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To. 181
Office Correspondence
To_.
FEDERAL RESERVE
BOARD
/
Date. I e ruary 9, 1935.
Subject: Reason? fg>r and against
ments coni
flnvornnr
the
General Co
Tom.
Dear Governor Eccles:
i am handing you herewith for your information a
memorandum which 1 prepared very hurriedly Thursday night at
the request of !.!r, Szymczak, which states reasons for and
against the amendments contained in Title II of the Banking
Act of 1935.
I did all of this in about five hours and, therefore,
it necessarily is not a very thorough or satisfactory job. However, it may be of some use to you.
I am sending a copy to
Dr. Goldenweiser.
Respectfully,
Walter <«
General C
nsel
February 7, 1936*
r.
Stymosak
Mr*
y a t t , J<m*ral Counsel,
Reasons for and against aaemUaents
contained in Title II of tha Banking
Act of
Dear Mr* Ssymeiaki
In aeoordanea with the request oontained in your memorandum
of this date, I am handin,; you herewith a "list of reasons' for and
against the amendments to the Federal Reserve Jot propose* in Title
II or tha Banking
ot of 1986*
I had so many Interruptions during tha day that it was
impossible for ma to start on this until after dinner tonight} and,
In view of the faot that you want it by toacorow morning, the time
is so limited that I oould not do a very thorough or satisfactory
job*
However, I sincerely hope that this will Bmnf your present
purposes and that, if you desire something more elaborate, you will
not hesitate to oall upon ma tor it*
I understand uhat this is for your personal use onlyi and,
for reasons which are obvious, I shall appreciate it if you will not
quot* it aa «xpreaslng my views one way or tha other*
It la not in-
tended to represent my views but only to lndioate tha prinelpal
arguments whioh, in my Judgment, oould be made for or against eaoh
proposed amendment*
Respectfullyt
Afelter yatt,
Ooneral Counsel*
Attachment*
WWimw
J
XT8 FOK AMD A iAIHST A¥HirW»T8 TO
AAL Kl&Sivtffc AC! COHTAIW&. I*
TITLE II
... ANXDR ACT
v <otei .he v a r i o u s aMndaants are d l t e u s t e d bv t o . i c a
i n MM order i n which they occur i n t h e mimeo
hd
of T i t l e I I . )
! •
j
_ .
Abolish the offloe of Federal reaerve A^ent and combine the
offioet of Chalrcex oi the
oani of vireetor* aad Oorernor at the ; eoV
• ral reserve banicsf appointment* to i-m made annually by the directors
of oach bank subjeot to ^p.roral ^y the federal iieeerve
oard.
Hie
.'orernor to be the chief executive o l i i o e r of the bank, thainean of
the
card of *Arectort, and a I lass o director*
A Vice -overnor to
e selected in the ease manner and to ^eriorm the executive function!
of the >o/ernor in hie abseouoe*
The Vice Governor iaay also be a C l a s t
C director and nay be api-ointed as «-eyuty
r.einaan of the
oard of
irectors \ eo. 201, pp* f&*40)»
r /uaents for the
roposal
This proposal would increase the efficieney of the or, anisatlons ol the
eceral reserve banks, by doin,;;. away rith the present dual
or,;anisatlon (uuder w ioh the responsibility for the y. ank's operation i s
divided between the
overnor end the >.hairmaa) and substituting a single
d-V
-
2 -
head w o . d l l be responsible for a l l or the operations of the
uank and for i t s personnel, and woulci «l«o have the power and responsib i l i t i e s of the <A airsan of t r e
oard of directors*
interest i f economy by cli; 1 runt in
It would
BTT9
the
one of the highest salaried o f f i c i a l s *
I t would be in l i n e with the intent of the o r l i n a l
•coral
©serve
ot,
which contemplated a ein 1© executive head of the bank in the person of
the l e t e r e l ****rr* ngent*
y requiring; the i/overnor to be apj-ointed
annually and raaicin.- his appointment su Ject to api roval by the I •coral
