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S. Res. 113

S^B R U A R Y 9, 29,


MARCH 7, 1928

Printed for the use of the Committee on Banking and Currency


PETER NORBECK, South Dakota, Chairman
J u l ia n W. B l o u n t , Clerk

WALTER E. EDGE, New Jersey.
LYNN J. FRAZIER, North Dakota.
W. B. PINE, Oklahoma.

Statement of—
Cunningham. E. H_______________________________________________
La Follette, jr., Senator Robert M------------------------------------------------Platt, Edmund-------------- --------------------------------------------------------------Sprague. Oliver W. M------------------------------------------------------------------Willis. Dr. Henry Parker________________________________________
Young, R. A_____________________________________________________




C o m m it t e e


n it e d


S tates S e x a t e .
and C urrency,

a n k in g

'Washington* D . C.
The committee met, pursuant to call, at 10.30 o’clock a. m. in
room 303, Senate Office Building, Senator Peter Norbeck presiding.
Present: Senators Norbeck (chairman), Edge, Frazier, Pine,
Brookhart, and Mayfield.
The committee thereupon proceeded to the consideration of S. Res.
113, which is here printed in full, as follows:
[S. Res, 113, Seventieth Congress, first session]

Whereas the total loans secured by stocks and bonds of the fifty-one member
banks in the New York Federal reserve district on January 11, 1928, reached
the unprecedented total of $3,819,573.000; and
Whereas the largest part of this sum is used for speculation on the New York
Stock Exchange as stated by the Federal Reserve Board in its annual report
for 1926 as follows:
“ The largest growth, both absolutely and relatively, was in security loans,
which increased by about 6(3 per centum during the period. That to this
growth in loans on securities represents to a considerable extent an increased
volume of credit used in financing transactions in securities at the New York
Stock Exchange is indicated by the rapid growth during the period of loans to
brokers and dealers in securities in the New York market.”
Whereas during the past year such speculative loans made through the
Federal reserve system have increased more than a billion dollars, and during
the past seven years more than $3,000,000,000; and
Whereas the reports of the New' York Federal Reserve Bank reveal that
$1,502,580,000 of these loans on stocks and bonds is for the account of out-oftown banks, representing credit transferred from other parts of the country to
be used in New York for speculative purposes: and
Whereas the inevitable result of the utilization of the funds of the Federal
reserve system for speculative purposes is to restrict the amount of credit
available for legitimate commercial purposes, as is indicated by the fact that
the amount of commercial paper outstanding as reported to the Federal Reserve
Bank of New York actually decreased from a total of $925,379,000 in October,
1924, to $610,945,000 in October, 1927; and
Whereas the intent of the Congress in the creation of the Federal reserve
systenj was to prevent its use for the encouragement of support of purely specu­
lative operations, as is evidenced by the following paragraph of section 13 of
the Federal reserve a ct:
“ Upon the indorsement of any of its member banks, which shall be deemed
a waiver of demand, notice and protest by such bank as to its own indorse;
ment exclusively, any Federal reserve bank may discount notes, drafts and
bills of exchange arising out of actual commercial transactions; that is. notes,
drafts, and bills of exchange issued or drawn for agricultural, industrial, or
commercial purposes, or the proceeds of which have been used, or are to be
used, for such purposes, the Federal Reserve Board to have the right to deter­
mine or define the character of the paper thus eligible for discount, within the




meaning of this act. Nothing in this act contained shall be construed to pro­
hibit such notes, drafts, and bills of exchange, secured by staple agricultural
products, or other goods, wares, or merchandise from being eligible for sucb
discount, and the notes, drafts, and bills of exchange of factors issued as such
making advances exclusively to producers of staple agricultural products in
their raw state shall be eligible for such discount; but such definition shall not
include notes, drafts, or bills covering merely investments or issued or drawn for
the purpose of carrying or trading in stocks, bonds, or other investment securi*
ties, except bonds and notes of the Government of the United States ” : Now,
therefore, be it
Resolved, That it is the sense of the Senate that the Federal Reserve Board
should immediately take steps to restrict the further expansion of loans by
member banks for speculative purposes and as rapidly as is compatible with
the financial stability of the Nation require the contraction of such loans to the
lowest possible amount; and be it further
Resolved, That the Federal Reserve Board be directed to report to the Con*
gress what legislation, if any, is required to prevent the future use of the funds
and credit of the Federal reserve system for speculative purposes.

The C h a ir m a n . The committee will come to order. The first mat*
ter to take up is the La Follette resolution, S. Res. 113, and Senator
La Follette will make a statement.

Senator L a F o l l e t t e . Mr. Chairman, first of all I would like to
express my appreciation to the chairman o f the committee and the
other members for giving me this opportunity to make a brief state­
ment. It is not my intention to take much of the committee’s time
this morning.
My purpose in introducing the resolution was to endeavor to bring
to the attention o f the committee and the Senate the situation with
regard to the increased amount of loans on stocks and bonds by the
member banks. At the time President Harding was inaugurated
loans on that account amounted to about $778,000,000, according to
my information. At the time President Coolidgk was inaugurated,
in 1925, they had increased to $2,119,000,000.* And to-day, that is, of
February 1, they amounted to $3,819,000,000. I have not the figures
which were made public this morning before me.
Dr. H. Parker Willis, whom we ail know took a great interest in
the. Federal reserve act at the time it was under consideration by
Congress, who for a time served as secretary of the Federal Reserve
Board, stated as long ago as last May— and I would like to quote
from his statement— that:
To-day we have much more than five and one-lialf billions of dollars de­
voted by the banks to carrying stocks and bonds, of which well toward three
and a half billions is applied in this way in New York City and places affiliated
with it ; the greater portion of that vast sum being used in margin trading.
I estimate that this amount is, roughly speaking, three times the amount so
used just after the war, and probably about three and a half times the amount
so used prior to the adoption of the reserve act. It is true that we have
t<>-day a raiher better control over speculation than formerly when we wish
to use it. and also that our reserve system has brought about beneficial changes
which have set free money that has gone into speculative uses without drawing
so heavily, as it otherwise must, on other lines. But when allowance has been
made by the most charitable of observers it remains a fact that our reserve
system has exerted no real remedial influence upon the great American evil
of stock-exchange gambling, and of the use of the liquid funds of banks in
that occupation.

B R O K E R S’ LO A N S


I also desire to quote, for the information o f the committee, in
part from an editorial which apepared in The Commercial and
Financial Chronicle, o f New York, I think, admittedly, one o f the
most conservative financial publications in this country, the editorial
being printed, I think, on August 6, 1927. In that editorial it was
set fo rth :
With stock-exchange speculation rampant, as just shown, and with borrowing
on stock-exchange account of huge volume and steadily growing, the true
course would be to raise rates, thereby rendering borrowing on the part of
the,member banks more costly and thus discouraging it. But the reserve banks
are anxious to increase the volume of their earning assets, which latterly
have been falling off somewhat, notwithstanding the absorption of so much
money in stock-exchange speculation. * * *
But is such a policy sound and sensible, and is it in consonance with the
theory upon which central banks are supposed to function? If not, why should
the managers of our reserve institutions give adherence to it? Are there
not serious portents in the course which is being pursued and should not these
receive careful attention and thoughtful consideration? Are we not sowing the
wind with danger of reaping the whirlwind?

I should like to say, Mr. Chairman, that it is my personal opinion,
and upon such competent advice of financial authorities I am led
to believe that it is also their opinion, that the use of the funds and
credits o f the Federal reserve system to support stock-market specula­
tion is a violation o f the clear intent and certainly of the purpose
o f the Federal reserve act. I call attention to the final and conclud­
ing phrase o f section 13 of the a ct:
but such definition [referring to paper subject to discount
banks] shall not include notes, drafts, or bills covering
or issued or drawn for the purpose of carrying or trading
other investment securities, except bonds and notes of tlie
United States.

by Federal reserve
merely investments
in stocks, bonds or
Government of the

I also, in support of the contention as to what was the intent o f the
framers and the supporters of the Federal reserve act at the time
it was enacted, should like to quote briefly from Senator Carter Glass,
who was then a Member of the House, and subsequently as we know,
Secretary o f the Treasury, and now a Member o f the Senate. He
stated on the floor o f the House on September 10. 1913 :
The whole fight of the great bankers is to drive us from our firm resolve
to break down the artificial connection between the banking business of this
country, and the stock speculative operations at the money centers. The
Monetary Commission, with more discretoin than courage, absolutely evaded
the problem; but the Banking and Currency Committee, of the House, has gone
to the very root of this gigantic evil, and in this bill proposed to cut the
cancer out. Under existing law we have permitted banks to pyramid credit
upon credit and to call these credits reserves. It is a misnomer; they are not
reserves. And when financial troubles come and the country banks call for
their money with which to pay their creditors they find it all invested in
stock-gambling operations. There is suspension of payment, and the whole
system breaks down under the strain, causing widespread confusion and almost
inconceivable damage.
The avowed purpose of this bill—

said Senator Glass, then a Member o f the House—
is to cure this evil; to withdraw the reserve funds of the country from the con­
gested money centers and to make them readily available for business uses in
the various sections of the country to which they belong.



On the floor o f the Senate Senator Robert L. Owen, who, I think
it is fair to say, led the fight for the enactment of the Federal reserve
act in the Senate, stated in the course o f the debate :
To put an end to the pyramiding of the bank reserves of the country and the
use of such reserves for gambling purposes on the stock exchange—

he declared was one o f the principal purposes of this Federal reserve
Mr. Chairman, it seems to me that the situation which has been in
existence since more than a year ago is one which merits the attention
o f Congress and o f this committee. It was with the hope that the at­
tention of this committee and of the Congress would be directed to
this situation, that this committee would take up this question, hold
hearings upon it, obtain all o f the information which is available
from the members o f the Federal Reserve Board and from competent
financial authorities in this country, that I introduced this resolution.
I am frank to say that I am not certain in my own mind as to just
what the remedy for this situation is. It is a complex, perplexing
problem, I am frank to admit. But that it is a problem which should
challenge the attention o f the Congress and the country I believe the
facts substantiate beyond peradventure o f contradiction. And so,
Mr. Chairman, I verj^ modestly suggest that it is the duty o f this
committee to devote its attention to this situation and to endeavor to
work out a sound and a substantial legislative remedy for it which
will result in returning the Federal reserve system to the legitimate
functions which its authors contemplated when the act was passed.
And once more I should like to express my appreciation for the
opportunity o f being heard by the committee.
Senator E d ge . Mr. Chairman, I am a little uncertain as to just
what the meeting was called for. I know the purpose that it was
called for, but was it to be a public meeting; that is, to have repre­
sentatives o f the Federal Reserve Board as w
rell as the sponsor, etc.,
give information; is that it?
The C h a irm a n . I wrote the Federal Reserve Board telling about
the meeting and suggesting that it was an open meeting and we
would be glad to have them here if they were interested. The only
other promise I made is that we will not take any hasty action. Sen­
ator Glass was unable to be here this morning, and his secretary
phoned and asked that he be given a chance to be heard before any­
thing is done.
S e n ator E d g e . I see we have n ot a quorum .
The C h a i r m a n . We have not a quorum for the purpose o f taking
a vote; we have a quorum for the purpose of holding a meeting.
Senator L a F o l l e t t e . Mr. Chairman, may I say in answer to Sen­
ator Edge’s suggestion, that I am not urging any precipitate action.
Senator E d ge. It is a pretty important subject.
Senator L a F o l l e t t e . It is an exceedingly important subject. And,
as I stated before, you came in, Senator, I admit its complexities.
But what I am urging upon this committee is that it is a pressing and
an important problem and one which merits the attention o f this
committee, and all that I am asking is that the committee shall dis­
charge what I believe to be its responsibility in the matter.
Senator E d g e . Mr. Chairman, may I make this suggestion ? I
have not read this resolution until I came in the committee room. I



had seen some reference to it in the press. It would seem to me the
first action that we should take leading to the investigation that the
Senator has requested—entirely within his rights, and it is our duty,
I agree with that—is that we should address officially a letter to the
Federal Reserve Board and ask them to comment on the terms o f the
resolution in any way they see fit so that we can have that as a part
o f our study. After all is said and done, they are in charge of the
system. And I would like to have that information. That is the
usual procedure that is taken in all of our committees, I think, when
an amendment or a law is proposed or a resolution is proposed affect­
ing this or that department; we refer it to the department and get
their reaction and comments, and unless there is some objection I
would like them to file with us a written brief covering the intent o f
the resolution.
Senator B r o o k h a r t . Mr. Chairman, some members of the Fed­
eral Reserve Board are present w ith us this morning. They might
be ready to say something about it at this time.
Senator Edge. Well, that is quite all right. I would be glad to
hear them.
The C h a ir m a n . I wish to say in reply to the Senator from New
Jersey that a letter was sent to the Treasury Department a few days
ago in regard to this resolution, and we have not as yet received a
Senator E d ge. Asking their comment?
The C h a ir m a n . Yes. But if the Senator desires that we address
an official communication to the Federal Reserve Board, that can be
done. Maybe that is where it should have gone.
Senator B r o o k h a r t . Mr. Chairman, I have already introduced a
bill which is before the committee for the specific purpose and design
o f correcting the evils which this resolution seeks to investigate, and
if this resolution is to be submitted to the Federal Reserve Board I
should like to have my bill submitted as well.
Senator M a y f i e l d . That your bill be submitted along with the
resolution ?
Senator B r o o k h a r t . Yes; that my bill be submitted to the Fed­
eral Reserve Board along with the resolution.
Senator M a y f i e l d . May I ask the Senator what his bill proposes,
briefly stated?
Senator B r o o k h a r t . Briefly stated, my bill proposes first to pro­
hibit speculative loans by member banks o f the Federal reserve
system in the same language that they are prohibited from being
rediscounted by the Federal reserve banks now on the theory that i f
they were outlawed by the bank at the top they ought to be outlawed
all the way through. There are two items o f reserve bank business,
the rediscount and the redeposit business, and this law only takes
a little portion o f the redeposit business into the Federal reserve,
that is the reserves themselves, and by permitting no rate of interest
to be paid on those redeposits it drives all o f the other redeposits
into New York, exactly what the speculators want, and I do not
know but that is probably two or three times as much as the reserves
themselves. And the law itself is therefore responsible for this big
accumulation, and I have prohibited one bank from paying another
bank any rate o f interest for redeposit. That will send this to the



reserve bank where it belongs instead of to the New Y ork bank.
Then I have gone further and provided that they shall pay a 2 per
cent interest rate for the use of those funds.
C hairman . Permit me to say to the Senator from Iow7 that
his bill was sent to the Treasury a few days ago for their comment.
Senator B r o o k h a r t . The Federal Reserve Board should have that.
Senator E dge. Well, it would probably be referred to the Federal
Reserve Board.
Senator B r o o k h a r t . Then the other provisions of this bill that
Senator Mayfield asked for fix the rates that they pay for these redeposits o f 2 per cent. I am not a believer in the theory that we
can control speculation by raising and lowering rates in some board.
I think it has got to be done by law; and I think the Congress is the
only board that ought to be trusted with such power. I f thev took
these deposits at 2 per cent, a 3 per cent rediscount rate would be
plenty high enough; perhaps 2y2 per cent might be after we try it
out. bo I fix that rediscount rate by law at 3 per cent, and then if
the lediscount rate is 3 per cent, the bank ought to operate at 5 per
Snnnnnmnanp t0 !tS membcrs- We have from Iowa probablv
$400,000,000 of surplus money m New York at this moment, and a
Rar, w
is drawmg on this redeposit 1% per cent, at least that is
mflde, and the balance of it is invested in these listed
bonds and things on the stock exchange at about 414 per cent. They
are not getting as much as 5 per cent or anything like it in that New
S t i« w
i ° n th,at/ ast sum of our surplus credit, and, while
oV°U i ?ai\ j *armers. are frowned upon as slow, and the
' l ‘ ... rai,c . °, en(j
e , a.v'I1
our mvn people to our own
people, although before the establishment of this Federal reserve sysl0anS IP X the
and soundest in all the w ork
Velli instead of urging all of those various
f ?
m the law, why do you not simply prohibit gambling in
stocks and bonds on the Hew York Stock Exchange? In that way
j ou could make a short cut to the proposition. Just stop it.
« K0° f H nT- Well’. X do not have an.v objection to doing
aw v r +
OUZenr m discussing the thing, said we needed


a m arket— a le g itim a te m ark e t fo r stocks and bonds


ainb1ing.AT IE
F IiI>‘ Preserve the legitimate market, but cut out

Senator B r o o k h a r t . I have been wondering if we could not DroI t i - f in" tTrtm the F?dtral reserve system itself and making
fn f I m ”'n f ther\ and do away with gambling. That is not
diiction of the bin! SUggestl° n haS occurred to ™ since the intron » S ^ arh ? r F
th*i S+
passing bill prohibiting that? at0r from Texas seriously consider
b o n d e d ! i i TMFf D ,T hele


I? illi,°nS ° f d0llars of stocks and

5 J
e ,)ple W1?. do not own them and have no
idea of owning them. Purely gambling on the market.

° ° KHART- There is no trouble at «« in’ stopping the

Senator E dge. It may be an old-fashioned viewpoint, but I never
figured out that you could pass a law to keep a man from throwing
away his own money. That is the fundamental view of it.

B R O K E R S’ LO A N S


Senator B r o o k h a r t . We have a law against poker gambling, and
we can have a law against stock gambling. It is just as easy. The
Senator from Texas is right so far as that is concerned. The trouble
is to get the inclination of the Congress to pass it. That is where the
trouble is.
Senator M a y f i e l d . I do not object to a man throwing away his
money. Senator, but what I object to is the Government lending
about $3,000,000,000 to help him to do it.
Senator E d ge. In the meantime the Government is making in­
terest I suppose.
Senator B r o o k h a r t . I just checked up on some 13 corporations
operating in W all Street during the past year and found that these
13 that I checked had an average loss of 11 per cent in net earnings
last year, but they had an average increase of 27 per cent in their
stock values on the stock exchange. So the blue sky business is going
at a very great rate on that stock exchange.
Senator E d ge . Mr. Chairman, are we going on with the considera­
tion of this resolution?
The C h a ir m a n . The committee will govern on that.
Senator P i n e . I think it would be advisable to confine the hearings
to the resolution because if we branch out we w
’ill go too far afield.
The C h a ir m a n . I f that is the wish o f the committee, why we will
bring this part of our morning business to a close.
Senator B r o o k h a r t . -The resolution, Mr. Chairman, calls for reme­
dies, and these propositions I have offered in the bill are simply
remedies for this identical situation. That is what I was driving at.
The C h a ir m a n . Senator La Follette has expressed the hope that
Doctor Willis can be here at a later date and be heard.
Senator M a y f i e l d . M r . Chairman, I am a member of the Inter­
state Commerce Committee of the Senate which is going to take a
vote this morning on an important measure that we have been hear­
ing for several days and it is necessary that I go to that meeting. I
want to say just before leaving that in my opinion this is one of the
most important propositions before the Congress to-day, and I hope
this committee will conduct a very searching investigation into this
whole situation. In 1920 we have a terrible situation in Texas that
affected the cotton farmers, and our cotton farmers were compelled
to dump their cotton on the market and sell it for 8 and 9 and 10
cents a pound, and if the Federal Reserve Bank of the eleventh dis­
trict had come to the aid of the member banks and let them have had
sufficient money with which to carry this cotton for a while our
farmers would have gotten, no doubt, a greater price for their cot­
ton. And we do not understand how it is that this tremendous
amount of money can be loaned to persons who are speculating purely
in stocks and bonds and relief not be given to the agricultural situa­
tion of the country. Our people are tremendously interested in this
question, and as a member of this committee I want to insist that
we have full and complete hearings on this proposition and report
to the Congress a measure that will give relief to the agricultural
conditions o f the United States.
Senator B r o o k h a r t . I think, Mr. Chairman, that the law as it is
now answers the main part o f the Senator’s question. The Federal
Reserve Board is not to blame for this situation. It is not the ad­



ministration of it at all. It is the law itself, when that law provides
first that the reserves shall be redeposited in the Federal reserve but
allows no compensation that compels that much o f the redeposits o f
the country to go into the Federal reserve. The law permits the
other surplus credit of the bank to be deposited in the Federal
reserve, but again it does not permit any compensation to be paid,
and that situation gives a virtual monopoly to these New York banks
and they can offer whatever rate they please and get these redeposits
o f the country over and above the reserves that must be deposited in
the Federal reserve. And the Federal Reserve Board is not to blame
for that, nor the administration, but the law itself is purely to blame*
Senator F r a z i e r . But the fact remains that instead of the Federal
Reserve Board furnishing money to the agricultural districts that
need it, such as the instance that the Senator from Texas stated, they
are furnishing it to the W all Street interests to gamble in stocks and
Senator B r o o k h a r t . The Federal Reserve Board will not redis­
count a speculative loan. That is prohibited by the law.
Senator M a y f i e l d . What are the loans in New York if they are
not speculative? They say to the banks in the South that want to
lend money to the farmers: “ N o ; we can not let you have that money
for any length o f time because that would be speculating on the prices
o f cotton.” And yet billions of dollars are loaned in NewT York for
the mere purpose of speculating in stocks and bonds.
Senator B r o o k h a r t . The law itself is largely to blame for the
Senator M a y f i e l d . And that money is furnished by the Federal
reserve bank.
Senator B r o o k h a r t . It may be that there have been some abuses
o f it in the administration, but I think they are not go^ng on now
at any rate.
Senator E d ge. I f it is necessary to have formal action on the reso­
lution I make the formal motion that the committee proceed to give
full consideration to the resolution, having such hearings as they
deem necessary.
The C h a ir m a n . And that to-day’s proceedings be included.
Senator E d ge. And that to-day’s proceedings be included as a part
of the record.
S e n a to r P i n e . I second th at m otion .

(The motion was put to a vote and carried.)
The C h a ir m a n . I f there is nothing further we will adjourn. I do
not suppose there is anything we can take up this morning?
Senator P i n e . D o the members of the board who are here want
to be heard?
The C h a i r m a n , They have not expressed any wish in the matter
so far.
Senator B r o o k h a r t . I would like very much to hear them if they
are ready.
Mr. R o y A. Y o u n g (governor o f the Federal Reserve Board, Wash­
ington, D. C . ) . I received Senator Norbeck’s communication last
evening about 5 o’clock. I was in a conference all day and did not
get out until late, and that did not give me very much opportunity
to make preparation to come before this committee this morning* In



addition to that I am new on the work of the Federal Reserve Board,
much of it is new to me, and it is a tremendous amount of work
for me to attempt to get up to date. I have been wrestling mostly
with agricultural and livestock credits for the last 10 years, and this
is all new to me, as to the problems that we find in the other Federal
reserve districts. Nowt, if I understand correctly, the action that the
banking committee has taken, it is that they are going to have future
hearings and they will give the Federal Reserve Board ample op­
portunity to prepare answers to any inquiries they may make ?
The C h a ir m a n . Certainly.
Mr. Y o u n g . And that would be the best procedure for us to follow.
Senator B r o o k h a r t . Mr. Chairman, I would like to suggest on<
or two propositions o f fact wdiich I would like to have the governor
answer. One of them is the amount o f deposits in the Federal re­
serve by member banks in comparison with the amount required by
law to be deposited as reserves. How much more there is than the
legal requirement. Then also, if you have that data, show how much
redeposits o f the banks generally of the country are in other banks
than the Federal reserve. In other words, I want to see how much
of this redeposit reserve bank business is being done by the Federal
reserve bank and how much is being done by New York banks par­
ticularly, and banks generally throughout the country—the big banks
The C h a ir m a n . You will give the governor time to get that data?
Senator B r o o k h a r t . Oh, yes, indeed.
Senator E d ge . I would suggest also, Governor, that you file your
opinion o f the terms o f the resolution, its practicability, or what the
difficulties are. O f course, you will naturally appear to answer ques­
tions, but I think it would be helpful to the committee to have a
brief stating the views of the Federal Reserve Board as to the
The C h a ir m a n . W e must have that, yes, before we conclude our
hearings. The committee will now stand adjourned.
(Whereupon, at 11.10 o’clock a. m. Thursday, February 9, 1928,
the committee adjourned subject to the call o f the chairman.)



U nited S tates S e n ate ,
C ommittee on B a n k in g and C urrency ,

Washington, D. 0.
The committee met, pursuant to the call o f the chairman, in room
301, Senate Office Building, at 2.50 o’clock p. m., Senator Peter
Norbeck presiding.
Present: Senators Norbeck (chairman), Frazier, Pine, Steiwer,
Fletcher, Barkley, and Glass.

The C h a irm a n . The committee will come to order. Doctor Willis,
will you give the stenographer your full name and address ?
Doctor W i l l i s . Henry Parker W illis; address, Columbia Uni­
versity, New York City*
Mr. Chairman, I have come here at the invitation of Senator
La Follette, who suggested that I should give you my thoughts about
this resolution, Senate Resolution 113, which, as I understand, is now
pending before your committee.
In reply, I told him that I thought I had no information about it
that is not accessible to you or to anyone who follows the current
prints and the Government publications, so that all that I could do
was merely to express my opinion about it as an individual; but that
I am very glad to do, if such is your wish.
The C h a irm a n . I think, Doctor W illis, it might be helpful to the
committee if you would briefly set out the facts as you understand
Doctor W i l l i s . Yes* Senate Resolution 113 briefly restates the
condition o f affairs in the reserve system at the present time with
respect to what are known as brokers’ loans, and then proceeds as
follow s:
That it is the sense of the Senate that the Federal Reserve Board should
immediately take steps to restrict the further expansion of loans by member
banks for speculative purposes and as rapidly as is compatible with the financial
stability of the Nation require the contraction of such loans to the lowest
possible amount.

Then it further recommends:
That the Federal Reserve Board be directed to report to the Congress what
legislation, if any, is required to prevent the future use of the funds and credit
of the Federal reserve system for speculative purposes.

As to that, Senator, it seems to me first of all that the situation
to whicli the resolution calls attention is one of extraordinary im­




portance, and I may add, very serious menace, to the present financial
stability of the country. In that opinion I think I am safe in saying
that the thoughtful members of the community, whether in the bank­
ing or brokerage world, are pretty well in agreement.
As to the remedy that is proposed by the resolution, I do not
altogether find myself in harmony. The proposal is that the board
should undertake to restrict the further expansion of loans by mem­
ber banks, and as to that, I question their power—that is, I question
their right to do it except through indirect means— while the state­
ment that they are to be restricted so far as made for speculative
purposes—or rather, that those that are made for speculative pur­
poses should be restricted—seems to me too vague, for we have all
kinds of speculation in this country at the present moment, both in
stocks and in other kinds of value; so that the injunction to restrict
the further expansion for .speculative purposes would not convey to
the board, I should say, any definite idea o f the wishes o f the Senate.
Then the statement that the loans are to be restricted to the
lowest possible amount seems to me also to need further clarification.
It would be difficult to say what the lowest possible amount is unless
one were to formulate in his own mind very clearly a notion o f pro­
priety in the making o f brokers’ loans, and to state distinctly some
measure or test by which that lowest possible amount should be
gauged. That seems to me to be a very difficult thing to do.
I should be disposed further, Mr. Chairman, to say that the giving
o f an order o f this kind to the board would be an unwise step to take.
Either we have a Federal Reserve Board which is capable and which
is willing to order a contraction of this kind or we have not; and
if not, it seems to me that the Senate—or, for that matter, any legis­
lative body—is hardly in a position to determine when an important
banking step of this kind should be taken and to give the order to
have it carried into effect. I f you should do that now, it seems to
me that the board might very well get into the habit o f looking to
you for instruction as to when it should do necessary things, and
would increase in timidity about doing them on future occasions,
until it had had a definite indication o f the wishes of the legislative
Senator G la s s . Has the board any authority under the law to do
exactly that thin,g now?
Doctor W i l l i s . A s I said a few moments ago, Senator Glass, I do
not think from my knowledge o f the system that it has a right to dic­
tate to member banks what they shall do; but I will indicate in a
moment what I think it might do, if the committee will permit.
Senator G la s s . I think there is something that should be done.
Doctor W i l l i s . Y es; I think so, too.
Senator G la s s . I am talking about the law as it is now.
Senator F l e t c h e r . Y o u spoke about there being something that
the committee might do.
Doctor W i l l i s . I f I may, I would like to defer that for the present,
Senator F l e t c h e r . Yes.
Doctor W i l m s . I will complete my statement by saying that the
resolution in its final paragraph requests the board wto report to
the Congress what legislation, if any, is required to prevent the
future use o f the funds and credit o f the Federal reserve system for



speculative purposes.” That seems to me to be a very desirable tiling
to ask the board to do—to indicate precisely what changes, if any,
should be made in the present law.
A mere request to the board to indicate that, however, is perhaps
hardly sufficient, inasmuch as the board would seem to feel that the
present volume o f brokers’ loans is not excessive. I f it thinks that,
it presumably would reply that no legislation is needed; so that
while I see no harm in asking the board to make this report in order
to put it on record, it seems to me that investigation from another
source is necessary in order to bring out all of the facts in the case.
That completes my statement, Mr. Chairman, o f my views about
this resolution. I may summarize it by saying that I think the
resolution has performed an important public service in calling
attention to a very dangerous situation, and that I think the Senate
would do well to take cognizance of it and to determine upon some
steps in the matter, but that I do not agree with the particular steps
suggested here, except in so far as I have indicated.
The C h a ir m a n . You feel that a dangerous condition is liable to
develop if the present policies are permitted-----Doctor W i l l i s . T o continue; I do.
Senator L a F o l l e t t e . W ill you enlarge a little bit, Doctor, if I
might be permitted to suggest-----The C h a ir m a n . I do not think there is any harm in letting the
Senator ask some questions.
Senator G la s s . No.
The C h a ir m a n . Y o u understand, you do not need to answer them
if you do not want to.
Doctor W i l l i s . Yes.
Senator L a F o l l e t t e . W ill you enlarge a little on your view of
the situation which has grown up in recent months and give the
committee the benefit of your careful observation, which I know
you have been making o f this situation as it has grown up ?
Doctor W i l u s . I shall be happy to do that as far as I can without
specific statistical preparation. Not knowing beforehand exactly
what ground would be covered in your questions, I shall have to
answer on the basis of general knowledge, and if anything should be
brought up that calls for statistical details I can, perhaps, furnish
that information afterwards.
It seems to me the situation now existing in New York is in some
ways quite parallel to that which existed just after the war in com­
modities and land. We then had the banks o f the country financing
land speculation and the hoarding o f commodities, with the result
that our price index advanced at a rapid rate, eventually reaching
about 270, or, according to the revised figures o f the Bureau of Labor
Statistics, about 250.
It was at that time that the reserve system awakened to the great
hazard which was developing and set itself to bring about a sounder
position in the banking system o f the country. That has often been
referred to as “ deflation.” By whatever name we may call it, it
was an effort to get back to a point at which our gold reserve was
adequate to the support o f our outstanding volume o f obligations
and at which the portfolios o f the banks were of at least a moder­
ately liquid sort. As the result o f the experience then had our bank­
95062— 28------ 2



ing community has been extraordinarily careful during the past
six or seven years not to overfinance farm-land speculation and not
to overfinance commodity speculation. In fact, it has, perhaps, gone
rather too far in its refusal to finance land and development of
land, for at the present time it is reported in the Western States
that even very good borrowers have difficulty in getting the accommo­
dation to which they should normally be entitled.
However, during the past five or six years there has been no such
hesitation about the financing of speculation in stocks and securities,
and the result is that we have built up a huge structure of loans
secured by stock-exchange collateral or, in the smaller cities, nonstock
exchange collateral, which the banks have provided funds to carry
along. Trading has spread itself very widely all over the country,
so that now great numbers of people who have no knowledge of the
market are in the market.
The result is that while the volume of brokers’ loans may not be
too great in the technical sense, and on high authority it has been
stated recently that it was not too great.
Senator G l a s s . What do you mean by “ high ” ?
Doctor W i l l i s . Statements of that sort, I think, have come from
the White House and from the Reserve Board and from the Treasury
Senator G l a s s . But it does not necessarily follow that a statement
which comes from the White House comes from high authority.
No matter who may be the occupant of the White House, if he does
not understand this particular problem. I would modify that and
say “ high sources.”
Doctor W i l l i s . Very well. While one might be disposed to say
that the volume of brokers’ loans is not too high in the abstract
sense of the term, inasmuch as the banks hold an enormous supply
of gold and resources in general, and so can carry them; and while
it is probably true that many of the banks are well protected, since
they have for a long time been building up exceptionally strong
margins, it is a fact that the development is excessive in that it has
been created on an abnormally high level of stock prices and under
dangerous technical market conditions. A very great number of
persons w ho do not know much about the stock market are interested;
and thus a sharp change in prices is likely to wipe out a great many
o f them------*
Senator G l a s s . Do what?
Doctor W i l l i s . W ipe them out.
Senator G l a s s . The speculators ?
Doctor W i l l i s . Yes. While reputable brokers and bankers do
not loan on “ thin ” margins, it is true that there is a great deal
of money loaned on rather thin margins in one way or another at
the present time, a hazardous situation has been developed in that
way through the toleration of our banks and our reserve system,
just as a similar condition was allowed to develop during the years
1919 and 1920, in another branch of speculation.
The danger, then, is analogous in the two cases. The results that
may be expected, other things being equal, are somewhat similar.
The C h a ir m a n . In other words, a substantial drop in the market
might cause great losses to the banks?



