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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-FIKST CONGEESS
THIRD SESSION
PURSUANT TO

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

PART 3
FEBRUARY 18, 23, 24, AND 25, 1931

Printed for the use of the Committee on Banking and Currency

34718




U N I T E D STATES
GOVERNMENT P R I N T I N G O F F I C E
W A S H I N G T O N : 1931

C O M M I T T E E ON B A N K I N G AND CURRENCY
P E T E R NORBECK, South Dakota,
LAWRENCE C. P H I P P S , Colorado.
SMITH W. BROOKHART, Iowa.
P H I L L I P S L E E GOLDSBOROUGH, Maryland.
J O H N G. TOWNSEND, J R . , Delaware.
F R E D E R I C K C. WALCOTT, Connecticut.
J O H N J. BLAINE, Wisconsin.
ROBERT D. CAREY, Wyoming.
J A M E S J . DAVIS, Pennsylvania.

Chairman

DUNCAN U. F L E T C H E R , Florida.
CARTER GLASS, Virginia.
ROBERT F . WAGNER, New York.
ALBEN W. BARKLEY, Kentucky.
TOM CONNALLY, Texas.
WILLIAM E. BROCK, Tennessee.
R O B E R T J. BULKLEY, Ohio.
CAMERON MORRISON, N o r t h Carolina.

J U L I A N W. BLOUNT, Cleric.

SUBCOMMITTEE ON SENATE RESOLUTION 71
CARTER GLASS, Virginia,
Chairman
R O B E R T J. BULKLEY, Ohio.
P E T E R NORBECK, South Dakota.
J O H N G. TOWNSEND, J R . , Delaware.
F R E D E R I C K C. WALCOTT, Connecticut.

n




CONTENTS
Pag©

Bean, Robert H
Coon, Robert M
Nadler, Marcus
Pope, Allan M
Ripley, W. Z
Williams, H. P




433
471
496
539
479
511
in

OPEKATION OF THE NATIONAL AND FEDEBAL KESERVE
BANKING SYSTEMS
WEDNESDAY, FEBRUARY 18, 1931
UNITED STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY,

Washington, D. G.
The subcommittee met, pursuant to adjournment, at 10.30 o'clock
a, m., Hon. Frederic C. Walcott presiding.
STATEMENT OP ROBERT H. BEAN, EXECUTIVE SECRETARY
AMERICAN ACCEPTANCE COUNCIL, NEW YORK CITY, N. Y.
The ACTING CHAIRMAN. Mr. Bean, will you give us your name and
official connection with the American Acceptance Council?
Mr. BEAN. Robert H . Bean, executive secretary American Acceptance Council, New York.
The ACTING CHAIRMAN. Mr. Bean, we are trying to make these
hearings as constructive and helpful as possible, avoiding every trace
of sensationalism or even embarrassing questions, but we naturally
want as frank and full answers as you feel like giving, and if there
are any parts of your answers you want off the record, please so
indicate.
We have prepared a few questions here that I shall run through,
and perhaps you would like to make a more or less general statement covering several questions with reference, for instance, to the
general situation of the acceptance market.
What are the outstanding problems of the present situation as
indicated by your experience? What changes in law relating to
acceptances do you think desirable, if any ? What changes in administrative rules or practices do you suggest ?
Then I , personally, should like to get into the question of a comparison between our methods of acceptances and the English methods of acceptances, if you are familiar with that part of it. If
you will just make your own statement with reference to those
questions, we shall appreciate it.
Mr. BEAN. May I have the first question again, Senator?
The ACTING CHAIRMAN. Describe, as far as you can, the general
situation of the acceptance market of the United States as it stands
at present, and what are the outstanding problems of the present
situation.
Mr. BEAN. The acceptance business at the present time is almost
at the peak of its activities since the system was first put into operation, The volume is not quite as high as it was at the end of 1929,




433

434

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

but that is due partly to commodity prices falling and partly to the
reduction in domestic and world trade. As far as the activity of the
acceptance business is concerned, it has probably been greater in
1930 and thus far into 1931 than at almost any previous period.
We now have a market demand that is quite evenly divided between the Federal reserve banks, the foreign correspondents of the
Federal reserve banks, such as foreign central banks of issue, and the
acceptance banks in the United States. By accepting banks, it might
be of interest for me to explain what I mean. There are only certain large and important banks that do any accepting at the present
time.
The ACTING CHAIRMAN. Suppose you insert at the outset of the
hearing a definition of an acceptance, as the bankers know it. There
may be some here who are taking notes that do not quite understand it.
Mr. BEAN. A bankers' acceptance, in its simplest definition, is a
draft or bill of exchange drawn on a bank by a merchant, importer,
or exporter and accepted by that bank as its promise to pay, by writing across the bill of exchange, "Accepted," payable at a given
future date, then adding the signature of the authorized officer of
the bank. I t differs from an ordinary commercial draft in that
such a draft is drawn, merchant on merchant, while this is drawn
merchant on bank. When it is accepted in that way it becomes a
bankers' acceptance. That is the very simplest form. There are
several types of bankers' acceptances—that is, there are several uses—
such as for imports and exports, for domestic storage, for domestic
shipment, and for the purpose of creating dollar exchange. Dollar
exchange bills are drawn in countries where dollar exchange is generally scarce or during temporary times when they have to have
exchange to pay for commodities they have purchased. That is not
a very important part of the acceptance business.
But those five classes and the sixth, which is against goods stored
in or shipped between foreign countries, make up the authorized uses
to which acceptance credits are put.
F o r several years the last item did not appear as a very important
division, but during the last four years it has increased very extensively. I t has grown until now it constitutes about one-third of all
the total outstanding volume of acceptances, and at this point it
might be Avell to give the classified volume for reference as we go
along.
The total volume, at the end of January, was $1,520,000,000. T h a t
total is divided among the six divisions as follows:
Import credits took $213,000,000; export credits took $400,000,000;
domestic shipments credits took $34,000,000; domestic warehouse credits took $257,000,000; dollar exchange credit took $65,000,000; and,
based on goods stored in or shipped between foreign countries, took
$548,000,000.
Senator NORBECK. H O W long a period do those figures cover?
Mr. BEAN. The figures cover the outstanding volume as of the
end of January, 1931.
Senator NORBECK. For the previous year?
Mr. B E A N . No; just the volume outstanding at that time.
Senator NORBECK. Outstanding at that time?




NATIONAL. AND FEDERAL KESEBVE BANKING SYSTEMS

435

Mr. BEAN. Yes. Every month we make a national survey and
these figures are shown as of the end of each month. They overlap
some, of course, but that has to be taken into consideration.
The ACTING CHAIRMAN. That is about a billion and a half ?
Mr. BEAN. $1,520,000,000 outstanding as of January 31 last—two
weeks ago.
The ACTING CHAIEMAN. Then, you might just add how these acceptances are handled. They are dated and they are negotiable—
discountable, and so forth.
Senator TOWNSEND. And give the usual time.
Mr. BEAN. The creation and general principles are regulated by
the Federal Reserve Board, but the average maturity of the outstanding bills, while varying in some years, is somewhere between 55 and
60 days. That is, at one season of the year, such as in the spring,
when there may be a clearing up of remaining exports of seasonal
commodities the credits will not be necessary for so long a period.
I n the fall of the year, however, we are apt to get the full limit of
maturity, but the average throughout the year I have found to be
about 55 or 60 days.
Senator TOWNSEND. If you take goods stored in a storehouse, and
the 60 days expire, and he does not remove the goods, you renew
that?
Mr. BEAN. Oftentimes they are put into warehouses pending shipment and in that period it is expected that the goods will be
shipped out. Now, if there is a bona fide sale of goods within
the period—within the warehouse credit period—and the goods
do not go out for various reasons—it may be lack of tonnage or
other facilities—the credit may have to go over for another period,
30 days more. But there is very little of what might be called
hoarding of goods; that is, putting goods into a warehouse, opening
an acceptance credit and hoping that some time there will be a
market to take them out of storage.
Senator TOWNSEND. That is the point I had in mind.
The ACTING CHAIRMAN. Have you cotton acceptances by themselves?
Mr. BEAN. Not by themselves. Our service has never gone into
analyzing the character of goods stored. We have left that to
the occasional surveys made by the Federal reserve banks, as they
analyze the bills that pass through their hands. I t would be quite
a task for us to ask the banks to check up and record each month,
the particular business they did and the particular commodities they
were financing.
Now these bills, once they are accepted by the banks, are then
ready for the market. I n some periods they are immediately sold.
At other times, if the banks are well supplied with funds, they will
carry the bills in their own portfolio as they are doing quite substantially at the present time.
At the end of January the accepting banks were carrying $130,000,000 of their own acceptances that were accepted and ready to
go to the market. The reason for that is that at this time the
banks have no way of employing those funds, and instead of marketing the bills and taking the proceeds and letting them pile up as
unemployed surplus funds, they keep the,bills and carry them in




436

NATIONAL. AND FEDERAL RESERVE BANKING SYSTEMS

the commercial loan accounts for the time being. When they are
again in need of funds, they will sell those bills to the dealers.
As a further evidence of the banks' liquid condition they are
now buying other banks' bills very heavily. On the last of January they were holding $433,000,000 in other banks' bills, the largest
volume the accepting banks have held since the business started.
T h a t represents an investment in other banks' acceptances.
The ACTING CHAIRMAN. How do you account for their having
reached a peak at this time in the volume of acceptances, and do
^
you find there are any large number of acceptances on cotton that
are frozen?
Mr. BEAN. I would not say that they are frozen, Senator. There
is undoubtedly a large volume of cotton acceptances, but I have
always felt, and do feel, that that is a commodity that will move
one year rapidly and one year slowly. This happens to be one of
the years when it is going out slowly.
I notice that our acceptances are now declining normally, as they
do every year. Over the 10 years in which we have studied the
acceptance development the total volume of bills is generally at its
peak on December 31. After that we generally get a normal decline.
My figures as of January 31, which were released for the papers
last week, show a decline of import credits of about $7,000,000; export credits went off $15,000,000; domestic warehouse credits went off
$14,000,000; and domestic shipments remained just about where they
were.
Credits based on goods stored abroad or shipped between foreign
countries went off about $13,000,000. This change is what we get
almost every year. I t is a normal seasonal decline, and it will
continue right through the spring up to June or J u l y before the
season turns again, and our charts will show the regularity of this
variation. I believe, gentlemen, you would like to look at the chart
[exhibiting] that shows the volume line
(See Chart I I I on page 447.)
Mr. W I L L I S . May I suggest that you insert them in your evidence?
Mr. BEAN. I should like to do that. T h a t [indicating] shows the
line of acceptance volume and the other shows the Federal reserve
holdings.
The ACTING CHAIRMAN. There is an enormous variation there, is
there not?
Mr. B E A N . This [indicating] is the $1,732,000,000 record peak.
This point [indicating] is higher than the other December 31 total
of the Federal holdings for many years. That was the time Doctor
Burgess made his announcement through the bank at New York.
Mr. W I L L I S . YOU speak of that as " Doctor Burgess's announcement." Do you mean it was an official announcement by the bank
of New York?
Mr. BEAN. Not as an official statement of the bank; that was an
address that Doctor Burgess made at
Mr. W I L L I S . Well, but is that an official announcement such that it
may be fairly said to be a policy of the bank of New York?
Mr. BEAN. I think it was.

Mr.

W I L L I S . YOU
Mr. BEAN. No.




have no doubt of it?

NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

The ACTING
December.

CHAIRMAN.

437

That peak seems to come along in

Mr. BEAN. December 3 1 ; yes.

The ACTING CHAIRMAN. A t the end of each year?
Mr. BEAN. Yes; and with the exception of that one year it is rather
regular.
The ACTING CHAIRMAN. Yes. Now, what was that announcement? That they would no longer carry them?
Mr. BEAN. They were carrying $489,000,000 at that time and Doctor Burgess made the announcement that the Federals would not be
buying any more bills for the present, and almost immediately their
volume began to go off—the total outstanding volume also began to
go off. The distribution to outside banks and investors speeded up
very rapidly after the Federal took that position.
Frankly I should like to say that t h a t was one of the most helpful
things that ever happened in the bill market.
The ACTING CHAIRMAN. D O you think that announcement had any
relation to that [indicating acceptance total line on chart] ?
Mr. BEAN. N O , sir; that greater total came at the end of the year
1929 when everything was running to high levels. I t will be noticed
there, too, that while this peak in 1929 was $1,732,000,000, the Federal's peak no where near balanced it. I t would have come way up
there, $600,000,000 at least [indicating], if the Federal had given the
same support to the bill market as in the previous year.
The ACTING CHAIRMAN. H O W do you feel toward the laws relating to acceptances ? Have you any changes you would suggest ?
Mr. BEAN. I have no changes that I would make in the regulations governing the use of acceptances. I t may be that the time will
come when we may not need domestic acceptances. Domestic acceptances have never seemed to be a very important part of our acceptance business, and while we have been through a period of low
money rates and easy bank credit, it may be that domestic acceptances will never be called upon extensively even in a tight money
period, when banks find it necessary to use every available credit
instrument.
So far as our import credits and export credits are concerned,
there is nothing in the regulations that I can think of that needs a
change. Domestic storage, I am satisfied, is very much cleaner and
finer to-day than it has ever been. I say that because of the recent
action of the American Warehousemen's Association in cooperating
with the Federal reserve banks and member banks and the superintendent of banks, to make certain that there is a clean business, as far
as the warehousemen are concerned, and that is bringing out a
quality of warehouse acceptances, better by far than they used to be.
As far as the warehouse credit item is concerned, that goes along
very naturally every year. Through the fall and winter months it
will increase, and in the spring, as goods move out, it goes down, and
in the period of 12 years, it has been a very regular and steady
movement.
The ACTING CHAIRMAN. Are your warehouses pretty well regulated now ?
Mr. BEAN. Very well regulated. We have the American Warehousemen's Association; we have the uniform warehouse receipts




438

NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

act, and the Department of Agriculture directing the operation of
the United States warehouse act and issuing Government licenses
for storing agricultural products. I have made quite a study of the
warehouse end of our acceptance business, and I believe we are very
much better off to-day in the management and control of the warehouse-acceptance business than ever before.
Mr. W I L L I S . Mr. Frederick, in an article published in the Acceptance Bulletin, in 1930, indicates some very serious features.
Mr. BEAN. A S far as the trust receipts are concerned ?
Mr. W I L L I S . Yes.
Mr. BEAN. Yes; he

does; and I am not in a state of mind to defend the trust receipts as it is handled to-day. I think it is one of
the weakest links in our banking system.
The ACTING CHAIRMAN. Would you do away with it?
Mr. BEAN. N o ; but I think we are in need of a uniform trust receipt act and a uniform trust receipt that will put it on the same
basis as the warehouse receipt, uniform bill of lading, and other
standard commercial documents.
Mr. W I L L I S . The warehouse receipt is not altogether satisfactory
for somewhat the same reasons, is it ?
Mr. BEAN. I n the hands of bona fide warehousemen it is all right.
Mr. W I L L I S . Many are not altogether legally in such a position
that their receipts are good, are they ?
Mr. BEAN. That is true, but that comes about very largely because of what are known as subsidiary warehouses. If you get
an independent warehouseman—bona fide warehouseman—he is the
only one who can issue a proper warehouseman's receipt, and you
are secured.
Mr. W I L L I S . YOU have had, in Brooklyn, quite a good deal of
duplicate receipt trouble, have you not ?
Mr.

BEAN.

Yes.

Mr. W I L L I S . That is likely to occur very often?
Mr. BEAN. Yes; in carelessly managed warehouses.
Mr. W I L L I S . SO what you say about the soundness of the warehouseman's receipts has a great deal of qualification ?
Mr. B E A N . I qualify it only to this extent: If it is business handled by independent warehousemen, in the business of warehousing,
and who are represented in the American Warehousemen's Association
The ACTING CHAIRMAN. But are there not a great many warehouses not in that association ?
Mr. BEAN. Yes.
The ACTING CHAIRMAN.

But you are not afraid of them? You
have not had any duplication recently of the old Detroit blowup ?
Mr. BEAN. NO ; and there are very few instances of that kind or
like the Brooklyn case. I think there are fewer and fewer of these
cases, and I know that the banks to-day are watching their warehouse
receipts as they have never watched them before.
The ACTING CHAIRMAN. YOU are not afraid, when the acceptances
cover, say, canned peas, that the cans contain water?
Mr.

BEAN. N O .

The ACTING CHAIRMAN. YOU remember some years ago there were
some pretty disastrous things that happened ?
Mr.

BEAN.




Yes.

NATIONAL AND FEDEEAL RESERVE BANKING SYSTEMS

439

The ACTING CHAIRMAN. Those were the irresponsible ones ? There
-was no inspection then?
Senator TOWNSEND. Will not the Government inspection help t h a t
very materially?
Mr. BEAN. Yes; but if an inspector goes into a warehouse and
sees 5,000 cans of so-called salmon, he is in a difficult position to
prove that the cans contain salmon. I f a warehouseman starts out
to be a crook it is a very difficult matter. I t is the same with bankers. The reason the banking business is successful is that about 99
per cent of the bankers are honest.
Senator TOWNSEND. Suppose the Government inspects all of the
stuff in the warehouse, and that at that warehouse there was a Government inspector; would that cover the point?
Mr. BEAN. N o ; I do not believe that your safety would be very
greatly increased.
The ACTING CHAIRMAN. Of course, the old scandals on canned
goods, which were more numerous than in connection with any other
type of warehoused goods, arose because the package could not be
opened without spoiling it. That is the whole point, is it not ?
Mr. BEAN. Yes.
Mr. W I L L I S . I think it would be well to insert in the record this

article by Mr. Frederick concerning trust receipts, appearing in the
Acceptance Bulletin for December, 1930.
The ACTING CHAIRMAN. And we may insert these charts?
Mr. BEAN. Certainly.
(The article and charts referred to are reproduced in full as
follows:)
[Acceptance Bulletin, December, 1930]
CONCERNING TRUST RECEIPTS

(Address by Mr. Karl T. Frederick, of Kobbe, Thatcher, Frederick & Hoar,
delivered before the Foreign Exchange Club, New York City, on November 25, 1930)
I am honored by being asked to talk to you about this matter of trust
receipts.
It is a small corner of the law. It is, frankly, one of the most difficult
little corners that I have ever happened upon. There have been many cases
in which trust receipts have been the subject of litigation but, unfortunately,
there is comparatively little light to be found in the bulk of judicial opinion
on the subject.
Trust receipts are a decidedly new type of security—I mean when you
compare them with other types of security. They are only about 55 or 60
years old, and I should say the first 45 years of their use was a period when
neither lawyers nor bankers knew what they were using nor why they were
upheld by the courts.
From a legal standpoint one may begin to examine the origin of trust
receipts perhaps 30 years before they were definitely used. That was what
you might call a preparatory period. They were an evolution and, as I say,
until the last few years very few bankers, lawyers or judges, have had any
logical idea of what a trust receipt was or where it could be used or what
principles of law underlay it. Consequently, if the subject has been a puzzling
one in any way to any of you you needn't feel any surprise because it really
is, at least from a lawyer's standpoint, and, so far as I have seen in practice
from a banker's standpoint, a difficult proposition to understand.
The trust receipt as a form of security here in the East at least and in
some other parts of the country, is now well recognized. Certainly in Massachusetts, Connecticut, New York, Pennsylvania, New Jerasey, Maryland, Delaware, Louisiana, Wisconsin, and some other States, it is well known and in
common use. I t is also used to some extent abroad.




440

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Security in general may be classified under two types—a type which depends
upon possession for its validity and a type which depends upon title, quite
apart from possession, for its validity. Under the first head, as you know,
you have the common type called pledge, where property is placed in the
possession of the pledgee. He is entitled to retain possession and under certain circumstances to sell for the satisfaction of his claim.
The other type is that which depends upon title, and there are two common
well-recognized forms of that kind of security. The first is called a conditional sale, where a contract is made by which A undertakes to sell something
to B but it is agreed that the title shall not vest in B, even though the possession may pass to B, until B has paid for it. That is brifly the type of
security known as conditional sale and it is in common use.
The other form is that of mortgage. Of course we are talking here about
security in personal property. When you come to talk about security in real
estate, mortgage needs some further amplification or discussion, because here
in New York at least there has been developed what they call the lien theory.
Historically, a mortgage always, whether of real estate or personalty, involved the putting of title into the motrgagee or person to be secured. That
is still true in the case of personalty, but here in New York it is not true in
the case of realty. In the case of realty a mortgage here in New York does
not convey title to the mortgagee; it gives him what the law recognizes and
enforces as a lien, title remaining however in the mortgagor. That is rather
anomalous, and I think to some extent an unsound legal doctrine, but it is
the law here in New York.
We have then these three general types of security—pledge, conditional sale,
and mortgage.
Now whenever a question of trust receipts was presented to a lawyer he
immediately tried to analyze the type of security and to see what particular
classification it fell under. The trust receipt obviously was not a pledge.
It didn't seem to be a mortgage, it didn't seem to be a conditional sale, and
that to lawyers, was the chief reason why the subject presented serious
difficulties.
In some respects it is obviously like a mortgage, but as almost everybody
knows a chattel mortgage is not of much value in this country unless it is
recorded and as banks and lawyers know, the trust receipt if it is good at all
is good without recording. Therefore, it does not exactly resemble a mortgage.
As a matter of fact, the trust receipt is an anomaly in the law. I may call
it a by-product. It does not rest upon any statute for its validity. Nevertheless, it is the result of the enactment of statutes, namely the recording acts.
If there were no recording acts relating to chattel mortgages there would never
have been any occasion or reason for the development of trust receipts. Because there were recording acts which were, in this particular field at least,
undesirable, the law through a process of evolution developed this anomalous
type of security which we know as trust receipts.
Now I don't suppose it is necessary to describe in any detail the appearance
or wording of a trust receipt. Commonly they are used in connection with
import transactions. The importer goes to a banker, gets a letter of credit
in favor of the shipper on the other side, who is the seller or the seller's agent,
and which provides that upon presentation of bills of lading and proper documents the bank will accept and pay the drafts drawn in connection with his
contract. Those documents, of course, are taken in the name of the bank
and when the goods come forward, the documents, which are documents of
title and for all legal purposes are the goods, are turned over to the importer
under a trust receipt. You may have the simple form where the documents
are turned over against a trust receipt to allow the importer to enter the
goods and to warehouse them, and immediately deliver to the bank the warehouse receipts issued in its name. That is a limited form not uncommonly
used.
It may be followed by another larger form which will permit the importer
to make a sale which he has arranged to a buyer, John Smith. It may name
the buyer and also provide that the money shall immediately be paid over to
the bank. Or a still wider form of trust receipt may be used which permits
the importer to sell as he can or to manufacture or fabricate in one way or
another and to sell the goods. These all provide that the title is to remain in
the bank.
This is obviously a security transaction, and it is probably worth a moment's
time to point out its differences from the other well-recognized forms of




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

441

security. It obviously is not a pledge, because the essence of pledge is not
title but possession, and if the property were pledged to the bank that pledge,
and therefore the security would be lost immediately possession was turned
over to the importer.
It, likewise, is not a conditional sale, in spite of the fact that the courts of
Connecticut have decided and one or two other courts have talked as if they
thought it was a conditional sale.
The reason it isn't a conditional sale is this: In a conditional sale the seller
is the man who has goods to sell and he is interested in selling the goods as a
seller of goods and interested in getting the purchase price of goods, and the
only contract which exists between him and the buyer is a contract for the
purchase of goods. Now, in the trust receipt case the seller was the man in
China or in Brazil or somewhere else (and I might say in passing that I am
simply taking that class of case because it is perhaps a little simpler to follow.
There is no reason why a transaction shouldn't be a domestic one just as well
as a foreign one). The seller is out of the picture when he turns over the
documents to the bank or its correspondent and gets his money on his draft.
He is through. That is the only contract of sale that ever has existed. The
contract between the bank and the importer is not a contract for the sale of
goods and the payment of the purchase price, because the bank has its goods
to sell; it isn't in the business of seeling goods; it is in the business of lending
money. The contract between the bank and the importer is a contract of loan.
If it were a conditional sale, the whole contract would be over and the liability
of the purchaser would be at an end if the seller retook the goods. But if the
bank retakes the goods under the trust receipt the importer is still under the
same liability he was under in the first place. His contract with the bank is
not to pay the purchase price of goods but to repay a loan or an advance made
at his request and for his benefit. The subject matter about which the bank
and the importer are dealing at all times is a lending of money and a repayment of money, and not the purchase and sale of goods, because if those
goods in the hands of the bank, for example, were destroyed and there was no
insurance, the importer would be equally liable to the bank, as he was at the
inception of the transaction; whereas if it were a conditional sale and the
goods were destroyed while in the hands of the seller, of course the buyer
would be under no obligation whatever.
The essential differences between those two classes of transactions must be
quite apparent, although as I say in a number of decisions and in two or three
States they have caused confusion in the minds of the courts.
Now there remains only one other kind of security, and that is mortgage.
The ordinary mortgage—and we are talking of chattel mortgage—consists of
a conveyance of the title by the title holder or mortgagor to another as
security for an advance or loan made by the other party to or for the benefit
of the mortgagor. If the mortgagor, for example, gives a mortgage on an
automobile, he may in addition also deliver possession to the mortgagee. The
mortgagee is not then a pledgee although he looks like one, but he is a mortgagee in possession. If that is done, of course, there is no necessity for recording the mortgage, because nobody is deceived by the situation. The mortgagee is in possession of his security and therefore the creditors of the mortgagor are not liable to be deceived. But if the mortgagor, the owner of the
car, wants to keep the machine and to continue to use it, he may still by a
proper instrument convey title to the mortgagee. In such a case practically
every State has required that the instrument be recorded so that the world may,
theoretically at least, have notice of the fact that the man who previously
owned the car, and who now apparently owns it and uses it, is not the real
owner, but that some one else is the real owner and has a claim on it as security.
The purpose of those statutes is, of course, to prevent a false credit being
given to people on whom the mortgagor might impose through his apparent
ownership of the car.
That is, as I say, the classic, normal form of chattel mortgage. It requires
recording if possession is to remain in the mortgagor. The trust receipt,
however, does not require recording in order to be valid. Nevertheless, possession is not in the hands of the title owner, the bank, but is in the hands of
some one else.
The question is, what is the true nature of a trust receipt, and I want to
point out that the trust receipt is really a chattel mortgage, but of a peculiar
and exceptional kind. There are certain facts in connection with the trust
receipt situation which enable us to distinguish it from the normal mortgage




442

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

situation and which justify, in the opinion of businessmen, and so far at
least in the opinion of legislators, the exclusion of trust receipts from the
recording statutes.
As I said, the essence of a mortgage consists of title in the person secured
while possession may be in the borrower. Where the borrower has previously
owned the property and has conveyed it to' the mortgagee, himself retaining
possession, you have the ordinary type of chattel mortgage which requires
recording. It isn't necessary, however, that title should have been conveyed
to the lender by the borrower, and that is the fact which affords a line of
cleavage between the trust receipt form of security and the ordinary chattel
mortgage form, because in the trust receipt situation we have first a seller in
whom the title originates. That person is not seeking credit; he is merely a
seller and he is to get cash for his goods. The lender is the bank, the second
party. The third party is the importer, who has never up to that time owned
the goods, but for whose benefit nevertheless the entire transactions is under*
taken.
Now, inasmuch as the importer has never previously owned those goods
and has never had them in his possession, no one who has any knowledge of
business affairs can be deceived by the fact that he suddenly comes into
possession of them.
The transaction, as I have tried to make clear, is, in legal theory, a chattel
mortgage, but it has distinguishing marks which differentiate it from the ordinary chattel mortgage in that the title comes to the bank from a third party
rather than from the mortgagor, whereas in the ordinary mortgage the title
comes from the owner who gets the credit and who retains possession of the
goods.
The trust receipt is useful and may properly be employed only in the circumstances that I have described. If it is used in the normal chattel mortgage situation, it is of no more value than an unrecorded chattel mortgage
would be. Now, I am not prepared to say that in some circumstances an
unrecorded chattel mortgage may not have value, but no one ought to deceive
himself into thinking that he is getting more security than he really is getting.
If you clearly realize that you are doing an unrecorded chattel mortgage business and if you clearly recognize the limits of the security that you are obtaining, it is all right to go ahead and do it, whether you do it under what is
frankly a chattel mortgage or whether you do it under the guise of a trust
receipt.
The difficulty is this: That the trust receipt has frequently been used in circumstances when it did not have validity beyond that of an unrecorded chattel
mortgage, but where the users have deceived themselves in thinking that they
had a good trust receipt. The most important point I want to make in what
I have to say is to point out that there is only one set of circumstances in
which a trust receipt can properly be used. If it is used in any other case, it
is not good as a trust receipt and the doctrines of trust receipt do not apply.
Unless you have that 3-cornered transaction of a seller and a lender and a
borrower, your trust receipt is not good. If a man comes to the bank and
says, "Here are some warehouse receipts for cotton that I own. I want to
pledge them to you," you may, by taking the warehouse receipts, get a good
security, but if he then comes and says, "Hand me back my warehouse receipts and I will take them under trust receipt," don't deceive yourself into
thinking that you have any security left after you have turned the warehouse
receipts back to him. You have practically nothing except his unsecured
obligation to pay.
The trust receipt can not be properly used under those circumstances and it
doesn't do any good to label the document that you use " trust receipt," because
the court that is going to examine the transaction isn't going to be guided in
reaching its conclusion by the fact that the document may have " trust receipt"
written across the top, any more than it is going to be guided by the fact that
it may have " chattel mortgage " written across the top, because the court will
look at the substance of the transaction and not at any labels.
The difficulty which has arisen in the minds of lawyers and which has also
existed in the minds and in the practice of bankers in many, many cases—
I think in practically all cases—has been due to a failure to recognize the
limits of the proper trust receipt doctrine; has been due to a failure to realize
that the trust receipt can be used only in the one class of cases that I have
described. It has been due to the fact that the trust receipt has been used




NATIONAL AND FEDERAL KESERVE BANKING SYSTEMS

443

in the other class that I have also described where it hasn't any business to be
used. The distinction, if I have succeeded in making it plain, is the backbone,
the essence of the trust receipt doctrine.
To go a little further into some of the details of the doctrine, I said that an
ordinary chattel mortgage requires recording, whereas a trust receipt is valid
without recording. There are at least two States in the country where the
recording statutes are so drawn that even a trust receipt is not valid unless
it is recorded. Those States are Ohio and Illinois, and, consequently, you
should never use a trust receipt in either of those States with the idea that
you are safe unless you record it.
It is not necessary or useful here to go into the history of the development
of the trust-receipt doctrine. That is primarily of interest to lawyers. It is
an interesting history because it is in evolution of new principle for which
there was demand because of the recording statutes. I may remark that
the classic example of trust receipt that is usually talked about is the import
case, such as an importation of coffee or silk or some other foreign commodity. The doctrine of trust receipts, however, did not arise from import
transactions. The cases which laid the foundation of this doctrine were all
cases relating to domestic transactions. They were in every case letter of
credit cases, but they were all domestic transactions.
There have been, during the last 10 or 12 years, a number of litigations,
especially affecting automobile financing operations, where the argument has
been made that the trust-receipt doctrine applies only to import transactions,
and the courts have been urged, indeed they have sometimes been told, that
domestic transactions of the same kind did not permit the use of the trust receipt. There is nothing in the argument. In proper cases a trust receipt can. be
used in domestic transactions just as well as it can in foreign cases.
The doctrine is just as vigorous and is better established than it ever has
been. In examining practically all the cases that had been decided on the subject a few years ago, I found an extraordinary consistency in the opinions.
They differed in respect to the nomenclature which they used.
Some of them, as I said, called the arrangement " conditional sale." In
Pennsylvania they called it a "bailment," and in other places they said, " W e
will not attempt to define the exact nature of this security." But they all,
practically without exception, upheld the principle of the trust reecipt and
enforced it. Consequently when one came to assemble all of the decisions and
from the opinions to evolve a statement of the doctrine of trust receipts, one
did not have to do what one has to do in many other branches of the law,
either distinguish or explain away the inconsistent rulings, because the decisions
of the courts in this field have been extraordinarily consistent.
There are two or three statutes which have a bearing upon this subject to
which I want to refer. One is what is known as the factors' act, which is of
particular importance here in New York. The factors' act was taken from an
English statute which was passed many years ago, but it has only been adopted
by New York and Massachusetts. In the absence of the factors' act it is a
principle of the common law that an agent to sell—that is, an agent whose power
extends to the sale of your goods—can not make a legal or binding pledge,
because a pledge would be beyond the scope of his authority. That is, as I
say, common law in the absence of statute. But in England, in New York,
and in Massachusetts a statute has been passed known as the factors' act,
which says in effect that a person who is intrusted with the possession of goods
with power to sell can make a valid pledge of those goods. That means in
respect to trust receipts that if a bank delivers possession of goods to the
importer with power to sell, but without explicit power to pledge, the importer
can nevertheless take those goods or the warehouse receipts, or bills of lading
to some other bank and make a valid pledge, and if the other bank retains
possession of the goods or the documents it will prevail over the first bank
which merely holds the trust receipt.
That is a risk which every bank in New York takes when it delivers goods
under trust receipt. It is taking a risk that its customer may repledge the
goods with some one else for a present advance.
Another act which is one of the uniform acts and which has been widely
adopted is the bills of lading act. It accomplishes practically the same result
which the factors' act accomplished but it is limited in its effect to bills of
lading. However, it goes a little further than the factors' act in that a
repledge under the factors' act must be for a present consideration. The bills of




444

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

lading act includes within its definition of value an antecedent obligation.
In other words, if your importer takes the bill of lading, which he has obtained under trust receipt, to another bank and pledges it as security for a
debt which he already owes to that bank, the pledge is good.
Another statute which I want to mention is the warehouse receipts act, and
that accomplishes with respect to warehouse receipts practically the same thing
which the bills of lading act accomplishes with respect to bills of lading. Its
definition of value is the same. In other words, a pledge of a warehouse receipt
for a preexisting obligation is good even though the pledgor has secured possession of the warehouse receipt by giving a trust receipt.
The curious result of these two statutes, the bills of lading act and the warehouse receipts act, is this: That the importer or the customer can do with
these documents of title which merely represents the goods what he could not
do with the goods themselves. If he had a bale of cotton he could not make
a valid pledge of that cotton for an antecedent or preexisting obligation, but if
he has a bill of lading or warehouse receipt which represents that cotton he
can make such a valid pledge. In other words, you are taking a slightly broader
risk when you turn over bills of lading or warehouse receipts to your customer
than you are when you turn over the goods themselves. As you generally deal
with documents of title I want to point that fact out to you.
Not infrequently a bill of lading is turned over to a customer to warehouse
the goods or to sell to a particular customer. If there is any likelihood that the
customer will place the goods in warehouse you should do one of two things:
You should either see to it that he turns over the warehouse receipts to you
as soon as he gets them, or you should very carefully stipulate in the document
that he can not take a negotiable warehouse receipt to his own order. If he
takes a negotiable receipt to his own order and does not immediately turn it
over to you, you are running a risk that he may dispose of it somewhere else.
I have outlined rather sketchily the fundamental principles of the law of
trust receipts. As a practical proposition you all know that the most difficult
problem is often to put your hands on the goods. If you decide that it is time
to protect yourself by recapture, or if your customer becomes bankrupt and you
have to recover the goods, you are often faced with a problem of identifying
them. That is under many circumstances an almost impossible task, and I
do not know of any way in which it can be simplified unless you go to the
trouble of watching the goods closely and tracing them as they progress on their
line through the process of manufacture.
You can with the aid of the court recapture your goods, provided you can
identify them. But it is obvious that they may have become mixed with
goods of other people; they may have become mixed with goods which are indistinguishable. They may have been changed by the addition of labor; they may
have been changed by the addition not only of labor but of other materials,
by weaving or any of the other processes of manufacture. They may have
been changed in appearance by dyeing and all kinds of things which may
happen, and it may be that you will find your goods involved with other goods
which have been released to the customer under trust receipts held by two or
three other banks.
You can picture the most complicated situations that may result from the
fact that the customer has gone on with the preparation of the goods for sale.
You can suggest many particular cases which may arise. In some cases it is
absolutely impossible to do anything about it. The goods are gone; you can't
find them; you can't identify them; and that is the end of it. There are
cases where you can trace the goods into their proceeds. If the goods have
been sold and the purchase price has not been collected you can collect it. If
the purchase price has been collected and can be identified you can get it. If
it has been mingled in the general bank account of the customer and has not
been drawn out since it was put in, you can generally get it. But it may
happen that it has just disappeared.
There are a good many cases which you can picture to yourself where if
you asked me, or any other lawyer what your rights are, we would be obliged to
say we do not know, because under a good many circumstances the courts have
never decided what the rights of the parties are. I have tried to picture a
good many such situations, and I must say that in some of them I have no
recourse except to figure out what I think the law ought to be without being
able to point to what the law is.
I think perhaps I can crystallize what I have had to say better by reading
to you, if you will bear with me, certain conclusions that I came to some time




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

445

ago in connection with trust receipts, and which really sum up the matter.
These were formulated about eight years ago, and so far as I know they are as
sound now as they were when they were formulated.
The first one i s :
" The only situation in which a trust receipt may properly be used is one in
which the title of property by way of security is conveyed to the creditor by an
owner who is not the person responsible for the satisfaction of the obligation
which the property secures, but where such obligor has a contractual or beneficial interest in the property subject to the satisfaction of such obligation."
In practice, the trust-receipt situation exists only in connection with advances
for the purchase of goods by way of the payment of drafts against bill of
lading.
"(2) The trust receipt should never be used in connection with the redelivery
of property pledged or mortgaged by the person signing the trust receipt.
"(3) In the proper trust receipt situation the creditor—generally a bank
or banker—has legal title to the property for the purpose of security. This
creditor is a mortgagee and the arrangement is a chattel mortgage, but of a
peculiar type, distinguishable from the usual chattel mortgage by reason of
the fact that the obligor has not prior to the arrangement had either title to
or possession of the property mortgaged.
"(4) Except in Ohio, Illinois, and perhaps South Carolina and Virginia,
cases so far decided hold that the trust receipt does not come within the provisions of the recording acts respecting chattel mortgages or conditional sales.
"(5) In New York and Massachusetts, where the factors' act is in force,
a bona fide mortgagee or pledgee for present value obtains from the signer
of the trust receipt a right superior to the title of the creditor who holds the
trust receipt.
"(6) The adoption of the uniform bills of lading act and the warehouse
receipts act by various States has given to those instruments in large degree
the qualities of negotiable instruments. These laws accomplish the results of
the factors' act. In those States which have adopted the definition of ' value *
as recommended by the committee on uniform legislation, an antecedent debt
constitutes value, and a bona fide purchaser, pledgee, or mortgagee of such a
document, regular on its face and from one to whom it has been entrusted by
the holder of the trust receipt, obtains a title superior to the rights of the
holder of the trust receipt.
"(7) If the goods themselves are entrusted under trust receipt, appropriate
language should be used to negative any presumption of right in the signer
to take negotiable warehouse receipts to his own order.
"(8) Except as noted in (4), property delivered to the signer of a trust
receipt under circumstances suitable for the use of such an instrument may,
if identified, be retaken from the signer at any time before the satisfaction of
the obligation secured by the property. It may also be retaken from his receiver,
assignee, trustee in bankruptcy, or an attaching creditor. Its proceeds may
likewise be retaken, provided they can be identified.
"(9) The unpaid purchase price of property delivered to the signer against
his trust receipt and by him sold to a bona fide purchaser may be recovered
by the holder of the trust receipt directly from such buyer.
"(10) The property delivered in a proper case against trust receipt may
be recovered by the holder of the trust receipt, prior to payment of the obligation secured thereby, from any person to whom the signer has delivered the
same, unless such right of recovery is cut off by the exercise of a power of
sale, express or implied, or statutory provisions which include a bona fide
pledge or mortgage within the scope of such power.
"(11) The trust receipt can not assure to the holder thereof any rights beyond
those which he would have had as the holder of an unrecorded chattel mortgage, an equitable pledge or mortgage, or a simple contract if it is used in any
case other than that which has been defined as a proper trust receipt case.
"(12) The benefit of the trust receipt doctrine is not dependent upon any special virtue in the name or the precise form or appearance of the agreement.
If the agreement can in substance be shown to have been clearly made between
the parties in a proper case, the legal results will follow, even though resort is
had to the original credit agreement for the purpose of establishing the existence
of the security arrangement."
34718—31—FT 3




2

446

NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

CHART I
MILLIONS of JDOLLARS

TOTAL VOLUME
BANKERS ACCEPTANCES
0UT3TANNN$

JK^ i

v
i *»z^

/"VT^T)
,»*»«/

v v^

I9Z0

I9Z2

7"07>U. VOLUME\t
COMMERCIAL PAPER
OUTSTANDWq (ayMo<

::r

1914-

W-

I9Z6

CHABT I I
MILLIONS ./ DOLLARS
600




192T

I9Z3

/9e9

/9Z0

NATIONAL AND FEDERAL. RESERVE BANKING SYSTEMS

CHART

447

III

MILLIONS of DOLLARS

TOTAL

BANKERS ACCEPTANCES
OUTSTANDfNQ

CHAET
MILLIONS •/
taoo ~

IV

DOLLARS

TOTAL BANKER*J ACCEPTAN CES
OC/TSTA\NDWq

r

f

\

VH

/
1^—_




I

i

t

*944

I
192 6

i

448

MILLIONS

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
CHART V
^ _ _

o/ DOLLARS

I9Z5

1926

1927

1928

1929

i960

Mr. MEYER. May I ask a question at this point ?
The ACTING CHAIRMAN. Certainly.
Mr. MEYER. I should like to ask Mr. Bean what importance he
attaches to the warehouse department of the Department of Agriculture in their supervision of United States bonded warehouses?
Mr. BEAN. Governor, that is a very excellent cooperative agency,
with the established warehouse business of the country. T h e great
difficulty has been that too often it has been made to appear that
the license is the main thing. A Government inspection is a very
splendid thing, and in cases where a warehouseman has a Government license you do have just that added protection.
Now, in the South there are many Government licensed warehouses, but many of those warehouses, though well managed, are
not strictly independent warehouses. F o r instance, Anderson, Clayton & Co. several years ago stored a lot of their cotton in what were
practically their own warehouses, but they had a Government license
and were Government controlled and inspected and excellent security
and protection was afforded. I have said to the Department of
Agriculture's representatives on many occasions that if they would
put their service cooperatively with the American Warehousemen's
Association and work together they would find, in many sections
of the country, much more security than we get now. The license is
not the main thing. The warehousemen are training the merchants
with whom they do business to put in goods of the right character,
and to do their business in a way that will be satisfactory to the
banks. The Government inspectors depend too much on the fact
it is a licensed warehouse. I am trying to bring out the point that
the license is not the main thing. The supervision by the Government inspectors
Mr. MEYER. Does not the Government bonded-warehouse system,
in the first place, in addition to checking on the physical conditions




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

449

of the warehouse, building, and so forth, look into the question of
management ?
Mr. BEAN. Yes; it does.

