMIPRING DEcilIBER,4,925 Pa.... Nunlber of 'banks in each State on December /a ' Member banks* Nonmember .1:) , noks State NE.,ticnal 1Nor.-nationa1_2n Par list Not on par list" Total '192411925 1 1924 11925 1 19214 97251- 192)4 192511--.7 19-25 I 1924 -7 1- 7 1EW ENGL.A2M STATIS: Maine 62 New Hampshire 55 Vermont 46 Massachusetts 181 Rhode Island 21. Connecticut 66 EASTERN STATES: New York 638 New Jersey 333 Pennsylvania 958 22 Delaware Maryland 89 Dist. of Columbia 13 SOUTHERN STATES: Virginia 193 West Virginia 1241 North Carolina 91 90 South Carolina 153 Georgia 70 Florida 146 Kentucky Tennessee 113 Alabama 1 214 Mississippi 45 122 Arkansas Louisiana 46 730 Texas MIDDLE WESTERN: Ohio 441 Indiana 265 Illinois 589 290 Michigan Wisconsin 135 Minnesota 331 417 Iowa Missouri 193 WESTERN STATES: North Dakota 163 122 South Dakota Nebraska 181 266 Kansas 111 Montana 34 Wyoming Colorado 134 33 New Mexico 335 Oklahoma PACIFIC STATES: 156 Washington 1314 Oregon 300 California Idaho 80 146 Utah 20 Arizona 10 Nevada . 4 50 49 - 14 15 - 25 4 3 39 70 3 84 35 71 3. 714 - 99 58 90 4 5 - 98 57 so 4 7 1 275 153 65s 32 166 3)4 276 141 659 35 170 33 - - - - 184 125 83 31 93 56 138 107 102 36 89 33 577 12 17 a .) 17 63 11 7 12 21 s 35 13 1 214 12 17 12 19 79 13 9 13 24 8 37 14 1714 227 196 89 25 75 87 1432 222 27 25 256 35 713 2/40 198 100 29 75 77 442 268 35 25 280 144 807 101 9 339 238 375 159 22 235 199 275 112 171 c.) 0 89 10 349 267 387 159' 17 206 195 2714 77 171 63 353 246 504 123 159 303 329 135 358 247 501 122 157 334 346 131 68 19 85 162 26 23 Es 63 bbl 89 656 832 326 21 82 1,293 1,300 526 513 164 645 30 618 6514 30 515 100 1,207 1,289 61 1,311 1,363 - - 8 20 92 13; 519 51 35 8 lg 33 162 403 33 32 1714 133 187 265 130 39 144 36 1430 160 110 169 259 SO 32 131 31 382 170 119 174 253 93 35 141 34 423 3 12 12 7 31 2 3. 2 3 4 14 13 7 37 4 3 2 7 203 203 7140 1,006 106 54 131 29 371 285 279 766 1,032 111 60 1.36 35 373 262 163 176 3 11 11 6 3 4 2214 144 171 5 9 11 7 3 5 156' 137 300 101 49 23 11 112 93 267 56 20 17 10 112 99 263 67 21 19 11 44 36 33 24 26 3 - 46 38 37 34 23 4 _ 171 110 329 80 63 30 24 177 114 375 72 66 33 23 32 29 - 29 27 1 4 - 3 - 62 58 58 4 514 54 514 1 146 182 21 66 46 1514 17 63 46 157 17 b3 27 14 3 632 313 953 22 91 15 539 275 868 13 34 13 534 256 873 18 84 114 196 1142 95 100 172 69 147 120 126 44 126 47 751 181 124 82 73 85 59 139 106 103 37 87 _33. o5b 447 268 533 286 137 364 446 192 9,494 9,6E2 8,050 6,-13 1,4,44 1,569 14,643 15,449 3,970 :5,047 *The figures fcr 1925 represent the number of member banks in actual operation; those for 19214 represent the number shown by the capital stock records of the Federal reserve bank. **Incorporated banks other than mutual savings banks. FEDERAL RESERVE BOARD, DIVISION OF BAIM ',,DPERATIONS (St. 4822) JANUARY 30, 1926. TOTAL • • (.411 ° • CONFIDENTIAL Not for publication OPERATIONS OF TEE ILD.LRAL RaTRVE CLEARING SYSTEM DURING DECEMBER 1S25 Page 3. F. R. Bank Number of banks in head office or_j2ranch zone on December 31 Nonme2,14r banks Member banks* or Branch National Non-national On par listrot on par list** Thtal and 1925 1 1924 ristrict num-cer lc.)25 1924 1925-11924 1925 11924 1925 11924 HEAD OFFICES 234 246 1. Boston 381 384 20 39 36 308 297 2. New York 797 773 673 650 124 123 513 519 3. Philadelphia 753 743 671 671 82 72 508 513 304 307 227 229 4, Cleveland 78 77 712 686 451 477 47 447 465 406 418 41 5. Richmond 420 404 84 g4 72 83 188 207 116 124 6. Atlanta 1,264 1,291 1,013 1,026 251 265 3,564 3,683 7. Chicago 76 1,507 1,564 77 409 402 332 326 Louis 67 1,079 1,387 54 I. Minneapolis 71S 776 664 709 12 1,326 1,357 13 lb. Kansas City 315 314 302 302 522 607 663 650 562 504 101 146 11. Pallas 24 26 211 226 12. San Francisco 171 176 147 150 2,363 6,449 6,524 9,494 5,493 955 1,031 10,31910,94g 2,601 TOTAL BRANCHES 84 22 86 62 64 23 85 63 2. Buffalo 307 306 13 15 217 221 204 206 4. Cincinnati' .26 26 342 344 316 316 25E 256 Pittsburgh 261 266 17 15 159 140 142 5. Baltimore 155 25 19 16 72 91 73 Birmingham 89 13 67 11 Jacksonville 70 56 59 69 137 90 2 90 2 Nashville 88 88 16 43 43 15 59 New Orleans 33 58 244 95 96 39 33 135 128 7. Detroit 162 27 46 26 69 73 43 8. Little Rock 332 7 93 86 86 92 Louisville 110 37 e3 37 o0 21 Memphis 58 S. 93 37 83 31 9. Helena 111 130 4 196 4 10. Denver 143 156 .139 152 2 351 2 Oklahoma City 356 390 354 388 794 17 14 215 226 201 209 Omaha 34 42 4 43 46 46 11. El Paso 3 212 33 145 142 121 109 24 Houston 159 14 12 12. Los Angeles 155 151 143 137 125 39 37 Portland 137 140 100 101 110 59 47 67 79 Salt Lake City114 138 66 63 57 54 Seattle 78 9 9_ 120 127 3S 97 103 61 36 65 7 Spokane 1,284 3,045 3,158 2,556 2,620 489 538 4,324 4,497 1,369 TOTAL COMBINED 246 234 36 39 420 420 381 384 1. Boston 331 391 145 147 735 714 859 York 3E2 2. New 519 513 7e ge 671 Philadelphia 753 743 671 3. 1,075 1,073 116 119 753 747 S72 863 4. Cleveland 712 743 64 56 602 624 546 560 5. Richmond 366 383 133 116 363 379 495 516 6. Atlanta 3,927 3,808 360 347 1,052 1,059 1,419 1,399 7. Chicago 2,111 133 2,225 130 495 6eg 628 498 g. st. Louis 85 104 1,185 1,498 9. Minneapolis 829 906 744 802 35 e,607 2,747 33 1,051 990 1,086 1,029 10. Kansas City 7o6 8o2 183 655 12b 7,(:) 854 838 11. Dallas E51 603 165 105 575 5E6 le. San Francisco 740 771 3,647 SYSTEM 9,494 9,682 8,050 8,113 1,444 1 569 14,643 15,445 3,970 *Tne figures'.