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327,-5 - RELATIONS BETWEEN FRBoard, FRBanks
& MEMBER BA NKS
(FRDistricta 1 - 6 )
; 'z

W ill 1:
im

^ . as ; i

Reproduced from the Unclassified / Declassified Holdings of the National Archives

FED ER AL RESERVE BOARD

5 J

WASHINGTON
A D D R E S S O F F IC IA L C O R R E S P O N D E N C E TO
T H E FED ERAL RESERVE BO ARD

X-9115
February 6 , 1935.

During an informal meeting of the Governors of the Fed
eral reserve banks with the Federal Reserve Board on February 5,
I stated to the Governors that it would be helpful to the Federal
Reserve Board if the Federal reserve banks would frankly point out
any features of the relations between the Federal Reserve Board and
the Federal reserve banks and member banks that in their opinion
are unsatisfactory or subject to criticism, with special reference
to any regulations or rulings or procedure of the Board.

If in

any respect the actions of the Board or its staff seem bureaucratic
or impractical or unduly rigid, the Board desires to be fully ad
vised so that it may take any measures that seem desirable to cor
rect and improve the situationIn addition, I suggested a number of subjects which it
seemed to me it would be desirable for the directors and officers
of the Federal reserve banks to discuss.

There are inclosed two

copies of a revised list of these subjects, which the Board would
like to have considered in the manner suggested, and to be advised

Reproduced from the Unclassified / Declassified Holdings of the National Archives

V
-

X-9115

as to the views of your bank within thirty days, treating each
subject separately.

Upon receipt of the replies from the Federal

reserve banks they will be analyzed and studied and an endeavor will
be made as promptly as possible to advise you as to any conclusions
that the Board may reach regarding them.
Very truly yours,

Inclosures.

TO ALL CHAIRMEN.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

The following is a list of certain subjects which were
brought to the attention of the Governors on February 5 by Governor
Eccles with the suggestion that these subjects be discussed by the
directors and officers of the Federal reserve banks and that the
Board be advised as to their views within thirty days, treating
each subject separately:
1.

General credit situation
(a)
(b)

Interest rates
(a)
(b)

Are commercial banks doing everything in their
power'
to improve the situation?
If not, what steps can be taken by the Federal
reserve banks or otherwise to bring about an
improvement?

On time and savings deposits of member banks.
On loans of member banks and on industrial ad
vances and commitments by Federal reserve banks .

Matters affecting admission of nonmember banks to Federal
reserve system
(a)
(b)
(c)

Earnings of nonmember banks from exchange
collection charges .
Present conditions of membership.
Advisability of extension of membership to
banks outside the States and the District
of Columbia.

Feed for continuance of assistance of Reconstruction
Finance Corporation in connection with rehabilitation
of capital structures of banks.

Adequacy of reimbursement of Federal reserve banks by
Treasury and. other governmental agencies for various
services rendered and for space used in Federal reserve
bank buildings.

Regulation fixing margin requirements for loans by banks
upon equity securities for the purpose of purchasing or
carrying securities registered on national securities
exchanges.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

-2 -

X-9115-a

(a)

Circumstances under which regulation should be
issued.
(b) "Whether regulation should permit borrower to
obtain from bank more than he could obtain from
broker under Regulation T.

Economic and statistical divisions of Federal reserve banks.
(a)
(b)

Usefulness to directors and officers»
Value of Federal reserve bank monthly reviews.

8 . Establishment of career system for personnel of Federal
reserve banks•
9.

Criticisms of existing regulations or rulings or procedure
of the Federal Reserve Board, with specific recommenda
tions as to changes which would correct any unsatisfactory
features of the relations between the Board or its staff
and the Federal reserve banks or member banks.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

Keproduced from the Unclassified / Declassified Holdings of the National Archives

V
TELEGRAM
FED ER AL RESERVE SYSTEM
(L E A S E D W I R E S E R V IC E )

RECEIVED A T W A S H IN G T O N , D. C .

y8bs
Boston 1205P Apl 5
1935 /iPft

Board

Washington
!
Your telegram. April 4> in the absence of the Chairman I advise that his
_
________________________________

—

letter of March 2 3 , and enclosures in response to the BoardTs letter of
February 6, (X-9H 5 ) were brought before the directors meeting on April 3*
The conclusions set forth in the enclosures were read or summarized and
no differences of opinion were expressed
Garrick

1 2 1 8p m

GOVERNMENT PRINTING OFFICE: |»M

16— 794

Reproduced from the Unclassified / Declassified Holdings of the National Archives

Form 118 b

T E L E G R A M
FEDERAL RESERVE BOARD

WASHINGTON

April 4, 1955

Curtiss - Boston
Please refer to your letter of March 25, arid inclosure, in response
to uoard*s lett r of February 6 (X-3115) and confirm by wire our
assumption that your directors at meeting yesterday concurred in
views expressed therein.
Bethea

LPB/faf

2— 9454

Reproduced from the Unclassified / Declassified Holdings of the National Archives

T ELEGRAM
FEDER AL RESERVE SYSTEM
(L E A S E D

W IR E S E R V IC E )

R E C E I V E D A T W A S H I N G T O N , D. C.

1935 MAR

Boston Liar 25

234 pm

Morrill
Washn
Reply to Board’s letter X - ^ 1 1 5 sent by Air mail this morning.
Curtiss

2 5 1 pm

D. S GOVERNMENT PRINTING OFFICE. 1933

16— 794

Reproduced from the Unclassified / Declassified Holdings of the National Archives

F o r m 148 b

TELEGRAM
FEDERAL RESERVE BO ARD

WASHINGTON

M^rch 25, 1955.

Curtice - Boston

Piece© refer Bocrd«e letter of February 6, X-9115, tnd foll o w
up letter »icrch 18, and advise b y wire when reply any be expected.

aorrill.

a a

(signed) Chester Morrill

* J

2— 9454

Reproduced from the Unclassified / Declassified Holdings of the National Archives

mm**.

-v.mmwhb !

‘-m mm--m

2 S J
FEDERAL RESERVE
OF
FREDERIC

BANK

BOSTON

H. C U R T I S S
CHAI R MAN

March 25, 1955

RECEIVED
f e d e r a l r e s e r v e bo ard

WASHINGTON
Federal Reserve Board
Washington
D. C.

1955

MAR

Dear Sirs;
You will find enclosed in this letter answers to the certain subjects
enclosed in the! Board's letter of February 6 , 1955 (X-9115) representing a list
of subjects which were brought to the attention of the Governors of the Federal
Reserve Banks on February 5 by Governor Eccles, with the suggestion that these
subjects be discussed by the directors and officers of the Federal Reserve Banks
and that the Board be advised as to their views within thirty days, treating
each subject separately.
The Board1s letter was discussed with our board of directors at the
first meeting after its receipt, and this reply will be discussed with them at
our next meeting, and if there are any differences of opinion the Federal
Reserve Board will be advised.
The delay in answering this letter has been caused by the absence of
Governor Young from the bank owing to ill health, and we have only today been
able to get together and agree on the views expressed.
I am
Yours very truly,

FHC/D
Enclosures

"3
^

Chairman

if 3 2- 0

t y ; JJ

■■■

r^epiuuucea from the Unclassified / Declassified Holdings of the National Archives

■

General credit situation.
(a)
(b)

Are commercial banks doing everything in their
power to improve the situation?
If not, what steps can be taken by the Federal
reserve banks or otherwise to bring about an
improvement?

This question would appear to have direct bearing upon the
accommodation that was furnished by commercial banks in this district to
applicants for commercial credit.
The reports from member banks
show that from January 2 to March 15, 1955 the member banks in this
district increased their commercial loans about $50,000,000.
In connection with the Industrial Loan Act, we have urged the
banks to scour their localities for possible credit needs, and this has
resulted in some $17,000,000 of applications for loans being made to the
Federal reserve bank under that Act, of which all but about $6,000,000
have either been approved or are under consideration.
Most of the
loans made by the Federal Reserve Bank are loans of a character where
the credit risk was other than a private bank risk.
We have under consideration at the present time two or three large loans
where the credit risk would appear to be satisfactory, but where the borrowers
wish to be assured they can count on the credit advanced for three or four
years, which is a longer period than commercial banks are accustomed to
make commitments.
Commercial banks have also been heavy purchasers of Government se
curities.
It would therefore appear that commercial banks are doing every
thing in their power to improve the situation} and that' nb suggestions
have yet been made where the Federal Reserve Banks can further assist
in bringing about improvement."

Reproduced from the Unclassified / Declassified Holdings of the National Archives

Interest Rates.
(a) On time and savings deposits of member banks.

/
u The interest rate of 2 i % now in force on time and
-r
savings deposits of member banks would appear to be satisfactory.1
The prevailing rates on mutual savings bank deposits are from 3 to
Many of the non member banks are still paying Z% on savings
accounts.
In Beston and other large cities Clearing House Associations
can control the rates of their member banks, and in some cases these rates
are lower than
It would be an advantage if all commercial banks,
members and non members, especially the non members insured, had
similar maximum rates.1
1
(b)

On loans of member banks and on industrial advances
and commitments by Federal reserve banks.

' In connection with rates on loans, the tendency of
'
member banks is to reduce rates, and it would appear that the borrowers
were getting proper relief.
In connection with industrial advances and commitments of
Federal reserve banks, it would appear that it is logical to have
differential rates on these as between Federal reserve districts and
between different borrowers in each district."
A modification of our Existing rates was recommended
at the meeting of our directors yesterday, which recommendation -b r 1 been
as
forwarded to Washington.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

(a)

Matters affecting admission of non member banks to
Federal Reserve System.

Earnings of nonmember banks from exchange collection charges.

**The problem of exchange collection charges is not one
that arises in this district, as all banks pay their checks at par J*

(b)

Present conditions of membership.

Every nonmember bank in this district has been called
upon during past years, and has been advised regarding the Federal
Reserve System and the provisions of conditions of membership/z So
far as we have been able to learnthe conditions of membership have
never been a deterrent to nonmember banks that have felt it was to
the i - advantage to join the Federal Reserve System. 1
t
1
There are a few features in the conditions of membership
that banks in this district have objected to, as follows:
Condition numbered 15. Some banks have been worried about the requirement
that they shall maintain their unimpaired capital and surplus at not less
than one-tenth of the average amount of their aggregate deposit liabilities.
They do not question the soundness of the ruling, but wonder sometimes
how they are going to increase their capital in times when their deposit
liabilities are increasing.
Condition numbered 17.
This condition has to do with the investment
of trust funds in mortgage participations. At the time of our Trust
Conference, the feeling was very strong against this condition of
membership which prevents transfers of mortgage participation
certificates from one trust to another.
The meeting adopted the
following resolution:
"Resolved, that the majority of the bank officers present is
opposed to the general condition of membership for new State
member banks which prevents such banks from switching participation
mortgage certificates, (of mortgages now in existence) between trust
funds even though such mortgages, on a new appraisal basis, meet
the requirements of a new investment for trust funds."
Condition numbered 18. This condition requires that if trust funds
held by such bank are deposited in its banking department or otherwise
used in the conduct of its business, it shall deposit with its trust
department security in the same manner and to the same extent as is
required of national banks exercising fiduciary powers.
At the conference of trust examiners in Washington, the conference asked
the Federal Reserve Board to define the words "trust funds," in the first
line of the condition, and a ruling whether "agency funds" held for
individuals and corporate trusts are to be protected by the deposit of
securities with the trust department, and whether deposits in the
savings department are to be so protected.
There is some objection to the deposit of securities with the trust
department in Connecticut, particularly in the case of deposits in the savings
department,which the banks claim are investments and not deposits.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

Need for the continuance of the assistance of the
Reconstruction Finance Corporation in the rehabilitation
of the capital structure of banks*

It is our opinion that there is a distinct need for the
continuance of the assistance of the Reconstruction Finance Corporation
in connection with the rehabilitation of the capital structure of banks
although at this particular moment such need of assistance is not in
evidence in this district to any material extent so far as member banks
are concerned. It will be imperative to continue the assistance of the
Reconstruction Finance Corporation in the event that any great number
of nonmember banks should attempt to become members of the Federal
Reserve System between now and July, 1957.
Undoubtedly there are some cases where the stock purchased
by the Reconstruction Finance Corpotation in rehabilitation of capital
structure has since become inpaired, and unless there is a considerable
improvement in the value of the assets of these particular banks,
it will be necessary for the Reconstruction Finance Corporation to accept
some sound plan of recapitalization and make further investment in
order to correct the impairment which exists

Reproduced from the Unclassified / Declassified Holdings of the National Archives

Adequacy of reimbursement of Federal reserve banks by Treasury
and other governmental agencies for various services rendered
and for space used in Federal reserve bank buildings.

This subject was discussed in detail at a meeting on Accounting of a
committee of Federal reserve banks held at Chicago, Illinois, on June 27 and 28,
1954, and it is considered as indicated in the recommendation of the committee
that Federal reserve banks should be reimbursed for all "out of pocket” expenses
in connection with services rendered governmental agencies and allowed a
reasonable amount for floor and vault space occupied by such agencies in Fed
eral reserve bank buildings.
For the year 1954, the Federal Reserve Bank of Boston received reimburse
ment amounting to $107,490.59 from the Treasury Department, Reconstruction
Finance Corporation, Farm Credit Administration and other governmental agencies
covering expenditures made in their behalf.
However, during that year certain
other expenses amounting to $99,524.26 were incurred for the same agencies for
which reimbursement was not received, although it is thought that this amount
might properly be considered reimbursable.
Detail figures are given on the
accompanying statement based on the report to the Federal Reserve Board of
fiscal and depositary expenses for the year 1954 (Form B-941).
The principal services rendered by Federal reserve banks for governmental
agencies have been those in connection with Treasury Department security
operations during and since the World War. The services performed for the
Reconstruction Finance Corporation, the Farm Credit Administration, the Public
Works Administration and other governmental agencies, of this character, have
been of more recent origin and relatively smaller in amount.
The Treasury
Department reimbursed Federal reserve banks for all Liberty Loan and fiscal
agency expenses until July 1, 1921.
Since that date reimbursement has been
made only for expenses relating to new issues although the redemption, exchange
and coupon operations currently carried on and in prospect are much larger in
volume than the" °new issue" work.
New issues are usually closed out in a
week or ten days, while redemptions continue over
much longer periods, and
exchanges from one issue to another have added greatly to the activities of the
coupon organization.
During 1955 and 1954 the number of Government checks
handled by the Federal Reserve Bank of Boston has increased over 500%, and the
expense of the department has more than doubled - reaching $16,461.45, for
the year ending December 51,1954, and a reasonable annual allowance for office
space would be $5,156.
Reimbursement has never been made for this service
but owing to the character of work performed and the present volume, it is
believed that it should properly be on a reimbursable basis.
The Boston Loan
Agency of the Reconstruction Finance Corporation occupies 4848 square feet of
space in the Federal Reserve Bank building and rental of $2.00 per square foot
per annum is charged, which includes heat, light and janitor service.
A
survey indicates that a charge from $2.50 to $2.75 per square foot per annum
is made for similar space and service in other business buildings in this
vicinity.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

- 2 FEDERAL RESERVE BARK OF BOSTON
Year ending December 31, 1934.

Governmental agency expenses and items for
which no reimbursement is received, although
it is considered that they should be on a
reimbursable basis._______________________
TREASURY DEPARTMENT.FISCAL AGENCY DIVISION
$21,452.16
Redemptions & Exchanges
Accounting
4,924.17
Custody of Securities
8,560.95
Government Coupons
3,911.34
Auditing
3,859.65
Office Space
9,428.00
Vault Space
5,672.00
Miscellaneous Activities
4.676.02
CUSTODIAN RECONSTRUCTION FINANCE CORPORATION
Auditing
$ 1,495.59
Office Space
6,552.00
Vault Space
3,127.42
2.017.49
Miscellaneous Activities
FARM CREDIT ADMINISTRATION AND OTHER GOVT.AGENCIES
$ 1,917.86
Departmental Expense
2,966.00
Office Space
1,546.40
Vault Space
TREASURY DEPARTMENT.GOVERNMENT CHECKS
Departmental Expense
Office Space
GRAND TOTAL

Amount received
in reimbursement
for expenses
i n c u r r e d . _____
$47,304.01

$60,484.27
44,350.61

13,192.50
15,835.97

6,230.26

0
$16,461.43
5.156.00

19.617.45
$99.524.26

$107.490.59

The detailed figures given above are based on the reports to the Federal Reserve
Board on Fiscal and Depositary Expenses (Form B-941) for the year ending December 51,1934

Reproduced from the Unclassified / Declassified Holdings of the National Archives

6 . Regulation fixing margin requirements for "loans by banks upon
equity securities for the purpose of purchasing or carrying
securities registered on national securities exchanges.

’’ view of the materially reduced amount of credit now being used
’In
for the purpose of purchasing and carrying securities, and in view of the
various provisions of the Federal Reserve Act and the Banking Act of 1953,
we suggest the issue of regulations fixing margin requirements for loans
by banks be delayed until there are indications that there will be
active demand for credit of the kind under consideration. "
When regulations are issued for the banks, such regulations will
have to be extended to cover all sources of credit for the purchase or
carrying of registered securities so as to cover nany persons” as used in
Section 7(d) of the Securities Exchange Act in order that effective and
preventative control may be exercised.
It is our opinion that the many ramifications of the securities
business and credit extended on collateral security which do not bear
directly on the speculative use of credit necessitate that any regulations be
confined to credit extended on registered equity ^securities when the purpose
is for the purchase and carrying of such securities and is so indicated in
some form on the note held by the bank.

* In order to facilitate the operations of margin requirements we
would suggest that banks be permitted to loan up to some percentage of the
market value, say 75$ in the case of brokers. A non-broker borrower is not
entitled to preferred treatment from a bank when the purpose of the proceeds
is for purchasing and carrying equity securities, and some simplified form
of Regulation T should be worked out applicable to such bank loans. Only the
larger banks would be equipped to handle their collateral loans under regu
lations similar to those now in force for members of securities exchanges, and
then only at considerable additional expense. Further, such an arrangement
would prove unsatisfactory.n
While we believe that it is the theory of the Bill that the Federal
Reserve Board should concern itself only with the regulation of the total
credit in use for the purpose of purchasing and carrying of securities, and
that it is not the duty of the Federal Reserve banks to police individual
loans, nevertheless, it must be recognized that had a regulation been in
force compelling the maintenance of margin, it might have proved beneficial.
We recognize that this is a very debatable point, possibly solved through
bank examinations, although to rely on such a method is to rely on an
”after-the-fact” situation.
If regulations are issued, the following should be exempted:
1. Day loans for purpose of clearings.
Z. Shipment of securities draft attached.
Both are in the nature of cash transactions. Regulations covering foreign
branches of domestic banks should be formulated but not issued until it is
evident- that these branches are a medium for extending credit.
' In conclusion,’
’
we do not believe the issuance of regulations is
necessary in the immediate future. We believe that insofar as it can be done
within the intent of the law, the regulations should be simple and should apply
in the main to the total credit in use, thereby reducing the costs of examina
tion and policing.t

Reproduced from the Unclassified / Declassified Holdings of the National Archives

Economic and statistical divisions of Federal reserve banks.
(a)
(b)

Usefulness to directors and officers.
Value of Federal reserve bank monthly review.

Inasmuch as the economic and statistical department comes
immediately under my jurisdiction I have asked Governor Young to
investigate the usefulness and value of this department from an
unprejudiced outside viewpoint.
He advises me that he is hardly
prepared to give a detailed reply because he has not had an opportunity
to make sufficient inquiries.
He has consulted individually three
of our directors,- the only ones with whom he could get in touch, and
he advises me that these three men say they use the information $rgpy
little.
This does not surprise me as our board of directors look to
the Governor and myself to keep informed on current conditions, and they
are kept currently advised by us at our directors’ meetings.
In fact,
none of our directors h a s : any contact with r f t t the economic and
cci
statistical division and have always been accustomed to consult
Governor Young and myself on any specific information that they need.
Furthermore, much of the information appearing in the monthly
review is old when the directors get it,such information having been
already furnished them at our directors’ meetings.
A canvass of our officers brings somewhat the same reply, although
our senior officers have charts in their offices, furnished by this divi-.
sion.
Governor Young tells me that so far as he is concerned he
uses the information and the department quite liberally.
He states
that he has attempted to determine in his own mind whether the
information that is furnished is more than reading matter to him, and
his conclusion is that if the information is not furnished periodically
he would be inquiring for it.
Owing to his three years’ experience on the
Federal Reserve Board and the fact that he is still a member of the
Open Market Investment Committee he attempts to keep posted on financial
problems both national and international.
When the information or
figures that he may want are not readily available, he has asked the
statistical department for the information and has received information
that has been beneficial.
Furthermore, he states that that department
has prepared and maintained charts for his office which he has used to
advantage in many ways.
All of this, he tells me, convinces him that the statistical
department should be maintained in the Federal reserve banks for the
benefit of certain officers even though all the officers and directors
do not use the service continuously.
He has had the mailing list of the monthly review, now
numbering approximately 7554, checked, and finds of this number 657
are sent to banks, 85 to bankers,and the balance used for general distri
bution to trade interests and the public.
Very few copies are
distributed to schools and students, and about 1500 are sent to
residents outside of New England.

L& p

du>

neproaucea rrom me unclassified / Declassified Holdings of the National Archives

He has inquired of the officers of certain large banks as
to how much the monthly review is read by their officers. He is
informed that so much reading matter now comes to the larger
banks that it is all routed to their statistical and research
department and only that part of such reading matter as is unusual
or of extreme importance is passed on to the officers.
I might add that this practice exists in this bank. The
monthly reviews of other banks in the system, and the reviews of
private banks, both foreign and national, go direct to our statistical
department, items being marked which might be of interest and then sent
to the senior officers of the bank.
Governor Young advises me that he has been unable to ascertain
of how much use the outlying and smaller banks make of the monthly
review, nor has he been able to ascertain how much the trade and industry
utilize that publication.
In this connection, it has been my experience that the statistical
departments of our larger banks and the individuals in trade and
industry, are frequently directly in contact with the economic and sta
tistical department, and especially in connection with trade it has brought
close contact between the reserve bank and our local business men.
Governor Young finds that the mailing list is checked regularly
and in answer to inquiries there still seems to be a demand for the
review.
He therefore assumes that 7300 odd people would not ask f or
the information unless the great majority of them at least were
interested.
He further states that he has had a feeling for several years
> that the publication of the 12 monthly reviews by the Federal reserve banks
\
together with the Monthly Bulletin of the Federal Reserve Board, was in
the nature of an extravagant procedure.'' Whether this is so or not he
believes could not be answered except by taking arbitrary action.
Suppose the 12 Federal reserve banks should discontinue their monthly
reviews for a few months and the reserve banks received no great
protest from those now receiving them, it would seem that this should .
be conclusive that the reviews were not serving the purpose that the
banks and the system intended.
On the other hand, if there was a
substantial protest it would appear that the reserve banks would be
justified in continuing the publications even though we had a smaller
circulation.

ixeproaucea tram tne Unclassified / Declassified Holdings of the National Archives

Establishment of career system for personnel of Federal Reserve Banks

v\ It has been the policy of the officers of this bank to encourage promotion
within the bank among its staff. A notable example is furnished of an
employee who entered the bank at $1600 a year as a general clerk and book
keeper and finally was elected deputy governor.
There have also been
transfers from the Auditing Department to the Department of Bank Examination.
Employees in the Banking Department have been given opportunity to work not
only in other departments of the bank but also to go out and assist the
examining department in the examination of member banks.
Our clerks have
for a number of years been given the advantage of taking courses under the
A.I.B.
Although we have one examiner who came to us from the Chicago Federal
Reserve Bank, that examiner was an applicant for the position, the change
being desired by him for personal reasons. x It would not appear to be
V
feasible to exchange employees between the Federal reserve banks, as most
of our male employees are not only married but own their own homes and it
would be a hardship and inconvenient to make such transfer, and most of our
female employees live with their families.
Since the bank holiday we
have, however, from time to time, released men for limited periods to the
Federal Reserve Board Departments in Washington, and the experience that
they have had from this work has proved valuable to our organization. *
*

Reproduced from the Unclassified / Declassified Holdings of the National Archives

Criticisms of existing
gulations or rulings or proced
, of the Federal Reserve
Board, with specific recommendations as to changes which would correct any un
satisfactory features of the relations between the Board or its staff and the
Federal reserve banks or member banks.
In commenting upon this topic we do not wish to be considered critical or out of
sympathy with the requirements of the Board, most of which are in our opinion
reasonable and desirable.
Having in mind, however, the Board*s desire to ascer
tain whether any features of the relations between the Federal Reserve Board and
the member banks are unsatisfactory or subject to criticism or seem bureaucratic
or impractical or unduly rigid, there are a few matters which we believe should
be mentioned in a general way, inasmuch as we sense some feeling of criticism on
the part of member banks though it has not been openly expressed.
The matters
referred to are conditions of membership, conditions applied in connection with
the issuance of voting permits to holding company affiliates, the denial of per
mits to directors under Section 52 of the Banking let of 1955 and the policy with
respect to Clayton let permits.
In several instances conditions have been imposed in connection with the admission
of State banks to membership or technical difficulties have been raised which have
seemed to the applying banks to go beyond the requirements of law or to deal with
matters which have been free from criticism in particular cases or to be unnecessar
ily burdensome.
It is true that in some instances the conditions have been modi
fied or withdrawn, but in some cases they seem to have left an unfavorable impres
sion.
Our suggestion is, that before unusual conditions, that is conditions not
required by law or which may be a serious burden to an applying bank, are imposed
we be given an opportunity to review them and if neeessaiy or desirable, to discuss
them in an informal way with the applying bank. 1
1
\

In connection with the issuance of voting permits to some holding company affili
ates,*’we have had some indication that conditions imposed have been looked upon
as going beyond the requirements of the law or have been considered too burdensome
or impractical of fulfillment •
We believe that in all cases the requirements of
the Board have contemplated the accomplishment of results which are theoretically
desirable.
At the same time we recognize the difficulty which confronts the staff
of the Board, in the absence of direct contact with the applicant and its subsidiaries
in imposing conditions which are possible and feasible in all cases, and we believe
I1 that it might serve to eliminate causes of criticism if an opportunity were afforded
to discuss the conditions with the applicant before they are definitely imposed. ^
According to our records, none of the applications by directors and officers of
member banks for interlocking relationships under Section 52 of the Banking Act
of 1955 has been granted, but there have been several instances where we believe
the Federal Reserve Board*s denial of a permit has been looked upon as working a
hardship upon a member bank.
We have reference to cases where there have been
practically no dealings between the dealer in securities and the member bank, and
where the services of a director connected with a dealer in securities have been
desired by the member bank because of his special knowledge of the investment
business.
In all cases where a permit has been denied, we have furnished advice
as to the Board* s decision in the matter as requested by the Board.
It is our
impression that the Board*e reasons for denying the permits have not always been
looked upon as convincing^' and in one case a question was raised as to the Board*s
policy with respect to issuing permits under Section 52.
We ourselves believe
that in several instances it would have been helpful to a member bank to have
the services of a director who was denied a permit, and that the granting of the
permitx
x
would not have been incompatible with the public interest. 1

Reproduced from the Unclassified / Declassified Holdings of the National Archives

(Continued)

— 2

\x
'With respect to Clayton Act applications and permits, while no specific criticism
has been received by us, we surmise that application forms have been considered
unnecessarily broad in the scope of the personal information requested."
There
is no definite comment which we can report and this is merely an impression. It
has been intimated to us occasionally that desirable directors have found it too
much trouble to apply for a permit and have preferred to relinquish their bank
connections.
In granting some of the permits, the Board has occasionally com
mented upon a director*s attendance at meetings of the board of directors of a
nonmember bank or upon his indebtedness to a nonmember bank or to another insti
tution and has requested us to bring such comments to the attention of the
director and to endeavor to bring about an improvement in attendance or a reduc
tion of the indebtedness.
Here again we have had no definite reaction that can
be quoted, but we have the impression that the reaction has sometimes been un
favorable and that the matter of attendance at directors* meetings of other
institutions and of indebtedness to nonmember banks may have been looked upon as
/ "beyond the concern of the Boards
Of course we realize that the indebtedness of
a director to another institution is of indirect importance to the member bank
and we understand the purpose of the Board*s comment.
Whether such comments
are correctly interpreted, especially in cases where the indebtedness has not
been the subject of criticism in reports of examination, is open to question. ,
f
It is rather difficult to comment to the Board on these matters because there is
a natural reticence on the part of applicants for permits about expressing any
criticism.
We are of the opinion though, that the matter of permits whether to
holding company affiliates or under Section 52 or under the Clayton Act 'is
potentially the most prolific single cause of criticism on the part of member
banks and others, of the Federal Reserve Board.
If the actions of the Board and
its staff seem bureaucratic or impractical or unduly rigid, we believe it is
more apt to be with respect to these matters than with respect to other regula
tions or requirements that relate to member banks*
In order to qualify under Section 8 (a) of the Securities Exchange Act, a non
member bank must sign agreement form T-l, the second paragraph of which is
objected to ty many nonmember banks, including savings banks, in this district
because of its scope.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

$«3 7 , * 3

March 18, 1955•

Mr. F. H* Curtiss, Chairman,
Federal Reserve Bank of Boston,
Boston, Massachusetts,
Dear Mr* Curtiss*
Reference is made to governor Eccles* let
ter of February 6, 1955 (X-9115), to the Chairmen of
all Federal reserve banks, requesting that the Board
be advised within thirty days as to the views of each
bank in regard to certain subjects, a list of which was
attached thereto.
It is understood that the*matter is receiving
your attention, and it will be appreciated if you will
indicate when you expect that a reply will be submitted.
Very truly yours,
(Signed) L, P» BEitiSA
L, P* Bethea,
Assistant Secretary.

