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BANKING ACT OF 1935
HEARINGS
BEFORE A

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

S. 1715 and H. R. 7617
BILLS TO PROVIDE FOR THE SOUND, EFFECTIVE, AND
UNINTERRUPTED OPERATION OF THE BANKING
SYSTEM, AND FOR OTHER PURPOSES

[CONSOLIDATED]
APRIL 19 TO JUNE 3, 1935

Printed for the use of the Committee on Banking and Currency

129688




UNITED S^KES
GOVERNMENT VflNTING OFFJ.«CE
WASHINGTON: 1935

COMMITTEE ON BANKING AND CURRENCY
DUNCAN U. FLETCHER, Florida, Chairman
PETER NORBECK, South Dakota
CARTER GLASS, Virginia
J O H N O . T O W N S E N D , JK., Delaware
ROBERT F. WAGNER, New York
ROBERT D. CAREY, Wyoming
ALB EN W. BARKLEY, Kentucky
JAMES COUZENS, Michigan
ROBERT J. BULKLEY, Ohio
FREDERICK STEIWER, Oregon
THOMAS P. CORE, Oklahoma
BRONSON CUTTIKG, NJBW Mexico i
EDWARD P. COSTTGAN, Colorado,
ROBERT R. REYNjOMJS; North CArolina
JAMES F. BYRNES, South Carolina
JOHN H. BANKHEAD, Alabama
WILLIAM GIBBS McADOO, California
ALVA B. ADAMS, Colorado
FRANCIS. T. MALONEY, Connecticut
GEORGE L. RADCLIFFE, Maryland
WIIXUK. L. HILL, Clerk

R. H. SPAEKMAN, Acting Clerk
SUBCOMMITTEE ON MONETARY POLICY, BANKING AND DEPOSIT INSURANCE
CARTER GLASS, Virginia, Chairman
ROBERT J. BULKLEY, Ohio
PETER NORBECK, South Dakota
WILLIAM GIBBS McADOO, California
JOHN G. TOWNSEND, JK , Delaware
JAMES F. BYRNES, South Carolina
JAMES COUZENS, Michigan
JOHN H. BANKHEAD, Alabama
BRONSON CUTTING, New Mexico'
> Death occurred during the progress of the hearings, Monday, May 6,1935.
II




CONTENTS
Aldrich, Winthrop W., chairman the Chase National Bank of the city of *"«•
New York
385, 413
Allendoerfer, Carl, vice president, First National Bank, Kansas City, Mo.
241
Anderson, Benjamin M., Jr., economist, the Chast National Bank of the
city of New York
435, 478
Andrew, L. A., formerly superintendent of banks, State of Iowa; recently
president of the State bank division of the American Bankers' Association, Des Moines, Iowa
254
Await, F. G., Deputy Comptroller of the Currency
178
Beattie, F. F., president First National Bank, Greenville, S. C
825
Birdzell, L. E., general counsel Federal Deposit Insurance Corporation-.
174
Bodfish, Morton, executive vice president, United States Building & Loan
League and assistant professor of economics at Northwestern University.
906
Brown, Edward E., president the First National Bank of Chicago
375
Byrne, John B., chairman special committee of the executive committee
of the Connecticut Bankers' Association, Hartford, Conn
667
Crowley, Leo T., chairman of the board Federal Deposit Insurance Corporation
24, 51, 181
Eccles, Marriner S., Governor of the Federal Reserve Board
279, 313
Eilenberger, C. B., Third Assistant Postmaster General
524
Elliott, Edward, vice president, Security First National Bank of Los
Angeles, Calif., representing the Bankers' Association of six States:
California, Arizona, New Mexico, Oregon, Idaho, and Utah
777
Elliott, W. S., vice president and cashier, Bank of Canton, and chairman
of the legislative committee of the Georgia Bankers Association, Canton,
Ga
934
Evans, Elwyn, representing the clearing-house banks, Wilmington, Del. .
257
Ferguson, Frank C , president of the Hudson County National Bank,
Jersey City, N. J.
193
Field, William J., president of the Commercial Trust Co. of New Jersey,
Jersey City, N. J
187
Frost, Joseph H., member, Federal Advisory Council, representing the
Eleventh Federal Reserve District; president Frost National Bank,
San Antonio, Tex
563
Graettinger, M. A., executive vice president, Illinois Bankers Association,
237
Chicago, 111
Hamilton, Willard, president Florida Bankers' Association, Orlando, Fla_
902
Hamlin, Charles, S., member, Federal Reserve Board, Washington, D. C.
940
Hanes, Robert M., president Wachovia Bank & Trust Co., WinstonSalem, N. C
497
Harriss, Robert, New York Cotton Exchange, New York, N. Y
891
Hecht, R. S., president American Bankers Association
515
Heinman, Henry H., executive manager National Association of Credit
Men, New York, N. Y
355
Hughes, James H., Jr., director and counsel, Delaware Trust Co., Wilmington, Del
268
James, George R., member Federal Reserve Board, Washington, D. C
922
Jones, Millard F., vice president Planters National Bank & Trust Co.,
Rocky Mount, N. C
499
Kemmerer, Edwin Walter, Walker professor of international finance,
Princeton University, Princeton, N. J
325
Kennedy, Edward E., secretary National Farmers Union, Kankakee, 111. 896
Langford, H. Grady, president Georgia Bankers Association, Atlanta, Ga.
933
Law, Francis M., president First National Bank of Houston, Tex
365
LeBlanc, George L., New York, N. Y
847
Leob, Howard A., vice president Federal Advisory Council, representing
the Third Federal Reserve District; cffiHrman Tradesmen's National
Bank & Trust Co., Philadelphia, Pa
549
m




IV

CONTENTS

Fan
675,
743, 765
Morgenthau, Henry, Jr., Secretary of the Treasury
503
Nahm, Max B., director Federal Reserve Bank, St. Louis, Mo.; vice
president, Citizens National Bank, Bowling Green Trust Co., Bowling
Green, Ky
510
O'Connor, J. F. T., Comptroller of the Currency
61, 99, 119, 143, 159, 177
Perkins, James H., member Federal Advisory Council, representing Second
Federal Reserve District; chairman National City Bank, New York,
N. Y
544
Ridgely, Henry, president of the Farmers Bank of the State of Delaware, in Delaware
265, 275
Rogers, W. H., president Florida Bar Association, and member of the
executive committee of the Florida National Bank, Jacksonville, Fla_902
Smith, Walter W., president Federal Advisory Council; president First
National Bank, St. Louis, Mo
529
Snyder, Frederick S., member, special committee on banking legislation
of the United States Chamber of Commerce, Boston, Mass
598
Sprague, Oliver M. W. (Dr.), professor of banking and finance, Harvard
University, Cambridge, Mass
209
Steele, Thomas M., member, Federal Advisory Council, representing the
First Federal Reserve District; president First National Bank & Trust
Co., New Haven, Conn
574
Stern, J. David, editor Philadelphia Record, Philadelphia, Pa
938
Sweet, William L., treasurer and general manager Rumford Chemical
Works, Rumford, R. I.; chairman of a special committee on banking
legislation of the United States Chamber of Commerce
595
Szymczak, M. S., member, Federal Reserve Board, Washington, D. C
966
Vanderlip, Frank A., former president National City Bank, New York,
N. Y
915
Thomas, J. J., vice governor, Federal Reserve Board, Washington, D. C 964
Warburg, James P., vice chairman Bank of the Manhattan Co., New York,
N. Y
71
Ward, Louis B., Detroit, Mich
783,799
Wiener, F. B , assistant solicitor of the Department of the Interior
99
Wiggins, L. M., president Bank of Hartsville, S. C
828
Willis, Henry Parker, economist, New Brighton, New York, N. Y
853
Winship, Blanton, Governor of Puerto Rico
95
Woods, J. E., president the Teague National Bank, Teague, Tex
958
Young, Owen D., chairman of the board, General Electric Co., New York,
N. Y
833
Zimmerman, Cnarles F., president First National Bank, Huntingdon, P a .
733
Miller, Alolph C , member Federal Reserve Board, Washington, D. C

STATEMENTS AND EXHIBITS
Losses to depositors in suspended commercial banks, July 1, 18C4, to
June 30, 1934
Earnings, expenses, losses, and profits of national banks' averages for
1918-30, compared with 6 months ending Dec. 31, 1933
Newly licensed banks grouped according to volume of total deposits by
class of bank, July 1, 1933, to Dec. 31, 1934
Reconstruction Finance Corporation purchases of capital obligations of
insured banks
Supplemental data submitted by Leo T. Crowley
Letters submitted by Governor Winship
Summary of explanation of object of proposed amendments contained in
title III of S. 1715
Summary of hypothetical projection of a deposit-insurance corporation's
operating statements, period Jan. 1, 1921, to Mar. 15, 1933
Disposition of licensed national banks which failed following the banking
holiday
a*.
Letter on letterhead of George B. Buck, consulting actuary, Treasury
Building, Washington, D. C , addressed to Mr. J. F. T. O'Connor,
Comptroller of the Currency; attention, Mr. George P. Barse, counsel-Statement of activities of the Department of Justice



26
30
32
33
57
97
113
123
129
173
177

CONTENTS

V

Page
Memorandum concerning title I, Banking Act of 1935, as introduced in
the House (H. R. 7617)
182
Statement regarding examinations and liquidations
183
Amendments proposed by Governor Eccles to title I I of S. 1715
320
Paper eligible for rediscount with Federal Reserve banks as reported by
member banks on selected call dates, Oct. 3, 1928, to Dec. 31, 1934
324
Average number of officers and employees of the Federal Reserve banks
during tke last 6 months of 1934
325
Letter addressed to Hon. Carter Glass, Chairman Subcommittee on Bankand Currency, United States Senate from Hon. James A. Farley, Postmaster General
525
Memorandum: Statement of depositors' balances in the Postal System
on the dates shown
527
Pamphlet issued by United States Chamber of Commerce, the proposed
Banking Act of 1935, Analysis of title II, and summary of other provisions
620
Pamphlet issued by United States Chamber of Commerce, proposed
changes in the Federal Reserve System: The provisions of title II of the
pending Banking Act of 1935, report of special committee
645
Letter, dated May 21, 1935, from M. S. Eccles, Governor Federal Reserve Board, to Senator Couzens
673
Preamble and principles of the National Union for Social Justice
785
Copy of pamphlet on Our Monetary System
792
Telegram submitted by Senator Glass from Father Coughlin
799
An Analysis of Banking and Money, by the New York Herald Tribune
819
Summary showing the Federal Reserve directorates
822
Summary, An Independent Board
822
Telegram submitted by Senator Glass, at the request of Senator McAdoo,
from A. P. Giannini, protesting against the proposed one-eighth assessment for insurance of deposits
901
Letter addressed to Chairman Fletcher from former Senator Robert
L. Owen, of Oklahoma, suggesting an amendment to the pending bill-901
Statement of R. E. Gormley, of Atlanta, Ga., submitted by Mr. Elliott
937
Statement submitted by Hugo E. Czerwonky
974
Statement from Robert B. Warren
986
Statement from Prof. Walter A. Spahr
989
Letter of J. F. T. O'Connor, Comptroller of the Currency, to Owen D.
Young
1004
Letter to Chairman Fletcher from, and statement of Benjamin .C. Marsh,
executive secretary of The People's Lobby, Inc
1005







BANKING ACT OF 1935
FRIDAY, APRIL 19, 1935
U N I T E D STATES SENATE,
S U B C O M M I T T E E OF T H E C O M M I T T E E O N
B A N K I N G AND CTJRRENCT,

Washington,
D. G.
T h e s u b c o m m i t t e e m e t , p u r s u a n t to call, at 1 0 : 3 0 a. m., in r o o m
301, S e n a t e Office B u i l d i n g , S e n a t o r C a r t e r Glass p r e s i d i n g .
P r e s e n t : S e n a t o r s G l a s s ( c h a i r m a n of t h e s u b c o m m i t t e e ) . B u l k ley, B y r n e s , T o w n s e n d , Couzens, a n d C u t t i n g .
Present also: Senator Fletcher.
S e n a t o r G L A S S ( c h a i r m a n of t h e s u b c o m m i t t e e ) . T h e c o m m i t t e e
will please come t o o r d e r .
S e n a t o r F L E T C H E R . M r . C h a i r m a n , it m i g h t be a p p r o p r i a t e a t t h e
b e g i n n i n g of y o u r h e a r i n g s t o d a y t o insert a letter w h i c h I received
f r o m t h e P r e s i d e n t on F e b r u a r y 4 , 1 9 3 5 ; a n d following t h a t , t h e bill.
I t h i n k t h a t is desirable.
S e n a t o r GLASS. I t h i n k t h a t w o u l d be desirable.
S e n a t o r F L E T C H E R . S o I w i l l ask to h a v e inserted t h i s l e t t e r a d dressed t o m e .
T H E WHITE HOUSE,

Washington, February 4, 1933.
Hon.

DUNCAN U. FLETCHER,

Chairman Banking and Currency Committee,
Urtited Stales Senate, Washington, D. G.
MY DEAK ME. CHAIRMAN : I have had a number of conferences regarding
three banking matters which are to some extent interrelated and which affect
the Federal Deposit Insurance Corporation, the Federal Reserve System, and
the Office of the Comptroller of the Currency. I have discussed these matters
with Mr. Leo T. Cromley, Chairman of the Federal Deposit Insurance Corporation ; Mr. Marriner S. Eccles, Governor of the Federal Reserve Board; and Mr.
J. F. T. O'Connor, Comptroller of the Currency. I have asked the representatives of the various departments and agencies affected to give consideration to
the matters discussed.
For the information of your committee they have prepared a tentative draft
of legislation and I am asking the gentlemen named to give the benefit of the
results of their discussions to you as Chairman of the Banking and Currency
Committee of the Senate.
I shall be glad to have you call them before your committee for further
information if you desire.
Very sincerely yours,
FRANKLIN D. ROOSEVELT.

S e n a t o r F L E T C H E R . I assume a s i m i l a r communication w a s a d dressed t o M r . S t e a g a l l , c h a i r m a n of t h e B a n k i n g a n d C u r r e n c y
C o m m i t t e e of t h e H o u s e ; a n d on F e b r u a r y 5 M r . S t e a g a l l i n t r o d u c e d t h e bill i n t h e H o u s e . T h e S e n a t e w a s in recess on t h a t d a y ,
a n d on F e b r u a r y 6 I i n t r o d u c e d t h e bill i n t h e Senate, w h i c h m a y
be set f o r t h i n y o u r r e c o r d as t h e p e n d i n g bill.
Senator GLASS.




Yes.

1

2

BANKING ACT OF 193 5

(The bill, S. 1715, is made a part of the record, in full, as follows:)
[S. 1715, 74th Cong., 1st sess.]
A BILL To pioyide for the Bound, effective, and uninterrupted operation of the banking
system, and for other purposes

Be it enacted oy the Senate and Bouse of Representatives of the United
States of America in Congress assembled, This A''t may be cited as the '• Banking Act of 1935."
TITLE I

Section 12B of the Federal Reserve Act, as amended (U. S. C, Supp. VII,
title 12, sec. 264), is further amended as follows:
1. By striking out subsection (a) and inserting in lieu thereof the following:
"(a) There is hereby created a Federal Deposit Insurance Corporation
(hereinafter referred to as the 'Corporation'), which shall insure, as hereinafter provided, the deposits of all banks which are entitled to the benefits
of insurance under this section, and which shall have the right to exercise all
powers hereinafter granted."
2. By adding at the end of subsection (b) the following:
" In the event of a vacancy in the office of the Comptroller of the Currency,
and pending tlie appointment of his successor, the Acting Comptroller of the
Currency shall be a member of the board of directors in his place and stead
In the absence of the Comptroller of the Curiency any Deputy Comptroller
of the Currency may, within the limits prescribed by the Comptroller, act as
a member of the board of directors in his place and stead."
3. By inserting a new subsection to read as follows:
"(c) As used in this section—
"(1) The term ' State bank' means any bank, banking association, trust company, savings bank, or other banking institution which is engaged in the business
of receiving deposits and which is incorporated under the laws of any State or
the Territories of Hawaii or Alaska or which is operating under the Code of the
District of Columbia (except a national bank).
"(2) The term ' State member bank' means any State bank which is a member of the Federal Reserve System, and the term ' State nonmember bank ' means
any other State bank.
"(3) The term 'District bank' means any State bank operating under the
Code of the District of Columbia.
"(4) The term 'national member bank' means any national bank located in
the States of the United States, the District of Columbia, or the Territories of
Hawaii or Alaska, except a national nonmember bank as hereinafter defined.
"(5) The term 'national nonmember bank' means any national bank located
in the Territories of Hawaii or Alaska which is not a member of the Federal
Reserve System.
"(6) The term 'mutual savings bank' means a bank without capital stock
transacting a savings bank business, the net earnings of which inure wholly to
the benefit of its depositors after payment of obligations for any advances by its
organizers.
"(7) The term 'insured bank' means any bank the deposits of which are
insured in accordance with the provisions of this section, and the term ' noninsured bank' means any other bank.
"(8) The term 'new bank' means a new national banking association organized by the corporation to assume the insured deposits of an insured bank
closed on account of inability to meet the demands of its depositors and otherwise to perform temporarily the functions provided in this section.
"(9) The term 'receiver' shall include a receiver, liquidating agent, conservator, commission, person, or other agency charged by law with the duty
of winding up the affairs of a bank.
"(10) The term 'board of directors' means the board of directors of the
corporation.
"(11) The term 'deposit' means the unpaid balance of money or its equivalent received by a bank in the usual course of business and for which it has
given or is obligated to give unconditional credit to a commercial, checking,
savings, time, or thrift account, or which is evidenced by its certificate of
deposit, and trust funds as provided in paragraph (5) of subsection (h) of




BANKING ACT OF 1935

3

this section, together with such other obligations of a bank as the board of
directors shall find and shall prescribe by its regulations to be deposit liabilities by general usage: Provided, That any obligation of a bank which is
payable only at an office of the bank located outside the States of the United
States, the District of Columbia, and the Territories of Hawaii and Alaska
shall not be a deposit for purposes of this section or be included as a part
of total deposits or of an insured deposit. The board of directors may by
regulation further define the terms used in this paragraph.
"(12) The term 'insured deposit' means such part of the net amount of
money due to any depositor for deposits in an insured bank, after deducting
offsets, as shall not exceed the maximum prescribed by paragraph (1) of subsection (1) of this section. Such amount shall be determined according to such
regulations as the board of directors may prescribe. In determining the amount
due to any depositor there shall be added together all deposits in the bank
maintained in the same capacity and the same right for his benefit either in his
own name or in the names of others, except trust funds which shall be insured
as provided in paragraph (5) of subsection (h) of this section.
"(13) The term ' transferred deposit' means a deposit in a new bank or other
insured bank made available to a depositor by the corporation as payment of
the insured deposit of such depositor in a closed bank, and assumed by such
new bank or other insured bank.
"(14) The term 'effective d a t e ' means the date of enactment of the title
containing this amendment."
4. By striking out in subsection (c) the following: " ( c ) " and inserting " ( d ) " ;
by striking out in said subsection (c) that part of the third sentence following
the words " Federal Reserve banks"' in said sentence and inserting a period;
by striking out in subsection (d) the following: " ( d ) " and the first four
sentences of said subsection (d) ; and by striking out in the fifth sentence of
said subsection the following: " class B "; and by inserting at the end of subsection " ( d ) " the following: " The capital stock of the corporation shall consist
of the shares subscribed for prior to the effective date. Such stock shall be
without nominal or par value, and shares issued prior to the effective date shall
be exchanged and reissued at the rate of one share for each $100 paid into
the corporation for capital stock. The consideration received by the corporation
for the capital stock shall be allocated to capital a...l to surplus in such amounts
as the board of directors shall prescribe. Such .stock shall have no vote and
shall not be entitled to the payment of dividends."
5. By striking out subsection (e) and inserting in lieu thereof the following:
"(e) (1) Every operating member bank, including a bank incorporated
since March 10, 1933, licensed on or before the effective date by the Secretary
of the Treasury shall be and continue without application or approval an insured bank and shall be subject to the provisions of this section.
"(2) Afler the effective date any national member bank authorized to commence or resume the business of banking, State bank converting into a national
member bank, or State bank becoming a member of the Federal Reserve System
shall be an insured bank from the time the certificate herein prescribed shall be
issued to the Corporation by the Comptroller of the Currency in the case of
such national member bank, or by the Federal Reserve Board in the case of
such State member bank. Provided, That in the case of an insured bank admitted to membership in the Federal Reserve System or insured State bank converting into a national member bank, such certificate shall not be required, and
the bank shall continue as an insured bank. Such certificate shall state that
the bank is authorized to transact the business of banking in the case of a
national member bank, or is a member of the Federal Reserve System in the
case of a State member bank, and that consideration has been given to the
factors enumerated in subsection (g) of this section."
6. By striking out subsection (f) and inserting in lieu thereof the following:
"(f) (1) Every bank not a member of the Federal Reserve System which
on the effective date is a member of the Temporary Federal Deposit Insurance
Fund or of the Fund for Mutuals created pursuant to the provisions of an
Act approved June 16, 1933 (48 Stat. 168, ch. 89), as amended June 16, 1934
(48 Stat. 969, ch. 546), shall be and continue without application or approval
an insured bank and shall be subject to the provisions of this section, unless
in accordance with regulations to be prescribed by the board of directors such
bank shall give to the corporation within thirty days after the effective date
written notice of its election not to continue after June 30, 1935, as an insured
bank and shall give to its depositors, by publication or by any reasonable




4

BANKING ACT OF 1935

means, as the board of directors may prescribe, not less than twenty days'
notice prior to June 30, 1935, of such election: Provided,, That any State nonmember bank which was admitted to said Temporary Federal Deposit Insurance Fund or Fund for Mutuals but which did not file on or before the effective date of October 1, 1934, certified statement and make the payment thereon
required by law as it existed prior to the effective date, shall cease to be an
insured bank on June 30, 1935: Provided further, That no bank admitted to the
said Temporary Federal Deposit Insurance Fund or the Fund for Mutuals
prior to the effective date shall, after June 30, 1935, be an insured bank or
have its deposits insured by the corporation, if such bank shall have permanently discontinued its banking operations prior to the effective date. Deposits of the bank giving such notice shall continue to be insured until June
30, 1935, and the rights of the bank shall be as provided by law existing prior
to the effective date, and such bank shall not be insured by the Corporation
beyond June 30, 1935.
"(2) Until July 1, 1987, any national noiimember bank, on application by the
bank and certification by the Comptroller of the Currency in the manner prescribed in subsection (e) of this section and until such date any State nonmember bank, upon application to and examination by the Corporation and
approval by the board of directors, may become an insured bank. Before approving the application of any such State nonmember bank, the board of directors shall give consideration to the factors enumerated in subsection (g) of this
section and shall determine, upon the basis of a thorough examination of such
bank, that its assets in excess of its capital requirements are adequate to enable
it to meet all of its liabilities as shown by the books of the bank to depositors
and other creditors."
7. By striking out subsection (g) and inserting in lieu thereof the following:
"(g) The factors to be enumerated in the certificate required under subsection (e) and to be considered by the board of directors under subsection (f)
shall be the following: The financial history and condition of the bank, the
adequacy of its capital structure, its future earnings prospects, the general
character of its management, the convenience and needs of the community to
be served by the bank, and whether or not its corporate powers are consistent
with the purposes of this section."
8. By striking out subsection (h) and inserting in lieu thereof the following:
"(h) (1) The assessment rate shall be one-twelfth of 1 per centum per annum
upon the total amount of the liability of the insured bank for deposits (according
to the definition of the term ' deposit' in and pursuant to paragraph (11) of subsection (c) of this section, without any deduction for indebtedness of depositors)
based on the average determined from such total as of the close of business on the
last day of June and the last day of December of each year: Provided, That
the board of directors from time to time may fix a lower rate or may provide
for a refund or credit by a percentage upon the last annual assessment rate
not exceeding 50 per centum thereof, when it finds that such action will provide
or leave, as the case may be, adequate revenue and reserves for the Corporation
having due regard to experience and conditions affecting banks. The rate or
percentage so fixed shall be applicable to all insured banks, except that the
board of directors on a similar finding, from time to time, may provide that
the rate so fixed shall be applicable to insured mutual savings banks only or
may provide a different rate applicable to mutual savings banks only.
"(2) On or before the 15th day of July of each year, each insured bank shall
file with the corporation a certified statement under oath showing the total
amount of its liability for deposits as of the close of business on the 30th day
of June last preceding and shall pay to the corporation the portion of the
annual assessment equal to one-half of the annual rate fixed by this subsection
(h) multiplied by its said total deposits on the date for which such statement
is made. On or before the 15th day of January of each year each insured bank
shall file a like statement showing the total amount of its liability for deposits
as of the close of business on the 31st day of December last preceding, and shall
pay to the corporation the portion of the annual assessment equal to one-half
of the annual rate fixed by this subsection (h) multiplied by its said total
deposits on the date for which such statement is made.
"(3) Every bank which becomes an insured bank after the effective date and
on any date more than thirty days before the next succeeding last day of June
or December of any year shall pay to the Corporation as an initial assessment
the prorated portion for the period between the date such bank became an insured bank and the next succeeding last day of June or December, as the case




BANKING ACT OF 1935

5

may be, of an amount equal to one-half the annual assessment rate provided
In this section multiplied by its total deposits at the close of business on the
15th day after it becomes an insured bank. In all other cases the initial assessment upon a bank which becomes an insured bank after the effective date shall
be the assessment payable according to paragraphs (1) and (2) of this subsection.
"(4) Each bank which shall be and continue without application or approval
an insured bank in accordance with the provisions of subsection (e) or (f) of
this section, shall, in lieu of all right to refund, be credited with any balance to
which such bank shall become entitled upon the termination of said Temporary
Federal Deposit Insurance Fund or the Fund for Mutuals. The credit shall be
applied by the corporation toward the payment of the assessment next becoming
due from such bank and upon succeeding assessments until the credit is
exhausted.
"(5) Trust funds held by an insured bank in a fiduciary capacity whether
held in its trust or deposited in any other department or in another bank shall
be insured subject to a $5,000 limit for each trust estate and when deposited by
the fiduciary bank in another insured bank, shall be similarly insured to the
fiduciary bank according to the trust estates represented. Notwithstanding any
other provision of this section, such insurance shall be separate from and additional to that covering other deposits of the owners of such trust funds or beneficiaries of such trust estates: Provided, That where the fiduciary bank deposits
any of such trust funds in other insured banks, the amount so held by other
insured banks on deposit on the last day of the month preceding the filing of
the certified statement required by paragraph (2) of subsection (h) of this section for the purpose of such statement shall not be considered to be a deposit
liability of the fiduciary bank, but shall be considered a deposit liability of the
bank in which such funds are so deposited by such fiduciary bank. The board
of directors shall have power by regulation to prescribe the manner of reporting
and of depositing such funds."
9. By striking out subsection (i) and inserting in lieu thereof the following:
"(i) (1) Any insured bank (except a national member bank or State member bank) may, upon not less than ninety days' written notice to the Corporation, terminate its status as an insured bank. W horever the board of directors shall find that an insured bank or its directoi • or trustees have continued
unsafe or unsound practices in conducting the business of such bank or have
knowingly or negligently permitted any of its officers or agents to violate repeatedly any provision of this section or of any regulation made thereunder,
or of any law or regulation made pursuant to law to which the insured bank
is subject, the board of directors shall first give to the Comptroller of the
Currency in the case of a national bank or district bank, to the authority
having supervision in case of a State bank, and also to the Federal Keserve
Board in case of a State member bank, a statement of such violation by the
bank for the purpose of securing a correction of such practices or conditions.
Unless such correction shall be made within such period of time not exceeding
one hundred and twenty days as the Comptroller of the Currency, the State
authority, or Federal Reserve Board, as the case may be, shall require, the
board of directors, if it shall determine to proceed further, shall give to the
bank not less than thirty days' written notice of intention to terminate the
status of the bank as an insured bank, fixing a time and place for a hearing
before the board of directors or before a person designated by it to conduct such
hearing, at which evidence may be produced, and upon such evidence the
board of directors shall make written findings which shall be conclusive.
Unless the bank shall appear at the hearing by a duly authorized representative, it shall be deemed to have consented to the termination of its status as
an insured bank. If the board of directors shall find that any ground specified
in such notice has been established, the board of directors may order that the
insured status of the bank be terminated on a date subsequent to such finding
and to the expiration of the time specified in such notice of intention. The
Corporation may publish notice of such termination and the bank shall give
notice of termination to its depositors, in such manner and at such time as the
board of directors may find necessary and may order for the protection of depositors. After termination of the insured status of any bank under the
provisions of this paragraph, the insured deposits of each depositor in the
bank on the date of such termination, less all subsequent withdrawals, shall
continue for a period of two years to be insured and the bank shall continue
to pay to the Corporation assessments as in the case of an insured bank for




6

BANKING ACT OF 1935

such period of two years from such termination, but no additions to any deposits or any new deposits shall be insured by the Corporation, and the bank
shall not advertise or hold itself out as having insured deposits unless in the
same connection it shall state with equal prominence that additions to deposits
and new deposits made after the date of such termination, specifying such
date, are not insured. Such bank shall in all other respects be subject to the
duties and obligations of an insured bank for the period of two years from
such termination and in the event of being closed on account of inability to
meet the demands of its depositors within such period of two years, the Corporation shall have the same powers and rights with respect to such bank as
in case of an insured bank.
"(2) Whenever the insured status of a member bank shall be terminated
by action of the board of directors, the Federal Reserve Board in the case of
a State member bank shall terminate its membership in the Federal Reserve
System in accordance with the provisions of section 9 of the Federal Reserve
Act and in the case of a national member bank the Comptroller of the Currency
shall appoint a receiver for the t a n k (to be the Corporation whenever the
bank shall be unable to meet the demands of its depositors). Whenever a
member bank shall cease to be a member of the Federal Reserve System, its
statute as an insured bank shall without notice or other action by the board of
directors terminate on the date of the taking effect of the termination of
membership of the bank in the Federal Reserve System, with like effect as if
terminated on said date by the board of directors after proceedings under
paragraph (1) of this subsection (i).
"(3) When the liabilities of an insured bank for deposits shall have been
assumed by another bank or banks, the insured status of such insured bank
shall terminate on the receipt by the Corporation of satisfactory evidence of
such assumption with like effect as if terminated on said date by the board
of directors after proceedings under paragraph (1) of this subsection (i) :
Provided, That if such bank gives notice of such assumption within thirty
days after such assumption takes effect to its depositors, by publication or
by any reasonable means, in accordance with regulations to be prescribed by
the board of directors, the insurance of its deposits shall terminate at the end
of six months from the date such assumption takes effect and such bank
shall be relieved of all future obligations to the Corporation, including the
obligation to pay future assessments."
10. By striking out the period at the end of paragraph " Fourth " of subsection (j) and inserting a colon and the following: "Provided. That, notwithstanding any other provision of law, all suits of a civil nature at common law
or in equity to which the Federal Deposit Insurance Corporation shall be a
party shall be deemed to arise under the laws of the United States, and the
district courts of the United States shall have original jurisdiction of all such
suits; and the Corporation as defendant in any such suit may, at any time
before the trial thereof, remove such suit from a State court into the district
court of the United States for the proper district by following the procedure
for the removal of causes otherwise provided by law. No attachment or execution shall be issued against the Corporation or its property before final judgment in any suit, action, or proceeding in any State, county, municipal, or
United States court."; and by inserting at the end of said subsection the
following:
" Eighth. To make examinations of and to require information and reports
from banks, as provided in this section.
" Ninth. To act as receiver.
"Tenth. To prescribe by its board of directors such rules and regulations
as it may deem necessary to carry out the provisions of this section."
11. By striking out in subsection (k) " ( k ) " and inserting in lieu thereof
"(k) ( 1 ) " ; and by adding to said subsection 3 new paragraphs to read as
follows:
"(2) The board of directors shall appoint examiners, who shall have power
on behalf of the Corporation (except as to a District bank) to examine any
insured State nonmember bank, State nonmember bank making application to
become an insured bank, or closed insured bank, whenever considered necessary. Such examiners shall have like power to examine, with the written
consent of the Comptroller of the Currency, any national bank, or District
bank and, with the written consent of the Federal Reserve Board, any State
member bank. Bach examiner shall have power to make a thorough examina-




BANKING ACT OF 1935

7

lion of all of the affairs of the bank and in doing so he shall have power to
administer oaths and to examine and take and preserve the testimony of any
of the officers and agents thereof under oath and shall make a full and detailed
report of the condition of the bank to the Corporation. The board of directors
in like manner shall appoint claim agents who shall have power to investigate
and examine all claims for insured deposits und transferred deposits. Each
claim agent shall have power to administer oaths and to examine under oath
and take and preserve testimony of any persons relating to such claims. Any
such examiner or claim agent in relation to any such examination, investigation, or taking of testimony may apply to any judge or clerk of any court of
the United States to issue subpenas and to compel the appearance of witnesses
and the production and taking of any such testimony and to punish disobedience in like manner as provided in sections 184-186 of the Revised Statutes
(U. S. C, title 5, sees. 94-96).
"(3) Each insured State nonmember bank (except a District bank) shall
make to the Corporation reports of condition in such form and at such times
as the board of directors may require of such bank. The board of directors
may require such reports to be published in such manner, not inconsistent with
any applicable law, as it may direct. Every such bank which fails to make or
publish any such report within such time, not less than five days, as the board
of directors may require, shall be subject to a penalty of $100 for each day
of such failure recoverable by the Corporation for its use.
"(4) The Corporation shall have access to reports of examinations made by
and reports of condition made to the Comptroller of the Currency or any Federal Reserve bank, and may accept any report made by or to nny commission,
board, or authority having supervision of a State nonmember bank (except a
District bank), and may furnish to the Comptroller of the Currency, or any
such Federal Reserve bank, commission, board, or authority reports of examinations made on behalf of and reports of condition made to the Corporation."
12. By striking out all of subsection (1) preceding the last paragraph thereof
and inserting in lieu thereof the following:
"(1) (1) The Temporary Federal Deposit Insurance Fund and the Fund for
Mutuals are hereby consolidated into the permanent insurance for deposits
created by this section and the assets therein shall be held by the Corporation
for the uses and purposes of the Corporation: Provided, That the obligations
to and rights of the Corporation, depositors, banks, and other persons arising
out of any event or transaction prior to the effective date shall remain unimpaired. From the effective date the Corporation shall insure the deposits of
all insured banks as defined and provided in this section. The maximum
amount of the insured deposit of any depositor shall be $5,000.
"(2) An insured bank shall for the purposes of ihis section, be deemed to
have been closed on account of inability to meet the demands ot its depositors in
any case where it has been closed for the purpose of liquidation without adequate
piovision for payment of its depositors.
"(3) Notwithstanding any other provision of law, whenever any insured
national bank or insured District bank shall have been closed by action of its
board of directors or the Comptroller of the Currency, as the case may be. on
account of inability to meet the demands of its depositors, the Comptroller of the
Currency shall appoint the Corporation receiver for such closed bank and no
other person shall be appointed as receiver of such closed bank.
•'(4) It shall be the duty of the Corporation as such receiver to realize upon
the assets of such closed bank, having due regard to the condition of credit in
the district in which such closed bank is located; to enforce the individual
liability of the stockholders and directors thereof; and to wind up the affairs of
such closed bank in conformity with the provisions of law relating to the liquidation of closed national banks, except as herein otherwise provided, retaining
for its own account such portion of the amount realized from such liquidation as
it shall be entitled to receive on account of its subrogation to the claims of
depositors and paying to depositors and other creditors the net amount available
for distribution to them. With respect to such closed bank, the Corporation as
such receiver shall have all the rights, powers, and privileges now possessed by
• >r hereafter given a receiver of an insolvent national bank.
"(5) Whenever any insured State bank, except a District bank, shall have
been closed by action of its board of directors or by the authority having supervision of such bank, as the case may be, on account of inability to meet the
demands of its depositors, the Corporation shall accept appointments as receiver
thereof, if such appointment be tendered by the authority having supervision of




8

BANKING ACT OF 1935

such bank and be authorized or permitted by State law. With respect to such
insured State bank, the Corporation shall possess the powers and privileges given
by State law to a receiver of such State bank.
"(6) When an insured bank shall have been closed on account of inability to
meet the demands of its depositors, payment of the insured deposits shall be
made by the Corporation, subject to the provisions of paragraph (7) of this
subsection (1), either (a) by making available to each depositor a transferred
deposit in a new bank or in another insured bank in the same community in an
amount equal to the insured deposit of such depositor and subject to withdrawal on demand, or (b) in accordance with any other procedure adopted by
the board of directors: Provided, That the Corporation, in its discretion, may
require proof of claims to be filed before paying the Insured deposits, and that
in any case where the Corporation is not satisfied as to the validity of a claim
for an insured deposit, it may require the final determination of a court of
competent jurisdiction before paying such claim.
"(7) In the case of a closed national bank or District bank the Corporation,
upon payment of any depositor as provided in paragraph (6) of this subsection
(1), shall become and be subrogated to all rights of the depositor to the extent
of such payment. In the case of any other closed insured bank, the Corporation
shall not pay any depositor until the right of the Corporation to be subrogated
to the rights of such depositor on the same basis as provided in the ease of a
closed national bank under this section shall have been recognized, by express
provisions of State law, by allowance of claims by the authority ha\ing supervision of such bank, by assignment of claims by depositors, or by any other
effective method. Such subrogation in the case of any closed bank shall include
the right to receive the same dividends from the proceeds of the assets of such
closed bank as would have teen payable to such depositor on a claim for the
insured deposit, such depositor retaining bis claim for any uninsured portion
of his deposit
"(8) As soon as po'Sible, the Corporation, if it finds that it is advisable and
in Ihe interest of the depositors of the closed bank or the public, shall organize
a new bank to assume the insured deposits of such closed bank and otherwise
to perform temporarily the functions provided for in this section. The new
bank shall have its place of business in the same community as the closed bank.
"(9) The articles of association and the organization certificate of the new
bank shall be executed by I epresentatives designated by the Corporation. No
capital stock need be paid in by the Corporation. The new bank shall not have
a board of directors, but shall be managed by an executive officer appointed by
the board of directors of the Corporation and who shall be subject to its directions. In other respects such bank shall be organized in accordance with the
existing provisions of the law relating to the organization of national bank
associations. The new bank may, with the approval ot the Corporation, accept
new deposits, which shall be subject to withdrawal on demand. The new bank,
without application or approval, shall be an insured bank and shall maintain
on deposit with the Federal Reserve bank of its district the reserves required
by law for member banks, but shall not be required to subscribe for stock of the
Federal Reserve bank. Funds of the new bank shall be kept on hand in cash,
invested in securities of the Government of the United States, or in securities
guaranteed as to principal and interest by the Government of the United States,
or deposited with the corporation, or with a Federal Resene bank, or with an
insured bank. The new bank, unless otherwise authorized by the Comptroller
of the Currency, shall transact no business except that authorized by this section and such business as may be incidental to its organization. Notwithstanding any other provision of law it, its franchise, property, and income shall be
exempt from all taxation now or hereafter imposed by the United States, by
any territory, dependency, or possession thereof, or by any State, county, municipality, or local taxing authority.
'•(10) On the organization of a new bank, the Corporation shall promptly
make available to the new bank an amount equal to the estimated insured
deposit of such closed bank plus the amount of its estimated expenses of operation and shall determine as expeditiously as possible the amount due each
depositor for his insured deposit in the closed bank, and the total expenses of
operation of the new bank. Upon determination thereof, the amounts so estimated and made available shall be adjusted to conform to the amounts so
determined. Earnings of the new bank shall be paid over or credited to the
Corporation in such adjustment. The new bank shall assume as transferred
deposits the payment of the insured deposits of such closed bank to each of its




BANKING ACT OF 193 5

9

depositors. Oi the amount so made available, the Corporation shall transfer
to the new bank, in cash, such amount as is necessary to enable it to meet
expenses and immediate cash demands on such transferred deposits and the
remainder shall be subject to withdrawal by the new bank on demand.
"(11) When in the judgment of the board of directors it is desirable to do so,
the Corporation shall cause capital stock of the new bank to be offered for sale
on such terms and conditions as the board of directors shall deem advisable,
in an amount sufficient, in the opinion of the board of directors, to make possible the conduct of the business of the new bank on a sound basis, but in no
event less than that required by section 5138 of the Revised Statutes, as
amended (U. S. C, Supp. VII, title 12, sec. 51), for the organization of a
national bank in the place where such new bank is located, giving the stockholders of the closed bank the first opportunity to purchase any shares of common stock so offered. Upon proof that an adequate amount of capital stock in
the new bank has been subscribed and paid for in cash, the Comptroller of
the Currency shall require the articles of association and the organization certificate to be amended to confoim to the requirements for the organization of a
national bank, and thereafter, when the lequirements oi law with respect to
the organization of a national bank have been complied with, he shall issue a
certificate of authority to commence business to the bank, which shall thereupon coase to have the status of a new bank and shall be managed by directors
elected by its own shareholders and may exercise all the powers granted by
law and shall be subject to all of the provisions of law relating to national
banks. Such bank shall thereafter be an insured national bank, without certification to or approval by the Corporation.
" (12) If the capital stock oi the new b>ank -.hall not be offered for sale, or if
an adequate amount of capital for such new bank is not subscribed and paid in,
the boaid of directors may offer to transfer its business to any insured bank
in the same community which will take over its assets, assume its liabilities,
and pay to the Corporation for such business such amount as the board of
directors may deem adequate; or the board of diiectors in its discretion may
change the location of the new bank to the office of the Corporation or to some
other place or may at any time wind up its affairs as herein provided. Unless
the capital stock of the new bank is sold or its assets acquired and its liabilities
assumed by an insured bank, as provided above, within two years from the date
of its organization, the Corpoiation shall wind up its affairs, after giving such
notice, if any, as the Comptroller of the Currency may require, and shall
certify to the Comptroller of the Currency the termination of the new bank
and thenceforth the Corporation shall be liable for its obligations and be the
owner of its assets. The provisions of sections 5220 and 5221 of the Revised
Statutes (U. S. C, title 12, sec. 181 and 182) shall not apply to such new banks."
13. By inserting before the said last paragraph of subsection (1) the following: " (n) ( 1 ) " ; and by striking out the comma after the words "United
States " in the first sentence of said paragraph and inserting before the word
" except" the following: " or in securities guaranteed as to principal and
interest by the Government of the United States," ; and by transposing said
paragraph to subsection (n) as amended, as paragraph (1) thereof.
14. By striking out in subsection (m) the following: " ( m ) " ; and by striking
out in said subsection the word " herein " and inserting in lieu thereof " in
this section " ; and by transposing said subsection to subsection (n), as amended,
as paragraph (2) thereof.
15. By adding a new subsection to read as follows:
"(m) (1) The Corporation as receiver of a closed national bank or District
bank shall not be required to furnish bond and shall have the right to appoint
an agent or agents to assist it in its duties as such receiver, and all fees,
compensation, and expenses of liquidation and administration thereof shall be
fixed by the Corporation, subject to the approval of the Comptroller of the
Currency, and may be paid by it out of funds coming into its possession as
such receiver. The Comptroller of the Currency is authorized and empowered
to waive and relieve the Corporation from complying with any regulations of
the Comptroller of the Currency with respect to receiverships where in his
discretion such action is deemed advisable to simplify administration.
"(2) Payment of an insured deposit to any person by the Corporation shall
discharge the Corporation, and payment of a transferred deposit to any person
by the new bank or the other insured bank shall discharge the Corporation and
such new bank or other insured bank, to the same extent that payment to such




10

BAWKIXG ACT OF 193 5

person by the closed bank would have discharged it from liability for the
insured deposit.
"(3) Except an otherwise prescribed by the board of directors, neither the
Corporation, such new bank, nor such other insured bank, shall be required to
recognize as the owner of any portion of a deposit appearing on the records
of the closed bank under a name other than that of the claimant, any person
whose name or interest as such owner is not disclosed on the records of such
closed bank as part owner of said account, where such recognition would
increase the aggregate amount of the insured deposits in such closed bank.
"(4) The Corporation may withhold payment of such portion of the insured
deposit of any depositor in a closed bank as may be required to provide for the
payment of any liability of such depositor as a stockholder of the bank, or of
any liability of such depositor to the bank or its receiver, not offset against a
claim due from the bank, pending the determination and payment of such
liability by such depositor or any other person liable therefor.
"(5) If any depositor in a closed bank shall fail to claim his insured deposit
from the Corporation, or shall fail to claim or arrange to continue the transferred deposit with the new bank or other bank assuming liability therefor
within one year after the appointment of the receiver for the closed bank, all
rights of the depositor against the Corporation in respect to the insured deposit
or against the new bank and such other bank in respect to the transferred
deposit shall be barred, and all rights of the depositor against the closed bank,
its shareholders or the receivership estate to which the Corporation may have
become subrogated shall thereupon revert to the depositor. The amount of any
transferred deposits not claimed within said one-year period shall be refunded
to the Corporation."
16. By striking out in subsection (n) the following: " ( n ) " and inserting
"(3) "; and by retaining said subsection in paragraph (3) of subsection (n), as
amended; and by striking out in said subsection (n) the words " member banks
which are now or may hereafter become insolvent or suspended" and inserting
in lieu thereof " insured banks closed on account of inability to meet the demands
of depositors"; and by striking out "State member" and inserting in lieu
thereof " insured State " ; and by striking out the period at the end of the first
sentence and inserting in lieu thereof " or District banks." ; and by adding at the
end of said subsection two new sentences to read: " The Corporation, in its
discretion, may make loans on the security of or may purchase and liquidate or
sell any part of the assets of an insured bank which is now or may hereafter be
closed on account of inability to meet the demands of its depositors. In any case
where the Corporation is acting as receiver of such insured bank such loan or
purchase shall not be made without approval of a court of competent jurisdiction." ; and by adding to subsection (n). as amended, a new paragraph to read as
follows:
"(4) Until July 1, 1986, whenever in the judgment of the board of directors
such action will reduce the risk or avert a threatened loss to the Corporation and
will facilitate a merger or consolidation, or facilitate the sale of the assets of an
insured bank to and assumption of its liabilities by another insured bank, the
Corporation may, upon such terms and conditions as it may determine, make
loans secured by the assets of such insured bank in subordination to the rights
of depositors or otherwise, or may purchase such assets, or may guarantee any
other insured bank against loss by reason of assuming the liabilities and purchasing the assets of such insured bank. Any insured national bank or District
bank or, with the approval of the Comptroller of the Currency, any conservator
thereof is authorized to contract for such sales or loans and to pledge any assets
of the bank to secure such loans.
17. By striking out in subsection (o) the following: "(o)", and inserting
in lieu thereof "(o) (1)"; and by inserting after the word "empowered" in
the first sentence in subsection (o) the following: "with the approval of the
Secretary 0 f the Treasury"; by striking out in subsection (o) the words "of
its capital" and inserting in lieu thereof " received by the Corporation in
payment of its capital stock and of the first annual assessments"; and by
adding at the end of subsection (o) two new paragraphs to read as follows:
"(2) The Secretary of the Treasury, in his discretion, is authorized to purchase any obligations of the corporation to be issued hereunder, and for such
purpose the Secretary of the Treasury is authorized to use as a public-debt
transaction the proceeds of the sale of any securities hereafter issued under
the Second Liberty Bond Act, as amended, and the purposes for which secu-




BANKING ACT OP 1935

11

rities may be issued under the Second Liberty Bond Act, as amended, are
extended to include any purchases of the Corporation's obligations hereunder. The Secretary of the Treasury may, at any time, sell any of the obligations of the Corporation acquired by him under this section. All redemptions, purchases, and sales by the Secretary of the Treasury of the obligations
of the Corporation shall be treated as public-debt transactions of the United
States.
"(3) No obligations, contingent or absolute, shall be incurred for the expenditure or other disposition of funds heretofore, hereby, or hereafter appropriated or otherwise obtained ior the carrying out of functions of the
Corporation unless within estimates of such obligations and expenditures
approved by the Director of the Budget: and, to the extent that the Secretary of the Treasury may consider practicable and under such rules and regulations as he may prescribe, there shall be maintained on the books of the
Treasury Department such accounts as may be necessary to give full force
and effect to this provision: Provided, That this paragraph shall not apply to
obligations of the Corporation to depositors of banks closed on account of inability to meet the demands of depositors, obligations for expenses of paying its
obligations to depositors or expenses of operation of new banks, obligations
connected with the powers and duties of the Corporation as receiver, or obligations incurred for the purposes provided in this subsection (n) of this section,
or obligations to make the refund provided by law to any bank not a member
of the Federal Reserve System electing as provided in subsection (f) of this
section not to continue after June 30, 1935, as an insured bank."
18. By adding at the end of subsection (r) the following:
" The board ol directors, irom time to time, shall gather information and
data and shall make investigations, and reports upon the organization, operation, closing, reopening, reorganization, and consolidation of banks, banking
practices and management, and the security of depositors and adequacy of
service to borrowers. The board of directors, in any annual or special report
to Congress, shall report its findings and make such recommendations and
requests as it shall find necessary and appropriate for the purpose of carrying
out the purposes of this section and tully providing for all of the obligations
of the Corporation."
19. By inserting in subsection (s) iollowing the words "purchase any assets"
the following: " or for the purpose of obtaining the payment of any insured
deposit or transferred deposit or the allowance, approval, or payment of any
claim,".
20. By striking out in subsection (v) the following: " ( v ) " and inserting in
lieu thereof "(v) ( 1 ) " ; and by striking out in said subsection "class A stockholder of the Federal Deposit Insurance Corporation" and inserting in lieu
thereof " insured bank."
21. By striking out the second paragiaph of subsection (v) and inserting in
lieu thereof the following:
"(2) Every insured bank shall display at each place of business maintained
by it a sign or signs, and shall include in advertisements relating to deposits and
in forms furnished for use of its depositors as specified by regulations of the
board of directors, a statement to the effect that its deposits are insured by the
Corporation. The board of directors shall prescribe by regulation the forms of
such signs and the manner of display and the forms of such statements and the
manner of use. For each day an insured bank continues to violate any provision
of this paragraph or any lawful provision of said regulations, it shall be subject
to a penalty of $100, which shall be recoverable by the Corporation for its use."
22. By adding to subsection (v) three new paragraphs to read as follows:
"(3) No insured bank shall pay any dividends on its capital stock while it
remains in default in the payment of any assessment clue to the Corporation;
and any director or officer of any insured bank, who participates in the declaration or payment of any such dividend shall, upon conviction, be fined not more
than $1,000 or imprisoned not more than one year, or both.
" (4) Unless, in addition to compliance with other provisions of law, it shall
have the prior written consent of the corporation, no insured bank shall enter
into any consolidation or merger with any noninsured bank, or assume liability
to pay any deposits of any noninsured bank, or transfer assets to any noninsured bank in consideration of the assumption of liability for any portion
of its deposit"*, and no insured State nonmember bank (except a district
bank) without s-ucli consent shall reduce the amount or retire any part of its




12

BANKING ACT OF 1935

common or preferred capital stock, or retire any part of its capital notes or
debentures.
" (5) Each insured bank shall provide such protection and indemnity against
burglary, fidelity, and other similar insurable losses as the board of directors
by regulation may require adequately to reimburse the bank for such losses.
Whenever any insured bank fails to comply with any such regulation the
corporation may contract for such protection and indemnity and add the cost
thereof to the assessment otherwise payable by such bank.
" (6) Whenever an insured bank, except a national bank or district bank,
for a period of one hundred and twenty days after written notice of the
recommendations of the Corporation, based on a report of examination of such
bank by an examiner of the Corporation, shall fail to comply with such recommendations, the Corporation shall have the power, and is hereby authorized, to
publish any part of such report of examination in such manner as it may
determine: Provided, That such notice of intention to make such publication
shall be given at the time such recommendations are made, or at any time
thereafter and at least ninety days before such publication."
23. By striking out all of subsection (y) preceding the last paragraph
thereof and inserting in lieu thereof the following:
" (y) (1) No State nonmember bank, other than (a) a mutual savings
bank, or (b) a Morris Plan Bank, or (c) a bank located in the Territories of
Hawaii or Alaska, shall become or continue an insured bank after July 1,
1937, and the insured status and insurance of the deposits of each State nonmember bank, other than (a) a mutual savings bank, or (b) a Morris Plan
Bank, or (c) a bank located in the Territories of Hawaii or Alaska, shall
terminate on July 1, 1937.
"(2) For the purposes of this section, and notwithstanding any other provision thereof, any unincorporated bank which continues to be an insured
bank without application or approval under the provisions of paragraph (1)
of subsection (f) of this section shall be included in the term ' State bank'
and ' State nonmember bank'."
24. By inserting at the beginning of the last paragraph of subsection (y)
the following: "(3)."
TITLE II—AMENDMENTS TO THE FEDERAL RESERVE ACT

SECTION 201. (a) Section 4 of the Federal Reserve Act, as amended, is
further amended by striking out the paragraph which commences with the
words " Class C directors shall be appointed by the Federal Reserve Board"
and the next succeeding paragraph, and inserting in lieu thereof the following:
" Class C directors shall be appointed by the Federal Reserve Board. They
shall have been for at least two years residents of the districts for which they
are appointed, except that this requirement shall not apply to the Governor and
Vice Governor of the bank. Each class C director shall hold office for a term
of three years except that the Governor's term as a class C director shall expire
when he ceases to be Governor of the bank and, if the Vice Governor be designated as a class C director, his term as a class C director shall expire when
he ceases to be Vice Governor. One of the directors of class C shall be appointed by the Federal Reserve Board as deputy chairman to exercise the
powers of the chairman of the board when necessary. In the case of the
absence of the chairman and deputy chairman, the third class C director shall
preside at meetings of the Board.
" Effective ninety days after the enactment of the Act containing this amendment, the officers of Governor and chairman of the board of directors of each
Federal Reserve bank shall be combined. The Governor shall be the chief
executive officer of the bank and shall be appointed annually by the board of
directors, subject to the approval of the Federal Reserve Board. He shall not
take office until approved by the Federal Reserve Board and thereupon he
shall be appointed by the Federal Reserve Board as one of the class C directors
of the bank. He shall be ex officio chairman of the board of directors and
chairman of the executive committee; and all other officers and employees of
the bank shall be directly responsible to him. For each Federal Reserve bank
there shall be appointed annually in the same manner as the Governor a Vice
Governor, who shall, in the absence or disability of the Governor or during
a vacancy in the office of Governor, serve as the chief executive officer of the
bank and act as chairman of the executive committee of the bank. He may
be appointed by the Federal Reserve Board as a class C director of the bank




BANKING ACT OF 19 3 5

13

and in such case may be appointed as deputy chairman of the board of directors.
Whenever a vacancy shall occur in the office of the Governor or Vice Governor
of a Federal Reserve bank, it shall be filled in the manner provided for original
appointments; and the person so appointed shall hold office until the expiration
of the term of his predecessor.
" Effective ninety days after the enactment of the act containing this
amendment, any Federal Reserve agent who shall not have been appointed
Governor of the bank shall cease to be a class C director and chairman of
the board of directors. All duties prescribed by law for the Federal Reserve
agent shall be performed by such person as the Federal Reserve Board shall
designate.
" No member of the board of directors of a Federal Reserve bank, other
than the Governor and Vice Governor, shall serve as a director for more than
two consecutive terms of three years each, but this shall not prevent the
present incumbents from serving ont the remainders of their present terms."
(b) The last paragraph of such section 4 is amended by striking out the
words " Theieafter every director of a Federal Reserve bank chosen as hereinbefore provided shall hold office for a term of three years " and substituting
the words " Thereafter each director of class A and each director of class B
chosen as hereinbefore provided shall hold office for a term of three years."
SEC. 202. Section 9 of the Federal Reserve Act, as amended, is amended by
changing the period at the end of the tenth paragraph thereof to a colon and
adding the following: •' Provided further, That upon application to the Federal
Reserve Board at any time prior to July 1, 1937, by any nonmember bank
which at the time of such application has been admitted to the benefits of
insurance by the Federal Deposit Insurance Corporation under section 12B
of this Act, the Federal Reserve Board, in its discretion, in order to facilitate
the admission of such bank to membership in the Federal Reserve System, may
waive in whole or in part the requirements of this section relating to the
amount of capital required of such bank. Such bank shall comply with such
requirements within such period or periods after admission as in the Board's
judgment shall be reasonable in view of all the circumstances."
SEC. 203. Section 10 of the Federal Reserve Act, as amended, is further
amended in the following respects:
(1) By striking out the second sentence of the first paragraph and substituting the following: " In selecting the six appointive members of the Federal
Reserve Board the President shall choose persons well qualified by education or
experience or both to participate in the formulation of national economic and
monetary policies. Not more than one of the appointive members shall be
selected from any one Federal Reserve district, except that this limitation shall
not apply to the selection of the Governor."
(2) By adding at the end of such first paragraph the following: "The appointive members of the Federal Reserve Board appointed after July 1, 1935,
shall each receive a salary at the same rate as that of the heads of executive
departments who are members of the President's Cabinet, together with actual
necessary traveling expenses. Each appointive member of the Federal Reserve
Board heretofore appointed may retire from active service upon reaching the
age of seventy or at any time thereafter, and all members hereafter appointed
shall retire upon reaching the age of seventy. Each member of the Board so
retired from active service who shall have served for at least five years shall
receive, during the remainder of his life, retirement pay in an amount equal to
the annual salary paid to appointive members prior to the enactment of the
Act containing this amendment: Provided, That if he shall not have served for
as much as twelve years his retirement pay shall be at the rate of one-twelfth
of such annual salary for each year and for any fraction of an additional year
of such service: Provided further, That any member whose term expires after
he reaches the age of sixty-five and who is not reappointed shall receive retirement pay upon the same basis as if he had been retired under the provisions
of this paragraph. The funds necessary for such retirement pay shall be provided by the Federal Reserve banks in such manner as the Federal Reserve
Board shall prescribe."
(3) By striking out the fourth sentence of the second paragraph and inserting in lieu thereof the following: "Of the six appointive members of the
Board one shall be designated by the President as Governor and one as Vice
Governor of the Federal Reserve Board, to serve as such until the further
order of the President, and the provisions of the next preceding sentence of
129688—35—PT 1




2

14

BANKING ACT OF 1935

this paragraph shall not apply to the member designated as Governor. The
term of office of the member designated as Governor .shall be the period during
which he shall continue as Governor and. upon the termination of his designation as Governor, lie shall be deemed to have served the full term for which
he was appointed."
SEC. 204. Subsection (i) of section 11 of the Federal Reserve Act, us amended,
is amended by adding the following at the end thereof: -'The Board may
assign to designated members of the Board or officers or representatives of the
Board, under such rules and regulations, the performance of duties, functions,
or services so specified, but any such assignment shall not include the determination of any national or system policy or any power to make rules and
regulations or any power winch under the terms of this act is required to be
exercised by a specified number of members of the Board."
Sao. 205. Effective ninety days after the enactment of this Act. section 12A
of the Federal Reserve Act. as amended, is amended to read as follows:
" SEC. 12A. There is hereby created a Federal Open Market Committee (hereinafter referred to as the "Committee"), which shall consist of the Governor
of the Federal Reserve Board, who shall be chairman of the Committee, two
members of the Federal Reserve Board, selected by the Board, and two governors of the Federal Reserve banks, selected by the governors of the Federal
Reserve banks in accordance with procedure prescribed by regulations of the
Federal Reserve Board The terms of the members of the Committee, other
than the Governor of the Federal Reserve Board, shall expire at the end of
each calendar year. Whenever a vacancy shall occur a successor shall be
selected in the same manner as his predecessor was selected. Meetings of
the Committee shall be held from time to time upon the call of the Governor,
at the request of the Board or of any two members of the Committee, or upon
his own initiative.
" The Committee from time to time shall consider, adopt, and transmit to
the Federal Reserve banks resolutions setting forth policies which in the
judgment of the Committee should be followed with respect to open-market
operations of the Federal Reserve banks, and the Federal Reserve banks shall
conform their open-market operations to the provisions thereof. The Committee shall aid in the execution of such polifies nnrt/or perform such other
duties relating thereto as the Federal Reserve Board may prescribe All openmarket operations of the Federal Reserve banks shall be subject to regulations
prescribed by the Federal Reserve Board. The Committee from time to time
shall also make recommendations to the Federal Reserve Board regarding the
discount rates of the Federal Reserve banks."
SEC. 206. Section 13 of the Federal Reserve Act. as amended, is further
amended by adding at the end thereof a new paragraph reading as follows:
" Upon the endorsement of any member bank, which shall be deemed a waiver
of demand, notice, and protest as to its own endorsement exclusively, and subject to such regulations as to maturities and other matters as the Federal
Reserve Board may prescribe, any Federal Reserve bank may discount any
commercial, agricultural or industrial paper and may make advances to any
such member bank on its promissory notes secured by any sound assets of such
member bank."
SEC. 207. Subsection (b) of section 14 of the Federal Reserve Act, as
amended, is further amended by changing the semicolon at the end thereof to
a colon and adding the following: " Provided, That any bonds, notes, or other
obligations which are direct obligations of the United States or which are
fully guaranteed by the United States as to principal and interest may be
bought and sold without regard to maturities."
SEC. 20S. Section 16 of the Federal Reserve Act, as amended, is further
amended in the following respects:
(1) By striking out the first ten paragraphs and substituting therefor the
following:
'' SEC. 1C. Each Federal Reserve bank may issue Federal Reserve notes,
which shall be obligations of the United States, secured by a first and paramount lien on nil of the assets of such bank. Federal Reserve notes shall be
issued and retired under such rules and regulations as the Federal Reserve
Board may prescribe and shall be legal tender for all purposes.
" Every Federal Reserve bank shall maintain reserves in lawful money (other
than Federal Reserve notes or Federal Reserve bank notes) of not less than 35
per centum against its deposits and reserves in gold certificates of not less than
40 per centum against its Federal Reserve notes in actual circulation. Each




BANKING ACT OF 193 5

15

Federal Reserve note shall bear upon its face a distinctive letter, which shall
be assigned by the Federal Reserve Board to each Fedeial Receive bank, and
also a serial number.
"When received by the Treasurer of the United States (nun <i source other
than a Federal Reserve bank, Federal Reserve notes unfit for further use shall
he canceled and retired; and, upon receipt of advice of such cancelation and
retirement, the issuing Federal Reserve bank, shall reimburse the Treasurer of
the United States for the notes so canceled and retired. When received by a
Federal Reserve bank, Federal Reserve notes unfit for further use shall be
canceled and forwarded to the Treasurer of the United States for retirement;
and, if issued by another Federal Reserve bank, such issuing bank shall reimburse the Federal Reserve bank which canceled such notes and forwarded them
ro the Treasurer of the United States.
" In order to furnish suitable notes for circulation as Federal Reserve notes,
the Comptroller of the Currency shall cause plates and dies to be engraved in
the best manner to guard against counterfeiting and fraudulent alterations, and
.shall have printed therefrom and numbered such quantities of such notes of
the denominations of $5, $10, $20, $50, $100, $500, $1,000, $5,000, and $10,000
as may be required to supply the Federal Reserve banks. Such notes shall be
in form and tenor as directed by the Secretary of the Treasury and shall bear
the distinctive numbers of the several Federal Reserve banks through which
They are issued. When such notes have been prepared, they shall be held in the
Treasury subject to the order of the Comptroller of the Currency for delivery
ro the Federal Reserve banks. Federal Reserve notes unfit for circulation shall
oe returned by the Federal Resets e banks to the Comptroller ot the Currency
for cancelation and destruction."
(2) By striking from the sixteenth paragraph the words " or Federal Reserve Agent"' where they occur in three different places and also the words
" or his " and the words " at the Treasury or at the Subtreasury of the United
States nearest the place of business of such Federal Reserve bank or such
Federal Reserve Agent."
SEC. 209. The sixth paragraph of section 19 of the Federal Reserve Act, as
amended, is amended to read as follows:
" Notwithstanding the other provisions of this section, the Fe.leral Reserve
Board, in order to prevent injurious credit expansion or conti action, may by
regulation change the requirements as to reserves to be maintained against
demand or time deposits or both by member banks in any or all Federal Reserve districts and/or any or all of the three classes of cities referred to above."
SEC. 210. The first paragraph of section 24 of the Federal Reserve Act, as
amended, is amended to read as follows:
'• SEC. 24. Any national banking association may make loans secured by first
liens upon improved real estate, including improved farm land and improved
business and residential properties. A loan secured by real estate within the
meaning of this section shall be in the form of an obligation or obligations
secured by mortgage, trust deed, oi other' instrument upon real estate when
the entire amount of such obligation or obligations is made or is 1 sold to such
association. The amount of any such loan shall not exceed 60 per centum
of the actual value of the real estate offered for security, but no such loan
upon such security shall be made for a longer term than three years: Pi ovided.
That loans may be made in amounts not exceeding 75 per centum of the actual
value of the real estate offered for security, if they are required to be completely amortized within periods not exceeding twenty yeais by means ot substantially equal monthly, quarterly, semiannual, or annual payments on principal with interest added or on principal and interest combined Any bank
may make such loans in an aggregate «uni equal to the amount of the capital
stock of such association paid in and unimpaired plus its unimpaired surplus
fund, or equal to 60 per centum of the amount of its time and savings deposits,
whichever is the greater: Provided, That in computing such aggregate sum
there shall be included all such loans on which the bank is liable as endorser,
guarantor, or otherwise, and the book value of all real estate owned by the;
bank directly or indirectly except its banking premises. Nothing contained
in this section shall prevent any national banking association from acquiring,
as additional security for loans previously made in good faith, second or subsequent liens on real estate or shares or participations in such liens In the
case of loans secured bv real estate which are insured under the piwisions
ui Title I I of the National Housing Act, the restrictions cf this >ecti«n ;is to




16

BANKING ACT OF 19 3 5

the amount of the loan in relation to the actual value of the real estate and
as to the three-year limit on the terms of such loans shall not apply. All
loans made hereunder shall be subject to the general limitations contained in
section 5200 of the Revised Statutes of the United States. Such banks may
continue hereafter as heretofore to receive time and savings deposits and to
pay interest on the same, but the rate of interest which such banks may pay
upon such time deposits or upon savings or other deposits shall not exceed
the maximum rate authorized by" law to be paid upon such deposits by State
banks or trust companies organized under the laws of the State wherein such
national banking association is located. State banks and trust companies
which are members of the Federal Reserve System shall not hereafter make
new loans secured by real estate except to the same extent and under the
same terms and conditions as national banking associations are permitted to
do so."
TITLE III

TECHNICAL AMENDMENTS

SECTION 301. Subsection (c) of section 2 of the Banking Act of 1933, as
amended, is amended by adding at the end thereof the following paragraph:
" Notwithstanding the foregoing, the term ' holding company affiliate' shall
not include any organization which, in the judgment of the Federal Reserve
Board, is not engaged, directly or indirectly, as a business in holding the
stock of, or managing or controlling, banks, banking associations, savings banks,
and/or trust companies."
SEC. 302. The first paragraph of section 20 of the Banking Act of 1933, as
amended, is amended by inserting before the period at the end thereof a colon
and the following: " Provided, That nothing in this paragraph shall apply to
any such organization which shall have been placed in formal liquidation and
which shall transact no business except such as may be incidental to the liquidation of its affairs."
SEC. 303. (a) Paragraph (1) of subsection (a) of section 21 of the Banking
Act of 1933, as amended, is amended by adding before the semicolon at the
end thereof a colon and the following: "Provided, That the provisions of this
paragraph shall not prohibit national banks or State banks or trust companies
(whether or not members of the Federal Reserve System) or other financial
institutions or private bankers from dealing in, underwriting, purchasing, and
selling investment securities to the extent permitted to national banking associations by the provisions of section 5136 of the Revised Statutes, as amended
(U. S. C, title 12, sec. 24; Supp. VII, title 12, sec. 24) : Provided further, That
nothing in this paragraph shall be construed as affecting in any way such
right as any bank, banking association, savings bank, trust company, or other
banking institution, may otherwise possess to sell, without recourse or agreement to repurchase, obligations evidencing loans on real estate."
(b) Paragraph (2) of subsection (a) of such section 21 is amended by
inserting after the words " to engage to any extent whatever " the words " with
others than his or its officers, agents, or employees", and is further amended
by adding the following sentence at the end of said paragraph: " The expense
of the examinations required hereunder shall be assessed against, and paid by,
the institution subject to examination in the manner and with the same effect
as provided by section 5240 of the Revised Statutes, as amended (U. S. C ,
title 12, sees. 484, 485; Supp. VII, title 12, sees. 481-483)."
SEC. 304. Section 22 of the Banking Act of 1933, as amended, is amended
by adding at the end thereof the following sentence: " Such additional liability
shall cease on July 1, 1937, with respect to shares issued prior to June 17, 1933,
by any association which shall be transacting the business of banking on
July 1. 1937."
SEC. 305. Section 4 of the Act entitled "An Act to amend section 12B of the
Federal Reserve Act so as to extend for one year the temporary plan for deposit
insurance, and for other purposes" (48 Stat. 969), approved June 26, 1934, is
amended to read as follows:
" SEC. 4. So much of section 31 of the Banking Act of 1933, as amended, as
relates to stock ownership by directors, trustees, or members of similar governing bodies of any national banking association or of any State bank or trust
company which is a member of the Federal Reserve System is hereby repealed."
SBO. 306. Effective January 1, 1936, section 32 of the Banking Act of 1933, as
amended, is amended to read as follows:
" SEC. 32. No officer, director, or employee of any corporation or unincorporated association, no partner or employee of any partnership, and no individual,



BANKING ACT OF 1935

17

primarily engaged in the issue, flotation, underwriting, public sale, or distribution, at wholesale or retail, or through syndicate participation, of stocks, bonds,
or other similar securities, shall serve at the same time as an officer, director, or
employee of any member bank except in limited classes of cases in which the
Federal Reserve Board may allow such service by general regulations when
in the judgment of the Federal Reserve Board it would not unduly influence
the investment policies of such member bank or the advice it gives its customers
regarding investments."
SBO. 307. (a) The second sentence of paragraph seventh of section 5136 of the
Revised Statutes, as amended (U. S. C, Supp VII, title 12, sec. 24), is amended
to read as follows: " The business of dealing in investment securities and stock
by the association shall be limited to purchasing and selling such securities
and stock without recourse, solely upon the order, and for the account of, customers, and in no case for its own account, and the association shall not underwrite any issue of securities or stock: Provided, That the association may
purchase for its own account investment securities under such limitations and
restrictions as the Comptroller of the Currency may bj regulation prescribe,
but in no event shall the total amount of the investment securities of any one
obligor or maker, purchased after this section, as amended, takes effect and
held by the association for its own account, exceed at any time 10 per centum
of its capital stock actually paid m and unimpaired and 10 per centum of its
unimpaired surplus fund."
(b) The fourth sentence of such paragraph seventh is amended to read as
follows: " Except as hereinafter provided or otherwise permitted by law,
nothing herein contained shall authorize the purchase by the association for
its own account of any shares of stock of any corporation."
SEC. 308. Section 5138 of the Revised Statutes, as amended (U. S. C, Supp.
VII, title 12. sec. 51), is amended by adding the following sentence at the
end thereof: " No such association shall hereafter be authorized to commence
the business of banking until it shall have a paid-in surplus equal to 20 per
centum of its capital: Provided, That the Comptroller of the Currency may
waive this requirement as to a State bank converting into a national banking
association."
SEC. 309. The last paragraph of section 5139 of the Revised Statutes, as
amended (U. S. C. Supp. VII, title 12, sec. 52), is amended to read as follows:
"After one year from the date of the enactment of the Banking Act of 1933,
no certificate evidencing the stock of any such association shall bear any
statement purporting to represent the stock of any other corporation, except a
member bank or a corporation existing on the date this paragraph takes effect
engaged primarily in holding the bank premises of such association, nor shall
the ownership, sale, or transfer of any certificate representing the stock of
any such association be conditioned in any manner whatsoever upon the ownership, sale, or transfer of a certificate representing the stock of any other corporation, except a member bank or a corporation existing on the date this
paragraph takes effect engaged primarily in holding the bank premises of such
association: Provided, That this section shall not operate to prevent the ownership, sale, or transfer of stock of any other corporation being conditioned upon
the ownership, sale, or transfer of a certificate representing stock of a
national banking association."
SEC. 310. (a) Section 5144 of the Revised Statutes, as amended (U. S. C,
Supp. VII, title 12, sec. 61), is amended by inserting before the period at the
end of the first sentence thereof a semicolon and the following: " except that
such holding company affiliate may without obtaining such permit vote in
tavor of placing the association in voluntary liquidation ".
(b) Such section 5144 is further amended by adding at the end of the first
paragraph thereof the following: "Whenever shares of stock cannot be voted
by reason of being held by the bank as sole trustee, such shares shall be excluded in determining whether matters voted upon by the shareholders were
adopted by the requisite percentage of shares."
(c) The first sentence of the third paragraph of such section 5144 is
amended to read: "Any such holding company affiliate may make application
to the Federal Reserve Board for a voting permit entitling it to vote the stock
controlled by it at any or all meetings of shareholders of such bank or authorizing the trustee or trustees holding the stock for its benefit or for the benefit
of its shareholders so to vote the same."
SEC. 311. Section 5154 of the Revised Statutes, as amended (U. S. C title
12, sec. 35), is amended by adding at the end thereof the following paragraph:




18

BANKING ACT OP 1935

" The Comptroller oi the Currency may, in his discretion and subject to such
conditions as he may prescribe, permit such converting bank to retain and carry
at a value determined by the Comptroller such of the assets of such converting
bank as do not conlorm to the legal requirements relative to assets acquired
and held by national banking associations."
SEC. 312. Section 5162 of the Revised Statutes (U. S. C, title 12, sec. 170) is
amended by adding at the end thereof the following paragraph:
" The Comptroller of the Currency may designate one or more persons to
countersign m his name and on his behalf such assignments or transfers of
bonds as require his countersignature."
SEC. 313. The first two sentences of section 5197 of the Revised Statutes, as
amended (V. S. C, Supp. VII, title 12, sec. 85), are amended to read as follows:
"Any association may take, receive, reserve, and charge on any loan in discount
made, or upon any notes, bills of exchange, or other evidences of debt, interest
at the rate allowed by the laws of the State, Territory, or District where the
association is located, or at a rate of 1 per centum in excess of the discount rate
on ninety-day commercial paper in effect at the Federal Reserve bank in the
Federal Reserve district where the association is located, whichever may be
the greater, and no more, except that where, by the laws of any State, u diiferent rate is limited for banks organized under State laws, the rate so limited
shall be allowed lor associations organized or existing in any such State under
this title. When no rate is fixed by the laws of the State, or Territoiy, or
District, the association may take, receive, reserve, or charge a rate not exceeding 7 per centum, or 1 per centum in excess of the discount rate on ninety-day
commercial paper in effect at the Federal Reserve bank in the Federal Reserve
district whore the association is located, whiclie\er may be the greater, and
such interest may be taken in advance, reckoning the days for which the
note, bill, or other evidence oi debt has to run: Provided, That the maximum
amount to be charged at a branch of an association located outside of the
States of the United States and the District of Columbia shall be at the rate
allowed by the laws of the country, territory, dependency, province, dominion,
insular possession, or other political subdivision where the branch is located."
SEC. 314. Section 5199 of the Revised Statutes (U. S. 0., title J2, sev. CO), is,
amended to read as follows:
" SEC. 5199. The directors of any association may, semiannually, declaie a
dividend of so much of the net profits of the association as they shall judge
expedient; but each association shall, before the declaration of a dividend on
its shares of common stock, carry not less than one-tenth part of its net profits
of the preceding half year to its surplus fund until the same shall equal the
amount of its common capital."
SEO. 315. Section 5209 of the Revised Statutes (U. S. C, title 12, sec. 592), is
hereby amended by inserting after the words, " known as the Federal Reserve
Act", the words " or of any insured bank as defined in subsection (c) of section
12B of the Federal Reserve A c t " ; and by inserting after the words " such Federal Reserve bank or member bank ", wherever they appear in such section, the
words " or insured bank " ; and by inserting after the words •' or the Comptroller
of the Currency ", the words, " or the Federal Deposit Insurance Corporation,".
SEO. 316. Section 5220 of the Revised Statutes (U. S. C, title 12, sec. 181), Is
amended by adding at the end thereof the following paragraph :
" The shareholders shall designate one or more persons to act as liquidating
agent or committee, who shall conduct the liquidation in accordance with law
and under the supervision of the board of directors, who shall require a suitable
bond to be given by said agent or committee. The liquidating agent or committee shall render annual reports to the Comptroller of the Currency on the
31st day of December of each year showing the progress of said liquidation until
the same is completed. The liquidating agent or committee shall also make an
annual report to a meeting of the shareholders to be held on the date fixed in the
articles of association for the annual meeting, at which meeting the shareholders
may, if they see fit, by a vote representing a majority of the entire stock of the
bank, remove the liquidating agent or committee and appoint one or more others
in place thereof. A special meeting of the shareholders may be called at any
time in the same manner as if the bank continued an active bank and at said
meeting the shareholders may, by vote of the majority of the stock, remove the
liquidating agent or committee. The Comptroller of the Currency is authorized
to have an examination made at any time into the affairs of the liquidating bank
until the claims of all creditors have been satisfied, and the expense of making
such examinations shall be assessed against such bank in the same manner as in




BANKING ACT OF 1935

19

the case of examinations made pursuant to section 5240 of the Revised Statutes,
as amended (U. S. C, title 12, sees. 484, 485; Supp. VII, title 12, sees. 481-483)."
SEC. 317. Section 5243 of the Revised Statutes (U. S. C, title 12, sec. 583) is
amended to read as follows :
" SEC. 5243. The use of the word ' national' either alone or in combination
with other words or syllables, as part oi the name or title used by any person,
corporation, firm, partnership, business trust, association, or other business
entity doing the business of bankers, brokers, or trust or savings institutions
is prohibited except where such institution is. organized under the laws of the
United States or is otherwise permitted by the laws of the United States to
use such name or title or is lawfully using such name or title on the date
when this section, as amended, takes effect."
SEC. 318. Section 5 of the Federal Reserve Act, as amended, is amended
by striking out the last two sentences thereof and inserting in lieu thereof the
following: "When a member bank reduces its capital stock or surplus it shall
surrender a proportionate amount of its holdings in the capital stock of said
Federal Reserve bank. Any member bank which holds capital stock of a
Federal Reserve bank in excess of the amount required on the basis of 6 per
centum of its paid-up capital stock and surplus shall surrender such excess
stock. When a member bank voluntarily liquidates it shall surrender all or its
holdings of the capital stock of said Federal Reserve bank and be released
from its stock subscription not previously called. In any such case the shares
surrendered shall be canceled and the member bank shall receive in payment
therefor, under regulations to be prescribed by the Federal Reserve Board, a
sum equal to its cash-paid subscriptions on the shares surrendered and one-half
of 1 per centum a month from the period of the last dividend, not to exceed
the book value thereof, less any liability of such member bank 10 the Federal
Reserve bank."
SEC. 319. The fifth paragraph of section 9 of the Federal Reserve Act. as
amended, is amended by adding at the end thereof the following sentence:
" Such reports of condition shall be in such form and shall contain such information as the Federal Reserve Board may require and shall be published by
the reporting banks in such manner and in accordance with such regulations
as the said Board may prescribe."
SEC 320. The first sentence of paragraph (m) of section 11 of the Federal
Reserve Act, as amended, is amended by inserting before the period at the end
thereof a colon and the following: " Provided, That with respect to loans represented by obligations in the form of notes secured by not less than a like amount
of bonds or notes of the United States issued since April 24, 1917, or certificates
of indebtedness of the United States, such limitation of 10 per centum on loans
to any person shall not apply, but State member banks shall be subject to the
same limitations and conditions as are applicable in the case of national banks
under paragraph (8) of section 5200 of the Revised Statutes, as amended
(U. S. C, Supp. VII, title 12, sec. 84)."
SBO. 321. The third paragraph of section 13 of the Federal Reserve Act, as
amended, is amended by changing the words " indorsed and otherwise secured
to the satisfaction of the Federal Reserve bank" in that paragraph to read
'• indorsed and/or otherwise secured to the satisfaction of the Federal Reserve
bank."
SEC. 322. Subsection (e) of section 13b of the Federal Reserve Act. as amended,
is amended by striking out " upon the date this section takes effect", and inserting in lieu thereof " on and after June 19, 1934 " ; and by striking out " the par
value of the holdings of each Federal Reserve bank of Federal Deposit Insurance Corporation stock " and inserting in lieu thereof " the amount paid by each
Federal Reserve bank for Federal Deposit Insurance Corporation stock."
SEC. 323. (a) The first paragraph of section 19 of the Federal Reserve Act,
as amended, is amended to read as follows:
" SEC. 19. The Federal Reserve Board is authorized, for the purposes of this
section, to define the terms ' demand deposits', ' gross demand deposits',
' deposits payable on demand', ' time deposits ', ' savings deposits', and ' trust
funds', to determine what shall be deemed to be a payment of interest, and to
prescribe such rules and regulations as it may deem necessary to effectuate
the purposes of this section and prevent evasions thereof."
(b) The tenth paragraph of such section 19 is amended to read as follows:
" In estimating the reserve balances required by this Act, member banks may
deduct from the amount of their gross demand deposits the amounts of balances
due from other banks (except Federal Reserve banks and foreign banks), includ-




20

BANKING ACT OF 1935

ing cash items with Federal Reserve banks and other banks in process of collection, checks on other banks in the same place, and exchanges for clearing
houses."
(c) The last two paragraphs of such section 19 are amended to read as
follows:
" No member bank shall, directly or indirectly, by any device whatsoever, pay
any interest on any deposit which is payable on demand: Provided, That nothing herein contained shall be construed as prohibiting the payment of interest
in accordance with the terms of any certificate of deposit or other contract
entered into in good faith which is in force on the date on which the bank
becomes subject to the provisions of this paragraph; but no such certificate of
deposit or other contract shall be renewed or extended unless it shall be modified
to conform to this paragraph, and every member bank shall take such action
as may be necessary to conform to this paragraph as soon as possible consistently with its contractual obligations: Provided further, That this paragraph
shall not apply (1) to any deposit of such bank which is payable only at an
office thereof located outside of the States of the United States and the District
of Columbia; (2) to any deposit made by a mutual savings bank; (3) to any
deposit of public funds made by or on behalf of any State, county, school district, or other subdivision or municipality, or to any deposit of trust funds if
the payment of interest with respect to such deposit of public funds or of trust
funds is required by State law; or (4) to any deposit of funds by the United
States, and Territory, District, or possession thereof (including the Philippine
Islands) or any public instrumentality or agency of the foregoing, with respect
to which interest is required by law to be paid.
" The Federal Reserve Board shall from time to time limit by regulation the
rate of interest which may be paid by member banks on time and savings
deposits; may classify time and savings deposits according to maturities, locations of banks, conditions respecting receipt, withdrawal, or repayment, or
otherwise as it may deem necessary in the public interest; and may prescribe
different rates for deposits of different classes. No member bank shall pay any
time deposit before its maturity except upon such conditions and in accordance
with such rules and regulations as may be prescribed by the Federal Reserve
Board, or waive any requirements of notice before payment of any savings
deposit except as to all savings deposits having the same requirement: Provided,
That the provisions of this paragraph shall not apply to any deposit which is
payable only at an office of a member bank located outside of the States of the
United States and the District of Columbia. Every bank whose deposits are
insured under the provisions of section 12B of this Act (except mutual savings
banks and Morris Plan banks which are not members of the Federal Reserve
System) shall comply with the provisions of this paragraph and the paragraph
immediately preceding and with the rules and regulations prescribed by the
Federal Reserve Board pursuant thereto."
(d) At the end of such section 19 there is added the following new paragraph:
" Notwithstanding the provisions of section 7 of the First Liberty Bond Act,
as amended, section 8 of the Second Liberty Bond Act, as amended, and section 8
of the Third Liberty Bond Act, as amended, member banks shall be required to
maintain the same reserves against deposits of public moneys by the United
States as they are required by this section to maintain against other deposits."
SEC. 324. Section 21 of the Federal Reserve Act, as amended, is amended by
adding at the end thereof the following paragraph :
" Whenever member banks are required to obtain reports from affiliates, or
whenever affiliates of member banks are required to submit to examination, the
Federal Reserve Board or the Comptroller of the Currency, as the case may be,
may waive such requirements with respect to any such report or examination of
any affiliate if in the judgment of the said Board or Comptroller, respectively,
such report or examination is not necessary to disclose fully the relations between
such affiliate and such bank and the effect thereof upon the affairs of such bank."
Sac. 325. (a) Subsection (a) of section 22 of the Federal Reserve Act, as
amended, is amended by inserting in the first paragraph thereof after " No
member bank " the following: " and no insured bank is defined in subsection (c)
of section 12B of this A c t " ; by inserting before the period at the end of the
first sentence of such paragraph " or assistant examiner who examines or has
authority to examine such bank " ; and by inserting after " any member bank "
In the second paragraph thereof " or insured bank"; by inserting before the
period at the end thereof " or Federal Deposit Insurance Corporation examiner " ; and by adding at the end of such subsection a new paragraph, as follows:




BANKING ACT OF 1935

21

"The provisions of this subsection shall apply to all public examiners and
assistant examiners who examine member banks of the Federal Reserve System
or insured banks, whether appointed by the Comptroller of the Currency, by
the Federal Reserve Board, by a Federal Reserve agent, by a Federal Reserve
bank, or by the Federal Deposit Insurance Corporation, or appointed or elected
under the laws of any State; but shall not apply to private examiners or
assistant examiners employed only by a clearing-house association or by the
directors of a bank."
(b) Subsection (b) of section 22 is amended by inserting therein after " n o
national bank examiner" the following: "and no Federal Deposit Insurance
Corporation examiner " ; and by inserting after " member bank " the following:
" o r insured b a n k " ; and by inserting after "from the Comptroller of the
Currency " the following " or from the Federal Deposit Insurance Corporation,".
(c) Subsection (g) of such section 22 is amended to read as follows:
"(g) No executive officer of any member bank shall borrow from or otherwise become indebted to any member bank of which he is an executive officer,
and no member bank shall make any loan or extend credit in any other manner
to any of its own executive officers: Provided, That loans made to any such
officer prior to June 16, 1933, may be renewed or extended for periods expiring
not more than five years from such date where the board of directors of the
member bank shall have satisfied themselves that such extension or renewal is
in the best interest of the bank and that the officer indebted has made reasonable effort to reduce his obligation, these findings to be evidenced by resolution
of the board of directors spread upon the minute book of the bank. If any
executive officer of any member bank borrow from or if he be or become
indebted to any bank other than a member bank of which he is an executive
officer, he shall make a written report to the board of directors of the member
bank of which he is an executive officer, stating the date and amount of such
loan or indebtedness, the security therefor, and the purpose for which the
proceeds have been or are to be used. Borrowing by, or loaning to, a partnership in which one or more executive officers of a member bank are partners
having either individually or together a majority interest in said partnership,
shall be considered within the prohibition of this subsection. Nothing contained in this subsection shall prohibit any executive officer of a member bank
from endorsing or guaranteeing for the protection of such bank any loan or
other asset which shall have been previously acquired by such bank in good
faith or from incurring any indebtedness to such hank for the purpose of protecting such bank against loss or giving financial assistance to it. The Federal
Reserve Board is authorized to define the term ' executive officer ', to determine
what shall be deemed to be a borrowing, indebtedness, loan, or extension of
credit, for the purpose of this subsection, and to prescribe such rules and
regulations as it may deem necessary to effectuate the provisions of this subsection in accordance with its purposes and to prevent evasions of such provisions. Any executive officer of a member bank accepting a loan or extension
of credit which is in violation of the provisions of this subsection shall be subject to removal from office in the manner prescribed in section 30 of the Banking
Act of 1933: Provided, That for each day that a loan or extension of credit
made in violation of this subsection exists, it shall be deemed to be a continuation of such violation within the meaning of said section 30."
SEC. 326. The third paragraph of section 23A of the Federal Reserve Act, as
amended, is amended to read as follows:
" For the purpose of this section, the term ' affiliate' shall include holding
company affiliates as well as other affiliates, and the provisions of this section
shall not apply to any affiliate (1) engaged primarily in holding the bank
premises of the member bank with which it is affiliated or in maintaining and
operating properties acquired for banking purposes prior to the date this section, as amended, takes effect; (2) engaged solely in conducting a safe-deposit
business or the business of an agricultural credit corporation or live-stock loan
company; (3) in the capital stock of which a national banking association is
authorized to Invest pursuant to section 25 of the Federal Reserve Act, as
amended, or a subsidiary of such affiliate, all the stock of which (except qualifying shares of directors in an amount not to exceed 10 per centum) is owned
by such affiliate; (4) organized under section 25 (a) of the Federal Reserve
Act, as amended, or a subsidiary of such affiliate, all the stock of which (except
qualifying shares of directors in an amount not to exceed 10 per centum) is
owned by such affiliate; (5) engaged solely in holding obligations of the United




22

BANKING ACT OF 1935

States Government, the Federal intermediate credit banks, the Federal land
banks, the Federal home-loan banks, or the Home Owners' Loan Corporation;
(6) where the affiliate relationship has arisen out of a bona fide debt contracted
prior to the date of the creation of such relationship; or (7) where the affiliate
relationship exists by reason of the ownership or control of any voting shares
thereof by a member bank as executor, administrator, trustee, receiver, agent,
depositary, or in any other fiduciary capacity, except where such shares are held
for the benefit of all or a majority of the stockholders of such member bank; but
as to any such affiliate, member banks shall continue to be subject to other provisions of law applicable to loans by such banks and investments by such banks in
stocks, bonds, debentures, or other such obligations. The provisions of this section shall likewise not apply to indebtedness of any affiliate for unpaid balances
due a bank on assets purchased from such bank."
SEC. 327. Section 24 of the Federal Reserve Act, as amended, is amended by
adding at the end thereof the following new paragraph:
" Loans made to establish industrial or commercial businesses (a) which are
in whole or in part discounted or purchased or loaned against as security by a
Federal Reserve bank under the provisions of section 13b of the Federal Reserve Act, (b) for any part of which a commitment shall have been made by a
Federal Reserve bank under the provisions of said section, (c) in the making
of which a Federal Reserve bank participates under the provisions of said
section, or (d) in which the Reconstruction Finance Corporation cooperates
or purchases a participation under the provision of section 5d of the Reconstruction Finance Corporation Act, shall not be subject to the restrictions or
limitations of this section upon loans secured by real estate."
SEC. 328. Effective January 1, 1936, the Act entitled "An Act to supplement
existing laws against unlawful restraints and monopolies, and ior other purposes" (38 Stat. 730), approved October 15, 1914, as amended, is further
amended (a) by striking out section 8A thereof and (b) by substituting for
the first three paragraphs of section 8 thereof the following:
" SEC. 8. No director, officer, or employee of any member bank of the Federal
Reserve System shall be at the same time a private banker or a director,
officer, or employee of any other bank, banking association, savings bank (other
than a mutual savings bank), or trust company except in limited classes of
cases in which the Federal Reserve Board may allow such service by general
regulations when in the judgment of the Federal Reserve Board such classes of
institutions are not in substantial competition."
SEC. 329. (a) Section 1 of the Act of November 7,1918, as amended (U. S. C ,
title 12, sec. 33; Supp. VII, title 12, sec. 33), is amended by striking out the
second proviso down to and including the words " to be ascertained " and inserting in lieu thereof the following: "And provided further, That if such consolidation shall be voted for at said meetings by the necessary majorities of the
shareholders of each of the associations proposing to consolidate, any shareholder of any of the associations consolidated who has voted against such consolidation at the meeting of the association of which he is a shareholder and
has given notice in writing thereat to the presiding officer that he dissents from
the plan of consolidation, shall be entitled to receive the value of the shares
so held by him if and when said consolidation shall be approved by the Comptroller of the Currency, such value to be ascertained as of the date of the
Comptroller's approval."
(b) Such section 1 is further amended by adding at the end thereof the
following paragraphs:
" Publication of notice and notification by registered mail of the meeting
provided for in the foregoing paragraph may be waived by unanimous action
of the shareholders of the respective associations. Where a dissenting shareholder has given notice as above provided to the association of which he is a
shareholder of his dissent from the plan of consolidation, and the directors
thereof fail for more than thirty days thereafter to appoint an appraiser of
the value of his shares, said shareholder may request the Comptroller of the
Currency to appoint such appraiser to act on the appraisal committee for and
on behalf of such association.
" If shares, when sold at public auction in accordance with this section,
realize a price greater than their final appraised value, the excess in such sale
price shall be paid to the shareholder. The consolidated association shall be




BANKING ACT OF 1935

23

liable for all liabilities of the respective consolidating associations. In the
event one of the appraisers fails to agree with the others as to the value of
said shares, then the valuation of the remaining appraisers shall govern.''
SEO. 330. (a) Section 3 of the Act of November 7, 1918, as amended (U. S. 0.,
Supp. VII, title 12, sec. 34 ( a ) ) , is amended by striking out the first sentence
tollowing the proviso down to and including the words •' to be ascertained "
and inserting in lieu thereof the following: " If such consolidation shall be
voted for at said meetings by the necessary majorities of the shareholders of
the association and of the State or other bank proposing to consolidate, and
thereafter the consolidation shall be approved by the Comptroller of the Currency, any shareholder of either the association or the State or other bank so
consolidated, who has voted against such consolidation at the meeting of the
association of which he is a stockholder, and has given notice in writing thereat
to the presiding officer that he dissents from the plan of consolidation, shall be
entitled to receive the value of the shares so held by him if and when said
consolidation shall be approved by the Comptroller of the Currency, such
value to be ascertained as of the date of the Comptroller's approval."
(b) Such section 3 is further amended by adding at the end thereof the
following paragraph:
" Where a dissenting shareholder has given notice as provided in this section to the bank of which he is a shareholder of his dissent from the plan of
consolidation, and the directors thereof fail for more than thirty days thereafter to appoint an appraiser of the value of his shares, said shareholder may
request the Comptroller of the Currency to appoint such appraiser to act on
the appraisal committee for and on behalf of such bank. In the event one of
the appraisers fails to> agree with the others as to the value of said shares, then
the valuation of the remaining appraisers shall govern."
SEC. 331. The Act entitled "An Act to prohibit offering for sale as Federal
farm loan bonds any securities not issued under the terms of the Farm Loan
Act. to limit the use of the words ' Federal', ' United States', or ' reserve',
or a combination of such words, to prohibit false advertising and for other
purposes", approved Mav 24. 1926 (U. S. C, Supp. VII, title 12, sees. 584-588),
is amended by inserting in section 2 thereof after " the words ' United States ' ",
the following, " the words ' Deposit Insurance' " : and by inserting in said
section after the words " the laws of the United States ", the following, " nor
to any new bank organized by the Federal Deposit Insurance Corporation as
provided in section 12B of the Federal Reserve A(t, as amended ", and by striking out the period at the end of section 4 and inserting the tollowing, " or the
Federal Deposit Insurance Corporation."
SEC. 332. The Act entitled "An Act to provide punishment for certain offenses
committed against banks organized or operating under laws of the United
States or any member of the Federal Reserve System" (48 Stat. 783), approval May 18. 1934, is amended by striking out the period after "United
States" in the first section thereof and inserting the following: " and any
insured bank as defined in subsection (c) of section 12B of the Federal
Reserve Act, as amended."
Senator FLETCHER. I thought I would make that statement, Mr.
Chairman, as the foundation for the hearings.
Senator GLASS. Yes; thank you, Mr. Chairman.
I n order t h a t it may be understood that there has been no delay
in the consideration of this bill, I desire to say that five members
of the subcommittee having charge of the bill are members of the
Senate Appropriations Committee, and all of them, more or less,
and especially the chairman of the committee, were occupied with
what is known as the " relief " and " works-relief b i l l ' ' ; hence it was
impossible to give consideration to this bill before now.
Senator BTJLKLET. I n addition to that, Mr. Chairman, three members of this subcommittee are members of the Home Loan subcommittee and have given a good deal of time to the Home Loan bill.
Senator TOWNSEND. T h a t is correct.




24

BANKING ACT OF 1 9 3 5

Senator GLASS. I just wanted it to appear in the record that we
have gotten to the bill as soon as we could.
Mr. Crowley, will you be good enough to take a seat over there ?
Mr. CROWLEY. Thank you, Mr. Chairman.
STATEMENT OF LEO T. CKOWLEY, CHAIRMAN" OF THE BOARD,
FEDERAL DEPOSIT INSURANCE CORPORATION
Senator GLASS. Mr. Crowley, you have heard read the letter of the
President to the Chairman of the Banking and Currency Committee
of the Senate, stating that this bill, known as " S. 1715 ". i« a tentative draft of the banking bill, and that the President desired that
you and others supposed to be associated with the drafting of the bill
be heard by the committee; and you have been requested to come
and testify accordingly. We would be glad to haAre you say what
you may desire.
Senator COTTZENS. I S this testimony going to be confined to title I ?
Senator GLASS. I n support of title I .
Mr. CROWLEY. Thank you.
Senator GLASS. I have been told by you that you had part only in
drafting title I of the bill.
Mr. CROWLEY. That is true; that is the part that I drew. The
general counsel and I drafted title I, which is the part I am familiar
with.
Senator GLASS. You had nothing to do with title I I I ?
Mr. CROWLEY. Not the drafting of i t ; no, sir.

Senator GLASS. And it was not your suggestion that they be combined in one?
Mr. CROWLEY. N O , sir; that was the suggestion of others—that they
be combined in one.
Senator GLASS. Very well.
Mr. CROWLEY. Mr. Chairman, I have here an outline that I
would like to present. I t will take probably 30 or 40 minutes to go
through with it. Do you object to that? I t is a complete report of
the changes in our bill.
Senator GLASS. N O ; I do not object to it.
Senator COUZEXS. You mean changes in the law, and not changes
in your bill ?
Mr. CROWLEY. Changes in the bill; yes, sir.
With your permission, I would like to outline to you in detail the
reasons which have motivated our suggestions for changes in the
permanent-insurance plan. The charts and tables on the next few
pages give a vivid picture of the commercial banking structures of
the United States. These data cover all insured and noninsured
banks, arranged according to total deposit liability size groupings.
They do not include mutual savings banks or private banks.
Ninety percent by number of all of the licensed commercial banks
in the United States have been admitted to the insurance fund. Over
98 percent of the total deposits in commercial banks and trust companies in the United States are in banks, the deposits of which are
insured. On October 1,1934, there were only 1,100 licensed commercial banks with deposits of slightly more than $500,000,000 which




BANKING ACT OF 1 9 3 5

25

were not insured, while insured commercial banks numbered more
than 14,000 on that date, and their deposits amounted to some
$36,000,000,000. Mutual savings banks have been excluded from these
figures. There are 68 out of the 576 mutual savings banks in the fund
for mutuals.
The charts, we will just pass for the time. We will come back
to those, Senator Bulkley, if you do not object.
Senator BULKLEY. I was wondering whether you wanted them
printed in the record.
Senator COTJZENS. Were they printed in the Kecord of the House?
Mr. CROWLEY. Yes, Senator.

Senator COTJZENS. I do not think we need to duplicate them here.
Senator GLASS. N o ; I do not think we do. I t would be a useless
expense.
Mr. CROWLEY. Losses to depositors, 1864 to 1934: To arrive at a
practical basis for estimating the amount of funds necessary to cover
the insurance liability of the Corporation, our first consideration has
been the volume of losses which depositors have borne during the
past.
From July 1, 1864, the beginning of the national banking system,
to June 30, 1934, about 16,000 commercial banks, with deposits of
nearly 9 billion dollars, are known to have suspended operations.
Losses to depositors in these banks are estimated at 3 billion dollars
over and above all recoveries.
The estimates of losses to depositors in suspended commercial
banks are based upon available data which clearly minimize the facts.
The figures for national banks are fairly complete and reliable, and
are taken from reports of the Comptroller of the Currency. The
figures for other commercial banks, however, are incomplete, particularly for the period prior to 1920. All failures have not been reported. Bank depositors, therefore, have suffered losses which have
not been recorded. Many records of voluntary liquidation by banks
ignore the fact that depositors were not paid in full. Then, again,
bank reorganizations, in late years, have been based upon the waiving
of depositors' claims, while in other cases depositors have voluntarily reduced their claim or made contributions to capital as a means
of absorbing losses.
The accompanying charts show, by years, from 1864 to 1934 the
percentage of national and other commercial banks suspending, and
the ratio of deposits in suspended banks to deposits in active banks.
The ratio of deposits in suspended banks to total deposits in all
active banks is smaller for national than for other commercial
institutions.
Senator COTJZENS. During the preparation of these figures did you
obtain any amounts that might have been lost by stockholders?'
Mr. F o x (accompanying Mr. Crowley). We have estimates that
we can give you if you would like them.
Senator COTTZENS. Yes; if it does not take uj> too much time. You
can go on and you can put that in later.
Mr. CROWLEY. Our estimates indicate that about one billion dollars
of the 9 billion dollars which was on deposit in commercial banks
that failed during the 70-year period, were secured by pledge of col-




26

BANKING ACT OP 193 5

lateral or otherwise. Of the remainder, some 6 billion dollars were
in accounts of less than $5,000, or constituted the first $5,000 of large
accounts. Two billion dollars represent the volume of these deposits
which was in accounts with balances above $5,000.
For every $100 of deposits in the entire commercial banking system, about 32 cents a year was lost. Of this figure, it is estimated that
24 cents represents losses to depositors with balances not in excess of
$5,000, while the remaining 8 cents represents losses to depositors
having balances in excess of $5,000. For every $100 of deposits in
the national banking system, 21 cents per year was lost, as against
42 cents per $100 per year in the State system. The table on the
following page summarizes the estimates of losses to depositors in
suspended national and other commercial banks during the 70 years
ending June 30, 1934.
Losses to depositors in suspended commercial banks, July 1, 1864-June 30, 1984
All commercial
banks
Deposits in suspended banks (millions of dollars!-.
Secured
Unsecured under $5,000
Unsecured over$5,000__

_

_

Estimated losses (millions of dollais)

Other commercial
banks

$8,778

-

_

---

_

Secured deposits
Unsecured deposits under $5,000
Unsecured deposits o\ er $5,000
Average loss per year for each $100 of deposits m active banks
Unsecured deposits under $5,000
Unsecured deposits over $5,000-

National
banks
$2,715

$6,06.1

1,033
5,762
1,983

184
1,675
856

849
4,087
1,127

3,113

1,015

0)
2,301
812

()667
'
348

464

0.32

0.21

0.42

.24
.08

.14
.07

.33
.09

()

1

Negligible.
Federal Deposit Insurance Corporation Division of Research and Statistics.

Losses to depositors have been most severe during the periods of
business depression. Two-thirds of the losses during this entire 70year period resulted from bank suspensions occurring during the 4
years ending June 30, 1934. For these 4 years, losses to depositors
are estimated at $1.32 per year for each $100 of deposits in the commercial banking system. Comparable losses during the depression
of the 1870's amounted to 35 cents, and during the depression of the
1890's amounted to 23 cents. The figures for the early periods understate the losses, but it is apparent that the losses in these earlier
periods were not as great in proportion to total deposits as during
the past 4 years. The data are summarized on the following tables.
The first shows the losses in commercial banks which suspended and
did not reopen during the three depression periods; the second compares losses during the 14 years included by the three critical periods,
with the other 56 years since 1864.




27

BANKING ACT OF 1935

Losses to depositors in commercial banks suspending during periods of crisisBanJcg which did not reopen
All commercial banks'
1873-78

1892-97

1931-34

$85

$134

$5,386

10
66
9

13
103
18

637
3,256
1,473

26

43

2,142

(!)

23
3

36
7

0.35

0 23

»1.28

.31
.04

.19
.04

.89
.40

1,478
664

1
!

Periods beginning on July 1 and ending on June 30 of the years specified.
Negligible.
• If losses of banks which subsequently reopened are included, the average loss per year for each $100 of
deposits in active banks is raised to $1.32.
Source: Federal Deposit Insuranca Corporation, Division of Research and Statistic

Losses to depositors in suspended banks, July 1, 1864-June 30, 1984—Three
crisis periods contrasted with the remaining years—All oommei vial banks
70 years
1864-1934

Deposits m suspended banks (millions of dollars)..
Secured
Unsecured under $5,000.
Unsecured over $5,000—.

14 years
during
3 crisis
periods l

$8,778

$6,084

!,694

1,033
5,762
1,983

716
3,738
1,630

317
2,024
353

Remaining 66
years

Estimated losses (millions of dollars).

3,113

844

Unsecured deposits under $5,000—
Unsecured deposits over $5.000...

2,301
812

723
121

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

1 17
.24

.11

.82

• Includes figures for banks suspending during period July 1,1930 to March 15,1933 which subsequently
reopened.
Source: Federal Deposit Insurance Corporation Division of Research and Statistics.

The experience of the past 70 years indicates that to repay losses
suffered by all depositors in our suspended commercial banks, an
assessment of 33 cents per $100 of total deposits, or one-third of 1
percent of total deposits in all open commercial banks, would have
been necessary. Excluding the losses incurred during the three depression periods (1873-78,1892-97, 1931-34) and confining ourselves
to losses occurring during the balance of the 70 years, an assessment
of one-eighth of 1 percent would have been necessary.
Future losses: I n the past, the number, timing, and geographic
concentrations of bank suspensions have been chiefly due to funda-




28

BANKING ACT OF 3 9 3 5

mental weaknesses in banking structure and the course of economic
events. Suspension of individual banks within the areas affected has
reflected, in the main, the quality of bank management. I n the
future, the magnitude of losses which will result from bank failures
will also depend upon the trend of economic events, the changes
which may occur in the structure and functions of the commercial
banking system, the caliber of the individual bank management, the
extent to which the system is reinsured against defalcations, and
the quality of the supervision exercised over these banking institutions.
Of course, the future trend of economic events cannot be forecast.
Changing tendencies are now apparent in the structure and functions of commercial banking. On the one hand, the drastic reduction in the number of banks during the past 14 years has greatly
relieved the over-banked condition in many communities. On the
other hand, new financial agencies, serving specialized needs have
been created, and will compete, to some extent, with commercial
banks. The types of credit which may be extended by commercial
banks may be subject to varying degrees of risk.
The extent to which the caliber of bank management will improve
in the future, over what it has been in the past, cannot be estimated.
While it is hoped that a better quality of personnel will develop, it
must be recognized that there will continue to be poorly managed
banks and that such institutions will eventually succumb. We cannot
foretell the extent to which the existence of deposit insurance will
influence bank management.
Insurance premium: To establish a fair rate of assessment which
the banks shall pay for Federal deposit insurance, the hopeful expectations for the future must be tempered by a consideration of the
realities of the past. Let me repeat that a premium at the rate of
one-third of 1 percent of total deposits would have been necessary
to cover all losses to depositors during the past 70 years. A premium
at the rate of one-eighth of 1 percent would have covered depositors'
losses in all years except those of severe depression.
We are concerned next with the basis of assessment, and with the
ability of the banks to pay the required amount.
The existing permanent insurance law provides that all insured
banks may become liable for an uncertain number of successive
assessments. I t is not sound deliberately to subject an operating
business to an unpredictable liability. The maximum rate and number of assessments should be fixed so that an insured bank may know
in advance its potential liability to the Corporation. An annual premium of a known maximum amount constitutes a sound basis for
insurance revenue, as it provides a specific payment to cover a clearly
defined risk for a definite period of time.
We also believe that payments made by insured banks should be
made in the form of premiums rather than through the purchase of
stock. As in the case of other insurance companies, receipts from
premiums should be added to the reserve funds of the Corporation.
Such reserve funds should not be considered an earning asset of the
insured banks. The interest received by the Corporation from the




BANKING ACT OF 1 9 3 5

29

investment of reserve funds should not be made the basis of dividend
payments.
I t is recommended that assessments be based upon total deposits
in insured banks, regardless of whether or not the insurance is limited to $5,000 per depositor. To base assessments solely on the first
$5,000 of each depositor's account places an undue burden upon the
small banks. The greatest risk to the Corporation does not necessarily lie in these institutions. On the contrary, it has been demonstrated frequently in recent years that the consequences of the failure
of a large bank may be more disastrous than the failure of a number
of small institutions. The closing of a large bank often brings in
its wake the failure of correspondent institutions.
The benefits of deposit insurance are not limited solely to the protection of the individual depositor. The entire banking structure of
the country is so intimately interwoven that a disturbance in any
part of the system may cause repercussions of far-reaching proportions. The benefits which will accrue to the large city banks because
of greater stability in the country banks, are real and tangible.
All banks, large and small, should be required to support the insurance system. Banking is no longer merely a private business proposition. I t involves great social consequences. The stability of the
banking system affects the economic prosperity of the country. The
raising of a sufficient revenue, solely through the levying of premiums against the deposits of those receiving direct insurance
benefits will not be a fair distribution of the burden.
Our analysis of the ability of the banks to pay assessments is confined solely to national banks, since adequate data for other institutions are not available. The figures for earnings, profits, and dividends of national banks since 1870, as published by the Comptroller
of the Currency, have been used. If the operating results of national
banks can be taken as criteria, the banking system as a whole could
have paid its losses during the past 70 years without impairing its
stability or the payment of reasonable dividends to stockholders.
Operating profits of the banks have been below normal during
recent years. The condition is reflected not only in reductions in
gross earnings but also in unusually heavy write-offs made necessary by shrinkage in values. As we come out of the depression, losses
on existing credits will appear. Banks should charge off these losses
currently as they develop. They should not allow them to accumulate as was frequently the case prior to the banking holiday of
1933. These losses may absorb a considerable part of the banks'
earnings over the next few years. To ask the banks to bear the
entire cost of insurance at a rate comparable to the experience of
losses over the past 70 years, would subject them to a heavy burden
at the present time.
Senator COTTZENS. D O you mind an interruption there?
Mr. CROWLEY. N O , sir.
Senator COTJZENS. During

the preparation of this statement and
the gathering of data for it, have you computed the cost of eliminating interest on the savings deposits ?
Mr. CROWLEY. We will come to that, Senator.
12P6S8—35—PT 1




3

30

BANKING ACT OP 193 5

Senator COUZENS. Very well.
Mr. CROWLEY. I t is probably true that after the period of adjustment has been completed, the banks' earnings will enable them to
pay an assessment adequate to cover losses at the rate shown for the
past 70 years. To ask them to do so, however, without making some
effort to reduce the burden of losses seems to me to be unfair to
the banks and to the public which must ultimately bear the cost.
This factor prompts us to ask for specific powers which will reduce
these losses so that the insurance plan can be operated upon a reasonable assessment basis.
The following table compares annual averages of earnings, expenses, losses, and profits of the national banks for the years 1918
to 1930 with similar figures for the 6 months' period ending December 31,1933. If charge-offs during the last half of 1933 had been no
heavier than the average for the years 1918 to 1930, the national
banks would have shown net profits of more than $1 for each $100
of total deposits or more than $7 for each $100 of invested capital.
Earnings, expenses, losses, and profits of national tanks' averages for 1918-80,
compared with 6 months ending Deo. SI, 1933
Amounts per year per $100
of total deposits
Items
Average
1918-30

Gross earnings, plus recoveries- Interest paid
Other expenses.
Net earnings, plus recoveries
Losses on loans and investments.
Net additions to profits

6 months
ending
Dee. 31,
1933'

$6.46
1.92
2.44
2.10
.81
1.29

$5.18
1.05
2.18
1.95
3.76
'1.81

Change

-$1.28
-.87
-.26
-.15
-2.95
-3.10

• The figures for the 6 months have been adjusted to show a rate per year, rather than for 6 months only.
»Deficit.
Source Federal Deposit Insurance Corporation, Division of Research and Statistics.

I t will be noted that the expenses of operating national banks were
considerably lower in 1933 than during the period 1918 to 1930. Most
of this reduction was due to a decline in the average rate of interest
paid on deposits. About two-thirds of this reduction in interest occurred before the Banking Act of 1933 became effective and reflected
the general decline in money rates. One-third of the reduction took
place after the passage of the act, reflecting almost entirely the prohibition against the payment of interest on demand deposits. The
savings in interest on account of this change in the law amounted to
26 cents for each $100 of total deposits or more than the premium
necessary to cover losses on deposits insured up to $5,000, as indicated
by the experience of the past 70 years.
The cost of insurance will not be disproportionately heavy in relation to earning power if paid by banks in proportion to their total
deposits. If insurance be limited to $5,000 for each depositor and the
cost is distributed among the banks in proportion to their insured




BANKING ACT OF

1935

81

deposits, the payments by smaller banks would be nearly double the
assessments distributed on the basis of total deposits.
Reserve for losses: We have recommended not only that subscriptions by insured banks to capital stock of the Corporation be
eliminated, but also that the Corporation be given the right to allocate to surplus any portion of the some $300,000,000 paid to it by the
Treasury and the Federal Reserve banks. If the amounts paid in
subscriptions to stock were to be carried in full on the books of the
Corporation as capital stock, the Corporation would be unable to pay
any losses except out of income, over and above operating expenses,
without impairment of its capital. The Corporation would have no
surplus and while it might legally be permitted to spend its capita]
in meeting its obligations, a substantial capital impairment shown in
its published reports would have a most adverse effect upon public
confidence. We are, therefore, recommending that the stock issued
by the Corporation to the Federal Reserve Banks and the Treasury,
be without par value and that the balance be placed in a surplus or
reserve account.
Until such time as the resources of the Corporation may be adequate
to handle the volume of anticipated losses, it would be very unwise for
the Corporation to pay dividends. We, therefore, recommend that
the payment of dividends be eliminated.
I t is important that the Corporation be given adequate means for
increasing the funds at its disposal during critical periods. I t is
doubtful, however, if at such times the Corporation could borrow
from private sources. The United States Treasury is the logical purchaser of these obligations. The Government is vitally interested
in the maintenance of the country's banking system. We recommend
that the obligations of the Corporation be issued only with the approval of the Secretary of the Treasury so that any credit which
the Corporation may require shall not conflict with the financial policies of the Government.
Standards of membership: During the past year the activities of
the Corporation have been chiefly concerned with the problem of rebuilding the capital structures of insured banks. I n the future 2 the
Corporation should devote a large part of its efforts to the maintenance of sound conditions among the insured institutions.
To maintain sound conditions among all insured banks it is essential that the Corporation have the power to control the admission
of banks to the insurance fund. We cannot return to the overbanked
condition of 1920 if we wish to have a sound banking structure. The
growth of excessive banking facilities was one of the most destructive influences which existed prior to the banking holiday of 1933.
Since the banking holiday much effort has been expended in reorganizing and relicensing banks in order that the frozen funds of
the depositors might be released. The accompanying table indicates
that more than 2,000 banks have been added to those which withstood the shock of the banking crisis.




32

BANKING ACT OF

Newly

licensed'

1935

banks propped according to volume 01 1otal deposits
of bank—July 1, 1933, to Dec. 31, 1934

bn

(lass

[Deposit figures in thousands]
July 1, 1933, to Dec 31, 1934
Number of banks
National
Banks with deposits of—
$100,000 or under
$100,001 to $150,000
$150,001 to $250,000
$250,001 to $500,000

25
29
131
219

Subtotal
$500,001 to $750,000
$750,001 to $1,000,000
$1,000,001 to $2,000,000-$2,000,001 to $5,000,000 ..
$5,000,001 to $10,000,000$10,000,001 to $50,000,000.
N o t available

Total

State

379
222
268
248

200
100
141
79
22
8
94
1,446

Total

78, 988

404
251

State

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

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

110, 544

Total

1,117
110
58
76
44
16
5
6

Aggregate deposits !

188, 024

299,568

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

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

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

559, 216

1, 229,110

National

$2,070
3,624
25,862

1

By "newly licensed" is meant existing banks reopened, banks reorganized, and primary organizations.
' Deposit figures for the most part as reported in Rand-McNally Bankers' Directory for July 1934
Source Card records of newly licensed banks maintained by the division.
Federal Deposit Insurance Corporation Division of Besearch and Statistics

Under present conditions the Corporation insui eh all newly licenced
banks which apply for insurance if they are found to be solvent.
Approximately 90 percent of the newly licensed institutions have
become insured. The Corporation should be granted the specific
power to refuse the admission of new banks into the insurance fund
•where such admission would weaken the banking system. The Corporation should also be given the specific right to require a higher
standard than mere solvency for admission to the insurance fund.
I t is my firm belief that every community which can produce a
sufficient volume of deposits to support a bank should receive the
advantages of such facilities. There are many localities throughout
the United States, however, which can support only one or two banks.
To establish a second or third bank in such communities leads to
speculative and destructive practices in an effort to earn sufficient
income to pay expenses. For the protection of the insured institutions, the Corporation, and the public welfare, the admission of
banks to the insurance fund should be carefully supervised.
I t is for these reasons that we have recommended that the legislation incorporate specific standards to be met by future applicants
before admission to the benefits of deposit insurance. These standards have already been recognized by Congress in other legislation.
Capital rehabilitation: I n the latter part of 1933 banks were admitted to membership in the insurance fund under exceptional conditions. The situation existing at the close of 1933 was critical. The
lack of real public confidence in banks was unsettling. Congress,
therefore, provided that all solvent banks should be admitted to the




33

BANKING ACT OF 1 9 3 5

insurance fund, even though their capital was impaired in a number
of instances. However, the Corporation immediately undertook to
assist all banks which needed it in rebuilding their capital structures
and correcting capital impairments which our examinations had
disclosed.
The capital rehabilitation of banks was to be effected either through
local contributions or through the facilities of the Reconstruction
Finance Corporation. The Insurance Corporation assisted State
nonmember banks to rebuild their capital structure. The responsibility for the condition of National and State member banks rests
with the Comptroller of the Currency and the Federal Reserve Board,
respectively. The Comptroller of the Currency and the Federal Reserve Board had the right to insist that banks under their jurisdiction
accept necessary aid. The Corporation, however, had no such power.
To a( complish the task of rebuilding the capital of nonmember State
banks which had been admitted to the benefits of insurance, the Corporation could only use the power of rational appeal to the board of
directors or to the State banking authorities. Without the cooperation of the State banking authorities the capital structure of nonmember banks would not have been rebuilt.
State nonmember banks which could not obtain local capital contributions were assisted in securing aid from the Reconstruction F i nance Corporation. Banks which had already made application were
assisted in complying with the conditions laid down by the Reconstruction Finance Corporation. The accompanying table reveals the
extent of the aid extended by the Reconstruction Finance Corporation to the various classes of banks in this country. While it is true
that by the close of 1934 Federal Reserve member banks (State and
national) had received almost three times as much Reconstruction
Finance Corporation aid as had nonmember banks, in proportion to
total deposit liability the aid given State nonmember banks was
twice as great as the assistance extended member banks.
Reconstruction, Finance Corporation purchases of capital obligations of insured
tanks
[In millions of dollars]

National
banks

1. T o t a l deposits, J u n e 30, 1934 i „ _
2 C a p i t a ] , s u r p l u s a n d u n d i v i d e d profits, J u n e 30,1934'.
3 N e t R e c o n s t r u c t i o n F i n a n c e C o r p o r a t i o n contribut i o n to c a p i t a l t o J u n e 30, 1934 '
4 R a t i o R e c o n s t r u c t i o n F i n a n c e C o r p o r a t i o n to total
deposits
„..percent-.
5 R a t i o R e c o n s t r u c t i o n F i n a n c e C o r p o r a t i o n to total
capital
percent
6 Reconstruction Finance Corporation cumulated
d i s b u r s e m e n t to r l l b i n k s , F i b 1, 1935 !
7 R a t i o of i t e m 6 t o i t e m 1
percent-.
8 R a t i o of i t e m 6 to i t e m 2
do

Insured
State m e m - n o n m e m ber b a n k s
ber banks
(excluding
mutuals)

$19,896
2,843

$11,116
1,886

384
1 9

$4,746
1,005

$35,814
5,752

202

184

773

1 8

3.9

2.2

13 5

10 7

18 3

13.4

$465
2 3
16 4

$238
2 1
12 6

5.4
25.5

2.7
16.7

' C a l l r e p o r t of insured b a n k s , n o 1
> As reported b y the Reconstruction Finance Corporation.
Source: F e d e r a l D e p o s i t I n s u r a n c e C o r p o r a t i o n , Division of Research a n d Statistics.




T o U l insured h a n k s
(excluding
mutuals)

34

BANKING ACT OP 1 9 3 5

I n some instances the necessary capital reconstruction had hardly
been accomplished when applications were made by the banks to
retire the preferred stock or debentures purchased from the Reconstruction Finance Corporation. As has been indicated, the capital
reconstruction program was carried out for the purpose of protecting not only the banks but the Insurance Corporation. The capital
and surplus of banks constitute a guaranty fund to depositors.
They represent a cushion for the liability of the Corporation. When
this capital and surplus are exhausted through losses, the depositor
must turn to the Insurance Corporation for the payment of his
deposits. The Corporation is vitally concerned, therefore, with the
amount and condition of the capital and surplus of insured institutions. The reduction of this cushion of safety should be permitted
only after obtaining the approval of the Corporation. If banks
are allowed to retire this new capital, the rehabilitation, which has
been so tediously accomplished, would be of no avail. The Corporation should have the right to control any future reductions in
capital by insured banks.
Mergers and consolidations: The Corporation should have the
right to review all mergers and consolidations affecting insured
banks. I t is possible that banks which have been refused admission
to the insurance fund may be absorbed by insured institutions, thus
extending the liability or the Corporation to depositors of the absorbed bank. Under the existing conditions, there is no way by
which such a subterfuge could be prevented.
I n the interests of the depositor the Corporation should have the
right to refuse to give its stamp of approval to inequitable or unsound reorganizations. Last year the Corporation was called upon
to review more than TOO such plans. Many of those which we have
seen are inequitable. The Corporation should have the right to pass
upon the justice and soundness of reorganization plans. Depositors
have often made tremendous sacrifices without the comparable sacrifice by stockholders and other special groups.
The Corporation now has the right to buy assets of closed Federal Reserve member banks. We have recommended that this right
to purchase be extended to operating insured banks until July 1936
whenever such action will avert an impending loss and facilitate a
merger or consolidation. I t will be to the best interests of both
depositors and the Corporation if, through the absorption by the
Corporation of a comparatively small loss, a more serious loss will
be averted. Furthermore, such a procedure will offer both an incentive and a method for completing the rehabilitation of all insured
banks prior to July 1, 1936. The right to purchase assets from
operating banks should not be exercised unless in conjunction with
a merger or consolidation and only for the purpose of averting loss.
Fidelity and other protection: Bank failures are frequently precipitated by defalcations. We, therefore, recommend that the Corporation be given the right to require adequate fidelity and other
insurance. Such insurance provides protection to depositors, to bank
executives, and to the Corporation. Where a given institution does
not carry sufficient insurance, the Corporation should be given the
right to contract for such insurance and charge the bank therefor.
Termination of insurance: A method whereby nonmember banks
may withdraw from the insurance fund should be included in the



BANKING ACT OP 1 9 3 5

35

legislation. Banks leaving the insurance fund should give adequate
notice to the Corporation and to their depositors. However, such
withdrawals should not expose the depositors to a sudden cancelation of the protection afforded them, and the insurance benefits
should be extended to the depositors for 2 years after the withdrawal
of any bank.
We also believe that the Insurance Corporation should have the
right to terminate the insurance of any bank if, after a hearing and
after notice to depositors, such action is in the best interest of both
depositors and the Corporation. I n establishing deposit insurance
Congress has assumed not only a definite responsibility to bank depositors, but also a moral obligation for the sound management of
banks. If the Corporation finds that an insured bank is engaged
in repeated practices detrimental to its depositors, the Corporation
should not be placed in the position of sanctioning such practices but
should be given the right to terminate the insurance of the bank's
deposits without jeopardizing the depositors. For the protection
of depositors we have recommended that in such cases insurance
be extended for 2 years from the time that membership in the fund
is terminated.
The right of dismissal may seem to be somewhat drastic, but it is
hoped that the use of this power may seldom be necessary. As an
intermediate step, and as a means of notifying the public, it is suggested that the Corporation be authorized to publish either all or
such portions of examination reports as it deems necessary. The
State supervisory authorities will be advised of the intention to publish aH or part of the examination report and only after adequate
notice has been served on the executives of the bank concerned will
such action take place. This procedure is designed to allow sufficient
time for the executives of the bank concerned to correct the practices
which jeopardize the safety of the depositors' funds. The Comptroller of the Currency has this right in the case of national banks.
Senator COTJZENS. May I ask a question at that point?
Mr. CROWLEY. Yes, sir, Senator.

Senator COTJZENS. What would happen to a bank if it was known
it had made an application for withdrawing from the Insurance
Deposit Corporation or if the Corporation undertook to cancel the
insurance ? Wouldn't there be a run on the bank ?
Mr. CROWLEY. Well, I would say this, that if a bank has been
carrying on practices of this kind, that we have given them 90 days'
time to correct them, and if they won't do it or haven't done so, that
the depositors should be protected by notice that that bank is going
to be put out of the system. Now, I presume it will be agreed that
if a bank has been guilty of practices such as that, it should be put
in liquidation, if it has been conducting its affairs along that line.
Senator COTJZENS. Yes; but what am I getting at is this: Would
not publicity of the fact that the bank is going to lose the insurance
ordinarily cause a run ? I am wondering if it would be better, when
that necessity arose, to close the bank and save the depositors.
Mr. CROWLEY. Well, 1 should say this: If a bank has been carrying on unsound practices, and the Corporation has given the 120
days' notice in which to correct such practices, and then the bank
either has failed or refused to make such corrections, then the de-




36

BANKING ACT OP 1 9 3 5

positoi-s of that bank should be protected by a suitable notice that
the bank is going to be dismissed. Now, I presume it is generally
agreed that if a bank has been guilty of unsound practices it should
be eliminated from the insurance fund, even though such elimination mean liquidation.
Senator COUZENS. YOU are asking power, however, to cancel the insurance and to permit a bank to withdraw from the fund, which is
tantamount to a notice to the depositors that the bank is in trouble.
I t seems to me there ought to be some better device for handling that
matter than has been suggested in your memorandum.
Mr. CROWLEY. A S I understand it, the Congress docs not have the
right to give the Corporation the power to close State banks.
Senator COUZENS. Would you give notice to the State bank before
you took any such action?
Mr. CROWLEY. Yes, and also notice to the State supervising
authorities.
Senator COUZENS. Would you give the State officials any notice
before you made public your action ?
Mr.

CROWLEY.

Yes.

Senator BYRNES. Would the public get the information ?
Mr. CROWLEY. Ultimately the public would get the information
after the necessary notice had been given and the bank given an
opportunity to appear before our Board to show cause why they
should not be eliminated from the fund.
Senator BYRNES. On the face of that notice, practically every
bank would have to close, they would feel that they would have to
close in order to take advantage of the insurance.
Mr. CROWLEY. YOU mean the final notice ?
Senator BYRNES. NO ; I mean just what Senator Couzens says, that
once it becomes known to the depositors that you believe their practices are such as to justify you in taking such action, that depositors
will immediately withdraw their funds, immediately the wise fellows will, and some of the officials will, on getting notice.
Mr. CROWLEY. The law will operate in this manner: Notice is first
given to the officials of the bank and the State supervising authority,
and the bank is given 120 days to make the necessary corrections.
A t the end of the 120 days, if the corrections have not been made,
the bank will then have 30 days within which its representative may
appear before the board of directors of our Corporation to answer
the charges. At the expiration of the 30 days, if the corrections have
not been made or the representative of the bank has not appeared,
the bank is expelled from the fund. You understand, however, t h a t
we insure those who are depositors at the date of expulsion for a
period of 2 years thereafter. We do not insure anyone who becomes
a depositor after the date of expulsion. This, I think, Senator,
covers the situation you have in mind.
Senator BYRNES. I t should not accept them without the depositor
having knowledge that the insurance has been removed.
Mr. CROWLEY. Yes; that is right.
Senator BYRNES. The only question is whether they should run at
all.




BANKING ACT OF 1 9 3 5

37

Senator COUZENS. Let us say there was the 120-day and 30-day additional notice, yet all the directors and officials of that bank have
the knowledge, what would happen to the insiders?
Mr. CROWLEY. The most the insiders could do would be to withdraw balances in excess of $5,000, realizing that if the bank should
ultimately close, they, like everyone else, would be protected up to the
$5,000 limit.
Senator COTJZENS. They may even want the money in there, having in mind that the Deposit Insurance Corporation could pay it
and then get the money out no matter whether it was below or above
the $5,000 insurance. I t seems to me there must be some better device
for handling this situation than is outlined in your testimony.
Mr. CROAVLEY. Well, we would be glad to talk with you about that.
Senator COUZENS. We can take that up later.
Senator BTJLKXEY. I would like to get clear the operation of your
distinction between the old and the new deposits. Suppose I have a
$4,000 deposit in a bank where you are going to terminate the insurance. Now, if I draw that money in the account down to $2,000 and
then make a new deposit of $2,000, how much am I insured to?
Mr. CROWLEY. $2,000.
Senator BULKLEY. If I made a new deposit, savings deposit, up
to $5,000, and then drew it down to $4,000, how much would I be
insured for?
Mr. CROWLEY. YOU will be insured only for the amount of your
balance at the day that we notify the bank that they are dismissed
from the fund.
Senator BULKLEY. Exactly; but I may be changing the amount,
depositing and checking out.
Mr. CROWTLEY. N O ; as you check out of that, our liability goes
down. Otherwise, there would be no incentive for putting the bank
out of the fund because our liability would always remain the same.
Senator BULKLEY. So, by checking out and drawing out money,
your liability would be reduced ?
Mr.

CROWLEY.

Yes.

Senator BULKLEY. And any new deposits would have no effect
whatever ?
Mr. CROWLEY. This is the primary reason why depositors should
know when their bank is no longer insured, so that any future deposits they may make will be made with full knowledge and at their
own risk.
The CHAIRMAN. YOU have no legal right, nor has Congress the
right to give you authority to close a State bank.
Mr. CROWLEY. That is right.
The CHAIRMAN. And when a bank gets in the condition you describe it ought to be closed by one method or another, it should not
be allowed to continue business and receive deposits over the counter
when it is an insolvent condition.
Mr. CROWLEY. T h a t is right.
The CHAIRMAN. Most of the States have statutes making that a
penitentiary offense to do that.
Mr. CROWLEY. But, Senator, we couldn't afford, with our liability
here, to depend upon the State commissioners to closie these banks.
The CHAIRMAN. I am saying that; yes. That is what I am saying.
Mr. CROWLEY. We have got to have some power.




38

BANKING ACT OF 1 9 3 5

The CHAIRMAN. I think when a bank gets into that condition it
ought to be closed in the speediest way possible.
Mr. CROWLEY. That is right.
The CHAIRMAN. Inasmuch as you are not authorized by law and
Congress cannot give you the right to close the bank, it seems to me
that your method there is worthy of very serious consideration, at
least.
Mr. CROWLEY. Reports of condition: Reports of condition now
being issued to the public are confusing because of their inadequacy
and lack of uniformity. Considerable effort has been expended in
a study of this question. Conferences have been held with the State
and Federal supervisory agencies in an effort to develop standard
and uniform reports of condition. I n order that the public may be
informed as to the status of the institutions with which they do
business, periodical statements of condition should be required of
all banks.
Payment of claims: Revision of the provisions of the law reciting
the obligation of the Corporation to pay the insured deposits of a
closed insured bank is necessary. As it now stands, the law requires the Corporation to organize a new national bank to act as its
instrumentality in paying the insured deposits of every closed insured bank. This procedure must be followed even though there
is not the slightest possibility of the community being able to capitalize the new national bank. Fifteen insured banks have thus far
closed but in only one instance were the local people in a position to capitalize the new bank.
This procedure for paying insured deposits has proved unsatisfactory since it involves needless expense and many unnecessary accounting problems which could be eliminated if the Corporation
were permitted to pay its obligations in the same manner as other
insurance companies engaged in the commercial field. Accordingly it is proposed that the organization of a new bank be at the
discretion of the Corporation.
Under the present law, where it pays the insured portion of a deposit claim which is larger than $5,000, the Corporation becomes
subrogated to the entire amount of the depositors' claim until it is
reimbursed for the amount paid out to the depositor. This is manifestly inequitable to the larger depositors. We believe that the Corporation should be subrogated only to that portion of the claim
which it pays, the depositor retaining his claim for any uninsured
portion, and receiving all dividends payable thereon directly from
the liquidating officer. I n the case of every closed bank there are
some depositors who can never be located by reason of death, disappearance, or change of residence. We believe claims which are
not filed within 1 year after an insured bank is closed should not
be paid by the Corporation. This suggestion finds ample precedent,
and will enable the Corporation to close its books on each pay-off
within a reasonable period.
The bill before you includes suggestions for clarification of provisions of the existing law about which some doubt has arisen. The
adoption of these provisions will facilitate administration.
Five thousand dollars maximum: W e recommend that the maximum limit of insurance to any one depositor be retained at the present figure of $5,000. Congress, in establishing deposit insurance, was



BANKING ACT OF

1935

39

presumably most concerned with the mass of depositors with small
accounts. Our reports cover 51,000,000 accounts, of which over 98
percent are fully insured with the $5,000 limitation. Many of the
accounts not fully covered are interbank accounts, public funds, deposits of corporations, institutions, and trust estates. The actual
number of individuals with deposits in excess of $5,000 is probably
less than 1 percent of the total number of depositors. Out of the
14,000 insured banks, over 9,600 have more than 80 percent of their
deposits insured under the $5,000 limitation. To raise the limit of
insurance above $5,000 would materially increase the maximum possible liability of the Corporation. If all the deposits were insured,
this would be more than doubled. I t would be increased from the
present I6V2 to nearly 30 billion dollars by the permanent plan
which now exists in the statute. This tremendous increase in the
maximum possible liability of the Corporation would benefit only
one out of each hundred bank depositors.
The Insurance Corporation's interest in the sound operation of
banks is more tangible and more vital than that of any supervisory
authority. Deposits in practically all commercial banks and trust
companies of the United States are insured by the Corporation.
Bank supervisory agencies have a responsibility to the depositing
public, and it is their duty to see to it that the bank laws are properly
enforced. The Corporation, however, has a financial liability to
these depositors. I t s interest in the sound operation of these institutions is one of dollars and cents.
There are two courses open to the Insurance Corporation. I t can
be a charitable institution which will pay for the mistakes, bad
banking, and dishonesty of bankers, in which case the cost of the
insurance must be set so high that it will be an injustice to every
sound bank. Or, by being placed on a sound basis, the Corporation
may be used as an instrument to improve the standards of bank management and reduce the losses to depositors through bank failures.
The latter course, which I prefer, requires that the standard of bank
supervision throughout the country be improved, that the Corporation be given the right to protect itself against excessive risks, and,
finally that the Corporation be not handicapped by taking into the
fund banks which are unsound or by continuing in the fund banks
which are mismanaged.
Senator COT/ZENS. Have you convenient what your experience has
been with the banks that have closed ?
Mr. CROWLEY. Yes, Senator; I have.
Senator COTJZENS. Have you it summarized? You don't need t o
give each bank.
Mr. CROWLEY. Fourteen of the fifteen insured banks which have
failed to date had total deposits of $3,392,000. The secured portion
of these deposits, including deposits subject to offset, was $953,000.
Our liability was $2,137,000 and deposits of $301,000 were neither
insured or secured.
Senator COTJZENS. How soon did they pay out after the closing of
the bank?
Mr. CROWLEY. Why, we usually started every pay-off within 10
days from the time of the closing.
Senator TOWNSEND. Have you finished your statement, Mr.
Crowley ?




40

BANKING ACT OP 1 9 3 5

Mr. CROWLEY. Yes; I have finished the written statement.
Senator TOWNSEND. What was the overhead of the Corporation
up to July 1, 1934, as compared with the cost of operation in the
last 6 months of 1934?
Mr. CROWLEY. The overhead from September 11, 1933, to J a n u ary 31, 1934, was $1,702,000. From February 1, 1934 to June 30,
1934, it was $1,130,000. From July 1, 1934 to December 31, 1934, it
was $1,512,000. Or, since the Corporation has been in operation,
the actual overhead was $4,345,000. The budget that is being set up
for 1935 estimates that the cost of operation will be about 2 % million dollars, or a reduction of about $800,000.
Senator TOWN SEND. That is 1935 as compared with 1934 ?
Mr. CROWLEY. That is correct, Senator.
Senator TOWN SEND. Yes.

The CHAIRMAN. I n the event, Mr. Crowley, that the duties and
the functions of the Corporation should at a later period be transferred to the Federal Reserve System, what do you estimate would
be the reduction in the overhead?
Mr. CROWLEY. I don't think, Senator, such a change would bring
about any appreciable reduction in overhead, for the reason that
practically all the functions now being carried on by our Corporation
would have to be carried on by some other agency for the protection
of the insurance fund. I t seems to me that when you consider the
contribution made toward the rebuilding of the entire banking system, the restoration of confidence among depositors, and the efforts
expended toward making banks more safe and sound, the expense
of operation of the Corporation can well be considered very nominal.
The CHAIRMAN. Isn't that largely upon the assumption that if
transferred to the Federal Reserve System there would be no examination of these banks?
Mr. CROWLEY. Senator, let me say t h i s : If you take away from
this Corporation its right to examine banks, vou are destroying the
greatest safeguard this Corporation has. We are now examining
some 7,800 State banks which applied and were admitted to the
insurance fund. If we must take the examination of State supervising authorities it means that the protection now afforded by
the right to make examination cannot be maintained, and in my judgment you could not hope to keep the Corporation solvent. Now, we
have many reasons for this belief, and I want to give one in confidence. I would like to have you read this memorandum, which shows
the reasons why hundreds of banks were closed. I t also gives you
some idea of the hazard we would have if we did not have the
examining right.
Senator BULKLEY. NOW, as to the banks which are members of the
Federal Reserve System, you would rely on the Federal Reserve
examination?
Mr. CROWLEY. We do that, Senator. We do not examine any national banks in the Federal Reserve System or members in the Federal
Reserve System which are not national banks.
Senator BULKLEY. You don't examine them at all ?
Mr. CROWLEY. There is no occasion to.
Senator COTIZENS. May I point out to Mr. Crowley that he h a d
better check the figures with respect to the banks that are closed. H e
read the figures and they were inaccurate as he read them in the




BANKING ACT OF 1 9 3 5

41

report because the insured deposits were larger than the amount he
read in the record, and the record ought to be corrected.
Mr. CROWLEY. $2,137,000.
Senator COUZENS. Yes; you read off 953.
Mr. CROWLEY. No; 953,000 was the secured.
Senator COTJZENS. But you didn't read it off that way.
Mr. CROWLEY. I beg your pardon.
Senator TOWNSEND. What was the condition of the State banking
system when you started to admit banks into your fund on January
1, 1934, and what has been done to correct the practice?
Mr. CROWLEY. When the Federal Deposit Insurance Corporation
first examined banks applying for membership, it found that there
were 732 banks, with deposits of about $690,000,000, which were
wholly without net sound capital. I n other words, the total
Senator TOWNSEND. H O W many banks?
Mr. CROWLEY. Seven hundred and thirty-two. I n other words,
the total of the amounts of the assets which the examiners considered doubtful and loss was equal to or more than the book capita]
of these banks. There were 723 additional banks, with deposits of
$860,000,000, which were in the danger class, since the net sound
capital in those banks was less than 5 percent of the deposits. In
other words, there were 1,450 nonmember State banks which the Corporal ion considered to be in an extraordinarily weak condition, since
they showed practically no net sound capital. These banks showed
approximately $155,000,000 of book capital.
Through the activrties of the Corporation it has been possible to
improve Hie net sound capital through the introduction of local and
R. F . C. funds in over 1,250 of the 1,450 banks which were originally
considered to be precariously weak. I n place of having $1,550,000,000 o f deposits in weak banks, which was the case at the inauguration of deposit insurance, we now have only $310,000,000 of deposits
in about 200 weak banks.
Considering all of the State nonmember banks together, we find
that the net sound capital has increased from $484,000,000 to
$812,000,000, an increase of over 60 percent. Upon first examination,
the combined net sound capital of nonmember State banks constituted about 45 percent of the book capital. On our most recent examinations net sound capital constitutes about 70 percent of the
book capital.
The increase in net sound capital has been brought about by the
following developments:
(a) Improvement in the condition and value of certain assets orig- '
mally criticized, between the time of the first and last examinations;
(b) The removal of bad assets from the banks by directors;
(c) The injection of new capital;
(d) Charge-off of further loss items; and, finally,
(e) The changed point of view of examiners.
We estimate that the State nonmember banks still have well over.
$300,000,000 of doubtful and loss assets on their hooks which should,
be written off. The current earnings, plus recoveries, but before
write-offs were taken during the year 1934, amounted to $92,000,000.
At this rate it will take the 7,700-odd State nonmember banks between 3 and 4 years to absorb all losses which at present stand on




42

BANKING ACT OF 1935

their books, assuming, of course, that no additional losses in the
assets of the banks are incurred.
Senator TOWNSEND. D O you know how many banks have been reorganized and given a charter since you started?
Mr. CROWLEY. Yes; I have that, Senator.
The CHAIRMAN. Mr. Crowley, I note that you recommend that all
dividends on the stock of a bank be eliminated. That, of course,
would transform the Treasury contribution into a gift.
Mr. CROWLEY. Well, I presume that you might refer to it as that,
Senator.
The CHAIRMAN. That is what I wanted it to be, from the first.
Mr. CROWLEY. There is no need of leaving the dividend provision
in, because there will be no way we can pay dividends.
The CHAIRMAN. Well, there ought to be some dividend. I don't
agree with you about that. There ought to be some way to pay dividends, but I agree that the contribution by the Treasury ought to be
made in recompense for the enormous amount of money t h a t the
Treasury took from the banks and didn't earn a dollar of it.
Now
Senator BUXKLEY. May I ask a question to clear u p a matter?
The

CHAIRMAN.

Yes.

Senator BULKXEY. I am not quite clear in my own mind as to
what banks the Federal Reserve System audits and checks. There
are the State member banks ?
Mr. CROWLEY. The State member banks; yes, sir.
Senator BULKXEY. That is their function?
Mr. CROWLEY. Yes, sir; as far as examination is concerned.
The CHAIRMAN. Member banks and State member banks?
Mr. CROWLEY. NO ; they do not examine national banks.
The CHAIRMAN. The Comptroller of the Currency does that, but
they have authority to do it, to make the audit, too.
Senator BULKXEY. And I understand the practice of the Federal
Reserve System is to examine member State banks, is t h a t right?
Mr. CROWLEY. That is correct.
Senator BULKXEY. And how often do they do it?
Mr. CROWLEY. I think they do it at least once a year.
Senator BULKLEY. I S that all?
Mr. CROWLEY. Yes. The Federal Reserve Board examines State
member banks about once a year.
Senator BULKXEY. And you find that examination adequate for
your corporation?
Mr. CROWLEY. Well, under the law, we must accept that examination.
Senator BULKXEY. Under the law; well, I asked you if you found
it adequate.
Mr. CROWLEY. I think that the Corporation should have the right
to go into any t a n k , if it felt t h a t it was necessary to protect itself,
and we have asked that, with the consent of the Comptroller, we
might go into any national bank to t r y to work out a merger, where
we might be subjected to loss, and we are asking for the same right
in the Federal Reserve member bank.




