The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
£-7133. # 6 8 A p r i l 14, 1932. C.S. Hamlin. THE GLASS BILL. Reply t o the Memorandum of Governor Harrison, and l e t t e r s of February 6, and A p r i l 7, 1932. On A p r i l 7, 1932, Governor Harrison sent to the Banking and Currency Committee of t h e Senate, a memorandum commenting on each s e c t i o n of t h e o r i g i n a l Glass b i l l , - Senate 4115 - and on the amendments suggested by the Federal Reserve Board. He a l s o enclosed a copy of a l e t t e r sent by him to Senator Glass dated February 6, 1932. In the l e t t e r of February 6, Governor Harrison s t a t e d t h a t he would withhold d e t a i l e d comments on t h e b i l l pending the r e p o r t thereon of Dr. Goldenweiser and Dr. Burgess. He d i d , however, d i s c u s s the p r o v i s i o n s as t o open market o p e r a t i o n s and some o t h e r s , and s t r o n g l y a t t a c k e d t h e increased power given to the Federal Reserve Board, r e f e r r i n g to i t as a p o l i t i c a l l y appointed body. He s t r e s s e d the n e c e s s i t y f o r autonomy i n the Federal r e s e r v e banks and made t h r e e suggestions as to the amendments t o t h e Federal Reserve Act. These suggestions were: 1. To reduce the number of d i r e c t o r s of each bank so as t p c o n c e n t r a t e r e s p o n s i b i l i t y and t o encourage s u p e r v i s i o n and management through t h e experienced d i r e c t o r s . ( I t a l i c s mine). 2. A grant of power f o r removal of incompetent bank officers. 3. R e s t r i c t i o n upon borrowing by bank o f f i c e r s except with approval of a cemmittee of d i r e c t o r s . X-7131 \ - 2 - 1 369 The f i r s t suggestion w i l l tie taken up l a t e r . As t o the second suggestion, i t w i l l s u f f i c e now t o s t a t e t h a t i n t h e memorandum, Governor Harrison s t a t e s t h a t t h i s should not "be done a t t h e p r e s e n t time. IIIn t h e l e t t e r of A p r i l 7, 1932, accompanying t h e memorandum, Governor Harrison admits " c e r t a i n past d e f e c t s , and t h e need f o r p r o v i s i o n f o r p o s s i b l e f u t u r e a b u s e s , " "but i n another p a r t of the l e t t e r s t a t e s t h a t " t h e r e do not appear to he any p a r t s of t h e Glass b i l l f o r which t h e r e i s an imperative need f o r immediate p a s s a g e . " The only exceptions made t o t h i s sweeping condemnation a r e the Federal L i q u i d a t i n g Corporation and the "branch "banking p r o v i s i o n ; t h e former, he s t a t e s , might he h e l p f u l and the l a t t e r he s t a t e s would be h e l p f u l . He r e a f f i r m s t h e p o s i t i o n taken by the Federal Reserve Bank i n 1929 t h a t only t h e discount r a t e and open market o p e r a t i o n s can e f f e c t i v e l y r e g u l a t e t h e p r i c e and t o t a l volume of c r e d i t . He s e v e r e l y c r i t i c i s e s t h e attempt of the Federal Reserve Board t o c o n t r o l through d i r e c t a c t i o n t h e loan or investment p o l i c i e s of i n d i v i d u a l banks. He admits, however, t h a t d i r e c t a c t i o n has i t s u s e s i n d e a l i n g with i n d i v i d u a l banks u s i n g more than t h e i r s h a r e of Federal r e s e r v e c r e d i t , but he a s s e r t s t h a t i t i s n e i t h e r an e f f e c t i v e nor s u i t a b l e method f o r general c o n t r o l of c r e d i t or t h e u s e s t o which c r e d i t may be p u t , i n v o l v i n g as i t does an assumption of r e s p o n s i b i l i t y f o r the management of i n d i v i d u a l banks which could not be e f f e c t i v e l y f u l f i l l e d . I s h a l l not undertake i n t h i