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Operation of the National and Federal Reserve
Banking Systems

HEARINGS
BEFORE THE

COMMITTEE ON BANKING AND CURRENCY
UNITED STATES SENATE
SEVENTY-SECOND CONGRESS
FIItST SESSION
ON

S. 4115
A

BILL

TO PROVIDE

FOR

THE

SAFER

AND

MORE

EFFECTIVE USE OF THE ASSETS OF FEDERAL RESERVE
BANKS A N D OF NATIONAL BANKING ASSOCIATIONS, TO
REGULATE INTERBANK CONTROL, TO PREVENT THE
UNDUE DIVERSION OF FUNDS INTO SPECULATIVE
OPERATIONS, AND FOR OTHER PURPOSES

PART 2
MARCH 28 J O 30, 1932

Printed for the use of the Committee on Banking and Currency

UNITED STATES
GOVERNMENT PRINTING OFFICE
111161




WASHINGTON : 1032

COMMITTEE ON BANKING AND CURRENCY
PETER NORBECK, S01 ith Dakota, Chairman
SMITII W. BROOKHART, Iowa.
DUNCAN U. FLETCHER, Florida.
PHILLIPS LEE GOLDSBOROUGH, Maryland. CARTER GLASS, Virginia.
JOHN G. TOWNSEND, JR., Delaware.
ROBERT V. WAGNER, New York.
FREDERIC C. WALCOTT, Connecticut.
ALBEN W. BARKLEY, Kentucky.
JOHN J. BLAINE, Wisconsin.
ROBERT J. BULKLEY, Ohio.
ROBERT D. CAREY, Wyoming.
CAMERON MORRISON, North Carolina,
JAMES E. WATSON, Indiana.
TIIOMAS P. GORE, Oklahoma.
JAMES COUZEXS, Michigan.
EDWARD P. COSTIGAN, Colorado.
FREDERICK STEIWER, Oregon.
CORDELL HULL, Tennessee
R BLOUNT, Clerk
JULIAN
.

n




CONTENTS
Statement of—
Page
Ayres, Leonard P., vice president Cleveland Trust Co., Cleveland
Ohio
251
Ball, Edward, representing- Du Pont-Ball Co. and Atlantic National
Bank, Jacksonville, Fla
293
Bruce, Howard, chairman of the board of the Baltimore Trust Co__
45G
Burgess, W. Randolph, deputy governor of the Federal reserve bank
in New York City
497
Burke, James Francis, general counsel the Pittsburgh Clearing House
Association, Pittsburgh, Pa., and a former member of the Committee on Banking and Currency of the House of Representatives..
441
Hanes, R. M., representing the Wachovia Bank & Trust Co.,
Winston-Salem, N.
489
Hecht, R. S., president Hibernia Bank & Trust Co., New Orleans, and
chairman economic policy commission of the American Bankers'
Association
225
Houston, P. IX, chairman board of the American National Bank,
Nashville, Tenn
534
Kent, Fred I., director of the Bankers Trust Co., Scarsdale, N. Y
508
McQuaid, W. R., president of the Barnett National Bank, Jacksonville, Fla
278
Marsh, Spencer S., vice president and cashier National Newark &
Essex Banking Co., Newark, N. J
299
Meyer, Eugene, governor Federal Reserve Board, Washington, D. 0 —
357
Ottley, John K., president First National Bank, Atlanta, Ga
315
Payne, William K., chairman of the board Auburn-Cayuga National
Bank & Trust Co., Auburn, N. Y
329
Piatt, Edmund S., New York City, vice president Marine Midland
Corporation of Buffalo, N. Y
310
Pole, J. W.f Comptroller of the Currency, Treasury Department,
Washington, D. C
422
Preston, Thomas R., Chattanooga, Tenn., president the Hamilton
National Bank
323
Rand, George F., president Marine Trust Co., Buffalo, N. Y
479
Wakefield, L. E., president First National Bank, Minneapolis, Minn—
339
Wolfe, O. Howard, cashier the Philadelphia National Bank, Philadelphia, Pa.; president the Association of Reserve City Bankers;
vice president Pennsylvania Bankers' Association; member economic policy committee of the American Bankers' Association;
and manager Philadelphia Loan Agency of the Reconstruction
Finance Corporation
263
Zimmerman, Charles F., president First National Bank of Huntingdon, Pa., and president State Bankers' Association of Pennsylvania
304




m




OPEEATION

OF T H E

NATIONAL

BANKING

AND FEDERAL

BESEBYE

SYSTEMS

MONDAY, HARCH 28, 1932
UNITED STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY,

Washington^ D. 0•
The committee met, pursuant to adjournment on Friday, March
25,1932, in Room 303, Senate Office Building, at 10.30 o'clock a, m.,
Senator Smith W. Brookhart presiding.
Present: Senators Brookhart (presiding), Walcott, Fletcher,
Glass, Wagner, BulHey, Barkley, and Costigan.
Senator BROOKHART (presiding). The committee will come to
order. We will hear Mr. Kudolph Hecht as the first witness.
STATEMENT OF R. S. HECHT, PRESIDENT HIBERNIA BABE &
TRUST CO., NEW ORLEANS, CHAIRMAN ECONOMIC POIICY COMMISSION OF THE AMERICAN BANKERS' ASSOCIATION
Senator BROOKHART (presiding). You may proceed whenever you
are ready, Mr. Hecht.
Mr. HECHT. Mr. Chairman and gentlemen of the committee, on
behalf of the economic policy commission of the American Bankers'
Association, I, as its chairman, ask for the privilege of filing with
your committee a brief official statement, and I shall then be glad to
give such further testimony as you may care to have me give in my
individual capacity as president of the Hibernia Bank & Trust Co.
of New Orleans.
Senator GLASS. Might I ask right here, has your American Bankers7 Association met and passed on this as its omcial statement?
Mr. HECHT. The commission has conferred on it, partly in person
and by wire, with those who were not able to be present. But the
formal statement which I present expresses the views of the commission.
The functions of the economic policy commission are to "give
consideration to all questions involving money and currency, public
finance, and the economic policy of the Government, including the
economic aspects of laws and" regulations governing the several
classes of banking organizations."
Accordingly, our commission has given careful study to the provisions of Senate bill 4115 and has attempted to analyze them not
from the selfish viewpoint of the banking interests, but from the
broader and more important viewpoint of the public interest and
the economic welfare of the country as a whole.



225

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•226

We will, therefore, confine our comments to the more general aspects of the proposed legislation leaving it to others to point out
more in detail the objections to the bill irom the standpoint of the
practical operations of the banks.
Banking, being a semipublic business, must necessarily be controlled by strict laws governing its operations. Nevertheless, banking in its actual operations can not be conducted by statute^ nor is
it feasible to substitute rigid rules enforced by public officials for
individual initiative and responsibility.
The human element must always remain a major part of banking operations and any attempt, to take important practical operating details out of the hands of individuals and have them function
automatically under rigid statutory formulas would be unworkable
and dangerous.
You can no more take the human element out of banking by legislation than you can put morality into people by mere .statutory enactments. Of course, banking like all other lines of human endeavor
has made many mistakes and has done things ..which—rin the light
of recent events—have proven unwise and perhaps indefensible.
However, it seems safe to say that the bankers of this generation
have learned important • lessons froni these events and are determined that banking shall benefit from them.' No doubt some new
legislative enactments are desirable and bankers more than anyone
else want to cooperate to prevent a repetition of the disastrous experiences of the past two and a half years. It seems not likely, however, that the mere transfer of the responsibility from one set of
human beings, that is, the officers of banks, to another set of human
beings, that is the officials in Washington, will prove a panacea for
our financial ills or be a guarantee against a reptition of the same
errors of human judgment in the future.
Admittedly the Federal reserve authorities should have broad
powers of supervision over, the general financial policies of banks
and to some extent over their practical operations. But it is extremely doubtful that the enactment of such a law as now proposed
which largely centeralize control over detailed operating functions
of banks in the hands of Government officials in Washington would
improve the situation.
After all it must be remembered that not a few of our business
leaders and bankers have heretofore, expressed the view that much
of the blame for the undue speculation and consequent later collapse
of 1929 attaches to the " easy money " policy of the Federal Reserve
Board then in office. It matters not whether we agree with that
criticism it is mentioned solely to. emphasize the fact that officials
in Washington are no less subject to errors of judgment than are
bankers in New York or elsewhere, and consequently a further increase of the power of Government officials over the banking structure is not necessarily a guarantee for better banking.
But granted that some changes are desirable in our existing laws
the present would hardly seem a propitious time for enacting new
and far-reaching provisions which in their very nature are highly
deflationary. The Federal reserve act which is admittedly a mas
terpiece offinanciallegislation was evolved only after several years*
study and careful deliberation, and on the whole it has proved
sound and well adapted to the needs of the country.



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS • 2 2 7

It would be niost unfortunate if we were now to rush in and attempt to cure the evils of the past few years by means which even
if they proved helpful at some future time would inevitably add
to the length and depth of the present depression.
For over two years we have been struggling with the most difficult and complicated business situation in our history.
Many important and necessary adjustments have had to be made,
4ind we are just emerging from an atmosphere of hysteria and fear,
which was the unavoidable consequence of this period.
More recently the passage of two relief measures, the Reconstruction Finance Corporation act and the Glass-Steagall bill, made possible by the broadminded nonpartisanship leadership of both parties,
has done much to restablish national confidence on the part of
bankers and the public.
, The passage of this bill would undoubtedly destroy the most if not
-all of the good that has been accomplished along this line, and would
lead to further deflation of securities and restriction of credit at a
time when just the opposite influences are needed.
The- fact that three years ago an unduly large amount of credit
was extended to stock-market operators by member banks, nonmember banks, as,well as'corporations and individuals, over whom bankers had no control, should not now cause us to go to the other
extreme and attempt to enact a law which would make all the legitimate investment business an outlaw business by practically preventing banks from extending credit to those engaged in that line. Nor
to the fact that in the past a few banks went too deeply into the
security markets, by now using that as an argument in favor of prohibiting all banks from dealing in sound, investment bonds.
Let us take care that in trying to devise means to prevent a repetition of the old mistakes we do not commit new and greater errors
by destroying the machinery for the distribution of long-term securities, which, after all, are an essential part of the Nation's financial
business and therefore an important public service.
In aiming to penalize speculative credits in view of past instances
we should not make all banks suffer by making them pay a higher
rate on their 15-day notes even when secured by United States Government obligations.
Such a provision would in turn force the United States Treasury to pay a correspondingly higher rate on itsfinancing,with the
result that interest on all classes of bonds would go up and the market
price of existing securities would continue to go down.
During the period of war depression when the membership of the
Federal reserve system was largely limited to national banks, a
special committee was appointed to induce banks operating under
State charters to join the system. They were loath to do so because
they did not wish to surrender their charter rights and make themselves entirely subservient to the authority of the Comptroller of
the Currency and the Federal Reserve Board. But after many conferences a satisfactory understanding was reached which assured
member banks operating under State charters such reasonable autonomy and freedom of action as they felt was necessary.
AS a result a large number of State-chartered institutions joined
the system, which they did largely as a patriotic measure, and to-day



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•228

approximately 40 per cent of the reserve of the Federal reserve system is contributed by such voluntary members.
It stands to reason, however, that this situation will quickly change
if the Federal authority over all member banks is increased a good
deal and the normal operations of member banks are made subject
to further burdensome official dictation by the Federal Government.
In fact, the definite statement has been made to our commission
by some of the largest and best managed banks operating under
State charters that the passage of this bill in its present form
will lead to their prompt retirement from the system; and we think
there is a danger that even national banks may deem it advisable
to accomplish the same result by surrendering their national
charters.
Such a development would be deplorable because the Federal
reserve system has been a tower of strength since its very inception,
and nothing should now be done to wreck it by making either the
compulsory membership of national banks or the voluntary membership of State-chartered institutions unduly burdensome and
unattractive through too much bureaucratic control in Washington,
On the subject of branch banking our association has gone officially on record, at its Cleveland convention in 1930, as favoring
a limited extension.
There exists some difference of opinion in our commission as to
the advisability of extending the privilege to cover an entire State.
However, we held unanimously to the view that the granting of
permission to national banks to establish branches in adjoining
States, not over 50 miles distant, would constitute a species of trade
area branch banking which would give national banks an unfair
advantage over their State bank competitors whose State governments could not authorize them to establish branches beyond
their own jurisdiction.
"We have previously expressed the belief that some control of
group and chain banking will ultimately become necessary, but we
are not in sympathy with the extremely drastic provisions now
proposed by depriving groups from voting on directors of Federal
reserve banks, nor the retirement as to reserve and double liability,
which are practically impossible to carry out.
Some supervision over the activities of affiliates of member banks
is no doubt desirable, but many of the proposed provisions appear
to us entirely too drastic and as unnecessary for the purpose of
exercising reasonable control over their affairs.
The provision for segregating some of the best assets of a bank
for the benefit of one class of depositors; that is, time depositors,
would undoubtedly cause uneasiness on the part of demand depositors who would not be so secured. This would be particularly felt
by country banks where a large proportion of the deposits are time
deposits and where heavy withdrawals of demand deposits might
result.
We do not believe that past experience justifies the radical increase
proposed in the reserve requirement on time deposits. If enacted
into law the burden would fall heaviest on member banks located
in cities where there is no Federal reserve bank. The provision
would either force a reduction in interest paid on time deposits
or an increase in rates on loans.



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

•

229

Moreover, it would in no small measure increase the gold reserve
to be carried by Federal reserve banks and would largely counteract
the benefits of the Glass-Steagall bill.
The various sections of the bill referring to real-estate loans
appear to us to be combersome, discriminatory, and unsound,
Moreover, we consider them impractical of operation.
We have on several previous occasions made similar recommendations as to the minimum requirements of capital for new banks, and
find ourselves in thorough sympathy with the proposals now made.
We are also in sympathy with the objects expressed in the bill to
provide some means for the prompt liquidation of assets of closed
banks. We feel that the burden proposed to be put upon member
banks to accomplish this purpose is too heavy, but we should like
to see Senator Glass introduce a separate bill designed to carry into
effect his general thoughts on that subject, so that it might receive
prompt and unbiased consideration on its own merits, free from the
controversial questions connected with the present bill.
In conclusion we desire to repeat our introductory statement to
the effect that we consider the passage of this bill in its present form
would be untimely and inadvisable. We believe that it would destroy much good that has recently been accomplished by the remedial
measures that have been adopted calculated to stop deflation; that
it would weaken rather than strengthen the present banking situation.
This is not meant to say, of course, that the subject of new banking
legislation should not be given due consideration.! We believe that
some changes in our banking laws that have been enacted are shown
by experience to be desirable. But we believe that just what those
changes should be can be determined only by careful deliberation,
and we pledge our own services and we are confident bankers as a
whole will be glad to cooperate in working out a desirable solution
to the problems presented.
Senator BROOKHART (presiding). Any question by any members
of the committee ?
Senator FLETCHER. Of what bank are you an officer?
Mr. HECHT. President of the Hibernia Bank & Trust Co. of New
Orleans.
Senator FLETCHER. IS that a member bank?
Mr. HECHT. Yes, sir. It was one of the earliest State banks to
join the Federal reserve system. We joined it in the very beginning.
Senator FLETCHER. Have your demand deposits decreased or increased within the last 12 months?
Mr. HECHT. They have been almost stationary. There has been
perhaps a slight decrease, but not more than 1 or 2 per cent at most.
Senator FLETCHER. HOW has it been with regard to your time
deposits?
Mr. HECHT. It was the matter of time deposits, wasn't it, that
you are speaking about? Or did you refer to demand deposits?
Senator FLETCHER. My first question referred to demand deposits.
Mr. HECHT. Oh, well. Our demand deposits have decreased during-the past 12 months something over 12 per cent.
Senator FLETCHER. HOW about time deposits?
Mr. HECHT. Time deposits have changed very little. Oh, it might
be 1 per cent difference.



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•230

Senator GLASS. Time deposits generally have greatly increased,
have they not?
Mr. HECHT. In the last 12 months?
Senator GLASS. Within the last four years.
SIR. HECHT. Oh, yes; within 4 years they have increased, but not
within the last 12 months.
Senator GORE. What was it that you said happened in the last
three or four years?
Mr. HECHT. I think time deposits as a whole have increased in the
last four years.
Senator GLASS. Say during the last six years, since we reduced
the reserve to 3 per cent, they have very greatly increased, have?
they not?
Mr. HECHT. I would not have associated the fact
Senator GLASS (interposing). I am not assuming what you may
associate it with. But what about the fact?
Mr. HECHT. It would be very difficult for me to fix the time limit
or six years, or even four years. But time deposits for the last
number of years, excepting the last two years, have undoubtedly
shown a tendency to increase.
Senator GLASS. They have not only shown a tendency to increase
but have, in fact, very largely increased, have they not?
Mr. HECHT. 1 do not think they have increased very much out of
proportion to other deposits. Deposits of all banks have shown a
large increase over a number of years, but I have not before me
statistics that would enable me to very definitely answer your question.
. Senator FLETCHER. That does not apply to the last 12 months?
Mr. HECHT. Not to the last two and a half years.
Senator FLETCHER.. Have postal savings banks interfered with your
deposits?
Mr. HECHT. I should not think they have interfered with deposits
in cities so much, but they have taken a great many deposits in the
smaller banks in the country, in neighborhoods where bank failures
have occurred. Whenever uneasiness develops over the failure of
one bank in a given country district there is the natural tendency of
persons to put their money into the Postal Savings System.
Senator FLETCHER. Have you had many failures in New Orleans
during the last year?
Mr. HECHT. In New Orleans we have had no bank failure in 2 5
years.
Senator FLETCHER. That is a pretty good record.
Mr. HECHT. But in Louisiana we have had a very few bank failures. But at that we have not had more than 10,1 should say, in a
year.
Senator FLETCHER. Have your loans increased or decreased in the
last 12 months?
Mr. HECHT. Well, they have not increased, and yet they have not
decreased as much as we would like to have them decrease.
Senator FLETCHER. You mean that you are devoting your attention to collecting sums due your bank rather than making new loans?
Mr. HECHT. Of course, a bank could hardly have a shrinkage of
12 per cent in its deposits and not make some efforts to collect in




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS • 2 3 1

some of its loans, because it could not meet its obligations if it did
not do so.
Senator FLETCHER. What kind of securities do you outline in
the matter of your loans?
Mr. HECHT. Well, of course, in New Orleans, we being at a port
where is is quite natural that commodities would play a very important part in our activities, cotton, sugar, rice, all commodities
that pass through the port of New Orleans form a very considerable
percentage of our collaterally secured loans. But we are, of course,
in other respects the same as other banks in cities, we loan to commercial institutions and we loan on good collateral of all kinds.
Senator FLETCHER. DO you loan much on real estate?
Mr. HECHT. Well, we ao so more indirectly than directly. We
loan to country banks large sums of money, who in turn, of course,
are lending largely on the basis of real estate. We do not make a
large percentage of direct real-estate mortgage loans.
Senator FLETCHER. Do you not approve of one feature of this
bill that would tend to a separation of real banking from the merchandising of securities?
Mr. HECHT. I should say that the tendency to limit the activities
is perfectly correct, but the unscrambling of affiliate corporations,
which over a period of the last 15 years have been closely tied up
with banking institutions, appears to me to be very difficult and
in some respects a dangerous procedure.
Senator GLASS. DO you think they should ever have become tied
up with commercial banking institutions?
Mr. HECHT. Senator Glass, may I answer your question in this
way? If the bill presently under discussion were a bill that we
might all consider for the purpose of starting the ideal banking:
system upon a fresh basis, then there would be a good many provisions in it which I would strongly favor. But under existing conditions, and because of the difficulty and the harm that would come
from their enforcement I am now opposed to them. In other words,
it is one thing to have a theoretical opinion whether banks should
ever have gone into the investment business in the past, and it is
another question whether we should now, by one swoop of the law,
try to undo something that has grown up over 20 years of banking
practice.
Senator FLETCHER. But if it is bad practice the sooner you quit
it the better.
Mr. HECHT. I am not prepared to say it is bad practice. I am
prepared only to admit that there has been cause tor criticism in
the operation of some security affiliates. I am not prepared to say
it is not a perfectly natural function for banks to deal in highclass investment securities, either through bond departments or
through security affiliates. It is only an abuse of the thing that is
bad; it is not the thing itself that is bad as I see it.
Senator FLETCHER. Have you any affiliate? .
Mr. HECHT. Yes; we have. We have the Hibernia Securities Co.,
which is an affiliate converted fi*om the bond department of the
bank as it had been previously operated. That was done some 14
or 15 years ago.



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•232

Senator GLASS. Then, I assume your theory is, if an evil practice
of long standing has associated itself with the banking business,
it ought never to be corrected.
Mr. HECHT. NO. I would not make any such statement or demand. And I have not admitted that it is an evil practice. I have
stated that it is the abuse of the practice that has justified criticism
now being leveled at it, and that it requires perhaps some additional
legislative control.
Senator GLASS. Oh, now, I understood you to say at the outset
that you did not believe in statutory restrictions at all, that the
matter ought to be left to the judgment and management of the
banks.
Mr. HECHT. I beg your pardon, Senator Glass. You could hardly
put on my language any such meaning as that, because I started
out to say that banks necessarily must be governed by strict laws
in their general operations, but that that does not mean all the
detailed transactions passing through a bank can or ought to be
governed by law and leave nothing to the private initiative and
judgment of the banker who is running the bank.
Senator GLASS. I understood, well down in your thesis, that you
said you were opposed to statutoiy regulations, or to supervision that
we might some of us say was severe, or that I would say was of a
vigilant character, by the board supervising control.
Mr. HECHT. I made the statement that a bank being a semipublic business must necessarily be controlled; by strict laws governing its operations.
Senator GLASS. Yes; but what else did you say? '
Mr. HECHT. But there is a limit most assuredly. That is exactly
my position. You can not govern every banking transaction by a
law that is going to be controlled in Washington.
Senator GLASS. Do you think this bill undertakes to govern every
banking transaction in Washington?
Mr. HECHT. N O ; but it attempts to govern a good many more
than are feasible, in my opinion.
Senator GLASS. DO you think it confers any more important
authority upon the Federal Reserve Board, for example, or upon
Federal reserve banks, than they already possess?
Mr. HECHT. Yes; I certainly do, in many respects.
Senator BARKLEY. When would you be willing to begin correcting
such evils as you admit exist in the present banking system?
Mr. HECHT. There are perhaps some that might be well corrected
rather promptly, but such important questions as the control of real
estate loans, control of loans on collateral security, and measures
of that kind, that are undoubtedly deflationary, will add to our
present troubles, which in my judgment should not be discussed or
at least enacted at this time, but should await a return, not to another
boom period but at least to a more normal period in banking, when
general confidence is not already shaken as badly as it is now.
Senator GLASS. You do not think we ought to correct things that
have shaken public confidence.
Mr. HECHT. I do not think we should do anything that will
lengthen the present depression, that will continue or add to the
fear and hysteria on the part of the general public that already
exists.



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

•

233

Senator GLASS. Doesn't the existing law undertake to control the
volume of real estate loans made by institutions engaged in commercial banking?
Mr. HECHT. Not to anything like the extent that this bill now proposes. Why, you would have to liquidate more real-estate loans under this bill than you could possibly hope to liquidate in normal
times even in a good many years.
Senator GLASS. But, of course, we do not think you would have
to liquidate any more such loans.
Senator BULKLEY. Mr. Hecht, I should like to hear upon what
basis you make that statement.
Mr. HECHT. Well, for instance, there is the question of real estate
owned by banks, and real estate owned by affiliates of banks, and the
calculation of what loans you could make on real estate when you
take into consideration, as this bill appears to do, the ownership) of
the banks' own buildings. It would just utterly make it impossible
within a 2-year period to comply with the provisions of this bill
without the sale of an enormous amount of real estate.
Senator FLETCHER. Do you object to the limitation as to amount
of loans on real estate being based on percentage of deposits?
Mr. HECHT. Well, I am objecting to it under its present form. I
am not prepared to say there should not be some limitation, and as
a matter of fact there are some limits now.
Senator BULKLEY. What do you think would be the amount of
liquidation that would be required?
Mr. HECHT. That is a pretty difficult question for any man to attempt to answer and give a horseback opinion.
Senator BULKLEY. Then you are prepared to say it would be disastrous without having the slightest idea of what it would be in fact?
Mr. HECHT. NO, but I would have to study the situation. I can
illustrate it by giving a few concrete examples of institutions I do
know something about, of banks that happen to have some buildings of their own, and have a certain amount of real-estate mortgage
business, that could not under any circumstances comply with the
provisions of this bill without forcing the sale of an enormous
amount of real estate, or else increasing the capital stock of their
banks by such an absurd amount as to make it just as impossible.
Senator BULKLEY. But I should like to get any specific information you may be able to give us as to that fact.
Mr. HECHT. I do not know that I would care to mention the names
of any particular institutions, but I can repeat the statements I have
already made, that
Senator BULKLEY (interposing). Here is my trouble: I do not
want to criticize your intent in the matter, but a good many people
come in here and make criticisms in so vague a way that we can not
put our finger on them, and they come to conclusions that we do not
agree to, and then leave the matter so far up in the air that there
is nothing for us to go upon. I should like to have any other information you may be able to give us in order that we may either say
you are right, or else understand that you can not give us an intelligent answer.
Mr. HECHT. Well, Senator, the difficulty is that to be specific in
figures on what you are now asking me a man would have to be prepared to get together some data and give you specific facts.



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•234

Senator BULKLEY. But how can you possibly reach the conclusion
that you state without any knowledge of the figures?
Mr. HECHT. I do not admit that I do not have any knowledge.
Senator BULKLEY. What knowledge have you? Let us get it on
the record.
Mr. HECHT. I have already made the statement that I could name,
without giving the name of the institutions, any number of banks.
Senator GORE. Can you give a hypothetical case that would parallel one of those actual cases?
Mr. HECHT. Why, yes; very easily.^
Senator GORE. Give us that.
Mr. HECHT. YOU take a bank that may have $5,000,000 of capital
and surplus and it has a bank building that may be on its books for
three and a half or four million dollars. There are any number of
such cases as that. It might also have a certain amount of mortgage
business besides. But the bank of that magnitude would have a
good many real estate loans. Under this provision not only would
the Comptroller revalue the real estate which they are carrying,
which to me appears to be an impossible task in times such as we
are living in now, because I do not know what the market value of
any. real estate is just now, but in addition to that the real estate
owned by that bank, plus the mortgage business that they may
normally do, plus the real estate that they may have money loaned
on more or less against their will that they may have taken as collateral security after a loan was made, would certainly so far exceed
the limitations in this bill that that bank could not under any condition within two years put itself in shape to comply with the
provisions of the bill.
Now, how many times that case can be multiplied I am not prepared to say, but I should say that there are hundreds of cases, to
be conservative, that would be in that class of cases.
Senator BULKLEY. Is . that an actual case, Mr. Hecht, that you
have just given?
M r . HECHT. Y e s .
Senator BULKLEY. YOU have given us actual facts?
Mr. HECHT. Yes. There are several cases where the

figures are
almost identical where this description would fit.
Senator BULKLEY. What is your opinion as a banker of the condition of that bank as a commercial banking institution?
Mr. HECHT. Senator, the question comes right back to what I
said a moment ago. If they were starting from scratch and were
trying to lay down laws of what is good business for a bank to do
in the way of encouraging it to own its own bank building or
office building, I might be inclined to say that the bank was unwise in going that far. But at the same time, there were circumstances that make that a perfectly sound transaction. In the several
cases I have in mind I Know the return is perfectly satisfactory,
and while it may not be what you and I would do if we started today, •still to undo that all over this country would do a great deal
of harm.
Senator BULKLEY. NOW let us avoid the hypothetical question of
what we might do if we were starting all over again. I would like
to know your opinion about whether that is a good sound condition
to-day or whether it is a bad condition.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

•

235

Mr. HECHT. It is not necessarily an unsound or bad condition at
all.
Senator BULKLEY. You think that is all right for a commercial
bank to be in the position that you have just stated?
Mr. HECHT. I think that the four or five banks that I have in
mind in what I am speaking about are perfectly sound, good banks.
Senator BULKLEY. I do not mean to question that, but I am asking
you whether you think that is a good condition for a commercial
bank to be in.
Mr. HECHT. I think it is a perfectly safe condition for the particular institutions to be in. I am not prepared to say that there
may not be some other banks where it is not a good condition.
Senator BULKLEY. We will have to measure the value of your conclusions in the light of that opinion expressed, that that is a sound
and proper condition for a bank to be in.
Mr. HECHT. Well, Senator, you have no right to put more in my
statement than I have put in "it.
Senator BULKLEY. I do not mean to put a bit more in it. I want
to get your own statement:
Mr. HECHT. I think it is not possible to lay down a hard and fast
rule and say that a thing is sound or unsound, because circumstances
alter cases, and there are many good banks that are in that position
that are just as safe and safer than banks that have no bank buildings
at all; but I have no doubt that there are other banks that have gotten
themselves into a tight position as a result of such unwise investments.
Senator BARKLEY. Let us suppose that your hypothetical bank that
has $5,000,000 of capital and surplus has three and a half or four million of it invested in a bank building, and let us suppose that the
value of that bank building has gone down to $2,000,000. You are
still valuing it on the books at three and a half or four—I don't
mean you, but your bank. Supposing that the Comptroller of the
Currency should take the same position with reference to that that he
has taken with reference to the deflation of the value of bonds. What
would be the result of that? Many banks have been closed because
of the deflation of the value of bonds in which the capital and surplus of the banks have been invested—that is true, is it not?
M r . HECHT. Y e s .
Senator BARKLEY.

Suppose the Comptroller of the Currency took
the same position with reference to the enormous decrease in the
value of real estate. What would be the result?
Mr. HECHT. Senator, there could only be one result.
Senator BARKLEY. Yes.
Mr. HECHT. And that would be disaster.
Senator BARKLEY. What is the difference, though, in the soundness of the security?
Mr. HECHT. Senator, I do not believe the man lives who could go
over these United States to-day and tell you or me what the value,
the market value, on all the bank buildings is in the United States
to-day. I do not think anybody can do that.
Senator BARKLEY. H O ; but we all know that there has been a considerable deflation in real-estate values.
Mr. HECHT. That is true, and yet the rentals from these bank
buildings probably have not changed at all: but I admit if you tried



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•236

to sell these buildings to-day you would unquestionably have to take
a very severe loss.
. . ,
, .
Senator GLASS. Do you believe in the existing law and m the requirements as to the judgment of the comptroller in writing off bad
loans?
Mr. HECHT. Why, yes; of course.
Senator GLASS. Do you think if he were to do that now he would
not close about 60 per cent of the existing banks?
Mr. HECIIT. I should hate to think that there was any such percentage as that, Senator, but no doubt that would close some banks.
Senator GLASS. I have heard it put much higher than that by
experienced bankers.
Mr. HECHT. Well, of course, I would leave it to the comptroller
to make that estimate. I would not care to hazard a guess of that
kind. But I would not like to add to his difficulties.
Senator GLASS. You do not think the law ought to be enforced,
then, do you?
Mr. HECHT. No; I do not say that. I think the comptroller is
quite capable of reaching his own conclusions on that. I think he
is doing the right thing in the valuation of high-class bonds. I
think that has been a very sound practice on the part of the comptroller in not attempting, just because there are a few chalk marks
that say a bond that is perfectly good and gives a good return and
is high class in every respect, that a bank should write down its
surplus because 5 or 10 bonds have sold at a certain price. I think
the comptroller on the whole has pursued a very sane and sensible
policy.
Senator GLASS. I am not questioning that, but it is not a policy in
conformity with the practice in ordinary times, is it, under the law?
Mr. HECHT. Well, he has undoubtedly made some modifications.
The one I have just spoken of is the best example. I do not happen
to be a national banker, and I am not perhaps in as close touch with
that as I might be.
Senator GLASS. What more reason is there requiring a comptroller
to require banks to write off depreciated stocks and bonds that does
not apply to real estate?
Mr. JHECHT. For the simple reason that I do not think it is possible to determine the value of real estate with anything like the
accuracy that you can determine the value of securities. I just do
not believe any real-estate appraiser in the land is capable of that.
Senator GLASS. Do you think the value of securities were very
accurately determined in 1928 and 1929?
Mr. HECHT. They were very accurately determined from the
standpoint of their salability. Too many of us made the mistake in
not selling .them, but they were certainly salable at that time.
Senator BROOKHART (presiding). Wasn't that the time when this
hysteria that you talk so much about occurred?
Mr. HECHT. It was another type of hysteria, Senator; yes. There
was just as much hysteria in 1929 on the bull side of it as there is
hysteria at the present time in fear and lack of confidence.
Senator BROOKHART. This thing you call hysteria now simply is
cautiousness against the hysteria we had in 1928 and 1929?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS • 2 3 7

Mr. HECHT. NO, Senator; I would go a little further than that
I would say that, taking the value of securities in 11)29, the question
of earnings or anything of that sort did not enter into it apparently.
Things were boomed up to an unreasonable point.
Senator BROOKHART. That was all hysteria, was it not?
Mr. HECHT. That was hysteria; yes.
Senator BROOKHART. And the bankers had just as much in that
as anybody else?
Mr. HECHT. I am not excusing the bankers from making out any
better than the average man. But I say that now the same is true;
that earnings and general values have just as little to do with quoted
§ rices on the exchanges as they had in 1929, because they have gone
own just as much below their intrinsic value as they were above
their intrinsic value in 1929.
Senator BROOKHART. I have here an Alexander Hamilton Institute chart which shows the value of those bonds, 95 stocks, are still,
to-day, as high or perhaps slightly higher than they were in the warinflation period of 1919.
Mr. HECHT. Well, of course, I am not familiar with the chart that
you have or know anything about it, but the question of what stocks
are picked out there and all that would enter into it. I would not
care to discuss that without knowing what I was referring to.
Senator BROOKHART. There is another chart of the Federal Reserve Board, with all 337 of them, showing about the same condition
of the whole output of stocks.
Mr. HECHT. What do you call the inflationary period of the war?
Senator BROOKHART. 1919 is what I am referring to here. That
is the high period until 1921.
Mr. HECHT. Of course, I am not an expert on stocks, and I do not
pretend to have any opinions on them; but just thinking in my own
terms of the large corporations in this country, and thinking of
their values to-day as compared with 12 or 14 years ago, I am sure
that they are selling far below their 1919 quotations to-day.
Senator BROOKHART. The Alexander Hamilton Institute would be
quite reliable?
Mr. HECHT. I should think it ought to be; but I repeat, I prefer
to stick to banking and not express opinions on stock exchange operations, because I know very little about that.
Senator BROOKHART. Well, but you have come here before us and
want to maintain these affiliates with the banks that deal in stocks
and bonds.
Mr. HECIIT. I am to begin with not thinking of affiliates in the
terms of dealing in stocks.
Senator BROOKHART. You limit them to bonds altogether?
Mr. HECIIT. Yes; I think the investment business is not a stock
business.
Senator BROOKHART. Bonds themselves are behind the stocks,
though, are they not?
Mr. HECHT. They come ahead of them, not behind them.
Senator BROOKHART. Well, ahead of them. They are part of the
same organization?
Mr. HECHT. But in quality they do vary materially from stocks.
Senator BROOKHART. But a bond may be watered just as easily as*
a stock?
111161—32—PT 2 2



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•238

Mr. HECIIT. Most assuredly, yes; but it has security behind it.
Senator BROOKHART. Were you in the National Credit Corporation that was organized by the banks?
M r . HECHT. Y e s , s i r .
Senator BROOKHART. To

help themselves and to take care of this
situation?
Mr. HECHT. We were.
Senator BROOKHART. And that did not get very far?
Mr. HECHT. We loaned out in our particular section in Louisiana
and Mississippi some eight or nine million dollars.
Senator BROOKHART. And how much was altogether? You have
quit now, haven't you?
Mr. HECHT. About one hundred eighty million, if I am not mistaken.
Senator BROOKHART. Out of thefivehundred million that was subscribed ?
Mr. HECHT. Yes, sir; approximately that. Some of it has been
paid back.
Senator GLASS. YOU subscribed how much?
Mr. HECHT. We subscribed to 10 per cent of our capital and
surplus.
Senator BROOKHART. HOW much did you ever pay in?
- Mr. HECHT. We paid in 30 per cent of that. In our case, with
five hundred fifty thousand subscription, we paid in 30 per cent,
one hundred sixty-five thousand, of which 15 per cent is being paid
back to-day, the first payment.
Senator GLASS. DO you regard that as a very great burden?
Mr. HECHT. Not under the circumstances.
Senator GLASS. Why, then, do you regard this one-half of 1 per
cent, or really one-quarter of 1 per cent assessment, of this liquidating corporation burdensome?
Mr. HECHT. I think there is a little difference there, because what
we were doing in subscribing to that, we were helping out our own
immediate situation in Louisiana and Mississippi, which was of
course very close to our hearts. In this we would be a little further
removed from it, but I have indicated that so far as the provision of
the liquidating corporation was concerned, while I think that is a
little too high, I have no serious difference of opinion with you on
that whole plan.
Senator GLASS. What percentage would you assess the banks?
Mr. HECHT. My objection to it, frankly, Senator, was more on the
proportion of the Federal reserve contribution who would have to
put in very little cash, and the banks who would have to put up a
proportionately large amount. Of course, you may say that was
offset, but my opinions on that are so nearly the same as yours that I
do not believe that if we had that bill under consideration by itself
it would be very difficult for me to agree with you, except that I still
might want to argue a little about the proportions, but I do not think
I would even want to oppose the bill itself on that ground.
Senator GLASS. The proportion would be just as burdensome in a
separate bill as in this, would it not?
Mr. HECHT. Yes, it would be. I have only made the statement
that I thought the proportions might be adjusted to some extent, but




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS • 2 3 9

I repeat, I have no such fixed opinion that I would not be glad to
support the bill if it had to be on that ground.
But I would like to just come back and answer your question perhaps a little more specifically why I was more willing to put my
money into the National Credit Corporation so freely and not in
here, because one was a strictly temporary measure and we were all
•assured it would be temporary, and the other would be a rather
permanent thing.
Senator GLASS. You had some other assurance, didn't you, that
the Government was going to take it over?
Mr. HECHT. Well, we heard about the plans for the Reconstruction
Finance Corporation.
Senator GLASS. But Mr. Pope stated to us here the other day that
you were very definitely assured.
Mr. HECHT. I was not in Washington, so I am not prepared to
make the statement one way or the other.
Senator BROOKHART. YOU did understand there was some such
assurance?
Mr. HECHT. We had understood that the Reconstruction Finance
ibill was under consideration and that its operations were to cover
this particular feature.
Senator BROOKHART. You supported the Reconstruction Finance
•Corporation ?
M r . HECHT. Y e s , sir.
Senator BROOKHART. YOU

wanted the Government to step in and
take charge of things in that regard then?
Mr. HECHT. We were entirely in sympathy with the proposal that
was made.
Senator BROOKHART. Yes, but now you are opposed to the Government taking any further steps to stop another inflation such as we
had in 1928 and 1929?
Mr. HECHT. NO, I am not opposed to that at all. I am only asking
the Government not to try to do something that will get us deeper
into the depression than we are to-day, and that is exactly what is
:going to happen if this bill passes in its present form.
Senator BROOKHART. Supposing the Government would prohibit
hanks from using their credit at all in speculation in any way. That
would be more drastic than this bill provides?
Mr. HECHT. If such a thing were possible that would be very fine,
but I do not know just how you are going to tell everybody—;—
Senator BROOKHART (interposing). You do not think it is possible?
M r . HECHT. N o , sir.
Senator BROOKHART.

Are you familiar with any of the cooperative
banking-systems of the world?
Mr. HECHT. In a broad way.
Senator BROOKHART. Do you know about the English ?
Mr. HECHT. In a general way only.
Senator BROOKHART. The German systems, Raiffeissen and Schulze
Delitzsch ?
Mr. HECHT. I know something about it; yes.
Senator BROOKHART. YOU know that the constitution of the organization prohibits the use of credit for speculative purposes?



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•240

Mr. HECHT. I am not prepared to say, though, that I would want
the American banking sj'stem to come down to that, because you
might cure 1 evil and create 10 new ones. That is about what
would happen.
Senator BROOKHART. Yes; but you know that any of those systems
is sounder and has not had the failures and shakeups of things and
values or anything else that our system has in our country, do vou
not?
Mr. HECHT. Yes. On the other hand, they have not had either
the development or the prosperity that this country has had.
Senator BROOKHART. They were also hit a hundred times harder
by the war and more than we were ?
Mr. HECHT. Yes; that is undoubtedly true.
Senator BROOKHART. There is really no occasion for the great
shake-up and the number of failures in our Nation except bad management and very largely in the banking system?
Mr. HECHT. Overexpansion, and I am not attempting to defend
the bankers in their share of it, but, Senator, the public at large
takes matters into their own hands. When they want to speculate,
when a man comes into my bank and he lias United States Government bonds and borrows money on them, I can not ask him whether
he is going to loan it out on Wall Street or whether he is going to
buy stocks with it or what he is going to do.
Senator GLASS. Why can't you? They do it in Canada. They do
it in Great Britain.
Mr. HECHT. DO you mean to say, Senator, in Canada the people
have not speculated in the markets as American business people have
speculated in the markets?
Senator GLASS. Have they had any bank failures up there in this
whole period?
Mr. HECHT. That has nothing to do with the
Senator GLASS (interposing). I mean to say this: I mean to say
if you were a business man in Canada and are accustomed to have a
line of credit with your bank, that that bank requires you at the beginning of your fiscal year or before the beginning of your fiscal
year to bring in your statement and tell what you are going'to do with
the money that you borrow. Is that not a fact?
Mr. HECIIT. I am not prepared to say it is or not, because I never
lived in Canada.
Senator GLASS. To me it is a most amazing statement for anybody
to say that a bank has not any right to inquire of its borrowers what
they "are going to do with the money.
Mr. HECHT. I have not said that we haven't any right to ask, but
I said we had no control over what the man does when he gets the
money.
Senator BROOKHART. You have control over letting him have the
loan?
Mr. HECHT. Perfectly true.
Senator BROOKHART. And you do inquire, do you not, all the time
what he is using that money for?
Mr. HECHT. We certainly have in recent times, because we have
had good reasons for wanting to know.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

•

241

Senator GLASS. YOU found no difficulty in disclosing these facts
in answering our questionnaires. Banks of the country gave a very
intimate, and we assume accurate, statement of what was done with
the money loaned.
Mr. HEOHT. Well, if banks can give an accurate statement of what
their clients do with the money they loan, speaking of it in broad
general terms, they are undertaking a great deal. We know, of
course, in many instances, but we can not pretend to—I would not
want to sign my name to a statement that told you exactly what
every customer who borrowed from my bank did with the money,
because I just could not do it; I would not know.
Senator FLETCHER. DO you figure, Mr. Hecht, that the holders of
the class A stock, say, in the liquidating corporation would expect
any profit?
Mr. HECHT. Senator, I do not know.
Senator FLETCHER. You have not gone into that?
Mr. HECHT. I do not know.
# Senator FLETCHER. DO you think there is anything in that provision that tends to protect depositors in banks?
Mr. HECHT. It would certainly tend to assist them. I do not
.know that it would protect them, but it would be a beneficial thing
to do, because so much hardship results from closed banks that the
unfortunates that are caught in it sometimes have to wait so long
for ordinary liquidation that the purpose of that liquidation would
he defeated.
Senator FLETCHER. YOU spoke about getting further time for consideration. Senator Glass introduced this bill in 1930, the first bill.
Haven't the banks had time enough up to now to consider it?
Mr. HECHT. Yes; we have very definite opinions on it too, and
the bill has not changed much since we considered it 60 days ago,
unci times have not changed much.
Senator FLETCHER. Have you reached any view as to the cause of
the terrific decline in price levels, commodity prices?
Mr. HECHT. Only the opinion that the pendulum swings from one
•extreme to the other. It went entirely too high and out of reason
m 1929.
Senator FLETCHER. YOU mean it did that with reference to excesses in speculation and so forth producing thefinancialcrisis, but
this depression reaches another stage, and that is the decline, unprecedented decline, in commodity prices, price level. Is that due to
an absence of purchasing power?
Mr. HECHT. Well, of course; speculation, Senator, is not limited to
securities. Speculation was just as strong in commodities at different times as it has been on securities. But there is no doubt that
the purchasing power of people generally has been greatly reduced
and that the lower prices are the effect of that reduced purchasing
power to some extent.
Senator FLETCHER. Have you any theory about how to help that
situation?
Mr. HECHT. No; I do not believe there is any panacea for the curing of that ill except a gradual, normal, steady return to prosperity,
and a reestablisliment of confidence that will allow people to go




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•242

about their business in a normal way and not be dominated by fear
and hysteria, as they have been dominated during the past year.
Senator BROOKHART. Don't you think it is quite as important that
they be no longer dominated by the hysteria of speculation?
M r . HECHT. Y e s ; I d o .
Senator BROOKHART. Isn't
M r . HECHT. Y e s ; I d o .
Senator BROOKHART. YOU

that the thing we need to stop?

mentioned that other countries did not
have the growth and development of the United States. What has
been the development .of the United States since 1928?
Mr. HECHT. The same as all the rest of the world. It has just
had the same depression that has existed—or at least in 1929. of
course.
Senator BROOKHART. We had a national wealth value in 1928, according to the National Industrial Conference Board estimate, of
360 billions. But it dropped to 329 billions in the same estimate in
1930, and then in 1931 it has gone very much lower than that. So*
that means that we have not had growth and development in the
United States, does it not?
Mr. HECHT. Quite certainly; but, if you compared the same figures
that you are now giving me for the United States, with \?hicli I
am not familiar, with those of other countries, I imagine perhaps
the percentage of decline in this country was, to say the least, nogreater than anywhere else.
Senator BROOKHART. Well, I am familiar with one other. I know
the Soviet Government has advanced a good deal more than wehave declined.
Mr. HECHT. That is probably correct. You have me at a disadvantage when you compare thesefigures,Senator. I am not familiar
with them.
Senator GLASS. Mr. Hecht, in the course of your argument you
very severely decry the power of bureaucracy, and generally speaking I am in sympathy with the criticism, if we really mean bureaucracy. But you had special reference to section 11 of the bill authorizing banks to borrow on their direct promissory notes for a period of
15 clays. You understand that under existing law the Federal Reserve Board has unrestricted power to fix . the rate of that sort of
borrowing, do you not ?
M r . HECHT. Y e s ; I d o .
Senator GLASS. YOU would deprive it of that right ?
Mr. HECHT. NO ; but you are depriving it of the right

of fixing
a 1 per cent higher rate.
Senator GLASS. I am fixing a minimum. "The Federal Reserve
Board, for example, in 1928 and 1929, knowing, if it did know, that
this provision of the law was being perverted to stock-speculative
purposes, had the right to fix that rate without limit, had it not?
Mr. HECHT. That is my understanding.
Senator GLASS. An extraordinary power, is it not?
Mr. HECHT. It has never been exercised in any wav that has been
embarrassing to anyone.
Senator GLASS, fto; the failure to exercise it has been embarrassing to the whole country and has brought us to this state. That
is what we are talking about now.
Mr. HECHT. I do not see where you are going to cure that by
arbitrarily fixing a rate of 1 per cent on the best collateral that



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS • 2 4 3

banks bring to the Federal reserve bank and fix a 1 per cent higher
rate than you do on other collateral. I do not see how that is
going to cure it.
Senator GLASS. Well, we think we know how it will cure it. It
will transfer the protection of the 15-day paper loan to eligible paper
required by the act instead of letting it rest wholly on bonds.
Mr. HECHT. Well, Senator, you mean
Senator GLASS (interposing). Let me ask you this: When this
provision was put in the act two and a half years after the system
was in operation and for a specific purpose, I assume, being a wellinformed banker, you know what the purpose was. Suppose we had
never had a World War and the Government of the United States
had retired its bonded indebtedness, which, at the time this provision
was put in, was less than a billion dollars, what would have happened with that provision?
Mr. HECHT. Senator, I do not think I would care to express any
opinion as to what would have happened if business conditions had
been as different as they probably would have been if we had not
had a World War.
Senator GLASS. You could not have borrowed under that provision
under United States bonds, could you ?
Mr. HECHT. We probably would not have needed to. Probably
we would not have the scarcity of commercial paper that we have
to-day. Probably we would have had a period of mortgaging,
where people borrowed on commercial paper to finance themselves
on preferred stock and otherwise, and so reduced the amount of
eligible paper that banks in many sections find extremly difficult
to have enough strictly eligible paper to keep themselves in comfortable position.
Senator GLASS. How many banks and in what sections?
Mr. HECHT. Why, a great many banks and in many sections,,
outside perhaps of thefinancialcenters of New York, Chicago, and
Philadelphia and a few other cities. I am not prepared to name
them all. But I should say that the scarcity of eligible paper is
very general, and the percentage of eligible paper held by member
banks is to-day smaller than I believe it has ever been, or certainly
it has been in many, many years.
Senator GLASS. The chief of the bank operations of the Federal
Reserve Board supplied me with the official figures showing that
the banks had an aggregate of $3,069,000,000 of eligible paper at
that last report and $5,500,000,000 Qf United States bonds; that only
91 banks out of the 7,000 in the system were without eligible
paper, and that at the time the banks had $8,500,000,000 of usable
paper they were discounting to the extent of less than a half billion
dollars.
Mr. HECHT. Well, of course, when you put all of those figures
together they may sound as if there was a large supply of eligible
paper, but when you
Senator GLASS (interposing). Well, there was $3,000,000,000 of it.
Mr. HECHT. All right, but it does not do a bank in New Orleans
or Birmingham or Nashville or in the West or anywhere else any
good to have a lot of eligible paper in the portfolios of the banks
of New York and Chicago, when in their own particular communities
the eligible paper is very limited.



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•244

Senator BULKLEY. How many banks in the whole Atlanta district
are short of eligible paper?
Mr. HECHT. 1 am not prepared to answer that question without
having statistics before me, but I should say that their percentage
of eligible paper in the Atlanta district, I should say I would be
very glad and it would be very interesting for me to do it, to furnish
you with that information, and I think it will bear out the statement
that I make that it is smaller to-day than it has been for many
years.
Senator BULKLEY. I think maybe Senator Glass can furnish it to
you and that you will be surprised.
Mr. HECHT. I would be v6ry interested. I happen to be a director
in the New Orleans branch.
Senator GLASS. Would you be surprised that in the operations of
the Federal reserve system reported to me it shows that there were
two banks in the Atlanta district that had no eligible paper?
Mr. HECHT. Well, Senator, I am not speaking of banks that have
no eligible paper; I am speaking of the banks that have not a percentage of eligible paper that we in the past felt a well-run bank
should have. I am not talking about the banks that were in distress.
Senator GLASS. But you were not using the paper that you had.
Mr. HECHT. YOU can not make that statement, Senator, without
having the facts before you.
Senator GLASS. I do not make it without having the facts before
me. I am giving you the facts that were furnished me officially.
Mr. HECHT. Yes; but that still does not tell you that there may
not be a great many banks that are short in their percentage of
-eligible paper, and I repeat my statement, and I will furnish it
officially, that the percentage of eligible paper held in the Federal
reserve district that I know anything about is smaller to-day than
it ever has been or certainly has been m many years.
Senator GLASS. And yet it was so great that $3,000,000,000 of it
were on hand unused?
Mr. HECHT. No; I am speaking of the Federal reserve district
that I know something about. You are taking figures there taking
in New York banks and Chicago banks and Philadelphia banks that
are in an entirely different class from the average city banks scattered over the country.
Senator GLASS. The report showed the distribution of eligible
paper over the whole country.
Senator BULKLEY. I think Mr. Hecht will furnish for the record
that data of which he speaks as soon as he can.
Mr. HECHT. I want to say that I will do that, because I want to
realty support my statement so far as my own Federal reserve district is concerned. I am not prepared to discuss it on the others.
Senator GLASS. Well, going back to section 11 of the bill relating
to stock speculative operations and the use made of Federal reserve
facilities to promote stock speculative operations: You do not think
that the Federal Reserve Board should have any means of enforcing
its orders in matters of that sort?
Mr. HECHT. I mean that raising the interest rate 1 per cent is not
going to have the slightest effect on it.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS • 2 4 5

Senator GLASS, That is just one-half of one sentence of the provision. I am asking you now if you think the Federal Reserve
Board ought to have authority to enforce that requirement. Eliminating the 1 per cent altogether, it now has unrestricted right to fix
any rate it pleases. Suppose it should fix a rate of 1 per cent, 2 per
cent, 5 per cent. Do you think it ought to have any authority to
enforce its rate?
Mr. HECHT. Enforce its rate?
Senator GLASS. Yes.
Mr. HECHT. Yes; I think so; most assuredly.
Senator GLASS. What authority would you give them to enforce it?
Mr. HECHT. Well, they have the authority now.
Senator GLASS. I know they have, but they have no means of
enforcing it. Don't you recall that when the Federal Reserve Board
undertook what they called " direct action " the board was flouted
and told to mind its own business and that a certain bank in New
York was going to do as it pleased about this?
Mr. HECHT. Yes; but that did not prevent the Federal Reserve
Board from raising its rate if it wanted to.
Senator GLASS. NO ; it was attempting to operate by direct action.
You do not think then that we should authorize the Federal Reserve
Board to suspend a bank, for a certain period as in its judgment it
should in order to enforce its decree?
Mr. HECHT. That is a pretty broad question, Senator, that I think
the subject is so much abused that I hesitate to say that it should
have that privilege. I think the Federal Reserve Board and the
banks have a good deal of control over their member banks in many
other ways without suspending them from the system. I believe
that if it ever came to that a bank would certainly resign from the
system before it would permit itself to be suspended.
Senator GLASS. Do you think they exercised that control in 1928
a n d 1929?
Mr. HECHT.

No; I do not think they did, but that is just what I
am contending, that the Federal Reserve Board is made up of so
many human beings, subject to just so many errors of judgment, th&
same that bankers and business men everywhere else are subject
to errors of judgment, and it is always so easy two and three and
four years later to point out mistakes of others, when perhaps if we
had been in their place we might not have done any better.
Senator GLASS. Congress is made up of so rtlany human beings
whose judgments are subject to error and mistake. Upon that theory, then, you would not permit Congress to embody anything in a
statute of a restrictive nature, would you?
Mr. HECHT. Quite the contrary. I have always believed in our
democratic form of government^ and whenever the majority decides
what should be done, that satisfies me, but I also assert
Senator GLASS (interposing). Here in this provision we do more
than that: We require more than a majority. We require six out
of seven members of the Federal Reserve Board to enforce a penalty. Is it not reasonable to suppose that if the six out of seven
members of the Federal Reserve Board should say to a bank in New
York or elsewhere, " You are too greatly extended in your speculative loans and we will not make you any further loans until you re-




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•246

duce or decline to extend your speculative loans," that would be in
accordance with your theory?
. Mr. HECHT. I should say if the directors in the Federal Reserve
bank in any given district made their report to that effect to the
Federal Reserve Board in Washington, and some one tried to defy
both the directors of the Federal reserve bank and the Federal Reserve Board, there would undoubtedly be mighty good cause for
some action.
Senator GLASS. That is what this thing provides. After due
warning by a Federal reserve bank or board.
Mr. HECHT. I am not speaking against that provision particularly.
It does riot appeal to me as being a desirable one, but at the same
time I have no serious argument against that, so long as it comes up
through the Federal reserve bank in the district that would know
the circumstances better than they could be known at a distance.
. Senator GLASS. That is what the bill requires. It requires a warning from the Federal reserve bank or board.
Mr. HECHT. Personally, I can not conceive
Senator GLASS (interposing). Then I understand your objection
to that provision is confined to the minimum of 1 per cent increased
rate?
Mr. HECHT. Well, and its general limitation on collateral loans. I
am not now just clear what is in section 11, but I am not laying any
stress, in any event, upon the point that you make.
Senator GLASS. It does not make a general limitation upon collateral loans. It simply says to a bank that if it is far extended in its
collateral loans
M r . HECHT. Y e s .
Senator GLASS. And

is duly warned to desist by a Federal reserve
bank or board, it shall desist.
Mr. HECHT. Of course, you have that paragraph in your mind so
clear and I have not, that it is a little hard tor me to categorically
reply.
I repeat that a provision of that sort is not at all to my personal
liking. I can not conceive, speaking more personally as a director,
that I could ever get myself in a position where such a thing coula
happen to me, but I have no particular argument against that unless
that power were abused, which I do not think it would be. I do not
see that any great harm could come from it.
Senator GLASS. YOU said that you believed in democracy.
M r . HECHT. Y e s . #
Senator GLASS. And

the majority rule. This requires the concurrence of six of the seven members of the board.
Mr. HECHT. I repeat I can not conceive any bank putting itself
in such a position, but if it so defied that authority as a member
bank I suppose some such drastic action might well be justified.
Senator BULKLEY. And you do agree with this then, the 1 per
cent penalty rate is a limitation of credit control rather than an
extension of it?
M r . HECHT. N o ; I d o n o t .
Senator BULKLEY. You do
M r . HECHT. N o ; I d o n o t .




not?

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

•

247

Senator BULKLEY. I thought you agreed a few minutes ago that
the board had a right to fix any vate.
Mr. HECHT. Yes; but what I just say now, force them to do that.
Senator BULKLEY. That is what I am saying; I am saying that
you agree with me that their power is restricted and not enlarged.
Mr. HECHT. Yes; their power is restricted, but on an unfavorable
basis.
Senator BULKLEY. But that is another question.
M r . HECHT. Y e s .
Senator BULKLEY. I

just wanted to get the question of bureaucratic control settled.
Senator BARKLEY. I want to ask this question, which is probably
.a question broader than the scope of this bill, but this man seems
to be a very intelligent banker, if not above the average intelligence
even for bankers.
Mr. HECHT. I do not know if that is a slam or a compliment^
Senator.
Senator BARKLEY. It is intended as a compliment.' I am very
much concerned—of course we all are—about a permanent solution
of this banking question, not looking with any degree of pride
more than anybody else, perhaps, to the fact that last year twentythree hundred* and some odd American banks failed; whereas m
no other country in the world, or in all of them combined, were
there that many failures. So that there is something fundamentally
wrong with our banking system. While the larger number of bant
failures in that year can be attributed to the depression, in normal
times when we delude ourselves into the belief that we are prosperous, there are entirely too many bank failures.
Have you thought out a remedy for that situation that is permanent ? Would you be willing to suggest, if you have, what we can
do to prevent that situation from existing in this country ?
Mr. HECHT. Senator, I ain not going to be conceited enough to
"believe that I have any remedy for that very deep-seated problem,
but I do not mind expressing at least some general views on the
.subject. I think the bank-failure record is a most unfortunate one
for the last two years, but it has been due to abnormal conditions.
So, let us in answering your question come back to what you yourself have pointed out, that even in normal times we have a good
many bank failures.
I would only say this: That I think that if you analyze the bank
failure record in normal times you will find that, while the number
has grown, it is usually among very small units; and my opinion is
that the tendency is going to have to be by an evolution of a process
of the concentration into, not great, big units of having a dozen banks
in this country like they have in Canada, which I am very much opposed to, but at least the concentration of these extremely small
units, which can not under existing economic conditions be on a
profitable basis: and a bank that is not profitable is sooner or later
goin<* to fail. Therefore, if we can gradually eliminate the very
small unit by combinations, mergers, or other means, I think we shall
go a long way toward at least improving materially the bank failure
record of this country. Proper supervision over State and national
institutions, of course, must also play a very important part in that.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•248

Senator BARKLEY. DO you think our dual system of banking has
anything to do with that?
•
Mr. HECHT. NO, I do not. I am afraid I am, perhaps, a little prejudiced on that subject, Senator, being a State banker; but I do
believe that there is a place in the banking structure of this country
for the dual banking system if the dual banking system is not used
to make unfair competition. I have fought many times, and I am
prepared tofightnow, against any discrimination that would make it
difficult for a national bank to compete properly with a State bank.
I am in favor personally, and not speaking for my commission, of
the extension of branch banking on a state-wide basis. Where the
State banks are permitted to do it, I think it would be an unfair
disadvantage for a national bank not to have that same privilege. In
other words, I believe that there should be an equality of opportunity
for the two systems on a sound basis. I do not think there should be
competition to see how much more loosely one bank will be permitted to do business than another, but I still believe that the dual banking system has its proper place in our scheme of things in this
country.
Senator BARKLEY. That is a profound subject and too long to try
to enter into here.
Senator BROOKHART. I do not want to close that without one suggestion about these small unit banks. Is it not true in our country
for 55 years they got along quite as well as any units?
Mr. HECHT. Yes, that is true, Senator; and I do not want you to
misunderstand me. What I am referring to is that the bank "in the
county seat has its place and will always have its place, but the improvement of roads and the concentration of business into some one
community have made it well-nigh impossible for a lot of the country
banks that had not a $15,000 capital to get along.
Senator BROOKHART. The big banks in the country went into speculative business and drew the little banks into it themselves. The
little banks do not have any particular trouble.
Mr. HECHT. Of course, I can not share your opinion on that because I think the trouble with little banks has been from the unfortunate condition of agriculture. I think that anything we can do to
improve the agricultural situation will cure the evil of the country
bank that has the problem in being able to earn enough money.
Senator FLETCHER. Do you think there ought to be a requirement
of more capital, both for the State banks and the national banks?
Mr. HECHT. Yes. I think very small banks are not going to be
able to operate profitably, and I think the limits for the establishment of new banks, both State and National, should by all means be
raised.
Senator BROOKHART. I shall have to close this now.
Senator WAGNER. I just want to ask one question. Mr. Hecht, you
stated previously that in your own State you had an unusual record
in the number of banks closed. In the citv of New Orleans, I understood you to say, there were none that failed.
Mr. HECHT. None over 2 0 years.
Senator WAGNER. In the whole State during this period of depression there were how many?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS • 2 4 9

Mr, HECHT. What would you call the period of depression?
'Twelve months, or shall we go back further?
Senator WAGNER. TWO years.
Mr. HECHT. In two years I should estimate there were probably
not over 30. Maybe less, but I think 30 would be an outside figure.
Senator WAGNER. HOW does that compare with other States?
Mr. HECHT. Very favorably.
Senator WAGNER. DO you attribute that to the fact that you have
not been hit as severely by the depression in your State?
M r . HECHT. NO.
Senator WAGNER. Or is it better supervision?
Mr. HECIIT. I think our agricultural situation

has been fully as
bad as it has been anywhere else with cotton and sugar and rice
having been at such low levels, but I think our bank supervision
on the whole has been very satisfactory and our record of failures
in our State over a long period of years has compared very favorably
with other States.
Senator BROOKHART. YOU have had small unit banks at all times?
Mr. HECHT. We have a great many; yes. Senator, in our State
you can have county branch banking, and that is what has happened
down there in a good many instances where the very small bank
went in with the bank in the county seat.
Senator GLASS. YOU know a large part of our trouble in legislation, Mr. Hecht, has been caused by the dual system of banking.
Whenever we tried to do something to make the national banking
system sounder than it is and to put it upon a high plane, we have
always been confronted by the objection that that puts a national
bank at a disadvantage with the State bank.
Mr. HECHT. That may be true, Senator. On the other hand the
48 States of the Union have their right and privilege to govern
their own banking system, and I do not see how they are going to get
away from that.
Senator GLASS. I am pointing out the difficulties that we have in
applying sound legislation.
Mr. HECHT. I realize that, and I have made the statement that the
thing I have always stood for was that the competition between the
two systems should be in respect to how good they can be made
and not how loose the# methods can be under which they operate.
Senator GORE. Louisiana had an exceptionally good banking sysat the time of the Civil War.
Mr. HECHT. Yes. It dates back.
Senator GORE. Prior to the banking act system. What are your
total deposits?
Mr. HECHT. In my own bank about forty to fifty million dollars.
Senator GORE. What is the percentage of time deposits?
Mr. HECHT. About 2 5 per cent of that, or a little more.
Senator GORE. What interest do you pay?
Mr. HECHT. A maximum of 3 per cent.
Senator GORE. What per cent do you pay on your demand deposits?
Mr. HECHT. None at all on a good portion of it, and a maximum
per cent.
Senator GORE. What per centage of vour demand deposits do vou
pay?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•250

Mr. HECHT. I should say probably one-third; maybe a little bit
more than that.
Senator GORE. Could you estimate what percentage of your demand deposits result from the deposit of cash or cash items and
what proportion from the loan discount operations?
Mr. HECHT. I think that is a very difficult question to answer. I
do not believe I could give you that per centage right off. Senator.
It would be a pure guess.
Senator GORE. YOU stated a minute ago in response to Senator
Barklev's question that a large part of the failures in this country
compared with other countries was due to the depression.
Sir. HECIIT. Not compared with other countries, because I do not
think we can compare our system in the number of failures with
that of any other country, for the reason there is not other country
that has anything like the banking system we have.
Senator (JOKE. That is true, but we have had the depression.
Mr. HECHT. But you know what has happened in the other countries except England and France. In France there have been a
good many substantial failures, but the banking was concentrated.
The Government and banking are closely affiliated. In Germany
you know the Government has actually subscribed preferred stock
in two of the large banks in order to save them from failing. They
would have failed.
Senator GORE. What I was trying to get at is this: That that is
a condition that is universally applicable to all countries, so we have
got to seek the weakness in our system of banking and find that to
account for the failures here.
Mr. HECHT. I am not prepared to admit that in percentage of
total resources the failures in this country would compare unfavorably writh what the failures might have been in Germany, for instance, if the Government had not stepped in, or in Norway and
Sweden, where they had their banking troubles and the Government
stepped in.
Senator GLASS. Our Government stepped in here to the extent of
$2,000,000,000 in one bill.
Mr. HECHT. $200,000,000 so far, Senator.
Senator GLASS. I say, the Government has stepped in to the extent
of $2,000,000,000. has it not ?
Mr. HECHT. Well, it has not advanced the money yet. It is prepared to.
Senator GLASS. It is prepared to advance the money.
Mr. HECIIT. That is what has stopped failures.
Senator GORE. Neither did the other National Credit Corporation advance the nioney.
Mr. HECHT. That is why we have had almost no failures in March
and very few in February as compared with what we had in December and November and the months before.
Senator GLASS. That is not altogether the reason. One reason is
that so many banks have already failed that there are not many more
left. [Laughter.]
Mr. HECHT. If it had not been for the National Credit Corporation and the Reconstruction Finance Corporation, the number would!
have been just as great or greater in these three months.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS • 2 5 1

Senator GLASS. That is a mere matter of opinion. I do not agree
with that statement.
Mr. HECHT. AS chairman of the reconstruction committee in my
territory, and having also had a great deal to do with the National
Credit Corporation, I am prepared to say that it is a little more
than just a horseback opinion that I am giving you.
Senator GORE. This National Credit Corporation, organized by
the bankers, did not advance very much money, did it?
Mr. HECHT. $180,000,000 in all.
Senator GORE. Has not a great deal of that been advanced after it
became practically certain that this reconstruction bill would pass?
Mr. HECIIT. NO. I think only a small percentage of it.
Senator GORE. I had in mind a big bank out on the Pacific Coast.
Mr. HECHT. Of course, I should not, perhaps, talk in percentages,
because I do not know. I mean as to the time element.
Senator BROOKHART. Thank you, Mr. Hecht.
Call Col. Leonard P. Ayres.
STATEMENT OF LEONARD P. AYRES, VICE PRESIDENT O THE
F
CLEVELAND TRUST CO., CLEVELAND, OHIO
Senator BROOKHART. YOU may proceed with your statement.
Mr. AYRES. Senator, I am vice president of the Cleveland Trust
Co. in Cleveland, Ohio, and also a member of the Economic Policies
Commission of the American Bankers5 Association.
My interest in this bill is general rather than relating to my own
institution. It happens that my own institution is not directly
affected by many of the provisions. It is a bank and trust company of some $250,000,000 deposits, doing a large savings business,
navmg, perhaps, some 440,000 depositors. It has no bond department. It has no underwritings or originations. It has no active
securities affiliate, and never has had. It has no interest in any
group or chain, but it has some 57 branches at the present time.
So it is that my own interests in this bill become general rathei
than specifically applied to that institution.
Senator GORE. Are you a member of the Federal Reserve system?
Mr. AYRES. Yes, sir. It seems to me, gentlemen, that the most
important thing that any of us have to think about and to deal with
in America to-day is this appalling depression in which we are,
in common with the other nations. We have in my own organization a somewhat active statistical division which has done a good
deal of research work, and, among other things, it has in the past
two years succeeded in carrying back as accurately as may be an
account of the variations in business activity and industrial production in this country ever since the beginnings of the Government. It
has carried it back month by month to 1790, with less accuracy,
clearly, in the earlier years, but with great pains, and as accurate as
the data make possible. The records show, I think, beyond any
question that this is the most serious depression that the country has
ever faced; that even the long and great depressions of the forties
and the seventies, about which we have such dreadful stories, were
less than this. Moreover, this depression is still getting worse. I
think it is true that, for example, the tons of railroad freight that




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•252

the railroads of this country will originate this year will be not
over half, per capita of the population, of what they were in 1913,
the year before the war, and that it will be less than in any year
since the depression of the nineties. It has a stoppage and cessation of business activity completely unparalleled in our history.
Probably business to-day is at something like from 40 to 50 per cent
below what might reasonably be termed as normal. Under those
conditions it seems to me that all of us must think of public questions and proposed actions in terms of their relationships to the
prospects and possibilities of business recovery; and so I have been
trying to think about this bill in those terms rather than in purely
technical terms.
Frankly, as I go through the numerous provisions and attempt to
analyze them, it seems to me that one can hardly pick out more than
a single provision embraced in two sections of the bill for which it
could fairly be claimed that it probably would be, if enacted into
law, an affirmatively positive help in business recovery. The one
that I refer to is that provision in, I think, sections 21 'and 22 that
would make possible the extension of branch banking for national
banks, thereby, perhaps, making it possible for some communities
to have stronger banks than they now have; and perhaps one might
say fairly that that would operate in positive fashion to facilitate
business recover}'.
As for all the rest of the bill I should believe that the provisions
either would have no positive effect on business recovery, however
desirable they might be in other ways for general banking conditions,
or would have an adverse effect; and it seems to me that for most
of them the effect would inevitably be adverse in this particular
respect of thinking about business recovery. Without going into any
technical consideration of them, one would for example, say that the
matter of increased reserves for time deposits, provided by section
13,1 believe, would require from the banks the locking up of cash
resources in Federal reserve banks in amounts that may be estimated at something approximating $130,000,000 a year for five years.
Whatever that might do in the long run for the protection of time
deposits, clearly its immediate effect on business recovery would not
be helpful but in so far as it took that money out of current credit
uses would be detrimental rather than beneficial.
Senator BTJLKLEY. When you say " current" of course you recall
this is not effective at all until 1933.
Mr. AYRES. Yes, Senator; but we are still going to be in a depression in 1933.
Senator BULKLEY. I thought that might have some bearing on
your use of the word " current."
Mr. AYRES. I think it would, and I think my use of the word " current " was misleading in that case. I was thinking of " current" as
of that time rather than as of now.
Senator BARKLEY. You think it is going to be a long current?
The current of this depression will last some time, to make a play on
the word?
t Mr. AYRES. Senator, the sad fact is that no one can study the long
diagram that I referred to, that shows thefluctuationsof business
activity over the past 140 years and more, without realizing that in




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

•

253

depressions recovery has always been lnore slow; than decline. Business always has gone down faster than it has come back. If that be
true this time, it would mean, that we are not yet half way, through'
this depression, because the depression is still continuing and business
is still declining. It has been doing so now for substantially two and
one-half years—not quite. Should recovery start now—and I think
there are a few-symptoms of it—still we should: be more optimistic
than anything in our past history would justify if we thought we
should get back to what the statistician and economist term normal
business, which is .a poor, unsatisfactory kind of business anyhow,
in another two and a half years; so that I think we can be quite
sadly confident that we have at least a long period ahead of us
before we shall see that measure of recovery.
.. Senator BROOKHART. On that proposition, Colonel, I have here a
chart that I think was prepared by you, showing half a century of
American business. It ends with 1930. This chart shows 8 major
depressions in the last 50 years. There were about seven little ones
thrown in for good measure.
Mr. AYRES. Yes. There are eight in here if you count the nineties
as two.
Senator BROOKHART. And then the line of normal business along
through the middle there. I looked over that to find out how much
of the time we had been normal, and I could not find 30 minutes in
the whole 50 years. [Laughter.J
Mr. AYRES. N O ; I suppose one could not if you are thinking about
a business that fluctuates in long, irregular waves from depression
through recovery to prosperity, to decline, and back to depression.
Of course, the moments when it is passing the equator, so to speak,
are not even in the aggregate numerous.
Senator BROOKHART. IS that a sound system of business? Is not
there something fundamentally wrong with the business that is
going up into inflation and then down into depression all the time?
Mr. AYRES. Yes. There is something fundamentally wrong.
Senator BROOKHART. IS not part of it due to the credit system of
banking?
Mr. AYRES. I believe it is myself. There is a great diversity of
opinion.
Senator BROOKHART. I agree with you that we are not through
this depression. . That is the way it looks to me all the time. But
what are the things necessary now to bring us out of this depression?
What could we do that would end the depression?
Mr. AYRES. Eight here the main thing we could do would be to
refrain from trying to change a very complicated credit and business
and banking situation and machinery, to disrupt it, to break it apart.
Senator FLETCHER. YOU mean, then, that we should do nothing?
Mr. AYRES. In so far as this proposed legislation goes, I personally
should say that there is no feature of it that would be greatly hurt
by being postponed, even the best features, and I think there are
many; and that there are other features that would be harmful to
enact now. I think myself that this would be the most unfortunate
time in recent years to make a complete or a considerable readjustment of our business of credit extension, except, perhaps, in 1918.
I think it would have been worse to remake our systems in 1918,
111161—32—PT 2 3



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•254

but with that exception I should say this is the worst time in recent
^Senator BROOKHART. Was the Reconstruction Finance Corporation a good thing}
Mr. AYRES. I think so.
.
Senator BROOKHART. It was a Government bolshevik institution
that we set up for the banks and the railroads mainly?
Mr. AYBES. Yes; to prevent breakdowns.
Senator BROOKHART. If it is a good tiling for them, could not we
do something for agriculture along the same line and restore agricultural prices?
, .
Mr. AYRES. We have not restored prices by means of that. Senator BROOKHART. And we are not going to, either, are we?
Mr* AYRES. I should think not, although there is some hope in it.
Senator BROOKHART. YOU think it would be a good thing if we did
restore agricultural prices and restored the buying power of agriculture?
Mr. AYRES. Yes; and general price levels, if we could do it.
Senator BROOKHART. Could not that be done by a Treasury note
issue to pay the soldiers9 bonus, for instance, and to provide a billion
dollar or more revolving fund for the Farm Board to handle the
exportable surplus of agriculture, to take it from the domestic markets. so the price could rise?
Mr. AYRES. It could conceivably be possible by changing the value
of our own dollar. However, I nave never been persuaded myself
that this Nation, acting, alone and by itself, could lift the world
levels of commodity prices. I think there is the difficulty.
Senator BROOKHART. YOU concede it has lifted the domestic level
of the protected industries, has it not, above the world level?
Mr. AYRES. It can lift a single price, of course.
Senator BROOKHART. Well, it can lift a long list of single prices,
and has done it by tariff protection, has it not?
Mr. AYRES. Somewhat; and yet it is astonishing how much the
commodity prices of the world move up and down together in these
long, irregular waves.
Senator BROOKHART. They move up and down, but the American
level stays all the time above the world level.
Mr. AYRES. Not on fundamental commodities. They have world
prices. Cotton has a world price.
Senator BROOKHART. But cotton goods are a different thing from
cotton in that respect.
Mr. AYRES. Yes. But it is so if one take cotton and wheat and
rye and copper and tobacco, and so forth.
Senator BROOKHART. All of those are things we export. There is
an exportable surplus.
M r . AYRES. Y e s .
Senator BROOKHART. I

am talking about the domestic things now
that we produce under the protective tariffs at home. Those maintain a higher price level than the world, do they not?
Mr. AYRES. Many manufactured goods do.
Senator BROOKHART. That is what I am talking about.
M r . AYRES. O h , y e s .




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS • 2 5 5

Senator BROOKHART. We have maintained that right along by this
artificial process called a protective tariff system?
Mr. AYRES. In part; yes.
Senator BROOKHART. Agriculture has had to pay that kind of a
price for the things it buys under that system. Is not agriculture
entitled to such governmental assistance as would give it that kind
of a price for its products?
Mr. AYRES. Senator, that last question is beyond the thoughts
that I have been marshalling for this matter. I hardly want to say*
Senator BROOKHART. I suppose it is; but I would like to get you
thinking about it and see if it would hot help get out of this depression.
Mr. AYRES. I am very glad to think about it. I think that everything that relates to a possible way out ought to be thought about
by everybody that can do the thinlnng.
Senator BROOKHART. If agricultural exports are less than 10 per
cent, on an average, of the production, the 90 per cent that is consumed at home could, under our Federal power, be protected up to
a cost of production level, could it not?
Mr. AYRES. That is exceedingly difficult, sir.
Senator BROOKHART. It could be done, though?
Mr. AYRES. I should not say it could not be done or that, by that
and other measures, these prices might not be lifted.
Senator BROOKHART. Since we maintain this artificial price level
for manufactured products in the country, is it not a foolish thing
to let the world fix a price of our agricultural products when there
is only on an average about 10 per cent of them that goes into the
world market?
Mr. AYRES. Not over 17 per cent.
Senator BARKLEY. IS it not true that there is a much larger percentage of the agricultural products that go into surplus than 10
per cent? You take cotton.
Senator BROOKHART. NO. I will give you those percentages if
you want them. There is a little over 50 per cent of cotton. That
is the biggest item. About 20 per cent of wheat; 7 or 8 per cent
of livestock products; less than 1 per cent of corn; less than 1 per
cent of oats.
Senator BARKLEY. Of course where we consume all of any product
we make, the world price would not have anything to do with it
except that it might regulate our imports to a certain extent; but
we can not lay down a hard and fast rule with reference to products
where we export and where our market and our prosperity depend
upon imports.
M r . AYRES. N o .
Senator BROOKHART.

But if we have only 1 per cent of corn, the
biggest of all agricultural products, exported, is it right that that
little 1 per cent should fix the price of the other 99 per cent here
at home, when the corn farmer must buy in a protected market of
a higher level than the world?
Mr. AYRES. Well, one may answer that, Senator, in either way.
One, of course, might follow out his answers in the terms of attempting a complete protection, or in the other direction, in the terms
of eventual equalization by reducing the barriers for the other




25©

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

things, so that we would have a very long discussion of the two
tvpes of possibilities and their ramifications. .
* Senator BROOKHART. Our protective system is now so firmly established that it would bring disaster on the country if we should abandon it suddenly and go to world free trade, would it not?
Mr. AYRES. Oh, quite so. We can not do any of those changes
^Senator BROOKHART. Regardless of whether you believe in this
original thing or not.
jilr. AYRES. Y*es.
Senator GLASS. Mr. Chairman, if I may venture and make a comment: It seems to me that here we are doing what we habitually
do in the Senate and discussing matters that are not related to the
measure we have under consideration.
Senator BROOKHART. Senator, here is the greatest statistician, I
think, in the country at this time.
Senator GLASS. I know, and when you get to your cooperative
proposition it would be well to summon him in and have h*m help
you out.
Senator BROOKHART. We shall be glad to do it.
Senator GLASS. We have only two days more of this hearing.
Mr. AYRES. One might go on. I know our time is short.
Senator BROOKHART. I specifically want to get now what would
bring us out of this depression that you state we are in and going
deeper still, and I want to see if there are not some things that could
be aone that would turn that tide.
Senator GORE. If you will suggest some way to do it, we will all
agree to elect you president.
Mr. AYRES. Gentlemen, I do not believe there is any short and
easily applied panacea by which we may emerge from the depression. I think it is going to be a matter of teamwork along very
many lines among very many kinds of people. I think we have done
quite a bit already.
Senator BROOKHART. Teamwork we have not had in the past.
Mr. AYRES. I would include the Glass-Steagall bill. I would include the reconstruction bill. Now, the Reconstruction and the National Credit Corporations are things to avert breakdowns rather
than constructively to build up, but tney did avert some breakdowns.
Senator GLASS. Can you tell us what has been the volume of rediscounts by the Federal reserve banks under the Glass-Steagall bill?
Mr. AYRES. I can not, infigures;no, sir. But I do know this: I
believe we can say that the banking crisis is by; not the difficulties
but the crisis; partly because of that and partly because of reconstruction. Bank failures have stopped virtually. Credit is becoming easier. The money that was hoarded isflowingback in. We
have not yet stopped the shrinkage of loans and deposits. That is
still going on. And yet all over the world interest rates are coming
down. There is a better sentiment in banking, and I think it is fair
to say that the crisis, the banking crisis that was carrying as toward
a dangerous abyss, is by, and that that is the greatest victory so far
m the process that will ultimately lead us into business recovery.
Senator WAGNER. Colonel, is the shrinkage in loans due to a lack
of demand for credit or is it the refusal of the banks to extend credit
9
in your opinion?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

• 257

Mr. AYRES. I do not think it is a lack of demand. I have tried to
look into that question. That is a very important question. I think
there is a fair aemand for enough good borrowing so that we should
be greatly benefited if the banks now were more generally extending credit. We have not really switched over to a period of credit
expansion, and that we ought to do.
Senator GLASS. We have heard it repeatedly stated in the public
prints recently, and I imagine upon accurate information, that the
banks have refused to make loans to the railroads or to renew loans
to the railroads.
Mr. AYRES. Well, I suppose that the banks, seeing that that was
the one kind of loan that they could, perhaps, transfer to an agency
constituted for the purpose, have felt that they could better serve
their commercial customers by turning over the railroad loan and
making loans for constructive purposes rather than carrying the
loans provided for by the Reconstruction Corporation.
.:«
Senator GLASS. The corporation was not instituted for that especial purpose.
M r . AYRES. NO.
Senator GLASS.

On the contrary, it predicated the power to loan
to the railroads upon, not the suggestion, but the explicit require*
'ment that they could not get loans from the banks at a reasonable
rate of interest.
M r . AYERS. Y e s .
Senator GLASS. SO

that it was not the design of the corporation to
loan a great amount of its money unnecessarily to the railroads but
only if the banks refused.
Mr. AYRES. Where the corporation has done the most good. I
think, is in constituting a place toward which the bank or the railroad or the other organization which qualifies may turn in time
of need, and having a place to which it may turn, it usually does
not have to turn. 1 think that that is what has stopped the bank
failures—not that they have been borrowing much from the Reconstruction Corporation, but because the banker and the customer
know that if pressure should come there is a place, and that has
done it.
One might go on with the other matters: The real-estate loans;
However, we may interpret the act, I suppose that we should agree
that by bringing in the bank premises and bringing in loans, the
eventual safety of which depends upon real estate, there would be
involved at least some tightening of real-estate lending in any national bank already carrying loans up to the 50 per cent established
limit. So, without pressing that too far, I think I should still include
it with those other things that would not tend actively and now to
aid in recovery from depression, but with the things which would
have a tendency in the other direction.
Senator GLASS* Why was it, Colonel, that the national bank act
for a period of 50 years prohibited commercial banks and national
banks from making loans on real estate at all)
Mr. AYRES. Of course, that was the way we did our banking business when the system was established, and it represented at that
time an advanced kind of highly protected—when 1 say tt protected''
I mean safeguarded—banking procedure. Then in time it was
decided to modify it. The modification is in effect. I am not argu


NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•258

ing againsj a modification of that modification; I am arguing that
-we should do well to stop and consider* whether it ought to be put
into effect in 1932.
Senator GLASS. Colonel, do you think it is particularly encouraging to see the picture that apparently has been presented here ? To
me the most depressing tiling, the most utterly discouraging thing
that has happened in recent months, is to have an organized effort
to make it appear that the banking business of the country has been
so abused and misused that it has got into such a deplorable state
that it can not tolerate any suggestion of remedy.
Mr. AYRES. I think it is always discouraging when one puts in
his best time and thought for a purpose which he conceives to be constructive and in the public interest and then a lot of other fellows
come in and find fault with it and criticize it. I do not share the
M ed as being entertained by
" " " * Jt '
*
I am sti thinking along
ill
, _
g about this matter of this
o
depression, and I have been thinking about the things that I think
you were thinking about in the drafting and developing of this bill.
1 went back and tried to study over a very long period of more than
a century what happened when we got into depressions and what
happened when we got out. I think there is in this bill the assumption that we get into depressions because of, or at least after, times of
overspeculation, and X think that the record supports that view.
There is in the history of these things a vast diversity of conditions, but one condition that apparently is always present when we
are going into a depression—^that is, in the prosperity preceding
the drop into the depression—is an overindulgence in speculation.
Now, that speculation is, however, very diverse in its forms. We
all know about 1929, but if we go back only 10 years we must realize
that we did not go into the depression of 1921 because of an overindulgence in general stock-market speculation. There was a bull
market, but it was a puny thing compared to this last 'one. What
we did that time was to speculate in commodities, and in those
days we all talked in the banks about frozen inventories. Nobody
talked about frozen loans. When we say " frozen loans " we may
mean the customer's collateral loan, but in those days, 10 years ago,
it was otherwise. If one goes back to the great depression of the
forties, which was perhaps the worst depression previous to this one,
and which lasted six years and was utterly disastrous, one finds
that what preceded that was an unparalleled speculation in farm
lands quite as active as anything we had in stocks this last time.
In that period this country was the* great wheat producer and exporter, and it became so prosperous in that type of agriculture
that we came into the late thirties with the farmers swapping their
wheat lands around among themselves so actively, with exchanges
set up in every town for doing it, that for several years they did
not plant the lands at all and we had to import wheat to feed the
people because the speculation in land was so great that the farmers
did not even cultivate it. We got along into the seventies, where our
great depression of six years again took place, and wefindthat the
speculation was a speculation in construction. The whole country
went wild on construction. They constructed railroads. They con


NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

•

259

structed whole new towns, new mills, new houses, new bridges,
turnpikes—everything. There was not much stock speculation in
there. We came up to the depression of the nineties, and we had
a new era just like that last one. We used the phrase " the new
era " to describe it, and we had a great stock speculation; but before
the depression of 1907 and 1908 it was rather a matter, if we can
again use the term, of a speculation in mergers, represented, it is
true, by securities,s but without any very great public participation
in it. It was the rich man's period, so called, and they merged about
everything, until the thing crashed and we had the mass of undigested securities.
Senator WAGNER. Was not the automobile industry the factor in
pulling us out of that depression primarily?
Mr. AYRES. We might say so. It was effective somewhat.
Senator WAGNER. I mean it helped to absorb ?
T'
1 us a great deal. I think we overcredit it,
absorbed a great deal of the unemployment?
M r . AYRES; Y e s .
Senator BROOKHART.

Does that all mean that these depressions
have been caused each time by general speculation of some kind?
Mr. AYRES. Of some kind.
Senator BROOKHART. In 1840, when agriculture was the principal
business of the country, if there occurred a general speculation in
that, that would bring on a general depression.
M r . AYRES. Y e s .
Senator BROOKHART. YOU

say the automobile industry probably
ulled us out, but has not agriculture helped to pull us out of these
epressions in the last 50 years?.
Mr. AYRES. Several times over.
Senator BROOKHART.-And that was due to the gradual advance
in land values?
Mr. AYRES. In part, and in some cases
Senator BROOKHART. Since 1920, when land turned back, agriculture has been unable to help pull us out of the depression?

S

M r . AYRES. Y e s .
Senator GLASS. The

automobile business has pulled more people
into difficulties than it has ever pulled them out.
Senator WAGNER. It pulled us out in 1921.
Senator FLETCHER. In reference to the seventies, you speak about
the depression there being of construction. Was not that the time
when Jay Cook went under?
Mr. AYRES. Cook nearly went under four years before that.
Beally the end of Cook's important period was Black Friday in
1869, connected with the gold situation.
Senator GLASS. Colonel, you have an intimate and accurate knowledge of these matters. Let me ask you this question: Do you know
of any legislative reformation of the banking business in all these
years that has not been suggested or prompted byfinancialdisasters?
Take the Federal reserve act for example.
Mr. AYRES. I would put it the other way around and I would
say that people always want to reform the banking system in every
big depression in this country and abroad, and have for a hundred
years past.



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•260

Senator GLASS. Has it been reformed in any other period of timet
Take the Federal reserve act for example. Was not that the product
of the 1907 and 1908 disaster?
Mr. AYRES. I would say so. More than any other one thing, yes.
Now, in the upturns from depressions
Senator BARKLEY. I do not know whether you have admitted specific evils in our banking system or not. I do not think you have.
Mr. AYRES. I could, but it would take me quite a long time.
Senator BARKLEY. Assuming that there are specific evils that need
specific remedies, when are we going to begin to administer those
remedies? When we are sick, or wait until we get well? When
we are well we become self-satisfied and we are afraid to do anything
lest we get back into the same sickness again.
Mr. AYRES. I would not do it either time, Senator. I would
do it on the recovery period. I do not think you can reform a banking system at the height of prosperity.
Senator GLASS. YOU can not even enforce existing law under the
existing procedure.
Mr. AYRES. It is extremely difficult. And I think it is dangerous
to do it at the bottom of a really serious depression, but when the
tide has turned; and it is not so hard to know when that is and
when recovery is well enough under way so that it has momentum.
I think we ought to take the lessons of the periods through which
we have come to legislate to improve the machinery.
Senator BARKLEY. Will not we be cautioned in such period against
doing anything for fear it slackens the momentum of recovery?
Mr. AYRES. I suppose you would if you tried to reform everything
at once. I think you might cut it up into small pieces.
Senator GORE. YOU say. that the speculation assumes different
forms but it always precedes a crisis and a depression—speculation
in some forms. Does not that rather tend to prove that this speculation and these great depressions rather grew out of human nature,
the tendency of men to buy on a rising market, as things would
go up to buy more and sell at a profit until you reach a limit where
somebody will not pay the price, they lose confidence, and they sell
on the falling market, driving the price down?
Mr. AYRES. Senator, I would not question at all that that is one
of the characteristics determining phenomena of these business
cycles.
Senator GORE. Is not that where the difficulty lies; you have got
to amend the law of human nature in order to stop that?
Mr. AJRES. It is one of the difficulties; but, Senator, we have got
to move in that direction, because we can not stand many depressions
like this one.
Senator GORE. Yes. They all have the same specific operations.
In other words, they repeat.
. Mr. AYRES. When the recovery period does get under way there
is a certain uniformity, I think, that has a true bearing on the questions that we are discussing here. Every depression that we nave
had for a hundred years past has been followed by a business recovery in which advancing prices and advancing volumes for long-term
securities took place before most other kinds of upturns occurred.
It is almost the singular, uniform phenomenon of business recovery.



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

•

261

Senator G&ASS. Is not that because long-term paper went lower
in value than any other form of credit?
Mr.. AYRES. I clo not think, there is any question that that has a
real bearing on the situation, and in the initial part of the move it
is a recovery of those prices from depths that daring people decided
were absurdly low.
Senator GORE. Until they stay at a low point long enough for
•people to be convinced they are not going to go any lower?
Mr. AYRES. Yes; except daring people are trying it all the time.
Theirfirstguesses are wrong? andfinallythey get right. But after
the upturn starts, then new issues come in, and there is where the
money comes from thatfinancesthe new construction, that buys the
new equipment, and that assembles the materials that put men to
work and stalls production to expand. What I am afraid of here
is that if we too fully divorce the operations of the banking system
which accumulates these funds from the operations of that other
system which turns them into the long-term securities which finance
recovery—if we do it before that recovery has started and throw on
to our fabric offinancethe job of an almost complete reorganization
of its methods and its procedures, I am afraid that we shall find
that we have done it just too early; that we have done it a time
which makes it extremely difficult for that recovery mechanism
which always has worked—and it is the only one we are sure about
that has worked without exception to operate effectively.
Senator GLASS. Colonel, in order that you may be sure that members of the subcommittee of the Banking and Currency Committee
did not proceed in a whimsical and arbitrary fashion to consider
these problems and to treat them in a legislative way, if you will
refer to the hearings that we had here—and the testimony was supplemented by personal interviews with experienced bankers and
political economists who did not care to appear in public—you will
find that we had, as we regard it, authoritative advice that would
have caused us to abolish investment affiliates outright over a brief
period of years, long enough, as it was conceived, to enable them
to get at the business in an orderly way. Instead of doing that we
have simply proposed to regulate them, as we conceive, in a rational
way.
Mr. AYRES. It is a question of judgment, Senator. It seems to me
like revising the fundamental system of the tactics of an army during a battle. This is almost a drawn battle and just being won,
and I would rather wait until I was sure-1 was winning out before
I revised the tactics.
Senator GLASS. We plan to wait. We give them three years, I
think, to detach themselves from the commercial-banking business or,
rather, to detach the commercial-banking business from its affiliates.
Mr. AYRES. I hope that is going to be enough time, but I would
like to be sure before I put it m.
Senator GLASS. You realize, I am sure, because you have, I see,
an intimate knowledge of such things—I will not say invariably, because I only have knowledge of particular instances—that when we
enacted the Federal reserve bill we were confronted with the same
kind of organized opposition, the same sort of bitter criticism, the
same sort of threats, to the enect that no national bank would enter
the system, and to the effect-r-a few days before the President ap


NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•262

proved the act—that the Federal reserve system would destroy the
national-banking system. You recall those things? ^
Mr. AYRES. I remember something about those periods; yes.
Senator BROOKHART. Colonel, I would like to ask you a few questions about these cooperative systems of the world. Have they had
the ups and downs of these other systems?
Mr. AYRES. Not in the same degree; no. There is a kind of
stability built into them. You mean the cooperative banking
systems ?
Senator'BROOKHART. Yes; of the various countries that have them.
Mr. AYRES. That has prevented that degree of fluctuation.
Senator BROOKHART. Are the two things in those that make for
stability, first, they never use the credit for speculation purposes
at all?
Mr. AYRES. They try not to.
Senator BROOKHART. And, second, they fix a wage for capital,
an absolute wage and earning, so that there is no occasion for
speculation?
M r . AYRES. Y e s .
Senator GORE. I did
Senator BROOKHART.

not get that last statement, Mr. Senator.
They fix a wage, an earning for capital,
definite and arbitrary and absolute, which stays, does not vary up
or down at all; and those things make for greater stability, do
they not?
Mr. AYRES. Yes; they do.
Senator FLETCHER. ^Referring to Senator Wagner's inquiry about
loans, I am curious to know whether or not this bill would correct
that or not. We passed the reconstruction act to help organize
them and we passed the Glass-Steagall bill to help them. Is it not
a fact that generally throughout the country the banks are refusing
to make loans and are calling in loans and making collections?
Mr. AYRES. I should hate to try to answer that question, because
I have been trying to find out the answer to it, and the testimony
is disinctly diverse. I suppose it must be true that conditions are
diverse in' various localities. I do know that there has been, and
we all know there lias been, a reluctance to lend in a great many
instances and a desire to get loans paid down. Now, that is slackening, that is leveling out, and I hope we have about come to the end
and shall travel in the other direction.
Senator FLETCHER. I had a good many letters to that effect from
business people, complaining not only that banks are not granting
loans, but they are calling in the loans, and this other suggestion
came to me, whether or not, if you know that to be true, there is
Sressure being brought to bear by the Treasury and by the Federal
Reserve Board on the banks to subscribe for Treasury certificates
and help out the Treasury generally to take these securities, and that
that is one reason why thp banks are calling in their loans, in order
to accommodate the demand of the Treasury. Do you know whether
or not that is so ?
Mr. AYRES. I should not believe, Senator, that that would have
much weight behind it. I have never known of a case in which a
bank demanded payments on loans in order to accumulate funds to
buy Government securities. I should really doubt it very much.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

•

263

Senator FLETCHER. Well, the banks constitute a very large market
for these Government securities.
Mr. AYRES. Yes; very large.
Senator GLASS. Have you any information to the effect that many
banks subscribe to the Government certificates with great reluctance?
Mr. AYRES. I have heard bankers talk in that sense. I suppose
we all have.
Senator FLETCHER. Then, in that degree, the Treasury largely
influences the banks, does it not?
Mr. AYRES. The Treasury, I will say, is under almost an insuperable pressure. It has got to sell its issues. It must sell them.
Senator FLETCHER. It puts banks, then, under pressure, too, does
it not?
Mr. AYRES. I should not want to say that, but one might infer it.
Senator FLETCHER. Hie latent intent of that observation was to
show that my judgment is not so far faulty when I want to divorce
the Treasury from the Federal Reserve System and not have it
dominated as it has done and is doing.
We are greatly obliged to you, Colonel, and I am sure the chairman
is also.
Senator BROOKHART. Yes, indeed. We will recess now until 3
o'clock at the Interstate Commerce committee room, upstairs, at the
Senate.
(Whereupon, at 12.55 o'clock p. m., a recess was taken until 3
o'clock p. m. oi the same day.)
AFTER RECESS

The committee reconvened in the hearing room of the Committee
on Interstate Commerce in the Capitol, at 3 o'clock p. m., at the
expiration of the recess.
The CHAIRMAN. The committee will come to order. Mr. Wolfe,
you mav come around to the committee table and take a seat opposite the reporter. Please give your name, address, and business,
and then you may proceed. But let me ask you first, how much
time do you want?
Mr. WOLFE. It will not take me more than ten minutes to say
what I have to say; depending upon how many questions may tie
propounded.
The CHAIRMAN. That is a very reasonable request. We are in
a hurry to get along as well as we can. You may proceed.
STATEMENT OF 0. HOWARD WOLFE, CASHIER OF THE PHILADELPHIA NATIONAL BANE, PHILADELPHIA, PA.; PBESIDENT OF
THE ASSOCIATION OF RESERVE CITY BANKERS, VICE PRESIDENT OF THE PENNSYLVANIA BANKERS' ASSOCIATION,TIEMBER
OF THE ECONOMIC POLICY COMMITTEE OF THE AMERICAN
BANKERS' ASSOCIATION, AND MANAGER OF THE PHILADELPHIA LOAN AGENCY OF THE RECONSTRUCTION FINANCE
CORPORATION
Mr. WOLFE. In addition to what I have said I will add that just
at the present time all of my time is taken up with the duties



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•264

of the Philadelphia loan agency of the Reconstruction Finance
Corporation.
.
Senator COUZENS. I wish we might ask questions of the witness
on that subject.
Mr. WOLFE. I shall be very glad to have you do so. In fact, I
will refer to it if you will let me.
.
l.
Senator COUZENS. I hardly think it is appropriate under this
bill, though.
"
. .
Mr. WOLFE. That may be. But I think I can show you how it is
operating.
Senator COUZENS. Well, we will listen to you as you go along.
Mr. WOLFE. What I have to say, Senator Glass, is not the result
of anv prearranged notes or statement or anything of that sort. I
have studied this bill very carefully, and this morning I listened
to the testimony given before you with a great deal of interest, and
I came to some conclusions.
But before I mention these conclusions I have arrived at, in
regard to the bill, I should like, if possible, to have it appear on
the record of your hearing that I was a friend of the Federal
reserve act at a time when it needed friends. I had known Doctor
Willis for many years, and during the time that bill was beiiwr
constructed I was a paid employee of the American Bankers' Association and an officer of that association, and all the preliminary
organization committee work was done in our offices of the American
Bankers9 Association at New York at Doctor Willis's request.
During that time I appeared before many of the bankers' conventions in different parts of the country in defense of the Federal
reserve system. I was being paid by the American Bankers' Association at that time, which I think is rather conclusive evidence that
the American Bankers' Association as such was not in any way
opposed to the Federal reserve act as seems to be the generalbelief.
Senator GLASS. It is not only the general belief but the absolute
record. And I should say that it was a very anomalous situation
that one of the paid officials of the American Bankers* Association
should be in favor of the Federal Reserve Act when the American
Bankers' Association itself was against it.
Mr. WOLFE. Well, I will let Mr. Haas answer for that matter, but
I do not think that is quite a correct statement.
Senator GLASS. I think it is.
Mr. WOLFE. During that period I originated and developed the
gold settlement fund. That was my particular contribution to that
work, and I, therefore, feel somewhat embarrassed here to-day by
appearing in opposition to your bill.
Senator GLASS. Get it out of your mind "that this is my bill. It
is a bill made up by the Subcommittee of Banking and Currency of
the Senate. It was introduced by me by the unanimous instructions
of the subcommittee.
Mr. WOLFE. Well, I will proceed now with my statement.
The CHAIRMAN. Go right ahead.
Mr. WOLFE. I think it was the Senator from Kentucky (Mr.
Barkley), perhaps, who asked Mr. Hecht the question whether in his
judgment, this bill corrected our present weaknesses in the banking
system. It seems to me that it does not, which is the chief reason I
have at this time for offering, I might say, some criticism of it.



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

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265

If the Members of this Senate committee could sit with me in the
office of the Reconstruction Finance Corporation, at Philedalphia,
for a week and examine the banks as we are obliged to examine
them, I think they would agree with me that there is nothing in the
bill, so far as I canfind,except one thing, and that is at the end of
the bill; that there is but one provision in this whole bill that in
any way, in my judgment, would correct our troubles, and that is
the very last paragraph of the bill.
The hanks that are of the type that have been failing for the
last two years are not at all touched by this bill, even remotely.
The banks that to-day are coming to the Government, we will say
for assistance, coming to the Reconstruction Finance Corporation,
I mean, are suffering from a multiplicity of troubles they have
fallen heir to over the generations back to the days of free banking,
when any person was permitted to go into the banking business.
There is no restriction in the National Bank Act upon the directors,
except that they shall live in a certain place, ana nothing on the
officers of any land. That is the principal weakness in our banking
system to-day.
Senator GLASS. And this would be a very opportune time to correct that.
Mr. WOLFE. I agree with you. You have done that in the last
paragraph of this bill where you have permitted, the Comptroller of
the Currency to remove an officer for cause, which you could never
do before. That is the really constructive measure in this bill.
Senator GLASS. I thought maybe that might be disastrous to the
banking situation at this time.
Mr. WOLFE. N O ; I think it is afinething. I think most bankers
would agree with my point of view in that matter, although I have
talked to but very few bankers upon it.
The CHAIRMAN. YOU may proceed with your statement.
Mr. WOLFE. The trouble with banks to-day is that they make
mortgage loans but they are not mortgages that are paid down at
all. In other words, they are not installment mortgages. Some
small banks are compelled to buy high-intesert-bearing bonds. They
bought that class of bonds because they had to, to meet the expense.
They have in their portfolios so-called commercial loans that are
not commercial loans in fact; they are capital loans.
Senator GLASS. Ought they to be permitted to do that sort of
thing?
M r . WOLFE. N o .

Senator GLASS. But this would be an unfortunate time to correct
that.
Mr. WOLFE. I agree with you that
Senator BROOKHART (interposing). Out in our section of the country they bought those bonds because the bank examiner said it was
good banking;
Mr. WOLFE. That is true. But I am talking of the type of bond
paying 6, 6^, and 7 per cent that we do not see so often; and they
were bought on that basis, not liquid bonds, not listed anywhere, but
6 per cent bonds.
Senator BROOKHART; If they were liquid, they would be able to
sell them on the stock exchange.
Mr. WOLFE. No; very few of them are listed bonds.



