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BANKING ACT OF 1935
HEARINGS
BEFORE THE
COMMITTEE ON BANKING AND CURRENCY
HOUSE OE REPRESENTATIVES
SEVENTY-FOURTH CONGRESS
FIRST SESSION
ON
H. R. 5357
A BILL TO PROVIDE FOR THE SOUND, EFFECTIVE, AND
UNINTERRUPTED OPERATION OF THE BANKING
SYSTEM, AND FOR OTHER PURPOSES
FEBRUARY 21, 22, 26, 27, 28, MARCH 1, 4, 5, 6, 11, 12, 13, 14, 15, 18, 19, 20, 21,
22, 25, 26, 27, 28, APRIL 2, 8, 1935
CORRECTED PRINT
127297
UNITED STATES
GOVERNMENT PRINTING OFFICE
WASHINGTON : 1935
COMMITTEE ON BANKING AND CURRENCY
H ENRY B. STEAGALL, Alabama, Chairman
T. ALAN GOLDSBOROUGH, Maryland
MICHAEL K. REILLY, Wisconsin
FRANK W. HANCOCK, Jr ., North Carolina
CLYDE WILLIAMS, Missouri
O. H. CROSS, Texas
BRENT SPENCE, Kentucky
PRENTISS M. BROWN, Michigan
FRED J. SISSON, New York
JAMES I. FARLEY, Indiana
JAMES A. MEEKS, Illinois
HERM AN P. KOPPLEMANN, Connecticut
MARTIN J. K ENNEDY, New York
THOMAS F. FORD, California
PAUL BROWN, Georgia
RICHARD M. RUSSELL, Massachusetts
D. J. DRISCOLL, Pennsylvania
D. W
rORTH CLARK, Idaho
J. T. C r a w f o r d ,
n
JOHN B. HOLLISTER, Ohio
JESSE P. WOLCOTT, Michigan
PETER A. CAVICCHIA, New Jersey
HAMILTON FISH, J r ., New York
CHARLES L. GIFFORD, Massachusetts
EVERETT M. DIRKSEN, Illinois
CLARE G. FENERTY, Pennsylvania
Clerk
CO NTENTS
Statement of—
Pa£«
Hon. Leo T. Crowley, Chairman of the Board, Federal Deposit
Insurance Corporation_________________________________ I, 29, 83, 113
Hon. L. E. Birdzell, General Counsel Federal Deposit Insurance
Corporation_________________________________________ 29, 51, 83, 113
Edson F. Adams, president Farmers & Merchants Savings Bank,
Oakland, Calif_____________________________________________
74
Hon. J. F. T. O’Connor, Comptroller of the Currency________143, 683, 661
Hon. Marriner S. Eccles, Governor FederalReserve Board________
179,
187,233, 243, 263, 395, 409
Dr. E. A. Goldenweiser, Chief, Statistical Division, Federal Reserve
Board_____________________________________________________
431
Hon. T. Jefferson Coolidge, Under Secretary of the Treasury______
465
Robert H. Hemphill, National Monetarv Conference, Washington,
D. C______________________________________________________
483
D. J. Needham, GeneralCounsel American Bankers Association__
513
Dr. Irving Fisher, professor of economics, Yale University, New
Haven, Conn______________________________________________
517
Hon. Robert L. Owen, former United States Senator from Oklahoma. _ 553
Edward A. O’Neal, president American Farm Bureau Federation,
Chicago, 111___________________________________________573, 611, 657
Fred H. Sexauer, president Dairymen’s League Cooperative Associa
tion, New York, N. Y ______________________________________
592
E. S. Foster, general secretary New York State Farm Bureau Federa
tion, Ithaca, N. Y______
615
Hon. William Schley Howard, former Member of Congress, Atlanta,
Ga_________________________________________
763
Dr. Walter E. Spahr, professor of economics, New York University,
New York_________________________________________________
705
George M. Brown, president Georgia Savings Bank & Trust Co.,
Atlanta, Ga________________________________________________
763
James E. Carolan, vice president and treasurer Atlantic Savings &
763
Trust Co., Savannah, Ga____________________________________
J. P. Houlihan, vice president, Georgia State Savings Association,
Savannah, Ga______________________________________________
763
Charles C. Mayer, Washington, D. C___________________________
776
Hon. Franklin W. Fort, former Member of Congress, Newark, N. J__
805
Hon. Frank A. Vanderlip, former Assistant Secretarv of the Treasury,
New York, N. Y___________________________
825
James H. Rand, chairman of board, Remington-Rand, Inc., New
York, N. Y____________________ 1_____ _____________________
859
m
BANKING ACT OF 1935
THURSDAY, FEBRUARY 21, 1935
H ouse of R epresentatives,
C ommittee on B anking and C urrency,
Washington, D. C.
The committee met at 10:30 a. m., Hon. Henry B. Steagall (chair
man) presiding.
The C hairman . Gentlemen, the committee w ill come to order,
please.
I have asked Mr. Crowley, of the Federal Deposit Insurance Cor
poration, to come before us this morning and discuss H. R. 5357. I
assume that he desires to address his remarks mainly to the provisions
of title I of the bill, which relates to the Federal Deposit Insurance
Corporation.
1 am going to desist from making any preliminary statement myself
at this time, but if I have the opportunity, I should like to incor
porate in the hearings a short preliminary statement of my own.
In deference to a suggestion which Mr. Crowley has made to me,
and what I think might be in the interest of time and orderly pro
cedure, I am going to suggest to the committee that they permit
Mr. Crowley to make his statement and complete his discussion in a
general way before committeemen interrogate him.
You may proceed, Mr. Crowley, if you will.
STATEMENT OF LEO T. CROWLEY, CHAIRMAN OF THE BOARD,
FEDERAL DEPOSIT INSURANCE CORPORATION
Mr. C rowley. Gentlemen, we have prepared a digest of this bill,
together with our recommendations. If it is agreeable to the com
mittee we will pass to each one of you a copy of our report, in order
that you may follow the report with me. I f you will be kind
enough to let us follow through -with it and answer your qestions
afterward, we would like to do that. We have a number of charts
that we would like to present to you. Is that agreeable to you, Mr.
Steagall ?
The C hairman . Yes; that will be perfectly all right.
Mr. C rowley. Gentlemen, last year I appeared before you and
recommended that the provisions of the so-called “ permanent insur
ance plan ” be suspended for another year, and that the temporary
insurance fund be continued to July 1. 1935. At that time it was
stated that we need additional experience before the permanent
plan went into effect. We also suggested that, through the adminis
1
2
BANKING ACT OF 19 3 5
tration of the temporary fund, we might gain some knowdedge which
would indicate desirable changes in the permanent plan. You have
asked me to appear before you today to discuss with you the results
of our 13 months’ experience and study and to explain the reasons
behind the proposals which you have before you, and which comprise
title I of the Banking Act of 1935.
With your permission, I would like to outline to you in detail the
reasons which have motivated our suggestions for changes in the
j^ermanent insurance plan. The charts and tables give a vivid pic
ture of the commercial banking structure of the United States.
These data cover all insured and noninsured banks, arranged accord
ing to total deposit liability size groupings.
They do not include mutual savings banks or private banks.
Ninety percent by number of all of the licensed commercial banks
in the United States have been admitted to the insurance fund.
Over 98 percent of the total deposits in commercial banks and trust
companies in the United States are in banks, the deposits of which
are insured. On October 1, 1934, there were only about 1,100 licensed
commercial banks, with deposits of slightly more than $500,000,000,
which were not insured, while insured commercial banks numbered
more than 14,000 on that date, and their deposits amounted to some
$36,000,000,000. Mutual savings banks have been excluded from
these figures. There are 68 of the 576 mutual savings banks in the
fund for mutuals.
We have in our fund 1.928 banks with deposits of $100,000 and
under; of banks with deposits of $100,000 to $250,000 we have 3.929;
with deposits of $250,000 to $500,000 we have 3,278; with deposits of
$500,000 to $750,000, we have 1.531; with deposits of $750,000 to
$1,000,000 we have 970; with deposits of $1,000,000 to $2,000,000 we
have 1,664; with deposits of $2,000,000 to $5,000,000 we have 1,076;
with deposits of $5,000,000 to $50,000,000 we have 647; with deposits
of $50,000,000 and over we have 96 banks in our fund.
The banks are broken down in our chart into national banks.
State banks, and State member banks, and the insured and uninsured
nonmember banks.
For instance, out of 1,091 banks that are outside of the fund, 426
of those have deposits of $100,000 and under, 349 have deposits of
$100,000 to $250,000, 169 have deposits of $250,000 to $500,000. 54
have deposits of $500,000 to $750,000, 27 have deposits of $750,000
to $1,000,000, 34 have deposits of $2,000,000 to $5,000,000, 16 have
deposits of $5,000,000 to $50,000,000, and 16 banks have deposits of
$50,000,000 and over, which make a total of 1.091 banks.
The C hairman . Does vour statement disclose the total of the
deposits in each of these 'groups ?
Mr. Crowley. Yes, sir.
The next chart that you have there shows that the banks with
deposits of $100,000 and under have a total deposit liability of $123,831,000. In other words, 1,900 banks have deposits of $123,831,000.
The banks with deposits of $100,000 to $250,000 have total deposits
of $664,493,000. and so on down. The $50,000,000 banks, and over,
have deposits of $18,942,000,000.
■
I
H
T
(The charts and tables referred to are as follows:)
N UM B E R OF I N S U R E D A ND U N I N S U R E D C O M M E R C I A L BANKS.
OCT. 1.1934 C L A S S I F I E D BY S I Z E OF B A N K S
T
ALL B A N K S
________ I ______ J________ I _______ I _______ I _______ I _______ I _______
_
_
_
_
_
_
F ederal D e p o s it I nsurance C orporation
D iv isio n
of
R esea r ch
and
S ta t ist ic s
CO
D E P O S I T S IN I N S U R E D AND U N I N S U R E D C O M M E R C I A L BANKS.
OCT. 1,1934, C L A S S I F I E D BY S I Z E OF B A N K S
B A N K S HAVING
D E P O S I T S OF
B IL L IO N S O F DO LLARS
0
—1 1 1 1
—
100.000 OR
LESS
i
1 i
i
—
10
n
|
i i 15 1 --- 1-- 1---1--20
— — ~
- - -
l
100.001 TO
250.000
5
m
250.001 TO
500.000
B A N K IN G ACT OF 1 9 3 5
■PL
N a tio n a l b a n k s
S ta te m e m b e r b a n k s
500.001 TO
750.000
in s u r e d n o n -m e m b e r b a n k s
750.001 TO
1.000.000
1.000.
N o n - in s u r e d n o n - m e m b e r b a n k s
001 TO
2.000.000
2.000.
001 TO
5.000.000
5.000.
001 TO
50.000.000
.50.000.001
AND OVER
__ i _ i _ i _ i _
_ _ _ _
F ederal Deposit I nsurance Corporation
U
is m
m
im
l
1 1 _ 1 _ 1 _ _ 1 _ 1 _ 1 _ 1 _ __ 1 _ 1 _ 1 _ 1 _
_ _ _ __ _ _ _
_ _ _ _
D iv isio n
op
R esearch
and
S t a t ist ic s
5
BANKING ACT OF 1 9 3 5
Insured and uninsured commercial banks classified by size of bank, Oct. 1, 1934
All banks
National
banks
Uninsured
Insured
State mem nonmember nonmember
ber banks
banks
banks
Banks having deposits of—
$100,001 to $250,000___ _____________
$250,001 to $500,000_________________
$500,001 to $750,000___ _____________
$750,001 to $1,000,000_______________
$1,000,001 to $2,000,000
___________
$2,000,001 to $5,000,000_________ _____
$5,000,001 to $50,000,000. ___________
1,928
3, 929
3,278
1,531
970
1,664
1,076
647
96
94
834
1,261
741
506
923
659
380
52
22
119
186
97
67
142
153
141
39
1,386
2,627
1,662
639
370
565
248
110
5
426
349
169
.54
27
34
16
16
Total, all groups..................................
1 15,119
5,450
966
7,612
1,091
1 Exclusive of 71 insured banks not reporting statistics and 31 uninsured banks for which no deposit
figures were available.
Deposits in insured and uninsured commercial banks classified by size of bank,
Oct. 1, 1934
[000’s omitted]
Uninsured
Insured
nonmember nonmember
banks 1
banks 1
All banks
National
banks 1
State
member
banks 1
$123,831
664,493
1,167,228
936,016
836,608
2, 324,922
3,242, 721
8, 250,016
18,942,184
$7,265
152.705
460.706
455, 702
437,095
1,300,832
1,982,864
4,691,139
10,582,628
$1,700
21,304
68,180
58, 545
57,331
199,540
487,542
2,118,575
7,951, 575
$90,750
435,381
579,700
388,983
318,940
778,427
723,051
1,216,797
407,981
$24,116
55,103
58,642
32, 786
23,242
46,123
49,264
223,505
Total, all groups....... ......... ......... ...... 336,488,019
20,070,936
10,964, 292
4,940,010
512,781
Banks having deposits of:
$100,000 and under__________
$100,000 to $250,000..........
$250,001 to $300,000....... ......
$500,001 to $750,000_______
$750,001 to $1,000,000 ____
$1,000,001 to $2,000,000...........
$2,000,001 to $5,000,000...........
$5,000,001 to $50,000,000___
$50,000,001 and over........................
1 Total deposits reported to the corporation on Oct. 1,1934 differ in some respects from those shown on
published statements.
1 As reported in Rand-McNally Bankers’ Directory for July 1934.
* Exclusive of deposits of 71 insured banks not reporting statistics and 31 uninsured banks for which no
deposit figures were available.
Mr. C rowley. T o arrive at a practical basis for estim ating the
amount o f funds necessary to cover the insurance liability of the
Corporation, our first consideration has been the volume of losses
which depositors have borne during the past.
From July 1, 1864, the beginning of the national banking system,
to June 30,1934, about 16 thousand commercial banks, which include
national banks, State banks, loan and trust companies, stock savings
if1 n ’ an<^ private banks for which there are data in the reports of
1
the Comptroller of the Currency, with deposits of nearly 9 billion
dollars, are known to have suspended operations. Losses to deposi
tors m these banks are estimated at 3 billion dollars over and above
all recoveries.
The estimates of losses to depositors in suspended commercial
banks are based upon available data which clearly minimize the
facts. Ihe figures for national banks are fairly complete and relia
ble, and are taken from reports of the Comptroller of the Currency.
The figures for other commercial banks, however, are incomplete,
particularly for the period prior to 1920. Since all failures have not
been recorded, bank depositors have suffered losses which have not
6
BANKING ACT OF 19 35
been recorded. For example, many records of voluntary liquidation
by banks ignore the fact that depositors were not paid in full. Then,
again, bank reorganizations, in late years, have been based upon
the waiving of depositors’ claims, while in other cases depositors
have voluntarily reduced their claims or made contributions to capi
tal as a means of absorbing losses.
Mr. K o p p l e m a n n . Mr. Crowley, do you mean to say that even
today there are banks that fail without being reported, private banks
or any kind of a bank ?
Mr. Crowley. What we are talking about is during the last few
years.
Mr. K o p p l e m a n n . I k n o w , b u t I w o n d ered w h e th er th a t situ a tio n
s t ill ex ists.
Mr. C rowley. I think there are some States in which banks might
fail, and we cannot get the information from them.
Mr. K opplemann . There are still?
Mr. Crowley. Yes.
The C hairman . Inasmuch as that question has been asked, what
information have you to support the statement that there have been
voluntary liquidations of State institutions, in which the depositors
are not paid in full? How do you get information like that?
Mr. Fox. Mr. Chairman, the source of the information is the Fed
eral Reserve Board. They make contacts with the State authorities
through their agents in the 12 Federal Reserve districts. If the
State authorities inform the agents, we get the information. How
ever, if the State authorities have no control over the banks, as is the
case with some private banks, we would not get the information.
The C hairman . W ould it not follow as a matter of course that
when a bank became insolvent, to the extent of w iping out its cap
ital structure, and leaving it with its depositors unprotected, there
would be a liquidation in the regular way of such an institution?
Mr. C rowley. What we are trying to bring out, Mr. Chairman,
is that there have been a lot of insolvent banks that have gone to
their depositors and made private deals with them, whereby they
wrote down their deposits liability in some instances as high as 40,
50, or 60 percent, and when they waived a portion of those deposits,
the portion that they waived was used for capital purposes.
Mr. Cross. Did you get that through the Internal Revenue De
partment?
Mr. Crowley. N o; there would be no reason for their reporting
to the Internal Revenue Department.
The C hairman . I was of the opinion that there would be no
report of that kind to the Commissioner.
Mr. Crowley. There would be no way to have it recorded. The
only place you could ^et it would be through the local bank com
missioner, and a lot of them do not keep complete records.
Mr. H ancock. What is your best estimate of the losses which
have occurred that are not accounted for?
Mr. Crowley. Have you any idea what that mmht amount to
Mr. Fox?
’
Mr. Fox. No, sir.
Mr. C rowley. What we have been trying to do is to find out from
the various State departments how much their depositors have lost
BANKING ACT OF 19 35
7
through waivers, and it has been an almost impossible thing to de
termine, because they have kept no records of it, but we do know
it has been a very substantial sum.
Mr. R eilly . In the case of Wisconsin have you a record?
Mr. Crowley. W e have not been able to get that as yet.
Mr. Fox. We are getting a record for the past 4 years. We already
have records from 18 States.
Mr. G oldsborough. Have you a record from Maryland?
Mr. Fox. Yes, sir.
The C hairman . Before you leave that, do you attempt to include
these estimated and unrecorded losses as a part of the total embraced
in your figures?
Mr. Crowley. N o. A s I understand it, Mr. Chairman, the $3,000,000,000 of loss has been determined from the actual liquidations; is
that correct, Mr. Fox?
Mr. Fox. Yes; from the actual figures.
The C hairman . Then there are no figures based on that, so it is
not so material.
Mr. Crowley. The charts which I will later file show, by years
from 1864 to 1934, the percentage of national and other commercial
banks suspending and the ratio of deposits in suspended banks to
deposits in active banks. The ratio of deposits in suspended banks
to total deposits in all active banks is smaller for national than for
other commercial institutions.
In other words, the loss from 1864 to 1934 was considerably less
in the national system than it was in the State system.
Our estimates indicate that about 1 billion dollars of the 9 billion
dollars which was on deposit in commercial banks that failed during
the 70-year period were secured by pledge of collateral or otherwise.
Of the remainder, some 6 billion dollars were in accounts of less
than $5,000 or constituted the first $5,000 of large accounts. In
other words, 6 billion dollars were within the $5,000 limit. Two
billion dollars represents the volume of these deposits which were in
accounts with balances above $5,000. The estimates of the amount
of funds representing balances in excess of $5,000 were made on the
basis of figures showing deposits classified by size of accounts in
national banks in 1918, in member banks of the Federal Reserve
System as of May 13, 1933, and in all insured commercial banks
as of October 1, 1934.
For every $100 of deposits in the entire commercial banking sys
tem, about 32 cents a year was lost. Of this figure, it is estimated
that 24 cents represents losses to depositors with balances not in
excess of $5,000, while the remaining 8 cents represents losses to
depositors having balances in excess of $5,000. For every $100 of
deposits in the national banking system, 21 cents per year was lost
as against 42 cents per $100 per year in the State system. The
tollowing table summarizes the estimates of losses to depositors in
suspended national and other commercial banks during the 70 years
ending June 30, 1934.
8
BANKING ACT OF 19 3 5
(The table referred to is as follows:)
Losses to depositors in suspended commercial banks July 1, 1864~June 30. 1934
All commer National
cial banks
banks
Other com
mercial
banks
$8,778.00
$2,715.00
$6,063.00
1.033.00
5, 762.00
1.983.00
184.00
1, 675.00
856.00
849.00
4.087.00
1.127.00
Estimated losses (millions of dollars) ........................... - ........................
3,113.00
1,015.00
2,098.00
Unsecured deposits under $5,000......................................................
Unsecured deposits over $5,000.........................................................
(*)
2, 301. 00
812.00
(>)
667.00
348.00
(0
1,634.00
464.00
Deposits in suspended banks (millions of dollars)................................
Average loss per year for each $100 of deposits in active banks...............
.32
.21
.42
Unsecured deposits under $5,000......................................................
Unsecured deposits over $5,000____________________________
.24
.08
.14
.07
.33
.09
1 Negligible.
Mr. C r o w l e y . Losses to depositors have been most severe during
the periods of business depression. Two-thirds of the losses during
this entire 70-year period resulted from bank suspensions occurring
during the 4 years ending June 30, 1934. In other words, two-thirds
of the losses in the banking system in this country took place from
1929 to June 30, 1934. For these 4 years losses to depositors are esti
mated at $1.32 per year for each $100 of deposits in the commercial
banking system. Comparable losses during the depression of the
1870‘s amounted to 35 cents, and during the depression of the 1890’s
amounted to 23 cents. The figures for the early periods understate
the losses, but it is apparent that the losses in these earlier periods
were not as great in proportion to total deposits as during the past
4 years. The data are summarized on the following tables. The
first shows the losses in commercial banks which suspended and did
not reopen during the three depression periods; the second compares
losses during the 14 years included by the three critical periods, with
the other 56 years since 1864.
(The tables referred to are as follows:)
Losses to depositors in commercial banks suspending during periods of crisis,
banks which did not reopen
[Federal Deposit Insurance Corporation, Division of Research and Statistics]
All commercial banks >
1873-78
Deposits in suspended banks (millions of dollars)________ _____
Secured............... ..................................... ......................................
Unsecured under $5,000.............. ......... ................ _..................
Unsecured over $5,000........................ ....................... ...............
Estimated losses in deposits (millions of dollars)....................
Secured deposits.............. ...................................... ................
Unsecured deposits under $5.000.......................................
Unsecured deposits over $5,000.......... .........................
Average loss per year for each $100 of deposits in active banks
Lnsecured deposits under $5,000____ ______ _____
Unsecured deposits over $5,000......................... ..........
■ r o w u u j uc6.u u iu 6 u u
uu J u n e ou ui m e y ears SDecified
$85.00
\M
)
23.00
. 00
.31
. 04
1892-97
1931-34
—
$134. 00 $5,356. 00
13.00
637.00
103.00 3, 256. 00
18.00
1.473. 00
43.00
2,142.00
(*)
(’)
36.00
1,478.00
664.00
7.00
» 1.28
.23
.89
. 19
.40
.04
* Negligible.
3 If losses of banks which subsequently reopened are included, the
of deposits in active banks is raised to $1.32.
’ ine averase loss per year for each $100
9
BANKING ACT OF 1 9 3 5
Losses to depositors in suspended banks, July 1, 1864-Jane 80, 1934, 8 crisis
periods contrasted with the remaining years, all commercial banks
[Federal Deposit Insurance Corporation, Division of Research and Statistics]
14 years Remain
70 years, during 3 ing 56
1864-1934
crisis
periods 1 years
"Secured_ '
_
............................................... 1_____________________
Unsecured under $5,000
__________________________________
Unsecured over $5,000
--- ___________ _____- .............
$8,778
1,033
5,762
1.983
3.113
2,301
812
.32
.24
.08
$6,084
716
3,738
1.630
2,269
1, 578
691
1.17
.82
.36
$2, 694
317
2, 024
353
844
723
121
. 11
.09
.02
1 Includes figures for banks suspending during period July 1, 1930, to Mar. 15,1933, which subsequently
reopened.
Mr. C rowley. The experience of the past TO years indicates that
to repay losses suffered by all depositors in our suspended commercial
banks, an assessment of 33? cents per $100 of total deposits, or onethird of 1 percent of total deposits in all open commercial banks,
would have been necessary. Excluding the losses incurred during
the three depression periods—1873-78, 1892-97, and 1931-34—and
confining ourselves to losses occurring during the balance of the
70 years, an assessment of one-eighth of 1 percent would have been
necessary.
In the past, the number, timing, and geographic concentrations of
bank suspensions have been chiefly due to fundamental weaknesses in
banking structure and the course of economic events. Suspension
of individual banks within the areas affected has reflected, in the
main, the quality of bank management. In the future, the magni
tude of losses which will result from bank failures will also depend
upon the trend of economic events, the changes which may occur
in the structure and functions of the commercial banking system,
the caliber of the individual bank management, the extent to which
the system is reinsured against defalcations, and the quality of the
supervision exercised over these banking institutions.
Of course, the future trend of economic events cannot be fore
cast.
Changing tendencies are now apparent in the structure and func
tions of commercial banking. On the one hand, the drastic reduction
in the number of banks during the past 14 years has greatly
relieved the overbanked condition in many communities. On the
other hand, new financial agencies, serving specialized needs, have
lieen created, and will compete, to some extent, with commercial
banks. I lie types of credit which may be extended by commercial
banks may be subject to varying degrees of risk.
1he extent to which the caliber of bank management will improve
in the future, over what it has been in the past, cannot be estimated.
While it is hoped that a better quality of personnel will develop,
it must be recognized that there will continue to be poorly managed
banks and that such institutions will eventually succumb. We can
not foretell the extent to which the existence of deposit insurance
will influence bank management.
10
BANKING ACT OF 1 9 3 5
To establish a fair rate of assessment which the banks shall pay
for Federal deposit insurance, the hopeful expectations of the future
must be tempered by a consideration of the realities of the past. Let
me repeat that a premium at the rate of one-third of 1 percent
of total deposits would have been necessary to cover all losses to
depositors during the past TO years. A premium at the rate of oneeighth of 1 percent would have covered depositors’ losses in all years
except those of severe depression.
We are concerned next with the basis of assessment and with the
ability of the banks to pay the required amount.
The existing permanent insurance law provides that all insured
banks may become liable for an uncertain number of successive as
sessments. I t is not sound deliberately to subject an operating busi
ness to an unpredictable liability. The maximum rate and number
of assessments should be fixed so that an insured bank may know in
advance its potential liability to the Corporation. An annual pre
mium of a known maximum amount constitutes a sound basis for
insurance revenue, as it provides a specific payment to cover a clearlv
defined risk for a definite period of time.
We also believe that payments made by insured banks should be in
the form of premiums, rather than through the purchase of stock.
As in the case of other insurance companies, receipts from premiums
should be added to the reserve funds of the Corporation. Such re
serve founds should not be considered an earning asset of the insured
banks. The interest received by the Corporation from the invest
ment of reserve funds should not be made on the basis of dividend
payments.
I t is recommended that assessments be based upon total deposits
in insured banks, regardless of whether or not the insurance is limited
to $5,000 per depositor. To base assessments solely on the first
$5,000 of each depositor’s account places an undue burden upon the
small banks, since most of the accounts of these institutions are less
than that amount. I t does not necessarily follow, however, that the
greatest risk to the Corporation lies in these institutions. On the
contrary, it has been demonstrated frequently in recent years that the
consequences of the failure of a large bank may be more disastrous
than the failure of a number of small institutions. The closing of a
large bank often brings in its wake the failure of correspondent
institutions.
The benefits of deposit insurance are not limited solely to the pro
tection of the individual depositor. The entire banking structure
of the country is so intimately interwoven that a disturbance in any
part of the system may cause repercussions of far-reaching propor
tions. The benefits which will accrue to the large city banks because
of great stability in the country banks are real and tangible.
All banks, large and small, should be required to support the
insurance system. Banking is no longer merely a private business
proposition. It involves great social consequences. The stabilitv of
the banking system affects the economic prosperity of the' country
The raising of a sufficient revenue, solely through the levying of
premiums against the deposits of those receiving direct insurance
benefits will not be a fair distribution of the burden.
11
BANKING ACT OF 1 9 3 5
Our analysis of the ability of the banks to pay assessments is con
fined solely to the national banks since adequate data for other insti
tutions are not available. The figures for earnings, profits, and divi
dends of national banks since 1870, as published by the Comptroller
of the Currency, have been used. If the operating result of national
banks can be taken as criteria, the banking system as a whole could
have paid its losses during the past TO years without impairing its
stability or the payment of reasonable dividends to stockholders.
Operating profits of the banks have been below normal during
recent years. The condition is reflected not only in reductions in
gross earnings but also in unusually heavy write-offs made neces
sary by shrinkage in values. As we come out of the depression,
losses on existing credits will appear. Banks should charge off these
losses currently as they develop. They should not allow them to ac
cumulate as was frequently the case prior to the banking holiday of
1933. These losses may absorb a considerable part of the banks’
earnings over the next few years. To ask the banks to bear the en
tire cost of insurance at a rate comparable to the experience of losses
over the past TO years would subject them to a heavy burden at the
present time.
It is probably true that after the period of adjustment has been
completed, the banks’ earnings will enable them to pay an assess
ment adequate to cover losses at the rate shown for the past T
O
years. To ask them to do so, however, without making some effort
to reduce the burden of losses seems to me to be unfair to the banks
and to the public, which must ultimately bear the cost. This factor
prompts us to ask for specific powers which will reduce these losses
so that the insurance plan can be operated upon a reasonable assess
ment basis.
The following table compares annual averages of earnings, ex
penses, losses, and profits of the national banks for the years 1918 to
3930 with similar figures for the 6 months’ period ending December
31, 1933. If charge-offs during the last half of 1933 had been no
heavier than the average for the years 1918 to 1930, the national banks
would have shown net profits of more than $1 for each $100 of total
deposits, or more than $T for each $100 of invested capital.
(The table referred to is as follows:)
Earnings, expenses, losses, and profits of national banks averages for 1918-30,
compared with 6 months ending Dec. 31, 1933
Amounts per year per $100 of
total deposits
Items
Gross earnings plus recoveries.. . .
Interest paid............... ...... ...........................
Other expenses_______ ______________ _____
Net earnings plus recoveries__________
Losses on loans and investments.........
Net additions to profits....................... .........................
months
Average 6ending
1918 to Dec. 31, Change
1930
19331
]81
I 20
3’76
I 1 81
-2.95
3 10
i The figures for the 6 months have been adjusted to show a rate per year, rather than for 6 months only.
>Deficit.
12
BANKING ACT OF 1 9 3 5
Mr. Crowley. It will be noted that the expenses of operating na
tional banks were considerably lower in 1933 than during the period
1918 to 1930. Most of this reduction was due to a decline in the
average rate of interest paid on deposits. About two-thirds of this
reduction in interest occurred before the Banking Act of 1933 became
effective and reflected the general decline in money rates. One-third
of the reduction took place after the passage of the act, reflecting
almost entirely the prohibition against the payment of interest on
demand deposits. The savings in interest on account of this change
in the law amounted to 26 cents for each $100 of total deposits, or
more than the premium necessary to cover losses on deposits insured
up to $5,000, as indicated by the experience of the past 70 years.
The cost of insurance will not be disproportionately heavy in rela
tion to earning power if paid by banks in proportion to their total
deposits. If insurance be limited to $5,000 for each depositor and
the cost is distributed among the banks in proportion to their insured
deposits, the payments by smaller banks would be nearly double the
assessments distributed on the basis of total deposits. In other words,
we have over 13,000 banks that are insured 70 percent or greater;
and if you place your premium on the insured portion only, it is
going to very materially raise the assessment on those 13,000 smaller
banks.
We have recommended not only that subscriptions by insured
banks to capital stocks of the Corporation be eliminated but also that
the Corporation be given the right to allocate to surplus any portion
of the some $300,000,000 paid to it by the Treasury and the Federal
Reserve banks. If the amounts paid in subscriptions to stock were
to be carried in full on the books of the Corporation as capital stock,
the Corporation would be unable to pay any losses except out of
income, over and above operating expenses, without impairment of
its capital. The Corporation would have no surplus; and while it
might legally be permitted to spend its capital in meeting its obliga
tions, a substantial capital impairment shown in its published re
ports would have a most adverse effect upon public confidence. We
are therefore recommending that the stock issued by the Corpora
tion to the Federal Reserve banks and the Treasury be without par
value, and that the balance be placed in a surplus or reserve account.
Until such time as the resources of the Corporation mav be ade
quate to handle the volume of anticipated losses it would be verv
unwise for the Corporation to pay dividends. We therefore recom
mend that the payment of dividends be eliminated.
It is important that the Corporation be given adequate means for
increasing the funds at its disposal during critical periods. It is
doubtful, however, if at such times tne Corporation could borrow
from private sources. The United States Treasury is the lo<dcal
purchaser of these obligations. The Government is vitallv interested
in the maintenance of the country’s banking system. We recommend
that the obligations of the Corporation be issued only with the ap
proval of the Secretary of the Treasury, so that any credit which the
Corporation may require shall not conflict with the financial policies
of the Government.
1 1
The success of deposit insurance depends upon the soundness of the
insured banks. In my opinion the two major objectives of those ari
ministering the affairs of the Federal Deposit Insurance Corpora
13
BANKING ACT OF 1 9 3 5
tion should be, first, to assist in making the insured banks sound
financially and, second, to keep them in sound shape.
During the past year the activities of the Corporation have been
chiefly concerned with the first of these problems, that is, the rebuild
ing of the capital structures of insured banks. In the future, the
Corporation should devote a large part of its efforts to the main
tenance of sound conditions among the insured institutions.
To maintain sound conditions among all insured banks it is essen
tial that the Corporation have the power to control the admission of
banks to the insurance fund. We cannot return to the overbanked
condition of 1920 if we wish to have a sound banking structure.
The growth of excessive banking facilities was one of the most de
structive influences which existed prior to the banking holiday
of 1933.
Since the banking holiday much effort has been expended in re
organizing and relicensing banks in order that the frozen funds
of the depositors might be released. The accompanying table indi
cates that more than 2,000 banks have been added to those which
withstood the shock of the banking crisis.
(The table referred to is as follows:)
Newly licensed banks grouped according to volume of total deposits by class of
bank, July 1, 1933 to Dec. 31, I33U
[Deposit figures in thousands]
July 1, 1933 to Dec. 31, 1934
Number of banks
National
State
Aggregate deposits 8
Total
National
State
Total
Banks with deposits of—
$100,000 or under __________ ______
$100,001 to $150,000.................... .........
$150,001 to $250,000....................... .........
$250,001 to $500,000........ .........................
25
29
131
219
379
222
268
248
404
251
399
467
$2,070
3,624
25,862
78,988
$22, 905
27,528
50,956
87, 635
$24,975
31,152
76,818
166, 623
Subtotal...............................................
$500,001 to $750,000........ .........................
$750,001 to $1,000,000-.. ___________
$1,000,001 to $2,000,000 ..........................
$2,000,001 to $5,000,000 .
$5,000,001 to $10,000,000 ...................
$10,000,001 to $50,000,000
Not available.._
404
110
58
76
44
16
5
6
1,117
90
42
65
35
6
3
88
1,521
200
100
141
79
22
8
94
110,544
67, 346
50,765
104, 282
131, 970
113,573
91,414
189,024
55, 735
36, 665
88, 732
102,133
35; 067
51,860
299, 568
123,081
87, 430
193, 014
234,103
148, 640
143, 274
719
1,446
2,165
669,894
559, 216 91,229,110
Total.............
' 5 y " n.®yh’ licensed” is meant existing banks reopened, banks reorganized, and primary organizations.
Deposit figures for the most part as reported in Rand-McNally Bankers’ Directory for July 1934.
Source. Card records of newly licensed banks maintained by the Division.
Mr. Crowley. Under present conditions, the Corporation insures
all newly licensed banks which apply for insurance, if they are found
to be solvent. Approximately 90 percent of the newly licensed insti
tutions have become insured. The Corporation should be granted
the specific power to refuse the admission of new banks into the
insurance^ fund where such admission would weaken the banking
system. The Corporation should also be given the specific right to
require a higher standard than mere solvency for admission to the
insurance fund.
127297— 35 ------•2
14
B A N K IN G ACT OF 1 9 3 5
I t is my firm belief that every community which can produce a
sufficient volume of deposits to support a bank should receive the
advantages of such facilities. There are many localities throughout
the United States, however, which can support only one or two
banks. To establish a second or third bank in such communities
leads to speculative and destructive practices in an effort to earn
sufficient income to pay expenses. For the protection of the insured
institutions, the Corporation and the public welfare, the admission
of banks to the insurance fund should be carefully supervised.
You understand that under our bill all of the banks that are now
members, State banks and member banks, automatically come into
the permanent fund, without being certified over again. The fact
that they are now members automatically washes them into the fund,
so that the only thing you are dealing with is the banks that are
outside of the fund, or banks that may be chartered in the future.
The C hairman . It might be well to state in that connection that
under the act for the insurance of bank deposits all national banks
and State banks of the Federal Reserve system were automatically
admitted into membership or participation in the benefits of the
Deposit Insurance; were they not?
Mr. Crowley. That is correct.
I t is for these reasons that we have recommended that the legis
lation incorporate specific standards to be met by future applicants
before admission to the benefits of deposit insurance. These stand
ards have already been recognized by Congress in other legislation.
In the latter part of 1933, banks were admitted to membership
in the insurance fund under exceptional conditions. The situation
existing at the close of 1933 -was critical. The lack of real public
confidence in banks was unsettling. Congress, therefore, provided
that all solvent banks should be admitted to the insurance fund
even though their capital was impaired in a number of instances.
However, the Corporation immediately undertook to assist all banks
which needed it in rebuilding their capital structures and correcting
capital impairments which our examinations had disclosed.
The capital rehabilitation of banks was to be effected either
through local contributions or through the facilities of the Recon
struction Finance Corporation. The Insurance Corporation assisted
State nonmember banks to rebuild their capital structure. The re
sponsibility for the condition of national and State member banks
rests with the Comptroller of the Currency and the Federal Reserve
Board, respectively. The Comptroller of the Currencv and the Fed
eral Reserve Board had the right to insist that banks under their
jurisdiction accept necessary aid. The Corporation, however, had
no such power. To accomplish the task of rebuilding the capital
of a nonmember State bank which had been admitted to the benefits
of insurance, the Corporation could only use the power of rational
appeal to the board of directors or to the State banking authorities
Without the cooperation of the State banking authorities the capi
tal structure of nonmember banks would not have been rebuilt' 1
State nonmember banks which could not obtain local capital con
tributions were assisted in securing aid from the Reconstruction
Finance Corporation. Banks which had already made applications
were assisted in complying with the conditions laid down by the
t
15
BANKING ACT OF 1 9 3 5
Reconstruction Finance Corporation. The accompanying table re
veals the extent of the aid extended by the Reconstruction Finance
•Corporation to the various classes of banks in this country. While
it is true that by the close of 1934 Federal Reserve member banks—
State and national—had received almost three times as much Re
construction Finance Corporation aid as had nonmember banks, in
proportion to total deposit liability the aid given nonmember banks
was twice as great as the assistance extended member banks.
(The table referred to is as follows:)
Reconstruction Finance Corporation purchases of capital obligations of insured
banks
[In m illions of dollars]
National
banks
Total deposits, June 30, 1934 >_______ ______________
Capital surplus and undivided profits, June 30,1934
Xet R. F. C. contribution to capital to June 30,19341___
Ratio R. F. C. to total deposits (percent)______ _____
Ratio R. F. C. to total capital (percent)............- -........
R. F. C. cumulated disbursement to all banks, Feb. 1,
1935 K
Ratio of item 6 to item 1 (percent)............_............... ......
Ratio of item 6 to item 2 (percent) ..................................
State
member
banks
Insured
Total
nonmem
insured
ber banks banks (ex
(excluding
cluding
mutuals)
mutuals)
$19,896
2,843
384
1.9
13.5
$11,116
1,886
202
1.8
10.7
$4,746
1,005
184
3.9
18.3
$35,814
5,752
773
2.2
13.4
465
2.3
16.4
238
2.1
12.6
256
5.4
25.5
959
2.7
16.7
1 Call Report of Insured Banks No. 1.
2 As reported by the R. F. C.
Mr. C r o w l e y . In some instances the necessary capital reconstruc
tion had hardly been accomplished when applications were made by
the banks to retire the preferred stock or debentures purchased from
the Reconstruction Finance Corporation. As has been indicated, the
capital reconstruction program was carried out for the purpose of
protecting not only the banks but the Insurance Corporation. The
capital and surplus of banks constitute a guaranty fund to depositors.
They represent a cushion for the liability of the Corporation. When
this capital and surplus are exhausted through losses, the depositor
must turn to the Insurance Corporation for the payment of his de
posits. The Corporation is vitally concerned, therefore, with the
amount and condition of the capital and surplus of insured institu
tions. The reduction of this cushion of safety should be permitted
only after obtaining the approval of the Corporation. If banks are
allowed to retire this new capital, the rehabilitation, which has been
so tediously accomplished, would be of no avail. The Corporation
should have the right to control any future reductions in capital by
insured banks.
I he Corporation should have the right to review all mergers and
consolidations affecting insured banks. It is possible that banks
which have been refused admission to the insurance fund may be
absorbed by insured institutions, thus extending the liability of the
Corporation to depositors of the absorbed bank. Under the existing
conditions there is no way in Avhich such a subterfuge could be
prevented.
In the interests of the depositor the Corporation should have the
right to refuse to give its stamp of approval to inequitable or unsound
I
16
BANKING ACT OF 1 9 3 5
reorganizations. Last year the Corporation was called upon to
review more than 700 such plans. Many of those which we have seen
are inequitable. The Corporation should have the right to pass upon
the justice and soundness of reorganization plans. Depositors have
often made tremendous sacrifices without the comparable sacrifice by
stockholders and other special groups.
The Corporation now has the right to buy assets of closed Federal
Reserve member banks. We have recommended that this right to
purchase be extended to operating insured banks until July 1, 1936,
whenever such action will avert an impending loss and facilitate a
merger or consolidation. It will be to the best interests of both
depositors and the Corporation if, through the absorption by the
Corporation of a comparatively small loss, a more serious loss will be
averted. Furthermore, such a procedure will offer both an incentive
and a method for completing the rehabilitation of all insured banks
prior to July 1, 1936. The right to purchase assets from operating
banks should not be exercised unless in conjunction with a merger or
consolidation and only for the purpose of averting loss.
Bank failures are frequently precipitated by defalcations. We,
therefore, recommend that the Corporation be given the right to
require adequate fidelity and other insurance. Such insurance pro
vides protection to depositors, to bank executives, and to the Corpo
ration. Where a given institution does not carry sufficient insurance,
the Corporation should be given the right to contract for such insur
ance and charge the bank therefor.
A method whereby nonmember banks may withdraw from the
insurance fund should be included in the legislation. Banks leav
ing the insurance fund should give adequate notice to the Corpora
tion and to their depositors. However, such withdrawals should not
expose the depositors to a sudden cancelation of the protection af
forded them, and the insurance benefits should be extended to the
depositors for 2 years after the withdrawal of any bank.
We also believe that the Insurance Corporation should have the
right to terminate the insurance of any bank if, after a hearing and
after notice to depositors, such action is in the best interests of both
depositors and the Corporation. In establishing deposit insurance,
Congress has assumed not only a definite responsibility to bank
depositors but also a moral obligation for the sound management
of banks. If the Corporation finds that an insured bank is engaged
in repeated practices detrimental to the depositors, the Corporation
should not be placed in the position of sanctioning such practices but
should be given the right to terminate the insurance of the bank’s
deposits without jeopardizing the depositors. For the protection
of depositors, we have recommended that in such cases insurance
be extended for 2 years from the time that membership in the fund
is terminated.
The right of dismissal may seem to be somewhat drastic, but it is
hoped that the use of this power may seldom be necessary. As an
intermediate step and as a means of notifying the public/it is sug
gested that the Corporation be authorized to publish either all or
such portions of examination reports as it deems necessary. The
State supervisory authorities will be advised of the intention to
publish all or part of the examination report and only after adequate
notice has been served on the executives of the bank concerned will
BANKING ACT OF 1 9 3 5
17
such action take place. This procedure is designed to allow suffi
cient time for the executives of the bank concerned to correct the
practices which jeopardize the safety of the depositors’ funds. The
Comptroller of the Currency has this right in the case of national
banks.
Reports of condition now being issued to the public are confusing
because of their inadequacy and lack of uniformity. Considerable
efforts have been made to study this question. Conferences have
been held with the State and Federal supervisory agencies in an
effort to develop standard and uniform reports of condition. In
order that the public may be informed as to the status of the insti
tutions with which they do business, periodical statements of con
dition should be required of all banks.
Revision of the provisions of the law reciting the obligation of the
Corporation to pay the insured deposits of a closed insured bank
is necessary. As it now stands, the law requires the Corporation to
organize a new national bank to act as its instrumentality in paying
the insured deposits of every closed insured bank. This procedure
must be followed, even though there is not the slightest possibility
of the community being able to capitalize the new national bank.
Eleven insured banks have thus far closed, but in only one instance
were the local people in a position to capitalize the new bank.
This procedure for paying insured deposits has proved unsatisfac
tory, since it involves needless expense and many unnecessary account
ing problems which could be eliminated if the Corporation were
permitted to pay its obligations in the same manner as other insur
ance companies engaged in the commercial field. Accordingly, it is
proposed that the organization of a new bank be at the discretion
of the Corporation.
Under the present law, where it pays the insured portion of a
deposit claim which is larger than $5,000, the Corporation becomes
subrogated to the entire amount of the depositors’ claim until it is
reimbursed for the amount paid out to the depositor. This is mani
festly inequitable to the larger depositors. We believe that the
Corporation should be subrogated only to that portion of the claim
which it pays, the depositor retaining his claim for any insured
portion and receiving all dividends payable thereon directly from
the liquidating officer. In the case of every closed bank there are
some depositors who can never be located by reason of death, dis
appearance, or change of residence. We believe claims which are not
filed within 1 year after an insured bank is closed should not be paid
by the Corporation. This suggestion finds ample precedent and will
enable the Corporation to close its books on each pav-off within a
reasonable period.
J he bill before you includes suggestions for clarification of pro
visions of the existing law about which some doubt has arisen. The
adoption of these provisions will facilitate administration.
H e recommend that the maximum limit of insurance to any one
depositor be retained at the present figure of $5,000. Congress, in
establishing deposit insurance, was presumably most concerned with
the mass of depositors with small accounts. Our reports cover
51.000.000 accounts, of which over 98 percent are fully insured with
the $5,000 limitation. Many of the accounts not fully covered are
interbank accounts, public funds, deposits of corporations, institu
18
BANKING ACT OF 19 3 5
tions, and trust estates. The actual number of individuals with
deposits in excess of $5,000 is probably less than 1 percent of the
total number of depositors. Out of the 14,000 insured banks, over
9,600 have more than 80 percent of their deposits insured under the
$5,000 limitation. To raise the limit of insurance above $5,000
would materially increase the maximum possible liability of the
Corporation. I f all the deposits were insured, this would be more
than doubled. It would be increased from the present 16i/2 to nearly
30 billion dollars by the permanent plan which now exists in the
statute. This tremendous increase in the maximum possible liability
of the Corporation would benefit only one out of each hundred
bank depositors.
The Insurance Corporation’s interest in the sound operation of
banks is more tangible and more vital than that of any supervisory
authority. Deposits in practically all commercial banks and trust
companies of the United States are insured by the Corporation.
Bank supervisory agencies have a responsibility to the depositing
public, and it is their duty to see to it that the bank laws are prop
erly enforced. The Corporation, however, has a financial liability
to these depositors. Its interest in the sound operation of these in
stitutions is one of dollars and cents.
There are two courses open to the Insurance Corporation. It may
be a charitable institution which will pay for the mistakes, bad
T
banking, and dishonesty of bankers, in which case the cost of the
insurance must be set so high that it will be an injustice to every
sound bank. Or, by being placed on a sound basis, the Corporation
may be used as an instrument to improve the standards of bank
management and reduce the losses to depositors through bank fail
ures. The latter course, which I prefer, requires that the standard
of bank supervision throughout the country be improved, that the
Corporation be given the right to protect itself against excessive
risks, and, finally, that the Corporation be not handicapped by taking
into the fund banks which are unsound or by continuing in the fund
banks which are mismanaged.
We have a number of charts, Mr. Chairman, and we would be
glad to answer any questions.
The C hairman . I would suggest, Mr. Crowley, that the charts
that are pertinent and connected with your statement might well
be appended as a part of your statement and published in the hear
ings at the proper place. Without objection, that will be done.
Mr. F ord. I f a bank is put out o f the fund, does the bank con
tinue to pay the assessment?
Mr. C rowley. Yes, sir. We collect the assessment for this reason:
The deposits of that bank remain insured for 2 years. If we put a
*
bank out of the fund we have naturally got to go in there from time
to time to look after our interests, and they must pay the premium.
Mr. H ollister. Even if the bank withdraws voluntarilv?
Mr. C rowley. Even if the bank withdraws voluntarilv. thev must
pay for 2 years. The reason for that is this: That you may put
some money in a bank, believing it to be insured, and if it withdraws
from the fund tomorrow you may be the victim of a misunderstand
ing. So we believe the depositors should be given a reasonable pro
tection before our liability ceases.
BANKING ACT OF 1 9 3 5
19
Mr. H ollistek. Isn’t it also a protection of the fund? Isn’t it
true that some banks would like to withdraw from the fund in order
to escape responsibility for assessments? That would be a great
weakening of the fund, would it not?
Mr. C rowley. Correct.
Here is another thing. Banks may come into the fund in order
to obtain the psychological effect of having insured deposits. As
they go along and find that it is going to cost them a little some
thing they would like to get out. They might believe that they
can live outside of the fund. They would like to come in in bad
times and get out in good times and have the door swinging both
ways for them. That is very unsound. I think, for the sake of
the whole banking system, every bank in the United States should
be forced to be a member of the Federal Deposit Insurance Cor
poration. Then you would have uniformity all the way through.
Mr. R eilly. Don’t you think there is going to be little opposition
amongst the banks, except the large banks?
Mr. Crowley. The cost of the insurance that we have recom
mended to the small banks is very nominal. To 13,000 banks it is a
very nominal sum. There will be no excuse, in my opinion, for the
smaller banks getting out of the fund on account of the cost of this
insurance, because it is not excessive.
Mr. Cross. It is the big banks, vou think, that are asking to get
out?
Mr. Crowley. I do not believe it is. If this corporation were
properly set up and properly sold to the depositors, I do not think
many banks could live outside of this fund, and I think that is the
way it should be.
Mr. K opplemann . I am very much interested in what you said a
moment ago, that every bank ought to be compelled to belong to the
Insurance Corporation. You know, of course, the difficulty we have
had in my State, Connecticut. Is there anything in this law which
would either compel the banks to come in, or make it so attractive
that they would come in?
Mr. C rowley. There are only 1,100 banks outside of this fund
now.
Mr. K opplemann . I am specifically interested in Connecticut, and
in the Nation as a whole, because of the difficulty we have had.
Mr. C rowley. I think that whole question is going to be answered
when we get our permanent law. If it is a law that we can all get
behind and support and sell to the depositors, and if the cost is not
excessive, I do not believe the banks of very many States can afford
to sta}^ out of the system.
Mr. K opplemann . I s not the real reason they did not want to
come in, this feature of exam ination, which they look upon as an
interference ?
Mr. Crowley. Y ou do not get so much objection to the examina
tion from a good bank. Our experience indicates this, that the objec
tion to examination comes from the fellow who should be examined
often, a our better institutions do not object to regulation.
Mr. K opplemann . What I am trying to get at is how we are going
to get these 1,100 banks in. Have you got anything in the law on
that ?
20
BANKING ACT OF 19 3 5
Mr. Crowley. N o ; but I think we have quite a few applications
before us now. have we not, Mr. Fox?
Mr. Fox. Yes; we have.
Mr. C rowley. We have been in operation 15 months, and we have
some 8,760 State banks which are insured. There are only 1,100
licensed banks outside of the entire system.
Mr. K opplemann . I believe the depositors throughout the Nation
are 100 percent for this thing, except those who have been told, as
they were in my State, that it is a terrible thing, and because they
do not have the facts, they believe that statement.
Mr. Crowley. We have had some opposition from the bankers, be
cause there were doubts in their minds. For instance, they had an
unlimited liability hanging over them. I think if that and some
other features were straightened out you would get the cooperation
of a great many of your financial institutions—especially if you give
to this Corporation some regulatory powers, so that it might have a
part in holding up your banking system.
Mr. G oldsborougii. I have noticed in several banks a sign reading,
“ The deposits in this bank insured by the Federal Deposit Insur
ance Corporation.” That creates the impression that all the deposits
are insured. Is there anything in this bill which would require those
signs, when they are put up, to show what the limitation is?
Mr. B i r d z e l l . Yes. I think you may have an erroneous impres
sion of the effect of the present sign. The present sign that we have
adopted shows the amount right on the sign.
Mr. G oldsborough. I did not mean that the sign of the Federal
Deposit Insurance Corporation was misleading, because I was talk
ing to a Congressman the other night, and he said that in his terri
tory the signs all disclose the amount of the insurance, but I want
to say that I have seen this misleading sign and it does not seem to
me that it ought to be allowed.
Mr. B i r d z e l l . From the very beginning we have used the utmost
care to prevent advertising being put out that would be misleading
to the public in that respect.
Mr. H ancock. Mr. Crowley, what would be the annual return to
your insurance fund, based upon one-twelfth of 1 percent of the
total?
Mr. Crowley. About $30,000,000, Congressman Hancock, per year.
Mr. H ancock. W hat would the assessment amount to?
Mr. Crowley. About $30,000,000, and income from the investment
would amount to about $9,000,000.
Mr. H ancock. Under the proposed new bill, is the levying of that
assessment mandatory or discretionary ?
Mr. Crowley. We have the right to reduce it, but not below 50
percent. In other words, we have a refunding provision in there,
after we get our reserves built to a certain point.
Mr. H ancock. Is it your purpose and intention to levy an annual
assessment every year?
Mr. Crowley. Yes; and that would have to be, because you will
have to build your reserves for the future, in order to take^ care of
some unforseen obstacle. If you do not do that, but only try to
assess in times of difficulty, you are going to create additional hard
BANKING ACT OF 1 9 3 5
21
ships when banks are already subjected to as great a load as they
can carry.
Mr. H ancock. I know that you have been making an exploratory
inquiry into this subject, and I am interested to know, as a result
of the figures and reports you have got, whether it is true that
1 percent of the people in this country own and control 60 percent
of the deposits in the banks?
Mr. Crowley. I think that 800,000 individuals and corporations
control about 65 percent of the deposits.
Mr. R eilly. Corporations too?
Mr. Crowley. They are included in depositors.
Mr. G ifford. Y ou said a good deal about the impairment of the
capital. When the R. F. C. provides a new capital structure, is it
easy for the banks to withdraw and repay the R. F. C.? Can you
explain to the committee what the conditions are they have to meet
before they are allowed to repay? Do you want to have something
to say about it?
Mr. C rowley. Yes. Let me say this: We have gone out in the
last year and have aided, with the help of the Reconstruction F i
nance Corporation, in strengthening very nearly 3,500 out of some
7,800 State banks in this country not members of the Federal Re
serve System. The difficulty is this, that we go out and we work
with the stockholders and directors and everyone, getting that money
in the bank. A lot of these banks seem to confuse liquidity with
capital position. In other words, because their deposits are increas
ing, although they may not have any capital to speak of, they feel
that they should be able to pay back the Reconstruction Finance
Corporation. What we want is this, that after doing this great job
that has been done, these banks should not be permitted to again
weaken their capital structures by repaying the R. F. C. unless
some local contribution is made, or unless earnings place the banks
in such a position that they will have sufficient capital to form an
adequate cushion for the protection of the depositors and this Coi*»
poration. These banks should not be allowed to undo the construc
tive work of the past 15 months.
Mr. G ifford. A s I understand it, many banks have come and ap
plied to the R. F. C., in order to get this capital structure, because
they were forced to mark off and mark down a considerable fund,
and to meet that contingency they felt it necessary to add to their
capital structure, but when that contingency seemed to have passed,
and the bank was in perhaps better shape, they desired to get rid
of the R. F. C., because the public at large felt that if they had to
fPPty the R- F. C. they necessarily must be involved. Wnen they
have gotten out of the condition that the examiner has forced them
l ° ^ em?yy, are you going to resist their dismissal of the R. F. C. ?
Mr. Crowley. I do not think we would object, provided they really
have corrected that condition.
. M r - G i f f o r d . Isn’t it a case of resisting sometimes, because there
is another second examination, one by you and one by the national
bank examiner? Doesn’t that defeat them?
Mr. Crowley. N o. There is no duplication in Federal examina
tions. Me do not examine a national bank, nor do we examine a
State member bank. We take the examination report of the Comp
troller and the Federal Reserve.
22
BANKING ACT OF 1 9 3 5
Mr. G ifford. I had assumed that you did, and by this talk this
morning had suggested that you wanted the power to refuse. Are
you going to take another examiner’s word for the condition ?
Mr. C rowley. Are you talking about banks coming into the fund ?
Mr. G ifford. Yes.
Mr. Crowley. With regard to the requirement for banks coming
into the fund, the Comptroller and the Federal Reserve may use the
same yardstick as we are expecting the State banks to use, for admis
sion to this fund.
In putting the banks out of the fund, we notify the Comptroller
or the Federal Reserve or State supervisor of the condition that
exists, and we give him 90 days time in which to make the correction.
If it is not made we serve notice on the bank and give the bank the
right of hearing.
As far as the capital-rebuilding program of the national banks is
concerned, that has been done exclusively by the Comptroller. We
have done it with the State nonmember banks only.
Mr. G ifford. Don’t you realize that the public at large have the
feeling that when the R. F. C. comes to the rescue of a bank it as
sumes more than 51 percent of the control? You realize that?
Mr. Crowley. That is not true. If you mean control of the in
dividual bank.
Mr. G ifford. Yes.
Mr. Cross. On the question of examinations you said you always
accept the Comptroller’s examination of a national bank and the
Federal Reserve’s examination of a member bank.
Mr. Crowley. That is right.
Mr. Cross. But in this bill you ask for authority to make an exam
ination, with the consent of the Comptroller and the consent of the
Federal Reserve.
Mr. C rowley. That is done for this reason, that we are asking for
the right to purchase assets in the case of consolidations and mergers.
Suppose you had a national bank that was in some difficulty. We
want the right to go in with the Comptroller and see if there is
anything we might be able to do.
Mr. Cross. Y ou do not contemplate a general request to the Comp
troller and to the Federal Reserve for examination of the institutions ?
Mr. Crowley. N o, sir.
Mr. F ord. Where the R. F. C. has purchased $100,000 of capital
stock of a bank, in order to strengthen its structure, and in the course
of 6 months they feel that they want to repay that, wouldn’t it be a
good idea to permit them to repay it, when capital is secured in the
district to replace that sum ?
Mr. C rowley. Let me say this to you gentlemen, that banks do
not improve their position materially in 6 months’ time.
Mr. F ord. Whatever the period would be.
Mr. C rowley. Oh, I agree with you—either through earnings or
an improvement in conditions, or local contributions. Does that
answer vour question?
Mr. G ifford. Don’t you understand that when there are three or
four banks in one community, and all receive assistance from the
R. F. C., but one is allowed to divest itself from the capital structure
of the R. F. C., the public then begins to think that that bank may
be a little bit stronger than the other two? Do you think that the
BANKING ACT OF 1 9 3 5
23
public is very tender in its viewpoint of the strength of the local
banks these days?
Mr. Crowley. That may be true, but, as a matter of fact, what are
you going to do if you have three banks and the impairment of one
of them was less, and through its own local contributions or its own
earning capacity it put itself in shape so that it could go on by
itself? The Government can only stay in these banks until the
banks are able to carry on themselves.
Mr. G ifford. That is what I asked you in the first place, if you
were going to attempt to resist their repayment of the It. F. C. ?
Mr. Crowley. N o ; I think Mr. Jones and everyone would be glad
if the banks could pay back a billion dollars tomorrow, without
weakening the banking structure, but we do not want them to pay
it back if it is going to mean a weakened situation.
Mr. H ancock. The chairman of the Federal Deposit Insurance
Corporation has made a very able, interesting, and comprehensive
statement here, and one that deserves the best thought and study of
our committee. I am wondering if he will be available to come back
to us from time to time.
The C hairman . Oh, yes.
Mr. C rowt . Surely.
ley
Mr. H ancock. T o discuss this report and statement after we have
had a chance to absorb it?
The C hairman . Surely.
Mr. D irksen . The question is perhaps speculative, but here is a
thought that was suggested to me last summer, when we were liqui
dating one of our banks in East Peoria, that probably one of the best
insurances of good banking comes from the fact that the bankers
look after each other somewhat. In other words, they are just as
much interested to see that their neighbor indulges in good banking
practice, because if the losses entailed should appreciate year after
year it would mean that sometime or other your insurance premium
would have to go up.
Mr. C rowley. That is right.
Mr. D irksen . However, the banks in Wisconsin in the aggregate
would have no way of looking after or having contact with the banks
in Illinois.
Mr. Crowley. T hat is right.
Suppose, as time goes on, you find that a geographi
cal classification of these losses discloses that they are infinitely
higher in one State than in another. I have heard bankers raise
the point that they are heartily in favor of this insurance, but if
^ should be developed that there were losses in other areas over
which they have no control or with which they had no contact, it
would constitute an unjust penalty upon them in that particular
area. Has it ever occurred to you that at some time or other it may
be necessary to think of classifying these insurance rates on the
basis of the geographical areas? It would involve a lot of work, I
know, but the equity involved must be considered.
Mr. CRo w l e y . I do not think that would be a practical thing for
the corporation, at least until the whole banking system is almost fool
proof, for this reason, that the thing that is the best security for
the corporation now is the diversification of risk which is spread
over the entire country.
Mr. D ir k sen .
24
BANKING ACT OF 1 9 3 5
For instance, if you put the Middle West in a class by itself, and
they have a drought like this last year, and they must stay on their
own, you are going to make insurance for those banks so expensive
that it is going to be almost prohibitory for them to belong to the
fund.
As I see this thing, the bankers have got to take this viewpoint,
that we had an almost complete collapse of the banking system in
March 1933. You can hear people say, “ We were still able to stay
open ” but the fact remains that the banking system, including the
New York banks and other Federal Reserve member banks, had, for
all practical purposes, broken down. The interest which the banks
should have in the Federal Deposit Insurance is to help it build
a banking system that will remain independent and sound. None of
us can justify a continuance of our kind of banking system, (and
I am an advocate of our present banking system) if we are to have
a reoccurrence in 10, 15, or 20 years of the situation which existed in
1933.
Mr. G oldsborotjgh. Why does it require a recurrence? Why
should you have to do it twice to prove it ?
Mr. C r o 'w l e y . I believe that the Federal Deposit Insurance does
offer the vehicle for the correction of the banking system of this
country. I am not talking about monetary control; I am talking
purely of supervision.
Mr. G oldsborotjgh. In the last analysis, the Federal Deposit In
surance Corporation has access to no more money than the banking
system itself has access to, and the banking system itself only has
access to about $7,000,000,000, which is the entire capital, surplus,
and undivided profits of all the banks, so that in the last analysis the
Federal Deposit Insurance Corporation can do absolutely nothing
except act as one means of maintaining the confidence of the people
in the integrity of the banks, and thus avoid runs on the banks.
Mr. Crowley. Yes.
Mr. G oldsborotjgh. That is the truth of the situation.
Mr. D irksen . At the present time one who goes to a bank and
makes a time deposit can under no circumstances withdraw that
money, even though he may waive all interest thereon. I under
stand that is embodied in regulation Q.
A man went into a small bank in my district, and he wanted to
place $1,200 on time deposit, for 90 days. He said, “A contingency
may arise whereby I might need the money. Can I get it out before
that time in such a case?” They said, “ No.” He said, “ Suppose I
waive the interest? ” They said, “ You cannot get your money anvway.” He went across the street and put his money in Postal Sav
ings. He can put his money in the Postal Savings and if any portion
of the money is there up to the interest pay day, he can'even <ret
interest, ancl get new certificates for the balance of his monev. " it
occurs to me that there is a disparity between the obligation imposed
by regulation Q and the practice of the Postal Savings System.
Mr. B i r d z e l l . That is correct.
Mr. D irksen . They ought to be brought into uniformity, because
it is affecting these small banks. And it is not necessarilv the fact
that the bank loses income from the small deposit, but it is a fact
that a man goes out of that bank and he says, “ There is something
wrong with this bank ”, and he does not realize the implications of
BANKING ACT OF 19 3 5
25
regulation Q, and once he gets to talking to his neighbors, he Impairs
some of the local confidence in the bank, because of that lack of
consistency in these systems at the present time.
Mr. Crowley. I do not think ours in inconsistent. I think ours is
consistent, and theirs is inconsistent.
Mr. D irksein. Y ou mean the Postal Savings?
Mr. Crowley. Yes.
Mr. D irksen . I agree with you, but I agree with you also that
the practice ought to be uniform, and the Postal Savings should be
•compelled to do precisely as you do.
M r . B i r d z e l l . There is a feature of the law that you may be
familiar with, which provides that where Postal Savings are per
mitted to be withdrawn without the service of the notice required by
the Banking Act of 1933, no interest shall be paid except interest
accruing prior to the effective date of the banking act. But not
withstanding that, apparently they are paying interest up to the
date of withdrawal.
Mr. D irksen . Precisely, and even if they did not pay interest it
would only remedy one-half the problem, because a man could still
go and deposit and withdraw the deposit, which he cannot do now
under regulation Q.
Mr. B irdzell. Your statement is correct, I believe. Attention
should be given to that matter, because there is some unfair com
petition between the Postal Savings and the banks. That is par
ticularly true now, when the banks are paying low rates of interest.
The C hairman . Of course, manv people hold the view that if you
insure all deposits in private banks the Government should not set
up and maintain a deposit institution in competition with them.
I t is contrary to sound public policy, and the necessity for it has
been removed, and there is no excuse for it. That is what we
attempted in the Banking Act of 1933, which has not been followed
as was contemplated by the framers of the act, to at least
require that the Government, insofar as it competed with the banks
in the matter of deposits, should maintain a purely savings system
and not regular checking accounts.
It might be well to state in that connection, I think, that we have
quite a number of communities, and you might say sections of the
country, where the banking facilities have been, for the time being
at least, swept away, so that the only depository left for the citizen
was the Postal Savings System. So that difficulty confronts us in
undertaking to deal with that problem, but for my part I think we
^
^ * some way legislate on that subject.
n
Mr. Crowley. I t will help eventually to correct a part of your
banking trouble when the Postal Savings deposits are permitted to
go into your small banks. They would get that volume of business
lat may be helpful to them, so that they may be able to make some
^ RKSf N- May I make one observation on the table on page 16
report? I see that in the first column, from 1873
to 1878, the deposits were $85,000,000 and the losses $26,000,000, so
the loss was approximately 30 percent. From 1892 to 1897 the
deposits were $134,000,000 and the losses $43,000,000, which was 32
percent. 1 hen the deposits from 1931 to 1934 were $5,356,000,000
and the losses $2,142,000,000, which was a loss of about 40 percent.
26
BANKING ACT OF 1 9 3 5
I am merely remarking the facts, because at the bottom the average
loss per year for each $100 of deposits of $1.28 seems disproportion
ately so much lighter than 30 percent and 40 percent.
Mr. Cavicchia. That is because it takes in a greater part of this.
Mr. D ir k s e n . That is probably true.
Mr. W olcott. I am given to understand that a man may have a
deposit guaranteed up to $5,000, and his wife may have a deposit
guaranteed up to $5,000, and there is no question about those. Is
the joint account, in addition to those guaranteed up to another
$5,000?
Mr. B irdzell. Yes.
Mr. W olcott. Is a bona fide trust account, as a part of that savings
division, subject to this insurance?
Mr. B irdzell. That is an account held in another capacity.
Mr. W olcott. I say “ bona fide ” to distinguish it from a mere
creation of a trust fund to avoid the purposes of the act.
Mr. B irdzell. Under the terms of the law, in paying off a bank
we have to combine all of the deposits of the particular claimant
which he holds in the same capacity and the same right. If he holds
them in different capacities—for instance, you may maintain a bank
account in your bank in your private capacity, and you may be a
member of a partnership that also has a bank account in that same
bank.
Mr. W olcott. I know, those are separate.
Mr. B irdzell. They are separate. If you and your w ife have
a joint account, that is an account held in a different right. It may
be all collected by your wife, or may be all collected by you while the
bank is operating, and we have the problem of offsets, and the same
law that applies in solving the problem of offsets in the closing of
a bank must apply and work harmoniously with regard to the in
surance. We must treat each one separately.
Mr. W olcott. Let us work that out in a practical way. Assume
that a man and his wife have $20,000 between them, and the man
has $20,000 in bank, in a joint account between himself and his wife,
with the feeling that upon his death his wife will not have to ad
minister his estate, or probate his estate, but she can go down and
avoid any such probation by merely drawing that money out as a
joint depositor. Then comes along the F. D. I. C., and my under
standing is that they can take that account and divide it up, so that
the deposit will be divided $5,000 to the husband, $5,000 to the wife,
and $5,000 in a joint account, with the possibility of another $5,000
in a trust account.
Mr. B irdzeix. N o; as long as the account is in the name of the
husband and wife, no matter what the amount is, it is treated as
one deposit, but it will be treated separately from any other account
of the husband.
Mr. W olcott. My point is th is: John Jones has $5,000 in the bank,
and John Jones and Mary Jones, his wife, have another $5,000 in a
joint account. Are both of those accounts insured up to $5,000?
Mr. B irdzell. The first being an individual account, and the other
being a joint account; yes.
Mr. W olcott. The same thing follows if Mary Jones has another
$5,000 in her name?
Mr. B irdzell. Exactly.
BANKING ACT OF 19 3 5
27
Mr. W olcott. S o he can take this $20,000 that they had in the
original account, and split it up, $5,000 in his own name, $5,000 in
her name, $5,000 in their joint names, and then $5,000 in the bona
fide trust account?
The C hairman . They could not do that after the bank had failed.
Mr. W olcott. I am saying that in that manner it would be pos
sible for him to insure the total of his $20,000.
Mr. B irdzell. If it is done merely as a cover, so as to enable a
man to get more insurance on his own money, we would pay him
$5,000.
Mr. G oldsborough. In that case the burden of proof would be on
the Deposit Insurance Corporation.
Mr. B irdzell. Yes.
Mr. W olcott. I know all the intricacies of the chancery practice,
and I know you could split it up in different banks, but my point is
on the face of it are those accounts insured, or upon the failure of
that bank or the closing of that bank must the individual go into
chancery and by suit against the Insurance Corporation, or some
thing of that nature, prove that they were bona fide separate accounts ?
Mr. B irdzell. If the information we get, upon going in to pay off
the bank, indicates that there has been an attempt to increase our
insurance liability to one owner of a deposit, using simply a joint
account, or some other device to cover up his ownership, we would
investigate that before we would pay the claim, and if we found
enough evidence to satisfy us that there was a subterfuge for the
purpose of increasing the insurance of one depositor, we would decline
to pay it.
The C hairman . The law specifically makes the test the individual
ownership.
Mr. B irdzell. Individual ownership.
The C hairman . Without objection, we will take a recess until
10:30 o’clock tomorrow morning, and Mr. Crowley, we would like to
have you and Judge Birdzell back tomorrow morning at 10:30
o’clock.
(Whereupon, at 12:30 p. m., the committee adjourned until Friday,
Feb. 22, 1935, at 10:30 a. m.)
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BANKING ACT OF 1935
F R ID A Y , F E B R U A R Y 22, 1935
H ouse of R epresentatives,
Committee on B anking and C urrency,
T
Vashington, D. C.
The committee met at 10: 30 a. m., Hon. Henry B. Steagall (chair
man) presiding.
STATEMENTS OF LEO T. CROWLEY, CHAIRMAN FEDERAL DEPOSIT
INSURANCE CORPORATION; AND L. E. BIRBZELL, GENERAL
COUNSEL FEDERAL DEPOSIT INSURANCE CORPORATION—
Continued
The C hairman . The committee will come to order. We will con
tinue the hearing on H. R. 5357.
Mr. Crowley, I would like to ask you two or three questions.
Did you give the figures showing the amount of insurance in banks
that have failed since the passage of the Deposit Insurance Act?
Mr. C rowley. We have that here, Mr. Chairman. Do you wish
the figures for each bank, or the total ?
The C hairman . I do not care about having it broken down.
Mr. C rowley. The deposits in 11 banks that have failed amounted
to $2,890,000, and of that amount the estimated net amount for which
depositors were insured was $1,765,000; the secured deposits, and
those subject to offset, amounted to $935,000. The uninsured bal
ance amounted to $190,000. In other words, of total deposits
amounting to $2,890,000 in failed insured banks, all but $190,000
were fully protected.
The C hairman . The amount of deposits insured for which your
corporation was responsible amounted to $1,765,000?
Mr. Crowley. Yes, sir.
The C hairman . H ow much would you say, of that amount, will
represent losses, if you can estimate it, by the Deposit Insurance
Corporation ?
Mr. M arkham . We only have estimates of anticipated recoveries
on the nine insured banks which failed during 1934. These banks
had total deposit liabilities of $1,938,000. The estimated net loss to
the F. D. I. C. amounts to about $356,000.
The C hairman . D o you mean to say that you will disburse to
depositors to make good their losses, above what vou will receive,
the sum of $356,000?
Mr. M arkham . Yes, sir.
127297— 35 ------ 3
29
30
BANKING ACT OF 1 9 3 5
Mr. M arkham . Of the $2,890,000, the offsets and the amount of
the security that the depositor has pays everything but $190,000.
The C hairman . What will you pay to depositors? Your net dis
bursements, or what we might term your “ final losses ” in the Cor
poration down to date, amount to how much ?
Mr. C rowley. It is impossible for us to tell you that because all we
can do is to estimate.
The C h a ir m a n . That is what I am asking for, an estimate.
Mr. C rowley. We have estimated, I think, that in the case of the
nine banks that suspended during 1934 the net losses to the Federal
Deposit Insurance Corporation will be something like 40 percent.
The C hairman . I can understand you can only give us an estimate,
but that is what I want to get.
Mr. Crowley. I think that is about correct, that it is about 40percent loss that we anticipate.
Mr. Crowley. All of the claims of depositors in the 11 banks that
were closed, with the exception of about $460,000, have already been
paid. All but about $50,000 or $60,000 will eventually be paid, ac
cording to our estimates.
The C hairman . They have been paid up to now?
Mr. C rowley. $2,430,000, including offsets settled and secured
claims paid.
The C hairman . All I want to ascertain is, first, the total amount
of deposits in banks insured that have closed down to date.
Mr. Crowley. That is $2,890,000.
The Chairman . What portion of that amount of deposits was
insured ?
Mr. Crowley. All except $190,000, when you add to our insur
ance offsets and secured deposits. The net insured deposits amounted
to $1,765,000.
The C hairman . That is the amount of deposits to be covered by
insurance?
Mr. Crowley. That is correct.
The C hairman . For which you were responsible. That is the total
of your actual liabilities?
Mr. C rowley. That is right.
The C hairman . And of that your estimate is that you will actu
ally lose 40 percent?
Mr. Crowley. We will recover 60 percent.
The C hairman . That is the same thing, is it not ?
Mr. Crowley. Yes.
The C hairman . The losses will be 40 percent ?
Mr. Crowley. Yes.
The C hairman . That will be about what amount?
Mr. M arkham . $356,000 in nine of the banks.
The C hairman . There were 11 of them that failed?
Mr. Crowley. That is right.
The Chairman . H ow many of those failures were normal or legiti
mate failures, and how many of those failures were due to defaults?
Mr. Crowley. I think six of them were due to defalcations.
The C hairman . Those figures are correct ?
Mr. Crowley. That is right.
BANKING ACT OF 1 9 3 5
31
The C hairman . S o we have had five bank failures other than
those due to defalcations since the effective date of the Deposit In
surance Corporation Act?
Mr. Crowley. Let me say this: There are three banks that I
think will pay 1 0 0 cents on the dollar.
The C hairman . H ow many failed insured banks will not pay
1 0 0 cents on the dollar and were not closed on account of defal
cations?
Mr. C rowley. There are four. For example, we have a little bank
with $40,000 deposits, which is so small that they put it in liquida
tion because they could not make any money.
The C hairman . Did you have any actual loss in that?
Mr. Crowley. Yes; I think we may have a small loss.
The C hairman . Y ou have already accounted for three banks in
which you have no substantial loss.
Mr. C rowley. Take the bank in Pittsburgh that closed. They
had some $700,000 in Postal Savings accounts. They took collateral
that might be helpful to us, which was necessary to use for Postal
Savings. Those depositors were protected by collateral that was
taken from the assets of the bank. I t weakened us to that degree.
Every time they post collateral for public funds, or what not,
they only weaken our position that much more.
The C hairman . I believe you said yesterday that your earnings
had amounted to about $9,000,000 down to this time; is that correct?
Mr. C rowley. They are running about 9 million, between 22 and
23 thousand dollars a day.
The C hairman . Taking your losses down to date, Amur net bal
ance will show a profit of something approaching 8 y2 million
dollars ?
Mr. Crowley. N o. They will before the overhead is deducted;
after the overhead is deducted, they will still show a substantial profit.
This corporation could be wound up today and pay its losses and
return to the Federal Reserve bank and to the Government their
money plus a return on their investment.
The Chairman . And a substantial return ?
Mr. C rowley. That is correct, sir. You understand, there w^r^
some suspensions outside of our fund; there were 47 banks that failea
outside of the fund.
Yh® ^ HAIRM
A:N- Y ou had made that statement yesterday, as I
recall, that there were 47 failures outside of the Insurance Corpo
ration.
Mr. C rowley. Yes.
I he C hairman . In that connection, to make those figures clear,
^ s^ e k°w many banks are uninsured.
i l l . Crowley. We have 1,100 banks that are operating in this
CORRtry today that are uninsured.
Ih e C hairman . And out of the 1,100 banks you had 47 failures
outside or the Corporation, and of the total number inside the Corporation you had the number to which rrou had already testified ?
Mr. Crowley. That is correct.