LPB-CM-jcb

Reproduced from the Unclassified / Declassified Holdings of the National Archives

>"F
,’

March 11, 1955.

Mr. F. H, Curtiss, Chairman,
Federal feeeerve Bank of Boston,
Boston, Massachusetts•
Dear Mr. Curtiss:
Reference is made to Governor Eccles1 letter
of February 6, 1955 (I-9115), to the Chairmen of all Federal
reserve banks, requesting that the Board be advised within
thirty days as to the views of each bank in regard to certain
subjects, a list of which
J A- A l
?
w
„
■
fettee it oppei
has ^fcn- e U i v e a '
#
frum'y o m

attached thereto.

such lot tec.
will be appreciated if you

will adviswr when
Very truly yours.

L. P. Bethea,
Assistant Secretary^

LPB-jcb

p )

FI L E

Reproduced from the Unclassified / Declassified Holdings of the National Archives

,F ^ r m N o .l3 I

Office Correspondence
Tn

ar. Morrill______________________

From.

FEDERAL RESERVE
BOARD

Date March 11, 1955.
Subject:.

3 ^ 1,-3

Mr. Bethea

ero

16— 852

To date replies have been received to the Board*s letter of February

6 (X-9115) from only four Federal reserve banks.

Inasmuch as Governor

Eccles requested that the banks respond within thirty days, which period
expired March 8 , it seems desirable at this time to send out follow-up
letters to those reserve banks which have not responded.

I have, therefore,

attached a draft of a follow-up letter which I propose, with your approval,
to send to the eight remaining reserve banks.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

March 18.
Replies or acknowledgments
now received from all but
four FRBanks.
.,
jcb

Reproduced from the Unclassified / Declassified Holdings of the National Archives

Keproauced from the Unclassified / Declassified Holdings of the National Archives

3J7,-_3

Fe d e r a l Re s e r v e
o f

Ba n k

o r k

March 25, 1935.

My dear Mr. Bethea:
This morning your secretary telephoned this office,
asking for two additional copies of the statement of the views
of this bank in respect of the questions raised in the Board’s
letter (X-9115) of February 6 , 1955, which Mr. Case forwarded
to the Board under date of March 15, 1935.

The two copies

are enclosed for your use, and, in the event that you should
need additional ones, we shall be glad to supply them.
Very truly yours,

Secretary to Mr. Case

Mr. L. Bethea,
Assistant Secretary, Federal Reserve Board,
Washington, D. C.

Enclosures (2)

Reproduced from the Unclassified / Declassified Holdings of the National Archives

c
« 7 , - 3 U

Fe d e r a l Re s e r v e B a n k
o f

- f

o r k

March 15, 1955.

Dear Governor Eccless
The list of subjects which accompanied!your
letter (X-9115) of February 6 , 1955, has been considered by
our directors and officers in the manner suggested by you,
and a statement of the views of this bank with respect to
these questions is attached hereto.
We have appreciated the opportunity to present
our views on these matters, particularly with regard to
certain aspects of the relations between the Federal Reserve
Board, the Federal reserve banks, the member banks and the
public, and we shall look forward to receiving the results of
the Board's study and analysis of the replies of the several
Federal reserve banks.

Hon. Marriner S. Eccles,
Governor, Federal Reserve Board,
Washington, D. C.
Encs.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

(a)

GENERAL CREDIT SITUATION

Are commercial banks doing everything in their power to improve the situation?

We have assumed that the purpose of this question is to ascertain
our views as to whether or not the commercial banks of this district are doing
everything possible to make credit available for productive use in agricul
ture, commerce and industry, and that it does not refer to those aspects of
the credit situation over which individual commercial banks exercise little
influence*
To answer the question, as we have interpreted it, is largely a
matter of opinion, since the extension of credit must be viewed in the light
of the risks assumed in each individual case.

The experiences of the banks

during the past five years have emphasized the difficulty of expressing whole
sale judgments on this question.

The banks have been subject to criticism,

on the one hand, for not being more liberal in the extension of credit and
subject to censure, on the other hand, by bank examiners and other supervisory
authorities, for the quality of loans and investments previously made.
It is our opinion that the commercial banks in this district are
ready, willing and even anxious to make credit available to their customers
wherever there is a reasonably sound basis for borrowing.

This is the business

of the banks, the reason for their existence and a source of their profits,
and they are under tremendous pressure, at the present time, to employ funds,
which are in large supply, so as to meet their operating expenses and other
charges.
Most of the questions recently raised with respect to lending opera
tions of commercial banks have had to do with intermediate term credits, not
prime in quality, which usually have been more in the nature of working capital
loans than strictly conmercial credits.

operating

Our own experience in this field,

under the provisions of Section 13b of the Federal Reserve Act, has

Reproduced from the Unclassified / Declassified Holdings of the National Archives

demonstrated to us that there is not a very widespread demand, even for credit
of this character, which the commercial banks can or should supply.

After

approximately eight months of operation, we have approved some 231 applications
for industrial loans, the aggregate amount of the prospective credit accommoda
tion in these cases being approximately $24,000,000.

The commercial banks

throughout the district have cooperated effectively with the Federal Reserve
Bank of New York in making credit of this sort available, but it is our view
that by far the greater part of this lending has been of a character not
suitable for commercial banks operating solely on their own account.
Demands for credit which do not meet the liberal requirements, both
as to soundness and maturity which have been set up in connection with loans
made under Section 13b of the Federal Reserve Act, clearly would seem to be
beyond the scope of the proper activities of commercial banks.
The investment policies of the banks of the district have been cir
cumscribed by the same conditions which have affected all those who have funds
to invest at this period.

To the usual uncertainties regarding the future

prospects of the security market in general, and the affairs of individual
issuers of securities in particular, have been added doubts as to the future
of the currency unit and as to governmental policies with respect to the con
duct and profits of business, and to the issuing of and dealing in securities.
In such circumstances, improvement of the situation does not seem to be within
the powers of the commercial banks.
(b)

If not, what steps can be taken by the Federal reserve banks or otherwise to
bring about an improvement?
P Steps which, in the general terms of your question, might be taken
to bring about improvement in the credit situation, involve consideration of
a whole range of problems, including the ultimate character of our commercial
banking system, the disposition of our savings bank business, the provision of

Reproduced from the Unclassified / Declassified Holdings of the National Archives

intermediate term credit and working capital for commercial and industrial
enterprises, and the functioning of the long term private capital market, in
cluding the market for mortgage money.
Permanent measures for improvement of the general credit situation,
we believe, should be directed toward those weaknesses in our present banking
system which contributed so heavily to the banking difficulties of the past
15 years, and more, and which have been alleviated, perhaps, but not cured by
recent or proposed banking legislation.

Until such problems as unification of

the banking system, the restriction or separation of commercial and savings
banking in the same financial units, the establishment of institutions designed
and equipped to provide intermediate term credits for industry and sound mort
gage financing for construction, and tho appropriate uses of branch banking,
have been solved, whatever steps are taken for the improvement of the general
credit situation must be considered as partial or temporary steps.
Such an intermediate or temporary step might be the enactment of
that section of Title II of the proposed Banking Act of 1935 which would
authorize the Federal Reserve Board, by regulation, to make any definition
of paper eligible for discount by Federal reserve banks subject only to the
limitation that such paper should be commercial, agricultural or industrial
paper, and which would extend the authority for the Federal reserve banks to
make advances to member banks
sound asset.

on their promissory notes secured by any

To provide a means of discount of all sound assets of commer

cial banks (at the discretion of and at a price fixed by the Federal reserve
banks) would make it possible to substitute real standards of soundness for
partly fictitious standards of liquidity in our banking operations, as now
conducted, and should encourage the use of credit wherever such use is
justified.

The enactment of this provision of the proposed bill, however,

would make it all the more necessary to proceed with the fundamental reorgani
zation of the commercial banking system and the appropriate treatment of

Reproduced from the Unclassified / Declassified Holdings of the National Archives

savings bank business.

The existing pressure of large excess reserves and

the need of the banks for earning assets, combined with enlarged, opportunities
for long term investment, creates a situation which introduces certain
elements of danger into the banking system, unless the presently proposed
legislation actually is viewed as an emergency measure, and a more permanent
corrective is promptly sought.
In connection with the private capital market there also appears to
be an immediate opportunity for a contribution toward the improvement of the
general credit situation.

Delay in reopening the private capital market re

mains a critical obstacle to such improvement, and to the whole progress of
recovery.

A resumption of private long term financing, with all that it

implies in the way of replacement of worn out or obsolescent plant, equipment,
and housing, and the promotion of new enterprises and new building, still
appears to be a necessary prerequisite to that reduction in governmental ex
penses and/or increase in governmental income which will eliminate the re
curring large Federal deficits, and thus make the most important of contribu
tions to the improvement of the general credit situation.
A revision of the Securities Act of 1933 and of the Banking Act of
1933, with a view to the elimination or modification of those sections of
these acts which may unnecessarily interfere with the functioning of the
private capital market, affords an important means of direct attack upon this
problem.

Allied to it, however, are all of the questions involved in the

future of our currency unit, of the regulation of business profits, of the
attitude of the government toward the railroads and the public utilities, and
the questions raised by those rigidities in the economic system, such as the
costs of certain materials and the wages of certain labor groups, which
hinder the resumption of productivity in such fields as building construction.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

These are questions which, obviously, cannot be developed within the limits
of this memorandum.
As a minor and temporary contribution to the further improvement of
the general credit situation, the continuance of the present liberal policies
of the Federal reserve banks with respect to their operations under Section
13b of the Federal Reserve Act is warranted.

This has some importance from

the standpoint of meeting the demands of borrowers whose command of credit
is of questionable validity under present emergency conditions, and in the
absence of the proper financial machinery for this sort of lending.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

(a )

INTEREST RATES

On time and savings deposits o * member banks.
f

In so far as this district is concerned, the present maximum rate
of interest permitted on time and savings deposits of member banks by regu
lation of the State banking departments and/or the Federal Reserve Board
appears to bear a proper relation to the average yield on invested funds.

the one hand, it is not so high as to be a deterrent to direct long term in
vestment by individual investors.

On the other hand, it is not so low as to

precipitate a substantial and rapid withdrawal of such deposits from the banks,
which would again place the banks in a strained position.

Finally, it is a

rate which the banks can afford to pay without having to reach for high yields
upon their investments in order to meet their operating expenses.
h In general and on principle, we are not in favor of the detailed
regulation of such rates by national action.

It seems to us that the goal

of administration should be relatively infrequent adjustments of the maximum
rate of interest to be paid on time and savings deposits by member banks, in
accordance with shifts in the trend of long term rates of interest, leaving
the detailed adjustment of rates, beneath this maximum, to the individual
banks.

Frequent adjustment of the maximum rate, by the Federal Reserve Board,

tends to fix upon the Board the responsibility for continuous control over
such rates and to take from the member banks their initiative in such matters.
Such a nationally fixed rate obviously cannot take account of different cir
cumstances of various banks and different conditions in various parts of the
country. '
'

(b )

On loans of member banks and on industrial advances and commitments by Federal
reserve banks.

http://fraser.stlouisfed.org/dinarily
Federal Reserve Bank of St. Louis

Interest rates charged on loans by member banks in this district or
vary little from year to year, except with respect to loans granted

Reproduced from the Unclassified / Declassified Holdings of the National Archives

to prime credit risks in the financial centers. Rates on the latter class
of loans fluctuate to a considerable extent with the current value of funds
in the market.

The rate charged by the average bank in smaller cities and

in the country, however, seldom varies from the usual six per cent per annum.
'If we should have a long period of cheap money which would justify
some downward revision of this established rate, the natural pressure for
the employment of funds, which would characterize such a period, probably
would compel such a revision.

Already, there are indications that competi

tion to place funds advantageously is bringing about a reduction of rates
where the credits involved are of a character to warrant such reduction.
It has been our observation in the past, however, that attempts to hasten
this natural action are quite likely to make more difficult the problem of
borrowers v/hose credit is not of the highest standard. ‘

,1 The rate structure of this bank with respect to industrial advances
and commitments appears to us to be satisfactory, both from the standpoint of
the level of rates charged and of the relationship existing between the rates
for the various kinds of loans and commitments.^ Furthermore, we think it
would be quite undesirable to reduce these rates below the going rates
charged by banks of the district to their better customers, a step which
would establish a wholly illogical rate position.

(This question is the

subject of a separate letter to the Federal Reserve Board, which is being
written in response to the BoardTs letter (X-91B2) dated February 11, 1935.)

Reproduced from the Unclassified / Declassified Holdings of the National Archives

3. MATTERS AFFECTING ADMISSION OF NONMEMBER BANKS TO FEDERAL RESERVE SYSTEM

(a)

Earnings of nomnember banks from exchange collection charges.

^ The nomnember banks of this district are not deriving income from ex
change collection charges on checks, and in this respect there is no obstacle
to their becoming members. V
;

(b)

Present conditions of membership.

The present revision (June 30, 1933) of the Conditions of Membership
comprises a list of 18 standard conditions.

Many of these conditions appear

to be of a desirable character, and banks entering the System have accepted
them without serious hesitation.

Nevertheless, we think that it would be well

to review the conditions at this time in the light of their history and pur
pose, and the statutory changes made since the adoption of each.
Furthermore, State member banks have been admitted to the System
over the course of a number of years, and the conditions to which such banks
are severally subject differ widely.

In considering a revision of the condi

tions, therefore, we think it would be desirable to endeavor, in so far as may
be possible, to make them uniform, both as to present State bank members and
as to State institutions joining the System in the future.
The conditions, in their present form, are, as we conceive them, of
three general kinds:

(1) those that serve to subject State member institutions

to certain provisions of law affecting national banks, to which such State in
stitutions might or would not otherwise be subject and to which it is desir
able that they should be subject;

(2) those that are designed to keep the

Federal reserve banks and the Board informed as to certain matters affecting
their relations with the State member banks;

and (3) those that serve as

Reproduced from the Unclassified / Declassified Holdings of the National Archives

reminders to such institutions of certain features of good banking practice
and of certain provisions of the statutes which might otherwise be overlooked.
Conditions of the first kind, generally speaking, may be said to be
those numbered 7,

8 t § and 18; those of the second kind, numbers 1, 9, 12 and

14; and those of the third kind, numbers 2, 3, 4, 5, 6, 7, 8, 10, 11, 13, 15,
16 and 17.

As will be noted, the purposes of the several conditions overlap

to some extent.
Generally speaking, we think conditions numbered 1, 9, 10, 14, 16
and 18 should be retained in their present form, and that conditions numbered
2, 3, 5, 6 and 15, which seem unnecessary, and conditions numbered 4, 11 and
13, which are adequately covered by statute, should be eliminated.
Condition numbered 7, we believe, should be omitted or at least re
vised, in view of recent amendments to Section 9 of the Federal Reserve Act
and Section 5136 of the Revised Statutes.

It would also seem that Section 24A

of the Federal Reserve Act, which relates to national banks only, establishes
the standard by which the Board should be guided in respect of condition
numbered 8, and that this condition might be revised accordingly.
We think that consideration should be given to a revision of con
dition numbered 17, which should be considered in connection with condition
numbered 12.

We construe condition numbered 12 to relate solely to the is

suance and sale as a business of notes, bonds, and mortgages, and certificates
of participation therein, although some time ago, in an informal discussion
with one of our member trust companies, its officers felt that the terms of
the condition overlapped those of condition numbered 17.

Condition numbered

17 relates to the investment of trust funds ”in participations in pools of
ft
mortgage bonds or other securities." We think that some ambiguity results

Reproduced from the Unclassified / Declassified Holdings of the National Archives

from the phrase ”in participations in pools.”

The idea of a pool would seem

to relate to a case such as that in which securities are issued under a col
lateral trust indenture where the collateral consists of mortgage bonds and
other securities, but it is doubted whether the condition was intended to be
so limited.

If it is desired to prohibit the investment of trust funds both

in mortgage participation certificates and in collateral trust instruments
secured by mortgages, we think the condition should so state.

The condition,

to the extent that it prohibits the investment of trust funds in mortgage
participation certificates, and to the extent that it limits a member bank
”to the collective investment of small amounts of trust funds where the cash
balances to the credit of certain trust estates are too small to be invested
separately to advantage if the bank owns no participation in the securities
in which such collective investments are made and has no interest in them ex
cept as trustee or other fiduciary,”

ignores the desirability of a trust

company being able to participate mortgages among the several trusts for which
it is acting as trustee, the method in which such participation is effected,
and, in so far as the law of the State of New York is concerned, the fact that
subdivision 7 of Section 188 of the Banking Law expressly permits trust com
panies organized under the laws of the State to invest trust funds in partici
pations in bonds and mortgages, including those in which the trust company
owns a participation.
It is our understanding that this phase of the business of a large
trust company is conducted substantially as follows:

The trust company, know

ing that it will have, over a period of three to six months, trust moneys to
invest, will, in anticipation of the requirements of its several trusts, make
a commitment to purchase a large mortgage, expecting delivery thereof to be
made in thirty, sixty or ninety days.

When the mortgage is delivered, title

Reproduced from the Unclassified / Declassified Holdings of the National Archives

is taken in the name of the trust company, appropriate entries being made on
its books to indicate that the- mortgage was purchased for the investment
therein of trust funds, and participations therein are issued to the extent
of the trust funds then awaiting investment.

The balance of the mortgage (to

the extent that participations therein have not been issued) is held by the
trust company, although carried in an account indicating that such balance is
held for the future investment in parts thereof of trust funds for which the
trust company is acting as trustee.

It should not be overlooked, however,

that until participation certificates have been issued for the entire amount
of the mortgage, the trust company itself has an interest therein.

If the

large trust companies are not permitted to operate in this manner, it as ap
parent that the small trusts are penalized.

We think, however, that this is

a matter which requires further detailed consideration before any attempt is
made to redraft the condition.

While the present condition may be suitable

in the case of smaller institutions, we think that even as to them, it works
an undue hardship on small trust estates.
^ We think that attempting to include in the conditions, matters which
are substantially covered by statute, serves unnecessarily to magnify the
requirements for membership;

that, at most, a reference to the applicable

statutes is all that is desirable as a reminder to applicant banks of certain
specific provisions of the laws which will govern their operations as members
of the System.
For some time it has been the policy to admit, as State bank
members of the Federal Reserve System,
nate

from their balance sheets

ciation

in market

only banks which can and will elimi

all estimated

value of securities held,

losses,

and all depre

other than those of the first

Reproduced from the Unclassified / Declassified Holdings of the National Archives

four grades.

These requirements for elimination of losses and depreciation

have been much more severe than any requirements which it has been possible to
apply to banks which are already members of the Federal Reserve System".

There

is reason to believe that this has had the effect of preventing the entrance
of a number of banks into the System, whose condition and management compare
favorably with the condition and management of many banks already members of
the System.

In view of the desirability of promoting unification of the bank

ing system, which is recognized in existing and contemplated provisions of
Section 12b of the Federal Reserve Act, it would seem desirable that this
phase of System policy, as to the admission of non-membr-r State banks, should
be liberalized.

Such relaxation of requirements as would permit the entrance

into the System of banks in distinctly unsatisfactory or dangerous conditions,
of course, is not suggested.*

(c )

Advisability of extension of membership to banks outside the States and the
District of Columbia.
Our position on this question was set forth in our two letters to
the Board, dated October 20, 1933, and November 29, 1933, from which we quote
the following:
"October 20, 1933.

S"It
/

is our view that, particularly in the light of recent
banking legislation, we should first study the whole question of
membership of banks in dependencies, insular possessions, or parts
of the United States outside the continental United States, and de
termine what our general policy is to be with reference to such
banks /- It may well be that the banking laws governing these areas,
and the banking supervision which is extended to them, do not wabrant
consideration of applications for membership, with its possible cor
ollary of participation in the Federal deposit insurance fund.

"Beyond this question of policy is the question of method and
approach* Here it is our view that before individual banks can be
examined intelligently for membership in the System, a general survey
of economic and banking conditions in the areas affected must be made.
The appropriate agencies for making such surveys, it seems to us, would

Reproduced from the Unclassified / Declassified Holdings of the National Archives

be the Governmental units charged with the administration of the de
pendencies or insular possessions concerned, with the possible assist
ance of representatives of the banking supervisory authorities and of
the Federal Reserve Board and the Federal reserve banks.” '*

"November 29, 1933.
*** "We are not able to relinquish the opinion expressed in my pre
vious letters that matters of national and System policy are here in
volved and that an investigation of the whole problem, preferably by or
in cooperation with the appropriate Governmental agencies, is a
necessary prerequisite to action upon applications for membership sub
mitted by individual banks in these areas.

"If, then, we are to be called upon for such recommendations in the
case of the three banks in Puerto Rico which have discussed the matter
with us, we should want to make not only an examination of the applying
banks, but also a study of the whole banking situation in that terri
tory and of those allied matters, knowledge of which is necessary for
an understanding of the banking position. '%uch a survey, it seems to
us, would have to take account of the following:

(1) The government of the territory, including the nature
and extent of the control exercised by American
officials.
(2) The economic organization of the territory and its trade
and financial relationships with the continental United
States,
(3) The banking system of the territory, the laws which govern
its operation, the supervision which it receives, and the
character of business which it transacts.
(4) The relation of the factors mentioned in the preceding
paragraph (3) to successful membership in the
Federal Reserve System (and presumably in the
Federal Deposit Insurance Corporation), and the
general requirements for membership which should be
established.
(5) The possibility of maintaining proper contact with
such banks and an adequate knowledge of their affairs,
if and when they are admitted to membership, and the
possibility of providing them with the services which
are supposed to be the corollary of membership, includ
ing such questions as the necessity for establishing a
branch or agency or currency depot of this bank in the
territory.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

(6) The general benefits and advantages of membership,
from the standpoint of the individual banks and
the people of the territory on the one hand, and
from the standpoint of the Federal reserve banks
and the United States on the other.
"It is obvious that a proper investigation of these matters would
have to be carried on both here and in Puerto Rico, and that it must
trespass upon many fields which ordinarily are within the provinces of the State Department, the Treasury Department, the War Department,
and other departments and bureaus concerned with territorial affairs.
Furthermore, in any consideration which is given to the problem as it
affects the banks in Puerto Rico, cognizance should be taken of the
situation which exists in Alaska and in other dependencies, insular
possessions, and parts of the United States outside of the continental
United States, such as the Philippine Islands, Hawaii, Canal Zone, the
Virgin Islands, American Samoa, and Guam.
"It is in the light of these facts that we have urged that the
question be considered as one for Governmental study, presumably with
the assistance of the Federal Reserve Board and the Federal reserve banks,
and that failing such a solution, we now suggest that it be considered a
System matter for study by the Federal Reserve Board with the cooperation
of the Federal reserve banks. Frankly, this bank is not now in a position
to divorce from their other duties the personnel which would be required to
make a thorough and competent study of this problem. At the some time we
recognize the unfairness, to the banks and people concerned, of postpon
ing action on this matter until our convenience is suited. In these
circumstances would it not be appropriate to appoint a system committee,
similar to the committee which investigated the question of branch banking
for us, and to require of it a prompt report upon the whole question of
membership of banks in our territories, dependencies, and insular
possessions?"

Reproduced from the Unclassified / Declassified Holdings of the National Archives

NEED FOR CONTINUANCE OF ASSISTANCE
OF RECONSTRUCTION FINANCE CORPORA
TION IN CONNECTION WITH REHABILITA
TION OF CAPITAL STRUCTURES OF BANKS.

The operations of the Reconstruction Finance Corporation, in con
nection with the rehabilitation of the capital structures of banks in this
district have been of tremendous value during the recent emergency.

During

the period of these operations, up to mid-February, 270 national banks have
received $144,788,000 of capital assistance, and 77 state member banks have re
ceived $110,184,000, while retirements of preferred stock or capital notes thus
purchased have only totaled approximately $54,659,000.

The original program of

the Reconstruction Finance Corporation to subscribe to preferred stock or capi
tal notes of banks in amounts sufficient to give them net sound capital equal
to approximately ten per cent of deposits is not yet completed.

In this

district there are approximately 14 state member banks and 68 national banks
whose applications are still pending.

We feel that the activities of the

Reconstruction Finance Corporation in this field should continue until these
pending applications have been disposed of, or until the problems of these
banks have been settled in some other way.
There also appears to be a temporary need for the continuance of this
type of activity by the Reconstruction Finance Corporation to bring further as
sistance to certain banks which have already received capital aid.

These are

banks with respect to which the original estimates of capital needs now appear
to have been too low and which, upon the basis of current examination reports,
still appear to be below the standard which has been considered desirable.

Our

data concerning this type of situation are not complete, but a survey of reports
of examinations made since October 1, 1934 indicates that of 410 banks examined,
approximately 7 state member banks and 48 national banks may be said to need
additional capital assistance, ranging from moderate amounts' up to very sub

http://fraser.stlouisfed.org/
stantial
Federal Reserve Bank of St. Louis

amounts, if the banks are to be placed in a thoroughly sound capital

Reproduced from the Unclassified / Declassified Holdings of the National Archives

position.

