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The Papers of Eugene M eyer (m ss5 2 0 1 9 )
118 03 00 1-
Subject File, Federal Reserve Board, Glass Bill (S. 4 1 1 5 ), Comments and
Recommendations, 1932
EUGENE MEYER
SUBJECT FILE
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- (1) The Federal Advisory Council has given careful consideration to
Senate Bill 4115.
It is of the opinion that the present is an inopportune
tine to raise many of the issues presented in this proposed legislative
measure.
Reforms in our banking system may be desirable, but such should
be made at a time when the country has passed through the present crisis
and when there is no danger that legislative enactments will retard
recovery and add to the existing difficulties with which banks are con
fronted.
The Council feels that the effect of this proposed measure is
likely to destroy the benefits of the Glass-Steagall Act, the Recon
struction Finance Corporation Act and similar measures.
If the bill
should be enacted into law it would necessitate a wholesale liquida
tion of securities which would most certainly cause a further decline
in the prices of all securities.
Such deflation would work extreme
hardship not merely upon banks but upon all holders of securities in
this country and especially upon those who have borrowed from banks
and who are finding difficulties even at present in meeting their
obligations.
It must also be pointed out that in the opinion of the Council,
the thesis apparently underlying this measure that loans upon securities
are in general undesirable and should be drastically limited would under
mine the customary system of capital financing which has been an inherent
part of the present industrial and financial system almost from its be
ginning.
Without the flotation of securities which have been financed
directly or
indirectly
up
the
large
of
industrial
by
enterprises
development
banks,
which
in
it
have
this
would
have
contributed
been
so
impossible
much
to
the
to
build
progress
country.
In addition to the above general expression of opinion, the Fed
eral Advisory Council desires to point out, in seme detail, its specific
objections to certain features of the bill.
1, Control of Affiliates. The Federal Advisory Council is in
accord with the purpose sought to be achieved in Section 20 and believes
that a control of affiliates is desirable.
The definition of affiliates in Section 2, however, is much too
broad and comprehensive.
It brings within the provisions of the Act any
corporation regardless of its business which may happen to have a
majority of its Executive Committee, directors or managing officers,
directors of a member bank.
Section 9 limits the sum which a parent member bank may lend to
an affiliate to 10% of the capital and surplus of the parent bank and
such loans must be secured by 120% of listed exchange securities or 100%
of either eligible paper or savings banksT securities, neither of which
Y/ould be for the most part in the possession of an affiliate, unless it
happened to be a bank. Furthermore, this provision would seem to bar
the acceptance of real estate mortgages as collateral from an affiliate
upon the part of those banks located in states ‘/here there are no laws
regulating the investments of savings banks. Likewise, commodity or
livestock paper, unless its maturity is such as to make it eligible,
could not be used as collateral for a loan made to an affiliate.
r
-
(3)
-
The Federal Advisory Council also believes that the provision in
Section 25, Page 49, Paragraph 2, which refers to the sale for cash of
the stock of an affiliate within a three year period is not at all clear.
If this means that the stock of the affiliate held by the parent insti
tution must be sold for cash away from the bank, in other words divorcf
ing the affiliate from control by the bank, it will create a distinct
hardship, as there are large numbers of such affiliates in existence
today whose compulsory liquidation would cause serious financial losses.
Apparently this section is in conflict with seme of the provisions of
Section 20
2i Centralization of Power.
It was the original intention of the
Federal Reserve Act to decentralize the hanking power in this country hy
establishing twelve autonomous regional Federal reserve hanks. The Federal
Reserve Board itself was planned originally to he largely a supervising and
coordinating body. The proposed Act, however, tends to increase radically
the power of the Federal Reserve Board at the expense of the individual Fed
eral reserve hanks and to make of the Federal Reserve System in effect a
centralized hanking institution.
In supnort of this statement attention is
called to the following sections.
Section 3 delegates the power of direct action to the Federal Re
serve Board which even if practical would result in so embarrassing the
operations of member hanks as to lead to the elimination of important and
necessary activities or to the virtual surrender of individual hank management
to the Federal Reserve Board.
Section 8 gives power to the Federal Reserve Board to fix the per
centage of the capital and surplus which any member hank may lend in the form
of collateral loans, and it is within the power of the Federal Reserve Board
to change this percentage at any time upon ten days* notice and to direct
any member hank to refrain from an increase of its security loans for any
period up to one year. This would he a tremendous increase in the powers
of the Federal Reserve Board and would introduce an element of uncertainty
in the minds of those directing any given member hank as to when the hank in
question might he subjected to the direct action authorized in this section.
The power
of
the
Federal
Open
of
control
Market
hy
the Federal
Committee,
as
Reserve
authorized
in
Board
over
Section
10,
the
actions
might
- 5possibly tend to slow up open market operations at times when quickness
of action might be absolutely essential in order to bring about desired
results.
In Section 11 the Federal Reserve Board is empowered to cancel
the right of any member bank to borrow on so-called fifteen day paper and
to declare existing loans due if such a member bank has failed to heed a
notice instructing it not to increase loans on collateral security.
It would
appear to the Federal Advisory Council that this endows the Federal Beserve
Board with an arbitrary power which is highly undesirable entirely aside
from other features in this section to which reference will be made hereafter.
The Federal Advisory Council believes that subdivisions F and G
of Section 13 give power to the Federal Reserve 3oard to regulate what is a
purely
~ r routine loan operation of a member bank. The ability of member banks
to trade in Federal reserve funds tends to maintain a greater degree of
liquidity in the general banking situation than would otherwise be the case.
In this connection attention is called to the ever increasing restrictions
upon, and to the diminishing scope of, loaning operations of banks. This
results in increasing unnecessary balances on the part of member banks and
makes it more difficult for them to employ funds profitably.
3. Liquidating Corporation. In general the Council endorses the
idea of a liquidating corporation.
It is, however, not in harmony with the
provisions as set forth under Section 10 (Section 12B) of the proposed Act.
The Council is of the opinion that such a corporation as is proposed should
be financed entirely by Government money as is intended to be done in the
case
of nonmember
banks.
Furthermore,
the
Council
believes
-(6)
that it night be well to consider the possibility of creating twelve
agencies, one in each of the Federal reserve districts, rather than
seeking to create a single body for the whole country. Such twelve
agencies night then be placed under the control and guidance of the
Federal Reserve Board or soue other coordinating group. In no event
does the Council believe it proper to require member banks to furnish
the funds needed for such a corporation without at the sane tioe giv
ing the member banks control of such a corporation for which they are to
furnish the capital from out of their own resources. The Council
furthermore, suggests the possibility of having the activities of a Fed
eral Liquidating Corporation taken over by the Reconstruction Finance
Corporation.
4.
Increase of Reserves. The Federal Advisory Council presu. cs
that the requirement of larger reserves as set forth in Section 13 of
the proposed Act is intended to provide for greater liquidity on the part
of banks. The Council believes, however, that the experience of the past
ten years has clearly indicated that there is little or no relation be
tween reserves and liquidity, in the opinion of the Council liquidity
is the result of careful end prudent bank management and is measured by
the character of the assets held by the bank. Furthermore, the imposi
tion of additional reserves will reduce available resources in the mem
ber banks at a time when these are largely needed, while at the sane time
they will bring no advantage to the System, the resources of which have
been and are ample to take care of changing financial situations. The
effect of this requirement would also be to tie up an additional volume
of gold as a reserve against increased member bank deposits in the Fed
eral reserve banks without any apparent justification.
-(*)5.
Segregation of Time Deposits.
The Federal Advisory Council
regards the provisions in Section 14 of the proposed Act, intended to
%
segregate the assets behind time deposits from those against other de
posits, as likely to lead to undesirable results. In the opinion of the
Council this provision will lead either to the withdrawal of demand
deposits or the diversion of demand deposits into tine deposits.
It
believes that the increase of investment in real estate foreseen in this
section will tend to reduce the liquidity of banks. There is also im
. posed upon the Comptroller of the Currency a duty which burdens him with
tremendous responsibility insofar as he is required to specify the type
of property and the securities in which one-half of the time deposits
of the member bank may be invested in the absence of state laws
governing the investment of such funds. It has been the experience of
a number of members of the Council that the absence of restriction in
respect to the investment of time deposits has produced a greater
degree of liquidity in banks than can be possibly accomplished under
the permissions granted in this section.
The Council fools that the views here set forth in regard to
Section 14 might be much amplified.
In its opinion the most important
effect of this section would be to bring about a disruption of the
present credit structure of the country. Hany banks in this country
having a large percentage of time deposits use these funds for the pur
pose of aiding commerce, industry and agriculture in their respective
communities. These would be compelled under the provisions of Section
14 to liquidate a large proportion of these loans and invest the funds so
obtained in real estate or specified securities.
-(e)toon Day Paper. Section 11 penalizes borrowers on sccallcd fiiteen day paper.
In the opinion of the Federal Advisory Council
such a provision v/ould make Government bonds a much loss desirable form
of investment for member banks.
It would handicap the United States
Treasury in its necessary financing, increasing the rate on Government
securities and thereby the interest rate on all other classes of
securities and thus depreciate the market price of securities generally.
It should also be pointed out that the ability of member banks to
borrow on thc-ir promissory notes for a period of not exceeding fifteen
days is essential in periods of depression when sufficient eligible
paper is not available for rediscount.
Limitation of Interest on Deposits. The limitation of
interest which member banks may pay upon deposit balances provided for
in Section 24 of the proposed Act, places such banks in unfair competi
tion with nonmember banks not so restricted.
It should bo remembered
that money is a commodity like any other and that member banks should
be free to pay the rates necessary to hold their deposits.
Bjpsnch and Group Banicing. In reference to Section 21 and
other sections of the proposed Act referring to branch or group banking,
the Council begs leave to refer to the recommendations which it made on
September 15, 1931, a copy of which is appended hereto.
loans and Securities. In the general statement
the federal Advisory Council has already expressed its views regarding
the desire to limit collateral loans.
It wishes here, however, to
discuss somewhat more in detail the provisions in Sections 8, 11, 13,
15, etc., all of which deal in whole or in part with the control of the
-(9)-
volume of collateral loans and the volume of securities held by member
banks. These sections give arbitrary powers of control and the right
to impose penalties to the Federal Reserve Board. These sections deal
with control of volume of collateral loans and volume of securities held
by member banks and place arbitrary powers of control and penalties in
the Federal Reserve Board. The enforcement of the mandatory provisions
of these sections will result in the enforced liquidation and to the
detriment of general business. The Council believes that such
liquidation will retard if it does not entirely defeat the beneficent
effects that may be expected to bo realized as a result of the GlassSteagall bill and the Reconstruction Finance Corporation Act. The
Council does not share the view of the proponents of the bill that the
underlying cause of either bank disasters or depression is directly
related to the volume of collateral loans or the volume of securities
hold by banks. Those did not, and do not now, impair the ability of
member banks properly to care for those typos of loans the proceeds of
which go more directly into commerce, industry and agriculture.
In conclusion the Council calls attention to the fact that
the bill, if enacted into law, would in offcct place an undeserved
stigma upon the flotation and selling of securities and make it almost
impossible for banks to do business with dealers in securities. There
would seem to be no justification whatsoever for such drastic action.
9
#
“(10)Finally, the Council believes that it is not possible to
promote activity in commerce, industry and agriculture under an easy
money and credit policy and at the same time prevent people by admonition
or restriction from buying securities which arc being made attractive
by this very activity.
F
E
D
E
R
A
L
A
D
V
I
S
O
R
Y
C
O
U
N
C
I
L
X - 7 0 9 4
1 9 3 2
O
f f i c e r s :
E x e c u t i v e
W a lt e r
W.
S m it h ,
M e lv in
A .
T r a y l o r ,
W a lt e r
L i c h t e n s t e i n ,
W a lt e r
W.
S m it h
H o w a r d
M e lv in
A .
T r a y l o r
J o h n
R o b e r t
H .
T r e m a n
W a lt e r
P r e s i d e n t
V i c e
P r e s i d e n t
S e c r e t a r y
C o m m i t t e e :
A .
K .
L o e b
O t t l e y
S .
M c L u c a s
MEMBERS
D
i s t r i c t
1
N o .
T h o m a s
2
N o .
M .
R o b e r t
H .
S t e e l e
P r e s . ,
T r e m a n
P r e s .
,
F i r s t
N a t i o n a l
N ew
H a v e n ,
T h e
T o m p k in s
I t h a c a ,
N o .
3
H o w a r d
A .
L o e b
C h rm .
,
N ew
4
J .
A .
H o u s e
P r e s . ,
T r a d e s m e n s
G u a r d ia n
C o u n t y
N a t i o n a l
5
H o w a rd
B r u c e
C h rm .
,
B a l t i m o r e
6
N o .
J o h n
K .
O t t l e y
P r e s .
,
F i r s t
N o .
7
M e lv in
A .
T r a y l o r
P r e s . ,
F i r s t
N o .
8
W a lt e r
W.
S m it h
P r e s . ,
F i r s t
S t .
N o .
N o .
9
T h e o d o r e
1 0
W a l t e r
S .
W o ld
V .
M c L u c a s
P . ,
C h r m .,
N o .
1 1
J o s e p h
H .
F r o s t
P r e s . ,
12
H e n r y
M.
R o b i n s o n
C h rm .
,
F e b r u a r y
o f
M r.
1 6 ,
L i c h t e n s t e i n ,
1 9 3 2 .
3 8
S o u t h
D e a r b o r n
B a n k ,
B a n k ,
M i s s o u r i .
M in n e s o t a .
T r u s t
C i t y ,
M
N a t i o n a l
A n t o n i o ,
A n g e l e s ,
M i n n e a p o l i s
C o m p a n y ,
i s s o u r i .
B a n k ,
T e x a s .
S e c u r i t y - F i r s t
S t r e e t ,
C o . ,
B a n k ,
N a t ’ l . B k . o f
F r o s t
T r .
C o m p a n y ,
M i n n e a p o l i s ,
L o s
A d d r e s s
N a t i o n a l
C o m m e rce
&
C o m p a n y ,
N o r t h w e s t e r n
S a n
N o .
B a n k
I l l i n o i s .
L o u i s ,
K a n s a s
B a n k ,
G e o r g i a .
N a t i o n a l
C h i c a g o ,
N a t i o n a l
M a r y la n d .
N a t i o n a l
A t l a n t a ,
C o . ,
O h io .
T r u s t
B a l t i m o r e ,
T r u s t
P e n n s y l v a n i a .
T r u s t
C l e v e l a n d ,
N o .
a n d
Y o r k .
P h i l a d e l p h i a ,
N o .
B a n k
C o n n e c t i c u t .
N a t i o n a l
C a l i f o r n i a .
C h i c a g o ,
I l l i n o i s
B a n k ,
/
COPY
X -7 0 9 1
F
E
D
E
R
A
L
A
D
V
I
S
O
R
Y
C
O
U
N
C
W a s h in g t o n ,
M r .
E u g e n e
F e d e r a l
M e y e r ,
R e s e r v e
W a s h i n g t o n ,
D e a r
D .
G o v e r n o r
F e d e r a l
u n a n im o u s l y
I n
y o u
o f
s u b m it
t h e
M e y e r :
C o u n c i l
1 2 ,
t h e
S e n a t e ,
1 9 3 2 .
b y
t h e
v i e w
t h e s e
C o n g r e s s
o f
f i n d
i n
w i t h
T h e s e
e l e v e n
t h e
t h e
b
m e m b e r s
o f
t h e
i l l
b y
r e c o m m e n d a t io n s
e x i s t i n g
t h e i r
t o
a m e n d m e n t s ,
r e c o m m e n d a t io n s
f o r
r e c o m m e n d a t io n s
r e f e r e n c e
t h e
M r .
w e r e
w e
p r o p e r
t r u l y
W a l t e r
W .
W a l t e r
L i c h t e n s t e i n
S e c r e t a r y .
3 6 1 6 ,
a s
o n
p r e s e n t .
r e q u e s t
t h a t
c o m m i t t e e s
y o u r s ,
P r e s i d e n t .
t h e
a d o p t e d
)
( s i g n e d )
o f
G la s s
C o u n c i l
s i t u a t i o n ,
t o
S .
c o n s i d e r a t i o n .
V e r y
( s i g n e d )
1 5 ,
C .
A d v i s o r y
F e b r u a r y
F e b r u a r y
G o v e r n o r ,
p l e a s e
t o
L
B o a r d ,
E n c l o s e d
r e p o r t e d
I
S m it h
1 9 3 2 .
r\
o p
y
X - 7 0 9 1 - a
T h e
S .
3 6 1 6
S e n a t e
a s
o n
r e p o r t e d
F e b r u a r y
a p p r o v e s
o f
m e a s u r e ,
h u t
f i e d
t h e
1 2 ,
d e s i g n e d
t h e
a n
a t i v e
t h e
a n y
o f
( 2 )
o f
t h e
o r
m o r e
t h e
o f f i c e
c o n s i s t
o f
I n
t h e
l e s s
s e c t i o n
l i n e s
1 0
t o
l o a n s
t o
g r o u p s
t h e i r
(3)
t h e
1 4
t h e
t i m e ,
t h a n
1
o n
p a g e
g r o u p s
t h r e e
i n c l u s i v e ,
o m it
c o n t a i n i n g
d e p o s i t
a s
t h e
C o u n c i l
h y
t h i s
i t
l e s s
h e
s p e c i
t h a n
s i x
r e q u i r e d
" n o t
F e d e r a l
m
i s
l e s s
t h a n
R e s e r v e
a j o r i t y
i n
t o
a
B o a r d
n o
c a s e
m e m b e r s " .
s u b s t i t u t e
r e q u i r e m e n t
" n o t
B o a r d "
s u c h
f o u r
t h a t
a c t
s u b s t i t u t e
o f
t o
c h a n g e s :
o f
R e s e r v e
m e m b e r s
a t
h a n k s ,
v o t e
h i l l
A d v i s o r y
a c c o m p l i s h e d
p r o p o s e d
a c t i o n ,
r e q u i r e m e n t
o m it
t h e
F e d e r a l
g i v e n
h e
s t u d i e d
a m e n d m e n ts ,
F e d e r a l
f o l l o w i n g
t h a t
a f f i r m
t o
h a s
w i t h
T h e
i n
h o l d i n g
o f
1 9 3 2 ,
u r g e s
o f
C o u n c i l
G l a s s ,
W h e r e v e r
a j o r i t y
a n d
M r.
( 1 )
p e r m i t
t o
A d v i s o r y
h y
a im s
i t
m e m b e r s
m
F e d e r a l
a
2
i n
s h a l l
o r
t h e
l e s s e r
t o
l i n e
t h e
1 ,
i n
c o n s i s t
m o r e
o f
h a n k s ,
p h r a s e
n u m b e r
p l a c e
f i v e
a n d
i n
p e r m i t t i n g
o f
a g g r e g a t e
h a n k s
a m o u n t
l i a b i l i t i e s .
In section 1 on page 2, omit the language
of the committee amendment beginning on line 3 and
running to the period in lin e 6, reading as follows:
"provided such banks have no adequate amounts of e l i
gible and acceptable assets to obtain su fficien t accom
modation through rediscounting at the Federal reserve
bank".
*»A•
FEDERAL RESERVE BOARD
W ASHINGTO N
A D D R E S S O F F IC IA L C O R R E S P O N D E N C E T O
X “ 7 1 2 2
T H E FEDERAL RESERVE B O A R D
M a r c h
2 6 ,
1 9 3 2 .
Honorable Peter Horbeck, Chairman,
Committee on Banking and Currency,
United States Senate,
W a s h in g t o n ,
M y
d e a r
D .