1 he C hairman . Mr. Crowley, I want to ask you what your present
resources are for the protection of depositors ? ‘
32
BANKING ACT OF 19 35
Mr. Crowley. We have $140,000,000 from the Federal Reserve
banks and $150,000,000 from the Treasury, which has been sub
scribed in the form of stock. We also have $41,000,000 from the banks
themselves. So we have approximately $330,000,000, and we have
that invested in Government securities, with the exception of about
$15,000,000 that we carry on hand for any normal expenses that we
might have.
The C hairman . Y ou have the right and the privilege and the au
thority under the law to expand your capital three times?
Mr. Crowley. By borrowing.
The C hairman . By issuing obligations?
Mr. Crowley. That is correct, Mr. Chairman.
The C hairman . S o you have potential resources of about $900,000,000, which would give you four times the amount of your capital \
Mr. Crowley. That is correct.
The C hairman . Which would be 1,200 m illion dollars?
Mr. C rowley. Yes.
The C hairman . In addition to that, under the act passed in 1934,
the amendatory act of last year, you have also the right to borrow
$250,000,000 from the Reconstruction Finance Corporation.
Mr. C rowley. That is correct, sir.
The C hairman . Summed up, it means that 37
our Corporation is
equipped practically to the amount of a billion and a quarter dollars
at this time?
Mr. C rowley. There is a question, Mr. Chairman, whether the
$250,000,000 that we have the right to borrow from the Reconstruc
tion Finance Corporation should not be included in our borrowings
of three times the amount of our capital.
The C hairman . H ow do you get that? The original act gave you
the right to expand your capital three times.
Mr. C rowley. That is right.
The C hairman . W e attempted and I thought we had supplemented
that last year in the bill passed at that time giving you entirely sep
arate authority to borrow a quarter of a million dollars from the
Reconstruction Finance Corporation.
Mr. B irdzell. This is the situation, Mr. Chairman. The law under
which we are operating does not provide for a Government guarantee
of either the principal or the interest of our debentures which we
may issue to the extent of three times our capital.
The C hairman . I know that.
Mr. B irdzell. Because of that fact we suggested that that guar
anty be given. It was in the bill that was under consideration last
year and was stricken out in the Senate. When the bill was ulti
mately passed, however, it was not passed quite in the form that you
now have in mind, Mr. Chairman.
It was passed in this form, that as to the debentures that might
be issued by our Corporation, our Corporation could call upon the
Reconstruction Finance Corporation to purchase at par to the extent
of $250,000,000. That is a sort of substitute for Government guar
antee, to provide us with a par market for our debentures up to that
amount.
BANKING ACT OF 1 9 3 5
33
I think if you will turn to the provision of the act where that is
found you will be impressed with the fact that the $250,000,000 is
part of the debenture authority of the board of directors, and not in
addition to that.
The C hairman . In any event, you have about twelve hundred
million dollars?
Mr. B irdzell. That is right.
Mr. Crowley. In our proposal we are asking for the right of
issuing three times the amount, which will give us $1 ,2 0 0 ,0 0 0 ,0 0 0 .
We say nothing about the 250 million, but it is still available from
the Reconstruction Finance Corporation.
Mr. F ord. I wanted to make one observation. The banks pay
this premium.
Mr. Crowley. T hat is right.
Mr. F ord. A s a matter of fact, the depositors pay it.
Mr. C rowley. Of course, the depositors, like the consumers of any
thing, ultimately pay the expense.
Mr. F ord. They have cut out the interest on the unused dollars,
and since they have quit paying interest that really make the depos
itor pay for his own protection.
Mr. Crowley. That does not affect the rank and file of the depos
itors. The average depositor never got anything on his demand
deposits.
Mr. K opplemann . Further on the banks that the chairman was
talking about, what, under the present law, or under the bill proposed
that is before us, are you empowered to do about rehabilitating
many of these closed banks.
Mr. Crowley. There is the possibility that in the 1 , 1 0 0 licensed
uninsured banks a very substantial number of those may lie brought
into our fund. There are some that are staying out because they
do not wish to join.
Mr. K opplemann . But what I specifically would like to know is
whether or not under the old law, or under the new bill as proposed,
you have the power to help these banks get back on to their feet.
Mr. Crowley. N o; we have no legal power to force them to do
anything. With the help of the Reconstruction Finance Corpora
tion we have been able to aid them.
Mr. K opplemann . Have you done so?
Mr. C rowley. We have already rebuilt the capital structure, with
the help of the Reconstruction Finance Corporation, of about 3,500
insured State banks in this country.
Mr. K opplemann . I mean after they are in trouble.
Mr. Crowley. They were in trouble when we got them.
Mr. K opplemann . I am talking about 1 1 closed banks that were
insured.
Mr. C rowley. We have not any authority.
Mr. K opplemann . N o authority to keep them going. You see
what I am trying to bring out, whether or not this act even goes
further than merely guaranteeing deposits, whether it does not also
save the banks.
Mr. B irdzell. I n d e r the existing law we could not. if we would,
purchase any assets or loan any money to a nonmember bank, and
34
BANKING ACT OF 19 3 5
of the 1 1 banks that have closed there were only 2 member banks.
So we could not, if we would, go into those banks and rehabilitate
them ourselves, except as to member banks. In this bill provision
is made for something like that to be done.
Mr. D ir k s e n . Does the $41,000,000 that has been referred to repre
sent the income from the deposit fund ?
Mr. Crowley. N o ; it represents the assessment of one-fourth of 1
percent on insured deposits against the banks. The members of our
fund pay an assessment. They have paid us $41,000,000.
Mr. D irksen . Under the original law, could you still issue stock
to the Federal Reserve bank?
Mr. C rowley. Yes; you could offer stock to the Treasury, or, under
the set-up that now exists, you could authorize----Mr. D irksen (interposing). The original law provided that the
Federal Reserve banks could subscribe to the extent of one-half of
their surplus, on the first of January 1933.
Mr. Crowley. They have done that.
Mr. D irksen . Then you have discretionary power to require only
the payment of one-half of the subscription ?
Mr. Crowley. W e have required the payment of the entire sub
scription.
Mr. D irksen . It has been paid entirely?
Mr. C rowley. I t has been paid entirely; yes, sir.
Mr. G ifford. You have used the expression recover immediately.
Mr. Crowley. We have started to pay off to depositors in closed
insured banks, Congressman, within 10 days from the time the bank
closed.
Mr. G ifford. Y ou have made no new suggestions?
Mr. C rowley. We have made some suggestions that are purely
administrative.
Let me explain that to you. There is a little bank in Montana that
closed. They are way off in the country. We had to go way up in
the hills and bring tlie people down to get their money. Under the
present law we must carry on the expenses of continuing that bank,
and it may be that all the depositors except three or four were paid.
We are asking for the right to bring the balance of the affairs of
the bank into Washington so that we might complete the tag-end
of those payments from our office here.
Mr. G ifford. Then I notice that you want some proof from depos
itors that a deposit in a bank that you may find is really one deposit,
is held for the benefit of one person.
In the future you may want written proof that a certain number
of deposits may be held for the benefit of one person, under different
names, unless it were proven to be a trust deposit.
Questions asked you yesterday related to deposits carried as trustee,
or in a joint account.
I thought I noticed a recommendation in reference to the matter
of determining whether there were not various deposits in a bank of
only one individual.
Mr. B irdzell . There is nothing specific on that further than this.
It provides for the claim agents of the Corporation being able to
take proof to determine the ownership of the different amounts of
money.
Mr. G ifford. My question was leading up to that.
i
BANKING ACT OF 1 9 3 5
35
Mr. B irdzell. We will not find occasion to use that provision of
law in any great number of cases, because we get practically all our
information from the books in the banks. These proofs of claims are
made up and then the depositors are asked to come in and get their
money. All that remains to do is to reconcile with the depositor’s
passbook.
Mr. G ifford. I am certain that there is a recommendation there
that seemed to be an attempt to prove that certain people might
divide their accounts in the same bank for the sake of being insured
under the $5,000 limit.
Mr. B irdzell. Would that be under the definition of insured de
posits ?
Mr. G ifford. I cannot recall.
Mr. G oldsborough. How much in the way of income is derived
from one-twelfth of 1 percent?
Mr. Crowley. About $30,000,000.
Mr. G oldsborough. A s I understand it the law provides that the
assessment may be lowered, but there is no provision in the pro
posed act under which the assessment can be raised.
Mr. Crowley. That is correct.
Mr. G oldsborough. On what theory do you feel that it would not
be wise to place in the proposed act some provision permitting the
Insurance Corporation to raise that contribution from one-twelfth
of 1 percent to such amount as might be necessary ?
Mr. Crowley. This is my own personal viewpoint about that. I
think that in building a fund the insurance of deposits, the first
responsibility is to correct some of the mistakes or weaknesses in
our banking system. In other words, I do not believe we are justi
fied in charging to the bank system of this country the mistakes of
the past. This Corporation should be given sufficient authority to
eliminate a great many of the past mistakes.
There is a question in my mind as to whether we are justified in
taking from a bank a large percentage of its income, or leaving it
liable to an assessment which might jeopardize the soundness of that
particular institution. To subject a bank to an additional assess
ment at a time when they are having about all the difficulties that
they can encounter themselves may not be a wise policy.
Mr. G oldsborough . That is the time when the Insurance Corpora
tion can be of service to the depositors in banks.
Mr. C rowley. I think that the Government now has a direct re
sponsibility in connection with our banking system. I think it has
a responsibility to the Federal Deposit Insurance Corporation, and
to the depositors. I believe that if we are going to build this fund
o\er a period of years, that in addition to the income you get from
the banks, you must have a way to build up a sufficiently large reion^e iQno6 *
lave. a recurrence of the conditions that existed in
^
i)r v • i ’ we
then have a cushion that we may fall back on
out ot which to pay losses.
. I am n°f disturbed particularly at the losses of this Corporation
in the next, 3, 4, or 5 years. Because of the rebuilding program and
a recovery of business which will restore values, losses will not be
great in the next 3 or 4 years.
I think over a period of 1 0 years this fund should build a sub
stantial reserve.
36
BANKING ACT OF 1 9 3 5
Mr. G oldsborough. Y ou mean the act should be amended to pro
vide for a Government contribution?
Mr. Crowley. I do not care whether it is a Government contribu
tion or income from some other source.
Mr. G oldsborough. I have no objection to it; I am just asking
the question.
Mr. Crowley. I think where we go into the field of insuring de
posits our first responsibility is to keep this Corporation solvent
so that it can at all times meet its demands. Otherwise, I think
confidence in banking would be broken down entirely.
Mr. G oldsborough. Personally, I have no fear about that for the
next 2 0 years.
But there is another consideration, and a very serious one, in my
mind. This Corporation, in the minds of the public, is a Federal
organization, a Federal deposit-insurance corporation; and unless it
has a dual responsibility, the title is just as misleading as the title
of the Bank of the United States in New York. I t simply deceives
the public.
I personally see no objection whatever to amending this proposed
act so as to give the Corporation the right to raise this contribution
from the banks from one-twelfth of 1 percent to one-fourth of 1
percent.
For a long while the banks will be afraid to make loans; the
examinations are going to be rather strict; but we have given the
banks in the last few years $13,000,000,000, and we are continuing to
issue bonds and give them more billions of dollars.
As they wax strong and arrogant, and as business is resumed, and
as they begin to brush the examinations aside, as they will in time,
it will become necessary to fortify this Corporation and serve notice
on the banks that they have the bag to hold if they go too far, as I
see it.
I believe if the public knew that this is a one-twelfth of 1 percent
limitation, and that the limitation was absolute and the Corporation
could go no further, I think it would interfere very seriously with
the morale of the public. That is my opinion—that they are bound
to give way in a short time.
Mr. Crowley. Congressman Goldsborough, I think that for the
psychological effect on the depositors they must have confidence in
this Corporation. Depositors must have confidence that the fund
is sufficiently large and that the Corporation is well managed. If
they lose that confidence, that is where the difficulty will be. The
great contribution which we have made is the establishment of con
fidence in the minds of the depositors.
Mr. G oldsborough. One other thing: When the time comes to sell
the debentures, aside from whatever the Reconstruction Finance
Corporation may think, what would be the justification in the mar
ket for those debentures?
Mr. Crowley. I would say that if it got to the point where we
had to issue debentures up to three times the amount of our capital
there would be no open market for them at all. By the very nature
of things, if we had such a situation that we would have to issue
our debentures up to the limit, there is only one place where we
could go to get that aid, and that is from the' Treasury.
BANKING ACT OF 1 9 3 5
37
Mr. G oldsborough. That is my opinion, and that is the reason I
asked you the question.
Mr. Clark. I want to say one thing in regard to the first point that
Mr. Goldsborough made. I think it is a point well taken, that the
Corporation should have the administrative power to raise the rate.
I want to state right here that I think of all the “ new deal”
agencies that have been set up this Corporation is the finest and has
been handled in the finest manner, administratively. In the 15
months you have been in existence you have done pretty nearly a
superhard job; and I for one would be willing to trust the admin
istration of this Corporation to them, and give them admin
istrative latitude, so that they could, if necessary, raise these pre
miums or assessments, and I think the public has more confidence in
the work you have done than in the work that has been done by
practically any other agency that has been set up in the last 2 years.
I am thoroughly convinced of that, both so far as the administra
tion is concerned and in the way you have done it.
I think, personally, I would like to have you consider whether
you think such an amendment as Mr. Goldsborough proposes would
have a bad effect, because it seems to me it would have a good effect
in giving you the administrative authority to raise the assessment,
if the times and conditions demanded it.
Mr. F ord. The reason I asked the question as to whether or not
the depositors were actually paying the insurance was with the idea
of making a suggestion along the lines that Mr. Clark has made.
But it seems that the banks, of course, will tell you, “ Of course, it
is all right to insure the deposits, but we pay the bill.”
As a matter of fact, the bill is paid by the people whose money is
in the bank. Quite a number of those deposits did not draw inter
est at any time. But there are also quite a number of them that
did heretofore draw interest, and they have cut down on their nor
mal interest. Where they used to pay 4 percent, they have cut as
low as 2 ! / 2 percent; so that in the long run, if the banks are paying
the bill, I think the Deposit Insurance Corporation should have a
broader latitude in reference to that assessment, so that they can
raise it, instead of one-twelfth of 1 percent to one-sixth of 1 percent.
Mr. C rowley. Y ou appreciate, of course, Mr. Congressman, that
we have changed the way of determining our assessments.
Mr. F ord. Yes.
Mr. C rowley. W e propose to assess on total deposits. A number
° t y°ur larger banks are only insured up to 26 percent, while a
vast majority are insured 70 percent or more.
1 think that if the Deposit Insurance Corporation is going to
bring about good banking, it is not going to do that through paying
out losses. I think that the protection that it is going to afford will
be brought about through studying and correcting a great manj7 of
our ills. I can foresee that, over a number of j^ears, with this Cor
poration properly conducted you would have a minimum number of
bank closings.
In other words, if we have the power to protect ourselves, there
are going to be very few forced liquidations in this country; and if
we are careful in the way we recharter banks—if we are careful in
the way we conduct ourselves—the Federal Deposit Insurance Cor
poration might become the greatest vehicle in the Government for
the rehabilitation of our "whole banking system.
38
BANKING ACT OF 1 9 3 5
The Chairman . Mr. Crowley, under the act now proposed, the
large banks will have, of course, to pay a premium of one-twelfth
of 1 percent, based on all their deposits now ?
Mr. Crowley. That is correct.
The C hairman . S o that, whether the general banking structure is
sound or not, these individual banks will realize that their liability
is limited; and they will have no incentive to try to keep the banking
structure on a legitimate basis.
On the other hand, if they realize that when they encourage
speculative activities, which are always unloaded on those who know
least about business, that their assessments are going to be increased,
it seems to me that it would be a great restraining influence on those
institutions.
Mr. C rowley. Well, I do not think-----The C hairman . I t would influence them to conduct themselves
in a very different way than they did in the period of 1925 to 1929.
Mr. Crowley. I do not think, Mr. Chairman, that the assessment
is going to be the thing that might prevent the recurrence of that
sort of thing, for this reason: Suppose that you double the assess
ment in some institutions, I do not believe that that would be a
sufficient disciplinary measure to prevent speculation.
The C hairman . Those institutions are the ones that have pre
vented a provision like that going into the law. There could not
have been any other reason why it has not become law. Is not
that correct?
Mr. Crowley. I think that is----The C hairman . They are the ones who do not want that provision
in the law.
Mr. Crowley. Well, I think this, Mr. Chairman, that your fund
must be kept sound. I think that the Deposit Insurance Corporation
must have sufficient income to pay the losses.
The C hairman . That does not answer it.
Mr. Crowley. If it is necessary to give us the power to make the
additional assessments, if that becomes necessary in order to keep
the insurance fund sound, we should have authority to do that.
Mr. F ord. But that assessment cannot be of any particular effect
in directly controlling an institution which wants to engage in
unsound practices.
The C hairman . I did not mean that, but they can have the banks
which are responsible, for speculations----Mr. F ord. Any form of insurance tends to remove much of the
incentive to observe sound practices.
The C hairman . Those banks, which are responsible for specula
tion, and which pass on their securities to the smaller banks, are the
banks who under this proposed law have the greatest amount of
insurance assessment to pay; and my theory is that if those banks
know that assessment is not going to be increased, and there is not
the tendency on their part to keep it straight. That is what I had
in mind.
Mr. J ones. But the general proposition is that wherever you give
insurance carelessness and speculation will actually increase, unless
have strict supervision. We have that exemplified in the automo
bile business. For instance, the man whose automobile is insured
BANKING ACT OF 19 3 5
39
becomes careless, even if the rates are punitive, so that in my State
certain localities have to pay more than other localities. We do not
even have a flat rate.
The C hairman . Is not that the general principle? Upon your
theory we ought to abolish the Deposit Insurance Corporation
entirely.
Mr. F ord. The rates have gone up comparatively; and in some
localities I think it is very difficult to—let me discuss this off the
record.
Mr. H ollister. Might I ask a question? Following out this prin
ciple, the desire to certain banks to get this insurance and the objec
tion of certain other banks, is it not true that—or, let me ask you,
rather, what kind of banks, as a general rule, object to the principle, or
the possibiliy, of unlimited assessment?
Mr. Crowley. Well, I believe that all the banks, large and small,
object to the unlimited liability. I do not believe that you should
have an unlimited liability. I do not thing that Congressman Goldsborough, when he refers to unlimited liability, has in mind an entirely
unlimited liability but the right to call for a second assessment in the
event it becomes necessary.
Mr. H ollister. Or a third or a fourth ?
Mr. C roavley. Then vou would be getting into an unlimited lia
bility. Congressman (jfoldsborough only wants to give the Cor
poration the right to call for an additional assessment in any one
year.
Here are the types of bank from which you would get your ob
jections. There is the fellow who does not want any supervision
at all.
Then, there are the fellows who feel that they do not want to con
tribute anything to general banking recovery or the reestablishment
of confidence. In other words, they are willing that the other fellows
should reestablish this confidence and feel that they will benefit b}7 it
as they have in the past. There are a great many business men who
will not join trade associations. They want the other man to rebuild
by his efforts and want to reap the benefits they have not helped to
bring about.
Other banks are afraid of the cost of this thing. They are not in
sympathy with the plan.
Now, my answer is this: The man who does not want it on account
of the supervision is the man whose depositors need the protection.
I he man who is unwilling to come in and assist in rebuilding the
banking system should be compelled to do it.
And the larger banker, who believes that he can live by himself, if
he will only analyze what happened to him in 1933, will realize this:
V ken we have trouble in the Northwest, that disturbance will graduj
abv work east, and, at some time or other, may result in the break
down of the banking system.
So, I say. if A could pass a law that would compel every bank in
ve
this country receiving deposits to become a member of the Federal
Deposit Insurance Corporation, that would be the greatest contribu
tion that you could make; and, when that was done, the Corporation
should be given powers that would enable them to protect themselves.
Mr. H ollister. I agree with you 100 percent.
40
BANKING ACT OF 1 9 3 5
Mr. Crowley. If we can build up this thing and get the depositors
to take the position that they will only do business with a bank that
has deposit insurance, then we will have gone a long way toward
correcting the evils in our banking system.
Mr. G ifford. In line with what Mr. Hollister has said, there are,
in my section of the country especially, a very great number of mutual
savings banks, who are doing a very safe banking-deposit business,
and who look with a great deal of concern on this proposition that
they have got to insure the deposits in other sections of the country,
where the banking is weaker. They do not look with very much
feeling of happiness on the prospect that they will have to pay the
losses on weak and improperly managed banks in other sections.
Mr. Crowley. What State do you come from, Mr. Congressman ?
Mr. G ifford. I t is my good fortune to come from the wonderful
State of Massachusetts.
Mr. Crowley. Well, you have had a pretty good banking system
in your State, but we have 47 other States; and I think it has been
proven in the past that no State can live bv itself. We are trying
to take a national viewpoint.
Mr. G ifford. I am not opposing your viewpoint, but I am trying
to reflect to you the feeling of those bankers in the United States
who feel that they have a pretty good—let me discuss this a moment
off the record.
Are the Massachusetts mutual savings banks under this ?
Mr. Crowley. N o ; they are not.
Mr. G ifford. Why are they not under it?
Mr. Crowley. They have a fund of their own.
Mr. G ifford. Do you say that is improper?
Mr. C rowley. I do not believe that any State fund that we have
analyzed up to date is successful or sound. I think that under any
crisis it would not be a success.
Mr. G ifford. Will you explain to the committee, to save me from
having to explain it further, why it is that the mutual savings banks
of Massachusetts prefer to insure themselves rather than to come
under this Federal deposit-insurance plan? Tell the committee what
you found to be their condition.
Mr. Crowley. Well, in the first place, you have 2 State depositinsurance funds in the East. You have 1 in New York and you have
1 in Massachusetts.
Now, neither one of those funds, in our estima
tion, are insurance funds at all, because of the fact that, by their very
nature, they are insuring in a limited area. If banks in those svstems had any loss of any great size, they would have to assess one
another. They have no capital structure to speak of and thev would
have no way of paying out losses if they were to have any lar^e
demand upon them.
Secondly, mutual savings banks have restricted withdrawals as
demands became heavy.
That is what has happened in your mutual savings bank systems,
and that is why your mutual savings bank losses are less than the
losses in the commercial field, because they restrict their withdrawals.
That is the reason why in Massachusetts they have a fund that they
call the insurance fund, but which, in realty, is not a fund that will
stand analysis as to its soundness.
BANKING ACT OF 19 3 5
41
Mr. G ifford. N ow, will 3’ou answer my question? What reason
have they given you for their refusal to join the Federal Deposit
Insurance Corporation?
Mr. C rowley. The only reason we have from Massachusetts is
that they have a fund of their own.
Mr. G ifford. And you challenge that fund as not being a sound
fund?
Mr. Crowley. Correct.
We have made analyses of the funds set up in the past. The out
come of a great many of them has been disastrous, because you can
not have adequate insurance where the banks are going to insure
each other in such a limited area. I t is just unsound.
The C hairman . I s not this the fact about i t : Any insurance sys
tem for success depends upon a spread of the risk ?
Mr. Crowley. That is correct, Mr. Chairman, you must also have
an adequate capital structure.
The C hairman . Well, not necessarily a capital, because we have
mutual insurance systems, do we not? Mutual insurance is really
the cheapest system of all, is it not, for the simple reason that it
does not require any capital structure? They simply pay what
losses they have when they occur, and there is no waste. Is not that
the mutual plan?
Mr. Crowley. That is correct; but I much prefer having a re
serve that you can fall back on. You should not have to fall back
upon special assessments for ordinary losses.
The C hairman . I am not speaking about that, but I am just
speaking about the principle of insurance; and the mutual insurance
is the cheapest insurance there is, if you acknowledge the liability
and propose to make good.
In connection with what Mr. Gifford has said, our history shows,
does it not, that the attempts to set up insurance systems for de
posits in the several States have failed?
Mr. C rowley. Yes.
The C hairman . Because of the fact that the units were too small ?
Mr. Crowley. That is right.
The C hairman . Y ou do not have now an epidemic of yellow fever
all over the United States, like we used to have in certain centers.
The same principle is illustrated by the San Francisco fire. Now,
in such cases the losses are absorbed by diversifying?
Mr. C rowley. That is correct.
The C hairman . And what you are doing with the banking system
under the Federal Insurance Deposit Corporation is for the pur
pose of protecting the depositors by spreading the risk throughout
Mr. Crowley. That is right.
I he C hairman . This happened, did it not, Mr. Crowley, during
the period of distress: The mutual savings banks and the big banks
and everybody else ran to the Federal Government, with their hands
up for assistance?
Mr. C rowley. Except Massachusetts. The mutual savings banks
in Massachusetts did not.
Mr. G ifford. I want to challenge the chairman’s argument. Massachuetts and New England claim that within themselves they have
42
BANKING ACT OF 1 9 3 5
that greatly diversified situation, where they can invest in those di
versified things, while in those great agricultural areas they are
limited in the investments they can make to a certain kind of in
vestment only. So it does not mean solely geographical diversifica
tion.
Mr. Crowley. Mr. Congressman, let me say this to you: I am
awfully sorry this discussion has gotten down to districts or regions,
because it is rather embarrassing, but your Massachusetts and New
England mutual savings banks made the same mistakes, the same
proportion of mistakes, perhaps, as the banks in other parts of the
country.
Some of your New England banks went out into the Northwest and
Southwest for investment in mortgages. They were looking for
larger yields. They were looking for 8 or 1 0 percent returns on
farm mortgages; and, naturally, now they have a large percentage
of assets that----The C hairman . They went into the Southeast and Southwest, too,
as well as the Northwest.
Mr. C rowley. A very large percentage of their bonds are not
productive of income.
Mr. G ifford. I challenge that statement also.
The only trouble with our mutual savings banks in Massachusetts
was that they had over 7 percent, which was their legal lim it; and I
■will say to you, as to our mutual savings banks which were closed up,
that there was an edict went forth from Washington----Mr. C row'ley. D o you mean to say that the mutual savings banks
could have continued right on paying without any restrictions?
Mr. G ifford. Oh, no; they would have to go on for 3 months. In
fact, there was an order received by them to withhold deposits.
Mr. Crowley. I cannot go into the details of th a t; but let me say
this----The C hairman . Let me interrupt you. I t should be said right
here—and I do not say this in criticism or unkindness—the fact
remains that big banks, railroads, and even life-insurance companies,
finally came to the Federal Government for a place of refuge and
for assistance; and the Government had to open up the Treasury of
the United States in order to enable them to carry on. That is the
record, is it not?
Mr. Crowley. I do not pretend to know much about insurance.
But I do know that, with very few exceptions, the banks, the mutual
savings banks, and all of them, were very happy to have the pressure
taken off on March 6 , 1933: and that, perhaps, while they will not
directly say this, yet a lot of them have benefited more by having had
Federal deposit insurance than, perhaps, they will admit.
Furthermore, Mr. Congressman, in reference to the banks taking
aid from the Reconstruction Finance Corporation, it is true that in
the very beginning a few banks did take capital aid from the Recon
struction Finance Corporation to be helpful; but the vast majority
needed every dollar they could get from that source. If it had not
been for the R. F. C. and the F. D. I. C., your banking system never
could have recovered. There was nowhere else that the banks could
go to get the capital aid which was necessary.
And I may add a little off the record.
BANKING ACT OF 19 3 5
43
Mr. F ord. W ould not this little couplet apply:
When the devil was sick, the devil a monk would be;
When the devil got well, the devil a monk was he.
Mr. Crowley. Yes.
Mr. G ifford. That little pleasantry does not cure the situation.
Now, I ask sincerely, if the mutual savings bank does not join
the Federal Deposit Insurance Corporation, there is a reason for
not doing so and there must be a fear of the thing? New England
has a feeling that no matter what the Federal Government does, we
will pay very greatly in excess of what we ever get; and I think
it is right to bring out here that, if they have that fear, there is a
real foundation for it.
Mr. Crowley. Of course, Mr. Congressman, there are always
bound to be differences of opinion as to questions of that sort.
The C hairman . Mr. Crowley, I want to ask you another question.
You gave us yesterday an estimate of the burdens that would have
been necessary to meet to take care of the losses to depositors in com
mercial banks during the 70-year period since the passage of the
National Banking Act; and you gave us the comparative losses as
between national banks and State banks.
The fact is that until recently there have not been many serious
efforts at strict regulation and supervision as to State banks?
Mr. C rowley. That is correct, sir.
The C hairman . I t is a fact, however, that in most of the States
now we have developed systems of regulation and supervision that
represent marked improvement and progress.
Mr. C rowley. Well, I think that there has been considerable im
provement in the supervision of the State banking systems; but
in many respects there is still a long way to go.
The C hairman . That is what I am asking you. It is a very d if
ferent story from what it was during the first 50 or 60 years of our
banking experience; so that same condition would not be reflected in
the future?
Mr. C rowley. I think that is correct, Mr. Chairman.
The C hairman . It could not be. Now, I want to ask you another
question. You estimated in that statement, as I remember it, that
one-third of 1 percent would have taken care of all the losses, for
banks of all types, during that 70-year period; and that one-eighth of
1 percent of the deposits would have covered all losses, exclusive
of periods of panic.
qV’ ^ R0W
LEY- That is right.
1he C hairman . Those figures, of course, are based upon operaions which were, in the first place, without effective supervision—
qq
as to the State hanks?
,. 0 C hairman . A nd without modernized regulation as to the
national banks?
qf/' p R0WI;EY* That is correct. Air. Chairman.
le tiairman. And they also represent the experience of a period
din mg v Inch there was no insurance of deposits.
Mr. C rowley. That is correct.
I he C hairman . So that, for the future, great allowances should
be made for the improvements we have made in regulation and
supervision and, also, for the operation and effect of successive de
posit-insurance funds, should there not?
44
BANKING ACT OF 1 9 3 5
Mr. Crowley. That is correct, Mr. Chairman.
The C hairman . Now, what is the percentage of losses since the
effective date of deposit insurance, as to banks that have been
insured ?
Mr. Crowley. T o answer your question will take quite a little
figuring. We had some thirty-six billions in deposits and we have
had $2,847,000 of deposits in closed insured banks. It will take quite
a little figuring to get the exact percentage of loss in insured banks.
The Chairm an . The losses will be $356,000, will they not?
Mr. Crowley. Yes.
Mr. R eilly . Well, certainly no one anticipated those losses, with
the exception of the activities of the Corporation, so that, as far as
I am concerned, the amount of the losses which have accrued up to
this time do not afford at all a basis for the actuarial experience
required in order to estimate what the assessments should be.
The C hairman . I agree fully with that.
Mr. R eilly. Let Mr. Crowley take just a minute on that question.
The C hairman . I want to ask you another question.
Mr. R eilly . I want him to answer my question.
Mr. Crowley. Mr. Congressman, perhaps I had better make sure
what you have in mind You asked me what question?
Mr. R eilly. I asked whether the amount of the losses that have
accrued up to this time, since the inauguration of the Federal
insurance system, afford any adequate basis for establishing the
actuarial experience required to estimate what assessments will be
required.
Mr. Crowley. I get it now.
. It is quite true that we should not have had, and we have not had,
normal losses yet. But the success of this Corporation depended
upon the rebuilding of your banking system. If that had not been
done, you would have had no Federal Insurance Deposit Corporation,
because the demand would have been so great that the Corporation
would have become insolvent and you could not have reestablished
confidence.
Now, I do not believe that for some time the banking system of
this country has been in better shape than it is today, and that means
that we are starting out on quite a clear basis, Mr. Congressman.
I think that the income should be determined by our experience of
the past, so that we may build reasonable reserves for the future.
Mr. G oldsborough. I am in accord with your statement, but, in
view of the fact that in these other estimates of percentages, which
we are undertaking to bring down to date, we have our experience
recorded in figures, I think that the picture should be completed by
giving the percentage of losses by totaling the deposits since the
Federal Insurance Deposit Corporation Act became effective. If
you have not those figures now, you may insert them in the record.
I realize that they may require considerable calculation; but let
us complete the picture.
Mr. C rowley. Mr. Congressman, will you take my statement and
turn the pages to the chart entitled “Ali Commercial Banks, 18651934.”
Mr. G oldsborough. Let me make a suggestion. We have been over
all of that. All I want is that you take a pencil and figure out
this percentage of losses for the record, so that the figure will be
BANKING ACT OF 1 9 3 5
45
available to us. You can do that. All I want is to have those
figures in the record to complete the picture.
Mr. C rowley. We will put that in the record for you.
(See p. 27 of hearings of Feb. 28.)
Mr. W illiams. I s it not a fact that prior to the bank-failure ep i
demic, prior to this panic, that bank losses were very nominal
throughout the history of this country?
Mr. Crowley. Y ou mean after the wasliing-out of the weaker
institutions ?
Mr. W illiams. N o ; I mean beginning before this panic, that the
bank failures for a period of 25 or 30 years had been practically
nominal ?
Mr. Crowley. They have always been reduced after such periods.
It is just like anything else; you wash out your weaker people; you
have losses and have destitute people in the community. That same
thing is true in the effect of the recent readjustments.
Mr. W illiams. D o you have any figures of the losses to bank
depositors in national banks from the beginning?
Mr. Crowley. Will you please answer that, Mr. Thompson?
Mr. W illiams. I refer to the national-bank situation.
Mr. T hompson. We estimate that the losses to depositors will
amount to about $1 ,0 0 0 ,0 0 0 ,0 0 0 . We can only give you a figure
that is partly estimated, inasmuch as the liquidation of the banks
that are still in the hands of receivers has not been completed. We
have had to take the value of the remaining assets and estimate
what the total recoveries will be.
Mr. W illiams. What proportion was the wash-out you spoke of,
o f the banks that did not reopen? W hat percentage o f the banks
closed have been allowed to reopen?
Mr. C rowley. D o you mean what percentage did not reopen, Mr.
Congressman ?
Mr. W illiams . Y ou know, we have overdrawn this matter of bank
failures, stating that the banks immediately after that time should
make such a remarkably good showing and then, in the next breath,
saying that they were in an awful condition.
Mr. C rowley. The thing that has happened to your banking sys
tem has been the rebuilding of confidence and, also of capital struc
tures. For instance, the Reconstruction Finance Corporation has
invested $1 ,0 0 0 ,0 0 0 , 0 0 0 in the capital structures of banks and, in
addition to that, there has been, I presume, four or five hundred
million dollars in local contributions to capital structure.
Mr. W illiams. Oh, I know there has been a lot o f this over
drawn—this scare that the banks were in such terrible condition.
Mr. C rowley. What was the capital structure of all the banks in
the country ? About $6 ,0 0 0 ,0 0 0 , 0 0 0 on June 30, 1934. I think you
will find that, with everything that has been contributed, there has
been, perhaps, a, billion and a half dollars, or over, put into the capi
tal of our banking system since 1933. This has been used chiefly to
write off losses rather than to increase the book capital of the banks.
Mr. W illiams. But weren’t there a lot of these banks that, if they
had been let alone, could have worked themselves out?
Mr. C rowley. There are always banks which, if let alone, might
be able to work themselves out.
127297— 35------ 4
46
BANKING ACT OF 1 9 3 5
Mr. G ifford. N ow, we in New England, let alone, we are working
ourselves out.
Mr. Crowley. The assets are improving, Mr. Congressman, all the
time.
Mr. W illiams. Right in that connection, while they are talking,
Mr. Chairman, how many of these banks altogether opened up with
out any assistance? Most of them were able to open after what we
called the bank holiday. How many of them opened, what propor
tion of them at least, opened without help from some source ?
Mr. Crowley. There were 15,000 banks, Mr. Williams, and between
five and six thousand have been given aid by the Federal Govern
ment; and that does not include some banks that have made their
own contributions to the reestablishment of capital structure.
Mr. W illiams. I was wondering if you had the figures of those
banks whose capital structure was built up by local capital, inde
pendently of the Government.
Mr. Crowley. I do not think we have that figure; but we are
assembling it and will have it soon.
Mr. W illiams. The question that I was interested in was from
the other end of it. You might say what was the number that were
able to reopen without any help.
Mr. C rowley. I would say possibly 50 percent, Mr. Congressman.
Mr. B irdzell. May I make this contribution, further, to complete
that thought ? Many of the reorganized banks have been capitalized
quite largely by their depositors, through waivers of deposit liability
or the conversion of deposit liability into preferred stock, or some
thing of that kind, so that some of the banks that were reopened in
reorganized fashion really had depositors’ losses included in their
capital.
Mr. W illiams. Yes; but that is the same thing as building up their
-capital structure through local contributions.
Mr. G ifford. The banks in my section all reopened, but, after
the reopening thev were forced to create a larger capital structure
simply to mark oft temporary losses that represented merely tempo
rarily decreased values, and many of these 5,000 banks that they talk
about having had Government aid got money from the Reconstruc
tion Finance Corporation that they did not need at all, just to allay
the fears of the people.
Mr. C rowley. Y ou mean by that, Mr. Congressman—what do you
mean when you refer to “ temporary losses ” ?
Mr. G ifford. Well, our banks claim that the bank examiners were
so severe that they demanded mark-downs or charge-offs of so much
that they have to have a larger capital to offset that.
Mr. C rowley. D o you mean that they made them take out bond
depreciation and things of that nature ?
Mr. G ifford. I know of particular real-estate matters where the
examiners required mark-downs for temporary losses.
Mr. W illiams. Let me ask this question in that connection: In
the temporary fund that is now established for nonmember banks,
what percentage of those banks that are in the fund were permitted to
come in without building up and strengthening their capital struc
ture?
BANKING ACT OF 1 9 3 5
47
Mr. Crowley. The national banks and State member banks, you
understand, came in automatically.
Mr. W illiams. That was not the question. I asked about the non
member banks. Were they permitted to come in without building up
or strengthening their capital structure?
Mr. C r o w l e y . We have some 8 ,0 0 0 nonmember State banks, a n d we
have rebuilt or have in process of rebuilding close to 4,000 of these
banks.
Mr. W illiams. In other words, only half of them were able to
come in without rebuilding their capital structures?
Mr. C rowley. That is right.
Mr. Clark. Following out that line of inquiry: you said that 50
percent did not need help to reopen because of the confidence the
public had in them. Isn’t that correct, that a large part of them
had to have help because confidence had to be reestablished, rather
than the financial structure? If everyone had reopened automatic
ally and the public had been in the frame of mind it was just before
the holiday, there is no way of knowing what percentage of the 50
percent could have withstood the shock f
Mr. C rowley. The first thing you had to do was to reestablish
confidence.
Mr. Clark. And then, after you did that, 50 percent could reopen;
and in 1933 we had approximately 6 billions of capital in our banking
structure?
Mr. C rowley. That is correct.
Mr. Clark. And there were approximately 31 billion dollars that
we set up in the form of liquid assets. That made a total col
lectible, assuming the capital was sound, of 37 billion dollars and
there were 57 billion dollars of deposit liabilities. That left 2 0
billion dollars actually frozen.
Now, had those banks at that time had the rediscount privilege,
of taking a large part of their frozen assets to some place where
they could have gotten money on them, as a matter of fact, we
would not have had much more than 5 billion dollars of frozen stuff
in the banking system.
Just roughly and approximately, how close is that to correct?
Mr. C rowley. Of course you would have been able to have post
poned this thing by loaning the banks money.
When the Reconstruction Finance Corporation was originally set
up it was with the idea of lending money to the banks in order to
meet that withdrawal. But the way it worked out, on account of the
whole economic crash, it in reality only preferred one depositor over
the other. When the banks finally did have to close the assets of
many of them were pledged for bills payable, and the depositor
who was an unsuspecting individual was left with the frozen assets.
There is only one thing that rediscount is good for; that is, to
take the place of liquidity; but it can never take the place of sound
ness.
Mr. Clark. I understand that; but the terrible crash might have
been held off.
Mr. Crowley. Y ou might have carried it along for a while; but
throughout the whole economic system the values were shrunk so
48
BANKING ACT OF 1 9 3 5
much that the assets in fact were not there. You might have had all
the rediscount privilege that you wanted; but, if you did not have
the values there, it would not have prevented the crash. At best you
would merely have deferred it.
Mr. W illiams. If they had had a chance to rediscount this paper
on real estate and other securities that ordinarily are good securities,
would not that have kept the values from shrinking, the fact that
they had that privilege?
Mr. Crowley. Y ou mean the forced liquidation that forced values
down?
Mr. W illiams. Yes.
Mr. Crowley. That always has a tendency to force values down.
The C hairman . Gentlemen, we cannot finish today, and we
want to put other witnesses on the stand to go over the technical
features of the bill; and I have an idea that we might meet again
about Tuesday morning and resume this discussion, and unless there
is something to interfere with that we will adjourn.
Mr. B rown. I would like to just get a little more information on
section 8 .
In your statement, Mr. Crowley, you said that a rate of approxi
mately one-third of 1 percent would cover all losses that have oc
curred during the past 70 years to depositors. What I am inter
ested in is this: How do you arrive at one-twelfth of 1 percent as
being an adequate figure? I assume, of course, that you take into
consideration the fact that you are speaking of all losses on page
19 of your statement; whereas, in the bill, in your recommendation,
you are speaking of losses on deposits of $5,000 or under. But is a
rate of one-twelfth of 1 percent adequate in view of the experience
of the past 70 years?
Mr. Crowley. I do not think that the banking experience of the
past 70 years is necessarily a fair criterion, for the reason that I do
not believe this Government should assume the responsibility of the
supervision of the banks if our system should be the same as it was
throughout the last 70 years.
In other words, I do not believe that our banking system is correct
if we are going to have the same proportionate amount of losses as
in the past.
Now, we will not have those losses if we do not let our banking
system build back to that 30,000 banks again. One of the biggest
defects in our banking system has been that we have had too many
banks, and we have had a great many banks that could not employ
the proper kind of management.
We arrived at the one-twelfth of 1 percent in this way: we do not
believe that one-twelfth of 1 percent will build large enough reserves
for the Deposit Insurance Corporation for the future, but the earn
ing capacity of the banks right now is very low. We are interested,
first, in the banks having sufficient income themselves so that they
may take their losses currently and so that they may build reserves
for the future. That is the greatest protection to the Deposit Insur
ance Corporation.
I would rather give up 50 percent of our income and have the
proper supervisory powers than to have $5,000,000 or $10,000,000
more income and not have the proper supervisory powers. I think
the success of this thing comes back to, first, the proper safeguards
B A N K IN G ACT OF 1 9 3 5
49
for this corporation to protect itself. The banks must pay a fair
share of this income. A contribution from other sources to help to
build our reserves might be considered.
Mr. B rown. Assuming that we are unable to improve the banking
system, then what, based upon the experience of the last 70 years,
should the rate be in order to be adequate? In other words, what
percentage would it have to be to cover losses up to $5,000 deposits,
on the basis of the experience of the past 70 years?
Mr. Crowley. Take out, if you will, those last 4 years.
Mr. B rown. Yes; take those out.
That is, for all banks.
Mr. Crowley. One-eight of 1 percent will take care of all deposits
except those in banks which closed during the years of banking
crises.
Mr. B rown. N o. That is for all deposits. That is not for the
deposits of $5,000 and under.
Mr. C rowley. I t is one-tenth of 1 percent for the deposits of
$5,000 and under.
Mr. B rown. That is one-tenth of 1 percent instead of one-twelfth
of 1 percent?
Mr. Crowley. That is right.
Mr. B rown. I t strikes me that your figures are very reasonable.
Mr. C lark. I do not want to go back to your original point, but
I wish that Mr. Crowley would be so kind as to confer with his
associates and, when he comes back Tuesday, tell us if he would
have any objection to such an amendment as Mr. Goldsborough pro
posed and which was mentioned for discussion, whereby, in addition
to the fixed liability at one-twelfth of 1 percent, the Deposit Insur
ance Corporation might, at any time when, in its discretion, the Cor
poration decided that it was necessary, levy an additional assessment
of one-twelfth of 1 percent in any one year.
Frankly, I want to go along with the Corporation just as far as
I can, because of the views that I have expressed, and I would like
to know, at your next appearance here, whether your Corporation
would or would not be interested in the amendment proposed by
Mr. Goldsborough.
(Thereupon, at 12:30 p. m., the committee adjourned until Tues
day, Feb. 26, 1935.)
BANKING ACT OF 1935
TUESDAY, FEBRUARY 26, 1935
H ouse of R epresentatives,
Committee on B anking and Currency,
W ashing ton, D. C.
The committee met at 10:30 a. m., Hon. T. Alan Goldsborough
presiding.
Mr. G oldsborough . The committee will come to order. Judge
Birdzell, Mr. Steagall is out of the city this morning, which is the
reason w hy I am occupying the position that he usually occupies.
Judge Birdzell, you will proceed in your own way, please; and
it seems to me that it would be better for you to complete your
statement, and if it is agreeable to the members of the committee,
we will have it that way.
Mr. W il l ia m s . I think that that would be the most satisfactory
way of handling it, the more orderly way.
Mr. G oldsborough . All right, Judge.
STATEMENT OF L. E. BIRDZELL, GENERAL COUNSEL, FEDERAL
DEPOSIT INSURANCE CORPORATION
Mr. B irdzell . Mr. Chairman and gentlemen of the committee, we
have reached a stage in the insurance of bank deposits where we
contemplate going onto a permanent basis, and we are at some ad
vantage now in planning for permanent deposit insurance because
we have had more than a year’s experience with deposit insurance
under the provisions of existing law, which provided for temporary
insurance.
We thought that we would be remiss in our duty if we did not
bring to your committee all of the information that has become avail
able to us by reason of our experience with the temporary plan; and
we thought, too, that we would be remiss in our duty if we did not
bring to you gentlemen suggestions for legislation which in our
opinion will improve the plan for permanent deposit insurance as
outlined in the Banking Act of 1933.
In all of our consideration of the matter, we have been brought
repeatedly to the conclusion that Congress planned wisely in plan
ning for permanent insurance, and when you consider the conditions
in which the permanent insurance provisions of the Banking Act of
1933 had to be framed, frankly we marvel at the completeness of the
plan that was written into that law.
I have circulated to the members of the committee a parallel print
containing in one column the proposed act as contained in title I of
the proposed banking act of 1935, and in another column the provi
sions of the existing law.
51
52
BANKING ACT OF 1 9 3 5
If you have read that print carefully and made comparison, I
think you will be impressed with the fact that we have followed
very closely the plan of the existing law in outlining a plan for
permanent insurance in the proposed law. There are places where
it would seem that we had taken out of the existing law subsections
and completely rewritten them,, but if you will follow the text in
the instances -where that appears to have taken place, you will find
that, after all, we have followed very closely the ideas as they were
expressed in the existing law.
I want to tell you very briefly why we considered that it was
necessary to make the number of changes that are proposed to be
made in this proposed act. In the first place, when we consider
this legislation we must consider it from a historical standpoint.
T
The deposit-insurance features of the Banking Act of 1933 were
features that were written into a bill that was under consideration
prior to that time, known as the “ deposit liquidation act.” It
provided for a deposit liquidation-corporation, which was to be
capitalized by a Federal Government subscription, and also by sub
scriptions to the stock of that corporation by the banks which were
members of the Federal Reserve System. That corporation was to
be authorized to loan money upon the assets of closed banks, and to
purchase the assets of closed banks, the primary purpose being to
provide for the liquidation, and speedy liquidation, of those banks
in the interests of the depositors.
Upon that structure was really superimposed the provisions for
permanent deposit insurance. That act had contemplated applica
tion only to Federal Reserve member banks, and consequently when
the insurance features were added, it was at first contemplated that
only Federal Reserve member banks would be insured. Later the
provision was made for extending the insurance to nonmember banks
voluntarily; that is, they could come in by voluntary application.
I t was contemplated that a deposit liquidation corporation could be
conservatively operated, and consequently it would be in a position to
make money—that is, it would make a fair return upon the capital
employed in that particular business. Consequently provision was
made that it should pay to the Federal Reserve member banks a
dividend on the capital thus employed.
I think, gentlemen, that you will probably agree that if you were
considering a corporation to insure deposits in banks generally, and
limited to that, at the expense of the banks, or at cost to the banks,
that you would not have had in mind any provision for dividends on
the stock that would be purchased by the banks in that same corpora
tion, because they would get the benefits of it automatically as the
costs were kept down.
So the dividend provisions of that act are not strictly applicable to
a corporation that limits its functions to the insurance of bank
deposits.
Since that act was intended to apply to banks which are members of
the Federal Reserve System, and since permanent insurance was pro
vided according to a certain schedule whereby all deposits would be
insured in some amount—you are familiar with the schedule: $ 1 0 , 0 0 0
insured 100 percent, up to $50,000 insured 75 percent, and above
$50,000 insured 50 percent—provision was made in that law for sub-
BANKING ACT OF 1 9 3 5
53
rogation rights of the corporation in case it went in and paid off a
closed bank, paying out to the depositors according to that schedule,
and that law provided that if the corporation paid off the depositors
in the closed banks, the corporation should succeed to all of the rights
of the depositor against the closed bank.
So, you see, the corporation would enjoy the right to subrogation
to the extent of all of the claims of depositors against the closed
bank.
Now, during the progress of the passage of that law there was
added to it, as you know, subsection (y), which provided for the
insurance of bank deposits in a temporary fund which should be
operative prior to the time when the permanent plan would become
operative, and that insurance was limited to $2,500, and subsequently
increased to $5,000.
There was no change made with respect to those provisions of law
embracing the rights of the corporation to be subrogated to the
rights of depositors upon paying off, but I think you will agree
with me that a subrogation provision that gives to the corporation
the right to be subrogated to the entire claim of the depositor against
the closed bank, where all of his deposit is insured to some extent, is
not appropriate and should not be applied where we are only insur
ing his deposit to a limited extent, as $2,500 or $5,000.
So it was necessary to change the subrogation provision of the
existing law. In fact, you gentlemen may remember that in the
act passed last June, provision was made for changing that sub
rogation feature, and it was approved by the House, but, unfortu
nately, it was stricken out in the conference, and never became a
part of the law. I indicate that history to you, that we have deposit
insurance superimposed upon a corporation originally intended to
be a deposit liquidation corporation. I give you that history so
that we may better have in mind the necessity for some changes if
the functions of the corporation are to be limited to insurance, as we
think they should be.
You gentlemen may recall that last year, when the extension of
the temporary plan was under consideration, the Corporation was
pointedly asked by gentlemen on this committee why it had not
exercised its functions as a liquidation corporation, because both
functions were expressed in subsection (a) of that bill, and you will
recall that the Corporation presented to your committee, I think,
satisfactory evidence that the liquidation function, so far as the
banks were concerned, was being performed quite satisfactorily by
the Reconstruction Finance Corporation. All of the money was
being advanced on the strength of the assets that it was thought
could be advanced upon a sound basis, but to make assurance doubly
sure your committee recommended the amendment of the Recon
struction Finance Corporation Act, which would authorize that Cor
poration to proceed with liquidation loans upon a more liberal basis
than it had in the past, and the recommendations of your committee
became a part of the law.
So that the liquidation end, as applied to banks that had already
closed, is practically taken care of now by the Reconstruction Finance
Corporation, and for that reason subsection (a) has been changed
by the omission from it of that language which was especially ap
plicable to the function of loaning money to member and nonmembei
54
BANKING ACT OP 19 3 5
banks that had closed for the purpose of making those funds
available to depositors.
Now, I do not know in what manner you gentlemen may desire
to consider this act; that is, whether you want now to take the
time to go through it section by section, but I can very briefly, I
think, indicate to you the main changes that have been made, and
then I will be very much pleased if I might be of any further assist
ance to the committee by way of answering any questions that may
occur to you.
I just explained the reason for the omission in subsection (a) of the
provisions relating to the loans to member banks.
Mr. S isson. What section is it you are referring to ?
Mr. B irdzelb. That is on the first page, subsection (a).
The next section deals wflth the management of the Corporation,
and is changed in one respect. Our Corporation is operated by a
board of three directors. The Comptroller of the Currency is one
director. The Chairman of the Corporation spends all of his time
directing the affairs oT the Corporation, and frequently the Comp
troller may be at some remote part of the country when it is neces
sary to have a meeting of the board; and in order to have a quorum,
it is sometimes necessary to wait until the Comptroller’s return or,
possibly, call in the Deputy Comptroller.
Sometime ago I furnished to the board of directors an opinion to
the effect that in the absence of the Comptroller the Deputy Comp
troller could function, but that opinion is based upon inference, and
it ought to be provided expressly in the law that in the absence of
the Comptroller a Deputy Comptroller may function in his stead
as a member of our board.
The remainder of what material you find on page 4 and page 5
consists of definitions, and those definitions have been made with
a view to convenience in constructing the remainder of the act. to
remove any ambiguity, and so forth. I think it is not necessary to
point that out, except that that is all new matter, and it is there for
the purpose of facilitating the drafting of the remainder of the act.
I do want to call attention to paragraph 11 on page 5, where we
have defined the term “ deposit ” :
The term “ deposit ” means the unpaid balance of money or its equivalent
received by a bank in the usual course of business and for which it has given
or is obligated to give unconditional credit to a commercial, checking, savings,
time, or thrift account, or which is evidenced by its certificate of deposit, and
trust funds as provided in paragraph (5) of subsection (h) of this section,
together with such other obligations of a bank as the board of directors shall
find and shall prescribe by its regulations to be deposit liabilities by general
Tisage.
Then there is a proviso which I am skipping here, and then it is
provided:
The board of directors may by regulation further define the terms used in
this paragraph.
All that there is in the existing law by way of defining deposits is
simply the use of the term “ deposit.” We have questions arising, for
instance, as to whether or not the uncollected funds of a bank that
on a given reporting day may amount to many hundreds of thousands
of dollars in the case of a large bank are a deposit.
BANKING ACT OF 19 3 5
55
You are familiar with the fact that as items are deposited in a
bank for collection they are deposited under an arrangement whereby,
while credit is immediately given, that credit cannot be drawn upon
until the item is completely collected. Is that a deposit as of that
time or is it only conditionally a deposit?
We have seen fit to clarify that in this expression here by con
sidering only the credits which have been made unconditionally.
Uncollected funds at any particular date are not a deposit lia
bility, although it may be more or less appropriate that reserves be
calculated on such funds.
For our purposes, the uncollected items are not considered de
posits, and we thought it well to have that definition in the law,
but we think that Congress cannot, in an enactment of this char
acter. so define the term “ deposits ’’ as to cover every conceivable
situation.
In the existing law we are referred to the definition of “ deposits ”
according to the Federal Reserve Board. The Federal Reserve
Board defines deposits for purposes of fixing reserve requirements.
Under this provision, our definition of “ deposits” may be inde
pendent of the definition of the Federal Reserve Board.
Take an item like cashiers’ checks, for instance. If we said that
a cashier’s check is a deposit, maybe we would be imposing by
definition artificially and arbitrarily on given types of transactions.
If a bank issues its cashier’s check to pay its rent, for instance, the
one to whom that check is issued may have no account in that bank at
all, and the account upon which it is drawn is the account of the bank
itself. There is no reason why a cashier’s check given for a purpose
like that should be considered a deposit liability.
When it comes to paying off the deposits of a bank, a cashier’s
check, however, may be purchased by a depositor and used by him
the same as he would if he had purchased a draft. In that event,
that type of cashier’s check should be considered a deposit liability
upon the closing of the bank and also for purposes of assessment.
I give you that merely to show you that it is necessary to have some
leeway for the board of directors to define deposits within the terms
of the law, and it would be extremely difficult to put all of the
definition into an act of this sort.
Mr. W olcoit. You say in this provision: “ The board of directors
may by regulation further define the terms used in this paragraph.’5
.
Do you not think it would be better to qualify that to the extent
that you just mentioned?
Mr. G oldsborough. Would it be feasible for you to defer that
inquiry until he gets through with his statement?
Mr. B irdzell. D o you want me to answer that ?
Mr. W olcott. N o ; go ahead.
Mr. B irdzell. The next change that I would call your attention to
is the change that you will find on page 8 .
Under the existing law, it is the duty of the Comptroller of the
Currency, in the case of national banks and of the Federal Reserve
Board in the case of the Federal Reserve member banks, to cer
tify those banks as being solvent in order to qualify them for mem
bership in the permanent fund.
In view of the work that has been done by way of building up cap
ital structures, and in view of the character of supervision of the
56
BANKING ACT OF 1 9 3 5
banks in the national bank ancl Federal Reserve system, we have
thought that that provision is now altogether unnecessary. However
appropriate it might have been if this act had been put into effect a
short while after the banking holiday, we think it is no longer nec
essary, and so all banks which are members of the Federal Reserve
System now come into the fund without any further certificate on
the part of the Comptroller or on the part of the Federal Reserve
Board.
The State banks, nonmembers of the Federal Reserve System, that
are now members of the fund, likewise come in on the strength of the
examinations previously had and on the strength of their member
ship in the temporary fund.
Under the existing law, the nonmember banks, to qualify for
membership in the permanent funds, would have been required only
to have subscribed for stock. In the new set-up, since we are not
providing for any dividends on stock—we are not providing for
bank ownership of stock at all—they come into the permanent fund
automatically.
Then, with respect to banks coming in subsequently, if a bank
be not a member of the Federal Reserve System, if you will look on
pages 8 and 9 you will find that provision is made for banks which
are not members of the system to come in, and as to national banks
which may not be members of the fund, they come in on the same
basis. National banks which are not members of the temporary
fund are national banks located in the Territories, for instance, in
Hawaii and Alaska. These are national banks which are not mem
bers of the Deposit Insurance Corporation and not members of the
Federal Reserve System.
Mr. H ollister . Did you not skip new matter on page 6 ? You are
taking this up consecutively, are you not ?
Mr. B irdzell. Yes.
Mr. H ollister. You were discussing the definitions ending up on
page 5 . Did you not skip all of that matter on page 6 , with respect
to the capital stock ?
Mr. B irdzell. Did you have som ething that you wanted to inquire
about on that?
Mr. G oldsborough . May I say that Judge Birdzell exlained that he
would just go over this in his own way.
Mr. B irdzell. I was only calling attention to some of the main
features.
Perhaps I should say a word with respect to that change in the
capital structure of a corporation.
Mr. H ollister. I do not want to interrupt your flow of thought.
Mr. B irdzell . I think it is w e ll to call that to your attention.
Mr. H ollister. I thought that you might explain the whole thing
as you went along.
Mr. B irdzell . Provision is made on page 6, at the bottom of the
page, for doing away with the dividends on the stock, and a capital
set-up is provided, whereby the capital stock of the corporation is
treated as consisting of the shares subscribed for prior to the effective
date. That includes the $150,000,000 subscription by the Federal
Government, and the $139,000,000 subscription by the Federal Reserve
banks. That stock is declared to be of nominal or no par value, and
provision is made for the exchange or reissue thereof, and the consid
BANKING ACT OF 1 9 3 5
57
eration received for the capital stock may be allocated to capital and
to surplus in such amounts as the board of directors shall prescribe,
and such stocks shall have no vote and shall not be entitled to the
payment of dividends.
The class B stock, the stock for Federal Reserve banks, was not
entitled to dividends under the existing law, but the Government
stock, the $150,000,000, plus the class A stock which would be sub
scribed for by the banks upon becoming members of our corporation,
would be entitled to dividends, and those are the features that are
changed.
The provision made for the allocation of the capital to capital
and surplus is, we think, appropriate in view of the fact that these
funds are supplied for the use of the Corporation for insurance pur
poses, and if a time should come when it would be necessary to utilize
some of the surplus funds of the Corporation in meeting losses, we
would not want the Corporation to be operating with an impaired
capital, and that could be avoided through proper allocation.
Now, in making provision for the entry of new banks or newly
applying banks into the Deposit Insurance Corporation, provision is
made for the board of directors passing upon the qualifications of
those banks for membership in the Corporation. That, we think, is
a very necessary provision in the interest of having the Corporation
function upon a sound basis. Through that, of course, reasonable
protection ought to be given to the insurance funds of the Corpora
tion.
A different test is laid down in this law from that laid down in the
existing law. This law, as it will come into effect, we anticipate,
much more than a year after the temporary plan started in operation,
could appropriately provide that the banks have sound capital. The
test of solvency laid down in the emergency period in the original
act was a test of solvency for an emergency period where banks were
permitted to insure their deposits without regard to the existence of
a sound or legal capital structure.
If you will turn to page 9, in the middle of the page, paragraph 2,
you will find this language:
Before approving the application of any such State nonmember bank, the
board of directors shall give consideration to the factors enumerated in subsec
tion (g) of this section and shall determine, upon the basis of a thorough
examination of such bank, that its assets in excess of its capital requirements
are adequate to enable it to meet all of its liabilities as shown by the books of
the bank to depositors and other creditors.
Likewise, the fore part of that deals with certificates by the Comp
troller with regard to a national bank, and he must likewise certify
to the Corporation with respect to a newly chartered national bank
and the same factors are to be enumerated in the certificate that is to
be given. These factors to be considered by the board of directors
and the Comptroller are the financial history and condition of the
bank, the adequacy of its capital structure, its future earnings pros
pects, the general character of its management, the convenience and
needs of the community to be served by the bank, and whether or not
its corporate powers are consistent with the purposes of this section.
That follows largely the provisions of the present national bank
law with respect to the chartering of new national banks by the
Comptroller of the Currency. Mr. Crowley has already explained
58
BANKING ACT OF 1 9 3 5
in his statement the practical necessity for some such requirement as
that.
The next section, or, rather, the paragraph on page 1 0 , deals with
the assessment. The assessment rate prescribed there is one-twelfth
of 1 percent upon the total amount of liability of the insured bank
for deposits, using the term deposits as used in the previous section,
which I read to you a moment ago. That is based on the average at
the close of business on the last days of June and December, and
those dates are chosen by reason of the fact that there is always
a call by the Comptroller of the Currency on those two dates. I t is
convenient, of course, to have the certificates to our Corporation based
upon those same calls.
The assessment plan provided in the existing law should be con
trasted with this. Under the existing law banks becoming mem
bers of our Corporation and insuring their deposits are required to
subscribe for stock in the amount of one-half of 1 percent of their
deposit liability. They must pay immediately one-half of that,
which makes one-fourth of 1 percent on their entire deposit liability.
Thereafter there are no stated payments to be made.
The obligation for further payments is expressed in this fashion:
As the banks close, it is the duty of the Corporation to set up on
its books an account wherein it will place the estimated debit bal
ances. When any bank closes the Corporation is required to make
an estimate of the ultimate amount of loss and that will be a debit
balance. There is provision for the adjustment of that debit bal
ance. Later on, if there is a greater loss than anticipated, more is
charged to it; if there is less, a credit is given, and when the aggre
T
gate of those debit balances reaches one-fourth of 1 percent of the
deposits in all of the banks that are insured, another assessment is
levied of one-fourth of 1 percent.
So that the successive assessments under the existing law cannot
be anticipated. An assessment would be made on the first of July
of this year, and there might not be another one for 2 years, or
there may be another one in 1 0 months.
Under this proposed plan an assessment is fixed at a certain figure.
It is due at a certain time and the payments are to be made at a
certain time.
Mr. D i r k s e n . Does the last portion of that subsection contemplate
a different rate for mutuals than for other banks?
Mr. B i r d z e l l . It contemplates giving to the Corporation the power
to prescribe a different rate for mutuals. You gentlemen who lis
tened so patiently during our hearings last year will remember that
very frequently the question of how this proposal or that would
affect mutual savings banks, and their attitude, came up. I remem
ber that you listened very patiently one day to the president of
the National Association of Mutual Savings Banks, and I think that
we all became impressed at that time with the fact that mutual sav
ings banks did create more or less of a problem in relation to any
activity of this sort, and the problem is to deal with them in a way
that is fitting to their particular function.
To illustrate, in the Banking Act of 1933, you made mutual sav
ings banks eligible for membership in the Federal Reserve System,
and yet I think that there are no advantages to be gained by mem
bership in the Federal Reserve System that can be enjoyed by mu
BANKING ACT OF 19 35
59
tual savings banks when they become members of the System. I
think that you gentlemen were generally impressed with that a year
ago.
Furthermore, the type of investments of mutual savings banks,
and the character of their supervision, have been such in this country
that it has been asserted—I am not an economist and I am not as
serting this in an authoritative way—but it is asserted by some that
on account of limitations as to investments and on account of the
character of supervision of mutual savings banks, and the type of
business that they do, they are a favored risk. I am not saying
that Congress ought to recognize that they are a favored risk from
an insurance standpoint, but possibly, in view of their characteris
tics, it is proper to allow them to be considered in a class by them
selves, separate and apart from commercial banks, and to give a
limited discretion to a board that is constantly confronted with the
problems presented from that particular group----Mr. F ord. Might I make an observation there?
Mr. G oldsborough. Mr. Ford, it was agreed when we began that
we would postpone the question until he had finished.
Mr. B irdzell. The thought is that there are limitations with re
spect to the character of their investments that do not obtain with
respect to commercial banks, and on account of that the mutual sav
ings banks have argued that they have a more favorable experience
than the commercial banks with respect to failures. I am not ex
pressing any opinion as to whether or not the arguments of the
mutual savings banks in that respect are sound. That is for the
economists and the statisticians to consider.
There is one provision in that subsection dealing with the assess
ments that I want to speak of. That is on page 12 with regard
to trust funds. You may have noted earlier that in defining “ de
posits ” express reference was made to trust funds as elsewhere de
fined and provided for, and that reference is here on page 12.
We have found the banks quite concerned, and, of course, we
have been seriously concerned, with the problem as to the protection
of uninvested trust funds. Many national banks have trust depart
ments. Many trust companies do a trust business exclusively, and
some of the trust companies do both a trust business and a banking
business. In the transaction of their business, there will be on hand
at any given time a considerable volume of cash that will be unin
vested. They say that that cash is trust funds, and not a deposit,
but if a bank closes, I fear the situation would be the other way
from the standpoint of the patrons of that trust company.
From the beginning we have required banks to report as deposits
any amount of trust funds that were on hand and uninvested, be
cause we felt that in the event of a closing we would be liable for
those deposits.
Now, among trust companies, in doing their ordinary business,
it is the practice of many of them to establish relations with com
mercial banks, so that they will deposit large amounts of money,
uninvested trust funds, in those commercial banks. That relation
ship is not like the ordinary correspondent relation of one bank
with another, one commercial bank with another, and, furthermore,
in the event of the closing of a bank, that fund cannot properly be
60
BANKING ACT OF 1 9 3 5
treated; that is, that particular kind of deposit cannot properly be
treated as belonging to one depositor because it belongs to all of
those who are patrons of the trust company and who under their
various interests would be entitled to that cash.
So that we have provided here for the insurance on trust funds
in a way that we think meets that situation. If a trust company
be a member of our Corporation, and if in the transaction of its
trust business it has idle funds which it places with some bank, that
bank, being the bank where those funds are deposited, should report
the entire amount of those deposits, and in the event of anything
happening to the bank where such funds are deposited, we should
look to the trust company, likewise a member of our Corporation,
to establish a beneficial ownership of those various trust funds in
that individual bank. Provision is made for the bank paying the
assessment on those trust funds, and in event of the failure of a
bank containing such funds, we will look to the various trust estates
in the trust company to determine the ownership and extent of the
claim that may be made on the closed bank.
I could outline that more in detail, but I think that that is enough
to give you an idea.
Now, there is a discretionary power, or, rather, a power of a super
visory nature, expressed at the bottom of page 1 2 , in paragraph 1
of subsection (i). It reads, in part:
Wherever the board of directors shall find that an insured bank or its di
rectors or trustees have continued unsafe or unsound practices in conducting
the business of such banks or have knowingly or negligently permitted any of
its officers or agents to violate repeatedly any provision of this section or of
any regulation made thereunder, or of any law or regulation made pursuant
to law to which the insured bank is subject, the board of directors shall first
give to the Comptroller of the Currency in the case of a national bank or dis
trict bank, to the authority having supervision in case of a State bank, and
also to the Federal Reserve Board in case of a State member bank, a statement
of such violation by the bank for the purpose of securing a correction of such
practices or conditions. Unless such correction shall be made within such
period of time not exceeding 120 days as the Comptroller of the Currency, the
State authority, or Federal Reserve Board, as the case may be, shall require,
the board of directors, if it shall determine to proceed further, shall give to
the bank not less than 30 days’ written notice of intention to terminate the
status of the bank as an insured bank, fixing a time and place for a hearing
before the board of directors or before a person designated by it to conduct
such hearing, at which evidence may be produced—
and so forth.
I read that to you to show you how the board proposes to secure
corrections of dangerous practices in banks. In the first place, I
call your attention to the fact that we do not deal directly with the
bank. If we have a complaint as to the practices of a State bank,
while we have a report of that bank, a report of the examination
upon which the complaint may be based, we take that up with the
State supervisory authority in an attempt to get a correction from
there, but we are not altogether dependent for our protection upon
the action of the State supervisory authority, for, obviously, if the
correction should not be made, the Corporation ought not to be sub
ject to the continuing hazard of the operation of that bank. So pro
vision is made whereby the Corporation, after ample time for cor
rection and after hearing, can terminate the relations of the bank
with the Corporation.
BANKING ACT OF 19 35
61
Provision is made, of course, for the continuing protection of the
depositors, even after the bank shall have terminated.
Mr. D irksen . I s not 2 years a rather long time for that?
Mr. B irdzell. Possibly it is; it may be a little longer time than
is needed, although we think we would rather err on the side of
having the time too long than too short, because any law of this
sort ought to be so constructed that it will deal absolutely fairly
with depositors, and we can conceive of cases where depositors might
not be able to obtain information with reference to the status of the
bank within any short period of time.
I think that we can pass those provisions, for our present purposes
at least, because this discussion is apt to become altogether too long.
There is one change that I would like to call attention to, on page
15, in the fourth paragraph, subsection (j). Provision is made
there that when suits of a civil nature at common law or in equity
may be brought in which the Corporation shall be a party, they shall
be deemed to arise under the laws of the United States, and the
district courts of the United States shall have original jurisdiction of
all such suits; and the Corporation as defendant in any such suit
may, at any time before the trial thereof, remove such suit from a
State court into the district court of the United States. That is
for the purpose of securing uniform interpretations of any provi
sion of this act of Congress.
There is a similar provision with respect to the Federal Reserve
banks.
Another feature that perhaps I should have mentioned earlier,
but it is appropriate to mention it here, is that the existing law was
constructed upon the principle that apparently did not contemplate
examinations of banks by the Corporation, because it was to be lim
ited in the first instance to banks which are members of the Federal
Reserve System. When Congress provided for the temporary in
surance, in (y), it authorized the Corporation to examine the non
member banks in order to admit them into the temporary fund, and
it authorized them to examine those banks as often as it might deem
necessary for its own protection.
Now' that we contemplate a permanent insurance extended to non
member banks, it is of course appropriate that there be an express
provision in the permanent act authorizing the examination of banks,
so that is provided for in the eighth paragraph, which enumerates
the powers of the Corporation, where before it was contained in
subsection (y). There is further provision made in paragraph 2,
below that, on page 16.
Then, on page 17, there is express provision for access by the Cor
poration to the examinations made by the Comptroller of the Cur
rency, and also to the reports of examinations of any Federal Reserve
member bank.
There is one other provision that I want to speak of, on page 18,
in subsection (1). If you would read the existing subsection (1)
and the new subsection (1), you would find that they are practically
the same, although on account of the other changes that had to be
made with reference to stock; for instance, there were frequent ref
erences to banks which are class A stockholders, and that reference
runs all through subsection (1), eliminating provisions for class A
stock made it necessary practically to rewrite subsection (1), but
127297—35------5
62
BANKING ACT OF 19 3 5
the present subsection (1) is to all intents and purposes the same
as the original. The language is much the same, with the exception
that the subrogation right which I explained a moment ago is ex
pressed differently in the proposed subsection (1). Upon paying the
insured deposit liability to a depositor, we are subrogated only to
that portion of his rights against the bank which he would have had
by virtue of the deposit which we paid to him.
An illustration would, of course, make that clear. I have a $10,000
deposit in a bank that has closed. This Corporation can only pay
me $5,000 on account of that deposit. What rights shall I give to
the Corporation in order that I may get my $5,000 insurance?
Shall I give the Corporation my rights arising on the whole $10,000,
or only with respect to the $5,000 ?
Under the terms of this act that we are suggesting, I give my
rights only to the extent of $5,000, and I retain the right to dividends
as to the remaining $5,000. Under the existing law, I would have
to give all of my rights to the Corporation in order to secure my
insurance.
Then one other significant change is made with reference to the
means of making available or the vehicle for making available the
insured deposit liability to the depositors. We use a term here that
we call a transferred deposit. We authorize a transferred deposit
credit to be set up either in a new national bank or in any other
insured bank in the locality, giving to the board of directors a dis
cretion to utilize an existing bank in the community rather than to
do the artificial thing of setting up a new national bank in the com
munity. If the board does set up a new national bank, it is operated
just the same as the new national bank would be operated under
the existing law, and the board has the same discretion with refer
ence to whether it shall receive deposits or not, with reference to
whether it shall be capitalized or not, that it has under the existing
law.
Now, the subrogation right that we speak of is expressed on the
top of page 20, if you are interested particularly in that.
One further feature with regard to the pay-off provisions gen
erally. Under the existing law, there is no limitation, apparently.
We may find it difficult to find a depositor determined to make a
claim. In fact, we have had to advertise already for depositors to
come in in some instances and make their claims. We should not be
subjected to a continuing liability. We step in at the closing of the
bank, and we are ready and anxious to pay out the insured deposit
liability in that community so that the community will scarcely
realize that there has been a bank failure, but we ought not to be
subject to a continuing liability of those who do no come in within
a year’s time and file claims with us.
So provision is made for a year’s statute of limitations, and that
does not mean, of course, that the depositor loses all of his rights
if he does not come in and claim his share. He loses all of his right
to insurance, but he still has his claim against the bank, and if we
are the receiver of that bank, we will have to treat him the same as
other creditors are treated.
Now, it seems to me that I have covered all of the principal
changes.
BANKING ACT OF 19 3 5
63
Do yon think of anything more that I ought to touch on, Mr.
Crowley ?
Mr. Crowley. I think that you might explain to them a little
more in detail about this liquidation in pay-off, the reason we want
to bring it in here, to shut off that expense.
Mr. B irdzell. Yes. Mr. Crowley reminds me of one change in
connection with the pay-off feature that I should have commented
upon, but which I omitted to mention.
Where, under the existing law, we set up a new national bank, there
is just one thing that we can do with that bank, and that is to keep
it alive for 2 years. To keep it alive for 2 years may involve a lot
of useless expense. After that bank has served its purpose, and paid
off 90, 95, or 99 percent of the insured liabilities in that community,
we ought to be given discretion to fold it up and say to the people
that have not come in, “ You may present your claim at the district
office of the Federal Deposit Insurance Corporation ”, because we
have offices in most of the Federal Reserve districts, or we ought
to be able to say to them, “ Present your proof to the head office of
the Insurance Corporation.” There is no need, in other words, of
requiring that this bank shall be kept in operation for 2 full years,
so provision is made here whereby as soon as the active period is
over in that locality, if there is no further need for that institution
there, we can deal with it in the manner that I have just indicated
in the interest of reasonable economy.
Mr. H ancock. I s that what you propose in the new act?
Mr. B irdzell. Yes.
Mr. H ancock. I thought that you were asking Congress to relieve
you----Mr. G oldsborougii. Let him finish his statement, please.
Mr. H ancock. I should not have asked that question now, but I
have such a different impression from him about that, that I thought
he might be mistaken about it.
Mr. B irdzell. I hope that I have made it clear that we may op
erate a pay-off in a particular case without setting up a new bank
at all.
Mr. H ancock. Y ou did not make that clear.
Mr. B irdzell. If I did not make it clear, I want to do so. When
I spoke of the transferred deposit, I said that the transferred deposit
may be set up either in a new bank or in an existing insured bank.
If, for instance, the community is one where there may be a desire
to set up a State bank, or where there may an existing, operating
State bank that is insured, we can set up in that existing, operating
State bank, or in a new State bank that may be at once capitalized
and become insured, transferred deposits to the credit of all of the
depositors in the old bank, and to the extent of the insured amount
of their deposits—that can be done, and that is a new feature. There
is one other feature that Mr. Crowley suggests.
The act as it is proposed will become effective upon its approval,
which will mean that immediately the permanent plan may be put
into effect; but provisions are inserted in the act that wiil enable
every bank, whether it desires to come into the permanent plan or
not, to have the benefit of insurance on its deposits until July 1st,
as provided in the existing laiv. In other words, while this act may
64
BANKING ACT OF 1 9 3 5
become effective as a permanent insurance plan immediately upon
its approval, any bank that is not a member of the Federal Reserve
System that desires to withdraw may do so upon giving notice
within 30 days after approval, but its deposit will continue to be
insured until the 1st of July of this year.
One other provision with respect to Federal Reserve membership.
Provision is made in the existing law whereby nonmember banks
may enjoy the benefits of insurance in this Corporation until July 1,
1937, without becoming members of the Federal Reserve System.
Our experience up to date with insured banks is a strong indication
to us that two types of banks, at least, which we have in the fund,
will not find it to their advantage, except for some wholly artificial
reason, to ever become members of the Federal Reserve System, and
those two types of banks are mutual savings banks and Morris Plan
or industrial banks.
So we propose in this act to amend the provision with respect to
Federal Reserve membership so as to exclude Morris Plan banks,
industrial banks, and mutual savings banks from that requirement;
and that will mean simply this, that commercial banks desiring to
continue insurance after July 1, 1937, will be required to join the
Federal Reserve System.
Mr. D irksen . May I ask a question at that point?
Mr. G oldsborough. I would like to proceed in accordance with
seniority, on one side and then the other. Mr. Hancock.
Mr. H ancock. I am not sure that he is through.
Mr. G oldsborough. Are you through?
