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August 13, 1934
Mr. Ecdes
FROM R. L. Hoguet, Jr.
I find that no one in Washington has any conclusive figures to show the
effect of a non-uniform reduction on rates paid on savings deposits in one
single city. I talked to Mr. Stark, Mr. Sanford of the Hew York Federal Beserve Bank, Mr. Thomas of the Federal Reserve Board, Mr. Stronk of the FDIC
and w father. They all have somewhat different opinions, varying from those
who believe that the savings customer has no personal relationship with the
bank and is therefore out to get all the interest he can, to those who believe
that the bank paying the lowest rate of interest mast be the safest place to
have one's account.
In the City of New York, there-is about $2,600,000,000 of savings money
in mutual banks and it is estimated about $250,000,000 in the CID departments
of the clearing house banks. The two largest mutuals, representing $950,000,00
of the $2,000,000,000, recently introduced a split-rate, that is 5 per cent up
to $1,500 and 2 j per cent on accounts above that. During the month of July
they lost between them about $8,000,000. However, the total loss by the mutuals
of the city was $14,000,000, so that their loss could hardly be ascribed to
their rate reduction. The other mutual banks in town are paying a straight
3 per cent rate. The rate paid by the commercial bank CID departments is not
at all uniform, varying from if per cent to 5 per cent. Those who believe that
the higher rate attracts the savings deposits say that the only reason that the
commercial banks have any savings money is because of their far-flung net work
of branches, that is that it is more convenient for depositors to put their
money in a local branch of a commercial bank than to go a fair distance to a
mutual bank which have only one branch apiece. It seems to me that the deciding
factor would always be peculiar to the particular town and banks involved, that
is if all the banks had been established for a long time and enjoyed a good reputation, the chances are that many would not move from the banks paying the lower
rate to the bank paying the higher rate.
Likewise, those people who are customers of long-standing would probably not
be tempted to move their accounts. All other things being equal, it would seem,
however, that anyone opening a new account would prefer to go to the bank paying
the higher rate. The insurance of bank deposits had some influence, for part of
the reason for which a depositor would continue to keep his account with a bank
paying a lower rate of interest, was because he believed it was safer there, but
now there is more temptation to move it to the so-called less conservative bank.
In Washington, I am told that bank clearing and non-clearing house banks
are paying a uniform rate of 2§ per emit on all new accounts. However, this rate
does not affect old deposits made prior to the introduction of the 2§ per

-2The Riggs National Bank did not believe that it was fair to discriminate
in favor of some of the depositors as against others, and accordingly reduced
its rate on old deposits to 2§ per cent* The other banks did not follow this
move* Of coarse old Riggs1 customers cannot in aqjr event get more than 2§
per cent, still they might presumably move elsewhere in anticipation of a
further drop in rates so that their accounts would then be old accounts with
other banks. However, the Riggs National Bank people tell me that they have
lost no accounts as a result of their move*
With regard to the FDIC's control of interest rates, I find that they
state that they derive their power to prescribe such maximum interest rates
from the following two excerpts:
From Sub-Section L of the Act - "The corporation may make such rules,
regulations and contracts as it my deem necessaiy in order to cany
out the provisions of this section."
From Sub-Section Y of the Act - w It is not the purpose Q£. this section
to discriminate in any manner against state non-member and any other
national or member banks? but the purpose is to provide all banks with
the same opportunity to obtain and enjoy the benefits of this section.w
They argue that if the Federal Reserve were to prescribe a maximum rate for its
members that the non-member banks would thus have a# unfair advantage in violation of the second clause quoted above. Their maximum rate is, of course, 5
per cent, the same as is in force by the Federal Reserve System at present.
Thqy state that they have had no trouble so far . enforcing that rate and ascribe
this to the fact that their penalty, a fine of |1OO, is easily enforced. The
penalty for violation of aqjr regulation of aqy Federal Reserve regulation, including Regulation Q is the expulstion of the bank from the System. This is
obviously too drastic to be effective. No mention is made in the contract between the bank and the FDIC with regard to interest rates. However, there is
a provision under which the bank promises to live up to such rules and regulations as the FDIC may prescribe in accordance with the first of the above two