**trr% .oard, V. e
oard's control over the actual operations of the bar.xs
would be strengthened*
ihe ar^unsnts in favor of a rice 'overnor to per-
form a l l of the executive functions of the
overnor in bis absence are
obvious*
tta A; alnat the ; ropotal
The proposal would weaken t.he control of the I eceral Ifje
oard over the >ed«ral r^Bwrrm banksj because i t would deprive
the
oard of i t s ensn representative, the i eceral Reserve A^pi t , who
i s appointed by the
oard alone and wl.o i s now requirec by lew to
maintain an of f l e e of the
oard on the preMlsee of the
bank, to make re /ular reports to the
functions as the Joejrd raay require*
eceral
r9»9rr9
oard, and to per lorn such other
ielnc i n i t i a l l y selected hy the
directors of the lederal reserve bank, the
ovemor would be more sub-
servient to the other direetortt than he would to the > © eral
uwrr*
x>ard, which only would hare the power to approve or disapprove hie
appeintsient*
oreover, by requiring the
oard to deei^-nate as a
l a s s 9 director the person selected by the directors as /ovemor i f he
i s api roved by the x>ard tor that of1ioe, the smendnont would deprive
the
card of the power to a n o i n t one t i the three directors now appointed
by the Board*
eserve
oreover, i f the Visji -overnor be d«»l<*rnat«
oard as a wlass G director, the I eueral
represented on the
esorre
by tho I-eoeral
oard would bo
oard of - irectoro by only one Class C director who i s
not selected i n i t i a l l y b : the other d i r e c t o r s .
v member of the
card ui directors of a reUeral rea^rv^ bank*
oxoept the >creraor and vioe cioTernor, & -all hold oil i c e for more ti>an
s i x consecutive ; oars.
I ee« 201, p« 40, l i n e s 1V-22.)
lor ti • xropusal
i ovidin u lor rotation in o f f i c e , this ; ropcsal would bring
rresh ideas and fresh viev v oints into the managenamt of the banks fro* t i c
to ti e and woulu prevent any one viewpoint or ar.y one interest from ob*
talnin v , toe strong a fouthold*
i t would iurnish an easy m ens 01 elinina*
without estf arrassaeat directors who have outlived their usefulness
bat wouK not prevent the re-«f. t ointncnt oi' especially a l e directors
after U.ey had been off of the board ror at l e a s t a year*
. u«>oat against the
ro^posal*
is aaendsent vould dsjfrlvl t i e
e«:eral reserve banks
oi their most e tarleWttf snd desirable directors, riM have renainec on
the boards of directors for nany years .clause cf their deep interest in
- 4 -
the affairs of the Federal heserre ty-stew and thair devotion to Its
oerrioe.
H would cake for lea* stability and continuity in tho bank's
management and would weaken th# adherence to hi-^h ideals and sound | rlnolples w.r ioh is inoid«ntal to tho Ion,; service of nan of hl»h character.
.
Li <X/*T
,••
quail 11 oations
•Oeral . asarva
-
A . r
of future ai, ointive n«nbors ci tr.a
card by ^roridin^ that they Ahall be well qualiiiec
•due*tion or ex^erionce or
oth to participate in tho fortaulation of
national economio and aonetary ix>licies«
Ake the ,reseat ~ec<r*: hical
limitations inapvlioable to the selection of future
oyeraorei*
re vide
that the •overnor'e sMBsbaxship on tho ©ajrc shall expire ,v #n he i s no
l o n e r design*: en as Governor by t i e :'resident» ( >.ction 207 [\)t
41, 42j ; ection 20?
its lor the
ra
ee
I , psjgi 45.)
ropcaal.
I present requirement that. In solectin., the s i x apj, olr tirm
neabers of the
card, the
r siuont siiall "have due rar*rv to a fair r%pn
sentation of the financial• agricultural. Industrial
worests t and
nd coctnerrial in*
©o: ra.l.lcal c i r i l i o n s ox the oountry" i s 1 proper because
i t indioates t i a t the
oard Members are e:rpecteC tc r*.; resent epeeial
interests or special parts of the oountry, whereas they should represent
the entire ocu t r y .