-ior 1925 rapresc:nt tna number of mellbar banks in actual operation; those for 1924 repreaant tae numbav shown by ths capital stock ,records of the Fc,daral reserve bank. (Sb.4822) **Incorporated banks other taan mutual savings banks. C. ON. IIMMUMNb. FEDERAL RESERVE BOARD WASHINGTON ADDRESS OFFICIAL CORRESPONDENCE TO THE FEDERAL RESERVE BOARD X-4521 February 3, 1926. Dear Sir: There are enclosed herewith, for your information, copies of letters exchanged by the Board with the Chairman of the Committee on Banking aid Gurrency of the House of Renresentatives, relative to a proposal to amend Section 9 of the Federal Reserve Act with respect to the conditions of membership which the Board may impose upon State banks joining the Federal Reserve System. Very truly yours, J. C. rooll, Assistalit 6cer3tary. (Enclosures) TO CHAIR= OF ALL F. R. BANKS. Page 111 Volume 156 - • ( COrY ) X-4521-a February 2, 1 9 2 6. Honorable Louis T. McFadden, Chairman, Conittee on Banking and Currency, House of Re2resentatives, Washington, D. C. My dear Congressan: ReceilA is acIrnowledged of your letter of January 25th referring to the appearance before the Federal Reserve Board on December 30, 1925, of the Committee representing the National Association of Supervisors of State Banks, for the purpose of discussing a Proposed amendment to the Federal Reserve Act which would change the last sentence of the first paragraph of Section 9 thereof to read as follows, the words underlined being added: "The Federal Reserve Board, subject to the provisions of this Act and to such conditions as it may prescribe pursuant thereto, may permit the ap2lying bank to become a stockholder of such Federal Reserve Bank; Provided,however, that such conditions or rules or regulations prescribed shall not limit or impair the charter or statutory rights and powers of such banks nor shall the Federal Reserve Board impose any conditions or restrictions other than those under which nation al banks shall ooerate." While the above mentioned conference was entirely informal and no formal vote was taken by the Federal Reserve Board, the discussion showed very clearly that the Board is strongly opposed to this proposed amendment and also developed the fact that the advocacy of this amendment by the National Association of Supervisors of State Banks is based upon a misunderstanding of the facts regarding the Board's policy and practice in proscribing conditions •of membership for State banks prior to their admission to the Federal Reserve System. In view of these facts the Board has not heretofore considered it necessary to take any formal action with reference to this amendment. You now desire a formal expression of the Board's views, and the Board has no hesitancy in expressing its unqualified disapproval of this proposed amendment. X-4521-a LEGAL EFF'ECT OF PROPOSED AMENDMENT. Before discussin the practical objections to this amendment, it is believed advisable to call attention to the legal phases of the subject. first two naragraphs of Section 9 of the Federal Reserve Act now es follows: IN bank incorporated by special law of any State, or organized under the general laws of any State or of the United States, desiring to become a member of the Federal Reserve System, may make application to the Federal Reserve Board, under such rules and re,culations as it may prescribe, for the right to subscribe to the stock of the Federal reserve bank organized within the district in which the applying bank is located. * * * The Federal Reserve Board, subject to slch conditicns as it may prescriI-, may permit the appl:ring bank to become a stockholder of such Federal reserve bani:." "In actiLg upon such applicction tae Federal Reserve Board shall consider the financial condition of the applying bank, the general character of its management, and whether or not the corporate -.lowers exercised are consistent with the purroses of this Act.' In acting upon an application of a State bank for membership in the Federal Reserve System, the Board is thus recuired by law to considcr (1) the financial condition of the applying bank, (2) the general Character of its management, a-id (3) whether or not the corporate powers exercised by it are consistent 7ith the purposes of the Federal Reserve Act, end before admitting a bank to membershlp in the Federal Reserve System the Board is authorized to prescribe such reasonable conditions of membership as may be necessary to provide for the maintenance of a high standard of membership. Suc*IIIItLJIons of membership, however, can be rrescribed only at the time a bank applies for membership in the Federal Reserve System and callnot becoue binding upon any bank unless and until such bank voluntarily accepts such conditions. Moreover, when certain conditions of membership have once been agreed upon between the Board and a particular banl: applying for membership and when that bank has once II I een admitted to membership subject to sach conditions, sII conditions cannot tnereafter be changed nor can any additional condons be prescribed by the Board, except by the mutual consent of the Board and the particular bank involved. The amendment proposed by the National Association of Supervisors State Banks would have the following legal effect : of (1) If strictly construed, it would take away the power of the Federal Reserve Board to prescribe any condition of membership except such as is made pursuant to some specc provision of the Federal Reserveso tbat the Board cyuld not prescribe any condition covering a particular situation which has not been foreseen in advance by Congress and provided for in some specific provision of the Federal Reserve Act. X-4512-a (2) It would forbid the Federal Reserve Board to prescribe any condition, rule or regulation which would limit or inpair the charter or statutory rights or powers of any State member bankl,so that, even if the Board should find that the corporate powers of a State bank applying for membership were inconsistent with the purposes of the Federal Reserve Act it could not admit that bank subject to a condition that \Oac bank would not exercise such powers but could do only one of two things: (a) Permit the bank to come into the Federal Reserve System and exercise powers inconsistent with membership in the Federal Reserve System, or (b) exclude such bank from membership in the Federal Reserve System altogether. (3) The proposed a;ncndment would forbid the Federal Reserve Board to impose any condition or restriction upon any State bank other than those under which national banks shall operate. (This is unnecessary and unimportant, becruse the Board never has prescribed any conditions of membership restricting a State bank to any greater extent than national banks