Full text of Marriner S. Eccles Papers : To Messrs. Parry, Thomas, Currie, Blattner, Garfield, Gardner and Piser, and Miss Burr, Box 14, Folder 1, Item 16

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

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f

Fiferaarjr 6,

m 11
A

1935

Mr* Parry ^
Mr. Thomas
Mr* Currie
Mr. Blattner
Mr. Garfield
Mr. Gardner
Mr* Piser
Miss Burr
I am giving you a copy of a letter on the banking legislation, which was not sent, a memorandum which was to be attached
to the letter and was not sent either, and an outline of the bill,
which was not intended to be sent and was. These documents, together with the bill., may be helpful in suggesting points that can
be brought out in support of the bill or in answer to criticisms.
If you have criticisms of the bill, I should be glad to have
them also.




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la connection with the proposed amendments to the Federal Deposit
Insurance law, i t will be recalled that daring the first i t s months of
the year 193^ * * * s l t s were insured to the extent of $9,500 for each depositor.

During the last six months ef the year the insurance was ex-

tended to $5,000 for eaoh depositor and i t i* found th*t thi* protects
96.39$ of the depositors ia the insured banks ia f u l l ,

fhis degree of

protection has proved adequate to restore eeafideaee ia the insured
hanks as a whole and ia the nine hanks which closed during the year
the peasants by the federal Deposit Insurance Oorporatiea have entirely
relieved the oenraaltles of the hardships aad dletwoaaoes which heretofore have generally accompanied a hank failure.
ttkder existing law the peraaaent plan would five increased benefit*
to only 1.61% of the depositors hot i t would almost double the l i a b i l i t y
of the Corporation by increasing i t from approximately $16,500,000,000 to
more than $?9,000,000,000.

I reeesnead, therefore, that the limitatioa

of $5,000 for each depositor be continued aad nato a part of the peraaaent
Insurance plea.
fhe original ptarpose of the fefflporary Fund of the Federal deposit
Insurance Corporation was to provide insurance of deposits Set a six
months' period before the necessary arrangements could be completed for
instituting the penaaaeat plan, fhe temporary fund has beea raised througi
assessments contributed by the banks based upon their insured deposit
liability,




fhe peraaaeat plan ia the existing law eontaaplates assessaent?.

i.
eased upon the entire deposit liability of the insured hanks. It it »eiieved that the general benefits both to t:« public and to the banking
structure of the Country resulting *"oa the insurance ©f deposits call for
an assessment plan substantially as provided in existing law, out limited
la aaount. fee plan of assessing upoa the insured deposit liability alone,
considering the general benefits, throve a disproportionate share of the
burden upon the smaller banks and upon banks in whieh small deposits
predominate.
Provision should ©e made which will enable the Corporation to
allocate to surplus part of its existing eapltal of approximately
$290,000,000, contributed by the Government and by the Federal Beeerve
Banks, and to enable it to set up reserves from the proceeds of the
assessments so that the insurance nay be continued at all times upon
a sound basis, at no creator cost than is necessary and without becoming unduly burdensome la times of stress*
In vie* of the liability of the foderal deposit Insurance Corporation to depositors of failed hanks, It is important to give to the
Directors of the Corporation authority to protect the funds of the
Corporation from the consequences of bad mwna<emeat and unsound bunking
practices on the part of insured banks, this should eo aAeoaplished with
due regard to the existing authority for direct supervision.
fhe proposal* relating to the !%4eral Beserve System are in recognition of changes that have occurred in our economic life since the




System ma established mure than tisoaty year© ago* fko whole enruing
period Ms boon one of trmntn that %h® framer* of %h& Federal
JM&t, sklUf-ully aad psnadontly us they claimed, could aettfea? have
forotooa aor ivm0>m&. Uhllo tlm Foior&l Hosorro ^mltm ha«
t#rrltt to lb# aatlon—turiag %bm mmr years t i i r i i
period of roiid^mstewmt* taring tte years #f isprtstlom mmt
p#rloi in iMdi M bmrm h^gm to <^#r^ from %h® tepretoloa, the
of twrnty y#sr§ tout tteia thai im tom« iroortant respects
Wm&mtsl i#»#rro %ttto m#tdt to ¥t etreo^theaed aad toprowd In
to matt a&tioB^vide sad wrli-wide economic otem#is»