S e n a t o r :
O n
G -la s s
t h e
M a r c h
i n c l o s i n g
B a n k in g
F e d e r a l
i t s
C .
c o n t a i n i n g
t h e
t h e
t h r e e
F e d e r a l
m e m b e r
g e n e r a l
S y s t e m
s u b j e c t
b i l l
t o
a r e
t h e
t o
o v e r
w o u ld
a n d
a n d
y o u r
a n d
w i t h
t h e
4 1 1 5 ,
b e
a n d
g l a d
o r
S e n a t o r
s t a t i n g
t o
h a v e
s u g g e s t i o n s
a
t h a t
t h e
t h a t
t h e r e
C o m m it t e e
i s
i n
i n c l o s e d
m em ora n d u m
r e c o m m e n d a t io n s .
i n
t h e
b i l l
T h o s e
r e l a t i n g
r e s e r v e
b a n k s ;
( 3 )
f r o m
A c c o r d i n g l y ,
o f
( 1 )
R e s e r v e
t h o s e
o f
g e n e r a l
t h a t
t h e
c r e d i t
w i t h
p u r s u e
i n
i s
m a y
b e
m o r e
( 2 )
d e a l i n g
c l a s s i f i e d
d i r e c t l y
t h o s e
w i t h
i t s
i n
s y m p a t h y
s u p e r v i s i o n
c o n d i t i o n s
c e r t a i n
u n s a f e
m e m b e r s h ip .
i n c o r p o r a t e d
b i l l .
B o a r d
s t r e n g t h e n
a u t h o r i t i e s
b a n k s
p r i v i l e g e s
o f
d e a l t
l e t t e r
i l l
c o m m e n ts
c o m m e n ts
b a n k s ,
F e d e r a l
r e s e r v e
r e l a t i o n
2 9
a n y
h e a d s :
B o a r d
m em b er
t h e
F e d e r a l
t h e
C o m m it t e e
B
a
t o
t h e
c o n c e r n i n g
a f f i l i a t e s
o f
b a n k s .
o f
s e r v e
S e n a t e
d e s i r a b l e .
s u b j e c t s
T h e
p o s e
r e c e i v e d
c o n s i d e r a t i o n
R e s e r v e
p r i m a r i l y
s e e m
I
h i s
m a k e
B o a r d ’ s
T h e
u n d e r
B o a r d
w o u ld
f o r
o f
C u r r e n c y
R e s e r v e
h e r e w i t h
1 9 3 2 ,
c o p i e s
a n d
ju d g m e n t
1 7 ,
T h e
a n d
a n d
t h e
rTi t h
d i s c i p l i n a r y
u n s o u n d
B o a r d ’ s
p r o p o s e d
o f
w i t h
t h e
F e d e r a l
p o w e r s
p o l i c i e s
o f
R e
i n v e s t i n g
r e c o m m e n d a t io n s
r e v i s i o n
p u r
o r
o n
S e c t i o n s
t h e
i n
a b u s e
t n i s
3
a n d
.
9,
X - 7 1 2 2 .
C l a r i f i c a t i o n
o p e n
m a r k e t
o p e r a t i o n s
i s
d e s i r a b l e ,
o f
i t s
s y s t e m
a n d
a u t h o r i t y ,
o p e n
o f
t h e
b a s i s
d i s c r i m
i e n c e
B o a r d
t h a t
p r o c e e d s
b e
t h a t
a c c o u n t s
C o m m it t e e
t h e
o f
r e s e r v e s
i n f l u e n c e
o n
i n f l u e n c e
d i r e c t i o n
T. v i t h
a s
o n
n o t
i n
t h a t
s o u n d
a n d
w o u ld
o f
o n
a n d
a d o p t i n g
d e v e l o p e d
h a v e
t o
t h e
o n
a
b e
F e d e r a l
c r e d i t
t h e
b e
f a v o r
h ia s
b e e n
m o d i f i e d
t h a t
p r o v i s i o n s
c o l l a t e r a l
o n
a n
i n t e r f e r e
t h e
t o
t h e
b a n k s ,
t h e
r e s e r v e
u s e
m a d e
c o n t r o l
c o l l a t e r a l
w i t h
t h e
E x p e r
F e d e r a l
w i t h
a t t e m p t
b a n k
o f
n o t e s .
w h ic h
c o n n e c t i o n
m em b er
t o
t h e i r
x v o u ld
in
s o e c -
n o t e s
w o u ld
e f f i c i e n t
a n d
s y s t e m .
r e l a t i n g
o f
t h e
t h r o u g h
" e ee , \
i ww hh ii cc h
w i t h
b a n k
a n y
o n l y
b a n k s
c l a r i f i c a t i o n
t h e r e f o r e ,
m a y
i n s t r u m e n t
c r e d i t
m em b er
s y s t e m
o f
v o lu m e ,
a n
R e s e r v e
b e c a u s e
c o n d i t i o n s
a t
r e s e r v e s
a s
a
S y s t e m
T h e
i t
t im e
B o a r d
b a s e d
r e c o m m e n d e d
im p o r t a n t
c o n d i t i o n s .
u n d e s i r a b l e ,
c r e d i t
a n d
f o r e i g n
s u c h
r
o v e r
•
m e m b e r
t h e
t h e
b e
n o t ,
m a r k e t
s y m p a t h y
i f
R e s e r v e s ,
w it h
e x p e r i e n c e .
p a r t i c u l a r
a s
s u p e r v i s i o n
w i t h
t o
i s
a r r a n g e m e n t
a d o p t i o n
w e l l
i s
6 p e n
r e s t r i c t i o n s
t h e
l e f t
B o a r d
l i t t l e
m a t t e r s
o f
f o r m u l a t i n g
b e
h a s
b u t
t h a t ,
f o r
T h e
a g a i n s t
o p e r a t i o n
O n
o f
o f
e f f e c t i v e
e c o n o m i c a l
b e l i e v e s
t h e
p o w e r
r e l a t i o n s h i p s
s h o u l d
la w
i s
t h e
o b t a i n e d
t h r o u g h
o p i n i o n
i n t o
f u r t h e r
o f
n o t
p o l i c y
o f
i s
u l a t i o n
m a c h i n e r y
v o l u n t a r y
c r e d i t
t h e
o v e r
t h e
i n a t i n g
s h o w s
B o a r d 's
B o a r d
i
T h e
b i l l
a n d
e x p e r i e n c e .
c r y s t a l l i z i n g
o n
t h e
t h e
m a r k e t
a d m i n i s t r a t i v e
o f
s t e p
in
c o u l d
s e c t i o n
w o u ld
w h e n
o n
b y
o f
t h e
v e l o c i t y
t h e
S y s t e m 's
s t r e n g t h e n i n g
e x e r t
o f
t h e
e x e r t
a
i t
n o t
i s
i s
in
t h e
b i l l
d e a l i n g
t i g h t e n i n g
i n
t h e
o u b l i c
22
X - 7 1
interest,
and
that
grown
have
classes
would acdentuhte
up
of member
T h e
c o r p o r a t i o n ,
c e r t a i n
b u t
O n
l i m
i t s
b r a n c h e s
i s
t h e
t h a t
l e g i s l a t i o n
g r a n t i n g
a n d
t o
l i m
i t a t i o n s
In
t h e
d i s t a n c e
t h a n
o n
t h e
a l l y
m e n t s
i s
w e l f a r e
a
f u r t h e r
c o n t r a c t i o n
a t
p e r i o d
p r o p o s e d
s h o u l d
a
o f
o f
b e
t h e
o n
t h e
a
different
a n d
o f
t h e
B o a r d
a n d
t o
t o
o f
a n d
i t s
t h e
t o
t h e
r e s o r t s
b a n k s
t o
t h i s
b e l i e v e s
o b t a i n
m a k e
a p p r o a c h
a t
c h i e f l y
m e m b e r
m a y
t h a t
b a n k
b a n k s
t h a t
a
t o
f f i l i
q u e s t i o n
t h e i r
l e g i s l a t i o n
o n
n r i n c i p l e .
l e g i s l a t i o n
b a n k
t h e
l o a n ’s
c o u n t r y 's
r e a d j u s t m e n t .
h a v e
t h u s
r e c o g n i z e d ,
m e m b e r
a n d
v A ie n
a n d
i t
S t a t e s .
b a n !® ,
m e m b e r
c r e d i t
o f
e f f e c t
o f
w o u ld
p a r e n t
t h e
t h a t
b i l l
l i q u i d a t i n g
s u g g e s t e d
o f
v i e w
s e v e r e
i s
c o n f i n e d
b a n k
v iq w
t h i s
t im e
o f
b e
p p o p e r
o f
b a n k
a u t h o r i t i e s
m e m b e r
m e m b e r
c h a r a c t e r
d e s i r a b l e
s h o u l d
a n d
a f f i l i a t e s
p o i n t
b a s e d
t a k e s
t h e
o f
b e
B o a r d
v i s i o n s
I t
between
f i n a n c i n g
t h e
f r o m
c o n s e q u e n c e s ,
a l l
i t
l i n e s
a f f i l i a t e s
o p i n i o n ,
f r o m , t h e
t h e
t h e
inequalities
a d m i n i s t r a t i o n .
b e t w e e n
s u p e r v i s o r y
l o a n s
i t s
b o u n d a r y
s u b j e c t
t h e
B o a r d '^
t h r o u g h
b u s i n e s s .
t h i s
to
s h o u l d
n o t
g o i n g
o n
t h e
r e s t r i c t i n g
i s
o f
t h a t
T h e
the
a
o f
b a n k in g
o n
u n f o r t u n a t e
i s
reserves
m e t h o d
f o r
b r a n c h
o n
o n
s u b j e c t
o f
o f
a f f i l i a t e s
o p e r a t i o n s
d i f f e r e n t
e x a m i n a t i o n s
t h e
of
e s t a b l i s h i n g
p r o v i s i o n s
d i v o r c e
p o w e r
m a k e
a t e s .
o f
o f
a
o f
b a s e d
C o m p le t e
h a v e
f a v o r
q u e s t i o n
r a t h e r
w o u ld
in
t h e
b e
t im e
reduce
distribution
p r o p o s e s
in
i t a t i o n s
the
than
banks.
B o a r d
c h a n g e s
t h e
in
father
a
t h e
f u r t h e r m o r e ,
a n d
t o
o f
b r i n g
r e c o v e r y
t h a t
m a t e r i
i n v e s t
b a n k i n g
S om e
t e n d e n c y
r e t a r d
f u r t h e r
s y s t e m
t h e
p r o
a b o u t
o f
e f f e c t i v e
f
•
4
^
*
X - 7 1 2 2
l
- 4 -
s u p e r v i s i o n
o f
f i e d
c o m p e t i t i o n
a n d
b y
t h e
t h a t
n a t i o n a l
t h e
b a n k in g
s u p e r v i s i o n
s e n t
s u p p l y
t o
y o u
t h i s
o f
i s
w i t h
o f
b e e n
m e m b e r
a n d
n o n m e m b e r
a
u n i f i e d
l e t t e r
C l a s s ,
c o p i e s
h a s
e s s e n t i a l
t h i s
S e n a t o r
c o u n t r y
b e t w e e n
e s t a b l i s h m e n t
C o p ie s
b e i n g
i n
f o r
to
a n d
a n d ,
t h e
s y s t e m
l a r g e l y
o f
fu n d a m e n t a l
t h e
t h e
i n c l o s e d
B o a r d
c o n v e n i e n c e
w
i l l
o f
n u l l i
b a n k s ,
b a n k in g
b a n k in g
u n d e r
r e f o r m .
m em ora n d u m
b e
e a c h
g l a d
m e m b e r
a r e
t o
o f
y o u r
C o m m it te e .
I n
v ie w
l a t i o n ,
t h e
B
a c t e d
i l l
i s
B o a r d
u p o n
o f
t h e
u n u s u a l
r e q u e s t s
b y
y o u r
a n
i m p o r t a n c e
o p p o r t u n i t y
t o
o f
b e
t h e
p r o p o s e d
h e a r d
C o m m it t e e .
V e r y
t r u l y
y o u r s ,
E u g e n e
M e y e r ,
G o v e r n o r .
i
b e f o r e
l e g i s
t h e
X -7 1 3 1
A p r i l
C .S .
TH E
R e p ly
t o
t h e
M em ora n d u m
F e b r u a r y
O n
A p r i l
C o m m it t e e
o r i g i n a l
F e d e r a l
H e
F e b r u a r y
I n
w i t h h o l d
D r .
s o m e
F e d e r a l
H e
a n d
G la s s
6 ,
m a d e
-
a
S e n a t e
H a r r i s o n
4 1 1 5
H a r r i s o n ,
A p r i l
m e m ora n d u m
-
H a m lin
B I L L .
G o v e r n o r
a n d
1 9 3 2
7 ,
s e n t
t o
c o m m e n t in g
a n d
a n d
l e t t e r s
o f
1 9 3 2 .
o n
t h e
t h e
o n
B a n k in g
e a c h
a n d
C u r r e n c y
s e c t i o n
a m e n d m e n ts
o f
t h e
s u g g e s t e d
b y
t h e
B e a r d .
e n c l o s e d
a
c o p y
o f
a
l e t t e r
s e n t
b y
h im
t o
S e n a t o r
G l a s s
d a t e d
1 9 3 2 .
t h e
l e t t e r
d e t a i l e d
d i d ,
o f
F e b r u a r y
c o m m e n ts
a n d
D r .
h o w e v e r ,
o t h e r s ,
R e s e r v e
t h r e e
a n d
t h e
o n
s t r o n g l y
G o v e r n o r
t h e
b i l l
t h e
H a r r i s o n
p e n d i n g
s u g g e s t i o n s
a s
p r o v i s i o n s
a t t a c k e d
r e f e r r i n g
n e c e s s i t y
s u g g e s t i o n s
6 ,
t h e
s t a t e d
r e p o r t
t h a t
h e
w o u ld
t h e r e o n
o f
B u r g e s s .
d i s c u s s
B e a r d ,
s t r e s s e d
T h e s e
o f
6 ,
G o v e r n o r
S e n a t e ,
b i l l ,
R e s e r v e
a l s o
1 9 3 2 ,
t h e
G o l d e n w e i s e r
H e
a n d
o f
7 ,
G LA SS
1 4 ,
t o
f o r
t o
i t
t h e
a s
t o
o p e n
i n c r e a s e d
a
a u t o n o m y
t h e
a s
p o w e r
p o l i t i c a l l y
i n
t h e
a m e n d m e n ts
t o
m a r k e t
g i v e n
t o
a p p o i n t e d
F e d e r a l
t h e
o p e r a t i o n s
b o d y .
r e s e r v e
F e d e r a l
w e r e :
To reduce the number of directors of each bank so as
to concentrate resp o n sib ility and to encourage
supervision and management through the experienced
d ire c to rs . (I ta lic s mine).
2 .
A
o f
p o w e r
f o r
r e m o v a l
o f
i n c o m p e t e n t
b a n k
o f f i c e r s .
3 .
R e s t r i c t i o n
u p o n
b o r r o w i n g
b y
b a n k
o f f i c e r s
with approval of a committee of d ire c to rs.
b a n k s
R e s e r v e
1.
g r a n t
t h e
e x c e p t
A c t .
X-7131
~ 2 -
T h e
f i r s t
A s
t o
t h e
m e m o ra n d u m ,
p r e s e n t
s u g g e s t i o n
s e c o n d
w
i l l
h e
t a k e n
s u g g e s t i o n ,
G o v e r n o r
H a r r i s o n
i t
w
s t a t e s
u p
l a t e r .
i l l
s u f f i c e
t h a t
t h i s
n ow
t o
s h o u l d
s t a t e
n o t
h e
t h a t
d o n e
i n
a t
t h e
t h e
t i m e .
I I .
I n
t h e
H a r r i s o n
l e t t e r
a d m it s
f u t u r e
a b u s e s , "
a p p e a r
t o
f o r
h e
T h e
s t a t e s ,
o n l y
t h e
H e
c o n t r o l
o f
e x c e p t i o n s
h e
a n d
a c c o m p a n y in g
d e f e c t s ,
t h e
p a r t
o f
G la s s
t h e
s e v e r e l y
t o
t h e
a n d
a n d
t h e
t h e
l e t t e r
h i l l
a n d
v o lu m e
c r i t i c i s e s
t h r o u g h
d i r e c t
a d m i t s ,
h o w e v e r ,
t h i s
f o r
t h e
n e e d
m e m o ra n d u m ,
f o r
G o v e r n o r
p r o v i s i o n
s t a t e s
w h i c h
t h a t
t h e r e
i s
f o r
" t h e r e
a n
p o s s i b l e
d o
n o t
i m p e r a t i v e
n e e d
p r o v i s i o n ;
s t a t e s
t h e
w o u ld
F e d e r a l
o p e r a t i o n s
a r e
t h e
h e
F e d e r a l
f o r m e r ,
h e
h e l p f u l .
R e s e r v e
c a n
t h e
B a n k
i n
e f f e c t i v e l y
1 9 2 9
t h a t
r e g u l a t e
c r e d i t .
t h e
a c t i o n
h e
b y
m a r k e t
c o n d e m n a t i o n
h a n k in g
l a t t e r
t a k e n
o p e n
o f
s w e e p in g
b r a n c h
t h e
p o s i t i o n
r a t e
t o t a l
m a d e
a n d
h e l p f u l
d i s c o u n t
p r i c e
p a s t
1 9 3 2 ,
a n o t h e r
p a r t s
r e a f f i r m s
t h e
i n
C o r p o r a t i o n
m ig h t
H e
h u t
7 ,
p a s s a g e . "
o n l y
L i q u i d a t i n g
A p r i l
" c e r t a i n
a n y
im m e d ia t e
o f
a t t e m p t
t h e
l e a n
o f
o r
t h e
F e d e r a l
i n v e s t m e n t
R e s e r v e
p o l i c i e s
B o a r d
o f
t o
i n d i v i d u a l
h a n k s .
H e
i n d i v i d u a l
h a n k s
h e
t h a t
a s s e r t s
u s i n g
i t
c o n t r o l
o f
d o e s
a s s u m p t i o n
a n
w h ic h
c r e d i t
c o u l d
I
s h a l l
n o t
n o t
i s
o r
h e
o f
t h a t
m o r e
t h a n
n e i t h e r
t h e
d i r e c t
u s e s
t h e i r
u n d e r t a k e
i n
h a s
s h a r e
a n
e f f e c t i v e
t o
w h i c h
r e s p o n s i b i l i t y
e f f e c t i v e l y
a c t i o n
f o r
o f
n o r
c r e d i t
t h e
i t s
u s e s
F e d e r a l
s u i t a b l e
m ay
h e
i n
r e s e r v e
m e t h o d
p u t ,
m a n a g e m e n t
d e a l i n g
c r e d i t ,
f o r
i n v o l v i n g
o f
w i t h
h u t
g e n e r a l
a s
i n d i v i d u a l
i t
h a n k s
f u l f i l l e d .
t h i s
c o n n e c t i o n
t o
g o
o v e r
t h e
a r g u m e n t s
f o r
or against direct pressure.
It will be sufficient to point out that the
Federal Reserve Bank of New York, in 1929, wished to increase discount
rates to prevent a runaway market which it believed was imminent; that the
Board refused to increase the discount rate but kept in the 5$ rate,
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 total
bills and security holdings of the Federal Reserve Bank of New York steadily
declined, while its reserve ratio steadily increased; that for tho whole
System, Federal reserve credit declined 193 millions during this period; that
the large gold imports were kept by this direct pressure from swelling the
member bank reserves and were used to take down acceptances, thus avoiding a
tremendous further expansion of member bank credit; that member ban]: reserves
in fact declined 68 millions during this period.
