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Operation of the National and Federal Reserve
Banking Systems

HEARINGS
BEFORE A

SUBCOMMITTEE OF THE
COMMITTEE ON BANKING AND CURRENCY
UNITED STATES SENATE
SEVENTY-FIRST CONGRESS
THIRD SESSION
PURSUANT TO

S. Res. 71
A RESOLUTION TO MAKE A COMPLETE SURVEY OF THE
NATIONAL AND FEDERAL RESERVE
BANKING SYSTEMS

PART 1
JANUARY 19, 20, 22, 23, 26, 29, AND 30, 1931

Printed for the use of the Committee on Banking and Currency

34718




UNITED STATES
GOVERNMENT PRINTING OFFICE
WASHINGTON : 1931

COMMITTEE ON BANKING AND CURRENCY
PETER NORRECK, South Dakota, Chairman
LAWRENCE C. PHIPPS, Colorado.
DUNCAN U. FLETCHER, Florida.
SMITH W. BROOKHART, Iowa.
CARTER GLASS, Virginia.
PHILLIPS LEE GOLDSFOROUGH, Maryland. ROBERT F. WAGNER, New York.
JOHN G. TOWNSEND, JR., Delaware.
ALBEN W. BARKLEY, Kentucky.
FREDERIC C. WALCOTT, Connecticut.
TOM CONNALLY, Texas.
JOHN J. BLAINE, Wisconsin.
WILLIAM E. BROCK, Tennessee.
ROBERT D. CAREY, Wyoming.
ROBERT J. BULKLEY, Ohio.
JAMES J. DAVIS, Pennsylvania.
CAMERON MORRISON, North Carolina.
JULIAN W., BLOUNT, Clerk

SUBCOMMITTEE ON SENATE RESOLUTION

71

CARTER GLASS, Virginia, Chairman
PETER NORBECK, South Dakota.
ROBERT J. BULKLEY, Ohio.
JOHN G. TOWNSEND, JB., Delaware.
FREDERIC C. WALCOTT, Connecticut.

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CONTENTS
Page

Statement of—
Broderick, Hon. John A
Case, J. H
Davison, George W
Hamlin, Hon. Charles S
Harrison, George L
Miller, A. C
Piatt, Edmund
Pole, Hon. J. W
Trafford, B. W
Wiggin, Albert H




271
106
251
163
31, 61,90
123
209
2
227
183

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OPERATION OF THE NATIONAL AND FEDEEAL EE8EEVE
BANKING SYSTEMS
MONDAY, JANUARY 19, 1931
UNITED STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY,

Washington, D. C.
The subcommittee met, pursuant to call of the chairman at the
room of the Committee on Banking and Currency, Senate Office
Building, at 10.30 o'clock a. m., Senator Carter Glass (chairman)
presiding.
Present: Senators Norbeck, Townsend, Walcott, and Bulkley; also
present, Senators Wagner and Brookhart, and H . P . Willis, special
counsel of the committee.
The CHAIRMAN. The committee will come to order. As a matter
for the record, I may state that this subcommittee is proceeding
under Senate Resolution 71, which I will hand to the stenographer
to be inserted in the record of the proceedings.
As will be noted, it gives the committee complete authority to
inquire into the banking situation of the country and the committee
is authorized and directed to inquire specifically into the administration of the Federal Reserve and National banking systems with
respect to the use of their facilities for trading in and carrying
speculative securities; the extent of call loans to brokers by member
banks for such purposes; the effect on the systems of the formation
of investment and security trusts; the desirability of chain banking;
the development of branch banking as a part of the national system,
together with ^ny related problems which the committee may think
it important to investigate.
(The resolution in full is as follows:)
RESOLUTION

Resolved, That in order to provide for a more effective operation of the
national and Federal reserve banking systems of the country the Committee
on Banking and Currency of the Senate, or a duly authorized subcommittee
thereof, be, and is hereby, empowered and directed to make a complete survey
of the systems and a full compilation of the essential facts and to report the
result of its findings as soon as practicable, together with such recommendations for legislation as the committee deems advisable. The inquiry thus
authorized and directed is to comprehend specifically the administration of
these banking systems with respect to the use of their facilities for trading
in and carrying speculative securities; the extent of call loans to brokers
by member banks for such purposes; the effect on the systems of the formation of investment and security trusts; the desirability of chain banking; the
development of branch banking as a part of the national system, together with
any related problems which the committee may think it important to investigate.




1

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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

For the purpose of this resolution the committee, or any duly authorized
subcommittee thereof, is authorized to hold hearings, to sit and act at such
times and places during the sessions and recesses of the Seventy-first and
succeeding Congresses until the final report is submitted, to employ such clerical
and other assistants, to require by subpoena or otherwise the attendance of
such witnesses and the production of such books, papers, and documents, to
administer such oaths, and to take such testimony, and make such expenditures
as it deems advisable. The cost of stenographic services to report such hearings shall not be in excess of 25 cents per hundred words. The expenses of
the committee, which shall not exceed $15,000, shall be paid from the contingent fund of the Senate upon vouchers approved by the chairman.

The CHAIRMAN. I may state that, as a matter of procedure, it had
been arranged that we should begin at the top of the Federal reserve
system and first hear Mr. Eugene Meyer, who has been nominated
and reported to the Senate for membership on the Federal Reserve
Board, and is now acting as governor of the Federal Reserve Board;
but, upon consultation, it is the consensus of opinion of the committee that for obvious reasons we would better defer the examination of Mr. Meyer to a later date and begin the hearings by asking
the Comptroller of the Currency, Mr. Pole, to let us hear from him
with a general statement, if you please, Mr. Comptroller.
Mr. POLE. Yes, sir.
The CHAIRMAN. With

a general statement of the present situation
of banking matters and what, if any, suggestions you have to offer
for the modification of either the Federal reserve act or of the
national banking act to meet the situation, and to prevent, if it
may be done by legislation, a recurrence of what some of us regard
as a very perilous situation at this time.
We shall be glad to have you proceed in your own way, and reserve
to ourselves the privilege of propounding questions when you shall
have made your statement.
STATEMENT OF HON. J. W. POLE, COMPTROLLEE OF THE CURRENCY
Mr. POLE. Mr. Chairman, I have prepared a brief statement which
I should like to give to the committee.
The CHAIRMAN. Very well.
Mr. POLE. Mr. Chairman, I have heretofore, in my annual report
to Congress for 1929, in my appearance before the House Committee
on Banking and Currency and in my annual report to Congress for
the year 1930, made statements and recommendations with reference
to new banking legislation. These documents are available to your
committee and I shall not at this time engage in a repetition other
than to attempt briefly to summarize the position I have taken.
This can be stated under two heads: First, branch banking emanating from commercial centers should be permitted gradually to be
established in the rural communities in order to give to them the
benefits of the best type of banking we have developed, and, second,
that the question is national in scope and Congress alone has the
power to make effective a policy which will put this type of branch
banking into effect.
I have already presented to Congress considerable information
on bank failures in the agricultural communities and I have cited as
a fundamental cause for these failures the great changes which have
occurred, economic and social, within the past quarter of a century,




NATIONAL AND FEDERAL. RESERVE BANKING SYSTEMS

3

which make it extremely difficult, if not impossible, for a unit bank
in a small agricultural community to meet the fundamental requirement of banking, namely, a diversification in its business. Good
management is of little avail in the absence of a sufficient volume
and diversification of local business.
Much of the business which once went to the local bank now goes
to the large bank in the nearest city. The local bank does not have
access to the most important business originating in its local territory. This is true both of corporate enterprises and of individual
persons of considerable means. While many small country banks
are still strong and may continue in operation for many years to
come, I see no future for this type of banking as a system of banking
and in my opinion, it is unjust to the rural communities to subject
them to the hazards of a banking policy which permits this condition
to exist. More than 6,000 bank failures, nearly all in the agricultural communities, during the past 10 years is sufficient to indicate
the existence of some fundamental adverse condition.
On the other hand, we have developed in the large commercial
centers a type of banking which is fundamentally strong and efficient. They hold the bulk of the banking resources of the country
and they 4are the real support of the Federal reserve system. They
have not only developed a wide diversification of banking business
within the cities in which they are located but they have an active
business in the entire geographical area in the rural communities
within the circumference of the trade zone or trade influence of such
a city. I t is for this reason that I have recommended that banks of
this type be authorized to establish branches within the regional
trade area of the city in which they are situated. Many inhabitants
of rural communities are now dealing directly with these banks or
with branches of them but this is a cause of inconvenience. Would
it not be a sounder policy to permit the best type of banks we have
to establish branches in the surrounding local communities in order
that these outlying populations may enjoy the same safety and the
same variety of banking facilities which they could obtain by making
a journey to the city? Under this theory these branches would no
doubt be established through business negotiations between the local
bank and the city bank through the ordinary processes of merger
or purchase.
I t is recognized that Congress can enlarge the charter powers only
of the national banks. I n the present situation, it seems to me that
a positive declaration of a national policy for the further extension
of branch banking is essential. I have, therefore, predicated my
recommendations for trade area branch banking upon the theory
that it is necessary to disregard State boundary lines with respect
to the trade areas of many cities just as it was necessary to disregard State boundary lines in many cases when the Federal reserve
districts were established. I see no relief to be gained from branch
banking for the rural communities unless Congress is willing to
permit the national banks in the commercial centers to establish
branches in the trade area of the city, notwithstanding the fact that
such trade areas of some cities may embrace territory in more than
one State and that the States in question have no similar branch
banking laws. Congress could not, of course, give to the large city




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

State banks and trust companies in commercial centers a similar
authority to establish branches, but a way would be open for such
banks to convert into national banks for the purpose of gaining
these branch banking privileges if it carried with it an operating
advantage sufficient to justify such action. Many national banks
have taken out State charters for the reason that the State law
gave them operating advantages of much less importance over the
national law.
The year 1930 has been one of great economic depression. I t has
had its effect upon the city banks, but not to any serious extent.
There have been a few failures of city banks of considerable size,
but these may be regarded as exceptional. On the other hand, the
failures of small country banks have been continuous throughout
the postwar period. The failure of a large city bank in every case
may be traced to some specific abnormal situation, whereas in the
case of country bank failures there is evidence of a general breakdown in that system of banking, which calls for positive remedial
action.
May I take this occasion to offer to your committee the full cooperation of my office with respect to any information which it may
possess or be able to obtain.
' *
The CHAIRMAN. Mr. Comptroller, to begin at the beginning, it has
been periodically suggested that the office of the Comptroller of
the Currency be abolished and its functions transferred to the Federal Keserve Board, and the reason given for such a suggestion is
that there is a large duplication of functions. Do you concur in
that belief that there is a large duplication of functions ?
Mr. POLE. I do not see, Mr. Chairman, that there is any duplication of functions. If the comptroller's office were attached to the
Federal Reserve Board, they would necessarily have to designate
somebody to take charge of the comptroller's duties, and while the
Federal Reserve Board has the right, and does make examinations
of banks from time to time, I think that the board is generally perfectly willing to rely upon the reports of the comptroller's office and
indeed of the State superintendents of banks, and where they are not
they have the right to make their own examinations. Moreover, the
Federal Reserve Board is a deliberative body, whereas the functions
of the comptroller are primarily executive.
The CHAIRMAN. Right upon that point: Can you tell the committee what, if anything, is the matter with the examination system of the comptroller's office or/and of the Federal Reserve Board,
and have you any suggestions to make to the committee with respect to a modification of either the Federal reserve act or the
national bank act concerning bank examinations ?
Mr. POLE. The examinations of the comptroller's office, as time
has gone on, have gradually been improved until to-day I think
they are about as complete as can be made. The one weakness,
perhaps, is the fact that notwithstanding an examination may develop certain practices in banks which are objectionable, we have
very little beyond moral suasion to enable us to correct those conditions except for direct violations of law, as distinguished from
bad practices which may eventually bring the bank into trouble.
But there are two things: I n the case of violation of law, we may




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

5

request the Attorney General to bring suit for forfeiture of charter.
However, in most instances, the punishment is out of all proportion
to the offense. I n cases of bad practices, we can put the banks on the
list for frequent examinations—examine them as frequently as we
feel necessary—and usually that is a question of making bad matters
worse. So that we have often thought that under a proper arrangement, if the comptroller's office had the right to recommend to a
board such as the Secretary of the Treasury and the Comptroller
of the Currency and the governor of the Federal reserve bank in
the district in which the bank might be located or, in fact, the Federal Reserve Board, for that matter—has the right to remove officers of the bank, I doubt whether it would be very necessary ever
to put that into practice. I think the mere fact it was on the statute
book would be a deterrent which would be very valuable and enable
us to be more effective in certain cases than we are now.
The CHAIRMAN. I had long labored under the impression that the
powers of the Comptroller of the Currency were rather autocratic
and he had a right to summon the board of directors of any national
bank and require the board to correct irregularities that might lead
to disaster.
Mr. POLE. He has the right, Mr. Chairman, to summon boards of
directors, which is very frequently done. But he has no power
beyond exacting from them a promise to do certain things which
might be necessary to improve the condition of the bank. But beyond that he has no power except to put that bank on the list for
frequent examinations, or, in cases of the violation of law, to bring
suit for forfeiture of charter through the office of the Attorney
General.
The CHAIRMAN. Well, would not the threat of repeated examination and of ultimate forfeiture of charter be very effective in correcting irregularities in a bank ?
Mr. POLE. I n many cases quite effective—in many cases quite effective. I n others, Mr. Chairman, where the board may be obdurate
or the bank may be under the domination of a single person, which
is very often the case, you can exact any sort of promise but performance is another thing.
The CHAIRMAN. Well, I am asking you these particular questions,
Mr. Comptroller, for the reason that since it has become known that
this subcommittee is to prosecute an inquiry into the banking situation, I have received numerous letters from various parts of the
country where there have been bank failures, asking to be told how
it could happen that in some cases within 60 days after national-bank
examiners reported a bank in solvent condition it would fail disastrously, and, to be specific, I have had many complaints from
Kentucky about a large bank failure in that State, saying that your
examiners had, at a quite recent date, reported the bank in a perfectly sound condition, and yet it failed and has created consternation
throughout that State.
Is there any remedy which you could propose for a thing of that
sort? Ought not your examiners have been able to determine
whether that bank was properly conducted and in a sound condition ?
Mr. POLE. Yes, sir; and did do so. I do not know what statements
you refer to, Mr. Chairman, but, of course, the only statement which




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

was made was the published statement of the bank's condition. As
far as any statement being made by our office or by the examiner in
the field, that, of course, is unthinkable with respect to any individual
bank.
This bank to which I am sure you refer was an extremely important bank. They had a very large number of deposits and a large
number of depositors, both individuals and banks, and the bank was
regarded as one of the very important banks of that whole part of
the country.
There is a great deal of information that I might file for the benefit
of this committee in connection with which I might not be able to
express myself now and which I shall be glad to do if you wish to
have me do so. But in a general way I will say that there was a
typical bank under the domination of a single arrogant person and
the condition of that bank was well known to our office.
The CHAIRMAN. What you would call a 1-man bank?
Mr. POLE. I t was a 1-man bank, Mr. Chairman. The condition
was well known to our office. The bank has been getting in bad
shape for a number of years, gradually getting worse, until some
action was taken which was effective in requiring a large number of
losses to be taken out of the bank.
Now, t h a t has been done over a period of years. The one salvation which we saw was that the bank was a tremendous earner. The
bank was earning a million dollars a year and a large p a r t of that
was, of course, being used to take out losses. The control of that bank
passed from the individuals to the Banco Kentucky Corporation,
a holding corporation, which corporation, in turn, invested a large
sum of money in an investment house or a real estate broker's firm—•
I do not know exactly what they would call themselves—which
failed, and the connection was so well known that a run started on
the bank to which you refer and it was so heavy that there seemed
to be nothing to do in order to conserve the resources of that bank
for the general creditors, but to close it, and it is easily possible—
may I add this, Mr. Chairman—that t h a t bank is not such a dismal
failure as seems, perhaps, to be in your mind.
The CHAIRMAN. Well, I know nothing of the details except that
these matters have repeatedly, in recent days, been brought to my
attention. But you state that the bank was badly managed and
conducting an irregular, if not an illicit, business over a period of
years. Of what effective use, then, is your examination system if
you are not authorized to correct irregularities of that kind ?
Mr. POLE. Of course, there was a case, it is true, where we did
force a great many corrections. We did correct them and the bank
was showing some improvement, because we were gradually getting
losses out of the bank, but what closed the bank, of course, was the
withdrawal of deposits occasioned by the failure of the company
referred to.
I t is our effort, always, to see what we can possibly do to keep a
bank from failing and we go to every length possible in order to
prevent the necessity of taking such a step, but in this particular
instance we did find it extremely difficult to get the officers and
directors to cooperate with us in cleaning the bank up anything like
as rapidly as it should.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

7

The CHAIRMAN. A S I understand it, your only suggestion for the
correction of a situation of this kind is that somebody—either the
Comptroller of the Currency, or some other official or body—be
given authority to remove officers of individual banks.
Mr. POLE. There is not any doubt but that if we had had authority to remove officers of that bank that that would have been
one oi the cases where it would have been employed.
Now, to elaborate a little bit more, Senator, as to why it is not
possible to bring more effective measures to play, I may say that
while, of course, the public is well aware of a bank failure—there
is not any doubt about that—it is not aware of the hundreds of
banks which are saved from failure by our office, and I will venture
to say that within the last five years as many as 500 banks have
bejen saved from failure through the activities of the comptroller's
office.
The CHAIRMAN. Mr. Comptroller, what do you conceive to be the
general cause of the numerous bank failures for the last five or six
years ?
Mr. POLE. Well, 90 per cent of the banks are in the small rural
communities. Economic changes have put those small communities
within easy distances of the larger commercial centers where the
banks are stronger and more efficient in every respect, and as a consequence of this ready access to these centers, the cream of the banking business has gone to those centers, which has had the effect of
reducing the opportunities of the small country banks to such an
extent that they find it difficult to earn a sufficient amount of money
to charge off their losses and to pay a reasonable dividend, and
neither can they offer anything like the facilities which the city
bank can offer, and with these opportunities removed, the bank is
not able to maintain itself.
The CHAIRMAN. YOU think that this may be partially corrected
by a system of branch banking?
Mr. POLE. I do, Mr. Chairman, and furthermore the fact that the
small bank has little or no opportunity of diversifying its investments is a fundamental condition.
Senator NORBECK. YOU say the cream has gone to the centers.
How does it come that the centers do not show the increase like,
for instance, the Twin Cities, Sioux Falls, Sioux City, and so forth ?
Mr. POLE. That is not a system of branch banking, Senator.
Senator NORBECK. But speaking of a general condition: You are
speaking of a general condition—the failure of the local bank in the
agricultural communities, which is due to the fact that the funds
have gravitated to the centers. However, you do not find it in the
centers. Where is it, then ?
Mr. POLE. Well, the business of the large banks of the Twin Cities
has grown very, very markedly, over a period of several years.
Senator NORBECK. If you include their consolidations in the country—not their own business—and take Sioux City (Sioux City is
one of the large cities in the Northwest), it shows a shrinkage in
deposits, and not a gain.
Mr. POLE. But Sioux City is a particular case.
Senator NORBECK. Well, all right.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. POLE. That is, Sioux City has been subject to criticism, as
a bank, for a great deal of the time, and people have, I think, generally understood there has been some trouble in Sioux City.
Senator NORBECK. Well, how much gain has there been, say in Des
Moines, if business has, as you say, gravitated to Des Moines ?
Mr. POLE. I am not prepared to give exact figures on these various
individual banks.
Senator NORBECK. Very well; I will withdraw the question.
Mr. POLE. If I may answer your first question. I say, under a
system of branch banking that the business of the Twin Cities has
grown tremendously, but that is not a branch-banking system. That
is a group-banking system. So, instead of embracing in their statements the statements of these various 150 banks which they have
allied with them those individual banks themselves would still publish their own statements and maintain their own identity.
Senator NORBECK. But they include in that statement the deposits
from the 150 country banks they control. But here, let us leave
that matter. Go on to the question of bank failures in rural communities. I think the comptroller is quite right when he says the
last 5 or 10 years has shown a large amount of them. Does that
necessarily mean it is due to the banking system ?
Mr. POLE. Aggravated, of course, by the local present conditions
of depression in farm prices, and so forth.
Senator NORBECK. NOW, you are getting down to the point—the
inability of the producer to pay, of course. Is it not a fact that, in
the decades preceding the last one, the banks in the agricultural
communities stood up better than in other places and you had less
bank failures in Iowa, for instance, and the agricultural communities
than in the industrial sections in the East? Why not take the 50year experience instead of only the last 5 or 6 years?
Mr. POLE. Well, of course, we have only gone back for 10 years,
Senator.
Senator NORBECK. Since the agricultural deflation the farmer does
not get a fair price for his product.
Mr. POLE. We are faced with entirely different conditions to-day
than we were 50 years ago, so we have felt that to go back for a
period of 10 years would ordinarily be sufficient to prove and
substantiate the statement that there is something wrong with the
agricultural communities from the' standpoint of banking, and the
principal thing is, I would say, that the bank is utterly unable to
diversify its investments. That is one of the outstanding things.
Senator NORBECK. Let me carry that a little further: The comptroller says that the chain banking system will grow out of the consolidation of other banks. Now, we have a system of chain banks
under the holding-company plan, and the comptroller is well aware
of the fact that a large number of them have been absorbed and
have gone into this form of chain banking.
Here is the question: Is it not a fact that the banks they have
absorbed are the banks of agricultural communities that have
weathered all this deflation and stood up in good shape ?
Mr. POLE. That is true in part.
Senator NORBECK. Because they have been very conservative
banks; have been hard-boiled and have stood up. Are not those the
banks that they have taken over into these chains ?



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

9

Mr. POLE. I n quite a number of cases; yes.
Senator NORBECK. The comptroller and I have talked this over
before. I do not want to go into those details now, because it borders on personalities; but is it not a fact that every single bank taken
over in South Dakota was a sound unit bank that weathered the
storm, and how can the chain bank make them better by the process
of taking them over ? Does that improve them ?
Mr. POLE. By no means were they all sound.
The CHAIRMAN. Mr. Comptroller, I do not understand that you
advocate chain banking.
Mr. POLE. Not at all; but the Senator's statement is not in accord
with our information—not only with our information but with our
actual knowledge. While it is true there have been a great many
banks which were quite good banks—the best in that whole section of
the country—which have been taken over by these groups, at the
same time the groups have come to the relief of many banks which
would not have weathered the storm without that relief.
Senator NORBECK. I n the same way that banks in the large cities
have come to the relief of their correspondent banks out in the
country. And that condition has existed for 50 years. Therefore
the chain part does not enter into it.
Mr. POLE. Of course, you understand I am not advocating chain
banking.
Senator NORBECK. I thought that was the thing you advocated.
Mr. POLE. N O . Perhaps you do not distinguish in your mind between chain, group, and branch banking.
Senator NORBECK. Well, they are all controlled from the center;
they are all alike in being controlled from the center.
Mr. POLE. Not with respect to group and chain banking. The
group-bank system is generally controlled from the center.
Senator NORBECK. And branch banks—are they not alike in being
controlled from the center?
Mr. POLE. Yes, there is central control.
Senator NORBECK. Well, I do not get the distinction.
The CHAIRMAN. There is a vast difference in responsibility between
branch banking and chain banking, is there not?
Mr. POLE. YOU put your finger on the very thing, then, Mr. Chairman. Branch banking would operate entirely differently with respect to the very thing you have in mind. Under a group-banking
system the members of the group, which are community banks, retain their local identity, have their own boards of directors, separate
officers, and operate independently, theoretically, but are more or less
managed from a head office, and necessarily have all the overhead
incident to an independent bank; whereas, if branch banking were
permitted, the parent bank could go out and throw all of its resources
and all of its facilities to the smallest hamlet, if you please.
Senator NORBECK. And could likewise draw the reserves from the
smallest hamlet.
Mr. POLE. Without doubt, but what is the history of it ? The history of it, as far as branch banking has been carried in this country,
particularly in California, is that the parent banks have thrown far
more of their funds to the small rural communities than they have
ever drawn from them.




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NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

Senator NORBECK. That is a California condition; if they had
foreseen that they probably would not have aquired all these
branches.
The CHAIRMAN. I S not that conspicuously true of the Canadian
system, Mr. Comptroller?
Mr. POLE. I do not think there is any doubt about it, Senator.
Senator NORBECK. I S the branch banking you advocate similar to
the Canadian system?
Mr. POLE. I t is similar, but not as comprehensive. I will say that.
My idea is that branch banking should develop gradually and that
it should develop from centers of importance, to the limits of what
I term the trade areas of those particular centers, so that I have no
idea of advocating, nor have I ever done so, a branch-banking system
which would comprehend the whole United States, which is the case
in Canada.
Senator NORBECK. NOW, then, I want to ask some more questions.
The comptroller speaks of 6,000 banks which have failed, mostly in
rural communities. Is that the statement?
Mr. POLE. I think that is a correct statement.
Senator NORBECK. Now much of that is rural communities and how
much not?
Mr. POLE. Ninety per cent rural communities.
Senator NORBECK. H O W would they compare, for instance—these
banks—with the other 10 per cent? Would the other 10 per cent,
taking into consideration their capital, resources, and deposits, represent even greater failures and involve more people in distress than
the 90 per cent of the small banks that failed?
Mr. POLE. N O , sir.
Senator NORBECK.

Is it not a fact that the scope of a $200,000,000
bank failure in New York involved as much loss as all the bank
failures in several agricultural States?
Mr. POLE. I think, of course, that is an extremely important
failure in New York.
Senator NORBECK. Well, the one in Philadelphia was not very
much different, was it ?
Mr. POLE. A S to whether or not the importance of that failure
would exceed that of 90 per cent of the rural failures is a very serious
question in my mind.
Senator NORBECK. Was it not fortunate indeed that bank did not
have hundreds of branches over the country ?
Mr. POLE. Under my recommended system, Senator, that bank
would not have had country branches.
Senator NORBECK. I S it not fortunate indeed that they were not
allowed to have branches outside of New York? As a matter of
fact, they had 50 or 60 there.
Mr. POLE. I think it was fortunate, Senator, but I am not advocating that that bank should ever have been permitted to
Senator NORBECK. But you are advocating a system that would
permit banks like that to have branches ?
Mr. POLE. I beg your pardon, Senator, not like that—unlike that.
Senator NORBECK. I want to clear up one more question, Mr. Chairman. The comptroller also made a statement that a large number of
national banks have taken out State charters. Am I correct in t h a t
being your statement?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

11

Mr. POLE. That is true, Senator.
Senator NORBECK. NOW then, the comptroller said nothing about
State banks that have taken out national charters? How do they
compare ?
Mr. POLE. Unfavorably.

Senator NORBECK. I n number, but speaking of capital.
of capital?

Speaking

Mr. POLE. Yes.
Senator NORBECK.

When we are told that 90 per cent of the bank
failures are in agricultural communities it sounds awful, but when
we learn that 10 per cent of the city bank failures involve about as
many dollars, as many people, and just as much disaster, then we
have a more correct picture of the wnole country.
The CHAIRMAN. A S a matter of fact, Mr. Comptroller, is it not
true that the amount written off by the large national banks is far
in excess of the losses of a larger number of the smaller banks?
That is just a repetition of the question that Senator Norbeck asked
and which I think you have answered.
Mr. POLE. As to whether or not the small proportion of large
banks was not larger in the matter of deposits ?
The CHAIRMAN. Yes; the losses written off of their books by the
larger banks in the large money centers, were not far in excess of
the losses of the larger number of small banks ?
Mr. POLE. Of course it is important, the losses in the banks in
the important centers, but it is true, of course, speaking from the
standpoint of national banks, that we have had only a relatively few
failures of national banks within the last 10 years. However, with
respect to question of losses a distinction must be made between
losses to depositors suffered through bank failures and losses written
off by going banks without affecting their solvency.
With respect to the latter class of losses figures are not available for
either country or city banks, but losses to depositors through the
failure of small country banks during the last 10 years are vastly in
excess of those to depositors in large city banks; in fact, the latter
will appear negligible by comparison.
The CHAIRMAN. W h a t do you estimate, approximately, as the
number of bank failures since 1920?
Mr. POLE. I n number?

The
Mr.
The

CHAIRMAN. Approximately the total number.
POLE. There have been, oh, say, roughly, 6,000.
CHAIRMAN. Of all banks?

Mr. POLE. Of all banks; yes, sir.

The CHAIRMAN. I believe you said that in your judgment the
examination by the comptroller's office has a large influence in stopping failures of banks.
Mr. POLE. A very large influence, Senator; so much so that I have
repared a statement showing precisely the number of banks which
ave been saved from failure through the activities of the comptroller's office over a period of five years, and the number is very
impressive.
The CHAIRMAN. Will you file that statement for the record?
Mr. POLE. I shall be very glad to.
The CHAIRMAN. I do not mean naming the banks, but as to the
number of banks, with their resources, and so forth.

E




12

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. POLE. I shall be glad to do that.
Senator TOWNSEND. Will that show the number of national banks
and State banks?
Mr. POLE. The national banks only.
Senator TOWNSEND. The 6,000 are national banks ?
Mr. POLE. N O , sir; all banks.

Senator TOWNSEND. What proportion are national banks and what
proportion are State banks ?
Mr. POLE. I t is less than 1,000 national banks.
Senator TOWNSEND. And 5,000 State banks?
Mr. POLE. Five thousand State banks; yes, sir. We might put the
exact number in the statement.
The number of banks saved through the efforts of this office and
the examiners in the field for a period of six years, exclusive of those
banks saved by voluntary contribution or by assessment in accordance
with law, is 559, with total capital of $64,411,800; total deposits of
$547,054,335; and total resources of $714,073,513.
The total number of bank suspensions in the United States, from
figures furnished by the Federal Eeserve Board, for the 10-year
period 1921-1930 was 6,968. Of this number, 797 were reopened,
leaving a balance of 6,171. Of this total of 6,171, 827 were national
banks and 230 were State member banks; 5,114 were nonmember
banks.
Bank suspensions,

1921-1930
All
banks

Suspended
Reopened

_.

__ _

Total closed

__

State
State
National member nonmembanks
banks ber banks

6,968
797

925
98

257
27

5,786
672

6,171

827

230

5,114

The CHAIRMAN. Very well. I n what measure have loans on securities—security loans—caused losses and shrinkage in bank assets?
Mr. POLE. I am satisfied that the shrinkage in securities, probably
more than the losses in security loans, would be an important figure.
I have not the figures with me. I had no idea what you would ask
me to-day.
The CHAIRMAN. The shrinkage of securities may or may not be an
inevitable aspect of security loans. What I am trying to arrive at
is to what extent security loans which, in large degree, may be called
frozen assets, are responsible for bank difficulties.
Mr. POLE. I think it can fairly be said that I know of no instance
where the shrinkage in value of collateral or bank investments as
far as national banks are concerned, has been responsible for any
bank failure or very, very few of them.
The CHAIRMAN. When a bank can not realize on its frozen assets,
what happens?
Mr. POLE. Those assets, Senator, are frequently not of the character which you describe.
The CHAIRMAN. Yes; but they frequently are.
Mr. POLE. T O an extent—yes; to an extent.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

13

The CHAIRMAN. Has the comptroller's office been disposed to discourage security loans by commercial banks—by national banks which
are supposed to be commercial banks?
Mr. POLE. If, in any way the amount of those security loans
would seem to be interfering with its ability to accommodate its
commercial customers; yes. Otherwise, I should say no.
The CHAIRMAN. I S it your opinion, Mr. Comptroller, that what
we call brokers' loans is a good form of banking for a commercial
bank?
Mr. POLE. I t has proved to be a very profitable form of commercial
banking.
The CHAIRMAN. But has it proved to be a very safe form ?
Mr. POLE. I know of no instance where a bank has lost anything
through its loans to brokers.
The CHAIRMAN. YOU think, then, it is a sound form of banking for
commercial banks, to put out their funds in call loans on the market ?
Mr. POLE. I should say, in answer to that, Senator, that if a bank
ha& accommodated its commercial customers, which is its first duty,
and attended to its local needs, that whatever surplus funds it has
may be so invested without criticism.
The CHAIRMAN. Does it not frequently happen that a commercial
bank fails to accommodate its commercial customers in order that it
may use the funds for call loans ?
Mr. POLE. I have no doubt there are cases of that.
The CHAIRMAN. Mr. Comptroller, do you think our reserve requirements at the present time are adequate ?
Mr. POLE. Are adequate?

The CHAIRMAN. Yes. You know they have been twice very materially reduced since the original passage of the Federal reserve banking act.
Mr. POLE. I feel, Mr. Chairman, that that is rather a broad question and which I think is now being studied by the Federal Reserve
Board, and I should like to reserve.my reply to that question until
perhaps I have had a little further opportunity of looking into it
and giving it further study.
The CHAIRMAN. Your examiners have had access to the business
of all of these national banks. Is it or is it not a fact that the
banks—some of them, if not a great many—have adopted the practice of manipulating their reserves and transferring from their demand-deposit accounts to their time-deposit accounts, in order t a
avail themselves of the 3 per cent reserve on time deposits?
Mr. POLE. There have been cases of that kind, Senator.
The CHAIRMAN. Have there not been many cases of that kind?
Mr. POLE. I do not know of many cases of that kind. I think y
as a general thing, banks calculate their reserves on a proper basis.
I think, particularly in the West, there have been efforts made to
create special deposits and perhaps use certain artifices whereby what
would be a proper demand deposit is converted into a time deposit.
I would not say that that is at all general, however, that matter
is being investigated with a view to correction, in connection with
the same investigation as to the reserves, by the Federal Reserve
Board.
The CHAIRMAN. Well, we want to investigate it also.
34718—31—PT 1




2

14

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
Mr. POLE. Yes.
The CHAIRMAN.

If that is not true, I am sure I am at a loss to
account for the enormous increase—relative increase—in time deposits as contrasted with demand deposits and upon inquiry, the
answer made to me has been—not public, because there has been no
public inquiry, but privately—that that has been a source of great
abuse in the banking system.
Do you think national banks should be permitted to take time
deposits ?
Mr. POLE. Yes, I think so, Senator.
The CHAIRMAN. YOU know, from time to time, Mr. Comptroller,
when we have had occasion to propose modifications of either the
Federal reserve act or the national banking act it has seemed to
me that instead of creating a national standard of sound banking
which the State systems might be induced to follow, we have introduced into the national banking system some, if not many, of the
abuses of the State systems, in order to enable national banks to
compete with State banks. Do you think that is a sound policy?
Mr. POLE. I think such a policy is positively unsound. I have upon
several occasions emphasized the need for a strong independent national policy in Federal banking legislation regardless of the status
of the 48 State banking codes. The State banks engaged in receiving savings deposits and in trust activities and the trust companies
engaged in commercial banking and in taking savings before the
national banks invaded either of these fields.
The CHAIRMAN. But they have finally invaded the State practices
and engaged in the trust business and fiduciary business.
Mr.

POLE.

Yes.

The CHAIRMAN. D O you think a commercial bank should be permitted to do that ?
Mr. POLE. Well, of course, Senator, they are in it now, and it
would be very difficult, I imagine, to unscramble them. Of course,
that was not your question, I realize.
The CHAIRMAN. The function of this committee is to correct
things that ought not to be done, notwithstanding they exist, and
without indicating what my own view is, I thought, perhaps, we
might obtain your experienced conception of what a commercial
bank ought to be permitted to do.
Mr. POLE. I think it would be an indeal situation, indeed
The CHAIRMAN. Well, I can tell you that we can not do anything
that is ideal. I can tell you that right now. People are disposed
to deride politicians and politics, but when you come to making
banking laws, you must reckon with politics and politicians, too,
and as I take it, it is a question of what you can do and not what
you may do in an ideal way.
Senator NORBECK. Would it not be well to let Mr. Pole amplify
the distinction between chain banks and branch banks? H e makes
quite a distinction. I do not make so much. Let us have the distinction, in his own words.
The CHAIRMAN. All right. Go ahead, Senator. You are privileged to ask any questions you please.
Mr. POLE. A chain bank is a system of independent banks usually
owned—the stock of which, either a majority or in an important




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

15

measure—by an individual or a group of individuals without central
management.
A group-banking system is usually a number of banks, the stock
of each owned or controlled in an important measure, by a holding
corporation formed for that purpose, and the management of these
independent banks being usually through a central member of the
holding corporation, which is located at a central point.
Senator NORBECK. W h a t designation would you give under that
definition to the chain system that exists in the Northwest now ?
Mr. POLE. I would call that a group banking system where the
stock of the individual bank is held by the holding corporation.
Senator NORBECK. With a branch banking system such as you suggest, there would be no stock owned by a holding company? The
banks themselves would issue no stock?
Mr. POLE. NO stock at all.

Senator NORBECK. And they would! have no stockholders—the
branches would not?
Mr. POLE. Not as a branch.

Senator NORBECK. They would have no local board of directors?
Mr. POLE. Not in the sense that the independent bank has. I t
would probably have a local advisory board.
Senator NORBECK. Yes; but not local directors. The power
Mr. POLE. Unless you would call this local advisory board the local
board, which is the custom now
Senator NORBECK. But their function would be only advisory.
They would have no power. F o r instance, if the central bank should
s a y , " Send us $50,000," they would have to send it?
Mr. POLE. Yes.
Senator NORBECK.

The control would be in the center, as in the
chain-banking system?
Mr. POLE. Yes.
Senator NORBECK.

I n that northwestern situation, the comptroller's view is that this thing has rather been a good thing for the
Northwest—this acquiring of the branches or these chain banks
throughout the Northwest has been rather a good thing for the
banking situation?
Mr. POLE. I think so.

Senator NORBECK. W h a t benefit has accrued to the small banks or
to the communities where the acquired banks are located ?
Mr. POLE. They have loaned money—probably not quite as great
an amount as loaned formerly, but they have done it more scientifically; they have prevented many banks from failing and, in a
great many instances, the very banks they took over would have
failed.
Senator NORBECK. The banks acquired by the Northwest chain system are banks that have stood the test of the deflation. They were
recognized as sound. I think the comptroller will agree with me
that all South Dakota banks acquired by the chains enjoyed the confidence of the community, with the possible exception of one, against
which some withdrawals were being made, but it must have been
financially sound or it would not have been taken over by the chain.
Do you believe they would have bought one that was not good ?
Mr. POLE. Not without readjustment.




16

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator NORBECK. I n other words, it had to be susceptible of readjustment or they would not have bought it,
Mr. POLE. They seemed to be very willing to go in and give a
reasonable premium on whatever good business there might be there.
Senator NORBECK. But the comptroller will also agree with me
that helping a community also consists of pushing out money to the
community in times like this?
Mr. POLE. Yes; where it can be done soundly.
Senator NORBECK. But the comptroller insists that it has been
going the other way—it has been pulled into the centers. The comptroller has called attention to the fact that this great growth of
branch banking in the Twin Cities has progressed to the extent of
acquiring 150 branches. H e says the Twin Cities showed increased
deposits.
Mr. POLE. We are talking about two different things. I think each
has helped the other.
Senator NORBECK. But if there are more funds in Minneapolis,
and less in South Dakota, who is helped?
Mr. POLE. I do not know of any good account in the small communities which the First Bank stock or the Northwest Bank Corp o r a t i o n is permitting to suffer.
Senator NORBECK. That, of course, is a matter of opinion. A
banker can say " We are not making any loans and therefore nobody
is suffering." That is their view. The fact of the matter is t h a t
they are hardly making any loans, are they?
The CHAIRMAN. Mr. Comptroller
Mr. POLE. I hope you understand, Senator, that I am not advocating or defending the group or chain systems.
The CHAIRMAN. On that point, Mr. Comptroller, have you examined
Senator NORBECK. But there is this distinction between a chain
and group: You do not recommend the group, but you recommend
the chain. But the group has certain advantages; for instance, local
capital and a local board and partially local management. The chain
would have none. I t would be all governed from the center.
Mr. POLE. That is branch banking.
Senator NORBECK. I beg your pardon. I said chain, did I not ?
Mr.

POLE.

Yes.

The CHAIRMAN. Would not the branch have its local office and
local agents and local establishments ?
Mr. POLE. I think one of the things which the Senator overlooks
is the fact that, while it is true that under a group banking system
the member of the group must be a bank of a character which could
be profitably operated under this
Senator NORBECK. I n other words, it must have been a good bank,
or they would not have bought i t ; therefore they are not helping a
community by buying good banks which have been getting along all
right and getting control of them and taking funds out of the
community.
Mr. POLE. They do not always do that. But under the central
management with better management it is better able to operate successfully. Under the branch banking system the large bank could
throw its resources into the small communities that might need
them.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

17

Senator NORBECK. I note the word " could."
Mr. POLE. Could throw its facilities and resources to the farthest
corner within its district, whatever its district may be, and deal with
that branch as though you were dealing with the main office in
Minneapolis.
The CHAIRMAN. Would it not have been the same acquisitive inducement to do that with the local bank?
Mr. POLE. Precisely.

Senator NORBECK. Would not the management of any bank put
the money where it was worst needed, or where they could gain the
most from its use ? Human nature is the same in banks as in politics.
Mr. POLE. Well, banking is a business.
Senator NORBECK. I t is a business for gain.
Mr. POLE. Banking is a business in which people engage for
profit as in any other business; and if they are simply going to bleed
the business for some particular selfish interest, of course the end
of that business is disaster.
Now, they are going to operate that business scientifically, which
means that they would distribute their funds over the district, because they are not going to make an investment in an outlying district and then starve it to death; they are going to build it up.
Senator NORBECK. Exactly, but they will have no investment. You
propose that they should do away with the local stock and management and have no investment there. You prefer the branch.
Mr. POLE. I t would be a distribution of the investment they make
as a part of their whole system. A part would be made to the
small hamlet—a small part because the amount of business is small—
but having invested that in the banking house, salaries of officers,
stationery, and general expenses of that bank, there would be that
investment, be it large or small. I t would be large or small in proportion to the amount of business done. They will not make any
investment there and starve it to death. They will foster it, nourish
it, and feed it funds when necessary, and experience has shown that
in very many instances money is sent out from the head office far
in excess of the amount of the deposits which may be collected from
that little community.
Senator NORBECK. The comptroller of course does not maintain
that is true of the present system, because he said that the increase
in the Twin Cities banks has been drawn from the smaller communities.
Mr. POLE. That, of course, in the State banks, has been due perhaps to two causes; in the first place, I was covering a period of
years during which the economic conditions have changed and
where St. Paul and Minneapolis are readily accessible to many communities which, 10 years ago, would have been a two days' trip.
Now they can reach it in 30 minutes, and the important deposits
now naturally go to the more important banks.
Senator NORBECK. Of course, we have always been dealing with
Minneapolis. We have no quarrel with Minneapolis. We have a
community of interest. I do not see how that community of interest can be helped by their getting absolute control of the credit
situation in our State.




18

NATIONAL AND FEDERAL. RESERVE BANKING SYSTEMS

But is not this a fact now, that during the high money rate in
New York a great many country banks sent a great deal of money
down there ?
Mr. POLE. During the high money period ?
Senator NORBECK. Yes.
Mr. POLE. I am satisfied they did.
Senator NORBECK. And do you not think many sent money down
there that might have loaned it at home where needed, because the
rate was better in New York ?
Mr. POLE. I have no doubt that condition obtained in a measure.
I am not prepared to say, Senator, that any commercial business
was overlooked.
Senator NORBECK. Well, of course, I know that is a matter of
opinion, whether there are certain communities entitled to any
credit or not. But the fact is money was sent there because it was
more profitable to have it down there.
Now, then, when we lodge control of our whole credit and funds
in one place, are they not more likely to go to New York when the
next boom comes than to lend it to the farmers, because New York
can pay a bigger rate and without any effective way of controlling
it, are we not going to be helpless ?
Mr. POLE. I do not think it works that way.
The CHAIRMAN. On this question of chain banking: Have you
examined S. 4723? Look at section 3 and see if you think that
abates the evil of chain banking, if it may be said to be an evil ? I
am not asking you if you think it would be a valid exercise of authority or whether the authority would be valid. I am asking what
you think the effect of it would be.
Mr. POLE. I am not prepared at this time to say what the effect of
that would be, Senator.
The CHAIRMAN. That would at least maintain control of the bank
in the local community, would it not?
Mr. POLE. Yes, sir. I think that the history of the disposition of
these corporations which hold stock is naturally in the direction of
the idea of having that stock pretty well distributed and undoubtedly
if it were a branch of a bank established in a certain locality, it would
be the disposition of the parent bank to distribute a reasonable
amount of that stock within that community which, of course, would
be held by individuals and voted as such.
The CHAIRMAN. That would not permit a central bank to vote its
stock in the local bank?
Mr.

POLE. N O .

The CHAIRMAN. That does not relate to branch banking.
Mr. POLE. I understand that.
The CHAIRMAN. I t relates to chain banking. Do you want to ask
any questions, Senator?
Senator BULKLEY. Just a couple. You referred a while ago to a
large bank in Kentucky where conditions got progressively worse
over a number of years and ultimately turned out pretty badly.
Could you give us, for the record or otherwise, the history of your
actions with respect to that bank, going all the way back to the time
when you first began to see trouble?
Mr.

POLE.




Yes.

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

19

Senator BULKLEY. I think it would be most instructive to the committee to see just what the efforts were and try to trace out wherein
the failure came.
Mr. POLE. I t is a very interesting story and I shall be very happy
to do that.
Senator BULKLEY. There is one other thing I
Mr. POLE. Was it your idea that that should be for the committee
and not for the public?
Senator BULKLEY. Well, I would take your judgment about that.
Mr. POLE. Such portions of that document as might be regarded
as confidential would be respected?
Senator BULKLEY. I do not see why it should not be. My questions
are for the information of the committee.
Mr. POLE. If I might give it to the committee for the committee,
I should be glad to go into a little fuller detail than otherwise.
Senator BULKLEY. I think that is all right, is it not, Mr. Chairman ?
The

CHAIRMAN.

Yes.

Senator BULKLEY. The other thing I wanted to ask you about is
this: You said under your proposal there would be no branches at
all established by such a bank as the one that recently had trouble
in New York City. Will you amplify that a little bit? I did not
quite catch the distinction.
Mr. POLE. That is a State bank, and my information with respect
to it is only from the newspapers, but I have been led to understand
that it was a bank which indulged in unsound banking practices, and
I am taking it for granted that by any comptroller there would be
no branch banks permitted to any bank unless the bank itself were a
bank which had proven itself to be sound and indulged in safe and
sound banking.
Senator BULKLEY. Your plan would be for each bank to get the
approval of the comptroller with respect to the establishment of each
branch ?
Mr. POLE. That is my recommendation.
Senator NORBECK. I S it not a fact that many banks well organized
and well set up and well managed go wrong gradually afterwards
and make the comptroller a lot of trouble?
Mr. POLE. Yes.
Senator NORBECK.

Would the fact that they have branches tend to
obviate—would that make them virtuous or would they be subject to
the same peculiarities of human nature ?
Mr. POLE. That might happen to any business, Senator. I n other
words, we can not forsee what will happen, and if a bank is in good
shape now you can not deny it privileges because, say, six years from
now it may have gone down instead of up.
Senator NORBECK. And the same might happen with a branchbanking system as might happen to a bank without branches ?
Mr. POLE. Yes.
Senator NORBECK.

And, therefore, what might happen in one case
might happen in another.
The CHAIRMAN. Mr. Comptroller, do you think this thing of permitting national banks, which are supposed to be strictly commercial
institutions, to have affiliated investment companies is a sound species
of banking?




20

NATIONAL. AND FEDERAL. RESERVE BANKING SYSTEMS

Mr. POLE. I think that it is in a great many instances productive
of unsound assets in the bank with which these corporations may be
affiliated.
The CHAIRMAN. Well, we saw that recently.
Mr. POLE. Yes.
The CHAIRMAN.

I n one single bank that had to write off over
$39,000,000 of one investment company affiliated with a notable
national bank—which had to write off $18,000,000 in losses or
$57,000,000 in all.
Mr. POLE. The method, Senator, is undoubtedly susceptible of a
great many evils.
The CHAIRMAN. And a great many evils have been applied in the
operation, have there not ?
Mr. POLE. Yes, sir.
The CHAIRMAN. Doctor

Willis, have you any questions you desire
t o ask ?
Mr. W I L L I S . I have one or two things following up the points
which have already been raised. Mr. Comptroller, do you, at the
present time, examine the security companies in New York and elsewhere which are affiliated with national banks ?
Mr. POLE. We do that in a great many instances by permission
of the bank itself.
Mr. W I L L I S . I n what proportion of them do you do that?
Mr. POLE. I n New York City, you mean ?
Mr. W I L L I S . Everywhere.
Mr. POLE. Oh, yes. Well, of course, everywhere
Mr. W I L L I S . Under your jurisdiction, I mean.
Mr. POLE. Quite a percentage of them.
Mr. W I L L I S . Fifty per cent?
Mr. POLE. I doubt whether it amounts to as high as 50 per cent.
The CHAIRMAN. Have you really any official jurisdiction over
them?
Mr. POLE. NO official jurisdiction whatever.
The CHAIRMAN. Is it not a very bad thing for the comptroller's
office to undertake to perform a task or service with which it has no
lawful connection?
Mr. POLE. I t is quite embarrassing sometimes. If we invite ourselves into the securities company, or whatever the affiliated company may be, we may be declined, but we do go into a great many
of them and feel it is quite necessary to do so, because, from the
very close affiliation, whatever might happen to the security company would happen to the bank. I t becomes necessary for the bank
to support the securities company by making it loans which might
be unwarranted, but necessary in order to save it.
The CHAIRMAN. I t seems to me if that is ever necessary, it ought
to be imperative.
Mr. POLE. I agree with you.
The CHAIRMAN. And we ought to embrace something in the statute.
Mr. W I L L I S . W h y not insist on it in all cases, if you think it
necessary ?
Mr. POLE. We have no power.
Mr. W I L L I S . Of course, no legal power.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

21

Mr. POLE. And of course it is not every securities company or not
every loan company, or whatever the affiliate may be, that we feel
it is necessary. Or course the character of the management of the
bank will often indicate the character of the management of the
investment company.
Mr. W I L L I S . But you do go into a large percentage of them?
Mr. POLE. We d o ; yes, sir.

Mr. W I L L I S . SO, you have a fair knowledge of what is being done
by those companies?
Mr. POLE. A general knowledge; yes.

The CHAIRMAN. But no power to correct them ?
Mr. POLE. NO, sir; no power to correct them.
Mr. W I L L I S . What is your policy as to the use of a bank's money
in such corporations, or have you any settled policy with respect
to that?
Mr. POLE. There is no policy. If the banks are loaning an inordinate amount to the securities companies we call attention to it
in the report.
Mr. W I L L I S . What would be an inordinate amount, for illustration?
Mr. POLE. An inordinate amount would be an amount that would
be regarded as inordinate from the standpoint of a bank's own investments for itself.
Mr. W I L L I S . I n the case of a typical bank, what would be an
inordinate amount?
Mr. POLE. Well, for example, a bank with $1,000,000 capital, a
loan of $250,000 would be an inordinate amount, regardless of the
collateral behind it.
Mr. W I L L I S . I n general, do you find in many cases loans as large
as that—loans in that proportion?
Mr. POLE. N O . While it would be possible to go through the
list of affiliates which we examined and develop a great number in
the aggregate of their actions which would be subject to criticism,
in the main I would not say that we find any great and very important violations of banking ethics or principles.
Mr. W I L L I S . YOU hold those companies subject to the same provisions of the law, of course, as you do all other borrowers? I n
other words, the 10 per cent rule applies ?
Mr. POLE. Yes, sir.
Mr. W I L L I S . If a bank

is working strictly according to the law,
in what circumstances would you say the amount of the loan would
become excessive ?
Mr. POLE. They would be subject to the provisions of section 5200
just as an individual or any other corporation not affiliated.
Mr. W I L L I S . But different securities companies habitually borrow
securities from other sources and borrow on them, as collateral, from
the parent bank ?
Mr. POLE. Habitually?

No.

Mr. W I L L I S . Well, frequently?
Mr. POLE. I would not be able to answer that.
Mr. WILLIS. D O they ever borrow from the parent bank, with its
own securities as collateral, which they have borrowed from it in the
first place?




22

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. POLE. I know of no instances like that.
The CHAIRMAN. D O you see no embarrassment, Mr. Comptroller,
to your office in making examinations not authorized by law?
Mr. POLE. The banks are quite often very reasonable and are glad
to cooperate with us in permitting us to look through the securities
companies.
The CHAIRMAN. But when you make an examination of that sort
as a mere accommodation to the national bank, what happens?
Does not the bank, for instance, disseminate the information that
its affiliated company has been examined by the Comptroller of the
Currency and found all right?
Mr. POLE. I think not, Senator.

Mr. W I L L I S . NOW, you speak of this practice as quite possibly
productive of a great many evils.
Mr. POLE.

Yes.

Mr. W I L L I S . YOU have not recommended any legislation on the
subject?
Mr. POLE. Yes; in the annual report of 1930 it is recommended
that the comptroller be authorized to examine any affiliated corporations.
Mr. W I L L I S . B u t you are doing it now, as a matter of fact. You
have gone no further than that? A s I understood you, you said
that the existence of the securities companies might be productive
of pretty serious evils. You have recommended nothing in the way
of the separation of the securities companies or anything other
than the examination?
Mr. POLE. That is all.
Mr. W I L L I S . D O you think that would be putting things in exactly
the right situation?
Mr. POLE. I t would be a step in the right direction.
Mr. W I L L I S . Is that all you would be prepared to recommend?
Mr. POLE. I think with a penal clause in there it might be very
effective.
Mr. W I L L I S . YOU are aware, are you not, that in New York the
superintendent of banks has recommended an entire separation of
the bank from the affiliated companies? W h a t do you think of
that?
Mr. POLE. I think that is a matter that might have very serious
consideration.
Mr. W I L L I S . YOU mean from yourself or the committee?
Mr. POLE. From the committee or anybody.
Mr. W I L L I S . D O you mean by serious consideration favorable consideration ?
Mr. POLE. Well, it is such a large question to answer as to whether
or not that would be an advisable thing to do in the light of the
long-established relations of securities companies with banks and
the manner in which it could be practically done, I would say that
it would be advisable that serious consideration be given before steps
are taken to that end.
Mr. W I L L I S . Are you familiar with the provisions of the bill to
which the chairman called attention as regards this matter ?
The CHAIRMAN. Section 7. I sent you a copy of the bill.
Mr. POLE. Yes. Senator.




NATIONAL AND EEDEBAL RESERVE BANKING SYSTEMS

23

The CHAIRMAN. Would that accomplish quite the purpose of this,
Mr. Comptroller?
Mr. POLE. That is with respect to the report, Senator? I t would
be helpful, but it would not be enough.
Mr. W I L L I S . NOW, with respect to the limitation of loans to be
made by such banks to their securities companies, do you approve
of that—the limitation of the total amount the securities company
could get—to say 10 per cent of the capital and surplus of the parent
bank?
Mr. POLE. That is applicable to the securities companies?
Mr. W I L L I S . N O ; under section 5200 the amount possibly to be
borrowed is very much larger.
Mr. POLE. Not to the securities companies?

Mr.

WILLIS.

I t might borrow in other ways.

Mr. POLE. Not in excess of 10 per cent.

, Mr. W I L L I S . What would you think of a limitation of 10 per cent
to all affiliates that the bank might have ? Suppose the bank might
have a dozen affiliates; would you approve of limiting the total
amount to 10 per cent?
Mr. POLE. Yes; that applies to individuals. But in the aggregate,
you mean ?
Mr. W I L L I S . Yes; in the aggregate.
Mr. POLE. I would be in favor of that ?
The CHAIRMAN. Mr. Comptroller, I want you to feel at liberty to
offer any suggestions—not here, but hereafter. You say that section
7 does not go far enough. I want you to feel quite at liberty to
offer any suggested modification that might occur to you.
Mr. POLE. Thank you.

The CHAIRMAN. Because we want it to go far enough.
Mr. W I L L I S . YOU speak of the securities companies and their loans
as being under very careful scrutiny, through the courtesy of the
parent banks ?
Mr. POLE. Yes.
Mr. W I L L I S . H O W

far does the Comptroller's office go in actually
checking up the security loans of other banks and suggesting or
dictating to them to cut off this, that, or the other line of security
loans? I n other words, does the comptroller's office ever undertake
to suggest to a bank that it is concentrating its securities loans too
much?
Mr. POLE. We suggest matters which we feel are, in a general way,
subject to criticism. Of course, we do not give the securities companies close scrutiny. We are in there simply by courtesy.
Mr. W I L L I S . Yes.
Mr. POLE. And we

want to know in a general way, and we feel we
do not want to abuse a privilege that is extended to us. We go, in
a general way, to see if there is any outstanding thing.
Mr. W I L L I S . But loans of a parent bank to affiliate are kept under
your direct legal scrutiny?
Mr. POLE. Yes,
Mr. W I L L I S . If

sir.

you find a bank is concentrating its loans upon any
particular bank or securities company, does that call for criticism?
Mr. POLE. I n the bank?
Mr. WILLIS.




Yes.

24

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. POLE. Decidedly so.

Mr.
tion?

W I L L I S . YOU

make an effort to prevent any overconcentra-

Mr. POLE. Yes, sir.
Mr. WILLIS. D O you

make a similar effort on the lines of loans to
brokers, and so forth?
Mr. POLE. With respect to concentration in loans to individuals or
corporations ?
Mr. W I L L I S . Where there is a concentration on one particular stock
or kind of security.
Mr. POLE. Decidedly so.

Mr. W I L L I S . What has been your policy with respect to that?
Mr. POLE. T O list in each report of an examination what we call
large lines, and that large line might consist of a large loan to a
particular industry or a large line to corporations which had affiliations or an individual with divergent and various interests, and
summed up, those would present an aggregate line which might be
dependent upon any one of those things mentioned.
Mr, W I L L I S . Would those large lines apply to what is called security loans, so that the action would cover an excess loaning on
one stock or a few ?
Mr. POLE. Decidedly.

Mr. W I L L I S . And in that case you call attention to it as in other
cases ?
Mr. POLE. W e call attention to it in emphatic terms, if it is necessary.
Mr. W I L L I S . If losses occur due to rapid depreciation of collateral,
and so forth, what liability does that create on the part of directors
who have not observed your suggestions ?
Mr. POLE. The question might be one of judgment. If it were,
then, of course, there would Be no liability attaching. If it were a
violation of banking principles in which the directors would overstep their authority as directors, then, of course, the question of
individual responsibility would obtain. I n the case of a bank's insolvency, if the directors had been remiss in their duties or neglectful, the receiver usually ascertains those facts and endeavors to
Mr. W I L L I S . That is, in the case of failure ?
Mr. POLE. I n the case of failures; yes, sir.
The CHAIRMAN. Should there not be applied, by authority of the
statute itself, some remedy for a situation of that sort before the
bank fails ?
Mr. POLE. A stockholder has always the right, if he can establish
malfeasance or misfeasance in office—particularly misfeasance—a
shareholder has always his day in court and can proceed on his own
initiative.
The CHAIRMAN. I know, Mr. Comptroller, and you know too, that
the average shareholder does not give attention to details of mismanagement.
Mr. POLE. That is true.
The CHAIRMAN. But your office comes into actual contact with it.
Mr. POLE. What we very frequently do, Senator, is, in the case of
a loss in a technically excessive loan, is to use pressure on the directors to make them personally reimburse the bank for such loss.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

25

The CHAIRMAN. Should they not be required to do it without moral
suasion ?
Mr. POLE. Well, I think that
The CHAIRMAN. YOU make a poor stockholder—and I have right
here in my pocket now a letter from an estimable woman, the wife
of a farmer in my county, who is a stockholder in that national bank
that failed not long ago in Brooklyn, in which she advises me t h a t
she not only lost the $1,000 she had invested in the stock but, under
the national banking act, she is required to pay another $1,000, under
the double liability requirement, which she can ill afford to do. I t
seems to me if a stockholder can be required to do that, the director
of a bank should be made to pay also.
Mr. POLE. I think so too, Senator.
Mr. W I L L I S . D O you find, from your observations of it, that during
the past year there has been a great movement of credit out of the
so-called brokers' loan accounts into the direct securities loans of the
banks, so that lately the brokers' loans have been greatly reduced ?
Mr. POLE. There has been a considerable reduction in brokers
loans but no increase in other security loans.
Mr. WILLIS. H O W do you account for it?

Mr. POLE. I n cases where it has happened, I would account for it
in some measure by reason of perhaps more liberal treatment on the
part of the bank toward its customers than toward the bank brokers.
Mr. W I L L I S . Has that not had the tendency of making the loans
of the banks more seriously frozen than a year ago?
Mr. POLE. I n such cases it has had an effect in that direction.
Mr. W I L L I S . W h a t have you done to check that progressive freezing
up?
Mr. POLE. We make, through our examiners, every effort to have
banks strengthen loans that might perhaps be slightly under margin.
Mr. W I L L I S . That is to protect the bank?
Mr. POLE. Always to protect the bank; yes.
Mr. W I L L I S . From the general banking standpoint, have you done
anything to try to prevent the freezing up of the assets of the banks,
as a body, through this stereotyping of credit through securities loans
and brokers' loans?
Mr. POLE. We endeavor to get the banks to divest themselves of
their security loans if they have a disproportionate amount of them.
Mr. W I L L I S . They have a disproportionate amount now, have they
not?
Mr. POLE. There may be, over the country, a disproportionate
amount of collateral loans of this character, but perhaps on the other
hand there is a somewhat limited demand for commercial loans that
banks, in an effort to keep their money invested in something or other,
are not disposed quickly to dispose of these collateral loans.
Mr. W I L L I S . I was anxious to k n o ^ if you were adopting any particular policy. I t might not be wise to do it now. I merely wanted
to know if the office had any definite policy.
Mr. POLE. There is a policy to do so provided it appears that
commercial investors are not being properly served, but if a bank
is in funds and it has good collateral loans, we do not take any
active steps in seeing that they dispose of them.




26

NATIONAL AND FEDEBAL EESERVE BANKING SYSTEMS

Mr. W I L L I S . I have one or two questions about the savings situation. The Chairman asked you about what you thought of the
reserve against savings—that is, the 3 per cent requirement. I t is
3 per cent, is it not ?
Mr.

POLE. Yes,

sir.

Mr. W I L L I S . With a possible 30-day notice?
Mr. POLE. Thirty to sixty days, in the option of the bank.
Mr. W I L L I S . And has that ever been invoked ?
Mr. POLE. Oh, yes.
Mr. W I L L I S . I n what proportion of the cases ?
Mr. POLE. I n very, very few.
Mr. W I L L I S . W h y is that?
Mr. POLE. More frequently of recent months,

the reason for it is
that the public is on notice that it can not get its money for 60 days
and the public immediately wants its money that much more quickly
and the result is that, as an illustration, I have in mind a large
building and loan corporation with $8,000,000 in deposits, a perfectly sound corporation according to the examiners, and they put
on their 30-day notice, and inside of 10 days they had, out of
$8,000,000 deposits, $4,000,000 applications for withdrawals causing
the association to close.
Mr. W I L L I S . If that is practically a dead letter—and it seems to
me you have indicated that it is—then the banks' savings deposits
are practically subject to withdrawal as the demand deposits?
Mr. POLE. A S a practical matter that is so.
Mr. W I L L I S . And yet they have only 3 per cent of reserves behind
them. Does that suggest to you at all that there should be a change
in that 3 per cent requirement ?
Mr. POLE. I t does not suggest so much to me there should be a
change in the 3 per cent as it does perhaps denying the right of the
savings depositor to withdraw his funds, while you are giving that
right to the commercial depositor. You are theoretically preferring
the commercial depositor. If that is the case, would it not then be
possible to see that the savings depositors were protected by segregating their assets ?
Mr. W I L L I S . I n other words, do I understand you propose or advocate segregation of the assets behind the savings deposits?
Mr. POLE. I am inclined to think there is considerable advantage
and fairness in such a plan.
Mr. W I L L I S . I S there more advantage to that than to any other
plan ? Would you recommend it ?
Mr. POLE. I t is a matter that is decidedly debatable—very debatable. There are many arguments in favor of and against it, but I
think that if the banks have the privilege of withholding a savings
deposit for 30 or 60 days, the savings depositor should have protection and that protection should be in the segregation of the assets.
Mr. W I L L I S . That would protect the depositors as to the ultimate
solvency, but it would still leave the banks with a low reserve as to
the balance of the depositors—the demand depositors.
Mr. POLE. I think the reserve of 3 per cent against time deposits
is ample.
Mr. W I L L I S . YOU think that is ample ?




NATIONAL AND FEDERAL EESEBVE BANKING SYSTEMS

27

Mr. PoiiE. Yes. I think the fact that higher interest rates are paid
on that account and that they are savings; that, in a general sense,,
people do not expect to withdraw those savings and they are more
or less dormant, there is no reason to my mind why there should be
any increase in the reserve requirements. I am speaking of legitimate savings and not those savings which may, in fact, be commercial savings but transferred to the savings deposits under some
arrangement.
The CHAIRMAN. I S not that largely done ? H a s not that manipulation gone on ever since we modified the law and made this 3 per cent
reserve behind it ?
Mr. POLE. I am not prepared to say to what extent that is done r
but I am inclined to think it is not a large extent.
The CHAIRMAN. I am sure you ought to have knowledge of the fact
it is largely done.
Mr. POLE. I think it is largely done in perhaps a single section of
the country. I t has become a habit, I think in a measure, in California to rig up special arrangements about savings contracts, but
otherwise I would not be prepared to say it is general at all.
The CHAIRMAN. I have never been able to expel from my mind an
incident that happened, as I recall, before the Banking and Currency
Committee of the House, or the subcommittee, during its money
trust investigation. They had under examination one of the notable
figures of the banking community and he was asked if his bank ever
violated the statutes and his very frank response was, as I recall it r
" Why, yes. What do we hire the best legal talent in the world for
except to evade the law ? Anybody can comply with the law."
I t has seemed to me that in this very particular matter of the
manipulation of the deposits many of the banks have just taken that
view of i t ; they want to evade the law rather than comply with it.
Mr. W I L L I S . I have one question about chain banking, Mr. Comptroller. When you have a situation like that which existed in the
Northwest, how does it affect the double liability of the shareholders
provision ?
Mr. POLE. We call that a group-banking system in the Northwest.
I n the case of the Northwest and the First Bank Stock Corporation,
I think that their stock is not subject to the double liability, although
the stock of some holding corporations is subject to double liability.
But in the case of those two corporations, in those particular cases—
not that it obtains too generally—they have invested in securities
other than bank stocks, so that a judgment against either one of those
corporations would be good for the assessment.
Mr. W I L L I S . I n those particular cases?
Mr. POLE. I n those particular cases; yes, sir.
Mr. W I L L I S . But there are cases where they are not subject to t h e
assessment ?
Mr. POLE. There are cases where they are not subject to the assessment; yes, and where they hold nothing but bank stocks.
Mr. W I L L I S . I n those cases where you have an affiliated bank that
buys all the stock of the bank itself, what becomes of the double
liability of the shareholder?
Mr. POLE. The securities company where it buys the stock of t h e
bank itself, would be the holder of the stock and subject to assessment.




28

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. W I L L I S . Yes; they buy it.
Mr. POLE. They would be subject to the assessment.
Mr. W I L L I S . That would be the bank itself—if you had a failure ?
Mr. POLE. Yes; that would be equivalent to being the bank itself.
Mr. W I L L I S . If it made large loans on the stock of the bank, how
would that affect the double liability ?
Mr. POLE. The individuals would be still responsible.
Mr. W I L L I S . They would be the same as shareholders?
Mr. POLE. The individual would be responsible regardless of
whether the stock was held as collateral in that or any other bank.
The individual holders of the stock, if it were in their names.
Mr. W I L L I S . If it were not, but held in a broker's account, how
would it be then?
Mr. POLE. I t would be the record holder of the stock.
Mr. W I L L I S . I t would be the record holder of the stock?
Mr.

POLE.

Yes.

Mr. W I L L I S . And if it were the securities holding company, the
double liability would be against
Mr. POLE. I t would be against the securities company.
Mr. W I L L I S . I S not the double liability then very largely neutralized ?
Mr.

POLE.

Yes.

Mr. W I L L I S . W h a t have you done to correct that?
Mr. POLE. We have done nothing to correct it.
Mr. W I L L I S . What can be done by law to correct it ?
Mr. POLE. That is a big problem.
Mr. W I L L I S . Can you make a recommendation covering that along
with your other problems?
Mr.

POLE.

Yes.

Mr. W I L L I S . I t ought to be done, should it not?
Mr. POLE. We hear a good deal about double liability. I t is not so
important as at first one might so regard it. As an illustration, the
deposits, we will say, of a bank with $100,000 capital would be ordinarily $1,000,000. If you collected the entire 10 per cent assessment,
you only would collect 10 per cent of your deposits after all.
Mr. W I L L I S . Still it would be something.
Mr. POLE. But in practice you would not collect over 50 per cent
of that. We do collect, as a matter of fact, just about 50 per cent.
Mr. W I L L I S . The double-liability clause then is one, I gather from
you, that needs pretty serious overhauling.
Mr. POLE. I think there are instances where we have gone through
the corporation to an individual and collected and got judgment
against individuals whose stock was held in the corporation, but
that is only in cases where it was evident that it was done for the
purpose of fraud; and in other cases, where the stock of the failed
banks is held in corporations, our counsel is now preparing to demonstrate that we either can or can not go through that corporation to the
individual through the courts.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

29

Mr. W I L L I S . D O you find many cases in your examination of banks
where the banks have discounted eligible paper in the reserve banks
and then been required to put u p collateral securities to protect the
paper ?
Mr. POLE. I think there are plenty of those cases; yes.
Mr. W I L L I S . W h a t is the effect of that upon the depositor in the
case of a bank failing?
Mr. POLE. The effect is that the bank holding the paper has a very
much better claim than the one who has a general claim.
Mr. W I L L I S . A preferred creditor, so to speak ?
Mr. POLE. I n a measure preferred to that extent—secured rather
than preferred.
Mr. W I L L I S . D O you find any warrant for that in the Federal reserve act? Do you think that is permissible under the Federal
reserve act?
Mr. POLE. We have always so thought. We have never taken any
exception to it and have not felt it is within our province to do so.
The CHAIRMAN. A t least the Federal reserve agent may require
additional security for a credit loan?
Mr.

POLE.

Yes.

The CHAIRMAN. The Federal reserve agent who issues the notes to
the reserve bank is authorized by the act, if I remember it correctly,
to demand additional security. That would seem to me a plain implication, at any rate, that the reserve bank, in turn, could demand
from the rediscounting bank additional security.
Mr. POLE. We have never taken any exception to that at all.
Mr. W I L L I S . A t any rate, that is the practice?
Mr. POLE. That is the practice and perhaps a very necessary practice in view of the character of paper that the Federal reserve bank
sometimes has to take.
The CHAIRMAN. There has been a very vigorous protest against
that practice recently presented from some point in North Carolina.
I do not just recall what point.
Mr. POLE. I think that is true, but at the same time the Federal
reserve banks of the various districts have exhibited great liberality
in the extension of credits to member banks and in order to justify,
as far as possible, that extension of credit they have necessarily had
to protect themselves in some measure by additional collateral.
Mr. W I L L I S . That makes it much harder for the smaller banks
to get the rediscount credit they need ?
Mr. POLE. I t would have that tendency.
Mr. W I L L I S . And it would leave the bank much less in case of
failure ?
Mr. POLE. If indeed the bank could get the money at all. Its
assets might be of such a character that the Federal reserve bank
in the district would not feel justified in making a loan at all without
further collateral.
34718—31—PT 1




3

30

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. W I L L I S . Can you file with the committee here a digest of the
reports of security companies that you have in hand—not by name,,
but simply listing the assets under given suitable heads
The CHAIRMAN. Just for the confidential information of the
committee.
Mr. POLE. Yes; I shall be glad to do that, Mr. Chairman.
The CHAIRMAN. Are there any further questions?
Mr. Comptroller, we thank you very cordially for the information
you have given us, and I want to repeat that I hope you will not
hesitate to offer us any suggestions as to what might be properly
done to strengthen the banking structure.
We shall adjourn now; until 10.30 to-morrow morning.
(Whereupon, at 12.30 o'clock p. m., the subcommittee adjourned
until to-morrow, Tuesday, January 20, 1931, at 10.30 o'clock a. m.)




OPEBATION OF THE NATIONAL AND FEDEEAL KESEBVE
BANKING SYSTEMS
TUESDAY, JANUARY 20, 1931
UNITED STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY.

Washington, D. C.
The subcommittee met, pursuant to ajournment, at the room of the
Committee on Banking and Currency, Senate Office Building, at
10.30 o'clock a. m., Hon. Carter Glass (chairman) presiding.
The CHAIRMAN. The subcommittee will please come to order.
STATEMENT OF GEORGE L. HARBISON, GOVERNOR OF THE FEDERAL RESERVE BANK OF NEW YORK
The CHAIRMAN. Governor Harrison, as you very likely know, this
is a subcommittee of the Banking and Currency Committee of the
Senate, authorized to make a thorough inquiry into the banking
situation with a view to determining, as exactly as we may, what
that situation is and has been for the last 12 months or more; and
what, if anything, is required to be done to modify the statutes dealing with the Federal reserve system and with the national banking
system and the banking system of the country generally, and we
have asked you to come down, as chief executive officer of the largest
Federal reserve bank, with the hope and confident expectation that
you may tell us of the situation and suggest to us any remedies
against a recurrence of what has happened and that which has so
much disturbed the country in the last two years or more. We
should be glad to have you make any initial statement that you care
to make and then we will exercise the privilege of asking you some
questions on particular points.
Governor HARRISON. Mr. Chairman, I have no prepared statement. I was not certain of the exact nature of the inquiry, so far
as it related to me or to the New York bank. I have received questionnaires which the committee has submitted to us and our final
and formal replies we hope to have ready for your committee very
shortly.
Those inquiries and replies more or less logically outline the
operations and policies of the Federal Reserve Bank of New York, not
only during the recent period but during the last six or eight years,
so that I am here at your wish with what I hope you will consider
the assurance that anything at all that I, or any officers of the Federal
Reserve Bank of New York, can contribute to your inquiry, we will




31

32

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

be only too happy to do, because we, as you, have been much interested in seeing how we could take stock of what has transpired in
the past two or three years in the effort possibly to minimize the
risk of a repetition of some of the things that have occurred during
that period.
Generally speaking, if you will let me go back a little, the difficulties may be considered in two categories; those that are fundamental
in the banking system and those that are more superficial and which
may require only certain minor amendments to the Federal reserve
act or the banking laws.
From the fundamental aspect, I think it is appropriate to make a
historical comparison with the development of the banking systems
of England and other countries and the United States.
I n England the banking business is done without any legislative
restrictions whatever either as to capital, reserves, percentage of
loans to individuals, or any of the other details of operation which
we have found to be necessary in this country. The only legal limitation as relating to any bank in England is that on note issues which
relates solely to the Bank of England because, except for a small
issue of 500,000 pounds, no other bank in England issues notes. The
development of the banking system in that fashion in England is
quite consistent with its traditions of centuries, leaving the banking business to the judgment of the bankers themselves rather than
to the dictates of the legislature. Obviously such a system as that
would not have been possible in a country such as the United States,
growing as rapidly as we were, both in population and in area and
without any of the banking facilities at all when we first started in
1800, we will say, that had existed for centuries in other countries.
Even in those days, there was bitter controversy about the incorporation of banks. The opposition was based largely upon the fact
that people in authority felt that the banking business was just a
means to aid speculation, to favor the rich and not to accommodate
the poor. Indeed, in 1803 there were two banking statutes vetoed in
Vermont precisely on that ground, that it was nothing but an aid and
machinery by which speculation might be encouraged. There were
similar debates in other States, but finally, in the period 1811 to 1814,
there was a very rapid growth of the banking business under
individual charters, and the number of banks in the country increased from 88 to 208. I n 1814 they had a wave of failures due to
the fact, first, that the banks were run by inexperienced persons who
had not had an opportunity to learn anything about banking and,
secondly, the laws under which they were operated were very loosely
conceived and not strictly administered any way.
I t was only in 1838 that we had the first " free banking system "
which was initiated by the State of New York and quickly followed
by other States. That was a State banking law under which any group
of persons could get together and organize a bank for the conduct of
the banking business. T h a t law set forth certain limitations as to
capital, reserves, and other requirements. As I say, it was quickly
followed by other States and we had a wave—almost a mania—of
banking growth following that period under these general banking laws which led eventually to the passage of the national banking
act and to more strict limitations in the various State laws.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

33

After the passage of the national bank act every State in the
Union adopted some sort of free banking law\ At the' present time,
therefore, we are confronted not with one banking system, not with
one set of banking laws providing sound and safe restrictions for the
operation of all banks, but rather with 49 banking systems with the
Federal reserve system superimposed.
The CHAIRMAN. D O you think it is desirable to have this dual system or multiplicity of banking systems ?
Governor HARRISON. Senator, my belief is that that multiplicity of
banking laws has perhaps done as much to encourage or make possible bad banking as any other one thing in the fundamental set-up
that we have got, because the competition between the Federal and
State Governments, or between the various State governments, to increase the number of their own organizations has, from time to
time, led to the adoption of liberalizing laws which have made possible—I will not say have provoked—but have made possible, some
developments which I think contribute to our present trouble; in
other words, I think that we have had over 6,000 bank failures during
the past 10 years, as you have all heard here, and I should imagine—and the comptroller can check this up if I am in error—I should
imagine that a great part of those failures was attributable not to
any violations of law but rather to the abuse of the privileges provided by law. I n other words, the limitations of the law, instead
of being restrictions on bad banking, have become an invitation to
bankers to use what Congress or the State legislatures have defined
as proper limits of banking.
The CHAIRMAN. I S it not largely the business of the comptroller
himself, as to the national banks, and State bank examiners or
State bank superintendents, as to State banks, to cure a situation of
that sort?
Governor HARRISON. I think the difficulty there, Senator, is
The CHAIRMAN. I mean where bad banking occurs and where the
law is flouted.
Governor HARRISON. Where the law is flouted, I think there is
no question of the jurisdiction of the comptroller or the State bank
superintendents and possibly the Federal reserve system. My
own belief, however, is that the difficulties into which banks get,
that are the forerunners of failure, are difficulties not caused by
violation of law—certainly not in the first instance—but rather by
the exercise of poor judgment within the law, and at that stage it
is very difficult to say what the comptroller or the State banking
superintendents can do.
The CHAIRMAN. H O W do you distinguish between poor judgment
within the law and violations of the banking laws?
Governor HARRISON. There are certain things prohibited, and if
a bank violates those prohibitions of the law the comptroller has definite powers in regard to the indictment and prosecution of the
officers; or, in the Federal reserve act, we have definite authority
in the case of national banks to ask the comptroller to bring suit
for forfeiture of charter and, in the case of State banks, to expel
them from the Federal reserve system. That is in the case of
violation of law. Even that is a pretty drastic remedy for what
might be a technical violation of the minor provisions of the statutes.




34

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

But the difficulty is largely, what are you going to do with a bank
acting quite within the legal provisions, whether of the national
banking act or a State law, but which, in our judgment, is on the
way to difficulty. I remember that when I had the privilege of
being with the Federal Reserve Board any State bank that applied
for membership in the Federal reserve system was required by a
condition imposed by the Federal Reserve Board to limit the amount
of its real-estate loans to some percentage, depending upon the kind
of business that the bank was doing. That condition of membership was very much resisted by the State banks applying for membership and the pressure was so great that Congress amended the
law so as to provide specifically that any State bank that came
into the Federal reserve system should retain all of its State charter rights. From then on, it was not competent for the Federal
Reserve Board to limit the amount of real-estate loans that a bank
could engage in. That is what I meant a moment ago by the competition between the different banking systems that results in a
gradual development that tends to break down the barriers.
Now, at the present time—and the comptroller will probably
bear me out in this—part of the difficulty of a number of these
banks that have failed is the loans that they have been authorized
to make on real estate. But those loans are not illegal loans in many
cases. They are specifically authorized by the State law and the
Federal reserve act, and the Federal reserve banks probably could not
place any binding restriction as to the percentage of real-estate loans
that a bank can engage in.
Now, if I may go on, unless you have something you want to
question me on, I do not mean by that that it is possible at this
time to conceive of one banking law—and I am not advocating that
because that involves practical and political considerations that
have great ramifications—but I do think this, that if it were competent for this committee to consider a banking system anew to-day,
without consideration of the past and if it were possible for it
to devise one set of laws that would apply to all deposit banks in
the United States, and if all those deposit banks in some fashion
were in the Federal reserve system, you would do much in that
fashion to protect the depositors in commercial banks.
That not being possible at the moment, I should imagine, because
of the multiplicity of laws, whatever you can do to approach that
ideal at the present time by some possible amendments to the law
would, I should think, be most important for your committee to
consider.
There are a number of State banks doing deposit banking business that might perhaps better be in the Federal reserve system.
Whether it is possible or wise to provide a law whereby all State
banks doing a deposit banking business should be members of the
Federal reserve system, I am not certain. My own preference would
be to look forward to the time when that will be possible, provided
two things: Provided the capital structure of those banks which
are admitted to membership is raised to a point that is much higher
than permitted in many of the States, and provided further, that
some system of branch banking be authorized so as to provide the
service that was heretofore performed by the smaller banks which




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

35

might be gradually dispensed with—that is, the too small banks not
large enough to be members of the Federal reserve system.
Now, under this multiplicity of laws, you had this development:
A bank to-day perfectly properly and perfectly legally incorporates
and either directly or through subsidiaries or affiliates, does a commercial banking business, a savings bank business, a trust-company
business, a securities business, and even an issue-house business. We
have then not only the legal set-up which permits of departmental
financial service but which, in some cases, has encouraged it. I do
not see now that it would be wise to destroy that system even if it
were possible, because the American business man who is in a great
rush always, finds great service in going to a banking institution and
discussing with his banker not only the possibility of opening a deposit with him, but getting his advice as to investments and perhaps
advice and help as to a trust that he wants to organize or the writing
of his will and providing for the future executorship under the will—
all those things that can be well done under one roof to the convenience of the customer. There is a danger that if you do not permit
that and the customer goes to a bank that is authorized to do only one
kind of business, the banker may encourage him to do something
that is not most suitable for that one man. If, on the other hand,
the banker has the capacity to offer him not merely a deposit service
but perhaps some means of investing his funds that would be better
for that customer, he has, in that situation, some freedom or alternative in advice, without the risk of losing the business.
But if you are going to authorize this departmental banking, then
I do think that there are certain things that ought to be done and
done fairly promptly, which will better safeguard it. I think one
of the principal developments in the past two or three years which
should be of the greatest concern to your committee, is the development of a savings banking or thrift deposit business by banks doing
a commercial banking business. A good percentage of the growth
in deposits in the past few years has been in time deposits. I t has
been due to a number of causes, but one of them no doubt is that
under the laws of many States a bank does not have to carry any
reserve against time deposits and, under the Federal Reserve Act, a
bank carries only 3 per cent as contrasted with 7, 10, or 13 per cent,
dependent on its location, on demand deposits.
The CHAIRMAN. What has been the result of that with respect to
the reserves carried by the banks ?
Governor HARRISON. I think it has encouraged the bankers to
solicit a bigger proportion of time deposits than they would have
solicited or would have obtained otherwise.
The CHAIRMAN. And has it not caused many banks to manipulate
their deposits and transfer their demand deposits to the savings
accounts in order to avail themselves of the 3 per cent reserve ?
Governor HARRISON. This has doubtless been done in some cases.
The CHAIRMAN. I n large measure do you think that that accounts
for the very large proportion or the larger increase in savings
deposits as against demand deposits ?
Governor HARRISON. Of course it is no doubt true in this period
of prosperity which we have had up until two years ago, savings
deposits increased very rapidly in savings banks and it was only




36

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

natural they would increase rapidly in commercial banks that were
doing a savings-bank business, but I do think also, as I stated at
the outset, that the differential in the reserve requirement has been
a great encouragement to banks to solicit accounts on that basis instead of as regular commercial demand deposits.
The CHAIRMAN. YOU think then we ought to alter the reserve
requirements of the act ?
Governor HARRISON. Senator, that has been so much a matter of
concern to the reserve system for several years now that about a
year ago a Federal reserve system committee was organized to study
the question of reserves. They are making a thorough academic
report on it. I do not know just when they will be able to make that
report, but they have made great progress. My own impression—
and I am speaking personally—is that the differential in reserves
between a demand deposit and a savings deposit in one bank that
is doing the two kinds of business, is wrong. I think that you have
got to realize this. Take one institution doing both kinds of business. A savings deposit theoretically authorizes the requirement of
30 days' notice. Having that protection or that nominal protection, the banker invests a part of his savings funds in slower
and less liquid investments than he would invest in were he doing a strictly commercial banking business, or did he admit the
fact that, in effect, those savings deposits are demand deposits.
I do not care what the privilege is or what the law is, any bank
on which there is a run that has got commercial demand deposits and
savings deposits must do either one of two things—pay them all off
on demand or else ask for his 30 days' notice which, in its turn, will
do one of two things, close the bank at once, if the State authorities
or the Comptroller of the Currency thought it was wise—and I think
they would think it was wise—or else run the risk of giving a preference to all demand depositors who could come in and get all the most
liquid assets and let the savings and thrift depositors take what is
left.
I should think myself that the sound way to approach the question—and I am giving you not the considered opinion of the Federal Reserve Bank of New York, but my own personal reaction—
the sound way to approach it would be by law to require a commercial bank that is taking thrift accounts to admit the fact that,
in effect and in substance, those accounts are demand deposits and
the corollary to that is to make them carry the same reserve that
they carry against demand deposits.
Senator BTJLKLEY. Would not you avoid the difficulties you are
speaking of if you had segregation of assets ?
Governor HARRISON. Personally, I do not believe in the segregation
of assets in one bank under one roof with all its deposits in one pool,
because as soon as you segregate assets in that fashion you imply that
the deposits against which those segregated assets are placed are in
a different category from the others; otherwise there is no point in
doing it.
Senator BTJLKLEY. I am just talking about what you say now
amounts to a preference in favor of the demand depositors, which
would not exist if you had the assets segregated.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

37

Governor HARRISON. The only difference is if you segregate the
assets against the time deposits, those depositors would have the
slower and less liquid assets against those deposits.
Senator BULKLEY. They would have the kind of assets that savings funds have been invested in—admittedly so.
Governor HARRISON. That is quite right, and if that were all there
were to it, I would agree with you.
Senator BULKLEY. Well, suppose you go ahead and develop it.
Governor HARRISON. Supposing you do segregate the assets against
savings deposits in one institution. If you do that, in order to
insure the soundness of those assets, you have got to make very
strict limitations as to their character. That would probably mean
some laws such as the laws in some States that I am familiar with
where savings banks investments are specifically set forth and there
is no alternative in the judgment of the officers of the bank.
Now, assuming that bank X is doing both a savings bank business
and a commercial deposit business and assuming that it gets 50
per cent of one kind and 50 per cent of another, and that the segregated assets against the time deposits or thrift accounts would be
the kind specified in the law. They are, by hypothesis, slow assets.
If anything should happen, as has happened in the past, to cause
any concern or distress in the minds of the depositors that there
is any difficulty with the bank, the savings depositors are usually
the first that start to withdraw. They are of a smaller individual
amount, but the number of depositors who get excited is greater.
Now, at that point, if the bank is going to pay off those savings
deposits, it has got to use the unsegregated liquid assets that are back
of the demand deposits or else it has got to demand the 30 days'
notice, and if it .demands 30 days' notice, that is notice to the world
that there is something wrong in the bank and you invite every
depositor in the demand department to get his money out. I think
it is a large risk for the institution to take as a whole. I t may
mean this, that everybody will be paid off in full. I t may not.
But it would take time and it would be very apt to force a closing
of the bank. That is my fear about it.
On the other hand, if you do it the other way, as long as you have
the two different departments and admit in effect you can not
demand a 30 days' notice without forcing the withdrawal of all the
demand deposits, and then impose the same reserve, you impress upon
the mind of the banker that, in effect and fact, those thrift accounts
and savings accounts are demand accounts, and the conservativeminded banker ought to build up a corresponding liquidity in his
institution upon recognition of that fact, rather than assume that
because he has a 30-day notice he has a protection.
The CHAIRMAN. Governor, I was a little diverted here by a statement made a while ago that was contrary to my recollection of the
statute, though I must confess that in recent years I have not made
any particular effort to familiarize myself again with the provisions
of the law. But I understood from what you said as to the action
of Congress in authorizing State member banks to exercise their
charter rights, particularly with respect to real estate—I understood
from what you said that the Federal Reserve Board would have no
right to limit their loans upon real estate ?