The capital rehabilitation program of the Reconstruction Finance

Corporation properly could be continued until there has been a final disposition
of situations of this kind, which really would involve no extension of the orig
inal program.
When the present program of capital rehabilitation has been com■l

pleted, however, we believe that the Reconstruction Finance Corporation should
definitely terminate its activities in this field.
Looking to the future, and so long as the Federal Deposit Insurance
Corporation is in existence, it might be advisable for that corporation to
have the option of making temporary capital advances to banks with weakened
capital structures, if it appears likely that such advances would permit the
banks so assisted to be restored to sound condition and to be put in a position
to operate profitably in the future, a procedure which, it Is to be hoped,
would result in a smaller contribution by the Federal Deposit Insurance Corpora
tion to the banks.
involved, than if they were permitted to fail.

(A suggestion

along these lines was contained in the report of the Federal Reserve System
Committee on legislative Program submitted to the Federal Reserve Board under
date of December 17, 1934,)

The expansion of the functions of the Federal

Deposit Insurance Corporation to meet this need would seem to be appropriate,
so long as underlying defects in our banking system make possible numerous
bank failures, inasmuch as the prevention of bank failures is much more im
portant and constructive, than the payment of depositors after a bank has been
closed

Reproduced from the Unclassified / Declassified Holdings of the National Archives

ADEQUACY OF REIMBURSEMENT OF FEDERAL RESERVE
BANKS BY TREASURY AND FOR OTHER GOVERNMENTAL
AGENCIES FOR VARIOUS SERVICES RENDERED AND FOR
SPACE USED IN FEDERAL RESERVE BANK BUILDINGS

There is attached a summary of the expenses of this bank as fiscal
agent and depositary of the United States for the period January 1, 1934 to
December 31, 1934, exclusive of expenses for banking house space utilized in
these operations, and exclusive of expenses incurred in connection with services
rendered to governmental agencies such as the Public Works Administration and the
Federal Farm Mortgage Corporation, with which we have contracts calling for reim
bursement of salary and out-of-pocket expenses.
A substantial part of the expenses set forth in this summary are at
tributable to services which we perform as depositary, such as the payment of
Government coupons, interest checks, disbursing officers* checks, and Treasury
warrants.

It has never been the policy of this bank to seek reimbursement for

expenses incurred in rendering these services, which appear to be the same sort
of services which a commercial bank would render its depositors in return for
balances maintained with it.
The general question of obtaining additional reimbursement for non
depositary services which we render to the Treasury Department has been the subject
of discussion at frequent intervals practically since the establishment of the
System.

Under date of August 3, 1922, the Treasury Department pointed out in a

letter addressed to this bank by the then Undersecretary of the Treasury, that the
Treasury had no funds from which it could reimburse Federal reserve banks for
their services other than those relating to new issues of Government securities,
and that there was a strong feeling in Congress that the operations of the Federal
reserve banks were sufficiently profitable to enable the banks to absorb any other
expenses connected with their fiscal agency operations.

It is our understanding,

therefore, that the Treasury Department would have to obtain from Congress an ad
ditional appropriation with which to pay all fiscal agency expenses of the Federal
reserve banks, other than those relating to new issues, and we do not recommend

Reproduced from the Unclassified / Declassified Holdings of the National Archives

2
attempting to secure such complete reimbursement at this time.

i
Nevertheless there

are certain services which we perform, apart from those relating to new issues,
where the Treasury already appears to have adequate authority in law to pay for
expenses and services rendered, such as purchases of gold and silver abroad.

these cases wo feel that the Federal reserve banks should seek immediate reimburse
ment .
^ As a matter of principle, it is our belief that, under existing conditions,
the Federal reserve banks should be reimbursed by the Treasury Department for var
ious non-depositary services which they now render for that department without
receiving adequate reimbursement. Referring to the Board’s memorandum B-941 (for
'
the six months ended June 1934) these services may be listed as follows:
Exhibit "C"
»D"
»E”
"Kn
"

"S"
"T"

"V?"

United States Government Issues - Redemptions and Exchanges.
United States Government Issues - Accounting.
United States Government Issues - Custody of Securities.
Safekeeping of Securities for various Government Officials
and Agencies.
Certification of Foreign Exchange Rates.
Miscellaneous Activities - Reconstruction Finance
Corporation, Farm Credit Administration, etc.
Farm Credit Administration.
Gold purchased abroad, Silver purchased abroad, etc.

v' While we do not obtain reimbursement from the Treasury Department on
account of rent, light, heat, power and similar items of overhead expenses in con
nection with the use of space in the bank building, we do obtain a nominal payment
for space in the bank building which we rent to agencies of the Government other
than the Treasury Department.

It is our opinion that the proximity of these agencies

to our offices is a convenience which warrants the establishment of smaller than
market rentals for the space which they occupy.
Tho ultimate solution of this whole problem seems to us to lie in the
restoration of some form of franchise tax, such as was formerly paid to the Govern
ment by the Federal reserve banks, which would justify the establishment of an
appropriate schedule of charges, on a business basis, for all services rendered by
the Federal reserve banks to the Treasury and other governmental agencies-, and for
space in Federal reserve buildings used by such agencies. v

Reproduced from the Unclassified / Declassified Holdings of the National Archives

FISCAL AGENCY AND DEPOSITARY EXPENSES
FOR YEAR ENDED DECEMBER 31,, 1934.
TOTAL
EXPENSE

New Issues

Redemptions and Exchanges

Accounting (Government Bond)

Custody of Securities Government Issues

REIMBURSABLE

$107,756

EXHIBIT

$ 99,443

81,081

8,313
81,081

5,878

NOT
REIMBURSABLE

)
)

13,252

Auditing - Government Issues

4,364

Government Checks

49,295

Government Coupons

25,666

Treasurer’s General Account

6,646

Transfer of Funds by Telegraph

473

Safekeeping - Government
)
Accounts - other than New
)
Issues, Reconstruction
)
Finance Corp. and Farm Credit)

58,797

52,060

6,737

Purchase and Sale of Securities

4,968

Supplying Government agencies )
with Currency and Coin
)

9,179

8,670

509

Foreign Exchange (President’s )
order of March 10, 1933)
)

33,580

29,637

3,943

Foreign Department - exclusive)
of "N*»
)

41,909

41,897

Miscellaneous Activities Treasury Department

11,666

3,151

10,101

0-Pv- w

Reconstruction Finance Corp.

Miscellaneous Activities Government Agencies

)
)

Farm Credit Administration
TOTAL ----------

Ac cou nt ing Dep art me nt,
March 4, 1935.

197,547
)
)

11,124

175,240

11,666
22,307

11,124

19,227

9,463

9,764

- $682,408

$377,676

$304,732

Reproduced from the Unclassified / Declassified Holdings of the National Archives

AMOUNTS COLLECTED FROM GOVERNMENT AGENCIES AS FISCAL AGENT AND DEPOSITARY
FOR YEAR ENDED 1934

EXHIBIT
B & E

Treasury Department - New Issues - - - - - - - - - - - - - -

Comptroller of the Currency Insolvent Bank Division - - Public Works Administration

- - - - - - -

- - - - - - - - - - -

-$20,422
5,748

Federal Farm Mortgage Corporation

- - - - - - - -

6,731

Home Owners* Loan Corporation - -

- - - - - - - -

18,198

Alien Property Custodian - - M

$102,594

- -- --

961

52,060

Postage - Shipments of Currency and Coin to
San /uan, West Indies, Coast Guard Stations
and Circulated Coins to Federals - - - - - - - - - - - -

8,670

Foreign Exchange Control - - - - - - - - - - - - - - - - - -

29,637

Reconstruction Finance Corporation - - - - - - - - - - - - -

175,240

O-P-

V-W

Foreign Department - Miscellaneous

- - - - - - - - - -

Farm Credit Administration - - - - - - - - - - - -

$7,868

Postage and Insurance - Shipments of
Farm Loan Bonds and Coupons - - - - - - - - -

1,575

9,465

T O T A L -------------------- $377,676

Account ing Department,
March 4, 1935.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

(a)

REGULATION FIXING HJtGIN REQUIREMENT
FOR LOANS BY BANKS UPON EQUITY SECURI
TIES FOR THE PURPOSE OF PURCHASING OR
CARRYING SECURITIES REGISTERED ON
NATIONAL SECURITIES EXCHziNGES

Circumstances under which regulations should be issued.
v In our opinion, inasmuch as the statute does not require the is
suance of such regulations, the Federal Reserve Board should not, at the
present time, issue regulations with respect to bank loans on securities,
for the following reasons:
1.

Regulation T has not been thoroughly digested by the brokers
and others subject to its provisions. In general the
brokerage community has only a limited knowledge of the
regulation and a considerable amount of explanation and
education is necessary before we can even tell how the
regulation will operate. The present technical dif
ficulties already apparent are sufficient to demand the
Board’s concentration. An active security market will
undoubtedly aggravate the present problems and uncover
further unforeseen difficulties. A new set of bank
loan regulations for securities even if couched in
general terms would cause increased confusion and re
tard the present healthy application of Regulation T.

The Banking Act of 1933 gives the Reserve System large
powers of control for the whole field of banking, in
so far as speculative credit, or the uses of credit
for ’any other purpose inconsistent with the main
’
tenance of sound credit conditions” are concerned.
Regulations covering bank collateral loans under the
Securities Exchange Act, therefore, are unnecessary at
this time for control purposes.

The general recovery program of the country has involved
encouragement of banks to adopt a liberal lending
policy. Placing further restrictions upon bank lend
ing, at this time would tend to be deflationary and to
counteract this general program.

A further study of collateral brink loans from a super
visory standpoint also would seem to be desirable
before additional regulations are promulgated. The
experience gained from evasion and circumvention
under Regulation T should supplement our present
limited knowledge of control in this field of banking.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

(b)

Whether regulation should permit borrowers to obtain from the bank more than
could be obtained from the broker under Regulation T._____________________ _
^ In our opinion, a new bank regulation, if it should be decided
to issue one, would require a different approach to the problem than that
of Regulation T.

The bank collateral loan is, essentially, a different type

of loan from the brokerfs loan. ( The broker looks wholly to the collateral
for protection and promotes the making of collateral loans partly for the
sake of commissions on trades;

whereas, the banker should use credit

judgment in regard to the character and worth of the borrower and the col
lateral becomes in many cases incidental to the loan.

Whether prescribed

margin requirements are needed on bank loans is debatable, when the
broker1s or dealerTs customers are subject to regulation in the extension
of credit.

\
V

Such restrictions might find the bank customer claiming his

right to the maximum loan value of the securities presented to the bank and
so in fact in some cases decrease rather than increase the actual margins.
For such reasons, a quite different approach to this question seems de
sirable.

Just what this approach would indicate it is difficult to

suggest without considerable further study.'1 The approach while different
from that of Regulation T should profit from a further accumulation of
experiences with that regulation.1

reproduced irom the Unclassified / Declassified Holdings of the National Archives

(a)

ECONOMIC AND STATISTICAL DIVISIONS
OF FEDERAL RESERVE BANKS

Usefulness to directors and officers.

The work of this Department, as now organized, represents the
outgrowth of fifteen years experience in supplying the needs of the
directors and officers of the Federal Reserve Bank of New York for
statistical information and research concerning matters related to the
credit policy of the bank.

One of the primary functions of the Depart

ment , from the outset, has been to maintain and analyze for the directors
and officers of the bank the various data on banking and business conditions,
and to obtain and report to the Federal Reserve Board data on the banking
and money situation, and to some extent on business in this district.
Quite early in the life of the department it became apparent that
the especial need at this bank was for research concerning factors affecting
the money market.

Fluctuations occurred in the supply of funds in the mar

ket and in money rates, the causes of which were more or less obscure, and
it became apparent that surmise concerning causes frequently was incorrect.
For at least the past ten years, therefore, one of the most important func
tions of the Reports Department has been to analyze and make available in
formation concerning all of the important factors bearing on the money
market, including not only the local supply of and demand for credit, but
inter-district movements of funds, the foreign exchanges and gold movements
and related factors, the security markets, etc.

A method was worked out a

number of years ago, whereby the department follows constantly the move
ments of funds in and out of the New York money market, so that causes of
changes in money market conditions are no longer a matter of conjecture.
In order correctly to interpret changes in business and banking data, the

Reproduced from the Unclassified / Declassified Holdings of the National Archives

department has also carried forward analytical work applied to business and
financial data,and research into the relations between business, banking,
and price data.
In order that the results of the regular work of the department
may be available in usable form, a regular system of reporting has been
evolved.

The reports prepared by the department include the following:

Daily reports
Internal reports
Several reports to officers are made each day concerning move
ments of funds in and out of the New York money market, and conditions
in the security, commodity, and foreign exchange markets.
Telegraphic reports to Federal Reserve Board
Three reports are made each day, along s ernewhat the same lines as
the reports to officers.
"Board Letter”
At the close of each day a mimeographed report is prepared in
letter form, a number of copies of which are sent to the Federal Re
serve Board, and other copies are distributed the next morning in the
bank for the information of the officers.

This report includes in

formation concerning factors affecting the supply of funds in the
money market, open market transactions in Government securities and
bills for this and other Federal Reserve Banks, changes in the earning;
assets of this bank, and developments in the commodity, security, and
foreign exchange markets.
Weekly reports to Directors
Business and Financial Summary

http://fraser.stlouisfed.org/
on
Federal Reserve Bank of St. Louis

A weekly report on banking and business developments is prepared
Tuesday of each week and is sent to the directors and officers for

Reproduced from the Unclassified / Declassified Holdings of the National Archives

their perusal in advance of the Directors Meeting on Thursday.

Just

before the meeting the information is brought up to date by the
preparation of a sheet containing the latest available data.
Report by Assistant Federal Reserve Agent
An oral report to the directors is made at each meeting by the
Assistant Federal Reserve Agent in charge of the Reports Department,
concerning developments in the banking and business situation, and
this report is considered before action is taken with respect to the
discount rates of the Bank, and, at times, before action is taken on
other matters.
Charts
In order that the data contained in these reports may be readily
visualized, a considerable number of wall charts are hung in the
Directors Room and are brought up to date before each meeting.

These

charts frequently are used in discussions of credit policy.
It has been found in this bank that close contact between the
statistical organization and the directors and officers is essential if the
department is to function successfully.

Attendance by the officer in charge

of the statistical department at meetings of the directors and officers
enables the department to keep in close touch with the problems that are
before the directors and officers, and it can therefore direct its efforts
in such a way that they will be definitely useful.

Without such contacts,

a statistical department is likely to be working more or less in the dark
i

and is likely to fall far short of its greatest usefulness to the bank.
One of the principal functions of the Reports Department in addi
tion to supplying regular reports on business and financial conditions is
to conduct special studies concerning problems that come before the directors

and senibr

officers. Some of these studies involve ascertaining the facts

Reproduced from the Unclassified / Declassified Holdings of the National Archives

concerning matters that need clarification;

some relate to the various

theories that are advanced concerning the relations between the money supply,
business, and prices;

others involve analyzing and estimating the potential

effects of proposed legislation;

others require an effort to forecast the

credit problems to be faced by the Reserve Bank and to indicate possible
ways of meeting such problems.

Needs for such studies are almost constantly

arising, and this bank has attempted to maintain, without unduly large ex
penditure, a staff competent to study the problems and report the findings
in concise and intelligible form.
A few of the studies which the Reports Department was called upon
to make at the request of the directors or officers of the bank during the
past year are listed below:
Estimate of effects of the Gold Reserve Act of 1934 on member
bank excess reserves.
Estimate of effects of devaluation of the dollar on balance of
payments of the United States and on gold movements.
Outlook for member bank excess reserves and possible ways of
dealing with the situation.
Survey of available facilities in the capital market for the dis
tribution of new securities, in view of liquidation of bank
affiliates, and failures or withdrawals from the field of
other houses.
Study of method of handling social insurance reserves that would
best conform to desirable credit policy.
Review of the extent of business recovery in connucti on with con
sideration of bank policy.
Study of comparative participation by member banks and by British
banks in financing the respective national governments.
Preliminary memoranda were also prepared at intervals for the
Federal Open Market Committee and for the Open Market Executive Committee.

(b)

Value of Federal reserve bank monthly reviews

/ l While the primary function of the Statistical Department of a
Reserve Bank is to supply information for the use of the Bank and the

Reproduced from the Unclassified / Declassified Holdings of the National Archives

Federal Reserve Board, the department can also serve a useful function in
matters relating to public relations, including the preparation of reports
for publication, the answering of outside inquiries concerning Reserve Bank
and member bank data, etc.

The most important phase of this work is the

\[
preparation of the Monthly Review.
The Monthly Review of the Federal Reserve Bank of New York in its
early years was devoted largely to reports in some detail on changes in bus
iness conditions, prices, etc., but for a number of years past has been
devoted largely to the subjects on which this bank is peculiarly fitted to
report, especially the money market and related factors, such as the security
markets, foreign exchanges, and gold movements.

Business data are now pre

sented in more condensed form for the benefit of our member banks and
general readers. W As this publication is devoted more largely than perhaps
any other to money market conditions, it is believed to occupy a rather
unique position among publications of this general character, and, while it
has not a voluminous circulation as compared with less technical business
and financial publications, it is widely distributed and apparently is well
regarded among those who are interested in the subject matter with which it
deals.x A brief summary of the distribution of the Monthly Review in
X
December 1934 follows:
Number
of copies
Banks in Second Federal Reserve District - - - - - - - - - - - Quantity shipments (largely to member banks) - - - - - - - - - Newspapers and magazines - - - - - - - - - - - - - - - - - Federal Reserve Board, F. R. Banks, branches, etc. - - - - - - Bank examining agencies and examiners - - - - - - - - - - - - Private bankers, brokers, etc. - - - - - - - - - - - - - - - - Foreign bank representatives in New York - - - - - - —
- - - Foreign commercial banks - - - - - - - - - —
- - - - - - - - Foreign central banks - - - - - - - - - - - - - - - - - - - - Foreign individuals - - - - - - - - - - - - - - - - - - - - - Reporting retail and wholesale concerns - - - - - - - - - - - Individuals, libraries, etc. (domestic) - - - - - - - - - - - Miscellaneous financial institutions and others - - - - - - - Total distributed - - - - - - _ _ _ _ _ _ _ _ _ _ _ _ _ _
Surplus copies - - - - - - - - - - - - - - - - - - - - - Total printed - - - - - - - - - - - - - - - - - - - - - -

1,264
7,956
235
96
41
249
61
310
137
845
178
9,044
422
20,838
862
21,700

Reproduced from the Unclassified / Declassified Holdings of the National Archives

The Review goes to every State in the country with the exception of Nevada,
and, as the table indicates, a number of copies are sent abroad.

The great

bulk, of course, are distributed in the Second District, including nearly
8,000 copies which are sent in quantity shipments to member banks for dis
tribution among their customers.

Of the bulk shipments to member banks,

about 3,000 copies are sent out in small quantities without charge, while
about 5,000 copies are paid for by the member banks.
In order that the mailing list for our Monthly Review may be
limited as far as possible to those who are really interested in receiving
it a revision of the list is made from time to time, the procedure being to
notify those receiving the Review that unless they advise us promptly that
they wish to continue to receive it, their names will be dropped from the mail
ing list.

At the time of the last revision, in July 1933, at least 70 per cent

of the individuals who get the Review by direct mailing requested that their
names be retained on our mailing list.

In addition to the considerable number

of people who receive the Monthly Review of this bank, many others undoubtedly
read the excerpts from the Review that are printed in the newspapers.
^

For institutions that have so few direct contacts with the public

as the Reserve Banks, we believe that the expense of preparing and distributing
the Monthly Review is quite justified, provided the publications are in such
form that they are well regarded.

All of the material used in the preparation

of the Monthly Review of the New York Reserve Bank is prepared primarily for
internal use, so that the additional cost of preparing the Review is not very
great.*

It is questionable how a similar amount could better be expended from

the viewpoint of public relations.''

* The total cost of the Monthly Review of the Federal Reserve Bank of New York,
in its preparation, as well as printing,
sales, is not over $12,000 a year,V'

including salary expense involved
http://fraser.stlouisfed.org/
postage, etc., less receipts from
Federal Reserve Bank of St. Louis

Reproduced from the Unclassified / Declassified Holdings of the National Archives

ESTABLISHMENT OF CAREER SYSTEM FOR
PERSONNEL OF FEDERAL RESERVE BANKS

We are firmly of the opinion that if central banking is to succeed in
this country all possible steps must be taken to build up a central banking
r
l

tradition and to increase the attractions of a central banking career.

^The art of central banking is not one which can be mastered readily and
quickly by reason of adaptability for and experience in ordinary commercial pur
suits.

It involves an attitude of mind which subordinates the profit motive, and

involves knowledge of a technique of credit control for which general business
training, or even commercial banking experience, offers inadequate preparation.^
\ We believe it would be desirable, therefore, to try to establish some
v
form of career system for the personnel of Federal reserve banks.

The aims of

such a system should be, it seems to us, to provide the stimulus of interesting
work, adequate compensation, and possible non-monetary rewards for the ablest men
who can be associated with the System personnelT
\ While there is interesting work to be done at all of the Federal reserve
N
banks, it is inevitable that in general, the most interesting work of the System,
as far as credit policy is concerned, must be done at Washington, D. C., by the
Federal Reserve Board and its staff, and at New York by this bank.

This situation

suggests that consideration be given to the possibility of devising a system of
temporary or permanent transfer (or exchange) of individuals who have shown special
aptitude for work upon the broad problems of credit policy to (or between) these
foci of action with respect to these problems.

A start already has been made in

this direction by the calling of men from the Federal reserve banks to Washington,
from time to time, to work with the staff of the Federal Reserve Board, and by the
exchange of men which has taken place between this bank and the Board.

The con

tinuance or renewal of conferences of those engaged in various phases of the work
of the Federal reserve banks, such as the conferences formerly held at Washington

by the
http://fraser.stlouisfed.org/ Division
Federal Reserve Bank of St. Louis

of Research and Statistics of the Federal Reserve Board, also is

Reproduced from the Unclassified / Declassified Holdings of the National Archives

2
a possible means of widening the interest in employment in the Federal Reserve
M
System.
v The question of adequate compensation involves the formulation of a
\
general salary policy which will permit the System to attract the most capable
available men by providing the possibilities of income and security which will
compare favorably with similar possibilities in other lines of endeavour, talcing
into account the satisfactions to be derived from the opportunity for public
ij

service which employment in the System affords.

VFinally, the question of non-monetary rewards, which is perhaps but an
elaboration of the idea of a satisfying public service, suggests that the number
of important posts within the System which a career man may aspire to fill be in
creased.

This may well be facilitated by greater freedom in the transfer of

men in the System, either temporarily or permanently, from one bank to another
or even between the Federal Reserve Board and the several banks.1
1

Reproduced from the Unclassified / Declassified Holdings of the National Archives

CRITICISMS OF EXISTING REGULATIONS OR RULINGS
OR PROCEDURE OF THE FEDERAL RESERVE BOARD, WITH
SPECIFIC RECOMMENDATIONS AS TO CHANGES WHICH
WOULD CORRECT ANY UNSATISFACTORY FEATURES OF
THE. RELATIONS BETWEEN THE BOARD OR ITS STAFF
AND THE FEDERAL RESERVE BANKS OR MEMBER BANKS.

It has seemed to us that the Federal Reserve Board’s policy, of
recent years, has called for the making of an enormous number of decisions,
involving the assembly in its offices at Washington of a vast amount of de
tailed data with respect to matters of relatively minor importance, the ad
ministration of which could better be delegated to the individual Federal
reserve banks,within the limits of broad general policies established by the
Federal Reserve Board.

The existing procedure has caused a multiplication of

work, delays in taking action, Increased expenses of administration, and a
separation between those (member banks and others) subject to administrative
control and those exercising the details of that control which rncourages the
growth of bureaucratic methods.

It is possible that in some periods of the

System’s operations, policy may have lent itself to inadequate treatment of
such matters, but in recent years the tendency sepms to have been to go much •
too far in the opposite direction.

Our views on certain specific matters in

this field and in the related field of relations between the Federal Reserve
Board and the Federal Reserve Banks, are presented below, '
*
Bank Membership.
In the admission of State banks to membership in the Federal Reserve
System, there have developed most exacting requirements as to material to be
furnished in connection with the application and as to conditions to be met by
banks prior to admission.

This has reached the point where it constitutes a

distinct obstacle to bringing many State banks of average or better than averW-)
age quality into the Federal Reserve System. We have made suggestions concern
ing the improvement of this situation in our discussion of Topic 3.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

Interpretation and administration of Section 8 and Section 8A of the Clayton
Act.
^\We concur in the feeling of the members of the Federal Beserve
Board as expressed in the letter of the Board dated January 9, 1935, (X-9082),
that the procedure during the past year in connection with Clayton Act appli
cations has not only been cumbersome but has not produced entirely satisfac
tory results.

It has been our experience that this procedure has operated, in

many instances, to deprive member banks in the Second Federal Reserve District
of the services of valuable directors, even where it has been shown that the
institutions covered by the application of a given individual were not so
situated as to be in substantial competition;

that even in instances where

permission has been granted to continue interlocking relationships, the
voluminous amount of information required of an applicant in support of his
application and the delay incident to the disposition thereof has occasioned
much irritation among bank directors and officers and the feeling that they
have been subjected to regulation unnecessarily oppressive inusharacter.

peated instances have come to our attention in which directors of national
banks in this district who were serving at the same time as officers and
directors of other banking institutions have elected to discontinue their
services to one or more of such institutions rather than undertake to obtain
the permission of the Federal Reserve Board to continue such interlocking
relationships.
Our view of Sections 8 and 8A of the Clayton Act is that they were
intended to supplement other anti-trust legislation, particularly the Sherman
Anti-Trust Act of 1890, and that it was not the intention of the Congress in
enacting these sections to place upon the Board the responsibility of passing
upon the general qualifications of applicants for service as bank directors.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

For the foregoing reasons we recommend that the Board give consider
ation to the advisability of adopting permanently the policy expressed in its
letter of January 9, 1935, (X-9082), i. e., that C.layton Act permits will be
granted in all cases except as to banks which are engaged in the same class
or classes of business in the same community and are so located as to be in a
position to compete substantially.

We feel that it would be advisable for the

Board to adopt this policy whether the law remains as it is at the present
time, or whether an amendment is enacted such as that proposed by Section 328
of H. R. 5357 (the proposed Banking Act of 1935), now pending before Congress,
and that the Board then delegate to the Federal reserve banks the execution of
this policy, in so far as is possible,
Interpretation and administration of Section 32 of the Banking Act of 1933,
\ In taking action with respect to applications of officers and
\
directors of member banks, submitted under Section 32 of the Banking Act of
1933 and the Board’s Regulation R, to serve at the same time as officers,
directors and employees of organizations engaged in the business of purchasing,
selling, or negotiating securities, and in rendering decisions in response to
requests for rulings concerning the necessity for making applications for
permits under Section 32, the Board has taken the position that it was the in
tent of Congress, in enacting Section 32, to terminate the usual relationships
of the types referred to in the section between member banks and dealers in
and underwriters of securities, and the Board has accordingly declined to
grant permits authorizing relationships of the kind referred to in that section
and has exercised its authority to issue permits only in exceptional cases
which, though coming within the letter of the section, are not typical of the
relationships commonly existing prior to the enactment of the Banking Act of
1933 between

banks and dealers in or underwriters of securities.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

\\ The practical result of this interpretation of Section 32, in so
far as this Federal Reserve District is concerned, has been that a number of
.
its member banks have been deprived of the services of valuable directors and
officers who were at the same time serving other organizations, such as in
vestment trusts and brokerage firms, even though no information was disclosed
in connection with the applications of such individuals which would reflect
in any degree upon their desirability as directors or officers of the member
banks in question, except that the relationships covered by their applications
came within the Board’s interpretation of the prohibitions of Section 32.*
^

This has given rise, we believe, to a feeling that the Board’s

policy with respect to the administration of Section 32 of the Banking Act of
1933 has been unnecessarily strict and inelastic.

