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BOARD OF GOVERNORS O F TH E F E D E R A L R E S E R V E Office Correspondence S Y S T E M Date__ August 6 , IQ41 To__________ The Files_________________ Subject:_________________________ From_______ Mr. Coe___________________ ___________________________________ After correspondence with Mrs. Hamlin (see letters of May25 and June 4, 1941) the items attached hereto and listed below, be cause of their possible confidential character, were taken from Vol ume 227 of Mr. Hamlins scrap book and placed in the Board’s files: VOLUME 227 Page ^ Preliminary Memo for the Open Market Policy Conference, April 12, 1932. Page 11 Eamings & Expenses of F.R. Banks, March 1932. Page 15 Memo to Mr. Hamlin from Mr. Goldenweiser re probable costs of the Steagall plan for guaranteeing bank deposits. Page 21 Reply to the Memo of Governor Harrison, and letters of February 6, and April 7, 1932. Page 3 3 Notes for Mr. Hamlin re effects of gold imports on credit expan sion. Page 34 Memo to Mr. Hamlin from Mr. Smead re customers rates on paper. Page 43 Memo to Mr. Hamlin from Mr. Smead re changes in bank loans and amount of domestic capital issues, 1926 to 1931. Pag£ 50 Letter to Mr. Harrison from Senator Glass re S. 411 5. Page ^.4 Draft recommended by F.R. Board on March 29, 1932, and draft sug gested to Senator Glass by C. S. Hamlin, on February 10, 1932. Page 65 The Bank of France and the New York Discount Rate. (Excerpt from letter of Governor Harrison to Governor Mever) Page 67 Memo to Mr. Hamlin from Mr. "Wyatt re Digest of Steagall Bill. Page 69 Memo to Mr. Hamlin from Mr. Goldenweiser re speculative loans. Page 75 Memo to Mr. Hamlin from Mr. Smead re changes in bank loans and amount of domestic capital issues, 1915-1931. Page 131 Memo to Mr. Hamlin from Mr. Smead re changes in member bank security loans in 1920-21, when F.R. Banks had a 7 per cent discount rate. Confidential April 8, 1932. PRELIMINARY MEMORANDUM FOR THE OPEN MARKET POLICY CONFERENCE, APRIL 12, 1932. Since the meeting of the Cpen Market Policy Conference on February 24 and 25, U. S, Government securities have been purchased at the rate of $25,000,000 a week, in accordance with the authorization given at that meeting. The funds paid out through these security purchases have been supplemented by a substantial return flow of currency, and also by a _ small gain of gold, with the consequence that member bank indebtedness has been reduced by $200,000,000. The following table summarizes the principal gains of funds by member banks between February 24 and March 30, and the disposition of the funds so received. (In millions of dollars) Sources of funds received by banks : F. R. purchases of TJ. S. securities Net retirement of currency - - - Increase in gold stock - - - -Reduction in Government deposits in Total - - - - - - - - - - - - - - 144 - - - - - - - - - - - - - - 134 - - - - - - - - - - - - - - 46 F. R. Banks - - - - - - - - gj 345 Disposition of funds;Reduction of member bank indebtedness Retiranent of bills from F. R. holdings Increase in member bank reserves - - Miscellaneous - - - - - - - - - - - - Total 200 75 65 5 345 As anticipated, the easier conditions which have resulted from the System's purchases of Government securities and other causes have re sulted in the restriction of offerings of bills to the Reserve Banks, so that the System's bill holdings have been reduced by maturities from $133,000,000 to $58,000,000, including foreign currency bills. The gold outflow, which at the time of the last Conference was expected to continue, ceased shortly thereafter and has been followed by a moderate inflow of gold, so that none of the funds paid out through the purchase of Government securities up to April 6 was required to offset gold losses. VOLUME 227 PAGE 5 Within the Federal Rerorvo of re-,7 York Reports Department 7 ^ * * . •?? *, 1932 _ M I L L I O N S OF D O L L A R S -2V2 7 3 past week, however, there have been several developments, including the pub lication abroad of false rumors concerning American institutions and condi tions in this country, which have unsettled confidence again, and some new outflow of gold has occurred. Question was raised at the time of the last Conference concerning the possibility of obtaining a distribution of the funds put out in the New York money market through the purchase of Government securities. Due largely to loans made by the Reconstruction Finance Corporation and to other Treasury disbursements, the desired distribution of funds has been successfully accomplished, Furthermore, the benefits of the return flow of currency have been widely distributed. The distribution of the decline in member bank indebtedness has been as follows: (In millions of dollars) F. R. Discounts on District Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco Total Feb. 24 39 169 123 121 35 48 72 22 15 39 15 138 835 Apr. 6 34 131 75 94 31 35 49 18 9 33 11 115 635 Decline 5 38 48 27 4 13 23 4 6 6 4 23 200 • In addition to the reduction in borrowings from the Reserve Banks the borrowings from New York City correspondent banks by banks in other parts of the country have also been substantially reduced. Between February 24 and April 6 the loans of New York City reporting banks to banks in other parts of the country were reduced from $358,000,000 to $294,000,000. From the high point in such loans reached early in February, the reduction has 3 amounted to approximately $105,000,000. The repayment of these loans in volves a movement of funds to New York from other districts, which has partly offset the withdrawals of funds frcm New York by the Treasury, and has been partly responsible for the accumulation of a moderate excess of reserves in the New York banks recently. The reduction in the indebtedness of banks outside of New York, and the comfortable position of New York City banks notwithstanding the heavy withdrawal of funds from New York by the Treasury, have tended to retard the decline in member bank credit and in bank deposits, but do not as yet appear to have stopped the decline. Basic commodity prices have declined to new low levels in recent weeks, and the volume of business and employment has shown considerably less than the usual spring expansion. Furthermore, uncertain ties concerning Congressional action with respect to taxation and the balanc ing of the national budget, and proposals of large newr currency issues, have had a disturbing influence. As a result of these adverse factors, security prices have recently shown acute weakness, especially the lower grade bonds, and the return flow of hoarded currency appears to have been checked for the moment. > C O N F I D E N T I A L iHot for publication E-7U2 EARHIHGS A1TD EXPOSES OF FEDERAL .RESERVE BAHICS, MARCH 1932 4 Month Federal darnings irom Reserve Bank Boston Hew York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Julias Francisco TOTAL March 1932 Feb. 1932 March 1931 Jan.-Mar. 1932 1931 Dis counted bills $1 0 5 ,6U3 36 3 ,71 6 289,095 325,016 Pur chased bills — Other sources $21,493 117,155 24,118 23,572 $115,095 684,245 $9,329 16,520 3>+,298 25 ,891+ 21+5 ,76 6 105,102 1 1 3 ,6s4 176 ,12 2 56,804 17,25S >+7,875 13,379 31,6 39 105,575 >+1 ,6 5 7 369,2 73 9,533 13,5S0 n,323 3S,295 2 ,088,326 2.377,865 1*3 6 ,99+1 Current expenses U. S. 134,096 150,309 57,6 9 5 61*,056 1+5,>+27 6l,1S2 91,369 35>+,i07 1 ,70 9 ,>+32 1+63,991 1 ,306 ,72 s 172 ,0 6 7 1.12++.917 1 , 1 *92 ,11*1* 1*,395,286 6,934.595 1,597,360 65>+,300 3,597,55>+ 1932 March secur ities FEDERAL RESERVE BOARD DIVISIOH OF BAFK OPERATIONS ' APRIL 12, 1932 of Total $147,823 527,568 110,057 57,762 10 3 ,0 3 1 269,827 109,282 60,016 135 .8 5 3 109,578 96,339 26 s, 1+99 1 0 3 ,1*69 108,316 187.462 69,012 127,296 118-C95 520,077 1 7 s,6S 7 $251,560 1,209,279 46o ,94 i 21,985 520,888 11.S99 16 7,319 16 3 ,01+7 3,088 22,880 3,933 21,140 Total $140,490 503,033 150,973 195,240 39 ,163 13,6 32 6 ,2 11 39,695 7 ,9 7 5 Exclusive of cost of F.R.currency Mar. 1932 Jan. ... Current net earnings Available for Current net earn! ngs Ratio reserves, Amount to surplus and Satio to '. ^ Amount ♦ paid-in paid-in franchise s v tax* capital capital m Per cent Per cent 12.4 10 .6 *359,078 *1 0 3 ,7 3 7 $182,371 1 ,297.621 14.6 2,182,536 631,711 13.5 970,U 56 300,032 2 3 .s 21.7 717.6 39 933,1+61+ 316,832 . 