Doctor W i l l i s . Might cause great losses to the people who are
speculating, and eventually directly or indirectly, to the banks.
But what is more important than that, it might bring about a
serious readjustment of values and price levels, and an increase of
failures, which would be injurious all around to all classes in the
community. The speculator has no doubt weighed the cost of his
operations, and is prepared to lose. Whether he has wisely under­
taken that kind of responsibility is another question: but we need
not- sympathize much with him" The person who is in danger in
this case is the general stockholder or depositor in the banks, and
the business community as a whole, which, o f course, suffers indi­
rectly through any breakdown of the distributive machinery.
Along with that general condition there has developed another,
which is perhaps considerably more serious, but which seldom
receives any attention at the present time. That has come about in
this way. Owing to the very cheap money which has existed in our
markets for some years past, not a few business concerns have found
it more profitable to finance themselves through the stock market than
at the banks. They have often found the local bank rather stingy
in some parts o f the country, rather inclined to charge high rates
o f interest, and not altogether broad visioned with respect to the
development o f the country. The result is that there have been great
numbers of refinancings, and of resorts to the stock market through
the issue of bonds and preferred stock and second preferred stock
and every other kind of security; so that as a result, we have an ab­
normal condition in which the business house instead of applying
to its bank, as it formerly used to do, often goes to the stock market
for the accommodation that it wants in carrying on its business.
The C h a ir m a n . To make that cleax*— instead o f going to the bank
for loans, it markets its loans in the stock market ?
Doctor W i l l i s . Exactly so; and then the bank which has funds
in hand and wants to do something with them, loans those funds
to persons who wish to carry these stocks and bonds; so that you
have a condition in which the bank is not willing to loan to the
individual borrower, and yet it loans to the speculator who is going
to carry the obligations of similar individual concerns. Now. that is
not a matter o f conjecture. For example, the Federal Reserve Board
in its annual report last year shows a very marked decline in the
amount o f eligible paper that is being carried by the banks o f the
country in their portfolios. It attributes that to the growth of loans
upon securities; but I should go further back than that and attribute
it partly to this change in the method o f financing. It gives the
statistics on page 9 o f its last annual report o f a year ago, and it
says this [reading:]
Looking at the developments in the condition of member banks as a whole in
recent years, the outstand ng changes have thus been in the direction of a
larger proportion of long-term investments and of loans on securities and of a
corresponding increase in the proportion of time deposits, as compared with
deposits payable on demand.
From the point of view of the Federal reserve system, an important outcome
of these developments in the character of the business of member banks has
been a decrease in the proportion of the banks’ assets that are eligible for redscount with the Federal reserve banks. Of the total loans and investments of
all member banks on June 30, 1926, 16 per cent was eligible for rediscount at
the reserve banks, and this proportion was 18 per cent for national banks and
about 12 per cent for nonnational member banks,



Then it gives totals, which show a substantial decline, which I be­
lieve has gone on at a much greater rate during the past year.
As a result, many country bankers profess that they are being
forced into the stock market, or into the investment market, either as
buyers o f securities or as lenders on such collateral. These loans are
being carried because the banks can not get enough business at home,
the real fact in the case being that this change of method has auto­
matically deprived them of loans that they need at home, and has
diverted their resources into an entirely different form and kind of
In general, those two things, Senator, are the basic elements in the
condition which has been developed.
Senator G la s s . Doctor, the Federal reserve statute expressly pro­
hibits the rediscount o f paper for speculative purposes at Federal
reserve banks?
Doctor W i l l i s . Yes.
Senator G la s s . What, exactly, is the nature of the manipulation
under which the resources of the Federal reserve system are applied
to speculative loans?
Doctor W i l l i s . The mechanism of that, Senator, is what I suppose
Senate Resolution 113, introduced by Senator La Follette, would
bring out if it were answered.
I would say that the situation is this: As the resolution points out,
the original Federal reserve act was drawn for two purposes, the
first that o f absolutely preventing the use of bank reserves in specu­
lative lines; the other that of making sure that the loans o f the
reserve banks were always liquid and based on actual transactions
in business. The two things are quite different in a way, but they
are the obverse and the reverse sides of the same situation.
W ith that in mind, as you well know, the act originally provided
for w hat we call rediscounting and did not provide for direct or
collateral loans.
Very early in the experience of the system, however, this was
altered in two ways. In the first place, the practice of the Federal
reserve banks was allowed to become such that they accepted col­
lateral in protection o f otherwise eligible paper, so that if a man
brought in a note which was superficially 01* technically elegible,
and might have been turned down on account o f its intrinsic weak­
ness, the reserve bank would discount that note provided it was
backed up by collateral. That was a change which was seemingly
quite necessary and, indeed, praiseworthy frojn the standpoint of
practical banking, but which, o f course, opened the door to all kinds
o f abuses.
The second change which was made was a change allowing direct
borrowing by member banks, so that a bank could go direct to a
reserve bank and borrow on its own note, provided that it submitted
eligible paper as collateral protecting that direct note.
Then, by the practice of certain Federal reserve banks, these bor­
rowers—these borrowing banks— were permitted to make loans for as
short a time as one day.
Senator G l a s s . I thought the limit was 15 days.
Doctor W i l l i s . That is true, technically, but in practice it gets
down to a day-to-day loan, because the borrowing banks are allowed
to take up their paper whenever they please, so that in effect the loans



are on a one-day basis. Conversely, the reserve bank, by the use o f
u repurchase agreements,” is in position to call loans on a day’s
Senator G la s s . I mean, 15 days was the limit. That would not
comprehend a one-day loan.
Doctor W i l l i s . The facts are as I have stated, so that the member
bank is allowed to get a very short loan, which it can cancel prac­
tically at will, and thus is enabled to obtain day-to-day money, or
practically that, for use in its speculative operations.
A long with that, as the result o f the war, came a change whereby
inevitably large quantities o f Government bonds were put out, as well
as Government certificates o f indebtedness. Such bonds or certifi­
cates o f indebtedness had been specifically provided for in the act;
but, needless to say, the framers of the reserve act had no foresight
which enabled them to anticipate the coming on of the war, with the
great increase in our debt.
Senator G la s s . The total outstanding bonded indebtedness o f the
country at that time was less than $1,000,000,000.
Doctor W i l l i s . It was; so that provision was naturally made there,
as in all other central banking countries, for loans designed to facili­
tate operations in the public debt, since the reserve banks were to
be fiscal agents o f the Government.
When the war was over, however, the present policy of short-term
Treasury financing became definitely rooted, and was continued;
and the obligations which were thus sold were put back into the
banks out o f which they had been, in part, driven during the vears
1919 and 1920.
The banks then used these notes and bonds as collateral for the
purpose of borrowing against their own direct obligations, so that
the Federal reserve bank became practically a supplier o f cash to
any bank that wanted it, provided that it stood in possession o f the
eligible paper, which in this case was the obligations o f the Gov­
ernment; and since such obligations could be borrowed for a small
commission, any bank, practically, could get accommodation in that
way. A t one time it happened, if I am not wrong in my memory,
that a single bank has had as high as $100,000,000, which it used
directly in the market.
That is the situation. It is, o f course, a complete breach o f the
spirit and the purpose o f the Federal reserve act, and undoubtedly
is—not wholly but in some measure— responsible for the inflated
condition o f the loans we have at the present moment.
Senator F l e t c h e r . Do you believe, Doctor W illis, that steps should
be taken to restrict further loans for speculative purposes?
Doctor W i l l i s . Speaking now, you mean, from the standpoint o f
the Senate, or o f the reserve system? I can answer only in this w ay:
I think there are too many loans now being made for "that purpose.
I think we have too large a volume o f our bank credit involved in
stocks, and I think we have far too large a proportion of reserve
bank credit, in one way or another, involved in the stock market.
As to whether immediate steps should be taken to curtail it, that
is a very difficult question. We have made these loans. We do not
want to pull the props out from under the market at the present
time. That would help nobody. But I am distinctly o f the opinion



that the further extension of this type of loan should be rigidly
restricted, and as soon as the volume can be safely reduced it
should be.
Senator F l e t c h e i l A s to the suggestion in the last resolution, th at
the board be directed to report to Congress what legislation is needed,
perhaps we ought to have some other agency to make that report.
What agency would you suggest there?
Doctor W i l l i s . I should think that your own investigation here
and the inquiries that you will direct, no doubt, to properly qualified
bankers, will give you the information without delay. The situation
is one that is well known and is widely discussed all over the country,
and I believe that the banking community is—well, I was going to
say that they are a unit, but that is too strong. I will say I believe
that the banking community is very much in agreement as to the
need of a more conservative policy.
As to how far it is agreed just what should be done, that is another
question; but undoubtedly the opinions of bankers on the subject
would lead to a general consensus of opinion as to the steps to be
Senator G l a s s . Doctor, with respect to what appears to be the in­
ordinate use o f the funds of banks throughout the country in specu­
lative centers, what would be the effect, in your judgment, of either a
direct limitation, or a prohibition, upon the payment of interest on
the deposits of one bank with another bank?
Doctor W i l l i s . That is a question that has been discussed a great
deal. It is very difficult to say w hat the effect of that would be. One
effect that it might have would be to aggravate this situation, in this
way. Bank A, we will say, of Keokuk, Iowa, has a balance of $500,000 that it thinks it does not know what to do with at the present
time. It sends that balance to New York, to a correspondent, and
gets a small rate of interest on it. Later, on hearing that the call
loan rate has gone up somewhat, it orders $250,000 of that loaned at
Now, suppose that you prohibit the payment o f interest by one
bank to another; it would be fair to suppose that the Iowa"bank
would thereupon loan its entire $500,000 in the call market, if it were
still disposed, as before, to keep it in New York at all.
Senator G l a s s . Might it not have the effect o f causing the Keokuk
bank to reduce its rate of discount to its local industries and business
men, so that it might contribute to the activity of business in its own
community ?
Doctor " W i l l i s . It conceivably might do that; but my thought
about that is that if the bank has not done that already, but has pre­
ferred to send its funds away from home, or to put "them into the
bonds o f Greece and Czechoslovakia and Germany and other coun­
tries-----Senator G l a s s . Approved by the United States Government here
at Washington.
Doctor W i l l i s (continuing). That then it is not likely to make a
drastic change in its policy solely because o f an alteration in rates
o f interest on deposits. I think there is an impression among bankers
that the present competition for bank deposits has been very bad,
and that the effect of it in raising the rates o f interest paid on de­
posits both by one bank to another and by banks in general to cus



tomers has been injurious, and that if it could be checked in sorne
way it would be desirable.
lhat, I think, is a thing that the reserve system might take in
hand for the purpose of correction. It is a ‘ thing that could be
largely corrected, undoubtedly, as is shown by the fact that the board
did at one time, a good many years ago, correct the evil in New
1 ork City. It did that in this way: The New York banks had
fallen into the habit of bidding against one another for country
money, and as the war was going on at that time and London banks
had also taken to bidding against them for money from the United
States, the board then intervened and obtained "an agreement be­
tween the New York banks whereby they all undertook to pay only
a uniform rate of interest upon out of town deposits, such rate to
be regulated as a percentage of the rate of discount of the reserve
bank at that time.
That had apparently a wholesome effect, because when the rate of
the reserve bank was very low, then a corresponding reduction was
worked in the rate that the banks paid for country money. That
tended to drive some country money away when the rate was eased
in New' York.
Whether that is lived up to at the present time or is not fully lived
up to, as many think, it would be only conjecture for me to say;
but the use of some means o f negotiation on the subject is open to
the reserve system, and undoubtedly would be more effective than
Senator P in e . Have you determined why it is there is so much
idle money in the country; so much money available in the country
for use in New York City?
Doctor W i l l i s . So much spare funds?
Senator P i n e . Yes.
Doctor W i l l i s . One important reason is the thing I have spoken
o f; that is the change in the type of financing, which has shifted
the obligations of the larger concerns from direct bank loans into
securities. I saw a computation— I could not say how accurately
it was made, but apparently it was carefully made— some weeks ago,
hich indicated that upward of two billions of dollars, I think, was
now being loaned by corporations in various ways, which meant that
they had overfinanced themselves to that extent and w'ere carrying
that amount along either as investment in securities, or in some cases,
perhaps, in call loans, or in other cases simply as idle money on
hand, the reason being, as you see, that they had now gone into
banking themselves. They had issued their securities to the public,
and then, when business was slack, instead o f canceling the loans
in bank, they had to find some use for them, and found it advisable
to carry them along in that way. I think the whole country has
fallen into a condition o f overcapitalization which results in what
appears to be a large volume of money, but which is really inflation;
and the inflation is illustrated by the fact that the actual coin reserve
now is so low as compared with the outstanding deposits. I think
it is figured nowT only about 6 or 7 per cent o f outstanding bank
Senator G la s s . The Federal reserve bank is not compelled by law
to make a given loan—to make a given rediscount. Suppose the
Digitized for board o f the Federal Eeserve Bank o f New Y ork would first admonFRASER



ish and then demand o f the rediscounting banks that there should
be a curtailment o f loans for speculative purposes, what would
happen ?
Doctor W i l l i s . I think there would be a curtailment.
Senator G la s s . S o do I.
Senator F l e t c h e r . In an instance such as you mentioned, where
the Federal Reserve Board was able to get an agreement among the
banks in New York, suppose the banks refused to make any agree­
ment, what recourse would the board have then ?
Doctor W i l l i s . O f course, if they absolutely refused to make an
agreement, I think the board would have no recourse. It is a matter
o f negotiation and adjustment. I believe, though, that that would
not be their attitude, because I believe that each of them admits that
the interest on deposits evil is a great one, and they only want col­
laboration and encouragement to cut it off.
I was in Minneapolis and St. Paul a few weeks ago and discussed
this whole situation with some o f the bankers there, and one or more
o f them immediately referred to the payment of interest on deposits
as a principal evil in the present situation.
Sen ator F




m uch interest do th ey p a y ?

Doctor W i l l i s . I could not give you the rates. Some of them in
the West are very high.
Senator F l e t c h e r . I mean in New York, on the country money
sent there.
Senator G la s s . It is i y 2 per cent, is it not? It used to be 2
per cent.
Doctor W i l l i s . I do not think it is as low as that. It is not less
than 2 per cent on demand deposits. Just how much money is car­
ried there at higher rates than that it would be interesting to know.
Senator F l e t c h e r . I thought it was 2 per cent.
Senator G la s s . I think they have reduced it either one-quarter or
one-half o f 1 per cent.
Doctor W i l l i s . There has been no condition there in which the
open or official rate was too high. That is not the case. The danger
comes from violations of the rule. I should say, and from the actions
o f banks that are perhaps not members o f the system in bidding
against others.
The C h a ir m a n . What per cent of the prevailing rate is being
paid on these deposits officially ? You spoke about it being elastic
and in harmony with the fluctuating rates of money?
Doctor W i l l i s . Yes.
The C h a ir m a n . How does it compare? Is it one-half or less?
Doctor W i l l i s . I do not think I quite understand you.
The C h a ir m a n . The payment that the banks make on deposits
received has a certain relation to the prevailing interest rate?
Doctor W i l l i s . A t the reserve bank it formerly had, and to-day
there is some such a relationship between the open-market rate and
the deposit rates.
The C h a ir m a n . What per cent is it?
Doctor W i l l i s . I can not give you that from memory. Shall I
state my recollection ?
The C h a i r m a n . Yes.
Doctor W i l l i s . My recollection is that when the reserve-bank
rate was 4 per cent the member-bank rate was not to exceed 2 per




cent under the old arrangement: but to-day there is no .official re­
lationship, though a cut in the deposit rate often occurs when the,
open-market rate is reduced.
The C h a ir m a n . Y o u laid stress upon the influence o f the rates pre^
vailing under these brokers’ loans. Would you care to go into that?
Doctor W i l l i s . The rate that is charged, you mean?
The C h a i r m a n . Yes; the increase in brokers5 loans under a low
rate o f interest, and the causes for the lower rate at certain periods.
Doctor W i l l i s . The effect of the rate on brokers’ loans is one that
has been, o f course, greatly controverted. One view o f it is that it is
largely psychological, and that a change of one-half of 1 per cent
at reserve banks does not have very great effect on the market. The
fact remains that such changes in rates have invariably been followed
by contraction or expansion; so that, so far as history goes, in our
short history of the reserve system it has apparently been a very
effective thing.
Thus, for example, last September the rate was cut to Sy2 per cent,
and there was a steady—almost steady and continuous— expansion o f
brokers’ loans from that time on until the raising of the rate to 4 per
cent, last month. Since that increase, about a month ago, there has
been a decline of, I suppose, $100,000,000, or perhaps more. So that,
superficially at least, the volume of speculative loans seems to follow
more or less closely the changes in the rate.
Reserve banks state that a more effective influence is found in the
open-market operations, and that they have prepared the way for
changes in the rate by buying and selling government securities and
acceptances. I have no doubt that that helps and makes the change
in the rate more effective. So that the change in the rate is an
announcement that a cycle of operations has been completed, and that
thereupon the influence growing out of those operations makes itself
directly felt.
Now, whether you take one view or the other, it comes to about the
same thing: the advance in the rate is a notification that credit has
been shortened to some extent.
A more important thing than that, however, is the variation of
rates between the districts. Under the early organization of the
reserve board, it was intended to have a variation of rates, first as
between districts, second as between maturities and kinds o f paper;
so that before the time that we went into the war we had a rather
elaborate rate structure— it was too elaborate, probably, but still a
rather extensive and carefully worked out rate structure— so that
there were differences of rates as between New York, the Middle
West, the Pacific slope, and the South. It was then put forward by
advocates o f the Federal reserve system as one of the great merits o f
the system that we had rendered possible an adaptation o f rates to the
necessities o f local communities.
During the war we had to abandon that plan because our rates were
then made such as to correspond to the coupon rate o f Government
bonds, in order to stimulate the subscription to Liberty bonds and to
enable people to carry them without loss.
A fter the war an effort was made to restore something like the old
rate structure. That was unsuccessful; and o f late years we have
had a single uniform rate structure, so that a rate o f Sy2 per cent



or 4 per cejit is made on all maturities and kinds and classes o f pa­
per, no matter what they may be, in each district.
In addition to that, in the last two years there has been a growing
effort to have a uniform rate throughout all districts, so that what­
ever was done in New York was the same in other districts, and
where western bankers did not care for the policy of adapting their
rate to an eastern rate, some pressure was placed upon them to do it.
Senator G la s s . And that administration by the board has been
in complete defiance of the avowed purpose of the act when it was
passed ?
Doctor W i l l i s . Yes; I think so; that is my opinion.
Senator G la s s . It is a fact.
Doctor W i l l i s . The effect o f the uniform rate sturcture is, o f
course, to siphon money out o f the interior and drive it to New
York, because money tends to flow away from the place where the
rate is below the normal rate; so that if you have 3!/^ Per cen^
Chicago, and it ought to be 4, the effect is to drive it to New York
where the rate is also 3y per cent. I f you raise it in Chicago, the
tendency is to draw it back from New York into the interior.
All of that was definitely contemplated when we were forming
the Federal reserve act, and that was the reason—or an important
reason— for maintaining a district reserve system, so that each dis­
trict would be the master of its own resources, and keep them there
i f it wanted to. O f course, if it did not do so, it had the right to
do as it chose; but if it wanted to have its own rate correspond to
the local rate— that is the rate in the open market, locally—it could
do it.
Senator G la s s . One of the outstanding controversies of the time,
as you will recall, one o f the bitterest contentions with which Con­
gress had to deal was on the question o f a uniform rediscount rate,
and Congress utterly rejected that idea.
Doctor W i l l i s . The so-called monetary commission bill had pro­
vided for a uniform rate o f discount throughout the country,
undoubtedly with the intention of building up and protecting the
New York money market in its preponderating importance. There
was, perhaps, nothing wrong in that. It was simply a difference
in point o f view.
Senator G la s s . There was a difference in degrees o f acquisitive­
ness. That is what we are doing now, is it not?
Doctor W i l l i s . The reserve act was modeled upon an entirely
different basis, which was the development of each local market
and giving each part o f the country control o f its own resources, so
that if it wanted to have a local speculative market, say, and float its
own issues of bonds and be self-sufficient it could do it.
Senator G la s s . And the board has chloroformed the philisophy
o f that.
Doctor W i l l i s . The thought was, of course, always repugnant to
the large issuing houses in New York, which wanted to have control
o f the issue business o f the country.
Senator G l a s s . The board, however, was not appointed to take
that point o f view.
Doctor W i l l i s . The formation o f the reserve act was upon the
other philosophy, and in order to carry that into effect the local
discount rates should be formed under a set o f local conditions. And



since we have here a great country with immensely varving natural
resources and climate and corporate activities, I should"sav, accord­
ing to the mathematical doctrine o f probabilities, it would be a
very rare thing when you would have a uniform discount rate all
over this country. It certainly would be rather difficult to arrive
at a uniform discount rate all over the continent of Europe in all
the central banks fhere.
Now, as a matter of fact, we have had a uniform rate throughout
this country for a long time, and the effect o f it, in my judgment, is
seen in the siphoning off of funds from the interior markets to the
New Y ork market, which naturally tends to build up there the
securities business and the general powerful control of finance which
has been developed there.
Senator P in e . Inflation.
Doctor W i l l i s . Inflation has been pretty common everywhere
from time to time, but we have it now, especially in the stock market.
Senator P in e . It is not in the agricultural regions.
Doctor W i l l i s . It was at one time. It is a good thing that it is
not prevalent in the agricultural regions, in my opinion.
Immediately after the rediscount rate changed, when Chicago put
its rate up to 4 per cent, New York remained for a few days at 3 y 2
per cent. Transfers, as I understand, were at once initiated through
the gold settlement fund. In other words, money began to move
sharply back to Chicago; whereupon the New York rate was raised
to 4 per cent, leaving the rather grotesque situation of
Per cent
at such places as Kansas City and Dallas, while it was at 4 per cent
at New York. But the return flow of money was stopped as quickly
as if one had turned a faucet in a pipe.
The C h a irm a n . Speaking of deflation, I am sorry the Senator
from Iowa is not here. The other day he put in the record a state­
ment along the line that while Iowa land values had increased to a
point where it w^ould show an index of 240, commodities as a whole
had even taken a little higher level; and, therefore, the land deflatiQn
in Iowa was not a deflation at all; it was just a little lower than
the general mark of exchange.
Senator G la ss. Yes; but he did not come back to-day, because I
pointed out the other day that he was sending $500,000,000 o f the
people's money in Iowa to New York for speculative purposes.
The C h a irm a n . He said that he protested against that, and
wanted to stop it.
Senator F ra z ie r. That is not because the farmers out there do not
want the money right now, but because the banks will not loan it
to them.
Senator G la ss. You ought to correct the banks at home.
Senator L a F o l l e t t e . Would you enlarge a little, for the benefit
of the committee, upon what you regard as the evils of this system
of financing upon the part o f industrial and other corporations
through the"market rather than through the banks?
Doctor W i l l i s . I will be glad to give you my thought about it;
with which you may not agree. I think, in the first place, it dimin­
ishes the desirable control by the banks, and their regulation of
business expansion. My thought about a bank is that it is in a sense
a public-secvice corporation. One of its functions is that o f shifting
capital into the various lines in which it ought to go. A wisely



managed, able bank is a bank which gives to every man according to
his necessities, and withholds from everyone capital when he is not
likely to use it, on the whole, for the best interests of the community.
In our capitalistic society we measure success in business on the basis
of profit and sound credit. Consequently, if a business is not doing
well, or is not wisely handled, the banker’s duty is to shut down on
its credit until changes are made, there. I f the business house now
gets its capital not from the bank but from thousands of investors
who never look into the statements, who never attend a stockholders’
meeting, and never do anything except draw their dividends and
spend them, the tendency in business is to separate itself from this
kind of supervision, and consequently to do things that are not, on
the whole, in the interest of the community. I do not mean by that
that it consciously acts in an antisocial manner, but simply that it
has been released from one of the types of control that under our
capitalistic system has been established for the purpose of regulation.
The effect of that is that that business tends to push ahead and
expand largely, to adopt methods o f selling its goods, etc., and to
act in ways that it would not if it was subject to satisfactory banking
Perhaps the best illustration of that is the overcapitalized condi­
tion of much o f our manufacturing industry in the United States
to-day. We have a great deal of idle plant capacity, and that is
due, of course, to the fact that businesses have been allowed to get
more capital than they really needed. That, to my mind, is one
major evil growing out of this condition o f affairs.
The C h a irm a n . Y o u feel, doubtless, that it is due rather to an
overdevelopment than to a falling off in the consumption of the
country ?
Doctor W i l l i s . Yes; I think there has been overdevelopment in
certain classes o f productive capital, so that we have idle plant capac­
ity; and one result o f that, incidentally, o f course, is that men are
drawn off from the farm to the factory, while excessive expansion
is going on.
Then, of course, it is necessary to provide an outlet for goods that
are thus overproduced, and we do that by installment selling or highpressure salesmanship, or in any way we see fit. The outcome of
that, o f course, is to bring about a still further one-sidedness in the
The C h a irm a n . Can we consume any substantially larger amounts
under the partial-payment plan than under the older system?
Doctor W i l l i s . The country has undoubtedly anticipated its
The C h a irm a n . It did that for a year or two. W ill it, in the
long run ?
Doctor W i l l i s . It did it at first. In the long run it can not do it.
The C h a irm a n . We are suffering from that now?
Doctor W i l l i s . Yes; I think that the spurt is having to-day a
bad effect in the overspeeding-up o f manufacturing, and the reflex
effect o f that on the types o f business I spoke of.
The C h a irm a n . And from a demand which in its nature was
Doctor W i l l i s . Y es; quite so. W e had supposed that the estab­
lishment o f the reserve system had been to supervise our banking



and make its action more public spirited than, it was under the old
banking system; but the actual working out shows how difficult it
is for anyone to foresee the future. It has not done it.
Senator L a F o l l e t t e . Y o u expressed your opinion as being op­
posed to that portion of the resolution which calls on the Federal
Reserve Board to take such steps which may be necessary to curtail
this present situation.
Doctor W i l l i s . By member banks, Senator.
Senator L a F o l l e t t e . I take it your criticism is rather based on
the theory of either the Senate or the House— or the Congress—
getting into the habit of advising the Federal Reserve Board as
to what it ought to do in specific situations, rather than on any dis­
agreement in so far as the graveness o f the present situation, or the
necess ty for some action being taken either by the Federal Reserve
Board or by Congress through legislation to remedy it, is concerned ?
Doctor W i l l i s . Yes; it is based essentially on what you speak
of as the undesirability of having Congress take over the direction
of practical banking.
It is also based, and I think this is the point that the Senator
from Florida—am I not right— asked me about some time ago when
I spoke about indirect control by the board. It is also based upon
the thought that the reserve board has not any right, so far as I
understand, to act directly to restrict the expansion of loans by
member banks. It can only do that indirectly through its man­
agement and the reserve banks; thart is, by requesting the reserve
banks to follow a policy of discouraging applications by banks that
want to use the money in speculation, or whose statement shows
that they already have a large sum in the market.
Senator L a F o l l e t t e . Do you feel that the exercise of that indirect
power, if I may term it so, is an unsound policy ?
Doctor W i l l i s . The exercise of it by the board, do you mean*
Senator L a F o l l e t t e . Yes.
Doctor W i l l i s . No. On the contrary, I think it is a perfectly
sound policy, judiciously to do just that through the reserve banks;
but not through direct orders to member banks, over which I con­
ceive they have no positive jurisdiction at all.
Senator L a F o l l e t t e . In other words, the board, if it viewed this
situation, might under existing law take steps to remedy it through
this indirect control?
Doctor W i l l i s . I think so. I think there is a great deal that the
board could do to cut that off, if it was impressed with the necessity
of doing so.
Senator G la s s . It might if it would.
Doctor W i l l i s . We gave authority to the Federal reserve banks
to control their rediscounts to the banks— their member banks— as
the board should generally indicate.
Senator L a F o l l e t t e . I f that paragraph o f the resolution was
amended to conform to the suggestion which we have just been dis­
cussing, would you still feel that it was unwise for the Senate to
take that action in view o f the gravity o f the present situation?
Senator G la s s . That goes back to his previously expressed opinion
that he does not think that Congress ought to undertake it; that
either branch o f Congress should undertake to instruct or suggest to
the board.



