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October 10,

Dear Abes
Attached is a perhaps over-long memorandum for your own
personal information which gives a general background of the
reasons why the three Federal banking agencies ought to be reorganised. It is an extremely difficult subject to cover briefly
or simply because the problem is of long standing and complex*
Because of your special interest as a member of the Banking and Currency Committee, you might, if you have the opportunity,
look over the excerpts, which I also attach, from the Board's Annual
Report to Congress of 1938, *» which I have underlined some of the
examples of conflicts, overlapping jurisdictions, duplications,
etc., which ought not to exist and can only be cured by a practical
reorganisation bill.
I do not know of anyone more able than you are to present
the case. I think you know me well enough to know that I am trying
to look at this matter objectively without the slightest desire for
more responsibility so far as I am individually concerned. The
present setup is wholly unsatisfactory.
You asked for examples of conflict, and aside from redpenciling the attached report which deals with the matter in detail,
I am also attaching a separate memorandum which lists the principal
duplications and overlapping functions.
One of the most discouraging aspects of the present unsatisfactory situation is the virtual campaign that FDIC has made to dissuade insured nonmember banks from joining the Reserve System, the
motive seemingly being due to fear that influence of the FDIC would
be diminished and that of the Reserve System increased.
Always with best regards,
Sincerely yours,

The Honorable Abe Murdock,
United States Senate,
Washington 25, D. C.
Attachments 3
Federal Reserve Bank of St. Louis

If there i s no reason for reorganising the three Federal banking
agencies, then there Is no reason for passing any reorganisation b i l l at
all* there Is no governmental area In which reorganisation i s store urgently
needed then in Federal banking supervision. I t i s replete with conflicting,
overlapping, discriminatory authorities affecting different classes of banks
that make for delay, confusion, waste and inefficiency*
There are two sources of opposition to any reorganisation of these
agenciesi one, the entrenched bureauorata who are fearful of their jobs or
prestige, second, the bankers who throughout history have opposed mry forward step* They fought the National Banking Act which created the office of
the Comptroller of the Currency* They fought the Federal 8M*mr9 system.
they fought the Federal Deposit Insurance Corporation* they are always against
any change from the status quo* And they prefer divided authority on the
divide-and-oonquer theory*
All the reasons for the reorganisation that led, for example, to
the creation of the Hone Loan Bank System and the Farm Credit Attaini strati on
are present in the case of the Federal banking agencies* the Home Loan Bank
setup, for instance, has worked far moro efficiently under unification which
provides for chartering, examinations, mettberfthips and insurance, a l l under
one authority, direction and policy* Ho one today would think of proposing
to break that up again into separate and divided units* ^organisation of
the Federal banking agencies would by no means be a curo-all of the hodgepodge of the legislation, State and national, affecting a l l banks, but I t
would be a long step forward in putting the Federal Government** house In
order so far as i t s supervision of banks subject to Federal Jurisdiction i s
As of the <snd of last June, there were li4,5OO banks In the United
States* They held at that time nearly 95 billions of Goverwaent securities.
These Government securities constituted nearly two-thirds of their total loans
and investments. By far the most important factor in the Governments re*
latlons with the banks of the country today i s the Management of the public
debt, of which the banks hold and will continue to hold so large a share*
Government supervisory and examination polioy with particular reference to
Government securities has become of crucial lsportanoe* Even i f there were
not and If there had not been in the past sharp cleavages estong the three
Federal banking agencies regarding bank examination policy, the fact that
there are three different authorities with differing oon«eptio*is of publio
policy inevitably stakes for uncertainty and confusion and always potential
Only one of the three agencies, the Federal Bm»mm System, Is
charged by Congress with responsibility over the supply and oost of credit,
which i s directly affected by reserve requirements, rate polioy and, under
modern conditions, chiefly by open market operations* Thus the Hftserve System
views the economic scene principally from the standpoint of national credit