Mr. METER. And continue to check it up ?
Mr. BEAN. Yes. I t is a very helpful agency, but I have always
tried to convince them that the Government agencies should cooperate with the established warehouse agencies rather than try to
be independent and show that no warehouses are of any real standing
unless they are Government licensed warehouses.
The ACTING CHAIRMAN. Senator Norbeck, have you anything on
that that you care to bring out?
Senator NORBECK. Not anything.
The ACTING CHAIRMAN. Havef you any statistics showing the
amount and character of dealers' portfolios of acceptances? Have
you anything on that?
Mr. BEAN. The volume carried by dealers?
The ACTING CHAIRMAN. Volume and character.
Mr. BEAN. Yes, sir; but not so much on the character. The dealers' portfolios for the last three years, 1928, 1929, and 1930, are as
follows:
I n 1928 the dealers' portfolios averaged $59,000,000.
I n 1929 they averaged $66,000,000.
I n 1930 they averaged $81,000,000.
At the present time, as to the reasons that affect that volume—
and we will take the month of December, 1930, for example, with a
billion and a half in acceptances—the dealers carried a portfolio
of only $52,000,000, which hardly paid their overhead. They could
well carry, as they did in January, 1930, $170,000,000, and at times
they have gone as high as $200,000,000. The dealers require a larger
portfolio than $52,000,000, but the demand for bills has been so
keen since May of last year that the dealers have been in the process
of taking bills in the morning and getting rid of them in the afternoon.
Mr. W I L L I S . That keenness has been due to the lowness of the
rates in the market?
Mr. BEAN. Yes,

sir.

Mr. W I L L I S . And before that they were not asking for bills at all—
the member banks ?
Mr. BEAN. The member banks were never in the market actively
until about the beginning of 1929.
Mr. W I L L I S . YOU think they will go out of the market when the
low-money period is over, as they did before ?
Mr. BEAN. I believe, in the matter of bill buying and holding bills,
they will conduct themselves as in other matters of bank management—when it is profitable to be in the market they will be buyers,
and when it is not they will not be in the market.
Mr. W I L L I S . But in England they are constant buyers?
Mr. BEAN.

Yes.

Mr. W I L L I S . H O W can they be made to do that here ?
Mr. BEAN. There is one possible way that has been mentioned, and
I think it might be well to bring it out here. If the reserve requirements of the banks were changed so that it would be permissible—
and I should like to emphasize the word " permissible "—for the 13




450

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

per cent reserve banks to carry a portion of their reserves in bankers'
acceptances, they would find it to their advantage to be in the market
all of the time.
Mr. W I L L I S . Carry them in their own portfolios ?
Mr. BEAN. Yes. The only difficulty about that plan, as I see it, is
that that is an artificial support of the market, and we try to avoid
this condition.
Mr. W I L L I S . I n order to do that you would have to be sure the
acceptances are thoroughly liquid ?
Mr, BEAN. Yes.
Mr. W I L L I S . We

have been carrying on an inquiry into this as well
as other matters. Questionnaires were sent to different reserve banks,
and one of them writes as follows:
With regard to the large increase in the volume of acceptances drawn for
foreign storage and shipment between foreign countries, it appears that a
substantial amount of this business originates in Germany and other central
European countries, and that it results, at least to some extent, from a continued shortage of capital and is not likely to be reduced until long-term loans
can be floated in this country or in London or in Paris. If long-term capital
were readily available, it is the belief that the amount of this class of bills
would be reduced to a considerable extent.

Another reserve bank writes:
It is undoubtedly true that acceptances arising from foreign storage and
shipments are to be explained by the curtailment of capital exports to central
Europe through 1929.

Assuming these two reserve banks are correct, is it not true that a
substantial part of our acceptances are merely a substitute for the
issue of bonds to finance central Europe ?
Mr. BEAN. I am not of that opinion, Doctor Willis.
Mr. WILLTS. You think these two banks are wrong in their observations ?
Mr. BEAN. I think they are not sound in their conclusions.
Mr. W I L L I S . But there has been a great accumulation ?
Mr. BEAN. There has been a great accumulation, but credit will
always seek the cheapest market, and we have been for months and
months either at or below the London market.
Mr. W I L L I S . YOU would agree, then, that the reserve system certainly ought not to carry the capital needs of European countries in
the form of acceptances ?
Mr.

BEAN.

Yes.

Mr. W I L L I S . And, if we are so doing, that would be a suitable
matter for consideration in connection with some change in the regulations %
Mr. BEAN. Very generally that is so. Our acceptances must be
what they are represented to be.
Mr. W I L L I S . I S there much renewal of acceptances now—refunding
of acceptances into new acceptances against commodities in storage?
Mr. BEAN. I think there is sometimes a confusion in reference to
what are known as revolving credits and renewing credits. I n a
revolving credit, where there is a general line established and used
over and over again, it may sometimes appear that these are renewed
credits, but in almost every case it is a new credit. T h a t is, it is a
new shipment or a new transaction.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

451

Mr. WILLIS, Did not the Reserve Board at one time issue a general
injunction against banks handling revolving acceptances?
Mr.

BEAN.

Yes.

Mr. W I L L I S . Has that injunction been withdrawn?
Mr. BEAN. A S far as I know, it has not been.
Mr, W I L L I S . I t is not being observed, is it?
Mr. BEAN. I t is being observed to this extent: That I believe the
banks and Federal reserve banks are careful to see, as far as they are
able to check it, that in a revolving credit each transaction represents
a new shipment or new lot of goods. They are respecting the wishes
of the board.
Mr. W I L L I S . We had some testimony here from a well-known
Southern banker within the last day or two that a great deal of cotton financing had been moved to the Northern States and converted
into acceptance financing as the result of the operations of the F a r m
Board.
Mr. BEAN. Yes.
Mr. W I L L I S . Assuming

that that board is carrying a large amount
of cotton and wheat in the warehouses, and assuming that it will
keep them off the market for some time, as I think is unofficially
stated to be the case, will not acceptances made against those commodities have to be constantly refunded into new acceptances ?
Mr. BEAN. Possibly; yes.

Mr. W I L L I S . Of course, these are possibilities that have to be
guarded against in legislation. Suppose you had a constantly increasing volume of acceptances being made, as these two reserve banks
have stated, against goods in storage in Europe, and particularly in
Germany, pending the time their bond issuing power here gets back
to normal, and suppose you had a considerable number of acceptances
also made for carrying wheat and cotton here at home. Is not that
likely to produce a very serious infringement on the liquidity of our
acceptances which you have so clearly set forth as essential ?
Mr. BEAN. To answer your question specifically yes or no, Doctor,
such a situation would probably develop a degree of liquidity that
would be unsatisfactory.
Mr. W I L L I S . I t is not a situation you would like to contemplate ?
Mr. BEAN. No; but I do not fear it, Doctor, because of the very
character of the acceptance business and the watchfulness of the
banks.
Mr. W I L L I S . The^ can not be very watchful or they would not have
allowed that situation to grow up. W h a t is the total amount of
acceptances carried against goods in storage in Europe ?
Mr. BEAN. I n storage, I do not know. I have tried repeatedly to
get that item divided as between storage and shipment, and I have
made inquiry of some of our largest banks but they inform me that
a very small part of this total is against goods in storage.
Mr. W I L L I S . Evidently these two reserve banks are inclined to
think a great deal of it is against goods in storage.
Mr. BEAN. Well, I think sometimes—with all due respect, Governor—some of the Federal reserve banks are not very well informed
on that subject. I mean that they may be in a section where they are
not closely watching or in touch with the acceptance business. We
have, for example, in Kansas City and the St. Louis district, prac-




452

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

tically no acceptance business in that territory. Atlanta is very much
the same.
Mr. W I L L I S . The governor of the Reserve Bank of New York
states that that bank acts for the others and informs them of everything that has occurred.
Mr. BEAN. I have great respect for the reserve banks, but I, too,
have to answer many questions for some reserve banks concerning
their acceptance problems. Furthermore, it is natural that they are
not as closely in touch with the situation as the New York bank.
The ACTING CHAIRMAN. They are not particularly interested.
Mr. BEAN. I t is perfectly natural; in the Kansas City district, for
instance, there are only two banks that ever do any acceptance business.
Mr. W I L L I S . I S it the practice at the present time among banks in
the interior to make acceptances and market them in New York ?
Mr.

BEAN.

Yes.

Mr. W I L L I S . Whereupon their own reserve bank may buy them
right back again through the New York bank ?
Mr. BEAN. After they have gone through the market.
Mr. W I L L I S . W h y should they not be directly sold to the reserve
bank in their own district?
Mr. BEAN. J u s t at the present time, for example, there is very
little market for acceptances in the Texas district.
Mr. W I L L I S . We were assuming that the reserve bank there did
actually buy them back.
Mr. BEAN. Yes; when they are in the market for bills.
Mr. W I L L I S . Why should they not have bought them from their
own member banks in the district?
Mr. BEAN. Well, that market question comes in there again. Governor Talley has advised his banks many times to put their bills out
through the market. If the bank in Dallas is taking on acceptances
they will indicate to the Federal reserve bank in New York that
they will be glad to take acceptances from that section. I t does not
always follow
Mr. W I L L I S . Does not that mean that the reserve system is not encouraging a market for acceptances anywhere except in New York ?
Mr. BEAN. NO ; I would not say that at all. They have encouraged
a market in San Francisco and Chicago and a great many bills from
the South are sold in the San Francisco Federal reserve district.
Banks in Mobile, for example, make acceptances which are sold in
San Francisco.
Mr. W I L L I S . The growth of markets has not been encouraged as a
feature of the Federal reserve banks except in those places you have
spoken of?
Mr. BEAN. There are only three or four Federal reserve sections
where a bill market is a natural thing.
Mr. W I L L I S . Apparently it is not very natural anywhere—using
the term " natural " in connection with " precedent "—because our
custom is very different from foreign countries. We are developing
our own precedents.
Mr. BEAN. We have had to, just as the French have found out they
can not copy our system for France.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

453

The ACTING CHAIRMAN. W h a t relation has that curve [indicating
on Chart I I , see p. 445] to the possible transfer or growth of the
acceptance business here? Has it grown out of exports? Does the
elevation of that curve [indicating] indicate there is a corresponding
decline of leading
Mr. BEAN. T O a great extent, it does.
The ACTING CHAIRMAN. That indicates that the acceptance business of a character that suits us in our market is coming from England and being absorbed here?
Mr. BEAN. Yes; particularly during the period when our rates are
at favorable variance with those in London. If that picture changes,
it will go right back.
The ACTING CHAIRMAN. Swing back ?
Mr.

BEAN.

Yes.

The ACTING CHAIRMAN. I n other words, it is seeking the cheapest
money always?
Mr. BEAN. Yes.
The ACTING CHAIRMAN.

I think that was rather an argument for
our present rate.
Mr. BEAN. I t is. I think the aim of our acceptance business should
always be to provide the most stable market at the lowest rate for
commercial credits.
The ACTING CHAIRMAN. Of course, there are other considerations
that have to be taken into account.
Mr. BEAN. Yes; we are not always exactly in competition with
the London market. We are more in cooperation. There are many
times lately that the British banks are quite willing to have some
business come over here, because they are not in a position to take
care of their customers there at their rates, and their volume of
acceptances is sometimes a little higher than the condition of their
money market would warrant. There is a very fine cooperative
movement between the London market and ourselves, and yet we are
distinctly different in our operation.
The ACTING CHAIRMAN. I think at this point it might be appropriate to indicate that difference to clarify the record. Suppose you
describe the English acceptance business ?
Mr. BEAN. I wish I knew more about the details of the London
market. Perhaps I can best sum it up by saying that in that market
acceptances come first. The adjustment for the day starts with a
knowledge of the volume of bills on hand—the bills purchased; the
dealers' volume.
I n our case it is secondary, or even third, although our market
to-day is more nearly independent than in the past, and has been
since 1928. We have always had, and probably always will have,
without some radical change, competition with the call-money market. We are feeling that pressure less just now. I n London they
have no call market or day-to-day loans, and for that reason the bills
come first. If our banks did not have that competitive influence
they would be using bills first, and we have had an illustration of
what would happen in the events of these last several months.
Mr. W I L L I S . Mr. Bean, do you favor term settlements on the stock
exchange ?




454

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. BEAN. Not along the line of the English system.
Mr. W I L L I S . You would not like to see settlement days applied to
the stock-exchange business ?
Mr. BEAN. No; not to the exchange business. We are not set up
for that. We have a different type of exchange machinery. We have
got a vast number of issues. The amount of money that would be
required to carry out a term-settlement system would be enormous.
Mr. W I L L I S . A vast amount of money as brokerage capital ?
Mr. BEAN. Yes.
Mr. W I L L I S . YOU think
Mr. BEAN. I doubt it.

that could not be supplied ?
We may well have some system that is
not yet evolved that will be more satisfactory than our present
method of day-to-day call loans.
Mr. W I L L I S . I S it true that acceptance makers have advocated a
term settlement?
Mr. BEAN. Yes; some are in favor of it, but it is not unanimous.
Mr. METER. May I ask a question at this point?
The ACTING CHAIRMAN.

Yes.

Mr. METER. T O return to the time when acceptances are created in
Texas, it would be in the autumn, would it not, in the harvesting and
marketing season?
Mr.

BEAN.

Yes.

Mr. METER. And at that time the Texas banks have their funds
pretty well engaged?
Mr.

BEAN.

Yes.

Mr. METER. So, when they are buyers of acceptances, it would be
more apt to be after the marketing season is over ?
Mr. BEAN. Yes.
Mr. METER. That

is the thing I had in mind, that probably the
Texas banks are using their liquid funds very fully and their buying
of acceptances would not be at the same time as the creation of the
acceptances in Texas.
Mr. W I L L I S . The buying by the reserve banks?
Mr. METER. The member banks have a great seasonal demand in
the fall and, of course, the Federal reserve bank has its funds to a
great extent engaged with the member banks, so that the Federal
reserve bank or member banks being in funds to buy acceptances,
would not just occur at the time the acceptances are created in Texas.
Mr. W I L L I S . That would impty that the Texas reserve bank was
not strong enough to meet the reserve requirements or accommodations of its member banks.
Mr. METER. Oh, no. The seasonal demand by the member banks
on the Federal reserve bank of Texas would be in the autumn when
the acceptances are being created. They have then the rediscount
demand so that they would not be in the same position where they
needed acceptances or could use them.
Mr. W I L L I S . But the reserve bank would always be in a position
to buy them.
Mr. METER. I t could if it had to, but right now, toward the end
of the year, the lowest ratio in the system is the Texas bank.
Mr. W I L L I S . But it has not been in a position in recent years where
it could not meet the requirements of the local banks ?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

455

Mr. MEYER. N O ; but if, in addition to making advances under
rediscounts, they were to take on all the acceptances created in
Texas
Mr. W I L L I S . There are not very many acceptances created in those
outlying districts, are there ? Did you not say in Kansas City there
were only two banks that made acceptances ?
Mr. BEAN. Yes.
Mr. W I L L I S . H O W

many in the Dallas district ?
Mr. BEAN. Fifteen or twenty.
Mr. MEYER. There is some volume of acceptances.
Mr. W I L L I S . I t would not be impossible for the Dallas bank to
absorb them?
Mr. MEYER. NO ; but the natural flow of acceptances would be to
places where there was a greater demand, because there was not the
peak in other places as in Texas, for other purposes.
Mr. W I L L I S . I t would seem to me to be the best thing to allow
each market to develop its own paper and finance it there.
Mr. MEYER. Well, what is the difference between the Texas bank
buying acceptances and rediscounting with other banks and letting
them flow into the other banks without going through the Texas
bank?
Mr. W I L L I S . I t seems to me the difference is the one often insisted
upon in the New York acceptance market, namely, building up and
keeping a very reliable market for the local banks. When that
market is in good order the local bank knows where it can go with its
paper. If the machinery is not developed or is allowed to fall into
disuse, you would not have any market there. When the Federal
reserve system was created it was said that you could not have
a market in the outlying districts. Experience shows that you must
have it. I t is easy to say that in some circumstances a bank can get
all the accommodation it needs by going to the New York district;
but the question, it seems to me, is whether it is worth while to
develop these local markets for this paper. I t seems to me that all
of the developments have shown that it is desirable.
Mr. BEAN. Texas is one of the districts where there is a steady
movement for the development of a local bill market. They have in
the Dallas district two very active bill dealers; one in Dallas and one
in F o r t Worth. Those dealers are not only finding an outside
market for many bills of the Texas banks, but they are selling the
bills locally when the rate is right and the banks have funds
Mr. W I L L I S . I think that is a most excellent situation and I should
think your association, as a promoter of the use of acceptances, would
desire to see that in every reserve district.
Mr. BEAN. I am keen to see that. May I illustrate what I mean
as to the desirability of that local market ?
Take, for example, one of the most important banks in Texas,
the First National Bank of Houston. There is a bank that has
stood out as one of the best banks in the South, and yet their bills
are not as readily ta*ken in the New York market as are the bills
of, say, the Philadelphia National Bank, or one of our New York
banks. I t means that the Southwest knows the First National
Bank of Houston, John Scott, and Mr. Law, and know that that




456

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

bill is all right and all through the Southwest the dealers can
sell that bill at a prime rate when it might not be possible at certain
seasons to move that bill at the prime rate in the New York district.
So, there is that desirability of a local market. I t will not hurt
our New York market the slightest to have the country develop its
own regional markets.
Mr. W I L L I S . I agree with you. Did I understand you to say
a moment ago or to indicate that the use of domestic acceptances
has been declining?
Mr. BEAN. I t has been under a peculiar test. I am not satisfied
it will ever become a very important division of our acceptance
business. I should like, however, to see the test in times of tight
money when the banks require every kind of credit accommodation
available. Acceptances would be one of these.
We have had a steady decline in commercial paper, we have
had a steady decline in bank loans at times, but the domestic acceptance has never seemed to come into its own as we originally believed
it would.
Mr. W I L L I S . Can you give any reason for that?
Mr. BEAN. A great many banks very frankly consider domestic
acceptances nothing more than commercial loans, and I quite agree
with them.
Mr. W I L L I S . And it is better to have the commercial loans in
some other shape ?
Mr. BEAN. Yes; in many cases.
Mr. W I L L I S . Would you see any harm in repealing that section
of the act ?
Mr. BEAN. I would not see any harm in it.
Mr. W I L L I S . NOW, about dollar acceptances: Is that form being
abused to your knowledge ?
Mr. BEAN. We have never noticed any indication that would lead
us to believe that. I t varies slightly. A t times it would be a little
higher and then go right down.
Mr. W I L L I S . D O you not think it would be better to limit the banks
that are allowed to make acceptances considerably more than they
are?
Mr. BEAN. I did not get that.

Mr. W I L L I S . D O you not think some more stringent restrictions on
the power to make acceptances would be helpful, so you would not
have as wide an acceptance-making power among the banks as now?
Mr. BEAN. I think possibly one of the difficulties is that we have
too many regulations now.
Mr. W I L L I S . What I mean is that—how many banks are making
acceptances now?
Mr. BEAN. About 150.

Mr. W I L L I S . Out of a possible total of
Mr. BEAN. I n the system alone we have 7,000.
Mr. W I L L I S . Would it not be better to have some more definite
requirements as to what banks shall make acceptances?
Mr. BEAN. Indicating the banks that may make acceptances ?
Mr. W I L L I S .




Yes.

NATIONAL AND FEDERAL/ RESERVE BANKING SYSTEMS

457

Mr. BEAN. I see your point. I wTould not favor that, Doctor.
You have there again that artificial action. Our business has grown
very well. Nothing is perfect, but our business has grown so well
that we have carried on a business in the neighborhood of $90,000,000,000 with a marvelously small amount of losses.
Mr. W I L L I S . $90,000,000,000 represents what?
Mr. BEAN. $90,000,000,000 of business has been financed by bank
acceptances in the aggregate.
Mr. W I L L I S . Since the beginning?
Mr. BEAN. Yes. I t was over $9,000,000,000 in the year 1930,
and I can say, even keeping in mind the instance of the Bank of
the United States, that to this day no investor has lost a dollar.
With respect to the fear concerning bills drawn for stored goods
abroad or for shipment between foreign countries, I am convinced
that the European banker has the most wholesome respect not only
for his standing with the American banks but a wholesome respect
for the regulations of the Federal Eeserve Board.
I have talked with a great many of them, not only Americans but
others coming from over there, and I believe that many of these
European bankers know the regulations of the Federal Eeserve
Board better than the American bankers. If there is the slightest
doubt of the bill being well received, the credits will not be offered
here. They will go to London instead, where all they want is a
general statement. They have no rules or regulations except such
as are known as custom.
Mr. W I L L I S . At the present time, under existing regulations—
you speak of there possibly being too many—is it not a fact that
while we are buying a great many acceptances of the kind you
are speaking of we are not inclined to buy a great many of those
the English regard as choice or prime, on the theory that the banks
that make them there do not file a statement with the reserve banks ?
Is it not a fact that our banks decline to buy acceptances which
are regarded in the English market as prime, and that the reason
they give for not buying them is, for example, that those banks have
not filed a statement with our reserve system ?
Mr. BEAN. T O some extent.
Mr. W I L L I S . I t would seem to be true that while, on one hand we
are not buying what are regarded as the best European acceptances,
on the other hand we are buying the stored-goods acceptances. I t
would seem to me we could improve our portfolio a great deal.
Mr. BEAN. YOU have a very fine screen for bills when they go
through our dealers' hands and Federal reserve banks. Many bills
are turned down because they do not measure up strictly to the regulations of the board.
Mr. W I L L I S . But many others are allowed to go through, as indicated by the line on your own chart relating to the growth of these
foreign-storage acceptances and domestic-storage acceptances. I am
asking these questions merely because I feel as you do, the immense
importance of developing this business. Do you not believe that if
this paper is to figure very largely in our banking transactions it
must not be allowed to degenerate into accommodation paper? Do
you agree with that ?




458

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. BEAN. I agree with you.
The ACTING CHAIRMAN. D O you think your views substantially
represent the views of your association ?
Mr. BEAN. Yes, sir.
The ACTING CHAIRMAN. These charts will be left here for

the

record ?
Mr. BEAN. Yes, sir.
Senator BULKLEY. Will you number them so that we may identify

them?
Mr. BEAN. They are legended for each line.
Mr. W I L L I S . Have you any statistics reviewing the general developing of the acceptance situation that you would care to file to make
your statement complete ?
Mr. BEAN. I think it possibly might be well to file this copy of the
Acceptance Bulletin, which contains the 1930 annual and previous
years, total, rates, and so forth.
The ACTING CHAIRMAN. If you will just extract those pages from
the bulletin and file them with the reporter, I think it will be desirable to have them in the hearing, and we are very much obliged to
you for your frank and full answers.
(The matter referred to is printed in full, as follows:)
H O W W E S T A N D I N FOREIGN TRADE

By O. K. Davis, Secretary, National Foreign Trade Council
In common with a general recession in trade the world over the foreign
trade of the United States dropped off measurably last year. The figures
for 1930, on the most recent estimates, show our exports to be approximately
$3,850,000,000 and our imports about $3,050,000,000, a drop of 26 per cent
and 31 per cent, respectively, from the figures of 1929.
Our foreign trade is still more than 30 per cent greater in quantity, however than before the war. Its recession in volume during the past year was
only between 12 and 15 per cent, as both our export and import prices for the
year were fully 15 per cent lower.
Import prices dropped more sharply than export prices because raw products and crude materials, which suffered the greatest price declines of all
commodities during the year, constitute the greater part of our imports.
This reduction in the prices of our principal imports compensated in many
cases for losses in our export trade. For example, although our exports to
Brazil were about $45,000,000 less for 1930 than for 1929, the reduced price
of coffee enabled American buyers to save slightly more than that sum on
our purchases of Brazil's chief commodity. In fact, the actual quantity of
our imports was within slightly more than 90 per cent of our purchases abroad
last year, denoting an active buying market in the United States for the
materials entering into our manufacturing industry.
In looking forward to 1931 American foreign traders are analyzing their
markets carefully and are preparing for the increased volume of business
that is sure to develop. The resources of our credit, as shown in the development of American foreign banking branches, on the one hand, and of the
systems initiated by credit departments of our large manufacturers, on the
other, have been developed to a very high point of efficiency. Our services
of transportation and communication are better than ever before. Our export
departments are better trained and are more at home in foreign trade.
In short, we possess advantages over our position in the corresponding slump
in 1921 that are the result of nine years' hard work. American foreign trade
has maintained its indispensable position in our general commerce throughout
the year and with better prospects for 1931 it is ready to resume the steady
advance it has made in all lines since the war.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

459

Open market purchases of bankers' acceptances by Federal reserve system—
Comparison with total outstanding volume
[In thousands of dollars]
Federal reserve
Federal
reserve
system's
own
holding
of bills i

Bought
for
foreign
correspondents

Total

$120,241
151,625
196,180
265,456

$442,435
448,667
448,809
440,326

$562,676
600,292
644,989
705,782

363,844
259,837
251,591
243,697
218,937
176,106
178,273
207,342
185,602
165,658
176,590
185,492
211,023
193,108
197,743
208,861
193,120
170,395
163,274
158,922
154,328
133,571
130,762
150,523
168,667
148,945
157,485
102,313
132,776
148,172
189, 240
175, 560
186,884
171,035
175, 203
209, 564
256,869
302,414
267,002
301,297
256,482
185,017
256, 538
271, 202
299,306
281,057
276, 084
295, 791

439.288
432, 327
434,006
417,422
425,826
428,938
428,561
426,541
431,670
433,259
437.289
439,103
435,194
431,411
432,624
433,843
458,450
459,830
471,522
478,315
480,094
483,454
478,027
481,315
478,082
477,930
481, 269
463.642
467.643
459,520
464,439
461,853
461,131
471,648
468, 574
465,458
459,983
459,446

469, 571
475, 524
496, 661
503, 362
505, 599
505,179
513, 346
518,664
523,891
526,924

803,132 $1,555,966,201
692,164
585,597
651,119
644,763
605,044 1,571,417,674
606,834
633,883
617,272
598,917 1,508,243,726
613,879
624,595
646,217
624,519
630,367
1,366, 734,157
642,704
651,570
630,220
634,796 1,339,383, 765
637, 237
634, 422
617,025
608,789 1,349,695,306
631,838
646, 749
626,875
638,754
565,955
1,304,831,222
600,419
607,692
653,679
637,413
648,015 1,382,206,855
642,683
643,777
675,022
716,852
761,860 1,413, 717,278
736, 573
776,821
753,143
688,379 1, 539,285,798
762,137
776,381
812,652
799,721 "I,"623,"899,"218"
799, 975
822,715

Including those held under resale agreement.




Total outstanding
volume of
bills end
of each month

Jan.
Jan.
Jan.
Jan.

29.
22.
15.
8.

1930

1929
Dec. SiDec. 24...
Dec. 18...
Dec. 11—
Dec. 4 . . . .
Nov. 27..
Nov. 20-.
Nov. 13-.
Nov. 6--Oct. 30...
Oct. 2 3 - .
Oct. 16—
Oct. 9 — .
Oct. 2 — .
Sept. 2 5 Sept. 1 8 Sept. 1 1 Sept. 4—
Aug. 28-_
Aug. 2 1 Aug. 14—
Aug. 7-_.
July 31—
July 24—
July 17—
July 10—
July 3 — .
June 26...
June 19June 12-.
June 5
May 29-.
May 22_.
May 15-.
May 8__.
May 1__.
Apr. 2 4 Apr. 17Apr. 10..
Apr. 3—.
Mar. 27-.
Mar. 20-.
Mar. 13..
Mar. 6—
Feb. 2 7 Feb. 2 0 Feb. 1 3 Feb. 6—

460

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

The first 49 in 19S0—Position of banks by months according to
volume
Position in January

Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

1. Guaranty Trust Co. New
York
2. National City Bank, New
York
3. Chase National Bank, New
York.
_
4. Equitable Trust Co., New
York
Acceptance
5. International
Bank, Inc., New York
6. Irving Trust Co., New York,.
Central Hanover Bank &
Trust Co., New York
7.
First National Bank of Bos8. ton, Boston
Bank of America, N. A., New
9. York
10
Continental Illinois Bank &
10. Trust Co., Chicago
New York Trust Co., New
11. York
13
Bankers Trust Co., New
12. York
Kidder Peabody Acceptance
13. Corporation, Boston
J. Henry Schroder Banking
14. Corporation, New York
Chemical Bank & Trust Co.,
15. New York
National Shawmut Bank of
16. Boston, Boston
First National Bank of Chi17. cago, Chicago
30
Bank of Italy National Trust
18. & Saving Association, San
Francisco
19. Chatham Phenix National
Bank & Trust Co., New
York
20. Brown Brothers & Co., New
York
17
21. French American Banking
Corporation, New York
22. Goldman Sachs & Co., New
York
21
23. Royal Bank of Canada, New
York
24. Lee, Higginson & Co
25. Philadelphia National Bank,
Philadelphia
24
26. Equitable Eastern Banking
Corp., New York
27. Huth & Co., New York
28. Harriman Bros. & Co., New
York
29. Canadian Bank of Commerce,
New York
30. Bank of New York & Trust
Co., New York
_
31. Union Trust Co., Cleveland-.!
32. Commercial National Bank
& Trust Co., New York___.
33. National Bank of the Republic, Chicago
34. American Trust Co., San
Francisco
35. Manufacturers Trust Co.,
New York
36. Interstate Trust Co., New
York
_._
37. Atlantic National Bank, Boston
_
38. Banca Commerciale Italiana
Agency, New York
Anglo & London Paris National Bank, San Francisco.
1
Merged with Chase National Bank.
* (New name) Bank of America National Trust
s
Merged with Chase National Bank.




outstanding

1

2

2

3

5

1

3

C1)
4
5

4

4
5

6

6

8

7

7
10
11

12

9

10

9

15

13

18

12

15

13

10

12

8

13

11

11

11

9

14

17

17

28

26

30

15

2 14

9
14
15
24
17

7
8

12

13
16

*

10

20

16

16

16

21

17

23

22

19

19

18

1

18

20

21

23

23
22

22
23

24
20

26
20

25

25

22

21

31
29

39

27
33
32

31

27

29

26

27

31
32
34

34

26

28
37
35
30
34

28

24

18

29

36

30

33

21

25

00
35
38

38
& Savings Bank

38

39
37

38

461

NATIONAL, AND FEDEBAL EESEEVE BANKING SYSTEMS

The first J^9 in 1930—Position of hanks by months according' to outstanding
volume—Continued
Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

Position in January
40. Central United National,
Bank, Cleveland
Pacific Trust Co., New York_
Marine Trust Co., Buffalo._.
Brooklyn Trust Co., Brooklyn
Public National Bank &
Trust Co., New York
Foreman-State National
Bank, Chicago
First Wisconsin National
Bank, Milwaukee.
Marine Midland Trust Co.,
New York...
Citizens National Trust &
Savings Bank, Los Angeles.
Guardian Trust Co., Cleveland__
__- _ _ -_
First National Bank, Detroit.
1

40
39
36

39
38
37

40

36

0)
33
37
40

37

37

37

40

33
36

31
40

31

32

28

27

27

40

40

36

36

33
34

27

38
32

27

38

24

40

36

40
35

35

36

37
- 39
40

Merged with Manufacturers Trust Co.
BANKEBS'

ACCEPTANCE

SURVEY

Bankers' acceptance totals December, 1930, 1929, 1928, 1927, 1926, 1925
Federal reserve
district No.—

Dec. 31,1930 Dec. 31,1929 Dec. 31, 1928 Dec. 31,1927

1—Boston. _.
2—New York
3—Philadelphia. _.
4—Cleveland
5—Richmond
6—Atlanta
7—Chicago
8—St. Louis
9—Minneapolis...
10—Kansas C i t y . . .
11—Dallas
12—San Francisco..

Dec. 31,
1926

Dec. 31,
1925

$144,846,528 $170,670,463 $145,468,255 $137,880,347 $81,630,444 $82,362,130
ll, 153,879,416 1,276,325, 656 954,945,831 790,792,139 562,711,280 581,047,770
24,588,842
17,443,309
16,183,361 8,294,750 11,354,612
25,652,174
15,148,388 9,819,059
26,385,913
15,442,210
27,183,550
9,394,246
12,890,372 10,273,775
10,366,544
11,809,212
13,411,734
15,212,960
17,436, 226 13,224,426
20,118,316
18,270, 381
19,002,106
17,194,319
37,879,941 28,818,803 22,322,308
88,793,504
50,969,590
100,642,397
2,306,560
3,518,351
2,028, 589
3,220,319
1,491,469
1,268,339
2, 530,132 4,700,768
5, 507,103
7, 210,712
10,043,903
4,874,885
459,014
242,832
1, 544,242
124,981
100,000
9,586,190
6,573,299
10,026,372
11,732,985
8,030,292
4,713,752
37,487, 895 26,240,234 23,890,271
71,388,385
50,628,487
73,006,859
1,555,966,201 1,732,436,388 1,284,485,780 1,080,580,565 755,360,281

773,735,592

Classification of hankers' acceptances as of December 31, 1930

Federal reserve
district No.—

1—Boston
2—New York..
3—Philadelphia
4—Cleveland
5—Richmond
6—Atlanta
7—Chicago
8—St. Louis
9—Minneapolis
10—Kansas City
11—Dallas
12—San Francisco

Imports

.

$22,118,428
164.519,894
10,022,026
1,622, 537
1,755, 582
3,000,999
5,809,664
326,360
159,103

Domestic

Warehouse
credits

To create
dollar
exchange

Based on
goods stored
in or shipped
between foreign countries

$30,785,264 $5,315,365
359,829,808 19,801,691
1,703,637 1,792,936
46,811
613,810
550,000
1,314, 723
1,859,292
5,960,125
4, 731,913
3,144,281

$15,045,326
163, 501,164
2,266,640
10,987,589
3,668,481
9,297,900
34,481,801
3,191,991
5,348,000

$650,000
47,595,951
1,530,000
500,000
626,000

$70,932,145
398,630,908
7,273,603
12,615,166
2,451,758

550,000

40,075,845

Exports

69,499
11,567,498

2,063,949
9,725,378

801
626, 722

4,308,250
19,386,450

750,000

130,800
29,332,337

220,971, 590

415,140,975

34,725,531

271,483,592

52,201,951

561,442,562

34718—31—:PT 3-




462

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
Comparison of classification totals, 1980, 1929, 1928, 1921, 1926, 1925
D e c . 31, 1930 D e c . 31,1929

$220,971,590
Imports.
Exports
415,140,975
Domestic. _
34,725,531
Warehoused
271,483, 592
credits
52,201,951
Dollar e x c h a n g e . . B a s e d o n goods
s t o r e d in or
shipped between
foreign c o u n t r i e s . 561,442,562

D e c . 31,1928

D e c . 31,1927

D e c . 31, 1926 D e c . 31,1925

$383,015,399
524,128,815
22,830,035

$315,614,399
496,652,654
16,197,909

$312,716,967
390,929,038
20,958,730

$283, 586,610
260,713,277
28,685,811

$311,443,033
296,951,022
25,605,866

284,918,886
76,285,155

173,589,807
39,152,668

196,784,066
28,316,432

115,882,201
26,179,328

103,494,356
19,248,553

130,875,332

40,313,054

16,992,762

1,555,966,201 1,732,436,388 1,284,485,780 1,080, 580,565

243,278,343

755,360,281

773,735,592

441,258, (

Bankers acceptances in 11 principal cities December, 1930, 1929, 1928,
1921, 1926, 1925
D e c . 31,1930

D e c . 31,1929

D e c . 31,1928

D e c . 31.1927 D e c . 31,1926 D e c . 31,1925

$141,632,131 $167,143,141 $141,738,046 $132,422, 518 $79,034,924
5,457,829
3,211,669
3,465,827
3,730,209
2, 583, 520
787,890,818 560,963,687
1,143,678,747 1,263,221,317 949,876,192
17,443,309
24,588,842
25,652,174
16,183,361
8,294,750
5,694,852
5,229,235
7,205,158
7,832,863
13,919,394
25,085,913
13, 500,915
25,715,910
8,451,860
1,253,718
389,866
452,996
1,237,517
701,500
1,891,260
1,548,988
757,698
2,657,295
1,210,515
16,709,746
15,944,818 11,795,096
16,961,021
16,221,393
87,082,048
71,368,380
32,549,526
33,375,310 25,697,704
5,120,912
10,797,683
6,047,695
2,759,287
2,138,551
1,812,389
2,994,319
2,054,860
3,346,351
1,319,068
10,010, 707
6,892,612
2,028,532
5,491,827
4,337,313
4,913,924
8,403,334
5,814,426
6,551,006
54,525,751
37,736,736
27,264,707 19,256,312
56,302,483
16,686,805
10,989,433
12,709,106
8,037,198
4,062,030
1,909,108
1,311,713
885,628
1,125,519
722,560

Boston
Providence.—
New York
PhiladelphiaBaltimore
Cleveland
Richmond
Mobile
N e w Orleans..
Chicago
Detroit
St. Louis
Minneapolis..
Dallas
S a n Francisco
Los Angeles—

Seattle

$79,212,097
2,085,658
579,836,022
11,354,612
7,181,031
2,263,661
712,770
14,678,124
18,833,906
1,422,135
990,589
4,409,385
16,626,544
4,108,706
434,255

Monthly volume for 1930 by Federal reserve districts
N o . 1, Boston
Jan. 31.
F e b . 28.
M a r . 31.
A p r . 30M a y 31J u n e 30.
July 31.
A u g . 30.
S e p t . 30.
Oct. 31..
N o v . 29.
Dec. 31.

$165,615,615
156,873,732
151,069,262
144,514,108
145,430,227
136,119,164
134,411,750
128, 741,380
121,944,362
137,395,045
145,141,142
144,846, 528

N o . 7,
Chicago

Jan. 31.
F e b . 28.
M a r . 31.
A p r . 30.
M a y 31.
J u n e 30.
July31_
A u g . 30.
Sept. 30
Oct. 3 1 .
N o v . 29.
Dec. 31.




$102,835,033
102,109,175
95,196,215
84,316,711
82,486,965
76,888,411
86,373,400
92,036,009
92,585,937
100,167,902
97,715,602
88, 793,504

N o . 2, N e w
York

N o . 3, PhilN o . 4,
adelphia
Cleveland

N o . 5,
Richmond

N o . 6,
Atlanta

$1,241 357,006 $25,910,044 $29,490,118 $12, 558,812 $16,143,843
1,185, 500,354 26,309,263 30,001,191 11,257,067
16,781,216
1,121, 040,708 23,930,082 29,227,725 10,483,703
17,553,193
1,030, 282,719 22,208,331 27, 520,618 9,067,078
17,243,408
1,008, 189,747 21,209,636 26,312, 596 8,531, 280 15,450,803
956, 295,597 20,291,598 21,501,092
8,411,193
12,221,739
550,019 20,687,126 23,770,021
8,069,339
11, 721,262
887,228 21,811,180 22,834,596
7,052,954
9,682,442
6,820,676
1,003, 662,813 23,142,056 22,694,938
16,482,943
8,302,026
1,108, 445,904 25,836,334 24.098.970
21,661,842
9,479,852
1,157, 656,545 25,417,728 25,649,076
20,733,967
1,153, 879,416 24,588,842 26,385,913 10,366,544
20,118,316

No. 8,
St. Louis

N o . 9,
Minneapolis

N o . 10,
Kansas
City

$2,818,203 $9,436,642 $1,769,663
2,290,714
8,008,198
1,231,821
2,098,474
7,324, 281 1,028, 058
1,636, 736 5, 600,995
1,043,749
2,279,594
988,915
3, 537.025
1,802,603
3,082,647
200,000
2,449,907
3,761,941
3,126,930
6,579,535
4,324,452
6,691,896
500,000
3,730,441
6, 527,752
500,000
3,518,351
5,507,103

No. 11,
Dallas

N o . 12,
San F ra ncisco

$8,369,354 $76,489,558
7,372,459
76,164,028
4,902,613
75,431,484
3,758,915
67,567,659
2,836,992
68,435,266
2,410,332
66,166,156
3,250,244
68,776,895
5,898, 518 64,227,610
6,945,779
62,748,188
6,361,609
64,457,746
7,230,463
71,635,106
6, 573,299 71,388,385

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

463

Acceptance total for all districts
1928
January *--..
February...
March
April
May
June
July
August
September.
October
November..
December..

1927

1926

1925

[$1,692,793,891 $1,279,271,163 $1,057,980,196 $773,604,424 $788,253,933 $834,824,681
785,487,908
767,127,116
808, 359,126.
1,623,899,218 1,228,027,796 1,056,389,782
745,659, 632 800,137,1961,539,285, 798 1, 204,979,653 1, 085,468, 742 809,445,721
757,073,786'
1,413,717,278 1,110,841,482 1,070, 712,002 810,965, 525 720,611,138
774,719,885
685,333,098
680,345,502
1,382,206,855 1,107,168,852 1,040,735,176
751,270,173
621,948,949
607,941,566
1,304,831,222 1,113,049,246 1,026,165,295
977,863,926
741, 258,404 600,486,807
569,386,316
1,349,695,306 1,126,698,805
782,055,029
582,634,951
555,166,837
1,339,383,765 1, 200, 536,146 952,051,109
863,823,006
614,151,287
607,025,151
1,366,734,157 1, 272, 270, 545 1,004,166,180
681,647,409
674,167,8ia
1,508,243,726 1, 540,738,123 1, 222,746,889 975,166,824
726,394,811
689,767,871
1,571,417,674 1,657,899,924 1,200,355,724 1,029,490,434
773,735,592:
1,555,966,201 1, 732,436,388 1, 284,485,780 1,080, 580,565 755,360,281

* End of month figures.