ihe present law contains no requirements aa to
qualification by education or experienoe« which Is relieved woulC be
aore appropriate than the requireraent that the oard nearer* represent
oertaln opeolal interests*
- E In selaotin^ the
>or«rnor the i resident should be free to
seleot the beat nan fron the entire country and sr.ould not be prevented
finm fr.pi'ointin,; the mn of hie cVcloe ceoause he happens to be from the
taste d i s t r i c t as another necnber of the .card*
The 'orernor should serve at the pleasure of the
reel dent, in
crd^r that he »i£ht always *-• i a sy?q>athy with, toui responsive t o , the
neeas of 1^ie adadni s t r a t i on*
the > reposal*
o proposed new qua!illoatIons of the aenbers oz the card
are of no importance beoausa they are va.;ue and will not prevent the
Iresiccnt fron appointing anyone he chooses to appoint*
ith only five other appointive issevbers on the oarc, tie
I resident always has seven Federal rm^wv
districts fron which to
select a -ov«rnor, and, irom this wide iiold, should always be able
to select the proper k:ind of nan to serve as overnor of the card*
To have the Governor of the oard aerve *t tl;e pleasure of
the
resident would make him distinctly a pollt oal appointee and woulc
make it more ilf ioult to incuoe suoceceful nen of independent Judnent
to accept the position of Governor*
it would aake the oard less in-
tiependent and less biased in its decisions and would make it les« like
a n5.uprerae Court of . ina.;ce"f tvhloh it was intended to > e, and more like
a politically mindec department of the Government*
It would increase
the dan er that the oard*s decisions on important econonio and financial
questions affeotin,; the entire country would be influenced by political
considerations*
- u 4.
j * _ _ _ ; IS AHD RETIR8M
.
Increase the salaries of future appointITS members to '15,000
per annum, with compulsory retirement at seventy on a pension of
12,000
pmr annum* Make present numbers e l i g i b l e for retirement at seventy.
1 How proportionate pensions for those who have served for more than
f i r e or l e s s than twelve years or whose terns expire after they hare
reached the age of s i x t y - f i v e and who are not re-appolntei. ( eo. 203
( * ) . PP.
i r^uaents for the Proposal,
Increasing their salaries and providing retlreaect pay for
Board menbers would make It easier for the "resident to obtain the
services of persons of a b i l i t y and high ohareoter whose personal fortunes are not sufficient to enable then to l i v e In ashin^on in
dignity end oorafort on the present salaries of Board members.
It
would make them more independent and more willing to nak» a life-time
career out of bein^ members of the Board,
Compulsory retirement at
seventy would prevent raembere from continuing to serve after they have
outlived their usefulness*
fr&maents against the Proposal,
The small increase in salary proposed i s not sufficient to
sake the position more attractive to nten of the right kind and the
salary i s not enough to enable a member oi the Moard to l i v e in "eshlngton In a manner ooomensurate with the dignity and importance of
b
- 7 his position.
A'hll* the pension would be ton* added inducement
and comfort to awn without dependents who desire to devote their
l W t i to service on the Board9 i t would provide no protection to
the wife or other dependents of such member*
:>amm men render t h e i r
beet service after pasting the age of seventy and the ooapulsory
retirement provision would prevent such men from giving their best
years of service zo the Ljoard*
5.
The Board shall be empowered to delegate speeifio powers
and duties to designated members of the Hoard or officers of reoresentativct of the : o a r i , bat shall not delegate the powor t o determine any national or system polioy or to nafce rules and regulations
or try power whioh i s required to be exercised by a specified number
of members of the board* (Bee* 204, pp* 48, 44)*
for the Proposal*
This proposal would enable the . oard members to <ilride up
themselTss the performance of many routine hitiea or to delegate
such duties to meiabers of their staff or to representatives ut the
Federal reaerTe banks, thus leaving each member of the ?oard much more
tine to give consideration to the .aore important questions of national
fend i>ystero polioy whioh deserve careful thought and thorough study*
It i s contemplated that the powers BO delegated would be exorcised in
ftoeordanoe with general regulations or polioies laid down by the .'joard.
- 8 -
•o that the only thin^ whloh really would be delegated woul * be the
power of applying the Hoard's £enerel p o l i c i e s t o the faota of
speoifio oases.
The board would formulate a l l national or
ystexn
Dolioies but would be rellevwd of the burdan of pasting; on individual
©•••a.
against tha Proposal.