We appreciate, however,

that serious administrative difficulties would have been involved if the Board
had undertaken to pass upon the question of whether the granting of a permit
was or was not in its judgment incompatible with the public interest in the
light of the particular facts and circumstances in each case,

Section 306 of H. R. 5357, the proposed Banking Act of 1935, as in
troduced in the House of Representatives on February 5, 1935, would amend
Section 32

of the Banking Act of 1933 so as to permit the Board to deal with

the subject-matter of that section by general regulation rather than by the
issuance of individual permits.

In view of this pending amendment we will not

undertake at this time to discuss the advisability of a review and possible
modification of the Board’s policy with respect to the administration of this
section as now effective.

If, however, the proposed amendment should not be

enacted we would like to give further consideration to this question and to
have the privilege of submitting a supplemental letter if we have any suggestions

Reproduced from the Unclassified / Declassified Holdings of the National Archives

Voting permits.
On the subject of voting permits, Section 5144 of the Revised
Statutes as amended by Section 19 of the Banking Act of 1933 provides, in part,
as follows I
"The Federal Reserve Board may, in its discretion, grant or
withhold such permit as the public interest may require. In
acting upon such application, the Board shall consider the
financial condition of the applicant, the general character
of its management, and the probable effect of the granting of
such permit upon the affairs of such bank."
The statute then proceeds to prescribe certain specific conditions on which
such permits shall be granted*
^ It would seem that with respect to the granting or withholding of
voting permits a broader view might have been taken of the statute and a more
liberal policy pursued.

The statute itself would seem to indicate that it was

intended that voting permits be granted or withheld on broad grounds, i. e .,
"as the public interest may require," and that the considerations entering
into the determination of the granting or withholding of a permit should be
(1) the financial condition of the applicant, (Si the general character of
the applicant’s management, and (3) the probable effect of the granting of the
permit on the affairs of the subsidiary member banks, and Section VI of the
Board’s Regulation P so stated..

Instead of in general merely determining on

the basis of these considerations whether it is in the public interest to
grant or withhold particular permits, the Board has, as we interpret its
policy, made each application for a voting permit a means of bringing pressure
to bear not only on subsidiary member banks but subsidiary non-member banks
as

w e ll,

to make immediate charge-offs or eliminations of estimated losses and

depreciation and to strengthen their capital structures to a degree that could
hardly be said to be required to give effect to the policy of the statute.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

nX In many cases a holding company affiliate has been asked to agree to do things
as a condition to the issuance of a permit to which its directors and officers
have conscientiously felt that the company could not agree, resulting in con
siderable embarrassment and irritation on the part of the officials of the
holding company affiliate and of the subsidiary banks, and difficult and time
consuming negotiations on the part of the officers of this bank to obtain
compliance with the

Board’s requirements.

V It would also seem that in some instances the dual policy of the
\
statute has been lost sight of, to wit, to strengthen holding company affili
ates or to terminate the holding company affiliate relationship, the Board
having been apparently reluctant to permit the distribution to its stockholders
by a holding company affiliate of the stocks of less than all of its several
subsidiary member banks notwithstanding that such distribution was a step to
ward the ultimate liquidation of the holding company affiliate.

In this con

nection it might be noted that some of the provisions of the form of applica
tion for a voting permit (F. R. B. Form P-1) are somewhat broader than the
corresponding provisions of the statute.'
jV

While the Board's policy with respect to passing upon applications

for voting permits has no doubt had beneficial results in hastening desirable
action by banks in the matter of charge-offs, etc., we question whether it is
within the fair intent of the statutes or whether it is necessary or desirable
to take the occasion of such applications to force such action.

In this con

nection we think it is true that subsidiary banks of holding company affiliates
have, by reason of the desirability or necessity of obtaining voting permits,
been subjected to more severe treatment than have other member banks, both
state and national, which are not subsidiaries of holding company affiliates.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

Notwithstanding the compliance of many holding company affiliates

with the Board1s requirements, up to the present time, only two general
>X

permits have been issued to holding company affiliates in this district.
We recommend that the Board consider the advisability of adopting
the general policy of issuing general voting permits to holding company af
filiates in all cases except those in which it appears that the issuance of
such permits would not be in the public interest, and that the question of
public interest be determined primarily on the basis of the factors enumerated
in the statute, i. e., the financial condition of the applicant, the general
character of its management, and the probable effect of the granting of such
permit upon the affairs of the subsidiary bank.

This would not of course

prevent the Board from imposing conditions in regard to charge-offs, etc., in
exceptional cases.

We suggest also that the Board’s policy with r.espect to

"limited" permits be modified so that such permits will be issued only in ex
ceptional cases rather than as a general practice.v
Finally, we question whether this is not another duty with respect to
which, under existing legislation or by amendment to the law, the Federal
reserve banks could be given greater freedom of action within the limits of a
general policy adopted by the Federal Reserve Board*
Granting permission to State member banks to open branches*
V We have had two cases in this district where State member banks have
applied for permission to open branches in accordance with the law of the
State,

The Federal Reserve Board and the Comptroller of the Currency have, in

these cases, made requirements as to certain charge-offs and eliminations.
This has occasioned resentment as the banks felt that it was unjust that a
request for authority to establish branches of small importance relative to
the total

of the bank’s business should be made the occasion of such requirements

Reproduced from the Unclassified / Declassified Holdings of the National Archives

V This feeling has been intensified by the fact that national banks which have
opened branches in the State during the same period have not been made the
subject of similar requirements.
n)

It is believed that a more liberal policy might be pursued in this
a ix

matter without detriment to the public interest.1
1
Salaries of officers and employees of this bank.

\ In recent years the exercise by the Board of its responsibilities
V
with respect to salaries provided by the Board of Directors for the officers
and employees of this bank has involved anvxunwarranted encroachment upon the
time of both the Board and the directors of the bank, and has interfered with
x

the maintenance of a salary schedule at this bank' which would give proper
recognition to the duties and responsibilities of the individual members of
the bank staff as well as to an appropriate relationship between the salaries
\V X

of different members of the staff.
x It is our view that in this field of Federal Reserve System opera
tion the Board should confine itself to broad questions of policy and not
attempt to control details of intra-bank administration.

While the total

salary expenditures of a Federal Reserve Bank properly may be a matter of con
cern to the Board, the division of that total within the bank would seem to
involve questions which, by their nature, must be reserved to the Board of
Directors and officers of the individual banks who are in close touch with the
work of the hank and the participations of various individuals in that work.
This is the policy which lias been in successful operation for some years with
respect to employees ©f the banks in the lower salary ranges, and it would
seem desirable to extend the idea underlying this established practice, al
though not its form, to the officers of the banks and the employees in the
higher salary ranges

Reproduced from the Unclassified / Declassified Holdings of the National Archives

^ We would suggest that the Board formulate a general policy for its
guidance, and the guidance of the Federal reserve banks, with respect to the
compensation of officers and employees of Federal reserve banks, and that such
policy should contemplate leaving the utmost discretion as to individual
salaries, as contrasted with total salary expense, to the Board of Directors
of the Reserve banks.

It is difficult to see how, without such a policy, we

can maintain a proper relationship between responsibility and salaries of
members of our staff, or expect to encourage the continuance in the service of
this bank of employees who have shown a capacity to develop and assume in
creased duties and responsibilities.

The establishment of a career system for

personnel of Federal reserve banks which will attract and hold the ablest
available men is, in large part, dependent upon the adoption of such a policy.
General relations between Federal Reserve Board and Federal reserve banks.
It is our view that nothing would contribute more to the establish
ment of satisfactory relations between the Federal Reserve Board and the
Federal reserve banks than the adoption by the Federal Reserve Board of a
broad general policy which would accord to the actions of the boards of direc
tors of Federal reserve banks, with respect to matters of bank administration,
district problems, or other matters concerning which the law gives the
directors initial responsibility, the presumption that such actions are right
and proper unless obviously in conflict with general System policies estab\
»
lished by the Board, or with the statutes. In any case where the Federal
Reserve Board feels that it must disapprove of the action taken by a board of
directors of a Federal reserve bank, or where it has reasons which it feels
justify its overruling the presumption in favor of the correctness or wisdom
of the action taken by the directors, it would seem to be clearly a matter of
good organization that the reasons for the Board’s disapproval should be

Reproduced from the Unclassified / Declassified Holdings of the National Archives

transmitted to the directors.

Otherwise,- it is difficult to see hew it

will be possible to develop and to maintain a wise and harmonious accord be
tween the Federal Reserve Board and the several boards of directors in the
w
conduct of the System's affairs»

Reproduced from the Unclassified / Declassified Holdings of the National Archives

■F E D E R A L R E S E R V E B O A R D F IL E

Fe d e r a l R e s e r v e B a n k
o f

o r k

y ?//^

February 8, 1935*

Dear Governor Eccles:

Mr.

Mr. f.-lorr;!!.
Mr.

Biha
ce

z ..

|Your letter of February 8, 1955 (X-9115) on the general

Mr. Carpenter.
Mr. Nocll. • •

•subject of relations between the Federal Reserve Board and the

Mr.
Mr.

•
Federal reserve banks and member banks, has been received.

Mr.
Mr.
Please note —

welcome the suggestion, made in your letter, that it would be
check

helpful if the Federal reserve banks would point out any features

and return to

JArTCarpfitef

of these relations which they deem may be unsatisfactory or subject
to criticism, and we shall be happy to cooperate in a survey of
this situation.
The list of subjects (X-9115-a) which accompanied your let
ter and which was suggested for discussion by our directors and
officers, also will have our careful consideration, and advice as to
our views thereon will be submitted to the Federal Reserve Board
within thirty days, as requested.
Faithfully yours,

J. H. CASE,
Chairman.
Honorable Marriner S. Eccles,
Governor, Federal Reserve Board,
Washington, D. C.

_ 3

A
c )

Reproduced from the Unclassified / Declassified Holdings of the National Archives

F e d e r a l Re s e r v e Ba n k o f P h i l a d e l
T

h ir d

D is tr ic t

Ri c h a r d L . A u s t i n
C hairm an of t h e B oard
and

February 6, 1937

F e d e r a l Re s e r ve Agent

R E C E IV E D

L. P. Bethea, Esq., AssTt Secy.,
Board of Governors of the
Federal Reserve System,
Washington, D. C.
/

Dear Mr. Bethea '

&37 FEB 10

BCArU.

GOVERNORS
OF THF
•EDERAL RESERVE SYSTEM

'our letter of January 29th, enclos
ing a copyOf the memorandum forwarded by this bank
under date of March 20, 1935 in response to Mr. Eccles1
letter of February 6, 1936, was duly received, and
I want to thank you for your kindness in having a copy
of this memorandum made for me.

Very truly yours,

Chairman

Reproduced from the Unclassified / Declassified Holdings of the National Archives

Mr. R. L* Austin, Chairman,
Federal Reserve Bank of Philadelphia,
Philadelphia, Pennsylvania,
Dear Mr. Austin!
Pursuant to the telephonic request made
of Mr. Leonard b y Mr, Hill, there is sent you here
with a copy of your letter of March £0, 1955, and
its lnclosure, which was written to Mr. Eccles in
response to his letter of February 6, 1955 (X-9115).
Very truly yours,

iSigned) L® P» BETHEA
L# P , Bethea,
Assistant Secretary.

Inclosure.

ect Mr. E. C. H ill

A2a ^

Reproduced from the Unclassified / Declassified Holdings of the National Archives

F e d e r a l Re s e r v e Ba n k o f P h i l a d e l p h i a
T

hird

3 ^ 7

D is tr ic t

Ri c h a r d L . A u s t i n
Chairm an o f the Board
and

F ed e r a l Re s e r ve Agent

March 20, 1955

Honorable Marriner S. Eccles,
Governor, Federal Reserve Board,
Washington,
D. C.
Dear Governor Eccles In reply to your letter of February
6th, 1935, X-9115, in which you submitted nine subjects to
be discussed by the directors and officers of this bank,
we enclose herewith an expression of their views resulting
from a discussion of those subjects, which I was authorized
at a meeting of the board, held this morning, to submit to
you.
Very truly yours,

Chairman
Enclosure

Reproduced from the Unclassified / Declassified Holdings of the National Archives

FEDERAL RESERVE BANKZ

OF PHILADELPHIA

General credit situation

(a)

Are commercial banks doing everything in their power to
improve the situation?

The commercial banks in the Third Federal Reserve District, with
few exceptions, have been and are doing everything in reason in meeting
the general credit situation, consistent with the duties and responsibil
ities owing to their depositors and stockholders.

Few justifiable complaints

have reached us concerning the inability on the part of business concerns
with proper credit standing to obtain needed commercial credit.

Most com

plaints are those of prejudiced persons or disappointed applicants undeserv
ing of credit.

In a few communities such as the shore resorts in Southern

New Jersey, and at Reading and Johnstown in Pennsylvania, credit has been
difficult to obtain due to restricted banking facilities following the clos
ing of banks.

Where banks have been reorganized in these communities, it

is natural to expect highly cautious lending attitudes, especially where,
for the most part, the would-be borrowers are of a class without adequate
credit standing, to whom credit was formerly extended when it should not have
been.

A relatively few commercial banks have indicated their unwillingness

to consider applications for industrial loans under Section 13b, with or
without our participation, not to be uncooperative, but primarily due to an
ultra-conservative lending policy of long duration, and to the length of time
such loans would have to remain outstanding.

Where deserving applicants have

been denied commercial credit for any of these enumerated reasons, we have
been able to relieve the situation somewhat through our operations under
Section 15b.

Banks in this district and, we believe, elsewhere, are generally

alert to the need for lending, if for no other reason than to increase earnings

uucu l,um

unuiassmea / Declassified Holdings of the National Archives

Z
federal reserve bank

OF PHILADELPHIA

to a point where expenses may be met and a reasonable profit obtained.
This is also indicated by a tendency toward lower interest rates for good
short-time commercial loans, and the large amounts of excess funds avail
able for lending and investment.^The problem is not one of unwillingness
on the part of banks to lend, but an unwillingness or inability on the
part of business concerns to borrow in the face of prevailing business and
credit conditions. 1 It is not unreasonable to expect that the volume of
commercial loans in this district will increase as the prospect for profit
able business grows brighter.

(b)

If not, what steps can be taken by the Federal Reserve
Banks or otherwise to bring about an improvement?

r It is our belief that in this district the greater part of unsatis
fied credit demand is represented by the type of credit which would normally
be obtained from private investors or through the securities market.

most instances, the industrial loans made by this bank cannot be considered
as strictly commercial loans, no matter how sound they may be from a credit
or risk point of view.

Commercial banks should not be expected to make loans

of this character which, in effect, would make them partners in or partowners of business enterprises.

Keproaucea irom the Unclassified / Declassified Holdings of the National Archives

FEDERAL RESERVE BANK**

OF PHILADELPHIA

Interest Rates

(a)

On time and savings deposits of member banks

The question of the amount of interest that should be paid on
time and savings deposits of member banks is one of vital importance to
American bankers and especially to the country banks.
! The executives of the smaller institutions appear to be reluc
|
tant to calculate the value of the deposit accounts in their institutions
and are prone to pay, either in interest or in services, more than the
account is worth, in the belief that increased deposits are an evidence
of growth and success.1
The payment of interest on deposits should be strictly confined
to time and savings accounts.
V The member banks of the Federal Reserve System in this district
have been greatly benefitted by the reduction in the amount of interest
payable on time accounts.

Some of them, however, would be very willing

to return to the old rates, feeling that it would result in an increase
in deposits.'
The member banks of the Federal Reserve System, of course, complain
bitterly where non-members are paying higher rates than the System limit,
and it is unfortunate that they must have that type of competition.

the other hand, in some neighborhoods the member banks are paying lower
rates of interest than the regulation requirements.
There should, if possible, be a more exact definition of time and
savings deposits.

There is a great difference between the ordinary so-

called time deposit and the true savings account such as we see in the

Reproduced from the Unclassified / Declassified Holdings of the National Archives

FEDERAL RESERVE BANK
OF PHILADELPHIA

mutual savings banks where people are saving for their old age without
expectation of withdrawing the money for expenditure or investment.
In the matter of savings accounts there should be a strict re
straint upon withdrawals without notice.

Some of the evils of the pre

sent situation might be cured if a maximum limit of say $50 a month
would be imposed, and that withdrawal without notice should be coupled
with some positive declaration of necessity.

(b)

On loans of member banks and on industrial advances and
commitments by Federal Reserve Banks.

This paragraph refers to three distinct types of accommodation:
(1)
(2)
(3)

Interest charged by member banks on their loans to customers;
Interest charged on direct loans to industry by Federal Re
serve Banks;
Commitments by Federal Reserve Banks.

(1)

Interest charged on loans to customers by member banks depends

upon a variety of conditions.

In the larger sense commercial banks charge

a rate to their customers that is based on the price of money in the real
money markets, and it is to a great extent a matter of supply and demand.
'In these days when funds are plentiful, larger banks will loan money to
their good customers at very low rates..

If the risk is increased or the

account of a customer is not attractive, they, of course, do not give him
the benefit of the lowest rate.

Good customers today have no trouble getI
*

ting liberal accommodation from their banks at very low interest.

It must

be remembered that customers are given accommodation at low rates provided
they maintain satisfactory balances.
(2)

The loans of funds of this Reserve Bank direct to industrial

institutions have been at 5% and 6% rates, and there have been no loans that

Keproduced from the Unclassified / Declassified Holdings of the National Archives

-j

the Street would call 1prime loans".
1

If there had been, the applicants

would not have had need to apply to us.
tor.

FEDERAL RESERVE BANK
OF PHILADELPHIA

The term of the loan is also a fac

Although the borrowers may have good prospects today and good accounts

on their books, the fact that the Reserve Bank's accommodation is a long
time contract, increases the chance of unsatisfactory conditions developing
which cannot be discovered until they have done some damage.

Even where a

mortgage was given, in many instances it was on a type of property that
was developed for a highly specialized purpose, and in the event of failure
to pay the debt a buyer for the highly specialized plant might not be found
for some time.

When the loan is made against "receivables", there is con

siderable labor in handling the changing paper and checking the credits.
' We know of no instance in which these loans have been made where a sound
'
\ \

commercial bank would have considered a lower rate.
(3)

It is our intention to make a further study of commitment rates.

Generally, the matter of making a commitment today to loan money a year
hence, and then carry the loan for a considerable period of time, is a hazard
for which the compensation should be carefully measured.

nupruuucea irom tne unclassified / Declassified Holdings of the National Archives

■■■■

fed era l

RESERVE BANK

OF pHiLADEV-PHlA

Matters affecting admission of nonmember
banks to Federal Reserve System.

(a)

Earnings of nonmember banks from exchange collection charges

Warnings of non-member banks from exchange and collection charges
are a negligible factor in this district.

All non-member banks are on the

par list, and hence exchange charges arise only from transactions with cor
respondent banks .^

(b)

Present conditions of membership

From a strictly System point of view, present conditions of member
ship are not considered too severe, although the requirements with respect
to charge-offs have made it impossible for the majority of the non-member
banks in this district to qualify.

Many non-member institutions have sub

stantial investments in stocks on which the depreciation is heavy.

The state

laws still permit banks and trust companies to invest in stocks, subject to
certain limitations.v
Present banking laws of Pennsylvania, which only recognize common
stock as capital for state institutions, have prevented them from eliminating
losses and depreciation through the usual method of reducing common capital,
and then rehabilitating the capital structure by the sale of preferred stock.
The new Secretary of Banking of Pennsylvania recently announced that legis
lation now is being drafted which will overcome this handicap by giving pre
ferred stock the same status as common stock.

u
’ Non-member state banks generally are aware of the closer supervision
and more stringent requirements imposed upon member state banks than those
to which they are subjected by the state supervisory authorities.

In most

Reproduced from the Unclassified / Declassified Holdings of the National Archives

7
feder al reserve bank

OF PHILADELPHIA

cases the bankers are willing to admit the desirability of the more
rigid regulation, but they believe that by postponing applying for mem
bership until it is required of them to retain the benefits of deposit
insurance, concessions will be made which will not demand such drastic
action in the matter of charge-offs and other corrective measures.v
^Uniform condition numbered 17 which prohibits the pooling of
trust investments, we believe, has deterred a number of Pennsylvania banks
from applying for membership.

The State Banking Code of 1955 prohibits

the pooling of investments and the sale of participations to the public
with or without the bank’s guarantee, although

pools still are permitted

for the collective investment of trust funds, by which means these funds
may be invested almost up to the last dollar, thereby producing a maximum
of income for the beneficiaries.

In more prosperous times the pooling

practice involved a minimum of risk.

The dangers and difficulties now,

however, are apparent to the managements of most of the trust companies.
The provision in condition numbered 17 which prohibits a bank from owning
an interest in a trust pool created for the investment of small balances
deprives the pool of the flexibility which is necessary for its successful
operation.

If some modification of condition numbered 17 were possible to

permit the bank’s participation in pools created for the collective invest
ment of small balances which cannot be invested separately to advantage, it
would have the effect of making membership more attractive to the smaller
trust companies/'
"/The power to issue title insurance is the birthright of practically
'
all trust companies in Pennsylvania.

The majority of the non-member banks are

trust companies, but apparently only approximately 16 per cent of them have

Reproduced from the Unclassified / Declassified Holdings of the National Archives

FEDERAL RESERVE BANK
OF PHILADELPHIA

exercised their title powers.

Under the provisions of a late Act, it

is believed that some of the companies which heretofore engaged in the
issuance of title policies have since lost the right to do so.

It is

recognized that title business is not a proper function for a commercial
bank to engage in, but in certain instances it would impose a real hard
ship upon banks for them to be forced to abandon their title business.
It is recommended that in such cases some modification of the Board's
usual policy be permitted, in order that these banks may qualify for mem«
/
bership, provided their conditions are otherwise satisfactory.
r Because of the dual supervision by State and Federal authorities
to which state member banks are subject, a number of the non-member banks
have expressed a preference to convert into national banks, rather than to
seek membership under their present charters.

It is believed that if the

Comptroller is given the discretionary authority provided for in the new
banking bill to permit converting state banks to carry over sound but nonconforming assets into national banks, a large number of state banks will
seek national charters in preference to membership under their present state
charters. *

(c)

Advisability of extension of membership to banks
outside the States and the District of Columbia.

!
/
The question of extension of membership to banks outside the States
and the District of Columbia is a matter about which we do not feel compe
tent to advise, because we are not familiar with the requirements of such
banks t Our contacts ad those of our member institutions with banks outside
'
the States for the most part are limited to the handling of checks and
collection items.

We understand at the present time all checks must be

Reproduced from the Unclassified / Declassified Holdings of the National Archives

FEDERAL RESERVE BANK
OF PHILADELPHIA

/
/
handled as collection items.

We believe that membership would make

possible uniformly lower exchange charges and also facilitate the col
lection of checks and drafts, thus encouraging business between the
United States and its possessions.

We presume that facilities for

obtaining cash and rediscounting would be of material benefit to such
banks.

Unless branches of the Federal Reserve Banks were established

in each of the possessions, however, there would appear to be presented
many problems in connection with the maintenance of reserve, etc., which
V
would make their administration and supervision difficult.

R e n rn rin n p rf fro m th e I In r la s s ifip rl / D p r.laa a ifip H H n lrlin n s n f th p N a tio n a l A rc h iv e s

Need for continuance of assistance of Reconstruction
Finance Corporation in connection with rehabilitation
of capital structures of banks.

In Pennsylvania there are approximately thirty-one banks now
in need of strengthened capital structures, according to a recent survey
made by the Federal Deposit Insurance Corporation and the Pennsylvania
State Banking Department.

Of this number, four are member banks and

twenty-seven are non-members.

The estimated total amount of additional

capital needed is $8,065,000.

Six of this group are banks in which the

Reconstruction Finance Corporation already has an investment, but with
respect to which it is estimated that additional capital is needed.

The

Philadelphia Agency of the Reconstruction Finance Corporation reports as
of March 1st, 1955, that it had outstanding undisbursed commitments to
nineteen non-member state banks and twelve member banks in this district
in the total amount of $2,960,000.
It is reported that the Federal Deposit Insurance Corporation has
completed its work in Southern New Jersey.

As a matter of fact, the prev

ious Commissioner of Banking was not disposed to cooperate fully with the
Federal agencies in connection with non-member banks with weakened capital
structures.

It is hoped that the new Commissioner of Banking, when appointed,

will be more cooperative with the Federal agencies, inasmuch as it is our
belief that there are a number of non-member banks in Southern New Jersey
in need of additional capital.

No need has been indicated for additional

capital in the state of Delaware.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

Adequacy of reimbursement of Federal Reserve Banks by
Treasury and other governmental agencies for various ser
vices rendered and for space used in Federal Reserve
Bank buildings.

The statement below giving the cost, during 1954, of such activ
ities and the amount received in reimbursement shows a net cost to this
bank of $80,946.42.

The only compensation that might be argued that

should be applied against the net cost is the problematical value of the
Government's balance during that year, which averaged $5,700,000.

This

balance was not usable, and involved the special handling of an enormous
number of checks.
It must be remembered that many of these activities are more costly
than the ordinary relations between a bank and its customers, because of
the Government's requirement of detailed reports and schedules and methods
of handling that are very different from what a bank ordinarily does for
its depositors.
FISCAL AGENCY AND DEPOSITORY EXPENSES
Total
Expense

$54,252.05 $52,665.67
24,175.67
5,657.20
—
1,558.97
8,281.88
11,521.99
5,575.52
4,565.10
5,256.46
458.02
127,565.28 114,863.45
357.60
557.60
639.24
' 659.24
360.55
560.55
1,391.73
1,391.73
4.947.46
$251,662.48 $150,716.06
150.716.06
Net cost to,this b a n k ---------------- $ 80,946.42

U. S. Government Issues -- New Issues
t
!
Redemption & Exchanges
M
Accounting
1
1
Custody of Securities
I
t
Auditing
Government Checks
Government Coupons
Treasurer's General Account
Supplying Government Agencies with Currency & Coin
Fiscal Agent & Custodian for R. F. C.
Farm Credit Administration
Federal Emergency Administration of Public Works
Federal Farm Mortgage Corporation
Home Owners' Loan Corporation
Miscellaneous Other Costs

Reimbursable

Reproduced from the Unclassified / Declassified Holdings of the National Archives

A
FEDERAL RESERVE BffrlK
OF PHILADELPHIA

No charge is included in the above tabulation for use of vault,

\\lt is our opinion that the cost of the above expenses should be
reimbursable, and that no credit should be allowed for the Government
deposit because, in the nature of things, reserve banks are not expected
to invest as closely as member banks, and therefore do not have the same
opportunities for using balances to create earnings.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

Regulation fixing margin requirements for loans
by banks upon equity securities for the purpose of pur
chasing or carrying securities registered on national
securities exchanges.