Cto

economic pfoblwit tauTt iomg touted t# become mare ami z&oro 3u&tional
la scopef sad si^oolaliy ao la tim field of banking. Omr coaMercial
thro^h tho creation of deposits, i^i>ly t^i groat Iraik of
coxoatry^ moaa« of pny»oat~ for goods and tervicee of o i l kindsf
for frodn0tl0B m& ei^loyment la tTory flold of eoaasmia endeavor*
Beaoo MQT material changes la tho wlt^^ of tMi mmmn of p«ymeatf
^feoth^r tkron# enlargement or onrtaltatoat of tko 4tpo«it« oroatod by
our ooimeralal feyaket MW aatloa^wldi la tholr economic effects*
»or tM« rwttoa It ha*fcecomei ^ a m t l w tlmt rtpilttioa of t^i
of omr mmm* of paymoat 1io oatrmstod to m tedy tMt rowowatt




the nation at a wfc&ief rather than to hate a wide** read division of
authority in a matter of guch grave national concern.

It Is daelr&ble

to retain regional gs&nmgemeiit and responsibility at the Federal tmtmrf
tank* la matters of loe&l concern, and no change la thit retpeet i t
contemplated 1ft the prepoted legislation.

But It It recommended that

for national policies %e plaead dlraetly on the Federal
l&ardt who** atmbtrt are appointed %f tha Fratlteat with tka
advice and consent of the Samt*.
fo acoompli»h this aalarfltaMiat of tfc* StairA1^ rttpamtlliillty* It
la propntad to elarify tha poiver &f tha Board to d#termine, In
c i t a t i o n with rtpreta»tatiT#s of tha y«ieml r « t a m banks, tha
market policy of tha ftderal laserre System*

In this mammt national

control will he estatdithad orar operations that are now tha most
important single factor la deteradnlng change© im the volum© of availahl* credit and the rates to he paid fer Arrowed money.
Since the Federal tMMVft Beard would thua hear the respoatilbility for national pollelen to he jrartaed ^y the federal Beearf*
i t It alto proponed that the appointment of the prlnciml executive
officer In eaeh federal retNinre hank he tub^eet to apfroval hy the




federal BM«nr« Board, aai that thte effiotr $sawn feriftl l i Governor
and at OBbudnHm of the i a a r i of StftfttMft*

Bh* Ved«r?l H#ferre 141

Itstflf makee BO provision fs§ the office ttf iovsraor at
%syafe§t l l r o # in ffNMttfl tot §#^#3PB0ir i s H i prtaeipal
pffle«r t ita#0%t4 % H H d l r t t t ^ r t wtttemt tht r«f«l9«iK| of UPM
% th« It&tral »#ttrt# Board*
1Sh» 4fliang9 h«3fa ?rop0tt4 wtuld rto^grtlit the off lee ®f
$®mm®w in the lav aad 00mlin# tble office ^itfe Vtett ef Oliaif^^E of
Use luajrd of M r ^ t o f i t %nt %h% appotatwmt of ifet toirtimor ami
the dlreete?* wotald lie st^Jtet i t the ^MNNNMdl of the
So«rA* A furfety effeet If thle pt^Med eliaaft voidd %#
immete eeooovgr M 4 efficiency 1B the rm®rf^ I « A | % doing sway
the pretest *m^l orgiaalsatlott aai %b# 00mt#fpeat ftlffoeloii of

enl&rgmeat of Ilia ree90nslU.ilty of the FeAeral Seeetre
and additional aoMnures KM^Mlii with a Tiair to » W n g s«©ili^?iMp 0m
the Board mr® iHititMKli HPi a-ttraotiw* ciadt in a ?«mniary respect*
®or« i i M i ! eihaiadffirftoiI t l e s t difficult thaa I t hat eoaetl»et 1NMB
1m the p i d to lB^@e mm wbo have the vision aat eoi^a^i, at well as
tfee vefoielte traiatsg m&A m^mimm$

t# w i t ^ t a t o tli# diffiemltt

t t t a l f M i eftwt mpopiiar to^ of fdi«il&timg n a t i o n ^

mmtmy

to f a c i l i t a t e H i ewrylng out of «MMI p o l l e i t t i t will N
alto to renotre ^ a t if t3be restrictions aow plmotd oa the aetiTltlni of