Mr. B irdzell. Perhaps I ought to comment on this, that there is
one provision of law—it is paragraph 5 on page 32—under which
we can require banks to protect themselves against loss through in
surance—fidelity insurance, burglary insurance, and that sort of
thing. It reads:
Each insured bank shall provide such protection and indemnity against bur
glary, fidelity, and other similar insurable losses as the board of directors, by
regulation, may require adequately to reimburse the bank for such losses.
Whenever any insured bank fails to comply with any such regulation the Cor
poration may contract for such protection and indemnity and add the cost
thereof to the assessment otherwise payable by such banks.
We can give you an illustration of a bank in operation today
wholly by reason of the fact that it does have burglary insurance.
A large amount of money was taken from that bank. The insur
ance company is contesting the claim. We looked into the claim,
and we think that it is a good one against the insurance company,
but the company contends that it is not liable for more than about
one-eighth of the loss. If they are not liable for the loss, that bank
is insolvent today.
In view of the fact that its deposits are insured, and in view
of the fact that the bank’s attorneys and we feel that that bank has
a fair prospect of recovering from the insurance company, that bank
is operating today.
We think that we are entitled to whatever protection can reason
ably be required of banks against losses that we know to be rather
of frequent occurrence—defalcations, burglary, and the like.
We have also made provision in here to protect State banks against
robbery, and so forth, where those banks are members of this Cor
BANKING
\.CT OF 1 9 3 5
65
poration. You gentlemen would be surprised, perhaps, to know that
in a number of instances officers operating State banks have written
in to us and suggested that some provision ought to be in the Federal
law which will operate as a deterrent to bank robbers, because they
say that their local authorities are absolutely at a loss to deal with
those situations and that bank robbers take advantage of that and
consequently rob the State banks, with almost immunity from
prosecution.
The experience is different with regard to the Federal Reserve
member banks, and the insured banks want to be given the same pro
tection that is accorded now to the Federal Reserve member banks,
so that the criminal features of the law in that respect have been
extended to cover insured banks.
Now, I would be glad, indeed, if I may assist the committee any
further by answering questions that might be based upon any feature
of the proposed act.
Mr. G oldsborough. Mr. Hancock, have you any questions that you
want to ask at this time ?
Mr. H anc oc k . I do not know. What is the pleasure of the com
mittee as to proceeding? How much longer are w e going to sit?
Mr. G oldsborough. We will proceed to half past 12, I presume,
unless there is some objection on the part of the committee.
Mr. H anc oc k . There are two or three questions that I w o u ld lik e
to ask Judge Birdzell.
I am very frank to say that I have not given the time and thought
to this proposed legislation that I do intend to give to i t ; b u t b a sed
upon the statement made the other day by Mr. Crowley with respect
to the amount of assessment on the banks, as I understand the new
law, the Corporation would have the right to levy an annual premium
of one-twelfth of 1 percent on the total deposit liabilities. Is that
correct ?
Mr. B irdzell. The act itself does that.
Mr. H anc oc k . I s that discretionary with the Board?
Mr. B irdzell. N o ; that is the assessment rate that is prescribed in
the law. There is provision, however, that would give the Board a
discretion to lower the assessment at some future time, if experience
seemed to warrant it.
Mr. H anc oc k . What do you mean, exactly, by lowering the assess
ment, Judge?
Mr. B irdzell. Suppose, for instance, that we went on for 2 or 3
years and added very materially to our reserves through assessments
collected, and suppose that we had added, we will say, $75,000,000 to
our funds available to meet losses. Suppose further that we had had
favorable experience all the way through; and suppose that we
should come upon a day when the banks were not earning, so that
they might complain—this assessment would take substantially, you
see, 1 percent on the entire capital of the bank; and suppose that
they would sav, “ lo u r reserves are up; your experience is favorable;
it is a hardship for us to meet this; can you not reduce the assessment
for this particular year? ” or for a particular 6 months’ period. It
is collected in two installments.
Mr. H a n c oc k . Under th e la w , h o w m u ch co u ld y o u red u ced ?
Mr. B i r d z e l l . Not more than 50 percent.
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BANKING ACT OF 19 35
Mr. Crowley. Let me say something about that to Congressman
Hancock.
I do not think that this provision, where you might have a right
to reduce the assessment, could be hoped to be operative for a great
many years. The Corporation should build up its surplus. I do
not think that the board would look with favor toward reducing
the assessment in the event it got a surplus of only $75,000,000, be
cause I do not think that is adequate.
Mr. H ancock. The point that I am trying to bring out is that I
got the impression the other day, from the statement presented by
Mr. Crowley, that it was the judgment of the Corporation that the
banks should not be responsible for all of this insurance protection.
Mr. Crowley. I think that that is correct, Mr. Congressman.
Mr. H ancock. That is the phase of this that I want to discuss
with you, to find out how much protection you think should be fur
nished by the banks and what contingent liability you think should
exist against the Government.
Mr. Crowley. I think this, Mr. Congressman, we must correct
the evils of the past. If we are going to have the same loss ratio
that we have had in the last 12 years, then I do not believe that the
banks can carry that load themselves. I cannot conceive of this
Congress or any other Congress not recognizing the necessity of
correcting some of the abuses of the past. I f we can correct and
strengthen our banking system, then the amount that might have to
be asked from some other source may be a very nominal amount,
maybe nothing at all. If, however, we are to have a crisis again
like we had in 1933, this fund could not take care of the demands
upon it. I think that the losses of this fund will be nominal in the
next few years. In the meantime, the Corporation should continue
to build its surplus, so that in 10 or 20 or 25 years from now, if you
have trouble like we had, perhaps, with some of our smaller com
munities, our fund would be sufficient to take care of the demands
without calling on the banks for an additional burden at a time
when they are under as heavy a load as they can carry.
Mr. H ancock. I, of course, appreciate the splendid purpose be
hind your viewpoint there, but what I am thinking about is this, that
your statistical department has evidently made exhaustive studies in
order to arrive at a fair assessment, and one that would be protec
tive, and it seems to me, from my recollection of your statement the
other day, that you said that to protect the depositors in all failures
that had occurred from 1864 to 1934, it would have required an as
sessment of one-third of 1 percent, and to eliminate from that period
what we might term the panic years, it would have required oneeighth of 1 percent.
Mr. C rowley. That is right.
Mr. H ancock. N ow, you arrive at an assessment of one-twelfth
of 1 percent.
Mr. C rowley. As I understand it, if you eliminate the periods
of depression. I think that our figures show that one-tenth of 1 per
cent would take care of those losses on a $5,000 limit.
Mr. H ancock. I fully appreciate the wisdom and desirability of
keeping the rate as low as possible to prevent it from being burden
some to the banks, especially today, but now we are engaged in
BANKING ACT OF 19 3 5
67
writing a permanent law, and the suggestion has been made here
that it is not the purpose of the fund to protect the depositor. Am
I correct?
Mr. Crowley. I do not think that is correct, Mr. Congressman.
What I really said was this, that if we were to be given certain
supervisory powers we could protect ourselves. You might go back
to 1920, when you had 30,000 banks. We lost nearly 15,000 banks
from 1920 to 1933. A great many of our overbanked conditions
have been washed out.
If we do not make the same mistakes as before and do not let
this overbanked condition come back again, and if we can protect
ourselves by going into a weakened institution and perhaps buying
the assets or absorbing losses in order that mergers can be brought
about, we are going to get away with a much lower loss. If we are
given power to protect ourselves from loss, then I believe that this
corporation can get along with a reasonable income. On the other
hand, if we are just going to drift as in the last few years, then I
do not believe you can assess against the good banks sufficient money
to take care of the weaker banks without crippling the capacity of
the good banks to write off their losses currently.
When it is all said and done the strength of the fund depends
upon the banks being so well run and their earning capacity being
sufficient to allow them to take their losses currently in place of let
ting them accumulate. I think everyone will agree that a good
many banks permitted their losses to accumulate. Some of these
banks even paid dividends, whereas they should have written off
their losses.
I think that this fund should eventually build a sufficiently large
surplus so that in the ordinary regional depressions—not a depres
sion like 1933—this fund could pay its losses promptly without mak
ing an assessment against the Government or the banks.
Mr. H ancock. I notice that in the new act you propose to vest dis
cretion in the board of directors with respect to the allocation of
your capital fund— and I am just asking these questions in order
that we may have a record before us. I am wondering if, in m aking
that request, there is an im plied suggestion that a situation m ight
arise whereby you would prefer to resort to that fund in paying your
losses rather than to levy an assessment?
Mr. Crowley. No. Our assessment of one-tenth of 1 percent or
one-twelfth of 1 percent will bring us in from 30 to 39 million
dollars a year. Supposing that during the first 2 years, before
you built up any surplus, you should have a serious failure. If
we were to pay that loss, we would pay it out of capital and im
mediately have an impaired capital. I do not think it makes any
difference to the Government whether they have a no-par-value
stock or $100,000,000 capital and $200,000,000 surplus, or whether
they have that all in capital, because that money was given to us
for the purpose of aiding us in paying losses. Only to have the in
come from that money, while it is helpful, is not enough. In other
words, the psychological effect of our Corporation would be better
if eventually we had $100,000,000 capital and $500,000,000 sur
plus—
Mr. H ancock. Yes; I understand that thoroughly.
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BANKING ACT OF 19 3 5
I t was my impression that, to begin with, that capital fund was
not to be used to pay losses. Is that correct?
Mr. Crowley. I do not know what else they gave it to us for, then.
Mr. H ancock. My understanding was that it was more or less for
back-log or reserve.
Mr. Crowley. I t if was not a reserve for losses, what was the
purpose of giving it to us?
Mr. H ancock. Under the original act, of course, you had the
right to expand three times the amount of the capital structure.
Mr. Crowley. Yes; but when you get to the point where you are
expanding and borrowing, that does not create confidence. That
you would only do in case of dire necessity.
Mr. H ancock. Surely the capital upon which you expand your
credit should be the last thing that you would touch.
Mr. C rowley. That is the reason why we are asking for a re
duction in the capital, so that we do not touch that capital. That is
the reason why we do not want to impair our capital.
Mr. H ancock. What is going to happen to the amount of $139,000,000 that we took away from the Federal Reserve banks and
allocated to your Insurance Corporation?
M r . C r o w l e y . Well, as I see it, it does not change their position
any. One hundred thousand dollars worth of stock in a corporation
that is worth $100,000, and that has no surplus, or $100,000 in a
corporation with $10,000 capital and $90,000 surplus, does not affect
the real value of our investment.
Mr. H ancock. Y ou probably did not catch my point. I under
stood that a trade arrangement had been made whereby the Federal
Reserve System would sell its stock to the Treasury Department. Do
you know anything about that?
Mr. Crowley. I do not recall.
Mr. H ancock. Is it not a fact that the Federal Reserve System
has sold $20,000,000 of that stock to the Treasury?
Mr. Crowley. That is in your industrial loan act of last year.
Mr. H ancock. That was an indirect way that they had of doing it.
Just one other feature at this time, Mr. Crowley.
One of the most important and attractive features of this act to me.
to begin with, was when our chairman emphasized that under the law,
in event of a failure, the Corporation would immediately set up a new
institution, so that the business of the community could go along
smoothly. I recognize that there may be times when to do that
would be futile, when it would be improper, and when it would be
unwise, but I think that it would have a very serious effect if the
board here should decide, as a matter of policy, not to carry out the
original provision with respect to that section. Of course, there
would be no sentiment in a community to set up a new bank on the
failure of a bank, but in time every community would want the
assistance of this Corporation in building up a new banking struc
ture in that community, and I do hope that this board will not act
arbitrarily in that matter in worthy cases.
Mr. Crowley. I do not think there is any doubt but what the
board is sympathetic with the idea of giving to every community
a bank as long as that community needs that bank. ‘ Let me tell
you what our experience in the past has been. For instance, we paid
off at Pittsburgh. Pittsburgh already has a great number of banks.
BANKING ACT OF 19 3 5
69
We have stayed there for several months now, and an expense is
accumulating against us every day. We went into Indiana and we
paid off an institution there. That community has sufficient banks
all around it. There are a great many instances in the cities where
you have two or three banks and where two banks can take care of
that community well.
Mr. H ancock. I know that the board has been acting wisely and
has done splendid work, but can it not be assured in some way that
where there is only one bank in a community, the Corporation would
always replace the closed institution?
Mr. Crowley. Let me say to you that I think you have to take
some of this on the faith of the Corporation. The Corporation now
has operated for some 15 months, and I think the great majority
of the small bankers feel that we have been very sympathetic with
them in trying to understand their problems. You men are here
every single year. If the Federal Deposit Insurance Corporation
gets too autocratic in some of these things, you men will immediately
put something in the law to stop that abuse.
Mr. H ancock. Nothing that I have said has suggested that I feel
that way.
Mr. Crowley. I understand that.
Mr. H ancock. N ow, here is one other point that I want to clear
up, and then I am through.
Could not some arrangement be made with the insured member
banks whereby they would agree with the Corporation that the un
expended balances in trust funds were actual trust funds, and not
deposits ?
Mr. Crowley. Judge, that is your end of it.
Mr. H ancock. I have had a number of complaints from North
Carolina on that particular point, Why would it not be proper and
perfectly legal for the officers of a bank to enter into an agreement
with you which would clarify the question as to whether they actually
constituted deposits or not?
Mr. B irdzell. Then, if the bank should fail, and the owner of those
funds should come to make claim against the Corporation, what
would we say to the owners of the funds?
Mr. H ancock. Y ou would just say what the bank officers had said
to you.
Mr. B irdzell. Yes; but-----Mr. H ancock. If they had enough confidence to put their money
in the bank that was manned by those officers, they certainly ought to
be forced to rely on their agreement.
Mr. B irdzell. But it is not the agreement of the depositor. I t
would be the agreement of the bank, and the depositor would be in
the position of having his claim unsatisfied. I t would be hard for
him to distinguish between what he had coming from the bank in the
shape ol uninvested trust funds and what he had coming from the
bank on his savings account. Furthermore, there would come a time
when it would have to be otherwise treated.
Take this situation: Say that it is a national bank that operates a
trust department. The trust funds may be deposited from the trust
department into the commercial department of the bank, and they
may be utilized just as all other funds of the bank are utilized, in
channels of commerce. Now, when the funds are placed at the dis
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BANKING ACT OF 19 35
position of the commercial department of the bank, or when they
might be deposited in another bank, certainly the persons that are
beneficially interested in those funds should be entitled to protection,
and certainly also they become deposits just like all other deposits in
the bank, and they are used as such.
Mr. H ancock. That is all.
Mr. G oldsborough. Mr. Hollister.
Mr. H ollister. With respect to the issue of notes and debentures
of the Corporation, the existing law provides that they may issue two
or three times the amount of the capital.
Mr. B i r d z e l l . Yes.
Mr. H ollister. They are not guaranteed by the Government,
although they are tax exempt.
Mr. B irdzell. Under the proposed law they would not be.
Mr. H ollister. I s that in the proposed law?
‘Mr. B irdzell. Yes; that is in the proposed law, although I did not
cover it.
Mr. H ollister. That is what I thought, that there is no guarantee
whatsoever of that kind, either in the existing law or in the new law.
Mr. B irdzell. B ut the Treasury is authorized to purchase them.
Mr. H ollister. The Treasury is authorized to, but the Treasury
might not purchase them. But there is no guaranty by the Govern
ment of those debentures?
Mr. B irdzell. Y ou are correct.
Mr. H ollister. Under the existing law, where there is a provision
that three times the amount of capital may be issued in bonds and
debentures, those debentures can be sold to better advantage because
of the unlimited assessment provision, for as long as losses may be
assessed continually against the banks, there can always be built up
a protection in the Corporation for those who buy the debentures.
Mr. B irdzell. That is correct.
Mr. H ollister. But under the proposed law, with a limitation of
one-twelfth of 1 percent a year, it is difficult for me to see the possible
market of those debentures outside of the Treasury. Here you have
a debenture that is not guaranteed by the Government, even though
it is nontaxable. Under a set of disastrous circumstances your capi
tal aud surplus might be completely wiped out.
Mr. B irdzell. There is a further market provided for those de
bentures, the Reconstruction Finance Corporation, to the extent of
$250,000,000.
Mr. H ollister. Yes; but that would require action by the Govern
ment. I am not saying that it is wrong, but I am merely trying to
get at the change in the whole idea. The original idea was a de
benture which was a sound proposition for private capital, because
of the fact that it had behind it the whole banking system of the
country, under the unlimited assessment idea. Now "you have a
debenture which it seems to me has no private market whatsoever,
but is solely valuable insofar as the Reconstruction Finance Corpo
ration or the Treasury would care to invest.
Is not that the case ?
Mr. B irdzell. Yes.
Mr. H ollister. It really ceases to be a private obligation to be
sold in the market.
BANKING ACT OF 1 9 3 5
71
Mr. Crowley. I t is true that if we had to issue debentures to
private borrowers up to three times the capital, undoubtedly the con
dition would be such that you could not find a ready market. It
might be possible that you had $300,000,000 in securities and that
you might only want to borrow $50,000. Of course, you could sell
debentures on that kind of a collateral provision.
Mr. H ollister. Of course, the theory in selling debentures would
be to get additional funds in order to satisfy the demands of the
Corporation, and if conditions should arise where it would appear
to be necessary for the Corporation to sell debentures, under the new
law it seems to me that the average private investor, when he would
realize that the only thing back of these debentures is the possibility
of collecting one-twelfth of 1 percent annually, would say, “ Not
withstanding the nontaxable feature, that is hardly a thing that I
am interested in.”
Mr. Crowley. That is true if you had a critical situation.
Mr. H ollister. But would you be selling them unless you had a
critical situation?
Mr. Crowley. N o ; unless you would be doing it for some short
term borrowings. Suppose that you had $3,000,000 in securities and
the market might be temporarily down. That would not atfect
your borrowing as long as you had adequate collateral. However,
if we got to a point where we had an emergency, and we had to issue
4 or 5 million dollars of debentures at that particular stage, I do
not believe that the open market would absorb those debentures un
less you had the Government guarantee. The fact that the Secre
tary of the Treasury would come to our rescue if we had that kind
of a condition, however, gives us some confidence.
Mr. H ollister. I am not presenting the view that it is wrong. I
am merely trying to bring out that, after all, if such debentures
under the new law should be issued, some kind of governmental
agency, the It. F. C. or the Treasury, would have to take them.
Mr. Crowley. We have $250,000,000 that the It. F. C. have ear
marked for our corporation.
Mr. H ollister. On page 5, in section 11. as to obligations payable
outside of the United States, that affects only a few banks and is put
in there because of the foreign competitive situation, is it?
Mr. B irdzell. It affects banks that have European branches, or
branches in outlying possessions, like Puerto Rico.
Mr. H ollister. Was that not included in the bill that passed the
House last year, but which never got through the Senate ?
Mr. B irdzell. No ; that is the old law.
Mr. H ollister. Section 11, on page 5?
Mr. B irdzell. Where is the provision that you are referring to?
Mr. H ollister. The proviso at the bottom, which reads:
Provided, That any obligation of a bank which is payable only at an office of
the bank located outside the States of the United States, the District of
Columbia, and the Territories of Hawaii and Alaska shall not be a deposit for
purposes of this section or be included as a part of total deposits or of an
insured deposit.
Mr. B irdzell. That was in the omnibus bill, which did not get
through.
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BANKING ACT OF 19 35
Mr. H ollister. And that is there because, if they had the cost of
the insurance to add to their operating cost, they would be in a bad
competitive situation in a foreign country?
Mr. B irdzell. Yes; that is the purpose of that, if I understand
your question, and that provision there is consistent with the provi
sion in last year’s omnibus bill.
Mr. G oldsborough. Mr. Williams.
Mr. W illiams. T o my mind, there are two very fundamental
things in this bill.
First, I am thinking about what you are going to do with some
8,000 nonmember banks that are not in the permanent insurance plan,
and which will not be under the provisions of this bill.
In the second place, there is the question of a limited liability.
Now, it is not contemplated, is it, that there will come a time when
these insurance deposits will not be paid in full?
Mr. C rowley. Y ou mean that these funds will not be sufficient?
Mr. W illiams. Yes.
Mr. C rowley. I t is my honest judgment that if you will give to
this Corporation the supervisory powers that we have asked for, that
this Corporation should be able to keep itself solvent, barring unfore
seen accidents.
If this country cannot operate a banking system so that the depos
itors will not suffer losses that may break this Corporation, then
there is something distinctly wrong with your banking system and
your monetary system. That calls for a corrective measure far
beyond the powers of the Federal Deposit Insurance Corporation.
Now, I believe that this Corporation can operate and pay to depos
itors their losses with any kind of normal conditions.
Mr. W illiams. That is perhaps true.
Mr. C rowley. I hope it is true.
Mr W illiams. I am not so much concerned with the power of the
Board to reduce this assessment as I am with the power to raise it in
case it is necessary, in order to take care of the liabilities of the
Corporation.
Mr. Crowley. Y ou understand that while the Corporation would
look with favor on all of the revenue that you can give us, neverthe
less you cannot have an unlimited liability or a liability so large
that in times of stress you may weaken your entire banking structure.
Mr. W illiams. Then your whole system, at the very time that it
is needed the most by the depositors of the country, breaks down ?
Mr. Crowley. I think that is where supervision comes in—to pre
vent that.
Mr. W illiams. Y ou have the supervision which will do it.
Mr. Crowley. Correct.
Mr. W illiams. But why not, if you say that you can administer
the law in such a way as to prevent those losses by the discretion and
the power that is in the Board, increases the assessment in case it is
necessary ?
Mr. C rowley. I think that there is a danger that deposit insurance
might break down the private initiative of men who are trying to
operate these institutions. We have a great many banks that we
are insuring almost 100 percent. Men operating these banks will
not have the same incentive as those which are operating banks only
5, 10, or 15 percent insured.
BANKING ACT OF 1 9 3 5
73
Mr. W illiams. Of course, you agree that we do not need any
insurance as long as there are no bank failures.
Mr. Crowley. I think that you will always have a certain number
of bank failures, but it is like anything else—like your hospitals or
your railroads or anything. If you have an epidemic in Washing
ton where everyone in Washington is sick, your hospitals are not
large enough to care for them. You cannot build this fund large
enough to pay out 16 or 19 billion dollars overnight.
Mr. W illiams. Then it is based upon the idea that you may have
a condition where you could not pay out ?
Mr. Crowley. I think everyone will agree that we could not pay
out our entire liability at one time.
Mr. W illiams. What other contingent funds have you in mind if
the assessment fails? What else would you do?
Mr. Crowley. We have our right to borrow from the Treasury.
That is all we have.
Mr. W illiams. Y ou are assuming, now----Mr. G o l d s b o r o u g h . Y ou do not mean the right to borrow? You
mean that the Treasury is authorized to loan if necessary?
Mr. W illiams. Y ou mean that under this act the borrowing power
is confined to the Treasury Department alone?
Mr. Crowley. And to the $25,000,000 from the R. F. C.
Mr. W illiams. Under this act, are private individuals permitted
to lend you money on your debentures?
Mr. Crowley. Yes; they are permitted to do it.
Mr. W illiams. If they want to?
Mr. Crowley. Yes; if they want to?
Mr. W illiams. If there is a private field for the investment, they
are permitted under this law to invest in your debentures ?
Mr. Crowley. That is correct.
Mr. W illiams. Y ou have that power?
Mr. Crowley. That is right.
Mr. W illiams. What is the purpose of allocating the capital struc
ture of that institution to surplus ?
Mr. Crowley. I do not think that allocation of capital has any
thing to do with the right of borrowing.
Mr. W illiams. It is the intention to use that in case of need to pay
the losses ?
Mr. C rowley. Yes. We may take ----Mr. W illiams. The idea back of it is that the money that is re
ceived from the Federal Reserve banks and from the Treasury should
be used as a reserve fund to pay these losses, rather than from the
banks themselves ?
Mr. Crowley. That is correct.
Mr. W illiams. N ow-----Mr. Crowley. Let me answer that. I think the Government, when
it licenses a bank and establishes a banking system, assumes a respon
sibility to the depositors, and when it created this Corporation I think
that it assumed a responsibility for the protection of the depositors.
I do not believe that any man argues that we should continue to permit
losses to occur as has been the case in the last 12 years.
Mr. W i l l i a m s . Nobody will contend that, I think, but you expect,
by reason of your regulatory powers, and by reason of reports made to
74
BANKING ACT OF 1935
you, and your inspections, to regulate, within reasonable grounds, the
banking activities of the country and to prevent these failures?
Mr. Crowley. But, Congressman, we do not guarantee to prevent
failures entirely. We hope to reduce the number of failures.
Mr. W illiams. That is so, and the very purpose of all this insur
ance, according to my idea, should be to guarantee, in case of failure,
the payment of the depositors in full.
Mr. Crowley. I think that* is correct, but I do not see any way in
the world that you can draft a bill or that you can give us sufficient
funds, so that you could say that at all times, regardless of whether
you have a complete collapse of your banking system, this Corpora
tion could pay the losses of all depositors.
Mr. W illiams. Could you conceive of a complete collapse in the
banking system of this country now, under the supervision of your
Corporation and of the Federal Reserve system?
Mr. Crowley. All that I can say to you is th is: I believe that under
our rebuilding program, the banks as a whole are in the best shape
that they have been in a great many years. With the proper kind of
supervision we should not have the losses that we have had in the past.
Mr. W illiams. Now, merely to furnish a factual background, there
are about thirty-six billion and a half in deposits now, are there not?
Mr. Crowley. That is correct.
Mr. W illiams. What part of that is in time deposits?
Mr. G oldsborottgh. Would it be agreeable for you gentlemen to
come back tomorrow morning?
I want to say to the members of the committee that there is a
gentleman here from California who has to go back tonight, and he
and Mr. Ford have both asked that he be allowed to put a statement
in the record.
Mr. Adams, will you come up here, please?
I t is very important, Mr. Adams, that the members of the com
mittee get to the floor of the House as quickly as possible, and I am
wondering if you could limit your statement to 10 minutes, and then
give to the members of the committee the written statement which
you left with me the other day.
STATEMENT OF EDSON F. ADAMS, PRESIDENT FARMERS AND
MERCHANTS SAVINGS BANK, OAKLAND, CALIF.
Mr. A dams. I think that I would have to read the statement, Mr.
Chairman, in order to make it clear. If I did not do that, I do not
think that they would grasp it.
Mr. G oldsborough. Y ou will proceed, then.
Mr. A dams. It appears quite necessary at this time that the Bank
ing Act of 1933 and Federal Deposit Insurance Act be amended
covering certain important matters as they now injuriously affect
banks doing a strictly savings bank business and, also, mutual sav
ings banks of the Middle Western and Pacific States which are
not numerous enough to protect themselves by establishing a savings-deposit guarantee under State authority, as has been done in
the State of New York.
Briefly, the main changes requested in the present laws are as
follows:
BANKING ACT OF 1 9 3 5
75
First, savings banks, doing no commercial business, and mutual
savings banks should be placed in a class or group by themselves
instead of being required to join in guaranteeing deposits in banks
doing all types of banking.
Second, savings banks should be granted the right to obtain in
terest on deposits with approved commercial banks of reserves and
surplus funds awaiting the demand for savings bank loans.
Third, savings banks and mutual savings banks should not be
forced to join the Federal Reserve System to obtain insurance, since
they do no commercial business, and, therefore, are not able to avail
themselves of its facilities.
Fourth, savings banks in the West should be granted the right
to allow depositors to use checks against short-notice savings
accounts, in order to protect their term-savings accounts against
competitors. State savings banks in California have had this right
for many years.
As to savings banks guarantee of all types of deposits, if the
country is to have permanent-deposit insurance, the great criticism
of the present act is that all banks are put together in one group,
when their methods of business are, in many cases, diametrically
opposed, some pay interest on practically all of their deposits, while
others pay no interest on any deposits and therefore require entirely
different handling of their resources.
It appears there should be two or three Federal Deposit Insurance
Corporations, based on the actual liability involved, instead of one,
with separate officers and garuanties for each corporation represent
ing each group of banks, and with provision for representation on its
board of directors; the commercial banks being placed in one group,
the departmental banks in one group, and the strictly savings banks
and mutual savings banks together in a separate group. In this way
each member of each group would be insuring its own type of business,
which would be the only fair way to handle it. Insurance for savings
banks would command a very low rate compared with commercial and
other types of banks. In California all savings-bank loans can be
made only on the highest type of security and the classes of security
and the conservative margins required are plainly stated in our bank
act.
I t is neither fair nor just to mutual savings banks and strictly sav
ings banks, as operated under western conditions, to link them with
departmental banks, commercial banks, and trust companies, where
money is shunted from one department to the other, as the oppor
tunity offers to play with the savings of savings depositors. Nor is
this all. In many banks property taken in under foreclosure is
thrown into holding companies owned by the bank’s stockholders and
manipulated so as to hide the fact that the bank is carrying property
taken for debt, thereby weakening the bank and deceiving the public.
Real savings banks, operated as such, are a boon to the man or
woman of small means. Conditions in the West are different from
those in the Eastern States, hence codes, rules, and regulations should
vary in each Federal Reserve district to conform to existing conditions
or customs not in conflict with good savings-bank practices.
This is so not only in banking but also in other lines of business:
For example, the first N. R. A. chief in California found that codes
prepared to cover eastern conditions did not fit those in the West.
76
BANKING ACT OF 1 9 3 5
National banks under several administrations have been receiving
the individual savings of the people and issuing savings passbooks
showing deposits and the money so received credited to the depositor
as a savings deposit, but here it ends. In practice, from here on, the
money so received is put into and mingled with the other funds of the
national bank, a commercial institution.
In a national bank the people’s savings deposits can be loaned on
notes of hand at will be the officials of the bank, and, if they choose,
without any security whatsoever to protect the loan except the per.
sonal responsibility of the recipient of the loan.
In the interest of safety the money so deposited by savings depos
itors should be loaned without the borrower first putting up ample
approved security to secure the money so loaned. In California the
law governing State banks requires that no money received from
savings deposits be loaned either by strictly savings banks, mutual
savings banks, or by a savings department of a departmental bank
except on ample and approved security. These provisions are appar
ently entirely ignored in the National Bank Act.
Mr. G oldsborough. I do not believe that it will be possible for the
members to stay, and each member has a copy of the statement that
you are reading, Mr. Adams, and I am going to suggest, sir—and I
want to be of every service that I can to you and your institution—
that you just insert your statement into the record. I can assure
you that every member of the committee will read it.
You have seen how they are leaving. I do not believe that you can
hold them.
Mr. WOLCOTT._I am staying here merely out of courtesy to you,
and I would prefer to read this in my office, if you are just going to
read it. I understood that you were going to comment on it as you
went along.
Mr. A dams. No ; the comments are all in it, but I have some addi
tions, in regard to other things.
Mr. W olcott. My opinion is that that which is written you could
put in the record without reading. We have some important legis
lation on the floor.
Mr. G oldsborough. The members of the committee really do have
to go on the floor, and, of course, if you were in a position to wait,
we would be very happy to hear you in full. We are extending to
you this courtesy because you have to get back to California.
Mr. A dams. I can wait until the end of the week, if there is no
opportunity now.
Mr. G oldsborough. I am not sure about it after Friday. On
Thursday we will have to have the home loan bill on the floor, and
I do not know what will happen.
I can assure you that you will receive just as much consideration
if you will just allow that statement to go into the record. This
committe is not going to overlook reading your statement.
Mr. A dams. I will tell you: I would like to submit copies of the
letter from Mr. Parker S. Maddux, who is the president of the San
Francisco bank----Mr. G o l d s b o r o u g h . Yes, sir; without objection, it will be inserted
in the record.
Mr. A dams. And also from Mr. Richard M. Tobin, who is the
president of the Hibernia Bank, San Francisco.
77
BANKING ACT OF 19 35
Mr. G oldsborough. Without objection, they may go into the record
at this point.
(The letters referred to are as follows:)
T e S n Fk n isc B n ,
h a ao o a k
E s n F. A a s, Esq.,
do
dm
San Francisco, Calif., February 6, 1935.
President Farmers & Merchants Savings Bank,
Oakland, Calif.
e r r d m o have exhibited to me a statement which you propose
a
as u
to submit to the chairman and members of the Banking Committee of the
House of Representatives at Washington. In this statement you suggest four
main changes to be made in the present banking laws of the United States.
The purpose of this letter is to assure you and the committee that this bank
is favorable to all of the suggested changes.
Hoping that you have a pleasant and successful trip to Washington, I beg to
remain,
Very truly yours,
a kr
re
a d x President.
du
D M. A
:Y
P
SM
.
,
H er ia B n ,
ib n a k
E
A ,
D M. A :
San Francisco, Calif., February If, 1935.
do F. d m President,
sn
as
Farmers d Merchants Savings Bank, Oakland, Calif.
e r r d m I have carefully read the draft of your proposed “ State
a
as
ment to the chairman and Members of the Bank Committee.”
The four objectives which you cite on the first page are all excellent, and
I approve especially of the first three.
With best wishes for your success, I remain
Yours very truly,
Mr.
R h r MT b .
ic a d . o in
Mr. A dams . I might say, in connection with these letters, that the
San Francisco Bank has savings deposits of $151,224,000, and total
resources of $167,847,098. They have 36,731 term savings accounts
and also special savings accounts with checking privileges, 5,800;
making total savings accounts 42,531.
The Hibernia Bank has savings deposits of $87,422,625, and the
total resources are $98,593,230. They have 69,889 savings accounts.
The bank of which I am president, the Farmers & Merchants
Savings Bank, has savings deposits of $7,877,094.96, and total re
sources of $8,385,636.68. We have 10,117 term savings accounts and
19,042 term school savings accounts and 2,317 special ordinary sav
ings accounts, with checking privileges, making total savings ac
counts 31,476. In this bank, the percentage of deposits covered by
Federal deposit insurance is 85 percent.
The Zion’s Savings Bank & Trust Co. are also desirous of having
some relief, as is shown by their letter to Mr. Frank B. Lanham,
special representative, Federal Deposit Insurance Corporation, Wash
ington, D. C. Their savings deposits amount to $13,103,232.13.
Mr. C avicciiia. May I suggest that the gentleman be given time to
hand to you any other communications that he wants inserted in the
record. If lie does not have them now, he may hand them in later
in the day.
Mr. G oldsborough. That will be entirely agreeable, if there is
anything else.
Mr. A dams. I would like to call your attention to this, that, of
course, I have some other things here which go to support my
proposition.
127297— 35------ 6
78
BANKING ACT OF 1 9 3 5
Mr. G oldsborough. I am inclined to think that the mutual banks
are going to be taken care of in this legislation. I do not believe
that you are going to find any fault with that.
Mr. A dams. I am not a mutual. We are a stock bank, you under
stand, and we have been left entirely out of this bill. The only
people that are referred to in this bill at all are the mutual savings
banks and nobody else, and that puts us in California and in the
West in a bad position. The Zion’s Savings Bank & Trust Co., in
Salt Lake City, are, as I have just indicated, in the same position.
Mr. W illiams. Can you not come into the Federal Savings and
Loan Insurance Corporation?
Mr. A dams. N o, sir; not unless we join the Federal Reserve Sys
tem, and we have no business in the Federal Reserve System. We
can do no business with them.
Mr. W illiams. I think that you are in error about that. The law
permits any institution that can qualify to come in.
Mr. A dams. We have already joined in the temporary deposit
insurance, you understand.
Mr. G oldsborough. And you think that your assessment should
be reduced?
Mr. A dams. Not necessarily, but we do not want to be made liable
for all classes of banking.
Mr. W illiams. I am talking about the Federal Savings and Loan
Insurance Corporation. I do not know whether you understood
me. The act passed last year by this Congress authorized building
and loan institutions and savings banks of the country to have an
insurance plan. W hat is the reason that the institution that you
represent cannot come into that plan if it wants to ?
Mr. A dams. Because we are not a building and loan institution,
as their type of business is entirely different from that of a bank.
The business which we do is of the same character, exactly, as the
mutuals, only that we have stock instead of a mutual association.
Mr. W illiams. But it includes not only the building and loan
associations but the savings banks and mutual banks as well.
Mr. C avtcchia. A s I understand it, Mr. Williams, the language of
the act that you are referring to states “ and other financial insti
tutions ”, which opens the door to this type.
Mr. W illiams. I t not only does that, but it mentions the very
class of institution about which he is talking.
I think, Mr. Adams, that you will find that out upon investi
gation.
Mr. A dams. We have not been able to find that, and if we have
to be brought in the Federal Reserve System, then we have to be
come a departmental bank, and we do not want to.
Mr. G oldsborough. Let me see if this suggestion will be helpful
to you: If you will insert what you have there in the record, and
then have an amendment drawn up which meets with your views
and hand that to Mr. Ford, he can then offer it, and we will consider
it with other amendments.
Mr. A dams. I will do that, Mr. Chairman, but I wanted to say
this, that you talked of national banks today, and they have savings
deposits amounting to $6,053,020,000, and those savings deposits can
be loaned out on unsecured notes, and there is nothing to prevent
BANKING ACT OF 19 3 5
79
that, not a thing, and they are doing it, and we do not want to be
tied to the tail of that kite, because we do not consider it a safe way
of handling of savings deposits.
I have been in business for 40 years, and I think I know something
about it.
Mr. G oldsborough. Prior to today, I thought that your idea was
that your assessment should not be as great as the assessment of a
commercial bank.
Mr. A dams. I t would not be under ordinary circumstances, if you
took the liability into consideration.
Mr. W illiams. A s I understand you, you want Congress to set up
another corporation, or an insurance company, simply to take care
of the class of institutions that you represent?
Mr. A dams. No. This could be done by classifying us, possibly,
with the mutuals, the outside mutuals which you brought in in your
last amendment.
Mr. G oldsborough. If your bank is really in the same class with
the mutuals, insofar as your liabilities are concerned, I am certain
that this committee will deal very justly with any amendment which
may be offered, and I presume that you will want Mr. Ford to offer
it, because, as I understand it, you only have 3 or 4 of these institu
tions in the United States.
Mr. A dams. There would be a great many in the United States,
if they had the opportunity.
Mr. G oldsborough. I understood you to tell me that there are two
in California and one in Utah.
Mr. A dams. What I said was that the two banks in California
had endorsed my propositions.
Mr. W olcott. Are you under State supervision ?
Mr. A dams. Under State supervision.
Mr. C avicchia. I think that that matter could be taken care of
by Mr. Ford, who is a member of this committee.
Mr. A dams. Yes. Shall I submit this?
Mr. G oldsborough. Yes; and it will be inserted in the record and
printed, and your amendment should be prepared and introduced,
I presume, by Mr. Ford, from your State.
Mr. A dams. Y ou mean these additional things?
Mr. G oldsborough. Yes. They will be inserted in the record. Just
hand them to the reporter.
The remainder of the statement is as follows:
By combinations and other manipulations, banks incorporated
principally for commercial business have acquired the people’s sav
ings deposits, sometimes in amounts almost double their commercial
deposits. In one instance, in a published statement, a national bank
has approximately 2G0 millions in commercial deposits and ap
proximately 460 millions in savings deposits, all dumped into the
same pot and these savings deposits can be handled and loaned
commercially, with all the attendant risks of commercial banking,
while mutual savings banks and savings banks doing no commercial
business, when loaning their deposits, must require ample security for
all loans made. This condition of facts shows very clearly that
banks having only saving deposits should be put in an independent
80
BANKING ACT OF 19 3 5
group by themselves and not be forced to participate in guaranteeing
unsecured loans of commercial banks.
As to interest on reserves of savings banks in correspondent banks,
under the provisions of the Banking Act of 1933, mutual savings
banks are allowed to receive interest upon their deposits (sec. 11, par.
(b.)).
The Legislature of the State of California in 1933, with the ap
proval of the State superintendent of banks, amended the State bank
act. General provisions section 21 (1). This section practically
follows section 19 of the Federal Reserve Act but allows savings
banks to receive interest on their deposits with commercial banks.
S
e t n 21. (1) No bank shall, directly or indirectly, by any device what
c io
ever, pay any interest on any deposit which is payable on demand: Provided,
That nothing herein contained shall be construed as prohibiting the payment
of interest in accordance with the terms of any certificate of deposit or other
contract heretofore entered into in good faith which is in force on the date
of the enactment hereof; but no such certificate of deposit or other contract
shall be renewed or extended unless it shall be modified to conform herewith,
and every bank shall take such action as may be necessary to conform here
with as soon as possible consistently with its contractual obligations: Pro
vided, however, That this section shall not apply to any deposit of such bank
which is payable only at an office thereof located in a foreign country, and
shall not apply to any deposit made by a savings bank, nor to any deposit of
public funds made by or on behalf of the State, or of any county, city and
county, city, town, municipality or other public or municipal corporation of
the State of California, with respect to which payment of interest is required
under State law. * * *
There are 594 mutual savings banks in the United States, as of
June 30, 1932, and they are located in the following States:
New England States 379, total resources____________________ $3, 711, 220, 000
Eastern States 195, total resources________________________ 7, 047, 074, 000
220, 708, 000
Middle Western States 16, total resources__________________
Pacific States 4, total resources-----------------------------------------155,140,000
Total______________________________________________ 11,134,142,000
I t will be noted that 574 are located in the New England and
Eastern States, with resources of $10,758,294,000, while the Middle
Western and Pacific States have only 20, with total resources of
$375,848,000, or approximately dy2 percent of the total resources of
the mutual savings banks in the United States.
A law giving to the mutual savings banks of New England and
Eastern States special privileges by not allowing strictly savings
banks in the rest of the country to receive interest from commercial
banks upon their deposits is unjust and unsound. In order to oper
ate savings banks conservatively, so they will be able to pay with
drawals without affecting their loaning ability, it is very essential
that they maintain sufficient balances in cash with banks duly author
ized by the State banking department, as _depositories. Unless a
savings bank has the right to receive some interest from its deposi
tories, the tendency would be to operate with as little cash as possible,
in order to meet the interest to savings depositors, costs of operation’
and other demands of the savings bank business. Under certain
conditions of the money market, this might at times cause the hurried
investment in securities and possibly would encourage loaning on a
poorer type of real-estate security.
BANKING ACT OF 19 3 5
81
As to savings banks as members of the Federal Reserve System,
the Federal Reserve System was inaugurated to develop the com
mercial banking resources of the country. Savings banks, properly
operated, have practically nothing in common with the Federal Re
serve System and it would be a great injustice to force them to join
that System. They are not able to discount their loans with the
Federal Reserve bank and therefore do not receive the main benefit
accruing to commercial banks which are members of the System.
As to savings banks’ depositors being allowed the use of checks to
withdraw funds, the Federal Reserve bank, having in mind solely
commercial business, would probably classify checking accounts
against a certain class of savings accounts, on which checks are used
as a convenient form of withdrawal, as being commercial business
which would not be the case, as no commercial loans are made at all
by savings banks in the State of California. I t has been found in
California, under western conditions, that a strictly savings bank, in
order to function properly, must have this type of account. These
accounts are opened principally for personal convenience by savings
depositors, who prefer to do all their banking in one place. They
are not of a type that require commercial accommodation. The bal
ances are moderate and the checking service has been found to be a
benefit to the depositor as well as to the savings bank. Also, fre
quently, people obtain loans from a savings bank, open checking
accounts, and some portion of the money remains with the bank for
a long period.
The savings bank of which I am president has over 2,286 accounts
of this type, aggregating over $780,000, of which only 21 are above
$5,000, and 275 between $500 and $5,000; 1,990 accounts are below
$500, which goes to show that these accounts are in no way commer
cial accounts, but are opened for the necessary personal accommoda
tion of our savings depositors; and it also shows that, in our western
country, the ability to allow a withdrawal by check is extremely im
portant and necessary to any savings bank doing only a savings-bank
business. This class of accounts has a provision for a 30 days’
notice, if the bank should require it.
Our State banking department for years has classified these ac
counts as savings accounts. Where there is strong competition by
departmental banks, savings deposits would be transferred from
strictly savings banks that do not have checking privileges, to other
banks, and would force savings banks to open commercial depart
ments at additional expense, without really wanting to do a commer
cial business, simply to accommodate and give personal checking
service to its savings depositors.
With over 40 years of experience in the savings-bank business, I
have observed that strictly savings bank operated by men versed in
savings-bank administration prosper and serve the public in a better
way than those left to be administered by highly specialized commer
cial bankers, whose main thought is the advancement of commercial
business.
I therefore urge that your committee amend the present acts at this
session of the Congress as outlined in the four changes enumerated,
so that savings banks may safely continue deposit insurance and at
82
BANKING ACT OF 19 3 5
the same time have reasonable protection in operating under western
conditions.
Mr. C avicchia. May I remind you, Mr. Williams, that one ques
tion that you asked was not answered, and I hope you will have an
answer as to what will happen to those 8,000 banks ?
Mr. W illiams. Yes; I am going to go back to that. I t is very
important.
Mr. G oldsborough. The committee will adjourn until tomorrow
morning at 10: 30.
(Thereupon, at 12:45 p. m., an adjournment was taken until
Wednesday morning, Feb. 27, 1935, at 10: 30 o’clock.)
B A N K IN G
WEDNESDAY,
ACT
OF
1935
FEBRUARY 27, 1935
H ouse of R epresentatives,
C ommittee on B anking and C urrency,
W ashington , D. C.
Hearings on the bill above referred to were resumed at 10:30
a. m., Hon. T. Alan Goldsborough presiding.
Mr. G oldsborough. The committee w ill be in order.
Mr. Williams, will you resume your questioning where you left
off yesterday?
STATEMENTS OF LEO T. CROWLEY, CHAIRMAN, AND L. E. BIRDZELL, GENERAL COUNSEL, FEDERAL DEPOSIT INSURANCE
CORPORATION— Resumed
Mr. W illiams. I believe that we agreed that the amount of de
posits in the commercial banks of the country was practically 36i/2
billion dollars. The last question was, what part of that is in time
deposits.
Mr. C rowley. I am told about one-third. That would be about
12 billions.
Mr. W illiams. What character of time deposits does that involve?
There are different kinds of time deposits.
Mr. C rowley. That includes, for instance, savings accounts and
certificates of deposit, where they are not subject to check.
Mr. W illiams. That means all o f the accounts, does it, in which
notice is required before they can be withdrawn; or, in other words,
they are for a definite, fixed period and not subject to check at all?
Mr. C rowley. That is correct, where you have to give definite no
tice of withdrawal.
That does not include postal savings.
Mr. C avicciiia. D o I understand that your answer to Mr. Wil
liams’ question includes deposits in savings institutions?
Mr. Crowley. No, sir; it does not.
Mr. W illiams. They are not included?
Mr. Crowley. Would you like some detail on that, Mr. Williams?
We have some figures here, if you would like to have us read them.
Mr. W illiams. A s far as I am concerned, no; unless someone else
on the committee wants it more definitely than that.
Mr. Cavicchia. Does that figure of 361^ billions that you gave
include sums deposited in savings banks and mutual banks ^
Mr. C rowley. No ; it does not; just commercial banks.
Mr. W illiams. During the last year, or after the passage of the
deposit insurance law and before the creation of this Corporation,
83
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BANKING ACT OF 19 3 5
as I understand it, there have been orders issued by the Federal Re
serve bank and by the Corporation as well concerning the interest
charges to be paid both on demand and time deposits in various banks
that are insured.
Mr. Crowley. That is correct.
Mr. W illiams. What have been the savings to the banks of the
country by reason of those orders and their following out the instruc
tions that were given to them with reference to paying no interest on
demand deposits and limiting the amount that they would pay on
time deposits ?
Mr. Crowley. I do not know that we can give that to you. That
is in our testimony, Mr. Congressman, and we will give it to you.
Mr. W illiams. Perhaps I have your statement on that, but let me
see if I understand it. Do I understand from your statement that by
reason of that action on the part of the banks in not paying interest
at all on demand deposits and cutting down the interest paid on time
deposits there has been a saving to the extent of 26 cents per $100
during the year 1934?
Mr. Crowley. A s the banks became more liquid, and as the demand
for money became less, the banks themselves declined to pay interest
on daily balances. That was prior to the Banking Act of 1933
Then, Mr. Congressman, in the Banking Act of 1933 it was provided
they could not pay interest on demand deposits, and we then showed
a saving that had been brought about by not paying interest on de
mand deposits. A percentage of that saving was brought about by
the legislation in 1933.
Mr. W illiams. The fact remains that that was done, regardless
of the cause of it, and that the banks during the last year have saved
about one-fourth of 1 percent on their entire deposits by having cut
down the rate of interest paid to the depositors ?
Mr. Crowley. That is correct.
Mr. Fox. Our figures are based on national banks, and the data is
available for the last half of 1933, the 6 months subsequent to the
passage of the act.
That shows that the savings to all national banks because of the
passage of the Banking Act of 1933, which reduced the interest on
time deposits and eliminated the interest on demand deposits, was
28 cents per $100 on deposits, 2 cents of which was due to a reduction
in the rate of interest on time deposits and 26 cents due to the elimi
nation of interest on demand deposits.
Mr. W illiams. Then, instead of 26 cents, it is 28 cents per $100?
Mr. Fox. That is correct.
Mr. W illiams. Which would be between a third and a fourth of
1 percent on all of the deposits in the banks, which in figures would
amount to how much ?
(At this point Mr. Crowley handed a paper to Mr. Williams.)
Mr. W illiams. I would like to have that in the record, to show how
much the banks of the country have served by reason of reductions
in the rates of interest paid during the last year.
Mr. R eilly . Have the banks been reporting how much money they
saved as interest on time and demand deposits?
Mr. C rowley. The banking law of 1933 forbids that.
Mr. R eilly. I know, but before that did not they make a specific
report of the amounts of money that they paid on demand deposits ?
BANKING ACT OF 1 9 3 5
85
Mr. Crowley. Yes.
Mr. Fox. The national banks filed reports of earnings and divi
dends every 6 months, and in that report is the section which details
their expenses, and there are three items in that section.
Mr. G oldsborough. Will you proceed, Mr. Williams?
Mr. W illiams. It would be a simple matter of calculation.
Mr. Fox. It is about $43,000,000 per year for national banks.
Mr. W illiams. $43,000,000 for national banks alone.
Have you any data showing the amount that has been saved by the
Federal Reserve members and the nonmember banks?
Mr. Fox. We could put the information in the record for the
Federal Reserve member banks. We did not until this year have
information on the nonmember State banks. Therefore, we could
not give you that information.
Mr. W illiams. Your statement of a saving of 28 cents per $100 is
based on the record of the national banks alone?
Mr. Fox. That is correct.
Mr. W illiams. H ow does that compare with the State member
banks that you know of?
Mr. Fox. I will have to put that in the record later on.
Mr. W illiams. Y ou will put that in the record for us?
Mr. Fox. Yes, sir.
Total savings in interest paid on deposits by State member banks
were at the rate of $30,000,000 per year. Expressed another way, the
savings in interest expense to State member banks amounted to 29
cents per year for each $100 of total deposits.
Mr. W illiams. And you have no information at all with refer
ence to the amount that the State member banks have saved on that
item?
Mr. Fox. No, sir. That is not available at all.
Mr. W illiams. And it is a fact, is it not, that the State nonmem
ber banks have followed the same policy as the member banks and
the national banks in that respect throughout the country?
Mr. Fox. I think so.
Mr. Crowley. I think that is generally true, Mr. Congressman.
In some States they have not.
Mr. W illiams. N ow, it is also true, is it not, that you issued an
order—and I refer to your Corporation—limiting the interest on
time deposits to 3 percent, and then later on formulated, at least,
another order bringing it down to 2y2 percent?
Mr. Crowley. That is correct.
Mr. W illiams. But that was never put into effect, was it? Some
controversy arose over the legality of it?
Mr. C rowley. That is correct. A year ago last December the
Federal Deposit Insurance Corporation and the Federal Reserve
Board fixed a 3-percent maximum. Then last December the Federal
Reserve Board fixed a rate of 2y2 percent, and we did likewise; and
then the controversy arose, and we withdrew our regulation.
Mr. W illiams. Then the practice that has heretofore prevailed
throughout the country of paying in certain cases interest on de
mand deposits is a thing of the past, is it not?
Mr. G oldsborough. May I suggest to you, Mr. Williams, that in
my section, in the First Congressional District of Maryland, they
are still paying 2y2 percent?
86
BANKING ACT OF 1 9 3 5
Mr. W illiams. But that is not a fact so far as the order of the
Board is concerned?
Mr. Crowley. The order of the Board was drawn, but a great
many of the banks, as the chairman says, have followed along on
the 2y2 percent.
Mr. W illiams. And they are following that not by your order
or direction but because of their own inclination and perhaps a de
sire to be uniform with the order of the Federal Reserve System?
Mr. F ord. One big banking group on the coast did not do that.
They offered 3 percent; and all of the other banks came to me and
asked me to come down to see you to change it, which I could not do.
Mr. Crowley. May I say this, on that matter of time deposits,
first, that I think that history will show that prior to the Federal Re
serve Board and prior to the Federal Deposit Insurance Corporation
issuing their regulations, in years gone by banks paid as high as 4,
5, and 6 percent for what we would term “ time deposits.” They
offered all kinds of premiums, like blankets and clocks and savings
banks, and the banks which perhaps should not have paid those
high interest rates were the ones that were the most apt to offer to
the depositor an interest rate that was not sound.
Now, the same thing was true of demand deposits. For instance,
a great many of your national corporations would have $25,000 or
$50,000 balances, and the banks would bid for that business; and in
reality in a great many instances it was not of any particular benefit,
and that was considered as an unsound practice. That is the reason
why in the Banking Act of 1933 you eliminated that abuse, because
it was an unwise and unsafe practice.
Now, the same thing goes for interest on time deposits. What the
supervisory agencies wanted to bring about was that a bank not
only paid to these people a reasonable rate of interest but also gave
them back their principal, because in a great many instances where
the bank paid 4, 5, and 6 percent, the depositors lost a very large
percentage of their principal.
Mr. W illiams. I s it your idea now that your Corporation should
have the power to direct the members of your Corporation not to
pay interest on demand deposits and to limit their payments on time
deposits to 2y2 percent?
Air. C rowley. I think it would be a great contribution to your
banking system if we had that power. There might be given suffi
cient authority, perhaps, that we might take into consideration the
various districts of the United States in regulating that interest.
In other words, we might find that in the East they were able to
put in one rate of interest and in the West another, and under those
conditions the thing to do would be not to make it all uniform,
because in some parts of the country they get a little more money
for their loans.
Mr. W illiams. But that idea is not contained in this bill?
Mr. Crowley. N o; it is not; but if you will read the entire Bank
ing Act of 1935, it does give that power to the Federal Reserve
Board.
Mr. W illiams. Undoubtedly. I think there is no question but
what the Federal Reserve Board has it.
Mr. Crowley. And it covers all insured banks in the new act that
has been presented to you.
BANKING ACT OF 1 9 3 5
87
Mr. W illiams. D o you mean by that that the provision with refer
ence to the Federal Reserve Act will cover all insured banks?
Mr. Crowley. That is correct.
Mr. W illiams. And that is on the theory that they will now have
to come into the Federal Reserve System ? .
Mr. Crowley. That is correct.
Mr. W illiams. But on the theory that we are going, perhaps, to
have a lot of them insured that are not in the Federal Reserve System,
what will we do about them?
Mr. Crowley. I think that it would be very helpful to the bank
ing system if that were made a part of the permanent insurance act.
Mr. B irdzell. If you will turn to page 65 of your printed bill,
H. R. 5357, you will find a provision there relating to interest. Shall
I read it to you ?
Mr. W illiams. I think from what you have stated about it, it is
not necessary to read it.
The point that I am asking about it is that there are some 8,500
banks of this country that are not in the System; and it is at least my
view that they will not be in it, unless they want to be, and what
will we do with them with reference to this interest charge?
Mr. B irdzell. D o you understand, Mr. Congressman, that this
provision of the bill on page 65 that I have directed your attention
to will enable the Federal Reserve Board to regulate the interest
rate for that portion of those 8,500 banks that is insured ?
Mr. W illiams. I did not so understand it.
Mr. B irdzell. That is the provision o f the bill.
Mr. W illiams. Regardless of whether they are in the Federal Re
serve System or not ?
Mr. B irdzell. Yes, sir.
Mr. Crowley. A s long as they are insured banks.
Mr. W illiams. The point that naturally arises in my mind is, why
should the Federal Reserve Board have that authority rather than
the Insurance Corporation, if they are not members of the Federal
Reserve System ?
Mr. Crowley. I t is only just a matter of uniformity; that is all.
You might have a situation where the Federal Reserve System
would have one rate for national banks, and the Federal Deposit
Insurance Corporation would have another one for State banks.
That was the reason, I believe, for putting it all under the Federal
Reserve Board.
However, our Corporation would welcome an opportunity to regu
late the interest rates of the nonmember State banks.
Mr. W illiams. N ow, during the period of time since the banking
holiday, there have been a great many concerted efforts on the part
of your Corporation, the R. F. C., and others to recapitalize and
rebuild the capital structure of the various banks throughout the
country. I believe that we went into that to some extent the other day.
Mr. C rowley. Yes, Mr. Congressman.
Mr. W illiams. And we reached the conclusion that perhaps half
of them had been helped in that way.
Mr. Crowley. There have been pretty close to 6,000, and there are
some to be done yet, so you won’t be far out of the way in saying that
close to 40 percent have been helped.
88
BANKING ACT OF 1 9 3 5
Mr. W illiams. I would like to have in the record the figures show
ing the capital structure of those banks, say, as of March 1, 1933,
about the beginning of the bank holiday, and as it exists at the
present time.
Mr. Fox. I t will not be possible to give it for March 1, 1933, for
State nonmember banks. It will be possible to give the book capital
for State nonmember banks as of the 1st of January 1934, virtually
before most of the aid had been put into the banks. However, the
book capital will not necessarily reveal what has been accomplished.
Mr. W illiams. Unless we had the capital structure existing at the
time these processes were begun, you could not tell what had been
done in that connection.
Mr. C rowley. That is very difficult for this reason: Suppose that
you had a million dollars in deposits or in assets; you could not deter
mine the position that your capital structure was in just from the
books of your bank, because perhaps you had not taken out your
losses, and perhaps you had not set up any reserve for bonds or for
depreciation, and you really cannot tell that without an examination,
don’t you see? In other words, we could not tell what condition the
banks were in in March 1933 until first an examination was made of
them.
Mr. W illiams. I understand that, except that you could get it from
the books themselves; the capital is there stated, by the books.
Mr. Crowley. Yes; but that would be misleading.
Mr. W illiams. I understand that it may be, but I just wanted to
know what that was as shown by the books; in other words, what was
the capital of the banks of this country.
Mr. Crowley. I think the capital was about $6,000,000,000.
We could get that for June 30, and that would be satisfactory.
Mr. W illiams. Yes. W hat is it now?
Mr. Crowley. About 6 billion dollars.
Mr. W illiams. Do you mean by that that the capital structure
of the banks of the country has not improved any during the last
year and a half?
Mr. Crowley. Here is what happened: We might have had 6
billion dollars in March or June 1933. as far as their books were
concerned. Now, then, they may have had a billion and a half of
losses there that had not been deducted. When we came along with
our rebuilding program, we eliminated the undesirable assets, and
put capital back in.
Mr. W illiams. But did you not also, in the case of a great many
of the smaller banks, increase that capital?
Mr. C rowley. Yes; but we increased----Mr. W illiams. I mean not only increased the physical assets, but
that you increased the book value? In other words, you raised the
capital in many cases from $50,000 to $100,000 ?
Mr. B irdzell. Just word with respect to that.
It has been quite a general practice where preferred stock has
been issued and sold to the Reconstruction Finance Corporation for
a bank that issued and sold that prefererd stock to make a correponding reduction of its common stock, so that while the new capi
tal has gone into the banks, the book capital remains substantially
the same as it was before. That is the reason why the present book
capital does not show much change from the book capital as it
might have been shown before the rehabilitation took place.
BANKING ACT OF 1 9 3 5
89
Mr. W illiams. N o w , let us get at it from this angle. How much
in public funds from the Reconstruction Finance Corporation, and
how much in private funds have been put into the banks to rebuild
and strengthen the capital structure during the last 18 months, or
since the bank holiday?
Mr. Fox. Approximately 1 billion dollars has been put in by the
Reconstruction Finance Corporation for recapitalizing the banks,
and we are now estimating what the extent of the local funds that
have been raised was, and while we have only gotten replies from 30
States, it already amounts to about $300,000,000 additional.
Mr. W illiams. I t will, perhaps, then amount to a billion and a
half?
Mr. Fox. At least.
Mr. Crowley. I would say much in excess of that, Mr. Congress
man. When you take into account your local contributions, reor
ganizations, and things like that, it will run far in excess of a billion
and a half dollars.
Mr. W illiams. In other words, the capital structure of the bank
ing system of the entire country has been very materially and very
substantially strengthened during the last 18 months?
Mr. Crowley. Pretty close to 50 percent of the banks, before we
get through, will be practically rebuilt.
You asked whether we aided in the increasing of capital. Where
we have rebuilt the capital structures of a great many of these banks,
we have tried through the Reconstruction Finance Corporation and
local contributions to build their capital so that they would have
a ratio between deposits and capital which was larger than the
ratio that they had before.
Mr. W illiams. I was just going to ask you what has been your
policy with reference to trying to create capital and establish a
definite relationship between capital and deposits. I understood
you to say that you had been making an effort to establish some kind
of a ratio between the capital and the deposits of an institution.
That has been your policy, has it?
Mr. C rowley. That has been our policy.
Mr. W illiams. What is the ratio?
Mr. Crowley. Where a bank has been able to go all the way
through, even though its ratio of capital to deposits might be less
than 10 to 1, we have not disturbed it. Those were banks that had
been able to carry themselves through, keep their capital intact, had
a good earning capacity, and could build reserves and surplus.
Where we rebuilt a bank we tried to rebuild on a 10-to-l basis.
Mr. W illiams. What I am trying to get is a general picture of
the bank situation in this country now as compared with what it
was during the 10 or 12 years preceding the bank holiday. When
did we reach the highest peak in the number of banks in this country?
I want to get what happened during that period.
Mr. Crowley. We reached it in 1920 or 1921.
Mr. W illiams. What was it in numbers?
Mr. C rowley. About 30,000 banks.
Mr. W illiams . At the present time there are how many?
Mr. Crowley. 15,000.
Mr. W illiams. In other words, we have half as many banks now
as we had in 1920—later than that, was it not ?
90
BANKING ACT OF 1 9 3 5
Mr. Crowley. About 1920 when your failures started.
Mr. Fox. 1921, exactly.
Mr. W illiams. Yes; 1921 and 1922. And at that time the bank
deposits were about 50 billions?
Mr. Fox. Thirty-eight and a half billions in 1921.
Mr. W illiams. When they were at their peak?
Mr. Fox. When the number of banks was at the peak the deposits
were not at their peak.
Mr. W illiams. The bank deposits were at their peak about 1928
and 1929?
Mr. Fox. 1930; 59.6 billions.
Mr. W illiams. N ow, during that period from 1922 to 1932 there
was the failure of some 11,000 or 12,000 banks, was there not?
Mr. Crowley. That is right.
Mr. W illiams. Of all kinds and characters, in all sections of the
country, I take it?
Mr. Crowley. More of them, Mr. Congressman, in the Northwest.
Your early failures first came, I think, in South Dakota, and then
in northern Iowa—the whole Middle Western country.
Mr. W illiams. There were, o f course, a number of causes for that.
Is it your opinion that we were overbanked; that we had entirely
too many of them?
Mr. Crowley. Yes; we had too many banks, Mr. Congressman,
that could not make a sufficient return on their investments or could
not set up reserves to take care of their losses. In other words, a
bank that has a $6,000 gross income, from which it must pay its over
head and set up its reserves for losses, it remains very difficult for
it, if it has a $2,000 or $3,000 loss in any particular year, to take it
currently.
Mr. W illiams. That was one thing; that there were too many
banks.
Mr. Crowley. And also later, from 1930 on, our banks suffered
terribly by bond depreciation and defaults.
Mr. W illiams. It was due to another reason, to the fact that they
had invested their money in securities of different kinds at inflated
values ?
Mr. Crowley. That was a contributing factor to the banking
trouble, and, of course, your economic situation.
Mr. W illiams. Was it not due to the fact that there had been
rather loose supervisions on the part of the authorities of the State
and Government?
Mr. C rowley. Y ou have in this country, under the State system,
48 different types of supervision. It is very difficult to have State
supervision that will be as efficient as where it is a long way removed
from local pressure.
Mr. W illiams. And there were other contributing causes to the
enormous number of failures that we had during that time?
Mr. Crowley. I think that the large contributing cause, Mr. Con
gressman, was your economic collapse. For instance, in the Middle
West, when your banking trouble started in 1921, that was the begin
ning of your agricultural trouble. You can say that as your agri
cultural trouble became more severe, your bank failures increased
very materially. Furthermore, they were frozen up in farm and
chattel mortgages and also in bonds that had depreciated to a point
BANKING ACT OF 1 9 3 5
91
where they could not sell them without taking a severe loss, and
they had nothing to charge their losses to.
M r. W il l ia m s . It is the hope and the intention now to eliminate
a great deal of that, is it not? This very act itself tries to furnish
a market for long-term rediscount paper ?
Mr. Crowley. That is correct.
Mr. W il l ia m s . iVnd to avoid that situation in the future, and also
by having supervisory control, regulatory control over these various
institutions by your examinations and your reports, it is the hope
to eliminate many of the bad practices that have existed before, is
it not?
Mr. Crowley. That is right.
Mr. W illiams. And, of course, it is also the intention further to
prevent the establishment of any more banks where they are not
needed ?
Mr. C rowley. That is correct.
Mr. W illiams. And by means of all of those things, you hope to
avoid the recurrence of this condition which has come upon us and
caused so many failures among these banks in the past?
Mr. Crowley. That is correct.
Mr. W illiams. N ow, I want to get back to this question: What are
you going to do, if this act is passed as written, with the 8,500 banks
that are not members of the Federal Reserve System ?
Mr. C rowt . Y ou mean as to what we are going to do with them
ley
in 1937?
Mr. W illiams. Yes.
Mr. Crowley. I hardly think that that is a fair question to
ask me.
Mr. W illiams. Y ou do not think that that is fair?
Mr. C rowt . I do not mean that personally.
ley
Mr. W illiams. The fact is that this law would provide for that,
would it not?
Mr. Crowley. T his law provides for them to join the Federal
Reserve System in 1937.
Mr. W illiams. W e have had a Federal Reserve System in effect
for 20 years, have we not ?
Mr. Crowley. Yes.
Mr. W illiams. And we have now 8,500 banks in the country that
have not seen fit to join it so far?
Mr. C rowley. That is correct.
Mr. W illiams. I notice that the expression is used throughout this
act, “ insured banks ”, and I understand that you have a definition of
an insured bank in your bill, but there is not any such thing as an
insured bank now, is there?
Mr. Crowley. I assumed that all banks that are insured are insured
banks.
Mr. W illiams. They are simply members of a temporary fund.
Mr. Crowley. That is correct.
Mr. W illiams. And there has not been a bank that has come in and
bought stock ?
Mr. Crowley. No, sir.
Mr. W illiams. And insured under the permanent policy?
Mr. Crowley. No, sir.
92
BANKING ACT OF 19 35
Mr. W illiams. N ow, when July 1, 1937, comes and this law is
enacted, all of these nonmember State institutions that are now in the
temporary fund will have to come into the Federal Reserve System or
get out of the insurance corporation ?
Mr. C rowley. That is the law.
Mr. W illiams. I am very much concerned myself about the 8,500
banks, because they are scattered from one end of the country to the
other, especially in the southern part of the country, and the rural
sections and small communities, and I, for one, have not reached the
conclusion yet that there is not a place in our system for a local
independent, unit bank. I do not believe that they ought to be re
quired, if they do not see fit to do so, to come into the Federal Reserve
System. You have means provided in this very act by \shich you
could supervise them rather strictly, by which you can examine them,
and you have a provision by which you can put them out of the
System if they engage in any unfair or unsound banking practices of
any kind or character, but it does seem to me that we ought not to
place in this bill a provision requiring them against their wishes to
come into the Federal Reserve System in order to get the benefit of
the insurance feature.
Mr. G o l d s b o r o u g h . Mr. Cavicchia.
Mr. C avicchia. Pursuing the line of thought that Mr. Williams has
been following, I would like to ask th is: Why force these 8,500 banks
into the Federal Reserve System if they do not wish to join ? Is it not
protection enough to the stockholders and to the depositors that they
are members of the insurance funds?
Mr. Crowley. I think the thought is, Mr. Congressman, that it
brings about a greater unification of banking, and perhaps better
control of your monetary system, if you have them all in the Federal
Reserve System.
Mr. Cavicchia. Will it cost these banks any more to become mem
bers of the Federal Reserve System than if they had stayed out?
Mr. Crowley. They will have to pay for their stock, but it will not
be a great burden.
Mr. Cavicchia. T o get back to the elimination of interest on de
mand deposits, many insurance companies, as well as municipal au
thorities, used to have large deposits on which they received through
out the East something like 2 percent on demand deposits. Has not
the fact that this interest has been terminated forced these people
to go into the bonding field raher than to have the money on deposit
on which they receive no interest?
Mr. Crowley. Well, of course, that is purely a matter of their own
judgment. If an insurance company has a million dollars of excess
reserves and it can find a place to employ it, I presume that it is
good business for them to do it.
On the other hand, you cannot expect a bank to pay 1 or 2 percent
on daily balances when the money is only lying there idle.
Mr. Cavicchia. Has there not been a great deal of complaint on
the part of municipal authorities because they have lost this 2 per
cent on demand deposits ?
Mr. Crowley. I think that that is correct, that there has been
complaint, but I do not think it is justifiable. I mean by that that
they might just as well wish for 4 percent as to wish for 2 percent
when the banks cannot pay out the 2 percent. There is no rime
BANKING ACT OF 1 9 3 5
93
or reason why I should, if I were in the banking business, take a
$100,000 account from you and pay you 2 percent for it, and then
leave it in the vaults or in the Federal Keserve banks and not
employ it.
Mr. C avicchia. That is true, because of the conditions existing
now, but if a time should come when the banks can employ money
to advantage and get good returns for it, if you pass this law they
will not be able to pay any interest, because the law forbids it.
Mr. Crowley. Mr. Congressman, that is not in this law. That
law was passed in 1933.
Mr. Cavicchia. But the fact is that we have that law.
Mr. Crowley. That is right.
Mr. B irdzell. One further suggestion there, Mr. Congressman.
In the Banking Act of 1933, which forbids the payment of interest
on demand deposits, exception is made where, under local law, State
laws, interest is required to be paid on public deposits.
Mr. C avicchia. N ow, to go back to that 29 cents per $100 that
has been saved through the law of 1933, does this 29 cents per $100
that the banks have saved in interest cover their costs of going into
the temporary insurance fund?
Mr. Crowley. I t would more than cover their costs on one-twelfth
of 1 percent.
Mr. C avicchia. In other words, the banks do not have to meet an
unreasonable demand to join in your fund, inasmuch as they have
saved 26 or 27 cents on every $100 ?
Mr. C rowley. I do not think that we have presented anything in
which offers any great obstacle to the banking system of the country.
Mr. C avicchia. Y ou mean, so far as the extra cost is involved ?
Mr. Crowley. That is correct.
Mr. Cavicchia. That is all.
Mr. G olosborough. Mr. lteilly, you were not here yesterday.
Mr. K eilly. I do not have any questions.
Mr. G oldsborough. Mr. Cross.
Mr. Cross. Now, Mr. Crowley, going back to the questions put to
you by Mr. Williams, you said that the bank crash was started in
the Western States. That was caused by falling prices of the com
modities of the people who did business with those banks, was it not,
and that caused falling prices in lands, did it not, and that reflected
finally on the eastern sections and caused a decline in the prices of
stocks, and that destroyed the purchasing power of the country and
brought on your bank crash?
Mr. Crowley. I think that is correct.
Mr. Cross. N ow, under title I I you say that you can get a sound
banking situation, that tile I I seems to be the key to the situation.
The question is to keep up your prices, and in order to control prices
that you should have a unified banking system. In other words, if
you have a whole bunch of banks that are uncontrolled in the credits
that they handle, if there are too many of them, they affect the
whole structure, and if they do not come into the system where they
can be regulated as to their credits, it directly affects price levels.
Do you see the point?
Mr.’ C r o w l e y . I agree with you that your bank failures were
largely due to your economic collapse starting back in 1921.
Mr. C ro ss . Surely.
127297— 35------ 7
94
BANKING ACT OF 1 9 3 5
Mr. Crowley. However, there were other factors such as overbanking conditions, poor judgment, or not being able to foresee that
land values were too high, and things like that.
Mr. Cross. Was not the overbanking situation brought about by
inflated credit, by abnormally high prices at that time of lands and
the things that securities were braced on, and the banks figured that
they could all make money, and everybody was taken into the bank
ing business ?
Mr C rowley. I think that is right.
Mr. Cross. And, of course, when the crash came, prices went
down, securities went down, and they were all blown up.
In reference to the question of paying interest on checking or cash
deposits, you remember that we had that question up, as you sav,
in 1933.
Mr. Crowley. Yes.
Mr. Cross. And the fellows that had big checking deposits the
banks got competing for, and they were paying too much interest
on them, and the mass of the little fellows knew nothing about that,
and, in addition, the big fellows also knew what condition the banks
were in, and they pulled their money out. but the little fellow got
caught.
In other words, there was a vicious system brought about by the
banks bidding on the checking deposits of the big fellows.
Mr. Crowley. That is correct.
Let me say one thing here, so that you will understand my view
point on the banking system. I think that the Federal Deposit
Insurance Corporation must have these powers that we are talking
about, but I do not want to go on record as saying that the entire
State system should be eliminated. I think that your State system
can be a very major factor in your banking system.
There are two types of banks in this country. You have your
larger banks, which by the very nature of their type of business
cannot afford to make the type of loans that are made in the small
Community, because it costs them too much money.
' Your community bank does contribute to your local community a
type of credit that I think is very essential in your whole financial
picture, and I do not believe that it is necessary for us to eliminate
in a wholesale way that type of bank. I think the think that we
should be very careful about is that we do not get back to that
overbanked condition, but we should do everything we possibly can
to try to preserve the banks that we have now, as long as they have
an opportunity of serving the people of those communities.
In other words, let us take a bank of $250,000 or $500,000 in de
posits. To my mind, they can be a large factor in the local com
munity and lend a larger percentage of their money locally in the
future than they have in the past if they will only profit by their
experience in the past in making those loans so that on maturity
they will be reduced from time to time and not be permitted to
become frozen.
Mr. Cross. Of course, those banks would not belong to the Fed
eral Reserve System, and the danger of that seems to be that the
Federal Reserve Board, not being able to control their credits or
the landings of those banks, could not bring about the situation
which you say is desirable.
BANKING ACT OF 1 9 3 5
95
Could this deposit insurance feature here be so administered so
that at least your Corporation would have something to say about
their credit activities?
Mr. C rowley. I think that as long as you have the State system.
Mr. Cross, that the State authorities must have the primary respon
sibility for the supervision. Now. the only place where I see that
we are entitled to supervise is where that supervision is necessary
for the protection of our Corporation.
I do not like to get into the matter of the Federal Reserve, be
cause I think that is a matter for Mr. Eccles, and I much prefer
not to go into anything that would interfere with his end of this bill,
if you have no objection to it.
Mr. C ross. Yes; I understand.
That is all.
Mr. G oldsborough. Mr. Gilford.
Mr. G ifford. I want to pursue the line of inquiry with reference
to the part of this bill that deals with the examination of banks.
I wish I had with me letters that I have received, with respect
to the fact that the Comptroller was out making speeches all over
the country, calling on the banks to loosen up on their credit, whereas
before that we found that the examining department of the Comp
troller’s office had put a great deal of fear into the bankers, so that
they did not dare to loan.
The whole tenor of this bill is to get a pretty good grip on these
banks by examination, and this assessment of one-twelfth of 1 per
cent would be sufficient so that you could control the conduct of the
banks, and you want to force them to carry burglary insurance and
other insurances, and, if they do not carry them, you order them and
charge them up to the bank.
Now, as I read this bill, and after having heard your statement,
you base a great deal of your possible success on your opportunity
to make examinations just as often as you like, so that you may make
the banks conform to anything that you may want them to do, and
that sort of thing. Is not that asking a good deal?
Mr. Crowley. N o; I do not think that there is a single thing in
our bill that goes too far.
Let me say this to you, that, in the first place, the law - that
r»as passed said that we may take these banks in on a test of solvency.
Now, we; all know that a bank that only has sufficient assets to meet
its deposit liability on any kind of a forced liquidation could not
pay out its deposits. Furthermore, our whole trend of banking
in this country is based on the theory that first the stockholder shall
have an equity in this bank, because it is a capitalistic system. So
that when we started in January 1934 after taking these 7,800 banks
in7
were faced with the problem of going out to determine their
position.
Now, our job, first, was to find out really what the condition was,
and in order to find out what the condition was, we had to try to
determine the value of their assets, and we were trying to do that,
of course, at a time when values were at perhaps a very low ebb,
and perhaps it was necessary sometimes to be pretty severe, but
my own judgment is that when we classify an asset, a good asset
96
BANKING ACT OF 19 35
in the bad column, that we perhaps classified as many bad assets
in the good column.
Mr. G ifford. D o you understand that recently there has been a
tremendous change in attitude on the part of bank examiners in
the whole country, and instructions must have been given to them
to have a different viewpoint?
Mr. Crowley. A s far as Federal Deposit Insurance is concerned,
there has been no change in the attitude of our examiners, because
our whole program has been based upon, first, putting the banks in
a sound position as far as capital is concerned. After you once get
the banks in a sound capital position, then you may not have to
use as severe a yardstick in a wholesale way as you had to at first.
