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Honorable Thomas ¥'• I ord. House of h. e presentr>tives, WfjikiBf on, i. • C. ,y dear Mr* Yordt I re,;ret that pressure of business has prevented an earlier reply to your letter of Mar h 11, 1935,Requestin£ my comments on the inclose*., letter addresse Yioe to you by Mr. Edward Elliott, resident of the Security-First national Bank oi Los Angeles, wherein Hr« hlliott e pressed certain views about the proposed banking Act of 19?5« he;ardless of the interpretation which :*x. Elliott may place upon my address before the Ohio Bankers Association nnd particularly the portion t creof with regard to t lie central! tat ion of banking authority, the fact is that, if this Bill is enacted, the control o t e Federal it has been in the past. tive embers of t eserve System will be no more political than Under the present law, all or the appoin- «deral i (.serve doard are appointed by the .'resi- dent for twelve-year terms and confirmee b^ the Senate and one of the appointive members is designated as Governor at the pleasure of the resident. The iill wouJd make no ch nge in this respect except to provide that, if tl e Governor be no longer d signated as such b; the residt t, i.e shall cease to be a member of the ^oard and shall be deemec to have serve,, the full term for which he was appointed. The r CD. 4'' iionorable Thomas *• i-ord - 2 purpose of this i s two-ioldi (1) To create a vacancy in ord r that the President may L« able to appoint to membership on the Hoard the person whou he desires to designate as Governor) and (2) to enable t.-.e outgoing Governor to reenter the tanking busi. *e&s i euiately, instead of having to wait two years as now required of a • >ember o t e oard who resigns before servin ; out h i s f u l l tenru iixcept for t r e second point, i t i s believed that t i e b i l l as introduced would make no chan e in the existing practical situation! because any me ber of t e board who had been designate as Governor and whose designation as such i s term nated by the President w i l l almost certainly resign as a member of the board. However* i t would seem desirable t o provide s p e c i f i c a l l y for a vacancy in the membership oi' t r e Board in such circumstances, in order that there may be no doubt the President w i l l be able to appoint to membership on the Board the person whom he desires to dtsignate as (Governor• The Board was created by Congress as an arm of the Federal ••Jovernraent to exercise covernmeiital powers of vast importance; and i t would seem appropriate for trie Governor uf the i'oard to be a person acceptable to the administration i n power, in order that he mi t maintain a satisfactory l i a i s o n between the President anc ti.e .oard. This would not riean that the oard as a whole would be dominated by the administration in powerj because, even If t e Jovernor, the Secretary of the Treasury and the Comptroller of t e Currency be considered representatives of tne administration, they would const! ute only a FQLE COPY honorable Thomas • ord - 5 minority of the Board and tt.e other five members usually would t« persons appointe during preceding ati r.istrations* The twelve-year term of oftioe of the appointive merbers constitutes a substantial safeguard against political domination over a majority of the board members* The a rovision making the appointment of the overnor of e oral reserve bank subject to approval by the Federal Reserve board would not subject the Fer eral i.eserve System to political control | because the actions of the Federal cserve Soard are not in- fluenced by political motives and because the Governor of the Federal reserve bank v<ould have to be selected in the first instance by the oard of directors of the bank, two thirds of whom are elected by the member banks* ioreover, if this Bill ie enacted, the Fe eral Reserve Board would actually have less control over the management of the Federal reserve banks than was contemplated by the original Reserve Act* eeral Under the original Act, it was contemplated that the ie eral Reserve Age t would be t »e chief e ecutive officer of the bank and he is deeignatec by the Fet eral reserve Board from among the Class C directors appointed by t; e federal reserve ^oard and is Chairman of the iioard of Jireotors and the official representative of the Federal Keaerrm t*>ard at the ederal reserve bank. He is appointed by the Feceral Keserve itaard alonei and the Board of directors of the bank have no voice whatever in his selection. /^> /^S The ofiice ^\ \\ /7 Honorable Thomas • ord - 4 of Governor of the Federal reserve bank was oreated by the direc ors of the Federal reserve banks witho t any specific sanction of law and has never been recognized by Congress in any part or the liberal Reserve Aet» The Bill would abolish the ofiioc of I ederal aeserve Agent, combine the ofiioe of Chairman with t.at of Governor* and require the person filling the combine-, office to be satisfactory both to the directors of the bank and to the Federal reserve ^-oard. The Federal koserve oard 7/ould no longer appoint a person of its own selection as Chairman of the Board of directors but would merely approve of t e person seleoted by the directors as Governor of t: e bank, who would thereupon becone Chairman of the Joard of directors* The Bill wo ild improve the organisation of the ie eral reserve banks by doinc away with the dual heads of the banks and substituting a single chief © ecutive officer who would be selected in the first instance b. the boards of directors of the banks, but would ; uve to be satisfactory to the Federal K< serve ,.oard» This would result in smoother operation within the banks and smoother cooperation between the banks and the federal Reserve I9SMNU Although Title 1 of the Bill provides for the