Con^raaa oraatad a Hoard baoausa nany of tha power a and <iutl«a
undar the Fadaral Haaarre Aot ara too important to ba entruated to aln^le
indiyidualat »n^ the proposed aaendment would enable the Board to delegate oany very Important powera to indirldual member« of thn Boari or
•rmi to empsoyeea or representatives of the Hoard, who *re not apoolnted
by the /resident or oonfirned by the Senate.
The Hoard sight beoome a
mere flexure head under t h i s arren^emant.
6.
0? :N ^AP.KiCT C>' ITT
Amend aeotion 12/ of the federal Z«B*rrm Aot nn as to proTide
for an open market oorsnittee oonslstln^ of th* -overnor an-*, two other
member a of the hoard elected annually by the Board, and two ./error nor a
of tha federal reserve banke eleoted annually by the governore of the
Federal reserve banks*
rive thia o o m i t toe the power to determine the
open market sollaiea of the Federal
eeerve jyater. and make auoh polioiea
binding on the Federal reaerve banks without •rjproval by the federal i-eaarve Board* All open market operations of the federal reiierve barJcs
would be subject to regulations preaoribed by the
V
9rieral I^eserve Board*
The ooanlttee would make reoorwendations regarding diaoount r a t e s |
but th« power actually to f i x iiioh rtitea would b«i l e f t in the directors
of the redorel reserve banks# subject to the review and determination
of the Federal Reserve Board at at present. (Sec. 205, pp. 44,46)
Arguments for the
ropoaal.
The preeent naohlnery, which provides for an open narket
ooauittee consisting of representatives of eaoh of the twelve federal
reserve banks whose reoomaendations autt be approved by th« Federal
Reserve 3nard before they beoome e f f e c t i v e i s too slow and ounbersome•
The proDosed new boosaittee would be more e f f i a i e u t and could aot aore
promptly* because It would be a
be f i n a l .
SJS*11
eoavnlttee and i t s decisions would
l i i l e the final authority would be transferred from the Fed-
eral Hfiserve Hoard to a oomaittee consisting of three members of the
3oerd and two representatives of the :ederal reserve banks, i t would
be consistent with the principle of the original Federal i'.eserve / ct
t;hat there should be a central body in ; nshin ,ton charged with tho duty
and {-iven the power to co-ordinate the a c t i v i t i e s of a l l twelve Federal
reserve banks for the purpose of carry irv; out credit p o l i c i e s effect In .
the country as a whole.
Ars-iaants against the Proposal.
This proposal would deprive the Federal
es«rve -'.oard of I t s
aost iaoortant function and would greatly reduce the Board's power and
oresti^e.
'laving a majority of the oo trait tee raembers of the ik)ard would
- 10 not correct t h i s d i f f i o u l t y j bec«use (a ; the three members of the
Board who are on the coxemittee might vote for a policy wh<ch the
other five member• of the board are opposed t o , or (b) conceivably,
one Board member and the two bank representatives ai^ht put into
effeot a polioy whioh th« other seven -members of the :5o*rA. would be
opposed to*
Since the final power to fix discount rates would remain with
the Board, t h i s might lead to a situation whore the Coetnlttee would be
striving for one result through open market operations, whil« the 3oerd
as a whole would be striving to prevent the same result through i t s
rate policy.
3ivlng the Committee the power to determine open narket o o l l o i e s
but leaving the board the power to proscribe regulations t;oyerninf; the
open market regulations mijht lead to hopeless conflicts of authority•
Vcreover, a oojBBittee such as that oroposed could not be as
independent or unprejudiced, or as well equipped, as the Federal
•-
serve Board to reach final decisions en matters of such tremendous
importance to the entire country*
Subject to such regulations as the federal
9G9TT*
!ioa.rd may
prescribe, «ake any oosaBarelal, agricultural, or industrial paper e l i gible for rediscount by
odaral roawm
banks and authorise ] nderal
reserve banks to natee adranoes tc their nember ban'xs on their promissory
- 11 notes secured by any sound a s s e t s of suoh
r banks. (See. 106,
pp. 4ft, 44).