(a)

Circumstances under which regulation should be issued.

Under the Securities Exchange Act the Federal Reserve Board ap
pears to be directed to prescribe marginal requirements for loans, for
the purpose of preventing excessive use of credit in the purchase and
carrying of registered securities.

This requirement seems to be intended

to apply to loans made by banks as well as brokers.

If this is the proper

interpretation of the Act, it would seem that the Board should issue the
regulation as soon as possible. ''Under existing circumstances, the present
appears a desirable time to issue such a regulation, as dealings in secur
ities now are of so small a volume that any adverse effect of such a regula
tion would produce a minimum of disturbance.

Also, if the regulation were

issued now, all parties would know the conditions under which loaning oper
ations in connection with registered securities should be conducted and a
future disturbance be avoided.''1

(b)

Whether regulation should permit borrower to obtain from bank
more than he could obtain from broker under Regulation T .

v We feel that restrictions in the Act which apply to brokers should
not apply to a bank in dealing with its own customers other than brokers.
Banks1 relations with their customers are such that they should be at liberty
to require such margin^as they think are necessary.

The Federal Reserve Act

gives the Board power at any time to fix the percentage of bank capital and
surplus which may be represented by loans secured by stocks and bond collat
eral, should it appear that too much bank credit is being used for the purpose
of carrying securities.^

Reproduced from the Unclassified / Declassified Holdings of the National Archives

f e d e r a l r e s e r v e ban

OF PHILADELPHIA

Economic and Statistical Division

(a)

Usefulness to directors and officers

The Economic and

Statistical Division of this bank, in addition

to the monthly bulletin issued by it, prepares for the directors and
officers, a weekly statement containing the latest current changes and
developments in business and banking. Much of this information is ob
tained directly through confidential and friendly relations established
by the Division, and is not obtainable through any other source.

\ The directors and officers, in reply to this inquiry, stated that
\
they find the information contained in these statements useful and de
pendable, and very helpful to them in the discharge of their duties.

With

the confusion and uncertainty which surrounds business at the present time
they feel the necessity for having all such information, and that this
\
\
Division performs a valuable service.

Reproduced irom the Unclassified / Declassified Holdings of the National Archives

Economic and statistical divisions
of Federal Reserve Banks.

(b)

Value of Federal Reserve Bank monthly reviews.

The value of our monthly bulletin, The Business Review, is prob
ably best indicated by the extent and character of monthly demand for it.
Our active mailing list at present is as follows:
Industrial and trade concerns
Banks in this district
Colleges and universities
Trade organizations
Individuals
Foreign (mostly banks)
Total

5,098
962
100
75
690
280
7,205

In order to keep this mailing list active, it has been our pract
ice to make a periodical check by asking the recipients of the bulletin if
they find it useful, and wish us to continue sending it to them.

When we

stopped sending the Review to those who failed to respond, complaints and
requests to be continued on the mailing list in many instances followed
immediately.

As a result, the number of undelivered copies has been reduced

to the minimum, and at present it seldom exceeds five copies in any one
month.

New requests for the bulletin in the past two years have averaged

about 30 a month, most of them coming from industrial and commercial concerns.
Industrial and trade concerns have shown us most generous cooperation
in making our monthly review of business conditions possible.

They have re

peatedly expressed their confidence in our statistical work, and have made
use of our current data on production, employment and distribution of goods.
^

The demand for our survey of current business activity in this dis

trict has been especially heavy since 1929, during which period reliable

< 3-2-o.
1

)

information on business conditions has been eagerly sought for in place
of rumors and press accounts usually based on inadequate facts, biased
views, or doubtful interpretations.
been growing persistently.

The demand for accurate data has

Our monthly review is undoubtedly regarded as

a unique and dependable source of information.^
Valuable as are the composite data for the country, they natur
ally do not meet the manifold business problems which require specific
information and knowledge of economic conditions by industrial areas.

Our

industrial advisory committees have used our Division of Statistics and
Research to the fullest extent.

During the past dozen years we have endeav

ored to build up our economic and statistical information so as to measure
currently the rate at which goods are being produced and marketed, the
volume of employment and changes in income from wages in this district.
No reliable local information of this kind was available by months before
this bank undertook to collect it.
At present nearly 4,000 business establishments are reporting to
us voluntarily their confidential data every month.

These statistical data

have enabled us to provide industry and commerce with a comprehensive and
accurate summary of business and agricultural conditions every month.

The

organization and presentation of current reports are made in an effort to
show not only the prevailing rate of activity by important lines of busi
ness and by industrial areas within this district, but also the existing
conditions in the reserve district as a whole.

We have endeavored to con

fine our surveys to the presentation of ascertained facts, avoiding the
interpretations and conclusions which might reflect forecasting.
In consequRnce, through the medium of our monthly bulletin as well
as advance releases on industrial employment and trade, it has been possible

for us to furnish our business and banking establishments with reliable
information on the current performance of industry and commerce, which
certainly bears a direct relation to banking and credit. ^We are convinced
that there is a definite need and demand for such local economic and
statistical information, and that there is at present no other agency in
our district that could provide this service for our own benefit and for
the use of business generally.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

Establishment of career system for
personnel of Federal Reserve Banks.

x The possibility of doing this, of course, depends upon how at
X
tractive the opportunities are for young men and young women of intelligence in the System.
v If Federal Reserve Banks are to operate as banks, with the same
X
opportunities of promotion and development of employees and the same
monetary return as may be found in other banking institutions, there is no
reason why young people interested in banking as a career should not be
interested in service in the Federal Reserve Banks.

At the present time,

however, there cannot be the same sense of security they would have if
they were employed in a strong, reputable bank or trust company.

There is

the possibility of the Federal Reserve Banks being made Government depart
ments, or that they may meet the same fate as the First and Second Banks
of the United States.

The political threat is serious and gives the offi

cers and employees grave concern.
v As to obtaining officers for Federal Reserve Banks, unless they
x
can receive salaries comparable to the compensation paid by other banking
institutions, there is little inducement for a young man to enter the service
of the Reserve Banks as a career, because if he has intelligence and initia
tive, his prospects are better elsewhere.'

On the other hand, Federal Reserve

Banks may find a few people to serve as Governors and in the higher posi
tions, if they have some independent means, provided the fear of political
domination or destruction is removed.
x^ Reserve Bank employees know that in the event of their incapacity
>
from illness, injury or old age, they will not be adequately provided for.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

' The retiring allowance for an average faithful employee who has served
)
twenty years would scarcely be enough to give him or her the barest ne
cessities of life.

The larger banks and other substantial business

corporations of this neighborhood provide much better for superannuated
or incapacitated employees.
y| The best thing for the Federal Reserve System would be for it to
V
provide the same compensation and demand the same intelligence and energy
as are required of employees of other banking institutions.
banks, this energy is devoted largely to getting business.

In commercial
In Reserve

Banks, it should be devoted to the supervision of member banks, the educa
tion of their officers, and the cultivation of good-will.
There is another matter that might be mentioned that has affected
prospective officers’ or employees’ attitudes towards connection with the
Federal Reserve Banks.^ The Board’s objection to officers or employees
having outside connections or interests is another deterrent.

Persons with

active minds and high-minded desires cannot be confined to the daily tasks
in their offices without dulling their mental and spiritual development.
To insist upon their confining their efforts to their business without out
side interests or contacts may develop a satisfactory bureau clerk, but
will not produce a competent bank officer.

A bank officer is not effective

simply because he knows the mechanics of banking.
and have a real knowledge of people and their ways.

He must be broad-minded
He needs breadth as

well as acuteness)V
In the commercial banks they require more than detailed knowledge
of bank work, and they are generally very glad to see their employees con
nected with outside interests, provided, of course, such connections do not

Reproduced from the Unclassified / Declassified Holdings of the National Archives

interfere with their work in the banks.

It gives them breadth of view

and marks them as personalities with possibility of development. ^The man
who knows nothing but the job in which he earns his living is apt to be
a very narrow person, and it is reasonable to believe that where a man's
life is made up of a variety of activities, which bring him into contact
with various groups and interests, the experience should make him more
valuable to the bank

Reproduced from the Unclassified / Declassified Holdings of the National Archives

rfi,
fed er a l reserve bank

OF PHILADELPHIA

Criticisms of existing regulations or rulings or
procedure of the Federal Reserve Board, with specific
recommendations as to changes which would correct
any unsatisfactory features of the relations between
the Board or its staff and the Federal Reserve Banks
or member banks.
v
V
v As to your ninth question we would say that the regulations of

the Board seem to us to have been carefully drawn, and we are, for the
most part, in accord with these regulations and the various rulings of
the Board.

Wp feel some hesitation in replying to the latter part of

this question - the relations between the Board or its staff and the
Federal Reserve Banks or member banks - but assume that you invite and
wish a frank statement of our feeling.

It might be summarized in the

statement that in the earlier years of the System we felt that the Board
realized that the banks were conducting the operations of the System, and
their disposition was to be cooperative and helpful.

Having this feeling,

we consulted freely with the Board, or with individual members, and never
failed to get a sympathetic hearing and helpful advice or suggestions.

regret to have to say that in later years we have noticed a changed attitude
on the part of the Board.

A disposition to distrust and criticise seems

to have succeeded to the former disposition to help.^ As a result we have
refrained from making inquiries or submitting doubtful questions, except
when necessary.^
^

We have never made any list or memorandum of illustrations of this

changed attitude, and there are probably a number that have passed from our
recollection.

The following are a few that now occur to us;

^ l.x In June, 1932, at the request of President Hoover, we got
\

Reproduced from the Unclassified / Declassified Holdings of the National Archives

twelve men of local prominence to serve as a "Banking and Industrial
Committee".

These gentlemen contributed their own valuable time, their

Chairman contributed his Secretary to act as Secretary of the Committee,
a local bank gave them quarters in its building rent-free, and they col
lected a very considerable sum of money from trades benefitted by a
"Renovize" campaign, which they waged with great success.

As we were

unable to contribute to their work either space or personnel, we agreed
to bear, for a limited number of months, the very moderate salaries of
two or three high-grade men they had to employ.

Our total expenditures

on account of this Committee were about $5,800.

Although the times were

critical and we were all overworked, we were harassed by constant inquiries,
from your Secretary as to these men, their duties, their compensation, and
the date of expiration of their employment.

Even after the employment of

the last man had ceased, on the date previously named to him, he inquired
whether it had ceased.^
\ 2.
'

The position taken by the Board in construing the Clayton Act

and Section 52 of the Banking Act of 1955, in considering applications for
permits to serve on two or more boards of directors, has disturbed our banks
very much; has weakened their boards of directors by depriving them of the
services of able men; and has excited a feeling of resentment on the part
of these men.

The Board*s negative decisions are generally regarded as

wrong because they are not supported by the data submitted to the Board with
the applications.

^ 5.

We recognize the duties and responsibilities imposed upon the

v
.Board, but we cannot avoid the feeling that the close and constant attention

paid by the Board to matters of employment, promotion, and compensation
comes very close to operation rather than supervision, and indicates a
lack of confidence in the interest and ability of our Director6.^ We have
been in the habit of reporting absences of employees over thirty days,
on account of sickness, to our Executive Committee, which approved exten
sions.

The minutes of the Executive Committee, including these details,

have always been read to and approved by the Board at its next meeting.
We cannot see the reason for requiring that the attention of the Board,
which has more important matters to consider, should be taken up with the
details of each individual case - character of illness, age, prognosis,
Iv
f
etc.

We have, however, been instructed that this must be done.
\ 4. l In two cases - that of the Berks County Trust Company of
x
|

Reading, and the "Main Line Trust Company" of Ardmore - the Board took po
sitions which indicated a total lack of confidence in the Directors and
officers of this bank, and a contempt for their judgment.

Indeed, in the

latter case, their comments to the Chairman and Governor cannot be charack\

terized otherwise than as offensive. '
N 5. h We deplore the Board1s insistence that all officers and em
'
ployees of Reserve Banks must divorce themselves from all civic and com
munity interests.

Mr* Austin *s enforced resignation from the Treasurership

of the Chamber of Commerce has cut off a valuable contact with the business
interests of the city.

The same is true of Mr. Norris* severance from the

Beneficial Saving Fund Society.

Perhaps the most striking illustration is

the insistence that a clerk in our Currency Department may not oblige his
neighbors by serving them on the School Board of a small country township".

Reproduced from the Unclassified / Declassified Holdings of the National Archives

* We feel that it is to the interest of the System, as well as to the
interest of the communities in which the Banks are located, that offi
cers and employees should maintain useful business contacts, and do
their duty as citizens, where such contacts and duties create no embar„ 1
1
rassment, and in no wise interfere with the performance of their work/1

Reproduced from the Unclassified / Declassified Holdings of the National Archives

3 21.-3

March 18, 1955.

Mr. R. L. Austin, Chairmen,
Federal Reserve Bank of Philadelphia,
Philadelphia, Pennsylvania.
Dear Mr. Austin:
Reference is made to Governor Eccles1 let
ter of February 6, 1955 (X-9115), to the Chairmen of ell
Federal reserve banks, requesting that the Board be ad
vised within thirty days as to the views of each bank in
regard to certain subjects, a list of which was attached
thereto.
It is understood that the matter is receiving
your attention, and it will be appreciated if you will in
dicate when you expect that a reply will be submitted.
Very truly yours,

L. P. Bethea,
Assistant Secretary.

LPB-jcb

Reproduced from the Unclassified / Declassified Holdings of the National Archives

e d e r a l

e s e r v e

o k

l e v e l a n d

a n k

M a r c h 11,
H o n . M . S. Eccles,
.

1955

Governor,

Federal Reserve Board,
Washington,

D . C.

Dear Governor Eccles:
Our Board of D i r e c t o r s at its m e e t i n g on M a r c h 8 gave
particular

consideration

X - 9 1 1 5 , and I have been

to y o u r l e t t e r of F e b ruary
instructed

to transmit

to y o u

the

general views of the m e m bers of the B o ard of D i r e c t o r s and
the officers

of the bank wit h r e s p e c t

the list t r a n s mitted with y o u r letter
1.

General

credit

to the

subjects

and numbered X-9115-a.

situation:

(a)

Are c o m m ercial banks d o ing eve r y t h i n g
in their power to improve the s i t u a
tion?

(b)

If not, what steps can be taken by
Fe d e r a l reserve banks or otherwise
to b r i n g about an improvement?

(a)

We have found in our contacts with m e m b e r banks as

well as through the regular visits
that there is a genuine desire
good industrial
so with i n
of the

of our field r e p r e s e n t a t i v e s

on the part of the banks

and commercial loans,

the l i m i t a t i o n s

supervisory

Generally
make

and that

to make

they are doing

imposed by law and the r e s t r i c t i o n s

authorities.

speaking,

however,

they are not inclined to

these loans for a l o n g -time p e r i o d , nor do they

deem it prudent to lower their credit
they do m a k e , especially

apparently

standards on loans which

in view of their past

experience

and

uuuvcu llum

unciassmea / Declassified Holdings of the National Archives

W
F

e d e r a l

o i

< C

i:h i

v i

-2-

the further fact that they are almost
supervisory

authorities

examiners who r e p r e s e n t

visions

especially

as inte r p r e t e d by the

constantly u r g i n g our banks

of Section 15b of the Federal R e s erve Act,
a v a i lable

in or comm i t m e n t s with re s p e c t
per

through participations

to loans,

c e n t . guarantee under

the p r o
fit
pointing

w i t h as much as an

the p r o v i s i o n s

of the lav/.

Interest r a t e s :
(a)

On time and
banks.

(b)

savings de p o s i t s

of m e mber

On loans of member banks and on i n d u s
trial a d v a n c e s and comm i t m e n t s by
Federal r e s erve banks.

(a) H In c o n s i d e r i n g the rate of in t e r e s t
time or savings deposits,
account the average rate

every bank must,

to be paid on

of c o u r s e , take into

on its i n v ested assets.

of earning assets of banks vary,

and

The port f o l i o s

consequently

the average

rate of r e t u r n v a r i e s ; and in e s t a b l i s h i n g a ma x i m u m rate
paid on time and
to the average
allowing,

the trans a c t i o n s pe r m i t t e d u n der

out to them the a d v a n t a g e s

eighty

strictly

those a u t h o r i t i e s .

We have u r g e d and are

consider

certain to be criticized

if they do not adhere

to sound commercial b a n k i n g pr a c t i c e

(b )

a n k

l e v e l a n d

H o n . M . S . Eccles -

by the

: B

savings deposits,

earnings

from

consideration

to be

should be given

this

source for the average bank,

of c o u r s e , a suf f i c i e n t

spread to cover o v e rhead and

a rea s o n a b l e p r o f i t .
(fe)

While in this

district

there

d u c t i o n in the rate paid on deposits,

has been a m a t e r i a l r e
generally

s p e aking there

Reproduced from the Unclassified / Declassified Holdings of the National Archives

Fe d e r a l R e s e r v e
o k

H o n . M.

S . Eccles -

B axil

l e v e l a n d

-5-

has been no m a t e r i a l red u c t i o n in the rate
who

is an ordinary

credit r i s k .

This

charged the b o r rower

situation

throughout the life of the F e d eral Reserve
words,

has p r e v a i l e d

System;

in other

have been p a y i n g a 6% r a t e , r e g a rdless

such b o r r o w e r s

the r e d i scount rate in effect at the Federal

reserve b a n k .

With

the present r e s t r i c t e d e a r ning power of b a n k s , a r e d u ction
the rate charged

the b o r rower who is an ordinary

mig ht mat e r i a l l y

affect a bank's

that its very

earning power

existence m i ght be t h r e a t e n e d .

of c o u r s e , have always r e c e i v e d

the benefit

credit risk

to such an extent
Prime

credit risks,

of favorable

interest

,
U
rates.
In c o n s i d e r i n g our rates

for i n d u strial

loans and/or

ments under Se c t i o n 1 3 b , it is felt that we must
count the rate
ing ordinary

esta b l i s h e d by our m e m b e r banks

commit

take into a c

for loans r e p r e s e n t

credit r i s k s , and it is not felt that our rate

be r e d u c e d below the p r e v a i l i n g rate*,
fact that in large m e a sure

the loans

especially

in v iew of the

offered to us are

in that they are of long m a t u r i t y , in many instances
by rece i v a b l e s

or other

pensive,

thus

etc.,

the

further w a r r a n t i n g

fect are in the nature
under more favorable

c ollateral

of lon g - t e r m

conditions,

s u b - s tandard

are

secured

servicing of w h ich is ex
the rate for what in ef

i n v e stment loans which,

would

should

even

carry a m a x i m u m r a t e .

A red u c t i o n in our 13b rates might bring p r e s s u r e upon m e m b e r
banks

to reduce

ber banks

their loans rates and,

can ill a f ford

to take this

if m e m b e r banks did not reduce

stated b e f o r e , some m e m

step.

On the other hand,

their rates f o l l o w i n g r e d u ction of

Reproduced from the Unclassified / Declassified Holdings of the National Archives

M
^

4
V

W 1

Fe d e r a l R e s e r v e

B axil

OF CLEViM^VNl)

Hon.

M . S. Eccles -

-4- ^

our 13b r a t e s , the result m i ght be an infl u x of borrowers
the Federal
by

reserve bank who

should p r o perly

be a c c o m m o d a t e d

their own banks.

The

commitment rate,

w h i c h in effect is a fee for the

\
w
e a r m arking of f u n d s , we feel is not u n r e a sonable, all c i r c u m
stances

considered,

especially

in view of the

expense

w h ich

the Federal reserve bank incurs in its i n v e s t i g a t i o n of the
business

of an a p p l i c a n t and the fact that when an a p p l i c a t i o n

is a p p r o v e d on a com m i t m e n t b a s i s , it is quite p r o bable
c o m m itment fee is the only
get for its services.

return w h i c h the reserve bank will

It must be r e m e m b e r e d too that approval

of a loan on a com m i t m e n t basis

creates

on the part of the r e s e r v e bank,
the loan must be exe r c i s e d

a contingent liability

and continued

t hroughout

s u p e r v i s i o n of

the life of the

commitment.

Matters a f f e c t i n g a d m i s s i o n of n o n - member
banks to F e d e r a l reserve system:
(a)

Earnings of n o n - m e m b e r banks from
exchange collection c h a r g e s .

(b)

P r e sent

(c)

A d v i s a b i l i t y of e x t e n s i o n of m e m b e r
ship to banks outside the States and
the D i s t r i c t of C o l u m b i a .

(a) , Earnings
z

from

conditions

exchange

of m e m b e r s h i p .

collection

factor in this d i s t r i c t , especially
exchange

that the

charges

have p e rhaps been

inau g u r a t e d by the b a n k s .
d e p o sitors and it would

These

charges are not a

since in a great many
s u p e rseded by

service

seem should

service

instances
charges

charges are paid by the

compensate

the banks for the

Reproduced from the Unclassified / Declassified Holdings of the National Archives

f'
m

zr*}
< y

Fe d e r a l R e s e r v e
of

H o n . M . S . Eccles -

Conditions

for m e m b e r s h i p
drastic

C l e v e ia x d

-5-

r e l i n q u i s h m e n t of exchange
(b )

R a n k

charges .
*

of m e m b e r s h i p

since

imposed on banks a p p l y i n g

the ba n k i n g holiday appear to be more

than those i m p osed on banks w h i c h entered

prior to the h o l i d a y .
membership

the System

It is our f e e l i n g that conditions

should now be of u n i f o r m a p p l i c a t i o n to all member

banks in so far as p r a c t i c a b l e .
(c )

Pres u m a b l y

to banks

in Alaska

this refers

or in a dep e n d e n c y

any part of the U n i t e d States
States,

to the

or insular p o s s e s s i o n or

outside

f
i

and it seems to us that this

extension of mem b e r s h i p

the

continental United

q u e stion could better be

an s w e r e d by the F e d e r a l reserve banks in the coast
is our view that the be n e f i t s

of m e m b e r s h i p

cities.

to banks

in these

remote l o c a t i o n s would depend upon the facility w ith w h i c h they
could transact

their busin e s s

w i t h the reserve banks wit h w h i c h

they were a f f i l i a t e d . ^

Need for c ontinuance of ass i s t a n c e of R e c o n
struction Finance Corp o r a t i o n in connection
with r e h a b i l i t a t i o n of capital structures of
banks.

n There are

still banks

tures need bolstering,

in this

district whose

and we b e l ieve the need

c o n t i n u a t i o n of R e c o n s t r u c t i o n F i n ance

capital

still exists

for

C o r p o r a t i o n assistance

this r e s p e c t .

struc

Adequacy of r e i m b u r s e m e n t of Federal reserve
banks by Treasury and other g o v e r nmental
a g e ncies for various services r e n d e r e d and for
space used in F e d eral reserve bank b u i l d i n g s .

from the Unclassified / Declassified Holdings of the National Archives

F k i >k i $a i . R e s e r v e
o f

Hon.

l e v e l a n d

S. Eccles -

X A study
v
rendered

-6-

of our own

the Treasury

indicates

situation w ith respect to

services

and other G o v e r n m e n t a l a g e ncies

the i n a d equacy

subject is under

1Va x h

clearly

of the r e i m b u r s e m e n t received.

c o n s i d e r a t i o n by a committee

This

of Governors

Fe d e r a l reserve banks.'
6.

R e g u l a t i o n fixing m a r g i n r e q u i r e m e n t s for
loans by banks upon equity securities for
the pu r p o s e of p u r c h a s i n g or carrying s e cur
ities r e g i s t e r e d on n a t ional securities ex
changes.
(a)

(b)

(a)

C i r c u m s t a n c e s u n der w h i c h r e g u l a t i o n
should be issued.
W h ether r e g u l a t i o n should permit bo r r o w e r
to o b tain from bank more than he could
obtain from broker u n d e r R e g u l a t i o n T.

and

( b ) . ^ It is the opinion

n
d
that Section 7(b)

Sec u r i t i e s Exchange Act of 1934 is impracticable,
time as the law is

s i m p lified

the issuance

of the

and until

such

of the r e g u l a t i o n

should

x\ \ \

be deferred.
* In the last analysis,

the m a king of securities loans

itself into a qu e s t i o n of credits.

Aside

r e s olves

from the collateral,

there are other factors w h i c h must be c o n s i d e r e d in such cases,
such as the p u rpose

of the loan,

rep u t a t i o n of the borrower,

the character,

ability,

and his f i n a n c i a l worth.

E c o nomic and s t a t i s t i c a l di v i s i o n of Federal
r e s erve banks:
(a)

Usefulness

(b)

to directors and officers.

Value of F e d e r a l reserve bank monthly
reviews.

(a) ^The B o a r d of Dir e c t o r s

and

and officers

of this bank

have

Reproduced from the Unclassified / Declassified Holdings of the National Archives

Fe d e r a l R e s e r v e

Ba n k

OF (jJtVHI^VXI)

Hon.

S . Eccles -

found the

-7-

statistical

data,

Statistical Department
meeting,

c h a r t s , etc.,

p r e pared by

to be very valuable.

the

At each Board

the head of the S t a t i s t i c a l D e p a r t m e n t p r e s e n t s

the Board his o b s e r v a t i o n s

from the

statistics a c c u m u l a t e d

V
during

the month.

(b) > It is the v iew of our B o a r d and officers
\
MONTHLY

B U S INESS R E V I E W

should be continued in view of the

w i d e - s p r e a d interest w h ich it has

e v o k e d .^

evidenced by the fact that from a small
1,000

copies m o nthly

to member banks,

and to the companies
to 10,000

of 9,000 b e ing the direct r e sult
and

receive

c i r c u l a t i o n of about
of this b a n k ,

su p p l y i n g us with data,

copies monthly,

the increase

of requests by individuals,

c orporations to be p l a c e d on the ma i l i n g list to

the REVIEW.

E s t a b l i s h m e n t of career system for p e r s onnel
of F e d eral reserve banks.

\ A career
\

system w i t h i n

each Federal reserve bank would

d e s i r a b l e , but it is not felt that a career
involve

This i n t erest is

to of f i c e r s and d i r ectors

c irculation has increased

firms,

that our

seem

system w h ich would

the m o v e m e n t of o f f icers and employees

from d i s trict to

district would be desirable.'V
A W i t h the vast territory

served by the F e d e r a l Reserve

and the great d i v e r s i t y in industrial,
p u r suits

exi s t i n g b e t ween districts,

customs and p r a c t i c e s
p r a c tices

of all,

commercial,

and the p r o b l e m s

and a g r i c u l t u r a l

it follows na t u r a l l y

of one district are not

System

that the

the customs and

of one district are not

the

Reproduced from the Unclassified / Declassified Holdings of the National Archives

Fe d e r a l R e s e r v e
o f

Hon.

l e v e l a n d

M . S . Eccles -

p r o blems

of all.

district

can only

trict;

-8-

Thorough knowledge
come th r o u g h y e a r s

and a man cannot

ability

the

the nomadic
a career

standpoint

existence

for

system which

of the pr o b l e m s of a
of res i d e n c e

in the d i s

serve a di s t r i c t to the best of his

if he is not thoroughly

From

]>a x i v

f a m i l i a r with its p r o b l e m s . u

of the individual,

it is felt that

employees w h ich might resu l t from

c o n t e mplates

the transfer of p e r sonnel

from d i s trict to d i s trict might prove u n a t t r a c t i v e
w o men who would oth e r w i s e

constitute

to men and

a very des i r a b l e

type of
x\

e m p l o y e e , especially

if they

were owners of their homes.

