Full text of Banking Act of 1935 : Hearings Before the Committee on Banking and Currency, House of Representatives, Seventy-Fourth Congress, First Session, on H.R. 5357, February 21, 22, 26, 27, 28, March 1, 4, 5, 6, 11, 12, 13, 14, 15, 18, 19, 20, 21, 22, 25, 26, 27, 28, April 2, 8, 1935

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BANKING ACT OF 1935
HEARINGS
BEFORE THE

COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
SEVENTY-FOURTH CONGRESS
FIRST SESSION
ON

H . R . 5357
A BILL TO PROVIDE FOR THE SOUND, EFFECTIVE, AND
UNINTERRUPTED OPERATION OF THE BANKING
SYSTEM, AND FOR OTHER PURPOSES

FEBRUARY 21, 22, 26, 27, 28, MARCH 1, 4, 5, 6,11,12,13,14,15, IS, 19, 30, 21,
22, 28, 26, 27, 28, APRIL 2, 8, 1035

CORRECTED PRINT

127297

UNITED STATES
GOVERNMENT PRINTING OFFICE
WASHINGTON: 1935

COMMITTEE ON BANKING AND CURRENCY
H ENRY B. STEAGALL, Alabama, CaairnmH
T. ALAN GOLDSBOROUGH, Maryland
JOHN B. HOLLISTER, Ohio
M ICHAEL K. REILLY, Wisconsin
JESSE P. WOLCOTT, Michigan
FRAN K W. HANCOCK, JR., North Carolina
PETER A. CAVICCHIA, New Jersey
CLYDE WILLIAMS, Missouri
HAM ILTON FISH, JR., New York
O. H. CROSS, Texas
CHARLES L. GIFFORD, Massachusetts
B REN T SPENCE, Kentucky
EVERETT M DIRKSEN, Illinois
PRENTISS M. BROWN, Michigan
CLARE G. FENERTY, Pennsylvania
FRED J. SISSON, New York
JAMES I. FARLEY, Indiana
JAMES A. MEEKS, Illinois
H ERM AN P. KOPPLEMANN, Connecticut
M A RTIN J. KENNEDY, New York
THOMAS F. FORD, California
PAUL BROWN, Georgia
RICHARD M. RUSSELL, Massachusetts
D. J. DRISCOLL, Pennsylvania
D. W ORTH CLARK, Idaho
J. T. CRAWFORD, <%!%

CO N TEN TS
Statement of—
Page
Hon. Leo T. Crowley, Chairman of the Board, Federal Deposit
Insurance Corporation_______________________________________ I, 29, 83, 113
Hon. L. E. Birdzell, General Counsel Federal Deposit Insurance
Corporation_____ ______ ____________________________________29, 51, 83, 113
Edson F. Adams, president Farmers & Merchants Savings Bank,
Oakland, Calif_____________________________________________________
74
Hon. J. F. T. O'Connor, Comptroller of the Currency_________ 143, 683, 661
Hon. Marriner 8. Eccles, Governor Federal Reserve Board-------------179,
187, 233, 243, 263, 395, 409
Dr. E. A. Goldenweiser, Chief, Statistical Division, Federal Reserve
Board_____________________________________________________________
431
Hon. T. Jefferson Coolidge, Under Secretary of the Treasury_______
465
.Robert H. Hemphill, National Monetary Conference, Washington,
483
D. C ______________________________________________________________
D. J. Needham, General Counsel American Bankers Association___
513
Dr. Irving Fisher, professor of economics, Yale University, New
Haven, Conn______________________________________________________
517
Hon. Robert L. Owen, former United States Senator from Oklahoma. 553
Edward A. O'Neal, president American Farm Bureau Federation,
Chicago, 111__________________________________________________573*611, 657
Fred H. Sexauer, president Dairymen's League Cooperative Associa
tion, New York, N. Y _____________________________________________
592
E. S. Foster, general secretary New York State Farm Bureau Federa
tion, Ithaca, N. Y _________________________________________________
615
Hon. William Schley Howard, former Member of Congress, Atlanta,
Ga
763
Dr. Walter E. Spahr, professor of economics, New Y ork University,
New Y o rk _________________________________________________________
705
George M. Brown, president Georgia Savings Bank & Trust Co.,
.Atlanta, Ga_______________________________________________________
763
James E. Cardan, vice president and treasurer Atlantic Savings &
Trust Co., Savannah, Ga__________________________________________
763
J. P. Houlihan, vice president, Georgia State Savings Association,
Savannah, G a________________________________________ __________ 763
Charles C. Mayer, Washington, D. C ________________________________
776
Hon. Franklin W. Fort, former M ember of Congress, Newark, N. J - .
805
Hon. Frank A. Vanderlip, former Assistant Secretary of the Treasury,
New York, N. Y ______^____________________________________________
825
James H. Rand, chairman of board, Rem ington-Rand, Inc., New
York, N. Y ________________________________________________________
859

BANKING ACT OF 1935
THURSDAY, FEBRUARY 21, 1935
HOUSE OF REPRESENTATIVES,
C O M M IT T E E ON B A N K I N G AND C U R R E N C Y ,

D. C.
The committee met at 10:30 a. m., Hon. Henry B. Steagall (chair
man) presiding.
The CHAIRMAN. Gentlemen, the committee will come to order,
please.
I have asked Mr. Crowley, of the Federal Deposit Insurance Cor
poration, to come before us this morning and discuss H. R. 5357. I
assume that he desires to address his remarks mainly to the provisions
of title I of the bill, which relates to the Federal Deposit Insurance
Corporation.
I am going to desist from making any preliminary statement myself
at this time, but if I have the opportunity, I should like to incor
porate in the hearings a short preliminary statement of my own.
In deference to a suggestion which Mr. Crowley has made to me,
and what I think might be in the interest of time and orderly pro
cedure, I am going to suggest to the committee that they permit
Mr. Crowley to make his statement and complete his discussion in a
general way before committeemen interrogate him.
You may proceed, Mr. Crowley, if you will.
STATEMENT OF LEO T. CROWLEY, CHAIRMAN OF THE BOARD,
FEDERAL DEPOSIT INSURANCE CORPORATION

Mr. CROWLEY. Gentlemen, we have prepared a digest of this bill,
together with our recommendations. If it is agreeable to the com
mittee we will pass to each one of you a copy of our report, in order
that you may follow the report with me. I f you will be kind
enough to let us follow through with it and answer your qestions
afterward, we would like to do that. We have a number of charts
thpt we would like to present to you. Is that agreeable to you, Mr.
Steagall!
The CHAIRMAN. Yes; that will be perfectly all right.
Mr.^ CROWLEY. Gentlemen, last year I appeared before you and
recommended that the provisions of the so-called " permanent insur
ance plan " be suspended for another year, and that the temporary
insurance fund be continued to July 1, 1935. At that time it was
stated that we need additional experience before the permanent
plan went into effect. We also suggested that, through the adminis-

BANKING ACT OF 19 3 5

tration of the temporary fund, we might gain some knowledge which
would indicate desirable changes in the permanent plan. You have
asked me to appear before you today to discuss with you the results
of our 13 months' experience and study and to explain the reasons
behind the proposals which you have before you, and which comprise
title I of the Banking Act of 1935.
With your permission, I would like to outline to you in detail the
reasons which have motivated our suggestions for changes in the
permanent insurance plan. The charts and tables give a vivid pic
ture of the commercial banking structure of the United States.
These data cover all insured and noninsured banks, arranged accord
ing to total deposit liability size groupings.
They do not include mutual savings banks or private banks.
Ninety percent by number of all of the licensed commercial banks
in the United States have been admitted to the insurance fund.
Over 98 percent of the total deposits in commercial banks and trust
companies in the United States are in banks, the deposits of which
are insured. On October 1, 1934, there were only about 1,100 licensed
commercial banks, with deposits of slightly more than $500,000,000,
which were not insured, while insured commercial banks numbered
more than 14,000 on that date, and their deposits amounted to some
$36,000,000,000. Mutual savings banks have been excluded from
these figures. There are 68 of the 576 mutual savings banks in the
fund for mutuals.
We have in our fund 1,928 banks with deposits of $100,000 and
under; of banks with deposits of $100,000 to $250,000 we have 3,929;
with deposits of $250,000 to $500,000 we have 3,278; with deposits oi
$500,000 to $750,000, we have 1,531; with deposits of $750,000 to
$1,000,000 we have 970; with deposits of $1,000,000 to $2,000,000 we
have 1,664; with deposits of $2,000,000 to $5,000,000 we have 1,076;
with deposits of $5,000,000 to $50,000,000 we have 647; with deposits
of $50,000,000 and over we have 96 banks in our fund.
The banks are broken down in our chart into national banks,
State banks, and State member banks, and the insured and uninsured
nonmember banks.
For instance, out of 1,091 banks that are outside of the fund, 42H
of those have deposits of $100,000 and under, 349 have deposits of
$100,000 to $250,000, 169 have deposits of $250,000 to $500,000, 54
have deposits of $500,000 to $750,000, 27 have deposits of $750,000
to $1,000,000, 34 have deposits of $2,000,000 to $5,000,000, 16 have
deposits of $5,000,000 to $50,000,000, and 16 banks have deposits of
$50,000,000 and over, which make a total of 1,091 banks.
The CHAIRMAN. Does your statement disclose the total of the
deposits in each of these groups?
Mr. CROWLEY. Yes, sir.
**
The next chart that you have there shows that the banks with
deposits of $100,000 and under have a total deposit liability of $123,831,000. In other words, 1,900 banks have deposits of $123,831,000.
the banks with deposits of $100,000 to $250,000 have total deposits
of $664,493,000, and so on down. The $50,000,000 banks, and over,
have deposits of $18,942,000,000.

^AMtCB H A V I N G
DEPOStTSOF

NU M BE R OF BAN KS ( T H OUSA NDS )

50.000.00!
AND OVER
N U M B E R OF B A N K S ( T H O U S A N D S )

1935

5.000.00! TO
50.000.000

/Rauradi)0R-H)6H)ber%HH^s

ACT

Mal/ona/
Stafe member baaira

BANKING

(The charts and tables referred to are as follows:)

NUMBER OP I NS U RE D AMD UN t NS UREDCOMMERCt AL RANKS,
OCT 1 , 1 9 3 4 C L A S S ! F ! E D BY SIZE OF BANKS

ALL BANKS

FEDERAL D E P O S IT iN S U B A N C n CORPORATION

D IV IS IO N OF RESEARCH AND STATISTICS

DEPOSITS !N ! N S U R E D A N D UN! NSURED COMMERCfAL BANKS.
OCT. 1 , 1 9 3 4 , C L A S S i F ! E D BY S ! Z E OF BANKS

BAMkSHAVfME.

B tL U O M S O f DOLLAR S

PEPOStTSOF
tO 0.000 OR
LE S S
! 0 0 .0 0 ! TO
250.000

BANKING

2 5 0 .0 0 ! TO
500.000

ACT
OF
1935

B t L H O N S OF DOLLARS

r ......

i . ,

ALL BAN KS

F EDERAL D E P O S IT IN S U R A N C E CORPORATION

i
%%%%^
!

D IV IS IO N OF R ESEARCH AND STATISTICS

BANKING ACT OF 1 9 3 5

att%

cZa^t^ed
All banks

Banks having deposits of—
$100,000 and under___________________
$100,001 to $250,000.................................
$250,001 to $500,000...................................
$500,001 to $750,000..................... .............
$750,001 to $1,000,000..............................
$1,000,001 to $2,000,000 ........................
$2,000,001 to $5,000,000............... .............
$5,000,001 to $50,000,000
......................
Total all groups

National
banks

^tze of

Oc^. .?,

Uninsured
Insured
State mem nonmember
nonmember
ber banks
banks
banks

1.928
3.929
3,278
1,531
970
1,664
1,076
647
96

94
834
1,261
741
506
923
659
380
52

22
119
186
97
67
142
153
141
39

1,386
2,627
1,662
639
370
565
348
110
5

426
349
169
54
27
34
16
16

i 15,119

5,450

966

7,612

1,091

^ Exclusive of 71 insured banks not reporting statistics and 31 uninsured banks for which no deposit
0gures were available.

JDepoaifs

aw%

co?nwerct^ &tnt^
Oc^. J, ^ 4

&y dize of

[000's omitted]

All banks

Banks having deposits of:
$100,000 and under....................................
$123,831
$100,000 to $250,000..................... .............
664,493
$250,001 to $300,000.............. .................... 1,167,228
$500,001 to $750,000....................................
936,016
$750,001 to $1,000,000......................... . . . .
836,608
$1^000,001 to $2,000,000............... ............. 2,324,922
3,242,721
$2,000,001 to $5,000,000............... .
$5,000,001 to $50,000,000............................ 8,250,016
$50,000,001 and over................................. 18,942,184
Total, all groups.... ..............- .......... .

! 36,488,019

Uninsured
Insured
nonmember nonmember
ban ks'

National
banks *

State

$7,265
152.705
460.706
455,702
437,095
1,300,832
1,982,864
4,691,139
10,582,628

$1,700
21,304
68,180
58,545
57,331
199,540
487,542
2.118.575
7.951.575

$90,750
435,381
579,700
388,983
318,940
778,427
723,051
1,216,797
407,981

$24,116
55,103
58,642
32,786
23,242
46,123
49,264
223,505

20,070,936

10,964,292

4,940,010

512,781

* T otal deposits reported to the corporation on Oct. 1,1934 diSer in some respects from those shown on
published statements.
* As reported in Rand-M cNally Bankers' Directory for July 1934.
' Exclusive of deposits of 71 insured banks not reporting statistics and 31 uninsured banks for which no
deposit figures were available.

Mr. CROWLEY. To arrive at a practical basis for estimating the
amount of funds necessary to cover the insurance liability of the
Corporation, our 6rst consideration has been the volume of losses
which depositors have borne during the past.
From July 1, 1864, the beginning of the national banking system,
to June $0,1934, about 16 thousand commercial banks, which include
national banks, State banks, loan and trust companies, stock savings
banks, and private banks for which there are data in the reports of
the Comptroller of the Currency, with deposits of nearly 9 billion
dollars, are known to have suspended operations. Losses to deposi
tors in these banks are estimated at 3 billion dollars over and aoove
all recoveries.
The estimates of losses to depositors in suspended commercial
banks are based upon available data, which clearly minimize the
facts. The figures for national banks are fairly complete and relia
ble, and are taken from reports of the Comptroller of the Currency.
The Rgures for other commercial banks, however, are incomplete,
particularly for the period prior to 1920. Since all failures have not
been recorded, bank depositors have suffered losses which have not

BANKING ACT OF 1 9 3 5

been recorded. For example, many records of voluntary liquidation
by banks ignore the fact that depositors were not paid in full. Then,
again, bank reorganizations, in late years, have been based upon
the waiving of depositors' claims, while in other cases depositors
have voluntarily reduced their claims or made contributions to capi
tal as a means of absorbing losses.
Mr. KOPPLEMANN. Mr. Crowley, do you mean to say that even
today there are banks that fail without being reported, private banks
or any kind of a bank ?
Mr. CROWLEY. What we are talking about is during the last few
years.
Mr. KoppLEMANN. I know, but I wondered whether that situation
still exists.
Mr. CROWLEY. I think there are some States in which banks might
fai!, and we cannot get the information from them.
Mr. KoppLEMANN. There are still ?
Mr. CROWLEY. Yes.
The CHAIRMAN. Inasmuch as that question has been asked, what
information have you to support the statement that there have been
voluntary liquidations of State institutions, in which the depositors
are not paid in full? How do you get information like that?
Mr. Fox. Mr. Chairman, the source of the information is the Fed
eral Reserve Board. They make contacts with the State authorities
through their agents in the 12 Federal Reserve districts. I f the
State authorities inform the agents, we get the information. How
ever, if the State authorities have no control over the banks, as is the
case with some private banks, we would not get the information.
The CHAIRMAN. Would it not follow as a matter of course that
when a bank became insolvent, to the extent of wiping out its cap
ital structure, and leaving it with its depositors unprotected, there
would be a liquidation in the regular way of such an institution?
Mr. CROWLEY. What we are trying to bring out, Mr. Chairman,
is that there have been a lot of insolvent banks that have gone to
their depositors and made private deals with them, whereby they
wrote down their deposits liability in some instances as high as 40,
50, or 60 percent, and when they waived a portion of those deposits,
the portion that they waived was used for capital purposes.
Mr. CROSS. Did you get that through the Internal Revenue De
partment?
Mr. CROWLEY. No; there would be no reason for their reporting
to the Internal Revenue Department.
The CHAIRMAN. I was of the opinion that there would be no
report of that kind to the Commissioner.
Mr. CROWLEY. There would be no way to have it recorded. The
only place you could get it would be through the local bank com
missioner, and a lot of them do not keep complete records.
Mr. HANCOCK. What is your best estimate of the losses which
have occurred that are not accounted for?
Mr. CROWLEY. Have you any idea what that might amount to,
Mr. Fox?
Mr. Fox. No, sir.
Mr. CROWLEY. What we have been trying to do is to Rnd out from
the various State departments how much their depositors have lost

BANKING ACT OF 1 9 3 5

through waivers, and it has been an almost impossible thing to de
termine, because they have kept no records of it, but we do know
it has been a very substantial sum.
Mr. REILLY. In the case of Wisconsin have you a record ?
Mr. CROWLEY. We have not been able to get that as yet.
Mr. Fox. We are getting a record for the past 4 years. We already
have records from 18 States.
Mr. GOLD8BOROUGH. Have you a record from Maryland?
Mr. Fox. Yes, sir.
The CHAIRMAN. Before you leave that, do you attempt to include
these estimated and unrecorded losses as a part of the total embraced
in your figures?
Mr. CROWLEY. No. As I understand it, Mr. Chairman, the $3,000,000,000 of loss has been determined from the actual liquidations; is
that correct, Mr. Fox?
Mr. Fox. Yes; from the actual Sgures.
The CHAIRMAN. Then there are no Sgures based on that, so it is
not so material.
Mr. CROWLEY. The charts which I will later Ale show, by years
from 1864 to 1934, the percentage of national and other commercial
banks suspending and the ratio of deposits in suspended banks to
deposits in active banks. The ratio of deposits in suspended banks
to total deposits in all active banks is smaller for national than for
other commercial institutions.
In other words, the loss from 1864 to 1934 was considerably less
in the national system than it was in the State system.
Our estimates indicate that about 1 billion dollars of the 9 billion
dollars which was on deposit in commercial banks that failed during
the 70-year period were secured by pledge of collateral or otherwise.
Of the remainder, some 6 billion dollars were in accounts of less
than $5,000 or constituted the first $5,000 of large accounts. In
other words, 6 billion dollars were within the $5,000 limit. Two
billion dollars represents the volume of these deposits which were in
accounts with balances above $5,000. The estimates of the amount
of funds representing balances in excess of $5,000 were made on the
basis of Sgures showing deposits classified by size of accounts in
national banks in 1918, in member banks of the Federal Reserve
System as of May 13, 1933, and in all insured commercial banks
as of October 1, 1934.
For every $100 of deposits in the entire commercial banking sys
tem, about 32 cents a year was lost. Of this figure, it is estimated
that 24 cents represents losses to depositors with balances not in
excess of $5,000, while the remaining 8 cents represents losses to
depositors having balances in excess of $5,000. For every $100 of
deposits in the national banking system, 21 cents per year was lost
as against 42 cents per $100 per year in the State system. The
following table summarizes the estimates of losses to depositors in
suspended national and other commercial banks during the 70 years
ending June 30, 1934.

BANKING ACT OF 19 3 5

(The table referred to is as follows:)
Losse# to depositor# tit y%#pe?M%€d ooMM?^ref%2

19^
National
banks

Deposits in suspended banks (millions of dollars).................................

$8,778.00

$2,715.00

Secured.______________ _________________ ____________________
Unsecured over $5,000..........................................................................

1.033.00
5.762.00
1.983.00

184.00
1,675.00
856.00

SS8

Other com
mercial

All commer
cial banks

Estimated losses (millions of dollars).......................................................

3,113.00

1,015.00

2,098.00

(')
2,301.00
812.00

(')
667.00
348.00

(')
1,634.00
464.00

.24
.08

.14
.07

Secured deposits - ............. .....
__________________________
Unsecured deposits under $5,000........................................................
Unsecured deposits over $5,000....................................................... .

$6,063.00

Average loss per year for each $100 of deposits in active banks...............
Unsecured deposits under $5,000.......................................................
Unsecured deposits over $5,000...........................................................

.33
.09

^ Negligible.

Mr. CROWLEY. Losses to depositors have been most severe during
the periods of business depression. Two-thirds of the losses during
this entire 70-year period resulted from bank suspensions occurring
during the 4 years ending June 30,1934. In other words, two-thirds
of the losses in the banking system in this country took place from
1929 to June 30,1934. For these 4 years losses to depositors are esti
mated at $1.32 per year for each $100 of deposits in the commercial
banking system. Comparable losses during the depression of the
18?0's amounted to 35 cents, and during the depression of the 1890's
amounted to 23 cents. The figures for the early periods understate
the losses, but it is apparent that the losses in these earlier periods
were not as great in proportion to total deposits as during the past
4 years. The data are summarized on the following tables. The
first shows the losses in commercial banks which suspended and did
not reopen during the three depression periods; the second compares
losses during the 14 years included by the three critical periods, with
the other 56 years since 1864.
(The tables referred to are as follows:)
Looses fo
m
during
o/
d id n o t reop ew
[Federal Deposit Insurance Corporation, Division of Research and Statistics]
All commercial banks *

Deposits in suspended banks (millions of dollars).... .................
Secured........................................................................................
Unsecured under $5,000.............................................................
Unsecured over $5,000...............................................................
Estimated losses in deposits (millions of dollars)..........—- ........
Secured deposits........................................................................
Unsecured deposits under $5,000.............................................
Unsecured deposits over $5,000................................................
Average loss per year for each $100 of deposits in active banks
Unsecured deposits under $5,000.............................................
Unsecured deposits over $5,000................................................

1873-78

1892-97

1931-34

$85.00
10.00
66,00
9.00
26.00
(')
23.00
3.00
.35
.31
.04

$134.00
13.00
103.00
18.00
43.00
(')
36.00
7.00
.23
.19
.04

$5,306.00
637.00
3.256.00
1.473.00
2.142.00

(')

I,47&00
664.00
'1 .2 8
.80
.40

i Periods beginning on July 1 and ending on June 30 of the years specified.
' Negligible.
' If losses of banks which subsequently reopened are included, the average loss per year for each $100
of deposits in active banks is raised to $1.32.

BANKING ACT OF 1 9 3 5

Logger to (%ep03i%ot*g

3Mgpe?M%ed &m^c3,

perio^3 co^^3fed wiM

re??KMMm^ yeor^,

3 cri3^3

contmerciaf !)a^?c3

[Federal Deposit Insurance Corporation, Division of Research and Statistics]
14 years Remain
70 years, during 3
ing 56
crisis
1864-1934
years
periods '
De osits in sus ended banks (millions of dollars)

$8,778
1,033
5,762
1,983
3.113
2, 301
812
.32
.24
.08

$6,084
716
3,738
1,630
2,269
1,578
691
1.17
.82
.36

$2,694
317
2,024
353
844
723
121
. 11
.09
.02

* Includes figures for banks suspending during period July 1, 1930, to Mar. 15,1933, which subsequently
reopened.

Mr. CROWLEY. The experience of the past 70 years indicates that
to repay losses suffered by all depositors in our suspended commercial
hanks, an assessment of 33 cents per $100 of total deposits, or onethird of 1 percent of total deposits in all open commercial banks,
would have been necessary. Excluding the losses incurred during
the three depression periods—1873-78, 1892-97, and 1931-34—and
confining ourselves to losses occurring during the balance of the
70 years, an assessment of one-eighth of 1 percent would have been
necessary.
In the past, the number, timing, and geographic concentrations of
bank suspensions have been chiefly due to fundamental weaknesses in
banking structure and the course of economic events. Suspension
of individual banks within the areas affected has reflected, in the
main, the quality of bank management. In the future, the magni
tude of losses which will result from bank failures will also depend
upon the trend of economic events, the changes which may occur
in the structure and functions of the commercial banking system,
the caliber of the individual bank management, the extent to which
the system is reinsured against defalcations, and the quality of the
supervision exercised over these banking institutions.
Of course, the future trend of economic events cannot be fore
cast.
Changing tendencies are now apparent in the structure and func
tions of commercial banking. On the one hand, the drastic reduction
in the number of banks during the past 14 years has greatly
relieved the overbanked condition in many communities. On the
other hand, new financial agencies, serving specialized needs, have
been created, and will compete, to some extent, with commercial
banks. The types of credit which may be extended by commercial
banks may be subject to varying degrees of risk.
The extent to which the caliber of bank management will improve
in the future, over what it has been in the past, cannot be estimated.
While it is hoped that a better quality of personnel will develop,
it must be recognized that there will continue to be poorly managed
banks and that such institutions will eventually succumb. We can
not foretell the extent to which the existence of deposit insurance
will influence bank management.

BANKING ACT OF 1 9 3 5

To establish a fair rate of assessment which the banks shall pay
for Federal deposit insurance, the hopeful expectations of the future
must be tempered by a consideration of the realities of the past. Let
me repeat that a premium at the rate of one-third of 1 percent
of total deposits would have been necessary to cover all losses to
depositors during the past 70 years. A premium at the rate of oneeighth of 1 percent would have covered depositors' losses in all years
except those of severe depression.
We are concerned next with the basis of assessment and with the
ability of the banks to pay the required amount.
The existing permanent insurance law provides that all insured
banks may become liable for an uncertain number of successive as
sessments. It is not sound deliberately to subject an operating busi
ness to an unpredictable liability. The maximum rate and number
of assessments should be fixed so that an insured bank may know in
advance its potential liability to the Corporation. An annual pre
mium of a known maximum amount constitutes a sound basis for
insurance revenue, as it provides a specific payment to cover a clearly
defined risk for a definite period of time.
We also believe that payments made by insured banks should be in
the form of premiums, rather than through the purchase of stock.
As in the case of other insurance companies, receipts from premiums
should be added to the reserve funds of the Corporation. Such re
serve founds should not be considered an earning asset of the insured
banks. The interest received by the Corporation from the invest
ment of reserve funds should not be made on the basis of dividend
payments.
It is recommended that assessments be based upon total deposits
in insured banks, regardless of whether or not the insurance is limited
to $3,000 per depositor. To base assessments solely on the first
$5,000 of each depositor's account places an undue burden upon the
unaii banks, since most of the accounts of these institutions are less
than that amount. It does not necessarily follow, however, that the
greatest risk to the Corporation lies in these institutions. On the
contrary, it lias been demonstrated frequently in recent years that the
consequences of the failure of a large bank may be more disastrous
than the failure of a number of small institutions. The closing of a
large bank often brings in its wake the failure of correspondent
institutions.
The benefits of deposit insurance are not limited solely to the pro
tection of the individual depositor. The entire banking structure
of the country is so intimately interwoven that a disturbance in any
part of the system may cause repercussions of far-reaching propor
tions. The benefits which will accrue to the large city banks Decause
of great stability in the country banks are real and tangible.
AH banks, large and small, should be required to support the
insurance system. Banking is no longer merely a private Dusiness
proposition. It involves great social consequences. The stability of
the banking system affects the economic prosperity of the country.
The raising of a sufEcient revenue, solely through the levying of
premiums against the deposits of those receiving direct insurance
benefits will not be a fair distribution of the burden.

BANKING ACT OF 1 9 3 5

Our analysis of the ability of the banks to pay assessments is con
fined solely to the national banks since adequate data for other insti
tutions are not available. The figures for earnings, profits, and divi
dends of national banks since 1870, as published by the Comptroller
of the Currency, have been used. I f the operating result of national
banks can be taxen as criteria, the banking system as a whole could
have paid its losses during the past 70 years without impairing its
stability or the payment of reasonable dividends to stockholders.
Operating profits of the banks have been below normal during
recent years. The condition is reflected not only in reductions in
gross earnings but also in unusually heavy write-offs made neces
sary by shrinkage in values. As we come out of the depression,
losses on existing credits will appear. Banks should charge off these
losses currently as they develop. They should not allow them to ac
cumulate as was frequently the case prior to the banking holiday of
1933. These losses may absorb a considerable part of the banks'
earnings over the next few years. To ask the banks to bear the en
tire cost of insurance at a rate comparable to the experience of losses
over the past 70 years would subject them to a heavy burden at the
present time.
It is probably true that after the period of adjustment has been
completed, the banks' earnings will enable them to pay an assess
ment adequate to cover losses at the rate shown for the past 70
years. To ask them to do so, however, without making some effort
to reduce the burden of losses seems to me to be unfair to the banks
and to the public, which must ultimately bear the cost. This factor
prompts us to ask for specific powers which will reduce these losses
so that the insurance plan can oe operated upon a reasonable assess
ment basis.
The following tab!e compares annual averages of earnings, ex
penses, losses, and profits of the national banks for the years 1918 to
1930 with similar figures for the 6 months' period ending December
31, 1933. I f charge-offs during the last half of 1933 had been no
heavier than the average for the years 1918 to 1930, the national banks
would have shown net profits o^ more than $1 for each $100 of total
deposits, or more than $7 for each $100 of invested capital.
(The table referred to is as follows:)
expenses, %osg<?%, c?M% pro/M# of naffina? tMMtRa averape# for J9.I8-3#,
compared i c M 6 monM# cud?*!# Dec.

.1933
Amounts per year per $100 of
total deposits

Items

Gross earnings plus recoveries
Net earnings plus recoveries_____________________________ ________
Losses on loans and investments....... .............. ................................. ......
Net additions to profits..... ...............................................................
.

months
Average 6ending
1918 to Dec. 31, Change
1930
1933*
$6.46
1.92
2.44
2.10
.81
1.29

$5.18
1.05
2.18
1.95
3.76
'1.81

-$1.28
-.8 7
-.2 6
-.1 5
-2 .95
-3 .1 0

! The figures for the 6 months have been adjusted to show a rate per year, rather than for 6 months only,
' Deficit.

BANKING ACT OF 19 3 5

Mr. CROWLEY. It will be noted that the expenses of operating na
tional banks were considerably lower in 1933 than during the period
1918 to 1930. Most of this reduction was due to a decline in the
average rate of interest paid on deposits. About two-thirds of this
reduction in interest occurred before the Banking Act of 1933 became
effective and reflected the general decline in money rates. One-third
of the reduction took place after the passage of the act, reflecting
almost entirely the prohibition against the payment of interest on
demand deposits. The savings in interest on account of this change
in the law amounted to 26 cents for each $100 of total deposits, or
more than the premium necessary to cover losses on deposits insured
up to $5,000, as indicated by the experience of the past 70 years.
The cost of insurance will not be disproportionately heavy in rela
tion to earning power if paid by banks in proportion to their total
deposits. I f insurance be limited to $5,000 for each depositor and
the cost is distributed among the banks in proportion to their insured
deposits, the payments by smaller banks would be nearly double the
assessments distributed on the basis of total deposits. In other words,
we have over 13,000 banks that are insured 70 percent or greater;
and if you place your premium on the insured portion only, it is
going to very materially raise the assessment on those 13,000 smaller
banks.
We have recommended not only that subscriptions by insured
banks to capital stocks of the Corporation be eliminated but also that
the Corporation be given the right to allocate to surplus any portion
of the some $300,000,000 paid to it by the Treasury and the Federal
Reserve banks. I f the amounts paid in subscriptions to stock were
to be carried in full on the books of the Corporation as capital stock,
the Corporation would be unable to pay any losses except out of
income, over and above operating expenses, without impairment of
its capital. The Corporation would have no surplus; and while it
might legally be permitted to spend its capital in meeting its obliga
tions, a substantial capital impairment shown in its published re
ports would have a most adverse effect upon public confidence. We
are therefore recommending that the stock issued by the Corpora
tion to the Federal Reserve banks and the Treasury be without par
value, and that the balance be placed in a surplus or reserve account.
Until such time as the resources of the Corporation may be ade
quate to handle the volume of anticipated losses it would be very
unwise for the Corporation to pay dividends. We therefore recom
mend that the payment of dividends be eliminated.
It is important that the Corporation be given adequate means for
increasing the funds at its disposal during critical periods. It is
doubtful^ however, if at such times the Corporation could borrow
from private sources. The United States Treasury is the logical
purchaser of these obligations. The Government is vitally interested
in the maintenance of the country's banking system. We recommend
that the obligations of the Corporation be issued only with the ap
proval of the Secretary of the Treasury, so that any credit which the
Corporation may require shall not conflict with the financial policies
of the Government.
The success of deposit insurance depends upon the soundness of the
insured banks. In my opinion the two major objectives of those ad
ministering the affairs of the Federal Deposit Insurance Corpora

BANKING ACT OF 1 9 3 5

tion should be, first, to assist in making the insured banks sound
financially and, second, to keep them in sound shape.
During the past year the activities of the Corporation have been
chiefly concerned with the first of these problems, that is, the rebuild
ing of the capital structures of insured banks. In the future, the
Corporation should devote a large part of its efforts to the main
tenance of sound conditions among the insured institutions.
To maintain sound conditions among all insured banks it is essen
tial that the Corporation have the power to control the admission of
banks to the insurance fund. We cannot return to the overbanked
condition of 1920 if we wish to have a sound banking structure-.
The growth of excessive banking facilities was one of the most de
structive influences which existed prior to the banking holiday
of 1933.
Since the banking holiday much effort has been expended in re
organizing and relicensing banks in order that the frozen funds
of the depositors might be released. The accompanying table indi
cates that more than 2,000 banks have been added to those which
withstood the shock of the banking crisis.
(The table referred to is as follows:)
propped according to

o? total deposes by cZ&sg of

J, .1933 to Dec. 3<?, .1934 *
[Deposit figures in thousands]
July 1, 1933 to Dec. 31,1934
Number of banks
National

State

Aggregate deposits *

Total

National

State

Total

Banks with deposits of—
$100,000 or under............................. ........
$100,001 to $153,000................................ .
$150,001 to $250,000.............................
$260,001 to $500,000........ ..........................

25
29
131
219

379
222
268
248

404
251
399
467

$2,070
3,624
25,862
78,988

$22,905
, 27,528
50,956
87,635

$24,975
31,152
76,818
166,623

$500,001 to $750,000...................................
$750,001 to $1,000,000.............................. .
$1,000,001 to $2,000,000........... ................
$2,000,001 to $5,000,000............................
$5,000,001 to $10,000,000...........................
$10,000,001 to $50,000,000.........................

404
110
58
76
44
16
5
6

1,117
90
42
65
35
6
3
88

1,621
200
100
141
79
22
8
94

110,544
67,346
50,765
104,282
131,970
113,573
91,414

189,024
55,735
36,665
88,732
102,133
35,067
51,860

299,568
123,081
87,430
193,014
234,103
148,640
143, 274

Total............................................... ......

719

1,446

2,165

669,894

659,216 91,229,110

i B y "n ew ly licensed" is meant existing banks reopened, banks reorganized, and primary organizations.
3 Deposit figures for the most part as reported in Rand-McNaUy Bankers' Directory for July 1934.
Source: Card records of newly licensed banks maintained b y the Division.

Mr. CROWLEY. Under present conditions, the Corporation insures
all newly licensed banks which apply for insurance, if they are found
to be solvent. Approximately 90 percent of the newly licensed insti
tutions, have become insured. The Corporation should be granted
the specific power to refuse the admission of new banks into the
insurance fund where such admission would weaken the banking
system. The Corporation should also be given the specific right to
require a higher standard than mere solvency for admission to the
insurance fund.
127297— 35------ 2

BANKING ACT OF 19 3 5

It is my firm belief that every community which can produce a
sufEcient volume of deposits to support a bank should receive the
advantages of such facilities. There are many localities throughout
the United States, however, which can support only one or two
banks. To establish a second or third bank in such communities
leads to speculative and destructive practices in an effort to earn
sufRcient income to pay expenses. For the protection of the insured
institutions, the Corporation and the public welfare, the admission
of banks to the insurance fund should be carefully supervised.
You understand that under our bill all of the banks that are now
members, State banks and member banks, automatically come into
the permanent fund, without being certified over again. The fact
that they are now members automatically washes them into the fund,
so that the only thing you are dealing with is the banks that are
outside of the fun& or banks that may be chartered in the future.
The CHAIRMAN. It might be well to state in that connection that
under the act for the insurance of bank deposits all national banks
and State banks of the Federal Reserve system were automatically
admitted into membership or participation in the benefits of the
Deposit Insurance; were they not!
Mr. CROWLEY. That is correct.
It is for these reasons that we have recommended that the legis
lation incorporate specific standards to be met by future applicants
before admission to the benefits of deposit insurance. These stand
ards have already been recognized by Congress in other legislation.
In the latter part of 1933, banks were admitted to membership
in the insurance fund under exceptional conditions. The situation
existing at the close of 1933 was critical. The lack of real public
confidence in banks was unsettling. Congress, therefore, provided
that all solvent banks should be admitted to the insurance fund
even though their capital was impaired in a number of instances.
However, the Corporation immediately undertook to assist all banks
which needed it in rebuilding their capital structures and correcting
capital impairments which our examinations had disclosed.
The capital rehabilitation of banks was to be effected either
through local contributions or through the facilities of the Recon
struction Finance Corporation. The Insurance Corporation assisted
State nonmember banks to rebuild their capital structure. The re
sponsibility for the condition of national and State member banks
rests with the Comptroller of the Currency and the Federal Reserve
Board, respectively. The Comptroller of the Currency and the Fed
eral Reserve Board had the right to insist that banks under their
jurisdiction accept necessary aid. The Corporation, however, had
no such power. To accomplish the task of rebuilding the capital
of a nonmember State bank which had been admitted to the benefits
of insurance, the Corporation could only use the power of rational
appeal to the board oi directors or to the State banking authorities.
Without the cooperation of the State banking authorities the capi
tal structure of nonmember banks would not have been rebuilt.
State nonmember banks which could not obtain local capital con
tributions were assisted in securing aid from the Reconstruction
Finance Corporation. Banks which had already made applications
were assisted in complying with the conditions laid down by the

BANKING ACT OF 1 9 3 5

Reconstruction Finance Corporation. The accompanying table re
veals the extent of the aid extended by the Reconstruction Finance
Corporation to the various classes of banks in this country. While
it is true that by the close of 1934 Federal Reserve member banks—
State and national—had received almost three times as much Re
construction Finance Corporation aid as had nonmember banks, in
proportion to total deposit liability the aid given nonmember banks
was twice as great as the assistance extended member banks.
(The table referred' to is as follows:)
Finance Corporation p-Mrc&ageg o /

of insured

&a?tRg

[In millions o f d-ollars]

National
banks

T otal deposits, June 30,1934 *............. ...................... ........
Capital surplus and undivided proRts, June 30,1934
Net R. F. C. contribution to capital to June 30,19341___
Ratio R. F. C. to total deposits (percent)........................
Ratio R. F. C. to total capital (percent). . .......................
R . F. C. cumulated disbursement to all banks, Feb. 1,
1935* ....................................
......................
Ratio of item 6 to item l (percent).........- ......................
Ratio of item. 6 to item 2 (percent)...................................

State
member
banks

Insured
nonmem
ber banks
(excluding
mutuals)

Total
insured
banks (ex
cluding
mutuals)

$19,896
2,843
384
1.9
13.5

$11,116
1,886
202
1.8
10.7

$4,746
1,005
184
3.9
18.3

$35,814
5,752
773
2.2
13.4

466
2.3
16.4

238
2.1
12.6

256
5.4
25.5

959
2,7
16.7

i Call Report of Insured Banks No. 1.
' As reported b y the R . F. C.

Mr. CROWLEY. In some instances the necessary capital reconstruc
tion had hardly been accomplished when applications were made by
the banks to retire the preferred stock or debentures purchased from
the Reconstruction Finance Corporation. As has been indicated, the
capital reconstruction program was carried out for the purpose of
protecting not only the banks but the Insurance Corporation. The
capital and surplus of banks constitute a guaranty fund to depositors.
They represent a cushion for the liability of the Corporation. When
this capital and surplus are exhausted through losses, the depositor
must turn to the Insurance Corporation for the payment of his de
posits. The Corporation is vitally concerned, therefore, with the
amount and condition of the capital and surplus of insured institu
tions. The reduction of this cushion of safety should be permitted
only after obtaining the approval of the Corporation. I f banks are
allowed to retire this new capital, the rehabilitation, which has been
so tediously accomplished, would be of no avail. The Corporation
should have the right to control any future reductions in capital by
insured banks.
The Corporation should have the right to review all mergers and
consolidations affecting insured banks. It is possible that banks
which have been refused admission to the insurance fund may be
absorbed by insured institutions, thus extending the liability of the
Corporation to depositors of the absorbed bank. Under the existing
conditions there is no way in which such a subterfuge could be
prevented.
In the interests of the depositor the Corporation should have the
right to refuse to give its stamp of approval to inequitable or unsound

BANKING ACT OF 19 3 5

reorganizations. Last year the Corporation was called upon to
review more than TOOsuch plans. Many of those which we have seen
are inequitable. The Corporation should have the right to pass upon
the justice and soundness of reorganization plans. Depositors have
often made tremendous sacriHces without the comparable sacrihce by
stockholders and other special groups.
The Corporation now has the right to buy assets of closed Federal
Reserve member banks. We have recommended that this right to
purchase be extended to operating insured ban-ks until July 1, 1936,
whenever such action will avert an impending loss and facilitate a
merger or consolidation. It will be to the best interests of both
depositors and the Corporation if, through the absorption by the
Corporation of a comparatively small loss, a more serious loss will be
averted. Furthermore, such a procedure will offer both an incentive
and a method for completing the rehabilitation of all insured banks
prior to July 1, 1936. The right to purchase assets from operating
banks should not be exercised unless in conjunction with a merger or
consolidation and only for the purpose of averting loss.
Bank failures are frequently precipitated by defalcations. We,
therefore, recommend that the Corporation be given the right to
require adequate Rdelity and other insurance. Such insurance pro
vides protection to depositors, to bank executives, and to the Corpo
ration. Where a given institution does not carry suiEcient insurance,
the Corporation should be given the right to contract for such insur
ance and charge the bank therefor.
A method whereby nonmember banks may withdraw from the
insurance fund should be included in the legislation. Banks leav
ing the insurance fund should give adequate notice to the Corpora
tion and to their depositors. However, such withdrawals should not
expose the depositors to a sudden cancelation of the protection af
forded them, and the insurance beneRts should be extended to the
depositors for 2 years after the withdrawal of any bank.
We also believe that the Insurance Corporation should have the
right to terminate the insurance of any bank if, after a hearing and
after notice to depositors, such action is in the best interests of both
depositors and the Corporation. In establishing deposit insurance,
Congress has assumed not only a dehnite responsibility to bank
depositors but also a moral obligation for the sound management
of banks. I f the Corporation 6nds that an insured bank is engaged
in repeated practices detrimental to the depositors, the Corporation
should not be placed in the position of sanctioning such practices but
should be given the right to terminate the insurance of the bank's
deposits without jeopardizing the depositors. For the protection
of depositors, we have recommended that in such cases insurance
be extended for 2 years from the time that membership in the fund
is terminated.
The right of dismissal may seem to be somewhat drastic, but it is
hoped that the use of this power may seldom be necessary. As an
intermediate step and as a means of notifying the public, it is sug
gested that the Corporation be authorized to publish either all or
such portions of examination reports as it deems necessary. The
State supervisory authorities will be advised of the intention to
publish all or part of the examination report and only after adequate
notice has been served on the executives of the bank concerned will

BANKING ACT OF 19 3 5

such action take place. This procedure is designed to allow suHicient time for the executives of the bank concerned to correct the
practices which jeopardize the safety of the depositors' funds* The
Comptroller of the Currency has this right in the case of national
banks.
Reports of condition now being issued to the public are confusing
because of their inadequacy and lack of uniformity. Considerable
efforts have been made to study this question. Conferences have
been held with the State and Federal supervisory agencies in an
effort to develop standard and uniform reports of condition. In
order that the public may be informed as to the status of the insti
tutions with which they do business, periodical statements of con
dition should be required of all banks.
Revision of the provisions of the law reciting the obligation of the
Corporation to pay the insured deposits of a closed insured bank
is necessary. As it now stands, the law requires the Corporation to
organize a new national bank to act as its instrumentality in paying
the insured deposits of every closed insured bank. This procedure
must be followed, even though there is not the slightest possibility
of the community being able to capitalize the new national bank.
Eleven insured banks have thus far closed, but in only one instance
were the local people in a position to capitalize the new bank.
This procedure for paying insured deposits has proved unsatisfac
tory, since it involves needless expense and many unnecessary account
ing problems which could be eliminated if the Corporation were
permitted to pay its obligations in the same manneT as other insur
ance companies engaged in the commercial Reid. Accordingly, it is
proposed that the organization of a new bank be at the discretion
of the Corporation.
Under the present law, where it pays the insured portion of a
deposit claim which is larger than $5,000, the Corporation becomes
subrogated to the entire amount of the depositors' claim until it is
reimbursed for the amount paid out to the depositor. This is mani
festly inequitable to the larger depositors. We believe that the
Corporation should be subrogated only to that portion of the claim
which it pays, the depositor retaining his claim for any insured
portion and receiving all dividends payable thereon directly from
the liquidating oiHcer. In the case of every closed bank there are
some depositors who can never be located by reason of death, dis
appearance, or change of residence. We believe claims which are not
filed within 1 year after an insured bank is closed should not be paid
bv the Corporation. This suggestion finds ample precedent and will
^enable the Corporation to close its books on each pay-off within a
reasonable period.
The bill before you includes suggestions for clarification of pro
visions of the existing law about which some doubt has arisen. The
adoption of these provisions will facilitate administration.
We recommend that the maximum limit of insurance to any one
depositor be retained at the present figure of $5,000. Congress, in
establishing deposit insurance, was presumably most concerned with
the mass of depositors with small accounts. Our reports cover
51,000,000 accounts, of which over 98 percent are fully insured with
the $5,000 limitation. Many of the accounts not fully covered are
interbank accounts, public funds, deposits of corporations, institu

BANKING ACT OF 19 3 5

tions, and trust estates. The actual number of individuals with
deposits in excess of $5,000 is probably less than 1 percent of the
total number of depositors. Out of the 14,000 insured banks, over
9,600 have more than 80 percent of their deposits insured under the
$5,000 limitation. To raise the limit of insurance above $5,000
would materially increase the maximum possible liability of the
Corporation. I f all the deposits were insured, this would be more
than doubled. It would be increased from the present 16% to nearly
30 billion dollars by the permanent plan which now exists in the
statute. This tremendous increase in the maximum possible liability
of the Corporation would beneRt only one out of each hundred
bank depositors.
The Insurance Corporation's interest in the sound operation of
banks is more tangible and more vital than that of any supervisory
authority. Deposits in practically all commercial banks and trust
companies of the United States are insured by the Corporation.
Bank supervisory agencies have a responsibility to the depositing
public, and it is their duty to see to it that the bank laws are prop
erly enforced. The Corporation^ however, has a financial liability
to these depositors. Its interest m the sound operation of these in
stitutions is one of dollars and cents.
There are two courses open to the Insurance Corporation. It may
be a charitable institution which will pay for the mistakes, bad
banking, and dishonesty of bankers, in which case the cost of the
insurance must be set so high that it will be an injustice to every
sound bank. Or, by being placed on a sound basis, the Corporation
may be used as an instrument to improve the standards of bank
management and reduce the losses to depositors through bank fail
ures. The latter course, which I prefer, requires that the standard
of bank supervision throughout the country be improved, that the
Corporation be given the right to protect itself against excessive
risks, and, finally, that the Corporation be not handicapped by taking
into .the fund banks which are unsound or by continuing in the fund
banks which are mismanaged.
We have a number of charts, Mr. Chairman, and we would be
glad to answer any questions*
The CHAIRMAN. I would suggest, Mr. Crowley, that the charts
that are pertinent and connected with your statement might well
be appended as a part of your statement and published in the hear
ings at the proper place. Without objection, that will be done.
Mr. FoRD. I f a bank is put out of the fund, does the bank con
tinue to pay the assessment?
Mr. CROWLEY. Yes, sir. We collect the assessment for this reason:
The deposits of that bank remain insured for 2 years. I f we put a
bank out of the fund we have naturally got to go in there from time
to time to look after our interests, and they must pay the premium.
Mr. HoLLisTER. Even if the bank withdraws voluntarily?
Mr. CROWLEY. Even if the bank withdraws voluntarily, thev must
pay for 2 years. The reason for that is this: That you may put
some money in a bank, believing it to be insured, and if it withdraws
from the fund tomorrow you may be the victim of a misunderstand
ing. So we believe the depositors should be given a reasonable pro
tection before our liability ceases.

BANKING ACT OF 1 9 3 5

Mr. H o L L i S T E R . Isn't it also a protection of the fund? Isn't it
true that some banks would like to withdraw from the fund in order
to escape responsibility for assessments ? That would be a great
weakening of the fund, would it not?
Mr. CROWLEY. Correct.
Here is another thing. Banks may come into the fund in order
to obtain the psychological effect of having insured deposits. As
they go along and 6nd that it is going to cost them a little some
thing they would like to get out. They might believe that they
can live outside of the fund. They would like to come in in bad
times and get out in good times and have the door swinging both
ways for them. That 13 very unsound. I think, for the sake of
the whole banking system, every bank in the United States should
be forced to be a member of the Federal Deposit Insurance Cor
poration. Then you would have uniformity all the way through.
Mr. REILLY. Don't you think there is going to be little opposition
amongst the banks, except the large banks?
Mr. CROWLEY. The cost o f the insurance that we have recom
mended to the small banks is very nominal. To 13,000 banks it is a
very nominal sum. There will be no excuse, in my opinion, for the
smaller banks getting out of the fund on account of the cost of this
insurance, because it is not excessive.
Mr. CROSS. It is the big banks, you think, that are asking to get
out ?
Mr. CROWLEY. I do not believe it is. I f this coiyoration were
properly set up and properly sold to the depositors, I do not think
many banks could live outside of this fund, and I think that is the
wav it should be.
Mr. KoppLEMANN. I am very much interested in what vou said a
moment ago, that every bank ought to be compelled to befong to the
Insurance Corporation. You know, of course, the difSculty we have
had in my State, Connecticut. Is there anything in this law which
would either compel the banks to come in, or make it so attractive
that they would come in?
Mr. CROWLEY. There are only 1,100 banks outside of this fund
now.
Mr. KoppLEMANN. I am speciScally interested in Connecticut, and
in the Nation as a whole, because of the diHiculty we have had.
Mr. CROWLEY. I think that whole question is going to be answered
when we get our permanent law. I f it is a law that we can all get
behind and support and sell to the depositors, and if the cost is not
excessive, I do not believe the banks of very many States can afford
to stay out of the system.
Mr. KoppLEMANN. Is not the real reason they did not want to
come in, this feature of examination, which they look upon as an
interference ?
Mr. CROWLEY. You do not get so much objection to the examina
tion from a good bank. Our experience indicates this, that the objec
tion to examination comes from the fellow who should be examined
often* Your better institutions do not object to regulation.
Mr. KoppLEMANN. What I am trying to get at is how we are going
to get these 1,100 banks in. Have you got anything in the law on
that!

BANKING ACT OF 19 3 5

Mr. CROWLEY. No; but I think we have quite a few applications
before us now, have we not, Mr. Fox?
Mr. Fox. Yes; we have.
Mr. CROWLEY. We have been in operation 15 months, and we have
some 8,760 State banks which are insured. There are only 1,100
licensed banks outside of the entire system.
Mr. KoppLEMANN. I believe the depositors throughout the Nation
are 100 percent for this thing?, except those who have been told, as
they were in my State, that it is a terrible thing, and because they
do not have the facts, they believe that statement.
Mr. CROWLEY. We have had some opposition from the bankers, be
cause there were doubts in their minds. For instance, they had an
unlimited liability hanging over them. I think if that and some
other features were straightened out you would get the cooperation
of a great many of your hnancial institutions—especially if you give
to this Corporation some regulatory powers, so that it might have a
part in holding up your banking system.
Mr. GOLDSBOROUGH. I have noticed in several banks a sign reading,
" The deposits in this bank insured by the Federal Deposit Insur
ance Corporation." That creates the impression that all the deposits
are insured. Is there anything in this bill which would require those
signs, when they are put up, to show what the limitation is?
Mr. BiRDZELL. Yes. I think you may have an erroneous impres
sion of the effect of the present sign. The present sign that we have
adopted shows the amount right on the sign.
Mr. GOLDSBOROUGH. I did not mean that the sign of the Federal
Deposit Insurance Corporation was misleading, because I was talk
ing to a Congressman the other night, and he said that in his terri
tory the signs all disclose the amount of the insurance, but I want
to say that I have seen this misleading sign and it does not seem to
me that it ought to be allowed.
Mr. BiRDZELL. From the very beginning we have used the utmost
care to prevent advertising being put out that would be misleading
to the public in that respect.
Mr. HANCOCK. Mr. Crowley, what would be the annual return to
your insurance fund, based upon one-twelfth of 1 percent of the
total?
Mr. CROWLEY. About $30,000,000, Congressman Hancock, per year.
Mr. HANCOCK. What would the assessment amount to!
Mr. CROWLEY. About $30,000,000, and income from the investment
would amount to about $9,000,000.
Mr. HANCOCK. Under the proposed new bill, is the levying of that
assessment mandatory or discretionary ?
Mr. CROWLEY. We have the right to reduce it, but not below 50
percent. In other words, we have a refunding provision in there,
after we get our reserves built to a certain point.
Mr. HANCOCK. Is it your purpose and intention to levy an annual
assessment every year?
Mr. CROWLEY. Yes; and that would have to be, because you will
have to build your reserves for the future, in order to take care of
some unforseen obstacle. If you do not do that, but only try to
assess in times of difEculty, you are going to create additional hard

BANKING ACT OF 1 9 3 5

ships when banks are already subjected to as great a load as they
can carry.
Mr. EfANcocK. I know that you have been making an exploratory
inquiry into this subject, and I am interested to know^ as a result
of the Sgures and reports you have got, whether it is true that
1 percent of the people in this country own and control 60 percent
of the deposits in the banks?
Mr. CROWLEY. I think that 800,000 individuals and corporations
control about 65 percent of the deposits.
Mr. REILLY. Corporations too!
Mr. CROWLEY. They are included in depositors.
Mr. GiFFORD. You said a good deal about the impairment of the
capital. When the R. F. C. provides & new capital structure, is it
easy for the banks to withdraw and repay the R. F. C ! Can you
explain to the committee what the conditions are they have to meet
before they are allowed to repay! Do you want to have something
to say about it!
Mr. CROWLEY. Yes. Let me say this: We have gone out in the
last year and have aided, with the help of the Reconstruction Fi
nance Corporation, in strengthening very nearly 3,500 out of some
7,800 State banks in this country not members of the Federal Re
serve System. The diiBculty is this, that we go out and we work
with the stockholders and directors and everyone, getting that money
in the bank. A lot of these banks seem to confuse liquidity with
capita^ position. In other words, because their deposits are increas
ing, although they may not have any capital to speak of, they feel
that they should be able to pay back the Reconstruction Finance
Corporation. What we want is this, that after doing this great job
that has been done, these banks should not be permitted to again
weaken their capital structures by repaying the R. F. C. unless
some local contribution is made, or unless earnings place the banks
in such a position that they will have suiEcient capital to form an
adequate cushion for the protection of the depositors and this Cop*
poration. These banks should not be allowed to undo the construc
tive work of the past 15 months.
Mr. GiFFORD. As I understand it, many banks have come and ap
plied to the R. F. C., in order to get this capital structure, because
they were forced to mark oR and mark down a considerable fund,
and to meet that contingency they felt it necessary to add to their
capital structure, but when that contingency seemed to have passed^
and the bank was in perhaps better shape, they desired to get rid
of the R. F. C., because the public at large felt that if they had to
apply to the R. F. C. they necessarily must be involved. When they
have gotten out of the condition that the examiner has forced them
to remedy, are you going to resist their dismissal of the R. F. C.t
Mr. CROWLEY. I do not think we would object, provided they really
have corrected that condition.
Mr. GiFFORD. Isn't it a case of resisting sometimes, because there
is another second examination, one by you and one by the national
bank examiner! Doesn't that defeat them!
Mr. CROWLEY. No. There is no duplication in Federal examina
tions. We do not examine a national bank, nor do we examine a
State member bank. We take the examination report of the Comp
troller and the Federal Reserve.

BANKING ACT OF 1 9 3 5

Mr. GiFFORD. I had assumed that you did, and by this talk this
morning had suggested that you wanted the power to refuse. Are
you going to take another examiner's word for the condition %
Mr. CROWLEY. Are you talking about banks coming into the fund ?
Mr. GiFFORD. Yes.
Mr. CROWLEY. With regard to the requirement for banks coming
into the fund, the Comptroller and the Federal Reserve may use the
same yardstick as we are expecting the State banks to use, for admis
sion to this fund.
In putting the banks out of the fund, we notify the Comptroller
or the Federal Reserve or State supervisor of the condition that
exists, and we give him 90 days time in which to make the correction.
I f it is not made we serve notice on the bank and give the bank the
right of hearing.
As far as the capital-rebuilding program of the national banks is
concerned, that has been done exclusively by the Comptroller. We
have done it with the State nonmember banks only.
Mr. GiFFORD. Don't you realize that the public at large have the
feeling that when the R. F. C. comes to the rescue of a bank it as
sumes more than 51 percent of the control! You realize that!
Mr. CROWLEY. That is not true. I f you mean control of the in
dividual bank.
Mr. GiFFORD. Yes.
Mr. CROSS. On the question of examinations you said you always
accept the Comptroller's examination of a national bank and the
Federal Reserve s examination of a member bank.
Mr. CROWLEY. That is right.
Mr. CRoss. But in this bill you ask for authority to make an exam
ination, with the consent of the Comptroller and the consent of the
Federal Reserve.
Mr. CROWLEY. That is done for this reason, that we are asking for
the right to purchase assets in the case of consolidations and mergers.
Suppose you had a national bank that was in some diRiculty. We
want the right to go in with the Comptroller and see if there is
anything we might be able to do.
Mr. CRoss. You do not contemplate a general request to the Comp
troller and to the Federal Reserve for examination of the institutions!
Mr. CROWLEY. No, sir.
Mr. FoRD. Where the R. F. C. has purchased $100,000 of capital
stock of a bank, in order to strengthen its structure, and in the course
of 6 months they feel that they want to repay that, wouldn't it be a
good idea to permit them to repay it, when capital is secured in the
district to replace that sum!
Mr. CROWLEY. Let me say this to you gentlemen, that banks do
not improve their position materially m 6 months' time.
Mr. FoRD. Whatever the period would be.
Mr. CROWLEY. Oh, I agree with you—either through earnings or
an improvement in conditions, or local contributions. Does that
answer your question!
Mr. GiFFORD. Don't you understand that when there are three or
four banks in one community, and all receive assistance from the
R. F. C., but one is allowed to divest itself from the capital structure
of the R. F. C., the public then begins to think that that bank may
be a little bit stronger than the other two! Do you think that the

BANKING ACT OF

19 3 5

public is very tender in its viewpoint of the strength of the local
!banks these days?
Mr. CROWLEY. That may be true, but, as a matter of fact, what are
you going to do if you have three banKs and the impairment of one
of them was less, and through its own local contributions or its own
earning capacity it put itself in shape so that it could go on by
itself? The Government can only stay in these banks until the
banks are able to carry on themselves.
Mr. GrFFORD. That is what I asked you in the first place, if you
were going to attempt to resist their repayment of the R. F. C.%
Mr. CROWLEY. No; I think Mr. Jones and everyone would be glad
if the banks could pay back a billion dollars tomorrow, without
weakening the banking structure, but we do not want them to pay
it back if it is going to mean a weakened situation*
Mr. HANCOCK. The chairman of the Federal Deposit Insurance
Corporation has made a very able, interesting, and comprehensive
statement here, and one that deserves the best thought and study of
our committee. I am wondering if he will be available to come back
to us from time to time*
The CHAIRMAN. Oh, yes.
Mr. CROWLEY. Surely.
Mr. HANCOCK. To discuss this report and statement after we have
had a chance to absorb it?
The CHAIRMAN. Surely.
Mr. DiRKSEN. The question is perhaps speculative, but here is a
thought that was suggested to me last summer, when we were liqui
dating one of our banks in East Peoria, that probably one of the best
insurances of good banking comes from the fact that the bankers
look after each other somewhat. In other words, they are just as
much interested to see that their neighbor indulges in good banking
practice, because if the losses entailed should appreciate year after
year it would mean that sometime or other your insurance premium
would have to go up.
Mr. CROWLEY. That is right.
Mr. DiRKSEN. However, the banks in Wisconsin in the aggregate
would have no way of looking after or having contact with the banks
in Illinois.
Mr. CROWLEY. That is right.
Mr. DiRKSEN. Suppose, as time goes on, you 6nd that a geographi
cal classification of these losses discloses that they are infinitely
higher in one State than in another. I have heard bankers raise
the point that they are heartily in favor of this insurance, but if
it should be developed that there were losses in other areas over
which they have no control or with which they had no contact, it
would constitute an unjust penalty upon them in that particular
area. Has it ever occurred to you that at some time or other it may
be necessary to think of classifying these insurance rates on the
basis of the geographical areas? It would involve a lot of work, I
know, but the equity involved must be considered.
Mr. CROWLEY. I do not think that would be a practical thing for
the corporation, at least until the whole banking system is almost fool
proof, for this reason, that the thing that is the best security for
the corporation now is the diversification of risk which is spread
over the entire country.

BANKING ACT OF 1 9 3 5

For instance, if you put the Middle West in a class by itself, and
they have a drought like this last year, and they must stay on their
own, you are going to make insurance for those banks so expensive
that it is going to be almost prohibitory for them to belong to the
fund.
As I see this thing, the bankers have got to take this viewpoint,
that we had an almost complete collapse of the banking system in
March 1933. You can hear people say, " We were still able to stay
open " but the fact remains that the banking system, including the
New York banks and other Federal Reserve member banks, had, for
all practical purposes, broken down. The interest which the banks
should have in the Federal Deposit Insurance is to help it build
a banking system that will remain independent and sound. None of
us can justify a continuance of our kind of banking system, (and
I am an advocate of our present banking system) if we are to have
a reoccurrence in 10, 15, or 20 years of the situation which existed in
1933.
Mr. GOLDSBOROUGH. Why does it require a recurrence? Why
should you have to do it twice to prove it ?
Mr. CROWLEY. I believe that the Federal Deposit Insurance does
offer the vehicle for the correction of the banking system of this
country. I am not talking about monetary control; I am talking
purely of supervision.
Mr. GOLDSBOROUGH. In the last analysis, the Federal Deposit In
surance Corporation has access to no more money than the banking
system itself has access to, and the banking system itself only has
access to about $7,000,000,000, which is the entire capital, surplus,.
and undivided proBts of all the banks, so that in the last analysis the
Federal Deposit Insurance Corporation can do absolutely nothing
except act as one means of maintaining the confidence of the people
in the integrity of the banks, and thus avoid runs on the banks.
Mr. CROWLEY. Yes.
Mr. GOLDSBOROUGH:. That is the truth of the situation.
Mr. DiRKSEN. At the present time one who goes to a bank and
makes a time deposit can under no circumstances withdraw that
money, even though he may waive all interest thereon. I under
stand that is embodied in regulation Q.
A man went into a small bank in my district, and he wanted to
place $1,200 on time deposit, for 90 days. He said, "A contingency
may arise whereby I might need the money. Can I get it out before
that time in such a case?" They said, " No." He said, " Suppose I
waive the interest? " They said, " You cannot get your money any
way." He went across the street and put his money in Postal Sav
ings. He can put his money in the Postal Savings and if any portion
of the money is there up to the interest pay day, he can even get
interest, and get new certificates for the balance of his money. It
occurs to me that there is a disparity between the obligation imposed
by regulation Q and the practice of the Postal Savings System.
Mr. BiRDZELL. That is correct.
Mr. DiRKSEN. They ought to be brought into uniformity, because
it is affecting these small banks. And it is not necessarily the fact
that the bank loses income from the small deposit, but it is a fact
that a man goes out of that bank and he says, " There is something
wrong with this bank ", and he does not realize the implications of

BANKING ACT OF 19 35

regulation Q, and once he gets to talking to his neighbors, he impairs
some of the local conhdence in the bank, because of that lack of
consistency in these systems at the present time.
Mr. CROWLEY. I do not think ours in inconsistent. I think ours is
consistent, and theirs is inconsistent.
Mr. DiRKSBN. You mean the Postal Savings?
Mr. CaowLEY. Yes.
Mr. DiRKSEN. I agree with you, but I agree with you also that
the practice ought to be uniform, and the Postal Savings should be
compelled to do precisely as you do.
Mr. BiRDZELL. There is a feature of the law that you may be
familiar with, which provides that where Postal Savings are per
mitted to be withdrawn without the service of the notioe required by
the Banking Act of 1933, no interest shall be paid except interest
accruing prior to the effective date of the banking act. But not
withstanding that, apparently they are paying interest up to the
date of withdrawal.
Mr. DiRKSEN. Precisely, and even if they did not pay interest it
would only remedy one-half the problem, because a man could still
go and deposit and withdraw the deposit, which he cannot do now
under regulation Q.
Mr. BiRDZELL. Your statement is correct, I believe. Attention
should be given to that matter, because there is some unfair com
petition between the Postal Savings and the banks. That is par
ticularly true now, when the banks are paying low rates of interest.
The CHAIRMAN. Of course, many people hold the view that if you
insure all deposits in private banKs the Government should not set
up and maintain a deposit institution in competition with them.
It is contrary to sound public policy, and the necessity for it has
heen removed, and there is no excuse for it. That is what we
attempted in the Banking Act of 1933, which has not been followed
as was contemplated by the framers of the act, to at least
require that the Government, insofar as it competed with the banks
in the matter of deposits, should maintain a purely savings system
and not regular checking accounts.
It might be well to state in that connection, I think, that we have
^uite a number of communities^ and you might say sections of the
country, where the banking facilities have been, for the time being
at least, swept away, so that the only depository left for the citizen
was the Postal Savings System. So that diiEculty confronts us in
undertaking to deal with that problem, but for my part I think we
should in some way legislate on that subject.
Mr. CnowMBY. It will help eventually to correct a part of your
banking trouble when the Postal Savings deposits are permitted to
go into your small banks. They would get that volume of business
that may be helpful to them, so that they may be able to make some
money.
Mr. DiRKSEN. May I make one observation on the table on page 16
of Mr. Crowley's report! I see that in the first column, from 1873
to 1878, the deposits were $85,000,000 and the losses $26,000,000, so
the loss was approximately 30 percent. From 1892 to 1897 the
deposits were $134,000,000 and the losses $43,000,000, which was 32
percent. Then the deposits from 1931 to 1934 were $5,356,000,000
and the losses $2,142,000,000, which was a loss of about 40 percent.

BANKING ACT OF 1 9 3 5

I am merely remarking the facts, because at the bottom the average
loss per year for each $100 of deposits of $1*28 seems disproportion
ately so much lighter than 30 percent and 40 percent.
Mr. CAviccHiA. That is because it takes in a greater part of this.
M r . DiRKSEN. That is probably true.
Mr. WOLCOTT. I am given to understand that a man may have a
deposit guaranteed up to $5,000, and his wife may have a deposit
guaranteed up to $5,000, and there is no question about those. Is
the joint account, in addition to those guaranteed up to another
$5,000?
Mr. BiRDZELL. Yes.
Mr. WOLCOTT. Is a bona 6de trust account, as a part of that savings
division, subject to this insurance!
Mr. BntDZELL. That is an account held in another capacity.
Mr. WoLcoTT. I say "b o n a R d e " to distinguish it from a m ere
creation o f a trust fund to avoid the purposes o f the act.
Mr. BiRDZELL. Under the terms of the law, in paying off

a bank
we have to combine all of the deposits of the particular claimant
which he holds in the same capacity and the same right. If he holds
them in different capacities—for instance, you may maintain a bank
account in your bank in your private capacity, and you may be a
member of a partnership that also has a bank account in that same
bank.
Mr* WoLcoTT. I know, those are separate.
Mr. BiRDZELL* They are separate. If you and your wife hav&
a joint account, that is an account held in a different right. It may
be all collected by your wife, or may be all collected by you while the
bank is operating, and we have the problem of offsets, and the same
law that applies in solving the problem of offsets in the closing of
a bank must apply and work harmoniously with regard to the in
surance. We must treat each one separately.
Mr. WoLcoTr. Let us work that out in a practical way. Assume
that a man and his wife have $20,000 between them, and the man
has $20,000 in bank, in a joint account between himself and his wife,,
with the feeling that upon his death his wife will not have to ad
minister his estate, or probate his estate, but she can go down and
avoid any such probation by merely drawing that money out as a
joint depositor. Then comes along the F. D. I* C., and my under
standing is that they can take that account and divide it up, so that
the deposit will be divided $5,000 to the husband, $5,000 to the wife,
and $5,000 in a joint account, with the possibility of another $5,00&
in a trust account.
Mr. BiRDZELL. No; as lon g as the account is in the name o f the
husband and w ife, no m atter w hat the amount is, it is treated as
one deposit, but it w ill be treated separately from any other account
o f the husband.

Mr* WoLcoTT. My point is this: John Jones has $5,000 in the bank,
and John Jones and Mary Jones, his wife, have another $5,000 in a.
joint account. Are both of those accounts insured up to $5,000?
Mr. BiRDZELL. The Rrst being an individual account, and the other
being a joint account; yes.
Mr* WoLcoTT. The same thing follows if Mary Jones has another
$5,000 in her name ?
Mr. BiRDzELL* Exactly.

BANKING ACT OF 1 9 3 5

Mr. WOLCOTT. So he can take this $20,000 that they had in the
original account, and split it up, $5,000 in his own name, $5,000 in
her name, $5,000 in their joint names, and then $5,000 in the bona
Sde trust account %
The CHAIRMAN. They could not do that after the bank had failed.
Mr. WoLcoTT. I am saying that in that manner it would be pos
sible for him to insure the total of his $20,000.
Mr. BiRDZELL. If it is done merely as a cover, so as to enable a
man to get more insurance on his own money, we would pay him
$5,000.
Mr. GOLDSBOROUGH. In that case the burden of proof would be on
the Deposit Insurance Corporation.
Mr. BiRnzELL. Yes.
Mr. WOLCOTT. I know all the intricacies of the chancery practice,
and I know you could split it up in different banks, but my point is
on the face of it are those accounts insured, or upon the failure of
that bank or the closing of that bank must the individual go into
chancery and by suit against the Insurance Corporation, or some
thing of that nature, prove that they were bona 8de separate accounts!
Mr. BiRDZELL. If the information we get, upon going in to pay off
the bank, indicates that there has been an attempt to increase our
insurance liability to one owner of a deposit, using simply a joint
account, or some other device to cover up his ownership, we would
investigate that before we would pay the claim, and if we found
enough evidence to satisfy us that there was a subterfuge for the
purpose of increasing the insurance of one depositor, we would decline
to pay it.
The CHAIRMAN. The law speciRcally makes the test the individual
ownership.
Mr. BiRDZELL. Individual ownership.
The CHAIRMAN. Without objection, we will take a recess until
10:30 o'clock tomorrow morning, and Mr. Crowley, we would like to
have you and Judge Birdzell back tomorrow morning at 10:30
o'clock.
(Whereupon, at 12:30 p. m., the committee adjourned until Friday,
Feb. 22,1935, at 10:30 a. m.)

BANKING ACT OF 1935
F R ID A Y , F E B R U A R Y 22, 1935
H O U S E OF REPR E SE N TA TIV E S,
C O M M IT T E E ON B A N K I N G AND C U R R E N C Y ,

Z7. C .

The committee met at 10:30 a. in., Hon. Henry B. Steagall (chair
man) presiding.
STATEMENTS OF LEO l ! CROWLEY, CHAIRMAN FEDERAL DEPOSIT
INSURANCE CORPORATION; AND L. E. BIRDZELL, GENERAL
COUNSEL FEDERAL DEPOSIT INSURANCE CORPORATION—
Continued

The CHAIRMAN. The committee will come to order. We will con
tinue the hearing on H. R. 5357.
Mr. Crowley, I would like to ask you two or three questions.
Did you give the figures showing the amount of insurance in banks
that have failed since the passage of the Deposit Insurance Art?
Mr. CROWLEY. We have that here, Mr. Chairman. Do you wish
the figures for each bank, or the total ?
The CHAIRMAN. I do not care about having it broken down.
Mr. CROWLEY. The deposits in 11 banks that have failed amounted
to $2,890,000, and of that amount the estimated net amount for which
depositors were insured was $1,765,000; the secured deposits, and
those subject to offset, amounted to $935,000. The uninsured bal
ance amounted to $190,000. In other words, of total deposits
amounting to $2,890,000 in failed insured banks, all but $190,000
were fully protected.
The CHAIRMAN. The amount of deposits insured for which your
corporation was responsible amounted to $1,765,000!
Mr. CROWLEY. Yes, sir.
The CHAIRMAN. How much would you say, of that amount, will
represent losses, if you can estimate it, by the Deposit Insurance
Corporation!
Mr. MARKHAM. We only have estimates of anticipated recoveries
on the nine insured banks which failed during 1934. These banks
had total deposit liabilities of $1,938,000. The estimated net loss to
the F. D. I. C. amounts to about $356,000.
The CHAIRMAN. Do you mean to say that you will disburse to
depositors to make good their losses, above what you will receive,
the sum of $356,000?
Mr. MARKHAM. Yes, sir.

BANKING ACT OF 19 3 5

Mr. MARKHAM. Of the $2,890,000, the offsets and the amount of
the security that the depositor has pays everything but $190,000.
The CHAIRMAN. What will you pay to depositors? Your net dis
bursements, or what we might term your " final losses " in the Cor
poration down to date, amount to how much ?
Mr. CROWLEY. It is impossible for us to tell you that because all we
can do is to estimate.
The CHAIRMAN. That is what I am asking for, an estimate.
Mr. CROWLEY. We have estimated, I think, that in the case of the
nine banks that suspended during 1934 the net losses to the Federal
Deposit Insurance Corporation will be something like 40 percent.
The CHAIRMAN. I can understand you can only give us an estimate,
but that is what I want to get.
Mr. CROWLEY. I think that is about correct, that it is about 40percent loss that we anticipate.
Mr. CROWLEY. All of the claims of depositors in the 11 banks that
were closed, with the exception of about $460,000, have already been
paid. All but about $50,000 or $60,000 will .eventually be paid, ac
cording to our estimates.
'
The CHAIRMAN. They have been paid up to now !
Mr. CROWLEY. $2,430,000, including offsets settled and secured
claims paid.
The CHAIRMAN. All I want to ascertain is, first, the total amount
of deposits in banks insured that have closed down to date.
Mr. CROWLEY. That is $2,890,000.
The CHAIRMAN. What portion of that amount of deposits was
insured ?
Mr. CROWLEY. All except $190,000, when you add to our insur
ance offsets and secured deposits. The net insured deposits amounted
to $1,765,000.
The CHAIRMAN. That is the amount of deposits to be covered by
insurance?
Mr. CROWLEY. That is correct.
The CHAIRMAN. For which you were responsible. That is the total
of your actual liabilities?
Mr. CROWLEY. That is right.
The CHAIRMAN. And of that your estimate is that you will actu
ally lose 40 percent?
Mr. CROWLEY. We will recover 60 percent.
The CHAIRMAN. That is the same thing, is it not ?
Mr. CROWLEY. Y e s.
The CHAIRMAN. The losses will be 40 percent!
Mr. CROWLEY. Y e s.
The CHAIRMAN. That will be about what amount?
Mr. MARKHAM. $356,000 in nine of the banks.
The CHAIRMAN. There were 11 of them that failed ?
Mr. CROWLEY. That is right.
The CHAIRMAN. How many of those failures were normal or legiti
mate failures, and how many of those failures were due to defaults?
Mr. CROWLEY. I think six of them were due to defalcations.
The CHAIRMAN. Those figures are correct?
Mr. CROWLEY. That is right.

BANKING ACT OF 1 9 3 5

The CHAIRMAN. So we have had five bank failures other than
those due to defalcations since the effective date of the Deposit In
surance Corporation Act?
Mr. CROWLEY. Let me say this: There are three banks that I
think will pay 100 cents on the dollar.
The CHAIRMAN. How many failed insured banks will not pay
100 cents on the dollar and were not closed on account of defal
cations ?
Mr. C R O W L E Y . There are four. For example, we have a little bank
with $40,000 deposits, which is so small that they put it in liquida
tion because they could not make any money.
The CHAIRMAN. Did you have any actual loss in that?
Mr. CROWLEY. Yes; I think we may have a small loss.
The CHAIRMAN. You have already accounted for three banks in
which you have no substantial loss.
Mr. CROWLEY. Take the bank in Pittsburgh that closed. They
had some $700,000 in Postal Savings accounts. They took collateral
that might be helpful to us, which was necessary to use for Postal
Savings. Those depositors were protected by collateral that was
taken from the assets of the bank. It weakened us to that degree.
Every time they post collateral for public funds, or what not,
they only weaken our position that much more.
The CHAIRMAN. I believe you said yesterday that your earnings
had amounted to about $9,000,000 down to this time; is that correct?
Mr. CROWLEY. They are running about 9 million, between 22 and
23 thousand dollars a day.
The CHAIRMAN. Taking your losses down to date, your net bal
ance will show a profit of something approaching 8% million
dollars ?
Mr. CROWLEY. No. They will before the overhead is deducted;
after the overhead is deducted, they will still show a substantial proBt.
This corporation could be wound up today and pay its losses and
return to the Federal Reserve bank and to the Government their
money plus a return on their investment.
The CHAIRMAN. And a substantial return ?
Mr. CROWLEY. That is correct, sir. You understand, there wen*
some suspensions outside of our fund; there were 47 banks that failea
outside of the fund.
The CHAIRMAN. You had made that statement yesterday, as I
recall, that there were 47 failures outside of the Insurance Corpo
ration.
Mr. CROWLEY. Yes.
The CHAIRMAN. In that connection, to make those figures clear,
you might state how many banks are uninsured.
Mr. CROWLEY. We have 1,100 banks that are operating in this
country today that are uninsured.
The CHAIRMAN. And out of the 1,100 banks you had 47 failures
outside of the Corporation, and of the total number inside the Cor
poration you had the number to which you had already testified!
Mr. CROWLEY. That is correct.
The CHAIRMAN. Mr. Crowley, I want to ask you what your present
resources are for the protection of depositors ?

BANKING ACT OF 1 9 3 5

Mr. CROWLEY. We have $140,000,000 from the Federal Reserve
banks and $150,000,000 from the Treasury, which has been sub
scribed in the form of stock. We also have $41,000,000 from the banks
themselves. So we have approximately $330,000,000, and we have
that invested in Government securities, with the exception of about
$15,000,000 that we carry on hand for any normal expenses that we
might have.
The CHAIRMAN. You have the right and the privilege and the au
thority under the law to expand your capital three times ?
Mr. CROWLEY. By borrowing.
The CHAIRMAN. By issuing obligations?
Mr. CROWLEY. That is correct, Mr. Chairman.
The CHAIRMAN. So you have potential resources of about $900,000,000, which would give you four times the amount of your capital %
Mr. CROWLEY. That is correct.
The CHAIRMAN. Which would be 1,200 million dollars ?
Mr. CROWLEY. Yes.
The CHAIRMAN. In addition to that, under the act passed in 1934,
the amendatory act of last year, you have also the right to borrow
$250,000,000 from the Reconstruction Finance Corporation.
Mr. CROWLEY. That is correct, sir.
The CHAIRMAN. Summed up, it means that your Corporation is
equipped practically to the amount of a billion and a quarter dollars
at this time?
Mr. CROWLEY. There is a question, Mr. Chairman, whether the
$250,000,000 that we have the right to borrow from the Reconstruc
tion Finance Corporation should not be included in our borrowings
of three times the amount of our capital.
The CHAIRMAN. How do you get that ? The original act gave you
the right to expand your capital three times.
Mr. CROWLEY. That is right.
The CHAIRMAN. We attempted and I thought we had supplemented
that last year in the bill passed at that time giving you entirely sep
arate authority to borrow a quarter of a million dollars from the
Reconstruction Finance Corporation.
Mr. BiRDZELL. This is the situation, Mr. Chairman. The law under
which we are operating does not provide for a Government guarantee
of either the principal or the interest of our debentures which we
may issue to the extent of three times our capital.
The CHAIRMAN. I know that.
Mr. BiRDZELL. Because of that fact we suggested that that guar
anty be given. It was in the bill that was under consideration last
year and was stricken out in the Senate. When the bill was ulti
mately passed, however, it was not passed quite in the form that you
now have in mind, Mr. Chairman.
It was passed in this form, that as to the debentures that might
be issued by our Corporation, our Corporation could call upon the
Reconstruction Finance Corporation to purchase at par to the extent
of $250,000,000. That is a sort of substitute for Government guar
antee, to provide us with a par market for our debentures up to that
amount.

BANKING ACT OF 1 9 3 5

I think if you will turn to the provision of the act where that is
found you will be impressed with the fact that the $250,000,000 is
part of the debenture authority of the board of directors, and not in
addition to that.
The CHAIRMAN. In any event, you have about twelve hundred
million dollars?
Mr. BiRDZELL. That is right.
Mr. CROWLEY. In our proposal we are asking for the right of
issuing three times the amount, which will give us $1,200,000,000.
We say nothing about the 250 million, but it is still available from
the Reconstruction Finance Corporation.
Mr. FoRD. I wanted to make one observation. The banks pay
this premium.
Mr. CROWLEY. That is right.
Mr. FoRD. As a matter o f fact, the depositors pay it.
Mr. CROWLEY. Of course, the depositors, like the consumers of any
thing, ultimately pay the expense.
Mr. FoRD. They have cut out the interest on the unused dollars,
and since they have quit paying interest that really make the depos
itor pay for his own protection.

Mr. CROWLEY. That does not affect the rank and file of the depos
itors. The average depositor never got anything on his demand
deposits.
Mr. KoppLEMANN. Further on the banks that the chairman was
talking about, what, under the present law, or under the bill proposed
that is before us, are you empowered to do about rehabilitating
many of these closed banks.
Mr. CROWLEY. There is the possibility that in the 1,100 licensed
uninsured banks a very substantial number of those may be brought
into our fund. There are some that are staying out because they
do not wish to join.
Mr. KoppLEMANN. But what I specifically would like to know is
whether or not under the old law, or under the new bill as proposed,
you have the power to help these banks get back on to their feet.
Mr. CROWLEY. No; we have no legal power to force them to do
anything. With the help of the Reconstruction Finance Corpora
tion we have been able to aid them.
Mr. KoppLEMANN. Have you done so?
Mr. CROWLEY. We have already rebuilt the capital structure, with
the help of the Reconstruction Finance Corporation, of about 3,500
insured State banks in this country.
Mr. KoppLEMANN. I mean after they are in trouble.
Mr. CROWLEY. They were in trouble when we got them.
Mr. KoppLEMANN. I am talking about 11 closed banks that were
insured.
Mr. CROWLEY. We have not any authority.
Mr. KoppLEMANN. No authority to keep them going. You see
what I am trying to bring out, whether or not this act even goes
further than merely guaranteeing deposits, whether it does not also
save the banks.

Mr. BiRDZELL. Under the existing law we could not, if we would,
purchase any assets or loan any money to a nonmember bank, and

BANKING ACT OF 1 9 3 5

of the 11 banks that have closed there were only 2 member banks.
So we could not, if we would, go into those banks and rehabilitate
them ourselves, except as to member banks. In this bill provision
is made for something like that to be done.
Mr. DiRKSEN. Does the $41,000,000 that has been referred to repre
sent the income from the deposit fund ?
Mr. CROWLEY. No; it represents the assessment of one-fourth of 1
percent on insured deposits against the banks. The members of our
fund pay an assessment. They have paid us $41,000,000.
Mr. DiRKSEN. Under the original law, could you still issue stock
to the Federal Reserve bank?
Mr. CROWLEY. Yes; you could offer stock to the Treasury, or, under
the set-up that now exists, you could authorize-----Mr. DiRKSEN (interposing). The original law provided that the
Federal Reserve banks could subscribe to the extent of one-half of
their surplus, on the first of January 1933.
Mr. CROWLEY. They have done that.
Mr. DiRKSEN. Then you have discretionary power to require only
the payment of one-half of the subscription ?
Mr. CROWLEY. We have required the payment of the entire sub
scription.
Mr. DiRKSEN. It has been paid entirely?
Mr. CROWLEY. It has been paid entirely; yes, sir.
Mr. GiFFORD. You have used the expression recover immediately.
Mr. CROWLEY. We have started to pay off to depositors in closed
insured banks, Congressman, within 10 days from the time the bank
closed.
Mr. GiFFORD. You have made no new suggestions?
Mr. CROWLEY. We have made some suggestions that are purely
administrative.
Let me explain that to you. There is a little bank in Montana that
closed. They are way ofF in the country. We had to go way up in
the hills and bring the people down to get their money. Under the
present law we must carry on the expenses of continuing that bank,
and it may be that all the depositors except three or four were paid.
We are asking for the right to bring the balance of the affairs of
the bank into Washington so that we might complete the tag-end
of those payments from our oiHce here.
Mr. GiFFORD. Then I notice that you want some proof from depos
itors that a deposit in a bank that you may find is really one deposit,
is held for the benefit of one person.
In the future you may want written proof that a certain number
of deposits may be held for the benefit of one person, under different
names, unless it were proven to be a trust deposit.
Questions asked you yesterday related to deposits carried as trustee,
or in a joint account.
I thought I noticed a recommendation in reference to the matter
of determining whether there were not various deposits in a bank of
only one individual.
Mr. BiRDZELL. There is nothing speci6c on that further than this.
It provides for the claim agents of the Corporation being able to
take proof to determine the ownership of the different amounts of
money.
Mr. GiFFORD. My question was leading up to that.

BANKING ACT OF 1 9 3 5

Mr. BiRDZELL. We will not find occasion to use that provision of
law in any great number of cases, because we get practically all our
information from the books in the banks* These proofs of claims are
made up and then the depositors are asked to come in and get their
money. All that remains to do is to reconcile with the depositor's
passbook.
Mr. GiFFORD. I am certain that there is a recommendation there
that seemed to be an attempt to prove that certain people might
divide their accounts in the same bank for the sake of being insured
under the $5,000 limit.
Mr. BiRDZELL. Would that be under the definition of insured de
posits ?
Mr. GiFFORD. I cannot recall.
Mr. GOLDSBOROUGH. How much in the way of income is derived
from one-twelfth of 1 percent?
Mr. CROWLEY. About $30,000,000.
Mr. GOLDSBOROUGH. As I understand it the law provides that the
assessment may be lowered, but there is no provision in the pro
posed act under which the assessment can be raised.
Mr. CROWLEY. That is correct.
Mr. G O L D S B O R O U G H . On what theory do you feel that it would not
be wise to place in the proposed act some provision permitting the
Insurance Corporation to raise that contribution from one-twelfth
of 1 percent to such amount as might be necessary?
Mr. CROWLEY. This is my own personal viewpoint about that. I
think that in building a fund the insurance of deposits, the first
responsibility is to correct some of the mistakes or weaknesses in
our banking system. In other words, I do not believe we are justi6ed in charging to the bank system of this country the mistakes of
the past. This Corporation should be given suHicient authority to
eliminate a great many of the past mistakes.
There is a question m my mind as to whether we are justified in
taking from a bank a large percentage of its income, or leaving it
liable to an assessment which might jeopardize the soundness of that
particular institution. To subject a bank to an additional assess
ment at a time when they are having about all the difRculties that
they can encounter themselves may not be a wise policy.
Mr. GOLDSBOROUGH. That is the time when the Insurance Corpora
tion can be of service to the depositors in banks.
Mr. CROWLEY. I think that the Government now has a direct re
sponsibility in connection with our banking system. I think it has
a responsibility to the Federal Deposit Insurance Corporation, and
to the depositors. I believe that if we are going to build this fund
over a period of years, that in addition to the income you get from
the banks, you must have a way to build up a sufRciently large re
serve. If we have a recurrence of the conditions that existed in
1907 or 1893, we will then have a cushion that we may fall back on
out of which to pay losses..
I am not disturbed particularly at the losses of this Corporation
in the next, 3, 4, or 5 years. Because of the rebuilding program and
will restore values, losses will not be
0 years this fund should build a sub
stantial reserve.

BANKING ACT OF 19 35

Mr. GOLDSBOROUGH. You mean the act should be amended to pro
vide for a Government contribution?
Mr. CROWLEY. I do not care whether it is a Government contribu
tion or income from some other source.
Mr. GOLDSBOROUGH. I have no objection to it; I am just asking
the question.
Mr. CROWLEY. I think where we go into the field of insuring de
posits our Rrst responsibility is to keep this Corporation solvent
so that it can at all times meet its demands. Otherwise, I think
confidence in banking would be broken down entirely.
Mr. GOLDSBOROUGH. Personally, I have no fear about that for the
next 20 years.
But there is another consideration, and a very serious one, in my
mind. This Corporation, in the minds of the public, is a Federal
organization, a Federal deposit-insurance corporation; and unless it
has a dual responsibility, the title is just as misleading as the title
of the Bank of the United States in New York. It simply deceives
the public.
I personally see no objection whatever to amending this proposed
act so as to give the Corporation the right to raise this contribution
from the banks from one-twelfth of 1 percent to one-fourth of 1
percent.
For a long while the banks will be afraid to make loans; the
examinations are going to be rather strict; but we have given the
banks in the last few years $13,000,000,000, and we are continuing to
issue bonds and give them more billions of dollars.
As they wax strong and arrogant, and as business is resumed, and
as they begin to brush the examinations aside, as they will in time,
it will become necessary to fortify this Corporation and serve notice
on the banks that they have the bag to hold if they go too far, as I
see it.
I believe if the public knew that this is a one-twelfth of 1 percent
limitation, and that the limitation was absolute and the Corporation
could go no further, I think it would interfere very seriously with
the morale of the public. That is my opinion—that they are bound
to give way in a short time.
Mr. CROWLEY. Congressman Goldsborough, I think that for the
psychological effect on the depositors they must have confidence in
this Corporation. Depositors must have conHdence that the fund
is sufSciently large and that the Corporation is well managed. I f
they lose that confidence, that is where the difEculty will be. The
great contribution which we have made is the establishment of con
fidence in the minds of the depositors.
Mr. GOLDSBOROUGH. One other thing: When the time comes to sell
the debentures, aside from whatever the Reconstruction Finance
Corporation may think, what would be the justification in the mar
ket for those debentures ?
Mr. CROWLEY. I would say that if it got to the point where we
had to issue debentures up to three times the amount of our capital
there would be no open market for them at all. By the very nature
of things, if we had such a situation that we would have to issue
our debentures up to the limit, there is only one place where we
could go to get that aid, and that is from the Treasury.

BANKING ACT OF 1 9 3 5

Mr. GOLDSBOROUGH. That is my opinion, and that is the reason I
asked you the question.
Mr. CLARK. I want to say one thing in regard to the first point that
Mr. Goldsborough made. I think it is a point well taken, that the
Corporation should have the administrative power to raise the rate.
I want to state right here that I think of all the "new deal"
agencies that have been set up this Corporation is the finest and has
been handled in the finest manner, administratively. In the 15
months you have been in existence you have done pretty nearly a
superhard job; and I for one would be willing to trust the admin
istration of this Corporation to them, and give them admin
istrative latitude, so that they could, if necessary, raise these pre
miums or assessments, and I think the public has more confidence in
the work you have done than in the work that has been done by
practically any other agency that has been set up in the last 2 years.
I am thoroughly convinced of that, both so far as the administra
tion is concerned and in the way you have done it.
I think, personally, I would like to have you consider whether
you think such an amendment as Mr. Goldsborough proposes would
have a bad effect, because it seems to me it would have a good e3ect
in giving you the administrative authority to raise the assessment,
if the times and conditions demanded it.
Mr. FoRD. The reason I asked the question as to whether or not
the depositors were actually paying the insurance was with the idea
of making a suggestion along the lines that Mr. Clark has made.
But it seems that the banks, of course, will tell you, " Of course, it
is all right to insure the deposits, but we pay the bill."
As a matter of fact, the bill is paid by the people whose money is
in the bank. Quite a number of those deposits did not draw inter
est at any time. But there are also quite a number of them that
did heretofore draw interest, and they have cut down on their nor
mal interest. Where they used to pay 4 percent, they have cut as
low as 2% percent; so that in the long run, if the banks are paying
the bill, I think the Deposit Insurance Corporation should have a
broader latitude in reference to that assessment, so that they can
raise it, instead of one-twelfth of 1 percent to one-sixth of 1 percent.
Mr. CROWLEY. You appreciate, of course, Mr. Congressman, that
we have changed the way of determining our assessments.
Mr. FoRD. Yes.
Mr. CROWLEY. We propose to assess on total deposits. A number
of your larger banks are only insured up to 26 percent, while a
vast majority are insured TO percent or more.
I think that if the Deposit Insurance Corporation is going to
bring about good banking, it is not going to do that through paying
out losses. I think that the protection that it is going to afford will
be brought about through studying and correcting a great many of
our ills. I can foresee that, over a number of years, with this Cor
poration properly conducted you would have a minimum number of
bank closings.
In other words, if we have the power to protect ourselves, there
are going to be very few forced liquidations in this country: and if
we are careful in the way we recharter banks—if we are careful in
the way we conduct ourselves—the Federal Deposit Insurance Cor
poration might become the greatest vehicle in the Government for
the rehabilitation of our whole banking system.

BANKING ACT OF 1 9 3 5

The CHAIRMAN. Mr. Crowley, under the act now proposed, the
large banks will have, of course, to pay a premium of one-twelfth
of 1 percent, based on all their deposits now ?
Mr. CRowLET. That is correct.
The CHAIRMAN. So that, whether the general banking structure^ is
sound or not, these individual banks will realize that their liability
is limited; and they will have no incentive to try to keep the banking
structure on a legitimate basis.
On the other hand, if they realize that when they encourage
speculative activities, which are always unloaded on those who know
least about business, that their assessments are going to be increased,
it seems to me that it would be a great restraining influence on those
institutions.
Mr. CROWLEY. Well, I do not think----The CHAIRMAN. It would inSuence them to conduct themselves
in a very different way than they did in the period of 1925 to 1929.
Mr. CROWLEY. I do not think, Mr. Chairman, that the assessment
is going to be the thing that might prevent the recurrence of that
sort of thing, for this reason: Suppose that you double the assess
ment in some institutions, I do not believe that that would be a
sufficient disciplinary measure to prevent speculation.
The CHAIRMAN. Those institutions are the ones that have pre
vented a provision like that going into the law. There could not
have been any other reason why it has not become law. Is not
that correct?
Mr. CROWLEY. I think that is----The CHAIRMAN. They are the ones who do not want that provision
in the law.
Mr. CROWLEY. Well, I think this, Mr. Chairman, that your fund
must be kept sound. I think that the Deposit Insurance Corporation
must have sufRcient income to pay the losses.
The CHAIRMAN. That does not answer it.
Mr. CROWLEY. If it is necessary to give us the power to make the
additional assessments, if that becomes necessary in order to keep
the insurance fund sound, we should have authority to do that.
Mr. FoRD. But that assessment cannot be of any particular effect
in directly controlling an institution which wants to engage in
unsound practices.

The CHAIRMAN. I did not mean that, but they can have the banks
which are responsible, for speculations-----Mr. FoRD. Any form of insurance tends to remove much of the
incentive to observe sound practices.
The C H A I R M A N . Those banks, which are responsible for specula
tion, and which pass on their securities to the smaller banks, are the
banks who under this proposed law have the greatest amount of
insurance assessment to pay; and my theory is that if those banks
know that assessment is not going to be increased, and there is not
the tendency on their part to keep it straight. That is what I had
in mind.
Mr. JoNEs. But the general proposition is that wherever you give
insurance carelessness and speculation will actually increase, unless
have strict supervision. We have that exemplified in the automo
bile business. For instance, the man whose automobile is insured

BANKING ACT OF 19 3 5

becomes careless, even if the rates are punitive, so that in my State
certain localities have to pay more than other localities. We do not
even have a flat rate.
The CHAIRMAN. Is not that the general principle? Upon your
theory we ought to abolish the Deposit Insurance Corporation
entirely.
Mr. FoRD. The rates have gone up comparatively; and in some
localities I think it is very difBcult to—let me discuss this off the
record.
Mr. HoLLiSTER. Might I ask a question? Following out this prin
ciple, the desire to certain banks to get this insurance and the objec
tion of certain other banks, is it not true that—or, let me ask you,
rather, what kind of banks, as a general rule, object to the principle, or
the possibiliy, of unlimited assessment ?
Mr. CRowLET. Well, I believe that all the banks, large and small,
object to the unlimited liability. I do not believe that you should
have an unlimited liability. I do not thing that Congressman Golds
borough, when he refers to unlimited liability, has in mind an entirely
unlimited liability but the right to call for a second assessment in the
event it becomes necessary.
Mr. HoLLisTER. Or a third or a fourth ?
Mr. CROWLEY. Then you would be getting into an unlimited lia
bility. Congressman Goldsborough only wants to give the Cor
poration the right to call for an additional assessment in any one
year.
Here are the types of bank from which you would get your ob
jections. There is the fellow who does not want any supervision
at all.
Then, there are the fellows who feel that they do not want to con
tribute anything to general banking recovery or the reestablishment
of confidence. In other words, they are willing that the other fellows
should reestablish this confidence and feel that they will benefit by it
as they have in the past. There are a great many business men who
will not join trade associations. They want the other man to rebuild
by his efforts and want to reap the benefits they have not helped to
bring about.
Other banks are afraid of the cost of this thing. They are not in
sympathy with the plan.
Now, my answer is this: The man who does not want it on account
of the supervision is the man whose depositors need the protection.
The man who is unwilling to come in and assist in rebuilding the
banking system should be compelled to do it.
And the larger banker, who believes that he can live by himself, if
he will only analyze what happened to him in 1933, will realize this:
When we have trouble in the Northwest, that disturbance will gradu
ally work east, and, at some time or other, may result in the break
down of the banking system.
So, I say, if we could pass a law that would compel every bank in
this country receiving deposits to become a member of the Federal
Deposit Insurance Corporation, that would be the greatest contribu
tion that you could make; and, when that was done, the Corporation
should be given powers that would enable them to protect themselves.
Mr. HOLLISTER. I agree with you 100 percent.

BANKING ACT OF 19 3 5

Mr. CnowLEY. I f we can build up this thing and get the depositors
to take the position that they will only do business with a bank that
has deposit insurance, then we will have gone a long way toward
correcting the evils in our banking system.
Mr. GiFFORD. In line with what Mr. Hollister has said, there are,
in my section of the country especially, a very great number of mutual
savings banks, who are doing a very safe banking-deposit business,
and who look with a great deal of concern on this proposition that
they have got to insure the deposits in other sections of the country,
where the banking is weaker. They do not look with very much
feeling of happiness on the prospect that they will have to pay the
losses on weak and improperly managed banks in other sections.
Mr. CROWLEY. What State do you come from, Mr. Congressman ?
Mr. GiFFORD. It is my good fortune to come from the wonderful
State of Massachusetts.
Mr. CROWLEY. Well, you have had a pretty good banking system
in your State, but we have 47 other States; and I think it has been
proven in the past that no State can live by itself. We are trying
to take a national viewpoint.
Mr. GiFFORD. I am not opposing your viewpoint, but I am trying
to reflect to you the feeling of those bankers in the United States
who feel that they have a pretty good—let me discuss this a moment
oS the record.
Are the Massachusetts mutual savings banks under this ?
Mr. CROWLEY. No; they are not.
Mr. GiFFORD. Why are they not under it?
Mr. CROWLEY. They have a fund of their own.
Mr. GiFFORD. Do you say that is improper ?
Mr. CROWLEY. I do not believe that any State fund that we have
analyzed up to date is successful or sound. I think that under any
crisis it would not be a success.
Mr. GiFFORD. Will you explain to the committee, to save me from
having to explain it further, why it is that the mutual savings banks
of Massachusetts prefer to insure themselves rather than to come
under this Federal deposit-insurance plan? Tell the committee what
you found to be their condition.
Mr. CROWLEY. Well, in the first place, you have 2 State depositinsurance funds in the East. You have 1 in New York and you have
1 in Massachusetts. Now, neither one of those funds, in our estima
tion, are insurance funds at all, because of the fact that, by their very
nature, they are insuring in a limited area. If banks in those sys
tems had any loss of any great size, they would have to assess one
another. They have no capital structure to speak of and they would
have no way of paying out losses if they were to have any large
demand upon them.
Secondly, mutual savings banks have restricted withdrawals as
demands became heavy.
That is what has happened in your mutual savings bank systems,
and that is why your mutual savings bank losses are less than the
losses in the commercial field, because they restrict their withdrawals.
That is the reason why in Massachusetts they have a fund that they
call the insurance fund, but which, in realty, is not a fund that will
stand analysis as to its soundness.

BANKING ACT OF 1 9 3 5

Mr. GiFFORD. Now, will you answer my question? What reason
have they given you for their refusal to join the Federal Deposit
Insurance Corporation ?
Mr. CROWLEY. The only reason we have from Massachusetts is
that they have a fund of their own.
Mr. GiFFORD. And you challenge that fund as not being a sound
fund?
Mr. CROWLEY. Correct.
We have made analyses of the funds set up in the past. The out
come of a great many of them has been disastrous, because you can
not have adequate insurance where the banks are going to insure
each other in such a limited area. It is just unsound.
The CHAIRMAN. Is not this the fact about it: Any insurance sys
tem for success depends upon a spread of the risk ?
Mr. CROWLEY. That is correct, Mr. Chairman, you must also have
an adequate capital structure.
The CHAIRMAN. Well, not necessarily a capital, because we have
mutual insurance systems, do we not? Mutual insurance is really
the cheapest system of all, is it not, for the simple reason that it
does not require any capital structure? They simply pay what
losses they have when they occur, and there is no waste. Is not that
the mutual plan ?
Mr. CROWLEY. That is correct; but I much prefer having a re
serve that you can fall back on. You should not have to fall back
upon special assessments for ordinary losses.
The CHAIRMAN. I am not speaking about that, but I am just
speaking about the principle of insurance; and the mutual insurance
is the cheapest insurance there is, if you acknowledge the liability
and propose to make good.
In connection with what Mr. Gilford has said, our history shows,
does it not, that the attempts to set up insurance systems for de
posits in the several States have failed ?
Mr. CROWLEY. Yes.
The CHAIRMAN. Because of the fact that the units were too small?
Mr. CROWLEY. That is right.
The CHAIRMAN. You do not have now an epidemic of yellow fever
all over the United States, like we used to have in certain centers.
The same principle is illustrated by the San Francisco 6re. Now,
in such cases the losses are absorbed by diversifying?
Mr. CROWLEY. That is correct.
The CHAIRMAN. And what you are doing with the banking system
under the Federal Insurance Deposit Corporation is for the pur
pose of protecting the depositors by spreading the risk throughout
the country?
Mr. CROWLEY. That is right.
The CHAIRMAN. This happened, did it not, Mr. Crowley, during
the period of distress: The mutual savings banks and the big banks
and everybody else ran to the Federal Government, with their hands
up for assistance?
Mr. CROWLEY. Except Massachusetts. The mutual savings banks
in Massachusetts did not.
Mr. GiFFORD. I want to challenge the chairman's argument. Massachuetts and New England claim that within themselves they have

BANKING ACT OF 1 9 3 5

that greatly diversified situation, where they can invest in those di
versified things, while in those great agricultural areas they are
limited in the investments they can make to a certain kind of in
vestment only. So it does not mean solely geographical diversifica
tion.
Mr. CROWLEY. Mr. Congressman, let me say this to you: I am
awfully sorry this discussion has gotten down to districts or regions,
because it is rather embarrassing, but your Massachusetts and New
England mutual savings banks made the same mistakes, the same
proportion of mistakes, perhaps, as the banks in other parts of the
country.
Some of your New England banks went out into the Northwest and
Southwest for investment in mortgages. They were looking for
larger yields. They were looking for 8 or 10 percent returns on
farm mortgages; and, naturally, now they have a large percentage
of assets that-----The CHAIRMAN. They went into the Southeast and Southwest, too,
as well as the Northwest.
Mr. CROWLEY. A very large percentage of their bonds are not
productive of income.
Mr. GiFFORD. I challenge th at statem ent also.
The only trouble with our mutual savings banks in Massachusetts
was that they had over 7 percent, which was their legal limit; and I
will say to you, as to our mutual savings banks which were closed up,
that there was an edict went forth from Washington-----Mr. CROWLEY. Do you mean to say that the mutual savings banks
could have continued right on paying without any restrictions?
Mr. GiFFORD. Oh, no; they would have to go on for 3 months. In
fact, there was an order received by them to withhold deposits.
Mr. CROWLEY. I cannot go into the details of that; but let me say
this-----The CHAIRMAN. Let me interrupt you. It should be said right
here—and I do not say this in criticism or unkindness—the fact
remains that big banks, railroads, and even life-insurance companies,
finally came to the Federal Government for a place of refuge and
for assistance; and the Government had to open up the Treasury of
the United States in order to enable them to carry on. That is the
record, is it not ?
Mr. CROWLEY. I do not pretend to know much about insurance.
But I do know that, with very few exceptions, the banks, the mutual
savings banks, and all of them, were very happy to have the pressure
taken off on March 6, 1933; and that, perhaps, while they will not
directly say this, yet a lot of them have benefited more by having had
Federal deposit insurance than, perhaps, they will admit.
Furthermore, Mr. Congressman, in reference to the banks taking
aid from the Reconstruction Finance Corporation, it is true that in
the very beginning a few banks did take capital aid from the Recon
struction Finance Corporation to be helpful; but the vast majority
needed every dollar they could get from that source. If it had not
been for the R. F. C. and the F. D. I. C., your banking system never
could have recovered. There was nowhere else that the banks could
go to get the capital aid which was necessary.
And I may add a little off the record.