Doctor W i l l i s . I can only say, Senator, that to answer your
question directly, yes or no, is very difficult, because that all depends
on how it is done. I think that unwise action or heavy-handed
action by the board now might produce very serious results.
Senator L a F o l l e t t e . I think we could agree about that.
Doctor W i l l i s . Yes. That the board should by proper methods
and by steady but determined exercise of authority gradually bring
about the reduction o f loans, I have no doubt whatever. As to the
passing of this resolution, of course, that is practically putting up a
signboard to the country that something is going to be done, and
anything like that is immediately taken advantage of by speculators
who want to profit by the decline, and there are plenty of those
just as there are on the other side. I have no more affection for the
man who wants to make a profit by beating down prices than for
the man who wants to make a profit in the other way, and it seems
to me that the situation is one that should be corrected through
internal management, if it can be, rather than through action by
Senator L a F o l l e t t e . Apparently we are confronted with the
situation where we can not get action.
Doctor W i l l i s . Yes.
Senator L a F o l l e t t e . I do not wish to draw you into any criti­
cism of the present board* because I realize you would not care to
do that.
Doctor W i l l i s . I have not hesitated to criticize the present board.
I have felt authorized by reason of my former position as a member
of their “ banking family,” and have uttered a great many friendly
criticisms of them.
Senator L a F o l l e t t e . But we are confronted with a situation
which I think most people agree is a grave menace.
Doctor W i l l i s . Yes.
Senator L a F o l l e t t e . And no action seems to be forthcoming. I
agree with you that I should not like to see Congress get into the
habit, or the Senate, of passing weekly resolutions directing the
activities of the Federal Reserve Board. That is contrary to the
whole theory upon which the board was created.
Doctor W i l l i s . Yes.
Senator L a F o l l e t t e . But I might say that I was prompted to
introduce this resolution by the extreme gravity of the situation
which I felt was growing up.
Doctor W i l l i s . I think you did right, Senator, and I think the
resolution has already done good. I f you will permit me to say so,
perhaps it has done all you intended. I do not know. On what date
did you introduce this resolution?
Senator L a F o l l e t t e . It was introduced on the 17th o f January.
Doctor W i l l i s . Since that time there has been an increase in the
rates of the Federal reserve banks.
Senator G l a s s . I think the resolution has done a great deal of
temporary good; but I think it ought to prompt this committee to
consider if there may not be some modification o f the act itself which
will do a permanent good; which will prevent, to some extent at
least, a recurrence o f the situation we are complaining of now.
Senator L a F o l l e t t e . That was the next question I was going to
ask the doctor. A t the time you were ill, Senator, and could not be

B R O K E R S’ LO A N S


here, and when we had the first hearing, I stated to the committee
that I felt that if the introduction o f this resolution would result in
the direction of the attention of this able committee and of the
Congress to the gravity of this situation and to the necessity for
some permanent legislation to remedy it, I should feel highly grati­
fied by the result.
Doctor W i l l i s . Senator, I should like to say there, although not in
direct answer to any question you have put, that I have for a long
time felt that this act needs a thorough revision and overhauling.
There are certain portions of it that are not being observed at all
and never have been observed, and whenever the question is raised in
official quarters the answer is, “ We do not think it is worth while
to observe them. We do not like those provisions of the act.”
Then there are other features o f it that have been observed, but
in a rather unsatisfactory way and in a way that is quite foreign
to the original purposes of the act.
In addition to that we are all of us wiser than we were when the
act was passed. W e have had 10 years or more o f real experience
under it, and they have been years of remarkable financial trans­
formations in the financial world.
The Canadians are in the habit of revising their banking act
every few years, and that gives opportunity for an exchange of
opinions and to round out these things. This act needs revision.
Needless to say, it should be a revision without any partisanship
at all. It should be a revision that is not made under the influence
o f the Federal reserve banks or by them. It should not be made
by the governors of the reserve banks, furnishing sections on this,
that, or the other topic for incorporation in it. I f you make it
in that way, it will be of no use. It should be a real, bona fide,
careful revision o f the whole act; not because it has been injurious
or bad, because it has been the one thing that all over the world has
set this country up as a financial example. It has been copied in
many countries and its practice has been adopted in many others.
It is mere commonplace to say that we could not have financed the
war without it. But it needs revision, because it has been as service­
able and as good as it has and because in the way that it is being
operated now it is dangerous and it needs modification. To under­
take that is a great piece o f work, but it is a piece of work urgently
needed. The sooner it is begun the better off we shall be.
Senator G la s s . Mr. Chairman, I am sorry I have to leave, but I
am in the hands o f my doctor and I have to go now.
(Senator Glass here left the committee room.)
Senator F l e t c h e r . Doctor, that brings up another question. What
is the use o f amending the act if it is not observed ? Would not the
whole effort be futile ?
Doctor W i l l i s . O f course, we can only struggle along with our
legislative efforts as best we may.
Senator F l e t c h e r . I think we are getting this country very much
into the position o f continental Europe, where they have what they
call the u droit administratif,” where the laws are administered by
bureaus and commissions without regard to the express provisions
o f the statutes*


B R O K E R S ’ LO A N S

Doctor W i l l i s . Undoubtedly there is danger of that kind; and
yet the express provision of Congress, especially if what it orders
is right, has a great effect on public opinion.
The C h a irm a n . I am much interested in your suggestion that
revision might be advisable; it might be an advisable thing to under­
take in the not too distant future.
Doctor W i l l i s . Yes.
The C h a irm a n . Would you care to enlarge on that?
Doctor W i l l i s . You mean as to the way it should be done ?
The C h a irm a n . Yes; the changes that you have in mind.
Doctor W i l l i s . Yes. I think that, if my memory serves me cor­
rectly, you have amended this act some sixteen or seventeen times
since it was adopted, and that they have usually been made without
any regard whatever to the main structure o f the original act. Dur­
ing the war the amendments were run through by machinery, so to
speak, because they were called for as phases of war finance.
The C h a irm a n . And one was to put a dirt farmer on the board.
Doctor W i l l i s . That certainly was one o f the things I thought
was unwise; unless the dirt farmer had other qualifications.
Incidentally I might say that you took away the provision that
two members of the board should be men of learning in banking
and finance. So that a good deal was done there that was at least
open to question.
It seems to me you might appoint a small committee whose duty
it would be to codify this act and its amendments, to take up all these
different amendments, and to analyze the national bank act in the
same way and eliminate conflicting provisions, of which there are
many, and embody such administrative rulings as may have been
made— that is such as may have proved themselves o f permanent
value— in the law, thus putting the whole thing into workable shape.
I f it should be that you want to provide something about this
rate of interest on deposits of banks, it seems to me you might very
well enact a proviso connecting the rate with the reserve bank dis­
count rate.
Among these amendments, a number have been introduced that are
directly at war with the original purposes o f the act. A great
change has been made in the acceptance provisions o f the act, and
that has been for the worse.
The change in the treatment o f commercial paper and gold held
behind notes, I think, has not been beneficial.
In the same way, the failure to establish branches of the reserve
system abroad I regard as a direct ignoring o f an important pro­
vision o f the act, which would have saved us much of the difficulty
that we are now having with our foreign loans. Either that should
be left out, if we are never going to apply it, or provision should
be made for establishing those branches. .
Then, I think you may very well consider, o f course, whether the
time has not come to make the reserve system a voluntary organi­
zation o f banks; that is, to eliminate the compulsory quality. The
small country bank complains to-day because the keeping o f its
reserves without interest is so great a burden upon it. It wants to
use its funds where it can get the most for them. I am not especi­
ally in sympathy with that, but I am inclined to think that the re­
serve system has had only a very slight, lax control over country

B R O K E R S' L O A N S


banks, anyhow. There have been more failures under the reserve
system than there ever were before, and we are not at the end, I
think, o f this failure epidemic.
The original conception o f the reserve act was that of a voluntary
association of banks. The compulsory feature was put in because of
the extraordinary resistance which all banks offered, so that in
order to get it started at all we had to take rather drastic measures;
and yet now, should we not have better results if you made it a
voluntary association?
The C h a ir m a n . Y o u think the attitude o f the banks is such that
they would still have a strong system without any compulsion?
Doctor W i l l i s . I think so; 1 believe so. It may be that that
change should be hedged about by some limitations. It may be that
you should restrict membership to banks o f less than a certain capi­
tal. I am not prepared to say now. But I am convinced that a
relaxation of that compulsory provision might well be studied to
When you have done that, of course, you have greatly changed
the working of the system; and then you will need to have the
reserve banks administered with real ability, so that there is an
object and a purpose for the banks to remain in, and to get in. Some
o f these reserve banks, at least, are now in the habit of resting on
their oars and saying that it makes no particular difference whether
school keeps or not, because they have their membership tied up.
I do not mean that that is characteristic of the whole system, but
that is human nature; so that that, among other things, should come
in for a very serious consideration.
A ll of those things, it seems to me, might very well be intrusted to
a subcommittee o f your body here, with due notice to the public that
you are going to do it, so that you will get suggestions from anybody
who wants to pass them in.
Senator P in e . Would you give the board the powers o f the Comp­
troller o f the Currency, and abolish that office ?
Doctor W i l l i s . Yes; I think so, without doubt. The Comptroller
o f the Currency is obsolete. I think either the board should have
that, or else we had better recast the system o f supervision entirely.
Senator L a F o l l e t t e . Would you care to express any opinion to
the committee as to the lines along which a legislative remedy
against this excessive condition o f speculative use of credit might
Doctor W i l l i s . I do not see how you can correct it by legislation.
It seems to me a thing that must be corrected by good banking. Per­
haps I am old-fashioned in that attitude, but I think that a vigor­
ous administration of the reserve board and the reserve banks can
easily prevent it from happening. We have prevented the devel­
opment o f inflation in the agricultural districts since 1922.
Senator P i n e . Killed them.
Doctor W i l l i s . Killed them?
Senator P i n e . Well, the bank failures killed agriculture.
Doctor W i l l i s . It was bank failures, then.
Senator P i n e . Let me ask you this: D id the open-market policy
o f the system have anything to do with the development o f these
speculative loans ?
95062— 28------ 3



Doctor W i l l i s . The open-market policy ?
Senator P in e . O f the system; yes. They were buying bonds.
Doctor W i l l i s . Yes; Government bonds.
Senator P in e . A t the time these loans reached their highest
Doctor W i l l i s . Yes. Well, that is very hard to say. The system
must have an open-market policy in order to be an effective, going
system. Every other central bank has one. O f course, ours is
based on an entirely erroneous plan; so that if you would modify
your question in such a way as to ask whether the present openmarket policy tended to aggravate things I think I should say yes,
with some limitation. A wise open-market policy would not have
brought on these bad results.
Senator P in e . It would not have compelled Chicago to reduce
its discount rate at the time they did. Would not Chicago have
drawn some of this money away from New York?
Doctor W i l l i s . I think so.
Senator P in e. And reduced the loans?
Doctor W i l l i s . I believe so.
The C h a irm a n . I, for one, certainly appreciate your coming here,
Doctor, and I am certain that the other members of the committee
do, also.
Doctor W i l l i s . Thank you, sir.
The C h airm an . I think you have thrown a good deal o f light on
this problem.
(Thereupon, at 4.10 o’clock p. m., the committee adjourned, sub­
ject to the call of the chairman.)


U nited S tates S en ate ,
C o m m ittee on B a n k in g and C u rren cy ,

Washington, D . C
The committee met, pursuant to the call of the chairman, in-the
room 301, Senate Office Building, at 10.30 o’clock a. m., Senator Peter
Norbeck presiding.
Present: Senators Norbeck (chairman), Edge, Glass, Brookhart,
Pine, Barkley, La Follette, and Steiwer.
The C h a irm a n . The committee will come to order. The first wit­
ness will be Doctor Sprague, of Harvard University.

The C h a irm a n . Doctor Sprague, we would like to have your
views on what, if anything, can be done along the line of Senator
La Follette's resolution, toward preventing in the future, if possible,
what seems to be an abuse of the present system.
Mr. S prague. I should wish, if I may, at first to consider the
matter rather generally, in order to indicate somewhat regarding the
character of business represented by the brokers’ loans and the influ­
ences which seem to lead to the growth o f loans of that kind.There are at the present time 26,000 banks in the United States.
Five years ago there were nearly 30,000. Between 3,000 and 4,000
have failed in that period of five years. It is, therefore, I thinks
pertinent to inquire whether banks have failed because of brokers’
loans, and also to inquire whether, if obstacles are placed in the
way o f using funds for brokers7 loans, the number of bank failures
might be affected, either to increase or to decrease them.
Senator G la ss. Doctor, might there not be another phase o f dis­
cussion ? The security o f banks is not the entire program.
Mr. S prague. Oh, no. It is simply one phase, Senator, and as I
must begin somewhere it occurs to me to begin by indicating the
reasons for the employment o f bank credit in brokers’ loans, and to
inquire whether that is a safe use, and whether some other use
would be equally safe.
I suppose the first requirement of any satisfactory banking sys­
tem is that it should be reasonably safe from the point of view o f
the depositors. Now, all o f these 26,000 banks are constantly en­
deavoring to employ their funds fully, to find a satisfactory use fo r
all the credit which they have at their disposal.
Senator P in e . Satisfactory to whom?




Mr. S p r a g u e . That depends upon the policy which they adopt I
now wish to inquire whether it would be possible, to find a use tor
all of the funds of all of the banks in the absence of some such use
as that which we find in the case of dealers or brokers’ loans.
Senator E dge. It would be one that w as satisfactory to the board
of directors, would it not?
Mr. S p r a g u e . And safe from the point of view of the depositor.
These 26,000 banks are in the main local banks. The principal
business which they handle is local business, and it is the most im­
portant business and the most profitable business which they have.
The rates on their local business are in general higher than the rates
upon brokers’ loans. Banks are not tempted to invest in brokers’
loans primarily by the rate of return since the rate is regularly lower
than the rate" on local loans. They invest in brokers’ loans pri­
marily because they do not find in the local situation a volume of
satisfactory loans sufficient to absorb all of their funds, consistent
with safety.
Senator P in e . Are you certain o f that position ?
Mr. S p ra gu e. I am.
Senator P in e . Where does that condition p revail at this tim e ?
Mr. S p r a g u e . That prevails throughout virtually the entire country.
Senator P in e . Does it prevail in Oklahoma ?
Mr. S p ra gu e. Surely, it does, and I will explain my reason for
thinking that is the case.
Senator B r o o k h a r t . Is not part of that condition due to the fact
that the bank examiners disapprove the local loans, but do approve
o f these brokers’ loans, and also of loans on listed bonds, and things
of that kind?
Senator P in e . D o you have in mind the fact that that was not
true before 1920, when we did not have any bank failures in the
Mr. S p ra gu e. Before 1920 we had a period of inflation, during
which prices on lands and of commodities were rising rapidly, and
it was practically impossible during that period of abnormal advance
in prices for banks to fail; but those banks which put all o f their
funds into a local situation, especially where that local situation
was one of a single industry or a single occupation, and where values
of land and values of inventories were inflated, have either failed
or experienced exceedingly great difficulties.
Senator E d ge. Your point, if I follow you, is that if, even in those
days where there was plenty of demand for local loans, the policy had
been followed that a certain proportion o f their loans had been made
on other types of securities, the failures would not have occurred ?
Mr. S p ra g u e . I think that is a reasonable assumption.
Senator P in e . For 50 years the banks did not fail.
Mr. S p ra gu e. During those 50 years there were numerous failures
at times, notably after 1893 and 1907. The record o f bank failures
in part indicates the hazards that are incurred when banks invest all
o f their funds in a local situation. Sound banking policy requires
that a bank hold reserves in cash, and in addition hold at least some
assets which can be readily liquidated without affecting unfavorably
the business o f the bank.

B R O K E R S' L O A N S


Senator B r o o k h a r t . D o you mean other types of securities that
were less inflated than land values ?
Mr. S p r a g u e . I wish to come to that in a moment. There is a
difference in the effect of inflation in one kind of business from
that which obtains in another. A well-conducted bank holds in
part customer loans. These loans ordinarily can not be liquidated
in any large measure without loss of standing o f the bank as a going
concern. In order to meet the regular requirements of its local cus­
tomers, if a bank is fully to utilize its resources at all times, it must
ordinarily invest a part of its resources outside, in an impersonal
way. if you please, holding a quasi reserve, and that is one of the
reasons for the shifting of funds to the large money centers from the
small money centers.
Senator P in e . Was that done for the purpose of protection of
the banks, or for the purpose o f building up the great money centers ?
Mr. Sprague. For the purpose of protecting the banks.
Senator P in e . The national banks were protected for 58 years
without that shifting.
Mr. Sprague. It is by 110 means a recent practice. Formerly the
banks deposited their surplus funds with other banks, and the
other banks paid interest on these deposits. That practice still con­
tinues, but* in addition, many of the banks lend directly. It has
always been the practice o f banks in Boston and Chicago and Cin­
cinnati and so on to lend to some extent directly through corre­
spondent banks in New York, and also to maintain balances in New
York. The practice now is somewhat more general of lending di­
rectly. A larger number o f outside banks now lend some o f their
surplus funds in New York, and at the same time continue to main­
tain balances in New York banks.
Senator B r o o k h a r t . Are the}^ not doing both ?
Mr. Sprague. They are doing both.
Senator B r o o k h a r t . The same banks are doing both ?
Mr. Sprague. Oh, yes; unquestionably.
Senator P in e . To a greater extent than ever before ?
Mr. Sprague. To a greater extent than ever before.
Senator P in e . Draining the money from the agricultural regions?
Mr. Sprague. N ow , the query presents itself whether they are
draining money which might be properly and desirably utilized in
their own locality or whether they are sending money there because
they do not find a safe and reasonably liquid use for those funds in
their own locality. Now, I will say that, by and large, beyond the
point of a quasi reserve, which would mean a moderate amount of
money transferred to New York, either to be carried as a balance or
to be lent on call, the balance, the increasing amount, represents
funds which the banks, in their best judgment, do not find it feasible
and safe under existing conditions to employ in their own localities.
I f, for example, a bank in Indianapolis, let us say, at the present time
does not find that it can employ all its funds locally, as large a volume
of funds in local use as it would wish to do, the reason is a very
simple one. It is due to the abundance of savings that are being
made throughout the country, and have been for the last five or six
years— savings which have reduced materially the rate of interest.
I notice in this resolution the statement that commercial loans have
fallen. The assumption is implied that they were reduced because



the banks are indisposed to invest in commercial paper on account
-of superior attractiveness of the call-loan market.
Senator B r o o k h a r t . H ow about loans to farmers?
Mr. Sp ragu e. Just let me finish this, if I may.
Senator B r o o k h a r t . Go ahead.
Mr. SPRActrE. Now, the reason for the contraction in commercial
loans is simple enough. It is due to the abundance of funds in the
capital market. Large corporations which formerly marketed commercial paper through note brokers among numerous banks have
found it quite possible to secure additional funds through the capital
market, in part through the issue of additional stock and in part
through bonds. I f the volume of savings had been much smaller,
rates in the capital market would have been higher, and these con­
cerns would have gone to banks and secured funds on a short-time
basis. Throughout the entire country business is now financed to a
greater extent than formerly on a permanent basis by stock, profits
put back in the business, bonds, and notes, while bank loans are rela­
tively smaller than they were five years ago.
Senator Edge. To what do you attribute this large increase in
the savings department? We hear so much about unemployment
The C h a ir m a n . Do you want to know whether it is the V ol­
stead Act?
Senator Edge. I do not want to interrupt your argument, but
would like your view on that question.
Mr. Sp ra gu e. It is due to several causes, in my judgment. It is
due in part to the greater efficiency of industry, the larger output
of industry in recent years, which l)as made it possible for many
to earn a larger income. And I am willing to say that it is, perhaps,
to some extent, at the expense of agriculture to the advantage of
urban communities. I believe the urban population of this country
has been securing its food at prices which have been, on the whole,
unremunerative to the farmer. If, for example, the city population
gets its milk at 2 cents a quart less than is a remunerative price, it
h a s ju s t th a t m uch more either to save or spend in other directions.
Senator B r o o k h a r t . That proposition has my full approval. I
know it is true.
Senator P in e . You maintain that the withdrawal o f this money
from the country will assist in preventing bank failures in the
country %
Mr. S p ra gu e . Yes.
Senator P in e . I think it has been responsible for the great number
o f bank failures. The banks failed where the money came from, and
the banks have not failed where the money went.
Mr. S p ra g u e . The bank failures, in my judgment, in large part,
were because of the investments in the various localities where banks
have failed, using a larger amount of bank credit than the economic
conditions of the locality justified. It is speculation in land and
speculation in inventories that I fear more than speculation on the
stock exchange. Speculation on the stock exchange may be an evil,
but it is an evil which is quickly corrected. In the event o f a sh a rp
decline in securities on the stock exchange various individuals
who have been speculating in the hope of a rise, may lose money,
actual money or paper profits; but the loss in the main is confined

B R O K E R S'1 LO A N S


to those individuals. When, however, the volume of bank credit is
extended to an excessive extent to those who are engaged in industry,
leading to inflated inventories, you have a collapse of a large number
o f industrial concerns and resulting unemployment.
The situation is even worse if it happens in the case of agricultural
lands. I f agricultural lands reach a price which is not justified by
current income, actual or prospective in the immediate future, the
damage is tenfold greater than it would be from a decline on the
stock exchange, and much greater than in industry, because the
farmer’s home is attached to his occupation, and often he can not
liquidate, without breaking up his home, as well as his occupation.
Thus you have in the case of inflated farm-land values a long and
painful period for which you have no analogy whatever in the case
o f industry, and much less in the case of the stock exchange.
Senator B r o o k h a r t . On that proposition I want to call your atten­
tion to some figures from the Department of Agriculture showing
that land values in Iowa were about as high as anywhere— not quite,
however, as several States were higher than Iowa— and reached an
index figure in the peak o f 1920 of 213. That is a little more than
double the price compared with pre-war prices.
Mr. S prague. Yes.
Senator B r o o k h a r t . But at the same time the general index
figure o f all products was 241.
Mr. Sprague. Yes.
Senator B r o o k h a r t . S o that land inflation never did reach the
stage o f inflation of other things. Then I find on page 3 of this
bulletin that the farm values continued to fall, while city realty
continued to hold its own and rise. The point I wish to call attention
to is that land values in industrial centers continued to rise, while
they continued to fall in agriculture.
Mr. S prague. T rue; but my point is that inflation is a more serious
evil in the case of agriculture than it is in the case of industry.
Senator B r o o k h a r t . Yes; but if we had a fair deal and this were
controlled by the United States instead of being controlled by the
brokers and gamblers, would not agriculture and other business go
up and down together?
Mr. S prague. No ; for the reason, as it seems to me, that there is
not an elastic demand for farm products, w
rhile there is a more or
less elastic demand for many of the products o f industry. You can
not induce the population of the United States to eat very much more
by a reduction in prices, whether that is brought about by an excess
in supply or whether it is brought about by increased efficiency in
production. I f you can reduce the prices of a great variety of manu­
factured articles, for whatever cause, you can stimulate the demand
for those articles; but you can not maintain the prices of these food
products, as to which there is an inelastic demand. An urban popula­
tion on the whole eats less, and our machine methods of production
mean that we do not exert ourselves physically to the extent that the
population did 30 years ago.
A ll these influences are tending toward a contraction o f the per
capita consumption o f food, and in my judgment it means that the
acreage under cultivation in the United States is unlikely to increase
appreciably in the next decade; and that means that we have a situa­
tion quite different from that which prevailed for decades prior tc



1920. In 1900 a farmer could buy land at a price that was not justi­
fied by the then yield, and he might hold it on the expectation, which
would generally be realized in four or five years, that the lan d would
appreciate in value enough to make the transaction worth while; but
if land prices are declining that does not work out.
Now, we have had no difficulty of that kind in New England, my
own part of the country, where no one has thought for years that
land values were going to increase. People do not buy land m -New
England on the basis of an expected appreciation. They rather buy
it on the supposition that it may be less valuable in a few years rather
than more valuable. So that the current income from the land will
in general support the price paid for the land. Now, I hold very
definitely that it would have been immensely better for all the people
west of the Mississippi River if the supply of funds available for
farm mortgages and for other purposes had been decidedly less be­
tween 1916 and 1920 than in fact it was.
Senator P in e . Did not the best authorities in the world approve
the prices at which Iowa land sold in 1920; the insurance companies
and the Federal reserve banks and others?
Mr. Sp ragu e. I would not wonder if that were the case, but it
simply proves again that not only may people be mistaken, but that
more credit may flow into the economic situation than is desirable for
a community.
Senator P ik e . Did they not consider the earning power o f th e
land at the time they approved these loans?
Mr. Sp ra gu e. Everybody was in more or less o f a feverish state
at that time, but the point which I am making is that it is particu­
larly important that credit be employed conservatively in agricul­
tural sections of the country, because of the difficulty in making an
adjustment if errors are made and inflation develops.
Senator B r o o k h a r t . D o you consider that brokers’ loans are a
conservative employment of capital?
Mr. S p ra gu e . I would like to come to that in just a minute, i f I
can finish with the proposition which I consider basic.
Senator G la s s . Concerning land speculation, do you think any­
body is ever sane in a community where there is a land b o o m ,
whether it is a bank or money lender or what not?
Mr. S p ra g u e . The First National Bank of Miami, Fla., h e ld
$66,000,000 o f deposits at the height of the boom, and it'had $8,000,000 lent in Miami, and the rest of its funds were in balances in New
York banks, in call loans, and in United States bonds and other
available bonds. When deposits went off from $66,000,000 to, I
think, $28,000,000, it was able to meet that situation.
Senator G la s s . That was so exceptional that y ou remember it and
cite it as an isolated instance.
Mr. S prague . That is sound banking.
Sen ator G la s s . I know it is, but does sound b a n k in g p r e v a il w here
there is a la n d b oo m ? I f it does, I w o u ld like to kn ow w h ere it is.
1 never heard of it before.
Mr. S p ra g u e . That being the case, it does not seem to me alto­
gether w ise to create by legislation conditions which will confine the
employment o f bank funds to local uses.
Senator G la s s . O f course not; but what I am saying is that when
the land booms occur, nobody is sane, bankers or anybody else. I



once paid $3,000 for a corner lot that afterwards sold for $1.38 for
taxes. Do you think I was sane when I did that ?
Mr. Sprague. N o ; but if the banks had been compelled to employ
all their money locally, perhaps you would have paid $3,500.
Senator G la ss. I am not talking about it with reference to that
proposition. Your contention is that if the banks are loaning their
money for speculative purposes in New York they could get it back,
whereas they lost it in the land boom?
Mr. S prague. Yes; and to the greater advantage of the com­
munity. I am considering it also on the part o f the community.
Senator B r o o k h a r t . Recently in New York I checked 13 big
corporations. I will bring the check here for the record. I found
that during the last nine months o f last year their earnings declined
on an average of 11 per cent, but at the same time their stock went
up 27 per cent.
Mr. Sprague. I will come to that in a short time, if I may, as one
of the hazards of the brokers’ loans. A ll I want to emphasize at this
point is that it is not at all certain that you can employ all of the
funds o f a bank locally; that it may not be to the advantage of the
community, and may be unsafe for the bank; and that, upon the
whole, the inducement is very strong on the part of the bank to em­
ploy all of their funds locally that they consider to be safe.
A great many of our 26,000 banks clearly have employed more
funds locally than was in fact safe. They misjudged the situation.
Whether there are some bankers who are unduly pessimistic about
their own localities, lacking in enterprise, and who fail to put an
adequate amount or a reasonable amount into the local situation, is
probably true, but I think such cases are exceptional.
Now, there is one other aspect of the local situation. It may be
contended that in order to maintain the going rates of interest on
loans in a locality, the banks put funds in the New York market
which they might have employed at home had they been willing
to reduce the rate a bit.
Senator B r o o k h a r t . D o you approve that method of banking?
Mr. S prague. Let me go on a moment.
Senator B r o o k h a r t . Yery well.
The C h a irm a n . I f you would rather proceed with your statement
until you have completed it, that will be agreeable.
Mr. Sprague. N o; I prefer questions if I may be at liberty to
throw out those I will come to later.
The C h a irm a n . Very well. Proceed.
Mr. S prague. Suppose the going rate in a locality is 6 per cent
on a variety of local loans, mortgages, and other loans, and a bank
is meeting all satisfactory applications for loans at that rate. It has
surplus funds and shunts them to New York. It is possible that if
that bank were prepared to lend at by* per cent rather than 6, an
additional volume o f satisfactory applications for loans might be
made to that bank. I think, however, that this additional business
would only be developed very gradually.
Senator B r o o k h a r t . They are sending the money from my State
now to New York and getting 1% per cent on bank balances, but
are charging the farmers 7 and 8 per cent.
Mr. Sprague. The banks are perhaps lending to the full extent of
all loans that they considered satisfactory at that rate and might



get a larger volume of satisfactory loans if the rate were reduced—*
drop to 6. I think that would be true in the course of time. I am not
certain that it would initially, right off the bat, develop any appre­
ciable amount of additional satisfactory business. It would take
some time for the policy of getting funds at a lower rate to influence
the economic condition of the community* But in the course of time
1 think it would have an effect. The obstable, in my judgment, how­
ever, is the rigid rate of interest which banks pay upon deposits.
Throughout the country various rates have become rather firmly
fixed as the interest which banks pay upon deposits. At some places
it is 4
per cent, some places 4, and others 3%? but whatever the
rate is, it is a fairly rigid rate.
Senator B r o o k h a r t. You spoke about one rate being 4 per cent.
Mr. Sprague. Yes.
Senator B r o o k h a r t. Then they send it down to New York at 1%
per cent and charge the local people 7 and 8 per cent, more 8 than
7, to make up the loss.
Mr. Sprague. Now, if the interest rates which banks pay were
flexible, then the rates which they charge customers might become
somewhat more flexible than in fact they are. I think the rates of
interest on deposits generally throughout the country are unduly
high at the present moment, and I think the rates charged on the
best class of local loans are unduly high. A reduction of both
would be, upon the whole, of advantage to the community— not im­
mediately of great advantage, but in the course of time I believe
it would have a favorable effect upon the industries in different parts
of the country. But, taking the situation as it is, with the rigid
deposit interest rate, it tends to maintain a fairly rigid rate on cus­
tomer loans.
Senator G l a s s . I s not the call-loan market responsible for the
rigid discount rates ?
Mr. Spragihe. It rather seems to me it is like this: You start with
your rigid deposit rate. You are endeavoring all the time to main­
tain a fair spread between your local loans and your deposit rate.
I f you could not invest in call loans the general effect, I think, would
be upon the bank to take less satisfactory loans at the rate of 7 or 8
per cent, whatever the rate, rather than reduce it in the hope of
developing satisfactory loans.
Senator G la ss. Might it not result in a reduction of the rate of
interest on deposits?
Mr. Sprague. That is the point.
Senator B r o o k h a r t. These loans in these localities that I referred
to. that refuse to pay 7 and 8 per cent, are nearly always the most
desirable loans. Those are men who size up the situation, and they
will not pay the high rate of interest and they stay out o f the
Mr. Sprague. Yes. Well, it is one of the factors leading to the
resort to the capital market. I f you can borrow in the capital
market at 4i/2 per cent you probably will not bother to secure funds
from banks if you have to pay 4 per cent or more. You must be
pretty certain you can borrow at banks at a rate rather less than
the capital-market rate. Otherwise, you will resort to the capital
market, and that is what has taken place.