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•266

Senator BROOKHART. Those sold out in our section of the country
were.
Mr. WOLFE. Then they were better than those offered in Pennsylvania. Lots of those bonds in the Pennsylvania banks are not listed.
Senator GLASS. You do not think any statute ought to restrain a
bank from that sort of investment, do you?
AIR. WOLFE. YOU can not do it by statute. In other words, you
can not make a banker good by statute. You can not mate a bank
sti*ong by regulation.
Senator GLASS. Therefore, you think there ought to be no statutory
restriction and no regulation for banks?
Mr. WOLFE. NO, Senator Glass, that is not what I am saying. I
am still talking 011 the last paragraph of the bill. I think we should
keep out of the banking business men not capable of running banks.
That is myfirstsuggestion.
Senator GLASS. But you think we ought not to do that right now?
Mr. WOLFE. It would not do any harm to do that right now. That
is one thingyou can do right now without doing any particular harm.
Senator FLETCHER. Can you do it by legislation?
Mr. WOLFE. Yes; and you are trying it right here in this paragraph, this last paragraph of the bill, and very properly trying to do
it here.
Senator GLASS. Would you repeal all the legislative restrictions in
the national bank act and in me Federal reserve act that undertake to put a limitation upon the kinds of businesses that a national
bank may engage in?
Mr. WOLFE. Not at all. But I am stating this fact, that a good
bank needs no such legislation. For instance, you do not need to
tell our particular bank, if I may use it as an illustration, that it
must carry a reserve. We do not have a single mortgage loan in
our shop. We do not think they are good for a bank to have.
Senator GLASS. But there are some oanks and some bankers who
do make those inadvisable loans.
M r . WOLFE. Y e s .
Senator GLASS. And

should not they be restrained bv regulation
or by statute?
Mr. WOLEE. They are. But that does not necessarily make it a
good banking system.
Senator GLASS. But it would be a pretty poor banking system
without any restraints.
M r . WOLFE. Y e s .
Senator GLASS. If

we have a poor banking system in spite of
restraints, it would certainly be a poorer one to have no restraints.
Mr. WoitfE. Yes. But, Senator Glass, you do not get exactly
what I am trying to say. I say in spite of the regulations we have
had bank failures, and this present bill in my judgment does not go
to the root of the trouble. In other words, the only kind of banks
this puts any further regulation or restraint oh are the strong and
big banks that have not gone down, while the Uttle banks that have
gone down are not touched by this bill directly at all.
* f y°}l
^ p t e that point: It would seem to be the
UP
wt4?18
Vs ^
^ the language used in
the bill), that you should control coUateral loans, and that is in the
very language of the biU; that such loans may be speculative, whereas



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

•

267

unsecured commercial paper is not speculative, and yet the reverse
might be true.
I think I can illustrate that to you by saying
Senator GLASS (interposing). Speculative in the sense that commercial paper is not bought based on the minute^ or the hour. In
other words, a man who makes a loan on commercial paper does not
have to stand at a ticker andfindout what is going to be the value
of it 15 minutes afterwards.
Mr. WOLFE. Let me illustrate what I mean: A man came to my
desk before I left the bank I am now with (I am with the Reconstruction Finance Corporation, temporarily loaned to that work) ; a man
came to my desk and wanted $10,000. I said to him: Let me see your
statement. He showed it to me. He owned $190,000 worth of good,
well-secured bonds, listed bonds. I said: " W e will loan you that
sum of money if you will give us some of the bonds for collateral."
He put up the bonds and got the loan. That was not a speculation
on our part. Now, those bonds represented his surplus. He did
not want to sell them. He got his $10,000. He did not want to sell
those bonds at that time because the market had depreciated. Now,
if we had taken $10,000 of unsecured paper it would not be as good
as taking the collateral and
Senator GLASS (interposing). The safety of a loan is not all of
banking.
Mr. WOLFE. But it is a good part of it.
Senator GLASS. It is not all of it, however. Liquidity has a good
deal to do with it. Do you mean to say there is no distinction between commercial banking and investment banking?
Mr. WOLFE. There is a great deal of distinction. Commercial
banking is one thing, and investment banking is another thing.
Senator GLASS. One would suppose they should be, but they are
not.
Mr. WOLFE. They are in good, well-managed banks, of which I
am glad to say we have a majority in this country.
Senator GLASS. But we are trying to correct the evils of mismanagement of banks.
Mr. WOLFE. I do not think your bill does it.
Senator GLASS. That is a difference of opinion.
Senator FLETCHER. Mr. Wolfe, are you in favor of separating
banking in its proper sense from going around and peddling
securities!
Mr. WOLFE. Yes. And that has been done by some banks before
this. Some banks gave up theitf affiliates when they saw the tendency. They did not need any law to make them do it. They did
it themselves, and that is a matter of record. They just voluntarily
gave over their affiliates.
Senator GLASS. A S a matter of statement; ves. Some of these
bankers came before our subcommittee and testified that they thought
affiliate banking was a very vicious system of banking, and accepting
the statement of banks to that effect, we have undertaken over a
period of years by this bill to separate affiiliates from commercial
banks. Do you think that is a desirable thing to do?
Mr. WOLFE. That at the present time I am afraid will have a
deflationary effect.




268

n a t i o n a l and f e d e r a l reserve banking systems

Senator GLASS. Well, we propose to give them three years to put
their house in order. Do you think that is too limited a time?
Mr. WOLFE. If we were in a higher market right now for bonds,
I should say you would not need three years. In fact, you would
not need three months. But there is no assurance that they will be
able to part with some of their securities within three years without suffering a great loss and further depressing the market.
Senator ULASS. And if we were in a nigher market we would
be told not to interfere with prosperity.
Mr. WOLFE. If I may go on with some concrete things that appear
ill advised?
The CHAIRMAN. Proceed.
Mr. WOLFE. In the first place, I would suggest that that word
" collateral" where it appears at so many places in the bill should be
made more definite as to what it means. I have in mind
suggesting
The CHAIRMAN (interposing). One question right there: Does
the word "collateral" in common practice mean the same thing
in all sections.of the country now?
Mr. WOLFE. I could not answer that question.
The CHAIRMAN. Or do bankers in the different sections of the
country have different interpretations for it?
Mr. WOLFE. Let me read to you from the Reconstruction Finance
Corporation act [reading]:
All loans made under, the foregoing provisions shall be fully and adequately
secured. The corporation, under such conditions as it shall prescribe, may
take over or provide for the administration and liquidation of any collateral
accepted by it as security for such loans.

Now, what do we mean by collateral?

[Reading:]

Such loans may be made directly upon promissory notes or by way of discount or rediscount of obligations tendered for the purpose, or otherwise in
such form and in such amount and at such interest or discount rates as the
corporation may approve.

Now, we mean secured paper. What is secured paper? Mort§agesj bonds, or anything put up as collateral under this act, and
lat is the interpretation that most bankers put on it when one
says a loan is collaterally secured.
Senator BULKLEY. Is that the definition stated in the act itself?
Mr. WOLFE. NO; that is not the definition.
Senator BULKLEY. Where does that definition come from?
Mr. WOLFE. The Chairman asked me what we considered to be
collateral in a bank.
The CHAIRMAN. I did not ask that question at all.
Mr. WOLFE. Well, I will say
Senator BULKLEY (interposing). Whose definition did you give
us just now?
Mr. WOLFE. It is not a definition but a ruling of the Reconstruction Finance Corporation.
Senator FLETCHER. In circular No. 1?
Mr. WOLFE. I think it is No. 1.
Senator FLETCHER. And what do you see in this bill that is
different?
Mr. WOLFE. Well. I will say that I read this reconstruction act
over just once and I had a pretty clear grasp of it. But I have



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

•

269

read this bill over sis times and each time I find something new,
and I have had 33 years' banking experience.
Senator FLETCHER. Then you contend that we should define in
our bill something that is not defined in the other act?
Mr. WOLFE. I do not mean that exactly, but if you leave it as
it is here then very properly the Federal Beserve Board might
say a warehouse receipt is a collateral which would fall under
this act.
Senator FLETCHER. And I am inclined to agree with you on that
point. .But I wanted to find out how the other act was so much
better drafted.
Mr. WOLFE. I would not say so much better drafted, but by collateral we mean anything put up as a loan.
Senator GLASS. We have asked bankers appearing before the committee to supply us with a proper definition and they have declined
to undertake it. One witness, an exceptionally intelligent man from
Kansas City, made that objection and we asked him to furnish us
with language that would make it clearer and more explicit. And
although he had been in the banking business for 40 years,fiveyears
longer than you have, he said he could not do it.
Mr. WOLFE. Very probably, judging by that answer, he did not
know what you had in mind. I would have to know what you
have in mind in drafting it.
Senator GLASS. I wanted him to indicate what he had in mind.
We knew what we had in mind all right.
Mr. WOLFE. I think you mean stocks and bonds.
Senator GLASS. Yes. We do not mean commodities and warehouse receipts and things of that sort.
Mr. WOLFE. I am afraid you will get in a jam if you do not make
it clear.
Senator GLASS. We won't get in any " jam " if the people who administer the law do not " jam " the law.
Mr. WOLFE. NOW, there are just two or three other things and
then I will havefinishedwith what seems to me ought to be given
consideration. One is a provision in the bill that
Senator* FLETCHER (interposing). Do you recommend that we
define the word " collateral" there?
M r . WOLFE. Y e s .
Senator FLETCHER. T O mean what?
Mr. WOLFE. TO mean just what you want it to mean.
Senator FLETCHER. What would you say it should mean?
Mr. WOLFE; I would not want you to put me in the position

of
telling you what you mean, but I think you mean stocks and bonds.
But you have not said so.
Senator FLETCHER. D O you mean all kinds of bonds?
Mr. WOLFE. Well, you take care of Government bonds in the
next sentence.
Senator FLETCHER. YOU mean that we would have to define it if
we did not want to exclude them.
M r . WOLFE* Y e s .

, Senator GLASS. But we do exclude Government bonds.
Mr. WOLFE. I would say that you mean other bonds than Govern-,
ment bonds.
Senator GLASS. All right.
111161—32—PT 2




£

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•270

Mr. WOLFE. YOU have a provision in this bill in which you legislate against the purchase and sale of excess reserves. Now, I have
been doing that in my own bank for a good many years. That
has been my particular job for 15 years. 1 have been buying and
selling excess Federal reserve funds. In that provision in attempting to fix the rate at which Federal Reserve funds should be sold
you are running counter to ordinary business, which depends upon
supply and demand.
If I may illustrate the point: Our particular bank is the fiscal
agent of the State of Pennsylvania. Not long ago the State of
Pennsylvania sold $20,000,000 worth of bonds, and they deposited
that $'20,000,000 with us us of a certain date. Under the laws of
Pennsylvania; we are bound to begin paying interest on that deposit
at once.
Of course you may say that we do not have to be afiscalagent.
I might go further and say, we do not have to be in the banking
business. But we took the money, and we had to make it earn
its way. Thefirstthing to do was to get the State Treasurer to tell
us when lie would take the $20,000,000. He said he could not tell
us, that it might be a longer or a shorter time. I was forced to
sell it day by day. In our own market I had to sell it at a lower
rate than the discount of the Federal reserve act. We had to take
care of it in that way until the Treasurer of the State of Pennsylvania took the money away, and then we no longer had those
excess funds.
Senator BROOKHART. Who did you sell it to?
Mr. WOLFE. TO our neighbors. We sold some of it to New York
but the most of it our neighbors. And they paid us by giving us
their cashier's check.
Senator GLASS. It has a tendency to put the reserves at a minimum.
Mr. WOLFE. DO you mean the rate?
Senator GLASS. Which privilege has been badly abused.
Mr. WOLFE. Then why not legislate against some particular abuse
rather than have us all suffer. This is a perfectly legitimate business. I do not see how you can stop it.
Senator GLASS. Then, if we can not stop it, the provision of the
law will be inoperative.
Mr. WOLFE. Well, I did not mean to say that you can not stop it,
but I do mean I do not see why you should stop it. Personally, I
have not seen any abuse of it in our State. There might have been
an abuse of it in other places, but if so I do not know of it.
Senator GLASS. My information is that it has been badly abused.
Mr. WOLFF:. Could not you legislate against that particular abuse
without making all of us suffer?
Senator GLASS. Well, we might, but the time is said to be inopportune; so we are advised not to legislate against any abuses.
Mr. WOLFE. I do not think you mean just that, Senator Glass.
The CHAIRMAN. YOU may proceed.
Mr. WOLFE. NOW, another matter here is this bill, and this is a
question that has been taken up so many times: You propose to permit Federal reserve banks to loan at 1 per cent higher on 15-day
paper. I want to say, Senator Glass, that I listened to Mr. Hecht*s
testimony this morning in which you questioned him as to eligible
paper. And I want to say that it is a serious problem. Our own



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

•

271

particular bank is one of the largest commercial banks in the country,
and has purchased for years more commercial paper than the average
institution. Yet, owing to the fact that we had to loan other banks
in order to keep them going some $40,000,000, we were running perilously close to our limit. We loaned that money and we had $70,000,000 of Government bonds on which to operate. If we had not
been permitted to do that we would have had to cut down our loans
to our correspondent banks right away in order to defend ourselves.
Senator GLASS. IT is a special privilege, you know.
Senator BULKLEY. Of course, this bill would not prevent you from
doing that.
Mr. WOLFE. It would cost us 1 per cent extra, and, therefore, we
would have had to put that much more cost onto the country banker.
Senator GLASS. YOU might not have been forced to do it. You
could rediscount.
Mr. WOLFE. And we did up close to the limit of our commercial
paper, and with no more available what could we have done? And
I do not know where we could have gotten more.
Senator BULKLEY. HOW do you reconcile that statement with the
figures Senator Glass gave from the Federal Reserve Board?
Mr. WOLFE. I do not attempt to do it. But I question Senator
Glass's figures.
Senator GLASS. They are not my figures. They arefiguresfurnished me by the chief of banking "operation of the Federal Reserve
Board.
Mr. WOLFE. I know that the commercial paper in the country has
been running down ever since 1918. That is a matter of record, too.
Senator BULKLEY. But you do not question that there are more
than three billions of dollars undiscounted now, do you?
Mr. WOLFE. I do not know about that. All I know is about our
• w bank, which is one of the largest .commercial banks in the East.
o n
Senator BULKLEY. DO you mean to say whether there is any
•doubt about that statement being true?
Mr. WOLFE. Yes, I do; from my experience. I know where he got
those figures.
Senator GLASS. If they are not correct, then they ought to get
another chief of banking operations.
Mr. WOLFE. Let me say this to you
Senator GLASS (continuing). And they were made up from
reports of the member banks throughout the country.
Mr. WOLFE. And a lot of those banks put down what paper they
have and call it commercial paper. But they have attempted to put
that paper in at the Federal reserve bank and have been turned
down, snowing it was not commercial paper. I will say that my
office happens to be in the Federal Reserve Bank of Philadelphia,
•and almost every day they bring paper up to me and say: We can
not take this paper. As a commercial bank you can take it. These
•country banks list it as commercial paper, but when it goes in to
the Federal reserve bank they turn it down.
Senator GLASS. Then the reports made to the Federal Reserve
Board are worthless.
Mr. WOLFE. No. sir: I would not say that, but thev must be taken
.-at a considerable discount.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•272

Senator FLETCHER. In other words, they may have that amount
of paper but it is not eligible.
,. , . .
•,*
Mr. WOLFE. Yes, sir; that is it. They think it is eligible paper,
but it is not.
,,
Senator BROOKHART. After they discount a good deal there would
still be a lot of it left.
,
Mr. WOLFE. It is in $5 and $10 lots. They loan, on notes and
say it is eligible, but the Federal reserve bank won't take it. It is
too small.
. .
Senator BROOKHART. It is not because it is not eligible, but because
it is too small?
# .
Mr. WOLFE. Yes, sir. And as a matter of fact, it is difficult to
determine its eligibility. Say a borrower wants to borrow $100,
and then the bank can not use that paper without a statement.
Senator BROOKHART. Then we will have to amend this bill in
order to treat the little fellows like the big ones.
Senator GLASS. Has there been an effort to create a market for
commercial paper? Have the Federal reserve banks ever bought
a dollar of commercial paper in open-market transactions?
Mr. WOLFE. I would not be prepared to answer that question. I
never worked in a Federal reserve bank. They discount a lot of
commercial paper, but I don't think they buy it in the open market.
Senator GLASS. Suppose this country had never entered the World
War and you did not have United States bonds to use for 15-day
loans, what would you do?
Mr. WOLFE. I think you would have to change the Federal reserve
act.^ I do not think there is enough commercial paper to do the
business we are doing. For instance, the merchant in the little
country district does not store up his shelves with goods like he
once did, on account of easy transportation.
Senator GLASS. It is not simply a matter of transportation, but
the whole system of banking is being changed because corporations
have come to be money lenders. They issue their securities and
put them on the stock exchange and thereby accentuate the opportunity for gambling in stock instead of going to the banks.
Mr. WOLFE. Verywell; how will you stop that?
Senator GLASS. We are undertalnng to do that in the matter of
loans to others.
Mr. WOLFE. But the banks did that long ago.
Senator GLASS. Not long ago.
Mr. WOLFE. A S soon as the abuse became apparent.
Senator GLASS. The abuse has been apparent for years.
Mr. WOLFE. Only since 1929.
Senator GLASS. H o in such stupendous proportions as in 1929.
Tt
Then the New York clearing house took action, I won't say because
they saw it incorporated in a bill that I had drafted, but at any rate
the New York clearing house adopted a regulation, which might be
repealed to-morrow if they found it convenient.
Mr. WOLFE. The Philadelphia National Bank has always refused
to make loans for others, ana has followed that practice consistently.
Senator GLASS. I have no doubt there are good banks. But there
are 22,000 banks in this country that are going concerns now and
when abuses enter the banking business, generally the only way we



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS • 2 7 3

can correct it is by a general statute or a general regulation and
not by attempting to legislate for specific instances.
Mr. WOLFE. I think no one would say it is necessary-to have a
further act to prevent loans for others. I think most bankers are
not engaging in that.
Senator COUZENS. If there is such a scarcity of commercial paper,
why do you have to rediscount it in the case of a commercial bank1
Mr. WOLFE. If there is such a scarcity of commercial paper, why
do we have to rediscount paper?
Senator COUZENS. Yes.
Mr. WOLFE. Well, I mentioned a while ago why we had
Senator COUZENS (interposing). But not at this time?
Mr. WOLFE. We owed the Federal Reserve Bank $40,000,000 a
while ago, which was because country banks with whom we do business were sorely beset by depositors and were rushing out for help
and came to us.
Senator GLASS. Why did they come to you?
Mr. WOLFE. Because there was nowhere else for them to go.
Senator GLASS. Why didn't they go to a Federal Reserve Bank ?
Mr. WOLFE. Because they were not members of the system. Some
are and some are not, but that was the situation.
Senator COUZENS. That does not answer my question. I am not
talking about abnormal times when banks are closing and you have
to come to the relief of a bank in order to protect your interests.
Why, if commercial paper is going out, do you lay such stress on
rediscount privileges in the Federal reserve system?
Mr. WOLFE. It is the best secondary reserve we have.
Senator COUZENS. Why do you use a secondary reserve when there
is no great demand for commercial loans?
Mr. WOLFE. Because 110 bank could run without a secondary reserve.
Senator COUZENS. What kind of secondary reserve do you want
to use?
Mr. WOLFE. Only commercial paper. It is the best kind we have.
Bonds are not the best because you have to find a market for them.
Senator COUZENS. But you say you can not get commercial paper
any more.
Mr. WOLFE. NO ; I did not say that.
Senator COUZENS. Well, you said you could not get an adequate
supply.
Mr. WOLFE. Yes; for the present need.
Senator COUZENS. If the whole banking system is changed so that
these commercial agencies that are benefited by the improved transportation facilities that you have referred to do not need to borrow,
then just what do you mean that you want this money from a Federal reserve bank for?
Mr. WOLFE. I do not think I quite get your question, but we do
not to-day have need for borrowing from the Federal reserve bank
that we had six months ago. In the case of our own institution we
have owed the Federal reserve bank nothing since the Reconstruction Finance Corporation came into being. I am speaking now for
my own bank. But we always would like to have in our portfolio
plenty of commercial paper so as to be prepared in case another need
came along, a seasonal need, if you please. It would be a secondary



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•274

reserve that we could fall back on. I have not said there is not as
much commercial paper, but not as much as Senator Glass s figures
would make you believe.
,, ~ ,
«
Senator GLASS. Why do you speak of tliem AS'- Senator Glass *
figures " when I have told you they are the officialfiguresof the * ederal Reserve Board?
T
IL*
0
A
Mr- WOLFE. Well, I beg your pardon, Senator Glass. I meant the
figures you presented this morning.
.
Senator GLASS. I think they are accurate figures. I think they
have better facilities for learning how much commercial paper there
is in the country than you could nave.
Mr. WOLFE. I think in our city the country banks use more paper
in borrowing to-day than they did before. But the thing they call
commercial paper is not commercial paper.
Senator FLETCHER. Are your loans increasing or decreasing?
Mr. WOLFE. Decreasing.
Senator FLETCHER. HOW much?
Mr. WOLFE. They are going down a great deal. Deposits are
about stationary now, but they have been decreasing for a year or
a year and a half.
Senator FLETCHER. Time deposits or demand deposits?
Mr. WOLFE. Both.
Senator GLASS. YOU say that the Reconstruction Finance Corporation has been a great help to your bank.
Mr. WOLFE. Yes, sir; not directly but indirectly.
Senator GLASS. Does that mean that the Reconstruction Finance
Corporation is making loans to banks that you would not make ?
Mr. WOLFE. NO, sir. Well, it is making some loans that we would
not make. For instance, we will not loan on real estate mortgages
and they will.
Senator GLASS. Why won't you loan on real estate mortgages?
Mr. WOLFE. Because we are a commercial bank and want to keep
ourselves much more liquid than would be the case if we had a lot
of real estate mortgages.
Senator GLASS. That is what we provide for here in this bill, but
it is inopportune to do that now, as I understand.
Mr. WOLFE. I would say so, sir.
The CHAIRMAN. You do not object to that provision in the bill,
do you?
Mr. WOLFE. About mortgages?
T h e CHAIRMAN. Y e s .
Mr. WOLFE. I should

like to say that it was a great mistake when
through force of circumstances you permitted national banks to
take on mortgage loans. I do not think they have any place in a
bank of deposit except it be an installment "mortgage "loan. That
is my personal opinion, however
Senator BROOKHART. As to this $8,000,000,000 of available commercial paper, is that in member banks?
Senator GLASS. Yes.
Senator BROOKHART. It does not include country banks.
Senator GLASS. It includes all member banks of the system.
Senator BROOKHART. Isn't it true that country banks would add
a good deal to it instead of subtracting from it?
Mr. WOLFE. DO you mean nonmember banks?



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

•

275

Senator BROOKHART. Yes.
Mr. WOLFE. I imagine so, but they can not put it up in the Federal
reserve system.
Senator GLASS. Well
Senator BROOKHART (interposing). I understand, but there is this
much in the Federal reserve system.
Mr. WOLFE. It is so reported, which I question.
Senator BROOKHART. Then there are more banks outside the Federal reserve system than there are in it.
Mr. WOLFE. In numbers, yes; but not in size.
Senator BROOKHART. Those outside would have a good deal of
commercial paper.
Mr. WOLFE. But that is absolutely useless because the provisions of
the Federal reserve act preclude any bank loaning for some other.
Senator BROOKHART. DO you include that kind of paper in country
banks?
Mr. WOLFE. NO ; in member banks, which report of commercial
paper I am afraid, as to a considerable amount of it at least, is not
really commercial paper. They so list it in their reports but an
actual test would show that it is not commercial paper.
Senator GLASS. Well, of course I can not tell nor can this committee tell as to that. We are not charged with the business of discriminating.
The CHAIRMAN. I am very glad to have you clear up the point
that thefiguresdo not include all banks.
Mr. WOLFE. NO ; they do not.
The CHAIRMAN. They just include member banks.
M r . WOLFE. Y e s , s i r .
The CHAIRMAN. But

cluded both?

your statement awhile ago was that it in-

M r . WOLFE. NO.
The CHAIRMAN. And you put emphasis on the nonmember
M r . WOLFE. NO, s i r .
The CHAIRMAN. They are separate and apart?
M r . WOLFE. Y e s , s i r .
The CHAIRMAN. In other words, it is a case of addition

banks!

instead
of subtraction.
Mr. WOLFE. Yes, sir. All I want to say on that subject is that I
suspect, having seen the inside of a large number of country banks,
that a lot of the paper listed by the Comptroller of the Currency
as eligible is not eligible paper.
The CHAIRMAN. All right. The eligible paper that Senator Glass
has given is what figure?
Senator GLASS. It is $3,069,000,000.
The CHAIRMAN. And the rediscount is what?
Senator GLASS. In addition to the $3,069,000,000 of commercial
paper, the report was that $5,500,000,000 of governments were usable
for rediscount purposes, and the total discounts of the Federal reserve banks at that time was considerably less than half a billion
dollars.
The CHAIRMAN. In other words, thefigures,if he took a discount
at 50 per cent off the Federel reserve, would still leave an astounding
amount of available paper.



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•276

Mr. WOLFE. What happened was this: Yerv frequently, this country being so large, while the Southwest might have plenty of commercial paper, the eastern section of the country might not have it;
and you would have in total figures a tremendous amount available
and yet it is not in the right place, and there is no way to get it
there.
Senator GLASS. The report of the chief of banking operations of
the Federal reserve system showed a pretty even distribution of
commercial paper.
Senator FLETCHER. DO you regard the Federal reserve banks as
being very strict in their classification of what is eligible paper and
what is not?
Mr. WOLFE. The interpretation is put on rather by the individual
bank. In other words, paper comes to a Federal reserve bank for
rediscount and they say yes or no. Of course, the Federal Reserve
Board lays down broad general principles. Having sat in on the
intepretation of the act, I remember with what particular care Doctor Willis tried to find out a satisfactory definition of eligible paper,
and am quite sure he was never able fully to satisfy himself on that
point. When paper is presented to Federal reserve banks, they
decide without asking the board. I am confident that some banks
may be more strict than others.
Senator GLASS. If you think you wrote the Federal reserve act,
then I have been laboring under a delusion for 18 years; and if
the American Bankers' Association favored the Federal reserve
bank system, I wonder why on earth I took the whole legislative
committee of the American Bankers5 Association, composed of Sol
Wexall, George M. Reynolds, Festus Wood, Mr. Forgan, and four
or five others up to the White House to prevail upon the President
to have a good many of its features changed. I wonder also why
the American Bankers' Association in its annual convention at New
Orleans unanimously, or I believe with one dissenting voice, indorsed the Aldrich bill instead of the proposed Federal reserve bill.
And why the American Bankers' Association in its group meetings
and in its convention at Boston just a few weeks before the Federal
reserve bill became a law, declared against it. I have been totally
misinformed about these events if your statement is correct; I have
just been deluded for the past 18 years.
Mr. WOLFE. Senator Glass, I don't think you quite want to get
it in the record that I said I wrote the Federal reserve act, do you?
Senator GLASS. NO.
Mr. WOLFE. DO you think it quite fair that it should go down
in the record that way?
Senator GLASS. YOU certainly said here that the American Bankers' Association was in favor of it.
Mr. WOLFE. I did not say that. I said they were not unanimously
against it. I said I also happened to know about
Senator GLASS (interposing). Well, the record will show what I
said.
Mr. WOLFE. But the record won't show that you said what vou
said with a smile.
Senator GLASS. Maybe not. Well, in that case I will try to adopt
a different type of smile. I have been accused of talking out of



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS • 2 7 7

one side of my mouth, but I didn't know I was accused of talking
with a smile. I will see if I can adopt my smile to circumstances.
Mr. "WOLFE. I have nothing further to say unless the members
of the committee want to ask me some questions.
The CHAIRMAN. Mr. Wolfe, are we to understand that you have
no objection to the other provisions in the bill except what you
have said?
Mr. WOLFE. There are some minor things, but I have enough
confidence in the intelligence of this body and in the intelligence
of the Senate to realize that you and they will correct some of the
little minor things I might call your attention to. It seemed to
me that the major thing was to do something to correct the weak
situation of the small country banks. That is our principal danger,
and it may be that you can do nothing to correct that situation.
The CHAIRMAN. I live in a country of weak country banks, and
when a bank went down I was told we could do nothing. But I now
see the same trouble has overtaken you people in the East, and now it
seems to be something different.
Mr. WOLFE. YOU will find in section 29 of the bill one constructive
thing to correct the situation, namely, to try so far as you can to
keep out of the banking business men not qualified to be in it.
The CHAIRMAN. One of the most notorious failures we had was
a big bank for $200,000,000 in deposits.
Mr. WOLFE. Yes; but that was only one out of thousands
The CHAIRMAN. It involved four times over the total money in
bank failures in certain States.
Mr. WOLFE. Yes; but the New York banking department could
not get those men out of business because they did not have this
kind of law.
The CHAIRMAN. But the big banks seem to go with the small
banks. That was a branch-banking system that is so highly recommended now.
Senator BROOKHART. I will say that I was in Louisville, Ky., when
the $57,000,000 National Bank of Kentucky went up.
Senator GLASS. Let me read for the record and for your information, if you are willing to believe it, Mr. Wolfe, the official statement as of this month, March of 1932, from the Federal Reserve
Board, as appears in its official bulletin. [Reading:]
The lifted for this legislation has not arisen from shortage in the aggregate
amount of the assets held by member banks. At the end of December they
reported they held $2,573,000,000 of eligible paper in addition to $4,694,000,000
of Government securities, or a total of nearly $7,300,000,000, exclusive of Government bonds pledged as collateral for national bank notes. These figures would
seem to indicate that the amount of eligible assets in the possession of member
banks of the Federal reserve system is nearly ten times as much as their aggregate borrowings from Federal reserve banks. These eligible assets furthermore
are fairly well distributed throughout the country among the member banks, so
that the number of individual banks that are not in a position to borrow to some
extent on eligible paper or Government securities is relatively small.

Of course, that report is three months later than the report I
referred to a while ago.
Senator TOWNSEND. Mr. Wolfe, from your study of the provisions
of this bill, do you think it would help the Federal reserve banks,
that is, the country banks, to come into the Federal reserve system?
Mr. WOLFE. I am afraid it would have a tendency in the" opposite
direction, but that is merely my opinion and I may be entirely



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•278

wrong, and will hope that I am. As a matter of fact, I believe we
ought to force into the Federal reserve system, if we can, every bank
that does a commercial business, whether State or national bank.
But I do not see how we could do it.
Senator TOWNSEND. I was hopeful that the bill would so attract
the country banks that they would be anxious to come into the
system.
Mr. WOLFE. I am afraid not. I happen to know two State banks
that came in as a patriotic measure, but have never used the Federal
reserve at all. Both say they will go out under these circumstances.
Senator GLASS. Nearly all national banks, for that matter, said
they would not come in; didn't they?
Mr. WOLFE. A good many said that, but they did not mean it.
Senator GLASS. Oh!
Senator BULKLEY. Then we have to discount that a great deal
more than the figures Senator Glass gave.
Senator GLASS. If I had the file of the Boston Transcript for
October of 1913, and I wish I had it here, I should like to read
to you the vicious statement made by Mr. Hepburn, the banking
scholar of the United States as of that time and chairman of the
legislative committee of the American Bankers' Association, in which
he said that the adoption of the Federal reserve bill would wreck
the national-banking system, and yet in a little more than a month
afterwards the first letter of congratulation, almost extravagant in
its praise of me, was from Mr. Hepburn.
Mr. WOLFE. I will match that if I can: The then president of
our bank, who was on that commission, told me the gold settlement
fund would wreck the banks of the country. He was wrong.
Senator GLASS. When gentlemen come here and threaten ns with
a torrent of withdrawals from the banking system if we undertake
some conservative reformation of abuses, we ought to take their
threats with some degree of allowance.
Mr. WOLFE. I should say so. I do not want to go into the record
that I am in any way opposed to the Federal reserve system or
that I ever was at any "time.
Senator GLASS. Well, I did not exactly identify you as the American Bankers' Association.
Mr. WOLFE. YOU have scolded me about what they did.
Senator GLASS. Well, I fear you got the wrong slant on my smile.
Mr. WOLFE. A H right.
The CHAIRMAN. IS that all?
Mr. WOLFE. Yes; Mr. Chairman, I thank you.
The CHAIRMAN. We will now have Mr. McQuaid, president of the
Barnett National Bank, of Jacksonville, Fla.
STATEMENT OF W. &. McftTJAED, PRESIDENT O THE BABNETT
P
NATIONAL BANK, JACKSONVILLE, FLA.
Mr. MCQUAID. I expect I better begin by reading my memorandum
on this bill.
Senator FLETCHER. You have examined the bill, S. 4115?
M r . MCQUAID. Y e s , sir.
Senator FLETCHER. You
Air MCQUAID. I might

may make any statement about it you like.
say that while the bank of which I am
president is in a reserve city, yet banks of our size are more or less



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

•

279

considered countiy banks by the metropolitan banks. Further, I
will say that we have affiliate banks in the smaller towns in Florida;
and the same thing is true of the two other large national banks in
Jacksonville. Those banks were organized after the failure of
banks in other cities, in order to supply some banking facilities
where there were then no banking facilities at all in a good many
instances.
I should like to present here just the view of how some of the
provisions of this bill would affect the smaller banks, and particularly affect the communities which they serve.
We are all heartily in accord with constructive and sound provisions that may improve the present banking laws. The bill we
have gone over is very drastic in a great many respects and would
result in far more harm than good and wouid ultimately force a
great many banks out of the national banking system. The subcommittee apparently had two principal objectives in mind: to curb
loans by all banks on all classes of securities other than Government
and municipal bonds and to curb or restrict the operation of corporations, which, under the definition in the bill are termed affiliates,
and in incorporating their ideas of the remedies in the bill they
have failed to realize the effect upon the general banking structure
of the country, and particularly the effect upon country banks outside of the cities in which security markets are maintained.
Xow, as to investment securities: Under the provisions of section
15 a bank may purchase for its own account only such investment
securities as may be by regulation prescribed by the Comptroller,
but in no event shall the total amounts held for its own account
exceed 15 per cent of that bank's capital and 25 per cent of its
unimpaired surplus. It has been common practice for banks to
maintain a secondary reserve in Government bonds and high grade
investment securities. The fact that banks have had tremendous
losses clue to depreciation in market values of such securities does
not mean that securities of the highest grade and of reasonably
short maturity are not still a sound investment for banks. Even
United States Government securities have declined within three
months as much as 16 points. The greatest security loss to banks
has resulted from the purchase of low-grade domestic and foreign
bonds, bought for the high return they gave or because of inexerience in the selection of securities. Restriction as to rating would
ave avoided the greatest part of this loss. The restriction as to
amount of investment securities that may be held is a very drastic
provision and will force banks into the investment in the less liquid
municipal bond in investing time deposits.
Senator BTJLKLET. Might I ask what section you now refer to?
Mr. MCQUAID. Section 15. A bank is limited to the amount
of investment securities it may purchase for its own account to
15 per cent of the capital and 25 per cent of the unimpaired surplus,
not including United States Government bonds.
Senator BULKLET. YOU take that to mean that a bank could not
hold any more securities than that limit?
MR. MCQUAID. That is right.
Senator BULKLEY. In the aggregate?
M r . MCQUAID. Y e s .




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•280

Senator BULKLEY. I do not blame you for that misunderstanding,
but as a matter of fact this means that you can not hold more than
that amount in one issue. That would quite change the situation,
wouldn't it?
Mr. MCQUAID. The limitation of the total amount?
Senator BULKLEY. NO; but to the total amount of any one issue.
Mr. MCQUAID. Well, I have no objection to that.
Senator BULKLEY. I thought you would not. I do not criticize
your misunderstanding of the provision.
Senator GLASS. Xo; I think it needs to be clarified.
Mr. MCQUAID. Well, that was my understanding of it.
The CHAIRMAN-. Well, you may now GO to your second objection..
That objection we will meet satisfactorily when we come to write
the bill.
Mr. MCQUAID. I thought it was the total or aggregate amount.
The CHAIRMAN. You are not the only one who misunderstood the
intent of that language.
Mr. MCQUAID. Now. as to savings deposits or time deposits: The
commercial banks outside of the larger cities almost invariably
maintain savings departments. In a great many States there are
but few strictly savings banks. Savings deposits and other time
deposits probably represent 35 to 40 per cent of the total deposits
of the national and State banks outside of the central reserve cities.
I have not the figures of the Comptroller of the Currency on
that. I think I saw some recent figures wherein the demand deposits of member banks were approximately $15,000,000 and time
deposits of member banks were approximately §11,000,000, but I
don't know whether they are correct or not. However, that would
not be uniform throughout a great number of banks. A great many
banks do a very small business in savings deposits. Our savings
deposits are not oyer 25 per cent of our total deposits.
Under the provisions of section 14 it is required that these deposits
be invested in certain kinds of loans or in certain kinds of securities and that the banks report these investments when such reports
are required by the comptroller. The investment of these time
funds in real-estate mortgage loans, in unsecured loans whose eventual safety depends upon the value of real estate, and the investment in bank premises is approved to a total amount not to exceed
half the bank's total time deposits.
Particularly in the country districts a great many loans are made
to farmers and individuals whose wealth is largely represented by
real estate. In a great many instances these loans are not made upon
mortgage, since the borrower only needs the loan for a short period
of time and it is not intended the loans shall run for a year or
longer, but they must be considered under the terms of this act as
real-estate loans and be kept within the limitations. Due to the
automobile and good roads, the business life of the small citv has
changed materially in the last 15 years. The amount of strictly
commercial paper eligible for discount with the Federal reserve bank
which the bank in the small city can make is very limited.
The limitation on the amount of mortgage loans which may be
made is proper, since such loans run usually from one to five years,
but to include in this limitation open loans made for short periods
whose eventual safety depends upon real property will severely



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS • 2 8 1

restrict tlie borrowing capacity of the community in which the smaller
bank operates, particularly in agricultural districts where farm lands
and other real estate in the principal basis of all loans. It should
be permissive and not mandatory that unsecured loans whose eventual
safety depends upon the value of real estate be counted for the
purposes of section 14 as real-estate loans.
We have one bank that has not as much as $100,000 of time funds.
It has agricultural territory around it, and a great part of the
loans it makes are advances to growers of citrus fruits, and other
advances for agricultural purposes. They may or may not take a
crop lien. The basis of those loans after all is real estate. There
are professional men in that community, and there is a university in
that community. Those men have definite incomes. They have
property of one or two classes: It is either real or personal property. If they do not happen to have stocks or bonds it is real
property.
They may come in to borrow some money for a short period of
time, and the loan would be made based upon their income whether
from real property or from a profession, but because their main
estate is real estate that has to be classified as a real-estate loan.
And if the bank should happen to have a small amount of time
deposits, the amount of such loans the bank could make under the
provision of this bill would be very limited, and the occasion will
arise when some one will come in justified in expecting the bank to
make such a loan.
Senator GLASS. What did you do when the law prohibited the
•making of any loans at all on Veal estate?
Mr. MCQUAID. We don't make them now.
Senator GLASS. Well, then, how do the provisions of this bill affect
you if you do not make them now?
Mr. MCQUAID. Because under the provisions of that section of the
bill, whether secured by real estate or not, if the ultimate safety of
the loan depends upon'real-estate values, they are classified for the
purpose of that section as real-estate loans, and it says they shall not
•exceed 50 per centum of the time deposits.
I know of banks in a good many sections of the country that have
taken advantage of the provisions of the Federal Reserve Act which
permits them to loan money on real estate, but it has not been our
.policy to do that.
Senator TOWNSEND. Will vou tell me where you find that in the
bill?
Senator FLETCHER. It says at line 17, page 33, of the bill [readying] :
Investments in bank premises and unsecured loans whose eventual safety
• depends upon the value of real estate shall be counted for the purposes of this
section as real-estate loans.

Senator TOWNSEND. NOW, you want to change the word " shall"
rto the word " may.5'
Mr. MCQUAID. * Yes: to me that would be better.
The CHAIRMAN. On what line is that?
Senator FLETCHER. It is on line 19. Then it would read:
Investments in bank premises and unsecured loan3 whose eventual safety
- depends upon the value of real estate may be counted for the purposes of this
-section as real-estate loans.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•282

The CHAIRMAN. What would it mean if you changed the word
" shall" to the word " may "? Who would have the discretion»
Senator TOWNSEND. The examiner or the Comptroller of the Currencv
•
Mr." MCQUAID. NO. The result would be that in reporting it
would permit the bank to report as loans made for account of sayings
deposits up to 50 per cent of the time deposits, such unsecured loans
as would be considered real-estate loans under this section.
The remaining 50 per cent of a bank's time deposits shall be invested under section 14 in securities in which savings banks of that
State may invest; or;1 in the absence of State law, in securities to be
specified by the Comptroller of the Currency. And because of my
misunderstanding of the aggregate amount covered by this bill, the
balance of my statement on that subject as I have it prepared would
be incorrect, and I will not read it. I thought we were limited to
tlie total amount and that that would force us then into the purchase of a less liquid investment, that is, a municipal bond, which
has a very narrow market.
Now, as to loan restrictions: Section 8 provides that six members
of the Federal Reserve Board shall have power to fix the percentage
of each individual bank's capital and surplus which may be represented in loans secured by collateral. The board is given power to
direct a bank to refrain from further increase in its security loans
for a period up to a year under penalty of suspension of its rediscount privilege; and, under section 11, if member bank increases
its outstanding loans to any borrower, with or without collateral
security, for the purpose of carrying investment securities (except
United States Government bonds) during the time the member bank
is borrowing from the Federal Reserve Bank, its note immediately
becomes due and payable, and it shall be ineligible to borrow on its
15-day note at the Federal Reserve Bank.
Shall six members of a board in Washington be permitted to
set an arbitrary precentage of capital and surplus which may be
loaned on collateral irrespective of the location of the bank and
local conditions; to apply to all sections of the country or even to
districts ? There are over 7,000 national banks and State banks that
are members of the Federal reserve system to which this would
appty- It would be impossible for any board to know the purely
local requirements for such loans in individual localities. Shall an
individual borrower be denied a loan for legitimate purposes when
he may have owned the securities outright for years, or the bank
be denied the right to take any collateral and even the most marketable collateral for a loan for legitimate purposes or purely local
needs and having no bearing upon speculation, just because the
bank is then a borrower at the Federal reserve bank or its total
loans secured by collateral of all kinds have reached a limit fixed
for it by a board? What bank would not take collateral, when they
can get it, in preference to making open loans? How it is possible
for any board to differentiate between many loans made by an
individual bank for perfectly legitimate business needs secured by
market collateral and those made for purely speculative purposes2
Shall we unduly restrict legitimate loans for fear a few speculative
ones will slip through ?



n a t i o n a l and f e d e r a l reserve banking systems

•

283

The term "collateral" there would apply to other tilings than
market collateral. While we are not in the cotton section, yet we
are in the naval stores section where such products as turpentine
and resin will be stored in warehouses at the port, and the banks
loan against those commodities. Furthermore, banks loan against
another agricultural commodity, canned grapefruit, in my section
of the country. We may loan against several other kinds of commodities, but these are all collateral loans to which this section
would apply.
The CHAIRMAN. I should like to ask this witness a question the
other witness did not answer: Is there a different meaning given to
the word " collateral" in different sections of the country? In
other words, would bankers have exactly the same thing in mind in
reference to the word "collateral" in Jacksonville as they would
have in New York?
Mr. MCQUAID. In some places I think the word "collateral"
should be more definitely defined.
The CHAIRMAN. It is not a definitely understood word at the
present time, is that it?
M r . ^ICQUAID. Y e s .
Senator GLASS. YOU

would not call tomatoes or canned goods
or citrus fruits collateral, would you, in the general accepted parlance of the banking business ?
Mr. MCQUAID. Well, Senator Glass, it says if you increase your
loans on collateral.
Senator GLASS. I say, you would not call these commodities collateral?
Mr. MCQUAID. Yes; while you are borrowing at the Federal reserve bank on 15-day loans.
Senator BULKLEY. Well, would you consider canned grapefruit
or tomatoes as collateral?
Mr. MCQUAID. Yes; if they are put in a warehouse the receipts
are collateral.
The CHAIRMAN. But it may not be so considered in every section
of the country; is that your understanding?
Mr. MCQUAID. Generally, it is so considered. And they loan on
receipts for wheat. That is collateral. They loan on warehouse
receipts for cotton. That is collateral.
The CHAIRMAN. Are you afraid the way this bill is drawn it
would exclude that?
Mr. MCQUAID. It would prevent it at a time when we are borrowing from the Federal reserve bank, when we are making any
additional loans on any form of collateral if we had reached the
limit set by the board in Washington. Then the banks in our section
of the country would have to turn down such loans or be subject
to the penalty of being unable to use the rediscount privilege of the
Federal Reserve Board.
Senator TOWNSEND. In the Tri-States it is very generally accepted
that canned goods will be taken as collateral, or that receipts therefor are accepted.
Senator GLASS. I would call it security, but I would not call it
collateral security.
Senator BROOKHART. That is a matter that can be easily corrected
in the bill if it is found desirable to do.




n a t i o n a l a n d f e d e r a l r e s e r v e BANKING s y s t e m s•284

Mr. MCQUAID. I think it goes a little bit beyond that. For instance, it comes right back to the same thing I mentioned a while
ago in reference to the limitation of loans; that the man not m
commercial business may have some temporary need for money. He
carries a good account at the bank; he has some bonds; instead of
accumulating real property he is accumulating some personal property in either stocks or bonds, and he comes in and wants to borrow
money on those bonds. The same thing would apply to that. We
do not want to turn him down, but we would have to. We would
have to say to him, " No; we have reached the limit that the Federal
Deserve Board says we can lend on collateral, and you can not get it."
So he will go over to the State bank and negotiate.
The CHAIRMAN. You may proceed.
Mr. MCQUAID. What really created a dangerous situation during
the market boom was the large amount of money loaned by banks
in the cities where security exchanges are operated to brokers for
the account of " others." Money of corporations and individuals in
all parts of the country.
The provision that a bank shall not act as agent of a nonbanking
corporation in making loans secured by market collateral for their
account is ample safeguard against large sums being loaned in the
future for speculative purposes.
Very few banks will borrow or rediscount at the Federal reserve
bank to carry what are known as " street loans," or loans to a noncustomer of the bank, usually a broker, to carry market securities.
There were some violations of that during the 1929 market conditions, but I think they were comparatively few; that as a rule the
banks would not borrow from the Federal reserve bank in order
to loan that money on the Street.
Senator GLASS. There is nothing in this bill that prohibits the
bank from loaning the money on the street. It can loan every
dollar of its depositors' on the street, but there is an inhibition
against coming to the Federal reserve bank and recouping itself
after it shall have done that, particularly if it persists in extending
loans of that kind.
Mr. MCQUAID. Yes; but you see, Senator, when you put that
limitation on there about increasing your loans on collateral, collateral of whatever nature, while the intention there is to prevent
you from using the Federal reserve funds that you get and loan
them for speculative purposes, in actual practice it is going to hit at
your local loaning of that money.
Senator BULKLEY. Suppose the word " collateral" in there is to
be read to mean what Senator Glass says it means: Then you do not
have the same objection to it, do you?
Mr. McQrAin. It will not apply quite as harshly.
Senator BULKLEY. Regardless of that, is it not a sound restriction ? There are lots of restrictions that are not entirely convenient
to the party restricted, but they are nevertheless sound and wholesome in the long run.
Mr. MCQUAID. The point I was making, Senator, was this:
Suppose you were not in commercial business and a bank was-borrowing from the Federal reserve bank on its 15-day note and you
had bonds that you wanted to offer to the bank and you were not
borrowing the money for speculative purposes at all, bonds in which



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you invested your money some time ago. That bank could not loan
you that money under those conditions.
Senator GLASS. Yes; it could, unless it appeared that the bank
was loaning for speculative purposes, and loaning excessively.
Thereupon that bank would be warned by the Federal reserve bank
or board that its loans on speculative collateral were excessive and
that if they continued to expand loans on speculative papers it
could not get rediscounts at the Federal reserve bank on its 15-day
notes. Is there anything unreasonable about that?
Mr. MCQUAID. Well, but, Senator, you first say in the bill that
that board shall fix the percentage.
Senator GLASS. It has the unlimited right now, has it not, to fix
the percentage? You are talking about investing the board with
power.
M r . MCQUAID. Y e s .

Senator GLASs.Under the existing law it has an unlimited power
to fix the percentage at anything it pleases, has it not?

Mr. MCQUAID. Fix the percentage of loans that we may make on
collateral ?
Senator GLASS. NO, the percentage; you are speaking now of the
1 per cent?
M r . MCQUAID. NO, n o .
Senator BULKLEY. Percentage of loans on collateral ?
M r . MCQUAID. Y e s .
Senator GLASS. NO.
Mr. MCQUAID. This bill gives them the right to fix the

percentage
of the loans which we may make on collateral, you see.
Senator GLASS. Oh, yes.
Mr. MCQUAID. YOU come in then with your bonds.
Senator BULKLEY. Yes.
Mr. MCQUAID. I say, " I have got to turn you down. You have
carried an account with me for years, carried a good account."
Senator BULKLEY. I do not see anything very bad about that, if
you haven't got amr money to lend.
Mr. MCQUAID. I think it has been a sound banking principle,
and that is what the Federal reserve bank was put here for; that it
was for the accommodation of business, commerce
Senator BULKLEY. Yes, within sound limits; but it has not been
for the purpose of giving you money to go ahead and loan more
than you should.
Mr.* MCQUAID. If it is necessary to accommodate your local customers for legitimate needs, that you should use the ^Federal reserve
bank for that purpose.
Senator BULKLEY. Not when jou have got limitations on making
loans that are not for such legitimate needs.
Senator COUZENS. Would you say that any specific amount could
be fixed to regulate that?
Mr. MCQUAID. The Federal Reserve Board fixes that amount;
I do not know what amount is going to be fixed.
Senator COUZENS. Would you prefer the Congress to fix that
amount rather than leave it to the board ?
Mr. MCQUAID. I do not believe an amount should be fixed.
Senator COUZENS. YOU do not believe any amount should be fixed?
M r . MCQUAID. NO.
111161—32—PT 2




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n a t i o n a l a n d jfedebaii r e s e r v e b a n k i n g s y s t e m s

Senator COUZENS. You think you should lend all your money on
that security then at the Federal reserve?
Mr, MCQUAID. How can the hoard determine for me and 7,000
other banks what our particular local needs are, irrespective of any
speculative conditions?
Senator COUZENS. Then your theory is that the bank can loan all
its money on stock exchange collateral and to these brokers and
investment houses without any restrictions at all? Is that your
idea?
Mr. MCQUAID. I do not think any limit should be fixed. But the
banks are not going to do that.
Senator COUZENS. If they are not going to do it, just tell us where
they are going to stop at
Mr. MCQUAID. Well, Senator, I do not believe that any legislation
should just so closely define what a bank shall and shall not do. as to
let that entirely take the place of management and judgment in the
operation of a bank.
Senator COUZENS. No.
Senator GLASS. Haven't they done it 40 times in the national bank
act and here in the Federal reserve act?
Mr. MCQUAID. You have put certain broad limitations on, Senator.
Senator GLASS. We have put many specific limitations upon it.
No member bank shall accept, whether in a foreign or domestic transaction,
for any one person, company, firm or corporation, to an amount equal at any
time in aggregate more than 10 per cent of its paid up and unimpaired
capital stock and surplus—

And so forth.
The Federal Keserve Board under such general regulations as it may prescribe, which shall apply to all banks alike, regardless of the amount of capital
stock and surplus, may authorize any member bank to accept such bills to an
amount not exceeding at any time in the aggregate 100 per cent of its
paid up and unimpaired capital stock and surplus—

And so on and so forth, all through the act, limitations occur
and authorizations occur.
The Federal Reserve Board and Federal reserve banks are empowered by general regulation to put limitations upon certain
classes of loans in statea percentages. You would strip the board
of all that power, would you?
Air. MCQUAID. Senator, is there any place in there now where there
is a limitation on the total aggregate amount of loans of any class
that a bank may take except real-estate mortgage loans?
Senator .GLASS. N O ; and that is the reason we are trying to put
it in now. But I am speaking of the relative authority of the board.
There have been protests against .confiding certain authority to a
central board here, and we have over and over and over again, both
in: the national bank act and in the Federal reserve act, confided
such authority either to the Comptroller of the Currency or to the
Federal Beserve Bank or Board.
Mr. MCQUAID. Of course, this is only one kind of loan. A bank
may make # classification of its loans for its own purpose to see
that it gets a proper distribution of loans.
Senator GLASS. Can you cite us to any abuses of authority in
circumscribing loans of which a Federal reserve bank or Federal
Beserve Board have been guilty?




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287

M r . MCQUAID. N o t y e t ; 110.
Senator GLASS. I can cite you

to some expansion of loans where
they have been Very guilty.
Mr. MCQUAID. Tiiev have been liberal in their views, I understand,
sometimes.
Senator GLASS. I think that is what is the matter with the country
to-day. Yoti see, you require six members of the board to agree.
Do you think it is reasonable to suppose that you could get six
members of the Federal Reserve Board to adopt a regulation that
would operate harshly upon a great many banks? The board, we
naturally assume, wants to facilitate, business transactions, wants
to see them expand legitimately in an unrestricted sense; Do you
think it would be reasonable to suppose that you could get six out
of the seven members of the board to adopt a regulation that would
work a great hardship upon any number of banks?
Mr. MCQUID. Why, I suppose that the board you would have
in the future would be just as good as the board you have had in
the past, and that they would all be reasonable men. At the same
time, can you fix a percentage for collateral loans to be made in
all sections of the country, all banks? There may be different
requirements in different sections at different times of the year.
Senator GLASS. My guess is that if they were to exercise that authority they woiikl exercise it in a rather too liberal way than in a
restrictive sense. That would be my guess.
Mr. MCQUAID. Well, you see the importance of at least more particularly defining the word " collateral."
Senator GLASS. I think it might be more comprehensively defined,
though I confess I would not know exactly how to do it, and some
very experienced bankers who have testified here have said they
would not know how to do it. I know just exactly in what sense
we use the term there, and I do not think it relates to such transactions as you have enumerated.
Mr. MCQUAID. Reserve requirements: The present legal reserve
required to be carried with the Federal reserve bank is only a part
of the cash a bank has to have to conduct its business. This legal
reserve with cash in value and in balance with correspondent banks
will run on an average 20 to 25 per cent of its deposits. This is
unproductive of any revenue except the small amount of interest it
receives on the balances with correspondent banks in reserve cities.
The bill increases the reserves required on time deposits to a fixed
rate. After a study of a year by the Federal Reserve Board, a far
better method of reserve requirements has been suggested} which
would automatically increase the reserve requirements in times of
increasing activity occasioned by either speculative or business boom
conditions and thus act as a brake on excesses.
Senator GLASS. YOU are for the immediate adoption of the velocity
system, then, are you?
M r . MCQUAID. Y e s , s i r .
Senator GLASS. DO you think

it would be thoroughly understood
throughout the banking community in the United States?
Mr. MCQUAID. They have to learn it.
Senator GLASS. We do not want to do anything now that anybody
has got to learn.




n a t i o n a l a n d f e d e r a l r e s e r v e b a n k i n g s y s t e m s•288

Mr. MCQUAID. There will not be much change in the velocity for
a while to come yet.
Senator GLASS. The suggestion that we make here is a pretty slow
process. It extends over a period of five years and merely restores
the reserves to where they were when we reduced them last. So
I do not think there will be much velocity in the system for some
time to come, certainly not if anybody will read the hearings we have
had here in the last three or four days.
Mr. MCQUAID. Liquidation Corporation: Section 12 " B " provides for a corporation which may purchase the good assets of a
closed bank in order to give quick relief to depositors and provides
that member banks shall subscribe to Class "A" stock of the corporation equal to one half of one per cent of their total deposits.
This corporation is plainly not to make any profit on the assets
of a closed bank. The interest the corporation receives on its invested capital funds and the liquidation fee will hardly do more
than pay its operating expenses, and the member banks may expect
no dividend on their Class "A" stock. Why should we be forced to
contribute to the capital of such a corporation ? The member banks
now, by the reserves they carry with the Federal reserve banks
without any interest, and their subscription to its stock, supply the
funds with which the Federal reserve banks make their profits.
The profits of the Federal reserve banks above dividend requirements alone should be used for this purpose, supplemented by that
part of the appropriation made to Reconstruction Finance Corporation for the same purpose.
Senator GLASS. Did your bank contribute to the National Credit
Corporation?
Mr. MCQUAID. We are already contributing through the Federal
reserve bank. Now we are asked to take in addition to that stock
Senator GLASS (interposing). No; but I say, did you contribute to
the National Credit Corporation?
M r . MCQUAID. N o , s i r ; w e d i d n o t .
Senator GLASS. Did not want to, did you ?
Mr. MCQUAID. Didn't think well of it.
Senator GLASS. You had not been apprised

of the fact that the
people who were engineering it had been promised here in Washington that it would be taken over at the expense of the taxpayers
of the country, did you ?
Mr. MCQUAID. I did not; know there was any promise made to
that effect.
Senator GLASS. Well, it is of record here that there was.
Mr. MCQUAID. In thefirstplace, we felt that
Senator FLETCHER (presiding). At any rate, you did not subscribe ?
Mr. MCQUAID. NO. We had our troubles down there two years
before, and we had not had the country come to our help particularly.
Senator GLASS. We thought in this provision that we were giving
member banks an^opportunity to secure additional profits out of
their investments in the Federal reserve system. We thought this
would be one of the most attractive things that we had in the bill.
It is so attractive that many people want us to take it out altogether and pass it anyhow.




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289

Mr. MCQUAID. Senator, if it were not for the reserves that we
carry with the Federal reserve bank, the Federal reserve bank would
not pay dividends, could not pay expenses.
Senator GLASS. Then, would you not be willing to concede that
if it were not for the Federal reserve system, that insurance against
a currency panic, many banks in this country would be in a frightful
situation ?
Mr. MCQUAID. I am heartily in favor of it and putting in that
part of my insurance.
Senator GLASS. DO you think that without the Federal reserve
system we could have survived the shock of the World War?
Mr. MCQUAID. I agree with you.
Senator GLASS. DO you think that without the Federal reserve
system we could have survived the shock of 1928 and 1929 on Wall
Street?
Mr. MCQUAID. We had to have something of that kind.
Senator GLASS. Is not insurance worth anything to a member
bank?
Mr. MCQUAID. This corporation is not an insurance corporation,
Senator; this is a liquidation corporation, Senator.
Senator GLASS. I know, but we think it will make money, and if
it does, 30 per cent of its profits will go to the member banks.
Mr. MCQUAID. I would rather forego my chance of getting profits.
Senator GLASS. Well, of course that is a question of judgment.
Mr. MCQUAID. I say that the Federal reserve system in its capital would not make any money.
Senator GLASS. Neither could the capital of your bank make any
money.
Mr. MCQUAID. HOW is that?
Senator GLASS. I say, neither could the capital of your bank make
any money. You make the money on your deposits.
Mr. MCQUAID. NO ; that is right.
Senator GLASS. Although one witness made the amazing statement to me and to the committee that he made more money out of
capital of his bank than he made out of the hundreds of millions
of deposits. I do not know exactly how he managed it.
Senator WALCOTT. Would you rather have this provision temporarily existing during a period of crisis, for instance, or extreme
deflation or depression, or would you rather have it permanent?
If j'ou are going to have it at all and if you got it so that it would
suit you in its provisions, would you rather have it a temporary,
emergency thing, or would you rather have it permanent?
Mr. MCQUAID. Are you speaking of the bill as a whole?
Senator WALCOTT. No; I am speaking of this liquidation corporation that we are now discussing.
Mr. MCQUAID. Oh, I think this liquidation corporation is intended to be a permanent corporation.
Senator WALCOTT. It is in this bill, but I say, does it help it any
in your mind if it should be transformed into an emergency measure ?
Mr. MCQUAID. I think that makes little difference.
Senator WALCOTT. Makes little difference?
Mr. MCQUAID. If they are going to form a liquidation corporation, why, it might just as well be permanent as temporary.




n a t i o n a l a n d f e d e r a l r e s e r v e b a n k i n g s y s t e m s•290

Senator GLASS. One part of that provision, though, you know, is
temporary, that which relates to nonmember banks.
M r . MCQUAID. Y e s .

Affiliates and branch banking: I think there should be stricken
out of lines 21 and 22 of section 21:
" If such establishment and operation are at the time permitted
to State banks by the law of the State in question."
Senator GLASS. YOU think we ought to go into the States, whether
they want us or not, with national banks ?
M r . MCQUAID. Y e s , sir.

Holding companies were created because Federal law did not, and
many States do not, permit state-wide branch banking.
As a bank having affiliated banks in our State we would welcome
the opportunity to convert these separate affiliated banks into
branches and feel that other banks having affiliated banks would
do likewise. There would not be any need for any regulation of
any holding corporation so far as we are concerned if you are able
to do that.
Senator GLASS. YOU know, one witness only to-day protested
against the invasion of State's rights to the extent of oO miles across
the border from the bank.
Mr. MCQUAID. My preference, Senator, would be to confine it to
State limits.
Senator GLASS. Whether the State law permits or not?
Mr. MCQUAID. Whether they permit it or not. Why should
the Federal law, enacted to give a national, uniform system of banking, be modified and hampered by laws of any one of 48 States,
or the national banks of 1 State denied the facilities or rights given
national banks in another State?
Senator GLASS. I am not disagreeing with you if you could get
an assurance that you could get the branch banking through Congress. I do not think this committee would largely disagree with
you.
Mr. MCQUAID. That would eliminate to a very considerable extent
some of these difficulties about holding corporations.
Senator GLASS. I would like you to have the job of managing
a bill like that through Congress. It took us 16 months to get the
small measure of branch banking in cities and counties.
Mr. MCQUAID. The provision in section 2, paragraph 2, that any
corporation, regardless of whether it is a corporation whose principal purpose is holding bank stocks or is a corporation handling
investment securities, is termed an affiliate if the shareholders owning a majority of the bank's shares control the corporation or if a
majority of the directing officers of the corporation are directors
of the bank, is entirely too drastic, as is also the provision in section
18 that no. director, officer, or employee of a member bank shall engage or be an officer of a corporation which engages in the business
of making loans on collateral regardless of whether thev are primarily dealing in investment securities. This will disqualify direcors who are in no way connected with the investment banking
business.
I mentioned the naval stores business. We have a director who is
president of one of the large naval stores corporations. They make
advances to the naval stores operators. Under the terms of this bill




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291

that director would have to resign. We would lose two other directors for similar reasons, because their companies loan money
on collateral. We have always thought that it was very desirable
that a director represent the different business interests in that
community, get the benefits of the advice of people in different lines
of business. I think still that is desirable, and I hate to see anything
of that kind curtailed, which this will do.
Senator GLASS. You were opposed to the Clayton Act, were you?
Mr. MCQUAID. Sir?
Senator GLASS. Were you opposed to the Clayton Act, that provision of it relating to interlocking directorates?
Mr. MCQUAID. It did not bother me much. I did not pay much
attention to it. We have gotten permission from the comptroller's
office under the Clayton Act to have officers of our bank act as officers
of our affiliate banks. We are not bothered verj^much about that.
Incidentally, we have another corporation thht this would apply to.
I suppose we would have to liquidate the corporation. It is organized ior the purpose of handling real estate mortgage loans, because
we do not believe in the bank making such loans; but under the
terms of this bill we would have to close it up, I expect, and get out
of that business. I do not know whether it is necessary for us to
go that far or not, but they are supplying a need to the community
there that it seems to me is very necessary. But I say, I think
generally under the terms of this bill it looks to me as though that
would be the result so far as we are concerned. It is broad enough
to cover that.
Further, the bank is prohibited from receiving deposits from such
corporations, firms, or individuals loaning money on collateral.
Such drastic provisions are entirely unnecessary and will prohibit
the bank from doing business with many depositors who are in no
way connected with dealings in investment securities.
Is the investment banking business so discreditable that banks
must disassociate themselves from those engaged in it in every way?
While in the opinon of some it may be desirable that banks no
longer engage in the distribution of investment securities, the investment banking business is lawful and an honorable business. Those
associated in it are desirable as directors of a bank and as customers and depositors.
Under the provisions of section 19 no corporation or partnership
owning more than 10 per cent of the capital stock of a bank is
permitted to vote the stock unless a permit is received from the
Comptroller of the Currency, even though the ownership by the
corporation or partnership is incidental to their real business, and
such permit will not be given if they engage in the distribution
of securities, and unless, among other tilings, reports be given periodically to the comptroller and permission be given to an examination
by national bank examiners.
While it may be desirable to require reports and permit examination of affiliate holding companies of banks owning control of affiliate banks—I have no objection at all to that—these restrictions
in other corporations owning more than 10 per cent of a bank's
stock are unnecessarily severe, at the most they should only be
required to satisfy the Comptroller of the Currency that they had




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sufficient other assets to meet any stock assessment that might be
levied upon bank stocks held.
I am perfectly in accord with the idea of regulating the affiliate
holding company such as ours is. We have a corporation whose
stock is indorsed upon the stock of our bank. It holds only bank
stocks, banks that we are interested in. I am perfectly willing that
that corporation be examined as many times as the comptroller
wants to examine it, and I am willing to comply with all the regulations you have provided in there, because that is strictly a holding
company of bank stocks. I am perfectly willing to create other assets that are sufficient to cover the par value of bank stocks. As
a matter of fact, we have cash now for almost the par value of the
bank stocks held in that corporation.
But when it comes to other corporations where they own bank
stock and their ownership is incidental, I think that is pretty severe.
Other lines of business are not going to permit examination by
Federal examiners.
Some of the radical changes and restrictions proposed in the
present bill, to . which only brief reference can be made here, can
work tremendous harm to the banking and business interests of
our country. Changes should be made only after careful consideration, both from the standpoint of actual practice and experience
as well as theory.
Senator GLASS. What would you call careful consideration, sir?
We have been working on this bill since February of last year.
Mr. MCQUAID. Well, Senator, the first thing I knew about this
bill was about a month ago.
Senator GLASS. The fundamental features of it were contained
in a bill that I introduced in the Senate on the 7th of June, 1930.
Mr. MCQUAID. I doubt if there are very many banks in this country that have analyzed this bill.
Senator GLASS. SO do I , sir. And do not mistake my smile when
I say that. Therefore, I wonder that they should have been induced to wire their respective Senators very definitely against the
bill, if they have not understood and seen it."
Mr. MCQUAID. I think instead of wiring they would have been
here had they read the bill. That is the reason*! came.
Senator GLASS. They are here, are they not?
Mr. MCQUAID. Understand, I am heartily in accord with constructive legislation, but I do not like to see something done that is
going to hamper the operation of a bank in a local community, that
is going to make the Federal reserve system less attractive to the
banks, because I think one of the things that you ought to try to do
is to make it more attractive and get more banks into it.
Senator GLASS. Well, so do we.
Mr. MCQUAID. Part of our troubles is very largely because there
are 48 system outside of the Federal reserve system, different kinds
of regulation. The failure of those smaller banks surrounding the
national banks have had the effect upon all of us.
Senator GLASS. If you can devise a provision of this bill or devise
a bill that will enable the constitution of it to create a uniform
system of deposit banking, we will be obliged to you. We find that
the Attorney General of the United States can not do it.




NATIONAL AND f e d e r a l r e s e r v e b a n k i n g s y s t e m s

Mr.

MCQUAID. DO

"'

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293

you think, Senator, that the Congress can not
11 ' ou can provide for state-wide bank-

been determined by the courts; yes.
we can do that. But I am talking about a uniform system 01
banking.
Mr. MCQUAID. Well, I think the other will come.
Senator GLASS. Maybe so.
Mr. MCQUAID. By a process of elimination.
Senator GLASS. We have not ingenuity enough to devise a provision that would be considered constitutional.
Mr. MCQUAID. Make it attractive to the banks that do come into
the system.
Senator GLASS. I mean it would make it so attractive that there
would not be any State banks left, provided we let them in the
system, if we could do that.
Mr. MCQUAID. The small, independent State bank is going to have
a hard time, then.
Senator FLETCHER (presiding). Mr. McQuaid, how many affiliates
has the Barnett Bank?
Mr. MCQUAID. Four banks.
Senator FLETCHER. And how many has the Florida National at
Jacksonville?.
Mr. MCQUAID. Outside of Jacksonville they have, I think, six.
Senator FLETCHER. And how may has the Atlantic Bank?
Mr. MCQAID. They have five outside of Jacksonville. I am not
counting the suburban banks.
Senator GLASS. That would mean that they would all become
branches under the state-wide banking system, would they not?
Mr. MCQUAID. I am only speaking for myself, but I am satisfied
the other two would. And then there is Mr. Romph's bank, the
First National Bank of Miami, that has affiliated banks, and they,
I think, would all welcome the opportunity of assimilating those
banks with the parent bank and operating as branches.
Senator FLETCHER (presiding). Any other questions of Mr.
McQuaid? That is all, then, Mr. McQuaid. We are much obliged
to you.
Mr. Edward W. Lane, who is chairman of the board of the Atlantic National Bank of Jacksonville, has been unable to come, and
he writes this note (reading) :
The hearer, Mr. Edward Ball, of du Pont-Ball Co., who is the controlling
spirit in the Florida National Bank of Jacksonville, has been requested by
me to represent the Atlantic National Bauk of. Jacksonville, and its affiliated:
banks in the Atlantic group, in opposing the objectionable features of the Glass
bill, particularly the group banking provision.
We trust the committee will recognize his representation of us.
Very truly yours,.
E. W .

LANE,

Chairman of the Board.

STATEMENT OF EDWARD BALL, REPRESENTING DTT PONT-BALL
CO. AND ATLANTIC NATIONAL BANK, JACKSONVILLE, FLA.

Senator FLETCHER (presiding). So Mr. Ball, will you speak now
for Mr. Lane and tell us your views about this bill?



n a t i o n a l a n d f e d e r a l r e s e r v e b a n k i n g s y s t e m s•294

Mr. BALL. Mr. Chairman, I am not a technical banker. I trust
that the members of the committee will bear with me when I do
not follow them on technical points.
The Florida National group, which I represent—and Mr. Lane
has asked me to represent the Atlantic National Bank—is also
opposed to the provision that the company owning more than 10
per cent of the stock is to be subject to examination by the Comptroller of the Currency's examiners. Our bank stock is only incidental in our business, though we operate seven banks in the State
of Florida. It is a very small percentage of the business of the
corporation, and we certainly do not expect to have the comptroller's
office examining the books of our corporation four times a year.
Senator FLETCHER. What is your corporation?
Mr. BALL. The Almours Securities (Inc.). We are certainly opposed to the provision in this bill that will require the member
banks to subscribe a certain per cent of their capital to a liquidating
corporation. We believe that when we are operating a line of business, we should try to make a profit, not to absorb the losses of some
people who are not fortunate enough to be able to operate on a
profitable basis.
Senator BULKLET. YOU understand that that is intended to absorb
losses?
Mr. BALL. It is my belief that that is exactly what it will have
to do.
Senator BULKLEY. Why so?
Mr. BALL. If a bank had such poor receivables that it closes up,
how can anyone make money out of liquidating some of those
receivables?
Senator BULKLEY. Does it not depend on what it gets out of them
when it liquidates them?
Mr. BALL. Perhaps SO, Senator.
Senator BULKLEY. Why perhaps? Does it not depend on that?
Mr. BALL. Yes, sir; and the comptroller's office apparently insists
on getting your last dime for the depositors of the closed bank,
and he does not seem to be interested in the success of the bank
who buys those.
Senator BULKLEY. The liquidation corporation is not obliged to
buy at anybody else's price?
Mr. BALL. That is true, Senator. We have had to purchase some
assets of closed banks in our own experience to be able to get a
charter.
Senator BULKLEY. That is different from the liquidating corporation. It does not have to buy any assets of closed banks.
Mr. BALL. Senator, would you suggest even that the liquidating
corporation is going to sell assets for less than their value? Would
that be fair to the depositors of the closed bank?
Senator BULKLEY. I suggest that they are not going to buy them
for any more than their value from the closed bark.
Mr. BALL. . If they pay them their full value, how can they make
J
a profit, Senator?
Senator BULKLEY. If they pay them their fair value they have
the profit of closing them out, of course. Of course, in buying they
allow for the probable expense of selling them, and they buy at a
price that they presume they can make money on; and they are pre


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sumed to buy at so much less than a price that they can make money
at that it is actually provided that they have to give back any excess
over and above a reasonable fee for closing out. Certainly it is not
contemplated that they are going to buy them for any exhorbitant
price or even their fair price. The whole contemplation of the act is
that they shall buy them for less than they can sell them for, and for
substantially less than they can sell them for.
Air. BALL. Would not the receiver of that bank be guilty of defrauding the depositors in the defunct bank if he sold them for less
than they were worth?
Senator BULKLEY. Why, certainly not, because any excess that is
realized from their liquidation comes back to them.
Mr. BALL. Comes back to the receiver?
Senator BULKLEY. Yes.
Mr. BALL. Then, Senator, how can the liquidating corporation
make any profit other than its liquidating expenses ?
Senator BULKLEY. It makes the 6 per cent.
Mr. BALL. If a bank can only make 6 per cent on its capital,
Senator, do you think it could continue in business long?
Senator BULKLEY. That is not what it is figured on; 6 per cent
of the amount realized. Have you read it at all ?.
M r . BALL. Y e s , sir.
Senator BULKLEY. Isn't that what is in it?
Mr. BALL. I read it in the press.
Senator BULKLEY. It hasn't anything to do

with 6 per cent of the
capital, has it? It is 6 per cent of the amount realized?
Mr. BALL. Six per cent of the amount realized.
Senator BULKLEY. Then why are you talking about the 6 per cent
on the capital ?
Mr. BALL. I gather, Senator, that you could only make 6 per cent
on your capital.
Senator BULKLEY. Not at all. There is no limit.
Mr. BALL. I thought it might be like the interstate commerce.
Senator BULKLEY. Not at all. We expect the liquidating corporation to make much more than 6 per cent on its capital.
Senator BROOKHART. Does not all capital in the United States
make less than 4 per cent?
Mr. BALL. Senator, I am convinced of that fact.
Senator BROOKIIART. You do not want the banks to have a special
privilege of making more than anybody else, do you?
Mr. BALL. At the present time, Senator, I think that most capital
makes less than 2 per cent.
Senator BROOKHART. It has made less than nothing since 1928.
Mr. BALL. Yes, sir. It would seem that this bill is an attempt to
regulate management into banks. Now, if it is desirable to regulate
management into banks, why is it not desirable to regulate management for the grain growers, the cattle growers, the canneries, and
every other industry?
Senator GORE. The Farm Board is doing that for the grain and
cotton people.
Senator BROOKHART. NOW let us talk about that just a minute.
Mr. BALL. But, Senator, they appear not to have been successful
for the grower.




n a t i o n a l a n d f e d e r a l r e s e r v e b a n k i n g s y s t e m s•76

Senator BROOKHART. The Farm Board has regulated us into
trouble, there is no doubt about that. But take the banks; the cooperative banking systems all over the world have a regulation first
fixing the earning of capital, wage of capital, just like you fix wages
for men; and second, they have a regulation absolutely prohibiting
the use of any credit for speculative purposes at all. It is arbitrary,
absolute; there is not any condition or ifs and ands about it. If you
are familiar with those you will find that those cooperative systems
in any country where they exist are sounder and safer and better
to-day than any of your competitive banking systems. So those are
very drastic regulations, are they not?
Mr. BALL. Which countries have the cooperative banking systems?
Senator BROOKHART. Well, Great Britain and France has it developed since the war, and Germany, the Raiffeisen and SchulzeDelitzsch, went through the war and through the deflation and came
out sound, when everything else blew up until the Government
helped it out, and Denmark has a magnificent system. Czechoslovakia has one that is almost perfect, and Bolshevik Russia has a
magnificent system.
Senator GLASS. When did you come to the conclusion, sir, that
there should be no regulation of banks and banking management
beyond that akin to the regulation of other enterprises?
Mr. BALL. Senator, I did not assume that banking was essentially
different from other enterprises, and I do believe
Senator GLASS (interposing). You did not?
Mr. BALL. Not necessarily; no. And I do believe that this country was built up on individual initiative and individual management
of business and not in regulation from Washington.
Senator BROOKHART. NOW let us talk about that a minute. Take
a corporation. Does the individual vote at all in any corporation
in this individual country of ours? It is not the capital, the stock
that votes, and not the individual?
Mr. BALL. That is true, Senator.
Senator BROOKHART. Where is your individuality, then, under a
system that wipes out all individuality?
Mr. BAIL. There is an individual management there.
Senator BROOKHART. Under your cooperative system one man
has one vote, regardless of how much stock he has, and those are
sound systems in the world, even in this world of depression. But
your so-called individuality is a misnomer in the United States.
Mr. BALL. Senator, I believe you are going back to—was it not
Daniel Webster's question as to whether the mule or man voted,
he had to have at least a mule before he could vote?
Senator BROOKHART. They used to have such a rule as that in
his days.
Senator GLASS. It looks to me as if you are going back to the
primitive system before the organization of banks when you say
that institutions that control all of the credits and practically all
of the deposits, that issue all of the currency with which we transact business, ought not to have any supervision or regulation.
Mr. BALL. Senator, do they not have a regulation to-day, and
supervision?
Senator GLASS. Yes; but you are not in favor of it.




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Mr. BALL. I had not advocated intentionally—if I had advocated
doing away with the regulation and supervision that they have
to-day, it was unintentional..
Senator GORE. HOW did they decide ? Who did they decide voted,
the man or the mule ?
Mr. BALL. I have forgotten which.
Senator FLETCHER (presiding). That would depend on who had
charge of the election. In some precincts where Peter Jones came
up on a mule, when they asked Peter Jones how he wanted to vote,
he says, " I am voting the Republican ticket." "How did you
come, Peter?" " I came on a mule." 44 Well, put Peter Jones down
voting the Republican ticket and Mr. A. Mule voting the Democratic ticket." [Laughter.]
Go ahead, Mr. Ball.
Mr. BAU.. If it is desirable to have banks subscribing to a liquidating corporation to close out the defunct banks, why would it not
be equally as desirable to have all corporations which own newspapers subscribe a pro rata amount of their capital to liquidate
the failed newspapers and make such profit as there were in liquidating them or absorb such losses as there might be—or any other
line of business?
Senator FLETCHER. DO you recognize the banking business as a
quasi-public business, Mr. Ball?
Mr. BALL. Yes, sir; Senator. Are not most businesses quasipublic ?
Before we had quite so much regulation it appears that the banks
did not fail as frequently as they have failed since we have had
some of this regulation.
Senator GLASS. I am not smiling at that; I am laughing outright.
Mr. BALL. That is what I thought, Senator, and. I have here a
newspaper clipping from a newspaper for the 10 years, 1911 to 1920,
both inclusive, showing that there were 762 banks failed in the
United States. For the 10 years, from 1921 to 1930, inclusive, there
were 6,477 banks that failed in the United States.
Senator GLASS. All due to regulation, was it?
Mr. BALL. I would not suggest, Senator; I would not presume to
suggest what caused the increased failures.
Senator BROOKHART. There was too much of this individuality
that you were talking about.
Mr. BALL. Senator? I believe individuality has been repressed considerably since 1920 m banking, as in other activities in the United
States.
Senator BROOKHART. Been repressed more and more, ever since the
first corporation was ever organized, the British IJast India Co.
That is the first one, I believe.
Mr. BALL. Well, Senator, I am hot familiar with how much individuality there was at the time of the British East India Co., but
it certainly seems that there is less room for individuality each year
under our increase in the number of bureaus in the United States,
and it is a fact that the cost of government per capita in the United
States has been increasing tremendously in the last few years.
Senator BROOKHART. Yes; I heard about that. I also heard that
Mr. Grace of the Bethlehem Steel Co. drew down a $12,000 salarv
and $1,625,000 bonus, which is more than all the salaries of all the



n a t i o n a l a n d f e d e r a l r e s e r v e b a n k i n g s y s t e m s•298

Senators in the United States, and their secretaries included. -1 am
in favor of reducing those salaries.
Senator GLASS. I I you would let Mr. Grace answer, he would say
he is worth more than all the Senators of the United States.
Senator FLETCHER. Is there any other point in the bill you want
to allude to, Mr. Ball, any further provision?
Mr. BALL. Senator, there is one point in the bill 011 branch banking that we do favor. We believe branch banking would be a good
thing, either within the State or throughout the United States. The
Senator here spoke just a moment ago of the British system, which
is a branch-banking system.
Senator BROOKHART. I was not talking about the branch-banking
system; I was talking about the cooperative system. I am opposed
to branch banking.
Mr. BALL. Senator, I thought in the British Isles they had branch
banking.
Senator BROOKHART. YOU know they had a cooperative system
with $4,000,000,000 in it, cooperative, not any of your competitive
system, where they let one man vote regardless of how much stock
he owns and where the earnings of the capital were absolutely fixed
and where the use of credit for speculation is absolutely prohibited.
You did not know about that system at all?
Mr. BALL. Senator, don't we have a competitive system in the
Dominion of Canada which is strictly a branch-banking system, and
where they have had so few bank failures since that system was
installed?
Senator BROOKHART. We just checked that over. They had 11
banks. Of course, they liave many more branches, and thev have
had 16 failures; so it was about 140 per cent in failures in Canada
in their system since it started. So I do not know as they are any
better off on that than your individuality.
Senator FLETCHER. Is there anything more, Mr. Ball?
Mr. BALL. There is only one thing, Senator. I was just going
to remark to Senator Brookhart that under the individual system of
banking in Florida, we have to-day, I was told by one of the members of the Comptroller of the Currency's staff, that the banks in the
State of Florida were the most liquid banks in the United States,
banks that are in stronger position financially than in any other
State.
*
.
Senator BROOKHART. I noticed a long list of them that failed
down there a little while back.
Mr. BALL. That is true.
Senator BROOKHART. And I noticed somebody trying to get there
with some money in an airplane to save them and aid not get there
in time.
Mr. BALL. There were a lot of them that failed, but I do not think
there were nearly as many of them that failed in Florida in the
last year, possibly, as they did in Iowa. Ours failed before yours
did.
Senator. BROOKHART. There was 55 years that we did not have
many failures in Iowa to amount to anything.
Mr. BALL. We hope not to have any failures in Florida in the
next 55 years.
Senator BROOKHART: Then, whenever you get too much of this
individuality you will have plenty of them.




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STATEMENT OF SPENCER S. MARSH, VICE PRESIDENT AND
CASHIER NATIONAL NEWARK & ESSEX BANKING CO., NEWARK, N. J.

Mr. MARSH. I am here at the request of the New Jersey Bankers
Association. While I have no written thesis I want to present to
your committee, sir, if I can, what we think in New Jersey this bill
will do to banks of our class, banks that run from fifty to one hundred millon dollars worth of assets, that have been serving an industrial and manufacturing community, that have not been actively
practicing investment banking or interested in stock-market problems except as they have been using their funds in purchasing highgrade bonds as a secondary reserve. While I have been listening
to the various gentlemen who have appeared before you, I find that
a number of tnem have taken some of my thunder, and I hesitate
to bring up subjects that have been discussed by them.
Senator FLETCHER. Are your banks nonmember banks?
Mr. MARSH. NO, sir. Ours is a national bank. There are both
in New Jersey. There are a great number of them.
Senator FLETCHER. YOU are speaking for the national banks or
the member banks?
Mr. MARSH. I am speaking for the New Jersey Banking Association, which has both members. Our bank is a national bank and
has been ever since national banks existed. We are 128 jrears old.
My first memorandum is that as a class our various institutions
that I have been in communication with do not like to have to
contribute to your liquidating corporation stock. In our own instance it means that we have to contribute $350,000 for that purpose,
and we feel that it is too large an amount for medium-sized banks
to contribute as an insurance fund, if we could use that term.
Some of }rou Senators did use that term, I think, while we were
talking.
Senator GLASS. What is the total volume of your deposits?
Mr. MARSH. $35,000,000. Total assets of $41,000,000.
Senator FLETCHER. Do you have any affiliates?
Mr. MARSH. Well, we have a securities corporation that is art
affiliate, that is only used as an affiliate to buy customers' stocks or
investments, bonds, and investments which they want. They do not
go in it as a business. We have a real estate affiliate that owns the
building we are in, so we are not disturbed about those features of
the bill. We would rather use our $350,000 in the banking business,
and would rather have this liquidating corporation divested from the
Federal reserve act.
- ^ "
One of the features in your bill that disturbs us as much as anything or more than anything is the restrictions on the 15-day loan.
That has come to be a very useful means for financing institutions
such as# we are. There are a large group of them in the State—
institutions that are practically all commercial banks with small
amounts of savings deposits whose depositors carry large amounts,
and they fluctuate. It means that it is easier for us to take Government securities to our Federal reserve bank and use that method of
borrowing, rather than commercial paper. Commercial paper has
disappeared, so far as we are concerned, in a very large measure,
and it has disappeared because a large number of our customers



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who were corporations, during the easy money of 1928 and 1929
financed their needs by issuing stocks and bonds, and got out of the
necessity for issuing commercial paper with which tofinancethemselves. In our particular case, our commercial paper has shrunk
from a volume of $20,000,000 down to $10,000,000. Our commercial
paper before that time ran in large pieces, and was used by manufacturers to finance themselves. The ease with which they sold
their securities took them right out of that market, and now it is
much easier for us. We have about 8 to 10 billion dollars' worth
of commercial paper.
Senator BROOKHART. Is not that enough for your rediscount demands?
Mr. MARSH. Yes; plenty;.but it is much easier for us and easier
for the Federal reserve bank to send them some Government securities and borrow on that. The reason for it is—one of the Senators,
I believe, asked that question—the reason for it is that there are
times when the large accounts drop quickly and we are short a temporary time, until we get our money and pay it off again, in the next
30 days, probably.
Senator FLETCHER. These corporations issue stocks and bonds and
relieve themselves in that way, unloading those on the public?
- Mr. MARSH. Yes; in a good many cases.
r Seniator FLETCHER. And most of them have depreciated?
Mr. MARSH. Oh, yes. They helped supply a large amount of the
stocks that depreciated.
. Senator BROOKHART. Have.the banks unloaded on the public?
. Mr. MARSH. NO, sir. Some of them may have, but I do not know
of any bank that did.
..Senator FLETCHER. Your bank does not engage in distribution of
securities ?
M r . MARSH. NO, s i r ; n o t at all.
. r
Senator BROOKHART. It was the bank affiliates that did that?
Mr. MARSH. I know of no bank in Newark that did it, and

I do
not know any in New Jersey that did it. Although New Jersey
is right under the influence oi the metropolitan practices, they have
never distributed that class of securities as banks. The objection
we have to that, Mr. Chairman, is that by putting the rate 1 per
cent higher than the rediscount rate, it puts a penalty on that
operation and prevents us from making loans, as one of the witnesses
said; and I would like you gentlemen to get this picture. We are
a sort of self-contained community with a good many securities
and a large number of comparatively small people who have securities that they come to the bank and borrow on. We have about
$6,000,000 worth of demand loans that are made up of loans on
collateral, and, I think, it is not touched bv anything that is in
your bill; but if we wanted to make some of those loans while we
were borrowing we could not do it.
Senator TOWNSEND. What is the collateral?
Mr. MARSH. Some of it is stock-exchange collateral. Some of it
is local stocks, and some bonds.
Senator TOWNSEND. Why would it not be covered in this bill?
Mr, MARSH. Because you say in there, in the bill, that while we
are borrowing on a 15-day loan we can not make collateral loans.
That goes back to your definition of " collateral," I suppose.




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301

Senator GLASS. But we do not exactly say that.
Senator TOWNSEND. No.
Senator GLASS. We say that when your bank is put upon notice
by the Federal reserve bank that you are already too far extended
in stock-exchange loans you can not make use of the facilities of
the Federal reserve bank if you persist in still further extending the
loans.
Mr. MARSH. A S I read it, Senator, I read it as prohibiting that
class of loans. If that is true, I would like to know it.
Senator GLASS. NO.
Mr. MARSH. My other objection is, I think that class of borrowing which definitely serves a definite purpose and, I think, a legitimate purpose should not be penalized with the 1 per cent higher rate.
Senator GLASS. That may be. That is a matter for further consideration, although it has had very serious consideration. Suppose that should be abated or eliminated, although you understand
the Federal reserve bank now has the unrestricted right to make
that percentage whatever it may please.
M r . MARSH. Y e s .

. Senator GLASS. And you are assuming because it has not done it
it never will do it, and I think your assumption is correct, I am
sorry to say.
Mr. MARSH. I hope it will.
Senator GLASS. With that eliminated, what objection would you
have to that provision ?
Mr. MARSH. I do not think I would have any;
Senator GLASS. Very well.
Mr. MARSH. The increase of reserves is my next topic. There is
another item I want to take up before that, if I may, and that is the
question of real-estate loans. The bill provides that we can make
a total of 50 per cent of our time deposits; that in figuring the total
of loans it must take in all of those loans that depend for their final
base on real estate. In New Jersey we have, unfortunately, a building-loan situation. The banks of New Jersey are loaning building
loans at the present time, some $63,000,000, and we are trying to
adjust things so that we can all go along as we should. If it is
necessary to figure the total of those loans in our real-estate loans
it is going to throw us way above the 50 per cent and will work a
very clear hardship on the building loans, and they are in bad
enough situation right now.
The CHAIRMAN. They are getting relief under this Reconstruction
Finance Corporation?
Mr. MARSH. Yes; some of them are getting it. That has helped
conditions very materially. Both the Reconstruction Corporation
and the Glass-Steagall bill are helping the conditions there very
materially. But this real-estate feature would work a very real
hardship at the moment because of the inability to. get rid of our
mortgages. There is no mortgage market under the conditions that
exist to-day, and there is no real-estate market. That is one of the
reasons and back of the reason why we feel that the bill should not
be passed at this time.
Senator GLASS. You know that relates to loans hereafter? You
observed that ?
Mr. MARSH. Not to those that we have?
111161—32—PT 2




6

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Senator GLASS. NO.
Mr. MARSH. I read it as though it referred to the present time.
Senator GLASS. No; I suggest you read it over again.

Mr. MARSH., I will.

The segregation of the time deposits: A large number of the
banks in New Jersey have small amounts of time deposits. Some
of them have a larger percentage of time deposits than they have
demand deposits. We feel that it would discriminate against our
demand deposits and would promote the withdrawal of those demand
deposits.
The question of reserves, which I have here, would work a hardship on banks that are at the present time struggling to make profits.
New Jersey suffered, I think as some of the rest of the country
did, by an overproduction of .banks,.both national and State banks,
and at the present time they are trying to have that adjusted. A
good many of the banks are not making any money. If you put
a burden of this kind on, although it is graduated and does not
all become operative, we feel that it is going to be a little'heavy—
too heavy for the banks to make proper profits, because, after all,
banking, as everything else, must make money or it can not exist.
Senator GLASS. How do youfigure,sir, that one-fourth of 1 per
cent on $35,000,000 of deposits would require you to pay $350,000?
Mr. MARSH. One-fourth of 1 per cent ?
Senator GLASS. Yes.
Mr. MARSH. I thought it was 1 per cent.
Senator GLASS. NO.
Senator TOWNSEND. $ 8 7 , 5 0 0 , 1 think.
Senator GLASS. Yes.- Mr. MARSH. I figured 1 per cent, $350,000. That is what I figured on. Whatever it is, we do not want to invest it. We would
rather have our
Senator GLASS. Of course, not. You would like to have all the
profit of the operation.
Mr. MARSH. N O ; we are wiling to give the other fellow a break,
but what, we want to do is to invest it in our banking business.
Senator BROOKHART. Would it not help your banking business to
open its closed banks?
. ?
Mr. MARSH. Our experience in New Jersey has been that almost
in every case where a bank; is closed there has been bad banking
behind it. There may be somewhere that has not been so; but it
has not been only the one thing; it is a combination of a couple
of things: Bad banking somewhere in the past and the present
crisis has brought it to a head. I may be wrong but I think it
would be a very healthy thing for some of those banks not to be
opened.
Senator BROOKHART. YOU do not think these 8,000 banks have
failed in the United States because of bad banking, do you?
Mr. MARSH. NO. I have not enough knowledge of those, really,
Senator, to have a definite opinion, but I have enough knowledge of
the New Jersey situation to know what happened in a good many
of those cases: Not all bad banking—I do not say that—but I said
in a great many instances it was predicated on bad banking and
the present situation brought it to a head.




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303

Senator GLASS. Did not bad banking bring about the present
situation ?
Mr. MARSH. Yes. I think it did.
Senator BROOKHART. In big places and big banks that reached out
over the whole country?
Mr. MARSH. Yes; I think it did.
Senator BROOKHART. And they ruined our little banks and
bankers.
Mr. MARSH. My feeling, Senator, is that there was an overproduction of banks, both national and State banks, all over the country.
Senator BROOKHART. I think there was an overproduction of
speculation.
Mr. MARSH. I agree with you there, too. < It seems to me that
the bill in aiming to curtail the practices of large metropolitan
banks, particularly in security centers, penalizing banks such
as I have tried to describe, which are honestly trying to meet their
responsibilities in industrial communities. I am not trying to paint
an ideal situation, and I do not believe that all bankers such as I
described are without some fault, but I do feel that in trying to
reach this control of affiliates, there are penalties and restrictions
in the bill that will react on banks, such as I have described, and
make it harder for us to operate.
Senator GLASS. What happened, sir, was that some of the experienced bankers who testified before the committee and upon whose
testimony the bill was drafted, were divided in their expressions
of judgment between the abolition of affiliates altogether, their
separation from commercial banks, and more or less severe oversight of them. We tried to strike a happy medium and did not
abolish them but proposed to regulate them.
Mr. MARSH. Well, we have no objection to the regulation of
affiliates. That, I submit, is justified. We do not object to that.
Senator GLASS. YOU, neither in your New Jersey banks, nor in any
other banks for that matter, are penalized along with banks in many
centers unless they follow tlie vicious practices which those banks
followed in making excessive and alarmingly dangerous loans upon
collateral security..
Mr. MARSH. We are penalized if we can not go into this 15-day
practice as we have been. We think we are, at any rate.
Senator GLASS. On the 1 per cent proposition?
M r . MARSH. Y e s .
Senator GLASS. That is a special privilege, though.
Mr. MARSH. Well, it has got to be a necessity as well

as a special
privilege.
Senator GLASS. It has come to be far beyond the intent of the
people who put it in the law.
Mr. MARSH. Of course, the intent, Senator, was to take over commercial paper. Now, take% our own case, and I think it is only
indicative of a great many others. The commercial paper would
mean that to cover a loan of $1,000,000—which is what we
get usually sometimes once a month, or twice a month—it would
mean we would have to take over 200 or 250 pieces of paper when
we have the Government bonds right in our portfolio. It would be




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a nuisance to the Federal reserve bank and a nuisance to us. So it is
following the line of least resistance.
Senator GLASS. I grant you that it is a medium of facility. In
other words it makes more convenient and more expeditious legitimate transactions, and if it were used only for that purpose nobody
would ever raise any particular objection except that to the extent
that it is used it carries you back to a bond secured currency that you
gentlemen for 50 years sought to escape from; but you can very
readily see that it was not intended for that purpose, because at the
time it was embodied in the act, two years and a half after the system
had been in effect, there were less than $100,000,000 of United States
securities that might be used for that purpose, whereas 10 banks
in New York over a limited period borrowed nearly a billion dollars.
M r . MARSH. Y e s .
Senator GLASS. Under that provision of the bill.
Mr. MARSH. TO use in the market?
Senator GLASS. Yes.
Mr. MAIJSH. One of the features of the bill—and

I would like to
know whether I am right in feeling this would touch it—is a situation that exists in some of these small towns. An individual is a
dealer in investment securities, distributing mostly municipal loans.
Now, I read the bill to say we could not go on and loan that individual money while we were borrowing on this 15-day note. That is
a distinct hardship.
Senator GLASS. Oh, no; it does not exclude you at all unless you
are borrowing excessively on speculation and have had warning.
Mr. MARSH. One of my friends has just asked me to speak of telephone loans; that is, loans from the Federal reserve bank. We do
that right along. We have our securities with the Federal reserve
bank and telephone in and get a loan, and send the note in. I do not
see that that stops that practice at all.
Senator GLASS. N O ; but if a telephone is run on the dial system
I hope it may stop it. [Laughter.]
Mr. MARSH. I have covered the main features on my memorandum, Mr. Chairman.
Senator GLASS. We are very much obliged to you.
The CHAIRMAN. We thank you.
STATEMENT OF CHARLES F. ZIMMERMAN, PRESIDENT OF THE
FIRST NATIONAL BANK OF HUNTINGDON, PA., AND PRESIDENT
OF THE STATE BANKERS' ASSOCIATION OF PENNSYLVANIA

The CHAIRMAN. Will you state your name, residence, and occupation?
Mr. ZIMMERMAN. Charles F. Zimmerman; president of the First
National Bank at Huntingdon, Pa. I am also secretary of the
Pennsylvania Bankers' Association.
I come before the committee with a good deal of diffidence because
of representing an interest that seems rapidly to be vanishing in this
country, known as the country banker; and I certainly do not wish
to create an inference that I speak with authority or finality. I do
feel, however, that it is quite pertinent that the viewpoint of the
country banker, which I believe in some considerable degree I represent, might be expressed with regard to the provisions of this bill.
The CHAIRMAN. W © will be very happy to hear it, sir.




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Mr. ZIMMERMAN. First of all, I should like to say that among the
ardent supporters of the Federal reserve system there are none
more marked than the country banker. There is a very high regard
for the administration of the Federal reserve system, particularly as
it comes out of the Federal Reserve Board at Washington, and I
am numbered among those who believe that for the good of banking in this country it is entirely right and proper that more authority
should be lodged in the Federal Reserve Board than heretofore. I
say this because of what little experience I have had in business and
in connection with the business of a bank and the granting of credits.
A house divided against itself can not stand, whether in the matter
of a unit bank or whether in the matter of establishing credit on a
broad basis affecting the whole country.
Therefore, I am entirely in sympathy with the provisions of the
bill that have to do with centering more authority in the Federal
Resefve Board. More than that, I am entirely in sympathy with
the provision in the bill that seeks to correct the abuse of shortterm credit granted by the Federal reserve system to large banks.
That there has been abuse, no one who has been observant would
attempt to deny. I believe that it has had a very vital effect upon
the difficulties that have developed in this country; and with a plan
to coordinate thefinerjudgment of the bankers of America with the
judgment of the Federal Reserve Board in respect to the furtherance
of those restrictions, I am sure the entire country would be in sympathy.
I had not particularly wished to take your time to discuss any of
these provisions at length. I wish to say, however, that in the bill,
as I view it, there are many excellent provisions. The subjects
treated upon throughout the hearings to-day, have been largely by
way of pointing out objections to provisions in the bill, and I do
feel that with respect to certain parts of the bill, there should be
a great deal of caution used so far as further deflation of our credit
position in this country is concerned. I share fully the sense of
anxiety that Colonel Ayers expressed, and I think that due regard
should be had for his point of view.
The particular clause which arouses my interest, and I might say,
amazement, being a country banker in the State of Pennsylvania,
which represents approximately one-tenth of the banking resources
of the United States, is the section that has to do with branch banking. In connection with my remarks on that section I should like
to say that the bane of our banking system as we have seen it develop
during that last six or seven years can be predicated upon the word
" promotion." If we had not been given to bank promotion in this
country as we had, there would not be so much difficulty in respect
to banking, nor would there be so much perplexity facing those who
wish to straighten out these difficulties. More than that, the burden
of the promotional side of banking, as I have viewed it, has fallen
tremendously upon the country banker, so much so that his interests
have been assailed on every hand, his position as an economic factor
has been belittled; and now it seems that those who'have scrambled
the eggs of what we have heretofore considered sound banking and
sound banking methods, are asking to be defended by new legislation rather than reckoned with in respect to the restoration of those




n a t i o n a l a n d f e d e r a l r e s e r v e b a n k i n g s y s t e m s•306

methods which have been time tested during our entire previous
history.
I come here without any prejudice in respect to the specific questions hinging upon the development of a certain branch, group, or
chain types of banking. I do come here feeling that it is a mistake
that Congress should in any way seek to cater to what I choose to
call the go-getter spirit in bank promotion, and that we ought to
the best of our ability, right about face in respect to the reestablishment of unit banking so far as that may be done. I have listened '
to the remarks that have been made before this committee by those
who have, on their own initiative and, perhaps, in violation of the
more conservative standards in banking, gone ahead and built up
these banking structures. I have been impressed with this fact,
that they have not been bankers in essence or to the extent which
would disallow the injection of other than high banking ideals in
our banking s}rstem. They now seek to hold the ground gained
through the sacrifice of those standards and wish to have it become
part and parcel of our thought about Federal legislation. To that
extent that we yield, it seems to me, more and more we are going
to be led into a maze of difficulty from which we might all seek to be
relieved in time to come. I have read the hearings that have been
held by the Senate subcommittee in respect to the suggestions to be
embodied in the Glass bill, and I could not help but feel that very,
very little attention was paid to the viewpoint of those who have
ardently sought to preserve the best standards in the conduct of
the business of banking.
With regard to this question of State's rights, I am simply
astounded to think that Congress would seriously consider the proposal to grant the right for a national bank to cross State lines in
so-called trade areas. I am at a loss to know where any substantial
demand of that sort should arise so far as the practical administration of banking is concerned and so far as the service of banking
to its constituency is concerned, except as it relates itself to the promotional idea in banking. Now, I have not a wide experience. I
have a wide acquaintanceship with many bankers, not only throughout the State of Pennsylvania but, I should say, throughout the
Nation, and I am at a loss to discover where any economic need
exists tor the Federal Government to grant any branch banking
privilege which contravenes the autonomy of our State banking
laws.
Senator GLASS. Mr. Zimmerman, I suppose, of course, you have
read the report of the Comptroller of the Currency on that program?
Mr. ZIMMERMAN. I have read all of them.
Senator GLASS. YOU will have noted there that he does not want
to confine us to state-wide branch banking, and he does not want to
confine us to Federal reserve zones. He wants us to have branch
banking in what he indefinitely defines as trade areas.
Mr. ZIMMERMAN. Senator Glass, I try to be open-minded on these
questions, but I am just as far—after all of my reading and investigation, from believing that proper ground has been established
by the Comptroller of the Currency in his various arguments or by
any other agency interested in that question—as I have ever been.




national and federal reserve banking systems

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307

Senator GLASS. Would you advocate state-wide branch banking
by national banks in those States that are permitted to have State
banks ?
Mr. ZIMMERMAN. I am a believer in the equalization of the rights
and prerogatives of national banks with State banking systems no
matter what they may be.
Senator GLASS. But you would oppose giving the right to national
banks to have branches in States which do not permit branch banking
in the State system?
Mr. Z I M M E R M A N . Unquestionably.
Senator GLASS. I may say to you, as to your suggested opposition to crossing State lines, if you will read the bill you will note that
that may be done only in extraordinary circumstances. The case is
cited to the committee of banks located in cities, that there are very
few of them in this country that cross State lines, and to banks located so near the border as that their main business may be across
the border. So it is not the thought of the committee that that
provision of the bill would be very largely availed of. The text of
the bill is that it may be done only in extraordinary circumstances.
Mr. Z I M M E R M A N . Senator, the provisions in the bill may be harmless enough, but its significance only comes out in respect to what
results from its application. I have a very clear idea as to what
would happen with respect to Pennsylvania if such a privilege were
to be granted. For instance—not that I think it is even remotely
thought of by any bank—in Philadelphia there would have to be
necessarily some compensating privilege granted to the State institution, otherwise, the natural inclination, if there were at least
any rivalry between two of the leading institutions in the city,
would be to leave the State system, and go into the national system.
But the compensating advantage would probably be along the lines
of extending branch banking and weakening the regulation of the
State bank. That is where I feel the danger lies.
Now, we are talking in terms in this country of strengthening
administrative practices of banks and the supervisory processes
as between the State and national systems. The only basis on which
they can be properly coordinated is the common basis on which
they operate. To whatever extent through Federal law you draw
a distinction between that parity, you ruin the highest standards,
it seems to me, that those of us who try to think sanely on banking
questions, have, namely the coordination more and more of the two
types of systems and the eventual bringing about of conditions
which will induce every State chartered institution, to become a
member of the Federal reserve system.
Senator GLASS. Does Pennsylvania permit branch banking at all ?
Mr. ZIMMERMAN. Oh, no; not beyond city limits.
Senator GLASS. Then how could this bill affect you?
Mr. Z I M M E R M A N . In respect to a possible extension of the right
of a Philadelphia bank to establish a branch in New Jersey.
Senator GLASS. D O you think that is very likely under the terms
of this bill ? What would be the extraordinary circumstances ?
Mr. Z I M M E R M A N . I fully grasp the significance of your thought;
but, Senator, if the experience of recent years have taught us anything, it is that through concentration of banking capital the weight
of influence possessed by large banks inevitably brings concussions




308

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and, perhaps, abuses that never were originally thought of when
tiie law was drafted. And so I think if 'we have learned anything
we must get away from the appearance of evil in respect to the
extension of the branch banking privilege.
Senator GLASS. Yes. That has been startlingly illustrated in the
15-day provision of the Federal reserve act.
Mr. ZIMMERMAN. Quite so.
Senator GLASS. I must confess I can not see how under the text
of this bill any Philadelphia bank would be permitted to establish
a branch in New Jersey.
Mr. ZIMMERMAN. I "think the right is certainly conceded if the
pressure were sufficiently strong to persuade the Federal Reserve
Board that it was an extraordinary case.
The C H A I R M A N . In other words, it could only be done by the
Bank of the State of New Jersey that has made you feel the need
of such an extension ?
Mr. ZIMMERMAN. I have no such thought.
Senator GLASS. Should not it be done?
Mr. ZIMMERMAN. The branch-banking privilege accorded a national bank should be upon a parity with that accorded to the
State bank, without a single exception or deviation of any kind.
Senator BROOKHART. I was considerably impressed with what you
said about this promotion proposition of banking. Did the comptroller and his examiners examining the national banks in Pennsylvania approve investments in listed bonds on tlie stock exchange?
l)id he approve that kind of investment as liquid assets?
. Mr. ZIMMERMAN. Oh, yes. I have no thought that in any single
institution in Pennsylvania the comptroller would have taken strong
exception to the method of conducting the bank except in so far
as it might have invested in weak assets. In other words, the finer
details of banking, as I think of them, have characterized every
banking institution. Now, if you make mistakes
Senator BROOKHART. He might describe those bonds as secondary
reserves and recommend them as strongly as that.
Mr. ZIMMERMAN. Oh, yes; there has been a good deal of that;
but I would not attribute to the comptroller's office any supposed
management of a local bank through the recommendation of particular types of securities.
Senator BROOKHART. Has not • that system of banking made the
little countiy banks sustain these big New York promotions all the
time ?
Mr. ZIMMERMAN. I have not a great deal of understanding of the
effect of that intimately within banks, but my discussion with
bankers, unit bankers particularly in Pennsylvania, leads me to believe that many of their securities were bought for the purpose of
secondary reserves due to their confidence in the big bank responsible
for issuing them.
Senator BROOKHART. In other words, they greatly depreciated
those same securities?
Mr. ZIMMER3IAN. That is quite true.
Senator BROOKHART. And I find in the West that the banks were
everywhere loaded up with those stock-exchange securities and now
they are frozen up worse than the farmers' loans were preceding
them.