Arguments for the Proposal.
The present e l i g i b i l i t y requirements are t h e o r e t i c a l . Impractical
and entirely too t e s h n i e a l . tfuoh of the paper that i s teohnioally e l i gible for redlseount i s not good froa a oredit standpoint and much paper
that i s not teohnleally e l i g i b l e for the rediscount i t oerfeotly good
from a oredit standpoint*
The result has been that Federal rmtmrtm
banks frequently discount e l i g i b l e paper of doubtful value and take
Ineligible paper as additional collateral*
This Is a senseless pro-
oedure whloh has wade the federal reserve banks appear superteohnleal
and soaetiacs ridiculous*
The changes in our eoenoale l i f e and in our method of doing
business whloh have taken plaee slnee the Federal Reserve Act was
passed have greatly reduced the amount of e l i g i b l e paper in the countryj
and many member banks do not have enough e l i g i b l e paper to enable them
to obtain reasonable oredit aoooamodatlons froa the Federal rmamrrm banks*
Moreover , in 1982 i t beeame neeessary to make any a s s e t of a member bank
e l i g i b l e as security for a loan froa the federal reserve bank in time of
emergency and the Reconstruct ion Fineno• Corporation made raeny of the
loans to member banks whieh the federal rm^mrym banks should have made.
If t h i s amendment i s enacted, the Federal rmMmtf banks oo Id
uorfora their functions auoh more e f f e c t i r e l y than they otn under ex-*
istin^ laws and i t would nab be neosasery to enact special l e g i s l a t i o n
- 12 to meet an emergency*
It their director• and officer* continue t o
be at empable and conservative as they hare been in the past, the
Federal rm—rv
banks w i l l net aequlre enough alow a s s e t s to effeot
their liquidity to any appreciable extent*
Argument* against the Proposal*
The proposal i s inconsistent with the theory of the original
federal Reserve
ot that the reserves of member banks should be i n -
vested only in short tern, ««lf-liquidating, business paper growing
out of current business transactions, so that th«
VOIUOA
of Federal
reserve credit in the market would automatically expand and contract
In response to the changing needs of business*
Furthermore, i t would
mmke i t possible for the Federal reserve banks, i f poorly managed, to
t i e up the reserves of the member banks in slow assets which could
not be liquidated i f the ne«d arose*
If i t i s improper for banks of
deposit to t i e up densuid deposits in slow loans and capital a s s e t s ,
i t i s juuoh more improper for the reserve banks to t i e up the reserves
of commercial banks in euch assets*
If t h i s should happen, the next
depression might wreck: not only a l l of the member banks but the Kedertl
reserve banks as well*
8*
,
. .v>-
OHLIUAT;
Tir.
Amend Seotlon 14 of the Federal Reserve Aot so as to make
e l i g i b l e for purchase by Federal reserve banks, without regard to the
- 13 etx
ontha' aaturity limitation of the present law, all obligations
whioh are fully ^uarenteed by the nited States as to prinoipal and
interest. u«o« 207, p. 46).
for the *roposal»
Inasmuch as bonds and notes whioh ere direct obligations of
the
nit ad , ' i ^ t u ere now e l i g i b l e for purchase by Federal reserve
banks without r*£ard to thair Maturities, i t seams inconsistent and
unnecessary to penoit obligations whioh are fully guaranteed by the
M
nited /tates as to prinoipal and interest to be purchased by ; ederal
reaerTe banks onjy when they hare asiturltles frost the date of purohnse
not exeeedin,, s i x months*
The credit of the ^overtnsut i s pledged for
the l a t t e r just as nuoh as for the former*
Arguments against the
roposal»
Federal reserve beaks o\i£ht not t i e up their funds In long
term investaunts| and t h i s anendaent simply adds to the e v i l s of the
present law by nolar^in^ the c l a s s of long teru securities whioh the
Federal r^twv
ben<s may purchase*
9*
FKD&RAL RB8IBTS
Abolish altogether the present requirement that Federal reserve
notes must be seeured at a l l times ty the specific pledge of gold oar*
tlfloates or eligible paper with a face value not less than the amount
of Federal reserve notes outstandin^i repeal the prohibition against
- 14 one Fsdsral reserve bank paying out the notss of •ncthorj and abolish
•any of th« present technical provisions regerdin ; the issue, redemptlon and retirement of Federal reserTs notes* (Sea* 208, pp. 46*48).