are restricted by law.) PRACTICAL EFFECT OF PROPOSED AMENDMENT. The Federal Reserve Board is strongly opposed to this amendment because it would deprive the Board of a power which it believes to be necessary to enable the Board to maintain a high standard of membership in the Federal Reserve System and Which it has always exercised temperately and reasonably. The wisdom of the possession of this power by the Federal Reserve Board and the fairness with which it has been exercised have been generally recognized by the banking fraternity and until recently there has been no opposition to it. Moreover, as will be shown below, such opposition as now exists is based upon a misconception of the facts regarding the scope and exercise of this power. thost of the conditions of membership prescribed by the Board are designed to carry out the purpose of that provision of Section 9 of the Federal Reserve Act which provides that in acting upon applications of State banks for membership in the Federal Reserve System, the Federal Reserve Board shall consider the financial condition of the applying bank, the general character of its management, and whether or not the corporate powers exercised are consistent with the purposes of the Federal Reserve Act. In other words, they are designed to require the member ban% to keep its management and financial condition sound after admission to the System and not to acauire and exercise additional corporate powers which might be inconsistent with the purposes of the Act. Other conditions are designed to cover peculiar situations affecting particular banks, which situations are not, and could not be covered by general 'revisions of law applicable to all State member banks. Thus, where a 'Lank has too large a proportion of its funds tied up in non-liquid real estate loans, the Board may prescribe as a condition of • membership it shall reduce the amount of mich loans to a certain percentage of its capital and surplus within a definite time. Similarly, where the applying bank has surplus fund against vihich losses could be charged off, the Board may prescrne as a cone.ition of mezbership that it shall put a certain percentago of its net earnings each year in its surplus fand until such fand reaches a given amount. If the applyin bank has certain corporate powers inconsistent with membership in the Federal Reserve System, the Board may approve its ao)lication sp:oject to a conon that it shall not exercise such powers while it is a member of the Federal Reserve System. Cases lik.e these net infrequently arise in which a bank applying for membership is in all respects eligible and desirable for inclusion in the ranks of the members of the Federal Reserve System except that in one or io respects its conon is not entirely satisfactory or its , - )ractices do not accord with the best banking policy. The bank itself desires to come in and is willing to agree to imorove its condon or correct its practices in these resnects by an agreement with the Federal Reserve Board. The Board and the Federal reserve bank, on the other hand, are desirous of having this particular institution as a memb er if these differences of practice can be ironed out. In such cathes the Bo ard feels that it is better to admit the bank sulject to appropriate conditions of membership than to exclude it altogether from the System. There are many members of the System today which are in all respects loyal and desirable members which the Board could not, in the exercise of a sound discretion, have admitted to menlership if it had not possessed the power to prescribe appre-)riate conditions of meMbership to fit their peculiar situations. The dbstacles in the way of admission were such that the Board felt that it cd oul not properly alait such banks to membership without some promise or assurance against the continued existence of practices tnen being engaged in by the applicant banks. The difficulty was overcome in all these cases by prescribing conditions of membership which were voluntarily accepted by the member banks prior to admission. If the authority of the Federal Reserve Board to prescribe such condons of membership is taken away fro:a it, there will be many cases in the future in whidh the Board will have to refuse to admit banks to membership because of tae absence of authority to require adequate assurances from the applicants as to their future conduct, although if these assurances cauld be %$L the applicants would in all probability prove to be very satisfactory aad helpful members of the System. The Board has sought in the regulations governing the admission of State banks and trust companies and in these conditions of membership to establish only such reasonable standards of admission as are necessary to protect the memIr banks, both State and national, against the admission of any bank which would be a source of weakness rather than of strength, and alsI to prescribe such regulations governing their conduct as will insure a reasonable conformity to funda.:iental principles deemed essential tS the continued success of the Federal Reserve System. It has been with these purposes in mind that the Board has from time to ti•me prescribed fIr State banks joining the System certain conditions •I membership which • -5- X-4521-a seem to be dictated by sourAft bunking policy and has recently publis hed the more usual of these conditio-2s in its Regulation H. Conditions which have been prescribed for State banks and trust companies coming into this System have been found by the Board to be effective in serving the purpose desired, and on the basis of the results obtained in the nast the Board believes that its policy of prescribing such conditions of membership is entirely sound and one which it seems advisable to continue in the future. The wisdom and necessity of the practice has long been recognized and acauiesced in by the banking fraternity; and, as will be shown below, Congress has impliedly an-proved it by amending the law so as expres sly to authorize it. HISTORY OF THIS