«hft fo&araX l n e m ^tmte % tim fftJtnl Batwrft Aat. B » M ••*
atrlotlona w#rt largnXy pjrtdle&teA 011 aondi Moats f t H i l i l l f *han mm
if§ HH a4apt#t H | | | $ i aal w#rs wtstXy lmpasad m a %nt«t that wa#
tarn ami isttttrieds *ui In th# e^tirst af time tto

and ^ # retti^etioBs haw# «amti»M f t i i l i !• fc# H i ^^r# Immful than

In tuit raap«ot th# rigid infiBition af tke kinds of
«•• aliglHa for iiswmii at te# ,r#strr# feudc* la edaarly to Trt
at an i»#Si,»mt« Olia^pt in mix m®nm®&® Xlfat notably in
of fimanoimg %mslEess antarptiaot &a^# natarlsCLXy
tba foltaMi of th©rt-%*mt aAf~ltqul&atlft£ p p t f of #fc# 0lssi#t
^dok tho dloooimt prlTiI#g#s of t&o raaarra lafci w

Xorftly

atrietod Igr X^w# Aft a o^EsttiiiTOoe of t l i s f in tlaaa of atraaa*
tha M#Xp of %&# fodor®! 2ta««r?a ayatatt feat %##n MMi wr^m%ly
hwra %##a damt& of ^§#%s allciida tow %®wwlitg at tba

aafvarity of tha tteitlHWMi pi a l i # M t m^dr wm

p Mi tt^ wmm
lagUlations ^t% tMi adtaM wa# m% Utttm WMI micfe iMHt bad
dona to the imalflMia of tba eotantry aad «wa3ra^nt#d bardablp and Xotf
OTrff#rad ly I w * itpetitors* iMfttftiMN *^r^ &® ^ prmmt
ttet «haa« Xl»itati0ai art ^utrilrntiag to tiia difflmaty if




M

moo& mnt& m& posooss porfootly mm& atonto, Imt nhn a r t
to ofct&ta tha r#fuij?0<i loaas tooanoo thoir a$g#t* are
for Alooomtt i
I t i t w ® i t tfeat th# l$0l

itm&Utlmn

m

sid authority %« ^ v t n t® tlit
in d#t^wiii# iM diMpa«t«r of » # * * MM riMil %# ali^LMt H i
&iscowit at the rtserve Tbmmkm..
p p i # t otemgts in. t t e Fotaf
with, t t e r«4uir*M&t for soevogaticoi of «oUat«ral ^*hl^
Itsorro

otas* SbMo notes mtm obligations of tho United

3tat#o CtoTortawtt aaA prior lioas on all tho tOtOil of
Roaonro fcMftfe Soippogfttioa of the coll ter 1 }&dt of
tiie^ofofOt -adfto nothing to tfaeir oafoty*

On tli« otbor

reqoirottmt for t o ^ t ^ t i o a eaxtood seart^mt diffleuX^r # }y
gold 0T#r aad al>oYe the ^0 per e@nt required reiorro, w&&n
a foroicoi i r a t e OB omr ^ 1 4 in 1951 and 1932» ®bo fitmati0B waa
not for tho w s r # p i ^ % pONttttaf ttO lA^ffi of M t t d State®
mm% oMlgstions M oollatoral a^iiuit Fodwal Eoowte B&totj 1m%
avkhoritgr of th® ros^nro iNgudoi 1B fhls matter i t only trnporary.
aftrlsafe&o mmn% vmdLA HHM to r«^v# tMg gjjtilitligi adtoeothor«
in #0sme0tiom with %hm f^oposalf rolatlmg t i r t e t l y t^ ooanorolal
^as&iBg# i t i t to b# l i l H M I *J»* *3Nf «»• AWi
•pooAing wt MMPPMf«