38

NATIONAL AND FEDERAL ItESERVE BANKING SYSTEMS

Governor HARRISON. That was my impression of that provision^
because it was a fact that, prior to the adoption of that provision,
the Federal Keserve Board did place conditions in practically all
approvals of memberships of State banks in some fashion limiting
the volume of their real-estate loans.
The CHAIRMAN. Has it not an unrestricted right to do that now
under the law ?
Governor1 HARRISON. That action upon the part of the board
caused a great deal of discussion and unhappiness in the minds of
some State bankers who wanted to become members of the system.
Subsequently, if my recollection of this is right—and I have not
looked at it for a number of years either—subsequently, the law
was amended specifically to provide that all State banks becoming
members of the system should retain all their State charter rights.
The CHAIRMAN. N O ; subject to the provisions of this act and to
the regulations of the board made pursuant thereto.
Governor HARRISON. Well, perhaps. I do not remember all the
circumstances surrounding that amendment, but I do know that subsequent to it the board abandoned the practice of requiring this condition, and I think it was because they felt they no longer had the
authority to require it.
The CHAIRMAN. I t has full authority to require it, and if you
will note paragraph 3 of section 9 of the Federal reserve act, you
will see that it is so. So, if there has been any abandonment of a
policy or practice, it has not been due to the statute itself, but to the
regulations of the board. This paragraph reads:
In acting upon such application—

That is, the application of a State bank for membership in the
F e d e r a l reserve system—
the Federal Reserve Board shall consider the financial condition of the applying bank, the general character of its management, and whether or not the
corporate powers exercised are consistent with the purposes of this act.

Therefore, if the board should reach a determination that excessive loans in the commercial bank on real estate are contrary to the
policy of the board and the requirements of this act, certainly it is
within the power of the board to prohibit any such thing by a member bank, whether State or national. But that is not important. I t
just struck me
Governor HARRISON. I was reviewing only the chain of events at
that time and the fact that the board did stop, as I remember, requiring that condition, in view of that provision of the law. They
may have been wrong in their interpretation of it.
One other effect of the multiplicity of laws which makes it possible
for one institution to do not only a bank of deposit business but
engage in other kinds of business, is the development of these security affiliates.
The

CHAIRMAN.

Yes.

Governor HARRISON. And I think if we were considering a virgin field and wanted to devise a brand-new banking system in the
light of present-day experience, I myself, would prefer that no commercial bank be permitted to have such an affiliate.




NATIONAL AND FEDERAL RESERVE RANKING SYSTEMS

39

The CHAIRMAN. Well, if it be an evil, why not correct it? W h y
let an evil persist simply because we did not correct it to begin
with?
Governor HARRISON. After all, the lapse of time makes a difference if only because of the fact that it teaches customers of banks
the privileges and facilities they now get under this departmental
system. If that is true and there is an advantage in it, is there any
way in which you can accomplish the same purpose without completely divorcing them, but by some amendment to the law that protects the depositors in the bank?
The CHAIRMAN. Is there not some way of correcting it ?
Governor HARRISON. I feel certain that if I were Comptroller of
the Currency or State superintendent of banks I would not want to
be responsible for a commercial bank unless I had the authority to
examine the security affiliates, and while there may be some question
as to the next step, my own present opinion tends toward the belief
that they ought to be required to publish a statement of their
condition.
The CHAIRMAN. YOU will note in the bill offered by me in the
Senate on the 17th of last June there is a requirement of that sort.
Governor HARRISON. NOW, I think that it is true that some institutions that are under the jurisdiction of the Comptroller of the Currency authorize voluntarily the comptroller to examine the security
company. Where that is done, I think it is helpful. I think they
are wise.
The CHAIRMAN. They are wise, but is the comptroller wise in assuming to do something for which there is no sanction in law ?
Governor HARRISON. I should think that he could imply authority
to do that. I t did not occur to me he could not and I hope I am not
out of my jurisdiction in mentioning this. But certainly, if a national bank has a security affiliate, 100 per cent owned by the same
shareholders of the national bank, through which certain business
is carried on that is not specifically authorized for national banks
under the present law, the national bank and the affiliate psychologically and, in fact, are so close, especially where there is an interplay of transactions between them, which is also perfectly legal, that
I think the comptroller could properly go into the security company
and examine it just as he would examine the statements of any
borrower from the bank.
The CHAIRMAN. Then, if there subsequently should be a failure of
the affiliate, and those interested in it should have the assurance that
it is in a sound condition because it has been examined by the Comptroller of the Currency, although it is without the authority of law
to pronounce it sound, would not there be a moral responsibility upon
the comptroller's office ?
I n other words, what right has the Comptroller of the Currency
to employ his attaches, their time and skill and experience, in examining an institution that is not under his jurisdiction?
Governor HARRISON. I should consider it along this line, Senator,
that if the national bank has an affiliate that is so close as one such
as I have described, and the comptroller is examining the national
bank, and it is recognized that, one way or another, it may have a
lot to do with the condition of the national bank, and if they give




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

the examining authority, whether the State superintendent or the
comptroller, access to the books or records of that affiliate, I should
think there would be no question as to his legal authority to go into
it. I think, however, there would be great question as to his right
to demand access.
The CHAIRMAN. If he has not the right under the law to demand
it, and he has no right to make the examination except as an accommodation—well, why is there an affiliate? I s it not because the
parent bank, the national bank, itself under the law is not permitted
to do certain things ?
Governor HARRISON. That is quite right.
The CHAIRMAN. Exactly. I t is an institution primarily and congenially for the evasion of the national banking act, is it not?
Governor HARRISON. Well, it is primarily to do a certain character
of business through a corporation other than a national bank which
the national bank is not authorized to do.
The CHAIRMAN. Yes, a particular business that the national bank
is not authorized to do.
Governor HARRISON. That is quite right.
The CHAIRMAN. Then, it is indirection, is it not? You need not
say so. I will say so.
Governor HARRISON. D O not misunderstand me, Senator. I am
not, myself, advocating the set-up or trying to pass upon the legal
question whether the superintendent of banks of the State of New
York or the Comptroller of the Currency has a legal right to go
into one of the affiliates. My only point in mentioning this is that
as long as you have been good enough to give me an opportunity of
making suggestions, I believe the comptroller should have the authority to examine the affiliates.
The CHAIRMAN. I agree with you if the existence of them is to
continue. If they are permitted to have affiliates, I think there
should be some authority of law—if we are authorized to enact such
a law—that will require their examination and publicity of the
statements.
Governor HARRISON. I think there ought to be another provision,
if I may suggest another one, in the law itself, that no member
bank should, either in the commercial department of the bank or in
the trust department, be permitted to buy any of the bonds on the
shelf of the security company. I know it is the practice in a great
many banks specifically, as a matter of internal procedure, to prohibit such a practice, and the better banks do not do it. But there
are other banks that do do it and in order to make it uniform and
require those that have not the same ethical sense that others have,
to conduct the business in a uniform fashion, I think it would be a
wise thing to have a provision in the law specifically covering it.
That, again, is all on the assumption that the security companies
are permitted to continue. If, as you indicate, there is any question
of abolishing them, then I should think that question does not arise.
The CHAIRMAN. Well I myself, for the reason indicated by you,
rather question the feasibility maybe of abolishing them because they
have been permitted for so long to exist. I t might create a confusion and embarrassment that would be worse than the evil itself.
Governor HARRISON. I t might result in a real disservice to the
community, especially if it is possible properly to control them.




NATIONAL AND FEDERAL. RESERVE BANKING SYSTEMS

41

The CHAIRMAN. If it is not posisble to control them in some way,
I should be agreeable to prohibiting them.
Senator NORBECK. Is there not this distinction between the bank
itself and the affiliates, that the laws are intended for the protection
of the depositors in the investment of their money, and the affiliate
does not lend the depositor's money ? Is not that right ?
Governor HARRISON. That is quite right.
The CHAIRMAN. Governor, you remarked a while ago something
about implied authority. You know, I think, one of the bases of
administration is the exercise of what a person chooses to interpret
as implied authority both by the courts and administrative officials.
I am going to ask you a question or two that may seem personal,
but they are not intended to be, nor in any degree embarassing.
You are governor of one of the Federal reserve banks. W h a t
authority of law is there for the establishment of any such office?
Governor HARRISON. Of governor of a Federal reserve bank?
The CHAIRMAN. Yes.
Governor HARRISON.

Well, I have not recently reviewed the provisions of the law which relate to the authority of the directors to
appoint the officers of a bank, but my recollection is that the directors
of the bank are authorized to appoint all the officers of the bank and
to fix their salaries, subject to the approval of the Federal Reserve
Board. I t is necessarily incumbent upon the directors, who are not
operating officers, to provide the machinery for running the bank.
I t is necessary, therefore, by hypothesis, for them to appoint some
officers.
The CHAIRMAN. Yes; some officers.
Governor HARRISON. H O W many officers they should appoint or
how high up they should go in executive authority I have not considered specifically; but I should think there is no limitation upon
the right to appoint both senior and junior executive officers.
The CHAIRMAN. Well, the provisions of the statute, as I understand it now, are akin to the same provision of law in the national
banking act that authorizes a board of directors of a national bank
to appoint such officers and attaches as are not otherwise provided
for in the law, the meaning of that being that the board of directors may appoint minor officials and attaches of the institution;
and to show that that was the purpose of the act—mind you, I think
the governor of a Federal reserve bank is a very useful if not an
essential officer, but I just want to know how it came about
Governor HARRISON. I never questioned the legality of my appointment before. I shall look into that provision with a great
deal more interest from now on.
The CHAIRMAN. I do not exactly question the legality of it now,
though I am sometimes disposed to question the judiciousness of
some things that governors do.
Governor HARRISON. Well, in retrospect, I agree with you.
The CHAIRMAN. I have said the questions I was about to propound were not personal. I t seemed to me at the time and, upon a
further examination of the law, now, that the proponents of the
act and the Congress itself, had intended that the chairman of the
board of directors of a Federal reserve bank should be the chief
executive officer of the bank. Is not that official, as a matter of
fact, the chief executive officer of the average large national bank?




42

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Governor HARRISON. I t depends upon the by-laws of the bank,
Mr. Chairman.
The CHAIRMAN. But do not the by-laws of the bank usually make
him the chief executive officer of the bank ?
Governor HARRISON. I do not think that is true.
The CHAIRMAN. I had rather supposed so. The statute here sets
out that one of the class C directors of the Federal reserve bank shall
be the chairman of the board of directors and that in addition to his
duties as chairman of the board, he shall be regarded as the peculiar
representative of the Government at the bank and it sets forth that
he shall be a man experienced in the knowledge of banking—tested
in banking experience—and that he shall establish an office in the
bank and make regular reports to the reserve board and act as its
official representative for the performance of functions conferred
by this act and the Federal Reserve Board, rather than the bank,
fixes his salary and he is the only officer of the Federal reserve bank
under the statute who is authorized to appoint his own assistants,
subject to the approval of the Federal Reserve Board. So that it
seemed to me at the time—and I do not know that this is of very
great importance except that I have been a little disposed to ascertain at this inquiry how far removed from its original conception
and purposes, the Federal reserve banks have been taken by administrative action rather than by statutory warrant—that the importance of this official is obvious in the statute. Then, as stated, it
goes on to say that the board of directors may appoint such other
officers—meaning, as I took it, and take it, minor officials and attaches of the bank.
Now, then, the governor of the bank is regarded as the chief
executive officer of the bank, is he not ?
Governor HARRISON. That is so under our by-laws.
The CHAIRMAN. And all communications except the formal reports
required and sent in by the Government agent and the chairman of
the board of directors—all communications are made by the governor
of the bank?
Governor HARRISON. Regarding the executive operations of the
bank.
The CHAIRMAN. My examination of the law and such examination
of the minutes of the board as I have been permitted to make, show
that the board itself created the office of governor of the Federal
reserve bank, and if it has any authority of law for having done it
I have been unable to find it. I do not want to disturb you in the
security of your position, because I think it is quite well established.
But now, along that line, Governor, do you consider that the United
States has a central banking system ?
Governor HARRISON. The term
The CHAIRMAN. I mean in the European sense of the term.
Governor HARRISON. N O ; I do not think so.
The CHAIRMAN. D O you think the New York bank is the central
bank of the United States ?
Governor HARRISON. I would be loath to think so.
The CHAIRMAN. Well, do you not think the impression is ingrained
in Europe that it is?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

43

Governor HARRISON. Of course, the further you get away, the less
knowledge there is of the real facts. I t is true that, because under
the law, the Federal Reserve Bank of New York has opened accounts
for foreign banks of issue, subject to the approval of the Federal
Reserve Board, in which, under the law as amended, all other Federal
reserve banks are authorized to participate, all correspondence and
all contact between those foreign correspondents and the Federal
reserve system as a whole, are necessarily through the one bank operating the accounts. I agree with you
The CHAIRMAN. Do the other banks participate to any extent?
Governor HARRISON. Participate pro rata in everything we do.
The CHAIRMAN. They do ?
Governor HARRISON. Yes, sir.
The CHAIRMAN. Right in this connection, Governor: The law itself authorizes the Federal reserve bank, by sanction of the board
and under the regulations, to be prescribed by the board, to establish foreign agencies, does it not?
Governor HARRISON. Yes; it does.
The CHAIRMAN. I t does specifically?
Governor HARRISON. Yes.
The CHAIRMAN. That being so, what right has the Secretary of
State to make a public announcement that no Federal reserve bank
official would be permitted to have anything to do with the international bank? Perhaps you would not like to comment on that.
Governor HARRISON. I would prefer not to discuss that.
The CHAIRMAN. You are unable to cite me to-day any sanction
of law for that?
Governor HARRISON. I think there is no provision of law which relates to it one way or another.
The CHAIRMAN. Exactly. Well, if you .have completed your general statement, I should like to ask you some questions about
Senator NORRECK. May I ask one or two questions ?
The CHAIRMAN. Certainly, Senator.
Senator NORBECK. I n your opening remark, you made reference
t o a very large number of bank failures in the last 10 years. To
what do you attribute that; especially ?
Governor HARRISON. I should like to answer negatively first. I
think it is not attributable to one of the defects in our earlier banking
system which the Federal reserve act was primarily intended to remedy and that was an inflexible currency system. Prior to the inauguration of the Federal reserve act there were a great many bank
failures. Going back to the class I referred to in 1814, those failures were due principally to a shortage of specie at the time it was
demanded. I think it was probably true that few, if any, banks that
Tiave failed in the past 10 years have failed because of the fact that
the Federal reserve system was not prepared and able to provide
currency when needed on eligible paper.
Senator NORBECK. We have had more failures since the Federal
reserve act than before.
Governor HARRISON. Yes. I do not know whether we have had
more proportionately. I think the percentage of failures in the past
10 years has been about the same as in the period of 1893. But it
is no doubt true that the proportion of banks that have failed in




44

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

the past 10 years has increased during the past year to a point where,
in the last few months of the year, we had a greater number of
failures than ever before.
The CHAIRMAN. Suppose there had been no Federal reserve system
during the last 10 years. What would have happened?
Governor HARRISON. I think the number of failures that would
have occurred, had we not had the system, would have been far
greater than we have had, in the face of it.
The CHAIRMAN. When we speak of failures, we mean an actual
failure of a bank where it is thrown into the hands of a receiver.
But as a matter of fact, prior to the adoption of the Federal reserve
system, did we not have periodically a practical breakdown of the
entire banking system from one end of the country to the other?
Governor HARRISON. Yes, sir.
The CHAIRMAN. SO that banks could not function in a legal way
and were compelled to resort to expedients to avert a greater disaster
than that then upon the country ?
Governor HARRISON. Quite right.
Senator NORRECK. Then you do not attribute the breakdown in
the banking structure in the country in the last 10 years to the
banking laws ?
Governor HARRISON. Senator, I think that the Federal reserve
system during the war and postwar depression, performed service
which it is impossible for the country or the rest of the world to
measure, and had it not been for the Federal reserve system during
those periods, no one could imagine what might have happened.
Now, as to the determination of the causes of the failures of these
6,000 banks in the past 10 years, I answered you negatively first, not
as a complete answer, but to show that I do not think it was because
of the cause of the earlier failures—shortage of currency. I t was not
that. I t was due, in part, I think, to the changed economic set-up in
the whole country; due to the fact that, with the automobile and
improved roads, the smaller banks in some cases, with nominal capital, out in the small rural communities, no longer had any reason
really to exist. Their depositors welcomed the opportunity to get
into their automobiles and go to the larger centers where they could
put their money.
Senator NORBECK. But that would imply that the money did go to
the larger centers.
Governor HARRISON. That is quite right.
Senator NORBECK. I S it not a fact that it did not ?
Governor HARRISON. NO ; but I should like to check that definitely
in the statistics.
Senator NORBECK. I am speaking of the centers. I am thinking of
the larger towns not in the East but in the Western States where the
automobile has been an immense influence in bringing the trade to the
centers. I recognize the influences you speak of, but I think they are
not major but minor.
Governor HARRISON. I agree w^ith you that there is no one cause
that can be specified as the cause of the failures.
Senator NORBECK. I S not the main cause of the failures due to the
change in economic conditions?
Governor HARRISON. Probably so.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

45

Senator NORBECK. I S it inability to pay, or has the banker lost his
brains in the last 10 years, so that he is less competent than in the
decade before?
Governor HARRISON. Under the law, he was authorized to make
certain loans up to a certain percentage of his capital and surplus
to certain customers. Having done that up to 8 or 10 years ago,
he finds that the little community in which he is located is suffering
from the postwar depression following the great expansion that
occurred in 1919 and in 1920; his customers in many cases either
were not able to liquidate their loans at once or, as I think is probably
largely true, those customers who had deposits, following the cycle
that I have mentioned, removed the deposits to other sections of the
country or to bigger centers and left the bank with the less liquid
assets, because when a withdrawal of money takes place, the banker
has to pay out of cash or his most liquid holdings, and what is left
is less liquid. That does not necessarily mean it is not as sound ultimately, but it is slower. If his deposits continue to go too rapidly,,
there comes a point where he has not enough liquid assets to pay off
the demand depositors, and the bank must close.
Senator NORBECK. The shrinkage in the Northwest States has not
been in the small towns but also in the centers. There has
been a shrinkage that included the whole territory. I quite agree
with you that it is due to changed economic conditions.
Governor HARRISON. YOU see, you have had a deflation in commodity prices of all kinds all over the world.
Senator NORBECK. And how can a change in the banking system
remedy it?
Governor HARRISON. I think that you can never set up a system
that is going to protect depositors against dishonesty or bad judgment, even though you have the strongest banking laws.
Senator NORBECK. Nor against the falling prices of commodities
that affect all property values, can you?
Governor HARRISON. If you could devise a law that would, in
effect, guarantee the immediate payment of all deposits, I think the
country would be much worse off than it is; in other words, it would
have to be so constructed that the banks in a given community would
have to keep so very liquid that they could not do the business that
the community demands. Therefore, while I think we can not and
should not attempt the English system of no regulation, I believe we
should strive to get as nearly uniform laws in the 49 jurisdictions
as possible to control deposit banking along sound lines, and then
do what I think is one of the things not done nowT as much as it
should be—have the directors of each bank realize the responsibility
they legally have to see that their officers are complying with the
law and to see to it that they are conducting business soundly within
the law. I think the banking directorates are too big and that they
leave too much leeway, in some cases, to the executives of the banks.
If it were possible, perhaps, through some limitation on the size of
directorates of banks, to impress upon the directors the real responsibility they have got in controlling the management of the bank
within the law, I think we could obviate many of the difficulties we
have had, because then you would have the combined judgment of a
group of directors who are directly controlling the bank's business
34718—31—PT 1




4

46

NATIONAL AND FEDERAL. RESERVE BANKING SYSTEMS

instead of having directors many of whom are merely new business
getters.
The CHAIRMAN. The Comptroller of Currency yesterday suggested that in addition to the severer penalty, which the comptroller
at all times perhaps is reluctant to impose, of closing up a bank
and taking away its charter, that the comptroller might have some
authority to suspend or even remove an official of a national bank.
What would you say as to that?
Governor HARRISON. I am faced with two difficulties. I think
some power other than what the comptroller has got now, which is
merely to close a bank, should be given him. I am very sympathetic
with anything that would give some right of removal to the comptroller, but without any question of personal reference, the big question, in principle, is whether one individual should be given such a
drastic right as removal of an officer not for any violation of a law,
but merely because he does not like the way he is doing business. If
there was no other way of doing it, I think he should have that
right, but I am turning over in my own mind and trying to devise
some other procedure which would be as effective, but, at. the same
time, less paternalistic, perhaps, than that.
The CHAIRMAN. Well, the Federal Reserve Board has the peremptory right to remove any director or official of a Federal reserve bank.
Governor HARRISON. That is less dangerous as an institution—I
mean as an American institution—than saying one individual shall
have the right of removal.
The CHAIRMAN. That means the exercise of judgment of eight
persons rather than one. Governor, right there, before it slips my
mind, do you not think that we have a mathematical demonstration
of the measurable efficiency of the Federal reserve banking system
in the fact that, as to the number of failures for the last 10 years—
6,000—the overwhelming majority of them were nonmember banks
rather than member banks of the system ?
Governor HARRISON. Yes; I think that is true. I think over twothirds were nonmember banks.
Senator TOWNSEND. The percentage was even larger than that, as
stated by Mr. Pole yesterday.
The CHAIRMAN. I think the comptroller said about 85 per cent.
Governor HARRISON. I hope he is right. I thought it was about
two-thirds.
Senator TOWNSEND. H e said 1,000 out of 6,000.
The CHAIRMAN. The distinction was as to national banks as
against State banks instead of member banks against nonmember
banks.
Senator TOWNSEND. Yes; that is right.
The CHAIRMAN. The percentage of nonmember bank failures was
approximately 70 per cent—68 or 70 per cent.
Governor HARRISON. That is about the figure that was in my mind.
I think the committee may wish to consider, since you raised the
question of the authority of the comptroller to do something short
of closing a bank, whether the Federal reserve system can do something short of expelling a bank from membership in the system.
Of course the actual expulsion, which becomes public notice, will of
itself precipitate the very thing you want to avoid—closing the
bank.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

47

The CHAIRMAN. The Federal Reserve Board, under the most
extreme provocation, has never even exercised its authority to remove
a director of a Federal reserve bank.
Governor HARRISON. Query: Whether it would be possible and
proper—and I throw this out as a suggestion to the committee—
to give to the Federal Reserve Board or to the Federal reserve
banks the right to suspend a member bank from any or all of the
privileges of membership during a given period in the event that the
bank has not, in our judgment, conducted itself in the safest way for
the depositors.
If that could be done in some fashion that would not involve publicity, and would not then necessarily invite what you are trying to
avoid by expelling the bank from membership, which necessarily becomes public, it would give us a very much stronger hand in dealing
with a recalcitrant bank than we have now.
The CHAIRMAN. YOU are speaking of member banks ?
Governor HARRISON. Yes, of course, only member banks—and by
recalcitrant banks, I do not mean a bank violating the law, which is
in a category of its own, but one which we believe is getting itself
into a position demanding more and more or a bigger and bigger
proportion of our assets in loans.
I t has been asserted that we have the authority of denying borrowing privileges.
The CHAIRMAN. YOU have that authority complete.
Governor HARRISON. I think that myself. I agree with you that
legally we have. The only difficulty with the exercise of that sort
of power, Senator, is this, that a bank borrows from the Federal
reserve bank not for the purpose of taking the money and applying
it to a particular loan or to a particular purpose but rather to make
good an already existing deficiency in its reserves.
At the end of a day—and I am talking principally of the banks
in the principal money centers with which I am most familiar—
at the end of a day the bank finds itself with either an excess of
reserves or a deficiency of reserves as a result of a myriad of transactions, due to new deposits, a loss of deposits, wire transfers to other
sections of the country, new loans, and perhaps transfers abroad or
incoming transfers—at any rate, at the end of the day it will find
itself with a deficiency, we will say, of $10,000,000, and they come to
us with perfectly eligible paper and ask us to give them $10,000,000.
We have two alternatives. We can say, " Yes, you can have that at
our rediscount rate, because you have eligible paper and need it to
repair your reserves," or, if we exercise the authority to refuse to
make that loan, which right has been questioned by many people,
the only thing that happens is that they are deficient in reserves, and
they borrow the money in a way, by having a shortage in their reserves rather than by a straight loan. I t is true that the shortage
carries with it a higher rate because they have to pay a penalty on
the deficiency. But that is not the sound way of trying to correct
the bank in its management even if we thought it was wise—that is,
force them to be deficient.
My thought was that if the committee could consider the possibility and propriety of giving to the reserve bank, subject to the




48

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

approval of the Federal Reserve Board, the right of suspension from
any or all of the privileges of membership so that we would have the
decision, in given circumstances, of what privileges we will deprive
them, there would be no question about that and it could be handled
with such dexterity as to avoid certain undesirable consequences that
we might otherwise precipitate.
The CHAIRMAN. I can't conceive why you should say or think that
you have not complete authority to refuse the rediscount privilege.
Governor HARRISON. When I was counsel for the Federal Reserve
Board I gave an opinion to the effect that we had complete authorhV^
and I have not changed my mind about it, Senator.
The CHAIRMAN. I understood you to suggest that there was good
reason to oppose that view.
Governor HARRISON. N O ; I merely meant to suggest that I saw the
points that some on the opposite side raise. I do not agree with them.
The CHAIRMAN. D O you take the view that member banks, in the
first instance, or the Federal .reserve banks, in the second instance,
have no right to inquire or to know to what use a borrower is going
to put the funds obtained ?
Governor HARRISON. Senator, I do not believe that it is a practicable thing, regardless of our legal right, to inquire what a borrowing member bank is going to do with the money it gets from
the Federal reserve bank, for the reason, as mentioned a while ago.
that it is an impracticable thing for the Federal reserve bank to t r y
to control the application of the proceeds of a loan. I n the first
place, by and large, the banks themselves do not know what particular transaction or group of transactions have made the loan
necessary. They are running various departments, and at the end
of the day they concentrate all their figures and find they are deficient in their reserves and they come in to borrow because the law
requires them to maintain their reserve position. If the Federal
reserve bank should undertake to predicate its loans upon an agreement from the banks as to what they were going to do with the
money, the bank would probably say to us, " We do not know; we
are just filling up the void that has occurred as the result of the total
of our day's transactions."
The CHAIRMAN. Did it not know ?
Governor HARRISON. Well, it may have been, for instance, that the
$10,000,000 that I referred to a moment ago was due, first, to a
withdrawal of $10,000,000 of deposits by a foreign correspondent
taking the money over the cable transfers. On the same day the
bank may have made a loan of $10,000,000 to a broker on stock
exchange collateral. Without either one or the other they would
not have had the deficiency. Now, to say which it is that caused
the need for that particular $10,000,000 is, of course, impossible t o
determine. I t is the sum total of all transactions that made it
necessary, but even if you could determine that, then comes the
further question in my mind as to whether the Federal reserve bank
should, even if it could with propriety and with adequate wisdom,
control the business of member banks within the law by a threat of
a refusal to make the loans, whether you and the country as a
whole would be satisfied to have one group of men in a Federal
reserve bank outlining the policies and controlling the operations of




.NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

49

all the individual institutions that are members of the Federal Reserve system.
I t is for that reason that I feel more strongly than I can tell you,
that so long as a bank is within the law, the directors are primarily
responsible for the direction the management takes within the law in
the matter of its business.
The CHAIRMAN. D O you regard the Canadian banking system as
a rational and sane system of banking ?
Governor HARRISON. If I may answer the question a little differently, I should think the English system for England is excellent;
that is, where they have got four or five principal joint-stock banks
with branches all over the country.
The CHAIRMAN. I am not asking the question strictly with reference to branch banking. I am talking about the soundness of
the system, its readiness and ability to respond to commercial
requirements.
Governor HARRISON. I do not know, Senator, that I am familiar
enough with the details of it really to give you a helpful answer
to that question.
The CHAIRMAN. I am asking the question because, as I recall the
testimony of Sir Edmund Walker, who was at that time the chief
executive officer of the Canadian banking system in 1913, he told us
that the customers of the Canadian banks were required at the beginning of each fiscal year, to submit to the bank a budget of their
contemplated requirements and expenditures for the ensuing fiscal
year and that, upon the basis of that budget, the loans for the
year were made, so that they seemed to think that it was the desirable and essential thing to do, I am told, to know what use was
to be made of the money borrowed from the bank.
Governor HARRISON. That is a little different, is it not, though,
because there you have an individual customer? You or I or any
other man in business, especially in these days, usually makes up a
budget of his needs for the year and that is a well-defined budget
based upon perhaps years of experience in hisi operations. But
wThen a bank embarks upon its business for the new year, the position in which it is going to be in the course of the year, is one that
no wisdom in the directors or officers would be wholly able to anticipate, because of the fact that their business depends upon the individual businesses of their customers, plus the whims of depositors
and, in some cases, unexpected runs. I t is too big an order to
expect individual member banks—certainly a sizable member bank
in one of the big money centers—to anticipate those needs. The
smaller the bank, the less variable its business and the more likely it
can, and in some cases they do, come before us and talk over their
needs for the coming season.
For instance, in some of the smaller banks uptown in the cloak
and fur district we know, as a matter of experience over a period
of years, that they will require funds from us beginning in the spring
and running through three or four months. That usually works
pretty well according to rule, but the larger money market banks
would find it almost impossible for them to make up a budget of
their needs from the Federal reserve bank.




50

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

The CHAIRMAN. Maybe so. The Federal reserve system, as I understand it, if I do understand it, was intended to be a commercial
system and its primary purpose, if not sole purpose, was to respond
to the requirements of commerce and business and industry. That
being so, the Federal reserve bank was given the right, by the statute, to discount the paper of member banks—paper such as notes,
drafts and bills of exchange, drawn for agricultural, industrial, or
commercial purposes. Those were the purposes set out in the law
for which discounts might be made by the Federal reserve bank of
eligible paper of its member banks and to the Federal Reserve
Board is delegated by law the power to define the character and
eligibility of paper that may be discounted, and in the same section
which confers this authority upon the bank and the board, it is
textually stated that such definition shall not include notes, drafts,
or bills covering merely investments, or issued or drawn for the
purpose of carrying or trading in stocks, bonds, or other investment
securities except bonds and notes of the Government of the United
States.
Now, what do you interpret that to mean \ What is the prohibition there, in that case ?
Governor HARRISON. I think it means this, that if any one of us
should undertake to go to a bank and borrow $1,000 from the bank
for the purpose of purchasing, say, $1,000 worth of stock and carrying that stock, that bank which loaned us that money could not then
bring that note, secured by that stock, to the Federal reserve bank
and have it rediscounted.
But it does not mean, in my mind, that if a bank makes such a
loan as that to its customers and at the end of a day it is deficient
in reserves for a variety of reasons, that we should say to it that,
having made this loan of $1,000, on this collateral, the bank is no
longer entitled to accommodation from the Federal reserve bank.
The CHAIRMAN. YOU say you are not authorized to inquire into
what purpose the bank is going to use the money it gets from the
Federal reserve bank. How do you determine
Governor HARRISON. If a bank comes to us with a note of a commercial concern, or a farmer, or someone in a small merchandise
business, or a big merchandise business, and the note is for $5,000 or
$10,000, and they ask us if we will discount it, we will ask for a statement of the original borrower to find out whether their condition is
such as to indicate that the loan that they have made from the bank
was for a commercial purpose rather than a capital purpose and if
their statement shows a situation which would indicate to us that
they are not borrowing for a capital purpose, but rather to conduct their business commercially, to buy an inventory pending sale
or buy seeds pending planting of a crop, we then make the discount.
We would not feel free, if a bank came to us with that kind of
paper, to say they could not have the accommodation merely because, on the same day, they had loaned $10,000 to Bill Jones to
buy stock.
The CHAIRMAN. YOU think then that this law is practically futile
and a dead letter ? I n other words, you think that a member bank
that wants to engage in the business of making loans for the purchase and carrying of stocks on the market, has a right to do that




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

51

ad libitum and take its eligible paper to supply the deficiency in its
funds thus created by engaging in the stock transactions ?
Governor HARRISON. I t is a pretty hard question, Senator, for this
reason, that, for a great many years prior to the beginning of this
great era of speculation the business of banks has included the
making of loans upon equities in approved American concerns.
I t has been one of the businesses of banks for many years, for generations, to make loans upon the stock of corporations or the bonds of
corporations. Now, those loans are not necessarily speculative loans.
They may be a perfectly proper means of securing a loan.
Over a period of years those loans in banks may have been for a
perfectly legitimate financing of the needs of the American people
quite apart from speculation. Now, what happens ? We come into
an era of speculation such as we had commencing with 1928 and those
loans go up very rapidly, and then the question comes, who is going
to determine whether they are going up too rapidly or not too
rapidly, and if someone in the Reserve, in his judgment, thinks they
are going up too rapidly, shall he use the threat of refusing a loan
on legally eligible paper to restrain that one particular kind of
business which in itself is not prohibited by law ?
Actually, all through this period of speculation, the New York City
banks' loan accounts on call loans, varied hardly at all. They stayed
around a billion dollars, which has been about the figure it has been
ever since we began collecting figures, and when the stock loans were
mounting with great rapidity the loans by the New York City banks
stayed fairly level.
I t would not have been competent for us, at that time, with no
evidence of increase in that character of business which admittedly is
legal, to say they should not have accommodation from us if they
lost deposits or needed to repair a deficiency in reserves for any
reason whatsoever.
The CHAIRMAN. I am not addressing myself to any specific instances. I want to adduce your opinion as to the intent of that
prohibition of the law there. What had the proponents of the Federal reserve bank system in mind when they inserted that prohibition
in the law ?
Governor HARRISON. Of course you know much better than I,
but I should not think one of their purposes was to try to control
gambling or speculation by the American citizens.
The CHAIRMAN. Was not the intent—not to control it or to prohibit it—was not the intent clearly to prohibit the use of Federal
reserve banking facilities for that purpose?
Governor HARRISON. I was going to state that second step. I
do not think it was intended to control or even prohibit speculation upon the part of the American people because I do not think
through the Federal reserve act, that it was possible. But it was
intended to keep out of the Federal reserve banks loans which were
made for speculative purposes.
The

CHAIRMAN.

Yes.

Governor HARRISON. NOW, the question which you are asking is
an intermediate question; whether loans perfectly "eligible under the
terms of the law must not be made because of the fact the bank that
is trying to obtain accommodations from us on those loans, has made




•52

NATIONAL AND FEDERAL. RESERVE BANKING SYSTEMS

some other advance to another customer for, perhaps, a speculative
purpose.
The CHAIRMAN. Then we get back to the crux of the whole matter. I t is your opinion that this provision of the Federal reserve
act is totally futile because a bank may use its funds and its rediscount privileges at the Federal reserve bank to supply the deficiency
in its credits, created by stock-speculative purposes?
Governor HARRISON. That would be my interpretation of that
provision, that
The CHAIRMAN. That it could do that ?
Governor HARRISON. That we could not refuse to make the loan
solely because
The CHAIRMAN. That is what I said, that you could practically
nullify this provision of the Federal reserve act by, nevertheless,
accommodating a bank which had been engaged in the wildest sort
of speculation, in order that it might replenish its credits out of
borrowings on eligible paper; it might replenish its credits used for
stock-speculative purposes.
Governor HARRISON. I would not say that we nullify that, that
way, because of two reasons; first, if that bank is unique and only
•one bank in a group, then we would control that bank in its borrowing, as we have ever since I have been with the Federal reserve bank,
not through telling them we do not like their particular type of
business, but on the ground they are borrowing from us disproportionately or too continuously, out of line with the other banks in the
community.
Now if, on the other hand
The CHAIRMAN. You tell them that without any knowledge of the
use they are making of the funds ?
Governor HARRISON. We have their statements, of course, which
indicate that their commercial loans have gone up so much or their
collateral loans have gone up so much or their investments have
gone up so much
The CHAIRMAN. I say you know it if your examiners are worth
a threepence.
Governor HARRISON. We know that, and any time they are borrowing out of proportion, we bring pressure upon them.
The CHAIRMAN. YOU do not think you have any right, notwithstanding you have full knowledge of the character of the loans the
member banks are making—you do not think you have any right to
decline, under the law, to rediscount for that bank which obviously
is proposing to use the assets of the Federal reserve bank to supply
deficiencies in its credits already used for stock speculative purposes ?
Governor HARRISON. Of course, the difficulty, Senator, is to get
your hypothesis. I mean the mere fact collateral loans are going
u p does not necessarily signify that those loans are speculative. Let
us forget the last two years
The CHAIRMAN. Let us not forget anything. What is the use of
that language if the Federal reserve assets or facilities may be used
as you indicate you think they may be used?
Governor HARRISON. I t keeps out of the Federal reserve what we
-call nonself-liquidating loans. I t does not permit us to purchase or
t o collateral Federal reserve notes with a loan that is predicated




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

53

upon the purchase or carrying of stocks or bonds, and we think
that is a very definite, concrete provision, and I think it is a wise
provision.
The CHAIRMAN. What effect has it if a bank may shift its credit,
as you indicate it may do; if it may use its funds legally in stock
speculations or loans to brokers for that purpose and recoup itself
and replenish its exchequer by rediscounting with the Federal reserve bank?
Governor HARRISON. I t has this effect, that it insures a very
definite complexion of the portfolio of the Federal reserve bank. I t
keeps in the Federal reserve bank a much more liquid and selfliquidating asset than if we are permitted to rediscount these loans
upon stocks.
The CHAIRMAN. Yet the bank will be availing itself of the Federal
reserve facilities to do the very thing that the law plainly was enacted to prevent; in other words, Governor, I think I may say with
some degree of confidence—I had something to do with it—the plain
intent of the proponents of this act was to remove the assets of the
Federal reserve banking system as far away from stock speculative
activities and purposes as it was possible, by statute, to get it.
Governor HARRISON. That is true, and I think it has done that.
The CHAIRMAN. I t has not done it if banks do as you say they
may do.
Governor HARRISON. But the assets that we hold in the portfolio
are free from speculative
The CHAIRMAN. That simply relates to the securities for your
loans—to the soundness of those loans. I t does not relate to the
purposes of them.
Governor HARRISON. Then, Senator, if that is true, if we can not
go by the face of the note
The CHAIRMAN. YOU do not have to go by the face of the note.
You know what the bank is doing.
Governor HARRISON. Then, if that is true, there would be no ijurpose in limiting the eligibility of paper for rediscount with the Federal Reserve Bank. We might as well lend to those banks on
bonds
The CHAIRMAN. A S a matter of fact, you could not lend them on
bonds at all if, at that time the proponents of the act had ever had
any conception of the fact that there would be billions of dollars
of outstanding United States bonds. You know when the act was
passed there was less than $1,000,000,000 of outstanding United States
bonds and they were rapidly disappearing. We never would have
included the right to use United States bonds as collateral for those
purposes, but for the fact that they were at that time rapidly disappearing.
Governor HARRISON. N O ; what I intended to say is this—and I
want you to help me because it is a practical difficulty in the operation of the bank—either we have got to try to control the management and investment policy and loan policy of a member bank or
not.
The CHAIRMAN. N O ; only with respect to what the law prohibits
and what the law permits.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Governor HARRISON. But the law, as I thought we both agreed at
the outset, did not attempt to control what others than the Federal
Reserve Banks were doing. I t could not. I have always interprets 1
that provision that way. All it intended to do was to make sure
that the Federal Reserve Bank took into its assets the kind of loans
limited to agricultural or commercial purposes. If we can not predicate our judgment upon the paper presented to us and rely upon
that—if we have to go beyond that and say " We do not like this
bank because it makes a loan to Bill Smith, a gambler "
The CHAIRMAN. I t is not a question of going back of the paper.
Governor HARRISON. If we have to go beyond the paper presented
and determine the loan upon not the character of the paper, but
the business of that bank
The CHAIRMAN. YOU have to determine it upon the purpose for
which that borrowing banks wants money from you.
Governor HARRISON. I n the usual case I would have to say that I
could not tell.
The CHAIRMAN. What are your examiners for if you can not tell ?
Governor HARRISON. Even the examiners, and the best examiners,
go into a bank and they find their security loans are so much. They
can not necessarily assume that those security loans are speculative
loans. I n many cases they are not. Some place along the line this
other theory would involve some man saying that a bank has gone
beyond a commercial or an investment business and is helping somebody in a speculative business, but there is no way of knowing it. A t
times, the banks themselves do not know whether the borrower is
speculating.
The CHAIRMAN. But ought they not to know that ?
Governor HARRISON. I t is sometimes pretty difficult to find out.
Senator NORBECK. YOU said a while ago if a farmer or a merchant
submits an application for a loan, you go into the question of whether
it is for capital or other purposes.
Governor HARRISON. Yes.
Senator NORBECK. I n other words, a farmer wants $5,000, and the
question comes up whether it is for feeding cows or buying cows.
Governor HARRISON. Yes. However, Senator, I will say that loans
under $5,000 we handle in a different category. We do not require
statements, but other than that, your statement is correct. We still do
that with every bank of the kind that the chairman is talking about.
When that note of the farmer comes in and we determine that it is
of the kind you suggest, we discount it. But the question is if the
bank that is wanting a loan from us is making a collateral loan to
some one else, should we decline to take the farmer's paper because
of that.
Senator NORBECK. I have reference to going into the application
for those loans very carefully. You stated how carefully you went
into some of them, and that the chairman was asking about some
others.
Governor HARRISON. I think there has been a misunderstanding.
We go into all loans that come to us from whatever bank and if the
paper is eligible, in accordance with the terms of section 13, we.take
it unless we consider that the bank has been borrowing too long
or disproportionately larger amounts in line with the rest of the
community.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

55

Now, the only question that I understand the chairman is asking
me is whether if a bank which presents us with this paper of this
farmer that you have just mentioned—hands us that paper and we
find out on the same date, at the same time or currently, they are
making other collateral loans to someone else that are speculative
loans, we should refuse to take the farmer's paper.
Senator NORBEOK. I thought you said you did not go into the
matter. I am sorry I interrupted. Go ahead.
The CHAIRMAN. That is all right, Senator. You are privileged
to ask any questions you desire and at any time.
Senator WALCOTT. Does not this all fall back on the definition of
what a speculative loan is ? Is it not a seasonable thing
Governor HARRISON. Senator, that was the second point I mentioned when the Senator asked me if we have any control. If the
community is borrowing too much money and the credit in the country is expanding too rapidly or beyond the normal seasonal growth,
determined by the total volume of trade and business, then I believe it is incumbent upon the Federal reserve system to control
the expansion in the way the law has given us, by putting on the
brake of the rediscount rate. I think that brake of the rediscount
rate should be applied in such a case whether the expansion is due to
speculation in real estate, securities, or commodities, or whether it is
due to abnormal growth in business. I think if credit is going up
too fast, whatever the cause and beyond a rate we can stand very long,
then you have given the power to put on the brakes through the
rediscount rate.
But to particularize as to a particular bank and to determine
whether certain loans are or are not speculative loans, is a very
difficult thing for one group of men to determine for 900 banks.
The CHAIRMAN. I t is neither difficult nor impossible to apply
what this statute regards as speculative loans. I t says expressly
that you are not to permit the facilities of the Federal reserve banks
to be used to purchase or to carry
Governor HARRISON. We do not
The CHAIRMAN. T O purchase or to carry—oh, you may not do it
directly, but you practically vitiate this act in the way you do it.
Senator WALCOTT. The borrowing bank does it.
The CHAIRMAN. The Federal reserve bank permits the borrowing
bank to do it. I t is the business of the Federal reserve bank to
know what the borrowing is doing and for what purpose it is doing
it. If that is not the meaning of this act, why should they feel—your
board of directors ever feel, in any sense or degree—warranted in
admonishing member banks in New York to reduce their loans to
brokers ?
Governor HARRISON. Senator, we never did it.
The CHAIRMAN. YOU did not?
Governor HARRISON. NO, sir. We did it
The CHAIRMAN. Did not the Federal Reserve Board do it ?
Governor HARRISON. That is a matter of public record. We never
did it in New York
The CHAIRMAN. Should not you have done it?
Governor HARRISON. For two reasons: I n the first place, the socalled brokers' loans of the New York banks were not going up.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

They were staying stable at the figure at which they rested even
before the period of speculation began and, in the second place, our
directors felt from the beginning the proper method of breaking
such expansion, if it occurred, was through the rate rather than
through a particular admonition to particular banks.
The CHAIRMAN. Eight there now. If not to be controlled, if you
have no authority to abate or control that sort of thing, why do you
do it through the rediscount rate ? W h y do you apply the rediscount
rate to a situation of that sort and penalize the legitimate commerce
in order to control something you say you have no right to control ?
Governor HARRISON. I think we have a perfect right to control
an expansion of credit, regardless of the cause of it, when credit is
expanding as it was in 1928 and 1929 at a great rate all through the
country. Because of the demand for money for speculative purposes,
we wanted to put up our rediscount rate believing that was a proper
means of limiting a too rapid use of the country's assets for speculative or other purposes.
The CHAIRMAN. Could you not more effectively have done it by
declining to let the assets of the Federal reserve bank be used for
that purpose ?
Governor HARRISON. I do not believe we could.
The CHAIRMAN. I disagree with you. I think you could. We see
now what is the result of the failure to do it.
Senator WALCOTT. Suppose you recognize—you and your associates—that the whole tendency of the country is toward rapid inflation as it was pretty generally admitted, say, in 1928 or 1929.
There is no difference of opinion about it except perhaps with a new
group of younger persons who have never had experience with this
thing—do you feel that you, as governor of a Federal reserve bank;
have not the legal power to put the brakes on ? This is one of the
prime objects of this investigation.
Governor HARRISON. I think we have. I think the power to put
the brakes on through the rediscount rate, which, in usual circumstances, is always effective if attacked promptly and courageously?
is given us. We made mistakes. I do not think we went up fast
enough.
Senator BTXLKLEY. YOU say you did not go up fast enough ?
Governor HARRISON. N O , sir; I do not think we did.
Senator WALCOTT. Without making a record of the mistakes, do
you not think there are other ways just as effective as advancing the
rate, which penalizes business which you want to succeed and in
which there may be no marked inflation ?
Governor HARRISON. N O , for this reason; that if you try to do it
through so-called direct action, what would happen in a community
such as New York? You would, perhaps, squeeze such loans out of
one bank only to have them slip around into another bank and 3^011
can not by questioning an individual bank, force down the whole
level of any one character of loans.
The effective way to do it is to put a rate control into effect which
will invariably result in a liquidation of those loans least desirable
first; in other words, if you are a borrowing bank and we put the
pressure of a 6 per cent rate on you, and you want to get out of
our debt, you will not call the commercial customers' loans, but the




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

57

least desirable loans or the most liquid loans or call loans, which are
used as secondary reserves. When the rate pressure begins to work
in New York, the first loans that begin to go are the call loans.
Why ? The banks trying to get out of debt will look at the collateral
loans and will pick out the least desirable of the call loans and then,
if the pressure is still too great, they will go up to the second level of
call loans. That is where they adjust their position first.
The rate at that time, in my judgment, would have been effective
had it not been for these loans " for others," which did more than
anything else to make all Federal reserve policies less effective than
they would have been otherwise.
The CHAIRMAN. We want to discuss the loans for others.
Governor HARRISON. I think that is the biggest problem in the
discussion to-day.
The CHAIRMAN. I simply do not agree with the governor that the
rate of discount was based upon a desire to control the market. I
think it was intended as a responsive method of administering to
local requirements, and I have never been able to see, and I did not
see in 1920, either the fairness or the effectiveness of increasing the
discount rate and thereby imposing a penalty upon the ordinary
business of the country, commercial or industrial, in order to control
the activities of the stock market. I t was not effective then and a
great many experienced bankers did not think it would be or was
effective more recently. When people are betting on margin—or
putting it in a less offensive way, when people are operating on
marginal transactions in which they usually hope to make large
profits—they do not pause to consider the change of one-half or
one-quarter of 1 per cent in the discount rate, do they?
Governor HARRISON. N O ; but the bank itself considers very seriously whether, with an increase in the reserve rate, it wants to
borrow the reserve against an expansion of loans.
The CHAIRMAN. The Federal Eeserve Board did not agree with
the view of the New York bank about that, did they ?
Governor HARRISON. N O , sir.
The CHAIRMAN. And the Federal reserve advisory council, composed exclusively of more or less experienced and skilled bankers,
did not agree, did they ?
Governor HARRISON. I thought they did. They, at one time, disagreed, but when they were asked the specific question whether we
should be allowed an increase in our discount rate, they voted unanimously in favor of it.
The CHAIRMAN. At the very last—but did not the advisory council advise against it ?
Governor HARRISON. Against increasing the discount rate?
The

CHAIRMAN.

Yes.

Governor HARRISON. I do not think they did. I thought they
specifically said they approved of what the Federal Eeserve Board
was trying to do through direct action in February but that they
were not then questioned as to the discount rate.
The CHAIRMAN. If they approved that, they could not approve the
rate.
Governor HARRISON. They may have done both.
The CHAIRMAN. I may have been misinformed, but I think I am
right in the statement that they did.




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NATIONAL kND FEDERAL RESERVE BANKING SYSTEMS

Senator WALCOTT. What do you think the effect would be if we
removed the tax on the profit from the sale of securities, on what we
are talking about—the effect on the speculative market?
Governor HARRISON. I think it would have a stabilizing influence^
Senator—not necessarily if withdrawn, but reduced—because it
would remove some of the inhibitions some people have on selling
when stocks go up.
Senator, may I
The CHAIRMAN. Governor, right there, and as a corollary to the
question the Senator has just asked: Do people invest their funds
for a day, or an hour, or a week, or a month ? Is that your conception of that terminology—investing?
Governor HARRISON. Of course the question of the motive at the
time of the original purchase is difficult to determine. If I buy
100 shares of stock to-day, intending to put them in my vault to
keep them indefinitely, and then I find something has happened to
me or my family within 10 days that forces me to sell them, I think I
am not out of the investment class.
The CHAIRMAN. If it has been your habit, however, to buy them
at one hour of the day and sell them at the next hour of the day,
or the next week, would you regard that as an investment ?
Governor HARRISON. I should not.
The CHAIRMAN. What would be the effect
Governor HARRISON. Except this: I mean dealers in various securities who buy securities merely for the purpose of reselling, of
course, could not be said to be speculators on that ground just because they sell within a short period. They are merchants in
securities.
The CHAIRMAN. W h a t would be the effect of a tax on transactions on the stock market where the stock had been held for less
than 60 days?
Governor HARRISON. I do not believe, myself, Senator, that would
be wise.
The CHAIRMAN. I am asking you what you think the effect would
be.
Governor HARRISON. I think it may deter a lot of these traders in
securities in the volume in which they trade—the fellows that are in
and out all the time—but whatever else you may say about their
motives, they are stabilizers in the market rather than otherwise.
I t may deter that.
I am wondering whether, though, it may not do something else—
put at a discount great volumes of securities which are dealt in day
after day purely as investments, Because I or someone else may not
want to buy securities subject to a prohibitive tax if I were to sell
out within a day or so.
The CHAIRMAN. I did not say a prohibitive tax.
Governor HARRISON. Well, an effective tax. I t may be a deterrent also to perfectly legitimate investments, because a man may
say, " I do not like to buy something that has such a tag on it."
The CHAIRMAN. There* is incidentally and inevitably associated
with every proposition something to which an objection may be
raised. That is a casual objection. That is a thing that would
happen, perhaps not so frequently, but it might happen.




NATIONAL. AND FEDERAL RESERVE BANKING SYSTEMS

59

Governor HARRISON. I think I would rather see, myself, a general
increase in the tax on the purchase and sale of securities, provided it
was coupled with something such as Senator Walcott mentioned to
you, a reduction in the capital tax for profits. I think that would
make an improved situation.
The CHAIRMAN. I was a little interested in that phase of the matter by reason of the fact that I had a chart prepared—how accurately it was prepared I do not know, because I have no skill
in such matters—but from it it appeared that the time of holding
the average stock dealt in on the New York Stock Exchange had
receded from 67 days 14 years ago to 22 days now.
Governor HARRISON. Yes; it is a very much more rapid turnover.
Senator, I do not feel that my comments about the discount rate
would be wholly complete unless I referred to the fact that any effort
to control the expansion of credit, such as was going on in 1928 and
1929, becomes prejudiced by the fact and to the extent that loans can
be made for speculative purposes wholly outside of the banking system. Several times in that period when Federal reserve policy became influential in checking the expansion of so-called speculative
loans, our purposes were defeated. Why? Primarily because of
loans for others from corporations and individuals wholly outside of
the banking structure, who sent in money for the purpose of making
loans to handle transactions on the stock exchange because they were
invited to do so by rates that ordinarily deter the banker from
doing it.
There were three different occasions in 1928 and 1929 when it is
fair to say that a check in the speculative rise was turned into an
advance again by virtue of the fact that these loans from others went
up at such an inordinate rate, and quite apart from the speculative
feature, the huge volume of these so-called outside loans was always
a potential threat upon the banking structure because of the fact that
whenever the situation went into reverse those loans were sure to be
thrown back on the banks. I n 1929 there were $3,000,000,000 of those
loans thrown back onto the banking system. I t does not mean that
that amount net was taken over by banks, because the total of all
brokers' loans went down at that time.
The CHAIRMAN. Well, what seemed singular to me, Governor, was
that the New York bankers seemeH to think that the discount rate
was intended to control the stock market rather than to relate
itself directly if not exclusively to agricultural and commercial
transactions.
Governor HARRISON. I do not think it is possible, through any
action on the part of the reserve system or any other central banking
authority to make money cheap for business and expensive for speculation. The credit pool is too big and fluid a pool for any group of
men, whoever they may be, to dictate the rates for funds that are to
* be put to different purposes.
The CHAIRMAN. I hope it shall, on the other hand, be possible
to prohibit it in a more effective way than it appears we have been
able to do in connection with the use of Federal reserve facilities
for speculative purposes.
Governor HARRISON. Well, I think there are things that can be
done to help, if we can control, for instance, the amount of these




60

NATIONAL. AND FEDERAL RESERVE BANKING SYSTEMS

loans for others on the outside, so that the pressure of the rate relates
itself to all reserves against those loans in the banks. Then you will
have a more effective control, in my judgment, than you can have in
any other fashion. Prompt action in cases of that kind will effectively accomplish its object without any great deterrent to business because business does not mind a high rate for a very short
while—up and then down. The thing that hurts business is a prolongation of a rate structure which gradually kills off the bond
and mortgage markets, followed by the effects of that inaction going
through the whole economic structure. If, on the other hand, you
can advance the rate quickly enough without regard to any temporary
effect on the business rate, you can probably accomplish what you
want to accomplish without too severe pressure on business because
the higher discount rate will, in the first instance, put pressure on
the banks to liquidate their call loans and not their customers 5 business loans. I t has always been that way.
The CHAIRMAN. Governor, it is now the lunch hour and I had
hoped that we might continue the hearing this afternoon, but we find
it is not feasible to do that. Would you mind waiting over until
morning ?
Governor HARRISON. I am completely at your service.
The CHAIRMAN. I want to inconvenience you as little as possible.
Governor HARRISON. I would prefer, if you could give me another
day than to-morrow, because I have a meeting with all the governors
of the other Federal reserve banks to-morrow.
The CHAIRMAN. How about returning Friday?
Governor HARRISON. That will be quite agreeable to me.
The CHAIRMAN. Could you be here Thursday morning?
Governor HARRISON. Yes, sir.
The CHAIRMAN. Very well; we will adjourn, then, until Thursday
morning at 10.30.
(Whereupon, at 1 o'clock p. m., the subcommittee adjourned until
Thursday, January 22, 1931, at 10.30 o'clock a. m.)




OPERATION OF THE NATIONAL AND FEDEEAL RESERVE
BANKING SYSTEMS
THURSDAY, JANUARY 22, 1931
UNITED STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY,

Washington, D. C.
The subcommittee met, pursuant to adjournment, at 10.30 o'clock
a. m., Hon. Carter Glass, chairman, presiding.
The CHAIRMAN. The committee will come to order. Governor
Harrison, I believe when we adjourned the hearing day before
yesterday I was interrogating you on the matter of doing something
to control in some degree security loans by member banks and incidentally rediscounts of Federal reserve banks to such member
banks. Have you examined section 11 of the bill that I proposed
last J u n e in the Senate ? I think I may add this, that the intention
of the proponents of the Federal reserve act in permitting the 15-day
direct loans on either eligible paper or United States bonds or notes
was solely to tide a bank over an unexpected emergency in which it
might have largely extended itself accommodations for commercial
purposes. As a matter of fact, has not that provision of the act
been very extensively used to increase stock-market operations?
STATEMENT OP GEOBGE L. HABBISON, G0VEBN0B OF THE
FEDEBAL BESEBVE BANK OF HEW YORK—Resumed
Governor HARRISON. Mr. Chairman, there is no doubt that the
authority conferred in section 13 of that act has been extensively
used. I do not know that I would agree with you that that privilege has been used or abused for the purpose of extending accommodations for speculative purposes, and I feel that way largely - for
this reason: At the time the law was amended so as to authorize
the 15-day advance, provided it was collateraled by eligible paper
or Government bonds, there was a feeling, I know, on the part of
the reserve banks and a great many of the member banks, that it
would be a great facility to them to have the privilege and avoid
what was mechanically a very cumbersome operation in rediscounting to maturity a great many individual notes; in other words under
the law we had the right—I am not talking about Governments
now, I will get back to that—under the law we had the right to
rediscount individual pieces of paper of certain definite maturities,
provided they were eligible. If a bank needed an accommodation
of $50,000, a small bank, it was able to bring to us a great number
of different pieces of paper of different maturities which we would
34718—31—PT 1




5

61

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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

have to purchase at the rediscount rate, figuring up maturities on
each individual note, and figuring up the discount on each individual note separately. This was mechanically a very cumbersome
operation for a great many institutions and for the Federal reserve
bank.
?
The CHAIRMAN. And yet it would seem inseparable from the
process of rediscounting eligible paper.
Governor HARRISON. Well, it was felt that the spirit of law—and
I am still not talking about Governments—would be complied with
quite as satisfactorily if we were authorized to make an advance
to the member bank of that $50,000 on its own note for 15 days,
collateraled by all of this composite of different kinds and different
maturities of eligible paper. I n that event all that we had to do was
to figure the maturity of 15 days on the one note, figure the discount
for that 15 days, and be certain that the collateral back of it was
adequate in face value and in goodness to cover the face amount of
that note.
The CHAIRMAN. The other collateral would be the United States
securities, would it not ?
Governor HARRISON. Yes, sir; the other collateral made available
was United States securities.
The CHAIRMAN. Would not that be shifting us right back to the
very thing that the Federal reserve act was enacted to take us away
from; would not that be shifting us back on bond and security currency instead of upon currency based on commercial transactions?
Governor HARRISON. I agree with you that the right of member
banks to borrow on notes secured by Government securities provides
an additional mechanism which might be used to further an inflation
in the currency. If banks used the mechanism in this way, then
in principle and in fact it would be bad; but, as a matter of fact,
what happens is this: Almost every bank that seeks accommodations from the Federal reserve bank on the security of Government
securities has plenty of eligible paper to present to us and chooses
the Government securities in preference to commercial paper, because
that is a more simple operation than using individual collateral
notes of different maturities, which they would have to submit to
us. I n fact, they go even further than that. A great many of our
country banks, not city banks, not knowing when they are going to be
deficient in reserves, not knowing when their deposits are going down,
and needing accommodation from us, maintain with us Government
securities in safe-keeping. Just as a custodian, we hold these securities in safe-keeping, available for instant use and for accommodation to them if for any reason they are short of currency; otherwise,
if we do not do that, they would be compelled, as a great many of
them are, because they have no Government securities, to ship eligible
commercial paper from whatever part of the district they are located
in, and then, if we get the paper the next day and find it to be
eligible, we go through the discount procedure I mentioned a moment
ago.
The CHAIRMAN. But the intent of the law was always to meet
just such emergencies as that, to avoid the sudden embarrassment
of the bank that might find itself in need of additional funds to
accommodate the commerce of each community. I t was not intended




NATIONAL AND FEDERAL, RESERVE BANKING SYSTEMS

63

to be a regular practice. Suppose, for example, to show more clearly
what the intent of the law was, suppose we did riot happen to have a
war and had not issued billions of dollars of United States securities,
to what extent would this practice prevail.
Governor HARRISON. I question whether the law would ever have
been amended to have permitted it unless and until the volume of
eligible paper, as defined by section 13, should decline to the point
where it would be inadequate to support the volume of the country's
business and reserve-credit requirements.
The CHAIRMAN. H O W could the eligible commercial paper be inadequate to support the country's business, if you mean by country's
business the commerce of the country?
Governor HARRISON. Mr. Chairman, I may not be quite accurate in
my figures, so take these subject to amendment, but in 1920, as I
remember it, the total volume of eligible paper in the hands of the
national banks was over $4,000,000,000, and it is now considerably
below $3,000,000,000, in spite of the fact that you would expect in
that period of 10 years to have a natural, normal growth proportionate to the growth of business and population of the country.
Now, something has happened to change the means by which
business and commerce is financing itself. The commercial paper,
as defined by section 13, is no longer in as great a quantity in absolute figures and relatively is in much less quantity. However, I
do not think you could say that as yet, as a total for the country,
it is inadequate, although as related to some individual banks it
may be inadequate. By and large, whatever abuse the privilege
of advances upon the security of Government bonds may in theory
be subject to, I do not believe it has yet been abused or has in itself
contributed to the increase in the speculative fervor to which you
have referred. This is because the machinery or means by which
a member bank comes to us for accommodation, is merely a matter
of preference and not merely a matter of necessity. That being so,
and I am sure it is true of all the principal banks in my district, if
you should make Government securities ineligible as collateral for
advances of this character, I do not believe it would change the volume of the Federal reserve credit and Federal reserve notes outstanding $1. I do not believe it would change the need of the
member banks for accommodation in any degree whatever. All it
would do would be to put a different form of asset into the Federal
reserve bank without in any way changing the substantial picture
of the credit situation.
The CHAIRMAN. Then you think it has in no.measure been abused
or used for stock speculative purposes? You think it has been used
altogether for commercial purposes?
Governor HARRISON. If you will let me answer your question the
other way around, I would rather do it.
The CHAIRMAN. But is not that your conclusion?
Governor HARRISON. N O ; I can not say that. To put it differently,
I do not say that no member bank has ever used Federal reserve
credit as a means of building up its reserve at a time when it has
collateral loans, some of which may be for speculative purposes.
That is a fact that we will all admit.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

But the question of the practicability or feasibility of determining
at what point or when a member bank's collateral loans have been
made for a normal day to day object or are in the speculative field,
is one about which we are at a loss. I would like to put it this way,
if you will let me, because I think this is one of the most important
things from our standpoint as well as the standpoint of your committee.
If a bank of $150,000 of assets, we will say, has $50,000 in Governments, $50,000 in commercial paper, and $50,000 in security loans,
those security loans may have been made to their customers to pay
doctor's bills or grocer's bills, or in some cases to buy a merchandise
inventory because of the fact that the bank did not trust the credit
of the merchant sufficiently without collateral. There may have been
a myriad of purposes back of those security loans. Some of them
may have been for speculative purposes. But the sum total of the
bank's portfolio is $50,000 Governments, $50,000 of commercial
paper, and $50,000 of these security loans. Now they are not borrowing from the Federal reserve bank at that point. To-morrow some
depositor, needing some of his money, withdraws $5,000. The bank
needs $5,000 in cash. One of the purposes for which the Federal reserve bank was created was to enable the bank to come to us for cash
to meet the withdrawal of these deposits.
There are three questions: First, should we at that stage before
making the required loan examine into the security account of the
bank to determine whether any of these loans are speculative loans
or not? Second, if we should examine, would we be competent to
determine that question? Third, if we do not determine that question at that point, but give them the amount required and then say
their security loans should not further increase, as this proposed bill
undertakes to do, are we not then putting ourselves up as arbiters
of the fact that every loan secured by collateral must necessarily
be speculative? Suppose we gave the bank the accommodation they
asked for and to-morrow Bill Smith's house is burned down, and he
needs immediately an accommodation for one reason or another to
help himself, or his wife is sick and he has to get a doctor, and he
goes to the bank and says, " I want a thousand dollars." The bank
says, " I do not like your credit now as much as I did yesterday, because your house is gone and it was not insured. Have you got any
collateral ? " Bill Smith says, " Yes; I have same Steel stock; I will
put that up as collateral for my note." Under this bill and under
those circumstances so long as that note to us was outstanding—no,
I will put it differently. Under this bill if they had previously
secured the $5,000 discount from us for the legitimate reason we
have just been discussing it would not be possible for that bank to
take on that thousand-dollar loan for Bill Smith, even though the
loan was not for speculative purposes, because it was collateraled by
stock-exchange collateral.
The CHAIRMAN. I n other words, you are stating what is in my
view, if my information is at all accurate, you are stating a very
exceptional case for the general guidance of the Federal Reserve
bank.
Governor HARRISON. I admit that it is a simple and homely case.
The CHAIRMAN. And a very exceptional one, too.




NATIONAL AND FEDERAL UNSERVE BANKING SYSTEMS

65

Governor HARRISON. The difficulty, though, is, Mr. Chairman, if
we discuss the more usual case that you have in mind, then the problem becomes even more complicated as far as the practical operation
of the Federal reserve bank is concerned, because it relates to one of
the larger banks with even more complicated problems. I n the case
of New York banks, as I pointed out day before yesterday, they all
for a period of a great many years have loaned money on stockexchange collateral. The banking system of the country has been
built up in large part upon the credits which equities in industry
afford, and a collateral loan does not necessarily mean speculation*
Over a period of years we find that the principal banks of New York
have loaned in the aggregate about a billion dollars, we will say, on
collateral—call loans to brokers and dealers. All through this speculative fever of 1928 and 1929, the aggregate of these loans of these
principal New York banks varied very little over or above that
figure. If, however, one of these banks during that period found it
necessary to come to us for an accommodation to meet a substantial
withdrawal of deposits, because of the transfer or withdrawal of
deposits of an individual customer or anything else, they come to us
and borrow, say, $5,000,000, as they would to make good that withdrawal, and then to-morrow an old, long, well-established customer
comes to it for accommodation on collateral, they would not be
allowed under the proposed bill to give him the loan so long as they
were in debt to the reserve bank.
The CHAIRMAN. Well, the intent of the provision of the law, Governor, was to provide against emergency embarrassment. I t was not
intended to enable the bank to get loans from Federal reserve banks
for stock speculative purposes. I wish I could think, as you seem to
imply, that there is not any excess in stock speculative activities in
New York.
Governor HARRISON. Well, I want to complete my statement on
that because if I leave the record at this point it will appear that
I am disingenuous, which I do not want to be. Of course, there
was speculation in New York; there was speculation all over the
country and all over the world. I t was a matter of the greatest
concern, not only to you but to all of us in the Federal reserve system. We exercised our imagination and ingenuity, I think, to the
limit to do what was proper to control it.
Beginning in 1928 we raised our discount rate three times. We
sold over four hundred millions of Government securities. We lost
$500,000,000 in gold. H a d anybody said two years before that it
was possible to raise the discount rate three times and sell
$400,000,000 of Government securities and export $500,000,000 of
gold without checking inflation, it would have been thought impossible ; but that is just what happened.
The CHAIRMAN. Did your rediscount rate for 1928 stop speculation ?
Governor HARRISON. NO ; it did not.
The CHAIRMAN. That question is important because I understand
it is your view that the raising of the commercial rediscount rate
has a tendency to put a stop to speculation.
Governor HARRISON. I think it has.
The CHAIRMAN. Did it do so in 1928?




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Governor HARRISON. N O ; it did not. I think, in looking back, in
retrospect, we made mistakes and probably will again in years to
come. We want, however, to minimize the number of those errors
in future and to decrease their effect. I hope we are learning as we
go on. This inquiry of yours will be most helpful to us. When I
look back on 1928, I feel that we made two particular mistakes—
first, we raised our rate the first time too late, and, second, we did
not raise it enough. I mean t h a t had we had at that time the light of
the experience we have since had, it would have been better perhaps
to have raised the rate 1 per cent in December of 1927. I do not
think except once in our history we have ever raised our rate more
than 1 per cent. Instead of that we waited until January, after the
turn or the year, when we raised it only one-half of 1 per cent. I
think that more prompt, vigorous rate action at that time would
have been more helpful. The difficulty with Federal reserve control, through rate action, over excessive use of credits for speculation, such as we experienced in 1928 and 1929, was very much enhanced by the fact that we developed in this country what has been
called a bootleg banking system; that is, corporations and individuals seeing the opportunity to get higher returns on readily available
funds, started loaning first in moderate amounts and then rapidly
growing amounts, to brokers and dealers in stock on stock-exchange
collateral. I n other words, loans that have been reported as " loans
for others." At one time over half the total volume of money borrowed by brokers and dealers was money advanced in that fashion.
I t was money that was wholly outside of the control of the banking
system; it was money loaned by lenders who had no responsibility
to the money market or to the banking system. I t was loaned without any responsibility on their part to maintain reserves of any
character.
So what happened was t h i s : When we raised our rate and put
pressure upon the bank reserves, instead of putting a grind, as we
call it, on the judgment and the freedom of the lending officers of a
member bank, instead of putting a pressure upon them to contract,
in a way which might be effective in reducing loans, the higher rates
resulted importantly in attracting other lenders quite outside of
the banking system to come in and lend their funds to speculators.
Now if rate control by the Federal reserve system, and I believe
it has the right of rate control, of any undue extension of credit is to
become effective, and that is to be our means of control, then I feel
something ought to be done and must be done to limit the facility
with which corporations and others loan money for speculative purposes direct to the stock exchange.
The CHAIRMAN. Undoubtedly that should be done.
Governor HARRISON. I admit further that as long as you have that
facility in such tremendous amounts the effectiveness of the discount
rate, in the control of speculation, is very much minimized.
The CHAIRMAN. I t was nil, was it not?
• Governor HARRISON. Well, no one can say whether if we had increased our discount rate more promptly and in greater amounts
whether the speculative mania would not have culminated sooner, or
maybe not have gone so high; you can not tell; it is a matter of guess.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

67

The CHAIRMAN. W h a t is the use of the banking reserve, and what
relation has the required reserve of the Federal reserve bank to its
rediscount activities; in other words, is not the Federal reserve bank
governed in some measure, if not in large measure in its rediscount
operations, by the amount of its reserve F
Governor HARRISON. There are various yardsticks; it is just a
matter of management. We are always considering and determining
whether a member bank is out of line or borrowing excessively in
proportion to the needs of the community. Another yardstick is
the amount of the member bank's reserve with us, and still another
is its capital and surplus, but I do not know any one of them that I
would say is a controlling yardstick. I t depends on the whole
situation.
For instance, you have a community of 10 banks and because of
a drought or plague or peculiarly poor business, because of the
kind of business they are dealing with, those banks, all of them, need
a great deal of Federal reserve accommodation. All their borrowings go up proportionately for the same reason, which is a community reason. We would be less severe or reluctant to lend a borrower of that kind because he is not himself abusing the privileges
for his own profit; in other words, he is using our privileges because
the needs of the community are such that the whole banking group
needs our help. But if in that same community of 10 banks some
one bank gets overambitious and develops an investment policy
of buying first-rate or second-rate bonds or even call loans, that
requires its borrowing from the Reserve bank, we will usually
have them come to our office and talk over the whole situation with
them intending to restrain the bank, not on the ground that we do
not like the particular bonds they had bought or do not like the particular customer they are dealing with, not on the ground that we
do not like their making a loan on collateral but rather that their
investment policy is an exaggerated one, designed solely to make a
profit because of the differential between our rate and the rate on
their investments.
The CHAIRMAN. I thought you took the view day before yesterday that you had no right to inquire into the uses of it, of the credit ?
Governor HARRISON. I made a note here to ask you to let me go
on with a statement that I started to make a few days ago. When
I made that statement you may remember that I mentioned an
exception that I did not have an opportunity to explain or go back to.
The CHAIRMAN. Governor, before we get away from the question
that I asked you a while ago, for my own information, and I suppose
it will be of service to the committee, I would like to know a little
more about your reserve question. If the Federal reserve bank has
an 80 per cent reserve under the law that requires a 40 per cent
minimum against notes, what excuse would it give for refusing, for
raising, its commercial rediscount rate to the business of the country ?
Governor HARRISON. Mr. Chairman, t h a t is a matter of monetary
policy, of banking judgment, about which a great many of us will
always differ; but I feel this, that as it is an orthodox principle of
central banking operation, that if central banking authorities see and
have reason to believe in view of the statistics available to them that
the total volume of credit of the country is expanding at a rate and
volume faster than any normal growth of business could justify,




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

it is incumbent upon the central banking authorities to put pressure
or restraint on that growth by an increase in the rediscount rate.
The CHAIRMAN. YOU do not object to the growth of legitimate
business, do you—commerce and industry?
Governor HARRISON. NO ; but I think I would go this f a r : That if
the expansion of credit was at an inordinate rate, and the only reason
we could see for it was the demand for credit for business, it would
be a healthy thing for business to put the rate up.
The CHAIRMAN. YOU put the brake on legitimate business then?
Governor HARRISON. N O ; because when business gets going too
fast
The CHAIRMAN. H O W do you mean, too fast? Do you mean sound
business could go too fast ?
Governor HARRISON. I think that business that thinks it is sound
may be going too fast.
The CHAIRMAN. Undoubtedly that. I am talking about legitimate business. I t was not supposed that a Federal Reserve bank
Senator WALCOTT. Who is to be the judge ?
The CHAIRMAN. The banker is to be the judge or is supposed t o
be the judge, I think.
Governor HARRISON. But is not the growth of the credit of the
country itself a pretty good indication of whether or not business is
being conducted legitimately ? I n other words, supposing you had a
case where no one claimed that there was any speculation in securities*
no one claimed that there was any real-estate boom involving any
unusual use of credit, and where the only thing we could see which
made us very happy and prosperous, was the growth of what appeared to be sound business. Suppose that at that time the Federal
reserve system authorities saw that the credit of the country was
expanding at a rate very much out of proportion to any normal
growth of the country's business in the past, say for an extreme case,
18 or 20 per cent, contrasted with the normal 3 or 4 per cent, why
then I would say that even though we thought we were in a business
paradise and were in for a period of wonderful American prosperity, we should raise the rate in an effort to check the too rapid
expansion of credit.
The CHAIRMAN. D O you know when there has ever been an increase from 3 to 20 per cent in ordinary legitimate business of the
country?
Governor HARRISON. N o ; I do not, but I do think that as a part
of, or as a result or incident of, the great expansion of speculation t h a t
took place in 1928-29 business got a disproportionate view of what
was proper for itself and that if it had had some of the restraint
t h a t would have been incident to an increased rediscount rate at that
time it would have been a healthy thing, and we would not, perhaps,
now find ourselves in as great distress as to-day.
The CHAIRMAN. D O you think that the demand for rediscounts by
the Federal reserve banks in 1928-29 was a demand of legitimate
business, legitimate commerce, and industry?
Governor HARRISON. I n a way.
The CHAIRMAN. But in a very small way.
Governor HARRISON. N O . Business expanded very rapidly during
those periods, not by borrowing on commercial paper, not by borrow-




NATIONAL AND FEDERAX, RESERVE BANKING SYSTEMS

69

ing on direct loans from banks, but by issuing their securities which
subsequently became an object of speculation. They got their accommodations through the security markets rather than through
commercial loans and used their new capital for expansion, which,
perhaps, was unduly rapid, merely because they thought speculativepaper profits were going to sustain their business at an increased rate.
The CHAIRMAN. But the issuance of the securities and the placing
of them on the stock exchange, listing them on the stock exchange,
did not affect that rediscount policy for commercial purposes.
Governor HARRISON. Well, if I may be permitted, I think I would
not agree with you for this reason, that if business is going ahead
too fast on the credit that it is obtaining directiy from investors, and
at the same time is getting additional credit forlsome lines of business
from banks, while it is true that we have not pjouy; direct pressure upon
the fellow who is getting his credit through the issue of securities,
it is equally true that the restraining influence of the increased rediscount rate in a period like that is a healthy thing for the country.
I do not think that central-bank authorities—as much as I wish
they could be—can be wise enough to analyze in detail the motives
or the precise character of the investments of individual banks, or
indeed the exact cause of a general expansion of credit that is going
on in the country as a whole. W e may all of us have ideas about it
and hunches about it; we may be right, but the best guide and the
one in the long run that will be at least subject to abuse or mismanagement is the guide of the total volume of credit being used in the
country in relation to the growth of production and business. If
we try to particularize too much beyond that we run the risk of
making the Federal reserve system or the Federal reserve bank, a
paternalistic system, and undertaking to do things which I do not
believe frankly we are wise enough to do.
The CHAIRMAN. Well, in a word, it seems to me you belong to the
school of thought that insists that the way to minimize speculative
activities is to penalize legitimate commerce by raising the rediscount rate ?
Governor HARRISON. May I make comment on that ?
The

CHAIRMAN.

Yes.

Governor HARRISON. If your hypothesis is true, then I think it is
possible that my theory is wrong. But I do not quite believe that
in practice your hypothesis is correct, for this reason, that when we
raise the rate in a situation such as in 1929, we serve notice on the
community that we think it is going too fast and that there must
be restraint. Now if you are a member bank in New York City,
and you are borrowing $20,000,000 from us, or $50,000,000 from us,
at the time we raise that rate from 5 to 6 per cent, it is an indication
to you that we want your borrowings from us to go down and you
accordingly would seek to reduce your loans.
The CHAIRMAN. Governor, you have admitted t h a t in 1928 and
1929 the advance of the rediscount rate did not accomplish its purpose ; it did not abate its fever of riot in speculation. I t continued
until it broke down of its own force, didn't it ?
Governor HARRISON. I agree that it did, but I also believe t h a t it
might have been much worse had we not raised our r a t e ; and I feel
also that we would have had more effective control and speculation




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

would not have gone so far had we raised our rate more promptly
and more courageously than we did. I want to supplement t h a t b j
saying that the ineffectiveness of the rate was contributed to by this
vast amount of loans made on the outside. B u t if we are looking
toward the future, and we all need your help to find the means of
effective control of inordinate speculation, which I hope is one of the
purposes of your inquiry, then I think we have got to puzzle out
as a matter both of theory and practice—because the two are not
always entirely consistent—what can be done most effectively to
restrain an inordinate growth of credit for speculative purposes.
The CHAIRMAN. T h a t is what we want to do, and what I am
trying to find out right on this point, whether your theory is that
the raising of the rediscount 1 rate, whether it be moderate or severe,
can accomplish the purpose; and if it can accomplish the purpose,
what must we do to accomplish it?
Governor HARRISON. My honest judgment is that it can be made
to accomplish the purpose, if we do the things we are now considering, and which I considered in some brief measure day before
yesterday. I was just reciting a minute ago the way the increase
of rate operates and how it makes a pressure on the loans in each
member bank. I was discussing it in relation to the possible bad
effect on business.
A t this point, when the president of a bank says," We must reduce
our borrowings from the Federal reserve bank because they have
raised the rate and it is too big a penalty," the loaning officers of the
bank will not go out and call their commercial loans. They will not
attempt to do it at that stage even by raising their rate on commercial loans. They will look over their portfolio and find the most
available or the most liquid loans, and those loans are brokers loans,
and not personal or individual loans. I n the majority of cases they
are loans to the market and bankers have no restraint whatever upon
calling such loans. The first thing they will call will be the broker's
loans.
The CHAIRMAN. Did they do it in 1928 and 1929?
Governor HARRISON. They did that. T h a t is just what I am trying
to establish. I think I could show you by the statistics, that in three
different periods through those years, when the Federal Reserve
System, both through the discount rate and the sale of Government
securities, evidenced pressure for liquidation, and when both brokers'
loans and stocks had been going up, the stock market stopped going
up or was checked, and on each of the three occasions outside lenders
came in with funds, attracted by the higher rates that we had contributed to by our operations, attracted by the higher rates that we
had partly caused, and by loaning their funds largely defeated what
was being done by the banking system, and enabled the speculators to
go on.
Now, if we could have stopped that leak, and it was a serious and
vital leak, because it was over 57 per cent of the total brokers' loans,
I think the policies of the system would have been much more
effective than they were and much more effective than they can be
made by direct action, as it is called.
The CHAIRMAN. YOU do not believe in direct action ?
Governor HARRISON. NO ; I am afraid I do not.




NATIONAL AND FEDERAL. RESERVE BANKING SYSTEMS

71

Senator TOWNSEND. Have you any knowledge that there were
individuals who sold stock in their own companies and loaned the
money back to the stock exchange attracted by these high rates ?
Governor HARRISON. I have no definite, concrete evidence of that,
but I think you can accept it as a fact that that was true. There
was a general report to that effect, and I have no doubt it was true.
The CHAIRMAN. Governor, in 1928, when the Federal reserve bank
authorities came to the conclusion that there were excessive activities
on the stock exchange, what did the banks in New York do about it ?
I believe you said you declined to admonish a member bank against
excessive extensions. What, then, did you do besides proposing to
raise the rediscount rate ?
Governor HARRISON. Of course, we did raise our rate from 3*4
to 5 in different steps. The system as a whole sold $400,000,000 of
Government securities in the face of the loss of $500,000,000 of gold,
and that ordinarily should have been adequate restraint. We wanted
to go one step further. We wanted to go to 6 per cent, and I would
say that had we done so, had we gone to 6 per cent, and if then it had
been necessary, I would have been willing to recommend going to 7
per cent.
The CHAIRMAN. Then 8 and 9 and 10, and so on ? If your theory
that the rediscount rate controls, there would be no reasonable termination, would there, to your raising the rediscount rate ?
Governor HARRISON. Of course, the turn never did come until
after we got our rate to 6 per cent. A t the same time, the Bank of
England went to &y2 per cent.
The CHAIRMAN. D O you think that is why the turn came?
Governor HARRISON. I think it came from a variety of reasons.
First, when business started to decline in July, 1929, it later began
to have its effect on speculation; second, very definite nervousness
was contributed to by the H a t r y failure in England, the ramifications
of which were great; third, restraint was contributed to by the increase in our rediscount rate in August; fourth, even though we
can not estimate its effect, the increase of the Bank of England
rediscount rate was a factor; and then, fifth, and perhaps the most
important, things had gotten so top-heavy that they could not go on
any further.
The CHAIRMAN. All that was most important, was it not, to cause
a season of famine that came about? People began to think that
the thing could not be skyrocketed any further.
Governor HARRISON. The only question was whether any of the
steps that we wanted to take would have brought back sanity any
quicker, or whether we could have limited the drop to the tenth
story instead of the twentieth story. But I do want, Mr. Chairman, to make an amplification of the statement I made day before
yesterday, if you will permit me, when I said that we did not apply
" direct action " and pressure to New York City banks in an effort
to restrict their collateral loans to brokers.
The CHAIRMAN. YOU said you declined to remonstrate with the
member banks even about the inexpediency of such an excessive
expansion.
Governor HARRISON. That answer related primarily to the New
York City banks, because until the break occurred on the 29th of




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NATIONAL AND FEDERAL. RESERVE BANKING SYSTEMS

October their brokers' loans stayed along at a fairly stationary level,
and they were not in a category where they deserved any vigorous remonstrance. But it is true with some of the smaller country banks—
and this looks like discrimination so I wish you would let me explain
fully before you reach a judgment on it—with some of the smaller
country banks we did remonstrate, and for this reason, that we have
a general policy that if any particular bank is borrowing from us
out of proportion to the rest of the banks of the same community,
disproportionately or for too long a time, we would put them on
inquiry, get them to come to us and ask them for their reasons. If
we find that they are borrowing because of the unavoidable withdrawal of deposits or because of some peculiar conditions in that
particular community that related to them, we have not attempted
to make them pay up. If, on the other hand, we find they have
gotten into this fix not because of any demand of the community
for a withdrawal of deposits, not on account of a demand or call
for additional accommodations by their customers but rather because of the fact that they have adopted a deliberate policy, an
investment policy, to make new investments and to make a profit
out of the rediscount rate, in that instance we do remonstrate with
them and urge them to adopt some policy to pay off their debts.
I go one step further. A country bank that participates in call
loans with or through New York banks is making an investment,
almost precisely as if it were buying bonds.
There is a vast difference in one sense between call loans and
bonds but as far as the use of the Federal Reserve facilities is
concerned, I do not believe there is any real difference in the case
of a country bank since in their case call loans to brokers and dealers
in securities in New York are in effect investments which they make
not as a result of any demand from their customers but because
they, in the exercise of their judgment in the management of the
bank, want to increase their earnings. That is very different from
the bank which is expanding its loans because of the legitimate
demands of its customers, and it is a very different thing even from
New York City banks lending directly on call as part of their responsibility to the money market in which they are located. Our
policy in that respect is to be found in the long letter which we sent
to the Federal Reserve Board, and which will be found in our replies to your questionnaire. I think myself that it is the only
practicable policy of operation. I think if it is followed assiduously and earnestly, with prompt and reasonable rate action, it will
be effective if we can do something about stopping this leak in these
" loans for others." I predicate most of what I am saying upon the
the possibility of doing that.
The CHAIRMAN. Would you like to see a statutory prohibition
against making loans for others?
Governor HARRISON. If that is the only way that we can get it,
I think it might be wise, but it would be better to accomplish it by
cooperative community action, if possible, and for this reason:
Even if we could contemplate that the associated banks in New York,
through whom 80 per cent of these loans for others are made, were
to agree voluntarily not to make them, there is still the risk that
you will force the organization of an outside corporation through




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

73

which all these other lenders will route their funds to the stock
exchange, and a statutory prohibition on the banks against making
these loans might definitely force that event.
Therefore I say I believe it would be better to accomplish it by
complete voluntary arrangement if possible. If you can get the
banks to agree not to do it, and at the same time get the cooperation of the stock exchange in not availing themselves of the facilities
of such a corporation organized just for the purpose of handling
such loans, then you would have a stoppage both ways, on the part
of the lender and on the part of the borrower. But statutory regulation, I believe, could not relate itself to the borrower and probably
could not relate itself to the individual lending corporation. I
imagine that it would not be competent for Congress to say that
the private X Y Z company could not lend any money to the ABC
brokerage firm. If this is to be effective it ought to be by community cooperation which would show a complete disinclination to
handle loans to brokers of this character and concentrate such loans
through the banks of the country, where the pressure of rates is
effective upon the reserves carried by the banks.
The CHAIRMAN. D O you think there is any statutory obligation or
authority, express or implied, for the Federal reserve bank to either
control or be controlled by the money market ?
Governor HARRISON. That is a big question. I think certainly
the Federal Reserve Bank of New York would not be complying with
the spirit or the intention of the law which set up the Federal reserve system, if it failed to recognize the relationship between its
operations and especially its rate operations, and money market
rates, because if we do fail to recognize that relationship, and fail to
adapt our rate to the market, we will by our own action or lack of
action, abandon control of the market.
The CHAIRMAN. Why should you control the market ?
Governor HARRISON.' F o r the very reason we have been discussing for two days, in the hope that we can maintain a control
that will check or prevent an inordinate use of credit beyond the
legitimate demands of commerce and industry.
The CHAIRMAN. Does that not come to this, in the last analysis,
that the commerce and industry of this country is to be controlled
by the speculative activities of the stock exchange in New York,
and does it not mean, in the last analysis, that the accommodations
to commercial and industrial borrowers must be regulated by the
stock market rather than by the ability of the Federal reserve
bank to accommodate commerce and industry ?
Governor HARRISON. YOU have in the country a credit pool of
a vast amount. I do not believe it is possible to conceive that, if
too much of that pool is being used for any one purpose whether
it is speculation in real estate or securities or commodities, that
credit will be available for other purposes at the same old rates;
in other words the law of supply and demand will necessarily
affect the rates for other credit. There is a lag, however, in the
change of these other rates if only because of commitments and
other arrangements that the banks have with their customers. But
I fear I was not very clear about this: If this credit pool begins to
be tapped too vigorously for any one or more purposes, and you have




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NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

a credit structure expanding on the basis of a demand that is out of
proportion to the needs of the country, it is in these circumstances
that we try to put on pressure. The pressure works first on the least
desirable or the most liquid loan and not on the business loan, so that
if we act promptly enough and actively enough to make that pressure
effective at once, you will probably cure the sore spot before it has
had an opportunity to have any substantial effect on business.
The CHAIRMAN. And you regard the speculative loan as the least
desirable loan, do you?
Governor HARRISON. I think that from the point of view of the
banker in New York, collateral loans or call loans, as he calls them,,
are regarded as secondary reserve. That is just what he calls them
and has always called them. So perhaps the words " least desirable " are not descriptive. When you begin to put pressure on, the
natural thing for the bank to do is to turn to its secondary reserve
and get the cash with which to pay off its debt to the reserve bank.
The CHAIRMAN. A S a matter of fact to the bankers they are the
most profitable loans, are they not?
Governor HARRISON. Today, almost the least profitable.
The CHAIRMAN. Least what?
Governor HARRISON. The least profitable.
The CHAIRMAN. Yes, that is indicated by your reduction of the
rediscount rate to 2 per cent
Governor HARRISON. The call rate is 1%.
The CHAIRMAN. Let me ask you this on that point: When you
reduced your rediscount rate in New York to 2 per cent, did you
imagine that would stimulate legitimate business, or did you have
any fear that it would revive speculation in securities ?
Governor HARRISON. I had no fear that it would revive speculation.
The CHAIRMAN. Why? Because nobody has anything to speculate
with any more?
Governor HARRISON. I think that it will be some while after
business has shown more evidence of revival than it has shown,
before the community will become overinterested in equities, but
I believe it is a fundamental reserve bank policy, that in a period
of depression rates should be lowered just as they should be raised
in a period of undue expansion of credit.
The CHAIRMAN. Just why did you reduce your rate to 2 per cent,
which is an abnormally low rate ?
Governor HARRISON. I t is quite low. But I think you can say
it is not a disproportionately low rate in relation to other rates in
the market.
The CHAIRMAN. I n the market?
Governor HARRISON.Yes; and which I think we have got to recognize, Senator.
The CHAIRMAN. I am not troubling about your recognizing it.
Of course, it is the business of an intelligent skillful bank officer
to recognize those conditions. What some people object to is that
you are being controlled by it.
Governor HARRISON. Well, of course, that is a question of fact and
depends upon the integrity of the management of the bank.
The

CHAIRMAN. I say so;




yes.