SUBJECT. It is believed that a better and clearer u:hZ_erstandin g of this subject will result from a chronological discussion of its history. Oririnal Statute and Practice Thereunder. Section 9 of the Federal Reserve Act as originally enacted provided, in part, as follows: The Organization Committee or the Federal Reserv e Board -under such rules and regulations as it may prescribe, subject to the provisions of this section, may permit the applying bank to become a stockholder in the Federal Reserve Bank of the district in which the applying bank is located." Acting undcr authority of this provision, the Board has always understood that it has the power to prescribe for State banks admitted to membership such conditions as in its discre tion it deems necessary or advisable. It acted on the thobry , that, oven if this power were not included in the power to prescribe rules and regula tions, it was an incident of the po7c,r to ap-)rove or reject the application of any particular State bank, in the Board's discretion. In other words, it acted on the theory that the discretionary power to approve or reject any ap-olication included the power to approve any application subjec t to such reasonable and proper conditions as the Board might proscr ibe. The Federal Reserve Board's circular letter published with its first regulations with reference to member ship of State banks (Regulation M, Series of 1915) contained the follow ing statements which indicate the Board's understanding of the scope of its power as well as the soirit in which it approached this problem : "A unified banking aystem,embracng in its member ship the well-managed banks of the country, small and large, State and National, is the aim of the Federal Reserve Act. There can be but one American credit system of nation-7ide extent, and it will fall short of satisfying -3- X-4521-a "the business judgment Lnd expectation of the country and fail of attaining its fall potentialities if it rests upon an incomlete foundation and loaves aut of its meMbership any considerable part of the banking strength of thc country. The way must be opened for State banking institutions to contribute their sharc to the capital and resources III of thc Federal reserve banks, in harmony with the intent of the Federal Reserve Act and in accordance with its provisions. State banks, trust companies, and national banks have their distinctive characters and places in the American bankdng organization, and tnese should be respected in coordinating them in the Federal Reserve System. The problem presented is to find a basis upon which these different types of banking institutions may thus be associated which shall be fair to each and which rill not reaaire greater uniformity of operation than may be necessary to the attainment of the purposes of the Federal Reserve Act. "Anpreciating fally that the strength of the 7ederal Reserve System is to be measured by the quality and character of its members, rather than by their number, the Federal Reserve Board is prepared to use the broad discretionary power vested in it by the Federal Reserve Act to bring about this coordination on the basis of equity and practicability. The Board has soughtt in the regalations governing the admission of state banks and trust companies hereto appended, first, to establish only such reasonable stae-,ards of admission as will be generally recognized as newssary to nrotect the Federal Reserve Systan and the national banks, whose membership in the System is obligatory, aFainst the admission of any bank which would be a source of wealmess rather than of strength, and second, to nrescribe such regulations governing their condact as will insure a reasonable conformity to fundamental principles dee.ned essential to the success of the new banking system. "The conditions of members _in of State institutions are, furthermore, prescrned only in general terms in the Act, the further and final elaboration of them being left to the Federal Reserve Board, which is vested with the necessary discretionary authority." • - 7- X-4521-a The text of the regulation (Regulation M, Series of 1915) provided, in part, as follows: "In passing upon an a--)plicaticn the Federal Reserve Board will consider es-oecially "(1) The financial condition of the a7olying bank or trr.zt comnany and the general character of its managcment. "(2) Whether the nature of the powers exercised bL, the said ba7.-. or trust comnany and its Charter 1Dro-viions are cosent with the DIaocr ca-idu,.;t of the "ou..sille ,,Js of banking and with memluership in the Federal Reserve Ean, "(3) Whether the of tile State or district in which the o bank or ',7.-ast company is located colfc,ai f,rovisions iikely to interfere 117';.th the 7iroper regulation and supervision of member It * * * Whenever the Board may deem it necessary, it will impose such conations as will insure compliance with the act and these regulations.. When the certificate of approval and any conditions contained therein have been accepted by the aprlying bank c..;' trust cmpany, stock in the Federal Recerve Bank of the district in which the applying bank or trust ;:oLipaay is located shall be issued and paid for undar the regulations of the Federal Reserve Act provided for national banks which become stockholders in the Federal Reserve Banks. * * * * * * * "Every State bank or trust company while a member of the Federal Reserve System "(1) shall retain its full charter and statutory rights as a State bank or trust company, and may continue to exercise the same functions as before admission, except as provided in the Federal Reserve Act and the regulations of the Federal Reserve Board, including any conditions embodied in the certificate of approval. Amendment of June 21, 1917. On June 21, 1917, there was enacted into the law a bill which had been drafted and submitted. to Congress by the Federal Reserve #pard for the purpose of making a number of amendments to various pro4isions of the Federal Reserve .Act. One of the principal purposes of - 8 - X-4521-a