BANKING ACT OF 19 33

Mr. FoRD. Would not this little couplet apply:
When the devil was sick, the devil a monk would b e ;
When the devil got weil, the devil a monk was he.
Mr* CROWLEY. Y es.

Mr. GiFFORD. That little pleasantry does not cure the situation.
Now, I ask sincerely, if the mutual savings bank does not join
the Federal Deposit Insurance Corporation, there is a reason for
not doing so and there must be a fear of the thing? New England
has a feeling that no matter what the Federal Government does, we
will pay very greatly in excess of what we ever get; and I think
it is right to bring out here that, if they have that fear, there is &
real foundation for it.
Mr. CROWLEY. Of course, Mr. Congressman, there are always
bound to be differences of opinion as to questions of that sort.
The CHAIRMAN. Mr. Crowley, I want to ask you another question.
You gave us yesterday an estimate of the burdens that would have
been necessary to meet to take care of the losses to depositors in com
mercial banks during the 70-year period since the passage of the
National Banking Act; and you gave us the comparative losses as
between national oanks and State banks.
The fact is that until recently there have not been many serious
efforts at strict regulation and supervision as to State banks!
Mr. CROWLEY. That is correct, sir.
The CHAIRMAN. It is a fact, however, that in most of the States
now we have developed systems of regulation and supervision that
represent marked improvement and progress.
Mr. CROWLEY. Well, I think that there has been considerable im
provement in the supervision of the State banking systems; but
in many respects there is still a long way to go.
The CHAIRMAN. That is what I am asking you. It is a very dif
ferent story from what it was during the first 50 or 60 years of our
banking experience; so that same condition would not be reflected in
the future ?
Mr. CROWLEY. I think that is correct, Mr. Chairman.
The CHAIRMAN. It could not be. Now, I want to ask you another
question. You estimated in that statement, as I remember it, that
one-third of 1 percent would have taken care of all the losses, for
banks of all types, during that 70-year period; and that one-eighth of
1 percent of the deposits would have covered all losses, exclusive
of periods of panic.
Mr. CROWLEY. That is right.
The CHAIRMAN. Those figures, of course, are based upon opera
tions which were, in the first place, without effective supervision—
certainly as to the State banks?
The CHAIRMAN. And without modernized regulation as to the
national banks?
Mr. CROWLEY. That is correct, Mr. Chairman.
The CHAIRMAN. And they also represent the experience of a period
during which there was no insurance of deposits.
Mr. CROWLEY. That is correct.
The CHAIRMAN. So that, for the future, great allowances should
be made for the improvements we have made in regulation and
supervision and. also, for the operation and effect of successive de
posit-insurance funds, should there not?

BANKING ACT OF 19 3 5

Mr. CROWLEY. That is correct, Mr. Chairman.
The CHAIRMAN. Now, what is the percentage of losses since the
effective date of deposit insurance, as to banks that have been
insured 2
Mr. CROWLEY. To answer your question will take quite a little
figuring. We had some thirty-six billions in deposits and we have
had $2,847,000 of deposits in closed insured banks. It will take quite
a little figuring to get the exact percentage of loss in insured banks.
The CHAIRMAN. The looses will be $356,000, will they not?
Mr. CROWLEY. Yes.
Mr. REILLY. Well, certainly no one anticipated those losses, with
the exception of the activities of the Corporation, so that, as far as
I am concerned, the amount of the losses which have accrued up to
this time do not afford at all a basis for the actuarial experience
required in order to estimate what the assessments should be.
The CHAIRMAN. I agree fully with that.
Mr. RsiLLY. Let Mr. Crowley take just a minute on that question.
The CHAIRMAN. I want to ask you another question.
Mr. REILLY. I want him to answer my question.
Mr. CROWLEY. Mr. Congressman, perhaps I had better make sure
what you have in mind You asked me what question?
Mr. REILLY. I asked whether the amount of the losses that have
accrued up to this time, since the inauguration of the Federal
insurance system, afford any adequate basis for establishing the
actuarial experience required to estimate what assessments will be
required.
Mr. CROWLEY. I get it now.
It is quite true that we should not have had, and we have not had,
normal losses yet. But the success of this Corporation depended
upon the rebuilding of your banking system. If that had not been
done, you would have had no Federal Insurance Deposit Corporation,
because the demand would have been so great that the Corporation
would have become insolvent and you could not have reestablished
confidence.
Now, I do not believe that for some time the banking system of
this country has been in better shape than it is today, and that means
that we are starting out on quite a clear basis, Mr. Congressman.
I think that the income should be determined by our experience of
the past, so that we may build reasonable reserves for the future.
Mr. GOLDSBOROUGH. I am in accord with your statement, but, in
view of the fact that in these other estimates of percentages, which
we are undertaking to bring down to date, we have our experience
recorded in figures, I think that the picture should be completed by
giving the percentage of losses by totaling the deposits since the
Federal Insurance Deposit Corporation Act became effective. I f
you have not those figures now, you may insert them in the record.
I realize that they may require considerable calculation; but let
us complete the picture.
Mr. CROWLEY. Mr. Congressman, will you take my statement and
turn the pages to the chart entitled "All Commercial Banks, 18651934."
Mr. GOLDSBOROUGH. Let me make a suggestion. We have been over
all of that. All I want is that you take a pencil and figure out
this percentage of losses for the record, so that the figure will be

BANKING ACT OF 19 3 5

available to us. You can do that. All I want is to have those
figures in the record to complete the picture.
Mr. CROWLEY. We will put that in the record for you.
(See p. 27 of hearings of Feb. 28.)
Mr. WILLIAMS. Is it not a fact that prior to the bank-failure epi
demic, prior to this panic, that bank losses were very nominal
throughout the history of this country?
Mr. CROWLEY. You mean after the washing-out of the weaker
institutions ?
Mr. W iLLiAM S. No; I mean beginning before this panic, that the
bank failures for a period of 25 or 30 years had been practically
nominal?
Mr. CROWLEY. They have always been reduced after such periods.
It is just like anything else; you wash out your weaker people; you
have losses and have destitute people in the community. That same
thing is true in the effect of the recent readjustments.
Mr. WILLIAMS. Do you have any figures of the losses to bank
depositors in national banks from the beginning?
Mr. CROWLEY. Will you please answer that, Mr. Thompson?
Mr. W iLLiAM S. I refer to the national-bank situation.
Mr. THOMPSON. We estimate that the losses to depositors will
amount to about $1,000,000,000. We can only give you a figure
that is partly estimated, inasmuch as the liquidation of the banks
that are still in the hands of receivers has not been completed. We
have had to take the value of the remaining assets and estimate
what the total recoveries will be.
Mr. W iLLiAM S. What proportion was the wash-out you spoke of,
of the banks that did not reopen? What percentage of the banks
closed have been allowed to reopen?
Mr. CROWLEY. Do you mean what percentage did not reopen, Mr.
Congressman ?
Mr. W iLLiAM S. You know, we have overdrawn this matter of bank
failures, stating that the banks immediately after that time should
make such a remarkably good showing and then, in the next breath,
saying that they were in an awful condition.
Mr. CROWLEY. The thing that has happened to your banking sys
tem has been the rebuilding of confidence and, also of capital struc
tures. For instance, the Reconstruction Finance Corporation has
invested $1,000,000,000 in the capital structures of banks and, in
addition to that, there has been, I presume, four or five hundred
million dollars in local contributions to capital structure.
Mr. W iLLiAM S. Oh, I know there has been a lot of this over
drawn—this scare that the banks were in such terrible condition.
Mr. CROWLEY. What was the capital structure of all the banks in
the country? About $6,000,000,000 on June 30, 1934. I think you
will find that, with everything that has been contributed, there has
been, perhaps, a billion and a half dollars, or over, put into the capi
tal of our banking system since 1933. This has been used chiefly to
write off losses rather than to increase the book capital of the banks.
Mr. WiLLiAMS. But weren't there a lot of these banks that, if they
had been let alone, could have worked themselves out?

Mr. CROWLEY. There are always banks which,
be able to work themselves out.
127297— 35— — 4

let alone, might

BANKING ACT OF 1 9 3 5

Mr. GiFFORD. Now, we in New England, let alone, we are working
ourselves out.
Mr. CROWLEY. The assets are improving, Mr. Congressman, all the
time.
Mr. WiLLiAMS. Right in that connection, while they are talking,
Mr. Chairman, how many of these banks altogether opened up with
out any assistance? Most of them were able to open after what we
called the bank holiday. How many of them opened, what propor
tion of them at least, opened without help from some source!
Mr. CROWLEY. There were 15,000 banks, Mr. Williams, and between
five and six thousand have been given aid by the Federal Govern
ment; and that does not include some banks that have made their
own contributions to the reestablishment of capital structure.
Mr. WiLLiAMS. I was wondering if you had the figures of those
banks whose capital structure was built up by local capital, inde
pendently of the Government.
Mr. CROWLEY. I do not think we have that figure; but we are
assembling it and will have it soon.
Mr. WiLLiAMS. The question that I was interested in was from
the other end of it. You might say what was the number that were
able to reopen without any help.
Mr. CROWLEY. I would say possibly 50 percent, Mr. Congressman.
Mr. BiRDZELL. May I make this contribution, further, to complete
that thought? Many of the reorganized banks have been capitalized
quite largely by their depositors, through waivers of deposit liability
or the conversion of deposit liability into preferred stock, or some
thing of that kind, so that some of the banks that were reopened in
reorganized fashion really had depositors' losses included in their
capital.
Mr. WiLLiAMS. Yes; but that is the same thing as building up their
capital structure through local contributions.
Mr. GiFFORD. The banks in my section all reopened, but, after
the reopening they were forced to create a larger capital structure
simply to mark on temporary losses that represented merely tempo
rarily decreased values, and many of these 5,000 banks that they talk
about having had Government aid got money from the Reconstruc
tion Finance Corporation that they did not need at all, just to allay
the fears of the people.
Mr. CROWLEY. You mean by that, Mr. Congressman—what do you
mean when you refer to " temporary losses "?
Mr. GiFFORD. Well, our banks claim that the bank examiners were
so severe that they demanded mark-downs or charge-offs of so much
that they have to have a larger capital to offset that.
Mr. CROWLEY. Do you mean that they made them take out bond
depreciation and things of that nature?
Mr. GiFFORD. I know of particular real-estate matters where the
examiners required mark-downs for temporary losses.
Mr. WiLLiAMS. Let me ask this question in that connection: In
the temporary fund that is now established for nonmember banks,
what percentage of those banks that are in the fund were permitted to
come in without building up and strengthening their capital struc?
ture!

BANKING ACT OF 1 9 3 5

Mr. CROWLEY. The national banks and State member banks, you
understand, came in automatically.
Mr. WiLLiAMS. That was not the question. I asked about the non
member banks. Were they permitted to come in without building up
or strengthening their capital structure!
Mr. CROWLEY. We have some 8,000 nonmember State banks, and we
have rebuilt or have in process of rebuilding close to 4,000 of these
banks.
Mr. WILLIAMS. In other words, only half of them were able to
come in without rebuilding tBeir capital structures 2
Mr. CROWLEY. That is right.
Mr. CLARK. Following out that line of inquiry: you said that 50
percent did not need help to reopen because of the confidence the
public had in them. Isn't that correct, that a large part of them
had to have help because confidence had to be reestablished, rather
than the financial structure! If everyone had reopened automatic
ally and the public had been in the frame of mind it was just before
the holiday, there is no way of knowing what percentage of the 50
percent could have withstood the shock!
Mr. CROWLEY. The first thing you had to do was to reestablish
confidence.
Mr. CLARK. And then, after you did that, 50 percent could reopen;
and in 1933 we had approximately 6 billions of capital in our banking
structure !
Mr. CROWLEY. That is correct.
Mr. CLARK. And there were approximately 31 billion dollars that
we set up in the form of liquid assets. That made a total col
lectible, assuming the capital was sound, of 37 billion dollars and
there were 57 billion dollars of deposit liabilities. That left 20
billion dollars actually frozen.
Now, had those banks at that time had the rediscount privilege,
of taking a large part of their frozen assets to some place where
they could have gotten money on them, as a matter of fact, we
would not have had much more than 5 billion dollars of frozen stuff
in the banking system.
Just roughly and approximately, how close is that to correct!
Mr. CROWLEY. Of course you would have been able to have post
poned this th in g by loaning the banks m oney.

When the Reconstruction Finance Corporation was originally set
up it was with the idea of lending money to the banks in order to
meet that withdrawal. But the way it worked out, on account of the
whole economic crash, it in reality only preferred one depositor over
the other. When the banks finally did have to close the assets of
many of them were pledged for bills payable, and the depositor
who was an unsuspecting individual was left with the frozen assets.
There is only one thing that rediscount is good for; that is, to
take the place of liquidity; but it can never take the place of sound
ness.
Mr. CLARK. I understand that; but the terrible crash might have
been held off.
Mr. CROWLEY. You might have carried it along for a while; but
throughout the whole economic system the values were shrunk so

BANKING ACT OF 1 9 3 5

much that the assets in fact were not there. You might have had all
the rediscount privilege that you wanted; but, if you did not have
the values there, it would not have prevented the crash. At best you
would merely have deferred it.
Mr. WiLLiAMS. If they had had a chance to rediscount this paper
on real estate and other securities that ordinarily are good securities^
would not that have kept the values from shrinking, the fact that
they had that privilege?
Mr. CROWLEY. You mean the forced liquidation that forced values
down?
Mr. WiLLiAMS. Yes.
Mr. CROWLEY. That always has a tendency to force values down.
The CHAIRMAN. Gentlemen, we cannot Rnish today, and we
want to put other witnesses on the stand to go over the technical
features of the bill; and I have an idea that we might meet again
about Tuesday morning and resume this discussion, and unless there
is something to interfere with that we will adjourn.
Mr. BROWN. I would like to just get a little more information on
section 8.
In your statement, Mr. Crowley, you said that a rate of approxi
mately one-third of 1 percent would cover all losses that have oc
curred during the past 70 years to depositors. What I am inter
ested in is this: How do you arrive at one-twelfth of 1 percent as
being an adequate Rgure? I assume, of course, that you take into
consideration the fact that you are speaking of all losses on page
19 of your statement; whereas, in the bill, in your recommendation,
you are speaking of losses on deposits of $5,000 or under. But is a
rate of one-twelfth of 1 percent adequate in view of the experience
of the past 70 years?
Mr. CROWLEY. I do not think that the banking experience of the
past 70 years is necessarily a fair criterion, for the reason that I do
not believe this Government should assume the responsibility of the
supervision of the banks if our system should be the same as it was
throughout the last 70 years.
In other words, I do not believe that our banking system is correct
if we are going to have the same proportionate amount of losses as
in the past.
Now, we will not have those losses if we do not let our banking
system build back to that 30,000 banks again. One of the biggest
defects in our banking system has been that we have had too many
banks, and we have had a great many banks that could not employ
the proper kind of management.
We arrived at the one-twelfth of 1 percent in this way: we do not
believe that one-twelfth of 1 percent will build large enough reserves
for the Deposit Insurance Corporation for the future, but the earn
ing capacity of the banks right now is very low. We are interested,
8rst, in the banks having sufBcient income themselves so that they
may take their losses currently and so that they may build reserves
for the future. That is the greatest protection to the Deposit Insur
ance Corporation.
I would rather give up 50 percent of our income and have the
proper supervisory powers than to have $5,000,000 or $10,000,000
more income and not have the proper supervisory powers. I think
the success of this thing comes back to, Hrst, the proper safeguards

BANKING ACT OF 1 9 3 5

for this corporation to protect itself. The banks must pay a fair
share of this income. A contribution from other sources to help to
build our reserves might be considered.
Mr. BROWN. Assuming that we are unable to improve the banking
system, then what, based upon the experience of the last 70 years,
should the rate be in order to be adequate? In other words, what
percentage would it have to be to cover losses up to $5,000 deposits,
on the basis of the experience of the past 70 years?
Mr. CROWLEY. Take out, if you will, those last 4 years.
Mr. BROWN. Yes; take those out.
That is, for all banks.
Mr. CROWLEY. One-eight of 1 percent will take care of all deposits
except those in banks which closed during the years of banking
crises.
Mr. BROWN. No. That is for all deposits. That is not for the
deposits of $5,000 and under.
Mr. CROWLEY. It is one-tenth of 1 percent for the deposits o f
$5,000 and under.
Mr. BROWN. That is one-tenth of 1 percent instead of one-twelfth
of 1 percent?
Mr. CROWLEY. That is right.
Mr. BROWN. It strikes me that your figures are very reasonable.
Mr. CLARK. I do not want to g( ' ' '
'igmal point, but
confer with his
I wish that Mr. Crowley would
associates and, when he comes back Tuesday, tell us if he would
have any objection to such an amendment as Mr. Goldsborough pro
posed and which was mentioned for discussion, whereby, in addition
to the fixed liability at one-twelfth of 1 percent, the Deposit Insur
ance Corporation might, at any time when, in its discretion, the Cor
poration decided that it was necessary, levy an additional assessment
of one-twelfth of 1 percent in any one year.
Frankly, I want to go along with the Corporation just as far as
I can, because of the views that I have expressed, and I would like
to know, at your next apnearance here, whether your Corporation
would or would not be interested in the amendment proposed by
Mr. Goldsborough.
(Thereupon, at 12:30 p. m., the committee adjourned until Tues
day, Feb. 26,1935.)

BANKING ACT OF 1935
TUESDAY, FEBRUARY 26, 1935
H oU SH OF REPRESENTATIVES,
COMMITTEE ON B A N K IN G AND CURRENCY,

W<z#A^y%w, D. C.
The committee met at 10:30 a. m., Hon. T. Alan Goldsborough
presiding.
Mr. GOLDSBOROUGH. The committee will come to order. Judge
Birdzell, Mr. Steagall is out of the city this morning, which is the
reason why I am occupying the position that he usually occupies.
Judge Birdzell, you will proceed in your own way, please; and
it seems to me that it would be better for you to complete your
statement, and if it is agreeable to the members of the committee,
we will have it that way.
M r . WiLLiAMS. I think that that would be the m ost satisfactory
w ay o f handling it, the more orderly way.

Mr. GOLDSBOROUGH. All right, Judge.
STATEMENT OF L. E. BIRDZELL, GENERAL COUNSEL, FEDERAL
DEPOSIT INSURANCE CORPORATION

Mr. BiRDZRLL. Mr. Chairman and gentlemen of the committee, we
have reached a stage in the insurance of bank deposits where we
contemplate going onto a permanent basis, and we are at some ad
vantage now in planning for permanent deposit insurance because
we have had more than a year's experience with deposit insurance
under the provisions of existing law, which provided for temporary
insurance.
We thought that we would be remiss in our duty if we did not
bring to your committee all of the information that has become avail
able to us by reason of our experience with the temporary plan; and
we thought, too, that we would be remiss in our duty if we did not
bring to you gentlemen suggestions for legislation which in our
opinion will improve the plan for permanent deposit insurance as
outlined in the Banking Act of 1933.
In all of our consideration of the matter, we have been brought
repeatedly to the conclusion that Congress planned wisely in plan
ning for permanent insurance, and when you consider the conditions
in which the permanent insurance provisions of the Banking Act of
1933 had to be framed, frankly we marvel at the completeness of the
plan that was written into that law.
I have circulated to the members of the committee a parallel print
containing in one column the proposed act as contained in title I of
the proposed banking act of 1935, and in another column the provi
sions of the existing law.

BANKING ACT OF 193 5

I f you have read that print carefully and made comparison, I
think you will be impressed with the fact that we have followed
very closely the plan of the existing law in outlining a plan for
permanent insurance in the proposed law. There are places where
it would seem that we had taken out of the existing law subsections
and completely rewritten them, but if you will follow the text in
the instances where that appears to have taken place, you will find
that, after all, we have followed very closely the ideas as they were
expressed in the existing law*
I want to tell you very briefly why we considered that it was
necessary to make the number of changes that are proposed to be
made in this proposed act. In the first place, when we consider
this legislation we must consider it from a historical standpoint.
The deposit-insurance features of the Banking Act of 1933 were
features that were written into a bill that was under consideration
prior to that time, known as the " deposit liquidation act" It
provided for a deposit liquidation-corporation, which was to be
capitalized by a Federal Government subscription, and also by sub
scriptions to the stock of that corporation by the banks which were
members of the Federal Reserve System, that corporation was to
be authorized to loan money upon the assets of closed banks, and to
purchase the assets of closed banks, the primary purpose being to
provide for the liquidation, and speedy liquidation, of those banks
in the interests of the depositors.
Upon that structure was really superimposed the provisions for
permanent deposit insurance. That act had contemplated applica
tion only to Federal Reserve member banks, and consequently when
the insurance features were added, it was at first contemplated that
only Federal Reserve member banks would be insured. Later the
provision was made for extending the insurance to nonmember banks
voluntarily; that is, they could come in by voluntary application.
It was contemplated that a deposit liquidation corporation could be
conservatively operated, and consequently it would be in a position to
make money—that is, it would make a fair return upon the capital
employed in that particular business. Consequently provision was
made that it should pay to the Federal Reserve member banks a
dividend on the capital thus employed.
'
I think, gentlemen, that you will probably agree that if you were
considering a corporation to insure deposits in banks generally, and
limited to that, at the expense of the banks, or at cost to the banks,
that you would not have had in mind any provision for dividends on
the stock that would be purchased by the banks in that same corpora
tion, because they would get the benefits of it automatically as the
costs were kept down.
So the dividend provisions of that act are not strictly applicable to
a corporation that limits its functions to the insurance of bank
deposits.
Since that act was intended to apply to banks which are members of
the Federal Reserve System, and since permanent insurance was pro
vided according to a certain schedule whereby all deposits would be
insured in some amount—you are familiar with the schedule; $10,000
insured 100 percent, up to $50,000 insured ?5 percent, and above
$50,000 insured 50 percent—provision was made in that law for sub-

BANKING ACT OF 1 9 3 5

rogation rights of the corporation in case it went in and paid off a
closed bank, paying out to the depositors according to that schedule,
and that law provided that if the corporation paid off the depositors
in the closed banks, the corporation should succeed to all of the rights
of the depositor against the closed bank. .
So, you see, the corporation would enjoy the right to subrogation
to the extent of all of the claims of depositors against the closed
bank.
Now, during the progress of the.passage of that law there was
added to it, as you know, subsection (y), which provided for the
insurance of bank deposits in a temporary fund which should be
operative prior to the time when the permanent plan would become
operative, and that insurance was limited to $2,500, and subsequently
increased to $5,000.
There was no change made with respect to those provisions of law
embracing the rights of the corporation to be subrogated to the
rights of depositors upon paying off, but I think you will agree
with me that a subrogation provision that gives to the corporation
the right to be subrogated to the entire claim of the depositor against
the closed bank, where all of his deposit is insured to some extent, is
not appropriate and should not be. applied where we are only insur
ing his deposit to a limited extent, as $2,500 or $5,000.
So it was necessary to change the subrogation provision of the
existing law. In fact, you gentlemen may remember that in the
act passed last June, provision was made for changing that sub
rogation feature, and it was approved by the House, but, unfortu
nately, it was stricken out in the conference, and never became a
part of the law. I indicate that history to you, that we have deposit
insurance superimposed upon a corporation originally intended to
be a deposit liquidation corporation. I give you that history so
that we may better have in mind the necessity for some changes if
the functions of the corporation are to be limited to insurance, as we
think they should be.
You gentlemen may recall that last year, when the extension of
the temporary plan was under consideration, the Corporation was
pointedly asked by gentlemen on this committee why it had not
exercised its functions as a liquidation coijporation, because both
functions were expressed in subsection (a) o f that bill, and you will
recall that the Corporation presented to your committee, I think,
satisfactory evidence that the liquidation function, so far as the
banks were concerned, was being performed quite satisfactorily by
the Reconstruction Finance Corporation. All of the money was
being advanced on the strength of the assets that it was thought
could be advanced upon a sound basis, but to make assurance doubly
sure your committee recommended the amendment of the Recon
struction Finance Corporation Act, which would authorize that Cor
poration to proceed with liquidation loans upon a more liberal basis
than it had in the past, and the recommendations of your committee
became a part of the law.
So that the liquidation end, as applied to banks that had already
closed, is practically taken care of now by the Reconstruction Finance
Corporation, and for that reason subsection (a) has been changed
by the omission from it of that language which was especially ap
plicable to the function of loaning money to member and nonmember

BANKING ACT OF 19 3 5

banks that had closed for the purpose of making those funds
available to depositors.
Now, I do not know in what manner you gentlemen may desire
to consider this act; that is, whether you want now to take the
time to go through it section by section, but I can very brieSy, I
think, indicate to you the main changes that have been made, and
then I will be very much pleased if I might be of any further assist
ance to the committee by way of answering any questions that may
occur to you.
I just explained the reason for the omission in subsection (a) of the
provisions relating to the loans to member banks.
Mr. SissoN. What section is it you are referring to ?
Mr. BiRDZELL. That is on the first page, subsection (a).
The. next section deals with the management of the Corporation,
and is changed in one respect. Our Corporation is operated by a
board of three directors. The Comptroller of the Currency is one
director. The Chairman of the Corporation spends all of his time
directing the affairs oF the Corporation, and frequently the Comp
troller may be at some remote part of the country when it is neces
sary to have a meeting of the board; and in order to have a quorum,
it is sometimes necessary to wait until the Comptroller's return or,
possibly, call in the Deputy Comptroller.
Sometime ago I furnished to the board of directors an opinion to
the effect that in the absence of the Comptroller the Deputy Comp
troller could function, but that opinion is based upon inference, and
it ought to be provided expressly in the law that in the absence of
the Comptroller a Deputy Comptroller may function in his stead
as a member of our board.
The remainder of what material you find on page 4 and page 5
consists of definitions, and those definitions have been made with
a view to convenience in constructing the remainder of the act, to
remove any ambiguity, and so forth. I think it is not necessary to
point that out, except that that is all new matter, and it is there for
the purpose of facilitating the drafting of the remainder of the act.
I do want to call attention to paragraph 11 on page 5, where we
have defined the term " deposit":
The term " deposit" means the unpaid balance o f money or its equivalent
received by a bank in the usual course o f business and for which it has given
o r is obligated to give unconditional credit to a commercial, checking, savings,
time, or thrift account, or which is evidenced by its certiiicate of deposit, and
trust funds as provided in paragraph (5) of subsection (h ) of this section,
together with such other obligations o f a bank as the board o f directors shall
find and shall prescribe by its regulations to be deposit liabilities by general
usage.

Then there is a proviso which I am skipping here, and then it is
provided:
The board o f directors may by regulation further define the terms used in
this paragraph.

All that there is in the existing law by way of defining deposits is
simply the use of the term " deposit." We have questions arising, for
instance, as to whether or not the uncollected funds of a bank that
on a given reporting day may amount to many hundreds of thousands
o f dollars in the case of a large bank are a deposit.

BANKING ACT OF 1 9 3 5

You are familiar with the fact that as items are deposited in a
bank for collection they are deposited under an arrangement whereby,
while credit is immediately given, that credit cannot be drawn upon
until the item is completely collected. Is that a deposit as of that
time or is it only conditionally a deposit?
We have seen fit to clarify that in this expression here by con
sidering only the credits which have been made unconditionally.
Uncollected funds at any particular date are not a deposit lia
bility, although it may be more or less appropriate that reserves be
calculated on such funds.
For our purposes, the uncollected items are not considered de
posits, and we thought it well to have that definition in the Jaw,
but we think that Congress cannot, in an enactment of this char
acter, so define the term " deposits *' as to cover every conceivable
situation.
In the existing law we are referred to the definition of " deposits "
according to the Federal Reserve Board. The Federal Reserve
Board defines deposits for purposes of Rxing reserve requirements.
Under this provision, our definition of " deposits " may be inde
pendent of the definition of the Federal Reserve Board.
Take an item like cashiers' checks, for instance. I f we said that
a cashier's check is a deposit, maybe we would be imposing by
definition artiScially and arbitrarily on given types of transactions.
I f a bank issues its cashier's check to pay its rent, for instance, the
one to whom that check is issued may have no account in that bank at
all, and the account upon which it is drawn is the account of the bank
itself. There is no reason why a cashier's check given for a purpose
like that should be considered a deposit liability.
When it comes to paying off the deposits of a bank, a cashier's
check, however, may be purchased by a depositor and used by him
the same as he would if he had purchased a draft. In that event,
that type of cashier's check should be considered a deposit liability
upon the closing of the bank and also for purposes of assessment.
I give you that merely to show you that it is necessary to have some
leeway for the board of directors to define deposits within the terms
of the law, and it would be extremely difRcult to put all of the
definition into an act of this sort.
Mr. WOLCOTT. You say in this provision: " The board of directors
may by regulation further define the terms used in this paragraph."
Do you not think it would be better to qualify that to the extent
that you just mentioned?
Mr. GOLDSBOROUGH. Would it be feasible for you to defer that
inquiry until he gets through with his statement ?
Mr. BiRDzELL. Do you w ant m e to answer th a t?
Mr. WOLCOTT. No ^ go ahead.
Mr. BiRDZELL. The next change that I w ou ld call you r attention to
is the change that you w ill 6nd on page 8.
Under the existing law, it is the duty of the Comptroller of the
Currency, in the case of national banks and of the Federal Reserve
Board in the case of the Federal Reserve member banks, to cer
tify those banks as being solvent in order to qualify them for mem
bership in the permanent fund.
In view.of the work that has been done by way of building up cap
ital structures, and in view of the character of supervision of the

BANKING ACT OF 19 3 5

banks in the national bank and Federal Reserve system, we have
thought that that provision is now altogether unnecessary. However
appropriate it might have been if this act had been put into effect a
short while after the banking holiday, we think it is no longer nec
essary, and so all banks which are members of the Federal Reserve
System now come into the fund without any further certificate on
the part of the Comptroller or on the part of the Federal Reserve
Board.
The State banks, nonmembers of the Federal Reserve System, that
are now members of the fund, likewise come in on the strength of the
examinations previously had and on the strength of their member
ship in the temporary fund.
Under the existing law, the nonmember banks, to qualify for
membership in the permanent funds, would have been required only
to have subscribed for stock. In the new set-up, since we are not
providing for any dividends on stock—we are not providing for
bank ownership of stock at all—they come into the permanent fund
automatically.
Then, with respect to banks coming in subsequently, if a bank
be not a member of the Federal Reserve System, if you will look on
pages 8 and 9 you will find that provision is made lor banks which
are not members of the system to come in, and as to national banks
which may not be members of the fund, they come in on the same
basis. National banks which are not members of the temporary
fund are national banks located in the Territories, for instance, in
Hawaii and Alaska. These are national banks which are not mem
bers of the Deposit Insurance Corporation and not members of the
Federal Reserve System.
Mr. HoLLisTER. Did you not skip new matter on page 6? You are
taking this up consecutively, are you not ?
Mr. BnmzELL. Yes.
Mr. HoLLisTER. You were discussing the definitions ending up on
page 5. Did you not skip all of that matter on page 6, with respect
to the capital stock ?
Mr. BiRDZELL. Did you have something that you wanted to inquire
about on that?
Mr. GOLDSBOROUGH. May I say that Judge Birdzell exlained that he
would just go over this in his own way.
Mr. BiRDZELL. I was only calling attention to some of the main
features.
Perhaps I should say a word with respect to that change in the
capital structure of a corporation.
M r . HoLLisTER. I do not w ant to interrupt your Row o f t h o u g h t
Mr. BiRDZELL. I think it is well to call that to your attention.
Mr. HoLLisTER. I th ou ght th at you m ig h t explain the whole th in g
as you w ent along.
Mr. BiRDZELL. Provision is made on page 6, at the bottom of the

page, for doing away with the dividends on the stock, and a capital
set-up is provided, whereby the capital stock of the corporation is
treated as consisting of the shares subscribed for prior to the effective
date. That includes the $150,000,000 subscription by the Federal
Government, and the $139,000,000 subscription by the Federal Reserve
banks. That stock is declared to be of nominal or no par value, and
provision is made for the exchange or reissue thereof, and the consid

BANKING ACT OF 1 9 3 5

eration received for the capital stock may be allocated to capital and
to surplus in such amounts as the board of directors shall prescribe,
and such stocks shall have no vote and shall not be entitled to the
payment of dividends.
The class B stock, the stock for Federal Reserve banks, was not
entitled to dividends under the existing law, but the Government
stock, the $150,000,000, plus the class A stock which would be sub
scribed for by the banks upon becoming members of our corporation,
would be entitled to dividends, and those are the features that are
changed.
The provision made for the allocation of the capital to capital
and surplus is, we think, appropriate in view of the fact that these
funds are supplied for the use of the Corporation for insurance pur
poses, and if a time should come when it would be necessary to utilize
some of the surplus funds of the Corporation in meeting losses, we
would not want the Corporation to be operating with an impaired
capital, and that could be avoided through proper allocation.
Now, in making provision for the entry of new banks or newly
applying banks into the Deposit Insurance Corporation, provision is
made for the board of directors passing upon the qualifications of
those banks for membership in the Corporation. That, we think, is
a very necessary provision in the interest of having the Corporation
function upon a sound basis. Through that, of course, reasonable
protection ought to be given to the insurance funds of the Corpora
tion.
A different test is laid down in this law from that laid down in the
existing law. This law, as it will come into effect, we anticipate,
much more than a year after the temporary pian started in operation,
could appropriately provide that the banks have sound capital. The
test of solvency laid down in the emergency period in the original
act was a test of solvency for an emergency period where banks were
permitted to insure their deposits without regard to the existence of
a sound or legal capital structure.
If you will turn to page 9, in the middle of the page, paragraph 2,
you will find this language:
Before approving the application of any such State nonmember bank, the
board o f directors shall give consideration to the factors enumerated in subsec
tion (g ) o f this section and shall determine, upon the basis o f a thorough
examination o f such bank, that its assets in excess o f its capital requirements
are adequate to enable it to meet all o f its liabilities as shown by the books of
the bank to depositors and other creditors.

Likewise, the fore part of that deals with certiRcates by the Comp
troller with regard
a national bank, and he must likewise certify
to the Corporation with respect to a newly chartered national bank
and the same factors are to be enumerated in the certiBcate that is to
be given. These factors to be considered by the board of directors
and the Comptroller are the financial history and condition of the
bank, the adequacy of its capital structure, its future earnings pros
pects, fhe general character of its management, the convenience and
needs of the community to be served by the bank, and whether or not
its corporate powers are consistent with the purposes of this section.
That follows largely the provisions of the present national bank
law with respect to the chartering of new national banks by the
Comptroller of the Currency. Mr. Crowley has already explained

BANKING ACT OF 1 9 3 5

in his statement the practical necessity for some such requirement as
that.
The next section, or, rather, the paragraph on page 10, deals with
the assessment. The assessment rate prescribed there is one-twelfth
of 1. percent upon the total amount of liability of the insured bank
for deposits, using the term deposits as used in the previous section,
which I read to you a moment ago. That is based on the average at
the close of business on the last d
" ^
i ^ - ithose dates are chosen by reason
a call by the Comptroller of the Currency on those two dates. It is
convenient, of course, to have the certificates to our Corporation based
upon those same calls.
The assessment plan provided in the existing law should be con
trasted with this. Under the existing law banks becoming mem
bers of our Corporation and insuring their deposits are required to
subscribe for stock in the amount of one-half of 1 percent of their
deposit liability. They must pay immediately one-half of that,
which makes one-fourth of 1 percent on their entire deposit liability.
Thereafter there are no stated payments to be made.
The obligation for further payments is expressed in this fashion:
As the banks close, it is the duty of the Corporation to set up on
its books an account wherein it will place the estimated debit bal
ances. When any bank closes the Corporation is required to make
an estimate of the ultimate amount of loss and that will be a debit
balance. There is provision for the adjustment of that debit bal
ance. Later on, if there is a greater loss than anticipated, more is
charged to it; if there is less, a credit is given, and when the aggre
gate of those debit balances reaches one-fourth of 1 percent of the
deposits in all of the banks that are insured, another assessment is
levied of one-fourth of 1 percent.
So that the successive assessments under the existing law cannot
be anticipated. An assessment would be made on the first of July
of this year, and there might not be another one for 2 years, or
there may be another one in 10 months.
Under this proposed plan an assessment is fixed at a certain figure.
It is due at a certain time and the payments are to be made at a
certain time.
Mr. DiRKSEN. Does the last portion of that subsection contemplate
a different rate for mutuals than for other banks ?
Mr. BiRDZELL. It contemplates giving to the Corporation the power
to prescribe a different rate for mutuals. You gentlemen who lis
tened so patiently during our hearings last year will remember that
very frequently the question of how this proposal or that would
aff&:t mutual savings banks, and their attitude, came up. I remem
ber that you listened very patiently one day to the president of
the National Association of Mutual Savings Banks, and 1 think that
we all became impressed at that time with the fact that mutual sav
ings banks did create more or less of a problem in relation to any
activity of this sort, and the problem is to deal with them in a way
that is fitting to their particular function.
To illustrate, in the Banking Act of 1933, you made mutual sav
ings banks eligible for membership in the Federal Reserve System,
and yet I think that there are no advantages to be gained by mem
bership in the Federal Reserve System that can be enjoyed by mu-

BANKING AuT OF 1 9 3 5

tuai savings banks when they become members of the System. I
think that you gentlemen were generally impressed with that a year
ago.
Furthermore, the type of investments of mutual savings banks,
and the character of their supervision, have been such in this country
that it has been asserted—I am not an economist and I am not as
serting this in an authoritative way—but it is asserted by some that
on account of limitations as to investments and on account of the
character of supervision of mutual savings banks, and the type of
business that they do, they are a favored risk. I am not saying
that Congress ought to recognize that they are a favored risk from
an insurance standpoint, but possibly, in view of their characteris
tics, it is proper to allow them to be considered in a class by them
selves, separate and apart from commercial banks, and to give a
limited discretion to a board that is constantly confronted with the
problems presented from that particular group-----Mr. FoRD. Might I make an observation there ?
Mr. GOLDSBOROUGH. Mr. Ford, it was agreed when we began that
we would postpone the question until he had 6nished.
Mr. BiRDZELL. The thought is that there are limitations with re
spect to the character of their investments that do not obtain with
respect to commercial banks, and on account of that the mutual sav
ings banks have argued that they have a more favorable experience
than the commercial banks with respect to. failures. I am not ex
pressing any opinion as to whether or not the arguments of the
mutual savings banks in that respect are sound. That is for the
economists and the statisticians to consider.
There is one provision in that subsection dealing with the assess
ments that I want to speak of. That is on page 13 with regard
to trust funds. You may have noted earlier that in defining " de
posits " express reference was made to trust funds as elsewhere de
fined and provided for, and that reference is here on page 12.
We have found the banks quite concerned, and, of course, we
have been seriously concerned, with the problem as to the protection
of uninvested trust funds. Many national banks have trust depart
ments. Many trust companies do a trust business exclusively, and
some of the trust companies do both a trust business and a banking
business. In the transaction of their business, there will be on hand
at any given time a considerable volume of cash that will be unin
vested. They say that that cash is trust funds, and not a deposit,
but if a bank closes, I fear the situation would be the other way
from the standpoint of the patrons of that trust company.
From the beginning we have required banks to report as deposits
any amount o f trust funds that were on hand and uninvested, be
cause we felt that in the event of a closing we would be liable for
those deposits.
Now, among trust companies, in doing their ordinary business,
it is the practice of many of them to establish relations with com
mercial banks, so that they will deposit large amounts of money,
uninvested trust funds, in those commercial banks. That relation
ship is not like the ordinary correspondent relation of one bank
with another, one commercial bank with another, and, furthermore,
in the event of the closing of a bank, that fund cannot properly be

BANKING ACT OF 1 9 3 5

treated; that is, that particular kind of deposit cannot properly be
treated as belonging to one depositor because it belongs to all of
those who are patrons of the trust company and who under their
various interests would be entitled to that cash.
So that we have provided here for the insurance on trust funds
in a way that we think meets that situation. If a trust company
be a member of our Corporation, and if in the transaction of its
trust business it has idle funds which it places with some bank, that
bank, being the bank where those funds are deposited, should report
the entire amount of those deposits, and in the event of anything
happening to the bank where such funds are deposited, we should
look to the trust company, likewise a member of our Corporation,
to establish a beneficial ownership of those various trust funds in
that individual bank. Provision is made for the bank paying the
assessment on those trust funds, and in event of the failure of a
bank containing such funds, we will look to the various trust estates
in the trust company to determine the ownership and extent of the
claim that may be made on the closed bank.
I could outline that more in detail, but I think that that is enough
to give you an idea.
Now, there is a discretionary power, or, rather, a power of a super
visory nature, expressed at the bottom of page 12, in paragraph 1
of subsection (i). It reads, in part:
Wherever the board o f directors shall Rnd that an insured bank or its di
rectors or trustees have continued unsafe or unsound practices in conducting
the business of such banks or have knowingly or negligently permitted any o f
its oHicers or agents to violate repeatedly any provision o f this section or o f
any regulation made thereunder, or of any law or regulation made pursuant
to law to which the insured bank is subject, the board o f directors shall Rrst
give to the Comptroller o f the Currency in the case o f a national bank or dis
trict bank, to the authority having supervision in case of a State bank, and
also to the Federal Reserve Board in case o f a State member bank, a statement
o f such violation by the bank for the purpose of securing a correction o f such
practices or conditions. Unless such correction shall be made within such
period o f time not exceeding 120 days as the Comptroller o f the Currency, the
State authority, or Federal Reserve Board, as the case may be, shall require,
the board of directors, if it shall determine to proceed further, shall give to
the bank not less than 30 days' written notice o f intention to terminate the
status o f the bank as an insured bank, Bxing a time and place for a hearing
before the board o f directors or before a person designated by it to conduct
such hearing, at which evidence may be produced—

and so forth.
I read that to you to show you how the board proposes to secure
corrections of dangerous practices in banks. In the first place, I
call your attention to the fact that we do not deal directly with the
bank. I f we have a complaint as to the practices of a State bank,
while we have a report of that bank, a report of the examination
upon which the complaint may be based, we take that up with the
State supervisory authority in an attempt to get a correction from
there, but we are not altogether dependent for our protection upou
the action of the State supervisory authority, for, obviously, if the
correction should not be made, the Corporation ought not to be sub
ject to the continuing hazard of the operation of that bank. So pro
vision is made whereby the Corporation, after ample time for cor
rection and after hearing, can terminate the relations of the bank
with the Corporation.

BANKING ACT OF 1 9 3 5

Provision is made, of course, for the continuing protection of the
depositors, even after the bank shall have terminated.
Mr. DiRKSEN. Is not 2 years a rather long time for that ?
Mr. B nm zELL. Possibly it is; it may be a little longer time than
is needed, although we think we would rather err on the side of
having the time too long than too short, because any law of this
sort ought to be so constructed that it will deal absolutely fairly
with depositors, and we can conceive of cases where depositors might
not be able to obtain information with reference to the status of the
bank within any short period of time.
I think that we can pass those provisions, for our present purposes
at least, because this discussion is apt to become altogether too long.
There is one change that I would like to call attention to, on page
15, in the fourth paragraph, subsection (j). Provision is made
there that when suits of a. civil nature at common law or in equity
may be brought in which the Corporation shall be a party, they shall
be deemed to arise under the laws of the United States, and the
district courts of the United States shall have original jurisdiction of
all such suits; and the Corporation as defendant in any such suit
may, at any time before the trial thereof, remove such suit from a
State court, into the district court of the United States. That is
for the purpose of securing uniform interpretations of any provi
sion of this act of Congress.
There is a similar provision with respect to the Federal Reserve
banks.
Another feature that perhaps I should have mentioned earlier,
but it is appropriate to mention it here, is that the existing law was
constructed upon the principle that apparently did not contemplate
examinations of banks by the Corporation, because it was to be lim
ited in the Rrst instance to banks which are members of the Federal
Reserve System. When Congress provided for the temporary in
surance, in (y), it authorized the Corporation to examine the non
member banks in order to admit them into the temporary fund, and
it authorized them to examine those banks as often as it might deem
necessary for its own protection.
Now that we contemplate a permanent insurance extended to nonmember banks, it is of course appropriate that there be an express
provision in the permanent act authorizing the examination of banks,
so that is provided for in the eighth paragraph, which enumerates
the powers of the Corporation, where before it was contained in
subsection (y). There is jfurther provision made in paragraph 2,
below that, on page 16.
Then, on page 17, there is express provision for access by the Cor
poration to the examinations made by the Comptroller o f the Cur
rency, and also to the reports of examinations of any Federal Reserve
member bank.
There is one other provision that I w&nt to speak of, on page 18,
in subsection (1). I f yom mould , Head the existing subsection (1)
and the Rew subsection (1 ^ you would Rnd that they are practically
the same, although oa account of the other changes that had to be
made with reference to stock; for instance, there were frequent ref
erences to banks which are class A stockholders, and that reference
runs all through subsection (1), eliminating provisions for class A
stock made it necessary practically to rewrite subsection (1), but
127297— 35------5

BANKING ACT OF 1 9 3 5

the present subsection (1) is to all intents and purposes the same
as the original. The language is much the same, with the exception
that the subrogation right which I explained a moment ago is ex
pressed differently in the proposed subsection (1). Upon paying the
insured deposit liability to a depositor, we are subrogated only to
that portion oi his rights against the bank which he would have had
by virtue oi the deposit which we paid to him.
An illustration would, of course, make that clear. I have a $10,000
deposit in a bank that has closed. This Corporation can only pay
me $5,000 on account of that deposit. What rights shall I give to
the Corporation in order that I may get my $5,000 insurance?
Shall I give the Corporation my rights arising on the whole $10,000?
or only with respect to the $5,000 ?
Under the terms of this act that we are suggesting, I give my
rights only to the extent of $5,000, and I retain the right to dividends
as to the remaining $5,000. Under the existing law, I would have
to give all of my rights to the Corporation in order to secure my
insurance.
Then one other significant change is made with reference to the
means of making available or the vehicle for making available the
insured deposit liability to the depositors. We use a term here that
we call a transferred deposit. We authorize a transferred deposit
credit to be set up either in a new national bank or in any other
insured bank in the locality, giving to the board of directors a dis
cretion to utilize an existing bank in the community rather than to
do the artificial thing of setting up a new national bank in the com
munity. If the board does set up a new national bank, it is operated
just the same as the new national bank would be operated under
the existing law, and the board has the same discretion with refer
ence to whether it shall receive deposits or not, with reference to
whether it shall be capitalized or not, that it has under the existing
law.
Now, the subrogation right that we speak of is expressed on the
top of page 20, if you are interested particularly in that.
One further feature with regard to the pay-off provisions gen
erally. Under the existing law, there is no limitation, apparently.
We may find it difRcult to find a depositor determined to make a
claim. In fact, we have had to advertise already for depositors to
come in in some instances and make their claims. We should not be
subjected to a continuing liability. We step in at the closing of the
bank, and we are ready and anxious to pay out the insured deposit
liability in that community so that the community will scarcely
realize that there has been a bank failure, but we ought not to be
subject to a continuing liability of those who do no come in within
a year's time and 61e claims with us.
So provision is made for a year's statute of limitations, and that
does not mean, of course, that the depositor loses all of his rights
if he does not come in and claim his share. He loses all of his right
to insurance, but he still has his claim against the bank, and if we
are the receiver of that bank, we will have to treat him the same as
other creditors are treated.
Now, it seems to me that I have covered all of the principal
changes.

BANKING ACT OF 1 9 3 5

Do you think of anything more that I ought to touch on, Mr.
Crowley 2
Mr. CROWLEY. I think that you might explain to them a little
more in detail about this liquidation in pay-off, the reason we want
to bring it in here, to shut on that expense.
M r. BiRDZELL. Yes. M r. Crowley reminds me of one change in
connection with the pay-off feature that I should have commented
upon, but which I omitted to mention.
Where, under the existing law, we set up a new national bank, there
is just one thing that we can do with that bank, and that is to keep
it alive for 2 years. To keep it alive for 2 years may involve a lot
of useless expense. After that bank has served its purpose, and paid
off 90, 95, or 99 percent of the insured liabilities in that community,
we ought to be given discretion to fold it up and say to the people
that have not come in, " You may present your claim at the district
ofHce of the Federal Deposit Insurance Corporation ", because we
have offices in most of the Federal Reserve districts, or we ought
to be able to pay to them, " Present your proof to the head ofHce of
the Insurance Corporation." There is no need, in other words, of
requiring that this bank shall be kept in operation for 2 full years,
so provision is made here whereby as soon as the active period is
over in that locality, if there is no further need for that institution
there, we can deal with it in the manner that I have just indicated
in the interest of reasonable economy.
Mr. HANCOCK. Ip that what you propose in the new act?
Mr. BlRDZELL. Yes.
Mr. HANCOCK. I thought that you were asking Congress to relieve
you-----Mr. GOLDSBOROUGH. Let him finish his statement, please.
Mr. HANCOCK. I should not have asked that question now, but I
have such a different impression from him about that, that I thought
he might be mistaken about it.
Mr. BiRDZELL. I hope that I have made it clear that we may op
erate a pay-off in a particular case without setting up a new bank
at all.
Mr. HANCOCK. You did not make that clear.
Mr. BiRDZELL. I f I did not make it clear, I want to do so. When
I spoke of the transferred deposit, I said that the transferred deposit
may be set up either in a new bank or in an existing insured bank.
If, for instance, the community is one where there may be a desire
to set up a State bank, or where there may an existing, operating
State bank that is insured, we can set up in that existing, operating
State bank, or in a new State bank that may be at once capitalized
and become insured, transferred deposits to the credit of all of the
depositors in the old bank, and to the extent of the insured amount
of their deposits—that can be done, and that is a new feature. There
is one other feature that Mr. Crowley suggests.
The act as it is proposed will become effective upon its approval,
which will mean that immediately the permanent plan may be put
into effect; but provisions are inserted in the act that will enable
every bank, whether it desires to come into the permanent plan or
not, to have the benefit of insurance on its deposits until July 1st,
as provided in the existing law. In other words, while this act may

BANKING ACT OF 19 35

become effective as a permanent insurance plan immediately upon
its approval, any bank that is not a member of the Federal Reserve
System that desires to withdraw may do so upon giving notice
within 30 days after approval, but its deposit will continue to be
insured until the 1st of July of this year.
One other provision with respect to Federal Reserve membership.
Provision is made in the existing law whereby nonmember banks
may enjoy the benefits of insurance in this Corporation until July 1,
1937, without becoming members of the Federal Reserve System.
Our experience up to date with insured banks is a strong indication
to us that two types of banks, at least, which we have in the fund,
will not Rnd it to their advantage, except for some wholly arti&cial
reason, to ever become members of the Federal Reserve System, and
those two types of banks are mutual savings banks and Morris Plan
or industrial banks.
So we propose in this act to amend the provision with respect to
Federal Reserve membership so as to exclude Morris Plan banks,
industrial banks, and mutual savings banks from that requirement;
and that will mean simply this, that commercial banks desiring to
continue insurance after July 1, 1937, will be required to join the
Federal Reserve System.
Mr. DiRKSEN. May I ask a question at that point?
Mr. GOLDSBOROUGH. I would like to proceed in accordance with
seniority, on one side and then the other. Mr. Hancock.
Mr. HANCOCK. I am not sure that he is through.
Mr. GOLDSBOROUGH. Are you through?
Mr. BiRDZELL. Perhaps I ought to compnent on this, that there is
one provision of law—it is paragraph 5 on page 32—under which
we can require banks to protect themselves against loss through insurance—fidelity insurance, burglary insurance, and that sort of
thing. It reads:
Each insured hank shall provide such protection and indemnity against bur
glary, Rdelity, and other similar insurable losses as the board o f directors, by
regulation, may require adequately to reimburse the bank for such losses.
Whenever any insured bank fails to comply with any such regulation the Cor
poration may contract for such protection and indemnity and add the cost
thereof to the assessment otherwise payable by such banks.

We can give you an illustration of a bank in operation today
wholly by reason of the fact that it does have burglary insurance.
A large amount of money was taken from that bank. The insur
ance company is contesting the claim. We looked into the claim,
and we think that it is a good one against the insurance company,
but the company contends that it is not liable for more than about
one-eighth of the loss. I f they are not liable for the loss, that bank
is insolvent today.
In view of the fact that its deposits are insured, and in view
of the fact that the bank's attorneys and we feel that that bank has
a fair prospect of recovering from the insurance company, that bank
is operating today.
We think that we are entitled to whatever protection can reason
ably be required of banks against losses that we know to be rather
of frequent occurrence—defalcations, burglary, and the like.
We have also made provision in here to protect State banks against
robbery, and so forth, where those banks are members of this Cor

BANKING

^CT OF 1 9 3 5

poration. You gentlemen would be surprised, perhaps, to know that
in a number of instances ofEcers operating State banks have written
in to us and suggested that some provision ought to be in the Federal
law which will operate as a deterrent to bank robbers, because they
say that their local authorities are absolutely at a loss to deal with
those situations and that bank robbers take advantage of that and
consequently rob the State banks, with almost immunity from
prosecution.
The experience is different with regard to the Federal Reserve
member banks, and the insured banks want to be given the same pro
tection that is accorded now to the Federal Reserve member banks,
so that the criminal features of the law in that respect have been
extended to cover insured banks.
Now, I would be glad, indeed, if I may assist the committee any
further by answering questions that might be based upon any feature
of the proposed act.
Mr. GOLDSBOROUGH. Mr. Hancock, have you any questions that you
want to ask at this time ?
Mr. HANCOCK. I do not know. What is the pleasure of the com
mittee as to proceeding? How much longer are we going to sit!
Mr. GOLDSBOROUGH. We will proceed to half past 12, I presume,
unless there is some objection on the part of the committee.
Mr. HANCOCK. There are two or three questions that I would like
to ask Judge Birdzell.
I am very frank to say that I have not given the time and thought
to this proposed legislation that I do intend to give to it ; but based
upon the statement made the other day by Mr. Crowley with respect
to the amount of assessment on the banks, as I understand the new
law, the Corporation would have the right to levy an annual premium
of one-twelfth of 1 percent on the total deposit liabilities. Is that
correct ?
Mr. BiRDZELL. The act itself does that.
Mr. HANCOCK. Is that discretionary with the Board ?
Mr. BiRDZELL. No; that is the assessment rate that is prescribed in
the law. There is provision, however, that would give the Board a
discretion to lower the assessment at some future time, if experience
seemed to warrant it.
Mr. HANCOCK. What do you mean, exactly, by lowering the assess
ment, Judge ?
Mr. BiRDZELL. Suppose, for instance, that we went on for 2 or 3
years and added very materially to our reserves through assessments
collected, and suppose that we had added, we will say, $75,000,000 to
our funds available to meet losses. Suppose further that we had had
favorable experience all the way through; and suppose that we
should come upon a day when the banks were not earning, so that
they might complain—this assessment would take substantially, you
see, 1 percent on the entire capital of the bank; and suppose that
they would say, " Your reserves are up; your experience is favorable;
it is a hardship for us to meet this; can you not reduce the assessment
for this particular year? " or for a particular 6 months' period. It
is collected in two installments.
Mr. HANCOCK. Under the law, how much could you reduced!
Mr. BiRDZELL. Not more than 50 percent.

BANKING ACT OF 1 9 3 5

Mr. CROWLEY. Let me say something about that to Congressman
Hancock.
I do not think that this provision, where you might have a right
to reduce the assessment, could be hoped to be operative for a great
many years. The Corporation should build up its surplus. I do
not think that the board would look with favor toward reducing
the assessment in the event it got a surplus of only $75,000,000, be
cause I do not think that is adequate.
Mr. HANCOCK. The point that I am trying to bring out is that I
got the impression the other day, from the statement presented by
Mr. Crowley, that it was the judgment of the Corporation that the
banks should not be responsible for all of this insurance protection.
Mr. CROWLEY. I think that that is correct, Mr. Congressman.
Mr. HANCOCK. That is the phase of this that I want to discuss
with you, to And out how much protection you think should be fur
nished by the banks and what contingent liability you think should
exist against the Government.
Mr. CROWLEY. I think this, Mr. Congressman, we must correct
the evils of the past. If we are going to have the same loss ratio
that we have had in the last 12 years, then I do not believe that the
banks can carry that load themselves. I cannot conceive of this
Congress or any other Congress not recognizing the necessity of
correcting some of the abuses of the past. I f we can correct and
strengthen our banking system, then the amount that might have to
be asked from some other source may be a very nominal amount,
maybe nothing at all. If, however, we are to have a crisis again
like we had in 1933, this fund could not take care of the demands
upon it. I think that the losses of this fund will be nominal in the
Aext few years. In the meantime, the Corporation should continue
to build its surplus, so that in 10 or 20 or 25 years from now, if you
have trouble like we had, perhaps, with some of our smaller com
munities, our fund would be suScient to take care of the demands
without calling on the banks for an additional burden at a time
when they are under as heavy a load as they can carry.
Mr. HANCOCK. I , of course, appreciate the splendid purpose be
hind your viewpoint there, but what I am thinking about is this, that
your statistical department has evidently made exhaustive studies in
order to arrive at a fair assessment, and one that would be protec
tive, and it seems to me, from my recollection of your statement the
other day, that you said that to protect the depositors in all failures
that had occurred from 1864 to 1934, it would have required an as
sessment of one-third of 1 percent, and to eliminate from that period
what we might term the panic years, it would have required oneeighth of 1 percent.
Mr. CROWLEY. That is right.
Mr. HANCOCK. Now, you arrive at an assessment of one-twelfth
of 1 percent.
Mr. CROWLEY. As I understand it, if you eliminate the periods
of depression, I think that our figures show that one-tenth of 1 per
cent would take care of those losses on a $5,000 limit.
Mr. HANCOCK. I fully appreciate the wisdom and desirability of
keeping the rate as low as possible to prevent it from being burden
some to the banks, especially today, but now we are engaged in

BANKING ACT OF 1 9 3 5

writing a peimanent law, and the suggestion has been made here
that it is not the purpose of the fund to protect the depositor. Am
I correct?
Mr. CROWLEY. I do not think that is correct, Mr. Congressman.
What I really said was this, that if we were to be given certain
supervisory powers we could protect ourselves. You might go back
to 1920, when you had 30,000 banks. We lost nearly 15,000 banks
from 1920 to 1933. A great many of our overbanked conditions
have been washed out.
If we do not make the same mistakes as before and do not let
this overbanked condition come back again, and if we can protect
ourselves by going into a weakened institution and perhaps buying
the assets or absorbing losses in order that mergers can be brought
about, we are going to get away with a much lower loss. If we are
given power to protect ourselves from loss, then I believe that this
corporation can get along with a reasonable income. On the other
hand, if we are just going to drift as in the last few years, then I
do not believe you can assess against the good banks sumcient money
to take care of the weaker banks without crippling the capacity of
the good banks to write off their losses currently.
When it is all said and done the strength of the fund depends
upon the banks being so well run and their earning capacity being
suRicient to allow them to take their losses currently in place of let
ting them accumulate. I think everyone will agree that a good
many banks permitted their losses to accumulate. Some of these
banks even paid dividends, whereas they should have written off
their losses.
I think that this fund should eventually build a suiEciently large
surplus so that in the ordinary regional depressions—not a depres
sion like 1933—this fund could pay its losses promptly without mak
ing an assessment against the Government or the banks.
Mr. HANCOCK. I notice that in the new act you propose to vest dis
cretion in the board of directors with respect to the allocation of
your capital fund—and I am just asking these questions in order
that we may have a record before us. I am wondering if, in making
that request, there is an implied suggestion that a situation might
arise whereby you would prefer to resort to that fund in paying your
losses rather than to levy an assessment ?
Mr. CROWLEY. No. Our assessment of one-tenth of 1 percent or
one-twelfth of 1 percent will bring us in from 30 to 39 million
dollars a year. Supposing that during the Rrst 2 years, before
you built up any surplus, you should have a serious failure. I f
we were to pay that loss, we would pay it out of capital and im
mediately have an impaired capital. I do not think it makes any
difference to the Government whether they have a no-par-value
stock or $100,000,000 capital and $200,000,000 surplus, or whether
they have that all in capital, because that money was given to us
for the purpose of aiding us in paying losses. Only to have the in
come from that money, while it is helpful, is not enough. In other
words, the psychological effect of our Corporation would be better
if eventually we had $100,000,000 capital and $500,000,000 sur
plus----Mr. HANCOCK. Yes; I understand that thoroughly.

BANKING ACT OF 1 9 3 5

It was my impression that, to begin with, that capital fund was
not to be used to pay losses. Is that correct ?
Mr. CROWLEY. I do not know what else they gave it to us for, then.
Mr. HANCOCK. My understanding was that it was more or less for
back-log or reserve.
Mr. CROWLEY. It if was not a reserve for losses, what was the
purpose of giving it to us ?
Mr. HANCOCK. Under the original act, of course, you had the
right to expand three times the amount of the capital structure.
Mr. CROWLEY. Yes; but when you get to the point where you are
expanding and borrowing, that does not create confidence. That
you would only do in case of dire necessity.
Mr. HANCOCK. Surely the capital upon which you expand your
credit should be the last thing that you would touch.
Mr. CROWLEY. That is the reason why we are asking for a re
duction in the capital, so that we do not touch that capital. That is
the reason why we do not want to impair our capital.
Mr. HANCOCK. What is going to happen to the amount of $139,000,000 that we took away from the Federal Reserve banks and
allocated to your Insurance Corporation?
Mr. CROWLEY. Well, as I see it, it does not change their position
any. One hundred thousand dollars worth of stock in a corporation
that is worth $100,000, and that has no surplus, or $100,000 in a
corporation with $10,000 capital and $90,000 surplus, does not affect
the real value of our investment.
Mr. HANCOCK. You probably did not catch my point. I under
stood that a trade arrangement had been made whereby the Federal
Reserve System would sell its stock to the Treasury Department. Do
you know anything about that?
Mr. CROWLEY. I do not recall.
Mr. HANCOCK. Is it not a fact that the Federal Reserve System
has sold $20,000,000 of that stock to the Treasury!
Mr. CROWLEY. That is in your industrial loan act of last year.
Mr. HANCOCK. That was an indirect way that they had of doing it.
Just one other feature at this time, Mr. Crowley.
One of the most important and attractive features of this act to me.
to begin with, was when our chairman emphasized that under the law,
in event of a failure, the Corporation would immediately set up a new
institution, so that the business of the community could go along
smoothly. I recognize that there may be times when to do that
would be futile, when it would be improper, and when it would be
unwise, but I think that it would have a very serious effect if the
board here should decide, as a matter of policy, not to carry out the
original provision with respect to that section. Of course, there
would be no sentiment in a community to set up a new bank on the
failure of a bank, but in time every community would want the
assistance of this Corporation in building up a new banking struc
ture in that community, and I do hope that this board will not act
arbitrarily in that matter in worthy cases.
Mr. CROWLEY. I do not think there is any doubt but what the
board is sympathetic with the idea of giving to every community
a bank as long as that community needs that bank. Let me tell
you what our experience in the past has been. For instance, we paid
off at Pittsburgh. Pittsburgh already has a great number of banks.

BANKING ACT OF 1 9 3 5

We have stayed there for several months now, and an expense is
accumulating against us every day. We went into Indiana and we
paid off an institution there. That community has sufHcient banks
all around it. There are a great many instances in the cities where
you have two or three banks and where two banks can take care of
that community well.
Mr. HANCOCK. I know that the board has been acting wisely and
has done splendid work, but can it not be assured in some way that
where there is only one bank in a community, the Corporation would
always replace the closed institution ?
Mr. CROWLEY. Let me say to you that I think you have to take
some of this on the faith of the Corporation. The Corporation now
has operated for some 15 months, and I think the great majority
of the small bankers feel that we have been very sympathetic with
them in trying to understand their problems. You men are here
every single year. If the Federal Deposit Insurance Corporation
gets too autocratic in some of these things, you men will immediately
put something in the law to stop that abuse.
Mr. HANCOCK. Nothing that I have said has suggested that I feel
that way.
Mr. CROWLEY. I understand that.
Mr. HANCOCK. Now, here is one other point that I want to clear
up, and then I am through.
Could not some arrangement be made with the insured member
banks whereby they would agree with the Corporation that the un
expended balances in trust funds were actual trust funds, and not
deposits ?
Mr. CROWLEY. Judge, that is your end of it.
Mr. HANCOCK. I have had a number of complaints from North
Carolina on that particular point. Why would it not be proper and
perfectly legal for the officers of a bank to enter into an agreement
with you which would clarify the question as to whether they actually
constituted deposits or not?
Mr. BiBDZELL. Then, if the bank should fail, and the owner of those
funds should come to make claim against the Corporation, what
would we say to the owners of the funds?
Mr. HANCOCK. You would just say what the bank ofRcers had said
to
Mr. HANCOCK. If they had enough confidence to put their money
in the bank that was manned by those ofRcers, they certainly ought to
be forced to rely on their agreement.
Mr. BiRDZELL. But it is not the agreement of the depositor. It
would be the agreement of the bank, and the depositor would be in
the position of having his claim unsatisfied. It would be hard for
him to distinguish between what he had coming from the bank in the
shape of uninvested trust funds and what he had coming from the
bank on his savings account. Furthermore, there would come a time
when it would have to be otherwise treated.
Take this situation: Say that it is a national bank that operates a
trust department. The trust funds may be deposited from the trust
department into the commercial department of the bank, and they
may be utilized just as all other funds of the bank are utilized, in
channels of commerce. Now, when the funds are placed at the dis

BANKING ACT OF 19 3 5

position of the commercial department of the bank, or when they
might be deposited in another bank, certainly the persons that are
beneficially interested in those funds should be entitled to protection,
and certainly also they become deposits just like all other deposits in
the bank, and they are used as such.

Mr. HANCOCK. That is all.
Mr. GOLDSBOROUGH. Mr. Hollister.
Mr. HoLLisTER. With respect to the issue of notes and debentures
of the Corporation, the existing law provides that they may issue two
or three times the amount of the capital.
Mr. BiRDZELL. Yes.
Mr. HoLLisTER. They are not guaranteed by the Government,
although they are tax exempt.
Mr. BiRDZELL. Under the proposed law they would not be*
Mr. HoLLisTER. I s that in the proposed law?
Mr. BiRDZELL. Yes; that is in the proposed law, although I did not
cover it.
Mr. HoLLisTER. That is what I thought, that there is no guarantee
whatsoever of that kind, either in the existing law or in the new law.

Mr. BiRDZELL. But the Treasury is authorized to purchase them.
Mr. HoLLisTER. The Treasury is authorized to, but the Treasury
might not purchase them. But there is no guaranty by the Govern
ment of those debentures?
Mr. BiRDZELL. You are correct.
Mr. HoLLisTER. Under the existing law, where there is a provision
that three times the amount of capital may be issued in bonds and
debentures, those debentures can be sold to better advantage because
of the unlimited assessment provision, for as long as losses may be
assessed continually against the banks, there can always be built up
a protection in the Corporation for those who buy the debentures.

Mr. BiRDZELL. That is correct.
Mr. HoLLisTER. But under the proposed law, with a limitation of
one-twelfth of 1 percent a year, it is diiBcult for me to see the possible
market of those debentures outside of the Treasury. Here you have
a debenture that is not guaranteed by the Government, even though
it is nontaxable. Under a set of disastrous circumstances your capi
tal aud surplus might be completely wiped out.
Mr. BiRDZELL. There is a further market provided for those de
bentures, the Reconstruction Finance Corporation, to the extent of
$250,000,000.
Mr. HoLLisTER. Yes; but that would require action by the Govern
ment. I am not saying that it is wrong, but I am merely trying to
get at the change in the whole idea. The original idea was a de
benture which was a sound proposition for private capital, because
of the fact that it had behind it the whole banking system of the
country, under the unlimited assessment idea. Now you have a
debenture which it seems to me has no private market whatsoever,
but is solely valuable insofar as the Reconstruction Finance Corpo
ration or the Treasury would care to invest.
Is not that the case $
Mr. BiRDZELL. Yes.
Mr. HoLLisTER. It really ceases to be a private obligation to be
sold in the market.

BANKING ACT OF 19 3 5

Mr. CnowLEY. It is true that if we had to issue debentures to
private borrowers up to three times the capital, undoubtedly the con
dition would be such that you could not find a ready market. It
might be-possible that you had $300,000,000 in securities and that
you might only want to borrow $50,000. Of course, you could sell
debentures on that kind of a collateral provision.
Mr. HoLLisTER. Of course, the theory in selling debentures would
be to get additional funds in order to satisfy the demands of the
Corporation, and if conditions should arise where it would appear
to be necessary for the Corporation to sell debentures, under the new
law it seems to me that the average private investor, when he would
realize that the only thing back of these debentures is the possibility
of collecting one-twelfth of 1 percent annually, would say, " Not
withstanding the nontaxable feature, that is hardly a thing that I
am interested in."
Mr. CROWLEY. That is true if you had a critical situation.
Mr. HoLLisTER. But would you be selling them unless you had a
critical situation?
Mr. CROWLEY. No; unless you would be doing it for some short
term borrowings. Suppose that you had $3,000,000 in securities and
the market might be temporarily down. That would not affect
your borrowing as long as you had adequate collateral. However,
if we got to a point where we had an emergency, and we had to issue
4 or 5 million dollars of debentures at that particular stage, I do
not believe that the open market would absorb those debentures un
less you had the Government guarantee. The fact that the Secre
tary of the Treasury would come to our rescue if we had that kind
of a condition, however, gives us some confidence.
Mr. HoLLisTER. I am not presenting the view that it is wrong. I
am merely trying to bring out that, after all, if such debentures
under the new law should be issued, some kind of governmental
agency, the R. F. C. or the Treasury, would have to take them.

Mr. CROWLEY. We have $250,000,000 that the R. F. C . have ear
marked for our corporation.
Mr. HoLUSTER. On page 5, in section 11, as to obligations payable
outside of the United States, that affects only a few banks and is put
in there because of the foreign competitive situation, is it?
Mr. BiRDZELL. It affects banks that have European branches, or
branches in outlying possessions, like Puerto Rico.
Mr. HoLLisTER. Was that not included in the bill that passed the
House last year, but which never got through the Senate ?
Mr. BiRDZELL. No; that is the old law.
Mr. HoLLisTER. Section 11, on page 5?

Mr.
Mr.

BiRDZELL. Where is the provision that you are referring
HoLLisTER. The proviso at the bottom, which reads:

to ?

.P!r<M77<%e<7, That any obligation o f a bank which is payable only at an oiRce o f
the bank located outside the States o f the United States, the District o f
Columbia, and the Territories of Hawaii and Alaska shall not be a deposit for
purposes o f this section or be included as a part of total deposits or o f an
insured deposit.

Mr. BiRDZELL. That was in the omnibus bill, which
through.

did

not get

BANKING ACT OF 19 35

Mr. HOLLISTER. And that is there because, if they had the cost oi
the insurance to add to their operating cost, they would be in a bad
competitive situation in a foreign country!
Mr. BiRDZELL. Yes; that is the purpose of that, if I understand
your question, and that provision there is consistent with the provi
sion in last year's omnibus bill.
Mr. GOLDSBOROUGH. Mr. Williams.
Mr. WiLLiAMS. To my mind, there are two very fundamental
things in this bill.
First, I am thinking about what you are going to do with some
8,000 nonmember banks that are not in the permanent insurance plan,
and which will not be under the provisions of this bill.
In the second place, there is the question of a limited liability.
Now, it is not contemplated, is it, that there will come a time when
these insurance deposits will not be paid in full?
Mr. CROWLEY. You mean that these funds will not be suHicient?
Mr. W iLL iAM S. Yes.
Mr. CROWLEY. It is my honest judgment that if you will give to
this Corporation the supervisory powers that we have asked for, that
this Corporation should be able to keep itself solvent, barring unfore
seen accidents.
I f this country cannot operate a banking system so that the depos
itors will not suffer losses that may break this Corporation, then
there is something distinctly wrong with your banking system and
your monetary system. That calls for a corrective measure far
beyond the powers of the Federal Deposit Insurance Corporation.
Now, I believe that this Corporation can operate and pay to depos
itors their losses with any kind of normal conditions.
Mr. W iLL iAM S. That is perhaps true.
Mr. CROWLEY. I hope it is true.
Mr W iLLiAM S. I am not so much concerned with the power of the
Board to reduce this assessment as I am with the power to raise it in
case it is necessary, in order to take care of the liabilities of the
Corporation.
Mr. CROWLEY. You understand that while the Corporation would
look with favor on all of the revenue that you can give us, neverthe
less you cannot have an unlimited liability or a liability so large
that in times of stress you may weaken your entire banking structure.
Mr W iLLiAM S. Then your whole system, at the very time that it
is needed the most by the depositors of the country, breaks down ?
Mr. CROWLEY. I think that is where supervision comes in—to pre
vent that.
Mr. W iLLiAM S. You have the supervision which will do it.
Mr. CROWLEY. Correct.
Mr. W iLL iAM S. But why not, if you say that you can administer
the law in such a way as to prevent those losses by the discretion and
the power that is in the Board, increases the assessment in case it is
necessary ?
Mr. CROWLEY. I think that there is a danger that deposit insurance
might break down the private initiative of men who are trying to
operate these institutions. We have a great many banks that we
are insuring almost 100 percent. Men operating these banks will
not have the same incentive as those which are operating banks only
5,10, or 15 percent insured.

BANKING ACT OF 1 9 3 5

Mr. W iLLiAM S. Of course, you agree that we do not need any
insurance as long as there are no bank failures.
Mr. CROWLEY. I think that you will always have a certain number
of bank failures, but it is like anything else—like your hospitals or
your railroads or anything. If you have an epidemic in Washing
ton where everyone ini Washington is sick, your hospitals are not
large enough to care for them. You cannot build this fund large
enough to pay out 16 or 19 billion dollars overnight.
Mr. W iLLiAM S. Then it is based upon the idea that you may have
a condition where you could not pay out ?
Mr. CROWLEY. I think everyone will agree that we could not pay
out our entire liability at one time.
Mr. W iLLiAM S. What other contingent funds have you in mind if
the assessment fails ? What else would you do ?
Mr. CROWLEY. We have our right to borrow from the Treasury.
That is all we have.
Mr. W iLLiAM S. You are assuming, now-----Mr. GOLDSBOROUGH. You do not mean the right to borrow? You
mean that the Treasury is authorized to loan if necessary ?
Mr. W iLLiAM S. You mean that under this act the borrowing power
is confined to the Treasury Department alone?
Mr. CROWLEY. And to the $25,000,000 from the R. F. C.
Mr. W iLLiAM S. Under this act, are private individuals permitted
to lend you money on your debentures s
Mr. CROWLEY. Yes; they are permitted to do it.
Mr. W iLLiAM S. If they want to?
Mr. CROWLEY. Yes; if they want to!
Mr. W iLLiAM S. If there is a private field for the investment, they
are permitted under this law to invest in your debentures!
Mr. CROWLEY. That is correct.
Mr. W iLLiAM S. You have that power?
Mr. CROWLEY. That is right.
Mr. W iLLiAM S. What is the purpose of allocating the capital struc
ture of that institution to surplus ?
Mr. CROWLEY. I do not think that allocation of capital has any
thing to do with the right of borrowing.
Mr. W iLLiAM S. It is the intention to use that in case of need to pay
the losses!
Mr. CROWLEY. Yes. We may take-----Mr. W iLLiAM S. The idea back of it is that the money that is re
ceived from the Federal Reserve banks and from the Treasury should
be used as a reserve fund to pay these losses, rather than from the
banks themselves ?
Mr. CROWLEY. That is correct.
Mr. WILLIAMS. Now-----Mr. CROWLEY. Let me answer that. I think the Government, when
it licenses a bank and establishes a banking system, assumes a respon
sibility to the depositors, and when it created this Corporation I think
that it assumed a responsibility for the protection oi the depositors.
I do not believe that any man argues that we should continue to permit
losses to occur as has been the case in the last 12 years.
Mr. W iLLiAM S. Nobody will contend that, I think, but you expect,
by reason of your regulatory powers, and by reason of reports made to

BANKING ACT OF 193 5

you, and your inspections, to regulate, within reasonable grounds, the
banking activities of the country and to prevent these failures?
Mr. CROWLEY. But, Congressman, we do not guarantee to prevent
failures entirely. We hope to reduce the number of failures.
Mr. W iLLiAM S. That is so, and the very purpose of all this insur
ance, according to my idea, should be to guarantee, in case of failure,
the payment of the depositors in full.
Mr. CROWLEY. I think that is correct, but I do not see any way in
the world that you can draft a bill or that you can give us sufficient
funds, so that you could say that at all times, regardless of whether
you have a complete collapse of your banking system, this Corpora
tion could pay the losses of all depositors.
Mr. W iLLiAM S. Could you conceive of a complete collapse in the
banking system of this country now, under the supervision of your
Corporation and of the Federal Reserve system?
Mr. CROWLEY. All that I can say to you is this: I believe that under
our rebuilding program, the banks as a whole are in the best shape
that they have been in a great many years* With the proper kind of
supervision we should not have the losses that we have had in the past.
Mr. W iLL iA M S. Now, merely to furnish a factual background, there
are about thirty-six billion and a half in deposits now, are there not?
Mr. CROWLEY. That is correct.
Mr. WiLLiAMS. W h a t part o f that is in tim e deposits?
Mr. GOLDSBOROUGH. Would it be agreeable for you gentlemen to
come back tomorrow morning?
I want to say to the members of the committee that there is a
gentleman here from California who has to go back tonight, and he
and Mr. Ford have both asked that he be allowed to put a statement
in the record.
Mr. Adams, will you come up here, please?
It is very important, Mr. Adams, that the members of the com
mittee get to the floor of the House as quickly as possible, and I am
wondering if you could limit your statement to 10 minutes, and then
give to the members of the committee the written statement which
you left with me the other day.
STATEMENT OF EDSON F. ADAMS, PRESIDENT FARMERS AND
MERCHANTS SAVINGS BANK, OAKLAND, CALIF.

Mr. ADAMS. I think that I would have to read the statement, Mr.
Chairman, in order to make it clear. I f I did not do that, I do not
think that they would grasp it.
Mr. GOLDSBOROUGH. You will proceed, then.
Mr. ADAMS. It appears quite necessary at this time that the Bank
ing Act of 1933 and Federal Deposit Insurance Act be amended
covering certain important matters as they now injuriously affect
banks doing a strictly savings bank business and, also, mutual sav
ings banks of the Middle Western and Pacific States which are
not numerous enough to protect themselves by establishing a savings-deposit guarantee under State authority, as has been done in
the State of New York.
Briefly, the main changes requested in the present laws are as
follows:

BANKING ACT OF 19 3 5

First, savings banks, doing no commercial business, and mutual
savings banks should be placed in a class or group by themselves
instead of being required to join in guaranteeing deposits in banks
doing all types of banking.
Second, savings banks should be granted the right to obtain in
terest on deposits with approved commercial banks of reserves and
surplus funds awaiting the demand for savings bank loans*
Third, savings banks and mutual savings banks should not be
forced to join the Federal Reserve System to obtain insurance, since
they do no commercial business, and, therefore, are not able to avail
themselves of its facilities*
Fourth, savings banks in the West should be granted the right
to allow depositors to use checks against short-notice savings
accounts, in order to protect their term-savings accounts against
competitors. State savings banks in California have had this right
for many years.
As to savings banks guarantee of all types of deposits, if the
country is to have permanent-deposit insurance, the great criticism
of the present act is that all banks are put together in one group,
when their methods of business are, in many cases, diametrically
opposed, some pay interest on practically all of their deposits, while
others pay no interest on any deposits and therefore require entirely
different handling of their resources.
It appears there should be two or three Federal Deposit Insurance
Corporations, based on the actual liability involved, instead of one,
with separate oiBcers and garuanties for each corporation represent
ing each group of banks, and with provision for representation on its
board of directors; the commercial banks being placed in one group,
the departmental banks in one group, and the strictly savings banks
and mutual savings banks together in a separate group. In this way
each member of each group would be insuring its own type of business,
which would be the only fair way to handle it. Insurance for savings
banks would command a very low rate compared with commercial and
other types of banks. In California all savings-bank loans can be
made only on the highest type of security and the classes of security
and the conservative margins required are plainly stated in our bank
act.
It is neither fair nor just to mutual savings banks and strictly sav
ings banks, as operated under western conditions, to link them with
departmental banks, commercial banks, and trust companies, where
money is shunted from one department to the other, as the oppor
tunity offers to play with the savings of savings depositors. Nor is
this all. In many banks property taken in under foreclosure is
thrown into holding companies owned by the bank's stockholders and
manipulated so as to hide the fact that the bank is carrying property
taken for debt, thereby weakening the bank and deceiving the public.
Real savings banks, operated as such, are a boon to the man or
woman of small means. Conditions in the West are different from
those in the Eastern States, hence codes, rules, and regulations should
vary in each Federal Reserve district to conform to existing conditions
or customs not in conflict with good savings-bank practices.
This is so not only in banking but also in other lines of business:
For example, the Rrst N. R. A. chief in California found that codes
prepared to cover eastern conditions did not Rt those in the West.

BANKING ACT OF 1 9 3 5

National banks under several administrations have been receiving
the individual savings of the people and issuing savings passbooks
showing deposits and the money so received credited to the depositor
as a savings deposit, but here it ends. In practice, from here on, the
money so received is put into and mingled with the other funds of the
national bank, a commercial institution.
In a national bank the people's savings deposits can be loaned on
notes of hand at will be the ofEcials of the bank, and, if they choose?
without any security whatsoever to protect the loan except the per*
sonal responsibility of the recipient of the loan.
In the interest of safety the money so deposited by savings depos
itors should be loaned without the borrower first putting up ample
approved security to secure the money so loaned. In California the
law governing State banks requires that no money received from
savings deposits be loaned either by strictly savings banks, mutual
savings banks, or by a savings department of a departmental bank
except on ample and approved security. These provisions are appar
ently entirely ignored in the National Bank Act.
Mr. GOLDSBOROUGH. I do not believe that it will be possible for the
members to stay, and each member has a copy of the statement that
you are reading, Mr. Adams, and I am going to suggest, sir—and I
want to be of every service that I can to you and your institution—
that you just insert your statement into the record. I can assure
you that every member of the committee will read it.
You have seen how they are leaving. I do not believe that you can
hold them.
Mr. W o L C O T T .-I am staying here merely out of courtesy to you,
and I would prefer to read this in my ofBce, if you are just going to
read it. I understood that you were going to comment on it as you
went along.
Mr. ADAMS. No; the comments are all in it, but I have some addi
tions, in regard to other things.
Mr. WoLcoTT. My opinion is that that which is written you could
put in the record without reading. We have some important legis
lation on the floor.

Mr. GOLDSBOROUGH. The members of the committee really do have
to go on the floor, and, of course, if you were in a position to wait,
we would be very happy to hear you in full. We are extending to
you this courtesy because you have to get back to California.
Mr. ADAMS. I can wait until the end of the week, if there is no
opportunity now.
Mr. GOLDSBOROUGH. I am not sure about it after Friday. On
Thursday we will have to have the home loan bill on the floor, and
I do not know what will happen.
I can assure you that you will receive just as much consideration
if you will just allow that statement to go into the record. This
committe is not going to overlook reading your statement.
Mr. ADAMS. I will tell you: I would like to submit copies of the
letter from Mr. Parker S. Maddux, who is the president of the San
Francisco bank-----Mr. GOLDSBOROUGH. Yes, sir; without objection, it will be inserted
in the record.
Mr. ADAMs. And also from Mr. Richard M. Tobin, who is the
president of the Hibernia Bank, San Francisco.

BANKING ACT OF 1 9 3 5

Mr* GOLDSBOROUGH. Without objection, they may go into the record
at this point.
(The letters referred to are as follows:)
TH E SAN FRANCISCO BA N K ,

Rdit FraMCigco, CaMf., -February 6, J935.
EDSON F. ADAMS, Esq.,

President Farmers <%jMerc7Mnifs Raring
DEAR Ms* AD AM S: You have exhibited to me a statement which you propose
to submit to the chairman and members of the Banking Committee o f the
House of Representatives at Washington. In this statement you suggest four
main changes to be made in the present banking laws o f the United States.
The purpose of this letter is to assure you and the committee that this bank
is favorable to all o f the suggested changes.
Hoping that you have a pleasant and successful trip to Washington, I beg to
remain,
Very truly yours,
PARKER S. MADDUx, President.

H IBE R N IA B A N K ,

Ran FraMc/seo,

Fe6rtMM*y 4,

Mr. EDsoN F. ADAMS, President,
F a r m e r s <6 Jferc?Mt%fs S t m w # R an & , 0aA;2tMM%, C a W

DEAR MR. ADAMS: I have carefully read the draft o f your proposed " State
ment to the chairman and Members o f the Bank Committee."
The four objectives which you cite on the Rrst page are all excellent, and
I approve especially o f the Rrst three.
With best wishes for your success, I remain
Yours very truly,
RICHARD M. TOBIN.

Mr. ADAMS. I might say, in connection with these letters, that the
San Francisco Bank has savings deposits of $151,224,000, and total
resources of $167,847,098. They have 36,731 term savings accounts
and also special savings accounts with checking privileges, 5,800;
making total savings accounts 42,531.
The Hibernia Bank has savings deposits of $87,422,625, and the
total resources are $98,593,230. They have 69,889 savings accounts.
The bank of which I am president, the Farmers & Merchants
Savings Bank, has savings deposits of $7,877,094.96, and total re
sources of $8,385,636.68. We have 10,117 term savings accounts and
19,042 term school savings accounts and 2,317 special ordinary sav
ings accounts, with checking privileges, making total savings ac
counts 31,476. In this bank, the percentage of deposits covered by
Federal deposit insurance is 85 percent.
The Zion's Savings Bank & Trust Co. are also desirous of having
some relief, as is shown by their letter to Mr. Frank B. Lanham,
special representative, Federal Deposit Insurance Corporation, Wash
ington, D. C. Their savings deposits amount to $13,103,232.13.
Mr. CAviccHiA. May I suggest that the gentleman be given time to
hand to you any other communications that he wants inserted in the
record. If he does not have them now, he may hand them in later
in the day.
Mr. GOLDSBOROUGH. That will be entirely agreeable, if there is
anything else.
Mr. ADAMS. I would like to call your attention to this, that, of
course, I have some other things here which go to support my
proposition.

BANKING ACT OF 1 9 3 5

Mr. GOLDSBOROUGH. I am inclined to think that the mutual banks
are going to be taken care of in this legislation. I do not believe
that you are going to find any fault with that.
Mr. ADAMS. I am not a mutual. We are a stock bank, you under
stand, and we have been left entirely out of this bill. The only
people that are referred to in this bill at all are the mutual savings
banks and nobody else, and that puts us in California and in the
West in a bad position. The Zion's Savings Bank & Trust Co., in
Salt Lake City, are, as I have just indicated, in the same position.
Mr. W iLLiAM S. Can you not come into the Federal Savings and
Loan Insurance Corporation?
Mr. ADAMS. No, sir; not unless we join the Federal Reserve Sys
tem, and we have no business in the Federal Reserve System. We
can do no business with them.
Mr. W iLLiAM S. I think that you are in error about that. The law
permits any institution that can qualify to come in.
Mr. ADAMS. We have already joined in the temporary deposit
insurance, you understand.
Mr. GOLDSBOROUGH. And you think that your assessment should
be reduced ?
Mr. ADAMS. Not necessarily, but we do not want to be made liable
for all classes of banking.
Mr. W iLL iAM S. I am talking about the Federal Savings and Loan
Insurance Corporation. I do not know whether you understood
me. The act passed last year by this Congress authorized building
and loan institutions and savings banks of the country to have an
insurance plan. What is the reason that the institution that you
represent cannot come into that plan if it wants to?
Mr. ADAMS. Because we are not a building and loan institution,
as their type of business is entirely different from that of a bank.
The business which we do is of the same character, exactly, as the
mutuals, only that we have stock instead of a mutual association.
Mr. W iLLiAM S. But it includes not only the building and loan
associations but the savings banks and mutual banks as well.
Mr. C A V iccH iA . As I understand it, Mr. Williams, the language of
the act that you are referring to states " and other financial insti
tutions ", which opens the door to this type.
Mr. W iLL iA M S. It not only does that, but it mentions the very
class of institution about which he is talking.
I think, Mr. Adams, that you will find that out upon investi
gation.
Mr. ADAMS. We have not been able to find that, and if we have
to be brought in the Federal Reserve System, then we have to be
come a departmental bank, and we do not want to.
Mr. GOLDSBOROUGH. Let me see if this suggestion will be helpful
to you: I f you will insert what you have there in the record, and
then have an amendment drawn up which meets with your views
and hand that to Mr. Ford, he can then offer it, and we will consider
it with other amendments.
Mr. ADAMS. I will do that, Mr. Chairman, but I wanted to say
this, that you talked of national banks today, and they have savings
deposits amounting to $6,053,020,000, and those savings deposits can
be loaned out on unsecured notes, and there is nothing to prevent

BANKING ACT OF 1 9 3 5

that, not a thing, and they are doing it, and we do not want to be
tied to the tail of that kite, because we do not consider it a safe way
of handling of savings deposits.
I have been in business for 40 years, and I think I know something
about it.
Mr. GOLDSBOROUGH. Prior to today, I thought that your idea was
that your assessment should not be as great as the assessment of a
commercial bank.
Mr. ADAMS. It would not be under ordinary circumstances, if you
took the liability into consideration.
Mr. W iLLiAM S. As I understand you, you want Congress to set up
another corporation, or an insurance company, simply to take care
of the class of institutions that you represent!
Mr. ADAMS. No. This could be done by classifying us, possibly,
with the mutuals, the outside mutuals which you brought in in your
last amendment.
Mr. GOLDSBOROUGH. I f your bank is really in the same class with
the mutuals, insofar as your liabilities are concerned, I am certain
that this committee will deal very justly with any amendment which
may be offered, and I presume that you will want Mr. Ford to offer
it, because, as I understand it, you only have 3 or 4 of these institu
tions in the United States.
Mr. ADAMS. There would be a great many in the United States,
if they had the opportunity.
Mr. GOLDSBOROUGH. I understood you to tell me that there are two
in California and one in Utah.
Mr. ADAMS. What I said was that the two banks in California
had endorsed my propositions.
Mr. W oL coT T . Are y o u under State supervision!
Mr. ADAMS. Under State supervision.
Mr. C A v iccH iA . I think that that matter could be taken care of
by Mr. Ford, who is a member of this committee.
Mr. ADAMS. Yes. Shall I submit this!
Mr. GOLDSBOROUGH. Yes; and it will be inserted in the record and
printed, and your amendment should be prepared and introduced,
I presume, by Mr. Ford, from your State.
Mr. AnAMs. You mean these additional things!
Mr. GOLDSBOROUGH. Yes. They will be inserted in the record. Just
hand them to the reporter.
The remainder of the statement is as follows:
By combinations and other manipulations, banks incorporated
principally for commercial business have acquired the people's sav
ings deposits, sometimes in amounts almost double their commercial
deposits. In one instance, in a published statement, a national bank
has approximately 260 millions in commercial deposits and ap
proximately 460 millions in savings deposits, all dumped into the
same pot and these savings deposits can be handled and loaned
commercially, with all the attendant risks of commercial banking,
while mutual savings banks and savings banks doing no commercial
business, when loaning their deposits, must require ample security for
all loans made. This condition of facts shows very clearly that
banks having only saving deposits should be put in an independent

BANKING ACT OF 1 9 3 5

group by themselves and not be forced to participate in guaranteeing
unsecured loans of commercial banks.
As to interest on reserves of savings banks in correspondent banks,
under the provisions of the Banking Act of 1983, mutual savings
banks are allowed to receive interest upon their deposits (sec* 11, par.
The Legislature of the State of California in 1933, with the ap
proval of the State superintendent of banks, amended the State bank
act. General provisions section 21 (1). This section practically
follows section 19 of the Federal Reserve Act but allows savings
banks to receive interest on their deposits with commercial banks.
SECTION 21. (1) No bank shall, directly or indirectly, by any device what
ever, pay any interest on any deposit which is payable on demand: Provided,
That nothing herein contained shall be construed as prohibiting the payment
o f interest in accordance with the terms o f any certificate o f deposit or other
contract heretofore entered into in good faith which is in force on the date
o f the enactment h ereof; but no such certiRcate o f deposit or other contract
shall be renewed or extended unless it shall be modiRed to conform herewith,
and every bank shall take such action as may be necessary to conform here
with as soon as possible consistently with its contractual obligations: jProvided,
That this section shall not apply to any deposit of such bank
which is payable only at an oRice thereof located in a foreign country, and
shall not apply to any deposit made by a savings bank, nor to any deposit of
public funds made by or on behalf of the State, or o f any county, city and
county, city, town, municipality or other public or municipal corporation of
the State o f California, with respect to which payment o f interest is required
under State law. * * *

There are 594 mutual savings banks in the United States, as of
June 30, 1932, and they are located in the following States;
New England States 379, total resources------- ----------------------------- $3, 711,220, 000
Eastern States 195, total resources---------------- --------------------------- 7,047,074,000
Middle Western States 16, total resources--------------------------------220,708, 000
PaciRc States 4, total resources__________________ ______________
155,140,000
T o ta l_____________________________________________________ 11,134,142,000

It will be noted that 574 are located in the New England and
Eastern States, with resources of $10,758,294,000, while the Middle
Western and Pacific States have only 20, with total resources of
$375,848,000, or approximately 3% percent of the total resources of
the mutual savings banks in the United States.
A law giving to the mutual savings banks of New England and
Eastern States special privileges by not allowing strictly savings
banks in the rest of the country to receive interest from commercial
banks upon their deposits is unjust and unsound. In order to oper
ate savings banks conservatively, so they will be able to pay with
drawals without affecting their loaning ability, it is very essential
that they maintain sufRcient balances in cash with banks duly author
ized by the State banking department, as depositories. Unless a
savings bank has the right to receive some interest from its deposi
tories, the tendency would be to operate with as little cash as possible,
in order to meet the interest to savings depositors, costs of operation^
and other demands of the savings bank business. Under certain
conditions of the money market, this might at times cause the hurried
investment in securities and possibly would encourage loaning on a
poorer type of real-estate security.

BANKING ACT OF 19 3 5

As to savings banks as members of the Federal Reserve System,
the Federal Reserve System was inaugurated to develop the com
mercial banking resources of the country. Savings banks, properly
operated, have practically nothing in common with the Federal Re
serve System and it would be a great injustice to force them to join
that System. They are not able to discount their loans with the
Federal Reserve bank and therefore do not receive the main benefit
accruing to commercial banks which are members of the System.
As to savings banks' depositors being allowed the use of checks to
withdraw funds, the Federal Reserve bank, having in mind solely
commercial business, would probably classify checking accounts
against a certain class of savings accounts, on which checks are used
as a convenient form of withdrawal, as being commercial business
which would not be the case, as no commercial loans are made at all
by savings banks in the State of California. It has been found in
California, under western conditions, that a strictly savings bank, in
order to function properly, must have this type of account. These
accounts are opened principally for personal convenience by savings
depositors, who prefer to do all their banking in one place. They
are not of a type that require commercial accommodation. The bal
ances are moderate and the checking service has been found to be a
benefit to the depositor as well as to the savings bank. Also, fre
quently, people obtain loans from a savings bank, open checking
accounts, and some portion of the money remains with the bank for
a long period.
The savings bank of which I am president has over 2,286 accounts
of this type, aggregating over $780,000, of which only 21 are above
$5,000, and 275 between $500 and $5,000; 1,990 accounts are below
$500, which goes to show that these accounts are in no way commer
cial accounts, but are opened for the necessary personal accommoda
tion of our savings depositors; and it also shows that, in our western
country, the ability to allow a withdrawal by check is extremely im
portant and necessary to any savings bank doing only a savings-bank
business. This class of accounts has a provision for a 30 days'
notice, if the bank should require it.
Our State banking department for years has classified these ac
counts as savings accounts. Where there is strong competition by
departmental banks, savings deposits would be transferred from
strictly savings banks that do not have checking privileges, to other
banks, and would force savings banks to open commercial depart
ments at additional expense, without really wanting to do a commer
cial business, simply to accommodate and give personal checking
service to its savings depositors.
With over 40 years of experience in the savings-bank business, I
have observed that strictly savings bank operated by men versed in
savings-bank administration prosper and serve the public in a better
way than those left to be administered by highly specialized commer
cial bankers, whose main thought is the advancement of commercial
business.
I therefore urge that your committee amend the present acts at this
session of the Congress as outlined in the four changes enumerated,
so that savings banks may safely continue deposit insurance and at

BANKING ACT OF 1 9 3 5

the same time have reasonable protection in operating under western
conditions.
Mr. CAViccHiA. May I remind you, Mr. Williams, that one ques
tion that you asked was not answered, and I hope you will have an
answer as to what will happen to those 8,000 banks ?
Mr. W iLLiAM S. Yes; I am going to go back to that. It is very
important.
Mr. GOLDSBOROUGH. The committee will adjourn until tomorrow
morning at 10:30.
(Thereupon, at 12:45 p. m., an adjournment was taken until
Wednesday morning, Feb. 27, 1935, at 10:30 o'clock.)

BANKING ACT OF 1935
W E D N E SD A Y ,

F E B R U A R Y 37, 1935
HOUSE OF REPRESENTATIVES,

COMMITTEE ON BANKING AND CURRENCY,

Z7. <7.
Hearings on the bill above referred to \vere resumed at 10:30
a. m., Hon. T. Alan Goldsborough presiding.
Mr. GOLDSBOROUGH. The committee will be in order.
Mr. Williams, will you resume your questioning where you left
off yesterday?
STATEMENTS OF LEO T. CROWLEY, CHAIRMAN, AND L. E. BIRD
ZELL, GENERAL COUNSEL, FEDERAL DEPOSIT INSURANCE
CORPORATION— Resumei

Mr. WiLLiAMS. I believe that we agreed that the amount of de
posits in the commercial banks of the country was practically 36%
billion dollars. The last question was, what part o f that is in time
deposits.

Mr. CROWLEY. I am told about one-third. That would be about
12 billions.
Mr. W iLLiAM S. What character of tinie deposits does that involve?
There are different kinds of time deposits*
Mr. CROWLEY. That includes, for instance, savings accounts and
certificates of deposit, where they are not subject to check.
Mr. WiLLiAMS. That means all of the accounts, does it, in which
notice is required before they can be withdrawn; or, in other words,
they are for a definite^ 6xed period and not subject to check at all?
Mr. CROWLEY. That is correct, where you have to give deSnite no
tice of withdrawal.
That does not include postal savings.
Mr. CAviccHiA. Do I understand th at your answer to Mr. Wil
liam s' question includes deposits in savings institutions?
Mr. CROWLEY. No, sir; it does not.
Mr. WiLLiAMS. They are not included ?
Mr. CROWLEY. Would you like some detail on that, Mr.

Williams!
We have some figures here, if you would like to have us read them*
Mr. WiLLiAMS. As fa r as I am concerned, n o ; unless someone else
on the comm ittee wants it more definitely than that.
Mr. CAviccHiA. Does that figure of 36% billions

that you gave
include sums deposited in savings banks and mutual banks?
Mr. CROWLEY. No; it does not; just commercial banks.
Mr. WiLLiAMS. During the last year, or after the passage of the
deposit insurance law and before the creation of this Corporation,

BANKING ACT OF 19 3 5

as I understand it, there have been orders issued by the Federal Re
serve bank and by the Corporation as well concerning the interest
charges to be paid both on demand and time deposits in various banks
that are insured.
Mr. CROWLEY. That is correct.
Mr. W iLLiAM S. What have been the savings to the banks of the
country by reason of those orders and their following out the instruc
tions that were given to them with reference to paying no interest on
demand deposits and limiting the amount that they would pay on
time deposits ?
Mr. CROWLEY. I do not know that we can give that to you. That
is in our testimony, Mr. Congressman, and we will give it to you.
Mr. W iLLiAM S. Perhaps I have your statement on that, but let me
see if I understand it. Do I understand from your statement that by
reason of that action on the part of the banks in not paying interest
at all on demand deposits and cutting down the interest paid on time
deposits there has been a saving to the extent of 26 cents per $100
during the year 1934?
Mr. CROWLEY. As the banks became more liquid, and as the demand
for money became less, the banks themselves declined to pay interest
on daily balances. That was prior to the Banking Act of 1933
Then, Mr. Congressman, in the Banking Act of 1933 it was provided
they could not pay interest on demand deposits, and we then showed
a saving that had been brought about by not paying interest on de
mand deposits. A percentage of that saving was brought about by
the legislation in 1933.
Mr. W iLLiAM S. The fact remains that that was done, regardless
of the cause of it, and that the banks during the last year have saved
about one-fourth of 1 percent on their entire deposits by having cut
down the rate of interest paid to the depositors?
Mr. CROWLEY. That is correct.
Mr. Fox. Our Rgures are based on national banks, and the data is
available for the last half of 1933, the 6 months subsequent to the
passage of the act.
That shows that the savings to all national banks because of the
passage of the Banking Act of 1933, which reduced the interest on
time deposits and eliminated the interest on demand deposits, was
28 cents per $100 on deposits, 2 cents of which was due to a reduction
in the rate of interest on time deposits and 26 cents due to the elimi
nation of interest on demand deposits.
Mr. W iL L iA M S. Then, instead of 26 cents, it is 28 cents per $100?
Mr. Fox. That is correct.
Mr. W iLL iA M S. Which would be between a third and a fourth of
1 percent on all of the deposits in the banks, which in Rgures would
amount to how much ?
(At this point Mr. Crowley handed a paper to Mr. Williams.)
Mr. W iLL iA M S. I would like to have that in the record, to show how
much the banks of the country have served by reason of reductions
in the rates of interest paid during the last year.
Mr. REILLY. Have the banks been reporting how much money they
saved as interest on time and demand deposits?
Mr. CROWLEY. The banking law of 1933 forbids that.
Mr. REILLY. I know, but before that did not they make a speciBc
report of the amounts of money that they paid on demand deposits ?

BANKING ACT OF 19 3 5

Mr. CROWLEY. Y es.
Mr. Fox. The national banks hied reports of earnings and divi
dends every 6 months, and in that report is the section which details
their expenses, and there are three items in that section.
Mr. GOLDSBOROUGH. Will you proceed, Mr. Williams?
Mr. W iLLiAM S. It would be a simple matter of calculation.
Mr. Fox. It is about $43,000,000 per year for national banks.
Mr. W iLLiAM S. $43,000,000 for national banks alone.
Have you any data showing the amount that has been saved by the
Federal Reserve members and the nonmember banks?
Mr. Fox. We could put the information in the record for the
Federal Reserve member banks. We did not until this year have
information on the nonmember State banks. Therefore, we could
not give you that information.
Mr. W iL LiAM S. Your statement of a saving of 28 cents per $100 is
based on the record of the national banks alone?
Mr. Fox. Hhat is correct.
Mr. W iLLiAM S. How does that compare with the State member
banks that you know of?
Mr. Fox. I will have to put that in the record later on.
Mr. W iLLiAM S. You will put that in the record for us?
Mr. Fox. Yes, sir.
Total savings in interest paid on deposits by State member banks
were at the rate of $30,000,000 per year. Expressed another way, the
savings in interest expense to State member banks amounted to 29
cents per year for each $100 of total deposits.
Mr. W iLLiAM S. And you have no information at all with refer
ence to the amount that the State member banks have saved on that
item?
Mr. Fox. No, sir. That is not available at all.
Mr. W iL LiAM S. And it is a fact, is it not, that the State nonmem
ber banks have followed the same policy as the member banks and
the national banks in that respect throughout the country?
Mr. Fox. I think so.
Mr. CROWLEY. I think that is generally true, Mr. Congressman*
In some States they have not.
Mr. W iL LiAM S. Now, it is also true, is it not, that you issued an
order—and I refer to your Corporation—limiting the interest on
time deposits to 3 percent, and then later on formulated, at least,
another order bringing it down to 2% percent?
Mr. CnowLEY. TTiat is correct.
Mr. W iLL iA M S. But that was never put into effect, was it? Some
controversy arose over the legality of it!
Mr. CROWLEY. That is correct. A year ago last December the
Federal Deposit Insurance Corporation and the Federal Reserve
Board fixed a 3-percent maximum. Then last December the Federal
Reserve Board fixed a rate of 2% percent, and we did likewise; and
then the controversy arose, and we withdrew our regulation.
Mr. W iLLiAM S. Then the practice that has heretofore prevailed
throughout the country of paying in certain cases interest on de
mand deposits is a thing of the past, is it not!
Mr. GOLDSBOROUGH. May I suggest to you, Mr. Williams, that in
my section, in the First Congressional District of Maryland, they
are still paying 2% percent!