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Mr. ZIMMERMAN. That is true.
Senator BROOKHART. IS not that a nation-wide system of watered
stocks and bonds that is very detrimental to the banking system?
Mr. ZIMMERMAN. Not only that, but international.
Senator BROOKHART. Yes, I agree with you; internationally; and
the comptroller, who used every opportunity he had to put out
statements for branch banking, was the same comptroller who loaded
up these banks with these securities all over the country, is he not?
Mr. ZIMMERMAN. I shall not admit that he loaded them up, Senator. I do not know anything about his official policies or actions.
Senator BROOKHART. YOU know, his bank examiners said that was
good banking, to buy those securities.
Mr. ZIMMERMAN. I do not think any of them ever said it to me
in our bank, but they may have elsewhere. I should like to offer
this as a closing thought in respect to branch banking: I feel that
the mere mention of state-wide branch banking in that clause is a
threat more or less to the future of unit banking. I do not feel
that state-wide branch banking has proved its case in America. I
believe I could produce——
The CHAIRMAN. And it will take several years tofindout?
Mr. ZIMMERMAN. Quite so. And I believe I could produce evidence that would be corroborative of that viewpoint, which I would
not care to do; biit the mere mention of state-wide branch banking
as though it were an ideal for the national bank system, is uncalled
for. If that whole clause were amended simply to say in respect
to branch banking, as was pronounced in the resolution adopted by
the American Bankers' Association, that the autonomy of State
banking laws should be upheld, I feel that Congress has answered
the question so far as the need for preserving the soundness of
branch banking methods in America is concerned. I see no reason
to depart from it, Senator.
Senator GLASS. Suppose we were to omit front that provision
the authorization with respect to crossing the State line in unusual
circumstances. What would be the objection to the provision then?
Mr. ZIMMERMAN. I think there is no inherent objection except the
one that I have in my mind as to the inference that state-wide branch
banking in itself is a tested system and that national banks are ready
to go along in any State that might think it was right.
Senator GLASS. Well, do you not think national banks should be
permitted to go along in any State that authorizes State banks to have branches?
Mr..ZIMMERMAN. I do. Now, Senator, you realize, perhaps, very
much more than I do, that the mere mention of a type of banking in a bill oftentimes results in the layman getting the wrong idea
about the whole thing. I think we need to avoid even the appearance of danger if we can do it satisfactorily by the wording of the
clause.
Senator GLASS. I have noticed bankers get perverted ideas as well
as laymen.
M r . ZIMMERMAN. Y e s .
The CHAIRMAN. YOU are

Association ?

an officer in the Pennsylvania-Bankers'

M r . ZIMMERMAN. Y e s , sir.
The CHAIRMAN. What position




do you hold?

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systems

Mr. ZIMMERMAN. Secretary. I should like to say, in line with
your suggestion, Senator Glass, that after a little more than 31 years
of experience , in banking, I sometimes wonder whether I have yet
understood anything about it, so that I can forgive a layman if he
is unable to get it right. .
_
,
Senator GLASS. I have been induced, almost, to believe to-day that
I have not only not understood anything about it but have not had
anything to do with it. [Laughter.]
Mr. ZIMMERMAN. May I say in response to that, Senator, I have
followed your work with the Federal reserve system and financial
legislation from its very, beginning. You speak of the opposition,
we will say for the sake of a milder word, of the American Bankers'
Association. If you have not learned yet where it happened that
the bankers had a change of heart, I will tell you. It was at Richmond after you spoke to them.
Senator GLASS. Well, that is gratifying.
The CHAIRMAN. We have two more witnesses here. I want you
to finish. I am just saying this for the members of the committee.
We want to hear Governor Piatt, and Mr. 0ttley,4 of Atlanta, will
be the next witness, and that will'conclude our hearing to-day. I do
not want to close until you are through.
Mr. ZIMMERMAN. I am quite through. I thank you very much.
The CHAIRMAN. I thank you.
Senator GLASS. I do, sir.
The CHAIRMAN. Governor Piatt.
STATEMENT OF EDMUND S. PIATT, NEW YORK CITY, VICE PRESIDENT OF THE MARINE MIDLAND CORPORATION OF BUFFALO,
N. Y.

Governor PLATT. I was moved to remark, in answer to Mr. Zimmerman, that I Pondered how the city of Philadelphia has managed
to survive all these years with a branch or. two located in it across
State lines. The Camden National Bank of Camden, N. J.,- has
had a branch in Philadelphia for almost 120 years, and Philadelphia
is still there. That branch was established in the old days when
crops used to be moved from the lower part of New Jersey into
Philadelphia and was established about 1813 to help move the crops,
and it has been there all these years. It was a State bank originally.
. Senator BUOOKHART. DO you think the idea was that Philadelphia would like to get even with Camden ?
Governor PLATT. A S a mattter of actual fact, branch banking is
not a cormorant and does not grow half as fast as its opponents
think it will. Maryland, Virginia, North Carolina, and a number
of other States have had state-wide branch banking for years, and
no bank in Baltimore has got a branch outside the city except in
the immediate locality, if I remember right, Senator Glass.
I believe that the only way to stop bank failures is to allow banks
to consolidate. Why should they be restricted from consolidating
if they do not happen to be located within the same limits? The
national bank act curiously provides that banks may consolidate
within county limits, but if you do consolidate them within county
limits and they do not happen to be within the same municipal




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limits, one of them has to be closed, and I do not see any sense
in that at all.
Senator BROOKHART. Out in my country they consolidated, and
both of them failed afterwards. [Laughter.X
Governor PLATT. I kiiow when I was on the Federal Reserve
Board we agreed to a consolidation of two banks that were 30 miles
apart—in South Dakota, I think—and it was said that there was
a good road between the two towns, and therefore there was no reason why the other town should have a bank. It would seem to me
20 miles is quite a long way to go. I have talked a good deal about
branch banking at various times, and I now want to say a few
words about the Federal reserve parts of the bill. •
The bill restricts the sale of Federal funds. Several witnesses
have spoken about that. I do not know what the objection to Federal funds is. Senator Glass, you said it has been abused. I know
about the rather amusing shooting of funds across the country in
regard to time. Chicago banks close an hour later than New 1 ork
banks, and the Denver banks close an hour later than the Chicago
banks, and the San Francisco banks another hour later. When the
banks in New York have funds left over at the close of the day they
have sometimes transferred thein to the Western cities when the
difference of time ieaves the banks still open. It does not do any
harm. It tends to spread the lower rates of New York throughout the country to some extent, and while it is a little amusing" as
an example of sharp pencil work on the part of bank managers, it
seems to me it is a good thing. It equalizes reserves to a certain
small extent. Of course, the actual volume of Federal funds that
are transferred is rather small, but so far as they go these are not
harmful, but helpful. There have been cases where Federal funds
have been furnished to another town in time of stress that were
sufficiently large to be of real service. And it enables, I think, Federal reserve policy to be a little better carried out, because, take a
city like Chicago; it naturally should have a Federal reserve rate a
little higher than the New York rate.
It is pretty hard to make a Federal reserve rate that is right for
the big banks that compete with the New York banks and is right for
the country banks, and if you can spread New York funds a little
bit, even in small amounts to the large banks in the city, the Federal
Reserve Bank of Chicago can fix its rate more fairly with reference
to its whole district, I think. So I ,do not see that there is any
reason for regulating or hampering the sale of Federal funds.
Since I have been in New York, I have watched the market for
Federal funds every day, through the Marine Midland vice president
in charge of the bank's reserve. Last summer, for several months,
Federal funds sold for one-eighth of 1 per cent—practically nothing. At that rate, if you sell a million dollars you get only about
$25 profit.
Senator GLASS. It is of so little consequence that I am not acquainted with it.
- Governor PLAIT. That was, of course, an exceptionally low rate
due chiefly to Federal reserve policy. The reserve system was putting funds in the market through purchase of Government securities, making money redundant as there was little business demand.
My belief is that the * Federal reserve system, generally speaking,



n a t i o n a l a n d f e d e r a l r e s e r v e b a n k i n g s y s t e m s•312

ought to regulate the volume of credit in the country through changing reserve rates and not so much through open-market operations,
and not through these little mechanical devices provided in this
bill. That is, devices giving the Federal Reserve Board power to fix
percentages of collateral loans, and so forth. The result of these
devices would be to give the board an opportunity to avoid responsibility in relation to rates, and you can regulate the whole thing,
I believe, mostly by means of rates.
Senator GLASS. YOU were in disagreement with your conferees on
the board in 1929 as to that proposition.
Governor PLATT. I was, very strongly..
Senator GLASS. And with me, too, for that matter, although I
voted to raise the rates on one occasion.
The CHAIRMAN. YOU were a member of the Federal Reserve Board
how long?
Governor PLATT. I was a member of the Federal Reserve Board
a little more than 10 years.
The CHAIRMAN. YOU are now connected with what is called the
Marine Midland Corporation?
Governor PLATT. I am vice president of the Marine Midland Corporation, with an ofiice in New York. But I am not. speaking for
the Marine Midland Corporation. Mr. Rand will be here to speak
for the Marine Midland Corporation.
The CHAIRMAN. We have had two requests from the Marine Midland Bank to hear Mr. Letchworth and Mr. Rand. I am thinking
that the committee has so short a time that we can only hear one of
them and will have to limit him somewhat if we are going to get
through with our hearings in the time agreed upon; but, I am not
saying that with any suggestion of curtailing the subject you are on.
You go ahead, Governor.
Governor PLATT. I have said all I wanted to say.
, Senator BROOKHART. Just a minute about that failure proposition. Out in the agricultural States, if the farmers had received
the cost of production for their products, there would not have been
any bank failures.
Governor PLATT. Well, the failure of no one industry ought to
aif'ect the banks. They ought to be on a broad enough base so that
what was lost in one neighborhood or industry would be made in
another.
Senator BROOKHART. In other words, although a State is predominantly agricultural, the agricultural industry ought not to be
able to make it prosperous ?
Governor PLATT. Well, certainly when agriculture goes down, and
the price of agricultural products goes down, the farmers are hard
enough hit then. Their banks will fail a year or two later and take
the rest of their money. That is what happens right along. Agricultural prices declined greatly in 1920 and 1921. The banks began
to fail in 1922 and 1923 and took the rest of the farmers' money,
and there is no good reason for bank failures.
The CHAIRMAN. I agree with you that the farmers took the expert advice, and those that did not lose their money in the banks, if
they bought securities, they are getting smaller dividends on them
than if they had deposits in good banks.
Governor PLATT. I do not know about that.



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The CHAIRMAN. I will admit it is not very simple mathematics.
Governor PLATT. After all, with any kind of judgment, they have
still got their securities, and most of them are paying them something. A good many of them are not. But we know in our best
years we have had as many as 40 bank failures during the last 25
or 30 years; and somebody said the other day with that, during our
best month in 1929, there were 17 bank failures. I think it is a
disgrace to have any.
The CHAIRMAN. 1 saw a magazine article here that was written
on the Canadian banking system. Their records show they only had
16 failures in 62 years.
Governor PLATT. They have not had a bank failure in 10 years,
and we had 10,000.
The CHAIRMAN. That is exactly it. In the 62 years they have
had more failures than they have had banks. They have 11 banks
in their set-up.
Governor PLATT. I think so. If you go back into the Dark Ages
62 years, you canfindthat a good many things have happened.
The CHAIRMAN. The trouble is, when you have a failure, you can
not just call it one with 400 branches.
Governor PLATT. The last bank failure in Canada was in August,
1922. That was the Home Bank of Toronto. It had about 62
branches. You can call that 62 failures. It does not compare with
the number we had in one year ourselves.
The CHAIRMAN. I am not contending they have the same number
of failures we do. But if the only thing we do with branch banks
is to recommend them as safe, there is not much we do. The
postal deposit will take care of the safety. I am assuming the bank
lias a function of doing something besides taking care of the safety
of the deposits. That is my attitude, but you and I would not agree
on that.
Governor PLATT. I am afraid we would not.
The CHAIRMAN. I am not going into that argument any more.
Governor PLATT. I do not think that we need to have nation-wide
branch banking. Until recently there was a very nice little bank
in Saskatchewan with 25 branches, all in one Province, Saskatchewan, the Wevburn Security Bank. All of the agricultural territory was hard" hit. They did not fail. They are in an agricultural territory, but good^ management or some additional spread of
risk through' branches in different communities kept them from
failure.
The CHAIRMAN. YOU know there are banks in agricultural sections of this country that have not failed.
Governor PLATT/Yes. They could have been run so as not to fail.
The CHAIRMAN. But there are a lot of them that have not failed.
Governor PLATT. Yes.. There are.a good many of them that have
not failed. They are the ones, perhaps, that were a little bit hardboiled or considered hard-boiled among the people that they were
serving.
Senator BROOKHART. It was the hard-boiled ones that broke down
the farmers' values andfinallydestroyed his credit, andfinallydestroyed the banks.
Governor PLATT. I hope we shall some day have a banking system
that will not fail.



n a t i o n a l a n d f e d e r a l r e s e r v e b a n k i n g s y s t e m s•314

The CHAIRMAN. Let us get this: You say Canada appropriated
money to pay their depositors ?
Governor PLATT. That was with relation to the Home Bank failure
of 1922. The depositors were paid. I understand an act of Parliament or of one of the Provinces was passed to pay the deposits.
The CHAIRMAN. All I know about it was I was in Canada and
saw the newspaper item to the effect that one department of the
Canadian Government had voted an appropriation.
Governor PLATT. I have heard that such an appropriation was
made, but I think the liquidation worked out so that the deposits
were covered and the government funds paid back.
The CHAIRMAN. It was a very unusual thing.
Governor PLATT. Yes. May I add that the Home Bank failure
was not due to branch banking in any sense, but to outside investments.
Senator BROOKHART. In the agricultural sections, when the banks
made loans to farmers that were not liquid because they could not
produce anything in six months or nine months, if they were buying
these New York bonds, that would injure agricultural credit and
agricultural values, would it not ?
Governor PLATT. Not necessarily. The banks in agricultural sections have always sent a lot of money to New York. For instance,
in your territory in the fall, when the crops come in, if everything
goes right the farmers will pay their notes off in the fall.
Senator BROOKHART. If they can get the price to pay them.
Governor PLATT. I say when everything goes well, when they have
good crops and good prices, they "will pay their notes off. With
that money the banks either buy commercial paper or send funds
to New York to lend. They can not lend this temporary surplus
at home safely—not at that season. If they do they become tied
up in real estate or something. Many of them have tried that, and,
that is one of the causes of bank failures in that country. The only
thing they can safely do is to send the funds to New York or lend
that money out at low rates on commercial paper, so that thej can
get the money back when needed. They generally buy paper m the
open market or buy New York bonds.
Senator BROOKHART. If the New York bonds were not liquid, the
farmers' loans were not.
Governor PLATT. The farmer would not want to borrow in the
winter, and he would have no reason for borrowing at the time when
the banks had this money.
Senator BROOKHART. Oh, yes; he does. He buys his cattle and
feeds them through the winter on his credit.
Governor PLATT. That is in the cattle-feeding territory; yes.
Senator BROOKHART. That is the territory I mean.
Governor PLATT. There is always a surplus of money in the West
in the fall, after the crops are in, when things go right.
Senator BROOKHART. There are certain crops there now. Thank
you.
The CHAIRMAN. Mr. Ottley is the last witness to-day.




n a t i o n a l and federal reserve banking systems

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315

STATEMENT OF JOHN K. OTTLEY, PRESIDENT OF THE FIRST
NATIONAL BANK OF ATLANTA, GA.

The CHAIRMAN. Tell us something about your banking connections, besides being president of the First National Bank of Atlanta.
You are connected with more than one bank, I understand?
Mr. OTTLEY. Yes, sir. I have that all in my statement.
The CHAIRMAN. YOU are telling your own business connections in
the statement you are about to make ?
M r . OTTLEY. Y e s , sir.

During a lifetime devoted exclusively to the banking business,
I have always believed in national banks, and am still of the opinion
that they should continue to furnish the soundest banking service to
the country. I am in favor of every regulation that promotes their
safety and stability without impairing their usefulness. I have
always been an advocate of the Federal reserve system. So great
was my interest and faith in the measure that I came to Washington to hear President Wilson deliver his message to Congress
on the subject. In addition to aiding in its establishment I served
for two terms as a director of the Federal Reserve Bank of Atlanta;
am at present a member of the advisory council to the Federal
Reserve Board, and have at all times aided in securing new members and in endeavoring to extend the usefulness of the system.
This statement is made in no spirit of egotism but merely for the
purpose of assuring the committee, who do not know me, that I
appear here as a friend of the system you are endeavoring to perfect,
and as one who desires earnestly to be permitted to round out his
banking career within the Federal reserve system.
It is not my purpose to discuss this bill in its general application,
but merely to show you how it affects the institutions with which
I am associated, and it is, therefore, proper that I should describe
them. The First National Bank of Atlanta has furnished sound
and conservative banking service to its city and section for more than
65 years. It is the oldest national bank in the cotton States and
the largest bank south of Philadelphia. Indorsed upon the certificates held by the shareholders of this bank is the usual clause
evidencing their pro rata beneficial interest in the trusteed stock of
the Trust Co. of Georgia.
This trust company has been a member of the Federal reserve system for a great many years. It was one of thefirsttrust companies
established in our part of the South, and by its conservative management has acquired a valuable good will. Its capital stock is
$2,000,000. Its surplus is $2,000,000. It has more than a million
dollars of undivided profits, and it is administering estates and
trusts or has wills on file representing something like $100,000,000.
The First National Associates is a corporation organized under
the laws of Georgia, all of whose capital stock is held by the Trust
Co. of Georgia. None of it is held by the public.
This company owns the majority of the capital stock of the following national banks, located in the five largest cities in Georgia,
outside of Atlanta: National Exchange Bank, Augusta, Ga.; Fourth
National Bank, Columbus,-Ga.; First National Bank & Trust Co.,
Macon, Ga.; First National Bank, Rome, Ga.; Liberty National
Bank & Trust Co., Savanjiah, Ga.



n a t i o n a l a n d f e d e r a l r e s e r v e b a n k i n g s y s t e m s•316

The First National Associates is the owner of a large quantity of
other property, but is strictly a holding company and does not engage
in any active business whatever.
Under the various definitions of affiliates in section 2 of the act,
it would appear that the First National Bank of Atlanta, the Trust
Co. of Georgia, and the First National Associates are each affiliates
of the other and of the national banks located in Augusta, Columbus,
Macon, Borne, and Savannah. Surely it was not the intention to
include member banks as affiliates. This would apparently follow
from the fact that affiliates are required to make statements and submit to examinations which would be quite unnecessary if affiliates are
member banks. The act can be made clear, if this is the intention, by
limiting the term " affiliate " to trust companies,financecompanies,
securities companies, discount and acceptance companies, investment
trusts, or other similar institutions or corporations not members of
the Federal reserve system (top of page 2.) I submit for your
consideration a proposed amendment to this effect.
Amendments to S. 4115: Page 2, line 1, after the words "trust
company " insert the words " other than a member bank."
Page 2, line 4, after the word "corporation" insert the words -'not
a member bank."
Indorsements on stock certificates: The act, if passed, would compel us to do away with the indorsement on the present certificates of
the stock of the First National Bank evidencing the ownership of the
holders in a pro rata amount of the stock of the Trust Co. of Georgia,
thereby completely divorcing the two institutions. (Sec. 17, p.
38, line 17.) Granting the power of Congress to do so, it seems to me
that the power should not. under the circumstances, be exercised
unless the necessity is compelling.
At the time this arrangement was made between the bank and the
trust company it was entirely legal and in accordance with a longestablished precedent which had at least the silent approval of Congress. For approximately 20 years such indorsement had been
commonly used before it was adopted by our companies, and Congress had not sought to pi-ohibit it. Rights had grown up under it,
investments had been made on account of it. and the obligations of
these contracts should not be lightly violated. A large amount of
trust business which might have come to the bank has been turned
over to the trust company, and these trusteeships can not now be
altered.
If I may be permitted I would like to say at this point, I assume
that it is probably known to all members of this committee that there
have been court decisions, one in Massachusetts, and one in Georgia
holding that a consolidated bank does not succeed to trust powers.
We had a State bank in Georgia doing a trust business and a national bank, and we consolidated them, and immediately following
the consolidation of those two under the national-bank charter, the
national bank was enjoined from succeeding to the trust business of
the State bank, and it was carried by us to the Supreme Court and
the Supreme Court of Georgia affirmed the decision. That is what
I mean by that.
The CHAIRMAN. In other words, you were sustained in your position?
Mr. OTTLEY. Yes, sir; that the trusteeships can not be changed.



n a t i o n a l and f e d e r a l reserve banking systems

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317

I would like further to defend the practice itself. Instead of being a detriment to sound banking, it is, as we use it, in the interest of
sound banking. Practically all the powers of the Trust Co. of
Georgia are incidental powers of banking which the First National •
Bank has the right to exercise. Instead of having all these activities
of a purely trust nature, carried on by the bank, they are exercised by
a trust company of substantial character with a long-established
reputation, itself a member of the Federal reserve system. The
bank is thereby left free to devote all of its energies and capital to
purley banking functions, which is, to my notion, in the interest of
sound banking practice. At the very least an exception should be
made of banks and trust companies which are members of the Federal
reserve system and subject to the regulations of the board.
Group banks: The act would, in my opinion, have a disastrous
effect on the group of banks in Georgia affiliated with the First National Bank of Atlanta. This group was organized in accordance
with the law, and rights have grown up which could not be protected under the Federal reserve system if this act is passed. Each
bank in this group is unquestionably stronger, and able to afford
better service to the public as a member of the group than it would
be if operated independently.
As between group banking and branch banking under proper regulations, I have no hesitation in saying that I advocate the latter.
Section 21 of the act, page 45, is an approval of branch banking, but
it does not go far enough to save the groups already organized since
it is limited to those States which permit branch banking by State
law. Georgia permits branches but under such limitations and restrictions as would not be applicable to our group. The legislature
of the State is not scheduled to meet for more than a year and we
could not, therefore, reasonably expect to secure the necessary legislation in time to save our group unless this act is amended by permitting groups already organized to be converted into one bank
with branches at the places where the established banks are now
located.
All members of our group are national banks and, therefore, members of the Federal reserve system. They are operated by independent officers, and in every instance care has been exercised to retain
the local boards of directors primarily interested in the welfare of
their communities and the accommodation of commerce, industry,
and agriculture in the contiguous territory. In addition to subscribing their full quota to the National Credit Corporation and
aiding in every legitimte way the other financial institutions in
Georgia, these banks have retained the confidence of the public and
have been able during the depression through which we have passed
to afford adequate banking facilities to their respective localities.
Having been organized in full compliance with the laws of both
of State and Nation, valid contracts have been made and relationships
have been established affecting extensive property rights. Having
done no wrong and having committed no crime, I respectfully submit
that we should not be punished because some < n else has broken faith
5e
or abused a privilege. The many provisions of the act aimed at
group banking would affect seriously not only our banks, which represent 30 per cent of the banking capital and deposits of Georgia, but
also another sound and well-organized group in the same territory.
111161—32—pt 2




7

n a t i o n a l a n d f e d e r a l r e s e r v e b a n k i n g s y s t e m s•318

These two groups furnish to the commerce, industry, and agriculture
of Georgia more than half of its banking accommodations.
Senator TOWNSEND. YOU are speaking of the whole State now?
Mr. OTTLEY. Yes, sir; the whole State.
The CHAIRMAN. Did I understand you to say this group furnishes
the banking facilities for more than half the State?
Mr. OTTLEY. I say the group that I represent furnishes more than
30 per cent of the banking capital and resources of the State. There
is another well-managed, sound, strong group, which, together with
our group, furnishes more'than 50 per cent of the banking capital and
more than 50 per cent of banking credit of the entire State.
The CHAIRMAN. Inasmuch as you speak of capital and credits I
will ask you, how many units does your group operate?
Mr. OTTLEY. Our group has the First National Bank in Atlanta
andfiveunits out in the State; in thefivelargest cities in the State
outside of Atlanta.
The CHAIRMAN. YOU have six of the largest banks in the State?
M r . OTTLEY. Y e s .
The CHAIRMAN. And

they furnish about 30 per cent of the banking capital?
Mr. OTTLEY. The other group has a larger number of units, even,
than we have, though the total capital and deposits are not quite §o
large as in the group that I represent.
The CHAIRMAN. They have about how many units, as an estimate I
Mr. OTTLEY. I would say that they have approximately a dozen.
The CHAIRMAN. Are they organized on the same basis that you
are? Is the set-up the same?
Mr. OTTLEY. I am glad you asked me that question. The other
group is the Citizens & Southern National Bank with headquarters
at Savannah, and they have branches in Atlanta and Augusta and
Macon and Athens. Then, in addition to that
The CHAIRMAN. Are they branches under the State law ?
Mr. OTILEY. Yes, sir. They took those branches when they were
a State bank and the laws of the State of Georgia permitted branch
banking. Then, when they joined the Federal reserve system, they
retained those branches, but they got those branches under the
State law.
Branches are not now permitted in Georgia outside the cities
because somebody put in a rider on a bill in the Georgia Legislature
one night after 12 o'clock. I was up there at the legislature until
about 12 o'clock listening to the bank bill. It looked as if it was
settled and everything, and then somebody after 12 o'clock stuck in
a rider limiting the branch banking in Georgia. Since that time
the other group, the Citizens & Southern National Bank, have established affiliates just the same as we have.
The CHAIRMAN. Who are the holders of the stock, then? Have
they a holding company that is the holder of the stock of those
affiliates?
Mr. OTTLEY. That is the way it is done in the State of Georgia.
They must be held by a holding company.
The CHAIRMAN. HOW many of these affiliate banks have they,
about?
Mr. OTTLEY. They have, for instance, established an affiliate at
Dublin, which, I think, was thefirstone. That is a good-sized town




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•

319

in which every bank in the town had failed, and upon the popular
request of the people they went down to that place and established
an affiliate.
The CHAIRMAN. Which affiliate has a national bank charter or a
State bank charter?
Mr. OTTLEY. That one has a State bank charter. Then they have
an affiliate at Thomaston. That is a State bank. Then they have an
affiliate at La Grange, Ga., and that is a national bank. Part of
their affiliates are national banks and part of them are State banks.
The CHAIRMAN. Their total number of units would not be over
15 or 20 branches and affiliates?
M r . OTTLEY. NO.
The CHAIRMAN. That

is what I am trying to get at. I was not
sure that I understood your set-up. I understand a number of large
banks have the stock held in a holding company there.
Mr. OTTLEY. The stock is held by our holding company; yes, sir.
The CHAIRMAN. All right. I thank you. You may proceed.
Mr. OTTLEY. These two groups furnish to the commerce and industry of Georgia more than half of its banking accommodations. A
way out should be left open, and this is through branch banks.
Groups already organized should be permitted to retain as branches
the banks they now have, notwithstanding the State law.
Senator GLASS. I understood you to say Georgia permitted branch
banking.
Mr. OTTLEY. Senator^ I said that at one time Georgia permitted
state-wide branch banking. It now permits branch banking but in
a limited way and so limited, in fact, that it would not cover the case
of either the First National group or the Citizens & Southern.
Loans on collateral security: The term " loans on collateral security " used in many places in the act should, in my opinion, be
clearly defined and limited. Loans on warehouse receipts, compress
receipts, bills of lading, and paper that stands for commodities of all
sorts are loans on collateral security. Banking accommodations can
not be afforded to the commerce, industry, and agriculture of the
country without loans on collateral security.
Under section 18 of the act, page 39, line 16, no national bank or
member bank can perform the functions of a correspondent bank or
have as its correspondent any corporation that makes loans on collateral security. Since all member banks make loans on collateral
security, none of these could act as correspondents for any other or
have any other act for it, and this prohibition would apply to the
Federal reserve banks themselves since they likewise make loans on
collateral security. I am sure this was not intended, but there is no
escape from the plain language of the act. If a certain kind of collateral security was intended this should be defined and all other
collateral loans excluded.
One hundred dollars par value: Section 17 of the act, page 38,
restores immediately the par value of all national-bank shares to
$100 each, but gives to banks having shares of less than $100 par
two years within which to issue new certificates. While I have no
objection to this change if it can be brought about without affecting
the present rights of stockholders, I call attention to the fact that all
persons having less than $100 par value of stock are automatically




n a t i o n a l a n d f e d e r a l r e s e r v e b a n k i n g s y s t e m s•320

disfranchised. If the par value at present is $10 a share and a shareholder has less than 10 shares, he could not vote and there would be
no way to issue him a certificate. Under those circumstances what
would become of his double liability? If the banks must issue new
$100 par certificates it is only fair that the act should provide a
method by which it can be legally accomplished.
Unobjectionable provisions: There are many provisions of the act
to which I personally have no objection, among them the open-market
committee and the requirements as to reports and examinations of
affiliates. The more frequent and the more searching you make the
examinations of the institutions in which I am interested the better
pleased I will be.
I heartily indorse the provision of section 28 for the removal of an
officer or director for the continuance of unsafe and unsound practices, and I believe that the enforcement of this provision would
strengthen the banking system of the county. I can not emphasize
that section too strongly, because it is familiar to every member of
this committee that banks have gone along with mismanagement and
the public has known about it, and the Comptroller of the Currency
has known about it, and the superintendents of State banks have
known about it and they have criticized it. But the way to get them
out has not been plain, and I think that a way ought to be made to
get them out; and so far as I am concerned as a banker, I willingly
and heartily indorse that section.
Senator BROOKHART. I would like to apply that to the Federal
Reserve Board itself.
Mr. OTTLEY. If I do not do right I am ready to let any three
people vote on me.
The CHAIRMAN. I think you want to go ahead without much interruption. It is getting late and I hope you will be permitted to.
Mr. OTTLEY. I am nearly through.

While I have no particular interest in the restrictions sought to be
placed on 15-day loans, section 11, page 25,1 am of the opinion that
the effect will be to limit a facility which is much needed to deprive
the Federal reserve banks of a profitable business, and to lessen the
value of Government securities.
Real-estate loans: Attention has been called by others to the practical difficulties involved in the enforcement of the provisions of
section 14 of the act, page 33, relative to the revaluation of all realestate loans and the adjustment of the loans to the revised valuations.
I indorse the testimony already given by others on this subject, and
would merely add that in my opinion this provision would prevent
national banks from making form loans, and would give to the
insurance and loan companies a monopoly of this business.
Increased reserves, section 13, beginning on page 27: I have
devoted my exclusive attention to banking during my entire business
life, and I give it as my deliberate opinion that character of assets
and not lack of reserves has been the cause of bank failures. The
increase of reserves at the present time is unwarranted, uncalled for,
contrary to the best interests of the banking system of America, and
lessens the ability of the banks to accommodate commerce, industry,
and agriculture."
The Federal reserve banks do not need these additional funds.
The member banks do need them. The First National Bank of




national, and f e d e r a l reserve banking systems

321

Atlanta alone has $28,000,000 in time deposits, mostly in the savings
department. The additional reserve on this sum would amount to
$1,960,000. In other words, my bank would have just that much
less to lend its customers and just that much less to stimulate the
commerce, agriculture, and industry of the section in which it
operates.
As a banker I would estimate this money as having an annual
earning value of 5 per cent or $98,000. Our bank has reduced its
dividend rate 25 per cent. Twice the salaries of its officers and employees, beginning at the top, have been reduced. Other necessary
economies in operation have been put into effect, and, in the face of
all this, to suffer the loss of $98,000 a year in revenue is more than we
should be asked to bear. The fact that we are given five years to
accumulate this additional reserve affords little comfort since the
obligation is immediately established.
Under the proposed reserves a nonmember State bank in Georgia
with the same deposits as the First National Bank of Atlanta would
have a possible advantage of $225,000 a year in earnings, since the
reserves of a member bank must be carried in the Federal reserve
bank without interest, while a nonmember bank could invest its
reserves in United States or State bonds.
Investment and segregation of time deposits, section 14, page
32: Section 14 makes it mandatory for national banks to invest all
time deposits not loaned upon the security of real estate in an eligible
list of securities set up under the State law in which savings banks
may invest, or where there is no such law, in such property and
securities as may be specified by the Comptroller of the Currency.
(P. 33, line 22.)
The section further provides that all the property of any insolvent
national bank acquired under this section shall be applied by the
receiver thereof in thefirstplace to the pavment in full of its time
deposits. (P. 34, line 11.)
Since real estate loans are made impractical under the provision
for revaluations and readjustments, it will mean that all time deposits must be invested in securities approved by the State for the
investment of savings bank funds, or in such property and securities
as may be specified by the comptroller, and they will thereby be
withdrawn from the available bank credits to commerce, industry,
and agriculture. This in my opinion is the exact reverse of what
should happen. We need in this country more liquid bank credits.
There are enough frozen assets already. We need money to handle
the crops, to hold them, if necessary, for better markets, and to
carry on the general legitimate business enterprises of the country.
In my own bank we have approximately $75,000,000 of deposits,
of which $28,000,000 is classified as time deposits. If this act becomes effective, none of this money—which means $28,000,000—can
be used for commercial banking purposes or the accommodation of
commerce, industry, and agriculture. When the average depositor
learns that his time deposits are additionally secured, we may confidently expect that he will resort more and more to time deposits,
leaving only a necessary balance in his checking account so that the
time deposits may soon come to exceed by far the demand deposits
in national banks. This provision of the act applies only to national
banks. By reason of the lien given time depositors, the demand



n a t i o n a l a n d f e d e r a l r e s e r v e b a n k i n g s y s t e m s•322

deposits will become to that extent more insecure. Since depositors
in State banks in Georgia and probably in most of the other States
stand on an equal footing, it becomes apparent that time deposits
will enjoy the greater security in national banks and demand deposits in State banks. The inevitable tendency will be to encourage
the use of State institutions for commercial banking and to transform national banks into savings associations.
The CHAIRMAN. I am not sure that I understood: Is there a
double liability in the stock held in your holding company?
Mr. OTTLEY. There is not a double liability; no, sir. But, as I
stated, we have a large amount of property other than bank stocks.
The CHAIRMAN. I am simply trying to find out how many of
these bank groups retain the double liability feature of the unit
bank. I thank you.
The committee will meet at 10.30 o'clock to-morrow morning in
the regular committee room.
(Whereupon, at 6.40 o'clock p. m., an adjournment was taken
until Tuesday, March 29,1932, at 10.30 o'clock a. m.)




OPERATION

OF

THE

NATIONAL

RESERVE BANKING

TUESDAY,

M A R C H

AND

FEDERAL

SYSTEM

29,

1932

UNITED STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY,

Washington, D. 0.
The committee met at 10.30 o'clock a. m. in room 303 Senate
Office Building, pursuant to adjournment on yesterday, Senator
Smith W. Brookhart presiding.
Present: Senators Brookhart (presiding), Townsend, Fletcher,
Glass, Wagner, and Bulkley.
Senator BROOKHART (presiding). The committee will come to
order. We will hear Mr. Preston first.
STATEMENT OF THOMAS R. PRESTON, CHATTANOOGA, TENN.,
PRESIDENT OF THE HAMILTON NATIONAL RANK

Mr. PRESTON. Mr. Chairman and gentlemen of the committee,
I have not prepared a statement although I have a few notes of
what I hope to say. I shall attempt to make clear to the committee
how this bill would affect our institution, and I think what will affect
one would affect all.
I am not going to attempt to speak except on two or three points.'
And I do wish to say that I believe the bill has many constructive
features.
First, I am going to attempt to explain to you how the proposed
reserve on time deposits would affect our institution. We have
normally about $20,000,000 of deposits, which are about 50-50; that
is, half time deposits and the other half checking or demand deposits.
Our normal reserve is about $1,000,000. In addition our deferred
credits will amount to about $500,000 more. So we have in reserve
account and in the deferred credit account with the Federal reserve
on the average about $1,500,000 .all the time.
Now, if the reserve is to be moved up on time deposits from 3
to 7 per cent it will mean that we will have to have $400,000
additional.
In addition to that I will say that we are not in a reserve city, and
we require a good deal of vault cash for pay rolls and other purposes.
Our vault cash now is just about in the same proportion it was
before the establishment of the Federal reserve system. So in
realitv with a bank no larger than ours one would have to have a
reserve account of $1,400,000 and deferred credits of $500,000.
Now. if we may say that money is worth 6 per cent, and that
is the legal rate in Tennessee, it would cost our bank $24,000 per
annum additional.



323

n a t i o n a l a n d f e d e r a l r e s e r v e b a n k i n g s y s t e m s•324

I appreciate the fact that the Federal reserve system is rather an
expensive thing. It has many advantages, of course, and this thing
of switching deposits from demand to time will be an expense to us,
too, which will be more than we could gain.
For instance, when we pay interest on demand deposits at all it
is at the rate of 1 y2 per cent, and on savings we pay 3% per cent.
So there is a difference of 2 per cent, and all that we would save
would be the difference between $30 on each $1,000 and $70. So instead of being an advantage to us it would be an expense.
I will say that we have rarely ever switched checking accounts to
savings accounts.
Senator BROOKHART. HOW about the case of other banks; would
that be an expense to them if they did that?
Mr. PRESTON. It would be the same probably to all banks.
Senator BROOKHART. Then why do they do that switching?
Mr. PRESTON. In our section of the country they do not do it to
any extent. Of course I can not speak for other sections, and I can
not speak for the other fellow, but I will say that we have never
done it to any extent. Occasionally we have had temporary deposits
that we have switched, but it is very seldom the case. In fact, at
this time I can not recall a single account that we have of that kind.
Another thing about the Federal reserve system, the people are
not sold on the system. A sign up on a bank that it is a member
of the Federal reserve system, to the public, does not mean what
it should mean. In other words, I do not think we have many, if
any, customers who do business with us because we are a member
of the Federal reserve system, or who would quit us if we were
not.
To put this additional burden on us would right at this time be
a hardship. We have reduced dividends. We have reduced expenses. We have reduced the pay of everybody from the porter up.
And this would mean to us in the matter of reserve an expense of
$24,000 per annum.
Senator BROOKHART. On that switching business I can see if they
switch from demand to time accounts, which would mean that they
would only pay the demand rate, where they would gain an advantage by reducing the reserve.
Mr. PRESTON. YOU take these bank examiners, and they would be
pretty apt tofindthat out and report it. I do not know that many
banks do that, because the difference between the time rate and the
demand rate is quite considerable. On lots of accounts we do not
pay anything at all.
Senator BROOKHART. IS there any way that it could be stopped
without increasing the,time reserve?
Mr. PRESTON. Yes. I think the bank examiners could stop that.
Senator GLASS. But the bank examiners do not seem to have
stopped many things that went on in Tennessee and Kentucky some
time ago.
Mr. PRESTON. Well, that is true.
Senator BROOKHART. YOU may proceed with your statement.
Mr. PRESTON. Another thing, eligible paper in banks is growing
less all the time. There are many reasons for that situation, but
one reason is that the average Federal reserve bank is rather drastic
in their consideration of what is eligible paper. And then, too,




national and federal reserve banking systems

•

325

improved transportation facilities has had a good deal to do with
reducing the amount of eligible paper.
We, as a rule, are a nonborrowing bank. We seldom use eligible
paper, and do not believe much in rediscounts and bills payable
except for temporary purposes and emergencies.
Now, you take this liquidation corporation that has been proposed,
and I think upon the whole it is a good thing. I think it would
inspire confidence to some extent in the public. If the bill is enacted
as drawn our subscription to the stock of such a corporation would
be $100,000, and I am very doubtful if that stock would ever pay us
anything in the shape of dividends.
Usually a bank exhausts its good assets before it fails. In liquidation there is very great depreciation. Now, that contribution coupled
with the excess reserve would cost our institution $30,000 a year
figuring money at 6 per cent, and about a like amount for the banks
that we are associated with or in a measure own. So upon the whole
it would cost us and our associates, and I will come to that in a
minute, $60,000 per annum, which would be a very great hardship
at this particular time.
Now, in a sense the subscription to this proposed liquidating coiv
poration means you will be doubling on the banks in a way. You
make them put up one-half of one per cent on their deposits, and
then the Federal Reserve System contributes to it. The Federal
reserve makes verv little money except upon the accounts the banks
that we have a subsidiary which has a capitalization of $500,000, which was created by dividends. The certificate
of the Hamilton National Bank carries with it a proportionate interest in this subsidiary. This bill would completely put that institution out of business and force us to liquidate what we have.
And why should that be done ? We think we have been constructive along that line. We handle municipal bonds, a few industrials,
and some preferred stocks. I can cite one instance in which I think
we have been helpful through that subsidiary to our community:
Our city water company, which is not publicly owned, wanted to
extend their mains. In" connection with another institution in our
town we underwrote $500,000 of preferred stock of the water company and sold it to the public, and thus the water companj' extended
their mains. And that is one stock which this depression has not
depreciated to any extent. It is being redeemed as agreed, and the
interest is promptly paid.
As I view the situation, people will always invest in securities.
I think a subsidiary of a bank as a rule is as responsible as the average individual broker. Some in our town are responsible and others
are not, and to those the investing public would be driven.
Senator BROOKHART. DO you invest in listed bonds on the stock
exchange in your bank?
Mr. PRESTON. TO some extent but to a very limited extent.
Senator TOWNSEND. DO you favor the same examination for your
affiliate?
Mr. PRESTON. Yes, sir. I see no reason against it. As a matter
of fact we have an examination now of the affiliate the same as of
the bank. An examiner has just completed an examination of our
institution, and he examined the affiliate the same as the bank.



n a t i o n a l a n d f e d e r a l r e s e r v e b a n k i n g s y s t e m s•326

Senator TOWNSEND. Referring back to the matter of the reserve,
do you feel that the present reserve is adequate ?
Mr. PRESTON. I think so. I do not see why it is not, I do not see
why the Federal reserve system needs any more money, and it
lessens the lending power of a bank when you increase the reserve,
there is no question about that.
Senator BROOKHART. YOU may continue your statement.
Mr. PRESTON. NOW, as to these 15-day loans: We sometimes use
that 15-day privilege but I do not recall many instances when we
have used it, and it has not always been on Government securities.
And it is quite an advantage to us. While that is not important, I
mean that extra 1 per cent, still it would be a hardship on us and
a hardship on the community.
Rediscounts and bills payable in our section of Tennessee have
never been popular.
Now, as to the rate of interest on loans: Our rate in Tennessee is
6 per cent, and, in this bill it says that the rate of interest must never
exceed the legal rate. In my judgment that will do harm to the
very people it is intended to benefit, and they are the small borrower
at the country bank. A man in Tennessee, who borrows $50 from a
small country bank, which is one of these character loans we talk
about, would be charged under this bill 25 cents. As a result they
won't make any loans.
Now, the industrial loan people, the Morris Plan Bank and others,
in our community charge 16 per cent, and I think they are doing a
very constructive and helpful work. If a man borrows $100 they
charge him 8 per cent and give him $92, and give him 12 months
in which to pay it, in 12 equal installments. By that plan he
keeps all the money an average of six months which is 16 per cent.
That is the lowest of those rates I know anything about in our
community.
If you eliminate the little follow from the making of character
loans, you will drive him to the industrial banks or to the loan
sharks.
Senator GLASS. Mr. Preston, it seems to me you have an amazing
misconception of that provision of this bill.
Mr. PRESTON. I may misunderstand it.
Senator GLASS. YOU are not permitted now to charge more than
the legal rate of interest, are you ?
Mr. PRESTON. Yes, we charge the legal rate of interest.
Senator GLASS. That is what I say. The purpose of that section
of this bill was to
Mrs. PRESTON (continuing). But it is not enforced. But the most
of our loans are at the rate of 6 per cent.
Senator GLASS. I do not think any restraining statutes about banking are enforced. That is the trouble. But I am saying that you
have the legal limitation now.
M r . PRESTON. Y e s .
Senator GLASS. The

sole purpose of this bill was to allow you to
charge above that legal rate when the Federal reserve bank raises its
discount rate, so that you will not be precluded altogether from transacting business in such times. For example, in 1920 the rate at three
Federal reserve banks was raised to 7 per cent. It was raised to 7
per cent in those territories where a majority of the States had a




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327

legal limitation of 6 per cent. Your bank in those circumstances
could do no rediscounting at all except at a loss of 1 per cent.
Mr. PRESTON. We could not.
Senator GLASS. Well, the whole purpose of that section would be
to enable a bank to do it in those circumstances.
Mr. PRESTON. Well, I did not so understand the provision.
Senator GLASS. I see you did not.
Mr. PRESTON. I am glad to know it. I thought it limited a bank's
character loans to the legal rate.
Senator GLASS. It enables a bank in such circumstances as I have
described to increase its interest charge, and that was the whole
purpose of the provision.
Mr. PRESTON. Thank you.
Senator BROOKHART. You may continue your statement.
Mr. PRESTON. NOW, we have a small group, and under the terms
of this bill—well, I will first describe the group: We have a group
only in our immediate territory. The parent bank is one and there
are 16 others. Our total deposits normally are about $40,000,000.
There are 4 groups in Tennessee, 2 in Nashville, 1 in Chattanooga, and 1 in West Tennessee, composed wholly of country
banks. Not a single one of those banks has had any trouble during
this depression, and I will say that I have been in the banking business a good many years, and have gone throughfivedepressions, but
I have never seen values melt as they have during this time. The
depression of 1893 was bad, but not as bad as this. None of these
banks has failed or taken the 60 days' withdrawal notice, and I think
all of them have done constructive work, and they have saved a good
many weak banks. We have ourselves taken over six in the past year
and a half, and some of those I know would have failed.
Another thing we have found, and I think it is true of all sections
of our State: The public are not against branch or group banks.
They like to do business with a large and sound bank.
Senator GLASS. Well, they are not the same thing, Mr. Preston.
Mr. PRESTON. I .know they are not the same thing.
Senator GLASS. They are not the same thing by any means.
Mr. PRESTON. But the public have no objection to either kind so
:far as I have been able to ascertain.
Senator GLASS. We have been urged to abolish group banking
altogether.
Mr. PRESTON. Well, I think it is all right to abolish group banking
if we had some place to go.
Senator GLASS. Well, we have tried to provide you a place in this
bill to go, in the matter of branch banking.
Mr. PRESTON. Branch banking would be all right. The bill provides that we can go to branch banking only when the State laws
allow the same privilege to State banks. As an example, you gentlemen would follow the Tennessee Legislature, and it IOOKS to me like
it would be fairer for the Tennessee Legislature to follow Congress.
Senator TOWNSEND. Doesn't the State of Tennessee permit branch/
banking?
Mr. PRESTON. Only within city limits.
Senator GLASS. If it permits it at all under this bill a national
bank would not be confined to a State. We do not require that.




328

national,

and

f e d e r a l reserve banking

systems

Mr. PRESTON. YOU permit only state-wide branch banking or areawide branch banking when the State permits it.
Senator GLASS. Yes.
Mr. PRESTON. Then some national banks in some States would
have a state-wide privilege, while in Tennessee they would not have
it. It may be all right, but I don't just quite understand the
provision.
Senator GLASS. That might put you to the necessity of going to
the Tennessee Legislature and getting them to legislate on a sound
basis for branch banking.
Mr. PRESTON. It would.
Senator GLASS. But if you can assure us that Congress will make
it otherwise we will be very glad for you to do it.
Mr. PRESTON. It looks to me like these limits could be put on
branch banking. For instance, you could have the groups covert
their units into branches and stop there, or you could permit them
to extend their branch banking when they bought out an older
institution and allow them to go on.
I think the unit bank has served a great purpose, and that it
should be preserved and protected. I do not believe that a large
bank should be allowed to put up a branch in any community at
will. They might buy an old bank or something like that or absorb
one and create a branch.
Senator GLASS. Did you ever hear of a borrower at a bank, a business man or merchant, who wanted credit at a bank, who objected to
branch banking?
Mr. PRESTON. In few instances I have.
Senator GLASS. I never have.
Mr. PRESTON. In fact, most complaints come from the borrower.
Senator GLASS. Well, I have been in Congress 3 0 years, and I
have sat in at many bank hearings, and I have never known'a-man
who wanted credit, who was a borrower at a bank, to object to branch
banking.
Mr. PRESTON. It is seldom the case, that is true.
Senator BROOKHART. I can bring you some that will make very
emphatic objections out of their own experience.
Senator GLASS. They might be major stockholders in some bank
who wanted to monopolize the community.
Senator BROOKHART. N O ; they are not bankers at all.
Mr. PRESTON. I think the key to this whole business is the branch
banking feature if it is extended and you allow these groups to
convert. I think that will do as much to stabilize thefinancialsituation as anything else, and probably more than anything else I
know of.
Senator BROOKHART. In branch banking doesn't it often turn out
that the local branch has to get authority from a higher place?
Mr. PRESTON. Sometimes that is true, but that depends upon
managers.
Senator BROOKHART. And it is very detrimental to the local
community.
Mr. PRESTON. Sometimes that is true. And sometimes it would
be better if it were true more frequently, to have at least a conference about loans.
Senator BROOKHART. YOU may proceed with your statement.




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329

Mr. PRESTON. Well, that is about all I have to say, gentlemen of
the committee.
Senator BROOKHART. Any more questions? ( A " pause, without
response.) We thank you, Mr. Preston.
Mr. PRESTON. I thank you gentlemen for hearing me.
Senator BROOKHART. We will now hear Mr. Payne.
STATEMENT OF WILLIAM K. PAYNE, CHAIRMAN OF THE
BOARD, AUBURN-CAYUGA NATIONAL BANK & TRUST CO.,
AXTBTIRN, N. Y.

Mr. PAYNE. Gentlemen of the committee, I come here as a smalltown banker in a small city in the State of New York, in the heart
of the agricultural section, where a good deal of our business is
dependent upon agriculture and the success of agriculture. A good
deal of our business is done with farmers.
Senator BROOKHART. IS that in northern New York?
Mr. PAYNE. N O ; it is in central New York, west of the central part
of New York State.
Our bank is a merger of two banks, one of which had served the
community for 115 years and the other for 99 years.
We have been through a great many depressions, and we hope and
expect to get successfully through this depression.
I appreciate that this committee has been engaged in a long and
exhaustive study of the banking situation, and I think you are entitled to the gratitude of all bankers for your work, and 1 certainly do
not want to come down here to Washington with any captious
criticism of any of the features of this bill.
But I, as well as other bankers in my section, are seriously alarmed
because of the very earnest belief that any attempt to change materially existing banking and commercail practices at this time will
tremendously handicap the recovery of business and the prosperity
of our people up there.
During the last 10 years I have had considerable to do with the
so-called banker-farmer movement up in our section of the country,
and I think I know considerable about the attitude of the smalltown banks in relation to our agricultural community and what their
troubles are. And I might add that we are having a very real struggle to keep the people there going, and we feel that they want and
need all the help we can give them.
Senator BROOKHART. DO you have many abandoned farms in your
section of the country?
Mr. PAYNE. A considerable number. We have a reforestation
project up there that is going to take care of many of those farms.
It will cost a good deal of money, but ultimately I think it will solve
some of our farm problems up in that whole section of the State.
As a small-town banker I have little immediate interest in the
so-called affiliates. Many of them seem to be serving a useful purpose, and some of them seem to have been operated not entirely for
the public good. The sort of banks I am speaking for are not bankers for stock exchange brokers or investment banking houses. At the
same time, we do feel with a strong conviction that an attempt at
this time to " reform drastically," if you please, this branch of our
financial system, in the manner proposed by this bill, would so



n a t i o n a l a n d f e d e r a l r e s e r v e b a n k i n g s y s t e m s•330

inevitably and seriously affect security values that many of our small
country banks, which have so far successfully weathered the storm,
would not be able to survive.
Senator BROOKHART. DO you mean by that statement that country banks buy a good many of these securities?
Mr. PAYNE. Yes; altogether more than we wish they had.
Senator BULKLEY. What provision of this bill will hit securities?
Mr. PAYNE. By disturbing or throwing out of gear this system
of marketing and carrying securities through the banking system.
Senator BULKLEY. I do not quite follow you yet. What will do
that?
Mr. PAYNE. This idea of cutting off from the facilities of commercial banks those people that are engaged in investment banking or stock exchange houses, it would inevitably throw on the
market in a very chaotic way a lot of securities.
Senator BULKLEY. Your understanding is that the bill cuts them
off from the facilities of banks?
Mr. PAYNE. I think it would severely hamper the existing system.
Senator BROOKHART. That ought to have been done before those
country banks bought those securities.
Mr. PAYNE. Possibly so. I am not particularly interested in how
they do business, but I am very much interested that the present
system shall not be disturbed, certainly not at the present time,
speaking from a selfish standpoint, for 1 believe it would affect our
own securities.
Senator BROOKHART. If it is wrong, it seems to me we have got
to get rid of it.
Mr. PAYNE. What was that?
Senator BROOKHART. I say, if it is wrong at some time we have
got to get rid of it.
Mr. PAYNE. Yes. And of course there are a great many changes
that could be made in the law at the proper time. But we are in
a situation now where we are very much alarmed at the idea of
these things being done, just at the present time.
Senator BULKLEY. I do not think: you have made clear how this
is going to hurt that situation any.
Senator TOWNSEND. IS it your feeling that any bill passed now
would be dangerous to the situation you have described; is that your
idea?
Mr. PAYNE. Yes. Any bill that markedly changes the existing
situation, a situation which has grown up, of course, through an
experience of years, would materially affect us in these present
times. And the situation to-day is so delicate that any little thing,
such as the suicide of Mr. Ivar Krueger in Paris, will have a bad
effect. That had a tremendous effect. I know a bank that has some
of those securities.
Senator BULKLEY. HOW much influence in the matter of actual
points of depreciation did that suicide have?
Mr. PAYNE. HOW was that?
Senator BULKLEY. HOW much effect did it have?
Mr. PAYNE. Well, I know of one bank that had quite a lot of their
securities, that they have wanted to get rid of for a Ion* time but
have not had the courage to take the loss, and they are seriously
contemplating whether they will not have to clo^e




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331

Senator BULKLEY. What does that have to do with the fact of the
suicide?
Mr. PAYNE. Well, the market went down.
Senator BULKLEY. HOW much?
Mr. PAYNE. I can not quote you the figures.
Senator BULKLEY. Very little, wasn't it, and it came right back
again?
Mr. PAYNE. It was quite a lot.
Senator TOWNSEND. The Krueger and Toll securities were affected
tremendously.
Senator BULKLEY. In the matter of their securities, yes; but I
thought Mr. Payne was talking about the general market situation.
Mr. PAYNE. I say that one thing disturbed that section of the market, and there is one bank I know of that will quite likely have to
close by reason of it. And if there is another general disturbance,
or other disturbances of the market at the present time, it will add
to the troubles of the banks.
Senator BULKLEY. I do no see that you have pointed out any disturbance that would be created by this bill.
Mr. PAYNE. Well, I think it is quite evident that if the provisions
of this bill drastically change the banking situation at this time, that
will be the result.
Senator BULKLEY. What do you mean is so drastic? What point
about this bill is drastic?
Mr. PAYNE. It would affect banks in many ways. You are cutting them off from the use of commercial banks. 1 mean people engaged infinancingsecurities.
Senator BULKLEY. What provision of this bill cuts any person off?
Mr. PAYNE. YOU are providing, for instance, that investments in
banks on time money shall be limited to certain real estate and savings bank securities.
Senator BULKLEY. What provision of the bill are you referring to
now? I am not quite sure that we are talking about the same thing?
Mr. PAYNE. It is section 14, I think. [Beading:]
Every such bank may apply the moneys deposited therein as time deposits to
the loans herein authorized, and the balance of such time deposits—

Senator BULKLEY (interposing). On what page of the bill do
you find that?
Mr. PAYNE. Page 33, at the bottom of the page.
[Continuing reading:]
and the balance of such time deposits shall be invested in property and securities in which savings banks may invest under the law of the State where such
national bank is situated.

Now, there are
Senator BUKLEY (interposing). How much difference does that
make in the case of your bank now ?
Mr. PAYNE. TO my own bank very little, but I know of a bank,
that has securities and they are just holding on by their toes.
Senator BULKLEY. YOU are speaking now about real estate securities.
Mr. PAYNE. No; I am speaking about the same securities that they
have now, but they are not savings-bank securities.
Senator GLASS. Ought they to have them?



n a t i o n a l a n d f e d e r a l r e s e r v e b a n k i n g s y s t e m s•332

Mr. PAYNE. NO. But this is a time when they are almost dead,
and I do not think you should suffocate them.
Senator GLASS. When will we stop it with the bad kind of bank?
Mr. PAYNE. When the situation gets so there is a real market for
securities, founded on their intrinsic value, and not when prices are
founded on panic values, such as we have now.
Senator GLASS. Then won't the bankers come here and say: Don't
touch anything now. You will freeze this remakable prosperity we
are enjoying.
Mr. PAYNE. I will not, Senator Glass, because I think it ought to
be done then.
. Senator BROOKHART. I have a chart made by the Alexander
Hamilton Institute which shows that stock values are right now as
high as they were at the time of the 1919 war inflation.
Mr. PAYNE. Of course, our bank has no stocks. We are not doing
a stock business.
Senator BROOKHART. Well, bonds would be inflated along with
stocks, or at least they always arc.
MI*. PAYNE. Well, we have a good many bonds in our bank that
certainly are not inflated.
Senator BROOKHART. There are a good many bonds that are deflated.
Mr. PAYNE. What was that?
Senator BROOKHART. Isn't the trouble with bonds that the banks
have purchased, they were inflated bonds and they are now depreciated in value ?
Mr. PAYNE. Yes; perhaps that is so in some cases.
Senator BROOKHART. And if their value is less, somebody has got
to take the loss. Should we <*ive them the opportunity to pass that
loss off on to innocent people?
Mr. PAYNE. I think at this time. Senator, if we should do that
if we should close these banks by that action, it would do more
harm to the investor than any possible harm that could be done
by holding on to them until we get back to fairly normal conditions.
In a small town if there is a bank failure it is a tremendous thing
to the community, as you know.
Senator BROOKHART. I know that perfectly well. I have been in
two of them myself, so that I know from experience.
Mr. PAYNE. Well, right around my section we have not had any,
and we certainly don't want any.
Senator WAGNER. Mr. Payne, has there been a shrinkage in the
amount of loans made by your bank covering, say, the last 12
months?
Mr. PAYNE. Yes. Of course we are not lending anything for the
purpose of investment. Where people want to get into the market
we don't help them. But people who have .business loans, of course
they have shrunk because they have not the use for the money*
Many of our industries are not operating.
Senator WAGNER. That is the point 1 want to come to next. Is
that due to the refusal of the bank to make loans?
M r . PAYNE. O h , n o .

Senator WAGNER. Or is it simply the reduced demand for credits?
Mr. PAYNE. We would be very glad to make some good loans.
We are loaning.




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333

Senator. WAGNER. That is clue to business activity?
Mr. PAYNE. Yes. We are now loaning to some of our farmers
who are looking ahead for their summer requirements, and even,
I think, we are making some loans I do not like to make but I feel
we have got to do it to lielp them along.
Senator WAGNER. Are they dairy farmers?
Mr. PAYNE. There are dairy farmers. We are a very diversified
agricultural industry. We are on the edge of the fruit belt. We
made a loan the other day to a man who has a large apple orchard
as well as other things. We have diversity of products. Our country used to be the largest timothy hay county in the United States
before Mr. Ford put the horses out of'business. They have changed
into dairying and raising of alfalfa and diversified crops.
Senator WAGNER. DO the farmers you are in touch with include
the territory around Orleans County ?
Mr. PAYNE. NO. That is quite a little west of us. We are just
26 miles west of Syracuse.
Senator WAGNER. There were a number of bank closings in the
Orleans district, were there not?
Mr. PAYNE. Yes; I think so. I am not very familiar with the details of it, but I know they had troubles up through there. They
had some trouble in the fruit section. When the joint stock land
banks started they made some very liberal loans up through there
and got the farmers very badly in debt, and they have had a lot
of trouble. We have had very little of that in our section.
Senator WAGNER. Some of the farmers up in that section now feel
there are not enough banking facilities there for their purposes?
Mr. PAYNE. They may not have for the immediate time, but I
think one of the things we are suffering from is they had too much
credit. They were encouraged to borrow too much money some
years ago.
Senator BTJLKLEY. I would like to understand further what you
think is drastic about this. As I understand it, you are reading
from section 14 as an example of a drastic change. Do you mean
that it is a drastic change in the existing law to have this limitation on loans on real estate ?
Mr. PAYNE. No; I do not think, Senator, that you understand me.
Senator BTJLKLEY. Just what is drastic about that? I would like
to understand you.
Mr. PAYNE. I stated that thing would cause trouble to some of
our banks. What I meant was
Senator BULKLEY. What sentence in it would cause trouble?
Mr. I?AYNE. It was not that paragraph that I referred to as a
drastic change in industrial machinery. What I referred to particularly was the provisions in here. I have gone over this.
Senator BULKLEY. What was your purpose in referring to this
paragraph? Do you object to it at all?
Mr. PAYNE. Yes. That a good many. of our banks if they are
limited to savings-bank investments suddenly will have to——
Senator BULKLEY. Limited to what ? Limited to .50 per cent of
their time deposits on real estate?
Mr. PAYNE. Limited to the balance that they may have in other
than real-estate loans, to savings banks, to legals. It will compel
111161—32—PT 2




S

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them to throw out of their banks at a very low price some securities
that they have to hold on to in order to weather this thing.
Senator BULKLEY. You noticed how long a time they are given to
complete by this section, did you?
Mr. PAYNE. Yes. If we knew when this recovery was coming,
and how fast, we might not be so thoroughly alarmed; but in my
opinion, and, I think, the opinion of most bankers, it is going to
be very, very slow.
Senator GLASS. Suppose we advance the time from two to five
years?
Mr. PAYNE. I think that would help very much.
Senator BULKLEY. I am inclined to think you are right about
that What did you mean by a drastic provision?
Mr. PAYNE. A S I went over the bill I was impressed very much
with the idea that it was going to very seriously cripple the
Senator- BULKLEY That is very interesting, because quite a number of witnesses here have made the statement that some provisions
of the bill are very drastic, and always when I ask them just what
the drastic provisions are, we have this same long pause, which is
not always shown in the record. I was wondering if you were going
to be more successful than some of those.
Mr. PAYNE. That is all very proper criticism, Senator; but I confess that I was focusing my attention more on certain specific things
here. I am not intimately interested in this stock exchange branch
of banking; but going over the bill, without specifically making
notes on just what they are, the impression was very strong on me
it was going to interfere seriously with that business.
Senator BULKLEY. My theory is some of you gentlemen have
had certain very drastic language suggested to you and you have
adopted it without analyzing it for yourselves.
Mr. PAYNE. I have had no language suggested to me.
Senator GLASS. Either that or there is a coincidence of opinion
and criticism that is rather extraordinary.
Mr. PAYNE. Well, it may be some of both. I do not know.
Senator GLASS. Some people have gone to night schools.
Senator BULKLEY. Just to get it fairly stated: Do you really mean
that there is anything drastic in it, or was that just a general
statement?
Mr. PAYNE. That was the impression made on me very strongly.
Senator BULKLEY. If it made that impression it surely ought to
be justified by some one or more things in the bill.
Mr. PAYNE. It certainly should, and I confess that just at the
moment I cannot put myfingeron them. I am quite sure they are
here.
Senator FLETCHER. The expression " a drastic provision " is a very
general expression. What do you mean by " a drastic provision"?
Restrictions or lack of restrictions, or what do you mean ?
Mr. PAYNE. I mean a rather drastic interpretation of the methods
of doing certain forms of business which have grown up for years
and any change in which would be sharp for the time being, and that
this is not the time to do anything of that sort.
Senator FLETCHER. YOU refer to the general effect of the legis6
lation?
M r . PAYNE. Y e s .




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Senator TOWNSEND. IS there a general opinion among the bankers
in your section that any legislation now, whether drastic or mild,
would affect the situation?
Mr. PAYNE. I talked with several of them before I came down,
here, and they all felt about the way I do, that this was no time to
do it. We are under a severe strain, and we feel that anything that
adds to that strain now simply should not be.
Senator GLASS. Then you think it would be deplorable for Congress to pursue this proposed investigation of the stock exchange
right now, do you not?
Mr. PAYNE. I do not know as it would be, no. I do not think an
investigation would do any harm—a constructive investigation.
Senator GLASS. DO not you think that would be rather disturbing
right now?
Mr. PAYNE. Well, we have had so much, if it is not followed by
a threat of immediate action, I doubt if it would have a serious effect.
I am not an expert on stock exchange procedure and my opinion is
worth very little on that subject, Senator, if anything.
Senator GLASS. But you seem rather disturbed over what you
think is some drastic interference with that.
Mr. PAYNE. I mean as it affects us as small country bankers. As
far as the large bankers are concerned, that is their grief. I do
not want to speak for them. I do not know about their situation.
Senator BULKLEY. It is not too late, if we can find something
that is really drastic in the bill, to correct it, but if you can not
guide us to it and we can not think of anything ourselves, it is pretty
hard to make it less drastic.
Mr. PAYNE. I got in here yesterday and heard some of the addresses here, and I have read some of the newspaper reports, and
it seems to me that—Senator BULKLEY. Have you heard anything more than just a
vague generality about how drastic it is?
Mr. PAYNE. I think I have. I do not know what you mean by
a vague generality. When a person comes in here and says that certain provisions of the bill which they point out will do this and
that?
Senator BULKLEY. If you would name the provision certainly I
would withdraw the charge of vague generality. That is what I
am inviting you to do.
Senator GLASS. Yesterday perhaps you heard an experienced and
apparently very intelligent banker, speaking for the whole banking
association of his State, say that the requirements of the liquidation
corporation would exact a contribution of $350,000 from his bank,
whereas the actual computation showed that the contribution would
onlv be $87,500.
Sir. PAYNE. I did not hear that statement.

I was not here all

the time.
'
.
Senator BULKLEY. I had a further purpose m asking you that
question, because I think there is some language in this bill which
certain bankers have misinterpreted, and I think that their misinterpretation is pretty readily understandable. Two or three
bankers have criticized one part of this bill and have promptly
withdrawn the criticism when it was explained to them what the



n a t i o n a l a n d f e d e r a l r e s e r v e b a n k i n g s y s t e m s•336

section really meant; and I w as wondering if you were one of those
that had been deceived in that way.
Mr. PAYNE. What provision is that?
Senator GLASS. The provision about " the purchasing and selling
hereafter."
Senator TOWNSEND. Section 15.
Senator BULKLEY. Concerning the amount of securities which
banks may purchase and hold for their own account.
Mr. PAYNE. I am frank to say that, on myfirstreading, I think
your language seems to be rather vague, but I did not interpret it
the way I heard it in some
Senator BULKLEY. YOU do not think there is anything to be
alarmed about that, do you ?
M r . PAYNE. N O ; I do not.
Senator BULKLEY. It has

generally been agreed that it is not
alarming when they understand what it means.
Mr. PAYNE. Yes. Of course, I would rather see the bill become
a law with a little more specific explanation about that.
Senator BULKLEY. I quite agree with you that the language would
have to be clarified.
Senator GLASS. Yes. We have repeatedly stated to witnesses we
are glad to clarify any of the language there that seems to be misunderstood ; but that does not seem to make any impression on
succeeding witnesses. They devote themselves to identical criticisms.
Senator BULKLEY. Some of them have not heard the other
witnesses.
Mr. PAYNE. I assume that is largely the purpose of these hearings,
to bring out those defects, so we may explain wrhat seems to be a
defect is not really a defect.
Senator GLASS. Most of them stick to the curriculum.
The CHAIRMAN. Have you any further statement?
Mr. PAYNE. Yes. There are one or two other things I would like
to say if I do not trespass too much on your time.
On the questioon of the branch bank business: Many of our country banks have long given their community satisfactory service under
the unit banking system and view with some apprehension a further
extension of chain and branch banking. My own opinion is that this
system will grow as, if, and when it suits the business needs. It is
a slow and evolutionary growth, and itsfinalform will come through
the trial and error system. Whatever legislation is enacted will not
be perfect; there will be defects in it, and during that time of experimentation it will be costly to the banking system, but I think
it has got to come.
Senator GLASS. What has got to come?
Mr. PAYNE. Experiments as to what is the ultimate form of out
banking system. But it seems to me that this is not the time to go
through those experiments. If you gentlemen feel at all the way I
feel about the serious situation we are in now, it seems to me you can
agree with me that anything in the nature of experimental legislation looking to a change or to new forms of the machinery of business
should not be undertaken at the present time.
Senator GLASS. But we have had witness after witness to tell us
that we not only should have branch banking but that we should
go into States regardless of State laws.




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•

337

Mr. PAYNE. That may be so. Senator. I do not think any of us
can predict what the ultimate form is going to evolve out of this
system. I think there are going to be changes as there are in practically every other form of business activity, retailing and other
things, but it seems to me this is not the time to begin those
experiments.
Senator GLASS. DO you favor general banking or group banking?
Mr. PAYNE. DO I favor it?
Senator GLASS. Yes.
Mr. PAYNE. Frankly, I do not know what the solution is. We
have grown up under a unit sjTstem and we like it. I do not think
it is going to continue. Of course, it is not now the only system.
We are going through an evolution, and what the ultimate outcome
is I do not know. I wish I did.
Senator BROOKHART. You are not familiar with cooperative
banking?
Mr. PAYNE. Only by some reading on the subject. That is a
very interesting experimentation. It might possibly be the ultimate
solution of the thing.
Senator BROOKHART. It is not an experiment any more in the
countries that have tried it. It is the oldest and best established
system, the cooperative.
Mr. PAYNE. Of course, opinions may differ on that. I think it
is going through some experimentation yet. I may be wrong.
Senator BROOKHART. That is in countries that have not tried it
or are just beginning.
Mr. PAYNE. I do not .think any form of business machinery is
static.
Senator FLETCHER. Do you mean to say that the present banking
laws as they stand now are satisfactory and ought to be let alone,
or do you feel that
Mr. PAYNE. Not entirely, Senator.
Senator FLETCHER. Or do you think there ought to be some changes
and improvements on the present banking laws?
Mr. PAYNE. I think we can always improve our machinery.
Senator FLETCHER. Then why not do it?
Mr. PAYNE. But I do not think at a time when our Nation is
so sick—and it has affected a great many towns, and whether a certain town is going to have a bank failure is a serious question from
week to week—I do not think that is the time to do it. That is the
one time when we should have a rest. That is my general attitude.
Now, there are just one or two specific provisions here—r—
Senator GLASS. Many of them have gone to their eternal rest,
have they not?
Mr. PAYNE. I know they have, and I want to save some others
from going through if I can.
There are two or three provisions of the bill which I believe are
particularly disturbing to banks in agricultural communities. I
would like to call to your attention section 11, penalizing the use
of other than eligible paper in borrowing from the Federal reserve
banks. Many country banks in small communities often have little
eligible paper (in spite of thefiguresyou have on the whole amount)
at the time they need to borrow in order -to make needed loans to
their neighbors. These loans are based largely, not on tangible



n a t i o n a l a n d f e d e r a l r e s e r v e b a n k i n g s y s t e m s•338

security, but on the intimate knowledge of the banker of the character, habits, and earning ability of the borrower. We loan a great
many farmers on our knowledge of the fact that for 50 years, perhaps, he has on the whole successfully conducted his business. It
does not create eligible paper, and in the small community we get
very little eligible paper, comparatively speaking, to what we used
to get from our merchants and our small manufacturers.
Senator GLASS. DO you make farmers5 loans for 15 days?
Mr. PAYNE. Loans to farmers, do you mean?
Senator GLASS. For 15 days; yes.
M r . PAYNE. O h , no.
Senator GLASS. What

is it you are talking about? What particular provision do you sav you are talking about? Section 11 of
the bill?
Mr. PAYNE. Section 11; yes.
Senator GLASS. HOW does that interfere with the loans to farmers?
Mr. PAYNE. Well, I say if we are penalized for using something
besides eligible paper to get money from the Federal reserve bank
when we need it
Senator GLASS. On 15-day paper?
M r . PAYNE. Y e s .
Senator GLASS. YOU make loans to farmers for 15 clays, do you?
M r . PAYNE. O h , no.
Senator GLASS. I do not exactly understand.
Mr. PAYNE. We borrow7 from time to time when we need it, in

the peak loads.
Senator BULKLEY. HOW often do you use this facility of borrowing on the 15-day note?
Mr. PAYNE. I should say we are in and out of the bank perhaps
.20 per cent of the year. We borrow for a few days, build up a reserve, and carry the peak and are out again.
Senator BULKLEY. Most of it you carry?
Mr. PAYNE. Practically all. We very seldom rediscount. We
carry $1,000,000 of Government securities.
Senator BULKLEY. YOU find it the more convenient way of borrowing? Even if you have the eligible paper you are likely to use
the Government securities?
Mr. PAYNE. Yes. It is very seldom we borrow by rediscounting.
Senator BULKLEY. YOU find it more convenient to complete the
transaction ?
Mr. PAYNE. It seems to me a waste of time in the Federal reserve
bank. We send down our note and that is all there is to it. There
is no question of getting together a lot of statements and scrutinizing
notes, perhaps throwing out some and substituting others. We find
it much more convenient.
Senator BULKLEY. YOU are speaking for your own bank?
M r . PAYNE. Y e s .
Senator BULKLEY. DO

you think that is true generally of some
other banks?
Mr. PAYNE. I do not know, of course, the intimate practices of
a great many of the other banks, but I know some of the banks
of our character that have the same experience. Just how universal
it is I could not tell you.




nationalr and f e d e r a l reserve banking systems

339

Section 13 increases the reserves on time deposits in country banks
to 7 per cent. Most of the country banks, especially in towns where
thre are no savings banks, have a large percentage of their deposits
on time. These are the banks, in my opinion, that at this time
need every dollar of profits they can legitimately earn, and therefore I think that this is no time to bring that in, if it is desirable.
Personally I can not see any desirability of doing that.* I do not
think the Federal reserve banks need those reserves, and it seems
to me it is just taxing, cutting down the earnings of our banks.
I can not see any particular reason for doing it.
Senator BULKLEY. It is generally agreed L>y expert opinion that
reserves are not too low.
Mr. PAYNE. NO. I do not think they are too low.
Senator BULKLEY. We have plenty of testimony on that.
Mr. PAYNE. YOU do think so? Our own experience is that when
the reserve limit was cut down before it changed our cash reserves
very little. In other words, the lower the amount we had in the
reserve bank, the) more we kept in our own till or with our New
York correspondent. We know from time to time about how much
cash reserves we need and we keep them.
One other proposition
The CHAIRMAN. Your time expired quite a while ago. We have
one more witness to hear before noon, so we might as well close it up.
Senator BULKLEY. I think it is largely my fault.
Mr. PAYNE. Section 14 provides for segregation of time deposits*
and limits their investment to real estate loans and securities legal
for savings banks. In my section of the country such a limitation
would deprive many communities, I believe, of the opportunity to
borrow from the bank the funds to which they are legitimately
entitled.
Senator TOWNSEND. What are the total deposits of your bank?
Mr. PAYNE. About $7,000,000 now.
Senator TOWNSEND. HOW are they divided?
Mr. PAYNE. A little more than $4,000,000 in time deposits and
the rest in demand deposits. We have two good savings banks in
our town. They have a large proportion of savings accounts in some
of our surroundings banks, and they do all the savings business there.
A very large proportion of their deposits are savings deposits. I
do not know how they are going tofinancetheir little community
and the surrounding country unless they can use those funds for it.
They are the funds gathered into the community for the purpose of
the use of the community, and I believe they ought to be available
for loaning.
That is all I have, and I thank you very much, sir.
Senator WAGNER. I would like to say if there is anything further
you want to communicate to the committee, will you send it to me?
Mr. PAYNE. Thank you, Senator. I shall be glad to send it to you.
The CHAIRMAN. Mr. Wakefield.
STATEMENT OF I . E. WAKEFIELD, PRESIDENT OF THE FIRST
NATIONAL BANK OF MINNEAPOLIS, MINN.

Mr. WAKEFIELD. Mr. Chairman and gentlemen: The First National Bank of Minneapolis, of which I am president, is a member



n a t i o n a l a n d f e d e r a l r e s e r v e b a n k i n g s y s t e m s•340

of a group system operating in the ninth Federal reserve district
and principally in the four States of Minnesota, North and South
Dakota, and Montana.
I shall confine my remarks to the effect of this bill in its present
form on group banking as it exists in the Northwest. I believe that
the purpose of the bill is constructive and contains great possibilities
for good, but after careful study we in the Northwest are convinced
that it should be altered in several particulars to avoid a harmful
result which outweighs helpful features.
By way of introduction I would like to state in a word what group
banking, with us, means. Most of the banks of our group are
national banks. The stock of these banks is owned by a holding
company and for the most part was acquired by exchanging the
stock of the holding company for the stock of the banks, so that
each original stockholder in an individual bank continues to be a
stockholder but with his stock interests spread over a number of
banks instead of being confined to one single bank. The result of
this exchange amounts, in practical effect, to the creation of a
partnership, in which all the partners obtain the benefit of diversity
of assets, increased efliciency of management, and economy through
standardization of banking methods. Inasmuch as the two cities of
Minneapolis and St. Paul predominate enormously in population
over the rest of our territory, which is largely rural, this partnership
is in reality a partnership existing between the cities and the country.
Up to the present time the partnership has turned out to be a
poor one for the cities and a correspondingly advantageous one foi
the country, because the extreme depression in agriculture, and agricultural values, resulting in heavy losses to the country banks and
a great increase in their frozen assets, has not only made it impossible for these banks to produce their share of the earnings of the
partnership, but has made it necessary for the holding companies
to supply them with large sums of money to restore their impaired
capital and reserves and keep them in a sound and safe condition.
However expensive this has been for the cities, it has in fact proved
of inestimable value to the district as a whole. We have had numerous failures of small independent banks, but we have had no big
bank failures. In spite of the disappearance of farm land values,
in spite of drastic reductions in the price of farm products, cattlej
etc., and in spite of drought and grasshoppers, we have succeeded in
maintaining a sound banking; structure for the people of our section,
and this success can only be attributed to the strength which is
inherent in the group system of banking.
We did not, as in the case of our friends in Michigan, remain
within the borders of one State, for the simple reason that, with the
possible exception of Minnesota, there is no one State in our territory
which of itself affords sufficient diversity of resources to make group
banking, thus limited, either profitable or safe. The development
of the past two years makes it clear that any group banking system
which had attempted to operate in Montana alone or in North
Dakota alone or in South Dakota alone would have had the most
disastrous experience and would probably have involved any one of
those states in a complete collapse of its banking structure.
Our task is by no means completed. We are willing to accept
the responsibility for completing it and hope to do so without ask-




n a t i o n a l and f e d e r a l reserve banking systems

•

341

ing anyfinancialassistance from the Reconstruction Finance Corporation, the National Credit Corporation, or any other agency.
We only ask that we be not hampered or hindered by the enactment
of legislation which would make our task any more onerous than
it already is.
Naturally that portion of this bill which is of paramount and
absolutely vital importance to us is section 20, which prescribes that
group bank holding companies shall maintain certain reserves in
assets other than bank stocks for the purpose of protecting any
future stockholders' liability. The enactment of this section as
written would completely put us out of business, or at least force
us out of the Federal reserve system. This is not a threat; it is a
plain statement of fact. We do not want to abandon the Federal
reserve system, but we are physically unable to comply with these
requirements. The assets which would have enabled us to maintain
these required reserves have been depleted by contributions to our
country banks for the purpose of restoring their capital and reserves.
Even if this were not so, we think the reserve requirements are altogether too severe and that they are particularly unwise in that they
require the holding company to maintain them in a frozen condition and only permits their use after a bank has failed rather than
allowing them to be used to prevent such failure.
I understand that an amendment is before the committee which
reduces these reserve requirements and makes them available by
way of prevention before failure .as well as a cure afterwards.- If
this amendment is adopted, it will remove our objections to
section 20.
The other provision of the section, requiring reports and examinations of the holding company and its affiliates, have our hearty approval and support.
The next subject of great interest to us as group bankers, and of
even greater importance to the communities we serve, is the matter
of branch banking, section 21 of the bill. As this section is now
drawn, with the limits as to State law included, it accomplishes
nothing so far as the Northwest is concerned. If this limitation were
removed, it is almost impossible to exaggerate what it would accomplish in our territory. I recognize that in advocating state-wide
branch banking at this time, I am departing from opinions I expressed in my testimony before the subcommittee a year ago. I admit
that frankly. We have learned by our experience of the last three
years how much more effective branch banking would be than group
banking. I do not think that a year ago the people in the country
districts were read}7 to accept branch banking, but this sentiment has
undergone a great change, and I am certain that the majority of
these people are not only no longer opposed to branch banking" but
anxiously hoping that it will be accomplished with least possible
delay.
Aside from the correction of faults and abuses which have de
veloped in the banking business during the last few years, it is essential that any banking legislation should be directed toward relieving
the emergency which exists at present in the banks of the country,
by preservation of the deposits in existing banks, the restoration of
confidence by the prevention of further bank failures, and the estab-




n a t i o n a l a n d f e d e r a l r e s e r v e b a n k i n g s y s t e m s•342

lishinent of a sound banking structure as the prime requisite 'to
revival of general business.
At this time there are a large number of banks open and operating where the capital and surplus have been impaired through deEreciation in the value of securities held and losses on loans caused
y the general depression. In addition to this, there are many places
which formerly had banking facilities, but which are not now being
served by any bank. I believe that the only thing that can even partially save or correct this situation is a law which will authorize
state-wide branch banking by national banks immediately and without waiting for the State legislatures to meet. I make this statement for the following reasons:
At the present time it is not possible to raise capital for the purpose of establishing small banks in communities which are not now
served.
The public authorities, the comptroller's office, and the various
superintendents of banks, in their anxiety to hold our banking system
intact so far as possible, are at present carrying on with a large number of banks whose capital and surplus have been impaired by both
depreciation and losses. They are doing this in the hope that banking legislation will provide some means whereby the deposits in these
banks can be rescued arid taken over into sound banking institutions
and be preserved as live deposits instead of turned into the obligations of a closed bank. There are a large number of these institutions
which could furnish a sufficient amount of sound assets so that their
deposit liabilities could be assumed by another bank as a branch
office. The local stockholder has, to a large extent, suffered business
reverses; he has paid in additional capital to his bank in the past
and is no longer able to supply the founds necessary for recapitalization at this time.
For these reasons it seems to me imperative that if there is any
desire on the part of Congress to preserve the greatest amount of
our present bank deposits, Congress should recognize this situation
vide a means immediately which will make this preservation
The suggestion is made that Congress is loath to legislate arbitrarily in this matter, preferring to leave the ultimate decision to
the legislatures of the various States. To me this is inconsistent
with the principles underlying the national banking system. This
system was established by Congress without regard to State law,
and Congress has jealously retained all rights and supervision over
it, so that any amendment to the national bank act could not be
legitimately considered as an interference with the sovereign rights
of any State. Furthermore, if the matter is left to the States, and
national banks are granted the same branch banking privileges as are
granted to State banks, we shall have the national banks of the
country operating under 48 different branch banking laws.
Just as a matter of interest I would like to refer to the fact
that the Reconstruction Finance Corporation is experiencing the
greatest difficulty in confusion on account of its having to adopt
itself to these various State laws—18 different systems, each one
having its own regulations and of a very peculiar nature; and the
provision authorizing national banks to operate branch banks, as
provided by State law, would simply mean the bringing of that same




n a t i o n a l and f e d e r a l reserve banking • systems

343

confusion of regulation and privilege into the national banking
system, which now prevails among the 48 States, and it seems to me
to be a very undesirable thing to do.
The advantage of having the entire system operating under one
standard law is too obvious for argument. Aside from all this, however, the controlling factor is time. If this matter is delayed for the
time necessary to secure State legislative action, the various banking
departments will not be able to put off taking the steps necessary to
remedy the present condition, which can only result in a great
increase in the number of closed institutions. A year's delay would
be fatal. Every bank which closes between now and next year
represents a local tragedy. Each one which might have been prevented by branch banking at this time will torever stand as a
reproach to the legislative body that might have saved it by the
exercise of political courage when it was most needed.
The CHAIRMAN. Would you be willing to take over all the banks
out there if you could ?
Mr. WAKEFIELD. That would have to be done under regulations
that would permit it.
The CHAIRMAN. Would you take over the solvent and the insolvent
also ?
Mr. WAKEFIELD. A S far as it would make possible negotiations.
Not all of them by any means.
The CHAIRMAN. I suspect, when this would come as a remedy, you
would find three classes of banks: First, those you could not buy;
second, those you would not buy, and the third, the ones you would
dicker for.
Mr. WAKEFIELD. I think it is the most favorable time, if there is
ever going to be a time, to permit branch banking for this reason
The CHAIRMAN. I do not care to go into my argument on that
Mr. Wakefield, but I thought your statement was too broad, holding
out the hope that branch banking will save the situation, the trouble
of ours which has an underlying cause. If you advocated a better
price for the farm products up there, the banking situation would
respond to something of that kind. Our trouble is agricultural,
rather than banking. That is my view.
Mr. WAKEFIELD. Yes; you are correct. In the meantime there is a
large portion of those existing banks which could be rescued.
The CHAIRMAN. YOU know how it is. It is like salvation. Some
want to be rescued and some do not want to be rescued. You can
only buy those that will sell to you, and you would only buy those
that you thought were sound.
Mr. WAKEFIELD. YOU certainly would not step in and assume a
large loss for the sake of protecting some deposits.
The CHAIRMAN. That is exactly so.
Mr. WAKEFIELD. Although we have in the past assumed our share
of it.
The CHAJRMAN. You heard Mr. Decker's statement down at the
Willard Hotel a month ago, did you not?
Mr. WAKEFIELD. Yes. I remember that.
The CHAIRMAN. He said the small banks have got to go.
Mr. WAKEFIELD. I do not agree with the statement that small
banks have got to go, but a great many of them have gone.




n a t i o n a l a n d f e d e r a l r e s e r v e b a n k i n g s y s t e m s•344

The CHAIRMAN. And so have some of the big ones, and the big
ones have been yelping around here all winter for help. We passed
a $2,000,000,000financecorporation bill mainly to help the big banks.
Senator GLASS. One of them alone got $40,000,000.
The CHAIRMAN. Yes. So I can not see the point that there is
strength in bulk only.
Mr. WAKEFIELD. There is not.
T h e CHAIRMAN. NO.
Mr. WAKEFIELD. NO

one has intimated it. I have not intended to
intimate it.
The CHAIRMAN. I did not mean to interrupt you so long.
Mr. WAKEFIELD. I am only seeking to point out the only spot that
I know of which we know could be created, which would make possible at this time the rescue and maintenance of a substantial portion
of now live deposits and continuing them in that shape.
There is probably no man on this committee who does not believe
that branch banking in some form, and at least state-wide, is inevitable sooner or later. If so, no time could be selected when it would
do more good than at present. It has been suggested that group
banks be permitted to convert their present units into branches,
restricted by State boundaries. If for political reasons it is impossible to obtain branch banking at this time, the alternative would, of
course, be welcome. It would be of enormous help to us in carrying
out the difficult work we are now engaged in, but there is no denying
the fact that it would not supply the needs of the rural communities
which I have mentioned. It would not enable us to prevent further
failures of small banks, nor would it enable us to furnish banking
service to communities which now have none.
We would respectfully urge that section 21 be amended by striking
out from page 45, lines 21 and 22, the clause: " If such establishment
and operation are at the time permitted to State banks by the law
of the State in question."
The third subject matter of this bill of great importance to us is
section 13, which increases the reserve requirements for national
banks. This provision would crucify the country banks in the Northwestern States. The principal disease which those banks are suffering from is lack of earnings, hence the thing which would hit them
the hardest is anything which would further reduce their earning
power. Loans from the National Credit Corporation or the Reconstruction Finance Corporation can not cure this evil. They are only
palliatives. Those loans must be repaid by the borrowing banks.
I would like to show the committee what this section would do
to the four Northwest States of Montana, North, and South Dakota,
and Minnesota. Based on the call statement for December 31, 1931,
the total reserve requirements when the 5-year plan is fully in
effect would be increased as follows: Montana, $1,370,000; North
Dakota, $1,300,000; South Dakota, $972,000; Minnesota (rural),
$5,200,00; Minnesota (Twin Cities), $9,000,000; total, $17,842,000.
Assuming an average earning power of 5 per cent this means a
loss of income to the national banks of these States in the annual
sum of $892,000. This would perhaps not be considered a large
amount of money in any of the large eastern States, but it is a very
large amount for us in the Northwest. Under present conditions
and under conditions as they will probably continue for a number




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

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345

of years, the banking structure of the Northwest can not afford
this loss.
Senator GLASS. HOW many banks in the Northwest failed before
the reduction of the reserve requirement? How many of them
were crucified?
Mr. WAKEFIELD. Of course, those conditions are past and we are
operating under conditions prevailing to-day, where losses are great
and earnings are hard to make.
Senator GLASS. YOU do not agree with Mr. Jefferson, then, that
experience is worth anything?
Mr. WAKEFIELD. I have no knowledge of any bank having failed
on account of not having enough reserve.
Senator GLASS. But they were not crucified before we reduced the
reserve from 7 per cent to 3 per cent, were they?
Mr. WAKEFIELD. NO; but they were then operating on a different
basis of relationship to their customers, and if you now change it
so that their earnings are reduced, thev have got to work through
a period of readjusting their relationships and regulating incomes
in some way.
Senator GLASS. In what way are the relationships different now
than the relationships formerly?
Mr. WAKEFIELD. They have extended the services and changed the
rates on loans, and they are operating on a different relationship.
Those things are bound to come.
Senator GLASS. I would like to get hold of a bank that has changed
its loans, that is, if it has reduced its discount rate.
Mr. WAKEFIELD. YOU ought to go up in the Northwest, where we
have real competition.
I understand that it has been suggested that the so-called " activity
reserve " be substituted as an alternative for this section of this bill.
The chief difficulty with the activity method is that in agricultural
sections it increases the reserve requirements during the crop-moving
periods at just the time when the banks' resources are most needed
by their customers. However, there is no question but that the
activity method would be far more acceptable to us than the section
as it is now written. It would increase our reserves substantially
but nowhere near as much as under this bill.
So far as I know, there is no necessity for increasing the total
reserve requirements of national banks at the present time, either as
a measure of safety or for supplying additional funds to the Federal
reserve. It seems that this section as written was inspired by the
misbehavior and abuse of some banks in so juggling their deposit
accounts as to get the benefit of the lower reserve rate on deposits
which for all practical purposes were, in fact, demand deposits.
Senator GLASS. YOU know, our information was—and, I think,
very definite and authentic—that that was being largely done by
the banking community.
Mr. WAKEFIELD. It is an experience that I know nothing about.
Senator GLASS. And the increase in the shift from savings deposits to time deposits would indicate that that was true.
Mr. WAKEFIELD. Of course there has been a very large increase in
time deposits during the last few years, due to the unemployment
of large corporate funds and the fact that they are carrying certificates instead of borrowing money. That is true to-day.



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS•346

Senator GLASS. We were told a good deal of it was due to the fact
that banks shift from demand deposits to time deposits in order to
avail themselves of the 3 per cent requirement.
Mr. WAKEFIELD. The difficulty there, Senator Glass, is that a
shift in savings banks costs too much money. In our case we could
not afford to shift but very few demand deposits to time deposits.
The savings in the reserve would have been eaten up a couple of
times by the increased rate of interest. So it would not work with
us at all.
Senator GLASS. It may riot have worked with you, but it seems
to have worked with some of them.
Senator FLETCHER. What interest do you pay?
Mr. WAKEFIELD. Three per cent on time deposits.
Senator FLETCHER. HOW much on the demand?
Mr. WAKEFIELD. One per cent of the demand deposits. I imagine
it would put us all out of kilter to clo that. We could not.
If this is so, it would seem more appropriate to enact legislation
which would prevent the continuance of these abuses rather than
penalize all of the banks of the country, including the innocent with
the guilty. However, if this is not practical, and it is felt that the
temptation to juggle accounts should be eliminated by abolishing
all distinction between the two classes of deposits and fixing one
rate for both, then such rate ought to befixedat a point between
the present rate on demand deposits and the present rate on time
deposits, so that the rotal reserves required shall not in the aggregate be any greater than they now are. For example, again based
on the call statement for December 31, 1931, this method would result in the following reserve requirements: Central reserve cities,
11.6 per cent; reserve cities, 6.7 per cent; nonreserve cities, 4.7 per
cent.
Thesefiguresare only based on one call rather than a study of an
average over a period of time, and hence are used only as an illustration. The principle I am suggesting, however, would entirely
remove the criticism made by Senator Glass, would not in the aggregate place a greater burden on the banks than they are now
under, would remove all controversies as to when a time deposit is
not a time deposit, and would greatly simplify the administration
of the law.
Senator GLASS. Why do you say the criticism made by Senator
Glass?
Mr. WAKEFIELD. Perhaps I am wrong in that, Senator Glass. It
is your committee that has made it.
Senator GLASS. Well, it is based upon criticism made at the very
prolonged and searching hearings that we had last year.
Mr. WAKEFIELD. I am willing to amend it to say it is criticism
which developed in the hearings.
Senator GLASS. If it is being done I am unhesitatingly criticizing
it as a species of dishonesty. It ought to be penalized. Go ahead.
Mr. WAKEFIELD. There is one other provision of the bill to which
we object strongly. That is section 14. I can see no possible good
that would be accomplished by this section, but on the contrary a
great deal of harm. It would be ruinous to the country districts.
In Montana and South Dakota savings deposits are 50 per cent of
the total in the national banks. In North Dakota they are 60 per




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4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

cent. In rural Minnesota they are in excess of 60 per cent. Even
in the city of St. Paul they are more than 50 per cent and in Minneapolis more than 40 per cent. In other words, more than half the
deposits available for the business needs of the community would be
withdrawn under this section. Instead of encouraging the making
of real estate loans, it would practically terminate them altogether.
The loss of earnings which would result in investing all this moivy in
Government bonds, municipals, and the other low-rate types ot securities permitted by State law, would be disastrous. I'he preference created in favor of time deposits in event of bank failure would
further stimulate the increase of time deposits even beyond their
present high proportions.
Senator GLASS. What becomes of State banks under the requirements of State law as to the investment of time deposits ?
Mr. WAKEFIELD. Only savings banks in Minnesota. The State
banks have the same requirements that national banks do as to
investment. There is no segregation in Minnesota.
Senator FLETCHER. What change is it you are afraid of ?
Mr. WAKEFIELD. Demanding segregated time deposits and stipulating an arbitrary class of securities in which they shall be invested.
Senator GLASS. Your State laws do not do that, do they?
Mr. WAKEFIELD. NO, they do not, a bank down in Austin has 7 5
per cent of their deposits in time deposits, and yet there is a considerable demand there for good loans. It is quite a town, a town
of 12,000 people. It would result in our having to withdraw our
loans from the community down there—the people that arc doing
business, the business people in town, and the fanners that come in—
and comply with the legal type of investment, just as a savings bank.
We have a savings bank law in Minnesota, and this would place us
under the savings bank law, which would mean that we would have
to buy municipals and certain specified types of securities, all of
which are of very high grade and bear a low fate of interest.
Senator GLASS. That is very much better than many that have been
bought.
Mr. WAKEFIELD. The peculiar thing about that, Senator Glass, is
that it is the very type of securities that we are not interested in
getting into at the moment.
Senator GLASS. It is better than these $12,000,000,000 of farm loans
that have been unloaded on the banks of the country, at any rate.
Mr. WAKEFIELD. I think that would be as a class very true; yes.
Senator BULKLET. DO you refer to this provision restricting investment to property and securities in which savings banks may
invest under the law "of the State? Is that what you were referring
to?
Mr. WAKEFIELD. Yes.' It is that definite segregation of your savings deposits. For instance, there is another thing about that. You
take in the city of Minneapolis.to-day, you know that the grain business is using no money because there is no business. Our grain
people are all of them long on money and they are carrying a lot of
money on time deposits. That increases our time deposits very
materially. That would mean that we would have to try to buy
savings bank securities for those deposits. We could not use them
in any other way, knowing that in 9 months, when a crop starts, we
do not know what day or what period, in 30, 60, 90, or 120 days, or



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4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

a year, those funds are going to be out, and there ,you have that
money temporarily that you know is time deposits but you can not
use it.
Senator GLASS. Can you recover your funds from investments in
real estate any more readily than you can from these?
M r . WAKEFIELD. NO.
Senator BULKLEY. YOU

are not objecting to the limitation on real
estate?
Mr. WAKEFIELD. NO. I do not care about that.
Senator BULKLEY. YOU are objecting-to the limitation as to the
use of other funds?
Mr. WAKEFIELD. Yes. I am objecting to the attempt to segregate
and put into one class a private, arbitrary type of investment for all
time deposits.
Senator BULKLEY. I do not quite understand your use of the term
" segregate." What additional segregation is there?
Mr. WAKEFIELD. That would mean we would have to run our books
on the basis of our investments. We would have to set out our total
savings deposits and we would have to use those deposits with an
entirely different class of investment than the general business of
the bank. That is, if some man came in and wanted to borrow half
a million dollars on wheat receipts in the elevator and we had nothing but time money available at the time, we would have to go to the
Federal reserve bank. Even though we had funds to loan we would
have to go and borrow the money to loan to that fellow. It is a condition that just makes almost an impossible bank transaction, and it
penalizes the bank very materially.
The CHAIRMAN. Would it be apt to meet the situation in your city
bank as it would in country banks?
Mr. WAKEFIELD. I think we would meet it much more in the city
bank than we can in the country, because they just have not any
place to go. IT would be very difficult when it comes to the country
bank.
The CHAIRMAN. In other words, their main difficulty from this
provision would come with the smaller banks?
Mr. WAKEFIELD. Yes, it would.
Senator BULKLEY. Your thought is you ought not to be precluded from making commercial loans out of the time deposits?
Mr. WAKEFIELD. That is exactly it. My thought is it is all right
to specify what percentages you can have in real-estate loans. I
think it is very desirable that it be done, but any attempt to fix
an arbitrary regulation as to how the balance of those funds should
be used from time deposits creates a hardship which I think will
penalize the public doing business with the bank very severely.
Senator FLETCHER. What precise language compels that?
Mr. WAKEFIELD. It is in section 14.
Senator BULKLET. Page 33, line 20.
Senator FLETCHER (reading). "Every such bank may applv the
moneys deposited therein as time deposits
"
Mr" WAKEFIELD. Then it tells you just how they can.
Senator BULKLEY (reading):44 To the loans herein authorized—."
That refers to real-estate loans. Then it goes on further: " and the
balance of such time deposits shall be invested in property and
securities in which savings banks may invest
"




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4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. WAKEFIELD. That is the place from which almost the bulk
of your objection to this thing in the country will originate. It
is very serious with them.
I have a telegram right here which came from the secretary of
the Minnesota Bankers' Association. May I read it? He asked me
to. He says [reading]:
The rural independent and group bankers unanimously agree that provision in the Glass bill segregating deposits is very detrimental to rural communities. Rural deposits mostly time money. The Glass bill prevents investing funds locally. Agricultural sections should not be restrained from their
investments. Many rural banks prove that local conservative loans are even
superior to savings-bank loans, therefore offers no further protection to savings depositors. To comply with this provision within the time limit would
close most of our national banks.

They all join in the feeling that they could not convert their
present loans, get them, out, and get into this other type within any
reasonable time and do it safely.
It says further [reading] :
Increased reserve requirements would reduce earnings and result in weaker
banks suffering. Our independent rural national banks would be forced into
the State system because of the above and other provisions. Bural bankers
ask you to present their case before the bank committees in Minnesota
delegation in Congress.
GEORGE

SUSAN,

Secretary Minnesota Bankers' Association.