those amendments was to make the Federal reserve System more attractive to State banks, and this result was sought in two ways: (1) By assuring them that the liberal interpretation of the law previously adopted by the Board would not be changed and that the Board would not amend those portions of its regulations which assured to State member banks the continued exercise of the rights enjoyed by them under State law, subject to such conditions as the Board might orescribe prior to their admission to membership: and (2) by repealing a number of provisi ons of the Federal Reserve Act which subjected State member banks to examination by the Comptroller of the Currency and to various provisions of the Nationa l Bank Act. The last sentence of the first soaragrarh of Section 9 was amended by the Act of June 21, 1917, to read as follows: "The Federal Reserve Board, subject to such conditions as it may prescribe, may permit the applying bank to become a stockholder of such Federal Reserve Bank." The substitution of the word "conditions" for the words "rules and regulations" which alDpeared in the corresponding portion of the original act was intended to sanction and exnressly to authori ze the Board's established ',practice of nrescribing conditions of members hip before admitting State banks and trust companies to the Federal Reserve System. Immediately after the clause above quoted a new paragraph was added, reading as follows: "In acting upon such application the Federal Reserve Board shall consider the financial condition of the anplying bank, the general character of its management, and whether or not the corporate powers exercised are consistent with the purposes ofthis act." This simply adopted and wrote into the law the principles previously announced by the Board in its Regulations as a basis for its action on the applications of State banks for membership. The following new language was also inserted in Section 9: "Subject to the provisions of this act and to the regulations of the Board made pursuant thereto, any bank becoming a member of the Federal Reserve System shall retain its full charter and statutory rights as a State bank or trust company, and may continue to exercise all corporate powers granted it by the State in which it was created and shall be entitled to all privileges of member banks: * * * " - 9 - X-4',321-a This new 7provi.;ion was also an adoptiod by Congress of a portion of the Board's regulation, and simply wrotc into the law the assurance previously given in the Board's relation that State banks joining the Federal Reserve System should retain their full charter and statutory rights and might continue to exercise the same functions ac before admission, except as provided in the Federal Reserve Act, the regulations of the Federal Reserve Board and the conditions of membership agreed upon prior to admission to the Federal Reserve System. It is obvious, therefore, that all of these dhanges in the language of Section 9 were made for the Tu:cpose of clarifying the law and writing into it the liberal interpretation w- ich the Board had given it and the liberal principles which the Board had previously incorporated in its regulations. The State banks had re,?resented to the Board that before coming into the Federal Reserve System they wished to know exactly what terms, conditions, and regulations they would be required to comply with and they wished to be assured before being admitted to membership that the Board would not thereafter amend its regulations in such a way as to change the terms and conditions on which they had entered the System. This desire was fully met by the amendment of June 21, 1917. Inasmuch as the Board's regulations regarding State member banks must be based upon the Provisions of the Act, the banks know in advance what such -orovisions are, and they can not be substantially changed without an amendment to the law. As to conditions of membership, they are equally protected, because such conditions must be submitted to, and accepted by, such banks before they become members. PUBLICATION OF CERTAIN CONDITIOYS OF EEMBERSHIP IN BOARD'S REGULATIXTS. Many of the conditions of membership prescribed by the Board from time to time are designed especially to meet peculiar conditions effecting a particular bank applying for membership, and such conditions cannot be standardized or incorporated in any set of regulations or statutes, nor can they all be foreseen in advance and provided for in a statute. Certain other conditions, however, had become quite well standardized and were &enerally prescribed by the Board for all banks admitted to membership in the Federal Reserve System; and the Board decided that, in order that any State bank or trust company which might contemplate applying for membership in the Federal Reserve System could know in advance what conditions of membership of a general nature, as distinguished from a special nature, it would be required to agree to, published some nine of these general conditions in Section IV of its Regulation H, Series of 1924. This section of the regulation , however, is not really in the nature of a regulation but is merely a statement of what the Board intends to do in the future in the way of prescribing conditions of membership for banks thereafter admitted to membership. It is not retroactive but simply states that hereafter the Board will Prescribe certain conditions of membership for all State banks • -10- X-4521-a or trust comoanies admitted to the Federal Reserv e System and that hereafter all such banks anplying for members'Ap would be requir ed to agree to such conditions and any other conditions which the Board might prescribe prior to the admission of such bank or trast company to the Federal Reserve System. The publication of these general conditions of member ship in the Board's Regulations has been uisunderstood and )robably is the cause of the opposition of the National /\ssociation of Super àI!visors of State Banks to the Boardfs practice of nrescribing conditions of I I for State