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COPX
.!q>ril 22, 1918.
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dear Governor:
I have road '7.Lth nmch interest tho letter of Mr. F. o. Williams,
President o:f tho Natione..l Association of SL1~:x;rvisors of State Ban.'l{s,
dated April 15, 1918, written to you u~ criticism of certain
rcc()D]!lendations made by mo to the Foc.oral Reserve Board in a memorandu.'ll
on tho subject of State and Federal legislation.
It is very evident that the purpose of these recommcmdations
has boon misunclcrstood and I &11 glad to have an opportunity to explain
row position in the matter.
Mr. Williams is of tho ~inion that the adoption of the policy
advocated vill have a very unpleasant and tisturbing result and will
seriously interfere \nth that cordial cooperation vd1idh exists at the
present t~e be~voon tho State and Federal banlcing authorities.
This view is obviously prcdi~cd upon tho assumption that the
purpose of the legislation proposed is, or the probable effect \vould
be, to encroach upon, if not to destroy, tho State systems.
I
I wish to disclaim any intention of recOJ."111nending legislation
that has this end in view, and to state in tho beginning that I :t'ully
agrcu Y.ri th Mr.. Uilliams that no action should be taJ.ton \"hich 'l<~uld
have a tcnc1cncy to Cl.cstroy that ver.J splendid spirit of cocperation
\lhich o:::i sts es bet\7Cen the State ane_ Federal ba:nking au tllori tics, or
which •10uld antagonize tho several thousand State banl~s and trust
companies ~~1idh l~vc rendered and aro rendering such petriotic and
valuable assistance to the Government in the conduct of its fiscal
e.ffairso
I respectfully submit that the adoptiou of the policy recommended
if pr<>p)rly uno.orstood should. he.ve neither effect.
As pointed out in the memorandum reforrcct to, tho Su~:;.~emc Court of
the United States has c.'l..ociced that Cong·ross may vest national banks
with any ~or.vers c~joycd by State corporations which come into competition with na tior:.al banl~s.
l:;pav~·,·me~ely su..:,oog0sted that the pmvers of national banks in
accordance with thir> d.ccision shoulcl be extended so as to enabl(; them to
moot successfully the competition of State banJ.;:s anc1 trust companies on a
basis of cquali ty, and to c~~tcnd to their cuctomors the character of
accommodation desired.
Eg:pcrionce has sho\Vll t.."lat tho bank custcr,1or prefers to deal with
one rather than. vd th several classes of banl::ir:..s institutions.
In
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theory, it may seem advisable to require commercial bari!tf.
confine
their operations to the business of commercial ba:nlcing, to require trust
companies to engage only in the trust company business and to prohibit
savings banks from doing any commercial ba.n£-..ing business.
State corporations, hovv-ever, have found it profitable to combine
these several functions and national ~cs have admittedly been at a
serious disadvantage in meeting competition of State banlm and trust
com1Janies Which have enjoyed much broader corporate po•vers.
In creating the Federal Reserve System, Congress has extended the
privilege of membership to State banks and trust companies. 'l!b.e Federal
Reserv.e Act e:>..":pressly provides that ttsubject to the provisions of this
Act and to the regulations of the Board made pursuant thereto, a:rr.y bank
becoming a member of the Federal Reserve System 9 shall retain its full
charter and statutory rights as a State bank or trust com};any and may
continue to exercise all corporate po...-vers granted it by the State in
which it is created, and ru1all be entitled to all privileges of member
banks."
·The Act, therefore, admits to membership banlcs vJhich admittedly
possess broader powers thru1 national banks. It also recognizes the right
of these banlt:S to t"Jithdraw from the system, while national banlcs are
required to go into liquidation in the event of wi thdrm7al.
Under the circumstances, the State authorities could l1ardly be
said to be justified in re~~sb1g to cooperate with the Federal authorities
if Congress should undertake to broaden the powers of national banks so
as to place them on an equality with other rr.ember banks.
Mr. Williams is opposed to any attempt to pass legislation which
might in a:rry vvay be construed as intendeo. to drive State banking interests
into the Federal Reserve System and seems to feel that any broadening
of national banldng pov;ers should be construed as au effort to accomplish
this purpose.