The fact is that direct pressure under the 5$ rate was so successful
that about the first of June, 1929, the Federal Reserve Ban]: informed the
Federal Reserve Board that there was shortly to be expected a commercial need
for expansion of Federal reserve credit; that the member banks were afraid
to increase their borrowings, and that an easing policy ^ould soon be essen
tial .
Governor Harrison, in his letter, criticises Section 3 of the Glass
bill, as amended by the Federal Reserve Board, perhaps more severely than
any other Section of the bill.
He absolutely opposes the grant of po^er in
X-7131
4
this
Section
privileges
to
and
close
to
the
suspend
discount
-
window
such banks
from
to b a n k s
further
abusing
use
of
the
discount
Federal
reserve
facilities.
He also objects to the duty imposed by this Section on Federal reserve
banks to keep themselves informed as to the loan and investment policies of
the member banks, (the imposition of which duty it may be parenthetically
stated was strongly recommended by the Federal Advisory Council in February,
1931.)
He states that the powers granted and the duties imposed by this Section
\
would be ineffective, would involve responsibilities which neither the Fed
eral reserve bank nor the Federal Reserve Board could fulfill, and that the
assumption of such powers would be harmful to the member banks and to the
Federal Reserve System as a whole.
In this 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 different view of the matter in their testimony before the
Sub-committee of the Senate.
On January 20, 1931, 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 all of the privileges of
membership, during a given period, in the event that the bank has not
conducted itself in the safest way for the depositors.
(Testimony, p. 46).
On February 4, 1931, Mr. Owen D. Young stated to the Sub-committee that
the Federal reserve bank should have the power to limit or refuse rediscount
even of eligible paper, and to suspend other privileges of membership, if the
banking practices of any particular bank were, in its judgment, unsound, and
1
X-7131
therefore subjected, its depositors to unreasonable risk, either as to
liquidity or security, with a right of appeal on the part of the member
.
I
hank in case the Federal Reserve Bank exercised its power unfairly, and
that if 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. 356).
Both Governor Harrison and Mr. Young were asked by the Chairman of the
Sub-committee whether under existing law the Federal reserve banks had not
the right to refuse to discount eligible paper.
Governor Harrison replied that that had always been his opinion, and
that he had so advised the Federal Reserve Board when he was its Counsel,
but that this right had been denied.
(Testimony, pps. 47, 48.)
Mr. Young told the Sub-committee that the directors had never been
able to agree that the power was clearly enough expressed to warrant such
action by the Board of Directors; that he believed the power now existed
but tnat such an extraordinary power and the obligation to execute it, should
be made clear.
(Testimony, p. 363).
The Glass bill, as amended, makes explicit these grants of powers, and
yet the memorandum, signed by both Governor Harrison and by Mr. Young,
positively objects to such power as harmful both to the member banks and to
the Federal Reserve System.1
It is possible that the Federal reserve bank may claim that it desired
this power only over individual banks borrowing more than other banks of
their class.
This, however, would be tantamount to saying that if any one
|
bank loses its head in the way of speculative loans, they want power to
correct it, but if all banks are infected with the speculative mania, they
desire no power except their existing powers over the discount rates on
commercial paper.
The power vested in the Federal Reserve Foard by Section 3 of the
Glass bill, would, of course, be exercised only on individual banks, but
it is a power which could not be defeated by proof that not one but all
banks are possessed by the speculative mania.
III.
Analysis of Memorandum.
The memorandum comments on each section of the bill in detail.
It opposes every section of the original bill except Section 16,
relating to a larger capital for future national banks, which it states
it prefers to the draft submitted by the Federal Reserve Board.
It approves in general the Federal Reserve Board1s recommendations
as to 22 sections of the original bill, but states that of these 22, 13
are not now necessary, and should be postponed for future consideration.
.Among these latter were;
Most of the recommendations as to affiliates, and
especially the divorce of affiliates.
The 90-day clause for member bank collateral notes
secured by eligible paper.
Supervision of holding companies.
Removal of officers and directors of member banks.
X-7131
- 7 The memorandum opposes the following recommendations of the Board;
The power to suspend member banks for abuse of Federal
reserve facilities.
The 3oard*s bill covering new reserve provisions.
The separation of bank and affiliate stock.
The divorce of affiliates, "the desirability of which at
any time is doubtful".
IV.
The G-lass bill, with the amendments of the Federal Reserve Board, is
designed to give some assurance to depositors and the n u b H c that the
speculative excesses culminating in the crash of 1929 will not be repeated.
The speculative craze which swept over the corntry will take its
place in history along with the tulip mania and the South Sea bubble.
The crash of 1929 was probably one of the worst in the world*s
history.
It represented a successful raid of the speculating public uoon
the banks of the country.
The banks were unable to stem this raid.
On the contrary, they
permitted it to increase by undue and excessive loans to their customers.
The final crash brought ruin to thousands and thousands of our
people and was felt over the whole world.
The Glass bill offers a remedy by giving the Federal Reserve
Board the right and duty to protect the public interest against any
such future mania .of speculation.
The Federal Reserve Bank of ITew York admits past defects and the
need for some provision for future possible abuses.
It suggests, as
\
X-7131
- 8 stated "before, that the directors of each bank be reduced in numbers "so
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 Heserve
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:Tne Federal reserve bank admits abuses in the past, and admits the
necessity for provision against possible future abuses, but it opposes
the present bill, and in effect takes the position that practically no
legislation is imperatively demanded at the uresent time.
The correspondence contains the statement that the business in the
United States is more dependent upon 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 canital market.
There 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 favorabl
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 for 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 canital
market would be most unfortunate.
The Glass Dill as amended by the Board by placing restraint upon
future mad speculation, will ultimately place the securities market unon
a much sounder foundation than exists today, and the argument that
\
legislation cringing about this ultimate result should be postponed, seems to
be not sound.
It is a customary objection to all remedial legislation
tnat it should be postponed, and the time will never come when all will
agree t.iat the task should be then undertaken.
The Federal Reserve Bank, as before stated, 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
general supervision by the Federal Reserve Board, but it makes clear
ohat 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 all of the member banks are feeding the
fire of unbridled speculation 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
t'ie country again, it will fin d 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.
Comments and Recommendations
' 11 4115,
72nd Congr
(All references are to sections, pages and lines of S. 4115 in the form
in which it was introduced on March 14 (calendar day, March 17), 1932.)
Washington, D. C.
March . , 1932.
-
(2)
SECTION 2
This section defines affiliates and upon the scope of this defiA
nition depends in a large measure the scope and effect of all provisions
of the till relating to affiliates.
While the definition contained in the bill mentions certain
specific types of institutions which are frequently affiliated with member
banks, the words "or a corporation” in line 4 on page 2 make it appli
cable to corporations of any character which are affiliated with member
banks in any of the ways described in the succeeding paragraphs of the
definition
It is believed that the most satisfactory solution of this prob
lem is to make the definition very broad but, in dealing with affiliates,
to observe the following principles:
(1)
To require, to make reports and
to submit to examination at the discretion of the Board or the Comptroller;
(2)
to limit the loans that can be extended to an affiliate by a member
bank; and (3) to prohibit the 'tying up of capital stock of an affiliate
with the capital stock of a member bank.
In favoring these limitations,
the Board has in mind that it may not be desirable to abolish all the
existing relationships between member banks and their affiliates, but
that it is desirable to protect the operations of the member banks from
being unduly influenced by their affiliates. Recent experience has demon
strated that operations of the affiliates at times have unfavorable effects
on the condition of member banks.-
SECTION 2 Continued Page 2
With these principles in mind, it is recommended that the
definition of affiliates te broadened by eliminating from paragraph
(b) in lines 1 to 4, page 2, all references to specific types of
corporations, and by inserting other words which would make the
definition applicable not only to corporations but to business trusts,
associations or other similar organizations, regardless of the type
of business in which they are engaged.
Certain other changes in the
phraseology of the definition are also suggested for the purpose of
clarifying them.
1.
The changes suggested are as follows:
On page 2, change lines 1 to 4, inclusive, to read as
follows:
”(b) The term ’affiliate’ includes any corporation,
business trust, association or other similar organiza
tion — ”
2.
In lines 9, 11 and 22 on page 2, strike out the words
"managing officers" and substitute in lieu thereof the words "persons
exercising similar functions".
3.
In lines 9 and 18 on page 2, and in line 3 on page 3,
strike out the words "annual meeting" and substitute in lieu thereof
the word "election".
- (4) -
SECTION 3
I '
Slq
{
j-fA
$
(
j
The Federal Reserve Board understands that the principles under
, . \
/
lying Section 3 of the hill are (1) That discounting at the Federal
reserve hanks is a privilege and not a right; (2) that the Federal
\
reserve system has the responsibility of keeping itself informed about
\
/
the use of hank credit; (3) that the power of Federal reserve hanks to
\
withhold credit accommodations should he used to discourage unsound
.
.
\ .
/
hanking practices and (4) that the Federal Reserve Board should have
,
\
.
/
power to suspend a member hank from the use of Federal reserve credit
facilities.
The Board is in sympathy with these principles.
\\
//
For the purpose of accomplishing these objectives, the Federal
\
/
Reserve Board suggests a substitute for Section 3, which will take the
\
j
place of Paragraph 8 of Section 4 of the Federal Reserve Act. In this
substitute the words "shall make advancementsn is changed to "may make
f
\
advancements'1, and the rest of the language is made somewhat more gen
eral than in the hill, for the purpose of avoiding the implication that
a Federal reserve hank can tell specifically what use is being made of
funds obtained from the hank on a given piece of paper.
1
Member hanks as
\
a rule do not borrow to relend, hut to make up deficiencies in reserves
arising from withdrawals of deposits or from other causes.
It is, there
fore, usually impossible to say that a loan to a member hank is granted
/
\
for this or that specific purpose.
It is, however, possible to determine
whether the loan and investment policies of a bank are inconsistent with
tne purposes of the Federal Reserve Act, and, if so, to refuse accommoda
tion to such bank or in aggravated cases to suspend it from the privilege
of using the system's credit facilities altogether.
SUCTION 3 Continued Page _2
It is recommended that Section 3 of the "bill he changed to read
as follows:
"Sec. 3.
The paragraph of Section 4 of the Federal Reserve Act,
as amended, which begins with the words, ’Said hoard shall administer
the affairs of said hank fairly and impartially’, is amended and re
enacted to read as follows:
’Said hoard of directors shall administer the affairs of said hank
fairly and impartially and without discrimination in favor of or against
any member hank or hanks and may, subject to the provisions cf law and
the orders of the Federal Reserve Board, extend to each member bank such
.
A
discounts, advancements and accommodations as may he safely and reason
ably made with due regard for the claims and demands of other member
banks, the maintenance of sound credit conditions and the accommodation
of commerce, industry and agriculture.
The Federal Reserve Board may
prescribe regulations further defining within the limitations of this
act the conditions under which discounts, advancements and accommodations
may be extended to member banks.
Each Federal reserve bank shall keep
itself informed of the general character and amount of Sfche loans and
•
v
• •
investments of its member banks with a view to ascertaining whether un
due use is being made of bank credit for the speculative carrying of or
/
\
trading in securities, real estate or commodities, or for any other pur
pose inconsistent with the maintenance of sound credit conditions; and,
y
C
MPT"
[Of' r
* iula‘
V.
in passing upon applications for advances, rediscounts or other credit
accommodations, the Federal reserve bank shall give consideration to
such information.
Whenever, in the judgment of the Federal Reserve
-
(6)
-
SECTION 3_ Continued Page 5.
Board, any member bank is making such undue use of bank credit, the
Board may, in its discretion, after reasonable notice and an oppor
tunity for a hearing, suspend such. bank from the use of the credit
facilities of the Federal Reserve System and may terminate such sus
, '
pension or may renew it from time to time,*”
- (4) -
SECTION 3
The Federal Reserve Board understands that the principles under
lying Section 3 of the hill are (1) that discounting at the Federal reserve
*
•••..
'
•
...
hanks is a privilege and not a right; (2) that the Federal reserve system
has the responsibility of keeping itself informed about the use of bank
credit; (3) that the power of Federal reserve banks to withhold credit ac
commodations should be used to discourage unsound banicing practices; and
(4) that the Federal Reserve Board should have power to suspend a member
bank from the use of Federal reserve credit facilities.
The Board is in
sympathy with these principles.
For the purpose of accomplishing these objectives, a substitute
for Section 3 is suggested.
This substitute includes a revision of the
paragraph of section 4 of the Federal Reserve Act which now reads as fol
lows :
*Said board shall administer the affairs of said bank fairly
and impartially and without discrimination in favor of or against
any member bank or banks and shall, subject to the provisions of law
and the orders of the Federal Reserve Board, extend to each member
bank such discounts, advancements and accommodations as may be
safely and reasonably made with due regard for the claims and de
mands of other member banks.”
In this revision the word ’’may” is substituted for ’’shall” and the
remaining language of the section is made somewhat more general than
in the bill.
- (5) -
SECTI011 3 Continued Page
2
Member banks as a rule do not borrow to relend, but to make up deficiencies
in reserves arising from withdrawals of deposits or from other causes.
It
is, therefore, usually impossible to say that a loan to a member bank is
granted for this or that specific purpose.
However, it ^ould be possible
to determine whether the loan and investment policies of a bank are in
consistent with the purposes of the Federal Reserve Act, and, if so, to
refuse accommodation to such bank or in aggravated cases to suspend it from
the privilege of using the system's credit facilities.
In this connection
attention is invited to the fact that Section 4 of the Federal Reserve
Act requires the chairman and Federal reserve agent at each Federal reserve
bank to "make regular reports to the Federal Reserve Board" and to "act
as its official representative for the performance of the functions con
ferred upon it by" the Federal Reserve Act.
It is recommended that Section 3 of the bill be changed to read
as follows:
"Sec. 3.
The paragraph of Section 4 of the Federal Reserve Act,
as amended, which begins with the words, 'Said board shall administer
the affairs of said bank fairly and impartially', is amended and re
enacted to read as follows:
'Said board of directors shall administer the affairs of said bank
fairly and impartially and without discrimination in favor of or against
any member ban]!: or banks and may, subject to the provisions of law and
the orders of the Federal Reserve Board, extend to each member ban]: such
discounts, advancements and accommodations as may be safely and reasonably
-
(6)
-
SECTION 3 Continued. Page 3
made with due regard for the claims and demands of other member banks,
the maintenance of sound credit conditions and the accommodation of
commerce, industry and agriculture.
The Federal Reserve Board may
prescrioe regulations further defining within the limitations of this
act the conditions under which discounts, advancements and accommodations
may be extended to member banks.
Each Federal reserve bank shall keep
itself informed of the general character and amount of the loans and
investments of its member banks with a view to ascertaining whether un
due use is being made of bank credit for the speculative carrying of or
trading in securities, real estate or commodities, or for any other pur
pose inconsistent with the maintenance of sound credit conditions; and,
in determining whether to grant or refuse advances, rediscounts or other
credit accommodations, the Federal reserve bank shall give consideration
to such information.
Whenever, in the judgment of the Federal Reserve
Board, any member bank is making such undue use of bank credit, the
Board may, in its discretion, after reasonable notice and an opportunity
for a hearing, suspend such bank from the use of the credit facilities
of the Federal Reserve System and may terminate such suspension or may
renew it from time to time.***
- (7) -
SSCfrION 4
It is recommended that this section he emitted.
It prohibits
•
banks that belong to a group or a chain from voting for Federal re
serve bank directors..
The wording of the section is such, however,
as not to confine the prohibition to group and chain banks, but to
include all banks that are not controlled entirely by locally resi
dent stockholders.
Since the stock of many important banks is widely
owned throughout the country, this might restrict the voting privi
lege largely to smaller and less important banks that are owned by
local stockholders.
It is to be feared that this section would bar
from participation in the selection of Federal reserve directors many
of the better managed banks.
The provision for more extended branch banking in a later section
would probably reduce chain bank, strength to a point where this section
would be unnecessary.
-
(8)
-
SECTION 5
This section would amend the f i r s t paragraph of Section 7 of the
Federal Reserve Act so that, a fter the payment of expenses and d iv i
dends, a l l of the net earnings of the Federal reserve hanks over and
above any amounts necessary to restore i t s surplus to i t s p o sition as
erf December 31, 1931, would be paid to the Federal liq u idatin g cor
poration.
The amendment is also worded in such a way as to prevent
the payment of any dividends out of surplus and to prevent the pay
ment of dividends whenever the surplus of a Federal reserve bank is
le ss than i t was on December 31, 1931.
A differen t method of financing the liquidating corporation is
proposed and w ill be discussed under the appropriate section .
For
th is reason a m odification of Section 5 is suggested which would not
change the provis ions of the present law in regard to the surplus of
the Federal reserve banks, but would authorize the Secretary of the
Treasury to use the franchise tax received from the Federal reserve
banks for the purpose of supplementing the funds of the corporation.
As changed Section 5 of the b i l l would read as follow st
"Sec. 5.
The second paragraph of Section 7 of the Federal
Reserve Act, as amended, is amended to read as fo llo w s:
'The net earnings derived by the United States from Federal
reserve banks s h a ll, in the d iscretio n of the Secretary of the
Treasury, (1) be used to supplement the gold reserve held against
outstanding United States notes, or (2) be applied to the reduction
of the outstanding bonded indebtedness o f the United States under
regulations to be prescribed by the Secretary of the Treasury, or
- O) SECTION 5 Continued. Page 2
(3)
be invested in debentures or other such obligations of the
Federal Liquidating Corporation.
Should a Federal reserve bank
be dissolved or go into liq u id a tio n , any surplus remaining,
a fte r the payment of a l l debts, dividend requirements as herein
before provided, and the par value of the stock, sh a ll be paid
to and become the property of the United States and sh all be
sim ilarly a p p l i e d ." ’
-
(10)
-
SECTION 6
In order that reports o f a f f i l i a t e s o f State member banks may
be required only when deemed necessary by the Federal Reserve Board and
also in order that suitable provision may be made for the examination of
a f f i l i a t e s o f State member banks when deemed necessary, i t is recommended
that Section 6 o f the B ill be changed to read as follow s:
"Sec. 6.
Section 9 o f the Federal Reserve A ct, as amended,
is further amended by adding at the end thereof two new paragraphs
reading as follow s:
'Whenever i t sh a ll be deemed necessary in order to obtain
adequate information regarding the relatio n s between any bank
admitted to membership under the provisions o f th is section
and i t s a f f i l i a t e s or the e ffe c t o f such relation s upon the
management or condition o f such bank, i t may be required under
rules and regulations prescribed by the Federal Reserve Board,
to obtain and furnish such reports as to any or a l l o f it s
a f f i l i a t e s as may be called fo r .
Each such report sh a ll
contain such information and sh a ll be submitted at such time
as may be specified in the c a ll therefor.
Any member bank
which f a i l s to furnish any report of an a f f i l i a t e when and
as required sh a ll be subject to a penalty of $100 for each
day during which such fa ilu re continues.
Such penalty may
be assessed by the Federal Reserve Board, in i t s d iscretio n ,
and, when assessed, may be collected by the Federal reserve
bank by su it or otherwise.
- (11) -
SECTION 6 Continued Page 2
’ Any examiner selected or approved by the Federal Reserve
Hoard may examine any a f f i l i a t e of any bank admitted to member
ship under the provisions o f this section when i t sh a ll be
deemed necessary in order to inform the Federal Reserve Board
or the Federal reserve bank o f the rela tio n s o f such a f f i l i a t e
with such member leank or o f the e ffe c t o f such relation s upon
the management or condition o f such member bank.