banks and trust companies azplying for admission to the r' Federal Reserve System. This opnosition originated with a speech delivered by Honorable George V. McLaughlin, then auperintendent of Banks of the State of New York, at the 23rd Annual Convention of the National Association of Superv •isors of State Banks, held at Buffalo, New York, on July 21-23, 1924, which resulted in the adoption of a resolution by that convention advocating certai n amendments to Section 9 of the Federal Reserve Act which would, among other things, take away the Board's power to proscribe conditions of membership. The text of Er. McLaughlin's speech, togother with a statement analyzing II it and answering the various IIints made therein, were published at your instance in the Congressional Record for January 8, 1925, at pages 1300 to 1511, inclusive. There was also published at the same time and place a cow of the Board 's Regulation H and the text of Mr. McLaughlin's original pro-)osal to amend the Federal Reserve Act. OPPOSITION BASED ON MISUNDERSTANDING. The resolution of the National Association of Supervisors of State Banks criticises the Board's new Regulation H, principally because of the conditions of membershiP set forth therein and certain other provisions designed for their Proper administration, and recommends that Congress repeal the Board's power to prescribe such condit ions of membersnip. That resolution, however, is based upon three assumptions, -ill of which are totally erroneous: 1. That the conditions of membership set forth in Section IV of the Board's ReEulation H, Series of 1924, are something entirely new and constitute a departure from the Board's previo us practice: 2. That the Board has the right to change these conditions of membership at any time, and that, therefore, State banks are utterly at the mercy of the Federal Reserve Board with regar d to such conditions of membership; and 3. That the conditions of membership prescribed by the Federal Reserve Board would discriminate against State banks and in favor of national banks, because the Board does not attempt to prescribe conditions of membersnip for national banks. order; Each of these propositions will be discussed briefl y in -11- X-4521-a 1. As shown above, these co5aditions of membership are not at all new, but are conditions which the Federal Reserve Board has for years customarily prescribed for State banks upon their admission to the Federal Reserve System. The only thing new about the situation is that for the first time the Board has set forth these conditions in its printed regulations for the information of the State banks, so that they may know and understand in advance of applying for members?lip what conditions they will be required to agree to if they are admitted to the Federal Reserve System. 2. The assumption that the Board has, or thinks it has, the right to change its conditions of membership at any time is also equally erroneous. The Board always has considered conditions of membership analogous to contracts or agreements between the Board and each individual State bank admitted to membership in the Federal Reserve System, and has always adhered to the view that they arc not subject to change except, of course, by the mutual consent of both parties. When an application for membership is received from a State bank and the Board is inclined to approve it, the Board notifies the bank that it is willing to approve the a-)plication provided it will agree to be bound by certain definite conditions of membership set forth in the notice. If the bank is willing to acce-oI these conditions of membership, it so notifies the Board, whereu]?on the Board's colditional approval of the bank's application for membership becomes effective, and the bank is admitted to the System. The conditions of membership applicable to that bank are thereby fixed for all time and cannot be changed except by the mutual consent of the Board and the bank. The Board does not have, nor has it ever claimed to have, the right to Change -a condition of membership subsequent to the admission of a bank without the consent of such Bank. In Practice, there have rarely been any changes in the conditions prescribed upon the admission of a bank; and in the few cases where such conditions have been changed, they have almost invariably been changed at the request of the member bank. 3. The assumption that conditions of membership prescribed by the Federal Reserve Board discriminate against State banks and in favor of national banks is equally erroneous. The Board never has prescribed any condition of membership for a State bank which restricts the operations of such bank to a greater extent than national banks are restricted by the provisions of the National Bank Act. On the contrary, the Board always has endeavored to permit State ban': members of the Federal Reserve System as much freedom as is consistent with mombership in the Federal Reserve System, even though this results in their exercising much more liberal powers than those enjoyed by national banks. It is the policy of the Federal Reserve Board to make the System as attractive as possible to State banks and not to restrict their operations within the System to any greater extent than is absolutely necessary for the preservation of a high standard of membership. State banks, however, operate under the laws of forty-eight different states, many of which are more or less inadequate to provide for -12- X-4521-a a proper supervon and regulation of the bankin g business; and in many instances it is absolutely necessary to prescr ibe conditions of membership for State banks in order to maintain a hich standard of membership in the Federal Reserve System. The only other altern atives would be to exclude such State Npnks from the Federal Reserve System or lower the standard of membersl- ip. When a State bank has once been admitted to membership in the Federal Reserve System it cannot be required to withdraw from the System unless it violates some condition of member ship or some