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November 1, 1958.

Memorandum for the Files;
At a conference in the office of Governor McEe©
on the afternoon of Monday, October 31f which was attended
by Messrs* Cagle, Dreibelbis and Morrlll, a communication
dated October 31, 1938, signed by H# 1* Small, President
of the Morris Plan Bankers Association, in regard to the
amendment adopted by the Board on August 31, 1933, eliminating the words "Morris Plan bank* from paragraph (a) of section 3 of legulation L, was presented on behalf of the Morris
Plan Bankers Association by Mr* Small, Mr* lobert 0. Bonnell,
President of The Pmbllc Bank, Baltimore, Maryland, and Mr*
Richard H» Stout, field Secretary of the Morris Plan Bankers
The letter of October 31 corers the ground of the
oral discussion diarlng which the point of Tiew of the Morris
Plan Bankers Association was presented and the reasons of
the Board for the adoption of the amendment were indicated.
Gkrremor McKec stated that at the first opportunity when
there could be a meeting of the Board for the pmipose the
information submitted on behalf of the Association would be
faithfully repeated so that all of the members of the Board
would hare the benefit of the discussion*


CM yd

(letterhead of)
Washington Building
Washington, D.C.
October 31, 1938.
Board of Governors of the
Federal Reserve System
Washington, D. C.
Section 3S9 of the Banking Act of 1935, which became
effective August 23 of that year, amended Section 8 of the Clayton
Act relating to interlocking directorates* The amended section 8
had the effect of providing that directors of a member of the Federal Reserve System or of a bank organized under the laws of the
United States mould not be eligible to serve as a director of any
other bank, with certain exceptions, on or after February 1, 1939.
But amended Section 8 further provided that notwithstanding the
above the Board of Governors of the Federal Reserve System may by
regulation permit such service to a director of not more than one
other such institution.
Authority was given the Federal Reserve Board to issue
any regulations it deemed necessary to enforce compliance with the
provision of Section 8. Pursuant to that authority, Regulation L,
dated January 4, 1936, was issued by your Board, which provided for
certain exceptions under Section 8 of the Clayton Act relating to
interlocking directorates. These exceptions, set out in Section 3,
paragraph (a) of the Regulations, permitted directors to serve on
the boards of not more than "one Morris Plan bank, cooperative bank,
credit union or other similar institution1*.
Under the 1935 Banking Act and the interpretation of Regulation L just mentioned, all banks, with the exceptions set forth
above, were required to reorganize their boards so as to terminate
any interlocking directorates before February 1, 1939, or in a period
of approximately sj- years •
Under date of August 31, 1938, however, the Federal Reserve
Board amended Regulation L (Section St paragraph (a), by eliminating
from the original regulation the words Morris Plan bank*. This has
the effect of requiring Morris Plan institutions to reorganize their
Boards of Directors in order to comply with the provisions of Regulation L as amended within a period of five months, instead of the
three and a half year period allowed commercial banks for compliance.

Morris Plan institutions are whole-heartedly in favor of
efforts to strengthen and stabilize banking in the United States, and
are in sympathy with the desire of your Board to eliminate abuses to
which interlocking directorates contributed* However, the compliance
with the provisions of Regulation L as amended August SI of tills year
presents to Morris Flan institutions an almost insurmountable problem,
in the solution of which the Morris Plan Bankers Association earnestly
solicits your cooperation•
In order to furnish you the facts pertinent to the dilemma
in which we now find ourselves, the following is submitted:
It is generally conceded that Morris Plan institutions were
the pioneers in furnishing on a nationwide basis consumer credit facilities. It was recognized that if the operations of these pioneer institutions were to be conducted successfully and the development of
consumer credit as a component part of the credit structure of the
country was to be an orderly one the best banking brains available in
each community where such institutions were organized should be enlisted in the undertaking* Consequently, a 8i**ta&# number of the
original directors of Morris Plan institutions were members of the
banking fraternity, and from time to time other bankers have been
added to these Boards.
The success of Morris Plan institutions over a period of
more than a quarter of a century would indicate that the above policy
was a sound one* Even the financial debacle of 1932 and 1935 left
Morris Plan institutions, as a group, with an enviable record. It
would appear, therefore, that, insofar as Morris Plan institutions
are concerned, interlocking directorates have proved to be a stabilizing and strengthening influence* But it is apparent that the very
policy which has been followed ty a substantial number of Morris Plan
banks increases theirdifficulties in attempting to comply with amended
Regulation L.
A hasty survey shows that out of 92 Morris Plan institutions
from whom we have heard, 57 of them will lose 199 directors.
In two instances as many as 13 directors will have to be
replaced and several will, in a few months, have to find suitable
substitutes for from thirty-three to fifty percent of the members of
their Boards•
Despite the prestige of these institutions, it would be
exceedingly difficult to avoid unfavorable public reaction to the
fact that the outstanding bankers and, in many instances, the most
prominent citizens of their respective communities are precipitously severing their connections with a financial institution.