Acceptance total by classifications

Imports

January
February. _.
March
April
May.
June
July
August
September.
October
November.
December..

Exports

$336,213,059
334,839,644
313,674,496
295,685,571
294,608,448
276,086,768
259,987,262
254,941,580
240,916,033
244,106,885
242,684,036
220,971,590

Domestic

$509,818,905 $20,064,014
474,786, 235 25,830,655
465,533,358 15,037,946
429,191,029 18,139,204
406,296,314 20, 672,144
372, 815,953 19,114,937
379, 666,187 29,414,788
357,470,655 26, 251, 847
363, 584,154 26, 536,496
407,090,647 31,640, 578
421,709,985 33, 604, 210
415,140,975 34,725,531

Warehouses
credits

To create
dollar
exchange

Based on
goods
stored in
or shipped:
between
foreign
countries

$288,994, 766 $67,187,838 $470,515,309256, 050,866 62,828,533 469,563, 285219,496,816 58,206,456 467,336, 72&
170,865,700 56, 563,495 443,272,279>
157,930,935 60,912,681 441,786,33$
144,929,103 50,120,200 441, 764,261
137,098,167 48,487,014 495,041,88S
145,286,491 53,818,660 501, 614, 532*
174,045,782 63,106,849 498, 644,84&
234,989,437 57,812,207 532,903,972
273,613,464 56, 055, 231 543, 750,748
271,483, 592 52, 201,951 561,442, 562

Average bid and asked rate for bankers acceptances for year 1980
30 days
January
February...
March
April
May
June
July
August
September..
October
November..
December.Grand average
for y e a r . .




60 days

90 days

120 days

4.081-3.956
3.892-3.767
3.204-3.079
3.063-2.938
2.612-2.487
2.211-2.086
2 000-1.875
2.000-1.875
2.000-1.875
2.000-1.875
2.000-1.875
2.000-1.875

4.081-3.956
3.892-3. 767
3.180-3.055
3.063-2.938
2.612-2.487
2.211-2.086
2.000-1.875
2.000-1.875
2.000-1.875
2.000-1. 875
2.000-1.875
2.000-1. 875

4.081-3.956
3.892-3.767
3.180-3.055
3.048-2.923
2.607-2.482
2.211-2.086
2. 000-1.875
2.000-1.875
2.000-1.875
2.000-1.875
2.000-1.875
2.000-1.875

4.120-3. 995
3.892-3.767
3.208-3.083
3.149-3.024
2. 661-2. 536
2. 336-2.211
2.125-2.000
2.125-2.000
2.125-2.000
2.125-2.000
2.125-2.000
2.125-2.000

2.589-2. 464

2.587-2.462

2. 585-2. 460 2. 676-2. 551

150 days

180 days

4.245-4.120
4.017-3.892
3. 310-3.185
3. 274-3.149
2.817-2.692
2.461-2.336
2. 347-2.222
2. 375-2. 250
2.375-2.250
2.370-2.245
2. 250-2.125
2. 250-2.125

4. 245-4.12a
4.017-3.892
3.310-3.185
3.274-3.1492.817-2. 692
2.461-2.336
2.347-2.222
2.375-2.250'
2. 375-2.2502.370-2.245
2. 250-2.125
2.250-2.125>

2,841-2.716

2.841-2.71&

464

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
Discount rates of Federal reserve banks in effect January 31, 1931
Paper maturing—

F e d e r a l reserve
bank

Commercial, agriculW i t h i n 90 d a y s
tural, and
livestock
paper, not
Secured
otherwise b y U n i t e d B a n k e r s '
Trade
specified States Gov- acceptaccepternment
ances
ances
obligations

Boston. _ _ _
New York
Philadelphia
Cleveland.
.
Richmond
Atlanta
Chicago.
. . ._.
St. Louis
Minneapolis . . .
..
Kansas City
D a l l a s _..
S a n Francisco

2H
2
V/2
3
VA
3
3
3

m
V/
m
2

3

m

2y2
2
VA
3

2
V/2
3
3
3
3

3
3
3

VA

v/2

3

v/2

m
m

3

2H
2
V/2
3
V/2
3
3
3
V/2
VA
VA
3

After 90
days b u t
within 6
months,
agricultural and
livestock
paper

After 6
but within
9 months,
agricultural and
livestock
paper

VA
2

2

m

m

3
3
3
3
VA

3
V/2
3
3
3
V/2
VA
VA
3

m
3

D a t e established

Jan.
2,1931
D e c . 24,1930
J u l y 3,1930
D e c . 29,1930
J u l y 18,1930
J a n . 10,1931
Do.
Jan.
8,1931
Sept. 12,1930
A u g . 15,1930
Sept. 9,1930
Jan.
9,1931

Discount market rates—Prime bankers acceptances, call loans, commercial
paper, time money, and Federal reserve bank rate, January 2 to December
29, 1980, by weeks

1930

Jan.

Feb.

Mar

Apr.

May

June

July

Aug.

Sept.

2—
6...
13—
20—
27...
3—
10.. _
17...
24...
3...
10...
17—
24...
31...
7—
14...
21—
28...
5...
12...
19...
26...
2...
9...
16...
23...
30-.
7—
14...
21 —
28—
4
11—
18...
25...
2—
8...
15—
22...
29—

30 d a y s

60 d a y s

90 d a y s

120
days

160
days

180
days

Call
Prime
loan
90-day
renewal
comrate
mercial
stock
paper
exchange

90-day
time
money

Federal
reserve

Per cent Per cent P e r cent Per cent Per cent Per cent Per cent Per cent Per cent P e r
VArV/% iX^A
6
5 - 5 H l%~5
4 - 3 K 4 - 3 K 4 - 3 K m-4
5 -5H 4M-5
5
4 -3K 4 -3K 4 -3K 4K-4
VA-V/s
QA-VA
4K-4
4K-4
4K-4
4K-4
VA-tyi
4 H W-5H
VA-ty*
4^-4
4KHt
4K-4
4K-4
&A-5X
VA-4%
4M-4K
4M-4X
4^-4
4K-4
4K-4
&A-5X
4K-4
VA
4K-4K
4M-4K
4 -VA 4 - 3 K 4 - 3 K 4 - 3 K 4 K - 4
4K-4
4M-5
4^-5
VA
4^-5
4^-5
4
3K-3M 3K-3M 3K-3M 4 - 3 K 4 - 3 K
4^-5
4^5
VAr&A
3K-3M 3K-3M 3K-3M 4 - 3 K 4 - 3 K
K-35
4^-5
4^-5
4
4 -3K
K
^
v/s-m 3 K -- 3 M 3 K -~33M 3 K - 3 Mi 4 - 3 K 4 - 3 K
4 ^ - 4 ^ m-&A
4
3K 3% 3
4 -3K
VArm
3
3^-3^
3K-3^
4 -4H
4
3 3 ^ - 3 ^ 3 K - 3 H &A-3H
vA-m 3M-3K 3M-3K
VATVA
3H 4 - 4 ^ 3^-3M
Ws-m
2^-2^
2 ^ - 2 1 ^ 2VrW2
2Y4r2% 2%-2V8
4 - 4 ^ 3^-4
4
WArVA
3^-4^
33^-4
4
3 -2% 2 K - 2 ^ 2 K ~ 2 ^ 3 - 2 K 3 - 2 K 3 - 2 K
4 -4M
4
3^-4^
3 -2% 3 - 2 K 3 - 2 K 3 K - 3
3 K - 3 K 3M-3K
4
3Ji-4^
3^-4^
3>i-3K
3 -2% 3 - 2 K 3 - 2 K 3 K - 3
4
3^-3
3K-3M
3M~4^ 3 M - 4 ^
3K-3
3K-3
3^-3K
Ws-m 334-3K
3^-4^
4
3^-3M
3 -2K 3K-3
3^-3
3K-3
3M-3K
3 - 3 ^
2^-2^
2 M - 2 ^ 2 M - 2 K 2M-2M 3 - 2 K 3 - 2 K
3H 3 ^ - 4 ^
2^-2^
3^-4
3^-4
3
2K-2^ 2K~2^ 2 ^ - 2 ^
2 M - 2 K 2U~2Vs
3H-4
3
2^-2^
2M-2K
3^-3M
2 K - 2 H 2M-2K
234-2K 2 ^ - 2 K
2^-2^
3^-4
3^-4
3
2^-2M
2^2H
2M-2K 2 ^ - 2 K
2Ar2%
3^-4
3 -Z%
3
2 K - 2 H 2M~2K 2 ^ - 2 K
2Ar2Y% 2 K - 2 K 2Ar2%
3^-4
3 -3^
3
2M-2K
2M-2K 2 K - 2 J i 2 K - 2 ^
2^-2K
2H-2ys
23^-2>i
2M-3^t
2V2
2M-2K 2 M - 2 K 2 K - 2 K 2M-2M
2H-2V8
25i-2M
3^-4
23^-3M
2K-2
2A
2K-2
2K-2
2Ji-2K 2^-2M
2
3M-4
2M-3K
2^-2K
2^-2K
2 - I K 2 - I K 2 - I K 2K-2
2
3M-3M 2 H - 3
2M-2K 2Ji-2K
2 - I K 2 - I K 2 - I K 2K-2
3 -3M 2 ^ - 3 ^
2A
2 K - 2 M 2Vs~2H
2 - I K 2 - I K 2 - I K 2K-2
2
3 -3K 3 - 3 3 ^
2 K - 2 M 2H-2H
2 - I K 2 - I K 2 - I K 2K-2
2
3 - 3 ^ 2Ji-3^
2K-2M
2^-2^
2 - I K 2 - I K 2 - I K 2K-2
2
3
-VA 2 K - 3 M
2K-2M 2K-2M
2 - I K 2 - I K 2 - I K 2K-2
2
3 - 3 M 2>i-3M
2K-2J4 2 K - 2 K
2 - I K 2 - I K 2 - I K 2K-2
2 K ~ 2 ^ 2V8-2H
2A,
3
-VA 23i-3M
2 - I K 2 - I K 2 - I K 2K-2
2*Ar2y4l
2
2^-2^
3 -3M 2K-3
2 - I K 2 - I K 2 - I K 2K-2
2K~2^
2K-2^
2
3 -3M 2 ^ - 3
2 - I K 2 - I K 2 - I K 2K-2
2 K ~ 2 ^ 2K"2Ji
2H 3 - 3 K 2Ji-3
2 - I K 2 - I K 2 - I K 2K-2
2 ^ - 2 J i 2K~2Ji
2 H 3 - 3 ^ 2H-3H
2 - I K 2 - I K 2K-2
2 -IK
2K"2^
2
3 -3
2V^2Y2
2 - I K 2 - I K 2 - I K 2K-2
2H-2V4,
2 -2%
1H
2Vs-2H
2 - I K 2 - I K 2 - I K 2K-2

m

svs-m




m

m-m

m-m

zx-m

f&^

i«

ce7tf

%

VA
&A
VA
VA
4
4
4
4
4
334
VA
VA
VA
VA

m

VA
3
3
3
3
3
3
3
2V2
2Y2
2Y2
2Y2
2A
2Y2
2Y%
2Y2
2Y2
2Y2
2H
2Y2
2%
2Y2
2Y2

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

465

Discount market rates—Prime bankers acceptances, call loans, commercial
paper, time money, and Federal reserve hank rate, January 2 to December 29,
1930, by weeks—Continued

1930

Oct.

6...
14...
20—
27...
Nov. 3 . . .
10—
17. _.
24...
Dec. 1--.
8—
15—
22—
29...

30 days 60 days 90 days

Per cent
2 -IK
2 -VA
2 ~VA
2 -VA
2 -VA
2 -VA
2 -VA
2 -VA
2 -VA
2 -VA
2 -VA
2 -VA
2 -VA




Per
2
2
2
2
2
2
2
2
2
2
2
2
2

120
days

150
days

180
days

Call
Prime
loan
renewal 90-day
comrate
stock mercial
exchange paper

90-day
time
money

Federal
reserve

cent Per cent Per cent Per cent Per mtf Per cent Per cent Per cent Per cent
2
2K-2K 2V8-2H
2%-ZH VAr2%
234
-VA 2 - I K 2K-2
2
3 -3K 2 -2%
2H"2Ji 2*A-2H
-VA 2 - I K 2K-2
2H
2
2^-3
2K-2#
2 -3
-VA 2 - I K 2K-2
2H
2
2^-3
2*4-23*
2 -3
-VA 2 -IK 2K-2
2Y2
2
2^-3
2M-2K
2 -3
-VA 2 -IK 234-2
234
2
2^-3
2Ji-2K
2 -2^
-VA 2 - I K 2K-2
2H
2
2M-3
2Ji-2K 2H-2Ys
2 -2%
-VA 2 - I K 2K-2
2Vt
2
2^-3
2 -2«4
-VA 2 - I K 2K-2
2H-2H 2^-2K
234
2
2^-3
2 -2*4
-VA 2 -IK 2K-2
2H
2H-2H 2Ji-2K
2
2%-Z
2 -2*4
2^-2K
-VA 2 -IK 2K-2
2V*
2H-2H 2M-2K
2M-3
-VA 2 - I K 2^-2
2K 2%-Z
2H
2H-2H 2K-2K
2%-Z
2H-3
2
- I K 2 - I K 2K-2
2H
2M-2K 2K-2K
2H-3
2M 2%-Z
2
- I K 2 -IK 2K-2
2K-2K

FINANCIAL AND BUSINESS BAROMETER
Discount market rates—Prime

bankers acceptances, call loans, commercial paper, time money, and Federal reserve bank rate, January
January 81, 1931

30 days

1931

Jan. 1. Holiday
2_
_
2 (1.30 p. m.)
3
5
6
7 .
8
9
10
12
13
14
15
16
17
__.
19
20(1. p . m . )
21
22
23
24
26
27...
28
29
30
31

_

___

_
_

„_
___
„

..

.__
.„_
_.

_

.

._

_

._
__ _

_

2 -IK
1K-1M
VA-1%
VA-1%
VA-1%
VA-1%
m~i%
VA-1%
m-i%
VArVA
m-m
I%-VA
VA-VA
VA-VA
VA-VA
1%-VA
V/&-VA
1K-1H

iy^m

__

vAri%

_

VA-VA
VArVA

60 days

2 -IK
VA-1%

m-m
V/K-1%

VA-1%
VA-1%
VArl%
m-i%
VA-I%
1%-VA
1%-VA
VA-VA
1%-VA
VA-VA
VA-VA
VArVA
VArVA
1H-1H
VArVA
m-1%
V4-VA
VA-VA
\V*-VA

90 days

2 -IK
VA-1%
VA-I%
VAr-1%
VA-1%
VA-1%
VA-1%
VA-l%
VA-1%
VA-1%
1%~1%
1%-VA
1%-VA
1%-VA
I%-VA
1%-VA
VArVA
VArVA
VA-VA
VATTVA

IH-VA
VA-1%
VArVA
v4-m

120 days 150 days 180 days

2K-2
2 -IK
2 -IK
2 -IK
2 -IK
2 -IK
2 -IK
2 -IK
2 -IK
2 -IK
iK-l^
VA-1%
VA-1%
VArl%
VA-1%
VA-1%
1%-VA
i%-m
1%-VA
1%-VA
1%-VA
1%-VA
iyrV4
VArVA
1%-lH
i%-m

2H-2H
2K-2
2K-2
2K-2
2K-2
2K-2
2K-2
2K-2
2K-2
2K-2
2 -IK
2 -IK
2 -IK
2 -IK
2 -IK
2 -IK
VA-1%
VA-i%
VA-1%
1%-VA
1%-VA
1%-VA
1%-VA
VArVA
VAr\%
V 1
& *6
VA-1%

2K-2K
2K-2
2K-2
2K-2
2K-2
2K-2
2K-2
2K-2
2K-2
2K-2_
2 -IK
2 -IK
2 -IK
2 -IK
2 -IK
2 -IK
VA-1%
VA-1%
VArl%
1%-VA
1%-VA
1%-VA
1%-VA
1%-VA
VA-1%
VA-1%
VArl%

Call loan
renewal
rate stock
exchange

1, to

Prime 90day com- 90-day time New York
Federal
money
mercial
reserve
paper

3

2^-3

2^-3

2

VA

2M-3
2^-3
2M-3
2^-3
2^-3
2^-3
2^-3
2^-3
2^-3
2^-3
2M-3
2^-3
2%^
2%-3
2M-3
2J^-3
2M-3
2^-3
2^-3
2H-3
2^-3

2^-3
2^-3
2M-3
2%-Z
2 -3
2 -3
2 -3
2 -3
2 -3
2 -3
lM-2^i
VA-2H
i%-2y2
i%-2y2
VA-2A
VAr2A
VA-2A
i%-2y2
VAr2H
VAr2H
VAr2*A
1H-2H
VArm
VAr2A,

2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2

VAL

VA
VA.
VA
VA
VA
VA
VA
VA
VA
VA
VA
VA
VA

m

VA
VA
VA
VA
VA
VA
VA

38

Average asked rate for prime 90-day bankers' acceptances, January, 3.956; February, 3.767; March, 3.055; April, 2.923; May, 2.482; June, 2.086" July, 1.875; August, 1.875; September, 1.875; October, 1.875; November, 1.875; December, 1.875.




2
>
H
t—i
O

>

w
tei
co
tel

>
w
I—t

©

3
K
CD

Foreign exchange {cable rates)
F e b . 27,
1930

Par

$4. 866
.039
.052
.193
.402
.268

England
France
Italy
Spain
Netherlands
Denmark
Norway
Sweden
Switzerland
Germany
Austria
Czechoslovakia,
Argentine
Canada
Hong Kong
Calcutta
Manila

$4. 8606
.0391
.0524
. 1225
.4008
.2677
.2674
.2683
.1929
.2386
. 1425
.0296
. 8553
i .9946
.3800
.3625
.4975

.193
.238
.140
.029
.965
1.00

Mar. 27, Apr. 28, M a y 27,
1930
1930
$4.8650
. 0391
.0524
.1242
.4013
.2680
.2679
.2690
.1936
.2387
. 1425
.0296
. 8590
i

.3775
. 3625
.4975

$4.8621
.0392
. 0524
.1241
.4025
.2677
.2677
.2688
.1939
.2387
. 1425
.0296
.8814
i.9990
.3737
.3618
.4975

$4.86
.0392
.0523
.1220
.4022
. 2675
.2676
.2684
1935
. 2386
. 1425
.0296
8683
* .9995
.3475
.3612
. 4962

June 27,
1930

July 29,
1930

A u g . 25, S e p t . 29,
1930
1930

Oct. 27,
1930

$1. 8609
.0392
.0523
.1122
.4019
.2676
.2677
.2686
. 1938
.2382
.1425
.0296
.8129
i . 9998
.3137
.3612
.4962

$4.87
. 0393
.0524
.1125
.4028
.2682
.2681
.2691
.1944
.2390
1425
.0296
.8215
1
1. 0015
. 3200
.3612
.4962

$4.8597
$4.87
.0392
. 0393
. 0523
.0523
.1053
.1091
.4034
.4029
.2677
.2682
.2676
.2681
. 2686
.2689
.1940
.1944
.2381
.2388
. 1425
.1425
.0297
.0297
.8128
8234
i . 9993 i 1. 00125
.2325
.3300
.3606
.3612
.4962
.4962

$4.8584
.0392
.0523
.1087
.4027
2675
. 2675
.2685
.1941
.2382
.1425
.0297
.7731
i 1.0015
.3200
.3606
.4962

Nov. 24, Dec. 30,
1930
1930

Jan. 27,
1930

$4. 8537
. 0392
.0523
.1053
.4026
\ 2674
. 2674
2680
.1939
. 2381
. 1425
.0296
.7047
i . 9984
.2700
.3600
.4962

$4. 8562
. 0391
.0523
.1034
.4021
.2674
. 2673
. 2676
.1934
, 2377
1425
,0296
.6911
1
.9990
.2437
.3600
.4962

$4.8538
.0392
.0523
.1121
.4024
.2675
.2674
.2684
.1937
.2384
.1425
.0296
.7770
i 1. 0015
.3125
.3600
. 4962

Jan. 21,
1930
$4. 8662
0392
.0523
.1323
.4018
.2675
.2672
. 2684
1932
. 2389
. 1425
. 0296
9129
i . 9886
.4025
. 3637
.4975

i D e m a n d rate.

Security prices
F e b . 27,
1930
25 i n d u s t r i a l s t o c k s . ,
25 railroad s t o c k s
40 b o n d s ,




_

.
-

,_

.

M a r . 27,
1930

A p r . 28,
1930

M a y 27,
1930

J u n e 27,
1930

J u l y 29,
1930

A u g . 25,
1930

S e p t . 29,
1930

O c t . 27,
1930

N o v . 24,
1930

D e c . 30,
1930

J a n . 27,
1930

$315.58
130.83
87.04

$344.44
132. 55
89.24

$336.11
125.87
88.00

$328.88
124.48
87.91

$266.54
108.05
86.44

$292. 84
114.31
87.79

$283. 81
109. 70
88.56

$256. 21
103.43
88.78

$243. 25
96.15
85. 39

$233.85
91.89
84.55

$207. 36
79.41
82.12

$217. 55
92.85
85.61

J a n . 21,
1930
$299.47
127. 53
86.76
CD
CO

3
B

United States Government bonds
oo
F e b . 27,
1930

M a r . 27,
1930

A p r . 28,
1930

M a y 27,
1930

J u n e 27,
1930

J u l y 29,
1930

A u g . 25,
1930

S e p t . 29,
1930

Oct. 27,
1930

N o v . 24,
1930

D e c . 30,
1930

J a n . 27,
1931

$99.18
101.7

$100.8
101. 27

$100.2
101.25

$100.9
102.9

$101.1
102.26

$100.29
102.30

$101.00
102.28

$101.7
103.13

$101.5
103.18

$101. 22
103.25

$101. 26
103.18

$102. 5
103. 31

J a n . 24,
1930

3
F i r s t 3 H s , 1932-1947
F o u r t h 4J4s, 1938

_

$98.30
101.1

o

Federal reserve system
[In thousands of dollars]
Mar. 26,
1930

Feb. 26,
1930
Total deposits
Federal reserve notes in circulation
Total cash reserves
Total bills and securities
Reserve ratio
per cent..

Apr. 30,
1930

May 28,
1930

June 25,
1930

July 30,
1930

Aug. 20,
1930

Sept. 24,
1930

Oct. 22,
1930

Nov. 26,
1930

Dec. 31,
1930

Jan. 28,
1931

$2, 407,980 $2, 388,467 $2,433,933 52,420,849 |$2,459, 384 |$2,468,871 $2,469,067 52,483, 544 $2, 489,420 |$2,463,413 [$2, 517,133 $2,484, 475
1,637, 094 1, 572,900 1, 507, 268 1,465,867 1,402,869
3,186, 585 3, 242, 081 3, 251,597 3,220,829 3, 231,811
982, 225
1,138, 522 1,001, 090
958, 776
916,038
82.9
78.8
81.8
82.5
83.7

1,335,141 1,323, 708
3,178,188 3,107,057
911, 554
964,963
81.9
83.5

1, 347, 720 1, 368, 512 1,421,868
3,140, 788 3,168, 283 3,163,802
973,483
976, 900 1, 011,940
82.0
81.4
82.1

1,663, 538 1,478, 302
3, 081, 517 3, 278, 432
1, 351, 852
945,405
73.7
82.7

Jan. 22,

$2, 414, 978

>
o
o

1, 739, 241
3,171, 518
1, 222, 804
76.3

Money market
F e b . 27,
1930

M a r . 27,
1930

A p r . 28,
1930

M a y 28,
1930

J u n e 27,
1930

J u l y 25,
1930

A u g . 25,
1930

S e p t . 29,
1930

O c t . 27,
1930

N o v . 2,
1930

D e c . 30,
1930

J a n . 30,
1931

J a n . 24,
1930

>
w

Call loans—Stock exchange, ren e w a l - __
N e w Y o r k R e s e r v e B a n k rediscount rate
__
._
T i m e m o n e y (90 d a y s ) .
C o m m e r c i a l p a p e r (90 d a y s )
London discount rate
L o n d o n call rate__
-_
B a n k of E n g l a n d r a t e - _
_




3^
4
4H-5
4^-5
4H

4

zyt-m

z%-m

2J4
2H
ZVi

2%

m
ZYi

3
3
3 -4
3H-4
23/6
3

2
2H
3^-4
2H

m
3

2
2^
2H-3K
3 -ZH
2H
3

2

2H
2*4-3
3 -3H
2H
IK
3

2
2H
2-2^4
3-3M
2-2M6
1%
3

2

2H

2 -3
2J4-3
2^-2^6
3

2
2H
2 -2%
2^4-3
2H
2
3

m

m

2
2U-2H
2M-3
2^6
1H
3

2
m
-2H
2H-3
2^6-2^
2
3

M

43^

Q

4J^
tyi-4%

w
CO

4^

zn K
5
02

Commodity prices furnished by Guranty Trust Co., New York
F e b . 15,
1930
W h e a t N o . 2—Red, N . Y . , b u
C o r n N o . 2—Yellow, N . Y . , b u
Oats N o . 2—White, N . Y., b u
F l o u r , F a n c y M i n n . P a t e n t s , N . Y., b b l _
Pork, Mess, N . Y., bbl
Coffee, R i o , N o . 7, N . Y . , l b
__.
C o t t o n s e e d Oil, I m m e d . , C r u d e Southeast, l b
Sugar, G r a n . , N . Y . , l b
I r o n , N o . 2, F o u n d r y , P h i l a d e l p h i a , del.,
ton
Silver, N . Y., oz
Lead, N . Y., lb
Copper,
Electrolytic, early
delivery,
N . Y., lb
C o t t o n , M d l . Spot, N Y . , l b
S i l k — W h i t e , 13-15d, J a p . , c r a c k X X ,
N . Y., lb
L e a t h e r , U n i o n , N o . 1, C o w b a c k s , N . Y.,
lb
R u b b e r , p l a n t a t i o n s m o k e d sheets, r i b b e d ,
N . Y „ lb
Tin, Straits, N . Y., lb

M a r . 15,
1930

A p r . 15,
1930

M a y 15,
1930

J u n e 16,
1930

J u l y 15,
1930

A u g . 15,
1930

S e p t . 15,
1930

O c t . 15,
1930

N o v . 1,
1930

D e c . 15,
1930

J a n . 15,
1931

$1.35
1.03375
.5650
8.05
28.50
.1025

$1.2525
.9263
.51
7.35
30.50
.1025

$1.25125
.99375
.555
7.30
32.00
.0975

$1.24875
.96125
.5450
7.15
32.00
.0925

$1.15125
.90125
.48
6.85
32.00
.0950

$1.03625
.9875
.4850
6.45
31.50
.0725

$1.05375
1.1825
.52
6.75
31.50
.075

$0.10875
1.09
.49
6.35
32.50
.075

$0.98875
1.0125
.475
6.15
32.50
.0925

$0.96125
.73
.45
5.85
33.50
.0775

$1.0125
.90125
.3350
6.15
30.50
.07

$1.00875
.85875
.435
6.30
28.50
.0675

$1.40
1.06125
.57
8.25
26.50
.10375

.0750
4.851

.0700
4.900

.07375
.04802

. 07375
. 04802

.0650
.0441

.0700
.0470

.06625
.0441

.065
.04361

.06125
. 04361

. 06375
.04655

.06
.04557

.06125
.04606

. 07125
. 05096

20.76
.4338
.0625

20.76
.41875
.0550

20.26
.42375
.0550

18.26
. 32875
.051

17.76
.29125
.0475

.17875
.1485

. 13875
.1600

.09875
.0945

.09875
.101

.17875
.1590
4.70

4.50

4.50

.48

.47
.14875
.3585

.1475
.3630

.12875
.1635

.47

.1588
.3875

19.76
.4075
.0560

4.10

19.76
.33625
.0550
. 11875
.1345
3.70
1.45

18.50
.3425
.0520
.11125
.1320

18.00
.3525
.055
.105
.119

19.26
.3625
.055
. 10375
.1095

19.26
.36
.051
.09875
.104

18.76
.3625
.051
.11375
.111

J a n . 15,
1930

21.26
.4625
.0625
. 17875
.1745

3.00

2.85

2.35

2.45

.440

.43

.43

.40

.38

.36

.10
.2985

.08
.29875

. 07875
.2575

.09
.261

. 08375
. 25625

>

M

O

>
>

O

.48

.11125
.2950

3
H

.1475
.38875

2.95

2.50

2.95

4.60
td

.14125
. 32375

.11750
.2950

.2375

OR

i Nominal.




<
W

>
w
l-H

Q

w
H

K

ID

470

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Total

values

of exports

and imports of the United
January 17, 1931

States

corrected

to

EXPORTS AND IMPORTS OF MERCHANDISE, BY MONTHS
1930

1929

1928

1927

1926

1925

EXPORTS

$410.849,000 $488,023, 000 $410,778,000 $419,402,000
348,852,000 441,751,000 371,448, 000 372,438,000
369, 549,000 489,851,000 420,617,000 408,973,000
331,732,000 425,264,000 363,928,000 415,374,000
320,034,000 385,013,000 422, 557,000 393,140,000
294,659,000 393,186,000 388,661,000 356,966,000
266,650,000 402,861,000 378,984,000 341,809,000
297,765,000 380,564,000 379,006,000 374,751,000
312, 207,000 437,163,000 421,607,000 425,267,000
326,900,000 528,514,000 550,014,000 488,675,000
289,008,000 442,254,000 544,912,000 460,940,000
273,000,000 426,551,000 475,845,000 407,641,000

$396,836, 000
352,905,000
374,406,000
387,974,000
356,699, 000
338,033,000
368,317,000
384,449,000
448, 071,000
455,301,000
480,300,000
465,369,000

$446,443,000
370,676,000
433,653,000
398,255,000
370,945,000
323,348,000
339,660,000
379,823,000
420,368,000
490,567,000
447,804,000
468,306,000

12 months
ended December
3,841,207,000 5,240,995,000 5,128,356,000 4,865,375,000 4,808,660,000

4,909,848,000

January
February.
March..
April
May
June.
July
August

__
_

October
November
December

IMPORTS

January
310,968,000 368,897,000 337,916,000 356,841,000 416,752,000
281,707,000 369,442,000 351,035,000 310,877,000 387,306,000
February
March
300,460,000 383,818,000 380,437,000 378,331,000 442,899,000
307,824,000 410,666,000 345,314,000 375,733,000 397,912,000
April
284,683,000 400,149,000 353,981,000 346,501,000 320,919,000
May..
250,343,000 353,403,000 317,249,000 354,892,000 336,251,000
June
220,558,000 352,980,000 317,848,000 319,298,000 338,959,000
July
218,417,000 369,358,000 346,715,000 368,875,000 336,477,000
August
226,352,000 351,304,000 319,618,000 342,154,000 343,202,000
September
247,339,000 391,063,000 355,358,000 355,738,000 376,868,000
October
203,718,000 338,472,000 326,665,000 344,269,000 373,881,000
November
209,000,000 309,809,000 339,408,000 331,234,000 359,462,000
December
12 months
ended December
3,061,369,000 4,399,361,000 4,091,444,000 4,184,742,000 4,430,888,000

346,165,000
333,387,000
385,379,000
346,091,000
327,519,000
325,216,000
325,648,000
340,086,000
349,954,000
374,074,000
376,431,000
396,640,000

4,226,589,000

EXPORTS AND IMPORTS OF GOLD AND SILVER, BY MONTHS
Gold
1930

1929

Silver
1928

1927

1930

1929

1928

EXPORTS

January
February
March
April
May
June
July
August
September.
October
November

$8,948,000 $1,378,000
207,000 1,425,000
290,000 1,635,000
110,000 1,594,000
467,000
82,000
550,000
26,000
807,000
41,529,000
881,000
39,332,000
11,133,000 1,205,000
9,266,000 3,805,000
5,008,000 30,289,000
36,000 72,547,000

$52,086,000 $14,890,000 $5,892,000
25,806,000 2,414,000 5,331,000
97,536,000 5,625,000 5,818,000
96,469,000 2,592,000 4,646,000
83,689,000 2,510,000 4,978,000
99,932,000 1,840,000 3,336,000
74,190,000 1,803,000 3,709,000
1,698,000 1,524,000 4,544,000
3,810,000 24,444,000 3,903,000
992,000 10,698,000 4,424,000
22,916,000 55,266,000 4,102,000
1,636,000 77,849,000 3,472,000

12 months
ended
December
115,967,000 116,583,000 560,760,000 201,455,000




$8,264,000
6,595,000
7,814,000
5,752,000
7,485,000
5,445,000
6,795,000
8,522,000
4,374,000
7,314,000
8,678,000
6,359,000

$6,692,000
7,479,000
7,405,000
6,587,000
6,712,000
7,456,000
6,160,000
9,246,000
6,229,000
7,252,000
7,674,000
8,489,000

54,156,000 83,398,000

87,382,000

N A T I O N A L , A N D FEDERAL, R E S E R V E B A N K I N G
Total

values

of exports

and imports
of the United
It,
1931—Continued

States

corrected

Gold
1930

1929

SYSTEMS
to

471
January

Silver
1928

IMPORTS

January
February
March
April
May
June
July
August—
September
OctoberNovember
December

$12,908,000 $48,577,000 $38,320,000 $59,355,000
60,198,000 26,913,000 14,686,000 22,309,000
55,768,000 26,470,000
2,683,000 16,382,000
65,835,000 24,687,000
5,319,000 14,503,000
--_. 23,552,000 24,097,000
1,968,000 34,212,000
13,938,000 30,762,000 20,001,000 14,611,000
21,889,000 35,524,000 10,331,000 10,738,000
19,714,000 19,271,000
7,877,000
2,445,000
13,680,000 18,891,000
4,273,000 12,979,000
35,635,000 21,321,000 14,331,000
2,056,000
40,159,000
7,123,000 29,591,000
2,082,000
32,778,000
8,121,000 24,940,000 10,431,000

$4,756,000
3,923,000
4,831,000
3,570,000
3,486,000
2,707,000
3,953,000
3,492,000
3,461,000
3,270,000
2,643,000
2,660,000

$8,260,000
4,458,000
6,435,000
3,957,000
4,602,000
5,022,000
4,723,000
7,345,000
4,111,000
5,403,000
5,144,000
4,477,000

$6,305,000
4,658,000
5,134,000
4,888,000
4,247,000
6,221,000
6,544,000
6,496,000
5,739,000
7,319,000
5,448,000
5,120,000

12 months
ended
December
396,054,000 291,649,000 168,897,000 207,535,000

42,752,000

63,937,000

68,117,000

STATEMENT OF ROBERT M. COON, ASSISTANT TREASURER, DISCOUNT CORPORATION OF NEW YORK, NEW YORK CITY, N. Y.
The A C T I N G CHAIRMAN. Mr. Coon, will you please give us your r e lation to the New York Discount Corporation ?
Mr. COON. My name is Eobert M. Coon. I am assistant treasurer
of the Discount Corporation of New York.
The ACTING CHAIRMAN. Will you describe the functions of the
New York Discount Corporation?
Mr. COON. We were formed and are owned by about 10 of the most
important banks and bankers of New York, in 1918, and started business in 1919, primarily to develop and aid in the development of a
satisfactory discount market in this country. W e confine ourselves
entirely to the purchase and sale of bank acceptances and United
States Government securities.
The ACTING CHAIRMAN. And do nothing else ?
Mr.

COON. No,

sir.

The ACTING CHAIRMAN. I t is a discount business entirely ?
Mr. COON. The Government-securities business is slightly different.
The A C T I N G CHAIRMAN. Will you describe your dealings? There
are three or four questions that might probably come together. Describe your dealings in acceptances and how far does this business
depend upon the reserve system; that is, what proportion of transactions are those which take place between yourselves and the reserve
bank?
Mr. COON. Of course, we buy our bills from quite a variety of
sources. We might buy them from the accepting banks or merchants who draw the bills, or we might buy them from an exchange
bank. The latter are primarily bills that*come from the F a r East
and South America. W e might also buy from some one who previously h a d bought the bills for investment and wished to resell them.
We occasionally buy bills from the reserve bank, the latter acting as
agent.




472

The
Mr.

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
ACTING CHAIRMAN. That is not a large volume?
COON. NO.
W I L L I S . I S there a fixed rate of commission in this business ?
COON. We ordinarily try to make one-eighth of 1 per cent. If

Mr.
Mr.
we buy at iy2, we sell at 1%. I t is a very narrow margin of profit.
Mr. W I L L I S . That is one-eighth of a per cent per annum?
Mr. COON. For the life of the bill.
Mr. W I L L I S . Have you any graph or statistics showing the volume
of your business?
Mr. COON. Last year Ave purchased about $1,800,000,000. The
previous year was approximately the same amount.
The ACTING CHAIRMAN. That is still very small compared with the
English business, is it not?
Mr. COON. I do not know that we have any accurate statistics on
the English business.
The ACTING CHAIRMAN. I t is more than that in pounds. Of course,
Mr. Bean said about $9,000,000,000 of bills were drawn last year.
Mr. COON. That would make us handle about 20 per cent. We
ordinarily average 30 to 40 per cent of the business handled in New
York by dealers.
The ACTING CHAIRMAN. W h a t is the capital of the Discount Corporation ?
Mr. COON. $5,000,000 capital and approximately $5,000,000 more
in surplus and undivided profits.
The ACTING CHAIRMAN. What do you think the minimum capital
of a discount corporation should be ?
Mr. COON. I do not see how one can get along with less than two
or three million dollars. I t depends on how extensively one wishes
to go into it. We stand ready to buy any amount of bills offered to
us. If you run a $100,000,000 portfolio, you have to borrow very
heavily from the banks.
The ACTING CHAIRMAN. What expert knowledge have you in the
scrutiny of bills? What is your risk there, in other words?
Mr. COON. Well, we have never lost a nickel in the more than 12
years we have been in business.
The ACTING CHAIRMAN. That is, after all, a matter of human equation, is it not, chiefly?
Mr. COON. We plan to know with whom we do business, and we
scrutinize each bill that goes through.
The ACTING CHAIRMAN. D O you have or make any scrutiny or inspection of the goods, whether they are warehouse goods, and so
forth?
Mr. COON. Nothing except what the bank places on the bill.
The ACTING CHAIRMAN. That is the last word with you?
Mr.

COON.

Yes.

Mr. W I L L I S . I t is reported that a bank sometimes decides on the
amount of acceptance credit it wants. Say it is $500,000. The bank
breaks it into rough fractions like $24,920, and so forth, and stamps
those bills as eligible, which perhaps they are, eventually, as they
represent a large series of transactions, and then puts them through
the market. Would you have any way of detecting anything of that
kind?




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

473

Mr. COON. No; we merely take the bank's word.
Mr. W I L L I S . Have you ever noticed that the bills are footed up
and total those round amounts ?
Mr. COON. We see that, sometimes.
Mr. W I L L I S . W h a t does that suggest to you ?
Mr. COON. We see it particularly on foreign bills. Such amounts
are probable multiples of a foreign currency; that is, 100,000 marks.
Mr. W I L L I S . Does it not mean there is no real transaction behind
such acceptances or series of acceptances?
Mr.

COON. N O .

Mr. WILLIS. I t does not suggest to you that the acceptances are
finance paper?
Mr. COON. I do not think so. As far as bills covering foreign
goods in storage are concerned, I think they are a very minor p a r t
of the total figure.
Mr. W I L L I S . Of what figure?
Mr. COON. This figure covering goods stored in and shipped between foreign countries. I am quite certain they are very much in
the minority.
Mr. W I L L I S . W h a t do you think of these quotations I read from
two of the reserve banks, saying that the growth of that kind of
acceptances was due to shortage of long-term credits ?
Mr. COON. I would say that those statements were made by small
banks not in very close touch with the situation.
Mr. W I L L I S . N O ; they are not small banks. However, you do not
agree with them?
Mr. COON. We are very much of the opinion that the increase has
been due to our differential in rate as compared with London.
The ACTING CHAIRMAN. D O you believe that the reserve bank
should go along supporting the market and practically making the
market, as it does at the present time? I s it practically making a
market ?
Mr. COON. I n the recent easy-money period the Federal reserve
rates or their attitude toward the market have been comparatively
unimportant.
The ACTING CHAIRMAN. Until recently the Federal reserve has
been a big factor ?
Mr. COON. Yes. I t depends entirely on the condition of the money
market.
Mr. W I L L I S . W h a t do you think would be necessary to make a
regular stable market for acceptances entirely independent of the
reserve system, such as we have in England ?
Mr. COON. I suppose it is mostly a matter of keeping at it and
trying to educate the banks into the value of holding bills.
The ACTING CHAIRMAN. Largely a matter of volume and importance?
Mr. COON. We have, all the time we have been in business, been
trying to educate the big New York banks to hold a secondary reserve in bills irrespective of the call-money rate.
The ACTING CHAIRMAN. YOU would like to see a differentiation
there established as between the acceptance rate and the call rate?
Do you think that is a feasible thing to do?




474

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. COON. I do not believe I understand your point.
The ACTING CHAIRMAN. YOU spoke of making your own rate.
How would you do that? How would you differentiate that as between the normal rate and the money market?
Mr. COON. Well, of course, our recent low rates have been related
almost entirely to the price of call money.
The ACTING CHAIRMAN. Yes; but has that any particular relation
to the acceptance business?
Mr. COON. Oh, yes. When we can borrow money at 1 per cent, as
we have been able to do in the past month, we are quite willing to
buy bills at 1%.
The ACTING CHAIRMAN. Is there any way of differentiating, as to
rates, between the acceptance business and any other business?
Mr. COON. Well, we ordinarily think we should receive a better
rate on bills than the stock brokers should receive.
The ACTING CHAIRMAN. That depends on the character of the
business ?
Mr. COON. Yes. We think our collateral as eligible collateral ought
to command a better rate. I t frequently happens that we are able to
secure about one-half of 1 per cent better rate than the stock broker
can get.
The ACTING CHAIRMAN. W h a t can be done to broaden and
strengthen the real acceptance market ?
Mr. COON. Abroad?