Senator FLETCHER. DO you have
M r . WAKEFIELD. Y e s .
Senator FLETCHER. This reads:

savings bank laws in your State?

where there U no such law relating to investments by savings banks, in such
property and securities as may be specified by the Comptroller of the Currency.

Mr. WAKEFIELD. They would be obliged in those cases where
there are no savings bank laws to set up, that is, the natural liberty
would be to set up a list of securities that do comply with the general
savings bank requirement. In view of the fact that it has been said
definitely to meet the savings bank requirements of the various
States that have them—and most of them do—I do not think that the
comptroller would feel that he had any liberty to set up a different
type of security for those States not having it.
Senator BULICLEY. I think you are justified in that. It says,
44 property and securities," and therefore would not permit commercial or agricultural loans.
M r . WAKEFIELD. NO.
Senator BULKLEY. I think you are right.
Mr. WAKEFIELD. YOU see, it classifies them

and limits it completely
to those legal investments, which is a serious matter.
The banking system of the country can not be strengthened by
reducing the banks' normal earning power. Such measures have
just the opposite effect. The condition in the Northwest is such
that very properly we might have asked Congress for legislation
which would increase the earning power of banks, particularly of
country banks. We have not done that but do ask that this earning
power be not decreased any lower than it is.
The unfortunate feature of both section 13 and section 14 is that
they fall with the greatest force upon the banks in the agricultural
communities, who are least able to withstand the blow. In my
1111C1—32—PT2




9

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4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

opinion, the bill should be amended by striking out section 14
altogether.
There are two other provisions which I would like to mention. ^
'Section 10 requires national banks to contribute a substantial
amount of capital to the Federal liquidating corporation, in whose
management, however, they are given no voice. This seems a particular hardship on the group of banks of the Northwest.
Senator GLASS. Why do you think they are given no vote ?
Mr. WAKEFIELD. They have no vote.
Senator GLASS. Well, the banks do have a vote.
M r . WAKEFIELD. H O W ?
Senator GLASS. They elect

six out of every nine directors of the
Federal Reserve.
Mr. WAKEFIELD. N O ; you have disfranchised us from electing
any directors in our district.
Senator GLASS. We ought to disfranchise you if you are operating
under a system that enables a holding company to control the entire
Federal reserve banking system of the zone.
Mr. WAKEFIELD. We do not want to do that.
Senator GLASS. Your remark there was not directed to your particular system of group banking; it was directed to the whole proposition. The member banks select six of the nine directors of the Federal reserve bank, and therefore the matter is in their control. If the
manager of this liquidating corporation selected by the Minneapolis
bank is not satisfactory to the member banks of that zone they can
select somebody else; so that altogether it is in the hands of the
member banks to manage.
Mr. WAKEFIELD. That is, the foreign and open market committee
that became the directors of the liquidation corporation?
Senator GLASS. Yes.
Mr. WAKEFIELD. We feel that we would have some control over
wTho those people were.
Senator GLASS. YOU would have complete control.
Senator BULKLEY. The banks would.
Mr. WAKEFIELD. Your other question about the voting of group
banks is an entirely different question. I did not intend to inject
that at this point because I was thinking the same as Senator
Glass was.
Senator BULKLEY. I think if you were not injecting that, you did
not state it correctly at all.
Mr. WAKEFIELD. I wonder whether that control, though, is close
enough so that we could have any effect upon the action of the
liquidating corporation in what they did or what they decided to
do with our money after they got it.
Senator GLASS. Well, the member banks select the members of the
liquidating corporation from the respective Federal reserve districts.
Mr. WAKEFIELD. But there is a combined purpose in the selection.
He is the open-market committee man and, incidentally, a director
of the liquidating corporation. Now, I can say the thing that
puzzled me is
Senator GLASS. The member banks are the only people who profit
by the liquidating corporation except that the depositors in failed
banks get the money sooner than they otherwise would do. But




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4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

in the distribution of profits you are the only people that really
get the profit.
Mr. WAKEFIELD. I was wondering how they are going to get
profits.
Senator GLASS. Well, in our conception they would get profits.
The corporation would make money and the member banks would,
get 30 per cent of it.
Mr. WAKEFIELD. The fear that I have in connection with that is;
that without some direct means of the banks being represented and^
controlling its management, after having put up the money, they*
subject themselves to the extreme possibility of loss due to attempts;
to regulate things and liquidate things that can not be liquidated!
Senator GLASS. YOU could not . have individual banks represented
on that committee?
M r . WAKEFIELD. NO.
Senator GLASS. There

would be 7,000 members of the committee
if we went to them all.
Mr. WAKEFIELD. This seems a particular hardship on the group
banks of the Northwest, because we have already drained our resources to clean up banks which would otherwise be candidates for
the benefits of this very section, and hence we have in effect already
contributed many times over our share of the burden. In order to
accomplish this we have cut our salaries from the top down, and
in spite of the possible effect upon 18,000 stockholders we have cut
our dividend in two. We have also subscribed to the National
Credit Corporation. Having made these sacrifices which will save
the Federal liquidating corporation many times the amount of our
subscription, it seems to us unfair that we should be now compelled
to cripple ourselves further by coming to the assistance of other
banks when we have all we can do to take care of our own.

Senator BROOKHART. On that proposition: Is it not true the
failures of those very banks injure your banks? Will it not be1 a
benefit to your bank if other funds can be distributed earlier?

Mr. WAKEFIELD. It would be, Senator Brookhart. We have tried
to do this in a way. The President sent out a letter some months
ago suggesting that one of the most favorable things which could
occur would be some provision by the going banks in the community
for making loans on or liquidating the assets of the closed banks.
We took that in good faith, at the request of the Federal reserve
bank in our district, and we got together with the State Department
and with the Comptroller's office and worked out with the lawyers a
legal scheme of doing that, which was quite i complicated affair, and
a
then we went into the country where banks had closed and tried to
find a chance to use it, and the real facts are that the bank that has
closed as a general rule has drained itself down of every possible
liquid thing it has until when it closes there really is not anything
left there to go on.
Senator BROOKHART. But there are some of those present assets
that are going to and will come around. They will be made liquid
by those processes.
Mr. WAKEFIELD. YOU would find a good many of those put up as
collateral for loans that they had already secured.
Senator BROOKHART. YOU think, then, it can be done ?




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4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. WAKEFIELD. I do not think it will be nearly as effective as I
think it might be in October and before the Reconstruction Finance
Corporation was formed. I think that to-day—and I am only expressing my opinion from what I know of closed banks—that on that
particular factor it is over emphasized as to what its benefits
would be.
Senator BROOKHART. DO you think the Reconstruction Finance
Corporation is doing any good by liquidating the closed banks?
Mr. WAKEFIELD. It is only recently that they have started making
loans to closed banks, and I would "be very curious to see how far
they can go in it because of these difficulties that exist in finding
anything to really loan on; but the Reconstruction Finance Corporation has unquestionably done a great deal of good in stopping'the
closing of banks.
Senator BROOKHART. Yes; but it has done that by lending money,
and when the money comes due some of these days you think they
will collect on 3-cent hogs and 25-cent corn?
Mr. WAKEFIELD. We are going to have better than 3-cent hogsSenator BROOKHART. You are not getting any better yet.
Mr. WAKEFIELD. NO, but everything is going to get better.
Senator BROOKHART. The representative of a great organization
yesterday said that we were not at the bottom yet and it takes longer
to get out of this thing than it does to get in.
Mr.'WAKEFIELD. It always takes longer to get out than it takes
to get in.
Senator GLASS. And always the time is inopportune to do anything to keep you from getting in.
Mr. WAKEFIELD. That is true. No one wants to let go of anything. I could make you a long speech about that if I had time.
Senator GLASS. We have had them made to us. [Laughter.] I
think the most depressing thing that has ever happened in this
country is the testimony we have had around this table.
Mr. WAKEFIELD. I am sorry to have been a contributor to that
depressing testimony.
Senator GLASS. Only to a very limited extent you have.
[Laughter.]
Mr. WAKEFIELD. Just one other matter I wish to mention, and
that is the much argued question of security-company affiliates. To
whatever extent these affiliates are allowed to continue under this
bill, either as now drawn or in its final form, we feel that the law
should be universal in its application and that all national banks
should enjoy the same privilege, or lack of privilege, as the case may
be. There is no possible reason why national banks should be discriminated against simply because they belong to a group system.
This bill does discriminate against them in section 20 (e) and this
subsection should be eliminated. If, in the last analysis, the committee decides that security-company affiliates should be abolished
altogether, we shall make no complaint, but to whatever extent they
are permitted to continue to exist, we ask only that our national
banks be given the same privilege as the other national banks of
the country.
Senator GLASS. If we should have state-wide branch banking you
would be in favor of abolishing affiliates, would you not?



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4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. WAKEFIELD. I do not think it could be done, Senator Glass;
not within the limit of a good many years.
Senator GLASS. Well, of course we will not close them up instantly.
We will give them time to liquidate.
Mr. WAKEFIELD. For instance, we have what we call the Agricultural Credit Corporation, which you may have heard of.
Senator GLASS. I thought you wanted to get rid of your affiliates
and make branches of them.
Mr. WAKEFIELD. Yes, but you can not make branches of a concern .
organized to permit farmers to buy stock and get them on a 5-year
payment plan and put them out on their farm. We would have to
liquidate that corporation and go out of business. We are willing
to do all of that if it is required, but I think it would work a great
hardship.
Senator FLETCHER. HOW many affiliates have you?
Mr. WAKEFIELD. We have about 107 banks.
Senator FLETCHER. In what States?
Mr. WAKEFIELD. Montana, North and South Dakota, and Minnesota. Four in the upper peninsula and two in the ninth district.
Senator FLETCHER. Most of them in Minnesota?
Mr. WAKEFIELD. NO. There are about 50 per cent in Montana,
North and South Dakota, and northern Michigan.
Senator FLETCHER. YOU would be willing to transfer them into
branches?
Mr. WAKEFIELD. Yes. We could very easily.
Senator FLETCHER. DO all those States allow branch banks?
Mr. WAKEFIELD. None.
Senator FLETCHER. None of them?
Mr. WAKEFIELD. NO; we have no branch banking.
As to the advisability or inadvisability of abolishing security company affiliates, I make no argument, but simply the suggestion that
the committee would do a greater service to the country by retaining
and regulating the security business through the power which Congress has over national banks than by driving that business into
less responsible hands over which Congress has no power of
regulation.
There are a number of minor errors, or what we conceive to be
errors, or phraseology in the bill where the actual language used
does not express what we believe to have been the intent of the
author. I will prepare a list of items with the suggestions for the
appropriate changes and hand it to the chairman.
That is all of my statement, sir.
Senator FLETCHER. That is a very good statement.
The CHAIRMAN. I would like to present for the record a letter by
the South Dakota Superintendent of Banks, together with a brief
against branch banking, also a letter from Mr. Don W. DeVay, an
independent banker of West Port, S. Dak. I would like to Have
them printed following this reference, if there is no objection on the
part of any member of the committee.




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4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

(The matter referred to by the chairman is here printed in the
record in full, as follows:)
DEPARTMENT o r B A N K I N G AND FINANCE,

Pierre, S. Dak., March 22, 1932.
Senator PETES NOBBECK,
United States Senate, Washington, D. C.
D E A R SENATOR : I sincerely appreciate receiving your letter of March 19 with
reference to the Glass banking bill. I also received a copy of the bill which
you were kind enough to send me.
I have read the bill but I am frank to say that I do not fully understand it.
I infer from the bill that no national bank can establish branches unless the
parent bank has a paid-up capital of not less than $500,000. This would preclude any of the present banks in South Dakota, unless their capital is increased, to establish branches. This restriction may be desirable but it would
appear to me that if State laws were enacted in harmony with this requirement that the banking business would eventually be controlled by institutions
and Individuals in the larger places. In my opinion, one of the most objectionable features of this bill is found in section 21 of the bill which provides that
even though our State did not enact laws permitting State banks to have
branches, a banking institution in an adjacent State, but not beyond a distance
of 50 miles from the seat of the parent bank, could establish branches. Just
as an illustration, Sioux City, because of its location and prominence, would
be an ideal location for a parent bank to be located and reach into southeastern
South Dakota with branches in competition with our own banks.
It does not seem to me that this is the proper time to undertake to pass
bank legislation for the reason that legislation of this kind passed during these
chaotic times might be ill considered and not prove workable during normal
times. It seems to me that certain interests are attempting to take advantage
of our uncertain financial condition and promote legislation so as to further
•centralize the control of our banking system. The fact of the matter is that, so
far as South Dakota is concerned, confidence is being restored in the banks,
which is evidenced by the fact that we have had only three bank closings since
November 2, and these three closings were some of the very smallest banks we
had in South Dakota; viz, State Bank of Scenic, with deposits of about $30,000;
Midland State Bank, deposits about $34,000; and the Farmers State Bank of
Lesterville, with total deposits of about $62,000, the total deposits in the three
banks being less than $150,000. The criticism has been that there were too
many banks, but I believe that this condition has adjusted itself or will, at
least, adjust itself through consolidations and voluntary liquidations. I infer
from your letter that you and I are quite in accord with preserving our State
banking system and the unit banks.
Some time ago I was urged by representatives of the American Bankers
Association to go to Washington to protest against a bill introduced by yourself
pertaining to the taxation of national banks. I refused to do this for the reason that I felt that I was a representative of the public rather than of the
banks, and especially in view of the fact that the bill had been introduced by
yourself I did not feel it proper either to embarrass you or to take a stand with
the banks against the public in this matter of taxation.
I sincerely appreciate the invitation you extended to me through Governor
Green to appear before the subcommittee on the Glass bill, and I had fully
intended coming to Washington pursuant to your invitation but first wanted to
obtain the consensus of opinion among the unit banks in South Dakota. I did
not realize at the time that this bill would be reported out so soon, otherwise
I would have tried to arrange matters so that I could have made the trip without delay, but I was busy at the time in ironing out a matter with one of our
former examiners in charge that needed immediate attention, hence my failure
to respond as quickly as I should have done. If it should develop at any time
that I could be of any assistance in furnishing information with reference to
matters affecting the banking situation in South Dakota, I shall be only too
glad to come to Washington.
Sincerely yours,
E.

A.

RUDEN,

Superintendent of Banks.
P. S.—I inclose copy of an article that was sent to me and which apparently
was printed in the American Banker in the January 15 issue. Maybe you
have seen this article but in any event it is interesting reading.




3554NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
A N D SOME CALL I T " BETTER "

[American Banker, January 15, 1932]

Sundry short-sighted gentlemen of the press and of banking point to our
2,300 bank suspensions in 1031 as a convincing 41 argument" that branch banking is a better system.
But the last four months has utterly exploded the validity of their argument.
Branch banking as practiced in England and carried on in Canada has faults
.more glaring and dangerous than any which can be charged against unit
banking.
If anything, the branch system is even further than unit banking from that
ideal of perfect bank responsibility, so desirable, yet, like other dreams of
human perfectibility, probably equally unattainable.
We have our bank closings. The figures tell the story. But branch-banking systems, instead of suspending individually when they are faced with a
run, pull the monetary standard of their countries crashingly down when they
face the crisis of deflation.
Branch-banking systems are " t o o b i g " to fail or to be permitted to fail.
They can not suspend to liquidate, as do our American banks, making way
for the reorganization of a sound bank or the organization of a new bank.
Their liquidation can not be compartmentized and absorbed locally where
their credits were spent.
Every Britisher is paying to-day with 30 per cent of his deposits for the
" safety" of his branch banking system. Every Canadian is paying for
" safety " of his branch-banking system with 20 per cent of his deposits. True,
the Britisher and the Canadian have as many pounds sterling or Dominion
dollars in the accounts as they had before the crash. However, 20 to 30 per
cent of their value has been taken from them by the loss of purchasing power
of their funds. True, also, they hope to get full value back. But so do American beneficiaries of individual closed banks, with better reasons, as we see it.
Perhaps you can fool the British and Canadian people into thinking that
such a system of mass confiscation of their banked wealth is better. Concentrate the money of a Nation into a few large banks through branch banking
if you like. Ignore, if you can, the fact that credit administration is thereby
taken from sympathetic local hands and put in the hands of distant city moneymarket manipulators. Forget, if you can, the fact that another field of the
individualistic enterprises to which we owe our American progress is thus
handed to a monopoly. Ignore such social and economic implications of branch
banking, if you can. But you can not escape the truth that mismanagement
of big banks is possible, and when it comes its very momentum is likely to be
more costly than we have found it under unit-banking systems. Mistakes can
be made by branch bankers. They were made in Prance, where, after some of
the smaller branch banks failed, the government was forced to pour billions of
fiat francs into the remaining branch-banking systems to keep them alive.
French depositors' demands for gold came simultaneously with this government subsidy. The situation in Germany before the moratorium was complicated with branch-bank failures which could only be solved by the use of
government guaranties and freezing of deposits. Not only has branch banking given a poor account of itself to its depositors, but countries which have
depended upon it have fared badly.
But do we need to look abroad to see the danger which is inherent in the
branch bank idea? Our own Government has had to pledge both money and
•credit to support at least one branch banking situation where poor management policies in the boom had led to weakened depositors' confidence in the
depression. Mistakes in banking are being made. And they are bigger and
more dangerous in geometric proportion to the scope and size of the banking
organizations making them. The fact that the error may hinge upon Government fiscal policy as well as banking, only emphasizes the fact that bigness of
banks is a liability to governments rather than an asset in times of crisis.
London made such a mistake. It was a banking and credit blunder. Every
moneyed person in the British Empire is to-day paying the price of that mistake. The folly was too big to be absorbed in the reorganization or liquidation
of one or more banks. Closing even one big branch bank would have precipitated a national smash. Instead, the British Government and bankers have
charged the cost of their mistakes to the entire wealth of the country. The
banks simplv went off the gold standard. Unit banking can not exist without




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the implication that some banks will be run better than others. But unit
bankers can look forward to the hope that through the cooperative effort toward better bank management as expressed in American Bankers Association
work, in Federal reserve membership, local clearing-house associations, and the
like, the percentage of mismanagement and the percentage of victims of Government mismanagement can be reduced to a smaller and smaller figure.
Branch banking systems can not be operated without facing the danger that
mistakes at headquarters will plunge the whole country disastrously off its
gold base.
Only a fool can delude himself into the belief that any guaranty of bank
deposits is possible.
His folly is no less if he worships the guaranty of deposits idea under the
guise of branch banking.
FARMERS STATE B A N K ,

Westport. S. Dak., March 26, 1932.
H o n . PETER NOBBECK,

United States Senate, Washington, D. C.
DEAR MR. NORBECK: The provision in the Glass bill restricting branch banking to those States that permit State branch banking should be sustained.
There is going to be a fight on this restriction—the branch, chain, and group
banking interests in the country are going to bring their influence to bear
against this restriction in the hope that it will provide another wedge into the
dream of national branch banking over the entire country.
States rights should be held inviolate; the people in each State should have
the power to say whether they want branch banking. The big argument in favor
and which is being stressed by those interested is in safety, but the record
of failures of branch and chain banking in this country the past few years
amply demonstrates the fallacy of that theory. Unit banks can be and manyare just as safe as a bank should be; they have the interest of their own
communities at heart. Witness this bank which in the 12 years under my
control has been one of the few in the country that has never had to borrow
any money, and to-day we are taking care of the legitimate requirements of
our customers.
Branch banking in the final analysis will bring on economic stagnation, stifle
individual enterprise, and throttle the " little fellows," the farmers and small
tradespeople. Why all this howl about losses to bank depositors? The percentage of loss has been less than to most any other class of investor. Let's
take, for sake of argument, the cases of, say, four people, who three years ago
each had $5,000 to invest. One put his money into a farm, one into what he
had been led to believe were sound bonds, one into a first-class farm or city
mortgage, and last put his into a bank. W e will say the bank failed. Who
was the worst off? The record will show that the man who put his money into
the bank sustained, in the majority of cases, the least loss of any.
The big banking interests of the country are simply using the present economic chaos into which the whole world finds itself as an excuse to sieze control of the banking business, to centralize the money power in the East for
the benefit of so-called big business and to the exclusion and disregard of the
agricultural sections of the country. If this succeeds it will mean ruin to
millions of people and the stifling of individual enterprise. If you have any
doubt of this you might take a trip into Canada, as I have on two different
occasions, and talk with people in that country—a country that is just as
wealthy in national resources as we are—you can come to but one conclusion,
and that is that their whole economic and individual development has been
permanently impaired—due, for the most part, to their system of branch
banking. The small tradesman, the merchant, and the farmer simply hasn't a
chance. If, finally, we have nation-wide branch banking in this country, then
we are coming to the same condition—just as surely as the sun rises in the
morning, and nation-wide branch banking is what we are coming to unless the
people wake up in time. There have been losses under our present form of
banking—losses which no system of banking can entirely overcome—but rather
those losses than the loss of our individuad initiative and economic progress
that is bound to follow the abolition of " independent" banking.
I am going to watch with much interest the scrap that is bound to come tip
over the restriction in the Glass bUl to which I have referred.
Yours very truly,
DON W . DB VET.




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The CHAIRMAN. We will adjourn to meet at 2.80 in the Interstate
Commerce Committee Room in the Capitol, Senator Couzens's room,
where we met yesterday afternoon, and thefirstwitness will be Mr.
Eugene Meyer, governor of the Federal Reserve Board.
(Accordingly, at 12.25 o'clock p. m., the committee was in recess
until 2.30 o'clock p. m. of the same day.)
AFTER RECESS

The committee reconvened at 2.30 o'clock p. m. in the hearing room
of the Interstate Commerce Committee in the Capitol, at the expiration of the recess, Senator Peter Norbeck presiding.
The CHAIRMAN. The committee will come to order. Mr. Meyer,
you may take a seat at ..the committee table opposite the committee
reporter.
STATEMENT OF EUGENE MEYER, GOVERNOR FEDERAL RESERVE
ROARD, WASHINGTON, D. C.

Mr. MEYER. Mr. Chairman and gentlemen of the committee, if I
may, I should like to have the opportunity to present the matters
that I have here without interruption, and then I will be ready to
answer questions so far as I can.
The CHAIRMAN. I think the members of the committee will be
perfectly willing to have you do that.
Mr. MEYER. I might add that I have a special reason for making
this request, because I shall be reading from a letter to the chairman
of this committee and from the memorandum attached to the letter,
expressions which are the unanimous views of the members of the
Federal Reserve Board, and if I were answering questions during
the reading of these communications I might not be able to speak
for the Board.
The CHAIRMAN. But you are perfectly willing to answer questions
propounded by the members of the committee afterwards?
Mr. MEYER. I shall be perfectly willing to answer any questions
I can.
The CHAIRMAN. YOU will proceed then.
Mr. MEYER. I shallfirstread a letter I am sending to you to-day
on behalf of the Federal Reserve Board. [Reading.]
MARCH 20,
H o n . PETEB NOBBECK,

1932.

Chairman Committee on Banking and Currency,
United States Senate, Washington, i>. C.
D E A R SENATOR NOBBECK : On March 17, 1932,1 received a letter from Senator
Glass inclosing copies of Senate Bill 4115, and stating tliat the Banking and
Currency Committee would be glad to have the Federal Reserve Board make
any comments or suggestions that in its judgment would seem desirable. Accordingly, there is inclosed herewith for the consideration of your committee
a memorandum containing the board's comments and recommendations.
The subjects dealt with in the bill may be classified under three general
heads: (1) Those relating more directly to tlie Federal Reserve Board and the
reserve banks; (2) those concerning primarily member banks, and (3) those
dealing with affiliates of member banks.
The Federal Reserve Board is in sympathy with the purpose of the bill to
strengthen the supervision of the Federal reserve system over general credit
conditions and to invest the Federal reserve authorities with certain disciplinary powers in relation to banks that pursue unsafe and unsound policies
or abuse the privileges of membership. The board's recommendations on this




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Subject are incorporated in its proposed revision of sections 3 and 29 of tlie
bill.
With respect to the section of the bill dealing with open-market operations,,
the board calls attention to the fact that there is already in existence an openmarket committee on which each of the Federal reserve banks has representation. This has come about as the result of natural development. The board
beUeves that it would be inadvisable to disturb this development by crystalizing into law any particular procedure. The board believes that nothingfurther is necessary or advisable at this time than an amendment clarifying
its power of supervision over open-market operations of the Federal reserve
banks and their relationships with foreign banks, as set out in the
memorandum attached.
The board is not in sympathy with the provisions of the bill discriminating
against member bank collateral notes. Experience shows that the particularinstrument on which Federal reserve credit is obtained is not an adequate
test of the use to be made by the member zank of the proceeds of the credit
and that an attempt to control speculation through restrictions on member
bank collateral notes would not be effective in accompUshing the purpose of"
this section of the bill. Indeed, it probably would interfere seriously with
the convenient and economical operation of the system. In this connection,,
the Federal Reserve Board desires to renew the recommendation made in
its annual reports for several years, that the maturity for which advances
may be made to member banks on their promissory notes secured by paper
which is eligible for discount be increased from 15 to 90 days. Such an
amendment would be especially helpful to country banks.
The board is of the opinion that the adoption of a system of reserves
based on velocity of accounts as well as on their volume, as recommended b y
the System's Committee on Reserves, would be an important step in strengthening the influence that the Federal Reserve System could exert in the direction
of sound credit conditions. The section of the bill dealing with reserves
would accentuate rather than reduce the inequalities that have grown up in*
the distribution of reserves between different classes of member banks. The
board also believes it should not be overlooked that this section of the bill
would exert a tightening influence on credit conditions at times when it would'
be contrary to the public interest.
The board is in favor of establishing a liquidating corporation, but proposesto limit the scope of its operations to member banks and suggests a different
method of financing it, together with certain changes in the provisions f o r
its administration.
If the section on branch banking is enacted in the form proposed in the
bill, it is suggested that certain sections of existing law be modified so as to
bring them into harmony with the purposes indicated in this section of the
bill.
With respect to affiliates, the board believes that important reforms to be*
accompUshed at the present time are the granting of power to the supervisory
authorities to obtain reports and to make examinations of all affiliates of
member banks and the prescribing of limitations on the loans that a member
bank may make to its affiliates. The board realizes that many evils have
developed through the operation of affiliates connected with member banksr
particularly affiliates dealing in securities. The attached memorandum contains a draft of a provision for the separation of such affiliates after a lapse
of three years.
The board takes the view that legislation further materially restricting
the character of member bank loans and investments is not desirable at a
time when the country's banking system is going through a period of severe
readjustment. Some of the provisions of the proposed bill would have a
tendency to bring about further contraction of credit and thus retard the
recovery of business. It is for these reasons that changes in a number of
sections of the bill are suggested.
It should be recognized that effective supervision of banking in this country
has been seriously hampered by the competition between member and nonmember banks, and that the establishment of a unified system of banking under
national supervision is essential to fundamental banking reform.
Copies of this letter and the inclosed memorandum are being sent to Senator
Glass, and the board will be glad to supply you with copies for the convenience
of each member of your committee.
Very truly yours,




EUGENE MEYER,

Governor.

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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. MEYER. The memorandum which I have here, and of which the
members of the committee will receive copies for their convenience
while sitting here at the table, contains detailed comments and suggestions of amendment of the form of the bill, some of which I
should like to read to the committee. Concerning some of these
matters I shall perhaps wish to make some additional comments as I
go along. As to others, I shall not take up the time of the committee
to read or discuss them but shall merely submit them as a part of the
memorandum.
Senator COUZENS. As you conclude each paragraph do you mind
questions, I mean after the paragraph has been concluded?
Mr. MEYER. NO. But, having in mind that this is the unanimous
recommendation of the board, and that when I answer questions X
can not always anticipate what replies the board would make, you
will understand that I can only answer in my personal capacity.
Senator COUZENS. But after you conclude each section that you
intend to discuss here, it seems to me the members of the committee
would perhaps like some amplification.
Senator WALCOTT. YOU mean, Senator Couzens, after each section
that he discusses.
Senator COUZENS. Yes.
Mr. MEYER. This is not a complete comment on each section of the
bill S. 4115, you will understand, Senator Couzens. This is a memorandum of particular points upon which the board desired to express
its views.
Senator COUZENS. Then are we to understand that as to those
paragraphs of the bill you do not comment on they are satisfactory
to the board?
Mr. MEYER. Well, there are some that you might describe as satisfactory, and there are others on which the board did not, for one
reason or another, undertake to express its views.
Senator COUZENS. Then I understand that where you do not comment on a section or paragraph of the bill, the board does not desire
to express its views, is that correct?
Mr. MEYER. That is correct, as the memorandum expresses the
unanimous opinion of the board, and I think almost all of the important sections of the bill are discussed.
The CHAIRMAN. YOU may proceed, Governor Meyer.
Mr. MEYER. These are comments and recommendations regarding
the bill S. 4115, and all references are to sections, pages, and lines in
the form in which the bill was introduced on March 14 (calendar
day, March 17), 1932.
Section 2: This section defines affiliates and upon its scope depends
in a large measure the scope and effect of all provisions of the bill
relating to affiliates.
While the definition contained in the bill mentions certain specific
types of institutions which are frequently affiliated with member
banks, the words " or a corporation,^ in line 4, on page 2, make it
applicable to corporations of any character which are affiliated with
member banks in any of the ways described in the succeeding paragraphs of the definition.
It is believed that the most satisfactory solution of this problem is
to make the definition very broad but, in dealing with affiliates, to
observe the following principles: (1) To require them to make



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reports and to submit to examination at the discretion of the board
or the comptroller; (2) to limit the loans that can be extended to an
affiliate by a member bank; (3) to prohibit the tying up of capital
stock of an affiliate with the capital stock of a member bank. In
favoring these limitations, the board has in mind that it may not be
desirable to abolish all the existing relationships between member
banks and their affiliates, but that it is desirable to protect the
operations of the member banks from being unduly influenced by
their affiliates. Recent experience has demonstrated that operations
of the affiliates at times have unfavorable effects on the condition of
member banks.
With these principles in mind, it is recommended that the definition of " affiliates " be broadened by eliminating from paragraph (b)
in lines 1 to 4, page 2, all references to specific types of corporations,
and by inserting other words which would make the definition
applicable not only to corporations but to business trusts, associations, or other similiar organizations, regardless of the type of
business in which they are engaged.
Senator TOWNSEND. Governor Meyer, do you suggest any language
in there?
Mr. MEYER. The memorandum farther down contains a suggestion
of the language.
Senator TOWNSEND. All right.
Mr. MEYER. This question of course is one of the most important
and interesting in the bill. There are certain possible affiliates of
banks which are now provided for by Federal law, such as national
agricultural corporations, to the capital of which the banks are
expressly authorized to subscribe; and there are several other categories of affiliates winch may be considered entirely legitimate and
proper.
Senator COUZENS. Will you name one for our information?
Mr. MEYER. Well, I would suggest, for instance
Senator FLETCHER (interposing). Looking at your memorandum,
Governor Meyer, would you mind reading your substitute in that
connection?
Mr. MEYER. All right. Certain other changes in the phraseology
of the definition are also suggested for the purpose or clarifying
them. The changes suggested are as follows:
1. On page 2. change lines 1 to 4, inclusive, to read as follows:
(b) The term " affiUate" includes any corporation, business trust, association or other similar organization—

2. In lines 9,11, and 22 on page 2, strike out the words " managing
officers" and substitute in lieu thereof the words " persons exercising similar functions."
3. In lines 9 and 18 on page 2, and in line 3 on page 3, strike out
the words " annual meeting " and substitute in lieu thereof the word
" election."
There are other references to the question of affiliates further on
in this memorandum, and if it is agreeable to the committee perhaps
we can discuss that question again later.
The CHAIRMAN. Very well. You may proceed.
Mr. MEYER. Section 3 : The Federal Reserve Board understands
that the principles underlying section 3 of the bill are (1) that discounting at the Federal reserve banks is a privilege and not a right;



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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

(2) that the Federal reserve system has the responsibility of keeping itself informed about the use of bank credit ; (3) that the power
of Federal reserve banks to withhold credit accommodations should
be used to discourage unsound banking practices; and (4) that the
Federal Reserve Board should have power to suspend a member bank
from the use of Federal reserve credit facilities. The board is in
sympathy with these principles.
For the purpose of accomplishing these objectives, a substitute for
section 3 is suggested. This substitute includes a revision of the
paragraph of section 4 of the Federal reserve act which now reads as
follows:
Said board shall administer the affairs of said bank fairly and impartially
and without discrimination in favor of or against any member bank or banks
and shall, subject to the provisions of law and the orders of the Federal Reserve
Board, extend to each member bank such discounts, advancements, and accommodations as may be safely and reasonably made with due regard for the claim
and demands of other member banks.

In this revision the word " may " is substituted for " shall " and
the remaining language of the section is made somewhat more general than in the bill.
Member banks as a rule do not borrow to relend, but to make up
deficiencies in reserves arising from withdrawals of deposits or from
other causes. It is, therefore, usually impossible to say that a loan
to a member bank is granted for this or that specific purpose. However, it would be possible to determine whether the loan and investment policies of a bank are inconsistent with the purposes of the
Federal reserve act, and, if so, to refuse accommodation to such bank
or in aggravated cases to suspend it from the privilege of using the
system's credit facilities. In this connection attention is invited to
the fact that section 4 of the Federal reserve act requires the chairman and Federal reserve agent at each Federal reserve bank to
" make regular reports to the Federal Reserve Board " and to " act
as its official representative for the performance of the functions conferred upon it by " the Federal reserve act.
It is recommended that section 3 of the bill be changed to read as
follows:
SEO. 3. The paragraph of section 4 of the Federal reserve act, as amended,
which begins with the words, " S a i d board shall administer the affairs of
said bank fairly and impartially," is amended and reenacted to read as follows:
" Said board of directors shall administer the affairs of said bank fairly nnd
impartially and without discrimination in favor of or against any member
bank or banks and may, subject to the provisions of law and the orders of the
Federal Reserve Board, extend to each member bank such discounts, advancements, and accommodations as may be safely and reasonably made with due regard for the claims and demands of other member banks, the maintenance, of
sound credit conditions and the accommodation of commerce, industry, and
agriculture. The Federal Reserve Board may prescribe regulations further
defining within the limitations of this act the conditions under which discounts, advancements, and accommodations may be extended to member banks.
Each Federal reserve bank shall keep itself informed of the general character and amount of the loans and investments of its member banks with a
view to ascertaining whether undue use is being made of bank credit for the
speculative carrying of or trading in securities, real estate, or commodities, or
for any other purpose inconsistent with the maintenance of sound credit conditions ; and, in determining whether to grant or refuse advances, rediscounts,
or other credit accommodations, the Federal reserve bank shall give consideration to such information. The chairman of the Federal reserve bank shall
report to the Federal Reserve Board any such undue use of bank credit by
any member bank, together with his recommendation. Whenever, in the j\idg-




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

uient of the Federal Reserve Board, any member bank is making such undue
use of bank credit, the board may, in its discretion, after reasonable notice and
an opportunity for a hearing, suspend such bank from the use of the credit
facilities of the Federal reserve system and may terminate such suspension
or may renew it from time to time."

SEC. 4. It is recommended that this section be omitted. It prohibits banks that belong to a group or a chain from voting for Federal reserve bank directors. The wording of the section is such as
not to confine the prohibition to group and chain banks, however,
but to include all banks that are not controlled entirely by locally
resident stockholders. Since the stock of many important banks is
widely owned throughout the country, this might restrict the voting
privilege to smaller and less important banks that are owned by local
stockholders. It is to be feared that this section would bar from participation in the selection of Federal reserve directors many of the
better managed banks.
SEC. 5. This section would amend the first paragraph of section
T of the Federal reserve act so that, after the payment of expenses
and dividends, all of the net earnings of a Federal reserve bank over
and above any amounts necessary to restore its surplus to the amount
on December 31,1931, would be paid to the Federal liquidating corporation. The amendment is also worded in such a way as to prevent the payment of any dividends out of surplus and to prevent the
payment of dividends whenever the surplus of a Federal reserve
bank is less than it was on December 31,1931.
A different method offinancingthe liquidating corporation is
proposed and will be discussed under the appropriate section. For
this reason a modification of section 5 is suggested which would not
•change the provisions of the present law in regard to the surplus of
the Federal reserve banks, but would authorize the Secretary of the
Treasury to use the franchise tax received from the Federal reserve
Banks for the purpose of supplementing the funds of the corporation.
As changed, section 5 of the bill would read as follows:
SEC. 5. The second paragraph of section 7 of the Federal reserve act, as
amended, is amended to read as follows:
" The net earnings derived by the United States from Federal reserve banks
shall, in the discretion of the Secretary of the Treasury, (1) be used to supplement the gold reserve held against outstanding United States notes, or (2)
be applied to the reduction of the outstanding bonded indebtedness of the
United States under regulations to be prescribed by the Secretary of the
Treasury, or (3) be invested in debentures or other such obligations of the
Federal Liquidating Corporation. Should a Federal reserve bank be dissolved
or go into liquidation, any surplus remaining, after the payment of all debts,
dividend requirements as hereinbefore provided, and the par value of the
stock, shall be paid to and become the property of the United States and shall
be similarly appUed."

Section 6: In order that reports of affiliates of State member
banks may be required only when deemed necessary by the Federal
Reserve Board and also in order that suitable provision may be
made for the examination of affiliates of State member banks when
deemed necessary, it is recommended that section 6 of the bill be
changed to read as follows:
SEC. 6. Section 9 of the Federal reserve act, as amended, is further amended
by adding at the end thereof two paragraphs reading as follows:
" Whenever it shall be deemed necessary in order to obtain adequate information regarding the relations between any bank admitted to membership




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

raider the provisions of this section and its affiliates or the effect of such
relations upon the management or condition of such bank, it may be required
under rules and regulations prescribed by the Federal Reserve Board to obtain
and furnish such reports as to any or all of its affiliates as may be called for.
Each such report shall contain such information and shall be submitted at
such time as may be specified in the call therefor. Any member bank which
ialls to furnish any report of an affiliate when and as required shall be subject
to a penalty of $100 for each day during which such failure continues. Such
penalty may be assessed by the Federal Reserve Board, in its discretion, and,
when assessed, may be collected by the Federal reserve bank by suit or
otherwise.
"Any examiner selected or approved by the Federal Reserve Board may
examine any affiliate of any bank admitted to membership under the prothe Federal Reserve Board or the Federal reserve bank of the relations of
visions of this section when it shall be deemed necessary in order to inform
the Federal Reserve Board or the Federal reserve bank of the relations of
such affiliate with such member bank or of the effect of such relations upon
the management or condition of such member bank. The examiner making
the examination of any such affiliate shall have power to make a thorough
examination of all the affairs of the affiliate, and in doing so he shall have
power to administer oaths and to examine any of the officers, directors, employees, and agents thereof under oath, and to make a report of his findings
to the Federal Reserve Board or to the Federal reserve bank. The expenses of
any examination made under the provisions of this paragraph may, in the
discretion of the Federal Reserve Board, be assessed against the affiliate
examined and, when so assessed, shall be paid by the affiliate examined. If
such affiliate shall refuse to pay such expenses or shall fail to do so within
sixty days after the date of such assessment, then such expenses may be
assessed against the affiliated member bank and, when so assessed, shall be
paid by such member bank: Provided, hoicever, That, if the affiliation is with
two or more member banks, such expenses may be assessed against, and collected from, any or all of such member banks in such proportions as the
JTederal Reserve Board may prescribe. If any affiliate of a bank admitted
to membership under the provisions of this section shall refuse to permit an
examiner to make an examination of such affiliate or refuse to give any inforjnation required in the course of any such examination, the member bank with
which it is affiliated shall be subject to. a penalty of not more than $100 for
each day that any such refusal shall continue. Such penalty may be assessed
by the Federal Reserve Board in its discretion and, when so assessed, may
•be collected by the Federal reserve bank by suit or otherwise."

Section 7. If this section is adopted in its present form, certain
•changes should be made in the text for the purpose of clarification
And of providing for certain matters not now covered in the bill
which will be referred to at the appropriate places.
For the purpose of clarification, it is suggested that subsection
.(b) be amended as follows:
1. In lines 6,11, and 12, on page 8, it is suggested that the word
M appointive " be inserted before the word " member."
2. In line 13, on page 8, it is suggested that after the words
" twelve years " there be inserted the words " from the expiration
of the term of his predecessor."
In order that the domicile of the board may be fixed for legal
reasons, and in order that provision may be made for a chairman
of the board, it is suggested that the following be inserted at the
beginning of line 23, on page 8:
The principal offices of the board shall be in the District of Columbia. At
meetings of the board, the governor shall preside as chairman, and, iu his
absence, the vice governor shall preside. In the absence of both the governor
and the vice governor, the board shall elect a member to act as chairman
pro tem.

If the authority of the Secretary of the Treasury to assign quarters to the Federal Reserve Board is repealed, it would seem that



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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

the hoard should be authorized to purchase or construct a building
for its own use and that, in the interest of convenience and efficiency,
space should be provided in such building for the Comptroller of
the Currency and his staff and for the proposed Federal liquidating
corporation. For this purpose, it is suggested that the following
be added at the end of section 7 of the bill:
(d) Section 10 of the Federal reserve act, as amended, is further
amended by adding at the end thereof a new paragraph reading as
follows:
The Federal Reserve Board is authorized and empowered to acquire by
purchase, condemnation or otherwise, a building located in the District of
Columbia which will provide suitable and adequate offices wherein the functions of the board and the Comptroller of the Currency may be carried on,
or to acquire by purchase, condemnation or otherwise, such site located in
the District of Columbia as it may deem necessary and to cause to be constructed thereon a building which will provide suitable and adequate offices
for the purposes of the Federal Reserve Board and the Comptroller of the
Currency, and to maintain, repair, enlarge or remodel any building so acquired
or constructed. The Federal Reserve Board may assign offices in any such
building for the use of the Comptroller of the Currency and the Federal
liquidating corporation without making any charge for the use of such offices,
and nothing contained in the act of June 3, 1864, or in section 331 of the
Revised Statutes (title 12, sec. 13, U. S. C.), or in any other provision
of law, shall be construed as preventing the Comptroller of the Currency
from making full use of any offices so assigned and from keeping therein
the records and all other valuable things belonging to his department. The
Federal Reserve Board may levy upon the Federal reserve banks, in proportion
to their capital stock and surplus, assessments sufficient to defray all costs and
expenses incurred under the provisions of this paragraph.

"Whether the Secretary of the Treasury should continue to serve
ex officio as a member and chairman of the board, is a auestion that
the board, I think, in general is inclined to feel should be decided
primarily by the committee and the Congress. I think the board
feels it might be a little out of place for it to make any suggestions
concerning its own composition.
I will say, however, that it is a rather interesting question.^ I
think the board feels there are some definite advantages in having
the secretary present at meetings and, on the other hand, there would
be perhaps some advantages in his absence. I had a little discussion
with Senator Glass on the subject when he asked me some months
ago how I felt about it, and I stated that I had no strong feelings.
As a matter of fact, during the time I have been governor of the
board, I have found nothing to object to in the presence of the Secretary of the Treasury as a member of the board. On the other
hand, it is easy enough to see that the board, having as its chairman ex officio a man as powerful and as important as the Secretary
of the Treasury, might be suspected of being unduly influenced by
him; and yet I know, gentlemen of the committee
Senator GLASS (interposing). Of course it is never so.
Mr. MEYER. Well, I know it is so, because I know you said you
did it. But it has not been so in the last year and a half.
Senator GLASS. Not since you have been governor, no. [Great
laughter in the room.]
Mr. MEYER. Well, I just have this thought about it from the point
of view of public policy: I can see all the disadvantages of having
such an important official of the Government as chairman ex officio.
On the other hand, if the board, with its power over the banking



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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

andfinancialsituation of the country, did not have in its membership
the kind of representation that the Secretary of the Treasury is
intended to provide, it is possible that, when some policy that was
unpopular but perhaps very sound was in process of being enforced,
the criticism would be made that this was a board of merely bureaucratic officials, set aside in the Government and independently exercising arbitrary power, with no one on the board reflecting the
public point oi view that an official such as the Secretary of the
Treasury might be expected to have. In other words, while it is
easy to see a disadvantage in the existing state of affairs, I think you
have to consider all of the possibilities that might arise under new
conditions.
Senator GLASS. Well, you will recall that when the Federal reserve bill was enacted into law one of the most vehement objections
to it was by the American Bankers' Association, and particularly to
that provision that put the Secretary of the Treasury on the board.
They called it a political board, and some of them do now.
Mr. MEYER. Well, that is the disadvantage of the presence of the
Secretary, and, laying aside any personalities as affecting the late
Secretary or the present Secretary or any present member on the
board, I can see great advantages in a separation. But I want to
say this, that while the Secretary's membership is always thought
of in the terms of the Secretary of the Treasury having access to
the board's counsels, and having the ability to influence its policy
in a direction advantageous to Governmentfinance,I see, too, that
direct contact with the Secretary of the Treasury, on behalf of the
board's interest from a banking point of view in the Treasury's
policies, is a considerable advantage. I do not think it is a one-sided
matter. I should say that we feel as free to express the banking
point of view on Treasury policies when the Secretary is present
in the board meetings as the Secretary does to express his views
from^ the Government's financial point of view about banking
policies.
Senator GLASS. I am glad that that has been so radically changed
since I was Secretary of the Treasury.
Mr. MEYER. Well, you can see that there is some point to that
possibility, because after all the banks of the country have a very
direct interest in the policies of Government finance.
I was wondering whether on this particular subject you would care
to consider perhaps an. intermediate course, for instance, perhaps to
make the Secretary of the Treasury an ex officio member of the
board without a vote and eliminate him from the chairmanship.
That would provide a normal and natural means for regular conferences, without, I should say, the suspicion of undue influence.
However, that is merely a suggestion for your consideration. I think
there is considerable advantage from the banking point of view in
having the Secretary on the board, and I am not thinking of any
advantage to the Secretary of the Treasury as head of the Government'sfinancialdepartment.
Senator FLETCHER. There is no difficulty about the board being in
frequent conference and contact with the Secretary of the Treasury,
is there?
Mr. MEYER. Well, of course, if this bill were enacted and the board
moved out of the building, if we wanted to have a conference, should
111161—32—pt 2 10



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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

we send for the Secretary of the Treasury to come over to see us?
Or should we ask for an appointment with the Secretary when we
might he allowed to see him? It might be a rather embarrassing
matter, whereas if he were an ex officio member without a vote he
would attend when pending matters were interesting to him, and
when he had the time, and he would be available in the normal way.
In other words, there would not be any discussion about how to
arrange meetings.
Senator FLETCHER. It seems to me that is a mere matter of location
of the offices.
Mr. MEYER. It is more than that. I do not think the Secretary of
the Treasury, who is a very important officer in the Government,
would care to be sent for by the various boards and bureaus of the
Government around Washington.
Senator GLASS. NO, and I sent for the board.
Mr. MEYER. And you were the Secretary of the Treasury then.
But I am saying if the Secretary of the Treasury were not a member
of the board he might not send for the boara, because the board
might not feel particularly responsive to his calls. I do not know
that the board would respond to a call from the Secretary of the
Treasur}' if he were not a member of the board and had no official
relationship with it.
Senator GLASS. YOU make yourself very skillfully persona grata.
Mr. MEYER. Well, I am only trying to throw a little light on the
discussion. I have not thought very much about this, although it is
interesting, I admit.
Senator FLETCHER. It seems to me if we are going to put him on
the board we should do so and not as a figurehead.
Mr. MEYER. Well, not as afigurehead,but by following that suggestion he would have a natural way for conference.
Senator GLASS. What about the Comptroller of the Currency?
Mr. MEYER. This report does not discuss that, and your bill did
not refer to it, so we did not comment on it. Personally I think it
is fair to say that a good many members of the board, although I
would not say all, because we have not taken a vote on it, have the
feeling that there is no need of, and no great benefit in, the presence
of the Comptroller of the Currency on the board. He is such a busy
individual that he has very little time to give to the affairs of the
board, except at meetings which he attends only occasionally, and
then probably for only a part of the meetings.
Senator GLASS. HOW many times in the year would your minutes
show the Secretary of the Treasury attended the meetings of the
board?
Mr. MEYER. DO you mean in the last year?
Senator GLASS. Well, in any one year.
Mr. MEYER. Over what period do you mean?
Senator GLASS. In a year.
Mr. MEYER. Well, I have only been there for a year and a half.
Mr. Mellon only attended meetings as a rule when we asked him
to for the purpose of making up a quorum. Since Mr. Mills has
been Secretary of the Treasury, he has frequently attended and is
interested in the discussions. He attends whenever he can—I should
say, whenever he has the time.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator GLASS. Of course you know that we have discussed this
matter for quite a period of time.
Mr. MEYER. HOW do you mean?
Senator GLASS. I mean that we have not sprung it on an unsuspecting public.
Mr. MEYER. NO, but the idea had not come to me previously that
the Secretary of the Treasury might be a nonvoting member of the
hoard.
Senator GLASS. DO you mean unofficial observer?
Mr. MEYER. Well, as an ex officio member of the board without a
vote, but eliminating him from the chairmanship as you propose.
I am not urging it. I am not recommending it, and the board did
not discuss that in this report, and therefore it is merely a suggestion
made now for your consideration.
Senator GLASS. Well, the subcommittee did not regard it as vital.
Mr. MEYER. HOW was that?
Senator GLASS. I say, the subcommittee did not regard it as vital.
Mr. MEYER. No, I so understand.
The CHAIRMAN. YOU may continue your statement, Mr. Meyer.
Mr. MEYER. Section 8 : The purpose of this section is to prevent the
undue use of bank loans for speculation in securities. It is believed
that this is sufficiently covered in section 3 and, therefore, the omission of section 8 is recommended.
Section 9. In accordance with the principles indicated in the discussion of section 2, it is recommended that section 9 of the bill be
changed to read as follows:
" SEO. 9. The Federal reserve act, as amended, is amended by inserting between sections 23 and 24 thereof the following new section:
"SEC. 23(a). No national banking association and no State member bank shall (1) make any loan or any extension of credit to, or
purchase securities under repurchase agreement from, any of its
affiliates, or (2) invest any of its funds in the capital stock, bonds, or
other obligation of any such affiliate, or (3) accept the capital stock,
bonds, or other obligations of any such affiliate as collateral security
ior advances^ made to any individual, partnership, association, or
corporation; if, in the case of any such affiliate, the aggregate amoum
of such loans or extensions of credit, repurchase agreements, investments, and advances against such collateral security will exceed 10
per centum of the capital stock and surplus of such national banking
association or State member bank; or if, in the case of all such affiliates, the aggregate amount of such loans, extensions of credit, investments, and advances against such collateral security will exceed 20
per centum of the capital stock and surplus of such national banking
association or State member bank: Provided? however\ That nothing
in this section, or in any section of the banking act of 1932, shall be
•construed as authorizing member banks to invest their funds in stock
•otherwise than as specifically authorized by existing law.
" 6 Each loan or extension of credit to an affiliate within the foregoing limitations shall be secured by collateral having a market
value at the time of making the loan or extension of credit of at least
20 per centum more than the amount of such loan: Provided, That
this requirement shall not apply to loans or extensions of credit on




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4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

the security of obligations of the United States Government, Reconstruction Finance Corporation, Federal Intermediate Credit
Banks, or Federal land banks, or on the security of notes, drafts, billa
of exchange, or acceptances eligible for discount or purchase by Federal reserve banks: And provided further, That when any loan is
made on the security of obligations of any State or political subdivision or agency thereof such obligations shall have a market value at
the time of making the loan of at least 10 per centum more than the
amount of such loan. A loan or extension of credit to a director,,
officer, clerk, or other employee or any representative of any such
affiliate shall be deemed a loan to the affiliate to the extent that the
proceeds of such loan are used for the benefit of, or transferred to,,
the affiliate.
" ' The provisions of this section shall not apply to any affiliate of
such national banking association or State member bank, (1) the sole
function pf which is to hold its banking house or houses and the site
or sites thereof, (2) the sole function of which is to conduct a safe
deposit business, (3) in the capital stock of which such bank has been
authorized to invest pursuant to section 25 of the Federal reserve
act, (4) organized under section 25(a) of the Federal reserve act,,
or (5) transacting only the business of an agricultural credit corporation or live stock loan# company; but as to such affiliates member
banks shall continue subject to the provisions of existing law limiting the amounts which they may lend to, or invest in the stock or
other obligations of, such corporations V5
SEC. 10. This section of the bill deals with two separate and distinct subjects, (1) open market operations of the Federal reserve
banks, and (2) the proposed Federal liquidating corporation. For
convenience, these subjects, will be discussed separately.
Open market operations: The first part of Section 10 would establish a Federal open market committee along the lines of the existingopen market policy conference which functions as a piece of administrative machinery without specific legal status.
The statement in paragraph (b) of section 10 which says that, " No
Federal reserve bank shall engage in open market operations, except
after approval and authorization by the committee," appears to be
too rigid. It deprives an individual reserve bank of all authority
to make purchases in the open market except after obtaining the
consent of both the board and the committee. The open market committee would have no authority to act without approval of the board
and the board would have no authority to act without approval of
the committee. This would result in the possibility of obstruction
of any system program and would tend to make the operation of the
Federal reserve system less timely and less efficient.
Lines 19 to 23 in paragraph (c) on page 12 of this section would
incorporate into law a principle which the Federal Reserve Board
has adopted in practice.
The following substitute for thefirstpart of section 10 of the bill
is suggested:
SEC. 10. Section 14 of the Federal reserve act, as amended, is further
amended by striking out the words 4 Every Federal reserve bank shall have
power;' and inserting in lieu thereof the following:
" Subject to such regulations, limitations, restrictions and procedure as theFederal Reserve Board may prescribe, every Federal reserve bank shall havepower : "




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4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

" Section 14 of the Federal reserve act, as amended, is further amended by
adding at the end thereof a new paragraph reading as follows:
" *Tlu» time, character and volume of all purchases and sales in the open
market under this section shall be governed with a view to accommodating
commerce and business and with regard to their bearing upon the general
•credit situation of the country.'"

Senator GLASS. Governor, wouldn't that proposed amendment
abrogate the right of a Federal reserve bank to initiate the discount
rate and transfer it to the Federal Reserve Board?
Mr. MEYER. I think not, Senator Glass. After looking at it again
I would say it concerns open market operations: I do not think it
would, but I should like to ask our counsel.
Mr. WYATT. I do not think it would.
Mr. MEYER. Our counsel is sitting here behind me, and he tells me
it would not.
a Senator GLASS. I am very much of opinion it would, and that is a
bitterly contested proposition.
Mr. MEYER. YOU want to maintain the initiative in the banks?
Senator GLASS. Yes.
Mr. MEYER. It has been our policy to do that. I have attended
meetings where the directors of banks have been discussing rates,
and never had anything to say about it at all.
Senator GLASS. But you know it was a bitterly controverted proposition.
M r . MEYER. Y e s .
Senator GLASS. And that it created quite a sensational dispute?'
Mr. MEYER. I am in entire sympathy with your view on that, Sena-

tor Glass, and am quite sure that we were not in the slightest degree
intending that there should be any change. And our counsel advises
me that he thinks it does not change that proposition.
Senator GLASS. Well, I was so certain of it that the technician of
this committee having embodied that in the bill I had it stricken
out.
Mr. MEYER. Well, of course it is worth studying from that point
of view, but I think it is perfectly innocuous in that respect. I
should like to have it looked into a little more fully by our counsel,
and will write you a memorandum on that, for the benefit of the
committee, if you and they so desire.
Senator GLASS. I am willing to be convinced.
Mr. MEYER. All right, Senator Glass, we will try to furnish you a
basis for a sound conviction.
The CHAIRMAN. YOU may continue your statement, Governor
Meyer.
Mr. MEYER. Federal liquidating corporation: The other part of
section 10 deals with the proposed Federal liquidating corporation,
and there is submitted a proposed substitute for the section as drafted
in the bill. The substitute would confine the benefits of the liquidating corporation to member banks. Provision is made for assistance
to nonmember banks in the Reconstruction Finance Corporation act,
and it would render membership in the system more attractive if the
benefits of the corporation were confined to member banks. In the
substitute it is proposed that $100,000,000 of the capital of the
liquidating corporation be subscribed by the Treasury. This subscription to capital may be considered as being derived from the
franchise tax previously paid to the Treasury by the reserve banks.



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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

In addition, it is proposed that the corporation be authorized to
issue debentures up to twice the amount of its subscribed capital
and that the Federal reserve banks be given authority to purchase
those debentures up to one-fourth of their surplus. This is not a
propitious time to ask the member banks to contribute to the liquidating corporation. The banks are going through a very difficult
period and to tax them for this purpose would be a considerable
hardship on them.
In order to make the operations of the corporation more easily
manageable, it is proposed that the directorate be comprised of 5
members instead of 14 as proposed in the bill.
For the reasons which have been stated the following separate
section on the Federal liquidating corporation has been drafted:
SEO. 5A. The Federal reserve act, as amended, is further amended by inserting between sections 28 and 29 thereof the following new section:
SEC. 28A. (a) There is hereby created a Federal liquidating corporation *
(hereafter referred to as the "corporation") for the purpose of making loans
on, or purchasing and liquidating as hereinafter provided, all or any part of
the assets of any member bank for which a receiver has been appointed. The
term "receiver" as.used in this section shall mean a receiver of a national
bank, and a receiver, liquidating agent, commission, person, or other agency
charged by State law with the responsibility and the duty of winding up the
affairs of an insolvent State member bank.
(b) The management of the corporation shall be vested in a board of
directors consisting of five members, one of whom shall be the Comptroller o f
the Currency, one a member of the Federal Reserve Board designated by the
board for the purpose, and three selected annually by the governors of the
12 Federal reserve banks under such procedure as may be prescribed by the
Federal Reserve Board.
(c) The corporation shall have a capital stock of $100,000,000, all of which*
shall be subscribed by the United States of America and payment for which
shall be subject to call in whole or in part by the board of directors of the
corporation.
There is hereby authorized to be appropriated out of any money in the
Treasury not otherwise appropriated the sum of $100,000,000 for the purposeof making payments upon such subscription. Receipts for payments by the
United States for or on account of such stock shall be issued by the corporation to the Secretary of the Treasury and shall be evidence of the stockownership of the United States.
Any Federal reserve bank may purchase and hold any debentures or other
such obligations of the corporation in an amount not exceeding one-fourth,
of the amount of its surplus fund.
(d) The corporation shall have p o w e r First. To adopt, alter, and use a corporate seal.
Second. To have perpetual succession from the date of enactment hereof,
unless it is sooner dissolved by an act of Congress.
Third. To make contracts; to purchase, lease, and hold or dispose of such
real estate or personal property as may be necessary or convenient for thetransaction of its business.
Fourth. To sue and be sued, complain and defend in any court of competent"*
jurisdiction.
Fifth. To appoint, employ, and fix the compensation of such officers, employees, attorneys, and agents as shall be necessary for the transaction of the
business of the corporation, without regard to the provisions of other laws
applicable to the employment and compensation of officers or employees of the
United States, to define their authority and duties, to require bonds of them
and fix the penalty thereof and to dismiss them at pleasure. Nothing in this?
or any other act sliall be construed to prevent the appointment and' compensation as a director, officer, or employee of the corporation of auv officer or
employee of the United States in any hoard, commission, independent
establishment, or executive department thereof.
Sixth. To prescribe, amend, and repeal by its board of directors by-laws and
rules and regulations not inconsistent with law governing the manner in which




3714NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
its general business may be conducted and the privileges granted to it by law
may be exercised and enjoyed.
Seventh. To exercise such incidental powers as shall be reasonably necessary
to carry out the powers so granted.
(e) The board of directors of the corporation shall determine and prescribe
the manner in which its obligations shall be incurred and its expenses allowed
and paid. The corporation shall be entitled to the free use of the United States
mails in the same manner as the executive departments of the Government.
The corporation with the consent of any Federal reserve bank or of any board,
commission, independent establishment, or executive department of the Government, including any field service thereof, may avail itself of the use of information, services, and facilities thereof in carrying out the provisions of this
act.
( f ) Upon the application of the receiver of any member bank, the corporation may in its discretion purchase the assets of such bank, in whole or
in part, or make loans to the receiver on the security of such assets or any
portion thereof, on such terms and conditions as shall be agreed upon between
the corporation and the receiver, subject to the approval of (1) the Comptroller of the Currency in the case of any national bank, or (2) the person
or agency designated by State law in the case of any State bank; except that,
in no case shall the corporation make any loan or purchase any assets in
an amount which in the opinion of the corporation shall not fully protect
such corporation and no such loan or purchase shall be made in the case of
State member banks unless expressly authorized by the law of the State in
which the bank is located. Receivers of national banks are hereby authorized
and empowered with the approval of the Comptroller of the Currency to borrow on, or sell, assets of banks of which they are receivers, and the proceeds
of every such sale or loan shall be utilized for the same purposes and in the
same manner as other funds realized from the liquidation of the assets of such
banks. The Comptroller of the Currency may, in his discretion, pay dividends
on proved claims at any time after the expiration of the period of advertisement made pursuant to section 5235 of the Revised Statutes, and no liability
shall attach to the Comptroller of the Currency or to the receiver of any
national bank by reason of any such payment for failure to pay dividends to
a claimant whose claim is not proved at the time of any such payment If
the amount realized from any assets acquired by the corporation under the
provisions of this section exceeds the sum paid therefor or loaned thereon,
the corporation shall make an additional payment to the receiver of the bank
equal to the amount of such excess, if any, after deducting the expenses of
liquidating such assets and an amount equal to interest at the rate of -6
per cent per annum. All loans made by the corporation to receivers shall
bear interest at the rate of 6 per cent per annum.
(g) Money of the corporation not otherwise employed shall be invested in
securities of the Government of the United States, except that for temporary
periods, in the discretion of the board of directors, funds of the corporation
may be deposited subject to check in any Federal reserve bank or with the
Treasurer of the United States. When designated for that purpose by the
Secretary of the Treasury, the corporation shall be a depositary of public
moneys, except receipts from customs, under such regulations as may be prescribed by the said Secretary, and may also be employed as a financial agent
of the Government. It shall perform all such reasonable duties as depositary of public moneys and financial agent of the Government as may be
required of it.
(h) The corporation is authorized and empowered to issue and to have
outstanding at any one time in an amount aggregating not more than twice
the amount of its capital, notes, debentures, bonds, or other such obligations,
to be redeemable at the option of the corporation before maturity in such
manner as may be stipulated in such obligations, to bear such rate or rates
of interest, and to mature at sueli time or times as may be determined by
the corporation: Provided, That the corporation may sell on a discount basis
short-term obligations payable at maturity without interest. Obligations of
the corporation may be secured by assets of the corporation in such manner
as shall be prescribed by the board of directors. Such obligations may be
offered for sale at such price or prices as the corporation may determine. The
said obligations shall be fully and unconditionally guaranteed both as to
interest and principal by the United States and such guaranty shall be expressed on the face thereof. In the event that the corporation shall be unable




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

to pay upon demand, when due, the principal of or interest on notes, debentures, bonds, or other such obligations issued by it, the Secretary of the
Treasury shall pay the amount thereof, which is hereby authorized to be appropriated, out of any moneys in the Treasury not otherwise appropriated, and
thereupon to the extent of the amounts so paid the Secretary of the Treasury
shall succeed to all the rights of the holders of such notes, debentures, bonds,
or other such obligations.
(i) All obligations issued by the corporation shall be exempt, both as to
principal and interest, from all taxation (except estate or inheritance taxes)
now or hereafter imposed by the United States, by any Territory, dependency
or possession thereof, or by any State, county, municipality, or local taxing
authority. The corporation, including its franchise, its capital, reserves, and
surplus, and Its income, shall be exempt from all taxation now or hereafter
imposed by the United States, by any Territory, dependency, or possession
thereof, or by any State, county, municipality, or local taxing authority, except
that any real property of the corporation shall be subject to State, county,
municipal, or local taxation to the same extent according to its value as other
real property is taxed.
(j) In order that the corporation may be supplied with such forms of
obligations as it may need for issuance under this act, the Secretary of the
Treasury is authorized to prepare such forms as shall be suitable and approved
by the corporation, to be held in the Treasury subject to delivery, upon order
•of the corporation. The engraved plates, dies, bed pieces, and other material
executed in connection therewith shall remain in the custody of the Secretary
of the Treasury. The corporation shall reimburse the Secretary of the
Treasury for any expenses incurred in the preparation, custody, and delivery
of such obligations.
(k) The corporation shall annually make a report of its operations to
the Congress as soon as practicable after the 1st day of January in each year.
(I) Whoever, for the purpose of obtaining any loan from the corporation,
-or any extension or renewal thereof, or the acceptance, release, or substitution of security therefor, or for the purpose of inducing the corporation to
purchase any assets, or for the purpose of influencing in any way the action
of the corporation under this act, makes any statement, knowing it to be
false, or wilfully overvalues any security, shall be punished by a fine of not
more than $5,000, or by imprisonment for not more than two years, or both.
(m) Whoever (1) falsely makes, forges, or counterfeits any obligation or
coupon, in imitation of or purporting to be an obligation or coupon, issued by
the corporation, or (2) passes, utters, or publishes, or attempts to pass, utter,
•or publish, any false, forged or counterfeit obligation or coupon, purporting to
have been issued by the corporation, knowing the same to be false, forged or
counterfeited, or (3) falsely alters any obligation, or coupon, issued or purporting to have been issued by the corporation, or (4) passes, utters, or publishes or attempts to pass, utter, or publish as true, any falsely altered or
spurious obligation or coupon, issued or purporting to have been issued by the
corporation, knowing the same to be falsely altered or spurious, shall be
punished by a fine of not more than $10,000 or by imprisonment for not more
than five years, or both.
(n) Whoever, being connected in any capacity with the corporation. (1)
embezzles, abstracts, purloins, or wilfully misapplies any moneys, funds, securities, or other things of value, whether belonging to it or pledged, or otherwise
•entrusted to it, or (2) with intent to defraud the corporation or any other
body, politic or corporate, or any individual, or to deceive any officer, auditor, or
examiner of the corporation, makes any false entry in any book, report, or
statement of or to the corporation, or without being duly authorized draws any
order or issues, puts forth or assigns any note, debenture, bond, or other such
obligation, or draft, bill of exchange, mortgage, judgment, or decree thereof,
shall be punished by a fine of not more than $10,000 or by imprisonment for
not more than five years, or both.
(o) No individual, association, partnership, or corporation shall use the
words "Federal Liquidating Corporation," or a combination of these three
words, as the name or a part thereof under which he or it shall do business.
Every individual, partnership, association, or corporation violating this subdivision shall be punished by a fine of not exceeding $1,000, or by imprisonment not exceeding one year, or both.
(p) The provisions of sections 112, 113,114, 115, 116, and 117 of the Criminal
•Code of the United States (U. S. C., title 18, ch. 5, sees. 202 to 207, inclusive),




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

insofar as applicable, are extended to apply to contracts or agreements with
the corporation under this act, which for the purposes hereof shall be held to
include loans, advances, extensions and renewals thereof, and acceptances,
releases, and substitutions of security therefor, purchases or sales of assets,
and all contracts and agreements pertaining to the same.
(q) The Secret Service Division of the Treasury Department is authorized to
detect, arrest, and deliver into the custody of the United States marshal having
jurisdiction any person committing any of the offenses punishable under this
section.

Senator GLASS. Governor, was it your judgment that it was all
right for the banks to contribute four times as much to the National
Credit Corporation?
Mr. MEYER. That was a temporary contribution, Senator Glass.
It was only intended to be so. and I think it will prove to be so.
Senator GLASS. This contribution is a single contribution and
only a contribution.
Mr. MEYER. Yes; but I think it is expected that the National
Credit Corporation will be able to return all of its capital.
Senator GLASS. The whole proposition is whether this is a propitious time to require the banks of the countrj7 to contribute four
times as much to the National Credit Corporation as to this corporation.
Mr. MEYER. All banks did not do it, only about half of thein.
Senator GLASS. And they were coerced into doing it?
Mr. MEYER. Some of them, perhaps.
Senator GLASS. We had testimony the other day that they only
did it then after they were assured by high authority that the Government through the taxpayers was going to take it over.
Mr. MEYER. Well, I think that the $100,000,000 capital for the
corporation, which is less than you suggested in the bill should
come from the Government, and that, with $200,000,000 borrowing
capacity, would enable the corporation to take care of the need for
advances to facilitate payments to depositors of closed banks.
Senator GLASS. Has the Government ever contributed a dollar
to the maintenance of the Federal reserve system?
Mr. MEYER. I know they have not in the last year and a half.
Senator GLASS. And you know7 they have never done it, either.
Mr. MEYER. Well, I will say that I think they have not, but you
understand I can not speak on that from personal knowledge.
Senator GLASS. And wliv should it ever do it? It is not a Government institution.
M r . MEYER. NO.
Senator GLASS. The

Government does not own one dollar of proprietary interest in the Federal reserve system, and I for one have
been intent on keeping it that way. I don't think the Government
should have anything to do with it except by way of supervisory
control.
Senator FLETCHER. HOW about nonmember banks being taken
care of?
Mr. MEYER. There are a good many States which do not authorizereceivers of closed banks to borrow. Some of the States are amending their laws, but some are not. Virginia amended its law.
Senator FLETCHER. The point I am making is, that the Reconstruction Finance Corporation itself is a temporary corporation.
M r . MEYER. Y e s .




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator FLETCHER. Whereas we are trying to write here a permanent law.
M r . MEYER. Y e s .
Senator FLETCHER. SO

the Reconstruction Finance Corporation
• a not take care of the needs of these nonmember banks very well.
cn
M r . MEYER. Y e s , but
Senator GLASS (interposing).

The provision in this bill with
respect to nonmember banks is a temporary arrangement. I must
confess that I had no particular partiality for it, and I have been
trying to ascertain from the Reconstruction Finance Corporation
within the last three or four days whether or not it thinks there is
any need for that temporary relief. In other words, whether the
$200,000,000 already appropriated is not sufficient to meet that issue.
Mr. MEYER. It is hard to answer that question. If some States
which have 1 0 laws authorizing borrowings by receivers, should
1
amend their laws and authorize them, I think there might be a considerable volume of applications for this purpose. But in the immediate present there is not, because most States have no laws which
permit borrowings by receivers of State banks.
Senator GLASS. This provision would expire by limitation before
many States could take advantage of it.
Mr. MEYER. It depends on how long that corporation functions.
1
" "
vhich I hope may be the case, that would be so,
extended.
Senator GLASS. This particular provision expires in two years.
M r . MEYER. Y e s , sir.
Senator WALCOTT. Governor

Meyer, would your proposed amendment make this an emergency measure or a permanent measure ?
Mr. MEYER. Permanent.
Senator WALCOTT. The same as this bill?
Mr. MEYER. Yes; but for member banks.
Senator WALCOTT. For member banks only?
M . MEYER. Y e s , sir.
Senator GLASS. I should

like to recapture from the Government
the whole of the $147,000,000 it has taken over from the Federal
reserve bank earnings and to which it was never entitled in my judgment.
Mr. MEYER. Well, this would recapture $100,000,000 as it is proposed here.
Senator GLASS. ,But it does not appear in the form of a recapture.
Mr. MEYER. I have the feeling, Senator Glass, that to take a large
part of the surplus of the Federal reserve banks and put it in the corporation would be a mistake.
Senator GLASS. The Federal reserve banks have more than 100 per
cent greater surplus thap they asked the Congress to give them.
Mr. MEYER. Well, it is a great element of strength in the banks,
and adds to the confidence of the people in the Federal reserve system. The surplus of any bank is as important to its capital structure
as its capital. The mere fact that it is called surplus does not mean
that it can be taken out without detriment.
Senator GLASS. We are not divorcing it. We are putting it to the
use of the member banks of the system.
Mr. MEYER. Yes. In an acute situation when , the real test of
confidence in strength develops the large surplus as well as the capi


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4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

tal of the Federal reserve system is a very important element, and
it never was more so than it was within the past year, and, if that
surplus had been invested, even well invested, in slow assets of
closed banks, I should say it would not have been as much in the
public interest as it was to keep it in reasonably liquid form.
Senator GLASS. And instead of that it was invested largely in
slow assets of foreign banks in foreign countries.
Mr. MEYER. Not very extensively.
Senator GLASS. But quite extensively.
Mr. MEYER. These advances have been repaid in large part.
Senator GLASS. Nevertheless, the investment was very extensive.
Mr. MEYER. It was not very prolonged. That not all of it was
slow has been proven by the fact that a considerable part has already
been retired.
Senator GLASS. But it never ought to have been done at all.
Mr. MEYER. Shall I now proceed, Mr. Chairman?
The CHAIRMAN. Proceed with your statement.
Mr. MEYER. I will take up section 11: Section 11 imposes a discriminatory rate against member-bank collateral notes. It also prescribes limitations on the use of such notes by banks that may be
making loans on stock-exchange collateral. It is believed that the
purposes of this section are accomplished by the proposed revision
of section 3 and that no further limitations along this line are desirable. The theory underlying this section, namely, that there is a
more direct connection between member-bank collateral notes and
the use of reserve credit for speculative activity than between other
borrowings and this activity is unfounded. Member banks borrow
on 15-day notes, because of the greater convenience both to them and
to the Federal reserve bank; and, if this form of borrowing were
prohibited or made more expensive, they would merely substitute
the procedure of rediscounting eligible paper without any change
in the use of the proceeds. For these reasons, it is believed that
this section would make the operation of the Federal reserve banks
less efficient and more expensive.
The recommendation has been made by the Federal Reserve Board
in its annual reports for several years that the maturity for which
advances may be made to member banks on their promissory notes
secured by paper which is eligible for discount be increased from
15 to 90 days. Such an amendment would be especially helpful to
country banks, and it is recommended that the following be substituted for section 11 of the bill:
SEC. 11. The seventh paragraph of section 13 of the Federal reserve act, as
.amended, is amended and reenacted to read as follows:
Any Federal reserve hank may make advances for periods not exceeding
15 days to its member banks on their promissory notes secured by the
deposit or pledge of bonds, notes, certificates of indebtedness or treasury bills
-of the United States; and any Federal reserve bank may make advances for
periods not exceeding 90 days to its member banks on their promissory
notes secured by such notes, drafts, bills of exchange or bankers' acceptances
as are eligible for rediscount or for purchase by Federal reserve banks under
the provisions of this act. All such advances shall be made at rates to be
established by such Federal reserve banks, subject to the review and determination of the Federal Reserve Board.

Section 12: Section 12 deals with relations of Federal reserve
banks with foreign banks. It is recommended that the words " subject to the powers conveyed to and bestowed upon the Federal open



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4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

market committee by section 12A of this act" be omitted. From
the middle of line 18 on page 26 through the word " writing " in
line 11 on page 27, the section is acceptable, but the omission of the
words " and control" in line 19 on page 26 is suggested, in order to
preserve the distinction between supervision and operation.
It is recommended, therefore, that section 12 of the bill be amended
as follows:
(1) Strike out the following language in lines 16, 17, and 18 on
page 26:
(g) Subject to the powers conveyed to and bestowed upon the Federal open
market committee by Section 12A of this Act;

(2) Strike out the words "and control" in line 19 on page 26;
and
(3) On page 27. line 11, insert a period after the word " writing "
and strike out evervthing in line 11 after that word and all of lines
12, 13, 14, and 15. "
Senator GLASS. What you read back there furnishes more fuel to
thefire,doesn't it?
Mr. MEYER. I think not, Senator Glass. Ifindin country districts
of the Federal reserve banks a very great desire to use bills payable
as a matter of convenience. It is not confined to large cities or large
money markets.
Senator GLASS. But it is principally used there, isn't it ?
Mr. MEYER. Of course those banks are larger and they use everything more; and abuse everything more sometimes. I think you will
agree with me on that, won't you?
Senator GLASS. Yes, but if I could get you to agree with me I
would feel more comfortable. [Laughter in the room.]
Mr. MEYER. Well, Senator Glass, in reading a comment of this
kind I think it is well to bear in mind that it consists of a list of
matters where there are differences of opinion and suggestions for
amendments. It does not, of course, undertake to recite a large
number of matters and the many points on which the board is in
thorough agreement with you and in sympathy with your point of
view. It appears from reading a document of this kind that it
enumerates only the differences, because that is all there is any use
in enumerating, and therefore it appears perhaps to be nothing but
disagreement. However, as stated in the covering letter which I
read, the board is in sympathy with the general purpose and point of
view of the bill; and I think you will agree with me that substantially there is a great deal in common between your point of view
and the point of view of the board.
Senator GLASS. Oh, ves. I think the most of the changes are
changes of phraseology:
Mr. MEYER. A good many of them at least.
Senator GLASS. Let me ask you this: The bank now has unrestrained power, subject to the review and determination of the
Federal Keserve Board, to make the rate anything it chooses on
15-day paper, doesn't it?
M r . MEYER. Y e s .
Senator GLASS. It has great power, hasn't it?
M r . MEYER. Y e s .
Senator GLASS. Why do you suppose it was put
Mr. MEYER. To be used in case of need.




in there?

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4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator GLASS. And perhaps never to be used. There was 110
need for it in 1928 and 1929, was there?
Mr. MEYER. Senator Glass, I would not say, for I can not testify
on that.
Senator GLASS. Oh, now! Well, vou know what happened at
least in 1928 and 1929.'
Mr. MEYER. I am not a good witness on 1928 and 1929. I should
like to be able to testify 0 1 1928 and 1929; but, I prefer to refrain
1
from posing as knowing very much about operations in that year
because I know no more than' anyone else on the outside.
Senator GLASS. Oh, well, now!
Mr. MEYER. I am not afraid to answer your questions, as you
know, Senator Glass, and I should like to do it; but I do not like
to testify on things I do not know about.
Senator GLASS. Well, Governor Meyer, you are a philosopher and
I am a layman. Let me ask you a direct question if you can understand it. [Laughter.] Should we eliminate the 1 per cent penalty and leave the board free to impose any penalty it might please,
would you then object to the balance of'the section? Don't you
think a Federal reserve bank and the board should have the right
to warn a stock-gambling bank, which is using the facilities of the
Federal reserve—well, I did not ask that question of your counsel.
Mr. MEYER. I have already answered it, because you willfindthat
we are trying in section 3 to cover exactly what you had in mind,
in the amendment to that section that we propose.
Senator GLASS. Exactly. But I think you come far from doing it.
That is what I am asking you now. If you will eliminate the
minimum penalty and leave the board and the bank free to impose
any penalty it may please, which it never has done, is there any
further objection to that provision of the bill ?
Mr. MEYER. Yes; because I think it violates the general principle
of what I think is good administration. That is, to place the matter
in the hands of administrative officers and then hold them responsible rather than to try to legislate in the matter of administration.
Senator GLASS. We did that, and they told you to go to a warmer
place than this room supplies.
Mr. MEYER. They did not tell me anything of the kind, Senator.
I was not there.
Senator GLASS. Oh, I know that you were not there.
Mr. MEYER. I have the feeling that the Federal reserve is a very
young system, with no great tradition and history behind it. The
banking system in this country as established in the last 20 years
has not the background of history and tradition such as has guided
other banking systems, where they made just as bad and even worse
mistakes than have been made in this system, as is shown by their
history. If you will read the history of the Bank of England,
which is now more governed by tradition than by law, you will find
numerous mistakes that they made, as great as any you can well
imagine.
Senator GLASS. Oh, Governor Meyer, I never thought you would
play the baby act in extenuation for the affront put upon the Federal
reserve banks and the Federal Reserve Board in 1929.




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4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. METER. I am not doing that, Senator Glass. And I again feel'
that I ought not to be asked to be responsible for the conduct of
officers in that period.
Senator GLASS. Oh, well, I would say if you remain as Governor
of the Federal Reserve Board interminably we will not have a.
repetition of that maybe, but that is not to be supposed.
Mr. MEYER. I am glad that you feel that way, Senator Glass. I
do not want to pride myself on being able to do better than other
men, but we do learn by experience and I hope are bringing about
better practices. The administration of any system will depend upon;
the men the Government is able to command for public service. The
problem is to get men to discharge the responsibilities that you lay
upon them and that you properly expect from them when you enact a
law. You can not, in my opinion, enact into administration things
that you can only get from wisdom, and above all things, moral
courage, the lack of which is what you were complaining ox as I see
it. How you can legislate moral courage I have not been able to seeSenator GLASS. We have not tried to do that.
Mr. METER. That is what it takes.
Senator GLASS. We have simply tried to avert a tradition that
I do not want to see persist. If the tradition of 1928 and 1929 is
foing to be the guide of the bank and the board it would be a pretty
ad situation.
Mr. METER. There are many things to consider. The system grew:
up in the war period, Senator Glass; it struggled with the post-war
conditions and abnormal situations until the middle twenties, and
almost before the war and the post-war crises had ended it was in.
the inflation period. I think it is quite easy to see the mistakes, but.
it is also possible to understand why those mistakes were made, and
while I do not think they ought to be condoned, I think we ought to
try to understand what produced them and avoid them in the future.
I do not think you can insure sound administration and courageous
administration by legislation alone.
Senator GLASS/ YOU think your proposed amendment to section 3
will accomplish the same purpose as section 11?
Mr. MEYER. I think it does.
Senator GLASS. It is just a little more polite?
Mr. METER. Yes; I think it is a little better, and the board does,,
and it is the unanimous opinion of the board. I am speaking on that
for the board.
Now may I read section 13?
The CHAIRMAN. Yes. You may go ahead.
Mr. METER. Section 13: The principal feature of this section is
that it discontinues the distinction between time deposits and demand deposits in so far as reserve requirements are concerned. The
distinction between these two types of deposits has led to many
abuses and has been a factor in making possible a growth of bank
credit without a corresponding growth in reserves. The proposal
which would raise the requirements on time deposits to the level of
those on demand deposits would increase reserve requirements by
$132,000,000 a year for five years with an ultimate increase of
$660,000,000.
Without proceeding to read that through I will say that the idea,,
of course, is one with which the members of the committee are thor


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4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

oughly familiar. The board feels justified in recommending the
plan of
Senator GLASS, (interposing). Your velocity system.
Mr. MEYER. The velocity system, and it has confidence that it will
serve the public interest better than the existing reserve law and
regulations, and better than the plan proposed in the report of the
committee.
Senator GLASS. I agree with the board; but I do not think the
board nor I nor anybody else can convince the banks of that fact.
Mr. MEYER. There were several witnesses, and I have not read the
testimony of many of them, but I think there were a good many who
testified in favor of the report of the committee on bank reserves of
the Federal reserve system. It has been thoroughly investigated by
many outside the committee that evolved the plan, and I will add
that it has been favorably commented on by foreign experts.
Recently I read an article favoring it, in the Economic Journal of
London, by a man who is an expert on monetary matters.
Senator GLASS. And he has been as often mistaken as anybody
else in some matters. And New York banks bitterly criticized it.
Mr. MEYER. Well, Senator Glass, sometimes you consider that an
argument in its favor and sometimes not.
Senator GLASS. IS that why you favor it—because they opposed it?
Mr. MEYER. NO. I favor it because, after studying it, and not
only studying the report itself, but studying the methods by which
the committee arrived at the result, it seemed all right. The work
of that committee represents a very careful scientific study and a
conscientious effort to arrive at a plan of reserves which would work
soundly and constructively. It would relax credit in depressions
and require an increasing volume of reserves in an expansion period.
They would have caught all these outside loans which were so disastrous in 1929 by this method. And they have convinced the board
I think, as well as many outside students of the problem, of the
soundness of their recommendation, by the thoroughness with which
they have applied tests of the proposal to past conditions over a long
period of years.
Senator GLASS. I did not dissent at all and the subcommittee
generally did not dissent from the views you express now. But do
you think now is the opportune time to introduce anything of a
revolutionary nature into the banking business?
Mr. MEYER. This gives a six months' period for member banks to
study it, and that ought to be all they need. If six months won't
teach them to understand it then six years won't. From the financial
point of view, I should say there is nothing to fear in it, and that it
is not revolutionary. It does not radically change the aggregate
amount of reserves required, and it is not a thing that needs to be
feared.
Senator GLASS. Would you advocate either a maximum or a minimum or both?
Mr. MEYER. Well, there is a minimum. The minimum is 5 per
cent for all classes of deposits. I want to express the greatest
sympathy with your point of view about time deposits and the
abuses that have developed in that connection, and the report of the
committee is designed to do the same thing that you have in mind
there.



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4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator GLASS. I am glad to get a little sympathy.
Senator BULKLEY, DO I understand that the recommendation of
the board is the same as the report of the technical committee we had
several months ago?
Mr. MEYER. I have not compared the two. There are some cases
for which it seemed desirable to make special provision as suggested
in this draft, in addition to the suggestions made in the report, for
instance, where banks have a very heavy turnover.
Senator BULKLEY. IS that the exception, for pay rolls and dividends ?
Mr. MEYER. I think that is covered, and one or two other forms
of exceptions.
Senator BULKLEY. And you do recommend those exceptions?
Mr. MEYER. Yes; to the extent provided for in the proposed substitute for section 13 of the bill.
Senator WALCOTT. Do you include the maximum as well as the
minimum provision?
Mr. MEYER. I think the maximum is 15 per cent.
Senator BULKLEY. DO you think that maximum would still be
necessary if you make an exception for disbursements ?
Mr. MEYER. I think so. I see no harm in it. A reserve of 15 per
cent of gross deposits would be enough.
Senator WALCOTT. If the committee should use that would you
have it active a little later?
Mr. MEYER. At the end of six months, as suggested in the proposed
amendment. I have heard no criticism of the plan proposed by the
committee on reserves. The only feeling I have perhaps is that we
can not tell how it* will work until it is put into effect. We tried to
apply every possible test, and particularly the committee studied
how it might be evaded, if at all, so that banks would be able to get
by with less reserves than intended and than would be sound and
safe. There has been no great difficulty or objection found in our
experience which would justify our being afraid to recommend it.
And now I wish to read you the remainder of the memorandum in
regard to section 13 of the bill:
Unless there were a contraction in the amount of member bank deposits,
this increase would result in an addition of about $230,000,000 to the gold
requirements of the Federal reserve banks. It would be an influence in the
direction of credit contraction without regard to the course of business and
credit and would be particularly undesirable at this time. Furthermore, the
increase would fall heaviest on banks outside of the principal financial centers,
which have been discriminated against under the existing reserve requirements
both because, owing to their distance from the cash facilities of the Federal
reserve bank, they are required to carry relatively large amounts of cash in
vault, which under existing law does not count as reserve, and because they
are not in a position to take advantage of deductions in determining net
deposits.
The proposal, therefore, would both increase the burden of reserves and
increase the inequaUties in their present distribution.
Any thorough-going revision of section 19 of the Federal reserve act should
base required reserves, in so far as practicable, upon the activity of the business
handled through each bank, rather than on an arbitrary classification of banks
according to location. A proposal submitted in the report of the committee
on bank reserves of the Federal reserve system embodies a method of calculating reserves which is believed to be sound in principle and which would make
fluctuations in the volume of required reserves exert an influence in the direction of sound credit conditions and would also eliminate many inequitable and
unfair features of the present law.




3814NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
There is submitted a proposed substitute for section 13 of the bill which
incorporates the proposals of the committee on bank reserves of the Federal
reserve system with slight modifications.
Section 13 includes two subjects not directly related to bank reserves and
not covered in the report of the reserve committer, namely, a prohibition
against brokers' loans for the account of others and a provision subjecting
the market for Federal funds to regulation by the Federal Reserve Board.
The purpose sought to be accomplished by paragraph (d) is desirable, but
it is believed that the language used is too far reaching. It is suggested that
the paragraph be changed so as to prohibit a member bank from acting as a
medium or agent of a nonbanking corporation or individual in making loans
on the security of stocks, bonds, and other investment securities to brokers
or dealers in such securities. This suggestion is incorporated in paragraph
(n) of the proposed revision of section 13 of the bill. It is not thought that
a provision prohibiting a member bank from making loans to any corporation
or individual if the proceeds of such transaction are to be used directly or indirectly for the purpose of making loans protected by collateral security in favor
of any investment banker, broker, or member of any stock exchange or any
dealer in securities, would be enforceable as it is impossible to follow the proceeds of loans once they have been granted.
Paragraphs ( f ) and (g) of the bill seek to control the market for Federal
funds by placing limitations on the use of balances standing to the credit of
member banks upon the books of the Federal reserve banks. It is not believed
that regulation of the market for Federal funds by law is desirable. It is
better to have these liquid funds move freely where they are most needed
than to have them thrown on the call market. The Federal reserve banks
keep in close touch with transactions in Federal funds and a ruling of the
Federal Reserve Board now requires member, banks to report purchases of
Federal funds as borrowed money.
The proposed substitute for section 13 of the bill is as follows:
" SEO. 13. Section 19 of the Federal reserve act (U. S. 0.V title 12, sec. 461466, incl., and sec. 374), as amended, is further amended and reenacted to
read as follows:
" ' RESERVES OF MEMBER

BANKS

"'SEO. 19. (a) Each member bank shall establish and maintain reserves
equal to five per centum of the amount of its net deposits, plus fifty per centum
of the amount of its average daily debits to deposit accounts: Provided, That
any member bank, at its option for any period not less than 90 days, may omit
any specific deposit account or accounts from such computation of its reserve
requirements if such account or accounts are reported separately to the Federal reserve bank and if a reserve of 50 per centum is maintained against
such account or accounts: Provided, however, That in no event shall the aggregate reserves required to be maintained by any member bank exceed 15
per centum of its gross deposits.
" ' ( b ) Each member bank located in the vicinity of a Federal reserve bank
or branch thereof shall maintain not less than four-fifths of its total required
reserves in the form of a reserve balance on deposit with the Federal reserve
bank and every other member bank shall maintain not less than two-fifths of
its total required reserves in the form of a reserve balance on deposit with the
Federal reserve bank. The remainder of the total required reserves of each
member bank, over and above the amount required to be maintained in the
form of a reserve balance on deposit with the Federal reserve bank, may, at
the option of such member bank, consist of a reserve balance on deposit with
the Federal reserve bank, or of cash owned by such member bank either in its
actual possession or in transit between such member bank and the Federal
reserve bank: Provided, Tlmt when, in its judgment the public interest so requires, the Federal Reserve Board may limit to an amount less than that permitted hereunder the amount of cash which any member bank or banks may
count as reserve: Provided, hoivercr. That, in prescribing such limitations,
the Federal Reserve Board shall be guided by the general principle that member banks should be permitted to count as reserve, within the limitations of
this section, as much cash as they reasonably need in view of the character of
their business and their degree of accessibility to the currency facilities of
the Federal reserve banks.
" ' ( c ) The term "gross deposits." within the meaning of this section, shall
include all deposit liabilities of any member bank whether or not immediately
111101—32—PT 2




11

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4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

available for withdrawal by the depositor, all liabilities for certified checks,
cashiers', treasurers', and other officers' checks, cash letters of credit, travelers' checks, and all other similar liabilities, as further defined and specified
by the Federal Reserve Board: Provided, however, That, in computing the
amount oi "gross deposits" (1) amounts shown on the books of any member
bank as liabilities of such bank payable to a branch of such bank located in a
foreign country or in a dependency or possession of the United States, and
(2) liabilities payable only at such a branch, shall be treated as though said
liabilities were due to or payable at a noninember bank.
" ' ( d ) The term " n e t deposits," as used in this section, shall mean the
amount of the gross deposits of any member bank, as above defined and as
further defined by the Federal Reserve Board, minus the sum of (1) all balances due to such member* bank from other member banks and their branches
in the United States and (2) checks and other cash items in process of collection which are payable immediately upon presentation in the United States,
within the meaning of these terms as further defined by the Federal Ileserve
Board.
" ' ( e ) The term "average daily debits to deposit accounts," as used in this
section, shall mean the average daily amount of checks, drafts, and other
items debited or charged by any member bank to any and all accounts included
in gross deposits as above defined and as further defined by the Federal Reserve Board, except charges resulting from the payment of certified checks
and cashiers', treasurers', and other officers' checks. :
< 4 l ( f ) The term " c a s h " within the. meaning of this section, shall include
all kinds of currency- and .coin issued or coined under authority of the laws
of the United States.
" ' ( g ) The term "reserve balances," as used in this section, shall mean a
member bank's actual net balance on; the books of the Federal reserve bank
representing funds available for reserve purposes.:under. regulations prescribed
by the Federal Reserve Board. :
'T .
" 4 (h) The term " vicinity of a Federal reserve bank or branch thereof," as
used in this section, shall mean the city in which a Federal reserve bank
or branch thereof is located, until such term is otherwise defined by the Federal
Reserve Board: Provided, That, with respect to each Federal reserve bank
and each branch thereof, the Federal Reserve Board, from time to time, in
its discretion, may either (1) define a specific geographic urea as comprising
the vicinity of such Federal reserve bank or branch thereof, within the meaning of this section, or (2) compile a list of member banks which shall be deemed
to be located in the vicinity of such Federal reserve bank or branch thereof,
within the meaning of this section, and add banks to, or remove banks from,
such list, from time to time: Provided,, however, That, in defining such areas
and compiling such lists, the Federal Reserve Board shall be guided by the
general principle indicated in subsection (b) hereof.
*
" * ( i ) With respect to each member bank, the term "Federal reserve bank,"
as used in this section, shall mean the Federal reserve bank of the district in
which such member bank is located.
M , ( j ) The Federal Reserve Board is authorized and empowered to prescribe regulations defining further the various terms used in this act, fixing
periods over which reserve requirements and actual reserves may be averaged,
determining the methods by which reserve requirements and actual reserves
shall be computed, and prescribing penalties for deficiencies in reserves. Such
regulations and all other regulations of the Federal Reserve Board shall
have the force and effect of law and the courts shall take judicial notice
of them.
" ' ( k ) Subject to such regulations and penalties as may be prescribed by
the Federal Reserve Board, any member bank may draw against or otherwise utilize its reserves for the purpose of meeting existing liabilities: Provided,
however, That, whenever the reserves of any member bank have been continuously deficient for fourteen consecutive calendar days, the Federal reserve
agent or assistant Federal reserve agent of the district in which such member
bank is located shall send to each director of such bank, by registered mail,
a letter advising him of such deficiency and calling attention to the provisions
of this subsection; and each director of such bank who after receipt of such
a letter, assents to or acquiesces in the making of additional loans or investments by such bank before the reserves of such bank shall have been restored
to the amount required by this section, shall be held liable in his personal or
individual capacity for any and all losses sustained by such bank on any such
loans or investments.




3834NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
" '(I)All penalties for deficiencies in reserves incurred under regulations
prescribed by the Federal Reserve Board pursuant to the provisions of this
Act shall be paid to the Federal reserve bank by the member bank against
which they are assessed.
• 4l (m) No member bank shall keep on deposit with any State bank or trust
company which is not a member bank a sum in excess of ten per centum of
its own paid-up capital and surplus. No member bank shall act as the medium
or agent of a nonmeinber bank *n applying for or receiving discounts from a
Federal reserve bank under the provisions of this act, except by permission of
the Federal Reserve Board.
" '(ii) No member bank shall act as the medium or agent of any nonbanking
corporation, partnership, association, business trust or individual in mailing
loans on the security of stocks, bonds, and other investment securities to
brokers or dealers in stocks, bonds, and other investment securities. Every violation of this provision by any member bank shall be punishable by a fine of not
more than $100 per day during the continuance of such violation; and such fine
may be collected, by suit or otherwise, by the Federal reserve bank of the.
district in which such member bank is located.
" ' ( o ) 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 remain nonmember banks,
and shall in that event maintain reserves and comply with all the condition©
now provided by law regulating. them; or said banks may, with the consent
of the Federal Reserve. Board, become member, banks of any one of the Federal
reserve districts, and shall in that event take stock, maintain reserves,, and
be subject to all the other provisions of this act.
" '(P) All* acts or parts of acts in conflict with this section are hereby repealed only in so far as they are in conflict with the provisions of this section.'
i* There are hereby repealed, the provisions of section 7 of the first Liberty
bond act, approved April 24, 1917, section 8 of the second Liberty bond act,
approved September 24, 1917, and section 8 - o f the third Liberty bond act,
approved April 4, 1918 (U. S. C., title 31, sec. 771), which read as follows:
u 4 That the provisions • of section fifty-one hundred and ninety-one of the
Revised Statutes, as amended by the Federal reserve act, and the amend*merits thereof, with reference to the reserves required to be kept by national
banking associations and other member banks of the Federal reserve system,
shall not apply to deposits of public moneys by the United States in designated
depositaries.'
" This section shall become effective on the first day of the seventh calendar
month following the enactment of this act."
Mr. MEXEB. AS to section 14, it is suggested that there should be some limit
put upon the amount a bank may invest in bank premises, and an amendment
is suggested.
The first portion of this section down to line 4 on page 33 is existing law.
The sentence in lines 4 to S, inclusive, is new and would interfere greatly with
the financing of real-estate transactions. When a time loan has been made
there appears to be no warrant, in the absence of default, for revising the
valuations on which the loan is based; and this provision, together with that
in lines 4 to 9 on page 34, would require the real estate on which each such
loan is based to be revalued at least five times each year. It could not reasonably be expected that real-estate loans would be made or applied for under
such conditions.
The sentence in lines 17 to 20 on page 33 would classify as real-estate loans
all unsecured loans whose eventual safety depends upon the value of real
estate, thereby subjecting all such loans to all the limitations or restrictions
in this section. This would produce confusion and uncertainty in a large
volume of loans and would interfere with the extension of adequate credit,,
particularly in the agricultural sections of the country.
The remaining amendments in this section make what appear to be unnecessary changes in the proportion of the real-estate loans permitted and propose,
wthout segregation, to give time depositors a preferred claim on all real-estate
loans and other assets of the bank acquired under this section. Such a provision would be difficult to administer and would be unfair to the other
depositors.




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4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

The sentence in lines 15 to 22 on page 8-1 is existing law and is
inconsistent with section 24 of the bill, which will be discussed
later.
It would seem desirable to limit the amount which banks may
invest in bank premises, but it is suggested that this be accomplished directly instead of indirectly.
It is recommended, therefore, that section 14 of the bill be stricken
out and that the following new section be substituted:
SEC. 14. The Federal reserve act, as amended, is amended by inserting be
tween section 24 and section 25 thereof the following new section:
SEC. 24 (a). Except with the permission of the Comptroller of the Currency,
no national bank, and except with the permission of the Federal Reserve
Board, no State member bank, shall hereafter invest in bunk premises or in the
stock or obligations of, or in loans to, any corporation owning or holding its
bank premises a sum exceeding the amount of the capital stock of such bank.'1

Referring to section 14 I think, gentlemen of the committee, it is
fair to say that the board is not confident about the soundness of the
idea of segregating assets for each class of deposits in the same
bank. As a matter of fact, in the various States there are different
laws and different conditions prevail. But I heard the superintendent
of banks of one important State say that if a large commercial
bank having time deposits on a considerable scale were to give notice or avail itself of the right to delay payment^ he would dose the
bank on the ground that it created a preference m favor of demand
depositors. So that segregation of securities for special classes
of deposits is not necessarily sound*
Senator GLASS. YOU say the limitation on the use of time deposits
is rather too great there?
Mr. MEYER. I did not catch that question.
Senator GLASS. I understand you to say that the limitation on
loans on real estate was too rigid.
Mr. MEYER. Well, as to the matter of appraisals
Senator GLASS (interposing). I am not talking about appraisals.
Mr. MEYER. Well, all unsecured loans which are in a measure
based upon real estate should not be considered as real-estate loans.
Senator GLASS. I am talking about the restriction of real-estate
loans to 15 per cent.
Mr. METER. That is not what I was discussing here.
The CHAIRMAN. YOU may proceed.
Senator WALCOTT. What is the nature of that amendment?
Senator GLASS. Not'more than the total of the capital.
Mr. MEYER. I think that is enough.
Senator FLETCHER. It has been suggested by one witness that in
the matter of investments in bank premises and unsecured loans
whose eventual safety depends upon the value of real estate " may
be counted " for the purposes of this section as real estate loans,
instead of " shall be counted " as contained in that section of the
bill.
The CHAIRMAN. He recommends that we change the word " shall"
to the word "may."
Senator FLETCHER. Yes. In other words, instead of making it
mandatory that it would be permissive.
Mr. MEYER. What section is that?
Senator FLETCHER. Section 14 of the bill, page 33, line 19.



3854NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. MEYER. I do not believe it is the proper thing to incorporate
that idea into law. Let me read it [reading] :
Investments in bank premises and unsecured loans whose eventual safety
depends upon the value of real estate shall be counted for the purposes of this
section as real-estate loans.

It is a matter of opinion and judgment. Any farmer who had
an unencumbered farm might borrow money for farming operations
and the banker would have the knowledge from his financial statement that, while he was borrowing to grow a crop, if he did not
make a profit or if the crop failed, or there was a loss, his background of strength would be his ownership of the unencumbered
land. I do not. think that makes it a real-estate loan. I do not
think it ought to be considered so. I do not think anybody ought
to have the right to call that a real-estate loan.
Senator FLETCHER. YOU think we ought to strike that out entirely?
Mr. MEYER. That is what we recommend. As a matter of fact,
the land values of the country are back of so much of the loans
that if we started to get back to the land you would end up with
almost every loan a real-estate loan.
The CHAIRMAN. YOU may continue, Governor Meyer.
Mr. MEYER. A S to section 15: This section would make it necessary for member banks to dispose of a large amount of securities
at this time which would be very unfortunate. Since it is aimed
generally at investments in securities, it is believed that its purpose
is covered sufficiently by the proposed substitute for section 3 of
the bill.
Senator COUZENS. What portion of that section do you think
would make banks dispose of their securities ? I can notfindany.
Senator GLASS. NO; and the subcommittee could find nothing of
the kind.
Mr. MEYER. But I think a large number of people have.
Senator COUZENS. But I can notfindit.
Senator GLASS. That was a part of the curriculum, Governor
Meyer. [Laughter.]
Mr. MEYER. I will read from the bill [reading] :
But in no event shall the total amount of such Investment securities of any
one obligor or maker held by such association exceed 10 per centum of the
total amount of such issue outstanding, nor shall the total amount of the
securities so purchased and held for its own account at any time exceed
15 per centum of the amount of the capital stock of such association actually
paid in and unimpaired and 25 per centum of its unimpaired surplus fund.

Senator COUZENS. This only applies to one obligor as you will
notice on line 12. But perhaps the word " obligor " should be put
lower down.
Mr. MEYER. But it says [reading]:
Nor shall the total amount of the securities so purchased and held.

Senator GLASS. But all in the case of one obligor.
Mr. MEYER. YOU are talking about the purchase of securities in
this section?
Senator BULKLEY. It is the purchase of securities, but it means
the purchase of a security of any one obligor.
M r . MEYER. I see.
Senator COUZENS.

There can not be any deflationary provision in
that section if you understand it only applies to only one obligor.