s connection t o go over t h e arguments f o r X-7131 or a g a i n s t d i r e c t presButei w i l l "be s u f f i c i e n t t o point out t h a t the f e d e r a l Reserve Bank of Hew York, i n 1929, wished to i n c r e a s e discount r a t e s to prevent a runaway market which i t believed was imminent; t h a t the Board r e f u s e d t o i n c r e a s e t h e discount r a t e but kept i n t h e 5$ r a t e , e x e r c i s i n g d i r e c t p r e s s u r e upon the member banks to c o n t r o l t h e i r s p e c u l a t i v e l o a n s , thus t a k i n g back p a r t of the Federal r e s e r v e c r e d i t which had seeped i n t o s p e c u l a t i v e markets; t h a t the runaway market f e a r e d by t h e Federal Reserve Bank did not eventuate; t h a t on the c o n t r a r y , during the p e r i o d of d i r e c t p r e s s u r e , - from e a r l y i n February t o e a r l y i n June, 1929, - the t o t a l b i l l s and s e c u r i t y holdings of the Federal Reserve Bank of Hew York s t e a d i l y d e c l i n e d , while i t s r e s e r v e r a t i o s t e a d i l y i n c r e a s e d ; t h a t f o r the rfaole System, Federal r e s e r v e c r e d i t declined 193 m i l l i o n s during t h i s p e r i o d ; t h a t the l a r g e gold imports were kept by t h i s d i r e c t p r e s s u r e from s w e l l i n g the member bank r e s e r v e s and were used t o t a k e down acceptances, thus avoiding a tremendous f u r t h e r expansion of member bank c r e d i t ; t h a t member bank reserves i n f a c t declined 68 m i l l i o n s during t h i s p e r i o d . The f a c t i s t h a t d i r e c t p r e s s u r e under the 5$ r a t e was so s u c c e s s f u l t h a t about t h e f i r s t of June, 1929, t h e Federal Reserve Bank informed t h e Federal Reserve Board t h a t t h e r e was s h o r t l y t o be expected a commercial need f o r expansion of Federal r e s e r v e c r e d i t ; t h a t the member banks were a f r a i d to i n c r e a s e t h e i r borrowings, and t h a t an easing p o l i c y "rould soon be essential. Governor H a r r i s o n , i n h i s l e t t e r , c r i t i c i s e s Section 3 of t h e Glass b i l l , as amended by t h e Federal Reserve Board, perhaps more s e v e r e l y than any o t h e r Section of t h e b i l l . He a b s o l u t e l y opposes t h e grant of po^er i n > 271 X-7131 — 4 — t h i s Section to c l o s e the discount window to banks abusing t h e discount p r i v i l e g e s and to suspend such banks from f u r t h e r use of Federal r e s e r v e facilities. He a l s o o b j e c t s t o the duty imposed by t h i s Section on f e d e r a l r e s e r v e banks to keep themselves informed as t o the loan and investment p o l i c i e s of the member banks, ( t h e imposition of which duty i t may be p a r e n t h e t i c a l l y s t a t e d was s t r o n g l y recommended by the Federal Advisory Council i n February, 1931.) He s t a t e s t h a t t h e powers granted and the d u t i e s imposed by t h i s Section would be i n e f f e c t i v e , would involve r e s p o n s i b i l i t i e s which n e i t h e r t h e Fede r a l r e s e r v e bank nor t h e Federal Reserve Board could f u l f i l l , and t h a t the assumption of such powers would be harmful to the member banks and to the Federal Reserve System as a whole. In t h i s connection, I would p o i n t out t h a t both Governor Harrison and Mr. Owen D. Young, who signed the memorandum s t a t i n g t h e above o b j e c t i o n s , took a very d i f f e r e n t view of t h e m a t t e r i n t h e i r testimony b e f o r e the Sub-committee of the Senate. On January 20, 1931, Governor Harrison suggested t o t h e Sub-committee t h a t power should be given to the Federal r e s e r v e banks, or t h e Federal Reserve Board, to suspend a member bank from any or a l l of the p r i v i l e g e s of membership, during a given p e r i o d , i n the event t h a t the bank has not conducted i t s e l f i n t h e s a f e s t way f o r the d e p o s i t o r s . (Testimony, p . 