B R O K E R S' L O A N S


Senator G la ss. Is not the capital market created b y this artificial
and unnatural flow of all of the surplus funds from the interior to the
points on the capital market?
Mr. S p ra g u e . Not mainly by bank credit. I would say no. The
net amount o f securities issued and marketed last year was $7,500,000,000. a sum very much larger for that one year than all the
bank credit that is now employed in connection with securities on
the New York market. I f it were simply bank credit that was doing
that, and not savings, the investment channel would very soon be
clogged and the interest rate would go up. The evidence that it is
really savings is shown in part by the decline in the rate of interest,
and in part the fair degree of steadiness in prices. We could not
have had. in my judgment, a series of years of generally active busi­
ness. accompanied by a decline in the rate of interest, had it not been
that actual savings were taking care of the bulk of the capital require­
ments o f the community.
Now, so far as safety goes, I do not think that any serious objec­
tion can be raised against the brokers or dealers7 loans. The records
in regard to losses of banks, though not perfect, clearly indicate that
the losses of banks arising out of this class of loans have been very
small. Therefore, I rule out, in discussing the desirability of placing
checks upon brokers7loans, both the feature of drawing money which
is needed in other parts of the country and the matter of risk. I do
not believe that any part of the country is suffering from a dearth
o f needed bank credit because of brokers’ loans, and I do not believe
that the interests of depositors are jeopardized in the slightest degree
by the granting o f that sort of loan.
Senator B r o o k h a r t . I f these brokers’ loans in the accumulation
o f this capital for this purpose lowers the interest rate to brokers,
which is an outlawed business under the Federal reserve law for
rediscount purposes, and at the same time raises the rate of interest
to the country at large, it is doing some damage, is it not?
Mr. S prague. W e are not certain whether the rate would be re­
duced throughout the country. A ll we can say is that perhaps, if
a more flexible system o f paying interest on deposits were used,
and if bankers were ready to adopt a more flexible rate as regards
customer loans, some business in the course o f time would develop
that is not now being developed. You can attack that problem in
your various sections with regard to the interest rates on deposits.
It seems to me that it would be putting the cart before the horse to
endeavor to contract the volume o f brokers’ loans, trusting to luck
that the funds could be advantageoush7 used in different parts o f
the country. The evidence would seem to indicate that with our
present banking organization, with 26,000 banks conducted by people
o f all degrees of experience, there is far graver danger of the in­
jection o f an excess of credit into different local situations than there
is o f a dearth o f credit.
Senator G la s s . You mean banks conducted by people of all de­
grees o f inexperience, do you not?
Mr. S prague. Well-----Senator B r o o k h a r t . Y o u think it is perfectly safe, do you, to
collect this vast sum o f money and turn it over to stock speculators ?



Mr. S p r a g u e . I understand that is the outcome of an absence of
demand throughout the country, of what the bankers consider a sat­
isfactory demand throughout "the country for loans which would
absorb the full amount of the funds.
Senator B r o o k h a r t . Does not the fact that this great supply of
credit goes into such speculation account for these continuing rising
stock prices, while the earnings are declining?
Mr. S p r a g u e . It may.
Senator B r o o k h a r t * And is not that an unsound condition that
may bring a crash to the whole country?
Mr. S p r a g u e . N o . That is my main point, I want to raise the
question, what damage would result by the use of the funds in that
Senator G la s s . Before you leaye the point of securities and bank
failures, I may say for myself that I do not think any loan is ordi­
narily safer than brokers’ loans. I think there are fewer bank
failures due to that than anything else. Is it not a fact that the
great percentage of bank failures arise from inadequate capitaliza­
tion, and the overpayment of interest on deposits ?
Mr. S p r a g u e . It arises in the main, I should say, from the excessive
number of banks in a locality.
Senator G l a s s . That is another way of saying inadequacy of
capitalization, division of the capital of a specific territory. Here
is an example: With nearly 500 banks in the Minneapolis Federal
reserve district year before last and last year, were not the greater
proportion of them small banks ?
Mr. S p r a g u e . They were small banks, doing a purely local busi­
ness. and in general with deposits under $500,000.
The C h a i r m a n . Most of them have no loans except around home.
Mr. S p r a g u e . Y e ^ .
Senator B r o o k h a r t . Let me call your attention to the fact that
in 55 years those small banks had fewer failures than the large banks
in Massachusetts.
Mr. S p r a g u e . In the State of Iowa—I think I have the figures
here—the number of banks from 1904 to 1920 more than doubled,
although the population was stationary. You had a division of
the resources of banks, an increase in the number of banks, with
aggregate resources of from $150,000 to $400,000 or $500,000.
Senator B r o o k h a r t . But we far more than doubled in value.
Mr. S p r a g u e . Ah. but your values were inflated, and there is the
Senator B r o o k h a r t . But before the inflation the regular growth
o f values was tar more than double.
Mr. S p r a g u e . 1 es; and in that period you had a rising demand
for agricultural products which supported the increase in the value
ot land.
Senator B r o o k i i a r t . In proportion to the agricultural products,
there was a rising demand.
i ^ r+ ? PR^GU * ®
no^ ^ave ^ie basis for twice the num­
ber ol banks m 1920 that you had in 1904, and it is impossible to
§^neia * ®onn^ an<?
managed banks when there is one
bank for every 1,200 people. That was the situation in Iowa.



would like to submit for the record, if you care for it, a report
which I prepared for the American Bankers' Association on the
causes o f and remedy for bank failures.
The C h a irm a n . Without objection, it will be inserted in the
(The document referred to is as follow s:)



B ank

F a i l i 'R e s


S ome

S ug gested

R e m e d ie s

Beginning in May, 1927, the economic policy commission made a careful
investigation of the causes of the large number of bank failures in the United
States during the past few years. The report which is presented to the Houston
convention of the American Bankers’ Association, October 24-27. 1927, is here
reprinted in full from the American Bankers’ Association Journal for Novem­
ber, 1927. Dr. O. M. W. Sprague, professor of banking at Harvard University,
assisted the commission in its inquiry. The report was one of the features of
the convention.
The Economic Policy Commission, after investigating the problem presented
by numerous bank failures, reports that more good can be done by correcting
defects in banking structure than through further restrictions on loans and
In the limited time at its disposal, the commission has not been able to make
a comprehensive investigation of the particular banking transactions that have
involved serious losses and numerous failures. A preliminary examination of
this aspect of the matter, however, disclosed great diversity among these un­
fortunate operations—a diversity so wide that it has forced upon the commis­
sion the conviction that it is hopeless to seek for a solution of the bank failure
problem in main reliance upon the imposition of further restrictions on bank
loans and investments.
Far more promising results may surely be anticipated from efforts directed
toward the correction of defects in banking structure and management, of which
unsound banking practices are but m erely symptoms. The recommendations
of the, commission are. therefore, designed to bring about the establishment of
conditions which will be more favorable than in the past to the conduct of
banking along safe lines.

In the supremely important matter of safety the recent record of the Ameri­
can system of independent unit banking has been conspicuously unsatisfactory.
During the last six years more than 3,800 banks, somewhat more than oneeighth of the total number of banks in the country, have been obliged to
suspend operations, and although a considerable number, after a variety of
adjustments and sacrifices, have been reopened, the aggregate of definite failures
has been in excess of 3,000.
Many additional banks also have escaped failure only through the absorp­
tion of losses on doubtful and worthless assets by directors, assessments on
shareholders to restore impaired capital, or by subscriptions to additional capital
from wider circles influenced by the desire to avert the damaging consequences
of a general loss of confidence in local banking institutions. Still other totter­
ing banks have been taken over by stronger neighbors, in some instances with
disastrous effect upon the solvency of the absorbing institution.
These failures and near failures do not imply a weak condition and poor
management in the case of the majority of banks throughout the country,
but they do indicate, as does experience in earlier periods, that large numbers
of banks, which seem to be in a flourishing condition during years of business
activity, are unable to withstand the stress and strain incident to depression
and a 'downward adjustment of values in the communities in which they are
Aside from scattered failures, due to dishonesty or gross mismanagement, the
banking troubles of the last six years have been concentrated in localities
which have experienced a prolonged period of adverse conditions or the sudden
collapse of a highly speculative local situation. In the Northeastern States, in
the territory served by the Federal Reserve Banks of Boston. New York, and
Philadelphia, a section which speedily recovered from the industrial reverse
of 1920, bank failures were relatively few, only 40 during the six years



1921-1926. The Cleveland district with 36 failures and San Francisco with
158 also show at least a comparatively low casualty rate. In the four Southern
districts of Richmond, Atlanta, St. Louis, and Dallas, on the other hand,
there 1,117 failures during this six-year period, while the three remaining
districts present a still more unfavorable record, the Chicago district with
437 failures, Kansas City with 590, and finally the astounding number of 999
failures in the Minneapolis district
A variety of adverse local influences, among which may be mentioned a
succession of crop failures and the collapse of urban real estate booms, pre­
cipitated numbers of these failures, but the great majority suspended because
they were unable to meet the stress exerted by the persistence of unprofitable
prices for the products of agriculture and animal husbandry—stress which
was particularly severe because it was experienced after years of abounding
prosperity, and extreme appreciation in the value of farm property, and a large
increase in the number of farms mortgaged and amount of mortgage indebted­

These adverse conditions, it can hardly be too strongly emphasized, do not
furnish an adequate explanation of the numerous bank failures of the last six
years. By no means all. or even a majority, of the banks in the localities
most seriously affected have been obliged to suspend operations. Unfavorable
economic conditions are an acid test of the policies which banks have followed
during preceding years of business prosperity. Financially weak and unskillfully managed banks are weeded out; strong and well-managed banks
experience losses but they survive. Great significance in this connection at­
taches to the findings of a special committee on the banking situation of
the 1927 Legislature of Minnesota, a State in which adverse conditions have
been particularly severe and the number of bank failures numerous. Analyz­
ing the causes of bank failures the committee says:
“A survey of the closed-bank situation in Minnesota presents an interesting
picture. Certain communities of th(‘ State seem to have escaped entirely, or
almost entirely, llris epidemic of closed banks, while in other parts of the State
the proportion of closed banks to the number of banks chartered in the com­
munity is very great; nor is this unequal distribution of closed banks due in
large measure to different conditions of soil or conditions of the farmers, for
in parts of the State where the farming conditions are almost identical one part
shows a large percentage of failed banks and another part shows almost none.
The cause lies deeper than that.”
Unqualified agreement with the view of the matter of this Minnesota com­
mittee is not inconsistent with definite recognition that external conditions in
many parts of the country during the last 10 years have been abnormally
unfavorable to the conduct of banking along safe lines. In the agricultural
development of the country, however, the stage is apparently more generally
being reached in which farm values will be more closely related to current
income, and it is not probable that commodity prices will again exhibit the
extieme fluctuations of the last decade. It is therefore reasonable to presume
that no future period of similar duration will witness the number of bank
failures that have marked the last six years. If these anticipations are realized,
the bank-failure problem assumes less unmanageable prpoportions * but in the
absence of improvements in organization and practice, it is not to be doubted
that a disci editable number of failures will continue to occur, mainly con­
centrated in periods of trade reaction.
It is also important to note that the inability of many banks to withstand
conditic>ns 18 n°t a problem that concerns exclusively those areas in
which bank failures have been numerous in recent years. Present immunity
furnishes no certain assurance that all banks in a locality are and will remain
in competent hands. The possibility, if not the probability, must be recognized
that adjustments even distantly approaching in difficulty those experienced in
agriculture might be accompanied by numbers of banking casualties in com­
munities in which manufacturing is the major occupation.


As in earlier periods marked by numerous bank failures an
tor grater safety in banking is to be anticipated, a n d X s “ em“
dered less reasonable by the presence of strong and weU-managed

no 7 r ^



every part of the country. The public must make use of banks, but few are in
position to distinguish between the strong and the weak. Bank statements
and other external information relating to banks do not furnish an adequate
basis for intelligent discrimination. Unless failures become exceptional, it may
be expected that all banks will be subjected to an increasing range of restric­
tions, restrictions that may be quite superfluous for well-managed banks, but
which are adopted to curb the weak and incompetent minority.
Numerous failures should be a matter of grave concern to well-managed
banks for still other reasons. To those bankers who are strongly opposed to
branch banking it should be evident that the recurrence of numerous failures
threatens to undermine the system of unit banking. Recognition should also
be given to the damaging effect upon the earnings of the better banks during
the more or less prolonged period of operation of weak banks before the failure
stage is reached. And finally, attention may be called to the unfavorable influ­
ence on earnings in consequence of the damage to a community which is en­
tailed by the unsound conditions and unsuccessful undertakings that are fos­
tered by banks under incompetent management.
While the experience of the last six years furnishes ample evidence of
serious defects in our present system of unit banking as it is now organized and
operated, and compels recognition of the urgent need for its modification and
improvement, the Economic Policy Commission is hopeful that no revolutionary
change, such for example as the general diffusion of branch banking, will be
required to provide adequate protection for the depositor and is also hopeful
that this result can be attained with no sacrifice but rather with a positive
enhancement of the characteristic advantages of unit banking. The causes of
numerous failures are not obscure and difficult to discover, and the commis­
sion believes that the number of failures in future can be substantially reduced
through the adoption of arrangements definitely designed to meet obvious
defects that experience has disclosed in our system of independent local unit
In the judgment of the commission, however, this objective can not possibly
be reached through the imposition of further legislative restrictions covering
the details of banking operations. Safety in banking will never be secured
if reliance continues to be placed primarily and almost exclusively upon restric­
tions, which even when carried to an extreme point can do no more than
somewhat narrow the field within w hich an incompetent management will
manifest its incompetence. A more immediate enforcement of existing legis­
lation would do much, but remedies for bank failures to be adequately effective
must be designed to reduce the number of financially weak banks, secure more
competent officers supported by responsible and active directors, and above
all insure that unsound policies shall be checked long before solvency is

A system of unit banks is peculiarly subject to the grave danger that a
much larger number of banks will be established than is compatible with the
requirements essential for safety of financial strength and good manage­
ment. Under a highly developed branch banking system the large capital
and, even more important, the extensive organization needed from the outset,
effectively restrict the formation of new banks. Branches may indeed be over­
developed, but experience indicates that the consequent inroad on earnings
is not serious enough to impair capital, much less jeopardize the position of
Strikingly different is the situation under a system of unit banking. In order
that aU communities may enjoy the benefits of banking facilities under com­
petitive conditions, the minimum capital required for the establishment of
a bank is necessarily set at a low figure, and operations can be handled by a
simple organization that can be readily improvised. Profits during years of
business prosperity are reasonably satisfactory, and the temptation to enter
the banking business is made more alluring by the exaggeration of these
profits under the faulty accounting practice that is followed by most banks.
Reserves are not created to take care of future losses, but all undistributed
earnings are allocated to surplus and undivided profits, from which deductions
are subsequently made, often most unwillingly, when losses have been unques­
tionably realized. In addition to anticipations of profits, a certain measure of
power and dignity, especially outside the large cities, that seems to attach to
the management of banks, does much to enlist an active interest in proposals
for additions to their number, and the possibility of securing liberal accommo­



dation, through relationship with a bank, as officer, director, or shareholder,
is a consideration that is by no means uncommon.
Public opinion also has in general looked with positive favor upon an un­
limited increase in the number of banks. That men of good character and
average business experience should be as free to engage in banking as in other
occupations seems to have been taken for granted. Insufficient account is taken
of the special characteristic of banking that it exposes to risk of loss not only
shareholders and business creditors but also the wide circle of depositors who
are not in position to protect themselves by the exercise of reasonable care and
foresight. Moreover, the misconception is widespread that additional banks in
a community will increase the available supply of credit, a motive particularly
strong in communities where the local supply of credit regularly falls short of
the local demand for accommodation.
It is not clearly perceived that the volume of credit in any community is
determined by the wealth and banking habits of its people, and that an increase
in the number of banks subdivides but does not appreciably augment the
aggregate amount of banking resources. A community with aggregate banking
resources of, say, H,000,000 will be better served in every way, including safety,
by two or three banks rather than by six or more. An excessive number of
banks induces cutthroat competition and tends to undermine conservative stand­
ards in the granting of credit, which in turn subjects the better borrowers to
the necessity of paying higher rates for loans since they are obliged to compete
with a demand for credit that properly should not receive favorable consideration.

During the decade and a half preceding the trade reaction of 1920, these
various influences brought about the organization of a large number of new
banks in most parts of the country, and, in the judgment of your commission,
the resulting overdevelopment of banking is more responsible than any other
factor for the banking disasters of the subsequent years. Between 1904 and
1920 the number of State banks and trust companies increased from 7,508 to
22,054 and the number of national banks from 5,331 to 8,123. Aggregate resources had, indeed, increased enormously, so that average resources at the
close of the period were greater than at its beginning. But an average of
resources is most misleading, since the gain in resources was by no means
evenly distributed among the banks. Many banks had become larger and
stronger, and the thousands of newly chartered banks served mainly to provide
the country w ith an unprecedented number of small banks employing resources
of from $100,000 or even less to $500,000.
The strength of any particular bank can not, of course, be determined by its
size. There are hundreds of small banks throughout the country that are ably
managed and abundantly strong. These banks are commonly subject to the
handicap of an absence of industrial diversity in the communities which they
serve—a handicap which they can only overcome by the exercise of exceptional
caution and judgment. On the other hand, while there is no exact relationship
between the number and size of the entire group of banks in a locality and the
strength of its banking position, it is certain that no community can hope to
enjoy the benefits of safety in banking if the business is organized in units so
numerous as to exceed the available supply of competent officers and responsible
directors, and with insufficient earning power to be able to absorb inevitable
losses. Ample evidence of the unhappy consequences of excessive numbers and
inadequate size in banking is clearly to be found in the geographical distri­
bution of the failures of the last six years.
In the three Federal reserve districts of Boston, New York, and Philadelphia
there were but 40 failures during these years. It is an area of 150,000 square
miles, with a population of 33,000,000, and was served at the close of 1926 by less
than 3,300 banks (3,265). The Chicago district, with a slightly larger area of
190.000 square miles but with a population of only 17,000,000 is provided with
2.000 more banks (5,268), and had a record of 437 failures between 1921 and
1926. Again, the Minneapolis district, it is true with a much greater area.
414.010 square miles, but with a population of only 5,500,000 still had 2,780
banks in operation after 999 failures.
Comparison by States tells the same story, only the more forcibly. The
11,000,000 people of the State of New York, with an area of 47,000 square miles,
managed very comfortably with 1,056 banks in 1920, and there were 8 failures
in the 6 subsequent years, while the slightly less than 2,500,000 occupying an



area of 55,000 square miles in Iowa, was served by 1,763 banks, of which 263
failed. North Dakota supplies an even more extreme example of the over­
development of banks and its inevitable sequel; 317 failures among 898 banks
having been established to meet the needs of a population of about 650,000 on
an area of 70,000 square miles.
No community can possibly provide adequate resources, competent officers, and
experienced directors for one bank to every 750 of its inhabitants as in North
Dakota, or to 1,400 as in Iowa. Banking troubles were inevitable with the
advent of adverse conditions, and for the severity of these conditions the unwise
use of credit administered by an inordinate multiplicity of banks is in no small
degree responsible. And, as may be seen from the table below, the situation in
these States was not exceptional.
State and National bank failures, 1921-1026


Banks in operation, 1920

I National


____ I
Arkansas............. ....
California.................. .
Colorado................... .
Connecticut.............. .


1 I

District of Columbia..

Florida.............. ........
Idaho_____ _____ ___
Indiana.................. .
Kentucky.......... .

M ichigan..........
Nevada.......... .
New Hampshire.
New Jersey.........
New Mexico.......
New York...........
North Carolina..
North Dakota_
Rhode Island___
South Carolina...
South Dakota_
Virginia___ . . .
West Virginia.,

420 |
28 :
30 I







11 i















23 !
3 ,












450 1
229 .




1,100 I

1 I



645 ■
1,130 ,
1,405 i













1, 610



151 !
47 !


8,032 ,








A long and essential first step toward the attainment of safety in banking
will have been taken when the number of banks charactered is limited to the
needs of the community, based upon clear recognition that development of every
95062— 28------ 4



community is best served by strong banks that employ conservative standaids
in the extension of credit.
An increase in minimum capital requirements would do much to hold the
number of banks within safe limits. When account is taken of improved
means of transportation and the general advance in prices of the last decade,
a minimum capital of $25,000 surely, and presumably of $50,000, would not
deprive any community of adequate banking facilities. But capital require­
ments alone are too mechanical and rigid to be made the sole factor in the
determination of the desirable number of banking institutions in a locality.
Needed elasticity in the granting of charters requires that approval shall be
made contingent upon evidence of a community need for additional banking
A provision of this character has already been adopted by a number of
States, and the most comprehensive of these requirements, that of Wisconsin
enacted in 1923, is here presented, preceded for the purposes of comparison
by the conspicuously inadequate provisions of the Iowa law.
Iowa: “ Incorporation—articles—contents.— State banks may be hereafter
organized by not less than five persons of lawful age, who shall, prior to the
commencement of business, sign and acknowledge articles of incorporation
before some officer authorized to take acknowledgment of deeds* * * * . .
“ Commencement of business—certificate of authority. No such association
shall have the right to commence business until its officers or its stockholders
shall have furnished to the superintendent of banking a sworn statement of
the paid-up capital, and when the said superintendent is satisfied as to that
fact he shall issue to such association a certificate authorizing it to commence
Wisconsin: “Any number of adult persons, citizens of Wisconsin, not
less than 7 nor more than 20, desiring to associate for the purpose of organizing
a banking corporation under this chapter, shall make application to the com­
missioner of banking in such manner as may be prescribed on a form furnished
by him. * * *
“ Upon receipt of proof of publication, the commissioner of banking, shall
thereupon ascertain from the best sources of information at his command, and
by snch investigation as he may deem necessary, whether the character,
responsibility, and general fitness of the persons named in such application are
such as to command confidence and to warrant the belief that the business of
the proposed corporation will be honestly and efficiently conducted in accord­
ance with the intent and purpose of this chapter; and whether public con­
venience and advantage will be promoted by allowing such bank to organize;
and he also shall investigate the character and experience of the proposed
officers, the adequacy of existing banking facilities, and the need of further
banking capital; the outlook for the growth and development of the city, town,
or village in which such bank is to be located, and the surrounding territory
from which patronage would be drawn; the methods and banking practices of
the existing bank or banks; the interest rate which they charge to borrowers;
the character of the service which they render the community, and the prospects
for the success of the proposed bank if efficiently managed. Such investigation
shall be completed within 90 days from the filing in the office of the commis­
sioner of banking of proof of publication and the making of the deposit herein
required, but in the event a majority of the applicants and the commissioner
of banking mutually agree to it, the time may be extended an additional period
of 60 days.”
This Wisconsin statute serves to indicate the variety of considerations that
may properly be given weight in the determination of community advantage
from the establishment of additional banks. Precise tests are lacking. Judg­
ment must be exercised, and it is, therefore, to be presumed that little will be
accomplished through legislation of this character unless those entrusted with
its execution are supported by a public opinion that clearly and permanently
recognizes the damaging consequences of an excessive number of banks
The problem is further complicated by the presence of two charter-granting
authorities, the National and the State, which may be played off one against
the other in doubtful cases by eager bank organizers. Both Federal and State
officials charged with the administration of the banking laws not unnaturally
become imbued with the desire that the system of banks under their juris­
diction shall exhibit both absolute and relative growth. Many banks have
unquestionably been chartered in the belief that a refusal would be followed
by a more favorable response in the other quarter. It is clearly most advisable



that in this matter National and State authorities should work in a spirit of
close and friendly cooperation, neither, except in the most unusual instances
granting a charter that has been refused by the other authority.

The organization of unnecessary banks would be a far less easy matter and
the management of banks would be subjected to more steady and effective super­
vision, if the responsibilities involved in the acceptance of the position of direc­
tor were more generally realized. The risks that are incurred are clearly set
forth in the following statement which has been prepared for the commission by
an experienced bank officer of legal antecedents:
“A director of either a National or a State bank, by accepting election as
such, assumes definite legal liabilities and what is often more important, moral
obligations, which he can not evade if he is to maintain his self-respect and posi­
tion in the community in which the bank is located.
“ The legal liabilities assumed by a bank director by his act of accepting elec­
tion as such, are of two kinds: Express statutory liabilities imposed by the
national bank act or by the laws of the State under which the bank is char­
tered ; and the general legal liability imposed by the common law upon every
director in any corporation for losses to the stockholders or the creditors of the
corporation, caused by his misconduct or negligence.
“ The first class of legal liabilities generally relate to excessive loans, wrong­
ful certification of checks, investments of a kind forbidden by law, guarantees
by the bank of the credit of some third person. Their exact nature depends
upon the terms of the law under which the bank is organized.
“ The second sort of legal liability which no bank director can escape is the
general liability assumed by every director and every officer of all corporations
to use ordinary care and diligence in following the affairs of the corporation
and seeing that improper conditions are corrected. It is more difficult to pin
negligence of this sort on a bank director in such a way as to make him respon­
sible financially to the depositors than it is to convict him of approving a loan
or an investment which the bank is specifically .forbidden to make. But there
are cases in which directors have been held accountable for negligence in fol­
lowing the affairs of their bank and many cases in which they have been held
responsible financially for their assent to direct violations of the act under
which the bank is organized. And for every case that reaches the courts, there
are a dozen in which settlements involving the payment of money by directors
have been made out of court, to avoid suit.
“ Directors of banks are frequently, perhaps generally, asked from time to
time to give guaranties or bonds in connection with the bank’s business. There
is no legal obligation, of course, for a director to give such guaranties or bonds.
Sucb guaranties by directors are generally given to secure the deposit of public
moneys in the bank. They are frequently given on the borrowings of the bank
from its city correspondent. The directors may be asked to go on the official
bond of a public official, who in return, promises to keep public money in the
bank. In any of such events a failure of the bank is practically certain to
convert the guaranty or bond into a real liability. And the existence of such
contingent liabilities on the part of directors, which become very real and direct
liabilities in the event of failure, is perhaps the main reason why in case after
case directors have paid or underwritten voluntary assessments and contribu­
tions far in excess of any double liability on their stock to keep banks open.
“ The moral obligation assumed by a director of a bank differs, of course,
from community to community, and with the moral standards of the director
himself. A bank directorship in most communities is regarded as an honor.
If the bank fails, that honor is generally converted into a disgrace. The com­
munity expects a bank director, even at personal financial sacrifice, to keep his
bank from failing. This is quite apart from any legal liability of the director.
And in the case of thousands of small banks that have suffered severe losses
the directors have, at great personal sacrifice, put in new money in an effort
to protect depositors and without any hope of recovery. The average farmer
or small-town director of country banks is entitled to a degree of credit for
meeting the moral obligaitons of his position, that the general public does not
give him, particularly if his sacrifices and those of his fellow directors do not
eventually save the bank from failure.”
In banking, as in other branches of business, the character and policies of
the organization will commonly be largely determined by some one individual,



but in banking and especially in the case of the smaller banks, the supervision,
of an active board of directors is peculiarly necessary. In many instances the
bank is by no means the most important business interest of its chief officers.
There is consequent danger that an undue proportion of the funds of the bank
may be employed in undertakings in which officers and perhaps some of the
directors are deeply engaged. As an effective means of enabling all directors
to become more fully conversant with the condition of their respective banks,
this commission strongly recommends that the American Bankers Association
undertake to work out model forms for the presentation of business at meetings
of the boards of directors of the banks.

Restraint in granting charters together with somewhat higher minimum capi­
tal requirements, and more regular and careful supervision by directors will
do much to strengthen our unit banking system, but by no means all that is
needed to afford adequate protection for the depositor. Among the thousands
of banks, large and small, throughout the country, wide differences in the skill
and competence of management are inevitable. Dishonesty and the employment
of an unduly large proportion of the funds of banks in the other undertakings
of officers and directors subject the solvency of banks of small or of modest size
to risks from which large banks are practically immune. And it is also, per­
haps, pertinent to observe that the qualities required to handle successfully a
small bank, where there is little local diversity in loans and an intense demand
for credit, are not more common than the qualities that are needed in the
management of much larger city institutions.
To meet those managerial elements of weakness in a system of unit bankings
reliance hitherto, outside a few cities, has been placed almost exclusively upon
legislation covering the details of banking operations and upon Government
supervision through periodic examinations. It will not be questioned that both
legislation and supervision have be^n necessary and serviceable. It is evident,
however, that they have fallen far short of the accomplishment of their pri­
mary purpose—the prevention of numerous bsnk failures. Wliil'* this commis­
sion is convinced that .something more than Government action is needed, and
that little or no advantage can be anticipated from additional restrictive legis­
lation, it is at the same time confident that unsound tendencies in many banks
would be checked under improved methods of supervision and a somewhat
more immediate enforcement of those provisions of existing statutes which deal
with operations that undermine the solvency of the banks.
In reaching its conclusion that additional legislation at the present time is
inadvisable, at least in the case of the national law and of those of most o f
the States, the commission has been influenced by three considerations. It has
noted that when allowance is made for differences in location and size, the
number of national banks that have failed, banks subject to the most restric­
tive of our banking laws, has been relatively not appreciably less than the
numer of defunct State institutiohs. Again, a widening of the range of
restrictions will ordinarily increase the numer of instances in which determi­
nation of a failure to comply with the law involves the exercise of judgment.
Numerous situations of this nature breed dissatisfaction with the statute and
work against the effective enforcement of the law by administrative authorities.

And, finally, it should be evident that in any event legislation can never
include within its scope all of the operations that may prove disastrous to a
bank. It can only deal with large classes of loans that are usually undesirable.
It can not take account of difference in time or place, or go very far in pre­
scribing well-balanced proportion between various classes of loans and invest­
ments. Loans that may be unwise at one time may be entirely satisfactory at
another, or for one bank and not for another. Much must be left to the dis­
cretion of management, and the unwise use of this discretion can not be ade­
quately checked by Government supervision which is mainly concerned with
the enforcement of statutory requirements. In many jurisdictions, moreover,
the salaries of examiners as well as those of bank commissioners have been far
too meager to secure and retain men with proper qualifications for the respon­
sible and difficult work of bank supervision. The better men speedily find
more remunerative employment elsewhere.



Recognizing the limitations of Government examinations and supervision, the
hanks of 33 cities, already organized in clearing houses, have set up their own
system of examination, and in general with highly satisfactory results. This
experience serves to indicate the large possibilities of improvement in banking
practice that can be brought about through associated action on the part of the
banks themselves. For such associated action, however, it is not necessary to
adopt exactly similar arrangements everywhere. The one essential is definite
recognition by bankers that active participation in banking supervision is neces­
sary in order to furnish adequate protection to depositors.
In the larger cities, where the clearing house is an indispensable adjunct of
banking, a more complete system of examination and supervision can be estab­
lished than is perhaps feasible elsewhere. Through the clearing house arrange­
ments favored by a majority of the members can be adopted. In the case of
country banks, the initial difficulty is encountered that an organization for the
specific purpose of supervision must be created, and the burden of additional
expense presents an evident further difficulty. It is also important to note that
the clearing-house system of supervision does not include within its scope all of
the banks of the cities in which it has been established. Some bansk are unwill­
ing to submit themselves to examination on account of the burden of expense
or for other reasons. In reserve-bank cities little or no pressure can be exerted
to secure the adherence of these banks since clearing facilities are unfortunately
available through the reserve banks. The admission of others is withheld on
account of their unsatisfactory condition.