Arguments for the Proposal*
The present requirement that Federal r***rv
notes be secured
by not less than a like amount of gold certificates or eligible paper
adds nothing to the value of suoh notsst beoause they ere also obligations of the United States and oonstitute first liens on all of the
assets of the Federal reserve banks* The Federal reserre banks would
always reoeiTe something of equal value for all Federal reserve notes
paid out and the holders of the notes would have a lien on these and
a l l the other assets of the Federal reserve banks without tho needless
red tape of the Federal r^mrm banks pledging collateral with the
Federal Reserve Agent* Moreover, this requirement and the aooompanylng
teehnleal provisions regarding the issue and retirement of Federal reserve notes involve a lot of red tape whioh results in delay and suoh
needless expense* The prohibition against one bank paying out the
notes of another is of no praetloal value and involve* much useless
labor and expense*
In the reeent emergency, the Federal reserve banks found thenselves without sufficient eligible paper to secure their Federal reserve
notes at a time when the country was faoed with a drain on i t s gold.
and i t was neoessary for Congress to pass an emergency law authorising
- 16 the :*deral reserve banks to pledge >ovemraent bonds as c o l l a t e r a l
for
oderel reserve notes*
A repetition of such en emergency could
be avoided by eliminating the collateral requirements*
•n the whole, t h i s amendment would greatly simplify and expedite
the issuance and retirement of Federal nBirrm
notes and would elimin-
ate aueh needless trouble and expense without impairing In any way the
soundness or seourit^ for the <ederel reserve notes*
The propose:\ araendfwmt would retain the requirement of existing
lsw that the '««4eral rnaerr*
banks maintain a reserve of 40 pr
oent
in r,old o e r t i f i o a t e s against the amount of Federal reserve notes in
aotue 1 circulation, fent! t h i s is the only oheok needed against an overissue of Federal reserve notes.
Dti Federal reserve banks oan now issue Federal raservo bank
notes against which th*y are require* to maintain no reserves whatever
ily a redemption fund of 5 per oent*
against the
roposal.
yy elimiTiatin^ the requirement that Federal reserve notes be
secured Lv «
I ooTr.eroial, agricultural and Industrial paper, we
would abandon the theory of the criminal 'ederfcl
eserve / o t that this
requirement oauses the volunt* of notes outstanding t o expend and oc-tract autoinatioally in such a way as to eoaonvnodate i t n e l f to tho needs
of le^itiinate business*
ihis a
sthor with tho axendntent
lshin,, the restriotions upon th* c l a s s e s of a s s e t s whioh ;'edepal
reserve banks nay discount or accept as security for loans, would wake
i s oossible for the federal reserve t
issue a lar « volune or rede-
erve notes
» speculative era to
loan*
speculative securities or ;nortv>%;«« on speculative real estate % end
the oollapse of such a speculative boon mi;ht find tto >edernl
banks without oeens of rodeeming their notes*
i\xoh urgimmt
against tho ,**o posed e>uendn\ent oeulrt also be
based upon the abolition of the redemption fund and auoh of the 3*ohin-ry
Tor the redemption of federal rmiwv
notes] but proTislo B for redemp-
tion are rteanin^less under the iaresent law, as anended b^ th«
old He*
3erve i ot %t li^M, because -ederel reserve rtotes are mm redeemable in
*ny oth<r kind of lawful aoney, v.hitoh sisply xoeans er-ohati^in^ one kind
of ourrenov for another*
10.
^_
__
hmmnd the sixth paragraph ef section It of thf»
^der»l
orerre
. ot as a.uended by the Thosms Amendment so as to permit the Peieral
tmrrm <>ard > inhoub th« approval of the
«-
resident und without declaring
the existence of an emergency) to decrease th« reserve requirements in
order to prevent Injurious credit contraction as well as to li crease
th« reserve requirements in order to prevent undue expansion of c r e d i t .