The examiner
making the examination o f any such a f f i l i a t e sh a ll have power
to make a thorough examination of a l l the a ffa ir s o f the a f f i l i
ate, and in doing so he sh a ll have power to administer oaths
and to examine any of the o ffic e r s , d ire cto rs, employees, and
agents thereof under oath, and to make a report of his findings
to the Federal Reserve Board or to the Federal reserve bank.
Copies o f the report o f any such examination may, in the d is
cretion of the Federal Reserve Board, be furnished to the
State au th orities having supervision o f State member banks,
to o f f ic e r s , d irecto rs, or the receiver o f the a f f i l i a t e
examined or o f the member bank with which i t is a f f i li a t e d ,
and to any other proper persons.
The expenses o f any exami
nation made under the provisions o f this paragraph may, in
the discretion o f the Federal Reserve Board, be assessed
against the a f f i l i a t e examined and, when so assessed, sh a ll be
paid by the a f f i l i a t e examined.
I f such a f f i l i a t e sh a ll refuse
-
(12)
-
SECTION 6 Continued Page 5
to pay such expenses or sh a ll f a i l to do so within s ix ty days
a fte r the date of such assessment, then such expenses may be
assessed against the a f f ilia t e d member bank and, when so
assessed, sh a ll be paid by such member bank; Provided, however,
That, i f the a f f i li a t i o n is with two or more member banks, such
expenses may be assessed against, and collected from, any or
a l l o f such member banks in such proportions as the Federal
Reserve Board may prescribe.
I f th e -.o ffic e rs, d ire cto rs, or
stockholders of any a f f i l i a t e of a bank admitted to member
ship under the provisions o f this section sh a ll refuse to per
mit an examiner to make an examination of such a f f i l i a t e or
refuse to give any information required in the course o f any
such examination, the member bank with which i t is a f f ilia t e d
sh a ll be subject to a penalty o f not more than $100 for each
day that any such refu sa l sh a ll continue.
Such penalty may
be assessed by the Federal Reserve Board in i t s d iscretio n ,
and, when so assessed may be collected by the Federal reserve
bank by su it or oth erw ise.’ ”
-
(is)
-
SECTION 7.
There are certain changes which should he made in the text of
this section fo r the purpose of c la r ific a tio n and of providing for
certain
'att .rs not no-* coverod in the h i l l -h ic h - i l l he referred to
at the vperopriate p laces.
For the purposes of c la r ific a t io n , i t is suggested that sub
section (h) he amended as follow s:
1.
In lin e s 6 , 11 and 12 on page 8 , i t is suggested that
the word "appointive” he inserted before the word "member".
2.
In lin e 13 on page 8, i t is suggested that a fte r the
words "twelve years" there he inserted the words "from the expira-
i
tion of the term of his predecessor".
In order that the domicile of the Board may he fixed for le g a l
reasons, and in order that provision may he made for a chairman of the
Board, i t is suggested that the follow ing he inserted at the beginning
of lin e 23 on page 8:
"The o ffic e s of the Board sh all he in the D is tr ic t of Columbia.
At meetings of the Board, the Governor shall preside as chairman,
and, in his absence, the Vice-Governor sh all p reside.
In the absence
of both the Governor and the Vice-Governor, the Board sh a ll elect a
member to act as chairman pro tern."
I f the authority of the Secretary of the Treasury to assign quarters
to the Federal Reserve Board is repealed, i t would seem that the Board
should he authorized to purchase or construct a building for i t s own
use and th at, in the in terest of convenience and e ffic ie n c y , space
snould he provided in such building for the Comptroller of the Currency
- (14) SECTION 7 Continued Page 2
and his s t a f f and for the proposed Federal Liquidating Corporation.
For this purpose, i t is suggested that the follow ing he added at the
end of Section 7 of the B i l l :
M(d)
Section 10 of the Federal Reserve A ct, as amended,
is further amended by adding at the end thereof a ne~ paragraph
reading as fo llo w s:
'The Federal Reserve Board is authorized and empowered
to acquire by purchase, condemnation or otherwise, a Build
ing located in the D istr ic t of Columbia "h ich m ill provide
su itab le and adequate o ffic e s "herein the functions of the
Board and the Comptroller of the Currency nay be carried on,
or to acquire by purchase, condemnation or otherwise, such
s it e located in the D is tr ic t of Columbia as i t may deem
necessary and to cause to be constructed thereon a building
~hich " i l l provide suitable and adequate o ffic e s for the
purposes of the Federal Reserve Beard and the Comptroller
of the Currency, and to maintain, rep air, enlarge or remodel
any building so acquired or constructed.
The Federal Reserve
Board may assign o ffic e s in any such building for the use
of the Comptroller of the Currency and the Federal Liquidating
Corporation "ith o u t making any charge for the use of such
o f f ic e s , and nothing contained in the Act of June 3 , 1854, or
in Section 331 of the Revised Statutes (T itle 12, Section 13,
U. S. C. ) ,
or in any other provision of l a " , sh all be construed
- (15) SECTI PIT 7 Continued Page 3
as preventing the Comptroller of the Currency from making
f u l l use of any o ffic e s so assigned and from keeping therein
the records and a l l other valuable things belonging to h is
department.
The Federal Reserve Board may levy upon the
Federal reserve banks, in proportion to their cap ital stock
and surplus, assessments s u ffic ie n t to defray a l l costs and
expenses incurred under the provisions of th is paragraph. 1,1
/
-
(16)
-
SECTION 8
The purpose o f th is section is to prevent the undue use
o f bank loans for speculation in se c u r itie s .
It is believed that
this is s u ffic ie n tly covered in Section 5 and, therefore, the
omission o f Section 8 is recommended
- (17) SECTION 9.
In accordance with the principles indicated in the discussion of
Section 6 , i t is recommended that Section 9 of the B i l l he changed to read
as follow s:
"S«c.9.
,TThe Federal Reserve Act, as amended, i s amended by inseriting
u a
o d
rCt Si
p. -g +* between Sections 23 and 24 thereof the follow ing new se ctio n :
•H <d G
)
to
u CO *H
’ Section 2 3 (a ). No national banking association and no
o tj tS
U
»
0)
d 0) si
State member bank sh a ll (1) make any lean or any extension of
o P 4*
•H U O
43 43
o 0) ^
credit to , or purchase se c u r itie s under repurchase agreement
<D d o
co o o
O +3
co
co
from, any of i t s a f f i l i a t e s , or (2) invest any of it s funds
•H <D
•
S
>
f
43 •Hl £
pH
as
in the cap ital stock, bonds, or other ob ligation o f any such
d pH tO r-l
•H o3 ti
W)
a f f i l i a t e , or (3) accept the cap ital stock, bonds, or other
<H •H
d
•H * 43
s
u CO
43i w
CO -H •H
obligations of any such a f f i l i a t e as c o lla te r a l security for
o CT> CD X
d pH Si 0>
43 tH +3
advances made to any individual, partnership, association , or
B O 43 rQ
S 43 CQO) T)
Eh
o > CD
m d d C
SJ
•pi •H
u
d
<D
> d o O
0) •H 43 4p3j
t£
o d w d
d
si
chase agreements, investments, and advances against such
d
p
H
a) S
a> Si pH
c o lla te r a l security w ill exceed 10 per centum of tho ca p ita l
rd 43 u Cj
O
•H
•
H
>
O O El <H
stock and surplus of such national banking association or State
a) *rl
u
d e o
CD
o
•p<
Pc
43
d CO
O *H
CO
0)
N
Oi «H
d
meats, and advances against such c o lla te r a l security w ill ex
ceed 20 per centum of the cap ital stock and surplus o f such
national banking association or State member banki /
’ Each loan or extension of credit to an a f f i l i a t e within
the foregoing lim itation s sh a ll be secured by c o lla te r a l having
i
- (18) SECTION 9 continued page 2*
*a market value at the time of making the loan or extension
of credit of at le a st 20 per centum more than the amount
of such loan: Provided, That th is requirement sh a ll not apply
to loans or extensions o f credit on the security of obliga
tions o f the United States Government, Reconstruction Finance
Corporation, Federal Intermediate Credit Banks, Federal land
banks, or on the security of notes, d r a fts , b i l l s of exchange,
or acceptances e lig ib le fo r discount or purchase by Federal
reserve banks: And provided, fu rth er, That when any loan is
made on the secu rity of obligations of any State or p o l i t i
cal subdivision or agency thereof such obligations sh a ll have
a market value at the time o f making the loan o f at le a st
10 per centum more than the amount of such loan.
A loan or
extension o f credit to a d ire cto r, o f f ic e r , clerk , or other
employee or representative of any such a f f i l i a t e sh a ll be
deemed a loan to the a f f i l i a t e to the extent that the pro
ceeds of such loan are used fo r the b en efit o f , or trans
ferred to , the a f f i l i a t e *
’ The provisions of th is section sh a ll not apply to any
a f f i l i a t e of such national banking association or state mem<st
ber bank, (1) organized fo r
the sole
A M ~ts-
A A A
purpose o f holding i t s
banking house or
houses and the s it e
or s ite s thereof, (2)
i
s n /
i
A
organized to conduct a safe deposit business, (5) in the
ca p ita l stock of
which such bonk has
been authorized to in
vest pursuant to
Section 25 of the Federal Reserve A ct, (4)
organized under Section 25(a) of the Federal Reserve Act,
- (19) SECTIOIT
l
' < ,;
continued pagQ
for (5) transacting only the business of an agricu ltu ral
flA
"fe*
credit corporation or liv e stock loan company; but such
a f f i l i a t e s s h a ll continue subject to tho provisions of
e x istin g lav; lim itin g tho amounts v/hich national banks or
State member banks may lend to , or invest in tho stock or
other obligations o f , such corp oration s.fn
-
(20)
-
(2) The proposed Federal Liquidating Corporation*
these subjects w ill be discussed separately*
For convenience,
/
/
OPEN MARKET OPERATIONS
The f i r s t part o f Section 10 would e sta b lish a Federal open
market committee along the lin es o f the e x istin g open market p olicy
conference which functions as a piece of administrative machinery without sp e c ific le g a l sta tu s.
I t would seem undesirable to incorporate
into law a procedure
developing out o f the experience
of the system and may
ed from time to time.
The stateme
) o f Section 10 which says that,
MNo Federal reserve b
n open market operations, except
a fte r approval and au
r ig id .
committee” , appears to be too
I t deprives
sre bank o f a l l authority to make
purchases in the open
3r obtaining the consent o f both
the Board and the' comi
narket committee would have no
authority to ac,t with/
3 Board and the Board would have
no authority to act w:
_
the committee.
Seven Federal
reserve banjrs holding le ss than h a lf the resources of a l l twelve couli
prevent the adoption o f any open market p o licy .
This would resu lt in
/
1
the p o s s ib ilit y o f obstruction of any system program and would tend to
7
make the operation o f the Federal reserve system le s s tim ely and le s s
/
e f f ic ie n t .
-
t
SECTION IQ Continued Page 2
(21)
1 .>
*
Open Mjafket Operations
Lines 19 to 23 in paragraph (c) on page 12 of th is section ,
incorporate into law a principle which the Federal Reserve Board has
\
/
adopted in practice*
I t is suggested that th is sentence and subsection
(a) o f Section 14 of S. 3215 be inserted into Section 14 o f the Federal
Reserve A ct.
These changes are suggested in the follow ing substitute
for the f i r s t part o f Section 10 o f the B i ll
\
/
"Section 14 o f the Federal Reserve Act, as amended, is
\
/
further amended by strik in g out the words,
’ Every Federal
* \
■ f
reserve bank sh a ll have power:’ and inserting in lie u thereof
r
the follow ing two paragraphs: /
’ The time, character, and volume of purchases and
/
\
sales in the open market sh a ll be governed with a view
to accommodating commerce and business and with regard
to their bearing upon the general credit situ ation of
the country.
’ Subject to such
\
re str ic tio n s as the Federal Reserve Board may pre
scrib e, every Federal reserve bank sh a ll have power:” ’
i
-
(22)
-
SECTION 10 Continued k g e ,5
t
FEDERAL LIQUIDATING CORPORATION
The other part of Section 10 deals with the proposed Federal
liquidating corporation, and there is submitted a proposed substitute
for the section as drafted in the bill*
The substitute would confine
the benefits of the liquidating corporation to member banks. Assistance
\
to nonmember banks is adequately taken care of in the Reconstruction
Finance Act, and it would render membership in the system more attrac\
/
tive if the benefits of the Corporation were confined to member banks.
In the substitute
that $100,000,000 of the capital of
the liquidating corporation be supplied by the Treasury.
This sub
scription to capital may be considered as being derived from the fran
chise tax previously paid to the Treasury by the reserve banks.
In addi
tion, it is proposed that the corporation be authorized to issue deben
tures up to twice the amount of its subscribed capital and that the
/
\
Federal reserve banks be given authority to purchase those debentures
up to one-fourth of their surplus.
This is not a propitious time to
ask the member banks to contribute to the liquidating corporation. The
/
\
banks are going through a very difficult period and to tax them for the
\
purpose of bailing out banks that have failed would be a considerable
hardship on them.
In order to make the operations of the corporation
/
\
\
more easily manageable, it is proposed that the directorate be comprised
\
of five members instead of fourteen as proposed in t
bill.
For the reasons which have been stated the following separate
section on the Federal Liquidating Corporation has been drafted:
-
(20)
-
SECTION 10
This section of the Bill deals with two separate and distinct
subjects, (1) Open market operations of the Federal reserve hanks, and
(2)
The proposed Federal Liquidating Corporation.
For convenience,
these subjects will be discussed separately*
0 P M MARKET OPERATIONS
The first part of Section 10 would establish a Federal open
market committee along the lines of the existing open market oolicy
conference which functions as a piece of administrative machinery with
out specific legal status.
The statement in paragraph (b) of Section 10 which says that,
"No Federal reserve bank shall engage in open market operations, exceot
after approval and authorization by the committee", appears to be too
rigid.
It deprives an individual reserve bank of all authority to make
purchases in the open market except after obtaining the consent of both
tne Board and the committee.
The open market committee would have no
authority to act without approval of the Board and the Board would have
no authority to act without approval of the committee.
This would re
sult in the possibility of obstruction of any system nrogram and would
tend to make the operation of the Federal reserve system less timely
and less efficient.
Lines 19 to 23 in paragraph (c) on page 12 of this section
would incorporate into law a principle which the Federal Reserve Board
has adopted in practice.
The following substitute for the first part of Section 10
of the Bill is suggested;
- (21) SECTIOH 10
Continued Page 2 - Open Market Operations
"Sec. 10.
Section 14 of the Federal Reserve Act,
as amended, is further amended "by striking out the words,
’Every Federal reserve bank shall have power;’ and inserting
in lieu thereof the following:
’Subject to such regulations, limitations,
restrictions and procedure as the Federal Reserve Board may
prescribe, every Federal reserve bank shall have power:’1’
"Section 14 of the Federal Reserve Act, as
amended is further amended by adding at the end thereof
the following:
’There is hereby created a Federal Open Market
Committee (hereinafter referred to as the "committee1’),
which shall consist of as many members as there are Federal
reserve districts.
Each Federal reserve bank by its board
of directors shall annually select one member of said com
mittee.
The committee shall meet upon the call of the Fed
eral Reserve Board, either upon the motion of the Board or
at the request of any three members of the committee.
’It shall be the duty of the committee to confer
with the Federal Reserve Board and among its own members
with regard to the conduct of all open market operations
for system account and to adopt and transmit to the several
Federal reserve banks and to the Federal Reserve 3oard
resolutions relating to the open market transactions of
- (21a ) ' K
« •
V
SFCTIOF 10 Continued. Page 3 - Open Market Operations
such "banks for system account and the relations of the
Federal reserve system with foreign central or other foreign
"banks.
The recommendations of the committee shall be subject
to the approval of the Federal Reserve Board.
No Federal re
serve bank shall engage in open market operations for its
own account except with the permission of the Federal Reserve
Board or upon such conditions, limitations and restrictions
as the Board may impose.
1The time, character and volume of all purchases:and
sales in the open market under .this section shall be govern
ed with a view to accommodating commerce and business and
with regard to their bearing upon the general credit
situation of the country. 1,1
FFDBmAL LIQUIDATING- CORPORATION
The other part of Section 10 deals with the proposed Federal
liquidating corporation, and there is submitted a proposed substitute
for tne section as drafted in the bill.
the benefits of the
The substitute would confine
liquidating corporation to member banks.
Assistance
to nonmember hanms is adequately taken care of in the Reconstruction
finance Corporation Act, and it would render membership in the system
moi e attractive if the benefits of the Corporation were confined to
member banks.
In the substitute it is proposed that $100,000,000 of
the capital of the liquidating corporation be subscribed by the Treasury.
This subscription to capital may be considered as being derived from the
franchise tax previously paid to the Treasury by the reserve banks.
In
-
SECTION 10
(22)
-
Continued Page 3a
addition, it is proposed that the corporation be authorized to issue
debentures up to twice the amount of it s subscribed capital and that
the Federal reserve banks be given authority to purchase those debentures
up to one-fourth o f their surplus.
This is not a propitious time to
ask the member b.?nks to contribute to the liq u idatin g corporation.
banks are going through a very d i f f i c u l t period and to tax them for
th is purpose would be a considerable hardship on them,
.
order to make the operations o f the corporation more
e a sily manageable, i t is proposed that the directorate be comprised
o f fiv e members instead of fourteen as proposed in the b i l l .
For the reasons which have been stated the follow ing
separate section on the Federal Liquidating Corporation has been
drafted:
The
.
- (23) SECTION 10 Continued Page 4 - Federal Liquidating Corporation
"Sec. 5A.
The Federal Reserve Act, as amended, is further
amended by inserting between Sections 28 and 29 thereof the f o l
lowing new section:
’ Sec. 28A.
I
(a) There is hereby created a Federal L i
quidating Corporation (hereafter referred to as the "co r
poration” ) for the purpose o f making loans on, or purchas
ing and liquidating as hereinafter provided, a l l or any
part o f the assets o f any member bank for v/hich a receiver
has been appointed.
The term "r e c e iv e r " as used in this
section sh a ll mean a receiver o f a national bank, and a
receiver, liquidating agent, commission, person or other
agency charged by State law with the r e sp o n sib ility and the
duty o f winding up the a ffa ir s o f an insolvent State mem
ber bank.
f (b)
The management of the Corporation sh a ll be
vested in a board o f directors consisting o f fiv e members,
.
one o f whom sh a ll be the Comptroller o f the Currency, one a
member o f the Federal Reserve Board designated by the
Board for the purpose, and three elected annually by the
Governors o f the twelve Federal reserve banks under such
procedure as may be prescribed by the Federal Reserve
Board.
f (c)
The corporation sh a ll have a cap ital stock o f
$10 0,0 0 0,0 0 0 , a l l o f which sh a ll be subscribed by the
United States o f America and payment for which sh a ll be
-
(24)
-
SECTION 10 Continued Page 5
subject to c a l l in whole or in part by the board of direc
tors o f the corporation.
’ There is hereby authorized to be appropriated out of
any money in the Treasury not otherwise appropriated the sum
o f $100,000,000 for the purpose o f making payments upon such
subscription.
Receipts for payments by the United States for
or on account o f such stock sh a ll be issued by the corpora
tion to the Secretary of the Treasury and sh a ll be evidence
of the stock ownership of the United S ta te s.