BANKING ACT OF 1 9 3 5

Mr. WiLLiAMS. But that is not a fact so far as the order of the
Board is concerned?
Mr. CROWLEY. The order of the Board was drawn, but a great
many of the banks, as the chairman says, have followed along on
the 2% percent.
Mr. W iLLiAM S. And they are following that not by your order
or direction but because of their own inclination and perhaps a de
sire to be uniform with the order of the Federal Reserve System?
Mr. FoRD. One big banking group on the coast did not do that
They offered 3 percent; and all of the other banks came to me and
asked me to come down to see you to change it, which I could not do.
Mr. CROWLEY. May I say this, on that matter of time deposits,
first, that I think that history will show that prior to the Federal Re
serve Board and prior to the Federal Deposit Insurance Corporation
issuing their regulations, in years gone by banks paid as high as 4,
5, and 6 percent for what we would term " time deposits." They
offered all kinds of premiums, like blankets and clocks and savings
banks, and the banks which perhaps should not have paid those
high interest rates were the ones that were the most apt to offer to
the depositor an interest rate that was not sound.
Now, the same thing was true of demand deposits. For instance,
a great many of your national corporations would have $25,000 or
$50,000 balances, and the banks would bid for that business; and in
reality in a great many instances it was not of any particular beneRt,
and that was considered as an unsound practice. That is the reason
why in the Banking Act of 1933 you eliminated that abuse, because
it was an unwise and unsafe practice.
Now, the same thing goes for interest on time deposits. What the
supervisory agencies wanted to bring about was that a bank not
only paid to these people a reasonable rate of interest but also gave
them back their principal, because in a great many instances where
the bank paid 4, 5, and 6 percent, the depositors lost a very large
percentage of their principal.
Mr. W iLLiAM S. Is it your idea now that your Corporation should
have the power to direct the members o f your Corporation not to
pay interest on demand deposits and to limit their payments on time
deposits to 2% percent?
Mr. CROWLEY. I think it would be a great contribution to your
banking system if we had that power. There might be given suffi
cient authority, perhaps, that we might take into consideration the
various districts of the United States in regulating that interest.
In other words, we might find that in the East they were able to
put in one rate of interest and in the West another, and under those
conditions the thing to do would be not to make it all uniform,
because in some parts of the country they get a little more money
for their loans.
Mr. W iLL iA M S. But that idea is not contained in this bill?
Mr. CROWLEY. No; it is not; but if you will read the entire Bank
ing Act of 1935, it does give that power to the Federal Reserve
Board.
Mr. W iLL iA M S. Undoubtedly. I think there is no question but
what the Federal Reserve Board has it.
Mr. CROWLEY. And it covers all insured banks in the new act that
has been presented to you.

BANKING ACT OF 19 3 5

Mr. WiLLiAMS. Do you mean by that that the provision with refer
ence to the Federal Reserve Act will cover all insured banks ?
Mr. CROWLEY. That is correct.
Mr. W iLLiAM S. And that is on the theory that they will now have
to come into the Federal Reserve System ?
Mr. CROWLEY. That is correct.
Mr. W iLLiAM S. But on the theory that we are going, perhaps, to
have a lot of them insured that are not in the Federal Reserve System,
what will we do about them %
Mr. CROWLEY. I think that it would be very helpful to the bank
ing system if that were made a part of the permanent insurance act.
Mr. BiRDZELL. If you will turn to page 65 of your printed bill,
H. R. 5357, you will find a provision there relating to interest. Shall
I read it to you ?
Mr. W iLLiAM S. I think from what you have stated about it, it is
not necessary to read it.
The point that I am asking about it is that there are some 8,500
banks of this country that are not in the System; and it is at least my
view that they will not be in it, unless they want to be, and what
will we do with them with reference to this interest charge!
Mr. BiRDZELL. Do you understand, Mr. Congressman, that this
provision of the bill on page 65 that I have directed your attention
to will enable the Federal Reserve Board to regulate the interest
rate for that portion of those 8,500 banks that is insured ?
Mr. WiLLiAMS. I did not so understand it.

Mr. BiRDZELL. That is the provision of the bill.
Mr. W iLLiAM S. Regardless of whether they are in the Federal Re
serve System or not?
Mr. BiRDZELL. Yes, sir.
Mr. CROWLEY. As long as they are insured banks.
Mr. W iLLiAM S. The point that naturally arises in my mind is, why
should the Federal Reserve Board have that authority rather than
the Insurance Corporation, if they are not members of the Federal
Reserve System?
Mr. CROWLEY. It is only just a matter of uniformity; that is all.
You might have a situation where the Federal Reserve System
would have one rate for national banks, and the Federal Deposit
Insurance Corporation would have another one for State banks.
That was the reason, I believe, for putting it all under the Federal
Reserve Board.
However, our Corporation would welcome an opportunity to regu
late the interest rates of the nonmember State banks.
Mr. W iLLiAM S. Now, during the period of time since the banking
holiday, there have been a great many concerted efforts on the part
of your Corporation, the R. F. C., and others to recapitalize and
rebuild the capital structure of the various banks throughout the
country. I believe that we went into that to some extent the other day.
Mr. CROWLEY. Yes, Mr. Congressman.
Mr. W iLLiAM S. And we reached the conclusion that perhaps half
of them had been helped in that way.
Mr. CROWLEY. There have been pretty close to 6,000, and there are
some to be done yet, so you won't be far out of the way in saying that
close to 40 percent have been helped.

BANKING ACT OF 19 35

Mr. WiLLiAMS. I would like to have in the record the Rgures show
ing the capital structure of those banks, say, as of March 1, 1933,
about the beginning of the bank holiday, and as it exists at the
present time.
Air. Fox. It will not be possible to give it for March 1, 1933, for
State nonmember banks. It will be possible to give the book capital
for State nonmember banks as of the 1st of January 1934, virtually
before most of the aid had been put into the banks. However, the
book capital will not necessarily reveal what has been accomplished.
Mr. W iLLiAM S. Unless we had the capital structure existing at the
time these processes were begun, you could not tell what had been
done in that connection.
Mr. CROWLEY. That is very dilRcult for this reason: Suppose that
you had a million dollars in deposits or in assets; you could not deter
mine the position that your capital structure was in just from the
books of your bank, because perhaps you had not taken out your
losses, and perhaps you had not set up any reserve for bonds or for
depreciation, and you really cannot tell that without an examination,
don't you see? In other words, we could not tell what condition the
banks were in in March 1933 until Rrst an examination was made of
them.
Mr. W iLL iAM S. I understand that, except that you could get it from
the books themselves; the capital is there stated, by the books.
Mr. CROWLEY. Yes; but that would be misleading.
Mr. W iLL iAM S. I understand that it may be, but I just wanted to
know what that was as shown by the books; in other words, what was
the capital of the banks of this country.
Mr. CROWLEY. I think the capital was about $6,000,000,000.
We could get that for June 30, and that would be satisfactory.
Mr. W iLLiAM S. Yes. What is it now?
Mr. CROWLEY. About 6 billion dollars.
Mr. W iLL iA M S. Do you mean by that that the capital structure
of the banks of the country has not improved any during the last
year and a half?
Mr. CROWLEY. Here is what happened: We might have had 6
billion dollars in March or June 1933, as far as their books were
concerned. Now, then, they may have had a billion and a half of
losses there that had not been deducted. When we came along with
our rebuilding program, we eliminated the undesirable assets, and
put capital back in.
Mr. W iLL iA M S. But did you not also, in the case of a great many
of the smaller banks, increase that capital?
Mr. CROWLEY. Yes; but we increased-----Mr. W iLLiAM S. I mean not only increased the physical assets, but
that you increased the book value? In other words, you raised the
capital in many cases from $50,000 to $100,000?
Mr. BiRDZELL. Just word with respect to that.
It has been quite a general practice where preferred stock has
been issued and sold to the Reconstruction Finance Corporation for
a bank that issued and sold that prefererd stock to make a correponding reduction of its common stock, so that while the new capi
tal has gone into the banks, the book capital remains substantially
the same as it was before. That is the reason why the present book
capital does not show much change from the book capital as it
might have been shown before the rehabilitation took place.

BANKING ACT OF 1 9 3 5

Mr. WILLIAMS. Now, let us get at it from this angle. How much
in public funds from the Reconstruction Finance Corporation, and
how much in private funds have been put into the banks to rebuild
and strengthen the capital structure during the last 18 months, or
since the bank holiday?
Mr. Fox. Approximately 1 billion dollars has been put in by the
Reconstruction Finance Corporation for recapitalizing the banks,
and we are now estimating what the extent of the local funds that
have been raised was, and while we have only gotten replies from 30
States, it already amounts to about $300,000,000 additional.
Mr. WiLLiAMs. It will, perhaps, then amount to a billion and a
half?
Mr. Fox. At least.
Mr. CROWLEY. I would say much in excess of that, Mr. Congress
man. When you take into account your local contributions, reor
ganizations, and things like that, it will run far in excess of a billion
and a half dollars*
Mr. WILLIAMS. In other words, the capital structure of the bank
ing system of the entire country has been very materially and very
substantially strengthened during* the last 18 months?
Mr. CnowLEY. Pretty close to 50 percent of the banks, before we
get through, will be practically rebuilt.
You asked whether we aided in the increasing of capital. Where
we have rebuilt the capital structures of a great many of these banks,
we have tried through the Reconstruction Finance Corporation and
local contributions to build their capital so that they would have
a ratio between deposits and capital which was larger than the
ratio that they had before.
Mr. WiLMAMS. I was just going to ask you what has been your
policy with reference to trying to create capital and establish a
deBnite relationship between capital and deposits. I understood
you to say that you had been making an eifort to establish some kind
of a ratio between the capital and the deposits of an institution.
That has been your policy, has it?
Mr. CROWLEY. That has been our policy.
Mr. WiLLiAMS. What is the ratio?

Mr. CROWLEY. Where a bank has been able to go all the way
through, even though its ratio of capital to deposits might be less
than 10 to 1, we have not disturbed it. Those were banks that had
been able to carry themselves through, keep their capital intact, had
a good earning capacity, and could build reserves and surplus.
Where we rebuilt a bank we tried to rebuild on a 10-to-l basis.
Mr. WiLLiAMS. What I am trying to get is a general picture of
the bank situation in this country now as compared with what it
was during the 10 or 12 years preceding the bank holiday. When
did we reach the highest peak in the number of banks in this country?
I want to get what happened during that period.
Mr. CROWLEY. We reached it in 1920 or 1921.
Mr. WiLLiAMS. What was it in numbers?

Mr. CROWLEY. About 30,000 banks.
Mr. W iL L iA M S . At the present time there are h o w many?
Mr. CROWLEY. 15,000.
Mr. WiLLiAMS. In other words, we have half as many banks now
as we had in 1920—latep than that, was it not!

BANKING ACT OF 1 9 3 5

Mr. CROWLEY* About 1920 when your failures started.
Mr. Fox. 1921, exactly.
Mr. WiLLiAMS. Yes; 1921 and 1922. And at that time the bank
deposits were about 50 billions?
Mr. Fox. Thirty-eight and a half billions in 1921.
Mr. WILLIAMS. When they were at their peak?
Mr. Fox. When the number of banks was at the peak the deposits
were not at their peak.
Mr. W iLLiAM S. The bank deposits were at their peak about 1928
and 1929?
Mr. Fox. 1930; 59.6 billions.
Mr, W iLLiAM S. Now, during that period from 1922 to 1932 there
was the failure of some 11,000 or 12,000 banks, was there not?
Mr. CROWLEY. That is right.
Mr. W iLLiAM S. Of all kinds and characters, in all sections of the
country, I take it?
Mr. CROWLEY. More of them, Mr. Congressman, in the Northwest.
Your early failures Rrst came, I think, in South Dakota, and then
in northern Iowa—the whole Middle Western country.
Mr. W iLLiAM S. There were, of course, a number of causes for that.
Is it your opinion that we were overbanked; that we had entirely
too maiw of them?
Mr. CROWLEY. Yes; we had too many banks, Mr. Congressman,
that could not make a suiEcient return on their investments or could
not set up reserves to take care of their losses. In other words, a
bank that has a $6,000 gross income, from which it must pay its over
head and set up its reserves for losses, it remains very diSicult for
it, if it has a $2,000 or $3,000 loss in any particular year, to take it
currently.
Mr. W iLLiAM S. That was one thing; that there were too many
banks.
Mr. CROWLEY. And also later, from 1930 on, our banks suffered
terribly by bond depreciation and defaults.
Mr. W iLLiAM S. It was due to another reason, to the fact that they
had invested their money in securities of different kinds at inRated
values?
Mr. CROWLEY. That was a contributing factor to the banking
trouble, and, of course, your economic situation.
Mr. W iLL iA M S. Was it not due to the fact that there had been
rather loose supervisions on the part of the authorities of the State
and Government!
Mr. CROWLEY. You have in this country, under the State system,
48 different types of supervision. It is very diSicult to have State
supervision that will be as efScient as where it is a long way removed
from local pressure.
Mr. W iLL iAM S. And there were other contributing causes to the
enormous number of failures that we had during that time?
Mr. CROWLEY. I think that the large contributing cause, Mr. Con
gressman, was your economic collapse. For instance, in the Middle
West, when your banking trouble started in 1921, that was the begin*
ning of your agricultural trouble. You can say that as your agri
cultural trouble became more severe, your bank failures increased
very materially. Furthermore, they were frozen up in farm and
chattel mortgages and also in bonds that had depreciated to a point

BANKING ACT OF 1 9 3 5

where they could not sell them without taking a severe loss, and
they had nothing to charge their losses to.
Mr. WILLIAMS. It is the hope and the intention now to eliminate
a great deal of that, is it not? This very act itself tries to furnish
a market for long-term rediscount paper ?
Mr. CROWLEY. That is correct.
Mr. WiLLiAMS. And to avoid that situation in the future, and also
by having supervisory control, regulatory control over these various
institutions by your examinations and your reports, it is the hope
to eliminate many of the bad practices that have existed before, is
it not?
Mr. CnowLEY. That is right.
Mr. W iLLiAM S. And, of course, it is also the intention further to
prevent the establishment of any more banks where they are not
needed ?
Mr. CROWLEY. That is correct.
Mr. W iLLiAM S. And by means of all of those things, you hope to
avoid the recurrence of this condition which has come upon us and
caused so many failures among these banks in the past?
Mr. CROWLEY. That is correct.
Mr. W iLLiAM S. Now, I want to get back to this question: What are
you going to do, if this act is passed as written, with the 8,500 banks
that are not members of the Federal Reserve System?
Mr. CROWLEY. You mean as to what we are goijig to do with them
in 1937?
Mr. W iLLiAM S. Yes.
Mr. CROWLEY. I hardly think that that is a fair question to
ask me.
Mr. W iLLiAM S. You do not think that that is fair?
Mr. CnowLEY. I do not mean that personally.

Mr. W iLLiAM S. The fact is that this law would provide for that,
would it not ?
Mr. CROWLEY. This law provides for them to join the Federal
Reserve System in 1937.
Mr. WiLLiAMS. W3 have had a Federal Reserve System in effect
for 20 years, have we not ?
Mr. CROWLEY. Yes.
Mr. W iLLiAM S. And we have now 8,500 banks in the country that
have not seen Rt to join it so far?
Mr. CROWLEY. That is correct.
Mr. W iLLiAM S. I notice that the expression is used throughout this
act, " insured banks ", and I understand that you have a definition of
an insured bank in your bill, but there is not any such thing as an
insured bank now, is there?
Mr. CROWLEY. I assumed that all banks that are insured are insured
banks.
Mr. W iLLiAM S. They are simply members of a temporary fund.
Mr. CROWLEY. That is correct.
Mr. W iLLiAM S. And there has not been a bank that has come in and
bought stock ?
Mr. CROWLEY. No, sir.
Mr. W iL LiAM S. And insured under the permanent policy!
Mr. CROWLEY. No, sir*

BANKING ACT OF 1 9 3 5

Mr. WiLLiAMs. Now, when July 1, 1937, comes and this law is
enacted, all of these nonmember State institutions that are now in the
temporary fund will have to come into the Federal Reserve System or
get out of the insurance corporation ?
Mr. CROWLEY. That is the law.
Mr. WiLLiAMs. I am very much concerned myself about the 8,500
banks, because they are scattered from one end of the country to the
other, especially in the southern part of the country, and the rural
sections and small communities, and I, for one, have not reached the
conclusion yet that there is not a place in our system for a local
independent, unit bank. I do not believe that they ought to be re
quired, if they do not see Rt to do so, to come into the Federal Reserve
System. You have means provided in this very act by which you
could supervise them rather strictly, by which you can examine them,
and you have a provision by which you can put them out of the
System if they engage in any unfair or unsound banking practices of
any kind or character, but it does seem to me that we ought not to
place in this bill a provision requiring them against their wishes to
come into the Federal Reserve System in order to get the beneRt of
the insurance feature.
Mr. GOLDSBOROUGH. Mr. Cavicchia.
Mr. CAviccHiA. Pursuing the line of thought that Mr. Williams has
been following, I would like to ask this: Why force these 8,500 banks
into the Federal Reserve System if they do not wish to join ? Is it not
protection enough to the stockholders and to the depositors that they
are members of the insurance funds?
Mr. CROWLEY. I think the thought is, Mr. Congressman, that it
brings about a greater uniRcation of banking, and perhaps better
control of your monetary system, if you have them all in the Federal
Reserve System.
Mr. CAviccHiA. Will it cost these banks any more to become mem
bers of the Federal Reserve System than if they had stayed out!
Mr. CROWLEY. They will have to pay for their stock, but it will not
be a great burden.
Mr. CAViccHiA. To get back to the elimination of interest on de
mand deposits, many insurance companies, as well as municipal au
thorities, used to have large deposits on which they received through
out the East something like 2 percent on demand deposits. Has not
the fact that this interest has been terminated forced these people
to go into the bonding Reid raher than to have the money on deposit
on which they receive no interest?
Mr. CROWLEY. Well, of course, that is purely a matter of their own
judgment. If an insurance company has a million dollars of excess
reserves and it can Rnd a place to employ it, I presume that it is
good business for them to do it.
On the other hand, you cannot expect a bank to pay 1 or 2 percent
on daily balances when the money is only lying there idle.
Mr. UAviccHiA. Has there not been a great deal of complaint on
the part of municipal authorities because they have lost this 2 per
cent on demand deposits ?
Mr. CROWLEY. I think that that is correct, that there has been
complaint, but I do not think it is justiRable. I mean by that that
they might just as well wish for 4 percent as to wish for 2 percent
when the banks cannot pay out the 2 percent. There is no rime

BANKING ACT OF 1 9 3 5

or reason why I should, if I were in the banking business, take a
$100,000 account from you and pay you 2 percent for it, and then
leave it in the vaults or in the Federal Reserve banks and not
employ it.
Mr. CAviccHiA. That is true, because of the conditions existing
now, but if a time should come when the banks can employ money
to advantage and get good returns for it, if you pass this law they
will not be able to pay any interest, because the law forbids it.
Mr. CROWLEY. Mr. Congressman, that is not in this law. That
law was passed in 1933.
Mr. CAviccHiA. But the fact is that we have that law.
Mr. CROWLEY. That is right.
Mr. BiRDZELL. One further suggestion there, Mr. Congressman.
In the Banking Act of 1933, which forbids the payment o f interest
on demand deposits, exception is made where, under local law, State
laws, interest is required to be paid on public deposits.
Mr. CAviccHiA. Now, to go back to that 29 cents per $100 that
has been saved through the law of 1933, does this 29 cents per $100
that the banks have saved in interest cover their costs of going into
the temporary insurance fund!
Mr. CROWLEY. It would more than cover their costs on one-twelfth
of 1 percent.
Mr. CAviccHiA. In other words, the banks do not have to meet an
unreasonable demand to join in your fund, inasmuch as they have
saved 26 or 27 cents on every $100!

Mr. CROWLEY. I do not think that we have presented anything in
which offers any great obstacle to the banking system of the country.
Mr. CAviccHiA. You mean, so far as the extra cost is involved!

Mr.

CROWLEY.

That

correct.

Mr. CAviccHiA. That is all.

Mr. GOLDSBOROUGH. Mr. Reilly, you were not here yesterday.
Mr. RmLLY. I do not have any questions.
Mr. GOLDSBOROUGH. Mr. Cross.
Mr. CROSS. Now, Mr. Crowley, going back to the questions put to
you by Mr. Williams, you said that the bank crash was started in
the Western States. That was caused by falling prices of the com
modities of the people who did business with those banks, was it not
and that caused falling prices in lands, did it not, and that reflected
finally on the eastern sections and caused a decline in the prices of
stocks, and that destroyed the purchasing power of the country and
brought on your bank crash!
Mr. CROWLEY. I think that is correct.
Mr. CROSS. Now, under title II you say that you can get a sound
banking situation, that tile II seems to be the key to the situation.
The question is to keep up your prices, and in order to control prices
that you should have a unified banking system. In other words, if
you have a whole bunch of banks that are uncontrolled in the credits
that they handle, if there are too many of them, they affect the
whole structure, and if they do not come into the system where they
can be regulated as to their credits, it directly affects price levels.
Do you see the point!
Mr. CROWLEY. I agree with you that your bank failures were
largely due to your economic collapse starting back in 1921.
Mr. CROSS. Surely.
127297— 35------ 7

BANKING ACT OF 1 9 3 5

Mr. CROWLEY. However, there were other factors such as over
banking conditions, poor judgment, or not being able to foresee that
land values were too high, and things like that.
Mr. CROSS. Was not the overbanking situation brought about by
inflated credit, by abnormally high prices at that time of lands and
the things that securities were braced on, and the banks Sgured that
they could all make money, and everybody was taken into the bank
ing business ?
Mr CROWLEY. I think that is right.
Mr. CRoss. And, of course, when the crash came, prices went
down, securities went down, and they were all blown up.
In reference to the question of paying interest on checking or cash
deposits, you remember that we had that question up, as you say,
in 1933.
Mr. CROWLEY. Yes.
Mr. CRoss. And the fellows that had big checking deposits the
banks got competing for, and they were paying too much interest
on them, and the mass of the little fellows knew nothing about that,
and, in addition, the big fellows also knew what condition the banks
were in, and they pulled their money out, but the little fellow got
caught.
In other words, there was a vicious system brought about by the
banks bidding on the checking deposits of the big fellows.
Mr. CROWLEY. That is correct.
Let me say one thing here, so that you will understand my view
point on the banking system. I think that the Federal Deposit
Insurance Corporation must have these powers that we are talking
about, but I do not want to go on record as saying that the entire
State system should be eliminated. I think that your State system
ran be a very major factor in your banking system.
There are two types of banks in this country. You have your
larger banks, which by the very nature of their type of business!
cannot afford to make the type of loans that are made in the small
community, because it costs them too much money.
Your community bank does contribute to your local community a
type of credit that I think is very essential in your whole financial
picture, and I do not believe that it is necessary for us to eliminate
in a wholesale way that type of bank. I think the think that we
should be very careful about is that we do not get back to that
overbanked condition, but we should do everything we possibly can
to try to preserve the banks that we have now, as long as they have
an opportunity of serving the people of those communities.
In other words, let us take a bank of $250,000 or $500,000 in de
posits. To my mind, they can be a large factor in the local com
munity and lend a larger percentage of their money locally in the
future than they have in the past if they will only profit by their
experience in the past in making those loans so that on maturity
they will be reduced from time to time and not be permitted to
become frozen.
Mr. CRoss. Of course, those banks would not belong to the Fed
eral Reserve System, and the danger of that seems to be that the
Federal Reserve Board, not being able to control their credits or
the landings of those banks, could not bring about the situation
which you say is desirable.

BANKING ACT OF 1 9 3 5

Could this deposit insurance feature here be so administered so
that at least your Corporation would have something to say about
their credit activities?
Mr. CnowLEY. I think that as long as you have the State system,
Mr. Cross, that the State authorities must have the primary respon
sibility for the supervision. Now, the only place where I see that
we are entitled to supervise is where that supervision is necessary
for the protection of our Corporation.
I do not like to get into the matter of the Federal Reserve, be
cause I think that is a matter for Mr. Eccles, and I much prefer
not to go into anything that would interfere with his end of this bill,
if you have no objection to it.
Mr. CRoss. Yes; I understand.
That is all.
Mr. GOLDSBOROUGH. Mr. Gifford.
Mr. GiFFORD. I want to pursue the line of inquiry with reference
to the part of this bill that deals with the examination of banks.
I wish I had with me letters that I have received, with respect
to the fact that the Comptroller was out making speeches all over
the country, calling on the banks to loosen up on their credit, whereas
before that we found that the examining department of the Comp
troller's ofEce had put a great deal of fear into the bankers, so that
they did not dare to loan.
The whole tenor of this bill is to get a pretty good grip on these
banks by examination, and this assessment of one-twelfth of 1 per
cent would be sufBcient so that you could control the conduct of the
banks, and you want to force them to carry burglary insurance and
other insurances, and, if they do not carry them, you order them and
charge them up to the bank.
Now, as I read this bill, and after having heard your statement,
you base a great deal of your possible success on your opportunity
to make examinations just as often as you like, so tliat you may make
the banks conform to anything that you may want them to do, and
that sort of thing. Is not that asking a good deal ?
Mr. CROWLEY. No; I do not think that there is a single thing in
our bill that goes too far.
Let me say this to you, that, in the 8rst place, the la,v. that
tvas passed said that we may take these banks in on a test of solvency.
Now, we all know that a bank that only has sufRcient assets to meet
its deposit liability on any kind of a forced liquidation could not
pay out its deposits. Furthermore, our whole trend of banking
in this country is based on the theory that first the stockholder shall
have ail equity in this bank, because it is a capitalistic system. So
that when we started in January 1934 after taking these 7,800 banks
in, we were faced with the problem of going out to determine their
position.
Now, our job, first, was to find out really what the condition was,
and in order to find out what the condition was, we had to try to
determine the value of their assets, and we were trying to do that,
of course, at a time when values were at perhaps a very low ebb.
and perhaps it was necessary sometimes to be pretty severe, but
my own judgment is that when we classify an asset, a good asset

BANKING ACT OF 1 9 3 5

in the bad column, that we perhaps classiRed as many bad assets
in the good column.
Mr. GiFFORD. Do you understand that recently there has been a
tremendous change in attitude on the part of bank examiners in
the whole country, and instructions must have been given to them
to have a different viewpoint!
Mr. CROWLEY. As far as Federal Deposit Insurance is concerned?
there has been no change in the attitude of our examiners, because
our whole program has been based upon, Rrst, putting the banks in
a sound position as far as capital is concerned. After you once get
the banks in a sound capital position, then you may not have to
use as severe a yardstick m a wholesale way as you had to at Rrst.
Mr. GiFFORD. I am not criticizing your method of examination,
but national bank examinations in the last 2 or 3 years. Do you
not know that there has been a very great change in the method of
making bank examinations lately, where slow loans in a bank have
not been persecuted as formerly!
Mr. CROWLEY. I do not know what the policy of the Comptroller's
OfRce is.
Mr. GiiT'ORD. Did you not see an article in the newspapers, to the
effect that the President himself had severely criticized the strictness
o f bank examinations!
Mr. CROWLEY. Let me say this to you on the matter of the criticism
of slow loans. You may criticize a slow loan if the bank has too
large a percentage of them, or if the bank is badly frozen. The
easing up of the criticism of slow loans has been due largely to the
fact*——
Mr. GiFFORD. That is all I asked, and you agree.
Mr. CROWEEY. Wait a minute—if it has been done.
Mr. <jriFFORD. Has it been done!
Mr. CBOWMrr. I presume it has, at least in places where the banks
have such extreme liquidity that there is no necessity of forcing
liquidation.
Mr. GiFFORD. Do you think that you could still hold these banks as
members of your corporation if they are subjected to all of these
things!
Mr, CROWLEY. We have had in here 22 State commissioners for
conferences on the matter of examinations and related topics.
Let me say that in the matter of rebuilding capital, in the matter
o f local contributions, time after time we have had a State commis
sioner come to us and ask us to exert our influence, because on account
o f local conditions he could not do it, and he has asked the Federal
Deposit Insurance Corporation to exert pressure in order to put that
bank back in shape.
So far as that examining program is concerned, every State com
missioner who wants a good State banking system will agree that if
we are going to carry such a high percentage of liability we have to
have ways and means of protecting ourselves.
Let me say this to you: That in the large percentage of the State
banks we are insuring them better than 70 percent. I think that there
are some 9,600 that we are insuring up to 80 percent. That is a tre
mendous responsibility.
Now, on the matter of burglary insurance, the reason we asked for
that is that a good many of the States have no legislation at all that

BANKING ACT OF 1 9 3 5

gives the Cofnmissioner the power to force a bank to carry a reason
able amount of insurance on its oiEcers or employees. Already, out of
the 11 banks where we have paid out, we have had a very unfortunate
experience. If they had had some adequate insurance, it would have
helped the stockholders very materially.
We do not propose, you understand, to do that in the case of a
wholesale majority and put an unnecessaiy burden on those banks.
We must be reasonable in all of our demands.
Mr. GiFFORD. I am wondering what the cost of those things will be
to the bank and what you insure them against!
Mr. CROWLEY. We certainly do not want to pay for all of their
mistakes without having any right to try to get them to correct them.
Mr. GiFFORD. Do you want them to insure themselves against every
conceivable thing, so that your corporation will not have any lia
bility!
Mr. CROWLEY. No; but where they have not suBicient burglary in
surance and protection and suHicient surety coverage on their em
ployees, I see no reason why they should not carry it as a matter
of protection to themselves and their own stockholders.
Mr. GiFFORD. Do you think that it is a fair treatment, and do you
think that it is a safe treatment of a bank to demand of it a certain
kind of report, and if it does not publish it in 5 days, to Rne them
$100 a day!

Mr. CROWLEY. I think that you are exaggerating that a little bit.
The purpose of the authority to publish reports is this, that a great
many of your bank statements in the past did not really show the
true conditions of the banks.
Mr. GiFFORD. Whose fault was that!
Mr. CROWLEY. I think it was the fault of the entire system.
Mr. GiFFORD. Do you mean to say that our present national bank
system is not sufficient to show the true condition of the banks!
Mr. CROWLEY. You take the old condensed statements gotten out
by national banks and State banks for years; they did not show the
market value of their bonds or the reasonable value of their loans.
Mr. GiFFORD. Did not they show the last demand of the bank
examiner in connection with the market value of those things!
Mr. CROWLEY. Oh, no; that has never been in a statement.
Let me say this to you. I think that you are starting out on a
different basis now. We are starting out anew, with the banking
system practically rebuilt and values way down.

Mr. GiFFORD. Do y o u n o t s e e t h a t y o u a r e a d d i n g c o n s i d e r a b l y t o
th e p r e s e n t b u r d e n o f th e b a n k s b y w a y o f th e s e e x a m in a tio n s , a n d ,
s e c o n d ly , th a t th ese e x a m in a tio n s m a y b e s o ir r it a t in g th a t m a n y
ban k s w o u ld ra th e r n o t b e lo n g !
Mr. CROWLEY. No. The great majority of the banks give to our
examiners every kind of cooperation, and do not seem to be irritable
because we are trying to get a true picture of their institutions.
Mr. GiFFORD. T h e n y o u r a n s w e r w o u l d b e t h a t t h e y w o u l d n o t
o b je c t t o th e s e t h in g s !
Mr. CROWLEY. A certain

percentage, yes, would object, but I do
not believe that that is the answer. Our corporation was set up for
the protection of depositors, not for the protection of the bankers.
We are trying to cut the losses to the depositors and of this cor
poration down to a minimum, and that is what our job it.

BANKING ACT OF 1 9 3 5

Mr. GiFFORD. And, in order to protect the depositors, you want
to get control of the banks!
Mr. CROWLEY. You can call it control or what you please, but we
are insuring 80 percent of the deposits in 9,600 banks in this coun
try, and we have to do whatever is necessary to cut down their
losses, within reason, of course.
Mr. GiFFORD. My question is really friendly. I am simply asking
you if these irritating things that you are asking for are not lessen
ing the number of banks that might belong.
Mr. CROWLEY. I do not think so.
Mr. GiFFORD. Are your examiners under civil service ?
Mr. CROWLEY. No; they are not.
Mr. GiFFORD. Are the national-bank examiners under civil service!
Mr. CROWLEY. There are no bank examiners under civil service;
Mr. GiFFORD. Do you train them so that they all use about the
same methods, or do you tell them that they must not follow any
fixed rule but use their own judgment in the case of, say, a bank that
has too many slow loans in proportion to the assets!
Mr. CROWLEY. Let me say this to you, that bank examiners are
like any other human beings. Some are good, and some are
bad; and, as far as their classification is concerned, you understand
that after they make their classiScation, it is reviewed again in
supervising ofBce by a reviewing committee, and even the reviewing
committee may make a mistake.
Like any other persons who get some authority, there is always a
certain percentage of them that become autocratic, but we try to be
as sympathetic as we can.
Mr. GiFFORD. The Comptroller wrote me a letter stating that he had
had but one or two cases where a bank had been dissatisfied with
the examinations, and where it had asked for a reexamination. I
wonder if that is because the otBcials of that bank wanted so badly
to get rid of the examiner that they did not want to see him again!
Mr. CROWLEY. I do not know about that.
Mr. GiFFORD. Do you not think that when an examiner walks into
a bank, it is a very irritating thing to the ofRcials of that bank!
Mr. CROWLEY. No; I do not agree with you there. I think that
the average examiner during this entire depression has certainly been
very helpful to the bankers. However, as I say, there are exceptions
to all rules.
Mr. B i R D Z E L L . May I add one word in reference to examinations!
The Corporation is working on a program in which it has solicited
the cooperation of the banking departments in all of the States on
the matter of examinations for the very purpose of making the
examinations a matter of as little burden to the banks as possible.
The program that we are working on contemplates that where a
State law might require two examinations of a bank a year, that
the banking commissioner would be authorized to accept the report
our examination in lieu of one he might make himself, and also
that provision be made so that the Corporation might receive the
reports of examinations made by examiners of the State admin
istration.
Mr. GiFFORD. You think that any more than two examinations a
year would be irritating!

BANKING ACT OF 1 9 3 5

Mr, BiRDZELL. We would have two wherever the State law requires
two.
Mr. GiFFQRD. But you think that any more than two would really
be an irritation?
Mr. BiRDZELL. I would think so.
Mr. CROWLEY. I think it would be unnecessary except in some un
usual conditions.
Mr. B i R D Z E L L . I might say that that suggestion is being very
favorably received in the various States.
Mr. GiFFORD. But you are asking us here for permission to make
examinations just as often as you want to.
Mr. CROWLEY. If you restrict us as to how many times we can go
in, there might be a condition where, in order to protect ourselves,
we might have to go in at some other time. We might Rnd a bank
in a bad condition this morning that we were in last week, and we
want to be able to go back and correct that. That is the reason why
we cannot limit it.
Mr. KoppLEMANx. In the light of what Mr. Gilford has been ques
tioning you about, perhaps it would be in order to ask Mr. Crow
ley----Mr. GOLDSBOROUOH. Mr. Koppelmann, we are attempting to take
the Members in regular order.
Mr. KoppLEMANN. I beg your pardon.
Mr. GOLDSBOROUGH. Mr. Spence.
Mr. SpENCE. When the banks joined the temporary fund, you lev
ied an assessment of one-fourth of 1 percent on the insured deposits,
did you not?
Mr. CROWLEY. That is corect.
Mr. SPENCE. And now the one-twelfth of 1 percent will be levied
on the entire deposit liability!
Mr. CROWLEY* That is correct.
Mr. SPENCE. What will be the difference in the amount realized
from the one-fourth of 1 percent on the insured deposits and onetwelfth of 1 percent on the entire deposit liability!
Mr. CROWLEY. We received about 38 or 39 million dollars under
the one-fourth of 1 percent, and we will receive about 30 million
dollars under the one-twelfth of 1 percent; but you understand, Mr
Spence, that we could only call, during the temporary period, foi
an additional one-fourth, whereas one-twelfth is an annual premium
payable each year, which must be charged to the bank's overhead.
Mr. SpENCE. You did levy the full assessment!
Mr. CROWLEY. No; only one-half of it. We never levied the other
one-half.
Mr. SPENCE. What percent of the amount of deposits is now
insured ?
Mr. CROWLEY. Forty-four percent in all, but I think that we ought
to read to you the insurance Agures by size groupings, because that is
very necessary for you to get the picture.
Mr. Fox. According to the total liability size groupings, banks
with $100,000 or less in total deposits, of which there are 1,500 now
insured, are insured up to 92 percent of their total deposits.
Banks in the next size grouping, from $100,000 to $250,000, of
which there are approximately 3,600, are insured up to 8? percent of
their total deposits.

100

BANKING ACT OF 1 9 3 5

j3^nks in the next size group, $250,000 to $500,000, of which there
are approximately 3,100. are insured up to 83 percent of their total
hrthe next size grouping, $500,000 to $750,000, of which there are
approximately 1,500 banks, they are insured up to 80 percent.
From $750,000 to $1,000,000, of which there are 950, they are insured
up to 78 percent.
From $1,000,000 to $2,000,000, of which there are 1,600, they are
insured up to 75 percent.
From $2,00Q,000 to $5,000,000, of which there are about 1,100, they
are insured up to 70 percent of their total deposits.
From $5,000,000 to $15,000,000, of which there are only 630, they
ar§ insured up to 50 percent of their total deposits.
$50,000,000 or over, there are about 100, and all of those banks are
insured about 26 percent.
Mr. BiRDZEi*L. For the record, where Mr. Fox s a i d up t o a c e r t a in
percentage, the average is meant.
Mr. SPENCE. Since 1921, according to this statement, including
1934, thene have been 2,548 national banks suspended and 11,004 State
banks suspended.
What percentage of the national banks were suspended, and what
percentage of the State banks!
Mr. CROWLEY. Of course, &s you go down your ratio, your percent
age always changes.
Mr. SPENCE. Was a great number of the State bank failures caused
by ;pts;ulfBeiei;t supervision or because of the inherent weakness of the
bank !
Mr. CROWLEY. I would say it was undoubtedly both.
Mr. gpBNCE. In other words, there are a good many small com
munities where they have two or three banks and where they only
need one. Is not that true of the State banks!
Mr. CROWLEY. That is right.
Mr. jSpENpE. Did that not to 4 large extent cause the failure of those
banks more than insu&cient supervision!
Mr. CROWLEY. In a great many of your States, Mr. Spence, the
State supervisors did not examine their banks with any great regui^yity. I have known of some States that did not examine some
banks for 2 years, and possibly sometimes a little longer, and then
a great many of the State laws did not give the supervisors perhaps
sufficient authority over their banks, and in a great many instances,
on the matter of licensing new banks, the Commissioner would de
cline a charter and perhaps then they would go to some board and
the board would override the Commissioner and grant the charter
in a community such as you are talking about.
Mr. SPENCE. I have received some letters from some of the smaller
bankers, in State banks, and they say that they now see no advantage
in becoming members of the Federal Reserve System.
What is your opinion about that, outside of belonging to the in
surance fund!
Mr. CROWLEY. I think this, that if your Federal Reserve System
is liberalized to the point that farm mortgages may be discountable,
certainly there is going to be an advantage to bank in availing itself
of that opportunity. In other words, in the matter of seasonal bor
rowings, or where they perhaps have a temporary sloughing off of

BANKING ACT OF 1 9 3 5

101

deposits, there is an advantage to a bank in having some place where
they may rediscount their long-term loans.
Mr. &PENCE. Do you think that that will overcome any of the
other disadvantages that might accrue to them by reason of being
a member?
Mr. C R O W L E Y . Mr. Spence, I do not like to get into a discussion on
the Federal Reserve provisions at this time* Mr. Eccles is coming
and he will present his information, and I am sure that we will ail
be together on it.
Mr. SPENCE. Did you give us the percentage of deposits in the
insured banks?
Mr. C R O W L E Y . We just read it to you.
Mr. SpENCE. In numbers?
Mr. CROWLEY. On your bank closings? Do you mean the de
positors ?
Mr. S p E N C E . Yes.
Mr. CROWLEY. It is over 98 percent. Almost 99 percent of all of
the depositors in the country, including all the banks, are insured
up to $5,000. In other words, their balances are under $5,000.
If you were to take all public funds out of your smaller banks
where they are insured 95 percent, I think you would 8nd perhaps
only one account in such a bank that was more than $5,000.
Mr. SpENCE. You think there is a justification for including all
of the deposit liability of the bank within the scope of this program ?
Mr. CROWLEY. Yes; for this reason, that I think that the respon
sibility of the Federal Deposit Insurance Corporation and their con
tribution, as I said many times here, cannot be the paying out of
that loss. People generally have lost confidence in the baiiking
system on account of the severe losses that they have had during
the last 12 years, and while the Federal Deposit Insurance Corpora
tion has had a psychological effect in the way o f restoring co&Rdence, we must not do anything that is going to destroy that con
fidence in the Corporation. Otherwise you are again going to have
losses and withdrawals from your Rnamcial institutions.
I think that Federal Deposit Insurance is the only vehicle in the
banking system that can help to correct this, and I think that it is a
long-term proposition over a period of a great many years, and that
the banks generally can well afford to make their contribution to it
for the beneSt of the entire banking system. I do not think that
it is unreasonable in any degree.
Mr. SpENCE. It not only insures the $5,000 liability, but it has an
effect upon all of the depositors in the banks!
Mr. C R O W L E Y . That is right.
Mr. SpENCE. Just one other question. On page 12 of your bill, in
reference to new banks, it says:
N o t w it h s t a n d in g a n y o th e r p r o v is io n o f la w , it s fr a n c h is e , p r o p e r t y , a n d
in c o m e s h a ll b e e x e m p t f r o m a l l t a x a t io n n o w a n d h e r e a f t e r im p o s e d b y t h e
U n it e d t S a t e s , o r b y a n y T e r r i t o r y , d e p e n d e n c y , o r p o s s e s s io n t h e r e o f —

and so forth.
That would exempt a bank building.
Mr. CROWLEY. No. That is where you set up a Federal deposit
bank during the time that the local stockholders are raising money
in your own community. Just as soon as the local stockholders come
in and take things over, then it becomes regular, taxable money.

102

BANKING ACT OF 1 9 3 5

Mr. BiRDZELL. The term " new bank " is defined in the first section
of the act, and it is confined only to a new national bank set-up.
Mr. SpENCE. You do hot contemplate that that bank will lend
money on real estate! Is that your idea?
Mr. CROWLEY. It should not during our term of ofEce. We would
not buy any real estate. Ours is really a bank that carries on during
the interim in a community where they need banking facilities until
the local people can take its place.
Mr. BiRDZELL. It can make no investments except in Government
b on d s.

Mr. SPENCE. That is all.
Mr. GOLDSBOROUGH. Mr. Wolcott.
N
Mr. WOLCOTT. I notice that the proportion of the losses of banks
other than national banks seems to be materially less than the pro
portion of losses of national banks. Could that be due to the fact
that there are so many small units in State banks %
Mr. CROWLEY. You mean in the State system?
Mr. WoLcoTT. Yes.
Mr. CROWLEY. Yes. You take your number of failures, they are
largely in your small State system.
We have an analysis of that, if you would like to see it.
Mr. WOLCOTT. As I understood you, the trust deposits were divided
so that the trust company having deposits in a bank could have
insured up to $5,000 each of their accounts as they carried them on
their books.
Mr. BiRDZELL. I f the trust company were a member of the Insur
ance Corporation ?
Mr. WOLCOTT, Yes.
Mr. BiRDZELL. Yes.
Mr. WoLcoTT. With respect to public money, where a county or
municipality determines on a particular bank as a depositary for
its funds, that is usually kept in a lump-sum deposit?
Mr. BiRDZELL. Yes.
Mr. WOLCOTT. However, on their own books, they carry it *as
grades, highways, sewers, contingent, and so forth.
Would the municipality have this fund guaranteed as a lump sum,
or would it be guaranteed according to the manner in which it was
carried on the books!
Mr. BiRDZELL. According to the manner they are owned.
For instance, if a city carries its deposit in a bank, and it places
its funds divided, we will say, for general fund purposes or for
some specific purpose for which funds may be appropriated, so that
it keeps its books separately, so that it can keep account of deposits
withdrawn or deposited for particular purposes, nevertheless those
are city funds and they must be combined for the purpose of insur
ance ; but, on the other han& school funds may be deposited by the
same treasurer as deposits oi city funds, and yet the schools, being
a separate corporate entity, would separately own whatever funds
were deposited and the school corporation could make, a separate
claim.
Mr. WoLcoTT. Let us take, as an example, a county where they
have a general fund, and then they have a drainage fund, and they
have a highway fund and a school fund, and then a fund into which
go the collections made by the county treasury for the beneBt of

BANKING ACT OF 1 9 3 5

103

the townships, where the county treasurer acts on the matter of de
linquent taxes as the agent of the township, your criterion is as to
whether these funds are held to the credit ot the distinct political
subdivision and political entities of that county!
Mr. BntDZEEL. Yes. It may be different in the case of your drain
age funds that you speak of, or your-----Mr. WOLCOTT. Irrigation district!
Mr. BiRDZELL. Irrigation district, or something of that sort, where
that is a special-assessment district and as such would be the pro
ceeds of special assessments levied. The same may be true of your
highways. In that case the drainage district or the highway district
would be considered a separate political entity.
Mr. WOLCOTT. Then, m order to get the full advantage of this
insurance, the municipal corporation or the State legislature should
provide tnat the school district and the drainage district or irriga
tion district, sidewalk district, or highway district should be con
sidered to all intents and purposes a political entity of the county!
Mr. B i R D Z E L L . It would depend on whether or not they are in
fact so. If they are, they are getting the beneiit of insurance now.
Mr. WOLCOTT. The average county or municipality makes a sep
arate levy for school purposes. They make a separate levy for high
way purposes and for all of these different purposes, and carry them
separately on their tax rolls.
Do you think that under that system they should be entities to the
extent that each of these funds would be insured up to $5,000!
Mr. ButDZELL. It depends upon whether the proceeds of the city
tax for school purposes belongs to the city, or whether they have a
separate corporate organization. If it be a separate organization,
and the tax was intended for that corporation, then that corporation
would own the deposits.
Mr. WOLCOTT. Of course, there is a great deal of overlapping there
in their prerogatives, and the municipality or city or county always
exercises a certain supervisory duty with respect to all of these other
entities, and while perhaps speciRcally these funds belong to the dis
trict, at the same time they belong to the county and the county is
made responsible for them.
Mr. B i R D Z E L L . The county might be merely the agent for collecting
the funds. That is true in many instances, and it might be that they
would employ one common treasurer who would have the control of
the deposits, but nevertheless the funds, when they go on deposit, are
certainly going on deposit to the credit of the particular municipality
that is authorized to expend them. That being the case, they would
belong to that municipality, and that municipality would be getting
the benefit of the insurance.
Mr. WOLCOTT. The criterion seems to be whether any part of this
fund which is deposited by the county or city treasurer is intended to
have been deposited in connection with the credit which he gives that
entity on his own books ?
Mr. B i R D Z E L L . Yes; that is correct. We have even gone to the
extent in some cases of giving assurance that sinking funds actually
belong under the peculiar law that they be rated under to the holders
of the bonds rather than to the municipality. There is one instance
that we have come across where the ownership of the sinking funds
is so deBnitely fixed by the State law under wTiich they are col!ected

104

BANKING ACT OF 19 3 5

that it can be said definitely that they belong to the owners of the
bonds rather than to the municipality. It is a question of ownership
in the last analysis.
Mr. WoLcoTT. Carrying out that same thought a little further, when
the banks in Michigan closed an endeavor was made to interpret the
law in such a manner that the funds of correspondent banks would be
preferred. We found that under certain rulings of the State courts
and of the United States Supreme Court, as I recall, they had no
preferred status.
Mr. B in nzE L L . That is right.
Mr. WoLcoTT. Under the present law, or under these changes as
contemplated, a small bank having deposits with a larger bank would
only have $5,000 of its deposits insured?
Mr. BiRDZELL. Yes; that is correct.
Mr. CROWLEY. Do you mean $5,000 of public funds!
Mr. WoLCorr. No. I mean a small bank in a city, we will say,
of 30,000 or 35,000 in close proximity to a large city where there are
large banks, and frequently, to safeguard their funds, they have
amounts deposited with the larger banks. In my own case, it I may
use it, we are located about 60 miles fromi Detroit. When the crash
came, we found that our banks in Port Huron had deposited their
reserves and the money that they were not using daily in the large
banks in Detroit, so when the large banks in Detroit closed, all of
the ready cash that our banks had to do business was what they
needed to carry on their daily business, and their reserves were tied
up. We found instances where some of our banks had their reserves
in the Chicago banks, and I know of one instance where the cashier
of the bank went to Chicago and drew out $80,000 of reserves and
came back with them in his inside pocket.
Of course, that precipitated the national bank closing; no question
about it, and I wonder if it would be feasible to provide for the
isolation of those funds in some manner so that it would prevent the
recurrence of a situation such as we had in Michigan, where one or
two large banks are closed by arbitrary authority, and where it
would not necessarily compel the closing of 500 other banks.
Mr. CROWLEY. We went into the matter of the entire bank de
posits, and it is my honest judgment that that should not be touched
until we have had an opportunity to study that thing a little further.
There is a lot to what you have said, but we have only had 1 year's
experience here, and perhaps next year from our experience we can
make a recommendation to you that may correct that diHiculty. It
does increase our liabilities, as you know, tremendously, if we take
on the entire bank deposits.
Now, on the question of public funds, Mr. Wolcott, there has been
perhaps more damage done by banks taking on too large a per
centage of public funds. In your average size bank your large ac
count can give us more trouble than where you have a diversiBcation of deposits, where your withdrawals are more or less uniform.
I f you had, for instance, a bank of $250,000, and you have one ac
count of $750,000, you have really got to carry excessive reserves to
take care of that iarge account, because you do not know when it
will go out on you.
So there is a lot of danger in banks taking too large a percentage
of their deposits in large accounts, which accounts will always cause

BANKING ACT OF 1 9 3 5

105

you trouble unless you have your investment in conformity with the
size of your accounts.
Mr. WoLcoTT. I brought that out merely because I wanted to
know whether, in the future, we could work out some plan so that
these fellows would not be isolated by the closing of a bank in one
case, which is always the case in connection with a branch-bank
system, but should not be the case with our present system, where it
affects 40 or 50 others in that locality.
Mr. CROWLEY. That is a matter that we have already given quite
A lot of thought to, and it should be studied for another year, I think.
Mr. WoLcoTT. When a corporation terminates its connection with
the Federal Deposit Insurance Corporation, there is a provision in
section 1 (5) on page 13 of your print that provides that the cor
poration may publish notice of such termination and the bank, mean
ing the assured institution, I assume, shall give notice of termination
to its depositors in such manner and at such time as the board of
directors may find necessary.
Of course, it is my thought in that particular that whenever a
bank withdraws from the fund, they are not going to rush out and
advertise the fact, and I wonder if we should not make this notice
mandatory, or specifically provide in this act the manner of the
notice and the time for giving notice by the bank which was with
drawing, rather than to leave it to the board of directors of these
banks as to whether or not they will give any effective notice.
Mr. BiRDZELL. You understand that the " board of directors " there
means our own Corporation, not the board of directors of the bank?
Mr. WOLCOTT. Possibly that clarifies that whole situation.
Mr. CROWLEY. Here is the reason why. On the matter of notify
ing depositors, we might have a bank, Mr. Wolcott, that we were
having considerable trouble with, and that we were going to expel
from the fund. We would notify the State supervisor, who would
notify the bank of the particular dif&culty. What we want to do
is to stop the bank from doing anything that may affect an innocent
depositor, because there are banks that are perfectly willing to stay
in here during this recovery program and which, after confidence
has been restored and we get on a normal condition again, will
perhaps want to get out because they do not want to have any part
in the whole banking system.
Mr. WOLCOTT. I think that perhaps my objection to that language
is answered by section 10 of your definition, which says:
T h e te rm

"b o a rd

o f d ir e c t o r s " m e a n s th e b o a r d o f d ir e c to r s o f th e C o r p o r a

t io n .

One more question^ please. In the Federal Reserve Act, there is
a provision that national banks may loan on real estate up to 75
percent of the value. I wonder whether that does not affect some of
the effectiveness of the Federal Deposit Insurance Corporation!
Mr. Cuowi^Y. In the Federal Reserve provision, Mr. Wolcott,
there is a provision that those mortgages shall be eligible for re
discount, which, of course, puts a little different complexion on it.
Mr. WoLCorr. You think that that clause is adequate protection
so far as your fund is concerned! I know that that is out of your
scope.
Mr. CROWLEY. It is out of my scope a little bit, and I think that
the Comptroller should talk on his national banks. There is no

106

BANKING ACT OF 19 35

question but what in the past, in your State systems, where they
were permitted to take mortgages, and where you had your shrink
age of values, it affected their conditions materially.
Mr. WOLCOTT. I understand that back in 1923 they amended the
National Banking Act to increase the amount that a national bank
could hold on real estate from 25 percent to 50 percent.. Now there
is a school of thought which lays all of our industrial ills on the
doorstep of that policy which allowed the banks to invest so heav
ily in real estate that they created a condition of insolvency on the
real-estate market, and I wonder if we are not just contributing to
the recurrence of a bank crash by increasing this still further from
50 percent to 75 percent, and, if so, of course we all are vitally in
terested in whether or not the Federal Deposit Insurance Corpora
tion would be in a position to meet such prices brought on by a
slump in the real-estate market
Mr. CROWLEY. I think there is a lot to what you say, and it all
depends, in my mind, as to what provisions you make in the Fed
eral Reserve Act for it. If they cannot rediscount those, there is
a great danger of a bank being frozen.
Mr. BROWN of Michigan. Even if they did rediscount those mort
gages, the primary loaning bank would still be responsible to the
Federal Reserve bank.
Mr. CROWLEY. Oh, yes; it would be bills payable.
Mr. BROWN of Michigan. I do not see that that would clear up
the situation that he is discussing.
Mr. CROWLEY. Here is what it would do: It would just place a
long-term loan in a position that they might borrow on it the same
as on their eligible paper. It does not place the same stigma against
a long-term loan if it is eligible for rediscount that it would have
if it were not eligible.
Mr. WoLcoTT. Here is another point in respect to that same ques
tion. There is no restriction made upon the funds which might be
used for investment in real estate at 75 percent of its value, and they
might take long-term real-estate paper and invest commercial funds
in it, and your commercial deposits are guaranteed under the fund.
Mr. CROWLEY. I think it does this: It means that they have to pay
off each year, reducing the principal, and that is the limit to the
amount of funds that they may employ in the mortgage Reid.
Mr. WoLcoTT. Yes; but we allow them to take 20-year commercial
paper up to 75 percent of the value of the real estate.
Mr. C R O W L E Y . Yes; but it must be amortized.
Mr. WoLcoTT. Nevertheless, it is a long-term investment.
Mr. CROWLEY. There is no question that it puts it in the same pe*ition as a bond.
Mr. BROWN of Michigan. I am a little bit disturbed about what
might be a duplication, or even a triplication, of the duties performed
by your corporation, the Comptroller's ofRce, and the Federal Re
serve Board.
Now, in your very clear statement which you gave to us on thb
first day, and of which we all have copies, you said on page 26—
I n t h e f u t u r e t h e C o i p o r a t i o n s h o u ld d e v o t e a i a r g e p a r t o f it s e f f o r t s
t h e m a in t e n a n c e o f s o u n d c o n d it io n s a m o n g t h e in s u r e d in s t it u t io n s .

BANKING ACT OF 1 9 3 5

107

Now, it seems to me that that clearly defines just what the duty of
the Comptroller of the Currency now is. Am I right about that, or
wrong!
Mr. CROWLEY. Do you mean in the case of a national bank!
Mr. BROWN of Michigan^ Yes.
Mr. CROWLEY. The only authority that we have, Mr. Brown, over
a national bank or a State member bank is that we have the power
to put them out of the fund just the same as a State bank, after
notifying the Comptroller and the Federal Reserve Board, just as
we notify the State supervisor.
Mr. BROWN of Michigan. I think that your power is greater than
that. You not only have the power to put them out of the fund, but
upon your determination that they should be out of the fund, the
statute is mandatory that both a member of the Federal Reserve
System and a national bank shall then be suspended. Is not that
true?
Mr. BiRDZELL. That w o u ld be correct.
Mr. BROWN of Michigan. If you once determined that a bank can
not rem ain a m e m b er o f y o u r fu n d , then the Federal Reserve Board
must suspend that bank and the Comptroller must appoint you as
receiver.
Mr. BiRDzELL. No; the Federal Reserve Board must see that the
bank is no longer in the Federal Reserve System, and in the case
of a national bank, o i course it would result in liquidation.
Mr. CROWLEY. You understand, the Federal Reserve Board h a s
no authority to appoint a receiver for a State member bank.
Mr. BnowN of Michigan* I understand that. It will appoint
your Corporation, or, if you do not care to take it, some other suit
able person as receiver.
In other words, in the power that you have asked, you will have
absolute authority in your board of directors to suspend any bank
in the United States if it is a member of your Corporation.
Mr. CROWLEY. I do not think that there is any duplication there.
I think that we are the only ones that have that power.
Mr. BROWN of Michigan. Of course, the national bank department
has that power with respect to national banks.
Mr. CROWLEY. There is no particular reason why we should not
have the same control of putting a bank out of the fund, be it a
Federal Reserve member bank or a State bank, if they are not con
ducting themselves in a manner that is going to give to this Corpo
ration the usual safeguards.
Mr. BROWN of Michigan. Well, I think that is true, but I am say
ing that that gives you the same power that the Comptroller now
has over national banks and that the Federal Reserve Board now
has over Federal Reserve banks.
Mr. CROWLEY. N o; the only power that the Federal Reserve Board
has over a State bank is that if they do not conduct themselves
properly, they may put them out of the Federal Reserve System,
but there they stay.
Mr. BROWN of Michigan. That is right.
Mr. CROWLEY. Now, then, the power that we have over the State
banks is just the same as the Federal Reserve Board has oter the

108

BANKING ACT OF 1 9 3 5

State banks, but we carry ours further, And we ask for the power
also over a national bank, that we may put them out of the fund.
Mr. BROWN of Michigan. But it does seem to me that we certainly
have a duplication there of power. In the temporary plan or the
permanent plan as it now exists, for instance, in the matter of exam
inations of Ibanks, you have to accept the examinations of the OHice
of the Comptroller.
Mr. CROWLEY. That is right.
Mr. BROWN of Michigan. And the only examinations which you
are empowered to make now under existing law are examinations
of nonmember banks.
Mr. CRowEHY. That is correct.
Mr. BROWN of Michigan. Now, on page 18 of the bill, I think it
is, you ask for the power to examine all banks----Mr. CROWLEY. No.
Mr. BROWN of Michigan (continuing). With the consent of the
Comptroller.
Mr. CROWLEY. May I explain that to you, Mr. Brown!
Mr. BROWN of Michigan. Yes.
Mr. CROWLEY. The reason for that is this. Supposing that the
Comptroller or the Federal Reserve Board has a bank which is in
dHHculty; under our law, we have asked you for the authority to
buy assets for the purpose of mergers. We may wish to go in with
the Comptroller or the Reserve Board and m^ke an examination to
know the position of the bank, in order to try to determine upon a
program that will prevent us from taking too great a loss. In other
words, we will go into a bank with a million dollars in deposits and
buy $250,000 of undesirable assets, and the Comptroller would merge
that with $750,000 in another bank, and that would save us the liqui*
dation of a million-dollar liability where we would be getting oif
with $250,000.
Do you get my point?
Mr. BROWN of Michigan. I get yoftr point, but----Mr. CROWLEY. In order to do that, we have to have the authority
to go into a national bank, and we are only asking for that where
the Comptroller is agreeable that we should go in with him on that
proposition.
Mr. BROWN of Michigan. But it seems to me that even at the
present time, under existing law, where we have a group of nationalbank examiners under jurisdiction of the Federal Reserve Board,
and a group of national-bank examiners under the jurisdiction of
the Comptroller, each having different duties, we must bear in mind
that we are here establishing a third group of national-bank exam
iners under your Control, with power, I grant you, only upon the
consent of the Comptroller, to examine national and member banks
of the Federal RegerVe System.
Now, my point is this, that it seems to me that the three depart
ments ought to get together to see if we cannot consolidate you all
into what seems to me to be a logical organization governing all the
national banks of the United States. I f we cannot do tha&, we at
least ought to consolidate these three boards or bureaus into one ex
amining division, that would have authority to examine for all three
of these governmental bureaus, and it just strikes me that the legis-

BANKING ACT OF 1 9 3 5

109

lation is ill-conceived in that respect. We have that provision now
with respect to the Federal Reserve Board and the Comptroller's
ofEce.
Perhaps I ought to say that I think that your Corporation is an
illogical Government organization or bureau to undertake that work,
but it does seem to me that you are placing an unnecessary burden
upon national banks and member banks and forcing them to pay the
expenses of examinations which certainly will be more numerous
than they have been in the past. It seems to me that you are by
this act diversifying the power and authority that the Comptroller^
ofEce has over bank examiners.
Now, if this ofEce is not the right ofEce to handle the matter of the
examination of national banks, let us turn it over to you or to the
Federal Reserve Board, but let us not have three different groups
o f national-bank examiners.
Mr. CROWLEY. Mr. Brown----- Mr. BROWN of Michigan. I believe that it is illogical.
Mr. C a o w L E Y . I do not think that y o u would have any three groups
of national-bank examiners, to this extent, that we have examined
only State banks. Now, there is no way under the present law
that anyone else can examine a State bank except the Federal Deposit
Insurance Corporation and the State supervisor.
Mr. BBowN of Michigan. That is true; but let me interrupt you to
say that if the law is enacted as you and your Corporation want it to
be enacted, that is, with the elimination of nonmember State banks
from the Federal Reserve Corporation, then the argument that you
are just making would not apply?
Mr. CROWLEY. That is correct.
Let me say to you that there is no duplication of Federal examina
tion at this time. I mean by that that the Comptroller examines the
national banks, the Federal Reserve Board examines only the
Federal Reserve member banks, and we examine only the State banks.
Let me add, on this matter of examination, that the Federal
Deposit Insurance Corporation cannot be put off here all by itself
and not be permitted to use the usual precautions that will be neces
sary in order to keep this fund sound.
Mr. BROWN of Michigan. You have all of that authority under the
existing law.
Mr. CROWLEY. We have not the authority to do this. All of the
help that we have had so far has been in going into the banks and
working with the State commissioner and, by moral persuasion,
getting the banks to build their capital, make their application to
the Reconstruction Finance Corporation, and things like that.
Mr. BROWN of Michigan. When you made that statement I was
inclined to disagree with you. You made it in your opening state
ment. On page 13 of the original act it provides that such certifica
tion to the Corporation by the State hanking commissioner that the
bank is in a solvent condition shall, after examination by and with
the Corporation, be entitled " and so forth. I grant you that great
pressure was brought upon you to be liberal about that, but you had
no legal right under the law to admit any bank that was not solvent,
and, of course, that means solvent not only as to its deposit liability,
but solvent as to its capital.
127207— 35------ S

110

BANKING ACT OF 19 3 5

Mr. B i R D Z E L L . The definition of solvency is given in the act, and
it says " whose assets are sufBcient to meet its liability to depositors
and other creditors."
If you will look further, that is the definition that we are revising
in this new draft.
Mr. BROWN of Michigan. You feel that until this serious question
of what is going to become of several thousand nonmember State
banks is solved, that we cannot very well set up a national bank
examining department ?
Mr. CROWLEY. I think this, Mr. Brown, that you have seen the
opposition to your State banks in joining the Federal Reserve
System-----Mr. BROWN of Michigan. Yes.
Mr. CROWLEY (continuing). And over a period of 20 years 960
have joined. Now, if you put the 7,800 State banks virtually under
a national examining supervision, I think that you would have the
same objection that was expressed to their joining the Federal
Reserve System.
I think that this whole matter must be taken step by step and
corrected each year until you finally get the system that you wish.
Mr. BROWN of Michigan. I may want to pursue that a little bit
further, but, before we close I would just like to call your attention
to one item on page 27 of the comparative print.
You will remember, Judge Birdzell, when the section of the law
which was called the Steagall amendment was attached to the
Federal Deposit Insurance law last spring, and that provided that
loans to closed banks were to be made through the Federal Deposit
Insurance Corporation.
Mr. B i R D Z E L L . Yes, sir; that is the way the House passed it.
Mr. BROWN of Michigan. And when it got to the Senate and came
back, our conferees agreed that it would go to the R. F. C.
Mr. BiRDZELL. Yes.
Mr. BROWN of Michigan. You will remember that either your de
partment or Judge Reed's department in the R. F. C. held that
under the wording of the statute, loans to closed banks or the assets
of closed banks could only be made on sale of all the assets. I do not
remember whether that was your ruling or the ruling of the R. F. C.
Mr. BiRDZELL. That ruling was not our ruling.
Mr. BROWN of Michigan. There was such a ruling, and I am sure
that the gentlemen on the committee remember that ruling.
Why not clarify this language here, which is identical, so that
you can make loans upon the qssets in whole or in part! Do you
not think that that amendment would be desirable!
Mr. BiRDZELL. There could not be any objection to that amend
ment at all.
Mr. BROWN of Michigan. Because that ruling was made, so thaf
you could loan on a part of the assets.
Mr. BiRDZELL. There would not be any objection to that kind o i
an amendment at all.
May I say, while we are on that subject, that that ruling was not
made during the pendency of that bill m Congress last year. It was
made subsequently, and it was not our ruling.

BANKING ACT OF 19 35

Mr. BROWN of Michigan. I think that you are a little bit unfair
to the depositors when you require them to file a claim within 1 year.
It is readily conceivable that a great many people may be away on
trips, or something of that kind.
Mr. BiRDZELL. We have no objection at all to a longer period. The
reason 1 year was suggested is because that is a sort of a prevail
ing contract limitation in insurance contracts, generally.
Mr. BROWN of Michigan. I understand it is.
Mr. BiRDZELL. And it was generally thought to be reasonable, but
if the committee should think that a longer period should be pro
vided for, 18 months or 2 years, all right.
Mr. BROWN of Michigan. I thought that perhaps we could clear
it up by some language to this effect, that when the claim is clearly
meritorious and not contested by the bank itself, the amount should
be paid, but if it is a case where there is any contest about it, I
would not object to a limitation.
Mr. CROWLEY. You understand that in a great many banks they
accumulate a lot of very small balances, maybe of 38 cents or $1, or
$2, or $5, and sometime or other we ought to be able to eliminate
ourselves from that liability.
Mr. BROWN of Michigan. On page 27, in the matter of loans to
banks concerning which you spoke a short time ago, Mr. Crowley,
where you are going to bring about a consolidation in order to avert
disaster, why do you limit that to July 1, 1936!
Mr. CROWLEY. For this reason-----Mr. BROWN of Michigan. Why should it not be permanent?
Mr. CROWLEY. What we would like to do is to operate it for a
year, and then we will come back and give you the benefit of our
experience and then have you extend it if you believe that it has
been entirely successful. There is grave danger in paying the losses
of these banks too easily. It might cause the banks to become care
less ; that is the reason we limit it so we can have a little experience
to guide us in the future.
Mr. BROWN of Michigan. A little trial legislation?
Mr. CROWLEY. That is right.
Mr. BROWN of Michigan. I would very much like to see you give
consideration to that matter of seeing that we do not have too many
different groups of Federal examiners investigating these banks. I
think that that is a serious question.
The CHAIRMAN. I want to ask if anyone else desires to interrogate
Mr. Birdzell or Mr. Crowley?
Mr. D iR K SE N . Yes; I d o .
The CHAIRMAN. Then we will meet tomorrow morning and resume
this questioning at 10:30.
(Thereupon, at 12:45 p. m., an adjournment was taken until
Thursday morning, Feb. 28,1935, at 10:30.)

BANKING ACT OF 1935
THURSDAY, FEBRUARY 28, 1935
HOUSE OF REPRESENTATIVES,
C O M M IT T E E

B A N K IN G

AND

CURRENCY,

77. C.
Hearings on title I of the bill above referred to were resumed at
710:30 a. m., Hon. Henry B. Steagall (chairman) presiding.
The CHAIRMAN. The committee will be in order.
I do not have before me the list of those who have already ques
tioned the witnesses, but I believe that Mr. Dirksen indicated at
the close of yesterday's session that he wanted to ask some questions.
STATEMENTS OF LEO T. CROWLEY, CHAIRMAN, AND L. E. BIRDZELL, GENERAL COUNSEL, FEDERAL DEPOSIT INSURANCE
CORPORATION— Resumed

Mr. D iR K SE N . Mr. Crowley and Mr. Birdzell, in the comparative
print, on page 33, I want to direct your attention for a little bit to
the new language there, which states that no State nonmember bank,
other than a mutual savings bank, or a Morris Plan bank, or a bank
located in the Territories of Hawaii or Alaska, shall become or
continue an insured bank after July 1, 1937.
Now, a State nonmember bank, of course, is not a member of the
Federal Reserve System.
Mr. BntDZELL. That is correct.
Mr. DmKSEN. It means that these banks are going to be compelled
to become members of the Federal Reserve System, or else the socalled "State nonmember banks" can have no insurance after July
1, 1937.
Mr. BiRDZELL. That is correct.
Mr. D iR K SE N . That is the proper inference from that paragraph?
Mr. BmDzELL. That is correct.
Mr. D iR K SE N . First of all, the question arises in m y mind as to
why, if a State bank is solvent, and if it is sound, and it is so dis
closed to be upon your own examination, such a bank should not be
insured without having to become a member of the Federal Reserve
System.
Mr. BiRDZELL. Mr. Congressman, that provision is in here in the
form that it is because section 12 (b) as passed originally, in June
of 1933, contained a similar requirement, except that the date was
July 1, 1936; that is, nonmember banks were permitted to obtain
the benefits of the insurance until July 1, 1936, without joining the
Federal Reserve System. Then, when the temporary fund was
extended for a year, that date was also set ahead a year, so as to give

113

114

BANKING ACT OF 19 3 5

the nonmember banks the benefits of the insurance until July 1, 1937,
instead of 1936.
Whatever the policy may be with respect to that question Congress
apparently considered at the time the Banking Act of 1933 was
under consideration here, and the Corporation has not suggested
any change in that respect, because it does not particularly affect
its operations. That is a matter of policy primarily for the con
sideration of Congress. There is an exception----The CHAIRMAN. Let me interrupt you for just a moment.
Mr. BiRDZELL. The exception relates to the mutual savings banks
and the Morris Plan banks. Our experience with regard to them
shows that there is no likelihood of those banks finding a place in
the Federal Reserve System, and we have suggested the amendment
which would enable those banks to continue insurance without join
ing the System.
Anything that Congress may do with respect to other banks is
something that we have no particular feeling about one way or the
other.
The CHAIRMAN. Let me say this in that connection, that the pro
vision in the Banking Act of 1933 requiring State nonmember
banks, in order to avail themselves of the benefits of participation in
the deposit insurance, to become members of the Federal Reserve
System after July 1, 1936, was stubbornly contested. The House
bill had no such provision, but provided for the admission of member
banks and State nonmember banks without discrimination, but the
Senate bill limited the insurance to member banks. The older mem
bers of the committee are familiar with the differences of opinion
that obtained among the members of the conference committee, and
I presume that you are, on that bill. This is the simple fact of the
matter, that we found ourselves with the adjournment of Congress
approaching, and the conferees deadlocked over two propositions, one
of which was the provision providing that national banks should be
permitted to have branches in all States where State laws permitted
such branches. That provision, and the provision requiring member
ship in the Federal Reserve System after July 1, 1936, in order to
participate in deposit insurance, were the two controversial points,
and we fought those out down to almost the hour of adjournment.
Rather than see the legislation embodied in the so-called " Glass
bill", which had been developed as a result of long hearings and
labor on the part of Senator Glass and his committee in the Senate,
defeated, and rather than to see the defeat of the insurance plan
which in a former session of Congress passed the House, and which
was embodied in the bill then under consideration, and which the
conferees for the House were exceedingly desirous of adopting, we
Rnally agreed to an amendment which would permit branch bank
ing and we yielded on the provision requiring membership in the
Federal Reserve System as a condition precedent to participation in
the benefits of deposit insurance by nonmember banks.
Last year when the act was passed extending the temporary in
surance, another compromise was reached respecting the privilege of
nonmember banks of participating in deposit insurance by postpon
ing until July 1, 1937, the date upon which they should be required

BANKING ACT OF 1 9 3 &

115

to become members of the Federal Reserve System in order to par
ticipate in the insurance benefits of the Corporation.
Now, of course, all of those questions will arise again in this com
mittee and in the House, and probably in the conference when this
bill is to be passed upon later.
Mr. DiRKSEN. Mr. Chairman and Mr. Birdzell, let me point out
what is bound to happen under this provision, which you have to
read in connection with section 202 of this bill, in title II. Your
paramount interest for the moment is in title I, but I suppose that
every member of this committee has had the same experience that
I have had in the last 2 years, where I helped or sat in on the reor
ganization of 12 or 15 small banks out in tne central part of Illinois.
We had to go to the depositors and take waivers of anywhere from
15 to 50 percent, and when these banks were finally reorganized, they
had to issue in lieu of the amount of money that was waived by the
depositors, so-called " deferred certificates , which are payable out
of earnings, and there is not any other way to pay them.
Now, the Federal Reserve bank in Chicago maintains that those
deferred certificates are a contingent liability, and they will not ac
cept them, and they will not accept any bank which has those de
ferred or contingent liabilities outstanding.
You take a bank in a small town, say of 1,000 people, where they
had to waive 50 percent of the deposits and in lieu thereof issue
these certificates, which became a charge upon the earnings of the
bank if and when earned; certainly a great many of these banks
cannot even earn enough money between now and the 1st of July
1937 to get those certincates out of the bank. They are there as a
definite charge upon earnings.
If then the Federal Reserve System does not accept those banks
because these contingent liabilities exist, and if you do not give insur
ance to those banks because they are not members of the Federal
Reserve System, then there is only one thing for them to do, and
that is either to go out of business or otherwise try to get along with
out the benefits of insurance.
I might elaborate on that a little bit. You may remember that
41 percent of all of the banks in this country are in towns of under
1,000 people, and in section 202 of this bill you will notice-----Mr. BiRDZEiJ,. What page is that?
Mr. DiRKSEN. That is on page 41, that particular section—you
will notice that that section says that the Federal Reserve Board,
in order to facilitate the admission of these banks, has authority to
waive in whole or in part the requirements of this section relating
only to the capital requirements of a bank.
Now, we have 2,900 banks in this country that have a capital of
$25,000, and in those cases the Federal Reserve Board, under this
section, has a right to waive those requirements if it desires, but it
has no right to waive any requirement with respect to a contingent
liability, and you are going to put those banks out of business under
that section. Either they will have to become members of the Fed
eral Reserve System, or not get insurance, and it constitutes a club
which is ^oing to have two effects, to put some banks in the Federai
Reserve System that do not want to go in, and^ secondly, there are
some banks that will not be able to go in, and, if insurance is materia?

116

BANKING ACT OF 19 35

to the stability, the soundness, and the continued operations of banks,
they will have to go out of business.
Mr. BiRDZELL. I think that there is merit in the Congressman's
suggestion, particularly with reference to the effect of the waivers
that he spoke of. We have come across a number of instances where
the depositors had waived a certain amount of their deposits and
released the bank from any obligations so far as that liability was
concerned, and that enabled the bank to reorganize.
The CHAIRMAN. Let me say a word right here in connection with
what Mr. Dirksen just said, in order to bring the history of this
transaction down to date.
It is not unfair to say that the conferees on the part of the House,
when this bill was under consideration, would never have yielded
in connection with this provision and permitted this provision to
be enacted requiring State nonmember banks after the 1st of July
1936, to become members of the Federal Reserve System if they were
to participate in the benefits of deposit insurance, if we had not felt
that the Congress could be trusted before that time to enact proper
legislation to extend the benefits of the Deposit Insurance Corpora
tion to the nonmember banks.
Mr. REiLLT. There will be two sessions of Congress after this one
before that will become effective.
Mr. DmKSEN. Before what!

Mr. R E IL L Y . Before the 1st of July 1937 will be here, and I think
that this discussion at this time is beside the issue, because Congress
will later be in a better position to determine what should be done
with State banks that do not come into the Federal Reserve System.
We might pass a law today, and it might be changed in 2 years.
Mr. D iR K SE N . But, on the other hand, we are writing a permanent
bill here now.
Mr. REILLY. It is permanent only until the next Congress sees Rt
to change it.
Mr. DiRKSEN. But it easier to try to get it right in the first place
than to have to come along later and change it.
Mr. W iL L iA M S . That is especially true when it should never have
been in there in the 6rst place.
Mr. D ntK S E N . Precisely.
Mr. BiRDZELL. If I may complete the statement that I started to
make a moment ago, I think that I can shed a little light on this mat
ter from the standpoint of its actual operation.
As the Congressman said in the case of those reorganized banks
where there are deposit waivers and the depositors have some kind
of a deferment certiScate, but no claim against the bank, only against
its earnings, we have reviewed in the legal department of the Deposit
Insurance Corporation many hundreds of reorganizations where
that element entered, and you will appreciate that such banks were
not eligible for membership in the Deposit Insurance Corporation
unless they were solvent. Whether deferment certificates of this type
constitute liabilities of the bank, has much to do with whether mat
bank is solvent and, consequently, eligible. Wherever we became
satisfied that the bank would not be liable for the amount of those
deferment certificates, we held that the bank was solvent, and in
sured it.

BANKING ACT OF 1 9 3 5

117

Now, what attitude the Federal Reserve Board may take with
respect to that same question I cannot tell you. I do know that
there have been instances where banks have been reorganized on a
deposit-waiver basis, where the Federal Reserve Board has ques
tioned whether the banks had the unimpaired capital required under
section 9 of the Federal Reserve Act; so that that is one of the things
that is going to confront Congress in dealing with this question.
The Reconstruction Finance Corporation has taken very much the
same view of that matter that we have taken in the Federal Deposit
Insurance Corporation.
So the Congressman does raise a question that should be con
sidered whenever this matter of Federal Reserve membership re
quirement is under consideration, and particularly where the capital
requirements of section 9 are under consideration*
Mr. DiBKSEN. Then, Mr. Birdzell, as a general thing, is there
any reason why a sound and solvent bank should not have insurance
and continue to have it!
Mr. BiRDZELL. I do not want to suggest any reason why it is not
entitled to insurance.
Mr. DiRKSEN. We have about 3,000 banks in this country that
have been operated continuously for 50 years, a great many of
them being State banks, and when a bank has a record like that, is
there any reason why you should either force them into a system or
not give them insurance?
M r . FoR D . I f w e a r e g o i n g t o h a v e a u n i f i e d b a n k i n g s y s t e m , w h y
n ot have one !
Mr. DiRKSEN. Why compel State banks to surrender all of the

rights that they have, and crowd them into a system when probably
they will not derive any benefit from it!
There are two or three banks in Missouri that have not missed a
dividend for 20 years, and one of them a few years ago declared a
dividend of 50 percent, and they never had occasion to use the Fed
eral Reserve System. They do the banking business of their com
munity, and they have never rediscounted paper, and their services
have been adequate in their community.
Why force banks like that into the Federal Reserve Svstem,
when they do not want to go in, and it carries with it the additional
burden of further examinations!
Mr. F oR D . There are a good many things that a great many insti
tutions do not want to do, and they have been allowed to run along
in their own way, and as a result others have been the victims of
their action.
Mr. DiRKSEN. That is beside the point, because those banks that
you refer to cannot qualify for the benefits of the F. D. I. C. But
now you bring in this alternative proposal, of either shoving them
into the Federal Reserve System, or else they cannot get insurance.
Mr. F oR D . Of course, my view at the present time is-----Mr. DiRKSEN. And no case has been made out to show why they
cannot get it, if they can qualify.
Mr. FoR D . I would like to have this put into the record, on the
statement of somebody else, that there are supposed to be 8,500
State banks outside of the Federal Reserve System. Is that about
right!

118

BANKING ACT OF 19 3 5

Mr* D iR K SE N . I t h i n k so*
Mr. F oR D . I would like to have a study made to see what percent
age of those banks and to what extent they were strengthened by
the R. F. C. in proportion to the banks that were in the Federal
Reserve System.
Do you get my point?
Mr. Fox* That is in the testimony.
Mr. BiRDZELL. That study has been made.
The CHAIRMAN. That is something that I have been wanting.
Mr. FoR D . I w a n t t h a t s t u d y m a d e i n a w a y s o t h a t w e c a n m a k e
3 n i n d e p e n d e n t s t u d y o f t h a t s it u a t io n .
The CH A IR M AN . iJet us have it as it is;

let us not let those figures
be played up in a way so that they do not depict the real situation.
Mr. Fox. They are on page 30 of Mr, Crowley's first statement.
Mr. D iR K SE N . I have one other question, and I think that I raised
this question a year or two ago, with respect to the provision start
ing at the bottom on page 12 of the comparative print, subsec
tion (i).
I understand from the full text of that section that banks whose
insurance has been terminated will be compelled to pay assessments
^or an additional 2-year period, and that that coverage for an addi
tional 2 years will be imposed upon them whether they will or not.
I think that that is quite long to require that period of 2 years,
because in that same section the Corporation is given the power to
require any kind of notice to be given, can give the notice itself or
compel the bank to give the notice. You can send the notices by
mail, or compel circulation of the notices in a newspaper for a month
or two, and I should say that 6 months would be an ample time and
that thereafter no further assessment should be required.
Mr. BntDZELL. Two years may be too long, but I believe that 6
months would be too short.
M r . D iR K SE N . P o s s i b l y s o .

Mr. BiRDZELL. We do not want to be open to the charge of not deal
ing in good faith with depositors of banks, and we would rather err
on the side of having that period too long than on the side of having
it too short. It is a matter of judgment.
Mr. DiRKSEN. Of course, in the metropolitan centers a little longer
time might be required, but in a community of 1,000 people, and
almost half of our banks are in towns of that sort, for all practical
purposes a week would be ample notice.
Mr. CROWLEY. I do not object to cutting it down from 2 years to
some extent, but it should be a long enough time so that there can
be no doubt in our minds but that the depositor has had plenty of
time in which to make up his mind as to whether or not he wants to
keep his money in that bank. Furthermore, if the bank is an insti
tution that has been doing things which caused us to put it out of
the fund, there is a question as to whether we should not give them
ample protection for a long period of time, to enable them to correct
their practices and again quality for insurance.
I do not think that the judge or any of us has any objection to
any compromise in that particular, but the time should be long
-enough. I do not see that it is any great hardship to the bank to
have a period of 2 years, and it is a great benefit to the depositor.

BANKING ACT OF 19 3 5

119

Itiis also of great benefit to the Corporation. These banks that
are badly managed, these banks that should be put out of the fund,
should have some string on them until you know that the depositors
have had that opportunity to which I have referred.
The CHAIRMAN. Let me say this, please, in this connection, and
I do not want to prolong this discussion unnecessarily, that the De
posit Insurance Corporation was never established, nor was the
plan of insurance deposits designed, nor in my judgment should it
be used, for the purpose of settling any quarrel between the nonmem
ber bands and the member banks. Some believe that we should have
a unified banking system, and if that view has enough support to
express itself in legislation, let those who believe in a uniGed banking
system in this country devote their efforts to that purpose, but let
it be fought out on its own merits; and if we are not to go the whole
way and adopt a unified system, let us leave the matter of member
ship in the Federal Reserve System for State nonmember banks
to be determined by the nonmember banks themselves, as provided in
the Federal Reserve Act. I f a State bank wants to join the Federal
Reserve System and finds it desirable, if the inducements are such
that the State bank wants to come in, let it come, but with all of its
rights under its charter issued by the State in which it does business.
This question of insurance on bank deposits ought not to become
involved in any way with the permanent policy respecting a unified
or dual banking system. I have my views about that, but I do not
think that they have any proper place in legislation affecting bank
deposits.
What we are trying to do here is to protect the public against
-bank failures and against the horrors that have attended bank
failures heretofore, and let that legislation be dealt with on its own
merits, and leave this question of membership and nonmembership
in the Federal Reserve System to be fought out in a normal way,
on its own merits.
I believe in membership in the Federal Reserve System, but un
doubtedly there are banks that do not want to join the Federal
Reserve System, and certainly, as I see it, it is not necessary, and
surely not indispensable, that every bank in the country should be
long to it or be members on a definite date.
Mr. ReiLLY. Do you not think that the Congress of the United
States will be in a better position 2 years from this time to decide
the question whether we want a unified banking system, after we
have had 2 years more experience, than it is today? That matter
can well be deferred until 2 years from this time, when we can make
a better final decision on it.
Mr. DiRKSEN. I think you are right, but this section would have
to come out of the bill, because that is an instrument of compulsion
to force them in.
Mr. W iLL iA M S. And you ought not to wait until the last day to
do that. I think that you ought to take it up right now, and give
them at least 2 years' notice that we mean to make this a permanent
policy, and not compel these State nonmember banks to wait until 2
years from now to see what they are going to be up against.
Mr. CLARK. I just want briefly to supplement what you said, if
I may.

120

BANKING ACT OF 1 9 3 5

As I said the other day, regardless of politics I think that the
Federal Deposit Insurance Corporation has the conSdence of the
people of this country. I know that it saved our West.
There has been some question as to whether or not the Federal
Reserve System, at least as it existed in 1929, did not break down.
There is a grave question in the minds of a lot of people in this
country as to the soundness at all of the Federal Reserve System.
Many of the small banks disapprove of it*
I do not believe that we should, under any circumstances, use a.
well-respected institution like this institution is, which has the con
fidence of the country, to club nonmember banks into a system which
may not have the confidence of the country.
I just wanted to make that one observation.
Mr. FARLEY. In the figures that you have submitted, is there any
thing that might be a guide as to how many of these banks could
not qualify, if this bill went through ?
Mr. CROWLEY. I think that 72 percent of the nonmember State
banks which are insured could qualify on their capital position now.
In other words, in the rebuilding program that has been taking
place, we have tried to base it so that they would have suSicient
capital to be eligible under the capital requirement.
Mr. FARLEY. I do not know that this question is germane to the
bill that we are considering here, but does your Corporation feel that
there are still too maiy banks!
Mr. CROWLEY. No; I do not think that that is generally true now,
Mr. Congressman. I think that the banks that have survived this
depression certainly showed themselves pretty well able to take care
of their situation. There may be certain isolated places where we
are overbanked, but I think that as a general proposition the country
can support the number of banks that we have now, if properly
located.
The big trouble is that you may go much further than the banks
that we have now, in extending new licenses.
Mr. FARLEY. Did this elimination of daily balances do the bank
ing business any good ?
Mr. CROWLEY. Do you mean the elimination of the interest on daily
balances!
Mr. FARLEY. Yes; the elimination of the interest on daily balances.
Mr. CROWLEY. Yes; Mr. Congressman, it did.
The banks were faced with the problem of reducing expenses in
proportion not only to their volume of business but also to the
reduced rate of earnings on the business that they had. As I ex
plained the other day, the elimination of interest on daily balances
subject to withdrawal on demand was an important factor in reduc
ing expenses.
Mr. FARLEY. Is there any demand that you know of on the part
of the large, central banks that that provision be restored, so that
they may pay interest on daily balances?
Mr. CROWLEY. I know of no demand from any source, either large
or small.
Mr. FARLEY. When we put that into the law, there was a great
deal of talk then along this line, that if we could hold this money in
the smaller banks and eliminate that 2 percent on the daily balances,.

BANKING ACT OF 19 3 5

121

or any other percent, they would use the money at home instead of
using it in the larger centers.
Has that worked out that way ?
Mr. CROWLEY. Of course, that is a very hard question to answer,
because there has been a very limited demand for new credit on
account of your business depression. I do not know how that would
work in normal times. I think that under the theory of the insur
ance of deposits, as I said yesterday, the banks might employ a larger
percentage of tneir deposits in local loans, because I do not think
they have to have that extreme liquidity through fear of runs that
they might have had before.
Mr. FARLEY. I think that the intent of this bill—and I do not refer
to you gentlemen personally—is further to eliminate banks, to get
rid of a lot of banks that we now have. I am just wondering how
many would have to go if we did it. Today we would lose 28 percent
of them.
Mr. CROWLEY. In what way! Do you mean that we would elim
inate 28 percent on account of joining the Federal Reserve System!
Mr. FARLEY. I mean that they could not get through.
Mr. CROWLEY. I do not like to get into the controversy on Federal
Reserve membership, because that is another part of this bill; but I
might say that I have always had enough confidence in legislative
bodies, and I have enough confidence in you men to feel that when
the time comes, if there are 2,000 or 3,000 banks in this country that
cannot join the Federal Reserve System, certainly you are not going
to put those banks out of our insurance system. I do not b&ieve
that you are going to put into liquidation 2,000 or 3,000 banks. From
our own standpoint, all that we have to do is to be reasonable. If
you were going to put 2,000 or 3,000 banks into our laps for liqui
dation, we would be the first ones to tell you how impracticable
that was, because of the cost to ourselves. So I have a lot of conRedence that somewhere along the line that will be adjusted, so that
the great majority of the State banks are going to be cared for.
Mr. WiLLiAMS. There is one thing that I do not yet understand,
and I want to get the record straight on it. You say that there
are only 72 percent of these nonmember banks that can qualify!
Mr. CROWLEY. I mean by that, Mr. Congressman, that under the
present Federal Reserve Law, they must have a minimum capital,
and 72 percent of these banks already have sufficient capital to m e e t
that requirement.
Now, under part 2 of this bill, the Federal Reserve Board is ask
ing for authority so that they may waive that minimum requirement
of capital.
Mr. WiMJAMS. Let me ask you this, then: Have you not already
qualified more than 72 percent of them for admission .into the tem
porary fund!
Mr. CROWLEY. Do you mean by the temporary fund, the Federal
Deposit Insurance Corporation!
Mr. W iL L iA M S . Yes.
Mr. CROWLEY. Of course, there are 7,800 State nonmember banks.
You and I are talking about two different things. I say that there
are 72 percent, Mr. Congressman, that are members of our fund now
whose capital position is sufEcient to joint the Federal Reserve Sys

122

BANKING ACT OF 1 9 3 5

tem with the old provision governing capital requirements for Fedr
eral Reserve members.
Mr. WiLLiAMS. I am not talking about the Federal Reserve. T
do not know whether Mr. Farley was or not.
Mr. FARLEY. Your answer was just what I wanted.
Mr. W iLLiAM S. I am talking about the number of nonmember
banks that can qualify under the law as it is now and come into the
temporary insurance fund, and automatically pass into the insured.
Mr. CROWLEY. There are only 1,100 banks, Mr. Williams, State
banks, that are outside of our fund today, and our law calls for the
7,800 banks now members of our fund to automatically become mem
bers of the permanent fund.
Mr. W iLLiAM S. They automatically pass in on the effective date
of this law?
Mr. CROWLEY. That is right.
Mr. W iLLiAM S. And that is more that 72 percent.
Mr. CROWLEY. Yes; but we are talking about two different things.
That is 90 percent.
M r . W iL L iA M S . N o w , y o u h a v e a l r e a d y q u a liR e d t h a t n u m b e r o f
b a n k s f o r th e t e m p o r a r y fu n d , a n d q u a lin e d th e m f o r th e p e r m a n e n t
f u n d ; t h a t is , u n t i l J u l y 1, 1987.
Mr. CROWLEY. That is correct.
Mr. W iLL iAM S. Is there any reason why they should not pass right

on into the permanent system after July 1, 1937?
Mr. CROWLEY. You mean, in our permanent system!
Mr. W iLLiAM S. Yes.
Mr. CROWLEY. They would go into our permanent system just as
soon as you pass this bill.
Mr. W iLLiAM S. But they go out on July 1,1937.
Mr. CROWLEY. My answer to that is this, Mr. Williams: As I said,
I have enough confidence in Congress to feel that they are not going
to force out of our insurance system 2,000 or 3,000 banks.
Mr. W iLLiAM S. You see what my point is, that you have already
qualified them, and they automatically pass into the system on the
effective date of this law and will be members of the system at least
until July 1, 1937, and my inquiry is why they cannot remain in the
system after that date.
Mr. REILLY. I might suggest that that will depend entirely upon
the judgment of Congress as to whether or not we shall have a unified
banking system.
Mr. W iLLiAM S. I am asking if there is any reason on the part of
this Corporation why that cannot be done. If there is, we would like
to have it, because that question will confront us from now on.
Mr. CROWLEY. I think this, that in dealing with that provision, you
have to take into consideration your capital requirements and the
advantages to your smaller banks of membership in the Federal
Reserve System. That, to my mind, is entirely a matter for Con
gress to determine. As I said, unless you change the Federal Reserve
law and liberalize it so that these banks can qualify, there will be at
least 2,000 of them that cannot come in unless we build their capital
structure up for them.
To put 2,000 banks out of the insurance fund would be a very
serious matter.

BANKING ACT OF 1 9 3 5

123

Mr. REILLY. You said that about 1,500 nonmember banks are out
of the insurance system.
Mr. CROWLEY. About 1,100.
Mr* RsiLLY. Why are they unable to come in and qualify?
Mr. CROWLEY. A very small percentage of these banks felt that
they did not need it.
Mr. RsiLLY. What percentage of those banks that could come in
did not come in?
Mr. CROWLEY. We do not know, exactly.
The CHAIRMAN. Of course, there is no way on this earth by which
you can know how many banks failed to apply for participation in
the deposit fund because they felt that they do not need it, or for
other reasons. You do not know anything about those who did not
apply.
Mr. CnowLBT. We made the best analysis that we could, but, of
course, we cannot say that that is the reason.
The CHAIRMAN. You cannot analyze a bank that you never had
anything to do with.
Mr. CROWLEY. Taking the 1,100 banks outside of the fund, their
deposit liability only amounts to a little over $500,000,000, so, as a
whole, they are very small banks. But there are two or three reai
large ones.
M r . W iL L iA M s . B u t t h a t d o e s n o t m e a n t h a t t h e y d o n o t s e r v e a
u s e f u l p u r p o s e in t h e i r c o m m u n it ie s , a n d t h a t t h e y a r e n o t s o u n d ?

Mr. CROWLEY. That is correct.
I think this: That really the ambition of the Federal Deposit In
surance Corporation should be to get every bank in the Federal
Deposit Insurance system, for the protection of depositors, even
though they had to make some adjustments in order to get them in.
M r . W iL L iA M s . W h a t p e r c e n t a g e
in su ra n c e h a v e n o t b e e n a d m itt e d ?

o f th e b a n k s th a t a p p lie d

fo r

Mr. CROWLEY. We admitted to the temporary fund all except 200
banks that made application, but what we did was this; we took
them in. and then we rebuilt them afterward.
Mr. WiLLiAMs. Then there have been about 200 out of all of these
applications that have been definitely and finally rejected!
Mr. CROWLEY. Yes.
The CHAIRMAN. I want to ask something about that, Mr. Williams.
How many .State banks that are nonmember banks belong to the
Deposit Insurance Corporation and participate in the insurance!
Mr. CROWLEY. Seven thousand eight hundred, Mr. Chairman.
The CHAIRMAN. How many member banks, both national and State
member banks, participate in the deposit insurance fund!
Mr. CROWLEY. Six thousand three hundred; that is, State and na
tional member banks.
The CHAIRMAN. Now, you have 7,800 nonmember banks that par
ticipate in the Deposit Corporation!
Mr. CROWLEY. That is right.
The CHAIRMAN. Now, the Reconstruction Finance Corporation has
supplied to those 7,800 banks $184,000,000 to replenish tbeir capital,
has it not?
Mr. CROWLEY. $256,000,000 up to February 1, Mr. Chairman.

124

BANE3NG ACT OF 19 3 5

: The CHAIRMAN. And you supplied to national banks $465,000,000
through the R. F. C. ?
Mr. CROWLEY. That is right.
The CHAIRMAN. And to your nonmember State banks, numbering
7,800, you have supplied $256,000,000?
Mr. CROWLEY. That is correct.
The CHAIRMAN. And, to your State member banks, numbering
about 900, you supplied $238,000,000?
Mr. CROWLEY. That is correct—960 such banks, instead of 900.
The CHAIRMAN. So that to your 7,800 nonmember banks that are
insured, the R. F. C. has extended $256,000,000, and to the member
banks $703,000,000. That does not seem to indicate that your State
banks involve any greater hazards or present any worse difHculties
than your national banks or member banks.
Mr. CROWLEY. Just let me answer t h a t off of th e record.
*
*
*
*
*
*
*
The CHAIRMAN. What is the amount of the deposits of your na
tional banks?
Mr. Fox. About 20 billions.
The CHAIRMAN. Is that for the national banks or for the members!
Mr. Fox. Just the nationals.
The CHAIRMAN. What is the amount of the deposits in your mem
ber banks ?
Mr. CROWLEY. You mean your State member banks.
Mr. Fox. Twelve billions.
The CHAIRMAN. So that you have 32 billions of dollars of deposits
in the banks that are members of the Federal Reserve System.
Mr. CROWLKY. That is correct.
The CHAIRMAN. What is the amount of the deposits in your non
member State banks!
Mr. Fox. About $4,800,000,000.
The CHAIRMAN. Those figures are not what I thought they would
be.
Mr. CROWLEY. Where you become confused a little bit is that we
are talking only about State banks that are commercial banks. If
you add the savings banks, that increases your total tremendously.
Mr. W iL L iA M S. Let me ask one other question, and then I think
I will be through.
In all of these Sgures respecting insured banks that we have be
fore us, I think your latest report ia as of last June. If we could
get those figure^ right up-to-date, I would appreciate it, and I think
that we ought to get them into the record.
What is the number of the national banks that are insured now,
and I would like to have your figures the same as they are in your
report, by classes.
Mr. FisH. May I ask a question!
The CH A IR M A N . I suggest that you supplement your statement by
the Sgures that Mr. Williams asked for, and if you do not have
them you can get them from the Comptroller's CMEce.
Mr. Fox. This is for January 31,1935.
Mr. W iL L iA M S. January 31 is all right.
Mr. Fox. Five thousand four hundred and sixty national banks.
Mr. W iLL iA M S. Now, your State banks that are members of the
Federal Reserve System!

BANKING ACT OF 1 9 3 5

125

Mr. Fox. Nine hundred and seventy-five.
Mr. WiLLiAMS. And your State banks that are not members of the
Federal Reserve System?
Mr. Fox. Seven thousand seven hundred and thirty-five.
Mr. WiLLiAMS. And your Morris Plan banks?
Mr. Fox. That is included in that.
Mr. BiRDZELL. They are in the State nonmember bank figures.
Mr. W iLLiAM S. The total, if you have.it? Of course, that is just
a matter of figuring it up*
Mr. Fox. Fourteen thousand one hundred and seventy.
Mr. W iLLiAM S. Now, have you at this time the exact number of
State member banks, commercial banks, that are not in the system
at all?
Mr. Fox. One thousand and sixty-six.
Mr. FisH. This may already be in the record, but I have not at
tended the hearings regularly. If it is not in the record, I think it
should be.
I would like to know the total amount of deposits that have been
insured, and the percentage of the deposits that have been insured.
Mr. CROWLEY. In the entire banking system, or of the members of
our fund?
Mr. FisH. I should think both. Can you tell that percentage?

Mr. CROWLEY. 43.49. In other words, of the 38% billion dollars
in deposits in the entire system, they are insured 43.49 percent.
Mr. FiSH. Therefore, when you provide for An assessment of onetwelfth of 1 percent, it is one-twelfth of 1 percent of the total de
posits, and not of the insured deposits?

Mr. CROWLEY. That is correct.
Mr. FisH. So it really amounts to about one-sixth of 1 percent of
the deposits that are insured?

Mr. CROWLEY. That i s correct.
Mr. Fisn. I really wanted to clear that up in my own mind. I
figured that on the basis of one-twelfth of 1 percent on the insured
deposits, the assessment might be too low to take care of the situa
tion except during normal times, but as long as it covers all of the
deposits, it really amounts to one-sixth of 1 percent of the total
deposits.
Mr. CROWLEY. Of t h e i n s u r e d d e p o s it s .
Mr. F i s H . I would like to ask you this—and I hope that i t is
not an embarrassing question—whether you could tell the com
mittee who sponsored or wrote or originated title I?
Mr. CROWLEY. Well, I think that we can very safely say that it
was our legal department and our statistical division.
Mr. Fisn. And when you say " our legal department", you mean
of the F. D. I. C.?
Mr. CROWLEY. Of the F. D. I. C., and the board of directors,
and we did have some help from Mr. Ekern, who gave us some
ideas on this thing. He is an insurance man, an insurance lawyer.
Mr. Await and Mr. McGrath of the Comptroller's staff also gave
substantial assistance.
Mr. Fisn. Those are the facts that the committee ought to know.
So far as I am concerned, I want to congratulate you. You did a
very fine job.

126

BANKING ACT OF 19 35

O f course, I want to make it clear that I am referring to title I,
and to title I only, in my commendation.
Mr. CROWLEY. I think that what I said about that was correct?
Mr. BiRDZELL. That is correct.
Mr. CROWLEY. May I put into the record here a statement as to
losses of insured banks and losses in uninsured banks during the
last year ?
The CHAIRMAN. Let that come in in connection with your state
ment touching the same matter, at the proper place.
(The statement referred to is as follows:)
caEetM&tr %/eor .19%

Item

Amounts per Percent of
$100 of total item to total
deposits in
deposits in
active banks active banks

Deposits in suspended banks:
10
.5

Ho
%00

Estimated losses in licensed banks suspending:
3.6
Losses to depositors:

*%000

3.5
^ .007
.1

*94.000
?ioo,ooo
H,ooo
]

i More than % of this loss represented losses to depositors with restricted deposits in 1 institution

Mr. BiRDZELL. During the hearing questions have been asked con
cerning paragraph 5 of subsection (h) of the proposed draft relating
to trust funds. That provision is new, and I am not surprised that
the members have shown some curiosity about it, and, furthermore,
it does deal with quite a technical matter.
Recently I had occasion to discuss the general subject of that sub
section with the trust section of the American Bankers Association
at their meeting in New York. The discussion is too lengthy, of
course, to be reproduced here for the purpose of listening to it, but
if the members would like to have the beneAt of that discussion I
would be glad to leave a copy of what I had to say with your reporter
so that it may be put into the hearings.

