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November 12, 1936.







The heart of the problem of stabilizing and
perpetuating the recovery movement achieved by the Administration lies in centralized control over money and
credit. It is impossible to have a v/ell managed currency upon which the success of stability depends in a
capitalistic economy without such central management of
the supply of bank credit and currency and an adequate
flow and velocity of funds. Money is the most important
mechanism of our system. Failure to establish adequate
control over that mechanism would be to invite another
and perhaps fatal disaster. The banking system must be
so organized and supervized as to encourage a maximum
utilization of the productive facilities and man power
of the nation. As the creator and extinguisher of money,
the banking system not only is a vital mechanism, but it
cannot work successfully in the future any more than it
has in the past if it is to be left to its own devices.
It will not operate automatically• The Board of Governors
of the Federal Reserve System, as appointed under this Administration, has in cooperation with the Treasury a large
share of the responsibility without the adequate mechanism
for such management. The fundamental weakness is to be
found in the existing banking structure of the country.
One of the greatest accomplishments of the Administration was the rehabilitation of banking and the
concentration in Washington, instead of in New York, of
such controls as exist over money and credit. There was
no opportunity, however, in the period of emergency for a
more fundamental reconstruction which is imperative for


the future of sound banking. The opportunity now exists
for the Administration to supplement its distinguished
work by such a broad revision based upon experience both
here and in other countries and upon the pressing needs of
the hour arising from drastically changed economic conditions. I assume that the Administration desires to take
full advantage of this opportunity which may never again
be so propitious.
There is every reason to believe that the changes
needed to effect a sounder, safer and more efficient banking
system adapted to proper currency management in the interest
of greater economic stability can be enacted without serious
opposition except from the now politically discredited forces
which object to all Federal supervision in the national interest—for example, the unit bankers, exemplified by Orval
There is no field in which this Administration
could make a more constructive contribution than in banking reform, and broadly, changes which need to be instituted at this time would undoubtedly stand as a landmark
no less notable than the enactment of the Federal Reserve
System under Yfoodrow Wilson1s leadership.
A mere glance at the existing banking structure
will suffice to show clearly why there should be fundamental
revision. We have in this country forty-eight separate banking systems—forty—eight state authorities to charter banks
which create money, conduct examinations and prescribe regulations. The complexity of these systems is infinite and
many of them are notoriously lax. It is still possible for
persons who have no competence in banking to open so-called
banks, which, in the words of Senator Glass, are in reality
nothing more than pawn shops. It was in these state chartered
non-member banks that the greatest holocaust of bank failures
occurred in the late 20fs and through the depression. It was
those mushroom miscalled banks which caused the greatest
losses and misery among their depositors and brought a large
share of discredit down upon the heads of bankers generally.
Through their various associations groups of these so-called
independent bankers have been the most implacable foes of
this Administration.


Superimposed upon this hodgepodge of state banks
is the national banking system and upon that, the Federal
Reserve System which is charged with a grave responsibility
for exercising its influence toward the objective of greater
economic stability and the avoidance of unsound banking
principles which contribute to the twin evils of inflation
on the upswing and deflation on the downswing* This System
cannot function efficiently or effectively in the national
interest so long as half of the banks are in it and the
other half out. Currency management which is inevitable in
a ? r r d off the gold standard becomes almost a mockery under
such a divided banking system, one-half of which is free to
lot nature take its course, to combat and to negative management in the national interest.
The existence of such a dual situation has produced what has long been known as a competition in laxity.
Obviously it is difficult to effect proper management methods
in member banks when non-member banks, free from competent
supervision, are free to do about as they please. Under such
circumstances regulations imposed upon member banks may often
penalize those banks in competition with nonr-members and even
drive member banks out of the System so that they may be freer
of restraints.
But, beyond this the existing structure from the
standpoint of the Federal Government is neither sound nor
workable. At present the various Federal laws require (1)
that the Comptroller of the Currency shall examine all
national banks* Incidentally, the office of the Comptroller
of the Currency has become obsolete except for this examining
authority as well as the authority to charter new national
banks. It has become obsolete because there is no longer any
national bank currency such as the office of the Comptroller
of the Currency was created to supervize. Moreover, another
important function of the Comptrollers office, that of
liquidating banks which are forced to close hereafter, is now
performed by the Federal Deposit Insurance Corporation. (2)
The Federal Reserve System is required to examine state member banks, and is dependent upon the Comptroller's office for
the examination of all other member banks. (5) The F.D.I.C.
is authorised to examine insured non-member banks and depends
upon the Comptroller and the Federal Reserve System for the


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examination of other insured banks. In addition, of course,
there are state laws for examination of institutions within
their state jurisdictions.
Manifestly, such a confusion of authorities is well
designed to make for inefficiency, conflict, harassment of
the banks themselves, and above all, a division of authority
which is the very negation of necessary and proper management
of banking in the national interest today.
At present the Comptroller has plenary power to
charter a national bank. The Federal Reserve System has no
choice but to accept that bank as a member, although it has
no voice either in ascertaining whether that bank is necessary, whether it is properly managed, or whether it complies
with what should be sound fundamentals of banking practice.
Similarly, the Federal Deposit Insurance Corporation has the right to insure banks which may then apply for
membership in the Federal Reserve System. Again the System
has no choice in whether such bank is a proper institution,
and to refuse it membership is tantamount to repudiating it
as a proper subject to be insured by the Government.
Moreover, all three Federal divisions of authority
prescribe regulations and despite every effort to achieve
reasonable cooperation and uniformity, conflicting impulses
and purposes continually make for confusion and ineffective
administration. In general, the same situation applies with
respect to call reports, which all three authorities issue.
By their very nature, the examining and regulatory powers of
the Comptroller^ office and the F. D. I. C. influence
national credit policies, and it is clear from the record
that the Comptrollers office has repeatedly pursued a policy
of restraint when it should relax and vice versa, directly
contrary to correct central bank policy.
These are but the highlights of a situation which
has not unjustly been criticized as a crazy quilt that makes
for inefficiency, waste and above all, bad banking. It is