- 2 -

conditions as affected by monetary, fiscal and other governmental policy.
The Comptroller of the Currency, whose present day function consists mainly
of examining national banks, does not have these broad responsibilities.
Similarly, the FDIC is chiefly concerned with accumulating and safeguarding
an insurance fund and is likewise without responsibility for broader policies*
These inherent differences of interest inevitably lead to conflicts in policy
conceptions and make it difficult and often impossible to reach agreements*
On the initiative of the Reserve System an effort was made in 1938
to bring about some degree of uniformity in bank examination policy, recognising that in the past rule-of-thumb and arbitrary rulings had served to intensify both deflation and inflation* IVhile a voluntary agreement was worked
out among the three Federal agencies, the permanence of this arrangement depends upon continuous agreement among the agencies on the policies involved
and, above all, the effectiveness of the agreement depends upon uniform
interpretation of the policies adopted* The interpretation, however, is
bound to vary from time to time in accordance with the differing fundamental
viewpoints of those responsible for policy in the three agencies* there is
agreement on paper only* In practice, old procedures that have worked badly
in the past are hard to eradicate so long as authority is divided and basic
policies differ* Bank examination policies assume new and far-reaching significance today in the light of the vast holdings of Government securities
by the banks* These policies cannot be separated from broad credit and
monetary policies* To have examination policies operate in diverse directions,
under divided authority, ©an be extremely detrimental to the management of the
public debt and the Government's credit* Too often in the past, when credit
and monetary policy was aimed at offsetting deflationary forces, bank examination policy became tighter as conditions grew worse, intensifying the deflation* Conversely, examination policy tended to accentuate inflationary forces
by relaxing at the very time when caution should have been observed*
This country has spent more on bank examination with worse results
than any nation In the world* Bank examination has not and cannot by Itself
protect depositors, stockholders or customers of banks* The health of the
banking system is determined by far more basic factors and is closely bound
up with broader Government economio, fiscal and monetary policies in general,
to which bank examination should be a subordinate corollary* This Nation's
record of bank failures is scandalous beyond anything in the history of the
world* In the early 20»s there were more than ^Q90Q0 commercial banks in
this country. More than half of them have disappeared, mainly through
failures that bank examination did not and could not prevent* To make that
policy separate from fiscal, monetary and other broader polioies and to have
it aimed either at rule-of-thumb routine examinations or at protection of an
insurance fund is a narrow and, in fact, dangerous policy today*

-3 The most recent striking example of the inability of the Federal
banking agencies to agree upon policy was in connection with the law prohibiting banks from paying; interest on demand deposits "directly or indirectly, or by any device whatsoever.11 While the Comptroller's office
avoided open conflict, the FDIC fought against interpreting this law to prohibit the practice of some banks of absorbing exchange for correspondent
banks as a device to obtain their deposits. The question at the moment is
not whether the law is good or bad or the interpretation sound or unsound.
The fact is that the spectacle of two of the three banking agencies publicly
at loggerheads over what should have been a unified policy, tested out if
need be in the courts, is intolerable. It took much of the time of committees and on the floor of Congress to shelve this issue, which so vividly exemplifies the inherent difficulty, needless confusion and waste of time resulting from the present setup.
Similarly, the acute problem of grave abuses resulting from certain
bank holding company operations go unconnected because the separate Federal
banking agencies cannot agree upon a remedy to propose to the Congress.
Even if there had been no publicly advertised differences to date,
the situation nould still call for correction by putting these agencies together under one tent so far as policy-making is concerned. There would be
no reason for disturbing t&e corporate entity of the FBIC, for example, or
in any way impairing the insurance of deposits, which today has general
public support notwithstanding the efforts the bankers once made to prevent
The major difficulties so far as the Federal agencies are concerned
could be remedied, however, by a merger under one authority. There is no
sense in having three separate examination, legal, research and other staffs
housed in three different headquarters in Washington and scattered through
multiple field offices all over the country. There should be one final Federal banking authority, whether it be a board or some other form which accomplishes the same result — in any case, any change from the present divided
setup is almost certain to be for the better.
In its Annual Heport to Congress of 1938 (copy of text attached),
the Reserve Board described the "craasy quilt of conflicting powers and jurisdictions, of overlapping authorities and gaps in authority," etc. (see page
3 ) . The picture so far as Federal banking agencies is concerned is replete
with difficulties that could be largely eliminated and substantial economies
brought about by an objective and practical reorganisation such as the President, with th© aid of experts in the Budget Bureau who have been working on
the problem for several years, may be expected to present to Congress if the
President's hands are not tied by exempting any one of the three agencies.