BANKING ACT OF 1 9 3 5

43

Senator BULKLEY. I n the Federal Eeserve Bank System you say
you rely solely on the Comptroller's examination so far as national
banks are concerned?
Mr.

CROWLEY. W e

do.

Senator BULKLEY. Do you find that adequate?
Mr. CROWLEY. Yes, but there are instances where I think it necessary that we have the power, with the consent of the Comptroller
and the Federal Reserve Board, to join in examinations of national
banks and State member banks, particularly in proposed mergers
and consolidations.
Senator BULKLEY. I see. Thank you.
The CHAIRMAN. Mr. Crowley, let me review a section from existing law, which prescribes that the Federal Eeserve Board shall from
time to time limit by regulation the rate of interest which may be
paid by member banks on time deposits, and may prescribe different rates for such banks on time and savings deposits having different maturities or subject to different conditions respecting withdrawal or repayment or subject to different conditions by reason of
different location. W h a t did you take that to mean?
Mr. CROWLEY. Well, we assumed this, Senator, that it meant the
Federal Eeserve had the power to regulate the interest on time deposits of any member bank, and then we assumed that we had the
power under our act to cooperate with them and fix the rate of
interest on members of the fund.
The CHAIRMAN. I know that was the assumption, but with respect
to the Federal Eeserve Board, what do you think that language
means? Doesn't it clearly imply that the proponents of this law
and that the Congress thought there was a good reason why the rate
of payment should be different according to different maturities or
subject to different conditions respecting withdrawal or repayment
or subject to different conditions by reason of different localities ?
Mr. CROWLEY. I think that is what they intended.
The CHAIRMAN. Otherwise, we wouldn't have p u t that in.
Mr. CROWLEY. I think that is practical, too, Senator, because some
parts of the country get a higher interest.
The CHAIRMAN. Senator Bulkley, who was a member of this committee as originally constituted, will recall that we discussed that
very intently and for a long time. Do you think there is any more
reason why a payment on time and savings deposits should be uniform throughout the country than there is a reason why discount
rates should be uniform throughout the country ?
Mr. CROWLEY. N O ; I think, Senator, the interest rate should be
determined by regional districts, taking into consideration the interest charged on loans for that district.
The CHAIRMAN. Well, I am glad to hear you say that, because
that has been my contention. I n other words, a bank that is limited
by State taxes in its current discount rate to 5 percent, as is the
case in Michigan and in one other State, or to 6 percent, as is the
case in Virginia and is the case in most of the eastern banks, ought
not t o be restricted in its payment of interest on these deposits, as
the western banks and some southern banks which charge 8 and 10
and 12 percent for the use of the depositors' money.
Mr. CROWLEY. T h a t is correct.




44

BANKING ACT OP

1935

The CHAIRMAN. In other words, a bank that is restricted to 5 or
6 percent in its discount rate or. rather, a bank that is allowed 8 or
10 or 12 percent tor the use of these depositors' money, can afford
to pay more to those time and savings depositors than a bank that
is restricted to 5 or 6 percent; isn't that true?
Mr. CKOWLEY. That is right. Senator, you asked me a question
about reorganizations.
Senator TOWNSEND. Yes. Do you think that the Corporation
should have the right to combine the assets of closed banks ?
Mr. CKOWLEY. We have proposed that this power be extended to
us until July 1, 1936, for these reasons: There are certain banks
whose existence cannot be economically justified, that is to say, their
size and location precludes the possibility of their making sufficient
earnings. There are others whose distressing condition is such as to
make it advisable for them to either close or consolidate with some
other bank. I t would be helpful to this Corporation if we had the
authority to purchase the assets of some of these banks in order to
bring about consolidations or mergers. Our liability would thereby
be greatly reduced.
Senator BUXKLEY. Why do vou recommend the date of July 1,
1936?
Mr. CROWLEY. I n order to give us an opportunity to observe the
practical results of operation the date was arbitrarily chosen. I do
think, however, there is danger of this power being abused, and that,
therefore, it ought to be used only in extreme cases. The Corporation would gain nothing if it purchased the bad assets from banks
that had been badly managed, and if State commissioners would later
recharter another bank with the same old management.
The CHAIRMAN. Adverting to the payment of time and savings
deposits.
Mr. CROWLEY. That was on open banks, Senator. Now, on the
matter of closed banks, there may be instances where we have 90 percent of deposit liability, we may wish to do the same thing as with
the closed bank, merging part of the assets. There are no limits to
that.
Senator TOWNSEND. I think you were interrupted in answering my
question about the number of banks there were reorganized and newly
opened.
Mr. CROWLEY. Since July 1, 1933, there have been 404 newly
licensed banks admitted to the fund with deposits of less than $100,000, 251 with deposits of less than $150,000, 399 with deposits of less
than $250,000, and 467 with deposits of less than $500,000.
The CHAIRMAN. H O W many banks closed from 1920 to 1933 ?
Mr. CROWLEY. About 11,000, Senator, closed, excluding those which
suspended and later reopened. I would like to show you the size of
these banks.
The

CHAIRMAN.

Yes.

Mr. CROWLEY. Since 1920, in 1920 you had 6,548 banks, with loans
and investments of under $150,000.
The CHAIRMAN. Do you call those banks ?
Mr. CROWLEY. From 1921 to 1931, 3,504 of that size suspended. I
would like at this point to call your attention to the fact t h a t there




BANKING ACT OF 19 3 5

45

is grave danger that we are traveling the same road that led to the
wholesale licensing of banks and the appalling number of closings.
I n order to avert a repetition of the mistakes that have been made
in the past, it seems to me that it is necessary to give this Corporation
powers we are seeking so that we will not have to admit to membership in the fund, banks which cannot economically survive.
The CHAIRMAN. H O W many of the banks that failed, that closed,
were State banks, and how many national banks? Have you stated
that?
Mr. CROWLEY. We have that here, Senator. From 1921 to 1933,
inclusive, about 1,800 national banks suspended and did not reopen.
More than 9,000 State banks suspended and did not reopen.
The CHAIRMAN. What is the average size of the banks now in your
fund?
Senator TOWNSEND. Pardon me, before you pass that. Does it give
you the amount? W h a t was the amount of the total deposits of the
11,000 State banks?
Mr. CROWLEY. They were very small, Senator, on an average. The
total in suspended State banks was about $4,000,000,000. I n the
national banks, it was about $1,700,000,000. Deposits of banks which
reopened are not included in these figures.
Now, the size of the banks in our fund. We have 1,502 banks with
deposits of $100,000 and less. They are made up of 94
The CHAIRMAN. W i t h deposits of what?
Mr. CROWLEY. $100,000 and less. They are made up of 94 national,
22 State member banks, and 1,386 State banks. The insured liability
of those banks is 91.67 percent. So you can see what our liability is in
that particular group of 1,502 banks.
From $100,000 to $250,000, there are 3,580 banks; 834 of them are
national, 119 are State members, and 2,627 are State nonmember
banks. And we have an insured liability there of approximately 87
percent of all those banks.
_ From $250,000 to $500,000, there are 3,109 banks; 1,261 are national, 186 are State members, and 1,662 are State nonmember banks.
We have an insured liability there of 83 percent.
From $500,000 to $750,000, there are 1,477 of them; 741 are national, 97 are State members, and 639 are State nonmember banks;
with an insured liability of approximately 80 percent.
Or in 9,668 banks, 2.930 are national banks, 424 are State member
banks, and 6,314 are State nonmembers. We have an insured liability of 80 percent or greater.
The CHAIRMAN. Well, how many of these banks do you think
might be so small that they may not remain economically sound and
that they will involve you in losses ?
Mr. CROWLEY. Our figures show that all of the State nonmember
banks, amounting to 7,700 banks, operated at a net loss of $115,000,000 for the year 1934. This is after taking into consideration their
current net earnings of $54,000,000. their recoveries of $38,000,000,
and their write-offs of $206,000,000.
As an example of what the banks' earnings were, let me call your
attention to the 1,200 State nonmember banks that have total deposits of less than $100,000. These banks operated at a net loss of
129688—35—PT 1




i

46

BANKING ACT OP

1935

$2,900,000, or about $2,400 per bank after taking into consideration
recovery and write-off of losses. On the average, operating expenses
of these banks were only $700 less per bank than operating earnings—in other words, I am not taking any losses at all. The operating income of the average bank of $100,000 and under was only $700
before they considered losses. After they took out their losses, they
operated in the red.
The banks with total deposits of from $100,000 to $250,000 of
which there are 2,500 showed a total loss for the year of almost
$10,000,000, after taking into consideration recoveries and write-offs.
On the average, each of these 2,500 banks had current earnings
which were only $1,800 more than their current expenses.
I n other words, this group of from $100,000 to $250,000 had average earnings before losses of $1,800 a year.
The CHAIRMAN. Isn't it conceivable, Mr. Crowley, that if that
sort of thing should continue, the losses of your Corporation will
be incredibly large ?
Mr. CHOWLEY. Senator, you cannot hope to keep this Corporation
solvent unless you either give it tremendous income, or unless you
give it supervisory powers and the right to correct unsound practices,
because by the very nature of their earning capacity these banks cannot keep themselves clean because any kind of a loss which they will
have will eat up any earnings they have and adversely affect their
capital position.
The CHAIRMAN. Adverting to this payment on time and savings
deposits, have you any provision in title I relating to that?
Mr. CROWLEY. N O , Senator; after my conversation with you t h a t
time, I left that out.
The CHAIRMAN. You left that to the Federal Reserve ?
Mr. CROWLEY. N O ; we haven't any provision at all for State banks.
You recall, you and I discussed that. I think there should be a provision in our law, Senator, to apply to the State nonmember banks.
The CHAIRMAN. And have the rate of payment relating itself to
the rate of discount?
Mr. CROWLEY. That is correct, sir.
The CHAIRMAN. Let me ask you t h i s : I t has been stated elsewhere
that nonmember banks have been or will be exempted from the obligation of becoming members of the Federal Reserve Banking System by J u l y 1, 1937. I think you very clearly recall the details
of this provision of the existing law, and the President and the
Secretary of the Treasury, then Mr. Woodin, were apparently irrevocably opposed to insurance of deposits. B u t they finally became
convinced that it might be a desirable experiment, only because it
seemed very probable that it would bring about approximately a
unified banking system by compelling all insured banks to come into
the Federal Reserve System. Do you alter that provision of the
law in your title I ?
Mr. CROWLEY. No, Senator; we leave that, as it was agreed last
year to extend it until 1937.
The CHAIRMAN. Yes.
Mr. CROWLEY. And that

year.




is in your bill just as it was agreed last

BANKING ACT OF 1 9 3 5

47

The CHAIRMAN. W h a t is your judgment as to the proposition of
eliminating that requirement?
Mr. CROWLEY. I think this, Senator: If the Government is going to
insure deposits, and really this is a Government fund because the
money comes from the Government; if it is going to assume the
responsibility, it should try to centralize the control of these banks,
and that is one way you can centralize the control of all State
nonmember banks.
The CHAIRMAN. B u t I don't agree that it is a Government fund.
I t is a fund derived from assessment on banks. Of course, a part of
the fund
Mr. CROWLEY. Senator, if we are going to have to pay the same
proportion of losses in the future as the depositors suffered in the
past, I don't think the banks can finance that fund themselves.
The CHAIRMAN. Well, I don't understand that anybody connected
with this administration, or perhaps I might say, though it is a
venture, that anybody connected with this committee now investigating this matter is in favor of Government guarantee of deposits.
We have provided for a bank guarantee of deposits.
Mr. CROWLEY. Well, I think that is true.
The CHAIRMAN. Of course, the Government has made what some
people call a contribution and what I call compensation, by the
Treasury putting in some money, but that is all, that is all of the
Government's liability. W h a t I want to arrive at directly is
whether or not you think we cannot ever have a unified banking
system unless this requirement remains?
Mr. CROWLEY. I think that is the first step in a unified banking
system, and I think in time to come, Senator, that you have got to
come to a unified banking system if you are going to reduce these
losses materially.
Senator BULKLEY. Mr. Crowley, I don't understand your statement
that the banks cannot finance this insurance. Didn't you just testify
that the saving in interest alone, the savings by the banks in the payment of interest at the bank and on accounts is about equivalent to
the amount necessary to carry the whole thing?
Mr. CROWLEY. Yes; but of course it doesn't mean that you can
take all that saving, Senator, from these banks, because some of that
saving was brought about by their own voluntary act, since they
could not employ these funds any more profitably, and naturally
they had to reduce the amount they could afford to pay for them.
I n other words
Senator BULKLEY. Are you testing the bank's ability to pay by
their earnings in these very depressed times?
Mr. CROWLEY. N o ; we have gone over a period of a great many
years' bank earnings. B u t what I say is this, Senator, that the first
thing you must do is to avoid the losses of the past. Because, certainly, our banking system has demonstrated that it had many
weaknesses in it. I f we are going to have the same amount of losses
in the future as we have in the past
Senator BULKLEY. There is no doubt about that. There are many
things that can be done.




48

BANKING ACT OF 1 9 3 5

Mr. CROWLEY. I think the banks can finance this plan provided the
Corporation is given the power to protect itself, particularly in not
permitting State supervising authorities to indiscriminately charter
new banks and make the Corporation take them into the fund. If
we are to assume the liability comparable to the one we are now
carrying in 9,668 banks, we must have the right to protect ourselves.
Senator BITLKLEY. Does the law now make you take them into the
fund?
Mr. CROWLEY. Yes, sir; under the law we must admit a bank into
the fund if its assets equal its deposit liabilities.
Senator BTJLKLEY. NOW, I understand what you are driving at.
The CHAIRMAN. Mr. Crowley, speaking of the banks financing this
insurance, it has been suggested, and for myself I can entirely concur
in the suggestion, that instead of having an annual stated assessment
from the banks, make an assessment on the banks until your fund
reaches a given strength, say, a half billion dollars, and when that
shall have been done that the assessments cease automatically until
that fund shall become impaired, say, by 25 percent, and then automatically the assessments be resumed. W h a t would you have to say
about that?
Mr. CROWLEY. YOU mean our surplus shall be $500,000,000. or
until we build a surplus of $500,000,000?
The CHAIRMAN. What do you call a surplus? What is the nearly
$400,000,000 that you have now ? What is it there for ?
Mr. CROWLEY. A part of that will become capital, of course, and
part of it will be used for surplus.
The CHAIRMAN. What do you need with capital?
Mr. CROWLEY. We don't particularly need it. As a matter of fact,
I think most of our present funds should be transferred to surplus.
The CHAIRMAN. I t was put there to pay losses, insure depoi-it-%
What I mean is that when that sum reaches a half billion dollar.1-,
that then the assessments upon the banks should automatically
cease, and whenever it shall become impaired by 25 percent, the
assessments automatically resumed.
Mr. CROWLEY. Now, that would depend upon this: If you would
keep that building of the fund to $500,000,000, and then let us continue to assess or start to assess again when our fund was impaired,
we will say, 20 percent, that it seems to me might be satisfactory.
The

CHAIRMAN. Yes.
CROWLEY (continuing). Which
The CHAIRMAN. Yes.
Mr. CROWLEY. But, you see, if you

Mr.

would bring it to $400,000,000.

had a 50-percent impairment,
which will
The CHAIRMAN. Nobody has suggested 50 percent.
Mr. CROWLEY. On the basis of the present proposed annual assessment of one-twelfth of 1 percent it will require a great many years
to build the fund up to $500,000,000. I can see no great objection to
putting a cap somewhere along the line to provide that the maximum
amount of the fund may not go beyond a reasonable amount.
Senator BYRNES. Otherwise you would be accumulating a fund
from which there is no immediate benefit. I t does seem it would be
unnecessary.




BANKING ACT OF

1935

49

Mr. CROWLEY. I t will be a long time before we get up to $500,000,000, Senator. Now, if you want to put a cap in there at that
place, I don't see any great objection to that.
Senator BYRKES. YOU say a long time. What is your estimate?
Mr. CROWLEY. I would say it would be 10 years, Senator, before
you got it up after deducting your losses.
The CHAIRMAN. Would not that largely depend upon what your
losses would be ?
Mr. CROWLEY. Yes, sir; that is right, Senator.
The CHAIRMAN. And if the banking business progresses, gets on
a better, more expanded basis, why it wouldn't take so long, would it?
Mr. CROWLEY. NO ; that is correct, Senator. I t will all depend on
how successful you are in improving your banking system so as to
eliminate losses.
The CHAIRMAN. I t has been suggested, Mr. Crowley, that the bank
examination agencies now in existence should be centralized in one
agency. What have you to say about that?
Mr. CROWLEY. I think, Senator, there is much to be said in favor
of a central examining system, however, I doubt if examinations
can be centralized before 1937. when it is required that all State
banks enter the Federal Eeserve System. At present I think there
would be much resentment toward any Federal examining agency
other than the Insurance Corporation making the required examinations of the 7.800 nonmember State banks. Up to date our relations
with the nonmember State banks which are members of the fund, as
veil as with the greater number of the State banking authorities,
have been quite satisfactory. I feel very strongly that during the
next year or two the Insurance Corporation must give the banks in
the fund very close attention and supervision. I think that in the
next 2 or 3 years there must be some changes in your banking laws,
but that is a matter that should be given very careful study and consideration. I am opposed to the hasty passage of far-reaching
changes in the banking laws without sufficient time and study being
devoted to them. One important question is what should be done in
order to give to small communities banking service, some of which
are not in position to raise independent local capital.
The CHAIRMAN. H O W do you propose to eliminate the unsound and
uneconomic banks? I believe you said you wanted authority to
merge and consolidate.
Mr. CROWLEY. I think, Senator, that unsound and uneconomic
banks should be eliminated through the process of merger or consolidation whenever possible. The Corporation is asking for the
authority to purchase assets wherever advisable, in order to effect
mergers and consolidations when in the best interests of the depositors and the Corporation. We are asking for certain powers which
will give us some discretion and latitude in the matter of admitting
newly chartered banks. This is in accord with the universal practice of insurance corporations generally, who have the right to pass
on what risks they are going to assume. With the wide-spread acceptance of deposit insurance amongst bankers and the increased
confidence of depositors in the plan, membership in the fund will
tend to become more and more attractive and necessary. I think




50

BANKING ACT OF 1 9 3 5

this will tend to eliminate the hasty and ill-advised chartering of new
banks when it is realized that the Corporation does not have to admit
indiscriminately any bank which applies for membership.
The CHAIRMAN. Would not that situation be very materially
helped by a system of State-wide branch banking ?
Mr. CROWLEY. I think so; there are certain communities t h a t are
entitled to certain banking service, but they can't support a bank
with capital and keep it in a sound position.
The CHAIRMAN. Mr. Crowley, could you be back here at 10:30
Monday morning ?
Mr. CROWLEY. Yes, Senator.

The CHAIRMAN. All right, please do that.
Mr. CROWLEY. Thank you.
(Whereupon, a recess was had at 12:25 p . m. to 10:30 a. m.,
Monday, Apr. 22, 1935.)




BANKING ACT OF 1935
MONDAY, APRIL 22, 1935
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY.

Washington, D. O.
The subcommittee met, pursuant to adjournment, at 10:30 a. m.,
in room 301, Senate Office Building, Senator Carter Glass presiding.
Present: Senators Glass (chairman of the subcommittee), Bulkley,
Byrnes, Bankhead, Townsend, Couzens, and Cutting.
Senator GLASS. The committee will please come to order. Mr.
Crowley, will you come forward and resume?
STATEMENT OF LEO T. CROWLEY, CHAIRMAN OF THE BOARD,
FEDERAL DEPOSIT INSURANCE CORPORATION—Resumed
Senator GLASS. Mr. Crowley, we were proceeding with your examination, and there are some few further questions that some of us
would like answered. I, particularly, want to ask you what would
be, in your judgment, the effect upon the insurance of deposits scheme
if all State banks are to be permitted to join the Deposit Insurance
Fund upon the mere payment of the assessment and not required
to come into the Federal Reserve System and comply with the provisions of that System?
Mr. CROWLEY. Well, Senator, that's a very difficult question for
me to answer on account of our limited experience with the plan of
insurance of deposits. I t seems to me that the answer depends upon
a number of factors, which obviously cannot be determined at this
time. F o r example, the manner in which the Corporation is administered, its relations with the various supervising authorities,
the public's acceptance of the plan, and the attitude of bankers will
all be determining influences.
Senator GLASS. W h a t was the purpose of this requirement that
they become members of the Federal Reserve System after a given
period of years ?
Mr. CROWLEY. Well, my understanding of the purpose was t h i s :
That when this act was agreed upon, it was agreed upon to set up
the insurance corporation with that provision in it that you were
going to be able to strengthen your banking system by having new
members in your Federal Reserve System.
Senator GLASS. T h a t we are going to be able to get approximately
a unified banking system ? Was it not your understanding that that
is the real reason the President agreed to that provision in the law ?




51

52

BANKING ACT OP 1 9 3 5

Mr. CROWLEY. I was not here at that time, Senator, but I understood, from what you have told me, that that is the reason that the
President agreed to that provision.
Senator GLASS. That is the only reason that the President, and
the then Secretary of the Treasury, Mr. Woodin, agreed to that
provision of the law. As I understand it, we have approximately
7,000 State banks who are voluntary members of the Deposit Insurance Fund?
Mr. CKOWLEY. That is correct, Senator.
Senator GLASS. Have those banks the right to withdraw from
the fund at any time?
Mr. CROWLEY. They have the right to withdraw, Senator, by giving us 30 days notice prior to June 30 of this year. Under the law
we give them the right to withdraw, but we are also asking that
they notify their depositors when they are going to withdraw.
Now, the reason for that is this: When you have an unsound or
a badly managed bank that requires supervision, and in order to
evade your supervision they may attempt to withdraw from the
fund, so that in order that those banks cannot withdraw we say
to them that they must notify their depositors, and we will protect
the old depositor for a period of 2 years. Now, the new depositor,
after he is once put on notice, puts his money in the bank at his
peril.
Senator GLASS. Well, would it not be reasonable to suppose that
bank directors would have to call meetings of their stockholders to
discuss the question of withdrawal ?
Mr. CROWLEY. I do not think it is as necessary for them to discuss
the question with the stockholders as to notify the depositors, because they have an interest in those banks by reason of assessment.
I believe they should have knowledge before they withdraw from
the fund.
Senator GLASS. Therefore, do you think it important for the bank
to know the attitude of their stockholders and depositors at a reasonably early period?
Mr. CROWLEY. I do, Senator.

Senator GLASS. You think, then, do you, that there is occasion
for the speedy enactment of title I of this bill ?
Mr. CROWLEY. I do, because opportunity must be given to those
banks now in the fund to withdraw if they so desire. If the proposed bill is not enacted the original permanent fund goes into
effect July 1 of this year. Moreover, the Corporation should be
given time to make administrative adjustments that will be necessary
before the proposed bill takes effect. Since there is such a short
period of time before the permanent fund provided in the existing
law becomes effective, we find a great number of bankers are vitally
interested in the passage of the proposed bill for the reason that
they consider it inadvisable to continue as members of the Corporation unless the proposed changes are made. I t is my opinion t h a t
unless the present bill is passed a great number of institutions will
not avail themselves of the opportunity of membership in the
permanent fund.
Mr. L. E. BIRDZELL (general counsel, Federal Deposit Insurance
Corporation). At the beginning of that statement, Mr. Crowley said
that under the law we are operating under now. T h a t should be,
under the proposed bill.



BANKING ACT OP 1 9 3 5

53

Senator GLASS. D O you recall how many banks the R. F . C. has
propped u p by loans?
Mr. CROWLET. By loans and also preferred stock or a debenture
Senator GLASS (interposing). Well, preferred stock is a loan, is it
not? W h a t else is it?
Senator COTJZENS. I S there not a difference whether it is a preferential creditor over the preferred stock? So it is not preferred
over a depositor, while a loan would perhaps come in there?
Senator GLASS. Well, I am told that nine tenths of the banks
which have sold their preferied stock sold it upon their own volition and upon application to the K. F . C , and not upon request of
the R. F . C , and they sold it in order to be propped up.
Mr. CROWIEY. Senator, I think thai is correct. I do not think
R. F . C. has ever asked any bank
•
Senator GLASS (interposing). I t has asked some few banks
Mr. CROWLEY (interposing). What I mean, Senator, is the rank
and file, to sell their preferred stock.
Senator BTJLKIEY. If has asked some.
Senator BYRNES. Are you connected with the R. F . C. I
Mr. CROWLEY. N o ; I am not, Senator.

Senator BYRNES. And yet yon attempt to say what they have done?
Mr. CROWLEY. What I mean, is, that they have not asked it of the
supervising agency.
Senator BYRNES. YOU mean they have not asked you ?
Mr. CROWLEY. They have not asked us.
Senator BYRNES. Can you say they have not asked the others ?
Mr. CROWLEY. I say, of the supervising agencies, that I have
suggested.
Senator BYRNES. I thought you said they have not done it.
Mr. CROWLEY. NO ; we have all done it.
Senator BYRNES. Than you agree that all banks are propped up?
Senator GLASS. F o r wThat reason, Mr. Crowley?
Senator BYRNES. Answer the chairman's question first, and then I
will take this up.
Senator GLASS. N o ; JTOU go ahead.

Senator BYRNES. YOU agree that these banks have been propped
up?
Mr. CROWLEY. Sure.
Senator BYRNES. H O W many of them?
Mr. CROWLEY. Five thousand four hundred and twelve.
Senator BYRNES. They all needed propping up?
Mr. CROWLEY. That is right, Senator.
Senator BYRNES. W h a t would have happened if they had not been
propped up ?
Mr. CROWLEY. I do not know. I t might have wrecked your banking system.
Senator BYRNES. A n d you talk about loans on preferred stock?
Mr. CROWLEY. The reason I say what I do about preferred stock,
is, they sold preferred stock, and the owner had to take class B
of the R. F . C , and maybe a loan for class C.
Senator GLASS. I suppose it would not have wrecked the entire
banking system, because more than 85 percent of the banks resumed
operations with licenses after the banking holiday.



54

BANKING ACT OF

1935

Senator COTTZENS. YOU do not take that seriously, do you?
Senator GLASS. I do not think that percentage of banks was sound,
because the Secretary of the Treasury admitted to me that he had
licensed at least 1,000 unsound national banks or insolvent national
banks. But what I mean, is, banks that were properly conducted—
and there were many thousands of banks t h a t were properly conducted and would not have been very much affected by the failure
of banks that were improperly conducted ? for the reason t h a t individual banks failed to create consternation among the depositors
of the country anyhow. I t was my theory—it is not particularly
pertinent here—it was my theory that every rotten bank in the
country should have been permitted to fail at the time we were
having bank failures, and then we would not have any trouble now.
Mr. Crowley, I believe I understood you to say t h a t you were a
member of what was called this committee of experts to prepare
banking legislation. You were a member of that committee?
Mr. CROWLEY. I was a member of the loan committee, if t h a t is
what you mean, Senator.
Senator GLASS. Yes. And, as I recall, you said you had nothing
to do with any provision of this bill except title I ?
Mr. CROWLEY. Our board of directors and the legal department
drafted title I and submitted it to the committee.
Senator GLASS. Yes. And you hoped that would be acted upon
separately from any other provision in the bill ?
Mr. CROWLEY. Well, that was decided; t h a t was our original
thought, Senator, but the President decided that he wanted it Kept
together, and told us so.
Senator GLASS. Yes; and he afterwards decided that he was willing to have them separated, and then again decided that he would
like to have them kept together.
How did you propose to eliminate the unsound and uneconomical
banks hereafter?
Mr. CROWLEY. I think what has got to happen, Senator, on that
is that the Corporation will have to make a survey of each State
and try to determine the banks that, by their size, or for other
reasons, cannot operate soundly, and try to bring about eliminations
by the purchasing of assets and consolidations, and then, of course,
by having power to restrict the rechartering of that same type of
bank in the future.
Senator COTTZENS. YOU mean the Federal Deposit Insurance Corporation has the power to charter ?
Mr. CROWLEY. N O ; I mean that we have the power, Senator, with
the banks that come into our fund. We have no power to charter a
State bank.
Senator COTTZENS. Or any national bank?
Mr. CROWLEY. That is right. But we ask for the power t h a t if a
• State commissioner should charter a bank that we think is
economically unsound, that we may not have to admit it to our fund.
That is the protection we are asking for.
Senator GLASS. That is the protection the Corporation is seeking
against the chartering of a lot of small and uneconomic banks hereafter?
Mr. CROWLEY. Well, the experience in the past, Senator, has been
this: That not only in small banks, but in lots of communities they



BANKING ACT OF 1 9 3 5

55

have had 2 or 3 or 5 banks where really the community could only
support 2 banks, and it is a question of the banks having an earning
capacity that they may keep themselves sound.
Senator GLASS. W h a t has been your experience with State bank
commissioners on the examination of State banks? Have they cooperated with you ?
Mr. CROWLEY. May I answer that off the record for the time being?
Senator GLASS. Yes; off the record.
(There was discussion off the record.)
Senator GLASS. Now, then, what provision have you for the dismissal of banks from the membership of the fund that seem to your
Board to be unworthy of insurance?
Mr. CROWLEY. I believe I have already outlined the procedure we
desire, namely, the giving of notice to the bank and supervising
authority.
Senator GLASS. W h a t percentage of the State banks that are now
in your fund could qualify for membership in the Federal Reserve
Banking System, do you think?
Mr. CROWLEY. You mean the capital requirement, Senator ?
Senator GLASS. Well, I mean the capital requirement—perhaps
that is the only point upon which you are informed. But there are
other requirements as well.
Mr. CROWLEY. There are 5,387, Senator, on June 30 that could
have qualified; and 2,134 that could not.
Senator GLASS. They have from now until July 1,1937, to be placed
in position to qualify?
Mr. CROWLEY. F o r those 2,134 banks to qualify, it will take
$55,583,000 to put them in condition to qualify. The deposits in
those 2,134 banks are $502,000,000. _
Senator GLASS. Well, do you think your fund would be entirely
safe unless they should qualify and become members of the Federal
Reserve System?
Mr. CROWLEY. Well, I think it all depends, Senator, on what power
you give our corporation.
Senator TOWNSEND. You mean, whether or not we give you the
power as designated in this bill ?
Mr. CROWLEY. Well, I think you have got a problem all the way
through your whole banking system that you have got to consider
in the next few years, and that is how to give these communities
banking service. There are a great many communities now that
need banking service; they have none, and yet they are not able to
raise sufficient capital. I think the whole principle of this thing
goes back to a correction of your whole banking system and making
certain changes that are going to give to your corporation better
protection, and strengthening of the banking system.
Senator GLASS. D O you think a branch banking system, Statewide, would do that?
Mr. CROWLEY. I t might. There are something like 17 States that
have no branch banking, whereas 30 or 31 do permit it. I n my opinion there must eventually be a thorough study of our entire banking
system made, at which time the subject of branch banking ought to
be impartially discussed.




56

BANKING ACT OP 1 9 3 5

Senator GLASS. Of course, that is an essential feature of branch
banking, you have to determine those matters.
What provision have you in this bill to protect your Corporation
against a reduction of capital in the banks which are now insured ?
Mr. CROWLEY. We are asking for the authority, Senator, that no
bank will reduce its capital without the consent of our Corporation.
We are asking for that after some experience of going out and getting these banks to come into the R. F . C. to take some aid, only to
find that in some of them we just get their capital rebuilt and they
go out and confuse liquidity with capital and want to repay the
K. F . C. before they are in position to do so.
Senator GLASS. Well, what provision have you against an insured
bank merging with a noninsured bank ?
Mr. CROWLEY. We are asking for the prevention of mergers, that
where they are attempting to merge with a noninsured bank, that
they will not do it without our consent. The reason we are asking
that is t h i s : We have permitted them to come in on occasions, and
then they have merged without our consent. I n other words, wt
took the liability that we formerly had refused.
Senator GLASS. I believe you provide in your title I that the temporary claut-e of the existing law as to the limitation upon insurance
shall be permanent; that is to say, $5.' no insurance?
Mr. CROWLEY. Yes, Senator; we i1: .

Senator
Senator

GLASS. Gentlemen, do you have any questions?
BYRNES. I would like to ask him one question.

Mr. CROWLEY. Yes; Senator.

Senator BYRNES. What power is contained in this bill as to the
determination of admission to the system of State banks? Exactly
what power is contained in this bill?
Mr. CROWLEY. You mean admission to our fund, Senator?
Senator BYRNES. Yes.

Mr. CROWLEY. All the banks that are now members, Senator, we
wash right into the permanent fund. They do not have to go
through any formality to come in at all. Now, on a bank that is
duly licensed—and there are some 1,100 outside our fund—we are
asking that those banks have more than just enough capital and
surplus to meet the solvency test. They must have a reasonable
capital to provide a protective cushion for the deposits.
Senator BYRNES. YOU make an examination of those banks, do
you not?
Mr. CROWLEY. Well, Senator, under the temporary law we have
only the authority to determine whether they have sufficient to pay
the deposits. We cannot ask that they have an excess. Do you
get the point ?
Senator BYRNES. Yes.

Mr. CROWLEY. Now, what we are asking for in this bill is that, in
addition to the meeting of the deposits, t h a t they also have sufficient
capital to protect their depositors; and also, in the case of a new
bank, that they be an economic necessity to that community.
Senator BYRNES. D O you remember the number of the section in
which that is provided?
Mr. BIRDZELL. I will give you that reference, Senator.
Senator BYRNES. I do not want to read it at this time.




57

BANKING ACT OP 193 5

May I ask another question: You gave the number of banks that
have bought preferred stock of the K. F . C. ?
Mr. CROWLEY. Yes, Senator.

Senator BYRNES. Will you give me that figure again, of the total
number of banks?
Mr. CROWLEY. Five thousand four hundred and twelve banks,
Senator.
Mr. BIRDZELL. That reference you asked for, Senator, is on page
9 of the bill, paragraph 7.
Senator BYRNES. T h a t number of banks, Mr. Crowley, is the number in which preferred stock was purchased ?
Mr. CROWLEY. And debentures.
Senator BYRNES. Out of how many banks ?
Mr. CROWLEY. Out of 14,200 insured banks, Senator, and the
amount of money is $821,000,000.
Senator GLASS. You said to Senator Byrnes that you are washing
in all of the banks that you have now insured; but you have a provision in here under which you could wash some of them out, have
you not?
Mr. CROWLEY. I f they do not conduct themselves properly, Senator.
Senator GLASS. Yes.

Mr. CROWLEY. I n other words, they will not have to go through
the qualifying stages again. They are already members of the fund
and they stay members as long as they stay in good standing.
Mr. BIRDZELL. May I add one observation there. Under the terms
of the existing law every bank that came in under the temporary
fund was made eligible to subscribe for class A stock, so they would
be automatically qualified for class A stock anyhow.
Senator GLASS. I understand, but they might very easily become
disqualified.
Mr. BIRDZELL. Yes, sir.
Senator GLASS. Mr. Crowley, we are very much obliged
Senator BYRNES. May I ask one other question ?
Senator GLASS. Certainly.
Senator BYRNES. Eeally, the discretion that you seek in

to you.

section 7
is practically the same discretion that is exercised by the Comptroller in chartering a national bank ?
Mr. CROWLEY. T h a t is right, Senator.
Senator BYRNES. Almost the same thing?
Mr. CROWLEY. That is right. Back in 1920 you had 30,000 banks.
Now you are down to about 15,000 banks. And when you had 30,000
banks, you had too many for your country, and what we are trying
to save is the growth back to the 30,000.
Is that all, Senator ?
Senator GLASS. T h a t is all.
Mr. CROWLEY. Thank you very much.
Senator GLASS. Thank you very much, Mr. Crowley.
(Supplemental data submitted by Leo T. Crowley is as follows:)
FEDERAL DEPOSIT INSURANCE CORPORATION,

Washington, D. C, April 12, 1935.
Hon. DUNCAN U. FLETCHER,

United States Senate, Washington, D. C.
MY DEAR SENATOR: The attached summary of public opinion concerning the

Federal Deposit Insurance Corporation has been submitted by the- National




58

BANKING ACT OP 1935

Emergency Council. We are calling it to your attention, feeling that you will
share our pleasure in the almost universally favorable reaction it mirrors.
The report is based on current interviews conducted by State directors of
the emergency council among banking, industrial, and businessmen so that it
presents an accurate and concise estimate of the national opinion of deposit
insurance.
Very truly yours,
LEO T. CROWLEY, Chairman.
SUMMARY OF PUBLICS OPINION CONCERNING FEDERAL DEPOSIT INSURANCE
CORPORATION

Alabama.—Never any criticism of this activity. Stands highest in public
opinion of all emergency measures; has restored confidence in banks and
resulted in greatly increased deposits.
Arizona.—Apparently public very favorable to Federal Deposit Insurance
Corporation. This agency has restored confidence in all banks and undoubtedly
exerted considerable influence in abolishing hoarding on the part of the people
who had previously felt that banks were unsafe and that they should keep
their money in cash at home. Every bank in this State except one is a member.
Information at hand indicates that the citizens of the district where this bank
is located are very dissatisfied and are not depositing their funds in this bank
due to the fact that it does not have deposit insurance. Considerable interest
expressed by public in the announcement that deposits in building and loan
associations might be insured. General summary would be that the public
is very much interested in continuation of deposit insurance and that it is a
very determining factor in restoring and maintaining confidence in the banking
institutions.
Arkansas.—Representative bankers advise that public reaction to Federal
Deposit Insurance Corporation is 100 percent favorable. Great majority of
bankers also favorable, but believe present limit might wisely be reduced to
$2,500. Two bankers state they are strongly opposed to plan in principle.
None interviewed has ever heard criticism of insured deposits by customers.
California.—Public opinion strongly back of Federal Deposit Insurance Corporation, despite objections of some larger banks to paying premiums.
Colorado.—Public opinion here practically unanimous in favor of Federal
Deposit Insurance Corporation.
Connecticut.—Public seems entirely indifferent to present Federal Deposit
Insurance law. Some 12 or 13 banks in Connecticut have not subscribed to
plan and their deposits have not been affected. Some depositors inquired of
their banks about this insurance when ,it became effective, but none has mentioned it to the Hartford banks in months. There is no demand here for increasing amount of insurance above $5,000 as 95 percent of all accounts are
fully protected under present law. No Connecticut savings banks subscribed
to plan because of adverse opinion of State attorney general. I can find no
objection by savings-bank depositors. State director personally feels that
the present $5,000 limit is sufficient in Connecticut. This State has been particularly fortunate in having very few bank failures.
Delaware.—Due to fact that no bank failures occurred in Delaware, the
public has shown little interest in Federal Deposit Insurance Corporation.
Contacts made are all-favorable.
Florida.—Have contacted 20 various business houses. Everyone heartily
endorses the Federal Deposit Insurance Corporation. Believes this sentiment
universal in Florida.
Georgia.—Federal Deposit Insurance Corporation was welcomed by great
mass of people. Has been important factor in restoring confidence in banks,
particularly smaller institutions. Regarded by many as one of most constructive steps in present national administration. Increased savings deposits in
many banks believed traceable to insurance plan. While activities not subject
to general discussion now, individuals and business, especially smaller business, finding satisfaction in safety provided by its operation.
Idaho.—Deposit insurance remains the cornerstone of public confidence in
b.inks. Bankers admit Federal Deposit Insurance Corporation has produced
solid public confidence in banks. Public opinion overwhelmingly favorable and
confidence in banks remains solid with deposits increasing.
Illinois.—Report not received up to April 12, 1935.
Indiana.—Has restored confidence in banks.




BANKING ACT OP 1935

59

Iowa.—Public reaction to Federal Deposit Insurance Corporation definitely
favorable. Small depositor, which includes savings depositor, is very favorable to insurance of deposits. Best evidence of this is literally hundreds of
cases reported to us of money taken from postal savings, from hoardings, and
from larger banks in border States and deposited in Iowa banks after inception of Federal Deposit Insurance Corporation. There is some disposition to
the belief that insurance is so satisfactory to the depositor that he does not
seek other investments. It tends to restore confidence in the bank and thereby
stabilizes banking conditions and satisfies small depositor, who as a rule is the
cause of runs on banks. Public is grateful and happy for benefits of Federal
Deposit Insurance Corporation.
Kansas.—Banks now beginning to fully appreciate the value of this activity
with the result that an increasing number are subscribing. It has greatly
increased confidence in financial institutions. However, many banks still
remain without insurance.
Kentucky.—Much appreciated by public generally. Resulted in growing
increase of deposits in all banks. Smaller banks quite enthusiastic. Some
larger institutions feel their independence, objecting to expense of operation.
These objections made some months ago but little protest at present t:me.
Unquestionable demand for retention of act.
Louisiana.-—My opinion public reaction Federal Deposit Insurance Corporation present act should be made permanent. Adds stability and confidence in
banks, decentralizes and distributes deposits and eliminates the chance of run
on banks from small depositors. Some bankers indifferent and feel their
institutions command confidence without insurance feature. Small banks in
country generally favorable to deposit insurance.
Maine.-—Public sentiment favorable to Federal Deposit Insurance Corporation. Maine commercial banks favor this. State savings banks have centrally managed liquidity fund.
Maryland.—Activities progressing quietly.
Massachusetts.—Report not received up to April 12. 1935.
Michigan.—From every source I get only favorable public reaction to Federal Deposit Insurance Corporation. Belief quite general that this agency is
reestablishing faith in banks. Incieased deposits in Michigan banks best proof
of renewed confidence.
Minnesota.—Agency has done outstanding work and 95 percent of banks in
this State are insured. Public well informed and very favorable toward this
activity. Agency 100 percent efficient and popular with both public and
banks. Exceedingly popular and has produced great public confidence in
banks.
Mississippi.—Public opinion appears entirely favorable to Federal protection.
Missouri.—Reaction of public and State banking department to Federal
Deposit Insurance Corporation is universally favorable. Deposits substantially increased. More than 500 State banks have voluntarily come under
Federal Deposit Insurance Corporation, and only 40 have not. Most of these
40 are small or family banks and expense is deterring factor. The favorable
public reaction is general over entire State and also the four-State area. It
is recognized as an essential part of the bnking system.
Montana.—Has greatly restored confidence and receives almost unanimous
acclaim.
Neoraska.—Agency has made a fine record in this State with a high percentage of deposits now insured.
Nevada.—After experience of last 3 years when banks were blowing up like
firecrackers in Nevada, depositors unequivocally approve deposit insurance
plan. They are not interested in howl of big banks who may have to carry
premiums for some of their weaker brethren. They feel this latter will be
an incentive to insist on good banking practices and will insure national
supervision and inspection.
New Hampshire.—About 1 out of 50 know anything about it. New Hampshire Bankers Association reports public neither informed nor interested.
Reaction nil.
New Jersey.—There is little comment concerning this agency, but it is believed that this activity has full public support.
New Mexico.—Have heard of no comments either pro or con in New Mexico.
New York—Public reaction to Federal Deposit Insurance Corporation not
widespread but generally favorable. Larger banks in Manhattan protest




60

BANKING ACT OF 193 5

method of assessments claiming only insurable amounts of deposits should be
taxed. Otherwise not opposed, although unenthusiastie.
North Carolitxa.—General public reaction most favorable. Find in contacting number of bankers, who will eventually help mould public opinion, in vast
majority think $5,000 coverage sufficient and iavor definite premium sufficient
to cover, but to be lowered if justified later. Majority lavor premium on
insured deposits only. Five thousand limit co\ers 95 percent depositors banks
this State.
North Dakota.—Public attitude and editorial comment uniformly favorable.
Ohio.—'Program has been exceptionally beneficial and remains least criticized
of all emergency agencies.
Oklahoma,.—Public reaction reveals this ih one Government ptograin with
which general public will go all the way. No derogatory comment to Federal
Deposit Insurance Corporation was made in interviews with large number of
Oklahoma business men and individual (Icioriitors. Editors and newspaper
clipping bureaus report State-wide app.c\;a i,f program as reflected in press.
Increased deposits indicative of restored confidence. Group 4 oi Oklahoma
Bankers Association in convention at Ardmore jesterday passed resolution
recommending titles 1 and 3, Congressional Banking Act of 1935, and commending work of Federal Deposit Insurance Corporation. Group 5 in Tulsa today
expected to pass similar resolution according to secretary of association. These
group meetings represent approximately 450 eastern Oklahoma bankers. State
banking commission reports only two failures in State banks since inception
of Federal Deposit Insurance Corporation. Continuance of Federal Deposit
Insurance Corporation under competent management felt essential to continued
faith in banking system.
Oregon.—Has produced desirable feeling of security of average citizen in
his bank account.
Pennsylvania.—Has functioned very successfully and restored confidence.
Has greatly strengthened banking system, although many small banks, due
to limited capital, criticize the provision compelling them to join the Federal
Reserve System by July 1, 1937, in order to maintain their insured status.
Rhode Island —Ranking situation herp unusually strong, therefore, except
for added confidence due to Federal Deposit Insurance Corporation, difficult
to determine public reaction.
South Carolina.—Has restored confidence in banks. Comment is frequently
expressed that this program is one of most important in " new deal." Public
has great faith in this activity.
South Dakota.—Comment wholly favorable, with the exception of a very few
bankers who are opposed to the principle of this activity.
Tennessee.—Has restored public confidence in banks.
Texas.—Well staffed and functioning effectively.
Utah.—Public unanimously for Federal Deposit Insurance Corporation,
although some bankers and financial interests remain skeptical.
Vermont.—Public reaction to Federal Deposit Insurance Corporation quiet
but favorable. About half the banks use their participation in their advertising. Bank public apparently take it as an accomplished fact and rely upon it,
although not particularly outspoken in their comment.
Virginia.—Report not received up to April 12, 1935.
Washington.—Has resulted in vastly improved banking conditions and a general increase in deposits, although need is seen for means to enforce provisions
of Federal Deposit Insurance Corporation.
West Virginia.—Public reaction to Federal Deposit Insurance Corporation
quite sympathetic and deposit insurance has stimulated confidence in banking
institutions. Deposits have materially increased. Bankers, however, are
opposed to proposed amendments to existing law now pending in Congress.
Wisconsin.—Don't hear about it. Deposits on increase. Only through restatement of fact that money is in circulation, do we know about its works.
Banks favorable.
Wyoming.—Banks noncooperative toward this activity.




61

BANKING ACT OF 193 5
LOSSES IN THE COMMEBCIAL BANKING SYSTEM FBOM 1864 to

1934

It is estimated that losses sustained in the commercial banking system over
the past 70 years by depositors and others have amounted to about $14,000,000,000. The figures are summarized in the following table:
Losses in commercial banks, 1864-1934
[Amounts in billions of dollars]
Losses

To despitors in suspended banks

Total

OtherAll com- National commermercial
cial
banks
banks
banks
3.3
1.7
7.9
1.8

1.2
.6
3.7
.6

2.1
1.1
4.2
.7

14.2

6.1

8.1

i Less estimated recoveries.
The figures of losses to depositors in suspended banks were obtained from
the study made by the Divj-do" of u?se.u h and Statistics of the Federal
Deposit Insurance Corporation. The figures of losses to stockholders in suspended banks and of losses written off in active banks were computed in the
case of national banks from data published in the reports of the Comptroller
of the Curiency. The data did not cover all of the years and in some cases
estimates were necessary. The character of the figures were such 1hat it is
believed that the estimates contain relatively small errors. The corresponding figures for other commercial banks were estimated on the assumption that
the experience of these banks was the same as tl^at of national banks. This
assumption has been justified by our study of suspended banks and by other
fragmentary data available.
The figures of losses not yet written off were estimated, in the case of national banks, oil the basis of the Comptroller's report on loss and doubtful
loans, and of the relation of losses on securities to losses on loans over recent
years. In the case of other commercial banks, the figures for State member
banks were estimated on the assumption that the experience of these banks
would be the same as that of the national banks. The figures for insured
State nonmember banks were obtained from our examination reports. Figures
for uninsured commercial banks \vere not included.
It is believed that these figures are probably correct to within 10 percent of
the results shown.
Now, Mr. Comptroller, will you please come forward?
STATEMENT OF J. F. T. O'CONNOR, COMPTROLLER OF THE
CURRENCY
Senator GLASS. Mr. O'Connor, you are Comptroller of the Currency, are yous
Mr. O'CONNOR, Yes, Senator.
Senator GLASS. A n d have been for how long?
Mr. O'CONNOR. Since May 11, 1933.
Senator GLASS , You are a member of the committee which was
asked to prepare what was regarded as essential banking legislation,
are you not ?
Mr. O'CONNOR. No, sir.
Senator GLASS. You are not a member of that committee ?
Mr. O'CONNOR. No, sir. B u t I was invited in by the Secretary of
the Treasury and attended a number of the meetings, Senator.
129688—35—pr 1


62

BANKING ACT OF 1 9 3 5

Senator GLASS. Yes. Well, then, you did not see this bill until it
came up here, did you?
Mr. O'CONNOR. You mean the completed bill?
Senator GLASS. Yes.

Mr. O'CONNOR. Oh, yes; title I I I , I had all to do with—my office.
And title I , dealing with Federal deposit, I am quite familiar with
all of the provisions of that, Senator, but not title I I . I know very
little about title I I .
Senator GLASS. YOU did not see that until it came up here ?
Mr. O'CONNOR. No. I think probably the day before it came up
there was some discussion of it.
Senator GLASS. Well, as to title I I I , are there any alterations in
that title that you care to suggest now ?
Mr. O'CONNOR. Yes, Senator; there are just a few. Senator, can I
hand the committee a copy of the corrections in title I I I \
Senator TOWNSBND. That you desire?
Mr. O'CONNOR. Yes; in title I I I .
Senator GLASS. Yes. Well, without going into those matters in
great detail, unless some member of the committee wants to do that,
there are one or two major matters that I want to interrogate you
about.
I t has been suggested as extremely desirable, if not exactly essential, that the bank-examining agencies be consolidated into one
agency. I should like to know what you think about that.
Mr. O'CONNOR. That same question, Senator, was asked before
the Banking and Currency Committee of the House, of myself, and
in view of the fact that it involved my office I did not think it was
your question, I believe it would be highly desirable if we could have
centralized examinations.
Senator GLASS. Well, what is there of an improper nature?
Mr. O'CONNOR. The fact that I happen to be Comptroller and
proper to say where those examinations should be. But, to answer
that I was asking that those functions be transferred.
Senator GLASS. Well, the Comptrollership is an office; it is not
an individual. And I cannot discover momentarily anything of an
improper nature in the question, and I cannot imagine that it would
be at all improper for you to suggest where the consolidated agency
should be located. Of course, we understand, without your answering the question—at least, I think I do—that you think it should be
in the Comptroller's office; and that Mr. Crowley thinks it should
be in the Federal Deposit Insurance Corporation; and, very likely,
the Federal Reserve Board thinks it should be in the Federal Reserve
Board. So, if it embarrasses you, I will not press the question.
Senator BYRNES. Mr. Chairman, I agree with you in your first
request. Assuming it to be a fact, I should like to know his reasons
for thinking it should be in the Comptroller's office.
Senator TOWNSEND. H e might state the reasons why it should be
in one agency, as he sees it.
Mr. O CONNOR. The Comptroller is on all three boards, and, therefore, from that angle it is rather impersonal. H e is on the Federal
Eeserve Board, and on the Federal Deposit Insurance Corporation
Board, and also Comptroller of the Currency. B u t the longest experience in the Government in this connection has been in the Comp-




BANKING ACT OF

1935

63

troller's office. F o r over 70 years they have built up the procedure.
When the Federal Deposit Insurance Corporation camo into existence and it was necessary to examine these nonmember State banks,
that organization was set up in the Comptroller's office to begin with,
before the actual organization of the Corporation—before the two
members of the Board were named by the President—not officially,
but the framework, because nothing could be done until the Board
met and approved it. A n d that examination was conducted in this
way, which seems to have been successful and met with the approval
of Congress and the people: One of the best national-bank examiners was placed at the head of every State examining staff with
as many assistants as we could give him, and then along with him
and under him were placed men who knew the values of property
in that State, and who had experience in banks, all working under
the direction of the national-bank examiner in that State. The
importance of that was that the State bank examiner had the contact with the officials here in Washington, and he knew who to call
on for matters requiring attention here; and it was not necessary
that he get in touch with us for instructions as to how banks should
be examined. T h a t was done in that way, and they were all brought
within the fund, as you know, with very few exceptions in the
country.
Now, the question I would like to clear up, Senator, is the question
of the so-called " duplication of examinations." There is no such
thing in the Government as duplication of examinations. There is
no one who enters into a national bank, except an examiner who is
duly appointed by the Comptroller of the Currency, with the approval of the Secretary of the Treasury, as the law provides, except
in one instance. If the bank makes a deal with the Eeconstruction
Finance Corporation, and the bank and the Eeconstruction Finance
Corporation go in as partners and provide for some kind of an
examination, it is entirely a voluntary matter between the bank and
the K. F . C. T h a t is the only instance in which anyone goes into a
bank except a duly accredited representative of the Comptroller's
office.
The Federal Eeserve Board examines State banks, and that work
is done in cooperation with the examiners of the various States, making examinations, I believe, once a year. The law requires the Comptroller to make two examinations every year of national banks.
Now, the only other agency that makes examinations in Washington is the Federal Deposit Insurance Corporation, and they examine
State nonmember banks which are members of the fund. And no
other agency goes into those banks on the part of the Federal Government.
I want to say that I have not found any complaint, or none has
been registered so far as I know as a member of the three offices or
departments, that there has been any criticism on the part of the
States directed against the Federal Deposit Insurance Corporation,
or the Federal Eeserve Board, in working together for the examinations of those State banks. I have not found any on the part of the
States. And I want to be sure to clear up the question that there is
no duplication of examinations. I have seen many statements made




64

BANKING ACT OF

1935

that examiners from two or three departments go into those banks,
which is not true.
Senator GLASS. Well, while it is practically a fact that there may
be no duplication of bank examinations, as a matter of law the
Federal Reserve Board is authorized at any time it pleases to examine
a member bank.
Mr. O'CONNOR. The law provides it may make special examinations, Senator.
Senator GLASS. Yes.

Mr. O'CONNOR. Yes; that is the wording of the law, which they
have never exercised, because they have access to our records.
Senator GLASS. They have access to all your data ?
Mr.

O'CONNOR. Yes,

sir.

Senator BYRNES. Your contention is, as a practical matter, then,
there is no duplication?
Mr. O'CONNOR. There is no duplication. There are no two examiners that go into a bank representing the National Government,
which is duplication of examination, Senator.
Senator GLASS. But when all of those State banks come into the
Federal Reserve System, as they are required to do by J u l y 1, 1937,
will they be examined by the Comptroller's office or by the Federal
Deposit Insurance Corporation?
Mr. O'CONNOR. Well, if they become members of the Federal
Reserve System, then, of course, they would not, under present
statutes of Congress, be examined at all by the Comptroller's office,
under the present statute.
Senator GLASS. Well, they would be examined by the Federal
Deposit Insurance Corporation examining board?
Mr.

O'CONNOR- N O ,

sir.

Senator GLASS. And then t h a t would not constitute a duplication? You would not examine them?
Mr. O'CONNOR. N O ; I would not examine them.
Senator GLASS. And the Corporation would not examine them ?
Mr. O'CONNOR. N O ; the Corporation would not examine them.
There would be no necessity.
Senator GLASS. They would be examined under the authority of
the Federal Reserve Board ?
Mr. O'CONNOR. Yes; just as they accept their examinations now.
Senator BYRNES. So far as the banks are concerned, they are not
annoyed by duplication of examinations ?
Mr.

O'CONNOR. No,

sir.

Senator BYRNES. But the fact is the Government has two sets of
examiners under the present organization?
Mr.

O'CONNOR. Yes,

sir.

Senator BYRNES. Making examinations?
Mr. O'CONNOR. Yes. Now, that is the proper way to state the
whole problem that is so misunderstood.
Senator GLASS. Under the law the Corporations—I mean both the
Federal Reserve Board and the Federal Deposit Insurance Corporation—have access to your data?
Mr.

O'CONNOR. Yes,

sir.

Senator GLASS. Your examinations of banks?
Mr. O'CONNOR. Yes, Senator.




BANKING ACT OF 1 9 3 5

65

Now, here probably is the foundation for the criticism that sometimes comes with reference to those examinations, to be very pointed.
If you have a town, which happens very often, where you have got a
national bank, and you have got a member bank, and you have got a
State nonmember bank in the town, you have got three sets of
examiners from the Federal Government going into that town; you
have got the national-bank examiner going in there with his assistants, and he has no authority to go into the others; you have the
Federal Reserve Board examiner, with his assistants, going in there;
and you have the Federal Deposit Insurance Corporation examiner
going in there.
Senator BYRNES. From the standpoint of administration, what
you have in mind is that if an examiner went there he should examine
the three institutions on one trip, instead of sending him, and then
another examiner, and then still a third examiner?
Mr. O'CONNOR. I am just pointing out, Senator
Senator BYRNES (interposing). That is the criticism?
Mr. O'CONNOR. Yes; that is the one criticism, that we have a
duplication. There is no duplication in the town.
Senator BYRNES. Would it tend to efficiency if it was concentrated
in one force?
Mr. O'CONNOR. Well, there could be only one answer to that, Senator.
Senator BULKLEY. Well, would it not make a better examination
and prevent the possibility of switching cash accounts?
Mr. O'CONNOR. T h a t is very true.
Senator GLASS. Passing that for the time, let me ask you if it is
not true t h a t under title I I I there is in it a provision to extend the
time when bank officials who are now indebted to their banks may
pay off their indebtedness?
Mr. O'CONNOR. Yes; we have recommended, Senator
Senator GLASS (interposing). I know there is a recommendation,
but is it embodied in title I I I ?
Mr. O'CONNOR. I t is also in title I I I that we extend time for payment to 1938. And you have raised a very serious question, Senator.
T h a t was section 22 of the Federal Reserve Act, and it is section 12
of the printed act of the Federal Reserve Act. On June 16 of this
year the provision that executive officers must no longer be indebted
to their bank expires; you gave them until June 16 of this year, and
Congress fixed extraordinarily heavy penalties for an executive officer to become indebted or to be indebted to his bank after that date.
H e shall not be indebted to the bank after that day under a penalty
of 1-year prison sentence or a fine of $5,000, or both, and the bank
may be fined $10,000 and a sum equal to the amount of the loan.
Senator GLASS. Well, contrasted with penalties provided for the
N. R. A., do you regard that as very excessive penalties?
Mr. O'CONNOR. Well, I do not know what those penalties are,
Senator. I have all the trouble I want taking care of my office.
Senator BYRNES. I t would depend on the size of the loan, too,
would it not?
Mr. O'CONNOR. Yes; it would, of course. And, reverting again
to this section with these drastic provisions in it, I believe there is
only one option for an executive officer who owes a bank on June 16




66

BANKING ACT OF 19 3 5

of this rear, and that is to resign if title I I I is not passed, not by
June 16, which is a very short time, but a considerable period before,
because these men must be given an opportunity to arrange their
indebtedness to do something, to either resign or
Senator BYRNES. Let me ask you about that. When was he given
notice to rearrange his loan?
Mr. O'CONNOR. Two years ago; in 1933.
Senator BYRNES. He will have 2 years on June 16?
Mr. O'CONNOR. That is right.
Senator BYRNES. During this time, as a general thing, have banks
been in position to make loans ?
Mr. O'CONNOR. Oh, yes.
Senator BYRNES. There is

no statement today t h a t the banks have
not funds sufficient to make loans upon good security, is there?
Mr. O'CONNOR. Oh, no; they have the funds, we all know that.
Senator BYRNES. D O not you think in 2 years the bank officers
have had fair notice to make arrangements for a loan other than
their own banks?
Senator GLASS. T h a t depends on the officers, does it not, and the
facility to pay?
Mr. O'CONNOR. I think, Senator, you would have to go into each
individual case.
Senator BYRNES. I t means you have 2 years at a time when there
is ample capital. I t depends on the kind of security the officer has
up with his bank ?
Mr. O'CONNOR. That is right.
Senator BYRNES. And if the security is not adequate it is about
time something is done, is it not ?
Mr. O'CONNOR. They have done something, Senator. I t may interest you to know that when you passed this bill the officers owed
about 90 million dollars—that is from the records I have access t o ;
and they have reduced that approximately 33 percent, getting ready
for what Congress has asked them to do. They have reduced their
indebtedness to that extent.
Senator BYRNES. I think it was responsible for a whole lot of our
trouble, excessive loaning on the p a r t of officers.
Senator TOWNSEND. Does that apply to the private loans, or to
the companies that he might be associated with ?
Mr. O'CONNOR. I t is direct loans. And there is also the indirect
loans to officers, which amounted in round figures to $40,000,000.
That has been reduced about the same percentage.
Senator GLASS. YOU do not understand that Senator Byrnes is
so well situated that he can pay off his loans on call, and some of
the balance of us have to take longer t h a n 2 years. I am not an
executive officer of a bank, nor any other sort of an officer, even a director, but there have been times in my business career when I would
not have liked a bank to call my loan within 2 years, because I
could not pay it.
Senator BYRNES. I t is a question of his arranging with some other
bank to finance his loan instead of his own.
Senator GLASS. Then he has to go through a process of getting
the consent of his board of directors and so on and so forth.
Senator BYRNES. Yes.




BANKING ACT OF

1935

67

Senator BULKLEY. Mr. O'Connor, as those loans have been reduced from $90,000,000 to $60,000,000, has that resulted in a good
many of them being cleaned up ?
Mr. O'CONNOR. I was just trying to find that information by looking in the place where it would appear. I would say no. They
have just liquidated out, trying to be able to reduce their indebtedness to carry out the wishes of Congress.
Senator BULKLEY. D O you know how many accounts are involved ?
Mr. O'CONNOR. Individuals?
Senator BULKLEY. Yes.
Mr. O'CONNOR. I haven't that data.
Senator BULKLEY. Well, then, you probably coidd not express an
opinion as to how badly it would disturb the banks if their executive officers that are in that predicament that they cannot pay their
loans should resign on June 16?
Mr.

O'CONNOR. N O .

Senator BULKLEY. Could you look that up and give us an opinion
about that tomorrow?
Senator TOWNSEND. The fact that a great number of them have
not been paid, Mr. O'Connor, is not conclusive that they are not
good, is it ?
Mr. O'CONNOR. Oh, no. They are probably slow loans that under
the instructions that are given to examiners by the Comptroller, that
they are not to suggest to the bank how they shall handle slow loans,
that a slow loan is a good loan. The bank has no reason to press
that for payment. I t is a sound loan; it has good security, and the
taxes are paid and the interest is paid.
Senator TOWNSEND. And the bank wishes the loan
Mr. O'CONNOR. Well, they certainly need it.
Senator TOWNSEND (continuing). I n a great many cases?
Mr. O'CONNOR. They certainly need the loans in a great many
cases.
Senator BULKLEY. On the other hand, if these loans were very
good, they could be refunded somewhere else, could they not?
Senator TOWNSEND. Of course, they could be refunded somewhere
else, but the bank wishes the loan.
Senator GLASS. The statute provides that they may borrow from
other banks with the consent of their boards of directors and after
due notice.
Senator BULKLEY. Yes.
Mr. O'CONNOR. Senator, may I read this section, because I have
also incorporated as a suggestion in the bill that the matter of the
extension of the loan must be passed on by the directors, so that we
will get the full picture before the directors of the bank, in addition.
Senator GLASS. All loans have to be passed upon by the directors.
Mr. O'CONNOR. Usually by a committee, Senator.
Senator GLASS. But the directors have to confirm what the committee does.
Mr. O'CONNOR. That is right.
(g) No executive officer of any member bank shall borrow from or otherwise become indebted to any member bank of which he is an executive officer,
and no member bank shall make any loan or extend credit in any other
manner to any of its own executive officers: Provided, That loans made to
any such officer prior to June 16, 1933. may be renewed or extended for




68

BANKING ACT OF

1935

periods expiring not more than five years from such date where the board of
directors of the member bank shall have satisfied themselves that such extensio nor renewal is in the best interest of the bank and that the officer indebted
has made reasonable effort to reduce his obligation, these findings to be
evidenced by a resolution of the board of directors spread upon the minute
book of the bank.

Senator TOWNSEND. What is the time of the extension ?
Mr. O'CONNOR. 1938, that would be, Senator.
Senator BULKLEY. I S that your law ?
Mr. O'CONNOR. That is in the law, Senator.
Senator BYRNES. That is in the bill.
Mr. O'CONNOR. That is in the bill.
Senator BULKLEY. Well, that is in this new bill we are considering
now?
Mr. O'CONNOR. Yes.
Senator BULKLEY. I S that what you recommend ?
Mr. O'CONNOR. Yes, sir.
Senator BULKLEY. However, would it be practicable

to require that
the renewal shall be conditioned on some actual reduction being made
in the loan in these last 2 years ? The language in the bill is " that
an effort shall be made."
Mr. O'CONNOR. Well, my answer, Senator, would be that the examiners look into these matters. I n other words, these loans, if they
are taken out of the bank and charged against the bank, if they are
good loans and if the examiner finds t h a t they have been making
payments and reducing them and they are in good standing, I think
it could be left safely to the examiner.
Senator BULKLEY. The question I am asking now is whether we
ought not to put in this bill the requirement that there must have
been some reduction of the loan.
Mr. O'CONNOR. Yes.
Senator BULKLEY. Understand,

I am not arguing the matter; I
am simply trying to find out.
Mr. O'CONNOR. I understand that. Well, with 30 percent paid, I
assume that that would not be a necessary requirement.
Senator BULKLEY. I t shows some of them can reduce their loans.
Mr. O'CONNOR. Because one-third has been paid?
Senator BULKLEY. Yes. And that third might have been distributed among almost all the accounts there are?
Mr. O'CONNOR. That is right.
Senator BYRNES. YOU are proposing to extend it until 1938?
Mr. O'CONNOR. Yes,
Senator GLASS. Mr.

sir.

Comptroller, if there are no further questions
on that point, you are a member of the Deposit Insurance Corporation, and the question has arisen as to the method of assessing banks.
There are two suggestions—one of one-twelfth of 1 percent and
another of one-eighth of 1 percent—and there is a suggestion that
instead of an annual assessment upon the banks, which might result
in the accumulation of a very great and unnecessary fund, that the
banks be assessed until there is accumulated a fund of a half billion
dollars and that then the assessment automatically ceases until that
fund shall have been impaired to the extent of 25 percent, and the
assessments automatically resumed when t h a t shall have occurred.
W h a t would you say to that?




BANKING ACT OF 1 9 3 5

69

Mr. O'CONNOR. Well, I heard your question on Friday, Senator,
to Mr. Crowley on that point, and Mr. Crowley's answer, and I have
been giving it some study since Friday, assuming, although not knowing, that I might be asked that question.
I cannot see any objection, Senator, to providing that in the bill,
for two reasons. First, because in going over a period from 1921
to date, I find that under an assessment of one-twelfth of 1 percent
on the total deposits, that we would have had a surplus in our fund
in 10 of those years, and they were quite bad years. I n four of them
we would have had a deficit. But two things must be kept in mind:
First, with deposit insurance, I don't believe we would have had the
critical condition because of the confidence that Federal deposit
insurance has given. And, secondly, because of the borrowing power
that is provided for in your 1933 act, we would be able to borrow the
money to take us over the 4 bad years, and then pick up the assessments again, which to me, gives me the greatest optimism as to the
future of the fund.
Senator GLASS. Well, you do not look for a repetition any time
within the next 100 years of those 4 bad years, do you ?
Mr. O'CONNOR. N O ; I would rather not be around if they are going
to come. But, you see, in those 4 years, which were the worst in the
history of banking of this Nation, while the bill provides that we
might borrow three times the capital of the Corporation, it would
not have been necessary to use the credit that you permitted us to
use in the bill to more than one and a half of the capital structure in
the very worst years and then to pick up the assessments, together
with the liquidation of banks, which occurs very fast, especially
during the first year after they are closed, and of course that is
added to the fund.
Senator GLASS. I t is very likely you could not have borrowed a
cent in those 4 years, is it not ?
Mr. O'CONNOR. I am assuming we were going to get it from the
Government, which is provided for.
Senator GLASS. I t has been suggested by Senator Townsend, and
others who are absent, that we recess at 12 o'clock until tomorrow.
Is there any objection to that?
Senator BYRNES. N O objection.
Senator GLASS. Can you be here for a little while tomorrow ?
Mr.

O'CONNOR. Yes,

sir.

(Thereupon, at 12 o'clock noon, a recess was had until 10:30 a. m.,
Apr. 23, 1935.)







BANKING ACT OF 1935
WEDNESDAY, APRIL 24, 1935
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE ON
BANKING AND CURRENCY,

Washington, D. C.
The subcommittee met, pursuant to adjournment, at 10:30 a. m.,
in room 301, Senate Office Building (having been adjourned on
Apr. 23, 1935, on account of a lack of a quorum), Senator Carter
Glass presiding.
Present: Senators Glass (chairman of the subcommittee), Byrnes,
Bankhead, Townsend, Couzens, and Cutting.
Senator GLASS. The committee will come to order. We have a
quorum. We are to hear this morning Mr. James P . Warburg. Mr.
Warburg will please take a seat over there opposite the committee
reporter. I am hearing Mr. Warburg this morning because he finds
it necessary to go to Europe on Friday. I had not contemplated
calling him until the officials of the Federal Reserve Board had first
been heard; but, owing to his arrangements, it is desirable to hear
him this morning.
STATEMENT OF JAMES P. WARBURG, VICE CHAIRMAN BANK OF
THE MANHATTAN CO., NEW YORK
Senator GLASS. Mr. Warburg, please give your name and your
occupation to the committee reporter.
Mr. WARBURG. My name is James P . Warburg; vice chairman
Bank of the Manhattan Co., New York.
Senator GLASS. YOU are the son, Mr. Warburg, of the late Paul
M. Warburg, who was for many years a member of the Federal
Eeserve Board ?
Mr. WARBURG. Yes, sir.
Senator GLASS. And also,

he was a member of the Aldrich Commission to investigate banking matters?
Mr. WARBURG. Yes, sir.
Senator GLASS. I wanted

to have that stated, so that the committee
might understand your background.
Mr. Warburg, we have before us S. 1715. You have familiarized
yourself with the provisions of the bill, have you ?
Mr.

WARBURG. Yes,

sir.