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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator WALCOTT. HOW would that affect a total issue, for
instance ?
Senator COUZENS. I should say that a bank should not be permitted
to take an entire issue. That was the intent of the section as I
.understand it.
Senator GLASS. YOU will not permit a borrower engaged in commerce to borrow any more of a bank's funds than that, and why
should you permit it in the case of real estate?
Mr. MEYER. I have not considered this section with that meaning.
I have considered it as relating to investments in the aggregate. I
would have to study that further to say what it would mean. I
would not liki» to express an opinion if that is the intent of the
language.
Senator COUZEXS. I think that is important, because the most of
the public opinion that has been developed along the lines that this
is a deflationary measure is based on that section.
.Mr. METEK. That was one of them; yes.
.Senator COUZENS. IS there any other section of the bill which is
deflationary ?
Mr. MEYER. I think some of them might be called that. But that
undoubtedly was one of them, and perhaps the most far-reaching.
Senator COUZEXS. And so far as you can see that was the main
-one which caused the public to think that?
Mr. MEYER. The language certainly lends itself to the interpretation put on it. because so many people have read it that way.
Senator GLASS. The strange thing to me is that w ^ have had to
e
explain over and over again to every witness that that is not what is
meant. But they have their lesson by rote and they just come in
and give it to us.
Mr. MEYER. Well. I got it from reading the bill.
Senator GLASS. Oh, yes; I know that you did not have to go to
night school.
Mr. MEYER. I will now continue with section 15.
Senator WALCOTT. It seoins to me we should not pass over that but
ought to try to .settle it. This is one of the most controversial points
in the whole bill. Every witness has dwelt on that to great length.
If that language needs clarifying, let us do it.
Senator GLASS. Oh, we have indicated over and over again that
• e will do it, and we have told witness after witness what it means,
w
and yet the very next witness comes along and makes the same
statement.
Senator COUZENS. We have told the witnesses that the word "obligor" means what we have said.
Mr. MEYER. Well, I did not draft the bill.
Senator WALCOTT. Will you suggest language to us?
Mr. MEYER. If the committee desires a suggestion as to a draft to
cover the intent as expressed by the committee we will be glad to
make a suggestion.
Senator FLETCHER. DO you comment on that in dealing with
section 15?
Senator COUZENS. I think if you would put on line 15 after the
word " securities " the words " of any one obligor," it would clarifv
it.
Senator GLASS. That is what we have written into the bill.



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4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator COUZENS. But perhaps that would clarify it.
Mr. MEYER. I will be glad to offer a suggestion in writing on it
if you desire.
Senator GLASS. We would be glad to have you do it. You have
here innumerable suggestions in writing.
Mr. MEYER. Well, it seems to be quite clear that it is not clear to
the public.
Senator COUZENS. I think we left out a necessary word.
The CHAIRMAN. You may continue, Governor Meyer.
Mr. MEYER. Further, in regard to section 15: The clause commencing in line 19 0 1 page 35 apparently is intended to enable
1
national banks to compete more effectively with State banks. Its
tendency would be to lower the standards of banking in the national
banking system to the standard of the State banks, where more
liberal powers are granted to State banks by State law.
The definition of investment securities which is contained in the
law, as amended by the act of February 25, 1927, would be stricken
out and apparently the comptroller would be given unlimited power
to prescribe his own definition except that stocks could not be included. This modification is undesirable.
For the reason stated, it is recommended that this section be
omitted entirely.
But with the other idea as to the intent, which you have discussed
here, I should like to ask our counsel to make a suggestion as to a
draft.
Section 16: This amendment is believed to be desirable; but it is
recommended that it be strengthened and that a means of evasion
be eliminated by striking out the exception in lines 17 to 21, inclusive, on page 37, which would permit the organization of national
banks with a capital of $25,000 in certain circumstances.
Section 17: The modification of the units in which bank stocks
can be issued would create unnecessary complications; and it is recommended that all of section 17 be omitted, with the exception of
the sentence in lines 17 to 23 on page 38, which should be made
effective not less than three years after enactment.
As modified, section 17 would read as follows:
SEC. 17. Section 5139 of tiie Revised Statutes, as amended, is amended BY
adding at the end thereof a new paragraph reading as follows:
" After three years from the date of the enactment of this act no certificate
representing the stock of any such association shall represent the stock of any
other corporation, nor shall the ownership, sale or transfer of any certificate
representing the stock of any such association be conditioned in any manner
whatsoever upon the ownership, sale> or transfer of a certilicate representing
the stock of any other corporation."

Section 18: Thefirstpart of this section would prohibit any director, officer, or employee of any member bank from acting as a
director, officer, or employee of certain other specified classes of business enterprises. It would be capable of easy evasion and would
become ineffective in many cases. The latter part of the section
would prohibit any member bank from clearing checks or doing the
ordinary banking business of a correspondent for any of the types of
business enterprises mentioned in this section. The'language of the
section is so broad that it would include banks within the classes of
business enterprises to which the prohibitions of the section would
apply. For example, all interlocking bank directorates now expressly



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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

authorized by law or permitted under certain conditions would be
prohibited, and one bank would be prohibited from acting as a correspondent of another bank. It is therefore recommended that this
entire section be omitted.
It has been clearly demonstrated that affiliations between member
banks and security companies have contributed to undesirable banking developments. There are, however, difficulties in the way of
accomplishing a complete divorce of member banks from their affiliates arising from the fact that a law intended for that purpose is
likely to be susceptible of evasion or else to apply to many cases to
which it is not intended to apply. Therefore, the board is not prepared at this time to make a definite recommendation, but submits,
for the consideration of the Committee on Banking and Currency? a
substitute for section 18 which is designed to provide for the divorce
of security affiliates from member banks after three years:
SEC. IS. From and after three years from the date of the enactment of this
ac t, no member bank shall be afiiliated in any manner described in section 2 (b)
hereof with any corporation, association, business trust, or other similar organization engaged principally in the issue, tlotation, underwriting, public sale, or
distribution at wholesale or retail, of stocks, bonds, debentures, notes, or other
securities.
For every violation of this section the member bank involved shall be subject
to a penalty not exceeding $1,000 per day for each day during which such violation continues. Such penalty may be assessed by the Federal Reserve Board,
in its discretion, and, when so assessed, may be collected by the Federal reserve
bank by suit or otherwise.
If any such violation shall continue for six calendar months after the member
bank shall have been warned by the Federal Reserve Board to discontinue
the same, (a) in the case of a national bank, all the rights, privileges and franchises granted to it under the national bank act may be forfeited.in the manner
prescribed in section 5239 of the Revised Statutes, or, (b) in the case of a State
member bank, all of its rights and privileges of membership in the Federal
reserve system may be forfeited in the manner prescribed in section 9 of the
Federal reserve act.

It is fair to say that, while the board is in agreement on the views
stated, there has been a good deal of discussion of the thought that
the question of divorce of affiliates might perhaps be better deferred,
instead of acting at this time to be effective three years from now,
and in the meantime to get reports and make examinations and then
enact a law later. However, tne suggestion here was agreed upon as
the best we could think of at the present time in the light of existing
information, or I might say in the absence of full information on the
subject. We do not feel, in the absence of more definite information,
any too great confidence in any recommendation that we or anyone
else could make. But this is a suggestion for your consideration,
which was the best we could evolve in the board with the assistance
of our experts.
If the bill is enacted into law and reportsflowto the Federal Reserve Board from affiliates, and information is developed that would
throw new light on it, I hope the board and the committee would feel
free to exchange views in the light of the information obtained and
the Congress could make any amendment that seemed necessary in
the provision offered at the prsent time for affiliate separation.
Sections 19 and 20: It is recommended that section 19 of the bill
be combined with section 20 in the manner hereinafter proposed:
that the combined section be known as section 19; and that a new




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4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

section applicable to holding companies which own or control State
member banks be substituted for section 20.
Under, the definition of " affiliate " contained in section 2 and under
the provisions of sections G, 27, and 28 of the bill, if amended in accordance with the recommendations contained in this report, all holding companies which control member banks and all banks owned or
controlled by such holding companies will be affiliates of such member
banks and will be required to make reports and submit to examinations whenever deemed necessary or advisable by the Comptroller of
the Currency, the Federal Reserve Board or examiners appointed by
them; and, therefore, it is suggested that the provisions regarding
examinations and condition reports of holding companies be omitted
from this section and from the corresponding sections regarding
holding companies which own or control State member banks.
It is also suggested that there be inserted in section 19 and in the
proposed new section 20 certain additional provisions providing for
the regulation and supervision of holding companies and requiring
all eligible State banks controlled by them to be members of the
Federal reserve system.
It is, therefore, recommended that section 19 of the bill be changed
to read as follows:
SEO. 19. Section 5144 of the Revised Statutes, as amended, is amended to
read as follows:
U SEC. 5144. In all elections of directors, and in deciding all questions at
meetings of shareholders, each shareholder shall be entitled to one vote on
each share of stock held by him, except that shares of its own stock held by
any national bank as trustee shall not be voted, and shares owned or controlled by any affiliate, as defined by the banking act of 1932, or by any
officer, director, employee, proxy, nominee, or representative or agent thereof,
shall not be voted unless such affiliate shall have filed with the Comptroller
of the Currency an agreement in such form as may be prescribed by him
accepting, and agreeing to submit to and comply with, all of the provisions
of this section, and such agreement shall not have been terminated. Shareholders may vote by proxies duly authorized in writing; but no officer, clerk,
teller, or bookkeeper of such association shall act as proxy; and no shareholder
whose liability is past due and unpaid shall be allowed to vote.
" W i t h i n a period of one year from the date of any such agreement, each
nonmember State bank owned or controlled by such affiliate which is eligible
for membership in the Federal reserve system shall apply for membership
therein in the manner prescribed by, and subject to the terms of, section 9
of the Federal reserve act. If such application is approved by the Federal
Reserve Board, such bank shall become a member of the Federal reserve
system and shall comply with ail of the provisions of law applicable to member
banks. If such application is not approved by the Federal Reserve Board,
or if any such bank shall faU to become, or shall cease to be, a member of
the Federal reserve system at any time while such agreement remains in
effect, such affiliate shall divest itself of ail stock ownership or other interest
in, or control of, such bank.
"Except as otherwise provided herein, every such affiliate. (1) on January
1, 1934, and at all times thereafter while such agreement remains in effect,
shall possess, free and clear of any lien, pledge or hypothecation of any
nature, readily marketable assets other than bank stock, which shall not
amount to less than 15 per centum of the aggregate par value of bank stocks
held or owned by such affiliate, and (2) shall reinvest in readily marketable
assets other than bank stock all net earnings over and above 6 per centum
per annum on the book value of its own shares outstanding, until its readily
marketable assets other than bank stocks shall amount to 25 per centum of
the aggregate par value of bank shares held or owned by it; Provided, however,
That, in computing the amount of readily marketable assets, other than bank
stock, which any such affiliate is required to possess at any given time, credit
shall be given to such affiliate for all contributions which it has made during
the preceding three years to banks owned or controlled by it at the time such




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4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

computation is made. The term • contribution,' as herein used, shall include
all such gifts of money, assets or other things of value to any such bank,
all such amounts paid for worthless or doubtful assets purchased from any
such bank, and all such other similar amounts as the Comptroller of the
Currency, in his discretion, may permit to be treated as contributions.
" If any such affiliate shall fail to comply with the provisions of this section
or with the provisions of any agreement with the Comptroller of the Currency
made pursuant thereto, the Comptroller, in his discretion, may terminate such
agreement.
"Any officer, director, agent, or employee of any such affiliate, which has
entered into an agreement with the Comptroller of the Currency in accordance
with the provisions of this section, who shall make any false entry in any
book, report or statement of such affiliate with intent in any case to injure
or defraud such affiliate, any member bank or any other company, body
politic or corporate, or any individual person, or with intent to deceive any
officer of such affiliate or of any member bank, or the Comptroller of the
Currency, or any agent or examiner appointed to examine the affairs of such
affiliate, shall be deemed guilty of a misdemeanor and upon conviction. thereof
in any district court of the United States shall be fined not more than $5,000
or shall be imprisoned lor not more than five years, or both, in the discretion
of the court.
" N o national bank shall (1) make any loan on the stock of any affiliate
which owns or controls such national bank directly or indirectly, (2) make
any loan to any affiliate which owns or controls such national bank, directly
or indirectly, on the security of any shares of stock of any corporation owned
or controlled by such affiliate, or (3) be the purchaser or holder of the stock
of such affiliate, unless such security or purchase shall be necessary to prevent
loss upon a debt previously contracted in good faith; and any stock so purchased or acquired shall be sold or disposed of at public or private sale within
two years from the date of its acquisition.
"Unless there is in effect at the time an agreement filed with the Comptroller of the Currency pursuant to the terms of this section, any person, firm,
corporation, association, business trust, or other organization, which shall
vote, or cause, direct, authorize, or permit to be voted, the stock of any national
bank owned or controlled by any affiliate, or by any officer, director, employee,
proxy, nominee or representative or agent thereof, shall he deemed guilty of
a misdemeanor and, upon conviction thereof in any district court of the United
States, shall be fined not more than §5,000 for each such offense. Each vote
cast shall constitute a separate offense within the meaning of this paragraph."

It is recommended that, in lieu of section 20, there be inserted a
new section 20 making similar requirements regarding holding companies which own or control State member banks of the Federal
reserve system; and it is recommended that such new section 20 read
as follows:
SEC. 20. The Federal reserve act, as amended, is further amended by inserting therein immediately after section 9 thereof a new section reading as follows:
"SEC. 9A. NO State bank shall be permitted to become a member of the
Federal reserve system unless any affiliate of such State bank or trust company, as defined in the banking act of 19o2, which owns or controls such member bank directly or indirectly shall have filed with the Federal Reserve Board
an agreement in such form as may he prescribed by such board accepting, and
agreeing to submit to and comply with, all of the provisions of this section;
and no State bank shall remain a member of the Federal reserve system after
one year from the date of the enactment of this act unless any* affiliate of
such State bank which owns or controls such member bank directly or indirectly shall have filed such an agreement with the Federal Reserve Board.
" Within a period of one year from the date of any such agreement, each
nonmember State bank owned or controlled by such affiliate which is eligible
for membership in the Federal reserve system shall apply for membership
therein in the manner prescribed by, and subject to the terms of, section 9
of this act. If such application is approved by the Federal Reserve Board,
such bank shall become a member of the Federal reserve system and shall
comply with all of the provisions of law applicable to member banks. If such
application is not approved by the Federal Reserve Board, or if any such
bank shall faU to become, or cease to be, a member of the Federal reserve




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

system at aiiy time while such agreement remains in effect, such affiliate shall
divest itself of all of the stock ownership or other interest in. or control of;
such hank.
"Except as provided herein, every such affiliate (1) on January 1, 1934,
and at all times thereafter during the.membership in the Federal reserve system,
of any state bank owned or controlled by it, shall possess, free and clear of
any lien, pledge, or hypothecation of any nature, readily marketable assets
other than bank stock, which shall not, amount to less than 15 per centum of
the aggregate par value of bank stocks held or owned by such affiliate; and.
(2) shall reinvest in readily marketable assets other than bank stock all net
earnings over and above 6 per centum per annum on the book value of its own
shares outstanding, until its readily marketable assets, other than bank stocks,
shall amount to 25 per centum of the aggregate par value of bank shares held
or owned by it: Provided, however, That, in computing the amount of readily
marketable assets, other than bank stock, which any such affiliate is required
to possess at any given time, credit shall be given to such affiliate for all contributions which it has made during the preceding three years to banks owned
or controlled by it at the time such computation is made. The term • contribution,' as herein used, shall include all such gifts of money, assets or other things
of value to any such bank, all such amounts paid for worthless or doubtful
assets purchased from any such bank, and all such other similar amounts as
the Federal Reserve Board, in its discretion, may permit to be treated as
contributions.
" If any such affiliate shall fail to comply with the provisions of this scction
or with the provisions of any agreement with the Federal Reserve Board madepursuant thereto, the said board, in its discretion, may require any state member bank owned or controlled by such affiliate to surrender- its stock in the
Federal reserve bank and to forfeit all rights and privileges of membership in
the Federal reserve system as provided in section 0 of this Act.
"Any officer, director, agent, or employee of any such affiliate which has filed
an agreement with the Federal Reserve Board, as provided in this section,
who shall make any false entry in any book, report or statement of such affiliate
with intent in any case to injure or defraud such affiliate, any member bank
or any other company, body politic or corporate, or any individual person, or
with intent to deceive any officer of such affiliate or of any member bank, or
the Federal Reserve Board, or any agent or examiner appointed to examine
the affairs of such affiliate, shall be deemed guilty of a misdemeanor, and upon
conviction thereof in any district court of the United States, shall he fined
not more than $5,000 or shall be imprisoned for not more than five years, or
both, in the discretion of the court.
" N o State member bank shall (1) make any loan on the stock of any affiliate
which owns or controls such State member bank directly or indirectly, (2) make
any' loan to any affiliate which owns or controls such State member bank,
directly or indirectly, on the security of any shares of stock of any corporation
owned or controlled by such affiliate, or (3) be the purchaser or holder of the
stock of such affiliate, unless such security or purchase shall be necessary to
prevent loss upon a debt previously contracted in good faith; and any stock
so purchased or acquired shall be sold or disposed of at public or private sale
within two years from the date of its acquisition."

Senator GLASS. From your own experience do yon see any necessity for affiliates? :
Mr. MEYER. Yes sir; there are a number of affiliates which you. in
the Congress authorized.
Senator GLASS. I mean those unauthorized by law.
M r . . MEYER. Y e s .
Senator GLASS. We

are not talking about these little inconsequential form matters.
Senator COUZEXS. I should like to ask about affiliates built up
outside of the law.
Mr. MEYER. Well, there are 15 different kinds of affiliates.
Senator COUZENS. I mean all those not authorized by law.
Mr. MEYER. There are realty companies, holding companies, bank
building companies, mortgage companies, liquidating companies, agri-




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4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

cultural loan companies, personal or small loan companies, investment trusts, building ana loan associations, insurance companies,
finance and acceptance corporations, title and mortgage companies,
and so on, I have a list here, as follows:
Number of nonhanlcing subsidiaries of notional banks
Mode of control
Kind of Affiliate

Securities companies
Realty companies...
Holding companies
.
Bank building companies
Safe deposit companies..
Mortgage companies
Liquidating companies
Agricultural loan companies
Personal or small loan companies
Investment trusts
Building and loan associations
Insurance agencies
Finance and acceptance corporations....
Title and mortgage guaranty companies.,
Foreign banks
Joint stock land banks
Title and mortgage companies
..
Investment houses, etc
Life or casualty insurance companies....
Miscellaneous
Total...

Stock
owned
by bank

Stock
trusteed

Stock
Stock
owned !
owned
by other by bank ; Total
stockaffiliate holders
. t

45

126
33
28
3
4
11
6
6
10

no;
4
18
26
26
16
8
14
10
3
4

1
1

2
2
2

!
i
i

i
!
;
i

3

1
1

i

192
155
70
51
44
37
35
35
27
17

16
15
7
7
6
6
3

1
1

21
245

81

45

346

770

Senator GLASS. HOW many associations have ever been formed
under the Edge Act?
Mr. MEYER. Not very many.
Senator GLASS. Only a few, and about all of those went out of
business.
Mr. MEYER. Well, real estate holding companies for bank premises
might be proper.
Senator COUZENS. The most objectionable one on the list is the
investment affiliate.
Mr. MEYER. Yes, sir; and they are getting rid of those.
Senator COUZENS. DO you think we could eliminate those investment affiliates more promptly than to give them a 3-year period?
Mr. MEYER. I would rather hesitate to advise it, because I do not
know what it would mean. I would hesitate to recommend too short
a jjeriod. As a matter of fact if a period is set, or even if it is not,
if information is being furnished in reports, I think the progress in
the gradual and continuous elimination of undesirable affiliates
would go right on. I see no disposition to acquire new affiliates for
the handling of securities and, on the the other hand, I see a good
deal of progress in the matter of elimination of them.
The CHAIRMAN. YOU would have no objection if we abolished
it?
Senator GLASS. We have had testimony here that if we eliminate
just those affiliates that are doing that wretchedly bad business, it
will result in a great deal of deflation.



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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. MEYER. Well, it is impossible to classify absolutely all affiliates that deal in securities as wicked and vicious.
Senator GLASS. We are not classifying all of them and we are
not intending to reach all of them. There are some things that
ought to be deflated. Stock gambling is one of them, and unloading on the portfolios of banks $12,000,000 as foreign investment
loans and things of that sort ought to be deflated; and any time is
opportune to deflate them, in my judgment.
Mr. MEYER. I think we shall not disagree on that, Senator. But
in reply to the Senator's direct question I am not prepared to say,
because I do not know enough about that.
Senator COTJZENS. A S a matter of fact, practically all of these
affiliates were developed by smart attorneys to evade the banking
laws.
M r . MEYER. Y e s .
Senator COTJZENS.

Why should they be encouraged to be allowed
to continue?
Mr. MEYER. I can not say, except that they were allowed to continue, and the Congress of the United States knew as well as anybody else that they were developed to evade the law.
Senator GLASS. NOW, when we want to put a stop to them, we are
told that the time is inopportune.
Mr. MEYER. A practice that has grown up with the semblancc
of legality, even thoughprimarily designed to evade a law, because
the authorities and the Congress of the United States did not object
to it, although they knew all about it, gains a certain right to be
treated with some consideration.
Senator COTJZENS. It is one of those things that is allowed to
go on when no trouble develops, and as soon as trouble develops,
of course, everybody is wise.
Mr. MEYER. That is the way. ^ •
Senator COTJZENS. The same thing happens, too, with your railroad holding companies.
Mr. MEYER. That is quite true. But, of course, these affiliates have
been for the most part organized under State charters and differ
fundamentally.
Senator GLASS. We can not interfere with that except when the
affiliates of national banks do wrong we can step in and have something to say.
Mr. MEYER. The first of these security affiliates was, I believe,
organized in 1908, Senator. Do you mean interference by the
authorities or the Congress?
Senator GLASS. It has only in recent years come to the attention of
Congress that they had been guilty of gross abuses and have created
a great deal of distress in the country.
Mr. MEYER. Mind you, Senator, I quite agree, and the board does,
with the general purpose and expresses sympatliv with your attitude.
In this particular case I think " when " may be important^ although I
do not know, because we have not the information. I am in hearty
sympathy personally, I may say, Senator, with your desire to separate commercial banking from investment banking. That is what
you really have in mind.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator GLASS. Some of the most experienced and reputable bankers in the United States came here and told us it ought to be done,
that they were for abolishing them.
Senator COUZENS. Not only that, but the banks are carrying public
advertisements now claiming they do not have affiliates in insurance
companies.
Mr. MEYER. Some of them do.
Senator COUZENS. SO it has got to be a discretionary practice; that
when you have institutions merely merchandising securities, they are
not to be called banks, are not to do a banking business.
Mr. METER. In section 21 there is nothing I wanted to comment
on. I would leave it to the members of the committee to read.
Senator TOWNSEND. YOU recommend that section 19 be combined
with section 20?
Mr. MEYER. Yes; in the way suggested in the memorandum.
Section 21. If tlie Committee on Banking and Currency decides
to recommend the enactment of section 21 of the bill in substantially
its present form, it is suggested that paragraph (d)' of section 5155
of the Revised Statutes, (which forbids the establishment, of any
branch in a place with a population of less than 25,000) be amended
in order that small communities may not be denied^ the banking
facilities which otherwise might be provided under this section. It
is also suggested that the second paragraph of section 9 of the
Federal reserve act be amended so as to place State member banks on
the same basis as national banks with respect to branches, either in
this country or in foreign countries.
The sentence commencing in line 7 on page 46 of the bill might be
substituted for paragraph (d) of section 5155 of the Revised Statutes;
and the following might be added at the end of the second paragraph
of section 9 of the Federal reserve act.
Then follows the suggestion for the amendment to be considered
by the committee.
I will now turn to section 24 with the permission of the committee.
Senator GLASS. Does the board favor branch banking?
Mr. MEYER. The board did not take a vote on branch banking,
because it is such a big subject and we did, not have very much time
for it. We had our experts analyzing the bill and explaining it to
us for the best part of a week, and we just had two sessions of about
three hours each and we did not get around to a thorough discussion
of banking.
Senator GLASS. I have had this analysis of your experts on my
.table for a month.
Mr. METER. That was another analysis.
Senator GLASS. I have not observed any difference in it.
Mr. METER. On the subject of branch banking I should say the
board would not be able to reach a unanimous expression Senator.
There are some differences of opinion. Some forms of branch
banking might be favored by some of us. We were not able in this
document, which is unanimous on the points which are discussed, to
express an opinion.
Senator GLASS. YOU want to put the entire responsibility of the
solution of this unhappy problem on us, do you?
Mr. MEYER. YOU do not seem to worry about responsibility, and
we feel you are amply equipped to handle it.



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

•

395

Senator GLASS. I have not done anything but worry for 14 months.
[Laughter.]
Mr. MEYER. We feel the responsibility is on sturdy shoulders,
Senator.
Senator GLASS. TOU do not seem to have much regard for the
shoulders. [Laughter.]
Mr. MEYER. Of course, I will call your attention to this, Senator:
As indicated in the letter transmitting the memorandum, it should
be recognized that effective supervision of banking in this country
has been seriously affected by the competition between member and
nonmember banks. I think branch banking, under a unified banking
system, would meet with a great deal of support. I know it would
from me.
Senator GLASS. Can you suggest to us a constitutional method of
creating a unified banking system in this country?
Mr. MEYER. Well, I do not know how to do that, but I believe
it can be done by taxation or some other method. I do not think
there is any doubt about the ability to do it. The principal thing
about being able to do something is to want to do it.
Senator GLASS. We have wanted to do itv
Mr. MEYER. DO you want to bring about"unified banking?
Senator GLASS. Why, undoubtedly; yes.
Mr. MEYER. I will be glad to help you.
Senator GLASS. I think the curse of the banking business of this
country is the dual system.
Mr. MEYER. Then the board is entirely in sympathy with the
committee on that subject.
Senator GLASS. Then let us get your recommendation.
Mr. MEYER. We will try to prepare one for you.
Senator GLASS. Let us get it quickly, then, if you please.
Mr. MEYER. We saw no evidence in the bill that there was such a
desire.
Senator GLASS. I do not suppose that I violate any confidence
when I said that the board went to the extent of trj'ing to obtain
and did obtain an opinion from the Attorney General of the United
States, and he could not suggest to us any method of doing it.
Mr. MEYER. I do not know whether the opinion was in reply to
questions which covered all the possible ways of doing it. I certainly
tnink it can be done, although I am'not a lawyer. I do know, however, that competition between the State and National banking systems has resulted in weakening both steadily.
Senator GLASS. I say so, yes; and I have not been afraid when we
come to tackle a question of that sort. There are more State banks
than there are national banks, and very likely more State bankers
would vote against me than national bankers would vote for me.
But that does not bother me the least in the world. If you will
simply suggest a constitutional way of doing the thing I will try to
put it through.
Senator WALCOTT. Governor, while we are on that: I do not think
it is betraying any confidence to say the members of the subcommittee would go even as far as the districts of the Federal reserve
system in making 35 branch districts, but we never could get it
through Congress. The subcommittee, I think, would unanimously
go as far as States with an exception on border-line towns within a



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4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

radius of 50 or a hundred miles such as the bill provides for. There
have been witnesses here that have been familiar with and have been
very active in the group banking business that have testified unless
they could have some provision for branch banking at least statewide, irrespective of State lines, that it would be the doom of the
group system; they must have an escape from the group banking.
The CHAIRMAN. The Senator will recall that some of the witnesses
of the group system a year ago had the opposite view.
Senator WALCOTT. Yes.
The CHAIRMAN. And appeared before this same committee on this
same bill.
Senator WALCOTT. Exactly.
The CHAIRMAN. In other words, they told us that 40 years of experience led to a judgment against branch banks. Now they say
they have had 41 and they have changed their minds. [Laughter.]
Senator WALCOTT. And they emphasized by saying that they must
have the branches.
The CHAIRMAN. In other words, they want to abandon experience
for a theory. They want to try a theory.
Mr. MEYER. The next is section 24. I shall not detain you much
longer. You have been very patient.
Senator FLETCHER. Before you turn away from section 21. In the
testimony this morning before this committee Mr. Wakefield particularly recommended line 21 on page 45, that you strike out the
words if such establishment and operation are at the time permitted to State banks by the law of the State in question/'
Mr. METER. If you strike that out, of course, the chances are that
immediately every one of those States would pass a law that would
authorize State branch banking, would they not ?
Senator WALCOTT. It might be a sound law, though.
Senator FLETCHER. I see that it might. I think it would have
that effect and might be a good thing.
Mr. MEYER. I am not prepared to give an offhand opinion on that.
Senator FLETCHER. HE suggests that as an amendment to this bill.
I should like to get something out of what we have before us. I
would like an opinion as to whether that would cure the situation or
would be beneficial or helpful.
Mr. MEYER. If you get a sound banking foundation, you can discuss the details of superstructure. I am more interested in the possibility of the committee going into a plan for unified banking, because it would simplify many of those questions which you are now
discussing.
Senator GLASS. YOU have your experts.
Mr. MEYER. I will see if we can do anything for you. May I then
go on with the views of the board?
Section 24: While it is recognized that certain evils arise from the competitive
bidding for deposits through the payment of unduly high rates, it is believed
that it is undesirable to further regulate by law the rates of interest, which
may be paid on deposits, especially since to do so would place member banks
at a disadvantage in competition with nonmember banks. It is, therefore, recommended that this section be omitted.

That is just an illustration of the inability to put sound regulations
in force on account of the competition that has to be met all the time.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Section 26: It is recommended that this section be omitted entirely.
It would apply to all loans on 44 collateral security " regardless of the nature
of the security, and would nullify certain provisions of section 5200 of the
Revised Statutes, including those permitting national banks to make loans (1)
in amounts not exceeding 25 per cent of their capital and surplus on the
security of shipping documents or chattel mortgages on live stock, and (2) in
amounts not exceeding 50 per cent of their capital and surplus on the security
of shipping documents.

Senator FLETCHER. We have had a great deal of difficulty about
that word " collateral."
Mr. MEYER. We feel that the words " collateral security " would
include a great deal that you do not intend.
Senator Glass. What do you suppose they meant by it when they
used it over and over again in these proposed amendments?
Mr. MEYER. They do not mean exclusively " collateral" loans. It
is used in the vernacular to mean what you use it to mean in this bill;
but its legal meaning is not confined to that, in the opinion of our
experts.
Senator FLETCHER. What does "collateral" mean?
Mr. MEYER. It means in addition to and on the side. [Laughter.]
In other words, you could get your money on an unsecured note but
somebody else would have to put up collateral security in addition
to his note.
Senator GLASS. What do you experts mean by the use of the
words here—and this is one of a dozen instances ? [Reading:]
No national banking association and no member bank shall (1) make any
loan or any extension of credit to any affiliate organized and existing for
the purpose of buying and selling stocks, bonds, real estate, or real-estate
mortgages, or for the purpose of holding title to any such property, or (2)
invest any of its funds in the capital stock, bonds, or other obligations of any
such affiliate, or (3) accept the capital stock, bonds, or other obligations of
any such affiliate as collateral security to protect loans made to any person.

And so forth and so on. And further down:
Investments and advances against such collateral security which will exceed
10 per centum.

Mr. MEYER. It mentions specifically there what the collateral
security is.
Senator GLASS. NO.
M r . MEYER. O h , yes.
Senator GLASS (reading):
Agreements, investments, and advances against collateral security which
will exceed 10 per centum of the capital stock.

And so forth. Those are just two of a dozen instances in which
the term " collateral security " is used.
Mr. MEYER. In tallring to-day on this very point with a gentleman
from Chicago, he said that in Chicago collateral security was more
usually warehouse receipts for grain than anything else. It is a
question of what the words mean.
Senator GLASS. I know. The question is what sense we have
used them in. We use them to indicate stocks, and bonds.
Mr. MEYER. Senator, you know since I saw a decision of the
Supreme Court that Congress meant one thing while the chairman
and members of the committee told me that they meant another
thing, I have not been able to feel that the intent of the committee
111161—32—PT 2




12

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4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

was conclusive when it came to the courts; and I think the language
ought to be clear if you do not want to do harm.
Senator GLASS. I I it is in one provision and in another provision,
I do not see the difference.
Mr. MEYER. I think it would cover many things besides stocks
and bonds as collateral security.
Senator GLASS. YOU know very well what we intended to cover.
Mr. MEYER. Surely.
Section 29: Section 29 provides for the removal of officers or directors of national banks under certain circumstances. It is believed that there should
be some means by which in extreme cases unsatisfactory management could
be corrected through the removal of officers and directors responsible therefor.
, It is believed, however, that the power of removal should be vested in the
Federal Reserve Board as a wbole rather than in a special committee consisting
of three officials, one of whom is the person bringing the charges against the
accused officer or director; and, in order to afford adequate additional protection to the interests of the banks and their officers and directors, certain other
changes in this section should be made. It is, therefore, recommended that
section 29 be amended to read as follows:

And suggestions are made as to the changes which the board thinks
are advisable and necessary for their protection.
Senator GLASS; Getting back to the proposition, Governor, that
you said you were going to have a provision—I have not observed
that you have come to it at all—about the deflationary nature of the
provision of this bill with respect to real-estate loans. You said
that the limitation was too severe, and I observe here that you make
it more severe. [Heading:]
Any such bank may make such loans in an aggregate sum including in such
aggregate any such loans on which it is liable as indorse? or guarantor or
otherwise equal to 15 per centum of the amount of capital stock of such association actually paid in and unimpaired and 15 per centum of its unimpaired
surplus fund.

That is just exactly what you testified. And then you go on to
say: " Or to one-third of its savings deposits."
That was one-half. It seems to me that your proposition is more
deflationary than ours.
Mr. MEYER. I think the phraseology there was concerned with the
appraisals which we felt——
henator GLASS. Oh, no.
Mr. MEYER. Senator, are you reading from the Burgess-Goldenweiser report?
Senator GLASS. Yes. I am reading from the bill that these gentlemen sent up here—your experts.
Mr. M E Y E R . Well, Senator, this is a new report that I am making
for the board.
Senator GLASS. I have not observed much change.
Mr. METER. I think there are quite a lot of changes and some additions, and I do not think we have followed that report in all details.
I am sure that we did not in the matter that you are reading:
Senator WALCOTT. What section is that?
Senator GLASS. We will come to that.
Mr. MEYER. I am not recommending that, Senator.
Senator GLASS. We will come to that.
Mr. MEYER. We did not recommend the section which you quote.
Senator GLASS. That is one case in which you changed your mind.



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Mr. MEYER. The Burgess-Goldenweiser report is not a report of
the board and was only seen by the board after it had been delivered to the subcommittee.
Senator GLASS. The board and Doctors Burgess and Goldenweiser
seem to have had one mind.
Mr. MEYER. Not entirely. That is proven by your quotation.
Senator GLASS. There are some inconsequential differences, I note.
The CHAIRMAN. Have youfinished?
Mr. MEYER. Yes, Mr. Chairman. I thank you for your patience.
The CHAIRMAN. I asked you that in order that the members of
the committee may be informed. I am sure some of them have refrained from asking questions since you made that request.
Mr. MEYER. I am very much obliged to you for that courtesy.
The CHAIRMAN. They will have their chance to ask you questions
now.
Senator GLASS. I do not want to ask him any.
The CHAIRMAN. Any further questions?
Mr. MEYER. I would like to ask, Mr. Chairman, if the memorandum which I have presented on behalf of the board, along with
the letter, may be introduced into the record in complete form. I
read most of the important sections.
The CHAIRMAN. Without objection that will be, but do you not
want it in connection with your testimony and your side remarks?
Mr. MEYER. I would: yes.
Senator WALCOTT. DO you want your comments printed
separately?
The CHAIRMAN. They will be out of line unless they go together
as your testimony.
Mr. MEYER. Yes; but I would like the letter and the complete
memorandum without the conversation and my comment introduced.
The CHAIRMAN. Also printed in a separate place?
Mr. MEYER. Complete, and as an exhibit to the hearings, if it is
agreeable.
The CHAIRMAN. Any objections ?
Senator BROOKHART. DO you think this bill ought to pass?
Mr. MEYER. I think the board feels that the bill with the suggested amendments would be good legislation and ought to pass.
Senator BROOKHART. And if the amendments are not adopted,
then what?
Mr. MEYER. We have not canvassed the board on that point.
Senator GLASS. YOU deal with many important problems, quite as
many as the subcommittee has dealt with. Do you think that now
is an inopportune time to make any of these alterations in the banking structure?
Mr. MEYER. I think that when the board sends a memorandum
suggesting changes in a piece of legislation and expressing general
sympathy with the purpose of the bill, it has taken a position in
support of the measure in a general way, subject, of course, to its
views as to particular clauses.
Senator GLASS. The board suggests certain amendments to the proposed bill. What I am asking you is whether you think or whether




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

the board thinks this is an opportune time to consider those amendments dealing with extremely vital and important bank matters or to
legislate at all?
Mr. MEYER. I think any legislation, Senator, to be considered at
this time ought to be most carefully considered from the viewpoint
of its time relation to the present economic and financial conditions.
I think it is a difficult time to legislate and the greatest care should
be used that any bill which is passed should not be restrictive of
credit and that it should not be disturbing to confidence. I am frank
to say that I think the reserve provisions in the bill as written would
be disturbing on account of the increase in the reserves provided for
in the bill. I think it is not a question whether a bill is a good thing
to pass at this time. I do not think that is a fair question.
Senator GLASS. Of course, any bill affecting the banking business
of the country ought to be seriously considered, and I am sure you do
not mean to imply that this subcommittee has not seriously considered
all of these problems over a long period of time and has not endeavored to the fullest extent to get the intelligent and uninfluenced judgment of men who are competent to speak.
Mr. MEYER. No; I am quite sure that the committee has worked
very industriously over a long period, but I still would not like to
say that a bill would be a good thing to pass because I do not think
it is a proper question. The question is whether a particular bill
would be a good bill to pass at any particular time.
Senator GLASS. That is exactly what I am asking. If we should
adopt the amendments proposed by the Federal Reserve Board, do
you think the bill thus amended, dealing with these vital problems of
banking, should be now passed?
Mr. MEYER. I think it could be passed without danger and with a
good deal of benefit.
Senator GLASS. I am not even saying that it could be passed at all.
I am asking you whether you think it should be passed at this time..
Mr. MEYER. Yes; I think it should. As amended, I would welcome its passage. There has, of course^ to be borne in mind the fact
that the question as to separation of affiliates, in our minds, is in the
realm of the unknown to a certain extent, because of the absence of
full information, and the board offers no strong recommendation
although it submits a suggestion. But on the other measures I think
the board would welcome the passage of the bill with the amendments.
The CHAIRMAN. I begin to think this Federal Reserve Board and
this banking committee are not so far apart.
Mr. MEYER. Who said we were, Senator?
Senator GLASS. I do. [Laughter.]
Mr. MEYEIJ. I was wondering. You think we are so far apart,.
Senator?
Senator GLASS. YOU express some considerable sympathy with our
point of view of things.
Mr. MEYER. Yes. I think we are not far apart. I think there is,
in principle, no great divergence.
Senator GLASS. Speaking of the affiliate problem, I had a real good
nice rest last night for the first time in a long time after reading
over twice and scrutinizing very carefully the affiliate provision
drafted by your experts. It is so akin to the one that we had in here,.



401

4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

with, possibly, the exception of definitions, that I felt very much
encouraged to think that we had such good authority on the subject.
Mr. MEYER. Well, Senator, I am glad you slept well. I can not
say that as to myself after I got notice late yesterday afternoon that
I had to appear here.
Senator GLASS. I have not observed you had that language in your
statement.
Mr. MEYER. It is a long section there.
Senator GLASS. YOU just did not read it?
M r . MEYER. Y e s .
Senator GLASS. It is a pretty good one, I think.
Mr. MEYER. I do not know that ours is identical.
Senator GLASS. I do not say " identical." I said
Mr. MEYER. It is a rather hard thing to define.

" akin."
It is one of the

most difficult definitions.
Senator GLASS. It is a hard thing to define, and we have been
trying to get somebody to define it for us; that is, the meaning of
" collateral security." ^ One of the distinguished and long-experienced
bankers who has testified at these hearings after a little bantering
agreed to attempt to give us his definition, and we will give it due
consideration.
Mr. MEYER. The subject that you have been working out in your
committee—better banking—is, I think, the most important public
question before the country, and the board sincerely desires to cooperate with this committee in every way, and has always been desirous of doing so, and we are glad to be able to offer you an expression of the board which, so far as it goes, is the joint and unanimous
expression of all of the members of the board.
Senator BROOKHART. IN 1928 and 1929 that great deflation was the
•cause of our present reaction and depression, was it not?
Mr. MEYER. The great inflation all over the world was perhaps
the principal cause of the present collapse and depression all over the
world.
Senator BROOKHART.^ Investment bankers and others had sold these
inflated bonds of foreign countries and also domestic bonds to our
people everywhere, had they not?
Mr. MEYER. NO doubt. Of course.
Senator BROOKHART. Did the policy of the Federal Reserve Board
have anything to do with that?
Mr. MEYER. I was not a member of the board at that time, Senator.
Senator BROOKHART. YOU know what the board did?
Mr. MEYER. I do not know what they did. Senator, I can not
testify on what the board did in 1928 or did not do. I know that I
expressed my opinion of a great many of these securities to such
officials as I 'met when I had an opportunity, and I even sought the
opportunity. I did that, however, in my personal and private capacity, and I had no official relation to the problem.
Senator BROOKHART. YOU noticed there was a problem, did you
not, at that time ?
Mr. MEYER. I think a great many people did. Senator.
Senator BROOKHART. Did not you pay any attention to the policy
of the Federal Reserve Board in reference to that problem?




402

4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

MR, MEYER. That is four years ago, Senator. I would not like to
testify about what I did in 1928 on matters with which I had no
official connection.
Senator BROOKHART. HOW many bank failures have there been in
the United States since you have been governor of the board?
Mr. MEYER. A great many.
Senator BROOKHART. More than usual?
M r . MEYER. Y e s .
Senator BROOKHART.

Was that because you were governor?
[Laughter.] Or was it because
Mr. MEYER. Well, I will say that in the month of March the number of banks closed was equalled by the number of banks opened,,
substantially, and that the resources of the banks opened were
larger than the resources of banks closed; and that is the best record
that has been made in four years in the United States which include
two and one half years when I was not governor.
Senator BROOKHART. That is what happened in one month there?
Mr. MEYER. Well, that is the present condition.
Senator BROOKHART. What I was interested in was whether or not
the policy of the board had anything to do with the bringing on of
the inflation.
Mr. MEYER. YOU mean in 1928 and 1929?
Senator BROOKHART. Yes.
Mr. MEYER. I can not testify back of September, 1980. There
has been no inflation since then. I am sorry to say there has been
too much deflation, but when these forces once get under way they are
hard to stop.
Senator BROOKHART. YOU think this bill would stop that kind of
performance in the future ?
Mr. MEYER. I think it would help to do so and make for better
banking, especially if you can find a way to bring about unified
banking in the country.
Senator GLASS. YOU are going to do that for us.
Mr. MEYER. The first thing is to find out whether you want to
do it.
Senator GLASS. I told you that we do.
Mr. MEYER. I heard it to-day for thefirsttime.
Senator BROOKHART. I am willing to do it on a cooperative principle. [Laughter.]
APPENDIX
^
H o n . PETER NORBECK,

MARCH 29,

1032.

Chairman, Committee on ISankiru/ and Currency,
United Mates Senate, Washington, D. C.
DEAR SENATOR NORBECK : On March 17, 1932. I received a letter from Senator
Glass inclosing copies of Senate bill 4115, aiul stating that the Banking and
Currency Committee would be glad to have the Federal Reserve Board make
any comments or suggestions that in its judgment would seem desirable. Accordingly, there is inclosed herewith for the consideration of your committee
a memorandum containing the board's comments and recommendations.
The subjects dealt with in the bill may be classified under three general
heads: (1) Those relating more directly to the Federal Reserve Board and
the reserve banks, (2) those concerning primarily member banks, and (3) those
dealing with affiliates of member banks.
The Federal Reserve Board is in sympathy with the purpose of the bill to
strengthen the supervision of the Federal reserve system over general credit




4034NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
conditions and to invest the Federal reserve authorities, with certain disciplinary
powers in relation to banks that pursue unsafe and unsound policies or abuse
the privileges of membership. The board's recommendations on this subject
are incorporated In its proposed revision of sections 3 and 20 of the bill.
With respect to the section of the bill dealing with open market operations,
the board calls attention to the fact that there is already in existence an open
market committee on which each of the Federal reserve banks has representation. This has come about as the result of natural development. The board
believes that it would be inadvisable to disturb this development by crystalizing into law any particular procedure. The board believes that nothing further
is necessary or advisable at this time than an amendment clarifying its power
of supervision over open market operations of the Federal reserve banks and
their relationships with foreign banks, as set out in the memorandum attached.
The board is not in sympathy with the provisions of the bill discriminating
against member bank collateral notes. Experience shows that the particular
instrument on which Federal reserve credit is obtained is not an adequate test of
the use to be made by the member bank of the proceeds of the credit and that
an attempt to control speculation through restrictions on member bank collateral
notes would not be effective in accomplishing the purpose of this section of
the bill. Indeed, it probably would interfere seriously with the convenient and
economical operation of the system. In this connection, the Federal Reserve
Board desires to renew the recommendation made in its annual reports for
several years, that the maturity for which advances may be made to member
banks on their promissory notes secured by paper which is eligible for discount
be increased from 15 to 90 days. Such an amendment would be especially
helpful to country banks.
The board is of the opinion that the adoption of a system of reserves based
on velocity of accounts as well as on their volume, as recommended by the
system's committee on reserves, would be an important step in strengthening
the influence that the Federal reserve system could exert in the direction of
sound credit conditions. The section of the bill dealing with reserves would
accentuate rather than reduce the inequalities that have grown up in the
distribution of reserves between different classes of member banks. The board
also believes it should not be overlooked that this section of the bill would exert
a tightening influence on credit conditions at times when it would be contrary
to the public interest.
The board is in favor of establishing a liquidating corporation, but proposes
to limit the scope of its operations to member banks and suggests a different
method of financing it, together with certain changes in the provisions for its
administration.
If the section on branch banking is enacted in the form proposed in the bill,
it is suggested that certain sections of existing law be modified so as to bring
them into harmony with the purposes indicated in1 this section of the bill.
With respect to affiliates, the board believes that important reforms to be
accomplished at the present time are the granting of power to the supervisory
authorities to obtain reports and to make examinations of all affiliates of
member banks and the prescribing of limitations on the loans that a member
bank may make to its affiliates. The board realizes that many evils have
developed through the operation of affiliates connected with member banks,
particularly affiliates dealing in securities. The attached memorandum contains
a draft of a provision for the separation of such affiliates after a lapse of
three years.
The board takes the view that legislation further materially restricting the
character of member bank loans and investments is not desii'able at a time
when the country's banking system is going through a period of severe readjustment. Some of the provisions of the proposed bill would have a tendency
to bring about further contraction of credit and thus retard the recovery of
business. It is for these reasons that changes in a number of sections of the
bill are suggested.
It should be recognized that effective supervision of banking in this country
has been seriously hampered by the competition between member and nonmember banks, and that the establishment of a unified system of banking under
national supervision is essential to fundamental banking reform.
Copies of this letter and the inclosed memorandum are being sent to Senator
Glass, and the board will be glad to supply you with copies for the convenience
of each member of your committee.
Very truly yours,




E U G E N E MEYEB,

Governor.

404

4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
COMMENTS AND RECOMMENDATIONS REGARDING SENATE B I L L 4 1 1 5

[All references are to sections, pages, and lines of S. 4115 in the form in which it was
introduced on March 14 (calendar day, March 17), 1932]

Section 2 : This section defines affiliates and upon its scope depends in a large
measure the scope and effect of all provisions of the bill relating to affiliates.
While the definition contained in the bill mentions certain specific types of
institutions which are frequently affiliated with member banks, the words " or a
corporation " in line 4, on page 2, make it applicable to corporations of any character which are affiliated with member banks in any of the ways described in
the succeeding paragraphs of the definition.
It is believed that the most satisfactory solution of this problem is to make
the definition very broad but, in dealing with affiliates, to observe the following
principles: (1) To require them to make reports and to submit to examination
at the discretion of the board or the comptroller; (2) to limit the loans that
can be extended to an affiliate by a member bank; and (3) to prohibit the
tying up of capital stock of an affiliate with the capital stock of a member
bank. In favoring these limitations, the board has in mind that it may not be
desirable to abolish all the existing relationships between member banks and
their affiliates, but that it is desirable to protect the operations of the member
banks from being unduly influenced by their affiliates. Becent experience has
demonstrated that operations of the affiliates at times have unfavorable effects
on the condition of member banks.
With these principles in mind, it is recommended that the definition of affiliates
be broadened by eliminating from paragraph (b) in lines 1 to 4, page 2, all
references to specific types of corporations, and by inserting other words which
would make the definition applicable not only to corporations but to business
trusts, associations, or other similar organizations, regardless of the type
of business in which they are engaged. Certain other changes in the phraseology of the definition are also suggested for the purpose of clarifying them.
The changes suggested are as follows:
1. On page 2, change lines 1 to 4, inclusive, to read as follows:
" ( b ) The term * affiliate' includes any corporation, business trust, association
or other similar organization/'
2. In lines 9, 11, and 22, on page 2, strike out the words " managing officers "
and substitute in lieu thereof the words " persons exercising similar functions."
3. In lines 9 and 18 on page 2, and in line 3 on page 3, strike out the words
" annual meeting " and substitute in lieu thereof the word " election."
Section 3 : The Federal Reserve Board understands that the principles
underlying section 3 of the bill are (1) that discounting at the Federal reserve
banks is a privilege and not a right; (2) that the Federal reserve system has
the responsibility of keeping itself informed about the use of bank credit;
(3) that the power of Federal reserve banks to withhold credit accommodations
should be used to discourage unsound banking practices; and (4) that the
Federal Reserve Board should have power to suspend a member bank from
the use of Federal reserve credit facilities. The board is in sympathy with
these principles.
For the purpose of accomplishing these objectives, a substitute for section
3 is suggested. This substitute includes a revision of the paragraph of section
4 of the Federal reserve act which now reads as follows:
44 Said board shall administer the affairs of said bank fairly and impartially and without discrimination in favor of or against any member bank
or banks and shall, subject to the provisions of law and the orders of the
Federal Reserve Board, extend to each member bank such discounts, advancements, and accommodations as may be safely and reasonably made with due
regard for the claims and demands of other member banks."
In this revision the word " may " is substituted for " shall" and the remaining language of the section is made somewhat more general than in the bill.
Member banks as a rule do not borrow to relend, but to make up deficiencies
in reserves arising from withdrawals of deposits or from other causes. It is,
therefore, usually impossible to say that a loan to a member bank is granted
for this or that specific purpose. However, it would be possible to determine
whether the loan and investment policies of a bank are inconsistent with the
purposes of the Federal reserve act, and. if so, to refuse .accommodation to
such bank or in aggravated cases to suspend it from the privilege of using
the system's credit facilities. In this connection attention is invited to the fact
that section 4 of the Federal reserve act requires the chairman and Federal
reserve agent at each Federal reserve bank to 44 make regular reports to the




4054NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
Federal ReserveBoard" and to " a c t as its official representative for the
performance of the functions conferred upon it by " the .Federal reserve act. .
It is recommended that section 3 of the bill be changed to read as follows:
" SEC. 3. The paragraph of section 4 of the Federal reserve act, as amended,
which begins with the words, * Said board shall administer the affairs of said
bank fairly and impartially/ is amended and reenacted to read as follows:
" ' S a i d board of directors shall administer the affairs of said bank fairly
and impartially and without discrimination in favor of or against any member bank or banks and may, subject to the provisions of law and the orders of
the Federal Reserve Board, extend to each member bank such discounts,
advancements and accommodations as may be safely and reasonably made
with due regard for the claims and demands of other member banks, the maintenance of sound credit conditions and the accommodation of commerce, industry, and agriculture. The Federal Reserve Board may prescribe regulations
further defining within the limitations of this act the conditions under which
discounts, advancements and accommodations may be extended to member
banks. Each Federal reserve bank shall keep itself informed of the general
character and amount of the loans and investments of its member banks with
a view to ascertaining whether undue use is being made of bank credit for the
speculative carrying of or trading in securities, real estate or commodities, or
for any other purpose inconsistent with the maintenance of sound credit conditions; and, in determining whether to grant or refuse advances, rediscounts
or other credit accommodations, the Federal reserve bank shall give consideration to such information. The chairman of the Federal reserve bank shall
report to the Federal Reserve Board any such undue use of bank credit by
any member bank, together with his recommendation. Whenever, in the judgment of the Federal Reserve Board, any member bank is making such undue
use of bank credit, the board may, in its discretion, after reasonable notice
and an opportunity for a hearing, suspend such bank from the use of the credit
facilities of the Federal reserve system and may terminate such suspension
or may renew it from time to time.'"
Section 4 : It is recommended that this section be omitted. It prohibits
banks that belong to a group or a chain from voting for Federal reserve bank
directors. The wording of the section is such as not to confine the prohibition to group and chain banks, however, but to include all banks that are
not controlled entirely by locally resident stockholders. Since the stock of
many important banks is widely owned throughout the country, this might
restrict the voting privilege to smaller and less important banks that are owned
by local stockholders. It is to he feared that this section would bar from
participation in the selection of Federal reserve directors many of the bettermanaged banks.
Section 5 : This section would amend the first paragraph of section 7 of
the Federal reserve act so that, after the payment of expenses and dividends,
all of the net earnings of a Federal reserve bank over and above any amounts
necessary to restore its surplus to the amount on December 31. 1931. would
be paid to the Federal liquidating corporation. The amendment is also worded
in such a way as to prevent the payment of any dividends out of surplus and
to prevent the payment of dividends whenever the surplus of a Federal reserve
bank is less than it was on December 31. 1031.
A different method of financing the liquidating corporation is proposed and
will be discussed under the appropriate section. For this reason a modification of section 5 is suggested which would not change the provisions of the
present law in regard to the surplus of the Federal reserve banks, but would
authorize the Secretary of the Treasury to use the franchise tax received from
the Federal reserve banks for the purpose of supplementing the funds of the
corporation.
As changed, section 5 of the bill would read as follows:
" SEC. 5. The second paragraph of section 7 of the Federal Reserve act. as
amended, is amended to read as follows:
" ' T h e net earnings derived by the United States from Federal reservebanks shall, in the discretion of the Secretary of the Treasury, (1) be used
to supplement the gold reserve held against outstanding United States notes,
or (2) be applied to the reduction of the outstanding bonded indebtedness of
the United States under regulations to be prescribed by the Secretary of the
Treasury, or (3) be invested in debentures or other such obligations of the
Federal liquidating corporation. Should a Federal reserve bank he dissolved
or go into liquidation, any surplus remaining, after the payment of all debts,.




406

4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

dividend requirements as hereinbefore provided, and the par value of the
stock, shall be paid to and become the property of the United States and shall
be similarly applied.'"
Section 6 : In order that reports of affiliates of State member banks may
l>e required only when deemed necessary by the Federal Reserve Board and
also in order that suitable provision may be made for the examination of
affiliates of State member banks when deemed necessary, it is recommended
that section 6 of the bill be changed to read as follows^:
" SEC. 6. Section 9 of the Federal reserve act, as amended, is further amended
by adding at the end thereof two new paragraphs reading as follows:
Whenever it shall be deemed necessary in. order to obtain adequate
information regarding the relations between any bank admitted to membership
tinder the provisions of this section and its affiliates or the effect of such relations upon the management or condition of such bank, it may be required under
rules and regulations prescribed by the Federal Reserve Board to obtain and
furnish such reports as to any or all of its affiliates as may be called for.
I2ach such report shall contain such information and shall be submitted at
such time as may be specified in the call therefor. Any member bank which
fails to furnish any report of an affiliate when and as required shall be subject
to a penalty of $100 for each day during which such failure continues. Such
penalty may be assessed by the Federal Reserve Board, in its discretion, and,
when assessed, may be collected by the Federal reserve bank by suit or otherwise.
" 4 Any examiner selected or approved by the Federal Reserve Board may
examine any affiliate of any bank admitted to membership under the provisions of this section when it shall l>e deemed necessary in order to inform the
Federal Reserve Board or the Federal reserve bank of the relations of such
affiliate with such member bank or of the effect of such relations upon the
management or condition of such member bank. The examiner making the
examination of any such affiliate shall have power to make a thorough examination of all the affairs of the affiliate, and in doing so he shall have power
to administer oaths and to examine any of the officers, directors, employees,
and agents thereof under oath, and to make a report of his findings to the
Federal Reserve Board or to the Federal reserve bank. The expenses of any
examination made under the provisions of this paragraph may, in the discretion of the Federal Reserve Board, be assessed against the affiliate examined
and, when so assessed, shall be paid by the affiliate examined. If such affiliate shall refuse to pay such expenses or shall fail to do so within sixty days
after the date of such assessment, then such expenses may be assessed against
the affiliated member bank and, when so assessed, shall be paid by such member bank; Provided, however, That if the affiliation is with two or more member banks, such expenses may be assessed against, and collected from, any
or all of such member banks in such proportions as the Federal Reserve Board
may prescribe. If any affiliate of a bank admitted to membership under the
provisions of this section shall refuse to permit an examiner to make an
examination of such affiliate or refuse to give any information required in the
course of any such examination, the member bank with which it is affiliated
shall be subject to a penalty of not more than $100 for each day that any
such refusal shall continue. Such penalty may be assessed by the Federal Reserve Board in its discretion, and, when so assessed, may be collected by the
Federal reserve bank by suit or otherwise.'"
Section 7 : If this section is adopted in its present form, certain changes
should be1 made in the text for the purpose of clarification and of providing
for certain matters not now covered in the bill which will be referred to at the
appropriate places.
For the purposes of clarification, it is suggested that subsection (b) be
amended as follows:
1. In lines 6,11, and 12, on page 8, it is suggested that the word " appointive "
be inserted before the word "member."
2. In line 13, on page 8, it is suggested that after the words " 1 2 years"
there be inserted the words " from the expiration of the term of his* predecessor."
In order that the domicile of the board may be fixed for legal reasons, and in
order that provision may be made for a chairman of the board, it is suggested
that the following be inserted at the beginning of line 23 on page 8 :
The principal offices of the board shall be in the District, of Columbia. At
meetings of the board, the governor shall preside as chairman, and, in his
absence, the vice governor shall preside. In the absence of both the governor




4074NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
and the vice governor, the board shall elect a member to act as chairman
pro tempore.
If the authority of the Secretary of the Treasury to assign quarters to the
Federal Reserve Board is repealed, it would seem that the board should be
authorized to purchase or construct a building for its own use and that, in
the interest of convenience and efficiency, space should be provided in such
building for the Comptroller of the Currency and his staff and for the proposed
Federal liquidating corporation. For this purpose, it is suggested that the
following be added at the end of section 7 of the bill:
" ( d ) Section 10 of the Federal reserve act, as amended, is further amended
by adding at the end thereof a new paragraph reading as follows:
" ' T h e Federal Reserve Board is authorized and empowered to acquire by
purchase, condemnation, or otherwise, a building located in the District of
Columbia which will provide suitable and adequate offices wherein the functions
of the board and the Comptroller of the Currency may be carried on, or to a<s
quire by purchase, condemnation, or otherwise, such site located in the District
of Columbia as it may deem necessary and to cause to be constructed thereon a
building which will provide suitable and adequate offices for the purposes of
the Federal Reserve Board and the Comptroller of tlie Currency, and to maintain, repair, enlarge, or remodel any building so acquired or constructed. The
Federal Reserve Board may assign offices in any such building for the use of
the Comptroller of the Currency and the Federal liquidating corporation without making any charge for tlie use of such offices, and nothing contained in the
act of June 3, 1864, or in section 331 of the Revised Statutes (title 12, sec. 13f
U. S. C.), or in any other provision of law, shall be construed as preventing
the Comptroller of tlie Currency from making full use of any offices so assigned and from keeping therein the records and all other valuable things belonging to his department. The Federal Reserve Board may levy upon the
Federal reserve banks, in proportion to their capital stock and surplus, assess*
ments sufficient to defray all costs and expenses incurred under the provisions
of this paragraph.' "
Section 8. The purpose of this section is to prevent the undue use of bank
loans for speculation in securities. It is believed that this is sufficiently covered in section 3, and, therefore, the omission of section 8 is recommended.
Section 9 : In accordance with the principles indicated in the discussion of
section 2, it is recommended that section 0 of the bill be changed to read as
follows:
14 SEC. 9. The Federal reserve act, as amended, is amended by inserting between sections 23 and 24 thereof the following new section:
"'SEC. 23 (a). No national banking association and no State member bank
shall (1) make any loan or any extension of credit to, or purchase securities
under repurchase agreement from, any of its affiliates; or (2) invest any of its
funds in tlie capital stock, bonds, or other obligation of any such affiliate; or (3)
accept the capital stock, bonds, or other obligations of any such affiliate as
collateral security for advances made to any individual, partnership, association. or corporation; if, in the case of any such affiliate, the aggregate amount
of such loans or extensions of credit, repurchase agreements, investments, and
advances against such collateral security will exceed 10 per centum of the
capital stock and surplus of such national banking association or State member
bank, or if, in the case of all such affiliates, the aggregate amount of such loans,
extensions of credit, investments, and advances against such collateral security*
will exceed 20 per centum of the capital stock and surplus of such national
banking association or State member bank: Provided, however, That nothing in
this section, or in any section of the banking act of 1932, shall be construed as
authorizing member banks to invest their funds in stock otherwise than as
specifically authorized by existing law.
" 4 Each loan or extension of credit to an affiliate within the foregoing limitations shall be secured by collateral having a market value at the time of making
the loan or extension of credit of at least 20 per centum more than the amount
of such loan: Provided, That this requirement shall not apply to loans or extensions of credit on tlie security of obligations of the United States Government* Reconstruction Finance Corporation, Federal intermediate credit banks,
or Federal land banks, or on the security of notes, drafts, bills of exchange, or
acceptances eligible for discount or purchase by Federal reserve banks: And
provided farther, That when r»ny loan is marie on the security of obligations
of any State or political subdivision or agency thereof such obligations shall
have a market value at the time of making the loan of at least 10 per centum
more than the amount of such loan. A loan or extension of credit to a director,




408

4

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

officer, clerk, or other employee or any representative of any such affiliate shall
be deemed a loan to the affiliate to the extent that the proceeds of such loan
are used for the benefit of, or transferred to, the affiliate.
" ' T h e provisions of this section shall not apply to any affiliate of such
national banking association or State member bank (1) the sole function of
which is to hold its banking house or houses and the site or sites thereof, (2)
the sole function of which is to conduct a safe deposit business, (3) in the
capital stock of which such bank has been authorized to invest pursuant to
section 25 of the Federal reserve act, (4) organized under section 25 (a) of
the Federal reserve act, or (5) transacting only the business of an agricultural
credit corporation or livestock loan company; but as to such affiliates member
banks shall continue subject to the provisions of existing law limiting the
amounts which they may lend to, or invest in the stock or other obligations of,
such corporations.'"
Section 10: This section of the bill deals with two separate and distinct subjects—(1) open market operations of the Federal reserve banks ,and (2) The
proposed Federal liquidating corporation. For convenience, these subjects will
be discussed separately.
OPEN-MAEKET OPERATIONS

The first part of section 10 would establish a Federal open-market committee
along the lines of the existing open-market policy conference which functions
as a piece of administrative machinery without specific legal status.
The statement in paragraph (b) of section 10 which says that " N o Federal
reserve bank shall engage in open-market operations, except after approval and
authorization by the committee," appears to be too rigid. It deprives an individual reserve bank of all authority to make purchases in the open market
except after obtaining the consent of both the board and the committee. The
open-market committee would have no authority to act without approval of the
board and the board would have no authority to act without approval of the
committee.. This would result in the possibility of obstruction of any system
program and would tend to make the operation of the Federal reserve system
less timely and less efficient.
Lines 19 to 23 in paragraph (c) on page 12 of this section would incorporate
into law a principle which the Federal Iteserve Board lias adopted in practice.
The following substitute for the first part of section 10 of the bill is suggested i
" SEC. 10. Section 14 of the Federal reserve act, as amended, is further
amended by striking out the wTords 'Every Federal reserve bank shall have
power'; and inserting in lieu thereof the following:
" 4 Subject to such regulations, limitations, restrictions, and procedure as the
Federal Reserve Board may .prescribe, every Federal reserve bank shall have
power.'
" Section 14 of the Federal reserve act, as amended, is further :imended
by adding at the end thereof a new paragraph reading as follows:
" ' T h e time, character, and volume of all purchases and sales in the open
market under this section shall be governed with a view to accommodating
commerce and business and with regard to their bearing upon the general
credit situation of the country.1"
FKDEKAL LIQUIDATING CORPORATION

The other part of section 10 deals with the proposed Federal liquidating corporation, and there is submitted a proposed substitute for the section as drafted
in the bill. The substitute would confine the benefits of the liquidating corporation to member banks. Provision is made for assistance to nonmember
banks in the Reconstruction Finance Corporation act, and it would render
membership in the system more attractive if the benefits of the corporation
were confined to member banks. In the substitute it is proposed that $100,000,000 of the capital of the liquidating corporation be subscribed by the Treasury. This subscription to capital may be considered as being derived from
the franchise tax previously paid to the Treasury by the reserve banks. In
addition, it is proposed that the corporation be authorized to issue debentures
up to twice the amount of its subscribed capital and that the Federal reserve
banks be given authority to purchase those debentures up to one-fourth of
their surplus. This is not a propitious time to ask the member banks to contribute to the liquidating corporation. The banks are going through a very




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

409

difiicult period and to tax them for this purpose would be a considerable hardship on them.
In order to make the operations of the corporation more easily manageable,
it is proposed that the directorate be comprised of five members instead of
fourteen as proposed in the bill.
For the reasons which have been stated the following separate section on
the Federal liquidating corporation has been drafted:
" SEC. 5 A. The Federal reserve act, as amended, is further amended by
inserting between sections 28 and 29 thereof the following new section:
"'SEC. 28 A. (a) There is hereby created a Federal liquidating corporation
(hereafter referred to as the "corporation") for the purpose of making loans
on, or purchasing and liquidating as hereinafter provided, all or any part of
the assets of any member bank for which a receiver has been appointed. The
term " receiver" as used in this section shall mean a receiver of a national
bank, and a receiver, liquidating agent, commission, person, or other agency
charged by State law with the responsibility and the duty of winding up the
affairs of an insolvent State member bank.
" * (b) The management of the corporation shall be vested in a board of
directors consisting of five members, one of whom shall be the Comptroller of
the Currency, one a member of the Federal Reserve Board designated by the
board for the purpose, and three selected annually by the governors of the
twelve Federal reserve banks under such procedure as may be prescribed by
the Federal Reserve Board.
" 4 (c) The corporation shall have a capital stock of $100,000,000, all of which
shall be subscribed by the United States of America and payment for which
shall be subject to call in whole or in part by the board of directors of the
corporation.
" 4 There is hereby authorized to be appropriated out of any money in the
Treasury not otherwise appropriated the sum of $100,000,000 for the purpose
•of making payments upon such subscription. Receipts for payments by the
United States for or on account of such stock shall be issued by the corporation
to the Secretary of the Treasury and shall be evidence of the stock ownership of
the United States.
" ' Any Federal reserve bank may purchase and hold any debentures or other
such obligations of the corporation in an amount not exceeding one-fourth of
the amount of its surplus fund.
" ' ( d ) The corporation shall have power—
" ' First. To adopt, alter, and use a corporate seal.
' Second. To have perpetual succession from the date of enactment hereof,
unless it is sooner dissolved by an act of Congress.
" ' Third. To make contracts; to purchase, lease, and hold or dispose of such
real estate or personal property as may be necessary or convenient for the
transaction of its business.
" 4 Fourth. To sue and be sued, complain and defend in any court of competent
jurisdiction.
" ' F i f t h . To appoint, employ, and fix the compensation of such officers, employees, attorneys, and agents as shall be necessary for the transaction of the
business of the corporation, without regard to the provisions of other laws applicable to the employment and compensation of officers or employees of the
United States, to define their authority and duties, to require bonds of them
and fix the penalty thereof and to dismiss them at pleasure. Nothing in this
or any other act shall be construed to prevent the appointment and compensation as a director, officer, or employee of the corporation of any officer or employee of the United States in any board, commission, independent establishment, or executive department thereof.
" 4 Sixth. To prescribe, amend, and repeal by its board of directors by-laws
and rules and regulations not inconsistent with law governing the manner in
which its general business may be conducted and the privileges granted to it by
low may be exercised and enjoyed.
" * Seventh. To exercise such incidental powers as shall be reasonably necessary to carry out the powers so granted.
• (e) The board of directors of the corporation shall determine and prescribe the manner in which its obligations shall be incurred and its expenses
allowed and paid. The corporation shall be entitled to the free use of the United
States mails in the same manner as the executive departments of the Government. The corporation with the consent of any Federal reserve bank or of
any board, commission, independent establishment, or executive department of
rhe Government, including any field service thereof, may avail itself of the use




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 410
cf information, services, and facilities thereof in carrying out the provisions of
this act.
" ' ( f ) Upon the application of the receiver of any member bank, the corporation may in its discretion purchase the assets of such bank, in whole or
in part, or make loans to the receiver on the security of such assets or any
portion thereof, on such terms and conditions as shall be agreed upon between
the corporation and the receiver, subject to the approval of (1) the Comptroller
of the Currency in the case of any national bank, or (2) the person or agency
designated by State law in the case of any State bank; except that, in nocase shall the corporation make any loan or purchase any assets in an amount
which in the opinion of the corporation shall not fully protect such corporation
and no such loan or purchase shall be made in the case of State member banks
unless expressly authorized by the law of the State in which the bank is
located. Receivers of national banks are hereby authorized and empowered
with the approval of the Comptroller of the Currency to borrow on, or sell,
assets of banks of which they are receivers, and the proceeds of every such sale
or loan shall be utilized for the same purposes and in the same manner as other
funds realized from the liquidation of the assets of such banks. The Comptroller of the Currency may, in his discretion, pay dividends on proved claims
at any time after the expiration of the period of advertisement made pursuant
to section 5235 of the Revised Statutes, and no liability shall attach to the
Comptroller of the Currency or to the receiver of any national bank by reason
of any such payment for failure to pay dividends to a claimant whose claim is
not proved at the time of any such payment. If the amount realized from any
assets acquired by the corporation under the provisions of this section exceeds
•the sum paid therefor or loaned thereon, the corporation shall make an additional payment to the receiver of the bank equal to the amount of such excess,
if any, after deducting the expenses of liquidating such assets and an amount
equal to interest at the rate of 6 per centum per annum. All loans made by
the corporation to receivers shall bear interest at the rate of 6 per centum
per annum.
" ' ( g ) Money of the corporation not otherwise employed shall be invested in
securities of the Government of the United States, except that for temporary
periods, in the discretion of the board of directors, funds of the corporation
may be deposited subject to check in any Federal reserve bank or with the
Treasurer of the United States. When designated for that purpose by the
Secretary of the Treasury, the corporation shall be a depositary of public
moneys, except receipts from customs, under such regulations as may be prescribed by the said Secretary, and may also be employed as a financial agent
of the Government. It shall perform all such reasonable duties as depositary
of public moneys and financial agent of the Government as may be required
of it.
" ' ( h ) The corporation is authorized and empowered to issue and to have
outstanding at any one time in an amount aggregating not more than twice
the amount of its capital, notes, debentures, bonds, or other such obligations,
to be redeemable at the option of the corporation before maturity in such
manner as may be stipulated in such obligations, to bear such rate or rates of
interest, and to mature at such time or times as may be determined by the
corporation: Provided, That the corporation may sell on a discount basis shortterm obligations payable at maturity without interest. Obligations of the
corporation may be secured by assets of the corporation in such manner as
shall be prescribed by the board of directors. Such obligations may be offered
for sale at such price or prices as the corporation may determine. The said
obligations shall be fully and unconditionally guaranteed both as to interest
and principal by the United States and such guaranty shall be expressed on
the face thereof. In the event that the corporation shall be unable to pay
upon demand, when due, the principal of or interest on notes, debentures, bonds,
or other such obligations issued by it, the Secretary of the Treasury shall pay
the amount thereof, which is hereby authorized to be appropriated, out of any
moneys in the Treasury not otherwise appropriated, and thereupon to the
extent of the amounts so paid the Secretary of the Treasury shall succeed to
all the rights of the holders of such notes, debentures, bonds, or other such,
obligations.
" ' ( i ) All obligations issued by the corporation shall be exempt, both as to
principal and interest, from all taxation (except estate or inheritance taxes)
now or hereafter imposed by the United States, by any Territory, dependency,
or possession thereof, or by any State, county, municipality, or local taxing




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

411

uuthority. The corporation, including its franchise, its capital, reserves, and
surplus, and its income, shall be exempt from all taxation now or hereafter
imposed by the United States, by any Territory, dependency, or possession
thereof, or by any State, county, municipality, or local taxing authority, except
that any real property of the corporation shall be subject to State, county,
municipal, or local taxation to the same extent according to its value as other
real property is taxed.
" ' ( j ) In order that the corporation may be suppUed with such forms of
obligations as it may need for issuance under this act, the Secretary of the
Treasury is authorized to prepare such forms as shall be suitable and approved
by the corporation, to be held in the Treasury subject to delivery, upon order
of the corporation. The engraved plates, dies, bed pieces, and other material
executed in connection therewith shall remain in the custody of the Secretary
of the Treasury. The corporation shall reimburse the Secretary of the Treasury
for any expenses incurred in the preparation, custody, and delivery of such
obligations.
" '(k) The corporation shall annually make a report of its operations to the
Congress as soon as practicable after the 1st day of January in each year.
" ' ( 1 ) Whoever, for the purpose of obtaining any loan from the corporation,
or any extension or renewal thereof, or the acceptance, release, or substitution
of security therefore, or for the purpose of inducing the corporation to purchase
any assets, or for the purpose of influencing in any way the action of the corporation under this act, makes any statement, knowing it to be false, or willfuUy
overvalues any security, shall be punished by a fine of not more than $5,000,
or by imprisonment for not more than two years, or both.
" '(m) Whoever (1) falsely makes, forges, or counterfeits any obligation or
coupon, in imitation of or purporting to be an obligation or coupon, issued by
the corporation, or (2) passes, utters, or publishes, or attempts to pass, utter,
or publish, any false, forged, or counterfeited obUgation or coupon, purporting
to have been issued by the coporation, knowing the same to be false, forged
or counterfeited, or (3) falsely alters any obligation, or coupon, issued or purporting to have been issued by the corporation, or (4) passes, utters, or publishes, or attempts to pass, utter, or publish as true, any falsely altered or
spurious obligation or coupon, issued or purporting to have been issued by the
corporation, knowing the same to be falsely altered or spurious, shall be punished by a fine of not more than $10,000 or by imprisonment for not more than
five years, or both.
t < l (n) Whoever, being connected in any capacity with the corporation, (1)
embezzles, abstracts, purloins, or willfully misapplies any moneys, funds, securities, or other things of value, whether belonging to it or pledged, , or otherwise entrusted to it, or (2) with intent to defraud the corporation or any other
body, politic or corporate, or any individual, or to deceive any officer, auditor,
or examiner of the corporation, makes any false entry in any book, report, or
statement of or to the corporation, or without being duly authorized draws any
order or issues, puts forth, or assigns any note, debenture, bond, or other such
obligation, or draft, biU of exchange, mortgage, judgment, or decree thereof,
shall be punished by a fine of not more than $10,000 or by imprisonment for not
more than five years, or both.
" ' ( o ) No individual, association, partnership, or corporation shall use the
words "Federal Liquidating Corporation", or a combination of these three
words, as the name or a part thereof under which he or it shall do business.
Every individual, partnership, association, or corporation violating this subdivision shall be punished by a fine of not exceeding $1000, or by imprisonment not exceeding one year, or both.
" • ( p ) The provisions of sections 112, 113, 114, 115, 116, and 117 of the
Criminal Code of the United States (U.S.C., title 18, ch. 5, sees. 202 to 207,
inclusive), in so far as applicable, are extended to apply to contracts or agree*
nients with the corporation under this act, which for the purposes hereof shall
be held to include loans, advances, extensions and renewals thereof, and acceptances, releases, and substitutions of security therefor, purchases or sales
of assets, and all contracts and agreements pertaining to the same.
" ' ( q ) The Secret Service Division of the Treasury Department is authorized
to detect, arrest, and deliver into the custody of the United States marshal having jurisdiction any person committing any of the offenses punishable under
this section.'"
,
. . .
* .
,
^ ,
Section 11: Section 11 imposes a discriminatory rate against member bank
collateral notes. It also prescribes limitations on the use of such notes by
banks that may be making loans on stock exchange collateral. It is believed




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 412
that the purposes of this section are accomplished by the proposed revision
of section 3 and that no further limitations along this line are desirable. The
theory underlying this section, namely, that there is a more direct connection
between member bank collateral notes and the use of reserve credit for speculative activity than between other borrowings and this activity is unfounded.
Member banks borrow on 15-day notes, because of the greater convenience both
to them and to the Federal reserve bank; and, if this form of borrowing were
prohibited or made more expensive, they would merely substitute the procedure
of rediscounting eligible paper without any change in the use of the proceeds.
For these reasons, it is believed that this section would make the operation
of the Federal reserve banks less efficient and more expensive.
The recommendation has been made by the Federal Reserve Board in its
annual reports for several years that the maturity for which advances may be
made to member banks on their promissory notes secured by paper which is
eligible for discount be increased from 15 to 90 days. Such an amendment
would be especially helpful to country banks, and it is recommended that the
following be substituted for section 11 of the bill:
"SEC. 11. The seventh paragraph of section 13 of the Federal reserve act,
as amended, is amended and reenacted to read as follows:
" 4 Any Federal reserve bank may make advances for periods not exceeding
fifteen days to its member banks on their promissory notes secured by the
deposit or pledge of bonds, notes, certificates of indebtedness or treasury bills
of the United States; and any Federal reserve bank may make advances for
periods not exceeding ninety days to its member banks on their promissory
notes secured by such notes, drafts, bills of exchange or bankers' acceptances
as are eligible for rediscount or for purchase by Federal reserve banks under
the provisions of this act. All such advances shall be made at rates to be
established by such Federal reserve banks, subject to the review and determination of the Federal Reserve Board.'"
Section 12. Section 12 deals with relations of Federal reserve banks with
foreign banks. It is recommended that the words "subject to the powers
conveyed to and bestowed upon the Federal open market committee by section
12 A of this act " be omitted. From the middle of line 18 on page 26 through
the word "writing" in line 11 on page 2T, the section is acceptable, but the
omission of the words " a n d control" in line 19 on page 26 is suggested, in
order to preserve the distinction between supervision and operation.
It is recommended, therefore, that section 12 of the bill be amended as
follows:
(1) Strike out the following language in lines 16, 17, and 18 on page 26:
" ( g ) Subject to the powers conveyed to and bestowed upon the Federal open
market committee by section 12 A of this a c t " ;
(2) Strike out the words " a n d control" in line 19 on page 26; and
(3) On page 27, line 11, insert a period after the word " writing%9 and strike
out everything in line 11 after that word and all of lines 12, 13, 14, and 15.
Section 13: The principal feature of this section is that it discontinues the
distinction between time deposits and demand deposits in so far as reserve
requirements are concerned. The distinction between these two types of
deposits has led to many abuses and has been a factor in making possible a
growth of bank credit without a corresponding growth in reserves. The
proposal which would raise the requirements on time deposits to the level
of those on demand deposits would increase reserve requirements by $132,000,000 a year for five years with an ultimate increase of $060,000,000. Unless
there were a contraction in the amount of member bank deposits, this increase
would result in an addition of about $230,000,000 to the gold requirements
of the Federal reserve banks. It would be an influence in the direction of
credit contraction without regard to the course of business and credit and
would be particularly undesirable at this time. Furthermore, the increase
would fall heaviest on banks outside of the principal financial centers, which
have been discriminated against under the existing reserve requirements both
because, owing to their distance from the cash facilities of the Federal reserve
banks, they, are required to carry relatively large amounts of cash in vault,
which under existing law does not count as reserve, and because they are not
in a position to take advantage of deductions in determining net deposits.
The proposal, therefore, would both increase the burden of reserves and
increase the inequalities in their present distribution.
Any thorough-going revision of section 19 of the Federal reserve act should
base required reserves, in so far as practicable, upon the activity of the business handled through each bank, rather than on an arbitrary classification of




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

413

banks according to location. A proposal submitted in the Report of the
Committee on Bank Reserves of the Federal Reserve System embodies a
method of calculating required reserves which is believed to be sound in
principle and which would make fluctuations in the volume of required reserves exert an influence in the direction of sound credit conditions and would
also eliminate many inequitable and unfair features of the present law.
There is submitted a proposed substitute for section 13 of the bill which
incorporates the proposals of the committee on bank reserves of the Federal
reserve system with slight modifications.
Section 13 includes two subjects not directly related to bank reserves and not
covered in the report of the reserve committee, namely, a prohibition against
brokers' loans for the account of others and a provision subjecting the market
for Federal funds to regulation by the Federal Reserve Board.
The purpose sought to be accomplished by paragraph (d) is desirable, but
it is believed that the language used is too far reaching. It is suggested that
the paragraph be changed so as to prohibit a member bank from acting as
a medium or agent of a nonbanking corporation or individual in making loans
on the security of stocks, bonds, and other investment securities to brokers or
dealers in such securities. This suggestion is incorporated in paragraph (n)
of the proposed revision of section 13 of the bill. It is not thought that a
provision prohibiting a member bank from making loans to any corporation
or individual if the proceeds of such transaction are to be used directly or
indirectly for the purpose of making loans protected by collateral security in
favor of any investment banker, broker, or member of any stock exchange or
any dealer in securities, would be enforceable as it is impossible to follow the
proceeds of loans once they have been granted.
Paragraphs ( f ) and (g) of the bill seek to control the market for Federal
funds by placing limitations on the use of balances standing to the credit
of member banks upon the books of the Federal reserve banks. It is not
believed that regulation of the market for Federal funds by law is desirable.
It is better to have these liquid funds move freely where they are most needed
than to have them thrown on the call market. The Federal reserve banks
keep in close touch with transactions in Federal funds and a ruling of the
Federal Reserve Board now requires member banks to report purchases of
Federal funds as borrowed money.
The proposed substitute for section 13 of the bill is as follows:
" SEC. 13. Section 19 of the Federal reserve act (U. S. C., title 12, sees. 461
to 466, inclusive, and sec. 374), as amended, is further amended and reenacted
to read as follows:
111

RESERVES OF M E M B E B B A N K S

41 '

SEC. 19. (a) Each member bank shall establish and maintain reserves equal to 5 per centum of the amount of its net deposits, plus 50 per
centum of the amount of its average daily debits to deposit accounts: Provided, That any member bank, at its option, for any period not less than ninety
days, may, omit any specific deposit account or accounts from such computation
of its reserve requirements if such account or accounts are reported separately
to the Federal reserve bank and if a reserve of 50 per centum is maintained
against such account or accounts: Provided, however, That, in no event, shall
the aggregate reserves required to be maintained by any member bank exceed
fifteen per centum of its gross deposits.
" • ( b ) Each member bank located in the vicinity of a Federal reserve bank
or branch thereof shall maintain not less than four-fifths of its total required
reserves in the form of a reserve balance on deposit with the Federal reserve
bank, and every other member bank shall maintain not less than two-fifths
of its total required reserves in the form of a reserve balance on deposit with
the Federal reserve bank. The remainder of the total required reserves of
each member bank, over and above the amount required to be maintained i n
the form of a reserve balance on deposit with the Federal reserve bank, may,
at the option of such member bank, consist of a reserve balance on deposit
with the Federal reserve bank, or of cash owned by such member bank either
in its actual possession or in transit between such member bank and the Federal reserve bank: Provided, That when, in its judgment the public interest so
requires, the Federal Reserve Board may limit to an amount less than that
permitted hereunder the amount of cash which any member bank or banks
may count as reserve: Provided, however, That, in prescribing such limitations,
the Federal Reserve Board shall be guided by the general principle that member banks should be permitted to count as reserve, within the limitations of
111161—32—PT 2




13

NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 414
this section, as much cash as they reasonably need in view of the characterof their business and their degree of accessibility to the currency facilities
of the Federal reserve banks.
" ' ( c ) The term "gross deposits," within the meaning of this section, shall
include all deposit liabilities of any member bank whether or not immediately
available for withdrawal by the depositor, all liabilities for certified checks;
cashiers*, treasurers', and other officers' checks; cash letters of credit; travelers'
checks; and all other similar liabilities, as further defined and specified by the
Federal Reserve Board: Provided, however, That, in computing the amount of
"gross deposits," (1) amounts shown on the books of any member bank as
liabilities of such bank payable to a branch of such bank located in a foreign
country or in a dependency or possession of the United States, and (2) liabilities payable only at such a branch, shall be treated as though said liabilities were due to or payable at a nonmember bank.
" ' ( d ) The term "net deposits," as used in this section, shall mean the
amount of the gross deposits of any member bank, as above defined and as further defined by the Federal Reserve Board, minus the sum of (1) all balances
due to such member bank from other member banks and their branches in the
United States, and (2) checks and other cash items in process of collection
which are payable immediately upon presentation in the United States, within
the meaning of these terms as further defined by the Federal Reserve Board.
" ' ( e ) The term "average daily debits to deposit accounts," as used in this
section, shall mean the average daily amount of checks, drafts, and other items
debited or charged by any member bank to any and all accounts included in
gross deposits as above defined and as further defined by the Federal Reserve
Board, except charges resulting from the payment of certified checks and
cashiers1, treasurers', and other officers' checks.
" ' ( f ) The term "cash," within the meaning of this section, shall include all
kinds of currency and coin issued or coined under the authority of the laws
of the United States.
" " ( g ) The term "reserve balances," as used in this section, shall mean a
member bank's actual net balance on the books of the Federal reserve bank
representing funds available for reserve purposes under regulations prescribed
by the Federal Reserve Board.
" ' ( h ) The term "vicinity of a Federal reserve bank or branch thereof," as
used in this section, shall mean the city in which a Federal reserve bank or
branch thereof is located, until such term is otherwise defined by the Federal
Reserve Board: Provided, That, with respect to each Federal reserve bank and
each branch thereof, the Federal Reserve Board, from time to time, in its discretion, may either (1) define a specific geographic area as comprising the
vicinity of such Federal reserve bank or branch thereof, within the meaning of
this section, or (2) compile a list of member banks which shall be deemed to
be located in the vicinity of such Federal reserve bank or branch thereof,
within the meaning of this section, and add banks to, or remove banks from]
such list, from time to time: Provided, however, That, in defining such areas
and compiling such lists, the Federal Reserve Board shall be guided, by the
general principle indicated in subsection (b) hereof.
" ' ( i ) With respect to each member bank, the term "Federal reserve bank,"
as used in this section, shall mean the Federal reserve bank of the district in
which such member bank is located.
" ' ( j ) The Federal Reserve Board is authorized and empowered to prescribe
regulations defining further the various terms used in this act, fixing periods
over which reserve requirements and actual reserves may be averaged, determining the methods by which reserve requirements and actual reserves shall
be computed, and prescribing penalties for deficiencies in reserves. Such regulations and all other regulations of the Federal Reserve Board shall have the
force and effect of law and the courts shall take judicial notice of them
" '(k) Subject to such regulations and penalties as may be prescribed by the
Federal Reserve Board, any member bank may draw against or otherwise
utilize its reserves for the purpose of meeting existing liabilities: Provided
however, That, whenever the reserves of any member bank have been continuously deficient for fourteen consecutive calendar days, the Federal reserve
agent or assistant Federal reserve agent of the district in which sueh member
bank is located shall send to each director of such bank, by registered mail a
letter advising him of such deficiency and calling attention to the provisions
of this subsection; and each director of such bank who after receipt of such a
letter, assents to or acquiesces in the making of additional loans or investments




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

415

by such bank before the reserves of such bank shall have been restored to the
amount required by this section, shall be held liable in his personal or individual
capacity for any and all losses sustained by such bank on any such loans or
investments.
" ' ( 1 ) All penalties for deficiencies in .reserves incurred under regulations
prescribed by the Federal Reserve Board pursuant to the provisions of this
act shall be paid to the Federal reserve bank by the member bank against
which they are assessed.
" ' ( m ) No member bank shall keep on deposit with any State bank or trust
company which is not a member bank a sum in excess of ten per centum of
its own paid-up capital and surplus. No member bank shall act as the
medium or agent of a nonmember bank in applying for or receiving discounts
from a Federal reserve bank under the provisions of this act, except by permission of the Federal Reserve Board.
" *(n) No member bank shall act as the medium or agent of any nonbanking
corporation, partnership, association, business trust, or individual in making
loans on the security of stocks, bonds, and other investment securities to brokers
or dealers in stocks, bonds, and other investment securities. Every violation
of this provision by any member bank shall be punishable by a fine of not
more than $100 per day during the continuance of such violation; and such
fine may be collected, by suit or otherwise, by the Federal reserve bank of the
district in which such member bank is located.
" ' ( o ) 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 remain nonmember banks,
and shall in that event maintain reserves and comply with all the conditions
now provided by law regulating them; or said banks may, with the consent of
the Federal Reserve Board, become member banks of any one of the Federal
reserve districts, and shall in that event take stock, maintain reserves, and
be subject to all the other provisions of this act.
" '(p) All acts or parts of acts in conflict with this section are hereby repealed
only in so far as they are in conflict with the provisions of this section.'
"There are hereby repealed the provisions of section 7 of the first liberty
bond act, approved April 24, 1917, section 8 of the second liberty bond act,
approved September 24, 1917, and sectijon 8 of the third liberty bond act,
approved April 4, 1918 (U. S. C., title 31, sec. 771) which read as follows:
" 4 That the provisions of section 5191 of the Revised Statutes, as amended
by the Federal reserve act, and the amendments thereof, with reference to
the reserves required to be kept by national banking associations and other
member banks of the Federal reserve system, shall not apply to deposits of public moneys by the United States in designated depositaries/
" This section shall become effective on the first day of the seventh calendar
month following the enactment of this act."
Section 14: The first portion of this section down to line 4 on page 33
is existing law. The sentence in lines 4 to 8, inclusive, is new and would
interfere greatly with the financing of real estate transactions. When a time
loan has been made there appears to be no warrant, in the absence of default,
for revising the valuations on which the loan is based: and this provision,
together with that in lines 4 to 9 on page 34, would require the real estate on
which each such loan is based to be revalued at least five times each year.
It could not reasonably be expected that real estate loans would be made or
applied for under such. conditions.
The sentence in lines 17 to 20 on page 33 would classify as real estate loans
all unsecured loans whose eventual safety depends upon the value of real
estate, thereby subjecting all such loans to all the limitations or restrictions
in this section, This would produce confusion and uncertainty in a large
volume of loans and would interfere with the extension of adequate credit,
particularly in the agricultural sections of the country.
The remaining amendments in this section make what appear to be unnecessary changes in the proportion of the real estate loans permitted and proposed,
without segregation, to give time depositors a preferred claim on all real estate
loans and other assets of the bank acquired under this section. Such a provision would be difficult to administer and would be unfair to the other
depositors.
The sentence in lines 15 to 22 on page 34 is existing law and is inconsistent
with section 24 of the bill, which will be
Inter.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 416
It would seem desirable to limit the amount which banks may invest in bank
premises, but it is suggested that this be accomplished directly instead of
indirectly.
It is recommended, therefore, that section 14 of the bill be stricken out and
that the following new section be substituted:
" SEO. 14. The Federal reserve act, as amended, is amended by inserting
between section 24 and section 25 thereof the following new section:
" SEC. 24 (a). Except with the permission of tlie Comptroller of the Currency,
no national bank, and except with the permission of the Federal Reserve
Board, no State member bank, shall hereafter invest in bank premises or in
the stock or obligations of, or In loans to, any corporation owning or holding
its bank premises a sum exceeding the amount of the capital stock of such
bank/ "
Section 15: This section would make it necessary for member banks to dispose of a large amount of securities at this time which would be very unfortunate. Since it is aimed generally at investments in securities, it is believed
that its purpose is covered sufficiently by the proposed substitute for section 3
of the bill.
The clause commencing in line 10 on page 35 apparently is intended to
enable national banks to compete more effectively with State banks. Its tendency would be to lower the standards of banking in the national banking
system to the standard of the State banks, where more liberal powers are
granted to State banks by State law.
The definition of investment securities which is contained in the law. as
amended by the act of February 25, 1917, would be stricken out and apparently
the comptroller would be given unlimited power to prescribe his own definition except that stocks could not be included. This modification is undesirable.
For the reasons stated, it is recommended that this section be omitted
entirely.
Section 16: This amendment is believed to be desirable; but it is recommended that it l>e strengthened and that a means of evasion be eliminated
by striking out the exception in lines 17 to 21, inclusive, on page 37, which
would permit the organization of national banks with a capital of §25,000 in
certain circumstances.
Section 17: The modification of the units in which hank stocks can be issued
would create unnecessary complications; and it is recommended that all of
section 17 be omitted, with the exception of the sentence in lines 17 to 23
on page 3S, which should be made effective not less than three years after
enactment.
As modified, section 17 would read as follows:
U SEC. 17. Section 5139 of the Revised Statutes, as amended, is amended by
by adding at the end thereof a new paragraph reading as follows:
" 1 After three years from the date of the enactment of this act, no certificate
representing the stock of any such association shall represent the stock of any
other corporation, nor shall the ownership, sale or transfer of any certificate
representing the stock of any such association be conditioned in any manner
whatsoever upon the ownership, sale, or transfer of a certificate representing
the stock of any other corporation.'"
Section 18: The first part of this section would prohibit any director, officer,
or employee of any member bank from acting as a director, officer, or employee
of certain other specified classes of business enterprises. It would be capable
of easy evasion and would become ineffective in many cases. The latter part
of the section would prohibit any member bank from clearing checks or doing
the ordinary banking business of a correspondent for any of the types of business enterprises mentioned in this section. The language of the section is so
broad that it would include banks within the classes of business enterprises
to which the prohibitions of the section would apply. For example, all
interlocking bank directorates now expressly authorized by law or permitted
under certain conditions would be prohibited, and one bank would be prohibited from acting as a correspondent of another bank. It is, therefore,
recommended that this entire section be omitted.
It has been clearly demonstrated that affiliations between member banks
and security companies have contributed to undesirable banking developments.
There are, however, difficulties in the way of accomplishing a complete divorce
of member banks from their affiliates arising from the fact that a law intended for that purpose is likely to be susceptible of evasion or else to apply
to many cases to which it is not intended to apply. Therefore, the board is




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

417

not prepared at this time to make a definite recommendation, but submits, for
the consideration of the Committee on Banking and Currency, a substitute for
section 18 which is designed to provide for the divorce of security affiliates
from member banks after three years:
44 SEO. 18. From and after three years from the date of the enactment of this
act, no member bank shall be affiliated in any manner described in section 2
(b) hereof with any corporation, association, business trust, or other similar
organization engaged principally in the issue, flotation, underwriting, public
sale, or distribution at wholesale or retail, of stocks, bonds, debentures, notes,
or other securities.
. " For every violation of this section, the member bank involved shall be subject to a penalty not exceeding $1,000 per day for each day during which such
violation continues. Such penalty may be assessed by the Federal Reserve
Board, in its discretion, and, when so assessed, may be collected by the Federal
reserve bank by suit or otherwise.
" If any such violation shall continue for six calendar months after the
member bank shall have been warned by the Federal Reserve Board to discontinue the same, (a) in the case of a national bank, all the rights, privileges, and
franchises granted to it under the national bank act may be forfeited in the
manner prescribed in section 5230 of the Revised Statutes, or, (b) in the case
of a State member bank, all of its rights and privileges of membership in the
Federal reserve system may be forfeited in the manner prescribed in section 9
of the Federal reserve act."
Sections 19 and 20: It is recommended that section 19 of the bill be combined with section 20 in the manner hereinafter proposed; that the combined
section be known as section 19; and that a new section applicable to holding
companies which own or control State member banks be substituted for section
20.
Under the definition of " affiliate " contained in section 2 and under the provisions of sections 6, 27, and 28 of the bill, if amended in accordance with the
recommendations contained in this report, all holding companies which control member banks and all banks owned or controlled by such holding companies will be affiliates of such member banks and will be required to make reports and submit to examinations whenever deemed necessary or advisable by
the Comptroller of the Currency, the Federal Reserve Board or examiners appointed by them; and, therefore, it is suggested that the provisions regarding
examinations and condition reports of holding companies be omitted from this
section and from the corresponding sections regarding holding companies which
own or control State member banks.
It is also suggested that there be inserted in section 19 and in the proposed
new section 20 certain additional provisions providing for the regulation and
supervision of holding companies and requiring all eligible State banks controlled by them to be members of the Federal reserve system.
It is, therefore, recommended that section 19 of the bill be changed to read
as follows:
" SEC. 19. Section 5144 of the Revised Statutes, as amended, is amended to
read as follows:
" ' SEO. 5144. In all elections of directors and in deciding all questions at meetings of shareholders, each shareholder shall be entitled to one vote on each share
of stock held by him, except that shares of its own stock held by any national
bank as trustee shall not be voted, and shares owned or controlled by any
affiliate, as defined by the banking act of 1932, or by any officer, director,
employee, proxy, nominee, or representative, or agent thereof, shall not be voted
unless such affiliate shall have filed with the Comptroller of the Currency an
agreement in such form as may be prescribed by him accepting, and agreeing to
submit to and comply with, all of the provisions of this section, and such agreement shall not have been terminated. Shareholders may vote by proxies duly
authorized in writing; but no officer, clerk, teller, or bookkeeper of such association shall act as proxy; and no shareholder whose liability is past due and
unpaid shall be allowed to vote.
" W i t h i n a period of one year from the date of any such agreement each
nonmember State bank owned or controlled by such affiliate which is eligible
for membership in the Federal reserve system shall apply for membership
therein in the manner prescribed by, and subject to the terms of, section 9
of the Federal reserve act. If such application is approved by the Federal
Reserve Board, such bank shall become a member of the Federal reserve system
and shall comply with all of the provisions of law applicable to member banks.
If such application is not approved by the Federal Reserve Board, or if any




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 418
such bank shall fail to become, or shall cease to be, a member of the Federal
reserve system at any time while such agreement remains in effect, such
affiiiiate shall divest itself of all stock ownership or other interest in, or
control of, such bank.
" Except as otherwise provided herein, every such affiliate, (1) on January 1,
1034, and at all times thereafter while such agreement remains in effect, shall
possess, free and clear of any lien, pledge, or hypothecation of any nature,
readily marketable assets other than bank stock, which shall not amount to
less than 35 per centum of the aggregate par value of bank stocks held or owned
by such affiliate, and (2) shall reinvest in readily marketable assets other
than bank stock all net earnings over and above 6 per centum per annum on the
book value of its own shares outstanding, uutil its readily marketable assets
other than bank stocks shall amount to 25 per centum of the aggregate par
value of bank shares held or owned by it; Provided, however, That, in computing the amount of readily marketable assets, other than bank stock, which
any such affiliate is required to possess at any given time, credit shall be
given to such affiliate for all contributions which it has made during the
preceding three years to banks owned or controlled by it at the time such
computation is made. The term " contribution," as herein used, shall include
all such gifts of money, assets or other things of value to any such bank, all
such amounts paid for worthless or doubtful assets purchased from any such
bank, and all such other similar amounts as the Comptroller of the Currency,
in his discretion, may permit to be treated as contributions.
" If any such affiliate shall fail to comply with the provisions of this section
or with the provisions of any agreement with the Comptroller of the Currency
made pursuant thereto, the Comptroller, in his discretion, may terminate such
agreement.
"Any officer, director, agent, or employee of any such affiliate, which has
entered into an agreement with the Comptroller of the Currency in accordance
with the provisions of this section, who shall make any false entry in any
book, report or statement of such afliliate with intent in any case to injure
or defraud such affiliate, any member bank or any other company, body politic
or corporate, or any individual person, or with intent to deceive any officer of
such affiliate or of any member bank, or the Comptroller of the Currency, or
any agent or examiner appointed to examine the affairs of such affiliate, shall
be deemed guilty of a misdemeanor and upon conviction thereof in any district
court of the United States shall be fined not more than §5,000 or shall be
imprisoned for not more than five years, or both, in the discretion of the
court.
" N o National bank shall (1) make any loan on the stock of any affiliate
which owns or controls such National bank directly or indirectly, (2) make
any loan to any affiliate which owns or controls such National bank, directly
or indirectly, on the security of any shares of stock of any corporation owned
or controlled by such affiliate, or (3) be the purchaser or holder of the stock
of such affiliate, unless such security or purchase shall be necessary to prevent
loss upon a debt previously contracted in good faitli; and any stock so
purchased or acquired shall be sold or disposed of at public or private sale
within two years from the date of its acquisition.
" ' Unless there is in effect at the time an agreement filed with the Comptroller
of the Currency pursuant to the terms of this section, any person, firm, corporation, association, business trust, or other organization, which shall vote, or
cause, direct, authorize, or permit to be voted, the stock of any national bank
owned or controlled by any affiliate, or by any officer, director, employee, proxy,
nominee or representative or agent thereof, shall be deemed guilty of a misdemeanor and, upon conviction thereof in any district court of the United States,
shall be fined not more than $5,000 for each such offense. Each vote cast shall
constitute a separate offense within the meaning of this paragraph.' "
It is recommended that in lieu of section 20, there be inserted a new scction
20 making similar requirements regarding holding companies which own or
control State member banks of the Federal reserve system; and it is recommended that such new section 20 read as follows:
" SEC. 20. The Federal reserve act, as amended, is further amended by inserting therein immediately after section 9 thereof a new section reading as follows:
" 1 SEC. OA. No State bank shall be permitted to become a member of the Federal reserve system unless any affiliate of such State bank or trust company, as
defined in the banking act of 1932, which owns or controls such member bank,
directly or indirectly, shall have filed with the Federal Reserve Board an -agree-




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

419

ment in such form as may be prescribed by such board accepting, and agreeing to submit to and comply with, all of the provisions of this section; and no
State bank shall remain a member of the Federal reserve system after one year
from the date of the enactment of this act unless any affiliate of such State
bank which owns or controls such member bank, directly or indirectly, shall
have filed such an agreement with the Federal Reserve Board.
41 ' Within a period of one year from the date of any such agreement, each
nonmember State bank owned or controlled by such affiliate which is eligible
for membership in the Federal reserve system shall apply for membership
therein in the manner prescribed by, and subject to the terms of, section 9 of
this act. If such application is approved by the Federal Reserve Board, such
bank shall become a member of the Federal reserve system and shall comply
with all of the provisions of law applicable to member banks. If such application is not approved by the Federal Reserve Board, or if any such bank shall
fail to become, or cease to be, a member of the Federal reserve system at any
time while such agreement remains in effect, such affiliate shall divest itself
of all of the stock ownership or other interest in, or control of, such bank.
" ' E x c e p t as provided herein, every such affiliate (1) on January 1, 1934,
and at all times thereafter during the membership in the Federal reserve
system of any State bank owned or controlled by it, shall possess, free and
clear of any lien, pledge or hypothecation of any nature, readily marketable
assets other than bank stock, which shall not amount to less than 15 per centum
of the aggregate par value of bank stocks held or owned by such affiliate, and
(2) shall reinvest in readily marketable assets other than bank stock all net
earnings over and above 6 per centum per annum on the book value of its own
shares outstanding, until its readily marketable assets, other than bank stocks,
shall amount to 25 per centum of the aggregate par value of bank shares
held or owned by it: Provided, however, That, in computing the amount of
readily marketable assets, other than bank stock, which any such affiliate is
required to possess at any given time, credit shall be given to such affiliate for
all contributions which it has made during the preceding three years to banks
owned or controlled by it at the time such computation is made. The term
"contribution," as herein used, shall include all such gifts of money, assets
or other things of value to any such bank, all such amounts paid for worthless
or doubtful assets purchased from any such bank, and all such other similar
amounts as the Federal Reserve Board, in its discretion, may permit to be
treated as contributions.
" 1 If any such affiliate shall fail to comply with the provisions of this section
or with the provisions of any agreement with the Federal Reserve Board made
pursuant thereto, the said board, in its discretion, may require any State
member bank owned or controlled by such affiliate to surrender its stock in
the Federal reserve bank and to forfeit all rights and privileges of membership .in the Federal reserve system as provided in section 9 of this act.
" ' A n y officer, director, agent, or employee of any such affiliate which has
filed an agreement with the Federal Reserve Board, as provided in this section, who shall make any false entry in any book, report, or statement of
such affiliate with intent in any case to injure or defraud such affiliate, any
member bank or any other company, body politic or corporate, or any individual person, or with intent to deceive auy officer of such affiliate or of any
member bank, or the Federal Reserve Board, or any agent or examiner appointed to examine the affairs of such affiliate, shall be deemed guilty of a
misdemeanor, and upon conviction thereof in any district court of the United
States, shall be fined not more than $5,000 or shall be imprisoned for not more
than five years, or both, in the discretion of the court.
" ' N o State member bank shall (1) make any loan on the stock of any
affiliate which owns or controls such State member bank directly or indirectly,
(2) make any loan to any affiliate which owns or controls such State member
bank, directly or indirectly, on the security of any shares of stock of any corporation owned or controlled by such affiliate, or (3) be the purchaser or
holder of the stock of such affiliate, unless such security or purchase shall be
necessary to prevent loss upon a debt previously contracted in good faith;
and any stock so purchased or acquired shall be sold or disposed of at public
or private sale within two years from the date of its acquisition.1"
Section 2 1 : If the Committee on Banking and Currency decides to recommend the enactment of section 21 of the bill in substantially its present form,
it is suggested that paragraph (d) of section 5155 of the Revised Statutes
(which forbids the establishment of any branch in a place with a population




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 420
of less tlmn 25,000) be amended in order that small communities may not be
denied the banking facilities which otherwise might be provided under this
section. It is also suggested that the second paragraph of section 9 of the
Federal reserve act be amended so as to place State member banks on the
same basis as national banks with respect to branches either in this country
or in foreign countries.
The sentence commencing in line 7 on page 40 of the bill might be substituted for paragraph (d) of section 5155 of the Revised Statutes; and the
following might be added at the end of the second paragraph of section 9 of
the Federal reserve act:
"Provided, however, That nothing herein contained shall prevent any State
member bank from establishing and operating branches in the United States
or any dependency or insular possession thereof or in any foreign country,
on the same terms and conditions and subject to the same limitations and
restrictions as are applicable to the establishment of branches by national
banks."
Section 23: This section is desirable; but, in view of the fact that the
Federal reserve act authorizes different rates of discount for different classes
of paper, it is recommended that this section be amended by striking out the
word " o f " inline 2 on page 47 and inserting in lieu thereof the words " on
90-day commercial paper in effect at."
Section 24: While it is recognized that certain evils arise from the competitive bidding for deposits through the payment of unduly high rates, it
is believed that it is undesirable to further regulate by law the rates of
interest, which may be paid on deposits, especially since to do so would place
member banks at a disadvantage in competition with nonmember banks. It
is, therefore, recommended that this section be omitted.
Section 25: In the interests of clarity, it is recommended that subsection
(a) of section 25 of the bill be amended by striking out the period at the end
thereof (i. e., at the end of line 8 on page 48) and inserting the following:
" in which such corporation owns or controls a majority interest."
It is recommended that the remainder of section 25 of the bill (p. 48, lines
9-25 and p. 49, lines 1-21) be omitted entirely.
The first part of paragraph (b) (lines 9 to 18, inclusive, on page 48) would
seem to be unnecessary because the exceptions in section 5200 are not applicable
to borrowers of the kind described, except the eighth exception which applies
only to loans secured by Government securities.
In so far as the remainder of paragraph (b) and the provisions of paragraph
(c) relate to affiliates of national banking associations, the exact meaning
of the restrictions is not clear; but these provisions appear to be in conflict
with those of section 9 of the bill, and the limitations on loans which may
be made by national banking associations to their affiliates are covered adequately by the proposed substitute for section 9. This substitute contains a
limitation on loans that may be made to one affiliate and a separate
limitation on the aggregate amount of loans that may be made to all affiliates
of the same member bank.
In the comments upon the definition of the term " affiliate " in section 2 of
the bill certain principles were indicated which have been applied in the
recommendations with respect to various sections of the bill relating to
affiliates; and it is believed that these recommendations are sufficient.
Section 20: It is recommended that this section be omitted entirely.
It would apply to all loans on " collateral security " regardless of the nature
of the security, and would nullify certain provisions of section 5200 of the
Revised Statutes, including those permitting national banks to make loans
(1) in amounts not exceeding 25 per cent of their capital and surplus on the
security of shipping documents or chattel mortgages on live stock, and (2) in
amounts not exceeding 50 per cent of their capital and surplus on the security
of shipping documents, warehouse receipts, or other such documents covering
readily marketable, nonperishable staples. It would greatly curtail the amount
of credit which could be extended by banks in agricultural communities to
farmers, cattlemen, and dealers in cotton, grain, and other agricultural
commodities.
Section 27: In order that reports of affiliates of national banks may be required only when deemed necessary and to clarify the provisions of the bill
with respect to such reports, it is recommended that section 27 of the bill be
amended to read as follows:




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

421

" SEC. 27. Section 5211 of the Revised Statutes of the United States, as
amended, is further amended, by adding at the end thereof the following new
paragraph:
" ' Whenever it shall be deemed necessary in order to obtain adequate information regarding the relations between any national bank and its affiliates, or
the effect of such relations upon the management or condition of such bank, it
may be required under rules and regulations prescribed by the Comptroller of
the Currency to obtain and furnish such reports as to any or all of its affiliates
as may be called for. Each such report shall contain such information and
shall be submitted at such time as may be specified in the call therefor. 9 "
Section 28: Section 28 of the bill purports to authorize examinations of affiliates of both national banks and State member banks; but it is doubtful whether
it would accomplish this purpose as to State member banks, because it amends
the first paragraph of section 5240 of the Revised Statutes so as to provide for
such examinations to be made by examiners acting under the jurisdiction of
the Comptroller of the Currency, whereas section 0 of the Federal reserve act,
as amended by the act of June 21, 1917, exempts State member banks from
examination by the Comptroller of the Currency under the provisions of the first
two paragraphs of section 5240 of the Revised Statutes. It has been recommended above that section 6 of the bill be amended so as to provide for examinations of affiliates of State member banks; and it is recommended that section
28 of the bill be amended to read as follows:
"SEC. 28. Section 5240 of the Revised Statutes of the United States, as
amended, is further amended by adding at the end thereof a new paragraph
reading as follows:
" 4 Examiners appointed under the provisions of the first paragraph of this
section may examine any affiliate of a national bank whenever it shall be
deemed necessary in order to obtain adequate information concerning the relations of such affiliate with such national bank or the effect of such relations
upon the management or condition of such national bank. The examiner making the examination of any affiliate of a national bank shall have power to
make a thorough examination of all the affairs of the affiliate, and in doing so
he shall have power to administer oaths and to examine any of the officers and
agents thereof under oath and to make a report of his findings to the Comptroller of the Currency. The expense of examinations provided for in this
paragraph may be assessed by the Comptroller of the Currency upon the affiliates examined in proportion to assets or resources held by the affiliates upon
the dates of examination of the various affiliates. If any such affiliates shall
refuse to pay such expenses or shall fail to do so within sixty days after the
date of such assessment, then such expenses may be assessed against the affiliated national bank and, when so assessed, shall be paid by such national bank:
Provided, hoicever, That, if the affiliation is with two or more national banks,
such expenses may be assessed against, and collected from, any or all of such
national banks in such proportions as the Comptroller of the Currency may
prescribe. If any affiliate of a national bank shall refuse to permit an examiner
to make an examination of the affiliate or shall refuse to give any information
required in the course of any such examination, the national bank with which
it is affiliated shall be subject to a penalty of not more than $100 for each day
that any such refusal shall continue. « Such penalty may be assessed by the
•Federal Reserve Board, in its discretion, and, when assessed, may be collected
by the Federal reserve bank by suit or otherwise/ "
Section 29. Section 29 provides for the removal of officers or directors of
national banks under certain circumstances. It is believed that there should
be some means by which in extreme cases unsatisfactory management could
be corrected through the removal of officers and directors responsible therefor.
It is believed, however, that the power of removal should be vested in the
Federal Reserve Board as a whole rather than in a special committee consisting of three officials, one of whom is the person bringing the charges against
the accused officer or director; and, in order to afford adequate additional
protection to the interests of the banks and their officers and directors, certain
other changes in this section should be made. It is, therefore, recommended
that section 29 be amended to read as follows:
" SEC. 29. Whenever, in the opinion of the Comptroller of the Currency, any
director or officer of a national bank, or of a bank or trust company doing
business in the District of Columbia, or whenever, in the opinion of a Federal
reserve agent, any director or officer of a State member bank in his district,
shall have continued to violate any law relating to such bank or shall have




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 422
continued unsafe or unsound practices in conducting tlie business of sucli bank
after having been warned by the Comptroller of the Currency or the Federal
reserve agent, as the case may be, to discontinue such violations of law or such
unsafe or unsound practices, the Comptroller of the Currency or the Federal
reserve agent, as the case may be, may certify the facts to the Federal Reserve
Board. In any such case, the Federal Reserve Board may cause notice to be
served upon such director or officer to appear before such board to show cause
why he should not be removed from office. A copy of such order shall be sent
to each director of the bank affected by registered mail. If, after granting
the accused director or officer a reasonable opportunity to be heard, the Federal Reserve Board finds that he has continued to violate any law relating to
such bank or has continued unsafe or unsound practices in conducting the
business of such bank after having been warned by the Comptroller of the
Currency or the Federal reserve agent to discontinue such violation of law
or such unsafe or unsound practices, the Federal Reserve Board, in its discretion, may order that he be removed from office. A copy of such order shall
be served upon such director or officer. A copy of such order shall also be
served upon the bank of wliicli he is a director or officer, whereupon such director or officer shall cease to be an officer or director of such bank: Provided
however, That such order and the findings of fact upon which it is based shall
not be made public or disclosed to any one except to the officer or director
involved and the directors of the bank involved, and no such finding or order
nor the evidence upon which it is based shall be produced in any court of
law except as evidence to punish violations of law under this section. Any such
director or officer upon whom any such order has been served as herein provided,
and who thereafter participates in any manner in the management of such bank
shall be fined not more than $5,000 or imprisoned for not more than five years,
or both, in the discretion of the court."