specific provision of the Federal Reserve Act. 70 VIOLATION OF STATE RIGHTS. It has been arreued that when the Federal Reserv e Board prescribes a condition of membership requiring a State bank to aEree not to exercise a certain one of its corporate powers while it remains a member of the Federal Reserve System, this violates the Public policy of the State under whose laws that bank was incorporated and infrinEes the rights of the State; but this is not so. The Board does not attem pt to say to any State what cor?orate powers it shall or shall not confer on banks created by it. It only says that if a State bank applies for membership in the Federal Reserve System and has certain -)owers incono istent with membership in the Federal Reserve System, it must agree not to exercise those powers while it is in the System. The fact that a particular State grants unusual powers to banks created by it does not necessarily mean that the -policy of the State requires the exercise of such powers by State banks, nor that such powers actually will be exercised. The State laws do not require but merely permit the organization of banks and trust compan ies; and even when they are organized State banks and trust companies are perfectly free to abstain from exercising certain powers grante d to them by the laws of their creation. Thus, the laws of Penns ylvania authorize all trust companies orEanized thereunder to transact a title insurance, fidelity insurance, and surety business; but many of the trust comnanies of Pennsylvania have never exercised this power. It is no violation of the policy of the State of Pennsylvania, therefore, for the Board to reeuire a Pennsylvenia trust com2any which never has and never will wish to exercise these powers to agree that it will not do so as long as it remains a member of the Federal Reserve System. PROPOSED AMENDMENT HARMFUL TO STATE BA-5KS AND TRUST COMPANIES. The genero1 banidng laws •of a number of the States confer on every bank or trust any. or,anized thereunder certain unusual power s which are inconsisteet with meSelrship in the Federal Reserve System and the inevitable result of the enactment of this proposed amendment would be to exclude every such bank or trust company from membership in the Federal Reserve System, even though they Should have. no desire whatever to exercise these unusual rowers. 411 X-4521--a At present such banks are admitted to membership in the Federal Reserve System on condftion that they will not exorcise the objectionable powers so long as they remain members of the System. If the power to prescribe such conditions of membership is taken away from it, the Board will have no alternative but to deny membership in the Federal Reserve System to all State banks or trust companies possessing such powers, because there will be no way in which the Board can assure itself that they will not undertake the exercise of such powers. Even viiies.'e banks ay-plying for membership in the Federal Reserve System have no corporate powers inconsistent with membership, it is often found that their management or financial condition is such that they cannot properly be admitted to the Federal Reserve System unless they will agree as a conditfon of membership to improve the character of their management or their financial condition within a specified time. In such cases the applying banks will have to be denied membership in the Federal Reserve System if the Board is deprived of the power to admit them subject to appropriate conditions designed to bring them up to the proper standard of members of the Federal Reserve System. Tostead of benefitting the State banks and trust companies, therefore, the enactment of the amendment Proposed by the 1:ational Association of SupervisOrs of State banks will in many cases work an actual hardship on them. CONCLUSION. In conclusion I wish to say that the Board has no desire to be autocratic or unreasonable in this matter and is always willing to hear and give due weight to the viev,s of State banks and State banking authorities with reference to the expediency and reasonableness of its regulations and the conditions of membership prescribed by it. The Board, however, has found by experience that the power to prescribe conditions of membership governing State banks organized under the divergent laws of forty-eight different States is absolutely essential to the preservation of a high standard of membership in the Federal Reserve System; and for this reason, the Board is strongly opposed to the amendment proposed by the National Association of Supervisors of State Banks or any other amendment which would take away or seriously impair the exercise of this power. The Board, however, has no objection to an amendment such as that contained in Section 10 of your Bill,H.R.2, as originally introduced, which would provide that the Board "shall not prescribe any condition of membership which will prevent the anplying bank from competing with national banks on a basis of substantial equality or which will subject the arplying ban",_ to any greater limitations or restrictions than those under which national banks shall operate"; because the Board never has and never would prescribe any such discriminatory condition of membership. Res-sectfully, Edmund Platt, Vice-Governor. • ) X-4521-b HOUSE 07 REPRESILNTATIVES Committee on Banking and Currency WASHIJGTON January 25, 1926. Honorable D. P. Crissinur, Governor, Fedora]. Reserve Board, Washington, D. C. Dear Governor Crissinger: Referring to the appearance of the committee ropresentiag the Association of State Bank Supervisors of the United States before the Federal Reserve Board on DeceMber 30 last, the purpose of this meeting was to discuss a proposed amendment to Section 9 of H. R4 2, on Line 21 4 as follows: "The Federal Reserve Board, subject to the provisions of this Act and to such conditions as it may prescribe pursuant thereto, may permit the apnlying bank to become a stockholder of such Federal Reserve Bank; Provided, however, that such conditions or rules