’ Any Federal reserve bank may purchase and hold any
debentures or other such obligations of the corporation in
an amount not exceeding one-fourth of the amount o f it s
surplus fund.
’ (d)
The corporation sh a ll have power
’ F ir s t:
To adopt, a lt e r , and use a corporate se a l;
’ Second: To have perpetual succession from the date of
enactment hereof, unless i t is sooner dissolved by an Act of
Congress;
’ Third:
To make contracts; to purchase, lease, and
hold or dispose o f such real estate or personal property
as may be necessary or convenient for the transaction of
i t s business;
’ Fourth: To sue and be sued, complain and defend in
any court o f competent ju risd ictio n ;
’ F ifth :
To appoint, employ, and f ix the compensation o f
SECTION 10 Continued Page 6
such o ffic e r s , employees, attorneys and agents as sh a ll he
necessary for the transaction of the business o f the cor
poration, without regard to the provisions o f other laws
applicable to the employment and compensation o f o ffic e r s
or employees o f the United S tates, to define th eir authority
and d u ties, to require bonds o f them and f ix the penalty
thereof and to dismiss them at pleasure.
Nothing in this
or any other Act sh a ll be construed to prevent the appoint
ment and compensation as a d ire cto r, o f f ic e r , or employee
o f the corporation o f any o ffic e r or employee o f the United
States in any board, commission, independent establishm ent,
or executive department thereof;
’ Sixth:
To prescribe, amend, and repeal by i t s board
of directors by-laws and rules and regulations not inconsis
tent with lav; governing the manner in which i t s general
business may be conducted and the p rivileges granted to i t
by law may be exercised and enjoyed;
’ Seventh: To exercise such incidental powers as s h a ll
be reasonably necessary to carry out the powers so granted.
’ (e)
The board of directors of the corporation sh a ll
determine and prescribe the manner in which i t s obligations
sh a ll be incurred and i t s expenses allowed and paid.
The
corporation sh a ll be e n titled to the free use of the United
States mails in the same manner as the executive departments
o f the Government.
The corporation with the consent o f any
SECTION 10 Continued Page ,7
Federal reserve bank or of any board, commission, indepen
dent establishment, or executive department o f the Government
including any fie ld service thereof, may a v a il i t s e l f o f the
use o f information, se rvices, and f a c i l i t i e s thereof in
carrying out the provisions o f th is Act.
’ (f)
Upon the application o f the receiver o f any
member bank, the corporation may in i t s discretion purchase
the assets of such bank, in whole or in part, or make loans to
the receiver on the secu rity o f such assets or any portion
thereof, on such terms and conditions as s h a ll be agreed
upon between the corporation and the receiver, subject to
the approval o f (1) the Comptroller o f the Currency^ in the
case of any national bank, and (2) the person or agency
designated by State law,/ in the case o f any state bank;
except that, in no case sh a ll the corporation make any
loan or purchase any assets in an amount which in the
opinion o f the corporation sh a ll not f u lly protect such
corporation and no such loan or purchase s h a ll be made in
the case o f State member banks unless permitted by the law of
the State in which the bank is located.
Receivers o f
national banks are hereby authorized and empowered with
the approval o f the Comptroller o f the Currency to borrow
«
on, or s e l l , assets o f banks o f which they are receivers,
and the proceeds o f every such sale or loan sh a ll be u tiliz e d
SECTION 10 Continued Page 8
for the same purposes and in the same manner as other funds
realized from the liquidation o f the assets o f such hanks.
The Comptroller of the Currency may, in his d isc re tio n , pay
dividends on proved claims at any time a fte r the expiration
o f the period o f advertisement made pursuant to Section 5235
o f the Revised S tatu tes, and no l i a b i l i t y sh a ll attach to
the Comptroller of the Currency or to the receiver o f any
national bank by reason o f any such payment for fa ilu re to
pay dividends to a claimant whose claim is not proved at the
time o f any such payment.
I f the amount realized from any
assets acquired by the corporation under the provisions o f
th is Section exceeds the sum paid therefor or loaned thereon,
the corporation sh a ll make an additional payment to the re
ceiver o f the bank equal to the amount o f such excess, i f any,
a fte r deducting the expenses o f liquidating such assets and
an amount equal to in terest at the rate o f 6 per centum per
annum.
A ll loans made by the corporation to receivers sh a ll
bear in terest at the rate o f 6 per centum per annum.
f (g)
Money o f the corporation not otherwise employed
sh a ll be invested in se cu ritie s of the Government of the
United S tates, except that for temporary periods, in the
discretion o f the board of d irecto rs, funds o f the corpora
tion may be deposited subject to check in any Federal reserve
bank or with the Treasury o f the United S tates.
When design
nated for that purpose by the Secretary of the Treasury, the
- (28) SECTION 10 Continued Page 9
corporation sh a ll he a depositary o f public moneys, except
receipts from customs, under such regulations as may lee pre
scribed by the said Secretary, and may also be employed as a
fin a n cia l agent of the Government.
I t sh a ll perform a l l such
reasonable duties as depositary o f public moneys and fin an cial
agent o f the Government as may be required o f i t .
’ (h)
The corporation is authorized and empowered to issue
and to have outstanding at any one time in an amount aggregating
not more than tv/ice the amount of i t s c a p ita l, notes, debentures,
bonds, or other such ob lig a tio n s,
to be redeemable at the option
of the corporation before maturity in su^h manner as may be
stipulated in such ob lig a tio n s, to bear such rate or rates of
in te r e st, and to mature at such time or times as may be deter
mined by the corporation:
Provided, That the corporation may
s e l l on a discount basis short-term obligations payable at
maturity without in te r e s t.
Obligations o f the corporation may
be secured by assets o f the corporation in such manner as
sh a ll be prescribed by the board of d ire cto rs.
Such o b liga
tions may "be offered for sale at such price or prices as the
corporation may determine.
The said ob ligations sh a ll be
f u lly and unconditionally guaranteed both as to in terest and
principal by the United States and such guaranty sh a ll be ex
pressed on the face th ereof.
In the event that the corpora
tion s h a ll be unable to pay upon demand, when due, the p rin ci
pal o f or in te re st on notes, debentures, bonds, or other such
- (29) SECTION 10 Continued Page 10
obligations issued by i t , the Secretary of the Treasury sh a ll
pay the amount thereof, which is hereby authorized to be ap
propriated, out of any moneys in the Treasury not otherv/iso
appropriated, and thereupon to the extent o f the amounts so paid
the Secretary o f the Treasury sh a ll succeed to a l l the righ ts of
the holders o f such notes, debentures, bonds, or other such o b li
gations.
T( i )
A ll obligations issued by the corporation s h a ll be
exempt, both as to princip al and in te r e s t, from a l l taxation
(except estate or inheritance taxes) now or hereafter imposed by
the United S ta te s, by any Territory, dependency, or possession
thereof, or by any State, county, m unicipality, or lo c a l taxing
authority.
The corporation, including i t s franchise, i t s
c a p ita l, reserves, and surplus, and i t s income, s h a ll be
exempt from a l l taxation now or hereafter imposed by the
United S ta tes, by any T erritory, dependency, or possession
thereof, or by any S ta te , county, m unicipality, or lo c a l taxartion authority, except that any re a l property o f the corpora
tion s h a ll be subject to S tate, county, municipal, or lo c a l
taxation to the same extent according to i t s value as other
re a l property is taxed.
T( j )
In order that the corporation may be supplied with
such forms o f obligations as i t may need for issuance under
th is a c t, the Secretary o f the Treasury is authorized to pre
pare such forms as s h a ll be suitable and approved by the cor
poration, to be hold in the Treasury subject to d elivery , upon
- (30) SECTION 10 Continued Pago, 11
order o f the corporation.
The engraved p la te s, d ie s, bed
pieces, and other m aterial executed in connection therewith
s h a ll remain in the custody o f the Secretary o f the Treasury.
The Corporation s h a ll reimburse the Secretary o f the Treasury
for any expenses incurred in the preparation, custody, and
delivery o f such ob lig a tio n s.
* (k)
The corporation s h a ll annually make a report o f i t s
operations to the Congress as soon as practicable a fte r the 1st
day o f January in each year.
f (l)
Whoever, for the purpose o f obtaining any loan from
the corporation, or any extension or renewal thereof, or the ac
ceptance, re le a se , or substitution of security th erefor, or for
the purpose of inducing the corporation to purchase any a sse ts,
or for the purpose o f influencing in any way the action o f the
corporation under th is a c t, makes any statement, knowing i t to
be fa ls e , or w ilf u lly overvalues any secu rity , s h a ll be punished
by a fine o f not more than $ 5 ,0 0 0 , or by imprisonment for not
more than two years, or both.
'fai)
Whoever (1) fa ls e ly makes, forges, or counterfeits
any obligation or coupon, in im itation o f or purporting to be
an obligation or coupon, issued by the corporation, or (2)
passes, u tte r s, or publishes, or attempts to pass, u tte r , or
publish, any f a ls e , forged or counterfeited ob ligation or
coupon, purporting to have been issued by the corporation,
knowing the same to bo f a ls e , forged or counterfeited, or
(31)
SECTION
10
Continued
(3 )
Pago
-
12
f a l s e l y a lt e r s any o b lig a tio n , or coupon, issued or pur
porting to have been issued by the corp oration , or (4 ) p a sses,
u tte rs,
or p u b lish es, or attempts to p a ss, u t t e r , or p u blish
as tru e , any f a l s e l y a lte r e d or spurious o b lig a tio n or coupon,
issued or purporting to have been issued by the corp oration ,
knowing the same to be f a l s e l y a lte re d or sp urious, s h a ll be
punished by a fin e o f not more than § 1 0 ,0 0 0 or by imprisonment
fo r not more than fiv e years, or both*
’ (n)
Whoever, being connected in any ca p a city with the
corp oration ,
(1) em bezzles, a b s tr a c ts , p u r lo in s, or w i l f u l l y
m isap p lies any moneys, funds, s e c u r i t i e s , or other things o f
v a lu e, whether belonging to i t or pledged, or otherwise en
tru sted to i t ,
or (2) with in ten t to defraud the corporation
or any other body, p o l i t i c
or corporate, or any in d iv id u a l,
or to deceive any o f f i c e r ,
a u d ito r, or examiner o f the cor
p ora tio n , makes any fa ls e entry in any book, rep o rt, or
statement o f or to the corp oration , or without being duly
authorized draws any order or is s u e s ,
puts fo r th or a ssign s
any n o te, debenture, bond, or other such o b lig a tio n , or
d r a f t , b i l l o f oxchango, mortgage,
th e r e o f,
judgment, or decree
s h a ll be punished by a fin e o f not more than
§ 1 0 ,0 0 0 or by imprisonment fo r not more than fiv e y e a rs,
or both.
SECTION
10
Continued
f (o)
Page
15
No in d iv id u a l, a s s o c ia tio n , p artn ersh ip , or corpor
a tio n s h a ll use the words "E ederal L iq u id atin g Corporation” ,
or a combination o f these three words, as the name or a part
th ereof under which he or i t s h a ll do b u sin e ss.
Every in d i
v id u a l, p artn ersh ip , a s s o c ia tio n , or corporation v io la tin g
th is su b d iv isio n s h a ll be punished by a fin e of not exceeding
$1000, or by imprisonment not exceeding one year, or both.
T(p)
The p rovision s of Sections 1 1 2 , 1 1 5 , 1 1 4 , 1 1 5 , 1 1 6 ,
and 117 of the Criminal Code o f the United S ta te s
t i t l e 1 8 , ch. 5 , s e c s . 202 to 2 0 7 , in c lu s i v e ),
( U .S .C .,
in so fa r as
a p p lic a b le , arc extended to apply to con tracts or agreements
wit h the corporation under t h is a c t , which fo r the purposes here
o f s h a ll be hold to include lo a n s, advances, extensions and
renewals th e r e o f, and accep tances, r e le a s e s , and s u b stitu tio n s
o f s e c u r ity th e r e fo r , purchases or s a le s o f a s s e t s , and a l l
con tracts and agreements p erta in in g to the same.
T(q)
The S ecret Service D iv isio n o f the Treasury Depart
ment i s authorized to d e t e c t , a r r e s t , and d e liv e r into the
custody o f the United S ta te s marshal having ju r is d ic t io n any
person committing any of the o ffe n se s punishable under t h is
s e c t i o n .r,t
SECTION
11
S ection 11 imposes a d iscrim in atory rate again st member bank
c o l l a t e r a l n o te s.
I t a ls o p resc rib es lim ita tio n s on the use o f such
notes by banks that may be making loans on stock exchange c o l l a t e r a l .
I t is b elie v ed that the purposes o f th is s e c tio n arc accomplished by
the proposed r e v is io n o f S ection 3 and th at no fu rth er lim ita tio n s along
th is lin e are d e s ir a b le .
The theory underlying th is s e c tio n , namely,
that there is a more d ir e c t connection between member bank c o lla t e r a l
notes and the use o f reserve cred it fo r sp ecu lative a c t i v i t y than
between other borrowings and th is a c t i v i t y i s unfounded.
Member barks
borrow on 15-d ay n o te s, because o f the g reater convenience both to them
and to the Federal reserve bark; and i f t h is form o f borrowing were pro
h ib ite d or made more expensive they would merely su b stitu te the
procedure o f rediscou n tin g e l i g i b l e paper without any change in the
use o f the proceeds.
For these rea so n s, i t i s b elie v ed that no u s e fu l
purpose would be served by t h is s e c tio n , but th at i t would make the
operation o f the Federal reserve banks l e s s e f f i c i e n t and more expensive;
and i t i s recommended that th is s e c tio n be om itted.
a* ttWMNlaUe* ham tseso m m fey t!k»
tool
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to it* toa*a •*;' st* for MMfti jtm»* that th« Motort* i W «hta>>
v'if*** * * * ®a*s* *»
to
im m u * * *
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to to 9 ) j * y * .
■ ■ ■ ■ t i n t M M U b* « * p * a l * U r t o t o t o l to c..t»atry *
1* W»3WBa»:i*a that th* folto»iBK 89 M l l t i M f i for
toUt
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*
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, x*
M t t M l i Of th»
- (33A) -
"S e c . 1 1 .
The seventh paragraph o f Section 13
o f the Federal Reserve A c t, as amended, i s amended and
reenacted to read as fo llo w s :
'Any Federal reserve bank m y make
advances fo r p eriods not exceeding f i f t e e n
day9 to i t s member banks on th e ir promis
sory notes secured by the deposit or pledge
o f bonds, n o te s, c e r t i f i c a t e s o f indebted
ness or treasury b i l l s o f the United S ta te s ;
and any Federal reserve bank may make advances
fo r p eriods not exceeding n in ety days to i t s
member banks on th e ir promissory notes secured
by such n o te s, d r a ft s , b i l l s o f exchange or
bankers' acceptances as are e l i g i b l e fo r r e d is
count or fo r purchase by Federal reserve banks
under the p ro v isio n s o f th is A c t.
A l l such
advances s h a ll be made a t ra te s to be estab
lish e d by such Federal reserve banks, su b ject
to the review and determ ination o f the Federal
Reserve B oard .1"
(34)
SECTION
-
12:
S ection 12 d eals with r e la tio n s o f Federal reserve banks
with fo reig n banks.
In vteTr o f the recommendation that the se c tio n
-ertrating the -Federal open market- committee be om itted, jft i s recom
mended that the words "s u b je c t to the powers conveyed to and bestowed
upon the Federal open market committee by S ection 12A o f th is a c t ”
be om itted.
From the middle o f lin e 18 on page 26 through the word
"w r itin g ” in lin e 11 on page 2 7 , the se c tio n i s accep ta b le, but the
omission o f the words ”and c o n tr o l” in lin e 19 on page 26 i s sug
gested ,
in order to preserve the d is t in c t io n between su p ervision
and op eration .
I t i s recommended, th e r e fo re ,
that Section 12 o f the B i l l
be amended as fo llo w s ;
(1)
S trik e out the fo llo w in g language in lin e s 1 6 , 17 and
18 on page 2 6 ;
” (g)
S u bject to the powers conveyed to and bestowed
upon the Federal open market committee by S ection 12A o f
th is A c t” ;
(2 )
S trik e out the words "and c o n tr o l" in lin e 19 on page
(3)
On page 2 7 , lin e 1 1 , in s e r t a period a ft e r the word
2 6 ; and
"w r itin g " and s tr ik e out everything in lin e 11 a ft e r that word and
a l l o f lin e s 1 2 , 1 3 , 14 and 1 5 .
-
(35)
-
Section 1 5 ,
The p r in c ip a l feature o f th is se c tio n i s that i t d iscontinues
the d is t in c t io n between time dep osits and demand d ep osits in so fa r as
reserve requirements are concerned*
The d is tin c tio n between these two
types of d ep osits has led to many abuses and has been a fa c to r in making
p o s s ib le a growth of bank cre d it without a corresponding growth in re
se r v e s .
The proposal which would r a is e the requirements cn time deposits
to the le v e l of those on demand d ep o sits would increase reserve req u ire
ments by $1 3 2 , 0 00 ,0 0 0 a year fo r f i v e years w ith an u ltim a te increase of
$6 6 0 , 0 0 0 , 0 0 0 .
Unless there were a con traction in the amount of member
bank d e p o s its , th is in crease would r e c u lt in an ad d ition c f about $2 3 0 ,
0 0 0 ,0 0 0 to the gold requirements o f the Federal reserve banks.
It would
be an in flu en ce in the d ir e c tio n of c r e d it con traction without regard
to the course of bu sin ess and cred it and would be p a r tic u la r ly u n d esir
able at th is tim e.
Furthermore, the increase would f a l l h eaviest on
banks ou tsid e o f the p rin c ip a l fin a n c ia l c e n te r s, which have been d is
crim inated against under the e x is tin g reserve requirements both because,
o^ing to th e ir d istan ce from the cash f a c i l i t i e s
o f the Federal reserve
banks, they are required to carry r e l a t i v e l y large amounts ©f cash in
v a u lt , which under e x is tin g law does not count as r e s e r v e , and because
they are not in a p o s itio n to take advantage of deductions in determining
net d e p o s its .
The p ro p o sa l, th e r e fo re , would both increase the burden o f
reserves and increase the in e q u a litie s in th e ir present d is t r ib u t io n .
Any thorough-going r e v is io n o f Section 19 o f the Federal Reserve
Act should base required re se rv e s, in so fa r as p r a c tic a b le , upon the
-
SECTION
13
Continued
ftage
(36)
-
2
a c t iv it y o f the business handled, through each bank, rather than on an
a rb itra ry c l a s s i f i c a t i o n of banks according to lo c a tio n .
A proposal
submitted in the "Report of the Committee on Bank Reserves o f the
F edeial Reserve System" embodies a method of c a lc u la tin g required re
serves which is b e lie v e d to be sound in p r in c ip le and which would make
flu c tu a tio n s in the volume of required reserves exert an in flu en ce in
tne d ir e c tio n o f sound cred it con d ition s and would a ls o elim in ate many
in e q u ita b le and u n fa ir featu res of the present law.
There i s submitted a proposed s u b stitu te fo r Section 13 of the
B i l l which incorporates the proposals o f the Committee on Bank Reserves
o f the Federal Reserve System with s lig h t m o d ific a tio n s.
Section 13 includes two su b jects not d ir e c t ly r e la te d to bank
reserves and not covered in the report of the Reseive Committee, namely:
a p ro h ib itio n again st b ro k e rs’ loans fo r the account of others and a p ro v i
sion su b jectin g the market fo r Federal funds to r e g u la tio n by the Federal
Reserve Board.