26 .1 70 3,76 5 25.9 509,1+58 200,930 >+,352,795 244,86s >+,393,1+52 111,681 1 ,31*5,659 7 9 1 ,331* 1 3 ,613,909 31+0,559 6 ,19 0,273 95,290 2 ,01+3 ,5 0 6 2,072,1*23 2 ,1 0 0 ,3 7 7 6 ,21*0 ,1 1 2 6 ,1*20,329 160,909 204,056 6 9 ,330 130,026 9 6 ,931+ lo>+, 1+32 12.9 1^.3 239,631 26,571 1 6 .1 38,936 57,1+36 1 5 .6 1 6 .5 6 .2 3 5 .5 2 1 ,1 6 1 3 3 5 ,61+5 2 ,1 1 3 ,3 2 5 2,239,^70 2,20>+,0o9 2,189,363 2 ,262,167 -4i6,50S 6 ,5 5 3 ,72 2 7 ,060,187 6 ,3 5 7 ,1*53 -6 67,185 7.0 182,341 13.6 20.1 105,142 251,406 8 3 8 ,10 3 5 5 ,2 73 19*0 176 ,0 23 569,140 ^.9 -18,524 109 ,1+sl* 1 5 2 ,76 2 7 3 ,0 5 3 91+7,2 3 1 14.9 14.8 7.2 33.9 64,495 90,259 2 ,7 6 7 771,035 16.9 1 7 .5 18.0 7 ,060 ,187 -6 6 7,18 5 18.0 >+.6 6 7 ,733 -2 .651t.179 ♦After making allowance for accrued dividends and current debits and credits to profit and loss account but not for profit or loss on sales of U. S. securities held in special investment account. ^ t: VOLUME 227 PAGE 11 To______ Mr. Hamlin Subject: •r• I transmit herewith a memorandum from Mr. Blattner in reply to your inquiry about probable costs of the Steagall plan for guaranteeing bank deposits. VOLUME 227 PAGE 1$ 2 — 84 95 Office Corresponaence To_ FEDERAL RESERVE BOARD Mr. Goldenweiser Subject! D a te . April 11, 1932 Cost of til© Steagall Plan F r o m ___ Mr . Blattrfer v. Mr. HamLin,s memorandum of April 5 asks that we make an estimate of what the Steagall Bill would have cost the Federal reserve system had it been in effect the past two years. If we assume that the Guaranty Fund provided for in the bill had gone into effect on January 1, 1930, and that bank failures would have been as experienced, the Fund would have had to deal with the suspension of about 700 member banks in the two years 1930 and 1931. These suspending banks had deposit liabilities of about $1,100,000,000. The Guaranty Fund might under the terms of the bill have called for as much as $450,000,000 from Federal reserve banks and member banks during the two years. A large pro portion of this sum, if not all, would in all probability never have been recovered by reserve or member banks. Under the bill the Guaranty Fund would draw from the Treasury all fran- their organization, amounting to $147,000,000. The Federal reserve banks also are to contribute at the outset $150,000,000 from their surplus. Thus, the initial working fund would have been about $300,000,000, if it had been established as of January 1, 1930. With the failure of the National Bank of K e n t u c k y and the Bank of the United States in the closing weeks of 1930, depositors of member banks sus pending during the year would have then had claims of $380,000,000 against the Fund. The Fund has twenty months within which to pay depositors in e i ^ Kj' full after a bank failure, though small depositors must be paid in months. It is not possible to say what proportion of the $380,000,000 in- Mr. Goldenweiser Page No. 2 April 11, 1932 volved in the year 1930 could have been raised within twenty months through the liquidation of the failed banks* assets. Experience of recent years tends to show that on the average not more than 60 per cent of the amount of the de posits of a bank at failure is recovered from the liquidation of the assets within twenty months or longer. Heavy failures of member banks in 1931 added to the failures of 1930 would have put the Guaranty Fund at the place where they would have needed resources in addition to the original $300,000,000. Member bank suspensions in 1931 by quarters ran as follows: _____ 1931____________________ Number_______________ Deposits_______ (In millions) 65 46,914 First quarter 82 109,939 Second quarter 202,857 Third quarter 121 373.818 249 Fourth quarter 517 733,528 Thus by the end of the first half of 1931 the Fund would have become liable to depositors for $158,000,000 in addition to the indebtedness of.$380,000,000 already accumulated, and the ensuing three months would have added $203,000,000 in liabilities. It is likely that sometime early in 1931 the Guaranty Fund, having exhausted the original $300,000,000, would have been drawing on its next line of resources. Under the bill, the Fund could draw an original assessment from member banks of $200,000,000, in proportion to a member bamk*s deposits; and twelve months after the payment of this sum it could in addition call on the member banks for $100,000,000 annually in proportion to member banks* earnings. So in all by the end of the year 1931 it might have thus called in $300,000,000 from member ***. Mr. Goldenweiser Page No. 3 April 11, 1932 The whole member banking system earned only about $13,000,000 in the year 1931, but presumably cash or surplus assets of the going banks might have been liqui dated to pay depositors of the failing banks. With $1,114,000,000 of member bank deposits involved in failures in the years 1930 and 1931, estimates indicate that 40 per cent or perhaps $446,000,000 v/ould never have been recovered from the assets of the liquidated banks and would have to be absorbed by the Guaranty Fund in the long run. The income and outgo of the Fund for the two years might be put in tabular form as follows: Income: Treasury contribution ........... . Federal reserve bank contribution .... Original levy on member banks ........ One annual levy on member banks.... $147,000,000 150,000,000 200,000,000 100.000.000 ....... $597,000,000 Permanent Disbursements: (temporary outgo might be much larger) 40 per cent of $1,114,000,000 of deposits involved in failures 446.000.000 Difference between income and disbursements.... ........... 151,000,000 Whether reserve banks or member banks would have ever gotten any of the differential of $150,000,000 back would, of course, depend on the bank failure record of the year 1932 and subsequent years. The figure of 40 per cent loss to depositors in failed banks is based on the computations of the Committee dT*Branch, Group, and Chain Banking, and re presents the experience of such banks failing since 1921 as have been fully liquidated in the interim. It is not possible to predict, of course, what losses to depositors will be in banks which failed of recent months. than 40 per cent; it may be lower. It may be higher X -7 1 3 1 A pril 14, 1932. C.S. Hamlin. THE GLASS BILL. Reply to the Memorandum of Governor Harrison, and le tt e r s of February 6 , and A p ril 7, 1932. On A pril 7 , 1932, Governor Harrison sent to the Banking and Currency Committee of the Senate, a memorandum commenting on each section of the origin al Glass "b ill, - Senate 4115 - and on the amendments suggested by the Federal Reserve Beard. He also enclosed a copy of a le tt e r sent by him to Senator Glass dated February 6, 1932. In the le tt e r of February 6, Governor Harrison stated that he would withhold detailed comments on the b i l l pending the report thereon of Dr. Goldenweiser and Dr. Burgess. He did, however, discuss the provisions as to open market operations and some oth ers, and strongly attacked the increased power given to the Federal Reserve Beard, referring to i t as a p o lit ic a lly appointed body. He stressed the necessity for autonomy in the Federal reserve banks and made three suggestions as to the amendments to the Federal Reserve Act. These suggestions were: VOLUME 2 2 7 PAGE 2 1 1. To reduce the number o f directors of each bank so as to concentrate re sp o n sib ility and to encourage supervision and management through the experienced d ir e c to r s . ( I t a lic s mine). 2. A grant of power for removal of incompetent bank o f f ic e r s . 3. R estriction upon borrowing by bank o ffic e r s except with approval of a committee of d ire cto rs. X -7 1 3 1 - 2 - The f i r s t suggestion w ill "be taken up la te r . As to the second suggestion, i t w ill su ffic e now to sta te that in the memorandum, Governor Harrison states that this should not he done at the present time. n. In the le tte r of A pril 7 , 1932, accompanying the memorandum, Governor Harrison admits "ce rta in past d e fe cts, and the need fo r provision for possible future ab u ses," but in another part of the le tte r states that "there do not appear to be any parts of the Glass b i l l for which there is an imperative need for immediate p a ssage." The only exceptions made to th is sweeping condemnation are the Federal Liquidating Corporation and the branch banking provision; the former, he s ta te s , might be h elp fu l and the la tte r he states would be h e lp fu l. He reaffirm s the p o sitio n taken by the Federal Reserve Bank in 1929 that only the discount rate and open market operations can e ffe c tiv e ly regulate the price and to ta l volume of cre d it. He severely c r it ic is e s the attempt of the Federal Reserve Board to control through d irect action the loan or investment p o lic ie s of individual banks. He admits, however, that direct action has i t s uses in dealing with individual banks using more than their share of Federal reserve c r e d it, but he asserts that i t is neither an e ffe c tiv e nor suitable method for general control of credit or the uses to which credit may be put, involving as i t does an assumption of re sp o n sib ility for the management of individual banks which could not be e ffe c tiv e ly f u l f i l l e d . I sh all not undertake in th is connection to go over the arguments fo r X -7 1 3 1 - or against direct pressure. 