1mt

^^^

u

tll#

Sboir p^«0s# in to i^iswvo rottrietioms in

Imn that N M M o t l has nvovot to fe# not

tmi •Wlfjgliy barNfal to fesako and borrowor* lllft§« *m the
of rtal ootato »rtgrco iMMf* Ifel propoood ei&a*gonHmt -tif
of otur %asdcai In atMag I4MH on MHft estate, nater th#
ttav3l&%#& ttt HM pNffii^Mli «ottlA neto It w r t feMllAo
to mnot tlto frooottt r«f^ir^«it# of aortgg^ iMnrrovero a^i to
mm a^p^tstiTely In tbo roflwl gf a^tiirity am
tho ednstwyetion lB4nttrj#
etnont of tbio l^gi^latl^n witli roopoot to
H i t ant towoTOimi \xrilm to f^rtti^ t f f w t in
tbo ©cwitiy1! ottdtt nootoi f « It would oaafelo Hunt to glto
uMtliitod fUjftHMttt to • wuanor not n^w pootiKUi for thoRt to that
of intaotvy hi HJMII tho a-pporimity for s^etiag lioth • ooeial




i t now groatoot*

Ak

The following is a brief running summary of proposed "banking
legislation* The bill is to be known as the "Banking Act of
1935." Its principal provisions are:
Title I ~ Federal Deposit Insurance Corporation
Amendments.
!• Existing Temporary Funds are merged into the Permanent
Insurance Plan, which becomes operative immediately upon enactment
of the "Banking Act ofl$35.!l
2. $5f000 continues to be the maximum insurance protection
f^r each depositor in any bank. Trust funds are insured up to
$5f000 for each trust estate.
3. Maximum limit of assessment of l/l2 of 1$ of total deposits
is substituted for obligatory stock subscription amounting to 1$
of total deposits with liability for repeated assessments thereafter.
A uniformly lower assessment may be fixed by the Board of Directors
for mutual savings banks.
4. Banks not members of the Federal Reserve System are permitted to withdraw from insurance after notice to their depositors
and to the Corporation. Similarly, after adequate notice and
after a hearing the Corporation may terminate the insured status
of any bank.
5. The Corporation's present right to buy assets of closed
member banks is extended until July 1, 1936, to open banks when
it will facilitate mergers and avert loss. For this purpose, the
Corporation may also make loans to insured banks or guarantee other
insured banks against loss in assuming liabilities of insured
banks.
&% The proceeds derived from the sale of capital stock of
the Corporation may be allocated between capitaLand surplus in
such amounts as the Board of Directors may prescribe, so that in
the event of losses exceeding the proceeds of the annual assessments




-2the Corporation will not "be forced to operate with impaired
capital* Dividends on capital stock of the Corporation are eliminated.
7« Detailed administrative and technical changes, which seem
advisable in the light of the experience of the Corporation, include
the following:
(a) Certain important terms used in the Act have teen defined;
(b) Mechanics of pay-offs have "been revised and clarified;
(c) The Corporation is given the right to require insured
"banks to maintain adequate fidelity and burglary
insurance;
(d) The standards for determining whether or not banks should
became insured are set forth;
(e) Insured banks not members of the Federal Reserve system
are required to make reports of conditions, and the
Corporation may order publication of such reports;"
(f) Corporation approval is required "before a merger ot
consolidation of insured banks with non-insured banks,
t*r before a reduction of capital of non—member banks
takes place;
(g) Other miscellaneous changes:
i. The use of the words "Deposit Insurance" in
the name of a bank is prohibited;
ii. Examiners of the Corporation are prohibited
from borrowing from insured tanks;
iii. Criminal provisions are extended to protect
all insured banks.
Title II ~ Federal Reserve Act Amendments^
With respect t« Federal Reserve Banks:
1. Combine offices of Chairman of the Board of Directors
and Governor at each ©f the Federal Reserve banks, appointments to
be made annually by the directors of the bank, after approval by
the Federal Reserve Board. Vice-Governors are to be selected in
the same manner.
2. No members of the Board of a Federal Reserve bank, except
Governor and Vice-Governor, shall hold office for more than six
consecutive years.
With respect to the Federal Reserve Board:
3. Change qualifications for future appointive members of
the Federal Reserve Board by providing that they shall be persons