Senator GLASS. We would be glad to have any comment that you
might desire to make to the subcommittee.
Mr. WARBURG. Mr. Chairman, I am grateful for this opportunity
to come before you, particularly in view of the amazing reticence on




71

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the part of the banking profession to appear and discuss this bill.
I speak for no group or institution, but I am very glad to state my
own position without fear or favor, with as much clarity as I can
muster, and to this end I have prepared a statement which I would
like to present to you.
The proposed Banking Act of 1935 consists of three titles. I
shall confine myself to a discussion of title I I , which deals with the
proposed amendments to the Federal Reserve Act. I shall do this
for the same reason that if someone were to say to me, " I am going
to do three things for you: Buy you a dinner, buy you a drink, and
cut your t h r o a t " , I would not waste very much time choosing my
drink or ordering my dinner.
Let me state at the outset that I am unequivocally opposed to the
present enactment of title I I of the proposed bill, with or without
modifications. I say this for three reasons: (1) Because I am convinced that no amount of changes which might be made in this
section of the bill would in any way alter its fundamental purpose or
materially alter the practical results of its enactment; (2) because
I profoundly disagree with the fundamental purpose of this section
of the bill; and (3) because there is no present emergency which
necessitates hasty action, whereas there is every reason why a matter
of such far-reaching effect upon the future economic welfare of the
country should be given the most careful study by competent
authorities.
The statement released to the press by Marriner S. Eccles, Governor of the Federal Reserve Board, on February 8 as well as subsequent testimony before the House committee, clearly defined the
purposes which motivate the suggested enactment of the proposed
measure.
Before dealing with the bill itself, it is therefore advisable to
consider the statements of Governor Eccles. At the beginning of
his statement of February 8, the Governor said:
The chief purposes of the proposals for changes in our banking laws, insofar as they relate to the Federal Reserve System, are the following:
1. To accelerate the rate of economic recovery.
2. To make our banking and monetary system, which was designed under
the conditions prevailing prior to the World War, more responsible to our
present and future economic needs.
3. To prevent a recurrence of conditions that led to the collapse of our
entire banking structure in the spring of 1933.
I have no quarrel with these three general purposes, but I emphatically disagree that the proposed measure will contribute toward
their realization.
To begin with, I do not believe that the enactment of title I I will
in any accelerate the rate of economic recovery. I say this because
if the present fiscal and monetary policies are designed to accelerate
recovery—which I for one do not believe they are—these fiscal and
monetary policies are certainly not being impeded today by any
obstacles that would be removed through the enactment of the proposed measure. The Federal Reserve System is today the obedient
servant of the Administration, even though by law it is intended
to be an independent authority. I fail to see how the mere legalization of the present status would in any way accelerate recovery.
Now, as to the other two purposes:




BANKING ACT OF 193 5

73

I do not quarrel with Governor Eccles' statement that " the banking system of this country has not been able to stand up under the
strain of the depression ", but I disagree that our banking system
failed, as the Governor implies, under circumstances in which another system, particularly the banking system now proposed, would
not have failed.
I t seems to me quite obvious that a phenomenon such as a worldwide economic depression has its origin in a multiplicity of causes—
in the case of this depression causes which seem to me linked very
largely to the waste, dislocations, and strains incident to the World
W a r and to the failures of political governments everywhere. I t
seems to me quite obvious that in the face of what has happened in
the world since August 1914 no banking system in this country
could have been able " to stand the strain of the depression."
Governor Eccles goes on to say thai the banking system of this
country has been unable to lend effective support in the fight against
the depression. If he is referring to 1932 and early 1933, I agree
with him. If he is referring to the banking system as it is today, I
must disagree. The banking system today is glutted with billions
of idle dollars waiting for business and industry to come and borrow
them.
I t does not follow, however, that I consider our banking system
a perfect system or even a good system; nor that I am opposed to
making changes in it.
On the contrary, I testified over a year ago before this committee
and before the House Committee on Coinage. Weights, and Measures
as to the need for thorough-going reform of our banking system.
The point I wish to make is that even if we had had a better banking system we should at best have avoided the ultimate spasms of
collapse—and then only if we had had better business and political
leadership than that which guided the destinies of our Nation in
the post-war decade.
The second point I wish to make is this:
Granting the need of banking reform—which no one admits more
readily nor has urged more assiduously than I—it does not follow
that what is now proposed is the right answer to our problem.
Governor Eccles says:
The principal measures contemplated in the proposed legislation, therefore,
are designed to remedy deficiencies now inherent in the banking structure
itself.

Taken in connection with the rest of the Governor's statement,
and in connection with the bill he proposes, it would seem that
" the deficiencies now inherent in the banking structure " consist
very largely in (1) a lack of complete control by the political administration over the operations of the Federal Reserve System.
at least insofar as these operations affect the national interest; and
(2) in the existence of certain superfluous restrictions upon the extension of credit by the Federal Reserve banks and by the commercial banks.
These, it would seem, are the deficiencies which the proposed bill
seeks to remedy.
Leaving aside for the moment the question of other and perhaps
more real deficiencies of our present system, let us examine the
theoretical background upon which the present proposal rests.



74

BANKING ACT OF 193 5

Governor Eccles says:
Underlying the proposed changes in the banking laws are fundamental economic and monetary considerations, the wide-spread influence of which has
not been adequately understood.
Iu fact, the lack of an adequate understanding of these fundamental considerations was an important factor in bringing about the disastrous collapse
of our economy, which culminated in the closing of all the banks in the spring
of 1933.
Fluctuations in production and employment, and in the national income, are
conditioned upon changes in the available supply of cash and deposit currency,
and upon the rate and character of monetary expenditures.
The effect of an increased rate of spending may be modified by decreasing the
supply of money and intensified by increasing the supply of money. Experience shows that, without conscious control, the supply of money tends to
expand when hte rate of spending increases and to contract when the rate
of spending diminishes.
During the depression the supply of money did not expand and thus moderate the effect of decreased rates of spending, but contracted rapidly and intensified the depression.

I have quoted this passage at length because it seems to me to
contain the kernel of the present proposal. This kernel I should
describe as " Curried Keynes ", for it is in fact a large half-cooked
lump of J . Maynard Keynes—the well-known British economist
whose theories find more support in this country t h a n in his own—
liberally seasoned with a sauce prepared by Prof. Laughlin Currie.
Senator GLASS. H a s he found any in his own?
Mr. WARBUEG. Not that I know of.
I do not pretend to be an economist, and I freely confess that a
recent reading of Dr. Currie's book left me hopelessly confused.
Being a plain ordinary practical banker, I have learned just enough
about money to know that I don't know it all and to suspect that
many who think they know don't know it all either.
I have listened to Mr. Keynes argue. I have read many of his
writings. I do not question the brilliance of his intellect. But I
profoundly distrust the practical value of some of his conclusions.
And of all the Keynesian conclusions, the one I distrust most is
the one I find imbedded in the statement of Governor Eccles, even
though, as I say, it is highly seasoned with " Currie sauce " ; namely
that the supply of cash and deposit currency and the rate and character of expenditure control the volume of business activity.
What little I know from practical experience, and what little I
have learned from recognized authorities would lead me more nearly
to the opposite conclusion; namely, t h a t under our system the volume
of business activity determines the available supply of cash and
credit; and that the rate and character of expenditure have their
effect upon the available supply of cash and credit chiefly via their
effect upon business activity.
But I am not asking you to accept my opinion as against that of
Governor Eccles—much less against that of the learned gentlemen
who have supplied the theoretical background of his proposal. I
ask you only, before you adopt this premise, to take into consideration that you are being asked to accept a proposal which is founded
upon a theory for which there is very little support among the world's
recognized authorities.
And now let me deal with the two basic deficiencies with which,
based upon the assumption of the Keynes theory, the present proposal is largely concerned.



BANKING ACT OF

1935

75

The first deficiency which it is, sought to cure is the lack of control over the Federal Reserve System by the political administration.
I n order to accomplish this purpose it is proposed to make certain
alterations, first, in the organization, and, second, in the operation
of the Federal Reserve System.
I am prepared to discuss each of the various items composing this
program of change if you desire me to do so, but for the purpose of
this general discussion it is not necessary for me to take up your time
with more than a few general observations.
1. The organic changes consist of (a) various steps designed to
strengthen the control of the Federal Reserve Board over the Federal
Reserve System; and (b) various steps designed to place the Federal
Reserve Board under the control of the political administration.
The result of these changes, if adopted, would undoubtedly be to
accomplish the desired purpose; the President would have complete
control over the Board—whose Governor would hold office at the
President's pleasure—and the Board would have complete control
over the System through its veto over the appointment of Federal
Reserve bank governors and the powers to be vested in its open-market
committee.
2. The changes in operation are designed to implement the purpose of the organic changes. The power to raise and lower rediscount rates, the power to raise and lower reserve requirements—not
necessarily to the same extent or at the same time in the 12 Federal
Reserve regions—and the power to conduct open-market operations
are all vested via the Federal Reserve Board and its open L market
committee in the head of the political administration.
This is the avowed purpose of the proposed legislation, and, if
the proposed bill is enacted, the purpose will undoubtedly be accomplished.
3. I n addition, a number of far-reaching changes are proposed
which would relax existing loan restrictions that now govern the
member banks and the Federal Reserve banks themselves.
My comments upon these proposals are these:
As already stated, I do not believe in the Keynes theory upon
which the bill is founded.
A p a r t from this theory, I do not believe that the country's best
interests would be served by vesting the control over the people's
money in the political administration.
I say " the people's money " because that is what it is. And I am
certainly not pleading for a bankers' control of the people's money.
Let me illustrate what I mean.
Speaking of open-market operations, Governor Eccles says:
By these operations reserves may be given to or taken away from member
banks; and it is on these reserves that deposits are based.
It is not too much to say that the power to control open-market operations
is the power to control the expansion and contraction of bank credit, and thus,
in large measure, to control the country's supply of money.
Let us see how this works out in practice.
Open-market operations are the purchase or sale by the Federal
Reserve banks of United States Government securities. When they
make such purchases the Federal Reserve banks use the money deposited with them by the member banks. These member bank deposits—called " reserves "—are a portion of the money deposited




76

BANKING ACT OP

1935

with the member banks by the people. The proportion so deposited
is fixed by law.
That is why I say it is a question of the people's money.
That is why the existing law provides that open-market purchases
shall be made by a committee on which the 12 member banks each
have a Voice in determining how much of the money of the people in
their regions is to be invested in Government bonds.
Under the proposed modification all this is to be changed.
Under the proposed modification this is what could h a p p e n :
The New York Federal Reserve Bank accounts for about onethird of the System's holdings of Government bonds; it has about
$2,108,914,000 of member-bank deposits.
Under the new scheme a committee consisting of three memoers of
the Federal Eeserve Board (one of them the Governor, who is subject to instant dismissal by the President) plus the Governors of, let
us say, the Atlanta and San Francisco Federal banks, could have
the sole right to determine how much of the $2,108,914,000 of money
belonging to the people in the New York Federal Reserve district
should be invested in Government bonds.
What is more, the Federal Reserve Board, under Governor Eccles'
scheme, could willy-nilly, raise the Reserve requirements in the New
York district and thus increase the proportion of the funds of that
district subject to the orders of his open-market committee.
And that is not all.
Under the proposed system the same officers of political government who direct the borrowing and spending of the people's money
are also to be the ones to determine how much of the people's money
is to be theirs to borrow and spend.
I am not saying that it may not be wise to some extent to centralize
control. I am not saying that the Federal Reserve Board does not
need strengthening.
But if Governor Eccles only wants to strengthen the Federal
Reserve Board as against the System ; in order to bring it, so
strengthened, under the control of political government, then I say
better leave the present " deficiency " in our system.
All history is there, gentlemen, to show you what happens when
the long arm of the Treasury reaches out into the control of the
credit machinery. All history shows such proposals as this one
before you to be the favorite device of spendthrift governments.
And recently they have become the favorite device of another and
more dangerous group—the device of those who seek by subtle means
to destroy the foundations of western civilization.
During the last year this country has been flooded with propaganda
to " nationalize the banking system " to " socialize credit", and so
forth. You have pending before your committee several bills whose
avowed purpose is of this nature.
I am not one who sees a Communist under every bed, but I sometimes wonder if the authors of these bills realize whose game they
are playing.
Listen to what Lenin, addressing the Bolshevik conference of April
1917, had to say:
We are all agreed that the first step in this direction, i. e., toward communism, must be such measures as the nationalization of banks * * v.




BANKING ACT OF 1 9 3 5

77

We cannot at once either nationalize the small consumers' concerns, i. e., one
or two wageworkers, or place them under a real workers' control. Through
the nationalization of banks they may be tied hand and foot.
I n his book, Preparing for Revolt, Lenin says:
It is essential to proceed immediately to the nationalization of the banks,
insurance companies, and of the most important branches of industry * * *.
One State bank as huge as possible with branches in every factory—this is
already nine-tenths of the socialist apparatus.
And here is what Mr. G. D. H . Cole, the influential British
Socialist, has to say:
Before a Labor Government nationalizes or any other productive industry
industry it should nationalize the banks. With the banks in our hands we can
take over other industries at our leisure.
I have more quotations from Mr. Cole, if you care to have them.
And finally, in Australia, where the proposal for nationalization
has just been defeated, Mr. Lang, the Labor leader, said:
You must remember there are always first steps. You must socialize credit
first. The other things will come later. If you want to go through a door
you must have the key first. Socialization of credit is the key.
Not for one minute do I attribute to the authors of the bill anything but the highest motives of patriotism. Not for one minute do
I suggest that they would willingly undermine the American order.
But, proposals like these are charged with dynamite—no matter how
innocent their origin.
Lest I be accused of opposing " nationalization " of the banking
system for reasons of self-interest and in order to keep the control
of the banking system in the hands of private bankers, permit me
to draw your attention to two proposals I made to this committee
when testifying on the Gold Reserve Act in January 1934.
One was to transfer the ownership of the Federal Reserve banks
from the commercial banks to the general public. This is certainly
not pleading for bankers' control of the Federal Reserve System. I
believe that the Federal Reserve banks should belong to the people,
but that is a very different thing from making them the tools of
political government while leaving the ownership where it is in the
commercial banks of the country.
Senator GLASS. You recall, Mr. Warburg—to interrupt you—that
there was a serious proposal at the time the Federal Reserve bill
was before Congress, to permit the people to subscribe for stock;
in fact, that is embodied in the Federal Reserve bill contingent upon
the failure of the banks to subscribe the stock, the people were
authorized to make subscriptions to the stock.
Mr.

WAKBTJKG. Yes,

sir.

Senator GLASS. That is a part of the existing Federal Reserve
law. But the banks very quickly—although they said they would
not—very quickly subscribed to the stock.
Mr. WAEBTJEG. The second proposal, which I made to this committee over a year ago, concerned the reconstitution of the Federal
Reserve Board with the idea of strengthening its authority over
the System and providing a more harmonious working between the
Board in Washington and the 12 regional banks.
So much for the first " deficiency ", which Governor Eceles seeks
to remedy.
129683—35—PT 1




6

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BANKING ACT OF

1935

As to the second " deficiency ", namely, the existence of restrictions " that are now imposed on the Federal Reserve System by the
Federal Reserve Act, but that experience has shown to be detrimental and impractical":
I realize that present-day thought tends away from automatic
controls and in the direction of a managed currency and credit
structure. Personally, I am opposed to this tendency on purely
practical grounds.
Ah a matter of theory, I am quite prepared to admit with Mr.
Keynes and his followers that it is perfectly possible to have a fiat
currency secured by nothing and limited as to its issued by nothing
except the principles of sound management. But, this theoretical
admission leads me to no practical result, for as a practical matter,
human nature being what it is, I cannot believe that any group of
human beings will be wise enough and strong enough to be equal to
such a task.
Least of all do I believe that the officials of a political Government who depend upon popular favor will ever do anything so
intrinsically unpopular as to arrest a boom.
If private bankers with their own capital at stake were in the
past unable to say " no " when they should have—were unable to
arrest excessive speculation, and were themselves drawn into the
whirlpool of public madness—if such warnings of the coming storm
as- were issued prior to the collapse of 1929 came as they did come,
noi from the Government but from a few courageous private bankers—why should we assume that in future a political bureaucracy,
dependent upon popular favor, should be able to safeguard the public interest without any legal restrictions or automatic controls?
I do not hesitate to oppose the removal of automatic controls
when such removal is combined as it is in the present proposal with
a transference of management to the political Government: I am
less sure of my ground when it comes to the intrinsic merit of the
restrictions themselves.
I t seems to me that the whole question of asset currency and the
restrictions under which it should be issued is one that merits the
most careful study by competent authorities, and that it is not one
which should be determined by hasty legislation.
I am aware of the arguments for doing away with the orthodox
ideas of a currency based on gold and commercial paper. My own
feeling is that these arguments are not sound. My own feeling is
that to say that we must loosen the restrictions because we have not
sufficient commercial paper in the country is to p u t the cart before
the horse. We could and should have sufficient commercial paper;
and the cure lies, I think, in exactly the opposite direction.
Senator GLASS. Right on that point, Mr. Warburg, are you aware
of the fact, as I am by an official document of the Federal Reserve
Board itself, that there are only 21 banks in the Federal Reserve System that have any eligible paper for rediscount ?
Mr. WARBURG. I know it is a small number.
The cure lies in a reorganization of our commercial banking structure and in the development of a real discount market.
To argue, as Governor Eccles argues, that since there is not
sufficient commercial paper of a self-liquidating nature, we must




BANKING ACT OP 1 9 3 5

79

issue our currency against any " sound " bank asset, including longterm real-estate loans, is to pile Pelion on Ossa in the structure of
error. And, not only is it no cure, but it seems to me that to issue
currency against long-term real-estate loans is almost to guarantee
its loss of elasticity.
Senator GLASS. A r e you aware of the fact, Mr. Warburg, that in
our hearings on the exchange bill the representatives of the brokerage interests in the larger commercial centers demonstrated that
there had been fewer losses on brokers' loans than on any other
species of loans of which the bankers had any knowledge?
Mr. WARBURG. Yes,
Senator GLASS. So

sir.

that to make loans on any sound proposition
would enable the open market committee under this bill to go into the
open market and deal in any kind of security on the New York
Stock Exchange?
Mr. WARBURG. I should think so.
Nevertheless, I am not one to dogmatize because I am only too
aware of the complexities of the problem; and this leads me to
the chief purpose of this statement.
I believe that the whole subject matter of title I I of the Banking
Act of 1935 is not ripe for legislation and should be referred to an
appropriate body for expert study and analysis.
I t is 20 years since our currency and banking system has been
thoroughly studied. I n those 20 years there have been drastic
changes in the economic life not only of our country but of the
entire world.
We have at present a currency system which is no currency system at all. W e have discarded the gold standard of the past and
adopted instead a currency dictatorship which, no matter how well
it may be suited to an emergency, can in no sense be termed a system
adequate to meet the needs of modern economic life.
We have no banking system. W h a t we have is a hotchpotch of
remnants of partially discarded systems, upon which there is superimposed the Federal Reserve System and, latterly, an emergency
structure designed to meet the crisis that arose in 1933.
Senator GLASS. Well, you say that we have no banking system.
I assume that you say t h a t in view of the fact that we have a multiple
banking system rather than a unified banking system; that we have
48 States with different banking laws.
Mr. WARBURG. Yes. I n fact, my next sentence is this:
Underneath the Federal Reserve System we have 49 different banking systems, each with its own ideas of law and supervision.
We have some States in which it is possible to start a bank with
a capital of $10,000.
We have many States in which there are no savings banks whatsoever.
I t is possible in most States for anyone, irrespective of training
or qualification, to start a bank and become a bank officer.
These are only some of the " deficiencies " that I see in our presentday banking and currency system. So far as I can see, they are
not even recognized by the present proposal which is " designed to
remedy the deficiencies now inherent in the banking structure."




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BANKING ACT OF 1 9 3 5

If we want a money and credit structure such as will insure the
safety and flexibility to which our people are entitled, we must
rebuild it from the bottom and not content ourselves with anything
so superficially conceived as the proposed legislation.
I n view of the vast complexity of the problem, in view of the fact
that there is no present emergency which makes necessary the adoption of the drastic and fundamental changes advocated by Governor
Eccles, I therefore urge this committee to consider whether it would
not be far wiser to appoint a commission to study the entire banking and currency problem thoroughly and at leisure before any
basic legislation is attempted.
This is not a suggestion born of fear of what the present proposal
contains. I t is a suggestion which I have been urging for over a
year and which is contained in considerable detail in a book published last September.
I n conclusion, title I I is a proposal (1) to make a centralized
system out of a regional reserve system; (2) to bring the system so
created under political domination and control; and (3) to remove
almost entirely the automatic controls inherent in the existing law.
As to these three proposals:
A. Much can be said for a stronger centralized control of the Reserve System, but I believe that much can also be said in favor of
greater decentralization and greater responsibility on the part of each
regional reserve bank for the soundness of the member banks within
its region. One does not necessarily preclude the other, if the
measures of reform are properly worked out.
B. I am unalterably opposed to political control of either a central
bank system or regional reserve system for three reasons: (1) Because I do not agree with the underlying theory upon which the
proposal rests; (2) because as a practical matter, I believe that
political control will result in more violent business cycles than we
have ever had before, for the simple reason that a political government will neither recognize an incipient boom nor have the courage
to counteract it; and (3) because the proposal for political control
of the banking and credit machinery is in effect a proposal to take
a step defined by the Communists as the most essential step toward
communism.
C. As to the elimination of automatic controls, I believe that this
proposal rests upon a fundamental misapprehension as to what are
the real deficiencies of our present banking system. The Banking
Act of 1933 proceeded on the theory—which I think was correct—
that our commercial banking system must be purified; that demand
deposits should not be loaned out to finance speculative loans nor
capital expenditures, and should be loaned out to finance self-liquidating commercial transactions. I n proceeding along these lines, the
authors of the Banking Act of 1933 were following principles arrived at by generations of study and experience.
The present proposal contemplates a complete reversal of these
principles and proceeds on the assumtion t h a t what is wrong with
our banking system is the existence of precisely the type of limitation that the act of 1933 sought to impose.
If we are to fly in the face of all past experience—if we are to
reverse the course in which both Congress and the administration




BANKING ACT OF 19 3 5

81

believed when the law of 1933 was enacted, then I think we should
do so only after far more thoughtful consideration than has been
given to the matter so far in the preparation of the proposal now
before you.
Senator GLASS. You are aware of the fact, Mr. Warburg, that the
Banking Act of 1933 was enacted only after 18 months of hearings
and consideration, are you not?
Mr. WARBURG. Yes, sir.
Senator GLASS. I find you

rather more progressive, if that is a
correct use of that term, than I. You speak of the desirability of
more centralized control. I recall your father took that view in
the hearings before the Banking and Currency Committee of the
House, in 1913.
But let me direct your attention to the fact that we have certain
requirements in the existing law, which may have escaped your
attention momentarily, which seem to me to offer a large degree of
centralization. The Federal Reserve Board is authorized to remove
any director of any one of the Federal Reserve banks for cause. Do
you recall that?
Mr. WARBURG. Yes, sir.
Senator GLASS. The open-market

committee of the existing system,
composed of a representative of each one of the Federal Reserve
banks, may operate only under rules and regulations adopted by the
Federal Reserve Board. Do you understand that that is so?
Mr. WARBURG. Yes. I did not endorse it.
Senator GLASS. Well, t h a t is a fact ?
Mr. WARBURG. Yes, sir.
Senator GLASS. The only

thing that involves local or regional
action with respect to the open-market committee operations is the
fact that any regional bank, by choice, may not participate in the
open-market operations. I n short, if the New York Federal Reserve
Bank, which transacts the larger part of the open-market activities,
should decide to invest in two or three million dollars of United
States securities, it would ask each of the other 11 Federal Reserve
banks if it desired to join in that operation, and each one of them
may accept or decline the invitation, as it pleases; upon the assumption that the regional banks understand their own conditions better
than the Federal Reserve Board here; that they understand the condition of their patrons, their habits, their thought, and their financial
status better than a central board here; and that, therefore, the act
as it exists and as it has existed for 20 years, recognizes the right of
local self-government to that degree. Do you think that is not
wise?
Mr. WARBURG. N O , sir; I think it is wise. The only increase of
centralization that I have suggested and would suggest tentatively
again, is that the Federal Reserve Board consist of only 3 or 4 appointed members: and, in addition to those 4 appointed members,
4 out of the 12 Federal Reserve Bank Board members serve in
rotation, t h a t being designed merely to coordinate the 12 bodies so
that you would not have the banks out of touch with the officials in
Washington. I certainly do not believe they should tell them what
to buy. If you want me to express an opinion on open-market
operations, I will tell you that I do not believe in them at all. I
think they are a one-way street.




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BANKING ACT OF 1 9 3 5

Senator GLASS. That reminds me that your father did not believe
in them for awhile, but his opposition arose out of the fact that he
feared that it would put the Federal Reserve banks in direct competition with their member banks which owned the Federal Reserve
banks.
Mr. WARBURG. Yes, sir.
Senator GLASS. You have

spoken of the reticence of the banking
community to express itself on the theories and the possible practical operations under this suggested bill. W h y do you think they
are reticent?
Mr. WARBURG. I would almost rather not express an opinion
about that, Senator. I can only attribute it to a lack of understanding of what this bill proposes, or a lack of courage.
Senator GLASS. Well, may it not be a combination of both ?
Mr. WARBURG. I t is quite possible.
Senator GLASS. The Governor of the Federal Reserve Board,
either before the Banking and Currency Committee of the other
body or in addresses made before banking associations, warned the
bankers that unless they accepted this bill, the likelihood was that
the Government would seize the banks and operate them itself. Do
you think that that might have anything to do with the reticence
of the banking community to express its judgment upon this bill ?
Mr. WARBURG. I t is possible. I t would not affect my willingness to
express my opinion.
Senator GLASS. I know. We have already seen that you are quite
ready to express your opinion. B u t I am talking about the entire
banking community.
Adverting to your remarks about the Banking Act of 1933 as it
relates to the centralization of control. You will recall that that
act, for the first time, made it the duty of every Federal Reserve
bank to keep itself intimately apprised of the operations of each
member bank in its particular district, particularly with reference
to speculative activities, and to report to the Federal Reserve Board
whenever there should appear to be an excess of speculative credits,
whereupon the Federal Reserve Board by the act is authorized to
warn that bank to restrict its speculative activities, under penalty
of being suspended or dismissed from the Federal Reserve System.
You are aware of that?
Mr. WARBURG. Yes; thoroughly aware of it, and I think it is a
good provision.
Senator GLASS. Well, is not that a large degree of central control ?
Mr. WARBURG. Yes; that is both central and decentralized control, because the local bank is responsible in the first instance. I
think that is desirable.
Senator GLASS. Yes. The Banking Act of 1933, enacted, as I
have said, after 18 months of extensive hearings and considerations
and consultations with banking experts, also provides a very strict
limitation upon the use of Federal Reserve facilities for speculative
purposes, in that it exacts an increased discount rate over the usual
discount rate for 90-day paper—it used to be 15-day paper. I do not
recall whether we made it 90-day paper. They wanted it made
that.
Mr. WARBURG. Yes; I think it was made that under the act of
1933.



BANKING ACT OF

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83

Senator GLASS. I was opposed to that but, as so frequently happens now, my sound opinions did not count for much. [Laughter.]
And we made it 90-day paper. But, in all events, we gave the
Federal Reserve Bank and the Federal Reserve Board the right to
suspend the bank from the facilities of the System, or to dismiss
it entirely from the System, which, after warning, persisted in
speculative activities. You recall that ?
Mr. WARBURG. Yes, sir. That whole philosophy, as I understand it, is only attempting to protect the banking system against
making loans
Senator GLASS (interposing). Against speculative loans.
Mr. WAEBUKG. Yes. And this philosophy is based upon the desirability of liquidity of assets, upon the theory that if you can make
things liquid, then you can borrow on them.
Senator GLASS. I n short, under this bill or proposal, the openmarket committee can go on the stock exchange and gamble its eyebrows off, can it not?
Mr. WAEBrHG. I think it can.
Senator GLASS. I t was proposed, when we had under consideration
the Banking Act of 1933, that we use the conjunctive, the Federal
Reserve bank and the Federal Reserve Board. The concealed purpose of that suggestion was that the Federal Reserve Board could
not restrain member banks from speculative activities unless the Federal Reserve bank agreed. That was another and/or case; but I insisted that we insert " or " instead of " and ", so that if a Federal
Reserve bank, as the New York Bank had done in 1929, refused to
put any restraint upon the gambling activities of member banks, the
Federal Reserve Board, here at Washington, might do it. That is
the law now. Would you not regard that as a large measure of
centralization ?
Mr.

WARBURG. Yes,

sir.

Senator GLASS. And, speaking of centralization, the Federal Reserve Act is not a haphazard piece of legislation. We discussed, for
months and months, the question of centralization, the majority
members of the Banking and Currency Committee of the House, as
stated at the outset of the hearings by me, as chairman of the committee, were precluded from even considering a central-bank plan,
because the political platform upon which Mr. Wilson was nominated
and elected President of the United States definitely and textually declared against a central bank, responsive to the whole history and
whole tradition of the Democratic Party, from the time of Andrew
Jackson, when it declared in favor of abolishing the United States
Bank. And nearly every Democratic platform since then has praised
us for doing that. So that, when you speak of centralization, I think
that we have determined that question, that this country does not
want a central bank, even such central banks as they have in Europe.
Mr. WARBURG. Well, I agree, Senator. Nothing that I said indicates that I would not like to see a central bank established; but I
said:
Much can be said for a stronger centralized control of the Reserve System,
but I believe that much can also be said in favor of greater decentralization and
greater responsibility on the part of each regional Reserve bank for the soundness of the member banks within its region.




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BANKING ACT OF

1935

Senator GLASS. NOW, then, it has been suggested—and I was surprised and disappointed that you apparently concur in the suggestion—that the existing banking system failed in this depression.
Was it the system that failed or was it the administration of the
system that failed?
Mr. WARBURG. Well, I do not think that is a question I can answer
categorically. I think any system would have failed under the same
•conditions which prevailed in 1932. The reason
Senator GLASS (interposing). Well, is it not the fact that both
in text and by implication the existing Federal Reserve Act is dead
set against speculation by banks, and is it not a fact that the Federal
Reserve Bank of New York, for example, to mention but one case,
week after week raised its rediscount rate in order, as it thought, to
curb the speculative fever that resulted in disaster, and is it not a
fact that the central board, week after week, declined to approve
that?
Mr. WARBURG. I have been told that, sir; yes.
Senator GLASS. Well, but this bill proposes now to charge the very
authority here at Washington with practically exclusive control of
a situation of that sort.
Mr. WARBUBG. But, again, I heartily disapprove of that.
Senator COTJZENS. I understood you to say, Mr. Warburg, that
no system could have stood up under the 1932 conditions. How do
you account for the fact that they stood up in Canada and Great
Britain, if no system could stand up under it?
Mr. WARBUEG. I do not think the conditions in Canada were
analogous to those here.
Senator COTJZENS. What were the conditions that were different in
Canada from this country?
Mr. WARBURG. I n the first place, let me say t h a t the British and.
Canadian systems both did stand up better than ours.
Senator COUZENS. Yes.
Mr. WARBURG. But they were not subjected to the same kind of
strain ours was.
Senator COUZENS. Was it the system t h a t was under a strain, or
the men that operated the system (
Mr. WARBURG. Was the system under strain, or the men that
operated the system?
Senator COUZENS. Yes.
Mr. WARBURG. Both. B u t I say, a greater strain on the system
than on the men themselves.
Senator COUZENS. S O that you believe that if we had had a better
•operation of the system, in 1932, that might have stood up ?
Mr. WARBURG. Would it have stood up?
Senator COUZENS. Yes; in 1932?
Mr. WARBURG. Your practical operation would have, but it would
have to go back farther than 1932.
Senator GLASS. Yes; I think you would have to go back, perhaps,
to 1927, when this riot of speculation was inaugurated and encouraged by the use of Federal Reserve bank facilities.
Senator COUZENS. Well, there was something wrong in the banking system itself, if it did not curb that, was there not?
Senator GLASS. N O ; I did not say that. I say, there was something wrong with the administration of the banking system if they



BANKING ACT OP 1 9 3 5

85

did not curb it. B u t we have cured that, I will say to the Senator
from Michigan, in my judgment, we have cured that in the 1933
Banking Act, both in t h a t provision which makes it the duty of the
Federal Reserve bank to keep itself informed as to the speculative
activities of member banks and to notify the Federal Reserve Board
here when there is excess, and authorized the Federal Reserve Board
to suspend or dismiss a bank which persisted in t h a t ; and in t h a t
other provision of the law which authorized an increased rate on
what I term speculative paper, of at least 1 percent—it is not confined to 1 percent; it may be raised much above 1 percent. I
think we cured that defect then.
Senator COUZENS. May I ask Mr. Warburg, if we had the British
or Canadian systems during those periods we would have gotten
away with less distress?
Mr. WABBTJEG. I cannot answer that, sir. I think yes, but I would
have to see the British system in operation here. But I go further
than Senator Glass in that I think much is to be done toward centralization, and I think you will agree that there is merit in a centralization, that our system would not have leaked as badly if we
had one system, instead of all the State authorities.
Senator GLASS. I have said that a thousand times. You said you
wanted to confine yourself to title I I . Right on that point, I tinderstand that this bank bill has been reported from the committee on
the other side of the Capitol with the elimination of that provision
which requires all insured banks, by 1937, to become members of
the Federal Reserve Bank System. Do you think that should be
done?
Mr. WARBURG. N O , sir; I think the only possible excuse for the
whole insurance business is that it produces a unified system.
Senator GLASS. Well, that is what I thought, and that the President thought, and t h a t the then Secretary of the Treasury, Mr.
Woodin, thought, and they were brought to agreement with the
insurance of bank deposits only upon that theory, that it might
result, and in all probability would result, in a unified banking
system.
Senator COUZENS. Do you not think, Mr. Warburg, before the
State banks should be encouraged to join the Federal Reserve System, that the State banks would be glad to join if they would perform a greater service to them?
Mr. WARBURG. I think that is largely a question of the hen and
eggs. I do not think they can perform a greater service until they
have a larger membership.
Senator COUZENS. I will ask you to what extent they can perform
service so as to encourage banks to become members, banks t h a t are
not members at present ?
Mr. WARBURG. As a practical banker, I would say that I would
not want to run a bank today that was not a member of the Federal
Reserve System.
Senator COUZENS. B u t there are still a lot of good banks that are
not in the System and do not signify an intention of joining.
Mr. WARBURG. I do not deny that.
Senator COUZENS. But you have got to have an assurance of service
before you join.




86

BANKING ACT OF 19 3 5

Senator GLASS. Let me ask you this question: As a matter of fact,
is it not a fact that the existence of the Federal Keserve System,
which for 20 years has prevented occurrence of panic in this country, has saved many of those banks that are outside of the Federal
Eeserve System?
Mr. WAKBTJEG. As I say, they do not realize what they are getting,
unless somebody else belongs to the System and there is a System.
I think that explains the neutral character of the American Bankers'
Association toward the System.
Senator COTTZENS. Then we ought to have everybody join the labor
unions because everybody outside gets the benefit from those who
belong.
Senator GLASS. I would not say so.
Senator COUZENS. I was asking the witness that.
Mr. WARBURG. I will steal the chairman's answer.
Senator GLASS. I t was futile for me to answer, because you knew
what I thought about it.
Mr. Warburg, it has been suggested, and you remarked upon it
in your direct testimony, that the proposed legislation would accelerate recovery. Just how would that occur?
Mr. WARBURG. I am the wrong witness to ask that, Senator. I
do not see how it could occur, unless on this theory, which I do not
subscribe to, that you can have recovery by the unlimited expenditure
of money that is not based on income, and that this would provide a
means of getting unlimited amounts of money. T h a t does not produce recovery in my mind, but if you believe in that, that is recovery.
Senator GLASS. You say unlimited amounts of money. You do
not mean unlimited amounts of money; you mean unlimited currency.
Mr. WARBURG. Yes, sir.
Senator GLASS. There is

a vast deal of difference between the
two, is there not ?
Mr. WARBURG. Yes; there is.
Senator GLASS. Let me ask you t h i s : Is it not a fact that at no
period of this depression have the Federal Eeserve banks been in
a condition that rendered them incapable, by reason of their reserve
facilities, to respond to the requirements of commerce, industry, and
agriculture ?
Mr. WARBURG. I should say t h a t was correct, sir.
Senator COUZENS. I S there not a difference, however, between being in a position to do that and the willingness to do it ?
Mr. WARBURG. Yes; but you do not alter the willingness to do it,
but alter the mechanical set-up.
Senator COUZENS. N O ; you can do that, but we do not want to get
away with the record that there is an entire difference of opinion
with respect to whether we have adequate facilities in the Federal
Keserve to do the job you just referred to, or whether we have the
willingness to do it.
Senator GLASS. Let me ask the witness if he can conceive any
reason why a Federal Reserve bank, under the permissible provisions
of the law, would not desire to respond to the requirements of commerce, industry, and agriculture ?
Mr. WARBURG. I cannot conceive of any reasonable reason.
Senator GLASS. What are they for? They are not conducted for
profit.



BACKING ACT OF 1 9 3 5
WARBURG. N O .
GLASS. They are there
Mr. WARBURG. Yes, sir.
Senator GLASS. NOW, it may be

87

Mr.

Senator

to do this very thing.

that there were and are still member banks which are not willing to make loans that, in their judgment, they think are unsound; and other member banks which have
conceived the notion that it is more important for them to be liquid
than to do business. B u t ordinarily what is a bank in business for,
except to do business?
Mr. WARBURG. I would not know why they stayed in the banking
business, sir, unless it is in the way you indicate the answer.
Senator COUZENS. H a s it ever come to your attention, Mr. Warburg, that it is within the range of possibility, and maybe of
probability, that some of the managers of these Federal Reserve
banks have private interests to serve ?
Mr. WARBURG. I would say it is within the range of possibility;
I would not say it is within the range of probability.
Senator COUZENS. Did you ever hear of a case ?
Mr. WARBURG. N O .

Senator GLASS. I did.

Senator COUZENS. So did I. And it is perhaps not curious if you
find there are some with private interests to serve, who are, therefore, not very anxious to make loans.
Senator GLASS. Well, I would not say some of the members; I
have never known but one, and when I stood on the Senate floor
and advised that he be kicked out of his board of directors before
the lunch hour, again my sound judgment seemed to have no effect.
Senator COUZENS. But you never lacked a sounding board, though,
did you, Senator?
Senator GLASS. Sir?
Senator COUZENS. You never lacked a sounding board although
you had a sound judgment?
Senator GLASS. I had some sounding board.
Senator COUZENS. Yes.
Senator GLASS. But he was not kicked out, all the same. And
he was afterward indicted, and he ought to have been kicked out.
Well, I do not want to be the whole show, if you gentlemen
desire to ask Mr. Warburg any questions, you are, of course, at
liberty to do it.
Senator COUZENS. I would like to ask Mr. Warburg that question over again in another form, to illustrate in part, what the
chairman said with respect to one banker. Outside of that particular incident, does the witness have any knowledge of that happening in any other Federal Eeserve bank?
Mr. WARBURG. N O , sir; I have no knowledge of that case, except
just what I have heard.
Senator COUZENS. You would be surprised, then, I suppose, if it
wa« called to your attention that some of these Federal Eeserve
banks, that is, the managers, have private interests which they prefer
to conserve, rather than making some loans?
Mr. WARBURG. Yes: I would be more than surprised. I would be
shocked.
Senator COUZENS. I cannot tell you here, but I will tell you at
some other time.




88

BANKING ACT OF 19 3 5

Senator GLASS. Well, if there is any such person on a Federal Reserve Bank Board, the Federal Eeserve Board here at Washington,
under the law, has full power to dismiss him. Is there anything in
this proposed legislation that would correct a situation like that ?
Senator COUZENS. N O . I am not dealing with that particular
question, except that the centralization which we have been discussing might, in part, remedy that.
Senator GLASS. Well, how could it when the Board already has
full authority to deal with a case of that sort ?
Senator COUZENS. Well, when all of this happened, of course, we
did not have the 1933 act, and maybe that has remedied some of
these complaints I have in my mind.
Senator GLASS. Yes; if you look into it you will find that that is to.
Senator COUZENS. Yes; I understand that, but you still have difficulty, Mr. Chairman, in proving an implication or a motive. I t
may be quite demonstrable that a motive and prejudice exist, and
yet be difficult to prove it so that the Federal Reserve Board
Senator GLASS (interposing). I understand that, but the difficulty
would be just as great under one system as under another.
Senator COUZENS. That may be so. B u t in that case that I just
referred to, the Federal Reserve Board may have, when provided
by law, some authority to determine the validity of an application
for a loan, rather than determine the incapacity or unfitness for the
board of directors of some member of the board of directors in a
Federal Reserve bank.
Senator GLASS. Mr. Warburg, just one more question from me,
and I apologize for asking you so many.
Mr. WARBURG. I am enjoying it, Senator.
Senator GLASS. If we are to have a central bank in this country,
would you prefer to have a central bank conducted by experienced
bankers, or a central bank conducted by a board inexperienced in the
technique and philosophy of central banking ?
Mr. WARBURG. I prefer the first alternative, sir.
Senator COUZENS. May I ask a question, Mr. Chairman?
Senator GLASS. As many as you please, Senator.
Senator COUZENS. The witness, Mr. Warburg, referred many times
to a political control, during the reading of his testimony. W h a t
kind of control do you prefer ?
Mr. WARBURG. T O political control?
Senator COUZENS. You disposed of political control in your testimony. What kind of control do you prefer, if you do not want
political control?
Mr. WARBURG. I n the first place, I do not believe there is any such
thing as conscious control of credit and monetary machinery. T h a t
is what this bill seeks. I do not believe it is possible to find any
person who is omniscient and omnipresent enough to do that. B u t
if you are going to set up a group of men and ask them to do what
I think is an impossible job, then you want to t r y to get the best
men you can get hold of and be sure they are divested of private
interests and that they do the best job possible. I do not think it
can be done at all in the sense they are trying to do it here.
Senator COUZENS. N O ; but I go back to the question—not with
respect to the particular bill in front of us—but you talked about




BANKING ACT OF

1935

89

political control, which is, obviously, an admission there must be
some control. W h a t kind of control would you have ?
Mr. WARBURG. I do not admit that that is an admission of control;
not the kind you mean.
Senator COUZENS. Did you ever know of anything in your life t h a t
did riot have some kind of control ?
Mr. WARBURG. The kind of control I meant, is a large number of
persons entering into transactions with the hope of profit. T h a t
gives a free economic order. Now the minute you inject into that
the reshaping of credit and monetary machinery because you control factors, or of private interests, you increase the disparity in other
factors. T h a t is why I take issue with the necessity for control.
Senator COTJZENS. Mr. Warburg, do you want this committee to
understand, and the public, that those influences have happened
without control?
Mr. WARBURG. Which influences, Senator?
Senator COUZENS. Why, the influences that you have been complaining about and that you want to get out of political control?
There is certainly something in the atmosphere that inspires you to
continue to repeat that you do not want political control. You must,
of course, have had enough experience to know that there is always
control in everything, and I would like to know if you do not admit
there has been some control somewhere.
Mr. WARBURG. Yes; there has been control somewhere.
Senator COUZENS. All right. What has it been and where has it
been?
Mr. WARBURG. I n the Federal Eeserve System has it been ?
Senator COUZENS. N o ; anywhere. You are talking of political
control. I suppose you mean political control of credits, and monetary control, and that sort of thing. And you have repeatedly said
that you do not want political control. Now, you know that there
is always control somewhere. I would like to know where it is, and
where you would approve putting it. I t has been hazy, I admit; it
has been, perhaps, difficult to allocate, but it has existed.
,Mr. WARBURG. I can only answer that by going rather deeply into
the whole philosophy. I believe that it is the function of political
government, in the field of economics, to do just about one thing, and
that is to insure free and fair competition in order that there may
be the greatest amount of goods produced at the lowest possible
price. Now, the minute that you go beyond that, it is like a referee
jn a game when you have the referee running with the ball when one
side is losing; and you get into a control that I do not believe in. I
say no one should control. Now, if you want me to answer why I
do not believe in political control, I can answer that.
Senator COUZENS. If you do not want political control, what control do you want?
Mr. WARBURG. I think you want to get as close as possible to an
impartial, nonpolitical body that is not influenced by the desire for
reelection, as you can.
Senator GLASS. Well, is there not control in the law itself? I n
other words, the Federal Eeserve Act, based upon 150 years of
banking experience, provides for the automatic issuance of credits
and currency. F o r what purpose ? To respond to the requirements




90

BANKING ACT OF

1935

of commerce, industry, and agriculture. A n d it gives to the Federal Reserve Board freedom of action as to its definitions of eligible
paper which relates itself to the business of the country, and prohibits the Federal Reserve Board from embracing in t h a t definition
speculative securities, only United States bonds being accepted, and
United States bonds were accepted only because at the time of the
adoption of the act there were less than $200,000,000 of United
States bonds available for open-market operations. The law itself
provides that when these business transactions shall have been terminated upon maturity the notes and credits would automatically terminate. The law itself provides, upon 150 years of banking experience, that there should be a 40-percent reserve upon the notes and
a 35-percent reserve upon the credits. The Federal Reserve Board
was set u p as a controlling, supervisory authority to see that the
law was carried out. Now, of course, there may be maladministration in any one of the Federal Reserve banks, as there seems to have
been in one that I know of. There may be mistaken administration
in the Federal Reserve Board; but as long as you have got human
beings to do these things that is apt to occur.
Mr. WARBURG. That suggests, sir
Senator GLASS (interposing). Let me interject there: As to the
political aspect of the thing, the proponents of the original act conceived the idea that there should be a measure of political influence
in the supervising board here in Washington, and for t h a t reason
they made the Secretary of the Treasury and the Comptroller of
the Currency ex-officio members of the Board, with a view t h a t in
the event the Board should ever pursue a policy that was manifestly damaging to the public interests, and there should be a change
of administration, there would certainly be a change in at least two
members of the Board, then composed of only seven members, and
that the President of the United States, elected by the people, could,
for cause stated in writing, dismiss one or more members of the
Board and change its policy. So t h a t there is t h a t measure of
political control in the Board. I t has been suggested, Mr. W a r b u r g ,
that the Secretary of the Treasury ought not to be a member QI
the Board, and the Senate, 3 years ago, by a vote of 62 to 14, or
62 to 19, or 62 to 9—I do not recall which—Senator Couzens has a
much more accurate memory than I and may remember
Senator COUZENS (interposing). I do not remember that.
Senator GLASS. Sixty-two to a very small objecting vote, passed
an act that removed the Secretary of the Treasury from the Board.
I have always been in favor of that, and for the reason t h a t when
I was Secretary of the Treasury—I would not say in an offensive
way that I dominated the Board, but I , at least, had considerable
influence with the action of the Board, and I have suspected—being
like Senator Couzens, naturally of a suspicious nature—I have suspected that frequently since the Secretary of the Treasury has had
too much influence upon the Board, and I do not think he ought
to be there.
Senator COTTZENS. I am always in favor of influence, but I want to
use it, that is all.
Senator GLASS. H O W is that?
Senator COUZENS. I am always in favor of influence, but I want
to be the one that uses it, that is all.



BANKING ACT OF 19 35

91

Senator GLASS. SO do I. But I do not want anybody to use it in
a wrong direction.
Mr. Warburg, we are very much obliged to you.
Senator BYRNES. May I ask a question, Mr. Chairman ?
Senator GLASS. Yes; as many as you want.
Senator BYRNES. What is the political control to which you refer ?
W h a t have you in mind when you speak of " political control " (
Mr. WARBURG. I think it is the avowed purpose of this bill to bring
the operation of the Federal Eeserve Board, and through that the
system, under the control of the administration.
Senator BYRNES. Of course, the bill has not been explained in full
to the committee; in fact, you are the first witness. May I ask you
to point out the language that you refer to, or the section which you
think brings the administration of the system under political
control ?
Mr. WARBURG. Well, without going into the section, I can give J'ou
the items.
Senator BYRNES. All right.
Mr. WARBURG. That the Governor is appointed subject to the
authority of the President.
Senator BYRNES. W h a t is the existing law ?
Mr. WARBURG. Well, I have got that right here.
Senator BYRNES. The present law, according to the House report,
states that of the six persons, one shall be designated by the President as Governor.
Mr. WARBURG. Yes, sir.
Senator BYRNES. Therefore,

under the existing law. the President

designates the Governor.
Mr.

WARBURG. Yes,

sir.

Senator BYRNES. What is the change?
Mr. WARBURG. As I read the proposal, under the existing law he
could not remove the Governor, except for cause, and then
Senator BYRNES (interposing). The existing law says: '"Of the
6 persons thus appointed, one shall be designated by the President
as Governor ", and so forth. Would you not, in construing that
language, say that if the President designated Mr. Brown, instead
of Mr. Jones, Mr. Brown would be Governor?
Mr.

WARBURG. Yes,

sir.

Senator BYRNES. I would think so. If that is the language of the
House bill which you have reference to as giving political control,
do you not then agree that there is no change from the existing law?
Mr. WARBURG. I cannot, Senator, go into a legal interpretation of
the bill, because I am not a lawyer.
Senator BYRNES. But, without being a lawyer, you would agree,
I think, that the President has the power not only to remove the
Governor, but to remove any member of the Board.
Mr. WARBURG. I will say more than that. I will say that the
present condition is very slightly changed by the proposal.
Senator BYRNES. Yes; but this
Mr. WARBURG (interposing). But the rest of it shows me so much
that there is in the present situation almost a usurpation of power;
that is, a domination of something that is supposed to be independent. Now. what this proposal is, as I understand it, is to legalize that domination.




92

BANKING ACT OP

1935

Senator BYRNES. T O legalize it? Do you mean something that
is done now that is not legal?
Mr. WARBURG. Not legal, but that is not the intention, as I understand the intention of the Federal Keserve Act.
Senator GLASS. The existing law has not been completely reported.
The President may remove any member of the Board, for cause, in
writing.
Senator BYRNES. May I ask these questions? I have not interrupted you when you were making your statement.
When you say " legalized ", you do not mean to say t h a t something
is being done that is not legal $
Mr. WARBURG. I would not know, because I am not a lawyer, but
it is certainly not according to my understanding of what the Federal Keserve Act intended to create.
Senator BYRNES. YOU were talking of the intent. As to the right
to remove a man, you would not say that this right to remove an
official is new, because you know that that is the law ever since the
case of Myers, in Oregon, that the President has a right to remove
a Government official. Do you not understand that ?
Mr. WARBURG. I will take your word for that.
Senator BYRNES. Well, if you are not familiar with it I will not
pursue it.
Now, as to the open-market operations and, again, because I am
not as familiar with the detailed provisions of title I I as I would
like to be, not having had the opportunity to study it, I ask you what
is the difference between the House bill as to the powers in the
House bill governing open-market operations, and the provisions of
the proposed bill here as to open-market operations?
Senator GLASS. D O you mean, what is the difference between the
existing law and the proposed bill ?
Senator BYRNES. The existing law and the proposed bill.
Mr. WARBURG. Under the existing law, the chairman outlined that
a while ago, that the 12 Federal Reserve banks, each speak their own
piece as to how much of Government bonds they will take. Under
the proposal they can be told what to buy by the open-market committee.
Senator BYRNES. And not by the Federal Keserve Board ?
Senator GLASS. They cannot only be told what to buy, but at what
price to buy.
Senator BYRNES. Do you agree to that statement ?
Mr. WARBURG. Yes, sir.
Senator BYRNES. That

the open-market committee—I have been
glancing at the House report while you have been testifying, and I
am wondering if that is a correct statement of it, and t h a t the Board
has no power in the premises. I notice in subdivision (b) [reading] :
The committee shall consult and advise with, and make recommendations to,
the Federal Keserve Board from time to time with regard to the open-market
policy of the Federal Keserve System. The committee shall also aid in the
execution of open-market policies adopted from time to time by the Federal
Reserve Board and shall perform such other duties relating thereto as the
Federal Reserve Board may prescribe.
What I want to know is whether the policy is fixed by the Board
or is the policy of the committee.
Mr. WARBURG. Under the existing law?
Senator BYRNES. NO ; under the House bill.



BANKING ACT OF 1 9 3 5

Mr.

WARBURG.

93

T h a t is, under the proposal ?

Senator BYRNES. Yes.

Mr. WARBURG. I would say that the whole open-market policy was
determined by the Federal Reserve Board, under that, and with such
consultation.
Senator BYRNES. YOU mean, the Federal Reserve Board?
Mr. WARBURG. Yes, sir.
Senator BYRNES. Not by the Governor, but by the Board?
Mr. WARBURG. I think that would depend upon the personality.
Senator BYRNES. Of course, on the personality, always. I t might

be someone other than the Governor who might be the dominating
influence on the Board.
Mr. WARBURG. Yes, sir.
Senator BYRNES. T h a t is

another question.
I think I heard made a statement by someone to the effect that if
the bankers did not accept this bill, that their banks might be seized
and, therefore, the bankers did not want to express an opinion.
Mr. WARBURG. I did not make that statement. That was a question.
Senator GLASS. I made the statement; but he did not make the
statement. Do you want to question me about it ?
Senator BYRNES. No. I wanted to ask the witness who made the
statement, and when and where, just for my information. The witness did not make it ?
Senator GLASS. N O ; the witness did not make it.
Let me ask you a concluding question, Mr. W a r b u r g : If there is
no difference between the existing law and the proposed bill, why
make any alterations?
Mr. WARBURG. I did not know whether the witness was allowed
to ask a question, but I wanted to ask that question myself.
Senator GLASS. Thank you, Mr. Warburg, very much for your
statement.
Mr. WARBURG. Thank you, sir.
Senator GLASS. The meeting is recessed until 10:30 tomorrow
morning.
(Whereupon, at 12:10 p . m., a recess was taken until tomorrow,
Thursday, Apr. 25, 1935, at 10:30 a. m.)

129688—35—VT 1




7




BANKING ACT OF 1935
THURSDAY, APEIL 35, 1935
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE ON
BANKING AND CURRENCY,

Washington, D. G.
The subcommittee met pursuant to adjournment at 10:30 a. m., in
room 301, Senate Office Building, Senator Carter Glass presiding.
Present: Senators Glass (chairman of the subcommittee), Bulkley, McAdoo, Byrnes, Bankhead, Townsend, and Couzens.
Senator GLASS. The committee will come to order.
Governor Winship, I understand you want briefly to address the
committee.
Governor W I N S H I P . Yes, Mr. Chairman. Thank you. May I sit
right here ?
Senator GLASS. Sit right there, and make such statement as you
desire.
[Uncorrected copy of]

STATEMENT OF HON. BLANTON WINSHIP, GOVERNOR OF PUERTO
RICO
Governor W I N S H I P . I merely wanted to ask the committee to be
good enough to recommend that the benefits of this act be extended
to Puerto Eico, Mr. Chairman. I think this would be very helpful
to Puerto Rico, and I think it might have been done before if it had
been brought as fully to the attention of the committee as it is now.
Senator GLASS. You mean you want to be brought under the insurance of deposits provision of the bill ?
Governor W I N S H I P . Yes, sir. This matter has been discussed with
Judge Birdzell; and J u d g e Rigby, who is our counsel for Puerto
Rico, is very conversant with the situation.
I think this is stated as definitely as I might in a radiogram I have
just had from Puerto Rico. I t is from the Acting Governor, who is
also very familiar with the situation. I n answer to a telegram I
sent him I have received this [reading] :
[Radiogram received Apr. 24, 1935]
DIVISION OF TEKKITOBIBS AND ISLAND POSSESSIONS,

April 23 (tfo. 161).
Your No. 123. For Governor Winship from Domenech: " Nineteen hundred
and thirty-three Banking Act provided no control of interest rates on loans, nor
was such control included original draft of pending bank act, and as extension
Puerto Rico legislation for insurance bank deposits would not affect insular
statute fixing local interest rates, believe no limitation of interest bank loans
95




96

BANKING ACT OF 1935

or regulation of deposits is involved. Insurance of deposits should be extended
to banks organized under laws of the United States, State, Territory, or insular
possessions, but not to Canadian or any other foreign banks."

There are two Canadian banks there.

[Continuing reading:]

Believe you should ask extension proposed insurance legislation to Puerto
Rico despite New York banks opposition, two of which banks already enjoy
insurance privilege. Failure to do so would mean great injustice our local
banks.
HOBTON, Acting

Governor.

Senator GLASS. Why the opposition on the part of the New York
banks ?
Governor W I N S H I P . The only opposition that was urged at that
time, as I understand, was on account of the rate of interest; and that
is not involved under the present extension. So, as I see it, there
is no objection on the part of the New York banks now.
Senator TOWNSEND. What is the rate of interest ?
Governor W I N S H I P . The rates of interest were different. They
thought they would have to charge a higher rate of interest.
Senator BANKHEAD. What is the rate of interest now ?
Senator MCADOO. The legal rate ?
Governor W I N S H I P . Nine percent, and under some conditions 8 '
percent—under certain conditions.
Senator TOWNSEND. They do not charge t h a t now, do they ?
Governor W I N S H I P . Oh, yes.

Senator MCADOO. They charge all they can get.
Governor W I N S H I P . Puerto Rico is very peculiar in that
respect
Senator GLASS (interposing). Well, not in this respect, that all
banks charge all they can get.
Governor W I N S H I P . Yes; I think they do. B u t Puerto Rico was
in a situation where 9 percent was nothing compared to what they
had charged, and the fact that we are now getting interest rates at
a reasonable rate is going to help the Puerto Ricans permanently.
Senator MCADOO. Would it be wise to establish a lower rate than
9 percent?
Governor W I N S H I P . I t is questionable whether you can get back
money if that was done. Of course, the Government has come in
there through its different agencies and is letting us have money.
The farm credit bank and other agencies have come in there and
are letting us have .money. I t is surprising how much good that
is doing. They are perfectly good loans that could be made, but
they had grown up under that old system of people putting their
money into mortgages, rather than other loans, if they could get
them. A n d I think the rate now, and the money t h a t is in there
to be had, is going to give us more money and we will also have
more local capital.
Senator MCADOO. If the legal rate were, say, 6 percent, do you not
think that the bankers under those circumstances would be willing
to make loans at 6 percent rather than not make them ?
Governor W I N S H I P . Well, I hope so. W e are considering that
at the present time.
Senator MOADOO. Nine percent seems to me to be a high rate.
Governor W I N S H I P . I t is 8 percent under certain circumstances.
Political divisions, like St. George's, borrow money, under certain
circumstances, and lend it to their people, and get a little spread.



97

BANKING ACT OF 19 35

Senator GLASS. Under existing laws national banks are permitted
to charge that rate of interest which is authorized by the statutes
of the different States. Where a State has no statute controlling
the interest rates, the banks may charge in excess of 7 percent.
Governor W I N S H I P . Well, that might be advisable, sir, to do that.
We would have to take that into consideration.
Senator GLASS. That has been so for years.
Governor W I N S H I P . Yes, sir.

Senator MCADOO. If Puerto Rico has established, through the
proper authority, the rate of 9 percent, the national banks would be
allowed to charge that rate.
Governor W I N S H I P . Y e s ; that is the situation.
Senator BANKHEAD. H O W many banks do you have, and how many
systems ?
Governor W I N S H I P . W e have the two Canadian banks, and the
National City Bank, and the Chase National Bank, and two local
banks.
Senator BANKHEAD. Are the local banks organized under the laws
of Puerto Rico?
Governor W I N S H I P . T h e local laws of Puerto Rico.
Senator BANKHEAD. D O you have national banks there under our
United States banking laws?
Governor W I N S H I P . T h e land bank is down there.
Senator BANKHEAD. Y e s : I know. B u t I mean commercial
banks.
Governor W I N S H I P . The National City Bank is there, and the
Chase National Bank.
Senator MCADOO. No local national bank?
Governor W I N S H I P . N O , sir.

Senator BANKHEAD. D O they have an office there?
Governor W I N S H I P . Y e s ; a branch office.
Senator BANKHEAD. A branch bank there?
Governor W I N S H I P . Yes, sir.

Senator GLASS. Governor, we shall be very glad to consider the
matter when we come to write the bill, sir.
Governor W I N S H I P . Thank you very much. I think it would be
very much to the interests of Puerto Rico to have this insurance of
deposits extended there. I think it would be very helpful to do it.
There are two letters from local banks that I think I will put into
the record, to give you what they have to say, with your permission.
Senator GLASS. Y O U have liberty to do that.
Governor W I N S H I P . I n fairness to the bankers I ask that the letters I have received from the Banco de Ponce be inserted in the
record. I am handing you copies for your purpose.
Senator GLASS. Very well.
(The letters submitted by Governor Winship are printed in the
record in full, as follows:)
BANCO DE PONCE,

Ponce, P. R., April S2, 19S5.
Gov. BIANTON "WINSHIP,

Care of Interior Department, Washington, D. C.
DEAR GOVERNOR W I N S H I P : On the occasion when you sailed, local newspapers

Informed that among other matters which took yon to Washington it was your
intention to use your efforts to have Puerto Rico included in the new banking act
which is at present under the consideration of Congress.




98

BANKING ACT OF 193 5

We wish to explain that when advertising of Government insurance was
made compulsory to insured banks in the Bank Act of 1934, the question of
the advisability of having the Federal Deposit Insurance Act made applicable
to Puerto Rico was discussed by the Puerto Rico Bankers Association, and as
we were apprehensive of the results which might develop through the advertising by insured banks of their special privilege, the Insular Banking Association
went on record as desiring that the law should be made extensive to the island.
However, according to the terms of the new bank act the insurance of deposits is specflcially omitted for branches of insured banks doing business in
the island, so that under the circumstances it is the general feeling of the majority of the members of the association that the obtention of the Government
insurance is no longer important to the native banks. The national banks
presently operating branches in the island (the Chase National Bank and the
National Gity Bank) would also prefer that their deposits should not be insured
in order to avoid the expense involved.
With respect to native banks, the main difficulty in having the legislation
made applicable to the island is the fact that we would be compelled to become
members of the Federal Reserve System on or before July 1937. On the
occasion when both Credito y Ahorro Ponceno and Banco de Ponce negotiated
capital notes with the Reconstruction Finance Corporation a year ago, the
Reconstruction Finance Corporation made it a condition that both banks should
become members of the Federal Reserve System on the preliminary approval of
the transaction, and in discussing matters with the majority of the members
of the Federal Reserve Board we were advised that membership would be impracticable, inasmuch as native banks would not obtain any practical benefits
because of the nature of their business, and the Federal Reserve Board at the
time requested the Reconstruction Finance Corporation to withdraw the condition of membership prior to granting the loan, which condition was removed
and substituted by one that whenever the Reconstruction Finance Corporation
should so request it, both banks, Credito y Ahorro Ponceno and Banco de Ponce,
would be compelled to make application for membership.
Unless the attitude of the Federal Reserve Board should have changed considerably, and it could be shown that through membership local banks could
obtain adequate advantages, there is really no reason why we should request
that the present bank act be made applicable to the island, as we shall then be
forced to apply for membership in the Federal Reserve System, irrespective of
the advantages, if any, which we would obtain thereby.
We are enclosing herewith copy of letter written by Mr. P. J. Rosaly,
manager of Banco de Ponce, to the American Banking Association at Washington, D. C, and copy of their reply, in which it is confirmed that the
deposits in branches in Puerto Rico of insured banks in the continental
United States, will not be covered by Government insurance, so that there is
no reason why we should ask for the law to be made applicable to the
island until and unless the Federal Reserve Board should make membership
attractive to native banks.
Under the circumstances we have thought it advisable to inform, you of
present attitude of the majority of native banks in respect to the proposed
bank act now under consideration in Congress.
We beg to remain,
Yours very tiuly,
BANCO DE PONCE,

By P. J. ROSALY, Manager.
CBEDITO Y AHORRO PONCENO,

By SANZ, Manager.
BANCO DE PONOE,

Ponce, P. B., April 3, 1935.
AMERICAN BANKERS ASSOCIATION,

Washington, D. C.
DEAB SIES: We are in receipt of your letter of the 22d ultimo in reference
to efforts of the association in respect to proposed bank legislation.
We should like to obtain your opinion with respect to whether deposits
with branches of an insured bank in Puerto Rico are to be considered insurable. According to the definition of the term " deposit", page 4, lines 9 to 25,
of H. R. 5347, it would appear that a deposit lodged with a' branch of




BANKING ACT OP 1935

99

a national bank doing business in Puerto Rico could not be included as an
insured deposit.
As the proposed legislation does not include Puerto Rico, it would be of
interest to local or native banks whether deposits lodged with their competitors'
branches of national banks, are subject to insurance.
As insured banks must necessarily apply for membership in the Federal
Reserve System on or before July 1937 and as the benefits to be derived from
native banks from membership in the Federal Reserve System are questionable,
local banks have not come to a decision as to whether it would be convenient
to have the law include Puerto Rico or leave the proposed legislation as presented, which specifically excludes the island, and for the purpose of further
consideration of the matter, we would like to have your opinion of the point
raised herein.
Will you be so kind as to render us your opinion at your very earliest opportunity and by air mail?
We thank you and beg to remain,
Yours very truly,
P. J. ROSALY, Manager.

Governor W I N S H I P . The representative of the Department of the
Interior is here and wanted to speak just a moment for the Virgin
Islands with reference to this same extension, Mr. Chairman.
Senator GLASS. Very well. We will hear him.
STATEMENT OF F. B. WIENER, ASSISTANT SOLICITOR OF THE
DEPARTMENT OF THE INTERIOR
Mr. W I E N E R . I do not want to take more than a moment of your
time, Mr. Chairman. The Department of the Interior would like
to see the insurance of deposits extended also to the Virgin Islands.
I n the Virgin Islands at the present time there is a national bank,
which has been organized partly through local subscriptions and
partly through subscriptions from the Reconstruction Finance Corporation. The only other bank there is a savings bank. The Department would like to see the insurance of deposits extended so t h a t
they can participate. The Department is agreeable to that. And
the Reconstruction Finance Corporation is agreeable to it, and I
understand from Judge Birdzell that the Federal Deposit Insurance
Corporation does not object.
Thank you, Mr. Chairman.
Senator GLASS. Thank you.
Now, Mr. Comptroller, you may resume.
STATEMENT OF J. F. T. O'CONNOR, COMPTROLLER OF THE
CURRENCY—Resumed
Mr. O'CONNOR. Senator, at the conclusion of the last hearing I
was asked about certain data bearing on loans of executive officers.
Could I first give the figures Senator Bulkley requested ?
Senator GLASS. Yes, sir.

Mr. O'CONNOR. The Banking Act of 1933 prevented further loans
to executive officers of member banks, but also gave the officers who
had loans in the banks 2 years in which to liquidate their loans.
On J u n e 30, 1933, in 4,902 national banks, with total assets of
$20,860,491,000, those banks had a capital and surplus of $2,456,245,000 and they showed liability of executive officers as follows:
Amount of direct borrowings by officers, of $93,743,000.




100

BANKING ACT OF 1 9 3 5

The ratio of direct borrowings to total assets of all active banks
was 0.45 percent.
The ratio of direct borrowings to capital and surplus of all active
banks was 3.82 percent.
The amount of indirect borrowings by officers, $43,487,000.
The ratio of indirect borrowings to total assets of all active banks
was less than a quarter of 1 percent, or 0.21 percent.
And the ratio of indirect borrowings to capital and surplus of all
active banks was 1.77 percent.
Senator GLASS. What do you mean by indirect borrowings; endorsements ?
Mr. O'CONNOR. Yes, Senator.
Now, the particular point that the Senator was interested in was
what showing had been made with reference to carrying out the direction of Congress in reducing this indebtedness. I secured that
data, Senator, as I felt the committee would probably ask for it, as we
have proposed in the bill an extension of time for those officers to
liquidate this indebtedness.
Senator COXJZENS. I S your testimony all in relation to title I I I , Mr.
Comptroller ?
Mr. O'CONNOR. Well, the other day some questions were asked
me on title I, and some on title I I I ; and just as I was leaving, this
question developed on title I I I . B u t the only ones I have testified
about were title I and title I I I .
Senator GLASS. You had nothing to do with the drafting of title
II?
Mr. O'CONNOR. Nothing whatever, Senator.
Now, on December 31, 1934—the figures heretofore given were all
with reference to June 30, 1933, which was the nearest date we
could get after the passage of your act of 1933. Now I am taking
figures as of December 31, 1934, the last available call report.
This showed the direct obligations of executive officers to banks
of $60,471,000; or a decrease of $33,272,000 in direct obligations.
And on December 31,1934, the indirect liability of officers to banks
was $30,281,000. That was a decrease of $13,206,000.
Unless there is some question, Senator, that is all I had on t h a t
particular point.
Senator GLASS. Well, you still adhere to your recommendation
that they be given further time in which to discharge their indebtedness?
Mr. O'CONNOR. Yes; I do, Senator, in view of that showing.
Senator MCADOO. YOU requested further time?
Mr. O'CONNOR. The bill, Senator McAdoo, extends the time to
1938. I t was extended for 2 years, which expires on the 13th of
June, of this year, and the bill, if adopted in its present language,
would extend that to 1938.
Senator MCADOO. F o r 3 years?
Mr. O'CONNOR. Yes,
Senator GLASS. Mr.

sir.

Comptroller, tell the committee the policy followed in reopening banks after the banking holiday of 1933.
I n this connection, one of the Washington newspapers reported the
chairman of this subcommittee as having severely hit Secretary Morgenthau for licensing involvent banks. As a matter of fact, Mr.




BANKING ACT OF 1 9 3 5

101

Morgenthau was not Secretary of the Treasury when those banks
were licensed, and I did not refer to Mr. Morgenthau at all. I
referred to an admission which was made personally to me by the
then Secretary of the Treasury, Mr. Woodin, and not to Mr. Morgenthau, the present Secretary of the Treasury.
Senator COTTZENS. You were not Comptroller when those banks
were opened up, were you. Mr. O'Connor?
Mr. O'CONNOR. TJp to March 16, 4,522 national banks were licensed, leaving 1,417 banks under jurisdiction of Comptroller unlicensed. I took office May 11, 1933.
Senator GLASS. Under the law, who is authorized to close banks ?
Mr. O'CONNOE. There is just a little question on that, Senator.
Until the Emergency Banking Act, the matter was entirely in the
hands of the Comptroller of the Currency; when he found a bank to
be insolvent, then it was closed up.
Senator GLASS. Yes.

Mr. O'CONNOR. The question now is left with some little doubt,
inasmuch as the law provides that the Secretary may license banks
in addition to their being chartered by the Comptroller. And the
Secretary may withdraw a license from a bank, and that would
operate to close it.
Senator GLASS. W h a t Federal official was ever authorized or could
be authorized by any Federal statute to close State banks ?
Mr. O'CONNOR. I t is impossible, Senator. I do not know that we
have any jurisdiction to close State banks at all.
Senator GLASS. NOW you may proceed with your statement without further troublesome questions.
Mr. O'CONNOR. I am very glad to answer them, Senator.
A t the date of the banking holiday, March 6,1933, there were 5,939
national banks. On March 13 the first banks were licensed and all
were licensed by March 16.
Senator TOWNSEND. All of that total number were licensed?
Mr. O'CONNOR. NO ; 4,522 of the number that were opened at that
time. And then we did not relicense 1,417.
I n other words, only 10 days elapsed between the closing of the
banks and the reopening, during which time it was necessary to
analyze and determine the condition of each bank on the available
information.
Now, the information on which the Comptroller's office acted
was the last report of the examination of the national banks,
which was analyzed by the various chief examiners and their
staffs in the field and considered, together with any other information which was available with respect to such banks. A
like analysis was made in the office by the Comptroller of
the Currency and, based upon such reports, all losses, market
value depreciation, and doubtful assets were deducted from capital
structure, and if the result of such deduction showed the bank to be
solvent and otherwise in good condition, including adequate liquidity
or borrowing power, the bank was recommended to the Secretary or
the Treasury for a license. Each Federal Reserve bank made a
similar analysis and submitted its recommendation on the national
banks direct to the Secretary. I n most instances the recommendations of the Federal Reserve banks and those of this office coincided.