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

75

Governor HARRISON. Going back to the discount rate, I believe
that when you are in a period of depression in business activity,
when it shows a greater decline than in almost any comparable
period, exports having fallen off 25 to 30 per cent, commodity prices
having shown a more rapid decline than they have in any period
since the postwar deflation, bank of issue authorities quite properly
should do everything they can to remove any possible brake or restriction or restraint upon the revival of expansion and activity—
business expansion and activity. Whether you should go to 3 per
cent or 2,per cent in their effort or desire to remove that brake, is a
matter of judgment. I think as long as that depression continues,
you should go as low as you can go in relation to the outside rates
without inviting any abuse of your privileges, and I think we have
not done that because banks are borrowing relatively nothing.
The CHAIRMAN. D O you think there has been, in consequence of
that abnormally low rediscount rate, any reflected advantage
throughout the country to borrowers of credit for legitimate commercial purposes; in other words, do you think the standard, or
what they call the standard, discount rate that the individual bank
has been brought about with the abnormally low rediscount rate
of the Federal reserve bank?
Governor HARRISON. Yes and no. So far as being accommodated
through the acceptance market is concerned, and a vast volume of
our business is accommodated in that fashion, business is being
accommodated at a much lower rate.
The CHAIRMAN. T O the foreign or domestic acceptance market?
Governor HARRISON. Both. Of course, the great volume of our
acceptances relate to foreign trade and not trade wholly within this
country. Commercial paper rates have also gone down from 6 per
cent to 2 % per cent in the last year, and customers' rates have gone
down from 5y2 to 3 ^ . Interest rates generally have declined materially, but whether this is due to any particular discount rate reduction, or to the general condition of depression or to the liquidation in
the stock market, nobody can say. I t is no doubt due to a great
number of factors.
The CHAIRMAN. That has reference exclusively to large borrowers, to people who engage in very large transactions.
Governor HARRISON. Unfortunately, practically everything I say
about this rate relationship must refer to the money market, because
in this country the barriers between the principal money centers and
the country districts are very great. There is great reluctance on
the part of funds to seep out from the money centers to the more
remote districts even when rates get as easy as they are in New
York to-day.
That reluctance is due to a number of causes. New York City
banks may have a large overage of funds that they do not know what
to do with, an overage of reserves in excess of requirements, because
they have not employed their funds. Those funds may not go out
of town for two reasons—first, there may not be an active demand
of the kind or in the sections that these banks' have been accustomed
to dealing with, and, second, the conservative attitude on the part
of the banking community in periods such as we have been hearing
about and a consequent desire to keep in a very liquid position. I n
this connection, Mr. Chairman, there has never been a time since I




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

have been in New York, in 10 years, when I have considered the principal banks in New York generally as liquid as they are to-day.
Now, if it were possible to develop a system of branch banking
which would enable banks in New York City and in other money
centers to feed out their surplus funds to the interior through management and officers who are their own, and whom they know, and
who know their policies, I think you would take one great step
toward a more effective distribution of credit now available in the
various centers.
The CHAIRMAN. YOU mean nation-wide branch banking?
Governor HARRISON. I imagine that is not practicable, and I
would not advocate it. I like the phrase that the comptroller has
used, trade areas, although I do not know exactly what it would
mean. The difficulty is a practical one. The normal and natural
thing to do, and I felt five years ago that it might be wise, is to
authorize State-wide branch banking because it is a definite and
concrete limitation to prescribe. On the other hand, that obviously
works some injustices. There may be very much more reason why
you should authorize branches within a radius of a hundred miles
than within State limits. I n the case of New York City, for
instance, if you authorize a New York City bank to put a branch
in White Plains, N. Y., and not in Newark, N. J., it would not seem
a logical distinction to make. On the other hand, a definition of a
trade area that would permit a branch being established in Newark
as well as in White Plains would, I think, be quite reasonable.
Whether you can define trade area by geographical radius or not
I do not know, but I think the thing your committee will likely
wish to consider is what sort of limitation you may put upon branch
banking that will be adequately restrictive without defeating the
very purpose that you are trying to accomplish. The Federal
Reserve System has done a good deal to equalize interest rates
throughout the country already. I t has also done much to equalize
interest rates in the different seasons throughout the year, as well
as throughout the country, but there is yet much to be accomplished
in making for a better distribution of credit from the principal
centers out to the more remote country districts, where rates have
been much more reluctant to decline. That is due to two reasons:
First of all there is a natural shortage, or not so much credit
available, in more remote districts, and, secondly, in the agricultural
or other sections where borrowers have already been forced by
economic conditions to hold over their loans for a year or more,
bankers are a little reluctant to loan at a lesser rate, and, indeed,
are entitled to lend at a higher rate. Even so, I think branch
banking would do much to make for a somewhat better distribution
of credit at more equal rates in the different sections of the country.
The CHAIRMAN. On that point I am going to ask leave of the
committee, if there is no objection, to insert in the record a brief
that I have asked to be prepared giving the court decisions on the
question of branch banking and the right to have the system adopted
across State lines. I may incidentally say that my own view is that
it is not feasible to attempt to do anything of the kind, but I would
like that to go into the record, so that the members of the committee
and others may see what has been the court decision on the question.
(The paper referred to is printed in full, as follows:)




NATIONAL AND FEDERAL RESEBVE BANKING SYSTEMS

77

THE CONSTITUTIONAL POWER OF CONGRESS TO AUTHORIZE THE ESTABfLISHMENT OF
BRANCHES BY NATIONAL BANKS IRRESPECTIVE OF STATE LAWS

The first Bank of the United States, 1191-1811.—The legal theory upon which
Congress enacted the national bank act and the Federal reserve act is the
same as that upon which Congress authorized the establishment of the first
Bank of the United States in 1791 and the second Bank of the United States
in 1816. When the first bank was proposed in Congress the constitutionality
of the bill was seriously debated, but a majority of both Houses supported it.
President Washington signed the bill after considering the official opinions both
for and against its constitutionality.
The first Bank of the United States was opened December 12, 1791, and
established eight branches in several States, namely, at Boston, New York,
Baltimore, Washington, Norfolk, Charleston, Savannah, and New Orleans. This
is the first precedent of the establishment of branches by a national bank.
Upon the occasion of the failure of Congress to renew the charter of the bank,
which expired in 1811, the constitutional question was again raised, and some
of the opposition against the renewal was upon the ground that Congress was
without power to establish and maintain a national bank.
The second National Bank of the United States, 1816-183G.—The attempt to
finance the War of 1812-1814 without any banking instrumentality under the
control of the Federal Government proved so disastrous that Congress in 1816
passed a new bill to charter a Bank of the United States similar to the first
bank, President Madison approving the act, having the year before vetoed
a similar measure which did not meet his views. As compared with the first
Bank of the United States, there was little difference between their organization and purpose.
The second Bank of the United States likewise established branches in
various States in the Union. In 1818 the Legislature of the State of Maryland
passed an act, the effect of which was to place a special tax upon the branch
of the Bank of the United States in operation in Baltimore. The Baltimore
branch refused to pay this tax, its cashier, McCulloch, was sued in the State
court, and a judgment sustained against him by the court of final jurisdiction.
He thereupon sued out a writ of error under which the case was brought
before the Supreme Court of the United States. Here for the first time the
constitutional power of Congress to establish the bank and of the bank to
establish branches was considered by that tribunal. (McCulloch v, Maryland,
4 Wheat. 424.)
In the following year, 1819, the State of Ohio imposed a tax of $50,000 on
each of the two branches of the Bank of the United States established at Cincinnati and Chillicothe. Upon the refusal of these branches to pay the tax the
sheriff on behalf of the State seized $98,000 in money. The State officials concerned were arrested by the Federal authorities and tried in the Federal circuit
court, where judgment was rendered against them to restore to the bank with
interest the funds seized. An appeal was taken to the Supreme Court of the
United States (Osborn v. Bank of the United States, 9 Wheat. 738), where
again the constitutional power of Congress was brought into question and
formed the basis of the opinion.
The opinions in both of these cases were written by Chief Justice Marshall
and for practical purposes can be considered as one case, the second being an
elaboration and a review of the first.
The principles decided in these cases may be briefly stated as follows:
(1) Congress has the constitutional power to incorporate a national bank.
(2) The existence of State banks can have no influence upon the question
of this paramount power of Congress.
(3) "After the most deliberate consideration, it is the unanimous and decided opinion of this court that the act to incorporate the Bank of the United
States is a law made in pursuance of the Constitution, and is a part of the
supreme law of the land. The branches proceeding from the same stock, and
being conducive to the complete accomplishment of the object, are equally
constitutional." (McCulloch case, 4 Wheat. 424.)
(4) Congress having the constitutional power to create a national bank
has also the constitutional power to determine, authorize, or create the faculties necessary to enable it to perform the services for which it was created,
and Congress alone is the judge of the means to be employed in the exercise
of these faculties.
34718—31—PT




78

NATIONAL. AND FEDERAL. RESERVE BANKING SYSTEMS

The Supreme Court of the United States in these two cases upheld the power
x)f a national bank to establish branches in the various States without permission or authority from the State Governments.
The national "bank act of 186S.—With the failure of Congress to renew the
.charter of the second Bank of the United States the Federal Government
.operated without a banking instrumentality under its control until the enactment of the national bank act in 1863. That act set up a system of independent national banks rather than one central national bank with branches.
The question of the power of national banks to establish branches did not
again come before the Supreme Court of the United States until 1924, more
than a century after the decisions of McCulloch v. Maryland, and Osborn v.
Bank of the United States, when it was presented in the case of the First
National Bank in St. Louis v. Missouri (263 U. S. 640).
In the meantime, however many cases had come before the Supreme Court
of the United States in which it became necessary to interpret and construe
the national bank act with reference to the charter powers of national banks
in their relationship to the State legislatures, in all of which the fundamental
principles enunciated in the McCulloch and the Osborn cases were sustained
and followed. It seems appropriate to consider some of these cases before
proceeding to the First National Bank in St. Louis v. Missouri.
Farmers & Mechanics' National Bank v. Bearing (91 U. S. 29*, 1875).—
This was the first case before the Supreme Court which construed the nationalbank act with reference to the authority of the State governments and involved
the application of the usury law of the State of New York. The court said:
" The constitutionality of the act of 1864 is not questioned. It rests on the
same principle as the act creating the second Bank of the United States. The
reasoning of Secretary Hamilton and of this court in McCulloch v. Maryland (4
Wheat. 316) and in Osborn v, Bank (9 Wheat. 738) therefore applies. The
national banks organized under the act are instruments designed to be used to
aid the Government in the administration of an important branch of the public
service. They are means appropriate to that end. Of the degree of the necessity which existed for creating them Congress is the sole judge.
" Being such means, brought into existence for this purpose, and intended to
,be so employed, the States can exercise no control over them, nor in any wise
affect their operation except in so far as Congress may see proper to permit.
Anything beyond this is ' an abuse, because it is the usurpation of power which
.a single State can not give.' Against the national will ' the States have no
power, by taxation or otherwise, to retard, impede, burthen, or in any manner
.control the operation of the constitutional laws enacted by Congress to carry
into execution the powers vested in the General Government.' Osborn v. Bank,
supra; Weston v. Charleston (2 Pet. 466) ; Brown v. Maryland (12 Wheat.
419) ; Dobbins v. Erie Co. (16 Pet. 435).
" The power to create carries with it the power to preserve. The latter is a
.corollary from the former.
The principle, announced in the authorities cited, is indispensable to the efficiency, the independence, and, indeed, to the beneficial existence of the General
Government; otherwise it would be liable, in the discharge of its most important trusts, to be annoyed and thwarted by the will or caprice of every State in
the Union. Infinite confusion would follow. The Government would be reduced
to a pitiable condition of weakness. The form might remain, but the vital
.essence would have departed. In the complex system of polity which obtains in
this country the powers of government may be divided into four classes:
" Those which belong exclusively to the States;
" Those which belong exclusively to the National Government;
" Those which may be exercised concurrently and independently by both;
"And those which may be exercised by the States, but only with the consent,
express or implied, of Congress.
" Whenever the will of the Nation intervenes exclusively in this class of cases
the authority of the State retires and lies in abeyance until a proper occasion
for its exercise shall recur. Gilman v. Philadelphia (3 Wall. 713, 18 L. Ed.
96) ; Ex parte MeNiel (13 Wall. 240, 20 L. Ed. 625).
" The power of the States to tax the existing national banks lies within the
category last mentioned.
" It must always be borne in mind that the Constitution of the United States
J
and the laws which shall be made in pursuance thereof' are ' the supreme law
fof the land' (Const. Art. VI), and that this law is as much a part of the law




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

79

<of each State, and as binding upon its authorities and people, as its own local
constitution and laws."
Casey v. GmlU (94 U. S. 673, 1877).—-This case held that Congress had the
power to authorize a State-chartered bank to convert into a national bank
without any assent or permission by the State, upon the ground that no
authority from the State was necessary.
Davis v. Mmira Savmffs Bank (161 U. S. 275, 1896).—The court in denying
the validity of a statute of the State of New York fixing preference in cases
<of insolvency, in so far as it applied to national banks, through Mr. Justice
^White, said:
" National banks are instrumentalities of the Federal Government, created
for a public purpose, and as such necessarily subject to the paramount authority of the United States. It follows that an attempt by a State to define their
duties or control the conduct of their affairs is absolutely void, wherever such
.attempted exercise of 'authority expressly conflicts with the laws of the United
States, and either frustrates the purpose of the national legislation or impairs
the efficiency of these agencies of the Federal Government to discharge the
^duties for the performance of which they were created. These principles are
.axiomatic and are sanctioned by the repeated adjudications of this court."
Easton v. Iowa (188 U. S. 220, 1903).—In this case the president of a national
bank was sentenced under a criminal statute of the State penalizing the receipt
of deposits with knowledge of the insolvency of the bank.
In taking issue with the supreme court of the State Mr. Justice Shiras, in
^delivering the opinion of the court, said:
" We think that this view of the subject is not based on a correct conception of the Federal legislation creating and regulating national banks. That
legislation has in view the erection of a system extending throughout the
.country, and independent, so far as powers conferred are concerned, of State
legislation which, if permitted to be applicable, might impose limitations and
restrictions as various and as numerous as the States. Having due regard to
the national character and purposes of that system, we can not concur in the
suggestions t h a t national banks, in respect to the powers conferred upon them,
;are to be viewed as solely organized and operated for private gain. The principles enunciated in McCullough v. Maryland (4 Wheat. 425, 4 L. ed. 606) and
in Osborn v. Bank of United States (9 Wheat. 738, 6 L. ed. 204), though expressed in respect to banks incorporated directly by acts of Congress, are
yet applicable to the later and present system of national banks.
" Such being the nature of these national institutions, it must be obvious
that their, pperations can not be limited or controlled by State legislation, and
Hhe Supreme Court of Iowa was in error when it held that national banks
: are organized and their business prosecuted for private gain, and that there
is no reason why the officers of such banks should be exempt from the penalties
prescribed for fraudulent banking."
First National Bank v. Fellows (244 U. S. 416, 1917).—In this case the
;State of Michigan contested the power of Congress to enact the provisions of
the Federal reserve act conferring trust powers upon national banks. The
Supreme €ourt of the United States (opinion delivered by Mr. Chief Justice
White) reversed ttie Supreme Court of Michigan and upheld the powers of
Congress, citing with approval the principles enunciated in McCullough v.
Maryland and Osborn v. Bank of the United States. Referring to the basic
principles of constitutional law laid down in the above two cases, the court
further said: "The doctrines thus announced have been reiterated in a multitude of judicial decisions, and have been undeviatingly applied in legislative
and enforced in administrative action."
Bumes National Bank v. Dunoon (265 U. S. 17, 1924).—In this case the
State of Missouri attempted to enforce against a national bank the State
law regulating the exercise of trust powers. The Supreme Court of the United
States reversed the State supreme court upon the authority of the Fellows
case and others above cited. Mr. Justice Holmes in delivering the opinion
<of the court reiterated the principle that the constitutional power of Congress
was to be tested by the right to create the bank and the authority to attach
to it that which was revelant in the judgment of Congress to make the business
of the bank successful, and that this excluded the power of the State in
such cases
First National Bank in St. Louis v. Missouri (263 U. S. 640, 1924).—This
.case involved primarily the question of the power of national banks to estab-




80

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

lish branches under the authority of the national bank act and rests upon a
state of facts different from that of McCulloch v. Maryland, in which the
Question of branches for national banks was first considered by the SupremeCourt.
The First National Bank, upon the advice of its own counsel, proceeded to
establish and conduct a branch bank in the city of St. Louis upon the theory
that whereas the Federal statutes did not expressly authorize national banks
to establish branches, such banks nevertheless possessed the incidental charter
power so to do. No permission from the comptroller was obtained for the
establishment of the branch. There was upon the statute books of the State a
law prohibiting the establishment of branch banks in that State. The attorney general of Missouri on behalf of the State took the position, first, that
the national bank exceeded its charter powers under the national bank act
when it established the branch and, second, that there being no permissive
Federal statute, the State was competent to enforce against the national bank,
its own law against branches. The following propositions are quoted from,
the brief of the attorney general of the State, which he filed before the Supreme
Court of the United States:
(1) "Branch banking by a national bank in a State is conduct in excessof any authority from the Nation."
(2) "Acts of a national bank in a State which are in excess of any authority
from the Nation, and in contravention of State law, can be stopped by theState."
(3) "An unauthorized, unlawful act of a national bank in a State should
stand upon the same footing as the unauthorized, unlawful act of any other
corporation."
(4) "A national agency is no more free from responsibility to the Statefor unlawful acts done in the State beyond the scope of its powers and.
authority than is a State agent."
(5) "The same conduct may be an offense against both State and nationalsovereignty, and may be restrained by both Nation and State."
It was upon these grounds that the action was brought by the State in*
the supreme court of the State in the nature of quo warranto. The formal
allegation of the State was to the effect, first, that the bank was not authorized
by Congress to establish a branch and, second, that in establishing the branchi
it violated a statute of the State expressly prohibiting the establishment of
branch banks.
At the request of the Comptroller of the Currency the Attorney General
of the United States intervened in this case, not, however, for the purpose of
upholding the right of the national bank to establish the branch but to contest
the jurisdiction of the State to inquire into the question whether Congress*
had authorized a national bank to establish a branch.
It was shown before the court that the office of the Comptroller of the
Currency had for years construed the national bank act as denying the right
of national banks to establish branches. This opinion was supported, by an
opinion of the Attorney General, May 11, 1911, which was cited with approval
in the opinion of the court in this case. The principal argument of counsel
on both sides before the court, and the bulk of the opinion of the court, isdevoted to the question of whether Congress had authorized national banks
to establish branches. The court reached the conclusion that there was no
doubt, especially in view of the long-continued construction of the national
bank act by the Comptroller of the Currency, that Congress had not conferred
upon national banks the charter power to establish branches.
In view, therefore, of this condition precedent the court held that the Statewas competent to enforce its own law against the national bank. The question, therefore, of the constitutional power of Congress to permit national
banks to establish branches was not involved in this case. The case is in
harmony with the previous decisions of the court hereinabove considered..
Had there been upon the Federal statute books an amendment to the national,
bank act permitting national banks to establish branches the Supreme Court
of the United States would have undoubtedly held the State law invalid as
applied to national banks. The question asked by the court of the State law,.
" Does it conflict with the laws of the United States ? " would have been necessarily answered in the affirmative. In the absence of such an amendment
the question was answered in the negative.
Congress inserted in the so-called McFadden-Pepper Act of February 25,
1927, a clause in its branch banking section that branches of national banks




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

81

would be permitted only in those States which permitted the State banks to
•establish branches. This clause was a concession to the States not as a matter
of constitutional necessity but rather as a matter of legislative policy.
In view of the above consideration there appears to be no doubt of the constitutional power of Congress to permit the national banks to establish branches
in any State of the Union, irrespective of the laws of the State. If Congress
determines that the national banks could better serve as instrumentalities of
the Federal Government through the establishment of branches it would
not be within the jurisdiction of a State to prohibit or restrict the purpose
of the National Legislature to this effect.

Governor HARRISON. Senator, you asked about changes in rates
of interest. Here is a chart that will portray what has happened
in regard to some rates [exhibiting paper].
Senator WALCOTT. Money rates ?
Governor HARRISON. Yes; since the end of October, 1929, in order
to give you the general trend of a very precipitous drop.
The CHAIRMAN. The thing that disturbs me, and has for a long
time, is that we undoubtedly thought and hoped that we would
accomplish the removal of the Federal reserve system as far as
possible from the money market, the speculative money market. I n
our effort to do that we put an actual textual prohibition in the
statute, and now to find that the operations of the Federal reserve
banking system are practically controlled by the stock exchange rate
is rather disturbing.
Governor HARRISON. Mr. Chairman, I want very quickly for the
record and everybody here to correct any inference that my discussion of the money market means necessarily only the stock exchange
call rate. The money market in New York is very much more complex and intricate than that and relates itself to a vast number of
different rates, not merely the rates that banks charge their customers on collateral loans but rates they charge them on their commercial paper, rates at which commercial paper dealers are able to
float commercial paper in the market, bankers' acceptance rates,
even the yields on Government securities and short-time securities
of that kind. Quite apart from that you have the rates which banks
pay for deposits in New York, which is an important factor in the
determination of what position the money market is in.
The CHAIRMAN. Right on that point
Governor HARRISON. When I use that term money market, we
mean that vast conglomeration of different kinds of short-term
money.
The CHAIRMAN. I am glad you supplemented that remark.
Governor HARRISON. That is the danger of using general phrases
of that kind.
The CHAIRMAN. Right there, do you think the banks in money
centers ought to be permitted to pay interest on bank deposits?
I do not mean on individual or concerns or corporate deposits;
I mean on deposits from the interior banks; does that not have
a tendency to draw a vast amount of funds and credits from interior
banks to the money centers?
Governor HARRISON. I think it does, but unfortunately such a big
percentage of the banks of the country are not members of the
Federal reserve system that under our State laws their reserves
•either have to be or may be carried in other banks. As a result
of that, in having some fourteen or fifteen thousand nonmember




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NATIONAL AND FEDERAL. RESERVE BANKING SYSTEMS

banks, you have competition on the part of big banks in the money
centers to get that reserve business, and that is what in part, at
least, makes for interest rates on bank deposits. But you take
New York to-day, for instance, the rate paid upon bank deposits
by the clearing-house banks, which is really the effective deposit
rate in New York, is only 1 per cent, but some other cities not so*
far removed from New York are paying as high as 3 per cent. I
do not see how they do it.
The CHAIRMAN. I have understood that a very distinguished official of a very notable Federal reserve bank takes the view that
Congress may control that under the interstate commerce laws of
the Constitution.
Governor HARRISON. I should feel very much happier if it were
possible without too great a readjustment in the process, if all banks
of deposit—I use those words advisedly—were members of the
Federal reserve system. If t h a t ' were ever required, however, I
believe it should be only under some limitation as to the minimum
amount of their capital, because some banks of deposit in existence
to-day have a capital that is too small fairly to entitle them to
membership. But if you could build up a minimum capital requirement for all banks of deposit and then in some fashion get them
under the roof of the Federal reserve system, I think the country
would be much better off. Among other things, the distribution
of credit, which is now checked for the reasons I mentioned some
time ago, would tend to be much more liquid than it is now.
Take, for instance, the years 1920 and 1921 and last year, as
well as the present time, country banks that are not members of the
Federal reserve system, instead of being able to come to the Federal reserve bank with eligible paper to meet their withdrawals y
have to concentrate their requests upon city banks. The city banks,,
even assuming they may be in a position to know as much about
these country banks as the Federal reserve bank, are necessarily
more limited in their ability to help and necessarily more reluctant
to do so in the very times when their help is most needed. I£f
therefore, all those banks were members of the reserve bank, in
sound condition with appropriate working capital, the banking
structure would be much more effective and sounder than it is now.
Senator WALCOTT. That presents a pretty interesting picture if
you put in all banks of deposit. You mean by that the State banks ?
Governor HARRISON. Yes, sir; because the national banks are required to do so.
Senator WALCOTT. That would include all trust companies with a
minimum capital requirement?
Governor HARRISON. All trust companies that are doing a deposit
banking business. There are some of those companies in some sections of the country I understand that are prohibited from doing a
regular deposit business.
Senator WALCOTT. I would like to refer for a moment to the banking system. Are you familiar with the English system of branch
banking ?
Governor HARRISON. Just generally.
Senator WALCOTT. I n the method of controlling the organization
there you had a system which is exceedingly flexible, where you have




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

83

a maximum responsibility on the branch banks rather than in the
dictation from headquarters. Take Lloyds, for instance, or any
large bank; take Midland, which is a good example, where you
have now a pretty well-defined tendency of different groups or different banks to go into what we are trying to define as trade areas,
trades, certain trades, into which certain banks ramify, or on which
they specialize and with great flexibility and broad powers lodged
in the branches themselves, because they are supposed to be expert,
and because they are localized; they are in that particular trade
center, like Manchester textiles, like steel in Lancaster, and so forth,
and shipping in Liverpool.
Governor HARRISON. Yes.
Senator WALCOTT. Are we working toward t h a t or are we not?
Apparently, I judge from the conversations that we are not working
toward it at all.
Governor HARRISON. I think we have not worked very far in that
direction as yet. Of course you can never do it in this country in
the same degree that they have in England, in my judgment, because
of the difference in geographical area, and also secondarily because
of the complication of conflicting State and Federal laws. We have
never looked into the question whether Congress could authorize a
national bank to have branches in several different States, but I suppose that would be possible.
The CHAIRMAN. YOU know it took us 14 months, do you not, under
the so-called McFadden bill, to get a fragmentary branch banking
authorization.
Governor HARRISON. But if our experience is demonstrating, Mr.
Chairman, that the small country bank is finding less and less need
for its existence, if the small banks will not find it profitable or
necessary for them to continue in small communities, is there not the
risk that sooner or later there will be certain sections of the country
that will need some sort of banking accommodation with credit supplies from the central reservoirs where it is more plentiful? I feel
that there is a real need for that system of conduits from the centers
to the more remote communities.
The CHAIRMAN. Yes, I have felt that for a long time, but I have
never been able to show it to Congress.
Governor HARRISON. One danger of not doing so we are facing
now in the development of the chain and group banking, which in my
judgment is unsound and fraught with risk.
The CHAIRMAN. Governor, to go back to the theories on the rediscount rate, that the Federal reserve bank is not effective in repressing
excessive speculation, I believe you said you raised your rate in 1928
three times.
Governor HARRISON. Well, that is my recollection, Senator. May
be I am wrong but I think that is right.
The CHAIRMAN. Of course you did that with the sanction of the
Federal Reserve Board ?
Governor HARRISON. Yes, sir.
The CHAIRMAN. And went as high as 6 per cent ?
Governor HARRISON. We reached 6 per cent in August, 1929.
The CHAIRMAN. Then you proposed somewhat before that, did
you not, to raise the rate and failed to get the sanction of the Federal Reserve Board ?



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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Governor HARRISON. We first requested the board's approval of
an increase in the rate on, I think it was, February 14; it was the
middle of February of 1929.
The CHAIRMAN. Was your board quite unanimous in asking to
increase the rate ?
Governor HARRISON. The directors of the Federal Reserve Bank
of New York voted unanimously for the increase in rate week after
week until the end of May, I think it was, and in all that period,
as I remember, there was only one dissenting vote and that was only
on one occasion for a particular reason.
The CHAIRMAN. Did your board give an explicit reason for its
desire to increase the rate ?
Governor HARRISON. Of course, the action of the board of directors
with regard to the discount rate must represent the sum total of
the impressions which the directors get from a myriad of different
factors which affect their judgment. I t is very hard to define
the motive which prompts the individual directors at an individual time to take specific action. F o r that reason it has always
been difficult in specific cases to give in a short paragraph a composite reason for action by a group. On the other hand, I do not
think there was ever a time when the reasons that prompted our
directors to act were more clear, or to them more convincing than
during that period in 1929. Time after time we discussed the propriety of the action and the need for the action.
The CHAIRMAN. Of course I understand that, but it seems to me
t h a t when that board, having the right to initiate a rate but with the
distinct reservation that the Federal Reserve Board would review
and determine the rate that your bank would give some more or less
definite reason why you wanted to raise the rate or lower the rate,
as the case may be.
Governor HARRISON. I did not mean to imply that we did not. We
did it this way: On various occasions the directors asked me and the
chairman of the board to go to Washington to review the whole
situation as we saw it. We discussed the many elements in the situation which prompted our directors to take action. There was never
a time, I think, when the Federal Reserve Board was not completely
and wholly familiar with what reasons we had. Furthermore, there
were one or two occasions during the period when we wrote the
Federal Reserve Board concerning the various factors that operated
upon the judgment of the directors in voting to increase the rate.
The CHAIRMAN. YOU say your own view is that excessive speculation is to be controlled by the operation of the discount rate ? Did
your board ever give to the Federal Reserve Board as a reason why
you wanted to raise the rate, the desire to repress excessive speculation?
Governor HARRISON. I think what we did—and we were careful to
do it that way—was to advise the board that we wanted to raise the
rate to control the continued rapid expansion in the country's credit
structure which was contributed to primarily by the demand for
loans upon stock exchange collateral.
The CHAIRMAN. YOU would not be willing to modify that expression by saying exclusively instead of primarily ?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

85

Governor HARBISON. Well, you could not say it was exclusively
because there were periods when we had real-estate speculation in
Florida and real-estate speculation elsewhere that contributed to it.
Furthermore, when I look backwards I can not help but be convinced
that indirectly business was getting too much credit for its own good
at that time, not only through commercial borrowing but through
new capital funds with which, for instance, they built up factories
that tended to overcapacitate them.
The CHAIRMAN. I t is astonishing to me that if business demands
were so many that they demanded increased credit that there are
so many people idle.
Governor HARRISON. I beg your pardon; I did not catch that.
The CHAIRMAN. I say it is astonishing to me that if business
activities were so great as to demand largely increased credit t h a t
there are so many people said to be idle now, unemployed.
Governor HARRISON. Perhaps that is one of the contributing reasons that they are now unemployed.
The CHAIRMAN. Business should afford such activities to the,
unemployed.
Governor HARRISON. That business may be and probably wa&
potentially overcapacitated through improved machinery and methods of output, plus some overexpansion in factory equipment, most
of which was accomplished by new credit of one fashion or another,,
there now seems reason to believe. Industry built up this productive power to a point proportioned to the excessive spending power
resulting in some measure from large profits arising out of stockexchange speculation. I would not, of course, say that the present
business depression is due wholly to overcapacity or to overproduction, because the decline in commodity prices has related itself
almost as much to commodities that we know to be not overproduced
as to those that we feel have been overproduced. The other side of
the picture is that there is a large underconsumption of goods due*
to the fact that in many parts of the world as a result of the war
and postwar deflation there has been a loss of capital which has*
destroyed their purchasing power of our goods and which can
not be revived, in my judgment, until those countries are able to*
import capital in the form of foreign loans from other countries.
The CHAIRMAN. Did the Federal Keserve Board ever give you
any reason, or give your board any definite reason, for its refusal
to sanction your increased discount rate ?
Governor HARRISON. Senator, I think perhaps that is a question
they can answer better than I, but certainly whether it is in the records or not, our understanding was that they believed it to be a more
effective way to control the credit situation by so-called direct action
than by rate action.
Mr. Chairman, may I make this one observation
The CHAIRMAN. Pardon me for interrupting the proceedings, but
there has been a suggestion made that the committee take a recess
as the nomination of Mr. Meyer as governor of the board is now
pending in the Senate. However, I think upon consideration that we
will proceed with the hearing.
Governor HARRISON. Mr. Case has called my attention to the fact
that the committee might misunderstand one statement that I made,*




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

to the effect that we have not remonstrated with or restrained the city
banks. What I said day before yesterday I hope did not necessarily
imply that. We have often, when occasion arose, remonstrated with
them whenever they have violated any one of the principles which
I have enunciated as applicable to country banks. Of course the
same principles are applicable to the city banks as to the country
banks. If they are borrowing disproportionately larger amounts
than the community demands, we do put pressure on their borrowings, and I do not want to have any misunderstanding as to that.
W h a t I said day before yesterday was also true, that we did not
criticize the management of a bank merely because of the fact that
they have collateral loans in their portfolio, or even if those loans
.may be increasing, provided they are not borrowing too continuously
or too long or in disproportionate amounts.
The CHAIRMAN. There is no reason why you should criticize the
i a n k s at all or remonstrate with them at all if they are not borrowing
from you, no matter what they do.
Governor HARRISON. A great many people feel to-day that we have
a responsibility for doing that because they say if we do not
The CHAIRMAN. Your only contact with the individual bank is
when it is proposing to rediscount with you, or when your examiners
.go there under the law to examine the banks.
Governor HARRISON. Yes; and that exemplifies the difficulty in
the matter of direct action that we have been discussing. Suppose
a bank has not been borrowing from us for a period of months, and
suppose between examinations they come to us for a loan of a million
dollars. We find out in the interim that their collateral loans have
gone up very rapidly, and such a situation as you have been critical
of exists, the bank comes to us at that moment to get funds to meet
a large withdrawal of deposits. If we refuse to make the loan we
run the risk of closing the bank, which may be proper punishment
for the management but is very severe and disproportionate punishment for the depositors. But even if we should assume that some
collateral loans are speculative loans, the situation in a large bank
is a most complex one and most difficult to interpret. Those banks,
-especially the banks of New York City, do not often borrow
continuously unless there is great stress in the community as a whole
such as we had in 1920 or 1921 when all loans were expanded and
when the banks were forced to borrow to make good the deficiencies
in their reserves. Then again in certain seasons of the year, in
certain times of the month and on certain days of the week we have
by experience learned that funds are transferred out of New York
to the interior of the country and that the banks must borrow to
make good the withdrawals. On other days, we find by experience,
that those funds are coming back again and that the borrowings will
be repaid. We can not well refuse to lend in such cases even though
the borrowing banks have outstanding loans on securities.
The CHAIRMAN. I n the degree that bank credits are useful for
speculative purposes, for stock-market purposes, that activity affects
the money market, does it not, in the matter of commercial credits ?
Governor HARRISON. I am sorry, but I did not understand the
preliminary part of your question, Mr. Chairman.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

87

The CHAIRMAN. I say, just in the degree that bank facilities are
used for stock-speculative purposes, in that measure the credit of
the market for other business is affected, is it not ?
Governor HARRISON. That is bound to be so, just as I said day
before yesterday, and the converse is true, that you can not control
one without controlling the other.
The CHAIRMAN. Then, the Federal reserve system having been
established as an incident to commerce—and you think there is some
obligation upon it to supervise or control the money market—would
not the obligation be theirs primarily to so control it as to enable
those who are in other business than speculative transactions to get
their credit at a reasonable rate of interest ?
Governor HARRISON. I think if that were possible to be done it
would of course be a wise thing. If there is any way by which any
group of men or any organization can insure a perfectly level flow of
credit year in and year out without stress or strain or without variation in rates caused by heavy demands from a particular class of the
community, that would be a splendid solution of our difficulties. But
where I am afraid that I differ with you is not so much in principle
as in its application. First of all, I do not see how any of us can
define what a speculative loan is. I have tried my hardest to but I
can not define it and never have been able to find anybody who could
define it in any fashion that would not work an injustice on perfectly
legitimate borrowing.
The CHAIRMAN. Well, under the law, no matter what it is, you
can pick out any one of the ten commandments under the law which
would work apparently an exceptional injustice, or rather an injustice in exceptional cases, but as a general proposition it is not very
difficult to define what a speculative loan is, is it?
Governor HARRISON. Well, take for instance the year 1929 in New
York, when these banks of ours were still lending, continuing to
lend, a billion dollars on collateral call loans to brokers which they
had loaned for some time even before great speculation began.
Would a continuous but steady loan at a time like that be considered
as sustaining a speculative movement?
The C H A R M A N . H a d it been continuous over a period of time
that might very largely be regarded as an investment loan, but the
fact is that the chart shows that the stocks dealt in on the New
York Stock Exchange are held on the average now 22 days, or at
least that was so a year ago—22 days as against 67 days 14 years
theretofore.
Governor HARRISON. Yes; I think that is true.
The CHAIRMAN. Has that no significance?
Governor HARRISON. Yes; it is very significant.
The CHAIRMAN. And might we not reasonably regard a situation
like that as a purely speculative situation ?
Governor HARRISON. Yes, I think that is true; but I am troubled
with a practical difficulty when we come to apply that principle in
practice to the handling of an operation in the Federal Reserve Bank
of New York. When an individual bank comes to us for a loan,
we can not say for certain that that particular bank is fostering
any appreciable amount of speculative activity.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator BULKLEY. I would like to get away from the use of the
word " speculative " in order to get away from an argumentative
point. Do you see any merit in a bank using its facilities for shorttime borrowing from the Federal Reserve Board by depositing Government securities as collateral and at the same time increasing
its loans made for the purpose of carrying investment securities!
Governor HARRISON. Senator, I think we are apt to make our
answers in the light of the experience we have just gone t h r o u g h :
but looking ahead
Senator BULKLEY. I mean looking ahead.
Governor HARRISON. Looking ahead to the normal period of operation when I hope we will not be faced with a repetition of what
we have had, if that proposed law is in effect and a bank comes to»
us for a loan for one of the reasons to which reference has been
made here so often, such as to meet a withdrawal of deposits, and
then a customer goes to them the next day and asks for accommodation upon stock-exchange collateral, should the customer be denied
the facility—a good customer of the bank—of getting the accommodation which he believes to be perfectly proper for his business o r
for his personal needs—not speculation—would he feel it was proper
that he should be denied that accommodation merely because the
bank is already borrowing from the reserve bank?
Senator BULKLEY. NOW you are getting away from the question I
asked you by asking me something different.
Governor HARRISON. I did not intend to do that, Senator.
Senator BULKLEY. I am putting a perfectly plain hypothesis to
you, where a customer is asking the bank for a loan to carry investment securities. I am trying to avoid the word " speculative," because I appreciate that that is argumentative; but there is such a
thing as a loan to carry investment securities, no matter what he
might ask for other purposes, but in what I am asking the purpose
is clear—it is the carrying of investment securities. Do you advocate
the increase of that sort of loan at the same time that the bank is
using its facilities for short-time borrowing by the deposit of Government securities?
The CHAIRMAN. May I suggest right there, if my cdfleague will
permit me, do you advocate it as a policy—we are not talking about
exceptional cases or emergency cases—but do you advocate it as a
policy ?
Governor HARRISON. I must apologize to the Senator. I misunderstood his question.
Senator BULKLEY. I did not mean to be impatient about it. I
want to get the question to you clearly.
Governor HARRISON. I think to permit it as a general policy might
be a matter of abuse; on the other hand, I do not see anything inherently wrong in a man borrowing or a bank lending, even though it
happened to be a member of the Federal reserve bank, funds to a
customer who is desiring to buy stock as a permanent investment
to put in his box and to pay for it out of his earnings. The difficulty of a law of that kind is that we can not separate the different
categories of loans very clearly and eliminate less desirable loans r
and at the same time permit what I believe to be perfectly proper
loans. I believe one way in which people may properly save a n d




NATIONAL AND FEDERAL UNSERVE BANKING SYSTEMS

89

invest, as has been done in the past, is to borrow money for invest^
ment in real estate or equities, or anything else, and to pay it off out
of income as time goes on. But to say that any bank which is accommodating the public in that sort of investment shall not be entitled to Federal reserve privileges is, I think, running a real risk. I
admit that if there is too great abuse and if it can not be controlled by
the discount rate, the only way of controlling the abuse may be as
Senator Glass proposes, even if the innocent will have to suffer with
the rest for the general good.
Senator BULKLEY. First, my question, inspired by section 11 of
this proposed bill, is not to deny Federal reserve facilities at all; it is
only to limit the use of them in what seems to me to be rather a
reasonable way, and I was just trying to develop your opinion as to
whether there should be any limitation at all. Maybe the limitation
is not exactly right as it is.
The CHAIRMAN. Governor, do many people very often find it necessary to borrow money on United States bonds, and buy securities
and put them away as an investment in their strong boxes; I mean
borrow for 15 days; you know this is an emergency provision exclusively, put in for that purpose to avoid embarrassment for a bank
whose deposits may have been unexpectedly withdrawn ? Is it often
t h a t a man or institution desires to borrow, for a period of 15 days or
less on United States securities, money to invest ?
Governor HARRISON. I think it is not often that an individual customer of the bank does that, except, of course, dealers in securities
who do do just that.
The CHAIRMAN. One more question. Would it be possible for
brokers to do their own financing as brokers rather than through
the bank in making what we call brokers' loans ?
Governor HARRISON. YOU mean out of capital ?
The CHAIRMAN. Yes; I mean out of their own resources rather
than borrowings from the banks.
Governor HARRISON. I t would mean a change in our whole system, of course. Whether it could be done without too big a readjustment, I do not know.
The CHAIRMAN. I S it done abroad frequently?
Governor HARRISON. I would agree that it might be wise to reduce
the amount that brokers may borrow in proportion to their capital.
1 think it is too high now, but whether you can very substantially
limit it or not, I do not know.
The CHAIRMAN. Governor, I think the committee will have to
suspend its hearings now for our recess. Doctor Willis, the expert
adviser of the committee, wants to ask you a few questions if you
could come back.
Governor HARRISON. I shall be very glad to, Mr. Chairman.
The CHAIRMAN. The committee will now take a recess until 2.30
o'clock p. m.
(Accordingly, 'at 12.30 o'clock, the committee took a recess until
2.30 o'clock p. m. to-day.)
AFTER RECESS

The subcommittee reassembled at the conclusion of the recess at
2.30 o'clock p. m., Hon. Carter Glass (chairman) presiding.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

STATEMENT OF GEORGE I . HARBISON, GOVERNOR OF THE FEDERAL RESERVE BANK OF NEW YORK—Besumed
The CHAIRMAN. The committee will come to order. Governor, I
believe I adverted to the fact the other day that the Federal reserve act contains provisions that its proponents from time to time
regard it as ample to enable the system to establish branches or
agencies abroad to look after our foreign trade, which I recall was
done upon special request of the then President, Mr. Wilson, whowas very anxious to look at our foreign trade, and Doctor Willis,
the expert of the committee, wants to ask you some questions with
respect to our European connections, and it may be that I may want
to ask a question or two after he gets through.
Mr. W I L L I S . First of all, I want to ask you a few questions
about the foreign operations. Why is it that bills stated in foreign
currencies held by the Federal reserve banks have shown such a
marked increase in recent months? I n what currencies are these
bills stated?
Governor HARBISON. W h a t bills?
Mr. W I L L I S . Bills stated in foreign currency, held by the New York
reserve bank ?
Governor HARRISON. Senator, if I may just make a short statement as a preface to our discussion, it will enable me more frankly
and fully to answer the inquiries. If I may assume that you do not
want me to disclose the business of the individual customers that d a
business with us it will be appreciated. I feel that it would not be
proper to do so, and I would prefer, unless the committee specifically
requests me to do so, to assume that I may discuss this question
without disclosing individual accounts of individual customers.
The CHAIRMAN. I should think that that could be done.
Governor HARRISON. I t would be a little embarrassing and I mention it only to indicate that if I appear at all unfrank it is just to»
safeguard the interests of some of our customers. Other than that,
I have no reservations, Mr. Willis.
The reference that you have made to our holdings of foreign currency bills is obviously to the increase that has taken place in the
past two months, amounting to approximately $35,000,000 in foreign
bills which we commenced buying, I think it was, in October, or
maybe in September.
The CHAIRMAN. Is that under the open-market provisions of theact?
Governor HARRISON. Yes, Mr. Chairman; it is under the provisions of subparagraph E of section 14, I think which authorizes
the Federal reserve bank, with the approval of the Federal Reserve Board, to appoint foreign correspondents. I t is in the same
paragraph, in other words, as that in which we are authorized to
establish agencies abroad. As you know the seasonal pressure upon
the foreign exchanges usually occurs in the fall, -at the time our
agricultural products are moving abroad, or are ready to be moved
abroad. We can almost always anticipate that that will be the season
of the heaviest pressure, although in recent years there has been
some disturbance to the normal on account of extraordinary conditions in many markets resulting from the inflation here two. years




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

91

ago. At the time we commenced to purchase these foreign currency
bills this past fall—and I am sorry I do not remember the exact
date—the foreign exchanges, and especially sterling, were very weak
and near the gold import point. Now, we know from experience
that one of the factors which influences the purchase of our goods
is the fluctuation in the exchanges, and at a period when the exchanges normally would be weak on account of the movement of
goods we can lend some support to the foreign exchanges through
the purchase of foreign currency bills.
We not only thus avoid the import of gold, for which we have no
immediate use, but it would also strengthen or tend to strengthen
those exchanges that make for stability at a time when the foreigners are purchasing our marketable goods. We usually contemplate
at the time of making these purchases that after the turn of the year,
in February and March, when the exchanges are beginning to
strengthen, we can then dispose of these sterling or franc or mark
bills. The exchanges are always stronger at a time when our agricultural products are not moving abroad.
Mr. W I L L I S . I n what currency are those bills chiefly stated?
Governor HARRISON. That, of course, would disclose the particular account.
Mr. W I L L I S . Not necessarily, at all. Many transactions of that
kind are stated in sterling, for example, or francs, in operations on
behalf of almost any other country.
Governor HARRISON. NO ; because we do not buy any foreign currency bills except those that we buy through the central bank of
the country of the currency in question. I think it makes no important difference in this case, but I would prefer unless this
committee wants me, not to make a public statement as to that.
Mr. W I L L I S . Very well, I will pass that.
Governor HARRISON. I do not mean to be obstinate about it.
The CHAIRMAN. YOU obviously are not obstinate about it.
Mr. WILLIS. H O W is the decision reached in the Federal reserve
system to purchase bills stated in foreign currencies ? How do you
arrive at such conclusion?
Governor HARRISON. I t is one of the factors which the directors of
the Federal Reserve Bank of New York constantly have under consideration. We do not believe we can properly administer the
affairs of the Federal Reserve Bank of New York without some
consideration of the foreign aspect of our rate situation in its relation to the whole credit situation.
Mr. W I L L I S . W h a t proportion of the bill holdings of the Federal
reserve bank for its own account is acquired through the operation
of the open-market investment committee?
Governor HARRISON. YOU are talking about the domestic bills
now, are you?
Mr. W I L L I S . Yes; and also bills in general. You say that the
New York bank directors have charge of the general decision here
as one of the factors that they have in mind for the management
and yet you buy those pro rata for all banks, do you not?
Governor HARRISON. We are still talking of the foreign currency
bills?
Mr. W I L L I S . Very well; let us speak of those for the moment.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Governor HARRISON. A S I explained to you day before yesterday,
under the law it is provided one Federal reserve bank may appoint
p^ents and correspondents abroad and open accounts with them,
with the understanding that other Federal reserve banks may participate in such accounts. We have never sought a foreign account
in our history. They have opened these accounts with us only after
we have been requested to open them and have made an investigation
of the bank and approved of it.
Mr. W I L L I S . What proportion of them are acquired through openjnarket investment in foreign bills ?
Governor HARRISON. None of them.
Mr. W I L L I S . But they are bought pro rata for all banks ?
Governor HARRISON. That is quite right.
Mr. W I L L I S . And the reason you were going to give ?
Governor HARRISON. A S I explained at the outset, the directors of
the Federal Reserve Bank of New York have these matters under
consideration all of the time. We buy sterling or marks or whatever the exchange is that we buy under the circumstances that I have
defined, and after we have bought the currency abroad we then
^endeavor to convert as much of it into bills as is possible rather than
to leave it on deposit. That is the way bills are acquired and that is
the way they are reflected in our account or statement. Now, those
accounts, at the request of all other Federal reserve banks, are participated among all Federal reserve banks.
Mr. W I L L I S . Proportionately?
Governor HARRISON. Yes, sir; that is right; participated pro rata
among all the reserve banks with complete information to them as
to any transaction engaged in.
Mr. W I L L I S . But you are really a central bank in foreign exchange
in this general control of the transactions ?
Governor HARRISON. Yes. And I think that is contemplated by
law.
Mr. W I L L I S . W h a t is the rate of commission received by the Federal reserve banks for the indorsement of the bills held for foreign
account?
Governor HARRISON. We do not indorse any bills. We purchase
bills for foreign account, and guarantee them, for which we charge
one-eighth per cent per annum to any bank.
Mr. W I L L I S . One-eighth. Have the acceptances of any banks that
subsequently failed been so indorsed?
Governor HARRISON. Have what?
Mr W I L L I S . Have the acceptances of any of the local banks that
subsequently failed been so indorsed ?
Governor HARRISON. They have been guaranteed, yes.
Mr. W I L L I S . W h a t proportion has there been of those?
Governor HARRISON. There has been an insignificant amount of
one bank, only one bank. Incidentally there has never been any
loss. We purchase for foreign account and guarantee only 3-named
paper—drawer, acceptor, and acceptable indorser.
Mr. W I L L I S . H O W much capital must a recognized dealer in acceptances possess?
Governor HARRISON. I forgot to say, Mr. Willis, that we are preparing specific, concrete answers to the questionnaire sent to us.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

93

I have got some of them here, in a preliminary draft of the answers
to the questions.
Mr. W I L L I S . On this particular one I want to make inquiry.
Governor HARRISON. May I hear the specific inquiry again?
Mr. W I L L I S . H O W much capital must a recognized dealer in acceptances possess?
Governor HARRISON. Recognized for what purpose?
Mr. W I L L I S . For dealing with you.
Governor HARRISON. D O you mean the dealer from whom we buy
acceptances ?
Mr.

W I L L I S . Yes,

sir.

Governor HARRISON. We may buy acceptances from any dealer regardless of the amount of capital. But we do some other things
with dealers than purchasing acceptances.
Mr. W I L L I S . What other things are they?
Governor HARRISON. A S we require a third indorsement we take
an indorsement from some dealer, and, obviously we must be satisfied with the value of the indorsement. We go into the question oitheir whole statement.
Mr. W I L L I S . H O W much do you require them to have as capital?
Governor HARRISON. I do not know that we have any specific minimum. I can say as a practical matter there is none that has less
than $1,000,000 capital.
Mr. WILLIS. YOU have never fixed the million as a basic minimum?
Governor HARRISON. I t has never been fixed as I am aware of,
certainly not by any specific action since I have been governor.
Mr. W I L L I S . I S it an understanding in the New York market that
it is $1,000,000, and that no one else need apply?
Governor HARRISON. I do not believe so, because we have had some
apply with less than that from whom for one reason or another we
were not content to accept an indorsement.
Mr. W I L L I S . But in a general way you want $1,000,000 capital before you deal with a dealer of that kind.
Governor HARRISON. Mr. Willis, when you talk about dealing with
a dealer, there are many different ways of dealing with a dealer.
Mr. W I L L I S . We are speaking about dealer's operations and so
forth.
Governor HARRISON. But it is not " and so forth " that I am speaking about. The indorsement is what I am speaking about.
Mr. W I L L I S . Speak of that, then.
Governor HARRISON. There is no dealer whose indorsement we
accept as a valid indorsement, who has a capital of less than a million dollars.
Mr. W I L L I S . And is there none you would accept at less than that
no matter what the capital investment was ?
Governor HARRISON. I think before we approve of it in our own
operating departments the indorsement of a particular dealer of less
than a million dollars would go to our directors for their authority.
Mr. W I L L I S . Of what protective value is the dealer's indorsement
on bills? Considering the small ratio of his net worth to his contingent liabilities, how much is that protective value?
Governor HARRISON. That depends on the dealer, his net worth,
and amount of acceptances from that dealer.
34718—31—PT 1




7

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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. W I L L I S . Taking it as an average, is it high or low in value,
like the discount average?
Governor HARRISON. We consider it has got a real value.
Mr. W I L L I S . Has that ever been tested in any way at all ?
Governor HARRISON. We have held some acceptances, which we
have guaranteed, that had three names, where the acceptor failed.
We lost no money. Whether they happened to be indorsed by banks,
or trust companies, or dealers, I am not sure, but we have never
lost any money on our guaranty.
Mr. W I L L I S . Are bills bought for foreign account purchased largely
from dealers?
Governor HARRISON. Yes, sir. I think it is probably true that
most are from dealers, although I would prefer, if you will let
me, to leave that answer subject to the exact figures which are in
the memorandum we are preparing for the committee.
Mr. W I L L I S . Does the open market investment committee control the total volume of aceptances purchased by the Federal reserve banks in the open market each fall ?
Governor HARRISON. N O ; the open-market committee does not.
Mr. W I L L I S . Have you any definite agreement with foreign central
banks as to the relations existing; that is, agreements in writing,
definite agreements with the foreign central banks as to the mutual
relationship existing in the purchase of bills in the respective
markets ?
Governor HARRISON. Yes; we have exchanged letters with all of
our correspondents, outlining what we will undertake to do for
them, and what we expect them to do for us.
Mr. W I L L I S . Will you file them with the committee ?
Governor HARRISON. I will be glad to file them, but I would rather
not disclose the details. I would not like to mention the terms
here.
Mr. W I L L I S . Have you any dealings with respect to the Bank of
International Settlements ?
Governor HARRISON. Yes; we have.
Mr. W I L L I S . Does that differ from any other central bank or is it
the same ?
Governor HARRISON. I t is the same, substantially the same. I
think it is exactly the same.
The CHAIRMAN. Let me ask you if you have had any dealings with
the International Bank, as you say you have, and as I assume you
would have; what becomes of the order of the State Department
that the Federal reserve system shall have no relations with international banks ?
Governor HARRISON. A S I understand the situation, Mr. Chairman,
neither the Federal reserve bank nor the Federal Reserve Board, as
far as I am aware, ever got any communication from the State
Department as to what we should or should not do.
The CHAIRMAN. YOU saw the public statement in the newspapers ?
Governor HARRISON. I saw the publib statement, and as I recollect
that statement the inhibition or prohibition, however it was expressed, was against our participation in the organization or management of the International Bank.
The CHAIRMAN. What had the State Department to do with it ?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

95

Governor HARRISON. Well, as I stated at the hearing day before
yesterday, I would really prefer not to discuss the public statement
of the State Department.
The CHAIRMAN. W h a t I am trying to develop i s : Do you know of
any provision of law now authorizing the State Department to
have anything at all to do with the Federal reserve system?
Governor HARRISON. No; I am not aware of any such provision.
The CHAIRMAN. I S there any provision of the law that would
enable the President of the United States to discharge a messenger
boy in the bank?
Governor HARRISON. None, that I know of.
Mr. W I L L I S . Have you any representative at the International
Bank who reports to you regularly?
Governor HARRISON. None, whatever.
Mr. W I L L I S . I have one or two questions on the money situation
which were raised this morning. W h a t is the relationship between
the Federal Reserve Bank of New York and the money committee
of the Stock Exchange ?
Governor HARRISON. There is no relationship.
Mr. W I L L I S . YOU never have had membership on that committee
of any kind?
Governor HARRISON. None, at all.
Mr. W I L L I S . And there is no assistance or cooperation in fixing
the rate in any way?
Governor HARRISON. N O ; although on various occasions they advise us the state of the money situation, and what they think the
rate ought to be.
Mr. W I L L I S . I S there ever any rediscounting with the Federal
reserve bank for the purpose of regulating the call money position;
that is to say, when there is danger of the call money rate going
up, when the member banks obtain from the Federal reserve bank
rediscount funds, and hence keep the call money rate down?
Governor HARRISON. Oh, there have been frequent occasions when
that has been done.
Mr. W I L L I S . And, of course, with the knowledge of the bank
and its board of directors.
Governor HARRISON. Yes, that is right. Take the period of
October and November, 1929, when in the span of 4 or 5 or 6 days,
that is within a week, between a billion and a half or two billion
dollars of these so-called outside loans, or loans for others, were
called. H a d not the New York City banks been in a position to
take over some of those loans that were called, you might have had
a gyration in call money rates with consequent pressure upon the
exchange that might have resulted in disaster.
Mr. W I L L I S . I S it fair to say then that the reserve bank in New
York is habitually a regulator of the call money rate in this way?
Governor HARRISON. Not at all; I think it is fair to say, however,
that the associated banks in New York feel that they have got
some responsibility for the call money rate, and that when occasion
develops they feel it is necessary to put money out and that that
involves the creation of new deposits and higher reserve requirements which at times forces the banks to borrow reserves from us.




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NATIONAL AND FEDERAL. RESERVE BANKING SYSTEMS

Mr. W I L L I S . A S to borrowing reserves, what is the attitude of
the bank toward the so-called market for Federal funds?
Governor HARRISON. My own opinion is that the market for
Federal funds if properly handled and executed by the banks
participating in it, is a wise thing for the reason that I was mentioning this morning. If for one reason or another money is very
much over in New York, and we will say tight in Chicago, and
the banks of New York have surplus reserves, the banks in Chicago
instead of borrowing from their own Federal reserve bank and
creating new discounts, which in the total are not needed, purchase
Federal reserve funds through the New York market, not from us
but from any bank that has excess reserves. That machinery tends
to make the credit picture much more fluid than it would be otherwise. I t enables the Chicago bank—I am using it for an example—
to acquire some of the excess reserves floating around New York at a
i*ate lower than their own rediscount rate. And that has the effect
of stabilizing or equalizing, or tending to harmonize the rate in both
communities.
Mr. W I L L I S . The effect of that, then, is to reduce the amount of
total reserve funds that would ordinarily be carried ?
Governor HARRISON. YOU mean the amount of discounts that
would be otherwise created?
Mr. W I L L I S . I mean that the amount of total reserve credit existing
on your books is smaller than it would otherwise be ?
Governor HARRISON. Yes, sir. I t means that if a bank has surplus
reserves of over 13 per cent, the minimum required by law, they
go out
Mr. W I L L I S . And as you have remarked, the savings deposit reserves have been affected in a similar way by cutting, down to their
3 per cent?
Governor HARRISON. I am afraid I do not understand.
Mr. W I L L I S . I understood you the other day to say that the savings deposits reserves were legally 3 per cent, and inasmuch as the
tendency was to cut reserves against deposits by shifting to savings
accounts at a 3 per cent reserve, that that was rather too small.
Governor HARRISON. I believe it is.
Mr. W I L L I S . I t would seem, then, that the present reserve is cut
at one end and also the other. That is due to this practice ?
Governor HARRISON. N O ; I do not believe it is.
Mr. W I L L I S . I thought you just said so.
Governor HARRISON. I said the legal reserves. I n one case you
were talking about actual reserves and in the other case you were
talking about the legally required reserves. I say that 3 per cent
reserve on savings deposits is too low, in my judgment. I claim also
that when a bank has money over and above their 13 per cent requirement in the Federal bank they can do any one of three things.
They can leave it with the Eeserve bank, they can sell it, or they have
a perfect right to withdraw it in currency and put it in their vaults.
There is no legal provision as to that.
Mr. W I L L I S . N O doubt they have a right to do it just as they have
a right to make the savings reserve 3 per cent. No one questions
the fact, no one questions the right to keep savings reserves at a
minimum.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

97

Governor HARRISON. The reason is that
Mr. WILLIS (interposing). Do not interrupt me for a moment.
Will you advocate the reserve requirement on savings deposits be
raised to a rate higher than 3 per cent ?
Governor HARRISON. I would like to defer my final judgment
pending the report of the committee which is studying the whole
reserve question. When it completes its study it will give very
much more complete and academic discussion than we could go
into at this moment. But my own impression is, and my own
personal belief is, that the reserve requirement on savings deposits,
for the reason that I defined day before yesterday, should be raised.
Whether you should do that without some corresponding adjustment
in the rate on demand deposits or not is a very broad question which
is being considered by the committee. I should think you might
perhaps want to make some adjustments.
The CHAIRMAN. Will the report of that committee be made
soon enough to have attention from this subcommittee in the preparation of any legislation we may design ?
Governor HARRISON. I think they have made great progress.
Mr. Rounds has informed me that he is of the opinion that it probably will not be ready until some time early in the summer.
The CHAIRMAN. I do not imagine we shall prepare legislation
before some time next summer.
Governor HARRISON. I confess that I am disappointed that it
will not be ready sooner than that, because I had hoped it was
nearly ready now. But it is a very delicate, intricate subject, as
you know, and requires all sorts of careful calculations to see what
would happen if we used this, that, or the other reserve ratio.
The volume of detail is great. I think that is the explanation of
the delay.
Mr. W I L L I S . Can you file a copy of it as soon as it is reasonably
ready?
Governor HARRISON. If I have any voice in it I will be glad to.
Mr. W I L L I S . I think you have data with reference to the current
amount of brokers' loans. Can you file them with the committee ?
Governor HARRISON. Yes, sir; I will be glad to do that. And I
think it will be very interesting to the committee. We have been
working on that for some while. I t is a very long and detailed
study. I have a summary of it with me. The summary itself is
18 pages.
Mr. W I L L I S . A summary probably will be sufficient if you will
file that (said summary to be submitted for the committee files).
The CHAIRMAN. Right at that point have you any concrete suggestion to make to the committee as to what might be done in a
legislative way to either abate the danger or prohibit altogether
the peril of these loans for others?
Governor HARRISON. Mr. Chairman, I hope that legislation won't
be necessary, but if it is, I mean if we can not accomplish it by
voluntary arrangement with the money market, and by that I mean
both the banks and brokers, I hope that something might be done
which will limit these loans through legislative action.
The CHAIRMAN. YOU are unprepared right now to suggest what
should be done?




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NATIONAL* AND FEDERAL RESERVE BANKING SYSTEMS

Governor HARRISON. Only for one reason, and that is the fear
that if a prohibition is made now in the law it would relate necessarily only to member banks, and that would leave open too many
avenues of escape or leakage. I think that by voluntary arrangement, if the community as a whole wants to operate by voluntary
arrangement, we can accomplish much more effectively what we have
in mind than we could by legislative action.
The CHAIRMAN. A very vital question which is involved right
there is whether it must necessarily relate to member banks only.
Governor HARRISON. Of course, I can not answer that.
The CHAIRMAN. YOU have a very distinguished authority in New
York who thinks not, so I am told.
Governor HARRISON. Well, I am surprised to hear it, but rather
glad to hear it. All that I had in mind was that I did not know
whether it was competent for Congress to say that you or I could
not lend some money to Bill Smith if we want to.
The CHAIRMAN. Maybe it might not apply to individuals, but it
might apply to corporations.
Mr. W I L L I S . Coming to the question, do you habitually buy Treasury certificates for the purpose of maintaining a marfiet for those
certificates ?
Governor HARRISON. I do not think it is an accurate statement to
say that we ever do that now, Mr. Willis.
Mr. W I L L I S . What is your policy with regard to buying Treasury
certificates ?
Governor HARRISON. The policy with respect to the purchase of
Treasury certificates now is one which is in the hands of the system
committee, called the open-market policy conference. That conference has been meeting quite frequently to consider the whole
credit picture in its relation to industry and trade. Whether we
decide to purchase or sell securities depends altogether on credit
conditions at the time the committee meets.
Mr. W I L L I S . Has it been the policy in the past to maintain it
that way, to maintain the market for the bonds ?
Governor HARRISON. Not that I know of.
Mr. W I L L I S . YOU spoke of it as being not entirely an accurate
statement, but at the same time it may be true that you are not
familiar with it ?
Governor HARRISON. I made that reservation only because I am not
familiar with the earlier days.
Mr. W I L L I S . Are repurchase agreements ever entered into with
reference to buying Treasury certificates so that the holders sell them
back to the bank under the repurchase agreement ?
Governor HARRISON. I think that falls in line with what you have
covered in the prior question. There are dealers in Government
securities as there are dealers in bills. There are retailers and there
are times when they have stocked up with Government securities,
pending resale of their wares, which are Treasury certificates, they
need accommodation. Ordinarily in the usual course they go to
the banks in the community to get that accommodation. If for
one reason or another the funds are not available at rates anything
proportionate to the yield upon the certificates, either they would
have to dump them on the market or get some accommodation at a




NATIONAL AND FEDERAL, RESERVE BANKING SYSTEMS

99

rate that would enable them to carry them pending their orderly
sale. I n order to take care of such cases we do purchase them from
the dealers under repurchase agreements.
Mr. W I L L I S . What is the effect of that on the current rates ?
Governor HARRISON. We do it always at our rediscount rate.
Mr. W I L L I S . A t your regular rediscount rate ?
Governor HARRISON. Yes, sir.
Mr. W I L L I S . What effect has it on the regular rediscount rate,
if any ?
Governor HARRISON. I do not think it has any effect on the rediscount rate but it does do this, whenever we purchase them that way
it puts money in the market for that period of time.
Mr. W I L L I S . What leads the open market committee to buy
Treasury certificates more or less in any given time ?
Governor HARRISON. A S I said a moment ago, that involves my
making a generalization only. I t depends entirely on the whole
economic, trade, business, and credit set-up. I would be glad to discuss any specific case because then it would perhaps be easier to
develop the thought.
The CHAIRMAN. Let me ask you one question right there. Does
the Treasury undertake to influence the action of the New York
bank, or any other! Federal reserve Bank, in transactions of that
sort?
Governor HARRISON. Never, now.
The CHAIRMAN. I know it did when I was Secretary of the
Treasury.
Governor HARRISON. That is the reason I said " now."
The CHAIRMAN. And I thought it was a pretty vicious thing to
do and was only done under war necessities, or immediate postwar
necessities rather, and I wondered whether it were continued or not.
Governor HARRISON. I think there was a time when as a result of
the pressure of war necessity the interest of the Treasury was a
very strong factor in certain Federal reserve policies. I think that
was really not a matter of very severe criticism in the circumstances,
but in recent years, and since that period has terminated, there has
never been any effort on the part of any of the Treasury officials
that I know of, as far as the Federal Reserve Bank of New York is
concerned, to influence our rate policies or our operations in Government securities.
Mr. W I L L I S . NOW a question or two on the matter of the openmarket rates. W h y was the open market buying rate on bankers'
acceptances cut down in the fall of 1928 and during 1929, while the
discount rate was advanced, so that finally the buying rate was a
full 1 per cent above the bill rate?
Governor HARRISON. T h a t involves a pretty academic study of
Federal reserve policy. First of all, when we go into the fall we
are going into a period when we usually have seasonal tightening of
money, when crops are being moved, and when business demands a
certain amount of accommodation. This usually results in the Federal reserve assets expanding between August and December, between $400,000,000 and $450,000,000. Therefore when we go into
August the system has three alternatives: We can say we will not do
anything affirmatively, which forces the banks to come in and bor-




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NATIONAL AND FEDERAL. RESERVE BANKING SYSTEMS

row $400,000,000. When they borrow $400,000,000 there is a heavy
increase in the pressure upon the credit structure because when
banks are in debt to the Federal reserve they are naturally putting
on the brakes in an effort not to expand any too fast. So if for any
reason when we are approaching the fall season we need to p u t
that pressure upon the credit structure we do so by purchasing as
few bills as possible, purchasing no Governments, possibly advancing the discount rate and forcing the banks to come in to get requisite reserves by borrowing from us. If, on the other hand, for one
reason or other, it seems wiser not to put that pressure on the community, we can offset the seasonal demand for Federal reserve
credit, which amounts to $400,000,000, in the average year, either
(a) by voluntarily purchasing Government securities or else (b) by
freely accepting acceptances that are offered to us for sale.
Now during the fall period we usually get in the normal course
of events around $200,000,000 of new acceptances which are offered
to us. Those acceptances are being drawn to facilitate the orderly
movement of the crops. If we keep the acceptance rate down it
facilitates the offering of these acceptances, and avoids the need of
borrowing, which puts the pressure on.
Mr. W I L L I S . Did the open-market acceptance policy of the reserve
bank interfere with its general policy of restrictive control of speculative credit expansion at any time during 1928 or 1929 ?
Governor HARRISON. I personally would have preferred to advance
the acceptance rate in the fall of 1928.
Mr. W I L L I S . You mean the rediscount rate?
Governor HARRISON. No; I am talking of the bill rate.
Mr. W I L L I S . Why did you not do it ?
Governor HARRISON. Well, there was a difference
Mr. W I L L I S . I n the Reserve Bank of New York?
Governor HARRISON. Some in the Reserve Bank

of opinion.

of New York and
some in the Reserve Board.
Mr. W I L L I S . Would the rediscount rate advances have been more
effective if seasonal purchases of acceptances at relatively low stated
buying rates had not been made during this period ?
Governor HARRISON. Yes; I think they would have been.
Mr. W I L L I S . That would have been better?
Governor HARRISON. Yes.
Mr. W I L L I S . I n a general way, do you reduce the rate on acceptances
in advance of reduction of the discount rate and raise it in advance
of an increase in the discount rate?
Governor HARRISON. No; because usually the conditions that lead
up to the reduction of the discount rate have previously forced the
acceptance rate down so that we are then in the position of following
a reduction in the bill rate by a reduction in the discount rate.
Mr. W I L L I S . I looked at your statement, and it occurred to me to
ask whether the present acceptance rates were too low. Country
banks, of course, habitually rediscount while city banks get more
through acceptances?
Governor HARRISON. I t gives a lower rate of accommodation to any
bank that happens to have acceptances to bring to us.
Mr. W I L L I S . And those banks are habitually which ones?
Governor HARRISON. Unfortunately they are not habitually any
one group. I wish they all were habitual holders of acceptances.




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101

Mr. W I L U S . F o r the most part do you find the acceptances in the
country or in the city ?
Governor HARRISON. Until the past year and a half the city banks
held a small proportion of the acceptances, unquestionably, and while
I have not prepared the figures, no doubt you will get them, I
assume that relatively the country banks had more before 1929 than
the city banks.
Mr. W I L L I S . What is the differential in favor of acceptances—I
mean the differential in favor of acceptances, instead of acceptance
credit—about how much cheaper does it run ?
Governor HARRISON. At the present time our bill rate is 1%, as
contrasted with a 2 per cent discount rate.
Mr. W I L L I S . And how about when the rate was 6 per cent or 5?
Governor HARRISON. I n 1929 the bill rate was 5% when the discount rate was 5 per cent, because we were not authorized to advance
our discount rate. We wanted it over the bill rate.
The CHAIRMAN. Governor, speaking of acceptances, has the volume
of domestic acceptances in recent years materially increased or
decreased ?
Governor HARRISON. The volume of domestic warehouse acceptances, Mr. Chairman, has gone up—I do not know whether I have
got the chart here or not—but that increase is due to this fact: That
each fall, and especially in 1927 and 1929, when there was a large
volume of agricultural products on the market not being sold, they
were being carried in warehouses. Many of the owners of those
products carried them through the medium of warehouse acceptances
which are authorized by section 13 of the Federal reserve act. Generally the peak in the volume of acceptances drawn against warehouse receipts is reached in November and December, representing
the peak of accumulated products taken off the farms. I t then goes
down to a minimum, around June and July. A t the end of December of this past year I think the volume of warehouse acceptances
outstanding was around $270,000,000, as contrasted with a low in
June or J u l y of around $120,000,000.
Mr. W I L L I S . Was that increase largely due to the growth in warehoused products stored abroad, in Germany ?
Governor HARRISON. I am talking of domestic acceptances.
Mr. W I L L I S . But there was an increase in foreign acceptances?
Governor HARRISON. Did you say our foreign ones?
Mr. W I L L I S . I did not say your foreign ones. I said foreign
acceptances.
Governor HARRISON. I want to be careful; I do not want any misunderstanding. These figures do not represent the holdings of the
Federal Reserve Bank. They represent the total volume of acceptances outstanding in the United States; that is, the acceptances
accepted by American banks and bankers.
The CHAIRMAN. I want the information as to domestic acceptances. I want in the course of this inquiry, if I may, to develop
just what use you think that domestic-acceptances provision in the
bill has been to the commerce of the country, because it was the view
of the Banking and Currency Committee, at least of the House, confirmed by the action of Congress itself, that the domestic acceptances,
the establishment of domestic acceptances, was to take form not only




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

to end the practice in this country but in other civilized countries;
and Mr. Walker, who appeared before the House Committee, made
a very emphatic statement that nothing like it was ever heard of
in banking, either in England or Continental Europe, and that a
system of that sort, if largely used, would come pretty nearly destroying the banking system of any country where it was tolerated.
I just wondered what had been the result of that authorization
made, as I recall, as a war measure ?
Governor HARRISON. I think there are many of us in the reserve
system who looked with some reservation on the extension of the
facilities of domestic acceptance credits, but I do not believe, as far
as I am able to judgte, that it has been abused. I think those acceptance credits against warehouse receipts are serving a very useful and stabilizing purpose in that they enable the carrying of farm
products, especially pending marketing, over this heavy period in
the late fall.
The CHAIRMAN. Would you not say it was an abuse in the system
for an acceptance house to be sending these agents around the
country and inducing banks to accept in order that they may buy
acceptances?
Governor HARRISON. I did not know that that was being done,
Mr. Chairman.
The CHAIRMAN. I say would you not regard that as an abuse
of the system ?
Governor HARRISON. I suppose that is just educational propaganda
to try to tell the banks how to help with their facilities.
The CHAIRMAN. I S there not a vast difference between the acceptance system as it is practiced in Europe within the limited geographical areas, and the domestic acceptance system here in this
country, with 30,000 banks authorized to accept ?
Governor HARRISON. I think the difference is very great. The
extraordinary part in my judgment is that the acceptance business,
which was wholly new to the United States up to the time of the
Federal reserve act, has developed as soundly as it has. There have
been some abuses but I think on the whole it serves a very important
economic purpose in our whole set-up to-day. I am not arguing
for any one kind of acceptance as against the other. As I say,
originally I was opposed to domestic acceptances myself, but they
have been permitted and I do not believe, they have been abused.
The percentage of domestic acceptances as contrasted! with the
whole, is very low.
The CHAIRMAN. That being so, we may say that the representation made to Congress at the time they incorporated that provision
in the act was greatly magnified because they were told that it was
a necessary war measure. If it is not feasible or desirable to abolish
the system, Governor, would you say that there should be a minimum
capital required for any bank making acceptances?
Governor HARRISON. I think that would be a wise limitation.
Of course what happens is t h i s : When a bank with too small capital
does accept, its bills do not float with freedom in the bill markets
and a taboo comes on them eventually.
The CHAIRMAN. Eventually; yes; after the damage has been
done.




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103

Governor HARRISON. I do not think that the advantages that are
offered by even our domestic acceptance facilities would be severely
limited if Congress put a limitation on the capital of the accepting
bank.
Mr. W I L L I S . One more question, Governor, and then I shall have
finished. I t is a matter of interpretation. I understood you this
morning to take the case of an individual who borrowed money and
used his collateral, his stock in United States Steel, a loan oeing
contemplated for some urgent purpose—to replace the burning down
of his establishment, and so forth. I understood you to say that that
note would not be eligible for rediscount by a reserve bank. Did I
understand you in that way?
Governor HARRISON. Under no circumstances is such a note as that
eligible.
Mr. W I L L I S . I beg your pardon. Is it not true that the reserve
banks are constantly discounting paper that has stock attached to
it in that way—just for protection, I mean ?
Governor HARRISON. I think it is true that on some occasions reserve banks rediscount perfectly eligible paper, and in the exercise of
prudent business judgment require that the paper have some additional collateral. As to additional collateral, there is no legal limitation at all; and rather than take from the banks other eligible paper
that they could offer us, we are prepared in those cases to take additional collateral of an ineligible character.
Mr. W I L L I S . Was not that the case with the man whom you suggested this morning, where you assumed the man had his store or
house burned down and wanted to restore i t ; and where you spoke of
his experience of going to the bank to borrow money, but the bank
does not regard his condition as good as it was, whereupon he says,
" I will put up my shares of United States Steel as collateral," which
he does. That would be an eligible note, would it not ?
Governor HARRISON. I see what you mean. There are such cases,
although I do not think many were offered to us.
Mr. W I L L I S . That was the case you put before us this morning
showing why collateral paper would be ruled out in some instances
but not any such instances as the chairman spoke of in the case of
" Bill Smith."
Senator BULKLEY. I think his illustration was where a man's
home burned down.
Mr. W I L L I S . That paper has been ruled out by the Federal reserve
bank?
Senator BUCKLEY. I t was to rebuild a home.
Mr. W I L L I S . Yet I understand that farmers' notes have been held
eligible for just such purposes as that.
Governor HARRISON. I do not know of any case where we have
ever accepted such paper in New York. I do not think that it
would be eligible since it involves putting money into bricks and
mortar. I t is a different thing, however, where a contractor wants to
buy some bricks from a factory to put into a house.
The CHAIRMAN. That is a mercantile transaction.
Governor HARRISON. Yes, a mercantile transaction, and it is perfectly eligible.
Mr. W I L L I S . SO the presence of steel stock attached to it would
not have anything to do with it whatever except to make it safer?




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NATIONAL. AND FEDERAL RESERVE BANKING SYSTEMS

Governor HARRISON. Not in that case.
Mr. W I L L I S . There are many cases in which the reserve banks do
discount such paper with such collateral attached?
Governor HARRISON. I do not know. We do not do that.
Mr. W I L L I S . YOU spoke of a long letter this morning to the Eeserve
Board outlining your discount policy. Can that be filed with the
committee ?
Governor HARRISON. I will be glad to file it with the committee,
but if so, I would like to have the privilege of looking over the vast
amount of correspondence we have had with the board and possibly
submit other letters as well, otherwise this letter may be misleading in
itself.
Senator WALOOTT. Before we leave that matter, Mr. Chairman,
we have discussed to some extent the question of acceptances. I
would like to ask the governor if he thinks there is anything in our
domestic situation here which might be improved by borrowing
from the English system, which is a very different thing? I s
there anything about that that we ought to be building up on?
Governor HARRISON. I have wondered about that, Senator. The
main difference, as I see it, is that the English system provides for
borrowing on overdrafts. Of course, we have always considered
that as bad practice in this country. The English system of lending
on overdrafts is, however, little different from our stock collateral
loans, because what they do is this
Senator WALCOTT. That is, the intervention of the Bank of
England.
Governor HARRISON. An English bank tells a customer to put with
the bank stock-exchange collateral of one kind or another, so as to
protect the bank whenever the owner of the collateral overdraws.
I n effect, it is nothing but a loan collateraled by the stock-exchange
collateral which is deposited with the loaning bank. Now, as to
that kind of loan there is no paper at all; there is nothing that can
be rediscounted. As I understand it, there is no evidence of it
except the entry on the books of the bank; that is, the withdrawal
of funds. The difference in our system, of course, is that we require
documentary evidence in the form of a note, collateraled or not, as
the bank sees fit. I n that case there is evidence in the portfolio of the
bank rather than the overdraft on the ledger of the bank.
Mr. W I L L I S . Of course, they have their regular periods of settlement, which helps that a good deal—settlement days.
Governor HARRISON. Yes, sir.
Mr. W I L L I S . And the Bank of England plays a very important
part in that transaction, too.
Governor HARRISON. But, of course, the Bank of England has
no way of rendering accommodation on the overdraft.
Senator WALCOTT. N O ; they are a factor, though, in the security
of that loan.
Governor HARRISON. Yes; because if the bank needs more funds
they let their bills run off or call loans made to bill houses, which
they can always do because the Bank of England stands behind
the bill market, ready to buy bills or make loans to dealers.
Senator WALCOTT. I t makes the Bank of England practically the
supervisor of it. But you think there is nothing in that system
that we ought to be working toward ?




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105

Governor HARRISON. There are a great many things in the English
system which would be very helpful in our own country if we were
adaptable to them. The difficulty is that both because of the limited
geographical area, and centuries of experience in conservative banking, the situation in England is quite different from our own. We
have quite a different setup.
Now I have wondered in the past whether this call loan market,
which is the source of so much trouble at all times such as we have
been through, could not be modified or corrected in some measure
if we adopted the term settlement, for stock-exchange transactions, as they do in London. There have been numerous committees
that have studied that and investigated it. We have had men from
our bank this year going over it with the idea of seeing if it could
not be applied to our situation. One difficulty is that it may still
further encourage speculation, for it gives you one week or two
weeks of trading before you need make a settlement.
The CHAIRMAN. Governor Harrison, I want to clarify in my own
mind the reasonableness of a complaint brought to me not long ago
by a Senator, which was brought to him by an attorney in a State
engaged in litigation with a Federal reserve bank, in the requirement of the Federal reserve bank of additional collateral security for
a loan. H e took the position that that was practically making the
Federal reserve bank a preferred creditor, exacting collateral security
largely in excess of the amount borrowed, or the amount of bills rediscounted. Ought not the bank, in your opinion, to have the right
to fortify the collateral security for a loan by demanding additional
security if they think what they have is not sufficient?
Governor HARRISON. I personally always have had some reluctance
in giving my assent to the Federal reserve bank asking for collateral
protection over and above the eligible paper which the bank gives us.
The CHAIRMAN. The Federal reserve agent was authorized to demand that at the bank, was he ?
Governor HARRISON. We have considered it four or five times,
lastly not over six weeks ago in a meeting of the board of directors.
The question: presents itself in this way: Suppose that a member
bank X is in difficulty. The more difficulty it is in the greater the
accommodation it needs. I t has previously rediscounted with us
its best eligible paper. What remains is less desirable. The question i s : Shall we say that the remaining paper is no longer sufficient
to justify the reserve bank in buying it and thus refuse to accommodate the bank, or should we say, in order to keep the bank open, as
we ought to do, that we will take the eligible paper if they will
give us as additional collateral some other form of paper that would
not be eligible for discount.
That has been the practice in New York for many years, although
the number of instances in which we have done that has been very
few. I do not believe it is a preference, although I may not be fully
posted on the law; I do not believe it is a preference where we take
the extra collateral for a present loan. If we ask to-day for collateral for a loan that we are considering making to-day, I think we
have a perfectly legal right, without any question of preference, in
asking for the extra protection. If that were not true no debtor in
difficulty could ever get relief.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

The CHAIRMAN. Is there any textual, or modified authority in the
act, for asking supplemental security for a loan already made?
Governor HARRISON. I suppose it is one of the incidental powers
in the conduct of our business—powers given to the bank by law.
The CHAIRMAN. I t is explicitly given to the Federal reserve
agent.
Governor HARRISON. Yes; he can ask for excess collateral to Federal reserve notes.
The CHAIRMAN. I t seems to me that that is an implied authority
to the bank.
Governor HARRISON. Putting it a little differently, Mr. Chairman,
I do not think the management of the reserve bank could properly
and safely go ahead and make loans which they believe not to be
sound, or a loan which they believe would not be paid in full, if
they did not have the right to ask for additional collateral. Of
course, if Congress should say we should not ask for additional collateral but should rely solely on the paper that is eligible, plus the
indorsement of the bank, our responsibility would be removed,
Short of that, I do not see how the reserve management could conservatively and wisely make a loan to a member bank that it believes
to be in a risky condition, or where there is questionable paper,
without taking collateral, especially as we have a mandate from Congress to make only such loans as can be safely made. T h a t is in
section 4 of the act.
The CHAIRMAN. D O any of you gentlemen desire to ask further
questions of Governor Harrison? Otherwise, Governor, we will
excuse you, and thank you for your very patient and interesting
testimony.
Governor HARRISON. I appreciate the opportunity of being with
you, Mr. Chairman. I wonder if it would be improper to ask if I
may have the privilege, if I think it is necessary after going over the
transcript, to submit, perhaps, a written summary covering some of
the disjointed statements that I have made.
The CHAIRMAN. Yes; you have the privilege of correcting your
testimony if you care to do so.
Governor HARRISON. I thank you.
STATEMENT OF J. H. CASE, OF NEW YORK, CHAIRMAN OF THE
BOARD OF DIRECTORS OF THE FEDERAL RESERVE BANK OF
NEW YORK
The CHAIRMAN. Mr. Case, I believe you are chairman of the
board of directors of the New York Federal Reserve Bank and the
Government agent there?
Mr.

CASE. Yes,

sir.