The clearing house examination system is not only initially selective: it also
includes the power of expulsion from the group of criticisms of the »xn miner
are persistently unheeded. By the assumption of these powers of selection and
exclusion, the banks accepting the arrangement practically plate themselves
in the position of guarantors against loss to the depositors in any bank that is
a member of the group. If insolvency is allowed to involve loss to depositors,
public confidence in the system is weakened, and its permanence is seriously
With all its unquestioned merits, then, the clearing-house system of examina­
tion has limitations which must always interfere with its adoption by all of the
banks of the country- There are cities in which it might now be established
with every promise of decided advantage to the community, and the system may
well be considered a goal ultimately to be reached everywhere. The adoption
of the system in any locality would, however, be most inexpedient at a time
when there were a considerable number of banks in a weak condition, since
exclusion of these banks might precipitate failures while their inclusion would
endanger the successful working of the plant itself.

In view of these obstacles to the general adoption of an additional system
o f examination of the clearing-house pattern, this commission has examined
alternative suggestions and finds large promise in a less ambitious plan, which
would subject the banks to no appreciable expense, is flexible, and involves no
implication of a guaranty against loss to depositors. The basic feature of tins
proposal is the organization of all banks, both State and National, in legional
groups of from 50 to 100 banks for the purpose of improving and making
more effective use of the present system of State and National examina­
tions. While there are doubtless large possibilities of improvement rn these
examinations, we believe that, aside from a few instances of exceptionally sk il­
ful dishonesty, and the special situation presented by chains of banks, succes­
sive examinations preceding failure have regularly disclosed an increasingly
unsatisfactory condition. More immediate and effects e use of ihe mfoimanon
secured through examinations is certainly not less important than improvements
in the examinations themselves.


To improve and make more effective use of the examinations, it is essential
that examiners should be assigned for a period of at least two to three years
to the banks of a definite area by the banking depai tments ot the States,^ and
that reports of examinations should be considered * ith the dn ector* of the



banks before they are forwarded to the office of the bank commissioner. These
are two essential features of the clearing-house examination system, and to
them much of its benefit may properly be attributed. A permanent examiner
of the State banks, working with the cooperation of the national examiners,
with intimate knowledge of local conditions and personalities, would be in
position to exert a potent influence, corrective of unsound banking policies.
Under this territorial organization of government examinations much might
be accomplished even without a corresponding regional organization of the
banks. But the benefit is small in comparison with that which may be antici­
pated if the examiner is supported by the banks organized for this definite
purpose. The moral support thus afforded would be a factor of large signifi­
cance, and perhaps initially to attempt more would be inadvisable. The
commission believes, however, again following clearing-house experience, that
a carefully chosen committee of the regional organization should be authorized
to receive representations from the examiner regarding unsatisfactory condi­
tions in a bank that have not been corrected at his suggestion by its officers and
It is important to note the proposed organization would not assume the
responsibility of excluding or of expelling any bank from the association. The
exercise of such power implies some measure of responsibility for the solvency
of the banks, a responsibility which can not be too explicitly disavowed. The
public should understand that, the organization includes all banks, the weak
as well as the strong, and that its sole purpose is to bring about a gradual but
permanent improvement in banking standards, and by this means reduce the
hazards to which the depositor is now exposed.
The difficulties that may be anticipated in securing general assent among
the bankers of a locality to enter a regional organization are by no means
inconsiderable, and the commission is therefore gratified to be able to report
that in one instance these difficulties have already been surmounted. During
the last few months the banks of eastern Nebraska have worked out the
details and completed the organization of the Fremont District Credit Clearing
House Association, and it is significant to note that, with a single exception,
all of the 70 State banks of the area have become members, membership of
national banks being temporarily deferred. An examiner has been assigned to
the territory, who, with the hearty approval of the State bank commissioner,
is to cooperate with the association to reduce losses and in general to improve
banking standards and practice. The operation of this pioneer organization
will be watched with keen interest, since it may well prove to be the beginning
of an improvement of vast consequence in the conduct of banking throughout
the country.



The conclusions of the commission may be summarized as follows:
1. A few banks fail on account of dishonesty or gross mismanagement.
2. Adverse conditions precipitate numerous failures of banks that are finan­
cially weak and unskillfully managed.
3. An excessive number of banks is the most potent single cause of numer­
ous failures. This situation can be corrected in part by increased capital
requirements, and more completely by the limitation of new charters to the
needs of the community for additional banks.
4. In view of the heavy responsibilities, both legal and moral, of bank
directors, closer supervision by them is desirable in their own interest, and
would serve to correct much that leads to insolvency. It is recommended’ that
the association prepare standard forms for the analysis of the condition of
bnnks and for the presentation of business to be brought to the attention of
bank directors.
5. While additional restrictive legislation covering loans and investments
is not favored, the more immediate enforcement of existing statute is ap­
6. The clearing-house examination system has been in general highly
advantageous, and its further growth is to be anticipated.
7. As a plan, more feasible for immediate and general adoption, the organ­
ization of local regional associations of banks for the purpose of supporting
and securing the more effective use of the existing system of government
examinations is strongly recommended.

Senator G la s s . The principal cause is the excessive number of
banks and small capitalization of those banks ?



Mr. S p r a g u e . Yes.
Now, I turn to the consequence of the use of funds in brokers’
loans and on the assumption that the amount is excessive. I sup­
pose we shall all agree that a considerable volume of bank credit is
properly employed, first, in financing the marketing o f new issues
of securities, and, in the second place, in making a market for out­
standing issues. Now, a market for outstanding issues is impossible
in the absence of a certain amount of speculation.
Senator B r o o k h a r t . I can not understand that proposition. We
have outlawed speculative loans entirely in the Federal reserve law
for rediscount purposes.
Mr. S p r a g u e . For those purposes.
Senator B r o o k h a r t . And it seems to m e that if they should be
outlawed for rediscount purposes they ought to be outlawed for
original loans from the banks.
Mr. S p r a g u e . From that point of view we have outlawed mort­
gage loans o f all kinds in the Federal reserve system.
Senator B r o o k h a r t . We did not outlaw mortgage loans. They
were not suitable to the business, because they were not flexible
enough; but the reason for outlawing speculative loans was because
that was an illegitimate business. There was no other reason.
Senator G la ss. We did not outlaw mortgage loans in the Federal
reserve act. They permitted a certain percentage of mortgage loans
for a period of five years.
Mr. S p r a g u e . A s an investment by national banks, but not for
rediscount at the reserve banks. The reasons, I should say, for not
including collateral loans in the Federal reserve act are these: That
under our rigid reserve system, before the Federal reserve act was
established, call loans were pretty much the only resource that banks
had for adjusting their reserve position. We had placed a premium
upon that particular class of loans in this country under our legisla­
tion o f previous years. Commercial loans took a back seat, if you
please, as an indirect consequence of our rigid reserve system. It
seemed desirable to emphasize the importance of commercial loans.
It was also desirable to make certain that a kind o f rediscountable
materials should be available all over the country, and in the ordi­
nary course o f business of any bank that it will have loans commer­
cial in character.
In the third place, there was the possibility o f a greater expansion
o f brokers’ loans than of any other kind of loans. On the other
hand, the Federal reserve act showed a decided misapprehension
about the nature o f credits. It presupposed that a demand based
upon a commercial loan, a rising demand, is a satisfactory demand.
Now, commercial loans may be most unsatisfactory from every point
o f view. They become unsatisfactory when speculation is wide­
spread in inventories throughout the country. If, for example, wool
advanced from 60 cents to $1.20 a pound, it would require in handling
a larger volume o f commercial loans, and yet that may be an in­
flated price. It may be highly undesirable that the banks should
lend as freely on wool at $1.20 as at 60 cents, and these commercial
loans under such circumstances may become frozen and it may lead
to the failure o f a large number o f concerns. There is no single
class o f loans which can be defined in such a way that in all situa­
tions it would be entirely safe.



Senator G l a s s . But that does not mean that we embodied in the
Federal reserve act any misconception of the value of commercial
loans. We regarded commercial loans as the normal activity of
business transactions.
Mr. S p r a g u e . But it was held that they were always liquid.
Senator G l a s s . A sound commercial loan, even at a limit of 90
days as prescribed by the Federal reserve act, is liquid.
Mr. S p r a g u e . It may be liquid, but it may involve and frequently
does a renewal.
Senator G l a s s . A speculative loan is not always liquid.
Mr. S p r a g u e . I quite agree. A ll classes of loans may be susceptible
o f deterioration through a wild speculative situation.
Senator G l a s s . Does not industry and commerce constitute the
legitimate and normal business o f the country ?
Mr. S p r a g u e . Quite true.
Senator G l a s s . Then, how do you arrive at the conclusion that we
embodied in the Federal reserve act a misconception of the value of
commercial loans?
Mr. S p r a g u e . I think there was a misconception, so far as it was
assumed that the demand for rediscounts, because it was based upon
commercial loans, would necessarily be a safe loan.
Senator G l a s s . The conception was that it was primarily, if not
the only, legitimate loan that ought to be made.
Mr. S p r a g u e . It is a legitimate loan.
Senator G l a s s . We did not propose to recognize any form of stock
Mr. S p r a g u e . N o .
Senator G l a s s . We proposed to recognize the ordinary and indis­
pensable industrial and commercial conditions.
Mr. S p r a g u e . My study of the legislation led me to the view that
it was rather anticipated that, if borrowing at the Federal reserve
banks were limited by the commercial loan requirements, in some way
or other the volume o f reserve bank credit would be kept within
desirable limits, and that does not seem to me to be the case. The
volume of eligible paper, define it as you will, is very large, and if
discounts were granted to its full amount it would bring into use
an enormous volume o f reserve bank credit which would presumably
lead to a dangerous amount o f inflation.
Senator G l a s s . That is a criticism, as I take it, not of the statute or
o f the system but o f the administration o f the system.
Mr. S p r a g u e . I think that we might not disagree on that.
Senator G l a s s . O f course, if the Federal reserve bank is going to
indiscriminately rediscount commercial paper, whether it is sound
or unsound, that is a perversion of the system rather than an ad­
herence to it.
Mr. S p r a g u e . I will finally say that I do not believe that the
exclusion o f any particular class o f business from eligibility in reserve
banks means that kind of business is outlawed. It simply means that
from the point of view o f a sound banking policy it may be unde­
sirable to admit that particular kind of business as a basis for accom­
modation at the Federal reserve bank.
Senator B r o o k h a r t . You say there were few losses from these
speculative loans? As a matter of safety they may be just as desir­
able in the rediscount field as in the original field, if there is no



reason for excluding them, because they would not be safe. The
only reason is becauses they are an illegitimate business.
Mr. S p r a g u e . N o . The reason is that it may lessen somewhat the
danger o f an excessive use of reserve bank credit.
Senator G l a s s . As I recall the situation, the thought which the
proponents of the Federal reserve system had was that we should
have a system that would meet the requirements of legitimate indus­
try and commerce, and not a system that would lend itself to what
many of us regard as an unproductive operation of stock and com­
modity gambling.
Mr. S p r a g u e . Let me try to show you how it seems to me to work
in that connection. First, I want to conclude what I have to say
about the effect of the use of a hypothetical excessive amount of
credit in connection with brokers7 loans. I assume that you will all
agree, as I said before, that the marketing o f securities involves, and
properly so, the use of some amount of bank credit. That is a mer­
chandising operation, and these brokers5 loans, so called, include also
the loans made to dealers.
Senator B r o o k h a r t . There is a difference between legitimate mar­
keting and speculating and gambling.
Mr. S p r a g u e . Yes.
Senator B r o o k h a r t . Those are two different fields.
Mr. S p r a g u e . True; but I am just pointing out that part of the
so-called brokers7 and dealers’ loans consists of accommodations
granted to those who are engaged in the business of marketing securi­
ties. In the second place, I should hold that bank credit is legiti­
mately employed in connection with dealing in the securities market,
in connection with stock exchange dealings, in so far as such transac­
tions are necessary or desirable in order to create a market for out­
standing issues for securities. The point at which it may be said
that undesirable speculation is reached is that at which the volume of
credit is such that it permits and accentuates dealings on the ex­
change which give rise to prices of large numbers of securities which
are not reasonably justified by the earning power of the company.
Senator G l a s s . Is not that the exact situation ?
Mr. S p r a g u e . Yes; but I narrow it down to this point: In the
absence o f the stock market, if I own General Electric stock, it would
be rather more difficult for me to dispose of it, and if that is a con­
dition which appeals to me and other investors, then I should suppose
you will agree that a stock exchange w^ith some volume of. dealing
is desirable It is the excess that is perhaps a matter of concern.
So I come to the inquiry of what the consequences are of a supply
o f credit so large for stock-exchange dealings that it encourages and
makes possible and results in, if you please, inflated prices for many
securities, and by that I mean prices which subsequently sharply
decline. It is obvious that declines of the kind I have indicated
subject certain individuals to losses, those who have been speculating
for a rise, and especially on a margin basis. T|u* amount of loss
which those persons experience is exceedingly difncult to deteimme,
because presumably they may have been making money while the
market was moving up, and the subsequent sharp reaction may
simply mean a scaling down of paper profits and not very much loss
o f actual money.



At all events, it does not appear to me to be a matter of vital con­
cern to the community the losses that some individual may experi­
ence from unwise operations in securities which reach inflated levels.
These operations are only of serious consequence from the point of
view o f the community in the event that inflated prices followed by
a sharp reaction on the stock exchange tend to bring about a general
reaction in trade and industry. I f that be the case, then I think it is
obviously of vital important that somehow or other an effort be
made to control these operations.
I do not think, however, that the evidence indicates that a decline
on the stock exchange is an independent cause of business or indus­
trial reaction. It is undoubtedly true that almost invariably when
there is a period o f trade reaction it is accompanied and perhaps pre­
ceded by a decline on the stock exchange; but there are plenty of
other instances in which declines on the stock exchange have not
been accompanied or preceded by a decline in general business. I f
the undue advance in prices of securities is purely a credit matter,
and business in general is in a sound condition, the reaction in the
market would not plunge the country into a period of business
depression. I therefor reach the conclusion that the brokers’ loan
evil at the most is an evil o f minor consequence, not one o f such
serious import that we need to sacrifice any other desirable interest
in the community in order to hold that matter in leash.
Senator B r o o k h a r t . H o w about this proposition? The present
situation shows there has been a constant rise in stock values on the
stock exchange since 1920.
Mr. S p r a g u e . Yes.
Senator B r o o k h a r t . And the country has been in a constant agri­
cultural depression all the time.
Mr. S p r a g u e . Very true.
Senator B r o o k h a r t . What effect or relation has the one to the
other ? What is the cause o f that condition, i f it is n ot to som e extent
that the credit has been taken away from the country, and what
they buy is costing them too much, and turned over to these specu­
lators at a low rate o f interest?
Mr. S p r a g u e . I do not think there is the slighest probability that if
the volume o f brokers’ loans at the present time were $500,000,000
less than in fact it is, that the agricultural situation would be appre­
ciably other than it is.
Senator B r o o k h a r t . Suppose they were three billion less?
Mr. S p r a g u e . Then I think perhaps the agricultural situation
would be worse than it is.
Senator B r o o k h a r t . We could probably get our money then at 5
per cent instead o f having to pay 8 per cent.
Mr. S p r a g u e . No. The capital market would have been seriously
affected. You would in all probability have made all sorts o f securi­
ties unsalable. You would have introduced, in other words, a dis­
turbing factor into the financial situation o f the country, which would
have its reaction, I should expect, upon all classes in the community.
Senator B r o o k h a r t . Y ou just pointed out that a reduction in those
stock values would not bring that general depression.
Mr. S p r a g u e . Y es; but a three-billion-dollar contraction would
have an effect upon those desirable uses o f brokers’ funds that I
have mentioned: First, the ordinary marketing of new issues o f se­



curities; and in the second place, the saleability of the many issues of
stocks and bonds now outstanding.
Senator B r o o k h a r t . But would not the proper use of this $3,000,000,000 give a legitimate market for these things, instead of a gam­
bling market, such as we have now ?
Mr. S p r a g u e . I do not think so.
Senator B r o o k h a r t . Here is what drives the money to the money
centers, is it not: A member bank in the Federal reserve system
must deposit its reserve, but it gets no rate of interest, no redeposit
Mr. S p r a g u e . True.
Senator B r o o k h a r t . It is permitted to deposit the reserve, if it
wants to, but again it gets no interest?
Mr. S p r a g u e . True.
Senator B r o o k h a r t . Therefore, in an attempt to employ these
funds when they are idle, they have no other place to send them
except to New York. Is not that true?
Mr. S p r a g u e . Yes.
Senator B r o o k h a r t . So they send them there, and the New York
fellow fixes the rate they will receive for it, which is at present 1%
per cent, for bank balances?
Mr. S p r a g u e . Yes.
Senator G l a s s . D o you think the Federal reserve banks should pay
interest on reserves?
Mr. S p r a g u e . Oh, no.
Senator G l a s s . That is what Senator Brookhart’s question leads
Up to. He wants the Federal reserve bank to pay interest on
reserves, and if they did it would smash the system all to pieces.
Mr. S p r a g u e . Yes. I think I shall come to that in a minute.
Senator B a r k l e y . Were you trying to finish an answer to some
question ?
Mr. S p r a g u e . I was going on to whether it would be possible to
control brokers’ loans. I am holding so far that they are at the most
a minor evil on the assumption that the amount is excessive. I
think Senator Brookhart was directing his remarks to the possi­
bility o f syphoning these funds back into the agricultural situation.
Senator B r o o k h a r t . I also want to ask some questions about the
proposition suggested by Senator Glass. You said you would come
to that.
Mr. S p r a g u e . I shall come to that soon.
Senator G l a s s . The reason Senator Brookhart’s people pay 8 per
cent is that his State permits it. I f he wants these usurious rates
reduced, and he would exert one-tenth of the influence on the State
legislature that he exerts here, he would get them down to a rea­
sonable rate.
Senator B r o o k h a r t . Let me concede that is a part of the reason,
but that is not the whole reason. Part o f it is due to this situation
in the Federal reserve bank depriving itself of that market, Senator.
The C h a i r m a n . That does not fully e x p la in why the Iowa b an k s
would rather take the low New York rate than the Iowa rate o f 8
per cent.
Senator G l a s s . Oh, no. I do say that 8 per cent on normal com­
mercial paper is usurious, and that Iowa ought to correct its own
situation before coining here and asking us to correct it for them.



Mr. S p rague. Y o u never will correct it unless you modify your
banking organizations. I f you support and maintain a system in
which you have a large number o f banks with resources of under
half a million dollars, you are bound to have something like an 8
per cent rate. I f in Iowa you had at Cedar Rapids and Des Moines
and other places a system of large banks operating branches within
50 or 100 miles o f those centers and if your average bank in Iowa
had resources of from $5,000,000 to $10,000,000 or $20,000,000, they
would be in a position to lower the rates charged on the best of loans
in your rural communities. But if you have banks with resources
o f $500,000 and they get 8 per cent on the average, they are only
getting $40,000, and then if you pay $15,000 o f that for interest, you
have only got $25,000 for operations.
Senator G la ss. I f a bank in Virginia, capitalized at $50,000, is
limited to a rate of G per cent, why is it that banks capitalized at
less than half a million dollars in Iowa could not live on the same
rate ?
Mr. Sprague. It is purely because of the greater stability of
values. In Iowa the average farm is worth, I suppose, from $40,000to $60,000, including the land and equipment. When a business is
operated with a unit of that size, it is almost absurd that the bank­
ing business should be conducted by institutions having $200,000 or
$300,000 o f resources.
Senator B r o o k h a r t . Y o u are in error about that average value.
In 1925 the average farm was practically 160 acres, and the average
value $149. That would make it about $24,000.
I want to give you a concrete situation out there. You mentioned
Cedar Rapids a while ago. In August I interviewed one of the
largest bankers in Cedar Rapids, w ho is one of the best-laiown men
in the State. He told me he had $3,000,000 o f deposits in his bank,
and he said:
At this moment I hare $1,600,000 of that in New York. Part of that is in
bank balances and I am getting 1% per cent. Part of it is invested in listed
bonds, for which I am getting 4% per cent, charging my farmer neighbor 7
per cent, and charging the best business loans 6 per cent. I am doing that
under this system because if I lend money to a farmer and he does not pay
when it is due. and we lose it or put it on the slow list, it is no longer re*
discountable, and I am under suspicion, and in order to keep myself in good
standing according to the New York rules, I am forced to run my bank
that way.

Since that I saw one of the big bankers in Waterloo, Iowa, who
has a little larger bank than the other man, and his story was the
same as the Cedar Rapids banker. I sawT one of the two biggest
bankers in the State at Des Moines, with $15,000,000 o f deposits,
and lie was in the same condition. I saw one from Boone, just re­
cently, and he told me that was the general condition throughout
the State.
Here is the point with me. They are getting 1% per cent for a
good deal of that money and charging that high rate of interest to
the farmers and business people at home. They would be better off
if that money was loaned at home at 5 per cent than they are under
present conditions.
Mr. S p ra gu e. D o you not think that, human nature being as it
is, with the large number o f bank failures and runs and so on, it is
very natural for bankers, perhaps for the moment, to go to the



opposite extreme? They want to be certain they can meet the de­
mands of their depositors. I think you will find in a few years,
when this has blown over, that there will be a somewhat better
situation. I think it is a reaction from what that part of the country
has been through in the way of bank runs and bank failures.
Senator B a r k l e y . Doctor, I would like to ask you this question:
O f course, taking human nature as it is, it is the desire of every
bank to make all the profit it can properly make by the lending of
money, which is their chief source of income. Is there any reason­
able inducement to a sound bank to send its funds, or any appre­
ciable part of them, to New York and receive 1% per cent, if those
funds could be loaned in their own community for 5 or 4 or 3 per
Mr. S p ra g u e . I quite agree. That was the statement which I
started with. However, I repeat, it is somewhat in the form of a
tradition. Bankers will cling to a traditional rate in the rate
charged to borrowers and the rate of interest they pay on deposits.
Senator G la s s . D o they not cling to the standard rate because
they are unable to shift these funds to New York at a nominal
rate of interest ?
Mr. S p ra g u e . But, I repeat, if they did not do that, I fear that
many undesirable loans would be made in order to get the 8 per
cent. You can always get your 8 per cent or 6 per cent or what­
ever the rate is if you are willing to take the risk. The opportunity
for depositing funds in New York moderates that inducement a
little. The question is whether you think there would be a loss of
safety, through a limitation on the employment of funds in New
York, which would more than offset any advantage the good bor­
rower might get on a lower rate. My judgment is that the loss in
safety would be too great a price to pay.
Senator B a r k x e y . Suppose a given bank, the one mentioned by
Senator Brookhai-t which had $1,600,000 in New York, was com­
pelled to return that money to its own vaults and to its own com­
munity, and assume that it was denied the privilege of obtaining that
1 per cent for it, and assume that it had made all the safe loans
it could make in the community, would not the situation of com­
pelling that money to remain idle tend to increase the rate upon other
loans in the community rather than lower them ?
M r. Sprague. It might have that effect.
Senator B r o o k h a r t . It is that long-time accumulation of that
standard rate that has brought about the condition which has
destroyed our land values and rendered our securities unsafe. I
think there is no doubt in the world but what that had more to do
with it than anything else.
Senator G la s s . As a matter of fact, I think it must be realized
that the other end of the proposition has never been experimented
with. The banks have never extended to their borrowers any other
rate than the standard rate of interest.
Senator B r o o k h a r t . That is correct.
, , .
Senator G la s s . They have never yielded one hair’s breadth in
that respect. It is the only business on earth that does not yield to
the law of supply and demand.
# ,



M r . Sprague. I think it m ight be said m that connection that
ft slow growth o f elasticity in rates; that an increasing num ­

there is



ber o f customers of banks are getting rates which move to some
extent up and down with the rates on the market. That is true, at
least, in the case o f the large borrowers in our cities, and it extends
as far as Dallas and Denver. It is only beginning.
Senator G l a s s . It is hardly appreciable so far.
Mr. S p r a g u e . It is true, if you take the communities with popu­
lations o f under 50,000, there is very little evidence of it, but there
is a beginning in that direction.
Now, if I may turn to the possibility o f influencing the volume
o f brokers’ loans through the operation of the Federal reserve banks,
I want to inquire whether it is possible through the operation of the
reserve banks, without undesirable results in other directions, to
control the volume of brokers’ loans.
Senator G l a s s . Right on that point I would be obliged if you
would explain to the committee precisely how the facilities of the
Federal reserve system are made available for brokers’ loans, when
it was the fixed purpose of the act to prohibit the use of the facilities
o f the Federal reserve system for that purpose?
Mr. S p r a g u e . That is along the line I was going to speak. The
Federal reserve banks are in position when an application is made
for a rediscount to grant the accommodation or to decline it. They
grant it ordinarily in the event that the borrowing bank presents
paper which meets the eligibility requirements of the statute—that is,
loans that are commercial in character or United States Government
securities. The operations which led the bank to resort to the Fed­
eral reserve bank for accommodations are not subject to control by
the Federal reseive Lank, and ii h all of the operations of every
kind and description of any member bank that brings it to the
Federal reserve bank for accommodations. A bank ordinarily bor­
rows because it finds itself with a deficient reserve, and that deficient
reserve is the result o f all the transactions passing through the bank
The eligible paper requirements simply limits the possible borrow­
ing of any member bank to the amount o f eligible paper that it
happens to own, but in no way does it affect the operations of the
bank beyond that point.
Now, the Federal reserve bank might conceivably say to a bor­
rowing member bank: “ You have outstanding various loans, brok­
ers’ loans in particular. Your paper is perfectly eligible, but we
will not rediscount it for you, because of these brokers loans which,
i f you liquidate, will render it unnesessary for you to borrow.” A
policy o f that sort, of course, would mean that "the reserve bank in
every instance would have to inquire into all the operations of the
borrowing bank.
Senator G la s s . Does it not do that anyhow ?
Mr. S p ra u g e . It does to the exten t o f fin d in g out w h ether the b an k
is upon the w h ole in a sa fe con d ition .
Senator G la s s . It finds out all of the details of the business?
Mr. S p ra gu e . It kn o w s that, but it does not act upon that informa­

tion, and the query is whether it would be desirable in the function­
ing of our system that the Federal reserve bank should generally
and frequently require the scaling down of brokers’ loans or any
other kind of loans, rather than extend credit to a member bank
in the form of rediscount. I should hold that if the Federal reserve
banks were to do that, it would almost completely destroy the effec­



tiveness o f the Federal reserve bank system as an instrument for
the control and regulation of credit. At the present time the banks
are not particularly eager to appear as rediscounters at the Federal
reserve bank. In general, the banks that borrow do it for a com­
paratively short period of time, often simply for a day or two. I f
you were ^ eliminate rediscounts, in the event that the bank had
these outside call loans, the reserve bank would be of still less service
from the point o f view of the large member banks throughout the
Senator B r o o k h a r t . You say these banks are not eager to redis­
count their paper at the Federal reserve bank. The only reason
for that is that right now they have to pay four per cent, and if they
can get these vast deposits from Iowa and other States at 1% per
cent, that is better than rediscounting at the Federal reserve bank.
Mr. S p r a g u e . Yes; but consider the situation in Minneapolis,
where the rate is also 4 per cent, and rediscounting at the Federal
reserve bank is in the neighborhood o f but $3,000,000. Take the
Dallas Bank with a similar small volume o f rediscounts. In both
those districts the average rate on the business of the member banks
is very much in excess o f the rediscount rate, but there is no particu­
lar disposition on the part of the member banks to borrow. They do
not wish in general to appear as continual borrowers at the Federal
reserve bank. I think that is one o f the features of the working o f
the system that was hardly realized by anyone when the act was
passed. It was very generally assumed that banks would be rather
eager to borrow from the reserve banks, unless the rate at the reserve
bank was decidedly above the average rate at which the banks were
Senator B r o o k h a k t . Another reason is that a good many of the
member banks are in competition for this rediscount business.
Mr. S p ra g u e ; Yes.
Senator B r o o k h a k t. The Continental
Commercial National
Bank of Chicago does an enormous rediscount business.
Mr. S p r a g u e . Certainly. There is a very considerable amount of
business there in competition with the reserve banks. But let us sup­
pose that the reserve banks did not absolutely refuse rediscount if a
bank had any brokers’ loans, but that they would raise difficulties
and very frequently reduce the amount or decline. I doubt very
much whether that would have any appreciable effect upon the vol­
ume o f brokers’ loans. It would probably mean that the rate, the callloan rate, would be less stable than it has been in recent years. It
might be that you would have the rate going up sometimes to 6 per
cent or more, because a number o f banks which would under exist­
ing arrangements have rediscounted for a few days might find it
necessary to liquidate their call loans.
But I do not believe that it would have any appreciable effect upon
the aggregate amount o f these loans. The only case in which the
policy o f the Federal reserve bank in that matter might be expected
to have some influence would be in the very limited number of
instances o f banks that have borrowed for considerable periods at
the reserve bank, and have at the same time been employing money
on the street. Cases o f that sort are regarded, I believe, with dis­
favor by the management o f the reserve bank, and are infrequent.