102

BANKING ACT OF 19 3 5

If there was a variance in any case, that case was made a matter of
special study and was discussed over long distance by members of
the staff of the Comptroller's Office with the chief examiners in
the field and with the Federal Reserve banks, in order to arrive at
the proper decision. No bank that was considered unsound was
recommended by the Comptroller's Office to the Secretary for
licensing.
I t was only natural that under this tremendous pressure and the
short time available and with many examination reports not current,
some errors occurred, but subsequent examinations have shown t h a t
they were few in number. I n this connection it is well to call attention to the fact that in more than 2 years which have elapsed since
the banking holiday only 11 national banks have suspended business.
Five of these banks suspended business on account of defalcation on
account of officers or employees. Seven of the banks were subsequently reorganized and three of that number paid creditors 100 cents
on the dollar. One paid 80 percent and will pay a total of 90 percent; 1 paid Q2y2 percent and will pay a total of 7 7 ^ percent; 1
paid 60 percent and will pay a total of 70 percent; 1 paid 65 percent;
1 paid 50 percent and will pay a total of 70 percent; 1 paid 75 percent and will pay a total of 83 percent; and 2 were taken care of
through the Federal deposit insurance.
I have a list and digest of each one of those 11 banks.
Senator TOWNSEND. Mr. Comptroller, you say there were 11 of those
banks, but only 2 were members of the Federal Deposit Insurance?
Mr. O'CONNOR. Yes, sir.
Senator TOWNSEND. Why were they not members?
Mr. O'CONNOR. They closed before the law became

effective. You
see, the law did not become effective until the first of the year 1934.
There was no insurance prior to t h a t time.
I n line with the policy of the office to require banks to maintain a
proper ratio of sound capital to deposits, analyses were made of the
condition of the licensed banks following their first examination after
the holiday, by which all losses, bond depreciation, and doubtful
assets were deducted from capital structure to arrive at the amount
of sound capital.
Senator BYRNES. Mr. Chairman, may I ask a question at this point?
Senator GLASS. Just as many as you please.
Senator BYRNES. Mr. O'Connor, how many national banks have
issued preferred stock, and for what amounts ? Have you a statement
showing that?
Mr. O'CONNOR. Yes, sir.
Senator GLASS. I suggest

to the Senator that we could get full information on that; but you may go ahead, Senator.
Mr. O'CONNOR. U p to the present date 2,170 national-banking associations have sold preferred stock in the total sum of $531,075,800.
I n addition there are pending in the office today 150 cases involving
approximately $23,000,000.
Senator MCADOO. What is the total number of active national banks
now, as of the latest available date?
Mr. O'CONNOR. I can give you that in a second, Senator.
Senator GLASS. YOU can supply it.
Mr. O'CONNOR. I have it here, Senator, and would be glad to give
it now. The number is 5,467.



BANKING ACT OF 1 9 3 5

103

Senator BYRNES. May I ask one further question on that preferredstock feature?
Mr.

O'CONNOR. Yes,

sir.

Senator BYRNES. Have you any record showing how many national banks have retired their preferred stock, and the amount of
stock which was retired ?
Mr. O'CONNOR. Yes, sir. One hundred and ninety-three banks
have retired their stock, in the sum of $11,496,982.
I might say, in passing, that not all these national banks really
needed preferred stock. The preferred stock was issued for two purposes: First, to strengthen the capital structure of the bank; and,
second, in many instances, where the banks wanted to carry slow
paper and not crowd the debtors, they took in additional cash to
enable them to do that. And, without giving the names, I happen to
know of some national banks that did not need it for either purpose
but did it because of the criticism that if the bank took additional
stock it indicated a precarious condition; and they did it, they took
the preferred stock, to help the weaker banks. T h a t actually happened in some cases.
Senator GLASS. I n some cases?
Mr.

O'CONNOR. Yes,

sir.

Senator GLASS. B u t for general reasons, why did they issue preferred stock?
Mr. O'CONNOR. First, to strengthen the capital structure; and,
secondly, while they had the opportunity to force the debtors to the
wall, they took the preferred stock which was to enable them to carry
those debtors. Those are the two reasons, Senator.
Senator MCADOO. The paper was simply slow paper ?
Mr.

O'CONNOR. Yes,

sir.

Senator MCADOO. But not necessarily bad paper ?
Mr. O'CONNOR. Sound, but slow.
Senator GLASS. Well, what is going to happen to the banks that
were in a precarious condition by reason of mismanagement that
took out preferred stock to try to recover their position? W h a t is
going to happen to them when they have to pay it?
Mr. O'CONNOR. Well, if the Government should call upon them,
Senator, for repayment of the amounts of preferred stock, and the
bank not be in shape to do it, there is only one thing that can happen;
it has got to fold up.
Senator BTJLKLEY. Is there any agreement by which the Government could call on them for payment ?
Mr. O'CONNOR. The Government requires from them that the bank
set up a reserve out of their earnings over a period of 20 years.
Senator BTJLKLEY. But if no earnings, no reserve.
Mr. O'CONNOR. No earnings, no reserve.
Senator BTJLKLEY. Then the bank could not be forced at all ?
Mr. O'CONNOR. I do not see how preferred stock could have a debt
status.
Senator COTTZENS. Were all these issuances uniform, of the preferred stock in all the banks? When they did subscribe for it, were
the conditions uniform in all ?
Mr. O'CONNOR. Senator, I am not in the best position to testify to
that, that being an K. F . C. matter; but I am inclined to think there




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BACKING ACT OF 1 9 3 5

were some variations under some circumstances. F o r instance, this
was a vital difference: When the R. F . C. found local interests were
able to take some preferred stock, the R. F . C. took A stock, and the
local interests took B stock.
Senator MOADOO. What Senator Couzens has in mind, I imagine,
is whether the character of certificates was uniform in all cases.
Mr. O'CONNOR. I t is my impression they were, Senator.
Senator MCADOO. They were necessarily so, were they not?
Senator COUZENS. Did you ever pass on them before they issued
them?
Mr. O'CONNOR. Yes; we passed on them.
Senator COTJZBNS. Then you would know, would you not, whether
they were uniform ?
Mr. O'CONNOR. I do not want to pass on that without investigation, because there might be some differences in terms.
Senator MCADOO. But not in the form of the stock and the obligation incurred ?
Mr. O'CONNOR. No. I would say, " Yes they were u n i f o r m " ,
Senator McAdoo, but the difference between the bank and the
It. F . C , the R. F . C. might ask the bank for a management clause.
Senator MCADOO. That would not vary the stock?
Mr. O'CONNOR. No; there was uniformity in the certificate.
Senator COTJZENS. I was talking about both.
Senator MCADOO. Were you ?
Senator COTJZENS. Yes.
Senator GLASS. A S a matter of fact, you know the R. F . C. did
demand the right of management of some banks ?
Mr. O'CONNOR. That is correct, Senator.
Senator GLASS. On the other hand, the R. F . C persuaded some
banks—I do not know how many; perhaps you do not know how
many—to take this preferred stock that really did not want to take
preferred stock, and there was no necessity for them to take preferred
stock; is that not true?
Mr. O'CONNOR. That is true.
Senator MCADOO. But the preference that the R. F . C. acquired by
the sale of these stocks was precisely the same. I am talking about
the legal preference.
Mr. O'CONNOR. They always had the legal preference.
Senator MCADOO. Collateral management was not involved?
Mr. O'CONNOR. No.
Senator MCADOO. That was outside?
Mr. O'CONNOR. Yes.
Senator MCADOO. But the preference

the Government got was the
same in each instance ?
Mr. O'CONNOR. Yes; that is true. The Government was in there
first.
Senator BXHNES. If there was any difference between the character of certificate insisted upon, I think we ought to know it. W h a t
Senator McAdoo has asked is what I wanted to know: Whether the
certificates of stock, A or B , issued by a bank differed by different
banks or whether they were uniform ?
Mr. O'CONNOR. Senator, we will let the record stand that they were
all uniform, because that is my recollection at the present time. I
will correct it if that is not correct.



BANKING ACT OF

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105

Senator TOWNSEND. Were there variations in the local situations,
Mr. Comptroller, of the different banks?
Mr. O'CONNOR. N o ; I think not.
Senator BULKLEY. I understand you are talking about national
banks all the time ?
Mr. O'CONNOR. T h a t is all.
I think it would interest the committee to know how much of this
preferred stock was purchased locally, because that has been my desire, and that of Mr. Jones—I should say of the Comptroller's office.
We have all been desirous of having the local people purchased as
much as possible.
Senator GLASS. YOU are speaking of the preferred stock of national banks?
Mr.

O'CONNOR. Yes,

sir.

Senator MCADOO. And not State banks?
Mr. O'CONNOR. Not of State banks.
T h a t sum was $359,365,445.
Senator MCADOO. Out of a total of a little more than 459 million
dollars ?
Mr.

O'CONNOR. Yes,

sir.

Senator GLASS. Mr. Comptroller, unless members of the committee
want to ask you more questions on that particular point, I want to
direct your attention to receiverships. There has been some discussion on the matter of receiverships, as to what bureau of the Government should handle receiverships. I believe the Federal Deposit
Insurance Corporation wants to do it, and I believe the Comptroller's
Office under the law was required to do it. What, if anything, do
you have to say on that subject?
Mr. O'CONNOR. When the Federal Deposit Insurance Law was
first drafted it was the plain intent of the law of Congress to insure
deposits greatly in excess of $5,000, up to $10,000, and then, 75 percent u p to $50,000 and 50 percent above $50,000; which, if it had
become effective, would have practically taken all of the deposits
in all banks under the insurable clause of the Federal Deposit Act.
Senator GLASS. That is the law now.
Mr. O'CONNOR. T h a t is the law now, that is correct, Senator; it
will be on July 1. I t is the law, but not effective until July 1. Congress saw fit to put the temporary fund of $2,500 into effect, and
then extended it to $5,000, which is now in effect.
Senator MCADOO. YOU mean insurance, instead of fund?
Mr. O'CONNOR. Insurance of these deposits, and that meant that
in national banks 42 percent of the total deposits in national banks
are insured under the $5,000 provision, which leaves the Comptroller's office responsible for 60 percent of the deposits. I n view of that
particular effect, it rather occurred to me that inasmuch as the Comptroller's office now has 1,530 actual and active receiverships; and in
view of the fact that there have been only two national bank failures
and in receivership that are now being liquidated by the Federal
Deposit Insurance Corporation as receiver, that it is a waste or
duplication of effort to have two organizations acting as receivers
set up and have an entirely different liquidating agency for just two
national banks. I think until the 1,530 receiverships are gotten out
of the way and until some appreciable number of national banks




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BANKING ACT OF 193 5

failed, that this waste should not occur and that the Federal Deposit
Insurance Corporation should file its claim the same as any other
claimant or debtor, and permit the Comptroller to liquidate the banks
under the law.
Senator GLASS. What has been the cost of receiverships under the
Comptroller ?
Mr. O'CONNOR. Quoting from my annual report for the year closed
on October 31 last:
Expenses incident to the administration of tlie 1,219 closed trusts, such as
the receivers' salaries, legal and other expenses, amounted to $33,578,643, or
3.86 percent of the book value of the assets and stock assessments administered,
or 7.39 percent of collections from assets and stock assessments. The assessments against shareholders averaged 68.25 percent of their holdings and total
collections from such assessments as wese levied amounted to 49.78 percent
of the amount assessed.

A much better record than that, I might say, Senator, has been
made in the larger banks, for instance, in Detroit, where we have
the two largest receiverships. The expenses there have been less
than 2 percent. I n other words, out of every dollar collected we
have made available for creditors 98 cents on the dollar.
Now, to complete the statement I made a few moments ago, because it is the other counterpart, we had, at the close of the banking
holiday 1,417 unlicensed banks, with deposits of $1,971,960,000.
T h a t was a period of a little more than 2 years ago.
And it is of great interest, I think, to note just what has been done
with those 1,417 national banks: 1,095 have been reorganized under
old or new charters or absorbed by another national bank, with
deposits of $1,807,334,000. And 31 of those national banks quit or
left the banking system voluntarily, and paid their depositors in
full the sum of $11,513,000.
And there were 291 of those banks placed in receivership that had
deposits of $153,113,000; and of that sum—that is, the sum in receivership—we have already returned to the depositors $54,250,490.
And that indicates that of the approximately $2,000,000,000 of deposits that were frozen in the banks at the close of the banking holiday there now remains only 5 percent that is not available to the
depositors. And I am very pleased to report to the committee that
there is not a single conservatorship created during the banking holiday that is left in the system at present.
Senator GLASS. Can you tell us or conjecture why those 1,417 banks
were not licensed when other banks t h a t were insolvent were licensed ?
Mr. O'CONNOR. Senator, my records do not show that any banks
were licensed that were not solvent.
Senator GLASS. The Secretary of the Treasury told me positively
that he licensed over 1,000 that were not solvent.
Mr. O'CONNOR. That is why I wanted to correct t h a t statement. I
do not know whether he referred to State banks or what he referred
to, but certainly it was not correct as to national banks.
Senator GLASS. He said member banks. T h a t included in all a
thousand State banks?
Mr. O'CONNOR. Yes; 900 and something.
Senator GLASS. I cannot be mistaken about it.
Mr. O'CONNOR. No; I am not saying t h a t you were.




BANKING ACT OF

1935

107

Senator GLASS. I jocularly said to him that that was contrary to
the Federal statute that made it a penal offense, and that 3 months
theretofore we had sent man to the penitentiary from Danville, Va.,
for taking deposits over the counter when he knew his bank was insolvent. H e laughed and said he hoped I would not send him there.
I told him " N o ; I was personally too fond of him."
Senator BANKHEAD. YOU mentioned something about 5 percent. I
did not get that.
Mr. O'CONNOR. Of the 1,417 we reorganized and reopened 1,095,
with deposits of $1,807,334,000; 31 of the national banks decided to
close up and go out of business, and pay their depositors in full,
which they did, a total of $11,513,000. That left 291 of those banks
that were not able to reorganize. I n other words, they could not get
the capital, or the banks were in such bad condition that they could
not be reopened under any conditions. I n those 291 banks there were
total deposits of $153,113,000, and we paid to the depositors in those
banks a total of $54,250,490.
Now, that leaves, roughly, $100,000,000, which is approximately
5 percent.
Senator BANKHEAD. Of the total deposits?
Mr. O'CONNOR. T h a t is right. That was left after the banking
holiday.
Senator BULKLEY. To what do you attribute the extraordinarily
low cost of liquidation of the Detroit banks ?
Mr. O'CONNOR. T O the large sum involved. That always gives
a low cost proportionately.
Senator BTTLKLEY. The rule is that in a large institution or bank,
you can work out a better ratio?
Mr. O'CONNOR. Yes. To give you one illustration: One of those
banks had deposits of about $415,000,000. We paid the receiver $14,000.
There is no private institution that could get a man to go in there
and do that work for $14,000.
Now, the proof of the fact that we can do it at low cost is that
our receiver was offered a much higher salary and went to a concern
that paid him a much higher salary, and then I was able to take that
receivership and combine it with the other one in Detroit, so that
instead of paying $28,000,1 am paying one receiver out there $16,000.
Senator MCADOO. Under that practice, Mr. Comptroller, of the
liquidation of insolvent banks, you do not permit the receivers to
receive a commission? You pay them a salary, always, which is
commensurate with the character of the work they have to do; is
that not a fact?
Mr. O'CONNOR. Senator McAdoo, that is one of the most important
distinctions between receiverships of national banks and other receiverships. There is no commission paid to anyone in a receivership.
A receiver is paid a straight salary, and every attorney that is appointed to represent the trust signs an agreement allowing the
Comptroller to fix his fee at a reasonable sum. H e submits his bill
to us, and then the lawyers here in my office go through it, item by
item, and he agrees to accept their conclusions.
Senator MCADOO. Mr. Comptroller, it has been, as I recall the law,
the historic right of the Comptroller of the Currency to appoint
receivers and to liquidate insolvent banks.
Mr. O'CONNOR. F o r 70 years.




108

BANKING ACT OF

1935

Senator MCADOO. During the whole period of years that that
practice has existed in the Comptroller's office, a very fine organization has been built u p of expert men who know how to handle such
things, and that is why you get such a fine administration in those
banks and at such a low cost; is that not a fact ?
Mr. O'CONNOR. Yes, sir.
Senator MCADOO. D O you

see any reason why the Comptroller's
office should be deprived of that administration of receiverships and
the work sent somewhere else ?
Mr. O'CONNOR. N O ; I cannot see it.
And a second reason is that we are able to list all of the securities
that we find in those banks and dispose of them at good rates. We
send the securities to New York, which is the best market for sales.
We have a very efficient staff there working with the Treasury. I n
other words, we do not permit the indiscriminate sale of securities,
but require an orderly liquidation.
I might mention this one principle: W e took in a great many
Home Owners' bonds in exchange for real-estate mortgages which
we had. And in discussing that with the liquidating department
erf my office, we gave orders that no bond was to be sold for less
than par. That was specific orders. I n other words, when the market got above par and investors wanted them we sold them. When
they got below par we stopped selling them. F o r that reason we
have not sold any below par.
Senator MCADOO. I want to get your view of t h i s : I n the administration of bankruptcies in the Federal courts, by a subcommittee of
the Senate it was developed that the net returns to the beneficiaries
was, in each instance, extraordinarily small; that not only applied to
equity receiverships, but also to bankruptcies; and it was clearly
shown that some more efficient method would have to be devised for
the liquidation of those bankrupt assets, particularly. I would think,
from my recollection of the testimony, t h a t the figures were just the
reverse from the figures that you have shown. I n other words, instead of cost being 2 percent, the cost was probably 98 percent, and
the beneficiaries got 2 percent, or in that neighborhood. Now, is it
at all possible to enlarge your administrative force there on a national scale to administer bankruptcies in the Federal courts? I
think it is perfectly clear that some more efficient organization must
be effected to administer those bankruptcies. Equity receiverships
is another class, but bankruptcies are quite different.
Mr. O'CONNOR. Senator, that would, of course, depend, first, on
an analysis which I do not have, of the number and the amounts involved of all those receiverships, bankruptcy receiverships, and so
forth, in the Federal courts, and then to determine just what it would
require in the way of a national administration to administer them.
I do think that some unified control should be exercised, and then developed to the extent that Congress desired it. I think that there
ought to be some commencement or beginning of it, and then develop
it as Congress would determine on the basis of what we are doing in
the national banks.
Senator MCADOO. I want to say that I think it is an unfair question
to ask you, with the idea that you could give me a response to it at
this time, because it has not been brought to your attention. I would




BANKING ACT OF 19 3 5

109

be glad if you would think of it, because it will become a live question
in a little while.
Senator GLASS. I am glad the Comptroller's Office has gotten so
efficient in the administration of receiverships because it has not
always been so. I have known receiverships to extend over a period
of 12 years.
Senator MCADOO. T h a t was in the old days.
Senator GLASS. And there was not anything difficult about them,
either.
Senator BYRNES. Mr. Chairman, may I ask a question along this
line?
Senator GLASS. Certainly.
Senator BYRNES. I assume that the Federal Deposit Insurance Corporation should handle their receiverships, because of their interest
in the insurance of deposits; is that right?
Mr. O'CONNOR. Yes; that's the present law Senator.
Senator BYBNES. Now, the receivership is to liquidate the trust
for all creditors other than depositors ?
Mr. O'CONNOR. T h a t is right.
Senator BYRNES. I f the Federal Deposit Insurance Corporation
has charge of the receivership, and there be a stock liability, it would
be to their interest to press that, because it would inure to the benefit
of the deposits and, therefore, to their fund, and the Comptroller of
the Currency, having the interest of all creditors, might not be as
anxious to hurriedly collect the stock liability. Would that be true ?
Mr. O'CONNOR. No, Senator; I think our record shows that we
have gotton every dollar that is available out of stock liability and.
frankly, it is not a pleasant task to have to sign these stock assessments, and Congress has released us of it.
Senator BYRNES. I t is a very disagreeable task, I suppose.
Mr. O'CONNOR. Yes. And you will not have anything of that in
the future, because you have eliminated it as to new banks and this
bill will eliminate it as to all banks.
Senator MCADOO. I t was a very brutal thing to do, and a brutal
performance, in many instances.
Mr.

O'CONNOR.

Yes.

Senator GLASS. I n the matter of consolidations, Mr. Comptroller,
where do you think t h a t authority ought to reside? I mean, the
consolidation of smaller banks in order to meet the requirements?
Mr. O'CONNOR. YOU cannot localize that very well, Senator, for
this reason: T h a t the Comptroller's office is, of course, responsible
and interested in the national banks, if it happens to be a national
bank. If it is a member State bank, then the Federal Eeserve is in
the picture and should be consulted.
Senator GLASS. The Comptroller of the Currency is ex officio a
member of the Federal Eeserve Board ?
Mr. O'CONNOR. Yes, Senator. Now, if you find a bank that is a
State bank not a member of the Federal Deposit Insurance Corporation, you must have the Federal Deposit Insurance Corporation
cooperating with the merger, because that is the only one that has
any jurisdiction—either the Federal Deposit Insurance Corporation
or the Federal Reserve Board.
Senator GLASS. Well, the law could make membership in the
Federal Eeserve a prerequisite to the right of being insured.
129688—35—PT 1




8

110

BANKING ACT OP

1935

Mr. O'CONNOR. Yes; any condition that Congress may write in
as a prerequisite to membership in the fund.
Senator GLASS. That is what I mean.
Mr. O'CONNOR. Yes, of course.
Senator GLASS. About the assessments on banks, I do not know
whether I questioned you about that when you were here before,
Mr. O'CONNOR. You asked me for some figures.
Senator GLASS. There were differing views as to that. My own
view and that of others has been that there should not be an annual
assessment beyond a certain figure, and when t h a t figure is reached
the assessment should automatically cease, and be automatically
resumed when the fund is impaired. W h a t amount would be
brought in by the one-eighth of 1 percent assessment and what
amount by the one-twelfth of 1 percent assessment ?
Mr. O'CONNOR. Senator, before I go to that, with your permission
and the permission of the committee, could I just put in the record
the figures showing unpaid deposits in these receiverships and the
amount of deposits that we have paid?
Senator GLASS. Yes.

Mr. O'CONNOR. Of the 1,530 receiverships of banks, the deposits
at closing were $1,871,681,991; and the deposits paid to date are
$1,032,673,040. We have distributed to depositors, since March 16,
1933, $644,793,467. And if I have these figures correct in my mind, I
think that is about 54 percent return.
Senator COUZENS. Does that include loans t h a t you got from the
It. F . C , when you talk about distributing to depositors?
Mr. O'CONNOR. Yes; that includes that.
Senator BYRNES. That made it possible ?
Mr. O'CONNOR. Yes; in that amount. Now, Senator, to answer
your question
Senator MCADOO (interposing). If I may ask you t h i s : W h a t percentage of loans does that represent from the E . F . C. ?
Mr. O'CONNOR. I have not those figures with me, Senator.
Senator GLASS. YOU may put them in.
Mr. O'CONNOR. I will be glad to. The figure is 59 percent but I
might mention, however, that loans from the Corporation to receivers
and conservators of national banks were not employed 100 percent in
making distributions to depositors of such banks. T h a t is to say, in
certain instances portions of It. F . C. loans have been used as necessary to retire secured indebtedness of banks and to redeem pledged
assets in order that such redeemed assets might thereafter be either
liquidated or used as collateral to additional loans from the Corporation. As no analysis has been made in my office as to the proportion
of K. F . C. loans employed exclusively in the payment of dividends
and as to now do so would require many days of work upon the
p a r t of a number of men, I assume you will not require this exact
data, which in any event would not give a materially different percentage from that quoted above based upon total loans.
Now, to answer your question, Senator:
An assessment for the 13i-year period from 1921 to 1933, inclusive,
of one-twelfth of 1 percent would amount to $545,454,077.
Senator GLASS. One-twelfth of 1 percent?
Mr. O'CONNOR. Yes, Senator.




BANKING ACT OF

1935

111

Senator COTJZENS. Over what period?
Mr. O'CONNOR. Thirteen years.
Senator COTJZENS. Why do you fix 13 years ?
Mr. O'CONNOK. I just go back to 1921.
Senator COTJZENS. O h !
Mr. O'CONNOR. F o r the same period, one-eighth of 1 percent would
amount to $818,181,115.
Senator COTJZENS. That is, collecting this assessment every year?
Mr. O'CONNOR. Yes, Senator.
One-sixth of 1 percent for the same period would amount to
$1,090,908,154.
Senator TOWNSEND. Would that be allowing interest each year ?
Mr. O'CONNOR. No. I will come to that, Senator.
Then, 1 percent for the same period the assessments would amount
to $6,545,448,924.
Now, if we take one-twelfth of 1 percent on the total deposits for
the 13-year period—and I will just pick out 2 or 3 years, just to give
an idea: I n 1921, with 30,812 banks, with total deposits of $38,-664,987,000, the income at one-twelfth of 1 percent would be $32,220,823.
And while I have them for each year I will just go down to 1927:
Total banks, 27,061; total deposits, of $56,751,307,000, with an
assessment income of $47,292,756.
And then, coming down to 1933, with 14.624 banks, with total
deposits of $41,533,470,000, we have an income of $34,611,225.
Now, I will just take two or three illustrations throughout that
period of 13 years. On the one-twelfth of 1 percent the earnings, at
3 % percent, on the $325,000,000 of capital structure of the Corporation would be $7,875,000. And recoveries from advances made,
$9,685,575. T h a t would give us a total income of $49,781,398. Advances to pay insured deposits as of that date in that year 1921,
$77,484,600. And the expenses of operation I have fixed through the
entire period at $2,500,000 per annum, which would be a total disbursement of $79,984,600 for 1921.
There would be a loss that year if you had totaled your assessment
of one-twelfth of 1 percent plus your earnings on your investment,
plus your recoveries, of $30,203,202, which, of course, would come
out of your capital, and which still leaves $294,796,798 of your capital. And during a period of 13 years, on your one-twelfth of 1
percent, we would be into the capital in 4 years of the entire 13—
in 1931, 1932, 1933, and 1934—but under the bill we are permitted to
borrow three times the capital; but it would only be necessary to
borrow approximately one and one-half times the capital in the worst
year of the 13-year period, which would be 1932. And then immediately we pick up in recoveries again from the closed banks, and
from 1934 to 1937—and I am taking that period because we base it
on a 5-year period of liquidation when we get into the recovery
value of the assets—we would be into the red $99,662,818 on onetwelfth of 1 percent without any borrowing. We would only have
to borrow, of course, that amount, and then after that the recoveries
go on again for 1937.
Senator GLASS. Well, you are embracing the 13 years of the unprecedented period of bank failures, are you not ?
Mr. O'CONNOR. Yes;




I

am.

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BANKING ACT OF 1 9 3 5

Senator GLASS. Well, you do not think anything like that will ever
happen again, do you ?
Mr. O'CONNOR. Never.
Senator GLASS. I t never happened before.
Mr. O'CONNOR. NOW, let us take the figures on one-eighth of 1
percent. The assessment income would be $818,181,115 for the 13
years. The investment earnings would be $117,182,694. And the
recoveries from advances made, $1,285,920,916, or a total income of
$2,221,284,722. Less advances to pay insured deposits, $2,296,287,450.
With expenses of operation of $35,000,000, or total disbursements of
$2,331,287,450.
And during the 13-year period, the same period that I covered
for the assessment of one-twelfth of 1 percent, we would be in the
red the first year $14,092,791 instead of $30,203,202; and after that
only three periods—in 1930, 1931, and 1932—would the corporation be in the red. And in 1932 the deficit would be $20,559,937 as
against $39,472,549 under one-twelfth of 1 percent.
And then, in 1933, under the one-eighth of 1 percent, with our
recoveries and our income we would be to the good again $157,904,593.
And from 1934 to 1937 we would again have a surplus of $217,525,178.
Now, this is based on insured deposits over the period of 45 percent, which is the figure given by the Federal Deposit Insurance
Corporation of 43.5, of total deposits in all banks, the national banks
being insured 42.29 percent for $5,000 and the member State banks
being insured 67.7 percent, and the State banks being insured 72.43
percent of their total deposits, or an average of 43.5 percent. So we
take the figure, then, during that time of 43 percent, and the eventual
losses of 44 percent, and the recoveries at 56 percent put back into
the fund.
Now, of course, as Senator Glass has pointed out, with those figures
we have got to keep in mind the very important fact t h a t the number
of bank suspensions in this period was 11,278, and nobody believes
that we will ever have any such picture as t h a t again. So, of course,
it would make the figures here much more favorable to this assessment.
Senator GLASS. Without meaning to give it any suggestion of politics, the last year of Mr. Wilson's administration there was one
national bank failure.
Senator COTTZENS. What would happen, Mr. Chairman, to this situation if our loaning continued and our credit was wrecked, as you
suggested ?
Senator GLASS. I do not think it would have been continued and
wrecked.
Senator COUZENS. I think you said, and the Comptroller said, that
this condition that has existed in the last few years would not happen
again.
Senator GLASS. Yes.

Senator COUZENS.
were so loaded with
tinue to sell bonds.
Senator GLASS. If
The whole structure
Senator COTTZENS.




And I asked you, in view of the fact that banks
bonds, if it might not happen again if you conyou continue to allocate them to banks, it might.
might be ruined, for that matter.
H O W long will you continue, Senator?

BANKING ACT OP 19 35

113

Senator GLASS. A S long as you gentlemen want to. I am sorry
there are not more members of the subcommittee here.
Is there anything further you desire to discuss, Mr. Comptroller?
Mr. O'CONNOB. Senator, on title I I I which, you remember, largely
becomes amendments to the banking act, I have prepared just a summary of each section that I should like to put into the record. I t will
save the members reading the entire bill.
Senator BTJLKLEY. I may want to ask some questions about that.
Mr. O'CONNOR. May I put this in, and also be subject to your call,
Senator ?
Senator GLASS. Yes; t h a t may go into the record.
(The summary referred to is here printed in the record in full, as
follows:)
EXPLANATION OF OBJECT OF PROPOSED A M E N D M E N T S CONTAINED I N TITLE I I I OF 8 . IT 15

The majority of the amendments in question are based upon H. R. 9876 and
S. 3748 submitted at the last session of Congress, which bills were mutually
acceptable to the Federal Reserve Board and to the Comptroller's Office and
were favorably reported by the Banking Committee of both Houses.
There has been placed before you copies of S. 1715 showing marked in red
and by typed inserts certain eliminations and additions that have been suggested to the bill's original provisions in title III, which changes I will explain
as each section is discussed.
A general statement of the object of the various amendments suggested in
last year's bill and now resubmitted and those added thereto in title III of this
bill are as follows (where these amendments were not embraced in last year's
approved bills or are substantially different from those presented, the notation
" new" appears in connection with this explanation) :
Section 301: Amends section 2 (c) of the Banking Act of 1933 so as to exclude
from the very broad definition of the term " holding-company affiliate", and
hence from all provisions of law regarding such affiliates (except the provisions
of section 23A of the Federal Reserve Act regarding loans to and investments
in the securities of such affiliates), every corporation wholly owned by the
United States and every organization which, in the judgment of the Federal
Reserve Board, " is not engaged, directly or indirectly, as a business in holding
the stock of, or managing or controlling, banks, banking associations, savings
"banks, or trust companies."
Section 302: Amends section 20 of the Banking Act of 1933, which requires
the divorcement of member banks from affiliated securities companies so as to
make it clear that its requirements do not extend to a securities company which
has been placed in formal liquidation and transacts no business except such as
may be incidental to the liquidation of its affairs. This is in accord with rulings
by the Federal Reserve Board and the Comptroller's Office as to a proper interpretation of the law.
Section 303 (a) : Makes it clear that the provisions of section 21 (a) (1) of
the Banking Act of 1933, prohibiting dealers in securities from engaging in the
business of taking deposits, does not prevent banking institutions from dealing
in, underwriting, purchasing, and selling investment securities to the extent
•expressly permitted to national banks under the National Banking Act and
does not prevent banking institutions from selling mortgages without recourse.
It will be observed that national banks are limited in dealing in and underwriting securities to doing so as to Government obligations, general obligations
of States or political subdivisions, obligations issued under authority of the
Federal Farm Loan Act, by the Federal Home Loan Board, or the Home
Owners' Loan Corporation.
Section 303 (b) : Makes it clear that section 21 (a) (2) of the Banking Act
•of 1933 does not require that business institutions which accept deposits only
from their own officers, agents, or employees need submit to examination and
publication of reports of condition. Hundreds of corporations, such as the
Baltimore & Ohio Railroad, Chrysler Motors, Deere & Co., permit employees to
leave part of their wages on deposit and in turn loan these funds to other
employees so as to encourage thrift and be of assistance thereto.




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BANKING ACT OP 193 5

This section also makes it clear that the expense of examining private banks
by this office or by the Federal Reserve Board shall be paid by the institution
examined as there are otherwise no funds available to bear the expense of
such examination. I understand it is the sentiment of the House committee to
repeal this subsection 21 (a) (2) entirely as it constitutionally is not only
questionable, but no purpose is served by examining such banks when no power
is given or can practically be given to force correction of dangerous conditions
found. Also the public is misled from fact of Federal examination into assuming there is also actual Federal supervision with its attendant safeguards. I
do not oppose repeal of the section.
Section 304 (new) : Eliminates the double liability of shareholders of national banks on July 1, 1937. This provision considered desirable because of
the fact that such liability has already been eliminated as to banks organized
since June 16, 1933, and as to new capital -issued since that date, with the
result that at the present time many banks are in the awkward position of having outstanding some common stock with liability and other common stock
without liability, resulting in needless confusion. Provision is being made in
section 314 of this bill for banks gradually increasing their surplus out of
earnings until same equals the bank's capital, thereby giving the creditors of
the bank substantially the same additional protection which is now afforded by
the assessment liability.
Section 305 (new) : Corrects the accidental omission of national banks in
Alaska and Hawaii from the benefits of an act passed last session repealing the
lequirement of section 31 of the Banking Act of 1933 that directors of national
banks and member banks increase the amount of their shareholdings therein.
This law was repealed incidentally because it was found physically impossible
to enforce its requirement, with the result that many banks would have been
forced to cease operation for lack of a qualified board of directors.
Section 306 (new) : Gives the Federal Reserve Board power to control relationships of officers, directors, and employees of banks with securities companies through regulation, thereby saving the great burden involved in present
procedure of issuing individual permits.
Section 307 (a) (new in part: Makes it clear that section 16 of the Banking
Act of 1933 was not intended to prohibit national banks or member banks from
buying or selling stocks solely for the account of their customers and as an
accommodation thereto and not for their own account. Extremely important,
particularly in communities remote from financial centers and since there is
involved no investment by the bank of its own funds, no objection can be seen
thereto. The amendment further limits national banks in purchasing investment securities for their own account to the purchase of same in an amount
as to any one issue limited to 10 percent of the bank's unimpaired capital and
surplus. The present law permits such investment in any one issue to an
amount equal to 15 percent of the unimpaired capital and 25 percent of surplus,
except where the total issue does not exceed $100,000 and does not exceed 50
percent of the capital of the association.
Section 307 (b) : This section merely restates in clearer form the existing
prohibition against national banks purchasing stock for their own account.
Section 308 (new): Section enacts into law present requirements of the
Comptroller's office as a matter of policy that newly organized national banks
have a paid-in surplus equal to 20 percent of capital before being authorized to
do business, which requirements may be waived where necessary in connection
with a State bank converting into a national bank.
Section 309 (new) : Eliminates any possibility of section 18 of the Banking
Act of 1933 being construed as preventing corporations other than a bank from
conditioning transfer of their shares on the simultaneous transfer of shares of
bank stock but preserving the unimpeded free and unconditional transfer of
bank stock.
Section 310 (a) : Permits holding company to vote on the question of placing a bank in voluntary liquidation without having to go through the expensive routine incidental to obtaining a voting permit, and section 310 (b).
Under present law shares held by a bank as sole trustee cannot be voted.
It consequently sometimes results where a large number of shares are so held
in trust that it is impossible to obtain the requisite number of votes required
by law to accomplish certain steps such as reduction in capital, amendments
to articles, etc., or to vote to go into voluntary liquidation where such is neces-




BANKING ACT OP 193 5

115

sary. Provision is accordingly made that the shares so held in trust shall be
excluded in determining whether the resolution in question has been adopted
by the requisite number of shares. For example, a bank has 1,000 shares outstanding. Four hundred of the shares, however, cannot be voted because
held in trust by the bank as sole trustee. Consequently, in determining
whether or not a resolution has been adopted by the required two-thirds vote,
the 400 shares held in trust will be excluded, leaving a balance of 600 shares
as the basis for determining whether a two-thirds vote has been obtained,
in which case a vote of 400 shares in favor of the matter would be the requisite
two-thirds majority of the shares entitled to vote.
It is suggested these two subsections be rewritten and combined as one section as per the draft before you and adding these additional changes: (1) To
show clearly that present law does not limit extra voting rights of Reconstruction Finance Corporation or other holders of preferred stock in case of default
on preferred dividends; (2) it permits stock held in trust by bank as sole
trustee to be voted where donor or beneficiary directs or controls manner in
which it shall be voted. This is desirable because the bank as trustee does
not then in fact control such vote.
Section 310 (c) (new) : Eliminates any doubt that a holding company which
has met the requirements for obtaining a voting permit may cumulate its shares
in the same manner as other shareholders are permitted to do. This is in
conformity with the construction placed upon the present law by the Federal Reserve Board and by the Comptroller's office.
Section 311: Gives discretion to the Comptroller to permit a State bank
converting into a national bank to carry over and retain, subject to certain
conditions, such sound assets as a State bank may have which do not conform to tne requirements as to assets held by national banks.
Section 312: Permits the Comptroller to delegate the manual labor of countersigning bond transfers in connection with substitution of securities held to
secure circulation issued by national banks.
Section 313: Permits branches of national banks, which branches are located
outside of the United States, to charge same interest rate permitted by local law
to competing institutions.
Section 314 (new) : Provides that before the declaration of dividends, national
banks shall carry not less than one-tenth of their net profits of the preceeding half year to surplus until same is built up to an amount equal to the
common capital instead of present requirement that same need only equal 20
per centum of capital. This change is deemed desirable in connection with the
provision that assessment liability be eliminated from bank stock and is further desirable from the standpoint of building up a proper capital structure.
Section 315 (new) : Extends the criminal provisions of existing law relative
to embezzlement, false entry, etc., by officers and employees of member banks to
include any insured bank.
Section 316: Gives the Comptroller closer supervision over national banks in
voluntary liquidation as distinguished from those in receivership by requiring
reports to him and to the shareholders and subjecting the bank to examination.
Also enables shareholders to remove an incompetent liquidating agent.
Section 317 (new) : Extends present prohibition on use of word, " national",
by banks other than national banks, to include " Federal" or " United States ",
or any combination of such words.
Section 318. Amends section 5 of the Federal Reserve Act so as to require
member banks to reduce their holdings of Federal Reserve bank stock upon a
reduction in their own surplus, just as they are already required to do upon a
reduction in their own capital. It would also repeal the provisions of sections
5 and 6 of the Federal Reserve Act which require the board of directors of a
Federal Reserve bank to execute a certificate to the Comptroller of the Currency
showing an increase or decrease in the capital stock of the Federal Reserve
bank. Inasmuch as every adjustment in Federal Reserve bank stock is approved by the Federal Reserve Board before the stock is issued or canceled,
the filing of such certificates with the Comptroller of the Currency is a useless
formality involving duplication of work.
Section 319: Authorizes Federal Reserve Board to prescribe form and contents of reports of condition to be made by State member banks and prescribes
manner in which such reports must be published.




116

BANKING ACT OF 193 5

Section 320 (a) : Amends section 11 (m) of the Federal Reserve Act so as to
place State member banks on a parity with national banks in lending on the
security of bonds, notes, certificates of indebtedness, and Treasury bills of the
United States, by changing the limitation on loans to one individual on such
security, from 10 percent of the bank's unimpaired capital and surplus to 25
percent thereof, as provided for national banks in section 5200 of the Revised
Statutes. •
Section 320 (b) : Amends section 5200 of the Revised Statutes so as to extend
the eighth exception thereof, which pertains to loans secured by bonds, notes,
and certificates of indebtedness of the United States, so as to appiy also to loans
secured by Treasury bills of the United States.
Section 321 (new) : Present law permits Federal Reserve bank to make
direct loans to private business on adequate endorsement and security. The
amendment permits such loan on adequate endorsement or security.
Section 322: This section makes certain changes in the language of section
13b of the Federal Reserve Act, making it conform to the amendment in title I
of the bill whereby stock of the Federal Deposit Insurance Corporation subscribed for by the Federal Reserve banks is changed to no par value. These
changes are in form only and do not alter the effect of the existing law.
Section 323 (a) (partly new) : Authorizes Federal Reserve Board to define
" deposit" and related terms for reserve and interest requirements respecting
deposits.
Section 323 (b) : Amends section 19 of the Federal Reserve Act so that, for
purposes of computing member bank reserves, amounts due from other banks
(including checks in process of collection) may be deducted from gross demand
deposits rather than from balances due to other banks, thus extending the benefit of this deduction to country banks which have no balances due to other banks.
Section 323 ( c ) : Amends section 19 of the Federal Reserve Act so as to
add to the classes of deposits exempted from the prohibition against the payment of interest on demand deposits the following: (1) Deposits payable
outside the States of the United States and the District of Columbia (rather
than merely those payable in foreign countries) ; (2) deposits of trust funds
on which; interest is required by State law; and (3) deposits of the United
States, its Territories, districts, or possessions on which interest is required
by law.
The section is also amended to make more flexible the Federal Reserve
Board's power to classify time and savings deposits and limit the rates of
interest to be paid thereon. The absolute prohibition against the payment
of time deposits before maturity is relaxed to permit such payments under
conditions prescribed by the Board; and deposits payable only at offices of
member banks located outside the States of the United States, and the District
of Columbia are exempted from all restrictions on payment before maturity
and all restrictions on interest rates.
Section 323 (d) (new) : Requires member banks to maintain same reserves
against Government deposits as against other deposits.
Section 324: Permits the Federal Reserve Board or the Comptroller of the
Currency, as the case may be, to permit waiver of report and examination
of affiliates of a bank where such report and examination is not necessary in
a particular case to disclose relationship existing between the bank and the
affiliate. This eliminates the burden and expense now involved in hundreds
of cases where there is no beneficial object to be gained in requiring submission and publication of such report, due to the fact that the affiliate is merely
a technical accidental affiliate having no relationships whatsoever with the
bank, such as for example, newspapers, clothing stores, lumber yards, etc.,
which become technical affiliates because of the accident that a majority of
their directors happen to be directors of the bank.
Section 325 (a) (new) : Extends the present provisions of the law prohibiting loans and gratuities to examiners of member banks to include examiners
of all insured banks.
Section 325 (b) (new) : Extends to Federal Deposit Insurance Corporation
examiners the present prohibitions of law against disclosure of confidential
information by examiners.
Section 325 (c) (partly new) : Corrects impractical features of present law
relative to loans to executive officers of banks by vesting certain discretions
with the Federal Reserve Board to issue regulations governing same and




BANKING ACT OF 19 35

117

substituting removal from office for present criminal provisions of the law.
There is also a 3-year extension of time within which present loans must be
retired, such extension, however, operative only if the board of directors
adopt a resolution determining that it is to the best interest of the bank to make
the extension and that the officer has made every proper effort to reduce his
obligation.
Section 326 (partly new) : Under present law there are certain rigid requirements and limitations on loans to affiliates. Exception to these requirements
is provided for where the affiliation arose out of foreclosure by the bank on
collateral. It is often necessary to advance funds to an affiliate, control of
which has been obtained through foreclosure in order to enable the bank to
salvage the real value out of its assets and reduce the bank's loss. Under the
circumstances, such affiliate manifestly cannot borrow elsewhere. There is
also excluded the accidental type of affiliate, control of which is obtained by
the bank in a fiduciary capacity, as for example, where the bank becomes
executor and/or trustee of the deceased's estate, among the assets of which is
a going business which must be operated by the bank as such trustee. There is
also excluded an affiliate engaged solely in operating property acquired for bank
purposes. An additional exception now recommended is to exclude from the
limitations of the section, loans fully secured by obligations fully guaranteed
by the United States and loans to affiliates engaged solely in holding such
obligations, thus extending present law in that respect as to direct obligations
of the United States to include obligations guaranteed by the United States.
Section 327 (new) : Exempts loans for industrial purposes made in cooperation with a Federal Reserve bank or the Reconstruction Finance Corporation
from existing restrictions on real-estate loans by national banks, due to protection received by the banks from either the Federal Reserve bank or the
Reconstruction Finance Corporation, where such loans are jointly made. As
to such loans there is no need for such restrictions as are desirable for a
real-estate loan made by the bank in its sole capacity. Furthermore, such
existing restrictions have been found to seriously interfere with the scope and
object of the Industrial Loan Act as they operate to prevent two or more
banks cooperating with the Federal Reserve bank or the Reconstruction Finance
Corporation in making a single industrial loan, prevents such loan where a
substantial part of the security is real estate located outside of the restricted
area in which national banks are limited in making real-estate loans, and for
other reasons.
Section 328 (new) : Amends the Clayton Act to permit the Federal Reserve
Board to supervise by regulation instead of by permit the matter of interlocking
directorates.
Sections 329 and 330: Bring the law governing consolidation of national banks
into conformity with that governing consolidations of a State and National
bank, and offers additional protection to dissenting shareholders in the matter
of obtaining the appraised value of their stock. Requirement is made that
notice of discount be given by such shareholders when the vote to consolidate
is had.
Sections 331 and 332 (new) : Extend to the Federal Deposit Insurance Corporation the protection now given by law to other Federal institutions against
the misleading use of their name and extend to all insured banks present requirements of law making robbery of member banks a Federal offense.
Section 333: Amends section 5143 of the Revised Statutes so as to make it
clear that, in approving reductions of capital stock by national banks, the
Comptroller of the Currency, in order to conserve the assets for the protection
of the banks, may specify that such banks shall not distribute a corresponding
amount of their assets to their shareholders. The amendment would also strike
out the words which make it necessary for capital-stock reductions to be approved by the Federal Reserve Board in addition to the Comptroller of the
Currency, thus eliminating an unnecessary duplication of work.
Section 334: Amends section 5139 of the Revised Statutes by adding a paragraph specifying certain information to be stated on certificates hereafter issued
representing shares of stock in national banks.
Section 335: Amends the last sentence of section 301 of the Emergency Banking Act of March 9, 1933, so as to require, in connection with the issuance of
preferred stock, the same kind of a certificate by the Comptroller of the Currency as to the validity of such issue as is now required in the case of the
issuance of common stock.




118

BANKING ACT OP 193 5

Section 336: Section 336 would terminate the liability of shareholders of
banks and trust companies in the District of Columbia as of July 1, 1937, in a
manner similar to that provided elsewhere in the bill for terminating the
liability of shareholders of national banks.
Senator COUZENS. Does title I I I suggest anything more than was

before us at the last session?
Senator BULKLEY. There are a few other matters; there are a few
eliminations from it, and also some differences.
Senator GLASS. Mr. O'Connor, can you return in the morning at
10:30?
Mr. O'CONNOE. Yes, sir.
Senator GLASS. We will recess

until tomorrow morning at 10:30.
(Whereupon, at 12:05 p. m., a recess was taken until tomorrow,
Friday, Apr. 26, 1935, at 10:30 a. m.)




BANKING ACT OF 1935
FRIDAY, APRIL 20, 1935
U N I T E D STATES SENATE,
SUBCOMMITTEE OP THE COMMITTEE ON
BANKING AND CURRENCY,

Washington, D. C.
The subcommittee met, pursuant to adjournment, at 10:30 a. m.,
in room 301, Senate Office Building, Senator Carter Glass presiding.
Present: Senators Glass (chairman of the subcommittee), Bulkley,
Byrnes, Bankhead, and Couzens.
Senator G L A S S . The committee will please come to order.
STATEMENT OF J. F. T. O'CONNOR, COMPTROLLER OF THE
CURRENCY—Resumed
Senator GLASS. Mr. Comptroller, I wanted to ask you, first, if you
ever had any particular observations of branch banking.
Mr. O ' C O N N O R . N O , sir; I have not. I have not made a study of it,
either, Senator.
Senator GLASS. YOU are not prepared to say what you think of
branch banking?
Mr. O ' C O N N O R . N O , sir.

Senator GLASS. Well, we were talking yesterday, when we recessed,
about receiverships. Have you any informative information, any
available information with respect to banks and receiverships?
Mr. O ' C O N N O R . Yes, Senator. There has been some question raised
with reference to information for the benefit of depositors with reference to the closed banks, and I think it is well to get that point cleared
up. In all receivership banks at the end of every quarter we post up
in the bank a complete statement of the condition of that trust, so t h a t
everybody that has any interest in that trust may go to that bank and
find out its condition.
Senator COUZENS. How long has that been the practice?
Mr. O ' C O N N O R . As long as I remember in the office, Senator, it
has not been of recent adoption.
Now, t h a t report, which is published quarterly, and usually the
newspapers in the community publish that voluntarily for the benefit
of the people, shows the following: Assets at date of suspension (book
value as reported in receivers' first report); additional assets acquired
since suspension (book value); stock assessment; total assets to be
accounted for, cash collected from assets; cash collected from additional assets; cash collected from stock assessment; total cash collected
from assets and stock assessments; offsets allowed on assets; losses
charged off on assets and on stock assessment; remaining assets,




119

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BANKING ACT OF 1 9 3 5

consisting of uncollected assets, uncollected additional assets, and
uncollected stock assessment; and also a recapitulation of remaining
assets: book and estimated values, showing uncollected assets,
uncollected additional assets, uncollected stock assessment, and a
total of the remaining assets.
And then under liabilities we show secured liabilities at date.of
suspension; unsecured liabilities at date of suspension, additional
liabilities established, total liabilities of this date; secured and preferred liabilities paid in cash (paid by conservator); unsecured liabilities offset; unsecured liabilities for which receiver's certificates have
been issued; unpaid secured liabilities (both proved and unproved)
unsecured liabilities not paid or proved, total liabilities accounted for.
And then we show collections and disbursements: Collections from
all sources, showing cash collected from assets and stock assessment;
cash collected from interest, premium, and rents; cash collected by
receiver, and held as trustee for owners; Reconstruction Finance
Corporation loans received (loan to conservator); total collections to
be accounted for.
Disbursements of every character, showing secured and preferred
liabilities paid (including dividends) (paid by conservator); collateral
account (collections held by secured creditors and not yet applied) ;
advances in protection of assets (taxes, insurance, etc.); expenses of
receivership (expenses and advances by conservator); dividends paid
to unsecured creditors (paid by conservator); Reconstruction Finance
Corporation loans repaid; cash in hands of receiver and Comptroller;
and total collections accounted for.
In addition to that, there is an annual report of the Comptroller
published each year; the year terminates on October 31, and in t h a t
report several hundred pages are devoted to the administration of
the liquidation of closed banks.
Senator COTJZENS. Individually, or collectively?
Mr. O'CONNOR. Both. For instance, I will give you individually
what we show.
All collections by receivers, collection and offsets allowed; collections from stock assessments.
This is for each bank, Senator.
Amounts borrowed
Senator COTJZENS (interposing). Let me understand it. Do I
understand that you put in a detail of this trust in your report; of
each trust?
Mr. O ' C O N N O R . Yes; of the 1,500. I am pleased you asked t h a t ,
Senator.
Amounts borrowed from the Reconstruction Finance Corporation;
dividends paid by receivers to secured and unsecured creditors;
distributions by conservators, payments to secured and preferred
creditors; offsets allowed and settled; disbursements for protection
of assets; receivers' salaries, legal and other expenses; conservators'
salaries, legal and other expenses; a table showing the status, progress,
and results of liquidation of all national banks placed in hands of
receivers from the date of the first national bank failure in 1865 to
October 31, last, the end of the fiscal year in the Comptroller's Office;
separate tables giving dates of appointment of receivers; capital at date
of organization and at date of failure; dividends paid while solvent;
total deposits, bills payable, and rediscounts at date of failure; also-




BANKING ACT OF 1 9 3 5

121

tables showing assets a t date of failure, additional assets acquired
subsequent to failure; offsets allowed; disposition of all collections
and dividends paid to creditors of all insolvent national banks, this
information being given in detail as to each and every national bank
in liquidation.
Now, I have given you two methods of rather wide publicity, and
the third method which we pursue is to call in a committee of the
larger depositors of the trust—advising the receiver to do so, whenever he has the sale of some rather important asset of the trust. And
the subcommittee knows that we cannot make a sale of property
without a petition filed with the court setting forth the price, and the
appraisement, and a hearing on it, and then the court, if he feels it
fair and equitable to the trust, will permit it to be sold.
I can give you a good illustration right in this city. We have a
rather large building; it is owned by one of the receivership banks in
Washington, and we were offered $400,000 for it, cash. The receiver
and representatives of the Comptroller's Office went into the matter
rather carefully, and I, myself, went down to the building and went
through the nine floors, and through the stores and the offices, and
we declined the $400,000 offer, and within 30 days the offer was raised
to $450,000. Before we accepted that we called in a committee of
five or six representing the largest depositors in that bank. We asked
them for their judgment of the matter and gave them all the information we had. They came up to my office. I talked to them personally
about it. They all felt t h a t we should accept it, felt it was a very
good offer. And we had for their information the income from the
building, the taxes, and the upkeep, and everything. That offer was
filed with the court for approval, and the court has given 2 or 3 weeks
of published notice to t h a t petition, and it is in its file and it will be
acted upon on the date fixed in that petition. That is an illustration
of the way these receivership matters are handled.
Senator GLASS. Mr. Comptroller^ while you have available for all
interested parties and for the public information of the sort recited
by you, you give out that information through your regular force, do
you not? You do not employ an expert publicity agent?
Mr. O ' C O N N O R . N O ; I have no such agent.
Senator GLASS. T h a t is contrary to law.
Mr. O ' C O N N O E . Yes,
Senator GLASS. B u t

sir.

it looks to me like every bureau in Washington has an expert publicity agent hired.
Mr. Comptroller, I note in the newspapers what is a mistake,
and I assume an inadvertent mistake. Yesterday, or the day before,
when you were testifying, you gave the amount of indebtedness of
executive officers of national banks, and the reduction made. You
did not mean to have anyone infer that there had been any loans to
executive officers since the passage of the Bank Act of 1933, did you?
Mr. O ' C O N N O R . N O , Senator; no loans have been made, according
to the reports of examinations filed in the Comptroller's office, by any
national bank to any executive officer since the passage of the Bank
Act of 1933; and the figures that I gave showing the indebtedness of
executive officers, both directly and indirectly, the two figures referred
to the loans that were then in the national banks as of June 30, 1933.
And then I followed t h a t by showing the reduction that had been




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BANKING ACT OF 1 9 3 5

made. B u t no new loans to the executive officers have been made
since the passage of that act.
Senator, might I clear up a matter that Senator Couzens asked
about yesterday?
Senator GLASS. Yes.

Mr. O'CONNOR. I said I would bring the figures today. Senator
Couzens, yesterday, when I gave the amount of dividends that had
been distributed to depositors in closed banks since March 16, 1933,
the total being $644,793,467, the Senator inquired whether I had a
break-down showing how much of that sum had been borrowed from
the Reconstruction Finance Corporation. I am prepared now,
Senator, to give tbose figures.
Senator COUZENS. Very well.
Mr. O'CONNOR. The Office of the Comptroller of the Currency borrowed from the Reconstruction Finance Corporation, from March 16,
1933, to April 20, 1935, $275,181,347.
We have repaid to the Reconstruction Finance Corporation
Senator BULKLEY (interposing). Is that the gross amount that has
been loaned to the banks?
Mr. O'CONNOR. Yes; to closed banks.
Senator BULKLEY. To closed banks?
Mr. O'CONNOR. Yes; about a billion has been loaned to all bank,
total.
Senator BULKLEY. You mean to closed banks?
Mr. O'CONNOR.

Yes.

We have repaid to the Reconstruction Finance Corporation
$160,125,692; not quite 50 percent has been repaid. As we would
collect on these assets, of course, we make repayment at once to the
Reconstruction Finance Corporation.
Senator BYRNES. YOU say you borrowed $275,181,347 and paid
back $160,125,692?
Mr. O'CONNOR. T h a t is right.
Senator BYRNES. That is more than 50 percent.
Mr. O'CONNOR. Yes. I deducted it. You are correct, Senator.
Now, all of this amount of $275,181,347 t h a t was borrowed, of
course, was not available for dividend purposes. I did not take the
trouble to break that down, but I just want to call your attention to
the fact that a large part of that sum—not intending to use the word
" l a r g e " by more than 50 percent—but a large part of it was used for
the payment of preferred claims.
Senator BANKHEAD. And to recapture collaterals?
Mr. O'CONNOR. Yes; and to recapture collaterals, to bring it back
into the bank, of course. And a part of it was used to repay the
Reconstruction Finance Corporation, and we made a new loan to
take care of this and new matters. I have not a break-down of
that. I would be glad to furnish it if the committee cares for it.
Now, Senator, for the information of the committee, I would like
to put into the record a table I used yesterday with reference to the
assessment for all purposes for thirteen years on one-eighth of 1 percent, if there is no objection.
Senator GLASS. That will be received.
(The table referred to is here printed in the record in full, as follows:)




BANKING ACT OF 1935

123

Summary of hypothetical projection of a deposit insurance corporation's operating
statements, period Jan. 1, 1921, to Mar. 15, 1938
Combined capital and surplus fund of Corporation as'of Jan. 1.
Add:
Assessment income (one-eighth of 1 percent)
Investment earnings for year (3% percent)
Recoveries from advances made
Total income

$325, 000, 000
818, 181, 112
117, 182, 694
1, 285, 920, 916

— 2, 221, 284, 722

Less:
Advances to pay insured deposits
Expense of operation
Total disbursementsNet loss

2, 296, 287, 450
35, 000, 000
2, 331, 287, 450
110, 002, 728

Combined capital and surplus fund of Corporation at end of
period
Number bank suspensions
Total deposits
Insured deposits (45 percent)
Losses (eventual, 44 percent).
Recoveries (eventual, 56 percent)

214, 997, 272
11, 278
$5, 102, 861, 000
$2, 296, 287, 450
$1, 010, 366, 584
$1, 285, 920, 916

MEMORANDUM

Assessments, 13-year period:
One-twelfth of 1 percent
$545, 454, 077
One-eighth of 1 percent
$818, 181, 115
One-sixth of 1 percent
$1, 090, 908, 154
1 percent
$6, 545, 448, 924
Total bank suspensions, period Jan. 1, 1921, to Mar. 15,1933..
11, 278
Total nonlicensed banks placed in liquidation or receivership
Mar. 16, 1933, to Dec. 31, 1934:
National
860
State member
68
Nonmember
1,092
Total
Total insured banks in the United States as of Oct. 31, 1934,
numbered
Total reporting banks in the United States as of June 30, 1934,
numbered

2, 020
14, 125
15, 894

Total insured deposits represented in the attached schedule
have been predicated upon a percentage factor of currently
insured deposits in active banks, of approximately percent
45
The amounts of liquidation recoveries given in the attached
schedule are predicated upon a total liquidation recovery, over a
Percent
5-year period of
56
Such recoveries have been further analyzed and found to occur at
the approximate progressive annual rates of
25, 15, 8, 5, 3
Relative to the above-mentioned liquidation recovery rate of 56
percent, the records of my office indicate the average percentage
of dividends paid in all national-bank receiverships liquidated
and finally closed from 1865 to Oct. 31, 1934, to have been
66. 51
The records of my office further indicate the average percentage of
dividends paid in national-bank receiverships liquidated and
finally closed during the 10-year period ended Oct. 31, 1934, to
have been
56. 82
The average liquidation recovery percentage of 56 percent used in the calculation herewith represents, therefore, some reduction in the rate apparent for




124

BANKING ACT OP 193 5

national-bank liquidations on account of the assumed lower percentage of liquidation in banks other than national.
The records of my office indicate the average period of liquidation for national
bank receiverships liquidated and finally closed during the 13-year period 1921
to 1934, to have been—5 years.
The issue of debentures to the Government in an amount substantially less
than the total authorized by law would have adequately served to cover the
deficits appearing in the attached schedule for the years 1931, 1932, and 1933,
and such debentures could be repaid from earnings in subsequent years.
Annual investment income, period Jan. 1, 1921, to Dec. SI, 1983, predicated upon
an average return of 8% percent upon invested funds
Invested
funds

Year
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931

Earnings

—

-

—

Total

$225,000,000
210,907,209
246,064,640
265,863,872
272,874,000
311,419,966
318,050,621
360,708,376
428,838,790
...
458,118,802
250, 234,826

$7,875,000
7,381,752
8,612,122
9,305,236
9, 550,590
10,899,699
11,131, 768
12,624, 793
15,009,358
16, 034,158
8,758,219

•257,644,692

.

117,182,694

> Average invested funds.

Annual assessment income, period Jan. 1,1921, to Dec. 81,1938, predicated upon an
assessment rate of y% of 1 percent of total deposits of active banks
Total
banks

Year

June 30:
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930 —
1931
1932
1933

—
-

Total




-

30,812
30,389
30,178
29,348
28,841
28,146
27,061
26,213
25,330
24,079
22,071
19,163
14,624

Total deposits

Assessment income

$38,664,987,000
41,128,352,000
44,249,524,000
47,709,028,000
51,995,059,000
54,069,257,000
56,751,307,000
58,431,061,000
57,910,641,000
59,847,195,000
56,864,744,000
45,390,269,000
41,533,470,000

$48,331,234
51,410,440
65,311,904
59,636,284
64,993,824
67,586,571
70,939,134
73,038,826
72,388,300
74,808,993
71,080,929
56,737,836
61,916,837

654,544,894,000

818,181,112

A projection of hypothetical operating statements of a deposit insurance corporation by years for the period Jan. 1, 1921 to Mar. IB, 1933, predicated upon an initial combined capital and surplus fund of $325,000,000, an annual assessment rate of y& of 1 percent of total deposits in
active banks, a maximum insurance of $5,000, a liquidation period of 5 years, and the inclusion of liquidation operations to 1937 to give
effect to total eventual recoveries upon all advances made
88—3

1921

1922

1923

1924

1925

1926

1927

CI

1 Combined capital and surplus fund of corporation as of Jan. 1.

$310,907,209

$346,060,640

$365,863,872

$372,874,000

$411,419,966

$418,050,521

51,410,440
7,381, 752
20,730,589

55,311,904
8,612,122
25,699,656

59,636,284
9,305,235
35,136,669

64,993,824
9, 550,590
41,901,302

67,586,571
10,899,699
47,814,385

70,939,134
11,131,768
52,785,003

65,891,809

79,522,781

89,623,682

104,078,078

116,445, 716

126,300,655

134,866,905

77,484,600
2,500,000

41,869,350
2,500,000

67,320,450
2,500,000

94,567,950
2,600,000

75,399, 750
2, 500,000

117,170,100
2,500,000

89,698,050
2,500,000

79,984,600

44, 369,350

69,820,450

97,067,950

77 899, 750

119,670,100

92,198,050

14,092, 791

35,153,431

19,803,232

7,010,128

38,545,966

6,630,565

42,667,855

310, 907, 209
100.000,000

346,060,640
100,000,000

365,863,872
100,000,000

372,874,000
100,000, 000

411,419,966
100, 000,000

418,050,521
100,000,000

460,708,376
100,000, 000

210,907, 209
505
$172,188,000

246, 060, 640
367
$93,043,000

265,863,872
646
$149,601,000

272,874,000
775
$210,151,000

311,419,966
618
$167, 555,000

318,050,521
976
$260,378,000

360,708,376
669
$199,329,000

77,484,600
34,093,224
43,391,376

<e

$325,000,000
48,331,234
7,875,000
9,685,575

£ Add:

41,869,350
18,452,514
23,446,836

67,320,450
29,620,998
37, 699,462

94,567,950
41,609, 898
62, 985,052

75,399,750
33,175,890
42,223,860

117,170,100
51,554,900
65,015,200

89,698, 050
39,467,142
50,230,908

Less:

C o m b i n e d capital a n d s u r p l u s fund of corporation as of D e c 31-

B a n k suspensions

NOTE.—Italic indicates red figures.




number .

A projection of hypothetical operating statements of a deposit insurance corporation by years for the period Jan. 1, 1921 to Mar. IB, 1933, predito
cated upon an initial combined capital and surplus fund of $325,000,000, an annual assessment rate of }i of 1 percent of total deposits in QJ
active banks, a maximum insurance of $5,000, a liquidation period of 5 years, and the inclusion of liquidation operations to 1937 to give
effect to total eventual recoveries upon all advances made—Continued
1928

1929

1930

1931

1932

1933

1934-37

$528,838,790

$558,118,802

$350,234,826

$189,871,562

73,038,826
12,624,793
49,127,795

72,388,300
15,009,358
48,171,704

74,808,993
16,034,158
87,786,223

71,080,929
8,758, 219
193,354,514

56,737,836

51,916,837

247,233,927

206,468,506

220,025,178

135,569,362

178,629,374

273,193,662

303,971,763

258,385,343

220,025,178

64,161,000
2,600,000

103,789,350
2,500,000

384,013,350
2,500,000

760,801,050
2,600,000

322,031,700
2,500,000

97,980,760
2,500,000

2,500,000

66,661,000

Less:

$460, 708,376

134,791,414

Combined capital and surplus fund of corporation as of Jan. 1.
Add:

106,289,360

386,513,350

763,301,050

324,531,700

100,480,750

2,500,000

$2,527,906

68,130,414

29,280,012

207, 883,976

490,107,388

157,904,593

217,525,178

528, 838, 790
100,000, 000

558,118,802
100, 000,000

350,234,826
100,000,000

139,872,562

160,431,499

2,5X7,906

214,997,272
100,000,000

428,838,790
499
$142, 680, 000

458,118, 802
659
$230, 643,000

250,234,826
1,352
$853,363,000

2,294
$1, 690, 669,000

1,456
$715, 626,000

462
$217, 735,000

64,161,000
28,230,840
35,930,160

Combined capital and surplus fund of corporation as of Dec 31.

SO, 559,937

$160,432,499

103.789, 350
45,667,314
68,122,036

384,013,350
168,965,874
215,047,476

760,801,050
334, 752,462
426,048, 588

322,031,700
141,693,948
180,337,752

97,980, 750
43, 111, 530
54,869, 220

NOTE —Italic indicates red figures.

Senator BTJLKLEY. Are you putting in the other table, showing the assessment of one-twelfth of 1 percent?
Mr. O'CONNOR. Yes; that should be in. That is in the bill.
Senator GLASS. I t may be received.
(The table referred to is here printed in the record, in full, as follows:)




>

o
!>
o
o

114,997,272
(0

w

A projection of hypothetical operating statements of a deposit insurance corporation by years for the period Jan. 1, 1921, to Mar. IB, 19S3,
predicated upon an initial combined capital and surplus fund of $325,000,000, an annual assessment rate of J/12 of 1 percent of total deposits
in active banks, a maximum insurance of $5,000, a liquidation period of 5 years, and the inclusion of liquidation operations to 1937 to
give effect to total eventual recoveries upon all advances made
1921

1922

1923

1924

1925

1926

1927

$326,000,000

$294,796,798

$312,249,552

$312,432,095

$297, 693,350

$311,943,385

$292,563,412

32,220,823
7,875,000
9,685,675

34,273,627
6,817,888
20,730,589

36,874,603
7,428,734
25,699,656

39,757,523
7,435,123
35,136, 559

43,329,216
6,919,267
41,901,302

45, 057, 714
7, 418,028
47,814,385

47,292,756
6, 739, 719
52,785,003

49,781,398

61,822,104

70,002,993

82,329,205

92,149,785

100,290,127

106, 817,478

77,484,600
2,500,000

C o m b i n e d capital a n d s u r p l u s fund of Corporation as of J a n 1--

41,869,350
2,500,000

67,320,450
2,500,000

94,567,960
2,500,00

75,399,750
2,500,000

117,170,100
2,500,000

89,698,050
2, 500, 000
92,198, 050

Add-

Less:

79,984,600

Losses ( e v e n t u a l , 44 percent)

__

NOTE.—Italics indicate red figures.




69,820,450

97,067,950

77,899,750

119, 670,100

17,452,754

182,543

U,7S8,7iS

14,250,035

19, S79, S7S

14, 619, 428

294,796,798
100,000,000

312,249,552
100,000,000

312,432,095
100,000,000

297,693,350
100,000,000

311,943,385
100,000,000

292,563,412
100,000,000

307,182,840
100,000,000

194,796,798
605
$172,188,000

C o m b i n e d capital a n d s u r p l u s fund of corporation as of D e c . 31-

44,369,350

SO, BOS, HOB

212,249,552
367
$93,043,000

212,432,095
646
$149,601,000

197,693,350
775
$210,151,000

211,943,385
618
$167,555,000

192,563,412
976
$260,378,000

207,182,840
669
$199,329, 000

77,484,600
34,093,224
43,391,376

41,869,350
18,422,514
23,446,836

67,320,450
29,620,998
37,699,452

94,567,950
41,609,898
52,958,062

75,399, 760
33,175,890
42,223,860

117,170,100
51,554,900
65,615,200

89,698,050
39,467,142
50,230,908

A projection of hypothetical operating statements of a deposit insurance corporation by years for the period Jan. 1, 1921, to Mar. 15, 1933,
predicated upon an initial combined capital and surplus fund of $325,000,000, and annual assessment rate of )/\2 of 1 percent of total deposits
%n active banks, a maximum insurance of $5,000, a liquidation period of 5 years, and the inclusion of liquidation operations to 1937 to
give effect to total eventual recoveries upon all advances
made—Continued
1928

1929

1930

1931

1932

1933

1934 to 1937

$418,814,428

48,692,551
7,261,399
49,1/7,795

48,268,867
8.6.6,959
48,171,704

49,872, 662
8, 563,847
87,786,223

47, 387,2S6
173,675
193.354,514

37,825,524

34,611,2i5

247,233, 927

206, 468,506

290,025,178

105,057,530

146,222,732

240,915,475

285,059,151

241,079, 731

220,025,178

64,161,000
2,500,000

103,789,350
2, 500,000

384,013,350
2, 500,000

760,801,050
2,500,000

322, 031,700
2, 500,000

97,980, 750
2, 500,000

2,600, 000

106,289,350

386,513,360

763, 301,050

324,631,700

100,480, 750

2,500,000

1,881,820

522,885,576

89,472,549

140, 958,981

217, 525,178

345, 593,585
100,000,000

344,361,765
100,000,000

104,071,147
100,000,000

418,8U, 128

457,788,977

817,187,996

99,662,818

244,361,765
659
$230,643,000

4,071,147
1.352
$853,363,000

2 294
$1,690, 669! 000

1,456
$715,026,000

462
$217,735,000

64,161,000
28,230,840
35,930,160




$104,071,147

245,593,585
499
$142,580,000

i Italics indicate red figures.

$344,361, 765

38, 410, 745
Combined capital and surplus fund of corporation as of Dec. 31_

$345, 593,685

66,661,000

Less'

$307,182,840

105, 071, 745

Combined capital and surplus fund of Corporation as of Jan. 1..
Add:

103,789,350
45,667,314
68,122,036

384,013.350
168,965,874
215,047,476

760,801,050
334,752,462
426,048,688

322,031,700
141,693,948
180,337,752

97,980,750
43, 111, 530
54,869,220

240,290,618

$457,788,977

$317,187,996

IS3
00

129

BANKING ACT OF 1 9 3 5

Mr. O'CONNOR. And yesterday, Senator, I also stated that there
were 11 national banks which had been closed since the banking holiday of 1933, and only 2 of those were members of the insurance fund.
And I have prepared a break-down for the information of the committee showing just why those banks failed—embezzlement, and other
reasons, the 13—and that is all the national banks that have failed
since the banking holiday of 1933. And with the permission of the
chairman and the committee I would like to put that into the record.
Senator GLASS. That may go into the record.
(Table and information regarding disposition of licensed national
banks which failed following the banking holiday, is here printed in
the record in full, as follows:)
M e m o r a n d u m for t h e C o m p t r o l l e r .
Information regarding disposition or present status of licensed national b a n k s
which failed following t h e b a n k i n g holiday:
Licensed banks closed with immediate appointment
Name of bank
Rushville, Ind.: American National Bank
_
Bank still in receivership. Dividends aggregating 80 percent have been
paid to creditors. Estimated future dividends approximately 10 percent
Kingfisher, Okla . First National Bank
Cause of failure Defalcations Bank still m receivership Dividends
aggregating 62^ percent paid to creditors. Estimated futu.j dividends
approximately 15 percent.
West, Tex : National Bank of
Cause of failure. Defalcations. Returned to directors 11a m , Oct. 9,
1834, for purpose of consummating sale of assets to the State National Bank
of West, Tex. Meeting of stockholders held and bank voted into voluntary
liquidation. Creditors paid 100 percent. Final report on Oct. 9,1934.
Lima, Mont.: First National Bank
Federal Deposit Insurance Corporation, receiver. Creditors paid in full
by corporation.
Herndon, Va National Bank of..
Cause of failure: Defalcations. Federal Deposit Ins arance Corporation
receiver.