3 - It w ill "be s u ffic ie n t to point out that the Federal Reserve Bank of New York, in 1929, wished to increase discount rates to prevent a runaway market which i t believed was imminent; that the Board refused to increase the discount rate but kept in the 5$ ra te , exercising direct pressure upon the member banks to control their speculative loans, thus taking back part of the Federal reserve credit which had seeped into speculative markets; that the runaway market feared by the Federal Reserve Bank did not eventuate; that on the contrary, during the period of direct pressure, - from early in February to early in June, 1929, - the to ta l b i l l s and security holdings of the Federal Reserve Bank of New York stead ily declined, while i t s reserve ra tio ste a d ily increased; that fo r the -hole System, Federal reserve credit declined 193 m illions during th is period; that the large gold imports were kept by th is direct pressure from sw elling the member bank reserves and were used to take down acceptances, thus avoiding a tremendous further expansion of member ban}?: cre d it; that member bank reserves in fa ct declined 68 m illio n s during this period. The fact is that direct pressure under the 5$ rate was so successful that about the f i r s t of June, 1929, the Federal Reserve Bank informed the federal Reserve Board that there was shortly to be expected a commercial need for expansion of Federal reserve c r e d it; that the member banks were afraid to increase their borrowings, and that an easing p o licy -ou ld soon be essen tia l . Governor Harrison, in his le t t e r , c r it ic is e s Section 3 of the Glass b i l l , as amended by the Federal Reserve Board, perhaps more severely than any ether Section of the b i l l . He absolutely opposes the grant of uo—er in X -7 1 3 1 - 4 - this Section to close the discount window to "banks abusing the discount p riv ile g e s and to suspend such banks from further use of Federal reserve fa c ilitie s . He also objects to the duty imposed by this Section on Federal reserve banks to keep themselves informed as to the loan and investment p o lic ie s of the member banks, (the imposition of which duty i t may be parenthetically stated was strongly recommended by the Federal Advisory Council in February, 1 9 31.) He states that the powers granted and the duties imposed by th is Section would be in e ffe c tiv e , would involve r e sp o n sib ilitie s which neither the Fed eral reserve bank nor the Federal Reserve Board could f u l f i l l , and that the assumption of such powers would be harmful to the member banks and to the Federal Reserve System as a whole. In th is connection, I would point out that both Governor Harrison and Mr. Owen D. Young, who signed the memorandum stating the above objections, took a very d iffe re n t view of the matter in their testimony before the Sub-committee of the Senate. On January 20, 1031, Governor Harrison suggested to the Sub-committee that power should be given to the Federal reserve banks, or the Federal Re serve Board, to suspend a member bank from any or a l l of the p riv ile g e s of membership, during a given period, in the event that the bank has not conducted i t s e l f in the safest way for the depositors. (Testimony, p. 4 6 ). On February 4 , 1931, Mr. Owen D. Young stated to the Sub-committee that the Federal reserve bank should have the power to lim it or refuse rediscount even of e lig ib le paper, and to suspend other p riv ile g e s of membership, i f the banicing practices of any particular bank were, in i t s judgment, unsound, and # X -7 1 3 1 * Btherefore subjected i t s depositors to unreasonable r is k , either as to liq u id ity or secu rity, with a right of appeal on the part of the member bank in case the Federal Reserve Bank exercised i t s power u n fa ir ly , and that i f the unsound practices were persisted in , the Federal Reserve Board, on complaint of any Federal reserve bank, might expel the bank from member ship. (Testimony, p. 3 5 6 ). Both Governor Harrison and Mr. Young were asked by the Chairman of the Sub-committee whether under existin g law the Federal reserve banks had not the right to refuse to discount e lig ib le paper. Governor Harrison replied that that had always been his opinion, and that he had so advised the Federal Reserve Board when he was i t s Counsel, out that this right had been denied. (Testimony, pps. 47, 4 8 .) Mr. Young told the Sub-committee that the directors had never been able to agree that the power was clea rly enough expressed to warrant such action by the Board of D irectors; that he believed the power now existed but that such an extraordinary power and the obligation to execute i t , be made cle a r. should (Testimony, p. 3 63). The Glass b i l l , as amended, makes e x p lic it these grants of powers, and yet the memorandum, signed by both Governor Harrison and by Mr. Young, p o sitiv e ly objects to such power as harmful both to the member banks and to the Federal Reserve System] It is p ossible that the Federal reserve bank may claim that i t desired th is power only over individual banks borrowing more than other banks of their c la s s . This, however, would be tantamount to saying that i f any one X -7 1 3 1 "bank lo ses it s head in the way of speculative loans, they want power to correct i t , hut i f a l l hanks are infected with the speculative mania, they desire no power except their existin g powers over the discount rates on commercial paper. The power vested in the Federal Reserve Board hy Section 3 of the Glass h i l l , would, of course, he exercised only on individual hanks, hut i t is a power which could not he defeated hy proof that not one hut a ll hanks are possessed hy the speculative mania. m. Analysis o f Memorandum. The memorandum comments on each s e c t i o n o f th e h i l l in d e t a i l . It opposes every section of the origin al h i l l except Section 16, r e la tin g to a larger cap ital fo r future national hanks, which it states i t prefers to the draft submitted hy the Federal Reserve Board. It approves in general the Federal Reserve Board’ s recommendations as to 22 sections of the origin al h i l l , hut states that o f these 22, 13 are not now necessary, and should he postponed for future consideration. Among these la tte r were: Most o f the recommendations as to a f f i l i a t e s , and e sp e cia lly the divorce o f a f f i l i a t e s . The 90-day clause for member hank c o lla te r a l notes secured hy e lig ib le paper. S u p e rv is io n o f h o ld in g companies. Removal o f o ffic e r s and directors o f member hanks. X -7 1 3 1 ~ 7 The memorandum opposes the follow ing recommendations o f the Board* The power to suspend member banks for abuse of Federal reserve f a c i l i t i e s . The Board’ s b i l l covering new reserve provisions. The separation o f bank and a f f i l i a t e stock. The divorce of a f f i l i a t e s , Mthe d e sir a b ility of which at any time is doubtful". IV. The Glass b i l l , with the amendments of the Federal Reserve Board, is designed to give some assurance to depositors and the public that the speculative excesses culminating in the crash o f 1929 w ill not be repeated. The speculative craze which swept over the country w ill take it s place in history along with the tu lip mania and the South Sea bubble. The crash of 1929 was probably one of the worst in the world’ s h istory. . It represented a successful raid of the speculating nublic unon the banks o f the country. The banks were unable to stem this raid. On the contrary, they permitted i t to increase by undue and excessive loans to th eir customers. The fin a l crash brought ruin to thousands and thousands o f our people and was f e l t over the whole world. The Glass b i l l o ffe rs a remedy by giving the Federal Reserve Board the right and duty to protect the public in terest against any such future mania .of speculation. The Federal Reserve Bank of hTew York admits past defects and the need for