The purpose sought to be accomplished by paragraph (d) i s d e s ir
a b le , but i t is b elie v ed that the language used i s too fa r reach ing.
It
i s suggested that the paragraph be changed so as to p ro h ib it a member bank
from a ctin g as a medium or agent of a non-banking corporation or in d iv id u a l
in making loans on the se c u r ity o f s to c k s , bonds and other investment se
c u r it ie s to brokers or d ealers in such s e c u r it ie s .
This su ggestion i s
incorporated in paragraph (n) o f the^proposed r e v is io n of S ection 13 of
the B i l l .
It i s not thought that p r o v isio n p ro h ib itin g a member bank
from making loans t o ^ or- dicc'cim tlng paper fen*** any corporation or
-
SECTION
13
Continued
Page
(37)
-
3
in d iv id u al i f the proceeds of such tran saction are to he used d ir e c t ly
or in d ir e c tly fo r the purpose o f making loans p rotected hy c o lla t e r a l
se c u r ity in favor o f any investment hanker
'
’
stock exchange or any d ealer in s e c u r itie s
off fre-i-ng--enforced hy the. Federal reserve-, hanks, as i t
*a
i s im possible fo r
'v-fSL/fXj
them to f o l l o w the proceeds of loans once they are granted.
Paragraphs ( f ) and (g ) of the B i l l seek to c on trol the market
fo r Federal funds hy p la c in g lim ita tio n s on the use o f balances standing
to the c re d it of member banks upon the hooks o f the Federal reserve hanks.
I t i s not b elie v ed th at le g a l regu lation ^ of the market fo r Federal funds
s ir a h le .
I t i s b e tte r to have these liq u id funds move fr e e ly where
they are most needed than to have them thrown on the c a l l market.
The
Federal reserve hanks keep in c lo se touch with tran saction s in Federal
funds and a ru lin g of the Federal Reserve Board now requ ires member
banks to report purchases of Federal funds as borrowed money.
The proposed su b stitu te fo r Section 13 of the B i l l is as fo llo w s
T i t l e 1 2 , Sections 461 to 4 6 6 , in c lu s iv e , and S ection 374 ) , as
amended, i s fu rth er amended and reenacted to read as fo llo w s :
'•RESERVES OF MEMBER BANKS.
•Section 1 9 , (a) Each member bank s h a ll e s ta b lis h
and maintain reserves equal to f i v e per centum ( 5$ ) o f the
amount o f i t s
net d e p o s its , p lu s f i f t y per centum ( 50$)
o f the amount of i t s average d a ily d ebits to d eposit
accounts;
Provided, That any member bank, at i t s
op tion ,
SECTION
13
Continued
Page
(38)
-
4
fo r any period net le s s than 90 days, nay onit any s p e c ific
dep osit account or accounts from such conputation of i t s
reserve requirements i f such account or accounts are re
ported sep a ra te ly to the Federal reserve bank and i f a reserve
of 50$ is maintained against such account or accounts: Provided,
however, T h at, in no event, s h a ll the aggregate reserves re
quired to he maintained by any member bank exceed f i f t e e n per
centum ( 15$) o f i t s gross d e p o s its .
*(b) Each member bank lo c a ted in the v i c i n i t y of a
Federal reserve bank or branch th ereof s h a ll maintain not
l e s s than f o u r - f i f t h s o f i t s
t o t a l required reserves in
the form o f a reserve balance on deposit w ith the Federal
reserve bank, and every other member bank s h a ll maintain
not le s s than t ^ o - f i f t h s
of i t s
t o t a l required reserves
in the form of a reserve balance on dep osit with the Federal
reserve bank.
The remainder of the t o t a l required reserves
o f each member bank, over and above the amount required to be
maintained in the form o f a reserve balance on d ep osit w ith
the Federal reserve bank, may, at the option of such member
bank, c o n sist o f a reserve balance on d ep osit w ith the Federal
reserve bank,
or of cash owned by such member bank eith e r in
i t s actu al p o sse ssio n or in tr a n s it between such member bank
and the Federal reserve bank: Provided, That when, in i t s
judgment the p u b lic in te r e s t so r e q u ir e s, the Federal Reserve
Board, may lim it to an amount le s s than that perm itted here
under the amount o f cash which any member bank or banks may count
as r e se rv e : P rovid ed , however , That, in p re sc rib in g such l i n i -
-
(39)
-
SECTION 15 Continued Page 5
tations, the Federal Reserve Board shall he guided hy the
general principle that member banks should be permitted to
count as reserve, within the limitations of this section,
as much cash as they reasonably need in view of the charac
ter of their business and their degree of accessibility to
the currency facilities of the Federal reserve banks.
f(c)
The term "gross deposits", within the meaning
of this section, shall include all deposit liabilities of
any member bank whether or not immediately available for
withdrawal by the depositor, all liabilities for certified
checks, cashiers’, treasurers’ and other officers’ checks,
cash letters of credit, travelers’ checks, and all other
similar liabilities, as further defined and specified by
the Federal Reserve Board: Provided, however, That, in
computing the amount of "gross deposits", (1) amounts shown
on the books of any member bank as liabilities of such bank
payable to a branch of such bank located in a foreign country
or in a dependency or possession of the United States, and
(2) liabilities payable only at such a branch, shall be
treated as though said liabilities were due to or payable at
a nonmember bank.
1(d)
The term "net deposits", as used in thifc section,
shall mean the amount of the gross deposits of any member bank,
as above defined and as further defined'by the Federal Reserve
Board, minus the sum of (1) all balances due to such member
bank from other member banks and their branches in the United
SECTION
13
Continued
Page
(4C)
-
6
States and. (2) checks and ,other cash items in process of col
lection which are payable immediately upon presentatioh in
the United States, within the meaning of these terms as fur
ther defined hy the Federal Reserve Board.
'(e)
The term "average daily debits to deposit accounts,"
as used in this section, shall mean the average daily amount
of checks, drafts, and other items debited or charged by any
member bank to any and all accounts included in gross deposits
as above defined and as further defined by the Federal Reserve
Board, except charges resulting from the payment of certified
checks and cashiers’, treasurers’, and other officers’ checks.
*(f)
The term "cash" within the meaning of this section,
shall include all kinds of currency and coin issued or coined
under authority of the laws of the United Ctates.
i
’(g)
The term "reserve balances," as used in this
section, shall mean a member bank’s actual net balance on the
books of the Federal reserve bank representing funds available
for reserve purposes under regulations prescribed by the Federal
Reserve Board.
’(h)
The term "vicinity of a Federal reserve bank or branch
thereof," as used in this section, shall mean the city in which
a Federal reserve bank or branch thereof is located, until such
term is otherwise defined by the Federal Reserve Board: Provided,
That, with respect to each Federal reserve bank and each branch
thereof, the Federal Reserve Board, from time to time, in its
discretion, may either (l) define a specific geographic area
-
(41)
*
SECTI01T 13 Continued Page 7
as comprising the vicinity of such Federal reserve bank
cr branch thereof, within the meaning of this section, or
(2) compile a list of member banks which shall be deemed
to be located in the vicinity of such Federal reserve bank
or branch thereof, within the meaning of this section, and
add banks to, or remove banks from, such list, from time to
time:
Provided, however, That, in defining such areas and
compiling such lists, the Federal.Reserve Board shall be
guided by the general principle indicated in subsection (b)
hereof,
f(i)
With respect to each member bank, the term '’Federal
reserve bank", as used in this section, shall mean the Federal
reserve bank of the district in which such member bank is
1oc at ed,
’(j)
The Federal Reserve Board is authorized and em
powered to prescribe regulations defining further the various
terms used in this Act, fixing periods over which reserve
requirements and actual reserves may be averaged, determining
the methods by which reserve requirements and actual reserves
shall be computed, and prescribing penalties for deficiencies
in reserves.
Such regulations and all other regulations of
the Federal Reserve Board shall have the force and effect of
law and the courts shall take judicial notice of them.
'(k)
Subject to such regulations and penalties as may
be prescribed by the Federal Reserve Board, ai$r member bank
may draw against or otherwise utilize its reserves for the
SECTION 13 Continued Page 8
purpose of meeting existing liabilities:
Provided, however,
That, whenever the reserves of any member bank have been
continuously deficient for fourteen consecutive calendar days,
the Federal Reserve Agent or Assistant Federal Reserve Agent
of the district in which such member bank is located shall
send to each director of such bank, by registered mail, a
letter advising him of such deficiency and calling attention
to the provisions of this subsection; and each director of such
acquiesces in, the making of additional
loans or investments by such bank after receipt of such a
letter and before the reserves of such bark shall have been
restored to the amount required by this section, shall be held
liable in his personal or individual capacity for any and all
losses sustained by such bank on any such loans or investments.
’(1)
All penalties for deficiencies in reserves incurred
under regulations prescribed by the Federal Reserve Board
pursuant to the provisions of this Act shall be paid to the
Federal reserve bank by the member bank against which they are
assessed.
'(m)
No member bank shall keep on deposit with any State
bank or trust company which is not a member bank a sum in excess
of ten per centum of its own paid-up capital and surplus.
No
member bank shall act as the medium or agent of a nonmember bank
in applying for or receiving discounts from a Federal reserve bank
under the provisions of this Act, except by permission of the
Federal Reserve Board.
-
(43)
-
SECTION 13 Continued. Page 9
*(n)
No mdmbsr tattle shall act as the medium c
agent of any nonbanking corporation or individual in
. Jr/\
making loans on the security of stocks, bonds and
other investment securities to brokers or dealers in
stocks, bonds and other investment securities.
Every
violation of this provision by any member bank shall
B
be punishable by a fine of not less than $100 per day
during the continuance of such violation; and such fine
may be collected, by suit or otherwise, by the Federal
reserve bank of the district in which such member bank
is located.
'(o)
National banks or banks organized under local
laws, located in Alaska or in a dependency or insular
possession or any part of the United States outside the
continental United States, may remain nonmember banks,
and shall in that event maintain reserves and comply with
all the conditions now provided by law regulating them;
or said banks may, with the consent of the Federal Reserve
Board, become member banks of any one of the Federal re
serve districts, and shall in that event take stock, main
tain reserves, and be subject to all the other provisions
of this Act.
1(p)
All acts or parts of acts in conflict with this
section are hereby repealed only in so far as thqy are in
conflict with the provisions of this section.f
-
(44)
SECTION 13 Continued Page 10
-
f
"There are hereby Repealed! thb provisions of Section 7 cf
the First Liberty Bond Act, approved April 24, 1517, Section 8
of the Second Liberty Bond Act, approved September 24, 1917,
and Section 8 of the Third Liberty Bond Act, approved April 4,
1918 (U.S. Code, Title 31, Section 771) which read as follows:
‘That the provisions of section fifty-one hundred
and ninety-one of the Revised Statutes, as amended by
the Federal Reserve Act, and the amendments thereof,
with reference to the reserves required to be kept by
national banking associations and other member banks
of the Federal Reserve System, shall not apply to
deposits of public moneys by the United States in
designated depositaries,’
"This section shall become effective on the first day
of the seventh calendar month following the enactment of
this A c t ."
/
- (45) -
SECTION 14
The first portion of this section down to line 4 on page 33
is existing law*
The sentence in lines 4 to 8, inclusive, is new and
would interfere greatly with the financing of real estate transactions.
When a time loan is made there appears to be no warrant, in the absence
of default, for revising the valuations on which the loan is based; and
this provision, together with that in lines 4 to 9 on page 34, would
require the real estate on which each such loan is based to be revalued
at least five times each year.
It could not reasonably be expected that
real estate loans would be made or applied for under such conditions.
The sentence in lines 17 to 20 on page 33 would classify as
real estate loans all unsecured loans whose eventual safety depends
upon the value of real estate, thereby subjecting all such loans to
all the limitations or restrictions in this section.
This would pro
duce confusion and uncertainty in a large volume of loans and would
interfere with the extension of adequate credit, particularly in the
agricultural sections of the country.
The remaining amendments in this section make what appear
to be unnecessary changes in the proportion of the real estate loans
permitted and propose, without segregation, to give time depositors
a preferred claim on all real estate loans and other assets of the
bank which are eligible under state laws as investments for savings
banks.
Such a provision would bo difficult to administer and would
be unfair to the other depositors.
The sentence in lines 15 to 22 on page 34 is existing law
and is inconsistent with Section 24 of the Bill, which will be dis
cussed later
SECTION 14 Continued Page 2
- (46) -
It would seem desirable to limit the amount which banks may
invest in bank premises, but it is suggested that this be accomplished
directly instead of indirectly.
It is recommended, therefore, that Section 14 of the Bill be
stricken out and that the following new section be substituted:
"Section 14.
The Federal Reserve Act, as amended, is
amended by inserting between Section 24 and Section 25 thereof
the following new section:
TSec. 24(a).
Except with the permission of the
Comptroller of the Currency, no national bank, and except
with the permission of the Federal Reserve Board, no State
member bank, shall hereafter invest in bank premises or in the
stock or obligations of, or in loans to, any corporation owning
or holding its bank premises a sum exceeding the amount of the
capital and surplus of such bank.tn
SECTION
( 47)
-
15
This section would make it necessary for member banks to dispose
of a large amount of securities at this time which would be very un
,
„
fortunate.
*
v
Since this section is aimed generally at investments in
securities, it is believed that its purpose is covered sufficiently
by the proposed substitute for Section 3 of the Bill.
•
is
The clause commencing in line 19 on page 35 apparently/intended
to enable national banks to compete more effectively with State banks.
Its tendency would be to lower the standards of banking in the national
banking system to the standard of the State banks, where more liberal
powers are granted to the State banks by the State law.
The definition of investment securities which is contained in the
law, as amended by the Act of February 25, 1927, would be stricken out
and apparently the Comptroller would be given unlimited power to pre
scribe his own definition except tint stocks could not be included.
This modification is undesirable.
For the reasons stated, it is recommended that this section be
omitted entirely.
* (48) SECTION
16
This amendment i s b e lie v e d to be d e s ir a b le ; but i t is
recommended that i t be strengthened and that a means o f evasion be
elim inated by s tr ik in g out the exception in lin e s 17 to 21, in c lu siv e
on page 5 7 , which would permit the organ ization o f n a tio n a l banks with
a c a p ita l o f $2 5 ,0 0 0 in c e rta in circum stances.
-
(-49) -
SECTION 17
The m od ification o f the u n its in which bank stocks can be i s
sued would create unnecessary com p lication s; and i t i s recommended th a t
S ection 17 be om itted , with the exception o f the sentence in lin e s
17 to 23 on page 3 8 , which should be made e f f e c t i v e not l e s s than three
years a ft e r enactment.
As m odified, Section 17 would read as fo llo w s :
"S e c . 1 7 .
S ectio n 5139 o f the Revised S ta tu te s , as amended,
i s amended by adding a t the end th e r e o f a new paragraph reading
as fo llo w s :
*After three years from the date of the enact
ment of this Act, no certificate representing the
stock of any such association shall represent the
stock of any other corporation, nor shall the owner
ship, sale or transfer of any certificate represent
ing the stock of any such association be conditioned
in any manner whatsoever ’upon the ownership, sale, or
transfer of a certificate representing the stock of
any other corporation.1"
*- (50)
SECTION
-
18
The first part of this section would prohibit any
director, officer or employee of any member bank from acting as
a director, officer or employee of certain other specified
classes of business enterprises.
It would be capable of easy
evasion and would become ineffective in many cases.
The latter
part of the section would prohibit any member bank from clear
ing checks or doing the ordinary banking business of a cor
respondent for any of the types of business enterprises men
tioned in this section.
The language of the section is so broad
that it would include banks within the classes of business enter
prises to which the prohibitions of the section would apply.
For example, interlocking bank directorates would be prohibited,
and one bank would be prohibited from acting as a correspondent
of another bank.
It is, therefore, recommended that this entire section
be omitted.
50A -
It has been clearly demonstrated that affiliations between
member banks and security companies have contributed to undesir
able banking developments.
There are, however, difficulties in
the way of accomplishing a complete divorce of member banks from
their affiliates arising from the fact that a law intended for
that purpose is likely to be susceptible of evasion or else to
apply to many cases to which it is not intended to annly.
There
fore, the Board is not prepared at this time to make a definite
recommendation, but submits, for the consideration of the
Committee on Banking and Currency, a substitute for Section
18 which is designed to provide for the divorce of security
affiliates from member banks after three years.
- (50 B) -
"Sec. 18.
From and after three years from the date of the enact
ment of this Act, no member bank shall be affiliated in any manner des
cribed in Section 2(b) hereof with any corporation, association, business
trust, or other similar organization engaged principally in the issue,
flotation, underwriting, public sale, or distribution at wholesale or
retail on -through-syndicate partiexpation of stocks, bonds, debentures,
notes, or other securities.
"For every violation of this section, the member bank involved
shall be subject to a penalty not exceeding $1,000 per day for each day
during which such violation continues.
Such penalty may be assessed
by the Federal Reserve Board, in its discretion, and, when so assessed,
may be collected by the Federal Reserve Bank by suit or otherwise.
"If any such violation shall continue for six calendar months after
the member bank shall have been warned by the Federal Reserve Board to
discontinue the same, (a) in the case of a national bank, all the rights,
privileges and franchises granted to it under the National Bank Act may
be forfeited in the manner prescribed in Section 5239 of the Revised
Statutes, or, (b) in the case of a State member bank, all of its rights
and privileges of membership in the Federal Reserve System may be for
feited in the manner prescribed in Section 9 of the Federal Reserve Act."
(51)-
SECTIOMS
19
and
20.
It is recommended that Section 19 of the Bill be combmod
with Section 20 in the manner hereinafter proposed; that the combined
section be known as Section 19; and that a new section applicable to
holding companies which own or control State member banks be substitu
ted for Section 20.
Under the definition of "affiliate" contained in Section 2 and
under the provisions of Sections 6, 27, and 28 of the Bill, if amended
in accordance with the recommendations contained in this report, all
holding companies which control State member banks or national banks
and all banks owned or controlled by such holding companies will be
_ _
/]/V'
affiliates of such banks and will be required to make reports of con
dition and submit to examinations whenever deemed necessary or advisa
ble by the Comptroller of the Currency, the Federal Reserve Board or
examiners appointed by them; and, therefore, it is suggested that the
provisions regarding examinations and condition reports of holding com
panies be omitted from this section and from the corresponding sec
tions regarding holding companies which own or control State member
banks.
It is also suggested that there be inserted in Section 19 and
in the proposed new section 20, certain additional provisions providing
for the regulation and supervision of holding companies and requiring
all eligible State banks controlled by them to be members of the Federal
Reserve System.
-
S E C T jlOIIS 1 9
an d
20
C o n t i m e cl P a g e
(52)
-
2
It is,therefore, recommended that Section 19 of the Bill be
changed to read as follows:
"Sec. 19.
Section 5144 of the Revised Statutes, as amended,
is amended, to read as follows:
TSec. 5144.
In all elections of directors and in
deciding all questions at meetings of shareholders, each
shareholder shall be entitled to one vote on each share of
stock held by him, except that shares of its own stock held
by any National bank as trustee shall not be voted, and
shares owned or controlled by any affiliate, as defined
by the Banking Act of 1932, or by any officer, director,
employee, proxy, nominee, or representative or agent there
of, shall not be voted unless such affiliate shall have
filed with the Comptroller of the Currency an agreement in
such form as may be prescribed by him accepting, and agree
ing to submit to and comply with, all of the provisions of
this section, and such agreoiaent shall not have been
terminated.
Shareholders may vote by proxies duly author
ized in writing; but no officer, clerk, teller, or
bookkeeper of such association shall act' as proxy; and no
shareholder vdioso liability is past due and unpaid shall
be allowed to vote.