Licensed

of receivers
Date of
suspension

Date receiver
appointed

Apr. 22,1933

Apr. 25,1933

July 20,1933

July 27,1933

Oct. 30,1933

Oct. 30,1933

July 19,1934

July 19,1934

Jan. 10,1925

Jan

banks closed through subsequent revocation of licenses and
appointed final disposition indicated

Name of bank

conservators

Date of suspension and Date receiver
appointment
appointed
of conservator

Albuquerque, N Mex.: First National Bank of-—
Apr. 17,1933
Cause of failure Defalcations. License issued to First National Bank
in Albuquerque to succeed First National Bank of Albuquerque, and
conservator of latter bank authorized to return bank to its board of directors, effective Oct 24,1933. Creditors paid 100 percent.
Camden, Ark • First National Bank
May 24,1933
Cause of failure Due to depreciation on large amounts Arkansas bonds,
revenues on which were taken away by State law 60 percent distribution made to creditors by Spokane Sale while m conservatorship Estimated future dividends approximately 10 percent Bank still m receivership
Battle Creek, Mich.: Old Merchants National Bank
_
June 13, 1933
Conservatorship terminated and bank returned to board of directors,
effective 12 noon, June 9, 1934, for the purpose of entering into a contract
of sale with the Security National Bank of Battle Creek, which bank was
licensed and authorized to commence business on June 9,1934. Creditors
paid 65 percent
Boulder, Colo : Boulder National Bank
July 12,1933
50 percent distribution to creditors through Spokane sale while in conservatorship. Estimated future dividends approximately 20 percent.
Bank still in receivership.




10,1935

Apr. 16,1934

Mar. 28,1934

130
Licensed

BANKING ACT OF
banks

closed through subsequent
appointed final disposition

Name of bank

193 5

revocation of licenses and
indicated—Continued

conservators

Date of suspension and Date receiver
appointment
appointed
of conservator

San Antonio, Tex • Commercial National Bank.
July 31,1933
Cause of failure Defalcations Receivership terminated at 5 p m ,
Oct 16, 1934, and bank restored to solvency for purpose of completing
reorganization plans and selling acceptable assets to Bexar County
National Bank of San Antomo Old bank voted into voluntary hquidadation. Creditors paid 100 percent Final report Oct. 16,1934
Waverly, N . Y : First National Bank
Sept. 1,1933
60-percent distribution paid to creditors by Spokane sale while bank in
conservatorship. Second dividend of 15 percent paid by receiver. Estimated future dividends approximately 8 percent. Bank still in receivership

Jan. 31,1934

Oct

24,1933

Senator BULKLEY. Mr. Comptroller, what classification do your
examiners report on loans?
Mr. O ' C O N N O R . We have three general classifications that the
examiners classify the loans. The first is slow
Senator BULKLEY (interposing). Now, this refers to all loans in all
banks examined?
Mr. O ' C O N N O R . That is right, all national banks, Senator. The
first classification is called the "slow loans," and that includes loans
that are good, loans that are sound, but loans that could not be
immediately liquidated but they are good and sound; and those are
put in the slow column.
The next column is the doubtful column, and in that column is
paper that the examiners say, "Well, it is not what I would call a
sound loan, and yet there is no evidence at once that it is a loss; if
business turns a little or some little thing happens in here, it is a
good loan, but I will have to classify it as doubtful."
Senator GLASS. What does the examiner do in certain instances of
that sort?
Mr. O ' C O N N O R . He puts it in the doubtful column.
Senator GLASS. I know, but what does he say to the bank officers?
Mr. O ' C O N N O R . I n the doubtful column?
Senator GLASS. Yes.

Mr. O ' C O N N O R . He advises them to watch that loan until his
next examination comes along, and to improve its condition, or get
additional collateral, or get it in better shape.
Now, the loss column, the examiner finds just a straight loss, or the
makers of the paper are bankrupt or people out of jobs entirely, or
they just cannot pay, and he just calls it a loss and out they go.
Senator BULKLEY. And then you are required to write it off?
Mr. O ' C O N N O R . Yes; that is written off. And that is in the loss
column.
Senator GLASS. I am asking you this question because I, at least,
want to know whether the Comptroller's office is pursuing a different
policy now from what was formerly pursued when the Comptroller of
the Currency, some years ago, came before us and told us that if he
would follow out the requirement of the law he would close one-half
of the national banks of the country. If t h a t was an accurate description of the situation it meant, of course, that the Comptroller's




BANKING ACT OP

1935

131

office had not been doing its duty for a number of years if he permitted
the banks to get into that sort of a situation.
Now you authorize examiners to report derelictions of more or less
a gross nature and suspend bank officers who do not comply with the
report of your examiners, do you not?
Mr. O ' C O N N O R . Yes; Senator, that is correct. And we made a
survey for, I believe, the first time in the history of the office
Senator COUZENS (interposing). Before you go into that, may I ask
you if you can clear up this situation: There have been articles in the
press from time to time that the examiners of the Comptroller's office
have adopted a deflationary attitude with respect to loans; while the
Reconstruction Finance Corporation was urging banks to make more
loans to industry and the bankers claimed they were in difficulty
between two governmental agencies, one resisting loans that might
not be A-l, and the other agency cf the Government was urging them
to make them. Have you any knowledge as to that?
Mr. O ' C O N N O R . Yes, Senator. I am glad you asked that question.
I want to answer it in two ways. First
Senator GLASS (interposing). Well, include in your answer an
answer to this question: Is it not your business under your oath of
office to protect the public interest and to protect the depositors in
banks, and to require banks to make good loans, rather than bad or
doubtful loans?
Mr. O ' C O N N O R . There is no question at all, Senator, about that
being the policy of the office and the law that we must follow.
Senator GLASS. Yes.

Mr.. O ' C O N N O R . N O W , to answer Senator Couzens' question more
directly: Some criticism such as that appeared, and in every instance
I have inquired and run down the criticism to find out whether or not
our examiners had acted fairly in the classification of assets of loans.
And I want to give one very clear illustration. The Mid-West Banking Magazine published an editorial and stated that one of my examiners had required the charging off of a loan of $65,000 that had
a two million dollar trust fund as security back of it, and criticized
him very severely. I immediately wrote the editor, and I told the
editor that if I had an examiner in the field doing that sort of thing
I would discharge him. The editor took the matter up with the bank.
The bank declined to give the name of the examiner and declined to
give the asset that was criticized; the editor declined to give the name
of the bank, and yet they published that false statement all over the
country. I t just was not true.
Now, to follow it up further: We made a survey of every examiner's
report to find out the percentage of loans that had been placed in the
three classifications that I have just given to Senator Bulkley, and
we examined 5,275 reports of national banks. And the total amount
of loans in those banks was $7,740,596,000. The examiners placed
2.88 percent of those loans in the loss column and 4.19 percent in the
doubtful column and 27.05 percent in the slow column. Now, the
slow column, of course, is the one that there is the most discussion
about.
Senator BULKLEY. D O you require them to set up reserves against
the slow and doubtful columns?
Mr. O ' C O N N O R . N O ; not against the slow.
Senator BULKLEY. B u t against the doubtful you do?




132

BANKING ACT OF

1935

Mr. O'CONNOR. Sometimes or a portion of it.
Now, with reference to the slow column, we cannot just permit the
slow column to go unchallenged. I n other words, we cannot permit
a bank to get overloaded with slow paper, and still we cannot run
the banks, and if the taxes are paid and the interest is paid, and the
only objection is that it is slow, we are not going to attempt to tell
the banker how he shall deal with that particular piece of paper,
provided he is not overloaded with it. So, here is the policy our
office has adopted and the advice to examiners with reference to the
slow column.
The examiners when classifying loans as slow should state briefly
the reasons for such classification, b u t should bear in mind that the
responsibility for determining and taking such action as may be
necessary to place such slow loans in proper bankable shape rests
entirely with the bankers. The examiners, therefore, should refrain
from instructing the bankers as to what course they should pursue
with their customers whose paper is classified as slow.
I t is sound and good, and the only question is, it is slow.
Now, what we want
Senator GLASS (interposing). What would happen to a bank that
is overloaded- with slow paper if a run should occur?
Mr. O ' C O N N O R . We do not permit it to get overloaded with it,
Senator. I was careful to state that. And that is the reason we
require these examiners to state the reasons for this classification, so
that that can be developed.
Now the report is that 27 percent, which is safe—I do not believe
anybody can challenge the fact that with 27 percent of the paper
slow, which does not mean that it cannot be rediscounted
Senator GLASS (interposing). You do not permit the bank to be
overloaded with slow paper?
Mr. O'CONNOR. We do

not.

Senator GLASS. Because you know very well in the event of a
disturbance and a run on a bank of t h a t type, it would be obliged to
close its doors.
Mr. O'CONNOR. That is correct, Senator.
Senator BULKLEY. Twenty-seven percent is the average for all
banks?
Mr. O'CONNOR. Yes,

sir.

Senator GLASS. National banks?
Senator BULKLEY. I mean national banks.
Mr. O'CONNOR. Yes, sir.
Senator BULKLEY. What is
Mr. O'CONNOR. Of course,

the maximum?
some run lower and some higher. I
have not checked that, Senator.
Senator BULKLEY. What maximum do you consider dangerous?
Mr. O'CONNOR. Well, you cannot just p u t it on a percentage basis,
Senator, for this reason—just say a percentage, because that will
depend on the other assets of the bank. If the balance is all cash, you
could have a much higher percentage of slow paper. If you have
cash and Governments and other slow paper, that is a different
situation. So you have to see the whole picutre, and you have to sit
back and examine it and see, as the Senator says, whether in the case
of a run it could take care of it. T h a t is our problem.




BANKING ACT OF 1 9 3 5

Senator
loans?
Mr.

COUZENS.

O'CONNOR.

133

M a y I ask what you do with under-collateralized

Yes.

Senator COUZENS. D O you attempt to say what you think are
good and what bad because of undercollateralization?
Mr. O ' C O N N O R . Yes; we attempt to do that also.
Senator COUZENS. SO there may be a loan for $100,000 which you
say is undercollateralized, because 75 percent slow and 25 percent
doubtful?
Mr.

O ' C O N N O R . Yes, sir.
COUZENS. YOU would

Senator
estimate?
Mr.

O ' C O N N O R . Yes,

add it up before you make your

sir.

Senator COUZENS. N O W , have you covered all that you have to say
in regard to title I, Mr. Comptroller?
Mr. O ' C O N N O R . Yes; I am through with title I.
Senator COUZENS. I would like to ask, before you leave that—
and you may have answered this before, and if you have you may
ignore it. When Mr. Crowley was before the committee, some time
ago, the question was raised as to the authority he asked for his this
bill, as I understand it, to close banks that were improperly conducted
or were not good risks for the Federal Deposit Insurance Corporation;
and I raised some question as to the method that was to be used by
Mr. Crowley for the Federal Deposit Insurance Corporation. Have
you commented on t h a t phase of it in your testimony?
Mr. O ' C O N N O R . N o ; I have not, Senator.
Senator COUZENS. Have you any views in connection with it?
Mr. O ' C O N N O R . Yes, sir. The Federal Reserve Board and the
Comptroller of the Currency, of course, have wide powers with reference to the operation and management of member banks and national
banks. We find ourselves in the Federal Deposit Insurance Corporation without any power a t all; none
Senator COUZENS (interposing). In that connection, is it practicable or does the policy exist of consulting these other agencies
that do have great power over the closing and conduct of the banks?
In other words, what I am trying to get at is that you say the Federal
Deposit Insurance Corporation lacks power.
Mr. O ' C O N N O R . Yes; it has none at all.
Senator COUZENS. N O W what I want to ask you is, if you can ask
the other agencies that do have power.
Mr. O ' C O N N O R . N O ; they have none, either.
Senator COUZENS. They have none?
Mr. O ' C O N N O R . Not over the nonmember banks, at all.
Senator COUZENS. I was speaking of the member banks, as well as
nonmember banks.
Mr. O ' C O N N O R . Whether the Federal Deposit Insurance Corporation can exercise its power?
Senator COUZENS. Yes.
Mr. O ' C O N N O R . Oh, yes; we all three work in harmony, when we
find anything wrong, and also the Reconstruction Finance Corporation, if they have got any interest in it—all three departments sit
down together then, and if it is an insured bank the Federal Deposit
Insurance Corporation try to work out a program for that bank.




134

BANKING ACT OF 1935

Now we are in this position, Senator, with reference to the insured
nonmember banks, as I stated: We have these rather broad powers
over State member banks, and then we find this great number of
banks, 7,500, approximately, of small nonmember State banks insured.
We must pay their losses; we have the responsibility to their depositors
to that extent, but without any direction for that bank. We can
examine them and we can find practices that wrould be condemend
by everyone, I assume, and then not be able to make a suggestion—
we can make a suggestion, but they do not have to do anything with
it at all.
Senator BANKHEAD. Can you withdraw the insurance?
Mr. O'CONNOR. N O ; we cannot, Senator. Now we are asking this
power, that wThen we find that condition in a bank, for the Federal
Deposit Insurance Corporation, that we notify the bank and point
out the things that ought to be corrected in that bank and give the
bank 120 days to do it. At the end of that period the bank has the
right to come before the Board and explain why it has not done it,
or show that it has attempted to do it or made some progress toward
it. Then we ask the power to cancel the insurance on future deposits
in that bank, but we cannot, of course, walk away from the liability
that we have incurred of insuring the deposits that were there on
the day that we cancel the insurance. And we carry that insurance
for a period of 2 years, so the bank thereafter is permitted to go along
and work itself out, if it can. That is all we are asking, and we think
it is fair enough power to ask over them, and we are going to protect
the depositors whom we have insured and whose premium is paid, for
2 years.
Senator BULKLEY. You are talking about what you would do if
you got the power in the law.
Mr. O ' C O N N O R . That is true, Senator.
Senator BULKLEY. Where is that in the bill?
Mr. O'CONNOR. Page 13.
Senator COTJZENS. Before-you go to that, is there any power in
the bill that you refer to for you to take it up with the State bank
commissioner?
Mr. O'CONNOR. Yes, sir.
Senator COUZENS. Where is that?
Mr. O'CONNOR. I will give it to you

(reading):

Any insured bank (except a national member bank or State member bank)
may, upon not less than ninety days' written notice to the Corporation, terminate
its status as an insured bank. Wherever the board of directors shall find that
an insured bank or its directors or trustees have continued unsafe or unsound
practices in conducting the business of such bank or have knowingly or negligently permitted any of its officers or agents to violate repeatedly any provision
of this section or of any regulation made thereunder, or of any law or regulation
made pursuant to law to which the insured bank is subject, the board of directors
shall first give to the Comptroller of the Currency in the case of a national bank
or district bank, to the authority having supervision in case of a State bank, and
also to the Federal Reserve Board in case of a State member bank, a statement
of such violation by the bank for the purpose of securing a correction of such
practices or conditions. Unless such correction shall be made within such period
of time not exceeding one hundred and twenty days as the Comptroller of the
Currency, the State authority, or Federal Reserve Board, as the case may be,
shall require, the board of directors, if it shall determine to proceed further, shall
give to the bank not less than thirty days' written notice of intention to terminate
the status of the bank as an insured bank, fixing a time and place for a hearing
before the board of directors or before a person designated by it to conduct such




BANKING ACT OF 1935

135

hearing, at which evidence may be produced, and upon such evidence the board
of directors shall make written findings which shall be conclusive. Unless the
bank shall appear at the hearing by a duly authorized representative, it shall be
deemed to have consented to the termination of its status as an insured bank.
If the board of directors shall find that any ground specified in such notice has
been established, the board of directors may order that the insured status of the
bank be terminated on a date subsequent to such finding and to the expiration
of the time specified in such notice of intention. The Corporation may publish
notice of such termination and the bank shall give notice of termination to its
depositors, in such manner and at such time as the board of directors may find
necessary and may order for the protection of depositors After termination of the
insured status of any bank under the provisions of this paragraph, the insured
deposits of each depositor in the bank on the date of such termination, less all
subsequent withdrawals, shall continue for a period of two years to be insured
and the bank shall continue to pay to the Corporation assessments as in the case
of an insured bank for such period of two years from such termination, but no
additions to any deposits or any new deposits shall be insured by the Corporation,
and the bank shall not advertise or hold itsell out as having insured deposits
unless in the same connection it shall state with equal prominence that additions
to deposits and new deposits made after the date of such termination, specifying
such date, are not insured. Such bank shall in all other respects be subject to
the duties and obligations of an insured bank for the period of t-n o years from
such termination and in the event of being closed on account of inability to meet
the demands of its depositors within such period of two years, the Corporation
shall have the same powers and rights with respect to such bank as in case of an
insured bank.
I think, Senator, t h a t covers the question.
Senator COUZEXS. N O W is there a provision by which a back t h a t
is insured may withdraw from the insurance?
Mr. O ' C O N N O R . Yes, sir.
Senator COTJZENS. YOU need not read it.
Senator BTTLKLEY. Would not that make it very difficult for a bank

to get any new deposits?
Mr. O ' C O N N O R . I think it would, Senator.
Senator BULKLEY. And would it not very nearly compel the depositors whose insurance was retained, to close their accounts within
2 years?
Mr. O ' C O N N O R . Oh, yes; they would have to close them within
the 2 years if unwilling to continue in an uninsured bank.
Senator BULKLEY. They would have to withdraw all that money,
then?
Mr. O ' C O N N O R . Yes; within 2 years.
Senator BULKLEY. I t would very nearly put an end to the bank,
then?
Mr. O ' C O N N O R . Well, if the bank is in the condition t h a t the
Corporation finds it to be
Senator BULKLEY (interposing). I t ought to be ended?
Mr. O ' C O N N O R . I t ought to be ended; it ought not to be in business
and ought not to take deposits.
Senator B Y R N E S . Let me ask you a question. Succeeding the bank
holiday, in my State, there were opened a number of depositaries.
They accept deposits, b u t make no loans, and I understand t h a t they
are insured in the Federal Deposit Insurance Corporation. Now,
under the provisions of the Bank Act of 1933, if they do not become
members of the Federal Reserve System, what will be the effect upon
those institutions? Will it put them out of business?
Mr. O ' C O N N O R . N o ; the only thing is, they would not have insurance, because the bill, as it now stands, provides that in order to retain




136

BANKING ACT OF

1935

the benefit of Insurance they must become members of the Federal
Reserve System.
Senator BYRNES. What is the provision in the bill reported to the
House?
Mr. O'CONNOR. They struck it out.
Senator BYRNES. Was that the reason that they struck it out, t h a t
they wanted to give such institutions the right to continue operations
and to receive the benefits of the insurance fund?
Mr. O'CONNOR. Well, the House, Senator, made its report on the
Banking Act of 1935
•
Senator BYRNES (interposing). You do not know, then?
Mr. O'CONNOR (continuing). In considerable detail. I do not know
whether they discussed that particular feature of it, or not.
Senator BYRNES. Were such institutions opened in many States
merely for the purpose of receiving deposits?
Mr. O'CONNOR. I think your State is the only one, excepting Wisconsin. They amended the law and permitted the receiving of deposits
a t different stations, but those were branches of banks.
Judge Birdzell, do you know of any other State?
Mr. BIRDZELL. No; I do not think there is any other State, Senator.
South Carolina is the only State, so far as we are aware, where cash
depositaries are set up with a small capital and t h a t function as banks.
When the question of their eligibility for membership in the Federal
Deposit Insurance Corporation temporary fund arose, the Corporation was doubtful as to their eligibility. The doubt, however, was
resolved in favor of their membership. I t seemed to the Corporation
that there was very little reason why such institutions should seek
insurance, in view of the contract rights of the depositors against the
institution, among which is the right to share only in the investments
which the depositary would make from any fund.
Senator BULKLEY. In other words, there was no promise made to
him that he would get his money back at all?
Mr. BIRDZELL. N O .
Senator BYRNES. Was

it the hope on his part that, as a result of
the insurance fund, he would get his money back?
Mr. BIRDZELL. Apparently these operating depositaries thought
they could operate more successfully if they were insured.
Mr. O'CONNOR. I can answer your question now, Senator, with
reference to the House attitude.
Senator BYRNES. I can take it up with you a n d get it later.
Mr. O'CONNOR. Let the record show that the House committee
discussed it on page 3 of the majority report, and also on page 26 of
the report.
Senator BULKLEY. Had you concluded what you were going to say
about the request that you are making under title I?
Mr. O'CONNOR. Yes; Senator.
Mr. BIRDZELL. May I add one word? Our information is that a
number of these cash depositories are intending to convert themselves
into regular State banks.
Senator COUZENS. Are you going on to title I I I now, Mr. Comptroller?
Mr. O'CONNOR. I believe it would be well, for the information of
the committee, in view of the figures that have been given, just to
state the income of the corporation at this time, the Federal Deposit




BANKING ACT OF 1935

137

Insurance Corporation. From our bond investment we have an
annual income of $8,710,761.27. That is a daily income of $23,878.63.
Senator BULKLEY. Are those investments in Government bonds?
Mr. O ' C O N N O R . Yes; and we can only invest in Governments,
under the law, Senator. I am glad you brought that out.
Senator COUZENS. Have j^ou got some other income from the assets
of banks whose deposits you have paid off?
Mr. O ' C O N N O R . Yes. We call it, really, recoveries. We have
already 75 percent in one bank, and 49 percent in another, and 50
percent in another, in 3 of the banks of the total number of banks
that have been closed, 15 banks in all.
Now, I am through with title I, Senator, unless you have some
questions.
Senator BULKLEY. I do not think of anything more now.
Senator COUZENS. Before you start on the other title, may I ask
you this: If you do not want to answer this, you do not need to. I t
appears from the low interest rate and the lack of opportunity for
income in banks generally throughout the country, that they are having difficulty to make any money. Some are just getting by, some are
in the red, and others make a small profit. Is that condition, if it
prevails, going to affect the Federal Deposit Insurance Corporation
materially?
Mr. O ' C O N N O R . Yes; of course, our banks, in order to be sound,
must make profit, and, frankly, I look with considerable optimism to
the future because of some of the benefits that the Banking Act of
1933 gave to the banks, and the most striking one is that by your act
you eliminated the provision with reference to interest on demand
deposits in national banks, and that saved the banks a very large sum
of money.
Senator COUZENS. Have you an estimate of how much?
Mr. O ' C O N N O R . The total amount paid during the past 5 years,
prior to the passage of the Bank Act of 1933 by member banks on
demand deposits was $1,230,242,000, which was an average of
$246,048,045 per annum. That was just for member banks.
Senator COUZENS. Have you estimated what that would have been
in the calendar year 1934 if it had not been prohibited by the Banking
Act of 1933?
Mr. O ' C O N N O R . Well, I would assume, Senator, that it would practically be the same as the average for the 5 years before.
Senator COUZENS. Well, no; because the deposits were much less.
If you have not got it convenient, I would like to have, if you can
compute it, what the interest would hav9 been, or an estimate^ of
what it would have been for the calendar year 1934 had the Banking
Act of 1933 not prohibited the payment of interest.
Mr. O ' C O N N O R . Yes; we can get that.
Average demand deposits in all member banks calendar year
1934
$20, 566, 035, 000
Interest at 1.17 percent on average demand deposits in 1934
240, 623, 000

Senator COUZENS. But, in spite of that, I am still of the impression
t h a t with the investment rates low and the opportunities to lend
money limited, t h a t some of these banks are having, notwithstanding
t h a t elimination of interest, difficulty in getting by. Has that been
your observation at all?




138

BANKING ACT OP 1 9 3 5

Mr. O'CONNOR. Oh, yes, Senator; there is no question about it.
Their earning power has been greatly impaired since 1933.
Senator BULKLEY. Now, as for section 301, t h a t is a new provision
that was not in our omnibus bill last year. W h a t was your experience
that caused you to ask for this change in the law?
Mr. O ' C O N N O B . Well, the particular reason for that, Senator, is
to permit the Reconstruction Finance Corporation not to come within
the provision of a holding company, so that any wholly Governmentowned corporation should be able to vote its stock and not have any
of the inhibitions or viciousness that attach to other holding
companies.
Senator BULKLEY. But the text goes a little farther than that. I t
says, "Any organization which, in the judgment of the Federal Reserve
Board, is not engaged," and so forth. Have you any experience to
base that on?
Mr. O ' C O N N O E . Yes; we have two or three, Senator. Here is one:
A corporation owning and operating large department stores in
several cities in the United States owns the stock of a small member
bank located on the premises of one of its stores, which bank is
operated primarily for the convenience of its customers and employees.
An unincorporated labor union owns a majority of the stock of a
member bank in New York City and a subsidiary organization of the
labor union owns the stock of a member bank located in Chicago.
A corporation organized to hold real and personal property of a
church owns or controls two member banks.
And a charitable foundation established for the purpose of aiding
young men and women in obtaining an education owns the stock of a
member bank.
Those are all illustrations.
Senator BULKLEY. Those are very good illustrations.
Now, there could be no discrimination in favor of those under
the law.
Mr.

O'CONNOR. N O .

Senator BULKLEY. And the change you propose would permit the
Federal Reserve Board to act in each specific case?
Mr.

O'CONNOR. Yes,

sir.

Senator BULKLEY. And each case would have to be acted upon?
Mr. O'CONNOR. Yes, sir; by general regulation.
Senator COUZENS. That is, they would have to make the determination before they could vote?
Mr. O'CONNOR. Yes, sir.
Senator BULKLEY. What

is the significance of these words " a s a
business"?
Mr. O ' C O N N O R . That is which section?
Senator BULKLEY. Line 16, on page 51.
Mr. O ' C O N N O R . Well, that is just to distinguish the real holding
company from the accidental affiliate. Those are not business,
Senator; that is just to make that distinction.
Senator BULKLEY. Section 302 is as it was in the omnibus bill last
year.
Mr. O ' C O N N O R . Yes. Senator, they are all the same in that bill
as the Bulkley bill, except where we have indicated.
Senator BULKLEY. Section 303 seems a little broader than it was
in last year's bill. You have included here, in lines 7, 8, and 9,




BANKING ACT OF 1 9 3 5

139

" o r other financial institutions or private bankers from dealing in,
underwriting, purchasing, and selling investment securities", and so
forth.
Mr. O ' C O N N O R . Section 303 (a) makes it clear that the provisions
of section 21 (a) (1) of the Banking Act of 1933, prohibiting dealers in
securities from engaging in the business of taking deposits, does not
prevent banking institutions from dealing in, underwriting, purchasing, and selling investment securities to the extent expressly
permitted to national banks under the National Banking Act and
does not prevent banking institutions from selling mortgages without
recourse. I t will be observed that national banks are limited in
dealing in and underwriting securities to doing so as to Government
obligations, general obligations of State or political subdivisions,
obligations issued under authority of the Federal Farm Loan Act,
by the Federal Home Loan Board, or the Home Owners' Loan Corporation.
Those should be included.
Senator BTJLKLEY. This proviso, beginning in line 12 is new
matter that was not in last year's bill, permitting banks to sell without
recourse obligations evidencing loans on real estate.
Mr. O ' C O N N O B . This section makes it clear that section 21 (a) (2)
of the Banking Act of 1933 does not require that business institutions
which accept deposits only from their own officers, agents, or employees need submit to examination and publication of reports of
conditions.
Oh, you are still on the other section?
Senator BTJLKLEY. Yes; the proviso beginning in line 12 is new
matter that was not in last year's bill.
Mr. O ' C O N N O B . Yes, Senator. The question has been raised,
Senator, in our office that banks might not have the right to sell
mortgages, and this does not add anything to it, except it clarifies
the fact that it does not interfere with what has been construed to be
their right to do.
Senator BTJLKLEY. In other words, mortgages would not be construed as an investment security?
Mr. O ' C O N N O B . T h a t is correct.
Senator BTJLKLEY. YOU do not consider them an investment
security now?
Mr. O ' C O N N O B . No.
Senator BTJLKLEY. But

you feel that this should be put in to make
it more clear?
Mr. O ' C O N N O R . Yes; that is right.
Senator BTJLKLEY. I t really does not change the effect at all?
Mr.

O ' C O N N O B . N O , sir.

Senator COTJZENS. When a bank sells any of these real-estate securities, do they continue the contingent liability of the mortgagor?
Mr. O ' C O N N O R . No.
Senator BTJLKLEY. NOW,

my recollection is that the amendment
offered on the floor to that effect when we had the omnibus bill up,
it was quite troublesome, and, as I remember, Senator Couzens
opposed to this amendment.
Senator COTJZENS. This amendment?
Senator BTJLKLEY. I t was my idea it was this amendment, or to
effect.



was
and
was
this-

140

BANKING ACT OF 1 9 3 5

Mr. F . G. AWALT (Deputy Comptroller of the Currency). I t was
much broader, Senator.
Senator COUZENS. Can you state what it was?
Mr. AWALT. Well, technically, it might have opened up to the banks
the right, whether they had it then, to deal in mortgage securities,
whereas this amendment confines it to the rights that they may have
under the present law.
Senator BULKLEY. To the rights they may have under the present
law?
Mr. AWALT. Yes; the way it is worded now. This is new. You
see, the objection under the 1933 Banking Act was as to—it was a
criminal provision, and the Attorney General says that a bank t h a t
sells a mortgage security, he has doubts whether or not they violate
the terms of the act, and they may be criminally prosecuted; and this
amendment is intended purely to give them a right to sell a mortgage,
if they have it, without being criminally prosecuted.
Senator BULKLEY. This, as I understand you, is to make clear t h a t
the law means what you think it is, anyhow.
Mr. AWALT. That is it.
Mr. O'CONNOR. That is it, Senator, exactly.
Senator BULKLEY. We will look up that debate and see whether
there is anything further to be inquired about here.
Now, this subsection (b) here raises a considerable question, because
in your memorandum you said that perhaps the whole subsection
which is here proposed to be amended ought to be repealed. D o
you know whether the House proposed, in the bill as reported, to
repeal it?
Mr. O'CONNOR. They struck it out, Senator.
Senator BULKLEY. The House struck out the subsection?
Mr. O'CONNOR. Yes. That is the examination of private banks.
And here is the situation with reference to it——
Senator BYRNES (interposing). You cannot do anything about an
examination, can you?
Mr. O'CONNOR. That is it. The Federal Government has no power
over State banking institutions. You require that the Comptroller
shall examine these private State institutions. And one of the
Members of the House asked me whether I had examined those banks
and institutions, and I said " yes." He said, " W h a t did you do with
the reports?" I said, " I filed them." He said, " I s that all you d i d ? "
I said, "Yes, because Congress told me to examine them."
Senator BULKLEY. Is there no provision for the publication of the
report?
Mr. O'CONNOR. I t might be required.
Senator BUCKLEY. I S it required under existing law?
Mr. O'CONNOR. Yes, as to reports of condition. And we have two
difficulties. First, that they advertise t h a t they are being examined
by the Federal Government, and we have not one bit of power to go
in and correct a bad situation.
Senator BYRNES. They get the benefit of the advertisement that
you are examining them, and you may find practices that you could
correct if you had the power.
Mr. O'CONNOR. That is correct.
Senator BULKLEY. However, that provision was put in the law as
a result of very considerable discussion and debate, and I think t h a t



BANKING ACT OF 1 9 3 5

141

this discussion here ought to be continued with a little larger proportion of our membership present.
Senator B Y R N E S . I think so. I t does seem that if it is to be continued we ought to make some provision for using the report of the
examiner. If, as it now stands, the Comptroller is merely to file it
and it accomplishes no purpose whatever, there is no reason for
continuing it.
Senator BULKLEY. I must say that under the statement the Comptroller makes it does seem somewhat ridiculous, b u t at the time it was
considered to have some importance.
Senator B Y R N E S . Yes; that impresses me. I t was brought to my
attention that the Comptroller did make a report, and nothing was
done about it, and t h a t the private bankers had the benefit of the
advertising that they were examined by the United States Government. If he has no power I should not think he should have the
responsibility.
Senator BULKLEY. If we should want some continuance of the
supervision, would you recommend that there be a specific direction
for publishing the reports, or do you think the whole thing is entirely
impracticable?
Mr. O ' C O N N O R . I think it is, Senator, because the reports mean so
little to the average person who goes into a bank and puts his money
in there. You can publish a report, but readers do not understand it.
I t is so difficult to reach the people who are making these deposits,
and who are dealing with these institutions. We have no power to
close such banks or to compel them to do anything and, just as the
Senator says, they advertise the advantage of being supervised by a
Federal Government institution.
Senator B Y R N E S . And because they are not under a State institution, you cannot turn it over to a State official. There is nothing
you can do but to file it.
Mr. O ' C O N N O R . T h a t is all.
Senator B U L K L E Y . Your memorandum says you do not oppose the
repeal of it. You really advocate the repeal of it, do you not?
Mr. O ' C O N N O R . Yes. I t seems to me, Senator, that we ought Jto
repeal it.
Senator B U L K L E Y (presiding). The committee will take a recess
until Monday morning at 10:30 o'clock.
(Whereupon, at 12:05 p. m., the subcommittee recessed until
Monday, Apr. 29, 1935, at 10:30 a. m.)

1296S8—35—PT 1




10




BANKING ACT OF 1935
TUESDAY, APBIL 30, 1935
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE
ON BANKING AND CURRENCY,

Washington, D. 0.
The subcommittee met, pursuant to adjournment, at 10:30 a. m.,
in room 301, Senate Office Building, Senator Carter Glass presiding.
Present: Senators Glass (chairman of the subcommittee), Bulkley,
Byrnes, and Townsend.
Senator GLASS. Proceed, Mr. Comptroller.
STATEMENT OF J. F. T. O'CONNOR, COMPTROLLER OF THE
CURRENCY—Resumed
Mr. O'CONNOR. Are you going to take up title I I I ?
Senator BULKLEY. I S that what you want to do ?
Mr. O'CONNOR. There is a matter in title I that I would like to
check up.
The Senate bill which is before us, S. 1715, on page 9, section 7,
provides as follows [reading] :
By striking out subsection (a) and inserting in lieu thereof the following:
"(g) The factors to be enumerated in the certificate required under subsection (e) and to be considered by the board of directors under subsection
(f) shall be the following: The financial history and condition of the bank,
the adequacy of its capital structure, its future earnings prospects, the general character of its management, the convenience and needs of the community
to be served by the bank, and whether or not its corporate powers are consistent with the purposes of this section."
I have just read from the Senate bill; and the language that I have
read is practically the rule followed by the Comptroller in chartering national banks.
Senator GLASS. YOU lay stress upon the requirement that the inquiry should be directed to the needs of the community, do you not ?
Mr. O'CONNOR. Yes, Senator; that is one of the particular points
that I would like to emphasize.
Senator GLASS. And you frequently refuse, as I know your predecessors have frequently refused, to charter a national bank in a community where the State banks met apparently all of the requirements of the banking business ?
Mr. O'CONNOR. That is absolutely correct, Senator; and, in addition to that, not long ago a national bank made application for a
branch. All branches of .national banks, under the statute, rrmst
be approved by the Comptroller. We made the usual investigation




143

144

BANKING ACT OF

1935

in this particular community, by our examiners, to determine
whether or not we felt there was need in t h a t community for more
banking facilities, and we found that the State had chartered a
State bank some months before in that particular community. I t s
deposits at the time of our investigation were around $250,000. The
bank was owned locally in that community, and I declined to permit
a national bank to establish a branch in competition with that State
bank because there seemed to be no need for it in that community.
I was rather surprised some weeks later to learn t h a t the State
itself had chartered a branch of a State bank in competition with
its own institution in that community. I wanted to enlarge your
suggestion, Senator Glass, that we also apply the same rule as tobranches.
Senator GLASS. I very distinctly recall the latest instance in m y
own State, when I think Mr. Await was acting Comptroller of the
Currency, or it may have been Mr. Pole, t h a t application was made
for the establishment of a national bank in Lancaster County, Va. r
at Cape Charles City, I think, in the third richest county in the
State; and Mr. Pole, or Mr. Await, as the case might be, declined to.
charter the bank because he held that the two State banks there were
affording ample banking facilities to the community.
Pardon me for interrupting you. You may proceed.
Mr. O'CONNOR. The House bill, H . K. 7617, on page 11, section 7,
provides as follows [reading]:
By striking out subsection (g) and inserting in lieu thereof the following:
"(g) The factors to be enumerated in the certificate required under subsection (e) and to be considered by the board of directors under subsection
(f) shall be the financial condition of the bank and the adequacy of its
capital structure."

Frankly, gentlemen, I regard this as one of the most important
provisions in title I of the suggested bill, and I consider the amendment in the proposal of the House as most dangerous.
Senator GLASS. You mean, in the bill, or in title I of the bill?
Mr. O'CONNOR. Title I of the bill. Let us consider it for a moment,
because of its great importance. If the section as suggested by t h e
House is adopted, rather than the one t h a t is in the Senate bill,
it will mean that every State-chartered institution t h a t applies tothe board for insurance, and which has an adequate capital, will
have to be admitted, because the financial condition of the bank is
not very important, for the reason that practically all banks in the
future will be new banks, and the financial condition of the institution being new would naturally be sound. W h a t will happen ? Over
the past 10 or 11 years 12,000 banks in this country have closed.
With deposit insurance in effect it will be the highest invitation
to those who want to speculate in this country in the establishment
of banks, because the promoters can say to the stockholders, " Your
bank will be insured, so why not invest in this institution? You
cannot be hurt." Secondly, because of the general move in the
different States, as well as by the Federal Government, to eliminate
the double assessment liability.
Senator BTJLKLEY. But you do not guarantee stockholders.
Senator TOWNSEND. He is using the argument that would be madeto prospective investors.




BANKING ACT OF 1 9 3 5

145

Mr. O'CONNOR. I am trying to make this point, Senator: Under
"the old system when a bank was organized there would have been
much greater care on the part of the investor going into the bank
when first he was confronted with a double liability, which has been
Temoved by Congress from new banks, and also some of the States
•are following the suggestion of Congress in this respect, and,
secondly, to say to the man investing, " This bank will not close
because it will be insured." So a man is more likely to invest his
money as a stockholder because of the fact that the bank will be
insured.
Senator BTTLKXEY. I do not see how that protects the stockholders. I t certainly protects the depositors.
Mr. O'CONNOR. If you prevent runs on banks it will protect the
stockholders.
Senator BULKLEY. The theory is that there will not be a run, and
therefore the bank would be protected? There is something in that,
of course.
Mr. O'CONNOR. Yes; that is it. I t is simply an invitation and an
encouragement in every State in the Union, because all that they
would have to do, gentlemen, would be to secure a State charter
and then come down here and be insured. If we had 11,000 or 12,000
failures in the past 10 years, I do not know what the situation will
"be in the next 10 or 12 years if that provision is permitted to
become law.
The Senate bill I believe is very sound. The Senate bill provides
as follows [reading] :
The financial history and condition of the bank—

Of course, that only applies to the remaining banks that are not
members of the fund—
the adequacy of its capital structure, its future earnings prospects—
And we make a careful investigation of that in chartering a
national bank—
the general character of its management—
And that is very important. The Comptroller's office cooperates
with the Federal Reserve Board in a very careful check-up of the
character and kind of men that are coming into the new banks. B u t
particularly this section in the Senate bill:
the convenience and needs of the communtiy to be served by the bank.
To prevent, if we can, over-banking this country. I consider it
of such importance, gentlemen, that I wanted particularly to call
your attention to it this morning; and I thank the Senator for giving
me an opportunity to point it out.
Senator GLASS. Mr. Comptroller, conceding that that is very important, do you think it more important than the provision in the
•existing law requiring all insured banks after July 1,1937, to become
members of the Federal Reserve System and comply with the law
that applies to member banks and which appears to have been
stricken out by the House bill? Do you think that is of any less
importance? W h a t do you think would happen to the insurance
fund if that requirement should be expunged from the law? You
.are a member of the Insurance Deposit Board, are you not?




BANKING ACT OF 1 9 3 5

146

Mr. O'CONNOR. Yes, Senator; I am. My view is this. The ultimate aim of the legislation of 1933 was to establish one system in
this country. The framers of the act had no objection to postponing the date of qualification to a future date when recovery was
reached in the country, as well as giving an opportunity to banks
to qualify for membership in the Federal Reserve System. That is
a consummation devoutly to be wished. We cannot be unfair to these
banks, and we must permit a reasonable time to elapse for the banks
to be able to so rearrange their internal affairs, their capital structure, if they can, so as to qualify for membership in the Federal
Reserve System. I believe we have made a step toward that, Senator,
in title I , if it is adoped, permitting the Federal Insurance Corporation to purchase the assets of going banks, so that we can
create mergers or bring about mergers all over the country, getting
these banks in shape to qualify for membership in the Federal
Reserve System. I think that was a wise provision of Congress,
because I believe it would have been manifestly unfair on the part
of Congress with respect to small banks to practically sign their
death warrant because they could not qualify for membership in
the Federal Reserve System; and in view of that, Congress wisely
provided that it would give them an opportunity, a certain length
of time in which to qualify for membership. I t is the policy of the
Federal Government as expressed in t h a t law that at some future
date all banks in the United States must become members of the Federal Reserve System.
Senator GLASS. A S a matter of fact, in your capital fund there is
$150,000,000 contributed by the Federal Government and also a
fund contributed from the surplus funds of the Federal Reserve
banks. Is there any reason why the Federal Reserve banks should
contribute $150,000,000 toward insuring deposits of nonmember
banks which refuse, after a period of 4 years, to become members
of the Federal Reserve System?
Mr. O'CONNOR. My understanding is that the banks that are members of the insurance fund will all pay their proportionate share of
the levy that is made by the Board.
Senator GLASS. But nonmember banks do not pay any part of the
$150,000,000 taken from the surplus of the Reserve banks, do they?
Mr. O'CONNOR. No; but that is in lieu of their assessment, Senator.
Is not that in lieu of their first assessment?
Senator TOWNSEND. YOU mean out of the $150,000,000?
Mr.

O'CONNOR.

Yes.

Senator TOWNSEND. I did not understand that.
Senator BULKLET. They have to pay their assessment besides that,
do they not?
Mr. O'CONNOR. But that was not out of the banks. That was
taken out of the surplus of the Federal Reserve, was it not ?
Senator GLASS. That is what I am saying. I t was taken out of
the surplus of the Federal Reserve, and it was put in the surplus of
the Federal Reserve by member banks.
Mr. O'CONNOR. That is true.
Senator GLASS. That is what I am talking about.
Mr. O'CONNOR. I suggested some time ago that t h a t be repaid.




BANKING ACT OP 1 9 3 5

147

Senator GLASS. I do not think it ought to be repaid. I do not
think the $150,000,000 taken out of the Treasury, which never ought
to have been in the Treasury, mulcted by law—there is such a thing
as legal robbery, you know—ought to be repaid.
Mr. O'CONNOR. There is a very simple way to do it.
Senator GLASS. I just wanted to know what your opinion was of
the proposition to relieve these banks, because I very distinctly
recall—and I do not disclose any secret in saying so—that the President of the United States and the then Secretary of the Treasury,
Mr. Woodin, brought acquiescence in the insurance provision of the
bill only upon the ground that it would seem to bring about in what
most people regarded as a constitutional way an approximately
unified banking system.
Mr. O'CONNOR. The Federal Reserve System has been repaid that
money. The money that they put in has been repaid them by the
Treasury. The Treasury now owns the stock
Senator GLASS. Owns what stock?
Mr. O'CONNOR. The money that the Federal Reserve Board put in.
Senator GLASS. The Federal Reserve Board has not been repaid.
Mr. O'CONNOR. The Treasury purchased that stock.
Senator GLASS. The Treasury put up $150,000,000 of its own.
Mr. O'CONNOR. And in addition to that it purchased the stock of
the Federal Reserve banks.
Senator GLASS. They took $150,000,000 of the surplus of the Federal Reserve banks.
Mr. O'CONNOR. And they bought that stock arid repaid it.
Senator BTTLKLEY. I did not know that. By what authority was
it repaid ?
Senator GLASS. I t never was intended to be repaid.
Senator BULKLEY. But the Comptroller says it was. How was the
authority given to repay that?
Mr. O'CONNOR. They bought that stock.
Senator BULKLEY. Out of what?
Mr. O'CONNOR. Treasury funds.
Senator BULKLEY. Under what authorization? Was that some of
the relief money ?
Mr. O'CONNOR. N o ; that is not relief money.
Mr. WOOD. I understand that under the industrial-loan bill last
year it was provided that the Treasury would make an advance to
the Federal Reserve banks in an amount equal to the amount that
they had subscribed for stock in the Federal Deposit Insurance Corporation.
Senator GLASS. T h a t was for a different purpose entirely.
Senator BULKLEY. I t is very different from repurchasing the stock,
too. If they made an advance of the same amount, it is only the
amount that happens to be the same. I t is not a repurchase of the
stock.
Senator GLASS. I t was to make direct loans to industry.
Senator BULKLEY. I t does not constitute a purchase of the stock
at all, as I understand it.
Mr. O'CONNOR. Let us read the section
Senator GLASS. I t was to make a contribution for direct loans to
industry.




148

BANKING ACT OF 1935

Mr. O'CONNOR. T h a t is right.
Mr. BIRDZELL. The capital status of the Corporation has not been
affected at all. We have $150,000,000 subscription; we have $139,000,000, in round numbers, from the surplus of the Federal Reserve
banks for which stock has been issued, and it has not been altered a
particle.
Senator GLASS. That was made the basis of the contribution of the
Government to industry.
Senator BTJLKLET. Was it not an advancement for another purpose than repayment of this amount?
Mr. WOOD. Yes. Our Corporation has not repaid any of that.
Mr. O'CONNOR. May I read the section? This is document no.
417, relating to direct loans for Federal Eeserve banks [reading] :
In order to enable the Federal Reserve banks to make loans, discounts, advances, purchases, and commitments provided for in this section, the Secretary
of the Treasury, upon the date this section takes effect, is authorized, under
such rules and regulations as he shall prescribe, to pay each Federal Reserve
bank not to exceed such portion of the sum of $139,299,557 as may be represented by the par value of the holdings of each Federal Reserve bank, all Federal Deposit Insurance Corporation stock upon the execution by each Federal
Reserve bank of its agreement to be endorsed on the certificate of such stock,
to hold such stock unencumbered and to pay to the United States all dividends,
all payments on liquidation, and all other proceeds of such stock for which dividend payments and proceeds the United States shall be secured by such stock
itself up to the total amount paid to each Federal Reserve bank by the Secretary of the Treasury under this section. Each Federal Reserve bank shall agree
that in the event such dividend payments and other proceeds in any calendar
3rear do not aggregate 2 percent of the total payment made by the Secretary of
the Treasury under this section, it will pay to the United States in such year
such further amount, if any, up to 2 percent of the said total payment as
thereby covered by the net earnings of the bank for that year derived from
the use of the sum so paid by the Secretary of the Treasury, and that for such
amount so due the United States shall have a first claim against such earnings,
and, further, that it will continue such payments until final liquidation of said
stock by the Federal Deposit Insurance Corporation. The sum so paid to each
Federal Reserve bank by the Secretary of the Treasury shall become a part of
the surplus fund of such Federal Reserve bank within the meaning of this section. All amounts required to be expended by the Secretary of the Treasury in
order to carry out the provisions of this section shall be paid out of the miscellaneous receipts of the Treasury created by the increment resulting from the
reduction of the weight of the gold dollar under the President's proclamation
of January 31, 1934; and there is hereby appropriated out of such receipts such
sum as shall be required for such purposes.
T h a t is what I had in mind.
Senator GLASS. We are entirely familiar with that. T h a t was
simply the basis for an additional contribution by the Treasury.
Senator TOWNSEND. H a s the Treasury paid the Federal Eeserve
banks this money?
Mr. O'CONNOR. My recollection is, Senator Townsend, t h a t they
have. Whether it has been fully paid or not I do not know. I can
look it up and let you know.
Senator TOWNSEND. Your first assertion, then, was correct?
Mr. O'CONNOR. That is what I had in mind.
Senator BTJLKLET. I t is rather a peculiar transaction. I t looks
different to me, however, from a purchase of the stock.
Senator TOWNSEND. They have received the money from the
Treasury.
Senator BTJLKLET. Yes; but not by way of purchase of the stock.




BANKING ACT OF 1 9 3 5

149

Senator TOWNSEND. I t may be or may not be a purchase.
Senator BULKLEY. I t is a most peculiar transaction.
Senator TOWNSEND. I t certainly is.
Senator BYRNES. I think we should ask the Comptroller if he
wants, after looking it u p , to make a statement in the record as to
what is the fact.
Senator BTJLKXEY. T h a t would be very satisfactory; but I do not
think it is very pertinent to what is before us.
Did you have something else to say ?
Mr. O'CONNOR. Not on that section, Senator.
Senator BTJI/KXEY. D O you want to go on with title I I I now?
Mr. O'CONNOR. Yes, senator. Section 304, page 53 of the bill, was
where we left off.
Senator BTTLKLEY. T h a t provides for eliminating double liability
with respect to shares issued prior to June 17, 1933, by national
banking associations. Have you considered whether we could in
fairness to creditors of banks eliminate the liability?
Mr. O'CONNOR. I have given that rather careful consideration,
Senator, and in my opinion you could not constitutionally destroy
the rights that exist now between the debtors and creditors of banks.
I n other words, when a depositor places his money in a bank at the
present time, with double liability on the stock, that becomes a part
of his contract with the bank.
Senator BTJLKLEY. H e is presumed to rely on only the security
that the law gives?
Mr. O'CONNOR. That is correct. That is very well stated. Now,
therefore, inasmuch as Congress has provided that as to new charters the double liability is eliminated, it would seem only fair to
make provision at a convenient time in the future for the elimination
of double liability on existing banks, and particularly because at the
present time we have national banks with two kinds of stock, stock
that has a double liability and new stock issued by the same bank
that does not have a double liability.
Senator BTJLKLEY. I can see the confusion of it and the desirability of getting it ironed out, but I am thinking about the question
of wiping out an obligation that actually exists in favor of existing
creditors.
Mr. O'CONNOR. We do not go that far, Senator, because we provide here that this double liability shall be eliminated on July 1,
1937, and we feel that if the law is passed now with presumptive
notice to all creditors that within that time they will all have had
notice of the passage of the act, it will therefore not be subject to
the constitutional objection. That is my argument on it. I believe
that there is not anything more distressing than to call for stock
assessments after a bank has closed, because usually it is the stockholders that have suffered greatly by the closing of the bank, and
secondly, it is usually in a period when they are less able to respond
to double liability, and the further fact that we have collected approximately 49 percent of the stock liability. I have suggested t o
this committee and to Congress that we should not weaken the financial structure of our banks too greatly. Just as soon as you take
away this double liability we must concede that we have greatly
weakened the structure of our national banks. So therefore I have




150

BANKING ACT OF 193 5

suggested that the national banks shall be required to set aside out
of their profits one-tenth each year until their surplus equals their
capital. I n other words, it will put into the bank this additional
sum, rather than to attempt to collect afterward.
Senator BTJLKLEY. That provision about adding surplus is in section 314, is it not?
Mr. O'CONNOR. Yes, sir. The committee on that basis will be
interested to know that in national banks we have a capital structure as of December 31, 1934, of $1,786,409,000.
Senator TOWNSEND. D O you mind an interruption there?
Mr. O'CONNOR. Certainly not, Senator.
Senator TOWNSEND. What percentage of the double liability assessment has been collected?
Mr. O'CONNOR. About 49 percent. The surplus in our national
banks as of December 31 was $837,887,000, or, roughly, nearly onehalf. Undivided profits amounted to $261,491,000. Of course, some
banks have tremendous reserves and surplus. I have one bank in
mind that has a capital of a million and a half and a surplus of 70
millions, and undivided profits of about a million and a half. I am
just illustrating the great differences and gradations of banks, because you can hardly think off-hand of a bank that has a million
and a half capital with 70 millions surplus.
May I further state, with reference to the constitutional objection
that you are interested in, Senator Bulkley, that the House discussed
that feature of it, and on page 60 of the House bill they inserted
this provision to which we had no objection [reading] :
SHO. 304. Section 22 of the Banking Act of 1933, as amended, is amended
by adding at the end thereof the following sentence: " Such additional liability
shall cease on July 1, 1937, with respect to all shares issued by any association which shall be transacting the business of banking on July 1, 1937:
Provided, That not less than six months prior to such date, such association
shall have caused notice of such prospective termination of liability to be
published in a newspaper published in the city, town, or county in which such
association is located, and if no newspaper is published in such city, town, or
county, then in a newspaper of general circulation therein. If the association
fail to give such notice as and when above provided, a termination of such
additional liability may thereafter be accomplished as of the date six months
subsequent to publication, in the manner above provided."

Senator BYRNES. Let me ask you a question about that. I f a
bank becomes insolvent under the existing law, the depositor has the
right to participate in any amounts that may be recovered from stock
liability; that is right, is it not?
Mr. O'CONNOR. That is right.
Senator BYRNES. Under the insurance fund we have attempted to
take care of that, so that if a bank becomes insolvent the depositors
will receive payment from the insurance fund?
Senator TOWNSEND. U p to $5,000.
Senator BYRNES. U p to $5,000. Then what you have in mind is
that while this insurance goes to the depositors, there shall be this
additional fund added to surplus in order to protect depositors over
$5,000, because the depositor who has no more than $5,000 is assured
of payment out of the fund?
Mr. O'CONNOR. Y O U just carry that one step further. I t applies
to the $5,000, too, because you have to keep in mind the fact the
Federal Deposit Insurance




BANKING ACT OF 1 9 3 5

151

Senator BYRNES. I t is subrogated to the rights of the depositors
against the stockholders?
Mr.

O'CONNOR.

Yes.

Senator BYRNES. Suppose you repealed it as to stockholders' liability, then there is no subrogation of the insurance fund. The depositor will have a remedy up to $5,000 ?
Mr. O'CONNOR. That is correct.'
Senator BYRNES. W h a t you are seeking to do, then, is to protect
the depositors whose deposits are in excess of $5,000, by adding to
the surplus and thereby improving the capital structure. Is that it ?
Senator TOWNSEND. If you repeal the law you increase the hazard
of the F . D. I . C , of course.
Senator BYRNES. If the Senator's statement is correct, the F . D . I. C.
would be in a better situation, because the structure of the bank would
be improved.
Mr. O'CONNOR. That is exactly correct, Senator.
Senator BULKLEY. Have you finished with section 304, Mr.
O'Connor?
Mr. O'CONNOR. Yes, sir.
Senator BULKLEY. Section

305 amends the Banking Act of 1933 in
a very peculiar way by amending an amendatory clause. What is
the idea of going around the bush in that way ?
Mr. AWALT. I t is just a simple way to do it.
Senator BULKLEY. D O you call that a simple way ?
Mr. AWALT. Much simpler than the other way, Senator.
Mr. O'CONNOR. I suppose that sometimes the longest way round is
the shortest way home. They have advised me that this is the
simplest way to accomplish it.
Mr. AWALT. I t is purely a question of draftsmanship.
Senator BULKLEY. I think the merit of the section is very easy to
understand.
As to section 306, Mr. O'Connor, do you wish to give a little more
explanation of that than is contained in the statement ?
Mr. O'CONNOR. Yes, Senator. This is recommended by the Federal Reserve Board and also by myself. The burden upon the Board
of investigating and examining each individual permit—thousands
of them—has become so great that it is practically impossible for
the Board to properly carry it out. but under the present law it must
be done individually. The Board would like the authority to prescribe general regulations and then to be able to grant permits, if
they come within those general regulations. We feel that this amendment will accomplish that.
Senator BULKLEY. Can you state just what happens under the existing law and how it would be changed by this amendment ?
Mr. O'CONNOR. A t the present time we have a complete summary
of the relationship between the officers, directors, and employees of
the banks and the security companies, and then each individual name
comes up and he is investigated; whereas, if we could prescribe general regulations, general questions to each one of these individuals, as
soon as it was looked over by one of the staff, he could see whether
there was any possible conflict with the provisions of the act or the
intent of Congress, and we would just pass them instead of going
into each one individually. The Board would not have to go into




152

BANKING ACT OF 1 9 3 5

each case individually. We would just pass them because they h a d
complied.
Senator BULKLEY. Are there many such cases to be passed on ?
Mr. O'CONNOR. Oh, a great many, Senator.
Senator BULKLEY. H O W does it run in figures ?
Mr. O'CONNOR. I have not the figures so much in mind as I have
a stack of instruments in front of us on the table in the board room.
Senator BULKLEY. And each one at present has to have a separate
resolution of the Board ?
Mr. O'CONNOR. Yes.
Senator BULKLEY. And

there are so many that the Board cannot
physically consider them ?
Mr. O'CONNOR. I t is very difficult to do it. I t is practically an impossible burden on the Board.
Senator BULKLEY. This section, as I understand it, does another
very important thing. Do you want to discuss that?
Mr. O'CONNOR. Yes. The section would revise section 32 of the
Banking Act of 1933, w7hich prohibits interlocking relations between,
member banks and securities companies, so as to extend the provisions
thereof to employees as well as officers and directors, and so as to include individuals engaged in the securities business as well as officers,
directors, and managers of organizations connected with such business. The description of this type of business can be revised so as tomeet the other provisions of the Banking Act of 1933. The prohibition against correspondent relationships between member banks and
securities companies would be eliminated. Whereas the existing law
authorizes the Federal Eeserve Board to make exceptions by granting permits in individual cases, the revised section would authorize
the Board to make exceptions only by general regulation b dealing
with limited classes of cases, when in the judgment of the Board
such relationship would not unduly influence the investment policies
of such member banks or the advice they give their customers regarding investments.
Senator BULKLEY. YOU are reading from the House report?
Mr. O'CONNOR. Yes, sir; on the Banking Act of 1935, page 17.
Senator BULKLEY. I do not see that there is anything in this section now to prohibit correspondent bank relationships at all. Do you
not simply eliminate that prohibition altogether ?
Mr. O'CONNOR. That is right.
Senator BULKLEY. I t is not a question, then, of licensing under
general regulations ?
Mr. O'CONNOR. Not that part of it.
Senator BULKLEY. I t is simply pitched out ?
Mr. O'CONNOR. That part goes out.
Senator BULKLEY. What was your thought in that ?
Mr. O'CONNOR. I t is the judgment of the Board, Senator, that
there is no abuse there; or, if there was any abuse, the attention of
Congress or the Board had—
Senator BULKLEY. YOU think that that was just an ill-advised provision of the law in the first place, do you ?
Mr. O'CONNOR. Well, from the way it worked out practically, that
was the result. I do not know that it was ill-advised, but that is theway it worked out.




BANKING ACT OF

1935

153

Senator BULKLEY. Let us go on with section 307.
Mr. O'CONNOR. Section 307 is largely the same as was in the bill,
"Senator, a year ago, with some additions. I t makes it clear that section 16 of the Banking Act of 1933 was not intended to prohibit
national banks or member banks from buying or selling stock solely
for the account of their customers and as accommodation thereto and
not for their own account. I t is extremely important, particularly in
communities remote from financial centers, and since there is involved
no investment by the bank of its own funds, no objection can be seen
thereto. The amendment further limits national banks in purchasing investment securities for their own account to the purchase of
same in an amount as to any one issue limited to 10 percent of the
bank's unimpaired capital and surplus. The present law permits such
investment in any one issue to an amount equal to 15 percent of the
unimpaired capital and 25 percent of the surplus, except where the
total issue does not exceed $100,000 and does not exceed 50 percent of
the capital of the association.
Senator B U L K L E T . I notice on page 54 you suggest striking out the
word " investment" in the phrase " investment securities." Is there
any significance in that ?
Mr. O'CONNOR. Customers might want to buy something besides
investment securities, and they would be prohibited from buying even
for their customers securities other than investment securities.
Senator BULKLEY. I thought there was a prohibition against buying investment securities. I see no objection to eliminating the word.
Senator GLASS. There is a distinction between securities and investment securities.
Mr. O'CONNOR. Yes; a very wide distinction.
Senator GLASS. A S a matter of fact, most of the things that are
gambled on on the stock exchange are securities and not investment
securities.
Senator BULKLEY. However, if you do eliminate it there, you
should also eliminate it at the top of page 55, should you not ?
Mr. AWALT. No, sir; because that is where the bank is buying
for its own account.
Senator B U L K L E T . T h a t was intended to mean a different thing
there, was it?
Mr. AWALT. Yes, sir.
Mr. O'CONNOR. Senator

Bulkley, at the end of section 307, which
we are discussing, we are suggesting adding to the end of the sentence the words "except that this limitation shall not require any
association to dispose of any securities lawfully held by it on the
date of the enactment of the Banking Act of 1935."
I n other words, we do not want them to dump their securities on
the market.
Senator BULKLEY. That is quite correct; and you have improved
that sentence by inserting that proviso. That is a very good technical correction. But it seems to me that the sentence is still in
some difficulty, because it says—
But in no event shall the total amount of the investment securities of any
one obligor or maker, purchased after this section, as amended, takes effect
and held by the association for its own account, exceed at any time 10 percent
of its capital stock—
And so forth.




154

BANKING ACT OF 1 9 3 5

Does that word " its " refer to the association ?
Mr.

O'CONNOR. Yes,

sir.

Senator BULKXEY. Did we not have some percentage of the proportion of the obligation
Mr. O'CONNOR. Except where the total issued does not exceed
$100,000.
Senator BULKXEY. Where are you reading from now?
Mr. O'CONNOR. The present law.
Senator BULKXEY. That remains unchanged?
Mr. O'CONNOR. NO.
Senator BULKXEY. YOU

are sure that this does not have the effect
of striking that out?
Mr. O'CONNOR. I will check it in a second. T h a t is the present
law, Senator. The present law provides for an amount equal to 15
percent of the unimpaired capital of the association, 25 percent of its
surplus except where the total issued does not exceed $100,000 and
does not exceed 50 percent of the capital of the association. T h a t
is in the present law.
Senator BULKXEY. I S that in section 5136?
Mr.

O'CONNOR. I t is cut

out.

Senator BULKXEY. I still think you are taking t h a t out.
Mr. O'CONNOR. I t is the present law that we are eliminating.
Senator BULKXEY. YOU just said you did not intend to eliminate it.
Mr. O'CONNOR. I meant, we are eliminating that section of it in
view of the suggestion we make here as to the limitation of investments.
Mr. AWALT. We are tightening up on the law. Instead of leaving
it 15 to 25 percent, as it was before, we are tightening it down to
10 percent of the capital and surplus.
Senator BULKXEY. And in view of that, you think you do not
need any limitation with respect to what proportion it may be of
the obligation of the obligor?
Mr. AWALT. NO ; we do not need that.
Senator BULKXEY. So that you are intending to eliminate that
restriction ?
Mr.

AWALT. Yes,

sir.

Senator BULKXEY. What is the next?
Mr. O'CONNOR. Section 307 (b). This section restates in clearer
form the existing prohibition against national banks purchasing
stock for their own account.
Senator GLASS. W h a t do you do with that ?
Mr. O'CONNOR. We just make it clear, Senator. I t is a question
of rewording it.
Senator GLASS. Sometimes people reword a thing and emasculate
the meaning of it.
Senator BULKLEY. I S there any significance in using the word
"hereinafter" instead of " h e r e i n " ? The word " h e r e i n a f t e r " appears in the existing law, but in the bill that we proposed last year
we changed it to " herein." My recollection is t h a t it was for some
good purpose, but I cannot remember now what it was.
Mr. O'CONNOR. We see no objection to it at all. I do not recall
the purpose either, but that will be satisfactory.




BANKING ACT OF

1935

155

Senator BULKLEY. The only change that you propose in the existing law is the insertion of these words " for its own account" in
lines 11 and 12? Is that right?
Mr. O'CONNOR. I have not the section before me, Senator, but
it is very easy to check it. I t is only one sentence. Yes; " for its
own account.
Senator GLASS. That is what it was intended to mean?
Mr.

O'CONNOR. Yes,

sir.

Senator BTJLKLEY. I think that is a clarification of the law. I
think that is good. W h a t is the next one ?
Mr. O'CONNOR. Section 308, Senator. This is a new section which
was not in your bill last year. I t enacts into law present requirements of the Comptroller's office as a matter of policy that newly
organized national banks have a paid-in surplus equal to 20 percent
of capital before being authorized to do business, which requirements
may be waived where necessary in connection with a State bank converting into a national bank. Whenever we charter a national bank
we require not only the capital that is required under the statute,
because of the population, and so forth, of a city—and as you know,
it varies—but we also require a 20-percent surplus which we have no
right to require. We are just asking for that authorization in the
statute because we think it ought to be there. For the first 6 months
t h a t a bank operates it has got rent, salaries, and expenses with no
earnings, practically; and we feel that there ought to be a surplus
in there so that the capital remains unimpaired. We are asking
Congress to affirm the policy that we have adopted for many years
in the Comptroller's office, which we think is sound.
Senator BULKLEY. Have you made no exceptions to it ?
Mr. O'CONNOR. No, sir.
Senator TOWNSEND. W h a t

is your reason for exempting that requirement in converted State banks ?
Mr. O'CONNOR. Because if the State bank has a sound capital, Senator, and it is in good shape otherwise, and it is an operating bank
and it can be determined, the Comptroller can look into it and see
whether or not it should be permitted to convert. Leave that to the
Comptroller, but do not require him, in addition to the capital which
might be far in excess of their actual needs, if their investments are
in good shape, to say, " You must have 20 percent also."
Senator BULKLEY. Section 309 ?
Mr. O'CONNOR. T h a t eliminates any possibility of section 18 of the
Banking Act of 1933 being construed as preventing corporations
other than a bank from conditioning transfer of their shares on the
simultaneous transfer of shares of bank stock, but preserving the
unimpeded free and unconditional transfer of bank stock.
Senator BTJLKLEY. I wish you would explain that. I t seems to
me that we prohibit a thing and then say that if you want to do it
backward you can go ahead and do it.
Mr. O'CONNOR. The Glass report on the Banking Act of 1933, page
16, section 18, provides for separating the certificates representing
ownership in national banks and ownership in the affiliates, other
than member banks or existing corporations engaged solely in holding the bank premises of the affiliated national bank, so that in the
future they will not be written upon a single certificate of ownership.




156

BANKING ACT OF

1935

This corresponds to the provisions contained in section 5, which is
applicable to State member banks.
Mr. AWALT. The question arose, due to the language of the section,
whether or not it went further than that. But what we are trying to
do is to bring it back just to accomplish this particular thing.
As I understand it, what this report of the Senator Glass
Committee was trying to do was to hit, for instance, the National City Bank and the National City Co., where the stock of the
company was trusteed and was evidenced on the back of the National
City Bank certificate. We have interpreted that section to mean
exactly that—that you cannot have that on the back of the certificate
of any sort of a corporation; but some people claim it might go further than that, so that where you have an irrevocable trust which is
evidenced in some cases by companies t h a t are not knocked out under
the affiliate section that company would have to be dissolved in addition to having the name taken off of the certificate. We had one
case in Chicago something like that. Have I made it clear ?
Senator BULKLEY. No; I really do not understand it.
Mr. O'CONNOR. Let Mr. McGrath t r y it.
Mr. MCGRATH. Some of them have construed this section as being
another provision requiring divorcement of an affiliate. I n section
20 of the Banking Act of 1933 it is provided that certain types of
affiliates are to be divorced from a bank. T h a t is the divorcement
section. This section is thought to be limited, as Mr. Await said, to
taking the provisions off the stock certificates when full compliance
is had by taking them off; but some say that since it provides that
no stock of another corporation can be conditioned on the transfer
of bank stock, the mere taking it off of the certificate is insufficient.
Senator BULKLEY. That is what I would think, myself.
Mr. MCGRATH. That is all right if it is an objectionable type of
affiliate, but we have a case in Chicago where the bank has transferred charged off real estate and other assets to a corporation, the
stock of which corporation is trusteed for the benefit of the shareholders of the bank. I t is very desirable that the bank should hold
that close control over the charged-off real estate. I f you are going
to require them to break up that trust agreement, then you would
permit a bank shareholder gradually to sell his interest in t h a t corporation, and in the course of time we would not have any relationship whatsoever between the bank and that affiliated corporation.
But it is a desirable relationship to maintain.
We had another case in the South where a national bank had an
interest in State banks in this way. The stock of the State banks
was trusteed for the benefit of the shareholders of the national bank.
They want to continue that relationship because there is a branch
banking law being passed in that State, and they want to convert
those State banks into branches of the national bank.
Senator BTTLKLEY. What is the significance of trusteeing it for
the benefit of the shareholders ? Does that simply take it out from
under the rights of creditors of the bank ?
Mr. MCGRATH. Well, in a sense it does.
Senator BULKLEY. What is the advantage of t h a t relationship?
W h y should it not simply be owned by the bank ?




BANKING ACT OF

1935

157

Mr. MCGKATH. The bank cannot own the stock itself. I t is prohibited from owning the stock. A national bank can only own stock
for a debt previously contracted.
Senator BULKUET. I thought you said this was for a debt previously contracted.
Mr. M O G E A T H . N O ; this would be a case where a corporation has
been organized to take over and liquidate bad assets of the bank,
to get them out of the bank entirely.
Senator BTTLKLEY. That relates to debts previously contracted.
Mr. MCGKATH. N o ; because that corporation does not owe the
bank any debt.
Senator BTTLKLEY. B u t the transaction relates to dealing with
debts that are owed to the bank.
Mr. MCGKATH. T h a t is t r u e ; but it is not a preexisting debt. I t
is a debt that it created simultaneously with the issuance of stock.
I n other words, the stock is issued in payment for the assets; and
that would be the same thing as going out and buying stock as an
initial transaction.
Senator BTJLKLEY. The bank in that case does not pay anything
for it, does it?
Mr. MCGKATH. I t transfers the assets to the other corporation.
Senator BULKLEY. Does it not simply take it as the measure of
liquidating a debt which was previously owed to the bank?
Mr. MCGKATH. A debt of another party to the bank.
Senator BUCKLEY. A party which is purely fictitious. I t is set up
for the purpose of liquidation, is it not?
Mr. MCGKATH. T h a t is true; but the transaction is with the
bank
Senator BTIX.KM:Y. I cannot see any advantage to the voluntary
creation of a needless legal complication. Unless the purpose of it
is to take that asset out so that it does not have to respond to the
creditors of the bank, I do not see that it does anything. I do not
think that is a good purpose. I should think that was a bad purpose.
Mr. MCGKATH. These corporations are already set up. I t is not
a case of letting them do it in the future. You have got them now
and you have got them under this irrevocable trust agreement that
you cannot break u p ; and they feel that they are in a position
possibly of violating the law.
Senator TOWNSEND. Y O U are simply making this amendment to
cure a situation that now exists?
Mr. MCGKATH. T h a t is it, and to express directly in the law what
our purpose is and what the Federal Reserve Board has been doing.
These companies come to us and say, " W h a t must we do to comply ? " We say, " Take it off your stock certificates." We cannot
order them to break up the arrangement, because they physically
cannot do it.
Senator GLASS. Let me ask you this question, please. Have you
undertaken in title I I I to clarify your definition of " affiliates" ?
F o r example, this case was brought to my attention. A newspaper
in Harrisburg, Pa., three of whose stockholders or directors were on
the board of a local bank, was declared a bank affiliate. That just
seems idiotic, to me.
129688—35—PT 1——11




158

BANKING ACT OF 193 5

Senator BULKLEY. There is a provision in the bill relating to
that.
Senator GLASS. I t ought to be clarified. I t means banking affiliates, and it does not mean that a newspaper is an affiliate of a bank
and that that newspaper is required, under the law, to make a
complete statement of all of its business, its circulation, its advertising, its contracts and everything of that sort. No such thing was
ever intended.
Mr. O'CONNOR. We have a church in the same position.
Senator GLASS. Well, it ought to be clarified.
Mr. O'CONNOR. Section 324, page 67, provides [reading] :
Whenever member banks are required to obtain reports from affiliates, or
whenever affiliates of members banks are required to submit to examination,
the Federal Keserve Board or the Comptroller of the Currency, as the case
may be, may waive such requirements with respect to any such report or
examination of any affiliate if in the judgment of the said Board or Comptroller, respectively, such report or examination is not necessary to disclose
fully the relations between such affiliate and such bank and the effect thereof
upon the affairs of such bank.