Criticisms of existing r e g u l a t i o n s or
rulings or pro c e d u r e of the Federal
Reserve Board, wit h specific r e c o m
men d a t i o n s as to changes w h i c h would
correct any u n s a t i s f a c t o r y features
of the r e l a t i o n s b e t w e e n the Board or
its staff and the Federal r e serve banks
or memb e r banks.

> t*In this connection,

we believe

that it might be helpful

the Fe d e r a l Reserve B o ard and to the F e d e r a l reserve banks
con s u l t i n g

committee were

of the r e serve banks,
sired,

especially

which involve

set up,

co m p o s e d of o p e r a t i n g officials

w h i c h the B o ard

could

consult if it so d e

comp l i c a t e d o p e r a t i n g pr o b l e m s

for m e m b e r banks and

A similar a r r a n g e m e n t might be helpful in

conn e c t i o n wit h the i s s uance by the B o a r d

of i n s t r u c t i o n s

to re-

setting up a c c o u n t i n g procedures.

May I assure y o u that we have been

if a

in c o n n e c t i o n vrith the drafting of r e g u lations

Federal reserve banks.

serve b a nks

glad to give the Board's

Reproduced from the Unclassified / Declassified Holdings of the National Archives

i m m e x e

e s e r v e

FLv n i l

OF ClJEVELAND

H o n . M . S . Eccles -

que s t i o n s our serious
fully

-9-

thought,

and I have ende a v o r e d

to c are

set down the opinions of our B o a r d and o f f icers on the

v a rious

topics.
Very

F-B

truly yours,

Governor

Reproduced from the Unclassified / Declassified Holdings of the National Archives

f
K o tin N o . 131

Office Corresponaence
To_ Files___________________________ _
_
From

Mr. Bethea

_____ _____________

t-E D E R A L R ES E R V E
BOARD

3 )7 c . 3

Date, March3i£,, 1£35l__
.
Topic 3(c) of Board1s letter X-9115
Subjecttjdated Feb. 6, 1935, "Advisability,
of extension of membership to banks
_____ outside the States and the District
of Columbia”. . .
.

In a telephone conversation with me this afternoon, Assistant Federal Re
serve Agent Fry clarified the position taken by the Richmond reserve bank with re
spect to the above subject by stating that it was felt that there would be no ob
jection to the admission to membership in the System of national banks in Alaska
or in a dependency or insular possession of the United States inasmuch as they
are under the supervision of the Comptroller of the Currency. He said that he re
garded supervision as of first importance and that in any case where a bank located
in Alaska or in a dependency or insular possession of the United States could
meet the usual membership requirements and was subject to adequate supervision
he saw no basis upon which admission to membership could properly be denied.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

F e d e r a l R e s e r v e Ba n k
M U o N

Ric h m o n d

j V

RECEIVED
FEDERAL RESERVE BOARD
WASHINGTON
1 9 3 5 M R 16
A

A
M

3 ^
March 15, 1955.
Federal Reserve Board,
Washington, D. G.
Dear Sirs:
Reference is made to the Board*s communication X-9115,
dated February 6, submitting a list of subjects brought to the
attention of the governors on February 5 by Governor Eccles,with
the suggestion that these subjects be discussed by the directors
and officers of the Federal reserve banks and that the Board be
advised as to their views.
The list of subjects was read to our Board at its first
meeting thereafter, February 15, at which time the Executive Com
mittee of the bank was directed to formulate a reply to be sub
mitted to the directors for consideration at their following meet
ing, which occurred on yesterday, Thursday, March 14.
The reply represents the composite opinion of the offi
cers of the bank, which was adopted by our Board, and it is now
submitted herewith.
Very truly yours,

GJS-CCP

EXECUTIVE COMMITTEE.

-3
l

i^cudabnieu noiaings or the National Archives

F e d e r a l R e s e r v e Ba n k
of

Ric h m o n d

REPLY BY TOPICS TO LETTER OF FEDERAL RESERVE BOARD, FEBRUARY 6, 1955. X-9115

General Credit Conditions.
(a)

Are commercial banks doing everything in their power
to improve the situation?

This question without thorough investigation and supporting data
permits only a general answer.
As an expression of opinion, however, based
upon our experience and observation, it is believed that the question may be
answered generally as follows:
V The principal argument which the banks make in their own defense
x
is that there is a lack of sound customers willing to borrow, brought about
by a feeling of uncertainty, which is believed to be widespread, with respect
to future developments in the political, monetary, and business fields, which
makes both the potential borrower and lender hesitate.'' Formerly, the occa
sions were rare when borrowers in good standing in the Fifth Federal Reserve
District complained of inability to obtain credit accommodations.
It is un
deniable that the banks were alarmed — and still are timid — because of the
experiences through which they have recently passed.
The tremendous decline
in the prices of securities, of real estate, and of commodities rendered it
impossible, at different periods, for banks to determine the soundness of
loans which they had already made.
We have heard more than one banker make
the statement that a most careful appraisement of his assets at one time was
subject to downward revision within a period of a few months.
These conditions impelled the banks to make strenuous effort to
achieve and maintain a highly liquid position even at the expense of earnings.
Beyond question, that is still their attitude.
They are entirely willing to
make loans which they believe to be good and safe according to their own
present standards.
A comparison of loans and investments by all member banks in this
district as of October 25, 1955, and October 17, 1954, shows an increase of
$115,000,000.
However, during the same period loans and advances made by
banks declined about $15,000,000, but a considerable increase took place in
the investment portfolios of member banks, consisting almost entirely of the
purchase of United States Government securities.
It appears to be true that the demand for accommodation at commer
cial banks upon terms generally associated with commercial bank credit has
declined perceptibly in recent months.
The question most frequently put to
us by member banks is: MHow may we employ our idle funds in a manner to yield
a maximum return?"
It is believed that many commercial banks are of the

reproduced from the Unclassified / Declassified Holdings of the National Archives

-S

Topic 1(a) Continued

' *

-Si-

opinion that the various governmental and semi-governmental lending agencies
afford sufficient credit facilities for agriculturists, home owners, and in
dustry unable to borrow on commercial banking terms. Many banks therefore
feel that, with the class of customers provided for already mentioned, their
own activities should be confined to strictly commercial bank credit or to
investment in Government securities, and in other securities of the highest
grade to a more limited extent.
It is not believed that this general attitude on the part of com
mercial banks which we have so briefly sketched is a conscious effort of non
cooperation in efforts to improve the general credit situation, but an aroused
sense of responsibility leads many banks to believe that their first duty is
to their depositors.

(b)

If not, what steps can be taken by the Federal reserve
banks or otherwise to bring about an improvement?

P
v
'

" It is not believed that any specific steps should be taken at this
time to adjust this situation.*'
Something can be accomplished with proprie
ty and in good reason through the medium of personal conferences with bank
officials, which are continually in process as a part of the regular routine
of this bank. |
X

" U,G uMuaoamcu / ueuidssmea noiaings or me National Archives

4
* •

Interest rates.
(a)

On time and savings deposits of member banks.

It has come to our attention that there is in this district a con
siderable amount of misunderstanding and wide variations in practice with
reference to the payment of interest on savings deposits and the distinction
between savings deposits and other kinds of time deposits.
The situation
in our opinion has been aggravated by the fact that we have in this district
such a large number (over six hundred) of nonmembers, which of course are
not governed by regulations of the Federal Reserve Board; but, apart from
this, there is much difference of interpretation of Regulation Q by member
banks, of which there are about four hundred.
The amendment to Section 19 of the Federal Reserve Act, known as
the Banking Act of 1955, divides deposits into two classes; First, those
payable on demand; and second, those with reference to which demand cannot
be made in less than thirty days or upon written notice given thirty days in
advance of an intention to withdraw.
Under the provisions of the Act with reference to demand deposits,
no member bank is allowed ’directly or indirectly, by any device whatsoever”
’
to pay any interest.”
With reference to time deposits, no member bank is
allowed to pay before maturity or waive any requirement of notice except on
a subdivision class known as ’savings deposits.”
’
\ Yath reference to the payment of' interest on demand deposits by
v
indirect methods, there is in this district a wide difference of opinion and
a wide difference in practice.
This has taken the form of absorption by
the hank of exchange charges incurred in the collection of items handled for
deposit.
Some banks are refusing to absorb any such charges or indeed any
out-of-pocket expenses in connection with a depositor’s account; others are
absorbing occasional exchange charges; still others are soliciting business
on the basis of absorbing at least ”a reasonable amount” in exchange and
other charges.
In our opinion it would be most helpful if the Board could
lay down definite and specific rules even though it might go to the extent
of prohibiting the absorption of any exchange charges or out-of-pocket ex
penses in consideration of the size or value of the depositor’s balance. It
is probable that in Regulation Q the Board has gone as far in this direction
as it can under existing law.
If this is the case, we think that the Act
should be further amended, and we think that in this respect nonmember banks
should be controlled through the F.D.I.C., which should also be given au
thority to deal with this situation.^

Time deposits are divided into three classes;
1.
2.
5.

Time deposits, open accounts.
Time certificates of deposit.
Savings accounts.

t,,G vMviaoameu / ueuidssmeu noiaings or me National Archives

Topic 2(a) Continued

-4-

'The Board*s regulations are clear and explicit with reference to
time deposits, open accounts, and we are not aware of any abuse or question
able practice with respect to them.
The Board’s regulations are also clear and explicit with reference
to certificates of deposit, except in one respect. x In Section 5 of Regula
X
tion Q we find the following:
t SECTION V.
\\

INTEREST ON SAVINGS DEPOSITS

. .

(a) Definition.— The term "savings deposit” means a deposit
which consists of funds accumulated £sem bona fide thrift pur
poses and in respect to which —

^ (1) the pass book or other form of receipt
evidencing such deposit, must be presented
to the bank whenever a withdrawal is made.

• because of the use of the expression "other form of receipt,” some banks have
t
insisted that a certificate of deposit was such other form' of receipt and
have consequently continued to pay such certificates before maturity and with
out thirty days written notice.
We would not be surprised if this practice
was fairly widespread among nonmember country banks. M

^ With reference to savings deposits, there are wide differences of
opinion, and we have no doubt wide differences in practice.
Again we realize
the probability that in defining savings deposits as thrift accounts in Regu
lation Q the Board has gone as far as it is warranted by the law as it now
exists.
There is in our opinion great need for further classification and
definition under specific amendments to the Federal Reserve Act or under an
amendment giving the Board discretion in making distinctions and regulations
with respect to the payment of interest on deposits.
In this connection we
would suggest the following for consideration with relation to this topic:s
b The amendment to Section 19 of the Federal Reserve Act forbidding
the payment of interest on deposits payable on demand and giving the Board the
right to limit the amount of interest which could be paid on time deposits was
made for the purpose of saving banks from themselves, or rather from a situa
tion into which they had been led by the keen and ruthless competition of re
cent years.
It was a well known fact that larger and larger percentages of
total deposits were shifting from demand to time, partly because the required
reserve against time deposits was less and partly because competition was
forcing the almost universal payment of interest, a
**It is true that with reference to time deposits banks had the right
to require written notice of thirty days or more, but it was also true that
to make such a requirement was often highly dangerous and raised the question
of solvency. «
<
In the foregoing we have made a number of statements in respect to
the practices of banks in this district, both member and nonmember.
We be
lieve these statements to be true, as they are based upon correspondence with

0 1 ,1Ie unudbbiiiea / ueciassitied holdings of the National Archives
11

Topic 2(a) Continued

-5-

various member banks, interviews with representatives of banks, and state
ments made to us in such interviews from time to time by representatives of
member banks.
\ In our opinion, the only practical way in which complete and ac
\
curate information with regard to practices with reference to absorption
of exchange charges and with reference to the questionable use of certifi
cates of deposit to represent savings accounts and the improper classifi
cation of accounts as savings accounts could be ascertained, would be by
instructing examiners to investigateethese matters as a part of their
routine examination of member banks.

(b)

On loans of member banks and on industrial
advances and commitments by Federal reserve
banks.

1 We have been advised by senior officials of a number of the mem
ber banks of this district that the tendency is to reduce the rate of inter
est to the customer, and that especially is this true in cases where the
security offered is considered ample, and in cases where the moral risk is
thoroughly satisfactory
Investigation of this matter leads us to believe
that, generally speaking, member banks are sincere in their statements that
they are endeavoring to make good loans whenever the opportunity presents
itself, and that they will make the rate of interest in keeping with the
risk involved, the length of time, and the general rate of interest pre
vailing in this district, as compared with the rate of interest generally
charged in other sections of the country.
A toith reference to interest rates charged on industrial advances
and commitments by Federal reserve banks, as stated in our reply of Febru
ary 25 to the Board’s letter X-9122, this matter has been given very care
ful consideration by the officers of this bank, and we feel that the rates
charged on advances and commitmentsj for the reasons set forth in that let
ter (copy attached) are proper under prevailing conditions.1
'

Topic 2(b) Continued

February 25, 1955.
Federal Reserve Board,
Washington, D. C.
Gentlemen:
The Board's letter X-9122, subject "Interest Rates Charged on
Industrial Advances and Commitments," was read and discussed with our direc
tors at their monthly meeting last Thursday, February 14, and the officers of
this bank have, as requested, carefully reviewed the rates charged by this
bank on industrial advances and commitments.
Nearly all industrial advances made by this bank are direct to the
applicant, on which advances interest is charged at the rate of 6% per annum,
but in a few cases we have made advances through a participating bank, such
bank taking 20% or more of the entire loan.
In these cases the participating
bank charges the borrower interest at the rate of 6% per annum, but we in turn
receive through the participating bank interest at the rate of 5% per annum on
that portion of the advance which we make.
This of course enables the parti
cipating bank to make 1% on the transaction and encourages banks to partici
pate with us in such loans.
The interest charged by this bank on commitments made in connection
with industrial advances is at the rate of 1% per annum.
We have made no commitments direct to borrowers but all commitments
made have been to banks participating in industrial loans.
The usual proce
dure is for the participating bank to make the entire loan and receive from
us a commitment to discount or purchase 80% or less, depending upon the actual
amount of the loan that the participating bank desires to become obligated for
itself.
In a few cases the participating banks have requested that we give
them a commitment for 100% of the loan, and they in turn have become responsi
ble to us for at least 20% of any loss that may ultimately occur, as provided
in the law.
Should the participating bank exercise the right given it under
our commitment and request that we take over the entire 100% of the loan, we
would charge 5% on that part of the loan upon which we would be responsible
for any ultimate loss, but would make the participating bank a better rate on
the remainder of the loan for which it was responsible for any ultimate loss.
We have had no cases of this kind and therefore have not yet fixed a rate.
As stated above, the matter of rates charged by this bank on indus
trial advances and commitments has been carefully reviev/ed; in fact, the mat
ter has been constantly before us since we were authorized to make industrial
loans and commitments.
We feel that all commitment rates should be on an
annual basis, and that has always been our policy.
We further feel that a
rate of 1% per annum for commitments is reasonable and encourages member banks
to make loans covered by commitments.
We are also of the opinion that inasmuch
as the Fifth Federal Reserve District, except in the larger cities and with

Keproduced trom the Unclassified / Declassified Holdings of the National Archives

Federal Reserve Board,
Ycashingtoru D. C.,Continued

-7-

valued customers, is normally a 6% district, and taking into consideration the
nature of the loans that we have been able to make under Section 13b, the dura
tion of the loans, the varied nature of the security offered, the general con
ditions surrounding the applicant, the fact that each applicant has been re
fused accommodation through regular channels (on the basis of the application
made), and furthermore the careful investigation (legal and otherwise) necessa
ry to be made prior to passing upon the application, frequently including
investigations made ty our men sent into the field, sometimes more than once,
the legal work required to be done after the loans are agreed upon, taking
nearly the entire time of our Counsel and the part-time work of two legal
assistants from the outside, for which no charge is made to the applicant (a
charge not being made unless by agreement with the applicant in advance that
we undertake to have made special appraisals or special accounting work) —
taking into consideration all of these facts, ¥ e believe that 6% is a proper
/
and reasonable charge to be made and so far have not made any loan on which
a lesser rate in our judgment would be justifiable.
Furthermore, it is to be taken into account that we are committed
to pay the Treasury 2% net on that part of its advances to us, being a return
of our surplus subscribed to the F.D.I.C. for the purpose of making these
loans.
ln are of the opinion that a 6% rate is nothing more than reasonable.
ie
It takes in many cases sixty days or more to complete a loan.
V e have made strenuous endeavors to induce banking institutions to
v
participate with us in making these loans, and even a 6% rate does not appear
to be entirely persuasive.
If in any case a banking institution finds itself
willing to make one of these loans at a rate less than 6%, we will make a
rate to such banking institution of 1% less than the rate charged by that bank
ing institution to the industrial or commercial borrower but not less than 4%
per annum.
Vthile these loans are sometimes referred to as secured loans, the
fact is that the best security obtainable is taken, but in not many cases can
it be considered as absolute or marketable security.
At the end of last 3
^ear,
this account was in the red, in very large part due to the allocation of ex
penses over a short period of time and for organization of facilities to handle
the loans.

Very truly yours,

Executive Committee.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

V
/
-

Matters affecting admission of nonmember banks to Federal
Reserve System.
(a)

Earnings of nonmember banks from exchange
collection charges*

In the Fifth Federal Reserve District 80% of the nonmember non
par banks are in the states of North Carolina and South Carolina. This dis
tinction is made by reason of the fact that nonmember banks on the par list
are not concerned with exchange collection charges to anything like the ex
tent to which nonmember non-par banks are interested in the subject.
A brief answer to the question propounded would be that in all states
in the Fifth Federal Reserve District, except the two Carolinas, it is not be
lieved that earnings from exchange collection charges seriously deter nonmember
banks from applying for membership in the System.
As evidence of this state
ment we quote from the Commissioner of Insurance and Banking in the State of
Virginia:
”Giving you my personal opinion, I do not believe that
the revenue from exchange bulks very large in the earnings
of our nonmember state banks.
There may be a few where it
is sufficient to pay the salary of an employee or officer
of the bank, but I believe more of our banks are remitting
at par.” V
A very brief survey of the background involved in an answer to the
current question may be desirable at this point.
Some years ago state banks
were permitted to organize and were granted charters with paid-in capital stock
for less than the present requirements.
It is also true that the restrictions
surrounding the organization of a state Dank were not numerous in former years
and, as a result of these tendencies, small state banks were chartered, not
only in the Fifth Federal Reserve District but elsewhere, under conditions which
mature thought and observance of economic necessities would have prevented.
In the southern part of our district, which comprises the two states
referred to, the above remarks apply with particular force.
In aggravated
cases there were state banks organized in isolated sections solely for the pur
pose of charging exchange, and they established their own rates.
There were
other state banks organized with small capital for the purpose of financing
local business in season but which depended for a steady revenue largely upon
exchange charges.
There appear to be two reasons, among others, why banks in the sec
tion referred to depend upon exchange charges to a marked degree: First, as
we have previously said, many of these small state banks were organized with
the full intention of charging exchange and with the realization that exchange
collection charges as revenue would be necessary to keep them alive; secondly,
in the section to which we refer, business generally speaking is highly season
al, certainly in the smaller communities in which banks of the type to which
we refer would be organized.
Therefore, in order to supplement their seasonal

Reproduced from the Unclassified / Declassified Holdings of the National Archives

Topic 5(a) Continued

-St

eamings, the banks have depended upon exchange collection charges.
"Therefore, we repeat the statement contained in the beginning of
this memorandum that, in the two Carolinas-in this district, we believe that
earnings of nonmember non-par banks from exchange collection charges restrain
many of these institutions, which might otherwise be eligible for membership
in the System, from' making application.
There are, no doubt, many small
banks of the class concerning which we write which would find it extremely
difficult to make a living if deprived of exchange collection charges.
In
fact, there are undoubtedly cases, probably few in number, in which small
state banks could not survive without this source of revenue.
It is a ques
tion whether these small banks are more than a convenience to their locali
ties.

(b) Present conditions of membership.

In our opinion there are only three of the standard conditions of
membership now prescribed by the Board which may be regarded as unreasonable
and which should be modified.
Condition No. 8 reads as follows: "Such banks shall not permit any
investment in a bank building or in a site for a bank building to assume such
proportions as, in the judgment of the Federal Reserve Board, would endanger
the bank*s solvency or liquidity, or would otherwise be unduly large or im
proper, and before any investment is made in a bank building or a site for a
bank building the bank shall refer the matter to the Federal Reserve Board
for consideration."
Of course no memberjbank should permit its investment
in bank building or site for a bank building to assume such proportions as
would endanger its solvency or liquidity,,but we do not think the state mem
ber bank should be required to refer this matter to the Federal Reserve Board
before making any such investment.
The provisions of Section 24(a) of the
Act are sufficient.
This section reads as follows: "Hereafter no national
bank, without the approval of the Comptroller of the Currency, and no State
member bank, without the approval of the Federal Reserve Board, shall (1) in
vest in bank premises, or in the stock, bonds, debentures, or other such
obligations of any corporation holding the premises of such bank or (2) make
any loans to or upon the security of the stock of any such corporation, if
the aggregate of all such investments and loans will exceed the amount of the
capital stock of such bank."
We suggest that condition numbered 8 be elimi
nated and that Section 24(a) govern this matter.
Condition numbered 18 reads as follows: "If trust funds held by such
bank are deposited in its banking department or otherwise used in the conduct
of its business, it shall deposit with its trust department security in the
same manner and to the same extent as is required of national banks exercising
fiduciary powers."
Each such account is insured by the Federal Deposit In
surance Corporation to the extent of $5,000. l This condition might well be
*

Reproduced from the Unclassified / Declassified Holdings of the National Archives

Topic 5(b) Continued

-10-

amended to provide that such portion of trust funds being used by the bank
which are not insured shall be covered by collateral as required of national
banks by the Federal Reserve Act^
Section 11(k) of the Act has not been
amended so as to take into consideration the insured portion of trust funds
on deposit with national banks.V
N
Condition numbered 19 reads as follows: “Such bank shall make ade
quate provision for depreciation in its banking houses and furniture and
fixtures, in amounts which in any one year shall be not less than 2 per cent
of the present carrying value of its banking houses and 10 per cent of thye
present carrying value of its furniture and fixtures.“
This requirement, in
many cases, is entirely unreasonable in that it does not take into account
the actual value of the property in its relationship to its book value.'
Re
cently a state member bank bought a banking house fully equipped from the re
ceiver of a failed bank for about $15,000.
The property purchased was com
paratively new and cost about $50,000 just a few years ago.
In order to
comply with condition numbered 8 this bank had to get permission from the
Federal Reserve Board to buy this valuable property at a ridiculously low
price.
Had the bank bought the property just prior to its becoming a mem
ber, it would have been subjected to condition numbered 19 and would be re
quired to write the property down each year regardless of its actual value.
There are other cases in which banking houses are carried at or below the
assessed value for tax purposes.
We think" it would be sufficient to require banks to reduce the book
value of their banking houses to a fair value and maintain them on this basis
at all times.'1

(c)

Advisability of extension of membership to banks
outside the states and the District of Columbia.

Section 19 of the Federal Reserve Act provides that national banks
or banks organized under local laws, located in Alaska, or in a dependency or
insular possession or any part of the United States outside the continental
United States may, with the consent of the Federal Reserve Board, become mem
ber banks.
Membership might be of some value to some banks so located.
We
know nothing of the laws governing such state banks and do not know what su
pervision they have.
In the absence of a better understanding of the condi
tions under which state banks are operated we do not think membership in the
Federal Reserve System should be extended to state banks outside the conti
nental United States.
If such banks believe membership in the Federal Re
serve System is valuable to them, they should obtain such membership by be
coming national banks.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

11-

Meed for continuance of assistance of Reconstruction Finance
Corporation in connection with rehabilitation of capital
structure of banks.

From the wording used above, it appears that the question is directed
to all banks in the district and is not confined to member banking institutions.
We have not maintained a collective record of the member banks in the district
which repaired their capital structures through the medium of the facilities of
the Reconstruction Finance Corporation.
The Richmond Agency of the R. F. C.
does not have such a record but the figures could undoubtedly be obtained from
the Corporation in Washington.
It is true that banks in the Fifth Federal Reserve District, member
and nonmember, have availed themselves freely of the assistance offered by the
Reconstruction Finance Corporation in repairing depleted capital structures.
In some cases this was done at the insistence of the supervisory authorities;
in other cases, the banks took the initiative themselves.
In nearly all cases
involving member banks, while some difference of opinion may have existed prior
to the application about the need for additional capital, events after the ar
rangements were completed have proved the wisdom of the move.
Among member
banks there are a few cases pending, and we are informed by the local agency
that a few cases are pending involving nonmember banks.
It is our belief and the belief of the Richmond Agency of the R. F. C.
that the need for further assistance for the purpose and along the lines men
tioned has been reduced to a minimum.
A few emergency cases have been developed
recently in which the facilities of the R. F. C. have been extremely valuable
in restoring impaired capital structures, but emergencies of this nature are
likely to develop at any time under almost any conditions.
Inquiry made of the Supervising Examiner of the Federal Deposit In
surance Corporation for this district results in the following expression of
opinion:
"While the capital rehabilitation program of insured state
banks not members of the Federal Reserve System has been fairly
well completed, naturally, there are some exceptions. * *
*
It is believed desirable, however, to continue this aid during
the current year. * * * It is very probable that no large
amount of funds will be required from the Reconstruction Finance
Corporation, but there will be certain cases that do actually
need such aid."
The above expression of opinion is in line with our experience and belief.
The Chief National Bank Examiner of this district advises that there
are nine cases involving the sale of preferred stock by national banks to the
R. F. C. which are pending.
He expresses the opinion that occasionally the
need will arise for capital rehabilitation, in which event facilities of the
R. F. C. will be very helpful.
In general, it is his opinion ttet the program
of the Reconstruction Finance Corporation in the rehabilitation of capital

Reproduced from the Unclassified / Declassified Holdings of the National Archives

Topic 4 Continued

-12-

structures of national banks in this district is well advanced.
.t
*
‘1From the information obtained from official sources upon this sub
ject, it would appear that the program of.the R. F. C. in,this particular is
nearing completion, but that it would be advisable to have the benefit of these
facilities for unfinished and emergency cases throughout the balance of this
year. l
'

Reproduced from the Unclassified Declassified Holdings of the National Archives

and for space used in Federal reserve bank buildings*

At the present time the Treasury Department makes reimbursement
only for direct or out-of-pocket expenses incurred by us as Fiscal Agent in
connection with new issues of Government securities.
It does not make reim
bursement for direct expenses incurred as Fiscal Agent in connection with re
demptions, exchanges, transfers, and conversions of Government securities, nor
does it make provision for the reimbursement of any general expenses, such as
personal maintenance, purchasing, telephone (other than tolls), protection,
equipment repairs, insurance, planning systems, etc., whether incurred in con
nection with new issues or other operations.
During the year 1934, expenses
incurred by this bank on account of the Treasury Department, including gener
al expenses, amounting to'$152,000, of which we received reimbursement for
$59,000, leaving $93,000, which we absorbed.
Of this $93,000 only $15,000
was represented by general expenses.
1ftith reference to the expenses of other Government agencies, of which
the activities of the R. F. C. are by far the largest, the total expenses dur
ing 1934 of this bank, including general expenses, amounted to $278,000, of
which we received reimbursement for $258,000, leaving $40,000, which we absorbed.
It will be seen from the above figures that during the year 1934 fis
cal agency, custodianship, and depository expenses of this bank on account of
the Treasury Department and other governmental agencies amounted to $410,000, of
which we received reimbursement for $277,000, leaving $133,000, absorbed by us,
which figure includes only a portion of a reasonable charge for rent of office
space and no charge for the rent of vault space. M I t is our opinion that the
Federal reserve banks should be reimbursed by the Treasury Department and other
governmental agencies for all expenses — general as well as direct — incurred
by the banks in connection with fiscal agency, custodianship, and depository
operations, including rent for office and vault space used in Federal reserve
bank buildings.’f
* While we have always thought that complete reimbursement should be
made to Federal reserve banks, in years past when the earnings of Federal re
serve banks were large, and particularly at the time when a very large portion
of such earnings, after providing for expenses, dividends and charge-offs, were
being paid to the Government as a franchise tax, there was little or no reason
for obtaining reimbursement from the Treasury for all expenses.
During recent
years, however, conditions have materially changed, and at the present time the
earnings of a number of Federal reserve banks are not adequate to meet expenses,
dividends and charge-offs, and the situation has caused the banks considerable
concern.
It has been suggested that in order to provide sufficient revenues
Federal reserve banks might be compelled to levy service charges against member
banks, and this would seem to be imminent unless the Treasury Department and
other governmental agencies will agree to reimburse us tor the cost of services
performed for them. xV

4f <
/ 1

Reproduced from the Unclassified / Declassified Holdings of the National Archives

-14-

Regulation fixing margin requirements for loans by banks upon
equity securities for the purpose of purchasing or carrying
securities registered on national securities exchanges.
(a)

Circumstances under which regulations should be issued.