4 6 ) . On February 4, 1931, Mr. Owen D. Young s t a t e d to the Sub-committee that the Federal r e s e r v e bank should have the power to l i m i t or r e f u s e rediscount even of e l i g i b l e p a p e r , and to suspend other p r i v i l e g e s of membership, i f t h e banking p r a c t i c e s of any p a r t i c u l a r bank were, i n i t s judgment, unsound, and X-7131 272 - 5 t h e r e f o r e subjected i t s depositors id tinresLsoiiable r i s k , e i t h e r as t o l i q u i d i t y or s e c u r i t y , with a r i g h t of appeal on the p a r t of the member bank i n case the Federal Reserve Bank exercised i t s power u n f a i r l y , and t h a t i f the unsound p r a c t i c e s were p e r s i s t e d i n , the Federal Reserve Board, on complaint of any Federal r e s e r v e bank, might expel t h e bank from membership. (Testimony, p . 356). Both Governor Harrison and Mr. Young were asked by the Chairman of the Sub-committee whether under e x i s t i n g law t h e Federal r e s e r v e banks had not the r i g h t to r e f u s e t o discount e l i g i b l e paper. Governor Harrison r e p l i e d t h a t t h a t had always been h i s opinion, and t h a t he had so advised t h e Federal Reserve Board when he was i t s Counsel, but t h a t t h i s r i g h t had been denied. (Testimony, p p s . 47, 4 8 . ) Mr. Young t o l d t h e Sub-committee t h a t t h e d i r e c t o r s had never been able to agree t h a t the power was c l e a r l y enough expressed to warrant such a c t i o n by the Board of D i r e c t o r s ; t h a t he believed t h e power now e x i s t e d but t h a t such an e x t r a o r d i n a r y power and the o b l i g a t i o n t o execute i t , should be made c l e a r . (Testimony, p . 363). The Glass b i l l , a s amended, makes e x p l i c i t t h e s e g r a n t s of powers, and yet the memorandum, signed by both Governor Harrison and by Mr. Young, p o s i t i v e l y o b j e c t s t o such power as harmful both to the member banks and to the Federal Reserve System! I t i s p o s s i b l e t h a t the Federal r e s e r v e bank may claim t h a t i t desired t h i s power only over i n d i v i d u a l banks borrowing more than other banks of their class. This, however, would be tantamount t o saying t h a t i f any one 6 - - X-7131 273 "bank l o s e s i t s head in t h e way df s p e c u l a t i v e l o a n s , they want power to c o r r e c t i t , hut i f a l l banks a r e i n f e c t e d with the s p e c u l a t i v e mania, they d e s i r e no power except t h e i r e x i s t i n g powers over t h e discount r a t e s on commercial p a p e r . The power vested in the Federal Reserve Board by Section 3 of the Glass b i l l , would, of course, be exercised only on i n d i v i d u a l banks, but i t i s a power which could not be d e f e a t e d by proof t h a t not one but a l l banks a r e possessed by t h e s p e c u l a t i v e mania. III. Analysis of Memorandum. The memorandum comments on each s e c t i o n of the b i l l in d e t a i l . I t opposes every s e c t i o n of the o r i g i n a l b i l l except Section 16, r e l a t i n g to a l a r g e r c a p i t a l f o r f u t u r e n a t i o n a l banks, which i t s t a t e s i t p r e f e r s to the d r a f t submitted by t h e Federal Reserve Board. I t approves in general the Federal Reserve Board's recommendations as to 22 s e c t i o n s of the o r i g i n a l b i l l , but s t a t e s t h a t of the se 22, 