The CHAIRMAN. Let me suggest, Judge Birdzell, that you incor
porate so much of your statement on that occasion as you regard as
helpful to the committee.
Mr. BiRDZELL. I think that it would be helpful. I could boil it
down some-----The CHAIRMAN. You be the judge of that.
Mr. BiRDZELL. I will leave it with the reporter.
(The remarks o f Mr. Birdzell referred to are as follows:)
ADDRESS OF H ON . L . E . BIRDZELL, GENERAL COUNSEL FEDERAL DEPOSIT INSURANCE
CORPORATION, ON FEDERAL INSURANCE OF TRUST DEPOSITS, AT THE MIDW INTER
TRUST CONFERENCE OF THE AMERICAN BANKERS* ASSOCIATION, N EW YORK C lT Y ,
FEBRUARY 13, 1935

I am indeed grateful for the opportunity to participate in this conference o f
the trust division o f the American Bankers* Association.
It is always a privilege for one who is daily concerned with problems that
affeet any group of his fellow citizens to he permitted to present the diRiculties
with which he is confronted and to gain from the group the viewpoint o f those

BANKING ACT OF 19 3 5

127

effected by the same problems and whose experiences are gained from a some
what different angle.
One of the finest characteristics of our basic system o f jurisprudence— the
common law— has always seemed to me to be that it was founded upon cus
tom, and that it has been sufficiently elastic to yield to the changing customs
o f society. I f this be a virtue in our legal system, as I believe it to be, the
virtue is emphasized with respect to that branch of our law which is broadly
embraced within the term " law m erchant/' Much of that law, particularly
that dealing with the rights, duties, and obligations o f parties to negotiable
instruments, was incorporated directly into our legal precedents by the defi
nition and determination o f established customs in the market places by those
whose contacts and experiences were most immediate and reliable.
I f in the formative stages o f the law merchant Lord Mansfield was lead to
right conclusions by empaneling juries made up of merchants and tradesmen,
perhaps it is not too much to expect that even in this day we may proceed
with greater assurance in dealing with questions peculiarly aRecting a highly
specialized branch o f business if we seek the counsel apd guidance of those
who are most fam iliar with its processes. It is with this hope in mind that I
venture to lay before you some of the problems that arise in the administration
o f the insurance provisions o f the Banking Act o f 1933 as they relate to the
Insurance of trust funds.
By way o f introducing the discussion, it may be well to refer briefly to some
purely elementary matters because o f their bearing upon the main questions
o f interest and because of the principles that rest upon fundamental practices.
In this presence it is not necessary, of course, to speak o f the history and
development of trust business, nor to trace in detail its connection with com
mercial banking business. It is sufBcient to observe that the banking func
tions and the trust functions o f modern trust companies are and should be kept
separate and distinct and to keep in mind at all times that there are certain
advantages in combining the two functions under one corporate organization.
The clients o f a trust company find it convenient to avail themselves of services
which can only be furnished by the banking department and, conversely, bankihg clients find it convenient to avail themselves o f the trust facilities o f their
bank. These advantages have been recognized by the provisions of section 11
o f the Federal Reserve Act, which authorize national banks to operate trust
departments under the permission o f the Federal Reserve Board.
The proper observance of the relations between the bank and its clients
and the trust department and its clients requires, however, that the bank
shall at all times function as a bank with respect to all funds coming to it in
that capacity, while the trust department shall equally observe the fiduciary
relation with respect to all funds coming to its trusts.
Under the Reserve Act and under laws existing in many o f the States, a na
tional bank or fiduciary company, by complying with stated requirements, may
iD effect become a debtor to its own trust department without entirely losing
its character as a fiduciary. W e have, then, one corporate entity sustaining
a dual legal relationship with respect to a single account with a single client.
But the act and the Federal Reserve Board in administering it have due
regard fo r the different relationships. The Reserve Board in Axing reserve
requirements has provided in regulation D that a bank exercising trust powers
need not maintain reserves against trust funds which it keeps segregated and
apart from its general assets or which it places on deposit in another institution
to its credit as trustee or as fiduciary. But if such funds are mingled with the
general assets o f the bank, under the authority o f the Federal Reserve Act, it
is provided that deposit liability thereby arises against which reserves must be
maintained. This liability is classified as individual deposit liability rather
than as bank deposits.
Assuming, in the language o f the Federal Reserve regulation D, that the
Rduciary keeps its trust funds segregated and apart from its general assets or
that it deposits them in another institution, some might question whether the
trust status is strictly maintained. Unless in addition to segregating them the
funds o f each trust be kept separate and be not mingled with the funds o f any
other trust, it could be plausibly contended in light o f ample trust precedent,
that a breach o f trust had been committed fo r which the trustee could ]be
charged. But any such requirement is so foreign to accepted methods fo r the
proper handling o f uninvested funds that it would be highly artificial to exact
it. A story is told, however, o f a trust ofScer in recent years exhibiting to an

128

BANKING ACT OF 1 9 3S

examiner his uninvested balances in cash, Rled away in the vault, the funds
c f each trust being kept separate and apart in an effort to comply with the law.
It may as well be expected that a warehouseman, in the case of grain or other
fungible goods, would provide separate bins for the accommodation of each o f
his storage customers. It is to the credit, I believe, o f the courts of New York
that this latter artiRciality was abolished many years ago.
Let us look now to some o f the speciRc problems which arise out of the trust
and banking relation as we seek to apply the insurance provisions o f the
Banking Act. Surely in the light o f the provisions of the Reserve Act which
facilitates the Row of trust funds into ordinary banking channels, there can
be no serious question that funds thus legally entering the channels o f com
merce are deposits within the terms of the la w ! They are called deposits
under the regulations o f the Federal Reserve Board and under the existing
law which provides for permanent insurance such regulations are controlling.
These funds have been regarded as deposits during the temporary period. W ith
this as a premise, how shall we answer the question as to the extent of the
liability o f the Federal Deposit Insurance Corporation for trust funds which
are deposited in the commercial side of the same institution? Shall w e regard
the company as one depositor and say that the insurance protection extends
only to $5,000 or, using the records of the insured institution as a guide, shall
we say that each beneRciary is an owner within the terms o f the law, and conse
quently, insured to the extent o f $5,000?
Let us look to the law. After prescribing the percentages o f insurance cover
age based upon the net amount due an owner from a closed bank (and the
same language applies to the limited amount insured under the temporary
fu nd), the act says, "P fw idetZ, That in determining the amount due to such
owner for the purpose of Rxing such percentage, there shall be added together
all net amounts due to such owner in the same capacity or the same right, on
account o f deposits, regardless o f whether such deposits be maintained in his
name or in the names o f others fo r his beneRt." From this it would seem that
if the account be maintained in the banking department in the name o f the
institution or o f its trust department as trustee that it is maintained for the
beneRt o f those who appear upon the books and records o f the insured institu
tion to be the ultimate owners, and it is believed that the Insurance Corporation
is so liable to each o f such owners. The command seems to be clear that we
shall determine the amount due, regardless o f whether the deposit be main
tained in the name o f the owner or in the name o f another fo r his beneRt and
where the records o f the institution show for whose beneRt the account is main
tained the legal measure o f insurance protection for each cannot be withheld.
Let us take a second hypothesis: Suppose an insured trust company should
deposit uninvested trust funds in another insured institution, the records o f
the latter will not reRect the beneRcial ownership of the funds deposited as in
the instance above noted. This would seem to be a single deposit account to
be insured as such in the depositee bank. The realization o f this situation has
led to a great many interested inquiries concerning the extent of the insurance
coverage on such a deposit, and it has led further to speciRc requests that the
coverage be extended to meet the practical requirements o f the situation.
Trust companies making such deposits and desiring to be insured to the same
extent as where a similar deposit would be made in its own banking department
have made a variety o f suggestions. They have offered to pay the assessment
upon the additional amount o f insurance coverage which would result from
a break down of the deposit according to the interests as they appear upon
their own books. (B ear in mind that the assessment is on the insured amount
only and not on total deposit liability.) They have demanded, in some instances,
that the bank open separate accounts for each trust or each beneRciary. They
have offered to Rle schedules identifying the beneRciaries and showing the
extent o f their interests, if only they may be assured o f corresponding protec
tion. I think we can all agree that there are all but insuperable objections,
either from a legal or a practical standpoint, to each of these proposals. Yet,
it would seem that if both the initial trust company and the depositee bank
be members o f the fund, protection should be accorded in this case in the same
measure as is given where the deposit be made by the trust company in its own
banking department.
Recognizing the reasonableness o f such oft repeated requests, the Insurance
Corporation offers a solution during the period o f the temporary fund based
upon this prin cip le: that where a fund member trust company made such a
deposit in another insured institution, it would be recognized that the deposit

BANKING ACT OF 1 9 3 5

129

was maintained by it for the beneRt of those appearing upon its books and
records to be the owners. This gives substantially the same protection to the
initial trust company and its patrons as where a deposit is made in the bank
ing department o f the same institution. Concerning the assessment, in such
case, it was recognized that while two insured institutions were interested there
was in fact but one risk; consequently, provision was made for substantially
one assessment. Some additional reasons for this w ill be mentioned later.
Time does not permit a discussion here o f the minor details o f this arrange
ment— details which are concerned with the manner o f apportioning the in^
terests o f the various beneRciaries where deposits are made in several institu
tions and of the difference which results from exclusive allocation o f the
funds o f each particular trust to one of several general trust accounts as dis
tinguished from depositing uninvested trust funds in general trust accounts
without such exclusive allocation— but an effort was made which has been
attended with considerable degree of success to make appropriate provision
for accommodation to the different methods o f handling such transactions.
It was necessary to recognize two fundamentally different methods of handling
such trust deposits. Where it was the practice of trust companies to group
uninvested funds or unexpended balances belonging to certain trust estates,
and to deposit each group balance in one of several banks in which the trust
company maintains general trust accounts the records of the company would
be a sufRcient guide in determining the beneRcia! interests represented in such
deposits; but where deposits o f trust funds might be made by the trust company
without exclusive allocation according to groups o f trust estates the interest
o f a beneficiary in any such deposits in a particular bank would be subject
to determination only by applying a formula designed to allocate on a propor
tional basis. This explains why, in carrying out the general plan for the
insurance o f trust deposits, under the temporary fund it has been necessary
to provide optional plans in order to determine the extent o f the insurance
coverage on such deposits.
I f 1 may tax your patience suSiciently to enumerate some o f the minor fac
tors involved in our consideration o f the general problem presented, let me
suggest the follow ing:
Filing a schedule o f beneficiaries with the depositee bank would involve dis
closure o f confidential information. This, in some instances, would involve
violation o f law and it would be objectionable also from a purely business
viewpoint. Owing to the constant shifting o f interests, the account will be
maintained actually for the benefit o f persons not named in the schedule and
the records o f the depositee bank would not identify the owners nor the
extent o f their interests in the deposit. W here limited insurance is provided,
with the depositor as the insured unit, the coverage should not be increased
by introducing undisclosed beneRciaries.
Opening separate accounts for separate beneficiaries or trusts involves
prohibitory service charges. The depositee bank many properly decline to
accept the schedule or to open numerous small accounts.
The furnishing o f schedules and certified statements o f insured amounts
involves examination o f numerous trust instruments and a determination o f
difBcuIt questions concerning vested and contingent interests and the like.
It would seem that any solution o f the problem o f protection o f trust de
posits made in the general circumstances outlined above should have regard
to these factors to the end that the whole matter may be simplified and be
brought into accord with rational practice.
It is believed that the proposed act which is now pending in Congress w ill
acceptably meet this situation. It is there provided that "tr u s t funds held
by an insured bank in a Rduciary capacity whether held in its trust or deposited
in any other department or in another bank shall be insured subject to a $5,000
limit for each trust estate and when deposited by the fiduciary bank in another
insured bank, shall be similarly insured to the fiduciary bank according to the
trust estates represented. N otw ith stan d in g any other provision o f this sec
tion, such insurance shall be separate from and additional to that covering
other deposits o f the owners o f such trust funds or beneRciaries o f such trust
estates: Provide#, That where the Rduciary bank deposits any o f such trust
funds in other insured banks, the amount so held by other insured banks on
deposit on the last day o f the month preceding the Rling o f the certiRed state
ment required by paragraph two o f subsection (h ) o f this Section for the
purpose o f such statement shall not be considered to be a deposit lability of
the Rduciary bank, but shall be considered a deposit liability o f tht* bank in

130

BANKING ACT OF 19 3 5

which such funds are so deposited by such Rduciary bank. The board of
directors shall have power by regulation to prescribe the manner of reporting
and o f depositing such funds."
Let us brieRy note the salient features of this provision:
First, the doubt in the existing law as to whether trust funds while held by
an insured Rduciary in its trust department should be considered as deposits
is removed. It so considers them. To this extent it is open to the criticism
that it is somewhat artificial. But there is no hardship in this because trust
companies do not as a rule hold any substantial amount of trust funds for
any length o f time in a Rduciary capacity. They are either invested or properly
utilized as bank funds. Besides, in the event o f the closing of an insured trust
company the Insurance Corporation could not otherwise give satisfactory
answer to the demands of patrons who would have had no means of knowing
whether their funds were in one department or another of the institution or
deposited elsewhere.
Second, it treats each trust estate as a unit and obviates the necessity for any
further break-down.
Third, it preserves the Rduciary status o f the depositing trust company by
expressly permitting it to be the claimant against the insured bank.
Fourth, it further preserves and recognizes the Rduciary relation and the
rightful control of the trust company over the account by treating the insurance
of such a deposit as separate from all other insurance for the trust company
or for any beneRciary of the trust estates. The amount of the insurance is
not affected by the circumstance that beneRciaries may likewise have accounts
in the insured bank.
Fifth, in the event of a deposit by an insured Rduciary bank in another
insured bank, it recognizes the singleness of the risk. The Rduciary bank is
not required to report the amount of such deposit for assessment purposes,
this being reported only by the depositee bank.
Sixth, further provision is made to enable the Insurance Corporation to know
the extent o f its liability.
I am not presenting to you statistics which will show what we all know to
be the fact, that a very high percentage o f trust funds consisting o f uninvested
cash and unexpended trust balances and Rduciary accounts generally go into
the banking departments o f trust companies and into commercial banks to be
utilized in the channels o f commerce to the same extent as other deposits.
These funds, therefore, are properly to be regarded as deposits in any plan
which has for its aim deposit protection. They have some characteristics,
however, which are not shared by other deposits generally.
In certain circumstances security of one kind or another may be required
at the point where they cease to be trust funds and become deposits, but not
in all circumstances. Furthermore, they are deposited, as indicated by regu
lation D of the Federal Reserve Board, not as bank deposits but as individual
deposits. By this it is meant to say that a trust company in its trust capacity
does not deposit in a bank primarily to promote its trust business or perform
its trust function. It does not establish a correspondent relation to facilitate
its trust business in the sense that a commercial bank utilizes correspondents
to facilitate the transaction o f its banking business. Yet such deposits, except
to the extent that they may be otherwise secured, are, in common with all
other deposits, subject to the hazard which insurance is designed to cover.
It is believed that the characteristics just referred to as peculiar to this
class o f business warrants the special provisions in the law which have been
set out above— provisions which are consistent with existing law and regula
tions concerning such deposits.
It has been suggested that in view of the security requirements such as are
contained in section 11 of the Federal Reserve Act and which are designed to
protect transfers o f funds from the trust to the commercial side o f a banking
institution, such deposits might well be excepted from deposit insurance. Simi
lar suggestions have been made from time to time with respect to deposits that
are required to be otherwise secured— public funds and the like. The insur
ance provisions o f the Banking A ct are clearly intended to apply to all de
posits, regardless o f whether they be otherwise secured. But from the begin
ning Congress recognized that other security requirements might properly be
relaxed to the extent insurance coverage was effected in the Federal Deposit
Insurance Corporation, for it provided that deposits o f Postal Savings funds In
the banks need not be protected by collateral to the extent they were so In

BANKING ACT OF 1 9 3 5

131

sured. In follow ing out the policy thus expressed in the Banking Act o f 1933
some of the States are likewise relaxing the requirement for other security
for public deposits and bills are pending in Congress to this effect with respect
to funds other than Postal Savings funds.
It may well be questioned whether it accords with sound policy for banks
to be permitted or required to give collateral security for particular types of
deposits. The Supreme Court o f the United States last year decided that the
power to thus secure deposits generally was not an implied charter power of
a national bank, and there are like decisions in a number o f States applicable
to State banks. Such arrangements, in the event o f the closing o f a bank,
operate to create a privileged class of depositors and in the case o f an insured
bank they necessarily have an adverse effect upon the Insurance Corporation
in that they cut down the amount to be recovered through subrogation to the
claims o f the insured depositors. W holly aside from these considerations, how
ever, it must be borne in mind that under the prevailing practice trust com
panies and trust departments End it advantageous to establish deposit rela
tions with other banks which do not and perhaps which cannot offer security
for the deposits, and it would seem to be preferable to establish a uniform rule
for insurance coverage rather than engraft a more or less artificial exception.
It is believed that such deposits should not be excepted from the insurance
provisions of the law.
Trust companies which are not members o f the temporary fund o f the Fed*
eral Deposit Insurance Corporation, which are not members o f the Federal
Reserve System, and which confine their activities to trust business have like
wise exhibited an interest in i n s u r a n c e coverage for such of their funds as are
deposited in commercial banks. The problem with respect to these institutions
is substantially the same as with respect to institutions which are members
of the fund. They desire like coverage, but since they are not members of
the fund the powers o f the Corporation with respect to examination do not
extend to them, and for this reason they are, with regard to their deposits, in
the same position as any other depositor. Hence, the Corporation is not able
to say to such a trust company that it is maintaining its deposit in a particular
bank for the benefit of any specified beneficiary or beneficiaries, and to recog
nize such undisclosed beneficiaries would involve the introduction o f undisclosed
owners for the purpose o f increasing the insurance coverage.
These companies are all, it is believed, eligible for membership in the fund,
and eligible for membership in the Federal Reserve System, and as they may
become members they will, of course, share in the benefits o f the insurance
These companies are all, it is believed, eligible for membership in the fund,
the existing law. Until such time, however, the only arrangement for insurance
protection with regard to them, which the Corporation has been able to suggest,
has been that they are insured as one depositor within the limit fixed for one
depositor, or if they should find it feasible to so arrange their deposit trans
actions that they may open separate accounts as trustee for a named beneficiary
or for a group o f beneficiaries, each separate account would be insured up to
the limit o f $5,000.
May I leave with you one final word with respect to the Federal Deposit
Insurance? I think we can all agree that insurance o f bank deposits came
into the Federal law at a time when there was the greatest need fo r restor
ation o f public confidence in the banking structure o f our country. I think, too,
that we can agree that the general acceptance o f the principle has operated
to restore and maintain that confidence. W e are engaged in an effort to w o!^
constructively toward the end that there may never be in our country a repeti
tion o f the financial catastrophe that has accompanied the late persistent
depression* W e can work toward this end and succeed only, in my judgment,
with the cooperation o f all who are immediately concerned with the m ajor
problems presented.
I am glad to be able to express to you this morning the appreciation o f the
ofBcers o f the Federal Deposit Insurance Corporation fo r the attitude o f help
fulness and for the constructive criticism which we have always had from
the members o f your group. I am personally and particularly grateful for the
patience and Rne spirit which was manifested by your president, Leon H .
Little, on an occasion some months ago when he was good enough to respond
to a request fo r a conference in Washington. I f w e go forw ard in this spirit
it is our hope that we may all have a part in a great constructive enterprise.
I thank you.

132

BANKING ACT OF 19 3 5

Mr. CROWLEY. Are there any other questions?
Mr. SissoN. How are we proceeding, in order or out of order, if
you will pardon this inquiry?

The CHAIRMAN. You are in order right now.
Mr. SissoN. We started out 3 or 4 days ago with the idea that we
would make the rounds and give each member of the committee an
opportunity to question the witnesses, but the way we are proceeding
now, the younger member of the committee will be gotten to on the
next Fourth of July.
The CHAIRMAN. As you know, I have been away, and when I came
in yesterday morning, I thought that the hearings had been pretty
well concluded. But let me say to you that everybody on the com
mittee will be glad to hear you right now.
Mr. SissoN. T am not speaking for myself alone, nor in criticism
of you.
One of the questions that has been raised here and discussed at
considerable length this morning is the question whether the State
banks should be required to come into the Federal Reserve System
in order to be eligible to membership in the insurance fund, and
whether the present provision of law as to when they shall come in,
which is, I believe, July 1, 1937, should be changed in this particular
bill at this time.
I want it understood, Mr. Chairman, that in anything I say I am
not taking any position; I mean by that that I feel that it is not
necessary from my point of view to take a position at this time. I
do not know whether I have any deSnite opinion on the matter now
or not, but it occurs '
^
^
i
^ ^ suggestion,
considerable merit.
that the statement
There will be two more sessions of Congress before that question
becomes imminent, and perhaps we would be in a better position to
pass on that after having had a greater fund of experience either at
the next session of Congress or the second session of Congress from
now, and for the reason stated by Mr. Reilly, I think that my posi
tion would be that at the present time we leave that as it is.
However, I appreciate that there are others who have different
views and who probably have very sound reasons for them. How
ever, it seems to me that possibly there is an additional reason, one
in addition to the reason stated by Mr. Reilly, why that is perhaps
academic now, that is, that it is academic for us to decide now
whether they shall or they shall not be required to come into the
Federal Reserve System in order to get into the insurance fund, and
that is that if the Congress should decide that that requirement ap
plies, that they should come in, there is pretty good reason, is there
not, why that should be in the law at the present time? In other
words, that gives them 2 years' notice or more, and by " them " I
refer to the nonmember banks.
Now, I want to ask either Mr. Crowley or Judge Birdzell a ques
tion with reference to the provision regarding the limiting of insur
ance on a single deposit of a trust fund, which I believe appears in
subsection (h) of paragraph 5. You nx that limit at $5,000, Is
that because of your assumption that the limit of insurance on a
single trust-fund deposit is in the permanent writing of this law to
be $5,000?
Mr. BiRDZELL. Yes.

BARKING ACT OF 1 9 ^ 5

133

Mr. Slssox. I was wondering if there was any confusion in your
answers. When you answered Mr. Williams in regard to the qualiBcation of banks to go into the permanent fund, were you assuming
that the permanent fund would contain that limitation of $5,0001
Mr. BiRDZELL. Yes.
Mr. SissoN*. Of course, under the present law, if we do not change
it, there will be a $10,000 limit up to 100 percent, and then---- Mr. BiRDZELL. Up to $50,000 it is 75 percent, and beyond $50,000
it is 50 percent insured.
Mr. Sissox. Now, regarding another question that was raised
yesterday, about the examinations and whether they were irritating
and irksome, do you have a practice at the present time of combin
ing in certain circumstances your examination with the examination
made by the Comptroller of the Currency ?
Mr. BiRDZELL. Not with the Comptroller, but we do with some
of the States.
Mr. CROWLEY. You understand, we make no examinations of na
tional banks.
Mr. SissoN. I just want to make this further comment with re
gard to some questions raised yesterday by Mr. Gifford about the
examination of banks and the suggestion—and this is not a question
addressed to you; I presume it is not in your province—that the
exactions of the Comptroller of the Currency are so great as made
through his examiners with respect to liquidity that it is slowing up
and retarding our credit.
I presume, Mr. Chairman, that Mr. O'Connor is going to be here
before the committee some time.
I would like to call the attention of the committee to this, that
perhaps 2 or 3 months ago the Comptroller of the Currency made
a speech at an association of bankers, I think in Nebraska, in which
he, in my opinion, gave facts which pretty conclusively disproved
the statement or the suggestion made by Mr. Gifford, and he gave
the figures which were secured by his examinations and a classifi
cation of loans, as to whether they are in the slow column, or doubt
ful, and so forth, and that address of the Comptroller is incorpo
rated in an appendix to the Record some time in January, I believe.
I f it is not, I make the suggestion, Mr. Chairman, or perhaps the
request, with the approval of Mr. O'Conper, of course, that that be
incorporated in these hearings. I think it pretty conclusively estab
lishes—at least it does to my mind—that the oft-repeated statement
that the Comptroller's examination of banks is the reason why the
banks are not lending money as they ought to is merely an alibi on
the part of the banks.
The CHAIRMAN. I am sure that the statement of the Comptroller
would be valuable in connection with these hearings; I will be glad
to have that incorporated in the hearings.
Mr. SissoN. I have one further suggestion, and then I am through.
I think that everything else has been covered in which I am inter
ested.
Now, I assume that there will not be any foreclosure on the question
as to whether the amount of deposit insurance is going to remain
permanently at $5,000, or whether it will be increased to $10,000,

134

BANKING ACT OF 1 9 3 5

and I want to say that the statement of the chairman as to the history
of this legislation, on whether State banks should be required to
come into the Federal Reserve System in order to participate in
this fund, to my recollection is an absolutely correct and accurate
statement of it.
But going back to this other question for just a moment, the chair
man and those of us who were on the committee when the Banking
Act of 1933 was passed containing the provision for deposit insur
ance will recall that many of the big banks took a very decided and
positive position against deposit insurance in general and deposit
insurance in any amount, and, in fact, the American Bankers Associa
tion—and, of course, the chairman is more familiar with this than,
I think, anybody else, because he probably had more to do with
deposit insurance than any of the rest of us—met in convention
very shortly after the adjournment of Congress, and very solemnly
passed a resolution calling upon the President not to put this act
into effect.
The CHAIRMAN. That is quite true, and they predicted dire con^
sequences to the economic structure of the country, and then last
year they were insisting that the amount of insurance on individual
deposits should remain at $2,500 in the permanent law. This year
I am not sure, but I think they are now insisting that we make it
$5,000 in the permanent law.
In that connection, and not to be critical, but merely because we
are dealing with a little history, the American Bankers' Association
met here last fall, and that was 1 year from the date of the Chicago
meeting to which Mr. Sisson referred, in which they passed a reso
lution condemning the bank-deposit-insurance law as dangerous to
banking institutions and to the general condition of the country; and
the first meeting after that was held here last fall.
The first 6 months of operation under the temporary-insurance
fund had shown not a single bank failure among the banks that were
participating in the fund, and down to the time of the meeting last
fall, I think six or seven banks represented the total number o f fail
ures, and it showed that the Federal Deposit Insurance Corpora
tion, instead of having encountered an insurmountable loss, was
operating at a profit, and the country for the first time in the his
tory of any man at that meeting had had a year of experience prac
tically free from bank failures.
But no mention whatever was made of those developments by any
man at the meeting of the American Bankers' Association last fall.
They forgot it*
Mr. MEEKS. I want to ask Mr. Sisson this question : The address
of the Comptroller of the Currency to which he made reference was
delivered in Iowa, was it not!
Mr. SissoN. I think it was in Nebraska.
Mr. MEEKS. There was one delivered in Iowa, and he sent copies
of the address to the Members of Congress and invited comment.
That is the address that I have reference to. Was that delivered in
Iowa!
Mr. BmazELL. In Nebraska.
Mr. MEEKS. Thank you; I just wanted to get clear on that.
Mr. FoRD. Now, in connection with these examinations, there have
been repeated charges made that there were three classes of exam

BANKING ACT OF 1 9 3 5

135

inations made of banks. First they said that the F. D. I* C. made
them, and then that the Comptroller made them, and then that the
R. F. C. made them, and that each one of the examinations called for
a different standard as to the classiRcation of assets, and that they
never knew where they were.
I w o u l d j u s t l i k e t o a s k , is t h e r e a n y b a s is f o r t h a t c h a r g e ?

Mr. CROWLEY. Let me say to you that we have never examined a
national bank and have no authority to do so. The law specifically
says that we shall accept the Comptroller's examination.
I believe that we have attempted, in the entire Federal Service,
to try to classify assets as nearly uniformly as possible. The R. F. C.,
on the matter of State banks, has always taken the examination
of the Federal Deposit Insurance Corporation. The only time that
they have ever sent a man in was where there had been some difRculty arising, where perhaps they already had an investment, or
where, when we made our examination and found that perhaps the
bank needed additional aid, or something like that, they have gone
in with us and tried to work outjthat situation. There has been no
harassing by duplicate examinations of the Federal Deposit Insur
ance Corporation and the R. F. C. The R. F. C., except in those
unusual cases, has taken the examination of the Federal Deposit
Insurance Corporation.
Mr. FoRD. I was very certain that that was the case, but I wanted
to get that in the record.

Mr. BiRDZELL. May I just add to that one thing that is just a n
impression with me, but I am quite certain that I am correct in
asserting it.
I think that about 2 months ago the Reconstruction Finance Cor
poration announced that it would no longer examine banks, but
would take the examinations of our Corporation, of the Federal
Reserve Board, and of the Comptroller.
Is not that true?
Mr. CROWLEY. They have been doing it.
Mr. BiRDZELL. I think that they made a formal announcement
of that. That is an impression that I have, and we can all check it.
Mr. CROWLEY. Except this, that they do reserve the right to pro
tect their investments.
Mr. SissoN. You mean that they have taken the Comptroller's
examination ?
Mr. BntDZELL. If they go into a national bank, they take the
Comptroller's examination, and if they go into a State bank that we
are interested in, they take ours. They did that with the idea that
it would remove the criticism with respect to examinations so far
as they were concerned.
Mr. W iL L iA M S . Has t h a t b e e n t h e p o l i c y a l l t h e t i m e ?
Mr. BiRDZELL. It has been the policy quite largely.
Mr. W iL L iA M S . I mean, in a case where the R. F. C. was advanc
ing money for capital structure purposes, have they not gone in and
made an examination of the bank to determine whether or not they
would make that advance ?
Mr. CROWLEY. No; except perhaps where there was a condition
there where they did not agree with our examinations, or in connec
tion with something that they wanted particularly to verify. In

136

BANKING ACT OF 19 3 5

the capital rebuilding program, in better than 90 percent of the
cases, they have always taken our examination.
Mr. BiRDZELL. A year and a half ago, they were then engaged
in the work of capital rehabilitation, and they might have had to
consider banks beiore we had gotten around to examining them at
all, and in that case they would have had to make examinations on
their own account,
Mr. WiLLiAMS. I have heard that complaint.
Mr. BiRDZELL. A great deal is being done to eliminate the basis
for it.
The CHAIRMAN. I am not complaining, exactly, but we should re
member in this connection that the R. F. C. act as originally passed
contained a provision for loans to banks, and also for loans upon
the assets of closed banks, and at that time the F. D. I. C. was not
even in existence.
Mr. BiRDZELL. That is correct.
The CHAIRMAN. And the country was in an unprecedented eco
nomic upheaval.
Mr. BiRDZELL. That is right.
The CHAIRMAN. And the R. F. C. was acting under a law that
required them to take full and adequate security, so that when they
began their operations they, of course, were more particular in look
ing over the assets of banks upon which they were to make loans than
they were later on, in the light of later developments.
Mr. CROWLEY. There hasoeen a lot of criticism of the examination
of banks. A great deal of that criticism is very unwarranted. You
understand that bankers have been under a great strain. They have
seen the sloughing away of a lot of values. They have seen a lot
of men who under normal times could take care oi their obligations
promptly unable any longer to do so.
Now, you go in and try to determine the position of a bank, in
order that you may try to rebuild its capital position and put it on
a sound basis. By the very nature of the trials and tribulations that
they have had, if they have not sufRcient reserves to absorb their
losses and have to write down their capital, naturally there is a feel
ing of resentment.
But, after the job is all done, it is like the person who has an
operation; they feel very good about it.
I know that there are a great many banks that take the examina
tion of the Comptroller's ofEce and of our ofRce and use them as a
sort of a club for collections, which is a very unfair thing. They
take out the report and say to the borrower. " Don't you see, we have
to call this, because the examiner classified it as slow."
Now, there is no criticism on the part of the examining body of a
slow asset. The classification of a, slow asset only means that the
asset is good, but that it cannot be paid at maturity, that it must
be spread over a period of time to give the borrower an opportunity
to pay it gradually. As long as your banks are sufficiently liquid,
it does not particularly mean that they are in hazardous position if
a percentage of their loans is in a slow classification; but, as you went
into the depression, with your depositors demanding money day by
day, it was necessary that the banks, to protect themselves; iforce
this liquidation, and that is the reason why you got your criticism

BANKING ACT OF 1 9 3 5

137

o f your slow loans. The depositors were demanding their money
more rapidly than the banks could liquidate the loans to furnish it
to them. When we have completed our capital rebuilding program,
the recovery from the assets that perhaps have been charged off as
doubtful and loss may mean considerable in the taking of losses
that we have not yet found in our institutions. As we come out
of this depression, our banks are again going to have some losses that
they will have to face which do not show up on the surface today.
A great many borrowers who are struggling today, hoping against
hope that they may be able to pay their debts and maintain their
businesses, will become discouraged and have to throw it up.
I think that a lot of this criticism is unfair. We will all grant
that certain examiners become too oSicious, and when they get an
assignment, they become autocratic; but, as a whole, I think that
the examiners have tried to be sympathetic in taking into considera
tion the mental state of a great many of these bankers.
The CHAIRMAN. Now, if there is anybody else who desires to pro
pound further inquiries to these gentlemen, I will be glad for you
to proceed.
Mr. CROWLEY. Before we close, I would like to express our thanks
for your kind consideration. Your questions have been most con
structive, and if there is any additional information that we may
furnish, we shall be very happy to do so.
The CHAIRMAN. If no one else has any more inquiries to make,
I will say that we have finished with Mr. Crowley and Mr. Birdzell,
and we will meet again tomorrow morning at 10:30, and I will try
to advise the members of the committee this afternoon just what the
program will be tomorrow. Before doing that, I want to talk to the
comptroller, to Mr. Eccles, and to the members of the committee.
(Ordered inserted in hearing)
SPECIAL REPORT OF PUBLIC OPINION AS GATHERED BY TH E NATIONAL EMERGENCY
COUNCIL ON THE ACTIVITIES OF THE FEDERAL DEPOSIT INSURANCE CORPORATION
ALABAMA

26, ^935.— Never any criticism o f this activity.
9,
— Stands highest in pubiic opinion o f ail emergency measures;
has restored conRdence in banks and resulted in greatly increased deposits.
ARIZONA

9,
— Apparently pubiic very favorable to Federal Deposit Insurance
Corporation. This agency has restored conRdence in ali banks and undoubtedly
exerted considerable inRuence in abolishing hoarding on the part o f the people
who had previously felt that banks were unsafe and that they should keep
their money in cash at home. Every bank in this State except one is a mem
ber. Information at hand indicates that the citizens o f the district where this
bank is located are very dissatisRed and are not depositing their funds in this
bank due to the fact that it does not have deposit insurance. Considerable
interest expressed by public in the announcement that deposits in building and
loan associations might be insured. General summary would be that the public
is very much interested in continuation o f deposit insurance and that it is a
very determining factor in restoring and maintaining conRdence in the banking
institutions.
ARKANSAS

ApW? 9,
— Representative bankers advise that pubiic reaction to Federal
Deposit Insurance Corporation is 100 percent favorable. Great m ajority of

138

BANKING ACT OF 1 9 3 5

backers also favorable, but believe present limit might wisely be reduced to
$2,500. Two bankers state they are strongly opposed to plan in principle.
None interviewed has ever heard criticism o f insured deposits by customers.
OAMFOBNIA

A pr^ 9, 7935.— Public opinion strongly back o f Federal Deposit Insurance
Corporation, despite objections o f some larger banks to paying premiums.
COLORADO

Apr% 9, 1935.— Public opinion here practically unanimous in favor o f Federal
Deposit Insurance Corporation.
CONNECTICUT

AprM 9, 1935.— Public seems entirely indifferent to present Federal Deposit
Insurance law. Some 12 or 13 banks in Connecticut have not subscribed to
plan and their deposits have not been affected. Some depositors inquired o f
their banks about this insurance when it became effective, but none has men
tioned it to the H artford banks in months. There is no demand here for increas
ing amount o f insurance above $5,000, as 95 percent of all accounts are fully pro
tected under present law. No Connecticut savings banks subscribed to plan
because o f adverse opinion o f State attorney general. I can and no objection
by savings bank depositors. State director personally feels that the present
$5,000 limit is sufBcient in Connecticut. This State has been particularly for
tunate in having very few bank failures.

AprM 9, 1935.— Due to fact that no bank failures occurred in Delaware, the
public has shown little interest in Federal Deposit Insurance Corporation.
Contacts made are all favorable.
FLORIDA

ApW% 9, 1935.— Have contacted 20 various business houses. Everyone heart
ily endorses the Federal Deposit Insurance Corporation. Believe this senti
ment universal in Florida.
GEORGIA

AprM 9,1935.— Federal Deposit Insurance Corporation was welcomed by great
mass o f people. Has been important factor in restoring conRdence in banks,
particularly smaller institutions. Regarded by many as one o f the most con
structive steps in present national administration. Increased savings deposits
in many banks believed traceable to insurance plan. W hile activities not sub
ject to general discussion now, individuals and business, especially smaller
business, Rnding satisfaction in safety provided by its operation.
IDAHO

Fe&fMwy 19, 1935.— Deposit insurance remains the cornerstone of public
confidence in our banks.
.March 26, 1935.— Remains cornerstone of public conRdence in banks. Bankers
admit Federal Deposit Insurance Corporation has produced solid public con
Rdence in banks.
AprH 9, 1935.— Public opinion overwhelmingly favorable and conRdence in
banks remains solid with deposits increasing.
INDIANA

ApW? 9, 1935.— Has restored conRdence in banks, but has not resulted__for
some reason— in a relaxation o f bank credit.
IOWA

AprtE 9, 1935.— Public reaction to Federal Deposit Insurance Corporation on
bank deposits deRnitely favorable. Small depositor, which includes savings
depositor, is very favorable to insurance of deposits. Best evidence o f this is

BANKING ACT OF 1 0 3 5

139

literally hundreds o f cases reported to us o f money taken from Postal Savings,
from hoardings, and from larger banks in border States and deposited in Iowa
banks after inception o f Federal Deposit Insurance Corporation. There is
some disposition to the belief that insurance is so satisfactory to the depositor
that he does not seek other investments. Large commercial accounts do not
emphasize insurance on their deposits, except as it tends to restore conRdence
in the bank and thereby stabilizes banking conditions and satisRes small de
positor, who as a rule is a cause of runs on banks. Public is grateful and
happy fo r beneRts of Federal Deposit Insurance Corporation.
KANSAS

Jfarca J, 1935.— Banks now beginning to fully appreciate the value o f this
activity with the result that an increasing number are subscribing, however,
many banks still remain without insurance.
9, Jf935.— Although many banks remain without insurance, it has
greatly increased conRdence in Rnancial institutions.
KENTUCKY

9, 1935.— Much appreciated by public generally. Resulted in growing
Increase of deposits in all banks. Smaller banks quite enthusiastic. Some
larger institutions feel their independence, objecting to expense o f operation.
Some suggest annual assessments o f service; others suggest limitation o f
amount of insurance to $5,000. These objections made some months ago but
little protest at present time. Unquestionable demand for retention o f act.
MAINE

Aprii 9, 1935.—Public sentiment favorable to Federal Deposit Insurance Cor
poration. Maine commercial banks favor this. State savings banks have
centrally managed liquidity fund.
MARYLAND

Jfaroh 26, 1935.— Activities progressing quietly.
MICHIGAN

April 9, 1935.— From every source I get only favorable public reaction to
Federal Deposit Insurance Corporation. Belief quite general that this agency
is reestablishing faith in banks. Increased deposits in Michigan banks best
proof o f renewed conRdence.
MINNESOTA

5, 1935.— Agency has done outstanding work and 95 percent o f banks
in this State are insured. Public well inform ed and very favorable toward
this activity.
26, 1935.—Agency 100 percent eSicient and popular with both public
and banks.
9, J935.— Exceedingly popular and has produced great public conRdence
in banks.
MISSISSIPPI

AprM 9, j?935.— Public opinion appears entirely favorable because o f Federal
protection.
MISSOURI

9, 1935.— Reaction o f public and State banking department to Federal
Deposit Insurance Corporation is universally favorable. Deposits substan
tially increased. More than 500 State banks have voluntarily come under Fed
eral Deposit Insurance Corporation and only 40 have not. Most o f these 40
are small or fam ily banks and expense is deterring factor. The favorable
public reaction is general over entire State and also the four-State area. It is
recognized as an essential part o f the banking system.

140

PACKING ACT OF 1 9 3 5
MONTANA

^6, ^935.— Has greatly restored conRdence and receives almost unani
mous acclaim.
NEBRASKA

^9, ^935 .^ A gen cy has made a Rne record in this State with a
high percentage of deposits now insured.
NEVADA

ApWE 9, ^935.— After experience o f last 3 years when banks were blowing up
like firecrackers in Nevada, depositors unequivocally approve deposit-insurance
plan. They are not interested in howl of big banks, who may have to carry
premiums for some o f their weaker brethren. They feel this latter w ill be an
incentive to insist on good banking practices and will insure national super
vision and inspection.
NEW HAMPSHIRE

AprH 9, .?935.— About 1 out of 50 know anything about it. New Hampshire
Bankers Association report public neither informed nor interested. Reaction
nil.
NEW JERSEY

Jfarc& 5, J935.— There is little comment concerning this agency, but it is
believed that this activity has full public support.
JH&roh 26,
— There is little said about this agency, its activities being
accepted as a matter o f course.
NEW MEXICO

, jlpriZ 9, ^935.— Have heard o f no comments either pro or con in New Mexico.
NEW YORK

^4prf% 9, .?935.— Public reaction to Federal Deposit Insurance Corporation not
wide-spread, but generally favorable. Larger banks in Manhattan protest
method o f assessment, claiming only insurable amounts o f deposits should be
taxed. Otherwise not opposed, although unenthusiastic.
NORTH CAROLINA

9, i9#5.— General public reaction most favorable. Find in contacting
number o f bankers^ who w ill eventually help mold public opinion, in vast m ajor
ity think $5,000 coverage sufficient and favor definite premium sufBcient to
cover, but to be lowered if justified later. M ajority same parties favor pre
mium on insured deposits only. Five thousand limit covers 95 percent de
positors banks this State.NORTH DAKOTA

Fe&rKary ^9, .1935.— Public attitude and editorial comment uniformly favor
able.
26, J935.— Has restored public confidence in banks and is now accepted
as a matter o f course.
,4pW% 9, .?935.— Agency has restored conSdence in banks and public opinion
remains wholly favorable.
OHIO

JMarch 26, J935.— Program has been exceptionally beneficial and remains least
criticized o f all emergency activities.
ApW% 9, J9&5.— Is least criticized o f all emergency agencies.
OKLAHOMA

AprM 9, jf93J.— Public reaction reveals this is one Government program with
which general public w ill go all the way. No derogatory comment to Federal
Deposit Insurance Corporation was made in interviews with large number o f
Oklahoma business men and individual depositors. Editors and newspaper
Upping bureaus report Statewide approval Of program as reflected in press.

BANKING ACT OF 19 3 5

I4t

Increased deposits indicative o f restored confidence. Group 4 of Oklahoma
bankers' association in convention at Ardmore yesterday passed resolution rec
ommending titles 1 and 3 of Congressional Banking Act o f 1935 and commending
work o f Federal Deposit Insurance Corporation. Group 5 in Tulsa today
expected to pass similar resolution according to secretary o f association. These
group meetings represent approximately 450 eastern Oklahoma bankers. State
banking commission reports only tw o failures in State banks since inception
of Federal Deposit Insurance Corporation. Continuance o f Federal Deposit
Insurance Corporation under competent management felt essential to continued
faith in banking system.
OREGON

Fe&rMary 79, 7935.— Haa produced desirable feeling o f security o f average
citizen in his bank account.
PENNSYLVANIA

.March 26, 7935.— Has functioned very successfully and restored confidence.
9, 7935.— Has greatly strengthened banking system, although many small
ban^s, due tp limited capital, criticize the provision compelling them to join
the Federal Reserve System by July 1, 19$7, in order to maintain their insured
status.
RHODE ISLAND

AprM 5, 7935.— Banking situation here unusually strong, therefore, except
fo r added confidence due to Federal Deposit Insurance Corporation, difficult to
determine public reaction.
SOUTH CAROLINA

79, 7935.— Has restored confidence in banks. Comment is frequently
expressed that this program is one of the most important in " new deal."
26, 7935.— Public has great faith in this activity.
9, 7935.— Most beneficial.
SOUTH DAKOTA

Fe&t'Mary 79, 7935.— Comment wholly favorable, with the exception o f A
very few bankers who are opposed to the principle o f this activity.
Jf&rch 5, 7935.— There is little comment concerning this agency, but it is
believed that this activity has fu ll public support.
TENNESSEE

Af&rch 5, 7935.— It is suggested that means be provided to inform the public
of a bank's insured status by means other than the notices on tellers' windows^
Jfarc&. 26, 7935.— Has restored public confidence in banks.
TEXAS

Jf&rch 26, 7935.— Well-staffed and functioning effectively.
9, 7935.— Continues to function effectively.
UTAH

T^e&n/ar?/ 79, 7935.— Public opinion generally favorable.
26, 7935.— Public unanimously for Federal Deposit Insurance Cor
poration, although some bankers and financial interests remain skeptical.
VERMONT

9, 7935.— Public reaction to Federal Deposit Insurance Corporation
quiet but favorable. About h alf the banks use their participation in their
advertising. Bank public apparently take it as an accomplished fact and rely
upon it, although not particularly outspoken in their comment.
WASHINGTON

26, 7935.— Has resulted in vastly improved banking conditions and a
general increase in deposits.
127597— 35------ 10

142

BANKING ACT OF 1 9 3 5

,ApW% 3, ^935.— Has resulted in improved banking conditions, although need
is seen fo r means to enforce provisions o f Federal Deposit Insurance Cor
poration.
WEST VIRGINIA

jipriX 9, ^935.— Public reaction to
quite sympathetic and guaranteeing
banking institutions. Deposits have
Are opposed to proposed amendments

Federal Deposit Insurance Corporation
o f deposits has stimulated conRdence in
materially increased. Bankers, however,
to existing law now pending in Congress.

WISCONSIN

9, J9#5.— Don't hear about it. Deposits on increase. Only through
restatement o f fact that money is in circulation, do w e know about its worka.
Banks favorable.
WYOMING

— Banks noncooperative tow ard this activity.

(Thereupon-at 12:45 p. m., an adjournment was taken until Fri
day morning, Mar. 1, 1935, at 10:30 o'clock.)

BANKING ACT OF 1935
F R ID A Y , M A R C H 1, 1935
HOUSE OF REPRESENTATIVES,
COMMITTEE ON BANKING AND CURRENCY,

Z7. C.

The committee met at 10:80 a. m., Hon. Henry B. Steagall, chairtman, presiding.
The CH A IRM AN . All right, gentlemen, we have with us this morn
ing Mr. O'Connor, Comptroller of the Currency, and he will discuss
the bill. I am going to suggest that Mr. O'Connor be permitted to
proceed in his own way, without interruption, until he shall have
Imished his preliminary statement, if that is agreeable with the
committee.
We will be glad to have you proceed without interruption, until
such time as you desire to be interrogated, Mr. O'Connor.
STATEMENT OF J. F. T. O'CONNOR, COMPTROLLER OF THE
CURRENCY

Mr. O 'C O N N O R. Mr. Chairman and gentlemen, I assume that, from
the inquires I ha,ve received from the members of this committee and
others in Congress, that they have a very especial interest in the
national-banking situation, inasmuch as Congress is more directly
3tnd largely responsible for the national banks, and I, of course, have
most to do with that possibly as Comptroller, and also as a member
of the board of the Federal Deposit Insurance Corporation, and I
would like to discuss the general situation as well as the bill.
The CH AIRM AN . Mr. O'Connor, if you permit me, I am going to
suggest that you address yourself, first, to title I of the bill, as we
have had that solely under discussion down to this time. After you
shall have finished with that, we will then decide as to when we
will take up the other parts of the bill, if that is agreeable to you.
Mr. O 'C O N N O R . Yes; thank you. Unless the committee desires it,
or unless they do not desire it, I would like to bring you up to date
with a brief picture of the national banking situation as it is today,
from the ofRce of the Comptroller, with reference to these closed
banks and unlicensed banks that we started with after the termi
nation of the banking holiday of 1933.
At the close of the banking holiday in March, we had 1,417 na
tional unlicensed banks, and these banks had in deposits $1,971,960,000. The question naturally arises before us this morning as to
what has been done with those banks and those deposits, and I am
giving you the figures of my ofBce up to the first of February, as we
release a montMy report at the end of every month.

143

144

BANKING ACT OF 1 9 3 5

We have reorganized 1,091 of these banks with deposits of $1,805,622,000. Thirty-one of these banks decided to go out of business,,
and they paid their depositors in full, $11,513,000.
There was placed in receivership 292, with deposits of $151,540,000
Now, that accounts for 1,414, leaving 3 unlicensed national banks
at the beginning of the present month, or the beginning of Febru
ary, rather, and those 3 had $3,280,000 in deposits.
Let us now take up the problem of these banks in receivership.
We have paid to depositors in those particular banks, $51,084,265*
and we have plans approved for reopening four of these receivership
banks, which will release an additional sum of $1,427,000.
That is the complete picture, gentlemen, from March 1933 to the
first of February of the present year, and you will notice that all
that remains of approximately $2,000,000,000 in the receivership
banks is approximately 5 percent of that amount.
That is, briefly, the story of the unlicensed national banks after
the holiday.
During the same period, from March 16, 1933, there has been
distributed to depositors in all banks, those closed before the bank
holiday and since the holiday, $621,920,917; and, roughly, I believe
that represents, gentlemen, about 54 percent of the total in the na
tional banks; and please bear in mind that I am only referring to
the national banks in this statement.
The total number of receiverships accumulated over the yeara
up to the present time, including those that I mentioned of unlicensed
banks, was 1,547, and they had deposits, at the time of the closing, of
$1,880,710,184, and there has been paid to depositors to date of Feb
ruary 1, 1935, $1,016,836,666.
In addition to that work, the Comptroller's of&ce has been very
much interested in the sale of preferred stock in the national banks?
to do two things: First, to strengthen, the capital of the national
banks; and, secondly, to make more money available for credit,
and also to relieve the banks from compelling debtors to pay who
are not able to pay at present, but had good, going businesses, and if
permitted to go along, could, in time, pay. That was the object
of purchasing preferred stock in national banks.
I have received this morning from the Reconstruction Finance
Corporation the purchases of preferred stock and capital notes and
debentured outstanding, and also loans on preferred stock outstand
ing, divided, first, national banks and, secondly, State member banks,
and third, nonmember banks.
In national banks the loans on preferred stock outstanding were
$9,624,716.30; purchases of preferred stock $437,577,064.65, a total of
$448,444,001.09.
In State member banks the loans on preferred stock outstanding—
and that probably would be also debentures or notes where they were
not permitted by State law to issue preferred stock—$1,064,618.44;
and purchases of preferred stock, capital notes, and debentures out
standing, $174,943,610.25, or a total of $176,008,228.69.
With reference to nonmember banks and other State banks that
are not members of the Federal Reserve System, loans on preferred
stock outstanding, $8,797,658.20; purchases of preferred stock, capital

BANKING ACT OF 1 9 3 5

145

notes, and debentures outstanding, $242,213,311, or a total of
$249,768,749.06.
Now, that makes a total of the loans by the Reconstruction Finance
-Corporation on these three classes of banks of $19,486,992.94; and
purchases in the capital structure of $854,733,985.90, and a grand
total of $874,220,978.84.
I think you will be interested in knowing that there was purchased,
locally, of the preferred stock in national banks, $73,366,655.
I think you will be interested in having pointed out, so we will
have the record clear, what we mean by loans on preferred stock or
capital debentures by the Reconstruction Finance Corporation and
the figure I have just given you, the Hgures with reference to pur
chases locally; it is the policy of the Reconstruction Finance Cor
poration that when a bank, whether State or national, needs capital
strengthening, first an effort is made to get the people in that com
munity to buy the stock. That seems to be the agreed and very
sound policy, that we all feel that we would much rather have the
people in the community own these banks, of course, than the Gov
ernment; the Government, as I take it, being only a temporary
expedient in the emergency, and that the stock should be purchased
by stockholders and others locally.
Now, another plan that has been worked out, which is also sound,
is that when local interests are willing to make purchases of the
capital stock to strengthen the bank, preferred stock or debentures of
capital notes, who are not able to pay for them in cash, which, of
course, must be done, the Reconstruction Finance Corporation will
take that stock and other collateral and lend against it, so that it
gives the purchasing party an opportunity to finally buy his stock
and own the bank.
Just for the record, because you gentlemen, of course, thoroughly
understand it, but so someone else reading the record will have it
clear, when we speak in the same breath about preferred stock and
capital notes and debentures, the reason for that is that Congress
permitted national banks to sell preferred stock, Congress having
exclusive jurisdiction over the national banks.
Most of the State laws, however, do not permit the sale of pre
ferred stock in State banks; and, therefore, Congress worked out
the problem for them of permitting them to sell debentures, or sell
capital notes; and the interpretation of all of the banking depart
ments of the Government is, that those notes and debentures are
considered the same as preferred stock in the capital structure of the
banks, some States permitting notes and some permitting debentures
to be sold. I thought that ought to be cleared up, but it does not
need to be cleared up for you gentlemen, but someone else who might
read it.
I would like, with your permission, Mr. Chairman, to read my
recommendations with reference to title I, which is the bill under
consideration, which is found on pages 14 and 15 of the annual report
o f the Comptroller of the Currency, for the year ending October 31,
1934:
Consideration should be given to strengthening the provisions o f the law
governing the Federal Deposit Insurance Corporation. In view o f the protec
tion afforded depositors, no doubt many o f the States will follow the precedent
established by Congress in eliminating the double liabilities on shares o f stock.

146

BANKING ACT OF 1 9 3 5

Relieving shares of stock from the double liability, and the insurance o f bank:
deposits offer added encouragement to the establishment o f new banks. Great
caution should be exercised in the future in the establishment o f either State
or national banks, or branches o f either, in order to prevent a repetition o f thefailures o f a few years ago. Under the present law, if a bank's assets are
sufEcient to pay its liabilities, the Federal Deposit Insurance Corporation
must accept it as a member, although it may have no capital structure.
The Comptroller's OfBce, under existing law, is in a position to require na
tional banks to maintain adequate sound capital, and also to prevent the
organization of a new national bank unless it has adequate, sound capital, and.
unless there is need for additional banking facilities in the location chosen,
and a reasonable prospect that the bank will operate successfully. The Comp
troller's Office is thus able to protect the interests of the Federal Deposit Insur
ance Corporation in those respects with reference to national banks, particularly
since the Comptroller is a member o f the board of the Corporation. There is,
however, no such safeguard as to State banks and it is believed that the law
governing the Federal Deposit Insurance Corporation should be amended to
make a State bank's admission to the fund conditional upon the approval o f
its capital structure by the Corporation; and in the case o f a new State bank,,
the board should be required to pass upon the need for additional banking
facilities in the place selected and upon the reasonable prospect o f the bank's
successful operation.
It would be well to consider whether the law should not be further amended,
to permit the Corporation, under proper limitations, to purchase assets o f
an insured bank for the purpose o f assisting in merging such a bank with
another, or o f reorganizing when it becomes apparent that a loss to the Cor
poration is impending. In this manner, losses may be limited or minimized.
Under the present law, the Corporation may do nothing until a bank is closed
and after that its recovery is dependent upon liquidation. Recoveries through,
liquidation are certain to be less than the values which may be placed upon
the same assets by a going institution.
The law should be amended to provide for examination by the Corporationof State nonmember banks which become members o f the fund. An express
provision should be made for reports o f condition by all insured banks not now
reporting to a Federal agency at intervals o f not oftener than twice a year,
such report to be as o f the same date as a call report made by national banks
to the Comptroller o f the Currency.
The Banking Act o f 1933 in section 11, subsection (d ) makes specific pro
vision that security for deposits of postal savings funds in banks shall not be
required to the extent that such deposits are insured. A general statutory
provision should be enacted so that no security shall be required under Federah
statutes for any deposits in banks to the extent that deposits referred to in
such statutes are insured under section 12 (b ) o f the Federal Reserve Act, as
amended.
It is believed that Congress might well consider the advisability o f levying
an annual assessment under the permanent plan in lieu o f an assessment
merely to repair insurance losses, and that it might make provision for carry
ing a portion o f the assessment in a reserve which could ultimately operate
to decrease such annual assessment. In banking, as in other businesses, it is
desirable when practicable to anticipate the fixed charges, and so far as pos
sible, the cost o f insurance should be made a fixed charge subject to reduction
through economical and efEcient operation.
Miscellaneous incidental matters affecting the Federal Deposit Insurance
Corporation should be provided fo r as fo llo w s:
Extend criminal provisions applicable to officers o f member banks to ofRcers
o f all insured banks. Eliminate reference to par value of Federal Deposit
Insurance Corporation stock in subsection E o f section 13 (b ) o f the Federal
Reserve A ct by substituting therefor the amount paid for said stock; extend
the prohibition in the present law against gratuities to Federal examiners to
examiners o f all insured banks and their ofBcers and likewise extend to same
the prohibition against disclosure of confidential inform ation; give the Federal
courts jurisdiction o f actions against the Corporation; extend to the Corpora
tion the protection now given to other Federal institutions against misleading
use of their nam es; and extend to all insured banks the present law making
robbery o f member banks a Federal offense,

BANKING ACT OF 1 9 3 5

147

Mr. Chairman, I am ready now for questions.
The CHAIRMAN. I am going to suggest that we begin with Mr*
Reilly.
Mr. REILLY* I have received quite a few letters recently, Mr.
O'Connor, from old national banks, inquiring as to the possibility
of relief from that double liability of assessment through an act o f
Congress, or some other method. What is your view as to the ad
visability or necessity or wisdom of any act by Congress at this
time?
Mr. O'CONNOR. I covered that in my annual report, and if you
will permit me, I will give you that. On page 12 of the annual re
port of the Comptroller of the Currency for 1934, in answer to Mr.
Reilly's question, I make this statement:
Section 22 o f the Banking Act of 1933 relieves shareholders o f national
banks from the additional liability imposed by Revised Statutes 5151, as
amended, and section 23 o f the Federal Reserve Act, as amended, with re
spect to shares issued after the date of enactment o f the act. Bills were
presented in the last session o f Congress to extend this relief to all outstanding^
shares o f stock o f national banking associations, regardless o f date of issue.
In the event it is determined to completely eliminate this assessment liability
o f shareholders, it is suggested that serious consideration be given to pro
viding for increasing the surplus o f national banking associations until same
equals the amount o f its common capital stock, thereby restoring to the bank's
creditors the protection now given by the potential assessment liability of the
shareholders and maintaining a sound banking structure.

Let me say, in that connection, that is a matter that our oBice,
Mr. Congressman, has given very serious consideration to. We
must at once appreciate the fact that, by eliminating the double
liability on all national banks, we have tremendously weakened the
banking structure of the nation. That must be clearly kept in
mind. Therefore, I have suggested that, if the Congress decides to
eliminate the double liability on all old national banks, the banks
should be required to build up, out of their profits, some substantial
amounts which shall go into a surplus fund of the banks.
Thereby, you will have in a bank and behind the capital structure,,
really, in time, the double liability and then relieve the stockholders
of it I appreciate that many people object to relieving the stock
holders of this double liability in banks, but those, I think, ought to
consider this: First, that banking investments are greatly discrimi
nated against, because of that double liability, investors not wishing
to put their money into a corporation upon which they may btf
called upon later to pay double the amount, or the same amount they
have already contributed ; and particularly those who make invest
ments feeling that, not during their lifetime, but it might happen
that, at their deaths, they have unloaded onto their widows and
children liabilities that might wipe out the whole assets and whole
savings of that man during his lifetime, which has happened in
some instances, unfortunately.
And, again, I think it ought to be pointed out to those who criti
cize Congress for doing this, that you levy the assessment at the
very time when either the holder ot the stock or his family is less
able to pay it, because in good times you do not need it, and it is only
when we get into a period such as we have been going through that

148

BANKING ACT OF 19 3 5

we put this extra burden and hazard upon people who are less able
to bear it.
It has been the policy of our oiBce to look into every case indi
vidually, because we have the duty imposed upon us by Congress to
^collect these assessments, and when people are perfectly able to pay
we require them to pay; we have no option, we cannot give away
money.
When people who have property and are not attempting to trans
fer it to defeat this assessment, or to sell i t come to us and tell us
that they are attempting to secure it, but they need time, in every
instance we have worked out a satisfactory arrangement with people
in those circumstances, and we have not had any particular complaint
that we have been unduly harsh in that respect.
Now, directly to the Congressmen, I have given you my view of
that, and have tried to answer the criticism.
Mr. REILLY. Your view would be that any legislation by Congress
waiving the double liability in the old national banks should be
limited to those institutions that have built up a reserve equal to
their capital stock ?
Mr. 0'CoNNon. That is not quite correct. I would abolish the
'double liability on all banks and provide for the building of the
surplus to 100 percent of capital in the future.
Mr. REILLY* I wonder whether any of that kind of legislation
would be constitutional. Has Congress any right to declare, by law,
that the depositors in a bank, say of $500,000 capital stock, shall be
denied the right to levy to the extent of that capital stock, in case
the bank should go into insolvency ?
Mr. O'CONNOR. Mr. Congressman, you have raised a very impor
tant question, and if I have retained any law since I got into the
banking business, I do not believe that Congress could pass a law
effectively today that would relieve the shareholders from double
liability as to depositors and creditors who have entered into a
contract with the bank at that time, when their rights were Sxed;
and their rights are Bxed and their contractual relationship with the
bank does exist, and I do not think Congress can destroy it.
The only thing Congress can do would be to throw the operating
period into the future a sufScient length of time, so that the existing
-creditors would not be affected, and that would be a contract—because
^very depositor has a contract between the depositor and the bank—
they would then come under the terms of the new law.
I think you have raised a ver yimportant question.
Mr. REiLLY. Or give them time to take their money out of the
bank and put into some other bank?
Mr. O'CONNOR. Yes.
Mr. REiLLY. Right on that point, on that question, what difHculties do the banks encounter when they attempt to reorganize and
come under a new law ? Suppose you had a national bank of $500,000 capital stock and it wants to get away from its double liability,
is there any diRiculty in reorganizing and getting a new charter l)y
changing some word in its title?
Mr. O'CONNOR. No; it can do that. Any corporation has that
right, but there is a great many procedural diSiculties in it.

BANKING ACT OF 1 9 3 5

149

In the first place, they have got to get the consent of all of their
stockholders and explain to them why they are doing it, and bankers
rather hesitate to take all of these issues and explain them and get
consent from several hundreds or thousands of stockholders and,
frankly, since the law has been in effect, we have not had that
question presented. There are probably one or two cases that I am
not familiar with, in no number that would affect the attention of
anybody.
That is my best answer, and I believe bankers have the feeling
that it is difficult to do it.

Now, under the present law, Mr. Congressman, you have this:
We have in national banks some stock that is subject to double
liability, and in the same bank we have stock that is not subject to
the double liability.
Mr. REILLY. How does that happen?
Mr. 0'CoNNon. Because all the new issued stock is not subject,
as you provided in the act, to the double liability.

The CHAIRMAN. Right there, let me trace the history of thi&
legislation. I might say I am responsible for the amendment to the
law, the purpose of which was to remove the double liability of the
stockholders. The bill as it passed the house, applied to the need
to something constantly requiring—I mean the bill as reported by
the committee to the House had that language, and the bill was
amended in the House in language that I cannot just at the moment
recall. I asked Mr. Await, a moment ago, if he remembered, but
he does not recall the exact language, but in conference the pro
vision was rewritten, and I suggested to Senator Bulkley—the fact
was that the Senators in Congress were hesitant about agreeing ta
it and I suggested to Senator Bulkley, who is an able lawyer, that
he rewrite the language so as to make sure of the accomplishment
of the purpose in mind.
It was my thought that the language employed by the House in
the passage of the bill was not adequate to accomplish the purpose,
and Senator Bulkley suggested a new idea which made it apply to
stock thereafter issued.
I, at least, and I cannot speak for the other members of the con
ference committee, but for myself, I proceeded upon the idea that
all stock repurchased or resold had to be reissued and that, therefore,
the language making the relief applicable to stock thereafter issued
would cover all old stock, if transferred.
So that the Comptroller's ofBce—and I am not questioning the
soundness of the decision—conclude the act to apply to stock there
after authorized to be issued; or in other words, applicable only to
new issues of stock. The construction was not in line with my own
idea. However, that is not important now.
I understood you to say that, in order to make such a provision
applicable to the existing stock, or to old stock, it would be necessary
to make the effective date at some future time as would remove all
question of the contractual relationship between the stockholder
and the depositor, or any other creditor of the bank.
I am wondering if you are not slightly in error about that, for
this reason: That under the original law, any stockholder of capital
in a national bank might transfer his stock and relieve himself of all
further liability by meeting the requirements of the existing law.

150

BANKING ACT OF 1 9 3 5

which fixes a definite time within which the statute of limitations
would operate against a stockholder who had transferred his stock
in good faith, and the period, as I remember it, was 60 days, as I
remember, Mr. Await.
Mr. AwALT. That is correct.
The CHAIRMAN. So that, in any event, any stockholder could
have relieved himself, under the original law, completely from any
liability to assessment, if he transferred his stock in good faith
60 days before the failure of the bank, or the period of liquidation;
is that true?
Mr. O'CONNOR. Then, Mr. Chairman, the man to whom he trans
ferred it would be liable.
The CHAIRMAN. What was that?
Mr. O'CONNOR. The stock is still liable. The man to whom he
transferred it would then be liable.
The CHAIRMAN. Yes, that is quite true.
Mr. O'CONNOR. You have not, you see, eliminated-----The CHAIRMAN. I am speaking now of the contractual relation
ship of the man in the first place. That man could relieve himself
of the contractual relationship after a period of 60 days, if he trans
ferred his stock in good faith?
Mr. O'CONNOR. To make it clear, we had better talk about the
liability attached to the share of stock, rather than to the individual,
and that you cannot abrogate by act of Congress.
The CHAIRMAN. Let me ask you this question: Do you know how
many States have laws providing double liability on the capital
of banks—State banks?
Mr. O'CONNOR. My recollection is, nearly all of them.
The CHAIRMAN. Nearly all of them?
Mr. O'CONNOR. Nearly all of them. That is my recollection.
The CHAIRMAN. I am a little surprised to hear that. Although
I have never seen the figures.
Mr. O'CONNOR. I think we can get a very clear picture if we ask
each member of the committee what his State holds, and you can
then get a cross section of the whole country.
The CHAIRMAN. It was my impression that only a few States
provided for the double liability.
Mr. O'CONNOR. The members of the committee could tell us
quickly what State has not got it.
The CHAIRMAN. Let me ask you this question, in that connection:
What would you think of a provision that would go the whole way
in the limitation of contractual obligations and existing difficulties
in relieving stockholders in national banks, in all States where no
double liability attaches to the stockholder, or to stock issued by a
State bank?
Mr. O'CONNOR. I can say, Mr. Chairman, and I am just giving
my opinion from my experience as a lawyer, my answer would be
that it would not avoid the constitutional objection that Congressman
Reilly has mentioned.
The CHAIRMAN. I don't think you quite got my question. I mean
aside from those difEculties, insofar as you might do so—I am
speaking now of the policy of duplicating the same law as to the
liability of stockholders.

BANKING ACT OF 1 9 3 5

151

Mr. 0'CoNNon. That is A matter of policy entirely within the
discretion of Congress, with the limitation that I previously stated
to the committee with reference to the constitutional objection. It
ivas placed, as I believe, in the future a sutEcient length of time-----The CHAIRMAN. My question contemplated the removal of those
diiBculties.
Mr. O'CONNOR. Oh, I see.

Mr. CRoss. Let me ask a question right there, Mr. Chairman.
The CHAIRMAN. Certainly, Mr. Cross.
Mr. CRoss. See if this would not eliminate the situation: I under
stand, of course, about making a deposit in a bank, and that at
the time I do it the stockholders are subject to double liability. I
assume, of course, that I have a contract with them, or when I put
it in the bank, they are liable, and that gives me better security
to get my money back. But suppose you were to put a clause in
the law that all deposits hereafter, the new deposits that go in a
bank, shall not have the double liability, so that when I put in
money in it, in that bank, after that—any money that I put in
there before that, I can take it out, all right, but that money that I
put in after that is no longer put in there under a contract that I
can reap the double liability on the stockholders, so why not put
in a clause like that relieving those stockholders of that double
liability only in reference to all new deposits?
Mr. O'CONNOR. Mr. Congressman, I mink you are absolutely cor
rect, because whenever you do that, you establish a new contractual
relationship. Could I suggest probably that some diiEculty would
be that of administration, of segregation of the amounts, the deter
mination of the dates of the deposits, and then waive the assess
ment for depositors who are under the double liability and segregated
from those that are not?
Mr. CRoss. Suppose I had $10,000 in a bank today in my checking
account—of course, I am putting money in the bank and drawing
money out, and my checking account will add up to $10,000. Now,
when my checking account adds up to that, then the stockholders
are not liable for the penalty, for the double liability?
Mr. O'CONNOR. You are absolutely correct. Mr. Congressman, may
I call your attention to page 53 of H. R. 5357, section 304, which
ireads:
Section 22 o f the Banking Act of 1933, as amended, is amended by adding at
the end thereof the follow ing sentence: " Such additional liability shall be
on July 1, 1937, with respect to shares issued prior to June 17, 1933, by any
association which shall be transacting the business of banking on July 1, 1937/'

I just call your attention to that because that is the section that
you would operate on, if I might use that wordy if you decide on
what you are discussing.
Mr. HoLLiSTER. Mr. O'Connor, your idea is that, even with respect
to the deposits which have been incurred, or which have been made
obligations of the bank, incurred prior to the enactment of this act,
i f enacted—if a certain length of time, 2 years or something more is
given, that notwithstanding the obligation that exists at the time
the deposit was made, which would give them ample opportunity and
they would be charged with knowledge of the change m the act, no
depositor could claim it after that time!

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BANKING ACT OF 1 9 3 5

Mr. O'CONNOR. Now, you are probably a better lawyer than I
am----Mr. HoLLisTER. I d ou b t it.
Mr. 0'CoNNon. This is very important, Mr. Congressman. Of
course, as lawyers, we both agree that any individual charged with
notice of the law, that he is bound by it, so far as it affects his rights.
You have raised the question that, if he continues during that
period with the same contractual relation that he had with the
bank as to those amounts, it is doubtful if the bank could abrogate
that contract. There is no doubt about a newi contract, as the
Congressman has suggested. In view of the law, there would be
no question about relieving them.
Mr. HoLLisTER. Would it not be a very simple matter with respect
to that- because the bank coud really notify all of its depostors to*
that enect, or to the effect that, on such and such a date, the law
would come into effect, and that any depositor will have a right to
withdraw his deposit? It will be assumed that, if a depositor does
not withdraw his deposits, that he will consent to making that new
deposit on that date, and thus change the contractual reationship^
between the depositor and the bank.
Mr. O'CONNOR. I think, Mr. Hollister, you are absoutely correct.
Mr. HoLLisTER. It seems to me that woud be a perfectly easy
way of obviating constitutional questions which might otherwise
arise.
Mr. O'CONNOR. In other words, this contractual relationship you
talk about can be terminated by either party, because the bank: haa
the right to say to a depositor, "W e don't want your money."
Mr* HoLLisTER. A depositor has no vested right in making a,
deposit, and if a bank cares to notify a depositor that, at a certain
date, the relationship between them will be changed, giving him
plenty of time to withdraw, it seems to me you are more than liberal
m 2 years. You can make it 6 months, and if a bank wanted to notify
all of its depositors and give them plenty of time to withdraw their
savings as well as demand deposits, that constitutional diiEculty
will be obviated.
Mr. O'CONNOR. I am inclined to agree with you.

The CHAIRMAN. I was going to propound that very inquiry.
Mr, O'CONNOR. You are too late.
The CHAIRMAN. That is just what I was going to ask.
Mr. O'CONNOR. You are too late.
The CHAIRMAN. What would be the difference between terminating
your liability at the end of 60 days, or at the end of 2 years or more ?
The principle would be the same, of course. Under the amendment,,
you are going to terminate those obligations arbitrarily, or by on&
party to the transaction, and if you are, you could do it just as welL
at the end of 60 days, if you met the same requirements.
Mr. O'CONNOR. Mr. Congressman, may I make this rather broacH
and rather challenging comment on why this should not be done at
the present time, in my judgment? You may not follow it, at ally
but looking at the picture now and not from a local angle but from
a national angle, I have given to this committee the work of the Gov
ernment in strengthening the capital structure of these banks. We
have gotten them all in very good condition today. I am inclined

BANKING ACT OF 19 3 5

153

to believe that we were able to do this job a good deal because of the
double liability that was on the shareholders.
Now, let me make that very particular: Here is a bank that has
an impairment of its capital, and the Comptroller says, "Y ou have
got to repair that capital and put up $100,000, or $1,000,000", and
if there is no double liability, those directors and shareholders are
not as interested in repairing that capital and working out the prob
lems of that bank as if there was no double liability, because they are
just apt to say, " Take it ; it is yours ", and walk out of the picture.
Now, while we are working out this problem, it is their problem
as well as ours, and the Government has gone a long way with these
banks in strengthening the capital structure of them, in getting local
contributions, so that ultimately they will be owned in the com
munities ; and when they realize the fact that, if we close them, they
will pay one hundred cents on the dollar of the liabilities, they are
going to hesitate a long time before they will permit that to be done.
Therefore, I believe that, until we get it worked out further, that
that is the controlling influence in saving a great deal of the banking
situation of this country, and that is why I would not like to see
it interfered with.
The CHAIRMAN. Mr. Comptroller, there is a great deal of force in
what you say, and I think I can appreciate it. The fact is, if I
may take time to say so, that I am not so enthusiastic about the
change in the law as I was at one time, because my attitude grew
out of the deep sympathy that I felt for so many innocent stock
holders, many of them citizens who, out of public spirit and for
the promotion of the community, had purchased stock in banks that
were under the control of others, with no part in the management,
themselves, and who had suffered finally by the imposition of the
double liability; and as you suggested a little while ago, many
instances have occurred of widows and children who found them
selves in the attitude of having inherited a serious liability, rather
than an asset. Those conditions were accentuated a year or two
But let me ask you this, in connection with your statement a few
moments ago: Is is not true that great difHculty was encountered,
in many instances, in reorganizing banks that had been temporarily
closed, because of the dread of the investors putting their money in
institutions where they incurred liability of reassessment equal to
their original investment? Would that not, in many instances, inter
fere with the reorganization of banks?
Mr. O'CONNOR. No; because that was the reason for passing the
law limiting double liability in new banks.
The CHAIRMAN. I am not talking about that; I am talking about
old institutions, who had a chance to replenish their capital and go
forward under the same ownership or organization and-----Mr. REiLLY. The new stock issued has no double liability?
The CHAIRMAN. That is true.
Mr. O'CONNOR. It was all new stock, because it wiped out the
other stock.
The CHAIRMAN. You had many cases of this kind, where stock
holders would come to the rescue of a weakening institution, by put
ting in new investments, and all that sort of thing, did you not?

154

BANKING ACT OF 1 9 3 5

Mr. O'CONNOR. They took new stock, which was not subject to the
liability.
The CHAIRMAN. They could take^he existing stock, as well as the
new stock----Mr* O'CONNOR. You mean to issue new stock?
The CHAIRMAN. No; strengthen the existing stock was what I
referred to.
Mr. O'CONNOR. Yes; they have done that, Mr. Chairman, but not
in a great many cases.
The CHAIRMAN. Let me ask you one other question: I believe you
suggested that stock in an existing institution is to be relieved o f
double liability—that when it is to be relieved of double liability, it
shall be a requirement that a surplus should be built up equal to the
amount of capital. Would you apply tha,t to a newly organized
institution ?
Mr. O'CONNOR. Absolutely. There is no reason why they should
be exempted from it. We would, under the terms of the bill, require
20 percent to start and gradually build up to 100 percent.
The CHAIRMAN. I was wondering, if they did not, why not. They
would be, of course, better protected, and it may be better business—
I would not say it would not—than the old plan of putting up onehalf and being liable for the other.
Mr. O'CONNOR. That is better. Mr. Congressman, can I make one
more comment?
The CHAIRMAN. Certainly, go ahead.
Mr. O'CONNOR. Do you not see how much it is going to also
assist the Federal Deposit Insurance Corporation, of course, if we
can keep that system strengthened and----The CHAIRMAN. It would, of course, make for a sounder system*
I think anybody can appreciate the contention that a bank should
not be permitted to pay out dividends to the point of weakening its
position.
Mr. REiLLY. Mr. O'Connor, with the exception of the interest
that the Federal Deposit Insurance Corporation would have in the
subject, and the interest of the depositors above the insurance liabil
ity, is not that academic, as far as the great mass of depositors
are concerned—that you are going to get this money, whether you get
it from the stockholders or from the insurance corporation! So^
relatively speaking, they are only a small fraction of the depositors
in our banks today, and only about 2 or 3 percent of them having
any financial interest in the question of whether or not that double
liability will be wiped out or left in, they are going to be paid jpst
the same, are they not ?
Mr. O'CONNOR. You are absolutely right, Mr. Congressman, keep
ing in mind the distinction between depositors and deposits in a
national bank, and that 42 percent of the deposits are insured under
$5,000.
Mr. REiLLY. The great majority?
Mr. O'CONNOR. Yes.
Mr. ReiLLY. You would really think that the Insurance Deposit
Corporation—if all of the depositors in a bank which was above
the insured limitation, would sign a request that the liability be
wiped out, there would be no reason why it should not and could
not be wiped out or eliminated ?

BANKING ACT OF 1 9 3 5

155

Mr. FoRD. Might I make a suggestion!
The CHAIRMAN. Yes.
Mr. FoRD. Would it not be wise to have it printed on the bank
pass book, that on and after such and such a date there was no
double liability on the part of the stockholders, and give every
depositor ample notice, and print it in the part of the rules in that
pass book! Why not, in a commercial bank, have it brought to
the attention of the depositor, by being printed on his pass book!
Mr. O'CONNOR. I think, Mr. Congressman, that is a very sound
suggestion. Mr. Hollister has the same suggestion, without being
specific. Mr. Hollister suggested that that would eliminate the
constitutional objection, by notification to the depositor, and you
suggest a specific method, and that method by you brings the direct
knowledge to the depositor, and he would not be injured, because
I think we have all agreed that it is a contractual relationship that
can be terminated and there is no injury done, because that depositor
can do as he likes.
The CHAIRMAN. I am not sure—I do not mean to put my judg
ment in the matter against that of lawyers competent to pass on it;
but I am not sure that any party to a contract can abrogate it merely
by notifying the other party that he is not going to live up to it.
Mr. O CONNOR. Can I answer that, Mr. Congressman!
The CHAIRMAN. Yes.
Mr. O'CONNOR. You can, if it is a contract that can be terminated
by either party on notice, and that is what this kind of contract is.
The CHAIRMAN. All right, Mr. Cross.
Mr. CRoss. I want to make this suggestion, or ask him a question:
Two methods have been suggested by which that could be done, that
contractual relationship could be terminated, but if you notified all
of the stockholders—I am speaking now from the psychological
standpoint and expediency—that, at a certain date, the double liabil
ity of the stockholders will end, or if you put in the pass book that
notice, would not that have a tendency to frighten the average citizen,
because he does not know anything about that! He would say that
the bank is in bad shape, or it is weakening. But you could put
that in the law and nobody would know anything about it, and that
would settle the whole thing, and it would go along smoothly, with
out any difEculty at all.
Mr. O'CONNOR. Mr. Congressman, I do not think it is possible to
frighten depositors today, with Federal Deposit Insurance Cor'
poration.
Mr. CRoss. Well, some of them have more than $5,000 in the bank.
Mr. O'CONNOR. Well, we just covered the point of the amount
which is involved. In the national banks, we have got 98 percent
of the number, so that the people that have the large deposits—I
think they probably are in a better position to know.
Mr. CROSS. A little more intelligent than the other fellow would be !
Mr. SissoN. Mr. O'Connor, I would like to get this information, if
you have it at hand.
Mr. O'CONNOR. Yes, Mr. Sisson.
Mr. SissoN. When you proceed to collect double liability, and in
case that you have to go to court, what is the percentage that you
collect, what do you get out of it, after it is all done!

156

BANKING ACT OF 1 9 3 5

Mr. 0'CoNNon. I can give you that very accurately, as it is in the
annual report. It is 49.78, and that is for a period of 70 years,
Mr. Congressman.
Mr. SissoN. There is one other thing about this: I suppose your
department had no other resource but to proceed to collect?
Mr. 0'CoNNon. No.
Mr. SissoN. But it is a terrible thing to happen to a community,
to have to do that. It is just too bad that a situation of that kind
has to come up, where the whole community interest may be de
stroyed. You are very familiar with what I have in mind. I am
thinking of a city in my own district right now.
Now, what I am particulary interested in is this: If this H. R.
5357 becomes the law, what is it going to do with the State banking
system?
Mr. O'CONNOR. I f what, Mr. Congressman?
Mr. SissoN. If this bill which we have under consideration right
now, H. R. 5357, becomes law, what is going to happen to the State
banking situation?
Mr. O'CONNOR. You are asking a question on this title?
Mr. SissoN. We practically forced the State banks into the Fed
eral Reserve System, or do it in the next 2 years, and I want to know
what we are going to do for those State banks, to make it easy for
them to get in: or how many of these banks are we going to put
out of business?
Mr. O'CONNOR. I can only answer that in a general way: I have
taken this position, and it is also one of the recommendations in
my annual report, that we ask the Congress to liberalize the assets
that are in these State banks, what we call under here "noncon
forming assets", so as to permit State banks to more easily
become members of the Federal Reserve System. In other words,
if we are going to compel the State banks to do something, we have
got to be careful that we do not do an injustice to those institutions;
and if a certain institution has got sound assets that are not con
forming, I feel that the Congress should give the Comptroller per
mission to permit those banks to qualify, or permit them to come
into the Federal Reserve System, and permit the Federal Reserve
System to accept them, which it could not do today under the exist
ing laws, because of the assets being as we say, " nonconforming." I
believe with you, Mr. Congressman, if we compel then—if we compel
that to be done, we have got to be exceedingly liberal in permitting
State banks—nobody wants a bank that is not sound, but we have
got to be liberal in permitting them to join. When you, by an act,
compel them to do that, you have got to be careful that you do not
do them a great injustice.
Mr. SissoN. Do you think that could be written into the law, do
you think that would be possible ?
Mr. O'CONNOR. You have got to write—you would have to change
the law, because you have nxed certain standards of membership,
and they must have what we call " conforming " assets. You would
have to change that, and we will be very glad, at the proper time,
to go in and analyze that section with you, and check up on it.
Mr. WoLcoTT. May I suggest that the Federal Reserve System
waive, in whole or in part, the capital requirements of nonmember

BANKING ACT OF 1 9 3 6

157

banks, as an inducement to get them in; and if that were true, I
assume the Board would be liberal in its interpretation of the law
and liberal in its requirements.
The CHAIRMAN. Mr. O'Connor, have you any further matter that
you would like to discuss relating to title I? If you have, I would
suggest that you do so, because we will be glad to hear you, and
then will resume our questions.
Mr. 0'CONNOH. Well, I have given my general approval, Mr.
Chairman, to this bill* I feel that it has been very carefully worked
out, and I think that the fundamental parts of it are very important
in looking forward to the successful operations of the Federal
Deposit Insurance Corporation.
This bill has been passed by the Banking Committee of the Treasury^ and I want to say that I think it is in veiy excellent shape.
I did tell the committee that one provision of it I thought was not
just in harmony with my ideas, but the committee thought other
wise. That is with reference to receiverships.
I feel that the present system should be continued. The Comp
troller should appoint the receivers of all national banks, particularly
based on the record of the oiBce of 70 years, without any reference
to myself, because I think we have done a good job in years past,
and I hope in the present, when we have returned, out of every
dollar collected, 93 cents to the depositors, and we have only taken
7 cents out of any dollar for expenses of salaries of the receivers,
and attorneys' fees and rent, and eveiy other item that you can
possibly conceive of, which has been included in the 7 cents, and we
have returned 93 cents to the depositors.
I doubt the wisdom of setting up two insolvent divisions in Wash
ington. The Comptroller's Omce has handled nearly Cfteen hundred
and I believe that, particularly in view of the fact that only 42
percent of the deposits in national banks are protected by the In
surance Corporation—still, the Comptroller is responsible for the
administration properly of the balance of nearly 60 percent and-----Mr. HOLLISTER. Fourteen hundred since the oSice was established!
Mr. O'CONNOR. Yes. It would probably be just as well for it to
continue without duplication. I am very much opposed to the use
of duplication in Government or private business.
I wanted to make that clear, and then say that the bill before
you has the endorsement of the committee and I have their com*
mentsohit.
There is one other section of the bill that I, frankly, have not
discussed with anybody, because I just ran across it yesterday, but
I believe-----The CHAIRMAN. Before you leave that, Mr. Comptroller, it might
be well to call attention to the faet that, under the existing law and
Under the original Deposit Insurance Corporation law, the Deposit
Insurance Corporation eould take over any national bank that was
closed and operate it as a clearing house for a period of 2 years;
meanwhile giving an opportunity for the reorganizing, or for the
organizing of a national bank.
The thought back of that was not so much to secure the wise
administration of the assets of the closed banks, but to permit the
corporation to continue to operate the bank, and to avoid paying the
actual cash to the depositors, by being authorized to issue new deposit

158

BANKING ACT OF 1 9 3 5

receipts by the new institution operated by the Deposit Insurance
Corporation.
Mr. O'CONNOR. When banks fail because of lack of business, I
think it is unwise to attempt to establish another bank on the ashes
of the old.
Only one national bank went into receivership in 1934, and it was
in Montana, with a deposit liability of approximately $30,000. For
several years there were no rains and the surrounding country, the
country surrounding it practically dried up, as illustrated by the fact
that it only had $30,000 in deposits. The community just could not
sustain another bank.
The CHAIRMAN. Then you think it would be uneconomical and un
wise to require the Deposit Insurance Corporation to continue to
operate a bank, even in a limited way, in that community ?
Mr. O'CONNOR. Absolutely.
The CHAIRMAN. But any such institution should at once be placed
in liquidation?
Mr. O'CONNOR. Yes. Now, we have a right whereby we may,
under this law, establish a national bank, but we do not do it, because
I am so anxious to avoid establishing banks which will only result
in distress to investors and depositors in the community.
Now, so far this year, we have had only one and----The CHAIRMAN. In the instance to which you have referred, or to
the particular case to which you have referred, that was not a case
where there would have been a national bank organized, or would
have been required to operate the bank for 2 years, but there would
have been no likelihood of reorganizing it ?
Mr. O'CONNOR. That is correct. Now, Mr. Chairman, following
that out, we only had one national bank fail this year, and they did
not fail because of the lack of business or of the lack of necessity for
a bank in the community. I would rather not give the State, because
that is not necessary, but it was due, unfortunately, to the fact that
one of the oScers had embezzled some $70,000, and who later confessed
the embezzlement. That is something that cannot be avoided. There
is need for a bank there and we have set up a bank and made excellent
progress, or are making excellent progress in the sale of the old bank
to the new bank and the sale of the stock to the people of that com
munity, because they must have banking facilities there, and that
gives them the option to do it.
Those are the only two, Mr. Chairman, in the national banking
system last year and this year that failed.
The CHAIRMAN. So that, as a matter of fact, you have had, la^t
year and this year, only two national bank failures?
Mr. O'CONNOR. That is right.
The CHAIRMAN. The insurance of deposits under the temporary
plan of $2,500, and under the $5,000 limitation provided in the act
last year, was not very harmful to the national banking system in
this country, was it?
Mr. O'CONNOR. I think it is one of the things that has reestab
lished confidence all over the country, Mr. Chairman, and I think
it is one of the justifications for the contribution on the part of the
large banks to sustain the banking system of the country^ because
when the banks started to crack up, outside of New York, they im-^
mediately drew out the reserves from the large centers, and the large

BANKING ACT OF 1 9 3 5

159

banks immediately drew upon the market stocks, in order to meet the
cash withdrawals, and we thereby started a vicious cycle of depres
sion; and if we can secure or reestablish the conRdence of the de
positors of the country, so that will not happen, we have saved the
banking situation. The big banks that suffered by that did not close,
but they suffered in those trades, and they should be willing to go a
long way to prevent that again.
The CHAIRMAN. The fact is that a good many big banks actually
closed before the holiday ?
Mr. O'CONNOR. I am talking about the big centers, where the big
cash reserves are kept, like New York and the other centers; but
some very large ones did close, Mr. Chairman, which started the with
drawals from these centers, which, in turn, shut the banks. I am
talking about the effects on the good banks, how they suffered, even
though they said, "Y ou can't close i t " ; but they suffered just the
same, and the whole country suffered by the throwing of hundreds of
millions of dollars worth of securities on the market, in order to
realize cash to take care of their customers in the country.
Mr. GiFFORD. Mr. O'Connor, I want to ask a question. I think
you have made a very good report here relating to the examination
of your banks, but as I recall, even the White House, itself, issued a
warning last fall that the bank examiners were still rather too strict,
and that they could not expect money to be loaned as long as the
banks were worried about collecting their slow loans and liquidating
their loans.
I remember your speeches over the country, and I think perhaps
you may recall that I may have written you a letter regarding your
own viewpoint, and you seem to agree, m those addresses, that the
banks should loosen up.
But in my section, whenever I visited the banks, and I visited a
great many, there existed a fear of your examiners, especially re
lating to slow loans. Now, you are claiming in your report that
you gave your examiners no instructions relating to the demanding
payment of the slow loans, but simply marked them " slow." That,
naturally, was effective on the hanks and the people who owned that
money, by marking them " slow loans." As I think the White House
expressed it, there were two branches of the Government, the Re
construction Finance Corporation and yourself arguing with the
banks that they should loosen up, and another branch, which is the
examination branch, frightening the banks so they did not dare make
loans.
I f I may pursue that, I realize that most of the banks—the chief
thing they had in mind was to reduce the slow loans, and they did not
want to get into any more trouble. You acknowledge in your re
port, if you are not quite ready to answer-----Mr. O'CONNOR. Yes, I am.
Mr. GiFFORD. You say here that there has been considerable con
troversy and misunderstanding with reference to the examination
of banks; that they may have been harassed by the Reconstruction
Finance Corporation's examinations, by the Federal Deposit Insur
ance examinations, though you examine but twice a year, but, while
they were only supervisory examinations, they probably did in
timidate and perhaps harass some banks by so many of these
examinations.

160

BANKING ACT OF 1 9 3 5

Mr. O'CONNOR. First, Mr. Gifford-----Mr. GiFFORD. Comment on that, please, on the slow loans.
Mr. O'CONNOR. There is no harassment of banks by several exam
inations. No national-bank ofScer in the United States, at no time
and at no place, has made criticism of a duplication of examinations,
because no such thing exists. The only man who has authority to
step into a national bank to examine it is an examiner from the
Comptroller's ofBce, and you have provided by law that we must
make at least two examinations a year. No other examiner from
the Federal Government ever goes into a national bank, with one
exception: When a national bank asks the Reconstruction Finance
Corporation to become a partner—because that is what they are
when they buy preferred stock in a bank—when they ask the R. F. C.
to become a partner, the banker and the Reconstruction Finance
Corporation sit down and agree on how the deal shall be made, and
in that deal the R. F. C. and the bank may agree that a R. F. C.
man may come in at a certain time and look over their assets or
check up certain matters, which is a matter entirely between the
bank and the R. F. C. The bank does not have to do that, or the
bank may yield to it, just in the deal between themselves.
The bank has a right to ask that an independent auditing firm
make audits—and many of them do that—aside from our examina
tions. Many of the larger and better banks have independent audits
made by some of the large auditing firms to be sure that they have
completely checked up on that bank. That disposes of the point
of harassment of diHerent examinations.
Now, I want to direct myself to the instructions that were sent out
in October 1933 to the national-bank examiners, and then I want to
show you the results that followed those instructions.
Mr. SissoN. May I suggest, Mr. O'Connor, that you give Mr. Gif
ford the figures as to the way you have classified the loans which
were placed in the loss column and the loans which were placed in
the doubtful column!
Mr. GiFFORD. I have read that, Mr. Sisson. There are very few in
the loss column. That is why I limited my question to the slow loans.
Mr. O'CONNOR. I was coming to it, Mr. Gifford, but I have to lay
the foundation to get the figures, if I might be permitted to do that.
Mr. GiFFORB. Yes; but I wanted to tell Mr. Sisson that I under
stand those Bgures, but I limited it to the slow loans.
Mr. HoLMSTER. Might I ask a question, Mr. Chairman ?
The CHAIRMAN. Yes.
Mr. H oLM ST E R . Mr. O'Connor, to go back, temporarily, to that
question of the taking of debentures in place of preferred stock, is it
not true that, in a great many cases, debentures were taken by the
Reconstruction Finance Corporation rather than preferred stock in
some States, because the laws of the State did not permit the issuing
of preferred stock, but also because, in some States where the pre
ferred stock might have been issued, it would have covered double
liability and the Reconstruction Finance Corporation did not want
to take stock that carried double liability!
Mr. O'CONNOR. Yes; I think that is true.
Mr. HoLMSTER. To show you what I am leading to, whether you
take preferred stock or notes or debentures of banks, it is exactly the
same, and it was merely to get additional capital!

BANKING ACT OF 1 9 3 5

161

Mr. O'CONNOR. Yes.
Mr. HoLLiSTER. That brings me to the question I am going to ask
you, not that it has anything particularly to do with this bill, but
I believe it ought to be brought out, and this is a good opportunity:
Is it not true that, at the present time, for income-tax purposes, a
bank which has notes and debentures outstanding, may deduct the
obligation of paying interest on those notes or debentures from its
income, and thereby pay less income tax; whereas a bank that has
preferred stock outstanding is not so permitted to deduct it, but the
amount which is ultimately paid out upon preferred stock must be
paid by the bank for income tax purposes; is that not the case!
Mr. O'CONNOR. You are absolutely correct, Mr. Congressman.
Mr. HoLLiSTER. So, would it not be proper to have—I realize you
have come from the Ways and Means Committee—would it not be
proper to have some sort of legislation passed, which would permit
the deduction by the bank of what it has to pay out, the same way
that the other banks that have debentures outstanding may deduct
the interest on those debentures?
Mr. O'CONNOR. On page 7 of my report to Congress, I make this
statement:
Section 23 of the Revenue Act o f 1934, paragraph (b ), provides for certain
deductions from gross income. It is understood that State banks which have
sold capital notes or debentures to the Reconstruction Finance Corporation may
under this paragraph deduct interest paid thereon in computing their net in
come for taxable purposes.
National banks in strengthening their capital structure have issued pre
ferred stock to the Reconstruction Finance Corporation, paying dividends
thereon, which payment o f dividends is substantially equivalent to the pay
ment o f interest made by State banks on capital notes sold by them to the
Reconstruction Finance Corporation.

You used my language.
Mr. HoMJSTER. I knew that was in the report, but I thought it
well to bring it out. Can you tell the committee whether your olRce
is suggesting to the Ways and Means Committee that they take up
that matter I
Mr. O'CONNOR. Yes, we have submitted it
The CHAIRMAN. Mr. O'Connor, let me suggest that you conclude
your discussion of the matter of examinations.
Mr. O'CONNOR. Oh, yes; thank you.
The CHAIRMAN. As I understand, you had not finished.
Mr. SissoN. Mr. Chairman, may I interrupt!
The CH A IR M A N . Yes.
Mr. SissoN. Mr. O'Connor, you spoke, a short time ago, about the
fact that—or you mentioned the Act that 97.5 percent, I believe,
of the total number of deposits were—I assume you were referring
then to the member banks, or just to the national banks?
Mr. O'CONNOR. National banks.
Mr. SissoN. Were covered by deposit insurance. I am not sure
whether Mr. Crowley testiRed—he testified yesterday quite fully on
that, but I am not sure whether he gave the aggregate amount, in
dollars, of the deposits that were covered. I f you have that con
veniently, I think it might be well to have that in the record at
this point.
Mr. 0'CONXOR. National banks, 5,450, insured deposits, $8,488,554,000, uninsured deposits, $11,583,949,000, and total deposits, at

162

BANKING ACT OF 1 9 3 5

this time, or on October 1, were $20,072,503,000, which shows that
42.29 percent of the deposits are insured by the Federal Deposit In
surance Corporation, insuring $25,972,035,000 deposits, and 405,811
deposits are partly insured, which makes a total of 26,377,846 deposi
tors, and 98.46 percent of the depositors are insured; and in State
banks, which are members of the Federal Reserve, we have 969 banks,
with insured deposits of $3,582,449,000, and uninsured $7,382,986,000,
making a total of $10,965,435,000, which shows that 32.67 percent of
the total deposits are insured, with 9,361,278 depositors, and 119,082
partly insured, with a total number of depositors of 9,560,360, and the
percentage of depositors insured is 97.92 percent; and State banks,
which are not members of the Federal Reserve, exclusive of the mutual
savings banks, number 7,638, with insured deposits of $3,580,803,000;
uninsured deposits of $1,363,262,000, and total deposits of $4,944,065,000; and the ratio of insured to the total deposits is 72.43 per
cent; and the depositors fully insured are 13,687,403; and depositors
partly insured, 142,947, making a total number of depositors of
13,812,350, or 99.10 percent of the number of depositors in State
banks are insured.
The CHAIRMAN. As State nonmember banks?
Mr. O'CoNNOR. Yes; that gives us a total there which is rather
interesting in these three divisions: 14,057 banks with insured depos
its of $15,651,806,000; uninsured, $20,330,197,000, with total deposits
of $35,982,003,000, with the ratio of insured to total deposits of 43.50
percent; and depositors fully insured, 49,020,716; depositors partly
insured, 729,840; and total number of depositors, 49,750,556; and
the total number of depositors insured in the three classes, under
the $5,000, is 98.53 percent.
Mr. SissoN. That gives the complete picture there.
Now, may I say, in a preliminary way to one question that I want
to ask, and I am not indicating any opinion that I have, because I
do not know whether I have any positive conviction about the advis
ability o f increasing the maximum of insurance deposits, but I just
wanted to ask you, before you pass from it, if you are going to dis
cuss it at some later date before the committee, that is, as to your
opinion of the advisability of increasing the maximum limit of
deposits, insured deposits ? If you do, I do not care to ask you to go
into it now, because that is perhaps breaking up the continuity of
your statement.
Mr. O'CONNOR. Well, Mr. Sisson, I feel that we have presented
all of the statistics and figures, and the amount is a matter that ought
to be a matter of policy of this committee.
Mr. SissoN. Yes, sir; but guiding the committee, unless the major
ity of the committee have decided already that there will be no
increase, the committee probably before voting upon or deciding upon
it, would like your opinion.
Mr. O'CONNOR. Then, may I put it this way?
Mr. SissoN. I am not asking you to give it now.
Mr. O'CONNOR. I f the committee agrees to it, or gets to that point,
I will be very glad to give you my opinion.
The CHAIRMAN. Mr. O'Connor, have you given any thought in
that connection? I am asking this question: Have you given any
thought to the difficulties that the banks will find themselves in,
in relation to their obligations to other banks, when they fail;

BANKING ACT OF 19 3 5

163

what that picture would disclose, if we should have any considerable
number of bank failures in the country ?
Mr. O'CONNOR. Yes, we have thought a good deal about that, and
it is pretty complicated.
The CHAIRMAN* I am wondering how much , noise we will hear
around here about the amount of deposit insurance after the banks
gather some experience and they Rnd they are not insured against
one another. That thought is reconciling me somewhat to the idea
of limiting this insurance, for the time being. I have the idea that
the banks will take care of the matter of increases, as soon as they
gather some experience, in case we have a large bank failure. I
would like to be here when that happens.
Mr. GiFFORD. Mr. Chairman, do you want me to continue on the
examination ?
The CHAIRMAN. Gentlemen, if nobody objects, let me suggest that
Mr. O'Connor conclude his discussion of this matter of examinations,
if he desires to say anything further.
Mr. O'CONNOR. I started, several times, and there is just two
pages, and as a foundation, I would like very much to put this in
the record and be subject to any questions.
The CHAIRMAN. There will be no objection to your incorporating
that in the record. You may do so right now, and if you desire to
say anything further, we will be glad to hear you.
(Here followed discussion oH the record.)
Mr. O'CONNOR. Mr. Chairman, I would rather that speech would
stand, because it is so knit together.
The CHAIRMAN. We will be glad to have it.
Mr. O'CONNOR. But at this time I would like very much to call
the committee's attention, for the purpose of laying the foundation
for future questions on a very important matter that the country
has been greatly interested in, and which has been considerably mis
represented until this was given to the country, and I would be glad
to give some reactions that I got after this speech was made by
depositors as well as bankers and others.
The Comptroller o f the Currency sent, on October 26, 1933, to each o f the
12 chief national-bank examiners in the United States instructions to this
e ffect:
"A fter the * Bank H o lid a y n a tio n a l-b a n k examiners were largely engaged
in the examination of banks which did not receive a license for the purpose
o f reorganization. It appears that some examiners in making examinations o f
licensed national banks have become what might be termed *Reorganization
M inded' and have lost sight of the President's recovery program and its rela
tion to licensed banks. It is the administration's desire that credit channels
be opened through licensed banks, and this policy cannot be accomplished if
examiners follow a delation policy in examinations. W e are all concerned
in having solvent banks, but there is a wide distinction between the potential
and intrinsic value o f assets of a going institution, and liquidating values.
Examiners in appraising and classifying assets o f licensed banks will not
apply liquidating values but w ill appraise on the basis o f fair values on a
recovery basis.
"A s an example— in dealing with bank buildings, the examiner must realize
that a bank building o f a going bank has an intrinsic value, as distinguished
from present depressed values, which, combined with the element o f recovery,
may fully substantiate the carrying value given to it by the bank. The same
is true o f mortgages, and in this connection the examiners should fam iliarize
themselves with the instructions given with respect to real-estate mortgages
by the Federal Deposit Insurance Corporation to its examiners.

164

BANKING ACT OF 193 5

*' You will advise examiners who are examining licensed banks o f this
policy and see that it is carried out. Any examination now in process, or any
future examination, will be governed by these instructions and where an
examination has been completed, the examiner making the report will review
the report on the above basis and rewrite such report if found necessary. I f
the examiner is not now available it may be necessary to make a new exami
nation on the proper basis."
Again on March 13, 1934, the following instruction was sent to all chief
national-bank exam iners:
"R ep orts o f examinations received by this office recently clearly indicate
that some few o f the examiners throughout the country have not fully grasped
the meaning o f instructions communicated to the chief examiners under date
of October 26, 1933, and are making more drastic classiRcation o f assets of the
banks examined by them than is necessary under the circumstances and more
severe than is contemplated by the instructions contained in oiRce letter
referred to above.
" I f there are in your Federal Reserve district any examiners who, in your
opinion, are making unnecessarily drastic classifications o f assets, please
confer with them promptly, looking towards having their classiRcations as
lenience as circustances in each case w ill permit and in order that they will
be in accord with the policies o f this oiRce.
"W h ile you are fam iliar with the character o f examinations made by your
examiners, it is suggested that in determining whether or not any o f them are
too severe in their classiHcations, you give particular attention to their ap
praisals o f banking houses, furniture and Rxturea, and loans secured by real

estate."

No system is perfect because men are not perfect. Here and there isolated
cases appear where examiners have been too harsh. These instances are some
times called to the attention o f the proper o& cials; but where examiners are
too lenient, that fact seldom appears. The instructions which I have cited have
never before been made public. However, I believe the time has come to clarify
a criticism which is unfair. The question naturally arises— what were the
results obtained under the instructions? Again, for the Rrst time, I w ill give
you a complete picture o f the examinations made by the national bank exami
ners as shown by 1934 reports o f examination. As is well known to bankers,
examiners classify loans under three headings— slow, doubtful, and loss. There
is little room for argument when assets are placed in the loss column and very
little question arises in the doubtful column. The slow column attracts the
most attention and controversy. An examination o f the reports Bled with the
OiBee o f the Comptroller of the Currency in each o f 5,275 banks reveals the
follow ing interesting Rgures: The total amount of loans was $7,740,596,000.
The examiners placed 2.88 percent o f these loans in the loss column and 4.19
percent in the doubtful column and 27.05 percent in the slow column. The
country has been advised o f the definition o f slow paper as fo llo w s:
" The examiners when classifying loans as slow should state brieRy the rea
sons for such classiHcations, but should bear in mind that the responsibility for
determining and taking such action as may be necessary to place such slow
loans in proper bankable shape rests entirely with the bankers. The examiners
therefore, should refrain from instructing the bankers as to what course they
should pursue with their customers whose paper is classiRed as slow.'*

Now, I want to answer specifically, Mr. Congressman, the question
you raised with reference to the reaction to the slow column or classi
fication. My general experience is that bank directors, aside now
from the operating ofHcials of banks, are very anxious that we retain
in our reports these slow columns. The purpose of that is to direct
the attention of the directors to what our examiners Rnd in the banks,
so that a bank will not gradually Bnd itself in a very frozen condition.
We merely point out certain paper to be slow; it is good, it is
sound or it would not be in that column; and by specific directions.
We say to our examiners, " You shall not tell that banker what he
shall do with that paper." Now, we say, " You are to make com
ments to us." Everyone will agree that a bank should not have an
undue amount of slow paper, and without giving places, which I

BANKING ACT OF 19 3 3

165

trust you will not ask me for, because it is not necessary for tht?
purpose of discussion, two most serious cases that arose in this coun
try, and in one where the greatest distress was found because of the
lack of dividends to depositors, was due to the fact that the bank
became frozen with slow paper, which should not have happened.
Therefore, it seems to be the common opinion among directors, and
in most instances now they are much more careful than they were
before, and they asked to have read and in the directors' minutes,
and our reports are read to them, and they are generally discussed,
and if they find the amount of the slow paper the directors them
selves can make inquiry of the ofRcer as to that particular paper,
what it is, and make some investigation of it; and we find, Mr. Con
gressman, notwithstanding the fact that there has been some discus
sion as to the elimination of the slow classification, my judgment is
it would be a serious thing to do.
Mr. GiFFORD. Mr. O'Connor, I think you fully understand why I
am asking the question. The public at large is interested, because
they thought there were two branches of the Government, one work
ing against the other; and when I got your report as to the slow
loans, I thought you did not even imply that putting them into that
column meant that they ought to be paid.
Our bankers say, "W e run our banks. We must pay 6 percent to
get this paper renewed." They have an abundance of property or
assets, and we have to harrass them. But those slow loans—I got
notice from the banks that the examiners had criticized their loans,
and when they put them in that column it was implied criticism,
although not an implied order that they must be collected.
Mr. O 'C O N N O R . The banker who said that was dishonest. The
banker who made that statement was dishonest with the borrower,
unless he accompanied it with the instructions that we sent to the
banker and to the examiners.
Mr. GiFFORD. If the banker had told you it was put into the slo w
column and is must be made an active account, something must be
paid on it, what would you thing about it? Of course, I could
bring up specific instances now, but I just do not want to. I could
give you several that I am sure you would agree to, I think, from
your letters to me, which I believe show your viewpoint.
Mr. O'CcNNOR. Yes, I know. I appreciate that very much.
Mr. GiFFORD. You acknowledge, yourself, your second letter to
your examiners, that in matters of real estate, they have been too
strict. Of course, there had been many cases where they were
marked off as a complete loss, certain real estate loans, that might
later prove of some value; and in many cases, the bank claimed the
loss, so they had to go to the R. F. C.
All of my questioning is specifically founded upon the fact, in this
article, or m this title I, you ask the banks to furnish burglar in
surance, and a whole lot of things, and that they be subject to further
examination. I f the examinations have been an irritating factor
to a sufEcient degree, to have caused the banks, in the last 2 years
to be unwilling to loan money, and that has been their chief----Mr. 0'C oN xoR . Alibi?
Mr. GiFFORD. You agree with that!
Mr. O 'C O N N O R . An a l i b i !