)3. 2U9, pp9 4a, 4 9 ) .
for the
roposml.
his amendment wrel;/ c l a r i f i e s and roakes oore logical and
workable a provlsioti at existing law wliioh was added to section 19 by
the Thomas mendiuent;.
tt i s a very important sSLfo^uard ii.tJniiiat i n : l a -
, because lc t,ives the /ederal
f
<»«rr-
yatHBi a deans of absjef
- 17 tho lar»,e amount of exotcn reserve* now possensed by th« member banks
and thus pleoln^ i t s e l f in a position uo exorcise * restrain!:!,, i n : 1aenoe on any tendency toward credit i n f l a t i o n .
Till* the present
lew authoriies the board t o increase or decrease the rcnenrt
«*ntt # i t authorii«« It to <*o so only what* wi aatr^snny nxi»t« "by
reason oi or*dlt •xpanalon1' > wh«r««« a l»or»».« In th« renerre
tMQtt ai&ht b« th« r«ka«<iy for »n undu* ore Ut oontrfcotion but would
only add to the p o s s i b i l i t i e s of undue ore l i t expansion.
The removal
of the requirement t)»t the "resident appro"** suoh aotiou on the part
cf the Soard would r e l i e v e th«
resident of much p o l i t i o s l embarrass-
aeat i: i t should beooiee neoessary to increase the reserve requirements
rder to eheo< inflation*
against ths* 'ropoaa
ic oould be ert;ue4 tha^, Instead of inoreasln,. ths board's
power in fchll respeot th« present provision of law on tl i t *ubj«ot
should be repealed} because i t i s too drastic and gives tb» :;oard rjore
power over the eoononlo welfare of the oountr^, anri the private property
rights of the a«r.>>er banks than ou^ht to be entrusted to any body of men
exoe?t Congress with the approval of the President.
11.
i
. .
•:cn,r:
•
:,.-*
"
~r'
BMil July 1 # Xti'M, authorise the .->4«ral lieaervo \ ourd to ndtnit
Insure-! nonmember banks to membership in th<« Vederal ;iaerve
out ooaplyln,^ with the capital requirements of tho reder&l
ystem withoserve /.ot 9
but require suoh banks to comply with such requlreiaeuts within such
• li
-
period or pericda after admiaaion aa in the board's judgpsent ahell
be reasonable In view c.*1 n i l of tha olrouaKtaneea. ( oo# 202, p« 4 1 ; .
Argument. 8 for the Proposal.
In view of the prohibition a,-«inat inaurin*, the deposit a of
noriaeabar banks after July I , 1937, and in view of the fact that
shoueande of nonaember banka have Insufficient oapitfcl to cmkc them
for o^«iberahip# thla requirement la iieeeaear/ in order to atcW
; another b^nidn , eriaia on or ahortl. before July 1, 1937, aa a
reault of th« lapau of the Insurance of depoaita in au«h nomveniber banka*
In f a c t , without thia proviaicn i.on^reaa probably oould r.ot realat the
preaaure to *&enrt the law ao aa to permit nencaember banka to enjo;' the
benefita of inauranoe permanentlyj and thia woula defeat the object of
bringing abcnit a unified banking ay a ten, without i»hioh we can nerer
have a aatlafaotory banking ayatem in thia countr .
Arguments a^aiaat the tropoaal.
One of th« oauaea for the large number of bank failure* in the
country waa the existence of a large number or' anail 1 banka which were
boo reek and too poorly naanaged Lr aurrive the Yioiaaitudea of an
eoonomlo depreaalon*
Con^reaa reeognised thla fact when i t inereaeed
the aininua capital requirement for the organisation of national Lanka
and for tha admlaaion of state banka to m<*mberahi? in the ; eder&l ! # •
nerve
yate/i froa £.25,000 to ^50,0<X>,
admit to .Tiemberahip in the
ederal
The proposal a.nendnent »oulr«
o«erve . yates\ banka with a enaller
oaoital than >26,000 or eren with no capital at a l l | and thla would h*
diatlnetly a ate
backward*
It would tend to weaken it*
Inatead of atrengthenin f ; our banklr,-. ayateat
- li -
12*
i.;
Anend section 24 01 the i-cc'eral
•••rve
ot so a* to - o r d t
national tanks to make real estate loana on an amortisation basis lor
periods not exoeetii:
.ears and in amounts not c.tceecin
• Uie oi
rtftrtyt
^e.eal
75 per cert
Le*2 l i ttntion at to
the location oJ the real estate areinot ri >-}. national ranks may "take
loans*
a the limitation 6n the a
rotate account o; real estate
loans ablefe nay be made lr national . anks so that
h© a. rebate anuu
eal estate leans t l u s other real estate \e.*national .ank 6 / a l l not erceet
Mk ^reniseit) held
sr :&rt »1 He trim * e] c e l t s
er.t ol i t s oaj i t a l «•. <) surplus^ w: lohever ie the
reater*
requirenez:t t! at a l l roal estate loans . e secure
Pft liene, but ^.erait seoond aud subsequent lions to
1 oans
reviously oontraeteu in , oc«J i- 1th.