Mr. MEYER. Thank you, Mr. Chairman.
The CHAIRMAN. The next witness is Mr. Pole, the Comptroller
of the Currency.
STATEMENT OF J. W. POLE, COMPTROLLER OP THE CURRENCY,.
TREASURY DEPARTMENT, WASHINGTON, D. C.

Mr. POLE. Mr. Chairman and members of the Banking and Cur*
rency Committee; with the permission of the committee, I should
like to confine by remarks to those provisions of the bill which affect
the office of the Comptroller of the Currency with respect to the
responsibilities imposed upon him by law, both in connection with
the operation of the national banks and the maintenance of the system of national banks as an instrumentality of the Federal Government. I shall, therefore, pass over without comment those provisions
of the bill relating to the Federal reserve system and the use of the
facilities of that system by member banks. Although I am a
member of the Federal Reserve Board, my responsibuity in that'
connection is shared by the other members. These questions I leave
to the board. They have already been discussed by the governor.
I am in sympathy with what I conceive to be the general purpose
of this bill, namely, the establishment of a high standard of commercial banking within the Federal reserve system. It seems to me,
however, that there are fundamental practical difficulties in the realization of this objective so long as Congress has legislative control
over only a portion of the institutions which are engaged in the
general banking business. The Federal Government exercises no
control whatever over State banks and trust companies operating on
the outside of the Federal reserve system. It has control over the
banking operations of State member banks of the Federal reserve
system only to the extent that it may set up conditions of member


NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

423

ship in that system. It may restrict the operation of such member
banks, but Congress can not confer upon them charter powers to
bring them within a national operating standard, nor can the Federal Government enforce the State laws against such member banks.
The third class of banks are the national banks which are wholly
under the jurisdiction and control of the Federal Government and
are instrumentalities thereof.
Let us assume for the sake of argument that a high standard of
banking in the United States would require commercial banks to
divorce themselves from all connections with the securities business,
the savings bank business, and the trust company business—and I
take it that this is, in part, one of the underlying purposes of the bill,
particularly with reference to securities: How can Congress make
any such standard fully effective if the standards set up for the
national banks are more severe than can be enforced upon the State
member banks in the Federal reserve system? A national bank can
easily escape the higher standard by taking out a State charter and
still remain in the Federal reserve system. If Congress attempts to
bring the State member bank standard up to the national bank
standard through the imposition of conditions upon membership in
the Federal reserve system, such State member banks can escape that
standard by choosing to operate as State banks on the outside of the
Federal reserve system.
In this connection I wish to direct the attention of the committee
to the fact that whereas the national banks at one time controlled
nearly all of the commercial banking resources of the country, to-day
they hold less than half of it. Within the last few years we have
witnessed one large bank after another giving up its national charter
and taking out a State charter. The motive for thus removing themselves from the direct supervision and control by the Federal Government was undoubtedly to gain, from the standpoint of the bank,
more favorable operating conditions. It is true they have remained
within-the Federal reserve system. New restrictions by Congress
applicable solely to national banks must inevitably accentuate this
movement from national to State bank charters.
Under such conditions we have to face the question of a Federal
Reserve system composed solely of State member banks, with Congress limited in its control over banking operations to setting up
conditions of membership in the Federal reserve system. This
method of control is too weak to furnish the basis for a national
policy in banking. There are two methods of setting up a standard of banking: One is negative by prohibitions upon the exercise
of certain powers, and the other is positive by conferring upon
banks the appropriate powers to conduct a sound banking business.
As to national banks, Congress can legislate with respect to both
of these elements, but as to State member banks it is limited to
the former and must leave to the State legislatures to confcr the
positive powers of banking.
Looking at bankingfrom the standpoint of a national question,
particulariy its essential connection with commerce and industry,
it seems to me that the conclusion is inescapable that Congress
should, if it can possibly do so, have complete control over the charter powers and the Federal Government complete supervision over
the operations of all members of the Federal reserve system, and



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 424

should prohibit commercial banking by banks outside of that system. If that be impossible or impracticable of realization, a bill
of this character, that is to say, a oill which attempts to raise the
standard of banking for national banks alone, will fall short of
its purpose because its provisions can be evaded by banks who
choose to remove themselves from the jurisdiction ox the Federal
Government.
There are many sections of this bill which impose what may be
regarded as burdens upon national banks but not upon State member banks. This is particularly true of those sections which amend
the national bank act, such as restrictions on voting national bank
stock, holding company control over national banks, and the divorce
of national bank affiliates through prohibition of indorsement on
stock certificates of national banks.
Without attempting to submit a complete analysis of the bill, I
should like to discuss some of its provisions. In section 14, which
amends the law respecting loans upon the security of real estate,
there is a provision which makes it mandatory upon the Comptroller of the Currency at the time of each examination of a national bank to revise the appraisal or valuation of all of the real
estate upon the security of which a bank may have made loans.
Furthermore, the comptroller is given the power to order changes
in these loans and to require adjustments to such revised appraisals.
Apart from the question of the legality of reducing the amount of a
loan after it is made and before it is due, theoretically, this may be
considered a sound procedure in that it apparently attempts to provide that such loans shall at all times be properly secured.
The practical difficulty, however, of reappraising twice a year
the vast amount of real estate offered as security for loans made
by national banks seems to me impossible of realization, since the
Comptroller of the Currency has no facilities for making such appraisals and the mere physical performance of the duties imposed by
this provision of examining the various parcels of real estate in
question could not be achieved during the course of examination
of a bank.
Senator GLASS. Apart from the practical operation of a provision
of that sort that is precisely what the comptroller does, and every
examination with respect to collateral loans, is it not?
Mr. POLE. That is true with regard to collateral loans, sir, except
as such collateral may consist of real estate loans.
Senator GLASS. I myself think that the question of practicability
is largely involved there.
Mr. POLE. I think so.
There is another clause in this section which classifies as real estate
those " unsecured loans whose eventual safety depends upon the value
of real estate." The Comptroller of the Currency would have extreme difficulty in attempting to enforce this provision. In my opinion, the language is not susceptible of application to concerte situations and would lead the examiner into all sorts of difficulties, in addition to which the words " whose eventual safety " do not appear to
have any definite, technical, legal meaning; but, if I understand the
thought, certainly almost any unsecured loan in an agricultural community might eventually depend on real estate. This provision




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

425

would unquestionably cause contraction of credit in the agricultural
districts.
In view of the fact that in many States there is no savings bank law
and national banks in these States receive time deposits it will be
necessary for the Comptroller of the Currency under this section of
the bill to set up an eligible list of property and securities for investment by national banks of their time deposits. This procedure
would put upon the Comptroller of the Currency^ a considerable burden of responsibility since it necessarily assumes the ability of the
comptroller to make a selection which will be safe and sound for investment s which deserve the highest protection—an undertaking
which at the present moment seems almost too difficult.
There is a provision at the end of section 14 which requires both
national and State member banks to comply fully with the provisions of this section. If this compliance as to State member banks is
applicable only to that clause of the section requiring such member
banks to report their investments to the Federal Reserve Board, then
all of the other limitations in the section operate against national
banks alone. That is to say, State member banks would not be required to segregate their time deposits and to invest them in real
estate and other property and securities listed by the Comptroller of
the Currency; but if on the other hand all of the provisions of this
section are intended to be made applicable to State member banks,
there would seem to be fundamental difficulties in enforcing those
provisions which imply supervision by the Comptroller of the Currency, such as reappraisement of real estate and setting up an eligible
list for investment of time deposits. Whatever the intention of the
section as now drafted, it would seem unfair to national banks to impose limitations upon national banks which can not be and are not
imposed upon State member banks.
Section 15 contains a clause which auliorizes national banks to engage in all forms of banking business and undertaking all types of
banking transactions which the laws of the State in which the national bank is situated permits to State banks, except in so far as
there may be a conflict with the Federal statute.
This provision, while apparently designed to enlarge the powers
of national banks in order that they may be able to compete with
State banking institutions in each State, would not, it seems to me,
give to the national banks any advantage worthy of consideration,
but, on the other hand, it might permit them to engage in certain
inferior phases of banking which would not be desirable. What
I have in mind is that the standard of the national banks is, as a
rule, higher than that of the State banks, and all of the legitimate
forms of banking operations are dealt with in the national banking
laws. There is, therefore, nothing left in the field of State bank
operations which would be desirable for national banks to have.
It is my view that this clause is based upon the wrong principle.
It would be in the direction of lowering the standard of the national
banks to that of the State banks.
I wish to direct attention also to the great difficulty in supervision
the enactment of this provision would cause. In "each of the 48
State bank jurisdictions it would be necessary for the Comptroller
of the Currency specifically to inform himself of all of those provisions of the State banking law which are not in conflict with the



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 426

national bank act, the Federal reserve act, or other Federal statutes
and to catalogue them as a part of the national banking powers in
each State. It would be necessary for the Comptroller of the Currency to go further and to inform himself accurately of the rules
and regulations of the State banking departments interpreting,
construing, and applying those laws, and in addition to familarize
himself with the decisions of the State courts to the same effect,
otherwise he would not know the exact character and extent of the
charter powers of the banks under his supervision. I am not qualified to pass 0 1 the purely legal criticism of this provision, but it
1
seems to me that these State laws which may thus be applicable to
national banks become, in effect, provisions of the Federal statutes,
otherwise how coulcl the Comptroller of the Currency enforce them
against the national banks in case of violation? We, therefore,
would have, it seems to me, the confusion of enforcing in the Federal
courts what were designed by the State legislatures to be applicable
only to the local institutions. I see endless complications if this
provision becomes a law. There should be no twilight zone in the
supervision of the national banks.
There is a provision in this section which repeals the existing law
which permits national banks to have bond departments which sell
bonds to their customers. This provision, as I understand the bill,
is applicable to national banks alone. The repeal of this charter
power without a corresponding restriction upon State member banks
might cause some national banlcs to give up their charters in favor of
State charters.
I approve of the increase in capital for national banks to a minimum of $50,000.
Senator GLASS. Why does a national bank ever give up its charter
to take a State bank charter!
Mr. POLE. SO that it may have, perhaps, greater ease of operation.
Senator GLASS. And engage in unsafe banking?
Mr. POLE. Well, I would perhaps say more liberal banking in a
good many instances.
Senator GLASS. You said that there is nothing in the State banking requirements that is soundly available to the national bank.
Mr. POLE. I know of nothing that is desirable in the State law that
is not embodied in the national banking law.
Senator GLASS. Then, why should a national bank give up its
charter and go into the State bank business?
Mr. POLE. Greater liberality of powers, sound or unsound.
Senator GLASS. And chiefly unsound, do you think?
Mr. POLE. I would not say so, Senator.
Senator GLASS. I know; but you think so. do you not ?
Mr. POLE. I can not think out loud, sir. [Laughter.]
The CHAIRMAN. I might ask at this time: You say quite a number
of national banks take State charters. Is the reverse true in a good
many instances?
Mr. POLE. Not comparable at all to the number of banks which
have gone out of th© system over the period of recent years.
Senator FLETCHER. YOU mean more have gone out than have
come in.
Mr. POLE. Many more have gone out than have come in.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

427

Senator WALCOTT. Have you any idea of theflightof capital from
the Federal reserve system to the member systems?
Mr. POLE. It has increased, Senator, but I have not the figures
here. If you would like to have them I would be glad to put them
in the record.
Senator WALCOTT. It would be an interesting exhibit to put in the
record, going back over a period of five years by years.
Mr. POLE. Five years by years, giving the amount of capital increase in member banks.
Senator WALCOTT. At the expense of the Federal reserve system.
That gives the amount of capital that has disappeared,flownfrom
the Federal reserve system and taken up State charters.
Senator BULKLEY. You mean national oanking system, do you not \
Senator WALCOTT. Yes.
Mr. POLE. From the national banking system, yes.
Senator WALCOTT. That is the Federal reserve system.
Senator GLASS. There are many State banks that are in the Federal reserve system.
Senator WALCOTT. I am not talking about the national banks; I am
talking about the Federal reserve system.
M r . POLE. Y e s .
Senator WALCOTT.

That is what you are talking about; you are
talking about the national?
Mr. POLE. I am talking about the national system, yes.
Mr. WALCOTT. I am anxious to know how many banks have escaped
from the Federal reserve system. You have that, do you?
M r . POLE. Y e s .
Senator WALCOOT. I

would like that, and then I would like also
the banks that have gone out of the national and become State banks.
Mr. POLE. State member banks?
Senator WALCOTT. State member banks; yes, sir.
Mr. POLE. And State nonmember banks. Yes, I will furnish that.
Senator GLASS. Ten years ago, as I recall, approximately the total
assets of the banks in the Federal reserve system, not simply the
national banks, but the banks in the Federal reserve system, were
about 70 per cent of the total banking assets of the country, as
against about 30 per cent in the State banking system. But that has
been quite much changed in recent years.
Mr. POLE. Yes, it has, Senator.
Senator WALCOTT. Has there been any movement, do you think,
from nonmember to member banks, any increase in membership?
Mr. POLE. Some slight movement.
Senator WALCOTT. Very slight?
M r . POLE. Y e s .
Senator WALCOTT. But more than there have been withdrawals?
Mr. POLE. Banks which have gone out of the system?
Senator WALCOTT. Yes.
Mr. POLE. I should think not, Senator.
Senator WALCOTT. That is wnat I want to see.
Mr. POLE. Yes. I will say that the Federal reserve system is not

losing net resources.
Senator WALCOTT. That is the picture that
accurately.




I

want to get

N A T I O N A L , A N D F E D E R A L R E S E R V E B A N K I N G S Y S T E M S 428

(Thereafter Mr. Pole submitted for the record the following data
and tables:)
COMPTROLLER OF THE CURRENCY,
Washington,
D. C., April lJh 1932.
H o n . FETES NORBEOK,
Chairman
Banking

and Currency
United States

Committee,
Senate,
Washington,

J). C.

DEAR MR. CHAIRMAN: I n accordance w i t h r e q u e s t o f t h e c o m m i t t e e , I a m
sending you h e r e w i t h :
( 1 ) A t a b l e s h o w i n g , b y y e a r s , f o r t h e 1 0 - y e a r period b e g i n n i n g N o v e m b e r
1 , 1 0 2 1 , a n d e n d i n g October 3 1 , 1 9 3 1 , t h e n u m b e r o f n a t i o n a l b a n k s , w i t h
capita), w h i c h h a v e e n t e r e d t h e S t a t e b a n k i n g s y s t e m s .
( 2 ) A t a b l e s h o w i n g f o r t h e 1 0 - y e a r period g i v e n i n T a b l e N o . 1 , b y n u m b e r
and capital, t h e State banks which h a d converted into national banks.
( 3 ) A t a b l e s h o w i n g b y n a m e s , c a p i t a l a n d t o t a l resources, 1 5 2 n a t i o n a l
banks, w i t h r e s o u r c e s o f o v e r $ 5 , 0 0 0 , 0 0 0 each, w h i c h h a v e l e f t t h e n a t i o n a l
b a n k i n g s y s t e m f o r t h e 1 2 - y e a r period b e g i n n i n g 1 9 2 0 .
Information with respect t o the State banks which have become State m e m bers o f t h e F e d e r a l reserve s y s t e m o r h a v e w i t h d r a w n a s S t a t e m e m b e r s i s
not a v a i l a b l e .
V e r y truly yours,
J. W . POLE,
Comptroller.
TABLE NO. 1 . — N u m b e r and capital of national banks which went
liquidation
and converted
into State
banks in {he 10 years
31, 1931
Number Authorized
capital
of banks
Year ended Oct. 31—
1922
1923
1924....
1925
1926
1927

77
73
96
71
92
99

Year ended Oct. 31—Con.
1928
1929
1930
1931

$12,590,000
30,070,000
24,165,000
10,055,000
18,923,300
28,170,000

List

of 152 large
their national

national
charters

1,029

banks
ended

21,835,000*
91,672,50ft
26,622,90028,945,000
293,048,700.

chartered
October

which
31,1931

were

Number Authorized
of banks
capital

liiiii

£§£3852

PP OlCi^OOl

99
139
148
135

Total

Number Authorized
capital
of banks

129
69
29
86
29
30

voluntary
October

Number Authorized
of banks
capital

TABLE NO. 2 . — N u m b e r and capital
of national
conversions
of State banks in the 10 years

Year ended Oct. 31—
1922
1923
1924..
1925
1926
1927

into
ended

Year ended Oct* 31—Con.
1928
1929
1930
1931

25
23
ai
6
457

Total

11,260,000
7,620,000
3,040,000
700,000
101,608,300

banks which have icithin the past 12 years given up
for the purpose of operating
under State
charters

Name and location of bank

State

| Capital

Resources




iiisiniii

JOJJJ-^O t?

New York
do
Pennsylvania...
Ohio
do
New Jersey
California
Michigan
New Jersey
New York

mmmm

Ytar ended Oct. SI, 1927
American Exchange-Pacific National Bank of New Y o r k . . .
First National Bank of A l b a n y . . . . .
West Branch National Bank of Williamsport
Citizens National Bank & Trust Co. of Cincinnati
Fifth-third National Bank of Cincinnati
Merchants & Manufacturers National Bank of Newark . . . .
Commercial National Trust <fc Savings Bank of Los Angeles.
Oriswold National Bank of Detroit
„
American National Bank of Newark
Franklin National Bank of New York

$264,212,000
15,154,000
9,657,00ft
20,330,000
53,527,000.
2a 458,000k
25,116,000
22,733,000
17,662; 000
7,263,000-

NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

429

List of 152 large national banks which have within the past 12 years given up
their national charters for the purpose of operating under State charters—

Continued.

Name and location of bank

State

Capital

Resources

Year ended Oct. 81,1928
Union National Bank of Philadelphia
City National Bank of Holyoke
National Bank of Commerce in Chicago
National Bank of Commerce in Philadelphia
Hamilton National Bank of New York
Bronx National Bank of the City of New York
First National Bank of Bangor
Liberty National Bank of Covington
First National Bank of Columbus
Massasoit-Pocasset National Bank of Fall River
United Capitol National Bank & Trust Co. of New York.
Flushing National Bank, Flushing
National Bank of Rochester
Broad Street National Bank of Philadelphia
National Bank of North Philadelphia
National City Bank of Los Angeles

$,0,0
10 00 0
5 00 0
0,0
800,000
5 00 0
0,0
15 00 0
,0,0
3 00 0
0,0
4 00 0
0,0
3 00 0
5,0
5 00 0
0,0
6 00 0
5,0
50 00 0
,0,0
200,000
12 00 0
,0,0
5 00 0
0,0
7 00 0
0,0
1,000,000

$ 30 40 0
2,4,0
58 30 0
,9,0
77 70 0
,1,0
1,3,0
07 20 0
1,1,0
92 60 0
90 60 0
,8,0
83 50 0
,0,0
56 60 0
,7,0
1,7,0
40 10 0
67 20 0
,5,0
5,4,0
31 40 0
50 00 0
,7,0
2,5,0
25 80 0
1,9,0
22 30 0
68 20 0
,7,0
1,9,0
08 80 0

10 00 0
,0,0
I,500,000
20 00 0
,0,0
40 00 0
,0,0
4 00 0
0,0
10 00 0
,0,0
10 00 0
,0,0
200,000
2,0,0
50 00 0
2 00 0
5,0
3 00 0
0,0
8 00 0
0,0
1,0,0
00 00 0
300,000
4 00 0
0,0
60 00 0
,0,0
4 00 0
0,0
7 00 0
5,0
20 00 0
,0,0
200,000
II,000,000
17 00 0
,0,0
20 00 0
,0,0
10 00 0
,0,0
10 00 0
,0,0
5 00 0
0,0
10 00 0
,0,0
200,000
10 00 0
,0,0
10 00 0
,0,0
12 00 0
,0,0
7 00 0
5,0
10 00 0
,0,0
10 00 0
,0,0
10 00 0
,0,0

2,2,0
30 50 0
1,2,0
45 40 0
2,7,0
17 40 0
1 46 50 0
6,4,0
1,5,0
02 60 0
1 , 5 ; 00
10 2 0
1,5,0
39 00 0
69 60 0
,1,0
6 44 60 0
8,5,0
56 90 0
,3,0
74 70 0
,5,0
16,666,000
2 00 60 0
0,2,0
55 30 0
,0,0
50 20 0
,0,0
2 37 80 0
3,0,0
97 00 0
,5,0
1,7,0
46 90 0
2,8,0
67 00 0
56 60 0
,6,0
2 69 40 0
8,5,0
2,5,0
37 10 0
2,6,0
16 70 0
1,4,0
07 60 0
2,9,0
35 60 0
56 60 0
,1,0
52 80 0
,1,0
51 70 0
,5,0
1,1,0
40 00 0
1,6,0
54 10 0
1,9,0
34 20 0
86 90 0
,7,0
1,8,0
22 50 0
1,9,0
12 70 0
1,5,0
83 10 0

Georgia
New York.
California.,
.do
.do.

10 00 0
,0,0
30 00 0
,0,0
600,000
3 00 0
0,0
20 00 0
,0,0

2,5,0
70 30 0
4,4,0
99 20 0
83 80 0
,5,0
69 50 0
,8,0
2,2,0
02 40 0

Missouri
do
New York
Ohio
New Jersey..
Ohio
Louisiana
Ohio
Missouri
Ohio
New Y o r k . . .
Missouri
California
New Y o r k . . .
California

10 00 0
,0,0
10 00 0
,0,0
25 00 0
,0,0
15 00 0
,0,0
40 00 0
,0,0
5 00 0
0,0
10 00 0
,0,0
10 00 0
,0,0
15 00 0
,0,0
50 00 0
,0,0
40 00 0
,0,0
3 50 0
7,0
3 00 0
0,0
3 00 0
0,0

1,000,000

1,3,0
15 40 0
1,4,0
25 20 0
2,7,0
22 20 0
1 15 40 0
0,2,0
3,7,0
13 20 0
7,2,0
83 30 0
1,6,0
18 30 0
1,8,0
67 10 0
2,2,0
76 90 0
1,6,0
47 50 0
1 16 20 0
2,4,0
6,1,0
86 30 0
54 40 0
,0,0
92 40 0
,2,0
54 00 0
,9,0

Pennsylvania...
Massachusetts..
Illinois
Pennsylvania...
New York
.—.do
.
Maine
Kentucky
Ohio
Massachusetts..
New York
.
do
do.
Pennsylvania*.
do
California

Year ended Oct. 81,1929
First National Bank of Brooklyn
Seventh National Bank of New York
American National Bank of Richmond
Merchants National Trust & Savings Bank of Los Angeles.
Northern National Bank of Philadelphia
National Union Bank of Maryland at Baltimore
Mercantile National Bank in Dallas
First National Bank of Long Beach
National Bank of Commerce in New York
First National Trust & Savings Bank of Whittier
Bloomfleld National Bank, Bloomfield
Old National Bank of Grand Rapids
Nanover National Bank of the City of New York
Third National Bank of Syracuse
Liberty National Bank & Trust Co. of Syracuse.
Chemical National Bank of New York
.
Chapman National Bank of Portland
Louisville National Bank & Trust Co., Louisville..
Merchants National Bank of Detroit
Arcadia National Bank & Trust Co. of Newark
Seaboard National Bapk of the City of N e w York
Merchants-Laclede National Bank of St. Louis
State National Bank of St. Louis
Tenth National Bank of Philadelphia
Community National Bank of Buffalo
Fordham National Bank in New York
Tbamet National Bank, Norwich
Norwood National Bank
City National Bank of San Antonio
National City Bank of Akron
National Bank of Niagara & Trust Co., Niagara Falls
Citizens National Bank of Raleigh
Murchison National Bank of Wilmington...
American National Bank <fc Trust Co. of Greensboro
City National Bank & Trust Co. of Bridgeport

New York
do
Virginia
California
Pennsylvania..
Maryland.
Texas
California
New York
California
New Jersey
Michigan
New York
.do.
.....do . . . . . . . .
do
Maine
Kentucky
Michigan.......
New York
.do.
Missouri
.—.do
.
Pennsylvania...
New York
.do.
Connecticut
Ohio
Texas
Ohio
New York
North Carolina.
do
do
Connecticut

Year ended Oct. 81,1920
Third National Bank of Atlanta
Marchants National Bank of the City of New York.
Security National Bank of Los Angeles
Farmers National Bank of Fresno
Mercantile National Bank of San Francisco

Year ended Oct. 81,1921
National Reserve Bank of Kansas C i t y . . . .
----Midwest National Bank <fc Trust Co. of Kansas City„
Lincoln National Bank of Rochester.
First National Bank of Cleveland
Union National Bank of N e w a r k —
Union Commerce National Bank of Cleveland
Canal-Commercial National Bank of New Orleans
National Bank of Commerce of Toledo
Central National Bank of St. Louis.
National Commercial Bank of Cleveland
Liberty National Bank of New York
National Bank of Commerce of Kansas City.
Union National Bank of Pasadena.
Ridgewood National Bank, Ridgewood
National Bank & Trust Co. of Pasadena.
111161—32—PT 2




14

NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 430
List of 152 large national banks which have within the past 12 years given up
their national charters for the purpose of operating under State charters—
Continued.
Name and location of bank

State

Capital

Year ended Oct. 81,1922
First National Bank of Fresno
First National Bank of BerkeleyFirst National Bank of Bakersfield
Atlantic National Bank of the City of New Y o r k . .
Bank of New York National Banking Association..
National State & City Bank of Richmond

California...
do
do. 4
New York.,
do..
Virginia...

$0,0
50 0
0
3 00 0
0,0
4 00 0
0,0
10 00 0
,0,0
20 00 0
,0,0
10 00 0
,0,0

Year ended Oct. St, 1928
Merchants National Bank of San Diego
California
Lowry National Bank of Atlanta
Georgia
Irving National Bank, New York
New York
Bank of North America, Philadelphia
Pennyslvania...
Merchants National Bank of San Francisco
__ California
First-Second National Bank of Akron
Ohio
Importers and Traders National Bank of New York
New York
Merchants National Bank of Raleigh
......
North Carolina.
Luzerne County National Bank of Wilkes-Barre.
Pennsylvania...
Battery Park National Bank of New York
New Y o r k . . .
American National Bank of San Francisco
California
Ninth National Bank of Philadelphia
Pennsylvania...

2 00 0
5,0
10 00 0
,0,0
1,0,0
25 00 0
20 00 0
,0,0
15 00 0
,0,0
15 00 0
,0,0
15 00 0
,0,0
3 00 0
0,0
4 00 0
0,0
15 00 0
,0,0
20 00 0
,0,0
5 00 0
0,0

Year ended Oct. 31,192J
Fourth National Bank of Cincinnati
Wells Fargo National Bank of San Francisco
National Exchange Bank of Baltimore
..
Lafayette National Bank of Buffalo
Continental National Bank & Trust Co. of Kansas City
Northern National Bank of Toledo
Long Beach National Bank, Long Beach
Second National Bank of Toledo
.
Corn Exchange National Bank of Chicago

Ohio
California
Maryland...
New York..
Missouri
Ohio
California
Ohio
Illinois

5 00 0
0,0
60 00 0
,0,0
1 5 00 0
> 0,0
10 00 0
,0,0
5 00 0
0,0
10 00 0
,0,0
200,000
10 00 0
,0,0
50 00 0
,0,0

California..
New York..
-doMassachusetts..

10 00 0
,0,0
12 00 0
,0,0
15 00 0
,0,0
10 00 0
,0,0

Year ended Oct. SI, 1925
First National Bank of Oakland
Fifth National Bank of the C i t y of New York.,
Gotham National Bank of N e w York
National Union Bank of B o s t o n . .
Year ended Oct. SI, 1926
Manufacturers <fc Traders National Bank of Buffalo
Coal & Iron National Bank of the City of N e w York
First National Bank of Hammond
Planters National Bank of Richmond
,
Norwood National Bank of Greenville
National Exchange Bank of Providence
....
First National Bank of Jamaica
City National Bank of Plainfleld
State National Bank of North Tonawanda
Phoenix National Bank of Hartford
National Exchange Bank of Lockport
Second National Bank of Hoboken
First National Bank & Trust Co. of Utica
National American Bank of N o w York
National Butchers <fc Drovers B a n t of the City of N e w
York.
Year ended Oct. 31,1930
Textile National Bank of Philadelphia
Peoples-First National Bank of Charleston.. . .
City National Bank & Trust Co. of Dayton
Exchange National Bank of Little Rock
Kalamazoo National Bank & Trust Co. of Kalamazoo""
National Bank of Baltimore
North Ward National Bank of Newark"
National City Bank of St. Louis
Central National Bank of the Citv of New York
Utica National Bank & Trust Co." of Utica
National Security Bank <fc Trust Co. of P h i l a d e l p h i a : : : : : : !
Columbia National Bank of Columbia.
American National Bank & Trust Co. of Mount V e r n o n " "
Peoples National Bank of E l i z a b e t h . . . .
'
Farmers & Merchants National Bank, Baltimore"
Drovers & Mechanics National Bank, Baltimore
Broadway National Bank
Trust Co. of N e w York
Chester National Bank of Chester .
^ o w x WJS




M

20 00 0
,0,0
15 00 0
,0,0
2 00 0
5,0
10 00 0
,0,0
2 00 0
5,0
12 00 0
,5,0
200,000
1 00 0
5,0
600,000
10 00 0
,0,0
3 00 0
0,0
7 00 0
0,0
12 00 0
,5,0
10 00 0
,0,0

New York,
do..
Indiana
Virginia
South Carolina..
Rhode Island...
N e w York
N e w Jersey
N e w York
Connecticut.....
N e w York
N e w Jersey
N e w York
.
—.do
do..

2,000,000

Pennsylvania...
South Carolina..
Ohio
Arkansas
Michigan
Maryland
New Jersey
Missouri
N e w York
-—do
Pennsylvania...
South Carolina..
N e w York
N e w Jersey
Maryland
do
N e w York
Pennsylvania...

5 00 0
0,0
10 00 0
,0,0
7 00 0
5,0
4 00 0
0,0
5 00 0
0,0
15 00 0
,0,0
4 00 0
0,0
10 00 0
,0,0
25 00 0
,0,0
7 00 0
5,0
4 00 0
0,0
5 00 0
0,0
5 00 0
0,0
3 00 0
0,0
6 00 0
5,0
10 00 0
,0,0
20 00 0
,0,0
3 00 0
0,0

NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

431

List of 152 large national banks tchich have toithin the past 12 years given up
their national charters for the purpose of operating under State charters—
Continued.
Name and location of bank
Year ended Oct. Si,

State

Resources

mt

Dallas National Bank of Dallas
First National Bank of Davenport.
Seward National Bank & Trust Co. of N e w York
American National Bank of Jamestown
Straus National Bank & Trust Co. of New York
National Bank of the Republic of Chicago
Engineers National Bank of Cleveland

N e w York
do
do
Illinois
Ohio
Number

1920
1921
19221923.
1924
1925
1926
1927
1928
1929
1930
1931

-

-

$500,000
400,000
2,000,000
300,000
2,000,000
11,000,000
1,000,000

$5,oS8,000
5,863,000
• 7,378,000
6,065,000
13,570,000
137,856,000
10,861,000

!

Capital

Resources

5
15
6
12
9
4
15
10
16
35
18
7

Recapitulation b y years of 152 banks

Total

Capital

$6,900,000
24,975,000
5,200,000
24,950,000
16,700.000
4,700,000
13,450,000
20,250,000
15,100,000
82,850,000
14,950,000
17,200,000

$112,562,000
538,978,000
137,3SOfOOO
500,794,000
310,956,000
73,755,000
241,582,000
456,112,000
222,230,000
1,966,789,000
195,504,000
196,1S4,000

152

247,225,000

4,952,836,000

Mr. POLE. Yes. Shall I go on?
The CHAIRMAN. These interruptions are only by your permission.
Mr. POLE. That is all right, Senator. I am very glad to have
you conduct the hearing in any way you want to.
In the matter of the divorce of security affiliates of national banks
by making unlawful the indorsement on the national bank certificate
and unlawful also the trust agreement conditioning the sale, it seems
to me that a distinction should be made between affiliates engaged
in the business of buying and selling investment securities and other
corporations not primarily concerned at all in the securities business.
The attention of the committee is directed to the fact that this
provision is a restriction upon the affiliates of national banks alone
and has no application to State member banks.
Section 18: This section so far as national banks are concerned
is supplementary to section 17 in that it prevents an interlocking of
personnel with an affiliate. It is, however, applicable to both
national and State member banks. In my opinion^ the language,
especially of subsection " C " where the term ima corporation
organized for any purpose whatsoever " appears, is too broad. It
would apparently embrace banks and trust companies, which, I
feel sure, is not intended by the bill.
Section 10: This section denies the right of a shareholder of a
national bank to vote unless he actually^ owns the stock and has
acquired it through bona fide purchase, gift or inheritance. There
may be other ways of becoming a bona fide owner of bank stock,
such as by exchange or by stock dividends, in which case such a
shareholder could not vote under this bill. This section also denies




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 432

the right to any owner of more than 10 per cent of any national
bank stock to vote the same at all unless he be an individual or
complies with the provisions of section 20 of the bill. The committee doubtless has given consideration to the disfranchisement of
stockholders of national banks which happen to be corporations,
associations, or partnerships, but which have no interest in operating
a chain of a group of banks.
Senator GLASS. Why haven't they an interest if they own considerable stock in the bank?
Mr. POLE. Senator, there might be stockholders who are steel and
industrial corporations, trust companies, banks, and all manner of
corporations which might own more than a 10 per cent interest in
a bank.
Senator GLASS. They are interested in the operation of the bank?
Mr. POLE. Yes; but they can not vote if they have more than 10
per cent of the stock unless they comply with a number of the provisions which are set out in section 20 of the bill.
Senator GLASS. That is a rare incident in banking business ?
Mr. POLE. Not at all, Senator. Not rare; not so rare.
Senator GLASS. YOU mean the steel corporations and the other
corporations are acquiring ownership of banks?
Mr. POLE. And a great many savings banks.
Senator GLASS. All right; go ahead.
Mr. POLE. Attention is particularly directed to the fact that this
section is a restriction upon national bank members of the Federal
reserve system only and does not apply to State member banks.
This is true also of section 20, which places restrictive regulations
and reserve requirements upon group bank holding companies which
have national banks in their groups. These two sections as they
stand would undoubtedly lead to the withdrawal of the great volume of resources now held by national banks in group bank organizations from the national system for the simple reason that any
such group organization can escape these burdens by becoming a
State tank and still remain within the Federal reserve system.
Senator GLASS. YOU think that group banking is a wholesome
system of banking then, do you ?
Mr. POLE. I have never been in favor of it, Senator, except that,
as I have said, before it is legislated against, some provision should
be made for that large amount of capital which is invested in group
banking, and that group banking has been extremely beneficial in
a number of sections of this country.
Section 21 contains the branch banking provisions of the bill, but
permits national banks to establish branches only in those States
where the State law permits it and only to the extent permitted by
such State law except for the proviso for a 50-mile extension beyond
State lines in certain cases. In my judgment, this section will accomplish little or nothing in the way of branch banking, since only a
few States permit state-wide branch banking. The particular need
for branch banking by national banks is in those States which do
not permit branch banking to the State banks. There is a cryin«r
need for banking facilities which can be given by strong city banks
in the rural communities of the United States. I know of no othersound solution of the rural bank question.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

433

I need not dwell upon this matter since I have expressed my
views at length both before this committee and before the House
Committee "on Banking and Currency, but I may add that subsequent events have only confirmed me in the recommendations I made
for wider branch-banking facilities, in my reports to Congress for
the years 1929, 1930, and 1931.
I 'wish to call the attention of the committee to the fact that the
pi'ovisions in section 2o amending section 5200 of the Revised Statutes restricting loans to securities dealers, and so forth, apply as
restrictions only upon national banks and do not restrict State
member banks.
With respect to the provisions of section 27 which provides for
an examination by the Comptroller of the Currency of affiliates of
national banks, attention is directed to the requirement for publication of the portfolio of such affiliate as a penalty for excessive
borrowing from any bank but no corresponding requirement for
publication is contained in section 9 requiring the report of the
affiliates of State member banks to the Federal Reserve Board.
I most heartily approve of section 29, which provides for the removal of bank officers for persistent violation of law or' continued
unsound banking practices. I think the mere granting of this power
to the reserve svstem and the Comptroller of the Currency will be
sufficient to make unnecessary the exercise of it and will have a
wholesome effect upon the wholefield'of governmental supervision
over members of the Federal reserve system.
That concludes my statement, Mr. Chairman.
The CHAIRMAN. Thank you, Mr. Pole. Do any members of the
committee want to ask any questions?
Senator GLASS. I do not.
Senator BROOKHART. Yes; I do. You mentioned the matter of
credit in the agricultural districts. I found in my State and in Illinois and Indiana and several other States, in the agricultural sections, that the national-bank examiners for many years have been
cautioning banks against loans to farmers; said to them, " They are
not liquid." Was that a general policy of your department?
Mr. POLE. I would say by no means, Senator. We must always
remember that a bank lias two classes of customers, depositors and
borrowers. The depositors, for the most part, put their money in
banks on demand, and if that money is loaned out on slow assets, and
unusual demands are made it becomes impossible for the banks to
liquidate their loans fast enough to meet that demand. Therefore, it
is necessary that a bank should confine certain of its investments to
more liquid securities than farm loans.
Senator BROOKHART. Then you did caution against the agricultural loans in that way, some of your bank examiners?
Mr. POLE. NO. The examiners have that general knowledge that
a bank must have a certain ratio of liquidity; no general instructions
to that effect.
Senator BROOKHART. Well, there was a general caution against
loai^s to farmers; that is, for production purposes also?
Sir. POLE. I know of nothing like that, Senator. I do not think
you can have any concrete evidence of the existence of any such
regulation as that.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 434

Senator BROOKHART. I can bring you some concrete evidence of it,
and plenty of it, that it was done by the examiners and quite generally. For instance, one of the best known bankers of my State was
cautioned by the national bank examiner against loans to farmers to
such an extent that hefinallytold the examiner to go to hell, and at
the same time went ahead with his farm loans. All the time the bank
examiner was approving the investment in these listed bonds from
New York—that was good banking. He bought about $125,000 of
these bonds, which was not much for his bank, considering the size
of it. But after he bought these bonds they depreciated, as all the
other bonds did, more than the farmers' paper did. Then the bank
examiners came around demanding that he charge off those bonds
or set up a reserve against tlieni, and he told them to go to hell again.
Now, I know that instance.
Senator GLASS. He must have gone to school with that New York
banker that told the Federal Reserve Board to go to hell.
Senator BROOKHART. That is only one of many instances that were
brought to my attention. And how many banks failed with frozen
farmers' assets ?
Mr. POLE. Well, of course, all the country banks have more or less
of it.
Senator BROOKHART. Four orfivethousand of them?
M r . POLE. Yes.
Senator BROOKHART.

And then later the frozen assets were these
listed bonds.
Mr. POLE. That is perfectly true.
Senator BROOKHART. And for a time banks were closed 011 that.
Mr. POLE. A great many banks have been affected through the
depreciation in bonds.
Senator BROOKHART. Then you did approve the investment in
those listed bonds everywhere ?
Mr. POLE. Well, Congress did that, not we.
Senator BROOKHART. What did Congress say about it? What law
was that ?
Mr. POLE. Section 2130, in giving national banks the right to invest
in securities of a certain character.
Senator BROOKHART. Congress did not express any preference for
those over loans to farmers, though, did it ?
M r . POLE. NO.
Senator GLASS.

section 5136?

M r . POLE. Y e s .
Senator GLASS.

That was the amendment in the McFaddcn bill to

It is right interesting to me that the State of the
Senator who was most vehement in favor of that suffered almost the
entire collapse of its banking system.
The CHAIRMAN. May I ask what was your attitude, the attitude of
your department, toward that legislation when it was pending, the
McFadden bill?
Mr. POLE. We were in favor of it. As a matter of fact, it was
really legalizing something which had already been engaged in.
Senator GLASS. Legalizing a bad practice that had already been
engaged in, was it not?
Sir. POLE. That practice, Senator.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

435

The CHAIRMAN. AS I recall, a good many Members of the Senate
voted for the bill because they thought you recommended it; I mean
your department.
Mr. POLE. I do not know whether our department had very much
to do with that.
Senator GLASS. And hundreds of banks have failed because of it,
have they not, recently, in the last two years ?
Mr. POLE. Hundreds of banks, Senator, have been very materially
affected by it.
Senator GLASS. Yes.
Senator BROOKHART. NOW, the destruction of these banks because
of frozen farmers' paper creates this demand for branch banks that
you recommend in those communities?
Mr. POLE. Not at all. I should say that the branch banks would
probably made more judicious loans, but not necessarily more restrictive where credit was warranted.
Senator BROOKHART. Has not this restrictive policy had about as
much to do as anything else with reducing farm prices and land
values and bringing about agricultural def>ression long ahead of
the other depression?
Mr. POLE. YOU are assuming something that does not exist, Senator, when you speak of restrictive policy. There is no restrictive
policy by the comptroller's office. There has been a most lenient
policy, probably too lenient in a great many instances.
Senator GLASS. Certainly so, is it not?
Mr. POLE. That is certainly so.
Senator BROOKHART. I would like to see what you call restrictive
then, see what it would look like. There was 55 years when there
was not any of these restrictions or troubles for farmers to get loans.
Farmers' paper was the best the banks could get.
M r . POLE. Y e s .
Senator BROOKHART.

And then this lenient policy of yours came
along and the farmer can not get anything andfivethousand of his
banks have been closed because of his frozen paper.
Mr. POLE. Senator, I can assure you that the comptroller's office
has gone just as far in that direction as it can with safety, having in
mind the interests of the creditors of the banks. We must not
forget them.
Senator BROOKHART. Well, you have ruined the depositors in the
banks by closing the banks too. If the farmers had been able to
pay, why, there would have been no trouble with the depositors
getting their money.
Mr. POLE. Senator, I will have to differ with you on that. We
closed very few banks. They closed themselves. The depositors
closed them. Very few banks the comptroller's office closed. We
encourage them in every way and do anything we can to keep them
from closing, even to going up to the Reconstruction Corporation.
Senator BROOKHART. That is a new thing, the Reconstruction Cor%
poration.
Mr. POLE. That is a new thing; but when the Reconstruction Corporation was not there, we went to the Federal Reserve Bank with
them or to their correspondents. We acted as doctors and wet nurses
for them.
Senator BROOKHART. But they closed just the same?



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 436

Mr. POLE. They closed themselves.
Senator TOWNSEND. I recall some of the witnesses who testified
here and indicated that any legislation of this time might be detrimental to the banking interests of the country. What is your judgment on that?
Mr. POLE. I think decidedly to the contrary; that it would be
extremely helpful at this time. In fact, I should say that if Congress
would amend this provision of Section 21, I think it is, which has
to do with branch banking, leaving the section just as it is, with
the amendment " regardless of whether or not the States permit it,"
it would enable the strong banks to give relief and extend their
facilities to the rural communities, which would be of invaluable
assistance to the country.
Senator GLASS. Are you satisfied, Mr. Pole, that the decisions of
the courts certainly make that constitutional?
Mr. POLE. I have been so advised, Senator.
Senator GLASS. I put into the record when we had the prolonged
hearings last year a summary of court decisions prepared and given
to me by Mr. Collins, formerly deputy comptroller, and I would
judge from this summary that it would be entirelv within the province of Congress to authorize state-wide branch banking regardless
of the laws of the States.
Mr. POLE. I have been advised so by what I regard as first-class
authority.
Senator GLASS. But you can not give us any guarantee that Congress would accept our view of it, can you?
Mr. POLE. I am afraid I can not do that. I think we could make
an effort, however.
Senator GLASS. A S well organized as the effort has been to tear
this bill down?
Mr. POLE. I think there is a lot of support for that kind of legislation, because there are a great many thinking people who realize
that something has to be done for tne banking system, something
more than this. We have to protect the rural communities. That is
what we are not doing now.
Senator GLASS. I am very sorry you were not a tutor at the night
school, because all of the testimony that we have heard here except
Governor Meyer today has been to the effect that it would be a fearful thing to enact any legislation at all at this particular time.
Mr. POLE. I think it would be a very good thing. I am not saying
there should be any disturbing or drastic legislation, but I do say
legislation of proper character would be immensely helpful.
Senator TOWNSEND. DO you agree with the recommendations as
made by Governor Meyer ?
Mr. POLE. There were no recommendations made with respect to
branch banking in that bill, Senator.
Senator TOWNSEND. With the recommendations that he made here?
Mr. POLE. I am a member of the board and subscribed to those
recommendations.
Senator GLASS. Then it is no use to catechize you on any particular
one of them?
Mr. POLE. NO. Those recommendations represent, my views.
Senator GLASS. YOU had some differences m the board and reconciled them?



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

437

Mr. POLE. Yes. There was much argument.
The CHAIRMAN. A pretty good conclusion reached in most of it?
Mr. POLE. In the main I was quite satisfied. That is the kind of
night school we have been to.
The CHAIRMAN. It is a different one from the ope that we heard
about.
Mr. POLE. A little different, I imagine.
Senator GLASS. YOU did not decide one hour that you did not
understand the bill at all and the next hour were so confident that
you thoroughly understood it that you deluged the country with
telegrams to kill it, did you?
Sir. POLE. NO; we did not send out many telegrams, Senator; not
any, in fact. We thought there was enough interest in the bill.
The CHAIRMAN. If you have concluded your statement and there
are no further questions to be. asked by members of the committee,
we will conclude the hearings for the day and meet in the room of
the Banking and Currency Committee to-morrow we will conclude
the hearings on this bill.
(Accordingly, at 5:30 o'clock p. m., the committee adjourned, to
meet at 10.30 o'clock a. m. of the next day, Wednesday, March 30,
1932, in committee room, 303 Senate Office Building.)







OPERATION

OF T H E

RESERYE

NATIONAL

BANKING

AND

FEDERAL

SYSTEM

W E D N E S D A Y , M A R C H 30, 1932
UNITED STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY,

Washington, D. C.
The committee met at 10.80 o'clock a. m. in room 303, Senate Office
Building, pursuant to adjournment on yesterday, Senator Peter
Norbeck, presiding.
Present: Senators Norbeck (chairman), Brookhart, Goldsborough, Townsend, Walcott, Fletcher, Glass, Wagner, Barkley,
Bulkley, and Costigan.
The CHAIRMAN. The committee will come to order.
Senator GOLDSBOROUGH. Mr. Chairman, if it is in order, I should
like to present for the record at this time the following telegram
[reading]:
Pmixirs

BALTIMORE, MD., March

22,

1932.

L E E GOLDSBOROUGH,

Senate Office Building:
At a meeting held this date of all members of Federal reserve system in
Baltimore, it was the unanimous opinion that the enactment of the proposed
Glass bill is most inadvisable and highly undesirable at this time.
CHARLES E . R I E M A N ,

President Baltimore Clearing House.

Also a letter from Charles E. Rieman, president of the Western
National Bank of Baltimore treading]:
Senator

MARCH 22,

1932.

PHILLIPS LEE GOLDSBOROUGH,

United States Senate, Washington, D. C.
There is so much in the bill introduced by
Senator Glass, of Virginia, as a revised edition of his earlier bill Senate 4115
that it is impossible to thoroughly tracc out its consequences if enacted, so
I can only attempt to present some of the salient features for your consideration.
I wish to say, however, that this afternoon I called a meeting of the banks
in Baltimore, which are members of the Federal reserve system, and the
provisions of the bill were reviewed, with the result that, by unanimous opinion,
it was held that it would he ill advised and undesirable to enact the bill.at
this time. I am inclosing you a copy of the resolution.
Every phase of banking is sensitive enough now without imposing regulation by statute on banking practices, which are part of our national development and sound if not overdone or abused, but, when entirely prohibited by
law, destroys the exercise of good judgment so needed to extricate the banking
situation from its present condition. I refer to the new limitations on loans
to the public and accommodations from the reserve banks; and, further, the
drive in tlie bill against loans secured by stocks and bonds will surely depress
the market for securities, if it becomes law. No matter what the ultimate
aim of the provisions of the bill may be, values and credits are too sensitive
DEAR

SENATOR GOLDSBOROUGH;




439

NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 440
now to attempt radical regulations in our banking practices. (This does not
preclude constructive legislation.)
To refer specifically to the bill, I wish to say iirst that I have always admired Senator Glass in his determined stand for protection of the Federal
reserve system, but he now offers numerous amendments to the Federal reserve
act to use the Federal reserve system to correct evils which have been practiced
by some member banks, but many have not. The bill contains no provisions to
encourage membership in the Federal reserve system or check the tendencies
which lead to loss in membership. From March, 1029, to December 31, 1931,
the system lost 1,509 member banks, and if I am not greatly mistaken some of
the regulations in the proposed act will accelerate the loss in membership and
resources.
All that part of the bill dealing with atiiliates appears very complete to render them harmless, but it may be better simply to prohibit member banks from
having atiiliates at some future date when the country emerges from this present
depression.
The amendment to the Federal reserve act by inserting the new section 12-B,
which creates the Federal liquidating corporation, I believe to be a very unwise
provision. Such a corporation as it creates should not be incorporated into the
Federal reserve system, and there are many provisions in connection with this
that certainly are very undesirable on the part of well managed member banks.
Section 24 regulates the amount of interest to be paid on deposits and this
will absolutely work against the best interests of member banks. While the
rates allowed appear to be ample at this time, yet the competition between
State bank institutions and member banks have savings departments which
pay over 3 per cent interest, and if the rate were cut to 3 per cent, millions of
deposits may be expected to go over to the State nonmember banks, and this
is no time for wholesale shifting of deposits; besides, the rate of interest on
deposits is largely an administrative matter and not one to be incorporated
into law.
The amendment to section 24 of the Federal reserve act in reference to realestate loans and controlling the amount of investment in the banking premises,
of course, has its merit for the future, but there are member banks at this time
which would be very much embarrassed by this amendment, owing to the amount
invested in their banking premises, and the effect would be very disastrous, as
there is a very thin market everywhere in the country now for real estate
of any size.
Tlie amendment to national bank act, .section alriS, requiring national banks
to place their shares on $100 par value within the period of two years is uncalled for now. While I believe the practice of splitting the par value of
shares up for the purpose of advancing prices is wrong, yet the damage has been
done in this respect, and the amendment should only prohibit reducing the par
value of shares below $100 in the future. There are many national banks
having shares of a par value of $10, $20, $30, ami $40 which have been outstanding for over 50 years, and it would be very disturbing to the stockholders
of these banks to make an adjustment, and many would be forced to sell their
small holdings.
*
The amendment to section 13 of the Federal reserve act discriminating against
15-day loans of member banks will be a great hardship on member banks for
quick short-time loans for daily settlements, and it will also handicap the banks
in participating in future Government issues.
The amendment to section 10 of the Federal reserve act altering the rate of
reserves against deposits certainly is one which deserves more studv, and the
regulation affecting the transfer of credits with reserve banks mav serve a
purpose at certain times and in certain localities, but ordinarily to handicap a
bank in the free use of its excess funds at the seserve banks will unquestionably disrupt long-established practice between banks in settling their debits
and the accommodation to their customers.
The amendment to national bank act, section 5255, in reference to branch
banking does not go far enough. If it is desirable that national banks can
have state-wide branch banking in one State, it applies to all States, and if
there ever was a need for branch banking it is now, which should be developed
under Federal laws and not under State laws. This is the one item in the whole
bill that is in the nature of constructive legislation but falls short of nationwide benefit
All of the above points will go a long way to discourage membership in the
Federal reserve system, and all those requirements in respect to loans secured
by stocks and bonds will have a serious effect, as stated above, on the market




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

441

value of the securities. (The mere consideration of this bill has, no doubt,
had an effect on the market.) The enactment of the regulations in this bill
would cause such a disturbance in the banking relations at this time, when
everything is at a high tension, that the effect would be very unfortunate.
The inclosed resolution shows you how the Baltimore bankers regard the
enactment of this bill at this time, and I trust that you will use your utmost
efforts to prevent its passage.
Very truly yours,
President.

CHARLES E . R I E M A N ,

BALTIMORE, MD., March

22,

1932.

At a meeting held this date of all members of Federal reserve system in
Baltimore it was resolved that it was the unanimous opinion that the enactment
of the proposed Glass bill is most inadvisable and highly undesirable at this
time.
CHARLES E .

RIEMAN,

President Baltimore Clearing Home,
Acting Chairman.
Banks present: National Central Bank, National Marine Bank, First National
Bank. Western National Bank, Ralto-Commercinl Bank, Baltimore Trust Co.,
Maryland Trust Co.

Also a letter from Mr. Waldo Newcomer, of Baltimore [reading] :
MARCH 2 1 ,
Hon. P. L.

1032.

GOLSBUROUGH,

United States Senate, Washington, D. C.
I thank you for the copy of the revised Glass
bill, which I have read and think it is an improvement over the original.
I would, however, like to call your attention to a few details, which may
be all right in the bill, but I think should be checked.
Page 7, lines 24 and 25: Should the words " o r affiliate" be added?
Page 9. line 1 : Should the words " or affiliate " be added?
Page 31, line 3, section ( f ) : What effect will this have on the practice in
Baltimore where banks who are members both of the clearing house and of the
Federal reserve clear for nonmembers of the clearing house and for clearing
house members who are not members of the Federal reserve system?
Page 32, lines 16 to 20: It looks to me like this provision was extremely
wide. It would allow a Baltimore bank to make loans on real estate in South
Carolina. Was this intended?
Very truly yours,
DEAR SENATOR GOLSBOKOUGII :

WALDO

NEWCOMER.

The CHAIRMAN. Ourfirstwitness this morning will be Mr. James
Francis Burke, general counsel of the Pittsburgh Clearing House
Association and a former member of the House Committee on
Banking and Currency.
STATEMENT OF JAMES FRANCIS BURKE, GENERAL COUNSEL OF
THE PITTSBURGH CLEARING HOUSE ASSOCIATION, PITTSBURGH,
FA.. AND A FORMER MEMBER OF THE COMMITTEE ON BANKING
AND CURRENCY OF THE HOUSE OF REPRESENTATIVES

Mr. BURKE. Mr. Chairman and gentlemen of the committee, I
wish first to present the formal resolution adopted by the Pittsburgh
Clearing House Association on Monday, March 28, 1932, and ask
that it be made a part of the record [reading] :
Resolved, That we convey to the Banking and Currency Committee of the
United States Senate and to the Members of the Senate and House of Representatives our earnest protest against the approval and enactment of Senate
bill 4115. known as the Glass banking bill, upon which hearings aire now
being held by said committee. .
For the following and many other reasons we regard its enactment at any
time, and particularly at this time, as unwise and unnecessary:




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 442
First. The present agitation or enactment of legislation based upon thetheory that our banking system is so defective in structure or so weak in
resources as to justify the radical changes proposed in this bill, is certain,
to create apprehension at a time when assurance and encouragement are
most needed.
Second. The dissemination of any such disturbing theory during the present
period of earnest effort upon the part of the Government and the business
world to reestablish stability and confidence can not fail to nullify to a
large extent the beneficial results of recent legislation brought about by the
commendable cooperation of the executive and legislative branches of the
Government and both political parties in the Congress and its prompt acceptance and approval by the banking and business world generally.
Third. One of the fundamental purposes of the Federal reserve system being
to decentralize authority and impose regional responsibilities upon those whose
duty it is prudently to administer the banking business throughout the country, we believe it unwise to deprive the directors in the various Federal
reserve districts of discretion and responsibility to the extent that this bill
would do so.
Fourth. We are convinced also that the unprecedented centralization of authority in the Federal Keserve Board at Washington is certain to weaken,
rather than strengthen, the banking structure, in addition to being in direct
conflict with the constantly increasing opposition of the American people
to the further absorption of local powers and the assumption of purely local
responsibilities by the Federal Government.
Fifth. We believe that the curtailment of the present privileges of banks
to use their funds in connection with transactions in securities is not only
In conflict with normal and well-established methods of sound banking but
will inevitably affect the marketability and value of Government securities
and ultimately compel banks, in order to subsist, to resort to higher rates of
interest 'on loans and lower rates of interest on deposits, and thus adversely
affect business generally.
Sixth. We believe that the restrictions made possible under the provisions
of this bill, in the matter of ownership of securities by member banks, regardless of the time limit within which divestment must be made, creates
such apprehension and uncertainty as inevitably to compel the sale of large
volumes of securities at a time when further enforced deflation would seriously retard business recovery.
Seventh. The result of increasing the reserves of member banks beyond their
normally safe requirements, whUe adding nothing to the soundness of member
banks, can not fail to be detrimental to business generally.
Eighth. To abruptly enforce complete separation of affiliates by memberbanks would result in widespread liquidation of securities at a time when
the market is not prepared to absorb them. This, in turn, would impose unnecessary losses upon holders of securities throughout the country.
Ninth. Furthermore, to enact a law which would create uncertainty as to>
when such separation might be required would have a tendency to undermine
confidence among member banks and inevitably induce them to divest themselves of securities lest they be suddenly called upon to do so at a more
inopportune time.
Tenth. The limitation of the right of national banks to own real estate ormake real-estate loans, would not only bar many member banks from making
many legitimate and safe loans on real-estate securities, but where banks are
undercapitalized or carry a small volume of time deposits, it would compel,
calling in the loans now outstanding, and in some cases actually require banks
to sell their bank premises and acquire or rent others. This would work
hardship upon stockholders and borrowers alike and induce further disastrous,
deflation of real-estate and security values generally.
Resolved, That a copy of these resolutions be presented to the Banking arnL
Currency Committee without delay.

Mr. BURKE. Inasmuch as this resolution practically traverses thepoints that have been made here by various witnesses who have preceded me I will not trespass upon the time of the committee for any
extended statement, but for a moment I should like to say a word,
on two phases of this proposed legislation:
First, on the question of the necessity for any such legislation; and.
Second, on the question of its timeliness.



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

443

I have a very deep-seated interest in the Federal reserve system.
I have just as deep-seated an interest in the reputation and distinguished record of Senator Glass, with whom I had the pleasure to
serve for many years on the Banking and Currency Committee of
the House of Representatives and during the time when we were
framing the Federal reserve law; likewise with Senator Bulkley,
of Ohio.
Senator GLASS. And incidentally you opposed it.
Mr. BURKE. I did not incidentally oppose it. I opposed it as a
main fact. I did oppose the original Federal reserve bill that was
sent to us as members of the Banking and Currency Committee of
the House and upon which we held on hearings in the committee.
Senator GLASS. Oh, we held hearings for three months.
Mr. BURKE. Yes; of course, subsequently we did hold hearings.
But I opposed it at that time because there were vital features of
the bill which I regarded as not constructive, not helpful to the
banking interests or the business interests of the country.
Senator GLASS. And which were written into the bill and were
never changed.
Mr. BURKE. Senator Glass, it is very true that there were many
features of the original bill which were retained. At the same time
there were many features of the original bill that were stricken out,
and I will say that that bill was seriously modified as a result of
hearings held in this very room.
Senator GLASS. There were not many changes made. There were
some dotting of i's and crossing of t's, but not a fundamental provision of the bill was changed.
Mr. BURKE. Well, of course that is a matter of opinion, and you
are entitled to your opinion, and I have great respect for it.
Senator GLASS. N O ; that is a fact. It is not a matter of opinion,
but a matter of record.
Mr. BURKE. Be that as it may, the Federal reserve system has been
in vogue now for a period of 19 years.
Now, as to the question of necessity. To my mind it has grown
to be the most efficient banking structure in the world. At the issuance of the last statement it had $5,342,000,000 of reserves. And now
taking your statement alone, Senator Glass, that it was given very
mature consideration by the Senate and the House at the time of
its original enactment, let me say that the bill subsequently was rewritten in certain measures in 1916, when the 15-day rule was written
into it, and it was subsequently amended
Senator GLASS (interposing). You do not mean that it was rewritten but that it was amended.
Mr. BURKE. Well, let us call it that; and it was amended in
1917, when additional changes were made, with the result that the
Federal reserve act of to-day is not the outgrowth of the single
impulse and the limited thought that was given to the original
measure, but is the result of the experience of years, and of the
devoted study of gentlemen like yourself.
Now, in addition to that, I will say that the Federal reserve
system has justified its existence. It has been a matter of open
boast before the public of this country by vour friends, Senator
Glass, that it piloted us through the World War, that it rendered




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 444

the greatest service to the people of this country and to the people
of the world that any banldng structure of any nation had done.
Now, that being the case it seems to me that after 19 years of
a record of that kind, it is a very serious question whether or not
it is necessary to modify in any material feature an act of that
character and with that record at a time like this.
Senator BROOKHART. Mr. Burke, on that question about its high
efficiency let me ask you, or rather I will state first, that it has
got into the hands of stock gamblers, and did it have anything
to do with the deflation of 1920 and the subsequent inflation, and
then the deflation of 1929?
Mr. BURKE. Not any more, Senator Brookhart, than any other
unit in our economic structure.
Senator BROOKHART. If it was so tremendously efficient why
shouldn't the Federal Reserve Board have laid its hand on that
situation and stopped it?
Mr. BURKE. It was efficient in a great emergency. Its business,
however, was not to control your impulse or mine. The American
people would never have tolerated any banking system that placed
in the hands of any set of men the power to say how they should
invest their money, or, if you will, squander their money.
Senator BROOKHART, But their business was to keep it out of the
hands of speculators and gamblers.
Mr. BURKE. I must most respectfully differ with you about that.
Senator Brookhart. The purpose of the Federal reserve structure
was to as far as possible decentralize the banking authority, to place
upon the bankers of this country regional responsibility in order that
they might apply in the administration of that structure the wisdom
that had come to them as the result of years of experience.
Senator BROOKHART. There is another point that occurs to me in
the matter of efficiency. How about the inflation that went on preceding and during 1928 and 1929, and the deflation that has followed
and seems to be continuing ? Did it permit that ? And is that what
you call its efficiency?
Mr. BURKE. Mjr answer to that observation and question is this:
There was not a single unit in our whole economic structure, there
was not a single class of people in this country, that did not contribute to the inflation of 1928 and 1929. And no one knows that
better than you do, Senator Brookhart, because it ran through the
0
agricultural regions of the country.
Senator BROOKHART. Oh, yes; but was the administration of the
Federal reserve act efficient in helping that along?
Mr. BURKE. NO. But I do want to say that
Senator BROOKHART (interposing). Well, I want to find out if I
can what you think about the character of its efficiency.
Mr. BURKE. Oh, I would not say affirmatively it did that. But I
do want to say that the people who had investments in the banks of
the country had the right to withdraw them and invest them as they
saw fit. That was not the difficulty. If the Federal reserve banks
had prohibited people to withdraw their money and use it as they
saw fit long before 1928 the people would have lost confidence in the
system. They wanted their money available for whatever purpose
1
they saw fit to use it.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

445

Senator BROOKHART. The system was not very efficient in stopping
deflation in late 1920 and in 1921* nor in permitting the inflation of
1928 and 1929. Did it have anything to do with the failure of some
8,000 banks as a result of that inflation and deflation?
Mr. BURKE. If you mean by that question to intimate that it had
an affirmative influence in bringing that situation about I would
answer no. To apply any such reasoning to the situation would be
an indictment of the bankers of this country, the directors of the
various Federal reserve districts and in turn the Federal Reserve
Board.
Senator BROOKHART. Well, I would not hestitate to bring such an
indictment against them.
Senator FLETCHER. But, let me ask you, did the Federal reserve
banks do what they might have done to check the inflation of 1928
and 1929?
Mr. BURKE. That is a matter of serious discussion and always
will be. It was a question of applying the wisdom in the minds of
the people at that time. Some thought this was a wise policy\and
some thought the other was a wise policy. That will always be
the subject of debate. And yet I do not gainsay the fact that
Senator Brookhart has suggested, as to what happened, and yet I
say
Senator BROOKHART (interposing). Mr. Burke, have you ever
studied the coojDerative banking system of Great Britain ?
Mr. BURKE. Not very minutely.
Senator BROOKHART. Have you ever compared its efficiency with
the ups and downs that we have had in the United States?
Mr. BURKE. N O ; I have riot. In fact, I have been too busy since the
panic came on to study any foreign banking system.
Senator BROOKHART. Then you are not in a position to say that
this banking system we have in the United States, is the most,efficient in the world.
Mr. BURKE. I do not know of any banking system in the world
that has stood the test better. We are one country that is still
on a gold basis and we are going along and "meeting situations as
they arise, and if that does not spell the success and efficiency of the
system I do not know what would.
Senator BROOKHART. We first had the greatest production of any
country in the world, and then the people suffered the greatest losses
of- any country in the world, and we have had more bankruptcies
than almost any country in the world.
Mr. BURKE. That may be, but what lias the Federal reserve system
to do with it? The situation that developed was of foreign origin.
The panic did not start in this country.
Senator BROOKHART. I think it is directly chargeable to the inflation that was permitted prior to 1928 and the deflation that followed.
Mr. BURKE. Well, Senator Brookhart, you are entitled to your
belief. That is a question of opinion on which people differ.
Senator BROOKHART. I object to a system that is so administered
that permits both inflation and deflation in that way.
Mr. BURKE. We could discuss that subject interminably and still
have an honest difference of opinion. And I will say. Senator
Brookhart, that I have very great respect for your opinion.
111161—32—RR 2




15

NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 446

Now, there is another phase of this subject that I should like to
address myself to. There is no question about the fact that in the
minds of the people of this country there is the feeling that we need
at this moment a liberalization of credit; a banishment of the fear
and apprehension that exists in the minds of all classes of people
and has existed for the past year.
And in proof of that I will say that the very gentleman who
fathered the Federal reserve system, whose name stands out in banking legislation in this country, Senator Glass, rendered a great
service to the people of this country in his teamwork with the Chief
Executive of this country and other members of both parties in
Congress, when he sponsored the Glass-Steagall bill for the purpose
of liberalizing credit and giving the people a chance to breathe.
And yet in the face of that
Senator BROOKHART (interposing). On that proposition I wish to
remind you that when Senator Glass presented this bill to Congress
he stated that one of its great purposes was to stop the use of surplus credit of the country in speculation over in New York.
Mr. BURKE. I understand that, but
Senator BROOKHART (continuing). And he has adhered consistently to that proposition in all his record, and yet there has been
no man who has criticized the administration of this law more than
he has because that principle has been violated all along.
Mr. BTJRKE. That may be. I am not discussing that. But the
Senator has confessed to the American people that what we need
at this time is a liberalization of credit. And just when we were
beginning to stand erect and breathe a little bit of freedom this
bill is introduced which, to my mind, would undo in large degree
the good that was done as a result of the Glass-Steagall bill and the
creation of the Reconstruction Finance Corporation.
Senator GLASS. And it does not interfere with a sentence of itMr. BURKE. You may not think so, b u t —
Senator GLASS (interposing). Well, I don't think so, and I am
quite sure of it.
Mr. BURKE. I am speaking now of the state of the public mind.
And while on that point I wish to add: On yesterday a very remarkable statement was made, one of the most dramatic statements
ever made in the House of Representatives, made by Speaker Garner. This is what he said:
As sure as I stand in the well of this house I believe with aU my soul that
if the Congress to-day should decline to levy a tax hill there would not he a
bank in existence in the United States in 60 days, that could meet its depositors.

What did he mean by that? That as a result of a single vote
on a single section of the tax bill last week there was practically a
Sanic in the minds of the people of this country, and the dollar
escended in value in every market of the world. What John N.
Garner meant there was, that regardless of the merits or demerits
of the tax-raising measure the refusal of the House of Representatives to act promptly on a great economic measure at this time was
going to carry terror to the banking and business interests of the
country and do untold damage.
SenatorBROOKHART. In spite of all this efficiency you have been
talking about we have had to create the Reconstruction Finance Cor-




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

447

poration with $2,000,000,000 taken from the Treasury, and have
had to have a tax bill that would levy more taxes upon the common
people of the country, in order to save us from the worst disaster
that ever came along.
Mr. BTJRKE. Exactly. And in addition to that you failed to mention the National Credit Corporation that went to the rescue of
1,100 banks, and1 to the defense of
Senator BROOKHART (interposing). Oh, yes; that is the one that
started out and threw up its hands.
Mr. BURKE. Even so that does not prove that any other banking
system would have left a better condition in this country.
Senator BROOKHART. I think my suggested cooperative banking
system would have left the conditions in the country better and not
worse.
Senator GLASS. I want to go on record again as saying that I do
not know of anything that happened anywhere in this country
that has contributed more to intensify the fear of the people than
the largest part of the testimony that has been given around this
table by the witnesses who have appeared before us.
Mr. BURKE. In answer to that may I ask you this question in turn:
This is banking legislation and who is demanding it? Since these
hearings opened you have had before you bankers from all sections
of the country, and every one of them has appeared in unanimous
protest against this bill.
Senator GLASS. Yes; and they were brought here in an organized
protest, just as I think you were.
Mr. BURKE. Suppose they were, yet the fact remains
Senator GLASS (interposing). Oh! Didn't we have the same sort
of protest, and didn't we have resolutions akin to the one you have
brought here from the Pittsburgh people, when we passed the Federal reserve act?
Mr. BURKE. Exactly. And isn't it a fact
Senator GLASS (interposing). Undoubtedly we did.
Mr. BURKE. Exactly, with reference to the original Federal reserve bill.
Senator GLASS. That shows just how much importance is to be
attached to similar propaganda.
Mr. BURKE. And right there I will say, Senator Glass, that I think
you do yourself an injustice, and I am sure that you do bankers
an injustice. The doctrine never has obtained in this country and
I hope never will when bankers and business men may not have
the right to come here and petition Congress and make known their
views as to legislation.
Senator GLASS. Nobody questions that.
Mr. BURKE. And you can not impeach them on the theory that
they are dragged here. I say they are coming here voluntarily because they are the men who have the confidence of their communities, and they are the people who have conserved the resources of this
country.
Senator GLASS. We are not simply guessing but we know why
they were brought here, and we have suggested it to them after they
got here.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 448

Mr, BURKE. DO you find fault with their coining here? Do you
deny their right to come here and present their views?
Senator GLASS. NO.
Mr. BURKE. Then there can be no complaint of their coming.
Senator GLASS. I do not admit that you have the right to question
my opinion as to why they were brought here, nor what was done
after they got here/
Mr. BURKE. Certainly riot. But you made the statement, and
while I am not questioning at all your right to make it, I am trying
to answer it.
The CHAIRMAN. Let the witness proceed.
Senator BARKLEY. Mr. Burke, do you condemn this whole bill or
do you admit that there are any features of it that are constructive?
Mr. BURKE. There are features of it that have been repeatedly approved by gentlemen who have been before you, or at least they have
said that tliey have merit. But after all, to my mind the question
at this time is, whether or not a measure that has survived for 19
years and rendered good service is in such a precarious condition, is
such a weak structure, so weak either in structure or resources, that
it calls for a drastic modification at a time when the public mind is
in its present state.
Senator BARKLEY. Why is it in that state? We have been sitting
here for two and a half years watching bank after bank go to the
wall and Congress has done nothing about it, no legislation that
lias been passed as yet has done anything about it fundamentally;
perhaps there has been a temporary remedy to keep the patient alive
until nature can take its course, but shall we sit here and do nothing
when the people are demanding something that will give the banking system strength and influence?
Mr* BURKE. Senator Barkley, if your premise were correct your
theory would be that you can correct the present condition by legislation. I do not believe you can. I do not think you can refill the
empty tills of the banks of this country by mere legislative fiat.
Senator BARKLEY. NO ; but we owe the duty to the public to keep
any more from failing.
Mr. BURKE. And you owe a duty to the public to do nothing that
will cause further deflation and greater destruction.
Senator BARKLEY. I agree with that but I am somewhat like the
old colored preacher who was dismissed from his pastorate because
he could not tell the people wherein; he could not tell the people
wherein although he could argufy and sputify " on every subject
Now, Mr. Burke, wherein will we injure the people by enacting this
bill into law?
Mr. BURKE. May I bring home this thought to you?
Senator BARKLEY. And I am intensely in earnest about it.
Mr. BURKE. NO doubt you are.
Senator BARKLEY. I am not •committed to any single provision of
this bill, but I do want to know, in view of the duty of Congress and
the people's suspicion in this whole situation that has been brought
about by somebody and I am not charging anybody with it, but we
certainly ought not to permit if we can help it a condition to be
perpetuated in this country that will make it possible for any
disaster like this to overcome the country. The question is whether
we are going to try to remedy it while we are sick and know what




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

440

the trouble is, if we do, or wait until we get well, and then maybe
the doctors will decide that we can not afford to clo it while we are
well because it might make us sick again. That is a homely sort of
philosophy but it is one that appeals to me.
Mr. BURKE. It is very sound from your viewpoint. But why in
the world would these men who are the trustees of their communities
back home under this regional banking system that we established
for the deliberate purpose of decentralizing banking authority of
this country; I say why would they come here from all parts of
the country and say to you that this legislation would damage the
banking structure, and that it would be inimical to the general in*
terests of the American people ? Can you gainsay for a moment their
interest ?
Senator BARKLEY. N O ; and I do not. I do not impeach their interest, their integrity, their good purpose, or their right to come
here. And as far as I am concerned I have welcomed their testimony in the sense that I want light on this subject.
Mr. BURKE. All right.
Senator BARKLEY. But after all it seems to me a mistake to take
the position that Congress does not owe some duty even in a crisis to
try to protect the people against a recurrence of it if we can do it*
Maybe this bill does not do it. but if it does not I should like for
somebody to offer a constructive measure that will.
Mr. BURKE. We agree witli you on that.
Senator BARKLEY-. We have allflounderedaround for lack of leadership, and it has been just as true of banking matters as of politics.
Mr. BURKE. I fully agree with you, Senator Barkley, that Congress should do all in its power to lead the American people out of
this dilemma. There is no difference of opinion about that. What
I am questioning is, the wisdom and necessity of enacting this particular measure at this time.
J o let us look at the situation from a practical legislative standTw
point. You have a congested calendar both in the benate and the
House. You are going to have an interminable debate on the tax
bill. You are going to have great difficulty concluding this session
of Congress by June 10 if you gentlemen should decide to adjourn
about that time for the national conventions; you will have great
difficulty in passing even the appropriation bills and other outstanding measures without any regard whatsoever to this measure.
And what will be the result if you press this measure ? You will
inject into the arena of debate a measure that has given rise to very
serious differences of opinion up to this precious moment, and that
will continue for the next six or nine months. The people want to
breathe freely, the people want to be out of an atmosphere of apprehension as it were, to go about their business. These bankers here
to-day ought to be back home attending to their business, trying
to revive and restore confidence in their communities.
Senator GLASS. I agree with you on that thoroughly.
Mr. BURKE. But as a result of your measure. Senator Glass, it is
necessary for them to be here in an effort to protect their own interests and'those of their communities.
Senator GLASS. Point out to us any provisions of this bill that
would do all these disastrous things* you talk about. You don't
need to talk to us about legislative strategy or procedure. We as



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 450

Members of Congress know those things quite as well and perhaps a
little better than you do.
Mr. BURKE. Nobody has denied that, but I have attempted to
point out the situation as I see it.
Senator GLASS. Just address yourself to the provisions of the
pending bill.
Senator FLETCHER. YOU have alluded to drastic provisions of this
bill. What are those provisions and what are your objections to
them?
'Mr. BURKE. The Comptroller of the Currency and the governor
of the Federal Reserve Board on yesterday pointed out in detail
where they differed with you on the "measure.
Senator GLASS. Didn't you hear the Comptroller of the Currency
say that he thought legislation at the present time was imperative?
Mr. BURKE. N O ; not imperative.
Senator GLASS. YOU did not hear him say that?
Mr. BURKE. N O ; not that it was imperative.
Senator GLASS. But he did.
Mr. BURKE. I beg your pardon.
Senator GLASS. He did say that, and the governor of the Federal
Reserve Board said he thought it very desirable, and that that was
the reason he made these recommendations.
Mr. BURKE. But I am talking about this bill. Before he made
that statement he spent an hour and a half dissecting the bill and
pointing out its evils.
Senator GLASS. A S a matter of fact he didn't do anything of the
kind. But if you will simply take the proposals he made and tell
me the difference between his proposals ana the jjrovisions of this
bill you will do a service to this committee.
Mr. BURKE. YOU understand that
Senator GLASS (interposing). Just point them out.
Mr. BURKE. Senator Glass, you, of course, understand the English
language and
Senator GLASS (interposing). I certainly do.
Mr. BURKE. Well, I will saySenator GLASS (interposing). Just point out to us the difference
between the proposals of the Federal Reserve Board and the provisions of this bill.
Mr. BURKE. YOU said on yesterday
Senator GLASS (interposing). Oh, let us come clown to concrete
things. Take a section of the bill and tell me the difference between
the proposal of the Federal Reserve Board and that section.
Mr. BURKE. Well, I will say
Senator GLASS (interposing). Just take up the bill and pick out
any section of it and tell me wherein there is a difference between
the proposal of the Federal Reserve Board and that section of the
bill.
Mr. BURKE. DO you want me to go into an analvsis of the bill?
Senator GLASS. Yes.
Mr. BURKE. If you want me to take up the bill section bv section
I can do it.
Senator GLASS. All right, and tell me the difference,
a t g^at length, but keep this in mind,
i Mr \ B 1 urke - 1 c a n d o
that the last thing you said on yesterday to Governor Meyer was



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

451

Senator GLASS (interposing). Just point out to us the difference.
Mr. BURKE. You said to Governor Meyer that you did not agree
with his theories or his amendments.
Senator GLASS. YOU just go ahead now and point out to us the
differences between the proposals of the Federal Reserve Board
and the provisions of this bill as you claim. As a matter of fact
I agree with a good many of those suggestions.
Mr. BURKE. I understand, but on yesterday you made the blanket
statement that you disagreed with them as a general proposition.
Senator GLASS. N O ; Idid not make any blanket statement.
Mr. BURKE. Then if you and Governor Meyer are in accord it is
all right.
Senator GLASS. But you and Governor Meyer are not in accord.
He says this should be done and you say not.
Mr. BURKE. NO. What I say is
Senator GLASS (interposing). The Comptroller of the Currency
said legislation was extremely desirable.
Mr. BURKE. But this is what Governor Meyer said
Senator GLASS (interposing). Let us not get off on that. Let
us stick to the matter of comparison.
Mr. BURKE. He said legislation such as he suggested here would
be timely at this time.
Senator GLASS. Take section 3 of the bill and let me know the
difference between the proposal of the Federal Reserve Board and
what is contained in that provision of the bill.
Mr. BURKE. Senator Glass, I have page after page here on all sections of the bill.
Senator BARKLEY. Mr. Burke, what is that document the pages of
which you are turning over?
Mr. BURKE. This is an analysis made in Pittsburgh by our clearing house association.
Senator GLASS. I am not talking about the Pittsburgh Clearing
House Association but the suggestion of the Federal Reserve Board.
Mr. BURKE. Very well.
Senator GLASS. Tell me the difference.
Mr. BURKE. I was going to tell you
Senator GLASS (interposing). The Pittsburgh Clearing House Association could not have passed on that recommendation made by the
Federal Reserve Board because it was only made on yesterday.
Mr. BURKE. Oh, no; but I am not talking about that at all.
Senator GLASS. Go ahead and tell me the differences.
Mr. BURKE. YOU were asking about section 3 of the bill.
Senator GLASS. All right. Go ahead.
Mr. BURKE. And you were speaking about you and the governor
of the Federal Reserve Board being in accord. When you said the
governor stated it was advisable to enact this legislation, and when
you stated that Comptroller Pole said that the passage of this legislation was imperative, I am quite certain, Senator Glass, that your
memory was at fault.
Senator GLASS. Oh, no. But you are here saying nothing should
be done at all.
Mr. BURKE. N O ; I did not say that.
Senator GLASS, Well, let the shorthand reporter read his notes of
what you said.



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 452

Mr. BURKE. No; I did not say that.
Senator GLASS. Let us have the shorthand reporter read his notes
of what you said and see if you did not say that.
Mr. BURKE. What I said was this: That legislation of this nature
at this time was untimely. And I said I believed the Federal reserve structure was so inherently strong, and for the reasons that I
pointed out, it was not necessary to inject amendments at this time
and bring about a discussion of this delicate matter during present
economic conditions. That is what I said.
Senator GLASS, Well, the record will show.
Mr. BURKE. All right. But, of course, Senator Glass, I have a
high regard for your opinion.
Senator BARKLEY. Mr. Burke, let me ask you this: Our banking
history in the last two and a half years has been very unfavorable
when compared to the banking history of other countries. Whatever may be the differences we might notfindit profitable to go into
them now. But we have had a deplorable accumulation ox bank
failures and there is more or less lack of confidence on the part of
the people in our banking system. What is your remedy for that?
Mr. BURKE. Senator Barkley, the remedy for that is the chastisement and wisdom that comes from experience. You can not legislate it into the minds of bankers. The bankers of this country have
had their lesson; and as a result of what transpired in 1927,1928, and
1929 the bankers of this country have learned a great lesson.
Senator BARKLEY. But are they going to profit by it?
Mr. BURKE. Yes; and they will profit by it without legislation.
Senator BARKLEY. How do you know?
Mr. BURKE. It is the history of the human race.
Senator BARKLEY. Not always.
Mr. BURKE. It is their history.
Senator BARKLEY. Your idea is that we ought not to do anything
as a result of the experience we have had in the last two years and
a half, and that if there are weak places in our banking system they
ought not to be strengthened at this time.
Mr. BURKE. Well, I think it is unnecessary at this time. I think
the system as a central structure should be allowed to exist without
any repairs at the present time. I think the country will be better
off if this bill were eliminated from thefieldof discussion for the
time being.
Senator BARKLEY. DO I understand that your attitude is purely
as a representative of the Pittsburgh Clearing House Association
and not as general attorney for the Republican National Committee?
Mr. BURKE. The Republican National Committee has nothing to
do with me in this matter. It is my own personal view. I should
like to be in accord with you, Senator Barkley, and I hope when
you sound the keynote in the Democratic National Convention you
and I will be in perfect accord.
Senator BARKLEY. Well, I will be willing to receive suggestions
from you.
Senator BULKLEY. Then am I to understand that these are your
?ersonal views and that you are not representing the Pittsburgh
Hearing House Association?
Mr. BURKE. These views I am expressing now I would say are my
own personal views as an individual, as a national bank director,



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

453

and as one who has . had somewhat to do with .legislation of • this
character. My associations with you, Senator, have been very pleasant and profitable.
Senator BULKLEY; A S to that resolution from the Pittsburgh
Clearing House Association, was that, in line with what you have
been saying?
Mr. BURKE. As to the general objections to the bill; yes,
Senator BULKLEY. Does it generally take the position that the Federal reserve law is how so good it ought not to be tampered with?
Mr. BURKE. It takes the view that it-is sufficiently strong to survive
the present emergency, and that it would be. wiser not to tamper
with it at this time.
Senator BULKLEY. DO you contend that there is anything in this
Glass4 bill that is in any way a modification of the intent of the
original Federal reserve act?
Mr. BURKE. That is a matter, Senator, of debate. It is in the state
of mind, whether it is a fact or not. I am dealing with the thing
that Speaker Garner dealt with yesterday on thefloorof the House.
You can not escape it.
Senator BULKLEY. YOU can hot put this in any such class as to
say that it is equivalent to failing to balance the Budget. That
would just make you ridiculous. You do not say that, do you?
Mr. BURKE. No; I do not say that is ridiculous.
Senator BULKLEY. Of course you do not.
Mr. BURKE. N O ; but——
Senator BULKLEY (interposing). Let us forget about it.
Mr. BURKE. But it bears the general relation to the same subject.
Senator. It has to do with the creation and the promulgation of
uneasiness. That is what it has to do.
Senator BULKLEY. Yes; you have said that, but I want to go one
step further now and I want you to show me how a measure that is
designed to carry out the purpose and intent of the Federal reserve
act, which you so highly praised, is going to create so much uneasiness. If you do not agree that it aoes carry out the purpose and
intent of the Federal reserve act, show me wherein there is a difference in principle.
Mr. BuRps. Well, your curtailment—you curtailed credits. There
is no question about that. You modified the matter of administration. You centralized authority. There is no feeling in this country
growing stronger daiy by day.
Senator BULKLEY. YOU are not telling us anything that is a departure from the principles of the Federal reserve act. If you say'
the act is so good, why shouldn't its principles be enforced and
tightened up?
Mr. BURKE. Senator, you have increased the powers of the Federal Reserve Board as compared with those that existed previously.
Senator BULKLEY. In some respects we increased them and in
some respects we did not increase them, but diminished them. Some
of the principal criticism is that we diminished the power of the
Federal Reserve Board in some respects.
Mr. BURKE. My crititcism would be that your enhancement of the
powers of the Federal Reserve Board is detrimental to the country.
Senator BULKLEY. YOU would not criticize that 1 per cent penalty rate, then?



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 454

Mr. BURKE. I do not see any necessity for it.
Senator BULKLEY. That is a restriction on the powers of the
Federal Reserve Board.
Mr. BURKE. That may all be, but at the same time, it is an imposition and an additional burden on the borrowing banks.
Senator BULKLEY. I would like to have you get back and answer
the question as to wherein we depart from the principles of the
Federal reserve act.
Mr. BURKE. The word " principles " is a very broad proposition.
You might state a detail here and there and say it is still within
the general principles.
Senator BULKLEY. Yes; but you say there are very drastic changes.
What are they?
Mr. BURKE. Well, the power you give to the Federal Reserve
Board themselves to determine the percentages within which investments can be made by banks in various regions. You are taking
away from the various regional directors the power that was lodged
in tnem as a result of the protest at the time the Federal reserve act
was passed against a central bank. That was repugnant to you, to
your associates, and to other people in the country. For that reason
you divested thein of these powers and distributed them through the
various sections of the country. Your tendency now is, according
to my impression, to deprive the local authorities of their powers
and vest them in the Federal Reserve Board.
Senator BULKLEY. Tell me how much that is done- What are
the several things that we take away from a local bank?
Mr. BURKE. That one thing, for instance.
Senator BULKLEY. That is one.
Mr. BURKE. That is an illustration.
Senator BULKLEY. What else is there altogether?
Mr. BURKE. NOW, I could go through that. Senator, at some
length; but, as I say, that is an illustration of it, and your open
market
Senator BULKLEY (interposing). Your implication is, of course,
that they run all the way through the bill, and yet you can not name
another instance of it.
Mr. BURKE. Oh, yes. Yes, there are other instances.
Senator BULKLEY. Well, I said you could not name them.
Mr. BURKE. HOW many sections are there in the bill? There are
21 sections, and every one of them is a modification.
Senator BULKLEY. Of the principles of the Federal reserve act?
Mr. BURKE. Well; no; they are a modification of the Federal
reserve act. You might call it a principle. You may say that they
are alterations of the act, but not alterations of the principles; and
other people believe that it is an alteration, and the bankers of the
country think that.
Senator BULKLEY. They are alterations to enforce the law as
originally intended.
Mr. BURKE. There is no necessity for reenforcing it as enacted.
It was enacted and enforced for 19 years, and enforced successfully
and admirably.
Senator BULKLEY. There has been plenty of necessity; more than
the world ever saw.
Mr. BURKE. That may be true. It is a matter of opinion.



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

455

Senator WAGNER. Mr. Burke, if we were not in a disturbed economic state, as you say, would you still oppose the major provisions
of this bill?
Mr. BURKE. From my standpoint I do not know that I would.
I am not sure about that. But because I am dealing solely from my
viewpoint with the timeliness of this matter, it might be; I might
modify my views about the intensity of the evil that would follow
this legislation. I might not. I might adhere to it. I do not know,
Senator.
Senator WAGNER. You are not determined in your own mind
M r . BURKE. NO.
Senator WAGNER. A S

to whether any of these provisions would
improve the system ?
Mr. BURKE. NO. I determine in my own mind that they are
unnecessary.
Senator WAGNER. Under any circumstances ?
Mr. BURKE. I think you have got a great structure and I think it
is a great monument to Senator Glass and Senator Bulkley and his
associates.
Senator GLASS. For the record, in order that it may be determined
who is accurate and who is not, the witness does not think there
should be any legislation at this time, and suggested that neither the
Federal Reserve Board nor the Comptroller of the Currency thought
there should be any legislation at this time; I have here the hearing
of yesterday in which I asked the Comptroller of the Currency if
he was fearful of legislation at this particular time, and he said:
I think legislation would be a very good tiling. I am not saying tliat there
should be any disturbing or drastic legislation, but I do say legislation of that
character—

speaking of the most controverted provision of the bill, branch
banking—
would be immensely helpful.

And so on.
Governor Meyer, being on the stand, was asked by me if he thought
there should b * legislation immediately along the line suggested by
e
the Federal Reserve Board.
Mr. MEYER. Yes; I think it should. I am not afraid to say that as amended
I would welcome the passage of the bill.

So that the board did not engage in an idle gesture when it sent
up to the committee some proposed amendments to this bill, most oi
wnich did not disagree in essential and substantive provisions from
the bill itself. They really want us to incorporate those amendments
to the bill and pass it.
Senator FLETCHER. He further said that he agreed generally in the
purpose of the bill; had no objection to the bill itself.
Senator GLASS. Yes; and he proposes—the board unanimously,
you understand, something that I venture to believe has not happened since the foundation of the system, agreed that these amenclr
ments should be made to the bill, many of which I am sure the committee will accept without dispute or much discussion, others of
which are not in disagreement with the substantial purpose of the
bill, and not much in disagreement with the text of the bill, and the
board wants us to incorporate those amendments in the bill and



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 456

pass it at once. So that by that record it may be determined who is
accurate and who is inaccurate.
Mr. BURKE. Thank you, Senator.
The CHAIRMAN. The next witness is Mr. Bruce, of Baltimore.
STATEMENT OF HOWARD BRUCE, CHAIRMAN OF THE BOARD OF
THE BALTIMORE TRUST CO., BALTIMORE, MD.