166

BANKING ACT OF 1 9 3 5

Mr. GiFFORD. Yes; call it an alibi, if you wish.
Mr. O'CONNOR. Which is not true.
Mr. GiFFORD. I doubt if it is true, myself, but we have been faced
with it by men who wanted to borrow money and-----Mr. SissoN. Mr. Chairman, if the committee will pardon a personal
allusion, I used to manage a baseball team and I fully realize how an
alibi can be used, because when a player, when he missed a ball, he
said that the field was uneven and the ball did not bounce right.
I think the most interesting alibi the bankers have had is, that they
have laid the blame upon the Comptroller's examinations.
That is what I have been trying to bring out before this committee.
The CHAIRMAN. The truth is, that the Comptroller's OfEce, for
several years, has been criticized because of its liberality^ and it risked
a great deal in going as far as it did in liberalizing the policy of
examinations, to try to deal constructively with the difHculties we
have had in the past years, and I commend you and your prede
cessors for what you have done, and I believe the people who under
stand it feel the same way.
Mr. GiFFORD. Mr. Chairman, I am trying to bring out the facts
that the banks have not loaned money me last 2 years, call it alibi
or anything else you like; they have not done it, and there has been
no reason for it.
The CHAIRMAN. When you call it alibi, I agfee with you.
Mr. GiFFORD. I am allowing that word to go in, but some deSnite
reason has been back of it for 2 years.
The CHAIRMAN. They are scared to death.
Gentlemen, let me ask if there are any other questions from Mr.
O'Connor; and if there are not, I am going to suggest we excuse him
and conclude with his statement on title I, and the committee will
not meet again until Monday.
Mr. WOLCOTT. Just a moment, please, let me ask you a question:
The Federal Reserve System, I am given to understand, have about
$2,400,000,000 of excess reserves. What is your opinion, Mr. O'Con
nor, as to why that money has not been loaned!
Mr. O'CONNOR. Well, Mr. Congressman, a rather careful analysis
was made of that in Dr. Viner's report, which he made sometime
ago, a few weeks ago, or probably a month ago, and he sent some
very efBcient men, I believe, and compared very carefully the rea
sons—now, I am just giving you what I think about it, not having
anything to do with it, but I believe that he sent men to foUow
through the loans of the banks that were rejected and get an analysis
of why the people were not borrowing and why the loans were re
jected, and I believe the Doctor concluded that there was not such
a demand for loans. He concluded that the demand was not there
for legitimate loans that the people thought.
Now, I am just stating that, because I read the report very briefly
and hurriedly, but the report is available and that was his conclu
sion, and I think that the report—I would rather refer to it and
refresh my memory about it than to give you an offhand opinion,
without any facts.
Mr. WOLCOTT. That would seem to be true, in view of the fact
that the Reconstruction Finance Corporation, I understand, has had
demands made upon them for only about $100,000,000 of the money

BANKING ACT OF 19 3 5

167

we made available for loans to small industries, and have paid out
actually less than $7 000.000.
Mr. O'CoNNOR. That is right.
Mr. WoLcoTT. What I am getting at is an expression of my own
personal feeling in that connection, that undoubtedly the lack of de
mand on the part of borrowers is due to the uncertainty of the eco
nomic future of the country; and possibly we might be able to over
come that by maintaining—by establishing and maintaining definite
policies concerning our money and our attitude towards business.
Do you not think that might help some ?
Mr. O'CoNNOR. As I say, that report, Mr. Congressman, is some
thing new, and it is a particular question that I have not gone into,
and I would have to refresh my memory; but he actually went into
the Held and made an investigation. The only way we can get at
these things is by the actual facts, and whatever they are, let us have
the facts. If it is a fact, let us look at it. Dr. Viner did send his
men out, made a very careful analysis, and got reports back of A
number of applications and why they were rejected and the amount
of them, and he follows great detail in it and made his conclusion in
that report: and I would like awfully well to refer you to that report.
Mr. WoLcoTT. Yes; I will read it with a great deal of interest. I
assume, from your statement, that he came to the conclusion it is
due to a lack of demand for the money?
Mr. O'CoNNOR. I think that is one of his conclusions. Well, put
it in another way, I think my impression from the report was, that
there was not as great demand as some people believed.
Mr. WoLcoTT. Following that through, the panacea for all of this

seems to be to create a condition of confidence, in which business will
get started to borrowing money from the banks and demanding
money from the banks for constructive purposes. I will not expect
you to answer that, Mr. O'Connor.
Mr. O'CONNOR. I do not know. I am only referring you to the
only authentic report that I know of.
Mr. FoRD. Could you not send copies of the report to the members
of the committee!
Mr. O'CONNOR. It is a very voluminous report.
Mr. WoLcoTT. What is it, a very long report!
Mr. O'CONNOR. Yes, sir.

Mr. HoLLiSTER. You have only to read about two pages of it, which
is a summary oi the thing.
The CHAIRMAN. Do you desire to say anything further right now!
Mr. O'CONNOR. Yes, there was one other section that I thought we
ought to give some discussion to, and I want to briefly state that, in
our banking law—and as I said, I had not given it consideration
until yesterday, but I feel we should not go along without at least
one comment on it, and that will conclude my troubles. On page 34,
section 18, the bill provides, in title I, the following:
The board o f directors, from time to time, shall gather information and data
and shall make investigations and reports upon the organization, operation,
closing, reopening, reorganization, and consolidation o f banks, banking practices
and management, and the security of depositors and adequacy o f service to
borrowers. The board of directors, in any annual or special report to Congress,
shaU report its Endings and make such recommendations and requests as it

168

BANKING ACT OF 1 9 3 5

shall And necessary and appropriate for the purpose o f carrying out the
purposes o f this section and fully provided for all of the obligations o f the
corporation.

I find some objection, Mr. Chairman, I am sorry to say, to this
section, because the Comptroller of the Currency makes a report
to Congress, the Federal Reserve Board makes a report to Congress,
and this is mandatory upon the Board, and I do not think that we
can justify an expense of as much as $50,000 or $100,000 to get that
additional information, which is now available through the Federal
Reserve and the Comptroller of the Currency, all of which is worked
in connection with our board, and I do not believe that section is
necessary and I think it would be a useless expenditure of money.
The CHAIRMAN. Mr. O'Connor, before you conclude^ there is one
matter I would like to draw your attention to for a brief discussion
by you, and that is the provision respecting the payment of interest
on deposits.
Mr. O'CONNOR. Have you special reference to the act which pro
vides for the elimination of interest on demand deposits ?
The CHAIRMAN, Yes.
Mr. O'CONNOR. Now, that is very important, Mr. Chairman, and
I am glad you mentioned it. There has been a great deal of discus
sion about the assessment on banks for the purpose of the Federal
Deposit Insurance Corporation. In the Glass-Steagall Act of 1933,
you provided that no longer should banks pay interest on demand
deposits. I believe that was one of the very serious matters in our
banking structure, and I think was a wrong system of banking.
The little depositor never got anything, anyway, and it mured
entirely to the benefit of the very large depositor, and it led to such
competition between banks for the large banks in their rates of
interest.
So you eliminated that by the act of 1933, and I called attention
to what that sum amounted to in my address before the American
Bankers in Chicago in September 1933, and discussed rather fully
that and other provisions of the insurance corporation, and I would
like to call attention to that particular point, Mr. Chairman, if you
will permit me to put that address in the record.
The CHAIRMAN. We will be very glad to have you do so.
Mr. O'CONNOR. On page 6 of the printed address, I said:
The elimination of interest on demand deposits will save the banks many
billions of dollars. The total amount paid during the past 5 years by member
banks on demand deposits was $1,230,242,000, making an average of $246,048,500 per annum.

And I believe out of the amount we collected from the banks upon
the levies of assessments we made—we levied the assessment and they
collected one-half of the levies—and I believe it was around $70,000,
and here we have just the member banks, because we do not have
available the figures on all banks, that the banks have paid out
approximately $250,000,000 a year that you prevented them from
paying out, is not considered by Congress as good banking. Now,
I think that is rather a striking statement.
The CHAIRMAN. Well, if we were to leave the assessments against
the member banks, which would amount to $250,000,000 annually to
support the deposit insurance fund, we would not have added that
burden upon the banks; is that a sound conclusion!

BANKING ACT OF 19 3 5

169

Mr. GiFFORD. What are you going to do with that amount of
money!
Mr. HoLLiSTER. That is the total ?
The CHAIRMAN. Yes; that is the total.
Mr. REILLY. Mr. O'Connor, have you got any report upon any
banks in recent years on the service charges that they did not charge
some years ago!
Mr. O'CONNOR. No, sir; we have not.
Mr. REILLY. Can you get that report ?
Mr. O'CONNOR. I am glad you asked that question, because we
have had a great many letters, Mr. Congresman, asking about those
matters, and we have no jurisdiction in the Comptroller's oHice
to regulate or to 6x in any way those charges. That is a matter
entirely at the present with the banks themselves.
Mr. REILLY. Do they not report their income items !
Mr. O'CONNOR. Yes.
Mr. ReiLLY. Have you not got any idea what they collect for
service charges!
Mr. O'CONNOR. Not a separate item, Mr. Congressman; no, not
the separate items.
Mr. RsiLLY. Some of the banks are making some awful charges
for handling accounts.
Mr. WOLCOTT. When they are prohibited from paying interest on
demand deposits, that likewise carries with it the fact that those
funds are more or less static and not being used by the banks for
the purpose of making money, yet I do not Rnd any restriction in
the act which protects those depositors against their use for long-term
investments. Do you not think that would be in keeping with the
act, that they do not pay interest on them, but they collect a service
charge for handling the accounts, that they maintain a little higher
degree of liquidity with reference to demand deposits than they do
with respect to time deposits and-----Mr. CMCONNOR. I think that is sound, Mr. Congressman.
Mr. WOLCOTT. In other words, it has been considered unsound
banking to invest commercial fund& in long-time paper, has it not!
Mr. FoRD. Mr. Chairman-----The CHAIRMAN. Just a moment, until Mr. Wolcott gets through,
please.
Mr. O'CONNOR* Would you read the Congressman's question!
(Thereupon the reporter read the pending question of Mr. Wol
cott.)
Mr. WOLCOTT. Perhaps I should say it should be considered un
sound banking to do that.
Mr. O'CONNOR. Yes, that is correct.
Mr. FoRD. At the opening of this hearing, Mr. Crowley was in
the chair, and I made this statement, and I think that this discussion
verifies it, that as a matter of fact, the banks are not paying the
insurance premium on the insuring of deposits, but the depositors
were paying it, because they have been relieved of paying interest on
time or demand deposits.
Mr. RniLLY. Mr. Ford, those were the big depositors, not the
great mass of depositors.
Mr. FoRD. Well, big or little, that is the situation just the same

170

BANKING ACT OF 19 3 5

Mr. SissoN. Mr. Chairman, if Mr. O'Connor is not coming back
here for several days, I think perhaps it might be proper to have
him state the witness to whom we may ask these questions, because
there is a question I am rather ashamed to ask, but frankly, I have
had, I think, four letters from bankers in my district, and they
were men in charge, you might say, of the administration of the
banks, but they were rather small banks, and I told them that, if
they wished to I thought the chairman would give them permission
to appear here, and they asked me to bring this to the attention of
the committee, in the passage of the act, which is perhaps a more
complete revision of the Banking Act, than anything for a long
time.
They object to the prohibition against borrowing money by mem
bers of a bank, his own bank, because, if they wished to borrow any
thing, they could go to some other ank and borrow, but because it
places them in the category, or a category that seems to them to rather
reflect upon them.
The CHAIRMAN. Mr. Sisson, that is a matter of wide interest
throughout the country, and of course of interest to the community.
Let me suggest to you that there is a provision entitled " I I I " in
this bill dealing with that particular matter, and it will come up for
discussion when we reach it; and I might say, in that connection,
you might advise your friends that we are attempting, and we
expect, if the legislation passes, to liberalize that provision of the
law.
Now^entlemen, I am going to suggest, if you are through with
Mr. O'Connor, we will meet again at 10:30, Monday morning, and
Mr. Eccles will appear before the committee at that time.
Mr. MEEKS. Mr. Chairman, may I ask a question ?
The CHAIRMAN. Yes.
Mr. MEEKS. Mr. O'Connor, are you putting your Chicago speech
in the record?
Mr. O'CONNOR. Yes, I can do so.
Mr. MEEKS. I wonder if you have copies available that you can
pass to the members? I would very much like to have a copy in
advance, because we may not get to see it soon.
Mr. O'CONNOR. Thank you, Mr. Meeks.
(The address of Mr. O'Connor is as follows:)
ADDRESS BY J. F. T. O'CONNOR, COMPTROLLER OF THE CURRENCY, BEFORE THE
CONVENTION OF THE AMERICAN BANKERS ASSOCIATION, AT CHICAGO, ILL.,
SEPTEMBER 7, 1933
Our common purpose justices the acceptance o f your gracious invitation. In
this my initial appearance before the American Bankers Association, i f some
slight suggestion can be made to strengthen the Rnancial structure o f the Nation,
my eKort will be fu lly compensated. At your last annual convention had any
one predicted that every banking institution would be closed fo r several days,
tredit paralyzed, and tickers silenced, ridicule, sharp criticism, and condemna
tion would have greeted the suggestion. It happened. The old order had com*
pletely broken down. W ill such a condition reoccur?
No Bner example o f patience and self-restraint can be found in our history
than was exhibited by our people in these black days of March. W ith the storm
raging in mad fury, with destructive waves breaking over the deck, a Arm hand
grasped the wheei, changed the course, substituted hope fo r despair, and arrived
safely in the harbor. Other storms will come, no one w ill deny. Possibly we

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171

cannot prevent the storm, but we can build a ship the elements cannot destroy.
The challenge is yours. The thrill o f the opportunity appeals to us all.
Probably no provisions in the Banking Act o f 1933, sometimes called the
Glass-Steagall Act, have attracted so much attention as the insurance provisions.
It is my sincere belief that the future o f American banking rests in a large
measure on proper and courageous management and the adoption of sound
policies in the administration of the insurance provisions o f the act. Fully
realizing the magnitude o f the operations involved, the pitfalls which must be
avoided, and the nondiverging path which must be followed, as one member of
the board o f the Corporation, I approach the task humbly but with a grim
determination o f success.
The principle of guaranteed deposits is not new. Our Government established
this on June 25, 1910, when President William Howard Taft advocated and
secured the passage o f the Postal Savings bill. Some deny this is an insurance
or a guarantee. Let us not quibble about words. No one denies that the full
faith and credit o f the United States is pledged to the return o f every dollar
in the Postal Savings banks. Today our Government guarantees, or insures
or promises, to return approximately $1,184,948,200. No one questions the
ability of the Government to pay these deposits. The growth o f these deposits
during the past 2 years is interesting, if not alarming. Let me give them :
June 30, 1931____________________________________________________ $347,416,749
June 30, 1932____________________________________________________
784, 819, 402
April 30, 1933____________________________________________________ 1,159, 794,016
As already noted, the estimate for June 30, 1933, indicates an increase over
April 30, 1933, o f $25,154,184. No comment to bankers is necessary on these
figures. Even a lawyer appreciates their significance. The Government re
quires security from the banks to insure these deposits. In this manner the
banks guarantee their safe return. The postal depositor becomes a preferred
creditor. The ordinary depositor in the bank is merely a creditor. Unlike a
story I heard some time a g o : A creditor called the president of a large corpora
tion and said, " I see we re in the bosom of a receiver." The president cor
rected him saying, " You mean the hands." " Well, I do not know about such
things/* " Oh, don't worry, you are a preferred creditor." "A preferred credi
tor, am I? W hat does that mean?" " I t means you know now you won't get
anything while the common creditor won't know for a year or more."
No individual is permitted to deposit over $2,500 in the Postal Savings bank.
There has been a growing demand from all parts o f the country to permit un
limited deposits. I f nearly $1,190,000,000 has been deposited in Postal Savings
under a $2,500 limit, what would the deposit be if the individual deposit were
unrestricted? When the insurance feature o f the Glass-Steagall bill becomes
operative, most o f this huge sum should find its way back into the banks.
Indeed, Congress would be justified in repealing the law entirely.
Let me brieBy outline n few o f the main provisions o f the Banking Act of
1933 on this su bject:
1. The Corporation has three directors: The Comptroller o f the Currency
and tw o directors, appointed by the President, who shall not be o f the same
political faith.
2. A " temporary Federal deposit insurance fund " w ill become operative on
January 1, 1934, which will insure deposits in each member of the fund up to
$2,500. Members o f the fund will be all member banks licensed before January
1, 1934, by the Secretary o f the Treasury and nonmember State banks with the
approval o f the State supervising authority, after certification to the Corpora
tion o f solvency and examination and approval by the Corporation. Both
member and nonmember banks must pay to the Corporation an amount equal
to one-half o f 1 percent o f the insured deposits certified as of the 15th o f the
month preceding the month they were admitted to the fund. One half o f this
payment will be made upon admission and the other half upon call by the
directors of the Corporation.
3. The permanent insurance is effective on July 1, 1934, as to all national
banks certified by the Comptroller of the Currency and all State member banks
certified by the Federal Reserve Board upon such banks becoming class A stock
holders in the Corporation, and nonmember banks have the benefit of such
insurance until July 1, 1936, by becoming class A stockholders o f the Corpora
tion in compliance with the terms o f the act.
4. In becoming class A stockholders, the banks must apply to the Corporation
for class A stock in an amount equal to one-half o f 1 percent of its total deposits

172

BANKING ACT OF 19 3 5

as computed in accordance with regulations o f the Federal Reserve Board, with
certain exceptions in the case o f banks organized after July 1, 1934. One-half
o f the amount due for the stock shall be paid into the Corporation upon
admission and one-half upon call by the directors of the Corporation.
5.
Under the permanent insurance features o f the act, net deposits are
insured as follow s:
One hundred percent not exceeding $10,000.
Seventy-five percent of the amount exceeding $10,000 but not exceeding
$50,000, and
F ifty percent o f the amount exceeding $50,000.
You will be interested in the progress made to date:
The Government, through the cooperation o f the Federal Reserve banks,
the Comptroller's OfRce, and the Reconstruction Finance Corporation, is making
a survey o f all the banks in the United States. The President called the at
tention of the governors of the various States to the provisions of the Banking
A ct of 1933 in a letter dated July 6. The letter was as follo w s:
MY DEAR GOVERNOR: You have no doubt given serious consideration to the
provisions o f the Glaes-Steagall bill, known as the "B an kin g A ct o f 1933'*,
which was approved by me on June 16, 1933.
This act contains far-reaching provisions with reference to State banks. In
a very short time, to wit, January 1, 1934, certain State banks which secure
a certificate o f solvency from the proper State banking authority, and which
after examination are found satisfactory to the Federal Deposit Insurance
Corporation, w ill be admitted to the benefits o f the insurance fund.
In order that State banks may receive the benefits o f the act, it w ill be
necessary in many States for additional legislation; in others, amendments to
existing laws, and in others, constitutional changes. You wilt appreciate the
necessity o f immediate action in order that the benefits of this act w ill be as
widely distributed as possible.
May I suggest to you that you call together representatives o f your State
banking department, together with leading State bankers, to discuss with
you the necessary legislative changes or constitutionai amendments to bring
about the desired effect.
I call your particular attention to the follow ing paragraph o f the Banking
Act o f 1933, which is found under subsection (y ) o f section 8 (last para*
graph), which reads as follow s:
" It is not the purpose of this section to discriminate, in any manner,
against State nonmember and in favor o f National or member banks; but the
purpose is to provide all banks with the same opportunity to obtain and enjoy
the benefits o f this title. No bank shall be discriminated against because its
capital stock is less than the amount required fo r eligibility for admission
into the Federal Reserve System/*
Thanking you for prompt consideration o f this matter, I beg to remain,
FRAN KLIN D. ROOSEVELT,

President.

The general outline o f the set-up o f the Corporation has been tentatively
approved by the President. I am in possession o f the names o f over 1,500
qualified men who are available to make examinations. These names have
been submitted by the State banking commissioners and others, and they are
qualified examiners who have had 5 years or more banking experience and
who known the values in the States. Arrangements have been made with the
Treasury fo r the necessary funds to carry out the preliminary work o f the
Corporation. Our Rrst task is the examination o f approximately 8,000 State
nonmember banks which are on an unrestricted basis. I shall make the fo l
lowing suggestions to the Board immediately upon reorganization:
First, that each bank applying for insurance be furnished with blank form s
to be completed by the banks setting forth each asset under a proper heading
and the amount o f its deposit liabilities and obligations to other creditors
This will save much time and the examiner w ill then check the item and ap
praise the same.
Secondly, that an examiner who knows the values in the particular State,
with necessary assistants, be assigned to each State capital to work with the
hanking commissioner and all examiners in the State clear through the exam
iner at the capital. In this way the work will be decentralized. It is my
belief that whenever a piece o f work can be done in a State just as well as at
the National Capital, it should be done in that State.

BANKING ACT OF 1 9 3

173

Thirdly, that the names of the banks insured and their location be given
simultaneously.
There has recently been sent out to many of the banks of the country a
letter in reference to the Federal Deposit Insurance Corporation from which
I quote two sentences as follows:
" In the parlance of the street, the independent bank is to be *ironed out.'"
" Powerful influences are at work to wipe out the small banks and the inde
pendent banker has been placed on the defensive."
I know of no more vicious, unwarranted, and untruthful propaganda. The
present administration has demonstrated its policy of protection for the little
fellow, whether individual or corporate. At a conference with the President
on Tuesday afternoon, he authorized me to say to you, and through you to the
country, that the object of the insurance provisions of the new bank act was
to insure as many nonmember banks as possib!e. He discussed the details of
the act with an amazing knowledge of its provisions* He discussed real values,
appraised values, and liquidating values with a Rne discrimination. " Injus
tice must be avoided." In that sentence, the Chief Executive summarized all
his comment and direction.
No greater demand came from the people during the past session of Congress
than that some form of guarantee or insurance for deposits be passed. The
fact that the bill passed the House with but six dissenting votes and passed
the Senate without a dissenting vote is evidence of the demand. It could not
be ignored. Whether we favored the provision or opposed it, bank insurance is
part of the Federal law. Let us examine some of the higher grounds which
possibly justify its existence:
First, every depositor in theory has a right to his money. This law makes
the theory a fact.
Second, it will banish the fear in every banker's mind of runs upon his bank.
We should not again witness the very serious crisis which developed with the
beginning of 1983 and which produced grave runs on practically every bank
in the country, culminating on March 4 with currency demands amounting alto
gether to $1,030,000,000. This huge sum was withdrawn in cash by panicstricken depositors.
Third, it will obviate the necessity for a postal savings bank and return to
the banks over a billion in deposits.
Fourth, it will permit an extension of credit and a modiRcation of cash re
serves. This will particularly beneRt small country banks and their customers.
Liquidity means immediate marketability. The average town or small city has
sound values but not a high degree of liquidity. Probably nothing in banking
parlance has been so much misunderstood as the term "liquidity." The law
provides that a certain percentage of a bank's assets shall be in cash and sound
banking requires other assets to be liquid. Some well-meaning individuals and
other demagogic persons have aroused communities because banks with frozen
assets have not been permitted to reopen. They say while certain securities are
not wOirth much toda# they will be worth face value in 5 or 10 years. If the
depositor would accept this viewpoint and take a mortgage or a bond worth $600
for his deposit of $1,000 on the theory that the security would be worth $1,000 in
a few years, our problem would be simple. The depositor may rightly demand
his entire deposit in cash.
Fifth, the elimination of interest on demand deposits will save the banks many
millions of dollars. The total amount paid during the past 5 years by member
banks on demand deposits was $1,230,242,000, making an average of $346,048,500
per annum. Again the Federal Reserve Board axes the rate of interest paid by
member banks on time deposits. Is there any depositor who would not accept
one-half of 1 percent less interest and know his deposit was insured, if such a
step were necessary to save the insurance provision? Would any nonmember
bank not cooperate to this extent? No depositor would object to paying two and
one-half or up to Rve dollars to insure a $1,000 deposit. Besides, the United
States Government is contributing $130,000,000, and approximately $139,000,000
will be contributed by the Federal Reserve banks, in addition to the one-half of
1 percent by the banks.
Sixth, now a point not generally discussed and offered here as a matter of
opinion. It is my Rrm opinion that the insurance features of the law will save
millions to our people. The high pressure and not ton scrupulous salesman
often plants the seed of suspicion as to a bank's solvency in the prospective pur
chaser's mind. The life savings of men and women have been withdrawn and
invested in worthless securities or enterprises because of this fear. When the
127297— 35------- 12

174

BANKING ACT OF 1 9 3 5

suspicions becomes a belief, the conHdential relation between the banker and the
depositor is destroyed. The very fact that the honest, highly trained, conserva
tive banker has made errors in making investments is proof o f the great danger
o f loss by those not trained in making investments.
The insurance feature of the bill differs from laws heretofore passed in two
main respects, Rrst, the participation of the United States Government in mak
ing a substantial investment in the capital structure, and secondly, in recog
nizing the sound insurance feature that risks should be spread over a large
territory and not localized.
The test o f admission of a bank to the insurance fund is determined upon
its ability to pay all o f its liabilities to depositors and other creditors, as shown
by the books of the bank. In other words, the assets must be suiHcient to
accomplish this purpose (sec. 1 2 B (e )).
Information gathered from 4,836
national banks at the close o f business on May 13, 1933, showed that 96.76
percent of the total depositors in national banks had deposits o f under $2,500.
The survey further showed that the average deposit was $183.17, and that these
96.76 percent, totaling 21,748,754 depositors, had 26.72 percent of the total
deposits in the national banks as o f that date, while 0.13 percent o f depositors,
totaling 28,356, had deposits of over $50,000, or 40.29 percent o f the total deposits,
which represented an average deposit of $211,820.85. It must be remembered
that the deposits o f over $50,000 represent deposits of State governments and
their subdivisions as well as the large corporations of the Nation. No effort
was made to distinguish between individual and corporate deposits.
The President has authorized me to give you the names of the men he has
selected as directors o f the Federal Deposit Insurance Corporation. The law
requires that one o f these members be a Democrat and one a Republican. T&e
Comptroller of the Currency is named by law as the third member o f the
Board.
As the Democratic member, the President has selected Walter Joseph Cum
mings, o f Chicago. Mr. Cummings is at present executive assistant to the
Secretary of the Treasury of the United States. He was appointed by Secre
tary W illiam H. W oodin on April 8, 1933. JE^e was born in Chicago, 111., on
June 24, 1879, and is the son o f W alter J. Cummings and Mary Cummingp, o f
Chicago. He attended the Chicago public schools and Loyola University. In
1902 he entered the plant of the Cummings Car & Coach Co. at Chicago, 111.,
for the manufacture of cars and trucks, acting as secretary and treasurer.
In 1907 he became vice president o f the company, and in 1918 was elected
president o f the Cummings Car & Coach Co. He also holds many important
directorships, including the American Car & Foundry Motors Co., o f 3?ew Y ork ;
J. G. B rill Co., o f Philadelphia; and is president o f the Chicago & W est Towns
R ailw ay Co., o f Chicago; the Chicago & Calumet District Transit Co., of;C h i
ca g o; and the Des Moines Railw ay Co., o f Des Moines. Mr. Cup?pi^ng& was
appointed by the Governor o f Illinois in January 1933 as commissioner o f
Lincoln Park, Chicago. H e has been identified with and acted in many civic
organizations of Chicago, and at the present time is a trustee o f Loyola Uni
versity, a member o f the executive committee o f the Associated Charities of
Chicago, and has taken a deep interest in the civic betterment <?f the city. H**
had conferred upon him the honorary degree o f doctor of laws by Loyola
University.
The delay in making the appointments on this Board was no dou&t cauped by
the selection o f the next member. As I have stated, the law requires that one
o f the members shall be a Republican, and the President had considerable
diiRculty in Rnding a Republican. Mr. E. G. Bennett, o f Ogden, Utah^ has
been appointed by the President.
Mr. Bennett was bom in York, Nebr., on April 23, 188& He received his
early training under Judge George W . Post, who controlled 12 banks in eastern
Nebraska now operated by the McLeod interests. He was employed fo r 8 years
oy J. S. & W . S. Kuhn, Inc., who built irrigation, power, and other projects
in the Snake River Valley o f Idaho, and then became vice president and gen
eral manager o f the First National Bank o f Jerome, Idaho, and the Jerome
Loan & Trust Co. During this period he made loans for Holland interests,
loaning approximately $1,500,000 on irrigated farms in Snake River Valley.
He acted as secretary of the Idaho agency o f the W ar Finance Corporation,
loaning $6,000,000 on livestock without loss. During the past 6 years and at
the present time, Mr. Bennett has devoted his time to the Eccles and Browning
interests in the capacity o f vice president and general manager. These inter
ests own and operate 28 banks in Utah, Idaho, and Wyoming, all but 3 o f which

BANKING ACT OF 1 9 3 5

175

are State banks. For the 4 years from 1924 to 1928, Mr. Bennett was a member
o f the executive council o f the American Bankers Association, representing
Idaho. In 1923 he was appointed by the Governor o f Idaho with two others
to the Bank Code Commission. The code prepared by the commission was
adopted by the legislature in 1925. In the preparation o f this code iiii ex
haustive study was made o f all the banking laws o f all the States.
Some o f Mr. Bennett's other connections are— president o f J. M. & S. M.
Browning C o.; president Browning Arms Co.; president Lindsay Land &
Livestock Co., which company owns a 130,000-acre ranch (18,000 ewes and
4,000 cattle) ; president Lion Coal Corporation operating mines in Utah and
W yom ing; president Eleventh Regional Agricultural Credit Corporation (Utnh,
Nevada, Arizona, and California).
Mr. Bennett's companies do not owe any money to anyone. His banks and
companies are in excellent Rnancial condition. No man knows better the
problems o f the State banker than Mr. Bennett. He will bring to the Board
a sympathetic understanding o f all those bankers who have assisted in building
the West. No man has a better knowledge of the present banking situation in
the country than Walter J. Cummings. For 5 months he has devoted his time
at great personal loss to assist in rehabilitating the banking structure. He
was drafted into the service by his close personal friend and business associate,
Hon. William H. Woodin, Secretary o f the Treasury. His experience in hand
ling large financial problems makes him a valuable member o f the Board. He
knows the Treasury and all of its departments. This insures us that there will
he no delay in getting the machinery in motion. These two sound and success
ful business men the President has called to a diRicult task. All we ask is a
fair trial.
There are several features of the Banking Act o f 1933 which have raised
innumerable questions of interpretation and of administration in which you may
be interested. First and foremost are the problems which have arisen in
connection with aRiliates as deRnied by the Banking Act of 1933. The deRnition o f aRiliates o f member banks as laid down by the act is very broad and
technical and a literal interpretation o f the iaw may lead to many situations
which could not be foreseen and which I doubt the framers o f the act meant
to bring about. Let me give you a few illustrations:
W e have a national bank, 96 percent <?f the stock o f which is owned by a
packing company* The packing company is a holding company aRiliate. This
corporation in turn owns or controls 200 other corporations scattered throughout
the world. Is each one, o f these 200 corporations also an aRiliate o f a national
bank? The national bank is required under the act to furnish report o f its
aRHiates and to publish the reports o f its aRiliates under the same conditions
as govern its own condition reports. I venture to state that the depositors of
this national bank w ill be somewhat mystiRed by the publication o f the reports
o f the 200 corporations.
The m ajority o f stock o f another national bank is owned by a church, a
corporation sole. The church is an aRiliate. It in turn has furnished all or
part o f the funds for other church buildings, a hospital, orphans' home, and
other charitable institutions in a particular State, all incorporated and con
trolled by the Rrst church. Are aU o f these institutions aRiliates o f the bank?
Must the bank furnish the statements o f these institutions and publish them?
A bank had as collateral to a loan the m ajority o f stock o f a hosiery
corporation and foreclosed on the collateral to protect itself, thus becoming
the owner o f the stock. Is the hosiery corporation an aRiliate? I f it is,
the bank cannot make a loan to it except on collateral which the corporation
does not have and since the corporation is unable to borrow from other
sources, the bank cannot protect itself.
There are but three illustrations o f the thousands o f problems which arise
in connection with aRiliates, and the Attorney General o f the United States
has been asked for his opinion with respect to some o f these problems.
The Banking Act o f 1933 provides in p a rt:
" No executive otRcer o f any member bank shall borrow from or otherwise
become indebted to any member bank o f which he is an executive officer/'
Violation o f the prohibition is a criminal offense. No deRnition o f " executive
oR icer" is given in the act. The question o f what is an "ex ecu tive oRicer"
immediately faced the banks and the examiners. No ruling on a criminal
statute by my Department would protect the banks. The opinion o f the
Attorney General was requested. He has advised th a t: " It is not the
designation under which one is known, but the nature o f his duties which

176

BANKING ACT OF 1 9 3 5

characterizes him as an " executive officer."
v.
Pregg, 225 N. Y. S.
141, 142/'
He further stated: " It is the duty of the banks and of all officers who by
any possibility might be afYected to keep within the statute and to weigh care
fully all the facts and circumstances (peculiarly within their provision)
before acting/'
He refers with approval to the statement in .Ar&aMsag ^wmgewteMt Corporation
v. Xempner (33 S. W. (2d) 42) to the effect that:
"An executive officer or employee is one who assumes command or control
and directs the course of the business, or some part thereof, and who outlines
the duties and directs the work of subordinate employees, as usually provider
for in the articles of association, the bylaws, or a resolution of the directors/
The practical administration of this section of the Banking Act of 1933 from
an examining standpoint requires the Comptroller's Office to take the position
that the following officials of a bank will de deemed, prima facie, to be " execu
tive ofRcers " for the purposes of said section, it being understood that such pre
sumption may be rebutted on a sufficient showing: The president, a vice presi
dent, the cashier, an assistant cashier.
The facts in any given case may, as indicted by the opinion of the Attorney
General, constitute other officers or employees, " executive officers " within the
scope of the act.
It, of course, would be more satisfactory to have the definition of " executive
officer " laid down by Congress, especially when, in weighing facts, one has a
penal statute involved.
The section of the Banking Act with respect to extension of branch banking
for national banking associations outside of the limits of the city, town, or
village in which the association is situated, has raised some problems, partic
ularly the language: " *
* * If such establishment and operation are at
the time authorized to State banks by the statute law of the State in question
by language specifically granting such authority affirmatively and not merely
by implication or recognition, and subject to the restrictions as to location im
posed by the law of the State on State banks."
Under the wording of this provision of the Banking Act, national banks are
not permitted to have branches outside of the city, town, or village in which
they are located in some States where State banks are permitted to establish
such branches. Two outstanding cases are those of Maryland and South
Carolina, where nonmember State banks may establish branches, but mem
ber banks, whether National or State, may not establish branches under the
wording of this particular statute. In connection with the establishment of
branches, it was of course, stated before the act was passed by many that
there would be a great rush for branches and they would be established rapidly.
The statute became effective on June 16 of this year; practically 3 months have
elapsed since its enactment. Only 37 branches of national banks have been
established under its provisions. Of this total, 9 branches were established
in communities which were without banking facilities, 2 branches were estab
lished for the purpose of taking over banking institutions in the hands of con
servators, 12 were established to take over going institutions, and 8 were estab
lished to replace 8 branches of State banks taken over by a national bank. Ac
cordingly, only 9 branches represented new banking faciHties.
There is not time to go into all of the various problems which have arisen
under the Banking Act of 1933, but I have given , you a few illustrations which
should be of interest.
There seems to be a great deal of misunderstanding by banks and the public
generally with respect to receiverships of national banks. These statements
are being made repeatedly:
'*1. Receivership means all assets thrown on the market at once—forced
liquidation/'
In the first place it is obviously impossible to throw the assets on the market
at once and, even could it be done, it would be poor policy. The Comptroller
acts in a trustee capacity and his duty is to realize as much as possible for
creditors. The average time required to fully liquidate a receivership is 5%
years.
'*2. Receivers get commissions—expenses are heavy and eat up the trust/'
The facts are that receivers of national banks are not paid any commission
but a flat salary and the average salary is around $350 per month, varying
as to the size of the receivership; and since one receiver in many cases handles
more than one bank, the average saiary per bank is about $1,713 per annum.

BANKING ACT OF 1 9 3 5

177

The total average cost of liquidation last year was but 3.2 percent of actual col
lections and the average for fully liquidating all banks in the past has been
3.9 percent of book value and 6.65 of actual collections.
I desire to touch for a few minutes upon the growth and work of the
Comptroller's OiHce, as now constituted, as compared with the past. It is
interesting to note from the Rrst report of the Comptroller of the Currency to
Congress, dated November 28, 1863, that there were 134 national banks and
that the personnel of the Comptroller's bureau consisted of 8 persons, including
the Comptroller. In 1865 the Comptroller reported 1,601 national banks with
the personnel of the bureau 77 in number. It may be rightly said that those
were the good old days with few problems. Let us see the condition in 1893—
a panic year. Quoting from The Romance and Tragedy of Banking, by T. P.
I^ane, former Deputy Comptroller of the Currency:
" Every hour of the day and late into the night telegram after telegram was
received announcing additional suspensions of banks or new complications
which had to be promptly met As many as 30 suspensions occurred in a
single day, and for a time it looked as if every national bank in the system
would succumb."
The Comptroller of the Currency that year in his report to Congress stated
that 154 national banks suspended, receivers being appointed for 65. Prob
lems? Yes, but today we face trust departments, savings departments, bond
departments, affiliates, preferred stock, organizations, reorganizations, bond
depreciation, other real estate, banks in conservatorship, and 1,123 banks in
the hands of receivers. In touching on these 1,123 receiverships, the old story
of the borrower who asked the banker if he had ever been in the pants business
and, upon receiving the answer " N o", stated: " Well, you are in it now ",
is certainly applicable to banks in receivership. I Rad that among the enter
prises the Comptroller of the Currency is directing are: Hotels; coal mines;
quarries; lumber manufacturing; vineyards; apartment houses; of&ce build
ings; farming; raising sheep and cattle; growing cotton, pecans, and citrus
fruits; operating pickle factories, cold-storage plants, motor freight terminals,
and a railroad. Incidentally, the railroad is operating at a proRt.
At the present time in the Comptroller of the Currency's OiBce there are 216
national examiners, 297 assistant examiners, and 156 other employees; in the
Reorganization and Conservators Division there are approximately 305 em
ployees; and 271 employees in the Insolvent Division, not including receivers,
conservators, their employees, or their attorneys. Besides using all available
space in the Treasury Building, it has been necessary to secure the major part
of a large modern oRlce building opposite the Treasury.
A picture of what has been achieved in giving re!ief to depositors by the
various governmental agencies is presented by the following figures:
On December 31, 1932, deposits in national banks amounted to approximately
$18,500,000,000. On March 16, 1933, the frozen deposits in unlicensed national
banks amounted to $2,200,774,000, representing approximately 12 percent of
the aggregate amount of deposits on December 31, 1932. On September 5,
1963, frozen deposits in unlicensed national banks amounted to $746,731,000,
representing 4 percent of deposits as of December 31, 1932. If we deduct the
amount of frozen deposits of $440,099,000 which will be released immediately
upon the consummation of the approved plans, the total amount of frozen
deposits in unlicensed national banks will be $306,632,000, or 1.66 percent of
the total amount on deposit on December 31, 1932.
On March 4, 1933, there were 5,938 operating national banks in the United
States. Of this number, 4,509 were licensed to resume normal banking func
tions on March 13, 14, and 15, leaving 1,429 national banks unlicensed as of
the beginning of busmen March 16. Within 174 days there have been 423 old
banks licensed, 100 new banks chartered, and 372 plans of reorganization
approved.
I desire to reafBrm what I stated in my address over the National Broad
casting System from Washington on July 19:
"N o discrimination has been made between Republican dollars and Demo*
cratic dollars in closed banks. My department has assumed that the Republican
depositor, although probably much less in need of his money than his Demo
cratic friend, is just as anxious to get his share of the remaining 5 percent
now in closed national banks. Of the many hundreds of depositors, creditors,
stockholders, and of&cers with whom I have discussed plans of reopening, I
have never inquired and do not know the politics of any. Let me say definitely
and positively that the Comptroller of the Currency is interested in your plans

178

BANKING ACT OF 19 3 5

for reopening of your bank and giving relief to the depositors and not in your
politics. There have been some Rne illustrations of self-sacriRce and true
Americanism by ofBcers and stockholders of many banks. Men and women
have come forward and volunteered their 100 percent assessment, waived their
deposits, subscribed for new capital, in order that the depositors should not lose
a single dollar. I mention this because some are prone to mention only those
connected with the banks who have tried to evade their legal and moral
responsibility and have been compelled by legal proceedings to make their just
contribution."
In conclusion, let me say that as politics have never entered into the con
sideration of any plan for reorganizing or reopening or the establishment of
any bank or branch in any of the divisions of the Comptroller's OiRce, can I ask
you to bear with me in the solution of difRcult problems in the same spirit. In
the great divine scheme of life, as individuals we play our part and pass on. Our
places can be Riled without the slightest interruption in the march of progress.
My purpose is to serve a great country with my limited ability. If uncounted
hours in the day and long into the night will bring forth a better understanding
between my Department and the people, will make for a more permanent bank
ing structure, the effort will not be counted In vain. Let us bring cold figures
to life. Let us put a heart back into banking and let profits be subservient to
service. Let us bring a great profession back to the leadership it once enjoyed.
Let the inspiration of the names of great bankers of the past—men who tossed
their fortunes into their country's exchequer to save Its credit and win its
wars—touch the inner recesses of our souls that we may imitate and serve.

(Thereupon, a recess was taken in the hearing until Monday
Mar. 4, 1935, at 10:30 a. m.)

BANKING ACT OF 1935
M O N D AY , M A R C H 4, 1935
H O U S E OF REPRESENTATIVES,

COMMITTEE ON BANKING AND CURRENCY,

Z7. C.
The committee met at 10:80 a. m., Hon. Henry B. Steagall (chair
man) presiding.
The CHAIRMAN. Gentlemen, we have with us this morning Gov
ernor Eccles of the Federal Reserve Board, who will discuss title II
of H. B. 5357, and I think Governor Eccles would like to proceed
without interruption until he shall have concluded a preliminary
discussion of the bill, after which, of course, he will be glad to
answer any questions and furnish any information that may be
desired by members of the committee.
Governor Eccles, we shall be glad to have you proceed in your
own way for such time as you desire, without being interrupted.
STATEMENT OF GOV. MARRINER S. ECCLES, OF THE FEDERAL
RESERVE BOARD

Mr. EccLES. I am sorry that I do not feel entirely up to par today.
I have been laboring under a rather heavy cold* I had thought, at
Erst, to make a rather extended verbal statement with reference to
the legislation. I decided, however, on account of the way I feel,
to make a brief written statement of the general outline of the legis
lation* I beiieve this will in a general way cover the philosophy
underlying section 2 of the bill.

The CHAIRMAN. Title II ?
Mr. EccLES. Title II of the bill. So that I will just proceed to
read this statement, if I may.
In recommending banking legislation at this time, it is recog
nized that the Congress has before it an unusual number of urgent
matters that are engaging its attention, and that legislation in order
to deserve your consideration at this session must not only be im
portant in general but must also be urgent at this particular time.
We are not unmindful of the fact that within the past 2 years
you have passed the Emergency Banking Act, the Banking Act of
1933, the Securities Exchange Act, and other important pieces of
legislation dealing with banks. One purpose of this legislation
has been to meet emergency conditions, and it is now proposed to
incorporate into permanent legislation the features of the emergency
laws that have proved to be valuable.
Another purpose of recent banking legislation, and particularly
of the banking bill of 1933 and of the portions of the Securities

179

180

BANKING ACT OF 1 9 3 5

Exchange Act that deal with powers of the Federal Reserve Board,
has been to prevent the recurrence of speculative excesses which pre
ceded the recent break-down of our banking machinery and were
partly responsible for this collapse. These bills were largely in
spired by the difEculties that came to a head in 1928 and 1929, and
it is gratifying to know that we now have on our statute books meas
ures that will go far toward preventing the recurrence of conditions
such as prevailed during the speculative orgy of these years.
At the present time, however, there appears to be no immediate
danger of excessive speculation. The present need is to so modify
our banking law as to encourage the banking system to give a full
measure of cooperation to efforts at economic recovery. It is even
more important from the longer time point of view to so modify
our banking structure and administration as to have it become an in
fluence toward the moderation of fluctuations in employment, trade,
and business. This would tend not only to avoid the particular evils
that came to a head in 1928 and 1929, but to so regulate underlying
conditions as to diminish the possibility of a speculative boom get
ting under way. For when speculation is once under way it ig
extremely difEcult to control, and the only means of preventing
excesses is to combat conditions that are favorable to their inception
And early development.
In order to accomplish this it is necessary to improve our machinery
of monetary control, which is the principal objective of title H of
the proposed bill.
More specifically these objectives are to increase the ability of the
banking system to promote stability of employment and business
insofar as this is possible within the scope of monetary action; as
a necessary step in that direction, to concentrate the authority and
responsibility tor the formulation of national monetary policies in a
body representing the Nation; to modify the structure of the Federal
Reserve System to the extent necessary for the accomplishment oi
these purposes, but without interfering with regional autonomy in
matters of local concern; and finally to relieve the banks of the
country of unnecessary restrictions that handicap them in the proper
performance of their functions and thus to enable them to contribute
more effectively to the acceleration of recovery.
In my opening remarks I wish to direct your attention particu
larly to four proposals incorporated in title II of the bill. Other,
provisions of the bill I wish to leave for your consideration, with
the understanding that I shall be glad to answer any questions that
you may wish to ask about them.
The four questions which I wish to discuss this morning are:
(1) The proposal to combine the ofBces of chairman of the board of
directors and governor of the Federal Reserve banks, and to have the
appointments to this combined olBce subject to approval by the Fed
eral Reserve Board (sec. 201 (1), pp. 3&-41); (2) modification of
the machinery for determining open-market policies of the Federal
Reserve System (sec. 205, pp. 43-44); (3) transfer of the determina
tion o f eligibility requirements from the statute to the Federal Re
serve Board (sec. 206, pp. 45-46); and (4) liberalization of provi
sions relating to real-estate loans (sec. 210, pp. 49-51).

BANKING ACT OF 19 3 5

181

I . COMBINING GOVERNORS AND CHAIRMEN

As you know, the present law provides that the Federal Reserve
Board appoint 3 directors of each Federal Reserve bank and that 1
of the directors appointed by the Board be the chairman of the board
of directors. It appears to have been the intention of the framers
of the Federal Reserve Act that the chairman of the board of direc
tors be the principal executive ofRcer of each bank and the law makes
him also the oiRcial representative of the Federal Reserve Board at
the bank. In practice, however, it has developed that the directors
appoint an executive oiEcer for whom they have adopted the title
of governor of the Federal Reserve bank, a title that is not mentioned
in the law, and that these governors have become the active heads
of the Federal Reserve banks.
The proposal in the bill is to recognize the existing situation by
giving the governor of a Reserve bank a status in the law and to com
bine his omce with that of the chairman of the board of directors.
It is, of course, essential that the holders of these combined of&ces
be approved by the Federal Reserve Board. The Board, you will
note, will no longer appoint a chairman of the board, but will merely
have the power to approve or disapprove the appointment of the
governor, who will also be chairman of the board. In this proposal
there is no encroachment on the autonomy of the individual Reserve
banks. It merely reestablishes the original principle of the Federal
Reserve Act that the Federal Reserve Board, which has responsibility
for national policies and for general supervision over the Reserve
banks, shall be a party to the selection of the active heads of the 12
Reserve banks. This change will work towards smoother coopera
tion between the Board and the banks and will establish within
the banks a greater unity of administrative control than now exists.
It will also result in considerable saving through the elimination of
one of the two highest oRicers in each Federal Reserve bank.
2. OPEN-MARKET OPERATIONS

From the long-time point of view the recommendations dealing
with changes in the machinery for determining and carrying out
the open-market policies of the Federal Reserve System are essen
tial. Opep-market operations are the most important single instru
ment of control over the volume and the cost of credit in this
country. When I say credit in this connection I mean money,
'because by far the largest part of money in use by the people of
this country is in the form of bank credit, or bank deposits. When
the Federal Reserve banks buy bills or securities in the open market,
they increase the volume of the people's money and lower its cost;
and when they sell in the open market, they decrease the volume
of money and increase its cost. Authority over these operations,
which anect the welfare of the people as a whole, must be vested
in a body representing the national interest.
Under existing law open-market operations must be initiated by
a committee consisting of representatives of the 12 Federal Reserve
banks, that is, by persons representing primarily local interests.

182

BANKING ACT OF 19 3 5

They must be submitted for approval or disapproval to the Federal
Reserve Board, and after they have been approved by the Federal
Reserve Board, the boards of directors of the Federal Reserve banks
have the power to decide whether or not they wish to participate
in the operations. We have, therefore, on this vital matter a set-up
by which the body which initiates the policies is not in a position
to ratify them; and the body which ratines them is not in a position
to initiate them or to insist on their being carried out after they are
ratified; and still a third group has the power to nullify policies
that have been initiated and ratified by the other two bodies. In
this matter, therefore, which requires prompt and immediate action
and the responsibility for which should be centralized so as to be
inescapable, the existing law requires the participation of 12 gov
ernors, 8 members of the Federal Reserve Board, and 108 directors
scattered all over the country before a policy can be put into
operation.
It requires no further explanation to show that the existing
machinery is better adapted to delay and obstruction than it is to
effective operation, and that it results in a diffusion of responsibility
which prevents the necessary feeling of complete authority and
responsibility by a small group of men who can be held accountable
by the Congress and the Nation for the conduct of this matter that
is of national importance.
The proposal in the bill is to set up a committee of
of whom
shall be members of the Federal Reserve Board and 2 governors
of Federal Reserve banks. This proposal would have the advantage
of creating a smair committee with undivided responsibility. It is
not clear, however, that this arrangement is the best that can be
devised for the desired purpose. The Federal Reserve Board, which
is appointed by the President and approved by the Senate for the
purpose of having general responsibility for the formulation of
monetary policies, would under this proposal have to delegate its
principal function to a committee, on which members of the Board
would have a bare majority, while governors of the banks would
have 2 out of 5 members.
From the point of view of the Board the disadvantages of this
arrangement are that a minority of the Board could adopt a policy
that would be opposed to one favored by the majority. It would
even be possible for one member of the Board by joiiim^ with the
two governors to adopt a policy that would be objectionable to
the seven other members of the Board.
The placing of this authority in such a cbmpiittee would also
have the disadvantage of giving one important power, the power
of open-market operations, to the open-market committee, while
other fundamental powers are vested m the Board. These powers
could be utilized to nullify the actions of the open-market com
mittee. For example, the committee might adopt a policy of easing
credit, while the Federal Reserve Board would be m a position to
tighten credit, either by raising discount and bill rates or by in
creasing member-bank reserve requirements. Also the Board,
through its power of prescribing regulations for open-market opera
tions, could conceivably interfere with the carrying out of the poli
cies of the committee. While it is not contemplated that such

BANKING ACT OF 19 3 5

183

extreme situations would occur, it does not seem desirable to
amend the law in a manner that might result in such unreasonable
developments.
Upon further study it would appear that the best way in which to
handle this proposal would be to place the responsibility for openmarket operations in the Federal Reserve Board as a whole and to
provide for a committee of five governors of Federal Reserve banks
to advise with the Board in this matter. The Board should be re
quired to obtain the views of this committee of governors before
adopting a policy for open-market operations, discount rates, or
changes in reserve requirements.
Such an arrangement would result in the power to initiate openmarket operations by either a committee of the governors or by the
Board, but would place the ultimate responsibility upon the Fed
eral Reserve Board, which is created for that purpose. In this con
nection I should like to quote President Woodrow Wilson, who in his
address to the joint session of Congress on June 23, 1913, said:
The control o f the system of banking and of issue * * * must be vested
in the Government itself, so that the banks may be the instruments, not the
masters, o f business and o f individual enterprise and initiative.
3 . E LIGIBILITY OF PAPER

It is proposed to give the Federal Reserve Board authority by
regulation to determine the character of paper that may be eligible
as a basis of borrowing at the Federal Reserve banks. This is par
ticularly important at this time because it would encourage member
banks to pay less attention to the form and maturity of paper that is
offered by would-be borrowers and to concentrate their attention on
the soundness of such paper. At present many banks are unwilling
to extend loans to borrowers who have assets that are unquestionably
sound because they lack the assurance that in case of a withdrawal
of deposits they would be able to liquefy these assets at the Federal
Reserve banks.
In times of emergency it has been necessary to remove existing
restrictions and to give discretion in the matter to the Federal Re
serve authorities, as was done under the Glass-Steagall Act of 1932.
This act, however, was passed after a great many banks had gone to
the wall at least partly because of lack of eligible paper and its pro
visions insofar as they relate to borrowing from the Reserve banks,
have now expired* I think they expired yesterday*
What is proposed is not, as- has been sometimes alleged, a policy
of opening the doors of the Federal Reserve banks to all kinds of
paper, regardless of its soundness. On the contrary, it is proposed
to place emphasis on soundness rather than on the technical form of
the paper that is presented.
Experience under emergency laws shows that the Federal Reserve
banks and the Federal Reserve Board have exercised caution and,
though they have extended credit on ineligible assets to the extent or
$300,000,000, all but $1,500,000 of this has been paid back and the
banks have suffered no considerable losses. It would appear safe,
therefore, to intrust discretion in the matter to the Federal Reserve
Board, which is always in session and, therefore, in a position to con
sider emergencies promptly without being under the necessity of

184

BANKING ACT OF 1 9 3 5

proclaiming them by an appeal to Congress and thereby aggravating
the situation, and being obliged to wait for Congress to be in session
and to act on the matter.
Another phase of this problem is that the total volume of jpaper
eligible for discount held by member banks at the present time is
only about $2,000,000,000, or less than 8 percent of the resources of
the banks, and even in 1929 it was only about $4,000,000,000, or a
little more than 12 percent. While this amount is sufRcient in the
aggregate to provide access to the Federal Reserve banks, there were
many individual banks that did not possess suihcient eligible paper.
Even more important than that, is the fact that in a period of timid
ity the banks tend to refrain from making loans, except on paper
eligible for discount at Federal Reserve banks. This is even now a
factor causing liquidation in many communities and preventing
adequate expansion of credit in others.
A bank that would conduct its business on the theory of having
only such assets as can be disposed of at will in times of crisis, when
the national income has been cut in two, cannot serve its community
adequately. Such a bank would coniine its operations to the pur
chase of the most liquid open-market paper, with the consequence
that it would neglect its local responsibilities and would neverthe
less Rnd it diHicult to earn enough from the low returns on such
paper to cover expenses and dividends. The banks should be in a
position to meet the needs of their communities for all kinds of
accommodation, both short and long term, so long as the credits are
sound, and they ought to have the assurance that all sound assets
can be liquefied at the Federal Reserve bank in case of an emergency.
4. REAL-ESTATE LOANS

Closely allied to this matter of eligibility is the proposal that the
limitations on real-estate loans be modified so as to permit member
banks better to supply the needs of their communities for mortgage
loans. This proposal does not introduce a new character of loan, it
merely relaxes existing limitations on real-estate loans which
national banks have made for 20 years. What the bill proposes is
to modify the requirements so as to make them more realistic and
to enable the member banks better to serve their communities*
Coupled with the provisions in regard to eligibility, these proposals
ought to result in greater willingness of member banks to lend on
real estate and, therefore, to an improvement in the mortgage market
and a stimulation of construction which is essential to business
recoveiy.
Member banks hold about $10,000,000,000 of the people's savings,
and it is therefore proper and necessary that they invest a part of
their funds in long-time undertakings. The separation of com
mercial banking from savings banking may be theoretically desir
able, but it cannot be accomplished in this country without
disrupting existing machinery, while the need for increased activity
in building is urgent. Member banks are suCering from the com
petition o f many Government and other agencies that are entering
the Reid of real-estate loans, and it is a matter of self-preservation
for the banks to be able to hold and expand their activities in this
6e!d.

BANKING ACT OF 1 9 3 5

185

The details of the bill as proposed may have to be modified. The
problem is a difEcult one because the laying down of specific per
centages of value presents many perplexities* In some regions, and
at some times, a 75-percent loan on real estate is conservative, while
At other times a 50-percent loan may be too liberal. It may be best
in this matter, as in others, to vest discretion in the Federal Reserve
Board to prescribe such rules and regulations about real-estate loans
as in its judgment would operate most effectively in the public
interest.
OTHER PROPOSALS IN TITLE II

Other sections of title II of the bill which I have not discussed
may be briefly enumerated: Provision that directors of the Federal
Reserve banks shall not serve for more than 6 consecutive years.
This would prevent crystallization of any one interest in the man
agement of a Reserve bank. A change in the qualifications of
members of the Federal Reserve Board to make these qualiRcatdons
more descriptive of the functions of the Board. An increase in
salary of future appointive members of the Board and provision
for pensions. Grant of power to the Board to assign specific duties
so as to be relieved of detail. Placing of obligations guaranteed by
the United States Government on the same basis as direct obliga
tions of the Government. Repeal of collateral requirements against
Federal Reserve notes. These requirements serve no useful purpose
and have been sources of serious trouble at critical times. Clarifica
tion of the authority of the Board to raise or lower reserve require
ments—the bill as introduced authorizes changes in reserve require
ments for different districts or classes of cities. It might be mod
ified by eliminating changes by districts and classifying cities into
two groups— (1) Reserve and Central Reserve cities and (2) other
cities./ Authority for the Federal Reserve Board to waive capital
requirements for admission of insured banks into the system prior
to July 1, 1937, when all banks, in order to be insured, must be
members of the Federal Reserve System. This might be broadened
so as to authorize the Board to waive not only capital but all
requirements and to permit existing banks to continue permanently
with their present capital, provided it is adequate in relation to
their liabilities.
TECHNICAL PROVISIONS

Title III of the bill contains a number of sections proposed by
the Comptroller of the Currency and by the Federal Deposit Insur
ance Corporation. Sections in which the Federal Reserve Board
is interested are in the nature of technical improvements of a noncontroversial nature of the same general character as those con
tained in the so-called " omnibus banking b ill" which was reported
favorably by the Banking and Currency Committees of both Houses
of Congress in June 1934, but failed of enactment in the closing
days of the Seventy-third Congress.
For example, a provision that a holding-company affiliate, which
is a holding company by accident and is not engaged in the busi
ness of holding bank stock, shall be exempted from the require
ment of obtaining a voting permit. Another example is the pro
vision that member b a n k s for the purpose of calculating reserve

186

BANKING ACT OF 1 9 3 5

requirements phall be allowed to deduct from gross deposits the
amounts that are due them from other banks rather than be allowed
to deduct these amounts only from the deposits they hold for other
banks. The existing provision has resulted in injustice to country
banks, which hold no deposits for other banks, and are, therefore,
unable to get the beneRt of the deduction which city banks can
make. There 13 also a proposal intended to simplify the provisions
of the Clayton Antitrust Act in regard to interlocking bank direc
torates and to facilitate the administration of these provisions by
the Federal Reserve Board.
Provisions in title III, as well as in title II, are still being studied
and improvements and modifications in technique and in phrase
ology are being developed. I shall, therefore, appreciate an oppor
tunity to submit to the committee for its consideration a number o f
amendments to the bill before Rnal action is taken. It would also
be helpful if the committee would permit the Board's counsel to
cooperate with the committee's counsel in the Rnal perfecting of
the phraseology of the bill.
Thank you.
The CHAIRMAN. Gentlemen, in view of the physical dilBcultiep
under which Governor Eccles is laboring this morning, I have
assured him that we would excuse him, when he had Rnished his
general statement. Governor Eccles, if you desire that we do so,
we shall be glad to let you go on tomorrow morning, and the com
mittee will meet at 10:30 o'clock.
(Whereupon the committee adjourned until 10:30 a. m., Tuesday,
Mar. 5,1935.)

BANKING ACT OF 1935
FRIDAY, MARCH 5, 1935
HOUSE OF REPRESENTATIVES,
COMMITTEE ON BANKING AND CURRENCY,

Z7. <7.
The committee met at 10:30 a. m., Hon. Henry B. Steagall
(chairman) presiding.
The CHAIRMAN. Gentlemen, we will come to order. Governor
Eccles, the committee will be glad to have you resume your discussion
of title II of the bill. You may proceed as far as you desire without
interruption.
STATIMENT OF HON. MARRINER S. ECCLES, GOVERNOR,
FEDERAL RESERVE BOARD— Resumed

Mr. EccLEs. I made a general statement yesterday, and it oc
curred to me that it might be helpful to the members of the com
mittee if I discussed, more or less informally and possibly in more
detail, some of the features of the bill.

It is proposed to combine the ofEce of the chairman of the board
of directors and the Governor of the Federal Reserve bank. At the
present time each df the 19 Reserve banks has 9 directors. Six of
those directors are elected by the stockholders of the banks, that is,
the member banks; three of them are appointed by the Federal
Reserve Board.
These directors are appointed for 3-year terms. Of the 6 direc
tors appointed or elected by the member banks, 3 are bankers, known
as " class A " directors; 3 must be selected from commerce, agricul
ture, or industry, and are known as " class B " directors. One of
the three directors appointed by the Federal Reserve Board, known
as " class C " directors?, is selected or appointed as chairman of the
board of directors of each Federal Reserve bank. He is also the
Federal Reserve ag3^t.' He is a full-time, highly paid olBcial; and
originally it was*ednceived that he would be the executive head of
each Federal Reserve bank.
The governors of the Federal Reserve hanks are not mentioned
m the Federal Reserve Act. The act provides that the directors
of the bank shall select such ofBcers and employees as are necessary
to conduct the affairs of the bank.
The title of "governor" was given by the nine directors to the
person selected by them as the operating head of the bank. In
practice, the position of the governor has become an outstanding
and important position, and in nearly every instance he has become
the head of the bank. He is not a director of the bank; he is

187

188

BANKING ACT OF 1 9 3 5

elected by the board of directors; the nine members of the board
of directors.
The Federal Reserve Board has no legal relationship with the
governor of the bank, has no responsibility in his selection except
that it passes on his salary. Its oRicial relationship with the bank
is through the chairman and Federal Reserve agent, whom the
law designates as the Board's oRicial representative at the Federal
Reserve bank.
It is proposed, in this legislation, as a matter of elEciency, coordi
nation, and good organization, to do away with this dual relation
ship and to combine the ofEce of governor with that of chairman,
making the governor and the chairman a class C director. The
board of directors of each Federal Reserve bank will select the
governor and the chairman; but this selection must be subject to
the approval of the Federal Reserve Board.
You will observe that the Federal Reserve Board will not have
the power of appointment of the chairman, which will be given to
the local board and combined with the o5i(^ of governor; the ap
pointment will be subject to the approval of the Federal Reserve
Board.
This will make for better coordination and economy, will do away
with the possibility of cleavage, by reason of the dual organization
of the chairman, appointed by the Board in Washington, and the
governor, selected by the local board.
Although the directors of the banks are appointed for a period
of 3 years only, in practice many of the directors have served since
the beginning of the Federal Reserve System. It is thought ad
visable to limit the term of oRice of all of the directors to two con
secutive terms, totaling a period of 6 years. This is proposed to
avoid the crystallization ot control or authority in any one group
or combination.
It is felt that, in each Federal Reserve district, there are many
able men to represent the bank members and also commerce and
industry, as well as the Board at Washington, which appoints the
three class C directors; and that the public nature of the Reserve
System is such that it would be to the interest of the System to have
a limit upon the terms of the directors.
It is recognized that there may be a loss of some very able men
as the result of this restriction, but it is believed that there will be
more gained as a result of this policy than will be lost.
It is interesting to note that two, and I believe three, o ft h e
Federal Reserve banks have adopted the policy, .without it being
prescribed by law, of limiting the terms o f their class A and class
B directors, that is, the directors elected by the member banks, to
3 years. The New York bank and the Dallas bank, and I think
the Atlanta bank, rotate the ofSces of their class A and B directors.
They And this in the interest of harmony among their member
banks; and it is felt that, if it is in the public interest to do that
in the case of those banks, it would be well to do it in the case of
all banks and to place the limitation to 6 years in the law.
Since this proposal was made, there has been considerable discus
sion, and I nnd that, almost universally, it is looked upon with a
great deal of favor by the banks throughout the country. I 6nd

BANKING ACT OF 1 9 3 5

189

that there is considerable feeling among many of them that there has
been a certain amount of crystallization of control in small groups.
I met with a group of bankers on Friday, and without exception,
they were all very favorable to that restriction.
Admission of insured nonmember banks: I am discussing this
briefly, in the order in which the proposals appear in the bill—the
Admission of insured nonmember banks is in section 202. It is recog
nized that many of the nonmember banks could not readily quality
as members of the Reserve System, and that a very great hardship
and injustice would be imposed upon them, if they were required to
become members of the Federal Reserve System under the present
legislation, and under the rules and regulations for membership. It
is, therefore, proposed that the Federal Reserve Board should have
authority to waive the capital requirements.
I suggested yesterday, in connection with this particular feature
of the bill, that the authority for the Federal Reserve Board to waive
the capital requirements for admission of insured banks into the
.System, prior to July 1, 1937, when State banks are required to be
members of the Reserve System in order to be insured, might be
broadened, so as to authorize the Board to waive not only the capital
requirements, but all requirements, and to permit existing banks to
continue permanently with their present capital, provided it is ade
quate in relation to their liabilities.
I think it is desirable to have unification of the banking system,
and I recognize that possibly the most likely way of getting it is
through all banks becoming members of the Federal Reserve System.
In many instances, the capital of nonmember banks, is less than
the minimum amount required—$50,000, and their volume of busi
ness is such that they do not require and cannot possibly use and
support a capital of $50,000 with an adequate surplus, which is also
desirable.
It is also recognized that certain of the rules and regulations for
membership would make it very difEcult for many banks to qualify
under those rules and regulations; and it is, therefore, the desire of
the Federal Reserve Board to so modify the law and its rules and
regulations as to make it possible, under reasonable conditions, for
nonmember banks to get the benefits of membership. I believe those
beneSts are very real. Particularly would that be true if the present
law is amended in some of the particulars as provided for in the pro
posed bill. I refer to the change in the present eligibility features;
also the recognition of the desirability of using the savings and time
funds in longer term lending, or in the real estate loan Beld. These
provisions would give to many of the nonmember State banks the
support that otherwise would not be available to them, if it were
possible for them to continue to operate as nonmember banks.
In section 203, it is recognized that it would be desirable to change
the present language with reference to the qualifications for mem
bership on the Board, as a recognition of the fact that the functions
and duties of the Federal Reserve Board are such as to make it a
tody representing the Nation, rather than any group or combination
o f groups. In recognition of that, it is provided in the bill that fu
ture appointive members of the Board shall be men who are qualiBed
127297— 35------ 13

190

BANKING ACT OF 1 9 3 5

by education or experience or both to participate in the formulation
of economic and monetary policies, which seems to me to be the
central and most important function of the Federal Reserve Board.
It is recognized that membership on the Federal Reserve Board is
one of the most important, responsible, and powerful positions of
the Nation. It is, therefore, believed that the position should attract,
by reason of its importance and responsibility, the best qualiRed men
in the Nation to deal with these monetary and economic problems.
It is felt that the men on the Board should be independent and,
therefore, it is recognized that their compensation should be such as
to enable them, without having to have an independent, private in
come, to live in Washington in the manner that their position would
require. It is proposed that the compensation for future appointive
members be increased to $15,000 per year, the salary now received
by members of the Cabinet. Their salary was originally equal to
that of Cabinet members, but later the Cabinet salaries were in
creased* The proposal is to reestablish this equality. It is also pro
posed that there be a pension or retirement provision, so that mem
bers of the Board who have severed their outside connections and
serve in this position, will not feel a dependency that otherwise
they may feel.
I do not believe the pension provision in the bill fully and ade
quately meets the situation. It provides that any of the present
members may retire at the age of 70, and that future appointive
members must retire at the age of 70. It also provides that, upon
retirement, they will receive a pension of $12,000 per year, when
they have served the full period of 12 years, or more, and a propor
tionate amount when they have served not less than 5 years. It
would seem to me that, in order to attract the ablest men obtainable
for this position, to make them willing to accept positions on this
Board as careers, and to sever all other connections, a pension should
be provided for future appointive members, irrespective of the age
at which their terms may expire.
It seems to me that this would have the effect of inducing these
men to accept positions of this sort during the most active and
remunerative period of their ^ives; otherwise, they might not be
willing to accept.
It does not seem fair to ask a person, of the caliber that Board
members should be, to accept a position and serve for a 12-year
term—we will say from the ages of 48 to 60—and at the end of the
period of 12 years, if not reappointed, to be obliged to go out and
undertake to reestablish connections, which were severed and neg
lected for a period of 12 years.
It would seem to me that, in the public interest, it would be well
to provide that, if a member is not reappointed, he would receive
the full pensio^ if he has served a full term or longer; but if he is
offered a reappointment and prefers not to serve, of course he should
not be given a pension. I believe that would make for greater
independence on the part of the members of the Board.
As to the term of the oRice of Governor of the Board: There has
been a good deal said about the provision in the proposed legislation
that the term of the Governor as a member of the Board shall expire
'then he is no longer designated as the Governor by the President.

BANKING ACT OF 1 9 3 5

191

The present law provides that the Governor shall be detonated by
the President to serve at his pleasure, the designation being from
among the Federal Reserve Board members. As a practical matter,
when the Governor is no )onger designated as Governor by the
President, it is because the President is desirous of having someone
else serve as Governor.
Mr. GOLDSBOROUGH. As I understand it, you approve of that
provision ?
Mr. EccLES. What is that?
Mr. GOLDSBOROUGH. You approve the provision allowing the Presi
dent to remove the Governor, whenever he sees fit?
Mr. EccLES. Well, I have no objection to it. I think that, as a
practical matter, it is reasonable. In some of the other central banks
there are similar provisions with reference to the executive heads
of the banks.
It seems to me that an administration is charged, when it goes into
power, with the economic and social problems of the Nation. Pol
itics are nothing more or less than dealing with economic and social
problems. It seems to me that it would be extremely dif&cult for any
administration to be able to succeed and intelligently deal with them
entirely apart from the money system. There must be a liaison
between the administration and the money system—a responsive rela
tionship. That does not necessarily mean political control in the
sense that it is often thought of.
Does that answer your question, Mr. Goldsborough?
Mr. GOLDSBOROUGH. Yes; from your standpoint, I think it does.
Mr. EccLES. Referring again to the term of ofRce-----The CHAIRMAN. Suppose you let me ask a question right there:
Is not the practical situation such that the administration has that
power and may exercise it, but under this bill there will be a tech
nical recognition of that power and a definite fixing of responsibility,
at least within limitations!
Mr. EccLES. Well, the only change—I do not think it will be ma
terial, but the only change in this MU over the present legislation is
that when the Governor is no longer designated as Governor by the
President, his term as a member of the Board will expire, whereas,
at the present, when he is no longer designated as Governor, his term
as a member does not expire. This means that if he is no longer
designated as Governor and he does not resign as a member, there
will be no vacancy on the Board to which the President could appoint
the person he desires to designate as Governor, unless he designates
an existing member of the Board. There is this disadvantage under
the existing law: When a member is no longer designated as Gov
ernor and resigns as a member—which is the only thing that a Gov
ernor could do, and a person who would not do that would certainly
not be a proper person to act as Governor—he is precluded for a
period of 2 years from entering the banking 6eld. That is a deter
rent in the present law to a man accepting that ofEce. I f he is taken
from the banking 8eld, he is required to sever all connections with
the banking business for an indefinite time, that is, for as long as
he is designated as Governor, and that may be for 2 or 3 or 4 yenrs.
When he is no longer designated as Governor^ he resigns as a mem
ber; and, if he has not served out his term as a member, he is pre
cluded for 2 years afterward from entering the banking 6eld again.

192

BANKING ACT OF 1 9 3 5

If he has served out his term as member, he may immediately enter
the private Reid.
Now, what I should like to propose here is that the Governor's
term as a member do not expire when he is no longer designated as
Governor; that is, leave the law as it is with reference to his term
as a member, but provide that, if he chooses to resign as a member
when he is no longer designated as Governor, his term as a member
be considered to have been fulRlled.
Mr. HoLLisTER. That is not what this new statute says, is it?
Mr. EccLES. No; I am oifering this as a suggested change: Whereas
th^ bill provides that he shall automatically cease to be a member
of the Board when he is no longer designated as Governor, I am
suggesting that it be changed <so as to provide that, if he does not
choose to continue to serve as a member when he is no longer desig
nated as Governor, he would be free to enter the banking Reid, with
out taking a 2-year vacation.
Mr. GOLDSBOROUGH. Your view is that they should resign volun
tarily, and the 2-year application should apply; but if they are
removed as Governor and they see Rt-----Mr. EccLES. It should not apply.
Mr. GOLDSBOROUGH. It should not apply!
Mr. EccLES. That is right.
Mr. GOLDSBOROUGH. That seems to me to be sound.
Mr. EccLEs. It seems to be fair and will remove a deterrent; and
it seems to me that it will accomplish the object of making it a more
attractive position in the future man it has been in the past.
Mr. HoLMSTER. Would it not also attract something else, or accom
plish something else! This is drafted to give the President the
opportunity, if he cares to do so, to make a clean sweep, to com
pletely clean up the whole Federal Reserve Board in a few days, does
it not!
Mr. EccLES. Well, of course, I think that if we are going to con
ceive of a President that would resort to what would be considered
sharp practice, he would possibly have more direct ways of cleaning
it up than that. I think a President that would resort to that sort of
thing would possibly have other ways of meeting the situation.
Mr. HoLMSTER. Presidents have in the past, unfortunately, done
things that some of us would not back up; but, as a matter of fact,
as the bill is drafted, it permits the President, if he cares to, to re
move successively every member of the Federal Reserve Board,
appoint him as Governor, and undesighate him; whereupon, he imme
diately retires from the Board!
Mr. EccLES. Yes; that is correct.
Mr. HoLLisTER. So the suggestion you make would at least elimi
nate the possibility of that happening, when we had a man in the
White House that might adopt such sharp practices!
Mr. EccLES. Yes.
Mr. CROSS. Mr. Chairman, may I make a suggestion as a member
of the committee?
The CHAIRMAN. Certainly.
Mr. CROSS. I would like to make this suggestion: That Mr. Eccles
be permitted to go ahead and Rnish his statement; and then that he
submit the amendments that he would suggest; and then when he

BANKING ACT OF 1 9 3 5

193

gets through with his statement, just as Mr. Goldsborough suggested
the other day, each member of the committee be given a chance to
ask questions, because every member has many questions, or a num
ber of questions, on this section that they would like to ask. I am
afraid that, if we start like this, we will never Rnish or get anywhere.
That is my suggestion.
The CHAIRMAN. Well, I certainly expect that every member of the
committee will have the opportunity you refer to, and I will recog
nize members in an orderly way, so that every member will be
allowed to ask questions.
Mr. CROSS. The point is, we will not have a coordinated idea of
this by going in and out, and I think it is much better to let him
finish, and then later on let him bring his proposed amendments to
the bill, and then we can take up those amendments and let him
discuss those amendments in a much more uniform way, and every
member will get a grasp of the bill. That seems to me to be the
best way to proceed.
The CHAIRMAN. All right, Mr. Eccles, you may proceed.
Mr. EccLEs. Assignment of duties: There is no controversy over
that question. It is just a practical way of enabling the Board to
meet the problems of increased responsibility that are placed upon
them by delegating to others many of the routine duties, so long as
they do not involve questions of policy.
Open-market operations: Inasmuch as this was covered quite fully
in my statement yesterday, I do not believe that I can add very much
to it. There will likely be a good many questions that will develop
in connection with that, because, under that heading, the whole
question of monetary control heads up.
I explained yesterday the way the open-market operation is now
organized, the manner in which the bill provides for it to be oper
ated, and the amendments suggested to the proposals in the bill.
Eligibility for discount: The eligibility requirements of the pres
ent law do not seem to me to meet the changed conditions that we
now have in the Nation, compared with the conditions that existed
at the time the Federal Reserve was established. The amount of
eligible paper available now held by banks is a very small part of
the total resources of the banks. Even in 1929 it was only slightly
over 12 percent of their loans and investments, and today I under
stand it is less than 8 percent. Approximately $2,000,000,000 is the
total amount of the paper which would be considered eligible by
the banks themselves. It was found, when the depression com
menced and as it continued, that the banks did not have eligible
paper to meet their shrinking deposits, brought about by the general
liquidation of bank loans and by hoarding; and that, in order to
avoid closing they were forced to sell such bonds as they had upon
the market. These bonds were considered, at one time, to be sec
ondary reserves, because they were listed. Banks also brought pres
sure upon all loans which came due during the period, and were
forced to refuse new credit, feeling, of course, that they had to have
as large cash reserves as possible and be as liquid as possible. They
were bringing pressure to collect loans that came due, and to sell the
securities that they had, wherever they could do so without taking
too large a loss. That attitude on the part of the banks throughout
the Nation was largely due, it seems to me, to the fact that they did

194

BANKING ACT OF 19 3 5

not have eligible paper in sufRcient quantities to meet the demand
and could not get help at the Federal Reserve banks unless the
paper was eligible.
Therefore, m an effort and under pressure to get liquidity, they
froze themselves so completely that they finally closed the entire
banking structure. So it was found out that, in the Snal analysis,
in a depression, there is no liquidity, except that liquidity which can
be created by the Federal Reserve or the central bank through its
power of issue.
This was finally recognized when great damage had been done,
when thousands of banks had been closed unnecessarily, when
millions of individuals and institutions had been forced to the wall
through the lack of available credit, or through pressure to pay
existing debts* Millions of depositors lost hundreds of millions of
dollars as the result of those closings.
We finally recognized that we did not have to have eligible paper
and we did not have to back our currency with gold or eligible paper
or even with Government bonds. We finally recognized that, in
order to get the banks open, we could take any sound asset into the
Reserve bank and issue Federal Reserve bank notes. When that
happened nobody wanted their money, the runs stopped, and liqui
dation stopped to a very great extent. Certainly, the pressure was
very greatly relieved.
Now it seems to me that it is only being a realist to recognize that
the Reserve banks, subject to rules and regulations made by the
Reserve Board, should have the power to meet emergencies, should
have the power to loan to member banks upon sound assets, rather
than see the banks close, or rather than see unnecessarily drastic
liquidation forced upon the community.
This provision does not mean inflation. Before the banks today,
as a whole, would have any occasion to use the Reserve System, they
would have to extend billions and billions and billions of dollars of
credit, because of the excess reserve position that they now occupy.
But, ijf the provision is there, it will make the banks feel altogether
different about extending credit today. It will make them recognize
that they do not have to have 90-day or 6-month paper in order to
make loans, when that type of demand for credit does not exist to
more than a very limited extent.
This, to my mind, is one of the most important features of the leg
islation at the present time. It will tend to do more toward inducing
recovery through credit expansion than any other feature of the bill.
The banking system must be made, to provide the money and credit
required, if it is going to justify its existence. At the present time,
that is largely provided by the Government. The banking system,
the commercial banking system-----Mr. GOLDSBOROUGH. You say it is being provided by the Govern
ment?
Mr. EccLES. To a very large extent.
Mr. GOLDSBOROUGH. We were under the impression that the Gov
ernment borrowed the money that it is now providing, from the
banks; is that not correct!
Mr. EccLES. That is very true. The banks are willing to extend
credit on Government bonds.

BANKING ACT OF 19 3 5

195

Mr. GOLDSBOROUQH. We have provided the banks with $13,000,000,000, about, have we not?
Mr. EccLES. Well, I do not know the exact amount, but----- Mr. GOLDSBOROUGH. That is an approximation.
Mr. EccLES. But whatever amount of Government bonds the
banks have purchased—it is not $13,000,000,000, but, including what
the Federal Reserve System has, I think it is nearly $13,000,000,000—
the Government is doing the lending through the various Govern
ment lending agencies, such as the Home Owners' Loan Corporation,
the Farm Credit Administration, and the Reconstruction Finance
Corporation. Those are the three most important agencies and, of
course, we know they have put out billions and billions of dollars,
and the banks have largely taken Government bonds and bonds guar
anteed by the Government, and the Government, in substitution, has
taken the loans of the individual and the corporations. So that it
has been a process of the banks liquidating their private loans, and
the Government taking them over, and the banks providing the
funds to take Government bonds or bonds guaranteed by the Govern
ment. And, of course, if continued, it seems to me that the banks
are going to have very great dif&culty in justifying their existence.
Mr. GOLDSBOROUGH. When they can only live by the Government
furnishing nearly one billion dollars a year in interest, which they
do not earn, it seems to me your statement is worthy of very serious
consideration.
Mr. EccLEs. I recognize that, and I have also told many of the
banks that the provisions of this legislation with reference to this
eligibility feature, and with reference to this real-estate loan feature,
are to give them an opportunity to utilize their funds in the direct
Eeld o f lending and get the Government out. Otherwise they will
End that the Government will have taken over the banking business,
not because the Government wanted to, but because the banks forced
it to.
Purchase of United States guaranteed obligations: It is provided
that obligations guaranteed by the United States Government should
be put on the same basis as direct obligations. There seems to me to
be no justification for discrimination; that they should be eligible
for purchase by the Reserve banks without regard to their maturity,
in the same manner that direct obligations of the Government are
eligible for purchase by the Federal Reserve banks.
Collateral for Federal Reserve notes: It is provided that the position
of Federal Reserve agent as such shall be eliminated and that the
position of chairman of the Federal Reserve bank shall be combined
with that of the governor. The Federal Reserve agent acts as a
trustee, holding the collateral against which Federal Reserve notes
are issued, at least 40 percent in gold certificates and the balance in
eligible paper or Government bonds, or both. It was thought, origi
nally, that the amount of currency outstanding at any time was influ
enced or regulated by the amount of commercial paper, which repre
sents the activity or the volume of trade or business. It has been found
that there is very little relationship between the volume of Federal
Reserve notes and the volume of commercial borrowing. Of course,
that is due to the fact that currency, as such, plays so small a part in
our money system and that bank credit or deposit currency plays a

196

BANKING ACT OF 19 3 5

major role. The amount of currency or Federal Reserve notes out
standing will depend upon the demand for currency by member
banks. The member banks discount or borrow from the Reserve
banks in order to maintain their required reserve balances with the
Reserve banks* Member banks draw currency to meet the demands
of their customers. It is not felt that the collateral put up back of
the Reserve notes in any way restricts the use of currency. It is
not felt that collateral adds anything to their security. They are
now guaranteed by the United States Government; they are a first
lien on all the assets of the Reserve banks. Whenever notes are
issued or deposits created by the Reserve banks, there are assets to
offset the liabilities of the Reserve banks, whether the liabilities
consist of notes or of deposits of their member banks.
There would seem to be no more reason to secure notes which they
issue than to secure deposit liabilities to their member banks. The
Reserve banks are required to hold gold certificates equal to not less
than 40 percent of their notes outstanding, and gold certificates or
lawful money of not less than 35 percent of their deposit liability
and-----Mr. WoLcoTT. Gold certificates!
Mr. EccLEs. Well, of course, they have no gold. There is no pro
posal to change that. The assets of the banks, on the other side,
consist of gold certificates and other money that they may hold,
and Government bonds and bills or rediscounts.
Mr. HANCOCK. Could you properly call those notes " asset cur
rency "?
Mr. EccLES. What is that?
Mr. HANCOCK. Could you properly call those notes "asset cur
rency"!
Mr. EccLES. I do not just understand what you mean.
Mr. HANCOCK. I do not want to begin questioning you, but right
on that point you made the statement that it was not necessary that
notes have any particular banking value.
Mr. Eccuss. Yes.
Mr. HANCOCK. In that they constitute a lien against all of the
assets of the banks.
Mr. EccLEs. That is right.
Mr. HANCOCK. Now, would you consider such notes as asset cur
rency ?
Mr. EccLEs. Well, they are the obligations of the banks that issue
them and are guaranteed by the United States Government. They
are not asset currency, in that they are not backed specifically by
this or that particular asset or assets, except to the extent that there
is at least 40 percent of gold certificates held, and there would be
other certificates back of them. The liabilities of the bank would
be offset by its assets. So, to that extent, there are assets in the form
of gold certificates, Government bonds, or loans and discounts, back
of all the notes issued, just as there are back of all of the deposits
of the bank. The value back of the Federal Reserve notes is deter
mined by the assets of the Reserve banks. In 1932 it was found im
practical to restrict the issue of these notes as they were restricted,
when gold was leaving the country very rapidly and when the banks
held very limited amounts of commercial paper. The requirements

BANKING ACT OF 193 5

197

of the law had to be suspended in 1932, and Government bonds had
to be accepted as substitutes for commercial paper as the basis for
issuing notes, in order to release the excess amount of gold that had
to be held in the absence of commercial paper. So it was found
that the restriction imposed at the time, and the only time when the
provisions of the law were tested at all, they had to be suspended.
The CHAIRMAN. It might be well to remember definitely the date
of that action.
Mr. EccLES. Well, you probably remember it. It was in 1932,
February 27, 1932.
Reserve requirements: The Federal Reserve Act, as amended by
the act of May 12,1933, provides that, with the consent of the Presi
dent, when an emergency is declared to exist, the Federal Reserve
Board has power to change the reserve requirements of member
banks. It is proposed to recognize this emergency provision as a
permanent provision and to give to the Board the power to change
reserve requirements, without declaring that an emergency exists and
without the approval of the President. This is a function of mon
etary control almost equal in importance to open-market operations,,
and it is felt to be necessary that the Board have this power, par
ticularly in order to control an inflationary condition, should one
develop.
It is conceivable that the reserves of the member banks may be
greatly in excess of the amount of Government bonds and paper
held by the Reserve banks. The sale of those securities in the
market would not be sufRcient to absorb the excess reserves; and
therefore, the increase of reserve requirements would come into use
as a means of controlling an inflation of credit. It would be ex
pected to be used only as a method secondary to open-market oper
ations. Changes in reserve requirements would be used at a time
when open-market operations failed to meet the situation.
Mr. CROSS. I might suggest that I remember the conditions that
existed in the worm, the speculation on the stock exchange; do you
think it would be wise to have a provision so that you could desig
nate certain particular banks, where they had increased their reserve,
rather than apply to all banks, everywhere, at any time?
Mr. EccLES. I do not believe so. I think money is too much like
water; it seeks a place where it can-----Mr. FoRD. Seeks it own level?
Mr. EccLES. Yes; it seeks a level, and of course that level is based
upon the return it can get.

We have proposed here that changes in reserve requirements might
be a pplied to two classes of cities: Central reserve and reserve cities
in one class and country banking areas in the other. It is conceiv
able that different reserve requirements could be applied to the
reserve cities, i f that is where speculation was going on and where
the excess of reserve was, which is usually the case. There is an
element of time in money seeking its level. Just what it is, I do
not know that anybody can say. But increases in reserves might
be applied first to the reserve cities and then later to the other areas,
if it seems to be necessary, rather than to apply them at the same
time universally. I do not believe that you could consider it beyond
that. I do not believe it would be practicable to apply it to indi*

198

BANKING ACT OF 1 9 3 5

vidual banks. The Federal Reserve Board has the power now to
regulate margin requirements on collateral and brokers' loans, which
is one of the most effective instruments of speculation control, I
think, now available. I believe that, had it been available in 1928
and 1929, it would hpve possibly been helpful in controlling or
restricting the speculative orgy that we went through.
The CHAIRMAN. Governor Eccles, the House has been in session
for a little while, and there are matters that require the attendance
of Members, and I am sure you will be glad to desist until tomorrow,
anyway. We will adjourn until 10.30 o'clock tomorrow morning,
and we expect to have the pleasure of having you back again with us.
(Whereupon the committee recessed until 10.30 a. m., tomorrow,
Wednesday, March 6, 1935.)

BANKING ACT OF 1935
H O U S E OF REPRESEN TATIVES,

COMMITTEE ON BANKING AND CURRENCY,

D. (7., TFe<%%ey<%ay,
The committee met at 10:30 a. m., Hon. Henry B. Steagall (chair
man) presiding.
The CHAIRMAN. Gentlemen, we will come to order. Some of us
have to appear before the Committee on Rules this morning, and I
have to leave in a few minutes. I am going to suggest that, unless
Governor Eccles decides to proceed further without interruption,
that the committee will now proceed to discuss with him title II or
the bill. If you desire further time without interruption, we shall
be glad for you to have it. We do not want to hurry you in the
least. It is our desire to permit you to have ample time to express
your views, in your own way, fully, after which the committee, o f
course, will desire to interrogate you.
Mr. ECCLES. I have Rnished my principal statement.
Mr. KoppLEMANN. May I ask a question ?
The CHAIRMAN. Certainly.
Mr. KoppLEMANN. There may be some questions that I want to
ask on title II, but I am not prepared to do that today. I suppose
that Governor Eccles will be here tomorrow?
The CH A IR M A N . Yes; you will have ample opportunity to do that.
I am taking it for granted, of course, that that will be done, if it is
necessary to meet your convenience.
Mr. EccLES. I finished the discussion yesterday of the proposals,
with the exception of the one relative to the real-estate loans.
The CHAIRMAN. The committee will be glad to hear you further
on that provision, or any other, without interruption, if you so
desire.
Mr. EccLES. I Rnished them all with the exception o f that yes
terday, and it seems to me to be one of the important issues, and it
might save time to say something about that.

The proposal is to amend the act to permit the national banks,
as well as other member banks, to make nrst-mortgage loans on im
proved real estate for a period up to 20 years; that is, if the loans
are amortized so that they would be paid off over that period of
time; to reduce the period from 5 years to 3 years in cases where
the loans are not amortized, and to increase the amount that they
can loan from 50 to 60 percent of the value of the real estate.
It is also proposed to increase the amount, the total amount of
bank funds that can be loaned, from 50 percent of time funds of a
bank up to 60 percent, including in the amount loaned, however,
other real estate excepting the banking houses.

199

200

BANKING ACT OF 193 5

You recall that I suggested yesterday that the proposed bill be
amended, if we think it advisable to amend it, so as to give the
Federal Reserve Board the power to determine the conditions of
real-estate loans by regulation, the reason for this being that to
try to put into the statute a limitation of 60 percent of the amount
of savings will work a very great hardship on many State banks.
We Rnd that some of the State member banks and many of the
State nonmember banks already have in excess of 60 percent of
their time funds in real-estate loans. It would seem, therefore, that
they would be required to cease making real-estate loans and to
liquidate the loans they had as they fell due.
Also, it seems that to try to Rx in a bill or in a statute a provision
permitting 75 percent of the appraised value of property might not
be desirable. It is felt that the situation would be better met if the
Board had the power to Rx the rules and regulations to meet this
matter; that it would make it much more flexible than if it is put in
the statute.
The member banks of the country have about $10,000,000,000 of
savings or time funds. The New England area and the New York
area are largely served by mutual savings banks. More than 50 per
cent of the deposits of the banks, outside of that area, consist of sav
ings deposits. These funds are equivalent to the funds that the
mutual savings banks are receiving from the people in the area that
they serve. The banks are required to pay interest on these time
funds. The maximum rate of interest at the present time is fixed at
2% percent. It is impossible for these banks to pay that interest and
to loan these funds on short-time paper.
In the first place, there is not available a sufEcient amount of shorttime commercial loans to utilize more than a fraction of the demand
deposits, much less the savings deposits; and as a result the banks
hold a very large volume of idle funds.
There lias been no restriction imposed upon banks with reference
to their investments in long-term bonds. They have been permitted
not only to invest all of their savings funds but as much of their
commercial funds as they desire, in long-term bonds, railroad bonds,
utility bonds, foreign bonds, and industrial bonds. I cannot see that
it is so much more desirable to permit banks to invest in long-term
listed bonds than it is to loan their funds on improved real estate on
an amortized basis in their local communities.
The fact that bonds were listed and, therefore, supposed to be
marketable, was considered a justiRcation for the investment of
funds in bonds as compared with the investment in real estate. The
depression proved that the ready market for bonds was only there
at prices that bankrupted the banks, if they were forced to sell in
the market that existed. More banks became insolvent as a result of
the depreciation of their bond accounts than as the result of their
real-estate loans. The fact that bonds were listed and were greatly
depreciated put the banks, when the examiners came into a condi
tion of insolvency, because of the difference between the quoted
market price and the cost of the bonds; whereas in the case of realestate loans it was not expected that there should be a ready market
for them, and so long as they were not in default, they were consid
ered to have the value of the amount of the loan. It was the

BANKING ACT OF 19 3 5

201

depreciation shown on the be Is and stocks, because of the quoted
market, that impaired and in uany cases wiped out the capital of
the banks.
It seems to me that, if we want to be so restrictive in the matter
of real-estate loans, because they are long-term investments of funds
which are likely to be drawn out on demand, we should also be
restrictive with reference to the investment of funds in long-term
bonds. I believe that the banks should be permitted to invest their
funds in long-term bonds aiid in long-term amortized mortgages.
Particularly is that true with reference to their savings or time
funds. The reason is that otherwise they have no way to use their
funds, except to buy Government bonds, or bonds guaranteed by
the Government.
Mr. GOLDSBOROUGH. You mean you think it is the duty of society
to support the banks!
Mr. ECCLES. No; I am not saying that. I am talking about the
condition that exists.
Mr. GOLDSBOROUGH. As far as society is concerned, it is interested
in banks only insofar as the banks are useful to society?
Mr. EccLES. That is correct. Either the banks holding these
$10,000,000,000 of time funds must be prepared to lose those funds
to the savings and loan associations, to mutual savings banks, or
to others, or they must be put in a position to use the time funds
in the long-term investment Reid.
I am convinced that it is not possible for the majority of banks
in this country to operate with demand deposits alone. The volume
of these funds is not adequate for profitable operation except in
the larger institutions, and to take time deposits away from the
banking system would reduce the size of many banks to the point
where they would be unable to exist.
I f our private banking system is expected to provide credit in
other ways besides buying Government obligations or obligations
guaranteed by the Government, then it seems to me that some of
the provisions of this proposed legislation are essential, the one
with reference to eligibility and the one with reference to realestate loans.
There is nothing new about national banks loaning on real estate,
since they have made such loans for 20 years. They have loaned,
however, for a limited period of 5 years on a. straight mortgage,
which makes for a much more unsound loan than a longer-term
amortized loan.
I believe that covers what I have to say, Mr. Goldsborough, and
I will be glad to answer any questions.
Air. GOLDSBOROUGH. Suppose we begin the regular examination.
Mr. Cavicchia has a question.
Mr. CAviccHiA. Mr. Chairman, I think this would be the proper
place in the record for the Governor to tell us, if he knows, to what
amount the mortgages of national banks are held or were held in
1933 or today, if he knows.
Mr. EccLES. I do not know off-hand, but I have it here. On
October 17, 1934, under the law in effect, the national banks had
authority to lend up to $3,400,000,000. Under the new proposal the
limit would be about $4,400,000,000 for national banks and about

202

BANKING ACT OF 1935

$6,800,000,000 for all banks. The total amount of actual loans on
real estate by all member banks at the end of 1934 was
$2,273,000,000.
Mr. GOLDSBOROUGH. Governor Eccles, you wanted to say some
thing else!

Mr. EccLEs. I was going to say that in connection with my dis
cussion of the provisions of the bill I have suggested certain pro
posed amendments or revisions for your consideration. I would
like, in closing, to call those to your attention in the order in which
they were suggested.

Mr. GOLDSBOROUGH. As this hearing naturally will be protracted,
we are not going to hurry you, and you may do so.
Mr. EccLES. In section 201, the Hrst section discussed, it was sug
gested that the governors and chairmen of the Federal Reserve
banks be approved by the Federal Reserve Board every 3 years
rather than annually so that their terms as governors and chairmen
would coincide with their terms as class C directors.
Mr. GOLDSBOROUGH. What page is that on, please!
Mr. E ccL E S. That is section 201. That is the one with reference
to combining the ofRces of chairman and governor.
Mr. WiLLiAMS. On page 39 of the bill.
Mr. EccLES. This, as you will notice, is a slight modi&cation, and
it is just offered as a suggestion.

There has been some criticism about the necessity of approving
the appointment of the governors each year, whereas they will be
appointed as class C directors for 3 years. I personally can see no
necessity of approving their appointments every year and feel that
it is well to consider the suggestion that they be approved every 3
years instead.
Section 202: On the question of admitting insured nonmember
banks to the Federal Reserve System, the suggestion is that the
Board have authority to waive not only the capital requirements but
all other requirements for admission, and that the Board be per
mitted to admit existing banks to permanent membership, without
requiring an increase in capital, provided that their capital funds
are adequate in relation to their liabilities.
Mr. GOLDSBOROUGH. When you refer to the capital, you mean the
capital and surplus combined!
Mr. EccLES. What is that!
Mr. GOLDSBOROUGH. You mean the capital and surplus combined!
Mr. EccLES. The law requires $50,000 capital at the present time,
and many banks----Mr. GOLDSBOROUGH. I know, but I think you say, " Providing its
capital is adequate "?
Mr. EccLES. No; I would think you should take the capital and
surplus in determining the adequacy.
Section 303: The suggested modification of the pension provision
is for the purpose of giving Board members a greater degree of
independence. It has been suggested that each member of the Board,
regardless of age, who has served as long as 5 years, whose term
expires and who is not reappointed, shall be entitled to a pension
on the same basis as though he were retiring at the age of 70. I
discussed that to some extent yesterday.

BANKING ACT OF 19 35

203

Section 203: It has been suggested also that a Governor of the
Federal Reserve Board, who is not redesignated by the President
may, if he chooses, continue his membership on the Federal Reserve
Board. That is the way the law is now, and the new bill that is
being considered, as you will recall, provides that his term as mem
ber of the Board shall cease when he is no longer designated as
Governor. It has been suggested that, as a result of that, the Presi
dent could designate each member of the Board and then no longer
designate him, and finally create a new Board completely. So, in
order to eliminate that criticism, this is the suggested amendment :
That the Governor could continue as a member of the Board even
if he is not designated as Governor; but that if he resigns from the
Board upon not being redesignated, it would be considered that he
had served out his term and he would not be precluded, by reason of
having resigned under those circumstances, from entering business
for a period of 2 years.
In section 205, it is suggested that authority over open-market
operations be vested in the Federal Reserve Board, but that there
be created a committee of 5 governors of the Federal Reserve banks
selected by the 12 governors of the Federal Reserve banks, and that
the Board be required to consult this committee before adopting an
open-market policy, a change in the discount rates, or a change in
member bank reserve requirements.
Mr. GOLDSBOROUGH. Is there any interpretation in your suggested
amendment as to what the consultation would consist o f ! Express
ing it another way, would the Board be bound to accept the sugges
tion of these five men, or any one of them?
Mr. Eccuss. No. It is a question of giving the governors a hear
ing and making a record before the Board can act; but the Board
would have the final responsibility for the action.
Mr. GOLDSBOROUGH. That is the intent, but I am not sure it is
entirely clear. Of course, that can be clari6ed.
Mr. Eccms. Yes; that is the intent. The Board would be charged
with the responsibility and they would have the power to initiate,
but before taking action they would be required to advise with and
get an expression of the views of the committee of the governors,
or the governors could initiate and come to the Board and make
their recommendations for the consideration of the Board.
Mr. FoRD. Should there be a time limitation on how long you have
to wait for that consultation!
Mr. EccMR. Well, I would provide that, of course, the Board
should be able to make rules with reference to that.
Section 209: It is suggested that the Board should not have the
power to change the reserve requirements by Federal Reserve dis
tricts. I discussed that, I think, to some extent yesterday. It has
been suggested, further, that the member banks be classined in the
two groups, one comprising member banks in the central reserve
and reserve cities, and the other all other member banks. Changes
in the reserve requirements, therefore, would have to be either for
the country as a whole, or for the financial centers, as against the
country districts.
Section 210: Real-estate loans: It has been suggested that the
conditions on which real-estate loans may be granted by member
banks be left to the discretion of the Federal Reserve Board, to be

204

BANKING ACT OF 1935

determined by regulations. I see no objection to accepting also some
geographical limitation as to where loans could be made, that is?
some specified distance from the banking houses. Of course, there
is no limitation as to the Reid where banks can loan funds on bonds?
but there seems to be a good deal of opposition to the elimination
of the geographical limitation on real-estate loans. I do not believe
it is of sumcient importance to have any disagreement over.
Well, now, those are the suggested modiRcations.
Mr. FoRD. Just one word on that geographical limitation: In cities
where the Federal Reserve banks to whom the various banks have to
go for these loans, if the geographical limitation is put in there?
very often there is very keen competition between cities and the city
in which the Board is located, and if it were limited, it might
mitigate against another city that did not have a bank, as to the
character of loans that they would be willing to discount. With
the geographical limitation, I think, in many instances, it might
have a very bad effect.
Mr. EccLES. You mean in the case of real-estate loans?
Mr. FoRD. Yes, sir.
Mr. EccLES. Well, I do not just get the point of your question.
Mr. FoRD. Let me illustrate it in another way: Let us say that the
main branch of the Federal Reserve is at San Francisco. Well, now,
the geographical limitation, for instance, leaves the city of San
Diego out of that limitation; and if there were some loans coming in
from there, and there happened to be competition, for instance, in
water transportation between those two points, and somebody on
that Board was anxious to work a little against San Diego, it might
be possible and something like that might come up, because it has
come up in other things.
Mr. Ecci*ES. Well, in the case of San Diego, in that case San Diego
would discount with the Los Angeles branch.
Mr. FoRD. That limitation would not touch the branches?
Mr. EccLES. The limitation is a mileage limitation from the bank
that makes the loan, the idea being that the bank in an area should
loan funds in the area in which it is acquainted, where the ofEcers
can personally be informed as to the property upon which they are
lending; whereas, if there is no geographical limitation, the funds
may be loaned in far-removed areas, a. thousand or two thousand
miles away, as the case may be.
Mr. FonD. If it applies to branches, that is all right.
Mr. EccLES. The advantage of taking the limitation off is this:
That in an area that has a surplus of funds beyond the demand for
real-estate loans, it could invest those funds through some corre
spondent institution where there is a shortage of real-estate money,,
just as our insurance companies in New Y oA and other points loan
money over the United States and building and loan companies have
loaned in a more or less wide area, and as the mutual banks loan in
far-removed areas.
Mr. GOLDSBOROUGH. Mr. Hancock, you may proceed, if you desire.
Mr. HANCOCK. Mr. Chairman, I have listened with intense interest
to the very abie and enlightening statement made by the Governor of
the Federal Reserve Board with respect to the purpose and phil
osophy of this important measure, and to his detailed explanation of
its mechanics. It occurs to me, however, that since it is such an

BANKING ACT OF 1 9 3 5

205

impoitant and far-reaching measure and is somewhat intricate, that
the committee should arrange immediately to have the Governor's
testimony reduced to writing so that we may have a chance to fully
analyze and digest it before we go into the questioning of the Gov
ernor. I hope the clerk will arrange to have this done at once.
I am not so much concerned with the mechanics as I am the pur
pose and philosophy of the bill. How it will be administered is, of
course, vitally important.
I want to ask the Governor what is the difference between this
measure and an outright central bank?
Mr. EccLES. Well, 1 do not know just what you mean by " central
bank." You mean by that a bank that is owned by the Government,
and a bank with branches?
Mr. HANCOCK. I would like to have an explanation of that, and
then I will ask you another question.
Mr. EccLES. There are a good many different kinds of central
banks and-----Mr. HANCOCK. Well, let me ask you this, Governor: What would
be the practical difference between the system proposed herein and
the Federal monetary authority that the committee last year studied,
conducted hearings on, and considered?
Mr. EccLES. I am not familiar with what the committee worked
on last year. I could not give you a comparison between Federal
Reserve operations and what was proposed under that bill, because
I am not familiar with it.
Mr. HANCOCK. Well, briefly, here is what the Federal monetary
authority undertook to do: It undertook to set up what you might
term a supreme court of finance insulated against political and com
mercial banking domination, and vested in that supreme court of
finance or authority the sole note-issuing power of the Nation. It
would have owned and controlled all of the gold, all of the metallic
base; and it would have had the right to control the open-market
operations through the sale and purchase of Governments, the con
trol of the rediscount rate, and other essential powers to control or
regulate the volume and cost of money for the national welfare.
Mr. E c c t E s . Speaking of the central bank, the Federal Reserve
System has always been expected to perform certain functions of a
central bank. It was set up on the basis of a certain regional auton
omy, due, I suppose, in part, to the opposition to centralization in
this country at the time the Federal Reserve System was set up, and
due, also, in part, to the size of the country and the different economic
conditions that existed in the different regions. The Reserve Board
was set up as a coordinating agency for these 12 banks, which have
25 branches.
The proposed bill in no way changes the physical structure. The
ownership of the Federal Reserve bank is left with the member
banks. In most of the countries of the world, the central bank is a
privately owned institution. Instead of being owned by the member
banks, it is owned by the public.
There is no change being made in the number of directors, 9 direc
tors, and the majority of them are selected by the stockholders of
the member banks—6 of the 9. A limitation is being put, however,

206

BANKING ACT OF 19 35

upon the terms of these directors. The general structure of the bank
is not being changed.
It is proposed, however, that the appointments of governors should
be approved by the Board. That is so that they would be in a more
direct relationship, a more responsive relationship to the Federal
Reserve Board, so that the Board's coordination of the system would
be through the governor, rather than through the chairman and
agent. This is the reason for the proposed combination of the ofEces
of Governor and Chairman. Such coordination would be further
effected through the Board's control over open-market operations and
discount rates. The Board today approves the discount rates.
There is no change in the matter of the discount rates proposed in
the bilL but there is a change regarding the open-market operations.
Mr. HANCOCK. And that is the heart of the bill, is it not?
Mr. EccLES. Well, it is the most important feature and----Mr. HANCOCK. That is the main method or means by which you
control the supply of money?
Mr. ECCLES. Well, the question of reserve requirements is also a
feature secondary------

Mr. HANCOCK. Secondary!
Mr. EccLES. I think secondary to the other features.

Mr. HANCOCK. But the open-market operation is the primary and
most effective feature!
Mr. EccLES. That is right. The other is secondary. The open
market is the primary feature.
Mr. HANCOCK. And under the terms of this bill, the open-market
operations are vested entirely in a Government board ?
Mr. EccLES. No; vested in the Federal Reserve Board under this
bill if changed in the manner which has been suggested.
Mr. HANCOCK. Yes, but under this bill, that Board is appointed
by the President and confirmed by the Senate!
Mr. EccLES. That is right, for terms of 12 years, and the openmarket power is vested in the Board. Today the Board has a veto
power over open-market policy. The governors have an openmarket committee. The 12 governors elect a committee of 5, and
that committee is a committee charged with the responsibility for
the initiation of open-market operations. The Federal R&erve
Board either approves or disapproves or induces them to modify
their program; but the Board cannot initiate. And then, if the
policy is initiated by the open-market committee and is approved
by the Board, the Board is not in position to require that the
banks carry out the policy. So it is proposed in this bill to place
the authority and responsibility in a small body, and the Board----Mr. HANCOCK. Under the bill proposed you can initiate the policy
and then enforce its execution, can you not ?
Mr. E ccL E S . That is right.
Mr. HANCOCK. So it really gives you complete control over the
money supply!
Mr. EccLES. That is right. Now, to that extent, it is centralizing
that function to a greater extent than it has ever been centralized.
Responsibiliy is always felt more keenly when it becomes a personal
responsibility, and it seems to me it is desirable to place that re
sponsibility m a small body, either in the Board or somewhere e!se.