The CHAIRMAN. Some of us thought that when we enacted the
Federal reserve act that you were a very important personage, if not
the chief executive officer of the bank, and we never had any idea
that any of your implied functions would be taken over by some
appointee of the board of directors. But that seems to have been
done.
Just what duties have you, Mr. Case, outside of those textually
prescribed by the act itself?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

107

Mr. CASE. I have charge of the reports and examining functions of
the bank, and as one of the senior officers of the bank I act in an
advisory capacity to any of the officers of the bank from time to
time in connection with problems that come up, and serve on a
number of committees.
The CHAIRMAN. I do not see that there is a great deal of use in
having a repetition of questions and very likely repetition of answers
with respect to Federal reserve policies. If Mr. Case would care to
make any general statement that would be helpful to the committee,
or if you have in mind any modificatiou of the provisions of the
law of any description that would be helpful, we would be very
glad to have you make the statement and offer the suggestions.
Mr. CASE. Senator, I have been here since Monday and have
listened to the questions and answers with a great deal of interest.
I have made a few observations of my own and reduced them to
writing. If you like I would be glad to present them.
The CHAIRMAN. We would be glad to have you present them.
Mr. CASE. The past 18 months have tested and revealed certain of
the virtues and certain of the limitations of the Federal reserve
system. I n October, 1929, and in December, 1930, the Federal reserve
mechanism was tested in two different emergencies relatively new in
its experience. The 1929 events have been recounted a number of
times, but let me remind you briefly of what occurred. The bull
market of 1928-29 was largely financed not by the banks but by corporations, firms, and individuals, in the form of advances classified
in the reports as " loans for account of others." These loans by corporations, firms, and individuals not in the banking business, attracted by high rates, rose from $1,500,000 at the beginning of 1928
to something like $5,500,000,000 if the figures from all sources are
put together. I t was the fact that these funds were not bank funds
that made the speculative movement so difficult to control.
When stock prices broke in later October of 1929 many of these
lenders became alarmed as to the safety of their loans and promptly
withdrew their funds. I n about two weeks they withdrew $2,500,000,000. To prevent a panic the New York City banks stepped in
and replaced as much of these funds as was necessary. Not all had
to be replaced because of the decline in security prices. But the
New York banks found it necessary in meeting this demand to increase their own loans, both to brokers and directly to customers,
by $1,500,000,000. With this increase in loans went a corresponding
increase in deposits and consequently a sizeable increase in reserve
requirements. I n fact these banks suddenly found themselves in
a single week in need of $200,000,000 additional reserve funds.
This emergency demand was met promptly, about half by borrowing
at the reserve bank and about half by funds supplied voluntarily
by the reserve banks by purchase of Government securities. The
smoothness with which this operation went through is indicated by
the fact that there was no major disturbance in money markets.
This was a demand for funds which the old money mechanism could
have met only with the greatest of difficulty, if at all, but which
the Federal reserve mechanism was able to handle without strain.
An equally severe but different type of emergency occurred in the
month of December just past. The transition from public belief




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

in a short-term depression to one of longer duration was marked
by a growing apprehension as to the solvency of various foreign
countries, business concerns, and the value of their securities, and,
last of all, banks.
Senator WALCOTT. Does the word " foreign " apply to all of those?
Mr. CASE. No, sir; if the word " domestic " were inserted following the words " foreign countries " my meaning would be made entirely clear.
Depressed commodity prices, business inactivity, and declining
bond values had in fact endangered the position of some banks, but
regardless of their true position the very state of apprehension which
existed was sufficient to endanger some institutions which were
undoubtedly solvent, though not highly liquid. There were runs
on several banks in the West and South resulting in the closing of
a number of institutions, including several chains.
At about the same time or in December a situation which had been
culminating in New York City resulted in the closing of two banks
there.
These are the only closures in New York City for some years past,
in fact the one member bank which closed is the only member bank
which has closed there since the reserve system was established.
There have been altogether nine other member banks in the second district which have closed since the system was established,
17 years, all small institutions, 7 of them having been closed as a
direct result of defalcation on the part of an officer or officers.
The closing of these banks in New York was followed by large
withdrawals from several other New York City banks doing business with a somewhat similar type of customers and in the same
general localities. These banks called upon the reserve banks for
large amounts of currency. Other banks also drew more than the
usual amounts of currency to be prepared with cash in till for any
exceptional withdrawals. These large demands for currency happened to come just at the time of year when currency demand is
ordinarily at its maximum for the holiday season. Thus in a single
week, ended December 13, 1930, over $170,000,000 of currency was
drawn from the Federal Reserve Bank of New York.
For the country as a whole it is estimated that withdrawals of
currency from the reserve banks due to this cause, over and above
the usual seasonal requirements, totaled over $300,000,000 before the
emergency passed and the return flow began early in the new year.
This added demand for Federal reserve credit, largely concentrated
in New York and occurring at the time of maximum seasonal demand,
was met without any market disturbance. Money rose from 2 to
2*4 per cent for three days and then reverted to 2 per cent. Banks
secured the extra currency they required largely by borrowing at
the reserve banks, though there was also some increase in Federal
reserve holdings of Government securities and bankers' acceptances.
The acceptances which member banks had acquired this autumn in
larger amounts than ever before proved a particularly convenient
means of securing funds for emergency or seasonal needs. The
effect of these operations on the position of the Federal Reserve Bank
of New York is indicated by the reserve percentage which declined
from 82.7 on December 10 to 76 on December 17.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

109

This emergency demand on the reserve mechanism was similar in
amount to that of the autumn of 1929, but the nature was different—
it was for currency rather than bank reserves—and it was more
nearly like the kind of emergency the f ramers of the Federal reserve
act had envisaged. They were thinking in terms of the currency
panic of 1907. This recent currency emergency came nearer to fulfilling precisely their dreams of the proper functioning of the system
than any event heretofore in the history of the system.
I n respect to these two events, then, the history of recent months
has tested the mechanism of the reserve system and has found it
adequate. I n certain other directions the necessary limitations of the
system have become evident. The law assigns the duties of bank
supervision in the first instance to the Comptroller of the Currency
for national banks and to the State superintendents of banking for
State banks. The reserve system is given no powders enabling it
either to guarantee bank deposits or to control the management of
banks. The system rather provides additional facilities to enable
member banks to obtain currency and credit to meet emergencies
and busy seasons. Bank supervision as developed under the jurisdiction of the Comptroller of the Currency and by the banking department of many States is only reasonably effective in correcting
the abuses of bank management and in checking bad tendencies and
practice. There is undoubtedly room for improvement in this regard
all along the line, but it may be questioned/ whether any substantial
part of the cure for the present situation is to be found in a more
effective supervisory control of banks, particularly as long as banks
function under 49 different jurisdictions. The supervisory authority
can only aid the banker somewhat in exercising his responsibility.
The responsibility for the solvency of banks and the safety of
depositors' money must inevitably be that of bank management. Responsibility and management can not be separated. Supervision can
not and should not undertake the responsibility for passing on loans
at the time they are made or for the purpose of investments.
The reserve system working with the supervising authorities can,
undoubtedly, aid greatly in the sound conduct of banking business
in the United States. We are fortunate at the present time in having
in our district, national and State supervising forces of integrity,
ability, and diligence it would be difficult to equal in any other part
of the Union or in any other country. I believe these two groups
of workers are steadily raising the standard of banking in this district. Progress will be aided from time to time by changes in the
law. Mr. Broderick, the New York State superintendent of banks,
has recently suggested some changes which deserve the most serious
consideration. But until we are willing to delegate to central authorities autocratic control of every detail of banking, the primary responsibilitiy for sound banking must rest with the management of
each bank and with the development of a sound banking tradition.
Responsibility must carry with it power—the power to make mistakes as well as successes. I n a democracy we learn in part by
making mistakes.
A study of recent bank failures indicates that during the past 30
years we have perhaps somewhat overdone the manufacture or creation of new banking institutions. I n 1900 we had approximately
34718—31—PT 1




8

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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

10,000 banks in this country. By 1920 this number had reached a
total of 30,000 (an increase of 200 per cent). Consideration should
be given to finding a way of avoiding this in future.
The Comptroller of the Currency testified on Monday that during
the past 10 years we in this country have witnessed some 6,000 bank
failures (20 per cent of the total existing in 1920). This leaves us
with some 24,000 institutions and suggests that during the early days
of this century banks were organized not only too rapidly but also
without due regard to the actual banking needs of the community
which the new institution was designed to serve. Our statistical
information indicates that these 6,000 banks which failed during the
past 10 years, and the major part of which were small country banks,
had aggregate deposits of $2,000,000,000. Assuming that the average deposit was $400 per depositor, this means that these failures
directly affected the lives of approximately 5,000,000 human beings
and indirectly many more. Also, it is interesting to note that the
average life of the banks which failed during this period was 18
years. The solution to this problem is not any easy one, but rather
is one requiring a careful fact-finding survey similar to the survey
and study made after the currency panic of 1907, out of which some
years later the Federal reserve system was born.
The CHAIRMAN. NOW, you will find a good many people that would
question the accuracy of that statement, Mr. Case.
Mr. CASE. I t seems to me, Mr. Chairman, on that point, that it is
a fact that after the terrible experience of 1907 our bankers surveyed
the situation throughout the world and found that these conditions
did not obtain in other countries and agreed that something must be
done about it.
The CHAIRMAN. I t was out of that experience that the Federal
reserve system was born.
Mr. CASE. I will stand corrected on that.
The CHAIRMAN. But not out of the subsequent conditions.
Mr. CASE. I am willing to substitute your language. " I t was out
of that experience that the Federal reserve system was born."
The

CHAIRMAN. Oh, no;

no.

Mr. CASE. I n talking recently with a retired officer of one of the
large Canadian banks—they have but 11 banks with hundreds of
branches—he referred to the fact that the western part of Canada—
the grain growing section—had substantially the same set of economic conditions and problems to deal with that we had experienced, but that, nevertheless, banking failures in Canada have been
almost negligible. The inference to be drawn from this statement
is that, under their system of branch banking, the large Canadian
banks with home offices in the eastern part of Canada have absorbed
the losses occurring in the western part of that country. That is
to say, the losses fall upon bank shareholders rather than upon
bank depositors.
Senator NORBECK. May I ask a question? I understand there
was a supplementary loaning agency by the Government to the farmers of the western Provinces ?
Mr. CASE. I n this country ?
Senator NORBECK. N O ; to the farmers of the western part of
Canada.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
Mr.

CASE.

111

Yes.

Senator NORBECK. Growing really out of the fact that the chain
banks, or the banks as organized there, did not want to handle that
kind of paper, and that the Government took substantial losses out
of this inflation; is that correct ?
Mr. CASE. I can not answer that, Senator. I did not know that
was true.
Senator NORBECK. I have not much information on it, but I
have heard the story told so often in the Northwest.
Mr. CASE. That may be true, but it was through one of the retired
officials of one of the large Canadian banks that I learned that they
had the same economic conditions there as obtained in the West.
As a matter of fact, our record of bank failures over a period
of years compares most unfavorably with that of Canada and Great
Britain.
There have been during the past decade three major speculative
inflationary movements, each one of which has weakened the banking
institutions in the territory affected and has been responsible for a
number of failures. I refer (1) to the intensive speculation in farm
lands in the Middle West and in the Northwest during the war and
postwar inflationary period, (2) the unprecedented speculation in
Florida real estate which followed and spread throughout the country
and finally (3) the culmination of the bull stock market in the autumn of 1929, which adversely affected the general business of the
country.
These three movements have each in turn culminated as they inevitably must in a deflation resulting in falling values; so that during the past year, there has been the most drastic liquidation in values
of which we have any record in times of peace.
These are the conditions which in large measure are undoubtedly
responsible for the great number of bank closures.
Senator NORBECK. I would rather be disposed to question that
statement, that the Canadian Northwest had the same economic
problems as the Northwestern States in this country, and the answer
to it is that for a long period of time better prices prevailed for farm
products in Canada than on this side due to the fact t h a t the Government relieved some of the burden. But so much for that. I was
going to ask the witness about the speculation and the rise of land
values in the Northwest. Is it not a fact that taken on an average
the rise was about 100 per cent, that land values doubled, notwithstanding some reports here and there about some lands selling at
three or four hundred dollars an acre? I have seen the report frequently circulated that Iowa land went to $208, a little more than
double in value. Is it not a fact that that is what commodity prices
went to, and individual land went no higher than anything else ?
Mr. CASE. May I answer that ?
Senator NORBECK. Yes.
Mr. CASE. I t seems to me, Senator, that if wheat, a commodity,
jumped from $1 a bushel to $3 a bushel, as the market value, and
land simultaneously advanced in price from $100 to $200, or $250
Senator NORBECK (interposing). Maybe the witness did not understand me. By commodity prices I did not necessarily mean agricultural commodity prices.




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NATIONAL. AND FEDERAL RESERVE BANKING SYSTEMS

Mr. CASE. NO ; but in any event it would be agricultural products
that would visibly affect the land values, it seems to me.
Senator NORBECK. Yes.
Mr. CASE. I maintain that, if wheat normally sells at 80 cents to
$1 per bushel, land will not go up, but that if wheat sells at two
or three dollars land values will go up. I t seems to me that if at
that point the banks loan money on the land at the inflated values
they are in for trouble.
Senator NORBECK. W h y use the term " inflation " on the farms
which have increased 100 per cent, instead of using it on a locomotive that has increased 100 per cent, or an office building that
has increased 100 per cent, or railway equipment that has increased
proportionately? Why is one inflation and the other one not?
Mr. CASE. If you had Iowa land values charted, showing the average value over 50 years, and if the average value was X , say $100
per acre, and presently, as the result of a war or some other condition that puts commodities up, the land should go up 100 or 150
per cent over the 50-year average the lender must, it seems to me,
recognize that value is certainly well above the average for a period
of years, and that he is running a risk in dealing in such values.
Senator NORBECK. I will admit that anyone who loans anything
0;n a farm will run a risk, because we do not know the future of
agriculture. I simply questioned the distinction of an inflation as
to land Just because land rose in value as compared with other
commodities.
Mr. CASE. I think it is true, Senator, that a great many bank failures in that section, in the Chicago district, in Iowa, and in the
Northwest, and in the Minneapolis district, were, in the judgment
of the officials of the reserve banks of those districts, caused by the
banks loaning money on these higher land values, which did not stay
put, but dropped back again to normal value.
Senator NORBECK. But you speak of that as a criticism of the
banking methods particularly.
Mr. CASE. That, it seems to me, deals with a very fundamental
banking difficulty.
Senator NORBECK. Let me ask you what would have been the result in other sections of the country if they had taken a similar
deflation in commodity and property values? Would not the banks
have blown up in the same way ?
Mr. CASE. Probably; yes.

Senator NORBECK. The answer is really interesting. We have
been told that there is nothing the matter in the Northwest except
the lack of judgment and lack of brains.
Mr. CASE. A S I said a few moments ago, in these few observations
I have been making it seems to me that new banks were chartered
too freely, perhaps beyond what the needs of the communities were,
and many of them had too small a capital. Under these circum
stances a high degree of skill is required in order to run a bank
successfully and avoid loans on overpriced lands and other products.
Senator NORBECK. Was not the same trouble with the northwestern banker two or three years ago the trouble with the eastern banker
for the last 10 years—his inability to see into the values of these
things ?




NATIONAL AND FEDERAL, RESERVE BANKING SYSTEMS

113

Mr. CASE. Yes; I think that is part of the present difficulty;
inability to correctly appraise real values and human nature being
what it is, that is one reason why we have so many failures.
The CHAIRMAN. Mr. Case, does it occur to you to suggest to the
committee any one or more particular modifications of either the
Federal reserve act or the national bank act? F o r example, what
may we do about this system of loans for others to abate the dangers
of it?
Mr. CASE. Senator, of course that is a very large order. I think
it should be carefully studied. I n other words, what should be
done about it is precisely what you are doing, making a very
careful survey and study of it. I t is a pretty large order to answer
out of hand, to say that in a democracy the X Y Z Corporation,
which had a surplus of funds, might not make such use of it as
seemed to it appropriate. The reason why they had this surplus
of funds is a very interesting bit of history.
The CHAIRMAN. I think so, myself. Why the surplus of funds?
W h y not distribute those funds to the stockholders?
Mr. CASE. May I just go back a little on that?
The CHAIRMAN. Yes; you may proceed.
Mr. CASE. I think the reason that there is a surplus of funds,
Senator, constitutes a very interesting background. You were
speaking this morning to the governor as a witness about the
possibility of business having an oversupply of credit. Personally,
I think there is a danger, and I think that that danger not only
existed, but that commerce and industry did have an oversupply
of credit extended them in 1919 and 1920. I n other words, during
the war and the postwar inflationary period, it seems to me the
record shows that commerce and industry were supplied with a
larger amount of credit than was good for them or was good for
the banks which loaned it.
Now, referring to 1919-20 we found that many of these corporations—large industrial corporations—were greatly overextended.
We had lived through a long period of rising prices which was
followed by a sharp drop. Industry and commerce found that not
only were they overstocked with merchandise, but they had commitments out for the future. They had borrowed extensively on their
own paper, which the banks held, and about which there was a good
deal of distress and worry, both on the part of the borrower, and on
the part of the banks. Now, there is an old adage that, "A singed cat
dreads the fire." And I think it was out of that experience in 1919
and 1920 that we subsequently had this great emission of new securities. I think the X Y Z Corporation that owed Bank A $10,000,000
in 1920 on its own paper said, " Never again will we get caught this
way; we will go out into the capital market and help ourselves to
new capital." And so they went out and sold securities. I f it was
fashionable to sell bonds they sold bonds, and later when it became
fashionable to sell equities they sold preferred and common stocks.
The CHAIRMAN. They quit patronizing the banks and went into
financing.
Mr. CASE. That is right, sir. And it seems to me that it was that
episode that has disturbed the management of some of our banks
as to the apparent drop in eligible paper. I know that the banks




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NATIONAL AND FEDERAL, RESERVE BANKING SYSTEMS

in New York, some of them at least, made a careful study of that,
and were greatly concerned over the reduction in the amount of
eligible paper which the associated banks as a whole owned. I
think it was because of that situation that I have just alluded to
about corporations being overextended in 1920 that led them to say
" W e will protect ourselves for the future." And I think t h a t it
is out of that experience that this great emission of new securities
occurred. Perhaps they issued more securities than they actually
needed to at the time, and if so that of course has given them surplus
funds. And out of that surplus grew a large part of these loans
for account of others.
The CHAIRMAN. And those others, neither the individuals nor the
corporations, were authorized or chartered to engage in the banking
business. I have sometimes wondered whether these corporations or
individuals paid tax on the money that they used in competition with
the banking business as required by law.
Mr. CASE. They only paid the customary tax, I would think, Senator, on their net earnings, whatever the source.
The CHAIRMAN. YOU mean they paid the income tax ?
Mr.

CASE.

Yes.

The CHAIRMAN. But did they pay the tax on the funds that they
were using in competition with national banks, as prescribed by the
national bank act?
Mr. CASE. I should say not, other than the commission which the
loaning bank, that acted as the vehicle for making the loan, charged
as a commission.
The CHAIRMAN. Exactly. They paid no tax to the Government.
Mr.

CASE. Not

at

all.

The CHAIRMAN. I t seems to me that there should be some statutory
means of abating that evil, if not of abolishing it.
Mr. CASE. A S Governor Harrison said this morning, it is a very
perplexing problem. I t is one thing to provide reserve requirements
and what not for your member banks. But if you have similar business being transacted by corporations and firms, who, as you say,
pay no taxes, that is a pretty difficult thing for the banking fraternity
to deal with.
The CHAIRMAN. I t seems to me that the Federal reserve bank has
a very powerful agency of control when it comes to the matter of bad
banking. You seem to think that they have a. little, and that the
whole thing is not equally confined to the judgment of the board or
to the individual bank management. The Federal reserve bank is
not compelled to rediscount. On the contrary, it is specifically given
the reserved right to decline to rediscount. And through its example
first, and that of the comptroller's office, it seems to me that a reserve
bank could thoroughly well know whether a member bank was being
mismanaged or not; and in the event that it should know that a bank
was being mismanaged it could bring tremendous pressure to bear
upon it to correct its mismanagement, or to refuse to rediscount for
it.
Mr. CASE. I listened with a good deal of interest to your question
this morning and Governor Harrison's reply to that question, and
I have precisely the same view that the governor expressed about
it. If you can fix definitely the time and the moment when you




NATIONAL AND FEDERAL, RESERVE BANKING SYSTEMS

115

know that a bank is being badly managed, of course, you can use
moral suasion, in talking to the officers about the management of
their bank. And we do. But if they come in the bank to-day and
say, " Our reserves are impaired; we have got to have $100,000,"
or some other sum, it is questionable procedure, it seems to me, sir,
to say to them, " You can not have it."
The CHAIRMAN. Could you not inquire why their reserves are
impaired ?
Mr. CASE. Oh, yes. I n our discussions we would undertake to
bring that out—to find out whether it is a loss of deposits, or some
other cause that impaired their reserves. But, on the other hand,
m a big city bank, it is very difficult indeed for them to know. I
might say just a word on that.
During the war period I had charge of our loaning operations
in the Federal reserve bank. And, as you know, some of the larger
banks in New York were borrowing very heavily, as much as
$100,000,000. And some of our directors thought if a bank was
borrowing $100,000,000 and wanted five or ten million more, wTe
should undertake to find the occasion for it. And I undertook to
do that.
One of the very big banks, the head of which is very well known
to you, a very broad-gauge and broad-minded banker, finally came
over to see me. H e said, " M r . Case, you have asked an impossible
question. Here is a bank with upward of $500,000,000 of deposits,
and we have a man stationed at point X whose duty it is to see
that the reserve requirements of the Federal reserve bank are complied with. Now, we are receiving deposits and paying out money
arising from myriads of transactions of all sorts all day. But at
10 minutes of 3 we are handed a check drawn upon us with instructions to wire the proceeds, $25,000,000 to Chicago or $15,000,000 to
San Francisco. Now, we are not anticipating that. But it has
come very suddenly. Our reserves are inadequate to pay it. We
have got to make it good. There have been hundreds of other
transactions during the day," he said, " and I can not pick out any
single one of those and say which one is responsible for the impairment of our reserve and which causes the necessity of our borrowing." We went into that very thoroughly. And I might say
that our directors were thoroughly satisfied not to undertake to
require us to pursue that inquiry in that form. Banking to-day is
not as simple as it was 30 or 40 years ago. Banks have so many
different departments functioning that it is not easy to ascertain
the real reason for impaired reserves. And so to undertake to deny
a bank credit without having the best of reasons is something that
should be done only after considerable prayer and fasting.
The CHAIRMAN. Some of us are disposed to think, Mr. Case, that
there are some bankers in New York so big that they assume to
tell directors what to do rather than have the directors tell them
what to do.
Mr. CASE. Yes. Unfortunately, there have been situations of
that sort. And as Governor Harrison suggested in his talk, if there
were a small board of directors or an executive committee charged
with the responsibility of running the bank while the others, who
were going to be " business getters," were put into some other position than that of director it might be wise.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

The CHAIRMAN. D O you care to ask him anything, Mr. Willis ?
Mr. W I L L I S . Mr. Case, I want to ask you a question or two about
the situation in New York to which you have referred as to realestate loans there. I want to know to what extent you think that
bank loans against the securities of real-estate holding companies
are made in your district.
Mr. CASE. My answer to that, Mr. Willis, is t h i s : Among the large
New York Clearing House banks I should say that the amount of
that sort of collateral was negligible. I would say that they just
simply would not loan against it. But among some of the smaller
banks I think it does prevail to a moderate extent.
Mr. W I L L I S . Was that true in the Bank of the United States ?
Mr. CASE. T O some extent. I think in that situation there was
much more money loaned on notes of hand which merely represented
real-estate equities than against the stock of real-estate companies.
Mr. W I L L I S . At what time did the examiners of the reserve bank
find out or know of the condition of the United States Bank ?
Mr. CASE. Mr. Willis, one examiner of the Federal reserve bank,
went in with the State superintendent of banks' examiners as of June
23. I should like to say, as you know, that they had some 48 or 49
branches. There were about 50 offices, and my recollection is that the
State superintendent had a force of 130 or 140 people. Now, the
report of that examination was not finished until well after the early
part of November; that is, it was early November before we received
a copy of it. But, going back of your question, I might say that the
management of that bank did not have our full confidence for a
period of years.
Mr. W I L L I S . What steps were taken by the bank?
Mr. CASE. We had a number of interviews with the president,
over a period of years. But let me say t h i s : (There was some
little discussion a few moments ago about the attitude of the
Federal reserve banks when member banks are not borrowing.)
F o r a considerable part of the period during recent years this
bank was not a borrower. Moreover, the bank was steadily, with
the approval of the superintendent of banks, absorbing other banking institutions. Let me say that we in the Federal reserve bank
knew nothing of these mergers until after the event. B u t it is
true, sir, that the management of that bank (like some of the corporations we were speaking of a moment ago), did go into the capital
market and help themselves very liberally to new capital. So
that on the date of this last examination, of which you speak, the
bank had a capital of $25,000,000, and surplus and undivided
profits of some $17,000,000. The examiners' report, which, as I
say, we received in November, indicated that the surplus and undivided profits were wiped out. I t also indicated that there were
some additional items that were exceedingly difficult to appraise,
including many notes that were predicated on real-estate equities.
Mr. W I L L I S . Did you have any information in the Federal reserve bank of the methods employed by the affiliates of the United
States Bank in the buying up of securities and the speculating in the
stock of the bank itself?
Mr. CASE. N O ; not until this examination.
Mr. W I L L I S . YOU knew nothing about it?




NATIONAL AND FEDERAL, RESERVE BANKING SYSTEMS

117

Mr. CASE. N O . I remember I did hear a rumor that, in absorbing one of the institutions which they took over in the la,st year
or so, a large number of units of the Bank of the United States
were issued (consisting of shares of bank stock coupled with shares
of stock of an affiliated securities corporation).
Mr. W I L L I S . NOW do you suppose, or have you been advised,
that there are other banks in your district following that same
plan, and security companies which are buying and speculating in
bank stock ?
Mr. CASE. Only rumors to that effect. You heard the comptroller's statement on Monday with respect to the examination of
the affiliates, and I think that not many of them have been examined;
but such speculation has been a matter of common report, I will say.
Mr. W I L L I S . Have you discussed or joined in those examinations
of security affiliates with the comptroller ?
Mr. CASE. We have not.
Mr. W I L L I S . YOU never have ?
Mr. CASE. We have not, sir.
The CHAIRMAN. Mr. Case, do you think that something in the
nature of legislative action should be taken to require examinations
of affiliates and publicity of their statements?
Mr. CASE. I d o ; yes, sir.
Mr. W I L L I S . D O you think

the reserve bank should be given that
power and authority, or share it with the comptroller, or what?
Mr. CASE. Mr. Willis, it seems to me that question is tied u p very
strongly with the question as to where the power of supervision
and examination rests. If we had just one type of bank I would
like to see them all under one central agency, as far as the examination is concerned, perhaps of the Federal reserve system. And in
that event such agency should examine into all these affiliates.
Mr. W I L L I S .

Yes.

Mr. CASE. I feel that quite strongly.
Mr. W I L L I S . What kind of an examination do you make of your
members now ?
Mr. CASE. Mr. Willis, as I mentioned in my memorandum a moment ago, we have, we think, very capable examinations on the
part of the Comptroller of the Currency and of the superintendent
of banks. And our directors, as provided in the statute or the regulations of the Federal Reserve Board, have authorized us to take
the examination reports of the comptroller's office, or of the State
superintendent of banks. Consequently, we have a very small
examination staff.
Mr. W I L L I S . YOU practically rely on them ?
Mr. CASE. Yes; to a very great extent, sir.
Mr. W I L L I S . NOW in your monthly bulletin, I believe, of last summer, you spoke of the fact that there was very little in the way of
undersecured collateral loans among members, and then I think that
the same statement was made in the remarks of some member of your
official staff.
Mr. CASE. Yes; I think that is correct, sir.
Mr. W I L L I S . Was that the result of careful examination of all
these collateral notes ?




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. CASE. There was a survey made, Mr. Willis, of a considerable
number of banks.
Mr. W I L L I S . Can you say how many ?
Mr. CASE. I can not say how many.

Mr. W I L L I S . One hundred and sixteen I think was the statement.
Mr. CASE. All right. I was going to say a considerable cross section of the banks, member banks, in our district, were gone into
thoroughly, and I think the statement to which you allude was predicated upon the facts at that time.
Mr. W I L L I S . Could you hold to it now in view of what happened
since then ?
Mr. CASE. I would assume, without knowing what these banks
have done day after day, that some of the loans might not be so
well margined; that some of them might now be " under water."
Mr. W I L L I S . And did that study involve active securities that had
no active market ?
Mr. CASE. Yes; I am sure that it had reference to the collateral
which was up against the loans, and of course some sort of value
must have been fixed upon this type of stock.
Mr. W I L L I S . I t seems like a hazardous thing to give positive
assurance of that, if you have only the examination you speak of.
Mr. CASE. I think that is debatable, Mr. Willis. The charge had
been made that a good many banks had collateral loans that were
" under water." We thought it worth while to make some study
of it and we did.
Mr. W I L L I S . I t seems there were a good many.
Mr. CASE. The statement that appeared in our monthly review
is one that I think may be relied upon as to the banks covered
by that inquiry.
The CHAIRMAN. Mr. Case, I take it from some of your observations there in your prepared statement, that you are rather disposed
to favor a system of branch banking.
Mr. CASE. Mr. Chairman, it seems to me at the present time that
we are gradually drifting toward branch banking. Personally,
while I think we are a long way off—and I personally hope we shall
continue to be a long way off—from nation-wide branch banking,
it seems to me that it might be desirable to permit a gradual extension of the branch-banking privilege, allowing banks, for instance,,
to spread throughout their own county, and in course of time throughout the State. Then, as suggested by the comptroller, natural trade
areas would develop.
The CHAIRMAN. Would it not be extremely difficult to determine
what is a trade area?
Mr. CASE. Perhaps it would. Of course, I am thinking of the
metropolitan area, and it seems to me that there it would not be
difficult. I n New York we have the northern part of New Jersey
and one corner of Connecticut, the southern tier of Connecticut.
I t seems to me—I do not know whether Senator Walcott will agree
with this—that perhaps Bridgeport and Stamford are large enough
cities to become the center of a trade area in Connecticut, and that
Newark, Paterson, Passaic, Elizabeth, and of course Jersey City
and Hoboken and other places adjacent to the metropolis, might
constitute trade areas of New York City.




NATIONAL AND FEDERAL. RESERVE BANKING SYSTEMS

119

The CHAIRMAN. Are not there in Connecticut towns or banks large
enough which might have their branches throughout the State of
Connecticut, confined to State lines of Connecticut, who could attend to the commercial and industrial requirements of that State
pretty well?
Mr. CASE. I should think they might do that pretty well, although
of course large corporations which are domiciled, say, in Bridgeport,
might elect to either come to New York, or continue their banking
connections in New York, which have been established over a period
of years.
The CHAIRMAN. Of course, they do that under the State banking
law.
Mr. CASE. Yes, that is true. Still I would think there are or
could be developed suitable banking institutions in Connecticut.
The CHAIRMAN. YOU see the difficulty is, that we have to deal
with this much contemned specimen of humanity called a politician,
and there are some in Congress, as well as a large number of statesmen, and we can not jump right into the nation-wide branch
banking.
Mr. CASE. N O , I should hope we would not.
The CHAIRMAN. And probably with no expectation on earth of
doing anything with it. I t is very doubtful whether we can do
much with the state-wide branch-banking proposition. I hope we
may.
Mr. CASE. Yes.
The CHAIRMAN. But certainly we can not go
Mr. CASE. These bank failures, of course,

beyond that.
are very disconcerting, and when you consider the number of lives which are adversely
affected by them it seems clear that we must try to find a solution.
I t seems to me that a banker in a small community occupies pretty
much the same position toward that community in a financial way
as the local physician does in looking after the physical health of
the people of the community. If the physicians do not do a good
job, you do not have a healthy community, and similarly it seems to
me this is true of banks. m When they are not able properly to adjust
themselves to the economic changes, which have been alluded to, we
have too many failures and the community suffers. I t is our duty
to study the problem and find some way of solving it.
The CHAIRMAN. You differentiate very greatly, do you not, between branch banking and chain and group oanking?
Mr. CASE. Oh, my, yes, sir; I certainly do.

Senator WALCOTT. I hope, Mr. Chairman, we can bring that out
before we are through with all of our questions, because that, to my
mind, is very important and there is a great deal of misconception
about it all.
The CHAIRMAN. A very small conception.
Senator WALCOTT. The public knows little about the difference.
The CHAIRMAN. I think we will be able to do that by our inquiries
and the report which they shall make to the committee as a result
of these inquiries.
Have you gentlemen any further questions to ask?
Mr. W I L L I S . One more, Mr. Case. I followed with interest your
account of the matters leading up to the panic, and so forth, and




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

there is one point I should like to ask you about. W h a t was the
cause of the change in the trend of the brokers' loans just after the
early summer of 1929, resulting in a marked increase of brokers*
loans for their own account by New York banks ?
Mr. CASE. I am sorry I do not have the chart of those loan figures
with me.
Mr. W I L L I S . J u s t generally.
Senator WALCOTT. Did it run along at about a billion and jump up t
Mr.

CASE.

Yes.

Mr. WILLIS. Governor Harrison, as I remember it, brought out the
fact that there had been no material increase in that for their own
account.
Mr. CASE. Yes. And without any statistics in front of me I
should say there was not a great increase until along in October,,
about the time the stock market crash came, when, as I said a moment
ago, the banks had to take over in 10 days or 2 weeks about a billion
and a half.
Mr. W I L L I S . YOU do not think the attitude of the New York banks
gave the stock market an additional lease of life for two months
longer than it would have had, by dumping in additional funds in
the early summer ?
Mr. CASE. On the contrary, Mr. Willis, I think we would have h a d
a catastrophe of tremendous importance if the New York banks
had not stepped in. I think they displayed a great deal of courage.
Mr. W I L L I S . That was just after the panic when loans of others
were withdrawn. I am referring to a slightly earlier period than
that. There has been a general impression that the dumping of
funds in the market in August and July of 1929 had the effect of
giving the market a sharp, upward trend, because at that time there
was a very sharp upward movement on account of brokers' loans
of New York banks.
Mr. CASE. Let me say t h i s : We had a period of very high interest
rates which resulted in drawing money into that market from all
over the world, to the detriment, I think, of the rest of the world.
Mr. W I L L I S . Yes.
Mr. CASE. NOW, if

you have an extra amount of brokers' loans
required, a large amount, if you please, and the New York banks are
riding along with a billion of them, and for one reason or another
$100,000,000 or $200,000,000 of loans by others are withdrawn (let us
say that occurred in August), why the answer to that, it seems to
me, Mr. Willis, is that the banks must take those over, or you will
have rates shoot through the ceiling.
Mr. W I L L I S . There had been a pretty sharp falling off of the
banks loans in 1929, and that was followed by this increase?
Mr.

CASE.

Yes.

Mr. W I L L I S . A S I understand you, it was due to the loans taken
over by foreigners and withdrawn.
Mr. CASE. Foreigners and others; not exclusively foreigners; I
mean individuals classified as " for the account of others."
Mr. W I L L I S . YOU mean they were running down before the sharp
drop?
Mr. CASE. I would not like to say definitely without any information in front of me.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

121

Mr. W I L L I S . YOU think it was the duty of some banks, as it was
said at that time, to dump money into the market to prevent a panic ?
Mr. CASE. I am inclined to think it was their duty to do it, and not
talk very much about it.
Mr. W I L L I S . There was a great deal of talk about it.
Mr. CASE. Yes.
The CHAIRMAN.

I am disposed to felicitate you, Mr. Case, upon
t h e fact that Mr. Harrison got all the disagreeable questions. We
are greatly obliged to you, and if at any time pending our inquiry, or the subsequent deliberations of the committee, you have any
suggestions to make to us as to remedying existing evils of the banking business, we should like to have you recommend them to us.
Mr. CASE. I should be very glad to.
The CHAIRMAN. The committee will now adjourn until to-morrow
morning at 11 o'clock.
(Accordingly, at 4.35 p. m., the committee adjourned until to-morrow, Friday, January 23, 1931, at 11 o'clock.)







OPERATION OF THE NATIONAL AND FEDERAL RESERVE
BANKING SYSTEM
FRIDAY, JANUARY 23, 1931
U N I T E D STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY

Washington J D. C.
The subcommittee met, pursuant to adjournment, at 11 o'clock
a. m., Hon. Carter Glass (chairman) presiding.
STATEMENT OF A. C. MILLER, MEMBER OF THE FEDERAL RESERVE
BOARD
The CHAIRMAN. The committee will come to order. Senator
Bulkley and Senator Norbeck are in the adjoining room and we will
count them as a quorum.
Doctor Miller, I was glad to see that you have been present in the
committee room at most of the hearings. You know pretty well
what the purpose of this inquiry is, and I have asked you and former
Governor Hamlin of the Federal Reserve Board, as the oldest members in point of service, being among the original appointees to the
Board, to appear and make any statement with respect to this problem
that you may care to make and, thereafter, subject yourself to any
reasonable inquiries that members of the committee may care to make.
We shall be glad to hear from you now
Mr. M I L L E R . Mr. Chairman and gentlemen of the committee: Your
committee has been occupying itself largely with a study of banking
conditions, I think, with an idea of finding what there is that makes
them go wrong.
Let me say very briefly, in order to indicate my general position
upon an inquiry of this kind, that bad banking conditions do not
usually generate themselves. They usually grow out of antecedent
disturbances either of an economic or a financial character. To say
that banking conditions are bad because management is bad, overlooks the fact, I think, that banking conditions are bad sometimes
when banking management is reasonably satisfactory. I t is when a
considerable change in the general economic conditions under which
business is done and banking conducted takes place, that the hazards
of banking judgment are increased and the problems of management
particularly as they relate to the extension of credit, become more
difficult.
The crop of bank failures in 1930 reflects, I think, the disturbed
conditions that developed in the years 1927 to 1929, just as the great
crop of bank failures in the twenties, reflected the disturbed conditions
that developed acutely from 1919 to 1921.




123

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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

You have referred, sir, to the fact that I am one of the original
members of the Federal Reserve Board. That is true, and I have
seen a great deal take place in the life history of the Federal reserve
system. The system has twice been overwhelmed by crises of well
nigh unprecedented magnitude and intensity. The first was the
crisis of 1920-1921, growing out of an antecedent condition of inflation which was particularly acute in the field of commodities. T h a t
was primarily a commodity-price crisis, a violent deflation of commodity prices, following the antecedent acute inflation.
The breakdown of the autumn of 1929 was a breakdown primarily
in the security markets of the country, a deflation of security values,
or, let me better say, prices, which was made inevitable by the preceding extensive and extreme inflation of security prices.
From my standpoint, as a member of the Federal Reserve Board, the
important preliminary to any understanding of the banking problems
confronting the country and, more immediately, this committee, is to
see what there is in these inflations, more particularly, the recent one,
that involves the Federal reserve system in some responsibility for
what has happened, or what might have been mitigated.
In general, the more nearly we can get at the source of any trouble,
the more easily we can control it. I am skeptical of the efficacy of
prohibitions, particularly concerning financial practices. In the long
run, I think they are apt to turn out to be prohibitions that do not in
fact prohibit. That is particularly true, I think, when we are dealing
with a banking system in which the numbers of banks run high into
the thousands. I am, therefore, more disposed to explore the possibilities of improving the operation of the banking machinery of the
country by seeing what we can do to improve the operation and the
administration of the reserve banks.
If you will permit me, in order that the presentation of what I
have in mind may be brief, I should like to show to the committee
some charts which have been prepared in the research division of the
Federal Reserve Board. Will that be agreeable?
The CHAIRMAN. Yes; that will be agreeable to us.
Mr. M I L L E R . The key to an understanding of the changes that go
on in banking, to my mind, is most immediately supplied by variations in the reserves of the banks of the country, more importantly,
the member banks of the Federal reserve system. I t is truer in
banking as practiced to-day than before, that our banks do i\ot carry
surplus reserves. Whatever they have in the way of reserves, they
endeavor to keep invested. Therefore, when we are trying to see
what it is that causes variations in banking and credit conditions, the
quickest guide is the changes in the amount of reserve money, or
lending power so to speak, which the member banks of the Federal
reserve system possess. (See Chart I on page 125.)
Now in reviewing the history of the period 1922 to date, the curve
"Member bank reserve balances" (Chart I) shows these changes.
The striking thing about that curve is that there has been, at times,
a pronounced irregularity in its prevailing upward trend. Several
times—for instance, in 1922, and again in 1924 and again in 1927—
for some reason there has occurred a sudden and marked accession
to the reserves or lending power of the member banks of the Federal
reserve system; they came into possession of increased reserves




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

125

available for an expansion of their banking business or enlarged
investments in their banking resources.
The same thing is brought out, Mr. Chairman, in Chart II, showing the important asset and liability items of our larger member
banks where the upper curve "Net demand plus time deposits''
indicates the movement of the deposits of the member banks of the
country. This curve indicates the credit made available to the customers or depositors of the banks for use. The variations in that
curve follow very closely the variations in the curve "Member bank
reserve balances" (Chart I). The more money the banks acquire
CHART I

MEMBER BANK RESERVE BALANCES COMPARED WITH OPEN MARKET HOLDINGS
O F F R.BANKS
25001
|
|
1
|
1
|
' |
fi]
|
12500

1922 1923 mh 1925 1 2 1 2 1928 1 2 1930 1 3
96 97
99
91
as reserves, the more lending power they have, obviously. So, it is
brought out why there occurred these great increases in the deposits
of the banks in 1922, again in 1924, and again in 1927. (See Chart II
on page 126.)
The increase throughout this period taken as a whole, might
not be regarded as abnormal or highly abnormal, but the increases
that took place in 1924 and in 1927 are to be regarded, I think, as
abnormal and carry with them certain implications of a serious
character concerning the credit condition of the country in this
period.
It will be worth while, therefore, to inquire what it was that occasioned these sudden elevations brought out on the charts for member
34718—31—PT 1



9

126

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

banks' deposits and reserve balances, notably in the years 1924 and
1927. Increases in the reserves of member banks come primarily
from two sources; one from increases in the gold stock of the country
and the other, increases in the amount of reserve balances supplied
to member banks by the Federal reserve banks, either through reCHART

REPORTING MEMBER BANKS

BIUIONS OF DOLLARS

1922

II

1923

1924-

1925

1926

1927

1928

1929

BILLIONS OF DOLLARS

1930 1931

discount operations or, more importantly, through open market
investments.
Taking the period 1922-1929 as a whole, the increases in the
monetary gold stock of the country amounted to nearly $700,000,000.
Senator WALCOTT. DO you recall the percentage? That would be
about 10 per cent, would it not?



127

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

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MILLIONS OF DO LLARS

Mr. MILLER. Ten per cent of what?
Senator WALCOTT. Of the gold we have got.
Mr. MILLER. It is about 15 or 16 per cent.

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CHANGE S

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Reserve Bank Credit

Member BanK
Reserve Balances

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"" Gold Stock

I Money in Circulation

WEEKLY AVERAGES OF DAILY FIGURES

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S OF DOLLARS

CHART

RE SERVE B/\NK CREDIT OUTSTAN DING & PRINCIPAL F=ACT0RS

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Turning now to Chart III for a moment: The curve "Gold stock"
represents what happened to our gold supply in these years. Starting
from a level of about $3,700,000,000 in 1922, it moved pretty rapidly
up to about $4,500,000,000 at the end of 1924, dropping a little in
1925, it then moved at a slight average incline into the year 1927.
About mid year 1927 it began a rather precipitate fall until the middle
of 1928. It then began, in an irregular movement, to go upwards.




128

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

We are now about where we were at the previous apex of the movement in May, 1927. I merely introduce this chart at this point for
the purpose of showing that the principal basis of the enlargement of
credit we experienced since the postwar deflation crisis, since the beginning of the year 1922, has been supplied by gold—mainly gold imports.
The CHAIRMAN. Doctor, how did the Federal reserve banks acquire
that large stock of gold?
Mr. M I L L E R . By deposits from their member banks; that is, by
an actual transfer of ownership of the gold to the reserve banks by
the member banks which had imported it, that being the conventional
phrase for describing the receipt of gold from abroad.
The CHAIRMAN. Did it acquire a large part of it by the exchange
of Federal reserve notes for gold?
Mr. M I L L E R . The gold reaching the country? The curve does not
represent gold in the Federal reserve banks, but gold in the country;
gold which came into the country by way of imports. These imports,
normally and almost with mathematical exactitude, come into the
Federal reserve banks in the first instance. The latter determine
from time to time what they will pursue in the way of a gold policy,
and may pay out gold certificates in preference to issuing their own
Federal reserve notes, in meeting demands for currency.
To go back, I repeat that, taking the movement of credit since
1922, the main basis of expansion was provided by gold imports
and it probably will be the verdict of economic history that the volume
of those imports was in excessive amounts; that is, in excess of what
the credit system of the country could absorb without producing
disturbances; in other words, without producing inflationary developments.
When we look at the pronounced jumps in the growth of member
banks reserves in 1924 and 1927 (Chart I), we begin to tie the Federal
reserve banks into the situation. These two great additions to the
lending and investing power of the member banks trace back to
the Federal reserve policy pursued in those years which expressed
itself primarily through operations in the open market.
The CHAIRMAN. Right on that point, Doctor, I want, in this
inquiry, to bring out as clearly as I may, just exactly how far, if at
all, the Federal reserve system has been taken away from the original intent of the proponents of the act and of the Congress which
passed the act, and I should like to ask you this question, if the open
market operations of the system have not largely submerged the
rediscount operations of the system which clearly were intended to be
the major function of it?
Mr. M I L L E R . I think, Mr. Chairman, that is true. I would perhaps qualify by saying that the Federal reserve system has been a
kind of alternating system as between open-market operations and
rediscount operations. I t eases or inflates through the open-market
operation and then undertakes to firm or deflate (and usually fails)
through the rediscount operation. That, in a nutshell, is the story of
1927 to 1929.
The CHAIRMAN. The system has established, as I understand it,
what is called an open-market committee, has it not?
Mr.

MILLER.

Yes.

The CHAIRMAN. Has not that open-market committee—well, I will
not say submerged in any sense the Federal reserve board—but has




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

129

not that open-market committee become a very powerful factor in the
activities of the Federal reserve system?
Mr. M I L L E R . The open-market operation is the most powerful
instrument the Federal reserve system ever uses to ease money
conditions. The history of credit in the last 10 years can not be
understood without paying the utmost attention to what has happened
as regards the open-market operations of the system.
The CHAIRMAN. I S that committee under the scrutiny and complete
authority of the Federal Reserve Board?
Mr. M I L L E R . Well, that committee, Mr. Chairman, under its
present constitution, is a policy committee. I t bears the name
" T h e open-market policy conference." I t has the authority to
consider, prepare, and recommend plans for open-market operations.
The CHAIRMAN. T O the board?
Mr. M I L L E R . T O the banks and to the board. The recommendations do not become effective until approved by the Federal Reserve
Board, so that, as a legal matter, all operations in the open market
for what we call "system account"—that is, apart from occasional
emergency operations that, for one reason or another, are engaged in
by individual reserve banks—are actions in which the Federal
Reserve Board is joined, under its general power of approval of purchases of securities in the open market.
The CHAIRMAN. SO that anything of a crtical nature that anybody
might want to say about the activities of the open-market committee,
would apply with equal force to the Federal Reserve Board, would
it not?
Mr. M I L L E R . A S a proposition of law; yes.
The CHAIRMAN. I mean of practice.
Mr. M I L L E R . That is a less simple question to answer.
The CHAIRMAN. What I am trying to determine is whether the
major operations of the Federal reserve system have, in any measure—
and, if so, to what extent—gotten away from the Federal Reserve
Board, which is the central supervisory, controlling power.
Mr. M I L L E R . Well, I should say of open market operations, they
never were until a year or two ago very adequately in the hands of
the Federal Reserve Board.
The CHAIRMAN. Well, but should they not be?
Mr. M I L L E R . I think so. But I would say only to the extent that
a satisfactory result can not be obtained without putting power of
initiative into the hands of the board.
The CHAIRMAN. Well, if it is not clear, it ought to be made clear,
should it not?
Mr. M I L L E R . Yes; but I am inclined to think that the situation is
clarifying itself in a natural way and I look for further improvement.
Though I have been in the system from the beginning, I have not
grown cynical; I believe that, through errors, the banks are learning,
and t h a t the system, as a system, is coming into its own.
I am also inclined to think, Mr. Chairman, that events, especially
in recent years, have demonstrated that the Federal Reserve Board
is not altogether without knowledge and wisdom with respect to
matters that concern good operation of the Federal reserve system.
Mr. W I L L I S . YOU spoke, Mr. Miller, of the board as not having
authority, or not having referred to it, the operations in the open




130

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

market transactions. Is it not a fact that the board can control,
through the fixing of the acceptance rate?
Mr. M I L L E R .

Yes.

Mr. W I L L I S . At the present time
Mr. M I L L E R . Let me interrupt. Only, of course, as to acceptance
operations.
Mr. W I L L I S .

Yes.

Mr. M I L L E R . More important, I think, in explaining the actual
operation of the open-market policy of the Federal reserve system
are purchase and sale, on occasion, of United States Government
securities.
Mr. W I L L I S . But that is also under the control of the board, is it
not?
Mr. M I L L E R . I t has not been as simple and definite a control, until
recently.
The CHAIRMAN. The act says that this may be done under regulations of the Federal Reserve Board.
Mr. M I L L E R . That is correct.
Mr. W I L L I S . And you have made such regulations?
Mr. M I L L E R . We have set up a procedure, called, first, in 1923,
the open market investment committee; later on—I think in 1929
or 1930—the open market policy conference, for the purpose of more
definitely regularizing the procedure with regard to these operations
that concern the whole country and that concern all of the Federal
reserve banks in maintaining control in their respective districts.
Mr. W I L L I S . And you have also issued instructions which have
been printed, as to purchases in the open market of bonds?
Mr. M I L L E R . We have never issued printed instructions covering
the purchase of Government securities.
Mr. W I L L I S . But you can do
Mr. M I L L E R . Probably; but

it?

such a procedure would hardly be

advisable.
Mr. W I L L I S . YOU spoke of the acceptance rate. The board at
present leaves that as a spread—leaves the reserve banks to fix any
rate they choose between certain limits?
Mr.

MILLER.

Yes.

Mr. W I L L I S . So, as a matter of fact, you are leaving it to them?
Mr. M I L L E R . Subject to the approval of the board. Acceptance
rates are more intimately related to day to day or week to week
market movements than are any other of the Federal reserve rates.
The result is that the system has long followed the practice of having
a so-called minimum buying rate and a so-called maximum buying
rate, the difference between the maximum and the minimum rates
having usually been about one-half of 1 per cent. Within those
limits, the banks buy and sell acceptances, using their judgment, on
any day or in any week, as to the rates at which they will buy and
informing the board of what they are doing.Mr. W I L L I S . But that spread is so great that, under money market
conditions, it leaves practically the full decision in their hands?
Mr. M I L L E R . It does as regards short-time periods.
The CHAIRMAN. Having been associated with the system from the
beginning, I wonder if you recall the fact that there was the most
intense hostility manifested by certain large bankers at the money
centers to the open-market provision of the Federal reserve act, upon




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

131

the theory that it would bring the Federal reserve banks in sharp
competition with the larger banks in the money centers, and that the
answer which some of us made to that objection was that the open
market provision of the act was intended directly or primarily for
two purposes: One was to enable the Federal reserve banks to enforce,
in some degree, its rediscount rate, and the other was—well, I would
say three purposes, another being to enable the bank to use its idle
funds for acquisitive purposes, in order to defray the expenses of the
overhead charges of the bank, while the third was to safeguard its gold
supply. I t was never contended at that time that the open-market
operations of the system would or ought to submerge the discount
activities of the Federal reserve banks or to control the money rate on
call loans and things of that sort. Do you recall that at the time it was
suggested that it should be or might be used for that purpose?
Mr. M I L L E R . No; I do

not.

The CHAIRMAN. In other words, to inflate or deflate?
Mr. M I L L E R . No; I do not. I think the original conception of the
reserve system is pretty clearly indicated in its title, where it is
described as an organization to provide rediscount facilities and for
some time the system operated on that basis. Later on, under the
stress or temptation of conditions, it changed.
You have referred to the fact that the open market clause of the
act, among other things, was intended to give an opportunity to the
banks to invest some of their resources to make some earnings.
That was primarily responsible for the heavy purchase of United
States Government obligations in the year 1922. That followed the
deflation of 1921. Rediscounts were running off very rapidly and
the reserve banks, or at any rate their governors, in many instances,
began to worry a little as to what their earnings position would be,
and so they began to buy Government securities, acting more or less
independently, and it was because of the appreciation, after a short
interval of time, that these operations were of vast importance in
the money market, that the first steps were taken toward setting up
some sort of a procedure.
The nucleus of that was a committee for centralized execution of
purchases of Government securities in the open market. That committee was set-up, I think, in 1922, and, as I recall, the Treasury at
that time felt that it was being embarrassed by reason of the fact
that the rapid and considerable increase of purchases of United
States securities by reserve banks was artificially affecting the market
for United States securities.
The CHAIRMAN. Affected the rate?
Mr. M I L L E R . Yes. Now, we come to the year 1924. That presents
a different condition from 1922. There we get the first real beginnings
of something in the nature of open-market operations as a factor of
great importance in Federal reserve policy and in the management
of credit conditions.
No doubt officers of the Federal reserve banks who were in the
system at that time would give different explanations of what lay
back of the great purchase of Government obligations shown by the
curve "Federal reserve holdings of United States securities" (Chart I).
And I think it is fair to say that the Federal reserve system, as a
system, was not fully conscious at that time of just what its objective
was. There was some drifting. The policy was not entered upon




132

NATIONAL ANI> FEDERAL RESERVE BANKING SYSTEMS

with a clear conception of what was the goal to be attained. I should
say, among other things, that the year 1924 having been a year of
industrial slackness—it was called a depression at the time, but it
seems on the whole a rather moderate depression as compared with
what we are experiencing at the present time—there was some
thought on the part of the Federal reserve system at that time, as
there has been since, that it could alter the psychology of business,
as is said, and thus arrest the recession or lift business out of the
depression, by the adoption of an avowed easy-money policy, the
policy expressing itself most effectively through increased purchases
of United States Government obligations.
I think there also filtered into the minds of the Federal reserve
officials at that time the thought that perhaps the system could do
something or ought to try to do something, to improve the international credit situation at least to the extent of not allowing the
heavy imports of gold then coming into this country to become, as
it was expressed, "sterilized," by being used to take down rediscounts
at the reserve banks.
The CHAIRMAN. Doctor, when you speak of something filtering
into the minds of the Federal reserve system, do you mean that it
entered the minds of the Federal Reserve Board or of a certain
Federal reserve bank?
Mr. M I L L E R . Well, I should say that it entered the mind of the
banks, and particularly of the largest bank in the system, which
regards itself as being charged with primary responsibility to be
quickly alert to what is going on or impending in the international
situation, and more slowly, into the minds of the Federal Reserve
Board. However, it was a factor, even though a dimly lighted factor
in the councils of the Federal reserve system at the time.
I think there was also more or less of the illusion (that became
more pronounced in 1927) that the Federal reserve system could do
something to correct what was then described, and is still described,
as the maldistribution of gold in the world. I am afraid that illusion
still obtains in certain Federal reserve circles, and in certain parts of
the country. I t is one of the most misleading illusions that any
body of men charged with the responsibility of administering the
fundamental credit mechanism of the country could allow to enter
its mind.
The CHAIRMAN. I S not the central supervisory authority charged
with the responsibility of correcting illusions of that sort?
Mr. M I L L E R . Yes, if, when and as it can. That brings us pretty
close, Mr. Chairman, to the human-equation factor.
I do not think you can ever overlook certain facts, that New York
is the central money market of this country and that it has become,
by virtue of all the vast changes that have swept over the economic
and financial relationships of the major countries of the world, the
most important money market in the world to-day.
The CHAIRMAN. Yes, but should it be big enough to control the
action of the central supervisory authority in matters of vital
importance?
Mr. M I L L E R . I should be disposed to say that it should be just as
big, in the sense of just as strong, and able, as it possibly can be made,
and that the central supervisory authority, as you describe it, should
be just as strong and able as it can be made, in order that out of the




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

133

differences between them may come a broadly balanced judgment
with respect to great problems of Federal reserve policy.
I have no objection to being confronted with strong opposition or
a positive attitude on the part of any of the reserve bank officers,
including those of the New York Federal Reserve Bank.
The CHAIRMAN. But the country should be able to venture the
hope that the convictions of the central power should be just as well
defined and as insistent as the convictions of those who are under
the authority of the central power.
Mr. MILLER. The country has a right to expect it and to demand
it; and as it gets it, I think the country will get a more competent
performance from the Federal reserve system than it has had in
recent years.
I have no hesitation in telling the committee that, in my judgment,
the safety of the Federal reserve system for the country depends very
largely upon the ability, the wisdom, the strength, and independence
of the men who constitute the Federal Reserve Board. Without a
strong board I see trouble ahead for the Federal reserve system.
Of necessity—almost inevitable necessity—because of the vast
consequences to the world as well as to the country that depend upon
the major decisions of the Federal reserve system in matters of policy,
the system has taken on something of a centralized character. That
means, in my judgment, that decisions on the larger matters of policy
must be viewed from a very broad standpoint. They must be
regarded as decisions of national economic policy.
Credit policy in the United States, of recent years, has become
public policy in a very important sense, and I think it has been
abundantly discovered by Federal reserve history, more particularly
in recent years, as the system has come to fuller stature, that the
contribution that has got to be made to the satisfactory determination of these problems of policy can only be made if an able, wise
body, public in character, with a keen and high sense of its responsibilities brings to bear on their solution the deeper insights and larger
understanding that may resaonably be expected from it.
I want to say, Mr. Chairman, that in the years I have been associated with the Federal reserve system, I have lived to see it pretty
well demonstrated that somehow or other a group of conscientious
men, of high character and good intelligence, sitting constantly with
these problems, somewhat remote from the atmosphere of the great
centers, is capable of an objective and detached view, such as the
ablest of men are seldom capable of when they are right in the
atmosphere of the large centers and engrossed in their own affairs.
The CHAIRMAN. If you will permit me to supply one adjective in
your description of an ideal Federal Reserve Board, without offense,
I would venture to do it.
Mr. MILLER. By all means, Mr. Chairman.
The CHAIRMAN. A courageous board, as well as an intelligent and
wise board.
Mr. MILLER. Yes; you are quite correct. But I believe, gentlemen, that if we have a board of truly able men, they will probably
have the courage to carry through. I think there is growing appreciation that the responsibilities that attach to membership in the
Federal Reserve Board are of such mighty character, that no decent




134

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

man who might be appointed to the board will hesitate to discharge
his responsibilities.
The CHAIRMAN. But sometimes there are decent men who are
timid.
Mr. M I L L E R . Well, the board is no place for a timid or neutral man.
The CHAIRMAN. I did not mean to interrupt you. Go ahead with
your statement, Doctor.
Mr. M I L L E R . I think in connection, Mr. Chairman, with one of
your contemplated amendments to the Federal reserve act, drawn
with the view of checking Federal reserve credit going into speculative
uses
The CHAIRMAN. Yes; I shall be glad to have you comment on any
provision of that proposed bill.
Mr. M I L L E R . I should like first to call attention to some things
that I think it is important be cleared up.
In the year 1927, if the committee will look at the curve (Chart I)
which relates to Federal reserve holdings of United States securities,
you will note the pronounced increase in these holdings in the second
half of the year. Coupled with the heavy purchases of acceptances it
was the greatest and boldest operation ever undertaken by the Federal reserve system, and, in my judgment, resulted in one of the most
costly errors committed by it or any other banking system in the last
75 years. I am inclined to think that a different policy at that time
would have left us with a different condition at this time. T h a t is
not an easy or a pleasant thing for me to say, but in the atmosphere of
this committee, where you are undertaking to find out what can be
done to control the use of Federal reserve credit for certain purposes,
I feel it ought to be said.
You notice that as the volume of these securities voluntarily purchased by the Federal reserve banks increases; in other words, as the
Federal reserve puts money into the market, not because member
banks asked it by offering paper for rediscount, but in pursuance of
an affirmative policy of its own, which in effect said,
We shall not wait to be asked to provide increased money through rediscounts;
we will operate on our own responsibility and through our own instrumentality,
to wit, the purchase of United States Government obligations—

there followed immediately an increase in the reserve balances of the
member banks, as shown on the topmost curve (Chart I). T h a t was
a time of business recession. Business could not use and was not
asking for increased money at that time. But the banks do not want
to, and in fact do not, carry uninvested moneys or idle reserves.
Here, then, in 1927 came an accession to their reserves for which they
had to find a use.
The CHAIRMAN. And left them free to invest the funds
Mr. M I L L E R . Not only left them free, but, from the point of view
of the banker, put them under an obligation to go and invest
The CHAIRMAN. Certainly under an invitation to do it?
Mr. M I L L E R . Yes. Now, let us see what the banks did. I
draw your attention again to Chart I I and its uppermost curve showing the increase of their deposits. If you will permit me to interrupt
myself for a moment, I would like to note a distinction that is very
important in the interpretation of banking deposits. There are two
noteworthy methods by which bank deposits are created. One is
the method which was in contemplation at the time the Federal




NATIONAL AND FEDERAL. RESERVE BANKING SYSTEMS

135

reserve act was drafted and which corresponded to the practice of
banking at that time, to wit, a borrower, a merchant or manufacturer, takes his note*to his bank and has it discounted and is given a
credit on the books of the bank. The credit is called a deposit.
Deposits of that kind arise out of and are tied to loans and discounts.
They keep in close correspondence with one another. The other
method of creating a deposit is through the making of a deposit of
cash or its equivalent by somebody in the bank. When that occurs
deposit precedes investment or loan. Finding its reserves increased,
the bank is obliged to go out and find some use for this new money.
I t rarely finds it immediately by increasing its commercial loans.
I t is, therefore, almost of necessity, compelled to buy investment
securities or open-market paper or to make so-called open-market
loans, of which the most familiar type is the call loan.
Now, that describes what happened in 1927. The deposits curve
shows a great growth in deposits, not offset by commercial loans
(Chart II.). The curve which bears the legend of "All other l o a n s "
is made up principally of commercial loans, loans to commercial and
business men, who discount their unsecured notes at member banks.
In 1927 no change occurred in the average volume of these commercial
loans. " W h a t then," one asks, "was the use made of the reserves
which, so to speak, were handed to the banks by the Federal reserve
banks, through open market purchases of securities"? Well, they
bought investments in increasing amounts. There is a considerable
increase in the volume of investments (shown by the curve "Investments," Chart I I ) , corresponding to growth in deposits. But more
important is the sudden and rapid upward flight of their loans on
securities—collateral loans, as shown on the chart. These loans
on securities include, of course, the so-called brokers' loans; in other
words, the call loans made by the banks. The call loan is in ordinary
times apt to be most sensitive in its response to an abundance of
loan funds in the member banks—in other words to cheap and easy
money. The call loan market will in ordinary times take all the
money offered it at a price. Under the reserve system, or, rather
since the reserve system was established, bankers endeavor to keep
loaned up. They want no surplus reserves because they do not
need them. Some of the things brought out in the testimony of
Governor Harrison yesterday, I think, are due to that fact.
Mr. W I L L I S . The Federal funds market would tend in that same
direction.
Mr. MILLER. Yes; but not to any important degree.
Mr. W I L L I S . SO far as it had a tendency, it would be in that
direction?
Mr. M I L L E R . SO far as it had a tendency, it would be in that
direction, in times when the call market or speculative security
market, that lies back of it, has an appetite for funds.
Mr. W I L L I S . In times when there is a delicate balance between
demands?
Mr. M I L L E R . Yes. The growth of security loans, which is marked
on the chart "Loans on securities and investments," includes security
loans of every character, customers' loans, the loans of financial
houses, engaged in bringing out or distributing securities as a business
The CHAIRMAN. Investments as distinguished from speculation?




136

NATIONAL AND FEDERAL KESEBVE BANKING SYSTEMS

Mr. MILLER. Yes. While that curve "Loans on securities" is
rather pronounced in its upward movement, there is an even more
pronounced movement in the brokers' loan curve (Chart IV) "For
domestic banks." The curve marked "Total" includes loans made
by nonbankers, the so-called bootleg loans.
A not inconsiderable part of the funds that came into the call-loan
market, from 1927 on, as loans for account of others, loans of corporations, firms and individuals, also traces back to the impulse that
the great creation of cheap credit in 1927 gave to company financing.
CHART IV

BROKERS' LOANS
MILLIONS OF DOLLARS

7000

M A D E B Y REPORTING MEMBER BANKS IN N E W YORK CITY

MILLIONS OF DOOMS

[7000

6000

and refinancing. By issues of stock as well as bonds companies
obtained funds in excess of immediate requirements which became
available for loans in the call-loan market.
I do not know that the committee wants to be troubled at this
time with facts and figures, but I will be happy to introduce into the
revised record later, statistics showing the growth of new issues—
stocks and bonds—during the period when the great growth in security loans and especially call loans took place. Many business
concerns that formerly financed themselves through bank loans,
when money became cheap and plentiful, began to put out debenture
issues or stock issues and thus provided themselves with working



KATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

137

capital and, in most cases, with working capital in excess of what they
actually needed to employ in their current business, and which was
available, therefore,, for loans or short investment.
Tie CHAIRMAN. And they proceeded to loan it on call?
Senator WALCOTT. It seems to me that would be a very interesting
chart to supply this committee, particularly if you can segregate
bonds and preferred stocks and equity stocks.
Mr. MILLER. We shall do the best we can. It will make an
interesting footnote. (See table following.)
Nominal capital issues

l

[In millions of dollars]
Total foreign and
domestic

1922
1923
1924
1925
1926
1927
1928
1929_

—.
_

_-.

4,395
4,440
5,557
6,205
6,282
7,489
7,979
10,005

Domestic issues
Total a
3,631
4,019
4,588
5,129
5,157
6,152
6,728
9,334

Bonds and
notes
3,061
3,360
3,759
3,977
4, 70
4,692
3,828
3,466

Stocks
570
659
829
1,152
1,087
1,460
2,900
5,868

Total
foreign 3

764
421
969
1,076
1,125
1,337
1,251
671

i Thesefiguresexclude direct refunding issues but include issues such as investment trust issues, the
proceeds of which may be reinvested in outstanding securities,
i Figures from Commercial and Financial Chronicle.
3 Figures from Department of Commerce.

There is, then, I think what might well be described as a parallelism,
a striking and significant parallelism, between the open-market
operations of the Federal reserve, particularly in the years 1927-28,
when it was entering the market to purchase Government securities,
and, as on certain other occasions, acceptances, but particularly
Government securities, and the growth of reserves and (consequent
upon that) the growth of investments, loans on securities, and
deposits. (See Chart V on page 138.)
The table presented in Chart V gives figures showing the growth
of credit at all member banks. Total loans and investments over
the period 1921 to 1929 grew by an amount of 48 per cent. "All
other loans" which are identified by the Federal reserve as mainly
commercial loans, showed a negligible growth, and remained practically constant through the period, notwithstanding the fact that
money was abundant and cheap. Presumably this slow growth of
commercial loans was not due to any inability to get accommodation,
but to certain factors which may be broadly described as this, that
business was able to finance itself by issuing securities and that it
needed fewer dollars per unit of business; in other words, that the
dollar was becoming more efficient; that it did more work; that
business practices in the handling of inventories and the like were
changing and business consequently needed less money relatively,
judged by pre-war standards. The tendencies of prices to fall kept
business alert not to be caught with large inventories on a falling
market.
Senator BULKLEY. Would the amount of loans be affected, as was
suggested in the statement made yesterday, by corporations being
better financed to carry their own business?



138

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. M I L L E R . Very materially. I was trying to bring that out a
moment ago.
The CHAIRMAN. If that situation is to persist, might not that suggest some alteration in the definition of eligible paper that banks
might take?
Mr. M I L L E R . YOU mean in order to broaden the class of paper to be
admitted to discount by the Federal reserve banks?
The CHAIRMAN.

Yes.

Mr. M I L L E R . I can not conceive of any alteration, or I do not, at
any rate, conceive of any that would improve conditions.
The CHAIRMAN. Nor I, either.
CHART V

LOANS AND INVESTMENTS-ALL MEMBER BANKS
In Millions of Dollars
JUNE 3 0

INVESTMENTS

192!
1922
1923
1924
1925
1926
1927
1928
1929

6.002
7017.
7.757
7963
8863
9.123
9.818
10.758
10.052

Actual Increase
1921-1929
Percentage
Increase
1 1921-1929

LOANS ON LOANS ON ALL OTHER
URBAN REAL
SECURITIES
LOANS
ESTATE 5/

J/4400
J/4500
J/4.950
J/5.350
6.718
7.321
8.156
9.068
J/10.095

U 875
J/1.100
J/1.350
J/1.575
J/1.875
2.161
2.449
2.624
2.750

12,844
11.565
12.450
12,279
12.062
12,579
12.333
12,611
12,814

4050

5.695

1.875

2/30

67%

129%

214 7.

—

TOTAL LOANS!
AND
INVESTMENTS

24.121
24182
26.507
27.167
29.518
31.184
32.756
35.061
35.711
11.590

1

4 8 7.

sJ Real Estate Loans other than Farm Lands
1 / Partli/Estimated
11 Decrease

Mr. M I L L E R . I should say that probably it might rather define the
least objectionable method for preventing a too rapid growth of the
country's credit.
The CHAIRMAN. If there are no rediscounts, what will the Federal
reserve banks do with their accumulated funds?
Mr. M I L L E R . There will be rediscounts.
The CHAIRMAN. Except to use their resources in the open market
as was disastrously done?
Mr. M I L L E R . There will be rediscounting the moment the h ederal
reserve banks reconvert themselves to institutions
The CHAIRMAN. Of commerce?

Mr.
The

M I L L E R . And rediscount.
CHAIRMAN. Yes.
M I L L E R . I think it is reasonably

.

Mr.
clear, from the operations ot
the last few years, that the Federal reserve is tied into the credit




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

139

situation of the country in such a way that it will have to maintain
outstanding about *a billion of credit under ordinary conditions for
the use of its member banks. Seldom, I think, will it drop much
below that or need to increase much above that except to meet seasonal or exceptional conditions, if the banks are operated as rediscounting institutions.
Mr. W I L L I S . In your report of three or four years ago, you brought
out the statement that there was a large quantity of eligible paper
in member banks which could have been rediscounted, did you not?
Mr. M I L L E R .

Yes.

Mr. W I L L I S . Yesterday it was estimated it was only about
$3,000,000,000.
Mr. M I L L E R . Yes.
Mr. W I L L I S . Has the board
Mr. M I L L E R . I think not;

changed its estimate on that?
it depends a great deal on how rigid
your criterion is as to what constitutes paper eligible for rediscount.
Mr. W I L L I S . But at the time you had it estimated, three or four
years ago, it was very much higher than that. I t seems to me that
you estimated it at seven and one-half billion.
Mr. M I L L E R . I do not recall. That figure includes what could be
taken out on bills payable.
Mr. W I L L I S . I merely wanted to bring out the fact that the board
had said at that time there was an abundant amount of eligible paper
in member banks that could be used for obtaining funds for commercial loaning if desirable.
Mr. M I L L E R . Yes. That might be used, at any rate, for the
maintenance of member bank reserves.
Mr. Chairman, I think it might be well to state that this table
brings out again in figure form the use made of the great increase in
member bank reserve balances; loans on securities, first and most
important; loans on urban real estate; and investments; in other
words, it comes pretty nearly, I think, to this, that when the Federal
reserve banks operate as investment banks, by buying investments,
they force the member banks of the country also to operate as investment banks by buying investments or loaning against investments
or by making loans of the kind here described as loans on real estate.
The CHAIRMAN. I have noted in the previous hearing that you
offered the suggestion that these extensive open market operations
of the system should require the sanction of at least five members of
the Federal Reserve Board. You have not altered your view of
that?
Mr. M I L L E R . I did not recall that I had ever expressed that opinion
publicly before. Was that in hearings before the House committee?
The CHAIRMAN. I think so.
Mr. M I L L E R . I am still of that opinion, Mr. Chairman—more so
than ever. I would say that the next step in the development of
the Federal reserve system is to make it less easy to
The CHAIRMAN. Could not you impose that obligation upon the
open-market committee or would it be better to incorporate such provision in the act itself?
Mr. M I L L E R . I do not see how we could do it with the openmarket committee. After all, that is merely a convenient working
organization, not constituted or authorized by law, and I think would




140

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

be a pretty considerable step toward the conversion of the original
reserve system into a central bank.
I want to call the attention of the committee to this, that whenever
the Federal reserve system operates through the open-market committee, it operates, in effect, as a central bank, of necessity. It operates with the resources of the 12 banks as a system.
The CHAIRMAN. Which it was never intended to be.
Mr. MILLER. YOU strip your regional banks of their separate control of credit in their several districts when you operate with their
resources in the central money market of the country.
The CHAIRMAN. I wonder how much the average Federal reserve
bank in the country has to do with these operations or to what extent
the boards of these respective banks influence the activities of the
open-market committee?
Mr. MILLER. Well, interesting things, I think, are in process, are
now going on in the Federal reserve system. I should say that until
a comparatively recent date, the influence of—let us say, for short,
the outside banks in the Federal reserve system—was trifling. But
I think the miscarriage of the 1927 adventure of the system in its
open-market operations
The CHAIRMAN. Yes?
Mr. MILLER (continuing). Has served to make the other banks—
the outside banks in the Federal reserve system—more solicitous, and
it is largely due to their feeling that the open-market committee has
changed its character and its size. It is now an open-market policy
conference in which every reserve bank is represented.
Senator BULKLEY. Was that 1927 adventure in the nature of a
central bank operation?
Mr. MILLER. Distinctly. It could hardly have been more so if
we had had but one bank.
The CHAIRMAN. Have any of the Federal reserve banks ever
declined to take their assignment of open-market paper?
Mr. MILLER. I think not on principle. I think they have never
declined because of disapproval of the open-market policy, except,
perhaps, on one or two occasions. There have been cases where some
of the regional banks have been pretty well invested up and therefore
had very little margin for participating in the system's open-market
purchases, or having participated in the purchases subsequently sold
their holdings in whole or in part to reserve banks in an easier position.
But generally I think the policy, when adopted, has been participated
in by all of the banks in a cooperative spirit.
The CHAIRMAN. If you have exhausted your very illuminating
talk—that is, illuminating to me—about the open-market transactions, I should like for you to tell us a little something about the discount policies of the Federal reserve system.
It was developed in the hearing yesterday, that the Federal Reserve
Bank of New York had—of course, with the assent of the Federal
Reserve Board—advanced its rediscount rate on several occasions—
three occasions as I recall it—in the early period of 1928 and that it
had from time to time, and quite repeatedly, recommended an advance
in the rate which the Federal Reserve Board declined to sanction.
Could you tell us something about that?
Mr. MILLER. Yes. It declined to sanction the advance recommended in 1929; it approved all advances recommended in 1928.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

141

The CHAIRMAN. TO begin with, is it your theory that the rediscount rate was ever intended or might effectively be used, to repress
activities in the stock market?
Mr. MILLER. Not per se. I would, however, think it a reasonable
use of the discount rate to test out, or restrain incipient developments
that might be in process—you can not be sure in such matters—and
that first might be exhibiting themselves in the securities market.
You can never be sure, when securities are inflating, that it may not
be preliminary to an inflation that will creep into the field of business
later on and so I would not have much hesitation in approving increase in the discount rate from a comparatively low level in circumstances of that character.
The CHAIRMAN. Would you make the advance to the extent of
penalizing the ordinary commercial transaction?
Mr. MILLER. NO; I would not and particularly not when, under
conditions such as obtained in 1929, there was no reason to believe
that it would do anything but that.
Let me say, on your question, Mr. Chairman, the Federal reserve
system began to go into the reverse, with its open-market policy, late
in 1927. After its major operation in enlarging its portfolio of Government securities in the autumn of that year, the developments which
are brought out on the charts began to give some concern, with the
result that the system suspended further purchases and prepared to
go into reverse and sell Government securities. That policy was
definitely assumed as system policy, with the advent of the year 1928.
The system began to sell securities, and not getting the reaction it
expected to get and believed it must get under a policy of sales, it
began to reinforce its sales of Government securities by what I would
describe as a hesitant increase of the discount rate. It entered the
year 1928 with a discount rate of 3K per cent. That was moved up
in three steps, to a rate of 5 per cent by midsummer of 1928. I think
that rate was fixed the 13th of July. In other words, it was then attempting to exert two forms of pressure; one to take money back from
the market by securities sales and force the banks to rediscount or
contract, and the other to raise the rate of rediscount from 3K to 4,
4K, and 5 per cent. But at that time the market had gotten such
speed, the call rate was moving up so rapidly, that it was constantly
ahead of the discount rate. In brief, the rates of 4, 4%, and even 5 per
cent, except momentarily, as a psychological influence, exercised,
and could exercise, no adequate deterrent influence. I have no hesitation in saying that I would have voted for a 6 per cent rate in 1928
in the belief that conditions were developing in credit that could
probably have been most effectively, and readily corrected by an
energetic application of the discount rate. I think the thing might
have been accomplished. I think that if, when the reserve banks raised
their rates from 3K to 4, they had raised it to 5 per cent, which is not
an unreasonable rate
The CHAIRMAN. At least that would have been a plain implication
that the authorities of the Federal reserve system thought things
were too much on the upward trend
Mr. MILLER.

Yes.

The CHAIRMAN. And it would have gone out that it was the purpose of the increase
Mr. MILLER.

Yes.

34718—31—PT 1



10

142

NATIONAL. AND FEDERAL. RESERVE BANKING SYSTEMS

The CHAIRMAN. T O put a stop to that sort of thing?
Mr. M I L L E R . Yes; I think it would have meant that there was a
conviction behind the action, that it was a decision to accomplish
something and that the Federal reserve had started out with the
conviction that there was something that needed correction.
The CHAIRMAN. Then just exactly why, may I ask, did the Federal Reserve Board decline to sanction further advances in the rate at
New York?
Mr. M I L L E R . The rate was raised by the New York bank to 5 per
cent on the 13th of July, 1928. I t was not until the 14th of February,
1929, or seven months later and one week after the board issued a
public statement to the country with respect to credit conditions, in
which was emphasized the dangers inherent in the extraordinary
growth in the volume of speculative security credit, that the Federal
Reserve bank moved. I t was not until after the board issued that
statement, that the first proposal to raise the rate to 6 per cent was
made to the board.
In a letter sent to the Reserve banks under date of February 2, a
>art of which was incorporated in the statement to the public reeased on February 7, the Board said that it " realizes that there are
elements in the situation which are not readily amenable to recognized methods of banking control."—Which meant that, in the
judgment of the Federal Reserve Board, the time had gone by for
useful rate action.
The CHAIRMAN. When you use the term "recognized m e t h o d s "
you mean ordinary methods?
Mr. M I L L E R . Conventional, traditional methods—discount rate
changes and open-market operations.
Senator WALCOTT. What was the date of that?

{

Mr. M I L L E R . February 2, 1929.

Senator WALCOTT. Would it be proper to let us have that letter
for insertion in the record?
Mr. M I L L E R . Yes. A part of the letter was contained in the
public statement, but there were a few queries addressed to the Federal
Reserve banks in this letter which might without impropriety become
a part of this record.
The CHAIRMAN. We will be glad to have that.
LETTER SENT TO ALL FEDERAL RESERVE BANKS
FEBRUARY 2, 1929.

.The firming tendencies of the money market which have been in evidence since
the beginning of the year—contrary to the usual trend at this season—make it
incumbent upon the Federal reserve banks to give constant and close attention
to the situation in order that no influence adverse to the trade and industry of
the country shall be exercised by the trend of money conditions, beyond what
may develop as inevitable.
The extraordinary absorption of funds in speculative security loans which has
characterized the credit movement during the past year or more, in the judgment
of the Federal Reserve Board, deserves particular attention lest it become a
decisive factor working toward a still further firming of money rates to the
prejudice of the country's commercial interests.
The resources of the Federal reserve system are ample for meeting the growth
of the country's commercial needs for credit, provided they are competently
administered and protected against seepage into uses not contemplated by the
Federal reserve act.
The Federal reserve act does not, in the opinion of the Federal Reserve Board,
contemplate the use of the resources of the Federal reserve banks for the creation




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

143

or extension of speculative credit. A member bank is not within its reasonable
claims for rediscount facilities at its Federal reserve bank when it borrows either
for the purpose of making speculative loans or for the purpose of maintaining
speculative loans.
The board has no disposition to assume authority to interfere with the loan
practices of member banks so long as they do not involve the Federal reserve
banks. It has, however, a grave responsibility whenever there is evidence that
member banks are maintaining speculative security loans with the aid of Federal
reserve credit. When such is the case the Federal reserve bank becomes either
a contributing or a sustaining factor in the current volume of speculative security
credit. This is not in harmony with the intent of the Federal reserve act nor is
it conducive to the wholesome operation of the banking and credit system of the
country.
You are desired to bring this letter to the attention of the directors of your
bank in order that they may be advised of the attitude of the Federal Reserve
Board with respect to this situation and the problem confronting the administration of Federal reserve banks. The board would like to have from them an expression as to (a) how they keep themselves fully informed of the use made of borrowings by their member banks, (b) what methods they employ to protect their institution against the improper use of its credit facilities by member banks, and (c)
how effective these methods have been.
The board realizes that the problem of protecting the credit situation from strain
because of excessive absorption of credit in speculative security loans is attended
with difficulties. It also realizes that there are elements in the situation which
are not readily amendable to recognized methods of banking control. The
board, nevertheless, believes that, however difficult, the problem can be more
completely met and that the existing situation admits of improvement.
The Federal Reserve Board awaits the reply of your directors to this letter
and bespeaks their prompt attention in order that it may have their reply at an
early date.
By direction of the Federal Reserve Board.

Mr. M I L L E R . I t was my opinion, expressed several times in discussions at Federal reserve meetings, in the opening month of the year
1929, that the Federal reserve system was drifting; that it was in the
midst of a perilous situation without a policy. I t was also my
opinion that the Federal Reserve Board was far more alive and aware
of the terrific implications of the situation existing at the opening of
the year 1929, than were the banks and that, in default of any program
on the part of the Federal reserve banks for dealing with the situation,
the Federal Reserve Board owed a responsibility to the country and to
the future of the Federal reserve system, for which it must find a
solution. That solution was found in a rejection of discount policy as
a suitable expedient in the circumstances, as they had then developed,
and the adoption of " direct pressure."
I t was our belief that an increase to 6 per cent in February, 1929,
would have been nothing but a futile gesture; that it would have been a
practical declaration to the speculative markets of the country that the
doors of the Federal reserve system were open to all comers with
paper of the kinds eligible for rediscount provided they paid 6 per cent.
With call rates mounting to 8, 9, 10, 15, and 20 per cent, a 6 per cent
discount rate would have been an admission of defeat and given
great relief to the speculating public.
An alternative use of discount policy would have been what you
alluded to yesterday, Mr. Chairman—a drastic application of the
policy, through successive increases to 6, 7, 8, or 9 per cent—in other
words, a race between the call rate and the discount rate.
The CHAIRMAN. With legitimate commerce the victim.
Mr. M I L L E R . With legitimate commerce thrown into a state of
bewilderment and the whole country thrown into a mental upheaval
with only one thing certain as the outcome—the wrecking of the stock




144

NATIONAL AND FEDERAL, RESERVE BANKING SYSTEMS

market, the wrecking of business, and with imputation of responsibility for both wreckages to the Federal reserve system. I t would
have been an act of madness.
I want to add if I may here, Senator, that my own individual concern, at that time early in 1929 was as to what the board could do by
appropriate intervention to save the good repute of the Federal
reserve system. I had no misgivings as to the ultimate consequences
of the speculative expansion at that time. I t was clear to me that it
had already gone beyond all the ordinary forms of control; that it
would end in some sort of violent revulsion.
The CHAIRMAN. What different policy was recommended by the
board or what different practice at that time other than the direct
method of dissuading or remonstrating?
Mr. M I L L E R . Well, we undertook to remind the reserve banks in
the letter of February 2 to them, that there was this great growth of
credit that was occasioning concern—"Speculative security credit"
was the term we used—that the use of Federal reserve credit for making loans of that character was not contemplated by the reserve act.
We laid down what might be regarded in the nature of a principle or
interpretation of the law when we said a member bank is not within
its reasonable claims to the use of the rediscount facilities of the
Federal reserve bank, when it borrows for the purpose of making or
maintaining speculative loans; that when that occurs the Federal
reserve banks become involved either as contributing factors or as
sustaining factors in the existing volume of speculative credit. We
stated in effect that we did not propose to have Federal reserve credit
used for the purpose of increasing the volume of speculative security
credit, on the two grounds, that the law did not recognize that as a
legitimate use and that such use was not conducive to good functioning
of the banking and credit system of the country.
Does that answer your inquiry?
The CHAIRMAN. Completely. Without any purpose to introduce
anything of a disagreeable nature into these hearings, I may note,
in the form of an inquiry, that it seems to me that a prominent director
of an outstanding Federal reserve bank severely resented that admonition of the board and refused to conform his conduct to it, did he not?
Mr. M I L L E R . I would say, without answering your question
directly or too immediately, that the procedure that the board saw fit
to advise the reserve banks to follow in the conditions that existed
at that time, did not commend itself to the judgments of all the reserve banks, notably the Federal Reserve Bank of New York, or to
all of the bankers, notably some in New York. But there were banks
in New York, among the very largest, that approved of the board's
policy and gave it their support.
The CHAIRMAN. And gave it full cooperation?
Mr. M I L L E R . And gave it remarkable cooperation and were using,
I think, the best judgment in mediating between what they regarded
as good Federal reserve policy and conditions that might, on too
severe an application of it, produce disaster in the stock market.
The CHAIRMAN. Was not that true of most of the important banks
in New York?
Mr. M I L L E R . I think that is a pretty fair statement; yes. I t is a
fair statement, I think, as regards New York. I t is a very fair statement as regards Chicago, where there was not only cooperation b u t




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

145

an approving cooperation. I t was true of most of the banks*in the
other larger interior centers.
The CHAIRMAN. Doctor, what was the attitude at that time of the
Federal Reserve Advisory Council?
Mr. M I L L E R . The attitude of the council, when the board put out
its statement of February 7, 1921, was one of approval. M y recollection is that the council met about six days after the board's statement was published. The board's statement was published on the
7th of February, 1929. The council assembled in Washington on
February 13 or 14 and naturally having had before them in the press
this most recent performance on the part of the Federal Reserve
Board—this statement—their minds were filled with it. We did
not refer the statement to them for expression of approval or disapproval. We purposely refrained from putting it on the usual
program of the topics that we wanted them to consider. I would not
want to speak for my colleagues, but I think that probably those, at
any rate, that were behind the February 7 statement of the board were
in very much the same state of mind that I was. They were afraid
it might embarrass the council to be asked, because of the fact that
these men, being representatives of the larger banks in their districts
from all over the country, might look with disapproval upon a method
of control of credit that was unorthodox and yet be reluctant to say so.
The CHAIRMAN. Why unorthodox, if explicitly authorized by law?
Mr. M I L L E R . Well, the banker, of course, has his own ideas of
what is proper procedure and practice. "Direct pressure" was not
among the recognized expedients. I think the bankers might well
have been expected—especially the large city bankers—to take a
cynical view or at least an unsympathetic view of this method of
undertaking to improve a situation which they were as much concerned about, I think, as we of the Federal Reserve Board. They
voluntarily raised the question when they met us in conference
whether we would like to hear what they thought. I think the
answer was that that was up to them. We did not know whether
they would say they thought well of this method or poorly of it.
My own expectation was that probably the large city banks represented in the conference would speak with doubt of the procedure, if
not actually disapprove it. On the contrary, the council approved
it and even went further than the board in its own recommendation.
The board, in its statement always referred to " speculative security
loans." The council, in its approval, referred to "security loans,"
which was much broader.
Here is their statement:
The Federal Advisory Council approves the action of the Federal Reserve
Board in instructing the Federal reserve banks to prevent, as far as possible,
the diversion of Federal reserve funds for the purpose of carrying loans based
on securities. The Federal Advisory Council suggests that all the member
banks in each district be asked directly by the Federal reserve bank of the district
to cooperate in order to attain the end desired. The council believes beneficial
results can be attained in this manner.

