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lebruary 4, r. wnrin . Secretary to the President, .&ite Bouse* Uelntyrei In accordance with our tolophon© this nfterft&cm, I am trftnsaitticg herewith two oopieg of * draft of a I#tt®r i^ioli I h m w prepared pursuant to a ^ilcb th« 'r««id«it made to o» last we«k# and uhloh p«rtala« to the proposed banking legislation X shall appreciate it if you will bring it to the President1* attention as soon as possible and I sincerely hope that it will be of some assistasoe in connection with the baakiag legislation* Very truly yours, : arriner &• ccles. Governor* February 4, 1935• raft of President's l e t t e r to the Committee Chairmeni X recoaaiend bo your Conmlttee certain changes la the laws concerning banks. The Banking ; o t of 1933, the legislative history of which extended over the preceding three years, was designed in large part to prevent a recurrence of the speculative excesses and abuses that culminated in the stock raarkat debacle of 1929* In addition, as & result of the great num- ber of bank failures that occurred from 1930-1933, provision was made in t h i s iet for the insurance of bank deposits* I am convinced, however, that further changes In our banking laws are urgently needed for smoothing the path of economic recovery and for preventing the recurrence of conditions? that led to the collapse of the banking system in the spring of 1933, It is proposed to mfce certain revisions of the deposit insurance law which has been extremely helpful since i t s enactment but requires amendment in th© light of a year's experience under the temporary plan. During the f i r s t six months of th© year 1954 deposits were insured to the extent of $2,500 for each depositor. NHSf the last six months of the year the insurance was extended to $5,000 for each depositor and it is found that this protects 98.59;* of a l l depositors in the insured banks in full* This degree of protection has proved adequate to restore confidence In the insured banks as a whole arid in the nine banks which closed during the year th© payments by the Federal )oposit Insurance - 2 - Corporation have entirely relieved the oontaunities of the hardships and disturbances union heretofore hare generally accompanied a bank failure* Under existing law the permanent plan would give increased benefits to only 1»61£ of the number of depositors but i t would almost double th© liability of th© Corporation by increasing i t from approximately 316,500,000,000 to raore than $23,000,000,000, I recomsiend, therefore, thafc the limitation of $5,000 for each depositor be continued and made a part of the permanent insurance plan. The original purpose of the faaporary Fund of the Federal Deposit Insurance Corporation m s to provide insurance of deposits for a six months' period before the n««essar^/ arrangements could be ooaplated for instituting the permanent plan* fhe Temporary ¥wa& has been rtiised through assessments contributed hf the banks based upon their insured deposit liability* The permanent plfea in the existing law oont<mplates assessments based upon the entire deposit l i a b i l i t y of the insured banks* It i s believed that the general Benefits both to fcha public and to the banking structure of the Country resulting from the insurance of deposits call for an assessment plan substantially as provided in existing law, but limited in amount* The plan of assessing upon the insured deposit l i a b i l i t y alone, considering the general benefit&, throws & disproportionate share of the burden upon the smaller banks and upon banks in which small deposits predominate• 4* * - 3 Provision should be snade which will enable the Corporation to allocate to surplus fart of its existing capital of approximately #290,000,000, ©distributed by the Joverntaent And fey the Federal Reserve banks, and, to enable it to set up reserves trim the proceeds of the assessments so that the insurance m&y be continued at all times upon a sound basis, at no greater oust than is necessary and without becoming unduly burdensome in times of stress* In view of the liability of the Federal Deposit Insurance Corporation to depositors of failed banks, it is important to t;ive to the Directors of the Corporation authority to protect the funds of the Corporation from the consequences of bad management and unsound banking practices on the part of insured banks. This should be accomplished with due regard to the existing authority for direct supervision. The cornerstone of our banking structure is the Federal Reserve System ami it is proposed to sake this system more directly responsive to national economic neads and to aake the ooesaereial banks better adapted to meeting the credit requirements of oosraeroe, industry, and agriculture* The Federal Reserve ^System was established more than twenty years age and has rendered invaluable service to the nation during the war, the post-war period of readjustment, and during the present depression* the experience of twenty years, however, has shown that in certain respects the