3 -

well qualified by education or experience or "both to participate
in the formulatipn of national economic and monetary policies. The
present geographical limitation shell rot apply to selection of
future Governors,
T^ie Governor1 s membership on the Board shall expire when he is no longer designated as Governor by the President*
4. Increase the salaries of future appointive members to
$15,000 per annum, with compulsory retirement at 70 on $12,000
pension. Present members to be eligible for retirement at 70. Proportionate pensions., will be allowed for service of less than twelve
years.m
5. The Board shall be empowered to., delegate specific powers
and duties not involving the determination of national or System
policies to individual members of the Board or its representatives.
With respect to credit control:
6. Change Section 12A of the Federal Reserve Act so as to
provide for an open-market committee to consist of the Governor and
two members of the Board elected annually by the Board, and two
•
governors of Federal Reserve banks elected annually by the governors
of the Federal Reserve banks*
This committee shall make recommendations about discount rate policies and shall forxsulate the System1s
open market policies which shall be binding on the Federal Reserve
banks.
With respect to collateral requirements:
7. Any sound asset of a member bank shall be eligible fo£
discount at a Reserve bank, subject to regulations of the Federal
Reserve Board, and the Board shall also have authority to prescribe
limitations on maturity of advances to member banks.
8. Section 14 is amended so that obligations the principal
and interest of which are guaranteed by the United States shall be
eligible for purcha.se by Federe.1 Reserve banks without regard to
maturity,
9. Collateral requirements for Federal Reserve notes shall be
repealed, and the office of Federal Reserve Agent shall be abolished.
With respect to reserve requirements:
10. In order to prevent injurious credit expansion or contraction, the Federal Reserve Board may change reserve requirements




~ 4 -

as to any or all Federal Reserve districts and/or any or all classes of
cities, and as to time and/or demand deposits,
With respect to capital requirements:
11. At any time prior to July 1, 1937, the Federal Reserve Board may
admit any insured non-member bank to membership in the Federal Reserve
System; and may waive the capital requirements for admission? provided tiiat
such bank shall comply with all of the regular requirements of members within such time as the Federal Reserve Board shall prescribe.
With respect to real estate loans:
12. Section 24 of the Federal Reserve Act is amended to permit loans
to be made on amortization besis for periods of 20 years and up to 75 per
cent of value of property.
The geographical limitation as to location of
real estate is removed.
The aggregate amount of real estate loans plus
other real estate (except bank premises) is not to exceed 60 per cent of
time deposits or 100 per cent of capital and surplus, whichever is the
greater. All real estate loans are to be secured by first liens, but second
and subsequent liens may be taken to secure debts previously contracted in
good faith. The limitations of Section 24 are made applicable to State
member banks.
Title III - Technical Amendments.
Section 301 exempts "accidental11 holding company affiliates from voting permit requirements where not engaged as a business in holding bank
stock.
Section 302 provides that member banks need not divorce securities
affiliates which are in formal liquidation.
Section 303 (a) makes it clear that the prohibition against security
dealers accepting deposits does not prevent banking institutions from deading in, underwriting, purchasing and selling investment securities to the
extent permitted to national banks and does not prevent banking institutions
from selling mortgages without recourse, (National banks are limited, in
dealing In and underwriting, to Government obligations, general obligations
of States or political subdivisions, obligations issued under authority of
Federal Farm Loan Act, by Federal Home Loan Board or Home Oraeffe* Loan
Corporation.) (b) Exempts business institutions accepting deposits solely
from their employees, from examination and publication of reports of condition; and requires private banks to bear expense of their examination when
made by Federal authorities.
Section 304 terminates double liability of shareholders of national
banks on July 1, 1937.
Section 305 corrects omission of national banks in Alaska and Hawaii
from benefit of amendment repealing law requiring directors of national
banks to increase their shareholdings.