Mr. G ifford. I am not criticizing your method of examination,
but national bank examinations in the last 2 or 3 years. Do you
not know that there has been a very great change in the method of
making bank examinations lately, where slow loans in a bank have
not been persecuted as formerly?
Mr. Crowley. I do not know what the policy of the Comptroller’s
Office is.
Mr. G ifford. Did you not see an article in the newspapers, to the
effect that the President himself had severely criticized the strictness
of bank examinations?
Mr. C rowley. Let me say this to you on the matter of the criticism
of slow loans. You may criticize a slow loan if the bank has too
large a percentage of them, or if the bank is badly frozen. The
easing up of the criticism of slow loans has been due largely to the
fact----Mr. G ifford. That is all I asked, and you agree.
Mr. Crowley. Wait a minute—if it has been done.
Mr. Gifford. Has it been done?
Mr. Crowley. I presume it has, at least in places where the banks
have such extreme liquidity that there is no necessity of forcing
liquidation.
Mr. Gifford. D o you think that you could still hold these banks as
members of your corporation if they are subjected to all of these
things ?
Mr. C row ley . We have had in here 22 State commissioners for
conferences on the matter of examinations and related topics.
Let me say that in the matter of rebuilding capital, in the matter
of local contributions, time after time we have had a State commis
sioner come to us and ask us to exert our influence, because on account
of local conditions he could not do it, and he has asked the Federal
Deposit Insurance Corporation to exert pressure in order to put that
bank back in shape.
So far as that examining program is concerned, every State com
missioner who wants a good State banking system will agree that if
we are going to carry such a high percentage of liability we have to
have ways and means of protecting ourselves.
Let me say this to you: That in the large percentage of the State
banks we are insuring them better than 70 percent. I think that there
are some 9,600 that we are insuring up to 80 percent. That is a tre
mendous responsibility.
Now’, on the matter of burglary insurance, the reason we asked for
that is that a good many of the States have no legislation at all that
BANKING ACT OF 1 9 3 5
97
gives the Commissioner the power to force a bank to carry a reason
able amount of insurance on its officers or employees. Already, out of
the 11 banks where we have paid out, we have had a very unfortunate
experience. If they had had some adequate insurance, it would have
helped the stockholders very materially.
We do not propose, you understand, to do that in the case of a
wholesale majority and put an unnecessary burden on those banks.
We must be reasonable in all of our demands.
Mr. G ifford. I am wondering what the cost of those things will be
to the bank and what you insure them against?
Mr. C rowley. We certainly do not want to pay for all of their
mistakes without having any right to try to get them to correct them.
Mr. G ifford. D o you want them to insure themselves against every
conceivable thing, so that your corporation will not have any lia
bility ?
Mr. C rowley. N o: but where they have not sufficient burglary in
surance arid protection and sufficient surety coverage on their em
ployees, I see no reason why they should not carry it as a matter
of protection to themselves and their own stockholders.
Mr. G ifford. D o you think that it is a fair treatment, and do you
think that it is a safe treatment of a bank to demand of it a certain
kind of report, and if it does not publish it in 5 days, to fine them
$100 a day?
Mr. Crowley. I think that you are exaggerating that a little bit.
The purpose of the authority to publish reports is this, that a great
many of your bank statements in the past did not really show the
true conditions of the banks.
Mr. G ifford. Whose fault was that?
Mr. C rowley. I think it was the fault of the entire system.
Mr. G ififord. D o you mean to say that our present national bank
system is not sufficient to show the true condition of the banks ?
Mr. Crowley. Y ou take the old condensed statements gotten out
by national banks and State banks for years; they did not show the
market value of their bonds or the reasonable value of their loans.
Mr. G ieford. Did not they show the last demand of the bank
examiner in connection with the market value of those things?
Mr. C rowley. Oh, no; that has never been in a statement.
Let me say this to you. I think that you are starting out on a
different basis now. We are starting out anew, with the banking
system practically rebuilt and values way down.
Mr. Gifford. D o you not see that you are adding considerably to
the present burden of the banks by way of these examinations, and,
secondly, that these examinations may be so irritating that many
banks would rather not belong?
Mr. C rowley. N o. The great majority of the banks give to our
examiners every kind of cooperation, and do not seem to be irritable
because we are trying to get a true picture of their institutions.
Mr. G ifford. Then your answer would be that they would not
object to these things?
Mr. C rowley. A certain percentage, yes, would object, but I do
not believe that that is the answer. Our corporation was set up for
the protection of depositors, not for the protection of the bankers.
We are trying to cut the losses to the depositors and of this cor
poration down to a minimum, and that is what our job it.
OS
BANKING ACT OF 1 9 3 5
Mr. Gifford. And, in order to protect the depositors, you want
to get control of the banks ?
Mr. Crowley. Y ou can call it control or what you please, but we
are insuring 80 percent of the deposits in 9,600 banks in this coun
try, and we have to do whatever is necessary to cut down their
losses, within reason, of course.
Mr. G ifford. My question is really friendly. I am simply asking
you if these irritating things that you are asking for are not lessen
ing the number of banks that might belong.
Mr. Crowley. I do not think so.
Mr. G ifford. Are your examiners under civil service?
Mr. Crowley. N o; they are not.
Mr. G ifford. Are the national-bank examiners under civil service ?
Mr. Crowley. There are no bank examiners under civil service.
Mr. G ifford. D o you train them so that they all use about the
same methods, or do you tell them that they must not follow any
fixed rule but use their own judgment in the case of, say, a bank that
has too many slow loans in proportion to the assets ?
Mr. Crowley. Let me say this to you, that bank examiners are
like any other human beings. Some are good, and some are
bad; and, as far as their classification is concerned, you understand
that after they make their classification, it is reviewed again in
supervising office by a reviewing committee, and even the reviewing
committee may make a mistake.
Like any other persons who get some authority, there is always a
certain percentage of them that become autocratic, but we try to be
as sympathetic as we can.
Mr. G ifford. The Comptroller wrote me a letter stating that he had
had but one or two cases where a bank had been dissatisfied with
the examinations, and where it had asked for a reexamination. I
wonder if that is because the officials of that bank wanted so badly
to get rid of the examiner that they did not want to see him again?
Mr. Crowley. I do not know about that.
Mr. G ifford. D o you not think that when an examiner walks into
a bank, it is a very irritating thing to the officials of that bank?
Mr. C rowley. So; I do not agree with you there. I think that
the average examiner during this entire depression has certainly been
very helpful to the bankers. However, as I say, there are exceptions
to all rules.
Mr. B t r d z e l l . May I add one word in reference to examinations?
The Corporation is working on a program in which it has solicited
the cooperation of the banking departments in all of the States on
the matter of examinations for the very purpose of making the
examinations a matter of as little burden to the banks as possible.
The program that we are working on contemplates that where a
State law might require two examinations of a bank a year, that
the banking commissioner would be authorized to accept the report
our examination in lieu of one he might make himself, and also
that provision be made so that the Corporation might receive the
reports of examinations made by examiners of the State admin
istration.
Mr. G ifford. Y ou think that any more than two examinations a
year would be irritating?
BANKING ACT OF 19 3 5
99
Mr. B irdzell. We would have two wherever the State law requiies
Mr. G ifford. But you think that any more than two would really
be an irritation?
Mr. B irdzell. I would think so.
Mr. Crowley. I think it would be unnecessary except in, some un
usual conditions.
.
. . .
Mr. B irdzell. I might say that that suggestion is being very
favorably received in the various States.
Mr. G ifford. But you are asking us here for permission to make
examinations just as often as you want to.
Mr. Crowley. If you restrict us as to how many times we can go
in, there might be a condition where, in order to protect ourselves,
we might have to go in at some other time. We might find a bank
in a bad condition this morning that we were in last week, and we
want to be able to go back and correct that. That is the reason why
we cannot limit it.
i,
Mr. K o pplem a n n . In the light of what Mr. Gifford has been ques
tioning you about, perhaps it would be in order to ask Mr. Crowj o y _____ —
Mr. G oldsborough. Mr. Koppelmann, we are attempting to take
the Members in regular order.
Mr. K o pplem ann . I beg your pardon.
Mr. G oldsborough. Mr. Spence.
Mr. S p e n c e . When the banks joined the temporary fund, you le v
ied an assessment of one-fourth of 1 percent on the insured d ep o sits,
did you not?
Mr. C rowley. That is corect.
Mr. S p e n c e . And now the one-twelfth of 1 percent will be levied
on the entire deposit liability ?
Mr. C rowley. That is correct.
Mr. S pence. What will be the difference in the amount realized
from the one-fourth of 1 percent on the insured deposits and onetwelfth of 1 percent on the entire deposit liability?
Mr. C row ley . We received about 38 or 39 million dollars under
the oiie-fourth of 1 percent, and we will receive about 30 million
dollars under the one-twelfth of 1 percent; but you understand, Mr
Spence, that we could only call, during the temporary period, fot
an additional one-fourth, whereas one-twelfth is an annual premium
payable each year, which must be charged to the bank’s overhead.
Mr. S pence. Y ou did levy the full assessment?
Mr. Crowley. N o ; only one-Iialf of it. We never levied the other
one-half.
Mr. S pence. What percent of the amount of deposits is now
insured ?
Mr. Crowley. Forty-four percent in all, but I think that we ought
to read to you the insurance figures by size groupings, because that is
very necessary for you to get the picture.
Mr. Fox. According to the total liability size groupings, banks
with $100,000 or less in total deposits, of which there are 1,500 now
insured, are insured up to 92 percent of their total deposits.
Banks in the next size grouping, from $100,000 to $250,000, of
which there are approximately 3,600, are insured up to 87 percent of
their total deposits.
100
BANKING ACT OF 1 9 3 5
Banks in the next size group, $250,000 to $500,000, of which there
are approximately 3,100. are insured up to 83 percent of their total
deposits.
In the next size grouping, $500,000 to $750,000, of which there are
approximately 1,500 banks, they are insured up to 80 percent.
From $750,000 to $1,000,000, of which there are 950, they are insured
up to 78 percent.
From $1,000,000 to $2,000,000, of which there are 1,600, they are
insured up to 75 percent.
From $2,000,000 to $5,000,000, of which there are about 1,100, they
are insured up to 70 percent of their total deposits.
From $5,000,000 to $15,000,000, of which there are only 630, they
are insured up to 50 percent of their total deposits.
$50,000,000 or over, there are about 100, and all of those banks are
insured about 26 percent.
Mr. B irdzell. For the record, where Mr. Fox said up to a certain
percentage, the average is meant.
Mr. S pence. Since 1921, according to this statement, including
1934, there have been 2,548 national banks suspended and 11,004 State
banks suspended.
What percentage of the national banks were suspended, and what
percentage of the State banks ?
Mr. Crowley. Of course, as you go down your ratio, your percent
age always changes.
Mr. S pence. W as a, great number of the State bank failures caused
by insufficient supervision or because of the inherent weakness of the
bank?
Mr. Crowley. I would say it was undoubtedly both.
Mr. S pence. In other words, there are a good many small com
munities where they have two or three banks and where they only
need one. Is not that true of the State banks ?
Mr. Crowley. That is right.
Mr. Spence. Did that not to a large extent cause the failure of those
banks more than insufficient supervision?
^ Mr. C rowley. In a great many of your States, Mr. Spence, the
State supervisors did not examine their banks with any great regu
larity. I have known of some States that did not examine some
banks for 2 years, and possibly sometimes a little longer, and then
a great many of the State laws did not give the supervisors perhaps
sufficient authority over their banks, and in a great many instances,
on the matter of licensing new banks, the Commissioner would de
cline a charter and perhaps then they would go to some board and
the board would override the Commissioner and grant the charter
in a community such as you are talking about.
Mr. S pence. I have received some letters from some of the smaller
bankers, in State banks, and they say that they now see no advantage
in becoming members of the Federal Reserve*System.
What is your opinion about that, outside o f‘belonging to the in
surance fund?
Mr. C row ley . I think this, that if your Federal Reserve System
is liberalized to the point that farm mortgages may be discountable,
certainly there is going to be an advantage to bank in availing itself
of that opportunity. In other words, in the matter of seasonal bor
rowings. or where they perhaps have a temporary sloughing off of
BANKING ACT OF 19 35
101
deposits, there is an advantage to a bank in having some place where
they may rediscount their long-term loans.
Mr. S pence. D o you think that that will overcome any of the
other disadvantages that might accrue to them by reason of being
a member?
Mr. C rowley. Mr. Spence, I do not like to get into a discussion on
the Federal Reserve provisions at this time. Mr. Eccles is coming
and he will present his information, and I am sure that we will all
be together on it.
Mr. S pence. Did you give us the percentage of deposits in the
insured banks?
Mr. Crowley. We just read it to you.
Mr. S pence. In numbers ?
Mr. Crowley. On your bank closings? Do you mean the de
positors ?
Mr. S pence. Yes.
Mr. C rowley. It is over 98 percent. Almost 99 percent of all of
the depositors in the country, including all the banks, are insured
up to $5,000. In other words, their balances are under $5,000.
If you were to take all public funds out of your smaller banks
where they are insured 95 percent, I think you would find perhaps
only one account in such a bank that was more than $5,000.
Mr. S pence. Y ou think there is a justification for including all
of the deposit liability of the bank within the scope of this program?
Mr. Crowley. Yes; for this reason, that I think that the respon
sibility of the Federal Deposit Insurance Corporation and their con
tribution, as I said many times here, cannot be the paying out of
that loss. People generally have lost confidence in the banking
system on account of the severe losses that they have had during
the last 12 years, and while the Federal Deposit Insurance Corpora
tion has had a psychological effect in the way of restoring confi
dence, we must not do anything that is going to destroy that con
fidence in the Corporation. Otherwise you are again going to have
losses and withdrawals from your financial institutions.
I think that Federal Deposit Insurance is the only vehicle in the
banking system that can help to correct this, and I think that it is a
long-term proposition over a period of a great many years, and that
the banks generally can well afford to make their contribution to it
for the benefit of the entire banking system. I do not think that
it is unreasonable in any degree.
Mr. S pence. I t not only insures the $5,000 liability, but it has an
effect upon all of the depositors in the banks?
Mr. Crowley. That is right.
Mr. S pence. Just one other question. On page 12 of your bill, in
reference to new banks, it says:
Notwithstanding any other provision of law, its franchise, property, and
income shall be exempt from all taxation now and hereafter imposed by the
United tSates, or by any Territory, dependency, or possession thereof—
and so forth.
That would exempt a bank building.
Mr. Crowley. N o. That is where you set up a Federal deposit
bank during the time that the local stockholders are raising money
in your own community. Just as soon as the local stockholders come
in and take things over, then it becomes regular, taxable money.
102
BANKING ACT OF 1 9 3 5
Mr. B irdzell. The term “ new bank ” is defined in the first section
of the act, and it is confined only to a new national bank set-up.
■Mr. S pence. Y ou do not contemplate that that bank w ill lend
money on real estate ? Is that your idea ?
Mr. Crowley. It should not during our term of office. We would
not buy any real estate. Ours is really a bank that carries on during
the interim in a community where they need banking facilities until
the local people can take its place.
Mr. B irdzell. I t can make no investments except in Government
bonds.
Mr. S pence. That is all.
Mr. G oldsborough. Mr. Wolcott.
Mr. W olcott. I notice that the proportion of the losses of banks
other than national banks seems to be materially less than the pro
portion of losses of national banks. Could that be due to the fact
that there are so many small units in State banks ?
Mr. Crowley. Y ou mean in the State system?
Mr. W olcott. Yes.
Mr. Crowley. Yes. You take your number of failures, they are
largely in your small State system.
We have an analysis of that, if you would like to see it.
Mr. W olcott. A s I understood you, the trust deposits were divided
so that the trust company having deposits in a bank could have
insured up to $5,000 each of their accounts as they carried them on
their books.
Mr. B irdzell. If the trust company were a member of the Insur
ance Corporation?
Mr. W olcott. Yes.
Mr. B irdzell. Yes.
Mr. W olcott. With respect to public money, wffiere a county or
municipality determines on a particular bank as a depositary for
its funds, that is usually kept in a lump-sum deposit?
Mr. B irdzell. Yes.
Mr. W olcott. However, on their own books, they carry it as
grades, highways, sewT
ers, contingent, and so forth.
Would the municipality have this fund guaranteed as a lump sum.
or would it be guaranteed according to the manner in which it was
carried on the books?
Mr. B irdzell. According to the manner they are owned.
For instance, if a city carries its deposit in a bank, and it places
its funds divided, we will say, for general fund purposes or for
some specific purpose for which funds may be appropriated, so that
it keeps its books separately, so that it can keep account of deposits
withdrawn or deposited for particular purposes, nevertheless those
are city funds and they must be combined for the purpose of insur
ance; but, on the other hand, school funds may be deposited bv the
same treasurer as deposits of city funds, and yet the schools, being
a separate corporate entity, would separately own whatever funds
were deposited and the school corporation could make a separate
claim.
Mr. W olcott. Let us take, as an example, a county where they
have a general fund, and then they have a drainage fund, and they
have a highway fund and a school fund, and then a fund into which
go the collections made by the county treasury for the benefit of
BANKING ACT OF 1 9 3 5
103
the townships, where the county treasurer acts on the matter of de
linquent taxes as the agent of the township, your criterion is as to
whether these funds are held to the credit or the distinct political
subdivision and political entities of that county?
Mr. B irdzell. Yes. I t may be different in the case of your drain
age funds that you speak of, or your-----Mr. W olcott. Irrigation district?
Mr. B irdzell. Irrigation district, or something of that sort, where
that is a special-assessment district and as such would be the pro
ceeds of special assessments levied. The same may be true of your
highways. In that case the drainage district or the highway district
would be considered a separate political entity.
Mr. W olcott. Then, in order to get the full advantage of this
insurance, the municipal corporation or the State legislature should
provide that the school district and the drainage district or irriga
tion district, sidewalk district, or highway district should be con
sidered to all intents and purposes a political entity of the county?
Mr. B irdzell . It would depend on whether or not they are in
fact so. If they are, they are getting the benefit of insurance now.
Mr. W olcott. The average county or municipality makes a sep
arate levy for school purposes. They make a separate levy for high
way purposes and for all of these different purposes, and carry them
separately on their tax rolls.
Do you think that under that system they should be entities to the
extent that each of these funds would be insured up to $5,000 ?
Mr. B irdzell . I t depends upon whether the proceeds of the city
tax for school purposes belongs to the city, or whether they have a
separate corporate organization. If it be a separate organization,
and the tax was intended for that corporation, then that corporation
would own the deposits.
Mr. W olcott. O f course, there is a great deal of overlapping there
in their prerogatives, and the municipality or city or county always
exercises a certain supervisory duty with respect to all of these other
entities, and while perhaps specifically these funds belong to the dis
trict, at the same time they belong to the county and the county is
made responsible for them.
Mr. B irdzell . The county might be merely the agent for collecting
the funds. That is true in many instances, and it might be that they
would employ one common treasurer who would have the control of
the deposits, but nevertheless the funds, when they go on deposit, are
certainly going on deposit to the credit of the particular municipality
that is authorized to expend them. That being the case, they would
belong to that municipality, and that municipality would be getting
the benefit of the insurance.
Mr. W olcott. The criterion seems to b e whether any part o f this
fund which is deposited by the county or city treasurer is intended to
have been deposited in connection with the credit which he gives that
entity on his own books?
Mr. B irdzell . le s ; that is correct. We have even gone to the
extent in some cases of giving assurance that sinking funds actually
belong under the peculiar law that they be rated under to the holders
of the bonds rather than to the municipality. There is one instance
that we have come across where the ownership of the sinking funds
is so definitely7 fixed by the State law under which they are collected
104
BANKING ACT OF 19 3 5
that it can be said definitely that they belong to the owners of the
bonds rather than to the municipality. I t is a question of ownership
in the last analysis.
Mr. W olcott. Carrying out that same thought a little further, when
the banks in Michigan closed an endeavor was made to interpret the
law in such a manner that the funds of correspondent banks would be
preferred. We found that under certain rulings of the State courts
and of the United States Supreme Court, as I recall, they had no
preferred status.
Mr. B irdzell. That is right.
Mr. W olcott. Under the present law, or under these changes as
contemplated, a small bank having deposits with a larger bank would
only have $5,000 of its deposits insured ?
Mr. B irdzell. Yes; that is correct.
Mr. C rowley. D o you mean $5,000 of public funds?
Mr. W olcott. N o. I mean a small bank in a city, we will say,
of 30,000 or 35,000 in close proximity to a larro city where there are
large banks, and frequently, to safeguard their funds, thev have
amounts deposited with the larger banks. In my own case, if I may
use it, we are located about 60 miles from Detroit. When the crash
came, we found that our banks in Port Huron had deposited their
reserves and the money that they were not using daily in the large
banks in Detroit, so when the large banks in Detroit closed, all of
the ready cash that our banks had to do business was what they
needed to carry on their daily business, and their reserves were tied
up. We found instances where some of our banks had their reserves
in the Chicago banks, and I know of one instance where the cashier
of the bank went to Chicago and drew out $80,000 of reserves and
came back with them in his inside pocket.
Of course, that precipitated the national bank closing; no question
about it, and I wonder if it would be feasible to provide for the
isolation of those funds in some manner so that it would prevent the
recurrence of a situation such as we had in Michigan, where one or
two large banks are closed by arbitrary authority, and where it
would not necessarily compel the closing of 500 other banks.
Mr. Crowley. We went into the matter of the entire bank de
posits, and it is my honest judgment that that should not be touched
until we have had an opportunity to study that thing a little further.
There is a lot to what you have said, but we have only had 1 year’s
experience here, and perhaps next year from our experience we can
make a recommendation to you that may correct that difficulty. I t
does increase our liabilities, as you know, tremendously, if we take
on the entire bank deposits.
Now, on the question of public funds, Mr. Wolcott, there has been
perhaps more damage done bv banks taking on too large a per
centage of public funds. In your average size bank your large ac
count can give us more trouble than where you have a diversifica
tion of deposits, where your withdrawals are more or less uniform.
If you had, for instance, a bank of $250,000, and you have one ac
count of $750,000, you have really got to carry excessive reserves to
take care of that large account, because you do not know when it
will go out on you.
So there is a lot of danger in banks taking too large a percentage
of their deposits in large accounts, which accounts will always cause
BANKING ACT OF 1 9 3 5
105
you trouble unless you have your investment in conformity with the
size of your accounts.
Mr. W olcott. I brought that out merely because I wanted to
know whether, in the future, we could work out some plan so that
these fellow s would not be isolated by the closing of a bank in one
case, which is always the case in connection with a branch-bank
system, but should not be the case with our present system, where it
affects 40 or 50 others in that locality.
Mr. C rowley. That is a matter that we have already given quite
a lot of thought to, and it should be studied for another year, I think.
Mr. W olcott. When a corporation terminates its connection with
the Federal Deposit Insurance Corporation, there is a provision in
section 1 (5) on page 13 of your print that provides that the cor
poration may publish notice of such termination and the bank, mean
ing the assured institution, I assume, shall give notice of termination
to its depositors in such manner and at such time as the board of
directors may find necessary.
Of course, it is my thought in that particular that whenever a
bank withdraws from the fund, they are not going to rush out and
advertise the fact, and I wonder if we should not make this notice
mandatory, or specifically provide in this act the manner of the
notice and the time for giving notice by the bank which was with
drawing, rather than to leave it to the^ board of directors of these
banks as to whether or not they will give any effective notice.
Mr. B irdzell . Y ou understand that the “ board of directors ” there
means our own Corporation, not the board of directors of the bank?
Mr. W olcott. Possibly that clarifies that whole situation.
Mr. Crowley. Here is the reason why. On the matter of notify
ing depositors, we might have a bank, Mr. Wolcott, that we were
having considerable trouble with, and that we were going to expel
from the fund. We would notify the State supervisor, who would
notify the bank of the particular difficulty. What we want to do
is to stop the bank from doing anything that may affect an innocent
depositor, because there are banks that are perfectly willing to stay
in here during this recovery program and which, after confidence
has been restored and we get on a normal condition again, will
perhaps want to get out because they do not want to have any part
in the whole banking system.
Mr. W olcott. I think that perhaps my objection to that language
is answered by section 10 of your definition, which sa y s:
The term “ board of directors” means the board of directors of the Corpora
tion.
One more question, please. In the Federal Reserve Act, there ^is
a provision that national banks may loan on real estate up to 75
percent of the value. I wonder whether that does not affect some of
the effectiveness of the Federal Deposit Insurance Corporation ?
Mr. Crowley. In the Federal Reserve provision, Mr. Wolcott,
there is a provision that those mortgages shall be eligible for re
discount, Avhich, of course, puts a little different complexion on it.
Mr. W olcott. You think that that clause is adequate protection
so far as your fund is concerned ? I know that that is out of your
scope.
.
xi
Mr. C rowley . It is out of my scope a little bit, and I think th at
the Comptroller should talk on his national banks. There is no
106
BANKING ACT OF 1 9 3 5
question but what in the past, in your State systems, where they
were permitted to take mortgages, and where you had your shrink
age of values, it affected their conditions materially.
Mr. W olcott. I understand that back in 1923 they amended the
National Banking Act to increase the amount that a national bank
could hold on real estate from 25 percent to 50 percent. Now there
is a school of thought which lays all of our industrial ills on the
doorstep of that policy which allowed the banks to invest so heav
ily in real estate that they created a condition of insolvency on the
real-estate market, and I wonder if we are not just contributing to
the recurrence of a bank crash by increasing this still further from
50 percent to 75 percent, and, if so, of course we all are vitally in
terested in whether or not the Federal Deposit Insurance Corpora
tion would be in a position to meet such prices brought on by a
slump in the real-estate market.
Mr. C row ley . I think there is a lot to what you say, and it all
depends, in my mind, as to what provisions you make in the Fed
eral Reserve Act for it. If they cannot rediscount those, there is
a great danger of a bank being frozen.
Mr. B row n of Michigan. Even if they d id rediscount those mort
gages, the primary loaning bank would still be responsible to the
Federal Reserve bank.
Mr. C row ley . Oh, yes; it would be bills payable.
Mr. B row n of Michigan. I do not see that that would clear up
the situation that he is discussing.
Mr. C row ley . Here is what it would do: It would just place a
long-term loan in a position that they might borrow on it the same
as on their eligible paper. I t does not place the same stigma against
a long-term loan if it is eligible for rediscount that it would have
if it were not eligible.
Mr. W olcott. Here is another point in re sp ec t to that same ques
tion. There is no restriction made upon the funds which might be
used for investment in real estate at 75 percent of its value, and th e y
might take long-term real-estate paper and invest commercial funds
in it, and your commercial deposits are guaranteed under the fund.
Mr. C row ley . I think it does this: It means that they have to pay
off each year, reducing the principal, and that is the limit to the
amount of funds that they may employ in the mortgage field.
Mr. W olcott. Yes; but we allow them to take 20-year commercial
paper up to 75 percent of the value of the real estate.
Mr. C row ley . Yes; but it must be amortized.
Mr. W olcott. Nevertheless, it is a long-term investment.
Mr. Crowley. There is no question that it puts it in the same posi
tion as a bond.
Mr. B row n of Michigan. I am a little bit disturbed about what
might be a duplication, or even a triplication, of the duties performed
by your corporation, the Comptroller’s office, and the Federal Re
serve Board.
Now, in your very clear statement which you gave to us on the
first day, and of which we all have copies, you said on page 26—
In the future the Corporation should devote a large part of its efforts to
the maintenance of sound conditions among the insured institutions.
BANKING ACT OF 1 9 3 5
107
Now, it seems to me that that clearly defines just what the duty of
the Comptroller of the Currency now is. Am I right about that, or
wrong ?
Mr. Crowley. D o you mean in the case of a national bank?
Mr. B rown of Michigan. Yes.
Mr. Crowley. The only authority that we have, Mr. Brown, over
a national bank or a State member bank is that we have the power
to put them out of the fund just the same as a State bank, after
notifying the Comptroller and the Federal Reserve Board, just as
we notify the State supervisor.
Mr. B rown of Michigan. I think that your power is greater than
that. You not only have the power to put them out of the fund, but
upon your determination that they should be out of the fund, the
statute is mandatory that both a member of the Federal Reserve
System and a national bank shall then be suspended. Is not that
true ?
,
Mr. B i r d z e l l . That would be correct.
Mr. B rown of Michigan. If you once determined that a bank can
not remain a member of your fund, then the Federal Reserve Board
must suspend that bank and the Comptroller must appoint you as
receiver.
Mr. B irdzell. N o ; the Federal Reserve Board must see that the
bank is no longer in the Federal Reserve System, and in the case
of a national bank, of course it would result in liquidation.
Mr. Crowley. Y ou understand, the Federal Reserve Board has
no authority to appoint a receiver for a State member bank.
Mr. B rown of Michigan. I understand that. I t will appoint
your Corporation, or, if you do not care to take it, some other suit
able person as receiver.
In other words, in the power that you have asked, you will have
absolute authority in your board of directors to suspend any bank
in the United States if it is a member of your Corporation.
Mr. C rowley. I do not think that there is any duplication there.
I think that we are the only ones that have that power.
Mr. B rown of Michigan. Of course, the national bank department
has that power with respect to national banks.
Mr. C rowley. There is no particular reason why we should not
have the same control of putting a bank out of the fund, be it a
Federal Reserve member bank or a State bank, if they are not con
ducting themselves in a manner that is going to give to this Corpo
ration the usual safeguards.
Mr. B rown of Michigan. Well, I think that is true, but I am say
ing that that gives you the same power that the Comptroller now
has over national banks and that the Federal Reserve Board now
has over Federal Reserve banks.
Mr. Crowley. N o ; the only power that the Federal Reserve Board
has over a State bank is that if they do not conduct themselves
properly, they may put them out of the Federal Reserve System,
but there they stay.
Mr. B rown of Michigan. That is right.
Mr. C rowley. N ow, then, the power that we have over the State
banks is just the same as the Federal Reserve Board has over the
108
BANKING ACT OF 1 9 3 5
State banks, but we carry ours further, and we ask for the power
also over a national bank, that we may put them out of the fund.
Mr. B rown of Michigan. But it does seem to me that we certainly
have a duplication there of power. In the temporary plan or the
permanent plan as it now exists, for instance, in the matter of exam
inations of banks, you have to accept the examinations of the Office
of the Comptroller.
Mr. Crowley. That is right.
Mr. B rown of Michigan. And the only examinations which you
are empowered to make now under existing law are examinations
of nonmember banks.
Mr. Crowley. That is correct.
Mr. B rown of Michigan. Now, on page 18 of the bill, I think it
is, you ask for the power to examine all banks-----Mr. C rowley. N o.
Mr. B rown of Michigan (continuing). With the consent of the
Comptroller.
Mr. Crowley. May I explain that to you, Mr. Brown ?
Mr. B rown of Michigan. Yes.
Mr. Crowley. The reason for that is this. Supposing that the
Comptroller or the Federal Reserve Board has a bank which is in
difficulty; under our law, we have asked you for the authority to
buy assets for the purpose of mergers. We may wish to go in with
the Comptroller or the Reserve Board and make an examination to
know the position of the bank, in order to try to determine upon a
program that will prevent us from taking too great a loss. In other
words, we will go into a bank with a million dollars in deposits and
buy $250,000 of undesirable assets, and the Comptroller would merge
that with $750,000 in another bank, and that would save us the liquh
dation of a million-dollar liability where we would be getting off
with $250,000.
Do you get mv point ?
Mr. B rown oi Michigan. I get your point, but----Mr. C rowley. In order to do that, we have to have the authority
to go into a national bank, and we are only asking for that where
the Comptroller is agreeable that we should go in with him on that
proposition.
Mr. B rown of Michigan. But it seems to me that even at the
present time, under existing law, where we have a group of nationalbank examiners under jurisdiction of the Federal Reserve Board,
and a group of national-bank examiners under the jurisdiction of
the Comptroller, each having different duties, w must bear in mind
re
that we are here establishing a third group of national-bank exam
iners under your control, with power, I grant you, only upon the
consent of the Comptroller, to examine national and member banks
of the Federal Reserve System.
Now, my point is this, that it seems to me that the three depart
ments ought to get together to see if we cannot consolidate vou all
into what seems to me to be a logical organization governing all the
national banks of the United States. If we cannot do that, we at
least ought to consolidate these three boards or bureaus into one ex
amining division, that would have authority to examine for all three
of these governmental bureaus, and it just strikes me that the legis
BANKING ACT OF 19 35
109
lation is ill-conceived in that respect. We have that provision now
with respect to the Federal Reserve Board and the Comptroller’s
office.
Perhaps I ought to say that I think that your Corporation is an
illogical Government organization or bureau to undertake that work,
but it does seem to me that you are placing an unnecessary burden
upon national banks and member banks and forcing them to pay the
expenses of examinations which certainly will be more numerous
than they have been in the past. I t seems to me that you are by
this act diversifying the power and authority that the Comptroller’s
office has over bank examiners.
Now, if this office is not the right office to handle the matter of the
examination of national banks, let us turn it over to you or to the
Federal Reserve Board, but let us not have three different groups
of national-bank examiners.
Mr. C rowley. Mr. Brown----Mr. B rown of Michigan. I believe that it is illogical.
Mr. Crowley. I do not think that you would have any three groups
of national-bank examiners, to this extent, that we have examined
only State banks. Now, there is no way under the present law
that anyone else can examine a State bank except the Federal Deposit
Insurance Corporation and the State supervisor.
Mr. B rown of Michigan. That is true; but let me interrupt you to
say that if the law is enacted as you and your Corporation want it to
be enacted, that is, with the elimination of nonmember State banks
from the Federal Reserve Corporation, then the argument that you
are just making would not apply?
Mr. C rowley. That is correct.
Let me say to you that there is no duplication of Federal examina
tion at this time. I mean by that that the Comptroller examines the
national banks, the Federal Reserve Board examines only the
Federal Reserve member banks, and we examine only the State banks.
Let me add, on this matter of examination, that the Federal
Deposit Insurance Corporation cannot be put off here all by itself
and not be permitted to use the usual precautions that will be neces
sary in order to keep this fund sound.
Mr. B rown of Michigan. You have all of that authority under the
existing law.
Mr. Crowley. We have not the authority to do this. All of the
help that we have had so far has been in going into the banks and
working with the State commissioner and, by moral persuasion,
getting the banks to build their capital, make their application to
the Reconstruction Finance Corporation, and things like that.
Mr. B rown of Michigan. When you made that statement I was
inclined to disagree with you. You made it in your opening state
ment. On page 13 of the original act it provides “ that such certifica
tion to the Corporation by the State banking commissioner that the
bank is in a solvent condition shall, after examination by and with
the Corporation, be entitled ” and so forth. I grant you that great
pressure was brought upon you to be liberal about that, but you had
no legal right under the law to admit any bank that was not solvent,
and, of course, that means solvent not only as to its deposit liability,
but solvent as to its capital.
127207— 35— — 8
110
BANKING ACT OF 19 3 5
Mr. B irdzell. The definition of solvency is given in the act, and
it says “ whose assets are sufficient to meet its liability to depositor’s
and other creditors.”
If you will look further, that is the definition that we are revising
in this new draft.
.
.
Mr. B rown of M ichigan. You feel that until this serious question
of what is going to become of several thousand nonmember State
banks is solved, that we cannot very w ell set up a national bank
examining department ?
, j
,
,,
Mr. Crowley. I think this, Mr. Brown, that you have seen the
opposition to your State banks in joining the Federal Reserve
System----.
Mr. B rown of Michigan, i es.
.
- O
A
QA
A
Mr. Crowley (continuing). And over a period of 20 years 960
have joined. Now, if you put the 7,800 State banks virtually tinder
a national examining supervision, I think that you would have the
same objection that was expressed to their joining the federal
^ 1 think "that this whole matter must be taken step by step and
corrected each year until you finally get the system that 7 ™
Mr. B rown of Michigan. I may want to pursue that a little bit
further, but, before we close I would just like to call your attention
to one item on page 27 of the comparative print.
You will remember, Judge Birdzell, when the section of the law
which was called the Steagall amendment was attached to the
Federal Deposit Insurance law last spring, and that provided that
loans to closed banks were to be made through the Federal Deposit
Insurance Corporation.
, .
Mr. B irdzell. Yes, s ir; that is the way the House passed it.
Mr. B rown of Michigan. And when it got to the Senate and came
back, our conferees agreed that it would go to the R. r . C.
Mr. B irdzell. Yes.
_
, ...
„ ■
,
Mr. B kown of Michigan. You will remember that either your de
partment or Judge Reed’s department in the R. F. C. held that
under the wording of the statute, loans to closed bairns oi the a^set.-,
of closed banks could only be made on sale of all the assets. I do not
remember whether that was your ruling or the ruling of the R. F. C.
Mr B irdzell. That ruling was not our ruling.
Mr. B rown of Michigan. There was such a ruling, and I am sure
that the gentlemen on the committee remember that ruling.
Whv not clarify this language here, which is identical, so that
you can make loans upon the a s s e t s in whole or in part? Do you
not think that that amendment would be desirable ?
Mr. B irdzell. There could not be any objection to that amendm M ^ B rown of Michigan.
Because that ruling was made, so that
you could loan on a part of the assets.
,
.
Mr. B i r d z e l l . There would not be any objection to that kind oi
an amendment at all.
..
.
May I say while we are on that subject, that that ruling was not
made during the pendency of that bill in Congress last year. It was
made subsequently, and it was not our ruling.
BANKING ACT OF 1 9 3 5
111
Mr. B rown of Michigan. I think that you are a little bit unfair
to the depositors when you require them to file a claim within 1 year.
It is readily conceivable that a great many people may be away on
trips, or something of that kind.
Mr. B irdzell. We have no objection at all to a longer period. The
reason 1 year was suggested is because that is a sort of a prevail
ing contract limitation in insurance contracts, generally.
Mr. B rown of Michigan. I understand it is.
Mr. B irdzell. And it was generally thought to be reasonable, but
if the committee should think that a longer period should be pro
vided for, 18 months or 2 years, all right.
Mr. B rown of Michigan. I thought that perhaps we could clear
it up by some language to this effect, that when the claim is clearly
meritorious and not contested by the bank itself, the amount should
be paid, but if it is a case where there is any contest about it, I
would not object to a limitation.
Mr. C rowley. Y ou understand that in a great many banks they
accumulate a lot of very small balances, maybe of 38 cents or $1, or
$2, or $5, and sometime or other we ought to be able to eliminate
ourselves from that liability.
Mr. B rown of Michigan. On page 27, in the matter of loans to
banks concerning which you spoke a short time ago, Mr. Crowley,
where you are going to bring about a consolidation in order to avert
disaster, why do you limit that to July 1, 1936?
Mr. Crowley. For this reason----Mr. B rown of Michigan. Why should it not be permanent?
Mr. C rowley. What we would like to do is to operate it for a
year, and then we will come back and give you the benefit of our
experience and then have you extend it if you believe that it has
been entirely successful. There is grave danger in paying the losses
of these banks too easily. I t might cause the banks to become care
less; that is the reason we limit it so we can have a little experience
to guide us in the future.
Mr. B rown of Michigan. A little trial legislation?
Mr. C rowley. That is right.
Mr. B rown of Michigan. I would very much like to see you give
consideration to that matter of seeing that we do not have too many
different groups of Federal examiners investigating these banks. I
think that that is a serious question.
The C hairman . 1 want to ask if anyone else desires to interrogate
Mr. Birdzell or Mr. Crowley?
Mr. D irksen . Yes; I do.
The C hairman . Then we will meet tomorrow morning and resume
this questioning at 10: 30.
(Thereupon, at 12:45 p. m., an adjournment was taken until
Ihursday morning, Feb. 28, 1935, at 10:30.)
B A N K IN G
ACT
OF
1935
T H U R S D A Y , F E B R U A R Y 28, 1935
H ouse of R epresentatives,
Committee on B anking and C urrency,
~Washington, D. G .
Hearings on title I of the bill above referred to were resumed at
10:30 a. m., Hon. Henry B. Steagall (chairman) presiding.
The C hairman . The committee will be in order.
I do not have before me the list of those who have already ques
tioned the witnesses, but I believe that Mr. Dirksen indicated at
the close of yesterday’s session that he wanted to ask some questions.
STATEMENTS OF LEO T. CROWLEY, CHAIRMAN, AND L. E. BIRDZELL, GENERAL COUNSEL, FEDERAL DEPOSIT INSURANCE
CORPORATION— Resumed
Mr. D irksen . Mr. Crowley and Mr. Birdzell, in the comparative
print, on page 33, I want to direct your attention for a little bit to
the new language there, which states that no State nonmember bank,
other than a mutual savings bank, or a Morris Plan bank, or a bank
located in the Territories of Hawaii or Alaska, shall become or
continue an insured bank after July 1, 1937.
Now, a State nonmember bank, of course, is not a member of the
Federal Reserve System.
Mr. B irdzell. That is correct.
Mr. D irksen . It means that these banks are going to be compelled
to become members of the Federal Reserve S}rstem, or else the socalled “ State nonmember banks” can have no insurance after July
1, 1937.
Mr. B irdzell. That is correct.
Mr. D irksen . That is the proper inference from that paragraph ?
Mr. B ir d z e l l . That is correct.
Mr. D i r k s e n . First of all, the question arises in m y mind as to
why, if a State bank is solvent, and if it is sound, and it is so dis
closed to be upon your own examination, such a bank should not be
insured without having to become a member of the Federal Reserve
System.
Mr. B irdzell. Mr. Congressman, that provision is in here in the
form that it is because section 12 (b) as passed originally, in June
of 1933, contained a similar requirement, except that the date was
July 1, 1936; that is, nonmember banks were permitted to obtain
the benefits of the insurance until July 1, 1936, without joining the
Federal Reserve System. Then, when the temporary fund was
•extended for a year, that date was also set ahead a year, so as to give
113
114
BANKING ACT OF 1 9 3 5
the nonmember banks the benefits of the insurance until July 1, 1937,
instead of 1936.
Whatever the policy may be with respect to that question Congress
apparently considered at the time the Banking Act of 1933 was
under consideration here, and the Corporation has not suggested
any change in that respect, because it does not particularly affect
its operations. That is a matter of policy primarily for the con
sideration of Congress. There is an exception----The C hairman . Let me interrupt you for just a moment.
Mr. B irdzekl. The exception relates to the mutual savings banks
and the Morris Plan banks. Our experience with regard to them
shows that there is no likelihood of those banks finding a place in
the Federal Reserve System, and we have suggested the amendment
which would enable those banks to continue insurance without join
ing the System.
Anything that Congress may do with respect to other banks is
something that we have no particular feeling about one way or the
other.
The C hairman . Let me say this in that connection, that the pro
vision in the Banking Act of 1933 requiring State nonmember
banks, in order to avail themselves of the benefits of participation in
the deposit insurance, to become members of the Federal Reserve
System after July 1, 1936, was stubbornly contested. The House
bill had no such provision, but provided for the admission of member
banks and State nonmember »banks without discrimination, but the
Senate bill limited the insurance to member banks. The older mem
bers of the committee are familiar with the differences of opinion
that obtained among the members of the conference committee, and
I presume that you are, on that bill. This is the simple fact of the
matter, that we found ourselves with the adjournment of Congress
approaching, and the conferees deadlocked over two propositions, one
of which was the provision providing that national banks should be
permitted to have branches in all States where State laws permitted
such branches. That provision, and the provision requiring member
ship in the Federal Reserve System after July 1, 1936, in order to
participate in deposit insurance, were the two controversial points,
and we fought those out down to almost the hour of adjournment.
Rather than see the legislation embodied in the so-called “ Glass
bill ”, which had been developed as a result of long hearings and
labor on the part of Senator Glass and his committee in the Senate,
defeated, and rather than to see the defeat of the insurance plan
which in a former session of Congress passed the House, and which
was embodied in the bill then under consideration, and which the
conferees for the House were exceedingly desirous of adopting, we
finally agreed to an amendment which would permit branch bank
ing and we yielded on the provision requiring membership in the
Federal Reserve System as a condition precedent to participation in
the benefits of deposit insurance by nonmember banks.
Last year when the act was passed extending the temporary in
surance, another compromise was reached respecting the privilege of
nonmembsr banks of participating in deposit insurance by postpon
ing until July 1. 1937. the date upon which they should be required
BANKING ACT OF 1 9 3 5
115
to become members of the Federal Reserve System in order to par
ticipate in the insurance benefits of the Corporation.
Now, of course, all of those questions will arise again in this com
mittee and in the House, and probably in the conference when this
bill is to be passed upon later.
Mr. D irksen . Mr. Chairman and Mr. Birdzell, let me point out
what is bound to happen under this provision, which you have to
read in connection with section 202 of this bill, in title II. Your
paramount interest for the moment is in title I, but I suppose that
every member of this committee has had the same experience that
I have had in the last 2 years, where I helped or sat in on the reor
ganization of 12 or 15 small banks out in the central part of Illinois.
We had to go to the depositors and take waivers of anywhere from
15 to 50 percent, and when these banks were finally reorganized, they
had to issue in lieu of the amount of money that was waived by the
depositors, so-called “ deferred certificates , which are payable out
of earnings, and there is not any other way to pay them.
Now, the Federal Reserve bank in Chicago maintains that those
deferred certificates are a contingent liability, and they will not ac
cept them, and they will not accept any bank which has those de
ferred or contingent liabilities outstanding.
You take a bank in a small town, say of 1,000 people, where they
had to waive 50 percent of the deposits and in lieu thereof issue
these certificates, which became a charge upon the earnings of the
bank if and when earned; certainly a great many of these banks
cannot even earn enough money between now and the 1st of July
1937 to get those certificates out of the bank. They are there as a
definite charge upon earnings.
If then the Federal Reserve System does not accept those banks
because these contingent liabilities exist, and if you do not give insur
ance to those banks because they are not members of the Federal
Reserve System, then there is only one thing for them to do, and
that is either to go out of business or otherwise try to get along with
out the benefits of insurance.
I might elaborate on that a little bit. You may remember that
41 percent of all of the banks in this country are in towns of under
1,000 people, and in section 202 of this bill you will notice---Mr. B irdzell. What page is that?
Mr. D irksen . That is on page 41, that particular section—you
will notice that that section says that the Federal Reserve Board,
in order to facilitate the admission of these banks, has authority to
waive in whole or in part the requirements of this section relating
only to the capital requirements of a bank.
Now, we have 2,900 banks in this country that have a capital of
$25,000, and in those cases the Federal Reserve Board, under this
section, has a right to waive those requirements if it desires, but it
has no right to waive any requirement with respect to a contingent
liability, and you are going to put those banks out of business under
that section. Either they will have to become members of the Fed
eral Reserve System, or not get insurance, and it constitutes a club
which is going to have two effects, to put some banks in the Federal
Reserve System that do not want to go in, and, secondly, there are
some banks that will not be able to go in. and, if insurance is material
116
BANKING ACT OF 1 9 3 5
to the stability, the soundness, and the continued operations of banks,
they will have to go out of business.
Mr. B irdzell. I think that there is merit in the Congressman’s
suggestion, particularly with reference to the effect of the waivers
that he spoke of. We have come across a number of instances where
the depositors had waived a certain amount of their deposits and
released the bank from any obligations so far as that liability was
concerned, and that enabled the bank to reorganize.
The C hairman . Let me say a word right here in connection with
what Mr. Dirksen just said, in order to bring the history of this
transaction down to date.
I t is not unfair to say that the conferees on the part of the House,
when this bill was under consideration, would never have yielded
in connection with this provision and permitted this provision to
be enacted requiring State nonmember banks after the 1st of July
1936, to become members of the Federal Reserve System if they were
to participate in the benefits of deposit insurance, if we had not felt
that the Congress could be trusted before that time to enact proper
legislation to extend the benefits of the Deposit Insurance Corpora
tion to the nonmember banks.
Mr. R eilly. There will be two sessions of Congress after this one
before that will become effective.
Mr. D irksen . Before what?
Mr. R eilly. Before the 1st of July 1937 will be here, and I think
that this discussion at this time is beside the issue, because Congress
will later be in a better position to determine what should be done
with State banks that do not come into the Federal Reserve System.
We might pass a law today, and it might be changed in 2 years.
Mr. D irksen . But, on the other hand, we are writing a permanent
bill here now.
Mr. R eilly . It is permanent only until the next Congress sees fit
to change it.
Mr. D irksen . But it easier to try to get it right in the first place
than to have to come along later and change it.
Mr. W illiams. That is especially true when it should never have
been in there in the first place.
Mr. D irksen . Precisely.
Mr. B irdzell. If I may complete the statement that I started to
make a moment ago, I think that I can shed a little light on this mat
ter from the standpoint of its actual operation.
As the Congressman said in the case of those reorganized banks
where there are deposit waivers and the depositors have some kind
of a deferment certificate, but no claim against the bank, only against
its earnings, we have reviewed in the legal department of the Deposit
Insurance Corporation many hundreds of reorganizations where
that element entered, and you will appreciate that such banks were
not eligible for membership in the Deposit Insurance Corporation
unless they were solvent. Whether deferment certificates of this type
constitute liabilities of the bank, has much to do with whether that
bank is solvent and, consequently, eligible. Wherever we became
satisfied that the bank would not be liable for the amount of those
deferment certificates, we held that the bank was solvent, and in
sured it.
BANKING ACT OF 1 9 3 5
117
Now, what attitude the Federal Reserve Board may take with
respect to that same question I cannot tell you. I do know that
there have been instances where banks have been reorganized on a
deposit-waiver basis, where the Federal Reserve Board has ques
tioned whether the banks had the unimpaired capital required under
section 9 of the Federal Reserve Act; so that that is one of the things
that is going to confront Congress in dealing with this question.
The Reconstruction Finance Corporation has taken very much the
same view of that matter that we have taken in the Federal Deposit
Insurance Corporation.
So the Congressman does raise a question that should be con
sidered whenever this matter of Federal Reserve membership re
quirement is under consideration, and particularly where the capital
requirements of section 9 are under consideration.
Mr. DrRKSEN. Then, Mr. Birdzell, as a general thing, is there
any reason why a sound' and solvent bank should not have insurance
and continue to have it?
Mr. B irdzell . I do not want to suggest any reason why it is not
entitled to insurance.
Mr. D irksen . We have about 3,000 banks in this country that
have been operated continuously for 50 years, a great many of
them being State banks, and when a bank has a record like that, is
there any reason why you should either force them into a system or
not give them insurance?
Mr. F ord. If we are going to have a unified banking svstem, whv
not have one?
Mr. D irksen . Why compel State banks to surrender all o f the
rights that they have, and crowd them into a system when probably
they will not derive any benefit from it?
There are two or three banks in Missouri that have not missed a
dividend for 20 years, and one of them a few years ago declared a
dividend of 50 percent, and they never had occasion to use the Fed
eral Reserve System. They do the banking business of their com
munity, and they have never rediscounted paper, and their services
have been adequate in their community.
Why force banks like that into the Federal Reserve System,
when they do not want to go in, and it carries with it the additional
burden of further examinations?
Mr. F ord. There are a good many things that a great many insti
tutions do not want to do, and they have been allowed to run along
in their own wav, and as a result others have been the victims of
their action.
Mr. D irksen . That is beside the point, because those banks that
you refer to cannot qualify for the benefits of the F. D. I. C. But
now you bring in this alternative proposal, of either shoving them
into the Federal Reserve System, or else they cannot get insurance.
Mr. F ord. Of course, my view at the present time is----Mr. D irksen . And no case has been made out to show why thev
cannot get it, if they can qualify.
Mr. F ord. I would like to have this put into the record, on the
statement of somebody else, that there are supposed to be 8,500
State banks outside of the Federal Reserve System. Is that about
right?
118
BANKING ACT OF 19 3 5
Mr. D ir k s e n . I th in k so.
Mr. F ord. I would like to have a study made to see what percent
age of those banks and to what extent they were strengthened by
the R. F. C. in proportion to the banks that were in the Federal
Reserve System.
Do you get my point?
Mr. Fox. That is in the testimony.
Mr. B irdzell . That study has been made.
The C h a ir m a n . That is something that I have been w a n tin g .
Mr. F ord. I want that study made in a way so that we can make
an independent study of that situation.
The C h a ir m a n . Let us have it as it is ; let us not let those figures
be played up in a way so that they do not depict the real situation.
Mr. Fox. They are on page 30 of Mr. Crowley’s first statement.
Mr. D irksen . I have one other question, and I think that I raised
this question a year or two ago, with respect to the provision start
ing at the bottom on page 12 of the comparative print, subsec
tion (i).
I understand from the full text of that section that banks whose
insurance has been terminated will be compelled to pay assessments
for an additional 2-year period, and that that coverage for an addi
tional 2 years will be imposed upon them whether they will or not.
I think that that is quite long to require that period of 2 years,
because in that same section the Corporation is given the power to
require any kind of notice to be given, can give the notice itself or
compel the bank to give the notice. You can send the notices by
mail, or compel circulation of the notices in a newspaper for a month
or two, and I should say that 6 months would be an ample time and
that thereafter no further assessment should be required.
Mr. B irdzell. T wo years may be too long, but I believe that 6
months would be too short.
Mr. D irksen . Possiblv so.
Mr. B i r d z e l l . We do not want to be open to the charge of not deal
ing in good faith with depositors of banks, and we would rather err
on the side of having that period too long than on the side of having
it too short. It is a matter of judgment.
Mr. D irksen . Of course, in the metropolitan centers a little longer
time might be required, but in a community of 1,000 people, and
almost half of our banks are in towns of that sort, for all practical
purposes a week would be ample notice.
Mr. C r o w l e y . I do not object to cutting it down from 2 years to
some extent, but it should be a long enough time so that there can
be no doubt in our minds but that the depositor has had plenty of
time in which to make up his mind as to whether or not he wants to
keep his money in that bank. Furthermore, if the bank is an insti
tution that has been doing things which caused us to put it out of
the fund, there is a question as to whether we should not give them
ample protection for a long period of time, to enable them to correct
their practices and again quality for insurance.
I do not think that the judge or any of us has any objection to
any compromise in that particular, but the time should be long
enough, I do not see that it is any great hardship to the bank to
have^a period of 2 years, and it is a great benefit to the depositor.
BANKING ACT OF 19 35
119
It is also of great benefit to the Corporation. These banks that
are badly managed, these banks that should be put out of the fund,
should have some string on them until you know that the depositors
have had that opportunity to which I have referred.
The C hairman . Let me say this, please, in this connection, and
I do not want to prolong this discussion unnecessarily, that the De
posit Insurance Corporation was never established, nor was the
plan of insurance deposits designed, nor in my judgment should it
be used, for the purpose of settling any quarrel between the nonmem
ber bands and the member banks. Some believe that we should have
a unified banking system, and if that view has enough support to
express itself in legislation, let those who believe in a unified banking
system in this country devote their efforts to that purpose, but let
it be fought out on its own merits; and if we are not to go the whole
way and adopt a unified system, let us leave the matter of member
ship in the Federal Reserve System for State nonmember banks
to be determined by the nonmember banks themselves, as provided in
the Federal Reserve Act. If a State bank wants to join the Federal
Reserve System and finds it desirable, if the inducements are such
that the State bank wants to come in, let it come, but with all of its
rights under its charter issued by the State in which it does business.
This question of insurance on bank deposits ought not to become
involved in any way with the permanent policy respecting a unified
or dual banking system. I have my views about that, but I do not
think that they have any proper place in legislation affecting bank
deposits.
What we are trying to do here is to protect the public against
bank failures and against the horrors that have attended bank
failures heretofore, and let that legislation be dealt with on its own
merits, and leave this question of membership and nonmembership
in the Federal Reserve System to be fought out in a normal way,
on its own merits.
I believe in membership in the Federal Reserve System, but un
doubtedly there are banks that do not want to join the Federal
Reserve System, and certainly, as I see it, it is not necessary, and
surely not indispensable, that every bank in the country should be
long to it or be members on a definite date.
Mr. R eilly . Do you not think that the Congress of the United
States will be in a Letter position 2 years from this time to decide
the question whether we want a unified banking system, after we
have had 2 years more experience, than it is today? That matter
can well be deferred until 2 years from this time, when we can make
a better final decision on it.
Mr. D irksen . I think you are right, but this section would have
to come out of the bill, because that is an instrument of compulsion
to force them in.
Mr. W illiams. And you ought not to wait until the last day to
do that. I think that you ought to take it up right now, and give
them at least 2 years’ notice that we mean to make this a permanent
policy, and not compel these State nonmember banks to wait until 2
years from now to see what thev are going to be up against.
Mr. C lark. I just want briefly to supplement what you said, if
1 may.
120
BANKING ACT OF 19 3 5
As I said the other day, regardless of politics I think that the
Federal Deposit Insurance Corporation has the confidence of the
people of this country. I know that it saved our West.
There has been some question as to whether or not the Federal
Reserve System, at least as it existed in 1929, did not break down.
There is a grave question in the minds of a lot of people in this
country as to the soundness at all of the Federal Reserve System.
Many of the small banks disapprove of it.
I do not believe that we should, under any circumstances, use a
well-respected institution like this institution is, which has the con
fidence of the country, to club nonmember banks into a system which
may not have the confidence of the country.
I just wanted to make that one observation.
Mr. F arley. In the figures that you have submitted, is there any
thing that might be a guide as to how many of these banks could
not qualify, if this bill went through ?
Mr. Crowley. I think that 72 percent of the nonmember State
banks which are insured could qualify on their capital position now.
In other words, in the rebuilding program that has been taking
place, we have tried to base it so that they would have sufficient
capital to be eligible under the capital requirement.
Mr. F arley. I do not know that this question is germane to the
bill that we are considering here, but does your Corporation feel that
there are still too many banks?
Mr. C row7 . No ; I do not think that that is generally true now,
ley
Mr. Congressman. I think that the banks that have survived this
depression certainly showed themselves pretty well able to take care
of their situation. There may be certain isolated places where we
are overbanked, but I think that as a general proposition the country
can support the number of banks that we have now, if properly
located.
The big trouble is that you may go much further than the banks
that we have now, in extending new licenses.
Mr. F arley. Did this elimination of daily balances do the bank
ing business any good ?
Mr. Crowley. D o you mean the elimination of the interest on daily
balances ?
Mr. F arley. Yes; the elimination of the interest on daily balances.
Mr. Crowley. Yes; Mr. Congressman, it did.
The banks were faced with the problem of reducing expenses in
proportion not only to their volume of business but also to the
reduced rate of earnings on the business that they had. As I ex
plained the other day, the elimination of interest on daily balances
subject to withdrawal on demand was an important factor in reduc
ing expenses.
Mr. F arley. I s there any demand that you know of on the part
of the large, central banks that that provision be restored, so that
they mav pay interest on daily balances?
Mr. Crowley. I know of no demand from any source, either large
or small.
Mr. F arley. When we put that into the law, there was a great
deal of talk then along this line, that if we could hold this money in
the smaller banks and eliminate that 2 percent on the daily balances,
BANKING ACT OF 19 3 5
121
or any other percent, they would use the money at home instead of
using it in the larger centers.
Has that worked out that way f
Mr. C row ley . Of course, that is a very hard question to answer,
because there has been a very limited demand for new credit on
account of your business depression. I do not know how that would
work in normal times. I think that under the theory of the insur
ance of deposits, as I said yesterday, the banks might employ a larger
percentage of their deposits in local loans, because I do not think
they have to have that extreme liquidity through fear of runs that
they might have had before.
Mr. F a rley . I think that the intent of this bill—and I do not refer
to you gentlemen personally—is further to eliminate banks, to get
rid of a lot of banks that we now have. I am just wondering how
many would have to go if we did it. Today we would lose 28 percent
of them.
Mr. C row ley . In what way? Do you mean that we would elim
inate 28 percent on account of joining the Federal Reserve System?
Mr. F arley . I mean that they could not get through.
Mr. C row ley . I do not like to get into the controversy on Federal
Reserve membership, because that is another part of this bill; but I
might say that I have always had enough confidence in legislative
bodies, and I have enough confidence in you men to feel that when
the time comes, if there are 2,000 or 3,000 banks in this country that
cannot join the Federal Reserve System, certainly you are not going
to put those banks out of our insurance system. I do not believe
that you are going to put into liquidation 2,000 or 3,000 banks. From
our own standpoint, all that we have to do is to be reasonable. If
you were going to put 2,000 or 3,000 banks into our laps for liqui
dation, we would be the first ones to tell you how impracticable
that was, because of the cost to ourselves. So I have a lot of confiedence that somewhere along the line that will be adjusted, so that
the great majority of the State banks are going to be cared for.
Mr. W il l ia m s . There is one thing that I do not yet understand,
and I want to get the record straight on it. You say that there
are only 72 percent of these nonmember banks that can qualify ?
Mr. C row ley . I mean by that, Mr. Congressman, that under the
present Federal Reserve Law, they must have a minimum capital,
and 72 percent of these banks already have sufficient capital to meet
that requirement.
Now, under part 2 of this bill, the Federal Reserve Board is ask
ing for authority so that they may waive that minimum requirement
of capital.
Mr. W il l ia m s . Let me ask you this, then: Have you not already
qualified more than 72 percent of them for admission into the tem
porary fund?
Mr. C row ley . D o you mean b y the temporary fund, the Federal
Deposit Insurance Corporation?
Mr. W il l ia m s . Yes.
Mr. C row ley . Of course, there are 7,800 State nonmember banks.
You and I are talking about two different things. I say that there
are 72 percent, Mr. Congressman, that are members of our fund now
whose capital position is sufficient to joint the Federal Reserve Svs-
122
BANKING ACT OF 1 9 3 5
tem with the old provision governing capital requirements for Fed
eral Reserve members.
Mr. W il l ia m s . I am not talking about the Federal Reserve. I
do not know whether Mr. Farley was or not.
Mr. F arley . Your answer was just what I wanted.
Mr. W il l ia m s . I am talking about the number of nonmember
banks that can qualify under the law as it is now and come into the
temporary insurance fund, and automatically pass into the insured.
Mr. C row ley . There are only 1,100 banks, Mr. Williams, State
banks, that are outside of our fund today, and our law calls for the
7,800 banks now members of our fund to automatically become mem
bers of the permanent fund.
Mr. W il l ia m s . They automatically pass in on the effective date
of this law?
Mr. C r o w l e y . That is right.
Mr. W il l ia m s . And that is more that 72 percent.
Mr. C row ley . Yes; but we are talking about two different things.
That is 90 percent.
Mr. W il l ia m s . N ow , you have already qualified that number of
banks for the temporary fund, and qualified them for the permanent
fund; that is, until July 1, 1937.
Mr. C rowt e y . That is correct.
l
Mr. W il l ia m s . Is there any reason why they should not pass right
on into the permanent system after July 1, 1937?
Mr. C row ley . Y ou mean, in our permanent system?
Mr. W il l ia m s . Yes.
Mr. C r o w l e y . They would go into our permanent system just as
soon as you pass this bill.
Mr. W il l ia m s . But th e y go out on July 1, 1937.
Mr. C row ley . My answer to that is this, Mr. Williams: As I said,
1 have enough confidence in Congress to feel that they are not going
to force out of our insurance system 2,000 or 3,000 banks.
Mr. W il l ia m s . Y ou see what my point is, that you have already
qualified them, and they automatically pass into the system on the
effective date of this law and will be members of the system at least
until July 1, 1937, and my inquiry is why they cannot remain in the
system after that date.
Mr. R e il l y . I might suggest that that will depend entirely upon
the judgment of Congress as to whether or not we shall have a unified
banking system.
Mr. W i l l i a m s . I am asking if there is any reason on the part of
this Corporation why that cannot be done. If there is, we would like
to have it, because that question will confront us from now on.
Mr. C row ley . I think this, that in dealing with that provision, you
have to take into consideration your capital requirements and the
advantages to your smaller banks of membership in the Federal
Reserve System. That, to my mind, is entirely a matter for Con
gress to determine. As I said, unless you change the Federal Reserve
law and liberalize it so that these banks can qualify, there will be at
least 2,000 of them that cannot come in unless we build their capital
structure up for them.
To put 2,000 banks out of the insurance fund would be a very
serious matter.
BANKING ACT OF 1 9 3 5
123
Mr. R e i l l y , ^ o u said that about 1.500 nonmember banks are out
of the insurance system.
Mr. C row ley . About 1,100.
Mr. R e il l y . Why are they unable to come in and qualify ?
Mr. C rowley . A very small percentage of these banks felt that
they did not need it.
Mr. R e il l y . What percentage o f those banks that could come in
did not come in?
Mr. C row ley . We do n o t k n o w , e x a c tly .
The C h a ir m a n . Of course, there is no way on this earth by which
you can know how many banks failed to apply for participation in
the deposit fund because they felt that they do not need it, or for
other reasons. You do not know anything about those who did not
apply.
Mr. C row ley . We made the best analysis that w e could, but, o f
course, we cannot say that that is the reason.
The C h a ir m a n . Y ou cannot analyze a bank that you never had
anything to do with.
Mr. C row ley . Taking the 1,100 banks outside of the fund, their
deposit liability only amounts to a little over $500,000,000, so. as a
whole, they are very small banks. But there are two or three real
large ones.
Mr. W il l ia m s . But that does not mean that they do not serve a
useful purpose in their communities, and that they are not sound?
Mr. C row ley . That is correct.
I think th is: That really the ambition of the Federal Deposit In
surance Corporation should be to get every bank in the Federal
Deposit Insurance system, for the protection of depositors, even
though they had to make some adjustments in order to get them in.
M r. W il l ia m s . W h a t p erc en ta g e o f th e b a n k s th a t a p p lie d f o r
in su r a n c e h a v e n ot been a d m itte d ?
Mr, C row ley . We admitted to the temporary fund all except 200
banks that made application, but what we did was this; we took
them in, and then we rebuilt them afterward.
Mr. WILLTAM Then there have been about 200 out of all of these
Sapplications that have been definitely and finally rejected?
Mr. C row ley . Y es.
The C h a ir m a n . I want to ask something about that, Mr. Williams.
How many State banks that are nonmember banks belong to the
Deposit Insurance Corporation and participate in the insurance?
Mr. C row ley . Seven thousand eight hundred, Mr. Chairman.
The C h a ir m a n . H ow m a n y member banks, both national and State
member banks, participate in the deposit insurance fund?
Mr. C row ley . Six thousand three hundred; that is, State and na
tional member banks.
The C h a ir m a n . N ow , you have 7,800 nonmember banks that par
ticipate m the Deposit Corporation ?
Mr. C row ley . That is right.
V !AIT ANVNo^ , ^ ie Reconstruction Finance Corporation has
supplied to those <.800 banks $184,000,000 to replenish their capital,
has it not?
'
F
F r
Mr. C rowley . $256,000,000 up to February 1. Mr. Chairman.
124
BANKING ACT OF 19 3 5
The C h a ir m a n . And you supplied to national banks $465,000,000
through the R. F. C. ?
Mr. C row ley . That is right.
The C h a ir m a n . And to your nonmember State banks, numbering
7,800, you have supplied $256,000,000?
Mr. C row ley . That is correct.
The C h a ir m a n . And, to your State member banks, numbering
about 900, you supplied $238,000,000?
Mr. C row ley . That is correct—960 such banks, instead of 900.
The C h a ir m a n . S o that to your 7,800 nonmember banks that are
insured, the R. F. C. has extended $256,000,000, and to the member
banks $703,000,000. That does not seem to indicate that your State
banks involve any greater hazards or present any worse difficulties
than your national banks or member banks.
Mr. C row ley . J u s t le t m e an sw er th a t off o f th e record.
*
*
*
*
*
*
*
The C h a ir m a n . What is the amount of the deposits o f y o u r na
tional banks?
Mr. Fox. About 20 billions.
The C h a ir m a n . I s that for the national banks or for the members?
Mr. Fox. Just the nationals.
The C h a ir m a n . What is the amount of the deposits in your mem
ber banks ?
Mr. C row ley . Y ou mean your State member banks.
Mr. Fox. Twelve billions.
The C h a ir m a n . So that you have 32 billions of dollars of deposits
in the banks that are members of the Federal Reserve System.
Mr. C row ley . That is correct.
The C h a ir m a n . What is the amount of the deposits in your non
member State banks?
Mr. Fox. About $4,800,000,000.
The C h a ir m a n . Those figures are not what I thought they would
be.
Mr. C row ley . Where you become confused a little bit is that we
are talking only about State banks that are commercial banks. If
you add the savings banks, that increases your total tremendously.
Mr. W il l ia m s . Let me ask one other question, and then I think
I will be through.
In all of these figures respecting insured banks that we have be
fore us, I think your latest report is as of last June. If we could
get those figures right up-to-date, I would appreciate it, and I think
that we ought to get them into the record.
What is the number of the national banks that are insured now,
and I would like to have your figures the same as they are in your
report, by classes.
Mr. F i s h . May I ask a question ?
The C h a ir m a n . I suggest that you supplement your statement by
the figures that Mr. Williams asked for, and if you do not have
them you can get them from the Comptroller’s Office.
Mr. Fox. This is for January 31, 1935.
Mr. W il l ia m s . January 31 is all right.
Mr. Fox. Five thousand four hundred and sixty national banks.
Mr. W il l ia m s . N ow , your State banks that are members o f the
Federal Reserve System?
BANKING ACT OF 19 35
125
Mr. Fox. Nine 'hundred and seventy-five.
Mr. W il l ia m s . And your State banks that are not members of the
Federal Reserve System?
Mr. Fox. Seven thousand seven hundred and thirty-five.
Mr. W il l ia m s . And your Morris Plan banks?
Mr. Fox. That is included in that.
Mr. B i r d z e l l . They are in the State nonmember bank figures. _
Mr. W il l ia m s . The total, if you have it? Of course, that is ju st
a matter of figuring it up.
Mr. Fox. Fourteen thousand one hundred and seventy.
Mr. W il l ia m s . Now, have you at this time the exact number o f
State member banks, commercial banks, that are not in the system
at all?
Mr. Fox. One thousand and sixty-six.
Mr. F i s h . This may already be in the record, but I have not at
tended the hearings regularly. If it is not in the record, I think it
should be.
I would like to know the total amount of deposits that have been
insured, and the percentage of the deposits that have been insured.
Mr. C row ley . In the entire banking system, or of the members of
our fund?
Mr. F i s h . I should think both. Can you tell that percentage ?
Mr. C row ley . 43.49. In other words, of the 38^/2 billion dollars
in deposits in the entire system, they are insured 43.49 percent.
Mr. F i s h . Therefore, when you provide for an assessment of onetwelfth of 1 percent, it is one-twelfth of 1 percent of the total de
posits, and not of the insured deposits?
Mr. C row ley . That is correct.
Mr. F i s h . S o it really amounts to about one-sixth of 1 percent of
the deposits that are insured?
Mr. C row ley . That is correct.
Mr. F i s h . I really wanted to clear that up in my own mind. I
figured that on the basis of one-twelfth of 1 percent on the insured
deposits, the assessment might be too low to take care of the situa
tion except during normal times, but as long as it covers all of the
deposits, it really amounts to one-sixth of 1 percent of the total
deposits.
Mr. C rowley . Of the insured deposits.
Mr. F i s h . I would like to ask you this—and I hope that it is
not an embarrassing question—whether you could tell the com
mittee who sponsored or wrote or originated title I?
Mr. C row ley . Well, I think that we can very safely say that it
was our legal department and our statistical division.
Mr. F i s h . And when you say “ our legal department ”, you mean
of the F. D. I. C.?
Mr. C row ley . Of the F. D. I. C., and the board of directors,
and we did have some help from Mr. Ekern, who gave us some
ideas on this thing. He is an insurance man, an insurance lawyer.
Mr. Await and Mr. McGrath of the Comptroller’s staff also gave
substantial assistance.
Mr. F i s h . Those are the facts that the committee ought to k n o w .
So far as I am concerned, I want to congratulate you. You did a
very fine job.
127297— 35 ------ 9
126
BANKING ACT OF 1 9 3 5
Of course, I want to make it clear that I am referring to title I,
and to title I only, in my commendation.
Mr. C row ley . I think that what I said about that was correct?
Mr. B irdzell . That is correct.
Mr. C row ley . May I put into the record here a statement as to
losses of insured banks and losses in uninsured banks during the
last year?
The C h a ir m a n . Let that come in in connection with your state
ment touching the same matter, at the proper place.
(The statement referred to is as follows:)
Licensed commercial banks suspending operations during the calendar year 19S4
Item
Deposits in suspended banks:
All banks.............. ........ ................................
Insured banks______ _______________
Estimated losses in licensed banks suspending:
Total losses................. ...................
Losses to depositors:
In banks not insured_______________
In banks insured_______________
Losses to Corporation-___ ___________
Amounts per Percent of
$100 of total item to total
deposits in
deposits in
active banks active banks
Cents
10
Ho
7200
3.6
3.5
i .007
.1
M.ooo
1 More than H of this loss represented losses to depositors with restricted deposits in 1 institution
Mr. B irdzell . During the hearing questions have been asked con
cerning paragraph 5 of subsection (h) of the proposed draft relating
to trust funds. That provision is new, and I am not surprised that
the members have shown some curiosity about it, and, furthermore,
it does deal with quite a technical matter.
Recently I had occasion to discuss the general subject of that sub
section with the trust section of the American Bankers Association
at their meeting in New York. The discussion is too lengthy, of
course, to be reproduced here for the purpose of listening to it, but
if the members would like to have the benefit of that discussion I
would be glad to leave a copy of what I had to say with your reporter
so that it may be put into the hearings.
The C h a ir m a n . Let me suggest, Judge Birdzell, that you incor
porate so much of your statement on that occasion as you regard as
helpful to the committee.
Mr. B irdzell . I th in k th a t i t w o u ld be h e lp fu l. I co u ld b o il it
d o w n som e------The C h a ir m a n . Y ou be the judge o f that.
Mr. B irdzell . I will leave it with the reporter.
(The remarks of Mr. Birdzell referred to are as follows:)
Adeso H n L E B de l Gn r lC u se F dr l Dpo it Inu a c
d rs f o . . . ir z l , e e a o n l e e a e s s r n e
Cro aio , o Fe e a Inu a c o T ut Dpo its, a tiie M w ter
o p r t n n dr l s r n e f r s e s
t
id in
Tr st C ne e c o th A e ic nB n er ’Aso ia io NwYr C y
u o f r n e f e mr a a k s s c t n e o k it
Fe r a y13, 1935I
bur
I am indeed grateful for the opportunity to participate in this conference of
the trust division of the American Bankers’ Association.
It is always a privilege for one who is daily concerned with problems that
affect any group of his fellow citizens to be permitted to present the difficulties
with which he is confronted and to gain from the group the viewpoint of those
BANKING ACT OF 1 9 3 5
127
affected by the same problems and whose experiences are gained from a some
what different angle.
One of the finest characteristics of our basic system of jurisprudence—the
common law—has always seemed to me to be that it was founded upon cus
tom, and that it has been sufficiently elastic to yield to the changing customs
of society. If this be a virtue in our legal system, as I believe it to be, the
virtue is emphasized with respect to that branch of our law which is broadly
embraced within the term “ law merchant.” Much of that law, particularly
that dealing with the rights, duties, and obligations of parties to negotiable
instruments, was incorporated directly into our legal precedents by the defi
nition and determination of established customs in the market places by those
whose contacts and experiences were most immediate and reliable.
If in the formative stages of the law merchant Lord Mansfield was lead to
right conclusions by empaneling juries made up of merchants and tradesmen,
perhaps it is not too much to expect that even in this day we may proceed
with greater assurance in dealing with questions peculiarly affecting a highly
specialized branch of business if we seek the counsel and guidance of those
who are most familiar with its processes. It is with this hope in mind that I
venture to lay before you some of the pi'oblems that arise in the administration
of the insurance provisions of the Banking Act of 1933 as they relate to the
insurance of trust funds.
By way of introducing the discussion, it may be well to refer briefly to some
purely elementary matters because of their bearing upon the main questions
of interest and because of tbe principles that rest upon fundamental practices.
In this presence it is not necessary, of course, to speak of the history and
development of trust business, nor to trace in detail its connection with com
mercial banking business. It is sufficient to observe that the banking func
tions and the trust functions of modern trust companies are and should be kept
separate and distinct and to keep in mind at all times that there are certain
advantages in combining the two functions under one corporate organization.
The clients of a trust company find it convenient to avail themselves of services
which can only be furnished by the banking department and, conversely, bank
ing clients find it convenient to avail themselves of tbe trust facilities of their
bank. These advantages have been recognized by the provisions of section 11
of the Federal Reserve Act, which authorize national banks to operate trust
departments under the permission of the Federal Reserve Board.
The proper observance of the relations between tbe bank and its clients
and the trust department and its clients requires, however, that the bank
shall at all times function as a bank with respect to all funds coming to it in
that capacity, while the trust department shall equally observe the fiduciary
relation with respect to all funds coming to its trusts.
Under the Reserve Act and under laws existing in many of the States, a na
tional bank or fiduciary company, by complying with stated requirements, may
in effect become a debtor to its own trust department without entirely losing
its character as a fiduciary. We have, then, one corporate entity sustaining
a dual legal relationship with respect to a single account with a single client.
Uut the act and the Federal Reserve Board in administering it have due
regard for the different relationships. The Reserve Board in fixing reserve
lcquirements has provided in regulation D that a bank exercising trust powers
need not maintain reserves against trust funds which it keeps segregated and
apart from its general assets or which it places on deposit in another institution
to its credit as trustee or as fiduciary. But if such funds are mingled with tbe
general assets of the bank, under the authority of the Federal Reserve Act, it
s provided that deposit liability thereby arises against which reserves must be
mam ained. This liability is classified as individual deDosit liability rather
than as bank deposits.