BANKING ACT OF 19 3 5

207

The responsibility for the exercise of these important functions of
monetary control should be in one body, either the Board or some
other body. It should not, to my mind, be divided to such an ex
tent that it can result in obstruction, lack of action, lack of coordi
nation, and lack of a feeling of responsibility.
There are many important functions the Reserve banks have out
side of the open-market operations, and there is no idea of taking
away from the regional banks all of the functions which they now
have. As a matter of fact, if the Board is given the authority it is
requesting here in the bill, to delegate some of its authority, I believe
that there are some of the duties that the'Board could delegate to
the regional banks beyond the responsibilities the banks now have.
The regional banks carry the reserves of the member banks. The
regional banks pass upon the credits to the member banks. It is
through the regional banks that the Board operates in the approv
ing of banks ior membership, in the issuing of voting permits, in
the examinations of banks, m the matter of reduction of capital
structure, or in the matter of consolidations. All of the important
relationships with all of the banks and the public in the area where
the Reserve banks are, are handled by the management and directors
of those banks; and there is no idea of taking away any part of
this, or attempting to centralize those functions here in the Federal
Reserve Board.
Mr. HANCOCK. In effect, Governor, does not this bill undertake
to bring back home the sovereign power vested in the Congress to
coin money and regulate the value of it!
Mr. EccLEs. Well, it brings to the Federal Reserve Board the
power, and, o f course——
Mr* HANCOCK. And through that Board back to Congress!
Mr. EccLES. That is right, because----Mr. HANCOCK. Is it not an unpleasant fact, Governor, that this
power has been farmed out to private interests for years and years!
Mr. EccLEB. Well, the power really has not been exercised to any
great extent. Up until 1922 there was not any recognition of the fact
that, by the open-market operations, you affected the supply of money.
There was no special machinery for open-market operations in the
original Federal Reserve Act. In 1922, during a period when some
of the banks were buying securities as investments, it was observed
that it influenced the situation in New York, and they began to realize
that these 12 Reserve banks, acting independently, in buying and sell
ing for their own investment account, irom a purely earning stand
point—in other words, operating as commercial banks would—had a
real influence and effect on the money market. The result of that was
a self-appointed committee of governors to work together, so as to
have a coordinated program of buying and selling; and I believe it
was not until 1938 that the open-market committee was recognized in
the law.
Mr. HANCOCK. Governor, based on your statement yesterday, would
it be unfair to interpret this bill as the last clear chance to save the
autonomy of private banks of America!
Mr. EccLES. Will you state that question again!

Mr. HANCOCK. I said, would it be fair to interpret this bill as the
last clear chance to save the private commercial banks in America
from their own destruction!

208

BANKING ACT OF 19 35

Mr. EccLEs. Well, that would be a question rather difficult for me
to answer.
Mr. HANCOCK. I am asking you the question, Governor, in the light
of what you said yesterday.
Mr. EccLES. I think this bill will certainly tend to make it possible
for the private banking system to function in a much more satisfactory
and adequate manner than it has in the past.
Mr. HANCOCK. Nothing could be more desirable.
To use the expression that you used before the Senate committee
in 1932, this measure, idealistically speaking, is designed to bring the
money world back into relations with the real world, is it not!
Mr. EocLES. Well, it is designed to create a condition of stability,
stable business, we will say, so far as it can be done through monetary
policy. The important thing today is not so much, as so many people
believe, to increase the quantity or volume of money, as it is to increase
the velocity of money that is already in existence.
Mr. HANCOCK. I believe you take the position as I do that the veloc
ity of money has a greater effect upon business activity than the quan
tity or volume ?
Mr. Eccles. The volume of money is a very important element, and
I think that, in a, period of great business activity and full employ
ment, or reasonably full employment, to reduce the quantity of money
is very effective in controlling inflation. A small reduction in the
quantity of money, through open-market operations, in certain pe
riods, would be very effective.
Mr. HANCOCK. It always, however, tends to decrease business
activity?
Mr. EccLES. That is right, and it is—well, it would tend to decrease
business activity, and possible excess reserves would be wiped out.
That would force the banks into borrowing, and that would materially
restrict credits and raise rates, and tend to slow up the volume of busi
ness. However, when you permit a condition to develop, such as has
developed during the past 4 or 5 years, when you 6rst had a great
period of deflation, of loans held by the banks, and bills held by the
Reserve banks were allowed to run off, the volume of money was being
extinguished at a terrifically rapid rate. From 1929 to the period of
the bank holiday, about one-third of our total bank deposit money was
extinguished, largely, through the liquidation of bank credit. This
liquidation was forced upon the banks in part by their inability to go
to the Federal Reserve banks with assets and meet the withdrawals of
depositors, who were hoarding their funds, because of banks failing.
Mr. HANCOCK. It was an emergency situation and the very time the
banks should have stepped in boldly as a rescuer or savior ? Of
course they were no able to go as far as they could go if this bill is
passed.
Mr. EccLES. Well, two things seem to me to have been necessary.

Mr. HANCOCK. In other words, the Reserve banks were affected
by the same emotional disease that the member banks were; is that
not correct!
Mr. EccLES. They were increasingly restrictive in the kind of
paper on which they would extend credit, and, of course, the law put
limitations on the type they could take. Now, as to whether or not,
by acting sooner or acting more vigorously in the open market, they
could have stopped the period of deflation, that is, of course, a debate

BANKING ACT OF 19 3a

209

able question. Some will argue that had they acted more vigorously
and sooner than they did, wnen there was a tremendous shortage of
funds due to hoarding and due to the gold that was pulled out of the
country and went abroad, that it would have turned the tide of
deflation.
Mr. HANCOCK. There was never, during that period, coordinated
action on the part of the Federal Reserve System as a whole, was
there! Were not some banks operating at cross purposes with
others!
M r . E ccL E S . I d o n o t k n o w .

I d o n o t k n o w e x a c tly w h a t y o u m ea n

by " c o o r d i n a t e d . "
Mr. HANCOCK. I mean this: That some of their actions were not
in unison or accord with a national policy, looking to unified opera
tions for the good of the entire country!
Mr. E c c iiE s . Well, I think the governors met and discussed the
problem, and I think they also met here in Washington with the
board and-----Mr. HANCOCK. I do not think there is any question about their
having met, but what unified effective policy did they agree on!
Mr. E ccL E S . Well, they reduced the discount rate, and they bought
securities in the market, beginning with the autumn of 1929, but
more vigorously after the passage of the Glass-Steagall Act in
February 1932.
Mr. GOLDSBOROUGH. I will say that they continued that until the
danger of the passage of the Goldsborough bill was over, and then
it immediately stopped.
Mr. HANCOCK. Governor, what constructive thing did the Federal
Reserve Sytem do, after delation was halted, to aid in bringing
about recovery! Would you mind telling this committee that!
Mr. EccLEs. Well, of course, in view of the fact that the entire
banking structure collapsed and had to completely close, it is difficult
to imagine how anything very much worse could have happened.
Mr. HANCOCK. Well, I believe in your statement made before the
Senate committee in 1932-----Mr. EccLES. 1933; in February of 1933.
Mr. HANCOCK. You referred to the fact that you considered the
Federal Reserve System an emergency system; is that correct!
Mr. E ccL E S . Well, I do not think so. I would not consider the
Federal Reserve System an emergency system; it is a system that cer
tainly should be able to regulate the volume of money. I f the banks
and the money system under capitalism cannot meet the emergency,
the Federal Reserve System is the only agency we now have to do it.
In other words, through the Federal Reserve System, we say that
we succeeded in financing* a war; and we know now this contributed
very greatly toward the nnancing of the extraordinary expenditures
of, the war, in the absence of putting on taxes high enough to do that.
The Reserve System has, of course, been very helpful in the clear
ing of checks, and it has been a very great improvement over the
system that was employed prior to the Federal Reserve System. It
has speeded up immensely, immeasurably, the clearing of Snancial
transactions throughout the country.
Mr. HANCOCK. Governor, if we had put on sufRcient taxes during
the war period, a large part of our present financial difficulties would
have been avoided, would they not!

210

BANKING ACT OF 193 5

Mr. EccLES. Well, I do not know that I could agree to that. I do
not think that the financial troubles of the present are due to the
war. We do not lack and did not lack in 1929 any material and
physical thing that we had before the war and after the war. We
had an increase in our total man power and in our capital production
facilities.
The CHAIRMAN. Let me interrupt. Did not we experience our
greatest period of prosperity in all of our history subsequent to the
war and prior to this panic!
Mr. EccLES. We had replaced every physical loss, and even the loss
of man power as the result of the war by a very great amount from
the end of the war up to 1929.
Mr. HANCOCK. Well, Governor, is it not a fact that our present
war debts largely represent profits made during and out of the war?
Mr. EccLES. Well, certainly, during the period of the war, we did
not consume and use, as a nation, more than we produced. As a
matter of fact, during that----Mr. HANCOCK. Ana in that way, we did not impoverish ourselves?
Mr. EccLES. We did not impoverish ourselves at all, because we
used much less than we produced, because we furnished the Alli6S a
tremendous amount of goods, which created the interallied war
debts; so there was no occasion for a huge war debt, if the popula
tion had all been put upon a basis whereby there would.have been
no advantages to any group or class, and there would have been no
profits as a result of that operation.
In other words, if the resources of the Nation had been mobilized
in the interests oi the Nation, for war purposes, we would not have
needed any inflation, we would not have needed the credit that was
extended. Our present situation indicates we are just as able now,
in this country, to meet the problems of the depression as we would
be to meet the problems of war. No one would question the fact that
our ability to fight a war would depend upon the men and materials
and our capital facilities in the form o f our factories, systems of
transportation, and so on. The question of money would not be the
measure of our ability to fight a war in this economy of abundance.
Neither is our ability to nght the depression in this economy of
abundance a problem of money.
Mr. HANCOCK. It is a question of distribution!
Mr. E ccL E S . Yes; it is a question of distribution. The depression,
to my mind, was not brought about through a shortage in the vol
ume ; and by an increase in the volume of money after 1929 it would
not have been possible to have avoided the depression. It might have
deferred it or delayed it; but so long as we had such an inequitable
distribution of wealth production as currently produced, so that our
capital production facilities were all out of balance with the buying
power of the people, the velocity was sure to slow up and a depres
sion was inevitable.
Mr. HANCOCK. Governor, with respect to the question of debt—
and then I will get to this bill again—I want to ask you this ques
tion, do you think a nation can impoverish itself by employing its
men and materials in improving its equipment ana resources!
Mr. E ccL E S . No; I cannot see how a nation can impoverish itself
by adding to or producing wealth. In my opinion, we might im
poverish certain individuals if we do not distribute the wealth that
I* nmdiiced through giving employment.

BANKING ACT OF 1 9 3 5

211

Mr. HANCOCK. Then all we need today in this country of rich
resources is, for our money to go to work; is that correct!
Mr. EccLES. That is correct*
Mr. HANCOCK. Will this new bill help to restore conRdence and
put it to work?
Mr. EccLES. Well, I cannot answer that; I can only express an
opinion. It is my belief that it will; it is one of the factors that
will help; it will make it possible for the banks to lend funds in
Belds in which they have been unwilling and unable to lend before.
Whether or not they will Rnd borrowers is another question. There
is a great absence 01 people who are willing to borrow, even on long
terms, or on any terms.
In connection with what I said, in order that I may not be mis
understood, I happened to read the other day an account of the
last report of the Brookings Institute, which 6nds that the excessive
savings went into speculation: Too much thrift held slump cause. It
seems to me that has a very important bearing upon this question
of the volume and quantity of money and the velocity of money.
Mr. HANCOCK. Said in a different way, you mean that too much
labor went into capital ^oods?
Mr. Ecci*Es. That is right. [Reading:]
The institution, in the third o f a series o f investigations to ascertain whether
maldistribution o f income is a primary cause o f the depression, found that
the Rrst need is for greater spending for goods rather than more savings.
Money going into savings, the report made public last night points out, la
not immediately spent for consumption, and the rapid growth o f savings in the
twenties resulted in too much money going into speculation and not into
actual buying o f goods.
The report disputed several traditional economic concepts. Theoretically,
according to one school o f thought, savings go into the expansion o f plant and
other physical facilities, but the institution found that so much money was
saved that there was a plethora.
Instead of going into either consumption goods or capital goods, it went into
speculation which served to inRate the prices o f securities and to produce
financial instability.
In announcing the report, the institution cautioned that it did not suggest
the individual o f moderate means should, as a matter o f policy, save less,
but that "t h e problem is one o f aggregate savings in proportions to aggregate
consumption."
The phenomenon of an excessive supply o f savings is, the report said, some
thing new. In the past there has usually been a dearth o f savings, with
resulting difaculties in expanding the Nation's productive facilities.
The report further disputed the theory that business expansion begins with
expansion o f capital goods, holding rather that such expansion begins after
people begin to buy.
The report noted that " a large part o f the savings o f individuals and
business corporations has gone to Rnance Government deR cits" since the
depression.

The same institution, as I recall, gave the Sgures ofthe distribu
tion o^ the national income—I think it was in 1929—showing that
one-tenth of 1 percent of the families at the top of the list received
the same income as 42 percent of the families at the bottom of the
list; or in other words, the average income, per family, at the top,
was equivalent to the average income of 420 families at the bottom*
Mr. HANCOCK. In the peak year, Governor, in 1929-----Mr. HoLUSTER. Pardon me, but I want to ask what report that is
that he is quoting from!
Mr. E ccL E s. That is the report of the Brookings Institute, The
Capacity to Consume.

212

BANKING ACT OF 19 35

Mr. Cr0LDSB0R0UGH. And that is the 42 percent the Brookings
Institute wants to spend ?
Mr. EcoLES. Well, the thing that they find is that that 42 percent
was not responsible for very much saving. The one-tenth of 1 per
cent, of course, were unable to use their income in consumers' perish
able and durable goods; and they, therefore, had to find an outlet
in the investment field, or in the Reid of capital or producers' goods,
until we reached a point where our capacity to produce was all out
of relationship to our ability to consume but not our capacity to con
sume and----Mr. HANCOCK. Which is a whale of a difference ?
Mr. EccLES. Yes; our problem is no longer one of production,
which it has been for generations, while we were building the coun
try, while we were a debtor Nation, and when we had a rapidly in
creasing population.
Our problem is one of distribution. By distribution we mean not
the distribution of the existing wealth but the distribution of the
wealth production as it is currently produced; and the most effec
tive day to do that, in times of prosperity, is through the incometax system. One of the greatest mistakes, I think, that was ever
made during a period of prosperity was to reduce income taxes
rather than to maintain them at the high war point and use the
funds collected to reduce the Federal debt; and then when unem
ployment developed to use the Federal credit to take care of un
employment.
Mr. HANCOCK. Governor, I think that same report to which you
referred just now also showed this startling information: That in
the peak year, 1929, 68.9 percent of the American families had gross
incomes of less than $1,500.
Mr. FoRD. May I make an observation there, Mr. Chairman!
The CHAIRMAN. Yes, Mr. Ford.

Mr. FoRD. In 1929 there were 22,000,000 people in the United
States, at the peak of our prosperity, who were living at or below
the subsistence line; there were 45,000,000 people that were just get
ting by; there were 25,000,000 that were fairly well off; there were
15,000,000 that were rich; and there were 10,000,000 wallowing in
wealth; and those are figures which were gotten out by a responsible
organization.
Mr. FiSH. And what is the subsistence line!
Mr. FoRD. It is just being able to live by a little help from the
country or relatives or somebody else; just getting by.
Mr. FiSH. On the basis of income, it depends on the cost of living,
but what is a subsistence income!
Mr. FoRD. Well, I do not know what it is, because it depends on
the section. It might be $15 in one part of the country and might be
$25 in another and $40 in another, depending on what part of the
country you live in.
Mr. HANCOCK. Governor, do you subscribe to the thought or belief
that the control of a nation depends upon the control of its credit!
Mr. EccLES. I do not know that I understand your question.
Mr. HANCOCK. By that question I mean that unless the Nation,
through its central Government, controls the credit or note-issuing
power of the Nation the Nation cannot be used for the protection
and welfare of all of the people!

BANKING ACT OF 193 5

213

Mr. EccLES. Well, I think there must be a control over the money
system.
Mr. HANCOCK. That means credit, does it not!
Mr. EccLES. It is not necessary to control the credit relationships
of individuals among themselves, nor the credit corporations extend
on accounts, and so forth.
Mr. HANCOCK. Of course not; but our money system is 90 percent
credit or check currency. You made that statement before the com
mittee.
Mr. EccLBS. Well, 90 percent of our payments are made by checks
on deposits, which is credit money; and it is necessary for a nation
to exercise control in the public interest over the money system.
Mr. HANCOCK. Well, now, this bill is designed to insure control of
the credit of the Nation in the interest of the Nation as a whole, is
it not, and without interference with the normal functioning of the
banks ?
Mr. Ecci^s. That is correct.
Mr. FoRD. Otherwise, socialize it?
Mr. EccLES. Well, it depends on what you mean by " socialize."
Of course, I read yesterday a statement oi Woodrow Wilson's con
ception of the Federal System, and I do not need to go beyond the
statement of the President in whose administration the organization
of this System was set up.
Mr. HOLUSTER. What is the purpose of that statement, Governor?
Mr. EccLES. It is the purpose of setting up the System. He said:
The control o f the system of banking and issue must be vested in the Govern
ment itself, so that the banks may be the instruments, and not the masters, o f
business and of individual enterprise and initiative.

Mr. HomsTER. Did anybody ever suggest that the Government
should have the control of issue!
Mr. Ecci^s. He has suggested the control of issue-----Mr. H oLLiSTER. Did anybody else ever set up the contention that
the Government was only for issue!
Mr. EccLES. The theory was that these banks would control the
issue.

Mr. H oLLiSTER. It was not the Government. The banks were not
identical with the Government, and nobody ever suggested that, did
they!
Mr. ECCLES. That is true, but the thought was, that the Federal
Reserve Board and the chairmen of these banks, wno were appointed,
were the representatives of the Government, or the people through
the Government.
Mr. HoLLiSTER. The Federal Reserve Board was, but not the Fed
eral Reserve System!
Mr. EccLEs. The chairman of the Federal Reserve banks was
appointed by the Federal Reserve Board, and was at that time
looked upon as the executive head of the banks.
Mr. HoLLiSTER. And the chairman appointed by the Board was
to completely control the individual Federal Reserve banks?
Mr. EccLES. No; the Federal Reserve banks, of course, were to be
controlled by their board of directors.
Mr. H oLLiSTER. Who were not Government appointees?
Mr. ECCLES. That is right.
Mr. H o u J S T E R . Except certain o f them!
Mr. EcCLES. That is correct.

214

BANKING AC'^ <JF 19 35

Mr. HANCOCK. Governor, I wanted to ask you one more question.
Do you think that the legitimate consumer demand or requirements
for credit in this country can and will be met, as long as banking
is a career ?
Mr. EccLES. Why, yes; I think so.
Mr. HANCOCK. I asKed you that question because I understood you
to refer to the fact that by providing independence or competence
for Federal Reserve Board directors they could take hold of such
positions and make careers of them and not have to look to outside
income.
Mr. E ccL E S. That is right.
Mr. HANCOCK. It is my thought that banking should never have
been a career but always a profession. I hope you understand what
I mean.
Mr. E ccL E S. Are you speaking of the private commercial bank, or
are you speaking of the Federal Reserve bank?
Mr. HANCOCK. I am speaking of ail kinds where the public is in
volved and their welfare at stake.
Mr. Chairman, they are all the questions I care to ask at this time,
but I reserve, of course, the right to discuss with the Governor the
various sections of the bill. In your absence I made a request that
the hearings up to now be printed, because it is humanly impossible
for any man to digest all of the statements and suggestions made
by the Governor, without having a written statement oefore him.
Mr. EccLES. Let me answer Mr. Hollister's question about the
control of issue because my associate has brought to my attention
this statement in the law:
The Board shall have the right, acting through the Federal Reserve agent, to
grant in whole or in part, or to reject entirely, the application of any Federal
Reserve bank for Federal Reserve notes.

Mr. HoLLiSTER. In other words, the Federal Reserve Board may
limit the issue of notes, but may not increase the issue of notes at
will ?
Mr. E ccL E S . That is right.
The CHAIRMAN. Gentlemen, it is probable that the H. 0. L. C. bill
will be taken up in the House tomorrow. I am not in a position to
say deSnitely about that, but I will know in a little w hile. I thought
we would not have any meeting of the committee tomorrow, and we
appeared before the Rules Committee and asked for a rule, and we
asked that we be given 1 day for debate of something like 4 hours
on the bill. We are hoping that request will be granted. As soon
as I can see the Speaker I can ascertain whether the bill will come
up tomorrow or not. If it does, I wish you gentlemen would help
me give information about it. If the bill comes up tomorrow, I sug
gest that the committee hold a meeting tomorrow afternoon at
3 o'clock, and just as soon as I can get that information I will have
it telephoned to your oSice.
Suppose we say that we will meet at 3:30 this afternoon if the
bill comes up.
Mr. HANCOCK. If the bill does not come up tomorrow, Governor
Eccles will come back. Is that correct?
The CHAIRMAN. If the bill does not come up, Governor Eccles will
come back; yes.
(Thereupon, the hearing in the above-entitled matter was ad
journed temporarily.)

BANKING ACT OF 1935
M O N D AY , M A R C H 11, 1935
HOUSE OF REPRESENTATIVES,
COMMITTEE ON BANKING AND CURRENCY,

Z7. (7.
The committee met at 10:30 a. m., Hon. Henry B. Steagall
presiding.
The CHAIRMAN. Gentlemen, we have Governor Eccles with us this
morning to resume the discussion of this bill, H. R. 5357, and it is
Mr. Williams' time to ask questions, if you desire, Mr. Williams.
Mr. W iLLiAM S. All right. Governor Eccles, I understand the
main purpose of title II of this act is to enlarge and further central
ize the powers of the Federal Reserve Board, in order that it may
have increased influence and power over the expansion and contrac
tion of credit of this country. That is to be done mainly through the
open-market committee, fixing discount rates and controlling the
resgyjves of the member banks. TIiose arc the agencies through
which it is to operate. Am I cdrrect in that assumption!
Mr. EccLEs. That is correct.
Mr. WiLLiAMS. Now, to what extent by the operation or by the
use of these agencies by the Federal Reserve Board, can the general
commodity price levels in this country be controlled, in your judg
ment!
Mr. EccLES. It is impossible to say. The proposal to give to the
Federal Reserve Board, with the advice of the Governors commit
tee, the responsibility for the use of these monetary controls, the
discount rate, the reserve requirements, and the open-market opera
tion is for tile purpose of maintaining stable business conditions,
insofar as this is possible by monetary means. A stable price level
does not necessarily mean stable business conditions.
It seems to me that we are far more interested in full employ
ment than we are in stable prices. If stable prices at some given
index figure would leave an army of unemployed, it does not seem
to me that this is the objective that would satisfy this country.
Mr. W iLLiAM S. Well, you will agree, will you not, that it is very
desirable, as far as possible, to have stable prices!
Mr. Eccms. Yes; I agree to that.
Mr. WiLLiAMS. And that the purchasing power be the same yes
terday, today, and forever, you might say, so far as we can make
them so !
M r . E ccL E S . I a g r e e t h a t w i d e a n d r a p i d S u c t u a t io n s i n p r i c e s a r e
in fla tio n a r y a n d d e fla tio n a r y a n d te n d t o cre a te c o n d it io n s th a t a re
u n f a v o r a b l e t o b u s in e s s s t a b i l i t y .

215

216

BANKING ACT OF 193 5

Mr. WiLLiAMs. I judge you are not in favor of Sxing certain com
modity price levels as the goal toward which the Board should strive
in its expansion and contraction policy?
Mr. EccLES. I would prefer that it be not made the central objec
tive of the banking bill.
Mr. WiLLiAMs. Do you think it is practicable to do that?
Mr. EccLEs. I do not think it is.

Mr. WiLHAM S. On the other hand, there is considerable criticism
in the country of the policy which places, entirely without any limi
tation, the matter in the hands of a few men, or the Board, this
great authority; do you think there is any danger along that line ?
Mr. EccLES. The control over the volume of money and credit
that the Federal Reserve Board can exercise through its use of three
instruments of monetary control, would not necessarily tend to
expand the amount of money in use in a depression such as we
have at the present time.
Mr. WiLLiAMs. Right in that connection, in the use of this word
"m oney", what do you mean?

Mr. E ccL E S. I mean demand deposits and currency.
Mr. WiLLiAMs. Bank credit?
Mr. EccLES. Yes; bank credit, deposits in commercial banks and
currency. More precisely it is deposits subject to check, exclusive
of bank float and interbank deposits, plus United States Government
deposits.
Mr. W iL L iA M s. Bank d e m a n d d e p o s it s ?
Mr. EccLBs. That is right.
Mr. W iL L iA M s. And currency?
Mr. EccLES. Yes; that is right.
Mr. WiLLiAMs. Is that what we mean when we talk about money
now?

Mr. EccLES* That is right.
Mr. W iL L iA M s. I w a n t t o h a v e
Mr. EccLES. That is correct.

t h a t u n d e r s t a n d in g a s w e g o a lo n g .

Mr. WiLLiAMs. Now, you say it would not necessarily result in
expansion, that the policy should not or might not result in expan
sion during a period of depression ?
Mr. EccLEs. You may create excess reserves through your open-

market policy, but unless the borrowers are willing to borrow from
the banks, and the banks are willing to lend to borrowers, you would
not create a further increase in your money supply. You would
increase the reserves of member banks, which would make for an
inducement for the banks to lend and tend to result in a reduction
in rates of interest, making for cheap money; but you must have
borrowers who are willing and able to borrow before you can create
additional money.
Mr. W iL L iA M s. Is there no relation between the quantity of money
and the volume of business that the country does!
Mr. EccLES. No cxact relation. The volume of money is an impor
tant factor, but the use of that money is an equally important factor
in determining the amount of business.
Mr. WiLLiAMs. Well, now, going back, for instance, to 1928, with
a certain volume of money at that time and amount of business, how
does that compare, we will say, with 1933?

BANKING ACT OF 1 9 3 5

217

Mr. EccuBS. In 1928 it was estimated that the national income
was about $83,000,000,000. According to the Department of Com
merce's figures, in 1933 the national income was about $47,000,000,000.
The money supply in June 1928 was $26,400,000,000 and in 1933 it
was $19,900,000,000. The ratio of the national income to the volume
of money was 3.12 in 1928 and 2.35 in 1933. That brings out the
point that I think you have in mind. I would estimate that in 1934,
with a national income somewhere between $50,000,000,000 and $55,000,000,Q0Q, .with an average volume of money of around $23,000,000,000, the number of times that your volume of money turned over
was very little over two times. At the same rate of velocity that
existed in 1928 and 1929, with the present volume of money, the
national income should now exceed $75,000,000,000, which indicates
that simply increasing the volume of money does not increase the
national income proportionally. It seems to me that the reason for
that is quite obvious.
The distribution of the ownership of money determines whether or
not it is going to be put into use. Money is put into use by corpora
tions and individual investors, who are led to believe that there is a
proRt in the investment or use of funds.
Mr. WiLLiAMS. Well, then, did the increase in the volume of money
build up reserves in the banks of the country! Would that not stim
ulate business itself, to the extent that it would make more money
available, and would lead the banks, by reason of the unusual and
unnecessary amount of money on hand, to try to get it out into the
Held of action ? In other words, it would not be earning them any
thing, and it would furnish them an incentive to lend on more rea
sonable and better terms, would it not!
Mr. EccLES. It has caused a very great reduction in interest rates,
which is an inducement to the borrower, to the extent that the bor
rower can use the money profitably. Money is created by debt. Our
banking system creates money-----The CHAIRMAN. Right there. Governor Eccles, you say money is
created by debt: you mean by that, bank credit!
Mr. EccLBS. Yes; that is right. I mean that the banking system,
the process of loaning money, extending credit, increases hank de
posits. In the absence of individuals and corporations who are will
ing and able to borrow, the banks have created additional funds by
purchasing Government bonds. The purchase of Government boncis
nas increased bank deposits.
Mr. W iL M A M S . Well, the volume of money times the velocity rep
resents the national income, does it not, but they have both got to
be there-----Mr. E ccL B S . They have both got to be there; yes.
Mr. W iL L tA M S . Y o u h a v e g o t t o h a v e v o l u m e a n d v e l o c i t y li k e y o u
h a v e in p h y s ic s t o h a v e m o m e n t u m !

Mr. EccLBS. That is right. You cannot have velocity of the means
of payment unless you nrst create a means of payment. You may
create a means of payment and if it is in the hands of those who are
unwilling to spend it, you do not create business activity.
Mr. WILLIAMS. Now, Governor, let us go to the question in this
second title here of issue by the Federal Reserve banks. This act, as

218

BANKING ACT OF 1935

I understand it, removes the necessity for any specific collateral back
of any particular issue?
Mr. E ccL E S . That is right.
Mr. WiLLiAMS. And simply permits the banks to issue upon their
assets? Of course, all of that is to be done under the rules and regu
lations of the board, I assume, the Federal Reserve Board? Now, in
other words, who is going to control how much they issue?
Mr. EccLES. The volume of notes issued depends in the Srst in
stance on the demand for cash by the public and more remotely on the
amount of deposits the Federal Reserve banks have created i!or their
member banks, either by extending loans to them or by open-market
operations.

Mr. WiLLiAMS. Who is going to determine whether an issue has
back of it sound assets, or not?
Mr. EccLBS. The Federal Reserve banks' credit departments will
determine that by the type of loans or type of credit which they ex
tend to the member banks.
Mr. WiLLiAMS. Now, let me see that I understand. The policy that
has been heretofore followed has been that the Federal Reserve agent
has had charge of that, has he not, or a representative of the Board !
Mr. EccLES. The Federal Reserve agent holds the collateral, con

sisting of gold certificates, eligible paper, and Government bonds.
Originally it had to consist of gold and eligible paper. The GlassSteagall Act of 1932 permitted Federal Reserve notes to be backed
by Government bonds in the absence of a sufficient amount of com
mercial paper.
Mr. WiLLiAMS. The application fo? issue is made to the Federal
Reserve agent?
Mr. EccLES. That is right.
Mr. WiLLiAMS. And he was required to have suf5cient assets, in
his judgment, back of that issue ; that is, they were required to put
up with him particular assets on a particular issue that they called
for; is that correct?
Mr. EccLES. It was figured as a whole, the total amount of notes
that each Federal Reserve bank had outstanding, backed by gold
certificates and bonds and other collateral that was deposited with
the Federal Reserve agent. But it seems to me that, in order to
understand what is back of the Federal Reserve notes, we must
consider the balance sheet of the Federal Reserve bank. The lia
bilities of the Federal Reserve bank to the public consist chieRy of
deposits of the member banks and of Federal Reserve notes.
Against these liabilities the Reserve banks hold assets, consisting
of investments in bills, Government securities, discounts to its mem
ber banks, and gold certificates.
It is impossible to issue Federal Reserve notes as liabilities with
out either an offsetting decrease in deposits or an offsetting increase
in assets, in the form of gold certiScates, Government bonds, eligible
bills, or loans to member banks; and the only question that could
arise regarding the security back of Federal Reserve notes would
be in connection with loans which the Federal Reserve bank made
to the member banks. If they made loans which were bad, whether
eligible paper or whether loans secured bv what would be considered
as sound assets, and the losses on those loans were in excess of the

BANKING ACT OF 19 3 5

219

capital and surplus of the reserve bank, then in theory the United
States Government would have to be called upon to make good the
guaranty of the Federal Reserve notes outstanding. But that is
the only way in which there could be any question as to the backing
of the Federal Reserve notes. At all of the central banks, except
the Federal Reserve System and the Bank of England, notes are
issued without any specific backing.
Mr. W iLLiAM S. Now, Governor, I want this clear in my mind-----Mr. HoLLiSTER. May I ask one question right there, Mr. Williams?
Mr. W iLLiAM S. Yes.
Mr. HoLLi&TER. Is it not true, however, that there is a statutory
limit in most of the countries as to the amount of that issue ?
Mr. EccLES. Well, I could not say.

Dr. Goldenweiser advised me there is no such statutory limit.
Mr. W iLLiAM S. Let me ask you this question: In the application
of a reserve bank under our present system, to the Federal Reserve
agent for an issue, has that application ever been denied ?
Mr. EccLES. I do not think so.
Mr. WiLLiAMS. When an application is made, who passes on it?

Mr. EccLES. That is a formal matter; it is almost an automatic
operation. The amount of notes that any Reserve bank requires to
meet tHe demands of its deposits would be turned over to it by the
Federal Reserve agent in exchange for the necessary collateral lodged
with the Federal Reserve agent.
Mr. W iLLiAM S. Now, are you saying that would be left entirely
to the Federal Reserve banks?
Mr. EccLES. The amount of issue will be determined by the call
which the member banks make for currency, and when they make
a call for currency they must have deposits with the Reserve bank,
just as an individual who wants currency must have funds in a
commercial bank to be able to draw down that currency.
Mr. W iLLiAM S. The part I am trying to get at is whether or not
the central Board, the one that has control or the one you want to
place more power in—whether or not they have control over the
amount of issue of each one of these Federal Reserve banks!
Mr. EccLES. The Federal Reserve Board has technical control over
the amount of issue under the present law, but it has found that it
is useless to control note issue after the member banks have acquired
deposits, and under the proposed law the Federal Reserve Board
would not have this purely technical or theoretical control. The
reason that the control is only theoretical is that, when member
banks wish to withdraw their deposits in cash, no Reserve bank can
refuse to pay out the cash, and the Federal Reserve Board cannot
take the responsibility for preventing it.
Mr. W iLLiAM S. Then, the Federal Reserve aigent simply is an ad
ministrative ofBcer; he has no discretion about it, but he is simply
a trustee with these funds in his hands!
Mr. EccLES. The Federal Reserve bank would have to close if the
member banks asked for currency in lieu of their accounts and were
refused.
There is no more justification for requiring specific collateral back
of Federal Reserve notes, which are the liabilities of the Reserve
banks, than there is for requiring speciRc security to be pledged

220

BANKING ACT OF 19 35

against the deposits of the Federal Reserve bank. Why should
Federal Reserve notes outstanding be given a preferred status over
the deposit liability of the Reserve banks !
Mr. WiLMAMS. Then, do you think it is a sound policy for the
Government to guarantee these notes and at the same time have no
control over their issue at all %
Mr. E ccL E S. I do not think that a controlled issue would be a
particle different than an issue that is not controlled, because the
Reserve banks are required to issue currency whenever member banks
have deposits and desire to draw down those deposits in currency.
It is in the determination of the volume of credit extended to member
banks for the purpose of creating the deposits that the real control
of the note issue lies. They cannot draw down currency unless they
have established balances with the Reserve bank, and have put up
acceptable assets, in which case they can drawn down their deposits
in currency in the same manner that any individual depositor of a
commercial bank is able to draw his deposits in currency. Whenever
a bank is unable to pay out the deposits in currency, that bank
must close.
Mr. WiMJAMs. They are turning out currency on what they call
" acceptable assets " as security!
Mr. E ccL E S . Who is!
Mr. W iL LiA M S. The Federal Reserve bank! If a member bank
wants to borrow money, how do they get it!
Mr. E ccL E S . They put up collateral.
Mr. W iL LiA M S. Who passes on that collateral!
Mr. E ccL E S . The Federal Reserve banks.
Mr. W iL LiA M S. And they get money for it! That is, the member
banks get money for it!
Mr. EccLES. Yes; they get credit.
Mr. W iL LiA M S. And that is guaranteed by the United States
Government!
Mr. EccLEs. They get deposit credit for it.
Mr. WiLLiAMS. Of course, that is money!
Mr. EccLES. Yes; that is right
Mr. W iL L iA M S. And the Government itself is back of it, and still
it is simply the deposit of eligible security in the judgment of the
Federal Reserve bank!
Mr. EccLES. That is right.
Mr. W iL LiA M S. And they have entire control and jurisdiction
over it!
Mr. EccLBs. Over the assets which they will take, yes.
Mr. W iL LiA M S. And pass on the question as to whether they are
good or bad!
Mr. EccLES. That is right.

Mr. W iL LiA M S. All right.
The CHAIRMAN. Governor Eccles, do you mean that they have
entire control over the kind of assets they accept! They pass upon
the acceptability of assets entered as collateral as to solvency and
technical eligibility, but when it comes to Sxing the rules of eligibil
ity under the present law, they are governed by the rules laid down
in the act, are they not!
Mr. EccLES. That is correct. They have discretion as to the ac
ceptability of assets or as tf the type of paper which they will take

BANKING ACT OF 19 3 5

221

from member banks, subject at the present time to the eligibility
requirements of the Federal Reserve Act.
In the future, if the present eligibility features of the act are
removed and discretion given to the Federal Reserve Board to deter
mine the eligibility requirements, the Reserve banks would have
discretion within the rules and regulations laid down by the Federal
Reserve Board. However, it would not be mandatory and it is not
mandatory in the present law, that the Federal Reserve banks loan
to member banks. They simply have authority to loan to member
banks upon what is considered eligible paper.
The proposed amendment would give the Federal Reserve banks
the power to loan to member banks on paper submitted to them,
provided it met the requirements laid down by the Federal Reserve
Board.
Mr. WiLLiAMS. Yes; I understand the only difference in the exist
ing law and the proposed law in that respect is, as it is now it is a
part of the statutory limitation, and the other is to leave it to the
rules and regulations of the Board as to what is eligible!
The CHAIRMAN. Let me ask you a question right there now: This
might happen, technically speaking, that under the new law the
Board could make regulations denning the eligible paper which
would be more restrictive than the rules fixed in the present law, or
if the Board saw fit, it could liberalize those rules, but it could work
either way?
Mr. EccLEs. I think so.
*
The CHAIRMAN. So it does not work arbitrarily in either direction?
Mr. EccLES. That is right.
The CHAIRMAN. Under the new bill, that is correct !
Mr. E ccL E S . That is correct, yes.
Mr. WiLLiAMS. What, in your opinion, should be the policy in
that respect, liberalized or made more restrictive?
Mr. EccLES. I think it would depend a great deal upon the condi
tions that confronted the country. In 1930 and 1931 it would have
been in the interests of the banking system and in the interest of the
entire country if the Federal Reserve banks had been permitted to
loan to member banks on any sound assets, when many of them had
very little or no commercial paper. The failure of the member
banks to be able to borrow from the Federal Reserve banks forced a
condition of great deflation. It forced the banks to refuse to extend
loans as they fell due, and forced them to sell their bonds, their secure
ities on the market. It resulted in liquidating or extinguishing,
through credit contraction, about $20,000,000,000 o f our total bank
deposits, including time deposits. A good deal of that, of course,
was the result of tying up deposits in closed institutions; but the
total volume of deposits was greatly reduced, partly because of the
inability of the member banks to get relief by proing to the Federal
Reserve bank, until we finally liquidated our banking structure to
such a point that it became entirely frozen and closed.
And in getting it open, we finally had to recognize, as an emer
gency matter, that the Federal Reserve banks could loan to their
member banks on all sound assets and that the Federal Reserve banks
could issue notes secured by any sound assets, without resort to gold,
Government bonds, or eligible paper.
127297— 35------ 15

222

BANKING ACT OF 1935

The CHAIRMAN. Now, let me interrupt you with something that
should be said right here. It not only went to the extent that you
have pointed out, but as an emergency measure we provided that
such loans might be made to nonmember banks and currency issued
to nonmember banks on the same rules and regulations; is that not
what happened ?
Mr. EocLES. That is correct.
The CHAIRMAN. So we were forced to do that in the hour of dis
tress, instead of having anticipated and provided for it in advance?
Mr. EccLES. Yes; Mr. Chairman, that is correct.
Mr. WiLLiAMs. Right in that connection, to what extent has it
worked 2

Mr. EccLES. When people can get their money, they do not want
it. I think the law was very effective, because it stopped banks from
closing. Instead of the Federal Reserve being required to make
loans to meet the demand, money which had gone into hoarding to
the extent of anywhere from $1,500,000,000 to $2,000,000,000 in cur
rency that was drawn from the banks beyond what was the normal
use or need of currency, tended to come back into the banks. That
enabled the banks to pay off the Federal Reserve banks, so that the
amount of borrowing by the member banks from the Reserve banks
today is practically negligible; whereas, in 1933, it was very large.
Mr. W iLLiAM s. Then instead of increasing the necessity for bor
rowing has actually decreased it?
Mr. EccLES. The requirements; yes.
Mr. W iLLiAM s. That has actually decreased!
Mr. EcOLES. That is right.
Mr. W iLLiAM s. There has been no demand upon the Federal Re
serve Board since the passage of this act, I take it, from what you
say, to borrow upon these general assets, I will say, which were not
heretofore eligible, such as real-estate securities, long-term bonds,
and things of that kind; there have not been any of them offered as
security to the Federal Reserve banks for the purpose of obtaining
loans?
Mr. EccLES. I think it is section 10 (b) of the Federal Reserve Act,
as amended by the Emergency Banking Act, which says that, under
exigent circumstances, member banks are permitted to borrow from
Reserve banks on their time or demand note secured to the satisfac
tion of the boards of directors of the Reserve banks. There was
some use made of that provision, but not very much, because it put
a bank in a position, where it applied for credit under the terms of
that provision, of admitting that it was in great distress and exigent
circumstances that it required special treatment by the board of the
Federal Reserve bank, which meant that a bank would only resort
to that, would only use the borrowing right, as the very last resort.
Mr. WiLLiAMs. To what extent are real-estate loans used for the
purpose of acquiring loans from the Federal Reserve?
Mr. EcCLES. I could not say to whab extent, but there has been
some borrowing from Reserve banks on bills payable backed by realestate mortgages, and other collateral put up to secure the notes of
the banks.

Mr. WiLLiAMs. It is the intention of this bill, as I understand it,
to so amortize real-estate loans as to make them eligible for discount!
Mr. EccLES. Not for discount.

BANKING ACT OF 19 35

223

Mr. WiLLiAMS. Well, for loans?
Mr. E ccL E S . Yes.
Mr. W iL L iA M S . As security for loans?
Mr. E ccL E S . Yes; the bill provides that the act be amended to au
thorize Federal Reserve banks, subject to the regulations of the
board, to discount for a member bank all commercial, industrial, or
agricultural paper, and to make advances to a member bank on its
promissory notes secured by any sound assets.
Mr. W iL L iA M S . And that includes real-estate loans, of course?
Mr. EccLES. Collateral loans, bonds, or any other sound assets.
Mr. W iL L iA M S . And the purpose of this—not of this section, but
of the real-estate section—is to so liberalize real-estate loans, by
amortizing them over a long period of time, as to make them eligible
as a permanent policy, to encourage additional loans by national
banks and member banks on real estate^ in order that they can, if
necessary, dispose of those in time of distress and get money from
the Federal Reserve banks?
Mr. ECCLES. So long as the commercial banking system is per
mitted to take savings deposits, I see no reason why those savings
funds cannot be loaned on amortized real-estate loans in the 'com
munity of the bank.
Mr. W iL L iA M S . I agree with that, myself. I absolutely agree with
that, but the purpose is, as far as it can be done, to liquefy realestate loans?
Mr. E ccL E S . Yes.
Mr. W iL L iA M S . I think we all agree that that cannot be done as
a policy, but as far as it can be done-----Mr. E c c L E s . In a depression, only the Federal Reserve can liquefy
assets. Real-estate loans are no different than any other type of
paper in a great deBation.
Mr. W iL L iA M S . Of course, they have been, for the reason that
there has been no place to discount them.
Mr. EccLES. In a great depression there is no other place to go.
And they do not have to be real-estate loans. They may be loans
on collateral, or they may be investments in bonds. When the market
is depressed, as it was for a period of several years, that meant bank
ruptcy for any bank that liquidated its assets on the existing market,
and that condition tended to close many banks.
Mr. W iL L iA M S . Is it the thought of the Federal Reserve Board
that there should be no limitation at all, upon these amortized realestate mortgages?
Mr. EccLES. You mean no limitation as to the percentage-----Mr. W iL L iA M S . No; I do not mean on the percentage of valuation,
but on the amount of the loan on each individual property.
Mr. E ccL E S . There is no limitation now, under the real-estate pro
vision of the National Banking Act under which they have operated
for 20 years, with the exception of the limitation of 10 percent of
the capital and surplus on any one loan.
Mr. W iL L iA M S . Real-estate loans have not heretofore been eligible
for discount with the Federal Reserve bank, except as an emergency
measure ?
Mr. EccLBs. There is over $2,000,000,000 of real-estate loans in
member banks.

224

BANKING ACT OF 1 9 3 5

Mr. WiLLiAMS. Have they been able to put those loans up with
the Federal Reserve bank?
Mr. EccLES. Only when an emergency was created and then they
were permitted as an emergency matter to do that.
Mr. WiLLiAMS. That is exactly what I say, except as an emergency
measure, they never have been eligible for loans?
Mr. EccLES. That is right.
Mr. WiLLiAMS. This act proposes to make them eligible?
Mr. EccLES. That is right.
Mr. WiLLiAMS. And it is not thought to place any limitation, at
all, upon them?
Mr. EccLES. You mean limitation as to----Mr. WiLLiAMS. As to the amount? Here is an apartment house
or hotel, or some other business institution, on which they want to
make a loan of $100,000,000, for example----Mr. EccLES. One bank is limited in the amount of a loan they can
make to any one borrower to 10 percent of its capital and surplus.
So it has that limitation on it*

Mr. WiLLiAMS. There is to be an increase under this act?
Mf. EccLES. No; there is no change in it, at all.
Mr. BROWN of Michigan. As a matter of fact, it is a decrease, that
is, 10 percent of the time deposits ?
Mr, EccLES. No; any bank can loan any borrower up to a total
of 10 percent of its capital and surplus.
The CHAIRMAN. You mean that a loan can be made on any col
lateral or without collateral?
Mr. EccLES. That is right. That has always been a provision of
the Banking Act.
Mr. WiLLiAMS. There is a provision in here, is there not, limiting
it as applied to real estate?
Mr. EccLES. No; the limitation is 50 percent of the time deposits
and 50 percent of the appraised value of the property, which is
the only limitation in the present act with reference to real estate.
Mr. WiLLiAMS. It is expanded to what it was, in effect?
Mr. EccLES. It is proposed to increase it from 50 to 60 percent,
but the 60 percent also includes other real estate which is not in
cluded in the 50 percent in the present law.
Mr. WiLLiAMS. Then loans to each institution heretofore have
been limited to 25 percent of the capital and surplus on real estate?
Mr. EccLES. Or 50 percent of its time deposits, whichever was
greater.
Mr. WiLLiAMS. What I am trying to get at is, it is expanded and
enlarged, or is it not?
Mr. EcoLBs. Yes; from 50 to 60 percent and up to 100 percent of
its capital and surplus, whichever is greater.
Mr. WiLLiAMS. Instead of 25 percent, it is now extended to the
full amount of its capital and surplus!
Mr. EccLES. Yes.
Mr. WiLLiAMS. Or 60 percent----Mr. EccLES. Of its time deposits.
Mr. W iLLiAM S. Of its time deposits!
Mr. EccLES. Right. I suggested that those limitations be taken
out of the act and the Federal Reserve be charged with the responsi

BANKING ACT OF 1 9 3 5

225

bility of determining regulations with reference to the real-estate
loans.
Mr. WiLLiAMS* Do you think there ought to be no limitation in
that respect in it, except the regulations and rules of the Board %
Mr. EccLES. That is right.
Mr. WiLLiAMS. Or whatever limitation they saw fit to place?
Mr. EccLEs. That is right.
Mr. WiLLiAMS. It ought not to be made a statutory provision!

Mr. EccLES. That is right.
Mr. WiLLiAMS. For the reason that it would give them more flexi
bility in the local communities, in the different localities, and at
different times, under differing conditions!
Mr. EccLEs. Many of the nonmember State banks have, at the
present time, more than 60 percent of their time deposits in realestate loans, and some of the member State banks have more than
60 percent. That would mean that those banks would be required
to liquidate their real-estate loans, in order to comply with the 60percent requirement. Many State banks are not limited in the
amount of their deposits that they can loan upon real estate.
Mr. WiLLiAMS. I am very much concerned about this provision
regarding real-estate loans, because I have been under the impres
sion, by reason of the fact that these loans were short-term loans,
not amortized loans, the banks were not able to handle them at
all in a period of depression.

Mr. EccLES. You mean under the present bill!
Mr. WiLLiAMS. Yes; under the present act, the law as it is now!
Mr. EccLEs. That is correct.
Mr. WiLLiAMS. And this act proposes to amortize them over a
period of years and make them eligible for discount and furnish a
market, somewhat, for them when the time comes when the banks
have to have their money. I think, myself, it is a very wise pro
vision in the law.

I believe that is all I care to ask at this time.
Mr. Fomi. Might I ask a question, Mr. Chairman, just a question!
The CHAIRMAN. Yes; indeed.
Mr. FoRD. Suppose the Federal Reserve has taken considerable
volume of real-estate loans, what provision is there for the Federal
Reserve bank, itself, to dispose of them, should they want to?
Mr. EccLEs. There would be no occasion for the Federal Reserve
bank to dispose of them, so long as the member bank that borrowed
the money was solvent. The member bank would owe the Federal
Reserve on its bills payable, secured by mortgages which it had taken.
Mr. FoRD. Suppose a member bank failed?
Mr. EccLES. The Federal Reserve bank would be required to
liquidate that mortgage or collect it or sell it, just as any other asset
Mr. FoRD. It could sell it, though!
Mr. EccLEs. Yes; it could sell it.
Mr. FoRD. It is not just put in there and held static!
Mr. EccLES. No; it would liquidate any asset or loan of the mem
ber bank which it held ^ust the same as the member bank would
undertake to liquidate the loan of an individual or corporation
borrower.

226

BANKING ACT OF 19 35

Mr. WiLLiAMs. Governor, there is this question that I want to ask
you before I Bnally quit: Under our present system, or under the
system proposed in this bill, what do the Federal Reserve banks pay
for the privilege of issuing money?
Mr. EccLES. They do not pay anything.

Mr. WiLLiAMs, Do not pay anything?
Mr. EccLES. No.

Mr. WiLLiAMs. Now, as you know, there is considerable agitation,
a good deal of comment in the country, about the Government own
ing these institutions. What would be the difference in effect if
the Government did own them?
Mr. EccLEs. The individual member banks are the owners today.
However, they are limited to 6 percent dividends on their stock.
The earnings of the Reserve System in excess of 6 percent are held
by the Reserve banks, and at one time----Mr. WiLLiAMs. Right in that connection, do they not belong to
the stockholders ?
Mr. EccLEs. Not under the law, not beyond the 6-percent divi
dends.

My. WiLLiAMs, Of course, I understand we had, by legislation, to
take it away from them. They were claiming to own it, were they
not?
Mr. EccLES. Yes; I think that there possibly was some claim to
that effect. Personally, I would see no objection to requiring that
the earnings of the Federal Reserve banks, beyond the limitation
of 6-percent dividends to member banks, should be turned over to
the Government when the surplus of the Reserve banks has reached
an amount equal to its capital.
Mr. WiLLiAMs. If the Government, however, can own and operate
them as successfully as private institutions have done, why not give
the 6 percent to the Government rather than to the private banks, as
well as the reserves and the surplus?
Mr. EccLEs. It is now provided in the law that, in case of liquida
tion, any surplus remaining, after the payment of all debts, divi
dend requirements, and the par value of the stock, shall be paid to
and become the property of the United States. I see no advantage
in the Government taking over the stock of the Reserve banks.
Mr. WiLLiAMs. It would not cost the Government anything to do
that, would it?
Mr. EccLES. I think it would; yes. The Government could not
take over the stock without paying the member banks, any more than
the Government could purchase any other asset without it costing it
anything.
Mr. WiLLiAMs. The purchase of the stock is already in the Federal
Reserve banks, the purchase price of it?
Mr. EccLES. That is right.
Mr. WiLLiAMs. And if you took it over, it would simply own it
instead of the Federal Reserve System owning it; the funds then
with which the stock was paid for would be in the hands of the Gov
ernment, would they not?
Mr. EccLES. No; the United States Treasury would have to make
payment to each member bank for its stock in the Reserve System,
and the stock would be transferred from the ownership of the indi

BAUBLING ACT OF 1 9 3 5

227

vidual member banks, which own stock in the respective Federal
Reserve banks----Mr. WiLLiAMS. Then, in taking over the System, we would get the
assets that belong to the bank, that were paid in there by the member
bank, would we not, for their stock?
Mr. EocLES. When you bought the stock held by a member bank
in the Federal Reserve System, you would naturally have—that is,
the Government would naturally have the assets represented by stock
which it purchased. That is correct.
Mr. WiLLiAMS. And that isisound, really, after all; it would not
cost the Government anything?
Mr. EccLES. It might be—it would not cost it in the sense
that it would be paying out funds without getting an equivalent
asset; it would be an investment, rather than an expense, but it would
cost the same-----Mr. WiLLiAMS. They would get the stock?
Mr. EcoLES. That is right.
Mr. WiLLiAMS. The stock the member banks now own? Now, I
believe I asked a question awhile ago, that if the Government can
own and operate the banks and issue money, instead of private insti
tutions, why not do that and save the 6 percent that we are now
paying.
Mr. EccLES. You would not save 6 percent. For the Government
to buy the stock, it would be required to raise the money that is used
to purchase the stock, and in raising that money it would borrow it.
I f it borrowed it or raised it as they raised funds for other purposes,
it would be required to pay whatever interest the Government debt
was required to bear, in order to Hoat the funds to get the money to
buy the stock.
Xt the present time, the last offerings of Government securities
bore a rate of 2% percent; so in that case, you would save 3% per
cent, the difference between 6 percent and 2% percent.
Mr. WiLLiAMS. Even so, why not save it?
Mr. EccLEs. The answer is, perhaps, that there is no more reason
for the Government to invest in this business* so long as it controls
the money supply, than in any other business.
Mr. HoLLisTER. Might I as& one question there ?
Mr. WiLLiAMS. Yes; go ahead.
Mr. HoLLisTER. That would be on the theory that you could neces
sarily buy the stock at par. There is nothing, is there, in the law
which would permit the Government, unless it is some new theory
of confiscation hitherto unannounced—there is nothing by which the
Government could expressly pay the member bank which owns a
particular amount of stock in a particular Federal Reserve bank—
there is nothing by which the Government could compel that bank
to sell its stock at par if it chose to put a price on it of $200 or $300
or $400, is there ?
Mr. E c c L E s . That is a legal question that I do not feel I am pre
pared to answer.
The CHAIRMAN. Let me suggest that if you answer that question
you also tell us what you would do about the stock oi the State bank
that is a member of the Federal Reserve System.
Mr. HoLLisTER. I am assuming that the Government is trying to
buy stock in a Federal Reserve bank owned by individual member

228

BANKING ACT OF 19 3 5

banks. That would be a matter of contract between the Government
and each individual stockholder bank as to what the Government
would be willing to pay and what the member bank would be willing
to surrender its stock for.
Mr. EccLEs. That would seem to be the situation, and that is a
legal question.
Mr. HoLLiSTER. If you are not prepared to answer the question, I
would rather not interfere with Mr. Williams. I do not want that
to remain open without some comment, but I will refer to it later.
Mr. WoLcoTT. May I ask a question, Mr. Williams?
Mr. WiLLiAMS. Well, yes.
Mr. WoLcoTT. Do I understand there is about $450,000,000 in that
fund which has been turned over to the Federal Treasury over and
above this 6 percent that was used—or we used one-third of it, did
we not, in subscribing for stock?
Mr. EccLEs. The Federal Deposit Insurance Corporation? That
was $140,000,000----Mr. WoLcoTT. Was it not one-third of that fund?
Mr. EccLES. No; it was more than one-third. The Treasury put
$150,000,000 and the Reserve System----Mr. WoLcoTT. $149,000,000?
Mr. EccLES. I think it was $140,000,000.
Mr. WoLcoTT. $189,000,000, I think it was.
Mr. EccLES. It made a total of $290,000,000 that was supplied by
the Reserve banks and the Treasury.
Mr. WoLcoTT. Out of this Reserve System ?
Mr. EccLES. Out of the surplus of the Federal Reserve bank.
Mr. WoLCorr. That could be used in payment of interest on these
bonds, and after that the full 6 percent and all over and above that
would go to the Government ?
Mr. EccLES. You mean, then----Mr. WoLcoTT. This reserve that is already in it----Mr. EccLES. Yes; but that money was paid out by the Reserve
banks to the Federal Deposit Insurance Corporation, and therefore
the Reserve banks no. longer have those funds. Those funds are
owned by the Federal Deposit Insurance Corporation and----The CHAIRMAN. Let me correct you just a moment.
Mr. WoLcoTT. We reimbursed the Federal Reserve bank for that,
did we not ?
The CHAIRMAN. We did not give any money to the Federal De
posit Insurance Corporation, but we merely subscribed to its capital
stock.
Mr. EccLEs. Yes.
Mr. WoLcoTT. Indirect loans------

Mr. EccLES. You do not think that the capital stock has very
much value, then, do you? The law provides that the stock of the
Federal Reserve banks can receive no dividends.
The CH AIRM AN. Tim will tell that.
Mr. EccLES. The first banking bill----The CHAIRMAN. It has made pretty good profit up to now.

Mr. EoCLES. Title I of the banking bill provides mat the Federal
Deposit Insurance Corporation's capital of $290,000,000 can be re
duced to a nominal amount, and the balance put to surplus, so there

BANKING ACT OF 1 9 3 5

229

would not be an impairment of capital, if it became necessary to
put up these funds.
Mr. WiLLiAMS. I would like to remark, in that connection, that
so far as I am concerned, that will not be done, because I believe
the banks themselves ought to bear that burden.
Now, coming back to the original proposition, Governor, whether
Or not the Government, as a practical proposition, can own and
operate the Federal Reserve banks on as sound a financial basis, and
render the same service and save these expenses, in the long run, if
you have dividends that are being paid to the banks on the stock—
if that can be done, why should it not be done ?
Mr. EccLES. I believe that the ownership of the stock by the
Government would not necessarily be of any particular benefit or
value in the operation of the Federal Reserve System. I believe
that through the adoption of the provisions of this bill, the control
would be effective and the responsibility fixed, and it should be just
as effective in operating the system in the public interest as it could
be operated if the Government owned the stock. It gets down to a
matter of human intelligence. The management of the banks or
the management of the System would have to be directed in some
manner by some means. I see no reason why a management selected
with the Government owning the stock would insure the System
being operated in the public interest anymore than would be the case
with the members of the Federal Reserve Board being appointed by
the President of the United States, as is now provided, and the
governors and chairmen of the individual banks selected by the local
directors of the bank, subject to the approval of the Federal Reserve
Board. There is a great advantage in keeping regional ownership
and interest in the Reserve banks.
Most of the central banks of the world are privately owned. The
bank which is just being set up in Canada, after a good deal of
investigation and study and consideration, is owned by the public. I
understand the stockholders elect the directors, but the Governor of
the bank must be approved by the finance minister, and he has very
great power and responsibility.
It is not so much who owns the bank as it is the way the bank
is set up and the responsibility with which it is charged.
Mr. WiLLiAMS. Is it your thought that Government-owned central
banks can operate as economically and as efficiently and as much in
the interest of the people of the country as our present system ?
Mr. E ccL E S . I do not think that the fact that it may be Govern
ment-owned, in and of itself, should make any difference. It may
be operated as efBciently and it may not be operated efficiently.
That, as I say, gets to the human problem, after all.
Mr. WiLLiAMS. The ownership of it, in that respect would make
no difference?

Mr. E ccL E S . I do not think so, not necessarily. I f the manage
ment of the banks, the personnel of the board consisted of efficient
men who would feel independent to use their best judgment and
thought in carrying out the affairs of the institution, the ownership
would make no difference. If, on the other hand, people were ap
pointed to operate the system for purely political reasons, rather
than with reference to their qualifications, and they were made to
feel subservient to the point where their best judgment was not

230

BANKING ACT OF 1 9 35

exercised, then of course the system, under those conditions, would
be badly and inefficiently and ineffectively operated.
Mr. WiLLiAMS. Of course, the central idea in this legislation here?
as is stated at the very beginning, is to try to increase and centralize
the power in the Federal Reserve Board over the System, and I
think properly so because I think that the Government and Con
gress and the administration should have control of the monetary
system. It is a national system, of course, and there should be some
central authority and central power responsible for it. The pur
pose of the bill is to create centralized authority, with complete
management of the corporation or system.
Mr. EccL E S. With the board, which would be charged with re
sponsibility for the monetary policy, working with and under the
advice of the Governors' committee. There are many functions that
would be carried out by the individual regional reserve banks, under
the direction of their boards of nine directors.
Mr. W iL LiA M S. But nothing that would influence the national
monetary policy, without the consent of the central board!
Mr. EccLES. That is right, except that the Governors would in
fluence the policies of the board, as a result of their counsel and
advice.
Mr. W iL LiA M S. And that would be true whether they were repre
senting the system governmentally owned or individually ownedy
would it not? Right in that connection the counsel that you propose
of five----Mr. E ccL E S . Representing the 12 Governors.
Mr. W iL LiA M S. What function does the advisory counsel now per
form! Why could it not do the work proposed by the five?
Mr. E ccL E s . I think it is more proper to have the executive heads
of each of the 12 banks select their committee for the purpose of
advising with reference to the policies, than to have the council
advise. The Governors are in much closer touch with monetary
problems. The members of the council are appointed, one from each
Federal Reserve bank district by the Federal Reserve banks, and
I think they consist entirely of commercial bankers from the Fed
eral Reserve districts. They are in touch with the individual prob
lems of their particular banks and their particular communities but
I do not believe would be as able or as qualified----Mr. W iL L iA M S. They perform a very valuable function; that is,
do they or do they not?
Mr. E ccL E S . I have not been on the Federal Reserve Board except
for a few months, and I have only had occasion to meet with the
advisory council on two occasions. It would, therefore, be difficult
for me to judge as to just how important the functions of that body
have been over the life of the System.
Mr. FoRD. Might I make a comment, Mr. Williams, please?
Mr. W iL L iA M S. Yes.
Mr. FoRD. Mr. Eccles, does not the demand for more complete
control on the part of the Government indicate that the heretofore
private control has not proved satisfactory to the Congress or the
country!
Mr. ECCLES. I would not say that we had had private control.
I think one of the principal di&culties of the money system has been
that we had not placed the responsibility definitely upon any one

BANKING ACT OF 19 3 5

231

body and given it the power and authority to carry out the responsi
bility that was imposed upon it.
Mr. FpRD. It is too wide-spread, and they have been forced to
operate and do what the Board wanted to do-----Mr. EccLES. We did not have a statutory open-market committee
until the Banking Act of 1933 created one of 12 Governors, and
charged that body with responsibility for the initiation of the openmarket operations and gave to the Board the power of approving
or disapproving the recommendations of the Governors. But even
then if the Board approved of recommendations of the Governors,
one or all of the 12 banks could refuse to participate in the operation.
Mr. WiLLiAMS. Has not the Board had that open-market policy
through the years!
Mr. EccLES. The Board was not charged by law with the duty of
formulating an open-market policy.

Mr. WiLLiAMS. None at all? Have they not intended to control,
in any way, the expansion and contraction of money through openmarket operation, through their advice and instruction to the member
banks, and through their own operations ?
Mr. EccLES. The Board has acted in all these matters, but without
a clear mandate of law.

Mr. WiLLiAMS. They made no effort—do I understand that the
Board itself has never made any effort at all along that line until
the open-market committee of 1933 ?
Mr. EccLES. The Board has attempted to influence the money mar
ket through changes in discount rates—that is, its right to approve
of the discount rates—and it has even changed discount rates on its
own motion. The need of the open-market operation was recognized
in 1922, and a voluntary committee of governors was organized to
carry out the open-market policy or program.
Mr. WiLLiAMS. They had that policy then?

Mr. EccLES. The open-market committee of the governors had the
responsibility for that program. The Board itself has not been
charged specifically with the responsibility for the open-market
policy.
Mr. WiLLiAMS. I understand, as a matter of law, but they have
actually adopted the policy, have they not !
Mr. EccLES. To what extent I cannot say. I am not as familiar
possibly as I should be with the detailed history of the operation of
the Board.
Mr. Csoss. May I ask a question just on that ?
Mr. WiLLiAMS. Yes.
Mr. CROSS. Now, is it not a fact that the Board, in April 1923 or
May 1924, brought its pressure on the open-market committee and
had them to buy $510,000,000 of Government securities and reduced
the rediscount rate from 4% percent to 3 percent, and, as a result, put
the wholesale commodity price level up to 11 percent, and the agri
cultural products up to 20 percent, and this action was repeated a
number of times, and brought about the beneficial effect when they
did it!
Air. EccLES. I do not know to what extent the open-market pur
chases and reductions in the rediscount rates had an effect upon
the price !evel. It is true, I think, that, under certain conditions, to
reduce the interest rates and increase the supply of money would be

232

BANKING ACT OF 193 5

effective in increasing business activity, just as to increase the in
terest rates and reduce the quantity of money would tend to restrict
business activities, and slow up borrowing, and possibly start &
process of liquidation.
I do not believe that anyone can say to what extent open-market
policy can be responsible for recovery or for depression.
The Swedish money management is one of the most interesting,
I think, that we have in the world today and possibly has been as
successful, or looked upon as being as successful as that of any
other country, and the governors of the Swedish bank, in February
1932, made this statement :
It follows that when forming its policy in view of fluctuations in the price
level the Riksbank cannot but take into account the causes of such changes
prices. For it is essential to determine whether price movements are caused,
e. g., by increased tariffs, altered exchange rates, or a tendency to inRation
on the domestic market which may be looked upon as primary in relation to
exchange rates. In any such analysis of price conditions, naturally other
price indexes besides the Riksbank's own index of consumers' prices will also
be taken into consideration. Obviously, in their endeavor to create as stable
economic conditions as possible, the governors are also taking into account
other factors than mere changes in the price level, particularly conditions
affecting productivity and stocks in various industries.

The CHAIRMAN. Gentlemen, it is evident that we cannot continue
much longer, in view of the business in the House. I am going to
suggest that we adjourn until tomorrow morning at 10:30, and
resume with Governor Eccles.
(Thereupon a recess was taken in the hearing until 10:30 a. m.,
Tuesday, March 12, 1935.)

BANKING ACT OF 1935
TU E SD AY, M A R C H 12, 1935
HOUSE OF REPRESENTATIVES,
COMMITTEE OX BANKING AND CURRENCY,

The committee met at 10:45 a. m., pursuant to adjournment, Hon.
Henry B. Steagall (chairman) presiding.
The CHAIRMAN. The committee will please come to order.
Mr. Eccles, you may proceed now. Mr. Williams, do you have
further questions ?
Mr. WiLLiAMS. I think not, Mr. Chairman.
The CH A IRM AN . All right, Mr. Cross.
STATEMENT OF MARRINER S. ECCLES, GOVERNOR OF FEDERAL
RESERVE BOARD— Continued

Mr. CROSS. Governor, you agree with the proposition that it is the
duty of Congress to regulate the value of money, don't you; that is,
Congress, acting through its agency which it sets up, shall do it!
Of course, Congress itself does not do it.
Governor EccLEs. I think that is a sovereign power given to Con
gress.
Mr. CRoss. In the Constitution.
Governor EccLES. In the Constitution.
Mr. CRoss. Now if that is the duty of Congress through its agency
which it sets up, which of course, is the Federal Reserve System,
don't you think that that agency ought to be independent of any
outside infhience or interests!
Governor EccLEs. The agency should represent the Nation as a
whole and should not be under the domination or control of any
group or groups.
Mr. CRoss. Should not the agency they set up, they being respon
sible and having the duty to perform, which they have delegated to
that agency, should not that agency be independent of any outside
agencies that come in with a different purpose in view!
Governor E ccL E S . It is my view that the Federal Reserve Board
should be as independent as it is possible to create a body of that
sort, charged with the responsibility of monetary policy in the public
interest.
Mr. CROSS. Now, Governor, isn't it a fact that the member banks
of the Federal Reserve System are constantly wanting to go out in
an opposite direction to what a wise policy would dictate, and that
they are constantly wanting to inflate when they should not, and
constantly wanting to deflate when they should not!

233

234

BANKING ACT OF 1 9 3 5

Governor E ccL E S . Well, of course, there are a good many thou
sands of member banks, and I don't believe there is any uniformity
of opinion. Inflation is brought about by creating a condition of
easy money, expressed in low rates and excessive reserves, in a pe
riod when there is great business activity and hence a willingness to
borrow.
Mr. CRoss. Yes. But now the point I am driving at is this, isn't
it a fact that the member banks, and I am asking this just to get your
reaction on this, are inflating when they should not be, and are de
flating when they should be inSating ? Here is what Governor Har
rison of the New York Federal Reserve Bank said in the hearing in
1932, page 53:
It is almost inevitable that the Federal Reserve System, or any central bank,
will always have to go contrary to what the banks are doing. When they are
debating, we have to put pressure on them, and when they are deflating we
have to boost things up. I think that is what we should do.

Isn't it a fact that the member banks, when they are trying to make
money for their stockholders, in times when prices are high, they
want, of course, to keep extending credit, credit, credit, and inflating,
and naturally their class A directors—and class B directors, who are
largely under the control of class A directors—wish to keep going
forward and expanding, and don't you think that is a conflicting
interest contrary to what the Federal Reserve System is intended
to do?
Governor E ccL E S . Of course, all I have is the record. From 1926
up to 1930, there was a very small variation in the supply of money.
There was no inflation in the volume or the quantity of money from
1926 to-----Mr. CRoss. You refer there to all money—credit money?
Governor E ccL E S . That is right; I refer to all money. I include
in that demand deposits of member banks and of nonmember banks,
and the currency outside the banks, in a word the entire circulating
medium.
Mr. CRoss. That is over what period ?
Governor EccLEs. That covers the period from 1926 to 1930.
Mr. CRoss. Will you please answer for me this question: There
was a vast difference in velocity in those years!
Governor EccLES. Yes; that is correct.

Mr. CRoss. And the Federal Reserve System can step in and con
trol velocity, can it not?
Governor E ccL E S . I don't think that the system has as much influ
ence or velocity as it has on volume of money. I think the velocity
of money is influenced more by the tax system than by monetary
policy. Velocity slows up as business activity declines, or as defla
tion develops.
With the national income in 1929 estimated at beyond 82 billions,
with the money volume at that time 264 billions, there was a velocity
of 3.12; that is, each dollar on the average turned over 3.12 times
in the course of the year in the process of making up the income of
the community.
Whereas, in 1933, with the national income diminished from 82
billions to 46 billions, and the volume of money reduced from 26.4

BANKING ACT OF 19 3 5

235

billions to 19.9 billions, income velocity had declined in that period
to two and a third.
Mr. CROSS. Yes; I understand, that Governor.
Now Governor, isn't it a fact that in order to control the situation
you must still have a Axed policy and step in in time? "A stitch m
time is worth nine ", as one of the governors explained here in his
testimony.
In 1929, Governor Harrison was insisting that something be done
to stop the inflation, but it delayed too long, until the crash came,
and of course then when that happened it was almost impossible to
do anything. But it is shown by the record before that they would
go out, putting out more securities, putting out more credit, more
money, when the commodity prices rose, and then when they would
stop that and sell, the reverse was true, because when you sell y^ou
take from the member banks their reserves, and that of necessity
causes them to rediscount which they don't like to do, and that has
the effect, of course, of steadying things, and slowing matters u p keeping them from rediscounting so much.
In order that I may get your reaction on some of these things, I
will quote from the testimony of Dr. Sprague who appeared before
the committee, I believe, in 1923:
There would be, I think, an advantage from the passage o f the bill. I
probably agree with you that the defects in the operation of the Federal R e
serve System are not so much errors o f judgment they have made, but rather
in the hesitating manner in which at times policies have been decided upon
and then executed.

Without a goal to go to, and the boards come and go, the present
Board may be gone in a short while, and with no goal to go to, the
individuals differ and hesitate, and don't you think that is one oi the
great troubles, not having any goal to go to ?
Governor EccLEs. You mean without a specific provision or objec
tive required ?
Mr. CRoss. Yes.
Governor EccLES. You mean required as a part of the law?

Mr. CROSS. Yes; for Congress to set down the purpose, and have
it the purpose of Congress, rather than to just turn the Board loose
and let them go ahead as they did in 1928, as my recollection of the
testimony shows, or 1924. when the Presidential election was coming
on and they determined they should have prosperity. So, therefore,
they got out and they bought Government securities, $510,000,000,
shooting the price level up 11 percent, the farm products 20 percent,
and built up commodity prices. Then, after that, they reversed the
process, but no election was then coming on.
Now if you have a goal to go to, so they can't just shoot things up
and down for some ulterior motive, they are fastened to an anchor,
and don't you think it would be wise to have such a provision in the
law !
Mr. WiLLiAMS. You mean a price level, do you, Mr. Cross?
Mr. CROSS. Yes.
Governor EccLES. I don't think there should be a mandatory pro
vision to reach a certain price level. It may be of interest in that
connection to consider the preamble of the recent law creating the
Bank of Canada. It is short and might be considered as a basis for

236

BANKING ACT OF 1 9 3 5

Our own. It doesn't definitely fix a price level, but it does fix an
objective:
Whereas it is desirable to establish a central bank in Canada to regulate
credit and currency in the best interests of the economic life of the nation,
to control and protect the external value of the national monetary unit, and to
mitigate by its influence fluctuations in thes general level o f production, trade,
prices, and employment, so far as may be passible within the scope of monetary
action, and generally to promote the economic and financial welfare o f the
Dominion.

Mr. CROSS. They will all say that, of course. Everybody agrees
to that, but isn't it a fact that our system is such, as I suggested, we
go out and do a thing when a Presidential election is coming on,
without any guide as to what the purchasing power of a dollar
should be, no relation to the commodity-price level, and then turn
them loose? They not only hesitate, but when they do jump, they
will jump because of some purpose that is actuating them like a
Presidential election.
For instance, let us take Dr. Sprague, who said in his testimony,
" I have reached the conclusion that a stabilization amendment might
prove serviceable."
Now, that was his testimony during that same time, in 1928.
Don't you think experience has shown those people that they
couldn't have a stable policy under those conditions ?
Now, I want to get your reaction on some more of his testimony.
Now,Dr. Miller, in the hearings in the Senate, in 1931, said:
It was my opinion expressed several times, in discussions at Federal Reserve
meetings in the opening months of the year 1929, that the Federal Reserve
System was drifting, that it was in the midst of a perilous situation without a
policy—

and won't that, in your opinion, continue to be the case unless you
have got a goal to go to ?
Governor ECCLES. I think there should be a goal, but the goal
shouldn't be a 6xed-price level. I think the goal should be stable
business conditions because if you have a goal of-----Mr. CROSS. Who is to determine what stable business conditions
are? The Board? They differ here.
Governor EccLES. Yes; it has got to be left up to the Board, which
should not be considered a political body. The law makes the
Board a nonpartisan body, on which political parties as such are
not represented and appointments to which are for periods of 12
years.
Mr. CROSS. That is true, but you know human nature doesn't
change, and it is just like the
&%%%
in the Supreme Court.
People don't change. And what we want to do, it is my idea that we
get something here where they are anchored to something.
For instance, now, here is the testimony of Governor Harding:
The American monetary system is a good deal like a ship at sea without
adequate equipment o f rudders and compass to guide it.

Don't you think they need something to guide them, something to
go to?

Governor EccLES. I don't believe that a Sxed-price level is a guide
that we should have. We might have a stable price level on the
basis of some index, and yet have a great deal of unemployment.

BANKING ACT OF 1 9 3 5

287

Nobody would be satisfied if you reached a 1926 price level and
continued to have a national income of 50 billion dollars instead of
80, and 10 million people unemployed.
Mr. CROSS. Yes, but Governor, the question of unemployment de
pends upon profits, doesn't it!
Governor EccLES. Not altogether----Mr. Cposs. I won't run my factory unless I make a profit, will I !
Governor EccLES. That is true.
Mr. CROSS. I f I make profits, I employ people.
Governor EccLES. That is right.
Mr. CRoss. And when I employ people that increases purchasing
power.
Governor EccLES. That is right.
Mr. CRoss. And when they have that increased purchasing power
they are going to buy, and I will continue to produce, but if you let
matters run wide open and I keep expanding, then there is bound
to be a reaction, and I throw a lot of people out of employment and
I destroy purchasing power.

Don't you think it is better to have a stable purchasing power in
relation to a wholesale price level!
Governor EccLEs. This is an interesting chart here that Dr. Goldenweiser gives me. It shows that the price level in England was
very stable from 1931 to 1934, but the amount of their unemployment
fluctuated considerably.
Mr. CRoss. Yes; I have seen some of the charts.
Governor EccLES. But I mean----Mr. CROSS. But, now, Governor, in reference to England, did you

read the book by Sir Charles Morgan Webb, in which he in substance
says that they regulated gold from 1823 on down to 1914 because they
were the only creditor nation of the world and they were carrying
the commerce of the world, and that it benefited them as a creditor
nation! Did you read that work!
Governor EccLES. N o; I didn't. It seems to me that the Federal
Reserve System can control to quite a large extent, not entirely, how
ever, the volume of money, by its power over discount rates and its
open-market policy.
Changes in the volume of money in the hands of the people, how
ever, depend also upon the willingness of people to borrow and
the willingness of banks to lend.
Mr. CRoss. Yes, Governor; but what I am trying to get at now
is to try to show you how confused the Federal Reserve Board has
been in the past. Now, for instance, here Dr. Miller testi6ed in
1928, and he says:
It is my opinion that the Federal Reserve mind at the present time is more
perplexed than it has been since the troublesome period o f 1920 to 1924; that
it is in a state o f mental confusion.

Why was that and what is there to keep it from remaining in a
state of mental confusion unless you have some goal to go to?
'
Governor EccLEs. I think there should be a goal, but I don't think
the question of prices-----Mr. CRoss. Well, name the goal you think is the proper one.
127297— 35------ 16

238

BANKING ACT OF 1 9 3 5

Governor Eccues. The goal is stable business conditions and full
employment.
Mr. CROSS. All right, they had that all the time, didn't they ? It
is Just the same as the goal m the law now, isn't it ?
Governor Eccms. In the existing law the Federal Reserve Board
is not charged with the responsibility of creating a condition either
of stable prices or of full employment.
As I understand it, the responsibility of the Federal Reserve Sys
tem is to supply the credit needs of commerce, agriculture, and
industry.
Mr. CROSS. All right, now let us go back to Congress. It is the
duty of Congress under the Constitution to furnish money, adequate
money, a medium of exchange, and regulate its value.
Governor EccLES. That is right.
Mr. CROSS. How can Congress regulate that value unless it fixes
the price level?
Governor EccLES. I don't say that prices are not part of the con
sideration. I think that every effort should be made to maintain
stable prices, but stable prices should not be the sole and paramount
objective, so that the Board would be directed to maintain stable
prices and not to consider total production and employment at all.
Mr. Caoss. Yes; but you take the wholesale index of prices in
the market, which are arrived at by taking the mean price, where
some may go way up and some way below, but you hold a mean level
of prices. Now, if you don't use that, you have got no measure of
value, have you ? Unless you use that, what other measure of value
could you figure for money ?
Governor Ecci^s. I am not sure that I can say. Gold, of course,
hasn't proven to be a very satisfactory measure oi value and the buy
ing power of money, measured in goods and services, of course, is
the value that the people are interested in.
Mr. CROSS. Governor, I want to ask you this question, You don't
think we are helpless in the midst of plenty to feed and clothe, with
man power to produce—that we are helpless and these things come
on and then there is no help for it? Do you think that?
Governor EccLES. I stated the other day that I don't believe that
any monetary policy alone will result in stable business. Simply
dealing with the volume of money, so far as it is possible to influ
ence or affect the volume of money through the controls that the
Reserve System has, cannot give you full prosperity. This is be
cause distribution of wealth production----Mr. CROSS. Yes.
Governor EccLES. Is a very important element, and that gets back
to the problem of the tax system. The banking system can influence
the volume of money----Mr. CROSS. Now, Governor, I understand that.
Governor EccLES. And the tax system, it seems to me, must in' Huence the velocity of money.
Mr. CRoss. Well, now, Governor, let me get this. Of course, I

don't think the tax system is so important that we are ever going
to get anywhere with it except to stop enormous fortunes by higher

BANKING ACT 03* 1 9 3 5

239

taxes in the upper brakets. But now suppose you have got a small
community such as they had in the early days, when people would
come in to the fairs and exchange their products, their things; and
they followed the law of supply and demand perfectly, did they not!
Governor EccLES. Yes.

Mr. CROSS. Now, the dollar or the monetary unit of a country
is supposed to reflect as a mirror the workings in that country of
the law of supply and demand for things; so if the country has
plenty of everything, if that law of supply and demand were fol
lowed just like they would come together and exchange what they
have, everybody would have plenty and would not be hungry and
distressed and ruined and broke. Now, don't you think the mon
etary unit ought to perform that function!
Governor EccLES. The monetary unit ought to; but the monetary
unit can't be made to perform that function simply through mon
etary policy. Placing the means of payment in the hands of people
who will spend is the thing that determines employment, business
activity, and price levels.
The ownership of the money is an important element in the use
of the means of payment. I f there are corporations, owning large
unused balances of funds, which cannot find a profitable place to
use or invest those funds, those funds don't go into circulation.
Mr. CRoss. That is true, but if you had prices at the point where
they could invest and make some profits-----Governor EccLES. But the-----Mr. CRoss (continuing). They would invest.
Governor EccLEs. The prices would not induce them to invest.
It is the profit opportunity that induces them to invest, and where
you already have a great unutilized capacity because the people as
a whole lack the buying power to purchase the goods produced, there
is no incentive to invest in further capital goods.
Mr. CRoss. Governor, don't you think the whole theory is that
we are helpless—and so far as the Federal Board is concerned we
needn't look to that for relief, not for much relief—that there are
all kinds of things out yonder that you can't reach and touch, and
therefore we just have to follow along?
Governor EccLES. No; I think that the monetary factor is 1 of
the 3—1 of the 3 important control measures of our capitalistic sys
tem. The volume of money can largely be controlled through a
banking system.
The distribution of funds which is a factor in their velocity must
be controlled through the income-tax system, and employment must
be regulated through a public-works system.
When the volume of money is adequate to support a certain price
level for a given volume of production, and unemployment begins
to develop, and as a result prices begin to decline, it is likely to be
because productive facilities are out of balance with the consumers'
buying power, and velocity of money is declining.
Mr. CRoss. Yes; but you don't want to let it get to where that
happens. I f you are going to let contractions take place, and as a
result all over the country where bonds have been issued for school

240

BANKING ACT OF 1 9 3 5

districts, road districts, municipalities—and you say that the dollar
today or next month will double in purchasing power, so that that
individual must pay twice in real value because there is no value in
money so far as keeping and clothing is concerned—he must pay
twice as much in real value to pay the taxes and to pay the interest
on his mortgage if he has one—it becomes an impossibility. It
means a general liquidation and discontent and trouble and threat
ened bankruptcy.
Governor EccLES. It does, if you let the national income decline.
The purpose of our tax system and the public-works system is to
keep up production when private business fails to keep up full em
ployment. The loss to the Nation, when the national income declines
through unemployment, is a loss we cannot afford.
Mr. CROSS. And your idea is to do it through public works, public
enterprises ?
Governor EccLES. That is right.
Mr. CRoss. Each time you do that you borrow a good many bil
lions bf dollars, don't you ?
Governor EccLES. You wouldn't have very much to do if you did
it at the right time, before you allowed deflation to proceed very
far. The amount that it would require at the beginning----Mr. CRoss. That is, more or less, just a guess, isn't it? If you
keep on running these billions up, who is paying that tax but the
public? And if you get 50 billions and a hundred billions, the
fellow who pays it has got to collect it back off the people. There
are bonds which they have got to collect off the people in taxes.
Governor EccLES. Who pays the difference between the 85 billion
of national income and the less than 50 billions of national income—
who pays that 85 billions?
Mr. CRoss. The fellow who has got the loans on his land. The
people who have the loans foreclose the mortgages and get the land,
and they keep it until they can resell it to these fellows again, those
who can buy. They have to take that loss. But my idea is to get
a stable purchasing power in your monetary unit, so that it can't
happen that if a man goes out and puts up a factory and has to
borrow money, and he borrows this money and builds the factory
and expands it, and the first thing he knows the purchasing power
of that dollar doubles and trebles, and he is sunk.
Governor EccLES. You may 6x a stable purchasing power as a
requirement of the monetary policy of the Federal Reserve Board,
or any other Board, but I don't know what methods they could use
to maintain or to reach that objective.
Mr. CRoss. Don't you think it could be kept by using the redis
count rates? In other words, using the reserves—the reserves in
the banks—couldn't you use the open-market operations?
Governor EccLES. No monetary policy alone by simply attempting
to regulate the volume of money will maintain a stable national in
come or------

Mr. CRoss. I don't say " volume " alone. I mean volume and
velocity. Can't you control it through the rates, loaning of the
reserves, and rediscount rates and open-market operations—wouldn't
that have an effect on the velocity as well as the volume ?

BANKING ACT OF 19 3 5

241

Governor EccLES. To the extent that a reduction of rates and an
increase in the supply of money would tend to stimulate velocity;
yes. But so long as there is an inequitable distribution of wealth
production which results in excessive saving we will have depres
sions.
Only by pulling back that part of our savings that we cannot
profitably use in new capital goods and using those funds to give
employment to those who become unemployed can we maintain a
balance.
The Government must be the compensatory agent in our economy
through the money system, through the tax system, and through a
public works system*
Mr. REILLY. I think the committee will have to go now. The com
mittee will adjourn now.
(Whereupon, at 11:25 a. m,, an adjournment was taken until
Wednesday, Mar. 13, 1935, at 10: 30 a. m.)

BANKING ACT OF 1935
WEDNESDAY, MARCH 13, 193S
HOTJSE OF REPRESENTATIVES,
C O M M IT T E E O N B A N K I N G

AND CURRENCY,

Z?. C.

The committee met at 10:30 a. m., Hon. Henry B. Steagall (chair
man) presiding.
The CHAIRMAN. The committee will come to order. Mr. Cross,
you may continue with your examination of Governor Eccles.
STATEMENT OF MABRINER S. ECCLES, GOVERNOR FEDERAL
RESERVE BOARD— Continued

Mr. CROSS. Governor, you may have thought, from my questions,
that I am in a critical mood. I want to say I think this bill pro
vides for a tremendous improvement over what we have, and I think
you are a big improvement over governors we have had heretofore;
so do not think I am criticizing you.
Check money, for all practical purposes, performs the functions
of legal tender money, does it not?
Governor EccLEs. Yes; it does.
Mr. CRoss. The easier credit is, the greater the volume of credit,
and the greater the number of check dollars, the less the dollar will
buy; is not that so? When credit is easy there are plenty of check
dollars, check money, and that means prices are up, does it not, and
therefore the purchasing power of the dollar is down, is it not?
Governor EccLES. That would be expected to follow. The easy
money-----Mr. CRoss (interposing). That is almost axiomatic, is it not?
Governor EccLES. Easy money, through the banking system, by
creating low interest rates----Mr. CROSS (interposing). That is a fact, is it not, that it is axio
matic; that when credit is easy there is a large volume of credit, and
that inevitably means that times are good and prices are up, and
proSts are up, and people are borrowing, and there is a supply of
check money like there was in 1928 and 1929 ?
Governor EccLES. Of course, your general prices go up when means
of payment in the hands of people who will spend increase faster
than production.
Mr. CROSS. Is the proposition I put to you true or not?
Governor EccLES. I think that is generally the case, but it cer

tainly is net always so. Witness the present situation.
Mr. CROSS. Then the tighter credit is, the less credit there is, the
fewer number of check dollars there are; that is true, is it hot ?

243

244

BANKING ACT OF 19 3 5

Governor EccLES. Yes; I think that is true.
Mr. CROSS. That being the case, then the more the dollar will buy,
will it not?
In other words, as credit dries up, check money, the purchasing
power of the dollar increases, does it not?
Governor EccLEs. Not always.
Mr. CROSS. Now, Governor, do you not think the velocity theory
of money is more or less a meaningless fiction?
Governor EccLES. No.
Mr. CROSS. Now, along in 1928 and 1929 we had a situation where
our credit money, our check money did about 90 percent of the
trafEc duty of the country, did it not?
Governor EccLEs. I think those were the estimated figures. I do
not know how accurate they are, but that would be approximately
correct.
Mr. CROSS. That is what they put it at, about 90 percent?
Governor EccLES. Yes.
Mr. CROSS. Now, if all of that check money had vanished or dried
up, 90 percent of the money had dried up, the trafEc of the country
had vanished, had it not ?
Governor EccLEs. Unless the deposits were drawn out in currency.
Mr. CROSS. If you have 5% billion in currency, we will say, and
we are talking about the check part of it, and practically 90 percent
of it was gone, then you had left your legal-tender money, which was
about 5 billion, we will say ?
Governor Eccles. Yes.
Mr. CRoss. Now, if nine-tenths of that money was check money;
that is, 90 percent, and you had 45 billions in check and 5 billions in
legal-tender money, and the 45 billion had vanished, it is not to be
assumed that it did not all go out ?
Governor EccLES. I do not know that I understand your point.

Mr. CROSS. If your check money had vanished like the mist—it is
a kind of phatom money, but it does the work of the country in all
its functions. Say that 90 percent of the trafEc was done through
check money, and we will say that is nine-tenths of the total, and
one-tenth of the business was done, we will say, with legal-tender
money, there being nine times as much check money as legal-tender
money, and the check money disappears, and you have only left your
legal-tender money, of course, then 45 billion in check money would
have vanished, would it not!
Governor EccLEs. If it disappeared, that would be the case.
Mr. CROSS. If your credit dried up like the mist, then it would
disappear, would it not ?
Governor EcOLES. Yes.
Mr. CRoss. And if you then had 5 billion in legal-tender money,
and then that 5 billion had kept on performing the duty of trans
ferring the property and the goods of the country at the same speed
at which it was traveling when you had your 45 billion of credit
money, it would have been doing only one-tenth of the amount of
trafEc duty that was being done by the whole amount of credit money
plus the currency or legal-tender money, would it not?
Governor EccLEs. If the total amount of money is reduced by ninetenths, then that one-tenth or the remaining money would be
doing-----

BANKING ACT OF 1 9 3 5

245

Mr. CROSS (interposing). Traveling as fast as it always had been,
it would have been one-tenth, would it not!
Governor EccLEs. I do not know whether it would have been
traveling that fast.

Mr. (Stoss. Assuming that it would be traveling as fast as it was
in 1928 and 1929, with the 45 billion gone, it was doing only onetenth of the work; if it was doing the same amount of work after
the crash as before the crash, is not that true ?
Governor EccLES. I f the velocity of the funds does not change, if
the volume is reduced nine times, of course, your volume times
your velocity would be one-tenth of what it was.

Mr. CROSS. Surely; that is simple mathematics.
Governor EccLES. Yes.
Mr. CROSS. Now, is it not a fact that in figuring velocity you
give credit to the work being done by the credit money when times
are good, and the legal-tender money, in fact, is not going any
faster than afterward, except that the credit money vanishes and
you no longer can figure what the credit money is doing to the legaltender money? In other words, you give credit to the legal-tender
money, and when times are good you say the currency amounted
to 5 billions, and it was going at such and such a speed; but you
are giving credit to the legal-tender money for all that is being done
by 45 billions of credit money, are you not? Is not that the way you
count velocity?
Governor EccLES. No; it is not.
Mr. CROSS. How do you count it! You cannot tell how often it
swaps hands.
Governor EccLES. The national income is the number of times
that your volume of money-----Mr. CROSS. Of what money!
Governor EccLEs. All money.
Mr. CROSS. All right.
Governor EccLES. There is no distinction so far as the working
of the money is concerned between currency and checking accounts;
they both perform the same function in the money system. I men
tioned yesterday the difference in the velocity figures.
Mr. CROSS. Let me get this concretely, if I can, so I can under
stand it.
Take, for instance, the situation in 1929. At what velocity do
you say money was traveling at that time ?
Governor EccLEs. What would be termed as the income velocity;
that is, the relationship of money to the national income-----Mr. CROSS (interposing). What was the velocity of money at that
time ? Say we had 50 billion, counting the credit money and the
legal-tender money, what was the velocity at which all of the 50
billion was traveling?
Governor E cci.E S . We had, in 1929, 26.4 billions----Mr. CROSS (interposing). Of all money?
Governor EccLES. Of all money.
Mr. CROSS. Checking-----Governor EccLES (interposing). And currency; that is right. That

eliminates, of course, your interbank deposits. These are the figures
I got from the Federal Reserve statistical division.
Mr. GOLDSBOROUGH. That does not include savings money %

246

BANKING ACT OF 1 9 3 5

Governor EccLEs. No; you cannot include savings money any more
than building and loan money.
Mr. CRoss. The checking accounts, plus the legal tender, amounted
to 26 billions ?
Governor EccLES. That is right. The national income was 82 bil
lions, according to the Department of Commerce figures, or, to be
exact, 82 billion 300 million.
Mr. CRoss. What do you understand as the national income %
Governor EccuES. It represents, as I understand it, the income
received in the production of all goods and services*
Mr. CRoss. What do you count as goods?
Governor EccLES. It would be capital goods as well as perishable
goods, buildings, factories------

Mr. CROSS (interposing). And lands?
Governor EccLES. Equipment; no land.
Mr. CRoss. Just buildings?
Governor EccLES. Buildings—factories and equipment; all kinds
of goods. The total volume of bank debits was estimated to be
between 1,000 and 1,200 billion. In other words, the actual turn
over of money was about 40 times a year, I think.
Mr. CRoss. Governor, now you say capital goods, and then you
say the income was 80 billion. Where do you get the income at
80 billion ? What do you mean by that ?
Governor EccLEs. the money value.
Mr. CRoss. Of all capital goods, buildings, and so forth?
Governor EccLES. The money value of what was produced in any
particular year. If in the year 1929 the value of all foods, clothing,
and capital equipment of all kinds produced in that year was a cer
tain amount, that would be income, after the elimination of dupli
cations—for instance, if you start to figure the value of wheat that
is sold to the miller, then the miller sells to the wholesaler and the
wholesaler sells to the retailer. When you take the total check trans
actions, they run between a thousand billion and twelve hundred
billion, and it takes into account all of those relationships. But
the national income only takes into account what is produced, and
by considering it once, and not in the various transactions through
the methods of production and distribution. That is the national
income.
Mr. CRoss. I am getting at the question of velocity. You say you
had 26 billion of all kinds of money. Upon what basis do you
figure the velocity of the 26 billion ?
Governor EccLES. With that amount of money, with 26 billion,
we had a national income of 82 billion, 300 million; or we had there
what is termed an income velocity of 3.12. In other words, the total
volume of our currency and checking account went into the total
national income that year 3.12 times.
Now, we come down to 1933, when the national income was 46
billion, 800 million, and our money had diminished from 26 billion.
400 million to 19 billion, 900 million.
Mr. GOLDSBOROUGH. When was that, 1933!
Governor EccLES. Yes.
Mr. GOLDSBOROUGH. The other year was 1928 ?
Governor EccLEs. The other year was 1929. There was very little
difference between the 1928 and 1929 figures. And with the income

BANKING ACT OF 1 9 3 5

247

o f 46 billions, 800 millions and the deposits and currency in exist
ence during that year of 19 billion 900 million, the income velocity
was 2.35. We have not the figures for 1934, but that is expected to
show a decrease. We know that the volume of deposit currency has
been very substantially increased as the result of three factors—the
budgetary deficit, gold imports, and the reduction of currency in
circulation as the result of the dehoarding.
Mr. CRoss. Your gold is all stabilized, is it not?
Governor EccLES. That is right. But the gold comes in from

abroad to take care of the unfavorable trade balances of Europe and
the rest of the world. The only way they have been able to take
care of their unfavorable trade balances is to pay us in gold. There
has been about 1 billion 300 million of gold coming into the country
in 1934. Those three factors increase your deposits. There would
have been a greater increase than that had there not been a shrinkage
of loans and investments of banks, outside of Government bonds.
As I recall the figure, it was around 6 or 7 hundred million dollars.
The result was an increase in deposits and currency by about $4,000,000,000, as I recall the figures.
Mr. CROSS. You say an increase in currency?
Governor EccLES. In deposits.
crease in currency.

I do not think there was any in

Mr. CROSS. As to this billion dollars of gold that comes in here, do
you mean to say that would make an increase of a billion dollars of
backbone or pocket money?
Governor EccLES. An increase in bank deposits in that amount;
yes, sir.

Mr. GOLDSBOROUGH. You said the amount in 1933 was forty-six bil
lion, eight hundred million. Have you the amount in 1934?
Governor EccLES. No; I have not. It is estimated as over fifty
billion, but the ratio of the national income to deposit money will
show up considerably less than it was in 1933, showing that with the
increase in the volume of money there has been a decrease in the
velocity of money; that the increased volume has not increased the
national income in proportion.
Mr. CRoss. What is the increase for 1934 over 1933 ?
Governor Ecci*ES. I have not the exact figures.
Mr. CRoss. In the volume of money?
Governor EccLES. It would just be an estimate. But I think it is

around four billions. That is the increase of 1934 over 1933.
Mr. CROSS. What is the difference between the check money of
1929 and the check money of 1933 ?
Governor EccLES. I do not know just what you mean. You mean
in amount, the actual amount of check money in 1929 as compared
with the check money in 1933?
Mr. CROSS. Yes.
Governor EccLES. There was a difference of 7% billion between
1929 and 1933.
The CHAIRMAN. Let me ask you a question right there, to make
sure I understand it. Do you mean to give the total figures for the
entire country? Are your figures predicated on calculations that
embrace all of our banks?
Governor EccLES. Oh, yes.

248

BANKING ACT OF 1 9 3 5

The CHAIRMAN. That is what I understood, but I wanted to make
it clear.
Governor EccLES. Yes; the member and nonmember banks.
Mr. CROSS. You do admit that the dollar as it is today, untied to
any price level, is no measure of value, do you not? In other words,
its purchasing power is constantly expanding and contracting!
Governor EccLES. That has always been true.
Mr. CROSS. You have an exact measure of length, for instance, in
the linear foot; and you have an exact measure of weight in the
pound. You also have an exact measure of volume in a cubic foot.
But you cannot measure volume by weight. You might have two
cubes of exactly the same dimensions, one made of cork and one of
lead, but if you attempt to measure them by weight you would not
get any idea about it at all, would you ? That is a simple question,
it seems to me. I am talking about the simple question of measure.
You could not get any idea as to the size of those two cubes by using
the measure of weight, per pound, could you!
Governor EccLES. No.
Mr. CROSS. One would probably weigh a hundred or a thousand
pounds more than the other.
Now, you attempt to measure the value by the pure unit of weight,
do you not, with so many grains of gold, for instance?
Governor EccLES. I do not think that a Sxed gold content results
in stable prices.
Mr. CROSS. I do not think it does either.

Governor Ecci^s. It never has in the past.
Mr. CROSS. I do not think so, but we put the price at $35 an ounce,
whereas it used to be $20.67.
Governor EccLES. That is right.

Mr. CRoss. So it is no measure of value, is it!
Governor EccMBS. I do not think so.
Mr. CROSS. Now, the only wav to get a measure of value is by a
price level; do you not think so f Do you have any other suggestion
as to a measure of value outside of a price level ?
Governor EccLES. Do you mean by some index Bgure?
Mr. CRoss. Yes; or some wholesale commodity price level.
Governor EccLES. That gives you a measure of value, but it is not
what you want.
Mr. CRoss. It does give a measure of value, does it not?
Governor EccLES. Yes; it does give a measure of value.
Mr. CROSS. Now, if you would tie your monetary unit of the dollar,
as we call it in this country, to the price level, you would get a
measure of value, would you not?
Governor EccLES. I do not know just how you would tie a mone
tary unit to the price level.
Mr. CROSS. I say, if you do do it.

Governor EccLES. Yes; if you can.
Mr. CRoss. I am saying, if you can you would get a measure of
value. As it is, you have not any measure of value. Do you know
of any other method by which you could approach a measure of
value %
Governor EccLES. I think that a stable price level is a desirable
objective.

BANKING ACT OF 19 3 5

249

Mr. CRoss. I know; we are talking about the price level. What
other way is there!
Governor EccLES. I should not say that I know of a way to get a
stable price level, and at the same time get a stable business condi
tion, which is a condition of full employment and prosperity.
Mr. CRoss. O f course, that is what we all want to do, if we can.

Let me ask you this question: As the result of this instability,
fluctuation, expanding, and contracting in the purchasing power of
the dollar, and consequently affecting the earning power of a dol
lar, credit, or credit money, or check money is very sensitive, timid,
and easily affected by any economic disturbance, is it not!
Governor EccLES. I do not think that check money is more sensi
tive than any other money.
Mr. CRoss. All right. Any kind of money is sensitive, is it not;

any other money, like legal tender!
Governor E ccL E S . Yes; that is right.
Mr. CRoss. I f you can stabilize it on a price level, it will become
a dependable measure of value and relieve credit from the insta
bility and constant fear to which it is now subject, will it not!

That is, if a man knows that he will know that he will have a
dollar to spend in the aggregate, and would take into consideration
the figures you use in determining the wholesale commodity price
level, and he knows it will hold up the purchasing power and the
value, would not that tend to stabilize and give confidence?
Governor EccLES. I think it would.

Mr. CROSS. The only method by which we know how t o d o that
are the levers you have in this bill, rediscount and open-market
operations.
Governor E cci*E S . Open-market operations, yes; that is right.
Mr. CRoss. Now, with those three levers, do you not think you
could approximate holding the purchasing power of the dollar stable
with the price level!

Governor EccLBS. Insofar as that can be done through monetary
action, I think you could accomplish that.
Mr. CRoss. We know of no other action----Governor EccLEs. In that connection let me read a short state
ment I have here which seems to me to cover this question.

Professor Olin, a Swedish authority—and they have possibly had
more experience in this question of managed currency-----Mr. CRoss. He has not had a long experience because this just
started recently.
Governor Eccn:s. That is true of the entire world. As a, mat
ter of fact, as to the problem of central banking and money manage
ment, there is plenty to learn about it. There is no country which
has had any experience for any great length of time.
Mr. GOLDSBOROUGH. There is plenty to unlearn about it, is there
not!
Governor Eccuss. About the question of managed money!
Mr. GOLDSBOROUGH. About the way to handle central banks. Can
you answer that!
Governor E ccL E S . I do not know enough about the history of
central bank operations. Of course an automatic gold standard has
been a guide in the operation of the world's banking system in the
past, up to the time of the war.

250

BANKING ACT OF 1 9 3 5

Mr. CRoss. Controlled banking, was it not ?
Governor EccLES. Very largely.
Mr. CRoss. I wish you would read that book written by an
Englishman.
Governor Ecci^s. This man says, after surveying the Swedish
experiment in an article in index, volume 8, that—
A business cycle policy that aims at as full and regular a utilization o f the
productive forces as possible, that is a maximization of the real national income
per head of the population over a long period, is bound to take many other
factors into account besides the development of prices; that is to say, it can
not be based on the idea of stabilizing any particular price level, especially if
the latter has been brought by an immediately preceding depression, but of
equilibrium with the other parts of the price system.

Mr. GOLDSBOROUGH. Which means that there are two factors: One
is the factor of a scientific monetary system and the other is the
factor of distribution of production. That is what he is talking
about, is it not ?
Governor Ecci^s. That is right; I agree with that.
Mr. CRoss. My idea is that this bill is all right, except that there
are two amendments we ought to have.
I think it is up to Congress to provide for the regulation of the
value of money, through our agent, which is the Federal Reserve
Board.
And since, as I think I showed here yesterday, the member banks
are in the business of making money, and the 12 Federal Reserve
banks have that idea, too, and as Governor Harrison, of the New
York Federal Reserve Bank, said, the very time the Federal Reserve
Board wants to hold down inflation or credit, the banks insist on
expanding it, and the very time the Federal Reserve Board wants to
boost credit, the banks tend to shrink and contract it. As long as
they own the stock of thp Federal Reserve banks, with their class A
and class B directors, with all those influences working, I am afraid
there will be cross-purposes, and I think they should be in a posi
tion, without any outside influence, to act for the whole people all the
time. That is why I believe that the stock should be taken over and
owned by the Government in those Federal Reserve banks.
Another amendment which I think should be adopted is this: I
think we ought to give them a goal to work to. It is the best we
have got; it might not be a perfect compass, and no doubt is not by
any means; yet I think we ought to have some kind of a price level,
whether you take 50 or 100 commodities, or 784, or use the economists'
index, we ought to have some goal set for them to anchor on. We
can try it, and if it does not work we can change it.
I notice that England has let the pound slide down, no doubt with
the idea of getting constantly under our dollar, giving her the advan
tage. I think we ought to take 20 percent above the wholesale com
modity price level of 1926. If we take that and go very little below
that, I think we should do it,-because if England or any other country
is constantly trying to slide under us and cheapen their money to
give them an advantage in the export trade, I think we should Se in
a position where we can follow along with them.
But I am sold on the question of tying the dollar to the price
level within a certain latitude.
Then I will tell you another thing I think about this bill, at least in
connection with the psychological effect. You have 40 cents on the

BANKING ACT OF 19 3 5

251

dollar back of the Federal Reserve note, and I think if you would
make it, say, 35, and provide, say, for 10 cents in silver certincates, you
would be taking a wise step.