Regulation T, which became effective October 1, 1954, has to do '
with the extension of credit by dealers, brokers, and members of national se
curities exchanges.
The Board may, however, make regulations as to the exten
sion of credit by banks for the purpose of purchasing or carrying securities
registered on national securities exchanges.
v The Federal Reserve Board should, in our opinion, interfere as little
as possible with the normal lending by banks by limiting the amount which they
may lend on a given security for the purpose just referred to.
For this reason
we do not think the Board should issue such regulations unless or until it is
thoroughly satisfied that banks generally are aiding in speculation to an un
reasonable and dangerous extent. Until such condition develops banks should
have the right to exercise their own judgment as to how much they will lend on
a given security.
There are many factors which enter into the lending of money
on securities besides the high, low, and present market value of the security. v
l

(b)

Whether regulation should permit borrower to obtain
from bank more than he could obtain from broker under
Regulation 1.

l Yes, unless, as above stated/ banks generally go too far in contributing
!
to dangerous speculation and diverting credit from commercial and agricultural
channels to that of purchasing and carrying securities.'1

Economic and statistical divisions of Federal reserve banks,
(a)

Usefulness to directors and officers.

This division includes the work of the head of the department and
one woman assistant and a large part of the time of several employees in the
accounting and planning department. ^ We do not see how the directors and of
ficers of this bank could intelligently operate the bank without having a
veiy large amount of statistical data which would have to be gathered and
tabulated by employees.
So long as the work has to be done,it might as well
be handled by a division in the bank.
In many instances the information
gathered is indispensable for our own good and absolutely necessary in order
that we may furnish the Federal Reserve Board from time to time with the in
formation which it requiresy

(b)

Value of Federal reserve bank monthly reviews.

We mailed 5549 copies of our January 51, 1955, issue, which is about
the same number we have mailed regularly each month for two years.
509 copies
went to member and nonmember banks.
2840 copies went to individuals, firms,
corporations, and institutions of various kinds scattered throughout the United
States and in thirteen foreign countries.
On at least two occasions we attempted to revise our list and in
closed a notice to the effect that unless specific request was made to be re
tained on the list the review would be discontinued.
The first time this was
attempted comparatively few requested that their names be dropped from the list.
On the second occasion our loss was greater, but we observed that later in the
year a great many of these people, including some colleges and libraries, wrote
us that they had failed to receive certain issues of the revie?/ and requested
that we supply them with the missing issues in order that they might complete
their files.
It appeared that they merely failed to sign the request to be
continued on the list.
Since that time we have printed on our envelope inclos
ing the review a return card, and invariably dropped from the list the name when
a review was not delivered.

\X The department preparing our monthly review gathers retail trade
figures which are greatly in demand by merchants, manufacturers, and industries
of various types.x
\
x\ Judging from the distribution of our review, we think we are justified
in saying that it is regarded by many as having real value, but we are not able
to appraise the value of the review in relation to its cost.'1

16 -

Establishment of career system for personnel of Federal reserve
banks.

We are doubtful of the practicability and the value of a systemwide career program for officers and employees of Federal reserve banks, but
we are convinced of the value of such a system within each Federal reserve
bank; in fact, such a system is necessary to the maintenance of a proper
morale in each bank, involving as it should orderly promotion by merit and
the education of employees to fill all the positions.
A system-wide career plan would necessarily involve the uprooting
in many cases of lifelong ties and the sacrifice of homes and social connec
tions.
The ambition of most young men is to establish and own a home, par
ticularly after marriage; and while there are perhaps few who would not be
willing to sacrifice all of these considerations if the material advantages
were sufficient, it is not believed that the arrangement as a plan would be
advantageous in its application to this section of the country.
A system
career for women is not believed to be practicable.
Membership on the Fed
eral Reserve Board might well be made a career, which would involve security
in tenure of office and succession in Governorship.
Incidentally,
unification in the banking system d the country would go far toward making
'
banking a profession or career.
We submit, however, a special memorandum on this topic.

SPECIAL MEMORANDUM
The term “career system” is frequently applied to the British Civil
Service and to certain members of our diplomatic corps, but its principles
are found in our Federal Civil Service, in large business corporations like
the Canadian banks with their far-flung branches, the Standard Oil Company
with its domestic and foreign organizations, the National City Bank of New
York with its branch offices, the Great Atlantic and Pacific Tea Company, etc
Though it may be accurately used in connection with business organizations of
fair size but of only one local unit, its fuller significance appears in con
nection with national and international agencies, private and governmental.
Without attempting to define "career system,” because its implica
tions suggest themselves, it is desirable in connection with the topic under
discussion to ask as to the field the term contemplates.
Is this field con
sidered in reference to a career system?
Or does the field embrace the en
tire Federal Reserve System, including all Federal reserve banks and branches
and the Federal Reserve Board?
Or does it extend to the entire banking sys
tem of the nation and contemplate encouraging men to seek training in Federal
reserve banks with a view to going later into commercial banks and trust com
panies, and thus spread a better understanding of the functions and work of
the Federal Reserve System and bring about a closer relationship between the
System and the other banking agencies?
In addition, it may be asked what
is the bottom level at which the career system would begin to operate and the
top level to which the personnel embraced could ultimately aspire?

from the Unclassified / Declassified Holdings of the National Archives

Topic 8 Continued

-17-

Presumably, the establishment of a career system would be for this
Broad general purpose: to develop a personnel of such capacity, training, and
loyalty as would insure that the management of Federal reserve banks would be
unselfish, free from unworthy political influences, and in the best interests
of the entire nation.
The establishment of such a system now that the Federal reserve
banks have been in operation more than twenty years would involve relating
it to those already in the employ of the banks and to the recruiting and
training of new employees.
Different considerations would seem to apply to
these two groups.
In the present personnel, especially among the executives, are many
who received their basic banking training outside the Federal reserve banks
before the System was established.
Many of the clerks and department managers
have grown up in the Federal reserve banks.
Speaking generally, both groups
have been encouraged to feel that to the limit of their capacities they would
be eligible for such positions above them as might develop, and that these
would not be filled with outsiders unless there were no persons within the or
ganization qualified to fill them.
Permanent stratification has thus been
avoided in large measure.
The men in the higher positions have felt that
they had lifelong jobs with the respective banks in their own communities pro
vided they continued to make good.
Consequently, a career system set up now,
if it is system-wide, should provide that men who have become established in
different banks through long years of service should have the privilege of de
clining without prejudice to their standing any invitation that might come to
them to go elsewhere in the System.
A man of this type may have a background
of knowledge of his bank, of the people, businesses, conditions, and needs of
his district which might be more valuable to his bank than the possibly great
er ability of a more active-minded stranger.
Preserving the morale of those
persons over whom capable men are placed by transfer from other Federal reserve
banks should receive careful consideration, especially during the earlier years
of any newly established career system.
With respect to relating the career system to employees coming in
after it is established, considerations touching three groups of persons sug
gest themselves.
In the British Civil Service there are, we understand, some 450,000
persons.
The positions grade all the way from those of menial character to
those of very great importance, including some of the higher ambassadorships.
These higher positions are filled by persons belonging to the administrative
class in the service, some 1,500 in number.
It is this group that is prima
rily referred to when one speaks of nthe Service” or ”the career system” in
Great Britain.
The men in the administrative group are recruited year by year
as needed, from the most outstanding recent graduates of Oxford, Cambridge, and
other great universities but only after passing severe competitive written and
oral examinations.
Successful candidates go through a long, varied training
leading to the higher positions. But applicants who fail to pass these examina
tions either drop out entirely or must content themselves with lower positions
that have less future, and it is our impression that persons below the adminis
trative class very rarely and only with difficulty advance to that class.

the Unclassified Declassified Holdings of the National Archives

Topic 8 Continued

-18-

Somewhat similarly, in many of our large industrial establishments
young men who have been graduated as engineers are "put through the mill" of
practical experience and gradually advanced to higher positions which are not
open to men of less education or are attained by them in only exceptional cases.
A career system, therefore, may be thought of as primarily referring
to those persons who because of special ability and training can be and are
rapidly developed into key men and placed in higher and higher executive posi
tions — that is, a group from which in time practically all the higher execu
tive positions are filled. This, as we understand it, reflects the technical
meaning of the term, but it should be of broader significance.
Apparently, banking in the future will be more and more a profession.
If so, the boy who comes in as a high school graduate only and starts through
the mill will find increasing difficulty in reaching the higher executive posi
tions under a career system which picks the most promising college and iniversity graduates, routes them more rapidly through a course of practical training
with a viewr to placing them in key positions as soon as qualified, and fills
practically all the executive positions from these especially trained men.
In
other words, these young men will arrive at these positions before even the
exceptional high school boy can, and generally speaking persons of less than
college and university training will be automatically limited to positions of
relatively less importance.
A consequent stratification with serious conse
quences to individuals and morale would seem to be likely, unless carefully
guarded against, if the proportion of career men becomes considerable and if
practically all the higher executive positions are filled from their ranks.
x For the reasons indicated, it would seem desirable to broaden the
V
term so that the proposed career system would embrace all employees up to a
very high level and recognize that they fall into three main groups (l) the
"career men" specifically; (2) others of ambition, capacity, and station who
prefer — if they can do so without prejudice to their interests — to remain
with the "bank in the community in which they have become rooted; (3) others
who do the routine work — a very necessary group.
So conceived, such a
career system, we take it, would include (l) freedom from unworthy political
influences, inside and outside, as far as practicable; (2) adequate principles
and methods of selection, training, and promotion with the doors to the higher
executive positions left open to all who could qualify therefor instead of
being limited strictly to the career men; (3) such discretion, within broad
limits, as respects salary, discipline, discharge, promotion, and development
of morale as would enable each unit to function properly in the light of its
peculiar conditions and thus prevent injustices, maladjustments, and dissatis
factions likely to develop under a rigid system that is under remote control;
(4) a retirement system providing for disability and old age retirement.
The
assurance of fair, considerate but firm treatment, the sense of financial se
curity, and the confidence that promotion will be made on a merit basis as
opportunities offer should go a long way toward making less urgent the indi
vidual^ feeling of the need of personal wealth for survival and prestige,
and consequently should encourage him to devote himself with the least distrac
tion, the greatest loyalty, and the most intelligence to serving the nation
through doing his best in his job. It would seem desirable, however, to guard
the proposed career system against developing an unwortiy class consciousness,
an out-of-touch bureaucracy, the unprogressive conservatism of mind and atti
tude likely to characterize a strongly entrenched group. Therefore, for the
time perhaps, the injection of new blood (other than career men) from the out
side now* and then and in certain positions should be provided for. I

Reproduced from the Unclassified / Declassified Holdings of the National Archives

Criticism of existing regulations or rulings or procedure
of the Federal Reserve Board, with specific recommendations
as to changes which would correct any unsatisfactory features
of the relations between the Board or its staff and the Fed
eral reserve banks or member banks.

Outside of the comments and suggestions contained in our answers
to other topics, we have no specific criticisms of existing regulations of
i
the Federal Reserve Board which would not involve amendments to the Feder
al Reserve Act; and in the present state of flux of the System, we deem it
judicious to withhold comments and criticisms of regulations pending changes
in the Act proposed by the new banking bill.
Topic 9 does not appear to
invite suggestions as to changes in the Act itself.
v Under a ruling of the Board, Federal reserve banks are permitted to
v
put up Government securities with the Federal Reserve Agent as collateral to
Federal reserve notes, in accordance with the formula outlined in the Board’s
letter of May 2, 1952, which imposes such conditions and restrictions as to
make it very inconvenient and at times troublesome for this bank to operate
under it.
The formula was prescribed almost three years ago and the figures
in this bank’s balance sheet upon which it was based gave us a margin as
specified in the Board’s letter of $15,000,000, which was later increased 50
per cent, as were the margins for all other reserve banks.
If the percentages
used in the formula were applied to our balance sheet as of March 5, 1955,this
bank’s margin would have been in excess of $27,000,000 instead of $15,000,000,
and an increase of 50 per cent would have given us a margin of over $40,000,000
instead of the present margin of $22,500,000. ^ I t is our opinion that the
limitations upon the amount of Government securities that may be put up as col
lateral to Federal reserve notes should either be abolished or each bank’s mar
gin should be recalculated upon its present balance sheet.
As we have stated
previously, our margin in far too small for comfortable operation.'*
x ^ The difficulty of obtaining prompt reply from the Board, or from the
staff of the Board, upon administrative matters arising out of regulations and
rulings is due no doubt to the tremendous pressure of matters upon both the
Board and its staff, and we therefore have no particular criticism in this con
nection.
But nevertheless we are often handicapped, and even embarrassed in
some instances, by such delay.1
'"
s With respect to the relations between the Board and the Federal re
'
serve banks, or this Federal reserve bank,^ it has for a long time been the feel
ing of our directors that the contacts of the Board and Board members with our
directors (individually and coliectively) is not as intimate and as close as is
believed to be desirable.
Our directors have felt — ancf have expressed the
feeling — that in matters of broad policy they have not at times been made
familiar with the views and policies of the Board or the Board members, and it
is believed that the coordination of the Federal reserve banks would be promoted
by more informal and intimate contact and exchange of views between the Board
members (individually and collectively) and the administration of Federal re
serve banks.^ It is of course recognized that the burden both upon the Board
and the directors of Federal reserve banks would be increased and that some
greater sacrifice of time would be involved by this procedure, but this reply
to the Board would not be complete without the expression of this view. '
v

Reproduced from the Unclassified / Declassified Holdings of the National Archives

F e d e r a l R e s e r v e Ba n k
o f

3 1 -3 (
£

Atlanta

O F F I C E OF

C h a i r m a n o f t h e Bo a r d .
Fe d e r a l Re s e r v e A g e n t .

March 26, 1935

Honorable M. S. E c d e s , Governor,
Federal Reserve Board,
Washington, D. C.
Dear Governor Eccles:
Reference is made to my letter of March 9, 1935,
which was written in reply to your letter of February 6, 1935 (X-9115),
addressed to all Chairmen of the Federal reserve banks.
The topic relating to interest rates on loans of menber
banks and on industrial advances and commitments by Federal reserve
banks was not discussed in my letter of March 9th.
A review of the reports of examination of ninety-eight
selected number of banks in the Sixth Federal Reserve District disclosed
the following information regarding interest rates charged on loses:
ALABAMA. - (Legal rate 6% - Contract rate 8 %) :
The First National Bank of B i m i n g h a m had a high rate of
8$, low of 1%, and average of 5 plus.

In Mobile the range is from 8

to 5, and in Montgomery, high 8%, low 3/4%, and average 5.15%.

In cities

such as Anniston, Huntsville and Selma the range is, high 8%, low 4% and
average 7%.

In the smaller Alabama towns 8% is generally charged, with

a minimum charge of $>1.00, except that CCC loans bear only 3 1/2%.
FLORIDA - (Legal rate 8% - Contract fate 10%):
In the cities of Jacksonville, Tampa and Miami the range
is 8% hi^i, 1% low, and 5% average.

In Bradenton the range is 10% high,

Reproduced from the Unclassified / Declassified Holdings of the National Archives

F e d e r a l R es erv e Bank of A

nta

Hon. M. S. Eccles - 2.

4% low and 7% average, and in cities such as Ocala, Orlando, Pensa
cola and West Palm Beach the range is 8% high, 5% low and 6% average.
In the smaller Florida towns the usual rate is 8%, with $1.00 minimum,
the average rate charged being 7%.
GEORGIA - (Legal rate 7%.

Contract rate 8% ) :

In Atlanta the range is 8# high, 1$ low and 4$ average,
and in Savannah 8% high, 1$ low and 6$ average.

In cities such as

Athens, Augusta, Columbus, Macon and Rome the range is, high 8%, low 3$
and average 6 1/2%.

In the smaller towns the range is 8% high, 3 1/2%

low and 7% average.
LOUISIANA * (Southern part of State located in Sixth District)
(Legal rate 5% - Contract rate 8%):
In New Orleans the range is 8% high, 3 1/2% low and
5 1/2% average.

In Baton Rouge and Lake Charles the range is 8% high,

4% low and 7% average, while in the smaller towns of Louisiana the range
is 8% high, 4% low and 7 1/2% average.
MISSISSIPPI -(Southern part of State located in Sixth District)
(Legal rate 6%. Contract rate 8 % ):
In Laurel and Meridian the range is 8% high, 6% low and
7% average.

In the smaller towns the rate of 8% prevails.

TENNESSEE - (
Eastern part of State located in Sixth District)
(Legal rate 6%. Contract rate 6%) i “
~
In Chattanooga and Nashville the range is 8% high, 1%
low and 6% average.

In cities such as Bristol, Johnson City, McMinnville

and Shelbyville the range is 8% high, 6% low and 7% average, with a mini-

Reproduced from the Unclassified / Declassified Holdings of the National Archives

F e d e r a l R e s e r v e B a n k o f A'

nta

Hon. M. S. Eccles - 3

mum charge ranging from $1.00 to $1.25.

In the smaller t o m s in

Tennessee the range is 8% hi^i, 6% low and 7$ average*
It will be observed the average interest rate increases

**
*

/
y

as banks are farther removed from financial centers; also that the
average rate is more nearly stationary in the rural sections.
The question of interest rates on industrial advances and
commitments has been given careful consideration by the officers and the
Executive Committee of this bank and it is the consensus of opinion that
the prevailing rates should not be changed at this time.

Applicants for

loans under Section 13b offer no objection to the rates and a number of
bankers are of the opinion that should the rate on direct loans be lowered
the Federal Reserve Banks would be placing themselves in position to com
pete substantially with comnercial banks in the making of industrial loans
This subject has bear discussed more at length in my letter of March 26th
addressed to Mr. Chester Morrill, Secretary, in reply to his letter of
February 11, 1935,

(X-9122), on the subject of “Interest Rates Charged

on Industrial Advances and Commitments."

Very truly yours,

H . nr ne-GTig,
v
Deputy Chairman.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

F e d e r a l R e s e r v e Ba n k
o

O F F I C E OF

C h a i r m a n o f t h e Bo a r d .
Fe d e r a l Re s e r v e Ag e n t .

March 9, 1935.

Honorable M. S. Ecclea, Governor,
Federal Reserve Board,
Washington, D. C.
Dear Governor Eccles:
Your letter of February 6, 1935, X-9115, addressed to
all Chairmen of the Federal Reserve Banks, has had the careful
consideration of the officers and directors of this bank.
The following represents the consensus of opinion as to
how the questions submitted in your letter should be answered:
1.

General credit situation.
(a)

Are commercial banks doing everything in their
power to improve the situation?

We believe that banks in the Sixth Federal Reserve Dis
trict are doing everything which they Bight reasonably be expected
to do in order to improve the situation.

In our opinion the banks

are generally desirous of extending credit and making sound loans
and are vigorously exerting themselves to do so.
The difficulty does not appear to be an unwillingness on
the part of the banks to extend credit.

On the contrary, there ap

pears to be a scarcity of demand among borrowers who are in position
to use available funds advantageously and at the same time offer
reasonable assurance of repayment • x A number of banks have repre
X
sentatives in the field actively soliciting loans and are also ex
'
s
tensively advertising for loans.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

F ede ral R es erv e Bank of A

\ n-

'
Hon. M. S. Ecclea - 2

(b)

If not, what steps can be taken by the Federal
Reserve Banks or otherwise to bring about an
improvement?

In view of the above and foregoing it does not appear
necessary to answer this question.

•■

•
2.

)

;

Inte rest rat es•
(a)

On time and savings deposits of member banks.

We are of the opinion that under conditions such as now
obtain the permitted maximum rate of interest should remain at
*

per cent per annum.

2-1/2

A lower prescribed maximum rate might place

member banks at a disadvantage because of competition of postal sav
ings bonds, and it is believed that the banks of the country, rural
as well as city, are unable at the present time to pay more than
2-1/2 per cent.1
1
(b)

On loans of member banks and on industrial
advances and commitments by Federal Reserve
Banks.

M Ho answer is made to this question at this time.

Governor

Newton will shortly attend a conference in Dallas, Texas, between the
officers and directors of the Dallas bank and the Governors of several
of the other reserve banks.

Our answer to this question may be molded

by the discussions which will be had at that conference.

Matters affecting admission of nonmember banks
to Federal Reserve System.
(a)

Earnings of nonmember banks from exchange
collection charge.

| This is a question of considerable importance in the Sixth
*

Reproduced from the Unclassified / Declassified Holdings of the National Archives

F e d e r a l R e s e r v e B a n k o f fi

\ N"

Hon. K. S. Eccles - 3

Federal Reserve District.

A number of nonmember banks, in making

inquiries concerning membership in the Federal Reserve System, have
stated that they feel that they could not forego the exacting of
charges for the payment and remission of checks drawn on themselves.

I
I
This applies peculiarly to banks located in the smaller conmunities.
While member banks may, of course, make charges within the limits
prescribed by law for collecting items placed with them on deposit
(and city banks customarily make such charges),-member banks located
in smaller communities would be unable to receive any considerable
amount of revenue frola this source, even if a long established cus
tom of not making collection charges did not militate against their
doing so.
It has been stated by the officers of some of these insti
tutions that the revenue from exchange (and by this we mean charges
for the payment and remission of checks as distinguished from collec-

..__-............................ .

tion charges) will average in a bank with a capital as small as
$15,000 from $1500 to $1800 per annum.

If deprived of this revenue

such banks of necessity would be compelled to liquidate.

Revenue from

this source, according to reliable information obtained from nonmember
banks, in most instances is sufficient to cover the salary of the
executive officer in charge of the bank.
We believe that a large percentage of nonmember banks in the
district would apply for membership if they felt that they might re

tain the equivalent of a substantial portion of the exchange charges

Reproduced from the Unclassified / Declassified Holdings of the National Archives

F ed e r a l R e s e r v e Ba n k of A

\ N'

Hon. M. S. Eccles - 4

which are now being made.
3.

(b) Present conditions of membership.

i
i
Laying to one side for the moment questions of capital re
quirements of nonmember banks, we give it as out opinion that the con
ditions of membership presently being prescribed by the Federal Reserve
Board should not be materially changed; this for the reason that it is
believed that modification of the conditions would have a tendency to
lower the standards of membership and give the member banks opportunity
to deviate from sound banking principles.

Member banks, almost without

exception, regard their membership very highly and would not appreciate
the lowering of standards in order that membership in the System might
be easier of attainment.
Assuming that the Federal Reserve Board is to be invested with
the right to waive, in whole or in part, the capital requirements of
banks applying for membership, we believe that the Board might properly
admit to membership any sound bank having the capital required by State
law and be rather liberal in fixing the time within which the bank would
be compelled to bring its capital requirements up to those set out in
Section 9.
(c)

Advisability of extension of membership to banks
outside the States and the District of Columbia.

We know of no reason why the privilege of membership should
not be extended to national banks located in Alaska and in the insular
possessions of the United States.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

F ede ral R es erv e Bank of A

Hon* M* S. Eccles - 5

Need for continuance of assistance of Reconstruction
Finance Corporation in connection with rehabilita
tion of capital structures of banks.

It is felt that for several years at least there will be a

real need for the continuance of the assistance of the Reconstruction
Finance Corporation in connection with the rehabilitation of the cap
ital structures of banks.

Our conclusions are based upon the belief

that a number of banks which sold preferred stock will in all likeli
hood be compelled later on to strengthen their capital structures,
and it does not appear possible for such banks under present condi
tions to secure additional capital from private investors* !
<

Adequacy of reimbursement of Federal reserve banks
by Treasury and other governmental agencies for
various services rendered and for space used in
Federal reserve bank buildings*

Reference to the statistical data prepared by the Federal
Reserve Banks incorporated in a report of the fiscal agency and de
positary expenses to the Federal Reserve Banks, compiled by the Di
vision of Bank Operations for the six months period ending June 30,
1934, reveals that Federal Reserve Banks expended $932,000 in the
performance of services, no part of which was reimbursed by the
United States Treasury Department. x
'lt is our opinion that a con
siderable part of these expenditures should be reimbursed, and we
therefore suggest that a careful study be made of all these expendi
tures with a view to securing for the Federal Reserve Banks adequate
reimbursement for items of expenditures made by them in connection
with services rendered exclusively in a fiscal agency capacity.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

F e d e r a l R es e r v e Ba n k of A

\ n-

Hon. M. S. Eccles - 6

Regulations fixing margin requirements for loans
by banks upon equity securities for the purpose of
purchasing or carrying securities registered on
national securities exchanges.
(a)

Circumstances under which regulation should
be issued.

v The regulation should be issued at such time as the Board
v
may deem advisable.

We believe, however, that its effective date

should be fixed at least fifteen and perhaps thirty days after the
date of its release, in order that the banks may have ample time in
which to familiarize themselves with its provisions.

We think also

that as to loans held by banks at the time of the effective date of
the regulation reasonable time should be given for the bringing of
margin requirements within the prescribed limits; this for the reason
that any unusual volume of sales occurring within a comparatively
short time and occasioned by the regulation might demoralize the se
curities market.
(b)

Whether regulation should permit borrower to
obtain from bank more than he could obtain from
broker under Regulation T.

' In our opinion there is no logical basis for a discrimina
V
tion by the Federal Reserve Board in favor of a bank and against a

\
V
broker in fixing margin requirements for such advances.