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an outgrowth of many years of piecemeal legislation. More
than ever today, however, it is imperative to make the
most of the unprecedented opportunity now presented to correct fundamental weaknesses. It is especially urgent not
merely because the Government has insured bank deposits and
is more than ever concerned to establish sound banking, but
because there can be no effective monetary and credit policies administered in the interest of the whole nation unless
the existing mechanism is first put in adequate working order.
The drafting of legislation is something that must
be carefully worked out in cooperation with the Federal Deposit Insurance Corporation, whose chairman is thoroughly
sympathetic with the general objectives herein set forth,
and with the Treasury Department which is vitally interested,
particularly in view of its own great responsibilities for
currency management today. Cooperation to this end with the
office of the Comptroller is, however, out of the question.
The immediate question is whether the Administration is disposed to lend encouragement and support to such
a program of fundamental banking revision. If the answer is
in the affirmative, then the first steps would be to
collaborate with the indicated authorities in drafting a
tentative measure for approval. Such a measure would broadly
contemplate a consolidation and reallocation of examining, administrative and regulatory functions under one roof,
specifically, under the Federal Reserve System, which is the
core of the Government's medium of banking supervision and
monetary management. The System's facilities are comprehensive and more than adequate; its twelve Federal reserve banks
with twenty-seven branches are strategically located; the System has a highly trained and competent personnel; its supervisory body, the Board of Governors, consists of seven members
whose work at the present time is not adequate for six members
or their capacities, to say nothing of their inevitable dissatisfaction in attempting to administer broad powers when
their jurisdiction over the banking field is so badly circumscribed and hampered by competing agencies. The Board is soon
to be established in its own large, new building which is
capable of housing all of the indicated activities if combined; and all of this consolidation can be accomplished with-


- 6 out cost to the Federal Government and indeed with a material
saving in present expenses of the Government*
I am taking the liberty of presenting this broad
problem at this time because it would be useless to go for7/ard with a program in cooperation with the Treasury and the
Federal Deposit Insurance Corporation unless the Administration feels that course to be desirable. If the revisions
suggested constituted a reform such as would be disturbing
to the country, or designed to create serious political
difficulties, or would tend to interrupt the .recovery program, I would not venture to urge it at this time. However,
I believe that the program outlined would be welcomed enthusiastically by the most competent banking and business
opinion throughout the nation as a contribution toward consolidating and perpetuating the recovery movement. And if
carried through as I believe it can be, I am convinced that
such a program will go down in history as among the outstanding achievements of this Administration.

One of the greatest causes of economic disturbance in the
world today is the large-scale movement of funds among leading countries. During the past two years upwards of three billion dollars of
gold, as well as other funds, have poured into this country. Stated
broadly, foreigners have sent us their gold, have obtained our dollars, have used those dollars to buy our securities, have thereby
greatly boomed the stock market and have accumulated a large share of
the profits of our recovery. They can take these funds out of our market at any time, causing a serious disturbance, and incidentally reaping a large profit for themselves. In the meantime we have been put
to the expense of storing the gold which is of no productive value to
us and these foreign speculators stand to get a large cut of the profits
arising from the Governments recovery expenditures.
Attempts of the Reserve System and Treasury to stabilize the
dollar to offset these capital movements and prevent them from causing
inflationary and speculative distortions are more or less frustrated
while this condition exists. The operations of the stabilization fund,
the Reserve System's raising of margin and reserve requirements and the
use of other instruments of control are inadequate to cope with this
major cause of disturbance. It is wholly illogical to permit these
foreign speculators in effect to raid our markets, to offset the economic balance which we are trying to achieve and to reap these rewards
without paying their fair share. From the standpoint of monetary management it is apparent that some curb must be imposed upon these vast
and violent movements of funds. They dislocate not only our domestic
economy but the repercussions are equally violent upon world conditions.
There appears to be no other way to reach this situation than through
power of taxation. While I am not prepared at this moment to state
exactly how that power can best be exercised, the subject is one that
needs thorough exploration in order to get at the root of this seriously
disturbing economic factor instead of trying to deal with it through
mere offsetting monetary operations.
Foreign capital has continued to move into our markets notwithstanding the stabilization agreement, and the present high level of the
stock market reflects these funds and does not reflect any increase in
the amount of bank or broker loans for security purchases. Should these
funds move out, the stock market would sustain a correspondingly large
deflation. It appears to be but ordinary prudence to institute a
thorough study of this problem between the Treasury and the Federal Reserve System with a view at least to imposing a tax that will tend to
discourage a continued vast inflow on the one hand and will exact from
funds now in the market a fair share of the profits already derived before such funds are withdrawn to other capitals.