In general, it can be said that the banks that are making these
brokers’ loans are not borrowers for appreciable periods of time at
the Federal reserve banks, and if they find themselves for some unex­
pected reason under the necessity of borrowing considerable sum?
they pretty speedily reduce their call loans and other commitments,
Senator B r o o k h a r t . I s not the chief reason why they can carry on
these operations without rediscounting at the Federal reserve bank
the fact that they get these redeposits from banks in the country
generally at 1% per cent, or about that?
Mr. S p r a g u e . I f the New York banks did not get those deposits,
if they did not pay interest on them, there would be a large volume
o f direct lending by outside banks. A t the present time, these banks
are lending nearly a billion and a half dollars through the New York
banks, an amount that is three hundred millions larger than the direct
loans of the New York banks themselves.
Senator B r o o k h a r t . H o w does an out-of-town bank make those
loans ?
Mr. S p r a g u e . The process is very simple. A n outside bank has a
balance in a New York bank, and it instructs by telephone or tele­
graph the New York bank to lend a certain amount o f that balance
on the exchange, upon proper collateral. The New York bank
arranges the loan and takes in the collateral and generally super­
vises it and charges a commission. I f it were not done by the New
York bank for an out-of-town correspondent, it would be a perfectly
simple matter for the out-of-town bank to arrange a direct loan on
the exchange.
Senator B r o o k h a r t . It is usually done through the New York
correspondent ?
Mr. S p r a g u e . Yes.
Senator G l a s s . It seems to me that the argument you have made
for the last 10 minutes implies the belief on your part that the Fed­
eral reserve system w as established primarily to offer its facilities
for stock and commodity speculative purposes, rather than primarily
to afford the commerce and industry o f the country assurance against
speculation and all the attendant evils. For example, would you have
us abolish the Federal reserve bank at Minneapolis, merely because
the stockholding banks of that particular district have not engaged
in the practice of rediscounting?
Mr. S p r a g u e . Oh, I would hardly wish to express an opinion.
I would rather answer the first part of your question.
Senator G la s s . T o go back to Mr. Warburg’s oft repeated simile,
would you destroy the reservoir simply because some people do
not use the water?
Mr. S p r a g u e . Oh, no; I am not proposing anything o f the sort.
I am simply using that as an illustration. I would rather answer
the first part o f your question.
The Federal reserve system was doubtless established primarily
to meet the requirements o f commerce and industry and agriculture;
and in the second place, to meet situations in the case ot emergen­
cies. But in the process o f doing these things it is impossible for the
Federal reserve bank to control in complete detail the entire use
o f the aggregate amount o f credit throughout the country.
The Federal reserve banks can readily reduce the total o f brokers’
loans, but in the process o f doing so they will inevitably bring about



a reduction in the supply of ci’edit available for other purposes. I f
the Federal reserve banks to-morrow were to begin to sell rapidly
their holdings of Government securities, the immediate result would
be to force the banks into the reserve banks as rediscounters. I f the
rate were raised, we will say, to 5 per cent, that would accenuate
unwillingness on the part o f the banks to remain as borrowers of
the reserve banks, and you would have a decided contraction in the
volume o f brokers’ loans. But the contraction would not be con­
fined altogether to brokers’ loans. It would have a reaction to a
greater or less extent upon all other kinds of loans.
Senator B r o o k h a r t . Would not the reaction be more severe on
legitimate business than on brokers’ loans?
Mr. S prague. It would, if persisted in, I think.
Senator B r o o k h a r t . Is not the broker or gambler more willing to
pay a high rate o f interest than one engaged in a legitimate business?
Mr. Sprague. Nevertheless, the desire of banks to accommodate
their own customers is very strong. It is possible for the reserve
banks from time to time to test the situation by a moderate stiffening
o f rates and moderate sale of Government securities. Let us consider,
for example, the last eight months. Last summer, as I understand
the matter, a policy o f somewhat easier rates was adopted by the
Federal reserve banks, partly to influence the gold flow, in the belief
that a further importation o f gold to this country was not desired
for us, and might haye a serious disturbing effect on countries re­
cently reverting to the gold standard or contemplating returning
thereto; and also influenced by the consideration that fairly easy
money here and the avoidance o f monetary difficulties on the other
side would be favorable to the market o f exported staples, such as cot­
ton. These results seem to have followed that policy. It has been
an incidental result of that policy that an enlarged volume of credit
has to some extent drifted into brokers’ loans.
Now, if the expansion of brokers’ loans is a matter of major con­
sequence, threatening the foundation o f prosperity in this country,
then it was an unwise policy to have permitted fairly easy money
last autumn. On the other hand, if the expansion of brokers’ loans
is a matter of secondary significance, perhaps undesirable, but still
of secondary importance, it was not too high a price to pay for the
strengthening o f the gold-standard position on the other side and
for such stimulation as that may have given to the export trade in
a variety of our staple products.
Senator G la ss. At the time the Federal reserve statute was enacted
the total outstanding bonded indebtedness o f this country was less
than a billion dollars, somewhat more than $900,000,000. W e had
that in view in enacting section 13 of that statute. Suppose there
had never been this inconceivable increase in the bonded indebtedness
of the country, how would these brokers have availed themselves of
the facilities of the Federal reserve system ?
Mr. Sprague. The banks in general use United States bonds as a
basis of borrowing at the Federal reserve banks, because they can be
handled more readily than the ordinary commercial paper.
Senator G la ss. Because it is permitted by the act.
Mr. S p ra g u e . Yes; but they have the commercial paper. I have
in mind, for example, a bank that has as a matter of policy some95062— 28------ 5



thing like $50,000,000 of eligible material. A part of that consists
in Government bonds and a part consists in commercial loans o
one sort or another, but about which there is no question of eligi­
bility. Then they have $50,000,000 or $100,000,000 more which they
can use, but which the reserve authorities might want to examine a
little more carefully. I f that bank has occasion to borrow, as it
frequently does, $6,000,000 or $8,000,000, it simply puts up the
Government securities.
Senator G lass. Because it gets a lower rate of interest on its bonds
and a higher rate of interest on its commercial paper ?
Mr. Sprague. The borrowing bank would get the interest on
either the bonds or the commercial paper in any event. It simply
is a little more convenient to put up 10 Government bonds to borrow
a million dollars than it is to put up a miscellaneous lot of commer­
cial loans.
Senator G lass. What would it do if it did not have the Govern­
ment bonds?
Mr. Sprague. It would put up the commercial loans. It has the
$50,000,000. Its present holdings of commercial paper it regards
as perfectly eligible, a character of paper about which there would not
be the slightest question at the reserve bank. It is a purely routine
matter in regard to the examination of the collateral, and the use
of Government bonds, in my judgment, is a mere convenience. But
the obstacle is not sufficiently great in the use of commercial paper
to have, I believe, an appreciable effect on the amount of redis­
In conclusion, I wish to simply leave my judgment on the matter
with the committee, that the matter of brokers’ loans is not a
matter of serious or first-rate consequence, not of sufficient conse­
quence to demand a change in legislation which might in other direc­
tions prove exceedingly damaging.
Senator G la ss. Y o u think, then, that the activities on the stock ex­
change in New York have no reflex influence whatever upon the
business of the country outside?
Mr. Sprague. Comparatively little.
Senator G la ss. D o you think an upheaval there does not attract
the attention, psychologically, of business men throughout the coun­
try, and have an appreciable effect upon business conditions?
Mr. S prague. I am inclined to take that view, with this further
statement that, assuming that the financial structure o f business is
tolerably sound, and that economic conditions are fairly satisfac­
tory, I do not believe that the credit situation alone would create
or lead to an upheaval on the stock exchange. I f, for example, the
business structure o f this country had been as unstable as it some­
times in the past has been, and if the range o f securities were as nar­
row as it was 30 or 40 years ago, all subject to the same influences,
favorable or unfavorable, then I should feel it would be possible
for an extreme upheaval upon the stock exchange under the impact of
credit stringency. I do not think that is the case under present
circumstances. I think that was illustrated a couple o f years ago,
when the volume of stock-exchange loans was reduced by about
$500,000,000 in the course of two or three months, without any serious
accompanying disturbance in business.



Senator G l a s s . In the last few months, measurably speaking, you
have had frightful fluctuations there, in which, as reported by finan­
cial newspapers, millions of dollars were lost or made, as the case
might be. Do you think that has no depressing influence upon the
general business of the country?
Mr. S p r a g u e . Very little.
Senator B r o o k h a r t . But you think, if we should reduce them by
several billion dollars, leaving them about what they had when the
reserve act was established, that would bring about trouble?
Mr. S p r a g u e . It would. The range of securities now handled on
the stock exchange is immeasurably wider than it formerly was.
Senator G l a s s . I s it not immeasurably wider than it has any
business to be ?
Mr. S pr a g u e . I do not think so.
Senator B r o o k h a r t . The principal idea in the reserve act was
that speculation had reached an unreasonable stage and was a cancer
on the system, that must be cut out, and now it is five or six times
as great.
Mr. S p r a g u e . But the proper dealing in the transfer of securities
between individuals has enormously widened in that period. A much
larger proportion of the industries o f the country is owned by
numerous individuals than formerly. I f you examine the stock
exchange list, for example, of 1894, you will find that it covers about
a page and a half in the Financial Chronicle, and nearly all the
securities were railroad securities. They moved up and down with
the same kind of influences. The market was an unsafe place for
lending, more unsafe than it now is.
Senator B r o o k h a r t . Is it not now an unsafe situation?
Mr. S p r a g u e . It is unsafe in some securities for particular indi­
viduals. In general, however, I should be inclined to say that the
average quotations 011 the stock exchange largely represent a revalu­
ation based upon a decline in the rate of interest. The rate o f in­
terest is declining, as measured by any test you would like to use.
Senator B r o o k h a r t . In the same way, if you get a declining rate
o f interest, the farms should increase in value the same as these
other commodities have increased.
Mr. S p r a g u e . Yes; but the way to do that is not to try to force
funds out o f a use in which after all the rate is moderate. I f the
rate on call loans were 7 per cent and the volume was what it is, I
should think there would be a fair case for the assumption that
other peojjle were being deprived o f needed accommodation; but
in so far as people are deprived of needed accommodation in any
part o f this country, I would say it was due to defects in banking
organizations and to the persistence o f certain traditions, such as
interest on deposits, together with the reaction from the numerous
bank failures which have affected some sections of the country.
Those seem to me to be the matters to attack rather than to attempt
to withdraw funds from one use on the chance that they might be
available for some other use.
Senator G l a s s . Y ou believe in branch banking, do you not?
Mr. S p r a g u e . To a lim ite d exten t.
Senator G l a s s . Y ou were limiting it a while ago to fifty or a
hundred miles. Congress limited to the corporation limits.



Mr. S prag ue . Yes; with the result that is not satisfactory, m my
judgment, in the first place, because you allowed an unlimited num­
ber ^of banks in any one institution in a large city. I do not believe
a city bank should be allowed to have 50 or 100 branches m any one
city. It preempts the situation too much. I believe in large cities
like Detroit and Cincinnati, it would be very much better if no
bank should have more than 20 or 25 branches in its home city.
Senator G l ass . Y ou should make your plea to the Comptroller of
the Currency. It is in his discretion. Congress never supposed he
would dot them all over the country.
Mr. S prag u e . Then the situation is unsatisfactory in that no con­
sideration was given to the problem presented by chain banks, which
is the most undesirable and dangerous kind of branch banking.
Senator G l a ss . That'is not branch banking. It is banking without
responsibility, whereas branch banks have concentrated responsi­
Mr. S p rag ue . Chain banking has all the disadvantages of branch
banks, with none of the advantages.
Senator G lass . Not a bit in the world. I f you and I could legis­
late instead of Congress, we could fix it all right.
Mr. S p r ag ue . No doubt.
Senator B r o o k h a r t . There is another matter that I want to in­
quire about. That is this redeposit business of the banks o f the
country. Now. a redeposit by one bank in another is the same bank­
ing business which is presented by the rediscount, naturally and
Mr. S prag ue . \es; it is a reserve, though it does not become a
legal reserve.
Senator B r o o k h a r t . The legal reserve is compelled to be rede­
posited in the reserve bank.
Mr. S prag u e . Yes.
Senator B r o o k h a r t . At no rate of interest.
Mr. S p r ag u e . No.
Senator G lass . We.rescued the legal reserve from the stock market.
Senator B r o o k h a r t . Yes; but the redeposit business o f the country
is two or three times as great as the legal reserve.
Senator G la ss . I know it is.
Senator B r o o k h a r t . Probably four times, counting in the legal
reserve. There is not more than one-fourth of the surplus monev
that is redeposited from one bank to another in the W a l reserve.
Mr. S p r a g u e . I have not the figures before me. I should have
thought that is rather high. It is large, in any event.
Senator B r o o k h a r t . My thought has been that that is ;he best
resource, the surest resource, o f these particular funds is thi« redeposit business which does not go into the Federal reserve banks,
and that it ought to be taken in.
Mr. S p ra g u e . Taken into the Federal reserve banks?
Senator B r o o k h a r t . Yes.
Senator G lass . Taken in how and used in what w av*

Senator B r o o k h a r t • My thought is that it ought to be taken in
and that we ought to limit these things to the Federal reserve bank
and make our market tnere instead o f the stock exchange, and get
rid o f this gam bling business. I think we could do it easily

B R O K E R S’ L O A N S


Senator G la ss. It looks to me like your proposition would transfer
the gambling business to the Federal reserve system.
Senator B r o o k h a r t . I do not propose to do that. I would prohibit
it by law.
Mr. S prague. May I say that in the aosence of some amount of
speculative interest in any kind of property you do not have a satis­
factory market. One of the troubles in the matter of farm lands is
that there are very few people prepared to buy at bargain prices.
Senator B r o o k h a r t . You just complained that our speculative
prices is what has ruined us.
Mr. Sprague. Yes; when you go up. You have in your area a
situation in which at times pretty much everybody is speculating for
a rise, and when the decline comes there is practically no one in a
position, though prices go down, to take the land off the market.
A satisfactory market is a place in which there is sufficient public
interest so that when prices decline buyers will come in. At the
present time, for example, if certain securities were to drop 10 or 15
points there are large numbers of individuals eagerly waiting for
that to happen, because they wish to buy those securities at a price.
When inventories of raw materials are thrown on the market, buyers
are often conspicuous by their absence, and the same is even more
true in the case of urban real estate or farm land. I f you should
close the stock exchange and these other exchanges, no one would
feel as well satisfied with the securities that he holds. He would
find it exceedingly difficult to market them, and, consequently, would
in all probability not continue to hold them.
Senator B r o o k h a r t . I will concede that, unless a new market is
established; but if we would have all these fast redeposits put in
the Federal reserve system, we would have the funds, the reserve
and everything, to create a new and legitimate market for those
securities. It seems to me it could be done more safely through the
Federal reserve bank system than it could through bank invest­
ments, listed bonds, or the stock exchange. I f we merely prohibit
one bank from paying another for these deposits, it seems to me that
would destroy our reserves. We would get the use of the legitimate
surplus funds in these banks, and they would be kept at home. I
want to keep that fund at home. But there would be a certain
amount that could legitimately go into the reserve all the time and
benefit everybody. I do not believe the United States Government
has to furnish a banking system to a bunch o f gamblers that are
buying on stock margins.
Senator G la ss. Y o u are proposing to have the United States fur­
nish a system for conducting gambling operations.
Senator B r o o k h a r t . N o. The Senator assumes that I am going
to transfer the gambling feature o f it into the Federal reserve system.
I would cut it out of the Federal reserve system.
Senator G la ss. They are using the facilities of the system now for
that very purpose, and that is what I want stopped, if anybody will
tell me how to do it.
Senator B r o o k h a r t . I agree that should be stopped, but I do not
so understand the administration o f the Federal reserve system. It
seems to me they are living up pretty well to the law as to rediscount
and speculative loans, but they are helpless, because there are



approximately three-fourths of the redeposits *of the country that
are going down there at a rate fixed by the gamblers themselves—
1% per cent.
The C h a i r m a n . Suppose we adjourn until 2.30. We will hear
Governor Young and some members of the Federal Reserve Board
(Whereupon, at 12.45 p. m., a recess was taken until 2.30 p. m.)

The committee resumed its session at 2.30 o’clock p. m., at the
expiration of its recess.
The C h a i r m a n . The committee will come to order.

Mr. Y o u n g . Professor Sprague has covered this whole situation
so well that there seems very little more for me to say.
I would like to have it understood by the members of the com­
mittee that any statement that I do make is a personal statement,
my own personal view, and not necessarily a view of the Federal
Reserve Board.
Now, with reference to the La Follette resolution, Resolution
113, it is perhaps best to consider some of the statements in the
preamble o f the resolution; and in order to bring that out properly,
it is perhaps best to review some of the credit conditions that have
developed in the United States in the last five years. I will have
to approach this entirely from the mechanical and operating stand­
point rather than the standpoint of theory.
During the last five years a large volume of gold has come to
this country. The banks have been able to expand credit on that
gold basis in large amount. The information that we have up to
June 30, 1927, which is the last date upon which figures are available,
shows that for the five-year period there has been a total increase
in bank credit in the United States, represented both by investments,
loans, and discounts, of approximately $14,000,000,000. O f that
increase we estimate that approximately $8,500,000,000 is represented
by loans to customers of banks; $4,600,000,000 is represented by the
increase in investment holdings, bonds, securities, etc. There has
been an increase of $950,000,000 in brokers’ loans in New York
City; an increase in acceptance holdings of $150,000,000; and a de­
crease in holdings of commercial paper of $200,000,000.
It is not necessary for me to explain again to the committee the
reason for the decrease in commercial paper held by the banks. That
was very fully covered by Professor Sprague this morning.
That leaves the picture on June 30 just about this: The total loans
and investments of all banks in the United States were in excess o f
$54,000,000,000. O f this amount it is estimated that $34,000,000,000
had been lent to customers; $17,000,000,000 represented bonds and
investments: $2,275,000,000 represented brokers^loans in New Y ork
City; $380,000,000 represented acceptances; and $570,000,000 repre­
sented commercial paper.
Senator G la s s . What is the amount of brokers’ loans!



Mr. Y o u n g . $2,275,000,000.
Senator B r o o k h a r t . That is just the members of the Federal
reserve ?
Mr. Y o u n g . All banks. I will explain those figures a little later,
if I may.
Senator G l a s s . Yes. Because there seems to be a very great dis­
crepancy between that and the figures we have had.
Mr. Y o u n g . That is true, and I will bring that out a little later,
Senator, if I may.
Now, I have used these figures for two reasons. One is to show
the tremendous increase in bank credit in the United States in the
last five years. The second is to remind the members of the com­
mittee that there are no legal restrictions that I know of as to how a
bank may lend its money, other than the legal restrictions as to the
amount it may lend to any individual person, or firm* or corporation;
or the amount it may lend on real-estate security.
Section 13 o f the Federal reserve act, an excerpt of which is quoted
in Senator La Follette’s resolution, defines the character and kind
of paper that a Federal reserve bank can rediscount, and I think Con­
gress properly defined the kind of paper that could be rediscounted.
Nevertheless, there are many investments that member banks can
make that are safe and liquid that are not included in the kind
o f paper that a reserve bank can rediscount.
In an attempt to interpret that part o f section 13 of the Federal
reserve act, I can see where the officers o f a reserve bank might
properly say to a member bank that came to it with eligible paper
and stated to the reserve bank that their sole object in rediscounting
the eligible paper was to lend the proceeds on call in New York— I
can see where a Federal reserve bank could properly discourage
that procedure, and I do not think it makes any difference as to
whether the funds were to go into speculation on the New York stock
market, or whether they were to go into speculation in commodities.
I think in any event the reserve bank could take that position. From
a practical standpoint, however, that is not what happens. What
happens is that the lending always precedes the rediscounting. In
other words, the banks make their loans, and then because of the
withdrawal of deposits, they come to the Federal reserve bank and
ask for assistance. Now, even though a member bank lias legally
made loans on real-estate security, or upon installment credit, or
otherwise, I hardly think that the Federal reserve bank is in a posi­
tion to deny credit to that bank when it comes with eligible paper.
What really happens in the entire banking system o f the country is
that the loans are first made by the banks, and then, because o f the
withdrawal o f deposits, if they are short in their reserves, they come
to the reserve bank for assistance, and tradition takes care of the
situation in 99 cases out o f 100; that is, the tradition that has been
established in America, which is, that banks do not want to show
money borrowed from the reserve banks. In a great many cases the
banks will get out o f debt promptly by calling street loans, or other
advances, and no action is necessary on the part of the Federal
reserve bank.
Senator G l a s s . Well, Governor, you, o f course, have a system of
bank examinations?
Mr. Y o u n g . Yes, sir.



Senator G la s s . A thorough system of bank examinations?
Mr. Y oung. Yes, sir.
Senator G l a ss . Which apprises the management of the Federal
reserve bank of the exact condition of the member banks?
Mr. Y o u n g . Yes, sir.
Senator G l a ss . I f the administrative officers of the Federal
reserve bank should judge, from the report of its examiners, that
the bank is doing an unsafe business, do you think it is within the
discretion of those administrative officers to deny it rediscounts, even
though it presents eligible paper ?
Mr. Y o u n g . I think, Senator, that a reserve bank would have that
discretion. What actually happens is that the reserve banks gener­
ally advance credit on the bank’s eligible paper, and call the officers
o f that bank in and talk the situation over.
Senator G l a s s . They do that ?
Mr. Y o u n g . They do that; yes, sir.
Senator G l a s s . Then what would be the objection, the officers of
the reserve bank seeing that a member bank has excessively extended
its call loans, to calling the officers of that bank in and suggesting
that a greater proportion of its loans be withdrawn from the
market ?
Mr. Y o u n g . N o objection to it at all in ninety-nine cases out of
one hundred. There might be some emergency in the country where
it might be well to let them go on. But there is no reason why the
reserve banks should not do that, in my opinion.
Senator G l a s s . I have understood they had a very great aversion
to doing anything of that kind.
Mr. Y o u n g . I do not think so, Senator. I will cover that a little
Senate Resolution 113 has to do particularly with the brokers’
loans, and in the preamble of the resolution figures are stated that
were published by the Federal Reserve Board on January 11, 1928,
$3,819,000,000. O f that amount New York banks had lent $1,321,000,000. The banks outside of New York had lent $1,502,000,000;
and the others, the corporations, individuals and foreign govern­
ments had lent $996,000,000.
Those figures are a good bit higher than the June figures referred
to earlier.
I have recently been appointed a member of the Federal Reserve
Board, and what I am going to say from here on is information I
have gathered largely from the records of the Federal Reserve
Board. I find that brokers’ loans first came seriously to the atten­
tion o f the Federal Reserve Board in October, 1917. They were
under discussion continually from then on. It took quite a time
to set up the machinery so that these figures could be secured. On
January 6, 1926, the Federal Reserve Board felt that it had some
information that it could give to the public, and one of its reasons
for giving the information to the public at that time was that the
information itself might have a deterrent effect on any undue expan­
sion of brokers’ loans. Shortly after January, 1926, there was quite
a reduction m the volume of brokers’ loans in the United States.
Whether the action o f the Federal Reserve Board in publishing the
figures brought about the reduction or not, I am not prepared to
say; but, in any event, that is what happened. Starting with the

B R O K E R S’ L O A N S


middle of 1926, there was a gradual increase in the volume of brokers’
loans until they reached the figures mentioned in Senator La F ol­
lette’s resolution.
It is interesting to note that on February 29, 1928, the last figures
that are available, the total volume of credit extended to brokers
by banks in New York and outside of New York was actually
$4,000,000 smaller than on January 6, 1926. In other words, on
January 6, 1926, the banks had lent to brokers and dealers $2,577,000,000; on February 29, 1928, the volume amounted to $2,573,000,000. N owt, the increase in brokers’ loans between, January 6, 1926,
and February 29, 1928, came about entirely in the advances that
were made bv corporations and individuals. That shows an increase
of $585,000,000.
With that picture before the Federal Reserve Board of the in­
crease in this particular form of credit, naturally the board made
some investigations through such channels as it could. My own idea
of investigating was to answer several questions. The first ques­
tion was, are brokers’ loans safely and conservatively made? From
all the information I can gather, I do not think there can be any
question about the safety of those loans at this time and of their
The second inquiry that I made of myself was this: Is this volume
of credit that is going to the stock market denying commerce and
industry credit? I can find no evidence o f credit being denied to
commerce or productive industry.
The third inquiry I made of myself was this: Are brokers’ loans
a part o f the necessary credit structure of the country, or are they
based upon unwarranted speculation? I find that you can answer
that both ways. Part o f the brokers’ loan account is a legitimate
credit function in America at the present time. Some of it no
doubt is based upon marginal accounts, which borders very closely
upon speculation, if it is not actual speculation. It is sometimes
extremely difficult to say where speculation starts.
Assuming that some of this credit has been used for speculative
purposes, the next inquiry I made of myself was: Is any of the
reserve credit of the Federal reserve system being used for that
purpose. Naturally, we look to the rediscount functions first. We
went to the comptroller’s office and made inquiries there, and we find
that they have no evidence at all of banks borrowing from the
Federal reserve system and simultaneously lending on call oil the
New York stock market, except for very short periods. That I will
cover a little bit later. So I think that the board is safe in saying
at this time that, in so far as the rediscount facilities of the Federal
reserve system are concerned, that they are not being used to further
the brokers’ loan account. I do not mean by that that a bank never
borrows from the Federal reserve system when it is a lender on
call. It frequently does, but it is of very short duration, a day or
two or three or four days; possibly, in some extreme cases, 30 or 60
Senator G l a s s . Coming back to the volume of brokers’ loans in
February, 1928, contrasted with the total o f such loans in January,
1926, what is the relative increase in brokers’ loans w ith respect to
the increase in commercial loans for the same period of time ?
Mr. Y o u n g . In dollars and cents or percentage?



Senator G l a ss . Well, either would give me the information I seek.
Mr. Y o u n g . Well, I have not the figures, Senator, to give you that.
I have the figures between 1922 and 1927.
Senator G l a s s . Well, that would practically cover it. I just
wanted to see whether the amount of loans to brokers was, by com­
parison, greater now than it was in 1926.
Mr. Y o u n g . Well, I have not those figures, Senator, between 1926
and 1928. I can make this statement to you, that between 1926* and
1928 there has been no increase in brokers’ loans so far as banks are
Senator G l a ss . I understand, but the individual and corporate
loans had increased the total volume.
Mr. Y o u n g . Doctor Goldenweiser will furnish those a little later
on, if that is all right.
Senator G l a s s . Oh, yes. It is not very material. I just wanted to
find whether there had been a greater increase in loans to brokers on
the stock market than there had been an increase in commercial
rediscounting, relatively.
Mr. Y o u n g . I might explain that this figure in the preamble of
the resolution, where it shows that the commercial paper outstanding
decreased from $925,000,000 in October, 1924, to $610,000,000 in Octo­
ber, 1927, that those figures only cover paper that is issued by concerns
that float their paper through note brokers; that would not include
the paper of the jobber or wholesaler, or country merchant, who
do not deal with a note broker; it would not cover any agricul­
tural and livestock paper, of course. Those figures would be included
in the figures that I furnished a little earlier, showing that between
1922 and 1927 there had been an increase in the loans to customers—
that would include the country merchant, the livestock man, the
jobber, and the wholesaler, and in that there has been an estimated
increase in five years’ time of $8,500,000,000.
Senator G l a s s . Yes.
Mr. Y o u n g . Unfortunately the Federal reserve system has not a
strict classification, and it would be almost impossible to give it.
Now, if I may repeat, I think, in so far as the rediscount facilities
of the Federal reserve system are concerned at the present time, there
is very little, if any, reserve-bank credit obtained to be relent on
brokers’ loans.
The only other possible influence that the Federal reserve system
might have on the volume of brokers’ loans is through its openmarket operations. In other words, if for some policy reason the
Federal reserve banks should elect to buy securities in the market, in
the great majority of cases that would have a tendency to ease the
money market. Whether as a result some reserve-bank credit drifts
into the stock market or not, it is very difficult to say. The proba­
bilities are that some of it does get there. But, on the other hand, if
the Federal reserve system elects at some time to sell securities'in the
market, they take a corresponding amount of credit out of the market.
That, m like manner, may affect the brokers’ loans, or may not affect
the brokers’ loans.
Senator G la ss. What is the primary purpose o f the Federal re­
serve bank in going into the open-market activities?
Mr. Y o u n g . The primary purpose------



Senator G lass (interposing). Is it to enforce its rediscount rate in
some instances, or is it to use its idle funds in other instances in order
that it may defray the expenses of the system ?
Mr. Y o u n g . N o , sir, Senator; it engages in open-market opera­
tions for many reasons, the primary reason is the gold movements.
Senator G l a s s . You know there was a very bitter complaint and
very persistent objection to the Federal reserve banks engaging in
open market transactions, as being in competition with the activities
of member banks and individual banks. The instant response to
that early objection was to the effect that the open market provision
o f the act was intended to enable the reserve bank, in the one case,
to make its rediscount rate effective in its district; and, in the second
place, to afford it an opportunity to utilize its idle funds, in order
that it might be sure to defray the expenses of the system. I just
wondered whether or not other reasons for open market activities
had developed in the course of the administration of the system ?
Mr. Y o u n g . I think the open market operations tend a great deal
to make effective a rediscount rate. That, I think, has been demon­
strated several times. The open market operations of the last five
years, I should say, have been based largely upon gold movements.
Now, i f credit has expanded too rapidly, that is, bank credit in the
United States recently— and there is evidence that it lias expanded
too rapidly, and it has not been required by commerce and in­
dustry— the resolution inquires as to what corrective measures the
Federal reserve system can adopt. In the first place, we can resort
to some publicity, which we already have done. There is a question
whether that produces beneficial results or not.
W e can, through the open market, sell securities, which has a
tendency to tighten credit. Since November 15, the market has lost
$150,000,000 through the earmarking, or exportation of gold, and
these withdrawals have not been offset by the reserve system. In
addition to that the system has sold $150,000,000 of Government
obligations. That is a total o f about $300,000,000 out of the market.
In addition there has been a raise in the rediscount rate at all of the
Federal reserve banks during the last three months. There has been
some contraction of credit and money rates have firmed somewhat.
Senator G l a s s . W hy should not the rediscount rates be raised in
all the Federal districts ? Are there not differing conditions in the
various Federal reserve districts?
Mr. Y o u n g . I am not a believer in the uniformity of the rediscount
rate at all times and under all conditions at all o f the Federal re­
serve banks. The fact that the rate is now 4 per cent at all the
banks comes about as the result of the action o f their directors.
Senator G l a s s . Does not that come about because the directors
have been taught to believe that the Federal Reserve Board here
at Washington has established the policy o f uniform rediscount
rates throughout the United States?
Mr. Y o u n g . Well, I would be very sorry, Senator, if they did
have that feeling. I can see why they possibly might have felt that
way, but I think that at the present time the directors of the Federal
Reserve banks do not have that feeling.
Senator G l a s s . I can readily see how a rediscount rate on the
Atlantic coast, in Boston, New York, and perhaps at Philadelphia
might have some reflex influence on foreign exchange, and how it



might have an influence on the general credit system in European
nations; but do you think the rediscount rate at Minneapolis or
Dallas or Atlanta could possibly or appreciably affect the foreign
Mr. Y o u n g . N o , sir; I do not. That is my own opinion, Senator.
I think that the fact that there is a uniform rate in the Federal
reserve system now o f 4 per cent comes about largely because 4 per
cent is closer to the normal rate in the interior than a 3y 2 per cent
rate. I f the uniform rate idea is to be discontinued in the future, I
think we will not see any evidence of that until there is a reduction
in rates, and the reduction may come from the east and not from
the interior. I am expressing my own opinion, and not necessarily
those of my associates.
Senator B r o o k h a k t . What is the effect o f this lowering and rais­
ing of the discount rate on price levels?
Mr. Y o u n g . Oh. that is a big question, Senator. I am not prepared
to answer.
Senator G l a s s . It is more quickly reflected in call money than it
is in ordinary commercial transactions, is it not i
Mr. Y o u n g . Yes. sir.
Senator B r o o k h a r t . It is finally reflected everywhere in a gen­
eral way, is it not I
Mr. Y o u n g . I f it is continued long enough. Senator.
Senator B r o o k i -ia r t . N o w , Senator Glass suggested that a different
rate at Dallas might not have any effect on the whole situation, but
it would contribute its little proportion, would it not?
Mr. Y o u n g . Under very unusual conditions, it would have a very
small effect.
Senator G l a s s . Well, does it have a very appreciable effect in the
district itself ? Do you think the banks generally, where there is
an inappreciable change in the rediscount rate in the interior Fed­
eral reserve bank, reflect that alteration in their loans to the ordinary
customer ?
Mr. Y o u n g . I do not think so; no.
Senator B r o o k h a r t . Would you not say that this recent raise had
caused rates to go up a little?
Mr. Y o u n g . I do not think it is the raising o f the rediscount rate
that brought that about, except the psychological effect it may have
on the public. I think it was the actual selling of securities and the
contraction o f credit that brought the rates up a little.
Senator B r o o k h a r t . It is the psychological effect that puts call
money up and down?
Mr. Y o u n g . I thought you were speaking of the direct result.
Senator B r o o k h a r t . N o : but as soon as a bank has to pay more
for rediscount money it will have to get more on its loans to keep
even, from their customers?
Mr. Y o u n g . That is true, if they can get it, Senator.
Senator G l a s s . Well, Governor, when the margin is very great,
as it is in some of the Western States, it does not seem to me it has
any appreciable effect. I f the local maximum discount rate in a
given State is 8 per cent and the rediscount rate at the Federal
reserve bank is 4 per cent, if the rate is reduced to 3%, or raised to



4%, do you think the average banker, authorized by State statute to
charge a maximum discount rate of 8 per cent, ever reduces his rate?
Mr. Y o u n g . I do not.
Senator G l a s s . Neither do I. He may do it here and there to a
very large borrower to whom an inappreciable change in rate might
mean something, but to the average borrower from the bank he does
not do it.
Mr. Y o u n g . The rate is approximately the same. There are a few
cases that you can cite that this man or the other may get a lower
rate. But the rate to the farmer, the livestock man, and the ordinary
borrower usually is the same rate year in and year out.
Senator G l a s s . Usually the maximum rate that the State permits.
Mr. Y o u n g . N o t alw ays.
Senator G l a s s . Well, I have not seen it differently.
Mr. Y o u n g . Well, I was informed on good authority that feeder
loans w ere made in Kansas last year at 5y2 and G per cent. That was
a little under the regular rate. Many of the banks preferred to take
that rate on feeder loans than lower rates on call loans, feeling that
they had a good loan, and they would rather lend their money to the
feeders than on call loans.
Senator B r o o k h a r t . Our maximum rate by law is 8 per cent, and
I think a little more than half o f the banks charge that to the
farmers. The farmers always get the worst of it. There are loans
in the eastern part of the Slate which are mostly at 7 per cent, in­
cluding Cedar Rapids, which has been mentioned. And I have
found some loans made as low as 6 per cent on the eastern side of
the State, where they do not charge uniformly under the law at all.
That is the maximum they can charge by law.
Senator G l a s s . Well, that is exceptional, because in my inter­
course with and observation of banks and bankers I have found that
what they call the standard rate o f interest is a fetish, and they
never abandon it if they can avoid it. O f course, there are excep­
tional cases where an individual or a concern borrows a great deal
o f money; he may get some slight concession. But they maintain
the standard authorized rate as a general proposition.
The C h a i r m a n . Do you not think that is more especially true
where the maximum legal rate is more nearly the commercial com­
petitive rate?
Senator G l a s s . That may be so.
The C h a i r m a n . I know in South Dakota we have a similar situa­
tion as Iowa. The western part has a higher rate than the eastern part.
Senator G l a s s . Why is money higher in one part of the State than
in the other?
The C h a i r m a n . I believe there are two reasons: The deposits in
those banks are small; but there is also a big reason in that where the
country is sparsely settled, the expenses of handling are large.
Senator B r o o k h a r t . On that proposition I want to ask some ques­
tions o f someone, probably Mr. Platt, of the effect on the Federal
reserve system o f these interest rates; but I understand Governor
Young has been in a very short time with the board. I want to ask
questions in connection with why interest is not paid on balances
carried with the Federal reserve bank, and its effect on interest rates
generally. Would you be able to explain that, Governor?