Economic and statistical divisions of Federal
Reserve Banks.
(a)

v The
n

Usefulness to officers and directors.

directors and officers of this bank believe that the in-

Reproduced from the Unclassified / Declassified Holdings of the National Archives

F ede ral R es erv e Bank of A

\ nt

Hon. M. S. Eccles - 7

formation furnished by the economic and statistical division of the
bank is of value to them and they recommend continuance of the service.^
7.

(b)

Value of Federal Reserve Bank monthly reviews.

^ The directors and officers also feel that the issuance of the
bank’s monthly review is of general value and that this is demonstrated
by the constant demand for copies.^ Approximately 3400 of our reviews,
including those sent to member banks in the Sixth District, are mailed
each month.

These reviews go into forty-five of the States and fifteen

foreign countries.

Hi are constantly adding new names to our list and

noting changes of addresses of distributees.

An effort is made to as

semble in one document all available data in regard to business condi
tions and business trends in the district.

Such data is accompanied by

citations of sources of information and consists of statements of ex
isting facts as distinguished from prophecies as to probable business
trends or developments.

A number of individuals have stated that our

review gives more actual information and reliable statistics than they
are able to obtain elsewhere.

For this reason an effort is made to

place in the review info m a t ion concerning as many different lines of
business as is reasonably feasible.

Establishment of career system for personnel of
Federal Reserve Banks.

^ It is the consensus of opinion that there should be est ablished the basis of a career system for the personnel of the Federal
Reserve Banks.

It has been tentatively suggested that each Federal

Reserve Bank might furnish the Federal Reserve Board with the names

Reproduced from the Unclassified / Declassified Holdings of the National Archives

F ede ral R es erv e Bank of A

\ n -t

Hon. M. S. Eccles - 8

of junior officers and employees who have demonstrated exceptional
ability and whose services might be employed to better advantage by
another Federal Reserve Bank because of lack of opportunity for ad
vancement with the bank of present connections.

Criticisms of existing regulations or rulings or
procedure of the Federal Reserve Board, with spe
cific recontoendations as to changes which would
correct any unsatisfactory features of relations
between the Board or its staff and Federal Reserve
banks or member banks.

v The examiners stationed at this bank often advise the offi
X
cer in charge of bank examinations that the management of our member
banks complain of the number, variety and extent of reports that they
are required to prepare.

The banks themselves would welcome a revision

of report f o m s and the reduction of requests for reports to a minimum.
it

They would also like consolidations of reports wherever possible.
x The officers and directors of this bank do not reconmend the
>
discontinuance of any reports now required nor the elimination of in
formation sought to be elicited thereby.

We believe that the Federal

Reserve Board and the office of the Comptroller of the Currency have
from time to time been advised of the viewpoint of the member banks on
this subject and are endeavoring to comply with the wishes of the banks
to the full extent consistent with the gathering of necessary or im
portant statistical or other data.

We do say, however, that any progress

in the direction of the lightening of what the member banks regard as a
burden would be welcomed and appreciated.
' In connection with our dealings with member banks, and par-

Reproduced from the Unclassified / Declassified Holdings of the National Archives

F ede ral R es erv e Bank of A

\ nt

Hon. M. S. Eccles - 9

ticularly in the handling of the woifc of the Federal Reserve Agent,
promptness on the part of the Board in giving rulings and in

reply-

i
l
ing to letters asking for advice would be of great assistance.

This

is not said by way of criticism, since we realize the unusual pressure
which has been put upon the Board in recent years.

We might add also

that we now receive rulings and replies to inquiries much more promptly
than was formerly the case.

In this bank we have endeavored to reduce

i
t
to a minimum requests for rulings and advice.
»Z

' 1 We believe that it would be beneficial to the officers of
1
the reserve banks were the examiners of the Federal Reserve Board at
the time of making examinations of reserve banks to offer constructive
and helpful suggestions.

This would bring about frank discussions

which would not only be beneficial,in our opinion, to the officers of
the Federal reserve banks but would also eliminate discussions by cor
respondence.

Through such constructive suggestions the officers of

the reserve banks might also learn more clearly the viewpoint of the
Board on matters, some of which are of relatively small importance and
'

could be disposed of during the period of examination.
In your letter you make reference to the possibility that to
some of the member banks the actions of the Board or its staff may seem
"bureaucratic or impractical or unduly rigid."

It is undoubtedly true

that a number of the member banks may have regarded some of the rulings,
decisions and requirements of the Board as being somewhat harsh and
burdensome.

We think that we should say, however, that in many instances

this point of view was the result of a failure to understand that the

Reproduced from the Unclassified / Declassified Holdings of the National Archives

F ede ral R es erv e Bank of A

\ nt

Hon. M. S. Eccles - 10

Board’s actions were required by the Banking Act of 1933 and were
not the result of some arbitrary action taken by the Board itself.
In all such eases we have endeavored to make plain to the banks that
the particular ruling of the Board or some specified requirement was
made or imposed because of provisions of law and not as a regulation
originating in the Board.v
v Some complaint was occasioned by reason of reports made to
United States Attorneys of possible violations of Section 22-G of the
Federal Reserve Act, in cases where it seemed apparent that no actual
violation was intended or was at most technical.

This source of

possible friction has now been eliminated.
v We believe that no harm would result, from the standpoint
of the public interest or otherwise, were the Board to modify some
what its requirements in the granting of permits under the Clayton Act
to serve more than one bank as director.

In cases where an officer or

director has manifestly abused his office or has been negligent in the
discharge of his duties, we believe that the grant of a permit would
be incompatible with the public interest, and.that the

sole question

of inquiry should not center around the question of a curtailment of
credit facilities or the lessening of competition.

However, technical

questions such as the possibility of the lessening of competition and
restriction of credit in cases of banks which are not within the pro
hibitions of Section 8 might be regarded as of relatively minor im
portance

Reproduced from the Unclassified / Declassified Holdings of the National Archives

F ederal R es erv e Bank of A

Hon. M. S. Eccles - 11

H As regards the relations between the Board and the
t
Federal reserve bank we desire at all times the utmost of harmony
and cooperation. '*It m i ^ t be well, however, for the Board to take
under advisement the question of whether the expenditure of rela
tively small amounts, in cases where there is no specific authoriza
tion by law and the object to be attained is not improper or un
lawful, might perhaps be left to the various Federal reserve banks
and not call for special authority given by the Board.1
\'The examiners also sometimes criticise unimportant matters

H
involving questions of local management rather than of general policy.
We are not endeavoring to particularize and are'only sug
gesting that in so far as minor matters are concerned—

matters which

involve no question of general policy and are of purely local con
cern—

more of autonomy might be left to the Federal Reserve Banks

and greater latitude be given to its officers and directors for the
exercise of their discretion. "

As stated, the above are the answers approved by the offi
cers and directors of this bank to the questions submitted in ydur
letter of February 6, 1935.
Upon receipt of your letter the same was sent to the various
branches of this bank, with the request that the directors of the
branches meet and give their own answers to the same questions.

The

directors of the branches have held such meetings and have sent me

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F ede ral R es erv e Bank of A

\ nt

Hon* M. S. Eccles - 12

copies of the minutes of the meetings at which the answers were
formulated.

Thinking that these minutes would he of service to

you, we are enclosing copies of the same•

Yours very truly,

Kettig,
Deputy Chairman of the Board,

Reproduced from the Unclassified / Declassified Holdings of the National Archives

e d e r a l

e s e r v e

a n k

O F F I C E OF

C h a i r m a n o f t h e Bo a r d .
Fe de ral Re s e r v e Ag e n t .

Febru ary 26, 1935*

Honorable M, S, Eccles, Governor,
Federal Reserve Board,
Washington, D, C,
Dear Governor Eccles;
Reference is made to your letter o f February 6, 1935

(X -9 1 15 ):
As stated in rpy letter of February 8th, the subjects
an A questions suggested by you were carefully considered by the members
of our Board of Directors at their meeting on February 8th and the
Executive Committee of this bank was directed to communicate with all
of our directors and branch directors, with request that the subjects
be considered and letters written to the Executive Committee expressing
their views#
I am advised that our four branches have held special
directors1 meetings for the purpose of considering the subjects out
lined by you and the reports from three of the branches have been re
ceived.
It is, of course, anticipated that the information com
piled on the various subjects will be presented to our Board of Directors
at their meeting on March 8th,
Governor Newton has informed me that he has been invited
to attend a conference at the Federal Reserve Bank of Dallas on March
12th, at which conference Governors of the Federal Reserve Banks of Saint
Louis and Kansas City will be present.
It is anticipated that your letter
will be considered by the four Governors at the Dallas conference *
it
is my opinion that it mi^it be desirable to delay making a detailed reply
to your letter until after this conference,
I trust that the manner in which we are proceeding
meets with your approval.

Cordially yours,

W, H. Kettig,

Deputy Chairman of the Board,

Reproduced from the Unclassified / Declassified Holdings of the National Archives

3=P7,-3

MINUTES OF MEETING
BOARD OF DIRECTORS
NASHVILLE BRANCH - FEDERAL RESERVE BANK OF ATLANTA

Thursday
11 o ’clock

Feb. 21,
1935

Mr. Paul M. Davis, Vice Chairman of the Board of Direc
tors of the Nashville Branch, Federal Reserve Bank of Atlanta,
called a special meeting of the Board on Thursday, February 21st,
to consider questions asked in the Federal Reserve Board1s letter
X-9115, as a matter of information in order to get our Board’s
general viewpoint on the subject.
Our Board covered each specific questionnminutely and
gave their respective viewpoints. These answers and opinions are
being forwarded in a special letter today to Mr. L. M. Clark,
Secretary of the Board, Federal Reserve Bank of Atlanta. Copy is
also attached to these minutes.

'uiuniyb ui me national Archives

In response to the Federal Reserve Board’s lettefc X-9115, asking
that the Board of Directors and officers of the Federal reserve banks
discuss certain subjects, at a special meeting of the Board of Directors
of the Nashville Branch, Federal Reserve Board of Atlanta, on Thursday,
February 21st, our directors expressed themselves as scheduled below:

General credit situation:
(a)

Are commercial banks doing everything in their power to
improve the situation?
Generally speaking they are. Some are not on account
of so much red tape and a lack of understanding regard
ing the rules and regulations.

(b)

If not, what steps can be taken by the Federal Reserve
Banks, or otherwise, to bring about an improvement?
Examiners’ criticisms have discouraged character loans
and in many cases character loans constitute material
benefit to the conmunity. Better understanding between
the Federal Reserve Banks and their member banks.

Interest rates (a)

On time and savings deposits of member banks.
Present rate of 2 1/2% has met with general approval.

(b)

On loans of member banks and on industrial advances and
commitments by Federal Reserve Banks.y/
Loans of member banks to industries are lower than in
normal times. Commitment rate charged by the Federal
Reserve Bank on industrial loans is too high, rate is
also too high.

Matters affecting admission of nonmember banks to the Federal
Reserve System.
(a)

Earnings of nonmember banks from exchange collection charges
These earnings are of minor importance at the present time.

(b)

Present conditions of membership.
Membership condition would be greatly improved if all of
the member banks had a better conception of the purposes
of the Federal Reserve Bank and if a continuity of purpose
prevailed rather than changing so rapidly.

(c)

Advisability of extension of membership to banks outside
the States and the District of Columbia.

No opinion expressed.

ueciassiriea Holdings of the National Archives

Need for continuance of assistance of the Reconstruction
Finance Corporation in connection with the rehabilitation
of capital structures df banks.
Work of the Reconstruction Finance Corporation is generally
satisfactory to the banking fraternity and should be con
tinued.
Adequacy of reimbursement of Federal Reserve Banks by
Treasury and other government agencies for various services
rendered and for space used in Federal Reserve Bank buildings.
It was the opinion of our Board that the Federal Reserve
Banks should be reimbursed for the expenses incurred for
services rendered and forthe space used.
Regulation fixing margin requirements for loans by banks upon
equity securities for the purpose of purchasing or carrying
securities registered on national securities exchanges.
(a)

Circumstances under which regulation should be issued.
Individual cases should govern the situation.

(b)

Whether regulation should permit borrower to obtain from
bank more than he could obtain from broker under Regula
tion T.
Should be judged on their respective merits.
Economic and statistical divisions of Federal Reserve Banks.
(a)

Usefulness to officers and directors.
Of very little use.

(b)

Should be dispensed with.

Value of Federal Reserve Bank monthly reviews.
Practically of no value.

Establishment of career system for personnel of Federal
Reserve Banks.
We believe in career system if due consideration is given
to ability.
Criticisms of existing regulations or rulings or procedure
of the Federal Reserve Board, and with specific recommenda
tions as to changes which would correct any unsatisfactory
feature of relations between the Board ac its staff and the
Federal Reserve Banks or member banks.
No specific criticisms at the present time.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

Minutes of
Special Meeting
Board of Directors
New Orleans Branch

New Orleans, La.,
February 21, 1953

3 4 7 , 4 3 (4/
Thursday, 9:50 A. M.

The Chairman stated that the purpose of the meeting was to con
sider the matters contained in letter from the Governor of the Federal
Reserve Board under date of February 6, 1955, X9115-X9115-a, and to ex
press thereon the views of this Board to the Board of the Parent Bank.
After full and free discussion the following statement was
agreed upon:
1•

General credit situation
(a)

Banks generally are apparently anxious to help in improving
the situation but are still laying stress on reasonable li
quidity and are disinclined to make capital loans that cannot
be liquidated within the year.
(b) ((Continuation of Federal Reserve Banks' present activity in
making industrial loans up to a five-year period is desirable,A
and the Federal Reserve Banks should encourage all banks in
their respective districts toccooperate as fully as possible
in referring such loans to them.

Interest rates
(a)

(b)

5«

The present policy of the Federal Reserve Board in fixing a
maximum rate of 2-J$ on time and savings deposits for all member
banks is considered in line with existing conditions. It cer
tainly should not be lowered as long as the Postal Savings rate
remains what it is.
The present policy of the Federal Reserve Bank of Atlanta in
charging a unifora rate of 6$ on industrial loans and 1/2 of 1%
on commitments is considered sound.

Matters affecting admission of nonmember banks to Federal Reserve System
(a)
(b)
(c)

In view of legislation already on the statute books, compelling
membership in 1957, and in view of other legislation on this
subject now pending, it is difficult to give specific answers to
Questions a, b and c.
However, if the large number of nonmember banks are to be forced
into the System, serious thought needs be given to allow them a
reasonable exchange charge for their collection service.

There is still need for continuation of the Reconstruction Finance
Corporation's authority to rehabilitate capital structure of banks.

There is inadequacy of reimbursement of Federal reserve banks by
Treasury and other governmental agencies for various services rmdered
and for space used in Federal reserve bank buildings.

,vcu " um 1 1 uiiudssniea / ueciassmea Holdings of the National Archives

Any regulation which the Federal Reserve Board will make
concerning loans by banks upon equity securities should leave
discretion to the banks to permit the borrower to obtain more
than he could obtain from a broker under Regulation T o

7»

The facts furnished by the economic and statistical divisions
of Federal reserve banks through their various bulletins and
monthly reviews are valuable and should be continued.

The members of this Board do not feel sufficiently familiar
with a career system for personnel of Federal reserve banks
to express a view.

There appears to be no reason for criticism concerning existing
regulations or rulings or procedure of the Federal Reserve
Board.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

3 Z I - J 2

Tuesday
10:30 A M

MINUTES OF A CALLED MEETING OF THE BOARD OF
DIRECTORS OF BIRMINGHAM, ALABAMA., BRANCH

February
19,
1935

The meeting was called to order by Mr. Kettig, Chairman of
the Board.
The object of the meeting is to give consideration to certain
subjects submitted for consideration by the Federal Reserve Board in
its letter of February 6, 1935, to the Patent Bank in Atlanta and trans
mitted to us by it. The questions asked are as follows:
1.

General credit situation
(a)

(b)

Are commercial banks doing everything in their power to
improve the situation?
If not, what steps can be taken by the Federal reserve
banks or otherwise to bring about an improvement?

Int ere st rat es
(a)
(b)

On time and savings deposits of member banks.
On loans of member banks and on industrial advances
and commitments by Federal reserve banks.

Matters affecting admission of nonmember banks to Federal Re
serve System
(a)
(b)
(c)

Earnings of nonmember banks from exchange collection charges.
Present conditions of membership
Advisability of extension of membership to banks outside the
States and the District of Columbia.

Need for continuance of assistance of Reconstruction Finance
Corporation in connection with rehabilitation of capital structures
of banks.

Adequacy of reimbursement of Federal reserve banks by Treasury
and other Government agencies for various services rendered and
for space used in Federal reserve bank buildings.

Regulation fixing margin requirements for ldans by banks upon
equity securities for the purpose of purchasing or carrying
securities registered on national securities exchanges.

(a)
(b)

Circumstances under which regulation should be issued.
whether regulation should permit borrower to obtain from
bank more than he could obtain from broker under
Regulation T.

reproduced trom the Unclassified / Declassified Holdings of the National Archives

Economic and statistical divisions of Federal Reserve Banks.
(a)
(b)

Usefulness to officers and directors.
Value of Federal Reserve Bank monthly reviews.

Establishment of career system for personnel of Federal Reserve Banks.

Criticisms of existing regulations or rulings or procedure
Federal Reserve Board, with specific recommendations as to
would correct any unsatisfactory features of the relations
Board or its staff and the Federal Reserve Banks or member

of the
changes which
between the
banks.

After careful consideration the statement which follows was
formulated as the answer of the Board to the questions submitted, and, on
motion duly made and seconded it was adopted.

(a)

Our Board is made up largely of bankers and therefore it would
be expected that its members would hold to the banking point of
view, but it is the impression among them that the commercial
banks are eager to make loans. The difficulty lies not in the
unwillingness of banks to extend credit. There is, however,
here as elsewhere, a scarcity of demand among those who can use
the surplus funds advantageously and at the same time give
adequate assurance of repayment,,

(a)
(b)

From 1% to 2
From 4% to 6$, and by the Federal Reserve Bank 6% .

(a)

Collection charges undoubtedly play a part in keeping nonmember
banks out of the Federal reserve system.

(b)

We do not believe the conditions are burdensome but we wonder
if there is not a lack of conviction as to the advantages of
membership to small nonmember banks.

(c)

See no reason for doing so.

Until the task which has been begun has been completed.

It is our opinion that the compensation is not adequate considering
the amount of vault space required, the guard service, and the services
generally by officers and other employees of the bank not specifically
reimbursed.

We are probably too far removed from the operation of the application
of such requirements to justify an expression of opinion.

(a)

We regard these as being valuable but care should be exercised
that they do not become too mechanical in their functions.

nupiuuuuea irom tne unciassitied / Declassified Holdings of the National Archives

(b)

It is always difficult to publish a monthly review in such
manner as to hold the attention of those who should be in
terested in its contents. Of course that applies to the
monthly reviews of the respective Federal reserve banks.
They are valuable, however, and a number of people watch
them for whatever progress may be reflected in them.

So far as branch operations are concerned it would not be practical
to undertake the maintenance of a comprehensive course of study for
the personnel of the branch. Excellent courses are offered by the
American Institute of Banking and these are available to the em
ployees and junior officers of the Federal Reserve Banks.

There is ample opportunity for examiners to make constructive and
helpful suggestions to the officers of the Federal Reserve Banks, as
they often do, and a frank discussion of questions is usually beneficial.
However, for an examiner to write a criticism in his report, as is
sometimes done, without first discussing the matter with the officers
of the bank is hardly fair, and it is not productive of the best
results. In order to put the matter in concrete f o m , we cite a
specific case: Our guard program at this branch has been carefully
thought out through a period of two years, it had been personally
looked into by the directors and any action of consequence had been
approved by them. It is reasonable to suppose that the conclusions
arrived at in this way are safer to follow that the conclusions of
an examiner, however able, who is here only a few days and who has
little opportunity to study the situation.
Hear the end of this two-year period an examiner from the Federal
Reserve Board came, and while here he did not even mention our guard
situation to the officers, but in his report he wrote a very general
criticism of it. The fact was that before he came we had plans under
way to greatly strengthen the situation; and these plans were carried
out before we had seen, or heard of, his report. The presumption is
that managements are desirous to improve their program along all
lines, therefore for an examiner to discuss measures with them would
be more helpful than to criticise a situation without first asking
what plans had been made to remedy it. The chief objection to this
sort of attitude on the part of examiners is not alone that it is
unfair, but that managements mayi agree to unwise proposals rather
than to incur criticism.
There is a feeling among many bankers that the Federal Reserve Bank
has become bureaucratic in dealing with its members. It is probably
due to the necessity of departmentalizing the work of these institu
tions, but it would seem to us that even that should not prevent the
free exercise of sound judgment in discussing and determining credit
policies or analyzing credit risks. Our view is that the relations
should be as far as possible on the same plane as those which ordi
narily exist between a bank and its correspondent. The same discretion
and good sense should characterize the classification of notes for

nc^uuuieu num me unclassified / Declassified Holdings of the National Archives

rediscount at a Federal Reserve Bank as is employed by the officers
of a large commercial banking institution. The directing head
should be a man of broad banking experience, capable of using wisely
and with discretion the latitude vouchsafed to him by a board of
directors made up of bankers and business men. As far as is practi
cable to do so, he should be given a staff of well equipped and well
trained men. The difficulty seems that so often those in subordinated
positions are drawn from the lower ranks in the Federal Reserve Bank,
or from clerical or accounting jobs in other banks and hence with a
limited experience in dealing with the customer, which, of course,
is the member bank. They do not always give a practical treatment
of the transaction involved. They seem to be rule-bound and hence
contribute to the impression that after all the Federal Reserve Bank
has become bureaucratic. In making this comment we realize that it
is much easier to point out difficulties of this nature than it is
to rectify them, but our opinion has been requested and we do believe
that much could be done if an effort were made to substitute a more
practical handling of many of the transactions which member banks
have with the Federal Reserve Banks.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

CALL MEETING

BOARD OF DIRECTORS
JACKSONVILLE BRANCH, FEDERAL RESERVE BANK.

Tuesday
3:00 P. M.

February 19, 1935

As suggested by the Board of Directors of the
Federal Reserve Bank of Atlanta at their meeting of February 8, a
special meeting of the Board of Directors of the Jacksonville
Branch was called for the purpose of a general discussion of the
subjects outlined in letter X-9115 written by the Honorable M. S.
Eccles, Governor of the Federal Reserve Board, to Mr, W. H.
Kettig, Deputy Chairman of the Board of the Federal Reserve Bank
of Atlanta.

unuaaanitiu / ueuiassmea noiaings or tne National Archives

■ JACKSONVILLE BRANCH
FEDERAL RESERVE BANK OF ATLANTA,
Jacksonville, Florida.

General credit situation
(a)

Are comnercial banks doing everything in their power to
improve the situation?
Yes

Interest rates
(a)

On time and savings deposits of member banks
Should be elastic but at this time a maximum rate of 2< .
j
o

(b)

On loans of manber banks and on industrial advances and
commitments by Federal reserve banks.
Should not char ge in excess of 6%.

•X
3»

Matters affecting admission of nonmember banks to Federal reserve
system.
(a)

(b)

Nonmember banks becoming members should comply with the
present rules, regulations and conditions now applying
to member banks; or, in other words, they should not be
given any special privileges.

(c)

We are opposed to nonmember banks being permitted to charge
exchange after they become member banks.

Extension of membership to banks located in insular
possessions only should be permitted. Banks in foreign
countries should not be allowed membership.

Need for continuance of assistance of Reconstiuction Finance
dorporation in connection with rehabilitation of capital
structure of banks.
We recommend the continuance of assistance of Reconstruction
Finance Corporation in connection with the rehabilitation of
capital structure of banks.

Adequacy of reimbursement of Federal reserve banks by Treasury
and other governmental agencies for various services rendered
and for space used in Federal Reserve Bank buildings.
A good accounting system should require the various Federal
agencies to pay to the Federal reserve banks and their branches
a reasonable and fair compensation for services rendered and
space used.

v " v,aoou,cu' ueuassmea Moldings of the National Archives

Regulation fixing requirements for loans by banks upon equity
securities for the purpose of purchasing or carrying securities
registered on national securities exchanges.
Answering (a) and (b), we think that member banks should be allowed
to make loans on listed securities to firms, individuals and cor
porations other than brokers, and use their own discretion as to
amount of margin.
Economic and statistical divisions of Federal reserve banks.
We appreciate the value of this service and recommend its con
tinuance o
Establishment of career system for personnel of Federal reservd
banks.
We recommend unqualifiedly the establishment of career system
for personnel of Federal reserve banks.
Criticisms of existing regulations or rulings or procedure of the
Federal Reserve Board, with specific recommendations as to changes
which would correct any unsatisfactory features of the relations
between the Board or its staff and the Federal reserve banks or
member banks.
We recommend that Federal reserve banks and branches not be per
mitted to collect any items, except checks drawn on member and non
member banks, without chargefor such service.
We recommend that facilities be given member banks for depositing
United States securities with any Federal reserve bank in the United
States and receive therefor a receipt.
We reeomriend a minimum of change in the present banking laws; and we
are unqualifiedly opposed to any legislation leading up to a central
banking system.
'We recommend that the Federal Reserve Board cause a Dali Loan Depart
ment to be established in New York that would permit member baiks to
make loans in New York through said agency, and require every member
placing call loans in New York to make them through the Federal re
serve agency. This in our opinion would give the Federal Reserve
Board a better knowledge of and control over the securities market
and afford members this service at a minimum risk and expense.
We recommend that the Federal Reserve Board construe the law regulat
ing the restriction of interest payments on deposits under Section
lib of the Banking Act of 1933, and furnish every member a copy of
their complete analysis of the law.

Reproduced from the Unclassified / Declassified Holdings of the National Archives

dear Mr. Eccles:
Mr. Hamlin

*
•

Mr, Miller
Mr. James

....February 6, 1935, suggesting a number of subjects and questions

Mr. Thomas
Mr. Szymczak
Mr..
Mr.

...
«

I received your letter No. X-9115, dated

. ...

Mr. Morrill. . |Z .

....regarding the Federal Reserve Banks in their relations with
... member banks.

Mr. Bethea. . ^

I submitted your letter to our Board today and

Mr. Carpenter
Mr. Noell.
Mr.
Mr.
Mr.
Mr.

't i members were delighted with the opportunity you have given
lb
'them to submit their views to the Federal Reserve Board on the
'various subjects mentioned.

They appreciate the opportunity of

Please note — check
and return ta

making constructive criticisms and answers to the questions

Ml C aviar

submitted.

1
referred

T e went over the matter very carefully and have
i
your communication to our Executive Committee.

They

have been directed to communicate with all our branches and all
our branch directors, also with some non-member banks.

The

Committee will gather in all these views and submit them to you
in concrete form as soon as they are received.

It may require a

little mdre than thirty days to compile this infonnation, but
the Committee will communicate with you and ask for further time
if necessary

,waoa,l,Bu ' ueuiassmea Moldings of the National Archives

ederal

R eserve

Bank of

Mr. M. S. Eccles, Governor - 2

I think your letter is a step in the ri^it
direction and will result in much good to the Federal
Reserve System.
With my regards, I am

Yours very truly,

W. H. Kettig,
Deputy Chairman of the Board•

Full text of Records of the Federal Reserve System, Record Group 82 : Relations Between FRBoard, FRBanks & Member Banks (FRDistricts 1-6), Box 1194, Folder 2

FRASER