some provision for future p ossible abuses. It suggests, as t X -7 1 3 1 *- 8 stated before, that the directors of each bank be reduced in numbers 11so as to concentrate the responsibility and to encourage supervision and management through the experienced directors". "Through the experienced directors"! To what directors does this refer? At first blush it would seem to refer to the Federal reserve bank directors. Such a change, however, would disrupt the Federal Reserve System by removing all directors representing the public interest, as distinct from the member banks. I assume, however, that the reference is to the directors of the member banks. Coupled with this recommendation is a recommendation limiting borrowings by bank officers, and also giving power of removal of in competent bank officers. The memorandum, however, states that the latter suggestion should not oe considered at the present time and, presumably, the same sug gestion would apply to the other recommendations. v: To sum up:The federal reserve bank admits abuses in the uast, and admits the necessity for provision against possible future abuses, but it opposes the jresent bill, and in effect takes the oosition that practically no legislation is imperatively demanded at the nresent time. c • * X-7131 - 9 The correspondence contains 'the statement that the business in the United States is more dependent noon the securities market (called in the correspondence the "capital market") than upon the banks, and that business recovery is dependent upon the proper functioning of the capital market. Tnere may be an element of truth in this statement as regards what is popularly known as "Big Business", but it is certainly not true as to that large volume of business which is absolutely dependent uoon short term credit extended by banks under the auspices of the Federal Reserve System. It should not be forgotten that it was the secession of "Big Business" from the banks, and the issue of their own securities on specially favorable terms beginning in 1927 , and later their action in pouring the funds thus obtained into the maelstrom of speculation, that was a major cause in the final collapse of 1929. Yet the attempt of the Glass bill to prevent a recurrence of these practices, is condemned as being injurious to the capital market, upon the prosperity of which the revival of business activity is stated to depend. The conclusion irresistibly to be drawn from the correspondence and memorandum is that the need ion changes in the Federal Reserve System must yield and give precedence to the needs of the capital market, and that any changes in the Federal Reserve System which might affect the capital market would be most unfortunate. The Glass oill as amended by the Board by placing restraint upon future mad speculation, will ultimately place the securities market uoon a much sounder foundation than exists today, and the argument that dm X-7131 10 legislation cringing about this ultimate result should be postponed, seems to * be not sound. It is a customary objection to all remedial legislation that it should be postponed, and the time will never come when all will agree that the task should be then undertaken. . The Federal Reserve Bank, as before s*tated, denies that there is a necessity for legislation on any subject i-n the Glass bill, except possibly the Liquidating Corporation and branch banks. It takes the position squarely that when legislation is enacted,'"it should give the Federal reserve banks more complete autonomy, free from all but very -jpic 'M' 9 L general supervision by the Federal Reserve 3oard,Jbut *r 'makes clear that if given this autonomy, it will use it in meeting another speculative mania solely by the exercise of the discount rate and open market opera tions, and that too even though ail of the member banks are feeding the fire of unbridled soeculation by undue and excessive loans to their customers on stock exchange collateral. I venture to express the view that the public demands something more than this, and that if such a wave of speculation should sweep over the country again, it will find the Federal Reserve Board charged with such power that its future warnings in the public interest will be received with respect and carried out with promptness. o April 9 , 1932 2 ju ~ oJU** *2. The prosperous years of expanding business activity from 1922 to 1929 would have been impossible without a corresponding expansion in bank credit. The Federal reserve system is often criticized for failing to check this up ward movement of credit and, on the contrary, for facilitating it. The feel ing is that the present depression would be much less acute if business and dredit had not developed at so rapid a pace from 1922 to 1929 . , In looking 1 •>>r back over the past, it is easy to think that if a somewhat different policy had been followed our difficulties might have been much less. Taking the period as a whole, however, it is difficult to see how the Federal reserve system could have checked this expansion of credit. Effects of gold imports on credit expansion Gold was coming into this country in large volume and could not be ab sorbed, as it had been in 1920 and 1 9 2 1 , in liquidating the indebtedness of member banks, because there were not enough discounts to liquidate. This in flow of gold, continuing with only short interruptions to May, 1 9 2 7 , and again in 1929 , provided a basis for credit expansion by member banks without increasI if ing their requirements for reserve bank credit. During this period the mone<- tary gold stock of the country increased by $481,000,000, and member bank re serve balances increased by $5 7 7 ,000 ,00 0 , so that all the funds created through gold imports during the period, and even more, went into member bank reserve balances, where ti constituted a basis of credit expansion. Member bank credit increased by $1 1 ,500 ,000,000 during this period, or at an approximate rate of $20.00 of member bank credit for $1.00 of member baik reserves. That the Fedep]frtracted eral system/to some extent the inflow of gold during this period taken as a VOLUME 227 PAGE 3 3 whole, is shown by the fact that Government security holdings of the reserve hanks declined hy $21+7,000,000, while member hank borrowings increased by $380,000,000. After May, 1927, increased foreign borrowings in the United States and the prevalence of much higher money rates abroad caused a reversal of the geld movement, with the consequence that between the middle of May, 1927, and. June, 192S, the country’s gold stock was reduced by $600,000,000. The firm ing effect of these exports of gold on the domestic credit situation was at first offset by the Federal reserve system through the purchase of securities, but a continuous growth of loans on securities in the United States caused the system in the early part of November, 1927, to discontinue these purchases. Be ginning with January, 192S, the system adopted a positive firm-money policy expressed through the sale of Government securities and through advances in discount rates in the course of 1928 from 3 l/2 per cent to a level of 5 per cent at eight of the reserve banks, and to H l/2 per cent at the four Western banks. Buying rates for bills also were advanced. The firmer money conditions in this country, however, brought counteracting forces into play and once more gold began to flow into this country. As I look back on the course of financial events in recent years ftpenr tfee from the depth to which we have been brought recently, I can see that we may have been over-enthusiastic in security purchases in I92U and over-solicitous about the fate of the gold standard in 1927, but it seems to me that, taking the period as a whole, there is little that one can criticize in the conduct of the system. The principal reason for credit expansion during this period Page 3 was the inflow of gold from abroad, which accentuated any mistakes that we may have made and neutralized the effects of aone policies that we adopted. In the light of what we knew currently, it is hard to see how we could have changed our policies in a way that would have altered the course of events. > Vr If we had^to do over, we would no doubt act differently in the light of what we have learned hy extremely hard experience. then — But others will probably have that to do, and to them the experience will not have the same compelling character that it has for us. That is why, to end on a philosophical note, human progress is so painfully slow and halting. F o r m No. 131 Office