Assuming, in the language of the Federal Reserve regulation D, that the
/ “ *1•’ 1<eePs its trust funds segregated and apart from its general assets or
V '!
that it: deposits them in another institution, some might question whether the
(rust status is strictly maintained. Unless in addition to segregating them the
s®
. trURt
kept separate and be not mingled with tbe funds of any
other trust, it could be plausibly contended in light of ample trust precedent,
that a bleach of trust had been committed for which the trustee could be
charged. But any such requirement is so foreign to accepted methods for the
proper handling of uninvested funds that it would be highly artificial to exact
it. A story is told, however, of a trust officer in recent years exhibiting to an
128
BANKING ACT OF 1 9 3 5
examiner his uninvested balances in cash, filed away in the vault, the funds
of each trust being kept separate and apart in an effort to comply with the law.
It may as well be expected that a warehouseman, in the case of grain or other
fungible goods, would provide separate bins for the accommodation of each of
his storage customers. It is to the credit, I believe, of the courts of New York
That this latter artificiality was abolished many years ago.
Let us look now to some of the specific problems which arise out of the trust
and banking relation as we seek to apply the insurance provisions of the
Banking Act. Surely in the light of the provisions of the Reserve Act which
facilitates the flow of trust funds into ordinary banking channels, there can
be no serious question that funds thus legally entering the channels of com
merce are deposits within the terms of the law! They are called deposits
under the regulations of the Federal Reserve Board and under the existing
law which provides for permanent insurance such regulations are controlling.
These funds have been regarded as deposits during the temporary period. With
this as a premise, how shall we answer the question as to the extent of the
liability of the Federal Deposit Insurance Corporation for trust funds which
are deposited in the commercial side of the same institution? Shall we regard
the company as one depositor and say that the insurance protection extends
only to $5,000 or, using the records of the insured institution as a guide, shall
we say that each beneficiary is an owner within the terms of the law, and conse
quently, insured to the extent of $5,000?
Let us look to the law. After prescribing the percentages of insurance cover
age based upon the net amount due an owner from a closed bank (and the
same language applies to the limited amount insured under the temporary
fund), the act says, “ Provided, That in determining the amount due to such
owner for the purpose of fixing such percentage, there shall be added together
all net amounts due to such owner in the same capacity or the same right, on
account of deposits, regardless of whether such deposits be maintained in his
name or in the names of others for his benefit.” From this it would seem that
if the account be maintained in the banking department in the name of the
institution or of its trust department as trustee that it is maintained for the
benefit of those who appear upon the books and records of the insured institu
tion to be the ultimate owners, and it is believed that the Insurance Corporation
is so liable to each of such owners. The command seems to be clear that we
shall determine the amount due, regardless of whether the deposit be main
tained in the name of the owner or in the name of another for his benefit and
where the records of the institution show for whose benefit the account is main
tained the legal measure of insurance protection for each cannot be withheld.
Let us take a second hypothesis: Suppose an insured trust company should
deposit uninvested trust funds in another insured institution, the records of
the latter will not reflect the beneficial ownership of the funds deposited as in
the instance above noted. This would seem to be a single deposit account to
be insured as such in the depositee bank. The realization of this situation has
led to a great many interested inquiries concerning the extent of the insurance
coverage on such a deposit, and it has led further to specific requests that the
coverage be extended to meet the practical requirements of the situation
Trust companies making such deposits and desiring to be insured to the same
extent as where a similar deposit would be made in its own banking department
have made a variety of suggestions. They have offered to pay the assessment
upon the additional amount of insurance coverage which would result from
a break-down of the deposit accoiding to the interests as they appear upon
their own books. (Bear in mind that the assessment is on the insured amount
only and not on total deposit liability.) They have demanded, in some instances
that the bank open separate accounts for each trust or each beneficiary. They
have offered to file schedules identifying the beneficiaries and showing the
extent of their interests, if only they may be assured of corresponding protec
tion. I think we can all agree that there are all but insuperable objections,
either from a legal or a practical standpoint, to each of these proposals. Yet,
it w
rould seem that if both the initial trust company and the depositee bank
be members of the fund, protection should be accorded in this case in the same
measure as is given where the deposit be made by the trust company in its own
banking department.
Recognizing the reasonableness of such oft repeated requests, the Insurance
Corporation offers a solution during the period of the temporary fund based
upon this principle: that where a fund member trust company 'made such a
deposit in another insured institution, it would be recognized that the deposit
BANKING ACT OF 19 3 5
129
was maintained by it for the benefit of those appearing upon its books and
records to be the owners. This gives substantially the same protection to the
initial trust company and its patrons as where a deposit is made in the bank
ing department of the same institution. Concerning the assessment, in such
case, it was recognized that while two insured institutions were interested there
was in fact but one risk; consequently, provision was made for substantially
one assessment. Some additional reasons for this will be mentioned later.
Time does not permit a discussion here of the minor details of this arrange
ment—details which are concerned with the manner of apportioning the in
terests of the various beneficiaries where deposits are made in several institu
tions and of the difference which results from exclusive allocation of the
funds of each particular trust to one of several general trust accounts as dis
tinguished from depositing uninvested trust funds in general trust accounts
without such exclusive allocation—but an effort was made which has been
attended with considerable degree of success to make appropriate provision
for accommodation to the different methods of handling such transactions.
It was necessary to recognize two fundamentally different methods of handling
such trust deposits. Where it was the practice of trust companies to group
uninvested funds or unexpended balances belonging to certain trust estates,
and to deposit each group balance in one of several banks in which the trust
company maintains general trust accounts the records of the company would
be a sufficient guide in determining the beneficial interests represented in such
deposits; but where deposits of trust funds might be made by the trust company
without exclusive allocation according to groups of trust estates the interest
of a beneficiary in any such deposits in a particular bank would be subject
to determination only by applying a formula designed to allocate on a propor
tional basis. This explains why, in carrying out the general plan for the
insurance of trust deposits, under the temporary fund it has been necessary
to provide optional plans ^n order to determine the extent of the insurance
coverage on such deposits.
If I may tax your patience sufficiently to enumerate some of the minor fac
tors involved in our consideration of the general problem presented, let me
suggest the following:
Filing a schedule of beneficiaries with the depositee bank would involve dis
closure of confidential information. This, in some instances, would involve
violation of law and it would be objectionable also from a purely business
viewpoint. Owing to the constant shifting of interests, the account will be
maintained actually for the benefit of persons not named in the schedule and
the records of the depositee bank would not identify the owners nor the
extent of their interests in the deposit. Where limited insurance is provided,
with the depositor as the insured unit, the coverage should not be increased
by introducing undisclosed beneficiaries.
Opening separate accounts for separate beneficiaries or trusts involves
prohibitory service charges. The depositee bank many properly decline to
accept the schedule or to open numerous small accounts.
. The furnishing of schedules and certified statements of insured amounts
involve, examination of numerous trust instruments and a determination of
difficult questions concerning vested and contingent interests and the like.
It would seem that any solution of the problem of protection of trust de
posits made in the general circumstances outlined above should have regard
n°
factors to the end that the whole matter may be simplified and be
Drought into accord with rational practice.
.
believed that the proposed act which is now pending in Congress will
acceptably meet this situation. It is there provided that “ trust funds held
py an insured bank in a fiduciary capacity whether held in its trust or deposited
other department or in another bank shall be insured subject to a $5,000
limit tor each trust estate and when deposited by the fiduciary bank in another
insured bank, shall be similarly insured to the fiduciary bank according to the
trust estates represented. Nothwithstanding anv other provision of this section. such insurance shall be separate from and additional to that covering
other deposits of the owners of such trust funds or beneficiaries of such trust
estates : I royiaea, That where the fiduciary bank deposits any of such trust
funds in other insured banks, the amount so held by other insured banks on
deposit on the last day of the month preceding the filing of the certified state
ment required by paragraph two of subsection (h) of this Section for the
purpose of such statement shall not be considered to be a deposit lability of
the fiduciary bank, but shall be considered a deposit liability of thp hank in
130
BANKING ACT OF 1 9 3 5
which such funds are so deposited by such fiduciary bank. The board of
dilectors shall have power by regulation to prescribe the manner of reporting
and of depositing such funds.”
Let us briefly note the salient features of this provision:
First, the doubt in the existing law as to whether trust funds while held by
an insured fiduciary in its trust department should be considered as deposits
is removed. It so considers them. To this extent it is open to the criticism
that it is somewhat artificial. But there is no hardship in this because trust
companies do not as a rule hold any substantial amount of trust funds for
any length of time in a fiduciary capacity. They are either invested or properly
utilized as bank funds. Besides, in the event of the closing of an insured trust
company the Insurance Corporation could not otherwise give satisfactory
answer to the demands of patrons who would have had no means of knowing
whether their funds were in one department or another of the institution or
deposited elsewhere.
Second, it treats each trust estate as a unit and obviates the necessity for anv
further break-down.
Third, it preserves the fiduciary status of the depositing trust companv bv
expressly permitting it to be the claimant against the insured bank.
Fourth, it further preserves and recognizes the fiduciary relation and the
rightful control of the trust company over the account by treating the insurance
of such a deposit as separate from all other insurance for the trust company
or for any beneficiary of the trust estates. The amount of the insurance is
not affected by the circumstance that beneficiaries may likewise have accounts
in the insured bank.
Fifth, in the event of a deposit by an insured fiduciary bank in another
insured bank, it recognizes the singleness of the risk. The fiduciary bank is
not required to report the amount of such deposit for assessment purposes
this being reported only by the depositee bank.
Sixth, further provision is made to enable the Insurance Corporation to know
the extent of its liability.
I am not presenting to you statistics which will show what we all know to
be the fact, that a very high percentage of trust funds consisting of uninvested
cnsh and unexpended trust balances and fiduciary accounts generally go into
the banking departments of trust companies and into commercial banks to be
utilized in the channels of commerce to the same extent as other deposits.
These iunds. therefore, are properly to be regarded as deposits in any plan
which has for its aim deposit protection. They have some characteristics,
however, which are not shared by other deposits generally.
In certain circumstances security of one kind or another may be required
at the point where they cease to be trust funds and become deposits, but not
in all circumstances. Furthermore, they are deposited, as indicated bv remlation D of the Federal Reserve Board, not as bank deposits but as individual
deposits. By this it is meant to say that a trust company in its trust capacitv
does not deposit in a bank primarily to promote its trust business or perform
its trust function. It does not establish a correspondent relation to facilitate
its trust business in the sense that a commercial bank utilizes correspondents
to facilitate the transaction of its banking business. Yet such deposits excent
to the extent that they may be otherwise secured, are, in common with all
other deposits, subject to the hazard which insurance is designed to cover
It is believed that the characteristics just referred to as peculiar to this
class of business warrants the special provisions in the law which have been
set out above—provisions which are consistent with existing law and ree-nlntions concerning such deposits.
s
It has been suggested that in view of the security requirements such as are
contained in section 11 of the Federal Reserve Act and which are designed to
protect transfers of funds from the trust to the commercial side of n banking
institution, such deposits might well be excepted from deposit insurance Sunk
lar suggestions have been made from time to time with respect to deposits that
are required to be otherwise seen red-public funds and the like The'insur
ance provisions of the Banking Act are clearly intended to apply to all de
posits regardless of whether they be otherwise secured. But from the beginre(f ff™zed that other security requirements might properly be
relaxed to the extent insurance coverage was effected in the Federal Deposit
Insurance Corporation, for it provided that deposits of Postal Savings funds in
the banks need not be protected by collateral to the extent they were so in-
BANKING ACT OF 19 3 5
131
sured. In following out the policy thus expressed in the Banking Act of 1933
some of the States are likewise relaxing the requirement for other security
for public deposits and bills are pending in Congress to this effect with respect
to funds other than Postal Savings funds.
It may well be questioned whether it accords with sound policy for banks
to be permitted or required to give collateral security for particular types of
deposits. The Supreme Court of the United States last year decided that the
power to thus secure deposits generally was not an implied charter power of
a national bank, and there are like decisions in a number of States applicable
to State banks. Such arrangements, in the event of the closing of a bank,
operate to create a privileged class of depositors and in the case of an insured
bank they necessarily have an adverse effect upon the Insurance Corporation
in that they cut down the amount to be recovered through subrogation to the
claims of the insured depositors. Wholly aside from these considerations, how
ever, it must be borne in mind that under the prevailing practice trust com
panies and trust departments find it advantageous to establish deposit rela
tions with other banks which do not and perhaps which cannot offer security
for the deposits, and it would seem to be preferable to establish a uniform rule
for insurance coverage rather than engraft a more or less artificial exception.
It is believed that such deposits should not be excepted from the insurance
provisions of the law.
, ^
_ ,
Trust companies which are not members of the temporary fund of the Fed
eral Deposit Insurance Corporation, which are not members of the Federal
Reserve System, and which confine their activities to trust business have like
wise exhibited an interest in insurance coverage for such of their funds as are
deposited in commercial banks. The problem with respect to these institutions
is substantially the same as with respect to institutions which are members
of the fund. They desire like coverage, but since they are not members of
the fund the powers of the Corporation with respect to examination do not
extend to them, and for this reason they are, with regard to their deposits, in
the same position as any other depositor. Hence, the Corporation is not able
to say to such a trust company that it is maintaining its deposit in a particular
bank for the benefit of any specified beneficiary or beneficiaries, and to recog
nize such undisclosed beneficiaries would involve the introduction of undisclosed
owners for the purpose of increasing the insurance coverage.
These companies are all, it is believed, eligible for membership in the fund,
and eligible for membership in the Federal Reserve System, and as they may
become members they will, of course, share in the benefits of the insurance
These companies are all, it is believed, eligible for membership in the tund,
the existing law. Until such time, however, the only arrangement for insurance
protection with regard to them, which the Corporation has been able to suggest,
has been that they are insured as one depositor within the limit fixed for one
depositor, or if tliey should find it feasible to so arrange their deposit trans
actions that they may open separate accounts as trustee for a named beneficiary
or for a group of beneficiaries, each separate account would be insured up to
the limit of $5,000.
May I leave with you one final word with respect to the Federal Deposit
Insurance? I think 'we can all agree that insurance of bank deposits came
into the Federal law at a time when there was the greatest need for restor
ation of public confidence in the banking structure of our country. I think, too,
that we can agree that the general acceptance of the principle has operated
to restore and maintain that confidence. We are engaged in an effort to work
constructively toward the end that there may never be in our country a repeti
tion of the financial catastrophe that has accompanied the late persistent
depression. We can work toward this end and succeed only, in my judgment,
with the cooperation of all who are immediately concerned with the major
problems presented.
I am glad to be able to express to you this morning the appreciation of the
officers of the Federal Deposit Insurance Corporation for the attitude of help
fulness and for the constructive criticism which we have always had from
the members of your group. I am personally and particularly grateful for the
patience and fine spirit which was manifested by your president, Leon M.
Little, on an occasion some months ago when he was good enough to respond
to a request for a conference in Washington. If we go forward in this spirit
it is our hope that we may all have a part in a great constructive enterprise.
I thank you.
132
BANKING ACT OF 1 9 3 5
Mr. C row ley . Are there any other questions?
Mr. S is so n . H ow are we proceeding, in order or out of order, i f
you will pardon this inquiry ?
The C h a ir m a n . Y ou are in order right now.
Mr. S is so n . We started out 3 or 4 days ago with the idea that we
would make the rounds and give each member of the committee an
opportunity to question the witnesses, but the way we are proceeding
now, the younger member of the committee will be gotten to on the
next Fourth of July.
The C h a ir m a n . A s you know, I have been away, and when I came
in yesterday morning, I thought that the hearings had been pretty
well concluded. But let me say to you that everybody on the com
mittee will be glad to hear you right now.
Mr. S is so n . I am not speaking for myself alone, nor in criticism
of you.
One of the questions that has been raised here and discussed at
considerable length this morning is the question whether the State
banks should be required to come into the Federal Reserve System
in order to be eligible to membership in the insurance fund, and
whether the present provision of law as to when they shall come in,
which is, I believe, July 1, 1937, should be changed in this particular
bill at this time.
I want it understood, Mr. Chairman, that in anything I say I am
not taking any position; I mean by that that I feel that it is ‘not
necessary from my point of view to take a position at this time. I
do not know whether I have any definite opinion on the matter now
or not, but it occurs to me, and I merely make this as a suggestion,
that the statement made by Mr. Reilly has considerable merit.
There will be two more sessions of Congress before that question
becomes imminent, and perhaps we would be in a better position to
pass on that after having had a greater fund of experience either at
the next session of Congress or the second session of Congress from
now, and for the reason stated by Mr. Reilly, I think that my posi
tion would be that at the present time we leave that as it is.
However, I appreciate that there are others who have different
views and who probably have very sound reasons for them. How
ever, it seems to me that possibly there is an additional reason, one
in addition to the reason stated by Mr. Reilly, why that is perhaps
academic now, that is, that it is academic for us to decide now
whether they shall or they shall not be required to come into the
Federal Reserve System in order to get into the insurance fund, and
that is that if the Congress should decide that that requirement ap
plies, that they should come in, there is pretty good reason, is there
not, why that’ should be in the law at the present time ? In other
words, that gives them 2 years’ notice or more, and by “ them ” I
refer to the nonmember banks.
Now, I want to ask either Mr. Crowley or Judge Birdzell a ques
tion with reference to the provision regarding the limiting of insur
ance on a single deposit of a trust fund, which I believe appears in
subsection (h) of paragraph 5. You fix that limit at $5,000. Is
that because of your assumption that the limit of insurance on a
single trust-fund deposit is in the permanent writing of this law to
be $5,000? .
Mr. B irdzell . Yes.
BANKING ACT OF 19 35
133
Mr. S isson . I was wondering if there was any confusion m your
answers. When you answered Mr. Williams in regard to the quali
fication of banks to go into the permanent fund, were you assuming
that the permanent fund would contain that limitation of $5,000.
Mr. B irdzell. Yes.
Mr. S is so n . Of course, under the present law, if we do not change
it, there will be a $10,000 limit up to 100 percent, and then----Mr. B irdzell. Up to $50,000 it is 75 percent, and beyond $50,000
it is 50 percent insured.
Mr. S is so n . N ow , regarding another question that was raised
yesterday, about the examinations and whether they were irritating
and irksome, do you have a practice at the present time of combin
ing in certain circumstances your examination with the examination
made by the Comptroller of the Currency %
Mr. B irdzell. Not with the Comptroller, but we do with some
o f the States.
Mr. C row ley . Y ou understand, we make no examinations of na
tional banks.
Mr. S is s o n . I just want to make this further comment with re
gard to some questions raised yesterday by Mr. Gifford about the
examination of banks and the suggestion—and this is not a question
addressed to you; I presume it is not in your province—that the
exactions of the Comptroller of the Currency are so great as made
through his examiners with respect to liquidity that it is slowing up
and retarding our credit.
I presume, Mr. Chairman, that Mr. O'Connor is going to be here
before the committee some time.
I would like to call the attention of the committee to this, that
perhaps 2 or 3 months ago the Comptroller of the Currency made
a speech at an association of bankers, I think in Nebraska, in which
he, in my opinion, gave facts which pretty conclusively disproved
the statement or the suggestion made by Mr. Gifford, and he gave
the figures which were secured by his examinations and a classifi
cation of loans, as to whether they are in the slow column, or doubt
ful, and so forth, and that address of the Comptroller is incorpo
rated in an appendix to the Record some time in January, I believe.
I f it is not, I make the suggestion. Mr. Chairman, or perhaps the
request, with the approval of Mr. O’Conner, of course, that that be
incorporated in these hearings. I think it pretty conclusively estab
lishes—at least it does to my mind—that the oft-repeated statement
that the Comptroller’s examination of banks is the reason why the
banks are not lending money as they ought to is merely an alibi on
the part of the banks.
The C h a ir m a n . I am sure that the statement of the Comptroller
would be valuable in connection with these hearings; I will be glad
to have that incorporated in the hearings.
Mr. S is so n . I have one further suggestion, and then I am through.
I think that everything else has been covered in which I am inter
ested.
Now, I assume that there will not be any foreclosure on the question
as to whether the amount of deposit insurance is going to remain
permanently at $5,000, or whether it will be increased to $10,000,
134
BANKING ACT OF 19 3 5
and I want to say that the statement of the chairman as to the history
of this legislation, on whether State banks should be required to
come into the Federal Reserve System in order to participate in
this fund, to my recollection is an absolutely correct and accurate
statement of it.
But going back to this other question for just a moment, the chair
man and those of us who were on the committee when the Banking
Act of 1933 was passed containing the provision for deposit insur
ance will recall that many of the big banks took a very decided and
positive position against deposit insurance in general and deposit
insurance in any amount, and, in fact, the American Bankers Associa
tion—and, of course, the chairman is more familiar with this than,
I think, anybody else, because he probably had more to do with
deposit insurance than any of the rest of us—met in convention
very shortly after the adjournment of Congress, and very solemnly
passed a resolution calling upon the President not to put this act
into effect.
The C h a ir m a n . That is quite true, and they predicted dire con
sequences to the economic structure of the country, and then last
year they were insisting that the amount of insurance on individual
deposits should remain at $2,500 in the permanent law. This year
I am not sure, but I think they are now insisting that we make it
$5,000 in the permanent law.
In that connection, and not to be critical, but merely because we
are dealing with a little history, the American Bankers’ Association
met here last fall, and that was 1 year from the date of the Chicago
meeting to which Mr. Sisson referred, in which they passed a reso
lution condemning the bank-deposit-insurance law as dangerous to
banking institutions and to the general condition of the country; and
the first meeting after that was held here last fall.
The first 6 months of operation under the temporary-insurance
fund had shown not a single bank failure among the banks that were
participating in the fund, and down to the time of the meeting last
fall, I think six or seven banks represented the total number of fail
ures, and it showed that the Federal Deposit Insurance Corpora
tion, instead of having encountered an insurmountable loss, was
operating at a profit, and the country for the first time in the his
tory of any man at that meeting had had a year of experience prac
tically free from bank failures.
But no mention whatever was made of those developments by any
man at the meeting of the American Bankers’ Association last fall.
They forgot it.
Mr. M e e k s . I want to ask Mr. Sisson this question: The address
of the Comptroller of the Currency to which he made reference was
delivered in Iowa, was it not?
Mr. S is so n . I think it was in Nebraska.
Mr. M e e k s . There was one delivered in Iowa, and he sent copies
of the address to the Members of Congress and invited comment.
That is the address that I have reference to. Was that delivered in
Iowa?
Mr. B irdzell . In Nebraska.
Mr. Meeks. Thank you; I just wanted to get clear on that.
Mr. F ord. N ow , in connection with these examinations, there have
been repeated charges made that there were three classes of exam-
BANKING ACT OF 1 9 3 5
135
inations made of banks. First they said that the F. D. I. C. made
them, and then that the Comptroller made them, and then that the
R. F. C. made them, and that each one of the examinations called for
a different standard as to the classification of assets, and that they
never knew where they were.
I would just like to ask, is there anv basis for that charge?
Mr. C row ley . Let me sa y to you that we have never examined a
national bank and have no authority to do so. The law specifically
says that we shall accept the Comptroller’s examination.
I believe that we have attempted, in the entire Federal Service,
to try to classify assets as nearly uniformly as possible. The R. F. C.,
on the matter of State banks, has always taken the examination
of the Federal Deposit Insurance Corporation. The only time that
they have ever sent a man in was where there had been some diffi
culty arising, where perhaps they already had an investment, or
where, when we made our examination and found that perhaps the
bank needed additional aid, or something like that, they have gone
in with us and tried to work out that situation. There has been no
harassing by duplicate examinations of the Federal Deposit Insur
ance Corporation and the R. F. C. The R. F. C.. except in those
unusual cases, has taken the examination of the Federal Deposit
Insurance Corporation.
Mr. F ord. I was very certain that that was the case, but I wanted
to iret that in the record.
Mr. B irdzell . May I just add to that one thing that is just an
impression with me, but I am quite certain that I am correct in
asserting it.
.
I think that about 2 months ago the Reconstruction Finance Cor
poration announced that it would no longer examine banks, but
would take the examinations of our Corporation, of the Federal
Reserve Board, and of the Comptroller.
Is not that true?
Mr. C row ley . They have been doing it.
Mr. B irdzell . I think that they made a formal announcement
of that. That is an impression that I have, and we can all check it.
Mr. C r o w l e y . Except this, that they do reserve the right to pro
tect their investments.
Mr. S is so n . Y ou mean that they have taken the Comptroller s
examination?
Mr. B irdzell . If they go into a national bank, they take the
Comptroller’s examination, and if they go into a State bank that we
are interested in, they take ours. They did that with the idea that
it would remove the criticism with respect to examinations so far
as they were concerned.
Mr. W il l ia m s . Has that been the policy all the time?
Mr. B irdzell . I t h as b een th e p o lic y q u ite largely.
Mr. W il l ia m s . I mean, in a case where the R F. C. was advanc
ing money for capital structure purposes, have they not gone in and
made an examination of the bank to determine whether or not they
would make that advance?
M r. C row ley . N o ; e x c e p t p erh a p s w h ere th ere w a s a c o n d itio n
th e re w h ere th e y d id n o t ag ree w ith ou r e x a m in a tio n s, or in co n n ec
tio n w ith so m e th in g th a t th e y w a n ted p a r tic u la r ly to v e r ify . In
136
BANKING ACT OF 1 9 3 5
the capital rebuilding program, in better than 90 percent of the
cases, they have always taken our examination.
Mr. B i r d z e l l . A year and a half ago, they were then engaged
in the work of capital rehabilitation, and they might have had to
consider banks before we had gotten around to examining them at
all, and in that case they would have had to make examinations on
their own account.
Mr. W i l l i a m s . I have heard that complaint.
Mr. B irdzell. A great deal is being done to eliminate the basis
for it.
The C hairman . I am not complaining, exactly, but we should re
member in this connection that the R. F. C. act as originally passed
contained a provision for loans to banks, and also for loans upon
the assets of closed banks, and at that time the F. D. I. C. was not
even in existence.
Mr. B irdzell. That is correct.
T h e C h a ir m a n . A n d th e c o u n tr y w a s in an u n p reced en ted ec o
n o m ic u p h ea v a l.
M r. B irdzell . T h a t is r ig h t.
The C h a i r m a n . And the R. F. C. was acting under a law that
required them to take full and adequate security, so that when they
began their operations they, of course, were more particular in look
ing over the assets of banks upon which they were to make loans than
they were later on, in the light of later developments.
Mr. Crowley. There has been a lot of criticism of the examination
of banks. A great deal of that criticism is very unwarranted. You
understand that bankers have been under a great strain. They have
seen the sloughing away of a lot of values. They have seen a lot
of men who under normal times could take care of their obligations
promptly unable any longer to do so.
Now, you go in and try to determine the position of a bank, m
order that you may try to rebuild its capital position and put it on
a sound basis. By the very nature of the trials and tribulations that
they have had, if they have not sufficient reserves to absorb their
losses and have to write down their capital, naturally there is a feel
ing of resentment.
But, after the job is all done, it is like the person who has an
operation; they feel very good about it.
I know that there are a great many banks that take the examina
tion of the Comptroller’s office and of our office and use them as a
sort of a club for collections, which is a very unfair thing. They
take out the report and say to the borrower. “ Don’t you see, we have
to call this, because the examiner classified it as slow.”
Now, there is no criticism on the part of the examining body of a
slow asset. The classification of a slow asset only means that the
asset is good, but that it cannot be paid at maturity, that it must
be spread over a period of time to give the borrower an opportunity
to pay it gradually. As long as your banks are sufficiently liquid,
it does not particularly mean that they are in hazardous position if
a percentage of their loans is in a slow classification; but, as you went
into the depression, with your depositors demanding money dav by
dav, it was necessary that the banks, to protect themselves, force
this liquidation, amTthat is the reason why you got your criticism
BANKING ACT OF 1 9 3 5
137
of your slow loans. The depositors were demanding their money
more rapidly than the banks could liquidate the loans to furnish it
to them. When we have completed our capital rebuilding program,,
the recovery from the assets that perhaps have been charged off as
doubtful and loss may mean considerable in the taking of losses
that we have not yet found in our institutions. As we come out
of this depression, our banks are again going to have some losses that
they will have to face which do not show up on the surface today.
A great many borrowers who are struggling today, hoping against
hope that they may be able to pay their debts and maintain their
businesses, will become discouraged and have to throw it up.
I think that a lot of this criticism is unfair. We will all grant
that certain examiners become too officious, and when they get an
assignment, they become autocratic; but, as a whole, I think that
the examiners have tried to be sympathetic in taking into considera
tion the mental state of a great many of these bankers.
The C h a ir m a n . N ow , if there is anybody else who desires to pro
pound further inquiries to these gentlemen, I will be glad for you
to proceed.
Mr. C row ley . Before we close, I would like to express our thanks
for your kind consideration. Your questions have been most con
structive, and if there is any additional information that we may
furnish, we shall be very happy to do so.
The C h a ir m a n . If no one else has any more inquiries to make,
I will say that we have finished with Mr. Crowley and Mr. Birdzell,
and we will meet again tomorrow morning at 10:30, and I will try
to advise the members of the committee this afternoon just what the
program will be tomorrow. Before doing that, I want to talk to the
comptroller, to Mr. Eccles, and to the members of the committee.
(Ordered inserted in hearing)
S ec l rp r o pu lic o in n a g t e e b th N t n l Emr e c
p ia eo t f b
p io s ahr d y e a io a e g n y
C u c o th a tiv ies o th Fe e a Dpoit Inu a c Cro aio
o n il n e c it f e dr l e s s r n e o p r t n
AAAA
LBM
March 26, 1935.—Never any criticism of this activity.
April 9, 1935.—Stands highest in public opinion of all emergency measures;
has restored confidence in banks and resulted in greatly increased deposits.
AIZN
R OA
April 9, 1935.—Apparently public very favorable to Federal Deposit Insurance
Corporation. This agency has restored confidence in all banks and undoubtedly
exerted considerable influence in abolishing hoarding on the part of the people
who had previously felt that banks were unsafe and that they should keep
their money in cash at home. Every bank in this State except one is a mem
ber. Information at hand indicates that the citizens of the district where this
bank is located are very dissatisfied and are not depositing their funds in this
bank due to the fact that it does not have deposit insurance. Considerable
interest expressed by public in the announcement that deposits in building and
loan associations might be insured. General summary would be that the public
is very much interested in continuation of deposit insurance and that it is a
very determining factor in restoring and maintaining confidence in the banking
institutions.
AKNA
RAS S
April 9, 1935.—Representative bankers advise that public reaction to Federal
Deposit Insurance Corporation is 100 percent favorable. Great majority of
138
BANKING ACT OF 19 3 5
bankers also favorable, but believe present limit might wisely be reduced to
$2,500. Two bankers state they are strongly opposed to plan in principle.
None interviewed has ever heard criticism of insured deposits by customers.
CL ON
AIF RIA
April 9, 1935.—Public opinion strongly back of Federal Deposit Insurance
Corporation, despite objections of some larger banks to paying premiums.
CLRD
OOAO
April 9, 1935—Public opinion here practically unanimous in favor of Federal
Deposit Insurance Corporation.
CNET U
ONCICT
April 9, 1935—Public seems entirely indifferent to present Federal Deposit
Insurance law. Some 12 or 13 banks in Connecticut have not subscribed to
plan and their deposits have not been affected. Some depositors inquired of
their banks about this insurance when it became effective, but none has men
tioned it to the Hartford banks in months. There is no demand here for increas
ing amount of insurance above $5,000, as 95 percent of all accounts are fully pro
tected under present law. No Connecticut savings banks subscribed to plan
because of adverse opinion of State attorney general. I can find no objection
by savings bank depositors. State director personally feels that the present
$5,000 limit is sufficient in Connecticut. This State has been particularly for
tunate in having very few bank failures.
DLWR
EA AE
April 9, 1935.—Due to fact that no bank failures occurred in Delaware, the
public has shown little interest in Federal Deposit Insurance Corporation.
Contacts made are all favorable.
FOID
LR A
April 9, 1935.—Have contacted 20 various business houses. Everyone heart
ily endorses the Federal Deposit Insurance Corporation. Believe this senti
ment universal in Florida.
GOG
ERIA
April 9 1935._Federal Deposit Insurance Corporation was welcomed by great
mass of people Has been important factor in restoring confidence in banks,
particularly smaller institutions. Regarded by many as one of the most con
structive steps in present national administration. Increased savings deposits
in many banks believed traceable to insurance plan. While activities not sub
ject to general discussion now, individuals and business, especially smaller
business, finding satisfaction in safety provided by its operation.
IDH
AO
February 19, 1935.—Deposit insurance remains the cornerstone of public
confidence in our banks.
March 26, 1935.—Remains cornerstone of public confidence in banks. Bankers
admit Federal Deposit Insurance Corporation has produced solid public con
fidence in banks.
April 9, 1935.—Public opinion overwhelmingly favorable and confidence in
banks remains solid with deposits increasing.
INIAA
DN
April 9, 1935.—Has restored confidence in banks, but has not resulted—for
some reason—in a relaxation of bank credit.
IO A
W
April 9, 1935.—Public reaction to Federal Deposit Insurance Corporation on
bank deposits definitely favorable. Small depositor, which, includes savings
depositor, is very favorable to insurance of deposits. Best evidence of this is
BANKING ACT OF 19 3 5
139
literally hundreds of cases reported to us of money taken from Postal Savings,
from hoardings, and from larger banks in border States and deposited in Iowa
banks after inception of Federal Deposit Insurance Corporation. There is
some disposition to the belief that insurance is so satisfactory to the depositor
that he does not seek other investments. Large commercial accounts do not
emphasize insurance on their deposits, except as it tends to restore confidence
in the bank and thereby stabilizes banking conditions and satisfies small de
positor, who as a rule is a cause of runs on banks. Public is grateful and
happy for benefits of Federal Deposit Insurance Corporation.
KNA
AS S
March 5, 1935.—Banks now beginning to fully appreciate the value of this
activity with the result that an increasing number are subscribing, however,
many banks still remain without insurance.
April 9, 1935.—Although many banks remain without insurance, it lias
greatly increased confidence in financial institutions.
KNUK
ETCY
April 9, 1935.—Much appreciated by public generally. Resulted in growing
increase of deposits in all banks. Smaller banks quite enthusiastic. Some
larger institutions feel their independence, objecting to expense of operation
Some suggest annual assessments of service; others suggest limitation of
amount of insurance to $5,000. These objections made some months ago but
little protest at present time. Unquestionable demand for retention of act.
MIN
AE
April 9 1935.—Public sentiment favorable to Federal Deposit Insurance Cor
poration. Maine commercial banks favor this. State savings banks have
centrally managed liquidity fund.
MRLN
AYAD
March 26, 1935.—Activities progressing quietly.
MH A
ICIGN
April 9 1935.—From every source I get only favorable public reaction to
Federal Deposit Insurance Corporation. Belief quite general that this agency
is reestablishing faith in banks. Increased deposits in Michigan banks best
proof of renewed confidence.
M NS T
INEOA
March 5 1935.—Agency has done outstanding work and 95 percent of banks
in this State are insured. Public well informed and very favorable toward
this activity.
,
... . . .
...
March 26, 1935.—Agency 100 percent efficient and popular with both public
and banks.
...
April 9, 1935.—Exceedingly popular and has produced great public confidence
in banks.
MS S P
ISIS IP I
April 9, 1935.—Public opinion appears entirely favorable because of Federal
protection.
MS UI
ISOR
April 9, 1935.—Reaction of public and State banking department to Federal
Deposit Insurance Corporation is universally favorable. Deposits substan
tially increased. More than 500 State banks have voluntarily come under Fed
eral Deposit Insurance Corporation and only 40 have not. Most of these 40
are small or family banks and expense is deterring factor.^ The favorable
public reaction is general over entire State and also the four-State area. It is
recognized as an essential part of the banking system.
m
140
BANKING ACT OF 1 9 3 5
MNAA
OTN
March 26, 1935.—Has greatly restored confidence and receives almost unani
mous acclaim.
NBAK
ERS A
February 19, 1935.—Agency has made a fine record in this State with a
high percentage of deposits now insured.
April 9, 1935.—After experience of last 3 years when banks were blowing up
like firecrackers in Nevada, depositors unequivocally approve deposit-insurance
plan. They are not interested in howl of big banks, who may have to carry
premiums for some of their weaker brethren. They feel this latter will be an
incentive to insist on good banking practices and will insure national super
vision and inspection.
NWHMS IR
E A PH E
April 9, 1935.—About 1 out of 50 know anything about it. New Hampshire
Bankers Association report public neither informed nor interested. Reaction
nil.
NWJESY
E RE
March 5, 1935.—There is little comment concerning this agency, but it is
believed that this activity has full public support.
.
.
March 26, 1935.—There is little said about this agency, its activities being
accepted as a matter of course.
NWM IC
E E O
X
April 9, 1935.—Have heard of no comments either pro or con in New Mexico.
NWYR
E OK
April 9, 1935.—Public reaction to Federal Deposit Insurance Corporation not
wide-spread, but generally favorable. Larger banks in Manhattan protest
method of assessment, claiming only insurable amounts of deposits should be
taxed. Otherwise not opposed, although unenthusiastic.
NRHCRL A
OT AOIN
\p ril 9, 1935._General public reaction most favorable. Find in contacting
number of bankers, who will eventually help mold public opinion, in vast major
ity think $5 000 coverage sufficient and favor definite premium sufficient to
cover but to be lowered if justified later. Majority same parties favor pre
mium on insured deposits only. Five thousand limit covers 95 percent de
positors banks this State.
NRHDKT
OT AOA
February 19, 1935.—Public attitude and editorial comment uniformly favorsblG.
March 26, 1935.—Has restored public confidence in banks and is now accepted
as a matter of course.
April 9, 1935.—Agency has restored confidence m banks and public opinion
remains wholly favorable.
OIO
H
March 26. 1935.—Program has been exceptionally beneficial and remains least
criticized of all emergency activities.
April 9, 1935.—Is least criticized of all emergency agencies.
OLHM
KAOA
A[/ril 9, 1935.—Public reaction reveals this is one Government program with
which general public will go all the way. No derogatory comment to Federal
Deposit Insurance Corporation was made in interviews with large number of
Oklahoma business men and individual depositors. Editors and newspaper
'lipping bureaus report Statewide approval of program as reflected in press.
BANKING ACT OP 19 3 5
141
Increased deposits indicative of restored confidence. Group 4 of Oklahoma
bankers’ association in convention at Ardmore yesterday passed resolution rec
ommending titles 1 and 3 of Congressional Banking Act of 1935 and commending
work of Federal Deposit Insurance Corporation. Group 5 in Tulsa today
expected to pass similar resolution according to secretary of association. These
group meetings represent approximately 450 eastern Oklahoma bankers. State
banking commission reports only two failures in State banks since inception
of Federal Deposit Insurance Corporation. Continuance of Federal Deposit
Insurance Corporation under competent management felt essential to continued
faith in banking system.
OEO
RGN
February 19, 1985.—Has produced desirable feeling of security of average
citizen in his bank account.
PNS L AIA
E NYVN
March 26, 1935.—Has functioned very successfully and restored confidence.
April 9,1935.—Has greatly strengthened banking system, although many small
banks, due to limited capital, criticize tbe provision compelling them to join
the Federal Reserve System by July 1, 1937, in order to maintain their insured
status.
ROEISAD
HD LN
April 8, 1935.—Banking situation here unusually strong, therefore, except
for added confidence due to Federal Deposit Insurance Corporation, difficult to
determine public reaction.
S UHCRL A
OT AOIN
February 19,1935.—Has restored confidence in banks. Comment is frequently
expressed that this program is one of the most important in “ new deal.”
March 26, 1935.—Public has great faith in this activity.
April 9, 1935.—Most beneficial.
S UHDKT
OT AOA
February 19, 1935.—Comment wholly favorable, with the exception of a
very few bankers who are opposed to the principle of this activity.
March 5, 1935.—There is little comment concerning this agency, but it is
believed that this activity has full public support.
TNESE
E NSE
March 5, 1935.—It is suggested that means be provided to inform the public
of a bank’s insured status by means other than the notices on tellers’ windows.
March. 26, 1935.—Has restored public confidence in banks.
TXS
EA
March 26, 1935.—Well-staffed and functioning effectively.
Api'il 9, 1935.—Continues to function effectively.
UA
TH
February 19, 1935.—Public opinion generally favorable.
March 26, 1985.—Public unanimously for Federal Deposit Insurance Cor
poration, although some bankers and financial interests remain skeptical.
VR OT
EMN
April 9, 1935.—Public reaction to Federal Deposit Insurance Corporation
quiet but favorable. About half the banks use their participation in their
ad\ertising. Bank public apparently take it as an accomplished fact and rely
upon it, although not particularly outspoken in their comment.
WS INT N
AH GO
March 26, 1935.—Has resulted in vastly improved banking conditions and a
general increase in deposits.
127297— 35------ 10
142
BANKING ACT OF 19 3 5
April 8 1935.—Has resulted in improved banking conditions, although need
is seen for means to enforce provisions of Federal Deposit Insurance Cor
poration.
WS V G IA
ET IRIN
April 9, 1935.—Public reaction to Federal Deposit Insurance Corporation
quite sympathetic and guaranteeing of deposits has stimulated confidence in
banking institutions. Deposits have materially increased. Bankers, however,
are opposed to proposed amendments to existing law now pending in Congress.
WCNIN
IS OS
April 9, 1935—Don’t hear about it. Deposits on increase. Only through
restatement of fact that money is in circulation, do we know about its works.
Banks favorable.
WO IN
YMG
April 9, 1935.—Banks noncooperative toward this activity.
(Thereupon, at 12:45 p. m., an adjournment was taken until F ri
day morning, Mar. 1, 1935, at 10:30 o’clock.)
B A N K IN G A C T O F 1935
FRIDAY, MARCH 1, 1935
H ouse of R epresentatives ,
C om m ittee on B a n k in g a n d C u r r en c y ,
W ashing ton, D. C.
The committee met at 10:30 a. m., Hon. Henry B. Steagall, chair
man, presiding.
The C h a ir m a n . All right, gentlemen, we have with us this morn
ing Mr. O’Connor, Comptroller of the Currency, and he will discuss
the bill. I am going to suggest that Mr. O’Connor be permitted to
proceed in his own way, without interruption, until he shall have
finished his preliminary statement, if that is agreeable with the
committee.
We will be glad to have you proceed without interruption, until
such time as you desire to be interrogated, Mr. O’Connor.
STATEMENT OF J. F. T. O’CONNOR, COMPTROLLER OF THE
CURRENCY
Mr. O’Connor. Mr. Chairman and gentlemen, I assume that, from
the inquires I have received from the members of this committee and
others in Congress, that they have a very especial interest in the
national-banking situation, inasmuch as Congress is more directly
and largely responsible for the national banks, and I, of course, have
most to do with that possibly as Comptroller, and also as a member
of the board of the Federal Deposit Insurance Corporation, and I
would like to discuss the general situation as well as the bill.
The C h a ir m a n . Mr. O’Connor, if you permit me, I am going to
suggest that you address yourself, first, to title I of the bill, as we
have had that solely under discussion down to this time. After you
shall have finished with that, we will then decide as to when we
will take up the other parts of the bill, if that is agreeable to you.
Mr. O’Connor. Yes; thank you. Unless the committee desires it,
or unless they do not desire it, I would like to bring you up to date
with a brief picture of the national banking situation as it is today,
from the office<of the Comptroller, with reference to these closed
banks and unlicensed banks that we started with after the termi
nation of the banking holiday of 1933.
At the close of the banking holiday in March, we had 1,417 na
tional unlicensed banks, and these banks had in deposits $1,971,960,000. The question naturally arises before us this morning as to
what has been done with those banks and those deposits, and I am
giving you the figures of my office up to the first of February, as we
release a monthly report at the end of every month.
143
144
BANKING ACT OF 19 3 5
We have reorganized 1,091 of these banks with deposits of $1,805,622,000. Thirty-one of these banks decided to go out of business,,
and they paid their depositors in full, $11,513,000.
There was placed in receivership 292, with deposits of $lol,o40r
Now, that accounts for 1,414, leaving 3 unlicensed national banks
at the beginning of the present month, or the beginning of Febru
ary, rather, and those 3 had $3,280,000 in deposits.
.
Let us now take up the problem of these banks in receivership.
We have paid to depositors in those particular banks, $ol,084,2bo,
and we have plans approved for reopening four of these receivership
banks, which will release an additional sum of $M27,OUO
That is the complete picture, gentlemen, from March 1933 to the
first of February of the present year, and you will notice that all
that remains of approximately $2,000,000,000 in the recenership
banks is approximately 5 percent of that amount.
.
^
That is, briefly, the story of the unlicensed national banks alter
During ^the same period, from March 16, 1933, there has been
distributed to depositors in all banks, those closed before the bank
holiday and since the holiday, $621,920,917; and roughly, I believe
that represents, gentlemen, about 54 percent of the total in the na
tional banks; and please bear in mind that I am only referring to
the national banks in this statement.
The total number of receiverships accumulated over the years
up to the present time, including those that I mentioned of unlicensed
banks, was 1,547, and they had deposits, at the time of the closing, of
$1,880 710.184, and there has been paid to depositors to date of r ebruary 1, 1935, $1,016,836,666.
In addition to that work, the Comptroller s office has been very
much interested in the sale of preferred stock in the national banks
to do two things: First, to strengthen the capital of the national
banks; and, secondly, to make more money available for credit,
and also to relieve the banks from compelling debtors to pay who
are not able to pay at present, but had good, going businesses, and if
permitted to go along, could, m time, pay. That 'was the object
of purchasing preferred stock in national banks.
I have received this morning from the Reconstruction Finance
Corporation the purchases of preferred stock and capital notes and
debentured outstanding, and also loans on preferred stock outstand
ing, divided, first, national banks and, secondly, State member banks,
and' third, nonmember banks.
In national banks the loans on preferred stock outstanding were
$9,624,716.30; purchases of preferred stock $437,577,064.65, a total of
$448,444,001.09.
,
_ x ,
In State member banks the loans on preferred stock outstanding—
and that probably would be also debentures or notes where they were
not permitted by State law to issue preferred stock—$1,064,618.44;
and purchases of preferred stock, capital notes, and debentures out
standing, $174,943,610.25, or a total of $176,008,228.69.
With reference to nonmember banks and other State banks that
are not members of the Federal Reserve System, loans on preferred
stock outstanding, $8,797,658.20; purchases of preferred stock, capital
BANKING ACT OF 1 9 3 5
145
notes, and debentures outstanding, $242,213,311, or a total of
$249,768,749.06.
.
Now, that makes a total of the loans by the Reconstruction F mance
Corporation on these three classes of banks of $19,486,992.94; and
purchases in the capital structure of $854,733,985.90, and a grand
total of $874,220,978.84.
I think you will be interested in knowing that there was purchased,
locally, of the preferred stock in national banks, $73,366,655.
I think you will be interested in having pointed out, so we will
have the record clear, what we mean by loans on preferred stock or
capital debentures by the Reconstruction Finance Corporation and
the figure I have just given you, the figures with reference to pur
chases locally; it is the policy of the Reconstruction F inance Cor
poration that when a bank, whether State or national, needs capital
strengthening, first an effort is made to get the people in that com
munity to buy the stock. That seems to be the agreed and very
sound policy, that we all feel that we would much rather have the
people in the community own these banks, of course, than the Gov
ernment; the Government, as I take it, being only a temporary
expedient in the emergency, and that the stock should be purchased
by stockholders and others locally.
‘ Now, another plan that has been worked out, which is also sound,
is that w
rhen local interests are willing to make purchases of the
capital stock to strengthen the bank, preferred stock or debentures of
capital notes, who are not able to pay for them in cash, which, of
course, must be done, the Reconstruction Finance Corporation will
take that stock and other collateral and lend against it, so that it
drives the purchasing party an opportunity to finally buy his stock
and own the bank.
Just for the record, because you gentlemen, of course, thoroughly
understand it, but so someone "else reading the record will have it
clear, when we speak in the same breath about preferred stock and
capital notes and debentures, the reason for that is that Congress
permitted national banks to sell preferred stock, Congress having
exclusive jurisdiction over the national banks.
Most of the State laws, however, do not permit the sale of pre
ferred stock in State banks; and, therefore, Congress worked out
the problem for them of permitting them to sell debentures, or sell
capital notes; and the interpretation of all of the banking depart
ments of the Government is, that those notes and debentures are
considered the same as preferred stock in the capital structure of the
banks, some States permitting notes and some permitting debentures
to be sold. I thought that ought to be cleared up, but it does not
need to be cleared up for you gentlemen, but someone else who might
read it.
I would like, with your permission, Mr. Chairman, to read my
recommendations with reference to title I, which is the bill under
consideration, which is found on pages 14 and 15 of the annual report
of the Comptroller of the Currency, for the year ending October 31,
1934:
Consideration should be given to strengthening the provisions of the law
governing the Federal Deposit Insurance Corporation. In view of the protec
tion afforded depositors, no doubt many of the States will follow the precedent
established by Congress in eliminating the double liabilities on shares of stock.
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BANKING ACT OF 1 9 3 5
Relieving shares of stock from the double liability, and the insurance of bank
deposits offer added encouragement to the establishment of new banks. Great
caution should be exercised in the future in the establishment of either State
or national banks, or branches of either, in order to prevent a repetition of the
failures of a few years ago. Under the present law if a bank’s assets are
%
sufficient to pay its liabilities, the Federal Deposit Insurance Corporation
must accept it as a member, although it may have no capital structure.
The Comptroller’s Office, under existing law, is in a position to require na
tional banks to maintain adequate sound capital, and also to prevent the
organization of a new national bank unless it has adequate, sound capital, and
unless there is need for additional banking facilities in the location chosen,
and a reasonable prospect that the bank will operate successfully. The Comp
troller’s Office is thus able to protect the interests of the Federal Deposit Insur
ance Corporation in those respects with reference to national banks, particularly
since the Comptroller is a member of the board of the Corporation. There is,
however no such safeguard as to State banks and it is believed that the law
governing the Federal Deposit Insurance Corporation should be amended to
make a State bank’s admission to the fund conditional upon the approval of
its capital structure by the Corporation; and in the case of a new State bank,
the board should be required to pass upon the need for additional banking
facilities in the place selected and upon the reasonable prospect of the bank’s
successful operation.
It would be well to consider whether the law should not be further amended
to permit the Corporation, under proper limitations, to purchase assets of
an insured bank for the purpose of assisting in merging such a bank with
another, or of reorganizing when it becomes apparent that a loss to the Cor
poration is impending. In this manner, losses may be limited or minimized.
Under the present law, the Corporation may do nothing until a bank is closed
and after that its recovery is dependent upon liquidation. Recoveries through
liquidation are certain to be less than the values which may be placed upon
the same assets by a going institution.
_ _
The law should be amended to provide for examination by the Corporation
of State nonmember banks which become members of the fund. An express
provision should be made for reports of condition by all insured banks not now
reporting to a Federal agency at intervals of not oftenei than tw ice a yeai,
such report to be as of the same date as a call report made by national banks
to the Comptroller of the Currency.
The Banking Act of 1933 in section 11, subsection (d) makes specific pro
vision that security for deposits of postal savings funds in banks shall not be
required to the extent that such deposits are insured. A general statutory
provision should be enacted so that no security shall be required under Federal
statutes for any deposits in banks to the extent that deposits referred to in
such statutes are insured under section 12 (b) of the Federal Reserve Act, as
amended.
.
. . . . . .
,
.
,
It is believed that Congress might well consider the advisability of levying
an annual assessment under the permanent plan in lieu of an assessment
merely to repair insurance losses, and that it might make provision for carry
ing a portion of the assessment in a reserve which could ultimately operate
to decrease such annual assessment. In banking, as in other businesses, it is
desirable when practicable to anticipate the fixed charges, and so far as pos
sible. the cost of insurance should be made a fixed charge subject to reduction
through economical and efficient operation.
Miscellaneous incidental matters affecting the Federal Deposit Insurance
Corporation should be provided for as follows:
Extend criminal provisions applicable to officers of member banks to officers
of all insured banks. Eliminate reference to par value of Federal Deposit
Insurance Corporation stock in subsection E of section 13 (b) of the Federal
Reserve Act by substituting therefor the amount paid for said stock; extend
the prohibition in the present law against gratuities to Federal examiners to
examiners of all insured banks and their officers and .likewise extend to same
the prohibition against disclosure of confidential information; give the Federal
courts jurisdiction of actions against the Corporation; extend to the Corpora
tion the protection now given to other Federal institutions against misleading
use of their names; and extend to all insured banks the present law making
robbery of member banks a Federal offense,
BANKING ACT OF 19 3 5
147
Mr. Chairman, I am ready now for questions.
The C h a ir m a n . I am going to suggest that we begin with Mr.
Reilly.
Mr. R e il l y . I have received quite a few letters recently, Mr.
O’Connor, from old national banks, inquiring as to the possibility
of relief from that double liability of assessment through an act of
Congress, or some other method. What is your view as to the ad
visability or necessity or wisdom of any act by Congress at this
time ?
Mr. O ’C o n n o r . I covered that in my annual report, and if you
will permit me, I will give you that. On page 12 of the annual re
port of the Comptroller of the Currency for 1934, in answer to Mr.
Reilly’s question, I make this statement:
Section 22 of the Banking Act of 1933 relieves shareholders of national
banks from the additional liability imposed by Revised Statutes 5151, as
amended, and section 23 of the Federal Reserve Act, as amended, with re
spect to shares issued after the date of enactment of the act. Bills were
presented in the last session of Congress to extend this relief to all outstanding
shares of stock of national banking associations, regardless of date of issue.
In the event it is determined to completely eliminate this assessment liability
of shareholders, it is suggested that serious consideration be given to pro
viding for increasing the surplus of national banking associations until same
equals the amount of its common capital stock, thereby restoring to the bank’s
creditors the protection now given by the potential assessment liability of the
shareholders and maintaining a sound banking structure.
Let me say, in that connection, that is a matter that our office,.
Mr. Congressman, has given very serious consideration to. We'
must at once appreciate the fact that, by eliminating the double
liability on all national banks, we have tremendously weakened the
banking structure of the nation. That must be clearly kept in
mind. Therefore, I have suggested that, if the Congress decides to
eliminate the double liability on all old national banks, the banks
should be required to build up, out of their profits, some substantial
amounts which shall go into a surplus fund of the banks.
Thereby, you will have in a bank and behind the capital structure,,
really, in time, the double liability and then relieve the stockholders
of it. I appreciate that many people object to relieving the stock
holders of this double liability in banks, but those, I think, ought to
consider th is: First, that banking investments are greatly discrimi
nated against, because of that double liability, investors not wishing
to put their money into a corporation upon which they may be
called upon later to pay double the amount, or the same amount they
have already contributed; and particularly those who make invest
ments feeling that, not during their lifetime, but it might happen
that, at their deaths, they have unloaded onto their widows and
children liabilities that might wipe out the whole assets and whole
savings of that man during his lifetime, which has happened in
some instances, unfortunately.
And, again, I think it ought to be pointed out to those who criti
cize Congress for doing this, that you levy the assessment at the
very time when either the holder of the stock or his family is less
able to pay it, because in good times you do not need it, and it is only
when we get into a period such as we have been going through that
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BANKING ACT OF 19 3 5
we put this extra burden and hazard upon people who are less able
to bear it.
It has been the policy of our office to look into every case indi
vidually, because we have the duty imposed upon us by Congress to
collect these assessments, and when people are perfectly able to pay
we require them to pay; we have no option, we cannot give away
money.
When people who have property and are not attempting to trans
fer it to defeat this assessment, or to sell it, come to us and tell us
that they are attempting to secure it, but they need time, in every
instance we have worked out a satisfactory arrangement with people
in those circumstances, and we have not had any particular complaint
that we have been unduly harsh in that respect.
Now, directly to the Congressmen, I have given you my view of
that, and have tried to answer the criticism.
Mr. R e il l y . Your view would be that any legislation by Congress
waiving the double liability in the old national banks should be
limited to those institutions that have built up a reserve equal to
their capital stock?
Mr. O’Connor. That is not quite correct. I would abolish the
double liability on all banks and provide for the building of the
surplus to 100 percent of capital in the future.
Mr. R e il l y . I wonder whether any of that kind of legislation
would be constitutional. Has Congress any right to declare, by law,
that the depositors in a bank, say of $500,000 capital stock, shall be
denied the right to levy to the extent of that capital stock, in case
the bank should go into insolvency ?
Mr. O’Connor. Mr. Congressman, you have raised a very impor
tant question, and if I have retained any law since I got into the
banking business, I do not believe that Congress could pass a law
effectively today that would relieve the shareholders from double
liability as to depositors and creditors who have entered into a
contract' with the bank at that time, when their rights were fixed;
and their rights are fixed and their contractual relationship with the
bank does exist, and I do not think Congress can destroy it.
The only thing Congress can do would be to throw the operating
period into the future a sufficient length of time, so that the existing
creditors would not be affected, and that would be a contract—because
every depositor has a contract between the depositor and the bank—
they" would then come under the terms of the new law.
I think you have raised a ver yimportant question.
Mr. R e il l y . Or give them time to take their money out o f th e
bank and put into some other bank ?
Mr. O'Connor. Yes.
Mr. R e il l y . Right on that point, on that question, what diffi
culties do the banks encounter when they attempt to reorganize and
come under a new law? Suppose you had a national bank of $500,000 capital stock and it wants to get away from its double liability,
is there any difficulty in reorganizing and getting a new charter by
changing some word in its title ?
Mr. O’Connor. N o ; it can do that. Any corporation has that
right, but there is a great many procedural difficulties in it.
BANKING ACT OF 1 9 3 5
149
In the first place, they have got to get the consent of all of their
stockholders and explain to them why they are doing it, and bankers
rather hesitate to take all of these issues and explain them and get
consent from several hundreds or thousands of stockholders and,,
frankly, since the law has been in effect, we have not had that
question presented. There are probably one or two cases that I am
not familiar with, in no number that would affect the attention of
an
s my best answer, and I believe bankers have the feeling
that it is difficult to do it.
Now, under the present law, Mr. Congressman, you have this:
We have in national banks some stock that is subject to double
liability, and in the same bank we have stock that is not subject to
the double liability.
Mr. R eilly. H ow d oes th a t h a p p en ?
Mr. O ’C o n n o r . Because all the new issued stock is not subject,
as you provided in the act, to the double liability.
The C h a ir m a n . Right there, let me trace the history of this
legislation. I might say I am responsible for the amendment to the
law, the purpose of which was to remove the double liability of the
stockholders. The bill as it passed the house, applied to the need
to something constantly requiring—I mean the bill as reported by
the committee to the House had that language, and the bill was
amended in the House in language that I cannot just at the moment
recall. I asked Mr. Await, a moment ago, if he remembered, but
he does not recall the exact language, but in conference the pro
vision was rewritten, and I suggested to Senator Bulkley—the fact
was that the Senators in Congress were hesitant about agreeing to
it and I suggested to Senator Bulkley, who is an able lawyer, that
he rewrite the language so as to make sure of the accomplishment
of the purpose in mind.
I t was my thought that the language employed by the House in
the passage of the bill was not adequate to accomplish the purpose,
and Senator Bulkley suggested a new idea which made it apply to
stock thereafter issued.
I,
at least, and I cannot speak for the other members of the con
ference committee, but for myself, I proceeded upon the idea that
all stock repurchased or resold had to be reissued and that, therefore,
the language making the relief applicable to stock thereafter issued
would cover all old stock, if transferred.
So that the Comptroller’s office—and I am not questioning the
soundness of the decision—conclude the act to apply to stock there
after authorized to be issued; or in other words, applicable only to
new issues of stock. The construction was not in line with my own
idea. However, that is not important now.
I u n d ersto o d y o u to sa y th a t, in ord er to m a k e su ch a p r o v isio n
a p p lic a b le to th e e x is tin g sto ck , or to o ld sto ck , it w o u ld be n ecessa ry
to m a k e th e e ffe c tiv e d a te a t som e fu tu r e tim e as w o u ld rem o v e a il
q u e stio n o f th e c o n tra c tu ra l r e la tio n sh ip b etw een th e sto ck h o ld e r
a n d th e d ep o sito r, or a n y o th e r cr e d ito r o f th e b ank.
I am wondering if you are not slightly in error about that, for
this reason: That under the original law, any stockholder of capital
in a national bank might transfer his stock and relieve himself of all
further liability by meeting the requirements of the existing law,
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BANKING ACT OF 19 3 5
which fixes a definite time within which the statute of limitations
would operate against a stockholder who had transferred his stock
in good faith, and the period, as I remember it, was 60 days, as I
remember, Mr. Await.
Mr. A walt . That is correct.
The C h a ir m a n . S o that, in any event, any stockholder could
have relieved himself, under the original law, completely from any
liability to assessment, if he transferred his stock in good faith
60 days before the failure of the bank, or the period of liquidation;
is that true?
Mr. O ’C o n n o r . Then, Mr. Chairman, the man to whom he trans
ferred it would be liable.
The C hairman . What was that?
Mr. O ’C o n n o r . The stock is still liable. The man to whom he
transferred it would then be liable.
The C hairman . Yes, that is quite true.
Mr. O ’C o n n o r . Y ou have not, you see, eliminated----The C hairman . I am speaking now of the contractual relation
ship of the man in the first place. That man could relieve himself
of the contractual relationship after a period of 60 days, if he trans
ferred his stock in good faith?
Mr. O ’C o n n o r . T o make it clear, we had better talk about the
liability attached to the share of stock, rather than to the individual,
and that you cannot abrogate by act of Congress.
The C h a i r m a n . Let me ask you this question: Do you know how
many States have laws providing double liability on the capital
of banks—State banks?
Mr. O ’C o n n o r . My recollection is, nearly all o f them.
The C hairman . Nearly all of them?
Mr. O ’C o n n o r . Nearly all of th e m . That is m y recollection.
The C h a ir m a n . I am a little surprised to hear that. Although
I have never seen the figures.
Mr. O ’C o n n o r . I think we can get a very clear picture if we ask
each member of the committee what his State holds, and you can
then get a cross section of the whole country.
The C h a i r m a n . I t was my impression that only a few States
provided for the double liability.
Mr. O ’C o n n o r . The members of the committee could tell us
quickly what State has not got it.
The" C h a i r m a n . Let me ask you this question, in that connection:
What would you think of a provision that would go the whole way
in the limitation of contractual obligations and existing difficulties
in relieving stockholders in national banks, in all States where no
double liability attaches to the stockholder, or to stock issued by a
State bank ?
Mr. O'Connor. I can say, Mr. Chairman, and I am just giving
my opinion from my experience as a lawyer, my answer would be
that it would not avoid the constitutional objection that Congressman
Reilly has mentioned.
The C h a i r m a n . I don’t think you quite got my question. I mean
aside from those difficulties, insofar as you might do so—I am
speaking now of the policy of duplicating the same law as to the
liability of stockholders.
BANKING ACT OF 1 9 3 5
151
Mr. O ’C o n n o r . That is a matter of policy entirely within the
discretion of Congress, with the limitation that I previously stated
to the committee with reference to the constitutional objection. It
was placed, as I believe, in the future a sufficient length of time-----The C h a ir m a n . My question contemplated the removal of those
difficulties.
Mr. O ’C o nn o r . Oh, I see.
Mr. C ross. Let me ask a question right there, Mr. Chairman.
The C h a ir m a n . Certainly, Mr. Cross.
Mr. C ross. See if this would not eliminate the situation: I under
stand, of course, about making a deposit in a bank, and that at
the time I do it the stockholders are subject to double liability. I
assume, of course, that I have a contract with them, or when I put
it in the bank, they are liable, and that gives me better security
to get my money back. But suppose you were to put a clause in
the law that all deposits hereafter, the new deposits that go in a
bank, shall not have the double liability, so that when I put in
money in it, in that bank, after that—any money that I put in
there before that, I can take it out, all right, but that money that I
put in after that is no longer put in there under a contract that I
can reap the double liability on the stockholders, so why not put
in a clause like that relieving those stockholders of that double
liability only in reference to all new deposits?
Mr. O ’C o n n o r . Mr. Congressman, I think you are absolutely cor
rect, because whenever you do that, you establish a new contractual
relationship. Could I suggest probably that some difficulty would
be that of administration, of segregation of the amounts, the deter
mination of the dates of the deposits, and then waive the assess
ment for depositors who are under the double liability and segregated
from those that are not?
Mr. C ross. Suppose I had $10,000 in a bank today in my checking
account—of course, I am putting money in the bank and drawing
money out, and my checking account will add up to $10,000. Now,
when iny checking account adds up to that, then the stockholders
are not liable for the penalty, for the double liability?
Mr. O ’C o n n o r . You are absolutely correct. Mr. Congressman, may
I call your attention to page 53 of H. R. 5357, section 301, which
reads:
Section 22 of the Banking Act of 1933, as amended, is amended by adding at
the end thereof the following sentence: “ Such additional liability shall be
on July 1, 1937, with respect to shares issued prior to June 17, 1933, by any
association which shall be transacting the business of banking on July 1, 1937.”
I just call your attention to that because that is the section that
you would operate on, if I might use that word, if you decide on
what you are discussing.
Mr. H ollister . Mr. O’Connor, your idea is that, even with respect
to the deposits which have been incurred, or which have been made
obligations of the bank, incurred prior to the enactment of this act,
if enacted—if a certain length of time, 2 years or something more is
given, that notwithstanding the obligation that exists at the time
the deposit was made, which would give them ample opportunity and
they would be charged with knowledge of the change in the act, no
depositor could claim it after that time?
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BANKING ACT OF 1 9 3 5
Mr. O’Connor. N ow, you are probably a better lawyer than I
am----Mr. H ollister . I d ou b t it.
Mr. O’Connor. This is very important, Mr. Congressman. Of
course, as lawyers, we both agree that any individual charged with
notice of the law, that he is bound by it, so far as it affects his rights.
You have raised the question that, if he continues during that
period with the same contractual relation that he had with the
bank as to those amounts, it is doubtful if the bank could abrogate
that contract. There is no doubt about a new contract, as the
Congressman has suggested. In view of the law, there would be
no question about relieving them.
Mr. H ollister . Would it not be a very simple matter with respect
to that, because the bank coud really notify all of its depostors to
that effect, or to the effect that, on such and such a date, the law
would come into effect, and that any depositor will have a right to
withdraw his deposit? It will be assumed that, if a depositor does
not withdraw his deposits, that he will consent to making that new
deposit on that date, and thus change the contractual reationship
between the depositor and the bank.
Mr. O’Connor. I think, Mr. Hollister, you are absoutely correct.
Mr. H ollister . I t seems to m e that woud be a perfectly easy
way of obviating constitutional questions which might otherwise
arise.
Mr. O’Connor. In other words, this contractual relationship you
talk about can be terminated by either party, because the bank has
the right to say to a d ep o sito r,W e don’t want your money.”
Mr. H ollister . A depositor has no vested right in making a
deposit, and if a bank cares to notify a depositor that, at a, certain
date, the relationship between them will be changed, giving him
plenty of time to withdraw, it seems to me you are more than liberal
in 2 years. You can make it 6 months, and if a bank wanted to notify
all of its depositors and give them plenty of time to withdraw their
savings as well as demand deposits, that constitutional difficulty
will be obviated.
Mr. O’Connor. I am inclined to agree with you.
The C h a ir m a n . I w a s going to propound that very inquiry.
Mr. O’Connor. Y ou are too late.
The C h a ir m a n . That is just what I was going to ask.
Mr. O’Connor. Y ou are too late.
The C h a ir m a n . W hat would be the difference between terminating
your liability at the end of 60 days, or at the end of 2 years or more ?
The principle would be the same, of course. Under the amendment,
you are going to terminate those obligations arbitrarily, or by one
party to the transaction, and if you are, you could do it just as well
at the end of 60 days, if you met the same requirements.
Mr. O’Connor. Mr. Congressman, may I make this rather broad
and rather challenging comment on why this should not be done at
the present time, in my judgment? You may not follow it, at all,
but looking at the picture now and not from a local angle but from
a national angle, I have given to this committee the work of the Gov
ernment in strengthening the capital structure of these banks. We
have gotten them all in very good condition today. I am inclined
BANKING ACT OF 19 3 5
153
to believe that we were able to do this job a good deal because of the
double liability that was on the shareholders.
Now, let me make that very particular: Here is a bank that has
an impairment of its capital, and the Comptroller says, “ You have
got to repair that capital and put up $100,000, or $1,000,000”, and
if there is no double liability, those directors and shareholders are
not as interested in repairing that capital and working out the prob
lems of that bank as if there was no double liability, because they are
just apt to say, “ Take it; it is yours ”, and walk out of the picture.
Now, while we are working out this problem, it is their problem
as well as ours, and the Government has gone a long way with these
banks in strengthening the capital structure of them, in getting local
contributions, so that ultimately they will be owned in the com
munities ; and when they realize the fact that, if we close them, they
will pay one hundred cents on the dollar of the liabilities, they are
going to hesitate a long time before they will permit that to be done.
Therefore, I believe that, until we get it worked out further, that
that is the controlling influence in saving a great deal of the banking
situation of this country, and that is why I would not like to see
it interfered with.
The C h a ir m a n . Mr. Comptroller, there is a great deal o f force in
what you say, and I think I can appreciate it. The fact is, if I
may take time to say so, that I am not so enthusiastic about the
change in the law as I was at one time, because my attitude grew
out of the deep sympathy that I felt for so many‘innocent stock
holders, many of them citizens who, out of public spirit and for
the promotion of the community, had purchased stock in banks that
were under the control of others, with no part in the management,
themselves, and who had suffered finally by the imposition of the
double liability; and as you suggested a little while ago, many
instances have occurred of widows and children who found them
selves in the attitude of having inherited a serious liability, rather
than an asset. Those conditions were accentuated a year or two
ago.
But let me ask you this, in connection with your statement a few
moments ago: Is is not true that great difficulty was encountered,
m many instances, in reorganizing banks that had been temporarily
closed, because of the dread of the investors putting their money in
institutions where they incurred liability of reassessment equal to
their original investment? Would that not, in many instances, inter
fere with the reorganization of banks?
Mr. O’Connor. No ; because that was the reason for passing the
law limiting double liability in new banks.
I h e C h a ir m a n . I am n o t t a lk in g ab ou t t h a t ; I am t a lk in g a b o u t
o ld in stitu tio n s, w h o h a d a ch an ce to re p len ish th e ir c a p ita l an d g o
fo r w a r d u n d er th e sam e o w n e r sh ip or o r g a n iz a tio n a n d ------Mr. R e il l y . The new stock issued has no double liability?
The C h a ir m a n . That is tru e.
Mr. O’Connor. I t was all new stock, because it wiped out the
other stock.
The C h a ir m a n . Y ou had many cases of this land, where stock
holders would come to the rescue of a weakening institution, by put
ting in new investments, and all that sort of thing, did you not?
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BANKING ACT OF 1 9 3 5
Mr. O’Connor. They took new stock, which was not subject to the
liability.
The C h a ir m a n . They could take the existing stock, as well as the
new stock----Mr. O’Connor. You mean to issue new stock?
The C h a ir m a n . N o ; strengthen the existing stock was what I
referred to.
Mr. O ’C o n n o r . Yes; they have done that, Mr. Chairman, but not
in a great many cases.
The C h a ir m a n . Let me ask you one other question: I believe you
suggested that stock in an existing institution is to be relieved of
double liability—that when it is to be relieved of double liability, it
shall be a requirement that a surplus should be built up equal to the
amount of capital. Would you apply that to a newly organized
institution ?
Mr. O ’C o n n o r . Absolutely. There is no reason why they should
be exempted from it. We would, under the terms of the bill, require
20 percent to start and gradually build up to 100 percent.
The C h a ir m a n . I was wondering, if they did not, why not. They
would be, of course, better protected, and it may be better business—
I would not say it would not—than the old plan of putting up onehalf and being liable for the other.
Mr. O ’C o n n o r . That is better. Mr. Congressman, can I make one
more comment?
The C h a ir m a n . Certainly, go ahead.
Mr. O ’C o n n o r . D o you not see how much it is going to also
assist the Federal Deposit Insurance Corporation, of course, if we
can keep that system strengthened and----The C h a ir m a n . I t would, of course, make for a sounder system.
I think anybody can appreciate the contention that a bank should
not be permitted to pay out dividends to the point of weakening its
position.
Mr. R e il l y . Mr. O’Connor, with the exception of the interest
that the Federal Deposit Insurance Corporation would have in the
subject, and the interest of the depositors above the insurance liabil
ity, is not that academic, as far as the great mass of depositors
are concerned—that you are going to get this money, whether you get
it from the stockholders or from the insurance corporation? So,
relatively speaking, they are only a small fraction of the depositors
in our banks today, and only about 2 or 3 percent of them having
any financial interest in the question of whether or not that double
liability will be wiped out or left in, they are going to be paid just
the same, are they not?
Mr. O ’C o n n o r . Y ou are absolutely right, Mr. Congressman, keep
ing in mind the distinction between depositors and deposits in a
national bank, and that 42 percent of the deposits are insured under
$5,000.
Mr. R e il l y . The great majority?
Mr. O ’C o n n o r . Yes.
Mr. R e il l y . Y ou would really think that the Insurance Deposit
Corporation—if all of the depositors in a bank which was above
the insured limitation, would sign a request that the liability be
wiped out, there would be no reason why it should not and could
not be wiped out or eliminated ?
BANKING ACT OF 1 9 3 5
155
Mr. F ord. Might I make a suggestion?
The C h a ir m a n . Yes.
Mr. F ord. Would it not be wise to have it printed on the bank
pass book, that on and after such and such a date there was no
double liability on the part of the stockholders, and give every
depositor ample notice, and print it in the part of the rules in that
pass book? Why not, in a commercial bank, have it brought to
the attention of the depositor, by being printed on his pass book ?
Mr. O ’C o n n o r . I think, Mr. Congressman, that is a very sound
suggestion. Mr. Hollister has the same suggestion, without being
specific. Mr. Hollister suggested that that would eliminate the
constitutional objection, by notification to the depositor, and you
suggest a specific method, and that method by you brings the direct
knowledge to the depositor, and he would not be injured, because
I think we have all agreed that it is a contractual relationship that
can be terminated and there is no injury done, because that depositor
can do as he likes.
The C h a ir m a n . I am not sure—I do not mean to put my judg
ment in the matter against that of lawyers competent to pass on it;
but I am not sure that any party to a contract can abrogate it merely
by notifying the other party that he is not going to live up to it.
Mr. O ’C o n n o r . Can I answer that, Mr. Congressman?
The C h a ir m a n . Yes.
Mr. O ’C o n n o r . You can, if it is a contract that can be terminated
by either party on notice, and that is what this kind of contract is.
The C h a ir m a n . All right, Mr. Cross.
Mr. C ross. I want to make this suggestion, or ask him a question:
Two methods have been suggested by which that could be done, that
contractual relationship could be terminated, but if you notified all
of the stockholders—I am speaking now from the psychological
standpoint and expediency—that, at a certain date, the double liabil
ity of the stockholders will end, or if you put in the pass book that
notice, would not that, have a tendency to frighten the average citizen,
because he does not know anything about that? He would say that
the bank is in bad shape, or it is weakening. But you could put
that in the law and nobody would know anything about it, and that
would settle the whole thing, and it would go along smoothly, with
out any difficulty at all.
Mr. O ’C o n n o r . Mr. Congressman, I do not think it is possible to
frighten depositors today, with Federal Deposit Insurance Cor
poration.
Mr. C ross. Well, some of them have more than $5,000 in the bank.
Mr. O ’C o n n o r . Well, we just covered the point of the amount
which is involved. In the national banks, we have got 98 percent
of the number, so that the people that have the large deposits—I
think they probably are in a better position to know.
Mr. C ross. A little more intelligent than the other fellow would be?
Mr. S is so n . Mr. O’Connor, I would like to get this information, if
you have it at hand.
Mr. O ’C o nn o r . Yes, Mr. Sisson.
Mr. S isso n . When you proceed to collect double liability, and in
case that you have to go to court, what is the percentage that you
collect, what do you get out of it, after it is all done?
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BANKING ACT OF 19 3 5
Mr. O ’C o n n o r . I can give you that very accurately, as it is in the
annual report. I t is 49.78, and that is for a period of 70 years,
Mr. Congressman.
Mr. S is so n . There is one other thing about this: I suppose your
department had no other resource but to proceed to collect?
Mr. O ’C o n n o r . N o.
Mr. S isso n . But it is a terrible thing to happen to a community,
to have to do that. It is just too bad that a situation of that kind
lias to come up, where the whole community interest may be de
stroyed. You are very familiar with what I have in mind. I am
thinking of a city in my own district right now.
Now, what I am particulary interested in is this: If this H. R.
5357 becomes the law, what is it going to do with the State banking
system ?
Mr'. O ’C o n n o r . If what, Mr. Congressman?
Mr. S isso n . If this bill which we have under consideration right
now, H. R. 5357, becomes law, what is going to happen to the State
banking situation?
Mr. O ’C o n n o r . Y ou are asking a question on this title?
Mr. S is so n . We practically forced the State banks into the Fed
eral Reserve System, or do it in the next? 2 years, and I want to know
what we are going to do for those State banks, to make it easy for
them to get in; or how many of these banks are we going to put
out of business?
Mr. O ’C o n n o r . I can only answer that in a general way: I have
taken this position, and it is also one of the recommendations in
my annual report, that we ask the Congress to liberalize the assets
that are in these State banks, what we call under here “ noncon
forming assets ”, so as to permit State banks to more easily
become members of the Federal Reserve System. In other words,
if we are going to compel the State banks to do something, we have
got to be careful that we do not do an injustice to those institutions;
and if a certain institution has got sound assets that are not con
forming, I feel that the Congress should give the Comptroller per
mission to permit those, banks to qualify, or permit them to come
into the Federal Reserve System, and permit the Federal Reserve
System to accept them, which it could not do today under the exist
ing laws, because of the assets being as we say, " nonconforming.” I
believe with you, Mr. Congressman, if we compel then—if we compel
that to be done, we have got to be exceedingly liberal in permitting
State banks—nobody wants a bank that is not sound, but we have
got to be liberal in permitting them to join. When you, by an act,
compel them to do that, you have got to be careful that you do not
do them a great injustice.