The ACTING CHAIRMAN. Here or abroad.
Mr. COON. Well, it has been going quite satisfactorily of late.
The ACTING CHAIRMAN. I t has been growing rapidly enough ?
Mr. COON. We are quite satisfied in general.
If possible, I should like to insert the following statement:
We believe that probably the greatest service which the open discount market
(composed of recognized dealers) can render the general banking situation is
in its ability to serve as a buffer between the member banks and the Federal
reserve. In order to command the confidence of the financial world the large
New York banks should not be continuous borrowers at the reserve. The
rediscount privilege should be used for emergencies only, and ordinary day-today needs should be adjusted by resorting to the discount market through the
sale of bills or calling of loans. In order to maintain this custom the discount
market must, of course, be permitted to resort to the open-market facilities of
the reserve banks; this requires an active open-market policy on the part of the
reserve banks adjusted reasonably closely to the prevailing open-market rates.

The ACTING
low basis ?

CHAIRMAN.

Your business pays, does it not, even on a

Mr. COON. We manage to pay dividends.

Mr. W I L L I S . Do you handle trade acceptances at all?
Mr. COON. Only with bank indorsements, and it is only a small
proportion of the total. Most of the trade bills we see come from the
Far East and cover silk.
Mr. W I L L I S . Have they declined in recent years?
Mr. COON. I do not know that there are any statistics. I think our
turnover in the last two years has been approximately the same.
Mr. W I L L I S . What is the reason the trade acceptance has not
flourished—the domestic trade acceptance?
Mr. COON. We have never been willing to purchase domestic trade
acceptances in any quantity.
Mr. W I L L I S . W h y not ?




NATIONAL. AND FEDERAL RESERVE BANKING SYSTEMS

475

Mr. COON. We are primarily interested in bankers' acceptances.
A trade bill, unless it bears a prime indorsement, involves a credit
risk.
Mr. W I L L I S . Suppose it has a banker's indorsement?
Mr. COON. We would probably buy it.

Mr. W I L L I S . There are not very many of them on the market?
Mr. COON. Very few of that class.
Mr. W I L L I S . W h y has not that phase developed to any great extent? Mr. Bean's association was formerly called the Trade Acceptance Council, was it not?
Mr. BEAN. Originally.

Mr. W I L L I S . Why did you cease to call it that ?
Mr. BEAN. I t was felt that we had better broaden it to make it
cover both trade and bankers' acceptances, and as for trade acceptances, if I may answer the question you put to Mr. Coon—and I
find my remarks in support of trade acceptances sometimes come
back to me. I used to talk a great deal about trade acceptances but
I am now of the opinion trade acceptances will never be a great
medium in business.
Mr. W I L L I S . Why?
Mr. BEAN. Early experiences with the trade acceptance in the
years following immediately after the Civil W a r were successful
because of a demand for some form of paper through which merchants could settle their accounts when money was scarce and bank
credit limited.
I n the most recent campaign an effort was made to have the trade
acceptance take the place of the open book account and the cashdiscount system which has grown extensively in the past 25 years
of keen business competition.
Merchants able to settle accounts promptly prefer to take their
discount; and those who need more time prefer to get an extension
of their open account to giving a trade acceptance, which they erroneously think is an indication to the business world that they are
a slow credit risk.
The trade acceptance remains a fine credit instrument but business
men either can not or will not see it.
Mr. W I L L I S . D O you agree with that, Mr. Coon?
Mr. COON. I think so.

Mr. W I L L I S . Then the trade acceptance has no future?
Mr. BEAN. With the exception, possibly, of the raw silk trade.
They use trade acceptances exclusively there, and they have the finest
type of trade acceptances.
The ACTING CHAIRMAN. Does the dealer's indorsement help any
where the Federal reserve knows the credit data of its member banks ?
Mr. BEAN. There are three dealers whose indorsements are recognized.
Mr. W I L L I S . With the volume that Mr. Coon speaks of, the dealer's
indorsement could not be of any great element of value if there was
any mistake whatsoever in judging the risk. If you had many banks
like the Bank of the United States, for example, your dealer's indorsement would not last very long.
Mr. COON. N o ; but we have had not less than $100,000,000 contingent liability in the last year or more, and we have never lost a
nickel.



476

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. W I L L I S . I S there much risk in putting your indorsement on a
bill?
Mr. COON. If the Federal buys a bill it requires 3-name paper.
Mr. WILLIS. Has not that the effect of narrowing the number of
dealers that can deal with the Federal reserve ? If they say, as Mr.
Harrison said the other day, they do not want anyone indorsing
paper who has a capital of less than $1,000,000, that materially reduces the number of dealers who can get into the acceptance market,
and yet from what you said the dealer's indorsement is really just a
gesture, since it is really very rarely availed of.
Mr. COON. If a dealer had indorsed the paper of the Bank of
United States recently it would have been of some consequence.
Mr. WILLIS. How do you account for the paper of the Bank of
United States circulating right up to the last ?
Mr. COON. We never did buy their bills.
Mr. W I L L I S . There was, probably, then, a faulty credit analysis?
Mr. COON. They (the reserve bank) had the third name, and that
made it eligible.
Mr. W I L L I S . Ought an indorsement of that kind to relieve them of
the necessity of carefully analyzing the names on the back of the
bankers' acceptances ? Is there not a responsibility to see that only
paper is bought that is indorsed by prime indorsers only? Apparently the only one they should have discriminated against was the
one they bought.
Mr. COON. Possibly; but they did not lose any money on it.
Mr. W I L L I S . I S there not a great responsibility on the Federal
reserve bank to maintain a liquid market for acceptances ?
Mr. COON. Possibly.

Mr. WILLIS. Do you not think so, Mr. Bean ?
Mr. BEAN. Yes, sir.
Mr. W I L L I S . Are there any changes in the rules

or regulations of
the reserve system under which acceptances are bought that you can
suggest, or are they satisfactory ?
Mr. COON. I think things are satisfactory. I think our bankers
are developing a mass of experience which is more valuable than
any rules.
The ACTING CHAIRMAN. YOU want flexibility?
Mr.

COON.

Yes.

Mr. W I L L I S . I S there any favoritism in present methods of dealing
with acceptance corporations on the part of the reserve bank, as far
as you know?
Mr. COON. I do not know of such.
The ACTING CHAIRMAN. Would there not naturally be, in view of
the fact that credit is involved ?
Mr. COON. Possibly so in regard to the volume of business handled.
Mr. W I L L I S . Has that caused much dissatisfaction at times?
Mr. COON. I do not think so. Each dealer receives business in
proportion to his resources.
Mr. W I L L I S . D O you deal with all reserve banks more or less, or
just the local ones?
Mr. COON. Almost entirely with the New York bank.
The ACTING CHAIRMAN. What would your trade area or region
include? You cover the whole country?
Mr. COON. To a greater or less degree.




NATIONAL AND FEDERAL KESERVE BANKING SYSTEMS

477

The ACTING CHAIRMAN. And are you pretty free from competition ?
Mr. COON. No; we have active competitors, several of them.
The ACTING CHAIRMAN. How many associations are there like your
own?
Mr. BEAN. There are really seven. They are of different types.
I t might be of interest to put that in the record—the different types
of bill houses.
There is the Discount Corporation; that has, as stockholders, several New York banks—6 or 7 New York banks and possibly 8.
Then there is the First National, Old Colony Corporation, and
Shawmut Corporation, and the National City Co. Those are affiliates of their respective banks.
Then there is the house of Salomon Bros. & Hutzler. They have
a branch of a general bond and security business in which their
acceptance business is conducted. Then there is the M. & T. Co.
That has taken the place of the C. F . Childs Co. While it is owned
by the M. & T. of Buffalo, it is an independent bill house.
Then there is Alexander T. Stephan. He is the only independent
bill dealer with his own capital and not tied in with any banks.
Mr. W I L L I S . There is only one out of seven not owned by banks?
Mr.

BEAN.

Yes.

Mr. W I L L I S . What other discount areas are there?
Mr. BEAN. San Francisco has one house that is not particularly
represented in New York. That is the American Securities Co.
They also have offices of the National City Co. and the First National Old Colony. Chicago has offices of the Shawmut and First
National Old Colony.
Mr. WILLIS. And the Continental?
Mr. BEAN. The Continental and the First National. I n Boston
there are offices of the First Old Colony, Shawmut, and National
City Co.
Mr. W I L L I S . How is the South represented?
Mr. BEAN. There is nothing all down the Atlantic Seaboard away
through New Orleans and into Texas. That business is taken care
of in New York or on the Pacific coast.
I n Fort Worth there is the Fort Worth Co., a subsidiary of the
Fort Worth National Bank. They do a very extensive bill business
in season.
Mr. WILLIS. And in Houston?

Mr. BEAN. There is nothing in Houston.
Mr. W I L L I S . Did you not speak of the First National Bank of
Houston as having a subsidiary ?
Mr. BEAN. The First National of Dallas. May I say, in regard
to trade acceptances again, that that business is not featured by our
organization for the reasons that I spoke of. There is a missing law
there that makes it possible for anyone to use a trade acceptance
for purposes other than is indicated on the face of the bill. When
}ou get into court you can always convict them for fraudulent use
of a credit instrument or receiving money under false pretenses or
grand larceny, but, regardless of that, you have an instrument that
is subject to that abuse, and every time you get a conviction you
34718—31—PT 3




4

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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

lower the opinion of the public, and rightly, on trade acceptances.
I t is unfortunate, but that is the condition.
Then there is opposition on the part of banks generally to a large
volume of trade acceptances in the place of an individual promissory
note.
Mr. W I L L I S . I should like to ask one more question, and then I
have finished: W h a t would be the harm in having business men
who obtain acceptances from the banks, deal direct with the Federal reserve banks, and sell their acceptances to them ?
Mr. BEAN. I take it you mean in place of the present system of
having banks sell bills direct to dealers?
Mr. W I L L I S . I n other words, what reason is there why, for example, the United States Steel Corporation or the International
Harvester Co. should not sell the acceptances of their banks direct
to the reserve banks ?
Mr. BEAN. Well, there is no reason why they could not do t h a t
Of course, the Federal reserve must have the bank indorsement.
Mr. W I L L I S . Must have the bankers' acceptance?
Mr. BEAN. Yes. But so far as the market is concerned, aside
from the Federal, it is very largely a matter of facility and convenience. F o r example, if you have a bank with 100 customers,
very fine concerns, and the market is very anxious to get bills, you
have now a single seller, which is the accepting bank, and in the
other plan you would have 100 telegrams or telephone calls to send
to all the principal drawers.
Mr. W I L L I S . Do*you see any reason, Mr. Coon, why the reliable
business house should not sell direct to the reserve bank acceptances
which it has obtained from its own bank?
Mr. COON. We believe that the bills should be sold to the reserve
banks only when the banks as a whole need reserve credit; in other
words, fresh bills should not be dumped into the Federal when the
open market has a demand for the bills.
Mr. W I L L I S . What is the English practice? There is nothing to
prevent the large English merchant from going to the Bank of
England with its bankers' acceptances, is there ?
Mr. COON. I am not certain.

Mr. BEAN. I believe that is possible.
Mr. W I L L I S . J u s t as it is possible to carry an account with the
bank?
Mr. BEAN. I believe the system as a whole is in better control if the
Federal is dealing with its member banks or with dealers. The whole
trend of the acceptance business in the last few years, particularly,
has been toward a more independent, clean-cut position than it formerly was, and the Federal to-day is very much less a factor in the
bill market than formerly, coming in only when necessary and letting
the bill market develop itself, and without additional legislation I
believe that will happen.
The ACTING CHAIRMAN. We are very much obliged to both of you,
Mr. Coon and Mr. Bean, and this hearing is adjourned now until
next Monday at 10.30. Mr. Stephan, who was expected to be here
to-day, was not able to be here.
(Whereupon, at 11.55 o'clock a. m., the committee adjourned until
Monday, February 23, 1931, at 10.30 o'clock a. m.)




OPEBATION OF THE NATIONAL AND FEDEEAL BESEEVE
BANKING SYSTEMS
MONDAY, FEBRUARY 23, 1931
UNITED STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY,

Washington, D. G.
The subcommittee met, pursuant to adjournment, at 10.30 o'clock
a. m., Hon. Carter Glass (chairman) presiding.
STATEMENT OF PROF. W. Z. RIPLEY, OP HARVARD UNIVERSITY
The CHAIRMAN. We have a quorum, and the committee will come
to order.
Professor, I assume that you know the business we are engaged
in here. We are making an inquiry here about the existing banking
situation with a view to determining what may be done in the way
of modifying the national banking act and/or Federal reserve act
to avert a recurrence of the troubles we have had in recent years,
and knowing that you are quite familiar with all the details of
banking, with, we think, a pretty clear understanding of the philosophy of banking, we desired you to come down and offer us any
suggestions you might care to make.
We shall be glad to have a general statement from you and then
take the privilege of asking you some questions.
Professor RIPLEY. I am afraid, Senator, that the principal statement I shall have to make will be a disclaimer of information in that
particular field. Your letter apparently reached my home after I
had left. I have been away several days, so there was no way of
knowing just what it is you desire.
The CHAIRMAN. Have you had an opportunity to examine the bill
that we had before the Senate, No. 4723 ?
Professor RIPLEY. I am sorry to say, sir, that I have not. I t is all
a complete blank to me, owing to the circumstances. I really have
no technical knowledge in the field of pure banking.
I n the fields which lie so close, namely, movements of securities and
investments—railroads particularly—there is possibly more proficiency.
The CHAIRMAN. Yes; I have had the pleasure of reading some of
your articles on the railroad situation.
Professor RIPLEY. A suggestion which I should be glad to press
upon your attention, if it has any bearing here, is emphasis upon
accounting standards and statements rendered public for all corporations like banks and public utilities which are engaged in interstate commerce. The phenomenal rise of public utilities, particu-




479

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NATIONAL AND FEDERAL RESEKVE BANKING SYSTEMS

larly, which touch the surplus capital or savings of the people is, of
course, a matter of record. I feel very strongly that there should be
a further intervention of the Federal Government in the direction
of publicity of the finances and accounting of these companies.
Mr. WILLIS. Before you go into that, Professor Ripley, may I ask
whether you think the investment and trust situation has changed
materially from the situation when you wrote " Main Street and
Wall Street"?
Professor RIPLEY. N O ; I think it is accentuated. To my way of
thinking, we have had merely a confirmation of what the investment
trusts promised five years ago. They undoubtedly played a very
large part in the inflation of quotations, I think, culminating in 1929.
Mr. WILLIS. One of the resolutions the Senate intrusted to this
committee was the relation of investment trusts and security prices
to banking. I think if your remarks could be made to touch upon,
that at some length it would be well worth while.
Professor RIPLEY. The same observation which was made with
reference to public utilities applies to investment trusts. The general situation, as I have watched it through a succession of groups
of corporations, has been this: That the larger proportion of companies engaged in any line of business—they might be railroads,
public utilities, banking, or investment trusts—mean to be sound and
straightforward in their statements, but there is, nevertheless, on the
fringe of every group of companies a certain number which is indirect in its aim or motive and which is operated primarily at the
expense of the public. That statement is perfectly applicable, to
my thinking, to the investment trusts. The idea at the bottom is
sound—a safe means of concentrating and applying the savings of
large numbers of people who could not expect, either because of
information or because of the technical difficulty, to make retail investments for themselves. The investment trust undertakes to do it
at wholesale.
The CHAIRMAN. Would you be willing to say that it is a sound
policy to have these investment trusts organized as auxiliaries to
the commercial banks and national banks?
Professor RIPLEY. I do not like the idea. One of the cardinal
weaknesses of the investment-trust plan is that when tied in in any
way with banking institutions—bankers or brokers—it offers a very
great temptation to use the trusts, so to say, as a wastebasket in
which to put the things which can not be successfully placed in the
hands of the public. I have seen that happen a number of times.
Senator TOWNSEND. I think Professor Ripley might be permitted
to formulate a written statement and forward it to the committee.
The CHAIRMAN. I think that that would be a good idea.
Professor RIPLEY. That is a matter of really writing a book. I
have a trunkful of material of one sort or another. My own mind
works from concrete facts and not from abstract general principles.
I have collected a large mass of material, and when I see a dozen or
15 investment trusts have done so and so, I scent a principle involved,
or a temptation or a weakness or something else, and chase it down.
The CHAIRMAN. Evidently you believe in the Baconian theory of
induction ?
Professor RIPLEY. I do, sir.




NATIONAL AND PEDEEAL RESERVE BANKING SYSTEMS

481

The CHAIRMAN. I make this suggestion, that we might send you
the proofs of what you say here, and if you care to elaborate any
statement, we would be obliged to have you do so.
Professor RIPLEY. Certain general conclusions, perhaps, as far as
one is likely to arrive at them without very detailed investigation, I
could state to-day.
The CHAIRMAN. Very well, Professor.
Professor RIPLEY. One of the primary difficulties is the point I
have made, that the association, common control, of banks, banking
houses, brokerage houses, dealers in securities of any kind, and investment trusts, offers a great temptation—almost irresistible in
weak hands—to divert some of those investments unduly into that
field which is covered by the immediate interests of banking houses
or firms.
Another danger is that this concentration of control may be used
as a means of breaking into the management of industrials or railroads for the personal advantage of the banking house, rather than
for the good of the corporation which is to be administered. Concrete instances of that might be given. Such a line of action is
diametrically opposed to the sound principle of the investment trust.
The sound principle of the investment trust is dispersion of risk.
Whenever I look over a list of holdings of an investment trust and
find a thousand Pennsylvania, a thousand Guaranty Trust, and so
forth, and suddenly come upon 300,000 shares of some quite unknown
corporation, the query arises first. Are those left-over securities,
which could not be sold to the public and which, least of all, belong
in the portfolio; or is there a desire on the part of those who promoted that particular enterprise to focus their control and hold
their interest dominant in the company whose securities went into the
trust portfolio %
Now, those two motives are diametrically opposed. The first calls
for dispersion of investment. The second calls for, necessarily, the
concentration of it. I n a case which came directly to my own personal attention, where such an investment was made,, I called these
opposing principles to the minds of those handling the investment
trust. I t was, indeed, openly charged that those two principles
were so diametrically opposed that the managers' conduct required
explanation.
The later development of investment trusts, particularly the discipline through change in the market, has put the fear of God into
some of them in a way which was not evident before October of 1929.
But the first thing—and this lesson has already been taken home by
the better of the investment trusts—is a complete, adequate, and
honest accounting.
Mr. W I L L I S . By the investment trusts or by the corporations?
Professor RIPLEY. The investment trusts. I am assuming that
the private banking or brokerage house is not under the same
compulsion, being privately owned. Reputation, in the long run,
depends, of course, upon such accounting to the informed; but
the trouble with this whole development for 25 years, but growing
increasingly more apparent all the time, is the inclusion of the
uninformed and the helpless, those who buy 1, 2, 3, or 4, or even
100 shares, with money that used to go into the savings banks.




482

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

I t now goes into these channels more or less instead, ever since
the Liberty loans.
The paper corporations which have sprung up in the field of
public utilities also come within the purview of this statement.
When you reach the top holding company in the public utilities
that is, in effect, an investment trust. I t does not have very much
to do with utilities, as such. I t is a means for financing by appeal
to the public of corporations below which need capital. With
such corporations there is the most glaring need of intelligent, adequate, and comparable publicity. I t is a greater need than the
regulation of utility rates; and as far as it touches the interest
of this committee, governmental pressure might well come from
such a committee as this, rather than from the Senate Committee
on Interstate Commerce. Both committees are, however, concerned
with the matter.
The CHAIRMAN. YOU think there should be a very thorough examination of these security companies and complete publicity of
their activities?
Professor RIPLEY. I do, sir, without any reservation.
Mr. W I L L I S . YOU mean only those that are affiliated with banks,
or all of them?
Professor RIPLEY. I think it should extend to all of those which
make an appeal to the public for purposes of investment. That is
the crucial point.
Mr. W I L L I S . On what theory could Congress do that in your
judgment?
Professor RIPLEY. Only one the ground that, in some way, interstate commerce is affected. That is the problem that I have been
studying for three or four years. The House committee which
has just reported on holding companies for railroads, of course,
deals with the same constitutional point.
Mr. W I L L I S . Would you discuss that constitutional point, please?
Professor RIPLEY. I can not discuss it as a lawyer, but only from
the economic viewpoint. There has been no decision of the Supreme
Court as yet, interpreting the Constitution, which holds that ownership is interstate commerce. The fullest discussion of it was probably in the Northern Securities case; but the Supreme Court in
t h a t instance refrained from affirming the point. They distinctly
refrained therefrom.
I n this report of the House Committee on Interstate Commerce
just issued, however, there is a very significant chapter on the constitutional law involved. I t touches companies which would be
engaged in interstate commerce only if ownership were held to be
interstate commerce. The conclusion seems to be indicated that
it would be necessary to prove that the ownership in question in
some way, more or less directly, affects interstate commerce in order
to invoke the Federal jurisdiction.
Mr. W I L L I S . Do you mean ownership or sale?
Professor RIPLEY. I mean ownership, and ownership perhaps as
evidenced by sale; because sale and purchase are essential to ownership. You have to acquire those things in some way.
Mr. W I L L I S . I S it not true that congressional legislation on securities companies or investment trusts not affected by banking is in
advance of the constitutional provision you are discussing?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

483

Professor RIPLEY. I t may be in advance; but it is in a field in
which there is bound to be a substantial advance in the next five
years.
Mr. W I L L I S . I t is your thought, then, that Congress should try
to legislate on that subject with the thought of having the matter
digested in the courts?
Professor RIPLEY. I t has got to come up with reference to four or
five different issues. This point is raised: The funds of millions of
American investors, and the more helpless—the small investors—
are being drawn together through these channels into great reservoirs, and the control of that reservoir is falling into a very limited
number of hands. One way in which that occurs, and which I have
not yet found described in the books, is through a process which is
well recognized in the " S t r e e t " and is taken as a matter of course.
I t is the custom under which the control of any great institution—
it might be a railroad, it might be a bank, it might be an investment
trust, or it might be a public utility—is held, in spite of a small
proportion of ownership, within the control of a certain group of
men. I t resembles the process which has been in the past, of course,
associated with some of the tactics of Members of Congress. This is
known as log rolling—you scratch my back and I will scratch yours.
For example, a certain banking house carries a large amount of
" s t r e e t " stock in an enterprise, although not enough probably in
itself to give them effective control. But they have placed securities
for it. They have sponsored it. They have been interested in the
financing of it. By common consent among the knowing that firm
is recognized as the banker for that business. Whereupon the custom
arises of passing the hat—and I think perhaps Mr. Willis will understand what I mean by that—around the district. And 25 or 30
houses each having " street " stock standing in their names, will contribute the proxies of that " street " stock. This operation thus gives
the first-named house enough in the aggregate to dominate the
situation.
Now, in return, by courtesy, reciprocity, or whatever you please to
call it, quite a number of the larger ones among those other concerns expect that when they have to pass the hat they will receive in
return the proxies on the " street" stocks of all the rest. Thus, by
mutual support, the uphold one another more and more in Wall
Street. The same thing is true of Chicago, of course, to a lesser extent, but I use the term Wall Street not as specifically applying to
New York but to the entire system. Thus is the capital of larger
and larger numbers of people effectively controlled by groups which
do not own in proportion to the power which they exercise.
This is very clearly brought out by this report on holding companies of railroads. I assume that the same principle applies to
banks. The observations are made in that report that the percentage
of concentrated holding in railroad stocks is surprisingly small; but
the report fails to add this other circumstance, which I have described, which enables the pyramiding of that control in the way
described. That circumstance in itself more and more enforces the
need for complete and intelligent publicity under governmental control. F o r interstate commerce, of course, things must be under Federal control. A way has got to be found within the next few years,




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

by the Supreme Court of the United States, to stabilize that condition; otherwise the whole corporate business will become top-heavy.
The CHAIRMAN. I t would require a great deal of ingenuity, however, to control that by legislation, would it not ?
Professor RIPLEY. I do not think it would require so much to
enforce intelligent publicity as it does to insure control.
Mr. W I L L I S . Can you specify what you think to be the essential
elements of desirable publicity for such companies, and then would
you state what you consider the essential elements for desirable control?
Professor EIPLEY. The best thing that I can do, I think, sir, would
be to submit to you a memorandum upon uniform accounts and adequate statistical reports in business, which was prepared for me by
the president of the American Telephone & Telegraph Co. and
which he has authorized me to use as I thought best. I t is one of
the best statements of the kind that I know. I t is based upon the
experience of the American Telephone & Telegraph Co. itself, particularly as to the relation between accounting and sound repute—
credit, for example. The gist of this report is that the enforcement,
since 1912, by the Federal Government of publicity and standardization of telephone and telegraph accounts has been highly beneficial.
The telephone industry not only does not object to it, it approves it
in detail. I t helps them. As they say:
(1) It has greatly increased the public confidence in telephone securities
amongst large investors and those who advise small investors, and (2) has
prevented " investigations " of Bell system financing by the simple process of
providing more facts currently than an investigation would bring out; and this
is important for, regardless of what the results of an investigation are, its being
carried on at all has something of the result on the reputation of a corporation
as an indictment has on an individual.
The CHAIRMAN. Professor, will you let us have that statement?
Professor RIPLEY. I think that is of distinct value as a public document, and I shall be pleased, if you care to have it, to give it to you.
The CHAIRMAN. Yes; we shall be pleased to have it for our record.
(The paper referred to is printed in full, as follows:)
UNIFORM

ACCOUNTS AND ADEQUATE S T A T I S T I C A L REPORTS I N

BUSINESS

The art of keeping accounts is an ancient one, but accounting as a science is
comparatively new. The establishment of scientific accounting generalizations
and rules is intimately connected with the development in recent time, of our
great modern industries.
In the business world of to-day the recording of financial facts, formerly the
main task of accounting, is but one phase of the work. The classification,
analysis, and interpretation of these financial facts now constitute the better
half of the contribution which accounting makes to business administration.
Because sound financial structures are vital to business, sound rules of accounting may be considered as highly compelling in their character. They bear
directly upon the health and progress of an enterprise in the same way as
proper rules of physical conduct bear upon the health and longevity of an Individual. Large modern business undertakings organized in corporate fashion,
growing with the growth of the country and having prospects of indefinite continuance, are especially in need of scientific accounting rules and systems.
During the past 50 years accounting has become recognized as a business
profession. Legal recognition of it has everywhere been extended in order
to distinguish those qualified to practice it publicly from those unqualified.
Improvement in the status of the well-equipped public and private accountant
has directly promoted sound accounting. Coming somewhat later, but even
more vigorous in development, has been the application of scientific accounting




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

485

by business men as a part of internal business administration. Up to recently
the demand for such " administrative accounting" services has been largely
supplied by accountants developed within industry who have studied and fitted
themselves to meet the varied needs of industry. In the future we may expect
that the colleges of business will in greater measure perform a most valuable
work by training men as administrative accountants.
Coming still later, and building upon the work of the public accountant and
his colaborer, the administrative or corporation accountant, a contribution of
no mean importance has been made by governmental regulation and examination of business. Public utilities have been required by Federal enactment to
conform to certain accounting rules and practices. The fiscal branch of the
Government has examined and quite often has challenged the capital and income accounting of thousands of companies paying taxes. Other governmental
agencies such as State regulatory commissions, the courts, the Federal reserve
system, and the Federal Power Commission have exerted a further potent influence.
As a result of the work of the several groups mentioned, performed from their
very different respective points of view, there has come about a fairly general
recognition of the difference between accounting principles and accounting
methods; between true accounting classification in the taxonomic sense, and
mere segregation or itemization based on internal convenience or upon the prepossessions of interested parties. No methods of accounting, however convenient, however established in commercial tradition, can be good for the long
pull if they violate sound principles.
Every highly developed corporation is bound to have its own peculiar
accounting problems, successful solution of which calls for continued experience
in that corporation or some similar one. Yet it is clear that all corporations
should uphold accepted fundamental accounting principles. Further than this,
it has now become fairly clear to everyone that the independent elements of
each industry have so many business and financial problems in common that
some systematic basis of exchange of views and means of comparison of conditions is of great value to all of them. Uniformity of accounting technique
is here of great practical advantage.
Within many industries the operating methods and problems of the separate
enterprises tend to great uniformity. In the competitive field a large hotel, for
example, has much the same organization, equipment, and operating work as
another large hotel. Broadly speaking, there ought to be one and only one
method of accounting which can be employed to the best advantage in both
hotels, due flexibility being, of course, maintained in its application to meet
individual needs. This is especially true if, as is likely, the hotel managers
desire to interchange certain comparative information concerning their experiences and problems. Important advantages have in fact come from the work
of various national trade and commercial associations which with such thoughts
as these in mind have fostered good accounting along standardized lines in their
respective fields.
In the public utility field it has been found that the operating practices of
such carriers as railways or telephone companies, for example, are likely to be
very much the same, respectively, regardless of whether the ownership is in
one financial interest or another. In these classes of carriers the interchange
of business has promoted the standardization of equipment and operating rules.
Business advantage is in many cases (perhaps it is true to say that it is
very generally) a force making for standardization of operating practice in
the larger undertakings, and since accounting naturally follows the business
trend, the same force also makes for uniformity of accounting. In the case
of the Bell Telephone system the record shows that persistent efforts have
been made since the early eighties to achieve uniformity in current accounting
and comparability of financial data. The introduction of a uniform system
of telephone accounts prescribed by the Federal Government in 1912 gave
further impetus to this movement and occasioned no radical changes. As a
result it is probable that uniformity of accounting and reports goes deeper in
the Bell system than in any other large group of companies. The uniformity
of railroad accounting, effective since 1907, is also very marked. This situation is, however, as much or more the result of the labor of the telephone and
railway accounting oflicers over a long term of years as of the supervisory
jurisdiction of the Government. (But this labor might not have been given
without Government activity.)




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

In this way it may seem that upon the basic proposition that accounting
fundamentals should be the same for all, must be superposed the further idea
that standardization of acounting aids in the effort of the industry as a whole
toward efficiency and economy. The logical outcome is the so-called uniform
system of accounts applied to-day in many lines of business.
The chief merit of Government action upon the accounting problems of quasi
public and supervised corporations is not so much that the systems now legally
in effect give the corporations what they should have in the way of sound
classifications, although such action exercised, as it generally has been, in the
right direction, undoubtedly has expedited progress. The outstanding contribution of the Government has been through radical improvement and extension
in the reporting of accounting results.
Public interest in certain classes of corporations requires, almost axiomatically, a system of reports covering their operations which shall be adequate
from the standpoint of the public as well as from that of the corporations
themselves. The best accounting system in the world will not suffice to those
who must approach it through the analysis of reports and summaries if the
latter are overbrief, discouragingly technical, or changeable in form. The
public interest very sharply distinguishes this case from an ordinary commercial case. Taking for illustration the two hotels previously mentioned, it is
possible that one may be owned by an individual responsible to no one but
himself, while the other may be owned by a corporation having a large number
of stockholders, absentee owners, who have no opportunity to look into the
affairs of the hotel for themselves but must rely upon reports based upon the
accounting made by the management—an interested party. The exigencies of
the competitive situation may impose some limitations upon the publicity of
details. The custom is to have a reputable certified public accountant make
an examination on behalf of both interests, management and ownership. In
the case of a hotel this should suffice at least as a minimum, although the
assurance conveyed and taken will doubtless be augmented if the report is
based upon a carefully designed standard system of hotel accounting which
the stockholder can obtain and study for himself.
But with public utilities empowered to provide a public service and operating under conditions which limit competition there are three instead of two
interests to be considered. The interests of the whole public in fair service
charges have justified the Government in requiring not merely that the underlying accounting shall be sound and correct as it ought to be in any event,
but that the results shall be reported in standard and easily understood form
so that any intelligent user of the service may examine and understand all
such reports.
The several kinds of forms of annual report specified by the Interstate
Commerce Commission for the use of various classes of carriers subject to its
jurisdiction, admirably meet the needs of this situation. In addition to requiring a full exposition of results of the ordinary accounting type as expressed in balance sheets, income statements, itemized schedules of revenues
and expenses, reports of receivables and of payables, etc., the instructions
provide for statements of the ownership of the corporation, and lists of its
directors and officers, data concerning voting powers and elections, disclosures
of the names of corporations controlled by the reporting carrier, reports of
extension of operations, of properties purchased and the consideration given
for them, of new securities issued and the amounts received thereon, of leaseholds acquired and surrendered, consolidation, mergers, contracts, etc., effected
and many other matters.
The conservative public-service corporations have been supported and the
less conservative ones have been steadied in their course of action by the
installation of governmental systems of reporting which while meeting all
legitimate requirements of publicity from the standpoint of reporting companies, have also acted as a sort of financial dragnet, running impartially
under the entire accounting system and bringing to view everything which it
presently contains. It is significant that at the present time the typically bad
corporate report which only serves to befog significant data or to occlude them
in groupings so vague and compendious as to afford no opportunity for
analysis and comparison, is confined to realms thus far immune from Government accounting supervision.
Of course, there is nothing in such governmental demands—confined as they
are to accomplished facts of past accounting and finance, to which enlightened
management or invested interest could object, while the advantages are ln>




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

487

pressive and manifest. A good corporate report providing for essential facts
regularly made public under oath of the highest responsible officers upon forms
devised by disinterested governmental accounting authority which has also
approved the soundness of the system of accounts underlying the report, is
certainly a factor toward efficient practice, corporate integrity, and public
confidence.
Very important financial interests are intrusted to the management of our
great corporations, and interested investors are entitled to every assurance
that reports made to them are on a sound basis. Sworn reports to the Government help to provide such assurance. The history of this country shows that
the people will not long submit to corporate exaction and are keen to resent
any unfairness on the part of private interests* supplying public needs. In
view of this, frank and adequate reports under Government supervision engender confidence and dispel ill-founded apprehensions on the part of all concerned,
including the users of the service generally.
It would seem that the matter of the proper reporting of corporate financial
results can hardly be taken too seriously, and it is a reasonable expectation
that the chief gains, at least in the early future will come, not so much from
more elaborate accounting as from more informative reporting based on soundly
conceived systems of accounts. Sound accounting is manifestly essential from
the outset, but to obtain the most satisfactory final result it is necessary to
make the accounting results sit up and talk plain English.
Consider the following list of advantages which by general admission should
flow from the use of a uniform system of accounts, and observe how many
of them depend for their realization upon adequate means of reporting and
exposition:
1. A uniform system of accounts makes the best system available to all. This
is so because the experts who prepare the system—representing as they do
the best thought regarding the industry—carefully select the most desirable
features from all preexisting systems. A uniform system also makes for- constant future improvement because the thought of all is directed toward the
one system instead of being diffused among different ones.
2. It is a true and comparable record of capital outlay, receipts, expenditures,
and results.
3. It permits comparability of data among divisions of a company and among
different companies.
4. It permits assembling of data from the industry as a whole with which
individual companies can compare their particular data.
5. It facilitates discussions with other companies, preparation of operating
contracts and settlements thereunder.
6. It assists in the auditing of accounts and in investigation and studies.
7. It provides the best basis for statistical treatment (and here we have
reference, not to the statistician who can find out how many times a wheel
goes around between New York and Omaha but to the man who by studying
various ascertained facts can bring to light further important, but hitherto
unascertained facts).
8. It provides assurance to all interested that the accounting and financial
facts regarding the undertaking have been disclosed fairly and as adequately
as they rightly should be.
Mere technical sufficiencies in accounting and reporting are not quite the
whole story. Something should be said as to the personality of the accounting
officer. The scientific progress of accounting and the development of fixed categories has not reduced him to an automaton. The art of accounting is still
as long as accounting working time is fleeting. In our great American corporations, frequently having their chains of affiliated corporations, the responsibility
resting upon the chief accounting officer has become very great. As general
business technique becomes more complex and scientific, the demand for adequate and illuminative accounting correspondingly increases. The management, the investors, creditors, and the Government alike look to the responsible
accounting head for faithful, efficient, discriminating work. As has been said
by a recognized authority, the late Henry C. Adams, professor of political
economy and finance at the University of Michigan, to whom is due in great
measure credit for initiating the prescription of uniform accounts for carriers
and public utilities under Federal jurisdiction:
" The accountant stands at the center of an organized industry; every transaction passes through his hands; every problem must receive the imprint of his
mind, for it is he who supplies, in concrete form, the information upon which




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NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

reliance must be placed for deciding administrative policies. No other single
officer of a great industry is required by virtue of his official position to know
as much of all operations in all departments as the accounting officer. This is
the explanation of a very significant fact disclosed by the recent history of
great industries—namely, that of the development of the bookkeeper into an
executive officer. The modern railway accountant is no longer a clerk whose
duty it is to keep records according to instructions received from others. On
the contrary, he has become a critic, responsible for detecting unnecessary
wastes in operation and for testing the efficiency of current administration.
He is responsible also for exposing incompetence, whether of departments or
of policies, and for the pointing out of those tendencies in the business world,
the recognition of which is "essential to the successful administration of a
property. It is no accident, therefore, that the railway accountant of to-day
is classed among the higher executive officials in the organization of American
railways."
In the case of the public utility accounting officer, to these administrative
demands are added those of governmental regulation which throw chiefly upon
the accounting officer the burden of the responsibility for his corporation in
conforming to intricate official rules. The fiducial reliance placed in him by
our Government and the public as well as the confidence extended to him by
the management and the investors of his corporation, render the position of
such an accounting officer one of the greatest honor and responsibility. His
reports especially should be from any point of view unassailable.
As illustrating this fact, the following quotation from the opinion of the
Interstate Commerce Commission, No. 933, is pertinent:
" The formative period to which we have referred must now be considered
as having come to an end so far as all the important principles and requirements of our regulations are concerned, and we shall hereafter expect a more
exact observance of the prescribed accounting systems by the carriers and
their officials. Accounting officers understand the true functions of accounts
and realize their importance in determining the correct economic condition of
the transportation properties with which they are affiliated. Their instincts
and training are such as naturally to lead them to keep their accounts as they
should be kept. They would not have the confidence of their superior officers
if this were not the case. But in many instances the accounting officers of
carriers have not been left free to follow their natural inclinations in this
regard. Irrespective, however, of the influences brought to bear upon an
accounting officer to turn him from his true course as an accountant and from
his duty, under the law, of keeping the accounts in accordance with the system
prescribed by the commission, it is nevertheless his hand, or the hand of some
one immediately under his authority, that makes the wrongful record, and it
is the first instance for the proper carrying out of its rules and regulations.
Under our regulations and prescribed form the oath of the accounting officer
must be attached to the annual report of the carrier to the commission, together
with that of the executive; and, from the necessities of the case, it is the
accounting officer who is immediately responsible and whom the commission
will first hold responsible when it becomes necessary to invoke the penalties of
law; but we shall not hesitate to call to account with even greater severity
anyone above the accounting officer in authority who may share in the responsibility for any violations of the accounting rules and regulations which have
been prescribed for the use of the carriers that are subject to the act."
Advocacy of adequate uniform accounting and reporting should not be carried to the point of making these serve as a cure-all. It too frequently happens
that valuable curative agencies are extolled as panaceas and credited with
divers powers which they do not in fact possess. When this happens, it is
probably that the indicated cures have proceeded more from the skill of the
practitioner who applied the remedy than from the mere fact of its use.
Accounting is something for expert use, and the expert should have a thorough
knowledge of his business field as* well as of the appropriate accounting. It
happens, too, that curative agencies of great benefit are denounced as ineffective
because they do not of themselves bring about results which can only be
brought about by discrimination in their effective employment. Good accounting
can not supply the lack of proper business control.
Take such a situation as the following:
The real cost of production is reported to be unobtainable from the books
of Company A because that company buys its product in a partially manufactured state from Company B, whose books, maintained in another State, are




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489

not accessible, and in any event enhance also the costs of product not taken
by Company A.
Or the following, which raises a wholly different sort of problem:
Company D is the owner of Companies E and F. It pays a dividend based
upon a dividend received by it from Company E, although Company F, whose
securities are carried at a conservative valuation on the books of Company D,
has contemporaneously lost as much money as Company E has gained and
paid to Company D.
Such situations go beyond the scope of accounting, and the remedial prescription, if one is necessary, must be written from a supervisory and not a
mere accounting point of view,
Sound accounting, per se, will not prevent a speculative " pyramiding" of
control through chains of subsidiary corporations, with the possible accompaniments of overcapitalization, undue profits by intercompany transactions,
and the pyramiding of risks no less than of chances of profit, nor will it prevent
the issuance of securities to defray the costs of improvident or unwise purchases or expansion of properties.
In conclusion, when companies which for many years have practiced uniform
accounting under Federal regulation find it advantageous to them the argument for a uniform practice would seem to be conclusive, for there can hardly
be a question of the advantages from a general social standpoint.
Officials of the Bell System see no disadvantage but, on the contrary, some
benefit to their companies from uniform, required accounting of a sound and
enlightened type. A superior standing attaches to certified published figures
developed under such a system, which the telephone people, extremely large
users of invested capital, have not failed to realize. For example, the telephone
accounts require the statement of all fixed plant and equipment at its cost
to the reporting company, which means, since the companies build practically
all of their own plant, that the published balance sheets generally exhibit the
exact original cost of construction. The great advantage to all concerned of
assured figures on this basis may be taken as obvious.
The uniform system of accounting has never been found other than helpful
in stating the facts regarding the immense growth of the telephone system
during the past 18 years. Indeed, it is considered that the financial position
of the Bell companies has been assisted and public confidence has been promoted through careful adherenece to an adequate system of mandatory
accounting.
Mr. W I L L I S . D O I understand that you think that the same system as applied to telephone companies should also be applied by
Congress to all companies that may be held to be interstate in character or operation, and t h a t it should then be left for discussion in
the courts which ones of them are so ?
Professor RIPLEY. I do. I would force a decision on that point,
l h e r e has never been a more opportune time of pointing out what
the evils are of noncompliance with such a program.
Mr. W I L L I S . That would imply a rather large bureau here in
Washington entrusted with the work of gathering in and codifying
those reports.
Professor RIPLEY. I think so.
Mr. W I L L I S . Is there any existing bureau which can be intrusted
with that duty?
Professor RIPLEY. You are speaking of investment trusts ?
Mr. W I L L I S . I am speaking of what you suggest; namely, a possible or theoretical congressional control of companies buying or
trading in corporation securities.
Professor RIPLEY. I think that has got to develop the agency out
of experience. We have had it so long in the case of banks, now
Mr. W I L L I S . W h a t would you think of the idea of prohibiting
banks from investing in the securities of any concerns which were
not amenable to such requirements for publicity?