That would clear it, Senator.
Mr. AWALT. That gives us discretion.
Senator GLASS. The idea of calling a newspaper an affiliate of a
bank is absurd.
Mr. O'CONNOR. H O W about a church?
Senator GLASS. Or a church, either.
I t is 12 o'clock. The subcommittee will adjourn until tomorrow
morning at 10:30.
(Whereupon, at 12 m., the subcommittee adjourned until tomorrow, Wednesday, May 1, 1935, at 10: 30 a. m.)




BANKING ACT OF 1935
WEDNESDAY, MAY 1, 1935
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE ON
BANKING AND CURRENCY,

Washington, D. G.
The subcommittee met, pursuant to adjournment, at 10:30 a. m.,
in room 301, Senate Office Building, Senator Carter Glass presiding.
Present: Senators Glass (chairman of the subcommittee), Bulkley,
Byrnes, Couzens, and Townsend.
Senator GLASS. The committee will come to order, and Mr. O'Connor will proceed with his statement.
STATEMENT OF J. F. T. O'CONNOR, COMPTROLLER OF THE
CURRENCY—Resumed
Mr. O'CONNOR. Were we on section 310, Senator ?
Senator BULKLEY. I think so.
Mr. O'CONNOR. T h a t section permits holding companies to vote
on the question of placing a bank in voluntary liquidation without
having to go through the expensive routine incidental to obtaining
a voting permit and section 310 (b). Under present law, shares
held by a bank as sole trustee cannot be voted. I t consequently sometimes results, where a large number of shares are so held in trust,
that it is impossible to obtain the requisite number of votes required
by law to accomplish certain steps such as reduction in capital,
amendments to articles, and so forth, or to vote to go into voluntary
liquidation where such is necessary.
Provision is accordingly made that the shares so held in trust shall
be excluded in determining whether the resolution in question has
been adopted by the requisite number of shares. For example, a
bank has 1,000 shares outstanding. Four hundred of the shares,
however, cannot be voted because held in trust by the bank as sole
trustee. Consequently, in determining whether or not a resolution
has been adopted by the required two-thirds vote, the 400 shares held
in trust will be excluded, leaving a balance of 600 shares as the basis
for determining whether a two-thirds vote has been obtained, in
which case a vote of 400 shares in favor of the matter would be the'
requisite two-thirds majority of the shares entitled to vote.
Senator B U L K L E T . I t seems to me that your examination is not on
(he printed text of the bill; I judge that you have submitted a new
draft of the section here.
Is that for the same purpose ?
£59



160

BANKING ACT OF

1935

Mr. O'CONNOR. Yes; that is explained as follows. Senator:
I t is suggested that these two subsections be rewritten and combined as one section, as per the draft before you, and add these additional changes: First, to show clearly that present law does not
limit extra voting rights of Reconstruction Finance Corporation or
other holders of preferred stock in case of default on preferred dividends^ two, it permits stock held in trust by the bank, as sole trustee,
to be voted where donor or beneficiary directs or controls the manner in which it shall be voted. This is desirable because the bank as
trustee does not then in fact control such votes.
Senator TOWNSEND. Your amendment, as outlined there, takes
•care of the proposition to your satisfaction?
Mr. O'CONNOR. Yes, Senator Townsend.
Senator BULKLEY. All right; I do not have anything more to say
about that.
Mr. O'CONNOR. Section 310 (c) is new, Senator, and is not included
i n your bill of last year.
I t eliminates any doubt that a holding company which has set the
acquirements for obtaining a voting permit may cumulate its shares
in the same manner as other shareholders are permitted to do. This
is in conformity with the construction placed upon the present law by
the Federal Reserve Board and by the Comptroller's office.
That is just a clarifying section.
Senator BULKLEY. I S that the only effect of it ?
Mr. O'CONNOR. That is all.
Senator BULKLEY. All right.
Mr. O'CONNOR. Section 311 gives discretion to the Comptroller to
permit a State bank converting into a national bank to carry over and
retain, subject to certain conditions, such sound assets as a State bank
may have which do not conform to the requirements as to assets held
by national banks.
Senator BULKLEY. That proposition was approved by the committee a year ago.
Mr. O^CONNOR. Yes,

sir.

Section 312 permits the Comptroller to delegate the manual labor
of countersigning bond transfers in connection with substitution of
securities held to secure circulation issued by national banks.
Senator BULKLEY. That was also approved last year.
Mr. O'CONNOR. That is right.
Section 313 permits branches of national banks, which banks are
located outside of the United States, to charge the same interest rates
permitted by local law to competing institutions.
Senator BULKLEY. That proposition was approved last year, but
I notice that you have considerably shortened the form of the
amendment.
Senator GLASS. Read that again, Mr. O'Connor.
Mr. O'CONNOR. I t permits branches of national banks, which
branches are located outside of the United States, to charge the same
:
nterest rate permitted by local law to competing institutions.
Senator, the parts omitted are the present law; and we feel that
it is not necessary to reenact the present law, and we just add the
proviso. That is the reason we shortened it.
Senator BULKLEY. Was there any change embodied by that
paragraph?



BANKING ACT OF 1 9 3 5

161

Mr. O'CONNOR. Not down to line 10.
Senator BTJLKLEY. All right.
Mr. O'CONNOR. Section 314 is new. I t provides that before the
declaration of dividends, national banks shall carry not less than
one-tenth p a r t of their net profits of the preceding half year to surplus until the same is built up t o an amount equal to the common
capital instead of the present requirement that same need only equal
20 percent of capital. This change is deemed desirable in connection
with the provision that assessment liability be eliminated from bank
stock, and is further desirable from the standpoint of building u p a.
proper capital structure.
I fully explained that yesterday, Senator.
Senator BULKLEY. Yes; I felt quite satisfied with what you said
yesterday.
Mr. O CONNOR. Section 315 is new. I t extends the criminal provisions of existing law relative to embezzlement, false entry, and so
forth, by officers and employees of member banks, to include any
insured bank.
Senator TOWNSEND. Did not that apply to the insured banks under
the old law ?
Mr. O'CONNOR. N O ; not to nonmember banks.
Senator GLASS. D O you make that a prerequisite to entrance 1 intothe insurance fund % Otherwise, it does not seem to me that you. haveany right to do it.
Mr. O'CONNOR. Let us read the section and see if it is broad enoughWith the permission of the committee, I should like to insert a
short statement showing just what the Attorney General has done
since the passage of the act of May 18, 1934. I t is a remarkable
record, since we have been giving the Attorney General jurisdiction
in these cases, under the new law you passed a year ago.
I t is just a paragraph or two, and I should like to insert it.
Senator BULKLEY. You want to read it to us?
Mr. O'CONNOR. I do not have it with me. I just thought of it, asI was reading the section.
Senator GLASS. H O W do you mean it is a remarkable record ?
Mr. O'CONNOR. I n two ways: First, the number of convictions,,
the number of arrests; and also as indicated by a statement of one
member of a gang of bank robbers. I have a statement from one
of them, in which he said that they were very careful not to violate r
or not to commit any act which is punishable by the Federal authorities, because the Federal Government would get them. But under
the State they could get away with it.
Senator GLASS. Yes.

Mr. O'CONNOR. And then I have the summary of what has been
done by the Attorney General's office since you passed the last act.
Senator GLASS. YOU mean, in convictions of persons who havebeen guilty of offenses against nonmember State banks?
Mr. O'CONNOR. Member State banks.
Senator GLASS. Well, there is no question about the right to d'o»
that.
But I am talking about nonmember banks. I t seems to me that
the only way you can apply the penalty to nonmember banks is t o
make it a condition of entry into the insurance fund.




162

BAXKINU ACT OF 1 9 3 5

Here is a provision, in title I I , that would authorize the Federal
Reserve Board to wipe out every single solitary requirement that
might be made for entrance into the Federal Reserve System of a
nonmember State bank, except the capital requirement. I t practically waives everything.
Senator BULKLET. Yes; that proviso is in the discretion of the
Federal Reserve Board.
Senator GLASS. Yes; it is.

Senator BULKLET. But it only applies to banks that have already
been admitted to the insurance provisions.
Senator GLASS. That is very true. But it might mean this—and
my conjecture is that it primarily means t h i s : The Federal Reserve
Act, in its very beginning, while it did not completely abolish exchange charges on check collections, it required that the banks could
.collect only actual costs, and it provides that now.
The actual cost is so infinitesimal that no statistician has ever been
able to define it—meaning that the actual cost does not amount to anything. I t has saved the business men of this country an average of
$250,000,000 a year.
Under this provision of the bill that requirement could be abolished.
The thing was fought out in the courts over a period of 5 or 6 years.
Cases were handled by Newton D. Baker, advisory counsel of the
Federal Reserve Board, and carried to the Supreme Court; and the
Board was sustained all the way through.
Now, here is a proposition that would enable the Board to abolish
every requirement of membership in the Federal Reserve System.
Senator COUZENS. Mr. Comptroller, your Department has nothing
to do with part I I of the bill ?
Senator GLASS. N O ; I understand that. But with respect to imposing penalties on offenses perpetrated by the officials of nonmember banks, I am no lawyer; and it seems presumptuous of me
to raise a legal point.
But it seems to me that you could not sustain a proposition of
that sort unless you make it a prerequisite of membership in the
insurance fund.
Senator COUZENS. Can we not take care of that when we come to
revise the bill?
Senator GLASS. I hope so. We may not revise the bill, you know.
Senator COUZENS. Let us go ahead.
Senator GLASS. All right; go ahead.
Mr. O'CONNOR. Section 316 gives the Comptroller closer supervision over national banks in voluntary liquidation, as distinguished
from those in receivership, by requiring reports to him and to the
shareholders, and subjecting the bank to examination. I t also
enables shareholders to remove an incompetent liquidating agent.
Senator BULKLEY. That was agreed to.
Mr. O'CONNOR. Yes, sir; and it is a rather important provision.
Section 317 is new, and extends present prohibition on use of the
word " national" by banks other than national banks to include
" Federal " or " United States ", or any combination of such words.
We are trying to prohibit the use of any of those words in anything b u t a national bank.
Senator BULKLET. A S I understand it, this is an amendment to the
provision of law that already prohibits the use of the word " n a 


BANKING ACT OF 1 9 3 5

163

t i o n a l " ; and the purpose of the amendment is to preclude the use
of these other phrases.
Mr. O'CONNOR. T h a t is right. F o r instance, we have a State bank
in North Dakota called the " International Bank."
Senator BTTLKXEY. That would not be prohibited here ?
Mr. O'CONNOR. Any combination of the word " national."
Senator COTTZENS. I think that is highly desirable.
Senator BULKXEY. Oh, yes; it would cover that.
Mr. O'CONNOR. I t is very important to prohibit any use of the
words " United States " or " Federal."
Senator BYRNES. D O you have the use of the words " United
States"?
Mr. O'CONNOR. We did have in New York—which I hope we shall
never have again.
Section 318 amends section 5 of the Federal Reserve Act so as to
require member banks to reduce their holdings of Federal Reserve
bank stock upon a reduction in their own surplus, just as they are
already required to do upon a reduction in their own capital. I t
would also repeal the provisions of sections 5 and 6 of the Federal
Reserve Act, which require the board of directors of a Federal Reserve bank to execute a certificate to the Comptroller of the Currency
showing an increase or decrease in the capital stock of the Federal
Reserve bank. Inasmuch as every adjustment in Federal Reserve
bank stock is approved by the Federal Reserve Board before the
stock is issued or canceled, the filing of such certificates with the
Comptroller of the Currency is a useless formality involving duplication of work.
That is entirely a matter of the Federal Reserve Board.
Senator BULKXEY. Here is a new proposal, to strike out the last
paragraph of section 6 of the Federal Reserve Act. W h a t is that?
I t is a proposed addition to section 318.
Mr. O'CONNOR. This is what goes out, Senator:
Whenever the capital stock of a Federal Reserve bank is reduced either on
account of a reduction in capital stock of any member bank, or of the liquidation
or insolvency of such bank, or on account of the appointment of receivers for a
national bank, following discontinuance of its banking operations, as provided by
this section, the board of directors shall cause to be executed a certificate to
the Comptroller of the Currency showing such reduction of the capital stock
and the amount repaid to such bank.
I t is just useless and is entirely a duplication of work with the
Federal Reserve Board.
Senator BULKXEY. All right.
Senator GLASS. The Comptroller of the Currency is a member of
the Federal Reserve Board and ordinarily would be apprised of the
fact, anyhow, would he not ?
Mr. O'CONNOR. Yes; that is very pertinent.
Section 319 authorizes the Federal Reserve Board to prescribe form
and contents of reports of conditions to be made by State member
banks, and prescribes the manner in which such reports must be
published.
Senator TOWNSEND. Does that refer to new State member banks or
the old ones? Do you not already have a form for the present
member banks?




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BANKING ACT OF 1 9 3 5

Mr. O'CONNOR. There is no authority in the act t o require publication of these reports unless the State law happens to require it.
Senator TOWNSEND. Even though they are members t
Mr. O'CONNOR. Even though they are members.
Senator TOWNSEND. All right.
Senator GLASS. The Federal Reserve Board is authorized to accept
the examination of the State authority, and to conform to the requirements of the State law, as to publicity.
Mr. O'CONNOR. That is right; that is the way it stands.
Senator COUZENS. I s there any uniformity between the- reports r e quired of the State boards, and the reports required of the Comptroller of the Currency, of these State member banks f
Mr. O'CONNOR. They are identical.
Senator COUZENS. I t seems to me, in my observation, that there is
a great deal of Confusion existing, with respect to the form of these
published bank statements. I have had considerable correspondence
with the Comptroller and his staff about that. I t seems, for example,
that after the Comptroller has made a call, a certain form is published, under the requirements of law; and about that same date,
another kind of report is published by the banks, giving a different
set of figures, and which is not required by the Comptroller of the
Currency. And the comparison of the two reports by that p a r t of.
the country that does not belong to the banking fraternity cannot be
understood.
I t seems to me that there ought to be some provision requiring
a uniformity of publication of these reports. I think the C o m p troller recognizes—and at least his staff ought to—that this has created confusion. I do not know whether i t can be covered by law r
or not; I just raise the question.
Senator GLASS. A S a matter of fact, not one person in ten understands the published reports.
Senator COTJZENS. That indicates the perfect uselessness of publishing the reports.
Senator GLASS. D O you not agree with that statement?'
Senator COUZENS. I think t h a t is true, where there are two kinds
of reports issued—one by the bank, on its own initiative, and another
by order of the Comptroller of the Currency; I think that is true.
But if there were a uniformity of published reports, from time to
time, so that some comparison could be made, they would be of benefit to the public, especially to large industries and large businesses.
Now, the trouble is that the published statement ordered' by the
Comptroller of the Currency, cannot be discerned, from reading the
press, from a report that is published by the directors of a bank
itself. And when you pick up one of these reports, you do not know
whether it is a report published by order of the Government or a
report published by order of the directors.
And in many of those cases a comparison is made, and no human
being can get an understanding of what it says—just as the Senator
from Virginia has said.
I brought this point up, because I thought the confusion should be
stopped.
Mr. O'CONNOR. I can clear it up.
Senator COUZENS. YOU can clear it up, but you cannot clear it up»
by a statement for the record.



BANKING ACT OF 1 9 3 5

165

Mr. O'CONNOR. I should like to suggest this clarification: The
Senator has in mind banks that make further publication of statements and figures.
I can clear that u p ; I can make the regulation that the report
that I require the banks to publish, shall state at the head, that it is
the report that is required by the Comptroller of the Currency; I
can require the banks to publish that statement right under the
bank's title.
Senator GLASS. Does not this happen, Mr. Comptroller: The reports that are required by the Comptroller's Office to be published
are technical ?
Mr. O'CONNOR. Yes; very.
Senator GLASS. My observation has led me to the conclusion that
not 1 patron of the bank in 10, unless he be an expert accountant
as is the Senator from Michigan, or a large depositor, as is the
Senator from Michigan—I am conjecturing, but I do not think that
anybody would contest the accuracy of the conjecture—understands
this technical report.
Therefore, many of the banks, in order to advertise their position
so that the ordinary business man may understand it, print advertisements in the newspapers, and emphasize what they regard as the
strength of the bank in particular items.
Of those reports, the Comptroller has no jurisdiction.
Senator COUZENS. The question is, Is it good judgment to have
jurisdiction ?
Senator GLASS. A S a newspaper publisher, I am opposed to a regulation which would prohibit a bank from advertising its business.
Mr. O'CONNOR. But, Senator, I do think that Senator Couzen's
point is well taken—just to show the report is one that is required
by the Comptroller. When the forms are sent out, we can place,
right under the bank's name, that this is a report that is required by
the Comptroller of the Currency.
Senator COTTZENS. T h a t simplifies that particular part of it. B u t
anyone who has been a banker, or who has had any experience in
banking, knows t h a t one of the best tests of the growth or falling
off of a bank's responsibility and management, is caused by a comparison of the total deposits, and the character of resources, as they
have changed from one report to another.
Now, if I take up a report published under the requirements of
the Comptroller of the Currency today, and if the Comptroller of
the Currency calls for another report in 6 months, and that is published, I have to go back to the newspaper of 6 months previous,
and find out, by comparative figures, whether the bank is making
progress or whether it is slipping back, or not.
So, in their effect, these reports published at the request of the
Comptroller, are absolutely useless, except for the benefit of the
newspaper publishers. And I do not see the benefit of requiring
them, unless a more thorough analysis of the bank's condition is
required when the report is published.
Senator GLASS. Would you stop all publications of reports, just
because the newspaper gets an inconsequential fee out of the advertising charge?




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BANKING ACT OF 1 9 3 5

Senator COTTZENS. N O ; what I am trying to bring out is the necessity for more understandable reports.
The reports are absolutely nonunderstandable, because you can
make no comparison. And the only way by which you can judge
the development of a bank, and the only way you can determine
whether it is slipping or going forward, is by a comparison of the
reports published from time to time.
Senator GLASS. I am one of the very modest depositors in a bank;
and the only way I can get any idea of what the bank is doing, is
whether I get my dividends, or do not get my dividends.
Senator COTTZENS. I am not so much concerned about that as I am
with the welfare of the depositors.
Senator TOWNSEND. Unless you had a comparative statement of
the bank's business for a 6-month period, or for a year previous,
how would you benefit?
Senator COUZENS. You would not, except that the reports published
close together, one at the direction of the directors and one at the
direction of the Comptroller of the Currency, are confusing. And
I can bring in numerous records to show that the reports, where they
come close together, are confusing to the public, and they are very
useless.
And it does seem to me that the situation is such that the administrative department of the Government, either by administrative
order or by legislative requirement, should demand a different kind
of report than is now published.
I do not care how many reports are published, and I want to give
the newspapers all the ads they can get, because I think that the
more the public knows about the condition of the banks, the better
it is.
Senator GLASS. Of course, I tried to be amusing, in my reference
about newspaper advertising.
Mr. O'CONNOR. Section 320 (a) amends section 11 (m) of the
Federal Reserve Act, so as to place State member banks on a parity
with national banks in lending on the security of bonds, notes, certificates of indebtedness and Treasury bills of the United States, by
changing the limitation on loans to one individual on such security,
from 10 percent of the bank's unimpaired capital and surplus to 25
percent thereof, as provided by national banks in section 5200 of the
Revised Statutes.
That was approved by the committee last year.
Section 320 (b) amends section 5200 of the Revised Statutes so
as to extend the eighth exception thereof, which pertains to loans
secured by bonds, notes, and certificates of indebtedness of the United
States, so as to apply also to loans secured by Treasury bills of the
United States.
That was approved by the committee last year.
Senator BULKLEY. I do not find it so, Mr. O'Connor.
Senator COTTZENS. I do not see any section 320 (b) in the bill.
Mr. F . G. Aw ALT. No; that is our recommendation.
Senator TOWNSEND. I do not find it in the bill.
Senator BULKLEY. I do not find the subject matter of section
320 (b) in last year's bill.




BANKING ACT OF 193 5

167

Mr. O'CONNOR. T h a t is right, Senator. That is in the bill that I
handed to the committee, with those additional changes we suggested.
I t should be the bill, Senator, that I gave the first day.
Senator BTJLKLEY. This year?
Mr. O'CONNOR. Yes; with the additional changes suggested.
Senator GLASS. I do not recall that the Banking Act of 1933, or"
any banking act, advances a limitatio nof 10 percent on loans to individuals, partnerships, associations, or corporations. I t was changed
to 25 percent.
Senator COTJZENS. I S not that a development along the lines that
you have been talking about of requiring the banks to load up with
Government securities?
Senator GLASS. YOU mean that I have been advocating the loading
up with Government securities?
Senator COTJZENS. N O ; I merely said that you have been talking
about i t ; I did not say that you have been advocating it or opposing it.
But that would accomplish this purpose if they Avere allowed up to
25 percent ?
Senator GLASS. Y e s ; I think so.
Senator TOWNSE^TD. T h a t liberalizes the provisionf of the State
member banks.
Is that what you are trying to do, Mr. Comptroller?
Mr. O'CONNOR. T h a t is correct.
The old section reads:
Obligations of any person, copartnership asso< iation. or corporation in the
form of notes secured by not less than a like amount of bonds or notes of the
United States issued since April 24, 1917, oi certificates of indebtedness of
the United States shall (except to the extent permitted by rules and regulations prescribed by the Comptroller of the Currency, with the approval of the
Secretary of the Treasury) be subject under this section to a limitation of 15
per centum of such capital and surplus in addition to such 10 per centum of such
capital and surplus.

Senator BTJLKLEY. Were you reading from the Federal Reserve
Act?
Mr. AWALT. Reading from the National Banking Act, section
5200, Revised Statutes, as amended.
Senator GLASS. Proceed.

Mr. O'CONNOR. Section 321 is new. The present law permits the
Federal Reserve bank to make direct loans to private business on
adequate endorsement and security. The amendment permits such
loan on adequate endorsement or security.
Senator GLASS. W h y do you not make it " and/or " ?
Senator COTJZENS. I t is in the bill, in that way.
Mr. O'CONNOR. Section 322. This section makes certain changes
in the language of section 13 (b) of the Federal Reserve Act, making
it conform to the amendment in title I of the bill, whereby stock of
the Federal Deposit Insurance Corporation subscribed for by the
Federal Reserve banks is changed to no par value. These changes
are in form only, and do not alter the effect of the existing law.
Senator COTJZENS. What were your reasons for changing it to " no
par value "?




168

BANKING ACT OF 19 3 5

Mr. O'CONNOR. I do not know that it makes a great deal of difference, except that I believe the suggestion of the chairman, on that
point, was that there would not be the impairment of the capital,
if it were " no par."
Senator GLASS. Which chairman?
Mr. O'CONNOR. The chairman of the Federal Deposit Insurance
Corporation; Mr. Crowley.
Section 323 (a) is partly new, and authorizes the Federal Reserve
Board to define " deposit and related terms for reserve and interest
requirements respecting deposits.
Senator TOWNSEND. Who defines those deposits ?
Mr. O'CONNOR. The Federal Reserve Board.
Senator BULKLEY. I think we ought to have a more full explanation of that. I am frank to say that I do not see what that is driving
.at.
Senator COTJZENS. Was that new over last year's act?
:Senator BULKLEY. Yes.

Mr. O'CONNOR. Yes; part of it is new.
:Senator BTJLKXEY. I t is all new in the sense that it was not contained in our omnibus bill last year.
Mr. O'CONNOR. I am reading from the report of the House, page 2 1 :
Section 323 (a) amends section 19 of the Federal Reserve Act so as to repeal
the rigid statutory definitions of " demand deposits " and " time deposits " and
.authorizes the Federal Reserve Board to define for the purposes of the section
the terms: " Demand deposits ", " gross demand deposits ", " deposits payable on
•demand ", " time deposits ", " savings deposits ", and " trust funds ", to determine .what is to be deemed a payment of interest and to prescribe regulations to
.effectuate the purposes of the section.

Oh, yes: it comes back to me now: We had a number of discussions
in the Federal Reserve Board, gentlemen, after the passage of the
1933 act, when you eliminated the interest on demand deposits, as t o
-what constituted a demand deposit, a time deposit, or a savings
•deposit. W e found great difficulty in applying the definitions that
were in the act, and we found some of the banks attempting to circumscribe the prohibitions; and we wanted, when we found those
evasions, to keep correcting the definition until they could not
evade it.
Senator COUZENS. Why was that not brought up in the omnibus bill
last year? You had not had the experience; is tnat it?
Mr. ©'CONNOR. N O . I t was in the bill last year although the language may have been slightly different.
Senator BULKLEY. I think there was a slight error in the marking
of my copy and that the Comptroller is right. T h a t part of this was
i n the omnibus bill last year.
Senator TOWNSEND. A t the present time member banks are not
ipermitted, in estimating their reserve balances, to deduct the amount
of their gross demand deposits, are they? And this gives them t h a t
privilege—due from other banks ?
Mr. O'CONNOR. Due from other banks; oh, yes.
Senator TOWNSEND. Well, I think they should have that privilege.
Senator GLASS. We shall have to take t h a t up when we come to it.
Senator BULKLEY. Yes; there was a different arrangement of it in
t h e omnibus bill last year, and I should have to give it further study
to see what this change is.




BANKING ACT OF 19 35

169

Mr. O'CONNOR. Section 323 (b) amends section 19 of the Federal
Reserve Act so that, for purposes of computing member bank reserves, amounts due from other banks (including checks in process
of collection) may be deducted from gross demand deposits rather
than from balances due to other banks, thus extending the benefit of
this deduction to country banks which have no balances due to other
banks.
Senator BTTLKLEY. I think that is new matter.
Mr. O'CONNOR. Yes; that is new matter. I t is not marked " new 'f
on my notes, Senator.
Senator BTTLKLEY. Have you anything to say about subsection (b) ?-'
Mr. O'CONNOR. N O , sir.
Senator BTTLKLEY. Now,

subsection (c), in a slightly different f orm r
was in the omnibus bill last year?
Mr. O'CONNOR. T h a t is correct.
Senator BTTLKLEY. W h a t is the change in that?
Mr. AWALT. I do not know exactly, now.
Mr. O'CONNOR. I can tell you, Senator, exactly what the present
section provides for.
Section 323 (c) amends section 19 of the Federal Reserve Act soas to add to the classes of deposits exempted from the prohibition
against the payment of interest on demand deposits the following:
First, deposits payable outside the States of the United States and!
the District of Columbia (rather than merely those payable in foreign countries); second, deposits of trust funds on which interest isrequired by State law; and, third, deposits of the United States, its
Territories, Districts, or possessions on which interest is required by
Federal law.
Senator BTTLKLEY. I n the corresponding section of the omnibusbill last year, there is a rather important sentence that seems to b e
omitted here; and I am wondering if you recall that, which is asfollows:
Any director or officer of any bank who shall have continued to violate trieprovisions of this or the preceding paragraph or the rules or regulations issued
pursuant thereto after having been warned to desist therefrom may be removed
from office in accordance with the provisions of section 30 of the Banking Act
of 1933: Provided, That in the case of a director or officer of a nonmember bank,
the warning and certification provided for therein shall be given by the Federal
Deposit Insurance Corporation.

Mr. O'CONNOR. We have the general removal clause of the BankingAct ; and they felt that that was sufficient, Senator, under the general
removal clause of the Banking Act of 1933 to cover this situation.
Senator BTTLKLEY. You really did not intend to leave out the power,but simply felt that it was provided for elsewhere ?
Mr. O'CONNOR. T h a t is correct.
Senator BTTLKLEY. We shall have to look into that further.
Mr. O'CONNOR. Section 323 (c) is also amended to make more
flexible the Federal Reserve Board's power to classify time and savings deposits1 and limit the rates of interest to be paid' thereon. The'
absolute prohibition against the payment of time deposits before m a turity is relaxed to permit such payments under conditions prescribed by the Board; and deposits payable only at offices of member
banks located outside the States of the United States,.and the Dis-




170

BANKING ACT OF

1935

trict of Columbia are exempted from all restrictions on payment before maturity and all restrictions on interest rates.
Section 323 (d) is new. I t requires member banks to maintain the
same reserves against the Government deposits as against other
deposits.
Section 324 permits the Federal Reserve Board or the Comptroller
of the Currency, as the case may be, to permit waiver of report and
examination of affiliates of a bank where such report and examination is not necessary in a particular case to disclose relationship existing between the bank and the affiliate. This eliminates the burden
and expense now involved in hundreds of cases where there is no
beneficial object to be gained in requiring submission and publication
of such report, due to the fact that the affiliate is merely a technical,
accidental affiliate, having no relationships whatsoever with the
bank—such, for example, as newspapers, clothing stores, lumberyards,
and so forth, which become technical affiliates because of the accident
that a majority of their directors happen to be directors of the bank.
We discussed that yesterday.
Senator GI-ASS. Oh. yes; that is a mere technical opinion, for which
your office is not at all responsible. I t gave people infinite, senseless
trouble.
Mr. O'CONNOR. Section 325 (a) is new. I t extends the present
provisions of the law prohibiting loans and gratuities to examiners
of member banks to include examiners of all insured banks.
Senator BULKLEY. I S that all that section 325 does ?
Mr. O'CONNOR. I am coming to subsection (b) now.
Section 325 (b) is new. I t extends to the Federal Deposit Insurance Corporation examiners the present prohibitions of law against
the disclosure of confidential information by examiners.
And section 325 (c) is partly new. I t corrects impractical features
of present law relative to loans to executive officers of banks by vesting certain discretions with the Federal Reserve Board to issue regulations governing same and substituting removal from office for present criminal provisions of the law. There is also a 3-year extension
of time within which present loans must be retired—such extension,
however, operative only if the board of directors adopt a resolution
determining that it is to the best interest of the bank to make the
extension, and that the officer has made every proper effort to reduce
his obligation.
We have already covered that very fully, and it is all in the record.
Section 326 is partly new. Under present law there are certain
rigid requirements and limitations on loans to affiliates. Exception
to these requirements is provided for where the affiliation arose out
of foreclosure by the bank on collateral. I t is often necessary to
advance funds to an affiliate, control of which has been obtained
through foreclosure in order to enable the bank to salvage the real
value out of its assets and reduce the bank's loss. Under the circumstances such affiliate manifestly cannot borrow elsewhere. There is
also excluded the accidental type of affiliate, control of which is
obtained by the bank in a fiduciary capacity, as, for example, where
the bank becomes executor and/or trustee of the deceased's estate,
among the assets of which is a going business which must be operated
by the bank as such trustee. There is also excluded an affiliate




BANKING ACT OP 1 9 3 5

171

engaged solely in operating property acquired for bank purposes.
A n additional exception now recommended is to exclude from the
limitations of the section loans fully secured by obligations fully
guaranteed by the United States and loans to affiliates engaged solely
in holding such obligations, thus extending present law in that respect
as to direct obligations of the United States, to include obligations
guaranteed by the United States.
I am not quite going to finish this, Senator. And since we are
closing at 12 o'clock, I should like to call the attention of the committee to another suggested amendment I have to title I I I .
Senator BTTLKLEY. W h y do you not go right ahead; we may sit a
little after 12 o'clock.
Mr. O'CONNOR. Very well.
Section 327 is new. I t exempts loans for industrial purposes made
in cooperation with a Federal Reserve bank or the Reconstruction
Finance Corporation from existing restrictions on real-estate loans
by national banks, due to protection received by the banks from
either the Federal Reserve bank or the Reconstruction Finance
Corporation, where such loans are jointly made. As to such loans,
there is no need for such restrictions as are desirable for a realestate loan made by the bank in its sole capacity. Furthermore,
such existing restrictions have been found to seriously interfere with
the scope and object of the Industrial Loan Act as they operate to
prevent two or more banks cooperating with the Federal Reserve
bank or the Reconstruction Finance Corporation in making a single
industrial loan, prevent such loan where a substatial p a r t of the
security is real estate located outside of the restricted area in which
national banks are limited in making real-estate loans, and for other
reasons.
Section 328 is new. I t amends the Clayton Act to permit the
Federal Reserve Board to supervise, by regulation instead of by
permit, the matter of interlocking directorates which we discussed
the other day.
Sections 329 and 330 bring the law governing consolidation of national banks into conformity with that governing consolidations of
a State and National bank, and offer additional protection to dissenting shareholders in the matter of obtaining the appraised value of
their stock. Requirement is made that notice of dissent be given by
such shareholders when the vote to consolidate is had.
That was approved.
Sections 331 and 332 are new. They extend to the Federal Deposit
Insurance Corporation the protection now given by law to other
Federal institutions against the misleading use of their name, and
extend to all insured banks the present requirements of law making
robbery of member banks a Federal offense.
Section 333 amends section 5143 of the Revised Statutes
Senator BULKLEY. YOU are now going beyond the bill, as introduced ?
Mr. O'CONNOR. Yes; t h a t is right.
Section 333 amends section 5143 of the Revised Statutes, so as to
make it clear that, in approving reductions of capital stock by
national banks, the Comptroller of the Currency, in order to conserve the assets for the protection of the banks, may specify t h a t




172

BANKING ACT OF

1935

such banks shall not distribute a corresponding amount of their
assets due their shareholders. The amendment would also trike out
the words which make it necessary for capital stock reductions to
be approved by the Federal Reserve Board, in addition to the Comptroller of the Currency, thus eliminating an unnecessary duplication
of work.
Section 334 amends section 5139 of the Revised Statutes by adding
a paragraph specifying certain information to be stated on certificates hereafter issued, representing shares of stock in national banks.
Section 335 amends the last sentence of section 301 of the Emergency Banking Act of March 9, 1933, so as to require, in connection
with the issuance of preferred stock, the same kind of a certificate
by the Comptroller of the Currency as to the validity of such issue,
as is now required in the case of the issuance of common stock.
Section 336 would terminate
Senator GLASS. Does that interfere with any of the operations of
theR. F. C?
Mr. O'CONNOR. No, sir. They have asked it, because it protects
them as well as other holders of preferred stock.
Section 336 would terminate the liability of shareholders of banks
and trust companies in the District of Columbia, as of J u l y 1, 1937,.
in a manner similar to that provided elsewhere in the bill for terminating the liability of shareholders of national banks.
I n other words, they are under the jurisdiction of the Comp*
troller, entirely; and we feel that they should be entitled to the-sameconsideration that we extend to national banks.
I should like to call to the committee's attention an amendment:
which we are proposing, and which we are asking to be incorporated
in the bill, which would permit the Comptroller's office to provide
a fund for pensions for examiners, similar to those now provided
for by the Federal Reserve examiners. There is no cost to the Government, of course; and there is only a very small charge to the banks.
And in that connection, I should like to submit for the record thetechnical amendment, and also a letter.
Senator GLASS. What is the existing provision of law with respect
to pensions of Federal Reserve examiners?
Mr. O'CONNOR. I t is not a provision of law, Senator, in the Federal
Reserve, that being quite a different set-up than we have in the
Comptroller's office.
Senator GLASS. The reason I am asking the question is that I know
that the matter of pensions came before Congress some 8 or 10
years ago. The Federal Reserve Board made a recommendation to
Congress, in respect to pensions; and it was not agreed to. And I
wondered what sort of a pensions system the Federal Reserve Board
is now authorized to have, without sanction of lawMr. O'CONNOR. Well, they do it by a joint contribution of the
Federal Reserve banks—the Federal Reserve banks seemed anxious
to do it—on the theory of additional compensation.
Senator GLASS. Well, I am not questioning the desirability of the
matter; I am just wondering what sanction of law they have for
anything of the kind.
Mr. O'CONNOR. Well, there is no direct provision of law,. Senator..
as I am informed.




BANKING ACT OF 193 5

173

Senator GLASS. There are so many matters that are not under lawful sanction, t h a t I am not pressing the question.
Mr. O'CONNOR. T h a t is why I am asking the consideration of the
committee to this authority so there will not be any question of the
authority.
Senator GLASS. T h a t is right. That is the way that the branches
of the Federal Government should d o ; they should ask authority for
things they do, and not just do them.
Mr. O'CONNOB. F o r the record, I should like to submit the suggested amendment, and the letter which gives, a little more in detail,
for the information of the committee, just how we propose to handle
it.
The letter is on the letterhead of George B. Buck, consulting
actuary, New York City; and it is dated April 29, 1935.
I t is addressed to Mr. J . F . T. O'Connor, Comptroller of the Currency, Treasury Building, Washington, D . C.; attention, Mr. George
P . Barse, counsel, and reads as follows:
DEAK SIB : On April 27 I had a conference with Messrs. George P. Barge and
M. M. Washburn, of your office, at which time I was requested to send you
a letter outlining certain actuarial work which I should be happy to perform
for your Department.
As I understand the situation, there are approximately 700 bank examiners
and associated employees, whom you desire to cover under a retirement system
with benefits similar to those of the retirement system of the Federal Reserve
banks, if the same is practicable. I am advised that you have complete service
and salary records of all those to be covered, which you can supply to me,
which records give the essential data on the basis of which, together with
suitable mortality and service tables such as are used in the retirement system
of the Federal Reserve banks, all needed actuarial calculations can be made.
Upon receipt of these records, we will undertake to test the practicability
of the plan, which now appears entirely practical, and to make a valuation
of the liabilities involved should these employees be covered by provisions the
same as those of the retirement system of the Federal Reserve banks. The
percentage rates of contribution required to be paid on aceount of such members
in order to provide for the liquidation of the liability will also be determined.
The results of the valuation and the rates would be submitted to you within
30 days after the date the data are received complete.
In addition to making the valuation above mentioned, I would review the
deed of trust and the rules and regulations covering the operation of the
system which you prepare. These documents would, I understand, follow
closely those used by the Federal Reserve banks, which rules were drafted
originally by this office.
With the results of the valuation, the deed of trust, and the rules and
regulations, you will have all you need for the final approval and the adoption
of the system. The work outlined above could be performed by my office at
a fee to be determined on the basis of the time required to complete the
work, but with a fixed maximum of $1,000 for all work enumerated. This fee
would include the cost of two conferences. Additional conferences would be
charged for at the rate of $35 per day and expenses if outside of New York.
Probably not more than one conference will be needed for the work described,
so that the cost of the other will be saved.
In addition to the above work there would be certain work required in
connection with setting up the proper forms and records for the operation of
the system after the system is authorized. Also for most of our clients we act
as regular consultants, making an annual actuarial valuation of the assets and
liabilities of the system, recommending the necessary adjustments in mortality
tables required to offset unfavorable experience, auditing each retirement allowance granted, and certifying the reserve to be set up at retirement, and
helping with miscellaneous technical questions which arise when the system
is operating. I should be very happy to have this office perform similar services
for your Department. The cost of this work can best be estimated when the
terms of the final plan are determined upon just prior to its adoption.
129688—35—PT 1




12

174

BANKING ACT OF 19 3 5

With the completion of the work described above, you will have everything
done that was done by the Governor's Committee of the Federal Reserve banks
before the plan was finally approved by the banks and the Federal Reserve
Board. The other work described has to do with the details of administration
of the system after its approval in order that it may be accommodated to your
existing personnel and pay-roll records with the minimum of effort and expense.
If you proceed with the work, I understand that the record cards will be delivered to my office, at which time the final details as to the valuation will be
arranged.
Trusting that you will find our services entirely satisfactory in every respect,
I am.
Very truly yours,
GEOBGE B. BUCK, Actuary.

The amendment is as follows:
SEC. —. The second sentence of the third proviso of section 5240 of the
Revised Statutes, as amended (U. S. C , Supp. VII, title 12, sec. 481 and 482),
is amended by striking out the word " is " after the words " whose compensation " and inserting in lieu thereof, a comma and the following:
" including retirement annuities to be fixed by the Comptroller of the Currency,
is and shall be", and said section is further amended by striking out the
words, " The Federal Reserve Board, upon the recommendation of."

That concludes my remarks.
Senator BTJLKLEY. Those several additions, from section 338 on,
are substantially what we reported to the House, are they not ?
Mr. AWALT. They were reported by the House.
Senator BULKLEY. I n the House report I find three additional sections.
Have you any comment to make on those ?
Mr. AWALT. They were added by the House committee itself; we
had nothing to do with them.
Senator BULKIEST. D O you have anything to say about them?
Mr.

AWALT. No,

sir.

Senator GLASS. Do you want to have anything to do with them?
Mr. AWALT. As I understand it, Judge Birdzell handled all three
of those amendments.
Mr. O'CONNOR. I talked to the chairman, Mr. Crowley, this morni n g ; and he said he was preparing a letter for the committee, that
would be sent up this morning, approving the position I took yesterday with reference to the admission of banks to the fund. No
doubt that letter should be here this morning.
Senator GLASS. I had word from Mr. Crowley, and he was expected to follow you this morning. H e said that he would like to
come up for a few minutes tomorrow morning, and very likely he
will present it then.
STATEMENT OF L. E. BIRDZELL, GENERAL COUNSEL, FEDERAL
DEPOSIT INSURANCE CORPORATION, WASHINGTON, D. C.
Mr. BIEDZELL. There are three provisions here. Two of them deal
with security which banks are required to give: One, for deposits
of bankruptcy funds; the other, for deposits of receivership funds;
and the third amendment deals with the matter of postal savings.
I n the Banking Act of 1933, express provision was made for
relieving the banks of the necessity of giving security for postalsavings funds, to the extent that they would be insured by the insurance of our Corporation. And following the principle of that, the




BANKING ACT OF 19,35

175

Corporation hao thought that it would be well to relieve the banks
of the burden of giving other security for some other types of
deposits, Avhere it is more or less of a nuisance.
I n the case of bankruptcy funds, for instance, the banks, under
existing law, would be required to give security, notwithstanding the
fact that the deposit would be insured.
The same is true in regard to funds that may be deposited in a
bank authorized to receive the deposits of receivers. Those two
matters are taken care of in sections 338 and 339, in the same way
that the Banking Act of 1933 took care of the deposits of postalsavings funds.
Senator GLASS. You suggested those?
Mr. BIKDZELL. We suggested those to the committee, and they incorporated them in the House bill.
I h e other is the Postal Savings matter, raising a question of
competition between the Postal Savings Department and savings
banks. With prohibitions existing against the payment of interest
on demand deposits, and the limitation of the interest rate payable
on savings deposits, banks are feeling, to some extent, the competition with the Postal Savings.
Under the law and the regulations of the Postal Department,
prospective depositors are given the assurance that if they put their
funds in the Postal Savings bank, they can withdraw them any time
they want, and receive interest substantially down to the date of
withdrawal.
The banks feel that this is a species of unfair competition.
The provisions of the existing law, on that subject, have been
restated, here in section 340, on pages 90 and 91 of the House bill,
with a view to requiring the forfeiture of interest for a definite
period, in the event of the withdrawal of Postal Savings funds
without giving the normal 60-day notice. The definite period provided for, in this act, is 3 months—in other words, one can withdraw
his funds from the Postal Savings bank, now, without giving a
60-day notice, under the terms of this law. But he will forfeit
interest on the amount withdrawn, for the period of 3 months. The
reason a definite period is put in there is because there is no regular
interest-crediting date in the Postal Savings. If you put in your
fund today, it will begin drawing interest on the 1st of the following
month; and your interest will be credited at stated intervals
thereafter.
Senator GLASS. Have you discussed that with the Post Office
Department ?
Mr. BIEDZELL. We have from time to time discussed the general
question with the Post Office Department.
As a matter of fact, under the existing law it is difficult to see how
interest can be allowed on funds that are allowed to be withdrawn
without giving the 60-day notice, because the existing law provides
that where funds are withdrawn, without giving the 60 days' notice,
no interest shall be allowed that has accrued subsequent to the passing of the Banking Act of 1933.
But somehow they think that is ambiguous, and they have been
paying interest.




176

BANKING ACT OF 193 5

Senator GLASS (reading) :
Any depositor may withdraw the whole or any part of the funds deposited
to his or her credit, with accrued interest on them, on notice given 60 days in
advance, and under such regulations as the Postmaster General may prescribe;
but withdrawal of any part of such funds may be made upon demand, but no
interest shall be paid on any funds so withdrawn, except interest accrued to
the date of enactment of the Banking Act of 1983.

Mr. BIEDZELL. Now, that would seem to me not to be ambiguous;
but under the regulations and the practice, I understand that they
are paying interest where funds are withdrawn without giving 60
days' notice, and they are paying interest accruing subsequent to the
passage of the banking act.
This particular provision was put in at the suggestion of the
House Members. I simply acted as their agent in drafting it.
But this particular provision has not been taken u p with the
Postal Department, so far as I know, because it was not proposed,
originally, by us.
Senator GLASS. Well, I think that perhaps i t should be done by
this committee.
I am told, Judge, that you are an exceptionally able lawyer; and
I should like to get your judgment upon this requirement as to the
payment of interest on deposits:
The Federal Reserve Board shall from time to time limit by regulation the
rate of interest which may be paid by member banks on time deposits.
And now, note this, please:
And may prescribe different rates for the payment on time and savings
deposits having different maturities or subject to different conditions respecting
withdrawal for repayment.
And now, note this, particularly:
Or subject to different conditions by reason of different locations.
Would you, or would you not, imagine that whoever is responsible
for drafting that provision of law, had in mind that that should be
done? I n other words, do you think that they had in mind that
there should not be a uniform rate of interest on deposits, but a differentiating rate, according to circumstances?
Mr. BIKDZELL. According to the business transacted and the location of the bank and the terms under which deposits may be made ?
Senator GLASS. Yes.

Mr. BIRDZELL. I would say that it clearly contemplated t h a t a
differentiation might be made, taking into consideration those different elements.
Senator GLASS. I t contemplated it would be made, because we
discussed it for hours and hours, in our committee.
Mr. BIEDZELL. I t may be doubtful whether a uniform rate could
be prescribed, unless it were found that the conditions justifying a
uniform rate were likewise uniform.
Senator GLASS. Of course, it should not be—and there is no more
reason why there should be a uniform rate of interest payment on
deposits than that there should be a uniform rate of discount
throughout the United States. A bank that is limiated by State
statute to a 5-percent current rate, or a 6-percent current rate, ought
not to be expected to pay the same rate on deposits as a bank t h a t is




BANKING ACT OF 193 5

177

authorized by State statute to pay 8, 10, or 12 percent, or to charge
8, 10, or 12 percent on the use of its deposits.
Does not t h a t seem reasonable ?
Mr. BIRDZELL. Yes; it does.
I do not like t o edit the Senator's remarks, but t h a t complimentary
portion, in referring to me, Senator, will be just as well omitted.
Senator GLASS. N O ; no.
STATEMENT OF J. F. T. O'CONNOR, COMPTROLLER OF THE
CURRENCY—Resumed
Mr. O'CONNOR. Senator, I have the record, now, of work done
by the Department of Justice, under the act passed by Congress and
signed by the President, May 16, 1934—a Federal statute making
robbery of national banks and member banks of the Federal Reserve
System, a Federal offense—and a statement of the work thereunder;
a n d I would ask permission to place in the record extracts dealing
with the Department of Justice, on pages 3 to 6.
Senator GLASS. There is no issue raised about the right of the
Federal Government to deal with those questions with respect t o national banks and State member banks; the question is whether the
Federal Government has any right to deal with them in cases of nonmember banks, unless you make it a prerequisite to the right of
insurance.
Mr. O'CONNOR. I am rather inclined to agree with that, Senator.
B u t the object was to show the work that had been done under
the laws passed by Congress. That is the reason why I wanted those
statistics p u t in the record.
Senator GLASS. YOU wanted t h a t p u t into the record ?
Mr. O'CONNOR. Yes; if you please.
Senator GLASS. All r i g h t ; p u t it in the record.
(The statement of activities of the Department of Justice is as
follows:)
The Department of Justice, under the direction of Attorney General Homer
Cummings, has initiated an intensive move against organized crime; against
those crimes of violence that appear as an accompaniment of modern civilization, at least in its American manifestations. What Attorney General Cummings has had in mind, and what he now has in mind, is an unrelenting,
persistent, sustained effort to deal with crimes of outlaw individuals and
desperate gangs who arm themselves with lethal weapons of offense, and who
avail themselves of all the resources of modern transportation and communication to commit their depredations upon the social, economic, and moral welfare
of the Nation. Coupled with this well-defined group are individual or gang
kidnapers and extortionists who have committed and are committing odious
crimes against private citizens and their families.
During the 73rd Congress, the Attorney General advocated the passage of
certain Federal criminal statutes, the object of which was to lend Federal
assistance in a movement to protect our social organization against specified
crimes of violence. He felt that between State and Federal jurisdiction there
existed a kind of twilight zone—a gap through which criminals of the most
dangerous description were escaping. The recent broadening of Federal power
was designed to illuminate that twilight and fill that gap. Most of the legislation enacted extends to the Federal Government jurisdiction in crimes of an
interstate character in which roving criminals are the principal offenders.
'1,'he object of such legislation is to enable Federal authorities to deal with
crime in its interstate aspects, to assist in the administration of justice at
the point where State jurisdiction ends, or where, in the nature of an interstate crime committed under modern conditions, the existence of an inter-




178

BANKING ACT OF 19 3 5

state enforcement unit to cooperate with State and local agencies is desirable
for the prompt detection and apprehension of the criminal.
Attorney General Cummings called a conference on crime last winter in Washington to consider this problem. This conference was for the purpose of appealing to the public for its thoughtful advice, for its sustained interest, and for its
active help in a national movement to meet a common peril. In attendance
there were the representatives of Federal, State, Territorial, and local Government*, as well as representatives of more than 75 private and quasi-public
agencies the interests and activities of which were pertinent to this problem.
In all there were about 600 delegates present from all parts of the United States,
who heard from the lips of practical experts a discussion of crime in its principi'l
aspects.
The short time which has elapsed since the passage of the series of crime bills
sponsored by the Attorney General does not permit a comprehensive analysis of
the assistance which the Federal Government can render to State and local
agencies in dealing with interstate crimes or the effect which the enlarged jurisdiction of the Federal Government will have in decreasing such crimes. However, experience has shown certain facts that may be of interest.
The Lindbergh kidnaping case occurred on March 1. 1932. The commission
of this crime resulted in the passage and approval of the Federal kidnaping
statute on June 22,1932. which gave the Federal Government jurisdiction in cases
involving kidnapinqs wherein interstate features were present. Since the passage of this statute the Federal Bureau of Investigation of the United States
Department of Justice has participated in the investigation of 35 cases involving
actual kidnaping and plots to kidnap. In all of these cases the identities of the
kidnapers are known. In the cases handled 81 persons have been convicted and
41 persons are now in custody awaiting trial. Sentences totaling 1,231 years 11
months and 2 days,, suspended sentences totaling 32 years - and'probationary
sentences' totaling' 22 years have been imposed, in addition to 16 life sentences
and 4 death sentences. In addition 2 kidnapers were lynched, 3 committed
suicide, 3 were murdered, and 4 were killed by officers.
The Federal bank robbery statute, making robberies of national banks and
member banks of the Federal Reserve System a Federal offense, was approved
by the President on May 16,1934. Since that date there have been 116 robberies
of national banks and member banks of the Federal Reserve System, with losses
totaling $509,000, which have been reported to the Federal Bureau of Investigation.
As the result of investigations conducted there are at the present time 72 individuals in custody awaiting further prosecutive action in connection with these
robberies and 47 individuals have been convicted in Federal court in connection
with these robberies. Two received life sentences and others have received
sentences totaling 1,095 years, suspended sentences totaling 120' years, probationary sentences totaling 38 years, and $33,206 in fines. One person has been
acquitted. In addition trials in State courts have resulted in 22 convictions,
with 2 life sentences, 13 indeterminate sentences, and other sentences totaling
136 years. During this period 6 bank robbers have been killed by State officers
and 1 adjudged insane.

Mr. O'CONNOR. And there is one other matter which I shall ask
Mr. Await to present.
STATEMENT OF F. G. AWALT, DEPUTY COMPTROLLER OF THE
CURRENCY, WASHINGTON, D. C.
Mr. AWALT. Senator, you remember that under 11 (k) of the
Federal Reserve Act, national banks that exercised fiduciary powers
are required to keep a separate set of books and records showing, in
detail, all transactions engaged in.
Then the law provides:
Such books and records shall be open to inspection by the State authorities,
to the same extent as the books and records of corporations organized under
State law which exercise fiduciary powers; but nothing in this act shall be
construed as authorizing the State authorities to examine the books, records,
and assets of the national bank which are not held in trust under the authority
of this subsection.




BAXKIXG ACT OF 1 9 3 5

179

Now, under that a great many of the States have for a long time
accepted the examinations made of the national banks by us.
Recently some of them have started to examine—which means a
duplication of examination. We examine, and they examine.
And it has been suggested for consideration—and we should like
to suggest this for the consideration of the committee—that the
committee amend that particular provision by providing that the
State banking authorities may have access to the reports of examinations made by the Comptroller of the Currency, insofar as such
reports relate to the trust department of such banks, instead of having a duplicate examination.
(The above-mentioned proposed amendment relative to examination of trust departments of national banks is as follows:)
SfC. —. The last sentence of the third paragraph of subsection (k) of
section 11 of the Federal Reserve Act, as amended (U. S. C, title 12, sec.
248 (k)), is amended to read as follows: "The State banking authorities may
have access to reports of examination made by the Comptroller of the Currency
insofar as such reports relate to the trust department of such bank, but
nothing in this Act shall be construed as authorizing the State banking authorities to examine the books, records, and assets of such bank."
Senator GLASS. T h a t is all for this morning, gentlemen. We shall
adjourn until tomorrow morning at 10: 30.
(Thereupon, at 12:30 p. m., an adjournment was taken until t o morrow, Thursday, May 2,1935, at 10:30 a. m.)







BANKING ACT OF 1935
THTXBSDAY, MAY 2, 1935
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE ON
BANKING AND CURRENCY,

WashMffton, D. 0.
The subcommittee met, pursuant to adjournment, at 10:30 a. m.,
in room 301, Senate Office Building, Senator Eobert J . Bulkley
presiding.
Present: Senators Glass (chairman of the subcommittee), Bulkley,
Bankhead, Couzens, and Townsend.
Also present: Senators Barbour and Moore.
Senator BULKLEY. Senator Glass says he will be here in a few
minutes; and in the meantime Mr. Crowley wants to supplement
his testimony.
STATEMENT OF LEO T. CROWLEY, CHAIRMAN FEDERAL
DEPOSIT INSURANCE CORPORATION—Resumed
Mr. CROWLEY. Senator Bulkley, there are three particular problems of the Federal Deposit Insurance Corporation which I should
like to have included in the record in my remarks. One of those
is the question of admission of banks to the fund.
The House, in its bill, has taken out that part of subsection 7 ;
and I should particularly like to call your committee's attention to
that section which gives us the right to investigate the financial
history and condition of the bank, the adequacy of its capital structure, its future earnings, prospects, the general character of its management, the convenience and needs of the community to be served
by the bank, and whether or not its corporate powers are consistent
with the purpose of this section.
Senator BULKLEY. F r o m what were you reading?
Mr. CROWLEY. This is the wording of the subsection that the House
took out.
Senator BULKLEY. T h a t was the subsection that was in the draft
of the bill as originally introduced, and the House committee struck
it out?
Mr. CROWLEY. That is correct, Senator.
Senator BULKLEY. A n d you want it in again?
Mr. CROWLEY. I t is in your bill now; and we want to keep it in
if we possibly can.
Senator BULKLEY. And you want now to have printed in the
record a memorandum in support of that addition ?




181

182

BANKING ACT OF 193 5

M r . CROWLEY. T h a t is correct.
S e n a t o r B U L K L E Y . V e r y w e l l ; i t will go i n .
( T h e m e m o r a n d u m is as f o l l o w s : )
MEMORANDUM CONCERNING TITLE I, BANKING ACT OF 1935, AS INTRODUCED IN THE
HOUSE (H. R. 7617)

As originally Introduced, the section on admissions read as follows (that
portion which is italicized has been deleted in the House bill) :
" SUBSECTION 7. (g) The factors to be enumerated in the certificate required
under subsection (e) and to be considered by the board of directors under
subsection (f) shall be the following: The financial history and condition of
the bank, the adequacy of its capital structure, its future earnings prospects,
the general character of its management, the convenience and needs of the
community to be served by the ba/nk, and whether or not its corporate powers
are consistent with the purpose of this section."
The Federal Deposit Insurance Corporation believes that the clauses in this
section which were deleted in the House bill are of vital importance and
should be retained. The Corporation was obliged under the original Deposit
Insurance Act to take in a considerable number of banks which were certified
by State commissioners to be solvent but which had very slight prospects of
making sufficient earnings to maintain their solvency. Some of these banks
had virtually no net sound capital; that is, the assets exceeded only slightly, if
at all, the deposit liability. The Federal Deposit Insurance Corporation and
the Reconstruction Finance Corporation assisted these banks to build up their
capital structure. It is highly important that these banks be protected against
the adverse effects that would result from the organization and insurance of
new banks in the same communities. In many of these communities a new
bank would be certain to take away business from existing insured banks
which are already not very strong and thus weaken both the insured banks and
the insurance fund.
There are 10 States in which the minimum capital requirement for a new
bank is as low as $15,000 and in some of the States there is already an obvious
tendency to permit banks to be organized which have no prospects of permanent success. Unless the Corporation is enabled to take future earning
prospects into consideration it may be required to insure a constant succession
of banks which operate for a shoj-t time and close with substantial losses to
the Corporation.
It is also highly desirable that the Corporation have power to take into consideration the convenience and needs of the community to be served by the
bank. Changing conditions, such as improvements in transportation, shifting
of industries and business concerns from one locality to another, and changes
in the population and in the income of communities, may make the organization of new banks superfluous. Yet the constant attempt of individuals to
enter the banking business is likely to result in the granting of corporate
charters in such communities, particularly those in which a part or all of the
banks in existence a few years ago have disappeared. To give the Corporation
power to consider the convenience and needs of the communities will be of
material aid in preventing a return to the overbanked condition of the 1920's.
The purpose of the last clause in the section on admissions, as originally
introduced, is to enable the Corporation to refuse membership to institutions
which are not in reality banks of deposit but which are primarily engaged in
other types of business enterprise and receive deposits in connection with those
enterprises.

Mr. CEOwiiEY. I should like also to include in the record a statement regarding examinations and liquidations. It is my judgment
that if the Corporation is to be successful, then, where they have 70
percent of the deposited liability in the 13,300 banks out of 14,200,
it is utterly useless for our Corporation to go into a bank after it has
once been involved; that we should have the right to be called in,
and to keep the banks sound, and not merely be called in to pay the
losses.




BANKING ACT OF 193 5

183

Also, on the matter of liquidations of the banks that have closed
today, we are the largest creditor, to the extent of 85 percent of the
banks closed up to this time.
Senator BULKLEY. D O I understand that you want to have the
power to take over a bank, without closing it ?
Mr. CROWLEY. We want the power of buying assets in an open
bank, and we want also to have the power—which is given to us in
the temporary act, and also in the present, permanent act—to liquidate assets of the closed banks that we pay off, in order that we may
control the assets of the closed banks.
Senator BULKLEY. T h a t was in the draft of the bill ?
Mr. CROWLEY. That is correct; and I simply just wish to add my
testimony as to why that should be left as it is.
Senator BULKLEY. That was not stricken out in the House bill?
Mr.

CROWLEY. No,

sir.

Senator TOWNSEND. The Comptroller rather favored that in his
testimony. And I think t h a t if these nien are to pay the bills, there
is a strong argument in favor of their controlling the assets.
Senator BULKLEY. The question, then, is whether you should control it, or whether the Comptroller's office should control it?
Mr. CROWLEY. Under the temporary act and under the bill which
is before you, the Comptroller, in the case of a closed national bank,
must appoint the Federal Deposit Insurance Corporation as receiver.
Senator BULKLEY. I see.
Mr. CROWLEY. Also, we have requested the various State legislatures to pass legislation providing that their State banking departments may appoint us receivers; and I believe that in some 30 States,
we have had favorable response.
Our argument is that we have the liability, and consequently those
assets should be handled by us because we are the ones who must
get the recovery from them; and in practically every instance, we
are liable for at least 70 percent of the deposits of these banks.
I should like to include that statement in the record, if there is
no objection.
Senator BULKLEY. All right; that may go in the record.
Mr. CROWLEY. That is all I have, Senator Bulkley; and I appreciate your courtesy.
Senator BULKLEY. Very well; thank you, Mr. Crowley.
(The above-mentioned statement is as follows:)
There are thiee powers which we consider to be indispensible to Ihe ultimate
success of deposit insurance: The first is the power to refuse to admit banks
into the insurance iund which are fundamentally unsound and, therefore, certain to develop into losses; the second is the power to examine insured banks;
and the third is the power to liquidate insured banks which become Insolvent.
During the period of 18 months ending December 31, 1934, over 2,200 banks
were licensed ro do business. About 1,500 of these banks had less than
$500,000 in deposits and about 400 had less than $100,000 in deposits. The
country as a whole would have been much better off had many of these banks
not been licensed. It indicates a tendency to return to the overbanked conditio!! of former jears. Of ihe banks licensed in 1934, well over a hundred
were primary organizations having no previous existence as distinguished from
institutions which took over the business of other banks.
The indiscriminate recharteiing of banks which have no economic justification will again return the country to the overbanked condition which existed
in 1920. Unless checked, the security of the insurance fund as well as the
banking system at large will be seriously jeopardized. The hoard of directors




184

BANKING ACT OF 193 5

of the Insurance Corpoiatiou should be given the power to refuse the benefits
of insurance to banks which are not now in the fund where the applying bank
cannot ever develop a volume of deposits sufficient to permit earnings which
will cover expenses and current losses.
We recommend that before a bank is admitted to the insurance fund thorough consideration be given to the history, future prospects, and management of the bank and the economic needs of the community where it proposes to engage' in business. We believe these to be the determining factors
in the ultimate success of a bank as an economically sound institution. In
the interest of protecting the funds of the Corporation, these important, factors should lie given consideration and the board should be permitted to accept or reject an application for insurance depending upon the result of its
analysis of the facts in this respect.
The next power which we consider to be necessary to safeguard the solvency
of the Corporation is the power to examine insured banks.
Seventy percent or more of the total deposit liabilities in over 13,300 of the
14,200 insured banks are now protected by insurance. In other words, in over
94 percent of all insured banks the Corporation's risk is at least equal to 70
percent of the total deposit liabilities of these banks and in a large majority
the Corporation's liability as compared to the total deposit liability of the
banks is even greater.
Included in these banks, each of which is 70 percent or more insured, are
92 percent of all national banks, 81 percent of all State member banks and
98 percent of all State nonmember banks. The liability of the Corporation
in all insured banks is estimated to be well in excess of $17,000,000,000. The
direct liability of the Corporation to the depositors in these banks is more
tangible than any responsibility which has heretofore existed in any Federal
or State supervisory authority. Bank supervisory oflMals are charged with
the duty of enforcing compliance by banks with the statutory requirements
imposed by the laws. It is the duty of these officials to require banks to correct impairments of capital, to place in liquidation insolvent institutions, and,
in many instances, to supervise liquidation in the interest of depositors. With
the performance of these functions their responsibility ceases. No supervisory
official is required to make good dollar losess.
The Federal Deposit Insurance Corporation, on the other hand, is in the
position of a guarantor for every insured bank. Since the Corporation must
supply to every depositor in a closed insured bank the amount of his insured
deposit, it must be concerned (in the interest of conserving its funds) with
protecting itself against bank failures. The most important instrument available tor effectuating this protection is the right of examining insured banks.
Only by giving the Corporation the free exercise of the right to examine banks
can the directors of the Corporation hope adequately to discharge their
responsibilities.
We have recently concluded a period of unprecedented bank failures. It
is of singular Importance that of the 13,500 banks which failed during the
14-year period ending December 31, 1934, over 11,000 were State banks. There
are many reasons inherent in the system which operate toward the lowering
of standards of the bank supervision which State supervisors exercise. We
are not concerned with this aspect of the problem. However, we believe it
would be a serious mistake to jeopardize the solvency of the Insurance Corporation by obliging it to accept the examinations made by State agencies, many
of the interests of which are at times inconsistent with those of the Insurance
Corporation. It is the Corporation which ultimately bears the losses which
may often be the consequence of inadequate examinations. It would seem
administratively unsound, therefore, to separate from the Corporation the
right of examination. To oblige the Corporation to depend upon examinations
performed by State supervisory authorities will not be in the interest of
preserving the solvency of the fund.
Included by law as insured banks are all national banks and all State banks
which are members of the Federal Reserve System. National banks are examined by the Comptroller of the Cuirtncy. while State memlter banks artexamined by the Federal Reserve Board. However, as to insured State banks
which are not members of the Federal Reserve System, Congress provided that
the Corporation should have the right of examination. As a consequence of
these provisions the Corporation has been engaged during the past 18 months
in examining State nonmember banks in every State in the Union. On December 31, 1934, there were 3J462 national banks, 980 State banks members of the




BANKING ACT OP 1935

185

Federal Reserve System, and 7,690 State banks not members of the Federal Reserve System. The Corporation now examines more banks, therefore, than does
either the Federal Reserve Board or the Comptroller of the Currency, or both
together.
The Corporation has now formulated a working program for the conduct of
Its examinations in cooperation with State supervising authorities. It is an
established practice for the examinations of the Corporation to be conducted
jointly with examinations by the State officials. In some States State officials
accept these examinations of the Corporation in lieu of their own examinations.
Copies, of examination reports made by the Corporation are furnished to the
bank and the State supervising authority, and to the Reconstruction Finance
Corporation where the latter corperation has- a capital investment. Constant
•contacts have been maintained with State authorities and the insured banks,
with the result that a vast amount of constructive work in improving the condition of these banks has been achieved. In some instances examiners are detailed to confer with the officers of the bank in a friendly capacity for the purpose of offering constructive and intelligent assistance to the bank in disposing
of any problems which may exist. This has enabled the Corporation greatly
ro strengthen the position of many banks. The figures evidencing the vast
amount of progress which has been made as a result of the examinations of
the Corporation are given elsewhere in the testimony. They give striking evidence of the constructive potentialities of examinations and of the importance
of this activity to the Corporation.
Constructive results which may follow from a thorough and competent examination constitute the most potent single instrument which might be given
the Corporation to reduce loss through bank failures. Examinations of sound
and well-managed banks accomplish much toward the continuance of these banks
In good condition. The examination of banks which are on the border line of
bad management or insolvency is essential in order that weaknesses may be
pointed out to the officers and in order that their attention may be directed to
approaching trouble. Examination of banks which have already become insolvent is essential in order that supervising authorities may be advised and
in order that they may be persuaded to close such institutions before the assets
are depleted, and, consequently, before the losses which the Corporation will
be obliged to assume are magnified. The practical supervisory powers which
are implied in and which follow from examinations are essential to the continued success of the Federal Deposit Insurance Corporation.
In addition, it should be pointed out that through deposit insurance over 90
percent of all commercial banks are now embraced in one Nation-wide system.
The insurance fund is in many ways a mutual undertaking. All insured banks
•contribute assessments in proportion to their deposit obligations, and to this
extent all insured banks are concerned with the losses which the Corporation
will be obliged to assume. It is only fitting, therefore, that all insured banks
should be subjected to the same standards of examination. Examinations conducted by 50 different examining authorities preclude the possibility of uniform
standards.
Since it is not practicable to assess banks at varying rates for the benefits of
insurance, which rates' presumably bear some relation to the degree of risk
involved, it is important that all banks be subjected to uniform standards of
examination, in order that an effort may be made to keep all banks on a uniformly sound basis. This is the only way in which the Insurance Corporation
may undertake to prevent what may otherwise be discrimination against those
banks which operate most soundly. In order to minimize discrimination against
The better-managed banks (those in which the Corporation's ultimate risk factor
is at a minimum), the Corporation should do everything within its power to
improve the condition of those banks which are badly managed (or in which
the Corporation has a high degree of risk). The Corporation can only undertake to improve the standards of management of the weaker institutions, if it
is given the right of examination.
Federal deposit insurance is a new development. It is still in an experimental stage. We have had a mere 18 months of experience. That experience
has shown us that the right of examination is the most useful and most constructive activity upon which the Corporation has engaged in order that it
might preserve its funds and keep losses through bank failures at a minimum.
Much remains to be done toward the improvement of the banking situation.
It is singularly true that progress has been made. We will continue to make
progress, if the right of examination is left with the Corporation.




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BANKING ACT OP 19 3 5

The right of the Federal Deposit Insurance Corporation to act as receiver
of insured banks where it is compelled to pay off the depositors is a right of
major importance. Congress recognized this in the original law by requiring
the Comptroller of the Currency to appoint the Corporation receiver of every
insured national bank which closed.
It also authorized the Corporation to act as receiver or liquidating agent of
any insured State bank which closed, ii the appointment is tendered by the
State authority having charge of the liquidation.
It is now possible for the Corporation to act as receiver or liquidating agent
of closed insured State banks in 30 States. In 13 of these States the right is
accorded by express provisions of a legislative act, and in the remaining 17 the
existing law was interpreted as permitting the appointment.
The Coiporation has submitted to the responsible authorities of every State a
bill to permit it to act as receiver or liquidating agent for consideration of its
legislature and has urged the passage thereof by the State legislatures.
The right of the Corporation to act as receiver of national banks should not be
changed back to the old system of allowing the Comptroller of the Currency to
appoint individual receivers who are to be responsible only to him. If this is
done, it will cause the States to go back to the old system also. The States
cannot consistently be asked to appoint the Corporation receiver where this
right is taken away in respect to national banks.
On December 31 Insured national banks had total deposits of $21,600,000,000.
Insured State banks (Federal Eeserve member and nonmember banks) had
total deposits of $17,400,000,000. Or, in other words, all State banks had approximately 45 percent of the total deposits in all commercial banks. As has
already been shown, the present maximum limit of insurance fully covers 70
percent or more of the deposits in 84 percent of all insured banks. More than
43 percent of the deposits of all insured banks are protected. Thus when the
Corporation pays out the insured deposits of these banks, it will become the
largest creditor by an overwhelming margin in approximately 9 cases out' of 10,
and in the remaining 1 case out of the 10 will be the largest single creditor,
with from 30 percent to 40 percent of the bank's liabilities owing to it.
In view of its tremendous investment in these closed insured banks, the
Corporation must have the right to supervise the liquidation of their assets.
In the preinsurance era the interest of local people who had their deposits
tied up in these assets supplied the necessary check on the receivers in charge
of the liquidations and the debtors who owed the trust money. Now, that is
changed, and unless the Corporation is given charge of the liquidations it will
be compelled to stand by while receivers do the job to suit themselves. Protracted receiverships will result because the receivers will not have any incentive to work themselves out of jobs. Unnecessary delay not only increases the
expense of liquidation but cuts down the returns because of the well-known fact
that the older a claim becomes the more difficult it is to collect.
That the creditors primarily interested in the outcome of a liquidation should
have the first voice in conducting it is a well-established principle of law. The
bankruptcy law provides for the election of a trustee to liquidate the assets of
bankrupt estates by a majority in number and amount of the bankrupt's
creditors.
Furthermore, the courts, in appointing receivers, frequently appoint the nominee of the principal creditors or set a time for hearing at which creditors may
present their recommendations.
As already stated, the laws of 13 States expressly authorize the appointment
of the Corporation as receiver of insured State banks. These States recognize
this principle.
The selection of the Corporation as receiver will tend to reduce the expense
of liquidation. The Corporation will be primarily interested in an economical
liquidation because its average interest out of every dollar collected in the
majority of cases will be 70 cents, which it will receive by way of dividends on
the claims of depositors paid by it. Protracted receiverships will be avoided
because of the expense involved. On the other hand, owing to the wide-spread
interest of the Corporation as insurer of banks in every community in the country, the Corporation will liquidate in such manner as not to damage the credit
structure of the community. The Corporation is gradually building its liquidating staff by training its own liquidators and will gradually absorb available
men of experience and ability now engaged in liquidation work with National or
State banking departments.