Mr. S is so n . D o you think that could be written into the law, do
you think that would be possible?
Mr. O ’C o nn o r . Y ou have got to write—you would have to change
the law, because you have fixed certain standards of membership,
and they must have what we call “ conforming ” assets. You would
have to change that, and we will be very glad, at the proper time,
to go in and analyze that section with you, and check up on it.
Mr. W olcott. May I suggest th at'th e Federal Reserve System
waive, in whole or in part, the capital requirements of nonmember
BANKING ACT OF 19 3 5
157
banks, as an inducement to get them in; and if that were true, I
assume the Board would be liberal in its interpretation of the law
and liberal in its requirements.
The C h a ir m a n . Mr. O’Connor, have you any further matter that
you would like to discuss relating to title I? If you have, I would
suggest that you do so, because we will be glad to hear you, and
then will resume our questions.
Mr. O ’C o n n o r . Well, I have given my general approval, Mr.
Chairman, to this bill. I feel that it has been very carefully worked
out, and I think that the fundamental parts of it are very important
in looking forward to the successful operations of the Federal
Deposit Insurance Corporation.
This bill has been passed by the Banking Committee of the Treas
ury, and I want to say that I think it is in very excellent shape.
I did tell the committee that one provision of it I thought was not
just in harmony with my ideas, but the committee thought other
wise. That is with reference to receiverships.
I feel that the present system should be continued. The Comp
troller should appoint the receivers of all national banks, particularly
based on the record of the office of 70 years, without any reference
to myself, because I think we have done a good job in years past,
and I hope in the present, when we have returned, out of every
dollar collected, 93 cents to the depositors, and we have only taken
7 cents out of any dollar for expenses of salaries of the receivers,
and attorneys’ fees and rent, and every other item that you can
possibly conceive of, which has been included in the 7 cents, and we
have returned 93 cents to the depositors.
I doubt the wisdom of setting up two insolvent divisions in Wash
ington. The Comptroller’s Office has handled nearly fifteen hundred
and I believe that, particularly in view of the fact that only 42
percent of the deposits in national banks are protected by the In
surance Corporation—still, the Comptroller is responsible for the
administration properly of the balance of nearly 60 percent and----Mr. H ollister . Fourteen hundred since the office was established?
Mr. O ’C o n n o r . Yes. It would probably be just as well for it to
continue without duplication. I am very much opposed to the use
of duplication in Government or private business.
I wanted to make that clear, and then say that the bill before
you has the endorsement of the committee and I have their com
ments on it.
There is one other section of the bill that I, frankly, have not
discussed with anybody, because I just ran across it yesterday, but
I believe----The C h a ir m a n . Before you leave that, Mr. Comptroller, it might
be well to call attention to the fact that, under the existing law and
under the original Deposit Insurance Corporation law, the Deposit
Insurance Corporation could take over any national bank that was
closed and operate it as a clearing house for a period of 2 years;
meanwhile giving an opportunity for the reorganizing, or for the
organizing of a national bank.
The thought back of that was not so much to secure the wise
administration of the assets of the closed banks, but to permit the
corporation to continue to operate the bank, and to avoid paying the
actual cash to the depositors, by being authorized to issue new deposit
127297— 35----- 11
158
BANKING ACT OF 193 5
receipts by the new institution operated by the Deposit Insurance
Corporation.
Mr. O ’C o nn o r . When banks fail because of lack of business, I
think it is unwise to attempt to establish another bank on the ashes
of the old.
Only one national bank went into receivership in 1934, and it was
in Montana, with a deposit liability of approximately $30,000. For
several years there were no rains and the surrounding country, the
country surrounding it practically dried up, as illustrated by the fact
that it only had $30,000 in deposits. The community just could not
sustain another bank.
The Chairman . Then you think it would be uneconomical and un
wise to require the Deposit Insurance Corporation to continue to
operate a bank, even in a limited way, in that community?
Mr. O ’C o n n o r . Absolutely.
The C hairman . But any such institution should at once be placed
in liquidation ?
Mr. O ’C o n n o r . Yes. Now, we have a right whereby w e may,
under this law, establish a national bank, but we do not do it, because
I am so anxious to avoid establishing banks which will only result
in distress to investors and depositors in the community.
Now, so far this year, we have had only one and— The C hairman . In the instance to which you have referred, or to
the particular case to which you have referred, that was not a case
where there would have been a national bank organized, or would
have been required to operate the bank for 2 years, but there would
have been no likelihood of reorganizing it?
Mr. O ’C o n n o r . That is correct. Now, Mr. Chairman, following
that out, we only had one national bank fail this year, and they did
not fail because of the lack of business or of the lack of necessity for
a bank in the community. I would rather not give the State, because
that is not necessary, but it was due, unfortunately, to the fact that
one of the officers had embezzled some $70,000, and who later confessed
the embezzlement. That is something that cannot be avoided. There
is need for a bank there and we have set up a bank and made excellent
progress, or are making excellent progress in the sale of the old bank
to the new bank and the sale of the stock to the people of that com
munity, because they must have banking facilities there, and that
gives them the option to do it.
Those are the only two, Mr. Chairman, in the national banking
system last year and this year that failed.
The C hairman . S o that, as a matter of fact, you have had last
year and this year, only two national bank failures?
Mr. O ’C o n n o r . That is right.
The C hairman . The insurance of deposits under the temporary
plan of $2,500, and under the $5,000 limitation provided in the act
last year, was not very harmful to the national banking system'in
this country, was it?
Mr. O ’C o n n o r . I think it is one of the things that has reestab
lished confidence all over the country, Mr. Chairman and I think
it is one of the justifications for the contribution on the part of the
large banks to sustain the banking system of the country, because
when the banks started to crack up, outside of New York, thev im
mediately drew out the reserves from the large centers, and’ the large
BANKING ACT OF 1 9 3 5
159
banks immediately drew upon the market stocks, in order to meet the
cash withdrawals, and we thereby started a vicious cycle of depres
sion; and if we can secure or reestablish the confidence of the de
positors of the country, so that will not happen, we have saved the
banking situation. The big banks that suffered by that did not close,
but they suffered in those trades, and they should be willing to go a
long way to prevent that again.
The C hairman . The fact is that a good many big banks actually
closed before the holiday?
Mr. O ’C o nn o r . I am talking about the big centers, where the big
cash reserves are kept, like New York and the other centers; but
some very large ones did close, Mr. Chairman, which started the with
drawals from these centers, which, in turn, shut the banks. I am
talking about the effects on the good banks, how they suffered, even
though they said, “ You can’t close it"’; but they suffered just the
same, and the whole country suffered by the throwing of hundreds of
millions of dollars worth of securities on the market, in order to
realize cash to take care of their customers in the country.
Mr. G ifford. Mr. O’Connor, I want to ask a question. I think
you have made a very good report here relating to the examination
of your banks, but as I recall, even the White House, itself, issued a
warning last fall that the bank examiners were still rather too strict,
and that they could not expect money to be loaned as long as the
banks were worried about collecting their slow loans and liquidating
their loans.
I remember your speeches over the country, and I think perhaps
you may recall that I may have written you a letter regarding your
own viewpoint, and you seem to agree, in those addresses, that the
banks should loosen up.
But in my section, whenever I visited the banks, and I visited a
great many, there existed a fear of your examiners, especially re
lating to slow loans. Now, you are claiming in your report that
you gave your examiners no instructions relating to the demanding
payment of the slow loans, but simply marked them “ slow.” That,
naturally, was effective on the banks and the people who owned that
money, by marking them “ slow loans.” As I think the White House
expressed it, there were two branches of the Government, the Re
construction Finance Corporation and yourself arguing with the
banks that they should loosen up, and another branch, which is the
examination branch, frightening the banks so they did not dare make
loans.
If I may pursue that, I realize that most of the banks—the chief
thing they had in mind was to reduce the slow loans, and they did not
want to get into any more trouble. You acknowledge in your reP°J"C
are n°t quite ready to answer----M r. O ’C o n n o r . Yes, I am .
Mr. G ifford. Y ou say here that there has been considerable con
troversy and misunderstanding with reference to the examination
of banks; that they may have been harassed by the Reconstruction
Finance Corporation’s examinations, by the Federal Deposit Insur
ance examinations, though you examine but twice a year, but, while
they were only supervisory examinations, they probably did in
timidate and perhaps harass some banks by so many of these
examinations.
160
BA N K IN G ACT OF 1 9 3 5
Mr. O’Connor. First, Mr. Gifford----M r. G ifford . C om m en t on th a t, p lea se, on th e slo w loan s.
Mr. O’Connor. There is no harassment of banks by several exam
inations. No national-bank officer in the United States, at no time
and at no place, has made criticism of a duplication of examinations,
because no such thing exists. The only man who has authority to
step into a national bank to examine it is an examiner from the
Comptroller’s office, and you have provided by law that we must
make at least two examinations a year. No other examiner from
the Federal Government ever goes into a national bank, with one
exception: When a national bank asks the Reconstruction Finance
Corporation to become a partner—because that is what they are
when they buy preferred stock in a bank—when they ask the R. F. C.
to become a partner, the banker and the Reconstruction Finance
Corporation sit down and agree on how the deal shall be made, and
in that deal the R. F. C. and the bank may agree that a R. F. C.
man may come in at a certain time and look over their assets or
check up certain matters, which is a matter entirely between the
bank and the R. F. C. The bank does not have to do that, or the
bank may yield to it, just in the deal between themselves.
The bank has a right to ask that an independent auditing firm
make audits—and many of them do that—aside from our examina
tions. Many of the larger and better banks have independent audits
made by some of the large auditing firms to be sure that they have
completely checked up on that bank. That disposes of the point
of harassment of different examinations.
Now, I want to direct myself to the instructions that were sent out
in October 1933 to the national-bank examiners, and then I want to
show you the results that followed those instructions.
Mr. S isson. May I suggest, Mr. O’Connor, that you give Mr. Gif
ford the figures as to the way vou have classified the loans which
were placed in the loss column and the loans which were placed in
the doubtful column ?
.
Mr. G ifford. I have read that, Mr. Sisson. There are very few in
the loss column. That is why I limited my question to the slow loans.
M r. O ’C o n n o r . I w a s c o m in g to it, M r. G iffo rd , b u t I h a v e to la y
th e fo u n d a tio n to g e t th e fig u res, i f I m ig h t be p e rm itted to d o th a t.
Mr. G ifford. Yes; but I wanted to tell Mr. Sisson that I under
stand those figures, but I limited it to the slow loans.
Mr. H ollister. Might I ask a question, Mr. Chairman ?
The C hairman . Yes.
Mr. H ollister. Mr. O’Connor, to go back, temporarily, to that
question of the taking of debentures in place of preferred stock, is it
not true that, in a great many cases, debentures were taken by the
Reconstruction Finance Corporation rather than preferred stock in
some States, because the laws of the State did not permit the issuing
of preferred stock, but also because, in some States where the pre
ferred stock might have been issued, it would have covered double
liability and the Reconstruction Finance Corporation did not want
to take stock that carried double liability ?
Mr. O’Connor. Yes; I think that is true.
Mr. H ollister. T o show you what I am leading to, whether you
take preferred stock or notes or debentures of banks, it is exactly the
same, and it was merely to get additional capital?
BANKING ACT OF 1 9 3 5
161
Mr. O’C onnor. Yes.
.
.
Mr. H ollister. That brings me to the question I am going to ask
you, not that it has anything particularly to do with this bill, but
I believe it ought to be brought out, and this is a good opportunity:
Is it not true that, at the present time, for income-tax purposes, a
bank which has notes and debentures outstanding, may deduct the
obligation of paying interest on those notes or debentures from its
income, and thereby pay less income tax; whereas a bank that has
preferred stock outstanding is not so permitted to deduct it, but the
amount which is ultimately paid out upon preferred stock must be
paid by the bank for income tax purposes; is that not the case ?
Mr. O ’C onnor. Y ou are absolutely correct, Mr. Congressman.
Mr. H ollister. S o, would it not be proper to have—I realize you
have come from the Ways and Means Committee—would it not be
proper to have some sort of legislation passed, which would permit
the deduction by the bank of what it has to pay out, the same way
that the other banks that have debentures outstanding may deduct
the interest on those debentures?
Mr. O’C onnor. On page 7 of my report to Congress, I make this
statement:
Section 23 of the Revenue Act of 1934, paragraph (b), provides for certain
deductions from gross income. It is understood that State banks which have
sold capital notes or debentures to the Reconstruction Finance Corporation may
under this paragraph deduct interest paid thereon in computing their net in
come for taxable purposes.
National banks in strengthening their capital structure have issued pre
ferred stock to the Reconstruction Finance Corporation, paying dividends
thereon, which payment of dividends is substantially equivalent to the pay
ment of interest made by State banks on capital notes sold by them to the
Reconstruction Finance Corporation.
You used my language.
Mr. H ollister. I knew that was in the report, but I thought it
well to bring it out. . Can you tell the committee whether your office
is suggesting to the Ways and Means Committee that they take up
that matter?
Mr. O ’Connor. Yes, we have submitted it.
The C hairman . Mr. O’Connor, let me suggest that you conclude
your discussion of the matter of examinations.
Mr. O’Connor. Oh, yes ; thank you.
The C hairman . As I understand, you had not finished.
Mr. S isson . Mr. Chairman, may I interrupt?
The C hairman . Yes.
Mr. S isson. Mr. O’Connor, you spoke, a short time ago, about the
fact that—or you mentioned the fact that 97.5 percent, I believe,
of the total number of deposits were—I assume you were referring
then to the member banks, or just to the national banks?
Mr. O ’Connor.^ National banks.
Mr. S isson. Were covered by deposit insurance. I am not sure
whether Mr. Crowley testified—he testified yesterday quite fully on
that, but I am not sure whether he gave the aggregate amount, in
dollars, of the deposits that were covered. If you have that con
veniently, I think it might be well to have that in the record at
this point.
Mr. O ’C onnor . National banks, 5,450, insured deposits, $8,488,554,000, uninsured deposits, $11,583,949,000, and total deposits, at
162
BANKING ACT OF 19 3 5
this time, or on October 1, were $20,072,503,000, which shows that
42.29 percent of the deposits are insured by the Federal Deposit In
surance Corporation, insuring $25,972,035,000 deposits, and 405,811
deposits are partly insured, which makes a total of 26,377,846 deposi
tors, and 98.46 percent of the depositors are insured; and in State
banks, which are members of the Federal Reserve, we have 969 banks,
T
with insured deposits of $3,582,449,000, and uninsured $7,382,986,000,
making a total of $10,965,435,000, which shows that 32.67 percent of
the total deposits are insured, with 9,361,278 depositors, and 119,082
partly insured, with a total number of depositors of 9,560,360, and the
percentage of depositors insured is 97.92 percent; and State banks,
which are not members of the Federal Reserve, exclusive of the mutual
savings banks, number 7,638, with insured deposits of $3,580,803,000;
uninsured deposits of $1,363,262,000, and total deposits of $4,944,065,000; and the ratio of insured to the total deposits is 72.43 per
cent; and the depositors fully insured are 13,687,403; and depositors
partly insured, 142,947, making a total number of depositors of
13,812,350, or 99.10 percent of the number of depositors in State
banks are insured.
The Chairman . As State nonmember banks?
Mr. O’Connor. Yes; that gives us a total there which is rather
interesting in these three divisions: 14,057 banks with insured depos
its of $15,651,806,000; uninsured, $20,330,197,000, with total deposits
of $35,982,003,000, with the ratio of insured to total deposits of 43.50
percent; and depositors fully insured, 49,020,716; depositors partly
insured, 729,840; and total number of depositors, 49,750,556; and
the total number of depositors insured in the three classes, under
the $5,000, is 98.53 percent.
Mr. S isson. That gives the complete picture there.
Now, may I say, in a preliminary way to one question that I want
to ask, and I am not indicating any opinion that I have, because I
do not know whether I have any positive conviction about the advis
ability of increasing the maximum of insurance deposits, but I just
wanted to ask you, before you pass from it, if you are going to dis
cuss it at some later date before the committee, that is, as to your
opinion of the advisability of increasing the maximum limit of
deposits, insured deposits? If you do, I do not care to ask you to go
into it now, because that is perhaps breaking up the continuity of
your statement.
Mr. O’Connor. Well, Mr. Sisson, I feel that we have presented
all of the statistics and figures, and the amount is a matter that ought
to be a matter of policy of this committee.
Mr. S isson . Yes, sir; but guiding the committee, unless the major
ity of the committee have decided already that there will be no
increase, the committee probably before voting upon or deciding upon
it, would like your opinion.
Mr. O’Connor. Then, may I put it this way?
Mr. S isson. I am not asking you to give it now.
Mr. O’Connor. If the committee agrees to it, or gets to that point,
I will be very glad to give you my opinion.
The C hairman . Mr. O’Connor, have you given any thought in
that connection? I am asking this question: Have you given any
thought to the difficulties that the banks will find themselves in,
in relation to their obligations to other banks, when they fail;
BANKING ACT OF 1 9 3 5
163
what that picture would disclose, if we should have any considerable
number of bank failures in the country ?
M r. O ’C o n n o r . Y e s , w e h a v e th o u g h t a g o o d d ea l a b o u t th a t, an d
i t is p r e tty co m p lic a te d .
The C hairman . I am wondering how much noise we will hear
around here about the amount of deposit insurance after the banks
gather some experience and they find they are not insured against
one another. That thought is reconciling me somewhat to the idea
of limiting this insurance, for the time being. I have the idea that
the banks will take care of the matter of increases, as soon as they
gather some experience, in case we have a large bank failure. I
would like to be here when that happens.
Mr. G ifford. Mr. Chairman, do you want me to continue on the
examination?
The C hairman . Gentlemen, if nobody objects, let me suggest that
Mr. O’Connor conclude his discussion of this matter of examinations,
if he desires to say anything further.
M r. O ’C o nn o r . I sta r te d , se v er a l tim e s, a n d th e re is ju s t tw o
p a g e s, an d as a fo u n d a tio n , I w o u ld lik e v e r y m u ch to p u t th is in
th e record an d be su b ject to a n y q u estio n s.
The C hairman . There will be no objection to your incorporating
that in the record. You may do so right now, and if you desire to
say anything further, we will be srlad to hear you.
(Here followed discussion off the record.)
Mr. O’Connor. Mr. Chairman, I would rather that speech would
stand, because it is so knit together.
The C hairman . We will be glad to have it.
Mr. O’Connor. But at this time I would like very much to call
the committee’s attention, for the purpose of laying the foundation
for future questions on a very important matter that the country
has been greatly interested in, and which has been considerably mis
represented until this was given to the country, and I would be glad
to give some reactions that I got after this speech was made by
depositors as well as bankers and others.
The Comptroller of the Currency sent, on October 26, 1933, to each of the
12 chief national-bank examiners ia the United States instructions to this
effect:
“After the ‘ Bank Holiday national-bank examiners were largely engaged
in the examination of banks which did not receive a license for the purpose
of reorganization. It appears that some examiners in making examinations of
licensed national banks have become what might be termed ‘ Reorganization
Minded ’ and have lost sight of the President's recovery program and its rela
tion to licensed banks. It is the administration’s desire that credit channels
be opened through licensed banks, and this policy cannot be accomplished if
examiners follow a deflation policy in examinations. We are all concerned
in having solvent banks, but there is a wide distinction between the potential
and intrinsic value of assets of a going institution, and liquidating values.
Examiners in appraising and classifying assets of licensed banks will not
apply liquidating values but will appraise on the basis of fair values on a
recovery basis.
“As an example—in dealing with bank buildings, the examiner must realize
that a bank building of a going bank has an intrinsic value, as distinguished
from present depressed values, which, combined with the element of recovery,
may fully substantiate the carrying value given to it by the bank. The same
is true of mortgages, and in this connection the examiners should familiarize
themselves with the instructions given with respect to real-estate mortgages
by the Federal Deposit Insurance Corporation to its examiners.
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BANKING ACT OF 19 3 5
“ You will advise examiners who are examining licensed banks of this
policy and see that it is carried out. Any examination now in process, or any
future examination, will be governed by these instructions and where an
examination has been completed, the examiner making the report will review
the report on the above basis and rewrite such report if found necessary. If
the examiner is not now available it may be necessary to make a new exami
nation on the proper basis.”
Again on March 13, 1934, the following instruction was sent to all chief
national-bank examiners:
“ Reports of examinations received by this office recently clearly indicate
that some few of the examiners throughout the country have not fully grasped
the meaning of instructions communicated to the chief examiners under date
of October 26, 1933, and are making more drastic classification of assets of the
banks examined by them than is necessary under the circumstances and more
severe than is contemplated by the instructions contained in office letter
referred to above.
“ If there are in your Federal Reserve district any examiners who, in your
opinion, are making unnecessarily drastic classifications of assets, please
confer with them promptly, looking towards having their classifications as
lenience as circustances in each case will permit and in order that they will
be in accord with the policies of this office.
“ While you are familiar with the character of examinations made by your
examiners, it is suggested that in determining whether or not any of them are
too severe in their classifications, you give particular attention to their ap
praisals of banking houses, furniture and fixtures, aud loans secured by real
estate.”
No system is perfect because men are not perfect. Here and there isolated
cases appear where examiners have been too harsh. These instances are some
times called to the attention of the proper officials; but where examiners are
too lenient, that fact seldom appears. The instructions which I have cited have
never before been made public. However, I believe the time has come to clarify
a criticism which is unfair. The question naturally arises—what were the
results obtained under the instructions? Again, for the first time, I will give
you a complete picture of the examinations made by the national bank exami
ners as shown by 1934 reports of examination. As is well known to bankers,
examiners classify loans under three headings—slow, doubtful, and loss. There
is little room for argument when assets are placed in the loss column and very
little question arises in the doubtful column. The slow column attracts the
most attention and controversy. An examination of the reports filed with the
Office of the Comptroller of the Currency in each of 5,275 banks reveals the
following interesting figures: The total amount of loans was $7,740,596,000.
The examiners placed 2.88 percent of these loans in the loss column and 4.19
percent in the doubtful column and 27.05 percent in the slow column. The
country has been advised of the definition of slow paper as follows:
“ The examiners when classifying loan^ as slow should state briefly the rea
sons for such classifications, but should bear in mind that the responsibility for
determining and taking such action as may be necessary to place such slow
loans in proper bankable shape rests entirely with the bankers. The examiners
therefore, should refrain from instructing the bankers as to what course they
should pursue with their customers whose paper is classified as slow.”
Now, I want to answer specifically, Mr. Congressman, the question
you raised with reference to the reaction to the slow column or classi
fication. My general experience is that bank directors, aside now
from the operating officials of banks, are very anxious that we retain
in our reports these slow columns. The purpose of that is to direct
the attention of the directors to what our examiners find in the banks,
so that a bank will not gradually find itself in a very frozen condition.
We merely point out certain paper to be slow; it is good, it is
sound or it would not be in that column; and by specific directions,
we say to our examiners, “ You shall not tell that banker what he
shall do with that paperd’ Now, we say. “ You are to make com
ments to us.” Everyone will agree that a bank should not have an
undue amount of slow paper, and without giving places, which I
BANKING ACT OF 193 5
165
trust you will not ask me for, because it is not necessary for the
purpose of discussion, two most serious cases that arose in this coun
try, and in one where the greatest distress was found because of the
lack of dividends to depositors, was due to the fact that the bank
became frozen with slow paper, which should not have happened.
Therefore, it seems to be the common opinion among directors, and
in most instances now they are much more careful than they were
before, and they asked to have read and in the directors’ minutes,
and our reports are read to them, and they are generally discussed,
and if they find the amount of the slow paper the directors them
selves can make inquiry of the officer as to that particular paper,
what it is, and make some investigation of it; and we find, Mr. Con
gressman, notwithstanding the fact that there has been some discus
sion as to the elimination of the slow classification, my judgment is
it would be a serious thing to do.
Mr. G ifford . Mr. O’Connor, I think you fully understand why I
am asking the question. The public at large is interested, because
they thought there were two branches of the Government, one work
ing against the other; and when I got your report as to the slow
loans, I thought you did not even imply that putting them into that
column meant that they ought to be paid.
Our bankers say, “ We run our banks. We must pay 6 percent to
get this paper renewed.” They have an abundance of property or
assets, and we have to harrass them. But those slow loans—I got
notice from the banks that the examiners had criticized their loans,
and when they put them in that column it was implied criticism,
although not an implied order that they must be collected.
Mr. O ’C o n n o r . The banker who said that was dishonest. The
banker who made that statement was dishonest with the borrower,
unless he accompanied it with the instructions that we sent to the
banker and to the examiners.
Mr. G ifford . If the banker had told you it was put into the slow
column and is must be made an active account, something must be
paid on it, what would you thing about it? Of course, I could
bring up specific instances now, but I just do not want to. I could
give you several that I am sure you would agree to, I think, from
your letters to me, which I believe show your viewpoint.
M r. O C o n n o r . Yes, I know. I appreciate that very much.
Mr. G ifford . Y ou acknowledge, yourself, your second letter to
your examiners, that in matters of real estate, they have been too
strict. Of course, there had been many cases where they were
marked off as a complete loss, certain real estate loans, that might
later prove of some value; and in many cases, the bank claimed the
loss, so they had to go to the R. F. C.
All of my questioning is specifically founded upon the fact, in this
article, or in this title I, you ask the banks to furnish burglar in
surance, and a whole lot of things, and that they be subject to further
examination. If the examinations have been an irritating factor
to a sufficient degree, to have caused the banks, in the last 2 years
to be unwilling to loan money, and that has been their chief----Mr. O ’C o n n o r . Alibi?
Mr. Gifford. Y ou agree with that?
Mr. O ’C o nn o r . An alibi?
166
BANKING ACT OF 19 3 5
Mr. G ifford . Yes; c a ll it an a lib i, i f y o u wish.
Mr. O ’C o n n o r . W h ic h is not true.
Mr. G ifford . I doubt if it is true, myself, but we have been faced
with it by men who wanted to borrow money and----Mr. S isso n . Mr. Chairman, if the committee will pardon a personal
allusion, I used to manage a baseball team and I fully realize how an
alibi can be used, because when a player, when he missed a ball, he
said that the field was uneven and the ball did not bounce right.
I think the most interesting alibi the bankers have had is, that they
have laid the blame upon the Comptroller’s examinations.
That is what I have been trying to bring out before this committee.
The C h a ir m a n . The truth is, that the Comptroller’s Office, for
several years, has been criticized because of its liberality, and it risked
a great deal in going as far as it did in liberalizing the policy of
examinations, to try to deal constructively with the difficulties we
have had in the past years, and I commend you and your prede
cessors for what you have done, and I believe the people who under
stand it feel the same way.
Mr. G ifford . Mr. Chairman, I am trying to bring out the facts
that the banks have not loaned money the last 2 years, call it alibi
or anything else you like; they have not done it, and there has been
no reason for it.
The C h a ir m a n . When you call it alibi, I agree with you.
Mr. G ifford . I am allowing that word to go in, but some definite
reason has been back of it for 2 years.
The C h a ir m a n . They are scared to death.
Gentlemen, let me ask if there are any other questions from Mr.
O’Connor; and if there are not, I am going to suggest we excuse him
and conclude with his statement on title I, and the committee will
not meet again until Monday.
Mr. W olcott. Just a moment, please, let me ask you a question:
The Federal Reserve System, I am given to understand, have about
$2,400,000,000 of excess reserves. What is your opinion, Mr. O’Con
nor, as to why that money has not been loaned ?
Mr. O ’C o n n o r . Well, Mr. Congressman, a rather careful analysis
was made of that in Dr. Yiner’s report, which he made sometime
ago, a few weeks ago. or probably a month ago, and he sent some
very efficient men, I believe, and compared very carefully the rea
sons—now, I am just giving you what I think about it, not having
anything to do with it, but I believe that he sent men to follow
through the loans of the banks that were rejected and get an analysis
of why the people were not borrowing and why the loans were re
jected, and I believe the Doctor concluded that there was not such
a demand for loans. He concluded that the demand was not there
for legitimate loans that the people thought.
Now, I am just stating that, because I read the report very briefly
and hurriedly, but the report is available and that was his conclu
sion, and I think that the report—I would rather refer to it and
refresh my memory about it than to give you an offhand opinion,
without any facts.
Mr. W o lc o t t . That would seem to be true, in view of the fact
that the Reconstruction Finance Corporation, I understand, has had
demands made upon them for only about $100,000,000 of the money
BANKING ACT OF 1 93 5
167
we made available for loans to small industries, and have paid out
actually less than $7,000,000.
M r. O ’C o nn o r . T h a t is r ig h t.
Mr. W olcott. What I am getting at is an expression of my own
personal feeling in that connection, that undoubtedly the lack of de
mand on the part of borrowers is due to the uncertainty of the eco
nomic future of the country; and possibly we might be able to over
come that by maintaining—by establishing and maintaining definite
policies concerning our money and our attitude towards business.
Do you not think that might help some ?
Mr. O ’C o n n o r . A s I sa y , that report, Mr. Congressman, is some
thing new, and it is a particular question that I have not gone into,
and I would have to refresh my memory; but he actually went into
the field and made an investigation. The only way we can get at
these things is by the actual facts, and whatever they are, let us have
the facts. If it is a fact, let us look at it. Dr. Viner did send his
men out, made a very careful analysis, and got reports back of a
number of applications and why they were rejected and the amount
of them, and he follows great detail in it and made his conclusion in
that report: and I would like awfully well to refer you to that report.
Mr. W olcott. Yes; I will read it with a great deal of interest. I
assume, from your statement, that he came to the conclusion it is
due to a lack of demand for the money?
Mr. O ’C o n n o r . I think that is one o f his conclusions. Well, put
it in another way, I think my impression from the report was, that
there was not as great demand as some people believed.
Mr. W olcott. Following that through, the panacea for all of this
seems to be to create a condition of confidence, in which business will
get started to borrowing money from the banks and demanding
money from the banks for constructive purposes. I will not expect
you to answer that, Mr. O’Connor.
M r. O ’C o n n o r . I d o n o t k n o w . I am o n ly r e fe r r in g y o u to th e
o n ly a u th en tic r e p o r t th a t I k n o w o f.
Mr. F ord. Could you not send copies of the report to the members
of the committee ?
Mr. O ’C o n n o r . I t is a very voluminous report.
Mr. W olcott. What is it, a very long' report?
M r. O ’C o n n o r . Y e s, sir.
Mr. H ollister. Y ou have only to read about two pages of it, which
is a summary of the thing.
T h e C hairman . D o y o u d esire to sa y a n y th in g fu r th e r r ig h t n ow ?
Mr. O ’C o n n o r . Yes, there was one other section that I thought w e
ought to give some discussion to, and I want to briefly state that, in
our banking law—and as I said, I had not given it consideration
until yesterday, but I feel we should not go along without at least
one comment on it, and that will conclude my troubles. On page 34,
section 18, the bill provides, in title I, the following:
The board of directors, from time to time, shall gather information and data
and shall make investigations and reports upon the organization, operation,
closing, reopening, reorganization, and consolidation of banks, banking practices
and management, and the security of depositors and adequacy of service to
borrowers. The hoard of directors, in any annual or special report to Congress,
shall report its findings and make such recommendations and requests as it
168
BANKING ACT OF 19 3 5
shall find necessary and appropriate for the purpose of carrying out the
purposes of this section and fully provided for all of the obligations ot the
corporation.
I find some objection, Mr. Chairman, I am sorry to say, to this
section, because the Comptroller of the Currency makes a report
to Congress, the Federal Reserve Board makes a report to Congress,
and this is mandatory upon the Board, and I do not think that we
can justify an expense of as much as $50,000 or $100,000 to get that
additional information, which is now available through the Federal
Reserve and the Comptroller of the Currency, all of which is worked
in connection with our board, and I do not believe that section is
necessary and I think it would be a useless expenditure of money.
The C hairman . Mr. O’Connor, before you conclude, there is one
matter I would like to draw your attention to for a brief discussion
by you, and that is the provision respecting the payment of interest
on deposits.
.
Mr. O ’C onnor . Have you special reference to the act which pro
vides for the elimination of interest on demand deposits?
The C hairman . Yes.
n
Mr. O ’C onnor . N ow. that is very important, Mr. Chairman, and
I am glad you mentioned it. There has been a great deal of discus
sion about the assessment on banks for the purpose of the Federal
Deposit Insurance Corporation. In the Glass-Steagall Act of 1933,
you provided that no longer should banks pay interest on demand
deposits. I believe that was one of the very serious matters in our
banking structure, and I think was a wrong system of banking.
The little depositor never got anything, anyway, and it mured
entirely to the benefit of the very large depositor, and it led to such
competition between banks for the large banks in their rates of
m t brest.
So you eliminated that by the act of 1933, and I called attention
to what that sum amounted to in my address before the American
Bankers in Chicago in September 1933, and discussed rather fully
that and other provisions of the insurance corporation, and I would
like to call attention to that particular point, Mr. Chairman, if you
will permit me to put that address in the record.
The C hairman . We w ill be very glad to have you do so.
Mr. O ’C onnor . On page 6 of the printed address, I said:
The elimination of interest on demand deposits will save the banks many
billions of dollars. The total amount paid during the past 5 years by member
banks on demand deposits was $1,230,242,000, making an average of $246,048,500 per annum.
And I believe out of the amount we collected from the banks upon
the levies of assessments we made—we levied the assessment and they
collected one-half of the levies—and I believe it was around $70,000,
and here we have just the member banks, because we do not have
available the figures on all banks, that the banks have paid out
approximately $250,000,000 a year that you prevented them from
paying out, is not considered by Congress as good banking. Now,
I think that is rather a striking statement,
The C h a i r m a n . Well, if we were to leave the assessments against
the member banks, which would amount to $250,000,000 annually to
support the deposit insurance fund, we would not have added that
burden upon the banks; is that a sound conclusion ?
BANKING ACT OF 1 9 3 5
169
Mr. G ifford. What are you going to do with that amount of
money ?
Mr. H ollister. That is the total?
The C hairman . Yes; that is the total.
Mr. R eilly. Mr. O’Connor, have you got any report upon* any
banks in recent years on the service charges that they did not charge
some years ago?
M r. O ’C o n n o r . N o , s ir ; w e h a v e n ot.
Mr. R eilly. Can you get that report?
Mr. O ’C o n n o r . I am glad you asked that question, because we
have had a great many letters, Mr. Congresman, asking about those
matters, and we have no jurisdiction in the Comptroller’s office
to regulate or to fix in any way those charges. That is a matter
entirely at the present with the banks themselves.
Mr. R eilly. D o they not report their income items ?
M r. O ’C o n n o r . Y es.
M r. R e il l y . H a v e y o u n o t g o t a n y id ea w h a t th e y c o lle c t for
se rv ic e ch a rg es?
Mr. O ’C o n n o r . N o t a se p a ra te item , Mr. C o n g r essm a n ; n o , n o t
th e se p a r a te item s.
Mr. R eilly . Some of the banks are making some awful charges
for handling accounts.
Mr. W olcott. When they are prohibited from paying interest on
demand deposits, that likewise carries with it the fact that those
funds are more or less static and not being used by the banks for
the purpose of making money, yet I do not find any restriction in
the act which protects those depositors against their use for long-term
investments. Do you not think that would be in keeping with the
act, that they do not pay interest on them, but they collect a service
charge for handling the accounts, that they maintain a little higher
degree of liquidity with reference to demand deposits than they do
with respect to time deposits and----Mr. O ’C o n n o r . I think that is sound, Mr. Congressman.
Mr. W olcott. In other words, it has been considered unsound
banking to invest commercial funds in long-time paper, has it not?
Mr. F ord. Mr. Chairman----The C hairman . Just a moment, until Mr. Wolcott gets through,
please.
Mr. O ’C o n n o r . Would you read th e Congressman’s question?
(Thereupon the reporter read the pending question of Mr. Wol
cott.)
Mr. W olcott. Perhaps I should say it should be considered un
sound banking to do that.
M r. O ’C o n n o r . Y e s , th a t is correct.
Mr. F ord. At the opening of this hearing. Mr. Crowley was in
the chair, and I made this statement, and I think that this discussion
verifies it, that as a matter of fact, the bank , are not paying the
insurance premium on the insuring of deposits, but the depositors
were pa; g it, because they have been relieved of paying interest on
tim e or demand deposits.
Mr. R eilly. Mr. Ford, those were the big depositors, not the
great mass of depositors.
Mr. F ord. Well, big or little, that is the situation just th« same
170
BANKING ACT OF 19 3 5
Mr. S isson. Mr. Chairman, if Mr. O’Connor is not coming back
here for several days, I think perhaps it might be proper to have
him state the witness to whom we may ask these questions, because
there is a question I am rather ashamed to ask, but frankly, I have
had,. I think, four letters from bankers in my district, and they
were men in charge, you might say, of the administration of the
banks, but they were rather small banks, and I told them that, if
they wished to I thought the chairman would give them permission
to appear here, and they asked me to bring this to the attention of
the committee, in the passage of the act, which is perhaps a more
complete revision of the Banking Act, than anything for a long
time.
They object to the prohibition against borrowing money by mem
bers of a bank, his own bank, because, if they wished to borrow any
thing, they could go to some other ank and borrow, but because it
places them in the category, or a category that seems to them to rather
reflect upon them.
The C hairman . Mr. Sisson, that is a matter of wide interest
throughout the country, and of course of interest to the community.
Let me suggest to you that there is a provision entitled “ I I I ” in
this bill dealing with that particular matter, and it will come up for
discussion when we reach it; and I might say, in that connection,
you might advise your friends that we are attempting, and we
expect, if the legislation passes, to liberalize that provision of the
law.
Now, gentlemen, I am going to suggest, if you are through with
Mr. O’Connor, we will meet again at 10: 30, Monday morning, and
Mr. Eccles will appear before the committee at that time.
Mr. M eeks. Mr. Chairman, may I ask a question ?
The C h a ir m a n . Yes.
Mr. M eeks. Mr. O’Connor, are you putting your Chicago speech
in the record?
M r. O ’C o n n o r . Y e s, I can d o so.
M r. M e e k s . I w o n d er i f y o u h a v e co p ie s a v a ila b le th a t y o u can
p a ss to th e m em b ers? I w o u ld v e r y m u ch lik e to h a v e a co p y in
a d v a n c e, b ecau se w e m a y n o t g e t to see it soon.
M r. O ’C o n n o r . T h a n k y o u , M r. M eeks.
(The address of Mr. O’Connor is as follows:)
Ad es b J. F. T. O o n r Cmt ol r o th C r e c , Bfo e th
d rs y
’C n o , o p r l e p e u r n y e r e
C n e t n o th A e ic n B n er Aso ia io , a C ic g , III.,
o v n io f e mr a a k s s c t n t h a o
S pt me 7, 1933
e e br
Our common purpose justifies the acceptance of your gracious invitation. In
this my initial appearance before the American Bankers Association, if some
slight suggestion can be made to strengthen the financial structure of the Nation,
my effort will be fully compensated. At your last annual convention had any
one predicted that every banking institution would be closed for several days,
credit paralyzed, and tickers silenced, ridicule, sharp criticism, and condemna
tion would have greeted the suggestion. It happened. The old order had com
pletely broken down. Will such a condition reoccur?
No finer example of patience and self-restraint can be found in our history
than was exhibited by our people in these black days of March. With the storm
raging in mad fury, with destructive waves breaking over the deck, a firm hand
"•rasped the wheel, changed the course, substituted hope for despair, and arrived
safely in the harbor. Other storms will come, no one will deny. Possibly we
BANKING ACT OF 1 9 3 5
171
cannot prevent the storm, but we can build a ship the elements cannot destroy.
The challenge is yours. The thrill of the opportunity appeals to us all.
Probably no provisions in the Banking Act of 1933, sometimes called the
Glass-Steagall Act, have attracted so much attention as the insurance provisions.
It is my sincere belief that the future of American banking rests in a large
measure on proper and courageous management and the adoption of sound
policies in the administration of the insurance provisions of the act. Fully
realizing the magnitude of the operations involved, the pitfalls which must be
avoided, and the nondiverging path which must be followed, as one member of
the board of the Corporation, I approach the task humbly but with a grim
determination of success.
The principle of guaranteed deposits is not new. Our Government established
this on June 25, 1910, when President William Howard Taft advocated and
secured the passage of the Postal Savings bill. Some deny this is an insurance
or a guarantee. Let us not quibble about words. No one denies that the full
faith and credit of the United States is pledged to the return of every dollar
in the Postal Savings banks. Today our Government guarantees, or insures
or promises, to return approximately $1,184,948,200. No one questions the
ability of the Government to pay these deposits. The growth of these deposits
during the past 2 years is interesting, if not alarming. Let me give them:
June 30, 1931_____________________________________________ $347,416,749
June 30, 1932_____________________________________________
784,819,402
April 30, 1933_____________________________________________ 1,159, 794, 016
As already noted, the estimate for June 30, 1933, indicates an increase over
April 30, 1933, of $25,354,184. No comment to bankers is necessary on these
figures. Even a lawyer appreciates their significance. The Government re
quires security from the banks to insure these deposits. In this manner the
banks guarantee their safe return. The postal depositor becomes a preferred
creditor. The ordinary depositor in the bank is merely a creditor. Unlike a
story I heard some time ago: A creditor called the president of a large corpora
tion and said, “ I see we’re in the bosom of a receiver.” The president cor
rected him saying, “ You mean the hands.” “ Well, I do not know about such
things.” “ Oh, don’t worry, you are a preferred creditor.” ‘‘A preferred credi
tor, am I? What does that mean?” “ It means you know now you won’t get
anything while the common creditor won’t know for a year or more.”
No individual is permitted to deposit over $2,500 in the Postal Savings bank.
There has been a growing demand from all parts of the country to permit un
limited deposits. If nearly $1,190,000,000 has been deposited in Postal Savings
under a $2,500 limit, what would the deposit be if the individual deposit were
unrestricted? When the insurance feature of the Glass-Steagall bill becomes
operative, most of this huge sum should find its way back into the banks.
Indeed, Congress would be justified in repealing the law entirely.
Let me briefly outline a few of the main provisions of the Banking Act of
1933 on this subject:
1. The Corporation has three directors: The Comptroller of the Currency
and two directors, appointed by the President, who shall not be of the same
political faith.
2. A “ temporary Federal deposit insurance fund ” will become operative on
January 1, 3934, which will insure deposits in each member of the fund up to
$2,5*30. Members of the fund will be all member banks licensed before January
1, 1934, by the Secretary of the Treasury and nonmember State banks with the
approval of the State supervising authority, after certification to the Corpora
tion of solvency and examination and approval by the Corporation. Both
member and nonmember banks must pay to the Corporation an amount equal
to one-half of 1 percent of the insured deposits certified as of the 15th of the
month preceding the month they were admitted to the fund. One half of this
payment will be made upon admission and the other half upon call by the
directors of the Corporation.
3. The permanent insurance is effective on July 1, 1934. as to all national
banks certified by the Comptroller of the Currency and all State member banks
certified by the Federal Reserve Board upon such banks becoming class A stock
holders in the Corporation, and nonmember banks have the benefit of such
insurance until July 3. 1936, by becoming class A stockholders of the Corpora
tion in compliance with the terms of the act.
4. In becoming class A stockholders, the banks must apply to the Corporation
for class A stock in an amount equal to one-half of 1 percent of its total deposits
172
BANKING ACT OP 19 3 5
as computed in accordance with regulations of the Federal Reserve Board, with
certain exceptions in the case of banks organized after July 1, 1934. One-half
of the amount due for the stock shall be paid into the Corporation upon
admission and one-half upon call by the directors of the Corporation.
5.
Under the permanent insurance features of the act, net deposits are
insured as follows:
One hundred percent not exceeding $10,000.
Seventy-five percent of the amount exceeding $10,000 but not exceeding
$50,000, and
Fifty percent of the amount exceeding $50,000.
You will be interested in the progress made to date:
The Government, through the cooperation of the Federal Reserve banks,
the Comptroller’s Office, and the Reconstruction Finance Corporation, is making
a survey of all the banks in the United States. The President called the at
tention of the governors of the various States to the provisions of the Banking
Act of 1933 in a letter dated July 6. The letter was as follows:
M y D e a r G o v e r n o r : You have no doubt given serious consideration to the
provisions of the Glass-Steagall bill, known as the “ Banking Act of 1933 ”,
which was approved by me on June 16, 1933.
This act contains far-reaching provisions with reference to State banks. In
a very short time, to wit, January 1, 1934, certain State banks which secure
a certificate of solvency from the proper State banking authority, and which
after examination are found satisfactory to the Federal Deposit Insurance
Corporation, will be admitted to the benefits of the insurance fund.
In order that State banks may receive the benefits of the act, it will be
necessary in many States for additional legislation; in others, amendments to
existing laws, and in others, constitutional changes. You will appreciate the
necessity of immediate action in order that the benefits of this act will be as
widely distributed as possible.
May I suggest to you that you call together representatives of your State
banking department, together with leading State bankers, to discuss with
you the necessary legislative changes or constitutional amendments to bring
about the desired effect.
I call your particular attention to the following paragraph of the Banking
Act of 1933, which is found under subsection (y) of section 8 (last para
graph), which reads as follows:
“ It is not the purpose of this section to discriminate, in any manner,
against State nonmember and in favor of National or member banks; but the
purpose is to provide all banks with the same opportunity to obtain and enjoy
the benefits of this title. No bank shall be discriminated against because its
capital stock is less than the amount required for eligibility for admission
into the Federal Reserve System.”
Thanking you for prompt consideration of this matter, I beg to remain,
r n l D. o s vl
a k in
oe e t
President.
The general outline of the set-up of the Corporation has been tentatively
approved by the President. I am in possession of the names of over 1,500
qualified men who are available to make examinations. These names have
been submitted by the State banking commissioners and others, and they are
qualified examiners who have had 5 years or more banking experience and
who known the values in the States. Arrangements have been made with the
Treasury for the necessary funds to carry out the preliminary work of the
Corporation. Our first task is the examination of approximately 8,000 State
nonmember banks which are on an unrestricted basis. I shall make the fol
lowing suggestions to the Board immediately upon reorganization •
First, that each bank applying for insurance be furnished with blank forms
to be completed by the banks setting forth each asset under a proper headin"
and the amount of its deposit liabilities and obligations to other creditors
This will save much time and the examiner will then check the item and am
praise the same.
Secondly, that an examiner who knows the values in the particular State
with necessary assistants, be assigned to each State capital to work with the
hanking commissioner and all examiners in the State clear through the exam
iner at the capital. In this way the work will be decentralized. It is my
belief that whenever a piece of work can be done in a State just as well as at
the National Capital, it should be done in that State.
F
R
,
BANKING ACT OF 1 9 3 5
173
Thirdly, that the names of the banks insured and their location be given
simultaneously.
given
There has recently been sent out to many of the banks of the country a
lettei m reference to the Federal Deposit Insurance Corporation from which
I quote two sentences as follows:
„?
,n
Parltmce of the street, the independent bank is to be ‘ ironed out ’ ”
J 0TeK
rlU! lnfluences are at work to wipe out the small banks and the inde
pendent banker has been placed on the defensive.”
I know of no more vicious, unwarranted, and untruthful propaganda The
feTlow w h S w ?aH-°^ha, or corporate. its policy of Protection the President
S
lellow, whether individual demonStrated At a conference with for the little
countTv?dth*itffhen0h“’ I'6 ? l h° insurance provisions of the new bank act the
country, that the object of the -iZetl “ie t0 Say t0 you' aild trough you to was
Hie actwifh
n<?
nmf mbe^ banks as possible. He discussed the details of
the act with an amazing knowledge of its provisions. He discussed real values
appraised values and liquidating values with a fine discrimination. « { £
S H S i u S . t,lat Se,,trace' thC ChW EMCUti''e ™
^ a U
denland came fr0m the people during the past session of Congress
£ban t w i
u„f° rm of guarantee or insurance for deposits be passed. The
fact that the bill passed the House with but six dissenting votes and passed
"e i-?„or» f
n
t
w
' *^
an* T°te ls 'Vdenee „( the demand! I? c„u?d not
nLt of the w
i'r, We faTO ed the Provlsion or opposed it, bank insurance is
Vf
" S *xam,ne S°me °f the hl8her 8ro“ nds 'vuch
thfliieorT * yfactI,0Sit01,
B
a
h“S “ right t0 hiS money* Tbis law makes
banish. the fear in every banker’s mind of runs upon his bank.
beeinn?nidn? ioQQa n
the Y
ery serious crisis which developed with the
h ‘ 2 , ! 1933 a. d J hich ProdlK‘ed grave runs on practically every bank
t
n
Sther to ^
March 4 with enrrency demands amounting altoSSteSn^ depositorT ’
?e SUm W S withdrawn in cash by P™ic&
i h J h S U WiU ehy’.^ etlie necessity for a postal savings bank and return to
the banks over a billion in deposits.
oJS22rthr ^ wi!|, p e ^ it an extension of credit and a modification of cash reserves. This will particularly benefit small country banks and their customers
Liquidity means immediate marketability. The average town or small citv has
sound values but not a high degree of liquidity. Probably nothing in banking
parlance has been so much misunderstood as the term “ liquidity ” The law
provides that a certain percentage of a bank’s assets shall be in cash and sound
bankmg requires other assets to be liquid. Some well-meaning individuals and
^ b*T demagogic persons have aroused communities because banks with frozen
nofwoHhV mn i ^ eA p i t i e d to reopen. They say while certain securities are
n
dennciw 1 mu.cb toda- *bey will be worth face value in 5 or 10 years. If the
v
for h ted eS V ^ 1?«ieSvnhiSf!ieT^°int and take a mort?a£e or a bond worth $500
a few vears nnr W’n ° °n the.^eory that the security would be worth $1,000 in
W sTntle dVosUP
in°cash. ™
Slmple* The depositor may lightly demand
millions ofedollia S atiTh ° t iatf rest on demand deposits will save the banks many
S n S “ n * £ £ £ dep^ w as n
the paSt 5 yea™ by member
ner annum Again tho w lJ i i 230,242’000, makln" an average of $246,048,500
member banks on ti™ depoTt, T s X r ^ n v
n ,l °f
nne-half of 1 nercenl
* 1 .V, e any depositor who would not accept
sten were necessar^
&nd know his deposit was insured, if such a
provision? Would any nonmember
one half or un t ^ V d n l S ? ? ? t? i N° depositor would object to paying two and
r^reenT b“
n the ret'Pral
bL
”»"t s ^ S
S
S
S
K
Sixth, now a point not generally discussed and offered here as a matter of
opinion. It is my firm opinion that the insurance features of the law will save
millions to oui people. The high pressure and not too scrupulous salesman
often plants the seed of suspicion as to a bank’s solvency in the prospective purchaser’s mind. The life savings of men and women have been withdrawn and
invested in worthless securities or enterprises because of this fear. When the
127297—35----- 12
174
BANKING ACT OF 1 9 3 5
suspicions becomes a belief, the confidential relation between the banker and the
depositor is destroyed. The very fact that the honest, highly tnuned, conseiyative banker has made errors in making investments is proot of the »reat danger
of loss by those not trained in making investments.
The insurance feature of the bill differs from laws heretofore passed 11
main respects, first, the participation of the United States Government in mak
ing a substantial investment in the capital structure, and secondly, in recog
nizing the sound insurance feature that risks should be spread over a lai0e
territory and not localized.
, . ,
,
The test of admission of a bank to the insurance fund is determined up
its ability to pay all of its liabilities to depositors and other creditors, as_ shown
by the books of the bank. In other words, the assets must be sufficient to
accomplish this purpose (sect 12B(e>). Infomat.on_gathered from 4.830
national banks at the close of business on May 13, 19o3, showed that 3b.<6
percent of the total depositors in national banks had deposits of under $2,oQ0.
The survey further showed that the average deposit was $1S3.1<, and that these
96 7G percent, totaling 21,748,754 depositors, had 26.72 percent of the total
deposits in the national banks as of that date, while 0.13 percent of depositors,
totaling 28,356, had deposits of over .$50,000, or 40.29 percent ot the total deposits,
which represented an average deposit of $211,820.85. It must be remembered
that the deposits of over $50,000 represent deposits of State go\ ernments and
their subdivisions as well as the large corporations of the Nation. No effort
was made to distinguish between individual and corporate deposits.
The President has authorized me to give you the names ot the men lie has
selected as directors of the Federal Deposit Insurance Corporation. The law
requires that one of these members be a Democrat and one a Republican. The
Comptroller of the Currency is named by law as the third member of the
^ As^the Democratic member, the President has selected Walter Joseph Cum
mings of Chicago. Mr. Cummings is at present executive assistant to the
Secretary of the Treasury of the United States. He was appointed by Secre
tary William H. Woodin on April 8, 1933. He was born in Chicago, 111., on
June 24 1879, and is the son of Walter J. Cummings and Mary Cummings, of
Chicago! He attended the Chicago public schools and Loyola University. In
1902 he entered the plant of the Cummings Car & Coach Co. at Chicago, 111.,
for the manufacture of cars and trucks, acting as secretary and treasurer.
In 1907 he became vice president of the company, and m 1918 was electee
president of the Cummings Car & Coach Co. He also holds many
directorships, including the American Car & Foundry 1
Motors*Co.,
’
J G Brill Co., of Philadelphia; and is president of the Chicago & West
”s
Railway Co., of Chicago; the Chicago & Calumet District Transit Co., of Chi
cago • and the Des Moines Railway Co., of Des Moines Mr. Cummings was
appointed by the Governor of Illinois in January 1933 as commissioner ot
Lincoln Park, Chicago. He has been identified with and acted in man j ervic
organizations of Chicago, and at the present time is a trustee of Loyola Uni
versity a member of the executive committee of the Associated Chanties of
Chicago and has taken a deep interest in the civic betterment of the city. He
had conferred upon him the honorary degree of doctor of laws by Loyola
The delay in making the appointments on this Board was no doubt caused by
the selection of the next member. As I have stated, the law requires that one
of the members shall be a Republican, and the President had considerable
difficulty in finding a Republican. Mr. E. G. Bennett, of Ogden, Utah, has
been appointed by the President.
. , ,.
Mr Bennett was born in York, Nebr., on April 23, 1888. He received his
early’training under Judge George W. Post, who controlled 12 banks in eastern
Nebraska now operated by the McLeod interests. He was employed for 8 years
oy J S & W S. Kuhn, Inc., who built irrigation, power, and other projects
in the Snake River Valley of Idaho, and then became vice president and gen
eral manager of the First National Bank of Jerome. Idaho, and the Jerome
I oan & Trust Co. During this period he made loans for Holland interests,
loaning approximately $1,500,000 on irrigated farms in Snake River Valley.
He acted as secretary of the Idaho agency of the War Finance Corporation,
loaning $6 000 000 on "livestock without loss. During the past 6 years and at
the present time Mr. Bennett has devoted his time to the Eccles and Browning
interests in the capacity of vice president and general manager. These inter
ests own and operate 28 banks in Utah, Idaho, and Wyoming, all but 3 of which
BANKING ACT OF 1 9 3 5
175
are State banks. For the 4 years from 1924 to 1928, Mr. Bennett was a member
of the executive council of the American Bankers Association, representing
Idaho. In 1923 he was appointed by the Governor of Idaho with two others
to the Bank Code Commission. The code prepared by the commission was
adopted by the legislature in 1925. In the preparation of this code an ex
haustive study was made of all the banking laws of all the States.
Some of Mr. Bennett’s other connections are—president of J. M. & S. M.
Browning Co.; president Browning Arms Co.; president Lindsay Land &
Livestock Co., which company owns a 130,000-acre ranch (18,000 ewes and
4,000 cattle) ; president Lion Coal Corporation operating mines in Utah and
Wyoming; president Eleventh Regional Agricultural Credit Corporation (Utah,
Nevada, Arizona, and California).
Mr. Bennett’s companies do not owe any money to anyone. His banks and
companies are in excellent financial condition. No man knows better the
problems of the State banker than Mr. Bennett. He will bring to the Board
a sympathetic understanding of all those bankers who have assisted in building
the West. No man has a better knowledge of the present banking situation in
the country than Walter J. Cummings. For 5 months he has devoted his time
at great personal loss to assist in rehabilitating the banking structure. He
was drafted into the service by his close personal friend and business associate,
Hon. William II. Woodin, Secretary of the Treasury. His experience in hand
ling large financial problems makes him a valuable member of the Board. He
knows the Treasury and all of its departments. This insures us that there will
be no delay in getting the machinery in motion. These two sound and success
ful business men the President has called to a difficult task. All we ask is a
fair trial.
There are several features of the Banking Act of 1933 which have raised
innumerable questions of interpretation and of administration in which you may
be interested. First and foremost are the problems which have arisen in
connection with affiliates as definied by the Banking Act of 1933. The defini
tion of affiliates of member banks as laid down by the act is very broad and
technical and a literal interpretation of the law may lead to many situations
which could not be foreseen and which I doubt the framers of the act meant
to bring about. Let me give you a few illustrations:
We have a national bank. 96 percent of the stock of which is owned by a
packing company. The packing company is a holding company affiliate. This
corporation in turn owns or controls 200 other corporations scattered throughout
the world. Is each one of these 200 corporations also an affiliate of a national
bank? The national bank is required under the act to furnish report of its
affiliates and to publish the reports of its affiliates under the same conditions
as govern its own condition reports. I venture to state that the depositors of
this national bank will be somewhat mystified by the publication of the reports
of the 200 corporations.
The majority of stock of another national bank is owned by a church, a
corporation sole. The church is an affiliate. It in turn has furnished all or
part of the funds for other church buildings, a hospital, orphans’ home, and
other charitable institutions in a particular State, all incorporated and con
trolled by the first church. Are all of these institutions affiliates of the bank?
Must the bank furnish the statements of these institutions and publish them?
A bank had as collateral to a loan the majority of stock of a hosiery
corporation and foreclosed on the collateral to protect itself, thus becoming
the owner of the stock. Is the hosiery corporation an affiliate? If it is,
the bank cannot make a loan to it except on collateral which the corporation
does not have and since the corporation is unable to borrow from other
sources, the bank cannot protect itself.
There are but three illustrations of the thousands of problems which arise
in connection with affiliates, and the Attorney General of the United States
has been asked for his opinion with respect to some of these problems.
The Banking Act of 1933 provides in part:
“ No executive officer of any member bank shall borrow from or otherwise
become indebted to any member bank of which he is an executive officer.”
Violation of the prohibition is a criminal offense. No definition of “ executive
officer ” is given in the act. The question of what is an “ executive officer ”
immediately faced the banks and the examiners. No ruling on a criminal
statute by my Department would protect the banks. The opinion of the
Attorney General was requested. He has advised that: “ It is not the
designation under which one is known, but the nature of his duties which
176
BANKING ACT OF 19 3 5
characterizes him as an “ executive officer.” Small v. Gibbs Press, 225 N. Y. S.
141, 142.”
He further stated: “ It is the duty of the banks and of all officers who by
any possibility might be affected to keep within the statute and to weigh care
fully all the facts and circumstances (peculiarly within their provision)
before acting.”
He refers with approval to the statement in Arkansas Amusement Corporation
v. Kempner (33 S. W. (2d) 42) to the effect that:
“An executive officer or employee is one who assumes command or control
and directs the course of the business, or some part thereof, and who outlines
the duties and directs the work of subordinate employees, as usually provider
for in the articles of association, the bylaws, or a resolution of the directors.’
The practical administration of this section of the Banking Act of 1933 from
an examining standpoint requires the Comptroller’s Office to take the position
that the following officials of a bank will de deemed, prima facie, to be “ execu
tive officers ” for the purposes of said section, it being understood that such pre
sumption may be rebutted on a sufficient showing: The president, a vice presi
dent, the cashier, an assistant cashier.
The facts in any given case may, as indicted by the opinion of the Attorney
General, constitute other officers or employees, “ executive officers ” within the
scope of the act.
It, of course, would be more satisfactory to have the definition of “ executive
officer ” laid down by Congress, especially when, in weighing facts, one has a
penal statute involved.
The section of the Banking Act with respect to extension of branch banking
for national banking associations outside of the limits of the city, town, or
village in which the association is situated, has raised some problems, partic
ularly the language: “ *
* * If such establishment and operation are at
the time authorized to State banks by the statute law of the State in question
by language specifically granting such authority affirmatively and not merely
by implication or recognition, and subject to the restrictions as to location im
posed by the law of the State on State banks.”
Under the wording of this provision of the Banking Act, national banks are
not permitted to have branches outside of the city, town, or village in which
they are located in some States where State banks are permitted to establish
such branches. Two outstanding cases are those of Maryland and South
Carolina, where nonmember State banks may establish branches, but mem
ber banks, whether National or State, may not establish branches under the
wording of this particular statute. In connection with the establishment of
branches, it was of course, stated before the act was passed by many that
there would be a great rush for branches and they would be established rapidly.
The statute became effective on June 16 of this year; practically 3 months have
elapsed since its enactment. Only 37 branches of national banks have been
established under its provisions. Of this total, 9 branches were established
in communities which were without banking facilities, 2 branches were estab
lished for the purpose of taking over banking institutions in the hands of con
servators, 12 were established to take over going institutions, and 8 were estab
lished to replace 8 branches of State banks taken over by a national bank. Ac
cordingly, only 9 branches represented new banking facilities.
There is not time to go into all of the various problems which have arisen
under the Banking Act of 1933, but I have given you a few illustrations which
should be of interest.
There seems to be a great deal of misunderstanding by banks and the public
generally with respect to receiverships of national banks. These statements
are being made repeatedly:
“ l. Receivership means all assets thrown on the market at once—forced
liquidation.”
In the first place it is obviously impossible to throw the assets on the mgrket
at once and, even could it be done, it would be poor policy. The Comptroller
acts in a trustee capacity and his duty is to realize as much as possible for
creditors. The average time required to fully liquidate a receivership is 5%
years.
“ 2. Receivers get commissions—expenses are heavy and eat up the trust.”
The facts are that receivers of national banks are not paid any commission
but a flat salary and the average salary is around $350 per month, varying
as to the size of the receivership; and since one receiver in many cases handles
more than one bank, the average salary per bank is about $1,713 per annum.
BANKING ACT OF 1 9 3 5
177
The total average cost of liquidation last year was but 3.2 percent of actual colS
average for fully liquidating all banks in the past has been
3.9 percent of book value and 6.65 of actual collections.
PnmnfrnuL? ^°mCh for a few mi.nutes uPon the growth and work of the
Comptiolier s Office, as now constituted, as compared with the past. It is
interesting to note from the first report of the Comptroller of the Currency to
Congress, dated November 28, 1863, that there were 134 national banks and
that the personnel of the Comptroller’s bureau consisted of 8 persons, including
C ! ! P °1ler;
f
1
I
1865 the Comptroller reported 1,601 national banks with
the personnel of the bureau 77 in number. It may be rightly said that those
were the good old days with few problems. Let us see the condition in 1893—
a panic year. Quoting from The Romance and Tragedy of Banking, by T. P.
Kane, former Deputy Comptroller of the Currency:
Lvery hour of the day and late into the night* telegram after telegram was
additional suspensions of banks or new complications
wh ch had to be promptly met. As many as 30 suspensions occurred in a
single day, and for a time it looked as if every national bank in the system
woum succumb.
Tb® Comptroller of the Currency that year in his report to Congress stated
tnat ±o4 national banks suspended, receivers being appointed for 65. ProbrWo ‘
.frvTe! ’ but today we face trust departments, savings departments, bond
aepartments, affiliates, preferred stock, organizations, reorganizations, bond
depreciation, other real estate, banks in conservatorship, and 1,123 banks in
the hands of receivers. In touching on these 1,123 receiverships, the old storv
ot the borrower who asked the banker if he had ever been in the pants business
and, upon receiving the answer “ No ”, stated: “ Well, you are in it now ”
is certainly applicable to banks in receivership. I find that among the enter
prises the Comptroller of the Currency is directing are: Hotels; coal mines;
quarries; lumber manufacturing; vineyards; apartment houses; office build
ings; farming; raising sheep and cattle; growing cotton, pecans, and citrus
iru its; operating pickle factories, cold-storage plants, motor freight terminals,
and a railroad. Incidentally, the railroad is operating at a profit.
At the present time in the Comptroller of the Currency’s Office there are 216
national examiners, 297 assistant examiners, and 156 other employees; in the
Reorganization and Conservators Division there are approximately 305 em
ployees; and 271 employees in the Insolvent Division, not including receivers
conservators, their employees, or their attorneys. Besides using all available
space in the Treasury Building, it has been necessary to secure the major part
of a large modern office building opposite the Treasury.
A picture of what has been achieved in giving relief to depositors by the
various governmental agencies is presented by the following figures:
° " D^ einber 31, 1932> deposits in national banks amounted to approximately
$18,.)00,000,000. On March 16, 1933, the frozen deposits in unlicensed national
banks amounted to $2,200,774,000, representing approximately 12 percent of
iQ Q
.Q a^gregate am°unt of deposits on December 31, 1932. On September 5,
trozen deposits in unlicensed national banks amounted to $746,731 000
4 1)erc? nt of deposits as of December 31, 1932. If we deduct the
m!m iL?fJ rOZen deposits of $440,099,000 which will be released immediately
dennsiS
, 1 nmmati 0n of the aPProved plans, the total amount of frozen
S
r ^
“
enSG nat.iorial banks will be $306,632,000, or 1.66 percent of
the touu amount on deposit on December 31, 1932.
States*' U th,^ 1nnmither^ ~£ re 5,938 °Peratil'S national banks in the United
(7f
y
Hons on March
W V ? ? T re licensed to resume normal banking func''
fhA heSnnins of
15> paving 1,429 national banks unlicensed as of
hanks lkSnsld lOO ntw ^ a£ ? 1(;- Witbin 174 days there have been 423 old
approved
'
banks chartered, and 372 plans of reorganization
I desire to leufliim what I stated in my address over the National Broad
casting System from Washington on July f 9 auuress over tne Watumal *ioadII No disenmination has been made between Republican dollars and Democratlc dollars in dosed banks. My department has assumed that the Republican
depositor, although probably much less in need of his money than his Demo
cratic friend, is just as anxious to get his share of the remaining 5 percent
now in closed national banks. Of the many hundreds of depositors, creditors,
stockholders, and officers with whom I have discussed plans of reopening I
have never inquired and do not know the politics of any. Let me say definitely
and positively that the Comptroller of the Currency is interested in your plans
178
B A N K IN G ACT OF 1 9 3 5
for reopening of your bank and giving relief to the depositors and not in your
politics. There have been some fine illustrations of self-sacrifice and true
Americanism by officers and stockholders of many banks. Men and women
have come forward and volunteered their 100 percent assessment, waived their
deposits, subscribed for new capital, in order that the depositors should not lose
a single dollar. I mention this because some are prone to mention only those
connected with the banks who have tried to evade their legal and moral
responsibility and have been compelled by legal proceedings to make their just
contribution.”
In conclusion, let me say that as politics have never entered into the con
sideration of any plan for reorganizing or reopening or the establishment of
any bank or branch in any of the divisions of the Comptroller’s Office, can I ask
you to bear with me in the solution of difficult problems in the same spirit. In
the great divine scheme of life, as individuals we play our part and pass on. Our
places can be filled without the slightest interruption in the march of progress.
My purpose is to serve a great country with my limited ability. If uncounted
hours in the day and long into the night will bring forth a better understanding
between my Department and the people, will make for a more permanent bank
ing structure, the effort will not be counted in vain. Let us bring cold figures
to life. Let us put a heart back into banking and let profits be subservient to
service. Let us bring a great profession back to the leadership it once enjoyed.
Let the inspiration of the names of great bankers of the past—men who tossed
their fortunes into their country’s exchequer to save its credit and win Its
wars—touch the inner recesses of our souls that we may imitate and serve.
(Thereupon, a recess was taken in the hearing until Monday
Mar. 4, 1935, at 10: 30 a. m.)
B A N K IN G
A C T O F 1935
MONDAY, MARCH 4, 1935
H ouse of R epresentatives,
C ommittee on B anking and C urrency,
W ashington , I). C.
The committee met at 10: 30 a. m., Hon. Henry B. Steagall (chair
man) presiding.
The C hairman . Gentlemen, we have with us this morning Governw T
»ccles of the Fede. al Reserve Board, who will discuss title II
r
oi H. R. 5357, and I think Governor Eccles would like to proceed
without interruption until he shall have concluded a preliminary
discussion of the bill, after which, of course, he will be glad to
answer any questions and furnish any information that may be
desired by members of the committee.
G o v ern o r E c c le s, w e s h a ll be g la d to h a v e y o u p ro ceed in y o u r
o w n w a y fo r su ch tim e as y o u d esire, w ith o u t b e in g in te rr u p te d .
STATEMENT OF GOV. MARRINER S. ECCLES, OF THE FEDERAL
RESERVE BOARD
Mr. E ccles. I am sorry that I do not feel entirely up to par today.
I have been laboring under a rather heavy cold. I had thought, at
hrst, to make a rather extended verbal statement with reference to
the legislation. I decided, however, on account of the way I feel,
to make a brief written statement of the general outline of the legis
lation. I believe this w ill in a general wav7 cover the philosophy
underlying section 2 of the bill.
The C hairman . Title II?
^ rR ^ CCLES’ d'file H of the bill. So that I will just proceed to
read this statement, if I may.
• I n i ^ c o m m e n d in g b a n k in g le g is la tio n a t th is tim e , it is r e c o g
n iz e d th a t th e C o n g r ess h as b efo re it an u n u su a l num ber o f u r g e n t
m a tter s th a t are e n g a g in g its a tte n tio n , a n d th a t le g is la tio n in o rd er
to d eserve y o u r c o n sid e r a tio n a t th is se ssio n m u st n o t o n ly be im p o r ta n t m g e n e r a l b u t m u st also be u r g e n t a t th is p a r tic u la r tim e.
We are not unmindful of the fact that within the past 2 years
ynooh?iV Passed the Emergency Banking Act, the Banking Act of
G
1J33, the Securities Exchange Act, and other important pieces of
legislation dealing with banks. One purpose of this legislation
has been to meet emergency conditions, and it is now proposed to
incorporate into peimanent legislation the features of the emergency
laws that have proved to be valuable.
Another purpose of recent banking legislation, and particularly
of the banking bill of 1933 and of the portions of the Securities
179
180
BANKING ACT OF 1 9 3 5
Exchange Act that deal with powers of the Federal Reserve Board,
has been to prevent the recurrence of speculative excesses which pre
ceded the recent break-down of our banking machinery and were
T
partly responsible for this collapse. These bills were largely in
spired by the difficulties that came to a head in 1928 and 1929^, and
it is gratifying to know that we now have on our statute books meas
ures that will go far toward preventing the recurrence of conditions
such as prevailed during the speculative orgy of these years.
At the present time, however, there appears to be no immediate
danger of excessive speculation. The present need is to so modify
our banking law as to encourage the banking system to give a full
measure of cooperation to efforts at economic recovery. It is even
more important from the longer time point of view to so modify
our banking structure and administration as to have it become an in
fluence toward the moderation of fluctuations in employment, trade,
and business. This would tend not only to avoid the particular evils
that came to a head in 1928 and 1929, but to so regulate underlying
conditions as to diminish the possibility of a speculative boom get
ting under way. For when speculation is once under way it is
extremely difficult to control, and the only means of preventing
excesses is to combat conditions that are favorable to their inception
and early development.
In order to accomplish this it is necessary to improve our machinery
of monetary control, which is the principal objective of title II of
the proposed bill.
More specifically these objectives are to increase the ability of the
banking system to promote stability of employment and business
insofar as this is possible within the scope of monetary action; as
a necessary step in that direction, to concentrate the authority and
responsibility for the formulation of national monetary policies in a
body representing the Nation; to modify the structure of the Federal
Reserve System to the extent necessary for the accomplishment of
these purposes, but without interfering with regional autonomy in
matters of local concern; and finally to relieve the banks of the
country of unnecessary restrictions that handicap them in the proper
performance of their functions and thus to enable them to contribute
more effectively to the acceleration of recovery.
In my opening remarks I wish to direct your attention particu
larly to four proposals incorporated in title II of the bill. Other
provisions of the bill I wish to leave for your consideration, with
the understanding that I shall be glad to answer any questions that
you may wish to ask about them.
The four questions which I wish to discuss this morning are:
(1) The proposal to combine the offices of chairman of the board of
directors and governor of the Federal Reserve banks, and to have the
appointments to this combined office subject to approval by the Fed
eral Reserve Board (sec. 201 (1), pp. 38-41); (2) modification of
the machinery for determining open-market policies of the Federal
Reserve System (sec. 205, pp. 43-44) ; (3) transfer of the determina
tion of eligibility requirements from the statute to the Federal Re
serve Board (sec. 206, pp. 45-46); and (4) liberalization of provi
sions relating to real-estate loans (sec. 210, pp. 49-51).
BANKING ACT OF 1 9 3 5
1.
181
COM BINING GOVERNORS A N D CH AIRM EN
As you know, the present law provides that the Federal Reserve
Board appoint 3 directors of each Federal Reserve bank and that 1
of the directors appointed by the Board be the chairman of the board
of directors. It appears to have been the intention of the framers
of the b ederal Reserve Act that the chairman of the board of direc
tors be the principal executive officer of each bank and the law makes
him also the official representative of the Federal Reserve Board at
the bank. In practice, however, it has developed that the directors
appoint an executive officer for whom they have adopted the title
of governor of the Federal Reserve bank, a title that is not mentioned
m the law, and that these governors have become the active heads
of the Federal Reserve banks.
The proposal in the bill is to recognize the existing situation by
giving the governor of a Reserve bank a status in the law and to com
bine his office with that of the chairman of the board of directors.
It is, of course, essential that the holders of these combined offices
be approved by the Federal Reserve Board. The Board, you will
note, will no longer appoint a chairman of the board, but will merely
have the power to approve or disapprove the appointment of the
governor, who will also be chairman of the board. In this proposal
there is no encroachment on the autonomy of the individual Reserve
banks. It merely reestablishes the original principle of the Federal
Reserve Act that the Federal Reserve Board, which has responsibility
for national policies and for general supervision over the Reserve
banks, shall be a party to the selection of the active heads of the 12
Reserve banks. This change will work towards smoother coopera
tion between the Board and the banks and will establish within
the banks a greater unity of administrative control than now exists.
It will also result in considerable saving through the elimination of
one of the two highest officers in each Federal Reserve bank.
2.
O PEN-M ARK ET OPERATIONS
From the long-time point of view the recommendations dealing
with changes in the machinery for determining and carrying out
the open-market policies of the Federal Reserve System are essen
tial. Open-market operations are the most important single instru
ment of control over the volume and the cost of credit in this
country. When I say credit in this connection I mean money,
ecause by far the largest part of money in use by the people of
this country is in the form of bank credit, or bank deposits. When
the f ederal Reserve banks buy bills or securities in the open market,
hey increase the volume of the people’s money and lower its cost;
and when they sell in the open market, they decrease the volume
or money and increase its cost. Authority over these operations,
which aliect the welfare of the people as a whole, must be vested
in a body representing the national interest.
Under existing law open-market operations must be initiated bv
a committee consisting of representatives of the 12 Federal Reserve
banks, that is, by persons representing primarily local interests.
182
BANKING ACT OF 19 3 5
They must be submitted for approval or disapproval to the Federal
Reserve Board, and after they have been approved by the Federal
Reserve Board, the boards of directors of the Federal Reserve banks
have the power to decide whether or not they wish to participate
in the operations. We have, therefore, on this vital matter a set-up
by which the body which initiates the policies is not in a position
to ratify them; and the body which ratifies them is not in a position
to initiate them or to insist on their being carried out after they are
ratified; and still a third group has the power to nullify policies
that have been initiated and ratified by the other two bodies. In
this matter, therefore, which requires prompt and immediate action
and the responsibility for which should be centralized so as to be
inescapable, the existing law requires the participation of 12 gov
ernors, 8 members of the Federal Reserve Board, and 108 directors
scattered all over the country before a policy can be put into
operation.
I t requires no further explanation to show that the existing
machinery is better adapted to delay and obstruction than it is to
effective operation, and that it results in a diffusion of responsibility
which prevents the necessary feeling of complete authority and
responsibility by a small group of men who can be held accountable
by the Congress and the Nation for the conduct of this matter that
is of national importance.
The proposal in the bill is to set up a committee of 5, 3 of whom
shall be members of the Federal Reserve Board and 2 governors
of Federal Reserve banks. This proposal would have the advantage
of creating a small committee with undivided responsibility. I t is
not clear, however, that this arrangement is the best that can be
devised for the desired purpose. The Federal Reserve Board, which
is appointed by the President and approved by the Senate for the
purpose of having general responsibility for the formulation of
monetary policies, would under this proposal have to delegate its
principal function to a committee, on which members of the Board
would have a bare majority, while governors of the banks would
have 2 out of 5 members.
From the point of view of the Board the disadvantages of this
arrangement are that a minority of the Board could adopt a policy
that would be opposed to one favored by the majority. It would
even be possible for one member of the Board by joining with the
two governors to adopt a policy that would be objectionable to
the seven other members of the Board.
The placing of this authority in such a committee would also
have the disadvantage of giving one important power, the power
of open-market operations, to the open-market committee, while
other fundamental powers are vested in the Board. These powers
could be utilized to nullify the actions of the open-market com
mittee. For example, the committee might adopt a policy of easing
credit, while the Federal Reserve Board would be in a position to
tighten credit, either by raising discount and bill rates or by in
creasing member-bank reserve requirements. Also the Board,
through its power of prescribing regulations for open-market opera
tions,'could conceivably interfere with the carrying out of the poli
cies of the committee. While it is not contemplated that such
BANKING ACT OF 1 9 3 5
183
extreme situations would occur, it does not seem desirable to
amend me Jaw in a manner that might result in such unreasonable
developments.