Correspondence To_ Mr. Hamlin F l'~• Smead FEDERAL RESERVE BOARD Date April 9, 1932 Subject: oro 2 — 8495 With regard to your request for information as to Whether member banks in 1929 charged customers higher rates on paper secured by stock exchange collateral than on commercial loans I find that the best in formation available on this subject is shown in the table on page 781 of the December 1929 Federal reserve bulletin. You will note from this table that it was the practice of banks in a nunber of cities to charge hitler rates on loans secured by prime stock exchange collateral than on other loans. This was particularly true for banks in Chicago, Boston and San Franci sco. As stated in the table, the rates shown are those at which the bulk of the loans of each class were made by about 200 representative bankB . ( Z ^ u . t VOLUME 227 PAGE 34 No. 131 Office C o r r e s p o ni mdie n c e To__ Mr. H & m l i n _________________ From,.Mr. Smead_______________ ! _______ FEDERAL RESERVE BOARD f W Date April lU, 1932 U Subject: Changes i n bank loans and amount of domestic capital _ __issues, 1926 to 153-1____ In accordance with your telephone request of this morning we have prepared the attached table which shows the growth in total loans (excluding investments) of member banks and of all banks in the United States, by years, from 1926 to 1 5 3 1 , and the amount of new corporate issues of stocks and bonds during the same period. You will note that the new issues of corporate securities were much larger in every year than the growth in bank loans, also that during 1330 and particularly in 1331 bark loans declined materially but that a substan tial volume of new corporate issues continued to be floated in 1930 and even in 1931 amounted to $1,500,000,000. Such information as is available indicates that the amount of corporate bonds (not including stocks) outstand ing was about $13,000,000,000 in excess of total bank loans in June 1931 and only about $ 6 ,500 ,000,000 less than total loans and investments of all banks in the United States. The reported new issues of corporate stocks and bonds include an unknown but probably substantial amount of duplication. For example, a substantial portion of the reported new issues during 1528 and 19 2 9 , particularly, were put out by investment trusts, which used the proceeds to invest in other cor porate securities. The flotation of securities by a holding corporation for the purpose of purchasing and carrying securities of an industrial corpora tion does not, of course, orovide industry with additional funds. VOLUME 227 PAGE 4 3 ST CHANGES IN BANK LOANS AND AMOUNT OB DOMESTIC CAPITAL ISSUES, 1926 to 1931 (In millions of dollars) Jfear Loans ________ £ Amount on December ^1 Change for the year Member banks i All banks 1 Member banks 1 All banks - (1925 21,996 3 5 .& 0 1926 2 2 ,6 5 2 3 6 .7 5 9 + 656 1927 2 3 ,8 8 6 38.H07 +1 .2 3 ^ 192S 25.155 Ho, 76 3 1929 2 6 ,1 5 0 1930 1931 + 1 ,1 1 9 3 .75 H 2,667 1,087 + l,6Hg H .6 5 7 3.183 1 .U71* ■*-1,269* + 2,356 5 .3 H6 2,385 2 ,9 6 1 1*1 ,8 9 3 + 995 + 1.135 S.002 2,078 5.92H 23.370 38.135 -2,280 - 3.763 H.US3 2,980 1.503 1 9 .2 6 1 3 1 ,6 1 6 -U,6o9 - 6 ,5 1 9 1 ,5 5 0 1.239 311 FEDERAL RESERVE BOARD DIVISION OF BANK OPERATIONS APRIL lU, 1932 Domestic Car>ital Issues (Cornorat e issues exclusive of refundings') _Total Bonds and notes I Sto cks # April 9, 1932• copy. Dear Governor Harrison: Permit me to acknowledge your courtesy in sending me a copy of your extended letter to Senator Norbeck, chairman of the Banking and Currency Committee of the United States Senate, in criticism of So 4115. I have read and re-read with scrupulous care the letter in question and have noted with considerable interest that it has the unanimous approval of the board of directors of the Federal Reserve Bank of New York. You may be sure that 1 am in no wise astonished at the nature of the letter nor at the approval of the New York bank board. 1 am, however, dis tinctly gratified, as I feel confident our committee will be, that you and your board have thus stated in unequivocal terms the misconception of the Federal Reserve banking act which so long has been reflected in the extraordinary policies pursued by the New York bank with respect to both domestic and foreign transactions. It is truly a notable document. In my considered view it constitutes a challenge to statutory authority and an unyielding antagonism to any restraining influences whatsoever. For wy part the challenge will be squarely met and the issue distinctly Joined in the United States Senate. * Sincerely yours, (Signed) CARTER GLASS. Hon. G. L. Harrison, Governor of the Federal Reserve Bank, New York City, New York. VOLUME 227 PAGE $0 D raft recommended "by Federal Reserve Board on March 2 9 , 1932, and d r a ft suggested to Senator Glass hy C* S. Hamlin, on February 1 0 , 1 9 3 2 . Federal Reserve Board D ra ft: / '•The Federal Reserve Board may p re sc r ib e regu lation s fu rth er d e fin in g w ithin the lim ita tio n s o f th is a c t the conditions under which d isco u n ts, advancements and accommodations may be extended to member banks* Each Federal reserve bank s h a ll keep i t s e l f informed o f the general character and amount o f the loans and investments o f i t s member banks with a view to ascer ta in in g v/hether undue use i s being made o f bank c re d it f o r the sp ecu la tiv e carrying o f or trading in s e c u r it ie s , re a l e sta te or commodities, or fo r any other purpose in c o n siste n t with the maintenance o f sound c r e d it c o n d itio n s; and, in determining whether to grant or refuse advances, rediscounts or other c re d it accommodations, the Federal reserve bank s h a ll give con sid eration to such information* The Chairman of the Federal reserve bank s h a ll report to the Federal Reserve Board any such undue use o f bank c re d it by any member bank, together with h is recommendation. Whenever, in the judgnent o f the Federal Reserve Board, any member bank i s making such undue use o f bank c r e d it , the Board may, in i t s d is c r e tio n , a f t e r reasonable notice and an opportunity f o r a h earin g, suspend such bank from the use o f the c re d it f a c i l i t i e s o f the Federal Reserve System and may terminate such suspension or may renew i t from time to tim e*" D raft suggested by C*S*H.j "I n order to secure a more e f f e c t iv e supervision o f banking in the in t e r e s t o f bank d ep ositors and o f the p u b lic , the Federal Reserve Board may p re scrib e regu lation s d e fin in g and reg u la tin g the use o f the c r e d it f a c i l i t i e s o f the Federal Reserve System w ithin the lim ita tio n s o f th is Act as amended. "Each Federal reserve bank s h a ll keep i t s e l f informed o f the loan and investment p o lic ie s of i t s member banks, and f o r th is purpose may c a l l uoon such banks from time to time f o r reports* "The Chairman o f the Board of each Federal reserve bank s h a ll report to h is bank and to the Federal Reserve Board any use made by a member bank o f Federal reserve f a c i l i t i e s , d ir e c t ly or in d ir e c t ly , in connection with any loans made by i t , v/hether commercial, sp e c u la tiv e , real e s t a t e , or otherw ise, which i s undue or excessive under th is Act as amended, and the regu latio n s o f the Federal Reserve Board. "Each Federal reserve bank may, in i t s d is c r e tio n , a f t e r due warning, suspend from the fu r th e r use of Federal reserve p r iv ile g e s any member bank abusing said f a c i l i t i e s , as above provided. " I f , in the judgment o f the Federal Reserve Board, any Federal reserve bank f a i l s to take proper a c tio n under th is p ro v isio n , the Board may, by an a ffir m a tiv e vote o f not l e s s than f i v e o f i t s members,enforce th is p ro v isio n a g a in st any offen d in g member bank or banks. VOLUME 227 PAGE 54 % 1. October 3, 1931• * Hew York He raid-Tribune favors a moderate increase# 218 - 14. 2. October 9# 1931. Hew York increases to 2 \ SIB - 52# 3. October 14# 1931* Visit of officers of Bank of France to Federal Besenre Bank of Hew York# 218 - 94* 4. October 16# 1931# Hew York increases to 3j$. 218 - 106. 