I realize if you can have stabilized and controlled currency you do
not need any metal at all, except as a matter of foreign trafRc. But as
long as the balance of trade is in our favor we do not even need that
because they have to be constantly buying money to pay for our goods*
Of course, if we become an importing nation and the balance of
trade is against us, we would have to use a different currency.
Governor EccLBS. As to this question of fixing the price level in the
bill, I personally would not like to see that. I would suggest that, in
lieu of a fixed price level ^something of this sort might be put in the
bill, as indicating the direction or objective to which the Federal
Reserve Board would be required to reach:
It shall be the duty o f the Federal Reserve Board to exercise such powers as
it possesses to promote conditions making for business stability and to mitigate
by its influence unstabilizing fluctuations in the general level o f production,
trade, prices, and employment, so far as may be possible within the scope of
monetary action.

Mr. CROSS. That is a lot better than what we have in there now.
Mr. CroLDSBOROUGH. Would you feel like including in that a state
ment indicating that the Board should also direct its attention toward
using its power in such a manner as to absorb the unemployment?
You have done that in a way, but it is not quite clear.
You know there are experts who I think are worthy of attention
who claim that you can use monetary powers in such a way as to
absorb unemployment to a certain point, and that when you do that
you then have notice that you have raised your price level to the
proper position.
I am wondering if you could put some sort of legislative direction
as that in what you have said. I think myself you have done very,
very well in what you just pointed out as a possible amendment.
Governor EccLEs. I am trying to avoid a rigid requirement in the
law that may be impossible of accomplishment, and nence may cause
embarassment. I would like to see enough Hexibility in the law; be
cause I do not believe that we can deal with our money, economic and
social problems, and they are all interrelated, as an exact science.
You have too many emotional factors to contend with, and when you
talk about the problems of business stability, stable prices, full em
ployment, and so forth, you have to take into account factors other
than purely the mathematical or mechanical factors of money.

Mr. GOLDSBOROUQH. Will you read that proposed provision again ?
Governor Seems. It says:
It shall be the duty o f the Federal Reserve Board to exercise such powers
possesses to promote conditions making for business stability and to miti
gate by its influence unstabilizing fluctuations in the general level of produc
tion, trade, prices, and employment, so far as may be possible within the
scope o f monetary action.

as it

Mr. GOLDSBOROUQH. You are stating the objectives.
Governor EccLES. That is right.
The CHAIRMAN. The present law was designed, of course, to pro
mote sound business conditions and laid down a guiding rule of pol
icy somewhat along the line of your suggestion, although not so
comprehensive.

252

BANKING ACT OF 1 9 3 5

Under the present law the language is:
The board o f directors shall administer the affairs impartially—

And so forth—
and extend accommodations such as may be safely and reasonably made, with
due regard to the claims and demands o f other banks, and to the requirements
c f industry, commerce, and agriculture.

It is not so comprehensive, but it is in the law, and to a certain
extent it is a recognition of the ends to be desired.
Personally, my view is that you have expressed the true policy,
and that is to take the general results that would be desired as the
guide and standard of activities.
In connection with Mr. Cross' inquiries, what is the relation be
tween actual currency, or Government currency, or Government
money, and check money and its velocity?
Governor Ecci^s. So far as their functioning and purchasing
power are concerned, there is no difference. They serve the same
purposes as a means of payment. Currency is used largely as a
matter of convenience in meeting pay rolls, in retail buying by the
man with a small income, where the checking account is too ex
pensive, or is not wanted. Even in cases where checking accounts
are used, particularly is it true now with service charges and the
check tax, people will cash checks for a larger amount and pay bills
with currency rather than pay all bills with small checks. The use
of the check has been greatly diminished.
The CHAIRMAN. What I am undertaking to develop is the neces
sary part that must be played by actual money in the present scheme.
Governor EccLES. I do not know that I quite understand you, Mr.
SteagaH.
The CHAIRMAN. We cannot get away entirely from the use of
actual money, even though we do 90 percent of our business by the
use of bank checks.
Governor ECCLES. That is right. We possibly use the bank check
more than any other country.
The CHAIRMAN. As we cannot rest our banking structure entirely
on air, we have to have a basis for that. What I am directing your
attention to and asking you to discuss is the proper basis, and the
necessity for it; how far the development of a sound bank-check
currency must rest upon the use of actual currency and the oppor
tunity to redeem the bank check in actual currency.
Governor EccLEa. Of course, a bank has to be in a position to
pay its deposits in currency. At one time it was required to pay it
in gold, and of course we know what trouble that got us into. The
bank is required to pay the deposit in currency. We found that,
while banks were closing and the great deflation was going on, that a
great many people and corporations wanted their deposits in cur
rency, to such an extent that the amount of currency outstanding
passed the all-time record of the use of currency, even when busi
ness was very active. It exceeded over seven billions of dollars, at
a time when our business activity was about 50 percent of what
it normally is, showing that a very substantial amount of that cur^
rency was not drawn out for current or immediate use but was
drawn out for fear of loss through bank failures, to be held in safe
keeping. We must prevent bank failures so far as is humanly

BANKING ACT OF 1 9 3 5

253

possible. When people found they could get their money if they
wanted it, confidence was reestablished in the banking system, and
the amount of currency outstanding greatly diminished.
The CHAIRMAN. You say we got into trouble under the system
under which we had to redeem everything in gold. Just what do
you mean by that!
Governor EccLEs. I mean that when people demanded payment in
gold, since gold was used as a reserve for our money system, it did
not take the withdrawal of very much gold to force a suspension of
gold payments and to put an embargo on gold.
The CHAIRMAN. Let me ask you this question, " Were we forced
to suspend gold payments? "
Governor EccLES. Yes; I think we were, not only because of with
drawals but also because of our price and debt structure and the
measures that were absolutely necessary to correct it*
Mr. CRoss. Gold was leaving the country very rapidly, was it not!
Governor EccLES. Yes; it was leaving the country very rapidly;
not only that, but it was being drawn out by corporations ana indi
viduals at a rapid rate.
The CHAIRMAN. When we suspended payment we had an un
precedented amount of gold on hand, did we not!
Governor Eccn:s. At the time we suspended we had lost a great
deal of gold.
The CHAIRMAN. We had lost a great deal of gold, but we still had
more than half of the world's gold, did we not!
Governor EccLES. No; we had about 40 percent of it.
The CHAIRMAN. But we had certainly something like a third—an
undue proportion of the world supply.
Governor EccLES. But at the rate at which it was being drawn out
it was evident that we might soon reach a position where it would
be necessary to dispense with gold payments and put an embargo
on, and therefore, why permit a preierence to those people and cor*
porations who demanded payment in gold!
The CHAIRMAN. Had we not always been able, by the use of Gov
ernment credit, to get our hands on all the gold we needed to redeem
the outstanding gold obHgations! I do notmean it was a desirable
thing to do; far from it; that is not my view of i t I am simply
stating the facts.
Governor EccLES. We had panics in the past where we could not
even pay in currency, up until the time we got the Federal Reserve
System set-up, I remember the panic of 19W, when they suspended
pa
'
"
* -house certificates.
difficulty in redeeming the
currency m gold, was there? Of course, we have always had occa
sion when quite a number of banks could not pay out any kind of
money because they could not get it. But there never was anv time
in those situations when there was any difficulty about exchanging
currency for gold, if you wanted it!
Mr. GOLDSBOROUGH. In the panic of 1873 the gold reserve was
depleted.
Mr. CRoss. And there is always a vast difference between dollars
and commodities. The whole world was trying to get back, and the
whole world was scrambling for it.

254

BANKING ACT OF 1 9 3 5

The CHAIRMAN* I am speaking about what did happen when Mr.
Cleveland was unable to get gold.
Governor EccLES. I think he negotiated a loan with Mr. Morgan.
The CHAIRMAN. As a matter of fact, we maintained our gold
standard with $150,000,000, did we not ? That leads to this question:
I am not one of those who think that our gold-standard system was
ideal; that is one of the things I think it might be said we had to
unlearn. Whether we have learned anything or not, I will not at
tempt to say.
But I think it will be agreed that is one of the things we have
unlearned.
But I was going to ask you this question: Why was it we could not
redeem in gold? Why could we not go along with that system?
Why was it not safe to continue it? That is what I am talking
about.
Governor EccLES. For the reason that----The CHAIRMAN. Is not this the fact, Governor, that the trouble
was there was not enough gold ?
Governor EccLES. Oi course, there was not a fraction of enough
gold in this country or in the world to meet the gold obligations.
The CHAIRMAN. We did not have enough gold.
Governor EccLEs. Not a fraction of enough to meet the obliga
tions, but that is always the condition. It works all right so long
as no questions are raised about redemption but in case of panic there
is not enough gold and payments have to be suspended.
The CHAIRMAN. Let me ask you another question. Was not that
the chief difficulty with the banks when they found themselves in
the situation where they could not meet their obligations in currency,
that the currency was too scarce ?
Governor EccLES. No; the currency was not scarce, because the
banks had assets with which they could go to the Federal Reserve
System and get credit, and they could have drawn down currency.
There was no shortage in the amount of currency available to a
bank, if the bank had assets acceptable to the Federal Reserve bank.
The CHAIRMAN. That is the point. The fact was they had de
posits, as you have said, I think, amounting to 26 billion, or say
25 billion in round figures, that were in the nature of demand obli
gations. But they had only a trivial amount in comparison to their
deposit obligations of assets upon which they could apply for and
obtain actual currency; is not that right?
Governor EccLES. That is right.
The CHAIRMAN. And the fact was^ as against 25 billion dollars
of demand-deposit obligations for which the banks were responsible,
they had only in the country something like 5 billion dollars in
which to meet that responsibility. And for all their cash o b l a
tions in the Nation they had only such a portion of actual eash that
they could have paid, plus their discountable or rediscountable
paper, and the amount of rediscountable paper had gotten to the
point where it was trivial as compared with the amount of obliga
tions they had.
Governor EccLEs. Oh, yes; and the amount of rediscountable
paper, even in 1928 or 1929, was only a fraction of the total deposit
liability.

BANKING ACT OF

1935

255

* The CHAIRMAN. As a matter of fact, the banks now owe deposit
obligations that I believe you say amount to about 25 billion.
Governor E ccL E S . That is , demand obligations*
The CHAIRMAN. The amount has increased from 19 billion to 25
billion of demand obligations outstanding against the banks!
Governor E ccL E S . That is right.
* The CHAIRMAN. And they have available today to meet those
demands something like three-quarters of a billion dollars of actual
money; is not that about right %
Dr. GoLDENWEISER. You mean cash in vaults!
The CHAIRMAN. Yes.
Dn GoLDENWEisER. That is about right.

The CHAIRMAN. That is what I am talking about. That is a
fair way to state that position, is it not!
Dr. GOLDENWEISER. No.
The CHAIRMAN. Of course, they have in addition to the cash
available to them their privilege of obtaining currency on their
assets, which is still limited to a certain quality of assets.
Governor E ccL E S . Besides the cash value which they have in their
vaults, they have their balances in the Reserve banks, which are the
equivalent of cash, the reason being that they can draw down cur
rency against those balances with the reserve banks, and those bal
ances today are over 4 billion dollars.
The CHAIRMAN. Then they would be entitled to have Federal Re
serve notes issued.
Governor E ccL E S . That is right; against those balances.
The CHAIRMAN. That is, their excess balances ?
Governor EccLES. They are required, of course, to carry a min
imum balance.

The CHAIRMAN. But they could not utilize that.
Governor E ccL E S . They could draw down their currency against
their excess balances, but they would be penalized if their balances
were below the legal requirements.
The CHAIRMAN. Which, of course, means that the legal require
ments could not be utilized, as a practical proposition.
Governor E ccL E S . Yes. It could be utilized subject to the pay
ment of a penalty for any deficiency in reserves.
The CHAIRMAN. So they would be limited to their excess balances
and their cash on hand, and such paper as they would have upon
which they might obtain currency.
Governor EccLES. That is right.
The CHAIRMAN. Does it not follow that the banks found them
selves in diSiculties in undertaking to meet their demand obligations
growing out of the scant supply of actual currency, as compared with
the demand upon that supply, not alone by the banks but demands
from various sources in the Nation!
Governor EccLES. The banks found that they were unable to meet
their deposit liabilities in currency because of the lack of assets
which the Reserve banks would accept. That reduced the amount
of currency that they were able to pay out, and the very fact that
many of them were unable to meet that demand caused the whole
Nation to want to convert their deposits into currency.
As soon as the people found that they could get their deposits in
currency, as the result of the emergency banking act of 1933 per

256

BANKING ACT OF 1 9 3 5

mitting the banks, not only the member but also the nonmember
banks, to get credit, and hence currency from the Reserve banks
upon all of their sound assets, the people of the country did not want
their deposits in currency. The reverse action developed and the
currency which they had wanted when they thought they could not
get it began to come back into the banks and increased the deposits
of the banks by an amount of from a billion and a half to two
billion dollars.
So that it seems to me that the lesson that that experience should
have taught is that the Federal Reserve Board should have some
discretionary power in the making of rules and regulations that
will permit the Federal Reserve banks to accept the sound assets
of banks and thus stop what otherwise would be a repetition of
what we have had in the way of a credit contraction and the re
duction of our deposit money.
The CHAIRMAN. Governor, it is unquestionably true that we have,
to a large extent, restored conRdence in the banks, and money in
hoarding, and no doubt considerable sums that have been with
drawn for legitimate uses, because of the distrust of the banks, has
been returned to the banks.
But does not that result mainly from the insurance of bank
deposits %
Governor EccLBS. I think that is a very important fact.
The CHAIRMAN. Let me ask you another question.
Governor Ecci^s. I think that is particularly— ^
The CHAIRMAN. We will not have accomplished much, no matter
how fully we accomplish that, if we only succeed in restoring con
Rdence in banks so that the public will leave its funds in banks
That would ^e a thing to be desired, and it seems to me a thing
which the public has a right to expect, but that would be a long
way from accomplishing what we need in this country, to bring
about a revival and recovery of normal business conditions; is not
that right?
Governor EccLES. Yes; that is right.
The CHAIRMAN. It is a fact, is it not, that we did Rnd the banks
in a condition where their demand obligations were so great that
they had no way on earth, with the limited amount of cash or cur
rency available to them, to meet their demand obligations. Even
though a bank might be solvent, the practical situation was that
there was no way for the bank to get enough currency to meet its
demand obligations. That was the situation that existed in many
cases, was it not!
Governor Ecci^s. That is right.
The CHAIRMAN. That is the situation that confronts us and for
which we must Rnd a remedy if we are going to make it possible to
bring about business recovery and the normal use of banking credit
to support business in the United States; is not that right!
Governor EccLES. That is right.
The CHAIRMAN. And this is also true, is it not, that the emergency
plans embodied in the emergency legislation which we passed in

BANKING ACT OF 1 9 3 5

257

1932 have certainly failed to accomplish those desirable results, have
they not ?
Governor EccLES. I think that is the only conclusion one could
reach, from the present evidence.

The CHAIRMAN. Those provisions are so hedged about, even though
under the law, under the act of 1933, as it was finally written by
an amendment that extended to nonmember banks the privilege of
having their sound assets treated as eligible for advances by the
Federal Reserve banks, and as a basis for the issuance of currency,
the rules and regulations were so hedged about, the law being a
temporary measure, and being tried out as an emergency measure,
was not enough to reassure the banks that they were free to go ahead
and use their credit facilities freely for the support of business
and to promote recovery.
Governor EccLES. An abundance of excess credit is available in
the banking system. Excess reserves are sufficient at the present
time for the banking system, as a whole, to extend credit to an
amount in excess of 20 billion dollars, without the banking system
as a whole having to use its rediscount facilities with the Reserve
System. Interest rates are at possibly an all-time low level. The
discount rates of the Reserve banks have been steadily reduced until
at the present time none of the banks have a rate in excess of 2 or 2%
percent.
The amount of the excess reserves held by the banks, the low dis
count rate, and hence the low rates that are prevailing for commer
cial paper, for high-grade bonds, industrial and municipal, and for
Government securities, are indicative of the excess supply of money
and credit in relation to the demand for it, on a basis largely of
short-term credit.
In order to expand the use of money which is necessary for
recovery, either those holding deposits in banks must be willing to
spend their funds, which would increase the velocity of the total
existing deposits, or borrowers who can command bank credit must
be willing to go to the banks and borrow funds which they will
spend, or a combination of both is necessary.
If, in the first instance, owners of funds spend their funds, yon
would get an improvement in business through an increase in the
velocity of the existing deposits. If new loans are made you would
then get an increase in the volume of money as well as an increase
in the velocity of money. In the absence of an increase in the
velocity of the funds held by the banks, or an increase in the volume
o f private credit extended by the banks, the Government has been
required to inject into our system through using its credit an in
creased How of funds. Government spending has the same effect
as private spending. It is somebody's income. Every one's spend
ing is somebody else's income.
The CHAIRMAN. Let me ask you a question right there. Do you
think Government spending has the same effect as private spending!
Do you think you want to adhere to that statement upon rejection?
Governor EccLES. From the purely monetary standpoint-----The CHAIRMAN. As far as the actual transaction is concerned;
but as far as the psychological effect is concerned, and the effect

258

BANKING ACT OF 1 9 3 5

upon a lot of men who want the money spread into their business,
it would be a different matter would it not?
Governor EccLES. It may be. It is, of course, desirable to have
private spending instead of having Government deficits.
The CHAIRMAN. In that connection, let me ask you this question:
In reference to the matter of farm-land values, we have put a certain
amount of support under farm-land values by the assistance that
has been extended by the Government. But the average citizen who
might have some idle cash and might want to invest it for his
children does not know how long that policy will continue, or when
that support will be withdrawn, and in such an event, what effect
it would have on bank values. But if this support was given in a
normal way so a citizen would expect it to be maintained and to
endure, he would have a different mental attitude toward the situa
tion, it seems to me.
Mr. CRoss. The difference, as I see it, is that money put up by the
Government in enterprises that would not come in conflict with the
activities of private business would cause those who receive wages
from that activity with the Government to spend money with the
merchants and others, but it does not affect the feeling or help the
condition. Everybody feels like the Government has to quit some
time somewhere, and therefore they remain nervous.
I f private enterprise should take up this unemployment people
will feel as if that is natural and normal. If you could get prices to
where private enterprise could make a profit, I do not see how the
credit you are talking about will be used, because neither the fellow
will borrow, nor would the bank be foolish enough to loan; but you
have to get prices to where a man can get a loan and can sell his
products and make a pro6t and pay it back. Of course, that means
the employment of labor, and that means spending power.
I know we are in a jam^ and it is hard to get out. Of course, we
can dig and dig, and get right back to where we 6nd ourselves in the
mud. But I do believe if we could get prices back we will be going
ahead.
Governor E ccuE S . The only way you could get prices back is
through increasing the means of payment in the hands of the people
who will spend faster than you increase production. To get them
back any other way means to get them badk through an artificial re
striction of production or the fixation of prices, which are not de
sirable ways to get prices up. In other words, to raise prices and
reduce production does not add anything to the national wealth.
Mr. CRoss. We are in this situation. You have a fixed indebted
ness on the people. You say that Tom, Dick, and Harry own these
buildings in this city. They do not. In the courthouse you will see
a paper title in their names. But there is a mortgage against it, and
under present prices, with the taxes they have to pay, they do not
own anything. They are mere interest-paying tenants. That is all
they are, struggling like the dickens to pay their rent to the fellow
who owns the mortgage.
The dollar has so increased in its purchasing power that it takes
twice as much for him to get the necessities and comforts that he has
than he had to pay before, and with the taxes he has to pay now

BANKING ACT OF 1 9 3 5

259

he is up against it. Unless we can get it to where he can pay back
with the same kind of dollar that he borrowed, I do not see anything
ahead but a general liquidation, and possibly a revolution.
Governor E c c L E S . Of course, there are two ways out of depressions,
it seems to me. One is through the process of liquidation and
bankruptcy.
Mr. CROSS. Then there may be a revolution.
Governor EccLBS. The other is through an inflationary process.
We went through a period of liquidation and bankruptcy as a result
of allowing nature to take its course until we had extinguished a
third of our deposit-money supply and until we had 15 or 16 million
people out of employment, and until the quoted values of the
resources of America were less than the debt. In other words, we
liquidated down to a point where we had created a condition of
general insolvency as measured by the ability of the people through
the national income to support the debt structure.
The deflation was finally stopped because of the unrest and because
of the suffering caused thereby and because it not only was affecting
the debtor but the creditor was equally affected. The corner of
completing the job of deflation was so hot that it could not be
turned, and there was only one other course open. In order to save
the system of capitalism and to maintain order, the Government was
forced to step in, even under Mr. Hoover.
The first effort was made through the organization of the Recon
struction Finance Corporation, not for the purpose of directly reliev
ing unemployment but for the purpose of using Government credit
to support, through further debt, the railroad system, the banking
system and the insurance structure, all of which was very necessary
to support.
That action did not meet the problem of unemployment. It was
an effort to support the private credit structure through the use of
Government credit.
That action, plus similar actions by the Government through other
credit agencies which have been set up and have not been inflation
ary—I mean the Home Owners' Loan Corporation, the Farm Credit
organization, and the Reconstruction Finance Corporation—stopped
deflation. The greatest portion of Government credit which has
been used during the depression is not of an inflationary nature, be
cause it is simply a question of transferring the debt from where it
is to a Government agency.
The CHAIRMAN. And by that process it did stop deflation!
Governor EccLES. Yes; that process stopped, or at least checked
deflation. The condition of inflation has to come about through the
increase in the volume and velocity of money either by Government
spending or by private spending, or by a combination of both.
Mr. FoRD. Would not ^reflation " be a better term!
Governor Ecci*ES. Yes. The difficulty is that so many people,
when you say " inflation ", think it is something unsound; they think
of worthless money. What I mean is that a rise in the general price
level, in employment, and improvement in the business situation,
from wherever it is, would be inflation, no matter how small the
extent.

260

BANKING ACT OF 1 9 3 5

The CHAIRMAN. Let me suggest that you just use the word politely
and call it " expansion."
Mr. CRoss. They debated until they got into this condition. Now,
if you go back to where we were, would we not simply be relating,
or expanding?
Governor EccLES. " Expanding " or " relating "—I do not care
what the term is. I think it is a question of what is meant.
Mr. CROSS. It ought to be controlled ?
Governor EccLES. Absolutely; it is very important, of course, that
it be controlled, and with the private banking system, with the excess
reserves now available, if the credit expansion should commence and
continue with the use of the present existing reserves, you could
get a business activity and a price level substantially higher, I think,
than we had in 1926, 1927, 1928 or 1929. You would have an in
crease in your total deposit money; or, in other words, your total
deposit money would be increased beyond any amount that we ever
had before.
Mr. CRoss. We know that, Governor; but do you not think that
by these levers that have been put in this bill, as you have it, jby
your control over the reserves, the rediscount rate, and so forth, you
could take the situation in hand any time so that you could control it!
Then, too, is it not much easier to control inflation, to stop things
from going up, than to stop deflation after it has once started ? As
one of the Governors who testiBed here before told us, whenever you
attempt to stop deflation, it is the hardest problem with which you
have to deal.
Governor EccLES. I think that the control of inflation is a far less
difficult problem than the control of deSation. We have had a good
deal of talk for a year or two about the fear of inflation. If mere
was any real fear of inflation, it would be evidenced by an increase
in equities. Stocks would be going up instead of down, high-grade
bonds would be going down instead of up, and the interest that
would be paid on long-term municipal, Government, and other se
curities would be increasing rather than decreasing. Likewise, realestate values would be rapidly increasing, and rents would be
going up.
In other words, if there were a fear o f inflation that we hear so
much talk about, money would be shifting from deposits into things,
and there would soon come a demand for increased credit, because
it would be profitable, with things going up, to use credit to buy
things.
Mr. CRoss. Every time a statement is given out, purporting to
come from the White House, that there is or will be no inflation,
down drops the stock market and everything else.
I f you nave any influence over there, I wish you would stop them
from doing that. [Laughter.]
Mr. FoRD. Is not the situation that you are describing there one
of fear on the one hand and cupidity on the other! In a deflation*
ary period, everybody is shivering; and in a boom period, every
body is overconfident and wants to get more. As I said, you have
cupidity on the one side and fear on the other. You step from one
stage to the other, do you not!

96 61 gO MV OKIXRVR

261

I am not criticizing that cupidity; that is human nature; but
that is what it amounts to.
Governor EccLES. You have, of course^ a lack of conRdence on
the part of a good many people, and a timidity; but on the other
hand, if they feel sure of inflation, that these things are going up,
the natural result is that they would buy things in order to make a
proRt.
The CHAIRMAN. It is 12: 30, and I think that this would be a good
time to recess.
Governor EccLES. I would be glad to have the Federal Reserve
furnish to the members of the committee mimeographed copies of
the Rrst 3 days' hearings.
The CHAIRMAN. That will be very helpful. We will appreciate it.
Governor E c c L E s . And also, when I have Rnished here, or the
hearings have been Rnished, I will be glad to furnish the members
of the committee with a complete brief, just as I have it here, of
every phase of this legislation.
The CHAIRMAN. All right.
We will meet at 10:30 tomorrow morning.
(Thereupon, at 12:80 p. m., a recess was taken until Thursday
morning, Mar. 14,1935, at 10:30 a. m.)

BANKING ACT OF 1935
TH U R SD A Y , M A R C H 14, 1935
HOUSE OF REPRESENTATIVES,
COMMITTEE ON BANKING AND CURRENCY,

Z7. C.

The committee met at 10:30 a. m., Hon. Henry B. Steagall
(chairman) presiding.
The CHAIRMAN. The committee will come to order. Mr. Eccles,
you may continue your statement. Mr. Cavicchia desires to ask you
some questions.
STATEMENT OF MARRINER S. ECCLES, GOVERNOR FEDERAL
RESERVE BOARD— Continued

Mr. CAviccHiA. Governor, I think the other day I asked you to tell
me the amount of mortgages held by member banks. I understand
that amount has already been inserted in the record, namely,

$2,270,000,000.
Governor Ecci^s. Yes; that is right.
Mr. CAVICCHIA. The bill before us, as I understand it, authorizes
the national banks to lend on amortized mortgages up to 75 percent
of the appraised value; am I correct ?
Governor ECCLES. That is the limitation put in the bill; but I
made the recommendation that the Federal Reserve Board be given
the power to make rules and regulations governing mortgages to be
t&ken by member banks, in lieu of the 75 percent and 60 percent
limitations in the bill.
Mr. CAVICCHIA. What do you mean by 75 percent and 60 percent!
Governor EccLES. Seventy-Bve percent of the appraised value of
the property and 60 percent of the amount of the time deposits.

Mr. CAViccHiA. One of the reasons given for the banks' inability
to meet the demands of the depositors, Governor, in this crisis we
have been going through in the last 5 or 6 years, was the fact that
they had so much of frozen assets on hand. Do you not think that
if you give authority to the banks to lend on mortgages on a higher
percentage than they have been loaning on heretofore that you will
make it still harder for them to meet the demands for payments in
case we should have another crisis!
Governor E ccL E S . I feel that the liberalization of the mortgage
provision should be considered in connection with the modiRcation
of the eligibility changes in the legislation. It seems to me that
nnless the eligibility provision be liberalized, permitting the Federal
Reserve banks to loan on sound assets in order to meet conditions
of delation, then the banks should be prohibited from loaning on

263

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BANKING ACT OF 19 3 5

5-year 50-percent mortgages. They should be prohibited from loan
ing on or purchasing any bonds the maturity of which runs beyond
6 months or a year.
Mr. CAviccHiA. You think that it is the short-term mortgages that
add to a feeling of fear?
Governor EccLES. No; what I think is this, that the banks, having
only 12 percent of their loans and investments eligible in 1929, and
those eligible assets not equally distributed throughout the banking
system were not able to meet a substantial contraction of credit with
out many of them being forced to the wall and without forcing the
payment of loans as they fell due.

There should be no more objection to the long-term amortized
mortgage as proposed in the bill than to the 5-year straight 50percent mortgage, which has been permitted for a period of 20
years, or to the investment in securities of all kinds without regard
to maturity.
It is interesting to note as to the banks which closed throughout
the country, and I understand that it has been shown by investiga
tion, that the greater number of bank failures was in the area—
and this is according to Federal Reserve districts—where the small
est amount of real-estate mortgages were held by the banks. The
area where the larger percentage of real-estate mortgages was held
by the banks was where the percentage of bank failures was the
smallest.
It is found that the investment in securities—in bonds—has a
very close relationship to bank failures.
Mr. CAviccHiA. That leads me to ask you this question: I think
you will agree with me that the decline in the value of real estate
has amounted to perhaps 25 percent or more during this crisis as
compared with what it was in 1923, 1924, and 1926. Do you agree
with me on that!
Governor EccLES. Yes; I think there is an average delation of

real estate of at least 25 percent.
Mr. CAviccHiA. So that if a bank loans up to 75 percent of the
appraised value on a mortgage, and then there should be a depression,
that 25 percent equity would be wiped out overnight, would it not?
Governor EccLES. It would be wiped out over the period that it

took to bring about a delation of that amount.
Mr. CAVACCHiA. It will not be as good a security as a mortgage
based on 50 percent, because if there is that difference there will
still be a leeway there.
Governor EccLES. I think that is correct, with this exception:
That in the case of the 50-percent straight mortgage, which is now
permitted, the owner-----Mr. CAviccHiA. What do you mean when you say " which is now
permitted "?

Governor EccLES. The law now permits a mortgage of 50 percent
of the appraised value—up to 50 percent of the time funds.
Mr. CAviccHiA. Is that in the law now!
Governor EccLES. That is in the law now, and it has been there
for 20 years.
Mr. CAviccHiA. You say "tim e funds"?
Governor ECCLES. That is right.

BANKING ACT OF 1 9 3 5

265

Mr. GOLDSBOROUQH. I think you are mistaken about the 20 years.
I know that Mr. Steagall and I fought the inclusion of a more
liberal provision in the banking act for years and years, and I have
only been on the Banking and Currency Committee for 15 years.
The CHAIRMAN. We liberalized the provision in the McFadden Act
of 1927.
Governor EccLES. You might have liberalized it, but they have
been making real-estate mortgages for 20 years. I was incorrect in
stating that the present provision has been there for 20 years.
Mr. GOLDSBOROUGH. They were not allowed to carry real-estate
mortgages before 1926.
Governor Eccuss. There is a provision in the original Federal
Reserve Act.
Here is the provision of the original Federal Reserve A ct:
See. 24. Any national banking association not situated in a central reserve
city may make loans secured by improved and unencumbered farm land, situ
ated within its Federal Reserve district, but no such loan shall be made for a
longer time than Rve years, nor for an amount exceeding Rfty per centum o f the
actual value o f the property offered as security. Any such bank may make
such loans in an aggregate sum equal to twenty-Rve per centum of its capital
and surplus or to one-third o f its time deposits and such banks may continue
hereafter as heretofore to receive time deposits and to pay interest on the same.
The Federal Reserve Board shall have power from time to time to add to
the list o f cities in which national banks shall not be permitted to make loans
secured upon real estate in the manner described in this section.

Mr. CAviccHiA. That was confined to farm lands, as you read it.
Governor EccLES. Yes.
The CHAIRMAN. Just a moment. This seems to be chasing niceties
rather than principles. Dr. Goldenweiser, can you give us off-hand
the history 6f this legislation?
Dr. GoLDENWEisER. I think Mr. Wyatt can answer that question.
Mr. WYATT. I cannot give you the details off-hand, but that sec
tion has been amended a number of times and all the amendments
were in the direction of greater liberality. The last extension of it
was in the McFadden Act of February 25, 1927.
Mr. GOLDSBOROUGH. My memory is that Mr. Steagall and I fought
that for years and years and years, and finally we were steam
rollered in 1927. I also know that this Congress has spent a large
part of its time in the last 2 years bailing out the banks that accu
mulated these real-estate mortgages over our protest.
Mr. WYATT. That section was amended twice: Once by the act of
September 7, 1916, which was in the direction of greater liberality,
and authorized loans on city real estate as well as farm land. It was
amended again by the McFadden Act of February 25, 1927 which
authorized loans on city real estate for 5 years, instead of 1 year,
removed the prohibition against banks in certain reserve cities mak
ing any real-estate loans, and increased the aggregate amount of realestate loans which might be made by any national bank from onehalf of its time deposits to one-third of the savings deposits.
Mr. CAviccHiA. When we talk of 1-year mortgages, it does not
mean that they will be called in at the end of 1 year. I f the people
will pay their interest and the property is kept up, the mortgage is
permitted to run along; am I correct or not!
Governor EccLES. I think that is true.
Mr. CAviccHiA. That is the general practice, is it not ?

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BANKING ACT OF 1 9 3 5

Governor EccLEs. That is the general practice, in connection with
most loans, whether real estate or otherwise.
Mr. CAViccHiA. I am only cognizant of what takes place in my
own State. I know of savings institutions-----Governor EccLES. The borrower usually pays a commission, how
ever, each time the loan is renewed, and he is always in the position
of never knowing-----Mr. CAviccHiA. That is not true in New Jersey. The savings in
stitutions make their mortgages for 1 year. They never pay a
bonus for getting the money. The mortgage is never renewed.
Under our law it may continue, even though it is for a 1-year period.
You will find mortgages that have been on some pieces of property
for 15, 20, or 25 years. As long as the people pay their interest, they
run on. They do not have to be renewed.
It does not cost them a nickle, except in the case of some mort
gage companies, where some 5 or 6 years ago they got into the habit
of writing short-term mortgages for 3, 4, or 5 years. When those
mortgages expired, they did have to be renewed, which caused extra
cost to the borrower, and sometimes a great deal of trouble in having
them refinanced.
Let me ask you one more question in connection with the mortgages.
I take it that the reason you are liberalizing the mortgage clause
in this banking bill is that you are hoping to be able to provide
mortgage money, which has been very scarce during the last 6 years.
Am I correct about that ?
Governor EcCLES. That is partly true. We had this in mind.
The commercial banking system has over 10 billion of time funds.
Those time funds, or savings funds, in the commercial banking
system are the equivalent, so far as the people are concerned, of funds
held by the mutual savings banks in the New England and New
York areas.
Either the banks are going to use those time funds in the long
term lending Reid, either long-term bonds of various kinds, or long
term mortgages, or long-term Government financing, or they are
going to have to stop paying interest and give up those time funds.
I f a bank is confined to its loans to eligible paper^ in order to be
liquid, then the only other avenue for investment of its funds would
be Government bonds. That would mean at the present time that
8 percent of the total loans and investments of the banks would be
commercial paper, and the 92 percent would be Government secu
rities. This would mean that the Government, through its agencies,
would be doing the lending business, furnishing long-term credit,
which it is largely doing today, and the banks which hold the
funds of the people would be furnishing the Government the funds
by purchasing Government bonds or bonds guaranteed by the Gov
ernment. That is the trend today.
As a matter of fact, 44 percent of the assets of the banks are now
Government bonds, or bonds guaranteed by the Government, and I
see no-----Mr. CRoss. Long-term deposits!
Governor EccLES. Forty-four percent of the loans and discounts;
that is, the investments of the banks represent Government bonds.

BANKING ACT OF 1 9 3 5

267

What I am trying to do is to put the banking sytem in a position
where it can furnish long-term credit to the communities, just as
the mutual savings banks and savings and loan associations do with
the time-funds vmich they have.
I f banks are not to be in a position to compete in that Beld for
loans and investments of that sort, then it seems to me that they
are put up against the problem of the use of these funds, which
they hold and which are greatly needed to bring about an improve
ment in business conditions.
As I indicated yesterday, the income velocity of our existing funds
was about two, whereas in 1926, 1927, 1928, and 1929 it was over
three. Of if we had the same velocity of our deposit money that we
had during that period, our national income would be at least from
20 to 25 billions more than it is.
But it is the stagnation of credit, the stagnation of funds, that
continues, it seems to me, to retard business recovery. As to the
extent to which an easing of credit by the use of long-term mort
gages or on the amortized basis, and the liberalizing of eligibility
requirements would bring about the use of that credit, nobody, I
think, is in a position to say.
Mr. CAviccHiA. I think you will agree with me when I say that
whether they be national banks or State banks, or mutual savings
banks, they have a lot of money on hand at the present time and are
not loaning it; am I correct?
Governor EccLES. That is right; they have excess reserves.

Mr. CAviccHiA. The savings banks or the mutual banks which are
Row permitted under State laws to loan money on mortgages up to

50 percent of die appraised value are not loaning any, or very little,
money at the present time.
Do you think, if this act were passed, that the national banks
would do what the mutual banks are not doing now—lend money
on mortgages?
Governor EccuEa. The mutual banks are lending money on mort
gages in certain sections. The insurance companies are lending on
mortgages, and one of the first things this act would do would be to
enable the banks which now hold over 2 billion of mortgages, many
of which are in excess of 50 percent of the appraised value-----Mr. CAviccHiA. That is because of the drop in the market?

-Governor Ecci^s. That is right. Therefore, they are forced to
collect on the mortgages, and Congress is appropriating money for
the Home Owners' Loan Corporation, the Federal Farm Mortgage
Corporation, and the R. F. C., to take up these mortgages.
The banks are not in a position to nold many of the mortgages
that they may have for the reason that their mortgages are in excess
of 50 percent, and they are due.
I would like to see the banks required to hold the mortgages they
have and refund them on a long-term basis, requiring amortized pay
ments with reduced interest. Instead of going through the process
of changing the form of the obligations they hold, they have to sub
stitute for their own loans obligations guaranteed by the Government.
Not only that, there are many State nonmember banks which, if
they should come into the Federal Reserve System, would have more
than 50 or 60 percent of their time funds in mortgages. In many
sections the banks are permitted to loan in excess of 50 percent; and,
if there is a liberalization of the mortgage feature, the bill will make

268

BANKING ACT OF 19 35

it less difEcult for the nonmember banks to come into the Reserve
System.
If we are going to proceed on the assumption that we are going
to have great cyclical booms and depressions, depressions that can
extinguish 30 percent of our deposit currency and can reduce the
national income by one-half, then I say that there is no way you
can set up a banking system that will serve the money needs of the
country and at the same time be prepared to meet that kind of a
catastrophe. Liquidity in deflation can only be provided by the
Federal Reserve System.
Mr. GOLDSBOROUGH. You mean as long as we are on this fractional
reserve basis of 10 percent? Is that what you mean!
Governor Eccms. Yes.
Mr. GOLDSBOROUGH. Of course, when you have an accordion and
just blow the air in and out, you are right, but you do not have to
have that system.
Governor EccLES. Of course, it seems to me we do not have any
alternative at this particular time without a very revolutionary
change in the whole banking set-up. The 100-percent reserve idea
would, of course, eliminate the 10 to 1 ratio. But that is another
story.
Mr. CAviccHiA. Governor, am I right in saying that one of the main
reasons why this provision is in the law is to encourage the banks to
hold onto the mortgages that they have now, because otherwise they
would have to resort to foreclosure, because their mortgages are no
longer on a 50-percent basis on account of the big drop in values!
Governor EccLES. I would say that is true in some cases, and I
would say that is one of the constructive effects. The other construc
tive effect would be that the banks are put in a position to do what
the R. F. C. and other Government agencies are now doing.
There apparently is no demand for short-term commercial credit.
The business of this country is largely done by concerns with an ade
quate working capital. But there does seem to be some demand for
longer-term credit, and there is no prospect of getting any building
activity without providing long-term credit at low interest.
The English have provided 30-year credit for home construction
on 80 percent of the value of the property at 4%-percent interest, and
that is done by the private savings institutions.
The most unsound type of mortgage credit is the straight loan that
we have had in this country. It means that the borrower, the builder,
will get a straight 50-percent loan from the banks and insurance
companies, and then a second-mortgage loan will be financed else
where at ruinous rates, until the cost of the mortgage money, consider
ing the first-mortgage cost and the second-mortgage cost, has made
the financing cost of the property ruinous to the home builder and
the home owner. The amortizing payments were to be made over a
period of time on the second mortgage. The first mortgage became
due and it was expected, of course, that the full amount would be
renewed.
Mr. CAviccHiA. Governor Eccles, I appreciate the fact that there
are many definitions as to what constitutes centralized banking* One
of the charges made about the bill that is before us now is that it tends
to centralize banking.

BANKING ACT OF 1 9 3 5

269

Is this so, or is it merely regulatory in the sense that this bill tends
to do away with the great disparity heretofore prevailing between the
national and State banks?
Governor Ecci*Es. Which part of the bill are you referring to?
Title II does not deal, it seems to me, with the problems of national
and State banks, except by giving the Board the right to waive the
present legal requirements for membership of nonmember State
banks.
Mr. CAviccHiA. I mean in the strict sense that centralized bank
ing is used. This is not a bill aimed to centralize authority in the
Federal Reserve Board, is it?
Governor EccLES. It centralizes some authority in the Federal Re
serve Board. The authority that is being centralized through this
in the Federal Reserve Board is the authority over open-market
operations.
The Board at the present time has authority over the discount
rate, and subject to the approval of the President, under the emer
gency act, has the authority to change reserve requirements by
declaring an emergency.
This bill is proposed to place in the Board, with the advice of the
governors, the third function of monetary control, that of openmarket operations, which, at the present time, is in the committee
of governors, subject to the approval of the Board, and then sub
ject, finally, to the decision of the twelve Federal Reserve banks as
to whether or nqt they will participate in the program recom
mended by the governors and approved by the Board.
Mr. CAviccHiA. Does that leave the different Federal Reserve
banks in different districts to operate independently, if they wish?
Governor EccLES. It leaves them to operate independently; and
that is not changed. The question of extending credit to member
banks is left with the credit division of each Federal Reserve bank.
It has been stated that the changing of eligibility requirements
would cause the Federal Reserve banks to be loaded up with long
term mortgages. It seems to be assumed that the Reserve banks
would discount these mortgages or any slow assets that they may
choose to take, during the lire of such assets.
In the first place, whether or not credit will be extended to a
member bank, and upon what basis, will be determined by the
regional Federal Reserve banks, which are responsible for the credits
extended to member banks. The Board will only make the rules
and regulations governing the basis upon which credit can be ex
tended, and it is proposed here to give the Board power to liberalize
the basis upon which the Reserve banks can extend credit to the
member banks. The occasion for the extension of credit arises
when the reserves of the banks get below the legal requirement, and
they find it necessary to borrow to build up the iyserves.
Mr. CAviccmA. The other day you showed the members of this
committee a chart, showing the conditions in England. This chart
seems to show that there is no relation between the price level and
the increase or decrease in employment; am I correct about that ?
Governor Eccijas. That is correct.
Mr. CAVICCHIA. Although we have been proceeding on the theory
in this country that if the price level goes up wages will increase
and unemployment will decrease; am I correct in that?

270

BANKING ACT OF 19 3 5

Governor EccLEs. You say we have been proceeding on that
theory? I do not know what you mean by " we.'
Mr. CAviccHiA. There are certain economists; everything that
this Administration has done in the past 2 years—and I am not
criticizing the Administration; I do not intend to be partisan; but
it has proceeded on the theory that if the price levels went up wages
would go up and unemployment would decrease. But the chart
showing conditions in England seems to negative that assumption.
Governor EccLES. That is correct.
Mr. CAviccHiA. Governor Eccles, the Canadian banks, I am told,
are not permitted to make mortgage loans, and in depression times
they are not met with the problem of frozen assets. Is this one of
the reasons why they have had no bank failures in Canada during
this depression!
Governor EccLES. I do not accept the assumption that a mortgage
is any more of A frozen asset during deflation than nearly any other
asset of the bank. The assets become frozen when every banking
institution wants to dispose of its assets to meet the demands of its
customers for money. The only liquidity that can be provided for
a banking system is through the central bank.
The Canadian banking system is a very different structure than
the American banking system. In the first place, they have very
few very large banks, and the creditor area—the eastern section of
Canada supplies the credit to the debtors of the interior provinces of
Canada. I have been told that the interior sections of Canada, had
they not been tied into the creditor or eastern section of Canada,
would have had the same kind of bank trouble that we have had in
this country; that it was the eastern section which was really furnish
ing the funds to develop the interior areas that enabled the system to
carry through.
The Canadian system had only a fraction of the credit contrac
tion that we had in this country. Had our credit contraction been
13 percent, as it was in Canada, we would not have had the banking
collapse that we had.
The credit contraction in the British banks during the depression
was practically negligible. The total amount of deposit money and
currency outstanding all during the period of the depression in
Great Britain remained almost uniform. Things might have been
diHerent here also, had our Federal Reserve System been in a posi
tion to loan against sound assets. The demand for money would
have ceased—that is, the demand for currency—because we know
that when people were able to get their currency after the bank
holiday they did not want it, and currency came back into the banks
instead of continuing to go out of the banks.
Mr. HoLLiSTER. You said Canada had very, very few very large
banks. You mean she only has a few very large ones.
Governor EccLEs. That is right.
Mr. HoLLiSTER. It sounded as if you meant there were a lot of
little ones.
Governor Ecc&ES. I mean that they have few very large banks,
but they have a large number of branch banks.
Mr. HoLLiSTER. I thought you might want to clear that up.
Governor EccLES. Yes; I thank you.

BANKING ACT OF 19 3 5

271

Mr. CROSS. You say that in Engiand they did not have trouble
with currency to take care of their deposits. Are the assets upon
which those banks loaned money broader than ours? Can they loan
upon any sound paper, where we are limited in that respect ?
Governor EccLES. Are you referring to central banks—that is, the
new Canadian Bank and the Bank of England—or are you referring
to the commercial banks ?
Mr. CRoss. I am just referring to your statement that they could
loan on sound security, and that if we had been in their position
we would not have had the crash that we had. The question I am
trying to get at is, Could they loan upon different assets than we
loaned upon, because it is sound paper and ours is sound, but we are
not under our law permitted to loan on that paper or discount that
paper ?
Governor EccLES. In the Rrst place, the Canadian banks, as 1
understand it—and I am not an authority by any means on that
subject; it is just what I have been told and hear—that the Canadian
banks and the British banks do not loan on real estate. The banking
structure, as I said, is entirely different; it is differently constituted.
The savings funds in Britain are largely built up, as I understand
it, in the savings and loan associations, the mutual savings and
loan associations, which carry the real-estate credit.
If our banking system was a large branch banking system such
as the Canadian system or the British system, it would be a much
easier problem to segregate investments or savings funds from the
commercial banking system. But so long as we have unit banks
operated under the laws of 48 different States and the National
Bank Act, these unit banks have two functions: The function of pro
viding the check money through their deposits, and the function of
investing the community's savings or investment funds.
Demand deposits representing our deposit currency should be in
vested in short-term paper, so far a$ possible, and m Government
Securities. But when it comes to investment funds, interest-bearing
funds, it seems to me that we have another problem, and it is entirely
different from the problem in Canada or the problem in Britain, or
in any other country.
If we are going to avoid a banking collapse and the extinguishing
of a large part (3 our money supply in the future, it is going to be
necessary to make it possible^ when contraction starts, for our Fed
eral Reserve System, which is our central bank and bears the same
relation to our banking structure as the Bank of England does to the
English banks, to loan on sound assets to prevent a continuation of
credit contraction and bank failures.
Mr. CAviccHiA. You need not answer this next question if you
feel that you ought not to, Governor. This is the question: In your
opinion, should we have a metallic base for our money, such as gold,
or is that an exploded theory!
Governor EccLES. A " yes-or-no " answer could be misunderstood.
That is a question which, in order to answer it, would need consid
erable explaining.
Mr. CAviccHiA. The reason I asked it is this: Some people still
hold to the theory that we should have a metallic base, and that that
should be gold. Others say it has been tried and it as failed. That
is why I asked the question.

272

BANKING ACT OF 1 9 3 5

It is a problem upon which many opinions are expressed; but I
do not think it has been answered. The fact that the important
countries of the world have been wedded to gold by experience and
habit for so long a time makes it a very di&cult matter to divorce
money from gold.
Mr. CAviccHiA. Governor, it is a moot question whether or not
the United States is still on a gold basis just now. What do you
say about this?
Governor EccLES. Our currency and our deposits in the Federal
Reserve still require the same gold reserve that they always have,
of 40 and 35 percent. To the extent that gold is not being paid out,
we might say that we are not on gold. To the extent that we are
requiring the same gold reserves, we can say we are on gold. We
permit the export of gold under license, so that internationally we
are on gold.
Mr. CAvicoHiA. So far as our imports are concerned, we are on
gold, are we not!
Governor EccLEs. The dollar has been Rxed at a certain price at

the present time in relation to gold.
Mr. HANCOCK. It has been stated that we are today on a discre
tionary international limping gold-reserve standard. What do you
think about that!
Governor EccLES. I would prefer npt to discuss that question. I
do not believe that has verv much relation to title II of tbe banking
bill.
Mr. HANCOCK. Well, it is not irrelevant.
Mr. CAviccHiA. Under our present system, fear and conRdence
have a lot to do with the banking question, have they not; and is
that not also true in relation to business in general!
Governor EccLES. Not as much as I think is sometimes claimed.
What is conRdence with one group would be lack of conRdence with
another.
An etfort to balance the Budget would give conRdence to a group
of people who feel that, if it is not balanced, their taxes are going
to be higher; but it would put fear and consternation in the minds
of the group of people who are dependent upon what the Govern
ment appropriates for relief.
Therefore, when we speak of conRdence, it does not have an equal
application to all our citizens.
Mr. GiFFORD. Governor, I question the necessity of title H . Mr.
Hancock questioned you and vou answered that that is really the
primary feature of the bill, while the secondary feature is in refer
ence to the reserve of banJas. I want to ask you a few questions
leading up to the necessity of it.
What is the total debt of the Nation, having in mind the present
expenditures and authorized expenditures! In the Presidents: mes
sage, was it 31 billion of authorized expenditure that faced us up to
that moment?
Governor E ccL E S . I would not be certain. As I recall, I know it
is over 30 billion, but I do not remember the exact Rgures.
Mr. GiFFORD. It is 31 billion and some fraction, I think.
Governor Ecci^s. I think that is approximately correct.
Mr. GiFFORD. Having in mind what has been done, we passed the
H. O. L. C. bill, carrying one and seven-tenths billion!

BANKING ACT OF 19 3 5

273

Governor EccLES. That is right.

Mr. GiFFORD* And if we pass the bonus bill that will be two and
three-tenths billions additional, will it not ?
Governor EccLES. It depends on which bill passes.
Mr. GiFFORD. It is two billion three hundred million, is it not!
Governor EccLES. It will depend on which bill passes.

Mr. GiFFORD. You are following these probable expenditures with
the idea in mind of the necessity for this law!
Governor EocLES. No; that is not correct. This law has no rela
tionship to that. I f the Government were to balance its Budget,
we would propose the same law.
Mr. GiFFORD. I think my vote, so far as the necessity of this is
concerned, would be guided by the actual necessity presented.
Governor EccLES. I think there has been-----Mr. GiFFORD. If the Public Works bill now pending in the Senate,
carrying $4,800,000,000 passes, and we provide for 1 billion to take
care of social problems, as suggested, and if another billion should
be required for farm-credit loans, we would get into the realm of a
national indebtedness of 42 billion dollars, should these things
transpire. You may subtract from your total, 3 billion, if you want
to, and take into consideration the $1,800,000,000 profit from gold,
but you would still have a debt of some 36 billion dollars. How
much did you say there were in deposits in the banks!
Governor EocLES. About 25 billion, eliminating interbank deposits.
That represents the demand deposits.
Mr. GiFFORD. There are 38 billion in currency and deposits in the
banks of the country. Do you recall the President's warning about
the danger of the banks having to absorb the deficiencies in 1932,
causing a very dangerous situation—that is, the deficiency caused by
the operations of the R. F. C !
Governor EccLES. I do not recall that statement, but, of course, I
would not feel there was any danger in that.

Mr. GiFFORD. The President spoke very strongly, and I wish you
would read what he said, of the great danger of the banks having
to absorb that deficiency caused before March 4, 1933, and since
then we have added this large amount.
The purpose of this legislation is to control the privately owned
banks, which would still be privately owned, by a Government board
in Washington, so far as open-market operations are concerned!
Governor Eccuas. You mean control the investments that are
made by the Reserve banks!
Mr. GiFFORD. To control open-market operations.
Governor Ecci^s. Yes; to control open-market operations by the
Reserve Board in Washington rather than by the banks themselves.
Mr. GiFFORD. They will still be privately owned, but they will be
Government controlled.
Governor EccLES. That is right.
Mr. GiFFORD. You mean the Government as constituted at the
moment.
Governor EccLES. I would say they are publicly controlled, rather^
than government ally controlled. The control of open-market opera
tions is proposed to be placed in the Federal Reserve Board.
Mr. GiFFORD. Exactly; and that policy will be dictated by this new
board.

274

BANKING ACT OF 1 9 3 5

Governor EccLEs. It will be carried out by the Federal Reserve
Board*
Mr. GiFFORD. So far as the Government as at present constituted is
concerned, that means just that, does it not, inasmuch as a provision
for refusal to reappoint was included in your bill 2
Governor EccLES. I do not think that has anything to do with the
political relationship.
Mr. GiFFORD. Oh, no; there is nothing political in this bill.
Governor Ecci^s. The fact is that the Governor has always been
appointed by the President, at his pleasure.
Mr. GiFFORD. This bill specifically indicates the method by which
the Governor might not be reappointed.
Governor EccLES. That is entirely incorrect. The bill provides that
the Governor shall be—that his term as a member shall expire when
he no longer-----Mr. GiFFORD. I am talking about the members of this new Boards
Governor EccLES. It is not a new Board; there is no difference^----Mr. GiFFORD. The present Federal Reserve Board-----Governor EccLES. There is no change whatever proposed in that
Board.
Mr. GiFFORD. But they retire at 70, under a pension, after a term
of years, and there are many changes.
Governor EccLES. Rertirement at 70 will be compulsory only fox
future appointive members.
Mr. GiFFORD. My point is, should another government come in,
otherwise constituted^could they get control of this Board!
Governor EccLES. In what way could they get control?
Mr. GiFFORD. I am asking you.
Governor EccLES. No; they cannot, not unless their terms expire,
and the President chooses to appoint some one other than a member
whose term expires.
Mr. GiFFORD. By that method could not the new President get
control?
Governor EccLES. By what method?
M r . GiFFORD. B y t h e r e f u s a l t o r e a p p o i n t .

Governor EccLEs. He could, if the terms expired* But a member
is appointed for a 12-year term.
Mr. GiFFORD. There is no way of getting rid of them!
Governor EccLES. There is no way of getting rid of them except
for cause. That has always been in the bill. There is no proposal
to put in the bill any change in the method of appointing members
of the Board, or as to their terms.
Mr. GiFFORD. That reminds me of the lady who insured her home.
There was a fire, and when the agent came to the house he said he
would look into the cause of the fire. Then she said, " I thought
there would be a catch in it."
Governor EccLEs. That has always been in the law; we are not
presenting any change.
Mr. GiFFORD. Then the banker who wrote this letter to me was
misinformed when he said that nothing short of a revolution could
ever change the condition that will be brought about by the enact
ment of this bill; is that correct!
Governor EccLEs. When the Federal Reserve Act was passed in
the beginning, what did the bankers say!

BANKING ACT OF 10 3 5

275

Mr. GiFFORD. Getting back to the necessity of it, it is not quite as
tight as the United States Supreme Court, is it ? It is not quite as
tight, is it, so far as the appointments are concerned? Would you
be willing to provide for the appointments in that way, to have these
men appointed in the same way that members of the Supreme Court
are appointed ?
Governor EccLES. They are appointed in the same way, by the
President of the United States, with the advice and consent of the
Senate.
Mr. GiFFORD. I think that has been challenged. But you claim it
is exactly the same ?
Governor ECCLES. It is the same, so far as the appointment and
confirmation is concerned. The term of the members is 12 years,
in the case of the Federal Reserve Board, whereas the term of a
Justice of the Supreme Court is for life. I believe he may be
removed for cause.
Mr. GiFFORD. For what cause may a Justice be removed? What
would be the cause in this case ?
Governor EccLES. I suppose for dishonesty or improper conduct.
Mr. GiFFORD. Or unwillingness to cooperate with the Government;
would that be a cause?
Governor EccLEs. I am not in a position to say what the cause
would be. All I know is that during the life of the Federal Reserve
Board of over 20 years no member of the Board has ever been
removed for cause. Their terms have expired or they have resigned
voluntarily.
Mr. GiFFORD. I think if they made it hot enough for them they
would get out, if they did not cooperate.
Now, coming back to the necessity for this bill: Faced with a
debt of 38 billion or 42 billion, do you want to make the assets of
the member banks sound assets, available for the issuing of cur
rency ; is that it!
Governor EccLES. No; that is not the purpose of it. The law is
not being drawn with that idea, of assisting in the financing of the
Government.
The Government is having no difficulty with its financing. Its
interest rate has been going down steadily. The desire of the banks
to purchase Government bonds is so great that whereas at the end
of Mr. Hoover's term the interest rate was nearly 4 percent, it is
now less than 2% percent.
Mr. GiFFORD. Of the present indebtedness of the Nation, how much
of it is in short-term loans?
Governor EccLES. Do you remember, Dr. Goldenwesier, what the
exact amount is?
Dr. GoLDENWESiER. I can look that up and let you know presently.
Mr. GiFFORD. You have not been offering many loans to the public
on long-timepaper, have you!
Governor EccLES. They have been doing a good deal of refunding.
They have just called one billion eight hundred million of the fourth
4 % -percent Liberty loan, and they offered in exchange a 25-year
bond at 2% percent.
Mr. GiFFORD. They did that in other countries, based partly on the
ground of patriotism.

276

BANKING ACT OF 1 9 3 5

Governor EccLEs. As a matter of fact, the bonds held by the banks
of this country are less in proportion than the Government bonds held
by the English banks. Thirty-nine percent of the assets of the mem
ber banks are invested in Government obligations, whereas 41 per
cent of the assets of English banks are so held.
Mr. GiFFORD. You said this morning it was 44 percent.
Governor EccLEs. Forty-four percent of the total outstanding
bonds; 44 percent of the amount of Government bonds outstanding
are in the member and Reserve banks and 39 percent of the assets of
the member banks are invested in Government bonds; whereas 15
percent of the total bonds outstanding in Britain are held by the
London clearing banks and the Bank of England, but that represents
41 percent of the resources of the British commercial banks.
It takes 5% percent of the national income of Great Britain to pay
the interest on the British national debt.
Mr. GiFFORD. Suppose we had to have an indebtedness of $40,000,000,000, and $9,000,000,000 was to be absorbed in the next year and a
half, what proportion would the banks probably hold?
Governor EccLEs. What proportion of their resources in bonds!
Mr. GiFFORD. Yes.
Governor EccLES. Of course, if the banks took 9 billion of bonds,
the banks would increase their deposits by 9 billion.
Mr. GiFFORD. The term " deposits " is a rather tricky term. I sup
pose if I owed you $100,000, and you should be able to discount that,
you would get some more currency and loan me another $100,000, ana
then take my second note and discount that, and still loan me still
another 100 thousand, and that process could go on inde6nitely, could
it not ?
Governor Ecci*ES. As a matter of fact, the banks could extend $20,000,000,000 of credit without rediscounting anything. The trouble
today is not the need of the banks to rediscount; the trouble is the
banks are unable to loan the funds that they now hold.
Mr. GiFFORD. We know that is a temporary situation. Idle money
is glad to get something to invest in. There have not been many
long-term offerings made in these times. They are all anxious to
get something. You do not consider that that condition will be
regular, do you!
Governor EccuES. I think—and this, of course, is my opinion
only—that for a long time to come there are not going to be in this
country short-term loans of sufScient quantity to create the money
that is required to carry our business structure.
Mr. GiFFORD. Why has not the Government—knowing that this
indebtedness cannot be paid oR for many years—why has not the
Treasury offered long-term paper or bonds?
Governor EccLBS. Why have they not!
Mr. GiFFORD. Yes.
Governor EccLES. That is a question I would prefer you ask the
Treasury. I would not want to answer that question for them.
Mr. GiFFORD. You have said money was plentiful.
Governor EccLES. Money is extremely plentiful. But if the
Treasury had offered long-term bonds a year ago or 2 years ago, they
would have paid a rate of maybe a half or three-quarters of a percent
more than they are paying now. So long as the Treasury can bor
row at a fraction of 1 percent, and the interest rate on long-term

277

BANKING ACT OF 1 9 3 5

financing is going down, would it not appear advisable to finance
on the cheapest basis of short-term credit, so long as the long-term
market is going down? It has been profitable up to date to defer
long-term financing.
Mr. GiFFORD. If they could sell these long-term securities at 2%
percent they would sell them, would they not?
Governor EccLES. I f they could, you say ?

Mr. GiFFORD. Yes; they would oner them if they could be sold,
would they not?
Governor EccLEs. I do not know whether they would or not.
Personally, I think you will see less than a 2% percent rate on long
term financing.
Mr. GiFFORD. Then you think there will continue to be plenty of
idle money and that business will not get busy and need this money ?
Governor EccuES. I cannot conceive of business using 20 billion
dollars of commercial credit, when in 1929 they only used 4 billion.
Mr. GiFFORD. You do not care to answer as to why the Treasury
does not now, when money is plentiful and rates are low, offer
long-term paper, that must, necessarily, be refinanced, a lot of it,
with short-term paper?
Governor Eccms. I f they can borrow later at 2 or 2% percent,
would it seem advisable now to borrow at 2% percent?
Mr. GiFFORD. Let us put it the other way. I f business recovers
and needs money, and money is at a higher rate, has not that been
the fear, that when these short-term securities are forced to be
refinanced by long-term securities that the rate will be very high?
Governor ECCLES. That has been the fear, but it has been unjusti
fiable, and the reverse has been true.
Mr. GiFFORD. I hope you w i l l prove to be a prophet, and a correct
prophet, so far as the next 5 years are concerned.
You have no fear, so far as the Government using the method of
issuing currency to banks with sound assets is concerned, that they
will not always have plenty of money to buy the issues put out by
the Government, and that this Government, under this plan of
banking, could go into that practically to any amount?
Governor E c c L E $ . The amount of the Government debt that can
be supported depends upon the national income, and a 40-billiondollar debt here with an 80-billion income, is 6 months of the national
income.
Mr. GiFFORD. We had a 90-billion-dollar income once, but what
is it now ?
Governor EccLEs. I think when Mr. Roosevelt came into ofEce it
was around about 38 or 40 billion. It is now some 50 billion.
Mr. GiFFORD. Our capital structure was 38 billion, that being the
amount on deposit, available money and credits in the banks?
Governor E ccL E S . No; it was 26 billion 400 million in 1929. That
was the amount of demand deposits plus currency.
Mr. GiFFORD. There are two other questions I want to ask you,
which you may be willing to answer.
You have no particular fear of a 40-billion-dollar national debt in
this country?
Governor EccLES. I have no fear of a 40-billion-dollar national
debt.

Mr.

GiFFORD.

Your answer staggers me.

have.

278

BANKING ACT OF 1 9 3 5

Governor EccLES. I can give you my reasons for not having it.

Mr. GiFFORD. Personally, I wish you would. With the present
national income you have no dread or fear of the consequences of a
40-billion-dollar debt?
Governor E ccL E S . I am concerned about the present national in
come, but you do not increase the present national income by di
minishing Government expenditures. It is the total expenditures
of the Nation that create the national income, and when the com
munity, as individuals and corporations, do not spend, then the
Government must.
Mr. GiFFORD. I am looking at it from the standpoint of my cor
porate interest. If I owed a hundred thousand dollars to you and
you discounted my note and loaned me another hundred thousand,
you could then go to the bank and discount my second note and loan
me still another hundred thousand, and keep that up indefinitely.
But then what happens to me, finally ! How long do you think that
a person, an individual, or corporation, can keep that up, and how
long can the Government keep that kind of thing up! The appli
cation is the same.
Governor E ccL E S . That is just where the mistake is usually made.
Government credit is considered in the same way as we consider
individual or corporate credit, whereas when the Nation borrows
it is a question of the Nation borrowing from itself, so long as it is
a creditor Nation. Therefore, when it borrows from itseli, that is
the-----Mr. GiFFORD. I f t h e c i t i z e n o w e d e n o u g h t a x e s , t h a t is s o u n d . But
t h e w h o l e r e v e n u e is b a s e d o n t a x a t i o n , is i t n o t ?
Governor E c c L E s . Taxes are the basis of the Government's

income.
I f by Government spending you increase the national income, you
increase the ability to pay taxes.
Mr. GiFFORD. Exactly. Then you have answered the question, that
a 40-billion-dollar debt can only be paid by taxes.
Governor E ccL E S . But the taxes will not be paid out of the present
national income. I believe in the Government spending to a point
that could prime the pump. I f you increase that spending, in that
way you increase the demands for goods.
M r . GiFFORD. Did y o u e v e r t r y t o p r i m e a p u m p a n d y o u d i d n o t
g e t q u it e e n o u g h w a t e r ?

Governor EccLES. That has just been the case.
Mr. GiFFORD. That being the case-----Governor E c c L E s . It is the c a s e t o d a y .
Mr. GiFFORD. Does anybody know the exact measure of water t o
be poured in before you catch ?
Governor E c c L E S . The measure would be when you get your un
employment problem rapidly diminishing and with private business
being required to employ those who are unemployed to meet the de
mand for goods, by reason of increasing purchasing power and
spending.
Mr. GiFFORD. Your statement about the 40-billion-dollar debt will
probably be of great comfort to those who vote for the soldiers'
bonus; it will probably be of great comfort to those who want social
legislation, that is, your statement that you have no fear of a 40billion-dollar debt. Do you realize the importance of that state
ment!

BANKING ACT OF 1 9 3 5

279

Governor EccLES. Forty billion dollars in relation to the debt of
Australia and in relation to the debt of Great Britain and other
countries that we look upon as having met all the problems of the
depression possibly as successfully as anybody else-----Mr. GiFFORD. So far as a comparison of our banking system is
concerned it is no comparison to compare that with the system of
other countries, if you can prove that our indebtedness is nothing
to be worried about, in comparison with other countries.
Governor EccLES. When we speak of a future debt of 40 billion,
it seems to me it is only fair to deduct from the 40 billion the assets
which the Government has taken in lieu of the debt. We cannot say
that the loans which the R. F. C. has made are entirely uncollectible,
and we should also take into account the balance in the Treasury in
considering the net debt.
Mr. GiFFORD. And the gold profit !
G o v e r n o r E ccL E S . I t h i n k a n y o t h e r c o u n t r y w o u l d t a k e t h e gold
p r o fit in to a cco u n t.
It is th e r e .
So that the debt is less than 23 billion today when you consider
the Treasury balance/and without considering the gold profit, but
when you consider the assets that you can use to offset the debt.
That is less than 4 months of the normal national income of this
country.
The indebtedness of Great Britain is 35 billion, and it takes 5%
percent of the national income to support the British debt. That is,
what is considered the present national income, which is between 19
and 20 billion.
Mr. GiFFORD. You do not want us to fall into their company, do
you!
Governor EccLEs. Our situation would require less than 1 per
cent of the normal national income to support the Federal debt.
Mr. CAviccHiA. What percent!
Governor EccLES. Less than 1 percent of the normal national in
come to support the present Federal debt.
Mr. GiFFORD. The national income!
Governor EccLES. I said the normal national income.

Mr. GiFFORD. What is that!
Governor EccLES. Eighty-two billion was the national income in
1929.
I am as anxious as anyone to see the Budget balanced. The
Budget can only be balanced, however, out of the national income.
The national income can only be increased by employment.
Mr. GiFFORD. May I say, before I go any further, Governor Eccles,
I may appear to be almost brutally fran& in my questions, but that
is my mannerism. I am the most harmless man on the committee.
I have letters from 25 commercial bankers in my district, all
fine bankers and upright men, who are opposed to this legislation,
and I want to find out about their opposition.
Governor EccLES. I appreciate the opportunity for giving my
answers. I have met with the bankers, with the representatives of
the American Bankers' Association, and with many other bankers,
and I find that their opposition to the bill has been largely the
result of a misunderstanding. They do not understand what is
in the present law, and the opposition they raise to this bill is the

280

BANKING ACT OF 1 9 3 5

same opposition which might be raised to the present law, in a
great many instances.

Mr. GiFFORD. I am a new member of the committee, and know
little about the problems.
Governor E ccL E S . I have now the Rgures of the Government
debt as of January 31, 1935, the total interest-bearing debt being
$27,952,000,000; due within a year, $5,606,000,000; from 1 to 5 years,
$8,792,000,000; and over 5 years, $13,554,000,000.
The CHAIRMAN. Let me suggest that in your statement you incor
porate the figures showing the holdings of the Government against
those obligations, in order to make the story complete.
Governor Eccms. Yes; I will do that.
Mr. HANCOCK. You mean the credit balances in the general fund
of the Treasury?
Governor EccLES. The general fund balance is somewhere be
tween a billion and a, half and two billion. We will have to insert
in the record the exact figures.

The CHAIRMAN. That is what I said, that you should do that to
complete the statement, showing the holdings in the R. F. C. and
other organizations inuring to the benefit of the Government.
and Met asset# o f the

Rtate#,

3.1, .1935

[In m illions o f dollars]

Gross public debt_______________________________________________________ 28,476
Net balance in general fund (excluding balance o f increment resulting
from reduction in weight o f the gold d o lla r)_________________________ 1,519
Net d e b t----------------------------------------------------------------------------------------- 26,95?
Proprietary interest o f the United States in governmental corporations
and credit agencies:
I. Financed wholly from Government fu nds:
Reconstruction Finance Corporation___________________________
Commercial Credit Corporation________________________________
Export-Import Bank___________________________________________
Public W orks Administration__________________________________
Regional Agricultural Credit Corporation_____________________
Products-Credit Corporation____________________________________
All other______________________ ________________________________

2,321
41
14
269
90
113
506

Total----------------------------------------------------------------------------------------II. Financed partly from Government funds______________________

3,354
1,120

Total----------------------------------------------------------------------------------------------Increment from reduction in weight o f the gold dollar_________________

4, 474
2,812

Mr. GiFFORD. We have your Treasury statement every day on our
desks. I am speaking this morning of the probable billions to be
added. We have that fact staring us in the Ace every day.
I want to bring out the fact that with this continual Snancing by
the Government of Federal indebtedness we need this sort of protec
tion.
Governor E c cL E S . The budget of any government must be bal
anced over a period of time; there is not any question about that.
Mr. GiFFORD. Would you suggest a time—possibly 5 years!
Governor E c c L E s . I would say it might be desirable over a 5-year
period, but I do not think it necessarily need be fatal if it i s only
balanced over a 10-year period. A war condition could create an

BANKING ACT OF 1 9 3 5

281

unbalanced budget for a considerable period of time, if sufEcient
taxes were not imposed to pay as it was carried on.
Mr. GiFFORD. Would you advise my creditors to carry me along
for 5 years ? If so, I wish you would send me a letter.
Governor Ecci*ES. It has been my philosophy that the amount and
the rapidity with which the Government spends will reduce—that
is, if the amount and the rapidity are sufRciently great—they will
reduce the total amount that the Government may be required to
spend. To do that we have had a 40-billion-dollar deficiency in
national income and a 3-billion priming process last year; that is
about what it was.
I do not consider the transfer of the existing debt from where it is
to the Government as a priming process. It stops deflation, but the
actual amount of the budgetary deficit as a result of the Government
spending and the Government lending for new structures that in
creases the buying power of our people has not been sufRcient to stop
the process of deflation and to give the momentum necessary when
you consider the size of the pump.
By that I mean that with 10 or 12 million unemployed the buying
power cannot be sufRciently increased by a 3-billion-dollar spending
to utilize our existing productive capacity.
Mr. GiFFORD. That is a 6ne statement you are making, but I am
sure that the priming process must reach down far enough to give
constructive money that not only feeds and clothes people, but begins
to construct something out of which people can get an income.
I f the Government had spent this money and it was being used by
people who were constructing something which was employing labor,
that would be different than simply feeding and clothing people and
building beautiful roads or race tracks, and ornamental things in the
country which, in the end, does not keep very many people at work
bringing in an income. That does not keep many people at work for
any length of time bringing in an income, does it!
G o v e r n o r E ccL E S . I t h i n k s o . I t h i n k t o s p e n d m o n e y , o r in c r e a s e
p r o d u c tiv e c a p a c it y w h e n y o u a lr e a d y h a v e a n e x ce s s o f p r o d u c tiv e
c a p a c i t y , is j u s t t h e p l a c e w h e r e y o u d o n o t w a n t t o s p e n d it .
Mr. GiFFORD. In my section, they want to spend money on public

works, or on race tracks and beautiful roads through the woods, and
after they spend that money how much of an income will that
produce !
Governor EccEES. After all, income has to come from spending.

Mr. GiFFORD. But if that spending is simply for feeding and clo
thing people and putting up ornamental unnecessary things, that will
not help them any in the future, so far as any income in the future
is concerned.
Governor EccLES. Of course, I do not believe that Government
spending should be in a field of competition with private enterprise,
where Government spending will be expected to return an income.
Mr. GiFFORD. You do not believe in the Government loaning to help
private business, do you!

Governor EccLES. I would prefer that the lending should be done
by the private-credit system, but when you reach an emergency such
as we had in 1932, and set up the R. F. C., it became necessary to save
the credit structure and lend money.

282

BANKING ACT OF 1 9 3 5

Mr. GiFFORD. Would you prefer that the $4,800,000,000 in the bill
pending in the Senate be loaned to private industry, the whole o f
it, rather than have it expended in the method suggested ?
Governor EccLEs. I would prefer that no part of it be loaned;
that every part of it be used as a grant, as leverage, so as to induce
private borrowing and spending.

Mr. GiFFORD. Would it be possible to make such a grant to private
industry by any such process without favoritism?
Governor EccLEs. It is possible to make grants to cities, counties,
and States for noncompetitive public works, and induce leverage
through that process.
It is possible, through a subsidy to home owners, to induce the
construction of new homes, and the subsidy will be the difference
between the cost and rents.
Mr. GiFFORD. Do you prefer non-Federal projects?
Governor Ecci,Es. When it is a pure Federal project there is no
multiplying. If the funds are used as a leverage, as a subsidy, we
will say, to cities, counties, and States, you get an increased spend
ing or a leverage added to the spending by the home owner. We
have a differential between costs and rents today which is retarding
private construction.
Mr. GiFFORD. You mean, do you not, if you grant 30 percent to
municipalities and the municipalities are putting up 70 percent,
therefore you get three times as much work done ?
Governor EccLEs. Yes.
Mr. GiFFORD. Exactly.
Governor EccLEs. But instead of the Government loaning 70 per
cent, let the municipalities arrange their own credit. I think 30 is
possibly not sufBcient.
Mr. HANCOCK. I am very much interested in the statement you
made with respect to subsidizing the private home owner to mduce
him to build a new home. I f such a program as that were carried
out by the Federal Government, would it not have a tendency to
stagnate every private lending institution in this country?
Governor EccLBs. It would stimulate them greatly if the subsidy
represented the difference between costs and rents.
Mr. HANCOCK. Are you explaining the proposal that the news
papers carried not long ago, to the enect that you advocated or sug
gested a plan whereby the Government would make a grant or a gift
to a prospective home owner up to, say, 20 percent of the cost of
construction ?
Governor EccLEs. I am not sponsoring any plan. The question
was with reference to the spending of the $4,800,000,000, whether I
would prefer that to be spent by the Government or used as a loan.
In answer to that I am simply making some observations here, or
some suggestions as to what would be my own personal view, in order
to get the most out of the proposed appropriation.
Mr. GiFFORD. I think you have answered my question sufSciently.
Mr. (^Ross. It seems to me we are going far aReld from this bin,
and that we have taken in all of the theories of loaning, most of
which have nothing whatever to do with this bill, and if We con
tinue along that line we will never get through with this hearing.
Mr. GiFFORD. Mr. Cross want very far aReld.

BANKING ACT OF 1 9 3 5

283

Mr. HANCOCK. I think the gentleman's questions have been inter
esting and pertinent.
Mr. GiFFORD. I will be through in 2 minutes, if you will give me 2
minutes longer. I want to make two remarks.
I believe thoroughly in non-Federal grants, where the Government
itself pays only 30 percent and the municipality puts up 70.
I want to say simply in connection with this matter of priming
the pump, the answer seems to be suggested to me that we have poured
in the water, but the well is frozen. Lack of conRdence has frozen
the well, and it does not amount to very much.
(Thereupon, the committee took a recess until 3 p. m. this day.)
AFTERNOON SESSION

The CHAIRMAN. All right, gentlemen. I believe we Rnished with
Mr. Cavicchia. Now, does anybody on this side want to interrogate
Governor Eccles?
Mr. SPENCE. I want to ask him some questions.
Mr. DiRKSEN. I w o u ld lik e to ask so m e qu estion s.
The CHAIRMAN. All right, proceed. Let us get along.
Mr. DiRKSEN. Governor, I shall try to be brief. Perhaps I ought
to restate the question Mr. Gifford had in mind this morning, I
think, namely, that the President has authority to designate one
man to the Board as Governor of the Federal Reserve Board; is
that a Presidential designation ?
Governor E ccL E S . That is right.
Mr. DiRKSEN. And when a man ceases to be designated by the
President, he is no longer a member of the Board ?
Governor E c c L E s . No; he i s no longer Governor, but he is a mem
ber of the Board.
Mr. D iR K sB N . He remains a member of the Board?
Governor Ecci^s. Yes; unless he resigns, which is usually the
case if he is no longer designated as Governor.
Mr. DntKSEN. I got the impression from reading your observations
on the bill that, when the President ceased to designate him as
Governor, he automatically divorces his membership as a member of
the Federal Reserve Board.
Governor E c c L E s . The present Federal Reserve Act requires that
the President designate a member of the Board to serve as Governor
at his pleasure.
M r . DiRKSEN. I think I see, and it will not take very long to state
the question. Now, with respect to the government of the Federal
Reserve bank, I think the residence requirement has been taken out
of the old act, has it not? In the new provision there is a state
ment to the effect that the Governor no longer has to be a resident
of the Federal Reserve district or Board on which he should serve.
Governor E ccL E S . That is right.
Mr. D iRK SB N . I am wondering whether it would be possible, under
this provision, to take a man from New York, for instance, and by
virtue of the fact that the power of approval is vested in the Federal
Reserve Board, insofar as the class C directors are concerned—if it
would be possible to transplant such a man to the seventh Federal
Reserve in Chicago, and by either the giving or withholding of the

284

BANKING ACT OF 19 3 5

power of approval, you could make him a member of the Board?
Do you think that is possible, if not probable ?
Governor EccLES. Yes; it is possible to transfer a man from any
other reserve districts, and the proposal simply applies the same
and class C director. At present the Governor may be chosen from
other reserve districts, and the proposal simply applies the same
principle to the chairman and class C director, which is necessary in
combining the oHices of governor, chairman, and class C director.
Mr. D iR K SE N . It w o u l d b e p o s s i b l e t h e n , t o t a k e s o m e b o d y f r o m
a n o th e r s e c tio n
p la c e ?

th e

cou n try

and

tra n sp o rt

h im

som e oth er

Governor EccLES. Yes. The idea of that was to promote able
men in the Reserve System by moving them from one bank to an
other bank, creating a career system. The selection of the Governor,
however, must be made by the local board of the reserve bank.
Mr. DiRKSEN. However, you have the power to approve?
Governor EccLEs. That is right.
Mr. DiRKSEN. And you could approve, or you could disapprove
anybody that you desired to disapprove? in other words, you
could prevent a man from becoming a combination governor, chair
man, and Federal Reserve agent by simply giving your disapproval
to his selection ?
Governor EccLEs. They would have to submit some other name.
Mr. DiRKSEN. So really you would have the power to control?
Governor EccLEs. Well, whether the power of approval is the
power to control may be open to debate. It would become necessary
for the board of the Reserve bank and the Board here—at least a
majority of the board of the Reserve bank and the majority of the
Board here to agree upon a man that would be the executive head
of the bank.
Mr. DiRKSEN. I think the matter is important, for this reason, and
this is not very familiar to me and may not be familiar to you, but
in 1927,1 think, the rediscount rate was reduced for the purpose of
stimulating the investment interests and also stop the Row of gold
toward Europe, and the directorate of the Chicago Federal Reserve
Bank was rather opposed to it, because they saw a possibility of the
Row of capital from every agricultural bank. They resisted the
idea, but it was done anyway; and I am not so sure but what, in
the light of hindsight, that was right, after all. So if it depends on
somebody out there who is absolutely sympathetic with all of the
things that are done, that might prejudice the interests of the par
ticular area. That brings up, of course, this question: I was inter
ested in your observations that it was seeking to make them respon
sive to the national interest. That was the idea I think that you
enlarged upon in the course of your remarks some days ago.
Governor EccLES. Make who responsive?
Mr. DiRKSEN. Well, your Federal Reserve Board, and I suppose
your open-market committee; they would be responsive to the large
public interest, rather than to the sectional or local interest.

Governor ECCLES. Yes; that is right.
Mr. DiRKSEN. That would, of course, eliminate the checks and
balances that did exist between the open-market committee and the
Federal Reserve Board and the directors of the respective Federal
Reserve banks. In the light of that experience back in 1927 I am

BANKING ACT OF 1 9 3 5

285

just wondering whether it would be wise to eliminate that check,
because, in that instance it would have had a most salutary effect
upon the country, if the directors of a particular Federal Reserve
bank had prevailed, and that probably had been able to carry out
their own policies with respect to that Reserve bank district.
Governor EccLES. Well, of course, if each of the 12 Reserve banks
is going to be permitted to operate independently of the interests of
the country as a, whole, with reference to their monetary policies, it
seems to me you would be sure to have great confusion.
Mr. Dm KSEN. If carried to the extreme?
- Governor E ccL E S . So long as you have 12 banks without a Federal
Reserve board, without coordination and the power to deal with the
problems of national interest, I cannot imagine how you could have
a monetary policy that would be effective in meeting a situation that
the Nation might be confmnted with. No other country, so far as
I know, has a divided responsibility with reference to the monetary
policy that would be comparable to a policy made by the 12 different
Federal Reserve banks.
Mr. DiRKSEN. You know, section 205 of this bill, in speaking, for
instance, of the open-market committee, contains this language: It
says that you are to deal, instead of through the Federal Reserve
Board, with the Federal Reserve banks, and then the language is,
" and the Federal Reserve banks shall conform their open-market
operations to the provisions hereof." So, you are going to estab
lish, after all, complete control at a time that might be disadvan
tageous to the interests of a particular geographical section. For
instance, I suppose in Atlanta and Dallas you have certain cotton
interests, in Minneapolis you have the grain interests, in Chicago
you have not only grain but industrial interests; and that very
question came up in 1927, and I am not so sure that, if it had pre
vailed, we might not have been infinitely better off. Of course, that
is a speculative thing, I admit, but that was one instance where it
proved out.
Governor EccLES. I feel that monetary policies must be dealt with
on a, national basis, and that for each Reserve bank to act inde
pendently with reference to open-market policy or discount rates
would cause great confusion. Money is like water—it seeks a, level;
and to raise rates in one section would cause the funds to How to
the section where the rates were raised from the section where the
rates were low, which would act to increase the excess reserves in
one area substantially and, therefore, make for expansion of credit
and cheap money, and have the opposite effect in another area.
Mr. DiRKSEN. But I think you will admit that was practiced in
one Federal Reserve district, and we might have had a 2 percent
rediscount, and in another place 2% percent, and another place
possibly 3 percent, because that seemed to fit the conditions of that
Federal Reserve district at that particular time.
Governor E ccL E S . I do not believe it is necessary to have a uniform
discount rate at all the Reserve banks and, as a matter of fact, there
has rarely been uniformity in the discount rates. The discount rate
is proposed by the Reserve banks and approved by the Federal
Reserve Bohrd, as a general rule.

286

BANKING ACT OF 19 3 5

Mr. DiRKSEN. But, examining the maximum possibilities of the
bill with respect to the open-market committee, it is quite possible
that the Federal Reserve directorate in any particular district would
not have anything to say about it. the System insisting that they
conform to whatever regulation is laid down about it ?
Governor EccLEs. That is correct. If the committee felt it was in
the national interest to raise rates to prevent undue expansion and
speculation, they would do -so; and, if they felt on the other hand
that there was an unnecessary contraction, they would want to re
duce the rates and the reserve requirements in an effort to stop the
deflationary process, so far as they could. It seems to me that must
be done in the interests of the Nation, because we have found that
every part of the country is very interdependent with every other
part of the country, and that money has a very rapid Row and is
movable and transferable almost instantaneously.
Mr. DiRKSEN. When Mr. Crowley was before the committee, I
asked him about the section entitled I, which provides that mutual
savings banks and other banks may become member banks, or in
sured banks, after July 1, 1937. In other word, you would have to
become a member of the Federal Reserve or otherwise have no Fed
eral Deposit Insurance. I presume you are familiar with that ?
Governor EcCLES. Yes; I am.
Mr. DiRKSEN. That, in the light of section 202 entitled " I I " of
the bill, which provides that the Federal Reserve, in order to facili
tate their entry into the System, can waive the capital requirements.
You enlarged on that somewhat in your observations and said, " and
any other requirements that may be necessary." Now, you are fa
miliar with the facts, also, that in organizing many of these State
banks, you had to give deferred certificates in lieu of deposits, and
I think you have answered that that is a contingent liability charged
against the capital and, therefore, you cannot take those banks into
the System.
What would you do about those banks, particularly in cases where
most of the deposit liability was made up by deferred certificates,
and there may be in small banks, as much as $30,000 or $40,000 out
standing of those certificates, and it may take 10 years to earn
enough money to pay them off ?
G o v e r n o r EccLES. I a m fa m ilia r w ith th a t ru le a n d I d o n ot k n o w
th a t I . p e r s o n a lly , a g ree w ith it.
Mr. DiRKSEN. The rule does exist, however?

Governor EccLEs. Yes; it was the opinion of counsel at the time
the question came up, that in the light of the present banking legis
lation, by reason of those deferred certificates which the banks had
issued, although they were secondary to the depositors' claims, still
the bank was unable to qualify for membership. Now, one of the
reasons for this provision which you just read is, to permit the mem
bership of the banks of the class that you referred to.
Mr. DiRKSEN. Well, now, the corollary of that is this: What will
the present members of the Federal Reserve System say if by whole
sale, you should take in these banks? They might object to the
fact that you are cutting corners in order to get them into the
System, might they not?
Governor E c c L E S . I cannot see that the other members of the Re
serve System could be, in any way, affected by that, except favor

BANKING ACT OF 193 5

287

ably. It would be to the interest of all of the member banks of the
System to have all of the nonmember banks members of the System,
for the purpose of uniformity in carrying out the bunking practices
and procedure, and so forth. Admitting those banks into the System
does not, in any way, place any liability upon the present member
banks.
Mr. DiRKSEX. Well, if this is a fair question, would you care to
say, categorically, whether you favor ail banks coming into the Fed
eral Reserve System at this time?
Governor EccLKs. I think that it is in the interest of the banking
situation as a whole, nonmember banks as well as member banks, to
have all banking institutions, which have the power to create money,
members of the Federal Reserve System.
I think that the period of 1937 is helpful, in that it gives to the
banks an element of time in adjusting their aifairs to any extent that
they may desire to, before applying for membership; and I think
that, if this proposed legislation is passed, permitting the Board it*
waive the requirements that the nonmember banks are unabie tf?
meet, and providing the eligibility features that this bill carries, it
will be a great source of strength to the Federal Deposit Insurance
Corporation and to the banking system as a whole, through all
banks being members of the Federal Reserve System.
Mr. DiRKSEN. Well, now, Governor, if I remember the figures, I
think 41 percent of all of the banks in the United States are in
towns of 1,000 in population. I am just wondering what distinct
advantage will accrue to a bank in a small town which is simply
subserving the money and borrowing interests of that community
to buy 6 percent of the stock of the Federal Reserve, on which they
will get no interest and discount benefits and privileges, which they
probably would not use.
Governor EccLES. They get 6 percent on the stock which they buy,
which is a very prohtable investment right now. Six percent is
what they get on the Federal Reserve bank stock which they buy
at the present time. Furthermore, the opportunity of rediscounting
or borrowing from the Reserve bank for seasonal requirements or
for emergency requirements should be a great source of help to the
local community and would tend to prevent bank failures which
otherwise might develop.
Mr. DiRKSEN. Well, now, if all of these banks come into the Fed
eral Reserve System, manifestly, you are first destroying the banking
authority of your State, and that would be possibly, or would pos
sibly have the effect of superseding the laws of the State with refer
ence to branch banking, and you might have an extension and de
velopment of branch banking; is that possible ?
Governor ECCLES. I have not said very much about branch bank-

ing----

Mr. DiRKSEN. Will you allow me to interpose and tell you that my
interest is aroused in the matter because of Senate bill 1926, which
was introduced recently by Senator Fletcher, a very short bill, and
the last phrase provides that—
Any national banking association may, with the approval of the Federal
Reserve Board, consolidate with or purchase the assets of, and thereafter
operate as a branch or branches thereof, and national or State banks, or banks,
located in the same State, with which such national bank association was on

288

BANKING ACT OF 1 9 3 5

January 1, 1935, and still is aSiliated, or shares or m ajority o f shares of
which were, on January 3, 1935, and still are owned by an aSiliate o f such
national banking institution.

Mr. GOLDSBOROUGH. I am putting the committee on notice of the
fact that the bill is before us now, and there seems to be a trend
toward unification of the banking system. The extent of the branch
banking would be easier than it is at the present time, when you still
have checks and safeguards of some State law.
Governor E ccL E S . Of course, there has been a rapid development
of branch banking in the last few years.
The CHAIRMAN. Since the passage of the act that was to restrict
branch banking.
Governor ECCLES. The National Banking Act or the Federal Re
serve Act permits State-wide branch banking in those States where
branch banking is permitted by State law.
Mr. GOLDSBOROUGH. Just to give the historical fact, we let the
branch-banking features slip by with the express assurance on the
part of those who wanted it that they would stand by the permanent
insurance plan, and as soon as the law passed they began to Rght the
permanent insurance plan; we have had that Rght on our hands ever
since. Our theory was that it would be impossible to make any
branch-banking law effective, because the independent banks would
be so strong under the permanent insurance plan that they could
preserve themselves. That is the history of that legislation. The
branch-banking features would not have passed had we not had the
assurance that the permanent insurance plan would be allowed to
stand.
The CHAIRMAN. Governor, in connection with what Mr. Golds
borough said, the remark I made a moment ago had reference to
the McFadden bill, which dealt with the matter of branch banking.
Governor E c< 3LES. The development of branch banking has been
brought about by the action of the various State legislatures, and
I understand that at the present time about one half of the States
permit branch banking, either on a State-wide basis or in some form;
and, of course, the national banks are permitted to carry on the
branch-banking business to the extent that is permitted in the States
in which they operate.
Now, there is nothing in this proposed legislation that in any way
changes the present laws with reference to branch banking, and
there is nothing that interferes, or encroaches upon, the State bank
ing organizations. The provision that requires insured nonmember
banks to become members in 1937 is not in this legislation, but in the
legislation that was passed last year. So there is nothing in this
legislation that is being considered now that in any way changes
the relationship of the State banking authority with reference to the
banking structure.
Mr. DiRKSEN. I quite agree. What I was getting at, of course,
is that, if a little later, it was all set up it would be made inRnitely
easier to extend the branch banks.
Now, getting over to section 206, there is a section there that
provides that any sound assets may be discounted, that any Federal
Reserve bank may discount any commercial, agricultural, or indus
trial paper and may make advances to any certain member bank on
its promissory notes secured by any sound assets of such member

BANKING ACT OF 19 3 5

289

bank. I presume an asset may be sound and still be " ill-liquid "
rather than liquid, can it not ? In other words, it might be good
security behind it, but still not liquid?
Governor E ccL E S . Yes. Many of the assets which are considered
to be eligible and held to be liquid were less sound than many of the
assets held by banks which could not qualify for rediscount or
security for borrowing from the Reserve banks.
The CHAIRMAN. Mr. Dirksen, let me ask him a question right
there, please.
If you have not already stated it, what percentage of the invest
ments of the banks, exclusive of Government securities, is eligible
for rediscount with the Federal Reserve bank?
Governor EccLES. Well, at the present time, I do not know the
exact percentage, but I understand it is less than 8 percent of the
total loans and investments of the banks that are eligible; and that
is according to the classifications made by the banks themselves and
not according to the classiRcation made by the Reserve banks. I
think, upon experience, the banks would find. if it were necessary to
use all the paper which they considered eligible, that some of it
would not be so considered by the Reserve banks. So that the Bgure
given, which is as I say, less than 8 percent, is the maximum.
Mr. DiRKSEN. I see section 207 provides that guaranteed obliga
tions of the United States may be bought and sold without regard
to maturity. Those are such bonds as Home Owners' Loan Cor
poration----Governor E ccL E S . And Federal farm mortgages, and so on.
Mr. DiRKSEN. Well, now, I suppose that has to be considered in
the light of the provision in the bill which calls for the repeal of
the collateral requirements. Is there any notion of policy that some
thing else should be substituted for 50 percent of the eligible paper
and collateral in addition to the 40-percent gold reserve ?
Governor E ccL E S . No. You see, this is providing for the elimina
tion of the collateral requirements against the Federal Reserve notes.
The reason for the provision that you have just read is that it is
felt that there should not be discrimination between Government
bonds and bonds guaranteed by the Government. The fact that the
Reserve banks may buy direct obligations of the Government, and
the fact that they may not buy long-term guaranteed obligations of
the Government is an unjustifiable discrimination between the guar
anteed bonds and direct obligations.
Of course, at the time the law providing for the purchase of direct
obligations was originally passed, there were no guaranteed obliga
tions; and I feel that, had there been guaranteed obligations at
that time the law would very likely have included both direct and
guaranteed obligations.
Mr. DiRKSEN. Well, now, heretofore, of course, the note-issuing
power was used largely commensurate with the rise and fall of
business in that area; and if there had to be a 40 percent gold re
serve and 60 percent of eligible paper, there had to be commercial
transactions behind all of that paper. And so as there was a fixed
volume of business, the chances of any demand on the Federal Re
serve agent for more Federal Reserve notes, or less, depended on
whether the tide of business was high or low.

290

BANKING ACT OF 1 9 3 5

Now, that collateral requirement is to be repealed and you are
authorized to buy and sell in the market, and these guaranteed obli
gations of the Government—that is what is called elasticity, which
does not mean a great deal to me—however, it is taken away, and
from then on the amount of notes that will be issued will bear no
definite relationship to the amount of business in the 12 Reserve
districts, or it may be a very arbitrary amount.
Governor EccLBS. That was the theory upon which the collateral
requirements for note issue were based, but that is proving to be
inapplicable to the facts in the case. The greatest requirements for
notes in any year in this country happened when the business volume
was at its lowest, showing that the demand for currency does not
necessarily follow the fluctuations of business. The Buctuation of
bank lending on short-term eligible paper reHects to some extent
the activity of business. The call for Federal Reserve notes in the
United States, a country where 90 percent of the business of the
country is done by check, has very little relationship to the volume
of business.
As I stated a few days ago in discussing this question, the Re
serve banks have two classes of liabilities: One is the deposits to
the member banks and the other is the notes outstanding.

The CHAIRMAN. Will you not add to that, the capital held by the
other banks ?
Governor EccLEs. That is a liability to the stockholders, of
course; and the surplus is a liability to the Government. In
liquidation, the assets of the Reserve bank consist of the gold cer
tificates, and the investments that the Reserve banks make in gov
ernments, and loans and discounts which they make to member
banks.
I see no reason for putting up 40 percent gold certificates back
of notes and then putting up eligible paper to the extent of 60 per
cent. As a matter of fact, it would be perfectly impossible to cover
the note requirements of the banks by 60 percent of commercial
paper; because the banks do not have the paper to cover that pro
portion of the note requirements. Therefore there would not be
sufHcient Federal Reserve notes to meet the requirements, if the
Reserve banks were required to secure notes, as originally contem
plated in the act, by 60 percent of the commercial paper.
There is no difference between note liability and deposit liability.
They are both liabilities of the bank and there would seem no more
occasion for the securing of notes than it would for the securing
of deposits. All of the assets of the Reserve banks are back of
all of the liabilities of the Reserve banks. The type of assets that
the Reserve banks hold—outside of the Government bonds which
they buy and the gold certiBcates which they hold—is determined
by each Reserve bank, when that Reserve bank extends credit to
member banks.
Mr. DiRKSEN. Well. Governor, if you have more than 40 percent
gold reserves, that means that the Federal Reserve bank has got
to issue $2.50 for every gold certificate dollar that it has; is that
correct 2
Governor EcCLES. What is that?
Mr. DiRKSEN. I f you have that 40-percent gold reserve behind
every dollar of Federal Reserve notes issued, you will have issued

BANKING ACT OF 193 5

291

2% times for every gold certificate that the Federal Reserve banks
may have?
(Governor EccLEs. That would be right.

Mr. DiRKSEN. Then in the light of the fact that you could buy
and sell without limit, virtually, all of the outstanding contingent
obligations of the Government, or those that are guaranteed, you
could retire most of them today if you so chose, and if that was
going to be the policy, by rather copious note issue; that would be
entirely possible under the bill, would it not ?
Governor E ccL E S . As I understand it, the bill would not change
that situation, at all.
Mr. DiRKSEN. But I would think that would be possible, would
it not?
Governor EccLES. The present law permits notes to be secured
by Government bonds and gold certincates. That is not in the
present law, it was in the Emergency Banking Act of 1932.
Mr. DiRKSEN. You could, instead of just securing them, retire
them altogether?
Governor E ccL E S . What is that?
Mr. DiRKSEN. I say, instead o f securing them, you could retire
them altogether ?
Governor E ccL E S . Retire what?
Mr. DiRKSEN. Retire these bonds that had been guaranteed as to
principal and interest, being nothing more than a note issue-----Governor E ocL E S . You mean that the Reserve Bank, through openmarket operations, could purchase all of the outstanding, or as many
of the outstanding Government bonds and guaranteed bonds as they
chose to do?
Mr. DiRKSEN. Yes; as far as there were gold certificates available
that would be possible, would it not?
Governor E ccL E S . Yes; but, of course, that would increase the
reserves of the members by the amount of bonds which were pur
chased, and the excess reserves of the members today are something
over $2,000,000,000. To extend that reserve, banks purchase addi
tional Government bonds or bonds guaranteed by the Government—
they would increase the reserves of the member banks.
Mr. DiRKSEN. I think this morning, or yesterday, you made the
observation that the relationship of income to the deposit currency
was as 3 to 1, or substantially so?
Governor EccLES. In 1928, and 1929 it was 3.12. That was about
the average, as I recall, of the deposits and currency to the national
income. In 1933 the relationship, or what is spoken of as the income
velocity, was about 2%. At the present time, it would be substan
tially less than that. That increase of money, deposits plus cur
rency, has been much more rapid than the increase in income, and
hence, the velocity has been reduced.
Mr. DiRKSEN. Has that relationship of 3-to-l between the income
and deposit currency existed for a longer period than since 1929 ?
Governor Ecci^s. No; it has been steadily going down.
Mr. DiRKSEN. It has been going down since that time, but I mean
anterior to that period. I do not know where I got that figure,
but-----Mr. GOLDSBOROUGH* Does income mean the same as production?

292

BANKING ACT OF 19 3 5

Governor EccLES. Yes; it is spoken of as the national income. Dr.
Currie says the figure was very stable from 1923 to 1929.

Mr. DiRKSEN. At 3-to-l ?
Governor EccLEs. Yes.
Mr. DiRKSEN. And before that time, what was it?
Governor EccLES^ I do not have the figure on it. Of course, during
the war period and during the period of depression in 1920 and 1921,
I imagine there would be some changes in ratio.
Mr. HANCOCK. May I ask a question ?
Mr. DiRKSEN. Yes.
Mr. HANCOCK. Governor, what do you mean by " national income?"
Governor EccLES. What I understand to be the basis for
the national income is the price of all goods, whether consumer &
goods or capital goods, that are produced in any one year.
Mr. HoLLiSTER. For ultimate sale?
Governor EccLES. Would that be sale?
Dr. C u R R i E . It is the wages, profits, dividends, of all the money
actually received by the income receivers.
Governor EccLES. It is supposed to represent all the goods bought
and sold.
Mr. HoLLiSTER. That is, the ultimate sales ?
Governor EccLES. The ultimate sales, yes; otherwise you get dupli
cation. That is right, the ultimate sales.
Mr. HoLLiSTER. Dr. Townsend refers to $1,200,000^000,000, and I
wanted to be sure about it.
Governor EccLEs. No, you have $900,000,000,000 to $1,000,000,*
000,000 of bank debits, which, based upon the amount of demand
deposits would possibly give a velocity of deposit currency turn-over
of over 50 times in the period of 1928 and 1929.
Mr. HANCOCK. At what rate is the national income running today!
Governor EccLEs. Well, I do not know. I do not know that there
are any figures at all on it.
Mr. HANCOCK. What was the national income in 1934, as defined
rnor EccLES. Do you have the figures of the Department o f
Commerce ?
Dr. CuRRiB. No; not for 1934.
Governor EccLEs. I have heard it variously estimated from $50^
000,000,000 to $50,000,000,000, but you would really have to have the
complete figures for 1934.
Mr. DiRKSEN. At any event, that ratio is invariable and goes back
to 1923 ?
Governor EccLEs. It was relatively constant.
Mr. DiRKSEN. And for any increase of $1,000,000,000 in deposit cur
rency, you would get an increase of $3,000,000,000 in national income !
Governor EcctEa. Well, theoretically, but that has not been the
case from 1929 to 1934.
Mr. DiRKSEN. But if it were invariable, there would be a great
incentive then to increase the amount of deposit currency, in the hope
of increasing the national income by just exactly three times that
amount and all the good that we could do with that amount o f money ?
Governor EccLEs. It would be fine—there is no question about
that—if we could do that by an increase of our volume of money,
without regard to who owns the money, and thus regulate our

BANKING ACT OF 193 5

293

national income. I do not believe that is possible. I do feel, as I
have said before, that of course the volume of money is an important
factor; and, certainly, with high interest rates and shortage of
reserves today, you could expect no credit expansion, and such a
situation would be very deflationary. Excess reserves, such as we
have today, which bring down the rate of interest, should ultimately
lead toward creating credit expansion—whether we can do that
and recover time alone can tell. That is one of the factors and one
of the elements that will help make for recovery, if private credit
expansion can induce recovery.
Mr. DRiscoLL. Governor, I am not entirely clear in my mind as to
the expression " national income"; does that mean the price of
<every taxable article that is produced in the United States per year!
Governor EccLES. It is the income received from the production
o f all goods.
Mr. DRiscoLL. We will say all of the hay, tobacco, textiles, wool
that is sold 2
Governor EccLES. No; you would get duplication then.

Mr. D R is co L L . Not if you sell it only once?
Governor E o c L E s . That is right. For instance, you would sell
wheat to the miller, and the miller would sell the flour to the whole
saler and so on, and you would get, of course, a duplication, because
that would be the flour sold to the consumer-----Mr. DRiscoLL. And not the wheat sold by the farmer!
Governor E ccL E S . No.
Mr. SissoN. In other words, there is a great distinction between
the national income and the total turnover of business.
Governor E ccL E S . A very great distinction.
Mr. SissoN. Many times?
Governor EccLES. A very great distinction, but the national in
come determines the actual wealth produced, which determines the
well-being of the people if it is properly distributed.
Mr. FoRD. Might I suggest that my interpretation of "national

income", is all wages, interest, dividends, ultimate sale prices of
goods. Does not that fairly well cover it!
Governor EccLES. I think that is the rule.

Mr. SissoN. That would not include the lawyers' income, who are
not productive members of society, as a part of the national income!
Governor E ccL E S . Yes; it includes a lawyers' income.
Mr. W iL L iA M S . How about wages!
Governor E ccL E S . The same thing applies.
Mr. H oLLiSTER. Would not the real test be not the national income
in dollars, but the units of articles sold in respect to these other
particular years! I f your prices are quite different, your national
income may look different, but it is the units of things that happen
to be sold in a particular year, with reference to the other year!
Governor E ccL E S . Yes, the production; that is right.
Mr. D R is c o L L . Governor, I see that section 209 of this bill con
fers upon the Reserve Board the authority by regulation to change
the requirement as to the reserves to be maintained against demand
or time deposits. As I understand the percentage on demand is now
13 for Chicago and New York, and 10 for other eastern cities, and
? for the country banks, and 3 percent on time deposits!
Governor EccLES. That is right.