Mr. Y o u n g . W o u ld you be k in d enough to repeat th at question*
Senator B r o o k h a r t . I say, in answer to the question of why inter­
est is not paid on the reserve balances carried in the Federal reserve
bank and the effect on interest rates generally if that were done.
Mr. Y o u n g . Well, if the Federal reserve banks paid interest upon
deposits they would have to employ much of their reserve funds in
the open market to earn sufficient to enable them to pay the interest.
Senator B r o o k h a r t . What effect would that have on the general
interest rate ^
Mr. Y o u n g . It would have the effect, I think, of lowering the rate,
creating an unusual and unwarranted expansion of credit throughout
the United States. It is hard to tell what it would eventually
develop into.
Senator G l a ss . Would it not develop into the wreckage of the
Federal reserve system very soon?
Mr. Y o u n g . I think so, Senator. In other words, you have got to
bear in mind that a Federal reserve bank is a reserve bank and not a
commercial bank.
Senator B r o o k h a r t . And this redeposit is as much a business as is
rediscount, is it not? Naturally and likely a redeposit from one
bank into another bank?
Senator G l a s s . But the redeposit is with the bank that does a com­
mercial banking business, and not strictly a reserve banking busi­
ness. It is with the bank that engages in all sort of activities. It
is with the bank that is receiving millions of dollars of the deposits,
perhaps, from the public which the Federal reserve bank does not
Senator B r o o k h a r t . But it is with a bank that is competing with
the commercial banking business.
Senator G l a s s . No.
Mr. Y o u n g . No; I do not think so.
Senator B r o o k h a r t . N o w , the law requires deposits in the Federal
reserve members. O f course, there is no interest rate can be paid
for the use o f those reserves. It permits any surplus funds of the
member bank to be deposited in the Federal reserve that wants to do
it; but it allows no compensation if it makes such deposit. Under
that situation the New York banks have a monopoly, practically, of
this redeposit business, except that portion which the law requires to
be put into the Federal reserve, and they can take it away from the
reserve bank by putting on a very low rate of interest for it. Is not
that the situation ?
Mr. Y o u n g . They can not take anything away from the Federal
reserve banks, Senator, that the law requires the member bank to
carry with the Federal reserve bank.
Senator B r o o k h a r t . N o; but I am complaining now that the
law should put all the redeposits into the reserve bank because it is,
as Doctor Sprague says, a reserve-bank business.
Senator G l a s s . Then do you think the law should also be altered
so as to allow the Federal reserve bank to do general commercial
business ?
Senator B r o o k h a r t . I think one part o f the reserve business is to
do the big reservoir business, and it does not do its function.
Mr. S p r a g u e . May I answer that question, Mr. Chairman?
The C h a i r m a n . Go ahead.

B R O K E R S’ L O A N S


Mr. S p r a g u e . There are $1,500,000,000, apparently, o f balances
held with other banks within the reserve banks which might, per­
haps, be regarded as additional reserves held by the banks of the
country. I take it that the Senator’s proposition would be to the
effect that these might be transferred to the reserve bank, the reserve
bank paying at least the equivalent the existing banks pay, and per­
haps to make it certain that they would go there rather than to the
New York banks, that that be the only place they could go, but the
banks to be allowed 2 per cent, or thereabouts, so that they would lose
no money. Now, the banks would have an additional $1,500,000,000,
on which they would pay 2 per cent—that is, $30,000,000. That
means that it would be necessary for the reserve banks to do about
$600,000,000 or $800,000,000 more business in order to pay that in­
terest, since their present earnings are no more than enough to pay
their operating expenses and the limited dividends on the stock. The
ways in which the reserve banks could use this $600,000,000 or
$800,000,000 would be, under the existing law, to buy more accept­
ances, and buy more Governments. Then you put that money into
the market. After it has reached the market the reserve banks would
have no more control over it. It would probably drift, in large
measure, into brokers’ loans, and into other uses which it now finds.
Senator P i n e . It is now in the market, is it not ?
Mr. S p r a g u e . It is now in the market. You divert it from the
banks to the New York banks; they would still-----Senator B r o o k h a r t (interposing). I tell you what I propose to
do there, Doctor Sprague. I propose to put the loans on the same
ground as the Federal reserve. It w^ould not go into those loans.
Mr. S p r a g u e . You w ould put it-----T
Senator G l a s s (interposing). How long do you think you would
have member banks ?
Senator B r o o k h a r t . I should meet that, perhaps, by providing
that the State banks should comply with the same rules or be denied
the use o f the United States mails.
Senator G l a s s . Y ou are revolutionizing the entire banking busi­
Mr. S p r a g u e . I simply wished to carry it as far as would be neces­
sary, unless there is prohibitive legislation.
Senator B r o o k h a r t . I would concede that unless there is farther
prohibitive legislation it would do substantially as you say.
Mr. S p r a g u e . Might I suggest then that the transfer to the reserve
banks would be surplusage? W hy not content yourself by pro­
hibiting these reserve loans?
Senator B r o o k h a r t . I would be glad to get that much. I f I
could get the committee to report that out I would be glad.
Mr. S p r a g u e . That would be surplusage.
Senator B r o o k h a r t . I would be glad to have the one bank pro­
hibited from paying another bank. I think Senator Glass’s course
then-----Senator G la s s (interposing). That is the same proposition.
Senator B r o o k h a r t . But Senator Glass’s proposition goes further
than I do, because that would not permit a sufficient use o f this
reservoir, which might be legitimate. It would keep the funds at
home. Now, here is what I have figured out about the Federal
reserve system and what it does now. A fter all the camouflage, this



is what it does: It takes the redeposits and it loans on rediscount
when a bank wants to borrow. Those are the only two things that it
ought to do. This law, as it stands now, can only meet a part of that
business. The doctor says there is $1,500,000,000. I had an* idea
there was more than that; but that is a vast sum. That business it
can not transact under this law, because it can not take anything
for it, and the neighbor bank can, and it takes it away from this
bank. Now, then, what is its service to the public? The public, in
the first place, wants an elastic currency, but that is to enable it to
do those two things that are proposed. And then there are the big
things, like financing a war, that we need the help of our reservoir.
That is all right. But the biggest and most important thing, if it
does make a more efficient use of the credit supply of the country,
it does it by transferring it from one business to another and from
one place to another when needed, and that would have the logical
effect of an increased credit supply and would naturally lower the
interest rate to the public generally. And if a reserve bank is not
going to lower the interest to the public generally, it has no warrant
for being created for the public by law. That is my general idea.
Senator G l a s s . H o w can the reserve bank lower the rate in Iowa,
where the State legislature says that your discounting bank may
charge 8 per cent ?
Senator B r o o k h a r t . H o w does it happen that it is lower in some
parts of the State than in others?
The C h a ir m a n . D o you not think it would be better to let the
governor go ahead and complete his statement ?
Mr. Y o u n g . Senator, in reply to your question with regard to
commercial loans between January, 1926, and February, 1928, Doctor
Goldenweiser furnished the figures that on January 6, 1926, the
amount o f commercial loans in about 650 weekly reporting member
banks amounted to $8,317,000,000. On February 29, 1928— the last
date for which figures are available—it amounted to $8,672,000,000.
During that time brokers’ loans have increased from $3,141,000,000
to $3,722,000,000; but, as I pointed out before, that increase does
not come in the bank credit, but in loans by individuals, corpora­
tions, and others that make them. The actual figures are, so far
as banks are concerned, in January, 1926, they had $2,577,000,000
loans on the call market in New York, brokers’ loans, and in Febru­
ary of this year they had $2,573,000,000; in other words, a reduction
o f $4,000,000 in brokers’ loan accounts.
Senator G l a s s . That is what I wanted.
Mr. Y o u n g . I have consumed a good deal of time, and I want to
conclude my remarks in reply to the specific resolution 113, by saying
that from all I can observe there has been a tremendous expansion
of bank credit in this country, some in brokers’ loans and some in
other loans at the same time, and I can not discover anywhere where
commerce and industry has been denied credit for the benefit o f
making these brokers' loans. Investment credit has developed in this
countiv at a tiemendous pace, and that, no doubt, has resulted in a
credit basis that has contributed to the growth in brokers’ loans. I
am com meed that the rediscount facilities o f the system have not
been abused to support this expansion. I think it has come about
largely by the gold that has come into the country. I f there is any
action that can be taken to arrest this expansion o f credit— the system



has already done something by taking $300,000,000 out of the market
and raising the rediscount rate.
Now, I am not prepared to say whether the brokers’ loans are
too high or too low. I do not think anybody else can say so. I am
satisfied they are safely and conservatively made.
Senator G la s s . Would you not modify that and say they are safely
Mr. Y o u n g . Yes; I am, however, speaking from the Federal
reserve-bank standpoint. I do not think the Federal reserve should
say whether they are too high or too low. Now if there is a further
expansion o f this brokers’ loan account and it gets to the place where
it is dangerous and borders on unwarranted speculation, I have
enough confidence in the American banking fraternity to believe
they can correct that situation themselves. I f they can not, however,
and it is necessary for them to come to the Federal reserve system,
the Federal reserve system has still got the corrective measures I
have mentioned. My conclusion is that there is no constructive legis­
lation that I can recommend to this committee at the present time.
The C h a i r m a n . Does that conclude your statement ?
Mr. Y o u n g . That concludes my statement.
The C h a i r m a n . Is there any other member of your board that
wants to say something ?
Mr. Y o u n g . They are all here. Mr. Platt is here, and so are Mr.
Cunningham and Mr. Hamlin.
The C h a i r m a n . Is there any member o f the board here that can
throw any light on the subject ? I f so, we will continue a while.

Mr. P l a t t . It seems to me, Mr. Chairman, it has been very fully
covered. Just two or three things occur to me, not as remedies,
but in the line o f legislation that might in the long run be a little
In the first place credit has expanded very greatly because of the
growth o f time deposits, over which we have no control whatever.
They have grown very much faster than demand deposists. De­
mand deposists are presumably purchasing power for commodities
rather than for securities, whereas time deposits are purchasing
power which naturally goes into securities or into long-term invest­
ments. Through the fact that the Federal reserve system provides
a 3 per cent reserve for time deposits, and a varying reserve for
demand deposits according to the size o f the town, 7 per cent in coun­
try banks, 10 per cent in reserve cities, and 13 per cent in New York
and Chicago the banks are supposed to have purposely shifted into
time deposits so as to take advantage of the lower reserve. I do
not think that can be demonstrated. I do not think you can figure
how they could make it profitable with the interest paid on time
deposits. Up in my territory on the Hudson River the banks are
now paying 4 y 2 per cent for time deposits. It seems to me an out­
rageously high rate. How in the world they can get away with it
I do not understand, and I have told some of them that they can
not make it pay.
95062— 28-------6



The C h a i r m a n . That is more than in the Northwestern States.
Mr. P l a t t . More than in North Dakota or South Dakota.
Senator G l a s s . The Virginia General Assembly last week put a
limitation o f 4 per cent on deposits, and I think' that is too high.
Mr. P l a t t . I think that is too high myself.
Senator B r o o k h a r t . I want to commend the Virginia General
Assembly for exercising their right and power there in doing that.
The C h a i r m a n . What is their legal rate of interest?
Senator G l a s s . Six per cent.
Mr. P l a t t . In upstate New York they started to pay 4y 2 per cent
themselves because the mutual savings banks pay it. And in New
England something over one-third of the mutual savings banks pay
5 per cent. I think 68 out of one hundred and sixty-something—is
that right, Professor Sprague?
Professor S pr a g u e . Yes.
Senator G l a s s . Mutual savings banks are cooperative investment
Mr. P l a t t . Mutual banks are cooperative investment associations,
and they have no stockholders, and their depositors are entitled to
everything they can make. And furthermore they are limited as to
the amount of deposit they can take from one person. In New York
State they can not pay interest on more than $7,500, unless the sum
in addition to that has been accumulated out of interest that has
been added. In my old home town we have a mutual savings bank
w ith $19,000,000 deposits in a city of 35,000 people, paying \ y 2 per
cent, and the average account is about $600. No interest is paid on
amounts above $7,500. But in some parts of the country commercial
banks pay interest on what they call savings deposits amounting to
$50,000 and $100,000. I talked with a banker not long ago who said
that he was paying 4 per cent interest I think on one account of
$100,000 put in his bank by a corporation. And they call it savings.
Now what I think might be somewhat helpful is that either Con­
gress might give us some more accurate definition of what should be
regarded as savings, or give the Federal Reserve Board authority by
regulation to prescribe what should be regarded as savings or time
deposits. A t the present time we feel doubtful whether we have
got quite authority to say that a savings account should be an account
on which no checks can be drawn. There are in some places savings
accounts on which checks are drawn outside and come into the bank
through a clearing house. They do not require a pass book to be
presented in all cases. We tried to enforce a regulation that pass
books must be presented. But our counsel thinks we have not quite
got authority to describe definitely that savings accounts shall not
be subject to check. It would be some help, not immediate, of course,
if w e could have some little more authority on that line, or if the
act could define savings more fully.
And then there is the matter of the redeposit of one bank in another
with relation to the reserve requirements. At the present time New
York and Chicago keep a 13 per cent reserve on the deposits o f other
banks and on all deposits except their time deposits, and time de­
posits do not figure largely in New York. They keep the 13 per cent
o f reserve on nearly everything. But there are cities o f considerable
size, like Providence, R. I., Hartford, Conn., Newark, N. J., and I

B R O K E R S’ L O A N S


could mention a good many western towns, that are not reserve cities,
where they do have bankers’ deposits to some extent on which they
only keep 7 per cent reserve. Obviously they are likely to have
more surplus funds to throw into the New York market with these
redeposits on a 7 per cent reserve than if they had to keep 13 per
cent, and where redeposits are made they ought to be made mostly in
reserve cities or central reserve cities. They ought not to be made
in small banks that often can not loan them locally. So it would be
some advantage, probably, if we could have a requirement of 13 per
cent reserve on bankers’ deposits wherever located.
Then there is one other little item which I might perhaps mention.
It seems to me that a whole lot of money is thrown into the invest­
ment market all the time by the rather unnecessarily rapid payment
of the public debt, and if the Congress could pass some kind of a
tax reduction bill and leave in the hands of the public a little more
purchasing power instead of bringing it to the Treasury and having
it paid out to bondholders who must necessarily reinvest it, that
would tend possibly to more moderation in speculation.
I do not say that the present situation is dangerous. I do not be­
lieve anybody can tell whether it is or not definitely. I do think
that the rate o f increase in brokers’ loans that was going on in
January was enough to make people do some thinking. And as you
know, as the governor has pointed out, the board has undertaken to
test the market a little. I think that is about all we can do, to test
and see whether it is all due to cheap money, or whether there are
some other underlying reasons for it.
The C h a ir m a n . D o you feel that this condition that developed in
New York led to an inflation where they were paying extremely
high prices for those securities ?
Mr. P l a t t . Well, it is pretty hard to say. Some of them are so
high that I do not think I would like to buy them at present prices.
The C h a i r m a n . I f evils have developed this may be one of them—
the fact that it tends to an absolute inflation.
Mr. P l a t t . It looks as if it was an inflation in the price of securi­
ties. On the other hand I do not believe anybody can positively
and definitely say that a security like United States Steel, for in­
stance, should not sell on a 5 per cent basis. At 140, paying 7 per
cent it sells on a 5 per cent basis. Now, maybe we have recovered
from the war sufficiently to warrant being on a 5 per cent basis.
I do not know. I do not see how anybody could tell. I doubt it
myself, but maybe we have. With all the saving o f capital that
Professor Sprague has told you about and everything, maybe there
is so much capital seeking investment that securities that appear to
be reasonably sound, with a future prospect perhaps ought to sell
on a 5 per cent or even a 4% per cent basis. I do not see how any­
body can tell positively.
Senator G la s s . D o you think that bets are always made with
reference to the soundness o f the security ?
Mr. P latt. Not always; but I think that is pretty generally true
with relation to the higher grade ones—such securities, for in­
stance, as the investment trusts all buy. There is another thing
injected into the situation. W e have had a tremendous growth in
investment trusts lately by which the smaller investor can put in a



thousand dollars and have his investment scattered among such stock
as American Telephone and Telegraph, United States Steel, etc. His
thousand dollars are spread among the whole lot of them so there is
not very much risk o f loss in the long run.
Senator G l a s s , I have in mind just a single security right now
among many others that occupy a similar position. It was quoted
in last January at 1081/4. There has been no change in the manage­
ment of the corporation, there has been no approximate increase or
diminution in the supply and sale of the product. The same security
is selling on the market, or was yesterday, at 69.
Mr. P l a t t . It was selling at 108 ?
Senator G l a s s . It was selling at 108 in January. It was selling
on the market yesterday at 69. Now, what is that but gambling?
Mr. P l a t t . I should think that came pretty close to gambling.
The C h a i r m a n . Unless they had a treasury default in the mean­
Senator G la s s . N o ; there has been no default at all.
Mr. P l a t t . But take a security like the Southern Railway, for in­
stance, that was selling a few years ago at 30 or 40. Now, it is
selling at 140, somewhere near there.
Senator G l a s s . Well, is it not a common thing to note that more
shares of a given corporation are sold in one day than are outstand­
Mr. P l a t t . Yes; I have heard that stated. But, of course, some
corporations like the Southern Railway are gradually being im­
proved. They are spending their money in building up the track,
in new equipment, etc., and after a while it is bound to show
in the price of the shares. As Professor Sprague pointed out this
morning the stock market is much broader than it used to be years
ago. Not everything is up. The oil stocks, for instance, are down
on account of overproduction in oil, and until recently the copper
stocks were down. The fertilizer stocks are all down, mostly. Some
things are down and some things are up. I think Mr. Lombard,
who represents Professor Fisher, once tried to tell me that stock
did not go up or down anyhow; that when one thing went up some*
thing else went down. I do not think that is true. The whole list
goes up sometimes.
Senator B h o o k h a r t . Let me suggest a proposition to you. I
recently checked the following companies: Allis Chalmers Manu­
facturing Co., American Smelting & Refining Co., the Bethlehem
Steel Co., Grain Products Refining Co., E. I. du Pont de Nemonrs,
Fleischmann & Co., General Motors Corporation, General Electric
Co.. National Biscuit Co., North American Co., United States Steel
Corporation, United States Smelting < Refining & Manufacturing
Co.. Youngstown Sheet & Tube Co., and from Poor’s Manual I as­
certained that the earnings in 1927 declined an average o f 11 per­
cent . That is the net earnings o f all those companies.
Mr. P l a i t . That is a pretty good list of companies.
Senator B r o o k h a r t . A pretty good list. But the stock values
increased an average o f 27 per cent.
Mr. P l a t t . Well, that looks unwarranted, and yet I do not know
those companies well enough to know, but I think the dividends they
are paying are pretty well buttressed in most o f them, even at the
reduced earnings. And, o f course, the public that buys them thinks

B R O K E R S7 LO A N S


th a t th e earn in gs are com in g back a ga in , w h ich they p ro b a b ly w ill
fo r som e o f them .
Senator B r o o k h a r t . But it is a gamble on whether they will or

not all the time.
Mr. P l a t t . Yes. Well, a good many other businesses are more or
less of a gamble.
Senator B r o o k h a r t . I want to inquire something about this power
that the Federal Reserve Board has in reference to discount rates.
I am not particularly concerned whether it is the central board or
the local boards. My view is the general power. What effect does
raising and lowering the discount rate have on prices generally ?
Mr. P l a t t . I do not believe it has much. That is something that
Representative Strong of the House is trying to make us admit, that
it has some effect. He wants to have the system managed primarily
to control the general price level.
Senator B r o o k h a r t . Well, if you raise the discount rate to 7 per
cent that would raise interest rates, would it not?
Mr. P l a t t . Yes, I should think it would.
Senator B r o o k h a r t . There is not any doubt about that.
Mr. P l a t t . Practically, but if we should do that arbitrarily it
would not do anything at all but throw-----Senator G l a s s . It would stop business.
Mr. P l a t t . It wouKl stop Federal reserve business. It would not
stop other banks. It would put our rates out o f line.
Senator G l a s s . Well, I mean it would stop Federal reserve
Mr. P l a t t . Yes.
Senator B r o o k h a r t . And raising of the iterest rates means a low­
ering o f prices.
Mr. P l a t t . That is the theory o f Professor Fisher and some other
people, but I do not believe that it necessarily follows.
Senator B r o o k h a r t . Well, as far as the land is concerned there
would be no doubt about it, would there?
Mr. P l a t t . Arbitrary raising of rates?
Senator B r o o k h a r t ." Well, any raising of rates, whether it is
arbitrary or not, the higher the interest rates the lower the prices
o f the land?
M r . P l a t t . The Federal reserve system's power to raise or lower
interest rates, the rates average borrowers pay, is pretty limited.
Unless there is a big volume of borrowing at the Federal reserve
banks, what we might do in raising or lowering the rates would not
have much effect.
Senator B r o o k h a r t . But would not the raising by you of the dis­
count rate raise interest rates?
Professor S p r ag u e . I f you raise the rate o f discount of Federal
reserve banks to 5 per cent, in so far as that might in the long run
affect the volume o f credit available, it would affect prices. But the
consequence o f it, in fact, in this situation would be in the first place
a speedy liquidation of rediscounts at reserve banks, and withdrawal
o f American balances held in London and New York with imports
o f gold, until in no short period of time the banks, quite independ­
ently o f the reserve banks, with the reserve banks doing no business
whatever-----Senator G l a s s . Exactly.



Professor S pr ag ue (continuing). Would have available the means
o f extending as large a volume of credit as they are extending, and in
those circumstances there would be no permanent effect on prices.
Mr. P l a t t . I think that is absolutely true.
Professor S p r a g u e . On the other hand if the member banks were
heavily indebted to the reserve banks, and had no balances abroad,
and you raised the discount rates, that would lead in a short period
of time to a contraction of credit in the country itself, with nothing
to replace it coming in from the outside, and prices would be reduced.
But at the present time it is impossible for the Federal reserve banks
greatly to reduce the volume o f credit. They could increase it by
enlarging the earning assets, but they could not diminish it except
very, very temporarily, because there are hundreds of millions of
American balances invested abroad that would be brought back to
this country in the form of gold, creating the reserves for additional
loans for the member banks.
Mr. P l a t t . That narrows our field of operation considerably.
Senator B r o o k h a r t . The immediate effect, though, even under the
professor’s statement, is to affect prices either higher or lower, de­
pending on which way you go with this rate, and then he figures out
circumstances which might finally bring us back to the former level.
But so far as the economic effect o f the reserve-bank action, it is to
raise or lower the prices?
Mr. P l a t t . I do not admit that it would have any appreciable
effect under the present circumstances at all.
Senator G l a s s . Well, as a matter of fact, under varying conditions
it has different effects. For example, the raising or lowering of the
rediscount rate in the Minneapolis district has an inappreciable affect
there because the member banks there do not rediscount. It does not
bother them the least in the world. The first effect of the raising of a
rediscount rate by a given Federal reserve bank is to somewhat
diminish the rediscount operations of the member banks of the
Mr. P l a t t . Yes.
Senator G l a s s . In other words, if a member bank had to pay a
Federal reserve bank 4 per cent for a rediscount rather than Sy2 per
cent it will do less discounting; is that not the fact?
Mr. P l a t t . That is the theory, but the rate is so low in those
western banks that according to the testimony of the managers of
the western banks, the governors o f the banks, it does not make any
difference on the volume of rediscounts whether the rate is Sy2 per
cent. 4 per cent or 4 y 2 per cent.
Senator G l a s s . N o t a bit on earth, because the margin between
the maximum and minimum legal rate o f interest out there is such
that it does not affect it.
Mr. P l a t t . In Texas the legal rate o f interest is 10 per cent.
Senator G l a s s . They offer a premium on rediscounting it. That
is why I object to this talk about a uniform rate o f interest. W hy
should you offer some bank in some part of the country a premium
a fortune on rediscounting?
Mr. P l a t t . Well, the difficulty is the difficulty of administering
the reserve banks due to the different classes of banks that we havel
the great number o f banks that we have, and the fact that some of
them are pretty large banks in the cities. For instance, Dallas has



some pretty big banks, whereas the west Texas banks are all small.
Now it is true that there are some borrowers in Dallas that are big
manufacturers, etc., who carry accounts not only in Dallas but in
Chicago and in New York, and if they do not get the rate they want
in Dallas they will go and borrow in New York. So that to some
extent it is difficult to fix a rediscount rate that is related to the big
city in which the reserve bank is located and also to the country
banks scattered outside. I f we had banks with branches it would
work differently.
Senator G l a s s . Would it be possible or desirable to graduate your
rediscount rate according to the rate on discount ?
Mr. P l a t t . Well, that has been somewhat discussed, mostly with
relation to the legal part of it. I think our counsel has said that it
might be possible to do that legally, but whether it would be practi­
cal or not I do not know. It is pretty hard to find out in the first
place just what your member banks are charging their customers on
all lines. W e ask to have that reported at times and we do make a
report o f it in our Bulletin. We do not get it on all cases, o f course.
Professor S p r ag u e . But might it not be said that it was at least
at present unnecessary inasmuch as the banks in Kansas City are
borrowing about $10,000,000 and the reserve bank in Kansas City,
and in Dallas slightly over $3,000,000, and in Minneapolis slightly
under $3,000,000. It is not a problem, because at no rate apparently
are these member banks in the interior districts eager to borrow.
Senator G l a s s . Well, that is an existing situation.
Professor S p r a g u e . Yes.
The C h a i r m a n . In other words the difference in the rate does not
stimulate the business.
Professor S pr a g u e . It does not.
Mr. P l a t t . N o.
Senator B r o o k h a r t . N o w , one of the troubles brought out very
clearly is that the legal interest rate is too high in some parts of the
country. Now, it seems to me that it is the duty of Congress, when
it establishes a banking system, to see that those legal interest rates
are not too high in any part of the country.
Senator G l a s s . That is the business o f your State legislature in
Senator B r o o k h a r t . It is so far as the State banks are concerned,
but it is the business of Congress so far as the national banks are
Senator G l a s s . Well, but a national bank is not permitted to charge
a greater discount rate than a State bank, the legal rate in the
Senator B r o o k h a r t . A ll right, if a State bank is permitted to
charge too high a rate Congress is under no obligation whatever to
follow that high rate.
Senator G l a s s . Yes; it is. I f there was a uniform banking system
throughout the country, if it was purely a national banking system,
there w ould be some substance to an argument o f that sort, but there
is a dual system.
Senator B r o o k h a r t . There was a time when the Congress legislated
with respect to the State banks of issue, but it has not gone far enough
in this national bank system to do justice yet to all parts o f the


B R O K E R S ’ LO A N S

country, and it could easily establish a rate and compel, by taxation
or denying the mails, the State banks to comply.
Senator G l a s s . Yes; but it could not compel people to take out
national bank charters, and if you ever did that they would take out
State bank charters, and the national banks would disappear.
Senator B r o o k h a r t . Not i f the State banks would have to comply
with the same rules. I want to ask Mr. Platt about this question of
lowering the rate. I think that is the big function of the bank, and
I have here Questions and Answers on the Federal Reserve System,
and question 170 on page 135 is:
Why is interest not paid on reserve balance carried with the Federal reserve

And here is the answer:
Because it is wrong in principle and would defeat one of the most important
objects for which the Federal reserve system was established, namely, “ to
afford means of rediscounting commercial paper.” If a Federal reserve bank
were compelled to use at all times a large percentage of its resources to pur­
chase paper in the open market for the purpose of earning interest to be
paid to member banks on their reserve deposits, it is manifest that this would
absorb funds to such a degree as to leave it without adequate resources to
meet the needs of its member banks in case of sudden emergency or for heavy
seasonal requirements.