In my opinion, legislation designed to place all member banks on a
basis of equality should not be constr'~ed as intendeo. to drive State banks
and trust compa.nies into the system, but on the contrary, should forestall
the possibility of legislation hav:l.ng this purpose in view.
In other words, legislation intended to force State bankS into the
system would probably talte the form of some penalty or tax. ~.m.posed upon
those rem.ining out of the system. For e:ltample, i t has been suggested
on more than one occasion that a tax should be imposed on all interstate
checks drawn against banks vhich are not members of and do not clear
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through Federal Reserve banks. It is obvious that legislation of this
sort woulo_ seriously impair the activities and. affect the business of
State banks and trust com:,Ja.nies remaining out of the system.
It may be contended that it is by no means likely that Congress
vvill undertake any such radical action. You will recall, however,
that the lack of uniformity in the la\7S of the several States and the
failure of many States to adOj_)t proper safeguards to protect State bank
circulation resulted in 1864 in the passage of a Federal statute
imposing a tax of ten lJer cento on State banJ.,;: circulation, thus depriving
such banlcs of this p:ri vilege. Prior to the passage of this .Act, State
banlcs had been offered by the Act of 1863 the :privilege of issuing
circulating notes against the security of United States Government
bonds~ but failed to avail thmi1Selves of this j?rivilege.
I do not.
mean to imply that it will be necessary for Congress to follow the
precedent established in that case, or that it is liltely that such a
bill will be passed. On the contrary 9 every indication points to the
fact that the barucs outside of the systemwill respond to the appeal
made by the President to become members in sufficient numbers to rrako
any such legislation ucru1ccessary. The banl~rs generally realize
that we are no\7 faced rli th a situation \7hich c~,lls for the scient.ific
utilization of our on.tire bahJ.dng pcvJOrs. 'E1is is not merely a
temporary~ but a continuing si tuat.ion.
~e demands made upon our
ba.xllting resources during tho period of readjustment follovdng tho
war uill in all probability be as great or greater than during the
present time. no radical log.i.slation should., thercfore 9 be necessary to
force the banlcs to become ;,1ombors.
Mr. Williams has obviously overlooked the fact that membership
does not deprive State banks of the right to exercise the powers
granted them by the States, bu.t as above stated, merely involves a
compliance with those restrictions \lhich apply to all member banks and
vfuiCh arc adopted for the protection of ~1ose dealing with suCh balli{s;
nor C.oes it impair the supervision of the State authorities over tho
operations of barU{S and trust companies organized under State law. 'E1e
FeC..cral Reserve Board is authorizeC. to accept the e:x.a.i11inations n:ade by
the State authorities in lieu of those requircC. by the Federal Statute,
and in many, if not most instances? c"..oes accept tl1ese examinations.
I respectfully submit~ therefore? that the legislation recommended
by me should not disturb the cordial relations existing between the State
ancl Federal authorities, and shoulcL not antagonize those in charge of
the operations of State banlcs anc_ trust companies.
In conclusion* it is hardly necessary to say that I fully agree
Williams that the Federal Reserve board
shoulc'c give carGfu1 co11..siCteration. to all aspects of the situation before
1,-1i th the suggestion made by Mr
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reaching any conclusion as to the legislative policy to be adopted.
It v;ill, of courset do this in any event. The memorandum prepared. by
me was offered merely as a tentative suggestion ano. has 11ot been
acted upon by the Board and l]aS not been published" With tho consent
of the Board, copies were furnished to representatives of some of the
committees of tho .American Banlrers Association and to tho Fecteral
Reserve agents.
Under the circumstances~ if an issue can be said to have been
created, it seems to be "Shall Congress broaden the powers of national
banlcs in accordance vvi th tho decision tin
,. the case of Barile v. Fellows 9
or would such an attoml?t have an unfortunate and disastrous effect
upon the State systems and upon the banks v.ihich compose those systems?''
In order that the Board may have before it all facts necessary
to enable it to roach a conclusion, I would suggest t:b.at :Mr, Williams
point out in just what v~y the e~tension of national banlcing powers
vvill encroach upon or have a tendency to destroy the State systems,
and why such systems will be injuriously affected if additional State
banlcs and trust cmnpanics become members of the Fbderal Reserve system.
Respectfully,
(Signed) M. C. Elliott
Counsel.
Ron. W. P. G. Harding 9
Governor, Federal Reserve Board.
@FedFRASER