I recall very distinctly that when their recommendation was
submitted, I asked whether the omission of the word "speculative"
was inadvertent or intentional. The answer from the chairman of
the council, who was then chairman of one of the largest banks in
the country, was that it was not inadvertent.




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The •CHAIRMAN. Which made it more comprehensive?
Mr. M I L L E R . Which made if far more comprehensive; yes, sir, and
they also indicated that they thought it would be a successful method
of coping with the then existing conditions. They even went so far
in a private memorandum to the board as to express themselves as
believing u every effort should be made to correct the present situation
in the speculative markets before resorting to an advance in rates.''
The CHAIRMAN. This is getting to be a right entertaining hearing.
Well, do you care to say anything further, Doctor?
Mr. M I L L E R . YOU have asked for suggestions as to how I think
this matter of keeping within limits the growth of speculative credit
can be accomplished. You referred to the suggestion made by me in
the hearings of the House committee.
The CHAIRMAN. I did not catch that.
Mr. M I L L E R . YOU referred to a suggestion I made before the
House Banking and Currency Committee that I thought might
The CHAIRMAN. Affecting the open market transactions?
Mr. M I L L E R . Affecting open market purchases of securities, yes,
and thereby occasioning those great bulges of credit shown on the
charts, with the almost certain eruption of something in the stock
market as a consequence when hopes are running high and business
is in a forward movement. These problems need not concern us
much, perhaps, when things are slack and flat as they now are. But
we are going forward in this country again, and if we repeat the errors
of 1927-28, we are going to have just about the same thing again as
occurred in 1929 in about 7 years, and certainly in 10. Therefore, if
I may repeat my recommendation, I would suggest for your very
thorough consideration, the establishment of safeguards against a too
easy entering upon these open market operations after the fashion
the Federal reserve act itself has set a precedent for; to wit, by requiring not less than 5 affirmative votes on the board whenever theFederal Reserve Board is asked to approve something out of the
ordinary.
The CHAIRMAN. I t has done that with respect to requiring one
Federal reserve bank to rediscount for another.
Mr. M I L L E R . Yes, and to suspend reserve requirements or to reduce the reserves of outlying banks. There are a number of those
things.
The reason I suggest the requirement of an affirmative vote of 5
is this: As I look back upon the history of these open market operations, it has not infrequently happened that a decision of great consequence was made by a majority of a. quorum of the board, but not
a majority of the board.
The

CHAIRMAN.

Yes.

Mr. M I L L E R . I am reasonably satisfied that, even as things have
been, that if there had been a requirement in the act of the kind I
have suggested, to wit, that it shall take the affirmative votes of
five members of the board in order to engage the Federal reserve
system in open-market operations, purchase operations on such an
extended scale as actually occurred might not and probably would
not have happened in 1927.
Senator WALCOTT. Was not that the time to do it?
Mr. M I L L E R . Yes; and if it had been done—I do not want to be
misunderstood. I do not think anything that the Federal reserve




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147

system could have done, either by omission or commission in 1927
could have avoided a crisis of some sort eventually. The causes of
the present crisis and depression go far deeper than the stock market.
The stock-market crash was symptomatic of ruptures and dislocations running all through the financial and economic structure of
the world which sooner or later would have exerted their effects.
But if there had been greater awareness of what was involved in the
economic disorganization left after the Great War, the Federal reserve
would have pursued more temperate policies, with the result that
when the crisis came, it would have been far less intense, severe, and
devastating and the resulting depression less overwhelming and
prolonged.
There is a lot of mopping up which has had to be done in the
last year, a lot that would not have been necessary if we had pursued
a more conservative policy in the system in 1927 and established a
more vigorous control in 1928.
There, I think, is where a weakness has been revealed before in the
open-market operations of the system. Men who enter boldly upon
an operation are not infrequently apt to be slow to reverse when
things don't turn out as expected. They are particularly apt to be
slow to reverse when they are not acting alone and privately. When
they are acting publicly and in seeming departure from their original
policy, the tendency to wait becomes more pronounced, because it
seems to involve them in confession of error. And so you get delay.
I criticize the attitude of the leading banks of the system in the first
half of the year 1928 as first slow and then hesitant.
I come back, therefore, to this, for your most earnest consideration—
the advisability of the attempted separation of the system from too
close contact with the speculative security credit market, of setting
up certain safeguards right in the system itself and primarily in the
Federal Reserve Board. I hope it will not be necessary, but if it is
not necessary, it will not do any harm anyhow. I would myself, if
I were at any time for an affirmative policy of buying Government
securities—I would myself feel more comfortable in my position, if
the law required at least four other of my colleagues to be joined to
make that policy effective. You must not leave it too easy for the
Federal reserve system to inflate. We have had too much inflation
in the Federal reserve system, and its favorite instrument is the openmarket purchase of Government securities.
We have had something of an obsession for easy money in the
system, a feeling that it makes the atmosphere of business; that it
can stop a recession of business and turn a period of depression into
one of recovery.
The CHAIRMAN. In line with that, what is the meaning of the 2
per cent rediscount rate in New York now?
Mr. M I L L E R . I think the 2 per cent rediscount rate is intended to
be notification to the people and to the world that credit conditions
are very comfortable, sound and easy in our leading money markets
and in the leading money markets of the world, and that no harm
will result from a rate as low as 2 per cent at the leading reserve
bank and that it might do something to release the business mind
of the country from the grip of fear in which it is still held.
The CHAIRMAN. Doctor, would you care to comment on the question of affiliates, as to their prohibition or as to a requirement of
examination and public report?




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Mr. M I L L E R . Yes. I have not very much to add to what has
already been said here, and what I think will be said better by others
who are to follow. I t is regrettable that there are so many of these
investment affiliates of banks. If we had not had these affiliated
institutions in 1928 and 1929, we should not have had as bad a
situation, speculatively, as we have had, I am satisfied. Some of
the banks of the country have not been operated strictly and only as
banks of discount and deposit. Some of them have at times had a
major interest in the operations of their affiliates. To speak frankly,
some of these affiliates have been little more than market operators.
By reason of their access to the credit facilities of the banks with
which they are affiliated, and the access of the banks to the Federal
reserve system, it has been made very easy for investment affiliates
to spread into dangerous zones. If we had not a condition to deal
with, I would think it a prudent safeguard of the law to absolutely
discountenance these affiliated relationships. I t is not, however, an
easy thing to turn back and unscramble. Therefore, I suppose the
development has got to be viewed in a more or less practical light,
and find out what is the best thing to be done in the circumstances.
I should say a very rigid examination of these affiliates, regular
examinations, some supervision and control over practices, is a
necessity.
Senator WALCOTT. I should like, apropos of previous conversations as to suggestions, to ask you, Doctor Miller, whether you would
not be willing to put into writing some suggestion by which we could
establish these checks and controls—perhaps other than placing the
minimum of votes necessary to approve at a higher point—at your
convenience, I mean. Does that meet with your approval, Mr.
Chairman.
The

CHAIRMAN.

Yes.

Mr. M I L L E R . I will be glad to do that if the committee will per
haps aflford me the opportunity of presenting the memorandum
later on.
The CHAIRMAN. We shall be glad to do that.
Mr. M I L L E R . I think, if you wish, I might comment upon one of
the particular amendments here, which has been devised to control.
Mr. W I L L I S . Which of the amendments is that?
Mr. M I L L E R . Amendment

Senator WALCOTT. N O . 11
Mr. M I L L E R . The amendment that when a bank borrows on its
bills payable, collateraled by Government securities, it may not increase its call loans.
The CHAIRMAN. The 15-day provision.
Mr. M I L L E R . I would say that the committee ought to have some
competent person who is in sympathy with your purposes analyze
the effects such a restriction as the amendment contemplates may
have on the operation of the call-loan market.
I do not think it desirable to impose restrictions that are not
absolutely necessary. I think it is very undesirable to do anything
that will unnecessarily interfere with a free capital market or a free
short-term money market in this country. I should be loath to see
anything unnecessarily done that would say, in effect, to A " Y o u
shall not loan to B , " when they are both private concerns.
The CHAIRMAN. Would you revert to a bond secured currency?




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149

Mr. M I L L E R . N O ; I would not.
The CHAIRMAN. Are you not in danger of doing that, under that
Mr. M I L L E R . I do not think so. I think under a wholesome operation of the Federal reserve system—that is, making these institutions
function as banks of rediscount
The CHAIRMAN. Yes, but the suggested alteration in the law is
brought about by what some of us considered the very unwholesome
operation of the system.
Mr. M I L L E R . Yes; I understand so.
The CHAIRMAN. We were told, when that provision was incorporated in the statute, that the purpose of it was to guard a bank against
unexpected withdrawal of deposits or embarrassment in an emergency,
and our information—not disclosed to you at this inquiry—my information has been that it has been used largely, if not principally, for
stock speculative purposes.
Mr. M I L L E R . Well, I would say as to that, when we look at the
whole sequence of circumstances and facts in the years before the
crisis, that the member banks sinned less than they were sinned
against. The inflation which caused bad banking came largely through
gold imports and the open-market operations of the Federal reserve
system. Then when the Federal reserve retired from the market and
sold securities, it undertook to get back money from the member
banks, and forced them to come in and rediscount.
The CHAIRMAN. Well, that is an emergency.
Mr. M I L L E R . Yes, they were caught, as it were.
The CHAIRMAN. The provision is not used simply and solely for
that, by any means, if my information is at all accurate.
Mr. M I L L E R . I think that is true, Senator, but, Senator, let us not
overlook this: There is nothing in the reserve act that implies any
restriction upon the occasions or the purposes for which the credit
that the Federal reserve banks release to the market through their
open market purchases may be used by the member banks. Whefi
the reserve system puts money into the market by open market
purchases, the money goes eventually to the highest bidder, and inasmuch as the open money market of the country is first and foremost in
New York where the great call market is, that is the market to which
the Federal reserve money tends to go. And where it first tends to
go, it has a tendency to stay.
We talk much of the fluidity of money and credit. The fact is that
it is sometimes very sluggish in its movement and tends to remain
where it is first put out—that is the New York call-loan market. I t
will stick there if there is a good demand for it.
That states the case as to our open market operations. These
great funds which have on occasion been released to the open market,
as in 1927, by the Federal reserve, go into the pool of money and
the member bank which gets some of it may not know where this
new money is coming from
The CHAIRMAN. But you are proposing to put a brake on that operation by requiring that five members of the Federal Reserve Board shall
vote to authorize anything of the kind.
M R . M I L L E R . Yes.
The CHAIRMAN. What

this provision means is to put a brake on
this thing of using the 15-day direct credit, for stock speculative
purposes.




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Mr. M I L L E R . I think what happens is this: When the banks come
into—let us speak particularly of the New York banks—when they
came, in 1928 and 1929, to rediscount their bills payable at the Federal
reserve bank, it was not primarily for the purpose of making new
brokers' loans. They were being subjected to pressure by some of their
large depositors withdrawing their money and lending it directly to
the call market. I do not believe t h a t there will ordinarily be any
considerable amount of rediscounting or borrowing on bills payable
from the reserve banks for the purpose of making new speculative
loans, except when a condition has been permitted to develop where
the reserve bank is trying to contract credit through forcing the banks
to rediscount and the situation does not readily admit of it, because of
the speed of the call-loan market.
M y thought, in the suggestion I have made, Mr. Chairman, is
this: I believe that our troubles will be enormously minimized—in
fact I think we will pretty nearly get rid of most of them—if the
Federal reserve banks are operated as institutions of rediscount.
The very reason they have not been primarily operated as institutions of rediscount is that the rediscount control is effective against
voluntary inflation by the member banks. They do not like to
borrow, they do not like to show indebtedness. I think you will find
in some of the testimony before congressional committees the statement made by officers of some reserve banks that the trouble with the
rediscount is not that it is not effective, but that it is ordinarily too
effective against member bank borrowing to enable the system to
use it when it wants to create "easy money'' or an expansion of
credit. But, almost by the same token, it has proved in its actual
application an ineffective instrument for forcing a contraction of
credit except by punitive and destructive rates.
The CHAIRMAN. Of course; and for that reason they have resorted
to the open-market operations and the open-market operations have
practically submerged the rediscount operations.
Mr. M I L L E R . That is true. But what I have in mind is not withdrawing the open-market operation from use, but restricting its use
to rare occasions when resort to it may be truly necessary. I t is in
the nature of a surgical operation of great value and essential in
circumstances.
The CHAIRMAN. I t is not proposed here to withdraw the 15-day
privilege. Frankly, it is my view that it ought to be repealed, but
this is a proposed modification of it.
Mr. M I L L E R . Yes. I should regret to see it repealed; it would
not, I think, be practicable to repeal it.
Senator BULKLEY. I do not yet see your objection to prohibiting
the member bank from increasing security loans at the same time
it has its secured bills with the Federal reserve banks.
Mr. M I L L E R . Well, let us look at Chart IV, "Brokers' loans."
I t will be noticed that funds, as witness 1927, pour into the call-loan
market from all over the country, whenever there is an accumulation of banking reserves beyond what the banks can find good use
for at home. The banks usually send the most considerable part of
their surplus money to New York—usually for investment in call
loans, especially when the rate on call loans is attractive. Bankers
still use the phrase that was current in pre-Federal reserve days, and
describe the call loan as "secondary reserve." Among the interior




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151

banks it is so treated and used. The advantage of a good secondary
reserve is that you can get it when you want it and in the meantime
get a return on it. In other words, when you call your loan, you must
be sure that you will get the money, otherwise it is a poor reliance as
a secondary reserve.
Now, in practice, as loans are called in New York, in any considerable volume, by-interior banks, there are going to be great gyrations
in the call rate, perhaps at times flurries in the stock exchange and
even panicky conditions, unless the banks of New York can stand
under the situation and take over the loans called by the interior
banks in whole or in part. The result is that the New York banks—
I do not mean the reserve bank, but the large New York member
banks—whether they like it or not, but simply because they are the
leading banks in the leading money center of the country, are obliged
to step into the breach and assume an obligation to the money market—even those who would prefer not to become thus involved.
The CHAIRMAN. Some^of them do not seem to think they owe one
whit of obligation to the Federal reserve banking system.
Mr. M I L L E R . I am the last who will deny that. That is, or rather
was, only too true.
Mr. W I L L I S . One point right there, Mr. Miller: You spoke of call
loans as a secondary reserve. Yesterday I think it was stated that
whenever pressure was brought on a bank the first thing it did was to
call in its call loans. Is it not a fact that a large percentage of
present call loans are frozen, that is, they are call loans only in name
and only a small fraction, relatively, are call loans in fact?
Mr. M I L L E R . I would not admit that, Mr. Willis. I would say the
call loan to-day is a highly liquid loan.
Mr. W I L L I S . The statement of many people is that you can not
call the loans without causing disaster.
Mr. M I L L E R . Why, $5,000,000,000 have been called since September, 1929. Look at the "Brokers' loans" chart (Chart IV). No
banking system in the world has ever been subjected to the pressure
and the test that the New York banks were in the last part of 1929.
Loans were called, they were met, they were liquidated; and the
marvelous thing is that the banking situation in New York at that
time had the strength it had. Of course it would not have had it if
the Federal reserve bank had not been across the street with its vast
resources to supplement
Mr. W I L L I S . YOU are speaking of an operation that occupied a
number of months.
Mr. M I L L E R . I t might be said to have been an operation that
occurred within a short period of time, about $3,500,000,000 were
liquidated in two and a half months, so far as the heaviest withdrawals and the acute pressure were concerned.
The CHAIRMAN. What would have happened if the Federal reserve
system had not been in existence?
Mr. M I L L E R . Pardon me, Mr. Chairman. I think it well worth
while to put into the record at this point that a billion of call loans
were taken over by the New York banks
Mr. W I L L I S . At the height of the panic?
Mr. M I L L E R . A billion of loans were taken over in a single week.
The CHAIRMAN. What would have happened to the country if it
had not had the Federal reserve system?




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Mr. MILLER. If we had had no Federal reserve system, Senator,
I do not think we would have had as bad a speculative situation as
we had, to begin with.
The CHAIRMAN. We have had ruinous speculative situations when
we had no Federal reserve system.
Mr. M I L L E R . We have had, yes, but I doubt whether we would
have had as bad a one as developed from 1927 to 1929.
The CHAIRMAN. Of course not. You have made that clear, t h a t
the Federal reserve system provided a terrific expansion by these
open-market transactions.
Mr. M I L L E R . I do not want, however, to give an exaggerated sense
of their importance. The importance of those open-market purchase
operations is their timing. I t is not what they contribute in the way
of funds over a long period of time, but what they do at certain brief
periods of time to create redundant and therefore unhealthy credit.
I was going to say, on the amendment, that anything which seriously
threatens the liquidity of the call loan market in New York—well,
would be a mistake. I t can not be done. Therefore, if you should
proceed with your amendment, with the purpose of which I am in the
most complete accord—and by purpose I mean to restrict the use of
Federal reserve credit in speculative loans
The CHAIRMAN. T O a reasonable percentage.
Mr. M I L L E R . Yes, I would think it advisable to add a proviso that
would give the board the power, when the public interest required
it—say, in a time of emergency—to suspend the restriction for limited
periods of time—not over 10 days, perhaps, at a time; and, then only
on affirmative vote of five members of the board.
The CHAIRMAN. The operation of the provision was only intended
for an occasion of that sort.
Mr. M I L L E R . Yes. Well, as I understand the provision, it would
estop any bank from borrowing on its bills payable at the Federal
reserve bank when it increases its loans on call.
The CHAIRMAN. On its direct 15-day note?
Mr. M I L L E R . Yes. When money is withdrawn by an interior
bank—say, in Cleveland—from New York, it exerts pressure on the
money market in New York. Either you let t h a t thing work out its
effect or you try to ease the operation in some way so as to give it
less of a disturbing character. For instance, when New York was in
a near-panic condition in the last week of March, 1929—I think it
was the 26th or the 27th of March, and I think it was in connection
with that situation, Senator, that the statement was made by the
gentlemen to whom you referred this morning—that condition was
immediately due to the fact that a large interior bank had decided to
readjust its position in accordance with the expressed desire of the
Federal Reserve Board and began to call in its loans. I t did not call
loans in New York. I t called them in another market. B u t even
so, the pressure it put upon that other market forced those whose
loans were called, to try to get accommodation elsewhere. For the
moment they were between the devil and the deep blue sea. The
only other market to which they could go was New York.
Now, I take it, it is not your purpose to tie up the Federal reserve
system so tight that we may have these little panics from time to
time which have no bearing upon an improvement in credit conditions,
but which would come to what might be called an inelastic, rigid,




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153

mechanical lockup of the money markets of the country at times. I
do not conceive how we could operate in this manner, unless the country
feels that there is virtue in the old-fashioned panic, and that when we
have a panic, it had better be a quick and all-embracing one, a complete liquidation and clean-up, with tremendous mortality in the
business and financial world, and yet, when
The CHAIRMAN. Well, why not go back to the old system, and
throw our reserve funds and the whole country into the maelstrom of
stock speculation?
Mr. M I L L E R . Because I think we can operate our present machinery
with results that, on the whole, will be much better than the old system and will, if competently handled, avoid both the excessive booms
and the later disastrous breakdowns. That is the primary function
of the reserve system. And it stands a failure unless it can meet
that test.
The CHAIRMAN. I t was never intended that our machinery should
be operated so as to support speculative call market operations.
Mr. M I L L E R . Well, I am satisfied that if the reserve system has its
hands tied against too easy a yielding to the seductive expedient of
inflation through open market purchase operations, we need not
worry so much about speculative abuses and excesses. The only
nullifying influences against a prudent Federal reserve attitude that
might happen would be uncontrollable imports of gold, which would
put the member banks in an independent position. That, as you
know, has been a large factor since the war.
The CHAIRMAN. I t is half-past 1 now. Some of the members of
the committee want to go to lunch, and I have no doubt you gentlemen do also
Senator BULKLEY. I should like to take just one minute more to
try to understand that thing. I do not just understand the force of
this objection to section 11. Do I understand you to say that all of
the banks would be likely to be struck at the same time with that
same pressure, and just because you deny a single bank the right to
carry on those operations under section 11, the whole structure would
fall?
Mr. M I L L E R . No; I think we may be discussing different matters.
Senator BULKLEY. What I am discussing is the rule proposed in
section 11, that the banks should not simultaneously borrow on a
15-day security note and at the same time increase their security
loans.
Mr. M I L L E R . I think it would prove unworkable, except at the
cost of occasional serious stringencies in the leading money market of
the country.
Senator BULKLEY. YOU started to develop the proposition that
there might be a pressure from some outside place, and New York
might want to take over those loans called somewhere else.
Mr. M I L L E R . The "Brokers' loans" chart (Chart IV) gives a very
good illustration of the matter in 1929. I t is an exaggerated one,
of course. But the curves make clear that the tremendous liquidation
of loans which occurred in the call market was accomplished in part
by the New York banks expanding theirs [indicating]. What would
have happened if these loans tiould not have been liquidated? We
might have been back on a clearing house basis. I t was the liquidation of those loans that perhaps did more than any one single thing




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to prevent the breakdown in the autumn of 1929 from becoming a
crisis and prostration beyond anything ever before experienced.
Senator BULKLEY. Unquestionably that facility was necessary
to be used in that emergency, but there having been no restriction
before, the banks all felt they had that facility to rely upon. B u t
what if they felt they could not do that?
Mr. M I L L E R . T h a t is a different matter, a very different matter.
The CHAIRMAN. H O W did they operate before they could borrow
on their 15-day paper?
Mr. M I L L E R . Let me have your question again, Senator.
Senator BULKLEY. I asked you why this restriction in here is not
practical, and you assured me that it would have been very terrible
at the time of the crash in 1929 if this facility had not existed. Now,
I answer of course it would have been terrible to withdraw it at t h a t
moment and there would be no solution of it, but what if all the time,
for all of 1929 and the years back of 1929, the banks had known in
advance they would not have that facility to rely on? Would not
they have steered a much better course?
Mr. M I L L E R . I doubt whether it would have made a big difference,
though on that I do not feel sure. I doubt whether it would, because,
as I have already said, the member banks were sinned against by
having been inflated from the outside. I t sounds a bit extravagant,
perhaps, to hear that, but it'nevertheless throws an essential light
upon the facts. The Federal reserve by its open-market policy
practically forced them to make the call loans complained of.
What was the object of Federal reserve policy in 1927? I t was to
bring down money rates, the call rate among them, because of the
international importance the call rate had come to acquire. The purpose was to start an outflow of gold—to reverse the previous inflow
of gold into this country. I am holding no brief for the New York
banks, but I think if I had been the head of one of those banks, I
should have been very much troubled in 1927 and 1928 as'to what my
duties were to my customers, to my stockholders, and to the situation.
Frankly we must admit the fact, that under the reserve system there
has, perhaps inevitably, taken place a relaxation of the sense of individual responsibhty that the banker feels for his own safety and for
the general situation. He swims with the tide and looks to the Federal
reserve to regulate the tide.
The CHAIRMAN. That is the responsibility we are trying to impose
upon him by this amendment.
Mr. M I L L E R . I think the responsibhty for maintaining good credit
and banking conditions belongs in the first instance, on the reserve
banks, of which there are only 12. The member banks number
thousands. The reserve banks should be the leaders. I t is their
business through sound policies and practices to control.
Senator, there was no great variation in the average amount of
call loans made by the New York City banks during the years 1927 and
1928, except in the latter part of that year, until we come to the panic
of 1929. They attained their quota back in 1924-25.
How was the situation met at the time of the crash in 1929? As
far as the call loan market was concerned, it was met by a precipitate
decline in the total volume of call loans, by a rapid decline of the volume of call loans of outside banks and a precipitate rise of the volume
of loans of the New York City banks. The call-loan market was under




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155

terrific pressure by reason of vast withdrawals of funds and the New
York banks stepped into, and had to step into the breach to avoid an
even worse catastrophe than actually occurred in those critical weeks
of October and November, 1929.
The CHAIRMAN. This provision was intended to preclude the necessity of pressure.
Mr. M I L L E R . SO I interpret it. But it must not be overlooked
that we start now with an abnormal condition—that the New York
banks have been holding the bag for a very large number of call loans
that have been in liquidation ever since the panic of 1929. By force
of circumstances, they have had to assume more call loans than they
wanted. They could not I think, operate, if we experienced a considerable revival of business, without some difficulty, if they were
denied access to the Federal reserve banks for funds, because of the
contingent liability they have been forced to assume in connection with
the call loan market.
Senator BULKLEY. I hope you do not feel we are doing this as a
measure of discipline against the banks.
Mr. M I L L E R . N O ; sanitation.
Senator BULKLEY. That is it.
Mr. M I L L E R . I am with you, but want to point out some difficulties.
The CHAIRMAN. If it is agreeable to you, gentlemen, we will adjourn
until 3 o'clock and try to conclude the hearing.
(Whereupon, at 1.45 o'clock p. m., the committee recessed until
3 o'clock p. m.)
AFTER RECESS

The subcommittee resumed its session at the conclusion of the
recess at 3 o'clock p. m., Hon. Carter Glass, chairman, presiding.
The CHAIRMAN. The committee will come to order. Doctor, in
order to save time, I am authorized to count some of my colleagues as
present here, and Doctor Willis, the expert adviser of the committee,
wants to ask you one or two questions. Would you mind excusing me?
Mr. M I L L E R . Certainly not.

The CHAIRMAN. And you may just proceed. Then I want to ask
you one or two questions myself.
Mr. W I L L I S . I just want to clear up a question or two, Doctor
Miller, that I thought were left over from this morning.
Mr. M I L L E R . Yes, sir; that will be agreeable to me.
Mr. W I L L I S . I have no new questions to speak of. In your testimony this morning with reference to the open market operations you
spoke of the general effect of the open market sales, and I want to
ask you this specific question: Do you think that a sale of the open
market portfolio of the reserve banks brings about a real contraction
of credit, or does it simply lead to increased borrowings on the part
of member banks at reserve banks, perhaps on the very securities
that have been sold?
Mr. M I L L E R . Yes, sir. I t has, I think, never effected a noteworthy contraction of the general volume of credit.
Mr. W I L L I S . Never?
Mr. M I L L E R . Never, except as to its own credit outstanding and
the only important instance of that since 1922 occurred in 1929 in
the first half year when "direct pressure" was being applied. Dis-




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

count policy has usually shifted the load of credit supplied by the
Federal reserve banks from the open market portfolio to the portfolio
of bills discounted, bills payable, and sometimes, notably at the end
of 1928, to acceptances. What it does do, however, is to make money
firmer, and to firm money conditions by reason of the fact that the
member banks, generally speaking, have a rather salutary prejudice
against borrowing unnecessarily. They are not, therefore, much
disposed to extend themselves when they are in debt to the Federal
reserve banks. And hence the familiar statement of the two leading
working principles of the Federal reserve system; to ease money, buy
securities from the open market; to firm money, sell securities to the
open market and put the member banks under the necessity of
rediscounting.
There is a view current in the reserve system that the mere fact
that member banks are obliged to rediscount after a period of easy
money in itself works a sufficient correction of the credit position;
in other words, that the fact of rediscounting, rather than the actual
rate of rediscount imposed by the Federal reserve system, is the
important thing in working away from an easy money position.
T h a t theory, in my judgment, in the light of the actual experience
of the Federal reserve system, needs very serious qualification. I
should say that overconfidence in the validity of that principle is, in a
very large measure, responsible for the ineffective discount policy
pursued by the reserve bank of New York in the year 1928.
Mr. W I L L I S . Have you found that where sales took place in the
open market in the portfolio, I assume, of Government securities,
they not infrequently resulted in increased borrowings on the basis
of those very securities?
Mr. M I L L E R . On the basis of like securities; yes.
Mr. W I L L I S . I do not mean upon the identical units. I mean, has
that not increased frequently the borrowings on the same class of
securities?
Mr. M I L L E R . On the basis of Government securities, 1 think that
is undoubtedly true.
Mr. W I L L I S . And what would be the effect then of such a circular
transaction as that?
Mr. M I L L E R . Such as what?
Mr. W I L L I S . Such a circular or repetitious operation as that.
Mr. M I L L E R . I tried to point out the effect. I t puts the banks
under pressure.
Mr.

W I L L I S . Yes,

sir.

Mr. M I L L E R . And, if you please, in a time like the present it
might tend to exercise an undesirable firming of money. The banks
are extremely reluctant to show borrowings from Federal reserve
banks. I t is, on the whole, a very healthy and a very desirable
feeling, but it sometimes deters resort to the Federal reserve banks
under conditions that may make such resort desirable and legitimate.
Such are present conditions.
Mr.

W I L L I S . Yes,

sir.

Mr. M I L L E R . But in periods of expansion the mere fact of rediscounting is not an adequate deterrent. T h a t is abundantly demonstrated by what took place in 1928. An effective discount control
in a time of inflation requires teeth in the shape of rates—stiff rates.




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157

Mr. W I L L I S . I have a further question of theory that I would like
to put merely by way of closing up something that I think you have
very clearly stated. As a result of the experience of the past few
years do you think that the reserve system can control the use to
which the credit is put as distinct from its amount? Can it control
the use to which credit is put at all?
Mr. M I L L E R . Yes, sir; I think so, within broad categories of credit.
Mr. WILLIS. Without qualification?
Mr. MILLER. Yes, sir; without qualification.
Mr. W I L L I S . NOW, may I ask you one question about the organization of the open-market committee of which you spoke this morning?
Is that a successor to the governors' conference that was originally
established?
Mr. M I L L E R . N O . The governors' conference still continues.
Mr. W I L L I S . Independent of this committee?
Mr. M I L L E R . Yes, sir. At times the two overlap in practice,
because their membership is identical. The lines are not, therefore,
drawn narrowly between them. At the present time, as I think I
pointed out this morning—at any rate I meant to—the constitution
of the open-market committee calls for a membership of all 12 Federal
reserve banks.
Mr. W I L L I S . Governors?
Mr. M I L L E R . Governors, yes, sir, have been designated by the
banks as representatives.
Mr. W I L L I S . SO it has the same membership as the conference?
Mr. M I L L E R . I t has the same membership as the conference.
Mr. W I L L I S . But it has different meetings and is a different body
entirely?
Mr. M I L L E R . I t is the same body of men but in a different capacity.
The CHAIRMAN. I have understood, Doctor, that the governors'
conference was practically defunct. I have understood that by
action of the Federal Reserve Board itself the governors' conference
is not permitted to function except upon request or suggestion of the
board.
Mr. M I L L E R . That is correct. I t is and has long been in effect
a conference with the board.
The CHAIRMAN. Yes.
Mr. M I L L E R . And the

call for the conference is issued by the board.
And I think it is also a fair statement to say, not that it is defunct,
but that its deliberations are mainly confined to technical matters.
The CHAIRMAN. What I mean is it seemed to many persons, and
apparently to the board itself, that the so-called governors' conference
bade fair to usurp the proper functions of the board itself, and there
had to be restraint upon that situation.
Mr. M I L L E R . Yes, sir; I think that is true. I think it was in 1916
or 1917 that the board felt some concern in the matter, and it was
then that it decided that these conferences should be held only when
called by the Federal Reserve Board. And that meant that they be
held in the board's offices in Washington, not elsewhere,
In actual operation, and I want to call your special attention to
this, the reconstitution of the open market committee provides for
12 members, and those 12 members are by designation of the banks
their governors. The Governors' conference consequently is relegated
to a subordinate position, except as to this, that usually when the
34718—31—PT 1




11

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NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

governors meet in conference and on the call of the board in the spring
of the year and in the autumn of the year they consider open-market
matters. That is, they meet as a governors' conference and then as
an open-market conference.
Mr. WILLIS. HOW often does the open market committee meet?
Mr. MILLER. It has no regular meeting, no regular meeting date.
Mr. WILLIS. But on the average it would meet about how often?
Mr. MILLER. It has met in the last year more frequently than ever
before. I would be very glad to supply that for the record. I should
say possibly, including two governors' conferences, which resolve
themselves into open-market committee meetings, anywhere from
five to seven times. (There were 11 meetings altogether held in
1929 and 1930.)
Mr. WILLIS. And does that committee in the interim have other
meetings? The functions of that committee—are they exercised by
a small subcommittee which is instructed at the general meeting?
Mr. MILLER. Senator, would you like to have a copy of the constitution of the open-market committee?
Here is the present procedure:
OPEN MARKET PROCEDURE AS ADOPTED BY THE FEDERAL RESERVE BOARD MARCH
25, 1930

(1) The open market investment committee, as at present constituted, is hereby
discontinued and a new Committee, voluntary in character, to be known as the
open market policy conference, is set up in its place.
(2) The open market policy conference shall consist of a representative from
each Federal reserve bank, designated by the board of directors of the bank.
(3) The conference shall meet with the Federal Reserve Board upon the call
of the governor of the Federal Reserve Board or the chairman of the executive
committee, after consultation with the governor of the Federal Reserve Board.
(4) The function of the open market policy conference shall be to consider,
develop and recommend policies and plans with regard to open market operations.
(5) The time, character, and volume of purchases and sales shall be governed
with the view of accommodating commerce and business and with regard to
their bearing upon the credit situation.
(6) The conclusions and/or recommendations of the open market policy
conference, when approved by the Federal Reserve Board, shall be submitted to
each Federal reserve bank for determination as to whether it will participate in
any purchases or sales recommended; any Federal reserve bank dissenting from
the proposed policy shall be expected to acquaint the Federal Reserve Board
and the chairman of the executive committee with the reasons for its dissent.
(7) An executive committee of five shall be selected from and by the members
of the conference for a term of one year, with full power to act in the execution
of the policies adopted by the open market policy conference and approved by
the Federal Reserve Board, and to hold meetings with the board as frequently
as may be desirable.
(8) Each Federal reserve bank participating in the open market policy conference shall be considered as waiving none of its rights under the Federal reserve
act; each Federal reserve bank shall have the right at its option to retire as a
member of the open market policy conference, but each bank while a member of
the conference shall respect its conference obligations.

The CHAIRMAN. It might be well to have it for the record.
Mr. MILLER. Yes, sir. There is an executive committee consisting
of five reserve banks, those being the banks of New York, Boston,
Philadelphia, Cleveland, and Chicago, the five largest reserve banks
that are in the near-by territory. The San Francisco Bank by size
would properly be a member of that committee, but it is too remote
to make it practicable for the governor of that bank to be ready to




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159

respond on short notice to calls for a meeting of the executive committee.
Mr. W I L L I S . I have one more matter, and then I have finished. In
regard to the foreign relations of the system, are those in any way
brought now to the attention of the board regularly for consideration,
approval and the like, or how are they managed?
Mr. M I L L E R . I should say t h a t if you mean by foreign relations,
operations that involve the Federal reserve banks, those operations
being subject to the approval of the Federal Reserve Board, are
necessarily brought before it. I think there are some matters affecting foreign relations or contacts t h a t have not yet been settled, or at
any rate settled satisfactorily, that still need adjustment. There is
some difference of opinion, at any rate, among the members of the
board, some feel a concern about the scope of some of these relations
and these operations as they have sometimes been handled—particularly in the informal and preliminary stages. But it looks as though
there is going to be improvement in this respect.
Mr. W I L L I S . And do you think the board should authorize or share
in conferences with the heads of other central banks or the foreign
central banks?
Mr. M I L L E R . The board has no direct official contact with central
banks. I think the central banks of Europe, following tradition and
habit, regard a contact as a contact from bank to bank. So t h a t
the Federal Reserve Board, not being an operating board or a bank,
not conducting a banking business, or itself in a position to open
any accounts at the instance of a foreign central bank, is regarded
as not immediately involved in an operating sense. The result is
that the usual contacts are between the banks themselves or their
representatives.
The CHAIRMAN. Has not that produced the impression abroad
that we have a central bank in the United States, and that that
central bank is the New York bank?
Mr. M I L L E R . I think that impression has existed to a certain
extent, I would say to a considerable extent.
I was abroad last summer and I should say that it does not exist
to the same extent it formerly did; and let me add, in a spirit of
frankness, because of some diminution in the prestige of the American
reserve system in the eyes of some European bankers, I think they
are becoming disposed to inquire more into the constitution of the
reserve system. I t has puzzled them. I t seems a bit complicated
in its set-up, and they do not know exactly just what are the relative
positions of the reserve banks and the Reserve Board in the functioning of the reserve system.
The CHAIRMAN. Would you say that anything that detracts from
the diginty of the supervising board rather has a tendency to minimize
the importance of the Federal reserve system?
Mr. M I L L E R . I am not sure of that, Mr. Chairman. I would say
that in the long run the importance of the Federal Reserve Board as a
factor in the Federal reserve system is going to depend upon what it
does rather than upon what it seems. A fully competent board will
be accorded the respect to which it is entitled and will not allow itself
to be pushed aside where it has ultimate responsibility.
The CHAIRMAN. I confess I thought it an extraordinary situation
at one time when the heads of foreign central banks found it desirable




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

to visit this country and discuss the relation of those banks to our
banking system. The only contact that the Federal Reserve Board,
which is the central and supreme authority of the system, had with
these gentlemen, was through the courtesy of the governor of one of
the Federal reserve banks.
Mr. M I L L E R . Yes, sir. You are perfectly right in that. T h a t was
a rather sorry and shabby episode. On the other hand, if the Federal
Reserve Board had taken a position at that time, as it was its power
and duty to do, on the matter which was the occasion of the visit to
which you have referred, I think the contact, brief and informal
though it was, would have sufficed to leave the visiting central bankers
in no doubt where the ultimate responsibility and source of power in
the matters which brought them to the United States resides—in the
Federal reserve system.
The CHAIRMAN. Doctor, there is a question that I would like to
ask. I have hesitated to ask it lest you might be reluctant to answer;
and that is in relation to one of the reasons of this proposed bill of
mine having reference to the organization of the Federal Reserve
Board itself, particularly as to the ex-officio members. In short, the
bill proposes that the Secretary of the Treasury shall no longer be a
member of the Federal Reserve Board. Would it embarrass you at
all to make some comment upon that?
Mr. M I L L E R . Not in the least.
The CHAIRMAN. I would be glad to have your view of it.
Mr. M I L L E R . In fact, I think that question was asked me two
years ago, when I appeared before the Banking Committee of the
House.
The CHAIRMAN. Yes, sir; but I had no memory of that.
Mr. M I L L E R . I think that the Secretary of the Treasury should
be eliminated from membership in the Federal Reserve Board. If I
may continue, I would state my view about the constitution of the
board as follows: A membership of seven with no ex-officio members.
The CHAIRMAN. Not even the Comptroller of the Currency?
Mr. M I L L E R . Not even the Comptroller of the Currency. I have
reached that conclusion after long years of experience. I t is a very
deliberate and a very firm conclusion.
I am satisfied that the Federal Reserve Board will never function
nearly as well as it might and should as long as it is not an absolutely
independent body, made up of men of strength, independence,
ability, and leadership. Because it will become more and more difficult
as we go along to induce men to come on to the board of the character and kind that must be on the Federal Reserve Board, if it is to do
its job, unless they can feel that they are masters in their own house.
The CHAIRMAN. I was about to observe that while we greatly
desired, and while we zealously sought to exclude what is commonly
known as politics from the Federal reserve system, it was felt that in
that larger and better sense there should be some way of having the
public opinion and judgment of the country operate. That means to
say, were we to have a board that seemed to be flagrantly derelict in
its concern for the public interest, the proponents of the original bill
felt that there ought to be some way of reaching a board, if we unhappily should have such a board, through changes of Government,
and that, among other reasons, constrained those of us who had to
do with the thing to put on these ex officio members.




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161

Mr. MILLER. Of course, if the board is constituted as a really independent body, like the Interstate Commerce Commission, and a
member is guilty of a flagrant violation of his responsibilities, or even
an incompetent discharge of his duties, the corrective, I should say,
would be the removal of such member of the board.
The CHAIRMAN. By the President?
Mr. MILLER. Yes, sir; by the President under power specifically
mentioned in the Federal reserve act.
The CHAIRMAN. Of course, that, we felt, was another method of
reaching the board.
Mr. MILLER. That, I think, is sufficient.
The CHAIRMAN. But I agree with you, and I have been very decidedly of the opinion ever since I happened to be, for a brief period,
Secretary of the Treasury, that the Secretary of the Treasury ought
not to be a member of the board for several very important reasons;
in the first place, he has so many other duties of a complex nature
that require his constant attention that he has not any time for the
Federal Reserve Board. From past experience and observation I am
led to doubt that the Secretary of the Treasury attends a meeting of
the board half a dozen times in a period of 12 months.
Mr. MILLER. That has varied. Sometimes it has been more frequent but usually and for the most part very infrequent. But he
may and frequently has been a factor even when not attending meetings.
The CHAIRMAN. Then, again, some of us felt, after the system had
begun to operate, that the Secretary of the Treasury, whether intentionally or unintentionally, exercises an undue influence upon the
activities of the board, and undertakes to draw it to the necessities
of the Treasury rather than of the commerce of the country.
Mr. MILLER. The secretaries of the Treasury have not been much
of a trouble in recent years. That has not been the trouble.
I would be inclined to suggest that if you are going to limit the
ex officio membership to one, that I would prefer to see you eliminate
the Comptroller of the Currency. There is at least this important
consideration for that: The Secretary of the Treasury is usually, I
would say regularly, a man of outstanding position and character.
He is regarded by the country as one of its most important officers.
He has a reputation. He may, by bad advice, involve the good
reputation of the administration of which he is a member. He is
exposed to criticism. Without disparaging in any way the men
that have occupied the position of Comptroller of the Currency,
the type must be admitted to be quite different, nor may we overlook
the fact that the office of the comptroller is one that is subjected to
great pressure, sometimes of a political nature and at times to pressure
when not political, that comes pretty near the border line of the
undesirable.
The CHAIRMAN. By the tenure of the comptroller he should be a
more important official than the Secretary of the Treasury. He is
required to report to Congress, and not to the Secretary of the Treasury. He has a term of six years that overlaps the changes of parties,
or the changes of administration, rather.
Mr. MILLER. The position should be, I think, regarded as one of the
most important in our whole executive mechanism. The comptroller's




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

office is certainly one of great difficulty and multiplicity of duties,
particularly in times of banking strain.
The CHAIRMAN. YOU would not abolish then, I understand, the
office of the Comptroller of the Currency?
Mr. M I L L E R . I am not prepared to say. I think that is one of the
most difficult questions in the whole machinery of the Government's
contact with the banking organizations of the country on which to
reach a satisfactory decision. I have thought at times that it might
be well to transfer the functions of the comptroller to the Federal
Reserve Board. I am of the opinion now that that would be a mistake, that it would turn the Federal Reserve Board into a board of
review of banking delinquencies. I have thought that if the appointment of the comptroller could be made subject to the approval of the
Federal Reserve Board, that might be of value; also, if the comptroller
were to have his contacts with the Federal Reserve Board, where he
now has them with the Secretary of the Treasury. But I am not
clear as to all this as yet. I t presents a most difficult administrative
problem. I may have something to suggest to the committee later on.
The CHAIRMAN. Doctor, unless you have some more observations
that you desire to make we will excuse you.
Mr. M I L L E R . I would like to say just a word, on a matter on which
I was interrupted this morning. I t is with regard to the gold policy
of the Federal reserve system.
There has been a vast amount of talk from time to time in the
European press and in the American press, in speeches and essays,
about the necessity of redistributing the gold of the world. And the
enormous holdings that the United States possesses have frequently
been alluded to as holdings that must be redistributed before the world
can function properly. Something of that philosophy was involved,
I think, in the determinations of the Federal reserve system in 1927
when it engaged in its great easing operation in the money market and
brought money rates down to the point where an outward flow of
gold was stimulated. This flow carried out almost six hundred
millions of gold, a trifle less, by midsummer 1928. I t was a gigantic
operation—without a parallel in peace-time history.
As an economic proposition, among countries on the gold standard
and maintaining a free gold market there can be no such thing as a
maldistribution of gold of any great extent or duration. Nor can
gold be redistributed on any large scale or for any length of time by
the process of central bank control of money rates. You might as
well talk about digging a hole in water as talk about rearranging the
relative levels of gold in the different countries by an artificial
maneuver.
And a rather notable thing is brought out on the gold chart,
Senator, which you will be particularly interested in (Chart I I I ) .
I t is a notable phenomenon that much, if not most, of the gold that
was shipped out in 1927 and 1928 is already back. The fact is sometimes overlooked that gold is the preeminent instance of a commodity
in which there is the nearest approach to absolute free trade, and that
therefore gold has an inevitable tendency to go where it is of the
greatest value or enjoys the greatest security. The gold that went
from the United States to South American countries in 1927 and
1928 in connection with their programs of monetary restoration is
pretty nearly all here again. The flow of gold is a thing that is




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163

governed by economic law, rather than by decrees or policies of central banks. They can operate within narrow limits, but when it
comes to great changes, or redistribution—why, it is impossible.
The maldistribution of gold so much complained of at the present
time as a chief cause of world maladjustment is evidence and an
effect of the maladjustment of the economic and trade relationships
of the leading countries of the world, not the cause. As these maladjustments correct themselves, in time, the maldistribution of gold
will also correct itself.
The CHAIRMAN. Speaking of your foreign relations, upon what
statutory authority would the Federal reserve bank guarantee a loan
of $200,000,000 or $250,000,000 to one of the foreign countries?
Mr. M I L L E R . I t opened a credit.
The CHAIRMAN. Yes, sir; I mean a credit.
Mr. M I L L E R . I t was and is my belief that there is no authority in
law for it. I think the legal opinion under which it was undertaken
was that the authority was implied in the powers of reserve banks to
engage in the purchase and sale of gold.
The CHAIRMAN. Implied functions sometimes, if not often, vitiate
the real purposes of a law. Is not that so?
Mr. M I L L E R . Yes, sir, Mr. Chairman. T h a t is so.
The CHAIRMAN. That is all, Doctor, unless you have some further
observations to make.
Mr. M I L L E R . I have nothing further to say at this time.
The CHAIRMAN. We are greatly indebted to you. I t has been one
of the most illuminating and educational hearings to-day that I have
had the satisfaction of participating in, and we are greatly indebted
to you.
Mr. M I L L E R . I thank you very much, and if there is anything more
that I can do for the committee, I am ready to do it.
The CHAIRMAN. We thank you. We will be very glad to have
any form of suggestion of modifying the existing laws, or anything
of that sort.
Mr. M I L L E R . And in accordance with the request, I think made
by you, or some of your colleagues this morning, I may submit a
memorandum later on.
The CHAIRMAN. Yes, sir. We will be very glad to have you do that.
Mr. M I L L E R . And the documents, too.
The CHAIRMAN. Yes, sir. And if you care to, you may revise your
remarks here.
Governor Hamlin, we would be very glad to hear any statement
you care to make in respect to this.
STATEMENT OF HON. CHARLES S. HAMIIN, MEMBER OF THE
FEDERAL RESERVE BOARD
Mr. HAMLIN. Mr. Chairman and gentlemen, I am very glad to
appear here in response to the request of the committee, and I want
so say in advance that I am going to express only my personal views,
and not necessarily those of the Federal Reserve Board.
The CHAIRMAN. We do not understand that you are going to
express any views of the board. We want your views as an original
and continuous member of the board.




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NATIONAL AND FEDERAL, RESERVE BANKING SYSTEMS

Mr. HAMLIN. I shall state my views simply, and I want it understood that in stating them that if I differ with any policies undertaken
by the system that I am not undertaking to criticise any one Federal
reserve bank, and that for the purposes of what I have to say I am
ready to assume that I am jointly responsible with any bank apparently criticised.
The testimony given yesterday indicating that a certain bank did
not approve of the so-called direct pressure of our board, and did not
approve our refusal to permit the increase in discount rates, and the
statements made in connection with both, seem to me to make it
incumbent upon me to tell the facts which governed my action to
the Senate committee.
A great deal has been said in the press about this so-called controversy between the Federal Reserve Board and the Reserve Bank of
New York in the matter of raising the discount rate. I t is not proper
to call that a controversy. The Federal Reserve Board has a distinct duty, the power to review a rate initiated by a Federal reserve
bank. The fact that the board, in exercising its power of review may
not approve the rate initiated by the bank should not be called a
controversy any more than to call a decision of the Supreme Court of
the United States a controversy when it overrules the decision of a
lower United States court. Each party was acting under its lawful
right, the bank to initiate the rate, and the Federal Reserve Board to
review the rate.
There is another misapprehension that has formed the basis of a
great deal of the criticism made of the Federal Reserve Board throughout this so-called difference of opinion. I t seems to be almost universally assumed that the difference between the board and the New
York bank began February 14, when that bank asked to increase its
rate to 6 per cent, and continued until August 9, when the board, it is
claimed, reversed itself, and agreed to the increased rate of 6 per cent.
I think that is one of the fundamental errors that has been going
around through the press and the minds of many bankers, and I want
to say emphatically that this so-called policy of direct pressure began
February 7, when the board issued its warning, and was suspended by
the board early in June, and a formal note to that effect was sent to the
Federal Reserve Bank of New York on June 12. But, as a matter of
fact, it was practically suspended, or agreed to be suspended, the
very latter part of May or, at the latest, very early in June, for on
M a y 22, the governor and chairman of the Federal Reserve Bank of
New York came before the board, and on M a y 31 the chairman,
Mr. McGarrah, wrote the board a letter, in which he said that under
the so-called direct pressure the banks were really afraid to borrow
at all, and that there was coming a time very soon when there would
be an absolute necessity for more Federal reserve credit—I think he
intimated perhaps 100,000,000 more; and that as to the discount
rate, while they still would like to have it advanced, yet that had
become relatively unimportant as compared with reaching some understanding with the board toward easing our discount policy.
From that time on the discount rate divergence of policy practically
went out of existence. As I have said, the board practically agreed
then that it would suspend direct pressure for the purpose of enabling
the banks to get the credit that they needed. That was not made
public for obvious reasons. It, however, got into the public press




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

165

through an article by Mr. David Lawrence. I do not known how he
got his facts, but his facts were essentially correct—that the board
was satisfied with the result of direct pressure, and it determined
that it would be wise for the present at least to suspend it. Now
that is the real history. I shall come to that again in a minute.
And now, as to credit expansion. Comparing the years for the
period covering 1922 to 1927, there was a very expanded condition;
I won't say inflation, because I have never been able to define that
term. I think to define Einstein's Theory of Relativity would be
far easier, because every one has a different definition of inflation. So
I am simply going to say there was, in my opinion, an undue expansion
as between security loans and commercial loans covering the period
of 1922 to 1927. In that period security loans increased three and
nine-tenths billions for the reporting member banks, or over 100 per
cent.
Commercial loans in the same period increased one and three-tenths
billions, or merely 18 per cent.
In contrasting security with commercial loans I want to point out
that the words "commercial loans'' may be a little bit misleading.
Of course, it includes all commercial loans. But the phrase we use
in the Federal reserve, I think, is "other loans", because there are
real estate and other loans in there. And, of course, on the other
hand, under the title "security loans" there may be loans made for
genuine agricultural or business purposes. But I merely draw that
distinction in a general way knowing that the term "commercial
loans" is not absolutely accurate.
In that same period, July, 1922 to 1927, the gold stock increased
$782,000,000 and the member bank reserves nearly $500,000,000.
The balanced that did not go into the member bank reserves went into
the money in circulation. And on that increase of member banks'
reserves during those years 1922 to 1927 the member banks expanded
at a ratio of about 12 to 1, which seems to me to answer any claim that
in any way we had "sterilized" this gold. If you take the annual
averages for the years 1922 to 1928, you find that again it was largely
the gold imports which formed the basis of this expansion, inflation,
or whatever you want to call it, and only relatively the Federal reserve
credit.
For example, in 1928, the average for the year of Federal reserve
credit outstanding was $79,000,000 less than it had been in the same
period in 1922. So that it is fair to say in that period although the
member bank reserves increased about $500,000,000 yet gold stocks
also increased about $750,000,000, showing the expansion was primarily based on gold imports. But in that period there were three
periods when the Federal reserve credit did increase, and that was
when we were buying Government securities. From February to June
1922, the Government securities increased $237,000,000, and the
member bank reserves increased $132,000,000.
From April to December, 1924, there was a similar increase in Government securities, and in 1927, the last quarter, another increase.
From the first two periods the increases caused by the purchase of
Government securities went to the member banks and were used
largely by them to take down their discounts. In 1927, however,
there were not a large amount of discounts to be taken down, because
the gold imports in the early part of the year had been used for this




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

purpose, and you had the expanded condition caused by buying
Government securities without a material amount of discounts to be
paid off. That was one of the reasons for the expansion explained by
Doctor Miller.
You remember that it has been said that in 1927 on August 5,
the rate was reduced to 3M per cent, and I have heard a great deal
about the disastrous result of that rate reduction, and that it produced easy money with all of its bad results. We must remember,
however, that money was easy on August 5. When that rate reduction was made the discounts had fallen off. The Federal reserve bank
was almost out of the market, as Governor Strong stated, and going
down to the 3% per cent merely recognized a condition that was
actually existing. When the question came up of voting on that
rate, I voted in favor of it, and I stated on the record that my reason
primarily was because we had quite a severe depression over the
country, and there was much unemployment; I thought at the time
conditions were just beginning to turn. Agriculture, of course, had
turned. I thought that if there ever was a time when a lower rate
was wise it was when you had a depression just beginning to turn
and which needed encouragement. I based it also, secondarily,
upon the result it might have of sending gold over to Europe to help
resume the gold standard, increasing purchasing power, and thus
helping our manufacturing and agricultural exports.
Then we come to the 1928 firming policy, where in six months we
sold $400,000,000 of Government securities and made three increases
of the discount rate up to July 13, 1928.
I agree with what was said yesterday that it might have been
better if by July 13, 1928, we had raised discount rates to 6 per cent
instead of 5 per cent, and I believe there might have been a chance
that such a rate might have curbed speculation without injuring
business. No such rate increase, however, was asked for by the
Federal reserve bank. But whether that is true or not, even if we
had gone to 6 per cent, by virtue of what happened during the latter
part of the year I think it would have been useless.
In the middle of August, August 13, 1928, authority was given by
the board to buy acceptances in the New York market, to take up
any seasonal credit demand which might arise. And it is a surprising
fact that while under this authority the seasonal credit was taken care
of it was, in fact, much more than taken care of, by buying acceptances. About $286,000,000 of acceptances were in fact bought, so that
the Federal reserve banks finally held two-thirds of all the acceptances
outstanding. So many were bought that the banks were able to take
down $193,000,000 of discounts with the proceeds. This was all during
a time, as we supposed, of a steady, firming policy. These purchases,
however, turned our policy from a policy of strict firmness into a
policy of ease. And what was the result? Federal reserve credit in
that period increased $122,000,000; member bank reserves increased
$28,000,000; security loans of reporting banks increased $127,000,000.
Stock prices ran up from 150 to 192. Stock sales increased from 11.8
to 23 million average. Brokers' loans increased $381,000,000, and
the loans for others, of which we have heard so much, increased
$488,000,000. This was all between July 13, 1928, and January 1,
1929. One officer of a bank in a very able address delivered in New
York in the middle of December stated that there was an excess




NATIONAL AND FEDERAL, RESERVE BANKINO SYSTEMS

167

bought over the seasonal requirements, through acceptances of at
least . $100,000,000. Such purchases do not necessarily increase
Federal reserve credit outstanding, because you really exchange
discounts for acceptances, but it produces a very decided easing effect.
And these operations, taking out $193,000,000 of discounts and putting
in their place $193,000,000 of acceptances, even though leaving the
Federal reserve credit outstanding the same, had a distinctly easing
effect, and it changed our policy from one of firmness into one of ease,
and rates of customers began to fall.
To make a long matter short, personally, I believe that at t h a t
moment, January 1, 1929, the discount rate had ceased to be an effective instrument for curbing speculation which had developed into a
perfect mania. While I would have been willing, looking back,
to have voted for a 6 per cent rate in the middle of 1928, thinking that then it might have proved a curb, I felt that in January, 1929,
it had absolutely gone by the board, and the discount rate would have
been of no help to us whatsoever. I will take that up again in more
detail in a minute.
On January 1, 1929, Federal reserve credit outstanding had
increased $226,000,000 over the amount outstanding on January 1,
1928.
For the year ending June 30, 1919, 1,114 banks were borrowing 80
per cent or more of the time, which we regarded a serious condition.
On February 2, as it has been stated, we sent a letter to the Federal
reserve banks, not a public letter, but a letter to each bank, pointing
out that Federal reserve funds had been seeping into speculative
channels, and asking the Federal reserve banks what they had done
to stop it, and how successful they had been in their efforts.
The CHAIRMAN. Did it just seep?
Mr. H A M L I N . I think " j u s t seeped" describes the process, b u t
perhaps you might say thrust at times. Certainly, there was always
a seepage. At this time the acceptance rate was the same as the
discount rate, 5 per cent. Now, I believed at that time that business
and agriculture were entitled, had it not been for this speculative
craze, to a lower rate than 5 per cent. And the majority of the board
made up their minds that that was so, and that they must use some
method, if possible, at least not to increase the rate to commerce and
business, and use what we termed direct pressure.
The board, on February 7, issued a public warning that Federal
reserve money had been going into use as the basis of speculative
transactions, and calling on the banks to conserve, to cut down their
unnecessary borrowings, and bring back the Federal reserve credit and
put it back in its proper channels. Everybody speaks of that direct
pressure as if the board approached the banks with a club. I t was
nothing of the kind. I t was simply an appeal to the banks to cooperate with the Federal reserve banks, and to correct th.ese conditions.
The board did not desire by that warning to bring about any
radical deflation of speculative loans. I t wanted gradually to attempt
to put Federal reserve credit back where it belonged, and take it out
as a basis of these excessive speculative loans.
The CHAIRMAN. Where it never should have been?
Mr. HAMLIN. Where in such quantities, at least, it never should
have been. And in one statement which the board made it showed
that fact. I t has been said that we wanted to smash things, to smash




168

NATIONAL AND FEDEBAXi RESERVE BANKING SYSTEMS

the stock niarket. There is nothing of the truth in that at all.
is fully disclosed in one sentence of the warning:

This

which, in the immediate situation, means to restrain the use, directly or indirectly,
of Federal reserve credit facilities in aid of the growth of speculative credit.

And under that policy of gradual restraint we felt hopeful that we
could bring back the Federal reserve credit without crashing or
smashing any market or anything of the kind.
That board warning was issued February 7, 1929. On November
22, 1928, the Federal Advisory Council had met, and advised us to
do this very thing. They did not call it direct pressure. They
called it cooperation between the member banks and the Federal
reserve banks, but they meant, of course, direct pressure. They
made, however, one exception. They did not intend to intimate
that there should be any restraint on customers' loans. I suppose
they had in mind simply the brokers' loans.
On February 15, 1929, however, a week after our warning had been
issued, the council came together again. The Reserve Bank of New
York had initiated the rate of 6 per cent on the 14th, but when the
council members met, they did not know what the New York Bank
had done. They took up our warning entirely as an independent
matter. And the council strongly endorsed the warning of the
board, except they in effect said, "you men have not gone far enough.
You have talked about speculative loans," meaning, they supposed,
brokers' loans. "You have to go farther. You have got to
bring about some way of restraining customers' speculative loans."
As Doctor Miller said, there was no misunderstanding about that,
because he put the question squarely to them. So the board's warning was approved. The council did something more, however—they
filed a resolution with our board, which was never published, stating
expressly that there should be no increase of discount rates until the
efforts under direct pressure had been exhausted. That was very,
very important. They not only indorsed what we had done, but they
expressly said:
That we should not increase the discount rates until we had exhausted the
efforts of direct pressure.

Now, what was the effect of that direct pressure? The table I have
here shows that from February 9 to June 8,1929—and that is about the
period of direct pressure—security loans for all the reporting member
banks decreased $361,000,000; investments decreased $262,000,000;
acceptances decreased $300,000,000, and the purchase of Government
securities fell off $44,000,000. On the other hand there was an increase
in gold stock of $173,000,000 and discounts increased $140,000,000.
But Federal reserve credit, however, decreased in that period $193,000,000.
Of course the keeping of acceptances out of the Federal reserve
banks by the high acceptance rates, threw an extra heavy strain on
discounts. And in spite of that terrific strain we were able to keep
the discount increase down to only $140,000,000 and at the same time
reduce the Federal reserve credit $193,000,000. I think that those
figures show that during the time in which direct pressure was in
operation it was a distinct success in the Federal reserve system as a
whole and also in the Federal Reserve District of New York, as opposed to the system, which latter figures I also will file.




NATIONAL AND FEDERAL. RESERVE BANKING SYSTEMS
Federal

Reserve

169

System

(The Federal reserve figures are weekly averages. The member bank figures are for weekly
statement dates)
[In millions of dollars]
Gold
MemFedU.S.
ber
eral
Dis- Accept- securi- bank Security
reserve counts ances
ties
res- loans
credit
erves

1. January, 1928January, 1929.2. February, 1928February, 1929.
3. D i r e c t action,
F e b r u a r y 9,
1929-June 8,
1929
4. June 8, 1929-AugustlO, 1929. _.
5. A u g u s t , 1929October, 1929__

Commercial
loans

Investment

CurIm- Ex- rency
in
ports ports circulation

+239

+503

+104

-364

-37

+796

+333

-24

251

-19

+245

+391

+42

-208

-12

+924

+82

-45

246

-33

-193

+140

-300

-44

-68

-361

+444

-262

173

+29

+62

+81

-24

+5

+31

+518

+189

-242

42

+65

+41

-186

+234

-20

+10

-28

+253

-134

31

+53

Federal Reserve Bank of New York

MemUnited
ber
Federal Bills
reserve dis- Accept- States bank
bank counted ances securi- reserve
balcredit
ties
ances

Period 1. Jan. 7, 1928-Jan. 5, 1929—.
Period 2. Feb. 11,1928-Feb. 9,1929...
Period 3. Direct action, Feb. 9,1929June 8,1929
Period 4. June 8,1929-Aug. 10, 1929..
Period 5. Aug. 10,1929-Oct. 12,1929..

+226
+39

+243
+78

+64
+10

-80
-51

-78
+198
-161

+1
+168
-216

-89
+19
+60

+2
+12
-19

-23
+2
-7
-9
+15

Reporting member
banks in New York
City
Secu- Com- Investrity mercial
loans loans ments
+344
+320

+90
+16

+37
+21

-179
+283
-125

+267
+82
+108

-78
-90
-29

Another interesting fact is that, although the direct pressure was
suspended in June, and a change was made in the discount rate,
which I will explain in a minute, on August 9, yet even after that,
right up to the time of the stock crash the Federal reserve credit outstanding increased for the system as a whole, comparatively little.
It increased simply by the amount of the increased demand for currency in circulation.
The CHAIRMAN. Governor, what do you mean by saying that your
warning was suspended? Do you mean that you thought that your
warning was an inadvisable thing?
Mr. HAMLIN. Oh, no. The New York bank said that our direct
pressure had affected the banks so that they did not dare to come to
borrow at all, that there was going to arise a demand for more credit
and that this might reach nearly a hundred million, and they said they
did not want our board to keep that pressure on the member banks
all the time to reduce their total borrowings when they have got to
increase them to a certain extent.
The CHAIRMAN. They were only advised to reduce borrowings
made on their speculative activities?




170

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. HAMLIN. Yes. And we never openly suspended anything.
We simply said to the New York bank that those banks can go ahead
and borrow where it is absolutely necessary for commercial purposes.
As a matter of fact, we never questioned any bank's right to borrow
for strictly commercial purposes. But to make things clear we made
that statement. Now, as I have already said, the news got out.
The CHAIRMAN. But why terminate advice to banks not to use
Federal reserve facilities either directly or indirectly for speculative
purposes?
Mr. HAMLIN. We simply in the first instance, at least, brought
pressure to bear on the total amount of borrowings they were making,
no matter how they were produced, by speculation, or by other loans
which could be cut down, or by investments which could be reduced.
The CHAIRMAN. That was not the text of your warning though.
Mr. HAMLIN. The text of our warning was that they must reduce
their use of Federal reserve credit, they must reduce their participation in speculative loans. I think the warning covered all sorts of
speculative loans, except, of course, commercial loans. But we never
openly and publicly revoked that warning. We simply told the
New York bank that on those banks, as they had to borrow for commercial purposes, we would! not continue our pressure to reduce total
borrowings. That was all of the suspension of the warning given
out, and I merely used the word "suspension" because in our letter
of June 12 explaining the position I think that phrase was, perhaps
not advisedly, used.
To our letter of February 2, which we sent out, asking what they
had done to stop Federal reserve credit going into speculative channels, Mr. McGarrah, on February 21, 1929, sent a letter to the
board telling what they had done along the lines of so-called direct
pressure. It is a very long letter and I am merely going to give this
very brief synopsis. He said his board had special reports as to banks
borrowing for profit or too much, or too continuously, in relation
to other comparable banks, and banks which had a voluntary investment policy for profit rather than for loaning in response to demands of
their customers. Then he added that the above had little effect
as to controlling the total amount of credit outstanding. Then he
took up the large New York City banks. He said that they had
usually adjusted their position when advised that they are out of line,
or acting contrary to our general policy. Apparently the direct
action was confined largely to banks out of line, that is, banks which
are borrowing more than other banks comparable with them as to
size. But we thought that pressure should be applied just as much
when all banks are engaged in encouraging speculation as when one
bank gets out of line by borrowing a little more than other banks of
its size. After describing the kind of pressure exerted, however,
Mr. McGarrah said that the above has not been very effective in
controlling the total amount of credit.
Governor Harrison stated the other day that the procedure outlined
by Mr. McGarrah in his letter of February 21, 1929, together with
discount rate increases, were the best ways of controlling credit, but
as I have just stated, Mr. McGarrah in this letter stated that the
procedure outlined was not very effective in controlling the total
volume of credit. Thus, according to the views expressed by the
governor, there would be little left in the way of control except the use
of the discount rate.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

171

On May 1, 1929, the board sent another letter to Mr. McGarrah
which led to another issue. The board in that letter, sent a list of
New York City banks which were borrowing continuously or frequently, and which were also carrying quite a large volume of security
loans, including brokers' loans, and customers loans, and we requested
him to take up the matter with those banks, and ask them why they
had not adjusted their positioii in accordance with our warning, or
what reason there was, why such adjustment was not in accordance
with the public interest. Mr. McGarrah replied on May 10, in which
letter he said that the board was laying down a new procedure to test
the abuse of Federal reserve citedit—carrying a considerable volume
of security loans. He said that this was entirely a new test; that it
implied that the right of a bank to borrow on eligible paper was
prejudiced by the fact that that bank is loaning on securities; that
the banks have a right to loan on securities; that it is not possible to
determine whether security loans are or are not speculative, even by
the member banks, and much less so by the Federal reserve banks. I
should suppose that a member bank would know in a general way for
what purpose a customer was borrowing large sums of money.
The CHAIRMAN. If not it is very poorly conducted.
Mr. HAMLIN. Mr. McGarrah replied further that to undertake
what the board suggested as to individual banks would be to close
its loan window with a view to rationing credit; that this would
produce a condition that the bank can not afford to risk; that the
most effective way, apart from the increase in discount rates, is to
follow the procedure he had outlined in his letter of February 21;
that any different procedure might entail serious consequences. In
that letter, however, as I have said, he stated that this procedure had
had little effect in controlling the total volume of credit.
I want to come now to the applications for increase in discount
rates to 6 per cent.
The CHAIRMAN. Right there, governor, what response did the board
make to that extraordinary letter?
Mr. HAMLIN. We wrote a great many letters. I do not have the
precise letter in mind now. I think we pointed out to him that that
was just what the board had a right to expect. I wilj. take that up
in a minute in considering our power to refuse discounts altogether.
The bank made the first application on February 14, 1929. It
had made no application since July 13, 1928. No official reasons
were given for that proposed increase in discount rates at that time.
Of course, in a general way the governor talked it over, but the board
felt that we wanted some official expression in writing. Eight here
let me go back and say that on October 5, 1928, our board requested
the Federal reserve banks, when suggesting a change in discount
rates, to give us very briefly the reasons prompting them to ask for
the change, so that we, under our power of review, could determine
the matter more satisfactorily.
The CHAIRMAN. I should think the information would be essential
for review and determination.
Mr. HAMLIN. My recollection is that every bank in the system
from that time forward, when initiating a rate change, gave the
reasons, except the Federal reserve bank of New York. On October
26, 1928, Mr. McGarrah wrote that they would with pleasure give
us all the statistics before their board, but it was not possible for




172

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

their board to give their reasons, because different members based
their conclusion on different grounds. I am not now criticizing the
bank; I am merely saying that this more or less did embarrass the
board.
The board felt that when this application came in for an increase
from 5 to 6 per cent, that a national question was involved, because
if New York was permitted to go from 5 to 6 per cent we knew, or
believed, that every Federal reserve bank east of the Mississippi River
would have to do the same, and probably every Federal reserve bank
in the system, and we feared that to add that 1 per cent at that time,
which would mean an increase in the rates which agriculture and
business were paying, would injure them.
The CHAIRMAN. I think that is true. But, Governor, why do you
think the uniform interest rate, discount rate, should prevail throughout the United States.
Mr. HAMLIN. I do not.
The CHAIRMAN. But you

say there you thought it would have
been forced?
Mr. HAMLIN. N O ; I believe the rate at that time was practically
uniform, 5 per cent, at the other Federal reserve banks, and I felt if
New York went up to 6 per cent that every other bank would have
to go up as high. I did not mean it as an approval of a uniform
discount rate. We felt that this proposed increase involved a national
question which we had to study, and we voted to take the application
under review and consider it, but not to decide it on that day. This
application, by the way, and I am not now criticizing the bank, was
made over the telephone from New York. Governor Harrison,
when advised of our decision, replied to Governor Young that he had
not given us the full vote of the New York board, which contained a
condition that our board should immediately decide it; and that his
board of directors were waiting, and could not leave until we decided it.
On that first application, the board was unanimous in rejecting it. I
want to add in fairness to my associates that some who favored the
application for increase, agreed that the condition imposed of an
immediate decision could not be accepted by the board, and therefore
joined in a unanimous rejection of the application.
There were other applications. There were in all 10 applications
beginning February 14, and ending M a y 23.
On April 9, 1929, Governor Harrison for the first time sent us an
official statement of reasons for desiring an increase in rates, and, of
course, that letter should be in the possession of the committee.
These reasons essentially were that speculation had injured business
by increasing interest rates; that high interest rates prevented the
flotation of foreign securities in the United States, that the purchasing power of Europe was thereby lowered, and that the high call loan
rates were drawing gold from Europe.
The CHAIRMAN. YOU will furnish us a copy of that letter?
Mr. HAMLIN. Yes, Mr. Chairman.

Now, there were different reasons at different times for this increase.
These applications for the 6 per cent rate lasted, I will say, from
February 14 to May 23. At first the feeling of the New York bank
was that discounts were increasing and the reserve ratio falling and
that there was danger, of a runaway market. But as time went on
conditions changed very materially. Total bills and securities of the




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

173

New York Bank which on January 2, 1929, were $709,000,000, by
June 5 had fallen to $253,000,000, and the reserve ratio had increased
from about 70 to 79.1 per cent. In other words, conditions had
arisen that normally give rise to lower rather than to higher rates.
The CHAIRMAN. I was going to ask what defense could a bank make
of raising its discount rate with a reserve of nearly 80 per cent.
Mr. HAMLIN. The money that had been pouring into the country
had really thrown out the reserve ratio as a test. B u t certainly if the
total bills and securities are falling and the reserve ratio is rising, it
would not speak very eloquently for an increase in discount rates.
Then later the ground was changed and the argument was advanced
as to the relation of rates, and we pointed out that it was not necessary
to have 6 per cent, but that 5% would have restored the old spread
between Federal reserve and market rates. Finally it was claimed t h a t
the Federal reserve rate should be as high as or higher than the
open-market rate. Of course, at that time the New York bank admitted the reserve ratio was rising rapidly. On May 31, as I have
said, Mr. McGarrah stated that more credit would soon be needed,
and while they still would like to go up to 6 per cent, at the same time
that had ceased to be of such relative importance; that it was now
much more important to consider how to ease the situation and permit
member banks, perhaps even encourage them, to borrow. After t h a t
date I think it is fair to say that there was really no division or dispute, if you want to call it that, between our board and the Federal
Keserve Bank of New York. We did encourage member banks to
borrow, to accommodate business and agriculture.
On June 3 and again on July 16, 1929, Mr. Mitchell came down and
favored a more liberal discount policy, the discount rate to remain at
5 per cent, barring excessive speculation.
On August 2 Governor Harrison came before the board. He
favored an easing policy, because, as he said, there was need for more
Federal reserve credit. He asked to have the discount rate increased
to 6 per cent, and that was done, as you remember, three days later,
on August 9, 1929. The increase was not made, however, to curb
speculation. T h a t increase was part of an easing policy. We determined to ease by lowering acceptance rates. The 6 per cent discount
rate was suggested merely to encourage the banks to use acceptance
money in paying off in part, at least, their discounts. I t was not any
new change of the policy of the Federal Reserve Board. Since the
10th or 12th day of June, the board has been in harmony with the
policy of New York. "
The Federal advisory council, after thoroughly approving our plan
on February 15, 1929, changed its view and on April 19, and again
on M a y 21 at their meeting stated they now thought the rate should
be increased to 6 per cent. I t is hardly necessary to spend much time
on that. Their recommendation of M a y 21, was just 10 days before
Mr. McGarrah wrote us that an easier money policy was necessary
to help the banks. If the council had waited 10 days I do not think
that recommendation of M a y 21 would ever have been made.
What was the real issue between the Federal Reserve Board and
the Federal Reserve Bank of New York? The majority of the
Federal Reserve Board felt that the 5 per cent rate should not be
increased, but that pressure should be brought to bear on the banks
to cut down unnecessary borrowings, reduce speculative loans and
34718-31—PT 1




12

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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

investments, and adjust their position in accordance with our warning. That was the position of the majority of the board.
Most people apparently believe that the only issue before our board
was whether the rate, which was then 5, be made 6. There never was
a greater mistake than that. The position of the New York Bank was
that, beginning at 6 per cent, we should start in on an affirmative rate
policy of repeated increases of discount rates until the situation
should be corrected.
The CHAIRMAN. What situation?
Mr. HAMLIN. I have been asked that a great many times. I think
it meant until the stock market was liquidated.
The CHAIRMAN. Exactly.
Mr. HAMLIN. But I have no right to put myself in another person's
shoes.
Governor Harrison, in an official letter dated April 9, 1929, to
Governor Young, among other things, stated a reason for increasing
discount rates as follows:
A rate increase would have the further result of giving definite public notice
to the country that the reserve system is ready to supplement and support all
its other efforts by an affirmative rate policy.
Public realization that the discount rate would be employed incisively and
repeatedly, if necessary, would greatly strengthen the effectiveness of the system's
policy, and in itself hasten the time when the system might lend its influence
towards easier money conditions.

This states the issue between the Federal Reserve Board and the
Federal Reserve Bank of New York. The Federal Reserve Board
was asked to approve an increase to 6 per cent on the understanding
that that was to be the first step, and then other increases were to
follow, if necessary. As a matter of fact, rates as high as 7, 8, and
9 per cent were discussed at conferences in the board as being possible
under such a drastic increased rate policy.
The CHAIRMAN. In short, as I understand it, then after permitting
the facilities of the Federal reserve system to be issued in an inordinate degree for speculative purposes it was proposed to penalize legitimate commerce in a desperate effort to abate the very danger that
had been thus created?
Mr. HAMLIN. Yes. And I believe that policy of drastic rate increases simply meant that the crash which came in October of 1929
would have been precipitated, by the action of the board, in perhaps
M a y or June," 1929.
The CHAIRMAN. Perhaps that might have been better.
Mr. HAMLIN. While probably most or all of the board members
and very many bankers and economists feared that a collapse was
inevitable because of this mad speculative mania, yet there were
not a few who took a decidedly different view. They seemed filled
with the spirit of the "new e r a " philosophies. Even the committee
on recent economic changes was very hopeful in its report, if not
"bullish," as to the future.
The majority of the board members felt, that under the direct
pressure instituted by them, speculative loans were being curbed;
that Federal reserve credit was being gradually reduced, and that
whatever improvement in the general situation by Federal reserve
action might be hoped for, could best be accomplished by the method
of continuous pressure.




NATIONAL AND FEDEKAL. RESERVE BANKING SYSTEMS

175

Under these circumstances the Federal Reserve Board was asked
to approve a new policy of drastic increases in discount rates which,
in my opinion, would have almost immediately precipitated the crisis,
with resultant injury to agriculture and business, which finally came
in October, 1929.
I believe that no board, whatever the economic acuteness or courage
of its individual members, would, under such circumstances, have
undertaken, or have been justified in undertaking, such an experiment.
The CHAIRMAN. Suppose the board had done that, Governor, and
the crash had come, who would have gotten all the blame for it?
Mr. HAMLIN. I think the Federal Reserve Board itself would.
The CHAIRMAN. Why, of course it would.
Mr. HAMLIN. Of course, «you understand that we can not discount
any paper secured by stock collateral. The only way we can discourage speculative loans through the discount rate is by putting up
discount rates on commercial and agricultural paper, and we were
asked to go into this system of drastic increases on such paper
in order to stop speculation. I believe that would have produced
a climax. I think business would have been prostrated. To ask us
to increase drastically the rates on business and agricultural paper in
order to stop speculation is to me like telling a father he must chastise
his only son because a drunken man is carousing in the street. I
admit that there have been times when we have increased discount
rates to curb speculation, but that was where small increases at the
beginning might curb speculation to the benefit of business. That is
one thing, but to say to agriculture and business that we are going to
raise the rate to 6, 7, 8, 9, or 10 per cent as our policy—what would
happen during all of this time? I fear disaster would have followed.
The CHAIRMAN. Yes; you would have had a panic right then and
there, and the Federal reserve would have been responsible for it.
Mr. HAMLIN. NOW, I am not going to interpret what New York
meant by favoring a drastic increase in rates. I am going, however,
to quote what the English paper, The Manchester Guardian, said as
to what such an increase meant. This paper did not approve our
wish to keep the discount rate down to 5 per cent. I quote from its
edition of March 4, 1929:
There appeared to be some slender hope that the Federal reserve authorities
were meditating action drastic enough to precipitate the crisis in Wall Street,
which, in the opinion of most monetary students, must come sooner or later.

That was the opinion of that journal as I understand it, of the
effect of that drastic policy which the New York bank at that time
favored. Our board, as I have said, did not want to precipitate any
crisis. We wanted to get our Federal reserve credit back where it
belonged. And, as I have said, had we yielded to a drastic series of
increases in rates, I think we would have brought on the crash which
even then I hoped could have been staved off. I think we would have
simply precipitated the crash which came in October.
When a speculative mania is once under way you can not do anything with it by the use of higher discount rates; when speculation was
beginning, higher rates might have been effective. But when you
came to 1929, the period we were considering, it would have no effect
whatsoever. The speculators, I believe, wanted us to approve the
6 per cent rate. Six per cent meant to those men easy money, because




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

it meant, as they hoped, a discontinuance of direct pressure and
permission to borrow all the money they wanted if they would merely
put up good collateral and pay the increased discount rate. A 6 per
cent rate would have been to the speculator a relief.
The CHAIRMAN. The effect even at the beginning of an increased
discount rate could only have been psychological merely.
Mr. HAMLIN. I t might have been psychological.
The CHAIRMAN. I say it could have been only psychological.
Mr. HAMLIN. At the meeting of September 28, 1928, Mr. Alexander took the view that the discount rate was useless when a speculative mania had got under way.
One of the most distinguished British economists talked to me
about that. He told me that to attempt to correct speculation b y
rate increases was useless.
Mr. H. A. Wheeler, a very prominent banker in Chicago, telegraphed us as to the same position, taking the same view.
The United States Chamber of Commerce took the view that we
should not attempt to correct speculation by drastic rate increases.
The London Economist said on May 11, 1929, that when stock
prices are rapidly rising, high money rates are only an inefficient
deterrent which penalizes the innocent without troubling the guilty;
that the only.remedy against rampant speculation is to cut off funds,
altogether.
The New York Journal of Commerce on May 14, 1929, stated t h a t
the Federal reserve system has no right to try to curb speculation
through drastic increases of discount rates. I t said " d r a s t i c . " I t
does not deny that there might have been some small increase. I t
also said,:
All that has been required of it at any time has been that it should keep its;
own funds, the reserves of the deposit banks, out of the speculative market.

That is thoroughly in accord with the view that I take. I will n o t
attempt to quote the other authorities. I will read, however, from
the London Statist of May 25, 1929:
The banking authorities in the United States apparently want a businesspanic to curb speculation.

I have a suspicion that that refers to the policy of drastic increases
of discount rates.
Now, as I have said, we believe that in those three or four months
we succeeded in direct pressure, because we did reduce loans t h a t
were increased before it and greatly increased after it.
The London Economist said on M a y 11, 1929:
The events of the past year have seen the beginnings of a new technique, which,,
if maintained and developed, may succeed in rationing the speculator without
injuring the trader.

And that was the feeling of certain members of the board, removing
Federal reserve credit from the speculator without injuring the trader.
The principal success of our direct pressure was in lowering brokers*
loans. They went down in New York City about $600,000,000
from February 6 to June 5, 1929. The customers' loans increased
about $300,000,000, and the net decrease was about $300,000,000.
Now we had a difference with the New York bank over that. W e
called their attention to certain New York banks, which were borrowing heavily with a large assortment of security loans, and asked them
to tell those banks to adjust their position. But, as I have before




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

177

said, the Federal reserve bank objected to looking into the internal
management of any lending bank unless perhaps it was out of line
with other banks. But we felt the Federal reserve bank had a right
and duty to acquaint itself with the loaning practices of those banks,
and that those banks ought to adjust their position as to their speculative loans.
One of the most prominent bankers in Chicago, whom you all
know—I will not mention his name—said:
The people have lost their lieads over stock gambling. The public has not
profited by advice of the Federal Reserve Board. We have now reached a point
where it is a matter for each individual bank to get into the game vigorously and
do whatever is necessary to at least force a reduction in the amount of money that
is borrowed against stock exchange collateral.

We felt that the Federal reserve bank had a right and duty to
inquire into the loan practices of any member bank. They have that
right under the power to refuse discounts. The law does not say they
shall discount, it says they may discount. And our counsel advised
us, and our special counsel, the Hon. Newton D . Baker, also
advised us, that the Federal reserve bank has the power to refuse discounts. I t is not m y belief that that power will ever have to be used,
but its merely being there is all that is necessary. We would not
suddenly and unexpectedly refuse, but we would talk with that bank
and advise it that in the future it must cut down its borrowings, or else
we would have to exercise our power. That is the way the Federal
reserve bank would operate. Governor Harrison said if we did refuse
discounts altogether that the bank could still draw on what was left
of its reserve, and all it would have to do would be to pay a sum of
money as a penalty for its deficient reserves which would be only a
little more than the discount rate. But the governor forgot that
there is a provision of the national banking act forbidding any director
to declare a dividend or make a loan when the bank is deficient in its
reserves. This would mean the personal liability of every director.
I do not think if that issue ever came up that it would trouble the
Federal reserve bank very much in working out a solution. But I
repeat, that issue is never likely to arise. We are going to cooperate
with the banks, and the banks will cooperate with us.
The CHAIRMAN. I t did arise.
Mr. HAMLIN. Certainly, it did arise. I am talking now about the
future, because I feel that it will never arise again. I feel those banks
appreciate to-day that they went too far, even with their favored
customers. I have heard bankers say over and over again, "A good
customer maintaining a satisfactory balance is entitled to any amount
of money he wants if he gives collateral and is willing to pay the
discount rate." In ordinary times that may be true. But when
people have gone mad, in a wild, hysterical craze, I feel that it is the
duty of a banker to the depositors to repress even his best customers.
They say they would lose their accounts, they would go across the
street to some other bank. That is undoubtedly true. The answer
is, let the banks in New York and the larger cities get together and
present a moderate statement to their customers, and I do not think
that with the approval of the Federal Reserve Board that would be
considered a restraint of trade under the Sherman Act. Unlimited
customers loans is not the English practice. In England the customer
can not go to any bank and get any amount that he can give collateral




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NATIONAL AND FEDERAL BESERVE BANKING SYSTEMS

for. As to this I want to quote what Governor Young said in an
address delivered at Old Point Comfort, Va., on May 7, 1930. He
said:
We bankers have a responsibility beyond our own balance sheets for the general
course of events.
We must look beyond the safety of the collateral offered us for a loan to the
safety of the aggregate volume of the collateral that we know is being offered for
loans at all the banks.
When we see an unhealthy development getting under way, we must not only
protect our own immediate institution, but we must take a broader view with
reference to the interests of the entire community.
In other countries,, where banking development has been longer and banking
has proceeded farther, certain methods of control have been developed.
A customer in England is not granted unlimited credit on the basis of security
offered as collateral; he is granted a line of credit in accordance with his credit
standing and the requirements of his business, and he can not easily exceed that
line, no matter how much collateral he may be able to offer.

Now, the whole question, as I have said, is one of cooperation.
I have talked with a great many member bank officers during the
16 or 17 years that I have been on this board, and I do not think I
have ever used the word "power." I t is simply cooperation; let us
get together. We want to cooperate. I t can be accomplished. The
banks are in a changed state of mind in this country to-day. I do
not feel any fear whatsoever of any future recrudescence of this
speculative craze. If it should come, I believe the member banks and
the Federal reserve banks will come together and so cooperate, that
we shall have no trouble whatever in adjusting any such situation.
The CHAIRMAN. I venture to interpose there my opinion that you
won't have that unless the system itself asserts its superiority to any
individual banker.
Mr. H A M L I N . I think the direct warning that we gave amounted to
an assertion of power over the banks.
The board members have been criticized severely because they have
been human, because they have allowed divergences and differences
to appear. I remember, however, a good many cases where the
Justices of the Supreme Court of the United States have not been
unanimous, where they have published dissenting opinions. We
have a board of individuals from all over the country, and while
every effort should be made to reach unanimity, it is their duty to
express their honest views. The claim that the board should always
be unanimous is practically saying that there must always be some
one on the board to tell the other members of that board what they
are to agree to. I remember a mythical story which illustrates
this perfectly. A judge in Massachusetts was trying a long case, and
gave the case to the jury late in the afternoon, and he told the sheriff
to let them go home if they reached an agreement during the night.
He then went home, and, returning in the morning, he saw the foreman of the jury walking in the street. When he arrived at the courthouse he said to the sheriff, " I see that the jury agreedI" The
sheriff said, "Oh, no, your honor, they are still o u t ! " The judge said,
" I saw the foreman walking in the street." The sheriff said, "Yes,
rour honor. You told me that if they agreed during the night, to
et them go, and as fast as they agreed I let them out."
Now, who is to be the sheriff to let the board members out as fast
as they agree? The law provides for no such contingency.