I want to ask in reference to that answer if those assets would be
as basis for issuing Federal reserve notes to meet those sudden
emergencies or heavy seasonal requirements?
Senator G la s s . Issue them upon what ?
Senator B r o o k h a r t . Upon this money that w as invested.
Senator G l a ss . Just issue fiat money?
Senator B r o o k h a r t . No, issue the money that is p ro vid ed by law.
Mr. P l a t t . Not as the act stands now, because all we can do is buy
Government securities or acceptances, and we can not issue Federal
reserve notes on Government securities.
Senator B r o o k h a r t . The notes are not issued on Government
Mr. P l a t t . Not on purchased securities. And there is a pretty
definite limit on the amount of Government securities we can pur­
chase because of that fact. Every once in a while it has happened
within the past few years that we have had to shift from the Fed­
eral reserve bank at St. Louis, perhaps, or Minneapolis, some Gov­
ernment securities to New York and take acceptances for them in
order that they would have security on which to issue notes.
Senator B r o o k h a r t . Well, that is what I want to get, your au­
thority, what you can invest these funds in, and how much o f them
are based on the Federal reserve notes?
Senator G l a s s . Only commercial transactions in gold are the basis
o f issuance of Federal reserve notes, and to the extent that the Fed­
eral reserve banks have purchased these 2 per cent bonds that
authorize circulation.
Senator B r o o k h a r t . Yes.
Senator G l a s s . I do not imagine that is a very extensive asset of
the Federal reserve bank.
Mr. P l a t t . N o. Practically none.
Senator G l a s s . What?
Mr. P l a t t . I think they hold practically none of the 2 per cent
bonds now. They have held some in times past.



Senator B r o o k h a r t . What is there you could invest those funds in
that would be a basis of the Federal reserve notes?
Supposing that
the Federal reserve banks had deposited in them the money that is
now deposited in the corresponding banks, and suppose you pay
interest on what is deposited, and then invested enough to earn that
interest, say 2 per cent. You would have to invest around half of
it to get the money.
Mr. P l a t t . Well, I have not made a calculation, but about all we
could do, unless the member banks wanted to borrow, would be to
buy Government securities. And we could not issue Federal reserve
notes against those.
Senator B r o o k h a r t . Y ou could not issue Federal reserve notes
against those ?
Mr. P l a t t . No.
Senator G l a s s . In other words, you would transform the Federal
reserve system into an investment system.
Mr. P l a t t . Yes. We might exhaust our reserves after a while.
Senator B r o o k h a r t . N o w , they say in the next paragraph in
answer to that:
Moreover, even if this were not the case, member banks would probably lose
far more than they would gain if Federal reserve banks should pay them
interest on their reserve deposits. The reserve deposits held by all Federal
reserve banks amount to, approximately, $2,200,000,000. The payment of inter­
est at 2 per cent on this amount would require the Federal reserve banks to
keep invested at all times at least $1,100,000,000 at 4 per cent fur this purpose.
If this sum were invested by the reserve banks in Government securities, it
would not only dissipate the reserves as above specified but would have the
effect of increasing the supply of credit to such an extent as to force down
interest rates.

Now, that is what I want the reserve system to do, to bring down
those interest rates.
Mr. P l a t t . Where would it bring them down first ? Right in
New York City?
Senator B r o o k h a r t . Well, if it reaches the farmers finally, why,
I would not care.
Mr. P l a t t . I do not know that anybody could be sure that it
Senator G l a s s . Y ou never are going to reach any Iowa farmers
unless vou get the State legislatures to reduce the rate.
Professor Sprague. Senator, if you did that there are $1,200,000,000 o f additional reserve money. On that basis by conserva­
tive calculation the member banks could expand their own credit by
from six to ten billions of dollars, which would result without any
question in inflation of prices.
Senator B r o o k h a r t . That would reduce the interest rates some
Senator G l a s s . Yes.
Senator B r o o k h a r t . S o I would not object to that.
Senator G l a s s . But that would increase prices.
The C h a i r m a n . Now, are we not getting away from this bill?
We are getting onto the Brookhart banking bill and getting away
from the La Follette resolution.
Senator B r o o k h a r t . That is a part o f the resolution as fa r as
that is concerned.


B R O K E R S ’ LO A N S

The C h a irm a n . Let us not string it out too long and get away
from the subject.
Senator B r o o k h a r t (continuing reading) :
If the amount were used in the open market in the purchase of bankers
acceptances and bills of exchange—

Are those the basis of Federal reserve notes?
Mr. P l a t t . Yes; but there are not half enough of them in exist­
ence to invest that money.
Senator B r o o k h a r t (continuing reading) :
it would come in direct competition with member banks and by increasing the
supply of credit would likewise tend to force down interest rates under ordi­
nary conditions, * * *.

Mr. P l a t t . Those particular answers are not those of the Federal
Reserve Board. I do not particularly stand by them.
Senator G la ss. But they are pretty sensible answers, all the same.
Senator B r o o k h a r t . They sound to me like they hit the facts all
M r . P l a i t . But let me say this, Senator. The operation o f the
Federal reserve system does tend to some extent to reduce interest
rates, and it has had that effect. Now interest rates have gone down,
and that is one reason why, as Professor Sprague said this morning,
securities have gone up. Interest rates generally have gone down,
and the country banks themselves complain that they can not make a
living out o f lower interest rates. How can a bank with deposits of
$200,000 make money out of lending money at 5 per cent. It can not
be done.
Senator G la ss. Let me ask you this question, Mr. Platt: How
many o f the great banks in New York, or in the East, or in the
West either for that matter—in Chicago, St. Louis, Kansas City, or
San Francisco— would think of remaining in the Federal reserve
system if the Federal reserve system chose to take in a billion and
one-half o f bank deposits and pay interest on them and use that bil­
lion and one-half dollars in open-market operations in competition
with its own members ?
Mr. P l a t t . None of them would.
Senator G la ss. O f course, they would not stay in 24 hours.
Mr. P l a t t . N o.
Senator B r o o k h a r t . Well, now, the same competition exists on
the rediscount side of the business, does it not ?
Mr. P l a t t . Well, to some extent it does, and yet the banks that do
the rediscounting, the big corresponding banks that rediscount for
country banks, also rediscount with the Federal reserve bank.
Senator B r o o k h a r t . Yes; they do that, but that means that the
Federal reserve bank has gone into competition with its members in
rediscounting paper all over the country.
Mr. P l a t t . I do not think they regard it so.
Senator B r o o k h a r t . And is there not about as much and maybe
more paper rediscounted from one member bank to another, or rather
from one bank to another, than there is in the Federal reserve right
Mr. P l a t t . I do not believe we have any figures on that, but I
imagine that is true.
Senator B r o o k h a r t . Yes.



Senator G l a s s . Well, not available paper, I would not say. As a
matter o f fact where your New York bank or any other big bank
in a central reserve city does rediscount it is because it has got its
country correspondents fooled into the belief that they have to do
the rediscounting there in order to get accommodations when they
are in trouble, when they do not have to do anything of the kind.
Mr. P l a t t . I recently talked with an up-State New York banker
who had a $25,000 bank with a surplus of $75,000, a pretty good
sized country bank, who told me he was borrowing $100,000 from
the Chase National Bank in New York. I asked him why he did
not borrow from the Federal reserve. He said he could borrow
from the Chase National Bank at the same rate, sometimes a little
higher, but the point is he borrows on railroad bond,s or something
else that he can not borrow on from the Federal reserve.
Senator G l a s s . A s I say, on available paper.
Mr. P l a t t . And he keeps his bonds on deposit with the Chase
National Bank, and he telephones down to them and says, Put
$50,000 to my credit ” or $100,000. And besides that, the city banks
buy theater tickets and entertain the coufitry correspondents in vari­
ous ways when they come into town, which we are not authorized
to do.
Senator B r o o k h a r t . Well, so far as the authority is concerned,
we are talking about remedying the thing, and if it needed more
authority, that could easily be given so you could do what a mem­
ber bank could do.
Senator G l a s s . Would it go to theater tickets?
Mr. P l a t t . We are getting pretty far afield.
The C h a i r m a n . Yes; we are getting prettv far afield. Let us
get back and hold to the subject closely or else we will never get
Mr. P l a t t . I do not believe you can prevent brokers from getting
loans somewhere or other. Great increases have been shown by indi­
viduals outside o f the banks.
Senator B r o o k h a r t . The only point was Senator Glass’s sugges­
tion that this great competition with member banks would prevent
you from doing this thing, and that would prevent us from having
a reserve bank at all.
Senator G l a s s . No; you would not have any member banks or you
would not have any Federal reserve banks.
Senator B r o o k h a r t . Before this Federal reserve system, all this
was done by banks that are now members o f the reserve, so that
argument would not apply- I f it is a better way to handle this
reserve business in a reserve bank than in individual banks, it ought
to be done, or that is my opinion.
Mr. P l a t t . Well, but the reserve banks are made for the legal
reserves, for what is supposed to be necessary to set aside to meet
extraordinary demands, and to take care o f the regular turnover.
Now, i f the banks have got surplus money above that, there does not
seem to be any reason why that should also be in the reserve banks
because it is not reserve in the primary sense. It is a secondary
reserve, perhaps, but there is no reason why the Federal reserve
banks should be converted into corresponding banks themselves just
because the banks have surplus funds.


B R O K E R S ’ LO A N S

Senator B r o o k h a r t . But they are converted into corresponding
banks on the rediscount side o f the business.
M r. P l a t t . N o.

Senator B r o o k h a r t . That was always done by corresponding
banks before the Federal reserve, and we took it away from the mem­
ber banks when we created this.
Senator G l a s s . Yes; because the reserves were pyramided and
finally drawn into the maelstrom of speculation so that when the inte­
rior banks wanted their money they could not get it and a panic
would ensue.
Senator B r o o k h a r t . Supposing we would prohibit by law a mem­
ber bank from making these speculative loans on the same terms that
you are prohibited from rediscounting them in the Federal reserve,
what do you say about that ?
Mr. P l a t t . Well, in the first place, I do not believe you can do it,
because it would destroy the safest loans the banks make and throw
that business into th e‘ hands of private banking or corporations.
That is to say, I think it is undoubtedly true that such loans to some
extent have got to be made in order to have a market.
Senator B r o o k h a r t . Well, we have plenty of power to reach the
private banking and prevent them from doing it, too.
Mr. P l a t t . I do not believe you have. Perhaps the State of New
York could reach the private bankers, but I do not believe Congress
Senator B r o o k h a r t . Well, Congress did do it in the old days when
we had the banks of issue.
Mr. P l a t t . But they were incorporated banks.
Senator B r o o k h a r t . Yes; but there is not any difference in the
authority whether it is incorporated or individual.
Mr. P l a t t . Well, could you prevent the Canadian Bank of Com­
merce and the Bank of Montreal, for instance, from making loans in
the stock market in New York?
Senator B r o o k h a r t . Well, that would be perfectly easy. They
are foreigners and we could do most anything we pleased about
Mr. P l a t t . Well, you would shut the money out from coming into
the United States; possibly you could do that.
Senator B r o o k h a r t . Well, we are sending billions of it out of the
United States, so I do not apprehend that would hurt us any.
Senator G l a s s . Well, I am afraid if you were to pass a law pro­
hibiting member banks of the Federal reserve system from making
brokers’ loans, the State banks would pretty soon have a monopoly
o f the system, and in a little while you would not have any member
banks o f the Federal reserve system.
Senator B r o o k h a r t . I concede that, too, Senator, unless we put
a restriction that would reach the State banks, too. But I think
that could be worked out. Now, how about if we would prohibit one
bank from depositing in another bank?
Mr. P l a t t . I think that would probably bring about something
that has been more or less of a hobby o f mine, and probably would
force branch banking pretty fast. You would have one system of
banks all over the country, so you would not need to redeposit.
Banks do not redeposit in Canada.
Senator P i n e . Y ou favor branch banking, do you?



Mr. P l a t t . Not to that extent. I favor limited branch banking
sufficient to strengthen the country banks a little and make them
larger and give them better management.
Senator P i n e . It also works in the way of taking money out of
the country, does it not, and concentrating it all in one place?
Mr. P l a t t . N o; I do not believe banks take money out of a highrate territory and lend in a low-rate territory if they can lend in
the high-rate territory.
Senator P i n e . Does it not have that effect in Canada?
Mr. P l a t t . N o ; I think it has the opposite effect. Money is
cheaper in up-State New York than it is in eastern Canada. In* my
own home town, we have got a surplus o f money that we can not
possibly loan in the neighborhood, but in Canada when they have
a surplus o f funds in the eastern towns, it can be loaned out in
Saskatchewan. We can not lend our money from a Hudson River
town in Oklahoma. I f we could we might try it.
Senator P i n e . I know a man that wanted a loan at Medicine Hat;
he had to go to Montreal to get it.
Mr. P l a t t . He must have wanted a large amount.
Senator P i n e . He did.
Mr. P l a t t . The managers have full authority to make small loans
without reference.
Senator P i n e . The agent could take in the money at Medicine Hat.
but he could not put it out at Medicine Hat.
Mr. P l a t t . I was not alluding to large amounts. But that is the
same way with our system. One of our little banks with $25,000
capital can not lend more than $2,500 to one person under the law.
Senator P i n e . T o get back to the subject, I know of a bank in
Oklahoma, and this is typical, where the deposits amount to threequarters of a million dollars. The bank is in a country town, and
that bank is lending only $42,000 to the local people. It has $130,000
in call loans, $200,000 and a little over invested in commercial paper,
and the balance in bonds.
Mr. P l a t t . An over-conservative diversification.
Senator P i n e . As I view it that bank is not serving that com­
munity as a bank. As I view it that bank is a liability to the
community in which it is located.
Senator G l a s s . You would like to have some stock in it, would
you not?
Mr. P l a tt . That is according to whether there is a demand for
money there. Governor Young can tell you about a man in Montana,
I think, who came out there and established a bank and gave out that
he was not going to make any local loans, or pay any interest on
deposits, and' he got $300,000 or $400,000 deposits right away. Am
I correct, Governor?
Mr. Y o ung . Well, he got much more than that. That was really
an extreme case.
Mr. P l a t t . Yes; people were looking for safety on deposits.
Senator P in e . That bank is a liability to the community. The
depositors in that community would be in better shape if the depos­
itors took the money and put it in tin cans and buried it out in the
orchard, from the standpoint of the community. Now, I feel that
the Federal Reserve Board and those who have authority, who are
in control of our banking system, are responsible for that condition.


B R O K E R S ’ LO A N S

In 1920 that bank had two hundred and some thousand dollars
loaned to local people. When the board started its deflation policy
it began calling those loans.
Mr. P l a t t . Oh, n o ; we never called them.
Senator P i n e . Well, I am connected with a little bank, and I
know that the examiners did call the loans.
Mr. P l a t t . Well, that belonged to the comptroller. We had no
connection with that.
Senator P i n e . But you started the deflation policy, inaugurated
the deflation policy.
M r . P l a t t . T h a t is a lo n g story.

Senator P i n e . Well, I have read the minutes, and Governor Hard­
ing said that the problem, as he viewed it, was to restrict credit and
increase protection, particularly on the farms, and to the extent that
the Federal Reserve Board accomplished that they are responsible
for the farm problem.
Senator G l a s s . Oh, well, now, Governor Harding has said some­
thing more. You omitted some part of what he said. He said re­
strict credits for luxuries and things o f that sort.
Mr. P l a t t . Speculation.
Senator G l a s s . Yes.
Senator P i n e . But this policy has produced this surplus of funds
in my State.
Mr. P l a t t . Well, why do not your people want to borrow?
Senator P i n e . They have been compelled to pay the loss that they
had at that time at the inopportune time. They have been com­
pelled to sacrifice their property in order to pay these loans, and
having been burnt once they are out of the market. They are not
Senator G l a s s . Compelled by whom, Senator ?
Senator P i n e . Compelled by the banking system of the United
Senator B r o o k h a r t . I think I can give you a particular illus­
tration o f that.
Senator P i n e . By those in control o f the banking system.
Senator B r o o k h a r t . This meeting that we are talking about was
held on May 18, 1920.
Senator G l a s s . Yes; and its real import has been perverted by you
more than anything that I know of whatsoever.
Senator B r o o k h a r t . Well, I am ready to meet the Senator on that
at any time.
Senator G l a s s . Well, I am ready to meet you at any time you
want to on that proposition.
Senator B r o o k h a r t . And in October, 1920, the Federal Reserve
Board o f Chicago held four-----Senator G l a s s . Hold on. Let us get to this secret meeting now.
When was it held ?
Senator B r o o k h a r t . On May 18, 1920.
Senator G l a s s . W hat was the volume o f outstanding credit in cur­
rency in the Federal reserve banking system six months thereafter—
eight months thereafter ?
Senator B r o o k h a r t . O f course, I am familiar with that.

B R O K E R S’ LO A N S


Senator G l a s s * Oh, yes; you are familiar with that, but you do
not make anybody else familiar with it when you are asking the
question. No; you do not.
Senator B r o o k h a r t . Yes.
Senator G l a s s . As a matter o f fact, eight months after that meet­
ing the volume outstanding of Federal reserve notes was greater than
it ever was theretofore or ever has been since.
Senator B r o o k h a r t . Yes; I know who got the money.
Senator G l a s s . And not only that, but eight months thereafter the
credits o f the Federal reserve banks, the combined Federal reserve
banking system, were higher than they ever were theretofore or ever
have been since.
Mr. P l a t t . That is true.
The C h a i r m a n . Now, that is deflation.
Senator B r o o k h a r t . That is because the big fellows were able to
get the vast sums.
Senator G l a s s . That is simply because there was no deflation. It
was inflation.
The C h a i r m a n . Governor Platt, if you are through we will close.
I f you want to go ahead, we will go ahead.
Mr. P l a t t . I think I have said everything that I have to say.
Senator B r o o k h a r t . I want to get this in the record.
Senator G l a s s . Well, I thought we would have a hearing here on
Senator La Follette’s resolution.
The C h a i r m a n . We have got to change our methods. We can
not call a witness and let the Senate committee do all the testifying.
I f we do, we will have to let all the witnesses go home.
Senator B r o o k h a r t . Here is what was said at that meeting. I did
not raise the question. I want this for the record.
Senator G l a s s . Who did?
Senator B r o o k h a r t . Well, I do not know whether you did or not,
Senator G l a s s . Well, you know you did.
Senator B r o o k h a r t . But Mr. McKay, representing the Chicago
branch o f the Federal Reserve Board, came out in Iowa and held
four public meetings. That was in October. This secret meeting—
the only part o f this meeting that was secret was about raising the
discount rate. The general deflation policy was published.
Senator G l a s s . There was not any part o f it secret, and that meet­
ing could not have raised the rediscount rate to save its life under the
Senator B r o o k h a r t . Well, let us see what Governor Harding said;
the last thing he said:
I would suggest, gentlemen, that you be careful not to give out anything
about any discussion of discount rates. That is one thing there ought not to
be any previous discussion about, because it disturbs everybody, and if people
think rates are going to be advanced, there wilP be an immediate rush to get
into the banks before the rates are put up, and the policy of the reserve board
is that that is one thing we never discuss with the newspaper man. I f he
comes in and wants to know if the board has considered any rates, or is likely
to do anything about any rates, some remark is made about the weather, or
something else, and we tell him we can not discuss rates at all, and I think we
are all agreed it would be very m-advised to give out any impression that any
general overruling of rates was discussed at this conference.


B R O K E R S ’ LO A N S

Senator G l a s s . And as a matter of fact, no bank official on earth
ever made a wiser suggestion. Never. The idea o f a director of a
bank giving out to the public that 60 days hence or 30 days hence the
discount rate of this bank will increase to such an extent, when as a
matter o f fact when that date should arrive they would not have
any funds in the bank to lend to anybody.
Senator B r o o k h a r t . Armour & Co. found out about it, though,
some way, because Armour’s banker was in the meeting, and imme­
diately they went out for a $60,000,000 loan and they got it. They
sold the paper all over Iowa.
Senator G la ss . Was there any raise or rediscount discussed at this
meeting ?
Senator B r o o k h a r t . N o ; but it was raised shortly thereafter.
Senator G l a s s . N o . There were two raises. There were raises at
three Federal reserves, possibly four, not in excess, and two of them
had been raised before that meeting, and that meeting had no more
lawful right to raise a rediscount rate of a Federal reserve bank
than you have, not a bit. And it did not either.
Senator B r o o k h a r t . Some day I am going to discuss with you all
that was said here, but I want to finish this meeting.
The C h a i r m a n . Go ahead.
Senator B r o o k h a r t . On October 7 four meetings were held. I
was at the last one at Ottumwa, Iowa. And Mr. Cunningham, of
the Federal Reserve Board, was there. And Mr. McKay said to us
in substance there that time that “ Your allotment o f Federal re­
serve loans to Iowa is $36*000.000. But we have loaned you $91,000,000. That is $55,000,000 more than your allotment, and the time
has come now when the people who are entitled to this credit ”-----Senator G l a s s . The difference between what, is it?
Senator B r o o k h a r t . Between $36,000,000 and $91,000,000; $ 5 5 ,000,000 is the way I have got it in mind. “ And the time has come
when the people who are entitled to this credit want it, and so you
will have to sell some o f these crops and reduce these loans.” Now,
about that time I got into the game and I asked him who made this
allotment, and he did not know. And I have never been able to
find out.
But here was a representative direct from the Federal Reserve
Board in Chicago, claiming it had been made, and we had a crop in
Iowa at the prices then prevailing that was worth more than a
billion dollars, and a credit allotment o f $36,000,000 for the whole
State in the Federal reserve, and calling our loans from $91,000,000
down to $36,000,000. That was arbitrary. Now, that did not relate
to the discount rate at all. That was simply arbitrary. And the
result was the banks called in the farmers— they did it”all over the
State— and they said, “ You have got to reduce these loans,” and
they forced them to reduce them, and they forced them to dump
their profits on the mar&et, and there never was such a panic in
farm prices in all the history o f agriculture. Corn went down from
$1.75 to 30 cents a bushel. It cost more to produce than any crop
ever produced in the country. And everything else went down in
proportion. Now, then, that is the way it was worked out out in
our country. Sixty-five per cent of all the cause o f our trouble
is due to that deflation policy that was put on us.



I do not think that the administration of the Federal Reserve
Board now is to blame for this accumulation of credit— of speculative
credit in New York. I think it is due to this provision of the law
that does not let them do the redeposit reserve bank business. But
I do think that policy of deflation was wrong back there in 1920.
That broke our credit and destroyed our values, and everything, that
deflation did. And we haye not got back; and we have not started
back. We are still down at the bottom, practicallv where we were
in 1920.
Senator G l a s s . Well, as a matter of fact, does not the Senator
know that the Chicago bank did not raise its rediscount rate? It
was not one o f the banks that raised its rates at all.
Senator B r o o k h a r t . This rediscount business did not bring about
the deflation.
Senator G la ss. The Chicago bank did not raise its rediscount
Senator B r o o k h a r t . But they came out there and said, “ You
have got to pay your loans.”
Senator G la ss. The bank said that ?
Senator B r o o k h a r t . McKay, of the Federal Reserve Board of
Senator G la ss. Well, I would like to hear Mr. McKay's explana­
tion of that.
Senator B r o o k h a r t . Well, Mr. Cunningham, who is now a mem­
ber of the Federal Reserve Board, was at that meeting, and he knows
what I have said is true about it.
Here is what Governor Harding said in that meeting, page 8 of
the proceedings:
Thus the directors of the Federal reserve banks are clearly within their
rights when they say to any member bank, “ You have gone far enough: we
are familiar with your condition; you have got more than your share, and we
want you to reduce; we can not let you have any more.”

That is what they said to us: “ $91,000,000 is $55,000,000 more than
your share, and you have got to reduce.”
Senator G la ss. Lend me that. Why do you not read all that
Governor Harding said? He said particularly that you cattle
dealers in that western part of the country should be taken care of,
and if there were any Federal reserve banks in all that section of the
country which had not ample means of its own to take care of the
cattle raisers of the country they should rediscount with some other
Federal reserve bank that did have the means. Why do you not
give the whole story?
Senator B r o o k h a k t. That applies to the range cattle and not the
cattle feeders in Iowa.
Mr. P la tt * We were doing that, Senator. That money that was
loaned by the Chicago bank was borrowed from Boston, Phila­
delphia, and Cleveland, very largely.
Senator B r o o k h a r t . Which ?
Mr. P l a t t . The money that was being loaned in Iowa at that
Senator B ro o k h a k t. Well, I do not care where it came from.
It was no excessive loan for the value of our crop. There was no
need of calling it.
95062—28------ 7



Mr. P l a t t . Well, o f course I can not say about that. I do not
think it was definitely called. Certainly no one had such authority
from the Reserve Board.
Senator G la ss. The State o f Iowa got four times greater volume
o f rediscounts in that postwar period than all of the national banks
in the United States combined got three months before the panic in
Mr. P l a t t . I think that is true.
Senator G la ss. That is what it did. That is what the Federal
reserve system did for the country.
Senator B r o o k h a r t . The loans were not being called right after
the meeting o f May 18. There was nothing to be done then. And
after deciding on the inflation policy-----Senator G la ss. Which they did not do.
Senator B r o o k h a r t . A lot o f big fellows were getting big loans.
Sinclair got a $46,000,000 loan. A good part o f Armour’s $60,000,000
paper was sold by the banks all over Iowa. And they did not know
this McKay was going to come out there in the fall and call these
loans, or anything o f the kind. Swift got a $50,000,000 loan.
Mr. P l a t t . Those loans were sold through brokers, were they not ?
Armour’s, I understood, were.
Senator B r o o k h a r t . N o; they were sold through banks. That
is in our country. They sent them out to the corresponding banks.
The Continental & Commercial National Bank sent them out. They
said “ Here is a good thing.” They paid 8 per cent to get that
money. “ Here is a good thing, take it,” and the banks took it.
And Armour soon had his $60,000,000 loan. Henry Ford, however,
could not get a loan.
Mr. P l a t t . I think those Armour loans are all brokers’ notes sold
by Armour to note brokers and by them to various banks.
The C h a irm a n . It is getting close to 4.30, and Mr. Cunningham
would like to be heard. Let us proceed with the business of the
committee. Do you want to be heard, Governor Hamlin?
Mr. H a m lin . Mr. Chairman, I think this matter has been gone
into so carefully that I really have nothing to add to the governor’s

‘ Mr. C u n n in g h a m . Mr. Chairman, I can not help but feel that you
have had considerable information given to you and a lot o f ancieht
history recited.
Senator G la ss. A lot o f ancient fiction recited, not the ancient
Mr. C u n n in g h a m . Well, Senator, I hope I will not be drawn into
that controversy. I was through some o f those meetings and under­
stand some o f the things that took place; but I <Jo not want to,be
drawn into that controversy at this time.
Up to yesterday I think the feeling in the hoard was that we
would come over here and present ourselves and offer any informa­
tion or testimony we could on this resolution that is before the cota^
mittee. And after Mr. Sprague had notified us that he was goin£ to
be heard, or we heard that he was going to be heardj I thbtight prob­
 the hearing would be so lengthy that possibly we Would
ably that



not all be heard.* so I prepared just a brief statement on the present
resolution, and if it is proper I will just file that statement, Mr.
Chairman. I will read it or I will file it, and yon can read it at
your leisure.
Senator B r o o k h a r t . W ill you read it ?
* Mr. C tjn n in g k a m . It does not go into the details about this ques­
tion. Understand, gentlemen of the committee, that I am not an
economist, and I must look at all these propositions from the stand­
point of cold-blooded business. I have been a farmer and I am a
farmer now. The only home I have got is on a farm, and I under­
stand, of course, considerable of the conditions that have existed in
Iowa and exist there at this time. And I would indorse the idea that
any reduction in interest rates that is to come to the man that is re­
discounting through the small banks in Iowa will eventually come
from his State legislature.
Senator G la s s , Yes.
Senator B r o o k h a r t . Well, in my part of the State he generally1
pays 7, but there is a provision in the note that there is 8 per cent
on default of interest,
Mr. C u n n in g h a m . Not all of them.
Senator G la s s . You ought to spread yourself all over the State
so1that it would be uniform— 7 per cent.
Senator B r o o k h a r t . Well, I would be perfectly willing for the
Senator to come out to help me to get that legislation to do it, but
I think the Congress ought to make its own national bank rules.
Senator G la s s . It does. It says n national bank in Iowa shall
charge more than the State’s legal rate of interest.
Senator B r o o k h a r t . Yes; but if .Mr. Cunningham’s statement is
correct that is too high. It ought to be reduced.
Senator G la s s . Yes; I think if is too high.
Senator B r o o k h a r t . And Congress is not doing its duty when it
fails to reduce it on the national banks.
Senator G la s s . G o ahead, Mr. Cunningham. I beg your pardon.
Mr. C u n n in g h a m . In view of the present status of the so-called
bj’okers5 loans account, it is indeed proper and timely that the sub­
ject matter of the La Follette resolution have full consideration.
There can be no doubt but what Congress, at the time it had under
consideration the bill creating the Federal reserve act, intended to
so draft the measure as to prevent, so far as possible, Federal reserve
credit being used in support of stock-exchange loans. However, it
is evident that the method by which the member banks in the Federal
reserve system obtain advances or are privileged to rediscount
eligible paper in order to reestablish their deficient reserve accounts,
follows a procedure which is in a measure responsible for at least a
portion of the credit obtained by such member banks from the Fed­
eral reserve banks of their district being used for investment in socalled brokers’ loans.
The total amount of brokers’ loans at this time is approximately
per cent of the total credit availability of the country.
In 1914 the total credit availability in this country was approxi­
mately $20,000,000,000, and the so-called stock exchange loan ac­
count at that time has been estimated at approximately $1,000,000,000. While at this time the total credit availability of the coun­




try is approximately $54,000,000,000, and the so-called brokers’ loans
account totals $3,750,000,000.
While I personally do. not think that the use of credit for invest­
ment in brokers’ loans, which are secured by stocks and bonds of an
investment nature, has been, or is at this time, so great in amount
as to in any way restrict the availability of credit tor the needs of
agriculture, industry, or commerce, X do feel, however, that the ra]»d
increase of the past three years in the use of credit for speculative
purposes is a tendency in the wrong direction. Credit used for such
purposes is a part of the credit availability of the country, and, im
the event that the credit supply should become curtailed or limited
the amount invested in stock loans will naturally have the effect of
limiting credit availability, and might possibly, if some measure oI
control is not provided, reach such proportions as to seriously
barrass the credit requirements of business and commerce.
I do not feel that the Federal Reserve Board should undertake
to dictate as to what use the member banks shall make of their own
resources; and I take the liberty of suggesting that if this invest*!
gation should determine that too great an amount of Federal
serve credit is finding its way into investments which are specificslly
excluded from eligibility for rediscount or purchase by Federal re­
serve banks, that any recommendations or amendments seeking to
remedy such a condition be most carefully considered; in order to
avoid the possibility of complications arising which might be sa
detrimental in their effect as to more than offset any benefits
from the change.
That is as brief as I could make it and make a statement on tfafr
The C h a irm a n . Thank you.
Mr. C u n n in g h a m . If there are any questions, why I will ao&wer
them if I can.
The C h a ir m a n . That will conclude our hearing for to-day. It id
20 minutes to 5 now. We will adjourn subject to the call of the
(Whereupon, at 4.40 g. m., Wednesday, March 7, 1928, the bettK
ings were adjourned subject to the call of the chairman.)


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