insurance of trust funds up to $5,000, Mr. Elliott objects to the provision requiring the bank to pay an insurance fee on such fu,\ds when they are deposited in the commercial department of the bank and secured -y a pledge of Government bonds with the trust department* This is a point which oould be discusser m re appropriately by the officials of the 1 Honorable Thomas F» Fora - 6 Federal deposit Insurenoe Corporation! but I oannot refrain from observing that I oan see no logleal reason wh banks should not pay an insursnoe foe on trust finds if they are insured to the same extent as deposits* regardless of the fact that they say be secured by Government bonds. Moreover, I understand that the insurance fee of one twelfth of one per oent per annum has been worked out Tory earef lly and the insurance fund sight beoome Inadequate if special classes of deposits are exempted from the assessments* Thus, de- posits of funds of the Federal Government are secured by the pledge of Government obligations and to exempt such deposits would reetly reduce tne basis of assessments and would make it necessary to increase the rate* In my testimony before the Committee, I reeognised that many State member banks hare not heretofore been limited in the aggregate amount of real estate loans which they are authorised to make and t it, if the Bill is enacted in its present form, many of them which already hare made loans e oeeding 60 per cent of their savings deposits will have to cease making real estate loans and will have to liquidate some of those already made when they reaoh maturity in order o bring themselves within the 60 per oent limitation* I recognised that this is objectionable and, in order to meet the situation, 1 suggested a substitute section which would omit the rigid statutory limitations and vest in the Federal iteaerve Board the ower to prescribe the necessary 11 itations by regulations which CD Honorable Thomas F* Ford - 6 oould be Modified from time to time to meet changing conditions* If my proposed substitute seetion is ado, tea, the Federal keawr* board ean presoribe regulations #iieh will meet the point raised by Mr* Elliott with respeet to the 60 per eent 11 it on the aggregate amount of real estate loans that may be made by State member banks* It would appear from Ur* Elliott's comments regarding the provisions governing the payment of interest on deposits that he is not familiar with the existing law on this subject* T • exemption of deposits of mutual savings banks from the prohibition against the payment of interest on demand deposits is in the existing law, and the 'ill would make no ohan ;e in this respect* Likewise, the exemption of deposits of publio funds made by or on behalf of any (tate, county, school district, or other subdivision or municipality with rea. ect to which payment of interest is require* by State law is also in the existing law and the only changes which would be made in this resueot are to exempt also deposits of trust fuuds with respect to which the payment of interest is required by State law and deposits of publie funds of the U: itec States or any territory* district or possession, publio instrumentality or agenoy thereof with rtspect to which interest is require: by law to be paid* It may seum illogical to e empt such deposits from the prohibition against paying interest on demand depositsi but it is necessary, as a praotioal matter, where the law requires the payment of Interest on such deposits* Otherwise member banks of the Federal Keserve System would be u. able to accept such FDL 4-1 Honorable Thomas F* Ford - 7 deposits and all of such funds wouild hare to be deposited in nonmember banks* Mr* Elliott1* final comment is with respeot to the provis.-cn requiring executive officers of member banks who borrow from other banking institutions to report the faots to the Boards of directors of their own banks* In view of the discussion of this subject during my testimony before the Banking and Currency Cosnnitt.ee on Friday* larch 15, I believe that the Committee fully recognises tie propriety of this provision and is in sympathy with Its purpose* nowever, I invite atten- tion to the fact that the present law requires executive offioers of member banks to report their borrowings from other banks to the Chair* men of the Boards of Directors of their own banks and the only change proposed in this resueot is to require the reports to be made to the Boards of Directors instead of the Chairmen* This change was suggested i by the Comptroller of the Currency for the practical reason that many national banks have no ersons with the formal title of Chairman of the Board of Directors* and the Comptroller has received many inquiries as to how the existing law is to be complied with in such circumstances. I personally feel that it is very Important for the Boards of directors of member banks to know to what e tent exeoutlve offioers of the banks are Indebted to other banking institutions, as indebtedness of this character may prevent an © ecutive offioer from being as impartial and as oaref JI as he should be la pfisiag upon extensions of credit by his own bank to the banks to which he is indebted* r P Honorable Thomas F* Ford - 8 I appreciate very auoh this opportunity to comment upon the points r&iseu by Mr* Flliott and I sincerely hope that t e above ooaments clear up these points to your satisfaction* If they do not, I shall be Tory glad to have you oo. isunioate with me furt er on the subject* In accordance with your request, I am returning Mr* Elliott's letter herewith} and I am also inclosing an e-tra copy of this letter. With kind regards, I an Cordially yours. (Signed) Marriner S. Eccles Inclosures 7AV gc n$ b y . . Approved by. ~£ b y . , Marriner S. Kocles, Governor.
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