The CHAIRMAN. State your full name and address and business
connections to the reporter, Mr. Bruce.
Mr. BRUCE. My name is Howard Bruce, Baltimore, Md.; chairman
of the board of the Baltimore Trust Co.
Mr. Chairman, I have prepared a statement, and might I be permitted to read that statementfirstand then try to answer any questions?
The CHAIRMAN. If agreeable to the committee. That requires
unanimous consent.
Senator TOWNSEND. That is agreeable to me.
The CHAIRMAN. If you would rather do that, I think we would all
agree to it.
Mr. BRUCE. I start with the theory that there is nothing sacrosanct
about the Federalreservesystem. Like every other system in the
process of -evolution, it is going to be changed; and unquestionably
there are changes that are needed in this system. I approach it
more with a definite feeling about the changes that are proposed to
be made bv this bill at this time and their bearing on what I think
is the condition of business andfinancein this country.
I feel that at the present time when we are in the depths of the
greatest depression which this country has ever experienced, no legislation should be proposed that is even open to the suspicion of retarding our recovery from the present business stagnation, following the
violent deflation through which this country has gone during the
past two and one-half years.
The formation of a liquidating corporation is clear of any such
suspicion. There may be wide differences of opinion as to the source
from which its capital should be derived, and as to the machinery
set up for its operation; but tliere is an almost unanimous indorsement of the creation of an agency that will return to the channels
of trade the assets now frozen in closed banks.
Affiliates: There is unquestionably the need of normal regulation
and control of banking affiliates. Aowever, in the present situation
the drastic regulating provisions contained in the bill can not fail
to have an unfortunate effect upon existing conditions, even if such
effect is to some extent in the form of a feeling of uncertainty and
unrest.
Section 9 limits the sum which a parent bank may loan to an affiliate to 10 per cent of the capital and surplus of the parent bank, and
such loans must be secured by 120 per cent of listed exchange securities or 100 per cent of either eligible paper or savings banks securities, neither of which would be for the most part in the possession of
an affiliate unless it happened to be a banking institution. The
enforcement of this provision will mean radical liquidation in the
case of many affiliates.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

457

The provision of section 25, page 49, paragraph 2, I interpret as
meaning that at the end of a 3-year period the affiliate must be
completely divorced from its parent company. This appeals to me
as a most drastic provision, as it is certainly possible to regulate and
control undesirable activities without abolishing an agency of great
importance in the distribution of securities and other necessary
functions.
Increase of reserves: Section 13 provides for increasing reserves
against time deposits over a 5-year period to afigureequal to the
present reserve on demand deposits. The Federal reserve system does
not need this fund, as it has been and is now able to meet all demands
upon it for credit. The depositors are not further protected, as their
protection is measured more by the character of assets of the banks
than by the amount of their reserve. The banks' loaning power and
earning capacity are both reduced.
The worst of its effects will be borne by the outlying banks in
rural communities holding a larger proportion of time deposits
than the city banks.
Segregation of assets back of time deposits: Much might be said
on the provisions of this section, but the most important consideration, to my mind, is that, even though its action is spread over a
period of 2 years, it is bound to bring about a disruption of the
credit structure of the country. Many banks, particularly those in
rural communities, have a large percentage of their time deposits
tied up in loans for the benefit of commerce and agriculture in their
surrounding territory. Such banks would be compelled to liquidate
a large proportion of these loans and invest the funds so obtained
in real estate or specified securities.
Limitation of interest on deposits: Section 24 limits the rate
of interest that may be paid on deposits. This seems to place the
member bank at a disadvantage in competition with nonmember
banks. Money is certainly a commodity, and I see no reason why
member banks should not be free to pay the rates necessary to hold
their deposits.
Control of collateral loans and security holdings of member banks:
The provisions undertaking to control the holding by member banks
of securities, either as investments or collateral, run all through
this bill.
Section 8 gives authority to six members of the Federal Reserve
Board to fix the percentage of capital and surplus of any member
bank that may be represented by loans on collateral securities, taking:
out of the hands of the board of directors one of its principal
functions .
Section 3 places the discretion in the hands of the Federal Reserve
Board as to what constitutes undue or improper use of credit facilities and gives abritrary power to the board to suspend a member
from use of the credit facilities of the Federal reserve system.
Section 11 establishes an increased rate upon 15-day borrowing
and places the power in the Federal Reserve Board to suspend a
member bank as a borrower from the Federal reserve bank, if such
member bank should increase his outstanding loans on collateral
security, despite a warning from the District JReserve Bank or the
Federal Reserve Board.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 458

Section 15 restricts the amount of investment securities of anyone obligor that may be held by a national bank to 10 per cent of
the total amount of "the issue outstanding, and further restricts the
aggregate amount of securities which may be owned. Both of
these provisions will bring about a forced liquidation of national
bank holdings and will have a further depressing effect upon the
market.
This bill throughout its numerous provisions seems to attempt by
edict to outlaw the owning of securities, the trading in securities,
and the loaning of money upon securities, and to further assume
that the blame for the present situation in this country is due to
the loaning of money upon collateral securities.
It seems to me impossible to segregate the speculative loan upon
collateral from the normal business loan of this character, or to
restrict the credit on collateral and at the same time maintain a freedom of credit on short-time paper or Government securities. The
whole structure of business of this country has been built up by the
wide distribution of securities. The effort to drastically restrict
and to control speculation, it seems to me, will result in evils of vastly
greater weight. The funds of savings banks, insurance companies,
and, in fact, a great part of the wealth of the country, is invested in
securities. Any action aimed at the speculative "which restricts
the free marketing of securities, and depresses their value, will in
one way or another affect every man, woman, and child in this
country.
A prerequisite to emergence from the present depression is an
atmosphere of public confidence, and not one of uneasiness or uncertainty. As I see it, there is nothing in this bill other than the
provision for a liquidating corporation, and a few minor provisions,
that will not result in creating an atmosphere of uncertainty and
unrest, and consequently, if the bill is enacted into a law, or if the
possibility of its enactment hangs over the country for any length
of time, a further degression of security values will follow. People
buy marketable securities for the income to be derived and for the
reason that they believe they are readily marketable and in time of
need they can readily borrow money upon them as collateral. A denial of this right, in an effort to reach the speculator, is grossly
unjust. What I am interested in primarily, and what every other
thinking man in this country is interested in at the present moment,
is to aid and assist in the emergence from the frightful condition
of depression and unemployment from which we are suffering.
If legislation is necessary or desirable to limit any future riots
of speculation, such as culminated in the year 1929, I am sorry to
say I believe we have a considerable lapse of time ahead of us before we will meet the next such issue, and I can see no possible
justification, in a period such as the present, to hurry through
drastic provisions which in my opinion will bring on a further
deflation of securities and proling the period of depression.
Senator FLETCHER. Mr. Bruce, you said it was very important to
preserve this free distribution of securities.
M r . BRUCE. Y e s .
Senator FLETCHER.

And ithat adds to the prosperity generally.
It is not a fact that, prior to 1931, 1929, and 1930, there was a distribution of about 70,000,000,000 of securities in this country, stocks,



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

459

bonds, foreign and domestic, unloaded on the public, and in prac* everything they put in?
fcr the present time, with the
-provisions of this bill, that you are going to aid that situation.
Senator FLETCHER. One of the effects you said was to check this
distribution of securities.
Mr. BRUCE. Well, you limit the owning of securities by an association.
Senator BULKLEY. Mr. Bruce, are you referring there to page
36 when you say we limit that?
Mr. BRUCE. That is the one that limits to 10 per cent the amount
of any one issue held by a national bank.
Senator BULKLEY. YES.
Mr. BRUCE. And further limits the total security.
Senator BULKLEY. That is what it does not do, and I thought you
probably misunderstood that. I do not blame you for the misunderstanding.
Mr. BRUCE. It certainly reads that way.
Senator BULKLEY. Yes: I do not blame you for the misunderstanding, but I think your criticism ought to be withdrawn in the light
of what is really meant. That has been the custom, those who have
misunderstood that and had it explained to them have usually
withdrawn the criticism.
Mr. BRUCE. What does it mean?
Senator BULKLEY. It means of any one issue.
Mr. BRUCE. Well, 10 per cent—that would prevent a bank from
taking an issue to cover a bad loan.
Senator BULKLEY. Yes; it would prevent taking more than 10
per cent of that issue.
Mr. BRUCE. There are constantly instances where a bank will take
a mortgage or something in the form of a security issue to cover a
frozen loan.
Senator BULKLEY. Yes; it does that. It does prevent that.
Senator GLASS. Can you loan more than. 10 per cent to a merchant?
Mr. BRUCE. This is 10.per cent upon one issue, Senator.
Senator GLASS. . I understand that; yes.
Senator BULKLEY. Ten per cent of any one issue.
Mr. BRUCE. Any one issue.
Senator BULKLEY. That is right.
Mr. BRUCE. Banks frequently in the normal course of lines of
credit get into a position where a loan is frozen, and, in an effort to
protect a loan, they take a mortgage or some issue of securities as
protection.
Senator GLASS. What percentage would you prescribe as a limit?
Do you think a bank ought to be allowed to take the whole issue of
n corporation?
Mr. BRUCE. I think the general clause that Governor Meyer suggested as a substitute for section 3, section 8, section 11, and section
15, the general clause giving authority to the Federal Reserve Board,
covers that. I think they have the authority now in a moral way,
if not a legal way, to control.
Senator GLASS. In other words, you would not limit the authority
by statute or even suggest it by statute?



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 460
M r . BRUCE. N o .
Senator GLASS. But

you would give the Federal Reserve Board
unlimited authority to deal with a matter of that sort, would you?
Mr. BRUCE. I do not know whether you have got to write it into
the law or let the present unwritten power act—the power lies
there now. I do not want to go under crossrexamination on the
English system, because I am not an expert, but my impression is
that most of the English system and the working of it is based
on custom that has gradually grown up. I think the Federal Reserve Board has the power now.
Senator GLASS. I think so, too, Mr. Bruce, but the board does not
exactly think so. There has been a great division of opinion on that
question, and the matter has been litigated in the courts.
Mr. BRUCE. I have no objection to that clause suggested by Mr.
Meyer.
Senator GLASS. And two decisions have been rendered to the effect
that the board has that power. I think undoubtedly it has always
had that power, and we intended to give it that power; but around
this table there has been a great discussion and a bitter attack
upon this bill upon the score that it gives the Federal Reserve
Board too much power, and now you say that you want their proposed section 3, and I am not objecting to it. But you must understand that their proposed section 3 confers in this respect unlimited
power on the board.
M r . BRUCE. Y e s .
Senator BULKLEY. I

take it Mr. Bruce disagrees with Mr. Burke
on that subject.
Senator GLASS. He disagrees with many of the others.
Sir. BRUCE. I was busy studying my own notes and I can not
say that I followed Mr. Burke's testimony.
Senator WALCOTT. Mr. Bruce, I understand you to say now that
you approve of the suggestion made by Governor Meyer before with
respect to section 3 ?
Mr. BRUCE. I think I do. All I could say about Mr. Meyer's
suggestion is based upon what I have read in the limited time while
I was motoring to Washington from my home this morning.
Senator GLASS. Most of it is contained in this bill, the text.
Mr. BRUCE. NO ; there is a difference. It does not apply this power
only to collateral loans. It spreads it out to all other loans.
Senator GLASS. And to that extent still enlarges the power of the
Federal Reserve Board?
Mr. BRUCE. Yes; I think it makes it sounder.
Senator WALCOTT. But you approve of that?
Mr. BRUCE. Yes; I have no objection. But your section 3 treated
only collateral loans.
Senator GLASS. N O ; this extends it to commodity loans.
Mr. BRUCE. All right.
Senator GLASS. The point I make is that you disagree with these
various other witnesses when they assailed the bill upon that section
or upon the power that it gives to the Federal Reserve Board. You
do not agree with that, do you?
Mr. BRUCE. I do not agree with that so far as Governor Meyer's
section 3, as I understand it, goes.
Senator GLASS. Yes; I understand.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

461

Senator BULKLEY. NOW, Mr. Bruce, I would like to get back here
to section 15. You have made a criticism which is perfectly clear cut
and which can stand without argument at the moment, that this
section would prevent a bank from taking over a whole issue, whether
for the purpose of clearing up a bad loan or any other purpose.
M r . BRUCE. Y e s .
Senator BULKLEY.
M r . BRUCE. Y e s .
Senator BULKLEY.

That is true.

Now, that is an understandable criticism. But
you did say in your prepared statement that what follows there
would cause an increased liquidation. Of course, that is not so, is it?
Mr. BRUCE. Yes; it is so, because I think many national banks hold
at the present time more than 10 per cent of individual issues.
Senator BULKLEY. Yes, but this only provides that they shall not
acquire it hereafter.
Mr. BRUCE. Is not the word " holding " in that section ?
Senator BULKLEY. Yes. I will not defend the wording of it, Mr.
Bruce.
Mr. BRUCE. I am discussing what it says.
Senator BULKLEY. I am not trying to put you in a hole. I am
trying to arrive at the truth, and I agree with you that the wording
is not appropriate to express the intent. But the intent of it is that
the bank shall not hereafter acquire for holding more than these
limits of any one security. It is subject to the criticism you made
for whatever merit it has, but the other criticism, because of too
much liquidation, does not stand, does it?
Mr. BRUCE. Yes; as it is worded it stands. Might I ask one other
thing: Is it the intention of that act that thev should not hold in
any form; of security more than 15 per cent of their capital and 25
per cent of their surplus? That is the way it reads to me.
Senator BULKLEY. Of any one security.
Mr. BRUCE. NOv, no; as I read it. It is involved, and as I see restricts total holdings of all securitiesSenator WAGNER. We have agreed that that should be amended.
Mr. BRUCE. It is involved, and I believe it covers all issues.
Senator BULKLEY. Yes; I agree with you that the wording is
unfortunate, but I want you to take our statement of what is the
intent of it.
Senator GLASS. We have explained to witness after witness, at
least a score of them—well, I won't say at least a score of them, but
more than a dozen of them—just what the intent was. We have
agreed that the language is involved and needs clarification, and
yet each succeeding witness comes back to the same criticism.
Mr. BRUCE. Well, I have tried to study this particular bill, Senator. I have not read any other testimony, and I have tried my
best to study this bill, and I have had a difficult job.
.. The CHAIRMAN. There seems to be no disagreement on that point.
Suppose we proceed to something else.
Mr. BRUCE. I think that the section 3 proposed by Governor
Meyer gives ample control, and I question the advisability of putting a rigid limit into this bill. I question it.
Senator WAGNER. In other words, Mr. Bruce, even if it applied
to only future issues
Mr. BRUCE (interposing). I question it.
111161—32—PT 2 16



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 462

Senator WAGNER. You still oppose the 10 per cent limitation ?
Mr. BRUCE. Absolutely, the 10 per cent; and I question that
whole thing. I think the criticism of the Federal Reserve Board,
if anything, is for not exercising power rather than for not having
power.
Senator GLASS. Well, undoubtedly ; and what assurance have we,
Mr. Bruce, that it is going to exercise it hereafter? Take section
11 of this bill: That is the 15-day period. Existing law there provides that the Federal Reserve Board may have unrestrained power
to control the rate of 15-day paper, which is a special privilege, not
oirginally designed and not originally incorporated in the act.
Why would you say we gave the board the right, the unrestricted
right, to make a rate on that transaction?
Mr. BRUCE. YOU stipulated that it must be at least 1 per cent
higher.
Senator GLASS. I am not talking about that now; I am talking
about why we gave that right. That is a limitation upon the board,
a restriction upon the board rather than an extension of its power.
The 15-day provision of the bill, which has been in there for 16
years, you will admit, gives the board unrestricted power?
Mr. BRUCE. Absolutely.
Senator GLASS. To lew a special rate on these transactions, does
it not?
M r . BRUCE. Y e s .
Senator GLASS. It has never been exercised?
M r . BRUCE. NO.
Senator GLASS. Don't you think it might have

been exercised in
1928,1929, and 1930?
Mr. BRUCE. Senator Glass, I was not a banker in that time. I
was an observer, and I would not
Senator GLASS (interposing). Well, I am not a banker at all at
any time. I am an observer. Don't you think the board might
very well have applied that authority then?
Mr. BRUCE. I think they had powers that might have to advantage been applied in those years that were not applied.
Senator GLASS. Then what assurance have we that hereafter they
will be applied?
Mr. BRUCE. Senator, I do not believe you can substitute legislation for discretionary power in as definite a way as that. It seems
also to be aimed particularly at the
Senator GLASS (interposing). Stock gambling?
Mr. BRUCE. Investments in stocks. Haven't you got to have some
discretion in somebody? You can not set down and predict conditions that are going to exist for all time.
Senator GLASS. Nobody seems to have exercised the discretion at
the imperative moment when it should have been severely exercised,
and it'was because of that default that the country is in such condition as it is to-day, and what we are trying to do is to avert a
repetition of that.
The CHAIRMAN. The Senator from Virginia will recall that we
had members of the Federal Reserve Board here before this committee in the spring of 1928.
Senator GLASS. Yes.
The CHAIRMAN. And they did not see the need of any action then.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

463

Senator GLASS. NOW, Mr. Bruce, all right; sir; I think you and
the committee are in agreement as to the desirability of doing some
things. You make the broad statement that a person buys securities
for the purpose of collecting the interest on the investment. Would
you apply that statement to conditions in 1928 and 1929 on the New
York Stock Exchange?
Mr. BRUCE. TO a tremendous number, yes; to a tremendous number.
Senator GLASS. YOU do not agree then with that New York paper
which takes pride in saying that it represents the vested interests of
the country and which has said that at least 90 per cent of the transactions of the jjrevious week on the stock exchange constituted as
much gambling as betting on the point of an arrow at a roulette
table?
Mr. BRUCE. Well, I do not know about that statement, but there
was no question but that there was a period toward the height of
that speculative period—and I think that the conditions were unsound—and could not definitely stay so. Where people paid 10 per
cent for money to buy securities yielding 2 per cent. It could not
go on. They knew they were gambling, of course, but everybody
thought he was smart enough to get out ahead of the other fellow.
Senator GLASS. I had a chart prepared some time ago to indicate
the period of time in which stoclcs passed on the New York Stock
Exchange were held. The investigation disclosed that 12 years
ago, the period was 67 days; that in recent years it had dropped to
22 days. Do you think people ordinarily "invest their funds for
22 days?
Mr. BRUCE. NO. I would hardly call that investment.
Senator GLASS. Nor I either.
Mr. BRUCE. But you seem to me to be trying by legislation to
change human nature. I do not believe you could do it.
Senator GLASS. I would like to change some human nature, particularly my own.
M r . BRUCE. SO do all of us, but we can not.
Senator GLASS. We ma}' restrain human nature,

though, particularly the excesses of human nature.
Senator BULKLEY. Mr. Bruce, I think perhaps that goes a little
too far. I think it may be difficult to change human nature, but is
it not practical to restrict the use of Federal reserve funds? Isn't
that what we are driving at? Isn't that what we should drive at?
Mr. BRUCE. I do not believe that you can segregate one part of
the credit structure and put that off to one side and control that and
leave the rest open. It is like a pool of water; you can not shove
down one corner. It will come right up. You can go on now and
try to restrict this class of loan and leave open the channels for
borrowing money on other characters of security
Senator BULKLEY (interposing). Yes.
Mr. BRUCE. And the money will find its way out and thru some
channel will gest back to be loaned on these same outlawed securities, if the public want to borrow on them.
Senator BULKLEY. We believe that we can restrict the use of
Federal Reserve money for carrying speculative accounts, and we
certainly intend to do so.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 464

Mr. BRUCE. You can. The board can. It can increase its rates
on all loans, and with the powers in that article 3, where a bank is
going too far, where a bank is carrying too much of one security
or carrying too many loans backed by one form of security, the
Board can stop it, and they can do it quietly and the club will never
have to be used as long as they have the club. I think they have the
club now.
Senator BULKLEY. I think that would rather disprove the theory
that it never has to be used as long as they have it, because there
were certainly great abuses while the power still existed.
Mr. BRUCE. If they swing the club.
Senator BULKLEY. That is a pretty big " if." We never can be
safe at that.
Mr. BRUCE. Well, can you? No matter what you do; can you?
Senator BULKLEY.-We can do better than we have done.
The CHAIR-MAN. We will have to, or we will not survive.
Senator GLASS. Mr. Bruce, I have here in my hand six pages containing 47 different paragraphs enumerating tlie powers of tlie Federal Reserve Board over member banks, and particularly the restraining power of the Federal Reserve Board over member banks.
I am having prepared a paper showing the legislative restraints
contained in the national bank act, which I apprehend will cover
the same number of paragraphs, and I propose to put these in the
record to show that this outcry against the centralization of authority to the Federal Reserve Board and restrictions upon what a member bank may do are not as valid as they would seem on the face
of them.
(Thereafter Senator Glass submitted the following material for the
record:)
CONTROL OVER NATIONAL B A N K S UNDER REVISED STATUTES AND OTHER PROVISIONS
OF L A W

Revised Statutes sections 5133 to 5156, both inclusive, regulate the organization of and confer certain powers on national banking associations.
Section 513G enumerates the principal powers of national banks and confers
power on the Comptroller of the Currency to redefine by regulation the term
" investment securities."
Act of May 1, 1SSG, section 2: Change of name and place of business to be
made only with the approval of the comptroller and not until comptroller has
issued a certificate of approval.
Section 5137 limits the power of national banks to hold real property.
Section 5138 fixes the amount of capital necessary for the organization of a
national bank and vests certain discretionary powers in regard to the matter in
the comptroller.
Sections 5130 to 5143, both inclusive, embody provisions relating to the
capital stock of national banks, the par value and transfer of shares, how they
are to be paid for, how and under what conditions the amount may be increased
or decreased, etc.
Act of October 15, 1914, the Clayton Act, sections 8 and 11, prohibit the
existence under certain conditions of interlocking directorates between national
banks, between a national bank and other member banks, and between national
banks and any other banking association, and provide for the enforcement of
the same.
Section 5151 Imposes individual liability on the shareholders of national
banks, and confers upon the comptroller the power to order closed any national
bank whose surplus falls below 20 per cent of its capital.
Section 5155 provides for the retaining, establishment, and removal of
branches of national banks, and confers upon the comptroller certain discretionary powers in the matter.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

465

Sections 5157 to 5180, both inclusive, regulate the obtaining and issuing by
national banks of circulating notes, and confers certain broad powers on the
comptroller in the administration of such provisions and regulations.
Sections 5190 to 5219, both inclusive, provide regulations for the conduct of
the banking business by national banks.
Section 5197 provides limitations on the rate of interest which national banks
may receive or charge on loans or discounts, and section 5198 provides penalties
for the violation of section 5197.
Section 5199 regulates the amount of dividends that may be declared by
national banks.
Section 5200 limits the amount of loans that may be made to any one person, partnership, association, or corporation.
Section 5201 prohibits loaning on, or the purchasing of, shares of its own
capital stock by a national bank.
Section 5202 imposes upon national banks a definite limit of the amount of
indebtedness that may be incurred by them over and above certain excepted
types of obligations.
Section 5203 restricts the use of circulating notes by national banks.
Section 5204 prohibits the withdrawal of any portion of capital by national
banks during the continuance of banking business, and the payment of unearned
dividends.
Section 5205 requires assessment upon shareholders of a national bank, upon
notice by comptroller, in the case of a deficiency in capital stock.
Section 5206 prohibits the putting in circulation by any national bank of the
uncurrent notes of any bank.
Section 5207 prohibits the holding of United States notes or national bank
notes as collateral security.
Section 5208 makes unlawful the certification by any member bank of the
check of any person, firm, or corporation, unless the drawer has on deposit with
such bank an amount not less than that specified iu the check, and providing
penalties therefor.
Section 5209 provides penalties for embezzleinent, misapplication, etc., of
funds or credits of a Federal reserve bank or member bank by any officer,
director, agent, or employer thereof.
Act of January 26, 1907. Prohibits contributions by national banks in connection with elections to political offices.
Section 5210 requires keeping of list of shareholders of a national bank open
to inspection by the shareholders and creditors of the bank, and by the State
tax assessors.
Section 5211 requires the making of reports by national banks to the comptroller and specifies the information to be contained therein, under oath or
affirmation of an appropriate officer of the bank.
Section 5212 requires reports by national banks to the comptroller of the
amount of any dividend declared, within 10 days after the declaration thereof.
Section 5213 provides penalties for failure to make the reports required under
Revised Statutes, sections 5211 and 5212.
Section 5214. and act of March 14, 1900, section 13, require taxes to be paid
to the Treasurer of the United States by national banks.
Sections 5215 and 521(5 require semiannual returns for the purpose of
assessing taxes made by national banks of the amounts of notes in circulation,
and provides penalties for failure to do so.
Sections 5217 and 5218 provide for the enforcement of taxes and refunding
of excess taxes.
Section 5219 allows State taxation of shares of national banks.
Sections 5220 and 5242, both inclusive, contain provisions governing the procedure on dissolution of national banking associations.
Section 5220 provides for a vote of the shareholders owning two-thirds of the
stock of a national bank in order to effect a voluntary liquidation.
Section 5228 requires a national bank to cease the business of banking on
failure to pay any of its circulating notes as ascertained by the comptroller.
Section 5234 gives broad discretionary powers to the comptroller in the
appointment of receivers to take over the affairs of national banks which are
in default, and prescribes the duties of such receivers, which are to be exercised
under the direction of the comptroller.
Section 5236 regulates the distribution of the assets of an insolvent bank
by the comptroller.
The acts of June 30, 1876, and March 29. 1886, both contain regulatory
provisions of a similar nature.




466

NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 466

Act. of November 7, 1918, regulates the consolidation of. national banking
associations.
Act of February 25,1927, Section 1, regulates the consolidation of State banks
with national banks.
CONTROL

OVER

NATIONAL

B A N K S UNDER T H E FEDERAL RESERVE A C T
NATIONAL B A N K A C T

AND

THE

FEDERAL RESERVE ACT

Section 2 : National banks required to subscribe for capital stock of reserve
banks up to 6 per centum of their paid-up capital and surplus.
Section 4 : Discounts, advancements and accommodations to be extended to
member banks by Federal reserve banks "subject to the provisions of law
and the orders of the Federal Reserve Board/'
Section 5 : Additional subscriptions to capital stock of Federal reserve banks
required of member banks when they increase their capital stock and surplus.
Shares of stock of reserve banks held by member banks not to be transferred
or hypothecated.
Member banks required (1) to surrender proportionate amount of stock of
reserve banks when the capital stock of member banks is reduced, and (2) to
surrender all of their holdings of such stock when they voluntarily liquidate.
Payment for stock so surrendered to be made under regulations of Federal
Reserve Board.
Section 6 : Where receivers are appointed for national banks the stock held
by them in reserve banks to be paid for under regulations of the Federal
Reserve Board.
Section 11: Federal Reserve Board authorized—
(1) To examine member banks and to require such statements and reports
as it may deem necessary.
(2) To suspend reserve requirements for 30 days with renewals of 15 days,
and to fix a graduated tax upon the amounts by which such requirements are
permitted to fall below specified levels.
(3) To add to the number of reserve and central reserve cities.
(4) To grant special permits to national banks to act as trustees, executors,
and administrators and in other fiduciary capacities.
Funds deposited or held in trust by the bank awaiting investment not to be
used unless securities approved by the Federal Reserve Board are first set aside
in the trust department of the bank.
Surrender of fiduciary powers of a national bank is subject to approval of
Federal Reserve Board.
Federal Reserve Board is authorized to make such regulations as it deems
necessary with respect to the exercise by national banks of their fiduciary
powers.
Federal Reserve Board was given power for temporary period (until October
31, 1921), upon the vote of not less than five members, to increase the amount
of paper indorsed by any one borrower which Federal reserve banks could
discount for any member bank.
SEC. 13. Reasonable charges by member banks for collection or payment of
checks, drafts, etc., " to be determined and regulated by the Federal Reserve
Board but in no case to exceed 10 cents per §100 or fraction thereof."
Federal Reserve Board given the power to " determine or define the character
of the paper thus eligible for discount within the meaning of this act."
The discounting or purchase of certain bills of exchange payable at sight or
on demand to be " subject to regulations and limitations to be prescribed by
the Federal Reserve Board."
Acceptance powers of member banks are limited generally (1) to an amount
equal to 10 per cent of its paid-up and unimpaired capital stock and surplus
for any one person, company, firm, or corporation, and (2) to a total amount
equal to 50 per cent of its paid-up and unimpaired capital stock and surplus.
The Federal Reserve Board, however, u under such general regulations as it
may prescribe " may authorize any member bank to accept to an amount not
exceeding 100 per cent of its paid-up and unimpaired capital stock and surplus.
Advances to member banks on 15 day paper to be at rates established by
the reserve banks, "subject to the review and determination of the Federal
Reserve Board."
Section 5202 of the Revised Statutes fixes the limit of the indebtedness of
national banks at any time (except on account of demands of certain specified




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

467

kinds) at an amount not to exceed the amount of their capital stock actually
paid in and remaining undiminished by losses or otherwise.
The discount and rediscount and the purchase and sale by reserve banks
of bills receivable, domestic and foreign bills of exchange, and acceptances
" shall be subject to such restrictions, limitations, and regulations as may be
imposed by the Federal Reserve Board."
National banks may act as agents for insurance ompanies in certain cases
"under such rules and regulations as may be prescribed by the Comptroller
of the Currency."
Member banks may accept drafts or bills of exchange having not more, than
three months' sight to run, drawn " under regulations to be prescribed by the
Federal Reserve Board " by certain banks for the purpose of furnishing dollar
exchange. Such drafts or bills may be acquired by the reserve banks " i n
such amounts and subject to such regulations, restrictions, and limitations as
may be prescribed by the Federal Reserve Board." The maximum limits of the
acceptance powers of member banks are also specified.
Section 13a: The discounting by reserve banks of agricultural paper indorsed by member banks is " subject to regulations and limitations to be prescribed by the Federal Reserve Board."
The board may also, by regulation, limit to a percentage of the assets of a
reserve bank the amount of paper which may be discounted and rediscounted
by the reserve bank.
Section 14: Open market transactions of the reserve banks are subject to
rules and regulations prescribed by the Federal Reserve Board.
The rates of discount to be charged by the reserve banks for each class of
paper are also " subject to review and determination of the Federal Reserve
Board."
Section 16: " The Federal Reserve Board shall, by rule, fix the charges to be
collected by the member banks from its patrons whose checks are cleared
through the Federal reserve bank * * *."
Section 18: Retirement of circulating notes of member banks is under the
supervision of the Federal Reserve Board.
Section 10: Reserve requirements of member banks in the outlying districts
of reserve and central reserve cities may be changed upon the vote at five
members of the Federal Reserve Board.
Reserve balances of member banks may be checked against and withdrawn
for the purpose of meeting existing liabilities, " under the regulations and subject to such penalties as may be prescribed by the Federal Reserve Board,"
but no bank shall make any new loans or pay any dividends unless and until
the total balance required by law is fully restored.
Section 21: National banks to be examined at least twice each year " a n d
oftener if considered necessary" by examiners appointed by the Comptroller
of the Currency.
Expense of examinations to be assessed against the banks examined.
Special examinations of member banks by Federal reserve banks, with the
approval of the Federal reserve agent or the Federal Reserve Board. Expenses
of such examiantions may, in the discretion of the Federal Reserve Board, be
assessed against the banks examined.
Section 22: Prohibitions against loans by member banks to bank examiners,
against purchases from or sales to their directors except in the regular course
of business, etc.
Federal Reserve Board is given power by regulation to require full disclosure
of the facts with respect to all sales of securities to a member bank by any of
its directors or by a firm in which any such director is a member.
Section 24: Limitations are imposed by this section upon real estate loans by
national banks and upon the interest rate they may pay upon time and savings
deposits.
Section 25: The establishment of foreign branches by national banks must
be approved by the Federal Reserve Board, which is also given wide discretion in connection with the examination and operation of the foreign branches
which it authorizes. The board may also authorize interlocking directorates
in such cases without regard to the Clayton Act.
Section 25 ( a ) : Limitations are placed upon the amount of stock which
national banks may hold in corporations formed by engaging in international
or foreign banking in dependencies or insular possessions of the United States.
Officers of member banks may serve as officers of such corporations with
the approval of the Federal Reserve Board without regard to the Clayton Act.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 468
Section 27: National banks are taxed upon their circulating notes secured
otherwise than by bonds of the United States.
Section 28 (amending section 5143 of the Revised Statutes): Reduction of
capital stock of national banks must be approved by the Comptroller of the
Currency and the Federal Reserve Board.

Mr. BRUCE. Senator, may I say
Senator GLASS (interposing). Anything you please.
Mr. BRUCE. It seems to me a lot of your objectives throughout this
bill might become more practical if you had control of all the banks,
of all the banking facilities. But you have such a large amount or
banks outside of your system that you do not control, and if you
restrict too much the member band and not those outside credit
just runs around the corner to find its level. If there is cheap
money anywhere on any collateral it will find its own level, no
matter what you say to the member banks about special collateral
loans.
Senator BARKLEY. Haven't you put your finger on one of the
fundamental difficulties in our banking system?
Mr. BRUCE. I think so. You control only a part of the banking
system.
" Senator BARKLEY. What can we do about it?
Senator GLASS. We thoroughly realize that. Can you suggest
to us what we can do?
Mr. BRUCE. NO, sir. That is why I asked your permission to
make that observation.
Senator WALCOTT. YOU have made a study of unified banking?
Mr. BRUCE. Yes; I would like to see them all in the same boat.
You have restriction here that I mentioned, such as the restriction
on interest. Right across the street is a bank that pays 3 p e r
cent. You restrict me to 3 per cent. Who is going to get the deposits?
Senator GLASS. There are innumerable statutory restrictions on
interest, are there not? Does not the State of Maryland put a limitation upon your charges for discounting?
Mr. BRUCE. I am talking about interest on deposits.
Senator GLASS. I know you are talking about your restraining
power and you are talking about the other.
Mr. BRUCE. I know, but I am talking about the one that hurts.
I am not talking about the other. I am saying that this would
limit us to 3 per cent, and I think up to just a few months ago we
were paying 3%, everybody was paying 3%.
Senator GLASS. Ought you to?
Mr. BRUCE. NOW, if you would stop the savings banks and stop
the State banks, I am all for it, yes, surely.
Senator WALCOTT. YOU are giving us arguments for a unified
banking law, which, of course, we need very badly.
Senator BARKLEY. But how are we going to get it?
Senator Townsend. Mr. Bruce, what effect do you think this bill
would have one the national bank system, the Federal system?
Mr. BRUCE. There is no use of saying you are going to break up
the system, because you are not. I know of one right large trust
company that was seriously considering, and even I might say neSotiating, to come into the system, and since this bill has been introuced it certainly has backed away. Now that is just an illustration.
I think that some situations will be such that some banks will have



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

469

to get out of the system. There is.no doubt about it, There is a
handicap if this bill does stand as drawn. It seems to me there is a
handicap to the free competition with a nonmember bank. That
means, t think, you -will stop accretions to the system and you will
have some leakage from it and you will have to stop those leakages,
and you will right the ship by repeal of legislation and you will
bring it back again to the present equilibrium. It certainly is not
going to make membership more desirable.
Senator GLASS. That is what we have it designed to do, to make
it more desirable.
Senator TOWNSEND. It was certainly considered by every member of the committee, I think, that the bill should make it more
desirable to bring in banks that are not now in the system.
Mr. BRUCE. Well, you take the segregation of assets back of
savings deposits; that is going to hurt, particularly where the
savings of borrowing banks run to a high percentage. I heard of
an instance in the last few days where a bank had 80 per cent of
its money on time and it was loaning it around to farmers and
generally local business about the neighborhood. What are they
going to do here. They have got to call those loans and go back
and invest it in real estate or savings bank securities that you
specify. That certainly is going to be a handicap to that member.
The CHAIRMAN. May I ask you: Will that provision affect the
larger banks less than it will the smaller banks ?
Mr. BRUCE. Yes. Yes, very much. The particular bank I am
connected with I do not think will be affected seriously. I think
it is a very big debatable question about that segregation of assets*
I mean I can make quite an argument on either side. Right now
I just picked out the thing that I think is bad, the thing that is
going to upset credit. I know what you are: after, and in some
ways there is considerable of it, but right now it is going to be had,
and particularly to the little bank that has got a lot of money on
time. What is he going to do? He is going to call the loan. He
is going to or get out of the system.
The CHAIRMAN. YOU have the same view as Mr. Meyer had on
that?
Mr. BRUCE. My examination of his statement was hurried, in a
car this morning, so I do not know it thoroughly.
Senator BARKLEY. Mr. Bruce, what per cent of the deposits in
the country banks, in your judgment, are time deposits?
Mr. BRUCE. I do not know. I know some instances. I have been
told instances where they run up to 70 and 80 per cent. I know
instances where they are 50 or 60 per cent.
Senator BARKLEY. As much as 75 per cent?
Mr. BRUCE; I do not know myself.
Senator GLASS. Mr. Bruce, how many banks, if any, of the 4,000
that have failed in the last two years, would you say failed because
of the present condition of their portfolios?
Mr. BRUCE. I do not know. That is why they failed. They
were frozen. They would keep on paying if they were solvent.
Senator GLASS. "They failed because of the investments in unliquid securities?
Mr. BRUCE. Well
Senator GLASS. Largely in real estate, was it not?



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 470

Mr. BRUCE. Their investments in securities depreciated to such a
point that the sale of them did not give them enough money to
pay their depositors in many instances.
Senator GLASS. Did they not have many on hand they could not
sell at all?
Mr. BRUCE. The market got to such a point that a good many
securities fell into that classification.
Senator GLASS. DO you think it is good banking to fill a bank's
portfolio with investment securities that can not be realized on in an
emergency?
Mr. BRUCE. Senator, you have gone thought a situation on which
I do not believe you can draw conclusions for all time. I sat with
a group of bankers on October 5, I think it was, one night until
about 11 or 12 o'clock. My bank was in pretty good shape,^ but
we all felt that if something did not happen this whole credit situation was going to close up, the way things were going. You could
not sell anything. There was no price on anything. There was difference of opinion between us, whether it was going to happen in
two days or four days. And then they brought out the National
Credit Association, which gave everybody hope, and it started up
again.
Senator GLASS. For 48 hours; yes.
Mr. BRUCE. Well, it lasted about four or five weeks and then
down it went; and then you brought out the Glass-Steagall bill
and the reconstruction act, and everybody took more hope. Now,
if this proposed bill is going to unsettle matters and bring about
uncertainty and make holders sell these securities to get inside the
provisions of this law, you are going to depress all securities.
Nobody can say what causes that depression except fear.
Senator BROOKHART. IS not the real trouble the fact that those
securities are still inflated, still too high ?
Mr. BRUCE. Well, if they are, I hope they will be a little more so
for a while. [Laughter.]
Senator BROOKHART. The psychology of this thing is more inflation.
Mr. BRUCE. It is all psychology. There is nothing in the world
that would do this country more good right now than a little inflation.
Senator BROOKHART. It is that question of making folks believe
there is a value when there is no real value. I have a chart of the
Federal Reserve Board that shows those securities up to date to be
some 30 or 40 per cent higher than they were in 1914, and that was
33 per cent over the preceding level. That was too high. Now, commodities have gone way down below the 1914 level, but your securities arc still up in the air. Is that a sound condition, or have we
got to squeeze all the water and wind out of those securities before
we get to a sound basis?
Mr. BRUCE. I do not know. I can discuss at length how we got
where we are, but when you talk to me about how you get out of
it, I say I have not seen anybody yet who can say; but I do know
thefirstthing is to create an atmosphere of confidence. There is a
tremendous amount of psvchology about it.
Senator BROOKHART. About getting out, what would you say to
this: If we would provide a set-up of a couple of billion dollars



NATIONAL*AND FEDERAL RESERVE BANKING SYSTEMS

471

or so, it would give the farmers a cost-of-production price for their
products, they being a third of the buying power of the American
people, and it would employ these seven or eight million people
that are out of jobs. Would not that start things upward on a
substantial basis?
Mr. BRUCE. X do not believe there is any substitute for the law
of supply and demand. If there are more farm products than
there is demand for them, their prices will be low. I do not believe you can pick yourself up by your bootstraps.
Senator BROOKHART. DO you not know that there is really no
surplus of farm products at all; there is an underconsumption?
Mr. BRUCE. Well, that is what I mean. What is the difference
between underconsumption and overproduction?
Senator BROOKHART. Would not that plan remedy the situation?
Mr. BRUCE. I do not know.
Senator BROOKHART. If we put these men to work?
Mr. BRUCE. I do not think so.
Senator BROOKHART. And remedy this thing at the bottom instead
of at the top ?
Mr. BRUCE. If we can change the atmosphere and let people once
get the idea we are at the bottom of this thing, that it has spent
itself, and there is some hope—then you will pick up.
Senator BROOKHART. In other words, you want people to again
believe in securities that are still enormously inflated?
Mr. BRUCE. I do not admit they are still enormously inflated.
Senator GLASS. At all events, I" am very glad that you believe in
the Federal Reserve Board's proposed substitution for section 3.
Mr. BRUCE. It has that power now.
Senator GLASS. I think so, too, Mr. Bruce, but it has never
exercised it.
Senator FLETCHER. IS not what is really needed an increased
purchasing power of the people ?
Mr. BRUCE. Of course it is.
Senator WAGNER. The way to do that is to put people back to
work.
M r . BRUCE. Y e s .
Senator FLETCHER.

It might be offensive to the bankers to suggest
whether or not to do that might increase the supply of primary
money.
Mr. BRUCE. I am not primarily a banker, but I know of a good
many instances of corporations with which I am affiliated whose
managements have said, "How much longer is this going to last? "
They have opportunities for spending money for improvements.
They are not doing it. They are afraid to do'it. But the moment
you get a feeling that this deflation has spent itself and that we are
at the bottom, everything will begin to emerge.
Senator GLASS. DO you think it is good psychology to have bankers sit around a table and tell you that if you legislate at this time
at all't-he whole banking system of the country will be wrecked ?
Mr. BRUCE. I do not think it is good psychology, but I do not
know what else they can say when they feel that the enactment of
this is going to injure the interests they represent.




NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS 472

Senator GLASS. It is not simply that. Most of them have said
that any legislation at this time will create, such despair in the
country that the banking system will be wrecked.
Mr. "BRUCE. It may not be good psychology, but I do not blamethem if they felt that way.
Senator BROOKHART. YOU said we have to restore the buying
power of the people. The farmers make up more than a third of
the American people. There is no way to restore their buying
power but to give them a better price for their products, is there!
Mr. BRUCE. I did not say anything about buying power.
Senator BROOKHART. Yes; that was one of the comments in answer
to Senator Fletcher.
Mr. BRUCE. That, is true.
Senator BROOKHART. There is no way to give these seven or eight
million unemployed men buying power but to give them jobs, is
there ?
M r . BRUCE. XO.
Senator MORRISON.

There is 1 0 way to give them jobs except ta
1
make the industries they have been employed in more profitable.
Mr. BRUCE. Give them confidence that they are not going broke
and they begin to spend monev and move out again.
Senator MORRISON. YOU think we could more likely give employment to the unemployed by making industrj' profitable instead of
doing it with Government donations, do you not?
Mr. BRUCE. Absolutely. I am not going into that.
Senator MORRISON. I know. I just thought I would ask you.
Mr. BRUCE. I do not want to go into that.
Senator BROOKHART. Industry itself has made itself unprofitable
in these methods. It has brought this thing 011. The farmers and
the laborer and the people did not bring that on. You do not claim
that?
Mr. BRUCE. X O ; but punishment is not going to bring them out
of it. They have got to come out of it.
Senator BROOKHART. We passed a Bolshevik bill here with $2,000,000,000 for the use of the banks and railroads. If we were to do as
much as that for the farmers and the laboring people and restore
their buying power, would not that have a substantial effect, whereas
this other stuff is still psychology'{
Mr. BRUCE. I would rather not go into that field. I have tried to
study this bill and its effect, but I am getting right far afield.
The CHAIRMAN. If you have finished we will call the next witness*
We are getting behind our schedule a good deal. I thank you very
much.
Senator MORRISON. Mr. Chairman, I would like to ask a question
if I may.
The CHAIRMAN. Pardon me. Go ahead.
Senator MORRISON. Mr. Bruce, as you interpret this bill it will
give the Federal Reserve Board powers to control the administration
of the assets of the banks belonging to the system further than they
now have, will it not?
Mr. BRUCE. I would answer both yes and 110. I think that they
have hidden away in the provisions of the law a tremendous amount
of power that they have not exercised. It has increased their
power; yes. I would say it has.



NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS

473

Senator MORRISON/ It makes clear that, in-addition to the paper
eligible for rediscount, they may say before they rediscount that
you must do so and so about securities other than eligible paper, and
they will control it more than they do now.
M r . BRUCE. Y e s .
Senator MORRISON.

This additional power is not confined to stockexchange collateral alone, is it?
Mr. BRUCE. Well, it is pointed more definitely at stock-exchange
securities. In general terms it says so.
Senator MORRISON. The Federal Reserve Board in section 3 says:
may prescribe regulations further defining and 'regulating the use of the credit
facilities of the Federal reserve system within tiie limitation* of this act. Such
facilities shall not be extended to member banks for tiie purpose of making
or carrying loans and other investments or facilitating the carrying of or
trading in stocks, bonds, or other investment .securities.

Just how do you define that expression, "investment securities?"
What does that "mean?
Mr. BRUCE. I think actually it is a very broad term.
Senator MORRISON. "Investment security?"
Mr. BRUCE. If you get back to the dictionary I* think you will
.find that is a very broad term. In one section of the country it is
interpreted to mean stocks and bonds, and in another section it
covers warehouse certificates, and in another, mortgages.
Senator MORRISON. Mortgages on real estate ?
Mr. BRUCE. Mortgages on all sorts of things.
Senator GLASS. Mr. Bruce, are you aware of the fact that that has
been in the law for 19 years ?
Mr. BRUCE. NO. I am not. I have not touched on that. I do not
dispute it. I just do not know it.
Senator GLASS. I say, you are aware of the fact that that requirement has been in the law?
Mr. BRUCE. I will admit it.
Senator GLASS. It has been in the act for nearly 19 years.
Senator MORRISON. Mr. Chairman, I do not want to collide with
the Senator. It is not a very safe thing to do. But I was not
through with the witness, and 1 would like to continue.
Senator GLASS. It does not make much difference if you collide
with me. I just do hot want anybody to collide with the law.
Senator MORRISON. I do not see, if it is in there, why you say
that the fourth paragraph after paragraph 8 of section 4 of the
Federal reserve act, as amended, is amended "by inserting before
the period at the end thereof a comma " and so forth. It looks to
me as though it is already in there, and it would not do any good
to put it in again.
Senator GLASS. If the Senator will examine section 13 of the Federal reserve act, on page 29 of the latest print, he will see that the
Federal reserve bank is not permitted to rediscount for any purpose
except in the interest of agriculture, industry, and commerce.
Senator MORRISON. I am heartily in favor of that.
Senator GLASS. Let mefinish,please.
Senator MORRISON. All right.
Senator GLASS. And that the board is very definitely denied the
right in its definition of eligible paper to include notes, drafts, or
bills covering merely investments issued or drawn for the purpose



NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS 474

of carrying on or trading in stocks, bonds, or other investment securities;
Senator MORRISON. I understand that; but now, before they rediscount this paper, which alone is subject to rediscount, you are giving
them the power to say to that bank what they shall do with their
funds? as I understand the law, and I think it is very clever, and
you give them the power.
Senator GLASS. We are simply saying what a Federal reserve bank
shall do.
Senator MORRISON. Yes, sir; but the law you read defines what
notes they may rediscount, and I subscribe to that. That is all right.
But I do not want, if I can help it, to give them the power to say,
Before we will discount that paper properly eligible, you shall run
your bank as we tell you to with reference to other investments."
I want to ask the witness to tell me if, in banking life, nearly all
securities which are good and not short-term paper in business process
is looked upon as investment paper.
Mr. BRUCE. Yes; if there is anything you can invest in.
Senator MORRISON. Would not this act, under the language I have
read, give the Federal reserve system the power to say to any bank
that belonged to the system, " Before we will rediscount your eligible
notes, we direct that you rearrange your loans and put a greater
proportion of them in paper other than investment paper " ?
Mr. BRUCE. That is the intent, sir.
Senator MORRISON. If it is not, what is it? If that is not what it
does, what does it do ? Do you think that is a wise power to give
this central board?
Mr. BRUCE. I think in effect it has that power in broad terms
now.
Senator MORRISON. Fortunately for the country they have not
thought so. They only used moral suasion.
Mr. BRUCE. By moral suasion, one way or another, they could
come to a bank and the examiner would say to a bank, " x ou are
loaning too much money on that particular security. Before we
come back for our next examination, we want you to shift that
around and get a more diversified list of collateral back of that
loan." That is what they do.
Senator GLASS. The courts have decided the board has that right
now.
Mr. BRUCE. I did not know that, but I know they do it, and I
know we do it, too, when they tell us to, if we can.
Senator MORRISON. Yes; and if they have that power nowMr. BRUCE. I do not know whether it is legal or not.
Senator MORRISON. Can you point out to me what law it is under?
Mr. BRUCE. I do not know. I said it may be moral power. I
can not answer you. I can not stand examination on the Federal
reserve law.
Senator MORRISON. My information is, they do it and have been
doing it.
Mr. BRUCE. They do it.
Senator MORRISON. That is one of the biggest troubles of this
country to-day, in my opinion. What percentage, generally speaking, would you say of the banks of this country were eligible for
discount under that law ?




NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS

475

Mr. BRUCE. It has decreased very much. I do not know the percentage. It is very small. It has been decreasing in the past 10
years, because the method of doing business has been changing.
The companies, that used to do business by seasonal borrowing,
during the period of prosperity have been able to issue securities and
supply themselves with money, they they are not borrowing. Therefor the amount of eligible paper has decreased from this cause.
And then, of course, in this time of depression there is not the same
activity of business. It has gone down. I do not know what it is.
I know it has decreased.
Senator MORRISON. Could you form an opinion satisfactory to
yourself, an esitmate, of the percentage of the whole banking?
Mr. BRUCE. NO. I do not know.
Senator MORRISON. Well, it is small, is it not, the country over?
Mr. BRUCE. I just do not know. I think it is small; yes.
Senator MORRISON. DO you not think there is danger of attaching
too much importance to this small percentage of the small types
of credit in the country and too little to the larger types ?
Mr. BRUCE. I think that credit is credit and it is fluid. I do not
believe you can crucify one end of it, constrict one end, for it will
slip up and come around on the other side, particularly when you
have a lot of banks that are not in the Federal reserve system.
Senator MORRISON. YOU could not run the banks in this country
on only eligible paper?
Mr. BRUCE. OH, no. What are you going to do with your money?
You have got to put your money somewhere. What are you going
to do with it?
Senator MORRISON. D O you think that banks could invest it as
wisely as Government officials could tell them to invest it?
Mr. BRUCE. I think the bank ought to have just as much autonomy
as it is possible to leave with them without wrecking somebody else.
Senator MORRISON. That is all I have to ask.
Senator GLASS. DO you think the Federal reserve system IN'its
administration has deprived the banks of autonomy?
M r , BRUCE. NO.
Senator GLASS. DO

you see any difference, Mr. Bruce, between
commercial banking which requires always liquid assets to pursue
its activities and investment banking?
Mr. BRUCE. DO I see a difference F
Senator GLASS. Yes.
Mr. BRUCE. Of a degree.
Senator GLASS. Well, I say a difference.
Mr. BRUCE. Yes. A difference of degree; yes.
Senator GLASS. What I am trying to get at is whether you think
the requirements of existing law are too restrictive as to the eligibility of paper for discount at Federal reserve banks.
Mr. BRUCE. Senator
Senator GLASS. In other words, would you freeze up the portfolios of the Federal reserve banks just as the portfolios of thousands of banks throughout the country are frozen up ?
Mr. BRUCE. NO. We want the security back of our currency as
liquid as possible in normal times. Right now we are in a position—we will not go into that.
Senator GLASS. I anticipated your answer.



NATIONAL*AND FEDERAL RESERVE BANKING SYSTEMS 476

Senator FLETCHER. HOW do your time deposits compare with
your demand deposits, Mr. Bruce ?
Mr. BRUCE. I think our time deposits are a little less than halt
About 40 per cent.
Senator BARKLEY. Has there been any falling off in the time deposits over a period of, say, two years due to the widespread fear
among a lot or our people about our banking situation ?
M r . BRUCE. Oh, yes.
Senator BARKLEY. They

hesitate to tie up their funds in longtime deposits when they might want to get them out to-morrow.
Mr. BRUCE. Yes. There is A lot of money tied up to-day. If
they liad a little assurance they would go right over in time deposits.
Senator BARKLEY. Let me ask you this: This is not assuming
anything that the committee will do, but assuming that it" should
look with favor on the suggestions of the Governor of the Federal
Reserve Board with reference to amendments to this bill, would
you still say it would be unwise to enact legislation now?
Mr. BRUCE. I have said right clearly, I think, I do not want to
see anything enacted if it is open to the suspicion of causing more
liquidation of securities. I think you can pick out different things
in this bill that are all right; but I think the things that change
the present flow of credit and the present holdings of securities,
that are going to shift them around, are going to have a disturbing effect and are going to retard what I am looking for, and that
is a feeling of confidence.
Senator GLASS. If they really do that.
Mr. BRUCE. Well
Senator BARKLEY. If we may assume that there are some fundamental defects which we found out from experience in our present
banking situation, we can attempt to remedy them.
Mr. BRUCE. Oftentimes a patient is right sick, you know, and he
needs some violent medicine, but you have to build up his constitution before you can administer it; and if you can tell me how long
the depression is going to last, then I can approach it. We are still
sliding arid there is not yet any stabilization or turning up of business. I think it is a bad time for applying strong medicine.
Senator GLASS. Mr. Bruce, you are a well-informed man.
Mr. BRUCE. Thank you.
Senator GLASS. Can you tell us when, if ever, a bank reform
measure has ever been passed except after afinancialdebacle?
Mr. BRUCE. Senator, I think I am right. The Federal reserve
bank act came into being as a result of tlie panic of 1907.
Senator GLASS. And 1908?
Mr. BRUCE. And 1908. That started, I think, the movement for
the formation of the Federal reserve system, and seven years
elsmsed before we passed it.
Senator GLASS. Oh, no; not seven.
M r . BRUCE. I n 1914.
Senator GLASS. 1913?
Mr. BRUCE. 1913. December 23, 1913.
Senator GLASS. Yes. But all that time

something.




we were trying to do

NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS

477

Mr. BRUCE. All right, keep on trying. That is all right. Let us
keep on. But let us not do it right now. Let us not do it in the
middle of this depression.
Senator GLASS. AS a somewhat experienced legislator over a period of 30 years in Congress, my conclusion is unless you do it now
you will wait to have another such lesson as we have had recently
to eyer do it.
Mr. BRUCE. Senator, we start from one different premise. I think
this depression is unprecedented in the history of the world. It is
something that people who usually are able to find a logical reason
and reach a conclusion do not know. I think this depression is
different.
Senator GLASS. The Comptroller of the Currency, for example,
thinks the adoption of branch banking would do something.
Mr. BRUCE. That is all right. I have no objection to that.
Senator GLASS. That is important legislation and is a bitterly
controverted proposition.
Mr. BRUCE. I limit my objection to just those parts that are open
to the suspicion of causing more liquidation and disturbance.
Senator GLASS. Of course, if we could be convinced—as some of
us have been—that any provision of this bill causes that, we would
modify or eliminate it.
Mr. BRUCE. YOU tell an affiliate his parent bank can not loan more
than 10 per cent of its capital stock and surplus. A lot of them
have more than that. What is he going to do? He is going to sell
to get within the law.
Senator GLASS. You mean affiliates?
M r . BRUCE. Y e s .
Senator GLASS. We

had pretty high authority for the abolition
altogether of affiliates of national banks. We brought here some of
the most experienced and enlightened practical bankers in the
United States, who advocated abolition of them, and two of these
bankers told us they had already abolished their affiliates.
Mr.- BRUCE. Senator, I am not going to argue with you about
that at all. I know that affiliates have sprung up like mushrooms
during the last 10 years, for all kinds of purposes. It is a back
door to banking, and I think they ought to be controlled. But I am
not going to argue with you. Maybe some of them ought to be prohibited. I do think right now is a right bad time to break up the
equilibrium.
Senator GLASS. HOW about three years from now?
Mr. BRUCE. If you will tell me how long the depression will last,
I will give you an opinion. I do not know.
Senator GLASS. If you will tell us how long, we will adapt ourselves to that.
Mr. BRUCE. YOU are still in session. You come back here every
year.
Senator WAGNER. What has been the experience of your bank
during the last 12 months? Has there been a shrinkage in the
amount of loans made by your bank?
Mr. BRUCE. I came into" a Oank only about six months ago and I
came in at the end of a right strenuous period, and since that time,
by hook or crook, we maintained a stability of our deposits. I am
not a banker in any sense.
111161—32—PT 2




IT

national,

AND FEDERAL RESERVE BANKING SYSTEMS 478

Senator WAGNER. What I had in mind was whether there was
a demand for credit facilities now, or whether the demand had
deceased.
Mr. BRUCE. The demand for commercial notes has decreased with
the decrease in the activity of commercial transactions. It has decreased a great deal.
Senator WAGNER. It is a controversial question as to whether the
shrinkage in outstanding loans has been caused by a lack of demand
for credit or by a refusal of the bankers to extend it.
Mr. BRUCE. In my bank, in repeated instances, the line of credit
which we give to various enterprises has, with the consent or at the
suggestion of the borrower, been reduced because they do not need
it. I mean the demand, of course, for money has decreased with
the decrease in the amount of money in current assets of the going
concern. As that decreases, the money tied up decreases. It has
decreased.
Senator MORRISON. Mr. Bruce, there has not been very much
trouble at any time about loans by the banks on sound paper eligible
for rediscount, has there, because they could use that?
Mr. BRUCE. I do not think there has been any trouble to obtain
such loans.
Senator MORRISON. Has there ever been any trouble?
Mr. BRUCE. No; I don't think there has been with that.
Senator MORRISON. And the trouble with the country was that as
the depression grew, good paper did not have a resort for rediscount
privileges, and that is why the demand for the Glass-Steagall bill
came—that there might in an emergency be enlarged power?
SIR. BRUCE. Y e s .
Senator MORRISON.

Do you not think that legislation has tremendously helped the country?
Mr. BRUCE. Oh, absolutely: yes. I do not know what would have
happened to us without that.
Senator MORRISON. Exactly; because we increase the rediscount
power of the Federal Reserve Board.
M r . BRUCE. Y e s .
Senator MORRISON.

And did not that tend to stop collections and
foreclosures by the banks of noneligible paper ?
Mr. BRUCE. It loosened up the whole credit. Absolutely.
Senator MORRISON. TO let them realize there was a resort ?
air. BRUCE. A hope.
Senator MORRISON. And prior to that they had to make collections?
M r . BRUCE. Yes.
Senator MORRISON.
M r . BRUCE. Y e s .
Senator MORRISON.

And make their banks more liquid?

And that has. at least to some extent, increased
throughout the country?
]Mr. BRUCE. A very considerable extent.
Senator FLETCHER." Have you any affiliates, Mr. Bruce ?
AIR. BRUCE. Y e s , sir.
The CHAIRMAN. We

would like to hear the next witness, because
we have the afternoon full. air. Rand, will you come forward?




NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS

479

STATEMENT OF GEORGE F. RAND, PRESIDENT OF THE MARINE
TRUST CO., OF BUFFALO, N. Y.

The CHAIRMAN. I suggest to tlie members of the committee if we
are going to get through with our hearing in proper time they let
the witnessfinishhis statement first and then ask questions afterwards.
Senator G L A S S . I will agree in advance.
The CHAIRMAN. You may proceed.
Mr. RAND. There lias been so much discussion of the general provisions of the proposed bill that I am going to confine myself to
the portions that would affect our group of banks in New York
State, feeling that that could help the committee more than if I discussed the general legislation, which has been so ably discussed .
before.
Senator FLETCHER. Will you state what you represent ?
Mr. RAND. I represent the Marine Trust Co. of Buffalo and theMarine Midland Corporation.
Marine Midland Corporation is a parent or holding company.,
organized under the laws of Delaware with an authorized capital
of 10,000.000 shares of the par value of $10 each, of which 5,550,768shares are issued and outstanding. Of these, 1,000,000 shares wereissued for cash at $00 a share, less underwriting commissions, upon:
the organization of the. corporation in October, 1929. The corporation, therefore, commenced business with $57,285,230 in cash, of
which it still holds upwards of $19,000,000, the balance having been:
used in the acquisition of additional bank stock upon original acquisitions and upon recapitalization of several of the banks for the*
purpose of strengthening tlieir condition; $19,287,591.49 of this
amount has been invested in Marine Midland banks as additions to<
their capital and surplus since the organization of the corporation*.
The corporation has no liabilities.
The remaining shares of Marine Midland Corporation stock, other
than the 1,000,000 so sold for cash, were issued in exchange for sharesof stock of the constituent banks and trust companies.
The group consists at the present time of 20 banks and trust companies, over 98 per cent of the stock of each of which, excluding directors' qualifying shares, is owned by Marine Midland Corporation..
The group also includes two security affiliates, Security PropertiesCo. (Inc.), 96.5 per cent of the stock of which is owned by Marine
Midland Corporation and which is operated in connectionWith the
bank at Troy, N. Y.; and Fitrust Corporation, 45.49 per cent of
the stock of which is owned by Marine Midland Trust Co. of New
York and 54.29 per cent by Marine Midland Corporation. Both of"
these companies are being liquidated and it is part of the plan on
which the group is organized that they shall be dissolved as soon as
conditions warrant.
Marine Midland Group (Inc.) is the service corporation. This was =
organized under the laws of New York with a nominal capital stock
which is owned by the various banks in the group. Its officers furnish service and advice to the member banks through central auditing staff, central creditfile,standardization of forms and accountingpractices, bond investment advice, publicity, advertising, and nevr




NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS 480

business, and so forth. In this corporation all of the activities of
the group as such are centered, the Marine Midland Corporation being merely a passive holding company, practically the sole business of
which consists in receiving dividends on the bank stocks owned by
it and interest on its bank balances and paying out its earnings in
dividends. It has no liabilities.
Statements as of December 31, 1931, with map, showing location
of the banks and statements of their condition oil that date, together with combined statement of all the banks as of that date and
lists of officers and directors, and copies of the annual report to
stockholders covering the year 1931 are submitted herewith.
The past two years have seen the organization of the Marine Midland Corporation fully justified. Its organization has materially
strengthened the banking structure throughout central and western
New York. Through the medium of the cash resources, which it
possessed, it has been enabled to contribute large sums of money and
management to the banks in its group, which might otherwise have
had great difficulty in raising additional capital.
Tlie Marine Midland Corporation has also been very effective in
its assistance to banks outside of the Marine Midland Group in
working out their problems and in assisting them during this period.
In the management of the National Credit Association group No.
1, western New York, the Marine Midland group took a prominent
part and its officers worked unselfishly in helping solve the problems
of banks throughout the territory.
It is an interesting thing to me that so many group banking organizations, with practically no knowledge of each other, sprang up
almost simultaneously in different sections of the country as the
result of a distinct need for this type of banking. The northwest
group, the Michigan group, Atlanta group, our group in western
New York developed along very much the same lines, although entirely independent of each other and with no conferences and with
no working together in any way. It seems to me that they fill a
distinct need in our banking structure. Group banking, during the
past two years, has been one of the most constructive features in
our whole banking situation.
In the provisions of the new Glass bill we hope that the splendid
work done by group organizations will be given recognition and
encouragement and will not be penalized by burdensome restrictions.
I arrived last evening and had the privilege of reading Mr. Wake:
field's statement to your committee yesterday. Mr. Wakefield's
statement represents my views in many respects. I concur in his
recommendations regarding section 20 in reference to the reserves
in assets other than bank stocks to be accumulated by holding companies. in reference to branch banking contained in section 21, in
reference to the reserve requirements for national and member banks
contained in section 13, in reference to limitation of investments of
time deposits contained in section 14.
The provisions regarding the reserves against time deposits would
require approximately $12,000,000 increased reserves to be carired
by the member and national banks in our group; 5 per cent on this
would be $600,000 a year additional cost to us. This is a terrific
burden of additional cost at this time. However, I do not think the
additional cost should be the controlling feature, but I do feel that




NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS

481

the banks have operated on the present reserves and I do not think
the reserve requirements are the cause of our banking difficulties.
The aggregate amount of time deposits in the national and member banks in our group December 31, 1031, was $100,000,000.
In passing, I wish to point out that the provision governing the
franting of a permit to vote stock of national banks held by a
olding company should be amended so as to allow such a permit to
apply to an officer, director or employee of such company and to
provide that it shall include the right "to vote the stock of national
banks at all meetings of the shareholders and for all purposes
rather than being limited as in the present bill to voting for directors.
Also, it is not provided in the bill how a national bank can operate
and carry on its corporate existence if a majority of its stock is not
allowed to vote. Many statutory provisions require the consent of
a majority or two-thirds of stock and the effect of the prohibition
would be to cause confusion in the corporate affairs of the bank.
In any event it is my opinion that the Federal Reserve Board
should not be given arbitrary power to withhold or revoke such a
permit. If the holding company complies with the conditions and
provisions set forth in section 20 it should as a matter of right be
allowed to vote the stock of national banks held by it.
Limitation of the right to declare dividends to the actual net
earnings" as determined by the comptroller might give rise to
serious differences of opinion. It would seem to take away the
discretionary power properly lodged in the board of directors.
I wish to call attention to one other provision, section 18 of the
bill, which in my opinion has a much more far-reaching effect than
popularly supposecf. Under this provision, if literally construed,
71 directors now serving on the boards of our various banks would
be disqualified, among whom are many of our most valuable
directors.
In closing. I again refer to the constructive work done by our
group in western and central New York, and in illustration I would
like to cite two concrete instances. In Albion, X. Y.. in Orleans
County, 11 banks had closed their doors in 27 days, within a radius
of 20 miles, including the Citizens National Bank* of Albion, leaving
our Orleans County Trust Co. the only operating bank in this
vicinity. Within 2 months and 11 days of closing of the Citizens
National Bank, we had made arrangements with the national banking department and had given immediate credit of 50 per cent to the
depositors of the closed bank, which set a record for speed in liquidation in our territory. At the present time we arc planning to open a
new bank in Medina, a village of 0,000 population, where both banks
have failed, and at the request of the banking department, we are
organizing a new bank there, which will be opened about April 4,
and will take over certain assets of the closed banks and give de{ositors of the closed banks credit for a proportion of their deposits.
cite these two instances, and these are typical, to show the constructive work we are doing, and I might say that rural New York
State does not present essentially different problems from the other
groups in the West and South.
In conclusion, I submit that the record made by group banks
throughout the country, during the past two years, has demonstrated
beyond doubt, the economic soundness of the principle upon which



NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS 482

they have been organized, and their right to recognition and encouragement in any new legislation.
Senator FLETCHER. Would you be pleased to have all your affiliates
branches instead of affiliates?
M r . BAND. Y e s .
Senator WALCOTT.

Mr. Rand, have you had the opportunity of
studying the recommendations of yesterday? Have you seen them?
Mr. It A D Of the Federal Seserve Board? Xo; I have not, I
N .
read it in the morning paper, but I have not had an opportunity to
study it carefully.
Senator WALCOTT. Going back to branch banking versus group
.banking: Would you put a system of branch banking in States
regardless of State laws ?
M r . RAND. Y e s .
Senator WALCOTT. That is the only yray to get started, is
Mr. RAND. I do not think the national banking system

it not 1
should
cater to each separate State. I should think they would have a
uniform system of branches irrespective of State laws.
Senator GLASS. If we should do that, Mr. Rand, will you and
these other gentlemen who have been here come clown' here and help
us get it through?
Mr. RAND. Senator Glass, I will if I can. If I can be of any
help I will be glad to do so. I can not answer for the other gentlemen, but I will.
The CHAIRMAN. I was just going to suggest that the witness
says we might ignore State laws in banking. I might add to that
that-the Federal reserve law seems to have been pretty much ignored
in the banking also. Go ahead, Senator Wagner. 1fou were going
to ask a question.
Senator WAGNER. I was going to ask about a local situation in
Albion, where you say your group opened a bank.
Mr. RAND. We did not open a new bank. We had a bank at
Albion, X. Y., a small bank, and within a period of a few weeks
practically every bank in several counties was closed, and the other
bank in Albion has closed. We immediately, as soon as wo were
able to do so, made an arrangement with the national banking department and gave immediate credit to the depositors of the closed
bank to the amount of 50 per cent of their deposits with the closed
bank in our bank, which was the only other bank in the town.
Senator WAGNER. Those credits were mostly agricultural, were
they not?
Mr. RAND. XO. We took over their bond account. We took
over certain loans that they had that we thought were good. We
took enough of the closed bank's assets to protect us for the advance
we made.
Senator GLASS. Did they let you have them at the market price?
Mr. RAND. We took them at the market price, Senator.
Senator GLASS. YOU made money on the transactions, did you
not?
Mr. RAND. We sold the securities right out. We did not gamble
on the securities. We sold them out the day we got them except
for the Government bonds and the Xew York State and municipal

bonds.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

483

Senator WAGNER. IS not there a need for more banks in that
particular section?
Mr. RAND. The section had too many banks, as a matter of fact.
Senator WAGNER. Have they now?
Mr. RAND. I am not prepared to say that. At one time in Medina, a town of six or seven thousand people, they had no banks,
and we are opening a new bank there around tlie 4tli or 5th of
April.
Senator BARKLEY. DO you have any bank in your own city?
Mr. RAND. In our own" city we have one, the* Marine Trust Co.
Senator BARKLEY'. Your group is largely country banks?
Mr. RAND. NO. Our group is built up around the Marine Trust
Co. of Buffalo, which is a $250,000,000 bank, and we have a large
bank in Rochester and a large bank in New York City, the Marine
Midland Trust Co., which is a member of the New "fork Clearing
House Association.
Senator GLASS. Mr. Rand, in a sense,' then, and in a degree do
Tve not have nation-wide branch banking in this country now?
Mr. RAND. DO we not have nation-wicle branch banking?
Senator GLASS. In a sense and in a degree, through correspondent
banks ? In other words, does a bank in Chicago and various banks
in New York have as many as 4,000 or 5,000 correspondent banks
throughout the country ? Is not that in a sense and in a degree
branch banking?
Mr. RAND. S O , I do not see, Senator Glass, how it is. It may
be in some sense, in some decree.
Senator GLASS. That is what I am saying. In other words, the
correspondent bank, usually the little country bank that has its
correspondent in New York City or in Chicago or in St. Louis, is
in a sense subservient to its big bank, is it not?
Mr. RAND. N O ; I would not say that, Senator Glass.
Senator GLASS. I know you would not, but I would.
Mr. RAND. The difference is that the New York bank has no
jurisdiction over its investments.
Senator GLASS. It has not statutory jurisdiction over it, but it
extends its privileges, does it not, for which it is duly thankful, or
gives it advice, does it not, which it usually follows?
Mr. RAND. I would not say that. It will if it is asked for, probably. It depends on the local situation. But where a New York
bank has several thousand correspondents, I do not see how it can
take very much interest in the internal affairs of any one of those
correspondents.
Senator GLASS. It does not extend privileges without knowing
something about their business, does it?
Mr. RAND. I did not understand that question.
Senator FLETCHER. They do not really extend privileges; they
require the correspondent bank to put up the money with them, do
they not?
Mr. RAND. I am not qualified to answer on that.
Senator GLASS. I know, but the reason they put up the money is
that they expect the privileges to be extended, and they are extended.
and the little bank feels under obligation to tlie big bank.




NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS 484

Senator BROOKHART. There are times when the big bank allots
investment issues to the little banks, and they usually tal>e their
allotment.
The CHAIRMAN. In confirmation of the statement of Senator
Glass, I will say I have noticed that our small bankers in South
Dakota, in conversation, will state,i{ I have just been down to Sioux
City and talked with the big bankers, and so and so." When I am in
Sioux City, they say, " We have just been to Chicago and we saw
the Chicago banker." He says he has just been to New York City.
Now, it seems where our banks were loaded with poor securities
and we have talked to them, they say, " Why, yes. The Sioux City
people say it is all right." The Sioux City people say they have
talked with Chicago, and Chicago said it was all right. The Chicago people say they have talked with New York, and New York
says it is all right. So I quite agree with Senator Glass that we
havo a branch banking system now, and, in my opinion, too much
of it, and I think the conclition of our banks in the country is proof
of it.
Mr. RAND.* I think we have the very opposite of that. The New
York banks or the large city correspondents have no control over
the purchase of securities or the investments of the smaller banks;
and there are so many other agencies that are selling securities to
the small bank that I think you will find the proportion of the
securities sold to the correspondent banks by their New York bank
correspondents is not high but very small.
The CHAIRMAN. We got information about certain ones that really
had to buy securities. That is a different thing from buying voluntarily. They had allotments of other banks which were pushed out
on them. At the time it seemed to be good. Now they know it is
not good.
Senator GLASS. They may not have borrowed from the parent
bank but from its afliliate.
Senator BROOKHART. Yes, that is the point.
The CHAIRMAN. May I ask one or two questions ? I am not sure I
understand your set-up clearly. How many banking units have you?
Mr. RAND. We have 20 banks.
The CHAIRMAN. Is their stock held by a holding company?
Mr. RAND. Their stock is held by a holding company.
The CHAIRMAN. Nearly all of tliat bank stock is helcl?
Mr. RAND. About 95 per cent and upward.
The CHAIRMAN. Do you retain the double liability on the holding
company stock ?
Mr. RAND. NO, we do not. We are not against double liability.
When we formed our company we raised $50,000,000 in cash, which
was more than the total double liability would be.
The CHAIRMAN. YOU are carrying your reserve in the holding
company as a protection?
Mr. RAND. At the present time we have $19,000,000 in cash in our
holding company.
The CHAIRMAN. What is the total capital of vour banks?
Mr. RAND. About $32,000,000.
The CHAIRMAN. Thank you.




NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS

485

If there is no objection, the reporter will place in the record comments on the Glass bill submitted by the Wilmington Trust Co. of
Wilmington, Del.
W I L M I N G T O N TRUST CO.,

Wilmington, Del., March 28, 1032.
H o n . JOHN G . TOWNSEND,

Jr.,

United States Senate, Washington, D. C.
D E A B SKNATOR T O W N S E N D : I shall inclose herewith comments upon the Glass
bill. Its proposed treatment of securities ami collateral loans is extremely
objectionable to us in the Wilmington Trust Co. I hope you agree with me.
Yours truly,
H E N R Y P . SCOTT,
T H E REVISED GLASS BILL, S. 4 1 1 5 , INTRODUCED MARCH

President.

17

This is little better than the first Glass bill. I t will force extreme deflation; .
restrict the independence of the Federal reserve banks and subject them to
political control and to an opeu-market committee; discriminate against collateral loans further than now; discriminate against 15-day notes, the principal instrument of member bank borrowing; hamper the Treasury of the
United States in financing its great requirements by charging discriminatory
rates for loans to banks on Government securities; require increased reserves
by member banks against time deposits; and require member banks to write
down their real-estate assets and loans to present market values.
FEDERAL RESERVE B A N K S

The Glass bill limits the powers of the Federal reserve banks and aggrandizes the Federal Reserve Board in Washington. This is probably in the long
run the most dangerous feature of the bill, because it derogates from the autonomy of the banks and subjects them to political control. To say this is no
reflection on the present Federal Reserve Board or the present exceptionally
able governor thereof. It is a matter of principle that the Federal reserve
banks should be autonomous banks, run by local bankers and supervised, but
not operated by a board in Washington appointed by the President and confirmed by the Senate. Section 12 for instance provides that the Federal
Reserve Board shall exercise special supervision and control over all relationships of any Federal reserve bank with any foreign bank or banker. This is
only an instance. The biU bristles with infringements upon the autonomy
of the Federal reserve banks.
NEUTRALIZING

T H E GLASS-STEAGALL

BILL

Equally dangerous and perhaps more disheartening at this moment is the
provision of section 10 to subordinate the open-market powers of the Federal
reserve bank to an open-market committee, consisting of the Governor of the
Federal Reserve Board and representatives of the 12 Federal reserve banks,
acting at meetings to lie held in Washington at least four times a year, by
formal resolution, and subject to the approval of the Federal Reserve Board.
This seems hopelessly cumbersome and dilatory procedure. The principal constructive significance of the recently enacted Glass-Steagall bill, upon which
such high hopes were built, lay in the authority (a) to member banks having
a capital less than $5,000,000 to borrow on collateral security from the Federal
reserve banks, and (b) in the authority of the Federal reserve banks to secure
Federal reserve notes by United States Government obligations purchased in
the open market. The revised Glass bill would overcome the constructive
features of the Glass-SteagaU bill by discriminating more than ever against
collateral loans and by putting the Federal reserve banks' open-market powers
into commission in such a way as to be unusable. The country thought it was
to be saved from depression and deflation by the Glass-Steagall bill. Is the
original Glass bill now to be revised to the end that depression and deflation
shall continue in the land?




NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS 486
HAMPERING TKEA8UKY FINANCE

In a period when tlie treasury of the United States has an unusually heavy
volume of necessary financing, and after two failures of Treasury issues last
fall, section 11 imposes a rate 1 per cent higher than the discount rate upon
any bank that ventures to borrow on 15-day notes. This will imperil Treasuryfinancing and depress bond prices. It is important to remember that member
banks as a matter of convenience and a matter of course during 15 years:
have maintained a large holding of short Government paper as furnishing
the most convenient kind of eligible paper and that there is a scarcity of
other eligible paper in this depression period.
THB UNSOUND THEORY OF THE BILL

The theory of the revised "Glass bill, like that held by the Federal Reserve
Board in 1020, is that monetary control should be had, not by raising and
lowering the discount rate, but by discrimination between borrowers or
"direct action." Now, it is axiomatic that the function of a bank of issueis to control the price and volume of credit and that the credit which it
creates will flow along natural channels where it is wanted to the highest
bidder. Credit is like water, or, even more, like quicksilver, and it follow*
its natural course. However, the Federal Reserve Board in Washington
during the inflation period held the contrary view and attempted to put it
into practice. It prevented the Federal reserve banks from raising the discount rate and attempted to ration credit to the stock exchanges and caU
money market, with what disastrous results we know.
It will be recalled that the consequence was that the call-money market
was obliged to pay very high rates for money, and that these very high rates
attracted loans 44from others" and from all over the world. They did not
discourage but rather stimulated speculation. The bull market continued
unabated, and, indeed, activity was exaggerated all through the first half of
the year 1020 and until after, in August, 1020, the Federal reserve banks were*
finally permitted by the Federal Reserve Board to increase their discount rates*
That stopped it instantly.
This was to be expected. It is not possible to inflate business and agriculture with cheap money and cheap credit and at the same time to inducepeople, by admonition or restriction or rationing, not to buy securities which
the inflation is making attractive. The orthodox remedy for inflation is to
raise the discount rate, not to deny credit to honest borrowers on goodsecurity.
But the revised Glass bill proceeds on the unsound and vicious principle of
"direct action" advocated and tested by the Federal Reserve Board in 1028
and 1020 with such disastrous consequences to the country. The bill attempts
to outlaw investment securities, the owners of them, dealers in them and
banks that lend on them. The country as a whole is to be punished for the
inflationary excesses of 1027 to 1020 by being subjected in 1082 to a further
drastic deflation of securities and of credit.
The bill undertakes to provide that the boom, which ended in September,
1020, shall never happen again. So preoccupied is the bill with preventing the
reoccurence of the boom tlnit is has set up machinery well devised to perpetuate
and aggravate the depression.
The Federal reserve act never has, until the Glass-Steagall bill, permitted
the Federal reserve banks to lend money to member banks on investment
securities or on other securities than on eligible paper, and governments.
However, it is the bill's purpose to go further and, so far as practicable, control all the assets of every member bank and restrict their use in collateral
loans. So far as practicable, the entire resources of all the banks are to be
controlled by the Federal Reserve Board to suit the theory that stocks and:
bonds are bad, that people who borrow on them are bad, that banks that lend;
on them are bad, and that Congress, by law, can control the use of the wholeof the assets of the banks to suit this theory.
Thus a principal feature of the bill is to force banks to discriminate against
coUateral loans on stocks and bonds. Through control of tlie lending power
f . t e £ e d e r r 5 e s , e r v e b a n b s ^ is proposed to control, not only the money
?
lent by them, but also all the assets of the member banks.




national and f e d e r a l reserve

banking

SYSTEMS

487

PROVISIONS AGAINST OWNERS OF INVESTMENT SECURITIES ANI> DEALERS IN TUE2X
AND BANKS THAT LEND ON THEM

Section 3 authorizes tbe Federal Reserve Board in Washington to prescribe
legislation further defining and regulating the use of the credit facilities of
the Federal reserve system. Tlie section provides that such facilities shall
not he extended to member banks for the purpose of making or carrying loans
covering investments, or facilitating the carrying of, or trading in, stocks, bonds,
or other investment securities other than obligations of the Government of the
United States. Each Federal reserve bank shall keep itself informed of the
loan and investment practices of its member banks and the uses made by them
of the credit facilities of the Federal Reserve System. The chairman, who is
the agent of tbe Washington board (not the governor, who is the head of the
local bank) of each Federal reserve bank, shall report to the Federal Reserve
Board any undue, unauthorized, or improper use of such credit facilities, together with his recommendation for remedial action in the matter. The
Federal Reserve Board may, in its discretion, suspend for not more than one
year from the use of the credit facilities of the Federal reserve system any
member bank milking undue, unauthorized, or improper use of such facilities*
Thus the Washington board, not the local Federal reserve bank, is to be
policeman to the member banks.
Section 8 provides that the Federal Reserve Board (not the Federal reserve
bank) shall have power to fix for any member bank the percentage of its
capital and surplus, which may be represented by loans on collateral security,
and that the board shall have power to direct any member bank to refrain
from increasing its security loans.
15-DAY NOTES AGAIN

Section 11 provides that member banks' borrowings on 15-day notes shall
bear a rate 1 per cent higher than the rediscount rate, and that any member
bank which, after warning, shall lend money on stock* and bonds or to stockexchange members, investment houses, or dealers in securities, for the purpose
of purchasing or carrying investment securities, except obligation of the United
States, shall have its loan called and shall be ineligible as a borrower at the
reserve bank on 15-day paper for a period to be determined by the Federal
Reserve Board.
NATIONAL BANKS TO UNLOAD BONDS

Section 15 repeals the authority heretofore given national banks to buy and
sell marketable obligations for their own account, except as prescribed by the
comptroller; but in no event shall the total amount of investment securities
of any obligor or maker exceed 10 per cent of the issue, nor shall the total
amount of all securities held exceed 15 per cent of the capital stock of the
bank and 25 per cent of its surplus. It forbids them absolutely to underwrite
the issue of securities. The limitation to 10 per cent of the issue is new. The
present limitation is that the total securities of any one obligor shall not exceed
j»er cent of capital and surplus. The limitation on the total holdings of
investment securities is also new. These requirements will force national
banks to dump their bonds in a period when it is difficult indeed to sell investment securities of even the highest grade to investors, for the bill prohibits
banks from holding as well as purchasing for their own account investment
securities except as prescribed. This is one of the worst sections. It will
gravely depress security prices and so impair the capital and surplus of many
banks and trust companies, even though they are not directly subject to the
section.
Section 25 amends section 5200 of the Revised Statutes so that subsidiaries*
obligations are figured in the amount a national bank may lend to one bor
rower; and that no obligation of a broker or member of a stock exchange or
similar organization, nor of any finance company, securities company, investment trust or similar institution, or of any affiliate shall be subject to the
exceptions in favor of bills of exchange, acceptances, etc., provided under sec*
tion 5200; and that all such obligations shaU in every case be subject to the
limitation of 10 per cent.
Section 26 also overrules these exceptions to section 5200 with regard to
all collateral loans.




NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS 488
Section 18 prohibits banks from acting as correspondents of brokers, leaders,
and investment bankers, and vice versa, and prohibits any of the latter from
receiving deposits or being directors of national banks and member banks.
PUNISHMENT o r ATX BORROWERS ON COLLATERAL SECURITY

Througout tlie bill, tlie phrase, " loans protected by collateral security," is
repeated as the blanket definition of the kind of loans member bunks are not
to make with Federal reserve credit. Dad as it is to penalize loans on collateral to brokers, securities dealers, investment bankers, etc., it is doubly bad
to punish many borrowers on collateral whom there is no intention to punish.
liven if, for tlie sake of argument, one were to accept the theory that it is
sound and proper to penalize and discriminate against call loans on the New
York Stock Exchange and those banks that make them, even then it is hard
to see how Congress could go so far as to outlaw all stocks and bonds and
louns upon them and investments in them. Most people invest their savings
in stocks and bonds, and if they borrow on them at all do so for business or
domestic needs in these hard times. Must they be punished too so that no
wicked speculator shall by chance escape?
INCREASE RESERVE AGAINST TIME DEPOSITS AND REPURCHASE AGREEMENTS

Section 13 requires a gradual increase over five years in the reserves carried
against time deposits from 3 to 13 per cent in central reserve cities, to 10 per
cent in reserve cities, and 7 per cent in other cities. This clause alone should
guarantee for a 5-year period bank failures and dellatiou.
In clause (d) it prohibits.loans " f o r others." In clauses ( f ) and (g) it
restricts or suspends the sale of reserve balances, and provides that, in computing required reserve balances, the liability created by every repurchase or
other similar agreement shall be added to net deposits.
WRITE DOWN REAL ESTATE

Section 14 requires the comptroller at every examination to revalue real
estate security for national-bank loans, which under present conditions would
probably mean that all the loans secured by real estate are undersecured. It
reduces the amount of real-estate loans which a bank may have from 25 to
15 per cent of its capital stock and surplus. It authorizes national banks to
invest the amount of their time deposits in real-estate loans and savings bank
securities, and members banks must report such investments at market value.
It is provided that all the property of any insolvent national bank which is
acquired under this section is to be applied by the receiver first to the payment
of time deposits. Nationant banks and member banks are required to comply*
with the terms of this section within two years.
CHAIN BANKS AND AFFILIATES

Section 4 disfranchises chain banks from electing Federal reserve directors.
Section 6 requires reports from afniiates.
Section 9 limits member-bank loans to and investment in and loans upon the
securities of afliliates to 10 per cent of the capital and surplus of the bank,
and under section 25 such loans to national bank afliliates shall also not exceed
the affiliate's paid-in capital. All such loans must be secured by 120 per cent
listed securities or 100 per cent eligible paper or savings-bank investments.
Section 17 requires national banks to separate the stock certificates of the
bank from the stock certificates of the affiliate within two years.
Section ID amends scction 5144 of the ltevised Statutes to prohibit anyone
but the true owner voting on national-hauk stock and prohibits anybody voting more than 10 per cent of the stock of a national bank, except under conditions specified in section 20, requiring an affiliate to make reports and
submit to examinations by the comptroller, to hold United States obligations equal to 10 per cent and other assets equal to on additional 15 per cent
of the capital stock owned by it in the national bank to cover its stockholders
liability, etc.
Section 25 amends section 5200 further so that the aggregate amount of the
obligations, including repurchase agreements, of all the afliliates of a national
bank shall not exceed 10 per cent of the capital stock of the bank and surplus,




NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS

489

except loans secured by obligations of the United States Government, of the
State in which tlie bank is issued, or a political subdivision of the State, if
actually owned by the borrower from the bank. Within three years every
national bank affiliate shall be capitalized through the sale of its own stock
and not from cash or stock dividends.
Section 27 amends section 5211 of the Revised Statutes by providing for
reports of affiliates.
Every national bank affiliate indebted in excess of 5 per cent of the capital
and surplus of the parent bank shall publish its portfolio.
Section 2S provides for their examination.
MISCELLANEOUS

Section 7 removes the Secretary of the Treasury from the Federal Reserve
Board and removes the Board from the Treasury building.
Section 10 (12 B) provides for a liquidating corporation and section 5 turns
over the net earnings of the Federal reserve banks to the liquidating corporation.
Section 21 contains an excellent provision permitting statewide branch banking, and permitting such branch banking beyond State lines in special circumstances.
Section 23 contains an excellent modification of the usury law, affecting
national banks.
. Section 24 limits the rate of interest which the hanks may pay to depositors
to one-half the statutory rate, and in the case of interbank deposits to the
discount rate of the Federal reserve bank or 2 % per cent which ever shall be
smaller.
Section 29 provides for the removal of directors or officers of member banks
who have misbehaved.
To summarize, the revised Glass bill is well devised to force further and
greater deflation and to prolong and deepen the depression. It would («) force
the liquidation of loans on.stocks and bonds and investments in stock and
bonds; (b) force the separation of national bank affiliates; (©) impose a rate
one per cent above the discount rate on member banks' 15-day notes, and thus
contract credit, jeopardize the Government's financing and depress all bonds;
(d) force member banks gradually to increase their reserves against time
deposits from 3 per cent to 13 per cent in central reserve cities, to 10 in reserve
cities, and to 7 per cent in other cities; (c) force member hanks to write down
their real estate and real-estate loans; if) prohibits members banks from acting as correspondents for, or making deposits with, hankers, brokers, and
others engaged in the business of buying and selling securities; ((/) deprive
the Federal reserve banks of their autonomy and subordinate them further
to the board in Washington and to an open-market committee; (h) destroy
the expected good effects of the Glass-Steagall bill.
STATEMENT OF S> M . HARES, REPRESENTING- T H E W A T C H O V I A
B A N E & TRUST CO., WINSTON-SALEM, N . C.

Mr. HANES. I would like to comment on one or two features of the
bill as it affects us in North Carolina.
Mr. Chairman and Senator Glass, we have had in North Carolina
a severe upheaval in banking over the past two years. Starting with
December, 1930, we lost from 50 to 75 banks, and then, starting with
September of last year, up until the 1st of February of this year,
we lost something like 100 to 150 banks. We have lost only 2 banks,
I believe, since the 1st of February.
We are very anxious in North Carolina, if possible, that nothing
be done, no drastic legislation be had at this time to do what we
think would probably upset the situation again. It is quiet now,
I think the public hysteria is over. Our people are satisfied that the
banks that have gone through are good, and we are very anxious
that nothing drastic be done, if possible.
Senator GLASS. What caused the failure of the 200 banks?



NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS 490

Mr. HANES. I think public hysteria to a great extent, sir. A great
many very good banks, that should be going to-day, closed because
of the hysteria. Depositors became frightened, went on to the banjss,
and asked for their money, and the banks could not liquidate their
investment holdings fast enough to pay them.
Senator GLASS. They were largely frozen?
Mr. HANES. Yes, sir; largely frozen.
Senator BROOKHART. Members of the Federal reserve system?
Mr. HANES. XO, sir. We only havefiveState banks left in North
Carolina, members of the Federal reserve system.
Senator BROOKHART. Some of the State tanks failed?
Mr. HANES. Yes, sir. Some national banks, too.
Senator BROOKHART. Of course, they would be members.
M r . HANES. Y e s .

We think that section 11 of the bill is detrimental, and we would
like to sec it either modified tremendously or left out. We think a
1 per cent penalty for borrowing on 15-day^ paper is bad; and we
also object to the Federal Reserve Board saying how we shall invest
our money. We think that should be left* to the discretion of the
banker, and we do not believe that legislation is going to make good
bankers of poor ones. We also object to the liquidating clause. In
the case of the bank I represent, for instance, we would have to put
up $205,000 of our funds to give back to the depositors of the closed
banks their funds.
Senator GLASS. What are your deposits?
Mr. HANES. About forty-two or forty-three million dollars, sir.
Senator GLASS. HOW do youfigurethe $265,000?
Sir. HANES. AS I understand the bill, it is one-half of 1 per cent.
Senator GLASS. One-fourth of 1 per cent is thefirstcall. The total
is one-half of 1 per cent.
Mr. HANES. Yes; but I understand one-half of 1 per cent is
the amount we would be liable for if called on.
Senator GLASS. YOU anticipate there would be more than one call?
Mr. HANES. A lot of these things we have not anticipated, Senator, in the past two years that have come on us.
Senator GLASS, itas the full capitalization of the Federal reserve
banks which have been in existence nearly 19 years been called? '
Mr. HANES. Xo, sir; I do not think so.
The CHAIRMAN. Would you have a different attitude toward
that if it were deferred a little longer?
Mr. HANES. X O , sir; I do not think we would.
The CHAIRMAN. DO you think there is any need?
Mr. HANES. I do not think private funds and stockholders' funds
should be put up to help banks in distress. We do not think that
is fair or right. We do not think we have a right to take our stockholders^ funds and prejudice their rights for other stockholders or
other depositors.
Senator GLASS. Did you subscribe to the capital of the National
Credit Corporation? #
M r . HANES. Y e s , sir.
Senator GLASS. That was 2 per cent, was
M r . HANES. Y e s , sir.
Senator GLASS. DO you think it was all

it not?

right to subscribe your
depositors' money to that and all wrong to subscribe it to this ?



NATIONAL*AND FEDERAL RESERVE BANKING SYSTEMS

491

Mr. HANES. Yes, sir: because that was the thing we had direct
control of or part of the control of and did it purely as an emergency measure. It was not clone to be strung out over a period of
years. Our directors felt the same way about that. It was a question of self-protection to them in a case of emergency.
Senator GLASS. Is not this a question of protection, and is it not
a profitable investment?
Mr. HANES. I think the difference, sir, is we were protecting our
banks in North Carolina and not banks all over the United States,
to a great extent, and we were more intimatelv connected with them.
Senator GLASS. HOW many member banks failed ?
Mr. HANES. I do not know the exact number, sir. There are only
five now.
Senator GLASS. DO you not think the depositors of those member
banks would like to get what is coming to them rather than to wait
over an extended period of years to have it doled put to them by a
receiver?
Mr. HANES. Yes: I think they would.'
Senator GLASS. That is what this bill provides.
Mr. HANES. It is only a question of whether the stockholders of
our banks should give up their funds to help the depositors of
another bank. We do not tliink that it quite fair.
Senator FLETCHER. The run on the one bank and the failure of
that one had 'a bad effect on all the banks, did it not?
Mr. HANES. Yes, sir. It multiplied the intensity of the trouble,
of course.
Senator FLETCHER. SO if you can prevent a bank from failing
it helps the whole system, helps the confidence of the depositors in
the whole system. In other words, there ought to be a little spirit,
of cooperation between banks.
Mr. HANES. Yes, sir. I think that is quite true, sir. I think
that has been shown by the National Credit Corporation. The cooperation they brought about did a tremendous good.
Senator GLASS. Why would not this do a tremendous good?
Mr. HANES. I think it probably would, sir, if it was wisely handled
and properly handled.
Senator GLASS. If it was wisely handled it was the thought of the
committee it would show a profit on your investment, x ou would
get 30 per cent of the earnings of the corporation.
Mr. HANES. Of course, it depends on the management altogether,
as to whether there is going to be any 30 per cent.
Senator GLASS. It depends upon the management of the National
Credit Corporation whether there would be any per cent, too.
Mr. HANES. Yes, sir. But I tried to«make it clear that that was
a purely emergency thing, where the bankers were largely interested
and their full time was put in in seeing that it was properly managed. I do not believe that that would be possible witn a corporation
that is run over a period of years.
Senator FLETCHER. The Federal Reserve Board passed a substitute for your section 11. Have you seen their substitute and examined it to see whether that would be satisfactory? *
Mr. HANES. Yes, sir; I just looked at it hurriedly this morning.




NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS 492

Senator GLASS. YOU think it is all right, then, to take the taxpayers' money and secure the deposits ot failed banks? That you
think is all right?
Mr. HANES. I think it much fairer, sir, than taking the wellmanaged funds of stockholders to pay losses of badly-managed
banks with. Bank solvency is a question of public good. The public as a whole are depositors in banks.
Senator GLASS. The taxpayers do not derive any profit from the
operation of this proposed liquidatingcorporation. That is a liquidating corporation proposed by the Federal Reserve Board. Why
should I, as a taxpayer, be taxed to do this thing when I have no
interest in it?
Mr. HANES. YOU have the interest, sir, as a- depositor in some
bank.
Senator GLASS. How do you know?
The CHAHOIAN. It is a very small part of the population that
are depositors, is it not?
Mr. HANES. Certainly a larger percentage are depositors than
are stockholders. I am not proposing to take the taxpayers9 money.
I am simply saying
The CHAIRMAN. If we talk about taking the taxpayers' money
for the protection of depositors, we get a very involved question.
Mr. HANES. I do not know, sir. We are taking it for a lot of
purposes.
Senator BROOKHART. If you are taking the taxpayers' money to
substitute for this National Credit Corporation or "Reconstruction
Finance Corporation, I guess itfinallycomes back to the taxpayer,
does it not?
Mr. HANES. Yes, sir; I should think so.
Senator GLASS. A S I concede, we have taken the taxpayers' money
for a good many purposes.
The CHAIRMAN. We have been taking it to help the big banks,
have we not?
Senator GLASS. We took $40,000,000 of it to help one bank.
Senator FLETCHER.^ You mention section 11. What other section
do you wish to criticize?
The CHAIRMAN. We took that in the hope of preventing a disaster.
Mr. HANES. They were the two principal sections that we objected
to. The other is section 12 B.
Senator GLASS. If we should eliminate the 1 per cent penalty,
what would be the objection to the section?
Mr. HANES. I think the objection still holds, sir, that the Federal
Reserve Board would say to us how much of our funds we could
put in security loans, which we object to. We think we can. handle
that ourselves better than they can tell us to. I hope so.
Senator GLASS. Have they not that authority now?
Mr. HANES. It is not as definitely prescribed as it is in here, as I
understand it. This makes it obligatory upon them. I do not think
it is now.
Senator GLASS. They have, under that provision of existing law,
unlimited authority to make any assessment against 15-day paper
they please, have they not?
M r . HANES. Y e s , sir.




NATIONAL*AND FEDERAL RESERVE BANKING SYSTEMS

493

Senator GLASS. SO when it comes to be a question of authority,
this is a restriction of authority rather than an expansion?
Mr. HANES. I think this makes it obligatory to say to a bank,
" You shall carry only so much in security loans," as I understand
the bill, sir.
Senator GLASS. NO. It simply authorizes the board to say that
if a bank is jeopardizing its business and depriving agricultural,
commercial, and industrial enterprise of its opportunity to get
credit on reasonable terms, it shall not extend tliat character of
oans.
M r . HANES. Y e s , sir.
Senator GLASS. It does not say it shall not make them.
Mr. HANES. I think that would have the effect, sir, of

this, as I
read the law and as the Federal reserve law now exists: We can
loan any amount of money on open paper, that is, one-name or twoname or three-name paper. We might have some one come in who
would want to borrow ten,fifteen,or twenty-five thousand dollars
who would offer perfectly good and liquid collateral. We would say,
" No, we are prohibited from taking that, but we will take your open
note and the monev will go to the same cause."
Senator GLASS. YOU will not be prohibited from taking it unless,
upon examination, the Federal reserve bank at Kichmond reaches
the conclusion that your extension on speculative loans is so great
as to jeopardize the business of your bank or to deprive legitimate
commerce of accommodation.
Mr. HANES. That is just the question, sir; whether these loans are
speculative or not. They are loans on security, but a great many of
them go right into commerce and industry.
Senator GLASS. That would be determined by the board of directors of the Federal reserve bank.
Mr. HANES. It is a very hard thing to determine, sir.
, The CHAIRMAN. Whether they would probably be slow or active.
Senator GLASS. Unhappily there is no imperative reason to suppose that the Federal reserve bank would ever do that. It is permitted to exercise the authority it already has, and it has unlimited
authority to fix the rate of interest on 15-day loans and never has
done it.
M r . HANES. Y e s .
Senator FLETCHER.

I did not quite catch whether you approved
of the Federal Reserve Board's substitute for that section 11 or not.
Mr. HANES. Well, as I read it very hurriedly this morning, I think
the Federal reserve substitute leaves the law just as it is on 15-day
loans.
Senator GLASS. I know, but they covered that whole proposition in
section 3. Do you approve of their section 3 ?
Mr. HANES. I do not know what their section 3 is. I read it just
this morning in the paper and very hurriedly. I have not had
opportunity to study it at all.
Senator GLASS. Their section 3 gives unrestrained, unlimited
power to the Federal Reserve Board to fix a percentage of loans, not
only on speculative paper but on real estate and on commodity paper.
Do you approve of that ?
Mr. HANES. I do not think the Federal Reserve Board has ever
abused its power so far, and I do not think it would in the future.
111161—32—pt 2




is

NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS 494

Senator GLASS. Why do you think it would as to section 1 1 ?
Mr. HANES. I think section 11 is very specific and very definite but
almost obligatory on them.
Senator GLASS. Oh, no. It leaves it entirely in their discretion.
In other words, under that section the national bank, for example,
may loan $50,000,000 on speculative security or $100,000,000, for
that matter, but only after it has extended loans on paper of that
character.
Mr. HANES. What borrowing we can do we do not do on eligible
paper. We borrow on Government securities altogether, because
it is much easier to go to the Federal reserve bank and get money
for two or three days l>y simply sending a note in and use it. Otherwise we would have to go through thefiles,get out the eligible paper
and have it all worked up into proper sheets and sent to Richmond
and then have it sent back to us as it matures. It is quite a lot of
trouble to do that.
Senator GLASS. Suppose there were no Government bonds. What
would you do?
Mr. HANES. Then we would have to do just what we could do. If
there-were no Government bonds we would have to buy other
securities.
Senator GLASS. When that provision was inserted in the Act there
were no Government bonds available for 15-day loans in appreciable
amounts.
Mr. HANES. There are a lot available now.
Senator GLASS. When we drafted the law there were none available. We never would have authorized the use of them, because the
Federal reserve system is a commercial system; it is not an investment banking system; and so far from being a speculative banking
system that we very definitely precluded speculative paper from the
1 the bill.
eli
Senator MORRISON. Were you through, Senator?
Senator GLASS. Yes.
Senator MORRISON. I noticed in your reference to section 3 a while
ago you did not seem to think it was as mandatory as section 11.
I want to call your attention to line 18 on page 3, section 3, where
it says:
Such facilities shall not be extended to member banks for the purpose of
making or currying loans covering investments or- facilitating the carrying
of or trading in stocks, bonds, or other investment securities other than
obligations of the Government of the United States;

Do you not think that is pretty mandatory?
Mr. HANES. Yes, sir; I think it is.
Senator MORRISON. DO you understand that to be the law now?
M r . HANES. N o , s i r ; I do not.
Senator GLASS. What do you understand by this?
Mr. HANES. I understand the law, as it is now, is

permissive entirely; but this, as I read it, is obligatory.
Senator GLASS. The law, as it exists, is absolutely negative. It says
that the Federal Reserve Board, in its definition of eligible paper
shall not include notes, drafts, or bills covering investments.




NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS

495

Mr. HANES. That is simply the rediscount privilege. That does
not say you can not hold these in your portfolio and still rediscount.
This bill does, as I understand it.
Senator GLASS. N O ; not what has been read there, does it? What
has been read there says that—
The Federal reserve bank shall not permit its facilities to be used for purchasing or carrying or trading in investment securities or notes, drafts, or
bills issued or drawn for the purpose of carying or trading in stocks, bonds—

And so forth.
M r . HANES. Y e s . .
Senator GLASS. IS

not that the exact language of section 3 as we
have it in the bill?
Mr. HANES. It is, sir; but, as I know the Federal reserve act now,
that simply applies to rediscounting. That does not say you shall
not carry that in your own portfolio if you want to.
Senator GLASS. Neither does the section that Senator Morrison
has read.
Senator MORRISON. Senator Glass, right there, that is a very important matter to me. I thought it did, and I interpreted it that
way. If I am wrong I would like to be convinced of it.
Senator GLASS. It applies to the Federal reserve bank, not the
member bank. It does not forbid the member bank to extend its
facilities for investment.
Senator MORRISON. The objection I see, as I read it, is they may
pass regulations regulating their member bank.
Senator GLASS. N O ; regulating the Federal reserve bank; that the
facilities of the Federal reserve bank, its rediscount facilities, shall
not be used for that purpose.
Senator MORRISON. For a bank that it has made rules governing, and if it breaks them it may punish them by not letting them
have any accommodations for 12 months.
Senator GLASS. No.
Senator MORRISON. I can talk to you privately. That is my
chief objection.
Senator GLASS. I think I can point out to you privately, as I
could publicly, that that is not the meaning of it at all.
Senator MORRISON. That is the way it reads to a country lawyer
like me.
Senator GLASS. That is simply a transfer of the text of the
existing provision of law to that section of the bill, with the proposed amendment by the Federal Reserve Board. It is just commending itself to tlie bankers and enlarges the power of the Federal Reserve Board in that respect.
Senator MORRISON. It goes onto say:
Only if such discouuts. advances, and accommodations are intended for the
accommodation of commerce, industry, and agriculture, and the Federal
Reserve Board may prescribe regulations further defining and regulating the
use of the credit facilities of the Federal reserve system.

Senator GLASS. Of the Federal reserve bank, not of the member bank.
Senator MORRISON. Yes: but the member bank, of course, gets
it from the Federal reserve bank.




NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS 496

Senator GLASS. Yes; but the existing law, Senator, for 19 years
has made that provision.
Senator MORRISON. When they ask for the discount it must befor that purpose, and with that I heartily agree with you as much
as anj'body.
Senator GLASS. That is all there is to it.
Senator MORRISON. When it comes to their saying, " But I won't
discount it for you because you have got too much of your securities in other things
"
Senator GLASS. It docs not say that.
Senator MORRISON. That will get rid of a heap of trouble.
Mr. HANES. Section 11, page 25, does say that, does it notr
Senator?
Senator MORRISON. That is with reference to the 15-day loans.
Senator GLASS. Section 11 with respect to that authorizes theFederal Reserve Board, if it conceives a bank has overextended in
speculative transactions, to warn it not to further extend its loans,,
and if it should disobey the warning, it may be suspended. That
is covered in the proposed amendment to section 3 of the bill recommended unanimously by the Federal Reserve Board.
The CHAIRMAN. DO you not think the danger of trouble from
that source is pretty remote?
Senator MORRISON. I think they have been doing it morally, like
that witness said this morning. I know they have been in my section of the country trying to regulate them all the time.
Senator GLASS. In other words, they made a mighty feebleattempt.
Senator MORRISON. They wrecked a great many people by it.
Senator GLASS. And that provision of the bill was inspired by a
notable episode. The Federal Reserve Board here at Washington;
undertook, under its authority as expressed in the act, to mildly remonstrate with a speculative bank, a tremendously speculative bank
in New York, against the extension of its loans for stock gamblingEurposes. That is the plain fact. That speculative bank, as I
ave said;figurativelytold the Federal Reserve Board to go to hell;
it was going to do as it pleased in the matter, and that it was going*
to the very next day rediscount to the extent of $25,000,000 and*
loan it on the market. The president of that bank, who was also*
a director, a sworn officer, of the Federal reserve system, took theposition that his obligation was to the stock market rather than to
the Federal reserve bank. Now, that provision is simply intended'
to say that if a thing of that sort should occur again, that bank
could be suspended from the use of the Federal reserve facilities*
Senator MORRISON. Senator, I think that is the intention. But at
the same time, in great sincerity. I think it goes to the extent of
giving them the power to undertake directly, and it is made mandatory, to control and regulate all of their investments; and I do*
not think they ought to have it.
As to the evil that you are striking at there—this is all aside—
I have a profound .sympathy with your view. May I ask you thisr
Mr. Haines, I do not want to ask you if you mind telling, there may
be some business reason why you would not like to tell, but may I ask,,
what percentage of your loans are now eligible for discount?.'




NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS

497

Mr. HANES. About 15 per cent, sir. We have about $3,500,000 of
•eligible paper.
Senator GLASS. And generally speaking, as a business practice, the
percentage of eligible paper in our section of the best banks as related to the whole sum of their credits is small, is it not?
Mr. HANES. Yes, very small.
Senator GLASS. Has the Federal reserve bank, as you understand
it, any legal power now to dictate to you except in a moral way
what you shall invest in so far as your bank is concerned?
Mr. HANES. I think they probably have under the act as it is
now if they should want to do it, but it never has been customary.
I do not think they could go as far as they could under this act
.at all.
Senator GLASS. According to my interpretation of it, it is made
mandatory, is it riot?
Mr. HANES. That is the way I read it, sir.
Senator GLASS. They shall do it under the above sections. You
would not want to see that done, would you?
Mr. HANES. NO, sir; I would rather not.
Senator GLASS. Well, would it not endanger the whole fabric of
our business life to have to restrict those credits and collect them
and reinvest them, at this time especially?
Mr. HANES. Yes, sir; I think it would.
Senator FLETCHER. YOU did not ])oint out what objection to section 12B you had. You said you objected to it.
Mr. HANES. That is the liquidating corporation provision.
Senator FLETCHER. You object to that whole plan?
M r . HANES. Y e s , sir.
The CHAIRMAN. I thank you

very much.
(Whereupon, at 1.10 o'clock p. m., a recess was taken until 2.30
•o'clock p. m.)
AFTERNOON SESSION

Pursuant to the expiration of the recess, the committee reconvened in the Interstate Commerce Committee room in the Capitol
at 2.30 o'clock p. m.
The CHAIRMAN. The committee will come to order. Thefirstwitness is Mr. Burgess. He wanted to appear for a few minutes.
STATEMENT 0 7 W . RANDOLPH BURGESS, DEPUTY GOVERNOR OP
T H E FEDERAL RESERVE B A N E I N N E W Y O R E C I T Y

The CHAIRMAN. You may take a seat, Mr. Burgess, and give your
full name and address and your business connections and whom
you represent.
Mr. BTTRGESS. W. Randolph Burgess, deputy governor of the Federal reserve bank in New York, New York City.
Mr. Chairman, I am appearing in behalf of Governor Harrison.
Governor Harrison was scheduled to appear before this committee
this afternoon at 2.30. Unfortunately, his brother lies very critically ill, and I am afraid at the point of death, and so he is not
going to be able to be here and asked me to come and express to you




NATIONAL*AND FEDERAL RESERVE BANKING SYSTEMS 498

personally his regrets and not being able to fulfill his appointment
and to ask if there is any possible way in which the committee could
arrange to hear him at a later time. I realize the difficulties in
that. The New York bank, of course, is very closely concerned
with the substance of this bill; our directors are most anxious that
Governor Harrison should be heard, and if there is any convenient
way in which that could be arranged, he and they would certainly
appreciate it.
Senator WALCOTT. Mr. Chairman, may I suggest that we ask
Doctor Burgess if it would not be just as convenient for Mr. Harrison, and equally good for us, if he submitted written comments as
part of the record, rather than to extend our hearings?
The CHAIRMAN. The Chair suggests that after hearings are closed
we go into executive session and take up those matters. I am glad
to have your explanation.
Senator GLASS. I would like to go upon the record here, in order
that it may not appear that Governor Harrison has no opportunity
to comment upon the provisions of this bill, that Governor Harrison
has complete knowledge of, I might say, every provision of the bill
except one, and has had for three weeks.
I want to say, furthermore, that I personally called Governor
Harrison on the phone, as members of the subcommittee will recall^
by direction of the subcommittee.
The CHAIRMAN. Some time ago?
Senator GLASS. Yes, sir.
The CHAIRMAN. A month or more ago?
Senator WALCOTT. About two weeks ago.
Senator GLASS. And said to him that the committee would give
him public hearing if he desired it, and he very explicitly, I may
say emphatically, stated that he did not want to be heard. I say
that, Mr. Burgess, in order that the impression may not get abroad
that we have done anything in a corner and have not given everybody
an opportunity to be heard.
The CHAIRMAN. GO ahead and make any further statement vou
want.
Mr. BURGESS. Mr. Chairman, I must just say that Governor Harrison reported the conversation' to me and I think his understanding
of it was that he did not care whether the hearing would be public or
private, but his negative response was to the question of whether
he desired a public hearing: that he did, however, desire a private
hearing, a hearing of some kind, whether public or private.
Senator GLASS. Well, of course,'you know we gave Governor Harrison repeated frequent private hearings.
Senator COUZENS. Mr. Chairman, I move that Governor Harrison
be permitted to file a statement with the committee.
Senator GLASS. I can see no objection in the world to that.
The CHAIRMAN. If there are no objections, the matter will be disposed of now in that way and he will be given permission to file a
Written statement.




NATIONAL*AND FEDERAL RESERVE BANKING SYSTEMS

499

LETTER OF GEORGE L . HARRISON. GOVERNOR FEDERAL RESERVE B A N K OF N E W Y O R K
FEDERAL RESERVE B A N K OF N E W

YORK,

April 7, 1932.
The attached letter of Governor Harrison, dated April 7, has been read
and unanimously approved by the directors of the Federal Reserve Bank of
New York present at their meeting on April 7,1032.
J.

HERBERT CASE; D . C . W A R N E R ,
THEO. F . WHITMARSH, OWEN D .
Y O U N G , ALBERT H . W I G G I N , C . M .
WOOLLEY, W . H . W O O D I N , S A M L .
W . REYBURK.

FEDERAL RESERVE B A N K OF N E W

YORK,

April % 1982.

H o n . PETER NOBBEOK,

Chairman Committee on Banking and Currency,
United States Senate, Washington, D. 0.
BEAR MR. SENATOR: I am sorry that my brother's death prevented me from
appearing personally before your committee on Tuesday, March 29, the day
on which an opportunity was given to me to express my views with respect to
the provisions of Senate bill 4115 now before your committee. However, I
very much appreciate the action of the committee in giving me this opportunity
to present to it a memorandum of our views with respect to this important bilL
Of course, it would be the wish of the committee and of all connected with,
the Federal reserve system, to do everything properly within our power to accomplish two objects: First, to check the present depression in business and
trade, and second, to prepare the means for avoiding, as far as may be possible
to do so by legislative or administrative action, a repetition of conditions which
may have contributed to the depression. We all have the same interest and
the same objectives. The task before us, however, is how to devise the means
of accomplishing these two purposes.
It is our opinion that Senate bill 4115 is directed more toward the second
objective, that is, a control of possible future inflation or abuses of credit, than
it is toward the first and at the moment the more important objective, that is,
a restoration of more normal business conditions. Apart from the relatively
few provisions in the bill, such as those relating to branch banking and possibly the liquidating corporation, the great majority of its substantial sections
appear to us to be deflationary or restrictive in their effect. To the extent
that the pending bill endeavors at this time to prevent possible future excesses,
it would operate as a restraint upon, and would probably require a drastic readjustment of, the banking and investment machinery of the couutry. This
would be a deterrent, both actual and psychological, to the recovery from the
present depression, which is one of the most severe in our history. That depression affects all classes of production, industry, agriculture, and trade. It
has been accompanied by an extremely rapid deflation in commodity prices and
in the general price level. It has resulted in unemployment never before exceeded in our history. It has been accompanied by receiverships and defaults,,
and in the closing of many banks throughout the country. As time goes on
prices, wages, and incomes are being reduced and unemployment is not
decreasing.
Regardless of the causes, we are now confronted with an economic crisis
which is the immediate and prime concern of every one of us.
With these conditions in mind, our views with respect to the proposed legislation may, for the purposes of this discussion, be summarized by the follow*
ing general statement of principles which we believe to be important:
First. The bill, through many of its provisions, tends further to centralize
in the Federal Reserve Board the control of operations of the Federal Reserve
banks and the member banks. We believe in the basic principle of the Federal
reserve act that the public interest will best be served by leaving to the boards
of directors of the several Federal reserve banks autonomous powers of operation within the terms of the law, and by leaving to the Federal Reserve Board
general and broad powers of supervision as was always contemplated by the
framers of the Federal reserve act. All the more important is it, in our judg-




NATIONAL*AND FEDERAL RESERVE BANKING SYSTEMS 500
meat, that the operations of the member banks within the terns of the law
should be left to the management of the respective boards of directors.
Second. The Federal reserve banks, as any bank of issue, should endeavor to
control unnecessary expansion or excessive uses of credit by the use of the
discount rate, supplemented by appropriate open-market operations, rather than
by arbitrary or dictatorial "direct action." It is not possible, nor would we
deem it wise if possible, for the Federal reserve banks or the Federal Reserve
Board or any one group of persons to control the uses to which the credit of
the country shall be put once it is let loose. It is one thing for Federal reserve
banks, through the discount rate and through open-market operations, to influence tlie total volume and the price of credit. It is a very different and, we
believe, an unwise thing for the Federal reserve banks or the Federal Reserve
Board, through so-called "direct action," to attempt to control or dictate the
loan or investment policies of many individual banking institutions of the
country.
Third. The danger of speculative excesses is not necessarily inherent in
granting bank loans based upon collateral security, or in investing bank funds
in capital securities. A large proportion of bank credit in the United States
has always been based upon the obligations of or equities in American industry
or business institutions. That is a necessary means of extending credit to
many classes of legitimate borrowers whose other credit alone is not adequate
to support a bank loan.
These are our general observations with regard to certain broad questions of
principle raised by the proposed bill. It is difficult in the space of a letter
to offer detailed comments as to specific provisions of the bill. There are,
however, certain general comments which we think should be made with
reference to some provisions of the bill which involves some! of the points outlined above.
The first, and perhaps the most important, question arising now in connection with this bill is the question of timeliness. Just as in time of warf the
interests and the energies of this country are now concentrated on the single
problem of recovery from depression, of restoring work to several milUon
unemployed, of raising commodity prices to a point where debtors may meet
their debts, of removing want, distress, and fear. A beginning has been made
in curing the basic causes of the depression, in reducing bank failures, in restoring confidence, and in making credit more freely available. It would be most
unfortunate should anything now be done to interfere with or retard the forces
of recovery. We trust, therefore, that in its consideration of the pending bill
the committee will give most careful consideration to the probable effects on
public sentiment and tlie credit situation which may arise from its action on this
bilL A threat of credit restriction or dislocation of the financial machinery
xnay at this time prove a seriously disturbing factor.
Even were it not for the present critical situation it must be recognized that
a fundamental revision of the banking law, going to the very roots of the
principles of central banking, is necessarily a large undertaking, and one which
should only be carried through on the basis of a considerable concensus of
opinion as to the major features. While the Senate committee has been working for more than a year, the definite proposals in the present bill have been
before the country only a Umited number of weeks, at a time when men's
minds have been largely diverted to other matters and when men's emotions
are greatly stirred. It is doubtful whether legislation of this sort should ever
be hurried unless there is some pressing public need for it. The evidence before
your committee tends to indicate that there is no such need just now. On the
contrary might not haste be particularly unfortunate at a time like the present?
As indicated in our preliminary summary, it seems to us that the pending
bill is based upon questionable principles in at least three particulars.
First, one basic principle of the Federal reserve system is that tlie system
should constitute a democracy of credit with a large measure of local autonomy.
As we interpret many of its provisions the question arises in our minds whether
the bill might not do much to defeat this fundamental principle. It would
increase to a great extent the powers of a Government board, not only over
the Federal reserve banks but over the member banks as well, and it would
give this board 110 small measure of responsibility for tlie management and
policies of individual banks.
Second, the bill proposes to check speculation by increasing Federal reserve
powers of restriction and prohibition upon the operations of individual banks.
This is the method of " direct action " which has its uses as a method for




NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS

501

dealing with individual hanks which may be using more than their share of
Federal reserve credit, but it is not an effective or suitable method for general
control of credit or the uses to which credit will be put The proper and most
effective instruments of credit policy are open-market operations and discount
rates, and the iniiuence exerted by a reserve bank on the loan and investment
policy of individual member banks ordinarily has but limited effect on credit
conditions as a whole. Not only is the type of " direct action " which this bill
embodies in law usually ineffective as an influence on general credit conditions,
but it involves the assumption by the Federal reserve system of a responsibility
for the management of individual member banks which could not effectively be
fulfilled. For proper and effective control of credit conditions the traditional
methods of influencing the volume and cost of credit by the discount rate and
open-market operations must be relied .upon. The proposals in sections 3, 8,
and 11, of the bill before you would, we believe, prove both ineffective and
seriously embarrassing and detrimental to the Federal reserve system and the
member banks.
Third, the bill attempts in considerable measure to divorce the banking
system from the capital market, and would do much to disturb the mechanism
of the capital market, the free functioning of which is now so important to a
recovery 'from existing business conditions.
There are really two banking systems in the United States, the organized
system of incorporated banks under State and National charter, and in addition an unincorporated, less organized system, generally known as the capital
market. This second banking system, this capital market, is the channel
through which the investors of this country place in the hands of American
business each year two or three times as much money as is placed through
the incorporated banks.
Business in the United States is oven more dependent upon this capital
market than upon the banks. Without the capital market new enterprises
would be curtailed, old businesses would be kept from expansion. The capital
market is particularly important at times like the present when business is
struggling to revive from depression. The almost complete lack of issues
of new securities in recent months has been an important cau«e of depression,
and the gradual revival of new issues will be one of tlie flrst signs of business recovery.
Admitting certain past defects and the need for the prevention of possible
future abuses of the capital market, we believe that any material disorganization of that market would now be most unfortunate.
At a number of points these two banking systems are related. The banks
participate in one way of another in the origination and distribution of new
issues. A substantial part of the securities sold in the United States is sold
through banks. Banks themselves are large buyers of bonds. The bill before
this committee proposes in some measure to disturb these relationships, and
at many points provides for a divorce of the banking system and the capital
market.
The broad question to be determined is the extent to which the capital
market should be divorced from the banking system and removed from all
supervision, or whether its relations with the banking system should be maintained and placed under appropriate supervision. It is an involved and
difficult problem, but the divorce proposed in this bill appears to l»e certainly
unwise at the present time when business recovery is so dependent on the
proper functioning of the capital market. As a permanent matter the capital market is necessarily dependent on the banks for aid in the intermediate
stage between tiie origination and distribution of an issue and for entirely
- proper credit to legitimate borrowers offering securities as collateral.
Your committee has before it a most comprehensive and illuminating report
upon Senate bill 4115 presented to you with the unanimous concurrence of the
Federal Reserve Board. This report reviews the bill section by section and
suggests many changes designed to bring the bill into conformity with sound
banking principles. We are in substantial agreement with many of those
recommendations. especiaUy in so far as they are purposed to eliminate certain deflationary or restrictive aspects of the bill. But we regret that we must
differ with some features of the board's report which we feel still leave the
bill open to certain fundamental objections
principle discussed above.
Section 3 of the bill even as amended by the Federal Reserve Board gives
the Federal reserve system and particularly the Federal Reserve Board extensive and direct powers over the operations of individual member banks.




NATIONAL*AND FEDERAL RESERVE BANKING SYSTEMS 502
.Section 12 even as amended by the board prescribes detailed rules of operation in foreign transactions, almost sure to prove unnecessary obstacles to the
proper handling of those operations. Sections 17 and 18 as amended by the
Board go further in a tentative suggestion of divorcing the banks and the
capital market than we should think wise at the moment.
In conclusion, there do not appear to us to be any parts of the bill for which
there is imperative need for immediate passage, although two sections of the
bill are, indeed, of a character which might be expected to be helpful in the
present emergency. They are the proposal for a liquidating corporation, section 10 (B), and the proposal for a wider extension of branch banking, section
21. If the liquidating corporation is to prove helpful, however, it would seem
to us to be essential that the amendment suggested by the Federal Reserve
Board be adopted, since a number of features of the proposal in the pending
bill might well be unnecessarily disturbing. The branch-bank proposal would be
helpful and useful in providing a mechanism for reorganizing and revitalizing
many small banks not now ables to render adequate banking service in their
communities.
As I stated when I appeared before your committee in January, 1931, and
as I reiterated to Senator Glass, chairman of the subcommittee of the Senate
Committee on Banking and Currency, in my letter of February <», 1032—a
copy of which I would like to attach—much of the banking trouble which we
"have experienced in the past has been due not so much to violations of law as
•to mismanagement within or abuse of the privileges afforded by the law. Competition between the State and National Governments in the granting of charters and in the liberalization of the banking laws has gone further and further
to make these legalized abuses possible. Limitations and restrictions in the
law intended as safeguards against bad banking are too often regarded as
invitations to unwise banking within the law. We fear that no matter how
well a law may be couceived and drafted, that danger will always be present
unless the management of individual banks is of the highest type. If. there*
.fore, it is not possible at this time, either for practical or political reasons, to
provide for one banking system which would include all commercial bauks. as
we would favor, then it seems to lis that one of the most important contributions that may be made to the banking situation would be the adoption of such
amendments to the law as might insure better and better management of individual banks, and not the centralization of managerial or dictatorial powers
in the Federal reserve banks or the Federal Reserve Board. No law, however
perfect in itself, can serve as a substitute for management of individual institutions. and with a dual competitive banking system legislative restrictions
often prove inoperative in any event. If too strict in one system, banks shift
to the other. If too lenient because of the competition for membership, they
sanction bad banking. Ultimately, therefore, the protection of bank creditors
and the community must depend largely upon the character and experience of
bank management.
Many of the views which we have expressed in this letter as to various questions of principle are but a recapitulation of more detailed views which we
have already presented to your committee under date of February 25, 1031, in
response to the questionnaire which your committee submitted to all Federal
reserve banks.
In case the committee may be interested, I am glad to inclose a memorandum
which contains very brief comments regarding each individual section of Senate
bill 4115 and the Federal Reserve Board's suggested amendments thereto.
Very truly yours,
GEORGE L. HARBISON, Governor.

SECTION BT SECTION COMMENT OF SENATE B I L L 4 1 1 5

Section 2. Definitions—goes with section on affiliates:
TVe agree with board amendments.
Section 3. Defining conditions of discounts:
We are not in agreement with either the bill or the board's amendment, believing that the powers thereby given to the reserve banks and the Reserve
Board would be ineffective to accomplish the implied purpose and would involve
responsibilities for the management and operation of individual banks which it
would be impossible for the reserve banks or the Reserve Board to fulfill and




NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS

503

the assumption of which would be harmful to the reserve system as a whole
and to the individual member banks.
Section 4. Denying votes at reserve bank elections to group and chain banks:
W e agree with the board's recommendation. Undesirable at any time.
Section 5. Disposition of reserve bank earnings—goes with liquidating corporation:
"We agree with board's amendment.
Section 6. Reports and examination of State member bank affiUates:
We agree with board's amendment. Desirable at some time, in amended
form suggested by board, but not necessary now.
Section 7* Changes in Reserve Board composition and terms:
We agree with board's amendment. Desirable some time, in amended form
suggested by board, but not necessary now.
Section 8. Limiting collateral loans:
W e agree with board's recommendation. Undesirable at any time and
disturbing now.
Section 0. Limiting loans to affiliates:
In substance we agree with board's amendment. Desirable at some time, not
necessary now.
Section 10. Open market operations:
We agree with board's amendment. No objection to adoption some time,
in amended form suggested by board, but not necessary now.
Section 10. Liquidating corporation:
We
with board s amendment. Prompt enactment might be helpful.
Section 31. Tvare ai d control of borrowing on 15-day advances:
We agree with board's recommendation that this section of biU be eliminated.
Undesirable at any time, disturbing now.
We favor board's suggested substitute about maturity of advances—desirable
some time, but not necessary now.
Section 12. Supervision of foreign operations:
We disagree with the board's amendment, which prescribes a procedure
which is unnecessarily cumbersome and in some respects unworkable. W e
believe the development of this procedure could more wisely be left to
experience:
Section 13. Reserve requirements:
The proposal involves a wholly new method for computing reserves making
considerable changes for individual banks. Time should be given for a more
general understanding of the proposal with further study as to its effect on
individual accounts and institutions.
Section 14. Control of real-estate loans, etc.:
We agree with board's recommendation—undesirable at any time and disturbing now.
We favor board's suggested substitute limiting the cost of bank buildings.
Desirable some time, in amended form suggested by board, but not necessary
now.
Section 15. Limiting bank investments and security operations:
We agree with board's recommendation. This particular proposal undersirable at any time and disturbing now—though some legislation on this subject
warrants later consideration.
Section 16. Increasing capital of new national banks:
We prefer the proposal in the bill to the board's amendment—desirable some
time but not necessary now.
Section 17. Stock units and separation of bank and affiliate stock:
We agree with board's recommendation on first half but favor omitting the
entire section as likely to be disturbing now. The proposal to separate bank
and affiliate stock may wisely be considered later though its desirability at any
time is doubtful.
Section 18. Divorce of affiliates:
We agree with board's recommendations opposing section 18 of the bill.
Undesirable at any time. The board's tentative substitute we believe would
be seriously disturbing now, but might wisely be considered at a later time,
though its desirability at any time is doubtful.
Sections 10-20. Supervision of holding companies:
We agree with board's amendments. Desirable some time, in amended form
suggested by board, but not necessary now.
Section 21. Branch banking:
We agree with board's amendments. Prompt enactment might prove helpful.




504

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Section 22. Verbal changes caused by 21:
Section 23. Extends limit on interest rates on loans:
We agree with board's amendment. Desirable some time in amended form
suggested by board, but not necessary now.
Section 24. Limits interest rates on deposits:
We agree with board's recommendation. Undesirable as long as we have
a dual banking systems-would be disturbing now.
Section 25. Limits national-bank loans:
We agree with board's recommendation. Undesirable and disturbing.
Section 26. Repeals exceptions to section 5200:
We agree with board's recommendation. Undesirable and disturbing.
Section 27. Reports of national-bank affiliates:
We agree with board's amendment. Desirable some time, in amenied form
suggested by board, but not necessary now.
Section 28. Examination of national-bank affiliates:
We agree with board's amendment. Desirable some time, in amended form
suggested by board, but not necessary now.
Section 20. Removal of officers and directors:
We agree with board's amendment. Desirable some time, in amended form
suggested by board, but not necessary now.

FEDERAL RESERVE BANK OF NEW YORK,
Hon. CARTER GLASS,

February 6, 1932.

United States Senate, Washington, D. 0.
MY DEAB MR. SENATOR: A week ago Tuesday, when I was in your office, you
or some of the members of your committee were good enough to suggest that I
send to you my comments and suggestions regarding the provisions of Senate
bill 3215. I said that I would try to have those comments before you by the
following Monday. In the meantime, however, that is, on the intervening
Thursday, I was informed of a change in the procedure, to which I understood
you and Senator Walcott had agreed, that is, that you and he reconsider the
provisions of your bill with Doctor Goldenweiser, of the Federal Reserve Board,
and Mr. Burgess, of this- bank. In view of this new set-up and the fact that
Doctor Goldenweiser and Mr. Burgess were to submit their comments and
suggestions as independent experts, I felt, and Senator Walcott agreed, that it
would be premature for me to write your committee regarding the provisions
of the original bill, since this new procedure would no doubt result in modifications in the published draft in any event.
I now understand that Doctor Goldenweiser and Mr. Burgess are to submit
a report to you early next week, and while I do not now want to make any
specific comments or suggestions regarding the original draft of the bill, I hope
it will not be inappropriate for me to make a few general observations.
During the past two years we have suffered one of the most severe depressions in history. There is no need in this letter to enlarge upon our difficulties. Suffice it to say that production, manufacture, and trade have suffered
severely. The general price level has declined approximately 23 per cent;
wholesale prices 32 per cent; wage rates perhaps 10 per cent; and weekly
income of wage earners about 20 per cent. Unemployment is greater than ever
before in history.
Coincident with these things, and'partly because of them, we have experienced a wave of bank failures that has caused great distress and alarm throughout the country ; over 2,000 of them, or approximately 10 per cent, in the last
year alone. Bank credit has declined over $0,000,000,000 in two years; $4,000,000.000 in the year 1931; and over $2,000,000,000 in the last quarter of 1031
alone. The rate of decline has not been checked in the first four or five weeks
of this year. This rate of deflation can not continue if we expect our financial
and business structure to weather the storm.
As a result of the innumerable bank failures, bank depositors throughout the
country, nervous and alarmed, have withdrawn their deposits from their banks
at a rapid rate, in many cases solely for the purpose of hoarding. We estimate
that over $1,000,000,000 of currency was withdrawn for this purpose in 1931.
Unfortunately, it is still continuing. Furthermore, this panic is not confined
solely to domestic depositors.




NATIONAL*AND FEDERAL RESERVE BANKING SYSTEMS

505

Shortly after England abandoned the gold standard there were wild rumors
all over Europe and the rest of the world regarding the banking situation in
the United States and the possibility of our abandoning the gold standard. As
a result of foreign withdrawals, over $700,000,000 of gold was withdrawn from
the Federal reserve banks for export or earmark in a period of six weeks
during September and October. While these withdrawals were then checked,
they were revived about the middle of January, and we are now in process
of losing gold again.
Thus you will see that the reserves of the Federal reserve system are
being pressed both from within and without. It was with this in mfnd
that in recent weeks I had several talks with you, hopeful that you might
see fit to include in your bill, not then published, some liberalization of
our so-called free-gold position. Because of existing collateral requirements
we were in the somewhat paradoxical position of having $1,300,000,000 of
gold in excess of our minimum reserve requirements, but in fact having only
approximately $450,000,000 of free gold. This margin, it seemed to me, was
entirely too low, in face of the continued withdrawals of currency by domestic depositors and the continued withdrawals of gold for foreign account.
During one of my talks with you, you were good enough to suggest that
I try my my hand at drafting an amendment which would enlarge our collateral provisions, and I later submitted to you a proposal which I believe
to be most important in the emergency with which we are now confronted.
This proposal, while simple enough in Its terms, is so complex and technical
in its nature that it would require too much space adequately to discuss it
in this letter. I shall therefore try to prepare for you a supplementary
memorandum on that subject alone. I am not at all unmindful of the
need of protecting the currency of the country from the risk of unnecessary
or arbitrary expansion, and do not believe that the proposal I have given
3'ou win of itself run that risk. On the contrary, I believe the proposed
amendment might well tend to defeat other. much more radical proposals
from an ever increasing number of inflationists.
Evidently, however, you concluded that it was not wise or practicable to
include in your original bill a proposal along the lines which I submitted,
so that that bill not only does not provide for the much needed liberalizing
of the collateral requirements, but in fact, as published, it would, if applied to our present holdings of discounted paper and bankers* acceptances
purchased in the open market, more than wipe out the existing $1,300,000,000
of excess gold reserve.
This would be accomplished by two changes in the law proposed in your
bill; the first no longer permitting gold held as security for Federal reserve
notes to be counted as part of the 40 per cent gold reserve against outstanding Federal reserve notes (this of itself would reduce our excess gold
to $250,000,000); and the second eliminating from eligible collateral for Federal reserve notes member-bank 15-day advances secured by Government
securities and also eliminating certain types of bankers' acceptances which
we purchase in the open market. These two provisions alone would, in
my judgment, render the Federal reserve system incapable of supporting continued withdrawals of currency and gold and would make it impossible for
us effectively to carry on, pending a change in conditions or sentiment which
would check withdrawals of deposits both by domestic and foreign depositors.
One other subject that we have discussed from time to time in the past
is the possibility of enlarging the eligibility provisions so that member
banks would be entitled in cases of need to borrow on assets not now
technically eligible. The last time we talked about this in your office, prior
to the publication of your bill, you mentioned to me quite privately that
you had incorporated a provision which would enable groups of banks in
an emergency, through some sort of combined liability, to seek accommodaiton from the Federal reserve banks. I said then that I felt that that provision would be most helpful in emergencies involving entire communities.
I did not feel, however, that it would be of much practicable help to the
individual bank, especially those located in the smaller communities, which
has been subject to large withdrawals of deposits, which has already used
up all of its eligible assets and which needs still further accommodation.
Any small bank in this position in an isolated community would find it
difficult, if not impossible, to form an association of 10 banks without running either the risk of too great delay or the risk of closing the bank because of advertising the very emergency which forced it to seek the or-




n a t i o n a l , a n d f e d e r a l r e s e r v e b a n k i n g s y s t e m s 506
ganteation of the group. But, even with this limitation, I felt at that time
that your proposal for group borrowing would be helpful and as supplemented
by the then proposed Reconstruction Finance Corporation, would probubly
be adequate.
I still feel that with your provision regarding group borrowing somewhat
modified, to statisfy practical requirements, and with the facilities which the
Reconstruction Finance Corporation will afford, there is not nearly the same
pressing need now for an extension of the eligibility provisions of the act as
there was at the time I first discussed this subject with you Even so, I can
not avoid the conviction that there should be some provision in the law which
would make it possible for a Federal reserve bank, under appropriate restriction and regulation by the Federal Reserve Board and during temporary periods
when the public interest requires, to extend accommodation to individual
member banks, in case of need, upon assets not now technically eligible and at
rates of discount at least 1 per cent higher than the prevailing discount rate on
eligible paper. I think that such an emergency provision would do much,
especially at a time such as the present, to relieve the minds of both banker and
depositor and that it might be adequately safeguarded so as to avoid abase.
This covers the two principal matters about which I have been most concerned in the past and on which I have felt it; was important to have some early
legislation.
Regarding the various and particular provisions of your bill I would prefer
not to make any specific or detailed suggestions at this time or until you and
Senator Walcott have proceeded further with Doctor Goldenweiser and Mr.
Burgess. Most of the provisions on which I might wish to comment now will,
no doubt, be discussed .with them and possibly modified or eliminated, so that
my comments at this time would be premature. But it does seem to me that,
apart from the many drastically deflationary features in your bill which I
have already briefly discussed with you and your committee, there is one
broader subject that in the long run may become a matter of great significance
to the system and to the country at large.
It is evident that many provisions of the bill are designed further to limit
the autonomy of the individual Federal reserve banks and to concentrate more
and more power in the Federal Reserve Board. I can not but believe that the
purpose of the original Federal reserve act to create 12 autonomous Federal
reserve banks, eacli managed by its own board of directors through officers appointed by those directors and subject only to general supervision of the Federal Reserve Board, was wise and sound. Any substantial departure from that
fundamental principle might, I believe, ultimately result in seriously impairing
the usefulness of the system.
Now, it is no doubt true that because of the fact that the New York Federal
Reserve Bank is located in the most densely populated area in the country—an
area in which are. concentrated approximately one-third of the banking resources of the country—and because it has its principal office in the chief
money center of the country, it will of necessity perform a disproportionate
share of the work and bear a disproportionate part of the responsibility in
connection with certain phases of the system's operations.
This is particularly true, of course, as to (he handling of accounts with and
from foreign central banks of issue, as well as to open-market operations in
both Government securities and bankers' acceptances.
As to the foreign accounts, it should be pointed out, however, that the Federal Reserve Bank of New York has never sought or solicited the opening of
any account from any foreign bank or banker. No such account lias ever been
opened with us nor has a reciprocal account been opened by us abroad without
the affirmative approval of the Federal Reserve Board. Furthermore, the
terms and conditions on which we do business with all foreign banks have
been specifically approved by the Federal Reserve Board in advance of our
opening any account In addition to this general approval we have always and
without exception submitted to the Federal Reserve Board for its approval
every credit arrangement which we have entered into with any central bank.
All accounts and all credit arrangements which we have opened *or entered into
with the approval of the Federal Reserve Board have been participated in by
each of the other Federal reserve banks of their own choice.
Thus, all of our foreign transactions, even the day-to-day routine transactions,
have been in accordance with agreements previously approved by the Federal
Reserve Board, and every special engagement or arrangement has had the
specific approval of the Federal Reserve Board, to which the fullest fnfornui-




NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS

507

tion is forwarded currently about all of our operations with or for foreign
account. This is as it should be. More than this, however, I do not believe
to be practicable or feasible.
Foreign central bank operations, especially exchange operations, are difficult
and technical operations, and must be handled promptly and expeditiously by
men trained in foreign exchange and international banking business. If they
are made subject to any greater or more direct control of the Federal Reserve
Board or to the supervision of the open-market committee, as provided in your
bill, our handling of those accounts will become practically so difficult and so
cumbersome that they wiU in all likelihood be forced to private banking institutions in New York, outside the Federal reserve bank, where we will lose
all the very real advantages of the present contacts and the value of the information afforded by those contacts. I can not overemphasize the importance
of those advantages to the proper functioning of tlie reserve bank in the
principal money center of the country.
So also I believe that the provisions of your bill relating to the open-market
committee which is given jurisdiction over operations in bills as well as
Government securities, are so cumbersome as to be inimical to the best interests
of Federal reserve operations. A general clause leaving these matters subject
to rules and regulations to be imposed by the Federal Reserve Board is, I
believe, all that is necessary or wise. But the terms of your bill relating to
open-market operations in Government securities and bankers' bills practically
make expeditious and effective operations by the Federal reserve banks impossible in these two fields of action. The bill requires approval not only of
the Federal Reserve Board but of a committee of 12 representatives of the
several Federal reserve banks. It takes from each Federal reserve bank any
individual powers, thwarts initiative, and leaves to the Federal reserve banks
only the powers of obstruction. Under the proposed bill no operation in securities or bankers' bills, even the day-to-day transactions, can be effected, even in
cases of emergency, without approval of the committee composed of representatives of the 12 reserve banks and of the Federal Reserve Board, and this
approval must then be submitted to the Federal Reserve Board for its approval,
and later to each Federal reserve bank as to its own participation. The
powers of the directors of any individual reserve bank are thus reduced to the
most insignificant proportions. Even the selection of the representative appointed by any individual Federal reserve bank to the open-market committee
must be confirmed by the Federal Reserve Board.
I can not avoid the belief that ultimately the greatest protection which the
system will have against political control or abuse is the maintenance of a
fair measure of autonomy in each of the Federal reserve banks. To the extent
that your bill further shifts power and authority from the Federal reserve
banks to the Federal Reserve Board, to that extent, I believe it aims toward
centralized operation and control through a politicaUy constituted body in
Washington. While I feet sure that the Board has not been dominated by
political influences in the past, that danger is unavoidably an ever present
one and would be materially accentuated by many of the proposals in your
bill.
The best safeguard against possible political control, which I believe the
Federal reserve act was originally designed above all else to avoid, is in the
board of directors of the several Federal reserve banks. At the present time
service on the board of directors is regarded as a privilege and an honor.
Each reserve bank is in a position to call upon the most outstanding men in
this community. But if they arc to be merely conduit pipes through which
recommendations of the Federal reserve bank officers will go to the Federal
Reserve Board in Washington for advance approval, we can not expect, over
a period of time, to be able to call for the service of the types of men who
should be the directors of a Federal reserve bank.
For that reason, if for no other. I think the provisions of the bill, which
further and further centralizes authority in Washington, will ultimately risk
impairing the full usefulness of the system. To my mind, they are fraught
with the gravest risk to the system. The bill eliminates the Secretary of the
Treasury from ex officio membership on the Federal Reserve Board. That,
no doubt, was purposed primarily to remove the Federal Reserve Svstem
from the possible taint of political pressure. But so many other provisions
of the bill aim to increase the power and authority of the Federal Reserve
Board, composed entirely of members who are political appointees, that it
might well result potentially, at least, in a far greater centralized political




NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS 508
influence than is possible at the present time, even with the Secretary of the
Treasury a member of the Board.
One more comment I would like to make and that is this: As I think I
stated before your committee about a year ago, much of the banking trouble
which we are now experiencing is due not so much to violations of law as to
mismanagement within or abuse of privileges afforded by the law. Competition between the State and National Governments to liberalize the banking
laws has gone further and further to make these legalized abuses possible.
Limitations and restrictions in the law intended as safeguards against bad
banking are too often regarded as invitations to unwise banking within the
law. I am afraid that no matter how well a law may be conceived and
drafted, that danger will always be present unless the management of individual banks is of the highest typo. If, therefore, it is not possible at this
time, either for practical or political reasons, to provide for one banking
system which would include all commercial banks, as I would favor, then it
seems to me that one of the most important contributions the proposed bill
can make will be to insure better and better management. '
With this in view might it not be appropriate for your committee further
to consider some modification designed to insure better management in fact
quite apart from legislative limitations and restrictions, such, for instance,
as (a) reducing the number of directors on each bank so as to concentrate
responsibility and to encourage supervision and management through experienced directors; (&) provision, under adequate safeguards, for the removal of incompetent bank officers after thorough investigation by disinterested authorities, and possibly (c) restriction upon the right of bank
officers to borrow except with the approval of the appropriate committee of
directors.
These and possibly other suggestions might be considered as a means of
insuring a more conservative and effective management of banks within the
limitations provided by law. No law, however perfect in itself, can serve
as a substitute for management of individual institutions. And with a dual
competitive banking system the legislative restrictions often prove inoperative
in any event. If too strict in one system, banks shift to the other. If too
lenient because of the competition for membership, they sanction bad banking. Ultimately, therefore, the protection of bank creditors and the. community must depend largely upon the character and experience of bank
management.
Very truly yours, GEORGE L .

HARBISON.

The next witness is Mr. Kent.
STATEMENT

OP FRED I . KENT, DIRECTOR OF T H E
TRUST CO., SCARSDALE, N . T .

BANKERS

Mr. KENT. Mr. Chairman, may I ask your indulgence until I get
this machine up? [Referring to hearing device.] I have to listen
by proxy. I think I will be able to hear you now without difficulty.
The CHAIRMAN. Give your full name and your address to the
reporter and state whom you represent, as well as whom you are
connected with.
•Mr- K e ^ My name is Fred I. Kent. My address is Scarsdale,
N. Y. I have, in a statement which I have prepared, mentioned at
the start the few matters with which I am connected that I think you
would like to have.
The CHAIRMAN. YOU are an officer of some banking institution?
Mr. KENT. I was for a number of years. At present I am a
director of the Bankers Trust Co.
T h e CHAIRMAN. O f N e w Y o r k ?
M r . KENT. O f N e w Y o r k ; yes.
T h e CHAIRMAN. YOU m a y proceed.

Mr. KENT. During recent years I have not been engaged in active
banking, although I am a director of the Bankersfrust Co. of




NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS

509

New York, but have given my time largely to the study of matters
having to do with tlie welfare of our people and particularly those
things upon which they depend for their better living, that have to
do with industry, trade, and agriculture, and the processes, financial
and otherwise, under which they are carried out. Such studies have
been aided through my connection with many organizations winch
have afforded me the opportunity to keep in touch with the growing
movements of business.
For a number of years I have been chairman of the commerce
and marine commission of the American Bankers Association, a
member of the executive committee of the National Industrial Conference Board, the finance department of the Chamber of Commerce
of the United States, and a member of the executive committee of
the American section of the International Chamber of Commerce.
The business of merchants I have followed through the Merchants
Association of New York and my membership on the banking and
currency committee of that organization. Between all of these
organizations and others in which I have membership, I have been
able to follow closely developments having to do with industry, trade,
and agriculture in the United States, with international developments of a similar character, and with financial operations. This
being true, I have endeavored to measure the Glass bill from the
standpoint of my general experience and my belief based upon such
experience as to'such values as it might have if it were enacted into
law. Other witnesses here have gone into the detail of the bill at
great length, and it would not seem necessary for me to do so.
Such values as I can carry in its consideration should have greater
bearing upon the general effect of the passage of such a bill than
upon its detail, and I will therefore confine myself to such consideration.
In view of the fact that I am opposed to the biU and must take a
position against it on that account, I would like to say that in doing
so, my critcism is based entirely upon the provisions in the bill and
the effect that they can be expected to have upon conditions as they
exist at the moment, and not upon the intent of the sponsor for
whom I have the utmost respect.
It would seem necessary, if we are going to mcfet intelligently the
problems of the future, that we weigh carefully the effect of any legislation that might be under consideration, particularly as it may
have a bearing upon the banking system of the country with possible
unfavorable repercussions upon industry and trade.
The Glass bill, if it proved to be deflationary as I and so many
others believe would be the case, would, if enacted into law, tend
to add to the depth and duration of the depression and probably to
an extent that might create further unemployment of a devastating
character.
Regardless, therefore, of whether the Glass bill is sound in principle, it clearly is against the interest of the whole people of the
United States to have it enacted into law before there has been a
very substantial recovery from present conditions and a period of
normal stability has been attained.
But is the bill sound in principle? Would it carry into our banking system a force for good even if its enactment were postponed
until industry and trade were again upon solid ground?

111101—82—PT 2



10

NATIONAL*AND FEDERAL RESERVE BANKING SYSTEMS 510

There would seem only one answer to such a question, and that is
that it would not. Back of its provisions which have to do with its
apparent principal purpose, it ignores our industrialfinancialsystem as it has been built up and as it exists and as it must be carried
on until we have some better system, if one can be devised to take
its place.
Does the Glass bill even attempt to provide a better system? No.
It would merely destroy in part our present system and provides
nothing in its place.
Let us analyze this statement and see why it is so:
Present-day industry and trade arefinancedin two parts, by capital or capital issues, and by bank borrowings. Capitalfinancingis
utilized to provide for plant, for required long-time turnover, continuing inventories of raw materials and of processed goods and for
margin of safety.
Bank borrowing is resorted to for seasonal requirements, purchases of raw materials which quickly move intofinishedgoods, finished goods on short-time carries, raw materials, andfinishedgoods
in transit from buyer to seller, and for other short-time purposes.
The general and ordinaryfinancialstructure of industry is therefore in the form of securities—stocks and/or bonds, or cash or other
securities, and commercial paper; that is, trade paper, or book accounts between business houses, and notes to banks.
There arefiveclasses of bank deposits: Two from cash, demand
and time, or saving; and three from credit: Loans, rediscounts or
sale of paper taking time to collect.
.The security structure of industry and trade, as it is built up, is
exchanged for cash which is received from a multiple of savings
and time deposits when banks become holders except, for their
capital investment account, and from cash or demand deposits
when individuals,firms,or corporations become holders.
Industry and trade can not, however,findthose who may be willing or anxious to become holders of their securities unless they depart from their regular business and enter into the business of
financing." This they could not do except at enormous expense for
an occasional issue, nor would they be able to assure themselves of
round sums so essential at times for needed expansion of plant or
other facilities if they would hold or create markets for goods.
The banker, therefore, becomes necessary to industry and trade
in placing securities as well as in loaning funds for seasonable
>ses,
eing securities requires underwriting in part and, most important of all; a market in which buyers may sell in case of need
or desire. Without such a market,findingbuyers would be worse
than trying to carry on world trade under barter.
But a market for securities requires capital and it also requires
both buyers and sellers who operate to distribute and not to nold.
Such persons handle securities as merchants do commodities. Those
who buy do so with the expectation of selling at a profit commensurate with the risk. Those who sell long or short do so with the
expectation of buying again at a profit commensurate with the risk.
The farmer plants and grows his products hoping to sell at a profit
and he does so at a risk; the manufacturer buys raw materials
pays for labor, and produces goods for which he hopes to get profit,




NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS

511

but he does so at a risk. Buyers and sellers of securities and commodities operate knowing that there is risk.
As commodity and security prices rise, the profit to those who in
their business buy or createfirstbecomes greater with the same turnover. But as such prices reach abnormal heights, risks increase
and borrowing for purchase of land, commodities, or securities, becomes fraught with growing danger.
As prices fall after the turn from high prices, those who buy
first on judgment or necessity lose margins of profit expected or
planned for in the same proportion, or make further losses if price
movements are rapidly downward.
But mankind must live whether prices are going up or down and
so production and distribution of many things are going on at all
times.
The normal growth of production has been found over a period
of years to be about S per cent annually. The destruction of capital
due to the vicissitudes of business operation, caused by errors in
judgment, catastrophe, invention, discovery, or changes in the habits
and customs of the people, together with the 8 per cent in increased
need, requires the issuance of new securities for capital used in
substantial sums year in and year out.
If the facilities which have been created through banking operation for such issues were to be unduly restricted because a wave of
extravagance passed over the nations and affected those in every
walk of life, that is, in Government, infinance,in industry, and in
and out of all business, we will pay the penalty through continued
unemployment.
Discrediting securities as collateral because prices are down during
a depression that is partly cyclical but whose depth and duration
are now largely due to unfortunate world political forces, is not only
unwise but would be positively suicidal.
Shall, we say that all government is. evil because men in government officeJiave made mistakes? Shall we strike at all industry because men in industry have made mistakes? Shall we unduly curtail
forms of banking, upon which both government and industry depend
for their ability to derive income, because some bankers have made
mistakes? All men were under the same pressure during the period
preceding November, 1929, and judgments were hard to render.
This, however, had nothing to do with the normal values of sound
securities. Neither did the fact that men and women in all walks
of life were speculating in real estate, commodities, production, or
securities, because human nature would have it so.
Industry and trade require, and will continue to require, funds
from securities and funds from banks. The proportions must be
sound. Federal reserve examinations are intended to insure the
maintenance of such soundness on the part of those who borrow from
the banks in the system and in the asset structure of the banks
themselves.
No group of men has the intelligence to measure in legislation
what is going to be the satisfactory and most effective use of banking capital month in and month out during the coming years. The
judgment of banking men must be allowed to prevail within reason




NATIONAL* AND FEDERALR E S E R V EBANKING SYSTEMS 512

currently with regard to the operating needs and policies of the
moment. Bankers are human beings and they have made mistakes
the same as other men, but they have done nothing to warrant the
abuse that has been heaped upon them recently to the great detriment
of our whole people. They have had to bear the burden of the most
trying conditions that bankers have ever faced and lived through,
and they are ready in tremendous proportion to meet the needs of
industry as they may arise during the reconstruction period that all
business is hoping will be allowed to set in by governments.
As proof of the statement of the needs of industry for corporate
issues we only need to refer to the amounts of new capital issues in
the United States for such purposes during recent years. For the
five years from 1919 to 1923, inclusive, the average issues per year
were $2,300,000,000. For the five years 1924-1928, inclusive, they
were $4,600,000,000. In 1929 they were $8,639,000,000, in 1930, $4,944,000,000, in 1931, $1,763,000,000. The falling off from 1929 to
1930 and from 1930 to 1931 clearly tells the story of reduced production and reduced business activity.
These new capital issues were to meet the needs of the railroads,
the iron, steel, coal, and copper industries, equipment manufacturers,
motor, and accessories, rubber, and a few other producers' goods,
and public utilities, and many other lines of consumers' goods. The
funas were needed to carry on the trade and industry of the country
with the same force that bank loans and rediscounts were required.
January 1, 1929, the average quotation of all American bonds on
the New York Stock Exchange was 98 per cent. March 1, 1932,
the average was 82 per cent. The market value of these securities
on January 1,1929, was $29,177,875,514. and on March 1,1932, $27,318,668,023. In addition to American bonds there was outstanding
in market values in March, 1932, on stock issues $27,585,969,257 and
in foreign bonds, $12,028,382,077. This mass of securities representing altogether $67,000,000,000 in roundfigures,even under present
conditions, is evidence of the value to the holders of a positive security market.
It is not conceivable that such a market could exist if every natural
channel through which funds are applied to maintain it was stopj>ed
up or curtailed through legislation. The securities listed carry income to the people, to partnerships and corporations. Industry and
trade in sufficient volume to meet the living needs and further the
desires of our 120,000,000 people have only been possible because of
the placing of these securities. Dealing in them carries neither disgrace nor should it carry criticism under normal conditions. The
protection of our security market, the utilization of the funds which
go into it and the buyers* and sellers who take part in it are essential
activities in connection with the other processes,financialand otherwise, of industry and trade.
So-called banking affiliates were created to meet an actual need
and for the double purpose of furthering the security business for
the benefit of industry on one side and of investors on the other, and
at the same time provide sound channels through which securities
could flow clearly separated from wild-cat issues. The fact that
security values, together with all other values as expressed in money,
have fallen because of the depression, and that reduced earning
powfcr due to the depression in business, has vitally affected the




NATIONAL*AND FEDERAL RESERVE BANKING SYSTEMS

513

standing of many securities, does not offer grounds for criticism
of those engaged in the security business. At the moment we are
all vitally concerned, in Government and out, in the reestablishment
of business on a basis that will absorb the unemployed and restore
normal values to all of those things which represent wealth ami
tokens of wealth. If such reestablishinent is to proceed with sufficient movement to protect our people, it is essential that the issuance
of securities and the security markets be protected and regardless of
whether following the return of normal times, it may be found
desirable to make some changes in methods of handling securities,
there would not seem to be the slightest doubt but that it would
be a great mistake to undertake anything of the kind at the momcut.
For many years Senator Glass has been striving to find ways to
prevent times of excessive speculation from developing that might
be harmful to the people. Bankers throughout the country, almost
without exception, have recognized the earnestness of his desire and
thefineintent back of it. But the problem is one of human nature
and reaches throughout mankind almost from the cradle to the grave.
The small boy loves to speculate in the little ways that opportunity
offers. Almost every act of man has a speculative side and its control is at times seemingly beyond power.
If there is a way to prevent the recurrence of the conditions which
prevailed during and since 1929 by legislation or otherwise, it should
be found. But there would seem grave doubt, based on the experience of mankind, to what degree it is possible to provide sound
corrective legislation during a period of strain and stress with all the
forces that are brought to bear upon legislators by those enduring
hardship.
Regardless of any other point of view, therefore, it would seem
unwise to attempt any corrective legislation attacking the fundamentals of business andfinancialoperations as they now exist until
the present depression has run its course.
The CHAIRMAN. DO any members of the committee want to ask
any questions?
Senator GLASS. I do not.
Senator BROOKHART. Mr. Chairman, I believe I do. I notice in
your statement that you say the wealth increase of the country is
about 3 j>er cent.
Mr. KENT. X O ; the production.
Senator BROOKHART. The wealth production ?
Mr. KENT. I was referring particularly to the physical production. It increases about 3 per cent.
Senator BROOKHART. That is 3 per cent upon what was in existence
at the beginning of the year?
M r . KENT. Y e s .
Senator BROOKHART.

end of the year?.

M r . KENT. Y e s , sir.
Senator BROOKHART.

And you add 3 per cent more to it at the

Does that represent the historv of the country?
Mr. KENT. It was measured by one of the statistic companies.
They cover a period of several years. I think it was something
like 10. They came to the conclusion from theirfiguresthat that
was about the average movement.



NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS 514

Senator BROOKHART. In the course of a period of 10 years it would
depend a good deal on which 10 years you would select. From 1912
to 1922 the census shows about 5y2 per cent.
KEXT. Per year?
Senator BROOKHART. Yes. But from 1912 to 1928 it is cut down
to about 4% per cent.
Mr. KENT. Yes; that is true.
Senator BROOKHART. And from 1912 up to date it is cut down
probably to your 3 per cent.
M r . KENT. Y e s .
Senator BROOKHART.

From a long study of it I havefiguredout
slightly less than 4 per cent.
Mr. KENT. Well, I have seen it stated as 4 per cent. I happened
to use thefiguresof the standard statistics because I thought we
might just as well be conservative. I have seen it stated 4 per cent.
Senator BROOKHART. That means, then? that the net income of
our country over all operating expenses, living expenses, and waste
of competition, and all that stuff, is about, we will say, 4 per cent?
Mr. KENT. This percentage is not based upon income; it is based
upon physical production.
Senator BROOKHART. I understand, but income is the physical
production. That is all there is to it, when you simmer it down.
Mr. KENT. It is a little different percentage when translated into
dollars.
Senator BROOKHART. I mean the income now of the whole people,
all labor, all capital, all everything that goes to make it up.
Mr. KENT. The income of the whole people has changed very
.materially. It wasfiguredout very carefully as being $71,000,000,000
in 1930 and $60,000,000,000 in 1931.
Senator BROOKHART. Yes; but out of that must come living
expenses.
M r . KENT. Y e s .
Senator BROOKHART. And operating
Mr. KENT. Yes; exactly.
Senator BROOKHART. And waste of

expenses.

competition, which is a tremendous item; and that leaves when we get down to it this 3 per
cent that you figure it, and Ifigureit something less than 4 per cent.
Mr. KENT. Over a period offiveyears, including 1928, the amount
of income that went into securities averaged about $600,000,000 a
month; that is, into securities and also savings accounts, which
meant that there was that amount left after all of these other things
you speak of were carried out.
Senator BROOKHART. Yes J I understand that went on the books,
but were not those securities necessarily watered and inflated in
order to render
Mr. KENT (interposing). No; not necessarily. The idea of water
in securities is not entirely clear from the standpoint of what actually happens when securities are issued. Suppose a concern issues
new capital and receives a million dollars tor it. It receives a
million dollars for capital, and it has that in cash. It utilizes that
capital to increase its plant or to increase its facilities to process or
to distribute, and so forth. Now there is no question of water there.




NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS

515

Senator BROOKHART. NO; but supposing it would issue $2,000,000
of stock and a million dollars of bonds then against it. That would
be water.
Mr. KENT. It makes no difference. No; there is necessarily no
water there.
Senator BROOKHART. That is what I call water, anyway.
Mr. KENT. It depends upon what you utilize it for, or whether you
carry it out in such a way that you have a full return, a hundred
per cent return for your investment.
Senator BROOKHART. NOW, then, coming down to this proposition:
If capital got all the wealth it possessed m the country it could not,
on your figures, on a broad distribution, get over but about 3 per
cent, could it?
Mr. KENT. Well, no, not exactly; because that 3 per cent to which
I referred was not 3 per cent in dollars, but I think if you will look
at it in this way, Senator Brookhart, there is a great deal of capital
destroyed every year, for the reasons which I stated, the vicissitudes
of business, catastrophe, change.
Senator BROOKHART. Waste of competition?
Mr. KENT. Yes. Well, from all the reasons that develop.
Changes in the habits and customs of people make tremendous
differences, and new inventions and discoveries destroy certain lines
of business.
Senator BROOKHART. It has been estimated by Senator Pepper
that 92 per cent of American business ultimately fails. Do you
agree with that?
Mr. KENT. Well, " ultimately " is a long time.
Senator BROOKHART. The average is less than 10 years.
not so long.

That is

^ Mr. KENT. That is pretty hard to say, because there are consolidations and changes going on in business. An invention will come in
and a man will change his business from doing that which he is
doing to something else. That business disappears. That may be
part of your 92 per cent, but it may be perfectly sound.
Senator BROOKHART. That would not be listed in the 92 per cent;
that would be in the 8 per cent
Mr. KENT. I am not so sure that it is possible, with statistics as
they are, to make any such differentiation.
Senator BROOKHART. You mentioned now? and your line of argument is, that nothing ought to be done to disturb'this sound system
of business of ours. Colonel Ayers in here the other day showed
that we had had 8 major depressions in the last 50 years. We have
been at no time at all in a normal line. We were either going up in
inflation or coming down in deflation.
Mr. KENT. Well, that comes about on account of human nature,
which seems to be unavoidable.
Senator BROOKHART. NOW, let us see about human nature, that
phase of it. You concede that this stock gambling and betting on
stocks has something to do with this up and down business in our
country, do you not ?
Mr. K E N T . It would occur anyway in commodity prices.
Senator BROOKHART. The stock exchange could not operate unless
it could use the mails and telegraph, could it?
Sir. KENT. I think that is probably right.
operate on the ground.




They would have to

NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS 516

Senator BROOKHART. That is one element of human nature we
could take out entirely by law?
Mr. KENT. If you wanted to destroy industry; ves.
Senator BROOKHART. If we wanted to destroy 'gambling, the speculation there.
Mr. KENT. I do not think you can destroy gambling while any
of us live.
Senator BROOKHART. Another way: We could levy a tax on these
speculative sales where they were reselling within 60 days high
enough to stop them.
Mr. KENT. And even then, you might destroy business. Now, the
reason I say that, Senator
Senator BROOKHART (interposing). Your idea is that this business
mustfluctuateup and down; that we can not get along without the
gambling feature of it?
Mr. KENT. If you say that a man who buys goods and puts them
in his store at a certain price expecting to*sell them for a higher
price is gambling, I would say yes.
Senator GLASS. You do not differentiate that from standing at a
ticker and betting what will be the state of the market in a half an
hour?
Mr. KENT. It is different. Standing in front of the ticker is done
on a different character of thought than I have in mind. But what
I mean is this, Senator: It is necessary that there be a market for
securities, because if there is no market for securities, the capital
structure of industry can not obtain the funds that it needs and
bankers would not be able to loan to industry unless its capital
structure was sufficient to act as a margin of safety.
Senator GLASS. Xobodv denies that proposition.
Mr. KENT. SO you must have a market for your securities.
Senator GLASS. I say nobody denies that proposition.
Mr. KENT. Yes. Well, then,*it means that you must have a market
for your securities, and in the market for securities you have men
who buy securities, no matter whether they want to keep them or
not, because they are hoping that the trend of conditions is such
that they will be able to sell them at a higher price. That is exactly
what the merchant does.
Now, you know, as I do, that in commodities and merchandise as
well as in stocks times occur when those engaged in the business
load up when tliey should not. You willfindthat many merchants
buy things and put them on their shelves at prices that are so high
they can not turn tliein over, and they buy large quantities when
they think that there is going to be arising-priceperiod. That is
the* natural way that happens when they buy large amounts.
Senator GLASS. You think that there can be no definite distinction
between "investment" and "gambling"?
Mr. K E N T . NO definite—no; I do not say that. I do not call it
gambling. You and I have possibly a different idea of gambling.
I do not consider that every man in this United States who buys
something before he sells it, whether it may be goods or whether it
may be raw materials to manufacture, or whether it may be labor
to apply to that manufacture, or whether it may be securities, is
gambling.




NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS

517

Senator GLASS. He sometimes affects to buy things which he does
not buy, and many times sells things that he does not own; isn't that
true? '
Mr. KENT. There is no difference. You must have short selling
in order to have a market that will make it possible for those who
have securities to sell their securities upon need at any moment, a
situation that carries a free market; and when men sell stocks that
they have not, they borrow those stocks and they owe those stocks
to the people from whom they borrow, exactly as a merchant would
borrow money from a bank to buy commodities.
Senator GLASS. Mr. Kent, I hope you do not think I have ever
been simple enough to suppose that I could put a stop to gambling.
Mr. KENT. N O ; I think you have a very high purpose in trying
to control it in so far as is possible.
Senator GLASS. But I have judged from your statement so far
that you think we made a grave mistake, if not in a moral sense,
certainly in an economic sense, to have ever instituted the Federal
reserve system. You think we made a grave mistake in withdrawing the reserve funds of the country from the stock speculative
market?
Mr. KENT. I think the Federal reserve system is a wonderful
system, veryfinelyconceived, and I think it is of tremendous value
to the people of the United States. I think it is of value to the
whole world as a stabilizing influence.
Senator GLASS. If you think stock speculation, as you call it, and
stock gambling as I call it, is essential to the prosperity of the country
and the souncfconduct of the banking business, why should we have
ever withdrawn the reserve funds' of the country from the financial
centers and impounded them in 12 Federal reserve banks and
textually by law precluded their use for stock-speculative purposes?
Mr. KENT. That purpose, as it was carried out in the Federal
reserve system was not, as I saw it, in 1913, when the Federal reserve
bank was being worked out, the main purpose. The situation as it
existed before the Federal reserve svstem was organized was that
banks throughout the United States had funds, we will say, in New
York banks that they placed there at the time of year when they
could not utilize them in their own pail; of the country, in their own
localities. Those funds were accumulated in the New York banks.
New York banks, in order to pay interest upon them and give the
return to the country banks that the country banks desired, were
obliged to loan those funds somewhere. What did they do with
them? Some of them they loaned against collateral security, stock
exchange security, and they never lost a dollar on the stock exchange
securities.
Senator GLASS. I am not talking about the security.
Mr. KENT. No;.I know. Some other funds were carried to other
countries and were loaned in England and in France and in Germany. Then, when the fall movement came on and the country
banks desired their funds, they would send to New York for those
funds and New York in turn "would send for them to London and
import gold in order to be in position to protect the banks out in
the country, and it was found that at times there would be such a
demand upon the New York banks for funds all at once that it made
it very difficult or impossible for them to meet those demands in a



NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS 518

way that was advisable in order to protect the country, and we had
the development in 1907 when the banks throughout the country
began to be fearful about their reserves and they withdrew the balances that they had in New York, not because of their fear of New
York banks, but because of their fear that so many might be asking
for money at the same time as to result in strain and so they began
to withdraw theirs.
Now, what happened ? As I recall it, I saw these figures in Decernber, 1913, the banks in Georgia had 180 per cent in cash more than
their reserve required, and the banks in other States throughout the*
South and the Middle West had a tremendous amount of cash above
their reserve requirements, and they not only withdrew their balances
from the New York banks, but they borrowed money from the New
York banks in addition, which they withdrew in cash also, and built
up cash reserves in their own banlcs for self-protection; that made it
very difficult and the New York banks had to go on a clearing-house
basis.
Now, that was not a sound situation to have developed. The Federal reserve system organized as it is now, has done away with the
menace of that situation. It has made it possible for the bankers
in the country to obtain funds when they need them, regardless of
how investments were carried out.
Senator GLASS. That is simply the historical technique of the
organization. That has not been the only purpose of the Federal
reserve banking system. Why, do you think, when we delegated to
the Federal Beserve Board the exclusive right to define eligible paper
affirmatively for agricultural, commercial, and industrial purposes,
and then negatively prohibited such definition to comprehend speculative investments, stocks and bonds, notes and bills drawn for speculative purposes—why do you think we did that when we drafted
the Federal reserve act?
Mr. KENT. At that time I remember there were many speeches
made against the use of the funds of the country on the New York
Stock Exchange, and that undoubtedly was in the minds of many
Congressmen when the bill was passed.
Senator GLASS. The law provides that to-day, does it not?
Mr. KENT. The law provided it. But the eligible paper has
proved to be insufficient, and the Glass-Steagall bill has recently
been passed in order to make it possible for the country to save
itself against this depression, and the conditions which have developed under it, because there is not sufficient eligible paper at the
moment.
Senator GLASS. I put into the record here on vesterdav, I think,
the latest report from the Federal Beserve Board itself, which definitely stated that there is ample eligible paper for rediscounting,
giving the volume at approximately $3,000,000,000.
M r . KENT. Y e s .
Senator GLASS. Somewhat, under

that amount, and added a statement that it was fairly distributed throughout the country.
Mr. KENT. Well, it might be fairly well distributed and yet not
be in the hands of those who need it most. But, of course, you have
another situation there that has developed because of tie depression that has made the banking situation much more difficult.




NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS

519

Senator GLASS. But aside from that, no matter what has been the
change in the situation, the banks have not any right to violate the
law, have they?
Sir. KENT. NO; they have not.
Senator GLASS. If the law is unwise
Mr. KENT (interposing). I do not know that the banks have violated the law.
Senator GLASS. If the law is unwise it ought to be changed.
Mr. KENT. If unwise, there ought to be a change. But I do not
know of the banks having violated the law.
Senator GLASS. There is nothing in this bill that prevents banks
from gambling away or speculating away, as you would prefer to
say, every dollar of its deposits, is there?
Mr. KENT. A bank can do that regardless of law or anything else
if a banker is in the mood to do it. You can not prevent that.
Senator GLASS. I say, there is nothing in this bill to prevent it, is
there?
Mr. KENT. TO prevent their doing it?
Senator GLASS. Yes.
Mr. KENT. In what way?
Senator GLASS. Well, just standing up at the ticker and betting
on margin.
Mr. KENT. Of course, they can not buy stocks. The national
banks can not buy stocks. Some State l)anks can, but that has
nothing to do with this bill.
Senator GLASS. I say that has nothing to do with this bill?
Mr. KENT. NO; that has nothing to do with this bill.
Senator GLASS. There is nothing in this bill that prevents a bank
from doing anything it pleases with its own money, is there i
Mr. KENT. It would seem to me there are many cases that might
develop where a bank could not do as it pleases in this bill.
Senator GLASS. There are many cases developed where a bank
should not do as it pleases, are there not?
Mr. KENT. There are many more where a bank should be able to
do as it pleases.
Senator GLASS. Well, perhaps so.
Mr. KENT. It is quite impossible to legislate either judgment or
knowledge into a banker. He has to carry his business on based on
his experience and in connection with the law as it exists. He
should be given every opportunity to utilize his judgment in the
ways that are necessary in order to'further business.
Senator GLASS. Well, in the last analysis, then, you would believe,
Mr. Kent, that there should be no legislative or regulatory restrictions upon the operations of a bank?
Mr. KENT. NO, sir; I would not say that. As a matter of fact, I
stated specifically here that if there is any way, through legislation
or otherwise, to develop a situation following this depression that
would have a tendency to prevent or would be helpful in preventing
a new development in the future like that which occurred in 1929,
that we should put it in force. We should study to find out what
it is and then put it in force. But I do not believe that we should
do anything at this moment that would be deflationary in character
or might be deflationary in actual practice, when we are all striving



NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS 520

with every force that we can bring to bear to get out of this difficult
situation/
Senator GLASS. Well, of course, there is a difference of opinion
as to
Mr. KENT (interposing). Oh, there would be, naturally. I realize
that.
Senator GLASS. Whether there is anything of a deflationary character in the bill. But what I am trying to elicit fromvou, Mr. Kent,
is whether you think it was unwise to set up the Federal reserve
system and primarily in the beginning and to this day to have preserved the reserve funds of the country for the use of agriculture,
commerce, and industrv.
Mr. KENT. NO; I think not, although I can easily see that in
addition to that it might be of tremendous value to have in the law
as a continuing force something that lies within the terms of the
Glass-Steagall bill that would enable the Federal reserve board in
case of emergency for the time that would seem necessary to meet
that emergency to cany out the operations all through the Federal
reserve banks that are covered in the Glass-Steagall bill.
Senator GLASS. We have that now. That is permanent law.
M r . KENT. Y e s .
Senator GLASS. Yes;

we have that now. Xobody is particularly
objecting to that.
Mr. KENT. I think it covers the question thoroughly.
Senator GLASS. I say, nobody is particularly objecting to that,
though I very much doubt whether it has been largely availed of.
Mr. KENT* The ability to avail of it is the important thing, because that relieves the banker who is in a difficult position because
of the drop in price of securities.
Senator GLASS. Another case of getting along with psychology.
Air. KENT. Yes. And very positively, Senator Glass. You take
these country banks and tlie banks in small towns, and they have
been put in a very difficult position where they have had cashdrawn
out for hoarding and the value of their securities has gone down and
the margin of safety in between has become very small, and they
were fearful to make loans even if. they had opportunities, but this
Glass-Steagall bill gives them a freedom from that fear.
Senator GLASS. Yes; we understood that.
Mr. KENT. Because if they sell the securities now and the markets
are clown, they will have to take the loss, whereas if they can carry
those securities until we get a turnabout, then they will not have to
take a loss.
Senator GLASS. Yes; we understood that. That is why we drafted
the so-called Glass-Steagall bill. Well, I am through, Mr. Chairman. Some of my colleagues rather deplore my combative tendencies anyhow. But when I hear andfindpresented and see what I
think is rather glaring lack of logic, why, I just can not help but
point it out. But I am through.
Senator BROOKHART. Mr. Kent, I wanted to ask you a little more
about those security issues. You gave a total, I believe, listed on
the stock exchange m 1929?
Mr. KENT. Thefiguresthat I gave you, ves: I gave for 1929, I
think, and 1932.
Senator BROOKHART. What is the total, do you remember?




national and f e d e r a l reserve banking

SYSTEMS

521

Mr. KENT. Thefiguresthat amounted to the sixty-seven billion
represented the value in March of this year on the stock exchange,
the quoted values.
Senator BROOKHART. What was the value in 1029, then, August
or September ?
Mr. KENT. The value in 1929, August and September—twenty-nine
billion in the case of the bonds on the New York Stock Exchange,
the domestic bonds. It was sixteen billion for the foreign bonds
Senator BROOKHART (interposing). The total is what I called for.
Mr. KENT. I do not recall that I have seen the total valuation
of the stocks separately. But those twTo bondfigureswould have
been forty-five billion. "That would leave the balance for the stocks,
which was very much higher.
Senator BROOKHART. . Some bonds increased in value from fortyfive up to sixty-seven billion ?
Mr. KENT. N O ; the sixty-seven billion includes the stocks in March,
1932. I did not give you the stocks in 1929. I may be able to think
of thosefiguresa little later, but I can not quite recall them at
the moment. I do not know that I noticed them particularly.
Senator BROOKHART. The total of the whole thing was very much
more than sixty-seven billion?
Mr. KENT. I am not so sure that it was not eighty-nine billion
for the stocks at that time, in 1929.
* .
Senator BROOKHART. And then about forty-five billion for the
bonds?
Mr. KENT. That is including domestic and foreign; yes.
Senator BROOKHART. They were worth more than twice as much
on the market then in 1929 as they were in
Mr. KENT (interposing). No. Oh, no. Thefigureswere 89 per
cent on the American bonds in value in 1929 and 82 per cent in
March, 1932. The foreign bonds were 96 in 1929 and they were
6 3 in 1932.
Senator GLASS. NOW, that I have made my speech, I suggest that
we get on, Senator.
Senator BROOKHART.-You say this 89 represents the whole value
of stocks, bonds, and everything?
Mr. KENT. NO ; only stocks and I would not give you that figure
as being positive, because you are asking me the value of stocks
in 1929.
Senator BROOKHART. If you don't remember it, we will not go
into it.
Air. KENT. My recollection is that their value was eighty-nine
billion, ancl I know the values of the bonds. I am sure ot that.
The bonds themjselves were twenty-nine billion and sixteen billion.
Senator BROOKHART. We will drop that, if you do not remember
the total. How much did the stock exchange sell each day in
August, 1929?
Mr. KENT. In shares? That ran up into many millions of shares
on some days but that was a turnover Dack and forth.
Senator BROOKHART. And all of these issues that you described,
these new issues, were sold to the public at large?
Mr. KENT. Yes. That is, they were distributed to the public, if
you want to include some bankers all over the country as a part



NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS 522

of the public. Many institutions bought them, life insurance companies and others.
Senator BROOKHART. And they passed them on to the public?
Mr. KENT. Oh, 110. Many of the bankers put them into their
investment accounts.
Senator GLASS. They wish now they had passed them on to the
public, do they not?
Mr. KENT. HOW is that?
Senator GLASS. I say, they wish now they had passed them on
the public, do they not?
Air. KENT. Everybody wishes that everything that they have
which is worth less now that it was when they bought it had been
sold or that they had not bought it. But that does not change
the value of those securities, Senator Glass. We are in a depression, and everything is down, and when we get out of this situation
and commodity prices begin to move up and earnings begin to come
back, then you will find that these securities are going to be reinstated.
Senator GLASS. When is that going to be?
Mr. KENT. It went up two points only last month.
Senator GLASS. When is that going to be?
Mr. KENT. Why, I have notfixedthe date yet. That is what we
want to have you do.
Senator BROOKHART. Tou say they are going to be reinstated.
Don't you mean under this system they are going to be reinfiated?
Mr. KENT. No; I do not see that it makes any difference what
you call it. The point is that their intrinsic values are coming
back. Many of these securities are quoted way under their intrinsic values.
Senator BROOKHART. Many of them are still above their intrinsic
values, too?
Mr. KENT. Well, you may know as to that. I do not.
Senator BROOKHART. I have a chart of the Federal Reserve Board
which shows them about 40 per cent above the 1914 level of values.
Mr. KENT. But that does not measure intrinsic values.
Senator BROOKHART. That was about 33 per cent above the next
preceding level in 1904.
Mr. KENT. That does not measure intrinsic values.
Senator BULKLEY. What are44intrinsic values"? .
Mr. KENT. Intrinsic values—suppose you have a bond that represents afirstmortgage on a railroad that has 22,000 miles of trackage
and the total value of the bonds outstanding on that particular issue,
that particularfirstmortgage, is such that the intrinsic value would
represent a certain value per mile.
Senator BULKLEY. What is 44 intrinsic value "?
Mr. KENT. "Intrinsic value" is what you might call the wealth
price, I should think.
Senator BULKLEY. That does not make it any more clear to me.
Mr. KENT. Well, suppose you take-;
Senator COUZENS. Take the Wabash Railroad, {or instance.
. Mr. KENT. Well, take. a corporation. Suppose a corporation
issues bonds and with the proceeds of those bonds it puts up buildings that cost a certain amount. Those buildings are kept m order
and they have certain values. They could be sold for those values.




national and federal reserve banking

SYSTEMS

523

The bonds are entirely upon those buildings. Now, the intrinsic
value of those bonds, if they cover the buildings and nothing else,
are thefirstlien upon those buildings, the intrinsic value would be
the value of
Senator COUZENS. What is the value of the building?
Mr. KENT. The value of the building would not always be the
same of course, the intrinsic value of the building might have been
different some years a«*o or possibly some years hence. The value
of the building depends upon what the people are willing to pay
for it partly, and partly what they get from it.
Senator COUZENS. What would have been the intrinsic value of a
brewery or distillery when the prohibition law went into effect?
Mr. KENT. Why, they may have utilized it to manufacture different things.
Senator COUZENS. But the intrinsic value before prohibition is
different from what it is after prohibition, is it not?
Mr. KENT. Well, certainly.
Senator COUZENS. YOU can not define " intrinsic value " then, can
you?
Mr. KENT. NOW, wait a minute. You say it was different. It was
different based on an earning power from the manufacture of liquor,
but the earning power from the manufacture of something else that
the building might have been utilized for. might have Deen even
more than the .return they got from manufacturing liquor.
Senator COUZENS. Yes; but let us take a railroad, for instance,
that was built prior to the advent of the increase of the motor vehicle.
M r . KENT. Y e s .
Senator COUZENS. IS

the intrinsic value the same now as it was
then when it was built?
Air. KENT. I should say not; but I do not think it is so much the
motor vehicle as it is the expenditures of the Government for waterways that go into taxes and the taxes that are collected from the
railroads and many things of that sort that have developed. I
thing that is more the trouble with the railroads.
Senator COUZENS. So the further you go on the less you are able
to define " intrinsic value
Air. KENT. Well, it means something. There is no question about
it.
Senator GLASS. Mr. Kent, you have tempted me to break in again.
The CHAIRMAN. Senator Brookhart has quit. So it is your turn.
Senator GLASS. At one period of stock-market operations in New
York in 1929, as I recall, though I will not be definite as to the figures, loans for others amounted to approximately seven billions of
dollars.
Mr. KENT. Oh, no; three billion nine hundred million. I think
that was the largest amount.
Senator GLASS. Thatfigurewill suit my purpose just as well as
seven billions. How much of that money would you be willing to
say was loaned discriminatingly and intelligently upon the intrinsic
value of the stock?
Mr. KENT. Why, I would say that events since would prove that
better than any opinion I might have. The total loans at that time
was six billion. Sow they are aboutfivehundred and fifty million.
They have all been paid without the loss of a dollar.



NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS 524

Senator GLASS. I am not talking about losses.
Mr. K E N T . Yes; but the loans from others went to the stock
exchange.
The CHATTIMAN. He means the banks did not lose that.
Senator GLASS. I know; I am not talking about what the banks
lost; I am talking about the people who sent that money there to
be bet 0 1 the stock market. How much of it was put up upon an
1
intelligent understanding and discrimination of the intrinsic values
of the particular stocks that it was levied against ?
Mr. KENT. It was put up in two or three ways. You must understand I have never dealt in stocks, so that I have not the full details
of the way they handle those things, except that I know this: Those
who are requested to buy stocks by people who want to invest are
told in large percentage what stocks they are to purchase, and they
act as brokers and make the purchases for the people. Then, there
are some cases where people confer with their broker's as to what
stocks they should buy. Now, the brokers, in their own interest,
prefer to have their clients make money. They do not want to put
them into securities where they will lose if they can help it. But,
unfortunately, in 1029 or previous to that, we had the capital gain
tax, which was largely responsible for the high point to which the
stock market went, for the reason that thousands and thousands of
men did not take care of their investment securities properly and
study them all the time and change them from this and that and
the other security to try and keep their investment portfolios sound,
because they saw if they sold they would take a loss, in thefixingof
an income-tax obligation, and the result was they held their stock.
They kept millions of shares of stock out of the market, so that,
when people tried to buy stocks, there were fewer shares for them
to buy. It made the market go up.
Then, another thing was that the Government received from the
capital-gain tax large sums at that time which it never should have
received, because that induces Government extravagance, and they
were sums that did not represent real profit. If you buy a lot of
stocks to-day and the whole stock market goes up" 10 per cent and
you sell them and then buy some other stocks, you have not made a
profit, because the other stocks you buy are purchased on the same
level as the ones that you sell. "There is not any question of doubt
but that the capital-gain tax was at the bottom of the high level
that was reached in 1929.
Senator GLASS. Well, I simply despair of getting you to answer
my direct question. If it is as difficult to answer it as it has seemed
to be easy not to answer it, it can not be answered. What I want to
know is, how many of these people outside of the metropolitan districts, who send their money there to be invested on the stock exchange, have any actual knowledge of the intrinsic value of the
stocks they are dealing in on the stock exchange.
Mr! Kp*T. The intrinsic value of any stock, if you want to use
the .word—I know you do not like the word, but I do not know as
it makes so much difference what word you use
Senator
means. .

BULKLEY. I

like it, but

I

would like to know what it

Mr. K E N T . I should say that the value would change. It must
change, because the earning power of any corporation changes with




NATIONAL*AND FEDERAL RESERVE BANKING SYSTEMS

525

the developments in the commodity price level, and therefore what
is back of the securities, that is, actual wealth, changes in the
amount that you can sell it for, but if you arc willing to accept your
intrinsic values asfluctuatingwith those conditions, you might just
as well call that intrinsic as anything else, I should think.
Senator GLASS. I am a countryman and my neighbor, another
countryman, knowing not any more about it tlian I, would suggest
to me in 1929 that if I would make a marginal purchase of American
Can
Mr. KENT (interposing). What was it, 143?
Senator GLASS. YOU will have to ask my Bishop about that. I
do not know. [Uproarious laughter.] Now, to get back to the
point, were he to suggest to me that buy on margin a thousand dollars of American Can; upon the supposition that I had a thousand
dollars, do I know anything about the intrinsic value of that
property ?
Mr. KENT.'Not if you were willing to say, yes; you would like
to buy it, without looking it up, but vou could have looked up—•—
Senator GLASS (interposing). Well, how many do you think look
it up ?
Mr. KENT. Well, whose fault is that?
Senator GLASS. Oh, well; now.
Mr. KENT. There are opportunities existing to look it up.
Senator GLASS. I give it up.
Senator FLETCHER. Mr. Kent, may I ask you if this whole $67,000,000,000 of stock issues, of capital issues as you call it
M r . KENT. Y e s .
Senator FLETCHER.
Mr. KENT. Why, I

Was unloaded on the public in the country?
would not say unloaded on the public, because
that is more or less of a wrong way to put it. You have got to
take things as they are.
Senator FLETCHER. Well, distributed to the public.
Mr. KENT. What happens is this: An industry, for instance, wants
funds. They study their capital structure. They study their
plant. They study'their needs for expansion, and they see that if
they can obtain a million dollars, we will say, that they can utilize
it to increase their business on what seems a sound basis in connection with the price commodity level at the time and the demand for
goods, they therefore make.an arrangement with the banker under
which the banker sells for them, we will say, a million dollars of
bonds or preferred stocks or whatever you choose, and the banker
advertises that issue and he also ordinarily gives a picture of the
business, shows the statement, shows what the earnings have been
over a period of years back, and so forth.
Now if that security appeals to those who study those advertisements and it is sound, based on the statement of the company,
people buy it. That is not unloading them on anybody. It is telling them the facts, and then they can use their own judgment.
Every individual in this world lias got to use his own judgment in
the things that he does himself. We can not change that.
Senator FLETCHER. I know that, but is that the method by which
this $67,000,000,000 of securities was distributed ? Is that the method,
usually through the banks, and the banks recommend it?
111161—32—PT 2




20

NATIONAL*AND FEDERAL RESERVE BANKING SYSTEMS 526

Mr. KENT. Not always through the banks. Sometimes it is done
through stock exchange houses, who are really bankers in a sense.
Senator FLETCHER. The result of all that is how much loss to the
public? Didn't that withdraw cash from people's homes and their
possession to an enormous extent? Was not that partly the cause of
this depression, the unloading of these securities of $67,000,000,000
on the public, all of which have been pretty nearly lost?
Mr. KENT. Not necessarily. If a person had to sell to-day, stock
bought in 1929, there would be a loss. If they carry that stock,
and they are able to, and it is in a sound company and a good business, there is no necessity why it may be a loss.
Senator FLETCHER. All right.
Mr. KENT. The market goes up and down. That is based largely
upon the movement of business, and of commodity prices. For
instance, take commodity prices as they are to-day; we can probably
anticipate that the time is going to come some day when there will
be a little motion in those commodity prices, that is a little rising
motion. Why? Because goods are desired by the people and the
retailers who ordinarily carry those goods will find that their
shelves are bare. They put an order upon the wholesaler. The
wholesaler orders from the manufacturer. The manufacturer orders
from the raw-material man. And so it goes on back to the beginning
and there becomes a little movement in commodity prices, a little
demand.
Then as others who manufacture see that that demand is causing
a little rise in prices they will begin to buy more of the goods which
thev require for processing than they have been buying and that will
add to and accelerate somewhat the movement of the commodity
prices of this and that and the other thing. As that gathers force
from a multitude of operations of that kind, then the desire to buy
early goes from those who are manufacturing through the wholesalers, and the retailers begin to load up their shelves beyond what
they actually require at the moment, for fear that they are going to
have to pay higher prices if they wait.
And so you have a moving commodity price level that gets higher
and higher and higher; and the banks are obliged to loan more money
in order to allow a client to process the same amount of goods, because the prices of goods are nigher, and so it goes on up.
Senator FLETCHER. X understand that.
Mr. KENT. NOW, the profits of nearly everybody then become
greaters because if they buy on a rising commodity price basis some
time before they can sell, they must have a wider profit, because of
the movement of the commodity price.
That means that taxes that the Government gets are higher on the
same base of taxation and the Government gets more money than it
has been getting without changing its base of taxation, and the Government then begins to spend that money and the Government develops then a budget that reaches a point where, when the commodity prices turn and go the other way and profits are not as great
and its income falls off, it has a momentum of expenditure that it
can not stop without a great deal of difficulty.
That is true in this whole world at the moment, and that is the
thing that we are trying to get out from under.



NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS

527

The business man and the individual from all over the world have
been cutting their expenditures because they have had to. Governments have not done it, not because they have not wanted to always,
but because it is tremendously difficult "because of the momentum of
expenditures that have come about on the upward turn, and that is
one thing that we all have to learn. If governments will learn to
stop their expenditures as commodity prices reach a normal level
and begin to go above it, then you will nnd it will be very helpful to
this world in preventing such things as happened in 1929.
Senator FLETCHER. HOW does that all apply to agricultural products? You are speaking about commodity prices.
Mr. KENT. The agricultural policy ?
Senator FLETCHER. Agricultural products.
Mr. KENT. Well, agricultural products have fallen more than
others. As I recall it, from 1930 to 1931 in December all commodity
prices, the average fell 15 per cent. Of that the agricultural prices
fell 22 percent, and the nonagricultural prices 10 per cent. It has
made a very difficult situation for the agriculturists, and I think it
would interest you very much if you carried it into the thought of
what these foreign governments have to do in order to pay off their
loans. Their situation is very much more difficult than is the situation of those in this country, for instance, who had to borrow.
Now we know the difficulties that New York, Chicago, and other
cities are having in meeting their obligations, but they are in dollars,
and those obligations are in the money that they receive from taxes.
But you take the countries of South America, for instance: They
have obligations in dollars. The income that they receive is in their
own monies, and how do they receive dollars? They obtain dollars
through the exports of certain agricultural commodities in large
proportion.
So that the Peruvian Government, for instance, depended upon
the exports of cotton and sugar and of copper and of oil for the
foreign exchange that they used to meet their debt charges. The
prices of those commodities have gone down tremendously. Consea u e n t l y Peru does not receive at the moment the number of units in
ollars that it did receive before the commodity price level fell.
That has been a tremendous loss to Peru.
Senator BROOKHART. Doesn't that mean that we ought to change
the gold standard so as to give them a square deal?
Mr. KENT. Oh, no: the gold standard has nothing to do with it.
There is no motion in the gold standard, absolutely no motion in
the gold standard. The gold standard is merely a measure of commodities, particularly as between each other.
The CHAIRMAN. May I ask just a few questions on this intrinsic
value ?
M r . KENT. Y e s .
The CHAIRMAN.

I notice you did not mention replacement cost
as one of the bases. Do you consider that important or do you not?
Mr. KENT. Intrinsic value—I do not think so, because it must be a
fluctuating value based upon commodity prices, together with an
earning capacity of the corporations which may have issued securities.




NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS 528

The CHAIRMAN. But I notice when apartment houses cost more
to put up they can borrow more money than when they can be'built
cheaper.
Mr. KENT. Yes, but of course you have to bear in mind that when
men are operating on any particular commodity price base that is
the thing they see. They have the present sense of the moment, but
they have no positive sense of the future. They have a feeling,
maybe, that commodity prices may be going up or may be going
down, but they have no certainty. They have no positive knowledge
about it.
The CHAUOIAN. No, but is it not a fact that many commodity
prices on much of the building, that the replacement cost of that
depends on the wage scale and that as that goes up or down the
values of the whole thing change?
Mr. KENT. Well, the wage, scale ordinarily in the production of
the average manufacture, I think, is 27 per cent of the total cost.
The CHAIRMAN. And you will agree with me, pretty nearly a
hundred per cent on farm products?
Mr. KENT. On farm products?
The CHAIRMAN. Yes; the labor that goes into it.
Mr. KENT. The farm products proposition is a very difficult one,
of course.
The CHAIRMAN. But I notice this; at the moment the wages get
up, the railroads begin to pay more for their ties and their rails, as
well as having a higher pay roll.
Mr. KENT. The rails liave been the same price for many years.
The CHAIRMAN. In our'region they are not. They were cheaper
at one time than they are now.
Mr. KENT. They are not since the depression.
The CHAIRMAN. NO; it seems to be a controlled commodity that
does not respond to something else.
Mr. KENT. IT was based on long-term arrangements for price that
covered labor on a certain basis, of course, and raw materials and
everything of that character.
Senator BROOKHART. It is $43 just the same as it was in the high
war period?
M r . KENT. Y e s .
The CHAIRMAN.

I am not sure that I understand yon on the
$67,000,000.
Mr. KENT. Yes. That is the market value of the domestic bonds,
the foreign bonds, and the stocks on the stock exchange at the
moment.
The CHAIRMAN. HOW much of those are marketed annually in this
country?
Mr. KENT. I gave those figures. They showed 2,300,000,000 in
five years up to 1924, when it ran up to 4,600,000,000, and in 1929 it
was 8,600,000,000, and it dropped off in 1930 to a less sum. I have
thosefigureshere. It was veiy much less than in 1931.
The CHAIRMAN. If they are in your statement I do not care to
have you repeat them. I was simply trying tofigureout what part
of the national earning goes into those investments.
Mr. KENT. I should say pretty close to 7 per cent, if you figure
national earnings on the basis that has been worked out. They were
figured to be 71,000,000,000 in 1930. They were 83,000,000,000 in



NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS

529

1929. It is felt that it will show something very close to 60,000,000
in 1931. But thefiguresare not available yet in their entirety. Of
course, you can see the taxation against that is very terrible. In
1930 the taxation in the United States was 13,000,000, including that
needed by the Federal Government, the States and municipalities,
and that "represented a very high proportion of the national income.
When that happens what really occurs is that those supposed to be
wealthy pay with dollars and the poor man pays with his job.
That is the result of excessive taxation. The poor man does not see
that he is paying with his job when you have excessive taxation, but
it has developed so clearly in Great I3ritain, Germany, Australia, and
other countries, that looking back over their picture you can see
actually that that has happened.
The CHAIRMAN. Now then, on taxation, is not the tax dollar something that also responds to the price level?
Mr. KENT. Yes; in so far as the receipts of Government change.
They fell with the commodity price level.
The CHAIRMAN. And only part of the tax is due to liberal expenditures?
Mr. KENT. N O ; government goes on and expends the same amount,
and then itraisestaxes in order to get it. Government does not
hold the same base of taxation when you get a fall in commodity
prices. If it did, it would not be so difficult to pay.
The CHAIRMAN. If the Goverment must pay more than that when
we have a lower wage scale, it means an increased tax, even though
you do not have any more clerks?
Mr. KENT. Well, it works this way: If you hold your base of taxation the same
The CHAIRMAN (interposing). You can not do that unless you
hold the salaries and the wages the same, can you?
M r . KENT. NO.
The CHAIRMAN. And commodity prices the same?
AIR. KENT. Of course, but they do not move in conjunction

or proportionately. They move in this and that and the other spot. That
is quite necessary, because of the dispersion of prices. A price level
is not a movement of the same percentage in proportion to every
commodity. If the commodities cross each other up and down based
on supply and demand, there is a great dispersion.
The CHAIRMAN. For instance, the national earnings during the
period from 1914 up to 1918 had an enormous rise compared to other
years?
M r . KENT. Y e s .
The CHAIRMAN.

And that national income was largely the result
of an inflation of commodity prices and higher wages, was it not?
Mr. KENT. Yes; because the majority
The CHAIRMAN (interposing). Therefore, it was a correct measure?
Mr. KENT. The majority buy before they sell. If commodity
prices are rising between the time that they "buy and the time that
they sell, their margin of profit is wider. "That is what causes the
greater profit, and on the same basis of taxation it means that Government gets more.
The CHAIRMAN. TO take an illustration close to home: A schoolteacher used to teach school for twenty-five to thirty-five dollars a



NATIONAL*AND FEDERAL RESERVE BANKING SYSTEMS 530

month. Since the higher wage scale became effective, she receives
a hundred dollars a month, country teaching. That school tax is
bound to be three or four times as high, even though you have the
same teacher and no additional schools.
Mr. KENT. Of course.
The CHAIRMAN. And we are told it is extravagance.
Mr. KENT. That is on the other side of it.
The CHAIRMAN. Yes; but it is one side of it.
Mr. KENT. It is a very important side of it.
The CHAIRMAN. Yes. In other words, it is not all extravagance.
Much of it is part of tlie changing conditions under which we are
operating.
Mr. KENT. Oh, that is true. That is true. And it is very difficult
to make adjustments that can be considered fair, because everything
does not move proportionately the same.
. Hie CHAIRMAN. After all, is not the main question whether we are
to be on a higher level or on a lower level ?
Mr. KENT. N O ; we must be on afluctuatinglevel.
The CHAIRMAN. HOW is that?
Mr. KENT. There must be a situation where we are on a fluctuating level. What we must strive to do and what I hope we can do
in this country is tofinda means to determine more closely to the
current moment the progress and the relation between production
and consumption. For instance, November, 1929, was really the
first time we knew that the business of those engaged in many commodities had begun to fall off in May, 1929. I f we had been aware
of that very promptly in May it would have been possible for those
whose business was getting m bad shape to have protected themselves little better. That is what we are striving to do through
the National Industrial Conference Board. We are trying to bring
closer to the present moment knowledge of what is happening and
when this, that, and the other industry is going down. Then when
we have that we are going to try to determine the cause and control it.
There are many things that enter into changing business. New
inventions, changes in the habits and customs of people, new discoveries or conditions that show there is going to be a turn in the
whole commodity price level. That is going to take time. When
we get that character of information, except as waves of extravagance go over the people of the world—and they seem to go in spite
of us—it would then mean that we would keep the movement lower
at the high part and higher at the lower part of the curve, which
would make less hardship for the people. That, of course, is what
we are striving for.
The CHAIRMAN. In other words, a more uniform level on which
to do business?
M r . KENT. Y e s .
The CHAIRMAN.

Less subject to fluctuation?

Mr. KENT. Yes. But there must be fluctuation, because the
human mind works that way, and do not think, Senator Brookhart,
that there is any motor or any self-starter or any mechanical brain
in a bar of gold. Gold is inanimate.




NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS

531

Senator BROOKHART. And itfluctuatesin intrinsic value the same
as anything else, and when it goes up everything else goes down
because of the deflation?
Mr. KENT. But that is not the reason; that has not been the reason
during the depression. Gold has nothing to do with this depression, in my opinion.

Senator BROOKHART. Let me ask you another question: I am a
subscriber for your National Industrial Conference Board, and I
think it is very valuable. Tour latest estimate shows that our
national income last year in dollars was $57,000,000,000; that is 1931*
Mr. KENT. 1930 was seventy-one billion.
Senator BROOKHART. Yes; seventy-one billion for 1930, but fiftyseven billion for 1931.
Mr. KENT. Well, yes.

Senator BROOKHART. That would be $ 2 , 2 1 0 for each average family of five. It seems to me that would be enough to keep things
prosperous if it were distributed.

Mr. KENT. That is enough to keep a vast amount of production
going on, but tfiis is a tremendous world2 and the number of units
of production that are necessary to provide during ordinary times
that are not purchased during times like this is so great that it
means a great fall in the utilization of the productive capacity of the
world.

Senator BROOKHART. If a few big corporations get that income
and discharge their men to protect their profits, I can see where that
would bring on trouble and remove buying power and all of that.
But if this $2,210 were distributed, everybody would have something
to buy with and prosperity would go on.
Mr. KENT. YOU can only distribute money effectively when something is given in return for it, and the problem of developing a situation of that kind is very hard.
Senator BROOKHART. YOU are familiar with the cooperative organizations in various countries?
M r . KENT. Y e s .
Senator BROOKHART.

They do not depend on that. They fix the
wage of capital to start with right away, just as they do for the men.
The English cooperatives pay about 3% per cent, and they are more
prosperous than the competitive business in England and have gone
right along even ever since the war.
Air. KENT. Well, of course, they carry things that are, you might
call, the commodities of life that people are able to buy from the
dole.
Senator BROOKHART. Yes: but so do other people. They have to
buy it just the same as they do in any other country, for that matter.
Mr. KENT. Yes; certain things.
Senator BROOKHART. And they have had no bank failures over
there with their cooperative banks.
Mr. KENT. That is a very different institution from ours. They
have a certain special purpose.
Senator BROOKHART. They have a couple of hundred factories doing
everything in human civilization. They have not had any failures,
going right along, because theyfixedthe wage of capital all the time.
So is that not a sounder system of business than this of ours?
Mr. KENT. I did not quite get that.




I

am sorry.

n a t i o n a l , a n d f e d e r a l r e s e r v e b a n k i n g s y s t e m s 532

* Senator BROOKHART. I say, is that not a sounder system of busi*
ness than ours?
Mr. KENT. N O ; that only applies to some certain character of
business.
Senator BROOKHART. YOU do not understand it then, because I
could notfindanything that anybody else was doing in England that
they were not doing. They were into everything, and business everywhere, all around the world.
Here is another thing: If 3 per cent is all we produce in this country, if that is all the wealth production we have
Mr. KENT (interposing). That is an increase.
Senator BROOKHART. I understand; the wealth increase—if that is
all we have, if we organize corporations and send them out in banks
or railroads or anything else tofightfor 5% or 10 or 40 of 100 per
cent, are we not in a state of economic warfare that is going to produce these ups and downs all the time?
Mr. KENT. But we do not do that.
Senator BROOKHART. We do not? Why. we gave the railroads a
right tofightfor 5% per cent by law, and they get that $7,000,000,000
watered value besides.
Mr. KENT. Yes; but you went on up to 100 per cent.
Senator BROOKHART. The Standard Oil Co. got as much as 600
per cent at one time.
Mr. KENT. In a turnover you can get most any per cent, but that
has nothing to do with the interest on money.
^ Senator BROOKHART. There is only 3 per cent left for distribution. That is all we gotfinallyover our living and operating expenses and wage, and if somebody is dipping out to 100 per cent,
why, somebody else has got to lose. That is all there is about it.
And that isfiguringeverything to capital alone, not to anything
else. Capital is getting all the wealth increase on that 3 per cent
basis.
So, are we not organized on an unsound basis to start with, that
is going to continue to produce these inflations and deflations and
requiringfirstone psychology and then another to get along?
Mr. KENT. That one psychology and another comes from actual
operations in commodities, based on supply and demand and the
opinion of men as to what that is going to be.
The CHAIRMAN. I wanted to ask—your statement of 27 per cent
of wages applies to what?
Mr. KENT; Twenty-seven per cent of the cost of a certain block
of production goes into wages.
The CHAIRMAN. I know the statement has been made that in the
construction of highways only 15 per cent goes into wages. The
cement that is used is mostly wage cost, is it not? The steel that is
used is largely wage. The machinery that goes into it is largely
wage. The transportation that goes into it is largely wage. Would
not the actual wage, if you followed it clear down/be 90 per cent?
Mr. KENT. It might seem so, as we think about it; but actually,
when you get all thefigurestogether, they came to 27 per cent. I
will try and see if I can get those figures/ I think I canfindthem
for vou.
The CHAIRMAN. It is either one thing or another. It is either
wages or earnings on capital, is it not?



NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS

533

Mr. KENT. It is wages and raw ^materials.
The CHAIRMAN. But raw materials are wages.
Mr. KENT. Oh, you arefiguringraw materials in wages?
The CHAIRMAN. Well, it takes labor to produce raw material as
well asfinishedproducts.
Mr. KENT. Yes. I would separate them. There are wages and
raw materials and distribution expenses.
The CHAIRMAN. In other words, you get the 2 7 per cent by cutting
off at a certain place instead of following it clear througli?
Mr. KENT. Yes; I was talking about direct wages.
The CHAIRMAN. That part was the basis of my remark that most
values were a reflection of the wage scale and the la*bor costs, and
that replacement values are often largely a question of what the
wages are. Buildings cost one price at $3 a day and another one at
$6 a day.
Mr. KENT. I will trv and remember to send you the report of the
National Industrial Conference Board that sliowed the percentage
of cost that wages take.
The CHAIRMAN. But this much we are agreed on; that it did not
go the whole way through ?
M r . KENT. O h , no.

The CHAIRMAN. That is all I wanted.
Senator BROOKHART. I will give you somefigureson that the whole
way through. In 1926 I believe was the year—it was about that—
manufactured products had a total of $60,000,000. The total wages
paid, all wages, all labor, all producing, all raw materials, and everything else, was $11,000,000 out of sixty.
The CHAIRMAN. Then the rest was profit.
Senator BROOKHART. The rest was profit, yes; and doubling up
of cost of raw material.
Senator FLETCHER (presiding). Have youfinishedwith Mr. Kent.
Senator GLASS. I do not see that I expedited these proceedings by
leaving the room for a half an hour.
Senator FLETCHER (presiding). We are much obliged to you. I
believe that is all now.
Mr. KENT. Thank you, gentlemen. I appreciated the opportunity
to talk with you.
(Thereafter Mr. Kent submitted the following letter, which was
ordered to be made a part of the record:)
NEW YORK, March 3 / , 1932.
H o n . PETER NOIUIECK.

Chainnan Committee on Banking and Currency,
United States Senate, Washington, D. C.
DEAR SENATOR NORBECK: Several times at tlie bearing yesterday it was in
my mind to state specifically in answer to some of Senator Glass's questions tlmt
my reference to stock exchange operations were confined entirely to the ordinary regular and sound dealings that represent its normal business.
There is in my opinion a vast difference between such operations and what
is called " stock gambling," and I hold no brief 'for the latter. It does seem
to me most unfortunate that because there are those who may engage in stock
gambling that a reputable, sound, and much-needed financial process should
be so unfairly criticized as is the New York Stock Exchange.
As questions came back at me quickly the several times when I was about
to express my disapproval of so-called stock gambling, as separated from the
regular stock exchange business, I did not have an opportunity to clarify my
opinion before the committee in connection with tliis phase of the matter.




NATIONAL*AND FEDERAL RESERVE BANKING SYSTEMS 534
It is my firm belief that the officers responsible for the running of the New
York Stock Exchange exercise to the highest degree intelligence and integrity
in tlie control of stock exchange operations. It is inconceivable to me that
the exchange could be in better hands from the standiH>int of business safety
and good citizenship. Further I feel very sure that such abuses as occur are
in tremendous percentage due to the acts of individuals who are not members
of. nor associated directly with, the stock exchange itself.
It really seems most unfortunate that the stock exchange market which is
so necessary to our financial structure is so consistently ignored in connection
with its real purpose and uses and that the accent is placed upon the opportunity offered to gamble which is inherent in atmost all the activities of mankind.
Whether you would consider it orderly to file this letter with the testimony
I do not know, but in any event I was anxious to have you and Senator Glass,
to whom I am sending a copy of this letter, realize through positive statement
that my expressions of approval of the upholding of a market for securities
upon the stock exchange had reference to the legitimate, normal, and ordinary
business that is carried on, and did not refer to mere stock gambling any more
than my reference to the businesses of banking, industry, or trade referred to
the abuses of a similar character which are possible to them as well as to
every form of business endeavor.
Please allow me to accept this opportunity to express my appreciation of
the courtesy extended me by you and the members of the Banking and Currency Committee of tlie United States Senate before whom I had the honor
to appear yesterday.
Sincerely yours,
FEED I .

Senator FLETCHER (presiding). Mr. P .

D.

KENT.

Houston.

STATEMENT OF P. D. HOUSTON, C H A I R M A N OF T H E BOARD
T H E A M E B I CA N N A T I O N A L B A N E , NASHVILLE, T E N N .

07

Senator FLETCHER, (presiding). Mr. Houston, you may state your
name and address and business connections for the record, please.
Mr. HOUSTON. P . D . Houston; chairman of the board of the American National Bank, Nashville, Tenn.
Senator FLETCHER. Mr. Houston, you have examined this bill,
have you, S. 4115?
Mr. HOUSTON. I have read it several times.
Senator FLETCHER. Just tell us what you think about it.
Mr. HOUSTON. I am going to be very brief with you, because I
think you must be more tired than I am, and I have been here all day.
This bill under normal conditions would not be especially objectionable; but at this time, when the entire country is emerging from
the greatest depression and resultant deflation in history, it would
be to the best interest of recovery to normalcy not to require such
drastic changes in banking operations. Confidence in banks and
business is more composed since the passage and functioning of the
Reconstruction Finance Corporation, because in my opinion it will
assist in enabling all solvent banks to meet their obligations. Banks
are simply public institutions and must be controlled under well*
defined laws governing their operation, but not to the extent that the
human element will be crowded out or be too much restricted. Banking as well as credit is based largely upon confidence, and psychology
plays an important part. To make such radical changes in banfc
operations just at this time would in my opinion retard recovery to
normalcy of