5# October 21# 1931. Ho understanding as to discount rate policy with the Bank of France# Hewspaper clipping# Shively# Hew York Sun# 219 - 41# 6* October 27# 19^1# Hark Sullivan states: ■If the American bankers had felt perfectly free to speak their minds to the French# they probably would have spoken somewhat as follows*.... •if you wish to leave your deposits with us# we should like to be assured they will not be withdrawn suddenly without notice.' "Something like this has actually been effected as an incident of the visit of 14# Laval and his financial advisers# and the French deposits In American banks are now attended by terms fixing definite future dates, before which they can not be withdrawn." 219 - 77. 7* December 18# 1931. Governor Harrison writes Governor Meyer that there is no basis# in fact# for any statement that we asked the Bank of France not to withdraw its deposits from the American money market# or# indeed# that they had "agreed" not to do so# Hor is there any foundation to statements which have been VOLUME 227 PAGE 65 2. 7. D ecem ber X8t 1931 (Cont»d.) made from time to time that in consideration of such an •undertaking the Federal Boserrs Bank of Hew York had agreed to maintain a firm money policy "by increasing its discount rate to 4)4, or by any other action# ...... I have reviewed these matters in some detail only because of the continued and repeated reports of an agreement in the nature of a "bargain* whereby the Federal Beserve Bank of Hew York surrendered its freedom of action regarding credit or discount rate policies in exchange for a proraise from the Bank of France that it would not withdraw its funds from our market# 'There was not any such agreement, or any such bargain..# In fact, there has never been a time in any of my conversations with any central bank when there was any request or even any suggestion that they or we should in any way make a commitment as to any future policy that would in any way destroy or limit our complete freedom of action in our own self-interest. There i s r e s p e c tfu lly submitted herew ith fo r your in form ation, a d ig e st o f the S te a g a ll B i l l (H.R. 1 0 2 4 1 ), which was prepared by Mr. Vest l a s t n ig h t. ♦ Digest attached VOLUME 227 PAGE 67 X -7 1 11 SUMMARY OF THE PROVISIONS OP H.R. 1 0 2 4 1 . The p rovision s o f th is b i l l d iv id e themselves conveniently in to three p o r tio n s : (b) (a ) amendments to the N ational Banking Laws; amendments to the Federal Reserve A c t; and (c ) p ro v isio n s e s ta b lis h in g a Federal Guaranty Fund fo r d ep ositors in member banks o f the Federal Reserve System. AMENDMENTS TO NATIONAL BANKING LAWS. The amendments to the N ational Banking Laws, which are contained in S ection 1 , 2 , 3 and 4 o f the b i l l , r e fe r in a l l cases only to n a tio n a l banks which may be organized h e r e a fte r . These amendments con tain three important changes in the law: (1 ) The a u th ority fo r the organ ization o f a n a tio n a l bank with a minimum c a p ita l o f $25,000 in p la ces of not exceeding 3 ,0 0 0 in h ab itan ts i s elim inated from the law; (2 ) no n a tio n a l bank may be organized u n less i t has a surplus of not le s s than 10 j> o f i t s c a p ita l sto c k , and (3 ) p ro v isio n s fo r the double l i a b i l i t y of shareholders o f n a tio n a l banks are elim in ated , except as to banks having branches. S ection 1 o f the b i l l elim in ates from Section 5138 o f the Revised S tatu tes the p ro v isio n that n atio n al banks may be organized in p la ces of not exceeding 3 ,0 0 0 in h ab itan ts with a minimum c a p ita l stock o f $ 2 5 ,0 0 0 . Section 2 o f the b i l l amends S ection 5138 o f the Revised S tatu tes so as to provide that no n atio n al bank s h a ll be organized except w ith an i n i t i a l surplus equal to 10$ o f i t s c a p ita l sto c k , X-7111 -2 - and. provides a number of corresponding amendments to other p rovisio n s o f the n ation al banking laws in order to make them conform to th is requirement. Thus, fo r th is purpose: Section 5168 (erroneously refe rre d to as S ection 5618) o f the Revised S ta tu te s , which requ ires the Comptroller o f the Currency to examine in to the con d ition o f a n a tio n a l bank, and e s p e c ia lly whether 50$ o f i t s c a p ita l stock has been paid in , in order to determine whether the bank is la w fu lly e n title d to commence b u sin e ss, i s amended to requ ire the Comptroller to a sc e rta in a lso whether 50$ of the required i n i t i a l surplus has been paid in . The Act o f November 7 , 1918, as amended, p rovid ing fo r the co n so lid a tio n o f n ation al banks, and fo r the co n so lid a tio n of a S tate bank with a n atio n al bank, is amended to require that the con solid ated in s t i t u t io n in each such case sh a ll have an i n i t i a l su rp lu s, as w ell as a c a p ita l sto c k , in the amount required fo r the organ ization of a n a tio n a l bank in the p la ce in which i t i s lo c a te d . Section 5154 o f the Revised S ta tu te s , p roviding fo r the con v ersio n of a S ta te bank in to a n atio n al bank, i s amended to require that the converted in s t i t u t io n have an i n i t i a l surplus $ • # X -7 1 1 1 - 3 not le s s than that required fo r the organ ization o f a n ation al hank in the p lace in which i t i s lo c a te d . S ection 5140 o f the Revised S ta tu te s , requ irin g at le a s t 50$ o f the c a p ita l stock of a n atio n al hank to he paid in b efore i t i s authorized to commence business and the remaind er to he paid in in 10$ monthly in sta llm en ts i s amended to make sim ila r requirements with regard to the required i n i t i a l su rp lu s. Section 5141 o f the Revised S ta tu te s , which au th orizes the sa le of the stock o f any shareholder who f a i l s to pay any in sta llm en t on h is stock as required by law, i s amended so as to g iv e the same a u th ority in the case o f a f a i l u r e to pay any in stallm en t o f the i n i t i a l su rp lu s. S ection 5205 o f the Revised S ta tu te s , which provides fo r assessments upon stockh olders o f a n atio n al bank in case i t s c a p ita l stock i s not paid up or in case of an impairment th ere in and fo r the appointment o f a re ce iv e r when the d e fic ie n c y i s not made up w ithin three months a fte r n o t ic e , i s amended to provide fo r such assessments where the i n i t i a l surplus i s not paid up and fo r the appointment o f a receiv er where the de fic ie n c y in i n i t i a l surplus is not met w ithin the three months* p erio d . Apparently an impairment in i n i t i a l surplus would not he grounds fo r such an assessm ent. The p ro v isio n o f S ection 5205 au th orizin g the sa le o f the stock o f a sh are- X-7111 - holder who f a i l s 4 - to pay such assessment against him would "be omitted "by th is amendment, apparently "by m istake. Section 5143 o f the Revised S ta tu te s , which au th orizes re ductions in c a p ita l stock of n a tio n a l hanks, i s amended so as to include surplus in i t s p r o v is io n s . While not c le a r , apparently a l l the present requirements fo r a reduction of c a p i t a l, in clu d in g tw o -th ird s' vo te o f shareholders and ap proval o f the Federal Reserve Board and o f the Comptroller o f the Currency, would he a p p lica b le as to every reduction in su rp lu s. S ection 3 o f the h i l l amends S ection 5151 o f the Revised S ta t u tes and Section 23 o f the Federal Reserve Act so as to elim inate the p ro v isio n fo r the double l i a b i l i t y of shareholders as to nation a l hanks h erea fter organized, except as to any hank which oper a tes or e sta b lish e s a branch. Section 4 o f the h i l l provides that the p ro v isio n s o f S ections 1 , 2 and 3 s h a ll apply only to n a tio n a l hanks organized a ft e r the date of the enactment o f th is A c t. X-7111 -5- AMEUDMENTS TO THE FEDERAL RESERVE ACT. Sections5, 6 and 7 of the "bill contain amendments to the Federal Reserve Act with regard to the distribution of earnings of Federal reserve banks, the charges which may be made by member banks for the collection or payment of checks and drafts, and the giving o_ immediate credit by Federal reserve banks for items received for collection. Section 5 would amend the first paragraph of Section 7 of the Federal Reserve Act so as to provide that the net earnings of each Federal reserve bank shall be distributed as follows: After the payment to member banks of the 6$ dividend now provided for and the payment of 10 $ of the net earnings to surplus, cne-half of the remainder of the net earnings shall be paid to the Federal Guaranty Fund for depositors of member banks, (provided for in later sections of this bill) and the remaining one-half shall be paid to the member banks in proportion to the amount of their capital stock. The pay ment of