Lpon fmther study it w
rould appear that the best way in which to
handle this proposal would be to place the responsibility for openmarket operations in the Federal Reserve Board as a whole and to
provide tor a committee of five governors of Federal Reserve banks
to advise with the Board in this matter. The Board should be re
quited to obtain the views of this committee of governors before
adopting a policy for open-market operations, discount rates, or
changes m reserve requirements.
Such an arrangement would result in the power to initiate openmarket operations by either a committee of the governors or by the
lioard, but would place the ultimate responsibility upon the Fed
eral Reserve Board, which is created for that purpose. In this con
nection I should like to quote President Woodrow Wilson, who in his
address to the joint session of Congress on June 23, 1913, said:
inTht ^ atro1 of the. system of banking and of issue * * * must be vested
masters ofeihi1
lm-ent itse1!’ so that the banks may be the instruments, not the
masters, of business and of individual enterprise and initiative.
3.
ELIG IBILITY OF PAPER
I t is proposed to give the Federal Reserve Board authority by
regulation to determine the character of paper that may be eligible
as a basis of borrowing at the Federal Reserve banks. This is parlci, ai y important at this time because it would encourage member
banks to pay less attention to the form and maturity of paper that is
otiered by would-be borrowers and to concentrate their attention on
the soundness of such paper. At present many banks are unwilling
to extend loans to borrowers who have assets that are unquestionably
sound because they lack the assurance that in case of a withdrawal
of deposits they would be able to liquefy these assets at the Federal
Reserve banks.
In times of emergency it has been necessary to remove existing
restrictions and to give discretion in the matter to the Federal Re^
serve authorities, as was done under the Glass-Steagall Act of 1932.
a n ’ , T ever’ was Passed after a great many banks had gone to
•c-inno • a^ leafd partly because of lack of eligible paper and its pro}vlvp n * far a? they relate to borrowing from the Reserve banks,
nS°
have now expired. I think they expired yesterday.
wnat is proposed is not, as has been sometimes alleged, a policy
of opening the doors of the Federal Reserve banks to all kinds of
paper, regardless of its soundness. On the contrary, it is proposed
to place emphasis on soundness rather than on the technical form of
the paper that is presented.
Experience under emergency laws shows that the Federal Reserve
banks and t ie Federal Reserve Board have exercised caution and,
ionn A Annn have extended credit on ineligible assets to the extent of
A
$300,000,00), all but !pl,o00,000 of this has been paid back and the
banks have suflered no considerable losses. I t would appear safe,
therefore, to intrust disci etion in tlic matter to tlie Federal Reserve
Board, which is always in session and, therefore, in a position to con
sider emergencies promptly without being under the necessity of
184
BANKING ACT OP 19 3 5
proclaiming them by an appeal to Congress and thereby aggravating
the situation, and being obliged to wait for Congress to be in session
and to act on the matter.
Another phase of this problem is that the total volume of paper
eligible for discount held by member banks at the present time is
only about $2,000,000,000, or less than 8 percent of the resources of
the banks, and even in 1929 it was only about $4,000,000,000, or a
little more than 12 percent. While this amount is sufficient in the
aggregate to provide access to the Federal Reserve banks, there were
many individual banks that did not possess sufficient eligible paper.
Even more important than that, is the fact that in a period of timid
ity the banks tend to refrain from making loans, except on paper
eligible for discount at Federal Reserve banks. This is even now a
factor causing liquidation in many communities and preventing
adequate expansion of credit in others.
A bank that would conduct its business on the theory of having
only such assets as can be disposed of at will in times of crisis, when
the national income has been cut in two, cannot serve its community
adequately. Such a bank would confine its operations to the pur
chase of the most liquid open-market paper, with the consequence
that it would neglect its local responsibilities and would neverthe
less find it difficult to earn enough from the low returns on such
paper to cover expenses and dividends. The banks should be in a
position to meet the needs of their communities for all kinds of
accommodation, both short and long term, so long as the credits are
sound, and they ought to have the assurance that all sound assets
can be liquefied at the Federal Reserve bank in case of an emergency.
4.
REAL-ESTATE LOANS
Closely allied to this matter of eligibility is the proposal that the
limitations on real-estate loans be modified so as to permit member
banks better to supply the needs of their communities for mortgage
loans. This proposal does not introduce a new character of loan, it
merely relaxes existing limitations on real-estate loans which
national banks have made for 20 years. What the bill proposes is
to modify the requirements so as to make them more realistic and
to enable the member banks better to serve their communities.
Coupled with the provisions in regard to eligibility, these proposals
ought to result in greater willingness of member banks to lend on
real estate and, therefore, to an improvement in the mortgage market
and a stimulation of construction which is essential to business
recovery.
Member banks hold about $10,000,000,000 of the people’s savings,
and it is therefore proper and necessary that they invest a part of
their funds in long-time undertakings. The separation of com
mercial banking from savings banking may be theoretically desir
able, but it cannot be accomplished in this country without
disrupting existing machinery, while the need for increased activity
in building is urgent. Member banks are suffering from the com
petition of many Government and other agencies that are entering
the field of real-estate loans, and it is a matter of self-preservation
for the banks to be able to hold and expand their activities in this
field.
BANKING ACT OF 1 9 3 5
185
The details of the bill as proposed may have to be modified. The
problem is a difficult one because the laying down of specific per
centages of value presents many perplexities. In some regions, and
at some times, a 75-percent loan on real estate is conservative, while
at other times a 50-percent loan may be too liberal. I t may be best
in this matter, as in others, to vest discretion in the Federal Reserve
Board to prescribe such rules and regulations about real-estate loans
as in its judgment would operate most effectively in the public
interest.
OTHER PROPOSALS I N
TITLE II
Other sections of title I I of the bill which I have not discussed
may be briefly enumerated: Provision that directors of the Federal
Reserve banks shall not serve for more than 6 consecutive years.
Ihis would prevent crystallization of any one interest in the man
agement of a Reserve bank. A change in the qualifications of
members of the Federal Reserve Board to make these qualifications
more descriptive of the functions of the Board. An increase in
salary of future appointive members of the Board and provision
for pensions. Grant of power to the Board to assign specific duties
so as to be relieved of detail. Placing of obligations guaranteed by
the United States Government on the same basis as direct obligations of the Government. Repeal of collateral requirements against
* e Jeral Reserve notes. These requirements serve no useful purpose
<
and have been sources of serious trouble at critical times. Clarifica
tion of the authority of the Board to raise or lower reserve require
ments—the bill as introduced authorizes changes in reserve require
ments for different districts or classes of cities. It might be mod
ified by eliminating changes by districts and classifying cities into
two groups— (1) Reserve and Central Reserve cities and (2) other
cities. Authority for the Federal Reserve Board to waive capital
requirements for admission of insured banks into the system prior
to July 1, 1937, when all banks, in order to be insured, must be
members of the Federal Reserve System. This might be broadened
so as to authorize the Board to waive not only capital but all
requirements and to permit existing banks to continue permanently
with their present capital, provided it is adequate in relation to
their liabilities.
TEC H N IC A L PROVISIONS
Title I I I of the bill contains a number of sections proposed by
the Comptroller of the Currency and by the Federal Deposit Insur
ance Coiporation. Sections in which the Federal Reserve Board
is interested are in the nature of technical improvements of a noncontroversial nature of the same general character as those con
tained m the so-called “ omnibus banking bill ” which was reported
favorably by the Banking and Currency Committees of both Houses
of Congress in June 1934, but failed of enactment in the closing
davs of the Seventy-third Congress.
For example, a provision that a holding-company affiliate, which
is a holding company by accident and is not engaged in the busi
ness of holding bank stock, shall be exempted from the require
ment of obtaining a voting permit. Another example is the pro
vision that member banks for the purpose of calculating reserve
mmmmm
186
BA N K IN G ACT OF 1 9 3 5
requirements shall be allowed to deduct from gross deposits the
amounts that are due them from other banks rather than be allowed
to deduct these amounts only from the deposits they hold for other
banks. The existing provision has resulted in injustice to country
banks, which hold no deposits for other banks, and are, therefore,
unable to get the benefit of the deduction which city banks can
make. There is also a proposal intended to simplify the provisions
of the Clayton Antitrust Act in regard to interlocking bank direc
torates and to facilitate the administration of these provisions by
the Federal Reserve Board.
Provisions in title III, as well as in title II, are still being studied
and improvements and modifications in technique and in phrase
ology are being developed. I shall, therefore, appreciate an oppor
tunity to submit to the committee for its consideration a number of
amendments to the bill before final action is taken. It would also
be helpful if the committee would permit the Board’s counsel to
cooperate with the committee’s counsel in the final perfecting of
the phraseology of the bill.
Thank you.
The C h a i r m a n . Gentlemen, in view o f the physical difficulties
under which Governor Eccles is laboring this morning, I have
assured him that we would excuse him, when he had finished his
general statement. Governor Eccles, if you desire that we do so,
we shall be glad to let you go on tomorrow morning, and the com
mittee will meet at 10:30 o’clock.
(Whereupon the committee adjourned until 10: 30 a. m., Tuesday,
Mar. 5, 1935.)
B A N K IN G
A C T O F 1935
F R ID A Y , M ARCH 5, 1935
H o u se of R e p r e s e n t a t iv e s ,
C o m m it t e e o n B a n k i n g a n d C u r r e n c y ,
W ashington, D. C.
I he committee met at 10:30 a. m., Hon. Henry B. Steagall
(chairman) presiding.
TJ16 C h a i r m a n . Gentlemen, we will come to order. Governor
Bedes, the committee will be glad to have you resume your discussion
ot title I I of the bill. You may proceed as far as vou desire without
interruption.
STATEMENT OF HON. MARRINER S. ECCLES, GOVERNOR,
FEDERAL RESERVE BOARD—Resumed
Mr E c c l e s . I made a general statement yesterday, and it oc
curred to me that it might be helpful to the members of the com
mittee if I discussed, more or less informally and possibly in more
detail, some of the features of the bill.
It is proposed to combine the office of the chairman of the board
of directors and the Governor of the Federal Reserve bank. At the
present time each of the 12 Reserve banks has 9 directors. Six of
those directors are elected by the stockholders of the banks, that is,
the member banks; three of them are appointed by the Federal
Reserve Board.
These directors are appointed for 3-year terms. Of the 6 direcois appointed or elected by the member banks, 3 are bankers, known
as class A” directors; 3 must be selected from commerce, aoriculmdustrT> and are known as “ class B ” directors.’ One of
tne three directors appointed by the Federal Reserve Board, known
as c ass C directors, is selected or appointed as chairman of the
boarc ol directors of each Federal Reserve bank. He is also the
Federal Reserve agent. He is a full-time, highly paid official; and
origuuil y it was conceived that he would be the executive head of
each Federal Reserve bank.•
• Vt!6
^ ederal Reserve banks are not mentioned
m the Fedeial Reserve Act. The act provides that the directors
of the bank shall select such officers and employees as are necessary
to conduct the affairs of the bank.
The title of governor ” w given by the nine directors to the
’as
person selected by them as the operating head of the bank. In
practice, the position of the governor has become an outstanding
and important position, and in nearly ever3r instance he has become
the head of the bank. He is not a director of the bank; he is
187
188
BANKING ACT OF 1 9 3 5
elected by the board of directors; the nine members of the board
of directors.
The Federal Reserve Board has no legal relationship with the
o-overnor of the bank, has no responsibility in his selection except
that it passes on his salary. Its official relationship with the bank
is through the chairman and Federal Reserve agent, whom the
law designates as the Board’s official representative at the Federal
Reserve bank.
.
.
It is proposed, in this legislation, as a matter of efficiency, coordi
nation, and good organization, to do away with this dual relation
ship and to combine the office of g o v e r n o r with that of chairman,
making the governor and the chairman a class C director. The
board °of directors of each Federal Reserve bank will select the
governor and the chairman; but this selection must be subject to
the approval of the Federal Reserve Board.
You will observe that the Federal Reserve Board will not have
the power of appointment of the chairman, which will be given to
the local board and combined with the office of governor; the ap
pointment will be subject to the approval of the Federal Reserve
Board.
.
This will make for better coordination and economy, will do away
with the possibility of cleavage, by reason of the dual organization
of the chairman, appointed by the Board in Washington, and the
governor, selected by the local board.
Although the directors of the banks are appointed for a period
of 3 years only, in practice many of the directors have served since
the beginning of the Federal Reserve System. I t is thought ad
visable to limit the term of office of all of the directors to two con
secutive terms, totaling a period of 6 years. This is proposed to
avoid the crystallization of control or authority in any one group
or combination.
I t is felt that, in each Federal Reserve district, there are many
able men to represent the bank members and also commerce and
industry, as well as the Board at W ashington, which appoints the
three class C directors; and that the public nature of the Reserve
System is such that it would be to the interest of the System to have
a limit upon the terms of the directors.
I t is recognized that there may be a loss of some very able men
as the result of this restriction, but it is believed that there will be
more gained as a result of this policy than will be lost.
I t is interesting to note that two, and I believe three, of the
Federal Reserve banks have adopted the policy, without it being
prescribed by law, of limiting the terms of their class A and class
B directors* that is, the directors elected by the member banks, to
3 years. The New York bank and the Dallas bank, and I think
the Atlanta bank, rotate the offices of their class A and B directors.
They find this in the interest of harmony among their member
banks; and it is felt that, if it is in the public interest to do that
in the case of those banks, it would be well to do it in the case of
all banks and to place the limitation to 6 years in the law.
Since this proposal was made, there has been considerable discus
sion, and I find that, almost universally, it is looked upon with a
great deal of favor by the banks throughout the country. I find
BANKING ACT OF 19 3 5
189
that there is considerable feeling among many of them that there has
been a certain amount of crystallization of control in small groups.
I met with a group of bankers on Friday, and without exception,
they were all very favorable to that restriction.
Admission of insured nonmember banks: I am discussing this
briefly, in the order in which the proposals appear in the bill—the
admission of insured nonmember banks is in section 202. It is recog
nized that many of the nonmember banks could not readily qualify
as members of the Reserve System, and that a very great hardship
and injustice would be imposed upon them, if they were required to
become members of the Federal Reserve System under the present
legislation, and under the rules and regulations for membership. It
is, therefore, proposed that the Federal Reserve Board should have
authority to waive the capital requirements.
I suggested yesterday, in connection with this particular feature
of the bill, that the authority for the Federal Reserve Board to waive
the capital requirements for admission of insured banks into the
System, prior to July 1, 1937, when State banks are required to be
members of the Reserve System in order to be insured, might be
broadened, so as to authorize the Board to waive not only the capital
requirements, but all requirements, and to permit existing banks to
continue permanently with their present capital, provided it is ade
quate in relation to their liabilities.
I think it is desirable to have unification of the banking system,
and I recognize that possibly the most likely way of getting it is
through all banks becoming members of the Federal Reserve System.
In many instances, the capital of nonmember banks, is less than
the minimum amount required—$50,000, and their volume of busi
ness is such that they do not require and cannot possibly use and
support a capital of $50,000 with an adequate surplus, which is also
desirable.
I t is also recognized that certain of the rules and regulations for
membership would make it very difficult for many banks to qualify
under those rules and regulations; and it is, therefore, the desire of
the Federal Reserve Board to so modify the law and its rules and
regulations as to make it possible, under reasonable conditions, for
nonmember banks to get the benefits of membership. I believe those
benefits are very real. Particularly would that be true if the present
law is amended in some of the particulars as provided for in the pro
posed bill. I refer to the change in the present eligibility features;
also the recognition of the desirability of using the savings and time
funds in longer term lending, or in the real estate loan field. These
provisions would give to many of the nonmember State banks the
support that otherwise would not be available to them, if it were
possible for them to continue to operate as nonmember banks.
In section 203, it is recognized that it would be desirable to change
the present language with reference to the qualifications for mem
bership on the Board, as a recognition of the fact that the functions
and duties of the Federal Reserve Board are such as to make it a
body representing the Nation, rather than anv group or combination
of groups. In recognition of that, it is provided in the bill that fu
ture appointive members of the Board shall be men who are qualified
127297— 35-
13
190
BANKING ACT OF 1 9 3 5
by education or experience or both to participate in the formulation
of economic and monetary policies, which seems to me to be the
central and most important function of the Federal Reserve Board.
It is recognized that membership on the Federal Reserve Board is
one of the most important, responsible, and powerful positions of
the Nation. It is, therefore, believed that the position should attract,
by reason of its importance and responsibility, the best qualified men
in the Nation to deal with these monetary and economic problems.
It is felt that the men on the Board should be independent and,
therefore, it is recognized that their compensation should be such as
to enable them, without having to have an independent, private in
come, to live in Washington in the manner that their position would
require. It is proposed that the compensation for future appointive
members be increased to $15,000 per year, the salary now received
by members of the Cabinet. Their salary was originally equal to
that of Cabinet members, but later the Cabinet salaries were in
creased. The proposal is to reestablish this equality. It is also pro
posed that there be a pension or retirement provision, so that mem
bers of the Board who have severed their outside connections and
serve in this position, will not feel a dependency that otherwise
they may feel.
I do not believe the pension provision in the bill fully and ade
quately meets the situation. It provides that any of the present
members may retire at the age of 70, and that future appointive
members must retire at the age of 70. I t also provides that, upon
retirement, they will receive a pension of $12,000 per year, when
they have served the full period of 12 years, or more, and a propor
tionate amount when they have served not less than 5 years. It
would seem to me that, in order to attract the ablest men obtainable
for this position, to make them willing to accept positions on this
Board as careers, and to sever all other connections, a pension should
be provided for future appointive members, irrespective of the age
at which their terms may expire.
It seems to me that this would have the effect of inducing these
men to accept positions of this sort during the most active and
remunerative period of their lives; otherwise, they might not be
willing to accept.
It does not seem fair to ask a person, of the caliber that Board
members should be, to accept a position and serve for a 12-year
term—we will say from the ages of 48 to 60—and at the end of the
period of 12 years, if not reappointed, to be obliged to go out and
undertake to reestablish connections, which were severed and neg
lected for a period of 12 years.
It would seem to me that, in the public interest, it would be well
to provide that, if a member is not reappointed, he would receive
the full pension, if he has served a full term or longer; but if he is
offered a reappointment and prefers not to serve, of course he should
not be given a pension. I believe that would make for greater
independence on the part of the members of the Board.
As to the term of the office of Governor of the Board: There has
been a good deal said about the provision in the proposed legislation
that the term of the Governor as a member of the Board shall expire
when he is no longer designated as the Governor by the President.
BANKING ACT OF 19 3 5
191
The present law provides that the Governor shall be detonated by
the President to serve at his pleasure, the designation being from
among the Federal Keserve Board members. As a practical matter,
when the Governor is no longer designated as Governor by the
President, it is because the President is desirous of having someone
else serve as Governor.
Mr. G oldsborough . As I understand it, you approve of that
provision ?
Mr. E ccles. What is that?
Mr. G oldsborough . Y ou approve the provision allowing the Presi
dent to remove the Governor, whenever he sees fit?
Mr. E ccles. Well, I have no objection to it. I think that, as a
practical matter, it is reasonable. In some of the other central banks
there are similar provisions with reference to the executive heads
of the banks.
It seems to me that an administration is charged, when it goes into
power, with the economic and social problems of the Nation. Pol
itics are nothing more or less than dealing with economic and social
problems. It seems to me that it would be extremely difficult for any
administration to be able to succeed and intelligently deal with them
entirely apart from the money system. There must be a liaison
between the administration and the money system—a responsive rela
tionship. That does not necessarily mean political control in the
sense that it is often thought of.
Does that answer your question, Mr. Goldsborough?
Mr. G oldsborough . Yes; from your standpoint, I think it does.
Mr. E ccles. Keferring again to the term of office----The C h a ir m a n . Suppose you let me ask a question right there:
Is not the practical situation such that the administration has that
power and may exercise it, but under this bill there wdll be a tech
nical recognition of that power and a definite fixing of responsibility,
at least within limitations?
Mr. E ccles. Well, the only change—I do not think it will be ma
terial, but the only change in this bill over the present legislation is
t hat when the Governor is no longer designated as Governor by the
President, his term as a member of the Board will expire, whereas,
at the present, when he is no longer designated as Governor, his term
as a member does not expire. This means that if he is no longer
designated as Governor and he does not resign as a member, there
a iII be no vacancy on the Board to which the President could appoint
v
the person he desires to designate as Governor, unless he designates
an existing member of the Board. {There is this disadvantage under
the existing law: When a member is no longer designated as Gov
ernor and resigns as a member—which is the only thing that a Gov
ernor could do, and a person who would not do that would certainly
not be a proper person to act as Governor—he is precluded for a
period of 2 years from entering the banking field. That is a deter
rent in the present law to a man accepting that office. If he is taken
from the^ banking field, he is required to sever all connections with
the banking business for an indefinite time, that is, for as long as
he is designated as Governor, and that may be for 2 or 3 or 4 yenrs.
When he is no longer designated as Governor, he resigns as a mem
ber: and, if he has not served out his term as a member, he is pre
cluded for 2 years afterward from entering the banking field again.
192
BANKING ACT OF 19 3 5
If he has served out his term as member, he may immediately enter
the private field.
Now, what I should like to propose here is that the Governor’s
term as a member do not expire when he is no longer designated as
Governor; that is, leave the law as it is with reference to his term
as a member, but provide that, if he chooses to resign as a member
when he is no longer designated as Governor, his term as a member
be considered to have been fulfilled.
Mr. H ollister . That is not what this new statute says, is it ?
Mr. E ccles. N o; I am offering this as a suggested change: Whereas
th« bill provides that he shall automatically cease to be a member
of the Board when he is no longer designated as Governor, I am
suggesting that it be changed so as to provide that, if he does not
choose to continue to serve as a member when he is no longer desig
nated as Governor, he would be free to enter the banking field, with
out taking a 2-year vacation.
Mr. G oldsborough . Your view is that they should resign volun
tarily, and the 2-year application should apply; but if they are
removed as Governor and they see fit----Mr. E ccles . It should not apply.
Mr. G oldsborough . It should not apply?
Mr. E ccles. That is right.
Mr. G oldsborough . That seem s to m e to be sou n d .
Mr. E ccles . It seems to be fair and will remove a deterrent; and
it seems to me that it will accomplish the object of making it a more
attractive position in the future than it has been in the past.
Mr. H ollister . Would it not also attract something else, or accom
plish something else? This is drafted to give the President the
opportunity, if he cares to do so, to make a clean sweep, to com
pletely clean up the whole Federal Reserve Board in a few days, does
it not?
Mr. E ccles . Well, of course, I think that if we are going to con
ceive of a President that -would resort to what would be considered
sharp practice, he would possibly have more direct ways of cleaning
it up than that, I think a President that would resort to that sort of
thing would possibly have other ways of meeting the situation.
Mr. H o l l i s t e r . Presidents have in the past, unfortunately, done
things that some of us would not back up; but, as a matter of fact,
as the bill is drafted, it permits the President, if he cares to, to re
move successively every member of the Federal Reserve Board,
appoint him as Governor, and undesignate him ; whereupon, he imme
diately retires from the Board ?*
Mr. E ccles. Yes; that is correct.
Mr. H o l l i s t e r . S o the suggestion you make would at least elimi
nate the possibility of that happening, when we had a man in the
White House that might adopt such sharp practices ?
Mr. E ccles . Yes.
Mr. C ross. Mr. Chairman, may I make a suggestion as a member
of the committee ?
The C h a ir m a n . Certainly.
Mr. C ross. I would like to make this suggestion: That Mr. Eccles
be permitted to go ahead and finish his statement; and then that he
submit the amendments that he would suggest; and then when he
BANKING ACT OF 1 93 5
193
gets through with his statement, just as Mr. Goldsborough suggested
the other day, each member of the committee be given a chance to
ask questions, because every member h#s many questions, or a num
ber of questions, on this section that they would like to ask. I am
afraid that, if we start like this, we will never finish or get anywhere.
That is my suggestion.
The C h a ir m a n . Well, I certainly expect that every member of the
committee will have the opportunity you refer to, and I will recog
nize members in an orderly way, so that every member will be
allowed to ask questions.
Mr. C ross. The point is, we will not have a coordinated idea of
this by going in and out, and I think it is much better to let him
finish, and then later on let him bring his proposed amendments to
the bill, and then we can take up those amendments and let him
discuss those amendments in a much more uniform way, and every
member will get a grasp of the bill. That seems to me to be the
best way to proceed.
The Ch a i r m a n . All right, Mr. Eccles, you may proceed.
Mr. E ccles . Assignment of duties: There is no controversy o v er
that question. It is just a practical way of enabling the Board to
meet the problems of increased responsibility that are placed upon
them by delegating to others many of the routine duties, so long as
they do not involve questions of policy.
Open-market operations: Inasmuch as this was covered quite fully
in my statement yesterday, I do not believe that I can add very much
to it. There will likely be a good many questions that will develop
in connection with that, because, under that heading, the whole
question of monetary control heads up.
I explained yesterday the way the open-market operation is now
organized, the manner in which the bill provides for it to be oper
ated, and the amendments suggested to the proposals in the bill.
Eligibility for discount: The eligibility requirements of the pres
ent law do not seem to me to meet the changed conditions that we
now have in the Nation, compared with the conditions that existed
at the time the Federal Keserve was established. The amount of
eligible paper available now held by banks is a very small part of
the total resources of the banks. Even in 1929 it was only slightly
over 12 percent of their loans and investments, and today I under
stand it is less than 8 percent. Approximately $2,000,000,000 is the
total amount of the paper which would be considered eligible by
the banks themselves. I t was found, when the depression com
menced and as it continued, that the banks did not have eligible
paper to meet their shrinking deposits, brought about by the general
liquidation of bank loans and by hoarding; and that, in order to
avoid closing they were forced to sell such bonds as they had upon
the market. Ihese bonds were considered, at one time, to be sec
ondary reserves, because they were listed. Banks also brought pres
sure upon all loans which came due during the period, and were
forced to refuse new credit, feeling, of course, that they had to have
as large cash reserves as possible and be as liquid as possible. They
were bringing pressure to collect loans that came due, and to sell the
securities that they had, wherever they could do so without taking
too large a loss. That attitude on the part of the banks throughout
the Nation was largely due, it seems to me, to the fact that they did
194
BANKING ACT OF 19 3 5
not have eligible paper in sufficient quantities to meet the demand
and could not get help at the Federal Reserve banks unless the
paper was eligible.
•
Therefore, in an effort and under pressure to get liquidity, they
froze themselves so completely that they finally closed the entire
banking structure. So it was found out that, in the final analysis,
in a depression, there is no liquidity, except that liquidity which can
be created by the Federal Reserve or the central bank through its
power of issue.
This was finally recognized when great damage had been done,
when thousands of banks had been closed unnecessarily, when
millions of individuals and institutions had been forced to the wall
through the lack of available credit, or through pressure to pay
existing debts. Millions of depositors lost hundreds of millions of
dollars as the result of those closings.
We finally recognized that we did not have to have eligible paper
and we did not have to back our currency with gold or eligible paper
or even with Government bonds. We finally recognized that, in
order to get the banks open, we could take any sound asset into the
Reserve bank and issue Federal Reserve bank notes. When that
happened nobody wanted their money, the runs stopped, and liqui
dation stopped to a very great extent. Certainly, the pressure was
very greatly relieved.
Now it seems to me that it is only being a realist to recognize that
the Reserve banks, subject to rules and regulations made by the
Reserve Board, should have the power to meet emergencies, should
have the power to loan to member banks upon sound assets, rather
than see the banks close, or rather than see unnecessarily drastic
liquidation forced upon the community.
This provision does not mean inflation. Before the banks today,
as a whole, would have any occasion to use the Reserve System, they
would have to extend billions and billions and billions of dollars of
credit, because of the excess reserve position that they now occupy.
But, if the provision is there, it will make the banks feel altogether
different about extending credit today. It will make them recognize
that they do not have to have 90-day or 6-month paper in order to
make loans, when that type of demand for credit does not exist to
more than a very limited extent.
This, to my mind, is one of the most important features of the leg
islation at the present time. I t will tend to do more toward inducirTg
recovery through credit expansion than any other feature of the bill.
The banking system must be made, to provide the money and credit
required, if it is going to justify its existence. At the present time
that is largely provided by the Government. The banking system*
the commercial banking system----Mr. G oldsborough . Y ou say it is being provided by the Govern
ment?
Mr. E ccles . To a very large extent.
Mr. G oldsborough . We were under the impression that the Gov
ernment borrowed the money that it is now providing, from the
banks; is that not correct?
Mr. E ccles . That is very true. The banks are willing to extend
credit on Government bonds.
BANKING ACT OF 1 9 3 5
195
M r. G oldsborough . We have provided the banks with $13,000,000,000, about, have we not ?
Mr. E ccles . Well, I do not know the exact amount, but---- Mr. G oldsborough . That is an approximation.
Mr. E ccles. But whatever amount of Government bonds the
banks have purchased—it is not $13,000,000,000, but, including what
the Federal Reserve System has, I think it is nearly $13,000,000,000—
the Government is doing the lending through the various Govern
ment lending agencies, such as the Home Owners’ Loan Corporation,
the Farm Credit Administration, and the Reconstruction Finance
Corporation. Those are the three most important agencies and, of
course, we know they have put out billions and billions of dollars,
and the banks have largely taken Government bonds and bonds guar
anteed by the Government, and the Government, in substitution, has
taken the loans of the individual and the corporations. So that it
has been a process of the banks liquidating their private loans, and
the Government taking them over, and the banks providing the
funds to take Government bonds or bonds guaranteed by the Govern
ment. And, of course, if continued, it seems to me that the banks
are going to have very great difficulty in justifying their existence.
Mr. G oldsborough . When they can only live by the Government
furnishing nearly one billion dollars a year in interest, which they
do not earn, it seems to me your statement is worthy of very serious
consideration.
Mr. E ccles . I recognize that, and I have also told many of the
banks that the provisions? of this legislation with reference to this
eligibility feature, and with reference to this real-estate loan feature,
are to give them an opportunity to utilize their funds in the direct
field of lending and get the Government out. Otherwise they will
find that the Government will have taken over the banking business,
not because the Government wanted to, but because the banks forced
it to.
Purchase of United States guaranteed obligations: I t is provided
that obligations guaranteed by the United States Government should
be put on the same basis as direct obligations. There seems to me to
be no justification for discrimination; that they should be eligible
for purchase by the Reserve banks without regard to their maturity,
in the same manner that direct obligations of the Government are
eligible for purchase by the Federal Reserve banks.
Collateral for Federal Reserve notes: It is provided that the position
of Federal Reserve agent as such shall be eliminated and that the
position of chairman of the Federal Reserve bank shall be combined
with that of the governor. The Federal Reserve agent acts as a
trustee, holding the collateral against which Federal Reserve notes
are issued, at least 40 percent in gold certificates and the balance in
eligible paper or Government bonds, or both. It was thought, origi
nally, that the amount of currency outstanding at any time was influ
enced or regulated by the amount of commercial paper, which repre
sents the activity or the volume of trade or business. It has been found
that there is very little relationship between the volume of Federal
Reserve notes and the volume of commercial borrowing. Of course,
that is due to the fact that currency, as such, plays so small a part in
our money system and that bank credit or deposit currency plays a
196
BANKING ACT OF 193 5
major role. The amount of currency or Federal Reserve notes out
standing will depend upon the demand for currency by member
banks. The member banks discount or borrow from the Reserve
banks in order to maintain their required reserve balances with the
Reserve banks. Member banks draw currency to meet the demands
of their customers. It is not felt that the collateral put up back of
the Reserve notes in any way restricts the use of currency. I t is
not felt that collateral adds anything to their security. They are
now guaranteed by the United States Government; they are a" first
lien on all the assets of the Reserve banks. Whenever notes are
issued or deposits created by the Reserve banks, there are assets to
offset the liabilities of the Reserve banks, whether the liabilities
consist of notes or of deposits of their member banks.
. There would seem to be no more reason to secure notes which they
issue than to secure deposit liabilities to their member banks. The
Reserve banks are required to hold gold certificates equal to not less
than 40 percent of their notes outstanding, and gold certificates or
^ d ^ money °f n°f less than 35 percent of their deposit liability
Mr. W olcott. Gold certificates?
Mr. E ccles . W ell, of course, they have no gold. There is no pro
posal to change that. The assets of the banks, on the other side,
consist of gold certificates and other money that they may hold,
and Government bonds and bills or rediscounts.
Mi\,- ? ancock- Could y°u properly call those notes “ asset cur
rency ?
Mr. E ccles . What is that?
M r- -Hanc oc k . Could you properly call those notes “ asset cur
rency ” ?
Mr. E ccles . I do not just understand what you mean.
Mr. H a n c o c k . I do not want to begin questioning you, but right
on that point you made the statement that it was not necessary that
notes have any particular banking value.
Mr. E ccles . Yes.
Mr. H a n c oc k . In th a t th e y co n stitu te a lie n a g a in st a ll o f th e
assets o f th e b ank s.
Mr. E ccles . That is right.
Mr. H anc oc k . Now, would
you consider such notes as asset cur
rency ?
Mr. E ccles . Well, they are the obligations of the banks that issue
them and are guaranteed by the United States Government. They
are not asset currency, in that they are not backed specifically by
this or that particular asset or assets, except to the extent that there
is at least 40 percent of gold certificates held, and there would be
other certificates back of them. The liabilities of the bank would
be offset by its assets. So, to that extent, there are assets in the form
of gold certificates, Government bonds, or loans and discounts, back
of all the notes issued, just as there are back of all of the deposits
of the bank. The value back of the Federal Reserve notes is deter
mined by the assets of the Reserve banks. In 1932 it was found im
practical to restrict the issue of these notes as they were restricted,
when gold was leaving the country very rapidly and when the banks
held very limited amounts of commercial paper. The requirements
I
BANKING ACT OF 193 5
197
of the law had to be suspended in 1932, and Government bonds had
to be accepted as substitutes for commercial paper as the basis for
issuing notes, in order to release the excess amount of gold that had
to be held in the absence of commercial paper. So it was found
that the restriction imposed at the time, and the only time when the
provisions of the law were tested at all, they had to be suspended.
ih e C h a ir m a n . I t might be well to remember definitely the date
of that action.
Mr. E ccles . Well, you probably remember it. I t was in 1932,
February 27, 1932.
Reserve requirements: The Federal Reserve Act, as amended by
the act of May 12, 1933, provides that, with the consent of the Presi
dent, when an emergency is declared to exist, the Federal Reserve
Board has power to change the reserve requirements of member
banks. I t is proposed to recognize this emergency provision as a
permanent provision and to give to the Board the power to change
reserve requirements, without declaring that an emergency exists and
without the approval of the President. This is a function of mon
etary control almost equal in importance to open-market operations,,
and it is felt to be necessary that the Board have this power, par
ticularly in order to control an inflationary condition, should one
develop.
I t is conceivable that the reserves of the member banks may be
greatly in excess of the amount of Government bonds and paper
held by the Reserve banks. The sale of those securities in the
market would not be sufficient to absorb the excess reserves; and
therefore, the increase of reserve requirements would come into use
as a means of controlling an inflation of credit. I t would be ex
pected to be used only as a method secondary to open-market oper
ations. Changes in reserve requirements would be used at a time
when open-market operations failed to meet the situation.
Mr. C ross. I might suggest that I remember the conditions that
existed in the world, the speculation on the stock exchange; do you
think it would be wise to have a provision so that you could desig
nate certain particular banks, where they had increased their reserve,
rather than apply to all banks, everywhere, at any time?
Mr. E ccles . I d o n o t b e lie v e so. I th in k m o n e y is to o m u ch lik e
w a te r ; i t seek s a p la ce w h ere it can ------Mr. F ord. Seeks it o w n level?
M r. E ccles . Y e s ; it seek s a le v e l, a n d o f cou rse th a t le v e l is b ased
u p o n th e r e tu r n it can g et.
We have proposed here that changes in reserve requirements might
be a pplied to two classes of cities: Central reserve and reserve cities
in one class and country banking areas in the other. I t is conceiv
able that different reserve requirements could be applied to the
reserve cities, if that is where speculation was going on and where
the excess of reserve was, which is usually the case. There is an
element of time in money seeking its level. Just what it is, I do
not know that anybody can say. But increases in reserves might
be applied first to the reserve cities and then later to the other areas,
if it seems to be necessary, rather than to apply them at the same
time universally. I do not believe that you could consider it beyond
that. I do not believe it would be practicable to apply it to indi
198
BANKING ACT OF 1 9 3 5
vidual banks. The Federal Reserve Board has the power now to
regulate margin requirements on collateral and brokers’ loans, which
is one of the most effective instruments of speculation control, I
think, now available. I believe that, had it been available in 1928
and 1929, it would have possibly been helpful in controlling or
restricting the speculative orgy that we went through.
The C h a ir m a n . Governor Eccles, the House has been in session
for a little while, and there are matters that require the attendance
of Members, and I am sure you will be glad to desist until tomorrow,
anyway. We will adjourn until 10.30 o’clock tomorrow morning,
and we expect to have the pleasure of having you back again with us.
(Whereupon the committee recessed until 10.30 a. m., tomorrow,
Wednesday, March 6, 1935.)
B A N K IN G
A C T O F 1935
H ouse of R epresentatives ,
C om m ittee on B a n k in g a n d C u r r en c y ,
W ashington, D. (7., W ednesday , M arch 6 , 1935.
The committee met at 10:30 a. m., Hon. Henry B. Steagall (chair
man) presiding.
The C h a ir m a n . Gentlemen, we will come to order. Some of u s
have to appear before the Committee on Rules this morning, and I
have to leave in a few minutes. I am going to suggest that, unless
Governor Eccles decides to proceed further without interruption,
that the committee will now proceed to discuss with him title I I of
the bill. If you desire further time without interruption, we shall
be glad for you to have it. We do not want to hurry you in the
least. It is our desire to permit you to have ample time to express
your views, in your own way, fully, after which the committee, of
course, will desire to interrogate you.
Mr. E ccles. I have finished my principal statement.
Mr. K o p p l e m a n n . May I ask a question ?
The C h a ir m a n . Certainly.
Mr. K o p p l e m a n n . There may be some questions that I want to
ask on title II, but I am not prepared to do that today. I suppose
that Governor Eccles will be here tomorrow?
The C h a ir m a n . Yes; you will have ample opportunity to do that.
I am taking it for granted, of course, that that will bo done, if it is
necessary to meet your convenience.
Mr. E ccles . I finished the discussion yesterday of the proposals,
with the exception of the one relative to the real-estate loans.
The C h a ir m a n . The committee will be glad to hear you further
on that provision, or any other, without interruption, if you so
desire.
Mr. E ccles . I finished them all with the exception of that yes
terday, and it seems to me to be one of the important issues, and it
might save time to say something about that.
The proposal is to amend the act to permit the national banks,
as well as other member banks, to make first-mortgage loans on im
proved real estate for a period up to 20 years; that is, if the loans
are amortized so that they would be paid off over that period of
time; to reduce the period from 5 years to 3 years in cases where
the loans are not amortized, and to increase the amount that they
can loan from 50 to 60 percent of the value of the real estate.
It is also proposed to increase the amount, the total amount of
bank funds that can be loaned, from 50 percent of time funds of a
bank up to 60 percent, including in the amount loaned, however,
other real estate excepting the banking houses.
199
200
BANKING ACT OF 19 3 5
You recall that I suggested yesterday that the proposed bill be
amended, if we think it advisable to amend it, so as to give the
Federal Reserve Board the power to determine the conditions of
real-estate loans by regulation, the reason for this being that to
try to put into the statute a limitation of 60 percent of the amount
of savings will work a very great hardship on many State banks.
We find that some of the State member banks and many of the
State nonmember banks already have in excess of 60 percent of
their time funds in real-estate loans. I t would seem, therefore, that
they would be required to cease making real-estate loans and to
liquidate the loans they had as they fell due.
Also, it seems that to try to fix in a bill or in a statute a provision
permitting 75 percent of the appraised value of property might not
be desirable. It is felt that the situation would be better met if the
Board had the power to fix the rules and regulations to meet this
m atter; that it would make it much more flexible than if it is put in
the statute.
The member banks of the country have about $10,000,000,000 of
savings or time funds. The New England area and the New York
area are largely served by mutual savings banks. More than 50 per
cent of the deposits of the banks, outside of that area, consist of sav
ings deposits. These funds are equivalent to the funds that the
mutual savings banks are receiving from the people in the area that
they serve. The banks are required to pay interest on these time
funds. The maximum rate of interest at the present time is fixed at
2y2 percent. I t is impossible for these banks to pay that interest and
to loan these funds on short-time paper.
In the first place, there is not available a sufficient amount of shorttime commercial loans to utilize more than a fraction of the demand
deposits, much less the savings deposits; and as a result the banks
hold a very large volume of idle funds.
There has been no restriction imposed upon banks with reference
to their investments in long-term bonds. They have been permitted
not only to invest all of their savings funds but as much of their
commercial funds as they desire, in long-term bonds, railroad bonds,
utility bonds, foreign bonds, and industrial bonds. I cannot see that
it is so much more desirable to permit banks to invest in long-term
listed bonds than it is to loan their funds on improved real estate on
an amortized basis in their local communities.
The fact that bonds were listed and, therefore, supposed to be
marketable, was considered a justification for the investment of
funds in bonds as compared with the investment in real estate. The
depression proved that the ready market for bonds was onlv there
at prices that bankrupted the banks, if they were forced to sell in
the market that existed. More banks became insolvent as a result of
the depreciation of their bond accounts than as the result of their
real-estate loans. The fact that bonds were listed and were greatly
depreciated put the banks, when the examiners came into a ^condi
tion of insolvency, because of the difference between the quoted
market price and the cost of the bonds; whereas in the case of realestate loans it was not expected that there should be a readv market
for them, and so long as they were not in default, thev were consid
ered to have the value of the amount of the loan' I t was the
I
BANKING ACT OF 19 3 5
201
depreciation shown on the be Is and stocks, because of the quoted
market, that impaired and ir uany cases wiped out the capital of
the banks.
I t seems to me that, if we want to be so restrictive in the matter
of real-estate loans, because they are long-term investments of funds
which are likely to be drawn out on demand, we should also be
restrictive with reference to the investment of funds in long-term
bonds. I believe that the banks should be permitted to invest their
funds in long-term bonds and in long-term amortized mortgages.
Particularly is that true with reference to their savings or time
funds. The reason is that otherwise they have no way to use their
funds, except to buy Government bonds, or bonds guaranteed by
the Government.
Mr. G oldsborough . Y ou mean you think it is the duty of society
to support the banks?
Mr. E ccles . N o ; I am not saying that. I am talking about the
condition that exists.
Mr. G oldsborough . A s far as society is concerned, it is interested
in banks only insofar as the banks are useful to society ?
Mr. E ccles . That is correct. Either the banks holding these
$10,000,000,000 of time funds must be prepared to lose those funds
to the savings and loan associations, to mutual savings banks, or
to others, or they must be put in a position to use the time funds
in the long-term investment field.
I am convinced that it is not possible for the majority of banks
in this country to operate with demand deposits alone. The volume
of these funds is not adequate for profitable operation except in
the larger institutions, and to take time deposits away from the
banking system would reduce the size of many banks to the point
where they would be unable to exist.
If our private banking system is expected to provide credit in
other ways besides buying Government obligations or obligations
guaranteed by the Government, then it seems to me that some of
the provisions of this proposed legislation are essential, the one
with reference to eligibility and the one with reference to realestate loans.
There is nothing new about national banks loaning on real estate,
since they have made such loans for 20 years. They have loaned,
however, for a limited period of 5 years on a straight mortgage,
which makes for a much more unsound loan than a longer-term
amortized loan.
I believe that covers what I have to say, Mr. Goldsborough, and
I will be glad to answer any questions.
/ ^ r ' G oldsborough . Suppose we begin the regular examination.
Mr. Cayicchia has a question.
Mr. C a v ic c h ia . Mr. Chairman, I think this would be the proper
place m the record for the Governor to tell us, if he knows, to what
amount the mortgages of national banks are held or were held in
1933 or today, if he knows.
Mr. E ccles . I do not know off-hand, but I have it here. On
October IT, 1934, under the law in effect, the national banks had
authority to lend up to $3,400,000,000. Under the new proposal the
limit would be about $4,400,000,000 for national banks and about
202
BANKING ACT OF 19 3 5
$6,800,000,000 for all banks. The total amount of actual loans on
real estate by all member banks at the end of 1934 was
$2,273,000,000.
Mr. G oldsborough . Governor Eccles, you wanted to say some
thing else?
Mr. E ccles . I was going to say that in connection with my dis
cussion of the provisions of the bill I have suggested certain pro
posed amendments or revisions for your consideration. I would
like, in closing, to call those to your attention in the order in which
they were suggested.
Mr. G oldsborough . A s this hearing naturally will be protracted,
we are not going to hurry you, and you may do so.
Mr. E ccles . In section 201, the first section discussed, it was sug
gested that the governors and chairmen of the Federal Reserve
banks be approved by the Federal Reserve Board every 3 years
rather than annually so that their terms as governors and chairmen
would coincide with their terms as class C directors.
Mr. G oldsborough . W hat p a g e is that o n , p lea se ?
Mr. E ccles . That is section 201. That is the one with reference
to combining the offices of chairman and governor.
Mr. W il l ia m s . On p a g e 39 o f th e b ill.
Mr. E ccles. This, as you will notice, is a slight modification, and
it is just offered as a suggestion.
There has been some criticism about the necessity of approving
the appointment of the governors each year, whereas they will be
appointed as class C directors for 3 years. I personally can see no
necessity of approving their appointments everv year and feel that
it is well to consider the suggestion that they be approved every 3
years instead.
Section 202: On the question of admitting insured nonmember
banks to the Federal Reserve System, the suggestion is that the
Board have authority to waive not only the capital requirements but
all other requirements for admission, and that the Board be per
mitted to admit existing banks to permanent membership, without
requiring an increase in capital, provided that their capital funds
are adequate in relation to their liabilities.
Mr. G oldsborough . When yo u refer to the c a p ita l, you mean the
c a p ita l a n d surplus co m b in ed ?
Mr. E ccles . W hat is that ?
Mr. G oldsborough . Y ou mean the capital and surplus combined?
Mr. E ccles . The law requires $50,000 capital at the present time,
and many banks----Mr. G oldsborough . I know, but I think you say, “ Providing its
capital is adequate ” ?
Mr. E ccles . No ; I would think you should take the capital and
surplus in determining the adequacy.
1
Section 303: The suggested modification of the pension provision
is for the purpose of giving Board members a greater decree of
independence. It has been suggested that each member of the^Board
regardless of age, who has served as long as 5 vears, whose term
expires and who is not reappointed, shall be entitled to a pension
on the same basis as though he were retiring at the a«re of 70 I
discussed that to some extent yesterday.
BANKING ACT OF 1 9 3 5
203
Section 203: It has been suggested also that a Governor of the
Federal Reserve Board, who is not redesignated by the President
may, if he chooses, continue his membership on the Federal Reserve
Board. That is the way the law is now, and the new bill that is
being considered, as you will recall, provides that his term as mem
ber of the Board shall cease when he is no longer designated as
Governor. It has been suggested that, as a result of that, the Presi
dent could designate each member of the Board and then no longer
designate him, and finally create a new Board completely. So, in
order to eliminate that criticism, this is the suggested amendment:
That the Governor could continue as a member of the Board even
if he is not designated as Governor; but that if he resigns from the
Board upon not being redesignated, it would be considered that he
had served out his term and he would not be precluded, by reason of
having resigned under those circumstances, from entering business
for a period of 2 j’ears.
In section 205, it is suggested that authority over open-market
operations be vested in the Federal Reserve Board, but that there
be created a committee of 5 governors of the Federal Reserve banks
selected by the 12 governors of the Federal Reserve banks, and that
the Board be required to consult this committee before adopting an
open-market policy, a change in the discount rates, or a change in
member bank reserve requirements.
Mr. G oldsborough . Is there any interpretation in your suggested
amendment as to what the consultation would consist of? Express
ing it another way, would the Board be bound to accept the sugges
tion of these five men, or any one of them ?
Mr. E ccles . N o. It is a question of giving the governors a hear
ing and making a record before the Board can act; but the Board
would have the final responsibility for the action.
Mr. G oldsborough . That is the intent, but I am not sure it is
entirely clear. Of course, that can be clarified.
Mr. E ccles . Yes; that is the intent. The Board would be charged
with the responsibility and they would have the power to initiate,
but before taking action they would be required to advise with and
get an expression of the views of the committee of the governors,
or the governors could initiate and come to the Board and make
their recommendations for the consideration of the Board.
Mr. F ord. Should there be a time limitation on how long y o u h a v e
to
for that consultation?
Mr. E ccles . Well, I would provide that, of course, the Board
should be able to make rules with reference to that.
Section 209: I t is suggested that the Board should not have the
power to change the reserve requirements by Federal Reserve dis
tricts. I discussed that, I think, to some extent yesterday. It has
been suggested, further, that the member banks be classified in the
two groups, one comprising member banks in the central reserve
and reserve cities, and the other all other member banks. Changes
in the reserve requirements, therefore, would have to be either for
the country as a whole, or for the financial centers, as against the
country districts.
Section 210: Real-estate loans: It has been suggested that the
conditions on which real-estate loans may be granted by member
banks be left to the discretion of the Federal Reserve Board, to be
204
BANKING ACT OF 1 9 3 5
determined by regulations. I see no objection to accepting also some
geographical limitation as to where loans could be made, that is,
some specified distance from the banking houses. Of course, there
is no limitation as to the field where banks can loan funds on bonds,
but there seems to be a good deal of opposition to the elimination
of the geographical limitation on real-estate loans. I do not believe
it is of sufficient importance to have any disagreement over.
Well, now, those are the suggested modifications.
Mr. F ord. Just one word on that geographical limitation: In cities
where the Federal Reserve banks to whom the various banks have to
go for these loans, if the geographical limitation is put in there,
very often there is very keen competition between cities and the city
in which the Board is located, and if it were limited, it might
mitigate against another city that did not have a bank, as to the
character of loans that they would be willing to discount. With
the geographical limitation, I think, in many instances, it might
have a very bad effect.
Mr. E ccles . Y ou mean in the case of real-estate loans?
Mr. F o r d . Yes, sir.
Mr. E ccles . Well, I do not just get the point of your question.
Mr. F ord. Let me illustrate it in another way: Let us say that the
main branch of the Federal Reserve is at San Francisco. Well, now,
the geographical limitation, for instance, leaves the city of San
Diego out of that limitation; and if there were some loans coming in
from there, and there happened to be competition, for instance, in
water transportation between those two points, and somebody on
that Board was anxious to work a little against San Diego, it might
be possible and something like that might come up, because it has
come up in other things.
Mr. E ccles . Well, in the case of San Diego, in that case San Diego
would discount w
rith the Los Angeles branch.
Mr. F ord. That limitation would not touch the branches ?
Mr. E ccles . The limitation is a mileage limitation from the bank
that makes the loan, the idea being that the bank in an area should
loan funds in the area in which it is acquainted, where the officers
can personally be informed as to the property upon which they are
lending; whereas, if there is no geographical limitation, the funds
may be loaned in far-removed areas, a thousand or two thousand
miles away, as the case may be.
M r. F ord. If it a p p lie s to b ra n ch es, th a t is a ll r ig h t.
Mr. E ccles . The advantage of taking the limitation off is this:
That in an area that has a surplus of funds beyond the demand for
real-estate loans, it could invest those funds through some corre
spondent institution where there is a shortage of real-estate monev.
just as our insurance companies in New York and other points loan
money over the United States and building and loan companies have
loaned in a more or less wide area, and as the mutual banks loan in
far-removed areas.
Mr. G oldsborougii. Mr. Hancock, you may proceed, if vou desire.
]\Ir. H ancoc k . Mr. Ghairman, I have listened with intense interest
to the very able and enlightening statement made by the Governor of
the Federal Reserve Board with respect to the purpose and phil
osophy of this important measure, and to his detailed explanation of
its mechanics. It occurs to me, however, that since it is such an
BANKING ACT OF 19 3 5
205
important and far-reaching measure and is somewhat intricate, that
the committee should arrange immediately to have the Governor’s
testimony reduced to writing so that we may have a chance to fully
analyze and digest it before we go into the questioning of the Gov
ernor. I hope the clerk will arrange to have this done at once.
I am not so much concerned with the mechanics as I am the pur
pose and philosophy of the bill. How it will be administered is, of
course, vitally important.
I want to ask the Governor what is the difference between this
measure and an outright central bank?
Mr. E ccles . Well, I do not know just what you mean by “ central
bank.” You mean by that a bank that is owned by the Government,
and a bank with branches?
Mr. H a n c o c k . I would like to have an explanation of that, and
then I will ask you another question.
Mr. E ccles . There are a good many different kinds o f central
banks and----Mr. H anc oc k . Well, let me ask you this, Governor: What would
be the practical difference between the system proposed herein and
the Federal monetary authority that the committee last year studied,
conducted hearings on, and considered?
Mr. E ccles . I am not familiar with what the committee worked
on last year. I could not give you a comparison between Federal
Reserve operations and what was proposed under that bill, because
I am not familiar with it.
Mr. H a n c o c k . Well, briefly, here is what the Federal monetary
authority undertook to do: It undertook to set up what you might
term a supreme court of finance insulated against political and com
mercial banking domination, and vested in that supreme court of
finance or authority the sole note-issuing power of the Nation. It
would have owned and controlled all of the gold, all of the metallic
base; and it would have had the right to control the open-market
operations through the sale and purchase of Governments, the con
trol of the rediscount rate, and other essential powers to control or
regulate the volume and cost of money for the national welfare.
Mr. E ccles . Speaking of the central bank, the Federal Reserve
System has always been expected to perform certain functions of a
central bank. It was set up on the basis of a certain regional auton
omy, due, I suppose, in part, to the opposition to centralization in
this country at the time the Federal Reserve System was set up, and
due, also, in part, to the size of the country and the different economic
conditions that existed in the different regions. The Reserve Board
was set up as a coordinating agency for these 12 banks, which have
25 branches.
The proposed bill in no way changes the physical structure. The
ownership of the Federal Reserve bank is left with the member
banks. In most of the countries of the world, the central bank is a
privately owned institution. Instead of being owned bv the member
banks, it is owned by the public.
There is no change being made in the number of directors, 9 direc
tors, and the majority of them are selected by the stockholders of
the member banks—6 of the 9. A limitation is being put, however,
127297— 35 ------ 14
206
BANKING ACT OF 19 3 5
upon the terms of these directors. The general structure of the bank
is not being changed.
I t is proposed, however, that the appointments of governors should
be approved by the Board. That is so that they would be in a more
direct relationship, a more responsive relationship to the Federal
Reserve Board, so that the Board’s coordination of the system would
be through the governor, rather than through the chairman and
agent. This is the reason for the proposed combination of the offices
of Governor and Chairman. Such coordination would be further
effected through the Board’s control over open-market operations and
discount rates. The Board today approves the discount rates.
There is no change in the matter of the discount rates proposed in
the bill, but there is a change regarding the open-market operations.
Mr. H ancock. And that is the heart of the bill, is it not?
Mr. E ccles . Well, it is the most important feature and----Mr. H anc oc k . That is the m a in method or means by which you
control the supply of money?
M r. E ccles . W e ll, th e q u e stio n o f reserve re q u ir em en ts is a lso a
fe a tu r e se co n d a r y ------Mr. H anc oc k . Secondary?
Mr. E ccles . I think secondary to the other features.
Mr. H anc oc k . But the open-market operation is the primary and
most effective feature?
Mr. E ccles . That is right. The other is secondary. The open
market is the primary feature.
Mr. H a n c o c k . And under the terms of this bill, the open-market
operations are vested entirely in a Government board ?
Mr. E ccles . N o; vested in the Federal Reserve Board under this
bill if changed in the manner which has been suggested.
Mr. H a n c o c k . Yes, but under this bill, that Board is appointed
by the President and confirmed by the Senate ?
Mr. E ccles . That is right, for terms of 12 years, and the openmarket power is vested in the Board. Today the Board has a veto
power over open-market policy. The governors have an openmarket committee. The 12 governors elect a committee of 5, and
that committee is a committee charged wdth the responsibility for
the initiation of open-market operations. The Federal Reserve
Board either approves or disapproves or induces them to modify
their program; but the Board cannot initiate. And then, if the
policy is initiated bv the open-market committee and is approved
by the Board, the Board is not in position to require that the
banks carry out the policy. So it is proposed in this bill to place
the authority and responsibility in a small body, and the Board___
Mr. H anc oc k . Under the bill proposed you can initiate the policy
and then enforce its execution, can you not ?
Mr. E ccles. That is right.
M r. H a n c oc k . S o i t r e a lly g iv e s y o u co m p le te c o n tro l o v e r th e
m o n e y su p p ly ?
E ccles . That is right. Now, to that extent, it is centralizing
that function to a greater extent than it has ever been centralized.
Responsibiliy is always felt more keenly when it becomes a personal
responsibility, and it seems to me it is desirable to place that re
sponsibility in a small body, either in the Board or somewhere else.
BANKING ACT OF 1 9 3 5
207
The responsibility for the exercise of these important functions of
monetary control should be in one body, either the Board or some
other body. I t should not, to my mind, be divided to such an ex
tent that it can result in obstruction, lack of action, lack of coordi
nation, and lack of a feeling of responsibility.
There are many important functions the Reserve banks have out
side of the open-market operations, and there is no idea of taking
away from the regional banks all of the functions which they now
have. As a matter of fact, if the Board is given the authority it is
requesting here in the bill, to delegate some of its authority, I believe
that there are some of the duties that the Board could delegate to
the regional banks beyond the responsibilities the banks now have.
The regional banks carry the reserves of the member banks. The
regional banks pass upon the credits to the member banks. I t is
through the regional banks that the Board operates in the approv
ing of banks for membership, in the issuing of voting permits, in
the examinations of banks, in the matter of reduction of capital
structure, or in the matter of consolidations. All of the important
relationships with all of the banks and the public in the area where
the Reserve banks are, are handled by the management and directors
of those banks; and there is no idea of taking away any part of
this, or attempting to centralize those functions here in the Federal
Reserve Board.
Mr. H a n c o c k . In effect, Governor, does not this bill undertake
to bring back home the sovereign power vested in the Congress to
coin money and regulate the value of it?
Mr. E ccles . Well, it brings to the Federal Reserve Board the
power, and, of course----Mr. H a n c o c k . And through that Board back to Congress?
Mr. E ccles . That is right, because----Mr. H a n c o c k . I s it not an unpleasant fact, Governor, that this
power has been farmed out to private interests for years and years?
Mr. E ccles . Well, the power really has not been exercised to any
great extent. Up until 1922 there was not any recognition of the fact
that, by the open-market operations, you affected the supply of money.
There was no special machinery for open-market operations in the
original Federal Reserve Act. In 1922, during a period when some
of the banks were buying securities as investments, it was observed
that it influenced the situation in Newr York, and they began to realize
that these 12 Reserve banks, acting independently, in buying and sell
ing for their own investment account, from a purely earning standP01; ^
other words, operating as commercial banks would—had a
real influence and effect on the money market. The result of that was
a sell-appointed committee of governors to work together, so as to
have a coordinated program of buying and selling; and I believe it
was not until 1933 that the open-market committee was recognized in
the law.
Mr. H a n c o c k . Governor, based on your statement yesterday, would
it be unfair to interpret this bill as the last clear chance to save the
autonomy of private banks of America ?
Mr. E ccles . Will you state that question again?
Mr. H a n c o c k . I said, would it be fair to interpret this bill as the
last clear chance to save the private commercial banks in America
from their own destruction?
208
BANKING ACT OF 19 3 5
Mr. E ccles . Well, that would be a question rather difficult for me
to answer.
Mr. H a n c o c k . I am asking you the question, Governor, in the light
of what you said yesterday.
Mr. E ccles . I think this bill will certainly tend to make it possible
for the private banking system to function in a much more satisfactory
and adequate manner than it has in the past.
Mr. H a n c o c k . Nothing co u ld be m o re d esira b le.
To use the expression that you used before the Senate committee
in 1932, this measure, idealistically speaking, is designed to bring the
money world back into relations with the real world, is it not?
Mr. E ccles . Well, it is designed to create a condition of stability,
stable business, we will say, so far as it can be done through monetary
policy. The important thing today is not so much, as so many people
believe, to increase the quantity or volume of money, as it is to increase
the velocity of money that is already in existence.
Mr. H a n c o c k . I believe you take the position as I do that the veloc
ity of money has a greater effect upon business activity than the quan
tity or volume ?
Mr. E ccles . The volume of money is a very important element, and
I think that, in a period of great business activity and full employ
ment, or reasonably full employment, to reduce the quantity of money
is very effective in controlling inflation. A small reduction in the
quantity of money, through open-market operations, in certain pe
riods, would be very effective.
Mr. H a n c o c k . It always, however, tends to decrease business
activity ?
Mr. E ccles . That is right, and it is—well, it would tend to decrease
business activity, and possible excess reserves would be wiped out.
That would force the banks into borrowing, and that would materially
restrict credits and raise rates, and tend to slow up the volume of busi
ness. However, when you permit a condition to develop, such as has
developed during the past 4 or 5 years, when you first had a great
period of deflation, of loans held by the banks, and bills held by the
Reserve banks were allowed to run off, the volume of money was being
extinguished at a terrifically rapid rate. From 1929 to the period of
the bank holiday, about one-third of our total bank deposit money was
extinguished, largely, through the liquidation of bank credit. This
liquidation was forced upon the banks in part by their inability to go
to the Federal Reserve banks with assets and meet the withdrawals of
depositors, ’ ho were hoarding their funds, because of banks failing
w
Mr. H a n c oc k . I t was an emergency situation and the very time the
banks should have stepped in boldly as a rescuer or savior? Of
course they were no able to go as far as they could go if this bill is
passed.
Mr. E ccles . Well, two things seem to me to have been necessary.
Mr. H a n c oc k . In other words, the Reserve b a n k s were affected*
by the same emotional disease that the member banks were: is that
not correct ?
M r. E ccles . T h e y w ere in c r e a s in g ly r e str ic tiv e in th e k in d o f
p a p e r on w h ic h th e y w o u ld e x te n d c r e d it, a n d , o f co u rse, th e la w p u t
lim ita tio n s o n th e t y p e th e y c o u ld ta k e. N o w , as to w h e th e r or n o t,
b y a c tin g so o n er o r a c t in g m o re v ig o r o u sly in th e o p en m a rk et, th e y
co u ld h a v e sto p p e d th e p erio d o f d e fla tio n , th a t is, o f co u rse, a d e b a t
BANKING ACT OF 19 3 5
209
able question. Some will argue that had they acted more vigorously
and sooner than they did, when there was a tremendous shortage of
funds due to hoarding and due to the gold that was pulled out of the
country and went abroad, that it would have turned the tide of
deflation.
Mr. H a n c o c k . There was never, during that period, coordinated
action on the part of the Federal Reserve System as a whole, was
there? Were not some banks operating at cross purposes with
others ?
Mr. E ccles . I do not know. I do not know exactly what y o u mean
by “ coordinated.”
Mr. H a n c o c k . I mean this: That some of their actions were not
in unison or accord with a national policy, looking to unified opera
tions for the good of the entire country ?
Mr. E ccles . Well, I think the governors met and discussed the
problem, and I think they also met here in Washington with the
board and----Mr. H a n c o c k . I do not think there is any question about their
having met, but what unified effective policy did they agree on ?
Mr. E ccles . Well, they reduced the discount rate, and they bought
securities in the market, beginning with the autumn of 1929, but
more vigorously after the passage of the Glass-Steagall Act in
February 1932.
Mr. G oldsborough . I will say that they continued that until the
danger of the passage of the Goldsborough bill was over, and then
it immediately stopped.
Mr. H a n c o c k . Governor, what constructive thing did the Federal
Reserve Sytem do, after deflation was halted, to aid in bringing
about recovery? Would you mind telling this committee that?
Mr. E ccles . Well, of course, in viewT of the fact that the entire
banking structure collapsed and had to completely close, it is difficult
to imagine how anything very much worse could have happened.
Mr. H a n c o c k . Well, I believe in your statement made before the
Senate committee in 1932----Mr. E ccles . 1933; in February of 1933.
^ Mr. H a n c o c k . Y ou referred to the fact that you considered the
federal Reserve System an emergency system; is that correct?
^ Mr. E ccles . Well, I do not think so. I would not consider the
federal Reserve System an emergency system; it is a system that cer
tainly should lie afile to regulate the volume of money. If the banks
and the money system under capitalism cannot meet the emergency,
the lederal Reserve System is the only agency we now have to do it.
In other words, through the Federal Reserve System, we say that
we succeeded in financing a w ar; and we know now this contributed
very greatly toward the financing of the extraordinary expenditures
of the war, in the absence of putting on taxes high enough to do that.
The Reserve System has, of course, been very helpful in the clear
ing of checks, and it has been a very great improvement over the
system that was employed prior to the Federal Reserve System. I t
has speeded up immensely, immeasurably, the clearing of financial
transactions throughout the country.
Mr. H a n c oc k . Governor, if we had put on sufficient taxes during
the war period, a large part of our present financial difficulties would
have been avoided, would they not?
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BANKING ACT OF 1 9 3 5
Mr. E ccles. Well. I do not know that I could agree to that. I do
not think that the financial troubles of the present are due to the
war. We do not lack and did not lack in 1929 any material and
physical thing that we had before the war and after the war. We
had an increase in our total man power and in our capital production
facilities.
The C h a ir m a n . Let m e interrupt. Did not we experience our
greatest period of prosperity in all of our history subsequent to the
war and prior to this panic?
Mr. E ccles . We had replaced every physical loss, and even the loss
of man power as the result of the war by a very great amount from
the end of the war up to 1929.
Mr. H a n c o c k . Well, Governor, is it not a fact that our present
war debts largelv represent profits made during and out of the war?
Mr. E ccles . Well, certainly, during the period of the war, we did
not consume and use, as a nation, more than we produced. As a
matter of fact, during that----Mr. H a n c o c k . And in that way, we did not impoverish ourselves?
Mr. E ccles . We did not impoverish ourselves at all, because we
used much less than we produced, because we furnished the Allies a
tremendous amount of goods, which created the interallied war
debts; so there was no occasion for a huge war debt, if the popula
tion had all been put upon a basis whereby there would have been
no advantages to any group or class, and there would have been no
profits as a result of that operation.
In other words, if the resources of the Nation had been mobilized
in the interests of the Nation, for war purposes, we would not have
needed any inflation, we would not have needed the credit that was
extended. Our present situation indicates we are just as able now,
in this country, to meet the problems of the depression as we would
be to meet the problems of war. No one would question the fact that
our ability to fight a war would depend upon the men and materials
and our capital facilities in the form of our factories, systems of
transportation, and so on. The question of money would not be the
measure of our ability to fight a war in this economy of abundance.
Neither is our ability to fight the depression in this economy of
abundance a problem of money.
Mr. H a n c o c k . It is a question of distribution?
Mr. E ccles . Yes; it is a question of distribution. The depression,
to my mind, was not brought about through a shortage in the vol
ume ; and by an increase in the volume of money after 1929 it would
not have been possible to have avoided the depression. It might have
deferred it or delayed i t ; but so long as we had such an inequitable
distribution of wealth production as currently produced, so that our
capital production facilities were all out of balance with the biivin"
power of the people, the velocity was sure to slow up and a depres
sion was inevitable.
Mr H anc oc k . Governor, with respect to the question of debt^and then I will get to this bill again—I want to ask vou this ques
tion, do }°u think a nation can impoverish itself by employing its
men and materials in improving its equipment and resources?"
Air. E ccles . rso; I cannot see how a nation can impoverish itself
by adding to or producing wealth. In my opinion, we might im
poverish certain individuals if we do not distribute the wealth that
jo nvnduced through giving employment.
BANKING ACT OF 1 9 3 5
211
Mr. H a n c o c k . Then all we need today in this country of rich
resources is, for our money to go to work; is that correct?
Mr. E ccles . That is correct.
Mr. H a n c o c k . Will this new bill help to restore confidence and
put it to work?
Mr. E ccles . Well, I cannot answer that; I can only express an
opinion. I t is my belief that it will; it is one of the factors that
will help; it will make it possible for the banks to lend funds in
fields in which they have been unwilling and unable to lend before.
Whether or not they will find borrowers is another question. There
is a great absence of people who are willing to borrow, even on long
terms, or on any terms.
In connection with what I said, in order that I may not be mis
understood, I happened to read the other day an account of the
last report of the Brookings Institute, which finds that the excessive
savings went into speculation: Too much thrift held slump cause. It
seems to me that has a very important bearing upon this question
of the volume and quantity of money and the velocity of money.
Mr. H a n c o c k . Said in a different way, you mean that too much
labor went into capital goods?
Mr. E ccles . That is right. [Reading:]
The institution, in the third of a series of investigations to ascertain whether
maldistribution of income is a primary cause of the depression, found that
the first need is for greater spending for goods rather than more savings.
Money going into savings, the report made public last night points out, is
not immediately spent for consumption, and the rapid growth of savings in the
twenties resulted in too much money going into speculation and not into
actual buying of goods.
The report disputed several traditional economic concepts. Theoretically,
according to one school of thought, savings go into the expansion of plant and
other physical facilities, but the institution found that so much money was
saved that there was a plethora.
Instead of going into either consumption goods or capital goods, it went into
speculation which served to inflate the prices of securities and to produce
financial instability.
In announcing the report, the institution cautioned that it did not suggest
the individual of moderate means should, as a matter of policy, save less,
but that “ the problem is one of aggregate savings in proportions to aggregate
consumption.”
The phenomenon of an excessive supply of savings is, the report said, some
thing new. In the past there has usually been a dearth of savings, with
resulting difficulties in expanding the Nation’s productive facilities.
The report further disputed the theory that business expansion begins with
expansion of capital goods, holding rather that such expansion begins after
people begin to buy.
The report noted that “ a large part of the savings of individuals and
business corporations has gone to finance Government deficits ” since the
depression.
The same institution, as I recall, gave the figures ofthe distribu
tion of the national income—I think it was in 1929—showing that
one-tenth of 1 percent of the families at the top of the list received
the same income as 42 percent of the families at the bottom of the
list; or in other words, the average income, per family, at the top,
was equivalent to the average income of 420 families at the bottom.
Mr. H a n c o c k . In the peak vear, Governor, in 1929----Mr. H ollister . Pardon me, but I want to ask what report that is
that he is quoting from?
.
_ . .
Mr. E ccles . That is the report of the Brookings Institute, lh
Capacity to Consume.
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BANKING ACT OF 19 3 5
Mr. G oldsborough. And that is the 42 percent the Brookings
Institute wants to spend ?
Mr. E ccles. Well, the thing that they find is that that 42 percent
was not responsible for very much saving. The one-tenth of 1 per
cent, of course, were unable to use their income in consumers’ perish
able and durable goods; and they, therefore, had to find an outlet
in the investment field, or in the field of capital or producers’ goods,
until we reached a point where our capacity to produce was all out
of relationship to our ability to consume but not our capacity to con
sume and----Mr. H ancock. Which is a whale of a difference?
Mr. E ccles. Yes; our problem is no longer one of production,
which it has been for generations, while we were building the coun
try, while we were a debtor Nation, and when we had a rapidly in
creasing population.
Our problem is one of distribution. By distribution we mean not
the distribution of the existing wealth but the distribution of the
wealth production as it is currently produced; and the most effec
tive day to do that, in times of prosperity, is through the incometax system. One of the greatest mistakes, I think, that was ever
made during a period of prosperity was to reduce income taxes
rather than to maintain them at the high war point and use the
funds collected to reduce the Federal debt; and then when unem
ployment developed to use the Federal credit to take care of un
employment.
Mr. H ancock. Governor, I think that same report to which you
referred just now also showed this startling information: That in
the peak year, 1929, 68.9 percent of the American families had gross
incomes of less than $1,500.
Mr. F ord. May I make an observation there, Mr. Chairman?
The C hairman . Yes, Mr. Ford.
Mr. F ord. In 1929 there were 22,000,000 people in the United
States, at the peak of our prosperity, who were living at or below
the subsistence line; there were 45,000,000 people that were just get
ting b y ; there were 25,000,000 that were fairly well off; there were
15,000,000 that were rich; and there were 10,000.000 wallowing in
wealth; and those are figures which were gotten out by a responsible
organization.
Mr. F ish . And what is the subsistence line?
Mr. F ord. It is just being able to live by a little help from the
country or relatives or somebody else; just getting by.
Mr. F ish . On the basis of income, it depends on the cost of living
but what is a subsistence income?
Mr. F ord. Well, I do not know what it is, because it depends on
the section. It might be $15 in one part of the country and mmht be
$25 in another and $40 in another, depending on what part of the
country you live in.
Mr. H ancock. Governor, do you subscribe to the thought or belief
that the control of a nation depends upon the control of its credit»
Mr. E ccles. I do not know that I understand your question.
Mr. H ancock. Bv that question I mean that unless the Nation,
through its central Government, controls the credit or note-issuinopower of the Nation the Nation cannot be used for the protection
and welfare of all of the people?
1
BANKING ACT OF 1 9 3 5
213
Mr. E ccles. Well, I think there must be a control over the money
system.
Mr. H ancock. That means credit, does it not?
Mr. E ccles. It is not necessary to control the credit relationships
of individuals among themselves, nor the credit corporations extend
on accounts, and so forth.
Mr. H ancock. Of course n ot; but our money system is 90 percent
credit or check currency. You made that statement before the com
mittee.
Mr. E ccles. Well, 90 percent of our payments are made by checks
on deposits, which is credit money; and it is necessary for a nation
to exercise control in the public interest over the money system.
Mr. H ancock. Well, now, this bill is designed to insure control of
the credit of the Nation in the interest of the Nation as a whole, is
it not, and without interference with the normal functioning of the
banks ?
Mr. E ccles. That is correct.
Mr. F ord. Otherwise, socialize it?
Mr. E ccles. Well, it depends on what you mean bv “ socialize.”
Of course, I read yesterday a statement of Woodrow Wilson’s con
ception of the Federal System, and I do not need to go beyond the
statement of the President in whose administration the organization
of this System was set up.
Mr. H ollister. What is the purpose of that statement, Governor?
Mr. E ccles. It is the purpose of setting up the System. He said:
The control of the system of banking and issue must be vested in the Govern
ment itself, so that the banks may be the instruments, and not the masters, of
business and of individual enterprise and initiative.
Mr. H ollister. Did anybody ever suggest that the Government
should have the control of issue ?
Mr. E ccles. He has suggested the control of issue----Mr. H ollister. Did anybody else ever set up the contention that
the Government was only for issue ?
Mr. E ccles. The theory was that these banks would control the
issue.
. Mr. H ollister. It was not the Government. The banks were not
identical with the Government, and nobodv ever suggested that, did
they?
Mr. E ccles. That is true, but the thought was, that the Federal
Heserve Board and the chairmen of these banks, who were appointed,
were the representatives of the Government, or the people through
the Government.
Mr. H ollister. The Federal Reserve Board w as. but not the Fed
eral Reserve System?
Mr. E ccles. The chairman o f the Federal Reserve banks was
appointed by the Federal Reserve Board, and was at that time
looked upon as the executive head o f the banks.
Mr. H ollister. And the chairman appointed bv the Board was
to completely control the individual Federal Reserve banks?
Mr. E ccles. No ; the Federal Reserve banks, of course, were to be
controlled by their board of directors.
Mr. H ollister. Who were not Government appointees?
Mr. E ccles. That is right.
Mr. H ollister. Except certain of them (
Mr. E ccles. That is correct.
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BANKING AC'- OF 1 9 3 5
Mr. H ancock . Governor, I wanted to ask you one more question.
Do you think that the legitimate consumer demand or requirements
for credit in this country can and will be met, as long as banking
is a career ?
Mr. E ccles. Why, yes; I think so.
Mr. H ancock . I asked you that question because I understood you
to refer to the fact that by providing independence or competence
for Federal Reserve Board directors they could take hold of such
positions and make careers of them and not have to look to outside
income.
Mr. E ccles. That is right.
Mr. H ancock . I t is my thought that banking should never have
been a career but always a profession. I hope you understand what
I mean.
Mr. E ccles. Are you speaking of the private commercial bank, or
are you speaking of the Federal Reserve bank?
Mr. H ancock . I am speaking of all kinds where the public is in
volved and their welfare at stake.
Mr. Chairman, they are all the questions I care to ask at this time,
but I reserve, of course, the right to discuss with the Governor the
various sections of the bill. In your absence I made a request that
the hearings up to now be printed, because it is humanly impossible
for any man to digest all of the statements and suggestions made
by the Governor, without having a written statement before him.
Mr. E ccles. Let me answer Mr. Hollister’s question about the
control of issue because my associate has brought to my attention
this statement in the law :
The Board shall have the right, acting through the Federal Reserve agent, to
grant in whole or in part, or to reject entirely, the application of any Federal
Reserve bank for Federal Reserve notes.
Mr. H ollister. In other words, the Federal Reserve Board may
limit the issue of notes, but may not increase the issue of notes at
will?
Mr. E ccles. That is right.
The C h a ir m a n . Gentlemen, it is probable that the H. O. L. C. bill
will be taken up in the House tomorrow. I am not in a position to
say definitely about that, but I will know in a little w hile. I thought
we would not have any meeting of the committee tomorrow, and we
appeared before the Rules Committee and asked for a rule, and we
asked that we be given 1 day for debate of something like 4 hours
on the bill. We are hoping that request will be granted. As soon
as I can see the Speaker I can ascertain whether the bill will come
up tomorrow or not. If it does, I wish you gentlemen would help
me give information about it. If the bill comes up tomorrow. I sug
gest that the committee hold a meeting tomorrow afternoon at
3 o clock, and just as soon as I can get that information I will have
it telephoned to your office.