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Professor RIPLEY. That is one of the first things I should like to
see, of course—you have raised the point of constitutionality, but if
\ ou could force it
Mr. W I L L I S . YOU could force that upon national banks or any bank
that holds its charter from Congress, could you not?
Professor RIPLEY. Yes.

Mr. W I L L I S . By specifying that they could invest only in such
securities as are issued by concerns which have complied with the
publicity legislation?
The CHAIRMAN. Right there we are confronted with the vice of a
dual system of banking. When you prohibit a national bank or a
member bank of the Federal reserve system from investing in these
securities there is either a provocative or the temptation of a member bank's withdrawing from the system and taking out a State bank
charter.
Professor RIPLEY. Yes; there is that danger.
The CHAIRMAN. If the courts were to decide that activities of this
description and processes of this sort constitute interstate commerce, that would simplify the matter ?
Professor RIPLEY. Well, it is because I feel that the issue of the
determination of the legal point is so rapidly coming to the front
and has already been brought to a head in the direction of railroads—and that is perhaps where it will arise first—that it is bound
to come up with public utilities, and I think it will follow next in
investment trusts.
The CHAIRMAN. And we might precipitate it in the banking business by some provision in legislation
Professor RIPLEY. The fact is—and I am sure Mr. Willis will
support me in that—that there is the widest range of practice in this
matter of accounting. I n general it is becoming better all the time.
The bulk of the big companies now have put themselves in fairly
good shape. But there is enough of irregularity and inadequacy so
that what we need is a situation under which the burden of proof
would lie against the company which did not conform to that intelligent publicity. When it begins to arouse a conviction amongst
those who advise people professionally that the reports of such and
buch a company are not understandable, then it will begin to affect
the credit of that company—its ability to place its securities.
So you will not only be helping but forcing the issue if your
committee acts as you suggested; you would force the issue upon the
courts and also you would tend to improve the standing and practice
in business with them. You direct attention to this matter as an
essential of modern, highly complicated finance. The whole system,
more and more, is being built upon the handling of funds and the
capital of millions of people by a very few.
The CHAIRMAN. Have you any familiarity with this process of
banking popularly known as loans for others in the stock market—
loans particularly by corporations?
Professor RIPLEY. Not very much. Of course, I have read what
has been said about it during the last disturbance and during the
period of inflation.
The CHAIRMAN. To what do you attribute the last disturbance—
the collapse?




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491

Professor RIPLEY. I suppose it is a little bit in the nature of things
that the wheels whir faster and faster until exhaustion comes. I
feel also, to a very much larger degree than has been appreciated,
the custom of installment has been influential; and I find other men
who, in my judgment, are well informed feel the same way about it.
The CHAIRMAN. Do you think our established banking systems
ought to be permitted to contribute to an upheaval of that sort ?
Professor RIPLEY. N O ; I think in every way by which you can
compel machinery should be fashioned so as to slow down the spending of money until people have saved it. That is just an individual
opinion, but I find it shared by a number of informed men.
Mr. W I L L I S . Would you think it desirable or proper to prohibit
member banks from financing installment selling and investment in
finance companies?
Professor RIPLEY. I should like to see that done. I t is the first
time I have been brought face to face with it, but there is a widespread opinion that many people have spent far ahead.
Mr. W I L L I S . Installment paper has crept into the banks more and
more until now it is quite a large proportion of the portfolio of the
banks?
Professor RIPLEY. Might it not be well to limit it to a certain
small proportion of those investments? I think that would be the
answer. You never can tell what you will run up against when you
say peremptorily that a certain thing shall not be.
The CHAIRMAN. What you run up against was very briefly and
succinctly described before the Money Trust investigation of some
years ago, when the attorney, catechizing a very prominent banker,
asked him if the banks—or many of them—did not engage in a practice of evading the law. " W h y , " he said, " of course. W h a t do you
think we hire the best legal talent on earth for? Anybody can obey
the law. We hire lawyers to tell us how to evade it."
Professor RIPLEY. Or to keep just a jump ahead of it.
The CHAIRMAN. Yes.
Professor RIPLEY. A

difficulty with absolute prohibition might be
that there should come into the hands of a bank, through failure in
some way, investments of this kind. If you compelled those things to
be disposed of at once, at perhaps great loss, under a flat prohibition,
it would be most unfortunate.
The

CHAIRMAN.

Yes.

Professor RIPLEY. But I think you might say that above a certain
proportion decided upon by those well informed in the business, such
a eeptances should not go into the portfolio of a bank.
Mr. WILLIS. Have you any criticisms of the present stock-market
methods in regard to the listing of shares or the admission of shares
to listing?
Professor RIPLEY. I should like to say this: That from a fairly
close contact with the committee on stock list, which began during the
administration of the late president of the New York exchange, I
have been distinctly impressed with its high purpose in seeking to
eliminate some of the gross evils which used to be connected with the
stock exchange. The close scrutiny to which the accounts are subjected of companies which are so listed mark a great advance. The
same objection, Senator, however, applies there that would apply to




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

putting a prohibition upon national banks. All these corporations
which do not wish to conform to the requirements of the New York
Stock Exchange list either on the Los Angeles or Reno or even
Boston (Mass.) Stock Exchange. I t has become rather notorious in
Boston that securities there have been listed which could not by any
chance be listed on the New York Stock Exchange.
I have in mind at the present time the preparation of a general
description of the conditions which should attach to safe investment
by the small and uninformed investor. I t was brought to my attention the other day by the spectacle at the Bowery Savings Bank,
under its new and able president, of the file of people who come in
there for safe-keeping with what they have been able to save out of
the Bank of the United States failure. Over 50,000 people have
opened new accounts with the Bowery Savings Bank, being turned
adrift, so to speak, as to the placement of their savings, through this
failure. The Bowery Savings Bank is, I think, doing the best it can
to advise these little clients, if they wish to go beyond putting it into
savings banks and to invest it, as to how those funds might safely be
so invested. There are many people concerned.
One of the first requirements for the uniformed person to observe
would be that his investment should be listed upon the New York
Stock Exchange. The management is now honest and staightforward. I t was not always so. But I believe now that the committee
on stock list is eminently public spirited in their requirements. If we
could have all of the investment trusts at the present time as well
as all of these big interstate public utilities listed on the stock exchange the imposed requirements as to accounting would go very far
toward stabilizing the situation. But many of those corporations
will not list there at the present time so long as people are uninformed. Possibly for the sake of an open market they may go
through the formality of listing on the Amsterdam or Los Angeles
exchange or some other place where no formalities are required.
Mr. W I L L I S . D O I understand you think the securities owned by
the investment trusts should all be listed or the investment trusts
themselves should have their securities listed on the stock exchange ?
Profesor RIPLEY. I think both should be done.
Mr. W I L L I S . But some of the very worst investment trusts have
been listed, have they not ?
Professor RIPLEY. I could not answer that question directly. The
difficulty of investigation before accepting for list is very great. I
doubt if they have formulated their rules yet for investment trusts,
but I know they have had it seriously in mind.
Mr. W I L L I S . D O you think there should be any connection between
banks' investments and listing? I n other words, you speak feelingly
of the small investor. How about the banks?
Professor RIPLEY. The only trouble there is that while you may
believe in the probability of steady improvement of the New York
Stock Exchange committee on stock list you have no guaranty to
that effect. If they should set up sound requirements and then that
committee should degenerate in character, or the administration of
the exchange should fail in public spirit, your requirements would
amount to nothing.




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493

Mr. W I L L I S . D O you think the New York Stock Exchange or,
broadly speaking, any exchange, is a proper subject for Federal
control ?
Professor RIPLEY. I have followed closely Mr. Samuel Untermyer's
several contentions as to that. No; I do not believe at the present
time, with the public spirit which has been manifested by Mr. Simmons for so many years, by his successor, and by the leading committees, that one need have the apprehension about the New York
Stock Exchange, in relation to the interest of the common people,
that would have been necessary 30 years ago. I t seems that the
situation has distinctly improved. I should prefer, on the whole,
to let them try and work out their own salvation without exerting
governmental compulsion.
Mr. W I L L I S . The panic of 1929 has affected a greater number of
investors than any other panic in the history of the Nation ?
Professor RIPLEY. That is because we are a bigger Nation. A
larger proportion of the savings of the people, instead of going into
horses and cows and land, has gone, since the World War, into paper
evidences of wealth.
Mr. W I L L I S . Does that mean you are inclined to exempt all stock
exchanges of the country, as such, from this regulation ?
Professor RIPLEY. Not the stock exchanges of the country, but I
am speaking of this particular institution because of the men at th*>
head of it.
(Discussion off the record.)
Professor RIPLEY. My answer to you, then, as to direct Federal
legislation or attempted legislation concerning the stock exchange,
is that the need for that action is not as great there ? if there is any,
the way they are going now, as it is in other directions. But along
the lines you have suggested, Mr. Chairman, one might well give
serious consideration to the amendment of the law.
The CHAIRMAN. Yes; if you are going to depend entirely upon the
personnel and the management, you will find that subject to variation. If you get a bad personnel and indifferent management, why,
disaster ensues.
Professor RIPLEY. But this may be said, I think, for the New York
Stock Exchange: They aspire to be the great stock exchange of this
country or to continue to be as preeminent as they are now; and the
intelligence of those who have been so largely associated with it is
high enough so that they comprehend that the future of that institution at bottom rests upon its integrity. That is where they differ,
I think, from the condition as it was 30 years ago. The so-called
big men then—a great many of them—were of a distinctly different type. There is getting to be enough representation of men
of large affairs who have to make an appeal to the public for their
capital funds to enforce the lesson that they can not hold the confidence of the public and get those funds continuously without maintaining a high degree of integrity. That is one explanation of that
memorandum from the American Telephone & Telegraph Co., which
is the most acceptable reservoir of investment funds for all the
people in the world.
The CHAIRMAN. I t has, perhaps, more holders of its securities,
numerically, than any other.
34718—31—PT 3




5

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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Professor

EIPLEY. Not more than some of these public
CHAIRMAN. I t has not ?
Professor EIPLEY. NO. I t is marvelous when you add

utilities.

The

up the figures of the ownership of stocks and bonds, preferred A and preferred B, and 9 or 10 other kinds of securities that they issue. The
total runs into the hundreds of thousands. There is one, I think,
with 750,000 security holders; perhaps more. You may set that figure for one company over against the total in the holding company
report here of only 840,000 railroad stockholders in the whole United
States. The reason they have so many is that they sell to my cook
or my chauffeur—to the small property holders—one or more shares
apiece. The meter man is a peddler of stock, like a life-insurance
agent or a bond salesman. He gets as much of a commission on what
he sells, too, as they.
The CHAIRMAN. I have been very much impressed with what you
say of the management of the New York Stock Exchange, and yet
it was principally upon the New York Stock Exchange that frightful excesses in the sales of stocks not possessed and in the exaggerated advancement of other stocks that the collapse came.
Professor RIPLEY. YOU are perfectly right, sir; and the query to a
thinking person is whether you can have an open market—and the
very essential of widespread public investment is preservation somewhere of an open market—how you are going to preserve the open
market and yet limit the abuse. I confess I do not know yet. Shortselling business, particularly, is most vexatious and puzzling.
The CHAIRMAN. That is a question of the proper, workable definition of an investment and a pure speculation or gamble.
Professor RIPLEY. Yes; and what is needed more than anything
else is a clear separation between those businesses which are speculative and those which are in the nature of an investment. That may
be illustrated by citing the case of one of the largest of the public
utilities—Cities Service. I have very carefully examined their accounts to determine how much of that is of the nature of an investment, namely, public utilities proper, and how much of it is one
of the most speculative businesses in the world—oil promotion. At
the present time it is about 50-50. I t was five-sixths oil and one-sixth
utility about 1920, and yet that stock was sold to you and to me and
to the public as an investment. The point is that the accounting
should in all cases be such that there may be no mistake about that.
And the nature of the public market should be such that it shall
minimize resort to that market for pure speculation, emphasizing
always its serviceability as an open market for the whole country.
The CHAIRMAN. A person ordinarily does not invest his money
for a day or a week or a month. I had a chart presented to me
perhaps, now, 12 months ago, which indicated that the average
holding time of stock, based on the New York Stock Exchange, had
dropped from 67 days 10 years theretofore to 22 days at the time
this chart was prepared. Well, not many people really invest their
funds for 67 days, and certainly nobody engages in 22-day transactions and calls that an investment, in my view.
Professor RIPLEY. YOU are perfectly right. But you must remember that that average—and I may assume that it was an average—that that average is made up of widely variant lists of securities. The natural progress of an old-established business is to pass




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

495

through the speculative zone over into the investment type. I have
watched that with great interest in the case of the United States
Steel Corporation. I n 1900, when I was in expert service for the old
United States Industrial Commission, I heard Mr. Schwab, the first
president, come down here and describe the United States Steel
Corporation. I t was all one great gamble at that time. I suppose
99 per cent of the securities still had to be placed in permanent
hands. One may watch year by year how the proportion of so-called
Street stock has declined.
Now, any period of promotion—and there was a great deal of
such promotion and always is in a period of inflation—is apt to be
marked by the advent of these new companies. The new companies
are all speculative for a time. Nobody knows just what they are
worth. I t takes time for them to find their due level. So that if
those figures which you cited happened to be taken during such a
time of active promotion, that promotion might have accounted for
it in part. There might have been an actual improvement among
the old-line seasoned investments, and yet a million or 100,000 million
people may go wild speculatively as to the new ventures.
The CHAIRMAN. The law itself is very specific, but they do not
the banks?
Professor RIPLEY. Of course.
Mr. W I L L I S . Does your analysis, Professor Ripley, suggest to you
any recommendations with reference to bank legislation specifically
designed to keep the reserve funds of banks and reserve banks, of
course, out of such speculative operations as you have described?
Professor RIPLEY. Not, perhaps, other than those observations
which have been made by the chairman and by yourself. I should
like to see the brakes put on.
The CHAIRMAN. The law itself is very specific, but they do not
just obey the law. That is all. We may be able to make it more
specific, but I am puzzled to know how.
Professor RIPLEY. YOU might make it more specific by a more
positive definition covering some of these new forms of investment
which have come up lately—the question of installment buying, that
of investment trusts, and so forth, which do not have adequate reports.
Of course, that means that you would have to set up additional
machinery for the inspection and enforcement of such laws. I t takes
a real expert to determine in any given instance whether there is
adequate publicity or not.
The CHAIRMAN. There is apparently not adequate examination
because we have banks examined one week and reported in good
order which fail the next.
Mr. W I L L I S . YOU are, however, perfectly clear in your own mind
that banks' reserve funds should be kept out of investments, so called,
in securities of the kind you have described ?
Professor RIPLEY. I think so; and I think the obligation to do
that becomes ever greater with the wider degree of popularization
of such investments.
Mr. W I L L I S . YOU have no belief in the statements that are so
current—that unless banks are allowed to go freely into the speculative market there will be a lack of capital for the development of
new industry?




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Professor KIPLEY. I am suspicious all along the line as to banking
management in the promotion of industrial enterprises. I have
watched them in a great many cases. The great concerns which
succeed best are those which keep free from banking affiliations.
T h e attitude of a banker is distinctly different from that of an
investor. That was clearly expressed in " W a l l Street and Main
S t r e e t " by the observation of the head of the firm handling the
Dodge Motor Co. The leading banker in that case defended his act
of withdrawing his capital and yet holding the control upon the
ground that a bank's natural function was not to administer an enterprise but to go in and out, withdrawing his capital continually in
order to put it somewhere else. What I object to was withdrawing
his own capital, however, and putting it somewhere else but still
maintaining all the control.
The CHAIRMAN. Professor, we are greatly indebted to you, sir.
You have given us a verj helpful session.
Professor RIPLEY. I wish it might have been more specific on the
banking side.
The CHAIRMAN. We are very much obliged to you. •
STATEMENT OP PROF. MARCUS NADLER, OF NEW YORK
UNIVERSITY
The CHAIRMAN. Professor, you are associated with New York
University ?
Professor NADLER. Yes, sir.

The CHAIRMAN. D O you have some connection with the Institute
of International Finance?
Professor N ABLER. Yes, sir; I am research director of the institute.
The CHAIRMAN. A n d you were formerly connected with the Federal reserve system?
Professor NADLER. Yes, sir.

The CHAIRMAN. I assume that you understand what we are engaged in here, and we shall be very glad to have you make a statement, if you will.
Professor NADLER. Mr. Chairman, if you will permit me, I have
prepared a brief statement covering some of the more important
points.
I have divided my analysis into two parts—bank failures and
security loans.
Aside from factors mentioned by other witnesses, such as lack
of diversification, improvement in transportation facilities, smallness of capital, bank failures are caused by lack of liquidity—
resulting partly from too large loans on securities and mortgages
and the holding of less liquid investments. This situation is particularly dangerous in times of falling commodity prices, security
prices, and a slow real-estate market. Security loans I intend to
take up later. The liquidity of small banks and of savings banks
would greatly increase if there were a central mortgage bank for
urban real estate which could take mortgages held by banks and
savings banks, and on the basis of these issue its own bonds. This
would create a ready market for urban mortgages and would in
times of stress enable the banks, commercial as well as savings,




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

497

to convert their mortgages into cash. Such an institution, in order
to accommodate savings banks, might also be authorized to discount
for the latter prime securities as well as mortgages.
I n other words, it seems to me that the establishment of a mortgage bank for urban real estate would help greatly the small banks.
Secondly, I feel, Mr. Chairman, that bank failures are, to a large
extent, caused by lack of responsibility of directors and officers. A
law which would hold bank directors and officers of a bank a priori
responsible for bank failures would, it seems to me, result in more
conservative banking.
Another thing, Mr. Chairman, is that the double liability clause
attached to bank stocks has in recent years lost a great deal of its
effectiveness. At the present a large part of these stocks is held
either by affiliates or by holding companies, and when these banks
fail the holding company fails or the affiliate companies fail, and the
double liability clause becomes practically worthless. A law forcing
corporations directly or indirectly interested in the management of
the bank or closely affiliated with the band, holding the stocks of
such a bank, to set up a reserve against their double liability would
remedy the situation. I am firmly convinced that any holding company or affiliate which holds the stock of its own bank should set u p
a reserve bank specified by the Comptroller of the Currency against
this double liability.
Another remedy would be the segregation of assets. Bank failures
are particularly disastrous to savings depositors. Segregation of
assets and investments of the savings deposits into securities or assets
approved for savings banks would protect savings depositors. Distinction, however, should be made between, first, actual time deposits and, second, savings or thrift accounts such as are evidenced
by savings pass books. I n my opinion, only the latter should be
segregated. To include all kinds of time deposits may injure legitimate bank business.
Branch banking: Under modern conditions of rapid transportation, of chain stores and branch factories, small unit banks have to
a considerable extent outlived their purpose. Failure of banks with
branches, however, is not unknown in Europe and in the United
States. A failure of a bank with a string of branches operating in
one district would cause disaster to the entire district. Branch banking also tends to create a monopoly of banking business in certain
sections of the country.
Furthermore, business houses are accustomed to have two or more
banking accounts. The absorption of one bank by another often results in unnecessarily restricting the line of credit to individual
firms. I t would seem to me, therefore, advisable that if branch banking is allow, certain provisions should be made to guard against the
creation of a banking monopoly in certain parts of the country; and,
secondly, not to restrict unnecessarily legitimate business. Before
branch banking is allowed, it seems to me that the powers of the
Comptroller of the Currency should be greatly increased.
Powers of the Comptroller of the Currency: No institution is
more susceptible to publicity than a bank. To give the Comptroller
of the Currency the power to publish his findings if a bank has not
remedied its situation within a reasonable time would be one of the
strongest weapons in the hands of the Comptroller. I reach this con-




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

elusion because the superintendent of banks of New York knew about
the bad state of affairs of the Bank of the United States, and the
Federal Keserve Bank of New York knew about it, and everybody
knew about it except the poor small depositors.
Mr. W I L L I S . How long before ?
Professor NADLER. I read in the newspapers that Mr. Case, chairman of the board of the Federal reserve bank, stated before this
committee that for a number of years he had information about the
bad condition of the Bank of the United States outfit. The State
superintendent of banks apparently knewT in 1929 that the Bank of
the United States was in very bad shape. If he had been forced by
law to publish his findings three months after he had given notice
to the bank, the bank either would have had to comply with his
request or he would have been under obligation to publish his findings. If he had published it, I think the interests of the depositors
would have been served better.
If I am not mistaken, Mr. Chairman, the Comptroller of the Currency has suggested that he be given the power to remove an officer
or director of a bank. I do not believe that this will be very effective
for the simple reason that the officer or director may be a dummy for
some one else directing the destinies of the bank. I think by imposing
the obligation upon the Comptroller of the Currency to publish his
findings, banks will be forced to live up to the traditions of the law
and conservative banking.
The CHAIRMAN. D O you happen to know whether the Federal Reserve Bank of New York lost anything by the failifre of the Bank
of the United States ?
Professor NADLER. It is common knowledge that the Bank of New
York held acceptances accepted by the Bank of the United States.
Of course there are two other persons liable on the acceptance, or
at least one—the drawer. I do not know whether they lost anything
or not.
I believe that the statements published by the banks should be
amplified. At present the balance sheets of banks reveal very little.
At the present time it takes an expert to know the meaning of a
bank's statement. I believe the comptroller should be given the
power to require banks to amplify their statements to the point where
at least an intelligent depositor could understand them.
Speculation—nature of security loans: Security loans with certain
exceptions (change from loan accounts to outright purchasers) can
not be liquidated to a great extent without incurring other loans.
They are frozen. Security loans, looked upon from the point of
view of the banking system as a whole, are not liquid and the larger
the volume of such loans outstanding the less is the liquidity of the
banking system.
Securities, to a very large extent, represent fixed assets or the
taxation power of political units. Security loans, therefore, looked
upon from the broader angle, are used for the construction of fixed
assets and their liquidity as far as the individual bank or borrower is
concerned depends upon the security market. If the New York
Stock Exchange should be closed as it was, if I am not mistaken, in
1914, all security loans would be illiquid.
Bank credit and speculation: Speculation in securities can not go
very far without the aid of bank credit. An expansion of bank




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499

loans in turn increases deposits and hence forces the member banks
to increase their reserve balances with the reserve banks. I t makes
only little difference whether banks make direct loans on securities
or they facilitate the selling of securities by corporations, which in
turn enables the latter to place funds on the call-money market.
One may, therefore, conclude that speculation can not go too far
without the aid of bank credit; the latter can not be overexpanded
(short of importation of gold or great reduction of currency in circulation which can easily be offset) without the aid of reserve credit,
and hence that the reserve banks have the power to prevent excessive
speculation.
Regulation of security loans: The fundamental principle not to be
overlooked is that one dollar of reserve credit supports ten to fifteen
dollars of member bank credit, and thus only a small amount of reserve credit can support a much larger volume of security loans. To
prevent reserve credit from being used for speculative purposes there
are a number of possibilities:
First. By imposing on reserve banks the duty to exercise qualitative control and to refuse the rediscounting of eligible paper for
banks which carry too large a volume of security loans.
Second. By fixing by law the total amounts of loans which a member bank may make for the purpose of carrying securities. This can
be done either by fixing the total amount of such loans in relation to
capital and surplus of the individual bank or, secondly, by fixing the
total amount outstanding as of the day when the law comes into
force; or, thirdly, by taking the maximum amount outstanding during a certain period. Any bank which has exceeded this limit should
not have the privilege of rediscounting with a Federal reserve bank.
I n my opinion, power should be given to the Federal Reserve Board
to change these amounts if an emergency should arise.
Repurchase agreements: Any limitation of security loans can be
circumvented to a considerable extent by the so-called repurchase
agreements. Since the securities obtained under a repurchase agreement in fact are not an investment, but actually a loan, the best way
out, therefore, without hurting legitimate business would seem to be to
require their classification as a security loan and not as an investment. To prohibit repurchase agreements could be circumvented by
instantaneous buying and selling of securities.
I n other words, Mr. Chairman, the repurchase agreement at the
present time, in certain cases, is used to avoid the provision of the
law which limits a bank in lending to one individual to 10 per cent
of its capital.and surplus, by making a repurchase agreement. A repurchase agreement, however, is not an investment. I t is a loan, and
if you classify it as such, you make it more difficult to avoid the law.
To prohibit repurchase agreements entirely could be easily circumvented by instantneous buying and selling of securities. A bank, for
instance, would actually buy the securities and at the same time sell
them at a lower price, the delivery of the securities to take place in
three or four months.
The CHAIRMAN. The difference being the amount of the discount ?
Professor NADLER. Yes.

Classification of loans: At present loans are classified according
t o the security in back of them and not according to purpose. Hence




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

a security loan may be obtained for business purposes, and vice versa,
an unsecured loan may be used for purposes of carrying securities.
Now, Mr. Chairman, suppose, for instance, that I have a security
loan with my bank and the security has gone down. The bank may
call me in and say, " If the superintendent of banks comes in and
finds that the value of the securities has gone down, he will make it
difficult for me." So, the bank helps itself by reducing the security
loan 50 per cent, but making a direct loan to the customer. However,
the loan is still used for the purpose of carrying securities.
The largest volume of security loans is not made to brokers or
dealers but to individuals or firms, and the largest increase in recent
years was in the latter item. As a matter of fact, loans on securities
to others are more dangerous to the credit structure of the country
than loans to brokers. Before any limitation on security loans is
imposed, it would seem advisable to make a careful analysis of these
loans and that legislation should be directed primarily against loans
obtained for the purpose of carrying securities and not against total
loans on securities.
Loans for account of others: Loans for account of others were
the most dangerous element in security speculation in 1928-29. The
danger arises from the following facts:
First. These loans may expand in volume without affecting the
volume of bank loans and bank deposits; hence they are more difficult to control by the reserve banks.
Second. They do not decrease the volume of loans and deposits
of the banking system as a whole and hence, no matter how large
they are, they do not affect the lending power of the banks; to the
contrary, they may increase the lending power of the Wall Street
banks if the funds come from outside New York City.
Third. To a large extent loans for account of others represent an
increased velocity of bank credits, thereby making speculation on a
large scale possible with comparatively little bank credit.
Proposed remedy: Since most of these loans are placed by corporations, the latter are carrying out banking functions. A law
prohibiting corporations whose primary function is not, banking^
from lending money, would seem to be the best remedy. If such a
law should be declared unconstitutional, a similar result could be
accomplished by the following measures:
Since in case of a rapid withdrawal of funds by " others," banks
invariably have to substitute their own credit for that withdrawn,,
and since they can do so only through an increase of reserve bank
credit, it would seem not improper to demand of banks to maintain
a reserve against these loans with the reserve banks. Through this,
and particularly if the Federal reserve banks are not allowed to lend
funds for security purposes, the banks themselves would refuse to
handle loans for the account of others.
Mr. WILLIS. Does that complete your statement ?
Professor NADLER. Yes, Doctor Willis.
Mr. W I L L I S . May I ask you a question or two about the foreign
bond situation? Have you made any inquiries or investigations
abroad lately on behalf of your institute ?
Professor NADLER. Yes, sir.




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501

Mr. W I L L I S . What do you expect to be the course of events as
regards the issue and purchase of foreign bond issues in this market
from now on?
Professor NADLER. From now on I believe the volume of foreign
securities issued in the American market will' be smaller. Foreign
securities, in my opinion, however, are a necessity at the present time,
for the simple reason that we have invested between ten and twelve
billion dollars abroad, excluding loans made by the United States
Government and excluding direct investments. If the debtor countries are to pay principal and interest, they will have to borrow
more here. I believe, however, that the American investment bankers, and particularly the sounder ones, have learned a lesson from the
experience of 1927.
I n 1927 the American investment banks—particularly those which
may be classified as second-rate banking houses—went over Europe
and South America, asking various States to borrow and suggesting
plans how to borrow, with the result that a number of countries
have overborrowed. So long as they could secure new loans, they
were in a position to pay principal and interest.
The CHAIRMAN. Out of the new loans ?
Professor NADLER. Yes, sir; or out of the proceeds of former loans,
and the moment the foreign bonds collapsed, because of the speculation in this country, foreign borrowing stopped and at the present
time we begin to have defaults along the same line as Great Britain
had 50 or 60 years ago.
Mention might be made of the default of Bolivia, which has
declared itself unable to pay the principal and interest on its outstanding obligations.
On the whole, Doctor Willis, foreign securities, as a group, are
about the same as any other group of securities. You will find among
the foreign securities " triple A " bonds, like the bonds of Switzerland
or Holland. At the same time you will find foreign bonds which
are worthless, like the bonds of Ceara and Santa Catharina. Such
loans should not have been made. The difficulty is that the small
interior banks are the ones that bought the bonds.
According to the report of the Comptroller of the Currency of
J u n e , 1930, the total volume of foreign securities held by member
banks amounted to $689,000,000, of which $119,000,000 were held by
central reserve city banks; $164,000,000 bv reserve city banks, and
$405,000,000 by the country banks.
The CHAIRMAN. Now, that would be a very small proportion of
the total.
Professor NADLER. That would be between 5 and 7 per cent.
The CHAIRMAN. Where is the rest of that, in your opinion ?
Professor NADLER. Well, the first-class bonds are held by investors
and a large number of bonds are floating around.
Mr. W I L L I S . They are held by houses that still have them for sale ?
Professor NADLER. Held by houses, and quite a number of them are
held by investment trusts.
Mr. W I L L I S . YOU feel the figures of the comptroller are not too
small? I t would seem to me there was a much larger commitment
on loans on foreign bonds.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Professor NADLER. I do not know whether they included Canadian
bonds, but these are the figures of the Comptroller of the Currency,
but only for member banks. I have had occasion to speak with
people holding foreign bonds, and I find that country banks have
quite a large amount of foreign bonds which are not of the highest
grade, and I asked them why they bought them instead of better
bonds, and they said because of the yield. The country banks' deposits consist largely of time deposits and they insist on having bonds
of high yield. If they bought Peruvian bonds, for instance, they
have a yield of 10 to 12 per cent, but the safety is not there.
The CHAIRMAN. Was any considerable amount of these bonds purchased by country banks bought upon the advice of the larger correspondent banks or upon the insistence of the larger correspondent
banks ?
Professor NADLER, Here, Mr. Chairman, you would have to distinguish among banking houses. There are many who are very
scrupulous in advising their customers what to buy. Others, on the
other hand, just consider the country banker as a good dumping
ground for second or third grade securities.
The CHAIRMAN. Those figures would indicate they dumped all
right.
Professor NADLER. Those figures would indicate that two-thirds
of the foreign bonds held by member banks on June 30, 1930, were
held by country banks.
The CHAIRMAN. What proportion would you think is held by
nonmember banks of which there are a great many more ?
Professor NADLER. I have no idea, but probably a great number.
Senator TOWNSEND. Your report only includes the member banks ?
Professor NADLER. Yes, sir.

Mr. W I L L I S . Do you think these foreign bonds held in the country
banks, for instance, will have to be redistributed, or do you think
they will be continued there and simply marked off from time to
time?
Professor NADLER. I believe if the banks were required to write
off their paper losses that the banks would be more careful in buying
securities. If, for instance, a bank in preparing its statement, instead
of putting $100,000 of bonds at the purchase price would have to
put in $60,000, the market price, the banks will be much more careful
in making investments.
Mr. WILLIS. A t the present time very little of that marking off
has been done in foreign bonds?
Professor NADLER. Very little, so far as I know.
Mr. W I L L I S . So the losses are still to be taken as a matter of fact?
Professor NADLER. They are still paper losses.
Mr. W I L L I S . Have you looked into the acceptance situation in
Europe at all?
(Discussion off the record.)
Professor NADLER. SO I think we have learned little from the
British experience. I n 1927 certain American banking houses threw
hundreds of millions of dollars into foreign countries, and in several
instances the loans were not warranted. The reason simply was that
the bonds could be sold. Of course, there were banking houses which




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

503

objected to such practices. They felt that through such dealings
foreign securities will be hurt and it will be impossible in the future
to issue high-grade foreign securities.
Mr. W I L L I S . Was not also that process helped along by reports of
so-called American experts who were sent to those countries by bond
houses and reported favorably on large issues of bonds?
Professor NADLER. I t had an influence, Doctor Willis. A number
of Americans would spend eight days in a country and come back
and write a glowing report. To a large extent it is the fault of the
country banks. I remember a country banker coming in to see me
and asking about Algerian securities, when as a matter of fact he
had in mind Bulgarian securities. He had no idea of the country,
but he was willing to buy its securities.
Mr. W I L L I S . And your institution endeavors to give facts which
will prevent that?
Professor NADLER. What we undertake to do is report the facts as
we find them in official documents.
Mr. WILLIS. I t is supported by bankers ?
Professor NADLER. We receive an annuity of about $10,000 from the
Investment Bankers Association, but they have no right to interfere with our findings or publications. Many times our reports were
not favorable, and the banks took them without protest or change.
Mr. W I L L I S . Was the institute created on account of these difficulties with foreign bonds?
Professor NADLER. The institute was created, I would say, by the
better houses interested in foreign securities for the purpose of preventing the issuance of poor-grade bonds—bonds which everybody
who had studied the situation knew would cause trouble in the future,
but, of course, so long as the market was good—and the market was
good in 1927—you could have sold any bonds.
Mr. W I L L I S . Was that all you desired, Senator, about foreign
bonds?
Senator WALCOTT. Yes.
Senator TOWNSEND. What other income have you ?
Professor NADLER. From New York University, which pays the
salaries of all the men who work for the institute. Then we charge
$15 or $25 a year to those who receive the bulletins, and the money
which we receive from the Investment Bankers Association is used
primarily for the purchase of books, pamphlets, magazines, and for
printing the bulletins.
Senator TOWNSEND. Are those bulletins issued weekly?
Professor NADLER. No, sir; about once a month.
Mr. W I L L I S . Those are bulletins on the credit of a given country ?
Professor NADLER, Yes.

Mr. W I L L I S . I want to ask what your observation abroad has been
about the acceptance situation. First, do you think our rate of increase in outstanding acceptances is more rapid than that of other
countries ?
Professor NADLER. Yes, Doctor Willis; I believe that the volume
of acceptances outstanding in this country has increased too fast at
the present time, and for a number of years it has been larger than
at any time in Great Britain. I further believe that if the reserve




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

banks had not taken the position that they have, under all circumstances, to support the acceptance market, we could not have had so
many acceptances outstanding.
Mr. W I L L I S . I t has been a hothouse development ?
Professor NADLER. I t has been a hothouse development; yes, sir.
Mr. W I L L I S . Have our acceptance transactions been subject to any
important abuse ?
Professor NADLER. Of course, for an outsider it is hard to say
whether there has been abuse or not. But I know of a few instances
where several acceptances have been issued on the basis of one transaction. For instance, on one parcel of silk, and particularly on one
parcel of fur, five or six acceptances might be outstanding. I consider that an abuse.
The CHAIRMAN. When you speak of acceptances, have you reference to exportations and importations of goods or to domestic
acceptances ?
Professor NADLER. Well, acceptances arising out of exports and
imports are, of course, very sound. They are self-liquidating.
The CHAIRMAN. They are the only sort of acceptance you have
in European banks?
Professor NADLER. Yes; I personally do not believe in domestic
acceptances, and particularly do I not believe in acceptances created
because commodities are carried in warehouses. I believe the volume
of domestic acceptances in this country is becoming too large.
The CHAIRMAN. If it is at all, it is too large.
Professor NADLER. I t is absolutely too large.
The CHAIRMAN. The whole system is wrong and impracticable,
in my opinion.
Professor NADLER. You can trace it largely to the Federal reserve
banks. There were times when the Federal reserve banks held twothirds of the acceptances outstanding, either for their own account
or the accounts of foreign correspondents. I t is a situation which
you can not find anywhere else in the world.
The CHAIRMAN. I t was predicted by one authority that if we ever
embarked on that system it would be ruinous.
Mr. W I L L I S . D O you think domestic acceptances have encouraged
speculation or not?
Professor NADLER. I think at times they have. The acceptance
is with the bank and it can be renewed from time to time, and the
owner of the merchandise thus holds out for a better price.
Mr. W I L L I S . YOU have not followed the extent to which the acceptance is used in carrying commodities for the F a r m Board, have
you ?
Professor NADLER. Not very much.
Mr. W I L L I S . D O you think the acceptance development in this
country has interfered with real credit control or the proper management and control of credit by the reserve banks ?
Professor NADLER. Absolutely. Of course it is difficult for me, in
the presence of Senator Glass or Mr. Willis, to interpret the reserve
act.
The CHAIRMAN. D O not fool yourself as far as Senator Glass is
concerned.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

505

Professor NADLER. A S I understand the act, the open-market operations of the reserve banks were intended to be incidental powers
and not primary. At the present time, and particularly during*the
last few years, the reserve banks have used the open-market operations as a major instrument of credit control, and the thing which
is particularly objectionable is for the reserve banks more or less to
tell in advance how many acceptances they will buy in the future.
For instance, I remember a bulletin issued by the Federal Keserve
Bank of New York in which it was stated that during the next three
or four months they will buy so many acceptances. That is a practical invitation to the acceptance dealers to bring their acceptances
to the Federal reserve banks.
Mr. W I L L I S . SO, on the whole, you feel the development of acceptances has improperly interfered with the development of credit ?
Professor NADLER. Yes.