the franchise tax by Federal reserve banks to the United States would thus be eliminated. with regard to the The second paragraph of Section 7, manner in which funds paid to the United States either as a franchise tax or upon dissolution of the Federal re serve bank are to be used, is amended to make the necessary cor responding changes. X-7111 - 6 - Section 6 would, amend the first paragraph of Section 13 of the Federal Reserve Act with regard to the charges which may he made by hanks for collection or payment of checks and drafts so as to eliminate the clause "hut no such charges shall he made against the Federal reserve hanks" and the provision for the determination and regulation of such charges hy the Federal Reserve Board; thus authorizing a hank to make a reasonable charge for collection or pay ment of checks and drafts, hut not exceeding 10 # per $100 or fraction thereof on the total of checks and drafts received at any one time, whether such checks and drafts are presented hy or through a Federal reserve hank or otherwise. Section 7 would also amend Section 13 of the Federal Re serve Act hy adding at the end of the first paragraph a new paragraph requiring a Federal reserve hank upon application of "a sending hank" to give immediate credit for checks and drafts received from such hank for collection and authorizing the Federal reserve hank to charge interest on the amount of the credit at the current redis count rate pending the collection of the item or, with the approval of the Federal Reserve Board, to establish a time schedule for this purpose. -7 - X -7 1 1 1 PROVISIONS FOR GUARANTY POND FOR DEPOSITORS OF MEMBER BANKS. The remaining sections of the hill, designated Sections 201 to 209, and comprising what is known as Title II of the hill, provide for the establishment of a Federal Bank Liquidating Board and for the guaranty of the deposits of member hanks. .Section 201 of the hill establishes a Federal Bank Liquida ting Board consisting of the Secretary of the Treasury, the Comp troller of the Currency, and three citizens of the United States appointed by the President by and with the advice and consent of the Senate. The appointive members, not more than one of whom shall be of the same political party as the President, are to hold office for four years and each is to receive a salary of $10,000 per annum. The appointive members are ineligible during the time they are in office, and for one year thereafter, to hold office or employment in any member bank or in or on the Federal Reserve Board# The Liquidating Board shall elect its own chairman and other of ficers and may employ and fix the compensation of its officers and employees, but the compensation is not to exceed $10,00 0 per annum in any case. Section 202 establishes a Federal guaranty fund for depos itors in member banks of the Federal reserve system. This fund is to be created by payments from three sources: (a) The entire amount heretofore paid to the United States as a franchise tax by the Fed eral reserve banks shall be paid, presumably by the United States, 7 X-7111 to the guaranty fund; (h) The Federal reserve hanks are to pay to the fund $150,000,000, the amount required of each to he deter mined pro rata according to the amount of its surplus on December 31, 1931; and (c) The hoard shall require the member hanks to pay to the fund (1 ) such an amount as it may fix, not exceeding $130, 000 ,000 , the amount required of each member bank to he determined pro rata according to its average deposits, other than time de posits, during the preceding calendar year, and (2 ) such an amount as the hoard may fix not to exceed $70,000,000, pro rated among such hanks according to their average time deposits during the preceding calendar year. At any time after one year subsequent to the payment of the above amounts, the hoard may, if in its judg ment the amount of the fund is inadequate, require the member hanks to pay annually to the fund not more than $100 ,000,000 pro rated among them according to their net earnings for the preceding calendar year. All sums payable either by a Federal reserve hank or by a member bank are subject to the call of the Liquidating Board; and, if in its judgment at any time the amount in the fund is in excess of the amount adequate for the purposes of the law, the board shall make a refund to each Federal reserve bank and to each national bank, the amount of the refund to be pro rated according to the amount of their contributions. Apparently State member banks would not share in any return of contributions. » -9- X-7111 Sums in the guaranty fund may he invested by the board in interest bearing obligations of the United States or deposited in member banks without interest. Section 203 provides that whenever a national bank is insolvent, the Comptroller of the Currency shall so certify to the Liquidating Board, which shall proceed to wind up the bank in accord ance with the law. Within thirty days after the receipt of the cer tificate of insolvency by the board, a committee consisting of one person appointed by the board, one appointed by the owners of a majority of the stock of the bank and one appointed by the depositors of more than 50 per cent of the outstanding deposits of the bank shall estimate the value of the assets and the amount of the liabilities of the bank and make a statement of the amount of the outstanding deposit of each depositor. .Section 204 provides that, on the basis of this estimate, as modified oy the board, and not less than sixty days after the cer tification of insolvency, the board shall pay to each depositor whose outstanding deposit is not more than $1 ,0 0 0 not less than fifty per cent thereof, and to each other depositor not less than twenty-five per cent of his outstanding deposit, or $500, whichever is greater. Within six months after such payment the board is to pay each depositor of the former class the remaining amount due him (and it is apparently the intention to provide that other depositors shall, -1 0 - X -7 1 1 1 within this six months’ period, "be paid an additional twenty-five per cent of their deposits, hut no such provision is contained in the hill.) Within the next six months period an additional twenty- five per cent shall he paid to all depositors not yet paid and within six months thereafter full payment shall he made to all depositors. Section 205 provides that the hoard, or a liquidating agent duly authorized hy the hoard, may borrow money on the security of tne assets of any insolvent national hank for the purpose of paying its depositors and creditors. Section 206 provides that in case of insolvency of a State member hank, the hoard shall request its receiver or liquidating agent to submit a report and estimate such as that required of the Committee in the case of a national hank; and the hoard upon approval of such report and estimate shall pay the receiver or liquidating agent in trust for the depositors the same amounts, and at the same times, as in the case of national hanks. .Section 207 makes it mandatory upon the Federal Reserve Board, after hearing, to forfeit the membership of any member hank failing to comply with the requirements of the hill with respect to the Guaranty Fund or any regulation of the Liquidating Board; and a national hank failing to comply with such provisions of the hill shall, in addition, forfeit all rights and franchises granted to it hy the law (apparently without any court proceeding, hut upon the basis of the hearing conducted hy the Federal Reserve Board.) 