13 a r e not now necessary, and should be postponed f o r f u t u r e c o n s i d e r a t i o n . Among these l a t t e r were; Most of the recommendations as to a f f i l i a t e s , and e s p e c i a l l y the divorce of a f f i l i a t e s . The 90-day clause f o r member bank c o l l a t e r a l n o t e s secured by e l i g i b l e paper. Supervision of holding companies. Removal of o f f i c e r s and d i r e c t o r s of member banks. X-7131 - 7 - , 274 The memorandum opposes t h e f a l l o w i n g recommendations of t h e Boards The power to suspend member banks f o r abuse of Federal reserve f a c i l i t i e s . The Board's b i l l covering new r e s e r v e p r o v i s i o n s . The s e p a r a t i o n of bank and a f f i l i a t e stock. The divorce of a f f i l i a t e s , " t h e d e s i r a b i l i t y of which a t any time i s d o u b t f u l " . IV. The Glass b i l l , with the amendments of the Federal Reserve Board, i s designed to give some assurance to d e p o s i t o r s and t h e p u b l i c t h a t the s p e c u l a t i v e excesses culminating in the crash of 1929 w i l l not be repeated. The s p e c u l a t i v e craze which swept over the c o r n t r y w i l l take i t s p l a c e in h i s t o r y along with t h e t u l i p mania and the South Sea bubble. The crash of 1929 was probably one of t h e worst i n the w o r l d ' s history. I t r e p r e s e n t e d a s u c c e s s f u l r a i d of t h e s p e c u l a t i n g p u b l i c upon the banks of t h e country. The banks were unable to stem t h i s r a i d . On the c o n t r a r y , they p e r m i t t e d i t to increase by undue and excessive loans to t h e i r customers. The f i n a l crash brought r u i n to thousands and thousands of our people and was f e l t over t h e whole world. The Glass b i l l o f f e r s a remedy by giving the Federal Reserve Board t h e r i g h t and duty to p r o t e c t the p u b l i c i n t e r e s t a g a i n s t any such f u t u r e mania .of s p e c u l a t i o n . The Federal Reserve Bank of Uew York admits p a s t d e f e c t s and the need f o r some p r o v i s i o n f o r f u t u r e p o s s i b l e abuses. I t s u g g e s t s , as X-7131 . s t a t e d b e f o r e , t h a t the d i r e c t o r s of each bank be reduced in numbers 11 so as to .concentrate the r e s p o n s i b i l i t y and to encourage s u p e r v i s i o n and management through the experienced d i r e c t o r s " . "Through the experienced directors 1 *! To what d i r e c t o r s does t h i s refer? At f i r s t b l u s h i t would seem to r e f e r to the Federal r e s e r v e bank directors. Such a change, however, would d i s r u p t the Federal Reserve System by removing a l l d i r e c t o r s r e p r e s e n t i n g t h e p u b l i c i n t e r e s t , as d i s t i n c t from t h e member banks. I assume, however, t h a t t h e r e f e r e n c e i s to the d i r e c t o r s of the member banks. Coupled with t h i s recommendation i s a recommendation l i m i t i n g borrowings by bank o f f i c e r s , and also giving power of removal of i n competent bank o f f i c e r s . The memorandum, however, s t a t e s t h a t the l a t t e r suggestion should not be considered a t the p r e s e n t time and, presumably, t h e same sugg e s t i o n would ap-oly to t h e other recommendations. V. To sum up; The Federal r e s e r v e bank admits abuses in the p a s t , and admits the n e c e s s i t y f o r p r o v i s i o n a g a i n s t p o s s i b l e f u t u r e abuses, but i t opposes the present b i l l , and in e f f e c t takes the p o s i t i o n t h a t p r a c t i c a l l y no l e g i s l a t i o n i s imperatively demanded a t the p r e s e n t time. 3 7 5 X-7131 - 9 - 2 7 6 The correspondence