53
SECTIONS
19
and
20
-
Continued, p a g e
-
3
’ Within a p eriod o f one year from the date o f any such
agreement, each nonmember S tate bank om ed or c o n tro lle d by
such a f f i l i a t e which i s e l i g i b l e fo r membership in the Fed
eral reserve system s h a ll apply fo r membership therein in
the manner p rescribed by, and subject to the terms o f ,
Section 9 of the Federal Reserve Act.
If such application
is approved by the Federal Reserve Board, such bank shall
become a member of the Federal reserve system and shall
comply with all of the provisions of law applicable to
member banks.
If such application is not a proved by the
Federal Reserve Board, or if any such bank shall fail to be
come, or shall cease to be, a member of the Federal reserve
system at any time while such agreement remains in effect,
such affiliate shall divest itself of all stock ownership
or other interest in, or control of, such bank.
’ Except as otherw ise provided h e re in , every such a f f i l i a t e ,
(1) on January 1, 1934, and at all times thereafter while such
agreement remains in effect, shall possess, free and clear
of any lien, pledge or hypothecation of any nature, readily
marketable assets other than bank stock, which shall not
amount to less than 15 per centum of the aggregate par value of
bank stocks held or owned by such affiliate, and (2) shall reinvest
in readily marketable assets other than bank stock all net earnings
(54) SECTIONS
19
and
20
- Continued
Page
4
over and above six per centum per annum on the book value of
its own shares outstanding, until its readily marketable
assets other than bank stocks shall amount to 25 per centum
of the aggregate par value of bank shares held or owned by
it; Provided, however, That, in computing the amount of
readily marketable assets, other than bank stock, which
any such affiliate is required to possess at any given
time, credit shall be given to such affiliate for all
contributions which it has made during the preceding
three years to banks owned or controlled by it at the time
such computation is made.
The term "contribution”, as
herein used, shall include all gifts of money, assets
or other things of value to any such bank, all amounts
paid for worthless or doubtful assets purchased from any
such bank, and such other similar amounts as the Comp
troller of the Currency, in his discretion, may permit
to be treated as contributions.
If any such affiliate shall fail to comply
with the provisions of this section or with the pro
visions of any agreement with the Comptroller of the
Currency made pursuant thereto, the Comptroller, in his
discretion, may terminate such agreement.
-
S E C T I PITS 1 9
and
20
Conti nuod
Page
(55)
-
5
Any officer, director, agent or employee of any such
affiliate, which has entered into an agreement with the Comptroller of
the Currency in accordance with the provisions of this section, v h o
shall make any false entry in any book, report or statement of such
affiliate with intent in any case to injure or defraud such affiliate,
any member barm or any other company, body politic or corporate, or any
individual person, or with intent to deceive any officer of such
affiliate or of any member bank, or the Comptroller of the Currency, or
any agent or examiner appointed to examine the affairs of such affiliate,
shall be deemed guilty of a misdemeanor and upon conviction thereof in
any district court of the United States shall be fined not more than
$5,000 or shall be imprisoned for not more than five years, or both,
in the discretion of the court.
f!To National bank shall, (1) make any loan on the stock of
any affiliate which owns or controls such National bank directly or
indirectly, (2) make any loan to any affiliate which owns or controls
such National bank, directly or indirectly, on the security of any shares
of stock of any corporation owned or controlled by such affiliate, or
(3)
be the purchaser or holder of the stock of such affiliate; unless
such security or purchase shall be necessary to prevent loss uuon a
debt previously contracted in good faith; and any stock so purchased
or acquired shall be sold or disposed of at public or private sale
within two years from the date of its acquisition.
—(56)—
SECTIONS
19
and
20
- Continued
pa&fo
(6) .
'Unless there is in effect at the time an agree
ment filed with the Comptroller of the Currency pursu
ant to the terms of this section, any person, firm,
corporation, association, business trust, or other or
ganization, which shall vote, or cause, direct, author
ize, or permit to be voted, the stock of any National
bank owned or controlled by any affiliate, or by any of
ficer, director, employee, proxy, nominee or represen
tative or agent thereof, shall be deemed guilty of a
misdemeanor and, upon conviction thereof in any dis
trict court of the United States, shall be fined not
more than
000 for each such offense.
Each vote
cast shall constitute a separate offense within the
meaning of this paragraph.1»
It is recommended that, .in lieu of Section 20, there be inserted
a new Section 20 making similar requirements regarding holding companies
which own or control State member banks of the Federal Reserve System;
and it is recommended that such new Section 20 read as follows:
oec. 20.
The Federal Reserve Act, as amended, is further
amended by inserting therein immediately after Section 9 thereof
a new section reading as follows:
*oeclion 9A.
No State bank shall be permitted to be
come a member of the Federal Reserve System unless any af-
-(57)SECTIONS
19
ana
20
-
Continued
page
(7)
filiate of such State bank or trust company, as defined in
the Banking Act of 1932, which owns or controls such member
bank directly or indirectly shall have filed with the Federal
Reserve Board an agreement in such form as may be prescribed
by such Board accepting, and agreeing to submit to and comply
with, all of the provisions of this section; and no State
bcdik shall remain a member of the Federal Reserve System after
one year from the date of the enactment of this act unless
any affiliate of such State bank which owns or controls such
member bank directly or indirectly shall have filed such an
agreement with the Federal Reserve Board.
'Within a period of one year from the date of any such
agreement, each nonmember State bank owned or controlled by
such affiliate which is eligible for membership in the Fed
eral Reserve System shall apply for membership therein in the
manner prescribed by, .and subject to the terms of, Section 9
/
of this Act.
If such application is approved by the Federal
Reserve Board, such bank shall become a member of the Federal
Reserve System and shall comply with all of the provisions of
law applicable to member banks.
If such application is not
approved by the Federal Reserve Board, or if any such bank shall
tail to become, or cease to be, a member of the Federal Reserve
System at any time while such agreement remains in effect, such
affiliate shall divest itself of all of the stock ownership or
other interest in, or control of, such bank.
•
-(58)-
SECTIONS 19 and 20 - Continued Pg\ge (8)
fExcept as ^toviddd herein, every such'affiliate, (1)
on January 1, 1934-> and at all tiroes thereafter during the
membership in the Federal Reserve System of any State bank
owned or controlled by it, shall possess, free and clear of
any lien, pledge or hypothecation of any nature, readily
marketable assets other than bank stock, vvhich shall not be
less than
15
per cent of the aggregate par value of bank stocks
held or owned by such affiliate; and (2) shall reinvest in
readily marketable assets other than bank stock all net earnings
over and above 6 per centum per annum on the book value of its
own shares outstanding, until its readily marketable assets,
other than bank stocks, shall amount to 25 per centum of the
aggregate par value of bank shares held or owned by it; Proyided, however. That, in computing the amount of readily mar
ketable assets, other than bank stock, which any such affiliate
is required to possess at any given time, credit shall be given
to such affiliate for all contributions which it has made during
the preceding three years to banks owned or controlled by it
at the time such computation is made.
The term "contribution",
as herein used, shall include all gifts of money, assets or other
things of value to any such bank, all amounts paid for worthless
or doubtful assets purchased from any such bank, and all such
other similar amounts as the Federal Reserve Board, in its dis
cretion, may permit to be treated as contributions.
!If any such affiliate shall fail to comply with the pro
visions of this section or with the provisions of any agreement
-(59)SECTIONS
19
and
20
-
Continued
Page
(9)
with the Federal Reserve Board made pursuant thereto, the
said Board, in its discretion, i.iay require any State member bank
owned or controlled by such affiliate to surrender its stock
in the Federal reserve bank and to forfeit all rights and priv-uleges of membership in the Federal Reserve System as provided
in Section 9 of this Act.
officer, director, agent or employee of any such af
filiate which has filed an agreement with the Federal Reserve
Beard, as provided in this section, who shall make any false
entry in any
book, report or statement of such affiliate with
intent in any case to injure or defraud such affiliate, any
member bank or any other company, body politic or corporate,
or any individual person, or with intent to deceive any offi
cer of such affiliate or of any robber bank, or the Federal
Reserve Board, or any agent or examiner appointed to examine
the affairs of such affiliate, shall be deeded guilty of a mis
demeanor, and upon conviction thereof in any district court of
the United States, shall be fined not more than i#5>000 or shall
be imprisoned for nop more than five years, or both, in the
discretion of the court.
No
tatc .aoj.ibor bank or .trust company shall, (1) make any
loan on uhe stock of any affiliate which owns or controls such
State member bank cr trust company directly or indirectly, (2)
-(60)-
SECTIONS
19
slid 2 0
- Continued
Pago
(10)
nake any loan to any affiliate which owns or controls such
State nonbor bank or trust company, directly or indirectly,
on the security of any shares of stock of any corporation
owned or controlled by such affiliate, or (3) be the pur
chaser or holder of the stock of such affiliate; unless
such security or purchase shall be necessary to prevent
loss upon a debt previously contracted in good faith; and
any stock so purchased or acquired shall bo sold or dis
posed of at public or private sale within two years fro.'.: the
date of its acquisition.111
*
SECT ION
(61)
-
21
Section 21 deals with branch banking.
It is recoramended that
\
/
the limitations be based on geographical location rather than on state
lines.
By permitting branches to be established with the anuroval of
the Federal Reserve Board within a distance of 100 miles, nany situations
V
if
where communities are entirely deprived of banking services could be
remedied, because banks in neighboring localities could establish
branches there.
At the same time, the proposed restrictions would
\
prevent an undue extension of branch banicing. There is no logical
economic connection between state- boundary lines and the channels of
\
/
trade, and for this reason it would scorn desirable to base the exten
sion of branch banking on a principle that is not connected with state
lines.
The further provisions -
this section regulating the capital
requirements of banks having branches are desirable.
/
\
It is recommended that Socfl^on 21 of the Bill be changed to
&
y
read as follows:
/
\
“Sec. 21.
Paragraphs (c), (d) and (e) of Section 5155 of the
Revised Statutes, as amended, are amended to read as follows:
.
T(c)
Any national banking association, with the
consent of the Comptroller of the Currency and the Federal
/
\
Reserve Board, may establish and operate branches within
f
\
the limits of the city, town or village in which it is
located or in any city, town or village which is not more
than 100 miles distant from the city, town or village in
which its head office is located.
f(d)
I'o such association shall establish a branch
SECTION
21
Continued
Pago
Z
'outside of the city, town, or village in which it is
situated unless it has a capital stock of not less than
$500,000.
The aggregate capital of every national hank
ing association and its branches shall at no time bo less
V
/
•
than the aggregate minimum capital required by law for the
establishment of an equal number of national bonking
V
*
associations situated in the various places where such
.
\
associations apd its branches are situated.
r(o)
Y
Ho branch of any national banking association
shall bo established or moved from one location to another
without first obtaining /the -.consent of the Comptroller of
the Currency and the federal Reserve Board.T"
In order that State m p & o r banks may not be prohibited by the
Federal Reserve Act from exercising, the seme privileges as ijill bo
allowed to national banks under the
amendment, it is recommended
that the following additional section b \ inserted in the Bill:
’
m
x *
sf
"Sec. S1A. Section 9 of the Federal Reserve Act, as amended,
•
/
\
is amended by changing the period at the end of the second param
V
.
graph thereof to a colon and adding the following:
TProvided
That nothing in this Act shall prevent
Y
any such bank which has a capital of not less than
$500,000 and which first obtains the consent of the
Federal Reserve Boa.rd from establishing branches in any
city, town or village located at a distance not more
than 100 miles from the city, town or village in which
SECTION
21
Continued Page
(63)
-
3
/
Tits head office is located: Provided, however, That no
such bank shall bo permitted .to establish any branch
outside of the city, town qtr village in which its head
office is located unless /uch bonk has a capital not
i
loss than the aggregate minimum capital required by law
for the establishment
an equal number of national
banking associations situated in the-various places
where such banks and its branch are situated.TT?
-
(61)
-
SECT1QII 21
If the Co^.iittco on Banking and Currency decides to recoiinond
the enactment of Section 21 of the Bill in substantially its present
I0'"* “"k XiJ suggested that paragraph (d) of Section 5155 of the Revised
Statutes, (vrhich forbids the establishment of any branch in a place vdth
a population of less than 25>000), be amended in order that s..all co.inanities nay not be denied the banking facilities uhich otherwise night
be provided under this section.
It is also suggested that the second
paragraph oi Section 9 of the Federal Reserve Act be amended so as to
place State .e.ber banks on the same basis as national banks uith res
pect to branches either in this country or in foreign countries.
The sentence commencing in line 7 on page
4.6 of the
Bill night
be substituted for paragraph (d) of Section 5155 of the Revised Statutes|
and the following night be added at the end of the second paragraph of
Section 9 of the Federal Reserve Act:
I’.^:rovided? hoy/ever. That nothing herein contained shall
prevent any State -ember bank from establishing and operating
.
branches in the Un ited States or any dependency or insular
possession thereof or in auy foreign country, on the sane
terns and coneitions and subject to the same limitations
and restrictions as are applicable to the establishment of
branches by national banks.
(64)
SECTIOiT 22.
In order to conform to the proposed new Section 21 regarding the
establishment of branches of national banks, it is recommended that
Section 22 be changed to res'
"Sec. 22.
Sections 1 s
*An Act to provide fork
“ "'
s:
Act entitled
iation of national
banking associations,’
Dvember 7, 1918,
as amended, are amende
ing after the words
’county, city, tov/n, o
wherever they occur
/
in each such section, the words ’or in cities, towns,
or villages not more than 100 miles distant from each
other. ’”
- i55-) -
SECTION 23
This section is desirable; but, in view of the fact
that the Federal Reserve Act authorizes different rates of dis
count for different classes of paper, it is recommended that this
section be amended by striking out the word "of” in line
2
on
page 47 and inserting in lieu thereof the words "on 90-day com
mercial paper in effect at”.
SECTION
24
While it is recognized that certain evils arise from
the competitive bidding for deposits through the payment of
unduly high rates, it is believed that it is undesirable to
further regulate by law the rates of interest, which may be
paid on deposits, especially since to do so would place member
banks at a disadvantage in competition with nonmember banks.
It is, therefore, recommended that this section be omitted.
SECTION 25
In the interests of cihfity, it is recommended that sub-section
(a) of Section 25 of the Bill he amended by striking out the period at the
end thereof (i. e., at the end of line 8 on page 48) and inserting the fol
lowing:
Min which such corporation owns or controls a majority
interest.0
It is recommended that the remainder of Section 25 of the Bill
(page 48, lines 9-25 and page 49, lines 1-21) be omitted entirely.
The first part of paragraph (b) (lines 9 to 18, inclusive, on page
48) would seem to be unnecessary because the exceptions in section 5200 are
not applicable to borrowers of the kind described, except the eighth
exception which applies only to loans secured by Government securities.
In so far as the remainder of paragraph (b) and the provisions of
paragraph (c) relate to affiliates of national banking associations, the
exact meaning of the restrictions is not clear; but it is believed that these
provisions appear to be in conflict with those of section 9 of the bill, and
the limitations on loans which may be made by national banking associations to
their affiliates are covered adequately by the proposed substitute for section
9. This substitute contains a limitation on loans that may be made to me
affiliate and a separate limitation on the aggregate amount of loans that may
be made to all affiliates of the same member bank.
In the comments upon the definition of the term °affiliate0 in
section 2 of the bill certain principles were indicated which have been
applied in the recommendations with respect to various sections of the bill
relating to affiliates; and it is believed that these recommendations axe
sufficient.
A
SECTION
(68)
-
26
It is recommended that this section be omitted entirely.
It would apply to all loans on "collateral security” re
gardless of the nature of the security, and would nullify certain
provisions of Section 5200 of the Revised Statutes, including those
permitting national banks to make loans (1) in amounts not exceed
ing 25°Jo of their capital and surplus on the security of shipping
documents or chattel mortgages on live stock, and (2) in amounts
not exceeding 50$ of their capital and surplus on the security of
shipping documents, warehouse receipts or other such documents
covering readily marketable, non perishable staples.
It would
greatly curtail the amount of credit which could be extended by
banks in agricultural communities to farmers, cattle men and
dealers in cotton, grain and other agricultural commodities.
SECTION
27
In order that reports of affiliates of national banks may
be required only when deemed necessary and to clarify the provisions
of the bill with respect to such reports, it is recommended that
Section 27 of the Bill be amended to read as follows:
"Sec. 27. Section 5211 of the Revised Statutes of the
United States, as amended, is further amended, by adding at
the end thereof the following new paragraph:
fWhenever it shall be deemed necessary in order to
obtain adequate information regarding the relations
between any national bank and its affiliates, or the
effect of such relations upon the management or condi
tion of such bank, it may be required under rules and
regulations prescribed by the Comptroller of the Cur
rency to obtain and furnish such reports as to any or
all of its affiliates as may be called for. Each such
report shall contain such information and shall be sub
mitted at such time as may be specified in the call there
for.
SECTION 28
Sectibn 28 of thg &iil ptihjpo^ts to authorize examinations
of affiliates of both national banks and State member banks; but
it is doubtful whether it would accomplish this purpose as to
State member banks, because it amends the first paragraph of Sec
tion 5240 of the Revised Statutes so as to provide for such exam
inations to be made by examiners acting under the jurisdiction of
the Comptroller of the Currency, whereas Section 9 of the Federal
Reserve Act, as amended by the Act of June 21, 1917, exempts
State member banks from examination by the Comptroller of the
Currency under the provisions* of the first two1paragraphs of
Section 5240 of the Revised Statutes.
It has been recommended
above that Section 6 of the Bill be amended so asvio provide
for examinations of affiliates of State member banks; and it
is recommended that Section 28 of the Bill be amended to read
as follows:
"Sec. 28. Section 5240 of the Revised Statutes
of the United States, as amended, is further amended
by adding at the end thereof a new paragraph reading
as follows:
‘Examiners appointed under the provisions of the
first paragraph of this section may examine any affiliate
of a national bank whenever it shall be deemed necessary
in order to obtain adequate information concerning the
relations of such affiliate with such national bank
or the effect of such relations upon the management
- 71 SECTION 28 - Continued. Page 2
or condition of such national "bank. The examiner
making the examination of any affiliate of a national
hank shall have power to make a thorough examination
of all the affairs of the affiliate, and in doing
so he shall have power to administer oaths and to
examine any of the officers and agents thereof under
oath and to make a report of his findings to the
Comptroller of the Currency.
Copies of the report
of any such examination may, in the discretion of
the Comptroller of the Currency, he furnished to
officers, directors or the receiver of the affiliate
examined or of the national hank with which it is
affiliated or to any other proper persons. The
expense of examinations provided for in this parar'
graph shall he assessed hy the Comptroller of the
Currency upon the affiliates examined in proportion
to assets or resources held hy the affiliates upon
the dates of examination of the various affiliates.
If such affiliate shall refuse to nay such expenses
or shall fail to do so within sixty days after the
date of such assessment, then such expenses may he
assessed against the affiliated national hank and,
when so assessed, shall he paid hy such national
hank: Provided, however, That, if the affiliation
is with two or more national hanks, such expenses
k * A
- 78 SECTION
28
-
Continued Page
3
may be a s s e s s e d a g a in s t ,
a ll
and c o lle c t e d from, any o r
o f such n a t io n a l hanks in such p r o p o r t io n s as
the C o m p tro ller o f the Currency may p r e s c r i b e .
the o f f i c e r s ,
filia t e
d ire c to rs ,
If
o r sto c k h o ld e rs o f any a f
o f a n a t io n a l bank s h a l l r e f u s e to p e rm it
an examiner to make an exam ination o f the a f f i l i a t e
o r s h a l l r e f u s e to g i v e any in fo rm a tio n r e q u ir e d
in the cou rse o f any such exam ination, the n a t io n a l
bank w ith which i t “i s a f f i l i a t e d
s h a l l b e s u b je c t
to a p e n a lt y o f not more than $1~,000 f o r each day
th at any such r e f u s a l s h a l l co n tin u e .