J




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

179

I have talked at very great length, much longer than I expected to
talk. In what I have said in criticism of any operations or policies
I am willing to assume joint responsibility for the errors of the system,
but I feel it my duty to talk frankly to your committee when it asked
me to do so. If there is anything in my testimony that you feel you
should keep in executive session it is agreeable to me that you do that.
Our board has tried its best to protect the commerce, agriculture,
and industry of this great country, and we have had to take many a
hard blow because of that determined effort. We think that during
the four months in which direct pressure was in force we succeeded
in our efforts. Whether the general belief that it was the "Loans for
Others'] which practically stalled the system, I shall not undertake
to consider now. That has been thoroughly gone into by others
who have already testified.
The CHAIRMAN. Governor, I want to ask you as to one matter in
my view, and I think I am perfectly accurate about it. The Federal
Keserve Board has no authority whatsoever to initiate a rediscount
rate. Do you think in any circumstances it would be desirable to
give it that power?
Mr. HAMLIN. Assuming now that it has no power to initiate a
discount rate, I think that it would be very desirable to give it that
power. There might be some emergency where that would be a very
useful power. You could conceive of a case where some bank maintained a very high rate, far above the level of other Federal reserve
rates, to the great injury of business, where the board might have t o
step in. I think such a power should be circumscribed, however, by
requiring five affirmative votes.
Of course, as you know, the Attorney General advised our board
that we had the power, and that of course was used for the purposes
of the board in initiating the rate in the Chicago rate decision, against
which I personally voted.
The CHAIRMAN. YOU know it is very extraordinary legal advice*
If they can find a sentence in the text, or a rational implication to
justify any such opinion as that, I would be very much obliged to
them to do it. I t never was the intent. Anybody who can read
the original report when the Federal reserve bill was presented to the
House, or will examine the discussions, is obliged to see that i t
never was the intent that the board should initiate the discount rate.
If it was intended, what idiocy for it to have been said that the rates
of the bank should be subject to review and determination of the
board. Why the two things are absolutely inconsistent.
Mr. HAMLIN. Assuming that we have not the power I think it
would be wise to give it to us, requiring, however, five affirmative
votes.
The CHAIRMAN. I do not assume it, I assert it.
Mr. HAMLIN. I say assuming that we have not the power I think
it would be wise.
The CHAIRMAN. I n the circumstances you mentioned.
Mr. HAMLIN. Yes, sir, with the five affirmative votes.
The CHAIRMAN. With limitations.
Mr. HAMLIN. Yes,
Mr. W I L L I S . Can

sir.

you state for the committee any suggestions*
you have for legislation that have occurred to you, or any comment
on the Glass bill which is now pending?




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NATIONAL AND FEDERAL. BESEBVE BANKING SYSTEMS

Mr, H A M L I N . I heard what Doctor Miller had to say about the
15-day collateral notes. I took that up some time ago and it is not
fresh in my memory, but I will tell you how it struck me then. I
would suggest increasing the maturity to 90 days when secured by
eligible paper. I think that that would be a great convenience.
But when notes are secured by Government bonds I should permit
them only in an emergency to be determined by the Federal reserve
bank or by the board, or any way you want, and at a higher rate.
But I think there should be an extension in time to 90 days, when
collateraled by eligible paper. That would be a great convenience
to a great many small banks.
Mr. W I L L I S . Governor, you are familiar with the situation in
France, the Bank of France, are you not—its discount policy?
Mr. HAMLIN. Not as well as I perhaps ought to be.
Mr. W I L L I S . I t has a somewhat small unit of discount.
Mr. HAMLIN.

Yes.

Mr. W I L L I S . I S it not true that the Bank of France with this
extremely small unit of discount has a great deal more work to do
than any Federal reserve bank has ever had in the direct discounting
of notes?
Mr. HAMLIN. Oh, yes.
Mr. W I L L I S . SO it is a perfectly practical and usable thing.
Mr. HAMLIN. Yes; it is a perfectly practicable and usable thing,

so
far as relates to the Federal reserve banks, but there are a great many
small member banks scattered all over the country, and you see it
would be a great convenience to them, and when secured by eligible
paper I would favor it in this case.
Mr. W I L L I S . YOU mean eligible commercial paper rather than
Government bonds?
Mr. HAMLIN. Yes, sir; eligible commercial paper, and not Government bonds.
Mr. W I L L I S . What is your comment on this bill?
Mr. HAMLIN. I would like to say that I think that such notes secured
by Government bonds ought to be confined to an emergency when
they should carry a higher rate.
Mr. W I L L I S . Yes. Have you examined that part of the bill which
relates to so-called chains, to the so-called chain system?
Mr. HAMLIN. N O , I have not gone over that.
Mr. W I L L I S . Have you any general suggestions for new legislation?
Mr. HAMLIN. N O ; I have not but I may have later on, if I may be
permitted to submit them later.
The CHAIRMAN. We will be very glad to have you do that, particularly with reference to, if you have not already formed your judgment,
this affiliate situation.
Mr. W I L L I S . Also perhaps you have something in mind specifically
with reference to the reserve situation. Do you consider the present
reserve situation satisfactory?
Mr. HAMLIN. N O . But we have been working on that for 10 or
12 years. We have a committee now that I earnestly hope is going
to evolve something of great value.
The CHAIRMAN. I hope they do it quickly, because we can not wait
10 or 12 years now to do what we have in mind.
Mr. HAMLIN. N O . We will do all we can.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

181

Mr. W I L L I S . YOU agree with the comptroller or with the governor
of the New York Bank, or with Mr. Miller, as to the present savings
reserves of 3 per cent?
Mr. HAMLIN. Yes. I t has always been my hope that we could
have one common reserve. Probably that means a little lower reserve than the reserve against demand deposits to-day. But that has
always been my hope. But what the committee will report, I do not
know.
The CHAIRMAN. I S it not a fact, Governor, that many of the banks
have manipulated their reserve and transferred their demand deposits
into savings deposits merely to get the advantage of that low rate?
Mr. HAMLIN. I can not prove that, but I have not a doubt of it.
Mr. W I L L I S . D O you think the segregation of assets as behind savings deposits would be helpful or not?
Mr. HAMLIN. I think it would be helpful; I am inclined to think so.
But I have not given that recently very much thought.
Mr. W I L L I S . Would you be kind enough to do so?
Mr. HAMLIN. Yes; I will be glad to.
The CHAIRMAN. We would be glad to have any written suggestion
of modification from you as to either the Federal reserve act or the
national bank act.
Mr. W I L L I S . D O you think savings banks like those of Massachusetts should be given any kind of access to reserve banks?
Mr. HAMLIN. I have always thought that; yes. Some one of the
representatives from one of the other States came to me two or three
months ago and said they were starting that up again. I gave them
all encouragement about that.
Mr. W I L L I S . What is your opinion about that? I would like to
have it in concrete form.
Mr. HAMLIN. I can not give it in detail now. I was in favor of
their joining the system. I considered the question of how much
they should contribute.
Mr. W I L L I S . On what basis would you allow them to get funds from
the reserve bonds? Did you consider that?
Mr. HAMLIN. We have not gone into that. Of course, in Massachusetts they hold commercial paper. I do not know whether they
do it in all States.
Mr. W I L L I S . They hold liquid paper, and it was on that assumption
that I asked whether they had commercial paper.
Mr. HAMLIN. Yes, commercial paper.
Mr. W I L L I S . Of course, there is no evident reason why they should
not be allowed to borrow on Government securities just as other
banks, if you are going to allow the latter to continue as they have
been doing. But what I had in mind is borrowing on liquid securities
such as they may have.
Mr. HAMLIN. Yes.
The CHAIRMAN. Governor,

we are greatly obliged to you for your
statement, and we are consequently relying upon you to give us any
assistance you can.
We will not hold a hearing to-morrow. The hearings will be
resumed on Monday.
(Whereupon, at 5 o'clock p. m., an adjournment was taken until
Monday, January 26, 1931, at 10 o'clock a. m.)







OPEBATION OF THE NATIONAL AND FEDEEAL EESEEVE
BANKING SYSTEMS
MONDAY, JANUARY 26, 1931
U N I T E D STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY,

Washington, D. C.
The subcommittee met, pursuant to adjournment, at 10.30 o'clock
a. m., Hon. Frederic C. Walcott presiding.
The ACTING CHAIRMAN. Senator Glass, the chairman of the subcommittee, who is temporarily detained on account of illness, expects
to attend later, and desires vto be recorded as present, for the purpose
of a quorum.
We will proceed now with Mr. Albert H. Wiggin.
STATEMENT OF ALBERT H. WIGGIN, CHAIRMAN OF THE GOVERNING BOARD, CHASE NATIONAL BANK, NEW YORK CITY, N. Y.
The ACTING CHAIRMAN. The committee wishes to compliment you,
Mr. Wiggin, on your replies to our questionnaire. Your replies were
exceedingly full and very gratifying and, as you know, probably, the
information contained in your replies will not be made public, of
course.
There is a resolution here, unanimously adopted by the representatives of the member banks of the first Federal reserve district, which
is rather interesting, and I think might properly be made a matter
of record here. If it meets with your approval, Senator Norbeck, we
will enter it in the record.
Mr. Wiggin, I am going to ask you to make your own statement,
taking your own time, and I am going to put three or four questions.
I think they have been asked of the other witnesses, all members of the
Federal reserve.
1. From the banking standpoint, what do you regard as the causes
of the collapse of 1929?
2. What specific evils in our banking system aided or contributed to
bringing it on?
3. What legislation, if any, do you recommend against a repetition
of such evils?
The purpose of this committee is a constructive one and if there is
something that can be inserted in the banking act, applying to the
Federal reserve, that will help them in the future, we should like to
know it, and if there is not, we should like to know that.
If you will keep those questions in your mind, and make any statement you desire, the committee will appreciate it.




183

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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. W I G G I N . I should rather reply to specific questions, if that is
agreeable. Suppose you read the first one and see what I can do
with it.
The ACTING CHAIRMAN. Would you rather make a general statement of your own first?
Mr. W I G G I N . I would not. I should prefer to answer specific
questions.
The ACTING CHAIRMAN. Very well. From the banking standpoint,
what do you regard as the causes of the collapse of 1929?
Mr. W I G G I N . The debauch of speculation reached its climax and
stopped.
The ACTING CHAIRMAN. What specific evils in our banking system
aided or contributed to bringing it on?
Mr. W I G G I N . I do not think it was an evil in the banking system.
I t was a participation by the public in a tremendous speculation.
The ACTING CHAIRMAN. D O you think that the policy of the Federal reserve with reference to their open-market operations, or the
relation between the demand and time loans had anything to do
with it?
Mr. W I G G I N . I think a stiffer policy on rates and a somewhat
different open-market operation policy might have reduced the
extremes to which the speculation went.
The ACTING CHAIRMAN. NOW, that is in accoid with the testimony
that we have gotten from all the Federal reserve men that we have
cross-questioned, and if that is true, is it or is it not advisable, in
your opinion, that we put some kind of check, or is it not feasible, in a
legislative way, to put some kind of check, on open-market operations?
Mr. W I G G I N . I think that is a question of management. I think
your law is all right. I should like to see the Federal reserve rate
higher than the market rate and, by the market rate, I do not mean
necessarily the extreme rates on call money, but what we do consider
the market rate for the best commercial paper.
The ACTING CHAIRMAN. NOW, when you speak of the rate, you mean
the rediscount rate?
Mr. W I G G I N . I would rather see the rediscount rate above the
market rate, and I would not object to seeing a higher rate on borrowings on Government bonds—higher than the commercial rate.
The ACTING CHAIRMAN. All right. Now, then, when you suggest
that, you, of course, have in mind the difficulty of separating the
banking business and the security business, or the commercial business,
and how are you going to keep business going along normally?
Supposing, for instance, as in 1928, business was reaching the peak
in its gross operations, and that any advance in your rediscount rate
would work a hardship on legitimate commercial business? Is it
possible to differentiate? Are you not hurting that legitimate business that we all want to foster, by that theory?
Mr. W I G G I N . I do not think so. I think that the record shows t h a t
I am right. In these very extreme rates on stock exchange money,
the commercial people always got their money at reasonable rates.
There was no interference. The speculation did not interfere in any
way with commercial borrowings.
The ACTING CHAIRMAN. YOU think that legitimate business had
all the money it needed at reasonable rates even when the call money
rate was as high as 18 per cent?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

185

Mr. W I G G I N . Yes, sir.
The ACTING CHAIRMAN. That had no serious influence?
Mr. W I G G I N . I do not think so. I know in our own case it
Senator TOWNSEND. YOU mean the banks made different

did not.
rates to
legitimate business than those they made for speculative purposes?
Mr. W I G G I N . Oh, absolutely.
The ACTING CHAIRMAN. NOW, what effect do you think the lending
to member banks has? There is apparently a tendency to shift loans
to cover stock operations and although the Federal reserve did not
intend it so, that is the inevitable result. The member bank shifts
to take care of its stock loans.
Mr. W I G G I N . YOU mean that a member bank borrows money from
the Federal reserve in order to lend on the stock exchange?
The ACTING CHAIRMAN. Well, we believe that has been true to quite
a large extent in the last two or three years.
Mr. WIGGIN. I do not see how you can prevent it.

To use an old

expression, you can not earmark the money.
The ACTING CHAIRMAN. YOU do not think there is any feasible way
of getting around that?
Mr. W I G G I N . I do not think so.
Senator BULKLEY. Has Mr. Wiggin seen the provision of section 11?
I would be glad to have his comment on that. Briefly, it is that
during any period that a member bank is borrowing from the Federal
reserve bank on its short-time notes, secured by Government securities, it shall not increase its loans on market securities*
Mr. W I G G I N . YOU can not tell when you lend money, always just
for what purpose the money is to be used. If you lend money to a
stockbroker, you have prima facie evidence it is for speculation.
Senator B U L K L E Y . I do not think you caught this. This does not
presume to identify the purpose. I t simply provides that while they
are in debt to the Federal reserve bank, for their own notes, secured
by Government securities, during that time they shall not increase
their loans to their customers, based on collateral security.
Mr. W I G G I N . I think I understand. Suppose a bank in another
city wants to borrow some money from the Chase National: Are we
to investigate the purpose for which they are borrowing the money?
Senator BULKLEY. I did not mean to start that.
Mr. WIGGIN. But you are starting it.

Senator BULKLEY. I t is only the form of the security that you are
to take into consideration. I t does not question the purpose of it.
Mr. W I G G I N . Well, wait a minute. We do business with a great
many other banks, and when they borrow, they give us collateral.
Now, should we stop lending those banks on collateral because we
are borrowing from the Federal reserve bank?
Senator BULKLEY. That is precisely the question we are asking.
Mr. W I G G I N . I do not see any reason for it. I think you would
interfere with the most legitimate business in the country. I t may
be abused in some instances, but by making it prohibitive, it might
cause trouble unjustifiably. Do I make that clear?
Senator BULKLEY. Not entirely. I should like to hear that elaborated a little.
Mr. W I G G I N . Suppose the most important bank in some interior
city wanted to borrow some money: Suppose they come to their New




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NATIONAL AND FEDEBAL BESERVB BANKING SYSTEMS

York correspondent: Suppose they give us collateral, as is customary r
Should we, because we happen to be borrowing money already from
the Federal reserve bank, be obliged to refuse that accommodation?
Senatory BULKLEY. NOW, you are simply turning around and asking me the question that I have asked you. I do not give any answer
to it. I am trying to find the opinion of banking authorities on a
proposal that is in the bill.
Mr. W I G G I N . M y answer is, do not do it; it is a mistake.
Senator BULKLEY. That is a very fair expression of opinion, b u t
I do not feel that you have made it very clear to us. I mean t h a t
very respectfully, of course.
Mr. W I G G I N . YOU asked for an opinion. That you have. Now,
you asked me to explain. I have cited the case of an out of town
bank borrowing money for legitimate purposes to take care of customers—borrowing from a New York bank on security. Now, if
we say no, are we not causing trouble that is unwise to cause?
Senator BUCKLEY. T h a t is just what I am not sure about. I think
if you should arbitrarily say no, now, with the law in the state it is,
that you would be causing trouble, but whether it would be desirable
to make a new regulation to be embodied in the law, seems to me to be
a different question.
Mr. W I G G I N . YOU see, I am representing a New York bank and,
as you know, the business of the New York banks is somewhat different from the banks throughout the coimtry and particularly in our
case, where we have this enormous number of bank correspondents
whom it was been our custom to serve for a number of years and loaning those banks is an important factor in the commercial business of
the country and, therefore, it would appear to us, as we see it, as
unwise to restrict our extending accommodation of that kind.
Senator BULKLEY. Just so long as they present any good security,
no matter what the character of the security is, you would say you
should go ahead and lend?
Mr. W I G G I N .
Mr. W I L L I S .

Yes.

Some years ago I had the opportunity of getting
information from a number of New York banks, including yours,
regarding their relations with correspondents. Now, at that time, it
appeared that the status of the correspondent was very carefully
analyzed. You would not go on extending credit to the correspondent unless its statement of condition was about what you wanted?
Mr. W I G G I N . Oh, no. We do not pretend to make any bad loans
and we would limit the loans to what seemed to us reasonable.
Mr. W I L L I S . If they were borrowing money for the purpose of engaging in any kind of speculative activity, you would feel free to cut
them out?
Mr. W I G G I N . If we knew it.
Mr.

W I L L I S . Yes.
BULKLEY. YOU do not inquire
Mr. W I G G I N . N O .
Mr. W I L L I S . Your constant analysis of

Senator

too closely, do you?

the statements goes on from
month to month and from quarter to quarter and, of course, the
Federal reserve bank is provided not only with the statements of the
examiners, but also its own examiners' statements. Is it not in good
position to know that a bank is gradually increasing its discount
line for the purpose of going into the market?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

187

Mr. W I G G I N . Yes, we take all those matters into consideration.
Mr. W I L L I S . SO, while you can not earmark any one loan, you can
tell when the current is setting in or against that direction?
Mr.

WIGGIN.

Yes.

The ACTING CHAIRMAN. Would it be wise, in your opinion, if we
found some way of controlling the stock exchange loans, to interfere
with local banking management or, in any way, put a check on t h a t
or an additional check other than what we have?
Mr. W I G G I N . I do not think so. I think your law is a good law
and I do not think anything in the world will prevent bad banking
occasionally.
The ACTING CHAIRMAN. Except bad bankers. If you have bad
bankers, the law does not stop them?
Mr. W I G G I N . That is right.
The ACTING CHAIRMAN. YOU think the law, as far as the regulation
of loans on the stock exchange collateral is concerned, is as far as we
can go?
Mr. W I G G I N . My suggestions would be these: If we were going to
change the law at all, I would liberalize it in one way. I will explain
what my idea is if you would like to have me.
The ACTING CHAIRMAN. That is what we want.
Mr. W I G G I N . The rest of the law I consider good and I believe that
a firmer policy on rates and a higher rate on bond borrowing and
non-commercial borrowing, would be beneficial in its results.
The ACTING CHAIRMAN. I S that your specific recommendation, or
have you others?
Mr. W I G G I N . In liberalizing the act
The ACTING CHAIRMAN. What do you mean by " liberalizing the
act ?
"
Mr. W I G G I N . We realize that commercial paper, in volume, is not
adequate to-day. I t is necessary for the banks to carry large holdings of Government bonds in order to have eligible collateral. I
believe it would be beneficial to so amend the act that clearing-house
certificates would be available as collateral to member banks. I
would limit the clearing-house certificates to cities of a certain size,
and to cities where the clearing-house associations had a certain
minimum number of members.
Senator TOWNSEND. Why would you make that limit?
Mr. W I G G I N . Because you might get into a clearing house of two
or three, in a small town. I would limit it to say—this is not as the
result of careful thought but I would limit it to cities of say 500,000
people and to cities where the clearing-house membership is not less
than 10, so that you would have a s scurity back of the collateral.
Now, that is liberalizing the act and not curtailing it any.
The ACTING CHAIRMAN. What do you think the net result was of
the large increase in Government securities starting in 1927? T h a t
curve goes up very rapidly. The reserves were very large. Was
not that largely responsible for making money plenty and making it
easy to lend on stock exchange collateral—in other words, bolstering
up the speculative situation?
Mr. W I G G I N . YOU mean if they could not have borrowed on Government bonds, they would not have had it to lend?
The ACTING CHAIRMAN.




Yes.

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NATIONAL, AND FEDERAL. RESERVE BANKING SYSTEMS

Mr. W I G G I N . I presume that is true. I t increased the available
collateral for borrowing from the Federal reserve bank.
The ACTING CHAIRMAN. I t seems to have run along in the New
York situation at about a billion dollars and that jumped up very
quickly by another billion and a half—well, within a week—over a
billion in a week, a little over a year ago.
Of course, the Federal reserve had been getting into a strong cash
position.
Is it, in your opinion, desirable that the Federal reserve, the later
policy of the Federal reserve in getting strong in the cash position
as much as possible—have they overdone it recently?
Mr. W I G G I N . Oh, I do not think so.
The ACTING CHAIRMAN. Of course, you naturally want the banks
in a strong position in times of this sort. Whether they have reached
that position too quickly or whether they have been too drastic
Mr. W I G G I N . I do not think they have been drastic.
The ACTING CHAIRMAN. There has been discussion on that more
or less here, and I wanted your opinion on that. Do you think, Mr.
Wiggin, that the abolition of loans for others would help the situation?
Mr. W I G G I N . Abolition of loans for others by members of the
Federal reserve system?
The ACTING CHAIRMAN.
Mr. W I G G I N . Not a bit.
The ACTING CHAIRMAN.

Yes.

If a law were passed limiting the handling
of such loans by commercial banks, would the increase in such loans
be restrained to any extent?
Mr. WIGGIN. Not in my judgment.

Mr. W I L L I S . What would become of them, in that instance?
Mr. W I G G I N . They would start their own firms. There is a vast
amount of money loaned on the stock exchange not handled by the
banks.
Mr. W I L L I S . Through money brokers?
Mr. W I G G I N . Yes; and private banks.
Mr. W I L L I S . I S it not possible for Congress to control that kind of
banking, where the loans consist of funds obtained from large commercial enterprises—their owners are the stockholders and they have
derived their business, in most cases, from all over the country.
Ought not this business to be in the hands of the banks and go through
them? Ought not the banks to be in full control of the situation and
the others kept out of it?
Mr. W I G G I N . We should like to have full control of it, but it can
not be done.
Mr. W I L L I S . That is wholly out of the question?
Mr. W I G G I N . In my judgment, yes. I think your figures will
show you that, during the pteriod of large amount of loans on the stock
exchange, there was something like $1,400,000,000 loaned by firms
Mr. W I L L I S . You regard that loans for others, then, as a permanent phenomenon and one likely to recur at any time?
Mr. W I G G I N . I think so, just as long as those lenders think they
are doing a safe business.
The ACTING CHAIRMAN. D O you regard security loans as one of
the important causes of the recent bank failures? Statistics show
there have been 6,000 bank failures in 10 years, and an abnormal
number in 1930. What is the underlying trouble there, in your
opinion?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

189

Mr. W I G G I N . I think the nonliquid position of many banks was
because of the larger proportion of their loans that were on securities.
The ACTING CHAIRMAN. T h a t applies to the banks that have
failed, you think?
Mr. W I G G I N . I think you must distinguish between liquid securities
and unliquid securities, when you speak of slow loans or loans that
are not slow.
Mr. W I L L I S . Sometimes all of them are nonliquid, are they not, as
in the autumn of 1929?
Mr. W I G G I N . Apparently not. The stock exchange loans were not
frozen in 1929.
Mr. W I L L I S . I mean for a short time during the panic.
Mr. W I G G I N . N O ; the only time they were frozen was in 1914.
You remember that?
Mr. W I L L I S . Yes. You think there was no substantial freezing
at all in 1929.
Mr. W I G G I N . We saw none.
The ACTING CHAIRMAN. There was a market for the offerings?
M r . W I G G I N . Yes.
Mr. W I L L I S . B u t with

great gaps and sudden perpendicular drops
when the securities were offered?
Mr. W I G G I N . Yes; b u t there was no defaulting in stock exchange
loans in 1929. Your slow loans throughout the country are not your
stock exchange loans. They are your collateral loans. They are
the loans on bank stocks and local manufacturing companies and real
estate companies
Mr. W I L L I S . Unlisted things?
Mr. W I G G I N . Yes; unlisted things.
Mr. W I L L I S . B u t there is always quite

a proportion of call loans
which can n o t be actually called in any immediate sense—that will
not be called except in extreme cases?
Mr. W I G G I N . Are you speaking of loans to brokers or to individuals throughout the country?
Mr. W I L L I S . I am speaking of loans to brokers.
Mr. W I G G I N . They can be called. I t may be there will be a condition where the whole Street stops doing business, as in 1914.
Mr. W I L L I S . T h a t can happen but it will not happen in practice?
Mr. W I G G I N . Everybody has to stop at once to make them nonliquid.
Mr. W I L L I S . A S a matter of fact, a great many of them will not be
called except in unusual conditions? Is not that so?
Mr. W I G G I N . Well, the only time we have seen Wall Street loans
frozen was in 1914 when they closed the stock exchange.
The ACTING CHAIRMAN. Was there any concerted action on the
part of the banks of New York, a little over a year ago, to support the
situation?
Mr. W I G G I N . I do not know that it was concerted, but there was
a general action of that kind.
The ACTING CHAIRMAN. Several banks came to the rescue?
Mr. WIGGINS. Yes. As you know, in our case, our loans increased
overnight.
The ACTING CHAIRMAN. T h e tables show they increased very
rapidly.
Mr. W I G G I N . Yes; a tremendous amount.
34718—31—FT 1




13

190

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

The ACTING CHAIRMAN. What do you regard as the likely future
trend of the volume of security loans in this country?
Mr. W I G G I N . Why, as the country grows larger and its wealth
accumulates, the tendency should be to increase those loans with not
a steady increase, but with temporary shrinkages. The next move
should be a temporary shrinkage and then a start up again.
Mr. W I L L I S . From the present point?
Mr. W I G G I N .
Mr. W I L L I S .

Yes.

What do you regard as the normal level of security
loans for the country at the present time?
Mr. W I G G I N . I can not answer that. I have figures that show the
increase and the shrinkage in commercial loans, but I would have to
analyze them to give any estimate of what it should be.
Mr. W I L L I S . T O get back to.satisfactory liquid conditions, do you
think we should go back to the level of about 1926 or 1927?
Mr. W I G G I N . I should say so.
Mr. W I L L I S . SO that for the immediate future, the movement should
be downward distinctly?
Mr. W I G G I N .
Mr. W I L L I S .

Yes.

With a slow trend upwards as the country grows

larger?
Mr. W I G G I N . Yes.
The ACTING CHAIRMAN. What are the figures now, Doctor Willis?
Mr. W I L L I S . They are given for member banks—that is, reporting

member banks—each week. I think the total, now, of security loans
is in the neighborhood of $7,500,000,000, if I am not mistaken.
The ACTING CHAIRMAN. D O you recall what those loans were in
1926 and 1927?
Mr. W I L L I S . About five and one-half billion, as I recall.
Mr. W I G G I N . I think about 6,000,000,000.
Mr. W I L L I S . About $6,000,000,000?
Mr. W I G G I N S . Yes, sir.
The ACTING CHAIRMAN.

Would you advocate conservative steps
looking toward the contraction of such loans over a period of time?
Outline some such steps as you think advisable, in your opinion.
Mr. W I G G I N . Let it take care of itself. I t will. The whole
country is stock-minded. They are waiting for a rebound to-day.
They will get over that.
Mr. W I L L I S . H O W long will it take?
Mr. W I G G I N . YOU have read my report, have you not?
The ACTING CHAIRMAN. What measures would you stiggest to
check future market expansion of security loans during periods of
popular widespread speculation?
Mr. W I G G I N . I would not take any steps. You can not question
the purpose for which the bank borrows money without going into
a tremendous amount of detail and they will always be able to convince you if it is for perfectly legitimate purposes.
The ACTING CHAIRMAN. YOU hear it frequently advocated that
short sales be prohibited by law. Will you give us your idea of that,
as a matter of record?
Mr. W I G G I N . I think it would be extremely unwise.
The ACTING CHAIRMAN. Why?
Mr. W I G G I N . I think the wider the market the less restriction
there is on the marketing of securities, the more wholesome the
market^




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

191

The ACTING CHAIRMAN. IS there any more reason for restricting
short sales than long sales?
Mr. W I G G I N . At certain times; yes.
The ACTING CHAIRMAN. Are you not conscious, Mr. Wiggin, of a
deliberate tendency, without making any specific charges, when we
get a situation like the last 14 or 15 months, on the part, let us say, of
professional bear raiders, to exaggerate depression, to exaggerate hard
luck stories, and to put them out? In other words, is there not a
pretty well systematized propaganda?
Mr. W I G G I N . That is what I had in mind when I said at certain
times there is a reason.
The ACTING CHAIRMAN. YOU agree with me in that respect?
Mr. W I G G I N . I think anything—and this is entirely independent
of short selling—anything that is scandalous; anything circulated to
do harm, to injure people and injure securities, is a bad thing.
The ACTING CHAIRMAN. T O depress
Mr. W I G G I N . Entirely regardless of short selling.
The ACTING CHAIRMAN. The two may be easily connected?
Mr. WIGGIN. Correct.

The ACTING CHAIRMAN. D O you think that the Federal reserve
banks in carrying out policies of credit control can exercise qualitative
as well as quantitative restrictions in the use of member-bank credits?
Mr. WIGGIN. Well, I think they can.
The ACTING CHAIRMAN. I t is their duty to, is it not?
Mr. WIGGIN. I think so.
Mr. W I L L I S . Does not that imply, then, that it is possible for them
to know what use is going to be made of the money?
Mr. WIGGIN. I t implies giving the executives of the Federal
reserve banks discretion.
Mr. W I L L I S . I t implies that he will be able to know or find out how
the proceeds of a certain discount will be likely to be used?
Mr. WIGGIN. I think so.
Mr. W I L L I S . From that, one would infer your opinion to be that a
loan made to a bank for carrying securities, for example, would have
a rather different immediate effect from the discount of eligible
paper, on the general credit situation?
Mr. WIGGIN. Yes, sir.
The ACTING CHAIRMAN.

I am anxious to bring out your idea on
security affiliates. Do you think they have served a good purpose?
Do you think some good has come from them? Do you think more
good has come from them than harm?
Mr. W I G G I N . I think, if I may, I will read a paragraph I have
prepared on that.
The ACTING CHAIRMAN. We will be glad to have it.
Mr. W I G G I N . The security affiliates of national banks should be
continued and not abolished. These companies are required to render
an essential banking service in financing the large corporations of the
company and other clients of the banks. This is a service which can
not, except within very narrow limits, be performed by the bank itself.
These companies in addition to providing long-term funds for customers of the bank, bring to the bank a great deal of banking business,
such as trusteeships, fiscal agencies, transfer agencies, registrations,
deposit accounts, and so forth.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

State institutions, such as the New York State trust companies,
can perform these services directly, and to place any restrictions on
national banks which would prevent them from rendering the same
service through affiliates, organized by the stockholders, would place
them at a disadvantage in competition with State institutions and
private bankers.
The method employed by the national banks of rendering this
service though an affiliate, the capital of which is provided by the
stockholders, permits a complete segregation of the capital funds used
for the rendition of this service from the capital fund employed in the
commercial and other general banking business.
I shall not take much longer on this. This may bore you.
The ACTING CHAIRMAN. N O ; it is interesting.
Mr. WIGGIN. As the service rendered by the security affiliate is
rendered primarily to the bank's customers, the arrangements for the
affiliation, as in the case of the Chase Securities Corporation and the
Chase National Bank, should be such that the directors of the Securities Corporation and of the bank are always elected by the same stockholders, although the stockholders could and do elect different boards
of directors for the securities company as against the bank. I t is also
essential that the affiliation arrangements should provide for an identity
of stock-owning interests in the bank and in the Securities Corporation,
so that the bank's stockholders will participate in any security business
that might originate with the bank but be transferred to the Securities
Corporation for consummation.
The bank examiners of the Comptroller of the Currency's office
examine the Chase Securities Corporation at the same time they
examine the bank. Of course, that examination is entirely agreeable
to us. We believe that it is an advisable thing to have this done in
connection with the examination of the bank.
The Chase Securities Corporation issues to its stockholders and to
the public annually a balance sheet and statement of its income. Of
course, since we do it ourselves, it is our belief that it is a sound policy.
We believe that a stockholder and the public are entitled to that information. I do not mean by that to go so far as to say that I think it is
advisable that the security affiliate should publish a statement as
frequently as the bank does. I see no objection, if desiied by the
Federal Government, why the Comptroller of the Currency should not
have reasonable supervisory powers with respect to any transactions
between the banks and any of its affiliations.
I think that completes my answer to that question. I can go into
detail as to the sort of examination that the Comptroller's office has
made, if you would like me to do so.
The ACTING CHAIRMAN. I t would be interesting. We have spent
a great deal of time in the last week on this question of affiliates.
Mr. W I G G I N . At the time of the usual examination of the Chase
National Bank by the bank examiners, one or two examiners are
assigned to examine the Chase Bank's affiliates.
Senator BULKLEY. D O I understand they have an absolute right to
do that?
Mr. WIGGIN. I t is by courtesy.

Senator BULKLEY. D O you think that should be?
Mr. W I G G I N . Oh, I would go the whole distance and make it
obligatory. This examination was first done at the time of our May,




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

193

1922, examination, and it has been followed regularly since that time.
Schedules are furnished, giving the balance sheets and list of investments, showing the name of the security, the par value and the book
value of everything on the list, the receivables and payables, the list
of money balances in syndicate accounts, and list of securities held in
syndicate accounts. The examiner is given access to our general
ledgers and the security ledgers and subsidiary books covering both
accounts. The securities held by the corporations, including syndicate securities held, have been verified by actual count by the examiners, not always, but up to the last two or three times they have
always done that. They have never made any request for the books
of the subsidiary companies nor for the records of the syndicate department other than those I have already mentioned. At times information on some specific company or investment has been requested
and, in such cases, the examiner has been referred to a senior officer
and his request always complied with.
The ACTING CHAIRMAN. Why was it omitted the last two or three
times?
Mr. W I G G I N . I suppose under their pressure, and that was only in
the examination of certain securities. They were all listed. They
had all the information, but they simply did not examine them all.
For example, in our last examination, in October, 1930, the balance
sheet of the American Express Co. was requested. T h a t is a subsidiary company and their last balance sheet was submitted.
I think I have covered the question.
Mr. W I L L I S . If you make that obligatory, should the portfolio be
published, in your opinion?
Mr. W I G G I N . I should not think so, any more than you would
publish the loans of a bank.
Mr. W I L L I S . Most investment companies publish it.
Mr. WIGGIN.
Mr. W I L L I S .
Mr. WIGGIN.
Mr. W I L L I S .
Mr. WIGGIN.
Mr. W I L L I S .
Mr. W I G G I N .

Yes.

In this case you think it should not be done?
I do not think so.
A statement of condition should be, however?
Yes.

Along with the bank statement?
Yes. I would make it once a year, because of the
difference in the business.
Mr. W I L L I S . What change would you make in the loans placed
by the parent bank with the security company, or with all its security
companies together?
Mr. WIGGINS. I would let it stand as the law is now. I would treat
each company on its merits and let it stand on its own bottom.
Mr. W I L L I S . At the present time, some of them get a large percentage of the capital and surplus of the parent bank.
Mr. W I G G I N . They are loaned by the bank simply within the limits
placed by the banking act.
Mr. W I L L I S . Yes; but suppose you have near 50 affiliates, as a
certain defunct bank had in New York, I believe, and you applied
that to each one: I t might make a seriously dangerous situation,
would it not?
Mr. W I G G I N S . Well, but you will have to cover that the same way
you cover this bad banking, by letting the Federal reserve have some
discretion.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. W I L L I S . If I mistake not, Mr. Case said the Federal reserve
knew nothing definite of this particular bank until last November.
Suppose that an examination such as you spoke of were not called
for by the State law but only by the national law, evidently then
it would have to be undertaken by the Federal reserve system, would
it not?
Mr. W I G G I N .
Mr. W I L L I S .

Yes.

Unless they had a much larger examination staff than
at present, it seems to me their hands would be strengthened a great
deal if you had some positive prohibition in the law limiting the
amount of loans by parent banks to security affiliates. -1 think the
Comptroller of the Currency said last week he thought it would be
very well to treat all security affiliates as if they were one; that is, to
regard the whole group of them as a unit under the law, so that the
existing \&w would apply to the aggregate and not separately to each
and every affiliate.
Mr. W I G G I N . I think you had better let each concern stand on its
own bottom, with its own figures and own capital, and consider it on
its own merits, rather than that because of the fact someone has
abused it
Mr. W I L L I S . YOU think, in spite of abuse, we should let each
affiliate stand as an independent borrower, subject to the restrictions
of the existing law and no other?
Mr. W I G G I N . I do. Take in our case, with the American Express
Co., with $18,000,000 of its own capital, with Harris-Forbes, with
$9,000,000 of its own capital, and Chase securities, with $108,000,000
capital, it would be unfair to put those all into one class and say you
could only lend all those great big concerns a certain amount of
money.
Mr. W I L L I S . Does not that mean you need an overhauling of the
entire loaning provisions of the act, since these companies were not
contemplated at the time the National banking act was framed?
Mr. W I G G I N . I do not think so. You can always have bad banking.
Mr. W I L L I S . On that basis, you would never have any banking
legislation at all, but simply work on the English system and leave it
to public opinion to insure good banking?
Mr. W I G G I N . That would be ideal.
Mr. W I L L I S . But we are not ready for such an ideal in this country,
are we?
Mr.

WIGGIN. NO.

The ACTING CHAIRMAN. D O you consider the present status of the
reserves entirely satisfactory?
Mr. W I G G I N . I think the reserve on time deposits is too low.
Mr. W I L L I S . H O W much should it be? Should it be the same
as on the demand deposits?
Mr. W I G G I N . I think so.
Mr. W I L L I S . H O W long would you give them to get up to that,
if you are going to legislate to make it the same as the demand deposits?
Mr. W I G G I N . I have not followed that.
Mr. W I L L I S . I S not that an essential problem?
Mr. W I G G I N . I t should go up three per cent a year.
The ACTING CHAIRMAN. Until it reached the level of the other
reserves?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
Mr. W I G G I N . Yes.
W I L L I S . YOU think
Mr. W I G G I N . I do.
Mr. W I L L I S . What do

Mr.

195

the level of the others is all right?

you think of the proposal that some have
made of either adding to the present reserve requirement a requirement that a certain proportion of unquestionably liquid securities be
carried by the banks, or perhaps letting down the present cash requirements somewhat and adding a somewhat larger requirement for the
carrying of liquid securities?
Mr. W I G G I N . Then you will get into the definition of liquid securities, which will always be very difficult.
Mr. W I L L I S . YOU think you would then have a call for the good
banking judgment you spoke of?
Mr. W I G G I N .
Mr. W I L L I S .

Yes.

The present percentage, you think, is about as good

as you can get?
Mr. W I G G I N . I think so. I think its results are as satisfactory as
any determined percentage you could fix.
Mr. W I L L I S . Has the market for Federal funds materially cut the
reserve we have, or not?
Mr. W I G G I N . I do not believe I understand.
Mr. W I L L I S . At the present time we have a market for Federal
funds which results in sales by a bank that has an overage to the
bank that is short, with the result that, on many occasions, surplus
reserve which would otherwise exist, does not exist. Apparently that
leads to a cutting down of the total percentage of the reserves a great
deal.
Mr. W I G G I N . I think t h a t custom does enable the banks to figure
much closer the average than they would establish otherwise.
Mr. W I L L I S . Have we not cut the amount of the reserves considerably more than before it was adopted, through this device?
M r . W I G G I N . Possibly they can figure more closely.
M r . W I L L I S . Have you any idea how much closer they do figure?
Mr. W I G G I N . I have not.
Mr. W I L L I S . I t would seem to be considerably closer through that
method.
The ACTING CHAIRMAN. Let us discuss, for a little while, this question of chain banking versus branch banking and see if we can clear
up the minds of the public to some extent. There is a great deal of
confusion to-day that exists between those two terms. You are, of
course, familiar with the English system of branch banking. What
do you think of extending that system to some extent in this country,
gradually?
Mr. W I G G I N . Every community in this country that will support
a bank is well cared for already. The communities that are not provided with banking facilities are communities that can not support
a bank. We have had a very long experience in acting as correspondent of banks throughout the country, and we do not know of a case
where a solvent bank has been permitted to fail from lack of accommodation from its correspondent.
Our own preference would be not to see any extension of branch
banking. If the branch banking were limited to trade areas or to
Federal reserve districts, it would cause, in the New York district,




196

NATIONAL AND FEDEBAL RESEBVE BANKING SYSTEMS

a competition in the buying of other banks in other cities, which we
would dislike to see.
You must also remember, with our present banking system as set
up, there is just as much reason for a New York bank serving Nebraska
as there is for serving the State of New York. We act as the correspondent of banks from all over the country and we lend those banks
from all over the country and if there was any suggestion of branch
banking to the extent of the whole country, we would consider it
exceedingly inadvisable, because of the difficulty and impossibility
of running branches at such a distance, in a satisfactory way. A lot
of this you had when I appeared before the House committee and I
do not want to repeat too much.
So in the suggestion of branch banking, whether it be country-wide
or trade area or Federal reserve districts, I can see nothing that is
going to supply a community that will not support a bank, with a
bank, and that apparently is the one thing they are striving for.
The ACTING CHAIRMAN. D O you think there are too many banks
now?
Mr. W I G G I N . Oh, I do not know. I think there was a mushroom
growth of banks, especially in the larger cities in the last few years,
that has been unhealthy, but that has been reduced somewhat in the
last few months.
The ACTING CHAIRMAN. Most of them have been taken care of?
Mr. W I G G I N . Where that line should be drawn, I do not know.
The ACTING CHAIRMAN. Of course, it is a pretty nice point to say
where any line should be drawn in a banking system. You are, of
course, familiar with our Farm Loan Board and its ramifications and
the system of banking set up. You are familiar with the system of
joint-stock land banks. They have been having hard sledding. They
are not, in any sense, guaranteed by the Government.
Have you an idea as to how that situation can be helped without
too much paternalism?
Mr. W I G G I N . N O ; I think we have helped it too much. I think
we have made the farm loans altogether too easily obtainable. I
think that is one of the causes of the trouble.
The ACTING CHAIRMAN. Insufficient collateral?
Mr. W I G G I N . Well, the minute a farmer borrows money, he buys
another farm. I t was not kept liquid.
Mr. W I L L I S . I t is not the fault of the banks?
Mr. W I G G I N . In part.
The ACTING CHAIRMAN. The bank permits that?
Mr. W I G G I N . Yes.
The ACTING CHAIRMAN.

I t might be well to cover chain banking
for the record.
Mr. W I G G I N . Well, I have no objection to chain banking. We
simply do not want to do it ourselves.
Mr. W I L L I S . I S it a sound system, Mr. Wiggin?
Mr. W I G G I N . Well, yes; I think it is sound. I t is all a question of
how far it goes and who does it.
Mr. W I L L I S . Under past conditions, do you think it can continue
to be carried on?
Mr. W I G G I N .

Yes.

Mr. W I L L I S . Does it not tend to exert a central control, without
central responsibility?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

197

Mr. W I G G I N . No; I think the responsibility is there just the same.
Mr. W I L L I S . I t largely nullifies or may nullify the double liability
on bank stocks, for whatever it is worth, may it not?
Mr. W I G G I N . T h a t is true.
Mr. W I L L I S . What do you think of the provision in this bill with
reference to chain banking—or have you examined that?
Mr. W I G G I N . I do not know the provisions of the bill and I will
not try to answer that.
Mr. W I L L I S . The provision, in brief, is simply to give the voting
power solely to the local owners so that the outside owners lose their
voting power on the shares they own.
Mr. W I G G I N . Is that constitutional?
Mr. W I L L I S . I think it has been held that Congress can make the
holding of national bank shares subject to whatever conditions it
may see fit to impose, within specified limits. Suppose it were constitutional: Do you think it would have any beneficial effect, or the
reverse?
Mr. W I G G I N . I do not think so. I think there are several groups
of chain banks that have strengthened the local banks.
Mr. W I L L I S . Strengthened the local control
Mr. W I G G I N . Strengthened the institution.
Mr. W I L L I S . Here is a question, as it seems to me: The people in
the various towns where banks are bought up, for one reason or
another—perhaps unwisely—object to that. They think they should
have an institution locally controlled. Ought they not to be able to
control that bank locally so that if an outsider comes in and buys it,
he simply buys an investment, or ought they remain subject to the
danger of losing their control of the local bank?
Mr. W I G G I N . All they have to do, if they sell it, is to start another
bank.
Mr. W I L L I S . B u t you have already said there were too many
banks.
Mr. W I G G I N . N O ; I said I did not know whether there were too
many banks.
Mr. W I L L I S . I thought you said there had been a fortunate reduction of a lot of weak ones.
Mr. W I G G I N . Yes; I said that.
Mr. W I L L I S . Then, the starting of another bank is not a satisfactory remedy for the existing situation, is it?
Mr. W I G G I N . I t depends on the community and its particular needs.
Mr. W I L L I S . Take the ordinary small community, that can support a small bank; it ought not to have more than one, should it?
Mr. W I G G I N . That is right.
Mr. W I L L I S . I t ought not to be necessary to start another bank to
bring about a satisfactory conduct of that particular bank?
Mr.

WIGGIN. N O .

Mr. W I L L I S . I t is perfectly true that if the people who own the bank
stock resolutely say: " W e will not sell it"—if they feel that way—
we need not discuss it, but they do not feel that way, and when they
have a high price offered them, they frequently sell to the disadvantage
of the welfare of the town. That has happened. Is it not well to
have a limitation on that, if you are going to continue to have a system
based on the idea of the unit bank? You yourself have spoken
against branch banking.




198

NATIONAL AND FEDERAL, RESERVE BANKING SYSTEMS

Mr. W I G G I N . I think the people who put their money in the banks
should have the right to run it.
Mr. W I L L I S . Regardless of what they do?
Mr. W I G G I N . I do not mean to say they should have the right to
abuse it.
Mr. W I L L I S . We are assuming they are abusing it; that they are
withdrawing funds from the community; using the local bank as a
means of mopping up the funds of the community and sending them
elsewhere, which undoubtedly has been done in many cases, so that
local industries have not been given the loaning facilities they ought
to have. I am speaking now purposely assuming sound banking,
but that the local funds have been mopped up and sent somewhere else.
Mr. W I G G I N . Well, all they have to do is to start another bank.
Mr. W I L L I S . But you are recommending as a remedy, the same thing
that you have pointed out as a crying evil.
Mr. W I G G I N . There are two different purposes involved. The local
purpose did not exist for starting the bank where there were too
many before, but in the event this bank that has been sold is run in
such a way that local industries feel they are suffering, then they can
correct that by starting another bank.
Mr. W I L L I S . But suppose the comptroller said they should not have
a charter?
Mr. W I G G I N . He would not, if it was a respectable crowd.
Mr. W I L L I S . Suppose he said he would prefer to give a charter
to the local bank in a chain?
Mr. W I G G I N . YOU are going a little too far for me. I do not
know what would happen.
Mr. W I L L I S . I t seems to me you would have to make some
provision against that contingency.
The ACTING CHAIRMAN. Of course, we do not want to go into any
unborn contingencies that may happen. I think we have briefly
covered the ground we have covered with the various Federal reserve
directors. Have you any questions, Senator Norbeck, you want to
bring out?
Senator NORBECK. I have none.
The ACTING CHAIRMAN. Have you, Senator Townsend?
Senator TOWNSEND. N O .
Mr. W I L L I S . I wanted to ask you about the so-called pool that was
established at the time of the panic, or just after the outbreak of
the panic in 1929, to sustain the market. That is always spoken
of as having been done by the banks. I suppose that was done
through the securities companies?
Mr. W I G G I N . In our case we did not regard it as one to sustain the
market, but as one so that there would be purchasing power at some
fair price, and not let these shrinkages be too severe at one time.
That may be the same thing. I do not know. In our case, it would
be done by the Chase Securities Corporation.
Mr. W I L L I S . And presumably in the same way by the others who
participated?
Mr. W I G G I N . I think so.
Mr. W I L L I S . Does that mean that the parent bank made a direct
loan to the securities corporation for the purpose of enabling it to do
this?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

199

Mr. W I G G I N . I do not know whether the Chase securities affiliate
borrowed any money at that time or not.
Mr. W I L L I S . Did the reserve bank lend any money for t h a t
purpose, as far as you know?
Mr. WIGGIN. A S I said, you can not ear-mark it.
Mr. W I L L I S . Did it simultaneously, or about that time, lend
money which might reasonably be supposed was used for t h a t
purpose?
Mr. W I G G I N . The Chase National Bank increased its loans very
largely—very much over the amount used by the Chase securities
pool.
Mr. W I L L I S . Did it do that because of the existence of that pool?
Mr. W I G G I N . Possibly, but the borrowings by the bank were so
much larger than the interest it had in that pool, you could not tell.
The bank took over these loans for account of others which immediately put the money on deposit, which required a reserve and
immediately made us borrow money, for a few weeks or a few days>
our loans ran up enormously.
Mr. W I L L I S . Was the pool really helpful and beneficial?
Mr. W I G G I N . I think so. I think it made people stop, look, and
listen.
Mr. W I L L I S . Did it exert its efforts over the whole field of the
securities or only in certain cases?
Mr. W I G G I N . Only in what they call pivotal stocks. They could
not do it in all. There were too many.
Mr. W I L L I S . What was the definition of "pivotal stocks"?
Mr. W I G G I N . I do not know. What you would call active-market
stocks I think is a good definition.
Mr. W I L L I S . The support had no relation to the stocks that had
"been, as it is called, "sponsored" by different houses?
Mr. W I G G I N . I do not think so.
Mr. WILLIS. If you had not had security companies existing at
that time, could that sort of market help have come equally easily?
Mr. W I G G I N . Not so easily. I t may have come from individuals.
Mr. W I L L I S . But the security companies were of distinct help in
facilitating the prevention of something worse in the. way of market
deterioration?
Mr. WIGGIN. I think so.
Mr. W I L L I S . How long did it take to liquidate the pool?
Mr. W I G G I N . I may be able to give you that exactly.
Mr. W I L L I S . I mean only approximately.
Mr. W I G G I N . Well, it ran for several weeks. As I remember, I do
not believe it was liquidated until after the turn of the year. I t may
have been five or six weeks. I am simply guessing on that.
Mr. W I L L I S . Might that situation have been avoided by sufficiently prompt action on the part of the reserve bank? I understood
you to say at the outset, Mr. Wiggin, you thought there should
be a slightly stiffer policy in the rates and a different open-market
policy. How far back would you carry that?
Mr. W I G G I N . I would have to look up my dates on that. I can
not answer that.
Mr. W I L L I S . That would be a criticism applying to some months
before?
Mr. W I G G I N . A great many months.




200

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. W I L L I S . I understood you also to say that legitimate business
had all the money it needed at reasonable rates?
Mr. W I G G I N .

Yes.

Mr. W I L L I S . D O not the compilations of the banking authorities
show that there was a steady upward movement of the commercial
rates during the year or two before that in which the collapse took
place, and that it took several months after that collapse before there
was a distinct downward tendency noticed in the ordinary commercial
rates?
Mr. W I G G I N . Let me glance at my papers and see what those
rates were. I think I have it right here.
Mr. W I L L I S . Suppose you add that to your testimony when it
comes to you for examination?
Mr. W I G G I N . Give me one second and if I do not find it right away,
I shall do that. I have a lot of figures on brokers' loans, if they are
of any interest to the committee.
Mr. W I L L I S . I suggest you file them with your testimony.
Mr. W I G G I N . N O ; I can not put my finger on that.
Mr. W I L L I S . Will you insert that in your testimony?
Mr. W I G G I N . Very well.
The ACTING CHAIRMAN. Have you some figures you think would
be interesting to us on brokers' loans?
Mr. W I G G I N . They may be of interest to you.
The ACTING CHAIRMAN. If you can spare them now, you might
leave them with the clerk.
Mr. W I G G I N . All right; I shall do that.
The ACTING CHAIRMAN. And we will put them in the record.
Mr. W I G G I N . I shall do that.
The ACTING CHAIRMAN. Without objection, the figures asked for
by Doctor Willis and these additional figures on broker's loans will
be included in the record.
(The figures referred to are printed in full, as follows:)




T A B L E 1.—Brokers loans

C h a s e call
Chase t i m e .
C u s t o m e r s call
Customers time

.
_._

Total

.

Low,
J a n . 4,
1930

High,
Sept. 27,
1929

Low,
S e p t . 4,
1929

High,
Oct. 15,
1929

Low,
Oct. 31,
1929

High,
N o v . 1,
1929

Low,
N o v . 27,
1929

High,
D e c . 30,
1929

Low,
D e c . 5,
1929

High,
J a n . 31,
1930

Low,
J a n . 3,
1930

51,560
510
884,752
21,069

50,964
43,432
560
750
762,977 1, 009,638
13,129
21, 709

46,394
510
879,216
20,519

42, 715
525
997,676
29,274

274.662
625
522,459
29,524

253,859
625
520,212
29,024

25, 566
1,410
385,557
17,606

52, 061
2,540
404,983
13, 316

18,223
1,710
391,534
14,631

28,841
1,508
430.276
12,426

21,359
2,490
411,952
13,066

21,722
2,490
411, 589
13,066

957,891

827,630 1, 075,529

946,639 1. 070,190

827,270

803, 720

430,139

472,900

426, 098

473,051

448,867

448,867

Low,
J u n e 30,
1930

High,
J u l y , 1,
1930

High,
A u g . 27,
1929

Low,
A u g . 1,
1929

High,
J u n e 5,
1930

Low,
J u l y 23,
1930

High,
F e b . 8,
1930

C h a s e call
Chase time
Customers call..
Customers time
Total

_ _ _
___

__




—

High,
A p r . 2,
1930

Low,
A p r . 30,
1930

High,
M a y 31,
1930

Low,
M a y 21,
1930

31,221
1,508
429,276
12,426

71,540
11, 563
437,119
25,605

22,205
1,543
439,238
11,925

80,936
11,778
429,488
25,330

51,864
11,797
425, 074
35, 661

176,431
42,645
485.685
91,755

48,488
11,695
394,979
25,480

223,895
42,545
490.751
88, 005

225,386
28,945
259,856
72,405

224,912
28,945
285, 038
73,905

166,753
7,745
303, 574
63,975

474,431

545,827

474,911

547, 532

524,396

796, 516

480,642

845,196

586,592

612,800

542,047

High,
A u g . 4,
1930

Total

Low,
M a r . 5,
1930

61,342
1,473
442,264
13, 072

__

High,
M a r . 27,
1930

518,151

C h a s e call
Chase t i m e —
Customers call. _
Customers time._

Low,
F e b . 1,
1930

Low,
A u g . 28,
1930

High,
S e p t . 25,
1930

Low,
S e p t . 4,
1930

High,
Oct. 3,
1930

Low,
Oct. 30,
1930

High,
N o v . 1,
1930

Low,
N o v . 26,
1930

High,
D e c . 8,
1930

257,995
7,820
273,635
65,920

153,114
15,445
286, 678
61, 845

250,191
14, 520
283,979
57,345

155,875
15,445
277,183
62,095

261,362
14, 570
223,223
52,945

163,299
17,645
197,662
44,765

167, 762
17,645
195,829
44, 765

104, 578
14, 020
166.886
36,215

160,722
13,905
168, 021
31, 015

99, 750
13,905
166, 576
35,115

605,370

517, 082

606, 035

510, 598

552,100

423, 371

426, 001

321,699

373,663

315, 346

_

Low,
D e c . 1,
1930

202

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
TABLE 2.—Brokers loans at close of business January 21, 1981

Demand loans of this bank (strict call)
$93, 125, 000. 00
Other demand loans of this bank (main office)
68, 482, 075. 00
Other demand loans of this bank (equitable branch)
4, 254, 289. 00
Other demand loans of this bank (mercantile branch)
3, 393, 800. 00
Time loans of this bank (main office)
15, 085, 000. 00
Time loans of this bank (equitable branch)
205, 571. 00
Call loans for account of domestic banks
83, 299, 010. 00
Time loans for account of domestic banks
8, 147, 283. 18
Time loans for account of London branch
32, 100, 000. 00
Call loans for account of firms, corporations and individuals
52, 234, 722. 22
Time loans for account of firms, corporations, and individuals.
537, 691. 59
The Chase National

360, 864, 441. 99

TABLE 3.—Shifting of loans
The following figures show the shift of loans since the peak of $1,075,000,000
was reached on September 27, 1929:
Sept. 27,1929
$3,250,000.00
40,182,624.84
750,000.00
380,723,900.00
15,368,883.17
8, 620,000.00
250,000.00

Demand loans of this bank (strict call)
Other demand loans of this bank..
Time loans of this bank..
Call loans for account domestic banks.
Time loans for account domestic banks
Call loans for account foreign banks
Time loans for account foreign banks
Call loans account firms, corporations and individuals. _
Time loans account firms, corporations, and individuals

Nov. 6, 1929
$57,500,000.00
109,495,244.84
625,000.00
210,409,800.00
22,400,883.17
1,923,000.00

620, 294,222. 22

6,090,297.45

303,809,222.22
6,473,297.45

1,075,529,927.68

712,636,447.68

This shows a reduction of $363,000,000. Chase loans increased $123,000,000
and customers' loans decreased $468,000,000.
L. H. J.
NOVEMBER 6,

1929.

TABLE 4.—Brokers' loans for the panic week
1929
Close of business Opening of busiOct. 23
ness Oct. 31
Demand loans of this bank 1 (strict call)
Other demand loans of this bank i
Time loans of this bank *

Increase or
decrease

$245,000.00
16,495,624.84
525,000.00

$188,630,000.00
109,353,244.84
625,000.00

+$188,385,000.00
+92,857,620.00
+100,000.00

17,265,624.84
370,274,800.00
23,150,883.17
8,650,000.00

298,608,244.84
216,491,300.00
22,850,883.17
1,773,000.00

+281,342,620.00
-153,783,500.00
-300,000.00
-6,877,000.00

592,219,222.22

311,769,222.22

—280,450,000.00

4,673,297.45

6,473,297.45

+1,800,000.00

Total
1,016,233,827.68
Total loans and discounts of Chase Bank—
Demand, time loans, bills discounted, and
overdue
_
690,275,000.00

857,965,947.68

-158,267,880.00

1,062,807,000.00

+372,532,000.00

Total brokers' loans of this bank i
Call loans for account of domestic banks.
Time loans for account of domestic banks. „
Call loans for account of foreign banks
Call loans for account of firms, corporations, and
individuals
Time loans for account of firms, corporations, and
individuals

1

From officers' bulletin, Chase National Bank.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

203

TABLE 5.—Money rates
Commercial paper
1920:
June
July
August
September.
October—
1929:
June
July
August
September.
October..-

Time
money

7.99
8.03
8.05
7.84
7.87

8.65
8.84
8.69
7.89
7.88

6.19
6.13
6.23
6.12
6.09

8.70
8.11
8.87
8.61
7.31

Call rate higher still.

TABLE 6.—Brokers' loans 1917 to 1931
(Total, as reported by member banks in New York City—Record of highs and
lows
At start of records, October 5, 1917, total broker loans as reported by member
banks in New York city were $934,000,000. Major changes were as follows:
Declined to 473 millions, January 25, 1918.
Increased to 1,518 millions, November 7, 1919.
Declined to 724 millions, July 6, 1921.
Increased to 1,695 millions, May 2, 1923.
Declined to 1,130 millions, November 7, 1923.
Increased to 3,141 millions,1 January 6, 1926.
Declined to 2,409 millions,2 May 19, 1926.
Increased to 6,804 millions, October 2, 1929.
Declined to 3,328 millions, December 24, 1929.
Increased to 4,274 millions, April 30, 1930.
Declined to 1,820 millions, January 14, 1931.
Source: Rederal Reserve Bulletin, The Annulist, Annual Report of Federal Reserve Board and Standard
Statistics.

TABLE 7.—Brokers' loans 1926 to 1931
(Total for account of others as reported by member banks in New York City—
Record of highs and lows)
At start of records, January 6, 1926, total loans for account of others were
$564,000,000. Major changes were as follows:
Increased to 3,907 millions October 2, 1929.
Declined to 294 millions December 24, 1930.
Increased to 344 millions January 14, 1931 (last available).
Supplementary: Figure as of October 23, 1929, 3,823 millions; figure as of
October 30, 1929, 2,443 millions.
H Source: The Annalist, Federal Reserve Bulletin and Annual Report of Federal Reserve Bulletin.
TABLE 8.—Brokers' loans 1918 to 1931
(Total as reported by New York Stock Exchange—Record of highs and lows)
At start of records, October 1, 1918, total broker loans were $1,009,000,000.
Major changes were as follows:
Declined to 970 millions February 1, 1919.
Increased to 1,756 millions November 1, 1919.
Declined to 948 millions September 1, 1921.
Increased to 1,927 millions November 1, 1922.
(Figures for years 1923-24-25 not available) 3,513 millions January 30, 1926.
1
A slight change was made in method of reporting data at the beginning of 1926. (New figure contained
about $200,000,000 not previously included.)
2 There were slight reverses in first and third quarters if 1928 and second quarter of 1929.




204

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Declined to 2,767 millions May 29, 1926.
Increased to 8,549 millions September 30, 1929.
Declined to 3,985 millions January 31, 1930.
Increased to 5,063 millions April 30, 1930.
Declined to 1,894 millions January 1, 1931.
Source: Annual Report of Federal Reserve Board, Stock Exchange Bulletin,
and Standard Statistics.
TABLE 9.—Brokers' loans 1918 to 1931
Total loans from private banks, brokers, foreign banking agencies, etc., as reported by New York Stock Exchange—Record of highs and lows
At start of records, October 1, 1918, total loans from private banks, brokers,
foreign banking agencies, etc., were $198,000,000. Major changes were as follows:
Increased to 212 millions December 1, 1918.
Declined to 177 millions May 1, 1919.
increased to 292 millions July 1, 1920.
Declined to 155 millions August 1, 1921.
Increased to 266 millions July 1, 1922.
(Figures for years 1923-24-25 not available) 470 millions January 30, 1926.
Declined to 367 millions April 30, 1926.
Increased to 1,472 millions September 30, 1929.
Declined to 585 millions November 30, 1929.
Increased to 654 millions April 30, 1930.
Declined to 233 millions November 30, 1930 (last available).
Source: Annual Report of Federal Reserve Board, Stock Exchange Bulletin,
and Standard Statistics.
TABLE 10.—Bills payable at the Federal Reserve Bank
On October 30, 1929, we borrowed $95,000,000, which on November 1 was increased to $100,000,000, which was the peak. From then one we made reductions
and on the following dates we owed balances as listed below:
November 4, $76,000,000; November 6, $60,000,000; November 7, $25,000,000;
November 8. $5,000,000; November 9, $10,000,000; November 11, payment in
full.
TABLE 11.—Number of shares of the stocks held as collateral to brokers' loans at the
opening of business January 26 as compared with January 22
Name
United States Steel
General Motors.
Chrysler Corporation
_
Packard Motors
_
Anaconda Copper
Kennecott Copper
International Nickel
Sinclair Consolidated Oil
Standard Oil of New Jersey
Barnsdall Corporation " A "
Standard Oil of New York
Standard Oil of Indiana
Texas Corporation
Continental Oil of Delaware
Phillips Petroleum
Atlantic Refining
American Can
American Radiator Standard San
General Electric
Consolidated Gas Co
American Telegraph & Telephone
International Telegraph & Telephone
Columbia Gas & Electric
Commonwealth & Southern
Adams Express
United Corporation
Electric Bond and Share...
_>_.
American Superpower
United Gas & Improvement
Kreuger & Toll.




In loans
Jan. 26
38,256
326,727
186,175
58,570
109,586
115,483
284,542
100,175
104,527
61,100
74,005
58,296
62,307
82,887
127,202
47,857
24,819
64,150
93,496
66, 255
45,996
97,085
69,360
105,630
33,331
275,038
124,030
77,140
82,274
53,297 1

In loans
Jan. 22
36,960
321,375
178,183
69,250
16,302
122,618
232,900
105,900
106,773
84,700
81,230
48,429
67,662
94,221
113,547
59,975
25,250
75,915
96,052
77,080
46,511
92,480
83,534
121,300
38,295
270,412
125,465
86,415
96,212
43,797

NATIONAL AND FEDERAL EESERVE BANKING SYSTEMS

205

TABLE 11.—Number of shares of the stocks held as collateral to brokers7 loans at the
opening of business January 26 as compared with January
22—Continued
Name
Radio Corporation
Montgomery Ward & Co
F . W. Woolworth
Columbia Graphaphone
Reynolds Tobacco " B "
Union Carbide & Carbon
__
Gold Dust
Commercial Solvents
General Foods Corporation
National Dairy Products
Standard Brands (Inc.)
Texas Gulf Sulphur
Warner Bros
Paramount Publix
Radio Keith
General Theatre Equipment, Common
General Theatre Equipment, preferred.

In loans
Jan. 26
166,664
119,778
55,209
46,700
108,324
55,230
62,453
78,887
63,764
108,616
185, 464
42,160
138,918
98, 245
110, 214
276,995
87, 792

In loans
Jan. 22
156,466
125,415
58,149
48,100
99,128
52,824
47, 578
86, 245
70,113
110,048
174,257
45, 772
144,990
98, 535
116, 231
199, 647
59, 637

Mr. W I L L I S . The other day, when one of the officers of a Federal
reserve bank was here, the question was raised by Chairman Glass
whether the chairman of the bank in New York at the present time
is regarded as the superior officer of the bank, as compared with the
president, who corresponds to the governor. Would you mind
stating your view of the practice on that?
Mr. WIGGINS. I think it depends entirely on the institution, or
the individual.
Mr. W I L L I S . But, in general, the prevailing view in New York.
Mr. W I G G I N . I think you have got to take each case.
Mr. W I L L I S . YOU can not state any general rule?
Mr. W I G G I N . When you think of a bank, you think of a certain
man. I would have to look over the list to see what title that man
held to answer that.
Mr. W I L L I S . YOU could not think of that individual, say, in the
Federal reserve system? What is desired now is to find out the
interpretation of the provision of the National banking act and the
Federal reserve law which referred to the usual custom of the banks
in that regard. T h a t was the purpose of my question.
Mr. W I G G I N . I do not think you can say what the usual custom is,
Mr. W I L L I S . I t is not sufficiently defined to say one way or the
other?
Mr. W I G G I N . N O . M y title is probably unique, and it was a title
that was invented for the occasion. When we found it necessary to
have another officer in the bank and we wanted him as president,
and we wanted to recognize the previous president by making him
chairman of the board, I made room by taking whatever title they
wanted to invent.
Mr. W I L L I S . NOW, taking the half a dozen banks that compare
with, or rank next to, yours in size, is there any rule or custom?
Mr. W I G G I N . I suppose in most cases the chairman of the board is
probably regarded as the senior executive officer.
Mr. W I L L I S . One other question and then I have finished: You
spoke of having the Federal reserve rate higher than the market rate
ordinarily. You mean the market rate for commercial paper? You
34718-31—PT 1




14

206

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

mean commercial paper in the ordinary sense of the word, or customers' loans?
Mr. W I G G I N . I mean the market rate for the best commercial
paper that has an open market.
Mr. W I L L I S . I think you said also that the rate on Government
borrowings, secured by Government obligations, should be higher
than the commercial paper rate? Did I understand that correctly?
Mr. W I G G I N . I think so.
Mr. W I L L I S . What should be the relationship of that rate, then, to
this general Federal reserve rate? I am assuming that you mean the
rate of the Federal reserve bank on borrowings on Government
securities.
Mr. W I G G I N .
Mr. W I L L I S .

Yes.

Mr. W I G G I N .

Yes.

Speaking of the two rates, one the general discount
rate and the other the special rate based on special Government
obligations
Mr. W I L L I S . Of those, which would you make the higher?
Mr. W I G G I N . The rate on Government obligations slightly higher
than the general discount rate.
Senator NORBECK. May I ask for what reason?
Mr. W I G G I N . SO that the purpose of the bill; namely, as the
bulkwark of commercial business, should be carried out.
Mr. W I L L I S . D O you think the Bank of England practice, on the
whole, should be used here; that is, the practice established by the
Bank of England for the past generation, in reference to openmarket rates—you think that is substantially applicable here?
Mr. W I G G I N . I am not sufficiently familiar with their operations,
but I understand they have two rates, and a higher rate on the noncommercial paper.
Mr. W I L L I S . Have you any view about the rates at the Federal
reserve bank, and rates at interior reserve banks? That is a question
that has been given some consideration here, but nothing very
conclusive has been reached, and I should like to know if you have
any thought on that.
Mr. W I G G I N . Whether they should be the same?
Mr. W I L L I S . Whether there should be a uniform discount rate or
a system of differentials, or rates based on district conditions.
Mr. W I G G I N . I think the rate fixed on district conditions should be
the right rate.
Mr. W I L L I S . I t should have no relationship to the New York and
Chicago rates?
Mr. W I G G I N . I n time it would probably adjust itself, but I would
make it on the district's needs.
Mr. W I L L I S . Have you been familiar with the existing rate structure
in the Federal reserve banks as compared with the old type of rates
fixed in the local districts, and resulting in a considerable variety of
rates in the different districts? Which of those do you think is the
better?
y Mr. W I G G I N . I have not studied them.
Mr. W I L L I S . D O you see any harm in practical uniformity of reserve
rates throughout the country at the present time?
Mr. W I G G I N . I think the rates are all too low.
Mr.|WiLLis. I am speaking of the relative feature.
Mr. W I G G I N . I see no harm.



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

207

M r . W I L L I S . What is the effect of having them so low as now?
Mr. W I G G I N . I t does not force the liquidation of lones as much as
I would like to see it.
Senator BTJLKLEY. I should like to return to that question of branch
banks. I think you said the only purpose of permitting branch banks
would be to provide banks for small communities that are possibly
n o t in shape to sustain banks. As I understood Comptroller Pole's
Tecommendation, it had a further purpose than that. I think his
theory was that many small communities that have already banks
would have stronger and better managed banks if they were taken
over as branches of larger institutions. Would you care to comment
on that?
Mr. W I G G I N . NOW, let me see if I understand. You are asking
about the small bank in the small place?
Senator BTJLKLEY. I am asking about the desirability of permitting
branch banks, and one element of that is what effect it would have on
the banks in the small communities. Now, as I understand it,
Comptroller Pole believes that by permitting the larger banks in
centers to buy up existing banks, or establish branches in communities that can well support branches, those communities would be
better served in that they would have banks of greater responsibility and better management represented in their communities.
Mr. W I G G I N . Well, where the community will support a bank, I
think that community is just as well served by one locally owned, as
one owned outside
Senator BTJLKLEY. Then, you do not think there is much merit in
M r . Pole's suggestion?
Mr. W I G G I N . Don't ask me that. [Laughter.]
Mr. W I L L I S . YOU recommended that clearing-house certificates
should be accepted as eligible paper. You think that would mean it
would be desirable to have any form of local organization to handle
them?
Mr. W I G G I N . I do not think so. I think the limit on the size of
the city and the number of members would be sufficient safeguard.
Mr. W I L L I S . Leave it to the bankers to decide what a clearing
house shall be?
Mr. W I G G I N . I would leave it with the limitation as to the size.
Mr. W I L L I S . Those clearing-house certificates would be certificates
issued against any assets?
Mr. W I G G I N . What you would have then is the entire strength of
the banking community against what the clearing-house issues.
What you would have also is a security that automatically retires
itself the minute the conditions warrant it; in other words, it is not
used for expansion, but simply for an emergency.
The ACTING CHAIRMAN. If the other members of the committee
have no other questions, I should like to keep you a few minutes on
this matter:
In the report of the chairman of the board the other day—the
Chase National Bank—you made this statement:
From the middle of 1924 to the middle of 1929, we delayed the adverse effect
of our high tariffs upon our exports, by heavy buying of foreign bonds. The
effect of this was to increase, year by year, the interest and amortization charges
the foreign countries have to meet, and to bring about a congestion in our foreign
bond market. Our alternative to-day is, therefore, either a reduction of our
tariffs, or readjustment to our greatly reduced volume of exports. The burden




208

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

of this readjustment, now under way, falls with particular weight upon agriculture
and farms are being abandoned.

Do you care to expand a little more in detail, that point of view?
Mr. W I G G I N . No; I think that is fairly complete.
The ACTING CHAIRMAN. T h a t is, you think unless we reduce our
tariff schedules—some of them—our export market will shrink?
Mr. W I G G I N . I think it has.
The ACTING CHAIRMAN. Well, the figures that we have here, recently compiled, within two or three weeks, indicate this, that the
imports on the dutiable list have not increased as rapidly as the articles on the free list. Of course, the volume of the first is not nearly
as great as the second, but we have not any specific evidence to prove
that point.
Senator BULKLEY. Are you not talking about imports, and M r .
Wiggin is talking about exports?
The ACTING CHAIRMAN. He is talking about both.
Mr. W I G G I N . Well, I do not think there is anything to add to that.
The ACTING CHAIRMAN. Is it not conceivable that, irrespective of
our tariff, the situation abroad—the buying power abroad—has been
reduced just as our own domestic buying power has been?
Mr. W I G G I N . Undoubtedly.
The ACTING CHAIRMAN. Therefore that statement, it seems to me,
is not necessarily true.
Mr. W I G G I N . Of course, there is a great deal of irritation in certain
countries. We find it particularly true in Switzerland—their watch
and lace trade—and find it true in other countries, which probably
adds to the situation.
The ACTING CHAIRMAN. NOW, a little further along in that next
paragraph you state:
Cancellation or reduction of the interallied debts has been increasingly discussed throughout the world. This question has an importance far beyond the
dollar magnitude of the debts involved. Without commenting on the many
arguments on both sides of the controversy, and aside from the question of the
justice of the cancellation, I am firmly convinced it would be good business for
our Government to initiate the reduction in these debts at this time.

Had you any reduction figure in mind?
Mr. W I G G I N . Well, I would rather not get into figures on that.
T h a t has caused us a great deal of trouble as it stands. The minute
I
The ACTING CHAIRMAN. Are you influenced in that opinion in t h a t
respect by certain agitations in Germany looking to the possible cancellation of the so-called Young plan?
Mr. W I G G I N . Oh, I think that is one thing that may have had an
influence.
The ACTING CHAIRMAN. T h a t is a very large factor, is it not?
Mr. W I G G I N . M y statement was based on this, that anything of
that kind would so improve the good feeling, would so improve the
willingness to buy, that it would be a wonderful thing for the trade
and manufacturers of this country.
The ACTING CHAIRMAN. More than offset the disadvantage in
dollars and cents?
Mr. W I G G I N . I think so.
The ACTING CHAIRMAN. T h a t is all, Mr. Wiggin, and we are very
much obliged to you. Mr. Wiggin we would like to have you take




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

209

l^ack this impression that this committee is anxious to really help the
banking situation and not at all desirous to unearth anything showing
weakness excepting for the purpose of eliminating the weakness as
far as possible and strengthening the situation.
Mr. W I G G I N . I came here distinctly with that feeling, and I go
away distinctly with that feeling.
The ACTING CHAIRMAN. We appreciate your coming down.
STATEMENT OF EDMUND PLATT, VICE PRESIDENT MARINE
MIDLAND CORPORATION
The ACTING CHAIRMAN. Mr. Piatt, will you please give us your full
n a m e for the record and your official position in connection with the
JFederal reserve system?
Mr. PLATT. I am not now connected with the Federal reserve.
The ACTING CHAIRMAN. Well, your previous connection.
Mr. PLATT. Edmund Platt. I was a member of the Federal Reserve Board from June, 1920, to September 15, 1930, and was vice
governor from August, 1920, I think.
At the present time I am a vice president of the Marine Midland
Corporation and also of an operating corporation known as the
Marine Midland group, of which I am also a director.
The ACTING CHAIRMAN. The purpose or business of that being
Mr. PLATT. The Marine Midland group?
The

ACTING CHAIRMAN.

Yes.

Mr. PLATT. The Marine Midland Corporation is simply a holding
•company, holding the stocks of the 16 banks of the group, maintaining
a reserve for double liability.
The Marine Midland group is a corporation with a comparatively
small capital, which does the actual operating, supervising the banks,
and so forth.
Senator TOWNSEND. Sixteen banks in the group?
Mr. PLATT. Sixteen banks in the group, yes; several of them rather
small banks around Buffalo, but they include the Fidelity Trust Co.,
now called the Midland Trust Co., the Union Trust Co. of Rochester,
the Manufacturers' National Bank of Troy, and the Peoples' Trust
Co. of Binghamton, N . Y. The largest bank in the group is the
Marine Trust Co. of Buffalo.
The ACTING CHAIRMAN. YOU have been present during the questioning of Mr. Wiggin and you are familiar with the general trend
of our questioning?
Mr.

PLATT.

Yes.

The ACTING CHAIRMAN. What we would like to develop from you
is, first, have you any general statement to make? Do you care to
make any statement?
Mr. PLATT. With relation to Federal reserve policy?
The ACTING CHAIRMAN. Yes; the Federal reserve policy.
Mr. PLATT. I may say that it was my impression during most of
the time I was a member of the Federal Reserve Board, that the rate
policy was too low. I became a member of the Federal Reserve Board
in 1920, just after the rates had been raised in the eastern Federal
reserve banks, in New York, Boston, and so forth, to 7 per cent.
The ACTING CHAIRMAN. YOU are speaking of your rediscount rate?




210

NATIONAL AND FEDEBAL RESERVE BANKING SYSTEMS

Mr. PLATT. Yes. Gradually some of the other rates were raised
to 7 per cent, and some others had a progressive rate based on 6 per
cent and went higher to banks that were borrowing more than a
certain percentage of what was called the basic line. A few of t h e
banks, I think, did not raise their rates above 6 per cent during all
that time.
The depression came on in 1920. There was no restriction of
credit. We went on loaning money. The high rates were fixed
before I became a member of the board, practically. There was
very little change after I became a member. They had to be raised,
in my opinion, because the Federal reserve system was right at t h e
lowest reserve percentage allowed by law; in fact, if we had calculated the percentage as we do now, it would have been a little b i t
under, or much closer than shown at the time. The only reason
why the Federal reserve banks could go on making loans in increasing
amounts during the rest of 1920, was due to the fact of the gold
imports. We had been exporting gold down to April, 1920, and
later in the year we began to import gold and we imported enough
gold to keep the reserve percentages up above the requirements in
spite of the fact we kept on increasing loans until about December.
There was so much criticism of the system and of the board when
prices began to fall and the depression began that it always seemed
to me that it more or less influenced the whole policy of the Federal
reserve system.
Senator TOWNSEND. YOU are speaking of the depression of 1920?
Mr. PLATT. 1920 and 1921; yes. Of course the country picked on
the Federal Reserve Board and the system as having caused t h e
depression, which, of course, was not true. Personally I think it had
very little, if anything, to do with it. But at any rate the rates had
to be raised enough to prevent too rapid further expansion of credit
at the time when they were raised.
Mr. W I L L I S . When was that?
Mr. PLATT. In May, as I remember it, or early June.
Mr. W I L L I S . May, 1920?
Mr. PLATT. Yes, sir. T h a t was when the reserve percentage was
the lowest—May 10, or about that. I am speaking from memory.
I do not know that the criticism at that time had very much effect
on the older members of the board who had been members since t h e
beginning, like Mr. Hamlin and Mr. Miller, but in 1921 a new administration came in and a year or two later new men were appointed,
and they were more or less of the idea that the depression had been
caused by the Federal reserve rates and were all a little resistant t o
increasing the rates. So it always seemed to me that we easily reduced rates and bought Government securities for the purpose of
easing the market but were slow in going into reverse, and we went
into reverse in a picayune fashion—on the basis of half a per cent
at a time.
I t seems to me the public has been taught to regard Federal reserve
rates as of a great deal more importance than they really are. An
increase of 1 per cent spread over all the loans of a member bank borrowing all of its reserves means only about one-tenth of 1 per cent.
There is very little out-of-pocket expense to a member bank from an
increase of the rate which requires that it get anything from its borrowing customers to amount to anything.




NATIONAL AND FEDEKAL EESERVE BANKING SYSTEMS

211

Mr. W I L L I S . Does not that overlook the effect that the increased
rate has on so-called marginal loans?
Mr. PLATT. T h a t is true. I t can not be spread over the investments, and it can be spread only over a part of the loans. But
even at that, in many banks, it would be only one-tenth of one per
cent, supposing the banks were borrowing their whole reserves, but
in New York City and other commercial centers, no bank ever does
borrow its whole reserve except on very rare occasions. Country
banks sometimes do. If the bank is not borrowing an increase of
the rediscount rate makes no out-of-pocket expense to it at all. If
it is borrowing only a small percentage of its reserves, it makes very
little difference. So, the effect of an increase of rates, it seems to
me, is mostly psychological, unless the increases were to go further
than they have ever gone. I t does not have much effect unless the
rates are above 5 or 6 per cent.
Mr. W I L L I S . Does not that largely ignore the experience of other
central banks?
Mr. PLATT. I do not think so. The central banks of Europe run
their rate up to as high as 7 and 8 per cent.
Mr. W I L L I S . Yes; since the war.
Mr. PLATT. In England, the joint stock bank rates are all tied
up to the Bank of England rates by custom. If the Bank of England
raises its rate 1 per cent, that raises the rates on the deposits and
rates charged customers. I t is not a law, but an invariable custom.
Nothing like that happens here; with relation to a great many of our
banks there is no change at all.
In New York State the country banks were loaning money at 6
per cent when they were paying the Federal reserve bank 7 per cent.
I do not suppose they lost any money by doing it.
Mr. W I L L I S . But they did not borrow as sharply as before.
Mr. PLATT. Probably not.

Mr. W I L L I S . Was not that the effect of the high rate? Did it not
keep them from borrowing?
Mr. PLATT. Doubtless to some extent, but a bank would not turn
away substantial business at a 6 per cent rate simply because it had
to borrow money for a few days at 7 per cent.
Mr. W I L L I S . But it would turn away the marginal business.
Mr. PLATT. Yes; it would turn away the marginal business. I t
seems to me that the law should be amended possibly—and this is
rather a horseback opinion—to allow the Federal reserve rates to be
minimum rates so that reserve banks could charge more under
certain conditions.
Mr. W I L L I S . SO that the reserve banks could charge more?
M t . PLATT. Yes. Every reserve bank in the commercial centers
does two classes of business. The New York reserve bank does
a central banking business with the city banks, but with the country
banks it does a correspondent banking business.
Mr. W I L L I S . YOU mean you would allow the Federal reserve bank
to charge one rate to some banks, and some other rate to other btoks,
or allow the Federal reserve banks to raise the rates to all, or make
the same rate to all?
Mr. PLATT. Where things are regulated by law and not by custom,
as in England, it is going to be difficult to allow the Federal reserve




212

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

banks to exercise discretion between banks.
wholesome thing if you could do it.
Mr. W I L L I S . In this country?
Mr.

PLATT.

I think it would be a

Yes.

Mr. W I L L I S . I S that practicable?
Mr. PLATT. I am not sure that it is not. There is a great deal of
difference in what banks borrow for. In the western towns, Governor
Young used to say a bank never borrowed money unless it was losing
deposits, which generally meant that funds were being transferred
to the East or at least out of the neighborhood. In such cases I
do not think that the reserve rate should be above the best market
rate, or when banks are borrowing for currency, as in the late affair in
New York City.
Mr. W I L L I S . If borrowing in the open market, you would advocate
the same rate as Mr. Wiggin—the rate for good open market paper?
Mr. PLATT. That is a definition I would give in the big cities. I
do not know what you could take as the lowest open market rate in
western cities. Perhaps in those districts, you could say the lowest
rate to first-class customers—the competitive rate. For instance,
Minneapolis and Kansas City and St. Louis all lend some money to big
customers in competition with the New York customers' rates.
Mr. W I L L I S . At the present time a differential exists through the
use of the open market position and the fixing of rates on acceptances
at times when the discount rate is raising.
Mr. PLATT. I did not quite catch that.
Mr. W I L L I S . Through the use of the acceptance power or the present
method of dealing in acceptances, there is, at the present time a
practical way by which some groups of banks may get funds from the
reserve bank materially lower than is true of other banks. Is not
that so?
Mr. PLATT. Yes, if they own acceptances; but banks are not big
buyers of acceptances. Banks that have bought acceptances can
turn them into the Federal reserve at a much lower rate. I wish we
could get them to buy more than they do. I am preaching that to
them all the time. They seem to think Government securities are
much better, though recently some large banks have purchased
acceptances.
Mr. W I L L I S . Many of the acceptances are frozen, are they not?
Mr. PLATT. That is something
Mr. W I L L I S . Especially when made against stored goods abroad.
Mr. PLATT. I suppose the acceptances that are based on the
Farm Board's wheat are frozen, in a sense.
Mr. W I L L I S . And also cotton and copper in Germany.
Mr. PLATT. I think some are renewed from time to time.
Mr. W I L L I S . They are not very liquid, are they?
Mr. PLATT. Except in the sense they can be sold from hand to
hand, the same as call loans are liquid, unless everybody discriminates
against them at the same time. They are well secured.
The ACTING CHAIRMAN. There is pretty apt to be a discount on the
unliquid loans if you are trying to sell them.
Mr. PLATT. If there are too many people trying to sell them at
once, probably, although, if you have a broad enough market, the
market takes care of the acceptances pretty well. Acceptances of




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213

banks like the Bank of the United States, ought to have been discriminated against more than they were.
There is a power that possibly you might give to the Federal
reserve banks or to the board on the recommendation of the comptroller—the power to take away from a bank that is not carrying on a
sound banking business, its right to accept. I t gives our American
acceptances a bad name when an accepting bank fails and its bills
go "sour."
Mr. W I L L I S . T h a t was never suggested with reference to the Bank
of the United States?
Mr. PLATT. I do not know positively but think not.
Mr. W I L L I S . H O W may acceptances did they have out?
Mr. PLATT. Their bills I understand were not regarded as prime but
nevertheless the dealers shoved in a few with the other prime acceptances and passed them along.
Mr. W I L L I S . They were held in other banks?
Mr. PLATT. I think a few were. Do you want me to speak further
on the Federal reserve policies?
The ACTING CHAIRMAN.

Yes.

Mr. PLATT. I should like to differ with Doctor Miller a little with
relation to 1927. I think he overemphasizes the events of that year
somewhat and it seems to me it was the whole easy money policy of
the last half of 1927 rather than the open market policy that deserves
criticisim.
We started in the summer of 1927 by forcing down the rediscount
rates. The Chicago rate was forced down by vote of the Federal
Reserve Board and other western reserve banks were practically told
that their rates should come down too. All 12 reserve banks went
down to a 3% per cent rate.
Mr. W I L L I S . What was the reason for doing that?
Mr. PLATT. Business seemed to be slipping a little bit and we had
been importing too much gold.
Mr. W I L L I S . YOU needed less credit to carry the business?
Mr. PLATT. Yes, but we had been importing gold and we wanted
to turn the gold current.
The ACTING CHAIRMAN. Were you alarmed at that gold influx?
Mr. PLATT. Alarmed is perhaps too strong a word, but we were
concerned about it. I t seemed to me that the low rate policy at
the time was all right with relation to the New York reserve bank
and the eastern reserve banks, but there was no necessity for forcing
the western and southern reserve banks down to a uniform 3% per
cent rediscount rate. If the rates are uniform throughout the
country, the New York rates are higher in practical effect, and will
tend to draw money from all over the country; in other words, the
interior banks should have a little pull on New York. Whether it
should be 1 per cent or one-half of a per cent higher, I do not know.
But they ought to be a little higher, as a rule.
That year they were all forced down and then we began to buy
securities in order to support the low rates. Then the gold current
turned and gold began to be exported and then we continued to
buy securities until about December to offset that. We did not go
into reverse fast enough in my opinion.
Personally I do not see any reason why the reserve banks can not
go into reverse more promptly and more effectively.




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Mr. W I L L I S . From what source did the impetus come for forcing
down the rate?
Mr. PLATT. I do not know that I can testify to that. There was
a great deal in the newspapers about a meeting of the Federal reserve
and the foreign central bank men. I happened to be in Europe at
the time and got back late in July and found it all set up.
Mr. W I L L I S . Did you find that this meeting of the central bankers
had reached an agreement to force down the rate?
Mr. PLATT. I do not think there was an agreement. Governor
Strong was in favor of lowering rates, but I do not think he wanted
the whole country to go down. I think there was a great deal of
camouflage used about that time—having the Kansas City bank start
the reduction.
Mr. W I L L I S . He wanted lower rates for the purpose of driving gold
away from this country, did he not?
Mr. PLATT. That was one motive, undoubtedly.
Mr. W I L L I S . Has there ever been, as far as you know, an agreement with the Bank of England as to the rates to be made by any
reserve bank in this country?
Mr. PLATT. I do not think there has been any agreement at any
time. I t seems to me it is important to know what the other central
banks are doing and to cooperate with them. I believe in international cooperation when possible. I believe it will be a serious matter
if it is not carried on in the future.
Mr. W I L L I S . But discussions have never culminated in an agreement?
Mr.