October 10,
Federal Reserve Bank of St. Louis


Duplicated and Overlapping Functions
Federal Supervisory Authorities

there are approximately 1U«OOO comtsroial banks which are subject in
greater or less degree to some form of authority exercised by the Board of
Governors, the FDIC, the Comptroller of the Currency and the Secretary of the
treasury* At least B6%$ of the deposits of all eossaereial banks are in rankers
of the Federal Reserve System*
The Federal reserve System lays donn the requirements for admission
of State banks to membership and it has authority to supervise and exaraine all
member banks. However, charters for National banks are issued by the Comptroller, and they become members of the Federal 3a*ejrm System without any
action by the Board of Governors* All raomber banks must be insured by the FDIC
upon certification by the Board in the case of State nember banks and by the
Comptroller In the case of national banks* The fact that a State bank is in*
sured by the FDIC does not entitle It to membership in the Federal Beserve
System, as it must meet certain additional requirements before it can be admitted* All member banks must have licenses Issued by the Secretary of the
Treasury, which are still subject to revocation by his*
the Comptroller issues regulations defining and governing the invest*
sent and purchase of Government securities by National banks* These regulations are applicable also to State member banks but not to insured nonmeraber
banks* the Comptroller enforces the regulations with respect to National banks
and the Beserve System enforces the same regulations with respect to State
member banks*
Although the Comptroller issues charters to National banks, they can
exercise trust powers only when granted by the Board of Governors, which issues
the regulations governing the exercise of trust powers* Supervision o^r the
exercise of trust powers and compliance with the Board's regulations as to
National banks, however, is in the hands of the Comptroller.
The Board of Governors issues regulations defining demand, time and
savings deposits for member banks and relating to interest on such deposits*
Payment of Interest on desand deposits is prohibited by Federal law for all in*
sured banks whether national, State member, or nonmesber. But the regulation
of the Board of Governors applies to national and State member banks only and
the FDIC has separate authority which it exercises with respect to nonmeiaber
insured banks* The two sets of regulations are not identical and policies of
administration are in conflict* While the Federal Reserve authorities enforce
the Board's regulations as to State member banks, the Comptroller administers
the Board's regulations with respect to National banks*
The Federal JfoBmrv* System is charged with the administration of the
law regarding holding company affiliates of member banks j but the saae holding
company sonetinss controls national banks, supervised by the Comptroller of the
Currency! State member banks, supervised by the Federal B&nQrv* authorities*
and nomaember insured banks, supervised by the FDIC*

" <• —

National bonks make reports of condition and e&rain^s sad expenses
to the Comptroller of the Currency; State jaember banks to the Board of
Governors; and insured notuaember banks to the FDIC* It has required much
labor and negotiation to bring these reports into reasonable harmony but the
information derived from them is tabulated separately by each of the three
Federal authorities for the cl&se of banks from which it receives the reports*
Each agency obtains from the other the comparable information derived from its
reports and all three, to some extent, publish the a ant* Information.
The Board of Governors has jurisdiction over all banks, regardless
of whether they are insured or not and whether they are members or not of the
Federal Ifcserve System, under Regulation U, relating to loans by banking institutions on stook exchange securities. This is also the case under the Board**
Regulation W, issued pursuant to an Executive Order relating to consumer credit*
nevertheless the examinations necessary to oarry out these regulations are administered as to each class of bank by the Federal authority to which it is
primarily responsible*
All member banks, whether national or State, are subject to the re*
serve requirement regulations of the Board of Governors and to the Board's
regulations governing discounting facilities of the Federal fteserve Banks* All
member banks also have the check clearing mnd ourrenoy facilities of the Federal Reserve Banks and are subject to the instructions of the Federal Heserve
Banks relating thereto* Member banks have certain preferential advantages with
rospect to discounting at Federal Seserve Banks; they can borrow on any sound
assets and they obtain the lowest rates* However, nonneiabar banks may also
borrow from the Federal Reserve Banks to a limited extent on soaewhat higher
rates* In their capacity as fiscal agents of the Federal Government the Federal Heserve Banks deal with all classes of banks without necessary regard for
membership in the System*
Although the fundamental policy of bank examination and supervision
should be governed by national credit policy which is the primary responsibility
of the Board of Governors, and although, as will be seen from the foregoing,
examinations should carry out the objectives of regulations most of which are
issued by the Board of Governors, the actual performance of the examination
function is distributed axiong the three Federal agencies* The Federal Beserve
Banks, under the direction of the Board of Governors, examine all State member
banks; the Comptroller directs the examination of all national banks; and the
FDIC directs the examination of all nonmesiber State insured banks* National
banks are exarainod at least twice a year and pay assessments to oover the cost;
State member banks and nonmember insured banks are not subjected to such requirements by the Board or the FDIC* Although there has been an agreement by
the three agencies upon uniform bank examination procedure, that agreement it
not carried out uniformly by the three agencies*

- 3the three supervisory agencies, both in Washington and In the
field, are largely housed separately in different locations, where** if
they were reorganised joint housing accomraodations could be provided and
the contacts of banks with the agencies greatly aiiaplifiod in Washington
as well as elsewhere.
As a result of the diverse Federal supervisory policies, banks may
leave one jurisdiction in preference for another* a national bank may give
up its Quarter in order to beoome a State nonnsaber insured bankj a State
neaber bank say withdraw from membership for the sane reason i and an insured
bank nay obtain a national charter or State bank membership in order to gain
the advantages that it B^%B in such action. Suoh conditions are not conducive to respeot for Federal supervisory authority.