contaitiB "the statement t h a t the b u s i n e s s in the United S t a t e s i s more dependent noon the s e c u r i t i e s market ( c a l l e d in the correspondence the 11 c a p i t a l market") than upon the banks, and t h a t business recovery i s dependent upon t h e proper f u n c t i o n i n g of the c a p i t a l market. There may be an element of t r u t h in t h i s statement as r e g a r d s what i s p o p u l a r l y known as "Big Business", but i t i s c e r t a i n l y not t r u e a s to t h a t l a r g e volume of b u s i n e s s which i s a b s o l u t e l y dependent unon s h o r t term c r e d i t extended by banks under t h e auspices of t h e Federal Reserve System. I t should not be f o r g o t t e n t h a t i t was the secession of "Big Business" from the banks, and the i s s u e of t h e i r own s e c u r i t i e s on s p e c i a l l y f a v o r a b l e terms beginning in 1927 , and l a t e r t h e i r a c t i o n in pouring t h e funds thus obtained into t h e maelstrom of s p e c u l a t i o n , t h a t was a major cause in the f i n a l c o l l a p s e of 1929. Yet the attempt of t h e Glass b i l l to prevent a r e c u r r e n c e of t h e s e p r a c t i c e s , i s condemned as being i n j u r i o u s to the c a p i t a l market, upon t h e p r o s p e r i t y of which t h e r e v i v a l of b u s i n e s s a c t i v i t y i s s t a t e d to depend. The conclusion i r r e s i s t i b l y to be drawn from the correspondence and memorandum i s t h a t the need f o r changes in the Federal Heserve System must y i e l d and give precedence to t h e needs of t h e c a p i t a l market, and t h a t any changes in the Federal "Reserve System which might a f f e c t the c a p i t a l market would be most u n f o r t u n a t e . The Glass b i l l as amended by the Board by p l a c i n g r e s t r a i n t upon f u t u r e mad s p e c u l a t i o n , w i l l u l t i m a t e l y p l a c e the s e c u r i t i e s market upon a much sounder foundation than e x i s t s today, and the argument t h a t X-7131 i 277 ' - 1 0 - l e g i s l a t i o n "cringing about thiri Ultimkte r e s u l t should be postponed, seems to be not sound. I t i s a customary o b j e c t i o n to a l l remedial l e g i s l a t i o n t h a t i t should be postponed, and t h e time w i l l never come when a l l w i l l agree t h a t the t a s k should be then undertaken. The Federal Reserve Bank, a s b e f o r e s t a t e d , denies t h a t t h e r e i s a n e c e s s i t y f o r l e g i s l a t i o n on Smy s u b j e c t l a t h e Glass b i l l , except p o s s i b l y the l i q u i d a t i n g Corporation and branch banks. I t t a k e s the p o s i t i o n squarely t h a t when l e g i s l a t i o n i s enacted, i t should give the Federal r e s e r v e banks more complete autonomy, f r e e from a l l but very general supervision by the Federal Reserve Board, b u t i t makes c l e a r t h a t i f given t h i s autonomy, i t w i l l use i t in meeting another s p e c u l a t i v e mania s o l e l y by t h e e x e r c i s e of the discount r a t e and open market operat i o n s , and t h a t too even though a l l of the member banks a r e f e e d i n g t h e f i r e of u n b r i d l e d speculation by undue and excessive loans to t h e i r customers on stock exchange c o l l a t e r a l . I venture to express t h e view t h a t the p u b l i c demands something more than t h i s , and t h a t i f such a wave of s p e c u l a t i o n should sweep over the country again, i t w i l l f i n d the Federal "Reserve Board charged with such power t h a t i t s f u t u r e warnings in the rmblic i n t e r e s t w i l l be r e c e i v e d with r e s p e c t and c a r r i e d out with promptness.
@FedFRASER