PLATT. N O , sir.

Mr. W I L L I S . This policy you mention was designed to improve
business—stimulate business internally—and drive gold back abroad,
was it not?
Mr. PLATT. And help create a market for our goods abroad. I
think that is a good policy when our crops are going abroad in the fall.
Mr. W I L L I S . I understood Mr. Miller the other day to say the rate
was too low at the start and he, would have gladly raised it, and it was
only later on when it became a penalty rate for business, that the
raising of the rate was opposed.
Mr. PLATT. That was in 1929.
Mr. W I L L I S . And the latter part of 1928.
Mr. PLATT. Yes. There was considerable resistance to the raising of the rate from 4% to 5 per cent in June and July,
1928. Chicago first established the 5 per cent rate and it was difficult to get it approved by the Federal Reserve Board. Some members happened to be away. I happened to be in charge, as acting
governor, and I could not get the rate approved at once. There
was a delay of two or three weeks.
I think Governor Harrison said the other day instead of changing
the rate from 4K to 5, it might well have been changed to h%. I
think it would have been a more effective check on speculation.
Speculation did slacken considerably in July, 1928, following the 5
per cent rates and did not start up until the fall, when the Federal
reserve began to ease money by buying acceptances. That was the
time of harvest and crop movement and it was believed that the
situation had to be eased. I think ther£ was perhaps more money
put into the market then than necessary.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

215

The ACTING CHAIRMAN. YOU think it would have helped the situation to-day if we had started sooner in 1927, when we were pretty
conscious of a big speculative fever?
Mr. PLATT. I t did not get rampant until 1928. Then we tried to
correct it by selling Government securities and raising the rates.
We did it a little at a time, and as we sold Government securities, we
p u t the member banks in debt to the reserve banks.
The New York banks, having money on the stock exchange could
not greatly reduce their street loans and had to go to the Federal
reserve to replenish their reserves to take the place of the reserve
funds taken out by the sale of securities by the reserve banks, and it
always seemed to me a little unfair
Mr. W I L L I S . Unfair to whom?
Mr. PLATT. T O the bankers lending on stock-exchange collateral.
We first furnished the reserve funds with which to make those loans
and then took the funds away from them and forced them to borrow.
Mr. W I L L I S . I think that was Doctor Miller's statement the other
day. His chart showed that.
Mr. PLATT. I was in favor of increasing the New York rate to 6
per cent.
M r . W I L L I S . At what time?
M r . PLATT. In February.

M r . W I L L I S . 1929?
Mr. PLATT. Yes. I think it could have been done earlier. I
think my file shows I wrote some letters suggesting it a month or
two earlier.
Mr. W I L L I S . Was that consistent with the open-market policy
then being pursued?
Mr. PLATT. Yes. We were selling securities and making money
dearer. We forced the commercial rates up by selling securities—
the rate people paid for borrowing money for commercial purposes;
as well as for speculation.
M r . W I L L I S . Up to what time did that condition prevail?
Mr. PLATT. The New York increase to 6 per cent was approved in
August—August 8, or something like that—and shortly after that
the Federal reserve began buying acceptances and the acceptance
rates were put down when the Federal reserve rate went up, so that
the market was eased a little.
Mr. W I L L I S . At the same time it was officially being tightened?
Mr. PLATT. I t turned out beautifully for the Federal reserve
system and the board, because the panic came along and the board
was not blamed.
Mr. W I L L I S . That was a political rather than an economic situation?
Mr. PLATT. I would not say that exactly. I suppose if the panic
h a d been precipitated in the spring of 1929, the Federal Reserve Board
would have been blamed if they had approved the 6 per cent rate.
M y own feeling was, when they talk about having one rate for business and another rate for—or rather, when they talk about penalizing
business by putting the rate up—business at that time ought to have
been penalized. Business was speculating as well as the stock market,
and the whole price level was high as well as the price of stocks. The
fact that commodity price levels had not risen and were not rising,
does not mean that those price levels were not too high. I think the




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

fact they have gone down so drastically since shows they were too
high. They were kept up by the speculative situation, and they had
to break when the stock market situation broke. Of course we had
no statistics to show that at that time. There was not much evidence
of accumulating inventories except perhaps in copper and price levels
had not gone up. I t did not look as if they were too high, but subsequent events show they were too high.
Mr. W I L L I S . Was it not high for this reason, that the policy of the
Federal Reserve Board had produced a mild deflation and thereby
deferred a sharp deflation that occurred at a later date?
Mr. PLATT. Of course, you can not be sure of anything in the
economic situation.
Mr. W I L L I S . What you had was an inflation in the form of a negative deflation?
Mr. PLATT. I think that is a fair statement of the case. I should
like to say a word or two with reference to branch banking and
group banking, if you care to have me.
The ACTING CHAIRMAN. Yes; and also discuss the affiliates—the
policy of affiliates. We are interested in that.
Mr. PLATT. I do not fully understand these things. I have been
connected with practical banking so short a time that I can not talk
alongside Mr. Wiggin on things of that sort, but if I grasp the idea
of the affiliates at all, these affiliates are doing something like what
the German banks do directly.
The German banks go directly into investments in industry a n d
sometimes even own them. T h a t business is not wrong. I t is useful
if properly done, and the segregation in affiliated corporations has its
advantages. They are doing a useful business and I do not see why
it should not be done in connection with the large banks.
After all, a very prominent English authority on banking has said
that good banking is made by good bankers and not by law. If y o u
have good bankers you can give them a little leeway.
Mr. W I L L I S . That is particularly true of the English system.
Mr. PLATT. Yes, sir; and it would be a great deal better if we did
not have so many laws binding in the Federal reserve and the member
bank. If we could be sure of having larger banks to insure good
management
Mr. W I L L I S . D O I understand you to say that large banks are
better managed than the smaller ones?
Mr. PLATT. On the whole, I think they are.
Mr. W I L L I S . A comparison of the losses in the last year would
interfere with that generalization.
Mr. PLATT. Yes; there was one failure of a big bank that militates
against that statement.
Mr. W I L L I S . I t is a fact that you have an abundance of well
managed, able, and profitable small banks all over the country?
Mr. PLATT. A considerable number of them, but we have also had
a tremendous number of failures of small banks—running about 1,300
this past year.
Mr. W I L L I S . According to the Federal reserve figures, it is much
larger than that. I t is 6,000, as stated by the comptroller, for the
past 10 years is it not?
Mr. PLATT. I am speaking about 1930. I t is not much over~6,000,
during the past 10 years, is it?




NATIONAL AND FEDERAL RESEKVE BANKING SYSTEMS

217

Mr. W I L L I S . Six thousand in the comptroller's figure. The
board's figures are generally higher. The figures we have do not
include November.
Mr. PLATT. Then it must be 7,000 if it does not include November,
with total liabilities of something over $2,000,000,000. I t seems to
me that not enough attention has been paid to that in discussing the
causes of the present depression. I think bank failures are an import a n t cause of depression. Nothing restricts credit like bank failure.
You can not imagine putting the Federal reserve rates up to a figure
t h a t would check credit like a bank failure.
The Federal reserve can not manage these little country banks.
I t does undertake, when it lends money—well, sometimes, they
pretty nearly run the banks, but these little banks in some sections
of the country have not a Chinaman's chance. Their system is
wrong.
Mr. W I L L I S . If they are well managed
Mr. PLATT. Not even if well managed.
Mr. W I L L I S . I have read, in your writings, the statement that
well-managed country banks may helpfully establish sound branch
banks.
Mr. PLATT. Well, the word " c o u n t r y " is applied to banks as a
technical expression. As used by the comptroller, it includes some
rather large banks. I t does not mean ten or twenty five thousand
dollar capitalized banks. I t may be banks of four or five hundred
thousand dollars or a million capital.
The ACTING CHAIRMAN. Suppose you go ahead and develop your
suggested remedy for this.
Mr. PLATT. I think the banking laws should be amended so that
country banks can consolidate just as the city banks do. I think the
McFadden Act discriminates against the country banks. Under that
act, you can combine the banks in four or five counties if you cover
them with brick and mortar, as in New York, but you can not combine
them even in one county if it contains several small cities or towns.
I do not see why they should not be allowed to merge.
The thing that is important is that the country bank should be
given an opportunity to do a diversified business. I t should not be
confined to one crop or to one class of business—agriculture or anything else. Most of the country banks in this country, are, outside of
New England and the East, where they generally have a sufficient
diversification, so that those country banks can lend on a lot of
different things. Outside of the New England and eastern country
banks, the country banks are often located in neighborhoods where
they have no chance to do a diversified business.
The Chase National Bank, the National City Bank, and other large
banks in New York do business all over the country. I t is not only
business done with correspondent banks, but with big business.
Pretty nearly every town of any size has individuals and corporations
that carry accounts in New York. Generally speaking, the local
bank is not large enough to handle their business. Some of those
local banks could be increased to handle the business by consolidations. That is one of the things the comptroller speaks about as
decentralization of credit. I do not know how much that will amount
to. I think big business will always carry accounts to a large extent
with New York and Chicago. They are our financial centers.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

However, when certain banks were consolidated in Detroit they
held certain of the business there that was previously forced to New
York. The same thing happened in Buffalo and in Cleveland.
I have said, in my speeches on branch banking, that I thought the
Blaine law, permitting branches in groups of counties, was about
right. If you can start with that and allow branches further away,
through consolidation, where necessary for diversification, as it would
be in the Dakotas and much of the West, where you would have to
go much farther away in order to get enough diversification—if you
can start in that way, you can begin to build up a system that will
stand up.
I think our banking system, for the purpose of serving small agricultural communities—I think it serves the cities excellently, as a
rule—but for the purpose of serving safely and adequately the small
agricultural communities, we have the worst banking system in the
world. We practically deny access to the strong banks to the small
man.
Mr. W I L L I S . Just following that up: You talk about the consolidation of the small banks or isolated country banks. How are you
going to get diversification? Let us take a group of small banks in
South Carolina or North Dakota or Wyoming, where they are mostly
all farmers, and in South Carolina where they raise cotton, and so
forth, where you have a one-crop situation: How are you going to do
it, unless you have a contact with some large center outside of t h a t
area?
Mr. PLATT. In many places I think you would have to do that.
BUG there is in South Carolina, since you have mentioned that, a
bank called, I believe, the South Carolina National Bank, with its
headquarters in Charleston and a branch in Columbia and a branch
over in the Piedmont at Greenville, and Mr. Small, president of t h a t
bank, in getting out his circular with relation to it, stated that when
Charleston has a surplus of money and is lending it in New York,
Greenville has a demand for money and, conversely, when Greenville
was lending in Wall Street, Charleston had a demand for money.
So, by connecting the banks across the country, they could keep the
money in the State and more fully employed at home. In other
words, Greenville is a manufacturing center, and the Columbia
section has diversified fruit growing and cotton, mostly, while Charleston has some shipping and largely garden truck, so that the peak
demands do not come at exactly the same time. On a smaller scale
it is very much what happens in California.
I used to say that branch banking within city limits was of no
consequence, economically; that it was all a matter of accomodation, like branch post offices, but since I have been getting some
actual experience I find that our little group of five branches of the
Marine Midland Trust in New York handle quite a diversified line
of business. For instance, the branch at Chambers Street they call
the butter and eggs branch, the branch at West and Liberty Streets
does business with the railroads, so there is some diversification
through branches in the big cities. The uptown branches handle a
business differing considerably from that of the down-town offices,
Mr. W I L L I S . The group in South Carolina was a group of small
banks picked up because they had gotten so weak they could not
carry on?




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219

Mr. PLATT. YOU are speaking of a different group. This group of
banks, consolidated into a branch banking system by Mr. Small, was
organized in January, 1926. There has been a group, perhaps more
than one, organized since. The recent systems took a number of
banks out of the Federal reserve system. The Federal reserve law
as amended by the McFadden Act, does not allow branch banks
outside of city limits.
Mr. W I L L I S . Would you apply the English development of branchbanking business to this country? Would that help?
Mr. PLATT. I should agree with Mr. Wiggin, that I should hate to
see our banks have to compete with each other for branches all over
the country. You may come to that in the long run, but it seems to
me it will be a long time coming and I do not believe there is any
reason for authorizing it at the present time. All we need to do is
to give the country banks a chance to group themselves together for
diversification. No one would insure a house with an insurance
company that had all of its risks in one town. But that is what
depositors in some of the small banks are doing. Some of these
banks are not really failing, but just drying up.
Senator NORBECK. T O what do you attribute so many failures in the
last 10 years, as compared with the previous 10 years?
Mr. PLATT. I think it goes back more or less in history. We had
one major panic in this country without many bank failures. That
was the panic of 1873. There were then very few State banks of
any kind, and the smallest national bank was capitalized at $50,000.
In the early nineties and late eighties, the Western States began
to charter banks of $5,000 and $10,000, and some Eastern States
$25,000. A lot of them went down in 1893. Two Comptrollers in
succession, Mr. Eckels and Mr. Charles G. Dawes, recommended
branch banking as a remedy. Mr. Dawes recommended it in towns
of 2,000 or less.
Senator NORBECK. Is it not a fact that most failures took place
in the section of the country where there was a deflation in the commodity prices of the country?
Mr. PLATT. Yes; but there were no failures just over the line in
Canada.
Senator NORBECK. But did not the United States Tariff Commission find that it costs just 42 cents a bushel more to raise a bushel
of wheat in the United States than in Canada? If we had had the
price advantage of Canada we would not have had an agricultural
depression.
Mr. PLATT. I do not know about that.
Senator NORBECK. The conditions are not similar.
Mr. PLATT. We had similar conditions and price reductions in
1920 and 1921 and that also obtained in Canada, but there were no
bank failures in Canada or only one (1922). There are no bank
failures now in Canada and there were 1,300 in 1930 in this country.
Senator NORBECK. We had our big drop about 1920 and the bank
failures came later.
Mr. PLATT. The prices dropped in 1920 and 1921.
Senator NORBECK. But our failures have been more recent.
Mr. PLATT. They came not long afterwards. Just about the time
the farmer was getting on his feet again his bank failed and tied
him up.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

I have seen some letters written about these bank failures that are
heart-rending. I remember one from a Presbyterian minister telling
about the situation in Arkansas, about the hard times the farmers
had experienced and then after that and on top of all that, the banks
failed.
Senator NORBECK. I quite agree with you, Governor Piatt, that
the bank failures have contributed greatly to the distress, but I
think you will agree with me that the inability of the farmers to pay
their notes really brought the bank failures.
Mr. PLATT. Yes, but if your banks had had a certain diversification, the failure of the crops or the drop in prices affecting a staple
crop in one neighborhood would not cause the bank to fail. I t
would be absorbed somewhere else, just as a fire burning up a big
building in one town does not cause everything to fail in that town,
because the insurance company has its risks in hundreds of towns.
Senator NORBECK. That is a beautiful theory, but the amswer is
we did not have the failures in those countries until we had the
deflation.
Mr. PLATT. That is true, but to go back a little bit, after the panic
in 1907, California passed a new banking law that provided for
branch banking. They had just the same drop in prices in California,
but very few branch bank failures.
Senator NORBECK. I S it not a fact that the deflation hit California
long after the depression hit the Mississippi Valley?
Mr. PLATT. I do not know
Senator NORBECK. I think the agricultural deflation hit the
Northwest the hardest. I think it is well set out in the industrial
report of the commission of which Mr. Young is a member, showing
that it was the Northwestern States and not the West coast or the
East coast that was hard hit, showing that the farmer in Nebraska,
for instance, has to suffer a deflation of 80 per cent and in Pennsylvania
the farmers suffered only about an 8 or 10 per cent deflation.
Mr. PLATT. If we had had a proper banking system, the banks
need not have failed.
Senator NORBECK. But if you lend money secured on something
worth $80 and it goes down to $30, how can you prevent a failure?
Mr. PLATT. Because you have a bank in another neighborhood
that is making a profit that can absorb that loss. We have some
rather small branch banks in this country that have been running for
over 30 years, like The Tennessee Valley Bank of Decatur, Ala.
The president of that small branch bank system told me that, operating individually, some of his branches would have been closed absolutely long ago. He has only 15 branches and all operated practically within the Cotton Belt, but he has just enough diversification
and a sufficiently broad outlook so that he can keep going. They
started in the late nineties. They should be spread over a larger
territory, but they managed to get along. So, branch banking does
help.
Senator NORBECK. D O you think that any banking situation that
covered the agricultural States would prove an advantage?
Mr. PLATT. A combination of groups as they have in St. Paul and
Minneapolis would help.
Senator NORBECK. But if the commodity prices fall in the territory
served by any of these branches who will absorb the losses?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

221

Mr. PLATT. There have been very few failures in your territory
this last year since the big groups came in.
Senator NORBECK. Surely; we had some hard-shell banks that had
not lost much money and by playing a conservative game they were
able to stand up and enjoy the confidence of the community and
then the group came in and bought some of them and said, "See what
we have done for your community." I want to ask you to name two
banks in the Northwest that have been helped or put on their feet
by these group banks.
Mr. PLATT. I do not know the northwestern groups closely enough
to answer that question, but I know some banks have been helped
and there have been very few failures in the Northwest since the
groups were organized.
Senator NORBECK. They waited to see which banks would stand
the test and then they started to acquire them. After acquiring
those good banks they said, "Look at us; see how strong we a r e . "
Mr. PLATT. T h a t is one objection to group banking as compared
with branch banking. I t is not quite as economical and it is more
likely to take strong banks rather than the weak ones. However,
they have helped the situation because they have strengthened the
strong banks, and at least some of the weaker ones also.
Senator NORBECK. I have never found anybody living outside of
our State that was charitably enough inclined to come in and give us
money and help us. I admit they can do it, but whether they will is
another question.
Mr. PLATT. YOU have had chain banks in your territory since
about 1900.
Senator NORBECK. N O ; we have not had chain banks.
Mr. PLATT. I have a study of chain banking made in the Northwest, made by Miss Hartrough for the University of Minnesota in
1924.
Senator NORBECK. I n the Northwest, but not in South Dakota.
The ACTING CHAIRMAN. Mr. Platt, suppose you give us a definition
that will distinguish between chain, group, and branch banking.
Mr. PLATT. The Federal Reserve Board, in its bulletin reporting
on chain banking and group banking, does not make a distinction,
but I think there is a distinction. I think chain banking began in
the 1890's, in response more or less to the recommendation of two
Comptrollers of the Currency, Mr. Eckels and Mr. Dawes. They
recommended branch banking in the small towns, and these strings
of banks were purchased, without any central organization, and along
a little after 1900 there began to be'holding companies organized,
mostly in the Northwest territory, around Minneapolis and St. Paul.
The ACTING CHAIRMAN. T O hold the stocks?
Mr. PLATT. Yes; and those chain banks, on the whole, have stood
up pretty well. Some have failed but they have stood up better than
the unit banks. They were built up, I believe, in response to a real
economic need. Probably the idea of a great many of their originators, when they started them, was that they would convert them
into branches if they were allowed to, but they were not allowed to.
The ACTING CHAIRMAN. Most of them are not member banks?
Mr. PLATT. Most of them are not. There is a man named Petersen,
who has & chain of six or eight banks in North Dakota. I do not
think any of his banks have failed. I know he wrote me about 1923
34718—31—PT 1




15

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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

asking if there was any way by which he could convert his banks into
branches.
Senator NORBECK. I hope Mr. Piatt did not understand me to say
that the group bank was necessarily wicked because it was a group.
I am not saying that. I am simply questioning what the benefits will
be of the group banking system.
Mr. PLATT. I t gives a chance for diversification as much as you
can do it through separately incoporated institutions. Converting
them into branches you would have the strength and greater diversification of the big institutions.
Senator NORBECK. Give us a fair price for our products and we
will build up good banks. I believe there was a statement that there
were less failures in Iowa for 50 years than in Massachusetts. So, if
the products of labor are sold at lower prices, then the banks are
hurt too—that is, if they have any loans out.
Mr. PLATT. If the banks go down that makes the situation
worse.
Senator NORBECK. I want to say that Governor Platt has been
very helpful while on the board and I do not want to be too critical.
I have no doubt Mr. Platt has the welfare of the whole country at
heart, and I think his testimony shows that. He and I just do not
share the same view as to the cause of bank failures in the Northwest. We had the same system in the previous decade as in the past,
but it was in the last decade we had the failures.
Mr. PLATT. I think Doctor Willis's compilation for a Senate
commiteee made in 1926 for the 25 precedng years shows that we had
40 bank failures in the best of those years. That was the minimum
number, and there were few years when the failues didn't go over 100.
Senator NORBECK. But there are at least 40 people go wrong every
year. You can not prevent that in the banking business or any other
business.
Mr. PLATT. We could to some extent, if we had larger units. I
think bank failures are due to two fundamental things. Back of the
whole thing is the free banking idea, which, carried to the extreme
limit, means you can give a bank charter to a bunch of crooks and
have a good bank if you keep them under strict enough suprvision.
Senator NORBECK. What law can you pass that will prevent honest
men selling a bank to crooks?
Mr. PLATT. We can not prevent that?
Senator NORBECK. I S not that what is happening time and time
again?
Mr. PLATT. Not with the lafge banks, I think.
Senator NORBECK. Will not a banker sell his bank to the highest
bidder, if it is for sale—generally?
Mr. PLATT. I do not know about that. I was never much of an
owner of bank stocks myself, having come on the Federal Reserve
Board before I had a chance to acquire a great deal for myself, but
I know there are bankers who won't sell. The free banking idea,
carried too far, means that you must not question a group of men too
much if they want a charter and have the capital required. In
former times Comptrollers of the Currency used to indicate that they
had no authority to inquire into the character of the applicants for a
charter, provided they had sufficient financial responsibility.
Mr. W I L L I S . But they do invariably now, do they not?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

223

Mr. PLATT. Yes, and they are also now giving attention to the
need for a new bank. The other point is that you can multiply banks
under the free banking idea carried to an extreme anil put them down
in capital as low as 5, 10, or 20 thousand dollars. No such banks
were created until in the late eighties and a lot went down in the panic
of 1893. A lot have gone down in every panic since. There are a
few bank failures always, but even the rather small Weyburn Security Bank in Canada, with all its branches in Saskatchewan, did not
fail.
Senator NORBECK. As long as they can keep that 42 cents a bushel
advantage in the cost of producing wheat, that advantage will keep
them open. The United States Tariff Commission is my authority
for that differential advantage. President Coolidge acted on their
advice. He admitted the principle of the findings, and he said that
the American farmer is at a disadvantage of 42 cents on each bushel
of wheat he raises.
Mr. PLATT. That may be true. I am not a wheat grower myself and
can not dispute that. However, I know that in a growing community a
little bank can be started with $5,000 or $ 10,000 capital or nothing at all
and, of course, if nothing happens and prosperity prevails that bank
can grow and come up. I remember when I was a member of the
Federal Reserve Board we had submitted to us the application of a
bank for admission into the system in Texas, which had started only
a few years before with $10,000 capital, and it had increased its
capital to $50,000, all out of earnings. If everything goes well they
will grow up with the community, but if the community does not
grow, and things go wrong, they have nothing to fall back on. The
trouble is that their eggs are all in one basket.
Senator NORBECK. I S it not a fact that in every State of the Union
that that is the way that big business has grown up—out of these
little things? Realizing they are in a weak position, they strive to
get away from it and manage to build up. Most businesses build
up out of earnings and most banks also build up out of earnings. A
$5,000 bank is, of course, a joke to our minds now, but it supplied a
necessity at one time and became a larger bank.
Mr. PLATT. A great many of them that survived did, but a great
many did not survive. We should have established a different
system. We should have served those places by branches and most
of them would have stood up, and we would not have had nearly as
many failures.
The ACTING CHAIRMAN. YOU approve, in a general way, in certain
cases, of branch banks; in certain other cases you approve of group
banks, where you have an economic and geographical situation that
favors it?
Mr. PLATT. Yes. I think a proper definition of group banking is
the one the comptroller gave; a group of banks, the stock of which is
controlled by a holding company and more or less integrated in
management with a rather large central institution.
The ACTING CHAIRMAN. Located in some proximity to the general
area?
Mr. PLATT. Yes. In the old chain banks there was never, as a
rule, any big bank or parent bank, so-called. They were simply &
string of small banks of about the same size. I think in Iowa theise




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

was a chain of banks with what they called a parent bank not much
larger, however, than the others.
T h e ACTING CHAIRMAN. But a Chicago bank could not have a
small cluster of banks in North Dakota and call that a group banking
system? I t would be much nearer branch banking?
Mr. PLATT. I do not know that I understood the question.
The ACTING CHAIRMAN. I t is a zonal thing or a regional thing?
Mr. PLATT. Yes; the central institution should be contiguous to
the rest of the group. All these nationally known groups have a
large bank in the same general region with which the other banks are
inore or less integrated in management. They advise them on buying
bonds, and so forth, and supervise their loaning policies, and it seems
to me there is a great deal of advantage in the system. I t is not as
economical as branch banking, but it is the best that can be done in
the circumstances. When the stock of the holding company has been
exchanged for the stock of the banks, it seems to me you still have the
neighborhood bank idea. The people still have a stock interest in
the local bank as well as the group.
Senator BTJLKLEY. Are you in accord with the comptroller's
recommendation in that respect?
Mr. PLATT. I think so. I think he has given us the right recommendation. I t will give us the strongest branch banking systems.
If I understand him correctly, he considers trade areas as rather large
areas, and I am not quite sure that they need to be very large. You
can have a trade area around a town of 50,000 inhabitants or even
25,000 inhabitants that would include two or three counties.
Senator BTJLKLEY. We have had some difficulty in defining trade
areas. What would you suggest as the limit, if not trade areas?
Mr. PLATT. I think " t r a d e areas'' is perhaps as good a term as you
could use, but I would not say that the trade area can exist only
outside of a city of 500,000. I think that cities of 50,000 inhabitants
or smaller also have trade areas that would compete with each other.
I think all we need is an area large enough to permit diversification
so that the banks will not have too many eggs in one basket.
The ACTING CHAIRMAN. Then, obviously, you can not limit a trade
area to any radius, in miles; you must get diversification no matter
how far you reach out for it?
Mr. PLATT. Yes. Still, there is some diversification even in
agricultural products. There is some advantage in loaning some money on wheat and some on corn and some on flax, and so forth. Crops
do not all go down at once.
Senator NORBECK. I think Mr. Platt is laboring under a great deal
of misapprehension as to the products of our State. For instance,
our income from butter and eggs is larger than our revenue from
wheat; our income from tourists is greater than the income from
wheat, and we lead in gold production.
Mr. PLATT. Yes; that is right—out in the Black Hills. I got you
for the moment mixed up with North Dakota.
Senator NORBECK. North Dakota is a wonderful wheat State, and
Canada is even better. There they have conditions which permit
them to raise wheat at an advantage of 42 cents a bushel over the
American farmer.
Senator TOWNSEND. Is it not a fact that there is a great competition between the State and Federal banks?




NATIONAL AND FEDERAL RESERVE BANKIHG SYSTEMS

225

Mr. PLATT. I think there is a great deal of unfortunate competition.
Senator TOWNSEND. Have you a remedy for that?
Mr. PLATT. I would relax the national laws and allow the national
banks to do a certain amount of branch banking business as Mr.
Pole suggests. I would not go into any unsound propositions. I
rather doubt whether it is very wise to let national banks do as much
real-estate business as some do.
Senator TOWNSEND. YOU think a great deal could be accomplished
by liberalizing the national banking law?
Mr. PLATT. I think if you allowed the small banks to consolidate,
making larger institutions, with branches, they would perhaps become
national banks; at least they would be large enough to become members of the Federal reserve system. That would bring the thing more
nearly to uniformity. I would not do away arbitrarily with the
State systems. The State banks do most of the experimenting and
some of the State laws are excellent. I have always believed the
California law was superior to the national banking act.
The ACTING CHAIRMAN. The comptroller has sent me his final figures in reference to bank suspensions, and they show 6,968 banks
suspended between the years 1921 and 1930, inclusive, of which 797
banks reopened, or a total closed of 6,171.
Senator TOWNSEND. Does he give the proportion with respect to
State and Federal?
The ACTING CHAIRMAN. During those same years, 1921 to 1930,
inclusive, national banks suspended, 925; State member banks, 257;
and State nonmember banks, 5,786.
Now,, of those reopened there were, national banks, 98; State member banks, 27; and State nonmembers, 672, leaving a net total closed
of all banks, 6,171, or, national banks, 827; State member banks, 230;
and State nonmember banks, 5,114.
Senator NORBECK. The diversification advice given our farmers
so freely by the eastern press, eastern business men and eastern
bankers simply proves their ignorance of our economic conditions.
I t was such fool advice that led to such an overproduction of butter
that it broke the American market.
Mr. PLATT. May I say one thing with reference to present efforts
at diversification in the Western banks? How do they do it? They
do it by engaging in open-market purchases, by loaning in Wall Street,
and in the purchase of bonds.
Mr. W I L L I S . Mr. Wiggin, will you give us your rough approximate
idea on this point: What proportion of total call loans, when they
were at the highest point, came from outside the city and what proportion came from the city banks?
Mr. W I G G I N . I do not think I can give it to you. In our own case
practically all our loans were for outsiders.
Mr. W I L L I S . Outside of New York?
Mr. W I G G I N . YOU mean separated from the accounts of others that
lived in the same city?
Senator BULKLEY. The question is between the country banks and
the city banks.
The ACTING CHAIRMAN. The rural banks.
Mr. W I G G I N . I can speak for the Chase National Bank and that
may be a criterion.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

On September 27, 1929, the demand loans of the Chase National
Bank, street call loans, $3,250,000.
Other demand loans of the Chase National Bank subject to call,
but not quick call—that we make a distinction on—$40,182,000.
Time loans of the Chase National Bank, street loans, less than a
million—$750,000.
Call loans and time loans—I put the two together—for account of
domestic banks—probably those were mostly out-of-town banks but
they may have included some in New York City—$396,000,000.
Call and time loans for account of foreign banks, $9,000,000.
Call loans and time loans for account of firms, corporations, and
individuals—whether out of town or in town we do not distinguish—
$626,000,000.
Senator BULKLEY. D O you think that is fairly typical?
Mr. W I G G I N . I think we probably did more for others than most
banks. If you would like to see the changes between that and the
November figures, it might interest you. I think that would be
very interesting.
November 20—this is after the break in the latter part of October—
demand loans for brokers, practically nil—$225,000.
Loans to others on demand, $41,000,000.
Time loans on the street, practically the same as the demand loans
on the street, $690,000.
Call loans for account of domestic banks, $151,000,000, against
$396,000,000.
Call and time loans, account of foreign banks, $1,700,000.
Call loans for individuals, $245,000,000 as against $626,000,000.
Mr. W I L L I S . They were all paid up, I think, without difficulty, in
cash?
Mr. W I G G I N . Yes. Our trouble came in loans on securities and
not the brokers' loans.
Mr. W I L L I S . The country banks had no difficulty in recovering all
they had placed with the banks?
Mr. W I G G I N . Not-a bit.
As to any possible improvements in the banking act, I would call
your attention to the fact that the minimum capital, the point that
Mr. Piatt raised, is pretty small for the size of the community. I t
used to be $50,000 but it has been reduced to $25,000 in certain
territories.
I would also call attention to the liberality of the loaning limit on
certain commodities. On certain commodities a bank can loan 50
per cent of its capital and surplus. I t provides for a certain margin,
but it might not be there shortly after the loan is made. I t is a pretty
large percentage of the capital and the surplus to permit to loan.
The ACTING CHAIRMAN. I t is now 1 o'clock and this hearing is
adjourned until 10.30 on Thursday morning.
(Whereupon, at 1 o'clock p. m. the committee adjourned until
Thursday, January 29, 1931, at 10.30 o'clock a. m.)




OPEBATION OF THE NATIONAL AND FEDEEAL KESEKVE
BANKING SYSTEMS
THURSDAY, JANUARY 29, 1931
U N I T E D STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY,

Washington, D. C.
The subcommittee met, pursuant to adjournment, at 10.30 o'clock
a. m., Hon. Frederic C. Walcott presiding.
The ACTING CHAIRMAN. The committee will come to order.
STATEMENT OF B. W. TRAFFORD, VICE CHAIRMAN OF THE
FIRST NATIONAL BANK OF BOSTON
The ACTING CHAIRMAN. Mr. Trafford, you have given your name
and occupation?
Mr.

TRAFFORD.

Yes.

The ACTING CHAIRMAN.
tional Bank of Boston?
Mr.

TRAFFORD. Yes,

YOU

are vice chairman of the First Na-

sir.

The ACTING CHAIRMAN. The purpose of this hearing is, we hope,
entirely constructive. Our hearings are informal. If there is anything you think ought to be kept off the record, state it frankly, and
we will keep it off the record, or if there is any question you feel you
do not care to answer in a public hearing, just say so. We do not
want to have anything appear in this record that is of a confidential
nature; I mean by that, personal accounts, and so forth. We are not
asking, as far as we know, any embarrassing questions. What we
are trying to do is to find out the cause and a partial or complete
cure for these depressions. We are analyzing them to see if there is
anything in the Federal reserve act that we can tighten up, if it is
wise, to avoid certain types of loans or whatever may be a dangerous
feature, and we feel that the time to engage the physician to cure the
disease is when the patient is sick, and we want to do it with the least
embarrassment to the patient.
I have a list of questions similar to those asked members of the
Federal Reserve Board, and, with you, we want to apply the questions
more particularly to New England. We want to get into the cottonmanufacturing business a little—into the textiles—to see what relation they have to the financial situation. I will ask you a few of
these questions, and then we will get into something more general,
unless you have a statement you would like to give us first.
Mr. TRAFFORD. N O ; this is simply a digest of the bill that I have
in my hand.




227

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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

The ACTING CHAIRMAN. First, what, in your opinion, was the
cause of the securities collapse of 1929 and the banking difficulties
accompanying and following it?
I shall read four questions to you now. The second question is,
what remedies have you to suggest against the recurrence of another
such episode; third, have you examined the bill pending before this
committee, and have you any criticism thereof; fourth, what other
suggestions for legislation can you make?
That is a pretty broad order and you can handle it any way you
please.
Mr. TRAFFORD. I think the cause of the collapse was that people
believed we were entering a new era and that stocks would increase
and continue to increase. I t was simply an orgy of speculation and it
collapsed. I do not think it was due to any defect in the banking law.
I t was just the collapse of an orgy of speculation.
The ACTING CHAIRMAN. YOU think the new generation coming
along imagined that earnings did not count, perhaps? T h a t thought
was thrown at me a number of times—a new era with a new way
of thinking.
Mr. TRAFFORD. I do not know what all thought, but some seemed
to think we were going to enter into an era of easy money, and that in
this machine age, immense profits were going to be made, and t h a t
earnings would increase indefinitely. We have simply gone back to
the old yardstick.
Mr. W I L L I S . But they would not have succeeded very well in their
speculations, without the aid of the banks? Did not the banks aid in
bringing on the collapse?
Mr. TRAFFORD. I think the money would have gone into speculation, banks or no banks, banking laws or no banking laws.
The ACTING CHAIRMAN. We have developed in the hearings in the
past 10 days the fact that there was an enormous accumulation of
reserves and eligible paper and United States securities in 1927 and
1928, and the member banks were in a position then to borrow
large sums of money, which they did, and probably diverted a great
deal of that legitimate borrowing over into brokers' loans.
Mr. TRAFFORD. Well, I do not think they diverted it really. I
think they satisfied all commercial needs. I never heard of anybody
not getting money for their commercial needs then or now.
The ACTING CHAIRMAN. YOU think the commercial borrowings were
kept on a lower level of rates than the brokers' loans?
Mr. TRAFFORD. They were with us, and I think that was true
generally.
Senator TOWNSEND. Your rate of interest did not exceed 6 per cent
for the regular business?
Mr. TRAFFORD. I think no commercial business was higher than
six. I do not know what the call loans went to—20 per cent, possibly.
Mr. W I L L I S . Did not 4 the high rates for call money tend to affect the
commercial rates?
Mr. TRAFFORD. I think they did have the effect of pulling them up a
little bit, but they were given favorable treatment.
Mr. W I L L I S . The figures of the Federal reserve system seem to indicate a general average increase over the country—perhaps 1% to 2
per cent—during that period. Was not that the direct result of the
diversion of funds into speculative channels?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

229

Mr. TRAFFORD. I think it must have had an effect of that kind.
Mr. W I L L I S . YOU think in New England the increase was not over
1 per cent?
Mr. TRAFFORD. Six per cent was our maximum, and I was thinking
of what it might have been if we had not had the condition you mention.
Mr. W I L L I S . YOU never went above 6 per cent?
Mr. TRAFFORD. I do not think our bank went above 6, and I do
not think banks generally did. I really do not know and I would
not want to be quoted. I think our bank stayed entirely at 6 per
cent or less.
Mr. W I L L I S . There was never any shortage of funds due to the
throwing in of the money into the call market?
Mr. TRAFFORD. N O ; I do not think I ever heard of a commercial
customer who could not get money if he deserved it, at a reasonable
rate.
Mr. W I L L I S . Was there much increase in borrowing at the reserve
bank of Boston as the result of this speculative episode?
Mr. TRAFFORD. I think there was.
Mr. W I L L I S . I mean directly as the result of speculation.
Mr. TRAFFORD. I do not know; I am not sure.
The ACTING CHAIRMAN. That was true in New York to a large
extent, was it not?
Mr. TRAFFORD. Yes; I think it was. That brings one thing to m y
mind. I do not know whether it is an appropriate time to discuss it.
The ACTING CHAIRMAN. Just go right ahead, Mr. Trafford.
Mr. TRAFFORD. The Federal reserve rediscount rates, as a rule,
are lower than the commercial rates and, in times just as you have
spoken of, it is a temptation, certainly, to lend on collateral with the
stock exchange houses and borrow at the Federal reserve bank at a
lower rate. I t is a scalping operation.
Mr. W I L L I S . Was there much of that in the Federal reserve district
around Boston?
Mr. TRAFFORD. I think there was some. I t seemed to me poor
banking to do that. T h a t leads me to think that if the rediscount rate
were a bit higher than the commercial rate, it would perhaps keep t h a t
situation more normal; there would not be the temptation to borrow
in order to scalp.
Senator TOWNSEND. D O you think an increase in the Federal
reserve rates would have obviated this condition?
Mr. TRAFFORD. What condition?
Senator TOWNSEND. This scalping condition in borrowing.
Mr. TRAFFORD. Even if the Federal reserve rates had been put up,
even higher than they were, I doubt if they would have prevented the
collapse. But there was a period when it was to the advantage of
the banks to lend money to the stock exchange on securities and
borrow from the Federal reserve banks. I t seemed to me to be poor
banking.
Mr. W I L L I S . Did the Boston banks loan chiefly to members of the
Boston Stock Exchange or also to the New York Stock Exchange?
Mr. TRAFFORD. I do not know.
Mr. W I L L I S . YOU made no use of your funds in that way?
Mr. TRAFFORD. N O ; we felt that whenever we had to go to the
reserve bank, we should get out as quickly as possible and not be a




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NATIONAL AND FEDEBAL BESEKVE BANKING SYSTEMS

steady boarder. We did not think it was right. T h a t leads to the
suggestion that the Federal reserve rates should be higher than the
commercial rates, to discourage that thing.
Mr. W I L L I S . What was the effect of having them lower in New
England? Have you a distinct local money market there or not?
Mr. TBAFFOBD. What do you mean—a brokers' loan market?
Mr. W I L L I S . I mean a definite organization—a money market
such as you have in New York, but on a smaller scale; for instance,
do you have a market for acceptances there or a call-loan market?
Mr. TBAFFOBD. We call it a call-loan market. I t is small.
Mr. W I L L I S . I S that regulated solely with reference to the New
York market, or do you fix the rates independently?
Mr. TBAFFOBD. A S a rule, the Boston rate is slightly above the
New York rate and the reason is that the collateral offered is less
well known and stocks and securities that are perhaps well known
in the Boston market are unknown in New York. Probably the
banks do not accept them there. I think, as a rule, the Boston rate
is just slightly above the New York rate—probably a quarter or
half of 1 per cent. I think now it is about the same.
Mr. W I L L I S . Have the banks in Boston developed any definite
business in local brokers' loans, or what have they done?
Mr. TBAFFOBD. All of the Boston brokers borrow from the Boston
banks and some of them borrow from New York banks.
Mr. W I L L I S . SO you have a regular brokers' loan market there?
Mr.

TBAFFOBD. Yes,

sir.

Mr. W I L L I S . T h a t is not merely a branch of the New York market,
but an independent, separate thing?
Mr. TBAFFOBD. An independent separate thing for what it is—
small.
Mr. W I L L I S . Does that market devote itself chiefly to the locally
listed stocks or is the money used in the New York market on stocks
listed there?
Mr. TBAFFOBD. Both. I think the real difference is that the
Boston banks will accept some collateral known in Boston which the
New York banks would not. Some of our loans by Boston banks
are purely New York Stock Exchange collateral and some are made
with Boston collateral.
Mr. W I L L I S . T O what extent do you think the New York call
market was in the habit of drawing from the reserve resources at
Boston?
Mr. TBAFFOBD. I do not quite see what you mean.
Mr. W I L L I S . AS you know, the New York Stock Exchange publishes
a compilation of brokers' loans made from time to time. Now,
those come both from local banks and also from other banks. The
question that seems to me interesting here is how far they come
from Boston banks, if you have any information on that.
Mr. TBAFFOBD. I have no figures, but it must have been a considerable item.
Mr. W I L L I S . SO that the Boston banks really were, in a certain
sense, a part of the New York call-loan market?
Mr. TBAFFOBD. I think so; I mean our own banks loan considerable
money in the New York market, in addition to lending on the local
market.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

231

The ACTING CHAIRMAN. We want to pay some attention to affiliates. You do not have them as extensively in connection with your
banks in Boston as they have them in New York.
Mr. TRAFFORD. Four Boston banks have them. T h a t may be as
large a percentage as in New York.
The ACTING CHAIRMAN. The First National has an affiliate?
Mr. TRAFFORD. Yes.
The ACTING CHAIRMAN. D O you think they
Mr. TRAFFORD. Yes.
The ACTING CHAIRMAN. YOU think they do

There are all kinds of abuses possible.
dulged in?
Mr. TRAFFORD. N O ; I do not.
The. ACTING CHAIRMAN. YOU do

are useful?

more good than harm?
Do you think they are in-*

not think there is a temptation?
Of course, you know the New York situation, and some of those
situations have been pretty disastrous in the last two years. Would
that situation have been better if there had been no affiliates at all in
the last 10 years?
Mr. TRAFFORD. N O ; I do not think so. I think they have done
their work well.
The ACTING CHAIRMAN. Well, in some cases
Mr. TRAFFORD. And fulfilled the needs. I think you started to
ask if there was a temptation on the part of the management to do
some crooked things. I think there is that temptation on the part of
bad management.
The ACTING CHAIRMAN. Of course, there is always that temptation
whether they have affiliates or anything else.
Mr. TRAFFORD. Yes, sir; exactly.
The ACTING CHAIRMAN. Would you place any further restrictions
on them in order to get a more complete separation between the bank
and the affiliate?
Mr. TRAFFORD. Well, I would try completely to separate them.
I would try to have the funds that support the security business
segregated from the commercial bank.
Mr. W I L L I S . H O W would you do that?
Mr. TRAFFORD. By putting the stock in the hands of trustees for
the benefit of the stockholders of the bank and let the affiliate have
its own capital and stand on its own feet.
Mr. W I L L I S . That is the same plan followed by the First National
of New York.
Mr. TRAFFORD. I think so. I am not sure whether all the affiliates are the same.
Mr. W I L L I S . Substantially the same.
Mr. TRAFFORD. Yes; I think it is substantially the same.
The ACTING CHAIRMAN. I t is different, I think, with the Chase and
the National City.
Senator TOWNSEND. YOU have the affiliate examined by the bank
examiners at the same time the bank is examined?
Mr. TRAFFORD. N O . However, I ought to qualify that. Our
affiliate did not start as a securities company. I t started under the
Edge Act to do a foreign business, and we were examined by the
Federal Reserve Board examiners every year simultaneously with the
examination of the bank, which is a very good plan, up to last year.
Then we ceased to be an Edge Act organization and our stock was




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

segregated. We asked the Boston reserve bank if we could be examined by them and they referred us to the New York reserve bank,
who declined. We then asked the Federal Reserve Board and they
said that inasmuch as we were not an Edge Act corporation they did
not feel like going outside of their field. However, I think it is very
desirable to examine them.
Mr. W I L L I S . When that Edge Act corporation existed, was its
stock owned by the same stockholders?
Mr. TRAFFORD. I t was owned by the bank itself. The law gave,
as I recall it, the right to invest a certain percentage in Edge Act
companies. I t was a small amount. That is the way we started in.
We did an acceptance business at first.
Mr. W I L L I S . When you changed over the stock was transferred?
Mr. TRAFFORD. I t was segregated from the bank and put into the
hands of trustees for the beneficial interest of the stockholders of the
bank.
Mr. W I L L I S . Of the First National Bank?
Mr. TRAFFORD. Yes, sir.
ACTING CHAIRMAN. D O you have a separate board of directors?
Mr. TRAFFORD. Yes, sir.
The ACTING CHAIRMAN. The trustees holding the stock—they do

The

not overlap?
Mr. TRAFFORD. N O , sir. What do you mean by "overlap"?
The ACTING CHAIRMAN. N O director of the bank is a trustee of the
affiliate?
Mr. TRAFFORD. Yes, the three trustees are directors of the bank.
Mr. W I L L L S . Are the officers the same?
Mr. TRAFFORD. Yes; they are.
Mr. W I L L I S . They are all the same?
Mr. TRAFFORD. N O ; the active operating officers are not the same.
For instance, I am chairman of the board of the corporation and vice
chairman of the bank. Mr. Stockton is president of the bank and
president of the corporation. The active operating officers, however,
are entirely different.
Mr. W I L L I S . Why did you give up the Edge Act function?
Mr. TRAFFORD. There were two reasons. May I take a little time
on this?
The Acting CHAIRMAN. Certainly.
Mr. TRAFFORD. I t is complicated and I am not sure I can trace it
now. We started under the Edge Act, when the war came along and
a tremendous foreign business was thrown on this country. Our
bank had been largely in the foreign business doing an acceptance
business. Foreign trade increased at such a rate that there were not
enough banking facilities to handle it, that is, banks organized to do
it. So, the Federal Reserve Board gave us permission to accept, up
to 100 per cent of our capital and surplus, but that was not sufficient
and then we founded this Edge Act corporation and did quite an
acceptance business, the Reserve Board giving us rather wide power
to make these acceptances.
Then the foreign trade subsided, and it left the corporation with
little to do. Then it was urged that we build up a market for
acceptances, which we have done, and have been very large dealers
in bankers' acceptances and United States Government bonds, which
were based on foreign Government loans. As our business grew the




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

233

capital limitation in the Edge Act—I have forgotten what it was—
was really too small for the volume of business we were doing. We
were in a sort of strait-jacket. That was the major reason. The
second reason was that this business was not so foreign as it had been
in the beginning. Our acceptance business brought us into touch
with a great many of the banks throughout the country. They
wanted some domestic loans and we began to do a little of that
business.
Then we did not know whether our business would develop into
a domestic business or be entirely foreign or mixed, and so we thought
we would have no question about it and be free to go either way.
First, on account of the restriction of capital and second to be able
to do a foreign or domestic business, we withdrew from the Edge
Act, increased the capital, and became a Massachusetts corporation.
Mr. W I L L I S . There are no corporations remaining now under the
Edge Act?
Mr. TRAFFORD. I do not know.
Mr. M E Y E R . Yes; there is one.
Mr. W I L L I S . Has not that just arranged to alter its business?
Mr. M E Y E R . I do not know about that.
Mr. W I L L I S . Do you think it would be well to repeal the Edge
Act provisions or recast it so there will be organizations under it?
Mr. TRAFFORD, I do not know much about the Edge Act except
we were allowed to qualify under it.
Mr. W I L L I S . YOU seem to have had more experience with it than
others.
The ACTING CHAIRMAN. Did your business under it produce profits?
Mr.

TRAFFORD. Yes,

sir.

Mr. W I L L I S . But you found it not suitable to your requirements?
Mr. TRAFFORD. We were invited to go into it under the Edge Act.
Mr. W I L L I S . But has it not proved to be ill-adapted to anybody's
needs, as proved by the fact that nobody that has gone into it has
remained in it?
Mr. TRAFFORD. I do not know what the Edge act is, except in the
one particular in which we qualified. We had to get out of it. I t
really did not suit our needs.
Mr. W I L L I S . I think that was the general experience.
The ACTING CHAIRMAN. You speak of " acceptances/' in the
American sense, and not the English sense? You have no English
acceptances, have you?
Mr. TRAFFORD. I do not know the difference between the American
And English.
The ACTING CHAIRMAN. H O W do you handle yours? I t is commercial paper: What is the guarantee?
Mr. TRAFFORD. Our acceptance business is mostly based on the
exportation and importation of goods.
Mr. W I L L I S . YOU do not handle domestic acceptances?
Mr. TRAFFORD. We have a very small proportion.
Mr. W I L L I S . Why is that?
Mr. TRAFFORD. I do not know. We have been in the foreign
business with a foreign atmosphere for 30 or 40 years. I t has gradually grown and grown so that we are able to get plenty of foreign
acceptance business.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. W I L L I S . D O you regard the domestic acceptance busines as
unsound?
Mr. TRAFFORD. I do not suppose it is unsound. We do not do
much of it. But I guess it is sound enough.
The ACTING CHAIRMAN. I t is practically all commodity paper?
Mr. TRAFFORD. The acceptances?
The ACTING CHAIRMAN.
Mr. TRAFFORD. Well, it

Yes.

is all commodity paper in some form or
other. The type that we use mostly, is on goods from one country
to another.
Mr. W I L L I S . D O you regard the making of acceptances against commodities in warehouses an undesirable practice?
Mr. TRAFFORD. I do not think it.is.
The ACTING CHAIRMAN. When you speak of
Mr. TRAFFORD. T h a t is, if you get the right warehouse.
The ACTING CHAIRMAN. YOU have to get that kind of warehouse?
Mr. TRAFFORD.
Mr. W I L L I S . It

Yes.

is very easy to mistake the character of the ware-

house?
Mr. TRAFFORD. Very.
The ACTING CHAIRMAN. YOU are handling commodities in transit,
as a rule?
Mr. TRAFFORD. Yes. We bring leather from the Argentine or
hides or wool and ship automobiles to Australia and these are covered
by these acceptances—usually 90 days.
Mr. W I L L I S . Does the First National Bank hold many acceptances
in its portfolio, usually?
Mr. TRAFFORD. We have now. As a rule, we do not, I am sorry
to say.
Mr. W I L L I S . Why is that?
Mr. TRAFFORD. Because we make more money in other directions.
Mr. W I L L I S . Why should others take acceptances then if you do
not?
Mr. TRAFFORD. They do not.
Mr. W I L L I S . Where do they go?
Mr. TRAFFORD. The Federal reserve bank.
Mr. W I L L I S . The Federal Reserve Bank of Boston is the sole
repository, practically?
Mr. TRAFFORD. The reserve banks are.
Mr. W I L L I S . I S that a healthy situation?
Mr. TRAFFORD. I do not think so.
Mr. W I L L I S . What can be done to remedy that and put the acceptances on their feet?
Mr. TRAFFORD. I do not think you can do it by any law. We have
been over 10 years trying to develop it. I t is a very slow-growing
plant.
Mr. W I L L I S . What is the reason?
Mr. TRAFFORD. Because banks can make more money somewhere
else.
Mr. W I L L I S . Where is that somewhere else?
Mr. TRAFFORD. We make commercial loans if we can get them.
Mr. W I L L I S . And when you can not
Mr. TRAFFORD. We can make more on Government bonds.
Mr. W I L L I S , When those are deficient?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

235

Mr. TRAFFORD. Then we have to go to acceptances. T h a t is
what we are doing now.
Mr. W I L L I S . YOU go into the call market as an alternative?
Mr. TRAFFORD. Oh,
Mr. W I L L I S . I S not

yes.

that the reason why the acceptance market is

depressed?
Mr. TRAFFORD. I think that is one.
Mr. W I L L I S . If the call market were not quite as active and allembracing as it is, there might be more business in acceptances?
Mr. TRAFFORD. There might. I know how that worked out when
the call market was active. Now, when it is less active there is
more buying of acceptances.
The ACTING CHAIRMAN. The call market now is pretty dead?
Mr. TRAFFORD. Yes; and the rates are very low.
The ACTING CHAIRMAN. Your rate, of course, is the dominant
jactor?
Mr. TRAFFORD. Yes; it is the rate.
The ACTING CHAIRMAN. If you get a high rate on your call loans,
of course your acceptance business must dwindle—no one wants it.
Mr. TRAFFORD. T h a t is right. I think we have between 60 and 70
millions of acceptances now in our portfolio.
Mr. W I L L I S . T h a t is, the portfolio of the First National Bank?
Mr. TRAFFORD. Yes. A year ago we did not have many.
Mr. W I L L I S . D O many of your acceptances base themselves upon
commodities in storage warehouses abroad, particularly in Germany?
Mr. TRAFFORD. N O ; I think not.
Mr. W I L L I S . There has been a great increase in such acceptances
elsewhere. I did not know whether it was true in the Boston district
or not.
Mr. TRAFFORD. I can not speak accurately on that. I do not
know. There may be some.
Mr. W I L L I S . Such increases as have taken place in that regard,
I take it, indicates a substitution for the longer-term bonds that Germany had been in the habit of floating here?
Mr. TRAFFORD. I think so.
Mr. W I L L I S . T h a t results in freezing the acceptances, does it
not?
Mr. TRAFFORD. I think so.
Mr. W I L L I S . H O W can that be prevented?
Mr. TRAFFORD. I do not know. I think it would be well to strike
this all off the record. I t is very casual.
The ACTING CHAIRMAN. I t might be slightly inaccurate, but it is
useful to us in what we are trying to get at. Your attitude toward
the security affiliate is interesting and instructive. You think there
must be a complete separation there.
Mr. TRAFFORD. I think there ought to be a complete separation.
I think there ought to be an examination and it ought to be simultaneous with the bank examination. I think you have got to have
The ACTING CHAIRMAN. I S there any reason that you know of why
the bank examiners have suddenly stopped within the last three
years, from regular examinations of security affiliates? I t is an unusual coincidence that they stopped with you and New York.
Mr. TRAFFORD. Ours only stopped in 1930.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

The ACTING CHAIRMAN. Well, in 1929 and 1930 they apparently
stopped in New York. I t is a curious coincidence.
Mr. TRAFFORD. I think I have explained why ours stopped.
The ACTING CHAIRMAN. YOU say they did not have any adequate
machinery for doing it, but they had been doing it regularly.
Mr. TRAFFORD. When we were under the Edge Act they considered
that we were under the regulations of the Federal Reserve Board and
were under their jurisdiction and they went about it and examined
it, and they always examined it simultaneously with the bank, and
they made very good examinations, and after a year or two they knew
how to make them and we valued them very highly. When we went
out from the Edge Act, as I told you, we requested the two reserve
banks and finally the Reserve Board, and they replied that we were
no longer under the Edge Act and they felt it was outside their
province to do it. I do not know whether the labor of making it
influenced their decision or not.
The ACTING CHAIRMAN. Whom would you make responsible for
the examination of the affiliates of the banks? Would you p u t it up
to the Federal reserve or whom would you have do the bank examining, the State bank examiner or the Federal examiner?
Mr. TRAFFORD. We would rather have the Federal examiner.
The ACTING CHAIRMAN. Under the direction of the comptroller or
the Federal reserve? How would you work it out; what is the practical solution of it?
Mr. TRAFFORD. The practical way, it would seem to me, would be
to have the comptroller do it. He examines the banks, and he could
also examine the affiliates simultaneously. I imagine in practice, if
the Federal Reserve Board did it, they would borrow some examiners,
and you really would not know who was really supervising it. I t
would probably be the same people. I think the same examiners
would be better. I think it is quite important they be the same examiners and that the examination be made at the same time.
Mr. W I L L I S . YOU have only the one affiliate?
Mr. TRAFFORD. Only one, under your definition. We have the
Old Colony Trust Co., which is, in a sense, an affiliate.
Mr. W I L L I S . The other Boston banks; have they more than one
affiliate, as a rule? You spoke of the four largest ones having an
affiliate? Have they each one or many?
Mr. TRAFFORD. We have more than one. We have the Old Colony
Trust Co., which is, in a sense, an affiliate, and then the First National
Old Colony Corporation, which is an affiliate. Then there is the Old
Colony Associates. I do not know whether you call that an affiliate
or not. T h a t is a Massachusetts association in which our corporation
owns 10 per cent of the stock. I do not know whether you would call
t h a t an affiliate.
Mr. W I L L I S . H O W much do you own of the other corporations—
the Old Colony Trust Co., for example? Who owns the stock
of that?
Mr. TRAFFORD. The Old Colony Trust Co., which is a trust company doing a fiduciary business almost exclusively—that stock is in
the hands of trustees for the benefit of the shareholders of the First
National Bank.
Mr. W I L L I S . Just the same as a security company?
Mr.

TRAFFORD.




Yes.

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

237

Mr. W I L L I S . The same method exactly?
Mr. TRAFFORD. Exactly; so, a shareholder in the First National
Bank of Boston, has an interest in the affiliates.
Mr. W I L L I S . There has been some feeling that when you had that
arrangement, that—in the hands of a bank officer who was not of the
highest standards—there was some danger of the exercise of the
fiduciary function in that the security affiliate from time to time
unloaded or dumped securities upon the trust company. Have you
seen any development of that in New England?
Mr. TRAFFORD. I should say generally not. In our case we are
forbidden. We do not do it. Our trust company does not buy
from the security affiliate, and we advertise that we do not do t h a t .
Mr. W I L L I S . But others do that.
Mr. TRAFFORD. I do not think many of them do.
Mr. W I L L I S . Then, there would be no harm in forbidding such a
transaction by law?
Mr. TRAFFORD. I would see no objection to it. I do not think
they ought to do it. Whether you want to put it into the law or n o t
I do not know.
Mr. W I L L I S . Still, if it is very rarely practiced and everyone disapproves of it, a law to that effect would do no harm.
Mr. TRAFFORD. I should not think so. If I could strike m y
answer off the record, I should say I would be very glad to have it
done.
Mr. W I L L I S . We have had some inquiry here as to the question of
loans of affiliates, and I think the Comptroller of the Currency has
favored the limitation of the total amount of loans to be made by the
banks to all of its security affiliates to the same amount that any one
of them would be able to get. What would you think of that?
Mr. TRAFFORD. T h a t is where they have more than one affiliate?
Mr. W I L L I S . Yes; for instance, the Bank of the United States in
New York is said to have had 48 of them, and various of the larger
New York banks have several. You have, yourself, several.
Mr. TRAFFORD. We have one security affiliate.
Mr. W I L L I S . Others have had real estate affiliates, and so forth.
Now at the present time, as we understand from the Comptroller
of the Currency, it is possible for each one of those affiliates to borrow,
under section 5,200 and other restrictions. The comptroller thinks
it might be well to treat all of the affiliates as one borrower, so that
the restrictions that would apply to each individually, would apply
in the aggregate, to all. What do you think of that?
Mr. TRAFFORD. I do not think well of that suggestion. I think
that that would be unfair.
Mr. W I L L I S . For what reason?
Mr. TRAFFORD. I do not know why they have all of these affiliates,
but supposing they had two affiliates, to simplify it, and each one
adequately capitalized and entitled to credit. I think each one ought
to be treated on its own merits and given what it should be given. I
do not see why you add them all together if they are segregated, one
from another.
Mr. W I L L I S . The investigation we have been making shows a very
high development of loans to security affiliates, and the question, it
seems to me, is whether the practice should be permitted to increase,
so that the affiliate becomes a brokers'department of the bank, making
34718—31—PT 1




16

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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

its loans primarily to brokers and dealers and borrowing from the
parent bank for that purpose to the full extent that the legal requirements would permit. If you do that and you go on with another
affiliate dealing in real estate, which makes equally generous real estate
loans to dealers in real estate, and then you have another affiliate
making some other kind of loans, you have a situation which a banks'
whole loaning power may be diverted to and engaged in frozen loans.
Is not that a danger?
Mr. TRAFFORD. Yes. I have not thought that there was that
-chain of arrangements. In other words, a bank might have 10
affiliates?
Mr. W I L L I S . Concededly.
Mr. TRAFFORD. And would lend 10 per cent of its capital and surplus to each one?
Mr. W I L L I S . Yes. That would not be a good situation?
Mr. TRAFFORD. Well, I should think it might be abused very
much, if all those 10 were bad. If they are all good, of course there
would not be any harm done. You would treat them as any other
•customer.
Mr. W I L L I S . Of course if all loans of banks were good, it would
not make very much difference how they were made. They would
be 100 per cent good in that case.
The ACTING CHAIRMAN. Let us get on to the security loans.
Mr. TRAFFORD. May I say one thing more? Are we leaving the
affiliate question?
The ACTING CHAIRMAN. Unless you have something to add.
Mr. TRAFFORD. YOU asked whether I thought they were doing
good work and should be continued. I said I did. The main reason
why I think they have to continue is this, that if they do not the
national banks will be at a tremendous disadvantage with the State
banks and private banks, and it is pretty hard now in New England
to keep the people in the system. They are all the time coming to us
asking why they should stay in. There is quite an exodus, and if
those added penalties were put on I do not know what would happen.
Mr. W I L L I S . YOU mean by "added penalties/' not allowing them
to have affiliates?
Mr. TRAFFORD. Yes. The State banks do. I t would lose the system an important part of the banks that I think you want.
(Discussion off the record.)
The ACTING CHAIRMAN. NOW, let us go to the matter of security
loans. What method do you think is safer—loaning directly to a
customer on a security basis or through a broker? Which, in the
average, over a period of time, would be the sounder business, do you
think, and what is your practice, generally speaking?
Mr. TRAFFORD. Of course we loan both ways. We loan to brokers
and to customers who want to borrow on securities.
The ACTING CHAIRMAN. YOU probably loan more through brokers?
Mr. TRAFFORD. I think we are loaning more direct. I know we are
now. I think we are probably loaning three times as much now and
I imagine, at the height of the inflation we were loaning about equally.
I would not like to be quoted on that, but it is about right.
The ACTING CHAIRMAN. I n other words, you look to the security—
you watch the security rather than the personal obligation?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

239

Mr. TRAFFORD. Yes. I know we made some losses on individual
collateral loans, and I am not sure, but I doubt if we have ever lost
any on New York Stock Exchange loans in all the years. I doubt it.
The ACTING CHAIRMAN. Would your tendency, in making the
loans, be more conservative than the average broker? Of course it
would be. Your margin would be higher?
Mr. TRAFFORD. I t was in 1928 and 1929.
ACTING CHAIRMAN. YOU jacked your
Mr. TRAFFORD. Yes.

The

margin up?

(Discussion off the record.)
T h e ACTING CHAIRMAN. In your opinion, is any substantial proportion of bank security loans at the present time backed by securities
the market value of which is less than 110 per cent of the amount of
&%e loan? That is tantamount to asking you whether you think the
margin on securities at the present time is adequate.
M r . TRAFFORD. I think there are some.
The ACTING CHAIRMAN. When the collateral is insufficient, is
tthere a tendency to shift over to other loans and discounts?
Mr. TRAFFORD. I did not get that.
The ACTING CHAIRMAN. When your collateral is insufficient and
impaired—you have an account "other loans and discounts"—do
you shift over?
Mr. TRAFFORD. I still do not get that.
M r . W I L L I S . I S there any tendency to transfer loans that are
undermargined ?
The ACTING CHAIRMAN. YOU must have that heading " Other
loans and discounts."
Mr. TRAFFORD. I do not know that we have.
The ACTING CHAIRMAN. Most banks have. I t is the cats and dogs
column.
Mr. W I L L I S . I S there any such practice in New England that you
know of?
Mr. TRAFFORD. N O ; we have our collateral men who deal with
ithese people right along and sweat and strain with them.
Mr. W I L L I S . There is no tendency in New England to use this as a
wastebasket provision for the purpose of cleaning up the security
loans accounts?
Mr. TRAFFORD. Not that I know of.
The ACTING CHAIRMAN. Would you suggest any remedy or any
legal method for restricting brokers 7 loans in the future, in the event
of the leading bankers in the country being pretty well agreed on a
period of inflation in sight—warnings sent out? Is there any way
other than good banking; good bankers? Would you leave that
flexible, as it is now?
Mr. TRAFFORD. I would leave it as it is now. I would not know
what to put into the law. Most anything I would think of would be
really damaging. I do not see how we can differentiate.
The ACTING CHAIRMAN. YOU believe in leaving the system and the
laws pretty flexible and getting good bankers in?
Mr. TRAFFORD. Yes; and keeping them in.
Mr. W I L L I S . H O W do you do that?
Mr. TRAFFORD. I think on that point you speak of there is a
radical improvement in the last few years in the number of young
men coming in.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

The ACTING CHAIRMAN. YOU think the personnel in improving?
Mr. TRAFFORD. I think so.
The ACTING CHAIRMAN. Under the head of " b a n k investments"
there are a few questions we desire to ask you. Do you regard the
great increase in the volume of bondholdings by banks in recent years
as tending to impair the liquidity of commercial banks?
Mr. TRAFFORD. I do not know how to answer that.
The ACTING CHAIRMAN. YOU are having the same experience now
as in New York—you have not been as liquid in years?
Mr.

TRAFFORD. N O , sir.

Mr. W I L L I S . The country banks are not quite as liquid?
Mr. TRAFFORD. I do not think New England country banks are
too liquid, but sound.
Senator TOWNSEND. I S there a keen competition between the
national banking system and the State banking system in your State?
Mr. TRAFFORD. There certainly is.
Senator TOWNSEND. Was the organization of your affiliates brought
about by this keen competition?
Mr.

TRAFFORD. N O .

Senator TOWNSEND. I t was not brought on by that competition?
Mr. TRAFFORD. N O , sir. I t came on as I described, from the big
war-time needs. The Government really asked us to do it. I dare
say that our being in it led others to do it.
Senator TOWNSEND. Have you any remedy for taking this keen
competition out between the Federal and State systems?
Mr. TRAFFORD. N O , I have not. If the reserve system could be
made attractive enough, so they would all come in, I think that would
be the best solution.
The ACTING CHAIRMAN. We will come to that in a few minutes.
That is a large question itself, in which we are very much interested.
Will you put any further restrictions on the question of bond purchases, perhaps through the office of the comptroller?
Mr. TRAFFORD. N O ; I would not.
Mr. W I L L I S . YOU are familiar with the confidential instructions
issued to the banks governing the buying of bonds, issued by the
comptroller?
Mr. TRAFFORD. I am not sure that I know what that is. Is it a
recent one?
Mr. W I L L I S . The circular the comptroller sent out, issued under the
McFadden Act, stating what bonds banks can buy. Is that thoroughly satisfactory?
Mr. TRAFFORD. I know what you mean. I read it, and at the
time I thought it was.
Mr. W T ILLIS. You do not think the banks now are in danger of
becoming water-logged with bonds and, of course, having to dispose
of them, as they are doing now, at a loss?
Mr. TRAFFORD. Of course that is always so.
Mr. W I L L I S . Under the McFadden Act, is there not a special
danger there of banks doing that?
Mr. TRAFFORD. Well, there is a chance to make a loss, but I do
not see how we can avoid that.
Mr. W I L L I S . Take the securities section of the McFadden law,
three years ago: Do you think that is a good thing to have in the law,
or do you regard it as advisable to repeal it?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

241

Mr. TRAFFORD. Will you digest that?
Mr. W I L L I S . I t provides that banks may become investors in
securities subject to the rules of the comptroller. Of course they
have always been able to buy bonds under rather loose regulations
of the comptroller. However, this seems to authorize their going
Into the investment business.
Mr. TRAFFORD. I think that is a good thing if it is as far as you are
going. I would like to see the security business segregated.
Mr. W I L L I S . YOU would not like to see it used for issue purposes?
Mr. TRAFFORD. Yes.
Mr. W I L L I S . YOU think

it is quite all right for the banks to become

issue houses?
Mr. TRAFFORD. Yes.
Mr. W I L L I S . You already

have them in the brokerage business with
the security affiliates?
Mr. TRAFFORD. I was thinking of the banker without an affiliate,
whether he should be allowed to do a security business. I think he
should. The State banks can do it.
Mr. W I L L I S . I think they can.
Mr. TRAFFORD. I would not do anything that would put us at a
•disadvantage with the State banks. I would get the State banks
into the system if I could.
The ACTING CHAIRMAN. If you had any modification, you would
tend to check up the State banks rather than restrict the National
banks; that is, you would bring the State banks to conform to the
national system rather than impair the activities of the national
banks? Is that what you mean?
Mr. TRAFFORD. I would not place the national banks at a disadvantage with the State banks unless I thought a bad practice was
involved. If the States had an obviously bad practice I would not
do that.
Mr. W I L L I S . This boils down to the provision that national banks
should be allowed to exercise all powers unless prohibited by the
national bank act, exercised by State banks in the locality in which
they are situated. What do you think of that?
Mr. TRAFFORD. I t sounds all right to me. We have had some
very serious droppings out of the Federal reserve system in New
England.
Mr. W I L L I S . I S it not a good thing to get the Federal reserve
system down to a compact body of banks that want to stay?
Mr. TRAFFORD. If I understand you, I do not think that at all.
I do not see why a select group should pay the expenses of the system
for the general benefit of everyone else. I think we ought to have
the system and I think we all ought to go in and support it and pay
our pro rata share.
The ACTING CHAIRMAN. In other words, they should be encouraged
t o come into the system?
Mr. TRAFFORD. I do not think a bank should say " I can save so
many thousand dollars a year by dropping out of the system."
The ACTING CHAIRMAN. In other words, you ought to give something for your fee—it ought to be a privilege?
Mr.

TRAFFORD.




Yes.

242

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator TOWNSEND. Have there been a number of national banks
in your State that have surrendered their charters and accepted
State charters?
Mr. TRAFFORD. There have been quite a few. I do not think there
is a national bank in Maine. I do not like that. What happens is
that we act as their reserve agent.
The ACTING CHAIRMAN. In other words, you are holding the bag?
Mr. TRAFFORD.

Yes.

Senator TOWNSEND. I S that for the reason they feel the State charters are more liberal?
Mr. TRAFFORD. Yes; and they save money by doing that. We
take 10 per cent of our deposits and put it into the Federal reserve
bank and get no interest on it. I do not know what they do with
it—perhaps invest it in Government bonds. They say that that is
so much a year and why should they forego that profit.
Senator TOWNSEND. Have you any suggestion to make to remedy
this situation?
Mr. TRAFFORD. N O . I notice in this bill one thing—in this digest
of it—and that is the dividends provision; that the banks should get
a larger proportion. I do not see why that should not be so. That
might help. I do not know whether you can do anything, under the
currency acts, to compel State banks to keep non-interest-bearingreserves of some kind. That seems to be the thing they do not like—
the non-interest-bearing reserve.
Mr. W I L L I S . They ought to maintain some such reserve, should
they not?
Mr. TRAFFORD. Yes; but they maintain it with us at 1 or 2 per
cent and in Government bonds at 4 per cent, and they do not see the
sense of maintaining the reserve in the Federal reserve system at zero.
Senator TOWNSEND. D O you think it is possible to liberalize the
Federal reserve act so as to attract State banks?
Mr. TRAFFORD. I S there any legal way in which you can regulate
the reserves of a State bank?
Mr. W I L L I S . There is a difference of opinion about that. There is
a question whether Congress could do it under the currency or
interstate commerce powers.
Mr. TRAFFORD. If they could do that—one of those two things—
it would very likely bring them back.
The ACTING CHAIRMAN. When the price of your securities you hold
in the bank falls below your cost price, how do you care for t h a t
on the books? Do you mark them down? Do you maintain the cost
price on your books always, or do you follow the market down?
Mr. TRAFFORD. What we do really is see that our total portfoliois at market.
Senator TOWNSEND. YOU set up a reserve for depreciation?
Mr. TRAFFORD. Yes; we have marked down some securities at
times.
(Discussion off the record.)
The ACTING CHAIRMAN. Would you advocate a legal provision that
banks must either write down—you can not write off a loan; it has got
to show as a reserve
Senator TOWNSEND. The transaction must be closed before they
can write off a loan.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

The ACTING
up a reserve?
Mr.

CHAIRMAN.

245

I t is not obligatory now that they set

TRAFFORD. N O .

Mr. W I L L I S . I think the chairman wants to know whether you
think it would be well to have any legislation at all on the revision of
book values of securities held by banks that have changed in market
value—either appreciated or depreciated?
Mr. TRAFFORD. I would leave that to the bank.
Mr. W I L L I S . YOU would not have any requirement whatever
as to the valuation of bonds on the books of the bank?
Mr. TRAFFORD. I would say hot.
Mr. W I L L I S . Even when they have deteriorated very markedly?
Mr. TRAFFORD. I think the examiners would speak about it.
Mr. W I L L I S . YOU would leave it to the discretion of the examiners?
Mr. TRAFFORD. The examiners and the mangement.
The ACTING CHAIRMAN. D O y6u think those investments have been
a significant cause of bank suspensions in the Northeast or in other
parts of the country?
Mr. TRAFFORD. Those investments?
The ACTING CHAIRMAN. Yes. You know there have been a great:
many bank failures?
Mr. TRAFFORD. There have been very few in New England.
The ACTING CHAIRMAN. Something like 1,300 last year and 6,006
in 10 years.
Mr. TRAFFORD. There have been very few in New England—very
few I do not know this last year how many, but not over a half a
dozen, possibly.
Mr. W I L L I S . What have been the causes of the failures there?
Mr. TRAFFORD. The two that I know about were just crooked
management; I think perhaps a couple more were unintelligent. B u t
there were only five or six altogether.
Mr. W I L L I S . The security movement has had nothing to do with
the bank failures in your part of the country at all?
Mr. TRAFFORD. Not this last year. I think no national bank failed
in New England last year. I think not.
The ACTING CHAIRMAN. Mr. Trafford, we want to consider the
branch-banking question a little, also groups and chains. Of course,
there is some modification between them. Have you given much
thought to branch banking and would you advise an extension of some
form of branch banking for New England or the Northeastern group?
Mr. TRAFFORD. Speaking just of New England?
The ACTING CHAIRMAN. Well, yes.
Mr. TRAFFORD. I do not see any need for branch banking in New
England.
The ACTING CHAIRMAN. Are you familiar with the point of view of
the present Comptroller of the Currency on branch banking? H e
speaks of trade areas which, or course, is a pretty indefinite term. I t
might be a radius of 100 miles in the East and a thousand miles in t h e
West. But whatever that might mean, branch banking, somewhat
along the English line, perhaps.
Mr. TRAFFORD. We would like that.
The ACTING CHAIRMAN. YOU would like that?
Mr. TRAFFORD. Yes, in trade areas.




244

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

The ACTING CHAIRMAN. YOU would like to go out and establish
branches—say, commercial banks along sound lines in any particular field?
Mr. TRAFFORD. Buy them.
The ACTING CHAIRMAN. Buy up existing banks?
Mr. TRAFFORD. Our bank would, because Boston, as you know, is
a little island with 30 municipalities around it. Municipal Boston is
Teally a small thing. We think we would like to have banks not only
in this municipality but in this entire area, which is simply metropolitan Boston.
Mr. W I L L I S . Would that need b e ' relieved by allowing branches
t o be established in counties—adjacent counties?
Mr. TRAFFORD. Yes; but we would have to take in four or five
counties. The city itself is one.
Mr. W I L L I S . T h a t has been suggested here.
M T . TRAFFORD. Certain adjoining counties.
Mr. W I L L I S . Any county adjoining the one in which you are
located?
Mr. TRAFFORD. T h a t might fit our case. I do not know what
kind of arrangement you would have for the country over, to p u t
t h a t into effect. M y own feeling is that the slower you go in branch
banking at present, the better. Personally, I would go to as limited
an extent and area as possible.
Mr. W I L L I S . YOU think branch banking would give rise to unsoundness in banking or bad management in banking? One witness
from New York has said that the effect of branch banking on a large
scale would be to produce a race for the purchase of banks, with the
result of embarking upon perhaps a feverish speculation in the stock
of those banks. Is that your thought?
Mr. TRAFFORD. Yes; I think they are all right on the line ready
to go. I do not know how many would go. I think it would have
t h a t effect. I do not think it would do much good.
Mr. W I L L I S . If you had it in your Federal reserve district, as
proposed by others, do you think the same effect would be produced?
Mr. TRAFFORD. Yes; on a much smaller scale. There would be a
few banks in New England bidding against each other.
The ACTING CHAIRMAN. And you would bid those values up probably out of all reason?
Mr. TRAFFORD. That is quite true.
The ACTING CHAIRMAN. Then, there is not anything in the suggestion unless it is done very quietly and without competition, and that
is pretty difficult to regulate.
Mr. TRAFFORD. If you raise the bars, that would allow a certain
amount of competition. If you raise the bars for the county, there
would be some; in the State it would be a little more, in the district
i t would be still more, but if you made it the whole country, there
would be a great stampede. I do not think it would do any particular
good. The larger banks do not need to be larger. The large business
can be taken care of as it is now.
Mr. W I L L I S . Have you many out of town correspondents?
Mr. TRAFFORD. A great many in New England and elsewhere.
Mr. W I L L I S . I S it not a fact that the banks with a large well-established line of correspondents are usually opposed to branch banking?
Mr. TRAFFORD. I think they have that tendency; yes. They have
built up the correspondent system.



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

245

Mr. W I L L I S . YOU think the branch-banking system would damage
your correspondent relationships considerably—tend to cut them off
and drive them away?
Mr. TRAFFORD. Yes; it would chop that system to pieces, but if
it were permitted by law, I do not think the communities would
resent it as much as if it were done indirectly.
The ACTING CHAIRMAN. What we are feeling around for is some
way of improvement—not particularly in New England, because t h e
situation is sounder there than in other sections, like the Southeast.
There you have a 1-crop situation and have long lean periods through
each year, and you have your grocery-store competition where the*
trader is practically the banker in one of those villages, and often a
very bad load factor. Now, whether the group system would relieve
the situation, with perhaps one large bank in the group to steer the
group
Mr. TRAFFORD. I suppose it would if it was a good group.
The ACTING CHAIRMAN. The problem is very sfcrious in the Southeast and the Northwest. Can you not imagine weak units being
strengthened through a single controlling bank in that group which
could diversify their loans and their business?
Mr. TRAFFORD. Yes; I can.
The ACTING CHAIRMAN. There

is no parallel in New England for
that situation, is there?
Mr. TRAFFORD. N O ; there is not; because farming is a small percentage of the business there and even the country banks are pretty
well diversified and locally we do not have the depression quite as
hard, and I think the management is pretty good as a rule, and so we
have not the dire consequences they have had in other sections of
the country. T h a t is the only end that really needs any help. The
big bank does not need it and the middle-sized bank does not. I
think it is only the little bank. I do not know what the answer is.
I suppose they would have made the same losses if they had been
the branches of some near-by bank. If they had the money in mortgages, the losses would have been there, but it might not have affected
the depositors of that bank.
The ACTING CHAIRMAN. I S it not conceivable that if they had close
affiliation with a so-called master bank, their banking would have
been a little sounder and more conservative?
Mr. TRAFFORD. I t might have been more sound. I do not know
what you can do in a 1-crop district. Whether it is owned by a big
bank or a small bank, there is a loss. I n the case of the small banks,
perhaps the depositors lose the money. Probably if you could get
some small branch banking rather than group banking in small areas,
that might help the situation. I do not think it is opportune to
open the country to branch banking on a large scale, at the present
time. I would rather see an improvement in the management and
supervision of what we have got, which is pretty good. We would be
trying an experiment which might or might not fit. Personally I do
not know what would fit.
The ACTING CHAIRMAN. Of course, branch banking is a very extensive system in England—Lloyds, London City Midland. I think t h e
London City Midland has a vast number of branches.
Mr. TRAFFORD. TWO thousand two hundred branches.




246

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

The ACTING CHAIRMAN. In England alone, which is a very small
area.
Mr. TRAFFORD. Yes. If you put England down on this map [indicating] it would not look very large. I do not know whether it works
well.
The ACTING CHAIRMAN. They think so.
Mr. TRAFFORD. Perhaps it does. I t might work better than ours,
b u t it is not entirely clear to me.
The ACTING CHAIRMAN. Have you any questions that occur to
you, Doctor Willis?
Mr. W I L L I S . Yes; one or two. Have you any development of
•chain banking in New England to any important extent?
Mr. TRAFFORD. I t is not growing. We have, I think, the largest
<jhain.
Mr. W I L L I S . Including how many members?
Mr. TRAFFORD. We call it a group. We have what we call the
Old Colony Associates, in which our corporation owns 10 per cent of
the stock. The "Associates" which is a holding group banking
system, owns a certain amount of stock of, I think it is, 20 of these
suburban banks around Boston.
Mr. W I L L I S . What function does it perform in reference to them?
What is its relation to the banks?
Mr. TRAFFORD. They help the management. They have a management committee and they try to introduce the best methods of
one into all others—really run them.
Mr. W I L L I S . D O they pass on loans and discounts in the Old Colony
Associates, or in each of the banks?
Mr. TRAFFORD. They have a central loan committee which, I
think, passes on loans over a certain size.
Mr. W I L L I S . D O you have a local board of directors in each case?
Mr.

TRAFFORD.

Yes.

Senator TOWNSEND. I S the local board permitted to make loans?
Mr. TRAFFORD. Up to a certain figure, and above that the central
-committee.
Mr. W I L L I S . H O W many such chains are there in New England?
Mr. TRAFFORD. We have about 20 in that group which may represent $100,000,000 deposits. In case of branch banking of the type
which has been suggested, they would likely become branches.
I think there are three other chains, or two others, in Boston.
Then there is a chain in Worcester County. I am not sure whether
there are any more.
Mr. W I L L I S . Are these chains pretty successful?
Mr. TRAFFORD. They have done very well.
Mr. W I L L I S . The central management has been a good thing; it
lias been shown to be a practical way of managing?
Mr. TRAFFORD. Our management committee tell us so.
Mr. W I L L I S . I am speaking of it in general terms and questioning
you about it as a method of banking, and not merely as handled by
one of the best banks, or under its auspices, but handled generally
Mr. TRAFFORD. I, personally, would prefer the branch-banking
method. I t seems to me the responsibility is more centralized.
Mr. W I L L I S . I had the impression awhile ago you did not think
highly of branch banking.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

247

Mr. TRAFFORD. I think it is a mistake to do it now. Whether,
20 years from now, we will have it, I do not know.
Mr. W I L L I S . I t is preferable to a chain.
Mr. TRAFFORD. Yes; you have it all under one head and there is
no shifting around.
Mr. W I L L I S . Who owns the other 90 cer cent of the old Colony
Associates stock?
Mr. TRAFFORD. The public.
The ACTING CHAIRMAN. Where is your chief saving in a chain
banking system? Are you saving in the overhead?
Mr. TRAFFORD. Yes; we are saving a bit in the overhead, but not
much.
The ACTING CHAIRMAN. YOU think you could do better where you
have central control
Mr. TRAFFORD. They think they do it better. They think now
t h a t bank No. 20 is run just as well as bank No. 1, which had a spectacular record.
The ACTING CHAIRMAN. That is by comparison of details of management?
Mr. TRAFFORD. Yes, and watching the security lists, watching general trends, and so forth, and they think they have generally good
Tesults, and I think they have myself.
Mr. W I L L I S . D O they give out to the public the information that
they are in a chain system?
Mr. TRAFFORD. I think they all do it—issue elaborate pamphlets.
The ACTING CHAIRMAN. There is nothing hidden about it?
Mr. TRAFFORD. N O .
ACTING CHAIRMAN. Does the State take any cognizance
Mr. TRAFFORD. N O .
The ACTING CHAIRMAN. There is no recognition legally?
Mr. TRAFFORD. N O .
The ACTING CHAIRMAN. N O interference with it?
Mr. TRAFFORD. N O .
Mr. W I L L I S . They simply examine the banks each as an

The

of it?

inde-

pendent unit?
Mr. TRAFFORD.

Yes.

The ACTING CHAIRMAN. Can a national bank take into its chain
l)oth a State bank and/or National bank and carry them in the
•same chain?
Mr. TRAFFORD. Well, the chain is done through a vehicle which
can do it.
The ACTING CHAIRMAN. I mean such a vehicle.
Mr.

TRAFFORD.

Yes.

The ACTING CHAIRMAN. And that vehicle may be entirely owned
b y a national bank?
Mr. TRAFFORD. I t can not be held by a national bank, can it?
Mr. W I L L I S . By the stockholders.
Mr. TRAFFORD. By a holding company; yes.
Senator TOWNSEND. Your published statements—are they published separately for each bank in a chain or altogether?
Mr. TRAFFORD. In the legal statements they are each published
separately and then the associates get out a group consolidated
statement.