Such p e n a lt y
may b e a s s e s s e d by the F e d e ra l R eserve B oard ,
in
i t s d i s c r e t i o n , and, when a s s e s s e d , may be c o l I 'e J k
le c t e d by the F e d e ra l R eserve Board b y s u i t o r
o th e rw is e .
S E C T I O N 29
S e c tio n 29 p r o v id e s f o r the rem oval o f o f f i c e r s
n a t io n a l banks under c e r t a i n circu m stan ces.
It
or d ire c to rs o f
i s b e lie v e d th a t th e re
should be some means by which in extreme cases u n s a t i s f a c t o r y management
co u ld be c o rre c te d through the rem oval o f o f f i c e r s and d i r e c t o r s r e s p o n s ib le
th e re fo r.
It
i s b e lie v e d ,
however,
th a t the power o f rem oval should be
v e s te d in the F e d e r a l R eserve Board as a whole r a t h e r than in a s p e c i a l
committee c o n s is t in g o f th ree o f f i c i a l s ,
one o f whom i s
in g the ch arges a g a in s t the accused o f f i c e r o r d i r e c t o r ;
the perso n b r i n g
and,
in o rd e r to
a f f o r d adequate a d d i t i o n a l p r o t e c t io n to the i n t e r e s t s o f the banks and
t h e i r o f f i c e r s and d i r e c t o r s ,
be made.
It
is ,
t h e r e fo r e ,
c e r t a i n o th e r changes in t h i s s e c t io n should
recommended th a t S e c tio n 29 be amended to read
as f o llo w s :
"S e c . 29.
Whenever, in
the o p in io n o f the C o m p tro lle r o f the
C urrency, any d i r e c t o r o r o f f i c e r o f a n a t io n a l bank, o r o f a bank
o r t r u s t company d o in g b u s in e s s in the D i s t r i c t o f Colum bia, o r
whenever,
in the o p in io n o f a F e d e r a l R eserve A gen t, any d i r e c t o r
o r o f f i c e r o f a S ta te member bank in h is d i s t r i c t ,
s h a l l have con
tin u ed to v i o l a t e any law r e l a t i n g to such bank o r s h a l l have
continued u n sa fe o r unsound p r a c t ic e s in conducting the b u sin e s s
o f such bank a f t e r h a vin g been warned by the C o m p tro lle r o f the
C u rrency o r the F e d e r a l R eserve A gen t, as the case may b e ,
to
d is c o n tin u e such v i o l a t i o n s o f la w o r such u n sa fe o r unsound
p r a c t ic e s ,
the C o m p tro lle r o f the C urrency o r the F e d e r a l R eserve
'7
-
0
ti#)-
SECTION 29 - Continued Page 2
A gen t,
as the case may b e; may c e r t i f y the fa c t s to the Fed
e r a l R eserve Board,
In any such c a se ,
the F e d e r a l R eserve Board
may cause n o t ic e to be served upon such d i r e c t o r o r o f f i c e r to
ap pear b e fo r e such Board to show cause why he should not be r e
moved from o f f i c e .
A copy o f each such o rd er s h a l l be sen t to
each d i r e c t o r o f the bank a f f e c t e d by r e g is t e r e d m a il.
If,
a fte r
g r a n t in g the accused d i r e c t o r o r o f f i c e r a r e a s o n a b le o p p o rtu n ity
to be h eard,
the F e d e r a l Reserve Board fin d s th at he has continued
to v i o l a t e any law r e l a t i n g
o r unsound p r a c t ic e s
to such tan k o r has continu ed u n sa fe
in conducting the b u sin e s s o f such bank a f t e r
h a v in g been warned by the C o m p tro lle r o f the Currency o r the Fed
e r a l R eserve Agent to d is c o n tin u e such v i o l a t i o n o f law o r such
u n s a fe o r unsound p r a c t ic e s ,
the F e d e r a l R eserve Board,
c r e t io n , may o rd e r th a t he be removed from o f f i c e .
in i t s
d is
A copy o f each
such o rd e r s h a l l be served upon such d i r e c t o r or o f f i c e r and upon
A
eft
aJLfrr
jdAAAt+d
,,the bank o f which he i s a d i r e c t o r or o f f i c e r ,
whereupon such
d i r e c t o r o r o f f i c e r s h a l l cease to be an o f f i c e r o r d i r e c t o r o f
such bank: P ro v id e d ,
f a c t upon which i t
how ever, That such o rd e r and the fin d in g s o f
i s based s h a l l not be made p u b lic o r d is c lo s e d
to any one except to the o f f i c e r o r d i r e c t o r in v o lv e d and the d i
r e c t o r s o f the bank in v o lv e d , and no such fin d in g o r o rd e r nor the
eviden ce upon which i t
i s based s h a l l be produced in any c o u rt o f
law except as ev id en ce to punish v i o l a t i o n s o f law under t h is
s e c t io n .
Any such d i r e c t o r or o f f i c e r upon whom any such o rd e r
SECTION
29
-
Continued
Page
3
has been se rv e d as h e r e in p ro v id ed and who t h e r e a f t e r p a r t i c
p ates in any manner in the management o f such bank s h a l l be
fin e d not more than $5,000 o r im prisoned f o r not more than 5
y ears,
o r b o th ,
in the d i s c r e t i o n o f the c o u r t . "
1
(oopy)
Lvatprubl
*
0 Lr+ a r & la£ s • C*)
Ifay T , 1932
*.
CuByiDtilttLALi offvt t- ts:.
VLfcs
the rendition s f w h
H oamrablo Qirtef (Haas, jca®** ti.; *..'^ilsxbiuo© c? ofCi^.i&t*?® #.■•■;.
tfnitod abates Geimttj
IK os& n gton , &• C »
o f th© lhJU
jDear asimtiir (lisasi
• * Iv o o d ti*ii$?
in terest* la rg e ly
i»iiu d ©
O%n® fie ld
Of b*nki r Sines our aoHvor&aticm regaining your b i l l 8* 4412 in
th e ra m in r/hioh i t was introduce’ on A p ril 18, £ have rev^ -od
I ts x>r» iwporumt con troversial fa ttu r e i end 1 a» settin g Sbrth
colow in *rot»ry form ce rta in points in re snoot to width m odifica
tio n s o f tb s b i l l would soon to bo oapoeiidly d esira b le,?.
tU s
. ,Lad inooss w^vHSOftrf bur* AtYILIAidfi. a f f ilia t e s osd upon tho
Kip*rvi* in vieor o f the prooont un settled ©auditions end the "womSed th t
p ra c tic a l probleu* involved in too separation o f secu rity o f. ili* *
o t^ f^ O k TSMber bonks end th*Hr holding aoaptaiiso, i t htis boon th at
auggosted, bad I-th in k tho suggestion hear great iao rit, th at o i l ho
o f tho provisions re m iring divoroo o f o f f ilio t s s bo ausndod so aa
to allow fiv s y#*ra instead o f tfrroo years fo r thU -purpose.
i’h ii
could, be oowwUoiaod by strik in g out the word s'three% and su b stitu tin g
tho word
in oeoh o f tho follow ing, p iao estJ age 8, lin ^ 1 1 1
pegs 37, M ae 17* page 48, U n e ll* and pegs 4b, lin o Id .
, vi
do-n
la t e tlm bdU in d ica te s, tho purpose fo r nrhioh. eauuai-
notiona are to bo m do end reports rm piired ©f o ffllio to a i s to
oseertadn te ftJ te ftl v*bh roopeot t© th s ir rela tio n s * ith wfcher
Honorable Carter Glaee - (2)
V-A !**f' 13S&'^•&■■•>
^
tank. « * the ffoet tf .ueh relation. «Poa the ooadition o^w»h
*Z*'
ta n k .,
heeerer, a .
«* to o -. ^
**
fo rth l a ooetloa * o f the tiJ J so ft 49
having h«l—
„
banking or ehioh do » t - —
fl*M»:** field
» * * »
.a r il* hava « * v > M
*****
upon the condition or aonagowa* «* n8-*0ar
« • a f f ilia t e d , and the W U con tain . w * * * *
•suoiBetiona and W f t . o f a l l a f f i l i a t e , oon ou rr^ tly *« fc * •
•m sdn atien . and re p o rt, o f th e ir . m i n t e d ~ * o r « * * » * « * •
eoold lapoM
harden, apoa a l l
. up. r v i . a *
-U
« -U
—
"**» « *
* * * * * Board r e c o r d that
thae. proviale** of the bill * . . - * » * * * « * *
°f
* *
diaorotion on tho port of the .upervieory a u t h o r i t i m . ^ * ^ 1 ttot
in the intere* of prao ioal ad«U: atratioa thia^ tfWffrai. « »
ehOT m
m
> to aoconpli.h
era
«g «** * face 6 , lines U and 16 , 9 tttt9 « * the oorda V t
* . ..,,,
l8.a than three r^*rt. during ea«h year" and • * * * * » ther^rd.
-w oh re p o rt. a**fae Board .h a ll * m w * - * * ’*
**»
U n . 18* on page d , .trike out all e f t ~ the «ord
t a and including the *ord£.how»" *» U n* Z on* » * V * ? t to
t
,■ *
Page a®, lin e . 1 0 uni U . etrik o put the o l*u » .t*% i*u *e
«at« ldentloal with those ftoed for the wdaatlon
i
nnrobln
\
^
G e r tie
w h ic h i t
;.
(Out - (3)
il »H U l« W l" » «f
6 "! W “
; 1-t;
toga 4 7, lin o 8, otrlfco out tha .words "bo* looo*to»a
^throo rocorto daring o n h S * * 1* * “ *» fona"
word* "#u«h roporto".
n u W t t t iA * ^
In linoo U to 1 7 , la o lu rtv o , otriko out
tho word* " « 0 Of datos id otttioal w ith tooao fo r rt»ioh tho Conptr o llo r s h a ll duria« ftflh year require the noporto o f the ooatUHOB o f tho aaeoeietion'V t: I * U*>*o “
to 28, in c lu s iv e , otrUco
tto en tire eswbooee beginning » ith tho ’Toi-d;"leth* w d ooding
with tho word • t k a m \
to trle ttc a ■■*•.■ >■'* dopriwe eidoM ag Stwso
...„ , j>ogo 48, U m 30, Worths ou t th o word "Inoiude 'iio d r
eifcotitube thoi-efor tho word* "hweo pewor to ■ »!»"* ttod to t —
; CKMAIS i>0SB8& OF IWHOKAI. AW> SSfAfB IBMfldH * •-"» « *
fR. _)y ,-a ,. a i I t * vmeninoue report the F#d«r*l Beoenr*ri»<*r*
reooifauended tho p aieslon o f o i l o f oootlon 15 o f 6 ,4 115 , which
4.
ooatui*od In 6,4412 in w o4ifiod fo r * o* •option 14 , vffc* . *»
which here bean node in th io oootion
o f tho dcord’ o objootion* but no* o i l o f them ,* In -tb i* MlUMlflM*
I in v ito your *fcte»\tion p ortiou lorly to tho elouso ofl pa;;® 34 in
i s to 2 1 , inoluoiw o, whioh would oonfur upon w t io m l *>"nk»
o i l bonking poworo grontod by Stoto low to bonking in o titytio n o
to tho Stotee wharo suoh notional batHa
tho extent expressly forhiddon by Congress.
l*o ato d , o^oopt to
Obriouoly th io olnuoo
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t « t w ith the g e n ia l theory of your b i l l .
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S ^ J S f t A
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jf
«=*.«• banka o f th olr charter rlch ta In oontrarention o f th e ir
understanding o f the M
»P°n which thay were adsoitted to the
Ai^VAilw&iS i.-*^
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aytem, it mat be borne in *ind that it would di.crininate u ^
*
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xnu raaso
TCi'-a'V cc
**♦ comv^iii®«.
-- xq
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m
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to b9 impoted, they eoiu»t ^
a :. &
'•
unified banking »ystea, vdiere re g u l a ^ « JW* *n* ^ eir p; ,• ;yJ?r?
yill is®.*"*-*a no JMMPI flwTlMW w
bo a ll membra? hanlca*
aote* fo r period
n
•
,
... rt •.
:i mty day® when weared ay paper
«rurn it is reooxBoendcd that aaction 1* and the
Therefore, « “ j,- ha...< w ?e..<«ral renervs r..mi:».
olewnt portion of aecUon 5 (b). oont^ned in lime 5 to 10,
Lnclulive, on page 8, bo etrioken out entirely
se
R<%d MOllOn X*'\Ef v* ****^^2
OPEH
MARKET
OPKM MAK
ajdT COMMITTEE
the 3*e.ieral
. i... section
.*.^*4. “
'' '
“■i1l l c**
‘
:i'p lt
? of* thd
b
o*
u’tva
as s®
In «y opinion all of the proposed "Section 12<d}" M
.ic<iirfftti~~3 Oor^vraxloa
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C a r t e r G la s s -
’-r
" /' /
reasons seV forth In the Boards recommendations transmitted with
/ a> ^ l s derived f ron wabscripUo** V ■W«w ^ wt# so m
«*
my letter of ^.arch 29, 1932. If, however, the provisions relating
4-1 h it*1 tn\.i t/- ’ i
-e per
o
^
'"l *“"'v "’
to /the Open Market Committee are to he retained in the bill they
.
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of t‘i« > :x%raX 'ev.; ;- ■
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should be modified by inserting on page 13, in line 16, after th.
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19354} {c, the ssr of i^jL*h^Ovvrf‘.'.*v
">
- * *•» “
*"
word Operations" the words "for system account" in order to avoid
conferring upon this committee functions which it does not now pososxif^iehe * * •»
sell fiJBdn&ve out • tending at euy ene time
seas *ith respect to the operations of individual banks, the exerte t w ic e i t e c e p i t e l ead e e r ^ lu s ,
x t nac e e e «
else of which would hamper unnecessarily the ordinary handling of
open market purchases, by Individual baaKS undar the authority of
existing law.
aSuii-.v.
a a i i v * c o i t a l and. s u r o lu s w- th e c o rp o ra tte n .
*
ADVANCES TO liaSBJEH BANKS
.
1* r.-.:-t,rosSjuiteay $255,000,000 and ite borrowing capacity vpprcAima.
for the reaso db contained in the Board* a recommendations
0 ,0 0 a
P
k t o t a l o f * r « ^ 0 Q 0 ,0 0 0 .
T h is i s
b e lie v e d
wo be f a r
of torch 29. 1932. the restrictions which would bo imposed by section
upon • J g ^ g y ^ Q w A jgSRSJ&e
eliminated, and there should be substituted the section recommended
8
.
•
..
• ■-,:■. a
c a l o f $10o,uA;,00v>. pa .w
■■• *-o
by the Board on page 33A of its report which would enable l^deral re
serve banks to make advances to member banks on their promissory
amount e^i3.al to twice its c uiimax, or,^*® o»*. w
'
notes for periods up to niiety days .hen secured by paper eligible
for rediscount or for purchase by Federal reserve oanis.
i S i f i t t c r M i w h ich th e ie a v d f a i t wouxet »
FEDERAX LIQUIDATING CORPOBATION
... .,^,,5 ... c.!Cr:, u.^.,c»" ■ w viy,-: ipec
.1 b '-.
..
The proposed section 12(B) of the -federal Beserve Act
r.t jfo? *.uiE:. part ox .wo
.«-*
~ 1' ** as s e t o u t i n s e c t io n 7 o f the b i l l c o n te m p la te s t h a t th e f e d e r a l
L i q u i d a t i n g C o r p o r a t io n s h a l l have a c a p i t a l and s u rp lu s composed
,smt
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honorable Cartar Glass — (6)
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o f (a ) funds derived from subscriptions Iff mwberbanks to the « t e n %
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o f one fourth o f one per cent o f th eir net time and decand d ep osits;
(b) one fourth o f the surplus o f the
federal .reserve,.banks a s to f July
1, 1932; U ) the sum o f $135,000,000 to be paid in by the Treasury o f
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the United S ta te s.
In addition, the corporation sould be empowered to,
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equal to t s ic e i t s c a p ita l and surplus,
I t ^as been^estimated that i y
the amount thus required o f member banks would be about $65,000,000
and the amount required o f
th e
fe d e r a l
reserve banks about an equal
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amount.
Thus the entire ca p ita l and surplus o f .thy CG rponftggf^gjl^V,
be approximately $ 2 5 5,0 0 0,0 0 0 and i t s borrowing capacity approximately
1 5 1 0,0 0 0,0 0 0 , or a t o ta l o f $ 7 6 5 ,0 0 0 ,0 0 0 .
Ihis i s believed to be fa r
in excess o f any reasonably probable need3 o f the corporation.
The Board, as you w ill r e c a ll , recommended that the cor
poration b e .provided with a ca p ita l o f $ 1 0 0,000,000 paid in by the
Treasury and authorised to s e l l i t s o b liga tion s in an ad d ition al
t
amount equal to twice i t s c a p ita l, o r . in other words, i t might.have
approximately $ 3 0 0 , 0 0 0 ,0 0 0 o f resources a v a ila b le fo r carrying on i t s
operations, which the Board f e l t would be adequate.
In these circum
stances i t seems unnecessary to impose upon member banks the burden
o f providing part o f the ca p ita l o f the proposed corporation and, as
you know, a great deal o f objection bas been made to the im position^
Honorable Carter Glass - (7)
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a o o u t c -n p lla n .c e w ith
necessity seems to exist for retiring the federal reserve banks to
subscribe to the capita! stock of the corporation.
On the other
hand, the provision permitting the 'Oderal reserve bae.cs to pur chase debentures of the corporation, as recommended by the Board.
sould be helpful to the marketing of the corporation's obligations.
It is therefore recommended that on pages 15 to 18, in
clusive, all of paragraphs
(c),
U ),
(e), (f)
and (g) be stricken
out and that paragraph (c) on pages 23 and 24 of the Board's report
be s u b s titu te d .
In this connection,
pn
page 23. in lines 12 and 13.
the words "and the amount authorized to be appropriated
paragraph (c)
of
pursuant to
this section" should be stricken out and the word
- wstockw substituted therefor.
PUBLICATION OF EXAMINATION REPORTS
•
While it is not one of the more controversial points in
the bill, it is believed that careful consideration should be given
to the elimination of the last two sentences of section 24(a) of the
bill, which appear in lines 5 to 13. inclusive, on page 49. and
which would authorize the Comptroller of the Currency to publish
reports of examinations of member banks and their affiliates in
certain oiroumstances.
This is a drastic power which, if exercised,
would have a damaging effect upon the banks involved and their bor
rowers. and perhaps upon general hanking conditions.
Furthermore.
It is inconsistent with the confidential nature of reports of. exami
nation. Under other sections of the bill adequate powers are given
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aorable Carter Glass - (8)
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to the Comptroller o f the Current to bring about compliance with
his requirements, including particularly the power to remove
o ffic e rs and directors.
4
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?0r your «o“y «ie o c e . there is inclosed a copy o f b i l l
J‘
‘41:; :ho* ing the changes discussed in this le tte r.
Very truly yours,
CCM
5^
( Signed) Sugene Meyer
*+
Governor.
a>
tx
Inclo sure.
@FedFRASER