The CHAIRMAN. I t is simply inviting loans instead of respondingto credit demands.
Professor NADLER. When the Federal reserve banks go out in the
market and buy acceptances, as they did in 1927, or buy Government
securities, it immediately forces the member banks to extend credit;
and if there is no demand for credit for commercial purposes t h e
money goes into the speculative market.
Mr. W I L L I S . Do you see any relation between the call-money rates
and commercial rates ?
Professor NADLER. There is a definite relationship. The callmoney rate is the dominant rate in New York. All rates go up or
down with the call-money rate. The only difference is that the callmoney rate is not primarily related to the discount rate, but t h e
acceptance rate and commercial paper rate tend to move along with
the discount rate, but the call-money rate almost always influences t h e
acceptance rate.
Mr. W I L L I S . I S that through voluntary action or community of
action on the part of those who fix the call-money rates or the reserve
authorities, or do you think it is through automatic or reflex action ?
Professor NADLER. I will say this: That whenever a bank has surplus funds to place in the market, it will almost always choose t h e
market where the rate of interest is higher. If the call-money rate
is higher, they will place their money in the call market.
Of course, the rate on acceptances depends largely on the rate of
rhe Federal reserve banks of which they buy the acceptances. However, if the call rate goes up, the acceptance rate tends to go up.
Mr. W I L L I S . I have one or two questions more on international
banking. Have you followed the development of the international
relationships; that is to say, relationships between the Federal re*
fcerve banks and other central banks during the past five years ? H a v e
you studied that during your inquiries abroad for the institute ?
Professor NADLER. Yes; I have. The action of the Federal Ee»
:erve Bank in New York or the New York money market has a very
strong influence on all other countries for the reason that New Y o r k
is one of the most important money centers in the world, and New^
York is, to a large extent, the clearing house for international t r a n s actions ; hence any increase in the rate of interest in New York finds




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

an immediate reflection in other countries, and, similarly, any decrease in the interest rates in New York is followed by a decrease
in other countries.
Mr. W I L L I S . You feel our interest rates here are controlling interest rates for the whole world?
Professor NADLER. T O a large extent; yes.
I n 1929 neither Great Britain nor other countries wanted to increase their discount rate, and yet they were forced to do so by the
higher rates prevailing in New York—the higher rates of interest
prevailing in the United States—because the higher rates here attracted a large volume of funds from European countries, resulting
in some instances to an inflow of gold, and in order to protect themselves they had to raise their discount rate.
Mr. W I L L I S . What responsibility do you think our reserve system
has in those premises? How far should it consult with foreign central banks and be influenced by foreign conditions ?
Professor NADLER. I n my opinion, the Federal reserve's prime
responsibility is to the American banking system.
The CHAIRMAN. That is what it was established for.
Professor NADLER. But at the same time neither the reserve banks
nor the Reserve Board can not overlook conditions abroad. I n the
past it has seemed to me that the reserve banks, or the Reserve Board,
whichever was the spokesman
The CHAIRMAN. The Reserve Board, primarily, is the final spokesman in matters of that sort.
Professor NADLER. I t seemed to me, in my opinion, the Federal
Reserve Board ought to take into consideration conditions abroad.
Now take, for instance, the period of 1927: I t is true that funds
and gold came into this country, but it was not necessary to lower
(he rate here artificially. If the European countries, and particularly the Bank of England, had raised its discount rate, the same
thing could have been accomplished. I t was not necessary to make
money artificially low here in order to help Great Britain.
The CHAIRMAN. That is what we did, however.
Professor NADLER. Yes. Another element in the situation is that
whenever the Federal reserve banks endeavor to help Europe they
do it through the open-market operations in this market, thereby
helping Europe, it is true, but at the same time affecting this market adversely. The Federal Reserve Board, if it felt it was advisable and necessary to help Europe, could accomplish the same thing
by buying in Europe. By buying acceptances in the London market
it would help the London Exchange without in any way affecting the
volume of credit in this country. But instead of this they have
helped Europe by making money artificially low here, by pouring
hundreds of millions of dollars of reserve credit into the open
market. Of course interest rates become low here, and there was
and outflow of gold to Europe and Europe was helped temporarily.
Of course low rates of interest started speculation, and created a
very good foreign bond market, with the result that foreign countries borrowed too much, and when speculation went too far the
foreign loan market collapsed and various countries found themselves with an increased public debt, increased debt service, but




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

507

no increase of national income or national revenues. So, in the
long run in my opinion, the reserve banks not only have not helped
Europe but have hurt Europe through their operations in 1927.
The CHAIRMAN. And hurt America, too?
Professor NADLER. Of course.
Mr. W I L L I S . What do you think should be the relation between
the Federal reserve system and the Bank for International Settlements?
Professor NADLER. Of course one has first to agree whether the
Bank for International Settlements was necessary and what is its
background. But it is here, and it has been established, and in
my opinion, I believe it would be better if the Federal Reserve Board
had direct contact with the Bank for International Settlements instead of indirectly, because there are contacts. No matter how one
looks upon it, Germany pays reparations to the Bank for International Settlements and a large part of it comes directly here.
That means a transfer of funds to the extent of $200,000,000 per
year and gradually increasing.
I t would be better, in my opinion, if the reserve board knew about
the transfers and could arrange these transfers in an appropriate
manner without disturbing the European market and without disturbing the American market. The Bank for International Settlements is also extending its activities through the placing of shortterm funds in numerous countries. I n many cases we have no
interest, but in some cases we might be directly interested, and I
believe, since the contact exists, it would be better for the Federal
Reserve Board to appoint somebody to represent the United States,
instead of private interests representing the United States.
Of course the Bank for International Settlements is political in
origin and is not yet free from politics.
(Discussion off the record.)
Mr. W I L L I S . What do you think of the pending bill, Professor
Nadler?
Professor NADLER. A S much as appeared in the press, I have read
carefully, Doctor Willis.
Mr. W I L L I S . Have you any opinion to express about it or any
suggested changes?
Professor NADLER. I n section 2, if I am not mistaken, of the Glass
bill, you would prohibit banks from buying or selling securities with
recourse. As I pointed out before, I believe this could easily be
circumvented by instantaneous buying and selling.
Then section 5 of the Glass bill provides a maximum rate of interest to be charged—I imagine to apply primarily to brokers' loans.
The CHAIRMAN. I t was not intended primarily to cover b a k e r s '
loans. What I had in view was the interior banks—member banks.
For example, the laws of the different States^ you know, vary in the
different States as to the rate of interest chargeable. For example,
in my State banks are not permitted to charge over 6 per cent interest. When, if ever, the discount rate of the fifth district goes to
6 per cent, why, that is an estoppel of rediscount by member banks.
I t ought not to be, but it is practically an estoppel because they can
not borrow money from the Federal reserve bank at any less rata




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

than they charge for the discount, and this was intended that when
that should happen the bank rate should be such as to insure a safe
transaction or desirable transaction to the member bank.
Professor NADLER. That makes it much clearer, Mr. Chairman, but
the experience with fixing a rate of interest—the usury laws of New
York fixed the maximum rate of 6 per cent—the experience is t h a t
it results in bonuses, surcharges, commissions, and so forth
The CHAIRMAN. We have the same thing in my State.
Professor NADLER. So that if anyone wants to sell a second mortgage he can seldom get it done at less than 12 per cent.
The CHAIRMAN. The real purpose was as I have indicated. F o r
example, a customer will come into a member bank, when the rediscount rate of the Federal reserve bank is high, and seek to renew a
loan or contract a new loan, and he is told by the banker that he
can not do it because the rate of the Federal reserve bank is so high
they can not rediscount, and when the rate goes as high as 6 per
cent—it never has in the fifth district, but it has in other districts—
it amounts to an estoppel of rediscounting by member banks with
the Federal reserve bank, and, of course, when there is no rediscounting it curtails the commercial transactions of the member banks.
That was the purpose of that section.
Professor NADLER. Of course, I did not understand that.
The CHAIRMAN. I t might apply on the stock market, but if so, I
should regret it.
Professor NADLER. Section 11 of the Glass bill would provide that
a member bank, when it borrows from the reserve bank on Government securities, should not be allowed, during this period, to increase
its security loans. My only question there i s : Why restrict it to
borrowing alone because member banks may rediscount, too?
Mr. W I L L I S . I do not follow you there.
Professor NADLER. A S I understand it, it applies only to 15-day
advances and does not apply to the rediscount of eligible paper. I n
my opinion, I would include the residcount, too.
Mr. W I L L I S . You would not allow them to get money, even on
eligible paper, if the proceeds of that are used for speculative
purposes ?
Professor NADLER. Certainly not. If a member bank borrows
$100,000 from the reserve bank, it can expand its loans and deposits
by about $1,000,000. Of this $100,000 may be for business purposes
and $900,000 for the purpose of carrying securities.
Senator WALCOTT. Would you do everything you could to restrict
speculation ?
Professor NADLER. Well
Senator WALCOTT. D O you not consider there are certain advantages in the freedom of movement ? Are you not afraid of nagging
laws, in other words ?
Professor NADLER. NO ; I personally would say this, that securities
should not be carried to a large extent with bank credit.
Take the situation in 1928 and 1929: Securities were issued. There
was not enough money in the country to buy all the securities; hence
the securities were carried with bank credit, and bank credit was,
therefore, used for the purpose of constructing plants. Then when




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

509

the banks called their loans the people had, to use an expression of
the street, to " milk " their own business in order to repay those loans.
There was a great deal of speculation going on with the aid of bank
credit, and when the crash came and the banks recalled their loans
that meant repayment, and repayment is always followed by depression. Speculation is all right so long as it is not carried out
with the aid of too much bank credit.
Senator WALCOTT. YOU have the greatest flexibility, for instance,
in England, but you do not get these periods of terrible inflation
such as we do as the result of the pouring in of bank credits; in
other words, their bankers are better than ours ?
The CHAIRMAN. YOU do not get these violent variations in the callmoney market.
Senator WALCOTT. NO ; they do not. They can put banking credit
behind securities, of course, over there. They have the utmost leeway.
Professor NADLER. There is the greatest difference between American banking and British practice. An American bank may not know
me but if I have securities to offer as collateral they will grant me a
loan. They have credit files, and if you took them away from the
American banks they would be blind. In England they look more
at the transaction—whether the transaction is self-liquidating or
not—and not so much to the individual. Here if a man has securities there is practically no limit to the amount of credit he can get
so long as he deals with a number of banks. I n London, however, a
man deals only with one bank.
The CHAIRMAN. Yes; and in Canada the same way.
Professor NADLER. I n England a man is not entitled to credit
primarily because he is responsible. They look at the transaction
itself.
Mr. W I L L I S . I S that all you have to say on the bill ?
Professor NADLER. I did not have a copy of the bill at my disposal
to read it over carefully.
Mr. WILLIS. I thought we had sent you one.
Professor NADLER. No, sir. W h a t I saw was in the newspapers.
The CHAIRMAN. We are very much indebted to you, professor.
Mr. Willis offered the following statement, presented by the Superintendent of Banking of Iowa, which is printed in full as follows:
Would like to respectfully submit to your committee that it apparently has
not been made plain the relative size of our two banking systems and the great
part they each play in the financial life of the country.
As of March 27, 1930, the latest available combined statement, there were
17,298 State banks and 7,316 national banks. State banks had capital funds of
$6,164,000,000, deposits of $35,800,000,000, and total resources of $44,690,000,000,
as compared with capital funds of $3,700,000,000, deposits of $21,600,000,000, and
total resources of $27,300,000,000 in the national banks. In brief, State institutions have 62 per cent more capital funds and 65 per cent larger deposits than
national banks. It may also be of interest for your committee to remember
that the resources of State banks have increased in the past 10 years from
$29,100,000,000 to $44,600,000,000, while the resources of national banks have
increased from $22,100,000,000 to $27,300,000,000. Total resources of all members of the Federal reserve system on March 27, 1930, amounted to $45,900,000,000, of which the State member banks contributed $18,500,000,000, or 40.42
per cent of the total.
34718—31—PT 3




6

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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

These figures make very plain the important part which State banking institutions play in our Federal reserve system through their voluntary membership.
Both classes of banks perform equally useful and necessary functions, and these
comparisons are not made with any purpose of disparagement but to make
correct statements which were necessary in their reflections on the comparative size, importance, and growth of our two great banking systems. Attention should also be directed to the need of both in the development of handling
of our country's business.
The failure of several thousand small State banks has been caused more by
severe economic depression of farm land and the prices of farm products than
by mismanagement, errors in supervision, or other banking causes. However,
better bank management would have provided for at least part of this depression. Mismanagement has not been entirely in banks in rural sections and in
totals of resources the failures in cities of over 200,000 population exceeded the
rest of the country combined in 1930.
L. A. ANDREW,

Superintendent of Banking of Iowa,
President National Association of Bank Supervisors,

(Whereupon, at 12.30 o'clock p. m., the committee went into executive session, at the conclusion of which the committee adjourned until
Tuesday, February 24, 1931, at 10.30 o'clock a. m.)




OPERATION OF THE NATIONAL AND FEDEEAL EESEEVE
BANKING SYSTEMS
TUESDAY, FEBRUARY 24, 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. Frederic C. Walcott presiding.
STATEMENT OF H. PUSHAE WILLIAMS, CHAIRMAN OF THE
EXECUTIVE COMMITTEE OF THE NEW YORK TITLE & MORTGAGE CO.
The ACTING CHAIRMAN. Mr. Williams, these hearings are rather
informal. We are trying to make them as constructive as possible.
We are trying to analyze the causes of panics, and trying to see if we
can not find some way to keep us on a little more even keel the next
time one comes, whenever that may be, and we appreciate frank
answers, and we have been getting them. We have been getting some
very valuable suggestions. They will be compiled, and I think you
ivill see, when you read them, we have done a fairhr good job.
Will you give, for the record, your name and official position?
Mr. WILLIAMS. H . Pushae Williams, chairman of the executive
committee of the New York Title & Mortgage Co., 135 Broadway,
New York. We are a mortgage and title company operating in the
metropolitan area, in so far as mortgage loans are concerned. Our
title business covers the entire United States.
Mr. W I L L I S . Is that an affiliate of The Manhattan Trust Co. ?
Mr. WILLIAMS. We are an affiliate of the Manhattan company.
The ACTING CHAIRMAN. Will you describe the nature of the business?
Mr. WILLIAMS. We are a title company organized under the insurance laws of the State of New York. We have three services to
render. The first service is title insurance, and the second is the
procuring of first-mortgage loan applications and, third, selling them
as guaranteed first mortgages. Those are our full limitations. We
did have, as an affiliate, the American Trust Co. That has been
taken in merger by the Bank of Manhattan Trust Co. But we are
limited to the three activities.
The ACTING CHAIRMAN. Your mortgage business is all guaranteed,
is it not?
Mr. WILLIAMS. We sell only guaranteed first mortgages. We do
not guarantee mortgages that we would not take ourselves; in other,




511

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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

words, we take mortgages and guarantee them as to principal and
interest.
The ACTING CHAIRMAN. Approximately what is the charge for t h e
guaranty ?
Mr. WILLIAMS. One-half of 1 per cent, irrespective of the interest
charge; in other words, if it is 6 per cent, it would be 5% guaranteed,
we would rather sell a guaranteed mortgage at 4 per cent, if the mortgage is 4 ^ per cent, than 5 per cent.
The ACTING CHAIRMAN. Your rate is a flat rate?
Mr.

WILLIAMS.

Yes.

The ACTING CHAIRMAN. I t is a rather customary rate?
Mr. WILLIAMS. I t is a fully established rate. I could bring out a
couple of points
The ACTING CHAIRMAN. If you have a prepared statement, we
should be glad to hear it.
Mr.

WILLIAMS. N O .

The ACTING CHAIRMAN. Or a verbal statement—anything you
care to say.
Mr. WILLIAMS. Mr. Willis was very liberal in his remarks, and so
I, in turn, will have to be rather liberal. I did not know the exact
province you wanted me to cover, but I think it is amazing to know
that, prior to the war, we wTill say, there were about two major
companies in New York, and I think their gross outstanding guarantys might have been around $100,000,000. I t might have been a
little more. We now have about 19 companies, and their outstanding
guaranties are about $3,000,000,000.
The ACTING CHAIRMAN. That is, in 10 years?
Mr. WILLIAMS. Just about 10 years. The last assessment roll,,
which does not include some of the mortgages that might come in,
shows $22,000,000,000. Of that, $4,000,000,000 is exempt. That
would leave about $18,000,000,000 net assessment roll. That would be
what you might call mortgagable property. Of that $18,000,000,000
there is about $4,000,000,000 to exclude immediately, because we do
not lend on factories, vacant lands, and in undesirable territory. I t
cuts it down to about $14,000,000,000.
The mortgage lien on that property would be about $8,400,000,000.
The ACTING CHAIRMAN. A little more than half ?
Mr. WILLIAMS. Yes. The guaranteed mortgage companies now
have about one-third of that mortgage lien in New York as against
about $100,000,000 prior to the war.
The ACTING CHAIRMAN. Were your first figures total? Would
that include insurance companies, or just the guaranteed mortgage
companies ?
Mr. WILLIAMS. I am speaking only of the guaranteed mortgages.
The banks in the metropolitan area have on deposit about $4,000,000,000. They lend about 60 per cent of that, which would be
$2,400,000,000, in mortgages. About 50 per cent of that is guaranteed
first mortgages; so another billion and a half would be mortgage
burden of the same type as a guaranteed mortgage company carries.
The ACTING CHAIRMAN. That brings it up to nearly $10,000,000,000.
Mr. WILLIAMS. That brings it up to about $4,000,000,000 actually
mortgaged
The ACTING CHAIRMAN. But you had $8,000,000,000




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

513

Mr. WILLIAMS. N O ; that is the mortgage lien values. You have
in addition to that about a billion more held by insurance companies,
trust companies, and estates.
Mr. W I L L I S . All in New York?
Mr. WILLIAMS. Yes. So I would say what you call conservative
mortgages now in the vaults of the companies, and so forth, that you
could consider as worth 100 cents on the dollar, about $5,000,000,000.
Now, the rest may be property without mortgages on it; it may
be held by individuals or held as purchase-money mortgages.
The ACTING CHAIRMAN. Those figures relate only to first mortgages ?
Mr. WILLIAMS. Yes; first. The type of mortgage we call a good
mortgage investment.
The ACTING CHAIRMAN. YOU have no figures covering the others—
the second mortgages?
Mr. WILLIAMS. N O ; you could not do that very well. Some man
could go through these figures and say my figures are wrong, but
they are about as near as you can get at them from the ordinary
point.
Of those 19 companies I referred to, I have not heard of any of
them refusing to pay the mortgage when due, in default of interest,
so that a guaranteed mortgage company, regulated by State authorities, is still a safe proposition.
The ACTING CHAIRMAN. And what has been their record in turn ?
Do you know what percentage of their mortgages are in default ?
Mr. WILLIAMS. We have taken a comparison of about the eight
largest companies. We do that out of their reports. I should say
the, gross amount of the largest company would be about 2 per
cent, and then it averages down to 1 per cent of the outstanding
guaranties.
A little item of foreclosures shows that during the last year,
from December 31, 1929, to 1930, units amounting to $1,200,000
were taken in and resold by one company, and they had left $140,000.
Another company foreclosed $11,000,000 worth and had left at the
end of the time $3,000,000. That company now has $10,000,000
under foreclosure, and I think you will find that about the same
proportion
•
The ACTING CHAIRMAN. On what basis is that? Is that on a 50
per cent basis ?
Mr. WILLIAMS. Sixty per cent.
The ACTING CHAIRMAN. All 60 ?
Mr. WILLIAMS. Yes.
The ACTING CHAIRMAN. Have you

the losses that show up in some
of those foreclosures?
Mr. WILLIAMS. Well, most of the guaranty companies have a land
company for taking in foreclosed property, rehabilitating it, and
then selling it. I do not know any of them that had an actual loss
yet—of the guaranty companies.
We in our experience in the last 10 years have a $2,000,000 reserve,
and we have not even touched that reserve in any of our presentday foreclosures. We are a long way from the top price when you
take a loan at- 60 per cent. You can even be a little bit above and
be fairly safe. I t is this taking of mortgages at 80 per cent that




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

has caused the damage in real estate. There has not been a single
failure of a guaranteed first mortgage company in New York, nor
have they defaulted in the payment of interest or principal. I n
other words, the day the interest is due the check arrives in the mail.
I am saying this for all of the companies, because I know if there
had been any difficulty that would have gone around like wildfire.
The ACTING CHAIRMAN. YOU are all under the State laws?
Mr. WILLIAMS. Yes. Against that record you can quickly name
the Cleveland Discount, the American Bond & Mortgage, the Commonwealth Bond & Mortgage, Forman & Co., and another company
that I think it wTould not be well to put on the record. These I have
named are notorious, because they are in the public eye now.
One very fitting example of the evil of the real-estate bond issues
is this: A builder made application to one of the companies now in
the hands of receivers for $4,250,000. He actually received $5,250,000. The property was well located. I n addition to that, the bonds
were offered for sale from the blue prints, and the bonds were all
sold to the unsuspecting public before a spade went into the ground.
Those funds went into a common pool, and the weak sisters were
helped from the sale of these bonds.
Now, we had a grand old time selling realty bonds. Anybody
could get a bond issue on a building—it did not make any difference;
they would buy anything. People who felt that they could get 6 or
7 per cent—why, the question of security was not involved. As
you know now, every one of these inflated bond issues must of necessity go to the laundry, be washed out, and start over again.
Mr. W I L L I S . Are there many in that position—that must " g o to
the laundry " in the next few years ?
Mr. WILLIAMS. I can not say with authority, but I think there are
Mr. W I L L I S . That is not only New York, but everywhere ?
Mr. WILLIAMS. I imagine so; yes.
Mr. W I L L I S . But you are speaking only of New York ?
Mr. WILLIAMS. I am speaking of New York.
Mr. W I L L I S . NOW, in the questionnaires which this committee has
sent out, it has been found that the banks are holders not only of a
great quantity of real-estate mortgages, but a great quantity of bonds
of the kind you described.
Mr. WILLIAMS. That is unfortunate, because many of these bonds
were sold without an idea of the return, without the idea of shrinkage, but on an appraised value in an inflated market and on the
return that was then had. Properties that were producing $30 and
$35 per room are now producing $18 and $20 per room; that is,
40 against 20 or 25. I t is almost 20 per cent—more than that, 30
per cent. So, you can see where the shrinkage will occur.
But it was common practice for all those bond houses to lend up
to 80 per cent and then try to cover it with an enormous amortization. Borrowers would pay the first amortization, but the second
would come along and they were helpless.
Mr. W I L L I S . YOU mean the holder who borrowed up to 80 per
cent
Mr. WILLIAMS. Yes; there ie no question about it. I know of one
bond issue now in default which had 17 points to the issuing company and another at 23 points to the issuing companj.
The ACTING CHAIRMAN. And that was on an inflated market, too?




NATIONAL AND FEDERAL EESEEVE BANKING SYSTEMS

515

Mr. WILLIAMS. Yes. That was dead before it started. Against
that the guaranteed mortgage company charges a maximum of 2 per
cent and costs for building loans. For straight loans it is 1 per cent
and costs, and in many cases less than that—maybe the title charge.
If you could have a loan on the corner of Forty-second Street and
Lexington Avenue, that is so desirable, the interest rates and charges
would be low.
The only way to make the bond issue carry that load wrould be to
step up the appraisal and then give them a large amortization, and
then the men who sold the bonds had a tremendous commission. The
Cleveland discount failure—one of the salesmen came to our office
and wanted a job. I asked him what his earning capacity was. H e
said he earned $15,000 the year before. I said, " How much did you
s e l l ? " "$150,000."
The ACTING CHAIKMAN. Ten per cent ?
Mr. WILLIAMS. Yes; 10 per cent.
Now, those are the faults of the present real-estate bond market.
But it is unfortunate that a real-estate bond market and a guaranteed mortgage market should be classified in the same category,
because they are not in the same category. They are as far apart as
day is from night.
Mr. W I L L I S . What do you regard, Mr. Williams, as the necessary
minimum qualifications to fit a real-estate bond for purchase by
banks ?
Mr. WILLIAMS. From long experience, I think our laws now—and
the experience of savings banks of 50 years—50 per cent of a conservative appraisal.
Mr. W I L L I S . Determined by whom?
Mr. WILLIAMS. If you have good committees in the bank—but let
me go back a point: If those lending institutions are also banks, and
have a well-set-up mortgage department, they can operate on a 60
per cent basis, determined by their own appraisers, who have had
experience in the field.
If those banks are the purchasers, they should not be allowed to buy
anything but guaranteed first mortgages. That sounds selfish but it
is not. I will give you an example.
The Bowery Savings Bank is a very large institution and the
Immigrant Savings Bank is a very large institution. They are large
enough and buy enough mortgages to be able to carry the burden of
their mortgage department, and so in those institutions they have a
regular lending department, including appraisers and inspectors, and
a regular follower-up for mortgages. The smaller banks that can
only purchase from time to time $10,000 or $15,000 or $25,000—they
send out one of their officers—maybe a director, who has no experience, who comes back and says it is a good loan, and then it goes
to their lawyers and they pass on the legal points, and they put in
the loan. They have not the machinery or the set-up for handling
mortgages, and unless they have a mortgage department they should
not buy anything except guaranteed mortgages.
I t might be worth while to hear the working of a mortgage company, so you can see the life and history of a mortgage.
Mr. W I L L I S . Before you go to t h a t : I understand you to say that
you think a mortgage, to be suitable for bank purchase, should be not
over 50 per cent of the appraised value




516

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

. Mr. WILLIAMS. NO ; 60 per cent.
Mr. W I L L I S . What amortization should there be ?
Mr. WILLIAMS. We, as a practice, use 2 per cent over $100,000. If
it can not stand a 2 per cent amortization and it is a very fine loan,
the period should be three years straight; in other words, if you
had a loan on the Vanderbilt house at Fifty-second Street and Fifth
Avenue, at 60 per cent, you could afford to take that on three years
straight and know at the end of the time the mortgage would be
more than certain. On the other hand, if you had a loan of $100,000
or over in the Bronx, a new building territory, it is necessary to
amortize that because the law of obsolescence immediately starts,
and you must have an amortization of 2 per cent per annum.
Mr. WILLIS. TWO per cent per annum is sufficient ?
Mr. WILLIAMS. Yes, sir.
Senator BULKLEY. YOU figure that on the building ?
Mr. WILLIAMS. Against the gross loan.
Senator BULKLEY. Including the land?
Mr. WILLIAMS. Yes.
Senator BULKLEY. You assume the land is depreciating?
Mr. WILLIAMS. The land really goes up, but the 2 per cent

on the
mortgage brings the mortgage down so that you can renew it.
The ACTING CHAIRMAN. YOU can apply it any way you please?
Mr. WILLIAMS, Yes, sir.
Mr. W I L L I S . Am I reasonable

in inferring that the bank ought not
to make mortgage loans itself direct, but should only buy guaranteed
mortgages ?
Mr. WILLIAMS. Unless they have the machinery for handling that
themselves.
Mr. W I L L I S . But the small banks do not have that machinery?
Mr. WILLIAMS. NO ; and can not have it, because it is too costly.
The ACTING CHAIRMAN. Then they should not deal in anything
except guaranteed mortgages?
Mr. WILLIAMS. That is right.
Mr. W I L L I S . What is your idea about buying real-estate bonds?
Mr. WILLIAMS. I should say they should take the same hazard, if
they are going to do it, as an outsider. I t is a hazard when you take
a real-estate bond and go after the high interest rate. You know
then you are taking a chance, and if they are willing to take that
chance, why
Mr. W I L L I S . Of course, every investment of a bank has some element of risk in it. The question is, how far ought a bank, with
savings deposits, to incur risks ?
Mr. WILLIAMS. None.
Mr. W I L L I S . Then, it would never do any business.
Mr. WILLIAMS. I do not know about that. You say they should
not take any risk
Mr. W I L L I S . But there is a risk in anything.
Mr. WILLIAMS. Oh, yes; United States Government bonds carry
some risk.
Mr. W I L L I S . A S I understood you, the maximum risk they should
take is that represented by the guaranteed mortgages, and you regard, for the small bank, either the direct real-estate loan, however
carefully made, by a concern that has not the machinery for it, or
the real-estate bond, as unfavorable investments?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

517

Mr. WILLIAMS. The present real-estate bond is undesirable as an
investment.
Mr. W I L L I S . By a bank ?
Mr. WILLIAMS. Yes. Savings banks that are not set up for making such loans should not make those real-estate loans. That seems
to me to be a sort of selfish statement on my part.
Senator BULKLEY. I do not see how you could say all real-estate
bonds are undesirable. I should think there would be as much difference between them as day and night.
Mr. W I L L I S . I think Mr. Williams said they were risky.
Senator BULKLEY. I thought what he said implied, as a class, all
real-estate bonds were bad.
Mr. WILLIAMS. Suppose we take those by the companies I have
mentioned, and others by bond companies down town, where they
have 10 or 15 points for the sale of them: Those are not desirable
real-estate bonds.
Senator BULKLEY. I did not think your language meant to condemn all real-estate bonds.
Mr. W I L L I S . Perhaps I led Mr. Williams to make too extreme a
statement by asking whether the average real-estate bond was too
risky for the average bank. I think that perhaps is the meaning
of his statement.
Mr. WILLIAMS. I should say the exception would be the rule in
that case. I t is the exceptional real-estate bond that is a good bank
investment, issued, as they have been, in the last five years.
The ACTING CHAIRMAN. I think that is a good qualifying clause.
They have gone wTild over the thing.
Mr. WILLIAMS. Oh, yes. You take a bond on the Lincoln Building in New York. That was properly set-up. They are good bonds.
I would not want to say they were bad bonds. As a matter of
fact, the bonds on The Manhattan Co. Building—we do not own the
building, although it is named after us; we own the land under
it—that is a good set-up. Those two items I remember particularly.
Mr. WILLIS. Take such bonds as those on 61 Broadway, the Waldorf Astoria Hotel, and others of that description.
Mr. WILLIAMS. I do not know the set-up of those bonds, but I
think they are all right. 61 Broadway, if that has the proper valuation set-up, ought to be a good bond. I t is a good location.
But it is not uncommon for any kind of a development to take
a bond issue. I t could be a hotel in Pinehurst; another one at
one of the beaches down in Virginia; two or three in Florida that
I might mention, and a couple in Atlanta; I think four or five in
Chicago that I think were in the morning paper, if I am not mistaken, and a couple in Washington, too, that I imagine they were
able to get some of our representatives to buy that they now wish
they had not purchased. I t is unfortunate that a real-estate bond,
whether it is good or bad, is classified as a real-estate bond. Many
of these bonds issued in the last four or five years have no right to
be called real-estate bonds. The people did not know, when they
were buying them, they were buying an interest in the property.
They know it now. They are really a participator in the purchase
^riee and a little bit more.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

The ACTING CHAIRMAN. H O W would a map look of the New York
mortgage business? Would it be mostly urban or have a fair scattering of rural property?
Mr. WILLIAMS. I am glad you asked that. Our savings banks
can not lend on vacant land, and most of the guaranteed mortgage
companies have a by-law against lending on vacant lands. The
market for guaranteed mortgages has very definitely marked what
\ o u can lend on and what you can not. So we eliminate factories;
we eliminate churches and breweries; we .are very scarce on theaters—
very few theaters or any specialties. They are practically eliminated
from the guaranteed mortgage field because
The ACTING CHAIRMAN. How about residences and farm properties?
Mr. WILLIAMS. Residences, apartment houses, store properties that
tfhow a good return, and some good loft buildings.
Senator BULKLEY. That does not mean that there are no apartmenthouse loans and no theater loans?
Mr. WILLIAMS. There is an old saying that everything is good at a
price and sometimes it applies to theater loans. If you borrow on a
theater in New York to-day, you borrow on the land value.
The ACTING CHAIRMAN. Your business depends largely on watching the trend of things—the drift?
Mr. WILLIAMS. Yes; but we would not go into the specialties,
anyhow.
The ACTING CHAIRMAN. You have learned to avoid them by experience ?
Mr. WILLIAMS. I t has been the 50 years' experience of savings
banks and about 30 years' experience of title companies, and their
experiences have taught them there are certain kinds of loans that if
you take them they stay on the books and you will have difficulty in
selling them before you are through.
The ACTING CHAIRMAN. Are you doing anything to educate the
investing public toward sound categories?
Mr. WILLIAMS. Our general guaranteed first mortgages are along
that line, and we have always been able to bring those people who
want sound investment
The ACTING CHAIRMAN. I think they need it.
Mr. WILLIAMS. Oh, a large amount of this trouble is the people's
fault.
The ACTING CHAIRMAN. Of course it is.
(Discussion off the record.)
Mr. WILLIS. I think you said a while ago it might be well to tell
what goes on in a mortgage department. I merely wanted to complete this part of the testimony before you went to that.
Mr. WILLIAMS. Well, an application comes to the title company.
There is an inspection department, and there are also the appraisal
department, and the estimate department. They all work on that
application. I n all your branches you have a local committee that
passes on that loan, and they are thoroughly familiar with the property in that territory. After the local committee has approved it,
it comes to your main committee in the headquarters, and they, in
turn, approve it. That is an application that is safe, and, in addition to that, we have also our credit department who check up the
credit of the proposed borrower. So we feel, when a loan arrives



NATIONAL AKD FEDERAL RESERVE BANKING SYSTEMS

519

at the stage that it is a mortgage, it has had every possible examination that a loan could have.
We look at it from three standpoints—its physical value, its earning value, and its saleability. If it will not pass those three tests,
we do not take it. After it has passed those three tests, we then
accept the loan and put our guaranty back of it, and we sell it to
an institution. We will not take a loan on the books that we would
not take ourselves as an investment; so that any time we guarantee
a mortgage we figure that some time it is coming back to us and it will
be our investment.
There is a great difference between a guaranteed first mortgage and
the real-estate bond. The man that issues a real-estate bond is
merely the agent of the applicant and the good purchasing public.
The minute the public buys those bonds the seller is out. He has no
further interest in it, except, if he is a large bond house, he may try
to protect them for the benefit of the company. But the ordinary
issuing house of that type, without a guarantee, is no longer responsible for the real-estate bond he has sold.
The greatest example of that is going on to-day where all these
companies, who are either in the hands of receivers or in questionable slate, are building up committees to take care of the properties.
They, themselves, are building up the committees so as to control the
situation. The moment a mortgage is in default, the guaranty company steps forth, and they say, " Our guaranty is good; we are responsible for that property; we will see it through, and there will be
no loss to you." Knowing that ahead of time, all the guaranty
companies, large or small, will not foolishly go ahead and take a loan
or even guarantee a loan that they know in three or four or five years
will come back on the books with the possibility of a loss.
Now, that is a strong governing feature. The human equation we
have in that is the difference that makes a guaranteed mortgage and
the ordinary real-estate bond.
That can be applied to purchasing savings banks or national
banks
The ACTING CHAIRMAN. What is the average return on mortgages
to the investor?
Mr. WILLIAMS. Five and a half and 5 per cent. There are a number of institutions that have bought mortgages right along that have
not had losses, however. The most outstanding of them is possibly
the United States Trust Co. in Wall Street. I mention them because
they are the essence of conservatism.
Mr. W I L L I S . They have bought them all over the country, have
they not ?
Mr. WILLIAMS. That is the United States Trust Co. I am speaking of the United States Trust Co. They may have bought some
where they have estates in New Jersey and Connecticut.
Mr. W I L L I S . But you have bought them all over the country ?
Mr. WILLIAMS.

Yes.

The ACTING CHAIRMAN. What kind of a certificate does the
investor hold ?
Mr. WILLIAMS. He holds a participation in the mortgage.
The ACTING CHAIRMAN. With your name on the paper ?
Mr. WILLIAMS. He holds two kinds. He holds a participation in
a distinct mortgage which, of course, is a trust investment or, in an



520

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

ordinary business man's investment, he holds a participation in the
pool.
Mr. W I L L I S . What is there to prevent the mortgage itself from
being disposed of, as has been the case, I understand, in some of the
failures here in Washington?
Mr. WILLIAMS. State regulation, I should imagine, in the case of a
pool, and the trusteeship in the case of a specific mortgage.
Mr. W I L L I S . Have you placed all mortgages in the hands of some
other company?
Mr. WILLIAMS. Always placed them in the hands of another company, but not for the direct pool issue.
Mr. W I L L I S . That remains in your hands ?
Mr. WILLIAMS. We have a State law which permits the title company to issue certificates direct against the deposit of the mortgage.
Mr. W I L L I S . But there is an element of danger involved, is
there not?
Mr. WILLIAMS. There is no element of danger if the company
is regulated or subject to inspection by the State and all those mortgages are in on an appraised value. There is an element of danger
in any company if it is not run right. The personal equation comes
in. I do not think there is any way of stopping that. You can
have specific mortgages which would be bad if there is collusion.
The ACTING CHAIRMAN. Have you any questions, Senator Norbeck, to ask Mr. Williams before we go to another phase?
Senator NORBECK. Yes; I have a few. Your company, Mr. Williams, has been in business how long?
Mr. WILLIAMS. Since 1901.
Senator NORBECK. Some of the companies have been in business
much longer?
Mr. WILLIAMS. TWO other companies, Title Guarantee & Trust
Co. and Lawyers Title & Guaranty Co.
Senator NORBECK. They have been in business how long?
Mr. WILLIAMS. About 47 years. They were the first companies.
Senator ISTORBECK. What capital have they—about how much?
Mr. WILLIAMS. I will give you the eight principal companies.
The New York Title & Mortgage Co. has $64,400,000 capital,
surplus, and undivided profits.
Senator TOWNSEND. How is that divided?
Mr. WILLIAMS. Capital, $20,000,000; surplus, $30,000,000; and undivided profits, $14,400,000.
Senator NORBECK. Could we not save time if he would put all
that information into the record ?
Mr. WILLIAMS. Very well.
(The information referred to is printed in full as follows:)
Comparative statement as of December SI, 19S0
New York Title & Mortgage Co
Capital
Surplus
Undivided profits

$20, 000, 000. 00
30, 000, 000.00
14, 401, 538. 84
64,401,538.84

There are $9.16 of capital funds for each $100 of guaranties
in addition to the property securing the mortgage
702, 979, 828.40




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
Bond & Mortgage Guarantee Co.:
Capital
Surplus
Undivided profits

521

$10, 000, 000.00
10, 000, 000. 00
1, 802, 202.40
21, 802, 202. 40

T h e r e a r e $2.53 of capital funds for each $100 of g u a r a n t i e s
in addition to the property securing the mortgage—
862, 000, 000.00
H o m e Title I n s u r a n c e Co.:
Capital
Surplus and undivided profits

There a r e $6.18 of capital funds for each $100 of g u a r a n t i e s
in addition to t h e property securing the mortgage
L a w y e r s Mortgage Co.:
Capital
Surplus
Undivided profits

2, 500, 000.00
2, 559, 348.52
.
(__
5, 059,348. 52
81, 880, 495. 59
12,000, 000.00
10, 00O, 000. 00
270, 341.00
22, 270, 341. 00

T h e r e a r e $5.30 of capital funds for each $100 of g u a r a n t i e s
in addition to t h e property securing the mortgage
419, 892, 799.00
L a w y e r s Title & G u a r a n t y Co.:
Capital
Surplus
Undivided profits

10,000,000.00
15, 000, 000. 00
3, 696,864.14
28, 696, 864.14

There a r e $13.08 of capital funds for each $100 of guaranties
in addition to the property securing the mortgage
219, 371, 955,04
This company h a s been guaranteeing mortgages only since
December, 1913.
L a w y e r s Westchester Mortgage & Title Co.:
Capital
Surplus
Undivided profits

3, 000,000.00
2, 000, 000. 00
616, 651.96
5, 616, 651.96

T h e r e a r e $10.78 of capital funds for each $100 of guaranties
in addition to the property securing t h e mortgage
Westchester Title & T r u s t Co.:
Capital
Surplus
Undivided profits

52, 095, 981.90
2,000,000. 00
2, 000, 000. 00
1,000, 851. 31
5,000, 851. 31

T h e r e a r e $6.78 of capital funds for each $100 of g u a r a n t i e s
in addition to the property securing t h e mortgage

73,722,199. 82

Mr. WILLIAMS. I will give you a couple of high spots on that.
The New York Title & Mortgage Co. has $64,400,000 capital funds,
and they have in bank of every $100 guaranteed, $9.16.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

The Bond & Mortgage Guaranty Co. has $21,802,000 capital fundsand they have $2.53 of capital funds for each $100 of guaranteesin addition to the property securing the mortgages.
The Lawyers' Mortgage Co. has $419,000,000 outstanding guarantees and they have against that $5.30 in capital funds for each
$100 outstanding.
From long experience, both in France and America, a guaranty
fund maintaining a ratio of 20 to 1 is perfectly safe.
The ACTING CHAIRMAN. Twenty to one ?
Mr. WILLIAMS. Yes. I think one of the French companies runs
about 40 to 1, but we only go about 20 to 1.
Senator NORBECK. Then there are only two companies older than
yourself ?
Mr. WILLIAMS. Yes, sir.
Senator NORBECK. You have

a company that takes over land that

you foreclose?
Mr. WILLIAMS. Yes, sir.
Senator NORBECK. D O they carry a
Mr. WILLIAMS. Quite a good deal.
Senator NORBECK, I am not sure I

great deal?

heard you in speaking about
the length of the term of loans you generally make ?
Mr. WILLIAMS. Three years and five years.
Senator NORBECK. The average-sized loan would run about what?
Mr. WILLIAMS. The smallest loan we make now is about $5,000, and
the largest loan we have made is about $5,000,000.
Senator NORBECK. Your average loan would run $100,000 or
$500,000?
Mr. WILLIAMS. N O ; we have a great many in the small amounts,
around $5,000 or $6,000. I do not think they would go that high.
Senator NORBECK. YOU spoke about loft buildings. That is a term
I did not understand.
The ACTING CHAIRMAN. H O W do you get along with such a small
capital ?
Mr. WILLIAMS. I think we have a very large capital. I t is 10 to 1.
W e can go out and guarantee $1,400,000,000 on that capital fund.
Mr. W I L L I S . D O you have the stockholders' double liability ?
Mr.

WILLIAMS, N O ,

sir.

Senator NORBECK. YOU spoke about loft buildings. What are
they?
Mr. WILLIAMS. They are buildings with open floors and used for
light manufacturing where they happen to be near the retail disposer; in other words, you have a concern like Lord & Taylor, for
whose particular needs a loft building is particularly desirable, and
if you have a loft building, say, between Fifth and Sixth Avenues,
t h a t is valuable property.
Senator NORBECK. What is the proportion between the real estate
value and the improvement?
Mr. WILLIAMS. That is very hard to answer.
Senator NORBECK. I mean of the loans you make. Does the
ground generally go with the property or is it generally on a lease ?
Mr. WILLIAMS. We can only loan on the fee. Leasehold loans we
do not like.
Senator NORBECK. Then, the proposition is




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

523

Mr. WILLIAMS. You did not ask me about leasehold bonds. We
disapprove of them intensely. We figure a man who buys a leasehold bond buys a participation in bills payable.
The ACTING CHAIRMAN. I think that is a good description of
them. Clarence H . Kelsey was the first to engage in this business,
was he not ?
Mr. WILLIAMS. About Clarence Kelsey: Everybody feels that
Clarence Kelsey was not only the dean but a shepherd and leader.
He laid down principles in title insurance that have been followed
for a great many years.
The ACTING CHAIRMAN. I am glad to hear you say that.
Senator NORBECK. NOW, a loan that is made on a piece of property valued at $1,000,000
Mr. WILLIAMS. We would lend $600,000.
Senator NORBECK. What is the comparative value of the real estate
and building generally ?
Mr. WILLIAMS. Well, now, the land might be worth a million
dollars and the building worth a million dollars, but we would only
lend a million on it. Another time the property might be worth a
million and a half and the building only worth half a million, and
we wTould still lend a million dollars. I have in mind a case where
we loaned $2,100,000 on property worth $4,800,000, and the buildings
will cost about $2,800,000. We are just lending the value of the land.
Now, when you go to the suburban section, where you get the
$5,000 loans, you will find probably the land is worth $2,500 or $3,000,
and the house costs $6,000 or $f,000, and we lend $6,000 on that.
That would be a 60 per cent loan. Those are good loans. The
borrower is a house owner, and he is not interested in the going
up or down of real-estate values or the stock market.
Senator NORBECK. Who generally buys your mortgages ?
Mr. WILLIAMS. I can give you that. If you ask another question,
I will answer that and continue looking this up. I n the meantime, I
think I will find it.
Senator NORBECK. I wanted to ask you something about the history of real-estate values in the city and the fluctuations.
Mr. WILLIAMS. Well, of course, New York for the last 10 years has
just been climbing the ladder in real-estate values. I have not the
figures before the war, but I think the last year or so they have
stepped up about $450,000,000.
Senator NORBECK. I n per cent that would be what? What would
be the per cent of increase in real-estate values in the last 10 years?
Mr. WILLIAMS. Since the war the return from apartment houses
is just 100 per cent more than it was in 1913.
Senator NORBECK. That is due to the difference in the replacement
value ?
Mr. WILLIAMS. These are the land values and all. That would
reflect the increase in the value.
Senator NORBECK. I S it not almost 100 per cent ? Did not the cost
of building go up almost 100 per cent between 1914 and 1924?
Mr. WILLIAMS. I t went higher than that, but an apartment that
was renting for $20 in 1913 and 1914 rents for $40 now.
Senator NORBECK. And it has been higher in the meantime ?
Mr. WILLIAMS. Yes. But that would be just about 100 per cent.