system needs to be strengthened in order to meet changing economic -4- in this ©ountry m& In th© w r l d . Our problssas, ©specially im the fisld of baaki&g* hav© beoosse iaor@ aad sore national in their SQope. Commercial banks, through th© oreatiom of credits3 supply the bulk of th® nations issans of payment* li'ffeets of ol*a&ges in th© molume of sredits are aatloss^wld® and rogulatioa of this voltaa® should b© «®p trusted to a body uhloh r©pre®«aits th@ nation • Therefore« while it is desirable to retain regional mm&^mmfo md responsibility at th© Federal Eeserv© banks in matters of local oo?joerat It 1© essential to vmlfy th© reepoxislfeilit^ for national policies* For this purpose it la pr&po**& to oha&ge the ocxa^ositioai of th© Pecbral Opea l^urket Compdttee so as to iSiOlude repre«entatlire@ of both the Federal Reserve Board and the ileeerve banks and to giv© the Coimittee th® power to determine the openrmrket policy of the Federal Ueeerve System. Sisace operations of the Federal Heserve banks in the open market are fr©<juestly the most iss^ portaat siBgle elemeaife determining ohanges in the TOIXQMI of oredit a/ailablc to the people and in the rate® required to be paid for bor* r®m& moaeys unified ecaatrol of these operations is imperative. Xt is also proposed to oaaabiji© th© office of the Governor of the Federal Reserve hmk0 who is now appointed by ths directors of t he \mbk$ with the offlee of QhaAmun of the Board of Directors* who Is now appointed bor the Federal kemrm Board, and to hair® the ©ooupaut of tho oombiaed offlee appointed by th© board of directors, subject to the approval of the Federal Reserve Board* ?he proposal would promote eomm? end effloiesey 1$r doing away with the present dual organisation of th*i bonks and the consequent diffusion of responsibility. To enable the federal Reserve bank® to respond rare effectively to the ©hanging needs of the country it is iiaportaiit t© remove sorae of the restriction© npm th@ir activities imposed by the original Federal "[©serve ifftg fully reeo$sii*ing that these restrictions wire wisely Supposed upon a system that was new and untried* Smm^ these is the rigid definition of the feiad© of paper that sx© eligible for diseoimt at the Reserve benlcs« Changes in our eooncBnie life and financial praotioes hate greatly reduoed the volume of self-ligiiidating paper of the kiad to «hioh Federal Reserve bank diseowxts are largely limited* In consequence * in times of stress, ifhm help fr«a the Federal lleserve ^stem m s most urgently needed* there issre mas^ basks devoid of assets available for borrowing at the Federal Reserve baz&g* It beeazse necessary to retaoT© these restriotlcms temporarily Ijy osaersenoy legislation* but this aetion nas not taken until mush harm had been das© to the country. At the present tiss© there is mi&mim that the restriotions m eligibility of paper for aiseeutst at the Beserpe banks oeaotribute to the diffieulty of pers^is ^ao tiesd to borrow mm&y and possess perfectly sound assets but are unable to obtain the required loans because these assets are technically ineligible for discount* For these reasons, legal restrictions on eligibility should be removed and the Federal reserve Hoard, «hl«h is altmys in session, should be ^iven authority to determine the character of paper that sliall be eligible for discount by a Reserve bank* -6- It is also proposed that segregation of collateral behind 2.989m notes bo no longer required. These notes are obligations of the United States Governasat and prior liens on all the assets of the Federal Reserve banks* Segregation of oollateral baek of these notes, therefore, adds nothing to their safety. It caused serious difficulties, moreover, in tying up gold over and above the 40 per cent required reserve in 1931 and 1952 -when there nas a foreign drain on our gold* In the field of commercial banking the proposals sure few but vital for t he speeding of recovery* They are directed toward the obj»t of siaking it more feasible for the banks to meet the credit n»9$M of their localities and to relieve them of some of the unnecessary restrictions which are at the present time a handicap to recovery. With this in view it is proposed to liberalise the authority of the banks to xaafce mortgage loans* This class of loans is essential for tho revival of building activity and, lafcder proper safeguards, present restrictions can be relaxed without endangering the soundness of the banking system,. 1 hope and believe that the enactment of these proposals -would spur the oceniaerciai banks to go further in their efforts to serve the country*s needs and to lend their unstinted support to economic recovery. The proposed legislation also eontains corrective and clarifying fffliands^nts to existing Isw which will provide for simplification of administration. They are mostly of a technical nature and f»re in large measure embraced in the so-called "Otenibus Banking Bill" approved Committees of the Seventy*Third Congress* Very truly your©, by both
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