-
by
e taken to secure
d state t H N r
anxa
. -eral - eser/e • yat«n to make real cstato loans excei t M vhe
•azae ex cent
are
er
u s^ime ter I
tions as national
or. t o - to do so* Ueotion t&0«
i .. w- i a ic?r the
II -
1)
rope sal
In order tc
«jik orex.it to m
stimulate bu&inessv i t i s necessar.
amortiiec loan equal
,
.ov! e onployment and
iberalise the terms upon vhieh
national bsnki r;iny make roal estate loans*
«nks
'
-an thai*. «. l i v e year loan eq.<
n the -tt.clc, a ttrenty-ycar
bhe
operty ie a
r cent oi the value o£
0 the ^roperty Which , atures all at one time m*i vw ioh tends to becoo« a
i'ermano:.t loan renew*., at each fj%saTl%«
a banl»fs real estate loans
*ere nil on an amortised t<as)s, i t coulc, '7 not I
tin
oosjtjil
of ivayri«nta on tuch loans, .;rei.ually rocuoa i t s iiwofiwrnant in loana ol
this typa9 ir.Btt.-ail of atte^ptir
« l l « o t th« «r.t;ra anount ol .
loans wlUt oonsaque^. .crdehl^a en
; al
urrowaru and uacoorali cation oi real
oatato narketft BJM values.
e ^roposei! increase in tlie a._r«_ato ««xu t of loans Irost
t:
I
.
|
er o«vt of t i n e ie; osita i s not very •ttorlftl
r r»ftl oatat© i s includes in o<nr»^ulin
tation wou
M *u I
loans
a prafi
o;cistir;
re/'
.
ar.is to take seconc Hi
o/.trttrtoc in
uelvee « uinst lose on louit.
1
.quent liens
1
1
. »s Ion. been in effoct tad 1
lo&ns Hbsi
lav
r real ostate*
• r \ 1. national
to
-, ' .t ":\ i -
tuoh rv.ro effective
M .
v ,
-
.9%
daka to
:ro-
arc net essential
state
er r.&r: ire no add!tic
s on roal aetate*
Jio restrlotions ej.ci 11
^licacie tt) state ;.ciV: ©r ':.aniia i s ill li/ie Y»-ith
the or*
fjeenre
si
in
Lsjala
state
nsnber banks as nearly «a :, o s s i c l e on a basis of substantial
.
/»
..
-.ruces .
ro&l estate values
•
1
sal
Lluroa
;>ars was the
faot t
lAka he<- investe
•
.. .
;al e*x.ate loart
«erc unable to liquids
«y
tors we. l<
is
•itwofjpt vo cnforot coliflotlon on wma^
«:»or«ilijte
•i,
•- .or real •ttn-u.,
i<tde i t • t i l l }«ar . r
^
ros.1 eattite
cr r«iii csta
s«
ronl eato
rito rapidly •
•i
o lib«raliM
i on r—1 «»t«te t;.©rer<,r«,
t r i l N w»
rftcvice v..
oollmpr
bati<
Lll •
o/Bt.
>k€ re r •
. tto /«ry lar
i
ieteac
reacin
the
tkt real estate loaaic, we eSculc
k al »arin.;s banicsy to naksj any sun} locng
••< r »
.... inwtcoa
@FedFRASER