524

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator NORBECK. Then the real-estate values from 1914 to 1924
increased more than 100 per cent, and they have been going up
slightly since?
Mr. WILLIAMS. Yes; and there has been a decrease, decidedly, in
the last year. I should say that it has ranged from 15 to 20 per cent
in real estate. Although the city has shown a lift in some of them,
there has been now—well, I think they reduced the valuation $400,000,000. There are many cases where the assessed value by the city
is higher than the appraised value by the companies. We are not
governed, of course, by the assessed value.
Senator NORBECK. But you find the assessed value a guide, as a
rule?
Mr. WILLIAMS. Oh, we use everything.
Senator NORBECK. YOU find it helpful on occasions %
Mr. WILLIAMS. Yes.
Senator NORBECK. What really determines the value of real estate ?
Mr. WILLIAMS. Income and location.
Senator NORBECK. Not so much replacement cost as income ?
Mr. WILLIAMS. Income determines the value—what can you

get for the property. We had a number of ideas—quick enhancement within the near future would give it value, but we have to
figure in the near future will there be a suitable—you can take a
store that is nothing more than a frameshack, and if it is properly
located it would place a value on the land which would absorb and
discount the value of the store and still give you a high net value.
When a situation like that arises we just discount the building and
allow one year's rent.
Senator NORBECK. The fact certain companies have run 25 or 30
years does not throw so much light on the subject as one would wish,
because in that period there has been a great increase in values on
their properties on which they have carried loans.
Mr. WILLIAMS. There has always been an increase of values in
New York, particularly in the last hundred years, you might say.
Senator NORBECK. There is not much chance for loss as long as
property is going up.
Mr. WILLIAMS. There is if you lend the wrong amount.
Senator NORBECK. Much less than when you begin to have a shrinking value.
Mr. WILLIAMS. The shrinkage in value of real estate has been far
less than the shrinkage in value of stocks and bonds.
Senator TOWNSEND. YOU are referring to New York alone "or the
whole country?
Mr. WILLIAMS. I am particularly referring to New York. Of
course we had all the stocks in New York, and I am comparing that
with our own real estate.
Senator NORBECK. Very well.
Mr. WILLIAMS. We have sold to insurance companies 30.15 per
cent; to savings banks, 21.94; commercial banks and trust companies,
16.29; trust funds, 5.38; charitable institutions, 1.88; miscellaneous,
7.56; individuals, 16.80; that makes 100 per cent. Any one of those
figures multiplied by $700,000,000 will show what they have.
The Bond & Mortgage Guarantee Co.: Insurance companies, they
have none; savings, 3.79 per cent; trust funds, 43.63; charitable, re-




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

525

ligious, and educational institutions, 1.59; corporations, 15.67;
individuals, 35.32.
The Lawyers Mortgage Co.—those are the three companies I have
prepared, and they are the outstanding companies for distribution,
because their relations are more general than other companies—the
Lawyers have: Insurance companies, 6.52; savings banks, 13.89; commercial banks and trust companies, 7.38; trust funds, 16.57; charitable
institutions, 11.81; individuals, 43.83; that also makes 100 per cent.
The ACTING CHAIRMAN. Would that approximately correspond to
the other large cities—the practice in the other large cities in the
country?
Mr. WILLIAMS. The other large cities have copied New York in
their records of distribution. I would be at a loss to know that,
however, because we have tried a little bit of outside mortgages and
decided we would confine ourselves to the metropolitan area. We
want to be able to ride to any of them within an hour.
The ACTING CHAIRMAN. Then you are entirely confined to the
metropolitan area?
Mr. WILLIAMS. Yes,
The ACTING CHAIRMAN.

That means you do not loan on farm
land?
Mr. WILLIAMS. NO. We do not lend on any vacant land. Whether
you want to term farm land vacant land or not, I do not know. I
think you ought to distinguish between vacant land in a growing
city and farm land. A city grows to the suburbs and crowds the
farmer out and the no man's land in that area is neither good for
farms nor buildings during the interim between that time and the
time it is built up.
The ACTING CHAIRMAN. I understand from what you say you do
not go out into the country beyond the suburbs and lend on land,
although there may be a house on it—so-called farm land?
Mr. WILLIAMS. There are a few exceptions. We would lend on a
high-grade suburban residence which has a large land value under
it; in certain places where there is a definite value fixed, like Huntington Shores, Bay Shore, and metropolitan New Jersey.
The ACTING CHAIRMAN. Take summer estates where they live in
them during the summer
Mr. WILLIAMS. Where there is an established value, we have loaned
outside of the State, but we have stopped that.
You asked about the distribution between mortgages and certificates.
Senator NORBECK. May I ask just one more question on this? I
understand there has been a constant increase in real-estate values
for several generations in the metropolitan area.
Mr.

WILLIAMS. Yes,

sir.

Senator NORBECK. But the increase has been faster during the war
period than at other times ?
Mr. WILLIAMS. I was not around then, but I understand right
after the Civil War they had a great increase in value in the metropolitan area.
Senator NORBECK. Did they also have a large increase during the
World W a r ?
34718—31—PT 3




7

526

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. WILLIAMS. N O ; we were stopped from building during the
World War.
Senator NORBECK. There was no particular increase in the value
of real estate during that period?
Mr. WILLIAMS. N O . A S a matter of fact it was dead. You had
an embargo on building, and then we discovered the population had
increased and there was no place for them to go; there was a house
shortage.
Senator NORBECK. The only increase in the value of property was
the increased cost of replacement?
Mr. WILLIAMS. The increase in population. There is always that.
Senator NORBECK. I t was reflected in the increase in the value of
the building rather than of the land?
Mr. WILLIAMS. There was no increase during the war. We stood
absolutely still from 1917 until
Senator NORBECK. I think you either misunderstand me now or
misunderstood me before. I asked about the enhancement of property from 1914 to 1924. I understood you to say that it was more
than 100 per cent.
Mr. WILLIAMS. Then suppose we change that to 1918—from 1918—
because from 1913 to 1918 there was little or nothing going on. I n
1913, as you remember, we had a psychological panic. I think Mr.
Wilson called it that, but we found it was an actual panic in New
York which affected real estate. From that time on there was little
or no building. We had a decided flat spot in 1913.
Senator NORBECK. When did this great increase in the value of
buildings come on?
Mr. WILLIAMS. I should say it started about 1920 and we had
another flat spot in 1921 and in 1922 it started again.
Senator NORBECK. But a building of the same size costs twice as
much now as before the war—right now ?
Mr. WILLIAMS. Yes. There is another little condition you might
bring out. There was not so much change in the replacement value
as the necessity for housing.
Senator NORBECK. I am speaking of the replacement cost. An old
building might change value because of the cost of putting up one
like it across the street ?
Mr. WILLIAMS. Anything that had a shelter value in 1913 and
1914—we had a great house shortage and we did not have a true
value in that time, but since then we have had the building overtake
the necessity.
Senator NORBECK. I n other words, the value is approximately the
replacement cost of the property?
Mr. WILLIAMS. At the present labor cost.
Senator NORBECK. And that is more than twice what it was before
the war?
Mr. WILLIAMS. Yes. The straight outstanding guaranteed mortgages of the New York Title & Mortgage Co. are $525,000,000 as
against $489,000,000 in 1929.
The Bond & Mortgage Guarantee Co., $561,000,000 as against
$516,000,000 in 1929—the same period.
The Lawyers Mortgage Co., $270,000,000 as against $262,000,000
in 1929—the same period.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

527

Then, the guaranteed certificates, which make up the balance of
the guaranteed funds—
New York Title & Mortgage Co., $177,000,000 against $149,000,000.
Bond & Mortgage Guarantee Co., $300,000,000 against $259,000,000.
Lawyers Mortgage Co., $149,000,000 against $132,000,000.
Those figures make a gross for the New York Title & Mortgage
Co. of $702,000,000; for the Bond & Mortgage Guarantee Co. of
$862,000,000; and the Lawyers, $419,000,000.
The ACTING CHAIRMAN. YOU say the trend is downward at the
moment in real-estate values?
Mr. WILLIAMS. Yes.
The ACTING CHAIRMAN.

Have you any idea how far this trend
may continue or how long it may continue ?
Mr. WILLIAMS. I t reflects, to a great extent, the unemployment
situation and until that changes, I do not know just exactly how far
it will go. I will say this, though, that it is far more encouraging
than it was a year ago. About this time last year, or about this time
three months ago, if you foreclosed a mortgage, you just got the
property. Now, the people have a tendency to protect and the
junior interests come in and try to protect. They think it is worth
having. So, that indicates that the value is there. I t may be that
the weak sisters were the first to go.
Now we are getting down to what we might call stable properties.
I might say that there are millions and millions of outstanding
mortgages. They have not happened in a year. They have been
built up in years. Many of those loans have been through the mill
twice and they are what you might call seasoned properties. I n
1928 and 1929, I think those were both in the high-peak period,
and there is where you see the difficulty in the real-estate bonds and
even the guaranteed mortgages. But the guaranty companies were
always very conservative against bond issues; in other words, having
a guarantee, they felt they had to be careful.
The ACTING CHAIRMAN. They recognized the inflation?
Mr.

WILLIAMS.

Yes.

Mr. W I L L I S . I think you said a while ago, Mr. Williams, there
had been practically no defaults in guaranteed mortgages. I think
the National Association of Keal Estate Boards has estimated that
there were $4,000,000,000 out of $18,000,000,000 in real-estate mortgages in general that have defaulted. Does that seem excessive?
Mr. WILLIAMS. W h a t do they mean by " defaults" ? Do they
mean the mortgagor defaulted or the company issuing them?
Mr. WILLIS. If the mortgagor defaulted ?
Mr. WILLIAMS. That would be excessive in New York.
Mr. W I L L I S . An excessive rate?
Mr. WILLIAMS. Yes.
Mr. W I L L I S . New York

is probably less troubled in that way than
other parts of the country?
Mr. WILLIAMS. Just now we are going through this Bank of the
United States situation and that is very bad. A lot of those
loans were made without any rhyme or reason. Well, there was
a reason
The ACTING CHAIRMAN. But no rhyme.
Mr. W I L L I S . Taking the country as a whole, what per cent of
the mortgagors in the past year have failed to pay what is due?




528

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. WILLIAMS. That is very hard for me to answer.
The ACTING CHAIRMAN. Mr. Williams, this $4,000,000,000 out of
$18,000,000,000 strikes you as too high?
Mr. WILLIAMS. That is about one-quarter and that is about what
some of your values have reduced. Of course, you must bear in
mind there were a lot of foolhardy mortgages made. They were
worse than some of the stock issues in New York. They were
founded on prospectuses and maps.
If you want to include Florida and Georgia and some of those
things that never had any right to be real-estate properties anyhow,
I should say that would be a small figure.
Mr. W I L L I S . The country banks report, as nearly as we can estimate, about a billion and a quarter of urban real estate mortgage
loans held by them at the present time. What do you think of the
value of that holding?
Mr. WILLIAMS. I can only give our own experience, and I can
say that the least trouble we have is with the small householder—
loans under $10,000. There is a big market in case a man does default, for some one to take up the property. I n addition to that, the
man calls it his home. I t is his home and he will protect it to the
last. But we have had less trouble—and I think I can say that of all
the house owner mortgages—that with any other kind of mortgages,
and we have a great many of them.
Mr. W I L L I S . SO the criticism of those loans would probably not
be in their goodness, but in the degree of their liquidity.
Mr. WILLIAMS. Yes.
Senator TOWTNSEND.

Are all the companies you have enumerated
practically confined to New York?
Mr. WILLIAMS. Yes; and regulated by New York. There are a
large number of mortgage companies in Jersey.
The ACTING CHAIRMAN. Which type of building, between the residential apartment houses and office buildings is in worse condition
now?
Mr. WILLIAMS. Would you ask me that question again, please.
The ACTING CHAIRMAN. As between these apartment houses—
residential apartments—and office buildings and industrial structures, which class in the poorest position at the present time?
Mr. WILLIAMS. I should say the small house owner is in the best
class. Cooperative apartments, while there has been some difficulty,
are in the second best class.
I will have to amplify the office-building situation, because south
ui Fiftieth Street to the Eleventh Street zone they are only 11 per
cent vacant; north of Fiftieth Street they are 30 per cent vacant.
So a lot depends on the location.
Industrial buildings
Senator BULKLEY. H O W are they down town ?
Mr. WILLIAMS. Those units completed before May 30 last year
are all right. There are two or three units that have come into the
field that are, I think, bad.
Senator BULKLEY. What is the percentage of vacancies ?
Mr. WILLIAMS. I t would be very small.
Senator BULKLEY. YOU mean the older buildings are all rented up
without any vacancies?
Mr. WILLIAMS. Within 10 per cent.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator BULKLET. The Irving Trust
Mr. WILLIAMS. Yes.
Senator BULKLEY. They would have

529

is coming along all right ?

a smaller percentage of vacancies than the Grand Central ?
Mr. WILLIAMS. Yes. There is a building at the water front just
finished and full to the roof. Twenty-nine Broadway has no tenants,
and 21 West Street very few.
The ACTING CHAIRMAN. And the Empire Building?
Mr. WILLIAMS. I would not be astonished to see that work out
well.
The ACTING CHAIRMAN. The Equitable is all filled ?
Mr. WILLIAMS. Yes. One hundred and twenty Broadway makes
that. The Manhattan, I think, is 80 per cent rented. And the
Farmers Loan & Trust will use their new building.
The ACTING CHAIRMAN. The Irving Trust is rented up full ?
Mr. WILLIAMS. Well located property is in good shape.
Now, industrial property is a question that—well, you can not
answer that. That depends entirely on the industry.
Mr. W I L L I S . Has there been any great change in the appraisal
methods of recent years giving greater weight to income from property rather than cost?
Mr. WILLIAMS. Very decidedly.
Mr. W I L L I S . W h a t is the reason for that ?
Mr. WILLIAMS. The * awakening. [Laughter.] I do not think
there is any other—a sad awakening. People had an idea that you
could buy a piece of property and never mind what it brought in,
it could be sold for more than that amount in six months, and so
those people bought it, but found six months afterwards that they
could not sell it. The idea of buying from John and selling higher
to Peter had gone on indefinitely, and all of a sudden Peter wTas out
of money and they had to carry it, and they learned they had better
buy the property and let it carry itself.
Mr. W I L L I S . NOW, in a case like the failure of the Bank of the
United States—and I merely use that instance because it has failed—
in that case the lending on real estate went right on in the way you
described by raising the appraised value indefinitely and selling out
again
Mr. WILLIAMS. With the exception they did not sell it.
Mr. W I L L I S . Did they not sell it on paper ?
Mr. WILLIAMS. Yes. That is a long story, and I think as you get
deeper into the story, it will indicate that the men who were handling
it did not know their jobs. We had men in different lines of business suddenly become bankers and then suddenly become real-estate
men.
The ACTING CHAIRMAN. That is the old, old story.
Mr. WILLIAMS. There are two very fitting examples. There is the
San Eemo, Central P a r k West. We analyzed that, and every other
large institution analyzed it. They had to get $1,000 for one room.
Anybody paying that much for a room will go to Fifth Avenue or
P a r k Avenue. They will not go to Central P a r k West. They were
in the wrong location. That building will rent at a figure, but they
will have to come down to that figure.
The ACTING CHAIRMAN. And burn some of their mortgages?
Mr. WILLIAMS. Yes,




sir.

530

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

The ACTING CHAIRMAN. That is the trouble with Florida. There
is plenty of sunshine there but they will have to burn mortgages.
Mr. WILLIAMS. The trouble with Florida was they were selling
real estate by the gallon instead of by the foot.
The ACTING CHAIRMAN. What has been the experience of the
mutual savings banks with real-estate mortgages in the past few
years ?
Mr. WILLIAMS. We have had a little difficulty but not much, and
those institutions that had a regular loaning department, set up and
well equipped for handling loans, have been able to handle them all
right.
The ACTING CHAIRMAN. H O W have the life insurance companies
fared ?
Mr. WILLIAMS. I n New York fairly well. I do not know about
the situation outside of New York.
Mr. W I L L I S . D O you mean by that that the life insurance companies located in New York have done fairly well all over the
country ?
Mr. WILLIAMS. N O ; in New York.
Mr. W I L L I S . YOU do not know how they have done in other places ?
Mr. WILLIAMS. No.
The ACTING CHAIRMAN.

They are all getting leary of getting out

of town?
Mr.

WILLIAMS.

Yes.

The ACTING CHAIRMAN. I know they are in Hartford.
Mr. WILLIAMS. At this point, I should like to say a word about
the small householder. There has been a lot of criticism, as you have
noticed, in some of these developments where they have flimsy construction. I do not approve of flimsy developments entirely, but I
do approve of a man going out in the country and owning his own
home. That is one way of making a good citizen of him. H e immediately becomes interested in his taxes and assessments and once
he pays his taxes and assessments he is interested in his Government.
You never get that out of the rent payer.
I n addition to this, this type of loan on houses in the suburbs has
caused little or no trouble. I just want to say a word of kindness
for that type of man. I think he is the real future citizen of
America and should be looked after.
The ACTING CHAIRMAN. W h a t changes in real-estate financing
have been brought about by the evolution of the giant office building
and giant apartment dwelling in larger cities ?
Mr. WILLIAMS. They caused the issuing of certificates. That is
one. They have also caused the issuing of the real-estate bond. I t
looks as though I am going to turn a double back somersault on
my statement about real-estate bonds, but the large office buildings
running into amounts as high as twenty or twenty-five million dollars must, of necessity, be handled by a bond issue, because the mortgage companies at the present time would not want to invest such
a large amount in one unit and go back of it with a guarantee.
But the fault in the past has been that the bond issues have been
careless and ridiculous in the way they have been put out and
have not been put out on a strictly mortgage basis. Those that have
been put out on a mortgage basis with sufficient return to cover




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

531

them have been very satisfactory. Those that have not been—why,
they are suffering accordingly.
The large apartment buildings—I just referred to office buildings—the large apartment buildings are still within the province of
the title companies and insurance companies, and there has been no
hesitation in taking those loans where they are properly located and
a proper income is shown.
The ACTING CHAIRMAN. The larger cities of the country report
bank mortgage loans of one and a half billion dollars. Do you
regard these as sounder than the mortgage loan in the small communities ?
Mr. WILLIAMS. I do not think you can compare them. I n Garden
City, which is out in a small community, Best & Co. have just put
up a store on the corner of Franklin and Stewart Avenues. That
store is of more value than a store in New York any place except
around Fifth and Madison Avenues. The automobile can not park
in the city any more and people do not bother to go to New York,
and they go to Best & Co. out in Garden City. I t has created such
a value that the opposite corner sold last week for $100,000, which
I think—oh, back a year or two ago—it would have sold for $40,000
or $50,000. That is an outlying community. So I think that every
mortgage loan stands on its own footing.
There is another place called Bay Shore, down Long Island—
Main Street, Bay Shore. Eight near the post office the stores are
extremely valuable, and I would rather have a drug store down
there right alongside the post office in Bay Shore than I would any
place in Brooklyn and New York at a higher price.
The ACTING CHAIRMAN. H O W about Bronxville ?
Mr. WILLIAMS. That has wonderful value. Greenwich also has
wonderful value.
The ACTING CHAIRMAN. Getting away from the marginal line that
has spread out every year, what is going to happen to that row of
box stalls between Sixtieth and Forty-third Streets and spreading
over from Madison Avenue to Lexington Avenue ?
Mr. WILLIAMS. When they started to build office buildings on
Forty-second Street they said Wall Street was gone. That was 10
years ago. Wall Street is stronger than ever. When they built the
subways to the suburbs they said that every suburb they built up
would take the traffic out of New York. You know what has happened. Queensboro has grown from 150,000 to over 1,000,000 in the
last 10 years, and yet there are more people in New York. There
are certain people who lived in New York in the past that will never
live there again because of the immigration law. That is what built
up the east side. That has changed. We now have no element to
build up our railroad apartments and flats. They will probably fall
of their own weight. That is particularly true on the east side that
Al Smith is particularly interested in, and trying to put a new housing program through to take care of. I think there is one place
where there are 250 vacant cold-water flat buildings. That means
the old law buildings that have not a tenant in them, and yet before
the immigration law went into effect that was a seething horde.
That is easily explained. The parents of the present generation
lived there, but when the children grew up and married they would
not stay there. That is the only section in the city that I know of



532

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

that has really suffered a depreciation. All the other sections of the
city have gone ahead.
The ACTING CHAIRMAN. S O that far as Madison Avenue is concerned, no matter what it is, if they do not like the box stalls they
get something else—the values are always there ?
Mr. WILLIAMS. Yes; and we are opening up $600,000,000 worth of
subways that all lead into that section.
The ACTING CHAIRMAN. Have you noticed any tendency for commercial banks to become heavily involved in the financing of large
structures ?
Mr. WILLIAMS. The Bank of the United States was one. I think
there was another bank that, by a change, has corrected that. I think
I had better not mention the name of that bank.
Mr. W I L L I S . Your own bank, the Bank of Manhattan, does not own
the building you are in ?
Mr. WILLIAMS. We own part of the fee with Iselin & Oswald.
Mr. W I L L I S . And the Irving Trust—does that own No. 1 Wall
Street?
Mr. WILLIAMS. I do not know.
Mr. W I L L I S . There is some danger of banks becoming overloaded
with heavy investments in large buildings ?
Mr. WILLIAMS. Yes; but many of the banks carry the real estate
at such a low figure that it is written off. I n our case we carry the
real estate at such a low figure it was lately written up.
Mr. W I L L I S . That is not true throughout the country? I n many
places the banks have very large assets in buildings ?
Mr. WILLIAMS. I would not want to answer that. I do not think
that is true in New York. I think the tendency has been to write it
off. We own 135 and 141 Broadway, right back to Church Street.
I think that is estimated at $16,000,000, and we have it on the books
at $4,000,000.
Mr. W I L L I S . I should like to ask a question or two about liquidity,
Mr. Williams. You have spoken at length of the inclusion of these
mortgages. How liquid can real-estate mortgages be made ?
Mr. WILLIAMS. They can not be.
Mr. W I L L I S . Take your guaranteed mortgages: Suppose I own one
and want money very badly, and I bring it to you, what would
you do?
Mr. WILLIAMS. I n ordinary circumstances we would help you out,
but that would just be by courtesy.
(Discussion off the record.)
Mr. W I L L I S . YOU think, then, Mr. Williams, that the real-estate
mortgage is always necessarily unliquid ?
Mr. WILLIAMS. I think so.
Mr. W I L L I S . And from that, is it a fair inference that where the
mortgages are held by commercial banks with a savings department,
so t h a t these savings deposits are really subject to demand, such a
bank ought not to hold real-estate mortgages? Is that a fair conclusion ?
Mr. WILLIAMS. Let me put it the other way, that a savings department of a bank should have the same regulations as a savings bank.
Mr. W I L L I S . Where you can not have that because of the inability
to apply the 30 or 60 day clause, then real-estate loans are not suitable
for a bank?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

533

Mr. WILLIAMS. N O . If they had some funds as a back-log, they
could invest in them.
The ACTING CHAIRMAN. D O you mean that you would departmentalize the bank so that the savings department of the bank would
have its own capital and own resources segregated from the rest of
the bank, such as they have in California, for instance ?
Mr. WILLIAMS. I have not gone into that from the point of the
banking game. Of course, from the mortgage salesman's point, it
would be a very desirable feature. I t seems where the savings department of a bank competes along the same lines as the savings
institutions, they should be regulated to the same extent as the
savings banks.
The ACTING CHAIRMAN. Would it not help if all national banks
dealing in real estate or mortgages, and so forth, should have their
assets segregated? Is not segregation valuable in certain circumstances?
Mr. WILLIAMS. Could I ask you a question on that before I
answer?
The

ACTING CHAIRMAN.

Yes.

Mr. WILLIAMS. On the thrift accounts which we have throughout
the country, is it necessary that those banks have those accounts or
have they reached out to get them to increase their business ?
The ACTING CHAIRMAN. I think they have reached out for them.
Mr. WILLIAMS. Then I think when it is not necessary to have the
savings-bank accounts they should have savings-bank regulations.
Where they have not reached out to get them, and there is no savings
institution in the State, that would be different.
The ACTING CHAIRMAN. The broad subdivisions of California are
these: The commercial savings and trust departments are limited
to the larger banks.
Mr. WILLIAMS. I am talking a little out of my sphere and I do
not like to do it on that account, but I understand in New York
City, the institutions that have savings accounts feel they should
be all in one fund.
The ACTING CHAIRMAN. Yes. That covers it. I s there any rediscounting of mortgages?
Mr. WILLIAMS. Practically none.
The ACTING CHAIRMAN. D O you think it is a good practice?
Mr. WILLIAMS. Well, I think you can borrow in a commercial
bank on a mortgage certificate or a man can take a mortgage to
a bank. You ask one point as to liquidity and ability to borrow.
The ability to borrow on a mortgage is recognized as quickly as
borrowing on a savings account.
Mr. W I L L I S . That is for the individual. I n some European countries they have rediscount institutions so that a bank that wants
to ged rid of a large number of mortgages can take them to the central mortgage rediscount institution and discount them.
Mr. WILLIAMS. If they had taken those mortgages themselves at
a high charge they could afford to rediscount and go out and do
the whole thing over again.
Mr. W I L L I S . Where it is pretty thoroughly safeguarded, as in the
Central Bank of Hungary, and elsewhere, they have been very carefully protected. But as. I understand you, you are afraid it would
turn out not so well in this country?




534
Mr.

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
WILLIAMS.

Yes.

(Discussion off the record.)
The ACTING CHAIRMAN. Would you put any legal restrictions on
the matter of appraisals?
Mr. WILLIAMS. I think I would stop them from investing while
they had a participation, if that will help very much, but the central institution you create as a rediscount agency would have to be
strong in itself and the securities they take care of would likewise
have to be strong. The fact the offering company had made a
mistake and was willing to make good its indorsement, should be
sufficient.
Mr. W I L L I S . W h a t is the situation with respect to building and loan
institutions in this country?
Mr. WILLIAMS. I think they reached out and bought on inflated
values.
Mr. W I L L I S . I t is not due to their going into the savings business ?
Mr. WILLIAMS. I think all of this trouble is due to bad management. I n addition to bad management is that psychological experience we have just gone through in the last three years—the sky is
the limit.
Mr. WILLIS. Gambling?
Mr.

WILLIAMS.

Yes.

Mr. W I L L I S . H O W are you going to get the building and loan associations back into good condition 1
Mr. WILLIAMS. I think they will have to go through the laundry
the same as everybody else.
Mr. W I L L I S . T O bring them to a safe basis ?
Mr. WILLIAMS. Yes. If the building and loan associations have
their money in homes, and so forth, they will be paid eventually; but
if they are in things appraised too high, they will eventually lose.
Mr. W I L L I S . D O you think they should be prohibited from taking
savings ?
Mr. WILLIAMS. I t depends on how they are set up. If they are set
up for savings
Mr. W I L L I S . I n that case they should be recognized as savings
institutions.
Mr. WILLIAMS. Every institution that has the earmark of a savings institution or a participation in savings should be regulated.
The moment you hold something out to the public that is a little
different than a commercial commodity and has the atmosphere
or earmark of a bank or savings institution or regulated investment^
that, in turn, should be regulated by the State.
I feel more than certain that had these big bond issues, and so
forth, which have been failures, been regulated by some State regulation, some responsibility of the issuing head, they would never have
come out. I think we would have had our development just the
same. I t would have been healthier, anyway.
The ACTING CHAIRMAN. YOU think some regulations are possible ?
Mr.

WILLIAMS.

Yes.

The ACTING CHAIRMAN. Have you anything in mind that you could
submit later along that line? That is what we are looking for. We
are coming to the conclusion that laws do not amount to very much
when everybody wants to fly, but if you have anything that will help
clear the investing ship, we would appreciate it very much.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

535

Mr. WILLIAMS. I would like to put that up to some of our men back
home and get their ideas.
The ACTING CHAIRMAN. Will you do that?
Mr.

WILLIAMS.

Yes.

Mr. W I L L I S . I think it would be well to get their idea as to what,
if any, other regulation should be had in connection with real-estate
loans made by banks; first, when they are merely commercial fund
depositories and lenders; second, when they have also a savings department; and, third, when they have thrift departments.
Mr. WILLIAMS. Let me bring to your attention one thing. The
word " savings " in New York is protected by law about as tight
as it can be protected, and I think it has been the bulwark of our
thrift. Any organization that uses that word " savings " unless it
is a savings bank or savings and loan association and under the
regulation of the superintendent of banks, violates the law, and,
in turn, the man on the street knows that the minute he sees " savings " in the name, that is regulated and his investment is safe.
Now, when we talk about real-estate participations and realestate bonds it was not over two or three years ago that a realestate bond was considered on the same basis as a mortgage certificate. One is regulated by the State subject to supervision, subject to the amount of money it will loan and responsibility after it
issues it, and the other people have no ties whatever and go along as
merrily as they wish, as long as people buy. If those things were
regulated, I think we would have a better situation.
The Acting CHAIRMAN. I will read this group of questions on
unsecured loans in relation to real estate, Mr. Williams, and you
can answer them in bulk.
Do you think any substantial portion of unsecured bank loans
is made for real-estate holding and development purposes?
Mr. WILLIAMS. Yes, it has been in the past; and that is through
the local developing company on their stock. I n certain cases, certain well-balanced companies have been very satisfactory, and particularly in the territory that I speak of as Queens. I t has been
bank loans on the stock were to substantial real-estate companies,
practically the upbuilding of that territory, because all commercialbank loans on the stock were to substantial real-estate companies,
and they were substantial.
I think the other picture is the Bank of the United States where
they loaned on the stock of the real-estate companies and they have
been very disastrous. One was proper banking and the other bad
banking.
Mr. WILLIS. Have you the same feeling as to the present practices as to building loans advanced for construction purposes?
Mr. WILLIAMS. I think the building loans should be made on the
same basis as permanent loans. New York had, in the past, what we
called corporations for building loans only. They were outside of
the regulations of the State and they would make a large building
loan. A man was able to build his building and go around and get
a loan to cover the costs. I think that will regulate itself, because
I think a number of those companies were just in the midst of a
great many building loans of large value when this slump came.
Mr. W I L L I S . The banks have lost rather heavily on them?




356

NATIONAL AND FEDERAL, RESERVE BANKING SYSTEMS

Mr. WILLIAMS. I do not know of any banks doing that except
the Bank of the United States and one other bank I will not mention. The other bank is still a going concern. But the banks forgot
they were banks and started doing other things.
Mr, W I L L I S . Normally you think there is no harm in those loans ?
Mr. WILLIAMS. N O . There is another thing the banks have done
in the past that has been very good business. When a loan has
been allowed by the loaning institution the banks have made the
in-between payments on an order from the loaning institution.
When the building was partly completed, up to a certain percentage a payment would be made at the bank. I n a good market,
that is good business. At the present time it is not, except where
the real-estate company is a very substantial one.
The ACTING CHAIRMAN. Why did the real-estate panic in Florida
in 1926 and 1927 result in so many bank failures in spite of and
in view of the number of limitations on real-estate transactions?
Mr. WILLIAMS. On account of the deposits. One bank in particular—and I think that is the Bank of Bay Biscayne—had $66,000,000 in deposits, and when the slump came everybody withdrew
their deposits. They were very careful not to go into the real-estate
loans and careful not to take real-estate mortgages, but their liquid
assets were quickly absorbed by the withdrawal of funds.
Senator TOWNSEND. Was not the fact that they had a great many
chain banks down there responsible for the great number of failures ?
Mr. WILLIAMS. I do not know whether a chain bank would make
any difference. The people were just drawing out their accounts
everywhere. If they were separate-unit banks, the accounts would
have been withdrawn anyway.
The ACTING CHAIRMAN. Can you suggest any way whereby legal
limitation can be placed on the ability of real-estate operators and
developers to secure bank credit?
Mr. WILLIAMS. We are doing that voluntarily now.
The ACTING CHAIRMAN. Is it desirable to do it legally ?
Mr. WILLIAMS. I do not see how you can. There would be some
men worth $20,000,000 I would not lend a penny to and there are
other men worth only $100,000 that you would lend them $100,000.
I t is not the credit of the bank; it is the personal equation.
The ACTING CHAIRMAN. That goes through everything.
Mr.

WILLIAMS.

Yes.

The ACTING CHAIRMAN. T O what extent do you think real-estate
operators and owners are securing bank credit for their operations
through unsecured loans in New York and Chicago ?
Mr. WILLIAMS. Very little in New York.
The ACTING CHAIRMAN. And Chicago?
Mr. WILLIAMS. I do not know about Chicago.
The ACTING CHAIRMAN. Chicago is a great real-estate market.
Mr. WILLIAMS. The reason they are not in New York is that it
is not a liquid loan and after 1929 they were very careful to see
that all their accounts were kept liquid. I think it is unfair to the
banking fraternity of New York to even consider that they have any
of the practices of the Bank of the United States, because they do
not. After all, a great deal of it depends on the personal equation.
Mr. W I L L I S . YOU would not put bank real-estate loans on the same
basis as bank loans on stocks ?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

537

Mr. WILLIAMS. No. Several banks have loaned on real-estate
transactions, but it has been done under good banking practice, but
the Bank of the United States transactions were not good banking.
Senator NORBECK. Was it due to bad banking, or were other elements involved?
Mr. WILLIAMS. When a man is vice president of a bank and in
charge of the bank, and likewise head of a real-estate syndicate and
is responsible for the*success of the syndicate, he occupies a dual
capacity and something is going to slip between the chairs.
(Discussion off the record.)
Mr. WILLIAMS. I am quite certain the Manhattan Building is a
very great asset to us.
Mr. W I L L I S . How was that financed ?
Mr. WILLIAMS. That was financed by Starrett Bros., and that was
done by mortgage and leasehold bonds. The fee is clear in the
owners, both in the Bank of Manhatten and
The Acting CHAIRMAN. You are a participant in that ?
Mr. WILLIAMS. No; only in the case of a fall-down.
Mr. W I L L I S . Who owns the bulk of the bonds ?
Mr. WILLIAMS. I think they are widely distributed. There is a
case where the bond issue was good.
Mr. W I L L I S . And they are not held to any great extent by the
Bank of Manhattan?
Mr. WILLIAMS. No.
The Acting CHAIRMAN. I S

it common for safe deposit subsidiaries
of banks to own substantial real estate with the aid of loans advanced by the bank?
Mr. WILLIAMS. There is no reason why they should.
The ACTING CHAIRMAN. Are there any substantial number of realestate owning affiliates of commercial banks; that is, an affiliate set
up for the purpose of holding real estate ?
Mr. WILLIAMS. I do not know of any in New York.
The ACTING CHAIRMAN. D O you favor the principle of limitation
of loans by a bank to all affiliates, including safe-deposit and realestate subsidiaries, as well as security companies, to 10 per cent of
the capital and surplus ?
Mr. WILLIAMS. That is the regulation we have now.
The ACTING CHAIRMAN. I t should include all the real-estate and
safe-deposit affiliates?
Mr. WILLIAMS. Yes.
Mr. W I L L I S . Would you

see any harm, from the real-estate standpoint, of having that 10 per cent apply to all affiliates in the aggregate, instead of each one, as now, or would that be too close a
limitation ?
Mr. WILLIAMS. I would not be able to answer that question.
Mr. W I L L I S . I n England they have a rather serious real-estate
problem growing out of the branch-banking situation, and in Ireland,
too, and I think the same on the Continent.
Do you think that branch banking necessarily involves any serious
real-estate question through the buying of branch buildings and
carrying them along in the portfolio of the parent ?
Mr. WILLIAMS. I can not say that as to England, but I would
absolutely say it was necessary in New York. You can not get a




538

NATIONAL AND FEDEKAL RESERVE BANKING SYSTEMS

location unless you buy. If you get a location by rentals, it is
very high and not economical.
Mr. W I L L I S . Branch banking involves a large real-estate portfolio on the part of the parent bank, does it not ?
Mr. WILLIAMS. Yes. I t has been extraordinarily successful with
us. I suppose we bought at the right time.
Senator NOEBECK. Before the war?
Mr. WILLIAMS. NO ; right straight along.
Senator NOEBECK. Before the rise in values?
Mr. WILLIAMS. N O ; it has been just right along. We have bought
property within the last six months. But the value of the properties
has risen and communities have grown around them. When you
place a bank, you expect that property to improve and it usually
does. If you have rented that spot, you can not gain any benefit from
that. If you own it, you get the benefit of the enhancement.
(Discussion off the record.)
The ACTING CHAIRMAN. Mr. Williams, we are very much obliged
to you.
The committee will adjourn until to-morrow morning at 10.30,
but we will now proceed with a short executive session.
(Whereupon, at 12.30 o'clock p. m., the committee went into
executive session, at the conclusion of which the committee adjourned
until to-morrow, Wednesday, February 25, 1931, at 10.30 o'clock
a. m.)




OPEEATION OF THE NATIONAL AND FEDERAL EESEEVE
BANKING SYSTEMS
WEDNESDAY, FEBRUARY 25, 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.
STATEMENT OF COI. ALLAN M. POPE, EXECUTIVE VICE PRESIDENT OF THE FIRST NATIONAL OLD COLONY CORPORATION
The CHAIRMAN. Colonel Pope, we are glad to have you here. I
assume you know the purpose of this inquiry. We are charged with
the duty of examining into all phases of the banking business to see
if anything is necessary to be done, and if so, what, with the Federal
reserve system, and the national banking system, and we will be
glad to have any suggestions that you may have in mind.
Colonel POPE. Mr. Chairman, I had prepared, based on the suggestion that Mr. Willis made the other day, a brief statement covering in general the subject matter he said would probably be up for
discussion to-day. If you care to have me do so, I shall read that.
The CHAIRMAN. We shall be glad to have you proceed with t h a t
and we may have occasion to ask you some questions about it.
Colonel POPE. I understand it is the desire of your committee to
question me on the general subject of the relation of banks to investment houses, and the relations between the Investment Bankers
Association of America and investment bankers. I n referring to
this general subject, I wish to make it clear that, although I am a
member of the board of governors of the Investment Bankers Association and am an officer of the First National Old Colony Corporation, I understand that my presence before your committee is in the
capacity of a private individual. I wish particularly to have it
understood that I am not in any sense speaking for the Investment
Bankers Association of America.
The increased size of individual security underwritings since the
war has emphasized the need of cooperation between underwriters
of securities and commercial banks. Such cooperation is to-day
essential to the average underwriting investment house which finds
it impracticable regularly to employ capital of sufficient size to meet
the only occasional demands of security underwritings of large
amount. The cooperation by commercial banks in standing ready to
loan funds to cover the commitments of investment houses is an




539

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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

additional assurance that such underwritings are sound, as the banks
must pass judgment on the securities to be underwritten as to whether
acceptable as collateral for loans by them to the underwriting house.
Most investment bankers have more than one commercial bank with
whom they consult, and most large issues have several investment
houses in the underwriting syndicate. The commercial-banking support is therefore usually widespread. Only by this cooperation are
underwritings of new issues of securities, both domestic and foreign,
possible, without which American industry and trade would suffer
and cease to expand.
I n the last 10 years, many of the major banking institutions of the
country have developed investment banking affiliates. This has had
a tendency to increase the commercial banker's knowledge of the
investment market. Most of these affiliates that are underwriters
have large sales organizations, and through their nationally and
internationally distributed offices are able to keep an intimate contact with the ultimate purchaser. They have thereby so increased
their knowledge of marketing conditions that a failure to reasonably
successfully distribute a large issue of securites is rare. I n some
other countries where large issues are floated a failure to distribute
large percentages of a new issue is not infrequent.
I do not believe that this country could have developed industrially to the extent that it has since the war without the assistance of
bank affiliates, because private capital probably could not have been
found in sufficient volume in so short a time as to develop private
investment houses to a point where they would have been in a
position to handle this enormous increase in underwriting and
distribution.
This vast mechanism of underwriting and distributing of both
domestic and foreign securities is primarily to the benefit of our
industry and trade. Foreign loans place funds in the hands of
prospective foreign purchasers of our goods. Public utility, railroad, and industrial securities are issued naturally to benefit those
desiring funds for developments or other capital requirements.
Even the distribution of securities for organizations, such as investment trusts, indirectly benefits, as the funds acquired in turn support the markets to which trade and industry must turn for new
money. I n England I understand investment trusts are directly
interested in underwritings.
I t is obvious that at certain times, when the markets are particularly receptive to new issues, the tendency will always be to supply
the demand, and it is obvious that at such times the pressure for
supply will lead to a certain amount of unwise financing. The
public demand is usually responsible for such conditions. However,
at the present time, although money is cheap and although several
large issues have been successfully marketed, nevertheless, due to
the scientific knowledge of the investment bankers, the flow of new
issues has been automatically regulated to such an extent that there
is no flooding of the market.
I t is impossible by regulations to supply good judgment, but it
would appear possible to determine whether good judgment was
being exercised by means of proper examination of bank affiliates
to the same extent that examinations are required of the parent
institutions. If this were done in the case of bank affiliates it would




NATIONAL AND FEDERAL EESERVE BANKING SYSTEMS

541

help to insure the proper conduct of a large proportion of the
underwriting houses of the country.
Our own experience leads me to the above conclusion. The First
National Corporation was owned by the First National Bank of
Boston and as such was subject to examination by the examiners
of the Federal Reserve Board. These examinations were admirably
conducted, and their thoroughness assured me that the Federal
Reserve Board had, through the examiners' report, an accurate
knowledge of the business methods and the condition of the First
National Corporation.
Approximately at the time of the merger of the First National
Corporation with the Old Colony Corporation, because the stock
of the merged corporations was no longer owned by the First National Bank of Boston, but beneficially owned by the stockholders
of the bank, the examinations by the Federal Reserve Board ceased*
We have attempted to have this periodic examination continued
because of its thoroughness but without success.
I would recommend that the affiliates of national banks be examined coincidentally with the examination of the parent institutions by the office of the Comptroller of the Currency, and that the
affiliates of banks examined by the Federal Reserve Board examiners be also examined. I t would also seem advisable that State
bank examiners examine the affiliates of State banks.
I t is probably needless to remark that the regulations do not
permit of loans to bank affiliates by the parent institution to any
greater extent than would be loaned to any other similar organization.
The Investment Bankers Association of America is an organization formed by investment bankers and to-day has a membership of
approximately 600 main offices and 1,200 registered branches.
Practically all representative investment bankers of the United
States are members. This organization is governed by the usual
officers and by a board of governors selected from the principal
financial centers of this country and one from Canada. While this
organization obviously has no regulatory powers, the effect of the
work of its various committees and the open discussions at its
conventions is far reaching in maintaining a high standard of
practice among investment banking houses throughout the country.
As long ago as 1927 a study of the money market was begun
within this association, which more recently has culminated in the
formation of a committee on money and credit, of which I am a
member. I bring this to your attention to point out that the investment bankers, some time before 1929, were carefully studying conditions with a view to safeguarding the issuance of new securities,
and this committee has recently proposed that frequent confidential
reports be made to some central authority, possibly the Federal
Reserve banks, by investment bankers of their holdings of various
classes of securities, thereby still further clarifying the investment
situation. This proposal is receiving consideration at the present
time.
I n connection with the investment by banks in bonds, it is
obvious that many institutions whose officers are far removed from
money centers or are unfamiliar with the investment markets will
34718—31—PT 3