- 5 -

Section 306 gives Federal Reserve Board power to control con-*
nections of officers, directors, and employees of tanks with
securities companies "by regulation rather than "by issue of individual
permits•
Section 307 (a) eliminates any question of power of member "banks
to buy or sell stocks solely for the account of their customers and
pennits national "banks to purchase far their own account investment
securities not to exceed 10 per centum of unimpaired capital and
surplus, (b) Restates existing prohibition against national banks
purchasing stock for their own account.
Section 308 requires new national "banks to have paid-in surplus
equal to 20 per cent of capital, subject to waiver as to State "bank
converting into national bank*
Section 309 eliminates possibility that present law prevents
corporations other than a bank from conditioning transfer of their
shares on transfer of bank stock*
Section 310 (a) permits holding company to vote to place bank
in voluntary liquidation without obtaining voting pemit. (b).
Since shares held by bank as sole trustee cannot be voted, same are
excluded from determination whether resolution adopted by requisite
number of shares• (c) Eliminates any doubt that holding company
with voting permit may cumulate its shares as may other shareholders.
Section 311 gives Comptroller discretion to permit converting
State bank to carry over sound assets not conforming to requirements
as to assets held by national banks.
Section 312 allows Comptroller to delegate manual labor of
countersigning bond transfer.
Section 313 permits national bank branches located outside
United States to charge interest rate permitted by local law.
Section 314 provides for national banks gradually increasing
surplus out of earnings, until equal to capital.
Section 315 extends criminal provisions applicable to member
banks to include insured banks.
Section 316 gives Comptroller closer supervision over banks in
voluntary liquidation.




- 6 -

Section 317 extends present prohibition on use of word,
"national", "by tanks other than national "banks, to include combinations
of such word*
Section 318 corrects oversight "by requiring member "banks to
reduce stockholdings in Federal Reserve "bank upon a reduction of
surplus.
Section 319 requires State member banks to publish reports of
condition*
Section 320 places State member banks on parity with national
banks as regards loans on government obligations.
Section 321 permits Federal Reserve bank direct loans to private
business to be made on adequate indorsement or security, instead of
requiring both as under present law*
Section 322* Reference to par value of Federal Deposit Insurance
Corporation stock in the "Loans to Industry" Act changed to "amount
paid for said stock,"
Section 323 (a) authorizes Federal Reserve Board to define
"deposit" and related terms for reserve and interest requirements
respecting deposits* (b) Permits amounts due from other banks to
be deducted from gross deposits, instead of amounts due to banks,
in determining reserve requirements* (c) Extends power to regulate
payment of interest by member banks to include all insured banks,
except mutual savings and Morris Plan banks not members of system*
(d) Requires member banks to maintain same reserves against government deposits as against other deposits*
Section 324 permits waiver of reports and examinations of barfs:
affiliates where deemed unnecessary fully to disclose relationship*
Section 325 (a)* Extends prohibition against loans and
gratuities, to examiners of all insured banks, (b) Extends prohibition against disclosure of confidential information to Federal
Deposit Insurance Corporation examiners* (c) Corrects impractical
features of law prohibiting loans to executive officers, by vesting
certain discretion in the Federal Reserve Board, substituting power
of removal from office for present criminal provisions, and extending
time within which existing loans must bo paid*
Section 326* Excepts affiliates from existing requirements on
loans whore affiliation arose out of foreclosure by bank on collateral*
and excludes affiliate engaged solely in operating property acquired
for bank purposes controlled by bank in fiduciary capacity*




~ 7 -

Section 327 exempts loans for industrial purposes made with
Federal Reserve Bank or Beconstniction Finance Corporation from
existing restrictions on real estate loans by national "banks*
Section 328 amends Clayton Act to permit Federal Reserve Board
to supervise matter of interlocking directorates throtigh general
regulations instead of by individual permits.
Sections329 and 330 bring law governing consolidation of
national banks into coriforaiity with that governing consolidations of
State and national "banks, offer additional protection to dissenting
shareholders, "but require notice of dissent to he given when vote
to consolidate is had.
Sections 331 and 332 extend to Federal Deposit Insurance
Corporation protection now given other Federal institutions against
misleading use of name and extend to all insured banks law making
robbery of member "banks a Federal offense*