, . Suppose we say that we will meet at 3:30 this afternoon if the
bill comes up.
Mr. H ancock . If the bill does not come up tomorrow, Governor
Eccles will come back. Is that correct?
The C h a ir m a n . If the bill does not come up, Governor Eccles will
come back; yes.
. (Thereupon, the hearing in the above-entitled matter was ad
journed temporarily.)
B A N K IN G
A C T O F 1935
MONDAY, MARCH 11, 1935
H ouse of R epresentatives ,
C ommittee on B a n k in g and C urrency ,
Washington, D. C.
The committee met at 10:30 a. m., Hon. Henry B. Steagall
presiding.
The C h a ir m a n . Gentlemen, we have Governor Eccles with us this
morning to resume the discussion of this bill, H. R. 5357, and it is
Mr. Williams’ time to ask questions, if you desire, Mr. Williams.
Mr. W illiam s . All right. Governor Eccles, I understand the
main purpose of title I I of this act is to enlarge and further central
ize the powers of the Federal Reserve Board, in order that it may
have increased influence and power over the expansion and contrac
tion of credit of this country. That is to be done mainly through the
open-market committee, fixing discount rates and controlling the
reserves of the member banks. Those are the agencies through
which it is to operate. Am I correct in that assumption?
Mr. E ccles. That is correct.
Mr. W illiam s . N ow , to what extent by the operation or by the
use of these agencies by the Federal Reserve Board, can the general
commodity price levels in this country be controlled, in your judg
ment?
Mr. E ccles. I t is impossible to say. The proposal to give to the
Federal Reserve Board, with the advice of the Governors commit
tee, the responsibility for the use of these monetary controls, the
discount rate, the reserve requirements, and the open-market opera
tion is for tlie purpose of maintaining stable business conditions,
insofar as this is possible by monetary means. A stable price level
does not necessarily mean stable business conditions.
It seems to me that we are far more interested in full employ
ment than we are in stable prices. If stable prices at some given
index figure would leave an army of unemployed, it does not seem
that this is the objective that would satisfy this country.
Mr. W illiam s . Well, you will agree, will vou not, that it is very
desirable, as far as possible, to have stable prices?
Mr. E ccles. le s ; I agree to that.
Mr. \v illiam s . And that the purchasing power be the same yes
terday, today, and forever, you might sav, so far as we can make
them so?
&
Mr. E ccles. I agree that wide and rapid fluctuations in prices are
inflationary and deflationary and tend to create conditions that are
unfavorable to business stability.
215
216
BANKING ACT OF 1 9 3 5
Mr. W illiams . I judge you are not in favor of fixing certain com
modity price levels as the goal toward which the Board should strive
in its expansion and contraction policy?
Mr. E ccles. I would prefer that it be not made the central objec
tive of the banking bill.
Mr. W illiams. D o you think it is practicable to do that?
Mr. E ccles. I do not think it is.
Mr. W illiams. On the other hand, there is considerable criticism
in the country of the policy which places, entirely without any limi
tation, the matter in the hands of a few men, or the Board, this
great authority; do you think there is any danger along that line ?
Mr. E ccles. The control over the volume of money and credit
that the Federal Reserve Board can exercise through its use of three
instruments of monetary control, would not necessarily tend to
expand the amount of money in use in a depression such as we
have at the present time.
Mr. W illiams. Right in that connection, in the use of this word
“ money ”, what do you mean ?
Mr. E ccles. I mean demand deposits and currency.
Mr. W illiams. Bank credit ?
Mr. E ccles. Yes; bank credit, deposits in commercial banks and
currency. More precisely it is deposits subject to check, exclusive
of bank float and interbank deposits, plus United States Government
deposits.
Mr. W illiams. Bank demand deposits?
Mr. E ccles. That is right.
1 r
I T T ________
4
i
o
Mr. W illiams. I s that what we mean when we talk about money
now?
Mr. E ccles. That is right.
Mr. W illiams . I want to have that understanding as we go along.
Mr. E ccles. That is correct.
Mr. W illiams. N ow, you say it would not necessarily result in
expansion, that the policy should not or might not result in expan
sion during a period of depression ?
Mr. E ccles. You may create excess reserves through your openmarket policy, but unless the borrowers are willing to borrow from
the banks, and the banks are willing to lend to borrowers, you would
not create a further increase in your money supply. You would
increase the reserves of member banks, which would make for an
inducement for the banks to lend and tend to result in a reduction
in rates of interest, making for cheap money; but you must have
borrowers who are willing and able to borrow before you can create
additional money.
Mr. W illiams. I s there no relation between the quantity of money
and the volume of business that the country does?
Mr. E ccles. N o exact relation. The volume of money is an impor
tant factor, but the use of that money is an equally important factor
in determining the amount of business.
Mr. W illiams. Well, now, going back, for instance, to 1928, with
a certain volume of money at that time and amount of business, how
does that compare, we will say, with 1933?
BANKING ACT OF 193 5
217
Mr. E ccles. In 1928 it was estimated that the national income
was about $83,000,000,000. According to the Department of Com
merce’s figures, in 1933 the national income was about $47,000,000,000.
The money supply in June 1928 was $26,400,000,000 and in 1933 it
was $19,900,000,000. The ratio of the national income to the volume
of money was 3.12 in 1928 and 2.35 in 1933. That brings out the
point that I think you have in mind. I would estimate that in 1934,
with a national income somewhere between $50,000,000,000 and $55,000,000,000, with an average volume of money of around $23,000,000,000, the number of times that your volume of money turned over
was very little over two times. At the same rate of velocity that
existed in 1928 and 1929, with the present volume of money, the
national income should now exceed $75,000,000,000, which indicates
that simply increasing the volume of money does not increase the
national income proportionally. I t seems to me that the reason for
that is quite obvious.
The distribution of the ownership of money determines whether or
not it is going to be put into use. Money is put into use by corpora
tions and individual investors, who are led to believe that there is a
profit in the investment or use of funds.
Mr. W illiam s . Well, then, did the increase in the volume of money
build up reserves in the banks of the country? Would that not stim
ulate business itself, to the extent that it would make more money
available, and would lead the banks, by reason of the unusual and
unnecessary amount of money on hand, to try to get it out into the
field of action ? In other words, it would not be earning them any
thing, and it would furnish them an incentive to lend on more rea
sonable and better terms, would it not?
Mr. E ccles. I t has caused a very great reduction in interest rates,
which is an inducement to the borrower, to the extent that the bor
rower can use the money profitably. Money is created by debt. Our
banking system creates money----The C h a ir m a n . Eight there, Governor Eccles, you say money is
created by debt; you mean by that, bank credit ?
Mr. E ccles. Yes; that is right. I mean that the banking system,
the process of loaning money, extending credit, increases bank de
posits. In the absence of individuals and corporations who are will
ing and able to borrow, the banks have created additional funds by
purchasing Government bonds. The purchase of Government bonds
has increased bank deposits.
Mr. W illiam s . Well, the volume of money times the velocity rep
resents the national income, does it not, but they have both got to
be there----- CLES' ^ e y haye both got to be there; yes.
Mr. W illiam s , ^ ou have got to have volume and velocity like you
in physics to have momentum?
Mr. E ccles. That is right. You cannot have velocity of the means
of payment unless you first create a means of payment. You may
create a means of payment and if it is in the hands of those who are
unwilling to spend it, you do not create business activity.
. Mr. W illiam s . N ow‘, Governor, let us so to the question in this
second title here of issue by the Federal Reserve banks. This act. as
1
218
BANKING ACT OF 1 9 3 5
I understand it, removes the necessity for any specific collateral back
of any particular issue?
Mr. E ccles. That is right.
Mr. W illiams. And simply permits the banks to issue upon their
assets ? Of course, all of that is to be done under the rules and regu
lations of the board, I assume, the Federal Reserve Board? Now, in
other words, who is going to control how much they issue ?
Mr. E ccles. The volume of notes issued depends in the first in
stance on the demand for cash by the public and more remotely on the
amount of deposits the Federal Reserve banks have created for their
member banks, either by extending loans to them or by open-market
operations.
Mr. W illiams. Who is going to determine whether an issue has
back of it sound assets, or not?
Mr. E ccles. The Federal Reserve banks’ credit departments will
determine that by the type of loans or type of credit which they ex
tend to the member banks.
Mr. W illiams. N ow, let me see that I understand. The policy that
has been heretofore followed has been that the Federal Reserve agent
has had charge of that, has he not, or a representative of the Board ?
Mr. E ccles. The Federal Reserve agent holds the collateral, con
sisting of gold certificates, eligible paper, and Government bonds.
Originally it had to consist of gold and eligible paper. The GlassSteagall Act of 1932 permitted Federal Reserve notes to be backed
by Government bonds in the absence of a sufficient amount of com
mercial paper.
Mr. W illiams. The application for issue is made to the Federal
Reserve agent ?
Mr. E ccles. That is right.
Mr. W illiams. And he was required to have sufficient assets, in
his judgment, back of that issue; that is, they were required to put
up with him particular assets on a particular issue that they called
for; is that correct?
Mr. E ccles. I t was figured as a whole, the total amount of notes
that each Federal Reserve bank had outstanding, backed by gold
certificates and bonds and other collateral that was deposited with
the Federal Reserve agent. But it seems to me that, in order to
understand what is back of the Federal Reserve notes, we must
consider the balance sheet of the Federal Reserve bank. The lia
bilities of the Federal Reserve bank to the public consist chiefly of
deposits of the member banks and of Federal Reserve notes.
Against these liabilities the Reserve banks hold assets, consisting
of investments in bills, Government securities, discounts to its meniber banks, and gold certificates.
It is impossible to issue Federal Reserve notes as liabilities with
out either an offsetting decrease in deposits or an offsetting increase
in assets, in the form of gold certificates, Government bonds, eligible
bills, or loans to member banks: and the onlv question that could
arise regarding the security back of Federal'Reserve notes would
be in connection with loans which the Federal Reserve bank made
to the member banks. If they made loans which were bad. whether
eligible paper or whether loans secured by wdiat would be considered
as sound assets, and the losses on those loans were in excess of the-
BANKING ACT OF 1935
219
capital and surplus of the reserve bank, then in theory the United
States Government would have to be called upon to make good the
guaranty of the Federal Reserve notes outstanding. But that is
the only way in which there could be any question as to the backing
of the Federal Reserve notes. At all of the central banks, except
the Federal Reserve System and the Bank of England, notes are
issued without any specific backing.
Mr. W illiams. N ow, Governor, I want this clear in my mind----Mr. H ollister. May I ask one question right there, Mr. Williams?
Mr. W illiams. Yes.
Mr. H ollister. I s it not true, however, that there is a statutory
limit in most of the countries as to the amount of that issue?
Mr. E ccles. Well, I could not say.
Dr. Goldenweiser advised me there is no such statutory limit.
Mr. W illiams. Let me ask you this question: In the application
of a reserve bank under our present system, to the Federal Reserve
agent for an issue, has that application ever been denied?
Mr. E ccles. I do not think so.
Mr. W illiams. When an application is made, who passes on it?
Mr. E ccles. That is a formal m atter; it is almost an automatic
operation. The amount of notes tlmt any Reserve bank requires to
meet the demands of its deposits would be turned over to it by the
Federal Reserve agent in exchange for the necessar}Tcollateral lodged
with the Federal Reserve agent.
Mr. W illiams. N ow, are you saying that would be left entirely
to the Federal Reserve banks?
Mr. E ccles. The amount of issue will be determined by the call
which the member banks make for currency, and when they make
a call for currency they must have deposits with the Reserve bank,
just as an individual who wants currency must have funds in a
commercial bank to be able to draw down that currency.
Mr. W illiams. The part I am trying to get at is whether or not
the central Board, the one that has" control or the one you want to
place more power in—whether or not they have control over the
amount of issue of each one of these Federal Reserve banks?
Mr. E ccles. The Federal Reserve Board has technical control over
the amount of issue under the present law, but it has found that it
is useless to control note issue after the member banks have acquired
deposits, and under the proposed law the Federal Reserve Board
would not have this purely technical or theoretical control. The
reason that the control is only theoretical is that, when member
banks wish to withdraw their deposits in cash, no Reserve bank can
refuse to pay out the cash, and the Federal Reserve Board cannot
take the responsibility for preventing it.
Mr. W illiams. Then, the Federal Reserve agent simply is an ad
ministrative officer; he has no discretion about it, but he is simply
a
with these funds in his hands?
Mr. E ccles. 1 he Federal Reserve bank would have to close if the
member banks asked for currency in lieu of their accounts and were
refused.
There is no more justification for requiring specific collateral back
of Federal Reserve notes, which are the liabilities of the Reserve
banks, than there is for requiring specific security to be pledged
1
220
BANKING ACT OF 1 9 3 5
against the deposits of the Federal Reserve bank. Why should
Federal Reserve notes outstanding be given a preferred status over
the deposit liability of the Reserve banks?
Mr. W illiams. Then, do you think it is a sound policy for the
Government to guarantee these notes and at the same time have no
control over their issue at all?
Mr. E ccles. I do not think that a controlled issue would be a
particle different than an issue that is not controlled, because the
Reserve banks are required to issue currency whenever member banks
have deposits and desire to draw down those deposits in currency.
I t is in the determination of the volume of credit extended to member
banks for the purpose of creating the deposits that the real control
of the note issue lies. They cannot draw down currency unless they
have established balances with the Reserve bank, and have put up
acceptable assets, in which case they can drawn down their deposits
in currency in the same manner that any individual depositor of a
commercial bank is able to draw his deposits in currency. Whenever
a bank is unable to pay out the deposits in currency, that bank
must close.
Mr. W illiams. They are turning out currency on what they call
“ acceptable assets ” as security ?
Mr. E ccles. Who is?
Mr. W illiams. The Federal Reserve bank? If a member bank
wants to borrow money, how do they get it ?
Mr. E ccles. They put up collateral.
Mr. W illiams. Who passes on that collateral?
Mr. E ccles. The Federal Reserve banks.
Mr. W illiams. And they get money for it? That is, the member
banks get money for it?
Mr. E ccles. Y es; they get credit.
Mr. W illiams. And that is guaranteed by the United States
Government ?
Mr. E ccles. They get deposit credit for it.
Mr. W illiams. Of course, that is money?
Mr. E ccles. Yes; that is right.
Mr. W illiams. And the Government itself is back of it, and still
it is simply the deposit of eligible security in the judgment of the
Federal Reserve bank?
Mr. E ccles. That is right.
Mr. W illiams. And they have entire control and jurisdiction
over it?
Mr. E ccles. Over the assets which they will take, yes.
Mr. W illiams. And pass on the question as to whether they are
good or bad?
Mr. E ccles. That is right.
Mr. W illiams. All right.
The C hairman . Governor Eccles, do you mean that thev have
entire control over the kind of assets they accept? They pass upon
the acceptability of assets entered as collateral as to solvency and
technical eligibility, but when it comes to fixing the rules of eligibil
ity under the present law, they are governed by the rules laid down
in the act, are they not?
Mr. E ccles. That is correct. They have discretion as to the ac
ceptability of assets or as to the type of paper which they will take
BANKING ACT OF 19 3 5
221
from member banks, subject at the present time to the eligibility
requirements of the Federal Reserve Act.
In the future, if the present eligibility features of the act are
removed and discretion given to the Federal Reserve Board to deter
mine the eligibility requirements, the Reserve banks would have
discretion within the rules and regulations laid down by the Federal
Reserve Board. However, it would not be mandatory and it is not
mandatory in the present law, that the Federal Reserve banks loan
to member banks. They simply have authority to loan to member
banks upon what is considered eligible paper.
The proposed amendment would give the Federal Reserve banks
the power to loan to member banks on paper submitted to them,
provided it met the requirements laid down by the Federal Reserve
Board.
Mr. W illiam s . Yes; I understand the only difference in the exist
ing law and the proposed law in that respect is, as it is now it is a
part of the statutory limitation, and the other is to leave it to the
rules and regulations of the Board as to what is eligible?
The C h a ir m a n . Let me ask you a question right there now: This
might happen, technically speaking, that under the new law the
Board could make regulations denning the eligible paper which
would be more restrictive than the rules fixed in the present law, or
if the Board saw fit, it could liberalize those rules, but it could work
either way?
Mr. E ccles. I think so.
The C h a ir m a n . S o it does not work arbitrarily in either direction ?
Mr. E ccles. That is right.
The C hairm an . Under the new bill, that is correct?
Mr. E ccles. That is correct, yes.
Mr. W illiams. What, in your opinion, should be the policy in
that respect, liberalized or made more restrictive?
Mr. E ccles. I think it would depend a great deal upon the condi
tions that confronted the country. In 1930 and 1931 it would have
been in the interests of the banking system and in the interest of the
entire country if the Federal Reserve banks had been permitted to
loan to member banks on any sound assets, when many of them had
very little or no commercial paper. The failure of the member
banks to be able to borrow from the Federal Reserve banks forced a
condition of great deflation. It forced the banks to refuse to extend
loans as thej7fell due, and forced them to sell their bonds, their secur
ities on the market. It resulted in liquidating or extinguishing,
through credit contraction, about $20,000,000,000 of our total bank
deposits, including time deposits. A good deal of that, of course,
was the result of tying up deposits in closed institutions; but the
total volume of deposits was greatlv reduced, partly because of the
inability of the member banks to get relief by going to the Federal
Reserve bank, until we finally liquidated our banking structure to
such a point that it became entirely frozen and closed.
And in getting it open, we finally had to recognize, as an emer
gency matter, that the Federal Reserve banks could loan to their
member banks on all sound assets and that the Federal Reserve banks
could issue notes secured bv any sound assets, without resort to gold,
Government bonds, or eligible paper.
127297— 35------ 15
222
BANKING ACT OF 1 9 3 5
The C h a i r m a n . N o w . let me interrupt you with something that
should be said right here. It not only went to the extent that you
have pointed out, but as an emergency measure we provided that
such loans might be made to nonmember banks and currency issued
to nonmember banks on the same rules and regulations; is that not
what happened?
M r. E c c l e s . T h a t is correct.
The C h a i r m a n . S o we were
forced to do that in the hour of dis
tress, instead of having anticipated and provided for it in advance?
Mr. E c c l e s . Yes: Mr. Chairman, that is correct.
Mr. W i l l i a m s . E ig h t in that connection, to w hat extent has it
worked ?
Mr. E c c l e s .
When people can get their money, they do not want
it. I think the law was very effective, because it stopped banks from
closing. Instead of the Federal Reserve being required to make
loans to meet the demand, money which had gone into hoarding to
the extent of anywhere from $1,500,000,000 to $2,000,000,000 in cur
rency that was drawn from the banks beyond what was the normal
use or need of currency, tended to come back into the banks. That
enabled the banks to pay off the Federal Reserve banks, so that the
amount of borrowing by the member banks from the Reserve banks
today is practically negligible; whereas, in 1933, it was very large.
Mr. W i l l i a m s . Then instead of increasing the necessity for bor
rowing has actually decreased it?
Mr. E c c l e s . The requirements; yes.
Mr. W i l l i a m s . That has actually decreased?
Mr. E c c l e s . That is right.
Mr. W i l l i a m s . There has been no demand upon the Federal Re
serve Board since the passage of this act. I take it, from what you
say, to borrow upon these general assets, I will say, which were not
heretofore eligible, such as real-estate securities, long-term bonds,
and things of that kind; there have not been any of them offered as
security to the Federal Reserve banks for the purpose of obtaining
loans ?
Mr. E c c l e s . I think it is section 10 (b ) of the Federal Reserve Act,
as amended by the Emergency Banking Act, which says that, under
exigent circumstances, member banks are permitted to borrow from
Reserve banks on their time or demand note secured to the satisfac
tion of the boards of directors of the Reserve banks. There was
some use made of that provision, but not very much, because it put
a bank in a position, where it applied for credit under the terms of
that provision, of admitting that it was in great distress and exigent
circumstances that it required special treatment by the board of the
Federal Reserve bank, which meant that a bank "would onlv resort
to that, would only use the borrowing right, as the very last resort.
Mr. W i l l i a m s . To w hat extent are real-estate loans used for the
purpose of acquiring loans from the Federal Reserve?
Mr. E c c l e s . I could not say to what extent, but there has been
some borrowing from Reserve banks on bills pavable backed by realestate mortgages, and other collateral put up to secure the notes of
the banks.
Mr. W i l l i a m s . I t is the intention of this bill, as I understand it.
to so amortize real-estate loans as to make them eligible for discount?
Mr. E c c l e s . Not for discount.
BANKING ACT OF 1 9 3 5
223
Mr. W i l l i a m s . Well, for loans?
Mr. E c c l e s . Yes.
Mr. W i l l i a m s . A s security for loans?
Mr. E c c l e s . Yes; the bill provides that the act be amended to au
thorize Federal Reserve banks, subject to the regulations of the
board, to discount for a member bank ail commercial, industrial, or
agricultural paper, and to make advances to a member bank on its
promissory notes secured by any sound assets.
Mr. W i l l i a m s . And that includes real-estate loans, of course?
Mr. E c c l e s . Collateral loans, bonds, or any other sound assets.
Mr. W i l l i a m s . And the purpose of this—not of this section, but
of the real-estate section—is to so liberalize real-estate loans, by
amortizing them over a long period of time, as to make them eligible
as a permanent policy, to encourage additional loans by national
banks and member banks on real estate, in order that they can, if
necessary, dispose of those in time of distress and get money from
the Federal Reserve banks?
M r. E c c l e s . S o lo n g as the commercial b a n k in g system is per
m itted to take sa vin g s deposits, I see no reason w h y those sa vin gs
fu n d s cannot be loaned on amortized real-estate loans in the com
m u n ity o f the bank.
M r . W i l l i a m s . I agree w ith that, m yself. I absolutely agree with
that, but the purpose is, as fa r as it can be done, to liquefy realestate loans?
Mr. E c c l e s . Yes.
Mr. W i l l i a m s . I think we all agree that that cannot be done as
a policy, but as far as it can be done----Mr. E c c l e s . In a depression, only the Federal Reserve can liquefy
assets. Real-estate loans are no different than any other type of
paper in a great deflation.
Mr. W i l l i a m s . O f course, they have been, for the reason that
there has been no place to discount them.
Mr. E c c l e s . In a great depression there is no other place to go.
And they do not have to be real-estate loans. They may be loans
on collateral, or they may be investments in bonds. When the market
is depressed, as it was for a period of several years, that meant bank
ruptcy for any bank that liquidated its assets on the existing market,
ari]M ^ conciition tended to close many banks.
la^
Mr W i l l i a m s . I s it the thought of the Federal Reserve Board
that there should be no limitation at all, upon these amortized realestate mortgages ?
Mr. E c c l e s . Y ou mean no limitation as to the percentage-----Mr. W i l l i a m s . No ; I do not mean on the percentage of valuation,
uutr°n l 6 amoun^ the l°an °n each individual property.
Mr. E c c l e s . 1 here is no limitation now. under the real-estate pro
vision of the National Banking Act under which they have operated
for 20 years, with the exception of the limitation of 10 percent of
the capital and surplus on any one loan.
Mr. A\ i l l i a m s . Real-estate loans have not heretofore been eligible
fo r discount w ith the Federal Reserve bank, except as an emergency
measure ?
Mr. E c c l e s .
member banks.
There is over $2,000,000,000 of real-estate loans in
224
BANKING ACT OF 19 35
Mr. W i l l i a m s . Have they been able to put those loans up with
the Federal Reserve bank ?
Mr. E c c l e s . Only when an emergency was created and then they
were permitted as an emergency matter to do that.
Mr. W i l l i a m s . That is exactly what I say, except as an emergency
measure, they never have been eligible for loans?
Mr. E c c l e s . That is right.
Mr. W i l l i a m s . This act proposes to m ake them eligible?
M r . E c c l e s . That is right.
Mr. W i l l i a m s . And it is not thought to place any limitation, at
all, upon them?
Mr. E c c l e s . Y ou mean limitation as to----Mr. W i l l i a m s . A s to the amount? Here is an apartment house
or hotel, or some other business institution, on which they want to
make a loan of $100,000,000, for example----Mr. E c c l e s . One bank is limited in the amount of a loan they can
make to any one borrower to 10 percent of its capital and surplus.
So it has that limitation on it.
Mr. W i l l i a m s . There is to be an increase under this act?
Mr. E c c l e s . N o ; there is no change in it, at all.
Mr. B r o w n of Michigan. As a matter of fact, it is a decrease, that
is, 10 percent of the time deposits?
Mr. E c c l e s . No ; any bank can loan any borrower up to a total
of 10 percent of its capital and surplus.
The C h a i r m a n . Y ou mean that a loan can be made on any col
lateral or w ithout collateral?
Mr. E c c l e s . That is right.
That has always been a provision of
the Banking Act.
Mr. W i l l i a m s . There is a provision in here, is there not, lim itin g
it as applied to real estate?
Mr. E c c l e s . N o ; the limitation is 50 percent of the time deposits
and 50 percent of the appraised value of the property, which is
the only limitation in the present act with reference to real estate.
Mr. W i l l i a m s . I t is expanded to what it was, in effect ?
Mr. E c c l e s . I t is proposed to increase it from 50 to 60 percent,
but the 60 percent also includes other real estate which is not in
cluded in the 50 percent in the present law.
Mr. W i l l i a m s . Then loans to each institution heretofore have
been limited to 25 percent of the capital and surplus on real estate?
Mr. E c c l e s . Or 50 percent of its time deposits, whichever was
greater.
Mr. W i l l i a m s . What I am trying to get at is, it is expanded and
enlarged, or is it not?
Mr. E c c l e s . Yes; from 50 to 60 percent and up to 100 percent of
its capital and surplus, whichever is greater.
Mr. W i l l i a m s . Instead of 25 percent, it is now extended to the
full amount of its capital and surplus?
Mr. E c c l e s . Yes.
Mr. W i l l i a m s . Or 60 percent----Mr. E c c l e s . Of its time deposits.
Mr. W i l l i a m s . Of its time deposits?
Mr. E c c l e s . Right. I suggested that those limitations be taken
out of the act and the Tederal Reserve be charged with the responsi
BANKING ACT OF 1 9 3 5
225
bility of determining regulations with reference to the real-estate
loans.
Mr. W i l l i a m s . D o you think there ought to be no limitation in
that respect in it, except the regulations and rules of the Board?
Mr. E c c l e s . That is right.
M r. W i l l i a m s . Or whatever lim itation they saw fit to place?
Mr. E c c l e s . That is right.
. Mr. W i l l i a m s . I t ought not to be made a statutory provision ?
Mr. E c c l e s . That is right.
Mr. W i l l i a m s . For the reason that it would give them more flexi
bility in the local communities, in the different localities, and at
different times, under differing conditions?
Mr. E c c l e s . Many of the nonmember State banks have, at the
present time, more than 60 percent of their time deposits in realestate loans, and some of the member State banks have more than
60 percent. That "would mean that those banks would be required
to liquidate their real-estate loans, in order to comply with the 60percent requirement. Many State banks are not limited in the
amount of their deposits that they can loan upon real estate.
Mr. W illiams. I am very much concerned about this provision
regarding real-estate loans, because I have been under the impres
sion. by reason of the fact that these loans were short-term loans,
not amortized loans, the banks were not able to handle them at
all in a period of depression.
Mr. E c c l e s . Y ou mean under the present b ill?
Mr. W i l l i a m s . Yes; under the present act. the law as it is now?
Mr. E c c l e s . That is correct.
Mr. W i l l i a m s . And this act proposes to amortize them over a
period of years and make them eligible for discount and furnish a
market, somewhat, for them when the time comes when the banks
have to have their money. I think, myself, it is a very wise pro
vision in the law.
I believe that is all I care to ask at this time.
Mr. F o rd . Might I ask a question. Mr. Chairman, just a question?
The C h a i r m a n . Yes: indeed.
Mr. F o r d . Suppose the Federal Reserve has taken considerable
volume of real-estate loans, what provision is there for the Federal
Reserve bank, itself, to dispose of them, should they want to?
Mr. E c c l e s . There would be no occasion for the Federal Reserve
bank to dispose of them, so long as the member bank that borrowed
the money was solvent. The member bank would owe the Federal
Reserve on its bills payable, secured by mortgages which it had taken.
Mr. F o r d . Suppose a member bank failed?
Mr. E c c l e s . The Federal Reserve ban k would be required to
liquidate that mortgage or collect it or sell it. just as anv other asset.
Mr. F o rd . It could sell it, though?
Mr. E c c l e s . Yes; it could sell it.
Mr. F o r d . It is not ju st put in there and held static?
Mr. E c c l e s . No ; it would liquidate any asset or loan of the mem
ber bank which it held just the same as the member bank would
undertake to liquidate the loan of an individual or corporation
borrower.
226
BANKING ACT OF 1 9 3 5
M r. W i l l i a m s . Governor, there is this question that I want to ask
you before I finally quit: Under our present system, or under the
system proposed in this bill, what do the Federal Reserve banks pay
for the privilege of issuing money?
M r. E
ccles.
T h e y do not pay anything.
Mr. W i l l i a m s . D o not pay anything?
Mr. E c c l e s . No.
Mr. W i l l i a m s . N o w , as you know, there is considerable agitation,
a good deal of comment in the country, about the Government own
ing these institutions. What would be the difference in effect if
the Government did own them?
Mr. E c c l e s . The individual member banks are the owners today.
However, they are limited to 6 percent dividends on their stock.
The earnings of the Reserve System in excess of 6 percent are held
by the Reserve banks, and at one time----Mr. W i l l i a m s . Right in that connection, do they not belong to
the stockholders?
Mr. E c c l e s . Not under the law, not beyond the 6-percent divi
dends.
Mr. W i l l i a m s . Of course, I understand we had, by legislation, to
take it away from them. They were claiming to own it, were they
not?
Mr. E c c l e s . Yes; I think that there possibly was some claim to
that effect. Personally, I would see no objection to requiring that
the earnings of the Federal Reserve banks, beyond the limitation
of 6-percent dividends to member banks, should be turned over to
the Government when the surplus of the Reserve banks has reached
an amount equal to its capital.
Mr. W i l l i a m s . If the Government, however, can own and operate
them as successfully as private institutions have done, why not give
the 6 percent to the Government rather than to the private banks, as
well as the reserves and the surplus?
Mr.-E c c l e s . I t is now provided in the law that, in case of liquida
tion, any surplus remaining, after the payment of all debts, divi
dend requirements, and the par value of the stock, shall be paid to
and become the property of the United States. I see no advantage
in the Government taking over the stock of the Reserve banks.
Mr. W i l l i a m s . It would not cost the Government anythin^ to do
that, would it?
Mr. E c c l e s . I think it would; yes. The Government could not
take over the stock without paying the member banks, any more than
the Government could purchase any other asset without it costing it
anything.
Mr. W i l l i a m s . The purchase o f the stock is already in the Federal
Reserve banks, the purchase price of it?
Mr. E c c l e s . That is right.
Mr. W i l l i a m s . And if you took it over, it would simply own it
instead of the Federal Reserve System owning it; the funds then
with which the stock was paid for would be in the hands of the Gov
ernment, would they not ?
Mr. E c c l e s . N o ; the United States Treasury would have to make
PaUllerd to each member bank for its stock in the Reserve System,
and the stock would be transferred from the ownership of the indi-
BANKING ACT OF 1 9 3 5
227
vidual member banks, which own stock in the respective Federal
Reserve banks----Mr. W illiams. Then, in taking over the System, we would get the
assets that belong to the bank, that were paid in there by the member
bank, would we not, for their stock?
Mr. E c c l e s . When you bought the stock held by a member bank
in the Federal Reserve System, you would naturally have—that is,
the Government would naturally have the asset-s represented by stock
which it purchased. That is correct.
Mr. W i l l i a m s . And that is sound, really, after all; it would not
cost the Government anything?
Mr. E c c l e s . It might be—it would not cost it in the sense
that it would be paying out funds without getting an equivalent
asset; it would be an investment, rather than an expense, but it would
cost the same----Mr. W i l l i a m s . They vT
ould get the stock?
Mr. E c c l e s . T h a t is right.
Mr. W i l l i a m s . The stock the member banks now own? Now, I
believe I asked a question awhile ago, that if the Government can
own and operate the banks and issue money, instead of private insti
tutions, why not do that and save the 6 percent that we are now
paying.
Mr. E c c l e s . You would not save 6 percent. For the Government
to buy the stock, it would be required to raise the money that is used
to purchase the stock, and in raising that money it would borrow it.
If it borrowed it or raised it as they raised funds for other purposes,
it would be required to pay whatever interest the Government debt
was required to bear, in order to float the funds to get the money to
buy the stock.
At the present time, the last offerings of Government securities
bore a rate of 2% percent; so in that case, you would save 3y8 per
cent, the difference between 6 percent and 2% percent.
Mr. W i l l i a m s . Even so, why not save it?
Mr. E c c l e s . The answer is, perhaps, that there is no more reason
for the Government to invest in this business so long as it controls
the money supply, than in any other business.
Mr. Hornaster . Might I ask one question there?
Mr. W i l l i a m s . Yes; go ahead.
Mr. H ollister. That would be on the theory that you could neces
sarily buy the stock at par. There is nothing, is there, in the law
which would permit the Government, unless it is some new theory
of confiscation hitherto unannounced—there is nothing by which the
Government could expressly pay the member bank which owns a
particular amount of stock in a particular Federal Reserve bank—
there is nothing by which the Government could compel that bank
to sell its stock at par if it chose to put a price on it of $200 or $300
or $400, is there?
*
Mr. E c c l e s . 1hat is a legal question that I do not feel I am pre
pared to answer.
T h e C h a ir m a n . Let m e suggest that if you answer that question
you also tell us what you would do about the stock of the State bank
that is a member of the Federal Reserve System.
Mr. H o l l is t e r . I am assuming that the Government is trying to
buy stock in a Federal Reserve bank owned by individual member
228
BANKING ACT OF 1 9 3 5
banks. That would be a matter of contract between the Government
and each individual stockholder bank as to what the Government
would be willing to pay and what the member bank would be willing
to surrender its stock for.
Mr. E c c l e s . That would seem to be the situation, and that is a
legal question.
Mr. H o l l is t e r . If you are not prepared to answer the question, I
would rather not interfere with Mr. Williams. I do not want that
to remain open without some comment, but I will refer to it later.
Mr. W o l c o t t . May I ask a question, Mr. Williams?
Mr. W i l l i a m s . Well, yes.
Mr. W o l c o t t . D o I understand there is about $450,000,000 in that
fund which has been turned over to the Federal Treasury over and
above this 6 percent that was used—or we used one-third of it, did
we not, in subscribing for stock?
Mr. E cclf .s . The Federal Deposit Insurance Corporation? That
was $140,000,000----Mr. W o l c o t t . Was it not one-third of that fund?
Mr. E c c l e s . Xo ; it was more than one-third. The Treasury put
$150,000,000 and the Reserve System----Mr. W o l c o t t . $149,000,000? "
Mr. E c c l e s . I think it was $140,000,000.
Mr. W o l c o t t . $139,000,000. I think it was.
Mr. E c c l e s . It made a total of $290,000,000 that was supplied by
the Reserve banks and the Treasury.
Mr. W o l c o t t . Out of this Reserve System?
Mr. E c c l e s . Out of the su rp lu s o f the Federal Reserve bank.
Mr. W o l c o t t . That could be used in payment of interest on these
bonds, and after that the full 6 percent and all over and above that
would go to the Government?
Mr. E c c l e s . You mean, then----Mr. W o l c o t t . This reserve that is already in it----Mr. E c c l e s . Yes; but that money was paid out by the Reserve
banks to the Federal Deposit Insurance Corporation, and therefore
the Reserve banks no longer have those funds. Those funds are
owned by the Federal Deposit Insurance Corporation and----The C h a i r m a n . Let me correct you just a moment.
Mr. W o l c o t t . We ieiinbursed the Federal Reserve bank for that,
did we not?
The C h a i r m a n . We did not give any monev to the Federal De
posit Insurance Corporation, but we merely subscribed to its capital
stock.
Mr. E c c l e s . Yes.
Mr. W o l c o t t . Indirect loans----Mr. E c c l e s . Y ou do not think that the capital stock has very
much value, then, do you? The law provides that the stock of the
Federal Reserve banks can receive no dividends.
Th e C h a i r m a n . T im w ill tell that.
Mr. E c c l e s . The first banking bill----The C h a i r m a n . I t has made pretty good profit up to now.
Mr. E c c l e s . Title I o f the banking bill provides that the Federal
Deposit Insurance Corporation’s capital of $290,000,000 can be re
duced to a nominal amount, and the balance put to surplus, so there
BANKING ACT OF 1 9 3 5
229
would not be an impairment of capital, if it became necessary to
put up these funds.
Mr. W i l l i a m s . I would like to remark, in that connection, that
so far as I am concerned, that will not be done, because I believe
the banks themselves ought to bear that burden.
Now, coming back to the original proposition. Governor, whether
or not the Government, as a practical proposition, can own and
operate the Federal Reserve banks on as sound a financial basis, and
render the same service and save these expenses, in the long run, if
you have dividends that are being paid to the banks on the stock—
if that can be done, why should it not be done?
Mr. E c c l e s . I believe that the ownership of the stock by the
Government would not necessarily be of any particular benefit or
value in the operation of the Federal Reserve System. I believe
that through the adoption of the provisions of this bill, the control
would be effective and the responsibility fixed, and it should be just
as effective in operating the system in the public interest as it could
be operated if the Government owned the stock. I t gets down to a
matter of human intelligence. The management of the banks or
the management of the System would have to be directed in some
manner by some means. I see no reason why a management selected
with the Government owning the stock would insure the System
being operated in the public interest anymore than would be the case
with the members of the Federal Reserve Board being appointed by
the President of the United States, as is now provided, and the
governors and chairmen of the individual banks selected by the local
directors of the bank, subject to the approval of the Federal Reserve
Board. There is a great advantage in keeping regional ownership
and interest in the Reserve banks.
Most of the central banks of the world are privately owned. The
bank which is just being set up in Canada, after a good deal of
investigation and study and consideration, is owned by the public. I
understand the stockholders elect the directors, but the Governor of
the bank must be approved by the finance minister, and he has very
great power and responsibility.
. If is not so much who owns the bank as it is the way the bank
is set up and the responsibility with which it is charged.
Mr. W i l l i a m s . I s it your thought that Government-owned central
banks can operate as economically and as efficiently and as much in
interest of the people of the country as our present system ?
Mr. E c c l e s . I do not think that the fact that it may be Govern
ment-owned. in and of itself, should make any difference. It may
be operated as efficiently and it may not be operated efficiently.
Sa,V
’
to the human problem, after all.
M r. \v i l l i a m s . Th e ow nership of it, in that respect w ould make
no difference?
Mr. E c c l e s . I do not think so. not necessarily. If the manage
ment of the banks, the personnel of the board consisted of efficient
men who would feel independent to use their best judgment and
thought in carrying out the affairs of the institution, the ownership
would make no difference. If, on the other hand, people were ap
pointed to operate the system for purely political reasons, rather
than with reference to their qualifications, and they were made to
feel subservient to the point where their best judgment was not
230
BANKING ACT OF 1 9 3 5
exercised, then of course the system, under those conditions, would
be badly and inefficiently and ineffectively operated.
Mr. W i l l i a m s . Of course, the central idea in this legislation here,
as is stated at the very beginning, is to try to increase and centralize
the power in the Federal Reserve Board over the System, and I
think properly so because I think that the Government and Con
gress and the administration should have control of the monetary
system. It is a national system, of course, and there should be some
central authority and central power responsible for it. The pur
pose of the bill is to create centralized authority, with complete
management of the corporation or system.
Mr. E c c l e s . With the board, which would be charged with re
T
sponsibility for the monetary policy, working with and under the
advice of the Governors’ committee. There are many functions that
would be carried out by the individual regional reserve banks, under
the direction of their boards of nine directors.
Mr. W i l l i a m s . But nothing that would influence the national
monetary policy, without the consent of the central board ?
Mr. E c c l e s . That is right, except that the Governors would in
fluence the policies of the board, as a result of their counsel and
advice.
Mr. W i l l i a m s . And that would be true whether they were repre
senting the system governmentally owned or individually owned,
would it not? Right in that connection the counsel that you propose
of five----Mr. E c c l e s . Representing the 12 Governors.
Mr. W i l l i a m s . What function does the advisory counsel now per
form ? Why could it not do the work proposed by the five ?
Mr. E c c l e s . I think it is more proper to have the executive heads
of each of the 12 banks select their committee for the purpose of
advising with reference to the policies, than to have the council
advise. The Governors are in much closer touch with monetary
problems. The members of the council are appointed, one from each
Federal Reserve bank district by the Federal Reserve banks, and
I think they consist entirely of commercial bankers from the Fed
eral Reserve districts. They are in touch with the individual prob
lems of their particular banks and their particular communities but
I do not believe would be as able or as qualified----Mr. W i l l i a m s . They perform a very valuable function; that is,
do they or do they not?
Mr. E c c l e s . I have not been on the Federal Reserve Board except
for a few months, and I have only had occasion to meet with the
advisory council on two occasions. It would, therefore, be difficult
tor me to judge as to just how important the functions of that body
have been over the life of the System.
Mr. F ord . Might I make a comment, Mr. Williams, please?
Mr. W i l l i a m s . Yes.
Mr. F o rd . Mr. Eccles, does not the demand for more complete
con roi on the part of the Government indicate that the heretofore
p m a e control has not proved satisfactorv to the Congress or the
country ?
t
^ CCLE® I would not say that we had had private control,
*
mk one of the principal difficulties of the money system has been
ia we had not placed the responsibility definitely upon any one
BANKING ACT OF 1 9 3 5
231
body and given it the power and authority to carry out the responsi
bility that was imposed upon it.
Mr. F ord. It is too wide-spread, and they have been forced to
operate and do what the Board wanted to do----Mr. E c c l e s . We did not have a statutory open-market committee
until the Banking Act of 1933 created one of 12 Governors, and
charged that body with responsibility for the initiation of the openmarket operations and gave to the Board the power of approving
or disapproving the recommendations of the Governors. But even
then if the Board approved of recommendations of the Governors,
one or all of the 12 banks could refuse to participate in the operation.
Mr. W i l l i a m s . Has not the Board had that open-market policy
through the years?
Mr. E c c l e s . The Board was not charged by law with the duty of
formulating an open-market policy.
Mr. W i l l i a m s . None at all? Have they not intended to control,
in any way, the expansion and contraction of money through openmarket operation, through their advice and instruction to the member
banks, and through their own operations?
Mr. E c c l e s . The Board has acted in all these matters, but without
a clear mandate of law.
Mr. W i l l i a m s . They made no effort—do I understand that the
Board itself has never made any effort at all along that line until
the open-market committee of 1933?
Mr. E c c l e s . The Board has attempted to influence the money mar
ket through changes in discount rates—that is, its right to approve
of the discount rates—and it has even changed discount rates on its
own motion. The need of the open-market operation was recognized
in 1922, and a voluntary committee of governors was organized to
carry out the open-market policy or program.
Mr. W i l l i a m s . They had that policy then ?
Mr. E c c l e s . The open-market committee of the governors had the
responsibility for that program. The Board itself has not been
charged specifically with the responsibility for the open-market
policy.
Mr. W i l l i a m s . I understand, as a m atter o f law. but they have
actually adopted the policy, have they not?
Mr. E c c l e s . T o what extent I cannot say.
I am not as familiar
possibly as I should be with the detailed history of the operation of
the Board.
Mr. ( r o ss . May I ask a question just on that?
Mr. W i l l i a m s . Yes.
Mr. C r o ss . N ow, is it not a fact that the Board, in April 1923 or
May 1924. brought its pressure on the open-market committee and
had them to bity $510,000,000 of Government securities and reduced
the rediscount rate from 4 ^ percent to 3 percent, and, as a result, put
the wholesale commodity price level up to 11 percent, and the agri
cultural products up to 20 percent, and this action was repeated a
number of times, and brought about tke beneficial effect when they
did it?
Mr. E c c l e s . I do not know to what extent the open-market pur
chases and reductions in the rediscount rates had an effect upon
the price level. It is true, I think, that, under certain conditions, to
reduce the interest rates and increase the supply of money would be
232
BANKING ACT OF 1 9 3 5
effective in increasing business activity, just as to increase the in
terest rates and reduce the quantity of money would tend to restrict
business activities, and slow up borrowing, and possibly start a
process of liquidation.
I do not believe that anyone can say to what extent open-market
policy can be responsible for recovery or for depression.
The Swedish money management is one of the most interesting,
I think, that we have in the world today and possibly has been as
successful, or looked upon as being as successful as that of any
other country, and the governors of the Swedish bank, in February
1932, made this statement:
It follows that when forming its policy in view of fluctuations in the price
level the Riksbank cannot but take into account the causes of such changes jn
prices. For it is essential to determine whether price movements are caused,
e. g., by increased tariffs, altered exchange rates, or a tendency to inflation
on the domestic market which may be looked upon as primary in relation to
exchange rates. In any such analysis of price conditions, naturally other
price indexes besides the Riksbank's own index of consumers' prices will also
be taken into consideration. Obviously, in their endeavor to create as stable
economic conditions as possible, the governors are also taking into account
other factors than mere changes in the price level, particularly conditions
affecting productivity and stocks in various industries.
The C h a i r m a n . Gentlemen, it is evident that we cannot continue
much longer, in view of the business in the House. I am going to
suggest that we adjourn until tomorrow morning at 10:30, and
resume with Governor Eccles.
(Thereupon a recess was taken in the hearing until 10:30 a. m.,
Tuesday, March 12, 1935.)
BANKING ACT OF 1935
TUESDAY, MARCH 12, 1935
H o u s e or R e p r e s e n t a t iv e s ,
C o m m it t e e o n B a n k i n g a n d C u r r e n c y ,
, . .
Washington D G
The committee met at 10: 45 a. in., pursuant to adjournment, Hon.
Henry B. Steagall (chairman) presiding.
The C h a i r m a n . The committee w ill plea>e come to order.
Mr. Eccles, you may proceed now. Mr. Williams, do you have
further questions?
Mr. W i l l i a m s . I think not, Mr. Chairman.
The C h a i r m a n . All right, Mr. Cross.
STATEMENT OF MARRINER S. ECCLES, GOVERNOR OF FEDERAL
RESERVE BOARD— Continued
Mr. C r o ss . Governor, you agree with the proposition that it is the
duty of Congress to regulate the value of money, don’t you; that is,
Congress, acting through its agency which it sets up, shall do it?
Of course, Congress itself does not do it.
Governor E c c l e s . I think that is a sovereign power given to Con
gress.
Mr. C r o ss . In the Constitution.
Governor E c c l e s . In the Constitution.
Mr. C r o ss . N ow’ if that is the duty of Congress through its agency
which it sets up, wdiich of course, is the Federal Reserve System,
don t you think that that agency ought to be independent of any
outside influence or interests?
Governor E c c l e s . The agency should represent the Nation as a
whole and should not be under the domination or control of any
group or groups.
■ll
•
Should not the agency they set up. they being respon
sible and having the duty to perform, which they have delegated to
that agency, should not that agency be independent of any outside
agencies that come in with a different purpose in view?
ton p i nor E c c l e s . It is my viewTthat the Federal Reserve Board
s mule be as independent as it is possible to create a body of that
hitercf r^e<
^
the responsibility of monetary policy in the public
Mr. ( ross. Now, Governor, isn’t it a fact that the member banks
of the Federal Reserve System are constantly wanting to go out in
an opposite direction to what a wise policy would dictate, and that
they are constantly wanting to inflate when thev should not. and
constantly wanting to deflate when they should not?
233
BANKING ACT OF 19 3 5
234
Governor E c c l e s . Well, of course, there are a good many thou
sands of member banks, and I don’t believe there is any uniformity
of opinion. Inflation is brought about by creating a condition of
easy money, expressed in low rates and excessive reserves, in a pe
riod when there is great business activity and hence a willingness to
borrow.
Mr. C r o ss . Yes. But now the point I am driving at is this, isn't
it a fact that the member banks, and I am asking this just to get your
reaction on this, are inflating when they should not be, and are de
flating when they should be inflating? Here is what Governor H ar
rison of the New York Federal Reserve Bank said in the hearing in
1932, page 53:
It is almost inevitable that the Federal Reserve System, or any central bank,
will always have to go contrary to what the banks are doing. When they are
deflating, we have to put pressure on them, and when they are deflating we
have to boost things up. I think that is what we should do.
Isn’t it a fact that the member banks, when they are trying to make
money for their stockholders, in times when prices are high, they
want, of course, to keep extending credit, credit, credit, and inflating,
and naturally their class A directors—and class B directors, who are
largely under the control of class A directors—wish to keep going
forward and expanding, and don’t you think that is a conflicting
interest contrary to what the Federal Reserve System is intended
to do?
Governor E c c l e s . Of course, all I have is the record. From 1926
up to 1930, there was a very small variation in the supply of money.
There was no inflation in the volume or the quantity of money from
1926 to----Mr. C r o ss . Y ou refer there to all money—credit money?
Governor E c c l e s . That is right; I refer to all money. I include
in that demand deposits of member banks and of nonmember banks,
and the currency outside the banks, in a word the entire circulating
medium.
Mr. C r o ss . That is over what period?
Governor E c c l e s . That covers the period from 1926 to 1930.
Mr. C r o ss . Will you please answer for me this question: There
was a vast difference in velocity in those years?
G overn or E
ccles.
Y e s; that is correct.
Mr. C r o ss . And the Federal Reserve System can step in and con
trol velocity, can it not?
Governor E c c l e s . I don’t think that the system has as much influ
ence or velocity as it has on volume of money. I think the velocitv
of money is influenced more by the tax system than by monetary
policy. Velocity slows up as business activity declines, or as defla
tion develops.
With the national income in 1929 estimated at beyond 82 billions,
with the money volume at that time 264 billions, there was a velocity
of 3.12; that is, each dollar on the average turned over 3.12 times
in the course of the year in the process of making up the income of
the community.
Whereas, in 1933, with the national income diminished from 82
billions to 46 billions, and the volume of money reduced from 26.4
BANKING ACT OF 1 9 3 5
235
billions to 19.9 billions, income velocity had declined in that period
to two and a third.
Mr. C ross. Yes; I understand, that Governor.
Now Governor, isn’t it a fact that in order to control the situation
you must still have a tixed policy and step in in time? “A stitch in
time is worth nine ”, as one of the governors explained here in his
testimony.
In 1929, Governor Harrison was insisting that something be done
to stop the*inflation, but it delayed too long, until the crash came,
and of course then when that happened it was almost impossible to
do anything. But it is shown by the record before that they would
go out, putting out more securities, putting out more credit, more
money, when the commodity prices rose, and then when they would
stop that and sell, the reverse was true, because when you sell you
take from the member banks their reserves, and that of necessity
causes them to rediscount which they don’t like to do, and that has
the effect, of course, of steadying things, and slowing matters up—
keeping them from rediscounting so much.
In order that I may get your reaction on some of these things, I
will quote from the testimony of Dr. Sprague who appeared before
the committee, I believe, in 1923:
There would be, I think, an advantage from the passage of the bill. I
probably agree with you that the defects in tiie operation of the Federal Re
serve System are not so much errors of judgment they have made, but rather
in the hesitating manner in which at times policies have been decided upon
and then executed.
Without a goal to go to, and the boards come and go, the present
Board may be gone in a short while, and with no goal to go to, the
individuals differ and hesitate, and don't }rou think that is one ot the
great troubles, not having any goal to go to?
Governor E c c l e s . Y ou mean without a specific provision or objec
tive required?
Yes.
Governor E c c l e s . You mean required as a part of the l aw?
Mr. C ross. Yes: for Congress to set down the purpose, and have
it the purpose of Congress, rather than to just turn the Board loose
and let them go ahead as they did in 1928, as my recollection of the
testimony shows, or 1924. when the Presidential'election was coming
on and they determined they should have prosperity. So, therefore,
they got out and they bought Government securities, $510,000,000,
shooting the price level up 11 percent, the farm products 20 percent,
and built up commodity prices. Then, after that, they reversed the
process, but no election was then coming on.
Now if you have a goal to go to, so they can’t just shoot things up
and down for some ulterior motive, they are fastened to an anchor,
and don’t you think it would be wise to have such a provision in the
law ?
Mr. W illiam s . Y ou mean a price level, do you. Mr. Cross?
Mr. C ross. Yes.
Governor E c c l e s . I don’t think there should be a mandatory pro
vision to reach a certain price level. It may be of interest in that
connection to consider the preamble of the recent law creating the
Bank of Canada. It is short and might be considered as a basis for
Mr. C ross.
236
BANKING ACT OF 1 9 3 5
our own. It doesn’t definitely fix a price level, but it does fix an
objective:
Whereas it is desirable to establish a central bank in Canada to regulate
credit and currency in the best interests of the economic life of the nation,
to control and protect the external value of the national monetary unit, and to
mitigate by its influence fluctuations in the general level of production, trade,
prices, and employment, so far as may be possible within the scope of monetary
action, and generally to promote the economic and financial welfare of the
Dominion.
Mr. C r o ss . They will all say that, of course. Everybody agrees
to that, but isn’t it a fact that our system is such, as I suggested, we
go out and do a thing when a Presidential election is coming on,
without any guide as to what the purchasing power of a dollar
should be, no relation to the commodity-price level, and then turn
them loose? They not only hesitate, but when they do jump, they
will jump because of some purpose that is actuating them like a
Presidential election.
For instance, let us take Dr. Sprague, who said in his testimony,
“ I have reached the conclusion that a stabilization amendment might
prove serviceable.”
Now, that was his testimony during that same time, in 1928.
Don’t you think experience has shown those people that they
couldn’t have a stable policy under those conditions ?
Now, I want to get your reaction on some more of his testimony.
Now, Dr. Miller, in the hearings in the Senate, in 1931, said:
It was my opinion expressed several times, in discussions at Federal Reserve
meetings in the opening months of the year 1929. that the Federal Reserve
System was drifting, that it was in the midst of a perilous situation without a
policy—
and won’t that, in your opinion, continue to be the case unless you
have got a goal to go to ?
Governor E c c l e s . I think there should be a goal, but the goal
shouldn’t be a fixed-price level. I think the goal should be stable
business conditions because if you have a goal of----Mr. C r o ss . Who is to determine what stable business conditions
are? The Board? They differ here.
Governor E c c l e s . Yes; it has got to be left up to the Board, which
should not be considered a political body. The law makes the
Board a nonpartisan body, on which political parties as such are
not represented and appointments to which are for periods of 12
years.
Mr. C r o s s . That is true, but you know human nature doesn’t
change, and it is just like the Dred Scott case in the Supreme Court.
People don’t change. And what we want to do. it is my idea that we
get something here where they are anchored to something.
For instance, now, here is the testimony of Governor H ardin":
The American monetary system is a good deal like a ship at sea without
adequate equipment of rudders and compass to guide it.
Don’t you think they need something to guide them, somethin" to
goto?
Governor E c c l e s . I don’t believe that a fixed-price level is a guide
that we should have. We might have a stable price level on the
basis of some index, and yet have a great deal of unemployment.
BANKING ACT OF 19 3 5
237
Nobody would be satisfied if you reached a 1926 price level and
continued to have a national income of 50 billion dollars instead of
80, and 10 million people unemployed.
Mr. Cross. Yes, but Governor, the question of unemployment de
pends upon profits, doesn’t it?
Governor E ccles. Not altogether----Mr. Cross. I won’t run my factory unless I make a profit, will I ?
Governor E ccles. That is true.
Mr. Cross. If I make profits, I employ people.
Governor E ccles. That is right.
Mr. Cross. And when I employ people that increases purchasing
power.
Governor E ccles. That is right.
Mr. Cross. And when they have that increased purchasing power
they are going to buy, and I will continue to produce, but if you let
matters run wide open and I keep expanding, then there is bound
to be a reaction, and I throw a lot of people out of employment and
I destroy purchasing power.
Don’t you think it is better to have a stable purchasing power in
relation to a wholesale price level?
Governor E ccles. This is an interesting chart here that Dr. Goldenweiser gives me. It shows that the price level in England was
very stable from 1931 to 1934, but the amount of their unemployment
fluctuated considerably.
Mr. Cross. Yes; I have seen some of the charts.
Governor E ccles. But I mean----Mr. Cross. But, now, Governor, in reference to England, did you
read the book by Sir Charles Morgan Webb, in which he in substance
says that they regulated gold from 1823 on down to 1914 because they
were the only creditor nation of the world and they were carrying
the commerce of the world, and that it benefited them as a creditor
nation? Did you read that work?
Governor E ccles. N o ; I didn't, I t seems to me that the Federal
Reserve System can control to quite a large extent, not entirely, how
ever, the volume of money, by its power over discount rates and its
open-market policy.
Ch an ge s in the volum e of money in the hands of the people, h ow
ever, depend also upon the w illin gn e ss o f people to borrow and
the w illin gn e ss of banks to lend.
Mr. Cross. Yes, Governor; but what I am trying to get at now
is to try to show you how confused the Federal Reserve Board has
been in the past. Now, for instance, here Dr. Miller testified in
1928, and he says:
It is my opinion that the Federal Reserve mind at the present time is more
perplexed than it has been since the troublesome period of 1920 to 1924; that
it is in a state of mental confusion.
Why was that and what is there to keep it from remaining in a
state of mental confusion unless you have some goal to go to?
Governor E ccles. I think there should be a goal, but I don’t think
the question of prices----Mr. Cross. Well, name the goal you think is the proper one.
127297— 35 ------ 16
238
BANKING ACT OF 1 9 3 5
Governor E c c l e s . The goal is stable business conditions and full
employment.
Mr."C ross. All right, they had that all the time, didn’t they? I t
is just the same as the goal in the law now, isn’t it?
Governor E ccles. In the existing law the Federal Reserve Board
is not charged with the responsibility of creating a condition either
of stable prices or of full employment.
As I understand it, the responsibility of the Federal Reserve Sys
tem is to supply the credit needs of commerce, agriculture, and
industry.
Mr. Cross. All right, now let us go back to Congress. It is the
duty of Congress under the Constitution to furnish money, adequate
money, a medium of exchange, and regulate its value.
Governor E ccles. That is right.
Mr. Cross. H ow can Congress regulate that value unless it fixes
the price level?
Governor E ccles. I don’t say that prices are not part of the con
sideration. I think that every effort should be made to maintain
stable prices, but stable prices should not be the sole and paramount
objective, so that the Board would be directed to maintain stable
prices and not to consider total production and employment at all.
Mr. Cross. Yes; but you take the wholesale index of prices in
the market, which are arrived at by taking the mean price, where
some may go way up and some way below, but you hold a mean level
of prices. Now, if you don’t use that, you have got no measure of
value, have you ? Unless you use that, what other measure of value
could you figure for money ?
Governor E ccles. I am not sure that I can say. Gold, of course,
hasn’t proven to be a very satisfactory measure of value and the buy
ing power of money, measured in goods and services, of course, is
the value that the people are interested in.
Mr. Cross. Governor, I want to ask you this question, You don't
think we are helpless in the midst of plenty to feed and clothe, with
man power to produce—that we are helpless and these things come
on and then there is no help for it? Do you think that?
Governor E c c l e s . I stated the other day that I don’t believe that
any monetary policy alone will result in stable business. Simply
dealing with the volume of money, so far as it is possible to influ
ence or affect the volume of money through the controls that the
Reserve System has. cannot give you full prosperity. This is be
cause distribution of wealth production----Mr. Cross. Yes.
Governor E ccles. Is a very important element, and that gets back
to the problem of the tax system. The banking system can influence
the volume of money----Mr. Cross. Now, Governor, I understand that.
Governor E ccles. And the tax system, it seems to me, must in
fluence the velocity of money.
Mr. Cross. Well, now, Governor, let me get this. Of course. I
don’t think the tax system is so important that we are ever going
to get anywhere with it except to stop enormous fortunes by higher
BANKING ACT OF 1 9 3 5
239
taxes in the upper brakets. But now suppose you have got a small
community such as they had in the early days, when people would
come in to the fairs and exchange their products, their things; and
they followed the law of supply and demand perfectly, did they not ?
Governor E ccles. Yes.
Mr. Cross. N ow, the dollar or the monetary unit of a country
is supposed to reflect as a mirror the workings in that country of
the law of supply and demand for things; so if the country has
plenty of everything, if that law of supply and demand were fol
lowed just like they would come together and exchange what they
have, everybody would have plenty and would not be hungry and
distressed and ruined and broke. Now, don't you think the mon
etary unit ought to perform that function ?
Governor E ccles. The monetary unit ought to : but the monetary
unit can’t be made to perform that function simply through mon
etary policy. Placing the means of payment in the hands of people
who will spend is the thing that determines employment, business
activity, and price levels.
The ownership of the money is an important element in the use
of the means of payment. I f there are corporations, owning large
unused balances of funds, which cannot find a profitable place to
use or invest those funds, those funds don't go into circulation.
Mr. Cross. That is true, but if you had prices at the point where
they could invest and make some profits----Governor E ccles. But the----Mr. Cross (continuing). They would invest.
Governor E ccles. The prices would not induce them to invest.
I t is the profit opportunity that induces them to invest, and where
you already have a great unutilized capacity because the people as
a whole lack the buying power to purchase the goods produced, there
is no incentive to invest in further capital goods.
Mr. Cross. Governor, don’t you think the whole theory is that
we are helpless—and so far as the Federal Board is concerned we
needn’t look to that for relief, not for much relief—th at there are
all kinds of things out yonder that you can’t reach and touch, and
therefore we just have to follow along?
Governor E ccles. N o; I think that the monetary factor is 1 of
the 3— of the 3 important control measures of our capitalistic sys
-1
tem. The volume of money can largely be controlled through a
banking system.
1 he distribution of funds which is a factor in their velocity must
be controlled through the income-tax system, and employment must
be regulated through a public-works system.
When the volume of money is adequate to support a certain price
level for a given volume of production, and unemployment begins
to develop, and as a result prices begin to decline, it is likely to be
beCciuse productive facilities are out of balance with the consumers’
buying power, and velocity of money is declining.
Mr. Cross. Yes; but you don’t want to let it <ret to where that
happens. If you are going to let contractions take place, and as a
result all over the country where bonds have been issued for school
240
BANKING ACT OF 1 9 3 5
districts, road districts, municipalities—and you sav that the dollar
today or next month will double in purchasing power, so that that
individual must pay twice in real value because there is no value in
money so far as keeping and clothing is concerned—he must pay
twice as much in real value to pay the taxes and to pay the interest
on his mortgage if he has one—it becomes an impossibility. It
means a general liquidation and discontent and trouble and threat
ened bankruptcy.
Governor E ccles. I t does, if you let the national income decline.
The purpose of our tax system and the public-works system is to
keep up production when private business fails to keep up full em
ployment. The loss to the Nation, when the national income declines
through unemployment, is a loss we cannot afford.
Mr. Cross. And your idea is to do it through public works, public
enterprises?
Governor E ccles. That is right.
Mr. C r o ss . Each time you d o t h a t you borrow a good many bil
lions of dollars, don’t you?
Governor E ccles. Y ou wouldn’t have very much to do if you did
it at the r ght time, before you allowed deflation to proceed very
far. The amount that it would require at the beginning----Mr. Cross. That is, more or less, just a guess, isn’t it? If you
keep on running these billions up, who is paying that tax but the
public? And if you get 50 billions and a hundred billions, the
fellow who pays it has got to collect it back off the people. There
are bonds which they have got to collect off the people in taxes.
Governor E ccles. Who pays the difference between the 85 billion
of national income and the less than 50 billions of national income—
who pa vs that 35 billions?
Mr. C ross. The fellow who has got the loans on his land. The
people who have the loans foreclose the mortgages and get the land,
and they keep it until they can resell it to these fellows again, those
who can buy. They have to take that loss. But my idea is to get
a stable purchasing power in your monetary unit, so that it can’t
happen that if a man ^oes out and puts up a factory and has to
borrow money, and he Dorrows this money and builds the factorv
and expands it, and the first thing he knows the purchasing power
of that dollar doubles and trebles, and he is sunk.
Governor E ccles. Y ou may fix a stable purchasing power as a
requirement of the monetary policy of the Federal Reserve Board
or any other Board, but I don’t know what methods they could use*
to maintain or to reach that objective.
Mr. Cross. Don’t you think it could be kept by usino- the redis
count rates? In other words, using the reserves—the “reserves in
the banks—couldn’t you use the open-market operations*
Governor E ccles. N o monetary policy alone bv simply attempting
to regulate the volume of money will maintain a stable* national in
come or----Mr Cross. I don’t say “ volume” alone. I mean volume and
velocity. Can’t you control lt through the rates, loaning of the
reserves, and rediscount rates and open-market operations-wouldn’t
that have an effect on the velocity as well as the volume?
BANKING ACT OF 19 3 5
241
Governor E c c l e s . T o the extent that a reduction of rates and an
increase in the supply of money would tend to stimulate velocity;
yes. But so long as there is an inequitable distribution of wealth
production which results in excessive saving we will have depres
sions.
Only by pulling back that part of our savings that we cannot
profitably use in new capital goods and using those funds to give
employment to those who become unemployed can we maintain a
balance.
The Government must be the compensatory agent in our economy
through the money system, through the tax system, and through a
public Avorks system.
Mr. Reilly. I think the committee will have to go now. The com
mittee Avill adjourn noA .
V
(Whereupon, at 11:25 a. m., an adjournment was taken until
Wednesday, Mar. 13, 1935, at 10:30 a. m.)
1
B A N K IN G
A C T O F 1935
WEDNESDAY, MARCH 13, 1935
H o u s e o f R e p r e s e n t a t iv e s ,
C o m m it t e e o n B a n k i n g a n d C u r r e n c y ,
W ashington, D. G.
The committee met at 10: 30 a. m., Hon. Henry B. Steagall (chair
man) presiding.
The C h a i r m a n . The committee will come to order. Mr. Cross,
you may continue with your examination of Governor Eccles.
STATEMENT OF MARRINER S. ECCLES, GOVERNOR FEDERAL
RESERVE BOARD— Continued
Mr. Cross. Governor, you may have thought, from my questions,
that I am in a critical mood. 1 want to say I think this bill pro
vides for a tremendous improvement over what we have, and I think
you are a big improvement over governors we have had heretofore;
so do not think I am criticizing you.
Check money, for all practical purposes, performs the functions
of legal tender money, does it not*
Governor E ccles. Yes; it does.
Mr. Cross. The easier credit is, the greater the volume of credit,
and the greater the number of check dollars, the less the dollar will
buy; is not that so? When credit is easy there are plenty of check
dollars, check money, and that means prices are up, does it not, and
therefore the purchasing power of the dollar is down, is it not?
Governor E ccles. That would be expected to follow. The easy
money----Mr. Cross (interposing). That is almost axiomatic, is it not?
Governor E c c l e s . Easy money, through the banking system, b y
creating low interest rates----Mr. C ro ss (interposing). That is a fact, is it not, that it is axio
matic; that when credit is easy there is a large volume of credit, and
that inevitably means that times are good and prices are up, and
profits are up, and people are borrowing, and there is a supply of
check money like there was in 1928 and 1929 (
Governor E ccles. Of course, your general prices go up when means
of payment in the hands of people who will spend increase faster
than production.
Mr. Cross. I s the proposition I put to vou true or not?
Governor E ccles. I think that is generally the case, but it cer
tainly is not always so. Witness the present situation.
Mr. Cross. Then the tighter credit is, the less credit there is, the
fewer number of check dollars there are; that is true, is it not?
243
t
244
BANKING ACT OF 1 9 3 5
Governor E ccles. Yes; I think that is true.
Mr. C ross. That being the case, then the more the dollar will buy,
will it not ?
In other words, as credit dries up, check money, the purchasing
power of the dollar increases, does it not ?
Governor E ccles. Not always.
Mr. Cross. Now, Governor, do you not think the velocity theory
o f money is more or less a meaningless fiction ?
Governor E ccles. No.
Mr. C ross. N ow, along in 1928 and 1929 we had a situation where
our credit money, our check money did about 90 percent of the
traffic duty o f the country, did it not?
Governor E ccles. I think those were the estimated figures. I do
not know how accurate they are, but that would be approximately
correct.
Mr. C ross. That is what they put it at, about 90 percent ?
Governor E ccles. Yes.
Mr. Cross. Now, if all of that check money had vanished or dried
up, 90 percent of the money had dried up, the traffic of the country
had vanished, had it not?
Governor E ccles. U nless the deposits were drawn out in currency.
Mr. C ross. If you have 5y2 billion in currency, we will say, and
we are talking about the check part of it, and practically 90 percent
of it was gone, then you had left your legal-tender money, which was
about 5 billion, we will say?
Governor E ccles. Yes.
Mr. Cross. N ow, if nine-tenths of that money was check money;
that is, 90 percent, and you had 45 billions in check and 5 billions in
legal-tender money, and the 45 billion had vanished, it is not to be
assumed that it did not all go out ?
Governor E ccles. I do not know that I understand your point.
Mr. Cross. If your check money had vanished like the mist—it is
a kind of phatom money, but it does the work of the country in all
its functions. Say that 90 percent of the traffic was done through
check money, and we will say that is nine-tenths of the total, and
one-tenth of the business was done, we will say, with legal-tender
money, there being nine times as much check money as legal-tender
money, and the check money disappears, and you have only left your
legal-tender money, of course, then 45 billion in check money would
have vanished, would it not?
Governor E ccles. If it disappeared, that would be the case.
Mr. C ross. If your credit dried up like the mist, then it would
disappear, would it not ?
Governor E ccles. Yes.
Mr. C ross. And if you then had 5 billion in legal-tender money,
and then that 5 billion had kept on perform ing the duty of trans
ferring the property and the goods of the country at the same speed
at which it was traveling when you had your 45 billion o f credit
m°ney, it would have been doing only one-tenth of the amount o f
traffic duty that was being done by the whole amount of credit money
plus the currency or legal-tender money, would it not ?
Governor E ccles. If the total amount of money is reduced by nine-
tenths, then that one-tenth or the remaining monev would be
doing-----
BANKING ACT OF 1 9 3 5
245
Mr. Cross (interposing). Traveling as fast as it always had been,
it would have been one-tenth, would it not ?
Governor E ccles. I do not know whether it would have been
traveling that fast.
Mr. Cross. Assuming that it would be traveling as fast as it was
in 1928 and 1929, with the 45 billion gone, it was doing only onetenth of the work; if it was doing the same amount of work after
the crash as before the crash, is not that true?
Governor E ccles. If the velocity of the funds does not change, if
the volume is reduced nine times, of course, your volume times
your velocity would be one-tenth of what it was.
Mr. Cross. Surely; that is simple mathematics.
Governor E ccles. Yes.
Mr. Cross. Now, is it not a fact that in figuring velocity you
give credit to the work being done by the credit money when times
are good, and the legal-tender money, in fact, is not going any
faster than afterward, except that the credit money vanishes and
you no longer can figure what the credit money is doing to the legaltender money ? In other words, you give credit to the legal-tender
money, and when times are good you say the currency amounted
to 5 billions, and it was going at such and such a speed; but you
are giving credit to the legal-tender money for all that is being done
by 45 billions of credit money, are you not? Is not that the way you
count velocity?
Governor E ccles. No ; it is not,
Mr. Cross. H ow do you count it? You cannot tell how often it
swaps hands.
Governor E ccles. The national income is the number of times
that your volume of money----Mr. Cross. Of what money?
Governor E ccles. All money.
Mr. Cross. All right.
Governor E ccles. There is no distinction so far as the working
of the money is concerned between currency and checking accounts;
they both perform the same function in the money system. I men
tioned yesterday the difference in the velocity figures.
Mr. Cross. Let me get this concretely, if I can, so I can under
stand it.
Take, for instance, the situation in 1929. At what velocity do
you say money was traveling at that time?
Governor Eccles. W hat would be termed as the income velocity;
^
1SY re^ ti° nship of money to the national income----the
Mr. ( ross (in terposin g). W hat was the velocity of money at that
time , bav we had 50 billion, counting the credit money and the
, .y..-ten d er money, what was the velocity at which all of the 50
billion was traveling?
Governor E ccles. We had, in 1929, 26.4 billions----Mr. Cross (interposing). Of all money?
Governor E ccles. Of all money.
Mr. Cross. Checking----Governor E ccles (interposing). And currency; that is right, lh a t
eliminates, of course, your interbank deposits. *These are the figures
I got from the Federal Reserve statistical division.
Mr. Goldsborougii. That does not include savings money?
246
BANKING ACT OF 1 9 3 5
Governor E ccles. Xo ; you cannot include savings money any more
than building and loan money.
Mr. Cross. The checking accounts, plus the legal tender, amounted
to 26 billions?
Governor E ccles. That is right. The national income was 82 bil
lions, according to the Department of Commerce figures, or, to be
exact, 82 billion 300 million.
Mr. Cross. What do you understand as the national income?
Governor E ccles. I t represents, as I understand it, the income
received in the production of all goods and services.
Mr. Cross. What do you count as goods ?
Governor E ccles. It would be capital goods as well as perishable
goods, buildings, factories----Mr. Cross (interposing). And lands?
Governor E ccles. Equipment; no land.
Mr. Cross. Just buildings?
Governor E ccles. Buildings—factories and equipment; all kinds
of goods. The total volume of bank debits was estimated to be
between 1,000 and 1,200 billion. In other words, the actual turn
over of money was about 40 times a year, I think.
Mr. Cross. Governor, nowT you say capital goods, and then you
say the income was 80 billion. Where do you get the income at
80 billion ? What do you mean by that ?
Governor E ccles. The money value.
Mr. Cross. Of all capital goods, buildings, and so forth?
Governor E ccles. The money value of what was produced in any
particular 3rear. If in the year 1929 the value of all foods, clothing,
and capital equipment of all kinds produced in that year was a cer
tain amount, that would be income, after the elimination of dupli
cations—for instance, if you start to figure the value of wheat that
is sold to the miller, then the miller sells to the wholesaler and the
wholesaler sells to the retailer. When you take the total check trans
actions, they run between a thousand billion and twelve hundred
billion, and it takes into account all of those relationships. But
the national income only takes into account what is produced, and
by considering it once, and not in the various transactions through
the methods of production and distribution. That is the national
income.
Mr. Cross. I am getting at the question of velocity. You sav you
had 26 billion of all kinds of money. Upon what basis do vou
figure the velocity of the 26 billion ?
Governor E ccles. With that amount of money, with 26 billion
we had a national income of 82 billion, 300 million; or we had there’
what is termed an income velocity of 3.12. In other words, the total
volume of our currency and checking account went into the total
national income that year 3.12 times.
Xow, we come down to 1933, when the national income was 46
billion, 800 million, and our money had diminished from ?6 billion
400 million to 19 billion, 900 million.
^
Mr. Goldsborough. When was that, 1933?
Governor E ccles. Yes.
Mr. Goldsborough. The other year was 19281
Governor Eccles. The other year was 1929. There was very little
difference between the 1928 and 1929 figures. And with the income
BANKING ACT OF 19 3 5
247
of 46 billions, 800 millions and the deposits and currency in exist
ence during that year of 19 billion 900 million, the income velocity
was 2.35. We have not the figures for 1934, but that is expected to
show a decrease. We know that the volume of deposit currency has
been very substantially increased as the result of three factors—the
budgetary deficit, gold imports, and the reduction of currency in
circulation as the result of the dehoarding.
Mr. Cross. Your gold is all stabilized, is it not?
Governor E ccles. That is right. But the gold comes in from
abroad to take care of the unfavorable trade balances of Europe and
the rest of the world. The only way they have been able to take
care of their unfavorable trade balances is to pay us in gold. There
has been about 1 billion 300 million of gold coming into the country
in 1934. Those three factors increase your deposits. There would
have been a greater increase than that had there not been a shrinkage
of loans and investments of banks, outside of Government bonds.
As I recall the figure, it was around 6 or 7 hundred million dollars.
The result was an increase in deposits and currency by about $4,000,000,000, as I recall the figures.
Mr. Cross. You say an increase in currency?
Governor E ccles. In deposits. I do not think there was any in
crease in currency.
Mr. Cross. A s to this billion dollars of gold that comes in here, do
you mean to say that would make an increase of a billion dollars of
back-bone or pocket money?
Governor E ccles. An increase in bank deposits in that amount;
yes, sir.
Mr. Goldsborough. Y ou said the amount in 1933 was forty-six bil
lion, eight hundred million. Have you the amount in 1934?
Governor E ccles. No; I have not. I t is estimated as over fifty
billion, but the ratio of the national income to deposit money will
show up considerably less than it was in 1933. showing that with the
increase in the volume of money there has been a decrease in the
velocity of money; that the increased volume has not increased the
national income in proportion.
Mr. Cross. W hat is the increase for 1934 over 1933?
Governor E ccles. I have not the exact figures.
Mr. Cross. In the volume of money?
Governor E ccles. It would just be an estimate. But I think it is
around four billions. That is the increase of 1934 over 1933.
Mr. Cross. What is the difference between the check money of
1929 and the check money of 1933 ?
Governor E ccles. I do not know just what you mean. io u mean
in amount, the actual amount of check money in 1929 as compare
with the check money in 1933?
]Vfr C r o ss . Y"gs*
Governor E ccles. There was a difference of 7% billion between
The C h a i r m a n . Let me ask you a question right there, to make
sure I understand it. Do you mean to give the total figures for the
entire country? Are your figures predicated on calculations tl a
embrace all of our banks?
Governor E ccles. Oh, yes.
@FedFRASER