1 X-7111 -11- Section 208 authorizes the Liquidating Board to make regulations necessary to carry out the provisions with respect to the Guaranty Fund. Section 209 authorizes appropriations of such sums as may he necessary to carry out the provisions of this act. * fi * O ffice Correspoi To ence Mr. Hamlin FEDERAL RESERVE BOARD Date___A pril 1 1 , 1932. Subject: Mr. Goldenwe 2— 8495 I have read with interest your reply to Governor Harrison's memorandum on the Glass bill, and shall be very glad to have a copy of it when you have it mimeo graphed. Your comments are a forceful statement of the position which you have maintained throughout, and I have no suggestions to make. I think perhaps the sentence on page seven, where you say that 1929 "represented a successful raid of the specu i lative public upon the deposits of the banks," it would be more accurate to say "upon the banks of the country." Speculative loans were not made out of existing deposits, but on the contrary themselves created bank deposits. I may add that I am not optimistic enough to agree with the last five words of your statement. Since writing the above I have seen Governor Harrison's statement, and I feel certain that you are mistaken in assum ing that his suggestion about directors applies to directors of Federal reserve banks. I have had many talks with him and with Burgess about this, and what they have in mind is that many member banks have so large a directorate that there is no adequate concentration of responsibility, and they were dis cussing a proposal for requiring national banks to have a 227 O r ft £ t Mr. Hamlin, - #2 directorate not to exceed some given figure. * » % . I-Y u m iI 'N o 1-WW . *131 'O ffice Correspond*ence Mr. JTftmlln FEDERAL RESERVE BOARD Date__ Apr il 21, 193 ^ Subject:_G a n g es in bank loans and amount of domestic capital issues, 1915 ~ 1 9 3 1 Mr. In accordance with your telephone request there is attached hereto a statement showing the growth in total loans (excluding investments) of member banks and of all banks in the United States, by years, from 1919 to 1 9 3 1 * said the amount of new domestic corporate issues of stocks and bonds during the same period. As figures of domestic corporate issues, exclusive of refundings, ore not available prior to 1 9 1 9 * 1 a10 handing you a separate table com paring the growth in bank loans for the period 1 9 1 5 to 1 9 IS, with total domestic and foreign corporate issues (In the United States), which in clude refundings. The foreign corporate issues included in this table represent for the most part, we ■'understand, Canadian issues. VOLUME 227 PAGE 75 1*) CHANGES IN BAM LOANS, Ain) AMOUNT OF DOMESTIC CAPITAL ISSUES, 19^8 - 1931 (In millions of dollars) Year 1918 Bank loans Amount at snd of June or December Year Member All 1 ending banks banks June Change for year Member All banks banks Domesti c Capital issues during the calendai yepr (Corporate issues exelusive of refundings) Stocks Bonds and notes Total — 13,233 22,392 — — June +2,181 +2,318 2,246 810 1 ,4 3 6 0519 ti 15.414 24, 710 1920 11 19,533 30,824 «i +4 ,1 1 9 + 6 ,ll4 2 .5 6 3 1 .5 6 1 1 ,0 0 2 19 2 1 n 18,119 28,970 11 -l,4 l4 -1,854 1,701 1 .4 3 5 265 1922 11 1 7 ,1 6 5 27,732 it -954 -1,238 2,212 1,642 570 it +1.585 +2,646 2.635 1 ,9 7 6 659 1923 June December 18,750 18,842 30,378 30,778 19 2 4 December 19,933 32.440 December +1 ,0 9 1 +1 ,6 6 2 3.029 2,200 829 1929 11 21,996 35.640 11 +2,063 +3,200 3,605 2,452 1.153 1926 11 22,652 36,759 ti +656 +1 , 1 1 9 3,754 2 .6 6 7 1,087 11 23, s s 6 38,407 11 +1 ,2 3 4 +1,648 4,657 3,183 1 ,4 7 4 1928 ti 25,155 40. 763 H +1 ,2 6 9 +2 ,3 5 6 5,346 2,385 2 .9 6 1 1929 11 26,150 4l,898 II +995 +1 . 1 3 5 8,002 2,078 5.924 1930 ti 23,870 38,135 II -2,280 - 3 ,7 6 3 4,483 2,980 1,503 19 3 1 11 1 9 ,2 6 1 3 1 ,6 1 6 II -4,609 - 6 ,5 1 9 1,550 1,239 311 0 2 7 •FEDERAL RESERVE BOARD DIVISION OF BAM OPERATIONS APRIL iq, 1932 CHANGES IN BA M LOAMS, AMD AMOUNT 0? DOMESTIC AMD FOREIGN CAPITAL ISSUES, 1915 - 1916 (In millions of dollar?. Year Source of Capital Issues data: . _____ 3ank loans Change for vee r ending: June Amount at end of June Meirb er All Meaber ! All banks berks* banks . _ ban1® 1 5 ,2 ^ 8 1915 6 ,7 2 0 1 5 ,6 6 3 + 1316 7,966 1 7 ,9 6 1 1917 including refundings, during the __________ s a l,£ n £ a r..y .i? & r— Total Stocks 1,580 1.169 391 + 1 ,2 6 6 + 2,313 1 ,8 6 6 1 ,2 3 0 636 2 0 ,5 1 0 + l,Uo6 + 2 ,5 6 9 1 ,5 7 6 1 ,1 7 3 U03 13.233 22,332 + 3 .3 6 3 + 1,862 1 ,2 1 6 1,020 196 cr\ 395 277 + ♦Part of increases shown for member banks is due to accessions to membership. FEDERAL RESERVE BOARD DIVISION OF BANK OPERATIONS APRIL 21, 1932 ------------------------------------ '"Bonds and notes ! O r— 6 ,6 6 3 n Domestic and Foreign Capital issues, i- a 19lU 1318 Wall Street Journal, January 26, 1932) April 3 0 , 1932 Changes in member bank securl loans in 1920-1921, when F. R. banka had & 7 per cent discount rate In response to your telephone request of yesterday that we prepare for Senator Glass data to show the changes that took place in member bank security loans in 1920-1921, when some of the Federal reserve banks had a 7 per cent discount rate, we are handing you herewith three tables covering the period December 1919 to December 1921, as follows: 1. Loans and investments of all weekly reporting member banks in leading cities 2. Loans and investments of weekly reporting member banks in Sew York City 3. Brokers* loans placed by New York City daily reporting banks There is also attached hereto a copy of the pamphlet "Discount rates of the Federal Reserve Banks, 191U-1921," showing all dianges in Federal reserve bank discount rates during that period. It will be noted from page 6 of the pamphlet that a 7 per cent rate on commercial, agricultural and livestock paper was established by the Federal Reserve Bank of New York on June 1, 1920, and that this rate was reduced to 6-1/2 per cent on May 5 , 1921, and to 6 per cent on June lb, 1921. The rate on paper secured by U. S. Government obligations did not go above 6 per cent. Changes in discount rates of the other Federal reserve banks are shown on other pages of the pamphlet. VOLUME 227 PAGE 131 jEH/fac LOANS AND INVESTMENTS OF *7SEKLY REPORTING MEKBSR BANTS IN LEADING CITIES, DECEMBER 1919 TO BSC, 1921 (Monthly averages of weekly figures; in Billions of dollars) Total Loans on loans and securllQVes.^eBia. IU jbs__ 1919- December 16.387 4.703 - January February March April 16 ,68 ? 16,652 16 .853 4,737 4,504 16.983 May June July August 1920 7.710 1.993 1,981 8,006 1.963 1.79* 1.654 1.693 1 .9 7 6 1 .9 6 5 4.390 8.384 8.788 8.954 16.992 16.971 16,921 16.907 4.303 4,249 4,181 4.087 9.050 9.177 9.326 9.431 1.711 1.647 1.535 1.510 1.957 1.9^5 \ 1.928 1.899 1.880 1,880 17.057 17,192 ■16 ,86 s 16,737 4,111 4.155 4.072 4,111 9.580 9.741 9.507 9.317 1.485 1.4i6 1.407 1.418 1,881 1,880 1.883 1.891 16 .447 9.131 8.967 8,864 1.343 1.322 1,342 1.328 1.937 1.925 1.940 15.778 4,036 3.961 3.921 3.849 May June July August 15.5H 15.364 15.065 14,92 1 3.842 3.805 3.740 3.670 8,430 8.232 8.113 8,018 1.294 1 .3 6 2 1 .2 7 4 1 .3 1 9 1 .9 4 4 1 .9 6 6 September October November December 14,9 0 2 14,942 14,837 14,842 3.667 3.717 3.721 3.765 8,005 7.947 7.773 7.655 1.328 1.324 1.399 1,462 1 .9 0 2 1 .9 5 4 1 .9 4 4 1 .9 6 0 September October November December 1921 - January February March April 16.176 16,066 FEDERAL RESERVE BOARD DIVISION OF BARK OPERATIONS APRIL 29, 1932 O.S. GoTt.i Other "All other" secursecur__Ui£S___ L .UlfiN 4 ,4 5 4 8.657 1 .9 4 5 1.938 1.913 AMD IN V E S T M E N T S 0? f ! m i R E P O R T IN G DECEM BER 1919 TO M S MB S R B A N K S IN N E f TO RT C IT Y D E C E M B E R ”. 1 9 2 1 (Monthly arerages of weekly figures; In Millions of dollars) ♦ Total Loans on 1 loans and secur_ ilurestraents . ities j "All U. S.GoTt. Other 1 other* secur secur 1 loans ities ities 1919 - December 5,689 1.930 2.527 677 555 1920 - January February March April 5.807 5.6l4 5.599 2 .6 1 9 2,708 2.79S 2,814 658 596 566 546 5 .6 5 7 1.964 1.764 1.722 1.705 533 588 551 May June July August 5,646 5.672 5.674 1 .6 5 2 1 .6 0 5 5 .6 3 0 1.534 2.838 2.901 2.969 3.023 September October Notember December 5.693 5.759 5.564 5.552 1.554 1.613 1.522 1.567 3.078 3.H5 3.033 2.972 5.446 5.319 5.235 5.088 1.521 1.463 1.425 1.391 2,890 2,828 May June July August 4.950 4, ggg 4.742 4.689 1.393 2 .5 9 6 1 .3 6 7 1.323 1.296 2.495 2.451 2.440 September October NoTember December 4.676 4.722 4.701 4.749 1.306 1.369 1.380 1.418 2.419 2.373 2,292 2.243 1921 - January February March April FEDERAL RESERVE BOARD DIVISION OF BASK OPERATIONS APRIL 29. 1932 1,668 2 .9 3 1 2 .7 1 1 591 566 548 526 545 550 552 552 548 507 554 470 56l 54l 540 469 4 74 464 44s 459 451* 530 518 523 532 4 34 493 527 533 452 447 516 506 450 501 520 512 517 46i 517 571 BROKERS' L0AS3 PLACED BY SRF YORK COT DAILY R3F0RTIKG BASES, DECEMBER 1919 TO DECEMBER 1921 (Monthly average* of weekly figure*; In millions of dollar*) 1919 - December 1920 - Janaary February March April May June July August September October Sovember December 1921 - January February March April 656 668 1.144 1,080 1.099 482 449 476 662 1.015 943 928 873 429 425 405 3*7 585 518 522 525 868 939 399 1.324 622 f / 835 3*1 344 358 785 778 778 752 3*5 3* 320 316 906 631 Msgr June July August 773 St 719 317 338 338 348 September October Sovember December 723 772 831 879 350 4o4 434 483 528 590 561 *77 44l 452 458 436 456 437 396 371 374 368 398 396 i ■ RESERVE board DIVISIOS OF BASE OFSRATIOSS APRIL 29. 1932 ‘A . *F fsdbkal ■j& W/ A
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