294

BAN ^NG

ACT OF 1 9 3 5

Mr. DiRKSEN. Now, at one time, I think when the Federal Reserve
was raising prices, it was up to 25, 18, and 15, was it not? Was it
not much higher, and mounting higher when the Federal Reserve
was first enacted ?
Governor EccLES. It was higher than it was in 1925; it was 18 and
down below 18.
Mr. DiRKSEN. It has been reduced ?
Governor EccLES. Yes. Dr. Goldenweiser, I wonder if you know
the reason for the drop in the Reserve requirements, from those
higher percentages to the percentage that applies at the present
time?
Dr. GoLDENWEiSER. The reason requirements were reduced at the
time was that it was the theory that the cash held in the bank
vaults amounted to about that much. When this cash in the vaults
held by the banks was excluded from the legal reserve, there was an
allowance made for it.
Mr. DiRKSEN. You do not require any cash in vault now, do you?
Dr. GoLDENWEiSER. No. When they would not let it count as
reserves any longer they reduced the requirement.
Mr. DiRKSEN. No; actually, there is no cash in the vault at the
present time, only of course these reserves against the deposits that
are deposited with the Federal Reserve bank?
Governor EccLES. There is cash in the vault, and these reserve
requirements of 7,10, and 13, as I understand Dr. Goldenweiser, were
reduced because previously the cash held was considered as a part
of the reserve requirements, and the cash now held by the banks is
not considered a part of the reserve. There is no legal cash require
ment, but banks have to hold suiBcient cash to be able to meet the
cash requirements of their customers, and those requirements fluc
tuate from day to day.
They have to ship money, from the Reserve bank to their bank and
the amount of cash required by a bank that is not in a Reserve
center, that is, in centers where there is no Reserve bank or branch
of a Reserve bank, is relatively higher than the percentage of cash
that is carried in a bank where there is a Federal Reserve branch
bank or Reserve bank.
Mr. DiRKSEN. What reserves do the Bank of England and the
Bank of France require, as compared to these requirements here?
Governor EccLES. I am unable to say.
Mr. DiRKSEN. Dr. Goldenweiser, what can you say about that?
Dr. GoLDENWEisER. There are no legal requirements about the
Reserves of commercial banks.
Mr. DiRKSEN. In practice, what do they maintain?
Governor EccLES. Well, in England, somewhere around 10 per
cent, as a rule.
Mr. DiRKSEN. Yes; both the demand and time deposits?
Dr. GoLDENWEiSER. Yes; against their deposits.
Mr. DiRKSEN. Against all deposits?
Dr. GoLDENWEiSER. Yes; and in France I do not know, because in
France they hold so much of it in actual notes and the ratio varies,
but it is not very greatly different from the English system.
Mr. DiRKSEN. Weil, now Governor, section 209. of course, would
confer upon the Federal Reserve Board the power to raise or lower

BANKING ACT OF 193 5

295

those reserve requirements; in other words, instead of 13. 10, and 7,
you could reduce them to 10, 7, and 3, and you might reduce the
reserve against the time deposits to 2 percent or even 1 percent. In
practice, how much of that reserve deposit do the Reserve banks, as
a general thing, carry?
Governor EccLES. You mean the member banks?
Mr. D i R K S E N . No; of the deposits that are carried by member
banks in the Federal Reserve bank, do they keep all of the 13 percent
or 10 percent or 7 percent on hand, or do they use it ?
Governor. EccLES. The Reserve banks.
Mr. DlRKSEN. Yes.
Governor EccLES. The Reserve banks do not invest their money—
that is, their deposit money—from the standpoint of keeping their
money operating at a profit. It is their business to invest their money
in open-market purchases as a regulatory measure of the monetary
system.
Mr. DiRKSEN. Well, the purpose, apparently, of that section is to
give greater flexibility and give the Federal Reserve Board the
authority to raise or lower their reserve requirements, and----Governor EccLES. That provision with reference to the reserve re
quirement is now in the law. The Thomas amendment to the act of
May 12,1933, added to the Federal Reserve Act a provision giving the
Federal Reserve Board the power, by declaring an emergency, to raise
the reserve requirements, with the consent of the President. That
was put in there as a supplemental monetary control to open-market
operations. It is a control against inflation.
Mr. D i R K S E N . Against inflation ?
Governor EccLES. Yes; that would be the purpose of that—a con
trol against inflation. For instance, assuming that the excess reserves
of member banks greatly exceeded the amount of Government bonds
which the Reserve banks held and the bills which they held, there
would be no way of controlling through open-market operations an
inSationary credit expansion on the part of member banks. There
would be no way of reducing or wiping out their excess reserves upon
which credit inflation is built. For instance, if the authority now
granted to issue $3,000,000,000 of greenback currency was exercised,
and if the $2,000,000,000 of gold profit now in the stabilization fund
were used, $5,000,000,000 additional bank deposits would be created.
Mr. GOLDSBOROUGH. Right there, if that money were used to retire
Government bonds, the deposits would not be increased but the
reserves would be increased ?
Governor EccLES. That is right. In that case it would increase the
reserves by that amount, but it would increase deposits to the extent
that it retired Government bonds not held by the banks. If the
money was used to retire Government bonds held by individuals, it
would increase deposits and increase reserves; to the extent that it
was used to buy Government bonds held only by the bankers, to that
extent it would increase the reserves alone without increasing
deposits.
It is possible with the use, we will say, of the $5,000,000,000 referred
to, to increase the reserves by that amount. Additional gold may con
tinue to come into the country, which would also tend to increase the
reserves. So that the banking system could build up excess reserves

296

BANKING ACT OF 19 35

from the $2,300,000,000, approximately, that they hold now to $7,300,000,000 plus any increased gold that comes in. You would have a
potential agency for bank-credit inflation that would simply be ter
rific and no open-market operation could control it. An increase of
reserve requirements would have the same effect in extinguishing the
excess reserves as a sale of securities, and that is why this proposal is
made.
Mr. DiRKSEN. That is the sense of the 20 percent in this bill ?
Governor EccLES. Yes.
Mr. DiRKSEN. Ultimately to extinguish the reserve requirements, if
necessary 2
Governor EccLES. Yes.
Mr. DiRKSEN. I think I have only one more question, and that is
with reference to section 210, dealing with real-estate loans. I was
much interested in the discussion this morning, and I wondered
whether, after all, we could not keep the banks on a commercial
basis and keep them liquid by letting the building and loan associa
tions handle the amortized real-estate mortgages up to 20 years, and
pursue the policy of greater leniency with respect to bank loans, to
such thrift agencies that now operate, I say that for this reason—
the building and loan associations are equipped to handle the amor
tized loans, and if the banks were going to handle them in any
quantity, they would have to set up separate establishments and take
on additional personnel to do that.
Mr. CAViccHiA. May I say this, Mr. Dirksen ?
Mr. DiRKSEX. Yes.
Mr. CAviccHiA. The great trouble was that many building and
loan associations were running businesses in opposition to the banks.
They got in the habit of going to the banks to borrow money on
notes and pay, say, 5 percent on the money that they borrowed irom
the national bank or trust company; and they would proceed to lend
it to me, or the man who wanted to buy himself a home; and they
would get 3 percent or 4 percent or 5 percent bonus; and if they
started to sell preferred shares to depositors and some of these com
panies borrowed—they did not borrow, but they took on deposit
money on which they guaranteed as much as 7 percent per annum,
which no bank could afford to pay. I f the building and loans had
not gone to that field, they would not have suffered as much as they
did when the crash came in 1929.
Mr. DiRKSEN. Well, let me say there are probably 700 or 800 Fed
eral savings and loan associations that have been established now;
and, of course, their sole mission is to deal in amortized loans.
Governor EccLEs. Well, I may answer that by stating that the
Federal savings and loan associations are members of the home-loan
banks.
Mr. DiR KSEX. And those are rediscount institutions?
Governor EccLES. Yes; and those institutions can borrow money
from the home-loan banks at 3 percent. Therefore I do not know
how commercial banks owning substantial savings funds upon which
they pay 2% percent could compete with the home-loan banks in
providing funds to savings and loan associations.

BANKING ACT OF 19 3 5

297

Mr. D i R K S E N . It could, but for one thing, and do you know what
it is? It is the bank examiners. There are lots of buildings and
loans that would go to the banks and make their notes signed by
all of the directors, get the money, and pour it into the development
of building and construction in their communities: but I doubt very
much whether the examiners would permit that at the present time.
Governor EccLES. The only thing is that a bank, in order to pay
2%-percent interest on time funds, which it will likely have to pay
toliold the funds against the competition of the 3- and 3%-percent
rates paid by savings and loan associations, must lend those time
funds on a basis to yield them not less than 5 percent.
A building and loan association, as a member of the home-loan
bank, would not be willing and could not afford to pay the banks
5 percent for funds which they in turn would have to loan out at
8 percent; and in borrowing from the banks, they would borrow on
a short-term basis and would be loaning in the community on homes
on a long-term basis. Therefore I do not think it is practicable to
expect the building and loan companies to borrow from the savings
or time funds of commercial banks.
Mr. D i R K S E N . There is one statement in here, one proviso in the
section dealing with real-estate loans, section 210, that says:
N o t h i n g c o n t a i n e d in t h i s s e c t i o n s h a l l p r e v e n t a n y n a t i o n a l b a n k i n g a s s o c i a
t i o n f r o m a c q u i r i n g , a s a d d i t i o n a l s e c u r i t y f o r lo a n s , p r e v i o u s l y m a d e in g o o d
f a it h , s e c o n d o r s u b s e q u e n t lie n s o n r e a l e s t a t e o r s h a r e s o r p a r t ic ip a t io n s in
su ch

lie n s .

Those are junior liens, or they would not be second mortgages?
G o v e r n o r E ccL E S . T h a t is r i g h t .

Mr. D i R K S E N . There would not be anything to prevent a bank from
taking a $2,000 first mortgage on a $10,000 property, and then step
ping in a little bit later and taking another junior mortgage for
$1,000, and making a junior lien against the first mortgage against
the property, if they so desired. I believe you stated this morning
you thought that was rather poor financing to even indulge in junior
liens, if it could be avoided.
Mr. Ecci*ES. A bank should be prohibited, in the first instance,
from taking a junior lien—from making a loan secured by a junior
lien; but if a bank has a loan, and even though it may be an unse
cured commercial loan or a collateral secured loan, the bank is justiRed in taking a second lien, for additional security, if conditions de
velop where the loan, which was adequately and properly secured,
or a loan which was made to a concern which had ample resources,
gets into a position where it becomes a doubtful loan. In such cases
Sie bank may take a second mortgage or take any other security
that it can get; and banks have always done that, in fact. They
have always been doing that.
Mr. D i R K S E N . The only requirement, however, in that language, is
the faith of the bank, " previously made in good faith."
G o v e r n o r E ccL E S . I t h i n k p o s s i b l y t h e o n l y r e a s o n f o r t h a t l a n
g u a g e t h e r e is t h i s : T h e b a n k s , w e k n o w , h a v e a l w a y s t a k e n , a n d
th e re h as b een n o p r o h ib it io n u p o n b a n k s ta k in g , f o r d e b ts p r e v i
o u s ly c o n tr a c t e d , s e c o n d m o r tg a g e s o r a n y o th e r c o lla t e r a l.

298
Mr.

BANKING ACT OF 19 3 5

DiRKSEN.

Have they that authority

now ?

Governor EccLEs. Yes.

Mr. D i R K S E N . To take second mortgages?
Governor E ccL E s. Yes; they have always done that.
Mr. C A v ic c iiiA . Is there not some contusion here, Mr. Dirksen?
I think you mentioned about a bank lending their $10,000, and sub
sequently he wants to borrow another $1,000 on the same piece of
real estate. That is perfectly legitimate, because it is considered
practically one mortgage loan—is it not—whether it is made in one
loan or two loans; am I correct, Governor ?
Governor EccLES. It would seem to me that it would be consid
ered a first and second mortgage, because the first mortgage might
be sold without recourse, and certainly the $1,000 mortgage would
then be a second mortgage. So long as both pieces of paper are held
by the same institution, they wouldoe, for all practical purposes, the
equivalent of a first mortgage.

Mr. C A v ic c m A . I had in mind the building and loan practice,
where a^ man has $5,000 mortgage, and a year or two later wants
another $1,000; in all respects, that is considered as one mortgage.
Now, a second mortgage is never taken by a building and loan—by a
member bank unless it wants to secure some loan that it had already
made; is that correct?
Governor E ccL E S . That is right.
Mr. HANCOCK. Mr. Dirksen, may I ask one question?
Mr. DiRKSEN. Y e s .
Mr. HANCOCK. In addition to the fact that there is such a s m a l l
amount of eligible commercial paper available for rediscount, did I
understand you to say the other day that one of the reasons why you
were suggesting that 20-year amortized real-estate mortgages shouM
be made eligible for borrowing was the fact that unless the banks
did handle this type of paper, these loans would continue to gravitate
to the home-building and thrift institutions ?
Governor EccLES. We are not proposing that 20-year mortgages,
as such, be eligible for rediscount. The proposal is that the banks
be permitted to make amortized real-estate loans on improved prop
erty up to the maximum period of 20 years, up to a certain percentage
of their time funds.
Mr. HANCOCK. Sixty percent, is it not?
Governor EccL E S. Yes. Now, with reference to the question of
eligibility, there is nothing said at all about the right to rediscount
those mortgages. The wording of the eligibility provision is to the
effect that the Federal Reserve Act would be amended to authorize
the Federal Reserve banks, subject to regulations of the Board, to
discount for member banks any commercial, agricultural, or indus
trial paper, and to make advances to member banks on promissory
notes, secured by any sound asset.
Mr. HANCOCK. I understand. This is something that was recog
nized in the Emergency Banking Act, that the member banks be per
mitted on their bills payable or promissory notes, secured by sound
assets, to borrow from a Reserve bank, and the credit department of
each Reserve bank would determine the terms upon which the mem
ber bank could borrow.

BANKING ACT OF 1 9 3 5

299

Let us see if we understand each other right there for a minute.
Under that provision, would the member bank be able to endorse,
without recourse, a Arst-mortgage note to a Federal Reserve bank?
Governor EccLES. A member bank now cannot endorse without
recourse any paper to a Reserve bank. All borrowing from the Fed
eral Reserve bank is done on eligible paper, on the discount basis,
with recourse, and all the bill does is to broaden the borrowing privi
lege so as to give to the Reserve banks the power to lend to member
banks on the member bank's note for a period of 3, 6, or 9 months,
according to' the regulations that the Board may make, those notes to
be secured by bonds, mortgages, or loans secured by collateral, with
such margin as the Reserve banks may consider adequate to make the
loans safe and sound to the Reserve bank.
Mr. HANCOCK. I think I understand that now; you see if I do.
In other words, the member banks, under this provision, would not
be able to rediscount a 20-year amortized mortgage with the Federal
Reserve System, but use the mortgage as collateral for a loan.
Governor EccLES. That's correct.

Mr. HANCOCK. But it could give its own note, secured by the 20year amortized mortgage, and secure a loan from the Federal Reserve
bank, if that was a sound asset ?
Governor EccLES. The Reserve bank would determine what mar
gin might be required, and would also determine whether the loan
would be made for 3 months or 6 months, or a longer period.
Mr. HANCOCK. But that would enable the member bank to be in a
position, in time of emergency, to take that paper and use it for the
purpose of liquidity ?
Governor EccLEs. The same as it could with eligible paper; that
is right.

Mr. HANCOCK. In other words, you mean put real-estate mort
gages on parity, as they should always have been, so far as eligibil
ity is concerned, with bonds?
Governor EccLEs. Government bonds, you mean?
Mr. HANCOCK. Yes; Government bonds?
Governor EccLES. Yes; so far as being able to borrow money from
the Reserve bank is concerned.
Mr. CA ViccH iA. Is this inflation, Governor?
Governor EccLES. This is not inflation, because no member bank
is going to borrow from the Reserve bank as long as it has excess
reserves. Now, when the borrowings of member banks reach the
point where you can get credit inflation, just as we have had in this
country in the past, it was said to be the duty of the Reserve Board
and the Reserve banks to raise the discount rates and to discourage
future credit expansion.
Inflation can only be brought about by the willingness of the
people and corporations to borrow money, and that is one thing we
are trying to get; we are trying to induce the borrowing and lend
ing of money upon which recovery is based. We are talking about
the fear of inflation or reflation, when, as a matter of fact, that is
what we want.
Mr. DiRKSEN. Governor, I have one more question, and that is
predicated on the question asked by the chairman of the committee

300

BANKING ACT OF 19 3 5

last week, when, off the record, he observed something about the
condition of one of the Federal Reserve banks. Was that early
in 1933?
The CHAIRMAN. I am not sure that I remember the remark you
refer to.
Mr. DiRKSEN. Well, I got the impression at that time that it was
the Federal Reserve banks that had lost their liquidity; is that
possible 2
Governor EccLEs. The Reserve bank lose its liquidity?
Mr. D i R K S E N . Yes.
Governor EccLES. I never heard of that.

Mr. D i R K S E N . I got that impression at the time, but that is neither
here nor there. I am just wondering if, carried to its logical con
clusion, there is plenty of demand for this money; and, as you say,
the assets can still be sound and still not be liquid, but if those were
infiltrated to the Federal Reserve banks, you may have another
flurry similar to the one we went through.
Governor EccLEs. An asset that may be considered sound and
liquid with business activity and a high rate of employment and
national income becomes frozen and unsound when the -national
income diminishes. Soundness is not determined only by the sub
stance of a loan or asset at the time the asset is purchased or the loan
is made; it depends upon the state of trade and business which fol
lows, and it is up to the banking system to maintain a state of trade
and business that will preserve soundness, if soundness existed when
the credit was created, in so far as it is possible.
When certain foreign bonds were purchased, German bonds, prior
to the war, we considered those the best in the world, and they were
sound assets. When wheat was selling at $2 a bushel, it would have
been considered perfectly sound, and the paper would have been
eligible to have been loaned upon, and it would have been proper to
have loaned upon that wheat with a 25-percent margin, on the warehouse-receipt basis. The same thing is true in any other commodity.
I remember when sugar was selling at around $21 a bag, and
within a 6-month period it fell below $5 a bag. I am not arguing
that a loan of 80 percent of the value of $21 sugar would have been
sound.
I remember when sheep were selling at $16 a head, when within
a 6-month period you could not sell them at $4 a head, yet a loan
made on sheep at $16 for 9 months—that is, on the basis of 50 per**
cent of $16—say, $8 a head for 6 months was eligible; whereas be^
fore that loan came due that security was not selling for one-half
of the amount of the loan.
The point I am trying to make is that the question of liquidity and
the question of soundness depends upon the state of trade and the
state of business; and to the extent that forced deflation through
forced credit contraction is obviated through making available the
rediscount facilities of the Reserve banks—to that extent you pro
vide liquidity. The only liquidity that really exists in a serious de
pression is the liquidity that is provided through the money-issuing
agency, the Reserve System. Even Government bonds cease to hav&

BANKING ACT OF 19 3 5

301

liquidity at the price at which corporations can sell them without
going bankrupt.

The price of Government bonds in 1932 was down, the 3's, I think,
to $83. A bank holding any substantial amount of those bonds—
to have sold them at that market—and if any substantial amount
had been sold, the market possibly would have gone to $50, and the
bank would have been ruined. The banks, however, could go to the
Federal Reserve banks and borrow on those Government bonds, and
that was a protection to the market, and also a protection to the
banks, which would not have existed if the banks had been forced
to sell those bonds to get money to meet the demands, instead of
going to the Reserve bank and getting the money.
Mr. HANCOCK. Mr. Dirksen, may I ask one other question?
Mr. DiRKSEN. Yes.
Mr. HANCOCK. Now, deposits you have already written oif.
Mr. DiRKSEN. I think if the Governor wanted to, in the light o f
the fact that it was related to the bonus, he might make a further
observation.
Governor EccLES. I do not care to express an opinion on matters
of that kind, because I feel it is entirely outside of my ofRcial posi
tion. I have my personal opinion, but I think it is outside oi my
oSicial position.

Mr. DiRKSEN. I have just one observation to make with refer
ence to this last section of title II, and it is this: Whether or not
the time deposits will be drained off in the form of real estate
amortized loans to any appreciable extent, will depend entirely upon
the public demand?
Governor EccLES. Entirely.

Mr. DiRKSEN. The public demand must necessarily be occasioned
upon the purchasing power?
Governor EccLES. There is no question about that.
Mr. DiRKSEN. If you have not got the purchasing power, they
might demand until they are blue m the face, and it would not do
any good; and that, in turn, is conditioned upon the state of employ
ment in the country!
Governor E c c L E s . That is correct.
Mr. DiRKSEN. The question that comes up to us is: Which is the
6rst, the hen or the egg? And I question whether it is going to do
any good.
Governor EccLES. I f you get demand for long-term credit for home
construction or for other construction, and the facilities for providing
it do not exist, that would be most unfortunate.

Now, I feel that, with low interest, and abundance of excess funds,
that the need and desire of institutions with those funds should be
to put them to work, and that may tend to create some construc
tion. I do not believe that the demand, today, throughout the
country as a whole, for long-term, amortized loans is entirely being
met. What you say about the hen and the egg is true, and I am not
claiming for the eligibility feature of this legislation and the realestate feature, one of which is the corollary to the other, that it will
bring about recovery; but it would create the machinery upon which,
recovery can be brought about.
127297— 35------ 20

302

BANKING ACT OF 1 9 3 5

I might say this: That the increase in private expenditures for
equipment and construction await upon the increased demands for
products of industry. The increased demand depends upon the in
creased incomes, as a whole. Increased incomes await upon in
creased expenditures in construction. There is your circle.
Now, the impasse can be broken in the first instance, I believe, only
by the various Government activities, and if the impasse is broken,
then you have created here the machinery with which to help carry
forward, just as you are creating in the case of the Home Owners'
Loan Act and providing funds for your home-loan banks to loan to
the members of the home-loan banks. That is the agency that will
help in the mortgage Reid as well.
Mr. HANCOCK. That is what you said in 1933, is it not?
Governor EccLES. Something like that.
Mr. D i R K S E N . That is all I have to ask, Mr. Chairman.
The CHAIRMAN. All right. Mr. Wolcott, have you any questions ?
Mr. HANCOCK. Let us adjourn now until in the morning, Mr. Chair
man.
Mr. FoRD. May I make one observation before we adjourn?

The CHAIRMAN. Pardon me just a minute.
record.
(Here follows discussion off the record.)

Let this be off the

Mr. SissoN. As I understand it, this bill makes no change in the
law with respect to the liability of the banks that are members of the
permanent insurance fund for assessment; that is, in other words,
the assessment is still based upon the total amount of the deposits;
that is correct, is it not, whether insured or not ?

The CHAIRMAN. That will be the situation under the new law, but
it is not the basis on which the assessments are made under the law as
is stands now.
Mr. SissoN. I know, but it was contemplated as a permanent fund?

The CHAIRMAN. Well, under the permanent plan, there would be
an assessment of one-fourth of 1 percent, to be repeated in case of
necessity. The necessity depends upon whether or not the total fund
on hand equals one-fourth of 1 percent of the amount of the total
deposits of insured banks.
Mr. SissoN. Well, what I am getting at, Mr. Chairman, is this:
You all know that was one of the points at issue last year, and that
is going to be one of the points in controversy this year. We are
getting some letters from certain banks to the eSect that that is
inequitable; that is, when the total amount of the deposits that are
insured are a relatively small percentage of their total deposits, as
compared with their uninsured deposits, they are making the claim
that there should be a change made.
I am not taking any position. In fact, if I were to take any posi
tion now, I wouid be opposed to that contention.
The CHAIRMAN. I think you will Rnd, Mr. Sisson, in Mr. Crowley's
testimony, and in Mr. O'Connors' testimony that that phase of the
legislation is fully covered, not only as to the changes made and the
systems being employed, but all Reids that enter into the calculation
are covered.
Mr. HANCOCK. Mr. Chairman, may I respond to my good friend
from New York?

BANKING ACT OF 1 9 3 5

303

I had occasion, today, Mr. Sisson, to go into a case affecting an
institution in my own State. I received a letter recent]y criticizing
the method proposed under title I of the new bill, whereby the pro
posed assessment of not more than one-twelfth of 1 percent would
be levied against the total deposits in any one institution, annually.
This institution that I have in mind, under the present law, insured
$20,700,000 of its total deposit liability of $58,000,000, and the present
cost to that institution is approximately $51,000 a year. Under the
provisions of the new act, whereby the assessments apply to the total
deposits of $58,000,000—on the basis of not in excess of one-twelfth
of 1 percent, the cost of insurance to this institution is actually re
duced $3,000, to $48,000 a year; and 13,000 institutions that are in
sured today would carry this insurance at a lesser amount under the
new act than they do under the temporary plan at the present time.
Mr. WiLLiAM S. The fact is, there is no insuring under the perma
nent system and----Mr. HANCOCK. No; I say, under the temporary plan.
The CHAIRMAN. Well, gentlemen, have we decided to adjourn for
the afternoon? We will meet at 10:30 in the morning, and I hope
we shall Rnish with Governor Eccles tomorrow.
(Thereupon, a recess was taken in the hearing until 10:30 a. m.,
Friday, Mar. 15, 1935.)

BANKING ACT OF 1935
F R ID A Y , M A R C H 15, 1935
HOUSE OF REPRESENTATIVES,
COMMITTEE ON BANKING AND CURRENCY,

i7. C.
The committe met at 10:30 a. m., Hon. Henry C. Steagall (chair
man) presiding.
The CHAIRMAN. All right, gentlemen, there is nothing in the
House to interfere with our meeting today.
We will resume with Governor Eccles. Mr. Ford, have you some
thing?
Mr. FoRD. Mr. Spence is next.
The CHAIRMAN. That is all right. Mr. Spence, if you have any
questions, you may proceed.
Mr. SPENCE. Governor Eccles, what will be the practical effect of
waiving the collateral requirements for the issuing of Federal Re
serve notes! In other words, is there any limitation, or will there
be any limitation on the issuance of notes ?
Governor EccLES. There is no limitation now, for all practical
purposes. What determines the use of currency is not the Federal
Reserve banks, nor the member banks, but the people of the country
who have claims on the deposits in the banks. They have the right
to request a bank to pay them in currency. The bank, in order to
be able to pay them such currency as they request, goes to the Fed
eral Reserve bank to get the currency. The bank, in order to get
the currency from the Federal Reserve, must have a balance with
the Federal Reserve, just as an individual depositor with a bank
must have a balance with the bank. Therefore, the only limitation
upon the issuance of currency is the demand for currency by the
people of the country that have bank deposits, and the collateral
requirements in no way affect or change the amount of the currency.
Mr. SPENCE. What was the philosophy of the original act which
so meticulously made the requirements for collateral?
Governor EccLEs. I do not know that I can say. I could only
surmise what was in the minds of the framers ot the act at that
time. The theory apparently was that the demand for currency
would fluctuate directly with the volume of activity of business, and
as business increased m activity, it would increase its borrowings
on eligible paper, which, together with the gold, would supply the
necessary collateral for the Federal Reserve not^s; and, as business
activity slackened or decreased, the volume of eligible paper held by
the banks would be reduced, and hence the volume of currency would
be reduced.

305

306

BANKING ACT OF 19 3 5

It has been found, however, that there is nothing in the history
of the Federal Reserve System to warrant such a conclusion. This is
the only country where there is a central banking system, outside of
Great Britain, which requires collateral to be held back of the note
issue of the central bank. All of the new central banks which have
been established in recent years recognize that, in essentially a checkusing country, there is no necessary relationship between the use of
currency and the volume of business.
We heard a great deal of talk about issuing currency with the
idea that, if that currency is issued in greater quantity than is now
outstanding, it would improve or help business. The direct spend
ing by the Government of currency, from the standpoint of the actual
money in circulation, and the business activity created thereby, would
be no different than the same amount of money spent by the Govern
ment as the result of its present method of financing; because you
cannot keep out in circulation more currency than is required by the
country to meet its convenience in doing business. The currency
comes right back to the banJks and from the banks goes to the Fed
eral Reserve banks and is destroyed. We have noticed that, from
the time of the bank holiday up until the present time, the amount
of currency in circulation has been reduced by about $2,000,000,000.
Mr. SrENCE. What is the total amount of gold held by the Federal
Reserve, Governor?
Governor EccLES. I do not recall the figures. Do you have that.
Dr. Goldenweiser ?
Dr. GoLDENWEISER. Gold certificates held by the Reserve banks
amount to $5,400,000,000.
Mr. FoBD. $7,866,000,000 in 1934.
Governor EccLEs. That would probably include the gold held by
the Treasury as well. The Federal Reserve would not have that.
Mr. SPENCE. The amount of gold reserves upon which the circu
lation is based; what would that be?
Governor EccLES. The law requires a 40-percent reserve against
Federal Reserve notes in circulation. Those gold certificates, plus
the Government bonds or commercial paper, or both, are held by the
Federal Reserve agent as collateral. In the absence of commercial
paper, it was necessary to accept Government bonds to make up the
60-percent difference between the 40-percent gold and the total of
notes outstanding.
Mr. SPENCE. And this act is that 40 percent of the gold reserve
is the sole basis of the circulation?
Governor ^CCLES. Yes; 40-percent gold reserve is the only limita
tion. There is also a reserve required against the deposits of the
Reserve banks, which is 35 percent in gold or lawful money.
Mr. SPENCE. And the circulation, based upon the gold now held,
would be two and one-half times that?
Governor EccLES. So far as ^old is concerned-----Mr. SfENCEL So far as gold is concerned?
Governor EccLEs. Yes; there is almost sufBcient gold now to back
up the outstanding currency 100 percent.
Mr. SPENCE. As I understand, the Federal agent was the agent of
the Federal Reserve Board in its dealings with the Federal Reserve
banks ?

BANKING ACT OF 1 9 3 5

307

Governor EccLES. The Federal Reserve agent is the chairman of
the board of directors, and is appointed by the Federal Reserve
Board and not by the banks, and he is the person at the bank through
whom the Federal Reserve Board deals.
Mr. SPENCE. He, in a sense, represents the Federal Reserve Board
in dealings with the Federal Reserve bank; is not that the philosophy
of it?
Governor EccLES. That is right.
Mr. SpENCE. And he saw that the Federal Reserve banks complied
with the requirements of the Federal Reserve Board. How will
those functions be performed now?
Governor EccLES. Through the Governor and the chairman, who
will be one and the same. Instead of having a dual organization,
which creates cleavage and which is bad administration, it is pro
posed to combine the two oiRces. That is one proposal in the bill
to which there has been practically no opposition from any source.
The bill will save, in the operation of the Federal Reserve System,
about $400,000 a year.
Mr. SrENCE. But the functions that were performed by the Fed
eral Reserve agent are still being performed, but the Board will
select the person to perform them?
Governor EccLES. One of the principal functions of the agent was
to hold the collateral as a sort of trustee against the notes which were
issued. He was responsible at all times to see to it that these gold
certificates and these Government bonds or commercial paper were
deposited with him in sufHcient amount to meet the legal require
ments for the issue of notes.
Mr. SrENCE. Under the law, one Federal Reserve bank may redis
count—it says under the orders of the Board and regulations pre
scribed by the Board, may rediscount its paper in other Federal
Reserve banks. To what extent has that been taken advantage of ^
Mr. EccLES. I could not tell you just to what extent. I under
stand, however, that in 1920 anJ 1921 there was some of that done,
when the reserves of the Reserve banks got down to practically the
legal limit and they were unable to extend further accommodations
and, at the same time, have suHicient gold to meet the legal require
ments for deposit and note-coverage. Do you remember to what
extent that was, Dr. Goldenweiser?
Dr. GoLDENWEisER. In 1920, from memory, about $250,000,000.
Mr. EccLES. How many banks were involved in the rediscount?
Dr. GOLDENWEISER. There were 11.
Mr. SrENCE. That provision, really, in effect, makes the Federal
Reserve bank a central bank, does it not?
Governor EccLES. It does so only to the extent of making the re
sources of the system available for the beneRt of all the member
banks, and that is all.
Mr. SPENCE. There is one other thing: I believe you said that you
thought that some policy ought to be prescribed with reference to
the administration of the bill, and you made a suggestion, or you
suggested an amendment. Will you tell us what that amendment
was, again ?
Governor EccLEs. I suggested that I thought that fixing the price
level as an objective would not be desirable, and as an alternative

308

BANKING ACT OF 19 3 5

I suggested that something like this might be better as a definition
of objective:
I t s h a ll b e th e d u ty o f t h e F e d e r a l R e s e r v e H o a r d to e x e r c is e su ch p o w e r s
a s i t p o s s e s s e s t o p r o m o t e c o n d i t i o n s m a k i n g f o r b u s in e s s s t a b i l i t y a n d t o m i t i
g a t e , b y i t s i n f lu e n c e , u n s t a b i l i z i n g f l u c t u a t i o n s in t h e g e n e r a l l e v e l o f p r o d u c
t io n , t r a d e , p r ic e s , a n d e m p l o y m e n t , s o f a r a s m a y b e p o s s i b l e w i t h i n t h e s c o p e
o f m o n e t a r y a c t io n .

That is better, I feel.
Mr. WiLLiAMS. That would be their duty even if you did not put
it in there, would it not 2
Governor EccLES. The present law does not give them such a duty,
at all. The present law only provides for------

Mr. WiLLiAMS. Ought it not to be their duty 2
Governor EccLES. I do not know. The law has looked upon the
Federal Reserve banks as agencies to provide credit for agriculture,
commerce, and industry. The original act never contemplated the
Federal Reserve bank as a monetary factor, as I understand it.
Mr. Cnoss. May I interject right there, that the testimony of the
members of the Reserve Board and some of the governors—they
testified that it was not their duty and they did not consider they
had anything to do with it.
Governor EccLES. I think it was thought that, if credit was pro
vided for commerce, agriculture, and industry, that is all that could
be done toward creating business stability.

Mr. WiLMAMS. You think they made no effort along that line, at
All?
Governor EccLES. What is that ?
Mr. W iLL iAM S. You think they have paid no attention to the objec
tive that you set out there, heretofore ?
Governor EccLEs. I would not say that. Of course^ the powers
of the Board have been limited, their authority and their duties-----Mr. WiLLiAMS. And they made no effort, at all, to stabilize business
conditions and mitigate the evil effect of fluctuating prices and
unemployment, and things of that kind ?
Governor EccL E S. I have only been on the Board, as you know,
for a very short time, and what the Board may have done is a matter
of record, and it would appear in the record, from the condition of
unemployment, the fluctuations of business activity, that whatever
may have been done was a long way from creating stable conditions.
Whether a condition of business stability can be brought about by
monetary policy, only time can determine; and, as I stated the other
day, monetary action has its limitations and has to be considered in
connection with the tax program and Government expenditures.
Mr. WiLLiAMS. I do not mean to be understood to be opposed to
the suggestion you made here. I had had the impression that was
their duty all right, and I still think, if it has not been their duty,
we ought to make it their duty.
Governor EccLES. I do not believe that under the existing law they
Are required to carry out or to perform that function.

The CHAIRMAN. Well, the fact is, is it not, Governor Eccles, that
there was an attempt to incorporate specific directions of that type
in the original Federal Reserve Act, and finally, it was left out of
the bill*
Mr. FARLEY. Mr. Chairman, may I have an opportunity-----

BANKING ACT OF 19 3 5

309

The CHAIRMAN. Mr. Spence, will you yield to Mr. Farley?
Mr. SPENCE. I just want to ask a question. Governor Eccles, do
you consider that this bill, if passed, will be an attempt by the Con
gress to exercise its constitutional legislative function to regulate
the value of money ?
Mr. EccLES. I should say that it would be a case of Congress dele
gating to a body that power and that responsibility, as defined in this
statement that I just read. We often think of regulating the value
of money as having reference to gold.

Mr. SpENCE. Well, as a corollary to that, that would be regulating
the price levels, too, would it not?
Governor EccLEs. It would be an attempt to regulate the price
level. If these instructions or requirements are prescribed for the Fed
eral Reserve Board the price level will be one of the objectives, but
not the only objective. Others will be stable production and employ
ment.
Mr. SpENCE. Well, how far do you think you could go in obtaining
some definite objective as to the regulation of price levels?
Governor E ccL E S . The controlling of production and the fixation
of prices can tend to create whatever price level is desired.
By the operation of the National Recovery Act and the Agricul
tural Adjustment Administration you can restrict production and
bring about a rise in prices; but it seems to me that the thing
that we are most interested in is to get a maximum of production in
the country as a whole and a maximum of consumption. That is far
more important than the price level.
In order to be able to get a maximum of production, it is necessary
to get a proper distribution, and the question of price naturally has
to enter into the problem. I do not know that I could add anything
to what I said when Mr. Cross was examining me with reference to
the problem of prices.
Mr. CRoss. May I ask a question ?

Mr. SPENCE. Go right ahead.
Mr. C R o s s . Governor, you said that three factors come in there r
The question of price and production and employment. If you
check the price level when the country was prosperous and when i t s
indebtedness was created, much of it fixed by bonds and taxes, and
the cheap dollar compared to the present dollar that existed—if you.
get a price level that is comparable to the price level then in that
period, is not that the very thing upon which depends both produc
tion and employment? In other words, to get employment you
have got to get the price to where the producer makes a proRt—a
probable profit, because not everybody makes a profit, of course, but
under good management, he can make a profit, and when he can do
that, he employs labor and in turn labor is given a purchasing
power and the country can function as a result of that, and you get
rid of your unemployment and you keep a stable product and you
keep a stable price level on the standard you take of some prosperous
year.
Governor EccLES. You know, from 1923 up to about 1929, we had
a fairly stable price level. Now, why was it that that stable price
level became an unstable price level and we got into the depression
we did!

310

BANKING ACT OF 19 3 5

Mr. CROSS. If you will let me answer that, if you put that as a
question——
Governor EccLES. I think maybe asking a question is the best way
for me to answer it.
Mr. CROss. I would say the Federal Reserve Board fell down in

its duty, or fell down under the law as it existed—I could not say
it was a duty. But in addition to that, we did not have then the
securities act to control the wild speculative gambling that took
place throughout the country on the stock exchanges. Now, we have
controlled it largely through the laws enacted in the Seventy-second
Congress.
Governor EccLEs. You assume that, if the volume of money in
relation to total production is kept at a certain ratio, you would
thereby maintain a uniform or fixed price.
Mr. CROSS. Not a fixed price of anything?
Governor EccLES. No, I know; I mean a fixed index, uniform
prices according to some index. And you overlook, it seems to me,
the income velocity, which is an element as important in our economy
as is the quantity of money. As I indicated the other day in reading
the quotations from the Brookings Institution report on our ca
pacity to consume, there must be a more equitable distribution of
income than existed in 1928 and 1929, in order to keep up income
velocity and to prevent production capacity getting all out of bal
ance or relationship with consumer buying power.
Mr. FonD. In other words, Governor, if you have a national in
come of $100,000,000,000, but if it was confined to a small percentage
of the people in the country, it would not accomplish the result of
wide-spread purchasing power, would it?
Governor EccLES. It would only so long as those receiving this
income continued to spend or invest those funds, but you reach a
point where----Mr. FoRD. A saturation point, in other words?
Governor EccLES. They no longer invest.

Mr. FARLET. Mr. Chairman, may I ask the Governor a few ques
tions about the bill itself?
Mr. SPENCE. When I get through; yes.
The CHAIRMAN. When Mr. Spence gets through, I will recognize
you immediately, Mr. Farley.
Mr. SPENCE. Governor, the maintenance of a stable dollar is some
thing that is very greatly to be desired, is it not, because if the
dollar would raise 10 percent in value and buying power, the wealth
of the Nation would be raised that much. For instance, if there
was $400,000,000,000 of wealth in the Nation and the dollar raised
its buying power, or was increased 10 percent, that would reduce the
money value of the wealth of the Nation $40,000,000,000, would it
not ?
Governor EccLEs. A stable price level is very desirable. If I
knew of some way to maintain stable prices, and at the same time
maximum production, naturally I would be very much in favor
of pursuing that method. But prices are influenced by so many
factors, crop failures, for instance, prices of imported goods as they
are influenced by the variation in the exchanges—those are two
factors that we may have very little or no control over, and they all
^nter into the price structure.

BANKING ACT OF 19 3 5

311

Mr. SPENCE. Now, in this bill we state a new policy, or new
standards, or new criterions, or new objectives to be attained. The
provision here in regard to the open-market committee says it shall
set forth policies that, in the judgment of the committee, should
be followed with respect to the open-market operation of the Federal
Reserve bank. Now, if this is a delegation of constituted legislative
power to regulate money, would it not be necessary for the Congress,
in making that delegation to state some objective to be attained %
I have not gone into that, but I want to read a paragraph from a
decision of the Supreme Court in P<27^7M
%%.
v.
^
—one of the " hot-oil " cases:
The Constitution provides that " all legislative powers herein granted shall
be vested in a Congress of the United States, which shall consist oi a Senate
and House o f Representatives" (a r t I. sec. 1). And the Congress is em
powered " to make all laws which shall be necessary and proper to carry into
execution" it general powers art. I, sec. 8, par. 18). The Congress mani
festly is not permited to abdicate, or to transfer to others, the essential legis
lative functions with which it is thus vested. Undoubtedly legislation must
often be adapted to complex conditions involving a host of details with which
the national legislative cannot deal directly. The Constitution has never been
regarded as denying to the Congress the necessary resources of Rexibility and
practicality, which will enable it to perform its function in laying down
policies and establishing standards, while leaving to selected instrumentalities
the making of subordinate rules within prescribed limits and the determination
o f facts to which the policy as declared by the legislature is to apply. Without
capacity to give authorizations of that sort we should have the anomaly o f a
legislative power when in many circumstances calling for its exertion would be
but a futility. But the constant recognition of the necessity and validity of
such provisions, and the wide range o f administrative authority which has been
developed by means of them, cannot be allowed to obscure the limitations o f the
authority to delegate, if our constitutional system is to be maintained.

I have not gone into that question, but do vou not think there
ought to be some objective, dennite objective pfaced in the law?
Governor EccLES. You mean as to price?

Mr. SPENCE. As to price level, the purchasing power of the
dollar?
Governor EccLES. By purchasing power of the dollar you mean
the price level?

Mr. SPENCE. The price level; yes.
Governor EccLES. I f the price level is placed in the law as an
objective for the Board to reach as a result of monetary action, and
the other factors are left out, we may get the result of having a
stable price level and not getting any of the other factors which we
want. I believe that the price level is less important than employ
ment. I think the most important element, after all, is total pro
duction, because that is the real measure of wealth. I do not
know what monetary policy could possibly be pursued to bring
about a fixed price level and maintain it; I do not know how that
would be possible.

Mr. SPENCE. Well, the price level does have a very great relation
to the production, does it not ?
Governor E ccL E S . It may or may not The thing that, after all,
has relation to production is the buying power of the people of the
country as a whole. When the national income is increasing faster
than production, prices rise and production is stimulated thereby;
and when the national income is diminishing, prices decline, and
production is diminished thereby.

312

BANKING ACT OF 1 9 3 5

Therefore, it seems to me that the problem of the national income
is a determining factor with reference to prices and production. So?
rather than an arbitrary fixation of prices, if we could get an in
crease in the national income, we would get an increase in pro
duction and an increase in prices; and that is why in 1929, after
we had had a period from 1923 to 1929 of stable prices—because
we had had reasonably full employment during that period—and
then our national income started to diminish and we got into a
cyclical depression, prices went down and production went down.
Mr. SpENCE. Do you think the changing price level comes from
conditions over which we have no control ?
Governor E c c L E s . Over which we do not have anything like
complete control. We possibly can exercise some control through
monetary action; but I do not think that we can exercise absolute
control, unless we undertake to fix prices, by legislation, and attempt
to regulate production accordingly. Even then, I doubt that we
could maintain stability of the price structure a s a whole.
Mr. SPENCE. The power given to the Congress, in the Constitu
tion, to regulate the value of money is a power you do not think
can be exercised?
Governor EccLES. I do not think it can be exercised to the extent
of maintaining a uniform price level, and at the same time keeping
up maximum production.

Mr. SPENCE. Well, a good many of our ills have resulted from
changing the value of the dollar and the fluctuating price level.
Governor EccLES. Oh, yes; but the changing value, as I say, has
been brought about primarily through the decrease in the national
income, which was brought about through the inequitable distribu
tion of income. That is where the trouble commenced very largely.

Mr. SPENCE. How far do you think legislation can go to stabilize
the value of the dollar? Suppose we set the objective that we might
not hit, but could we come anywhere near it!
Governor EccLES. I do not know how. Certainly, interest rates
could not be very much lower than they are now. The volume of
money that is not in use is very great, and to increase it, it seems to
me, would accomplish nothing toward either price raising or increas
ing business activity.
We have a potential increase of $20,000,000,000 in the supply of
money. The excess reserves provide that. True, if Government
spending were greatly increased, you would get an increase in the
price level, because you would get an increase m the national income?
and you would get an inflationary or reflationary effect as the result
of that increased spending.
Mr. SpENCE. That would be an artificial condition?
Governor EccLES. It would bring about the same result as an
equal volume of spending by our people of their own funds, or their
being willing to borrow and spend a like amount. That would in
ject into the circulation an increased amount of money and increase
the velocity of money and raise the price level, and the buying power
of the people would increase through that spending, and production
would then have to increase to meet the increased buying power, and
with the general increases, prices should tend upward.
Mr. CRoss. May I ask a question ?
The CHAIRMAN. Mr. Farley is next.

BANKING ACT OF 1 9 3 5

313

Mr. SpENCE. There is one question more. I have gotten so many
letters from State banks—there is a provision in the iaw that you
can waive the capital requirements of the State banks and then give
them such additional time to conform to the requirements as the
Board may, by regulations, prescribe. A good many of them feel
that they ought to know just how long they have to comply with
these requirements, when they become members of the Federal Re
serve System, with the ultimate purpose of remaining in.
Governor EccLES. I suggested an amendment to that the other
day that would give the Board the power not only to waive the capi
tal requirements, but all other requirements, and also to permit banks
to continue with less than $50,000 capital, if it is adequate in rela
tion to their liabilities. So there would be no time limit if a bank
with $25,000 capital did not need a greater capital in relation to its
deposit liability.
Mr. SpENCE. Well, I suppose it works both ways.
Governor E c c L E s . That was the suggested amendment to liberal
ize that section.
The CHAIRMAN. All right, Mr. Farley.
Mr. FARLEY. That is right in line, gentlemen, with what I had in
mind. In section 202 you provide-----Governor E ccL E S . Where?
Mr. FARLEY. Section 202, that the time in which this shall become
effective is July 1, 1937. But why is there any objection to writing
into the law 1940, for instance ?
Governor E ccL E S . That is not in the banking bill of 1935. As I
understand it, that is in the banking act which was passed in 1933.
Personally, I see no reason for an extension of time in lieu of the
provisions that are being made, in order to make it possible to admit
all the State nonmember banks which are insured. I believe that it
would be in the interest of those banks and the System as a whole to
be members of the Federal Reserve System, if this legislation broad
ening the eligibility features is passed.
Mr. FARLEY. I wanted to ask this, because in the State of Indiana we
have, in round numbers, 420 banks, and only six now are in the Federal
Reserve, and I have the fear that, if they are compelled to qualify by
July 1, 1937, there will be many of them left out. Do you not think
that, if the insurance feature is withdrawn from these banks, because
they have not qualified, it is just the same as closing the banks!
Governor E ccL E S . Why do you think they cannot qualify!
Mr. FARLEY. Well, they might be able to qualify m a little addi
tional time, but if the rules governing the examination of these banks
continue as rigid as they have been for some months past, they prob
ably would not be able to qualify, because they have a lot of frozen
assets yet.
Governor E ccL E S . I am sure that, so far as the present Federal Re
serve Board is concerned, they realize fully that situation, and it is
their expectation to take into the System all, or practically all, banks
which are insured. It is for that reason that we are proposing this
amendment to the Federal Reserve Act.
It is true that, as a condition of admission to membership, the Fed
eral Reserve Board has rather rigid regulations, which are not require
ments of law. They require banks to charge off all paper that is
classified as a loss, b^ t&e reserve examiners, and all depreciation on

314

BANKING ACT OF 193 5

bonds except those in the four highest classifications. However, the
Federal Reserve Board, under this provision, would be expected to
give the same consideration to the bond accounts of these banks that
is now given to the bond accounts of existing member banks both by
the Reserve Board and by the Comptroller's ofHce.
Mr. FARLEY. Well, the inference, then, is that you mean to under
take to liberalize them: and I do not mind saying that, from the
impression I have of you and your public work, I should not be much
afraid that would not be done.
Why object to writing it into the law and making it 1940? I have
in mind a case where I tried, a year and a half ago, to get a bank into
the Federal Reserve System, and they were declined, because they had
something like $360,000 of what they counted doubtful paper. Now,
even in these hard times, that bank has been able to reduce that now
over $200,000, and collect-----Governor EccL E s. When was that, you say?
Mr. FARLEY. About a year and a half ago.
Governor EccLEs. With the guaranteeing of bank deposits by the
Federal Deposit Insurance Corporation and with help from the Re
construction Finance Corporation, with reference to capital struc
tures, providing funds at 3^ percent for preferred stock, the banking
problem is very different than it was. As a practical matter, it seems
to me that the banks which are insured by the Deposit Insurance Cor
poration should be admitted to membership in the Reserve System.
There would be no point in making requirements upon those banks
which would exclude them from the Reserve System, and thus exclude
them from the benefits of the Deposit Insurance Corporation, and
possibly close them. That would be a foolhardy thing to do.
So long as the depositor is protected by the Federal Deposit Insur
ance, there should be an effort made to get all of the banks into the
System, so as to have unification of the banking system and thus be
able more effectively to carry out a monetary policy; and by that
means, also, greatly to assist in dealing with deflation as well as
inflation.
It is true that by far the greatest decline, both as to the percentages
of deposits and as to total deposits, was in nonmember State banks,
practically twice as great as it was in the member banks.
Mr. GOLDSBOROUGH. I did not catch that.
Governor EccLES. I said the shrinkage in deposits of nonmember
banks, the deflation in nonmembers banks from the peak of their
highest deposits down to their lowest deposits—in other words, the
deflation of nonmember State banks—was almost twice as great as
the deflation in the deposits of member banks.
That was a very great hardship on the communities which those
banks served, and the bank failures were far greater in the case of
nonmember State banks than in the case of member banks, both State
and national, and that of course-----Mr. GOLDSBOROUGH. I would like to inject that that was not the
condition in the State of Maryland; it was the failure of the large
member banks in the important cities which carried the reserves of
the country banks which burst the nonmember country banks.
Governor EccLES. I think there are exceptions all over the United
States; but what I am speaking of is the United States as a whole.
I am taking the entire country.

BANKING ACT OF 193 5

315

The CHAIRMAN. Somebody in the Senate. Governor Eccles, and I
believe it was Senator Norbcck—I never ran it down like I should
possibly have done—gave the figures, as I remember, for the year
1931, which show that the deposits, the casting up of accounts, showed
that there were as many deposits tied up in the failed national banks
as there were in the State banks; that I think the figures would show
that, in 1931. there were more deposits tied up in failed national
banks in the State of New York and in the State of Pennsylvania
than there were in the State banks. I would not say that I could not
be mistaken in those figures, because I am not an authority, but that
is my recollection.
But let me ask you this question: What happened was that the
failures first took place among the smaller banks; and of course that
involved, at least in number, the State banks more than the national
banks, and the nonmember banks probably more than the member
banks; but when the fire spread from the back aUeys and side streets
to the mansion on the front and to the important centers, and began
to involve the large banks, they were not helpless; they did not stand
by and let the fire ruin them, but they came to Congress and had us
open the Treasury of the United States to them.
So that it seems to me that an appraisal of that situation should
be taken in the light of the fact that the processes w^ere started by
resort to the Federal Treasury, and never allowed to reach that end.
So we do not know what the complete picture might have shown.
Mr. GOLHSBOROUGH. I think it ought to be stated here, as well as
any other time, that another direct cause of the failure of the small
banks was the fact that the large national member banks in the great
centers, through the years immediately preceding 1929, unloaded se
curities on those banks, practically all of which securities afterward
were shown to be sour.
Governor EccLES. I have pointed out the effect of the bond acount
when I was upholding the real-estate loan provision.
With reference to the chairman's remarks, I am not here making
any odious comparisons between member and nonmember banks, for
the purpose of putting the nonmember banks to any disadvantage. I
am only trying to argue for the need of all banks to be members of
the Reserve System and have available to them borrowing and redis
count facilities of that System, as well as of deposit insurance, so
that we may avoid Ares starting in the back alleys, et cetera; because,
after ail, the net result of the conflagration of the bank failures is
finally to burn down the System, if it is not stopped; and in the
process it is not only the bankers and the stockholders of the banks
that we are directly or particularly interested in, but it seems to me
we are interested in this problem as the duty of Congress and as the
dutv of ofEcials who are responsible for our money situation.
Air. GOLDSBOROUGH. Mr. Eccles, right there. Yesterday, I think,
you stated that the stockholders in the Federal Reserve System
receive 6 percent on their investments?
Governor EccLES. That is right.
Mr. GOLDSBOROUGH. But the Federal Reserve System, in turn does
not redeposit those funds in th
'
banks; so that, in
case of an investment which
Federal Reserve
System, they only get interest once; whereas on the ordinary in

316

BANKING ACT OF 19 3 5

vestment, where they get a redeposit, they may lend the same
money 10 times. Is not that the reason why they object to coming
into the Federal Reserve System, because they do not get the bene8t of the deposits which they can reloan?
Governor Ecci^s. As I understand it, most State laws provide
that State banks—whether members or nonmembers they are sub
ject to State laws—are required to maintain reserves, either in
money or in balances with other banks, or both, of a certain per
centage of their deposits. Now, I know the requirement for State
banks in two of the Western States that I am familiar with is 15
percent of demand deposits and 10 percent of time deposits, which
must be carried in cash or with other banks.
Mr. GOLDSBOROUGH. Yes; but that does not answer my question.
I do not know whether you want to direct your attention to my ques
tion, but what I asked was, whether or not, as a matter of fact,
when one of these small country banks enters the Federal Reserve
System and gets its 6 percent, that is all the interest it gets on
that particular investment. The investment is not redeposited with
them so they can loan it over again, as the ordinary investment is
which they make.
For instance, if they loan me $5,000, they expect me to simply
take a bank book from them, so they can reloan that same money.
Governor Ecci.ES, When you buy a Government bond, the pro
ceeds are not reinvested, or when they buy other bonds that are
marketable, we will say, or listed on the New York Exchange, or
when they buy Canadian bonds or other bonds, those funds are not
redeposited with them.
Mr. GOLDSBOROUGH. They are not redeposited with the country
bank, but they are redeposited with some bank?
Governor EccLES. That is correct.
Mr, GOLDSBOROUGH. But the small banks are not loaded up with
Government bonds.
Governor EccLES. Their percentage of Government bonds is pretty
high; it is much higher than it was, because there was no other
place-----Mr. GOLDSBOROUGH. When one of these national banks buys
$100,000 worth of bonds, all the Government gets is an entry by
some $25-a-week clerk to the effect that the Government has depos
ited or has a deposit in that bank of $100,000. That is what
happens.
The CHAIRMAN. Just one moment, in connection with what has
been said, I think it might be well to call attention to the situation:
It means more to the small bank, the bank of small capital, to tie
up 6 percent of its stock in the Federal Reserve bank than it does
for the large institution to carry that burden, it would seem to me.
The little banks, under the old order, were permitted to carry their
reserves in a correspondent bank, upon which they were accustomed
to draw interest, which was no little thing to small banks. That
operated in this way: In the South, for instance, or in the West,
the demand for credit is seasonal. When marketing time came and
collections came in, the bank had a plan by which it could use its
surplus funds, to put them to earning, by carrying them to the
city bank; and that, in turn, gave them a large borrowing privi

BANKING ACT OF 1 9 3 5

317

lege during seasons when the demand for loans was accentuated.
So that was an advantage that they enjoyed.
In addition to that, the small banks, members of the system, had
to surrender their right to charge for the services rendered in re
mitting checks, and that is, of course, a big item to any small bank
where the problem of overhead is great, and where the volume of
business is small, and, of course, that requirement kept many banks
from joining the Federal Reserve System. And those banks that
were automatically taken into the Federal Reserve System—the na
tional banks—conducted a war against the efForts of the Federal
Reserve Board to take away such earnings, as long as they were able
to carry on the Hght. They Anally lost through legislative action and
processes that I will not take the time now to review, but which were
not altogether justifiable, in my view of the matter.
You may resume, Mr. Spence.
Mr. SPENCE. I want to address----Mr. FARLEY. There is one other question I want to ask, in connec
tion with your statement of the wide diiference between the assets
of the nonmember banks and the member banks. Was that arrived
at by the same committee's examination!
Governor EccLES. I do not just understand your question.
Mr. FARLEY. You said, a few moments ago, that the nonmember
banks had a much larger amount of worthless assets than the member
banks. Did the same group examine the nonmember banks, or Arrive
at the same conclusion!
Governor EccLES. You must have misunderstood me. I did not
make a comparison between the assets of the member and nonmember
banks.
Mr. FARLEY. Then I misunderstood you.
Mr. EccLBS. I made ho comparison between the assets, because I
am not familiar with the condition of the assets of the nonmember
banks.
Mr. FARLEY. I thought you said that the losses were greater in the
nonmember banks than in the member banks, or their portfolios were
not so good.
Governor EccLES. No; what I said was, that the shrinkage in de
posits and the liquidation at nonmember banks was far greater than
that at member oanks; that! the deposit delation, as the result of
bank closings and credit contraction in the nonmember banks----Mr. FARLEY. I get the idea.
Governor EccLES. Was about twice as great as that in the member
banks, in proportion to the total deposits of each group of banks.
Mr. FARLEY. I have a letter in which the Indiana Bankers' Asso
ciation makes this very emphatic statement:
The Indiana Bankers* Association is unalterably opposed to centra! banking
in any form, and especially to a central banking system in which credit grant
ing and management will be vested in any political body.

That gets back to the question of control. You thought, the other
day, there was no danger of anything of that kind happening.
Governor EccLBS. I see no reason to expect the Federal Reserve
System, under this bill, to be any more subject to political control
than has been the case in the past under existing legislation.
Mr. FARLEY. I remember your answer. There is another item I
would like to get a little information on. I have read your speech
127297— 35------ 21

318

BANKING ACT OF 1 9 3 5

at Columbus over several times, and it is a very excellent presentation
of the subject.
I personally think you never can have a price level until you con
trol all products of every kind and description, from the farmer to
the market, or to the consumer. I do not ask you to say whether you
do or not concur in that suggestion. But now, about this provision by
which you are going out and loan on all types of real estate, making
provision for the rediscount of those securities at the Federal Reserve
bank, and then permit the Federal Reserve itself to issue currency
against all securities. It seems to me that the wildest inflationist in
the world could not have had a better term than that. When you
take on anything and issue securities—and issue currency against
those securities, it seems to me it is just like Germany did at the end
of the war. Is there anything in that ?
Governor EccLES. I though I had answered that point. That
question has been asked a number of times. I will try to answer it
very briefly and cover the subject. Three phases of this legislation
have a bearing on this matter: Changing eligibility requirements,
permitting long-term real-estate loans, and eliminating collateral
requirements for Federal Reserve notes.
In the Srst place, I think that you will probably agree that the
amount o f Federal Reserve notes that go into circulation has no
relationship to the collateral requirements. I attempted this morn
ing, and yesterday, and I think the day before yesterday, to explain
why that is the case.
Mr. FARLEY. I f that is already in the record, Governor, it is not
necessary to repeat it.
Governor EccLES. With reference to the question of eligibility,
what we are proposing is to permit the banks, subject to rules and
regulations by the Board, not only to discount eligible paper, but
also to make advances to member banks on notes of the member
banks, secured by any of their sound assets. That does not mean
that the Reserve bank would have the power to discount a 20-year
mortgage. What it does mean is this: That the Board could, by
regulation, permit the Reserve banks to loan to member banks on
bills payable of the member banks, for such-----Mr. GOLDSBOROUGH. A promissory note; that is what you mean?
Governor EccLES. That is right, a promissory note, secured by
bonds, mortgages, collateral loans, on a basis to be determined by
each Reserve bank to be a sound basis for the loan.
Those loans would be made for periods of 90 days or 6 months,
according to the regulations that the Reserve Board may make with
reference to maturities. The member banks in the aggregate do not
borrow for the purpose of reloaning. What is usually done is that
the banks borrow to meet a shrinkage of deposits, the shifting of
funds back and forth, which always happens seasonally under normal
conditions, and it is usually seasonal borrowing.
I f an emergency situation developed, the only way that the fire
of deflation and bank closing can be stopped is by the banks being
able to meet the demands of their depositors, and when they are able
to do that, the depositors do not want their money. But when the
depositors find banks are unable to meet the demands and banks
start to close, it is a progressive condition of deflation that develops;
<md, therefore, this eligibility feature becomes effective.

BANKING ACT OF 1 9 3 5

319

By the way, I believe that the governors of the Federal Reserve
banks and most of the member banks favor that requirement and
recognize the advantage of it in protecting the banking system. The
banking system, as a whole, would have to expand its credit by
$20,000,000,000 before there would be any occasion to do any borrow
ing from the Reserve System, on the basis of present excess reserves.
The amount of real-estate loans to be made is not determined by
the member bank's ability to borrow from the Federal Reserve bank,
but by the percentage of time deposits, which, in itself, puts a limi
tation upon the expansion of real-estate loans.
I do not know that I answered your question-----Mr. FARLEY. Well, I have 2 or 3 other little questions I want
to get a little light on. Does the practice still prevail of buying
foreign bonds?
Governor EccLES. I do not know to what extent. I would think,
however, that if experience is any teacher, there would not be any
great traiBc today m foreign bonds. There are, however, certain
foreign bonds, such as the Canadian issues, if that could be consid
ered foreign, and Australian issues, and British bonds, and I think
the bonds of Finland, and Poland, and Scandinavian bonds, which
maintain their strength, their marketability, and have a very much
better record than many domestic bonds of our cities, and counties,
and States.
Generally speaking, foreign bond accounts of banks have been
disastrous to them, particularly some of the South American issues
and some of the European issues.
Mr. FARLEY. Would you care to state whether they need the Postal
Savings System now. Governor?
Governor EccLES. You mean is it a necessity!
Mr. FARLEY. Well, is it a good business proposition?
Governor EoCLES. For the Government?
Mr. FARLEY. Yes; for the Government?
Governor EccLES. It is a good business proposition to the extent
that they have been able to get money for 2 percent. I do not think
that it is necessary for the Government for its own interests. I think
the Postal Savings System has operated for the convenience and
beneRt and security of citizens who prefer to deposit up to $2,500
with the Government through the Postal System.
Mr. FARLEY. Well, would the guaranteed bank-deposit proposi
tion----Mr. EccLES. It is less needed.
Mr. FARLEY. I think it is obsolete and ought to be put in the place
where the interest that would be collected would be so low that
nobody would even tiy it.
Governor EccLES. 1 know that bankers, generally speaking, feel
that there is a competitive relationship, and I think many of them
would like to see the Postal Savings System eliminated, and feel
that it is unnecessary in view of the Federal Deposit Insurance Cor
poration insuring $5,000 accounts. I do not believe it is very im
portant, however, because the total funds in the Postal Savings Sys
tem I think are somewhere around $1,000,000,000, and that is a com
paratively small percentage of the total deposits of the banking
system.

320

BANKING ACT OF 1 9 3 5

Mr. FARLEY. On page 69 of this act, in paragraph (g), we wrote
into the law in 1933 that bank directors could not borrow from their
own banks. Has any good purpose been served by that act? In
other words, do you not think that it is time that we liberalized
that?
Governor EccLES. It is not bank directors, it is bank ofRcers.
Mr. FARLEY. Well, bank ofRcers.
Mr. EccLES. Yes. I think it is a very constructive piece of legis
lation. There is not any question that, in principle, ofRcers of a
bank should not be in position to loan to themselves funds of the
bank. It may be very difRcult for an ofRcer to be impartial in deal
ing with himself.
However, to the extent that ofRcers of banks have loans in banks,
which were made prior to the passage of the legislation, those loans
should be treated, it seems to me, with due regard to the ability of
the borrower to meet the obligations. There is a time limitation
provided in the law, which I think is July 1935.
Mr. FARLEY. June 16, 1935.
Governor EccLEs. June 16, 1935, and, of course, there are many
ofRcers' loans in banks that it has been impossible, during this period
of depression, shrinkage of values, and lack of market for securities
to meet by June 16, and it is proposed in section 3 of this bill that
that time be extended for 3 years.
Mr. FARLEY. Three years from June 16, 1935?
Governor EccLES. Yes.
Mr. FARLEY. Now, would it not be infinitesimally better to pro
hibit bank olHcers from borrowing outside of their own bank, and
thus compel an ofRcer to do his borrowing from the bank with which
he is connected, and if desirable and with the approval of the
majority of the board, to the end that his board may be able at all
times to know what he is doing, and also place some responsibility
on the board. Is not there this danger, that to permit the executive
ofRcers to borrow outside of their own banks could prove very dan
gerous ? There is nothing to prevent an ofRcer from an inland bank
to borrow excessively from a large and distant city bank, for which
he may furnish proper security, but which might involve him beyond
the point where his directors would consider it safe for him to go!
Governor EccLES. There is in the law a provision that requires
ofRcers who borrow outside of their own banks to report those loans
to the chairman of the board, or the president of the bank; and if it
happens to be the president or chairman himself, he is required to
report to the board of directors.
I feel that ofRcers should be prohibited from borrowing from their
own banks, and I feel that they should also be required, if they
borrow outside, to report their borrowings, as now provided in
the law.
Bank ofRcers in the past have always been required to report their
loans within their own bank to the board of directors, because it is
the duty of the board of directors of a bank to approve all loans,
and, therefore, ofRcers' loans in their own banks have been reported
to the boards of directors; but we have found that not only ofBcers'
loans but many loans to directors have, in instances, created real
banking difRcuities, and I cannot help but feel that, in view of the rec
ord of the past, the prohibition now imposed should be continued,

BANKING ACT OF 1 9 3 5

321

with the extension of 3 years for those oiRcers' loans which cannot be
paid at the expiration of the period on June 16 of this year.
Mr. FARLEY. Have you already put in the record whether you
think we have money enough in circulation or not ?
Governor EccLES. If I have not, I am willing to.
Mr. FARLEY. In your speech at Columbus, you stated there were
$24,000,000,000 in circulation. Do you think it would be a good
thing if we increased that circulation?
Governor EccLEs. How is it possible to increase it?
Mr. FARLEY. Why do we not use the authority we gave the execu
tive department to issue $3,000,000,000, to take up some of these
bonds bearing interest?
Governor EccLES. How would that increase circulation?
Mr. FARLEY. Well, it would give these banks the actual cash
instead of bonds.
Governor EccLES. What would they do with the cash? They
would immediately send it back to the Federal Reserve bank and
it would be in the Reserve banks as their excess reserves, and actual
circulation would not change. The banks would have, in lieu of
Government bonds, $3,000,000,000 additional excess reserves.
Mr. FARLEY. I was in a bank not so long ago and the banker made
this statement, and he said he wanted to sell $50,000 worth of bonds,
and he could get immediate credit without any trouble if he called
Chicago and New York, but he could not dispose of them. He
wanted the money on the bonds he had in his safe-----Governor EccLES. You mean Government bonds?
Mr. FARLEY. Yes.
Governor EccLES. You mean he could not sell Government bonds!
Mr. FARLEY. That is the statement that he made—that is, without
a little sacrifice at that time.
Governor EccLEs. He is misaken. He could have gone to the
Federal Reserve bank and borrowed par on those bonds and possibly
at a discount rate of 2 percent. I f they were 3-percent bonds he
would have gotton more than the interest on his loan. He could
have borrowed the funds at par from the Reserve bank.
Mr. FARLEY. In your judgment, we do not need any more circulat
ing medium right now!
Governor EccLES. In my judgment, you cannot possibly force out
and keep in circulation more currency than you have now. You
may substitute-^—
Mr. CROSS. Right there, may I ask a question?
Governor, if that be true that this money would go right back—
if that be true—and if you were to take the $3,000,000,000 that he
refers to and buys bonds with it and you could not keep that money
in circulation, it would go right back out of circulation ?
Governor EccLES. That is right.
Mr. CRoss. That is unquestionably true, is it?
Governor EccLEs. There is no question about it.
Mr. CRoss. Why not pay off all of the Government bonds and get
rid of paying any interest—because that would be inflation itself!
Governor EccLES. Here is what would happen: We have out
standing some twenty-odd billions of dollars and Mr. Cross asked
the question, why do we not do that, and I think I should explain

322

BANKING ACT OF 1 9 3 5

that such action would simply increase the reserves of the banking
system by the amount of Government bonds which were purchased
with currency. The currency would go out, if it was $10,000,000,000 or $20,000,000,000 or $3,000,000,000, whatever amount the Govern
ment paid out in currency to retire its bonds; but the currency would
immediately go into the "banks and from the banks into the Federal
Reserve banks and be destroyed, and you would just have additional
reserves, additional excess reserves.
The CHAIRMAN. Do you not think this bill rests upon the theory
that it is necessary to control the excess reserves, because of the
fact that it would have a bearing on the circulation ?
Governor EccLEs. Yes. You get to the point of increasing the
reserve requirements a sufBcient amount to extinguish the excess
reserves created by the amount of the Government bonds retired.
Mr. GOLDSBOROUGH. That is when the banks really begin to fight,
is it not ?
Governor EccLEs. Now, let me follow that point through and see
what the situation would be. In the first place-----Mr. GOLDSBOROUGH. Can I just carry out the question so you can
answer this too? Have we not actually given the banks over
$13,000,000,000, and if we undertake to pay the bonds off in the way
indicated by Mr. Cross we would simply be taking away from them
what we have already given them ?
Governor EccLEs. The thought is that you are giving the banks
an interest payment that is unnecessary and is therefore a subsidy;
and that, by the Government paying its bonds in currency and thus
increasing the reserves of the banks by the amount of Government
bonds retired, it would be necessary to increase the reserve require
ments by that amount in order to extinguish the reserves; otherwise
this operation could carry possibility of credit inflation to almost
unknown heights.
The CHAIRMAN. You mean by that that the release of that cur
rency would tend to bring about inflation, but there would be under
this bill the power in the Board to control that tendency or defeat it?
Governor EccLEs. It would have to get started first. Of course,
the $2,000,000,000 that we now have in the excess reserves should
tend to do that, and it has not done it. But following out the ex
tinguishing of these reserves, that would close thousands of banks
for this reason: About 39 percent of the total loans and investments
of banks is represented by Government bonds. Therefore, if the
bonds, we will say, which are held by the banks are retired, it would
mean that the reserve requirements would be increased by the amount
of Government bonds that are retired. Some banks have only 10
percent, and that is particularly true of nonmember State banks;
and, of course, if this only applied to the member banks, you would
destroy the Reserve System, because they would all leave it and
become nonmember State banks. That is one thing that it would do.
If all the banks were members of the Reserve System, and the
principle of increasing the reserve requirements by the amount of
total bonds that were retired through currency were put into elfect,
a bank that had 10 percent of its assets in Government bonds would
be required to increase its reserve requirements, we will say, by 39
percent. That would mean that that bank would have to liquidate
the difference between the 39 percent and its Government bonds,

B AN KIN G ACT OP 1 0 3 6

323

unless you simply would say to the bank that its reserve requirement
increases only by the amount of the Government bonds taken up with
currency; in that case the bank that had the largest amount of Gov
ernment bonds would suffer the greatest loss of earning assets and
would have the largest increase in reserve requirements. This would
be thoroughly unworkable.
For the time being, it does not seem to me that is the alternative
at all, because it would create a condition that would do anything
but make for recovery. It would create a condition that would be
terribly deflationary. It would put the banking system in the posi
tion that you do not want to put it in. After all, whether we like
the system or not, we have it today; and to make a change of this
sort would be so revolutionary that it would bring about, as I said,
a condition of great deflation.
Mr. H oLLiSTER. Would it not, incidentally, scare every sound busi
ness man to death!
Governor EccLES. I say, without question, that it would bring
about a condition that would be almost as bad as the bank holiday.
Mr. Hou^iSTER. Which would be reflected immediately in decreas
ing employment, would it not!
Governor EccLEs. It would close up thousands of banks, because
there is not any question that you cannot take away from the banking
system 39 percent of its present investments, when we all know that
they are not operating today very profitably-----^fr. Caoss. Governor, if that should happen-----Mr. HoLLiSTER. Let him finish, please.
Governor EccLEs. We have not taken a most important feature
into account, and that is the service which the bank renders. I f a
bank has to carry reserves equal to its demand deposits, why on
earth would a bank take demand deposits and become the book
keeper for the community funds, for every individual that carries an
account, and act as a collection agency for the purpose of clearing
and facilitating individual business transactions from all over the
Nation, unless that institution made up by service charges, what it
lost through having to carry increased reserves by the amount of
Government bonds retired with currency? This would be anything
but popular with the people of this country.
Mr. GOLDSBOROUGH. The service charge would be assumed by so
ciety, of course. The Government would assume the service charge!
Governor EccLEs. O f course, and that is exactly what is being
done today through the Government paying this interest on its
bonds. That means that the service charge is being assumed by
society.
Mr. GOLDSBOROUGH. In other words, you agree that bonds—it is
not necessary for the Government to issue bonds; in other words, to
borrow money, it is just the same as the Government issuing a circu
lation medium, is it not!
Governor EccLES. As a mechanical proposition, yes. But after
all, we have established a method of financing, not only in this
country, but in every other country—Russia is the only excep
tion-----Mr. GOLDSBOROUGH. Well, we do not have to do things that are
wrong simply because somebody else does it.

324

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ACT OF 1 9 3 5

Governor EccLES. Whether it is wrong or not, is a question. I am
pointing out what are the customs, what are the practices, and to
make a change, as proposed, which is revolutionary, would destroy
confidence and so delay and retard recovery that I do not think it is
desirable, and I do not believe that there are any particular advan
tages or arguments for the retirement of Government bonds by the
issuing of currency.
It may be interesting to see just what the Government is paying
the banks. There have been some very exaggerated statements
made with reference to this subject, and it has been claimed that
the banks were getting as much as $1,000,000,000 a year subsidy in
the form of bond interest.
Mr. GOLDSBOROUGH. You are the'only one that ever has called that
by its true name, subsidy. We have never heard that before. You
cannot find a metropolitan daily in the country that has the guts
to call it a subsidy. You are the only one who has ever had nerve
enough to call it by its right name.
Governor EccLES. Society, then, is paying the banking system
for a service—and you admitted that it was necessary that society
should pay for the service which the banking system renders the
people and communities-----Mr. GOLDSBOROTJGH, Yes; but they should pay it directly and not
by the banking system. That is the bunk, and if the public under
stood what the banking system was, if the public knew that the
banks were allowed to loan the same money 10 times, they would
not exist 24 hours, because Congress would be forced to change
the law.
Governor EccLES. I do not know that the banking business has
been the most desirable or profitable, even with all of the subsidies
and privileges you claim it gets.
Mr. GOLDSBOROUGH. Your reasoning is that, when deflation starts
there is no way on earth to stop it?
Governor EccLEs. I would not go that far.
Mr. GOLDSBOROUGH. I f you are on a 100-percent basis, you could
not have deflation, because the money would always be in existence.
Governor EccLES. I think that, mechanically, inflation is far more
easy to control than is deflation.
Mr. GOLDSBOROUGH. You cannot control deflation under our system,
and you cannot do it for this reason: That the creation of money
amounts simply to the extension of credit, and whenever the banks
start—when the banking system starts to collect its debts, it imme
diately decreases the circulation medium, it immediately causes a
fall in all values, and it immediately causes the calling in of other
debts. You just cannot stop it when you once start it under our
system of fractional reserves.
Can I illustrate that in this way? In 1920 a very distinguished
Member of this House, who is now on one of the boards down town,
came to speak for me in my district. He said he had just had a
talk with Mr. W. P. G. Harding, who was then Governor of the
Federal Reserve Board. Cotton was then 30 cents a pound. He
said Harding had told him they were going to bring the price of
cotton down to 25 cents and stabilize it. I said, " My God! I f you

BANKING ACT OF 193&

325

ever start that? you can't stop it." And cotton did not stop until it
got down to 5 cents a pound. That is what happened^
Mr. FoRD. Mr. Chairman, the Governor was going to read some
thing that I ain very much interested in----The CHAIRMAN. Yes; we are all interested in that.
Governor EccLES. I had a memorandum on this subject, because I
had anticipated that that question might be discussed. With refer
ence to the general opinion that banks are being paid $1,000,000,000
a year by the Government in interest, that is a greatly exaggerated
statement. The total interest paid on the national debt during the
calendar year 1934 was $817,000,000. Now, the banks, under the
most generous estimate that you can figure, taking the bonds that
they had, received about $260,000,000. And these are member banks.
Figuring all banks, $320,000,000 is the maximum.
If the refunding operations of the Government continued until
the holdings of the banks were converted into securities, bearing
the current average yields, the interest received would fall to
$180,000,000.
Now, it must be remembered that there are expenses in connection
with the issuance of currency and keeping it in circulation; and it
may be interesting to note that the cost of keeping the greenbacks
and notes of the United States in circulation today is more per
annum than the present rate that the Government is paying on its
180-day bills.
Mr. GOLDSBOROUGH. If they are entitled to some further consider
ation, do you not think it is a shame that we are refunding and
giving them less interest?
Governor EccLES. I am not arguing for consideration. I am
pointing out the diHiculties with no advantages of making the . ad
justments which you propose and which would be revolutionary, of
the whole banking and monetary system, and I think, at this time,
it would be disastrous.

Mr. HANCOCK. Will the cost of keeping the greenbacks out com
pare with the cost of issuing the 180-day bills ?
Governor EccLEs. It is estimated here about fifteen-hundredths of
1 percent per annum on the greenbacks, and the 180-day bills were
on the basis of eleven-hundredths of 1 percent, about one-tenth of
1 percent, which is less than the cost of keeping the greenbacks out.

Mr. HANCOCK. Where is the cost in keeping the greenbacks out?
Governor EccLES. The destruction is rather rapid and they have
to be reprinted, and the cost of shipping them out and shipping
them back is something. Then there are insurance charges and ex
press charges and there is personnel accounting, and other expenses.
Mr. HANCOCK. Does that same cost ratio apply to the Federal
Reserve notes?
Governor EccLEs. I do not know what that cost ratio is. Do you?
Doctor ?
Mr. GoLDENWEisER. It is less than that, because of the fact that
the denominations are large. In the Federal Reserve notes there
are no $1 bills.
Mr. FARiiET. Mr. Chairman, I read into the record a while ago a
rather emphatic protest from the State Bankers Association of In
diana, and just for the Governor's benefit I want to read just a little

326

BANKING ACT OF 1 9 3 5

paragraph from the second largest national bank in the State of
Indiana, and which, by your grace, survived all of the storms and
is still a wonderful institution:
We might say we have given the whole bill very careful consideration. In
fact, we discussed it for nearly 2 hours in our directors* meeting yesterday,
and we believe that the bill, on the whole, is pretty good and meets the
present needs.

That is a national bank's attitude.

Governor EccLEs. I am interested, of course, to get that reaction,
and I have found, whenever I have had an opportunity to sit down
and meet the arguments and questions with reference to the legisla
tion, invariably the bankers feel that this bill is not what it has
been reported to be by many of our Bnancial writers and economists.
Most of the criticism directed at the bill could be directed toward
the act that we have been operating under for the last 20 years.
The CHAIRMAN. Mr. Williams, did you say you have a question
to ask?
Mr. WiLLiAMS. Yes. Governor, in connection with the interest
that is being paid by the Government to the banks—there has been
a good deal said about the interest that has been paid on bonds
in the national banks and Federal Reserve System, and keeping or
using those same bonds as the basis for issuing and lending out
money which they get on account of that issue, and getting interest
on it. Of course, in other words, that would be double interest, in
terest on the bonds which they deposit, or which they sell for the
purpose of securing the issue, and the currency which they lend out,
so they would get double interest on it, would they not ?
Governor EccLBs. You are speaking of national bank notes?
Mr. WiLLiAMS. National and Federal Reserve notes.
Governor EccLEs. The Federal Reserve member banks, of course,
do not deposit bonds and issue Federal Reserve notes, but the na
tional banks have the privilege of issuing national bank notes,
which right has now been eliminated.
Mr. WiLLiAMS. Here is the question. How much, in number of
bonds, is used as the basis of the currency issue ?

Governor EccLEs. There is about $800,000,000 of national-bank
notes outstanding. They are the only cases where the bonds are
used by banks for the purpose of issuing currency.
Mr. WiLUAMS. What about the Federal Reserve bank notes?

Governor EccLEs. The Federal Reserve banks have paid off their
liability on Federal Reserve bank notes.
Mr. WiLLiAMS. That is right recently, is it not!
Governor EccLEs. Yes; recently. There was never more than
about $150,000,000 issued, and that was issued right after the bank
holiday ; and those Federal Reserve bank notes were put out on the
basis of sound assets other than Government bonds and other than
gold.
Mr. WiLLiAMS. Well, now, I see a statement that the Treasury pro
poses also to retire bonds upon which the national banks issue notes.
Governor EccLEs. That is right.
Mr. WiLLiAMS. When that is done, that activity will be removed
from the picture!
Governor E ccLEs. That is right.

BANKING ACT OF

1935

327

Mr. WiLLiAMS. In other words, there will be no cost of Govern
ment interest upon its bonds!
Mr. EccLES. There are greenbacks which, of course, have been
out for a good many years, about $300,000,000-----Dr. GoLDENWEiSER. $346,000,000.
Governor EccLES. $346,000,000, with a certain amount of gold held
back of those greenbacks.
Mr. WiLLiAM S. And there is the argument that is being made by
a great many people, that the Government has favored the banks
by permitting them to deposit bonds----Governor EccLES. And issu in g currency.
Mr. WiLLiAMS. Andj {issuing currency, receiving currency, and
lending it out and securing interest on it, and at the same time secur
ing interest on the bonds which they deposit for that purpose. Now,
as I understand, that is a thing of the past?
Governor EccLES. The Treasury last Monday announced that they
were calling the 2-percent consols and 2-percent Panama's as of
July 1, approximately $675,000,000 in total, and on July 1 the cir
culation privilege which was given to other Government bonds ex
pires.
Mr. WiLLiAMS. Have there been none of them used for the pur
pose of Federal Reserve note issue?
Governor EccLES. No; not used by the Reserve banks. The Fed
eral Reserve banks are required to deposit with the Federal Reserve
agent gold equivalent to 40 percent of the notes outstanding, and
the balance of 60 percent may be made up of eligible paper or
Government bonds.
Mr. WiLLiAMS. That is what I am getting at. Those bonds have
been deposited, have they?
Governor EccLES. Only by the Federal Reserve banks, from one
department of the bank to another. In other words, the bank has
been required to deposit with the Federal Reserve agent, who is the
chairman, gold certificates and bonds, or gold certificates, bonds, and
eligible paper.
We are proposing to eliminate the collateral requirement for the
Federal Reserve notes; because it serves no purpose, it only adds
additional expense, and has no relationship to the amount of cur
rency in circulation, and is not required in any other central bank
that has been recently set up anywhere in the world.
Mr. WiLLiAMS. In other words, you propose to abolish the prin
ciple that has heretofore been followed of issuing currency based
upon Government bonds?
Governor EoCLEs. Yes.
Mr. SPENCE. Have all of the banks that had that privilege that
availed themselves of it been national banks?
Governor EccLES. Yes; no other banks had that privilege.
The CHAIRMAN. They are using about $150,000,000 extended under
the relief act and----Dr. GOLDENWEISER. That was in the Home Loan Act of 1932.
Mr. SPENCE. What proportion of them have not availed them
selves of the privilege? Have you any figures on that subject,
Governor!
Governor ECCLES. Mr. Smead could get that. What percentage
of the national banks have not availed themselves of that privilege!

328

BANKING ACT OF 19 3 5

Mr. SMEAD. Of the 5,422 reporting licensed national banks on
June 80, 1934, there were 4,600 banks issuing circulating notes, and
822 banks which did not exercise the circulation privilege.
The CHAIRMAN. Well, there will be no more notes issued by the
national banks, based upon Government bonds!
Governor EccLES. That is right.

Mr. CRoss. Governor, I want to go back to where we were awhile
ago, when I asked you about the $3,000,000,000. As I understood
your first statement, it was that if you were to take that $8,000,000,000 and buy bonds with it, call it in or buy that much bonds,
it would not cause any inflation to come back; but, as a secondary
proposition, there would be inflation through the banks, because they
would have more business; is that correct ?
Governor EccLEs. There would be a possibility of inflation
through the banks, by reason of the increased reserves from-----Mr. Cnoss. The $3,000,000,000?
Governor EccLES. You have a potential inflation, but you would
have to use the existing $2,000,000,000 of excess reserves before the

$3,000,000,000 would have any effect.
Mr. CRoss. Now, we realize one thing, and this is what is disturb
ing me: As I get your attitude, we cannot get a measure of value—
that is, we cannot make the dollar the measure of value, and I do
not know why the atmosphere seems to be so surcharged with the
idea of expanding the currency. Everybody is talking about infla
tion, yet we have inSation until we are as flat as a Bounder in the
mud.
Now, we certainly cannot come back until we reflate, and I should
say that, if we started reflating, we can get back to the normal situa
tion ; that we are helpless, or we must go ahead and start on a wild
spree of inflation until we explode and plunge back and down into
the mud again.
Governor EccLEs. I do not think that is necessary.
Mr. CRoss. That is what I am contending, that it is not necessary.
My idea is that, with the levers you have, you ought to be able to
agree on a price level that would give you a measure of value in dol
lars, but if we have these things recurring and are helpless, that is
a tremendous indictment of our intelligence.
My idea is that we should certainly be able to get a measure of
value. In other words, just to illustrate the proposition, that A
borrows from B a certain amount of money, and the present price
of the dollar, we will say, is money covering one particle of all of the
things that are necessary to feed and clothe and supply the comforts
and luxuries of life. Now, the next year, when he wishes to pay it
off, because there is no value in the dollar, he has got to pay back
two particles of that commodity that will buy the necessities and
comforts of life, and it appears to me it is just as much within the
law robbing the poor devil as if I had loaned you $100 and I met
you on the street next year, when it was due, and took out a 6-shooter
and said, " Give me that $200 you have in your pocket", because I
am taking it from you, and it will supply me with twice the things
that the $100 I let you have would supply me with. In other words,
if $1 will take care of me all of my life, i do not need but $1.
Governor EccLES. Yes; what you say is true, that it is an injustice
for a debtor to have to pay back debts m goods and services that have

BANKING ACT OF 1 9 3 5

329

substantially less value when he pays his loan than it had when he
received it.
Assuming that a dollar a bushel is fixed for the price of wheat,
and the total wheat production at $1 is 400,000,000 bushels, are the
farmers, as a whole, any better off than they would be with 800,000,000 bushels of wheat selling at 75 cents a bushel? In one case the
income from the wheat would probably be $600,000,000 and in the
other case it would be $400,000,000.
Mr. CROSS. I do not think you can take any one commodity.
Governor EccLES. The point I am making is, it is production we
are interested in. No one can pay his debts in terms of the price
level. Higher prices do not help a business that only has one-half
of the volume of business with which to pay its debts. You need
to maintain not only the price level but also production.
Mr. CRoss. I understand. You said that a number of times; but
do you think it is possible to get a measure of value or have the
dollar come to where it would be the true measure of value ?
Governor Ecci^s. I do not think that is possible.
Mr. CRoss. Then we are helpless.
Governor E ccL E S . No; I do not think we are helpless.
Mr. SPENCE. The Federal Reserve can exercise their power to
regulate the rate of interest paid by banks to depositors on time
deposits and savings deposits?
Governor EccLES. That is right.
Mr. SPENCE. I think that is a very beneficial thing, because they
have been the victims of competition or of the depression. Now,
there is no authority in any national agency to regulate the rates
paid by State banks, is there, at this time ?
Governor Ecci^s. Nonmember?
Mr. SPENCE. Yes.
Governor EccLEs. There is no authority, unless the Federal Deposit
Insurance Corporation has it.
Mr. SPENCE. I do not think the Federal Deposit Insurance Cor
poration ought to have that power.
Governor EccLEs. That is taken care of in the Banking Act of
1935.

Mr. SPENCE. I think that would be welcomed by the banks, because
they are the victims of their own competition.
Governor EccLES. It is absolutely essential that member banks
should not be subject to competition of nonmember banks by a limita
tion of the maximum interest that the member banks can pay and
have the nonmember banka benefited and protected by the Deposit
Insurance, and at the same time permitted to pay any rate of interest,
whether it is a sound rate or not, that they wish to pay.
Mr. SPENCE. It would be very much better, if they could all do
that and-----Governor EcciJES. The Banking Act of 1935 provides for that in
section 323 (c), page 67, lines 1 to 7.
Mr. SPENCE. Have they exercised that power?
Governor Ecci^s. The act has not been passed.
Mr. SPENCE. This act, you mean ?
Governor EccLES. Yes.

330

BANKING ACT OF 1 9 3 5

Mr. FoRD. Let me make an observation there. The banks are
Rxing the amount of interest that they can pay for deposits, are they
not!
Governor EccLES. We Ax the maximum only. There are a great
many cases where they pay much less.
Mr. FoRD. Would there not be a good deal—there is no attempt
made to Rx the maximum interest they might charge when they
Joan that money !
Governor EccLES. Most States have usury laws.
Mr. FoRD. I understand, but they are pretty liberal. We make
the price, we will say, to the miller, of wheat at $1 a bushel, but
he can charge $10 a barrel for the Rour, if he can get it, and that
is a competitive matter and I do not think can be Rxed. You
could not say any maximum rate of interest that the bank would
charge, because it was getting money from its depositors at 2 percent,
because the demand for that money and the volume of it would
determine what rate it would get!
Governor EccLES. It will bring the rates down, and it is bringing
the rates down.
Mr. FoRD. But it is a Rxed thing, is it not!
Governor EccLES. Fixing the maximum rate of interest on de
posits tends to bring down the rate on loans. That is the effect.
Mr. WiLLiAMs. Governor, in order that we might have this clear,
did I understand you to say that there is in the proposed law a
provision which authorizes the Insurance Corporation to Rx rates
that could be paid by any member bank!
Governor EccLES. Requires them to Rx the rate! It is Rxed by
the Reserve Board for the member banks.
Mr. WiLLiAMs. Where is that!
Governor EccLEs. Pages 66 and 67. We have not gone into that,
because that is in title III of the bill. That is in title III.
Mr. FoRD. What page!
Governor EccLEs. Pages 66 and 67.
Mr. WiLLiAMs. Does that apply to the nonmember banks!
Governor EccLES. Yes, that is what it does apply to.
The CHAIRMAN. The purpose of that is to prevent one bank inside
of the Federal Deposit Insurance Corporation Rghting against an
other bank!
Governor EccLES. That is right.
The CHAIRMAN. And taking an undue advantage of it!
Governor EccLEs. That is right.
The CHAIRMAN. Gentlemen, may we not quit until 3 o'clock! I
think we had better adjourn, until 3 o'clock.
(Thereupon, a recess was taken in the hearing until 3 p. m.)
AFTERNOON SESSION

The CHAIRMAN. Governor Eccles, I believe Mr. Ford desires to
make some inquiries.
Mr. FoRD. Governor, I am not going to take you into the backalley Rnance in my statement. I am just simply going to say, in a
very short statement, that it is my reasoned conviction that the pres
ent biH, while not perfect as to all of its details, and undoubtedly

BANKING ACT OF 1 9 3 5

331

requiring some minor technical amendments, seeks, on the whole, to
accomplish the following desirable results:
First, by broadening the eligibility requirements of the Federal
Reserve bank discounts, to uncover a great reservoir of potential
credit, which will be made available. Is that true!
Governor Ecci*ES. There is ample credit today, but, without change
in the eligibility features, there will be great hesitancy on the part of
the banks to loan on other than short-term commercial paper or
Government bonds.
Mr. FoRD. All right. We will change that to make it " available
so far as the borrower is concerned."
Governor EccLEs. It makes it available, not because they need to
borrow funds to do it^ but it makes it available because they would
be willing to loan existing funds, if they could get borrowers, on
longer time loans, that, otherwise, they would feel unsafe in making.
Mr. FoRD. My second point is that, by placing in the hands of the
Federal Reserve Board the authority to initiate open-market opera
tions, we give them the power to regulate in a material degree or to
stabilize in a material degree business operations. Would it do that!
Governor EccLEs. The three powers of monetary control—open
market, discount rate, and reserve requirements—put into the hands
of the Federal Reserve Board a power to control inflation. And
they also put into their hands the power to prevent deflation, so far
as can be done by the creation of excess reserves and by the reduction
of interest rates.
There is no action that the Board itself can take that will induce
people to borrow, induce corporations to borrow, the excess funds
which the banks may have as a result of the Board's action in creat
ing excess funds.
Mr. FoRD. But it is an effective check on the impulse for inflation,
on the one hand, and credit deflation, on the other hand, is it not?
Governor EccLEs. I think so. I think the eligibility changes and
the control over the supply of money would certainly tend toward a
prevention of deflation.
Mr. FoRD. In addition to that, in the third place, does it not add two
other desirable things: By broadening the eligibility requirements of
the Federal Reserve Board, each member bank witn sound but long
term paper could, under emergency conditions, take this paper to the
Federal Reserve bank and get currency and thus better serve the needs
of its community or meet a sudden emergency ? Would that be a clear
statement!
Governor EccLEs. The Reserve banks will have the power to loan
to member banks on sound assets, which would enable the member
banks to meet the demands of their depositors.
Mr. FoRD. Certainly.
Governor EccLEs. Which otherwise they might be able to meet only
by forcing a contraction of credit or by selling securities; or it might
be that they would be unable to meet the demand and thus be forced to
close.
Mr. FoRD. Now, if I understood you correctly when you were mak
ing your various statements, you said that the Federal Reserve banks
today had at least $10,000,000,000 that seeks profitable investment.
Governor EccLEs. No, sir. I said that the commercial banks had
$10,000,000,000 of time deposits.

332

BANKING ACT OF 1 9 8 5

Mr. FoRD. I mean the member banks of the banking system had
excess funds.
Governor EccLES. No. The banking system has excess funds seek
ing investment of over $2,000,000,000.
Mr. FoRD. What was that 10-billion-dollar figure that you used:
Governor EccLEs. I said that the time funds or saving funds held
by the commercial banks amounted to more than $10,000,000,000.
Mr. FoRD. But that would be seeking profitable investment, would
it not?
Governor EccLES. A good deal of those fupds are loaned already
in various types of loans. A great deal of those funds are no doubt
invested in Government bonds and other securities and bonds guaran
teed by the Government. The excess reserves of the banks, which are
in excess of $2,000,000,000, are suiEcient in amount to enable the bank
ing system as a whole to extend new loans or to purchase additional
bonds to the extent of more than $20,000,000,000 without the banking
system as a whole being required to borrow from the Federal Reserve
System.
The banking system creates money through its loans and invest
ments. A bank making a loan of $1,000 to a customer creates $1,000
of deposits. However, for every $1,000 increase in the deposits of
the bank the excess reserve decreases by 10 percent of the amount
of that deposit increase, so that a loan of $1,000 increases the assets
of the bank by $1,000 and the liabilities, in the form of deposits, by
a thousand, and the reserve requirement by $100, approximately.
You see, this increase in deposits would increase reserve require
ments by 10 percent of that amount.
Therefore, 2 billion dollars of reserves in the System as a whole
are a sufEcient amount to enable the banks, on the basis of 10 for 1,
to extend credit to the extent of 20 billion dollars, without having to
go to the Reserve banks and discount or borrow money.
Excess reserve can be increased or decreased by open-market oper
ations or by a change of reserve requirements? That is where you
get your monetary control.
Mr. FoRD. Now, then, at the presept time we have a potential
credit reservoir of about 20 billion dollars.
Governor Eccles. That is right.
Mr. FoRD. I f paper eligible for rediscount came along, the banks
would be free to make those loans, wouldn't they, knowing that they
could take that paper, in an emergency, to the Federal Reserve banks,
if they got into trouble?
Governor EccLES. They would be. It would be very proRtable to
make those loans if they were available.
Mr. FoRD. In comparison with the 2% percent to the banks on
long-term Government bonds, you are holding out an inducement
to the banks, through this bill, to exercise their functions as banks
and make every possible loan that they can----Governor Ecci^s (interposing). With safety.
Mr. FoRD. I did not mean that they should go out and go crazy.
But, when people come in wanting money, they would be in a posi
tion to loan it to them.
That is a thing that has always bothered me. I do not know
whether I have got the explanation of it or not.

BANKING ACT OF 1 9 3 5

333

Now, I note that since 1922 the volume of commercial paper in
the United States—the normal commercial paper, under the old law,
the 90-day paper, has been greatly diminished. Now, my under
standing or my belief is that the reason for that diminution in that
commercial paper was that many corporations, both large and small,
instead of going, as they used to do, to their banks and getting their
short-term requirements, have found that, through the investment
bankers, they could issue securities and get that money all in a lump.
And in many cases much of that money, after they had gotten it,
did not go to their own bank, but went to New York, to be used for
other loans, for speculation. Is not that true?
Governor E ccL E S . Partly. It seems to me that the transition that
has taken place in our business and banking systems during the
life of the Federal Reserve System has been that our business sys
tem has become more concentrated, into larger and larger units;
and that there is today a greater concentration of corporate opera
tions in the country, in fewer companies, than we have ever had
before. The trend is in that direction, as evidenced by the chainstore development and the developments in almost every Reid of
manufacturing activity.
Mr. FoRD. Steel and all others.
Governor E ccL E S . We see a drift toward consolidation and merg
ers, making for bigness and a greater concentration of control.
That has tended to concentrate commercial deposits to a greater
extent than formerly in the centers where the headquarters of the
various companies are located; and it has also, in cases where there
has been borrowing, largely concentrated all borrowing, at very low
rates, on the commercial-paper basis, in the money market; so that
the average small bank, or the banks in the towns of 10,000 people
or even 25,000 people, and less, have not had the demand, and have
not had even during the period of our great activity, in the twen
ties, the commercial loans to their local business concerns that they
had prior to the developments to which I have referred.
It is true that many of the consolidations and mergers were
brought about through Rotations of securities, bonds, and stocks,
and the effect of those Rotations was that the banks that formerly
carried commercial loans and short-term loans for the carrying on
of business transactions, furnished the money through the pur
chase of bonds, or through loaning to customers, who purchased bonds
or stock. So that there was a substitution, to, no doubt, quite an
extent, of bonds and collateral loans in banks; whereas, formerly,
particularly before the war, commercial paper was used to a far
greater extent.
And, of course, in the case of farmer financing, that has been taken
away from the local banks to quite an extent through the Produc
tion Credit Corporation. The Production Credit Corporations,
which are a part of the Farm Credit Administration, get most of
their funds by the sale of 6-month and 9-month debentures, outside
of their capital, which has been furnished to them by the Gov
ernment.
These debentures are sold in the market and the present rate is
somewhere on the basis o f 1% percent per annum. The big banks,
in the centers, with the surplus funds, are the purchasers, largely, of
127297— 35------ 22

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BANKING ACT OF 1 9 3 5

these debentures, thus providing the funds to the Production Credit
Corporation, and the Production Credit Corporation supplies the
funds to the farmers, through the local communities. So, it means
that the banks in the centers, through the Production Credit Corpora
tion, are financing agricultural production; and that, of course, takes
away from the banks in the agricultural areas the eligible agricultural
paper.
Mr. Fomx I note that in 1929 the commercial paper; that is, the
commercial loans made by banks, were only $4,396,000,000, and that
was at the peak of our so-called " prosperity ", and that in 1934 that
sum had dropped to $2,144,000,000; so that there has been a gradual
diminution or gradual disappearance of commercial paper as a source
of business to these banks, and there is very little likelihood of any
substantial increase in that.
Governor EccLES. For the reason that, if you will examine the
statements of most of our business concerns, it will be found that they
have an excessive working capital. One of the difEculties today is
that they are the owners of huge pools of deposit money now in the
banking system, which they are not using and are not able to utilize;
so that, even with an improvement of business the most that could be
expected from many of our business concerns would be that they would
put into use the funds that they now have, and under no circumstance
would they be required to borrow.
Now, I am speaking of our business concerns in very general terms.
In number there may be, and no doubt are, a great many business con
cerns that would be required to borrow; but, measured in the volume
of the business which they do, which, of course, is the important ele
ment, there would be a small percentage.
Mr. FoRD. Well now, that being the case, if the reason for the exist
ence of our banks is continued, then we have got to afford them some
additional opportunity, where their funds can be employed; and it
seems to me that the long-term real-estate loan is about the only out
let that appears on the horizon at the present time to any great
volume.

Is that an admissible statement ?
Governor Ecci<ES. There is no prohibition now against banks
making collateral loans which are not eligible; and there is no prohibi
tion against banks buying long-term bonds. So long, then, as there
is no prohibition now against the banks investing depositors' money
in those Reids, which are likely, in the event of depression, to be just
as frozen as real-estate loans, there should be some liberalization with
reference to the power of the member banks to make long-term realestate loans. To what extent that will be utilized by borrowers it is
impossible to say.
Mr. FoRD. Oh, I realize that. But we all know, if we read our
correspondence, and I know from my particular experience, that it
is almost impossible, or it has been up to quite recently, to get a
real-estate loan from any bank. Now, the reason the banks gave
for that was that that was an unliquid paper, and if they put their
money in there it would stay there, and they would have no way of
getting it out if they had a call.
Governor EcctEs. They had been made to feel that a real-estate
loan is a slow and an undesirable asset to have. And inasmuch as

BANKING ACT OF 1 9 3 5

335

the banks have most of the loanable funds, and mortgage companies
and the savings and loan associations, as a whole, have very little,
and in most o f the communities have no funds to loan, but are in the
process of reducing and bringing pressure to bear, it would seem
that the situation would be helped and relieved by permitting and
encouraging the banks to make long-term, sound, real-estate loans.
Mr. Fom>. Not with the idea, Governor Eccles, of making the loan
today and taking it to the bank tomorrow and getting a discount,
getting the money and coming back to make another loan; but with
the idea of making a loan that was a proRtable loan—and in our
country the rate is 7 percent, which is quite different from 2% per
cent—they could put that money into that market. Then, should
there be a sudden demand on them for more money, they could
always take those securities to the Federal Reserve bank and get the
money for them, could they not, under this law ?
Governor EccLES. The Federal Reserve banks would have the
power legally to loan to member banks on the notes of the member
banks, secured by mortgages or other collateral, with such margin
as they thought was advisable to make the loan sound. Certainly
member banks would not loan money on mortgages and then borrow
from the Reserve banks so long as the member banks had excess
funds to loan. It could be expected that the member banks would
be willing to pay interest on borrowed money from the Federal
Reserve banks only when a condition was reached by any member
bank that made it necessary for it to borrow to meet its shrinking
deposits.
It has never been a policy of the Federal Reserve System to per
mit its member banks to borrow continuously or to borrow for the
purpose of reloaning because there was a pront between the discount
rate at the Reserve banks and the loaning rate of the member banks.
Mr. FoRD. They were only there for the purpose of the bank get
ting the money when it actually had to have it and for a proper
purpose ?
G o v e r n o r E ccL E S . T o m e e t t h e c u r r e n t d e m a n d .

Mr. FoRD. Now, Governor Eccles, there is just one other observa
tion I want to make.
There seems to be some apprehension in the minds of some of
my correspondents as to this bill being an inflationary measure.
We have had that out here before, but I just want to make an
observation on it. We discussed this morning the question of Bxing
a price level.
Now, my conception of the possibilities lying dormant in this
bill, and which can be developed if it is passed, for credit, is this:
It will make available—and when I say available I do not mean
that it does not now exist—but it will make it a little easier and
more attractive for the banks to go into the business of loaning
money, for the purpose of bringing our production up to a maxi
mum. If we could do that we would bring our unemployment down
to a minimum. The result would be a large pool of money poured
out over the country and that would give purchasing power to the
consumers of the country generally, and that would tend not only
to stabilize business but to bring a gradual increase in the price
level, up to some point where there might be an attempt made to

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BANKING ACT OF 19 3 5

peg it, within certain limits. Would not that be one of the ways of
doing it!

Governor EccLEs. I do not know that I understand what you
mean when you say, " Would not that be one of the ways of doing
i t "? Do you mean the bill as now drawn?

Mr. FoRD. I am talking about bringing our production up to a
maximum.
At every meeting that this committee has had there have been
people who said, "Now, industry cannot get money; and, when in
dustry cannot get money, it cannot produce; and the reason it
cannot get money is that the banks are afraid to loan."
Now, the loaning of money of real estate might conceivably have
a tremendous influence on industry, because it would put men to
work. Now, if you could create conditions so that money could
be easily gotten by industry, with a prospect of getting it back and
getting a proBt, that would immediately create a wage pool, and
it would give an increase of income to the country and, with the
increase of income to the country—and the wide-spread of the
purchasing power that goes to the men that do the work is one of
the factors—it would naturally put purchasing power in the country,
and, with an increased demand for goods, the price level of all
goods would come up, would it not?
Governor EccLEs. Yes.
Mr. FoRD. And if there was a tendency on the part of prices to
go up wildly, could not the Reserve Board, under this bill, put
an appreciable brake or check on that?
Governor E ccL E S . Yes; a general increase means an inflation;
and that can be, in my opinion, controlled through the powers that
this bill provides to be given to the Federal Reserve Board.
Mr. FoRD. Well now, taking the questions that I have asked and
the picture that I have painted, I ask if this bill tends to make that
possible? Do you think it does?
Governor E c c L E s . I do.
Mr. FoRD. All right. That is why I say in the beginning, that I
believe this is the measure that the country needs and that I am
going to feel very comfortable in supporting this bill in the House.
The CHAIRMAN. All right.
Does anybody else on this side have any questions?
Mr. CLARK. It will take only a minute for my questions, Mr.
Chairman.
I do not think that Mr. Cross, Governor, is very much satisfied
with our helplessness in this situation.
In the amendment that you have proposed three objectives are
tentatively stated: First, stable business conditions; second, full em
ployment ; and, third, a more or less stable price level.
I believe that you stated that, if this bill were passed, it would
give the Federal Reserve Board a control over the volume of money.
That is right, is it not!
Governor E ccL E S . I think it gives the Board a control of the vol
ume of money on the up side. It does not give it such a complete
control of the volume of money on the down side.
Mr. CLARK. No; but it tends to give the Board a more nearly
complete control of the volume of money than it has had heretofore.

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Governor EccLES. Oh, yes; through

Full text of Banking Act of 1935 : Hearings Before the Committee on Banking and Currency, House of Representatives, Seventy-Fourth Congress, First Session, on H.R. 5357, February 21, 22, 26, 27, 28, March 1, 4, 5, 6, 11, 12, 13, 14, 15, 18, 19, 20, 21, 22, 25, 26, 27, 28, April 2, 8, 1935

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