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c 0 p I August 18, 1937 Honorable Robert F* Wagner* Chairman, Committee on Banking and Currency, United States Senate, Washington, b. C. My dear frr. Chairman* This refers to your letter of June 22, 1937, in which you re** quest an opinion aa to the merits of the bill S. 2660 which would amend section 19 of the Federal Reserve Act so as to permit member banks for a period of five years after August 23, 1937, to pay interest on demand deposits aade by savings banks or on demand deposits of public funds of States or political subdivisions thereof or demand deposits of trust funds, if the payment of interest with respect to such deposits of public funds or trust funds is required by State law. It will be recalled that prior to the enactment of the Banking Act of 1933 the law contained no prohibition against the payment of interest on demand deposits by member b*aiks and contained no provision relating to tae regulation of the rate of interest payable on time or savings deposits. The Banking Let of 1933 authorised the Board of Governors to regulate the rata of interest payable on time and savings deposits by umber b:nks and prohibited member banks from paying interest on any deposit payable on aeraand, except that this prohibition did not apply to deposits made by mutual savings banks or to deposits of public fund© made by or on behalf of any State, county,, school district or other subdivision or municipality with respect to which the payment of interest was required under State law* the Banking Act of 1935, enacted August 23, 1935, rewrote the language of this exception to the prohibition on the payment of interest on de&ana deposits, nnd as thus amended the law now provided in effect that until August 23, 1937, but not thereafter, a in ember bank may pay interest on any uem-.nd uejosit made by & saving® or mutual savings bank, on any tieraoad deposit of public funds nacde by or on behalf of any State, county, school district or other subdivision or municipality, or on any demand deposit of trust funds, if the payment of interest with respect to such deposits of public funds or trust funds ia re.uired by State law. In enacting the Banking Act of 1935, it was the evident policy of Congress to eliminate the several existing exceptions to the prohibition on the payment of interest on demand deposits by mmher banks after a temporary period ending August 23, 1937* No reason is apparent why the policy of Congress* as taus prescribed, should now be altered, as ia proposed in S. 2680. There has been no change in the conditions existing at the time of the enactment of the Banking Act of 1935 wnich would seaa to make desirable a reconsideration of the policy in this regard* Honorable Robert F* Wagner - 2 The prohibition upon the payment of interest on desano deposits m s enacted by Congress in order to eli&in&to detrimental competition for deposits among banks, and there is equally as much opportunity for such competition with respect to deposits of the kind now excepted from the prohibition as with respect to any other class of demand deposits* In f-uctj deposits of public funds of States* counties and municipalities are of a kind with regard to which competition among banKs has bean most active* Moreover, such public deposits are not infrequently withdrawn from banks in lt.rge amounts without notice and with possible disastrous consequences* It is believed tliat no justification exists for giving these classes of deposits privileges which other deposits do not have. This ia especially true in view of % e fact that payment of interest by a ember banks on demand deposits of public funds of the United States and Territories, Districts and possessions thereof act only is not permitted bit is specifically prohibited by the law aa amended by the Banking Act of 1935• In considering this question, it should be re^erabc-red that a two-year period, been provided by Congress in which the necessary justeents to ^onfom to Federal law might be ia.de, A mmb^r of States have amended their laws so a a to meet the situation £.nd the passage of S# 2680 would, xn ef/Vetj not only penalize those States which have already acted but would r.lso encourage States to adopt legislation establishing interest requirements on demand deposit3 of public funds. The Federal statutes md the regulations of the Board of Cover-* nors provide for the placing of funds in member banks on a time deposit interest-bearing basis$ ana it is believed that it would be feasible for a substantial proportion of tvve funds which will be &fi\*eted by the c mn^e wriich automatically takes pl^ca on August 23, 1937, to he placed in member banks as time deposits, in which ev~mtf of course, they amy draw interest at a rats not exceeding that ,u-r<ascribed by the regulations of the Board* For the reasons stated, the Board of Governors does not favor tne enactment of S* 2680. Sincerely yours* M« S* Eccles, Chairaaa.
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