or regulations prescribed shall not limit or impair the charter or statutory rights and powers of such banks nor shall the Federal Reserve _Board impose any conditions or restrictions other than those under which national banks shall operate." The matter underlined is new. imoor I gained the impression during the discussion of this subject that it was the view of the Federal Reserve Board that such a provision was undesirable, but apparently the committee representing the Association of State Bank Supervisors was not convinced of the soundness of the views presented to them by the individual members of your Board who were present at this meeting, because their insistence on pressing their amendment is manifest. The purpose of this letter is to ask you if you will not kindly write me the Board's objections tothis amendment that I may present these views to the Members of the House in such opposition as I shall make to this proposal when it is offered on the floor of the House during the consideration of H. R. 2. I expect now that the consideration of this measure will be taken up by the House next Wednesday, January 27, and I believe that debate will be concluded on this bill and vote had on the following Wednesday. I am, therefore, hoping to have as early a reply from you as possible. Very truly yours, LTM:b Digitized_ for FRASER (signed) L. T. McFadden. C ONFI uLNIIAL Not for publication Federal Reserve Bank From discounted bills Boston $175,042 vew York 615,39 Philadelphia 199,227 Cleveland 295,175 Richmond 155,166 Atlanta 101,300 Chicago 317,270 St. Louis 83,947 Minneapolis 19,601 Kansas City 61,930 Dallas San Francisco TOTAL Dec. 1925 Nov. 1925 Dec. 1924 Month of Earnings From purchased bills 1 From and U. S. other securitie6 1 sources $267,474 343,926 Total Current expenses 1925 Year 1 9 2 5 Annual rate Balance available fcr deCurrent of current net Current 1Dividends preciation allowances, surnet earnings on net earnaccrued plus, franchise tax, etc. earnings average ings to 1 to On Dec. On Nov. 30 paid -in-capital Pec. 31 1 Dec. 31 Per cent 31 T: $454,042 $155,232 $298,310 70,511 1,029,976 444,753 40.9 41,262,691 $502,643 $760,043 $506,094 2,003,776 1,579,365 21.4 3,891,972 1,388,196 165,477 16.8 1,099,232 673,212 426,070 318,613 226,798 205,371 18.4 1,413,827 778,811 635,016 495,363 123,374 68,627 13.5 730,846 358,162 372,634 333,955 356,435 129,763 26,672 57.14 846,645 276,488 570,157 366,727 38,734 598,578 313,104 285,474 21.4 1,680,624 934,016 746,608 139,714 539,752 6,372 230,c)33 140,276 89,757 20.6 665,533 306,753 358,785 294,661 111,847 6,069 137,517 8.9,877 47,640 17.6 340,512 193,560 146,952 115,221 242,418 144,533 97,885 27.2 582,542 258,426 324,116 247,446 101,502 124,951 34.4 590,282 255,239 335,043 231,464 215,141 214,258 30.6 1,167,782 490,447 677,335 504,257 229,529 4,654,793 2,244,648 2,410,145 131,890 3,923,247 2,233,836 1,689,411 390,944 3,658,243 2,176,587 1,431,656 11.6 14,272,543 6,915,958 7,356,535 5,532,913 9,909,323 6,682,496 3,226,827 2,306,137 10,658 120,079 27,480 247,635 242,574 155,704 20,887 16,915 9,355 7,450 e4,784 185,874 7,524 192,287 227,710 9,402 920,256 Decem - 585,223 2,175,725 1,972,686 2,347,043 FEDERAL RESERVE BOARD DIVISION OF BANK OPERATIONS T -DRUARY 10, 1920. Page 142 Volume 156 $11,526 33,055 2,249,539 1,318,671 St. 4336 EARNINq.S AND EXPENSES OF FEDERAL RESERVE 3ANXS 325,772 432,169 192,001 226,453 429,399 160,295 214.3 15.6 Mr. Hamlin IkONTIPENTIAL Not for publication Federal Resarve Bank From counted bills pston O New York Philadelpnia Cleveland Richmond Atlanta $104,474 517,698 163,031 Month of Earninas I From purIcnased bilis' From I I and U. S. 1 otner 1 I securities I soul:222i Total Month of January 1926 Annual rate 1 Current 1 Current 'of current net Current 'Dividends 1Balance'availaJle for deex1 net :Jet earn1 earnings on 1preciation allowances, surpenses 'earnings 1 average ings accrued 1plus, franchise tax, etc. IPaid-in-capital Par cent $275,261 $6,162 $385,897 $177,134 $208,763 28.5 $ 208,76) $ 41,703 247,563 18,883 784,164 523,851 200,313 9.3 260,313 1°3,954 121,632 14,198 298,861 179,558 119,303 12.1 119,303 5E417 14,281 354,540 208,09y 146,441 13.1 146,441 65,E72 S. 177,408 123,199 54,2b9 10.6 54,269 30,011 199,599 140,660 129,214 40,154 88,614 St. 4839 EARNINGS AND EXPENSES OF FEDERAL RESERVE BANKS 217,958 4,783 311,355 114,481 196,874 49.2 196,874 22,758 272,162 256,068 28,844 557,074 313,321 243,753 18.2 243,753 79,006 66,66 144,852 3,6g8 215,406 108,360 107,046 24.6 107,046 25,633 Minneapolis 15,ss6 93,397 7,944 117,227 96,7E6 20,441 7.6 20,441 15,401 4111 ansas City 52,694 161,262 23,525 237,481 149,109 88,372 24.5 88,372 21,2C4 25,355 168,994 5,326 199,675 95,602 104,073 28.7 104,073 21,342 San Francisco 105,2c7 TOTAL Jan. 1926 1,740,890 rac. 1925 2,249,539 Jan. 1925 805,159 235,205 6,302 346,804 196,034 150,770 21.6 150,770 41,002 2,103,02o 2,175,725 2,140,481 142,036 229,529 292,333 17.0 1,700,418 586,003 1,114,415 860,537 561,011 299,526 Chicago St. Louis Pallas FENRAL RESERVE BOARD DIVISION OF BANK OPERATIONS FEBRUARY 11, 1926. 3,9s5,952 2,2s5,534 1,7oo,Las 4,o54,793 2,244,648 2,410,145 3,237,973 2,377,436 860,537 " Page 145 Volume 156 A 24.3 9.0 • •41Pg. • Fl • • - EARNINGS AND EXPENSa OF ?ErEhAL RESERVE BA,,AS JAI\UARY 1926. DURI Total earnis and earnings from counted bills for the montn of January were eacie,_ very substantially oelow earnins for December but considerably above tnose for January 19,.?.5. earaiags were ti53,03y more and current 4 expenses about $900XJC; lass in January 192b than in January 19c--5, with tae result tnat current net earnins were $1,70j,0C),.-), or at an annual rate of 17 par ceat of average paid-in .t capital as compared with $8630)30, or 9 par caitt - in January 1925. All tae Federal reserve bai,k1V: earned their dividends during January, whereas in January 1925 the St. Louis and Minnearolis banks failed to earn their dividends, and the Ricnmond and Atlanta banks did not have sufficient earnings to cover current operating expenses. -St. 4S39a
@FedFRASER