248

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. W I L L I S . H O W many of these are members of the Federal reserve system—this chain of banks?
Mr. TRAFFORD. I do not know.
Mr. W I L L I S . A considerable number?
Mr. TRAFFORD. I think so.
Mr. W I L L I S . SO that you really get, in that way, a pretty large
voting power in managing the Federal reserve bank, do you not?
Mr. TRAFFORD. I have never thought of that.
Mr. W I L L I S . In some of the western districts I have understood
that the chain banks really control the Federal reserve banks because
they have so many members in a small number of chains that the
control of the reserve bank is in the control of a few hands.
Mr. TRAFFORD. That is not true with us.
Mr. W I L L I S . But that would be perfectly possible, would it not?
Mr. TRAFFORD. I suppose it would.
The ACTING CHAIRMAN. Mr. Trafford, what is your opinion with
reference to our legislation? Would you be opposed to any legislation, or have you studied this bill far enough to know whether there
is anything in this that appeals to you?
Mr. TRAFFORD. I have not read the bill, but this is a digest [exhibiting] which was given me.
The ACTING CHAIRMAN. Are you at liberty to read that?
Mr. TRAFFORD. This is just a digest of the bill. I guess I had b e t t e r
begin at the end. There are twelve points. Most of them I do not
see any objection to, or not much reason for. This says that member
banks when borrowing, roughly, shall not make any further collateral
loans. I do not think that is good at all. I think it is very bad.
The ACTING CHAIRMAN. That is section 11?
Mr. TRAFFORD. Yes. I mean we have to be helpful to banks i n
New England and we should hate to tell a correspondent bank,
" W e are very sorry, but we happen to be borrowing in the Federal
reserve bank to-day, and although you may fail to-morrow, we can
not help y o u . " I do not think, simply because we are borrowing"
for a day or for a week from the Federal reserve bank, we should
not be permitted to loan.
Mr. W I L L I S . I think your digest does not quite represent section
11. I merely call that to your attention for further reading. I t
only has reference to speculative loans.
Senator BULKLEY. I S there any part way measure on this? You
say it would be too strict as there proposed. Is there any limitation
along that line that would be reasonable or desirable?
Mr. TRAFFORD. I do not know of any, and I would hesitate to put
anything in that might be more embarrassing and might not be
helpful.
Senator BULKLEY. I S your answer that you can not think of a
remedy, for you think there is nothing there to be remedied?
Mr. TRAFFORD. Well, I think that the thing will work itself out
about as well without legislation as with. I think you will get these
waves of speculation and an artificial rule here or there on this will
not stop it. I think it had better be left to the management of t h e
bank as to where the money they are borrowing is going. I can
not think of anything that will fit the situation.
Now, here is one—the last one—which I do not understand. I t
requires national banks to invest time and savings deposits, and so*




HATIONAL AND FEDERAL BESERVE BANKING SYSTEMS

249

forth. If a national bank becomes insolvent all the property in this
connection shall be applied ratably. I t limits them in one group.
Mr. W I L L I S . I t is merely to bring about segregation of assets, so
t h a t savings deposits shall be protected, as in savings banks, by a
special list of assets that are designated for that purpose.
Mr. TRAFFORD. What bothered me at first was there is a great
difference in New England between time and savings deposits.
They should not be classified together. I do not think the time deposits need protection and neither do the savings deposits.
The ACTING CHAIRMAN. YOU have had very little opportunity to
study the bill?
Mr. TRAFFORD. I have had none. This is simply a digest of the
bill.
The ACTING CHAIRMAN. We would like to have your mature opinion
on it, and will you not take the bill back with you and submit something in writing later, after you have had a chance to consult with
some one on the bill?
Mr. TRAFFORD. I shall be very glad to do that.
The ACTING CHAIRMAN. D O you favor a restriction on the placing
of loans for the account of others? Would you put in any restrictions
.as to what would go into that column?
Mr. TRAFFORD. I would not. I do not know what you aim to
accomplish by that.
The ACTING CHAIRMAN. I suppose that account is a sort of dumping ground.
Mr. TRAFFORD. I did not get you. I thought you meant loans for
the account of others.
Mr. W I L L I S . The question has been asked of almost all witnesses,
•and discussed by most of them, as to whether the so-called " loans for
others " in stock-exchange transactions—whether those have not been
an injurious thing. Most have testified they have been an injurious
thing and would like to see the case remedied if they could.
Mr. TRAFFORD. I do not know whether you can do that. I suppose
It is a bad thing. I am not so dead sure it is. Even if it is, I do not
see what you can do about it. We had cases a year ago of corporations who wanted to lend and who told us that if we did not wxant
to do it others would.
Mr. W I L L I S . Were those mostly corporations who had financed
themselves in the market recently and had separate capital on hand,
or old established corporations?
Mr. TRAFFORD. I think it was both those types and also individuals.
T h e y said, " W e have so much money, and the rate is so much and
we want to put it out."
The ACTING CHAIRMAN. D O you think corporations borrowed much
money for use for that purpose?
Mr. TRAFFORD. I do not believe so.
The ACTING CHAIRMAN. Or sold securities in order to get money
to lend at that high interest?
Mr. TRAFFORD. I do not know.
Senator TOWNSEND. D O you think individuals did that? In other
words, you think they sold stock in their own companies to get money
to lend at the higher rate?
Mr. TRAFFORD. They did not come to my attention, but it did
come to my attention that individuals said, "If you do not lend it




250

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

for us, we will get other banks, and if other banks will not lend it, we
will get it through other sources that will or loan it direct, ourselves/ T
The ACTING CHAIRMAN. Mr. Trafford, we are very much obliged
to you for coming down and giving us your views.
Mr. TRAFFORD. I have enjoyed it very much.
The ACTING CHAIRMAN. That is very high praise. We will adjourn
now until 10.30 o'clock tomorrow morning, when we will have another
open hearing.
(Adjourned at 12.15 p. m. until Friday, January 3Q„ 1931, at 10.30
o'clock a. m.).




OPERATION OF THE NATIONAL AND FEDERAL RESERVE
BANKING SYSTEMS
FRIDAY, JANUARY 30, 1930
U N I T E D STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY,

Washington, D. C.
The subcommittee met, pursuant to adjournment, at 11 o'clock
a. m. Hon. Carter Glass (chairman) presiding.
The CHAIRMAN. The committee will come to order. Senators
Walcott and Townsend will be here in a few minutes, and they have*
authorized me to announce them as present, for a quorum.
STATEMENT OF GEORGE W. DAVISON, PRESIDENT OF THE
CENTRAL HANOVER BANK AND TRUST CO. OF NEW YORK
The CHAIRMAN. Mr. Davison, we are obliged to you for coming
down. We have in process a general inquiry into the banking situation of the country with the expectation and hope of being able to
do something to prevent a recurrence of such a situation as we now
have. I believe you appeared before the House Committee on the
5th of last June?
Mr. DAVISON. Yes.
The CHAIRMAN. And

practically confined your statement to a discussion of the question of branch banks?
Mr. DAVISON.

Yes.

The CHAIRMAN. SO that that hearing is available to the committee
and the likelihood is that we shall not ask you to talk, certainly in
an extended way, about branch banking, except that some members
of the committee might have occasion to ask you some question about
that.
What we should like you to do is to give us a general statement of
the situation as you see it, and of proposed legislation or any legislation that may commend itself to your favorable consideration; in
other words, state to us what is the situation and what you think
may be done to prevent a recurrence of it, if it is bad.
Mr. DAVISON. That is a very large order, Mr. Chairman.
The CHAIRMAN. Yes, but that is what we are making the inquiry
about.
Mr. DAVISON. I do not believe that you could make good banking
by legislation. I do not know of any good banks that have failed.
I think one
The CHAIRMAN. What we want to do is to prevent bad banking,
as far as we may by legislation.




251

252

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. DAVISON. I think the great trouble has been the too liberal
chartering of banks. There have been banks with too small capital,
and certainly in the past there has been a sort of rivalry between the
State and National systems. Where one bank was operating successfully in a small community, another would be started under a different aegis. The result of two banks attempting to operate in a community that will support but one is bad. The tendency is for the
new bank to take accounts from the old bank, and it may be that the
old bank will do things it ordinarily would not do, in order to keep
accounts.
Coupled with that you have had a change in economic conditions.
The larger centers, with good roads, e t c . / h a v e been brought very
much nearer to the small communities, and business tends to the
centers. That probably has been helped by the absorption of small
businesses into chains or groups where a clerk, instead of a business
man is running the business, and the business of the group has been
done in some larger center.
I think those two things have contributed very largely to the failure
of banks, coupled with the further fact that banks have been formed in
communities where there was not enough business to furnish a bank
with opportunities for a proper use of its money and, having deposits,
it has had to go and buy bonds and with the tremendous swings that
we have had in interest rates, beginning in 1914, good bonds have had
a wide variety of prices which would seriously affect the capital and
surplus structure of a small institution.
The CHAIRMAN. Mr. Davison, have you given any consideration at
all to the question of how we may, by legislation, readjust the competition between the National and State systems?
Mr. DAVISON. N O ; I have not. I think it is a real handicap that
we labor under, having 49 different systems.
The CHAIRMAN. And you can not tell us any way of correcting
that situation?
Mr. DAVISON. Except by more cooperation.
The CHAIRMAN. YOU say no well-managed banks failed in 1928
and 1929?
Mr.

DAVISON. Nor in

1930.

The CHAIRMAN. Well, is there no way of correcting banking mismanagement by legislation?
Mr. DAVISON. Not by legislation. You have now examinations
which should disclose the condition of banks.
The CHAIRMAN. Well, do they?
Mr. DAVISON. Well, I can not say that they do not. The examinations that have been made by our State superintendent and your
Federal reserve system and our clearing house have been very helpful
to us and I think they are searching examinations. The great difficulty, of course, with the superintending authority is how to correct
the abuses that he finds. If he talks about them, he endangers the
bank. He does not want to close a bank that may, by any probability
be solvent, and it becomes a difficult question of administration.
The CHAIRMAN. The Comptroller of the Currency ventured to
suggest, as to the national system, that either the comptroller or the
Federal Reserve Board might well be given authority to suspend
bank officials, and, if necessary, to dismiss them when they might be
found to be mismanaging a bank.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

253

Mr. DAVISON. Of course, that is a notice to the public that there
is something wrong in the bank. I should think that it would disturb the public and create a run that might result in the closing of
the bank. I can not conceive of a situation where a board of directors,
on the proper statement from the examining authority, would not
take things into their hands. I think that we have been very careless
in chartering too many banks, and especially banks with small capital.
The CHAIRMAN. I talked not more than half an hour ago—at least,
I terminated a talk—with a high official, having in large measure
supervisory control of the national banking system, and he told me
that over and over and over again, an innumerable number of times,
they have undertaken to remonstrate with boards of directors of
banks, pointing out to them the unsafe processes prevailing at the
bank, without making any impression on them at all.
Mr. DAVISON. He has now the authority to close the bank. I
think suspension is practically the same thing.
The CHAIRMAN. I called his attention to that, but he thought that
was a dreadful remedy.
Mr. DAVISON. I think suspension is practically the same thing.
The CHAIRMAN. Well, would it not be better to close a bank doing
a business of that sort, than to permit it to continue in a business of
that sort?
Mr. DAVISON. I am inclined to think it would.
The CHAIRMAN. And involve its patrons—its depositors and stockholders—in a greater degree?
Mr. DAVISON. In my judgment the best thing is to do it right away
and not temporize.
The CHAIRMAN. I t is not being done.
Mr. DAVISON. That is a matter of administration.
The CHAIRMAN. D O you think the situation in 1929 was brought
about by bad banking management?
Mr. DAVISON. Yes.
The CHAIRMAN. Well,

what different type of management would
you suggest to us?
Mr. DAVISON. Well, I could not suggest any different type of management. I will give you, in support of my opinion, the statement
of the man who, in my office, has closest touch with the correspondents, who made the remark to me that no good bank had failed. He
is in touch with a great many banks throughout the country.
The CHAIRMAN. Have no banks failed
Senator NORBECK. M a y I ask a question? Isn't it a fact that all
banks in New York failed at one time?
Mr. DAVISON. That they all failed at one time?
Senator NORBECK. Yes.
Mr. DAVISON. Not that I know of.
Senator WALCOTT. I S the converse of that true, that all banks
which have failed, have failed necessarily because they are badly
run banks?
The CHAIRMAN. I was going to ask a kindred question to that;
that is to say, have not many good banks failed because of bad
management?
Mr. DAVISON. There is no doubt some banks that would have been
fundamentally sound, but for dishonesty or bad management^ have
failed—yes.
34718—31—PT 1




17

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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

The CHAIRMAN. D O you think the management of the Federal
reserve system had anything to do with the situation in 1929?
Mr. DAVISON. I think the Federal reserve system has been a
tremendous contribution of benefit to the banking situation in the
United States.
The CHAIRMAN. Yes, we all think that, Mr. Davison, but what I
am asking is, Did its policy or its lack of policy or its courageous
supervision or lack of courageous supervision, contribute, in any
measure, to the situation we had in 1929?
Mr. DAVISON. Possibly. There are a tremendous number of
reasons I think that led to the situation in 1929. I think the primary
cause of the tremendous rise in prices was the capital gains tax.
The CHAIRMAN. YOU mean the taxpayers or holders of securities
were unwilling to take profits and realize on them because they were
taxed?
Mr. DAVISON. I t is not because they are taxed, but people who had
securities which they had held for a long while and which they wished
to continue to hold at the same prices, figured that if they sold and
paid the taxes they would have to reinvest their money and might
not be in a position to do so advantageously and did not know how.
long they would have to wait. So they decided to hold on, and this
did result in a corner in a great many stocks; in other words, the
supply of securities of that type was limited and it left a situation
where the small floating supply was marked up to high prices. T h a t
is one of the causes.
The CHAIRMAN. In what degree were adventures in the stock
market the cause of the situation?
Mr. DAVISON. I do not think there is any question that the participation in the stock market by the whole country also was a large
contributing factor. Waves of that kind do come at different times,
based on prosperity and based to some extent on the high prices of
securities which had a real investment value and had been marked
up to unprecedented prices. I t is not improbable that the easy
money of 1927, which made a real contribution to our agricultural
business and our other business may have been continued too long.
I t is quite probable that if Federal reserve rediscount rates had been
raised a little faster and with less talk about it, it might have checked
much speculation but that is a matter of judgment and it is much
easier to judge now than then.
The CHAIRMAN. D O you think it was ever intended that the rediscount provisions of the Federal reserve act should be used to control
stock speculation or influence it in any way?
Mr. DAVIDSON. Well, it is expressly provided that the Federal
reserve banks shall not rediscount on securities.
The CHAIRMAN. I know that is the provision, and that being so,
would it not seem to indicate what was in the minds of the proponents
of the system; namely, that the rediscount processes of the Federal
reserve banking system should not be used to affect the stock market?
Mr. DAVISON. I t is very hard to earmark any particular kind of
money. All banks did not use the Federal reserve system, so that
they could have money to loan on stocks
The CHAIRMAN. Should any banks have been permitted to do it?
Mr. DAVISON. I think, from the nature of the business which
banks do, that it would be impossible that they should not occasion-




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

255

ally have to borrow because of loans that they had made that were
cofiateraled by securities. As a matter of fact, in ordinary times,
with the daily settlements on the New York Stock Exchange, call
loans furnish as good a secondary reserve as any bank could have.
The CHAIRMAN. That I understand. I understand there were
comparatively few losses on call loans, but what I am trying to arrive
at is: What is the meaning of section 13 of the Federal reserve act if
it does not mean to preclude that sort of business from the operations of the Federal reserve bank.
Mr. DAVISON. The Federal reserve provisions mean that if I have
securities which can be rediscounted, I can use them. If you can
find some way that I can not use them so that I can lend money
in improper channels, that is all right. As a matter of fact, my
bank did not do it.
The CHAIRMAN. I am not suggesting that it did, but other banks
did, did they not?
Mr. DAVISON. I do not think so, generally. I had not supposed
that banks took advantage of that situation to secure money to loan
on securities.
The CHAIRMAN. Then, if they do not do that, what could be the
objection to the proposed amendment to the act contained in the bill
introduced in the Senate recently expressly to prohibit the rediscounting of any bank which does make loans of that description
beyond a certain limit?
Mr. DAVISON. Well, I think that any restrictions that you put on
banking are apt to work a hardship. My experience has been that
legislation remedies drafted for a particular malady that you suffered
once have usually, sooner or later, been repealed.
The CHAIRMAN. Could it work any greater hardship than the
country had to endure recently?
Mr. DAVISON. Yes; the situation might have been very much
worse than it was.
The CHAIRMAN. Well, it takes a lively imagination to come to that
conclusion, it seems to me. My contention has been that, in the
Federal reserve system, we set up a commercial reserve banking
system to respond readily to the demands of commerce.
Mr. DAVISON. And I do not believe that business suffered in any
way or any bank was not able, during all that time, to make loans
to its commercial customers, or did not make them, or that they
made them at as high a rate as the loans on securities in the Street.
The CHAIRMAN. But I understood you to advocate the use of the
commercial rediscount rate of the Federal reserve system to abate
the violence of stock speculation.
Mr. DAVISON. I did not understand that I had said that. I said
that my practice had been otherwise.
The CHAIRMAN. Well, I am not talking about the practice of your
particular bank, Mr. Davison. I understood you to say
Mr. DAVISON. I said I did not think the situation called for any
legislation.
The CHAIRMAN. I understood you to say, however, that ha;d there
been an increase in the rediscount rate in the Federal reserve system
sooner, and more persistent, that that would have had th& effect
of




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NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

Mr. DAVISON. I said it might have—that such a regulatory step as
any step—proven effective.
The CHAIRMAN. Some of us think that legitimate commerce should
not be penalized in the matter of rediscount rates at the Federal
reserve banks for the express purpose of abating the violence of stock
vspeculations.
M r . DAVISON. T h a t means that commerce should have a different
rate on its money than loans on stocks. Is that right?
The CHAIRMAN. I t means that none of the facilities of the Federal
reserve banking system should be used for stock speculative purposes
or any investment purposes.
Mr. DAVISON. Well, I think that would be a great hardship. I
think that the investment of the people's money in this country is a
very important part of the business of this country.
The CHAIRMAN. But it is not an important part of the business of a
reserve banking system, set up to respond readily to the needs of
commerce.
Mr. DAVISON. I t is a necessary part of our banking system.
The CHAIRMAN. Then, why did we preclude from the definition of
eligible paper, investment securities?
Mr. DAVISON. To make more advantageous to the bank loans on
commercial paper.
The CHAIRMAN. Well, did we not textually preclude loans for
stock speculative purposes?
Mr. DAVISON. You have just proved that you did not.
The CHAIRMAN. Well, we intended to, if the English language can
do anything of the sort. I t says so.
Mr. DAVISON. All loans on securities are not speculative.
The CHAIRMAN. The statute does not employ the term " speculative. " I t says for the purchase or carrying of investment loans. Is
not that the fact?
Mr. DAVISON. I assume that you have quoted the language correctly. I do not know.
The CHAIRMAN. But you think had the Federal Reserve Bank of
New York, for example, been permitted, by the Federal Reserve
Board at Washington, to raise its commercial rediscount rate—I
might say indefinitely—it would have been the correct method of
using the facilities of the Federal reserve bank?
Mr.

DAVISON.

Yes.

The CHAIRMAN. For the sole purpose of abating the violence of
stock speculation?
Mr. DAVISON. I did not say that.
The CHAIRMAN. Well, for what other purpose?
Mr. DAVISON. For the purpose of trying to stop the inordinate
rise of all prices, including securities.
The CHAIRMAN. YOU think a Federal reserve bank, with an 80 per
cent reserve, could justify itself in raising its commercial rediscount
rate?
Mr. DAVISON. I do. Of course you realize that we are permitted
to rediscount against Government securities?
The CHAIRMAN. Yes; I am coming to that.
Mr. DAVISON. Otherwise, we could probably not have floated the
loans during the war.
The CHAIRMAN. We did float loans during the war before that provision was inserted in the bill.




NATIONAL AND FEDEBAL RESERVE BANKING SYSTEMS

Mr. DAVISON. A very small amount, compared to what we finally
did.
The CHAIRMAN. D O you think that provision of the act has been
abused at all, and used for stock speculative purposes?
Mr. DAVISON. N O .

The CHAIRMAN. Then, you differ with other authorities who have
testified before us.
Mr. DAVISON. I am not an authority.
The CHAIRMAN. Y O U differ with other authorities who have testified before the committee. Then I take it, Mr. Davison, that you
think the Federal reserve banks were established to affect the stock
market rather than respond to the demands of commerce?
Mr. DAVISON. I do not think so, n o r 4 o I think I have said so.
The CHAIRMAN. Well, as it seems to me, that is your conclusion.
Mr. DAVISON. Then I have not correctly conveyed my opinion.
The CHAIRMAN. Well, let us see whether I am mistaken or you
are mistaken. You think a Federal reserve bank, regardless of its
plethora of reserves, should increase its rediscount rate upon legitimate commercial transactions?
Mr. DAVISON. I have said that I thought if this had been done, it
was quite possible that it would have served to halt the speculation
that was then going on.
The CHAIRMAN. What I am trying to arrive at, Mr. Davison, if
you please, is whether a Federal reserve bank had any justification, in
fact, under the statute to penalize ordinary commerce, in order to
abate the violence of speculation in the stock market.
Mr. DAVISON. Well, I thought, under our system as it was being
administered, and under all the facts, that you could not earmark
certain kinds of money, and that it was not improbable that that
might have accomplished a very good purpose. I presume you know
there has been a very great decrease in the amount of commercial
paper available for banks in the last eight or nine years.
The CHAIRMAN. Yes; I know that. Do you favor permitting Federal reserve banks to rediscount outright on investment loans on the
stock exchange?
Mr. DAVISON. N O .
The CHAIRMAN. Well,

if you would not have us do it by law, why
should the Federal reserve banks be permitted to do it, when the
statute itself textually says they can not?
Mr. DAVISON. If they legally can not do it, of course, they can
not do it.
The CHAIRMAN. But do they not do it?
Mr. DAVISON. I do not think they rediscount to make loans on
securities. That was not my experience.
The CHAIRMAN. YOU speak of the difficulty of earmarking loans.
Do you think any soundly conducted bank is in ignorance of the use
of its credits?
Mr. DAVISON. N O ; we know to whom the loans go.
The CHAIRMAN. What is that?
Mr. DAVISON. We know who borrows the money, of course.
The CHAIRMAN. D O you not know for what purpose it is borrowed?
Mr. DAVISON. Generally.
The CHAIRMAN. Should you not know?
Mr. DAVISON. AS a rule.




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NATIONAL AND FEDERAL KESEEVE BANKING SYSTEMS

The CHAIRMAN. Therefore, if any member of the Federal reserve
system is overextended in its loans for investment purposes, should
not the Federal reserve bank authorities know that?
Mr. DAVISON. I do not know.
The CHAIRMAN. And you think the 15-day loan—direct loans to
banks—on Government securities, has not been abused at all?
Mr. DAVISON. I do not know of any abuse.
The CHAIRMAN. A S I recall, both Doctor Miller and former Governor Hamlin of the Federal Reserve Board, and very likely—although
I am not certain—the Comptroller of the Currency, thought that had
been the case.
Mr. DAVISON. They would be much more familiar with the facts
than I, since they have a broader field to cover.
* The CHAIRMAN. I t may be that since your bank is conducted in
such a sound and orthodox way, you find it difficult to imagine t h a t
any other banks are conducted in any other way. Well, of course,
t h a t does not require a specific answer.
Do you believe in the affiliate banking system, Mr. Davison? Do
you think a national bank should be permitted to have affiliates?
Mr. DAVISON. T h a t is a very difficult question. We have no
affiliate. You have got them in the national banks. I think it may
work a hardship to take them away. I do not know. They are
capable of abuse. The Bank of United States shows what can happen
when they are abused. I t is a very glaring example—especially when
dealing in their own securities.
The CHAIRMAN. And some other banks with affiliates might be
placed under the same criticism, might they not?
Mr. DAVISON. I t has possibilities of abuse and danger.
The CHAIRMAN. If experience has shown that they have not only
possibilities, but that flagrant abuses have occurred, should there not
be some legislation?
Mr. DAVISON. I should think there should be.
T h e CHAIRMAN. YOU would help us tremendously if you would
suggest what might be done to correct that situation.
Mr c DAVISON. Well, I think examinations
Senator WALCOTT. Coincidental with the bank?
Mr. DAVISON. Absolutely—and possibly a publication of their
statements?
The CHAIRMAN. We have a provision in the legislation now proposed, requiring examination tod publicity.
Mr. DAVISON. And a prohibition, certainly, of dealing in their own
stocks.
The CHAIRMAN. Yes. You think t h a t should be done, then?
Mr. DAVISON. Yes, sir. I hesitate, Mr. Chairman, to express any
opinion on it because it may appear I am suggesting something about
someone's else's business. However, I think those things would be
helpful.
The CHAIRMAN. I think the fact that you have not done it yourself is convincing evidence you do not believe in that system of
banking.
Mr. DAVISON. T h a t is right.
The CHAIRMAN. D O you think the trust or fiduciary powers now
bestowed on member banks is open to any criticism at all?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

259

Mr. DAVISON. No. Of course I deplore the fact you have ever
iven them the power, but having given it to them, I do not see
ow you can change it.
The CHAIRMAN. Well, if I may ask you without offense, you
deplore the fact
Mr. DAVISON. Because we did a very large trust business and I got
just that many more competitors?

f

The CHAIRMAN.

Yes.

Mr. W I L L I S . But your objection is based on something more extensive than that, is it not?
Mr. DAVISON. Well, since it has been done, and they have been
exercising these powers and acquiring experience, whatever primary
objection I might have had, I can not press to-day, without being subjected to criticism that I was doing it in self-interest.
Mr. W I L L I S . I do not think anyone would suggest that. I think it
is very desirable, for the sake of proposed legislation, to get your view.
Mr. DAVISON. I do not think you could take away the power,
having given it, without working a hardship.
The CHAIRMAN. YOU do not think we could take a power away, if
we find it is being dangerously abused?
Mr. DAVISON. I would not say it is being dangerously abused.
Mr. W I L L I S . If trust powers are granted to banks such as have been
mentioned—that is, undesirable banks—there is grave danger there,
is there not?
Mr. DAVISON. Very.
Mr. W I L L I S . Trust powers are being granted at the present time
very freely to small banks, among others?
Mr. DAVISON. Yes.
Mr. W I L L I S . And to banks that are not especially
Mr. DAVISON. I t might very easily be that a bank

high grade?
should not have

trust powers if it did not have substantial capital.
Mr. W I L L I S . Meaning by that how much?
Mr. DAVISON. Not less than $100,000.
Mr. W I L L I S . Preferably a great deal more than that?
Mr. DAVISON. Preferably a great deal more than that; yes.
The CHAIRMAN. Mr. Davison, I believe it has been generally agreed
by those who have done us the honor to appear here and testify, that
this system of loans for others, on the New York Stock Exchange,
has been a source of rather alarming abuse and was largely responsible
for the excessive speculation which resulted in the collapse of 1929.
Do you know how that may be measurably controlled?
Mr. DAVISON. I do not. I wish I did.
The CHAIRMAN. YOU think it should be, if it can be?
Mr. DAVISON. I think it is very bad. I t has been a slow growth,
but it did get to very big figures. Of course it has naturally gone down
now with the rates for money. I t came about probably from the
fact that many of our corporations learned a lesson in 1919 or 1920,
and having the opportunity to raise sufficient capital, had large sums
and they loaned them. We refused to do it for a long while until I
was losing business to competitors and we had to do it.
But I wish there were some way of stopping it. I do not know how.
We had to make "loans for others." I t would be very easy, if the
banks did not do it, for the lenders to arrange otherwise. I really do
do not know how you could stop it.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

The CHAIRMAN. Mr. Davison, according to the fact
Mr. DAVISON. There were some corporations which refused to join
in making these loans and deserve a great deal of credit for standing
on a high moral and business ground.
The CHAIRMAN. I think they should be commended in a very
unqualified way for refusing to do it.
Mr. DAVISON. I mean corporations that had money.
The CHAIRMAN. I think there ou^ht to be—and I am very much in
hope there may be—some way legislatively to prevent or penalize
t h a t sort of thing.
Mr. DAVISON. I t can not be done through the banking end of it. I
think it would have to go back to the lending end. If the banks will
not do it, there are other agencies they could and did use.
The CHAIRMAN. Your bank is a member of the Federal reserve
system?
Mr. DAVISON. We are.
The CHAIRMAN. And of course you value its services.
Mr. DAVISON. We do.
The CHAIRMAN. And I imagine you are entirely familiar

with its
operations.
Mr. DAVISON. Generally.
The CHAIRMAN. D O you think it wise to have the open market
operations of the Federal reserve banking system practically submerge the rediscount feature of the system?
Mr. DAVISON. Well, I think they work together. I do not believe
you could separate them.
The CHAIRMAN. The original purpose of the open market provision
of the act was, as I have stated, here, threefold. I think I have some
familiarity with it.
Mr. DAVISON. N O one greater.

The CHAIRMAN. I t was to enable the Federal reserve bank to compel largely an observance of its commercial rate; it was likewise to
enable it to use any surplus funds it might have on hand—idle funds—
to insure the overhead charges of the bank itself and, in the third
place, to enable it to safeguard its gold supply. I t never was intended—
it never was remotely suggested—when we had the act in preparation and in process of passage, that the open market provision of the
bill would authorize a Federal reserve bank to go extensively into the
open market in order to control the money rate. We had supposed,
some of us, that the discount rate of a Federal reserve bank would very
largely, if not completely, depend upon the bank's resources—upon the
amount of its reserve—in responding to the demands of commerce, but
it seems that the open market provision of the act has been used in
an attempt to control the market rate both in the purchase of Government securities and the sale of Government securities.
H a d you understood that that was the intent of t h a t provision?
Mr. DAVISON. I do not know just what the intent was, but there
is no question in my mind you could not separate commercial money
by putting it into one pocket from the other money of the United
States in the other pocket. I t is money and it is like two streams of
water meeting. They become one. I do not think that you can separate them at all. I t is a natural corollary.
The CHAIRMAN. T h a t would mean to me, in the last analysis, t h a t
either the Federal reserve bank would control the money market or
the money market would control the bank.



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

261

Mr. DAVISON. T h a t it has a relation to the money market is beyond
question.
The CHAIRMAN. Well, that it has been given a relation to the money
market
Mr. DAVISON. T h a t it must have.
The CHAIRMAN. We tried our best to prevent it.
Mr. DAVISON. I do not think you can.
The CHAIRMAN. Well, we have not.
Mr. DAVISON. YOU can not. I t is impossible.
The CHAIRMAN. Then the only thing we have done, by setting up
the Federal reserve system, is to prevent a currency famine?
Mr. DAVISON. T h a t is one great thing you have accomplished.
The CHAIRMAN. I S not that about the only thing we have accomplished?
M r . DAVISON. I do not think so. T h a t is one great thing you
did do.
The CHAIRMAN. Yes; and we are about to be taken away from that.
Mr. DAVISON. They—the Federal Reserve Banks—have given a
liquidity to the assets of banks that never existed before and made a
wonderful contribution to the banking welfare of the country.
The CHAIRMAN. I know; but if it is going to be perverted and take
us back practically to the old system, we want to prevent such a
result.
Mr. DAVISON. Well, I do not think you are back at the old system.
The CHAIRMAN. I t seems to me under the 15-day-loan provision
of the bill, as it has been operated, we are back to the point where we
have a bond secured currency largely, and that is the one thing above
all others that we tried to get away from.
Mr. DAVISON. Of course there were a number of things happened
after you drew the bill that we did not contempate and one was that
the Government would issue $20,000,000,000 of securities.
The CHAIRMAN. Yes; we had a war that compelled the Government to issue billions of dollars of securities. If we had had a contemplation of that sort, we would not have included Government securities.
Mr. DAVISON. If you had not, you would have put them in during
the war; otherwise you could not have sold them.
The CHAIRMAN. Of course, as a war measure, we would have put
them in, but what I mean to say is that we would not have permitted
them as a basis of rediscount at the Federal reserve banks.
Mr. DAVISON. During normal times?
The CHAIRMAN. Yes; had we not been faced with a situation wherein
the Government had less than a billion dollars of outstanding securities, $748,000,000 of which were being used by national banks for
circulation purposes; and the fact we did have a war and the act
authorized United States securities as a basis of loans, does not seem
to me to mean necessarily that we may not now guard against that
abuse of that situation.
Mr. DAVISON. I do not believe it is being abused. T h a t is a matter
of opinion, of course.
The CHAIRMAN. Those who are in intimate contact with the situation think it has been very much abused.
Have you any questions, Senator?




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator WALCOTT. I have nothing particularly in mind. We have
covered most of this ground with others. I am particularly interested, of course, in trying to find something that we can do here that
is constructive that will put some kind of a check on a recurrence of
this stock market panic, if you can call it that—and that is the purpose of our inquiry—so that naturally I am very much interested in
all phases of the question of the taxing of the sale of securities. If it
did not exist, the market would be a great deal longer on securities
than it is now. If it were cut in two, or reduced to any extent, it
would tend to increase the number of securities for sale.
The CHAIRMAN. YOU mean the capital tax?
Seantor WALCOTT. Yes—the profit on the sale of securities—and
I should like to be pretty sure about the way Mr. Davison feels about
that. It did not seem to me you were very specific.
Mr. DAVISON. The idea is to do away with it altogether—certainly
a reduction if reduction will help. I am not guessing on that. I
have talked with certain people who came in and told me and said to
me, "If I pay the tax, will I get the money back if the stock goes
down? I like this thing and want to live with it; I think it has a
great future; but what is my situation if I do not have an opportunity
to buy it back?''
The opportunity came, as it usually does. It is like another man
who boasted that he had sold his holdings at a high price, and he
was asked what he bought with the money he received.
The CHAIRMAN. IS not that a matter, Senator, that has to be dealt
with in the revenue bill?
Senator WLACOTT. Yes; I think it does not pertain to this bill.
Mr. DAVISON. I think it has a large influence on the situation.
The CHAIRMAN. What I am particularly interested in, Mr. Davison, speaking for myself alone, is to do something more effectively to
prevent the use of Federal reserve banking assets and Federal reserve
banking facilities, in stock speculation. We tried to, and thought at
the time we had, removed the system as far as possible from the influence of the stock market.
Mr. DAVISON. All loans on securities are not for the purpose of
speculation. Most of the real-estate operations and homes in this
country, are held on margin. I have in mind particularly now an
elderly man who told me whenever he bought anything, he bought
more than he could pay for, because when he owed money, he kept
saving money and paid off his debts. That was good business. He
was not speculating but making an investment.
The CHAIRMAN. But as I have intimated before, to make sure of
what we were doing, we did not use the term "speculation." We
used the term "securities."
Mr. DAVISON. I want to emphasize one other thing, and that is
I think that investments form a very large part of our banking business and a very essential part.
The CHAIRMAN. Undoubtedly that is true, but they were not
intended to form a part of the reserve banking system.
Mr. DAVISON. There is one other thing I want to say, and that is,
with the rates very high on call money, the rates on commercial loans
were very much lower.
The CHAIRMAN. That is because we have the Federal reserve banking system, is it not?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

263

Mr. DAVISON. Possibly; but it is a uniform practice of banks
always.
The CHAIRMAN. Before we had the Federal reserve banking system,
the call-loan market practically controlled the commercial rates, as
well as all other rates.
Mr. DAVISON. N O ; I think the determination of a commercial rate,
as a rule, is a different matter from fixing the rate for a loan that you
can jcall for payment in an emergency, and that you make when you
have temporarily too much money. You know you can call one
loan and get it paid the next day, whereas the other loan is running
for a given period of time.
The CHAIRMAN. The time came when you could not get it the next
day and could not get it at all.
Mr. DAVISON. There have been very few times when that happened.
The CHAIRMAN. Every decennial period we have had a situation of
that sort-—pretty nearly.
Mr. DAVISON. I do not think I quite agree with that.
The CHAIRMAN. YOU mean we never had any currency panics in
the country when banks could not call loans?
Mr. DAVISON. We had a panic in 1907. There is no doubt about
that. We did not have a currency panic in 1914 when the exchange
was closed.
The CHAIRMAN. Well, did you not have a currency panic? We
had to issue many hundred of millions of dollars under the VreelandAldrich bill, after radically amending the original measure. T h a t
came just before the opening of the Federal reserve banking system.
The act had been passed
Mr. DAVISON. T h a t was 1913.
The CHAIRMAN. The act was passed and approved in December,
1913. The banks were opened later in 1914.
Mr. DAVISON. Yes.
The CHAIRMAN. And

the only reason we did not have a very
decided currency panic was, that under the Vreeland-Aldrich Act as
au^ended, we put out about $300,000,000 of emergency currency.
I believe—in fact, I know, having read your testimony—you are
opposed to branch banking.
Mr. DAVISON. N O ; I am not opposed to branch banking within
definite limits. I think I am opposed to chain banking of any kind.
The CHAIRMAN. And gjroup banking?
Mr. DAVISON. I think it is bad and irresponsible. Branch banking
within definite limits, where your head office can know the needs of a
community and where the branch is in close touch with the head office,
has proven to be a satisfactory form of banking.
The CHAIRMAN. Would state-wide branch banking appeal to your
judgment?
Mr. DAVISON. I t would not. I t would be very unfortunate. I
think it would mean a remote control, which is entirely foreign to all
our ideas and the theory and practice upon which this country has
been built u p . You would have clerks running the branch office,
whose prime purpose would be safety, and loans made on personal
character would not be made.
The CHAIRMAN. W h y would they not be made?




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Mr. DAVISON. Well, the record of branch management is going to
be, as far as the manager can make it, that he makes no losses. He
will play safe always.
The CHAIBMAN. Would not the parent bank be somewhat guided
by the recommendation of its local representatives?
R§iMr. DAVISON. I t could not have the touch and knowledge that is
necessary in making some kinds of loans—loans that oeople would be
entitled to.
Senator WALCOTT. Would you be willing to extend branch banking
somewhat as under the English system?
Mr. DAVISON. I do not think our people would like it at all, and
after I made some remarks about this out in San Francisco, I got one or
two letters, particularly from a man who had been in touch with
Canada, and he said that the people in outlying sections there were
just dried u p ; that the branches were deposit places, but they could not
get loans.
Senator WALCOTT. They have practically the English method?
Mr. DAVISON. They have; but it is a different nature of people.
The CHAIBMAN. Well, is not the unit banking system carried to
an undesirable, if not a disastrous, extreme when you have banks
chartered all over the country with a capital anywhere from $15,000
up to $50,000?
Mr. DAVISON. I am very sure that it is.
The CHAIBMAN. And they break all to pieces. Could statewide
branch banking do any worse than that?
Mr. DAVISON. I do not think it would help it at all, because in all
the groups that have been formed, you can not find the people,
forming them, buying the little country banks. They buy the big,
well-established country banks.
The CHAIBMAN. Of course they would not buy these little country
banks. They are simply pawnshops. They are not banks.
Mr. DAVISON. YOU will not have branches going out there.
The CHAIBMAN. N O community should have any banking facilities
if it be not able to support a bank.
Mr. DAVISON. That is right.
The CHAIBMAN. A unit bank that will stand, I mean.
Mr. DAVISON. YOU should not have more than the community
can support.
Senator TOWNSEND. Have you a suggestion looking toward the
helping of the condition that seems to exist—the very keen competition between State and national banks?
Mr. DAVISON. N O ; I have no suggestion. I wish we could have a
uniform banking law, if possible, throughout the country. I think
it would be a grand thing.
Senator TOWNSEND. For both State and national systems?
Mr. DAVISON. Yes. You have tried to reach it by permitting
national banks to do whatever State banks do in any particular State?
Senator TOWNSEND. What influence would you say the State
banks have had on the organization of affiliates by national banks?
Mr. DAVISON. I think they were undoubtedly started because the
national banks could not do certain things the State banks could do.
T h a t was the beginning.
Senator TOWNSEND. Exactly. Then, you have no specific suggestions for relieving this competition other than what you have
just stated?




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265

Mr. DAVISON. N O . I think that latterly there has been some
relief, because I think both State and National Governments have
been more chary of chartering banks.
Senator TOWNSEND. They have increased the capital stock,
probably.
Mr. DAVISON. Yes; but I remember a good while ago, in a vicinity
that I was very familiar with, there were a number of State banks
along through a section of the country, and a group of people came
out and formed a national bank in every one of its communities.
They have all prospered because the communities grew rapidly, but
that sort of thing, in a community that does not grow, or starts to
go back at all, works out disastrously.
Senator TOWNSEND. Does not the reverse condition obtain in a
great many cases; so that where a national bank has been organized
in a community, it has shifted to State charter?
Mr. DAVISON. I t has been both ways. There is no doubt about
that.
Senator TOWNSEND. Then another condition exists, too. For
instance, a national bank is in a community where they have probably a liberal State charter. The examiner has insisted on the
national bank's doing certain things and it begins to get worried.
I t immediately takes out a State charter which gives it a little
longer lease of life. I think that may weaken the State banking
structure very much, too.
The CHAIRMAN. The dual system of banking has seemed to me to
be an almost insuperable obstacle in the way of sound banking legislation. If we undertake to make certain prescriptions for the conduct or management of national banks
Mr. DAVISON. They take out State charters.
The CHAIRMAN. Yes; if any number of them do not like it, they
take out State charters.
Mr. DAVISON. T h a t is a very unfortunate situation.
Senator TOWNSEND. Have you any suggestion looking toward
liberalizing the Federal reserve system that would make it more
attractive for banks outside of the system to enter it?
Mr. DAVISON. I do not know of any; no.
The CHAIRMAN. Are there not very few banks outside of the
system which would contribute to the strength of the system—worthy
to come in?
Mr. DAVISON. I think that is pretty nearly true. There are some,
though, that should be in it, but I thmk they are rather exceptional.
The CHAIRMAN. The banking business, in that respect, is somewhat like religion. The soundness of it does not consist in numbers,
but in the. integrity and soundness of those who are in it.
Mr. DAVISON. Correct.

The CHAIRMAN. This thing of getting religion by holding up your
hand does not appeal to me.
Senator TOWNSEND. A S a matter of fact, though, are there not a
great many sound institutions outside of the Federal reserve system?
Mr. DAVISON. I do not know that there are a great many. I am
not familiar with the exact figures anyhow, I am sorry to say.
Mr. W I L L I S . Mr. Davison, may I ask you a little further about the
exercise of the trust powers? I followed what you said about your
general attitude on the exercise of these powers by commercial banks.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Now, before the full exercise of trust powers was given to national
banks, in the original reserve act, we had it limited to the exercise
of corporate trusts but not personal trusts. Was not t h a t a better
situation than the one existing now?
Mr. DAVISON. AS I say, I am not free to talk about that, because
my interests may prejudice my judgment.
Mr. W I L L I S . YOU do not feel you can give any answer at all?
Mr. DAVISON. N O . I say, having given the powers which have
been exercised so long, there is a certain responsibility to the capital
structure of an institution. I do not know how you can take that
away.
Mr. W I L L I S . There are a few things that need comment by way
of making the situation a little clearer. Do you think banks should
be prohibited from purchasing for trust account securities issued by
themselves or through security affiliates?
Mr. DAVISON. I do.
Mr. W I L L I S . If you

think that should be done, should it be absolute or in a modified form?
Mr. DAVISON. I think it should be absolute. I t is a well-known
principle of law, they tell me, that a trustee can not profit from the
execution of his trust. So, if it were ever questioned, I do not
believe you could do it now.
Mr. W I L L I S . A S things stand?
Mr. DAVISON. If anybody questions it.
Mr. W I L L I S . Well, now, if one were to do that, would not a considerable part of the profit derived from the present situation disappear—
that is, if we absolutely prohibited that?
Mr. DAVISON. I do not know. I am not going to say they make
a practice of it now.
Mr. W I L L I S . Suppose you go on with the situation as it stands now.
Have you any view as to whether such affiliates should be allowed to
trade in the stock of the parent bank and make loans on that?
Mr. DAVISON. That is one thing that helped break the Bank of
United States. I think that is an abuse of power.
Mr. W I L L I S . Should that be absolutely prohibited?
Mr. DAVISON. I n my opinion, yes.

Mr. W I L L I S . Are there any other functions or practices currently
engaged in which should be similarly prohibited, so far as you know,
if you maintain the system of security affiliates?
Mr. DAVISON. Not that I know of.
Mr. W I L L I S . Those strike you as outstanding?
Mr. DAVISON. YOU have the suggested examination and publication.
Mr. W I L L I S . Those are the outstanding evils at the present time
t h a t could be touched by law?
Mr. DAVISON. I think so.
Mr. W I L L I S . About the question of earmarking the proceeds of
loans: Did I understand you correctly to say that you thought that
that could not be done; that you could not tell sufficiently accurately
for practical purposes, what a loan was intended for?
Mr. DAVISON. Yes.
Mr. W I L L I S . I n the

questionnaires that the committee has sent
out to security affiliates and banks, I note there is a question asking
for the percentage of loans that are made for commercial, industrial,




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

267

and agricultural purposes. I find that the loaning officers who made
these replies up were apparently able to tell, down to two decimal
places, for what purposes the loans were made.
Mr. DAVISON. T h a t is shown by the character of the loans. Of
course, you can do that.
Mr. W I L L I S . Does not that mean you can, in effect, find out
Mr. DAVISON. I think I told the chairman a bank knows where its
money is loaned and, generally, for what it is used. Yet I might loan
money to someone on a commercial account and they may not make
that use of it.
Mr. W I L L I S . Does not that amount to the same thing as earmarking the money?
Mr. DAVISON. T O the extent of that loan; yes.
Mr. W I L L I S . In the case of trust companies, has your experience
shown that they were more deeply engaged in loans on securities than
the banks were before the panic of 1929 or not, or were they in about
the same position?
Mr. DAVISON. Well, I would not know any distinction.
Mr. W I L L I S . YOU have no impression about that?
Mr.

DAVISON. N O .

Mr. W I L L I S . A S far as you know, were they continuing in about the
same way and same proportion, in the security loans, during the years
1928 and 1929, as before that, or were they increasing such loans?
Mr. DAVISON. I know it happened with us that our Street loans
to brokers were lower in 1929 than they normally are.
Mr. W I L L I S . Did I understand you to say iths morning that your
discounts were also lower at the Federal reserve bank?
Mr. DAVISON. I did not say they were lower. I said during the
period of higher money we borrowed only twice—both for one day.
One was caused by the fact of our banking merger; and our exchanges
happened to be big at the settling date. We borrowed a large amount
one day, and the 1st of August we made another borrowing.
Mr. W I L L I S . I understood you to say you kept out of the loans
for others as long as you could.
Mr. DAVISON. Yes; and when we did go in, we had to do it.
Mr. W I L L I S . I t is your judgment, evidently, that it is not a good
thing to do in the proportions in which it was going on at that time?
Mr. DAVISON. I think it is very unfortunate.
Mr. W I L L I S . If that is the case, is it not practical to get the same
point of view that you have suggested, as the head of one of the large
banks of the country, enforced in the other banks.
Mr. DAVISON. I think the corporations and other depositors would
lend their money through other channels and accomplish the same
result. I think in order to remedy the situation, you have to go to
people who have the money to lend.
Mr. W I L L I S . That is, you have to legislate against the corporations
using it in that way?
Mr. DAVISON. Yes.
Mr. W I L L I S . D O you think that
Mr. DAVISON. I do not know.

is a practical thing?
I think not. I had no remedy
when I started to speak. I know you can not accomplish it the other
way. The lenders have shown me what they will do if I do not do it.
Mr. W I L L I S . Could you accomplish it by a joint effort of the stock
exchange and the clearing-house banks?




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. DAVISON. I do not think so.
Mr. W I L L I S . Nothing we could do would materially prevent it?
Mr. DAVISON. I do not think so.
The CHAIRMAN. They would then make loans through institutions
not controlled by the stock-exchange banks and clearing-house banks?
Mr. DAVISON. Absolutely.
The CHAIRMAN. Might it not be reached through the famous
interstate commerce clause of the Constitution? Legislators reach
everything they want to reach through.that clause.
Mr. DAVISON. I t is possible.

Mr. W I L L I S . D O you think that the present savings deposit situation is in serious danger?
Mr. DAVISON. It probably has no dangers to-day, but it has been
shown to have dangerous possibilities. To my mind it is very difficult
to have a commercial bank act as a savings bank. The two kinds of
funds are different. The rates of interest are different and, in order
to earn the rate of interest they have been paying on savings, they
have to make different kinds of investments, which make them less
liquid.
The CHAIRMAN. D O you not think there should be some readjustment of the reserve requirements?
Mr. DAVISON. I certainly do.

The CHAIRMAN. YOU think the 3 per cent is entirely too low?
Mr. DAVISON. I think the 3 per cent on thrift accounts is entirely
too low, because they are practically demand deposits.
Mr. W I L L I S . YOU would make it the same as demand deposits?
Mr. DAVISON. When we discussed it last year in the commission
Governor Roosevelt appointed, we were willing to stop somewhere in
between. I suggested another remedy which I thought was more
efficacious than either—that an ordinary bank pay no interest on accounts under $1,000.
Mr. W I L L I S . T O anybody?

Mr. DAVISON. That would mean the money would go into the
savings account where it should be. I t is an impossible situation
where a banker like myself, a commercial banker, has to pay a higher
rate of interest on thrift money, which is the first to go out, necessitating the use of liquid assets on the theoretically slow thrift money.
Mr. W I L L I S . D O you believe in the segregation of assets?
Mr. DAVISON. For the reasons I have suggested, it is unthinkable
to me, but it has worked in some States. They tell me in California
where you segregate your assets in savings accounts and commercial
accounts, that where there has been a failure, the savings depositors
got a little more money back than the commercial accounts.
I do not see how a man can be two or three minded in running a
financial institution. I really think that eliminating the interest on
deposits under a thousand dollars would be a very efficacious way of
handling the situation.
The CHAIRMAN. H O W would it be if you put a limitation upon all
deposits of banks with other banks?
Mr. DAVISON. Why?
The CHAIRMAN. T O prevent the drawing of money from the interior
banks to the money centers.
Mr. DAVISON. Well, I do not think that happens—not at the instance of the money center, at any rate.




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269

The CHAIRMAN. Yes; I knew that was your view.
Mr. DAVISON. That is my experience.
The CHAIRMAN. DO we not have this situation, Mr. Davison,
that local industries and local commerce never get the benefit of easy
credit and easy money? Do they not have a standard rate of discount from which they never depart, and do they not bundle up
their excess supplies of credit and money and send them up to the
money centers at a nominal rate of interest and never give their local
people the advantage?
Mr. DAVISON. I think they are apt to have a uniform rate. I do
not think they bundle up their money and send it to the money centers
and not lend it locally.
The CHAIRMAN. They prefer to send it up to their correspondent
bank at a nominal interest rather than reduce the rate of discount to
the local people.
Mr. DAVISON. That could not be the practice of a successful local
bank. As a matter of fact, we find they call on us in moments of
stress for loans.
The CHAIRMAN. That is the reason they have you as a correspondent.
Mr. DAVISON. And we are able to serve a useful purpose.
The CHAIRMAN. But they send the money to you rather than
reduce the rate of discount locally?
Mr. DAVISON. If they have a use for it, they use it in the community. They do not send it to us unless it is necessary for a reserve
or liquidity.
The CHAIRMAN. They lend it in the community at their st ndard
rate of discount from which they never depart. They would rather
loan it through you at one and a half of 1 per cent, at call, than
reduce their rate of discount to people in their own locality.
Mr. DAVISON. I should like to find some community where I can
make loans on that basis.
The CHAIRMAN. It is my general information that it is the practice
and my observation is that it is the practice. No matter what the
condition of the money market is, I am never able to borrow from my
bank at less than 6 per cent.
Mr. DAVISON. YOU ought to change banks.
The CHAIRMAN. I could not, unless I got out of my community,
and if I got into any other community I would be confronted with the
same situation.
Senator TOWNSEND. Mr. Davison, you said you favored branch
banking, but not on State lines. How would you define the limit?
Mr. DAVISON. The limit would be where the head office could be
thoroughly familiar with the situation of the branch banks and where
the branch could be in constant touch with the head office, so that
the whole situation would be before them.
Senator TOWNSEND. And you would define it by county lines or
trade areas?
Mr. DAVISON. NO. Trade areas might be very wide and too wide.
The CHAIRMAN. Mr. Davison, is not the correspondent bank
system of the country now practically nation-wide branch banking?
Mr. DAVISON. NO ; it is not practically nation-wide branch banking.
I think it is very much better than branch banking in that in each
community you have a responsible body or bank that knows the
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18

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NATIONAL AND FEDERAL BESEEVE BANKING SYSTEMS

needs of that community and, as a rule, commands the respect of
the community and knows all about it. I t does its business independent of any direction whatever from the correspondent bank, but it
does know that when it has made good loans and has pressure for
money, it can always go and get money from the correspondent bank,
but the initiative and responsibiity are in the locality where they
should be.
Senator TOWNSEND. Would that be true with a well established
and soundly-conducted parent bank with an agency in the community?
Mr. DAVISON. I do not think it would. If you would go into one of
the English banks, you would find they would receive your money,
but when you wanted to talk about a loan, you would find it was a
matter of long negotiation. The local management, as a rule, has no
authority. I think an extensive branch banking system would be
simply using the remote community as a source of contributing, in a
sense—simply draining money out of that community to the money
center.
The CHAIRMAN. There is one thing in connection with this discussion of branch banking that has always appeared to be outstanding
to me, Mr. Davison. I have been in Congress about 30 years, on the
Banking and Currency Committee of the House for 18 years and on
this committee for 12 years, and I have never known a borrower to
object to branch banking. The only objections that have ever come
have come from the bankers themselves, and there seems to be some
change of attitude among bankers, as indicated by the more recent
action of the American Bankers Association.
Mr. DAVISON. T h a t was very limited, and that was a rather
equivocal resolution that they passed. Certainly when I saw the
American Bankers Association a year ago, in October, in San Francisco, they were whole-heartedly opposed to branch banking to any
extent, and the way bankers talk to me, they feel that way still.
The CHAIRMAN. TWO years ago the American Bankers Association,
was it not, at Los Angeles
Mr. DAVISON. They were at San Francisco a year ago in October.
The CHAIRMAN. Well, were they not at Los Angeles two years ago
when they had the McFadden Bill under discussion, with its very
meagre, limited grant of branch banking?
Mr. DAVISON. I do not know.
Mr. W I L L I S . I t was four years ago.
The CHAIRMAN. Time goes by fast with me now.
Mr. DAVISON. I t certainly does.
The CHAIRMAN. I know the American Bankers Association then
reversed its attitude and I have never known a man or an association
of men who wanted credit to object to a branch banking system.
Under the 10 per cent limitation, Mr. Davison, on loans to individuals, concerns or corporations, would a branch banking system overcome the many objections to that restriction?
Mr. DAVISON. I do not believe that it works a hardship. If a man
is entitled to further credit, the correspondent bank is usually glad to
take the excess of it.
The CHAIRMAN. I S not that an aspect of branch banking?
Mr. DAVISON. I t is an aspect of cooperation which helps to overcome what you might call an objection to a local bank.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

271

The CHAIRMAN. I t helps if it is always available.
Mr. DAVISON. I t is going to be just as available as the loan is going
to be available if it is the branch of some bank, because we are going
to have the same knowledge and going to have a man with experience
and whose money is at stake in the community, rather than some one
we hire.
The CHAIRMAN. YOU think you have carried the spirit of independent banking to an excess when we charter a lot of little banks all
over the country that can not stand up?
Mr. DAVISON. I think beyond question.
The CHAIRMAN. Well, sir, we are greatly indebted to you for
coming down here.
STATEMENT OF JOHN A. BRODERICK, SUPERINTENDENT OF
BANKS, STATE OF NEW YORK
The CHAIRMAN. Mr. Broderick, it is very good of you to come
down here at this time because you have a situation of your own in
New York, have you not?
Mr. BRODERICK. I have not very much trouble in keeping busy,
Mr. Glass.
The CHAIRMAN. Would you mind telling us what, in your judgment, brought about the situation in New York in 1929?
Mr. BRODERICK. In 1929?
The CHAIRMAN.

Yes.

Mr. BRODERISCK. That is a pretty large order. But I would say
that the situation was brought about by two years of unbridled
speculation, nation-wide, which affected every branch of business,
including banking.
Senator TOWNSEND. Unbridled speculation?
Mr. BRODERICK. Yes.
Senator TOWNSEND. Have

you any suggestion of a way to bridle
speculation?
Mr. BRODERICK. The man who can do that is not living at the
present time. The speculative fever is in the blood of the American
people and it will break out again.
The CHAIRMAN. Knowing that, those of us who had to do with the
construction of the Federal reserve act, at least, tried to guard the
Federal reserve system from influences and practices of that sort.
Were not the Federal reserve facilities used in New York to contribute to that sort of thing?
Mr. BRODERICK. Senator, there are some questions which I do not
think it would be proper for me to answer.
The CHAIRMAN. I know that.
Mr. BRODERICK. Of course, I am interested in the Federal reserve
system. As you know, I was in it at its birth, too. B u t I would
hesitate to express an opinion about some things because of the fact
I occupy an official position myself. In private I would not hesitate
to do it.
The CHAIRMAN. I understand the delicacy of the situation. Let
me just ask you this: You were at one time Secretary of the board
when that position meant very much more than it has meant since.
Was it or was it not your judgment that the purpose of the act was to




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

preclude the use of Federal reserve facilities for stock speculative
purposes?
Mr. BRODERICK. Yes; it was, to stabilize the banking situation.
Senator TOWNSEND. I was going to ask, Mr. Broderick, what percentage of your State banks were in the Federal reserve system in
New York?
Mr. BRODERICK. I could not answer that offhand, but I might say
that the principal banks in the State are members of the Federal
reserve system. The smaller ones are not. That refers to banks
and trust companies. Of course our savings banks, which are very
large, have deposits of between four and four and three-quarters
billions of dollars, and they have depositors that number over
5,300,000; they, of course, are not members of the Federal reserve
system, although I should like to see them members.
Senator TOWNSEND. Would you say 50 per cent of the State
banks in New York State are members?
Mr. BRODERICK. N O ; not as much as that.
The CHAIRMAN. Would you not say that much more than 50 per
cent of the banking resources of the State belong to members of the
Federal reserve system?
Mr. BRODERICK. Yes; I would go higher, 75 to 80 per cent.
Senator TOWNSEND. Have you any suggestion to make whereby
banks not in the system might be induced to come into it?
Mr. BRODERICK. I think it could only be done, Senator, through
missionary work. I think there is great room to " s e l l " the Federal
reserve system from the standpoint of insurance. I t can be done.
They think they are losing money by not belonging to the system.
Senator TOWNSEND. They think they are losing money by not
belonging to it?
Mr. BRODERICK. By belonging to it. Pardon me.
Senator TOWNSEND. Yes; I find that sentiment.
The CHAIRMAN. H O W do they imagine they are losing money?
Simply by failure to get interest on their reserve deposits?
Mr. BRODERICK. Yes; which is quite a big item to the small banks.
The CHAIRMAN. But is it a bigger item to the small bank than the
prospect of a collapse of the money market and an occurrence of
famine, such as we had before the establishment of the Federal
reserve system?
Mr. BRODERICK. N O ; it is not, but they can not see that. They
say, " W e will be pretty well taken care of by the New York correspondents."
The CHAIRMAN. But they were not, in some periods of panics,
were they?
Mr. BRODERICK. Not in 1907. They could not get currency in any
circumstances.
The CHAIRMAN. Yes; they had to issue clearing-house certificates.
Senator TOWNSEND. There has been some criticism here on affiliates;
and one banker has stated that probably the liberality of the State
law had compelled the national banks to go into affiliates because the
State law permitted it.
Mr. BRODERICK. The only section of the State law to which t h a t
reference can be made is in connection with trust companies which
have the right to invest in stocks. That, practically, is the only
power which the State trust companies have which the national




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273

banks have not. They may be referring to that. But that does not
even justify them. That is the only difference between the State
and national banks.
The CHAIRMAN. Under the system of examinations, national,
State, and Federal reserve, is it ever difficult for an important bank to
know what uses are made of its credits?
Mr. BRODERICK. Usually they know what the uses are.
The CHAIRMAN. Ought they not always to know?
Mr. BRODERICK. I believe they try to, but a customer may borrow
and tell you the reason why he is borrowing, and tell you also what
his basis of repayment is, and then turn around and use the money
for. other purposes.
The CHAIRMAN. Oh, I know you can not prevent people from lying
or changing their minds, either. Is it not easy enough, under the
system of examination—is not inevitable, under the system of
examination—that the Federal reserve bank of any given district
should know whether or not its facilities are being used for stock
speculative purposes?
Mr. BRODERICK. That is a difficult question to answer, Senator.
The Federal reserve banks loan on commercial paper or lend against
United States bonds. Those are simply temporary loans. But
where they rediscount, they have every reason to believe, from the
Tediscounted paper, that the reason for the rediscount is to take care
of those people and not speculation.
The CHAIRMAN. Have they not reason to believe that if they know a
particular bank is largely engaged in brokers' loans and is overextended for speculative purposes—they know that if that bank is
extending its commercial paper and using the facilities of the Federal
reserve bank, and is it reasonable to suppose that the Federal reserve
bank management does not know that that is being done?
Mr. BRODERICK. I t might not know, but I believe it could find out.
The CHAIRMAN. Ought it not to know?
Mr. BRODERICK. They would have to send in people especially to
ascertain that, and if they did that, it might look as if they had some
doubt of the correctness of the statements of the bank officers as
to the purpose of the loans.
The CHAIRMAN. If they have not correctly stated the case, should
it not be found out?
Mr. BRODERICK. YOU are going quite a distance when you doubt
a bank officer's statement. I do not believe that some bank officers
can always tell.
The CHAIRMAN. But is it not easy enough for a Federal reserve
bank—the Federal Reserve Bank of New York—to know whether a
given member bank is using its facilities for speculative purposes
rather than for ordinary commercial purposes?
Mr. BRODERICK. Well, I think I will have to ask you to excuse me
on that question, because my knowledge of the Federal reserve bank
goes back 10 years
The CHAIRMAN. D O you not know whether a State bank is using
its facilities for speculative rather than commercial purposes?
Mr. BRODERICK.
The CHAIRMAN.

Yes.

If you know that as to State banks, which may be
members of the Federal reserve system, should not the Federal reserve
bank know that?




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NATIONAL AND FEDEBAL RESERVE BANKING SYSTEMS

Mr. BRODERICK. Yes, but in each case of that kind, the bank was
not borrowing from the Federal reserve bank.
The CHAIRMAN. If it is not borrowing from the Federal reserve
bank, there is no reason for the Federal reserve bank to inquire into
its specific activities.
Mr. BRODERICK. Most of the borrowings Senator—I am speaking
of the State institutions—most of the borrowings from the SWteral
reserve bank in New York are from the smaller institutions, and when
the larger banks borrow it is simply for a day or two to readjust their
position. I t is not customary for them to borrow steadily.
The CHAIRMAN. Why does a bank have to readjust its position?
Mr. BRODERICK. Withdrawals may be heavier than anticipated.
The CHAIRMAN. I know, but are there not other reasons why they
have to readjust their reserve situation?
Mr. BRODERICK. What have you in mind, Senator?
The CHAIRMAN. Well, if they were overextended in their brokers'
loans.
Mr. BRODERICK. Well, if they are overextended in brokers' loans,
all they have to do is call the brokers' loans and correct it immediately.
The CHAIRMAN. But they do not call them; they increase them.
Mr. BRODERICK. N O , Senator. They do call them when they
need the money that way. The only exception to that is where the
particular brokers have accounts with them—their own customers'
loans. They have no compunction at all about calling the average
brokers' loans.
The CHAIRMAN. Mr. Broderick, have you made any concrete
suggestions for amendment of the banking laws of New York State,
in order to avert the situation such as confronts you now?
Mr. BRODERICK. Quite a few. We have made 60 of them to the
Legislature of the State of New York, some of which my good banking
friends consider quite radical.
The CHAIRMAN. Would you mind letting us have a list of them?
Mr. BRODERICK. I am glad to give you this copy.
The CHAIRMAN. I am greatly obliged to you. We will put this in
the record.
(The recommendations referred to are printed in full, as follows:)
MEMORANDUM PROPOSALS FOR AMENDMENTS TO THE BANKING LAW MADE BY
THE SUPERINTENDENT OF BANKS IN H I S PRELIMINARY REPORT FILED W I T H
THE GOVERNOR AND THE LEGISLATURE JANUARY 7, 1931
GENERAL

1. To amend the banking law in order to permit prompt mergers of banking
institutions in case of emergency or when necessary to protect the interests of
depositors and shareholders, by providing that with the approval of the superintendent of banks, the boards of directors of any two or more banking institutions may merger such institutions under an agreement which will protect and
preserve the equities of the respective stockholders. Such amendment might
also provide that such agreement shall be subject to the approval of a justice of
the Supreme Court of New York.
Under the existing law when a banking institution, because of lack of liquidity
or depreciation in the value of assets, can no longer safely be permitted to continue in the conduct of its business, the superintendent of banks is placed in the
position of being obliged to either close such institution or urge that it merge
with some institution having a sound financial standing. The latter remedy,
providing the merger is a proper one, is much to be preferred to the first, for
the reason that the closing of an institution undermines public confidence




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275

generally and often leads to heavy withdrawals from other institutions. Furthermore, the closing of a banking institution may result in loss to depositors for no
other reason than the fact that the closing operates to depreciate the value of
certain classes of assets, not easily liquidated, though of substantial value to a
going institution.
Why not mergeis then in all cases where the condition of an institution will
not justify permitting it to continue in business? Under the present law,
mergers to become effective must be approved by stockholders. To procure such
approval it may be necessary to inform them of the facts necessitating the
merger, which is likely to lead to uncertainty and rumors, resulting in runs which
may cause the institution's closing before the merger can be effected. Furthermore, because of rumors which may originate suddenly, it becomes necessary
in some instances to accomplish mergers over night if institutions are to be
saved, which under the present law is impossible since approval by stockholders
must be obtained at a meeting held on two weeks' notice.
For these reasons, and because it is a matter of great public interest that
banking institutions be closed only in cases where there is no other alternative,
it is urged that the legislature, which is about to meet, adopt legislation permitting, in cases where an emergency exists, the merger of banking institutions
by action of the respective boards of directors without the approval of stockholders. The proposed statute, which is now in the process of being drafted, will
permit such a merger only in cases where the superintendent of banks declares
that such action is necessary in order to avoid closing one of the institutions. It
also makes ample provision for the protection of the interest of stockholders of the
merging institutions.
Had the present law contained such a provision, the Bank of United States
would have been merged with one of our strongest institutions and its closing
avoided.
2. To permit the superintendnent to remove from office, officers or directors of
banking institutions who have been guilty of persistent violations of the banking
law, or of a continuance of unsafe and unsound policies.
3. To permit the superintendent, to insist upon charge offs as directed by the
department, within 60 days after receipt of notification, permitting reserves to be
established in lieu of charge offs.
4. To provide that the stock of all banks and trust companies and other corporations subject to the supervision of the banking department be evidenced by
individual certificates of stock, which shall not be coupled with the stock of any
other corporation. All such arrangements existing at the present time shall terminate within two years.
5. To limit the extension of credit and investment of funds in stock and obligations of affiliated corporations as defined in section 39 of the banking law, by
providing that the aggregate investment in capital shares or obligations of, or
direct or indirect loans to or loans secured by the shares or obligations of, any
corporation affiliated with a banking institution and/or any subsidiary corporation of such affiliated corporation, shall not exceed in the aggregate 10 per cent
of the capital and surplus of any banking institution.
6. To prohibit any officer, clerk, or other employee of a bank or trust company
from borrowing from the institution of which he is an officer, clerk, or other
employee, and from becoming obligated directly or indirectly, conditionally or
otherwise, to such institution.
7. To provide that an officer of a banking institution shall not be permitted to
become an officer of any company engaged primarily in the business of the purchase and sale of securities.
8. To provide that every director of any banking institution who is directly,
indirectly, conditionally, or otherwise obligated on any loan or other extension of
credit made by such institution to such director or other individual, partnership,
unincorporated association, or corporation shall file with such institution once in
each year, and at such other times as the superintendent may require, a statement
of his financial condition.
9. To change the period within which directors' examinations are to be made to
provide for such examinations at least once in each six months period. The scope
of such examinations to include a complete review by each director of all loans and
investments in excess of one-tenth of 1 per cent of the capital and surplus of such
institution (exceeding a minimum of $1,000, however), including all extensions of
credit to affiliated or subsidiary companies. At least once in two successive years:
such examination is to include a complete verification of deposit liabilities.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

10. To require that banks and trust companies shall, at the end of each year,
render to stockholders a report showing the attendance of directors at meetings
lield during that year.
11. To provide for the segregation of thrift accounts in commercial banking
institutions located in cities having a population of 75,000 or over, and to place
restrictions on the investment of such thrift funds. This provisions is to be
applicable to all funds received after June 30, 1931; deposits made prior to that
date to be invested in such manner as prescribed at the rate of one-fifth of the
total of such deposits yearly for a period of five years.
12. To limit the amount of the funds of any banking institution that may be
deposited with any other banking institution, giving effect to the varying exi;gencies attaching to the depositing of funds with (a) designated reserve depositaries; (b) domestic banking institutions not acting as reserve agents; (c) foreign
banking institutions.
13. To require banks and trust companies to maintain reserves against time
•deposits.
14. To omit foreign exchange balances credited to a banking institution from
the items that may be deducted from the total deposits of such banking institution
in arriving at the aggregate demand deposits thereof against which reserves are
required to be maintained.
15. To permit any agency of a foreign institution, with the approval of the
superintendent, to change the location of its place of business in the same state.
16. To coordinate the provisions of the banking law relating to the change of
national banks to State banks, and the change of State banks to trust companies,
with the provisions of the banking law relating to the organization of banks and
trust companies respectively.
17. To limit the aggregate amount of funds which a banking institution may
invest in the stock, convertible bonds, or other obligations of other corporations.
18. To modify the provision of the banking law which now required that
«ach director of a trust company be a citizen of the United States, to provide
some elasticity in the case of trust companies which at the time such provision
became law had on their boards of directors, persons who were not citizens of the
United States, by permitting one noncitizen to become a director.
19. To provide that any holding company which owns stock of a banking institution shall be required to maintain reserves or surety bonds to protect the statutory double liability which attaches to such stock.
20. To make applicable to trust companies the provisions of the banking law
relating to adverse claims to bank deposits as now provided for banks in section
149 subdivision (6) of the banking law.
21. To provide that pass books used as receipts by any individual, copartnership, unincorporated association or corporation authorized to engage in business
under the provisions of any laws other than the banking or insurance laws, and
used in connection with the sale of securities shall bear the statement " N o t under
the superivison of the banking department."
22. To provide that no office or place of business of any corporation association
or private banker authorized to engage in business under the banking law shall
'be open to the public for the transaction of banking business on Sunday.
23. To permit the superintendent to order, at the expense of a bank or trust
company, appraisals of real estate properties owned by or mortgaged to such
institutions, by independent, impartial appraisers of recognized standing.
PRIVATE BANKERS

1. To require that the deposit liabilities of private bankers shall be audited
periodically by an outside independent auditor.
2. To modify the present provisions requiring that a certain portion of reserves
maintained against deposits shall be kept on hand and to permit a larger proportion to be deposited with the designated reserve depositary.
3. To provide for the continuation of the business of an individual engaged in
the business of a private banker during any interim between the death of such
private banker and the appointment of his executor, administrator or legal
representative.
4. To permit any person engaged in the business of transmission of funds to
others pursuant to the provisions of section 150, subdivision 4 of the banking law.,
to deposit with the superintendent, stocks, bonds, or interest bearing obligations
of the United States or of this State or of any city, county, town, village, or free
school district in this State instead of only interest bearing stock or bonds of
such obligors.




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277

5. To provide restrictions on loans, purchases of securities, and total liabilities
to a private banker of any one person to conform with similar restrictions now
imposed on banks and trust companies.
6. To provide that all licensed private bankers in cities of this State shall be
required to discontinue accepting deposits by June 30, 1931, and be required to
liquidate their deposit liabilities by December 31, 1931.
SAVINGS BANKS

1. To permit savings banks with the approval of the superintendent to establish and maintain deposit and withdrawal stations limiting the locations thereof
to the county in which the principal office is located.
2. To amend section 239, subdivision 9 of the banking law relating to the
liability of the trustees of a savings bank with reference to the investment of the
deposits and guaranty fund thereof to bring it into conformity with the contents
of section 239.
3. To amend section 239, subdivision 8, subparagraph (c) of the banking law
relating to the investment of deposits and guaranty fund of savings banks in
promissory notes secured by the assignment and pledge to the savings bank of
first mortgages on real estate in order to bring the restrictions placed upon that
class of investment as compared with the deposits and the guaranty fund of a
savings bank into conformity with the restrictions placed upon the investment of
a savings bank in bonds and mortgages as compared with the total assets of such
savings bank.
4. To broaden the provisions of section 239, subdivision 12, of the banking law
relating to the investment of deposits and guaranty fund of savings banks in
bonds of public utility companies to include bonds of companies that purchase
natural gas as a substitute for artificial gas.
5. To permit a savings bank to change the location of a place of business occupied and maintained by it as a branch office as a result of prior merger with
another savings bank to another place in the same county.
6. To permit the superintendent of banks to order at the expense of the savings bank, appraisals of real estate property owned by or mortgaged to such
institution, by independent, impartial appraisers of recognized standing.
7. To permit the payment of extra dividends above a basic rate when earnings
permit.
INVESTMENT COMPANIES

To amend the banking law to provide as follows:
(a) That industrial banking companies and domestic corporations engaged in
the business of foreign banking shall be the only classes of institutions permitted
to be organized under the investment article of the banking law. In this connection, provision will be made for the reincorporation of mortgage companies
and finance companies under the stock corporation law.
(6) That the business of industrial-loan companies and domestic corporations
engaged in the business of foreign banking shall be limited to general powers
which will be clearly defined in the statute.
(c) That industrial-loan conpanies shall be required to maintain a specified
ratio of capital funds to outstanding unhypothecated bonds or notes issued by
them, now known as investment certificates.
(d) That industrial-loan companies shall be required to maintain reserves
against outstanding unhypothecated bonds or notes issued by them now known
as investment certificates.
(e) That domestic corporations engaged in the business of foreign banking
be permitted to accept deposits only under definite conditions.
0") That the statutory total liability attaching to the capital stock of moneyed
corporations be extended to industrial-loan companies and domestic corporations
engaged in the business of foreign banking.
(g) That it shall be the duty of the board of directors of every industrial-loan
company and domestic corporation engaged in the business of foreign banking to
examine fully the affairs of the company of which they are directors.
(h) That directors of every industrial-loan company and domestic corporation
engaged in the business of foreign banking be required to meet the qualifications
similar to those set up for directors of banks and trust companies.
(i) That restrictions be placed upon the investment of industrial-loan companies*
in the capital stock of similar companies.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Provisions relating to the organization and operation of domestic corporations
engaged in the business of foreign banking will follow closely the provisions of
the Federal reserve act relating to companies organized under that act to engage
in business of a similar type.
SAVINGS AND LOAN ASSOCIATIONS

1. To require the segregation of funds received by a savings and loan association on account of the issuance of savings shares and to restrict the investment
of these funds to the class of securities in which savings banks are required by
the provisions of section 239 to invest deposits and guaranty fund.
2. To provide for the transfer each year to guaranty fund of a larger portion
of the earnings of a savings and loan association and to require a more adequate
guaranty fund.
3. To require that vacancies in the board of directors of a savings and loan
association occasioned by resignation, death, or other cause shall be reported to
the superintendent within 10 days of the event and that the savings and loan
Association shall likewise report each election by the board to fill such vacancy.
CREDIT UNIONS

1. To amend generally the credit union article of the banking law to provide
as follows:
(a) That the qualifications for membership shall be limited strictly so that
open membership credit unions may not be authorized henceforth.
(6) That credit unions shall not have the power to accept deposits.
(c) That the power of credit unions to borrow money shall be further limited,
and subject to the approval of the superintendent of banks.
(d) That credit unions be required to set up reserves at the end of each fiscal
year against bad debts.
DEPARTMENTAL

1. To permit a deputy, clerk, or other employee to obtain a mortgage loan
upon his own home from a savings bank or savings and loan association and to
permit him to open an account with or subscribe to the shares of such institutions.
2. To permit the department to charge a fee to an applicant for a new charter
in order to defray expense of investigation so that such expenses do not become
a charge upon existing banking institutions.
3. To permit the superintendent, in his discretion, to reinstate any bank
examiner who has left the department, provided he had served as a bank examiner
for three successive years but who had been separated from the service through
no delinquency or misconduct on his part.
4. To permit the superintendent to transfer to the State treasurer, interest
now in his possession which accrued on unclaimed deposits prior to 1914.
5. To permit the superintendent, in his discretion, to omit one examination in
any year of a bank or trust company which is a member of the New York Clearing House Association and to accept in lieu thereof a report of examination made
by such association during that year.
6. To permit the superintendent to examine any corporation which owns 10
per cent or more of the capital stock of any corporation organized under the
banking law.
7. To provide for the establishment within the department of a special bureau
for investigations of illegal banking concerns, general complaints against banking
institutions, illegal banking operations of individuals, firms and corporationss
providing further for the appointment under classified service, of six accountant;
.and investigators including also one practicing attorney; the expenses of this
bureau to be borne directly by the State and not assessed on banking institutions.

Mr. WILLIS. HOW many of those recommendations are applicable
to the national system, do you think? How many would be helpful
if taken over into the national system?
Mr. BRODERICK. I think there are least five or six. However, I
would not have it appear that I am making any suggestions to you.
There are a number of them, however, of general application which
we would consider very good for either national or State systems.
Mr. WILLIS. Which are those?




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279

Mr, BRODERICK. The merger provision, which would permit two
institutions to merge overnight, without the consent of the stockholders; second, the right of the supervising authority to remove from
office and directors for persistent violation of the banking law or
for the continuation of unsafe or unsound practices.
The CHAIRMAN. I might interject that t h a t is a very important one.
Mr. BRODERICK. Most important, Senator.
The CHAIRMAN. The Comptroller of the Currency hesitates long—
and sometimes too long—to adopt the radical action of closing a
bank.
Mr. BRODERICK. I am 100 per cent with the comptroller in that,
Senator, because a bank should be closed only as a last resort.
The CHAIRMAN. B u t this would be an intermediate remedy?
Mr. BRODERICK. Yes; and prevent quite a few things. The fact
that that law would be on the statute books—in itself would mean it
would never have to be used. I t would be a sort of big stick to force
out some of these people. We have been years trying to force out
some of our people in New York. Peaceful means are not always
successful. Any authority will hesitate a long while before putting
the burden on depositors of closing a bank when there is any chance
of saving it at all.
However, some people object to this and say it is radical and drastic
and is an authority that should not be given a public official.
Senator TOWNSEND. The bankers object to it?
Mr. BRODERICK. Yes. Th£y are wrong, because if a man is to be
a proper supervisory authority, he must be an autocrat, and must be
above influence of any kind, and must do what he thinks is right
without assistance or suggestion from the outside, and he must have
some means whereby he can enforce what he believes is right.
The CHAIRMAN. I t does no good, as a high banking authority told
me to-day, to assemble a board of directors and admonish them.
The admonishment is laughed at in the end, because you have no
authority except to close the bank and you are reluctant to do that.
Mr. BRODERICK. Mr. Pole will undoubtedly back me up in this,
I think, that the moment you close a bank, automatically you close
out one-third of its assets—the difference between a going and a closed
institution.
Mr. W I L L I S . What are the rest of them?
Mr. BRODERICK. With reference to affiliate companies, we are
recommending that no officer of any bank be permitted to be an officer
of any affiliate company or holding company; that the stock of the
affiliate or holding company be represented b y individual certificates
and not coupled in any way with the certificates of the bank.
Third, a blanket provision as to the limiting to 10 per cent of the
capital stock of a banking institution, all loans made to a company
or its affiliates, investments in stock, investments in bonds of any
kind, so that the aggregate of all shall not exceed 10 per cent of the
capital and surplus of such institution.
The affiliated company is defined in section 39 of our law and I
might say that that was one of the fine recommendations made by
Mr. Davison's committee last year. We have the right to invesitgate,
for information only, any company affiliated with the bank. We did
not have that right last year, but we have investigated affiliated
companies ever since April, 1929, when I took office, without any




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legal right, until April of this year. T h a t is why we know how things
stand. T h a t is the reason we have corrected a large number of
instances, although I am sorry to say we were not in a position to
correct past mistakes which happened before I took office.
Those are the three suggestions there in regard to affiliated companies. We have recommended too, segregation of thrift accounts in
cities having a population of 75,000 or more.
Senator TOWNSEND. Have you reason to believe that the legislature
will pass your recommendations?
Mr. BRODERICK. I am never discouraged, Senator. I had experience last year in a great deal of legislation. I t requires very patient—
I am not saying labor—but very patient missionary work. I believe
the legislature can be sold on this. I t does not take in the country
districts. The principle is correct. I t takes in cities only. The
reason why we are not recommending at this time the country districts is because practically every bank and trust company, whether
it be a national bank, State bank, or trust company or savings bank,
outside of the cities of New York and Buffalo are, in reality, savings
banks. Do I make that clear?
Senator TOWNSEND. Yes; that prevails in a great many States.
Mr. BRODERICK. And the segregation of such a large amount at
any one time would not be possible or advisable. I t is possible in
the cities. A thrift account, I would define as an account not exceeding $7,500 in amount, not subject to check, but possible of withdrawal
only on presentation of pass books and also subject to 30 or 60 days'
notice.
Senator TOWNSEND. YOU may have had that thought back in your
mind; but you thought you had opposition enough in the cities without
taking in the country banks?
Mr. BRODERICK. I am never discouraged at all. I am optimist
enough to fight it.
There may be some others in the list there, Senator, which might be
probably good for national banks, too.
The merger provision is subject to a great deal of opposition on the
ground of its constitutionality. I believe it is constitutional.
Senator TOWNSEND. Suppose a national bank in your district
decides to give up its charter and take a State charter: What are the
provisions of law with reference to taking it over?
Mr. BRODERICK. A very thorough examination to find out if their
condition is such as to permit them to be taken over.
Senator TOWNSEND. I t is absolutely under your authority?
Mr. BRODERICK. Yes.
Senator TOWNSEND. In

some States they get a charter from the
legislature and then the bank examiner or bank commissioner has no
choice in the matter except to take them over and give them a charter.
Mr. BRODERICK. I think the bank commissioner in our State has
unlimited discretionary power.
Senator TOWNSEND. I think he should have—or some authority.
Mr. BRODERICK. He has it in connection with bank charters, bank
mergers, and bank brandies.
The CHAIRMAN. Do you have any suggestions to make, Mr. Broderick, as to improving the effectiveness of bank examinations?
Mr. BRODERICK. I think the bank examination system, Senator, is
still in its infancy. I t is possible to do too much and possible to do




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281

too little Success depends on the men. You can not hire bank
examiners. You must develop them. Our department and, I think,
the other departments, have to take young men and train them. I t
takes time to build up a force of that kind.
The CHAIRMAN. Of what great service is an effective examination of a bank, if your only recourse, after ascertaining a condition
is to admonish the officials of a bank against pursuing an illicit course?
Mr. BRODERICK. Senator, in effect, bank examinations are very
effective because I would say with 90 to 95 per cent of the banks,
moral suasion is still a potent influence, and sometimes ths big stick
can still be used to force things. I t is only in the extreme cases where
we have to have means of firing some pepole. However, with 90 to 95
per cent of the cases moral suasion is effective.
Now, with both National and State banks in our State—the nationals
are probably the first in this line—after the examination, the directors
receive a complete copy of the report of the examinations and quite
often conferences are held and if the conditions are unsatisfactory,
every effort is made to force correction where possible.
The bank examination also has a great effect from an advisory
standpoint. No bank examination is successful, nor is any system
effective, unless a means is found to detect and correct unsound
tendencies; in other words, policies that might lead to unsound and
unsafe conditions. Until the bank examinations get to a point where
it is possible to detect unsound tendencies and stop them before conditions become dangerous, the bank examination will not be successful.
The CHAIRMAN. There is a difficulty we encounter in any proposed
legislation. The 90 per cent of the banking community which is
amenable to advice and remonstrance and which wants to do right,
does not want to be subjected to a statutory regulation which is meant
for only to 10 per cent of the banking community which wants to do
the wrong thing or does wrong.
Mr. BRODERICK. Yes, that is correct. They will all say that, but
I think, Senator, if I may say so, that the bankers as a rule do not
give enough attention to the public aspect of banking but consider
mainly the private aspects of it and in a democracy such as we have,
in law you have to be guided by the greatest good for the greatest
number. I t is unfortunate t h a t our better bankers have got to be
inconvenienced because of the acts of those who are less experienced
and less skillful than themselves, but there is no other way to handle it.
The CHAIRMAN. I do not think so. What do you think, Mr.
Broderick, of branch banking?
Mr. BRODERICK. Well, first off, I think there is no power on the
globe that can stop the development of branch banking. Whether
it is the best thing or not for the country is something that experience
alone will show. I t is coming. I t is the only thing for cities. The
day of the small bank in the cities has gone. I t is hard for a small
bank to find the type of management t h a t is necessary to properly
run the bank. The small banks get the extra hazardous credit risks,
and not the big banks.
The CHAIRMAN. What is your exact definition of a city?
Mr. BRODERICK. Well
The CHAIRMAN. A city in which a small bank may not exist?
Mr. BRODERICK. I would say 100,000 or more. I find a tendency
in every city of that size. A small bank will be chartered and it will




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

be run about a year and then sold out. So with the national bank.
A national bank will be chartered and will run about a year and will
then sell out.
Senator TOWNSEND. They convert them into branches?
Mr. BRODERICK. We have killed that by giving branches direct.
The CHAIRMAN. I S there a distinct analogy between a correspondent bank and a branch bank?
Mr. BRODERICK. Somewhat, except the correspondent banks that
take in the whole country.
The CHAIRMAN. I t is nation-wide, if the bank is large enough?
Mr. BRODERICK. I do not think we will ever have a nation-wide
branch banking system that will run successfully.
The CHAIRMAN. But we have a correspondent banking system
that is nation-wide.
Mr. BRODERICK. T h a t is true, but that has been built up over a
period of years. I n most cases, you will find there is a generation of
experience with the particular banks. There is only a small number
of banks in New York that have that system.
The CHAIRMAN. If there is objection to branch banking, even to a
limited extent, such as State wide branch banking, would not the
same objection apply with equal force to the correspondent banking—
nation-wide correspondent banking?
Mr. BRODERICK. I t is a case where we have one and have not the
other.
The CHAIRMAN. Well, have you not to some extent the other?
Mr. BRODERICK. The New York City banks and Chicago banks
that have a large number of correspondents are really banks of rediscount. They are doing a large rediscount business for their
correspondent banks, performing the same function for their correspondents, as the Federal reserve banks do for their members.
The CHAIRMAN. Which it was never intended they should do.
Mr. BRODERICK. May I go on* and answer the question about
branch banking?
The

CHAIRMAN.

Yes.

Mr. BRODERICK. I think there are two or three things that will
bring about branch banking within limited areas. One is the difficulty
in replacing the present managers of small unit banks and one subreason for that is the expense of running these small banks is growing
each year and the income is not sufficient, and the second big reason
is that in a community like New York or New England, where most of
the banks have excess funds on deposit—that is, deposits in excess of
the borrowing demand in that particular community—are having
difficulty in properly and safely investing their surplus funds. The
average banker at the present time has not the skill that is necessary
to invest those funds in the proper way.
The CHAIRMAN. I S there any greater incentive for a small bank,
locally organized, to do business than there is for the established
agency of a branch bank in the same community?
Mr. BRODERICK. I do not think I am clear on that question,
Senator.
The CHAIRMAN. What I mean is
Mr. BRODERICK. What is the advantage?
The CHAIRMAN. I S there more incentive to a bank locally organized
and conducted by officers and the board of directors, to do business




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

283

in the community than there would be for a branch bank of a large
parent bank, doing business through an agency?
Mr. BRODERICK. N O ; except the prestige which generally comes
to a man who is president or a director in a bank. Objection is raised
by the opponents of branch banking that the communities would not
receive as much consideration from the branch of an existing bank a&
they would from an independent institution.
The CHAIRMAN. Why not? That is what I am trying to reach.
Mr. BRODERICK. I can not answer that. I think that idea is a
fallacy.
The CHAIRMAN. The parent bank is in business to do a banking
business and I should think it would to the fullest extent respond to
the demands of the local community just as readily and as completely
as a locally organized bank.
Mr. BRODERICK. For all the legitimate needs oi* the community.
What they really mean is that they want a local bank there because
they will have an easier credit policy than they would get from a larger
institution.
The CHAIRMAN. Would that be true if the overhead of the local
bank exceeds considerably the charge of an agency there?
Mr. BRODERICK. I t would exceed it.
The CHAIRMAN. Well, I say it would exceed it, and if it would
exceed it to any considerable extent, could not the branch agency of a
parent bank be just as liberal as a local bank with its credit accommodations?
Mr. BRODERICK. Yes; except a local bank will be probably more'
liberal to its own officers and directors than an outside institution.
The CHAIRMAN. And that has been an abuse, has it not?
Mr. BRODERICK. Yes; and I think you will find one of the recommendations I have here is an attempt to curb quite a few abuses,.
Senator, which I would not dare mention in times like this.
Mr. W I L L I S . Mr. Broderick, suppose nothing is done on the question of security affiliates, but that we simply go ahead as at present.
Suppose you are not able to obtain the passage of your reform and
nothing is done legislatively. Do you think the security affiliate
system is likely to grow pretty rapidly and become even more of an
abuse than it has been or what is its future?
Mr. BRODERICK. Frankly, I do not think it is apt to grow.
(Discussion off the record.)
The CHAIRMAN. That is all, Mr. Broderick, and we are greatly
indebted to you. We know what a busy man you are and we know
what a delicate situation you are in.
(Whereupon at 1.15 o'clock p. m. the subcommittee adjourned
until Monday, February 2, 1931, at 10.30 o'clock a. m.)

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