-3It would be even more difficult during the short period left for Morris
Plan banks to comply with Regulation L as amended, to persuade equally
outstanding citizens, whose advice and counsel as directors would be
valuable, to take on additional responsibilities and to make the investment necessary in order to qualify as directors within the five
month period allowed; a difficulty which Congress recognised when it
fixed a three and one half year limit for compliance by commercial
banks* There can be little doubt but what the stability of many Morris
Plan banks would be jeopardized.
Under these circumstances, the Morris plan Bankers Association respectfully urges your Board to give immediate consideration to
this problem and to grant Morris Plan institutions an adequate measure
of relief from a most embarrassing situation*
For purposes of clarification, we also wish to direct your
attention to certain facts, which may be helpful in your consideration
of our difficulty •
While all of our member institutions operate wthe Morris Plan
of Industrial Banking9, they are set up to conform with the statutes of
the various states under which they were organized and operate. As a
result, they divide themselves into three classifications:
1« Banks of deposit accepting personal checking
accounts as well as savings or time deposits
2. Banks of deposit accepting only savings or
time deposits
3. Corporations organised under other than the
Banking Law and not permitted to accept deposits as such but authorised to sell choses
in action designated as Investment Certificates, Debentures, etc.
In practically all instances, the banks belonging to group
one accept demand accounts only from individuals, the service being
rendered in connection with a program to provide a complete banking
service for the individual but without any attempt to offer commercial
bank accommodations. These banks, obviously, do not solicit nor do
they accept commercial accounts.
Banks operating under the second classification are pure
savings banks which accept only time deposits• They accept no demand
deposits and are in no way competitive with what we generally understand as a commercial bank operation.

-4The institutions which belong to the third classification
are definitely not banks of deposit. This point was recognized when
the Federal Deposit Insurance Corporation ruled them ineligible for
membership. It, therefore, seems apparent, to us* that Regulation L
as amended was never intended to apply to those institutions covered
in the third classification.
In the first classification 15 Morris Plan banks are members
of the Federal Deposit Insurance Corporation* Of these, 9 would h%
affected by Regulation L as amended. The most seriously affected are
the banks in Duluth, Minnesota; Cincinnati, Ohio; Wilmington, Delaware;
St. Louis, Missouri; New York City.
Of the banks falling into group No. M$ 25 are members of
the Federal Deposit Insurance Corporation and 8 would be affected,
Baltimore and Youngstown the most seriously.
In the third classification 40 institutions will be affected.
Some of these, as pointed out earlier in this letter, would
l o w the majority of their present directors if they were required to
comply with Regulation L as amended. If, however, our assumption is
correct that those institutions which are properly grouped in the third
classification mentioned above are not subject to the provisions of Regulation L as amended, then our concern is confined to the predicament
in which banks grouped in classifications 1 and Z above now find themselves.
While the act, in its entirety, is aimed at the elimination
of interlocking boards of competitive institutions, Congress in amending
Seotion 8 of the Clayton Act of 19S5 specifically excepted Mutual Savings
Banks. It thereby indicated a willingness to recognize differences of
degree in competition.
We must admit that a certain amount of competition exists between all financial institutions, but we respectfully point out that
the amount of competition which does exist between the relatively small
portion of the commercial bank's business which is handled in its personal
loan department and Morris Plan institutions, is not out of line with the
competition which exists between commercial banks and mutual savings banks,
cooperative banks and credit unions. Consequently the effect of Regulation L as amended appears to be discriminatory against Morris Plan banks
in favor of mutual savings banks, cooperative banks and credit unions.
The above action by Congress would appear to furnish your
Board justification for any exception it might be willing to make in
the case of Morris Plan institutions*

-5In view of all of the foregoing circumstances, the Morris
Plan Bankers Association urges that you re-amend Regulation L as
amended so as to permit a director of not more than one Federal
Reserve IMnber bank to qualify as a director of a Morris Plan bank.

Respectfully yours,
(Signed) H. E. Small
H. 1. Small