8

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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

make mistakes, and many have been made. The improvement,
however, in the holdings of banks in the last few years has been
noticeable. This is due, at least in part, to the thought given to
the subject by investment banking houses. I know of no better
way to illustrate this fact than by describing the method adopted
by the First National-Old Colony Corporation, which provides,
through an investment-supervision department, information to
hundreds of banks relative not only to their present holdings but
also relative to market conditions in general, and in particular
provides information regarding the practices as followed by leading successful institutions in diversification of securities not only
by class but also by maturities. I n this service selected foreign
bonds are included in their proper proportion.
I n connection with the purchase of foreign bonds by banks it
might be interesting to note that in England a compilation was
made in 1911 of the proportion of foreign securities floated from
1882 to that date in the English market, which was then the largest
market for this class of securities in the world. Of the securities
floated in the English market, only four-tenths of 1 per cent of
foreign loans were in default, while the defaults in domestic railroad and industrial developments averaged 1.84 per cent and 2.07
per cent, respectively. Of the approximately $10,000,000,000 of
bonds, debentures, and other interest-bearing securities of foreign
governments, municipalities, and corporations issued in this country
since the war, I am advised that at present approximately
$30,000,000 are in default, or three-tenths of 1 per cent. I have no
avaidable data comparing this with other securities issued in this
country, but this record speaks for itself.
I n connection with foreign loans, I would say that it seems one
of the paramount duties of the underwriters of this country, for the
sake of stimulation of trade and industry in America, to supply
through the medium of new bond issues the legitimate needs of those
foreign countries entitled to credit.
I understand that I am expected to touch upon thje subject of
so-called lombard loans, or loans by a central bank against securities
other than Government bonds, acceptances, and commercial paper as
collateral. I am under the impression that this matter might well
be carefully considered, particularly as a means by which in this
country a Federal reserve bank might, under conditions of stress,
make a loan to a bank unable to provide rediscountable paper and
then at a rate several per cent above the rediscount rate. I t would
seem that in normal times there would be no necessity for such loans
as, for example, are made under certain conditions by the Bank
of England. I believe an examination would show that in recent
months some bank failures would have been legitimately averted had
it been possible to have recourse to this method. I n case lombard
loans should be authorized, a provision requiring the Federal
Reserve Board to pass on the merits of each case might provide
a proper safeguard.
With regard to the bankers' acceptance market, my knowledge
comes from the operations of the First National-Old Colony Corporation, which is one of the principal dealers in this country.
Although in part due to the ease in money, there has been, however,
a constant improvement in the distribution of bankers' acceptances,




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

543

.although the bulk of the buying is still confined to the principal
financial centers, largely those on the east coast. This corporation
does not make acceptances and therefore is not in contact directly
with the drawers of bills but does, as a matter of business precaution, carefully scrutinize the bills as they are purchased. I t has
not come to our observation that there is any infringement of the
Federal reserve regulations. The present status of the bill market
is a healthy one. The American Acceptance Council has been of
great service in disseminating useful information to the dealers and
to the investing public in bankers' acceptances.
As to the general use of Federal reserve credit for undertakings
such as I have described above, being an investment banker my
information is derived from observation and not from direct knowledge. I believe, however, that rediscounts can in general be ascribed
to unforeseen reductions in deposits and not to meet requirements
such as loans to industry or to investment bankers or others. I n
general, therefore, the bank rediscounting and the Federal reserve
bank not only have no control over the purpose for which the original credit is used, but, further they have no control over the purpose
for which ten times this amount is used, as it is roughly calculated
that a dollar of reserve credit makes available approximately ten
times that amount of bank credit.
The CHAIRMAN. Colonel, I gather from your general statement,
that you favor the affiliate system but that you would require rigid
examination of the affiliates of commercial banks?
Colonel POPE. Yes, sir; I can not see any reason why there should
not be.
The CHAIRMAN. Would you add that you favor publicity of
statements as well as examination?
Colonel POPE. I would not favor publicity of statements, but I
would not say that publicity of statments would necessarily hinder
or cripple the activities of the investments by affiliates. I think
publication of the holdings of investments by affiliates would be a
very serious detriment as it would be a factor periodically in disturbing the investment market.
The CHAIRMAN. Well, you would favor that degree of publicity
that would enable investors and the public to understand whether
or not the condition of the affiliate is sound or not ?
Colonel POPE. Well, the publication of a statement would presumably merely show the amount of securities held or the amount
of loans, whatever is normally found in a statement. If that were
published, it would not, I think, affect the security market as much
as the publication of the holdings of bills, but I do feel that the
security market is such a sensitive thing and the fluctuations so
frequently the cause of loss of money and hardship, that anything
tending to cause those fluctuations is a hindrance, and I think that
the examination by proper authorities of the bank affiliates would so
safeguard the public that the publication of the statements would
not be necessary.
The CHAIRMAN. I t has been suggested here, in view of the fact
that about the only penalty prescribed under existing law for illicit
banking or for the mismanagement of a bank is the revocation of its
charter, that the Comptroller of the Currency might be authorized,
where a bank persists in irregular practices, to give some measure




544

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

of publicity to the fact that this particular bank is engaged in
irregular practices.
Would you favor anything of that sort with reference to them?
Colonel POPE. I certainly would not. I think it would be tantamount to closing the doors of the bank immediately.
The CHAIRMAN. Well, should not the doors be closed if the bank
persists in disregarding the admonitions and warnings of the Comptroller of the Currency?
Colonel POPE. Well, I think
The CHAIRMAN. I n other words, the extreme penalty, revocation:
of a charter, seems so harsh that the Comptroller of the Currency
(not this comptroller particularly, but all Comptrollers of the Currency) has been very reluctant to apply the penalty, and what we
are trying to develop is whether there might not be some intermediate
penalty that would compel the bank to correct its mismanagement.
Colonel POPE. I do not feel, Mr. Chairman, that I could properly
answer that question without considerable thought. My feeling, a t
the moment, is that any publicity by virtue of penalties that are*
open to the public to know about, and the cause for those penalties,,
is such that the run on the bank and other things affecting the bank
adversely would be such that the closing of it would be the only step.
The CHAIRMAN. Well, would it not have been better to have had
a run on the United States Bank in New York about five years a g a
rather than recently ?
Colonel POPE. I do not know, sir. I t would seem, from all I
know, which is only from the newspapers, that between five years,
ago and now, corrective methods could have been applied which
would have prevented the present situation. I may be wrong.
The CHAIRMAN. If a bank management persists in rejecting corrective methods and warnings and admonitions, what are you goings
to do with it?
Colonel POPE. Well, I should think if that persistence continued
after the threat of the charter being withdrawn, that that was all
that was left to be done.
The CHAIRMAN. Yes; but we are trying to reach some intermediate
penalty that might avert the revocation of the charter and have the*
bank continue in business. I note from your general statement,.
Colonel, that you think Federal reserve banks should be authorized,
in certain emergencies, to make loans on other securities than that of
eligible paper. Would you indicate the purposes for which such
loans might be made ?
Colonel POPE. Well, I could conceive that a panic situation—and
you understand I merely mention this as a possibility in times of
real stress—that a bank would be in such a position where, u n d e r
the present regulations, it would be unable to borrow from the Federal reserve bank, having insufficient rediscountable paper and where
other banks that might be willing to come to their assistance would
be unable, except over a period of time, to determine whether there
was sufficient collateral to lend them. If the Federal Reserve Board
were empowered, in such conditions, to step in with their examiners
and determine the value of the collateral available, I believe, under
such conditions, some banks could be saved by the agency of the
Federal Reserve Board's passing on that collateral as sufficient to-




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

545

warrant a loan. I think it should not be used except with the greatest safeguards and except in times of utmost stress, and, unless so
used, it would be of very doubtful value.
The CHAIRMAN. Well, is not the 15-day provision of the Federal
reserve act intended for that very purpose ?
Colonel POPE. By the 15-day provision you mean what, sir?
The CHAIRMAN. I mean the provision which enables a bank to
borrow for a period of 15 days in direct loans from the Federal
Eeserve Bank with United States bonds as security.
Colonel POPE. I would think it would probably be insufficient time,
but if they did not have sufficient rediscountable collateral they are
not going to be able to take advantage of the 15-day provision.
The CHAIRMAN. Well, of course, if they have not the commercial
paper they might resort to United States securities, of which there
is a superabundance. If they had neither, how could they expect
t o get a loan from the Federal reserve bank ?
Colonel POPE. Not under the present conditions.
The CHAIRMAN. Should they get any if they have not proper
securities ?
Colonel POPE. I t is just a question that, if a bank can be saved
legitimately, whether it is a function of the Federal reserve bank
to assist in the saving, even when the normal course of events can
not be followed.
The CHAIRMAN. Should a Federal reserve bank undertake to save
an individual bank at its own hazard? I mean at the hazard of
the Federal reserve bank?
Colonel POPE. I should not think so, because I do not think the
Federal reserve bank, under the lombard loans, should make the
loan unless they consider the type of collateral sound for the amount
of the loan.
The CHAIRMAN. Are you prepared to say, Colonel, from your
knowledge or observation, whether or not this 15-day provision of
the Federal reserve act has or has not been badly abused for stock
speculative purposes?
Colonel POPE. I can not say from the standpoint of the banks.
My only knowledge of it is from the standpoint of the investment
banker.
The CHAIRMAN. Colonel, I shall have to ask Senator Walcott to
conduct the balance of the examination, as I have an important
engagement at 12 o'clock.
(Senator Walcott thereupon assumed the chair.)
Mr. W I L L I S . Colonel Pope, there is one matter that I wanted to
ask you about which was briefly touched on in your introductory
statement, and that is the work of the special committee of the
Investment Bankers' Association of America. As I understand it,
they are studying the whole relationship of investment banking to
the money market?
Colonel POPE. Yes.

Mr.

WILLIS.

The committee is covering that whole field?

Colonel POPE. Yes, sir.

Mr. W I L L I S . What has the committee done up to the present time?
Colonel POPE. A t the present time it has largely confined itself
t o a study of this large subject and has prepared numerous forms




546

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

for consideration on which the investment banks will make the report of their holdings to some central bank, and a rather voluminous
report has been made on at least two occasions to the board < f
*
governors by this subcommittee. I t has opened u p a great deal
of discussion in the board of governors.
They have consulted numerous large underwriting houses as to
the methods and have discussed the matter freely with the Federal
reserve bank at least in New York, and may be other Federal reserve
banks, for advice and suggestions. Being such a radical departure
from present practice involving, as it does, the reporting of portfolios and the publication, although names naturally are not disclosed, of such confidential information, it is not easy to progress
rapidly in that committee. But progress is being made in constructive lines.
Mr. W I L L I S . Are there any results of the work of that committee
that you could file with this committee? I n other words, has it any
concrete results so far? I had understood it had an inventory of
unsold bonds on the shelves of investment banking houses which it
was getting up from month to month. H a s it done that?
Colonel POPE. N O , sir.

Mr.

WILLIS.

There is no such inventory anywhere?

Colonel POPE. N O , sir.

Mr. W I L L I S . H a s the committee put anything yet into concrete
form that is available for use?
Colonel POPE. The committee has submitted reports and exhibits
in those reports of various proposed forms. I have them with me,.
but I hesitate to submit them without the authority of the chairman of the committee or the president of the Investment Bankers
Association, not because I think there is any hesitancy to offer them,
but I have no authority to do so.
Mr. W I L L I S . Those are forms only, that have not been filled out?
Colonel POPE. Yes, sir.

Mr. W I L L I S . Then I am wrong in thinking that the committee, or
the Investment Bankers Association has compiled a monthly summary of the inventories ?
Colonel POPE. Yes, sir; you are wrong.
Mr. W I L L I S . I t has no data of the undigested securities existing
in the market in any shape ?
Colonel POPE. N O , sir.

Mr. W I L L I S . I S it possible to get that in any way?
Colonel POPE. Only by asking the houses.
Mr. W I L L I S . H O W laborious a piece of work would that be and
how would the houses regard that ?
Colonel POPE. I think at the present time merely requesting it,
it would be impossible to get it.
Mr. W I L L I S . That is, they would not give it ?
Colonel POPE. N O , sir.

Mr. W I L L I S . I t is possible for the Investment Bankers Association
to obtain and furnish it, without any names, to this committee ? The
reason for asking is t h i s : I t seems to me that the amount of undigested securities in the market and the fact that those securities
have been unquestionably overissued from time to time, was one of
the main troubles just before the panic. I notice in your statement
you seem to think just the reverse of that. I think you remarked




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

547

that the care and knowledge of the investment bankers had prevented overissues, but I think you will submit at the time there
were a great many undigested ones ?
Colonel POPE. I think I said the investment bankers were able to
determine when congestion was arriving, but even though congestion
might occur, as in 1929, the demand still continued and that demand
was filled and I stated then, under such conditions, often by some
unwise financing.
Mr. W I L L I S . I S it not a fact that for some time before the panic
the volume of increase of brokers' loans kept pace fairly well with
the increase in new issues ?
Colonel POPE. I have forgotten exactly, but I think it did. *
Mr. W I L L I S . Thus indicating that the new issues that came along
then were in excess of the saving power of the community and
had to be carried by bank credits ?
Colonel POPE. Yes, it would give that indication for all classes
of securities, including stocks and other securities bought by individuals which might be old issues.
Mr. W I L L I S . N O ; I am speaking of new issues there—the total of
new issues put out, as shown by current bulletins, was about equal
to the increase in brokers' loans, which indicated that there was
a correspondence betweem them.
Colonel POPE. I think undoubtedly there was some correspondence
between them.
Mr. W I L L I S . I t has been stated by people who have discussed this
matter—and I think one was Mr. F . I. Kent, and another, if I am
not mistaken, the former president of the stock exchange—that the
great trouble before the panic was the overissuing of securities; in
other words, that the investment banking institution was allowed to
run wild.
Colonel POPE. I know those statements have been made at various times.
Mr. W I L U S . They have suggested that there should be some control over the securities in order to prevent such cases from taking
?lace. I n order to do that, is it not necessary to know the real
acts about the question of undigested securities?
Colonel POPE. I t would seem to us, who are on this committee on
credit and money, that that was the most feasible way of determining that, and I think that the Investment Bankers Association are
very alive to the desirability of it.
The question of method is now being discussed by the Investment
Bankers Association and, as I say, it takes considerable time to put
such a radical thing through in the proper way. I think it will
still take some time.
Mr. W I L L I S . Is it feasible for you to get the Investment Bankers
Association, let us say, by the beginning of next autumn, to collect
figures showing, for the past few years—say three or four years,
month by month—the amount of new issues and the amount carried
on the shelves that was undigested; the loans required to carry them
in that way, and any suggestions that they have to make for the
adjustment of new issue mechanism and the credit granting
mechanism ?
Colonel POPE. I would not be sure by next autumn, because the
convention of the Investment Bankers Association takes place in




548

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

October. B u t I can only express the opinion that I hope that something along those lines could be done during this year.
The ACTING CHAIRMAN (Senator Walcott in the chair). How would
the private banking house look upon such a thing as that ?
Colonel POPE. Of course this would be
Mr. W I L L I S . I s it not of importance in any matter of control,* to
prevent the thing that occurred in 1929? Is it not of an essential
character?
Colonel POPE. We, on this committee, think so.
Mr. W I L L I S . I n order to make any use of it in connection with the
work being done here, it is necessary to have that data within a
few months.
Colonel POPE. I know, of course, that the Investment Bankers
Association would always be very ready to cooperate with the constructive work of your committee. I t is not because they would not
want to that they would not furnish this; it is merely because they
can not get everybody in agreement on such a matter of major
change. This matter, as you may know, has been under discussion
since 1927.
Mr. W I L L I S . T h a t is four years, now.
Colonel POPE. But it has only been within the last year that the
committee was formed to come to some concrete idea.
Mr. W I L L I S YOU do not think that a questionnaire sent out to
the investment banking houses and asking for these data would
t>ring the desired result ?
Colonel POPE. I think, in many cases, it would not be answered.
Mr. W I L L I S . H O W many people ought to be queried, or how many
people would have to join in making such an inventory, in order
to make it representative ?
Mr. POPE. I should think six or seven hundred houses.
The ACTING CHAIRMAN. But the very factors t h a t you want in
there are the factors that would run away from you if there was
•any danger in sight?
Colonel POPE. Yes, sir.

The ACTING CHAIRMAN. That is the trouble with it. You have
the same thing with the dry-goods association. They have tried
the same thing. There is a vital interest of all in what the shelf
stocks are. I n 50 years, to my knowledge, they have never been
able to do it. I n normal times they can do it easily, but the minute
there begins to be a congestion, the man who has a heavy shelf of
stuff has to keep it, quiet or there is no chance of getting rid of it.
I do not think we should fool ourselves. I am perfectly certain
every private banking house wants to know that information that
Doctor Willis is getting at, but he does not want to give information
about his own position, if it is a weak position. Legislation might
bring it out. The question is whether we need that legislation. I t
is very valuable. Even the private banking houses will admit the
value of it, but how are you going to get it ?
Mr. W I L L I S . Can you suggest 2 in the absence of such data, any
kind of mechanism that can be used to prevent overissues occurring?
The ACTING CHAIRMAN. That is what we want to know.
Colonel POPE. I think we can not always judge the mistakes
made by referring to 1929 as the only year. When the incentive
to bring out new issues is produced by a real demand, so that under-




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

549

writers, without any difficulty, can sell their issues and make a profit,
it is very difficult to stop them from doing it.
I n 1929 unquestionably toward the end—just before the panic—
the majority of the ultimate purchasers had to borrow money in
order to purchase, and that, of course, is a very bad situation and
soon corrected itself. But I do not see how it is possible to legislate
against the issuance. The correction comes from the aftermath
which, for some time, underwriting houses remember. The new
generation may not remember what happened in panics. I n normal
times, there is no necessity for correction. These are perhaps abnormal times, with a tentative market. Every underwriting house
knows almost exactly the result of the marketing of each new security and sets its course according to the results of the previous one.
Mr. W I L L I S . YOU say he does know that? F o r others?
Colonel POPE. New York is a very small town in one sense.
Mr. W I L L I S . W h y do most houses give out the statement that an
issue is oversubscribed?
Colonel POPE. I do not think it does always. I think in some cases
it does, but statements of that kind, in the investment fraternity,
are discouraged.
Mr. W I L L I S . The association has not taken any position against
that?
Colonel POPE. Yes, sir; in one sense. F o r instance, advertisements
appear in the evening papers. This advertisement appears as a
matter of record: " Securities have all been sold." That implies to
the general public that the ultimate purchaser had bought the whole
issue which, normally, was not the case, as part was still in the process
of being distributed by a subsyndicate.
The Investment Bankers Association have discussed that phraseology—"All securities have been sold"—and they have gone on
record as disapproving of such statements, so that now houses merely
state—"this advertisement appears as a matter of record only,"
without the statement of the amount sold.
Mr. W I L L I S . Do they not give out publicly a notice saying it has
been sold ?
Colonel POPE. I do not say it has not been done by some investment houses, but I think it has been done less and less.
Mr. W I L L I S . But the other members of the investment community,
I understood you to say, have a substantially accurate idea of what
the real facts are ?
Colonel POPE. Yes, sir.

The ACTING CHAIRMAN. I t is always known how " sticky " foreign
loans are, within a few days?
Colonel POPE. Yes, sir.

The ACTING CHAIRMAN. Of course, you must know, Doctor Willis,
that such a statement in the main is misleading, because there will
be subsyndicates and allotment houses. The larger houses have
groups of small country houses—small-town houses, of course—that
are practically obliged to take a certain percentage. That is their
allotment, just as you get an allotment of Ford cars. Those are
called " sold " but some of the smaller fellows may sweat blood
before they are actually sold.
Mr. W I L L I S . D O you think there is anything that the stock exchange can do to regulate this matter ?



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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Colonel POPE. I know, of course, little of the internal workings of
the stock exchange, as my corporation, naturally, is not a member.
I think it is fair to say that a large proportion of the underwriting
is done by nonmembers of the stock exchange to-day.
Mr. WILLIS. I mean through the listing of securities. H a s it not
a better control over the listing of securities, to be exerted at times?
Colonel POPE. I would not think, offhand—I have not given this
much thought—that the stock exchange would undertake to bar the
listing because there are more securities in the market than should be.
Mr. WILLIS. I think it might. I have heard it suggested.
Colonel POPE. I do not think it would, off hand, undertake to do
that, or that it would be particularly beneficial, because you immediately shut off the best market in which to sell undigested
securities.
Mr. W I L L I S . That would not tend to keep them out of the banks ?
Colonel POPE. N O ; it would simply help relieve the banks.
The ACTING CHAIRMAN. D O you think, Colonel, we will ever get
around to the English method of issuing securities, where the issuing
house has to tell everything about the security—where it all goes;
what commissions in cash, and what commissions in securities ? They
have to tell the whole story so that the public knows, when the first
•circular goes out, exactly what is happening on the inside; in other
words, how are we going stop in this country the issuance of securities that are almost worthless when they are issued—in other words,
robbing the public, which is being done every week in the year by
some irresponsible house or individual. That hurts the good houses
and all the business and unsettles the whole country in times of inflation. W h a t check can be put on that that will stop swindlers?
Colonel POPE. That is a pretty big question.
The ACTING CHAIRMAN. That is a big order. W e have been
working at it for 50 years.
Colonel POPE. I think that the average person naturally turns to
regulation of new issues by State authority after they have examined
into them, but it has been the experience of most houses that, whereas
t h e so-called blue-sky laws may have a deterrent effect in some particular instances, yet the effect of the blue-sky laws in many cases
has, to my knowledge, resulted in making it impossible for the people in a State to buy good securities, because of the inability in the
time allotted, to have them, as they call it, blue-skied in those States.
I think that, for the benefit such laws give, the harm is more often
greater. I feel that although we will never educate the people in
general not to speculate unwisely, the ultimate way to decrease
fraudulent or poor securities being sold is to educate the public—
which is rapidly being done.
The Acting CHAIRMAN. That is the business of the conservative
houses ?
Colonel POPE. Yes, sir.

Mr. W I L L I S . YOU say that is rapidly being done?
Colonel POPE. Yes, sir. Thousands of dollars a day, certainly, are
being spent by investment houses through their sales organizations,
through letters, and other means reaching new customers all the
time, and now the tendency is to explain to them how to judge securities, explain the merits of the various securities, analyzing




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

551

-securities for them that they now hold, explaining why some are not
good; and, in the last 10 years, I think the strides in the education of
the public in proper investment has been enormous.
Mr. W I L L I S . But the total of losses through fraudulent securities
continues about as large as ever.
Colonel POPE. Of course, the issue of good securities has been terrificly increased. I do not know the increase, but the proportion, it
would not seem to me, would be as great.
Mr. W I L L I S . But the aggregate might be?
Colonel POPE. Yes, sir.

Mr. W I L L I S . What do you think of the aid extended to investment
houses by banks? What do you think is the proper relationship
between investment houses and commercial banks?
Colonel POPE. Well, I think that the bank to whom the investment
house must turn, in many cases, to insure coverage of their commitments in case of necessity, or perhaps for a period of time until sold,
should be very close and, as I stated in my statement, I feel that it
is getting increasingly close partly because of the attention paid to
the investment market by banks who have bank affiiliates in that
business.
I think that it is seldom that a bank ever makes loans to investment houses for the purpose of covering clients except where the
bank desires to make a loan where its position is such that it can or
it thinks the collateral is sufficiently secure. I have, to my knowledge, no record of any institution being brought into the investment
market by virtue of making loans to investment houses beyond the
business judgment of the banks.
Mr. W I L L I S . That is, I infer from that, you think even in recent
years—the last two or three years—there has been no lending by
banks to investment houses for the purpose of carrying bonds with
which they have become overloaded, that was excessive or unreasonable ?
Colonel POPE. I think there are probably cases where that is the
fact, but it was not general.
Mr. WILLIS. I t was not general?

Colonel POPE. No, sir. Of course, the regulations would not permit a bank to lend above 10 per cent to any one name or affiliate ?
Mr. W I L L I S . That is, on unsecured loans?
Colonel POPE. That would be against the regulations. I would
not think that that was a general situation, although I can conceive—
although from personal knowledge I do not know that it was loaned
to excess—I have seen, in some instances which have recently been
before the public, where a bank apparently did that.
Mr. W I L L I S . YOU are referring to the Bank of the United States?
Colonel POPE. Yes, sir.

Mr. WILLIS. Well, of course, what as was done there was done in
many other cases which were not so flagrant.
Colonel POPE. That is possible, but I do not know of that situation,
and I do know of many cases where banks would not permit the investment bankers—in one case I think it applied in general to a
whole Federal reserve district—where they would not permit
investment bankers to take any commitments without consulting the
banks ?




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. W I L L I S . Without consulting whom?
Colonel POPE. Without consulting the banks first. That was in
1929 and I think it applied, by presumably some mutual agreement^
to the actions of practically all the banks in one Federal reserve
district.
Mr. W I L L I S . At the present time I suppose everyone will admit thebanks are overloaded with securities. One of the witnesses we
had here, the head of one of the larger banks of New York, the other
day stated approximately $2,000,000,000 worth of securities have to
be gotten rid of by the banks. What do you think is the direct
avenue through which that undue amount of securities was placed i n
the hands of the banks ? You stated very specifically, it seems to me,
they did not get them by helping in the issue of them.
Colonel POPE. I do not think they came, except in isolated cases,,
from the borrowing of issuing houses. This is only a guess, as I
am not a commercial banker and have not seen their portfolios.
Mr. W I L L I S . You have the published statement every week of t h e
amount they are holding, and when you compare that with what
they were holding three or four years ago, the increase is remarkable.
Colonel POPE. Yes; but on the other hand I know in a few cases of
large commercial banks that are buying long-term general market
high-grade securities, and have been doing so for the last six months^
and our own Government bond department indicates by virtue of the
increased Government sales of $800,000,000 this year over last, that
the banks are buying and have been buying heavily, of Government
securities, which seems to me in general that although they may have
some securities they would prefer not to have, they still have not had
enough to keep their funds profitably employed.
Mr. W I L L I S . They have had more than enough to destroy their
liquidity to a very serious degree.
Colonel POPE. I n many smaller institutions; yes, sir.
Mr. W I L L I S . That raises the question I am asking: I n what way
do you think this excess of securities came most largely into their
hands? Do you think it came from direct discounts for their
individual customers who wanted to carry securities ? Do you t h i n k
it came chiefly from brokers' loans or from the absorbing of so-called
loans for others, or in what way did it come? The only one you
exclude is loans for issuing houses.
Colonel POPE. I think where the congestion is most obvious has
been in the smaller institutions, and I do not think that it is entirely,
to the best of my knowledge, investments. I t is oftentimes loanswith real estate as collateral. But in cases of that nature, with the
smaller institutions, I think it is entirely individuals discounting
with the banks.
Mr. W I L L I S . Discounting direct for the individuals?
Colonel POPE. Yes; and not the underwriting houses which would
normally never go to a small bank.
Mr. W I L L I S . D O you think that calls for any regulation in the way
of determining the proportion of a bank's funds which shall be used
in buying or owning investments or making advancements upon investments which speedily become of such a nature that they can not:
be liquid without breaking the market?
Colonel POPE. I have not given that enough thought, Doctor, to>
really make my answer worth anything. I will reply, but it would



NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

553

•seem to me that, with the safeguards now in existence in the form of
regulations of national banks and state institutions, in the case of
the States, further regulations are not going to help. You have got
to have men of good judgment run a bank.
Mr. W I L L I S . Of course that is said by everyone who comes here,
but it is almost a useless thing to say. If I should place an order
for 1,000 men of good judgment to run banks, you could
not fill it. The banks would have found them if they could. You
will always have a free banking system in this country. Even if
you had branch banking it would not eliminate the small banks.
You will have men engaged in banking who are not experts in it,
just as you will have men running automobiles who ought not to
run them because they are temperamentally unsuited for it. You
can not run the banks on the English plan. I t seems to me in this
particular case we have clearly demonstrated there is something
at fault in our system in the matter of discounts based on commercial
paper. I t seems to me that it is very urgent that the investment
bankers of the country should express an opinion as to how that
could be corrected in the interests of keeping their own business
steady and at the same time protecting the country.
Colonel POPE. I would think that that, instead of being an investment banking problem, was a commercial banking problem entirely.
But I cannot make myself feel that it is possible to legislate for all
alike in all sections of the country, in villages as well as in large
cities, which will limit, in general, discounts by individuals with
collateral, because there are many districts, as, for instance, banks
in the surburbs of our large cities, where the more wealthy people
live who often use the local bank for borrowing for various things,
using stock exchange collateral as collateral for their loans, and
I have been a director of a bank in such a situation, and while I
was a director I never recall the bank's having lost a cent of money
on such loans. Whenever they were called, they were paid, and
if the margins were not sufficient and they were not sound, the loans
were not made. To limit a bank of that kind in indulging in that
legitimate business it would seem to me is unwise; whereas, I think
in the case of a bank in a small community with the pressure that
there is on the president to make loans, and when he asks for margins to put it off for a while—I do not see how regulations could
help a situation like that.
The ACTING CHAIRMAN. State regulations might help, but not
Federal regulations.
Colonel POPE. I think State regulations might because I think
the local situations would be visible to the State which perhaps
would not be to the National Government. I t might therefore be
possibly better done by State regulation than national regulation,
but I am at a loss to give you a very helpful suggestion as to how to
correct it. I do think that greater supervision may tend to correct
it.
The ACTING CHAIRMAN. The failures, as you know, have been
among the State banks almost entirely, partly from insufficient capital and partly from bad banking. I t is a question whether there
is any way of reaching them. One witness here said that all State
banks should be given up gradually and forced into the Federal
reserve. W h a t do you think of that?



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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Colonel POPE. Well, I think it is always wise to have as many
banks in the Federal reserve system as possible. I am unable t o
give you much assistance as to how to force banks to join the Federal
reserve system, as I am not familiar enough with that subject.
The ACTING CHAIRMAN. The tendency of your replies seems to be
that you are well satisfied with the Federal reserve system and not
very well satisfied with the State system of banks. Of course, there
is a tremendous competition between the two systems, the State system being a little more lenient and perhaps egging the national
system on in connection with loose methods of competition.
Colonel POPE. I have observed, with considerable admiration, the
operation of the Federal reserve system, and I think the uniformity
which I think is shown to exist in the Federal reserve system is
preferable in many cases, certainly to large banking institutions, than
a system which differs from State to State. I would not say that I
oppose the State banks in any sense. There are many, of course,
that are admirably run, and many that are admirably examined.
The ACTING CHAIRMAN. H O W could we get—to go back to the
question of blue-sky laws—how could we get some suggestions from
a conservative organization like your own that will offset the clamor
at a time like this? Following more or less of a securities panic,
there is always a great clamor on the part of reactionaries, or whatever you may call them, for blue-sky laws, as you know. Every
period we go through like this there is a great clamor for blue-sky
laws and, as you say, blue-sky laws are usually hampering business^
provided the banker is a sound man. W h y can not your organization study a situation of that sort with the idea of making suggestions that will, to some extent, protect the public without making
the issuance of securities too rigid?
I t seems to me, in my association with English banking, that the
English securities are issued on a much more wholesome, frank, and
honest basis than ours, and I think we can learn a lesson from them.
Colonel POPE. I think it is difficult to compare the English system
with ours because in England the underwriting is in the hands of a
comparatively very few, and they have no sales force and their
distribution is done by means of a broker who receives, on an average,
a quota of 1 per cent for distributing, and many of those brokers are
houses of long standing. The vast number of small and sometimes
irresponsible houses in this country is certainly not in existence in
England to the same extent it is here, although every so often they
have difficulty on account of securities nearly worthless being issued
in speculative times.
I can recall in 1929 in talking to a man in London who had recently
issued $15,000,000 worth of common stock of the company which
since has been unable to continue in its entirety, saying that if you
wanted to bring out a pure speculation, bring it to London for
issuance. That was because the people were in the frame of mind
there where they wanted to double their money as quickly as possible
and naturally took to the wholly speculative issues; so that England,
even, is not free of that. I know that the Investment Bankers
Associations in various committees have had the subject that you
asked me about up before them many times. There have been many
studies made. They have consulted with many State legislatures




NATIONAL AND FEDERAL, RESERVE BANKING SYSTEMS

555

on the question of laws which they are proposing to enact, and
have worked with them and cooperated with them and it is their
endeavor to do so at all times. I will say that the thought which you
asked me about, as to whether that association could come to some
solution in the matter which would be beneficial to all, would be
most welcome to them, if it could. I think it is probably the most
difficult subject they are confronted with. I do not think they have,
by any means solved it, but I think they have done what they could
to solve it, and are doing what they can on that.
The ACTING CHAIRMAN. On the question of the money market,
have you any suggestions for regulating or checking the increase
in loans for the account of others during periods of great speculation or speculative credit expansion?
Colonel POPE. If I understand correctly, you mean by account of
others, industrial concerns lending on the call-money market ?
The

ACTING CHAIRMAN.

Yes.

Colonel POPE. I think that is impossible to correct by regulation,
although I have not given this long study. But at the time it was
much discussed, I did study it somewhat. I think that for the
reason that at the time of high call-money rates naturally the surplus funds of industry are taken to that market, and except for
the fact it is disturbing to those endeavoring to control the situation in a healthy way there is no particular reason that I can
see why they should not use that market as a safe means of investment of temporary funds, and my impression is that if you penalize
the industrialists or prohibit from lending call money in the usual
way, through his bank, he would go direct to the stock-exchange houses
and make the loan direct and would have less control over the situation than you have at the present time. My impression is, therefore,
that you can not stop such loans by regulation.
Mr. W I L L I S . Did your house place any such loans or did the Old
Colony Corporation?
Colonel POPE. The First National Old Colony Corporation makes
no loans for anyone.
Mr. W I L L I S . You placed none for others ?
Colonel POPE. No, sir.

Mr. W I L L I S . Have you any idea how many concerns there were
that placed such loans—commercial concerns?
Colonel POPE. I have no idea; no, sir. I think that at the time
when the newspaper discussions brought out the undesirability of
loans by others, that many—I know of one or two cases personally—
withdrew funds from the call money market because of the desire
to help the general situation and I think the moral effect exercised
by the banks and publicity probably withdrew large sums in the
aggregate from the call money market.
The ACTING CHAIRMAN. The commission that is earned in placing
those loans is divided with the broker ?
Colonel POPE. The placing of the loan in New York, for example,
by the clearing house rule—there is a charge of one-half of 1 per
cent for placing the loan on call. The broker's fee is paid by the
borrower, but the handling of the collateral by the bank carries a
fee of one-half of 1 per cent.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. W I L L I S . W h a t would be the broker's fee ?
Colonel POPE. One-eighth of 1 per cent on demand and one quarter of 1 per cent on time.
Mr. W I L L I S . That is a uniform practice ?
Colonel POPE. I think so. T h a t is one-eighth per cent per annum.
Mr. W I L L I S . I understand.
The ACTING CHAIRMAN. D O you regard the present acceptance
situation as sound?
Colonel POPE. From the standpoint of the market for acceptances,
which is the only phase of that business with which I am familiar,
it is probably as sound as it ever has been.
The ACTING CHAIRMAN. Have you had any experience with domestic acceptances? We have had several witnesses who thought
t h a t it might as well be withdrawn.
Colonel POPE. I do not believe I am in a position to answer that.
We are not an accepting house and the purpose for which drawn,
except as stated on the face of the bill, is difficult to obtain.
The ACTING CHAIRMAN. YOU handle domestic acceptances the
same as foreign ?
Colonel POPE. Yes, sir.

The ACTING CHAIRMAN. D O you have any more difficulty in
handling them than foreign acceptances ?
Colonel POPE. The nature of the transaction does not enter into
the marketability.
The ACTING CHAIRMAN. There is no discrimination in the market
now on the part of anybody against acceptances made for the movement of commodities from one part of the country to another as
distinguished from the movement of commodities from this country,
say, to France?
Colonel POPE. No, sir.

The ACTING CHAIRMAN. D O you make or study the credit analysis
of the acceptance ?
Colonel POPE. We only study the credit of the acceptor.
The ACTING CHAIRMAN. YOU only study the credit of the acceptor?
Colonel POPE. Yes, sir.

The

ACTING CHAIRMAN.

B u t you do study that ?

Colonel POPE. Yes, sir.

The ACTING CHAIRMAN. H O W do you account for the Bank of
the United States acceptances being in the market and actually sold
and held right up to the last?
Colonel POPE. I do not know. W e did not, ourselves, have any.
But I can conceive of a house of large size, with a purchasing power
of bills in large amounts, very well having to take a small amount
of bills that are thrown into a big block which they might sometimes
rather not take.
Mr. W I L L I S . YOU do not think it was due to th# lack of credit
study or indiscriminate purchase of acceptances without credit
analysis?
Colonel POPE. N O . Did you mean unindorsed bills? I could conceive of indorsed bills of that type being taken quite freely.
Mr. W I L L I S . D O I understand you to say that the indorsed bills of
the bank would be taken quite freely ?
Colonel POPE. Yes, sir.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

557

Mr. W I L L I S . The buyer, then, would not care particularly who
made them, provided he was safe ?
Colonel POPE. Yes, sir.

Mr. WILLIS. That would not hold good in the English market (
Colonel POPE. I do not know.
Mr. W I L L I S . The theory there is to discriminate agairist bills that
ought not to be in the market.
Now, several witnesses we have had here have said directly or
indirectly just about what you said—if the bill was indorsed so that
the buyer of it was not likely to lose, he probably would not care
very much who made the bill. I t might be a bill of the Bank of the
United States or anybody else. Is that generally the case ?
Colonel POPE. Of course it is pretty hard for me to say, with any
knowledge, as to whether that is true or not, but I think it is generally our experience that it is the name rather than the purpose that
carries weight on the part of the purchaser.
The ACTING CHAIRMAN. The name of the bank ?
Colonel POPE The name of the acceptor and indorser.
Mr. W I L L I S . There is no definite effort to eliminate the bills of
banks that really ought not to be there, as far as you know ?
Colonel POPE. I should think that it wras not general to discriminate between bills on account of purpose, in this country.
Mr. WILLIS. Nor on account of the acceptor, if sufficiently
indorsed ?
Colonel POPE. The account of the accepting bank is not examined
and scrutinized, because the majority of the bills in the open market
are sold with the third name.
Mr. WILLIS. If the third name is there, a weak bank's acceptance
will move quite satisfactorily in our market.
Colonel POPE. I would think that that was subject to some modification. But I think I perhaps misled you by my reference to the
bank you referred to, by saying that the Bank of the United States'
bills would flow freely even though its credit was discussed, if it
had an indorsement on it.
Mr. WILLIS. I understood you to say that.
Colonel POPE. I meant to say that I could conceive of bills beingbought with the third name on them, for one reason or another, and
I think that accounted for most of the bills of the Bank of the
United States which were in the market where I would not think that
the Bank of the United States, as an accepting bank, would have
passed freely in the recent weeks before the closing of the bank. We
did not buy, even with the indorsement.
Mr. W I L L I S . S O I understood. Do you think there are many weak
banks' names like that in the market now, or do you think the accepting banks constitute a very high grade satisfactory and reliable body
of acceptors almost without exception?
Colonel POPE. I think the names of the accepting banks that appear in the discount market are a very high type of name. There
is comparatively very little business done in the smaller institutions
who have only occasionally a small amount of bills. If their bills
are sold to investors at all, it is practically always locally.
34718—31—PT 3




9

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NATIONAL AND FEDEKAL UESEKVE BANKING SYSTEMS

The ACTING CHAIRMAN. Commercial paper has declined measurably %
Colonel POPE. I understand so; yes, sir.
The ACTING CHAIRMAN. I n your section of the country as wel]
as others?
Colonel POPE. T understand so; but I only know that from reading. We do not handle commercial paper.
The ACTING CHAIRMAN. The Federal funds market is a big factor
in banking. Do you look upon that development as a healthy one?
Colonel POPE. I think it has been a tremendous help in many ways
to commercial banks in rapidity of settlement, in the rapidity of
distribution of funds throughout the country, and I think it has
been a big factor in the speeding up of banking operations.
The ACTING CHAIRMAN. Would you favor settlement days as a
possible check on quick turnovers?
Colonel POPE. Such as in London ?
The ACTING CHAIRMAN. Perhaps more frequent, but say 15 or 30
days?
Colonel POPE. I think that would be unwise, although I am not
enough familiar with that problem to really give you a helpful
answer.
The ACTING CHAIRMAN. I t has a tendency to hold down the ticker
man ?
Colonel POPE. I t can be said to have some advantagqs, but in most
ca^es in talking with people recently, they all feel it does not apply
to our methods of banking in this country.
Mr. W I L L I S . YOU think, Colonel Pope, that the banks at the present time should carry their investment securities, taken as a whole,
at market value rather than at cost, or do you think they should
be obliged to mark down the whole lot of them periodically, in accordance with the change of the market value? There is a very
unsatisfactory situation about that.
Colonel POPE. I think that is a subject which would require a
great deal more thought than I have given it, to give an intelligent
answer.
The ACTING CHAIRMAN. YOU certainly would not mark them up?
Colonel POPE. I certainly would not mark them u p ; no, sir. But
I can see that in times of stress, such as we passed through this last
year, where bond values dropped 30, 40, and 50 points, without any
real reason other than lack of buyers, where the bonds were undoubtedly going to be paid at maturity and were paying interest—if those
were marked down to the market, the capital of many banks would
have been impaired and, I think, unjustly, in view of the more recent rise. If you are marking down to the market, the question is
always as to what is the market, because there were many bonds
that you really could not get a bid for and 20 might as well have
been the price at which you actually could have sold them as 50.
So, to say to mark them at the market is a matter of judgment as to
what the market is.
Mr. W I L L I S . I n the case of real estate, it appears that a great many
real-estate loans held by banks at the present time are wholly unmarketable, so it is difficult to say what the liquidity of such is.
Would amortizing the real-estate loans by banks be a desirable thing?




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

559

Colonel POPE. I know so little about real-estate loans, which we
do not happen to make
Mr. W I L L I S . YOU do not make them?
Colonel POPE. No, sir. We have sold issues some years ago of one
or two selected joint-stock land banks, but I really know too little
about real-estate loans to give you a proper answer to that question.
Mr. W I L L I S . YOU are not handling any joint-stock land bank securities now?
Colonel POPE. Yes, sir. Of course there are no new issues at the
present time and have not been for some years on account of the
general market situation. But we buy and sell for customers' accounts frequently and in some cases if there is a moderately active
market in some joint-stock land bank issues, and we have handled
some Federal farm loan bonds.
Mr. W I L L I S . YOU get some of their bonds ?
Colonel POPE. Yes, sir.

Mr.

WILLIS. YOU

deal in them quite actively ?

Colonel POPE. Yes, sir.

The ACTING CHAIRMAN. We are very much obliged to you, Colonel
Pope, for your full and frank answers, and appreciate very much
your coming here.
(Whereupon, at 12.05 o'clock p. m., the subcommittee adjourned until Monday, March 2, 1931, at 10.30 o'clock a. m.)
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