BANKING ACT OF 19 3 5

187

A large portion of the work preliminary to actual liquidation must be done
by the Corporation, whether it acts as receiver or not. This work is done in
preparing for paying off the insured depositors. The Corporation prepares a
complete record of all of the deposit liabilities of the bank and secures claims
from the depositors covering the amounts of their respective balances. In
several cases where this Corporation has paid the insured deposits of closed
State banks the State law did not permit the Corporation to act as receiver or
liquidating agent. The result was that all work of the foregoing character was
duplicated by State officials, and the depositors were compelled to prove their
claims, not only with the Corporation but with the State officials also.
In addition, in order that it may be properly informed as to the progress of
the liquidation under the supervision of the State receiver, the Corporation
makes an inventory of all of the bank's assets, determines the valuation thereof,
and estimates its loss, in accordance with the requirements of the Banking
Act of 1933. In national banks, the Corporation now acts as receiver and in
such eases all of the foregoing records are available for use of its liquidating
agents, thereby eliminating a vast amount of preliminary work and expense.

Senator BULKLEY. Senator Barbour and Senator Moore are here,
with some gentlemen from New Jersey.
Senator BAKBOUR. Mr. Chairman and members of the committee,
in conjunction with my colleague Senator Moore and the New Jersey delegation in the House, we have had a number of conferences
with bankers from the State of New Jersey; and the banking fraternity of our State has designated the following committee to come
before you gentlemen and to discuss our ideas with respect to the
pending bill.
The committee consists of the following gentlemen: Mr. William
J . Field, Commercial Trust Co. of New Jersey, of Jersey City; Mr.
F . C. Ferguson, Hudson County National Bank, of Jersey City; Hon.
Edward C. Stokes, of Trenton, former Governor of the State;
Mr. H a r r y H. Pond, of Plainfield; Mr. F . Morse Archer, of Camden;
and Mr. Spencer S. Marsh, of Newark.
Mr. Field would like to testify on titles I and III, and Mr. Ferguson would like to testify regarding title I I . So we should be pleased
if the chairman would call either one of these two gentlemen.
Senator BULKLEY. Do they represent the State Bankers' Association?
Senator BARBOUR. Yes; they do.
Senator B U L K L E T . Very well. I t does not matter who speaks
first; we shall leave that to their preference.
Senator BARBOUR. I would suggest, then, Mr. Chairman, that Mr.
Fields speak first, and then have Mr. Ferguson follow, if that is
agreeable to you.
STATEMENT OF WILLIAM J. FIELD, PRESIDENT OF THE COMMERCIAL TRUST CO. OF NEW JERSEY, JERSEY CITY, N. J.
Mr. FIELD. Mr. Chairman and gentlemen, I represent the New
Jersey Bankers' Association, and my job is to ask you to reconsider
some of the suggestions in title I and I I I of the bill.
Senator TOWNSEND. As written in the Senate or the House bill as
passed ?
Mr. FIELD. The original bill and some of the proposed amendments of the House.
Senator BANKHEAD. With what bank are you connected ?
Mr. FIELD. The Commercial Trust Co., of Jersey City.




188
Senator

BANKING ACT OF 1 9 3 5
BANKHEAD. YOU

are the president of that bank ?

Mr. FIELD. Yes; the president of it.

Presuming the probability of titles I and I I I of the Banking Act
of 1935 being enacted at the present session, and also the possibility
of the Congress enacting title I I , we wish to take this opportunity
of bringing to your attention several sections of the bill which we
believe should either be modified or clarified.
The following suggestions apply to title I of the proposed law.
Section 12B of the Federal Reserve Act is further amended, paragraph 23Y, to provide that all State nonmember banks must become
members of the Federal Reserve System by J u l y 1, 1937, or discontinue membership in the Federal Deposit Insurance Corporation.
One of the requirements at such time is assets, in excess of capital
requirements, adequate to meet liabilities to depositors and other
creditors.
The rule adopted by Government financial authorities—Federal
Reserve bank, Federal Deposit Insurance Corporation, and Reconstruction Finance Corporation—for adequate capital is the 10-to-l
rule; that for every $10 of deposits there must be $1 of capital assets.
Section 308 is amended to require banks to have a surplus of 20
percent before opening for business.
These sections may mean rulings to the effect that nonmember
State institutions, when joining the Federal Reserve System, in order
to qualify for insurance with the Federal Deposit Insurance Corporation, must have good capital assets of at least 10 percent of
deposits, of which the surplus fund shall be at least 20 percent of
the capital.
Our fear under this situation is that when we consider the unreasonable value of assets by some of our banking supervisors, many
of the present nonmember State institutions will be unable to meet
these requirements.
T o refuse them membership in the Federal Reserve System, and
thus place them in a position where they would be obliged to advise
their depositors they were no longer an insured bank, would, under
existing conditions, result in many such banks closing their doors.
Again, to start closing banks would undoubtedly cause serious
trouble in the general banking situation.
We believe this situation has been considered by the House, and
the bill amended to eliminate compulsory membership in the Federal
Reserve System, leaving qualifications for membership in the Federal Deposit Insurance Corporation to the discretion of the Federal
Deposit Insurance Corporation. While membership in the Federal
Reserve System may eventually be highly desirable for all insured
banks, it is our opinion that for the next few years many State
banking institutions will be unable to make the grade for such
membership.
Under this same section, 12-B, in paragraph 8-H 1 and 2, it is
provided " that each insured bank shall be assessed at not to exceed
one-twelfth of 1 percent—since increased to one-eighth of 1 percent—of its total deposits based on the average, determined from
such total as of the close of business on the last day of J u n e and the
last day of December of each year."
Further on in this section, it is provided that on or before the 15th
day of July of each year, each insured bank shall file with the Cor-




BANKING ACT OF 1 9 3 5

189

poration a certified statement under oath showing the total amount
of its liability for deposits as of the close of business on the 30th
day of June last preceding, and shall pay to the Corporation the
portion of the annual assessment equal to one-half of the annual
rate. This same wording applies to the assessment for the last half
of each year.
Our presumption is that the intent of this wording is to assess
banks on their average deposits for each 6 months, according to
statements prepared of such average as of June 30 and December
31 of each year, and we ask that this part of the bill be clarified so
there will be no question that the assessment will be made against
such average deposits.
I t would not be fair or reasonable to the banks to assess them on
total deposits as shown on these particular days, and disregard average deposits, for the reason that many banks pay dividends and interest for depositors on J u l y 1 and January 1 from deposits made a
few days prior to such dates by corporations, counties, cities, and so
forthj and really have no investment use of such funds. The cost of
premiums for insurance of such deposits would be prohibitive. I t
would be necessary for banks to refuse such deposits, and such refusal would case much disturbance in the orderly distribution of
income.
The House amendment has endeavored to clarify this section by
showing it is clearly the intent to make premium assessments on
average deposits. However, the method of determining such average, as suggested by the House amendment, is neither fair nor equitable. They suggest the amount to be assessed for each 6 months, be
determined by selecting three arbitrary dates during such period,
and averaging the deposits of such dates. How the dates are to be
selected is not determined and they may well be selected from a hat.
Should J a n u a r y 1, March 30, and June 30 be selected, the banks
Avould show deposits much in excess of their true average.
A simple and true method of determining average deposits would
be to average the daily deposits for 6 months' periods ending June
30 and December 31. This method would give the average of
actual deposits; and as each bank has records so prepared, this
would simplify the work for the banks.
When figuring these deposits, to arrive at the basis of assessment,
it would appear fair and reasonable to permit a deduction of all
deposits that are otherwise insured or secured: Bankruptcy funds,
deposits by a trust department of the depository bank, postal savings funds, Federal Reserve moneys, and other Government moneys.
These moneys are all secured by insurance or by the bank's securities, and the Federal Deposit Insurance Corporation would not have
to be considered for payment. If you will consider, for instance, the
deposits of postal savings: Banks now have to secure such moneys
with a deposit of securities and at the same time pay a prohibitive
rate of interest on them. If such deposits had to be included in the
average the Government would soon be without a depository bank.
I t is further provided in this section that a. separate rate of assessment may be fixed for mutual-savings banks.
We ask your consideration of this situation, as we believe that if
any different rate of assessment is made on deposits of savings banks,
129688—as—IT I




in

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BANKING ACT OF 1 9 3 5

such rate should apply to time or savings deposits in National and
State bank and trust companies. Deposits should be classified as to
insurance rates rather than the kind of banks having such deposits.
Savings banks are all State institutions, and each State has different
laws governing savings.
All of the several kinds of banking institutions are in competition
for savings deposits, but many savings banks are not insured by
the Federal Deposit Insurance Corporation; and as time elapses
comparatively few savings banks will be insured. I n New Jersey
we have a savings institution with capital stock. This institution
is organized under a special charter and is partly mutual. I t would
be difficult to classify such a bank under the proposed law.
The assessment of the Federal Deposit Insurance Corporation at
the maximum rate permitted is a very serious charge on the earnings
of a bank, especially in these times of exceptionally low interest
returns from proper investments. A n d if this rate should be assessed
on savings or time deposits of all commercial banks, the result would
be a higher cost for such money and a consequent lessening of the
safety of investments in order to obtain additional income or a reduction of interest rates on such deposits.
Senator GLASS. D O you think that all mutual-savings banks go
into the insurance-deposit fund ?
Mr. FIELD. Not if they are well located. If they are located near
banks that are on the verge of being upset it might be reasonable
for them to go in.
Senator GLASS. A S a matter of fact, have they not, almost en bloc,
determined not to go in ?
Mr. FIELD. Yes; many of them have. And I think that as time goes
on many of them will get out.
Senator TOWNSEND. Are you speaking of the insurance or of the
Federal Eeserve?
Mr. FIELD. Insurance.
Senator GLASS. Yes; insurance.
I say that the mutual-savings banks, almost en bloc, have declined
to go into the insurance fund. A n d they ought to have declined,
and they ought to stay out.
Mr. FIELD. If the deposits of a savings bank are not insured, or,
if insured, are assessed at a lower rate than similar deposits in commercial banks, such savings bank can naturally pay more interest
than commercial banks, and thus enter into unfair and unwise
competition.
The House has endeavored to make a distinction between " savings
b a n k s " and "mutual-savings banks." I n some States, there may
possibly be a slight distinction, but there is very little difference.
And when you consider the savings departments of national and
State banks and trust companies, the very little difference still applies. This endeavor to make these fine distinctions, will only lead
to confusion and unfairness.
We ask that all such deposits, regardless of the kind of depository,
be assessed at the same rate.
Now in regard to an assessment of the limit permitted; t h a t is,
one-twelfth of 1 percent per annum, and now increased to one-eighth
of 1 percent, it will undoubtedly be found that this rate is excessive
insofar as the general funds of the Federal Deposit Insurance Cor


BANKING ACT OF 1 9 3 5

191

poration are concerned, and will be prohibitive insofar as many
banking institutions are concerned. For instance, as to the funds of
the Federal Deposit Insurance Corporation, there should be practically no loss or depletion of the amounts contributed, and consequently there should be a limit to the proposed accumulation of
surplus.
When an insured bank fails and the Federal Deposit Insurance
Corporation is called upon to pay insured deposits, the Federal Deposit Insurance Corporation takes over all assets of such closed bank
and is reimbursed from the liquidation of such assets.
I t would be difficult to find many banks whose total deposit liability would be insured, because of all its deposits being for $5,000
or less. Consequently, the margin of assets covering deposits over
$5,000 per depositor, plus capital and surplus liabilities, or what is
left of them, should always insure the Federal Deposit Insurance
Corporation against ultimate loss.
The House suggests that depositors having on deposit, in a closed,
insured bank, an amount in excess of $5,000, should share pro rata
in recovery from the assets of the closed bank. This, of course, will
somewhat reduce the margin of safety of the Federal Deposit Insurance Corporation, but is certainly an equitable arrangement.
An investigation of assessments already made on insured banks
will disclose that most good banks paid such assessment from reserves
and did not accrue the amount as a charge against current income.
Many other banks—and there are many—are carrying the amount
as an asset, which, of course, is a doubtful and unsafe procedure.
Subsequent assessments should naturally be paid from earnings; and
earnings will show, in many cases, an inability to meet the assessments.
The Government, through the K. F . C , has endeavored to safeguard many banks by increasing their capital with preferred stock.
Many find it difficult to service such preferred stock with present
earnings. Where such banks will obtain money to meet Federal
Deposit Insurance Corporation assessments is a very serious question
and one to which you gentlemen should give your earnest consideration.
The House has changed this rate of assessment from one-twelfth
of 1 percent to one-eighth of 1 percent, or from $833.33 per $1,000,000
of deposits to $1,250 per $1,000,000, and has eliminated the provision
that assessments shall not be less than such rate. I t would seem reasonable to give the Federal Deposit Insurance Corporation power to
assess at a smaller rate, if, in their judgment, the circumstances
warrant such action.
I n this same section of the bill, paragraph 22-6, there is provided
that the Federal Deposit Insurance Corporation, after the examination of a member bank, may make certain recommendations to such
member; and failure to comply with such recommendations gives
the Corporation power to publish any part of the report of such
examination of any bank other than a national bank.
We cannot see why all banks should not be considered on a like
basis in this contingency, and why there should be an exception in
the case of a national bank. B u t we further believe that even if
there were no exceptions, the publication provided for might work




192

BANKING ACT OF 3 9 3 5

material harm, and should be eliminated. A proper system of fines
might be much wiser in such cases, and would avoid publicity.
A situation to be considered under title I is the question of insuring deposits of beneficiaries of trust estates. Under the present law
banks are required to report all insured deposits; and each beneficiary is safeguarded to the insured limit.
Under the proposed law a trust estate, as such, is insured to $5,000,
regardless of the number of beneficiaries, although banks are required to pay an assessment on total deposits.
I t is impractical for executors and trustees to break up an estate
so as to deposit separate amounts according to the number of beneficiaries interested. I t is our suggestion that this situation be modified so that each beneficiary will be protected up to the insured limit.
We are firmly of the opinion that insurance should be based on
the amount insured, and that each bank should pay for the insurance
benefits which it receives; in other words, we believe that the larger
and better banks should not be asked to pay for insurance on deposits
in smaller institutions. This result is not accomplished when total
deposits are assessed instead of actual insured deposits. This charge
is a socialistic principle with which we are not in accord and against
which we enter our sincere protest.
Title I I of the act provides mostly for a clarification of many moot
questions, and insofar as we have been able to study it we believe it
should be favorably considered.
There is one paragraph which should be further considered from
the standpoint of the time limit imposed. We refer to the matter
of loans made prior to June 16, 1933, to executive officers. The act
permits the extension of such loans to 5 years from June 16, 1933.
This situation would be better safeguarded if such loans might be
extended for 5 years beyond the date of enactment of the proposed
law. Many of these loans to executives are secured by bank stock
and mortgages which in all probability will take at least 5 years to
show any substantial recovery. Such loans cannot be removed to
other banks, and the time allotted is too short to permit orderly
liquidation without damage to the borrower and the lending bank.
As new loans of this kind are prohibited, it is only reasonable to g r a n t
ample time to clean up the present situation.
Gentlemen, we hope that you will give heed to the request of the
New Jersey bankers. We think that we are practical people. W e
want to help this new legislation, and we should like very much to
see titles I and I I I passed—of course, with the modifications we have
suggested.
We think it is very important to the country t h a t title I , especially—the Federal Deposit Insurance Corporation—should be set up
properly, and the amounts limited so that they are within reason,
and are within reach of the banks.
Under the E. F . C. the banks have been taking much preferred
stock. I am a member of the New York advisory committee of the
R. F . C , and I have seen many cases where they cannot service the
preferred stock. This large assessment—and the assessment coming
regularly every year—will put many of those banks out of business.
They cannot stand the pressure. I t must be either a lenient assessment, or they will be put out of business.




BANKING ACT OF 1 9 3 5

193

Senator BANKEAD. I notice that you are especially interested in
titles I and I I I .
I n the event that title I I is not retained in the bill, do you advocate defeating the bill ?
Mr.

FIELD.

No.

Senator BANKHEAD. Then, if title I I is put in, you oppose the
whole bill?
Mr. FIELD. I think t h a t title I I should be eliminated. If title I I
is retained, we oppose the whole bill. Title I I is so radically out of
order that we do not stand for it for a minute.
STATEMENT OF FRANK C. FERGUSON, PRESIDENT HUDSON
COUNTY NATIONAL BANK, JERSEY CITY, N. J.
Mr. FERGUSON. My name is F r a n k C. Ferguson. I am president of
the Hudson County National Bank, Jersey City, N. J., and chairman
of the committee on Federal legislation of the New Jersey Bankers'
Association, in which capacity I appear before this committee to
speak on title I I of the proposed act.
Senator GLASS. On title I I \
Mr. FERGUSON. On title I I .
I approach this subject with a considerable amount of trepidation,
because I want tp say at the outset that I do not pose as an expert
on money or credit currency. The views that I am going to express
in this memorandum, which has also been submitted to the executive
committee of the New Jersey Bankers' Association, are based on the
theories which I learned in school 25 years ago, and which 25 years
of active commercial banking experience have not caused me to
change.
I might also add, before I start on the memorandum, that the views
which I am going to express in this memorandum are much better
expressed in the writings and teachings of such men as Dr. Kemmerer. of Princeton; H . Parker Willis, of Columbia; Walter E
Spahr, of New York University; and Dr. Sprague, of Harvard.
With your permission, I shall proceed with my memorandum.
Title I I of the proposed banking bill of 1935 contemplates fundamental changes in our money and banking systems and is the most
important division of the bill.
There are, unquestionably, serious weaknesses in our money and
banking structures, as our expei iences during the past years have
shown us. Legislative steps should be taken to eliminate the known
defects and to provide the Nation with the proper type of money
and banking systems. However, such legislation, affecting the most
vital and important cog of our economic system—our money and
banking mechanism—should be (he outgrowth of a careful, deliberate,
and impartial study, and analysis of our money and banking problems should be conducted by our most competent experts.
The last great banking legislative step undertaken by this Nation
was the present Federal Reserve System. The Federal Reserve Act
was the result of years of study—conducted by Congress, banking
associations, industry, economists, and others—of the banking systems of the world and of our money and banking problems.
The present situation may well be compared to the situation which
existed before the passage of the Federal Reserve Act. Then, as




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BANKING ACT OF 193 5

now, we knew that our monetary and credit machinery was in need of
overhauling and reconstruction, but how to accomplish this and to
make the changes fit the needs of business and commerce was and is
the problem. Any meddling with our monetary and credit systems
may have serious effects on our business life and may aggravate the
present evils. Changes in our monetary and credit systems, such as
may be accomplished by title I I of the Banking Act of 1935, should
be made only after the most careful and painstaking inquiry conducted by a nonpartisan monetary commission—composed, as suggested by Dr. Walter E. S p a h r :
First, of those members of the Senate and House Committees on Banking
and Currency who have devoted years to the study of problems of money and
banking;
Second, of the most outstanding and experienced economists and professors
of money and banking in our leading universities—men whose reputation, intellectual integrity, and capacity are beyond question;
Third, of outstanding bankers who are men oE experience, maturity, and
social vision; and
Fourth, other students of money and banking, drawn from other fields of
activity, if they are recognized as thorough students of money and banking
problems.

An impartial analysis of title I I reveals most conclusively that
it does not contain the solution for our problems. Title I I I would
make possible political control and consequent possible manipulation
of the banking mechanism of the Nation. The bill, in this title,
also provides for drastic changes in the basis of issuance of Federal
Reserve notes, throws wide open the rediscounting and advancing
powers of the reserve banks, increases the emergency powers of the
Federal Eeserve Board with respect to required reserves, and lets
down the bars considerabty with respect to the mortgage-loan
powers of national banks.
aragraph 3 of section 203, because of its provisions will inevitably—despite all protestations to the contrary—bring about political
control of the Federal Reserve Board. I t states—
that of the six appointive members of the Board, one shall be designated by
the President as Governor and one as Vice Governor of the Federal Reserve
Board, to serve as such until the further order of the President * * *.
The term of office of the member designated as Governor shall be the period
during which he shall continue as Governor and, upon the termination of his
designation as Governor, he shall be deemed to have served the full term for
which he was appointed."

Under the provisions of this paragraph the Governor of the Federal Reserve Board would hold office only at the pleasure of the
President. He would, in effect, take office only by submitting an
undated letter of resignation to the President. This provision would
enable a President to advance any member of the Board to the
governorship, remove him, and thus in a short time completely t u r n
over the appointive personnel of the Board, despite the fact t h a t
the four appointive members, other than the Governor and the Vice
Governor, are chosen for a term of 12 years.
Because of these provisions, the Federal Reserve Board will at all
times be subject to residential control.
Paragraph 1 of section 203 provides that the President—
shall choose persons well qualified by education or experience or both to participate in the formulation of national economic and monetary policies.




BANKING ACT OF 1 9 3 5

195

The result, as a consequence of paragraphs 1 and 3, may be that
political expediency will be the prime consideration in the selection
of the appointive members of the Board. These political appointees
may be men of wide experience in banking and finance; nevertheless,
they may have been appointed because their beliefs are compatible
with those of the administration. The power of removal being at
the disposal of the President, independent action by the Federal
Reserve Board will not be possible, and thus membership in the
Board will be restricted to those men who will fully comply with
the wishes of the administration.
This section is the most dangerous section in the entire bill. I t
gives the political party in power the power to dictate the policies
of the Federal Eeserve Board—which Board, once appointed, should
be absolutely free of political domination. The Federal Reserve
System constitutes the central banking organism of the country.
The governing body of the System, the Federal Reserve Board, has a
position of the utmost importance in influencing the economic life of
the Nation. Therefore, the independence of the Board should, if
possible, be strengthened, and not weakened. I t should be the main
function of the Board to conduct the Federal Reserve System as
" a neutral agent to finance commerce, agriculture, and i n d u s t r y "
to the mutual benefit of all concerned. Since title I I provides for
a Federal Reserve Board which might become a political instrument, it is obvious that the independence of the Board, is in jeopardy.
Senator BANKHEAD. Let me ask you, there, if there has ever been
a time when fhey were not subject to the influence of the administration in power?
Mr. FERGUSON. They certainly have been subject to the influence in
the last 10 years.
Senator GLASS. Yes; I can name a time when they were not: During the 8 years of the administration of Woodrow Wilson, he would
not even have social contact with the members of the Federal Reserve
Board for fear that it might be suggested that he was undertaking
to influence the Board.
Senator BANKHEAD. My question, if the Senator will note, was not
if there has ever been a time when they were not influenced, but
when they were not subject to the influence.
Senator GLASS. Well, there were other times when they were not
influenced in a political way, in any sense, as I recall. President
Coolidge reappointed two of the Democratic members of the Federal
Reserve Board during the term of his service as President; and
although my contact with the Board may not have been as intimate
as that of some others, I do not recall any instance in which President
Coolidge ever sought to control the action of the Board, or to influence it in any respect.
Mr. FERGUSON. Section 201 provides the means by which the Federal Reserve banks would be brought under the control of the Federal
Reserve Board. The most important feature of this section relates to
the office of governor of the Reserve bank. I t provides that the
present offices of governor and chairman of the board of directors
of each Federal Reserve bank should be combined. The governor,
under the new act, shall be appointed annually by the board of
directors of the Reserve bank, subject to the approval of the Federal




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BANKING ACT OF

1935

Reserve Board. He shall not take office until approved by the Board,
and upon approval, he is to be designated by the Board as one of the
class C directors of the Eeserve bank. The governor is to be the chief
executive officer of the bank, chairman of the executive committee,
and " all other officers and employees of the bank shall be directly
responsible to him."
The appointment of a vice governor for each Federal Reserve bank
is to be made in the same manner as the governor. The vice governor
may be appointed by the Federal Reserve Board as a class C director
and, in such cases, he may be appointed deputy chairman of the board
of directors. Class C directors, appointed by the Federal Reserve
Board, shall hold office for a term of 3 years; but this does not apply
to the governor's term, or to the vice governor's term if he is appointed a class 0 director. As stated before, these officers are to be
appointed annually. Another requirement that class C directors
must have been residents of their districts for at least 2 years, likewise does not apply to the offices of governor and vice governor. A
class C director, other than the vice governor, may be appointed
deputy chairman of the board of directors. The duties of the present
Federal Reserve agent are to be performed by " such person as the
Federal Reserve Board may designate."
The provisions of section 201, therefore, would bring the Federal
Reserve banks under the complete control of the Federal Reserve
Board, which, under the provisions of section 203, might become politically controlled. The executive offices of governor and vice governor will come under the direct control of the Federal Reserve Board
because their tenure of office will depend upon the Board's approval.
The powers and status of the board of directors of each Federal
Reserve bank will be practically nil, because the senior officers of the
bank will not be responsible to them. These boards will lose still
more of their power, in that the rank and file of the Reserve banks
will be directly responsible to the various governors. As a result,
any political party in power, through the medium of setting up a
subservient Federal Reserve Board—and which it would be able to
accomplish without any difficulty—would not only be in a position to
control the filling of the executive offices of the Reserve banks, but
also the rank and file positions in these banks. I n this manner the
political party in power could use the Federal Reserve System and
the Federal Reserve banks to its own advantage. I t is evident, therefore, that better banking cannot and will not result from the provisions of sections 201 and 203.
Section 205, title I I , proposes to create a new type of a Federal
open-market committee. The new committee would consist of the
Governor of the Federal Reserve, who is to be chairman of this
committee; 2 members of the Federal Reserve Board, selected by
the Board; and 2 governors of the Federal Reserve banks, selected
by the governors of the Federal Reserve banks. With the exception of the Governor of the Federal Reserve Board, the terms of
the members of this committee would expire annually. The two
important duties of the committee would be:
F i r s t : " To consider, adopt, and to transmit to the Federal Reserve banks, resolutions setting forth policies which, in the judgment
of the committee, should be followed with respect to open-market
operations of the Federal Reserve banks ", and,



BANKING ACT OF 1 9 3 5

197

Second: To " make recommendations to the Federal Reserve Board
regarding the discount rates of the Federal Reserve banks."
Another important provision in this section is that the Federal
Reserve banks would be required to conform their open-market operations to the recommendations of the committee.
The changes contemplated in this section can be better appreciated
when one realizes that the present Federal open-market committee
is composed of 12 members, 1 from each Federal Reserve district,
and selected by the Reserve bank in such district. The present committee performs the same functions as proposed for the new committee, but its open-market recommendations are not mandatory, in
that a Federal Reserve bank not wishing to participate in the openmarket operations recommended may refuse to do so by filing notice
with the Federal Reserve Board within 30 days of its decision.
This section would bring under the absolute control of the new
committee the open-market operations of all the Federal Reserve
banks. The committee, in turn, would come under the complete
control of the Federal Reserve Board, because 3 of its members
would be Board members and the remaining 2 members would
hold office as Governors of their Reserve banks subject to the approval of the Board. If the Federal Reserve Board were to be an
independent body, free from political influence, this section would
be desirable, for it is highly desirable that a central banking system
respond in its entirety to actions involving the adjustment of the
rediscount rate or open-market operations.
Senator GLASS. B u t do we have a central banking system? My
recollection of the history of banking legislation is that Congress
very definitely rejected a central-banking system, and created a
regional-banking system with the central-supervisory power here
at Washington.
Mr. FERGUSON. That is so. But, of course, we approach that central-banking system through the regional banks.
Senator GLASS. Yes; but we have no central banking system. We
have a regional-banking system with supervisory control by a central body, altruistic in its character, with no acquisitive considerations, whatsoever.
Mr. FERGUSON. YOU have a central-banking system under this
proposed 1935 bill.
Senator GLASS. B u t I am talking about the existing system.
Of course, we have a central-banking system here, wherein the
Government would control a central bank, and yet not own one dollar
of proprietary interest in the banks that it proposes to manage.
There have been propositions for central banks to be owned by
the Government; and that is one thing. But do you not observe
that this bill sets up a central bank, to be managed by the Government, without the Government owning a dollar of proprietary
interest in the banks?
Mr. FERGUSON. Yes; the member banks own the Reserve banks.
May I go ahead?
Senator GLASS. Oh, yes.

Mr. FERGUSON. I t is the function of a central banking system, such
as the Federal Reserve System, through its open-market operations
and the discount rate, to control the monetary and credit mecha-




198

BANKING ACT OF 1 9 3 5

nisms of the Nation for the mutual benefit of commerce, industry,
and agriculture.
I t is not the function of a central banking system to concern itself
primarily with Government financing, as now exists and will be
further encouraged by the provisions of this section and of the bill.
This section provides the means whereby any administration,
through a controlled Federal Reserve Board, can initiate such openmarket operations as will suit its purposes. A t the present time,
through pressure from the Treasury, the Federal Reserve System is
maintaining an easy money-market condition of an extremely artificial nature, to aid the financing of Government expenditures through
the banks. Excess reserves have skyrocketed to record levels and, if
this bill is passed, is there any reason to believe that an open-market
committee, which might be subject to political influence, would undertake open-market operations to counteract the inflationary potentialities of the excess reserves?
Section 206 provides that, subject to regulations as to maturity
and such other matters as the Federal Reserve Board may prescribe,
any Federal Reserve bank may discount for any member bank, upon
its endorsement, " any commercial, agricultural, or industrial
paper ", and may make advances to any such member bank secured
by " any sound assets" of such member bank. This amendment
would open the way toward converting our commercial banking
system into a nonliquid noncommercial system. As this provision
is intended to be permanent, it would in time make the Federal Reserve System a nonliquid system, when by all means it should maintain its liquidity if it is to properly function as a depository of the
Nation's reserves.
Section 207 of the bill proposes to widen the scope of the System's open-market operations so that obligations fully guaranteed
by the United States as to principal and interest may be purchased
by the Federal Reserve banks without regard to maturities. Keeping in mind the proposed reorganization of the open-market committee, this section would enable the committee, possibly dominated
by factors of political expediency, to force the Federal Reserve
banks to increase their scope of purchases of " governments " and
thus tend to become nonliquid. The import of this amendment and
of section 206 will be more fully discussed in that section of this
statement dealing with the proposed issuance of Federal Reserve
notes under section 208 of the bill.
By means of section 208 the bill proposes, first, to issue Federal
Reserve notes under such rules and regulations as a possibly politically controlled Federal Reserve Board may prescribe; second, to
maintain the present reserve requirements of at least 35 percent
against deposits in lawful money and at least 40 percent in gold
certificates against Federal Reserve notes; third, to abolish the
5-percent redemption fund now maintained with the Treasurer of
the United States; and, fourth, to permit one Reserve bank to p a y
out the notes of other Reserve banks, without any penalties. I n
general, this section would permit the issuance of Federal Reserve
notes against the general assets of the Federal Reserve banks, which,
under the provisions of title I I , may well consist of mortgage paper,
bonds, Government securities, and so forth.




BANKING ACT OF

1935

199

P r i o r to the enactment of the Federal Reserve Act, the Nation's
bank note and deposit currency did not meet the required needs of
industry, commerce, and agriculture, and, as a matter of fact, proved
to be detrimental. Bank notes, as represented by national bank
notes, backed by certain issues of United States Government bonds
purchased by national banks and deposited with the United States
Treasury, did not permit elasticity of contraction or expansion
insofar as the needs of business were concerned. The issuance of
these notes was dependent upon the price of " governments " and
the profitability of their use on the part of the national banks.
Then, again, as the National Government reduced its funded debt,
as it did between 1881 and 1891, the supply of bonds available for
note-circulation purposes was seriously reduced. Because of these
factors, national-bank-note circulation did not expand or contract
as necessary. During periods of stress, when expansion of note
circulation would be desirable to ease the currency strain, nationalbank-note circulation would decline, because the price of " governments " would be so prohibitive as to make note issue unprofitable.
A n d during periods of easy money conditions, when additional note
circulation was not needed or warranted, national-bank-note circulation would increase because of the favorable price of " governments."
Senator GLASS. Even if the price of " governments " were not prohibitive, the extent to which bank notes might be issued was Jess
than a billion dollars.
Mr. FERGUSON. Yes, sir; limited to the amount of " governments "
out.
The failure of national-bank notes to expand and contract as
needed, during the period prior to the passage of the Federal Reserve Act, tended to add to the inelasticity of our deposit currency.
Other major factors tending to make the deposit currency inelastic
were the prevailing system of scattered reserves and the lack of
central banking'facilities. The country was urgently in need of an
elastic note and deposit currency which would prevent the money
panics occurring with more or less certain regularity.
The enactment of the Federal Reserve Act remedied these defects
in t h a t it provided for the issuance of an elastic bank note—the
Federal Reserve note—and, through a system of mobilized reserves
and of rediscounting facilities, elasticity was imparted to our deposit
currency.
The act provided for a note issue subject to both automatic and
manipulative control. The automatic control asserts itself in the
retirement of Federal Reserve notes through the maturing of the
short-term self-liquidating eligible paper used as collateral for purposes of note issue. The manipulative check is operated through the
medium of open-market operations by means of which the Federal
Reserve System can expand or contract the supply of money outstanding. Deposit currency likewise became subject to these checks.
So long as both note and deposit currency are issued against reserves
and self-liquidating paper, which in turn, are based upon transactions t h a t will by their nature pay off the loans which gave rise to
the deposit or note currency, redeemability and elasticity are provided and inflation is avoided.




200

BANKING ACT OF 1935

Senator GLASS. Eight there, Mr. Ferguson, let me say to you that
the manipulative aspect of Federal Reserve transactions was never
contemplated by the proponents of the Federal Reserve Act. In the
first place, at that time there were less than $200,000,000 of United
States bonds available for purchase on the open market. I venture
to say that there was less than $100,000,000 of United States bonds
available for purchase in the open market. Therefore, any manipulative practice that might have ensued would have been accordingly
circumscribed.
Mr. FERGUSON. Yes; limited to the buying of bills, and so forth.
Senator GLASS. Yes; but it was never intended t h a t the openmarket transactions of a Federal Reserve bank were to be made with
a view to controlling credit. I t was intended t h a t it should be used
to enable the Federal Reserve bank—any Federal Reserve bank—
analogous to the transactions of the Bank of E n g l a n d ; to enforce its
rediscount rate, or to enable any given Federal Reserve bank, if it
had a surplus of funds on hand, to make money enough to pay its
overhead charges. For a long period of time some of the banks were
not able to pay their overhead charges and to pay their interest to
the member banks.
So that this manipulative aspect of the Federal Reserve banking
activities was never contemplated.
Mr. FERGUSON. A S a matter of fact, you framers of the Federal
Reserve Act never contemplated Government financing, except where
taxes failed to come in, and you temporarily loaned the Government
money.
Senator GLASS. Oh, of course, we never did.
Mr. FERGUSON. May I go ahead?
Senator GLASS. Yes, sir.

Mr. FERGUSON. I n the following passages Dr. Walter E. Spahr,
the economist who predicts that inflation may be the result of a
change in the rediscount base, has very ably described the economic
consequences of issuing Federal Reserve notes against Government
securities, mortgage paper, or nonliquid paper, which would be
possible under title I I :
Inflation is always to be avoided because it is an extension of purchasing
power, either in the form of paper money or credit, which is not secured by
reserves or commodities that will liquidate it at the proper time; and this, of
course, means losses for someone.
Therefore when Federal Reserve notes are,issued against bonds, the desired
and appropriate feature of elasticity is destroyed, and the inflationary procedure is being followed. Elasticitj is destroyed because there is nothing in
the nature of the bond security which automatically liquidates the notes after
the exchange transaction is completed. When such notes are issued against
commercial paper they are an advance to business men who will, in 30, 60, or
90 days, sell goods, retire the paper lying behind the notes, and, consequently,
retire the notes. Thus the notes effect the exchanges, which could not be completed for 30, 60, or G days, and then they disappear. When, on the other
O
hand, such notes are issued against bonds, the exchange is completed, the
notes remain outstanding, there is norhirm in the nature of the transaction that
remains to be completed, and there is nothing to take place which will retire
the notes.
Thus there is a net addition to the currency, the price level tends to be disturbed, the currency goes into circulation without any new wealth being produced to liquidate the notes, and the procedure, therefore, is inflationaryBonds should represent a transfer of savings from the bond buyer to the bond
seller, and the currency supplj should remain undisturbed. But the issuance




BANKING ACT OP 193 5

201

of currency against the bonds has the effect of creating an additional supply
of currency with no new creation of wealth.
As the Federal Reserve banks purchase bonds, by creating a deposit to the
credit of the Government, a deposit currency is created which is inelastic and
inflationary in nature. The banks receive the bonds and the Government receives the deposit. But the currency supply does not remain unchanged; it is
increased by the amount of the deposit, less any reserve which might be needed.
If there is a surplus of reserves, then there is a full net increase in currency,
equal to the value of the bonds. If the withdrawal of deposits gives rise to
the withdrawal of Federal Reserve notes, the effect is the same. There is a
net increase in the Reserve notes without any additional reserves or commodities being created to liquidate them. This is an inflationary procedure
and one that can continue as bonds are purchased until the reserves of the
Federal Reserve hanks are reduced to the legal limit. Thus the price level
tends to rise against the available wealth.

Senator GLASS. Of what account is a reserve that is irredeemable
in itself?
Mr. FERGUSON. Well, my old boss used to tell me that a reserve was
something that you should use when you needed it.
" W h a t is it for, otherwise ? " he used to say.
Senator GLASS. But I am asking you, of what account is an irredeemable reserve ? W h a t is it for ?
Mr. FERGUSON. I t is used to create confidence in the depositors.
Senator GLASS. Under existing circumstances, it is merely psychological, is it not?
Mr. FERGUSON.

Yes.

The assets held by the banks against these notes will not retire the notes
automatically, and it is doubtful it any management group would force such a
retirement. People pay higher prices for things not because there has been
an increased production and a resulting increase in income but because of a
defect in the currency itself. It is a depreciating currency, and the general
public loses in the form of trading the existing goods at the higher prices
because of a defect in the currency.
If an effort is made later to retire such a currency, it will be necessary for
the Government to raise taxes to pay off the bonds. Taxes are a burden to all
people and have a depressing effect. Thus additional burdens must be incurred
as a means of retiring the currency which in itself caused the public losses.
The same line of reasoning is applicable to the creation of a currency against
mortgage paper as an asset. Such paper should represent a transfer of savings
from one group to another so that the currency supply will remain unchanged.
And when the mortgage is paid off, it should be paid out of savings. Hence
it is proper, within certain limits, to use savirigs deposits for investment in such
paper. But if a commercial bank creates deposit currency against such investment paper, it is deflating the currency, because the currency is not selfliquidating, and it is inelastic for the same reason. When Federal Reserve
notes are drawn into circulation as a consequence of the creation of deposits
against such assets, the note currency becomes inflated and inelastic.
In connection with these considerations, especially when considering1 the
relations of currencies to rising prices, it is very important to remember that
there are two types of rising prices—the sound and the unsound. The causal
factors in each case are different; the reactions of people to them are different;
and the economic effects are different.
The sound rise in the price level is caused by business men, especially in the
heavy industries, who find it profitable to expand their productive activities;
the unsound rise in the price level is caused by the act of inflating, or of
threatening to inflate, the currency. The sound rise in prices generates confidence because it is pulled up by a confident buying, which, in turn, rests
upon an increased purchasing power derived! from the increased production.
The unsound rise in prices generates fears, and people rush to purchase—not
because they have more income, or because there is more production or more
employment—but because of fear of a depreciating currency. The sound price
level leads to economic equilibrium and widespread prosperity. The unsound,
caused by inflation, leads to disasters.




202

BANKING ACT OP 1 9 3 5

Section 208 would permit the Federal Reserve Board to change
reserve requirements as it sees fit during periods of " injurious credit
expansion and contraction." The question arises as to whether or
not this power would be exercised wisely by a potentially politically
controlled Federal Eeserve Board, or if it would be used to aid the
carrying out of administration policies. I n the hands of an independent Board, this power to change reserve requirements would be
desirable—as they would, theoretically, during periods of " injurious
credit expansions ", increase the reserve requirements; and, during
periods of " injurious credit contraction ", decrease the reserve requirements. However, this section does not satisfactorily solve the
problem of reserves, in that the question would still exist as to
whether or not the distinction between time and demand deposits
should be maintained and as to whether or not the distinction between central reserve cities, reserve cities, and others, should be
maintained.
Finally, title I I proposes to eliminate geographical limitations
on mortgage loans made by national banks, to increase the amount
of such loans up to 75 percent of the property value, if the loan
is to be amortized within 20 years, or up to 60 percent of the property value for a 3-year period, and to increase the aggregate amount
of such loans to an amount equal to the capital and surplus of the
bank, or 60 percent of the time and savings deposits, whichever is
greater. I n view of the fact that during the past years real-estate
loans of a far more restricted nature have caused great losses for
the commercial banks of the country, this section entirely disregards
the disastrous experiences of the past with respect to such loans.
Haste should not prevail in the passage of title I I . Under the
Federal Reserve Act at the present time any emergency can be met.
I n the meanwhile a National Monetary Commission, as proposed
earlier in this statement, should be formed to study our problems of
money and banking; and then a bill should be drafted, based upon
its conclusions as a result of its findings and observations. Such a
commission may well include in its agenda the following:
First. How and why has the Federal Reserve System failed to
function as a properly managed central bank should, and how can
this situation be corrected ?
Second. Why, if it is so, have the present reserve requirements
proved to be inadequate, and how can this be corrected ?
Third. The Nation has approximately 15,000 banks and 49 different
State banking systems. H a s our banking and monetary structure
been weakened because of this; and, if so, what is the best practical
solution ?
Fourth. How can the complex and confusing money system of the
Nation be simplified ?
Fifth. Is there a need for a central mortgage bank?
Sixth. To what extent has business financing changed, and how
can the commercial banks meet this change, if any, without sacrificing their soundness and liquidity ?
Seventh. Consider the advisability of the creation of a permanent
institution, along the lines of the present R. F . C , to make loans to
banks on a long-term basis on their secondary reserves during periods
of emergencies.




BAKKIKG ACT OP 1935

203

Title I I of the proposed banking bill of 1935 does not supply the
solution to these fundamental problems, and therein lies its defects.
The title provides for Government control of the currency and credit
mechanism. So it would not help to promote a sound business recovery because of its potentially inflationary provisions, and it will not
tend to strengthen fundamentally the banking structure of the
country.
Senator COUZENS. I was absent when you started your statement,
Mr. Ferguson and, if you have answered this question, you do not
need to repeat.
Have you expressed any views as to why the Federal Reserve System broke down or fell down in the late twenties ?
Mr. FERGUSON. N O ; I have not. And I prefer not to.
Senator COUZENS. You prefer not to what?
Mr. FERGUSON. Express my views.
Senator COUZENS. Oh, I thought you said you did not have any?
Mr. FERGUSON. YOU asked me if I had expressed my views, and
I said that I had not; no one had asked me.
Senator COUZENS. D O you have in mind what kind of a monetary
commission ought to be set-up?
Mr. FERGUSON. Yes, sir; I shall read it again to you if you wish.
Senator COUZENS. N O ; 1 have to go to the Finance Committee.
Senator GLASS. Of course, there is a very serious question as to
whether the Federal Reserve System broke down or has broken down
at any period in its existence. There may be a question as to whether
it was maladministered, but in my personal view, the System itself
has never broken down. I think it has been badly administered at
times.
Senator COUZENS. I recognize the fact that the Senator from Virginia is not on the witness stand. But I was wondering if the witness, Mr. Ferguson, could tell us in what manner he had observed
this maladministration.
Mr. FERGUSON. N O ; I ducked the question, Senator.
Senator GLASS. I am not going to duck it, when it comes to the time
to discuss this bill.
Senator COUZENS. T h a t only raises the question in my mind; and
it does not seem to be answered by the statement of this witness,
or by anybody else whom I have heard so f a r : That, no matter what
system you set up, how are you going to assure the proper administration, or the avoidance of maladministration?
Mr. FERGUSON. I think that a great deal of our trouble could have
been avoided had we—at the outset of the panic—had some place
where the banks could lay down their secondary reserves—what we
call " secondary reserves "—which consist of bonds for which there
was no market because of the condition of the exchanges; and also a
place where, upon the exhaustion of those secondary reserves, we
could lay down our mortgages. But we were obsolutely stumped;
we had no place to go. Our available commercial paper was lower
than it had ever been because business did not require any; and the
Federal Reserve, until the passage of the Glass-Steagall Act, was
helpless to help us out in an emergency.
Senator BULKLEY. D O you mean borrowing against assets, when
you refer to " laying them down " ?
Mr. FERGUSON. Yes,




sir.

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BANKING ACT OF 1 9 3 5

Senator GLASS. May I ask if there was no way in which the crash
could have been prevented ? I ask that question because Mr. Ferguson seems to suggest a remedy for the conditions after the crash and
not before.
Mr. FERGUSON. Well, I think that it could have been very much
mitigated, so far as the banks were concerned, if we had had some
place where we could borrow on our assets which were not eligible
at the Federal Reserve banks.
Senator BULKLEY. Those borrowings would have been at the then
market price, would they not ?
Mr. FERGUSON. I think they should have been very liberal in their
allowance to the banks on those assets.
Senator BULEXEY. I n an effort to maintain the prices that then
existed ?
Senator COUZENS. And that without regard to how much the banks
had discounted for the Wall Street brokers ?
Mr. FERGUSON. I hold no brief for the Wall Street brokers.
Senator COUZENS. N O ; they are not to blame. I t is the banks
which made the loans. And I am wondering whether, in view of
that, the Government should provide some reserve on which you
could unload your secondary securities.
Mr. FERGUSON. I do not know how to answer you, Senator. I had
no loans to Wall Street brokers in my institution; but yet I would
have been very glad to have a place, when they were running our
institutions, where I could go and lay down my bonds or mortgages.
B u t I had no place to go.
Senator GLASS. I t seems to me that the question could be ansAvered
by taking the simple facts: That the banks should not have engaged
in this riot of speculation; and, particularly, the Federal Reserve
banks should not have permitted the facilities of the Federal Reserve
banks to be used to encourage this riot of speculation.
And that difficulty—as it seems to me, at least—was cured by the
Banking Act of 1933.
Senator COUZENS. May I suggest to the witness, if he can answer
this question: That the Senator from Virginia says he thinks the
difficulty was cured by the Banking Act of 1933. And may I ask—
and not in any desire to go into the personal portfolio of the witness' bank—but could you enumerate the class of securities that you
would have liked to have disposed of, or borrowed on, at the time
of the crash ?
Mr. FERGUSON. Yes.
Senator COUZENS. Will you please do so?
Mr. FERGUSON. Bonds of railroads, industrials,

and public-utility
corporations of the United States.
Senator COUZENS. W h a t do you mean?
Mr. FERGUSON. Those listed on the stock exchange.
Senator TOWNSEND. You are speaking of bonds, now, are you?
Mr. FERGUSON. Yes; I am speaking of bonds.
And obligations of municipalities, created in financing tax payments.
After those had been exhausted, then we should have liked to have
had an advance on our first mortgages, which we took under the
National Banking Act, and in strict conformity with the National




BANKING ACT OF 1 9 3 5

205

Banking Act, but on which it was not possible to borrow a 5-cent
piece.
Senator COUZENS. Could that occur again?
Mr. FERGUSON. My understanding is that the K. F . C. is a tempor a r y institution.
Senator COTJZENS. N O ; but I meant with respect to your discounting of the high-class first mortgage.
I s it likely that you would encounter that condition again, where
you would want to borrow on them ?
Mr. FERGUSON. Surely.
Senator COUZENS. Does not the Eccles bill provide that ?
Mr. FERGUSON. I admit that there should be an agency—and I have
stated it in the last paragraph of my letter suggesting a central mortgage bank—or a permanent R. F . C. where a bank can borrow on its
bonds and can borrow on its mortgages.
But where I differ from the Eccles bill is that under the Eccles bill
those loans on bonds and on mortgages can be made the basis of deposit
currency or note currency.
Senator BANKHEAD. Under your suggestion, where would the
R. F . C. or the central bank get the money to make the loans ?
Mr. FERGUSON. My idea is that the R. F . C , a permanent institution, would sell its obligations, guaranteed by the United States Government, in the open market; and I would further provide that those
bonds of the It. F . C , guaranteed by the United States Government,
could not be purchased by any bank or by any Federal Reserve bank.
Senator GLASS. Let me ask you this question: What would you
have done with your money if you could have borrowed on those notes ?
Mr. FERGUSON. Paid it out over the counter to the throngs of depositors who came.
Senator GLASS. A n d would they have loaned it to brokers to increase
the unprecedented brokerage loans—to gamble on Wall Street?
Mr. FERGUSON. NO ; I am talking about the days of the gold rush,
when they took it home and put it in the old sock.
Senator GLASS. But I am talking about the days when the Federal
Reserve System was supposed to have broken down, but when it had
not been broken down, but its facilities were used for stock-gambling
purposes.
Mr. FERGUSON. I am talking about a different time; and I thought
the Senator was asking me about the days of the calls on the banks.
Senator GLASS. Yes; that was partly in my question.
B u t I am shocked that you want a politically controlled R. F . C ,
but do not want a politically controlled Federal Reserve Board.
Mr. FERGUSON. B u t I do not want a politically controlled R. F . C.
Senator GLASS. B u t the R. F . C , under the theory of you gentlemen, is a politically controlled body. So it shocks me that you want
a politically controlled R. F . C.
And it also shocks me that the Government wants to run things
that the Government does not own.
Mr. FERGUSON. I recognize the fact, Senator, that it is necessary
t h a t there be an appointing power.
Senator COUZENS. Yes.
Mr. FERGUSON. And t h a t has to be in the President.
129688—33—PT 1




14

206

BANKING ACT OF 1 9 3 5

What I should like to see, with respect to the Federal Reserve
Board, is a bipartisan board appointed for a term of, let us say, 15
years, and the members of the Board removable only upon charges
to be preferred for malfeasance, misfeasance, or nonfeasance, and
heard on those charges.
And under those circumstances I do not care where you get your
men; you can get them from any source. They feel secure in their
office.
And, following your argument, I would make my proposed R. F . C.
the same way.
Senator GLASS. W h a t is the matter with the existing law ?
Mr. FERGUSON. I am not kicking about the existing law.
Senator GLASS. A S to the appointment of the Federal Reserve
Board, has any member of the Board ever been removed by a President of the United States ?
Mr. FERGUSON. Well, perhaps you will not think it impertinent of
me if I ask you whether, under the existing law, in the past 10 years
the Federal Reserve Board has been brought under the domination
of the political party in control.
Senator GLASS. Of course, it has been brought. I t has been absolutely dominated by the political party in control. But the law does
not make it so. I t is the violation of the whole spirit and intent of
the law that has made it so.
Mr. FERGUSON. Well, Senator, under my plan, I want to remove it
from politics, if I can—recognizing the fact that the President of the
United States must " start the ball rolling " by making the appointments.
I want to keep these men in there, secure in their positions, regardless of what they do—provided they are not guilty of malfeasance,
misfeasance, or nonfeasance—in the same manner that the members
of the Supreme Court of the United States are kept secure in their
positions.
Senator GLASS. Under the existing law the President of the United
States cannot remove a member of the Board except for cause, in
writing to the Senate.
Mr. FERGUSON. I t seems to me that, within the last several weeks,
I have read that it is contended t h a t the President of the United
States has the power of removal of Federal Reserve Board members.
Senator GLASS. Well, he has the power of removal for cause, in
writing, to the Senate.
Mr. FERGUSON. I did not know t h a t the President had to prefer
charges against them.
Senator GLASS. Well, he does not necessarily have to prefer
charges against them; he has to give his reason for the removal.
Senator COUZENS. Both the chairman, the Senator from Virginia,
and the witness admit that the Federal Reserve Board has, in the
past, been politically controlled; at least, the record so shows.
Mr. FERGUSON. I did not say t h a t ; that is going too far.
Senator COUZENS. Well, the question you asked the Senator from
Virginia inferred that, at least.
Senator GLASS. I do not mean t h a t it has been politically controlled; and I doubt if Mr. Ferguson means that it has been politically controlled, in the sense of party politics.
Mr. FERGUSON. N O ; I did not mean that, at all.



BANKING ACT OF

1935

207

Senator GLASS. And I did not mean that, at all.
I mean t h a t there have been times when there has been gross maladministration of the act.
Senator COUZENS. Due to political influence.
Senator GLASS. "Well, I would not call it political influence.
Senator COUZENS. I do not know what you call the Secretary of
the Treasury, or any other publicly appointed officer—whether he
is not a politically appointed man.
Senator GLASS. The Secretary of the Treasury and the Comptroller of the Currency were intended, by the proponents of the act, to
represent in a broad sense, and not in the sense which you employed.
Senator COUZENS. How do you know my implication ?
Senator GLASS. Well, because I have some sense.
Senator COUZENS. Of course, we cannot very well repeat private
conversations that take place.
Senator GLASS. YOU can repeat anything that I have said to you.
Senator COUZENS. YOU do not recall condemning the greatest Secretary of the Treasury since Hamilton's time?
Senator GLASS. Yes; I do.

Senator COUZENS. Do you recall condemning him for his influence
on the Federal Reserve?
Senator GLASS. Yes; certainly.
Senator COUZENS. I S not that political control?
Senator GLASS. I t is maladministration.
Senator COUZENS. I t was due to political control by party politics.
Senator GLASS. N o ; it was due to governmental control, and not
to party politics, at all.
I t was due to the desire of the Secretary of the Treasury to facilitate the issuance of Government credit; that is what it was.
I t was not due to party politics at all. I t was a maladministration
of the text and the intent of the Federal Reserve Act; that is what
it was.
Senator COUZENS. Of course, I cannot agree to such a limited degree of control, as defined by the Senator from Virginia.
But, then, we are supposed to hear witnesses, and not hear ourselves.
Senator GLASS. Well, we can have that out among ourselves.
Senator COUZENS. A r e you stopping for the day now ?
Senator BULKLEY. Have you finished, Mr. Ferguson ?
Mr. FERGUSON. Yes.
Senator GLASS. We are

very much obliged to you, gentlemen.
I will say this, Mr. Ferguson: That I had not supposed you wished
to discuss title I I , or I should have familiarized myself, perhaps,
more definitely with the provisions of that title of the bill. I had
been told by Senator Barbour that you gentlemen wanted to discuss
titles I and I I I .
Senator BARBOUR. Senator Glass, I know that the fault must be
mine.
Senator GLASS. I t was not any great fault.
Senator BARBOUR. I sent you a memorandum, and we spoke about
it on the telephone. I n the memorandum there was an inadvertence—
that one gentleman was going to speak on titles I and I I I and that
the other gentleman was to speak on title I I I .




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BANKING ACT OF 193 5

But we spoke on the telephone, and I thought I corrected that and
that you understood it.
I know that Senator Moore and myself are very grateful to the
chairman and to the committee for their attention and interest.
Senator GLASS. We are very much obliged to the gentlemen for
their testimony.
(Thereupon, at 12:15 p. m., an adjournment was taken until tomorrow, Friday, May 3,1935, at 10:30 a. m.)




BANKING ACT OF 1935
FRIDAY, MAY 3, 1935
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE ON
BANKING AND CURRENCY,

Yfashington, D. G.
The subcommittee met, pursuant to adjournment, at 10:30 a. m.,
in room 301, Senate Office Building, Senator Carter Glass presiding.
Present: Senators Glass (chairman of the subcommittee), Bulkley,
Couzens, McAdoo, and Townsend.
Senator GLASS. We have Dr. Sprague with us this morning.
We wanted to hear from you on title I I of the impending banking
bill, S. 1715; and we should be glad to have you make any statement
that you may care to, in connection with it.
STATEMENT OF DR. OLIVER M. W. SPRAGUE, PROFESSOR OF
BANKING AND FINANCE, HARVARD UNIVERSITY, CAMBRIDGE,
MASS.
Dr. SPRAGUE. I shall confine what I have to say to title I I ; and the
first matter that I should wish to bring up is as to whether the passage of that part of this bill may be regarded as an emergency or
recovery measure.
I n my opinion, it has little value from that point of view. There
is practically nothing that the Federal Eeserve System might not
do under existing law, as a contribution to trade recovery, that it
will be able to do if title I I becomes law.
I look upon title I I primarily, then, as a means of improving the
Federal Reserve System over the years. There are only two features
ing title I I that, as far as I can judge, might have a bearing upon the
immediate situation: The first is that which will empower the Federal
Reserve banks to lend to member banks on sound assets, rather than
exclusively on eligible paper. That change, in its immediate effects,
does not seem to me to be of any importance whatever, partly because the banks are not borrowing at the present time, except to
an insignificant extent; and secondly, because, as a matter of fact,
the Reserve System has always loaned to member banks on the basis
of sound assets. Wherever the eligible paper of a member bank,
when offered, was not regarded as a good asset, the member banks
have taken additional collateral—sometimes styled "excess collateral "—because the particular bits of eligible paper offered for rediscount were not regarded as a very good asset.
I t does not, therefore, seem to me that the immediate effect of
this change will be very great.




209

210

BANKING ACT OP

1935

Senator BTJLKLEY. But suppose they do not have sufficient eligible
paper: They cannot borrow, under present law, on sound assets, can
they?
Dr. SPRAGTJE. If they had no paper that, by any stretch of the
imagination, could be styled " eligible ", then you are quite right,
sir.
Senator BULKLEY. Or if they did not have enough for their needs ?
Dr. SPRAGTJE. Yes.
Senator MCADOO. They

could borrow on Government bonds, of
course—if they had Government bonds.
Dr. SPRAGTJE. They are eligible.
I am not saying that it is an undesirable change; I am simply
saying that it does not appear to me that, at the moment, it will
contribute very much.
Now, on the whole, I am inclined to think t h a t it is a desirable
change—for the reason that I do not believe that there is any close
relationship between the eligible paper that a bank may have and
the safe or desirable limits of borrowing, for the individual bank.
Nor do I believe that there is any close relationship between the
amount of eligible paper that may be offered and the desirable
amount of credit to be extended by Federal Reserve banks.
Senator GLASS. Under the existing statute, the Federal Reserve
Board has very broad powers in denning the eligibility of paper.
Dr. SPRAGTJE. Yes; that is so.
Senator GLASS. I t is only restricted by statute, when it comes to
speculative matters; is not that true?
Dr. SPRAGTJE. Well, the eligible paper may be broadly defined as
loans which serve to provide funds for immediate working capital
requirements of a business concern.
Senator GLASS. That I understand.
But the only restriction upon the Board, in its definition of eligible paper—which must relate itself to commerce, industry, and agriculture—is that it shall not accept speculative investment paper.
Dr. SPRAGTJE. I t cannot accept a real-estate mortgage, as such, for
rediscount.
Senator GLASS. Under the existing law, Doctor, it is not allowed
to accept any paper that is presented for discount for speculative
purposes.
Dr. SPRAGTJE. N O ; that is another restriction; and that might be
put into the sound assets, if you wish to include the purpose.
"Well, I look at this sound asset proposition mainly with reference
to those activities of the Federal Reserve banks t h a t have to do
with their lending to the individual member. And the problem
has not yet been solved, to determine the wise limits within which
to lend to a particular member bank. If a member bank's loans
were entirely liquid—all gilt-edge commercial paper of the openmarket type—it would then be reasonable and safe to lend t h a t
bank a very large amount, by way of rediscount.
On the other hand, if a bank is not very liquid, and if its loans
are purely local, then to rediscount the assets t h a t it has may weaken
that bank, leaving very little for the shareholders or depositors, in
the event of failure.
I do not think we solve the problem of the proper use for Federal
Reserve credit, in relation to the member bank, by any method of



BANKING ACT OF 19 35

211

definition. You can rediscount an undesirably large amount, for
a member bank, whether it be that you rediscount its eligible paper
or whether you grant it advances on the basis of its sound assets.
And it is one of the things which the Federal Reserve authorities
need to work out far more than they have yet, on the basis of past
experience—what amount, in the varying situations of different
banks, it is helpful and desirable to lend to the particular institution.
Therefore, on the whole, I am inclined to favor this change, which
emphasizes the sound assets and recognizes that it must be through
management that you determine what the wise limit of advances to
a particular member bank may be.
Senator GLASS. D O not the brokers on the stock exchange claim
that their loans are the soundest and the best loans that are made,
at all?
Senator GLASS. And yet the existing law prohibits those loans—
and, I think, very wisely.
Dr. SPRAGTJE. I think so, too.
And that relates very much more to the other activities of our
Federal Reserve banks—their operations in the money market.
Senator GLASS. But does not this proposed change textually authorize the Federal Reserve bank to make discounts on brokers'
loans, or anything else it pleases, that it may regard as sound ?
If it accepts the brokers' views that the brokers' loans are the
soundest loans t h a t may be made, and involve the fewest losses of
any loans that may be made, would it not be authorized to engage
in speculative transactions?
Dr. SPRAGTJE. I t is possible that you are right, even though there
are provisions in the Glass-Steagall bill which I had supposed
covered that point.
Senator GLASS. Well, they do cover that point, but this uncovers it.
Senator TOWNSEND. T h e only question to be considered here is
whether it is considered sound or not; is that it ?
Dr.

SPEAGUE.

Yes.

Senator MCADOO. Doctor, let me ask you this question: There are
many banks of the United States where the opportunity for making
what we call self-liquidating loans—that is, I mean eligible commercial paper—does not exist to such an extent that those banks can
employ a sufficiently large part of their assets in such loans.
On the other hand, they can make many loans that are perfectly
sound, that are not commercial or self-liquidating loans; for instance,
the loans to a customer who can secure them, let us say, by municipal
or State bonds, or other security which is perfectly satisfactory and
which makes the loan perfectly safe.
Now, that bank, also, may not have any Government bonds in its
portfolio.
I n such a condition as that, the banker needs to rediscount but has
an insufficient amount of eligible paper, for the reasons that I have
stated, and has no Government bonds; and the other paper that he
has, that might be perfectly good—as I have described it—would not
be available for rediscount.
Dr. SPRAGTJE. T h a t illustrates my point that there are banks in
every sort of position and that a given amount of accommodation t h a t




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BANKING ACT OF

1935

may be quite appropriate and desirable for one bank may not be for
another.
For example, there is a very interesting document prepared on the
banks in Arkansas and their failures. And it is quite clear, from that
analysis, that the banks that failed—to a rather large extent—were
banks that had borrowed extensively, whether from city correspondents or from the Federal Eeserve.
I t is very clear, on the basis of the experience of the last 15 years,
that it would have been better for the people of Arkansas if their
banks had not borrowed quite as much as they did borrow. And it
is not a question of the kind of assets t h a t they used for borrowing;
the trouble was that they exhausted their more liquid assets in
the process of borrowing and had very little margin left to take
rave of the situation of deposit withdrawals.
Now, you can either leave the matter to the intelligence of the
Federal Reserve or you can attempt to describe, by the law, a
sufficient variety of situations t o cover the varying situations of
different banks.
But I am clear in this: That eligibility, as we have it, has not been
a satisfactory safeguard. I t has led a great many banks—or, at least,
made it possible for a great many banks—to borrow more than it
was desirable that they should borrow, given their entire situation.
Senator MCADOO. But if you widen the field for borrowing, by
extending it to cover sound assets, do you not increase the temptation
to overborrow instead of decreasing it?
Dr. SPBAGTTE. YOU do, unless the public and the management of the
Eeserve banks recognize the necessity of restraint varying with regard to the situation of the various banks.
Senator GLASS. Doctor, I can call your attention to the fact—which
I am sure you know—that the existing law charges the Federal
Reserve Board with the exclusive right to determine or define the
character of paper eligible for discount, always relating it to business transactions of a commercial, industrial, or agricultural nature.
Dr.

SPRAGUE.

Yes.

Senator GLASS. And that the only restriction on the Board, in
making its definition, is in this language:
but such definition shall not include notes, drafts, or bills covering merely investments or issued or drawn for the purpose of carrying on trade in stocks,
bonds, or other investment securities, except bonds and notes of the Government of the United States.

That is the only restriction upon the Board, in its definition of
eligible business paper.
Now, what I am asking you is that if we substitute for that the
words that you have had under discussion, we would simply supersede this restriction, as it seems to me, and the bank could go in the
open market and gamble to its heart's content, in any security on the
stock exchange that it might desire.
Dr. SPEAGTJE. Well. I would suggest that you substitute the sound
assets for the first part of that provision, and then add the limitation which is there contained.
Senator GLASS. But therein—according to the brokers, who have
repeatedly testified before our committee—you preclude the most
liquid assets, and the soundest assets known to banking.




BANKING ACT OF 1 9 3 5

213

Dr. SPRAGUE. YOU are precluding them from a general reason:
That is, because it is thought that they foment undesirable speculation ; it is not with regard to the safety and appropriate amount of
borrowing to which a particular bank may resort.
They seem to me to be two fairly distinct problems: That there
are banks that do not have very much of the paper of the sort included in the regulations of the Federal Reserve Board.
Senator GLASS. I S that not largely due to the fact that we have
gone back to a bond-secured currency, instead of a commercial
currency ?
Dr. SPRAGUE. Well, if you have 60 billions of deposits, you simply
do not have available an evenly and sufficiently well-distributed
mass of these business loans, to provide all banks with a variable
amount of material for rediscount at the Federal Reserve banks.
Senator GLASS. H O W many banks would you guess, as of this
date, that there are without eligible paper for discount?
Dr. SPRAGUE. Well, if you include the United States Government
bonds—not very many.
But, again, I would say that I regard this feature primarily with
reference to the years ahead. And anything that will emphasize the
responsibility of the Federal Reserve to limit borrowings to what is
safe—from the viewpoint of the particular borrowing bank—is
desirable.
If, however, you take the view that a bank has a right to secure
accommodation, because what it offers is good, then the more restrictions you have upon what it may offer for rediscount, the
better.
But I do not feel that it is wise, if you feel that the bank is
not very well managed: or if you feel that 75 percent of its assets
are slow and doubtful, for the bank in that condition to secure accommodation, ordinarily, from the Federal Reserve or from anywhere else.
But I repeat that I do not say that it is likely to have very much
effect, immediately, on what the banks are prepared to do. I t is
like many other provisions of this bill, that may be wise, or that
may not be wise, but are unimportant as regards what the banks are
going to be doing in the next 6 or 12 months.
Senator MCADOO. Outside of brokers' loans—which can easily be
defined and can easily be excluded from that which is available for
rediscount, ai Federal Reserve banks—there is, of course, a wide
field of individually good loans secured by collateral that is absolutely sound.
Dr.

SPRAGUE.

Yes.

Senator MCADOO. Some of it may be stock exchange securities, or
other bonds or stocks—first class, and always finding a ready market.
Xow, with respect to that large field of loans, there is no provision under existing law by which they can be used even as a
supplement to commercial loans, by a bank which wants to borrow
from a member bank.
Dr.

SPRAGUE.

Yes.

Senator MCADOO. I t seems to me that if we can draft this provision in such a way that paper of that character would not be
denied eligibility, it would extend the field of operations for many




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BAHKING ACT OP

1935

of these banks which, as you have just stated, do not find, in the area
of purely commercial loans or self-liquidating paper, as you denominate it, a sufficient opportunity to rediscount their funds.
Is that correct ?
Dr. SPRAGUE. Yes.
Senator GLASS. Under

existing law, is not the Board authorized to
make such definitions ?
Dr. SPKAGUE. I do not think so, except in view of the temporary
definition made in view of the emergency ?
Now, if I may go on to the next matter that has a bearing upon
the immediate situation—the provision regarding real-estate loans;
and I am taking, for purposes of discussion, not the original draft
presented to the Senate but rather the modified House bill, which,
so far as real-estate loans are concerned, has made a change which
renders the provision far more satisfactory from my point of view.
I think it highly desirable that we develop in this country the practice of borrowing on real estate for longish terms rather t h a n for
the 3- or 5-year period that has been so customary, and with an
amortization feature.
Senator MOADOO. Doctor, may I interrupt you for a moment?
Dr. SPRAGUE. Yes.
Senator MCADOO.

I should like to ask to what particular provision, page, and line you are referring in House bill 7617?
Dr. SPRAGUE. That is almost at the end of title I I .
Senator MCADOO. Section 24, on page 57, I presume, is it not?
Dr. SPRAGUE. Yes.
Senator MCADOO. Let

us look at that and see if that is the provision to which you have reference.
Dr. SPRAGUE. Yes.
Senator MCADOO. All right.
Dr. SPRAGUE. NOW, that is now

set out in very broad terms, with
authority in the Federal Reserve Board to issue regulations; and it
seems to me that it might be used for the purpose of improving the
practice in the matter of real-estate loans, whether they be of urban
or agricultural character.
Senator MCADOO. YOU are not expressing approval of that section
of the House bill?
Dr. SPRAGUE. I am expressing approval of that section, on the
whole.
Senator MCADOO. Yes.

Dr. SPRAGUE. But also, I am pointing out that it does not seem to
me, again, to be a feature that is going to contribute very much to
change the present situation.
As with the case of most of the features of this bill, I am looking
a t it primarily from a long-run point of view.
Senator GLASS. You have already stated that you do not think
they contribute to the present recovery from the depression?
Dr.

SPRAGUE.

Yes.

Senator GLASS. And you have already stated that they are not
emergency requirements at all?
Dr. SPRAGUE. Yes. And they are the only features of the bill
that, by any stretch of the imagination, so far as I can see, can be
regarded as affecting the immediate situation.




BANKING ACT OF 1 9 3 5

215

Senator GLASS. D O you see any disadvantage in banks' investing
demand deposits in long-term real-estate loans?
Dr. SPEAGUE. I t depends upon the situation of the bank, and upon
the proportion thereof. I t is largely a matter of proportion.
A well-managed bank will continue in operation indefinitely. I t
must have a good proportion of assets that are near cash—which
proportion will vary with all sorts of situations.
B u t in this particular proposal, it only has to do with the investment of a proportion of the time deposits, in real-estate loans.
Senator MCADOO. YOU insist, of course, upon the essential element
t h a t such loans, including the amortization, be soundly secured ?
Dr. SPEAGUE. I think that is highly important.
Senator MCADOO. I t is essential, is it not?
Dr. SPRAGUE. I think so.
Senator GLASS. Do you think it important to combine commercial
banking with investment banking? Is not a reserve system intended
t o meet, at all times and promptly, the requirements of commerce,
industry, and agriculture?
Dr. SPEAGUE. I t seems almost unavoidable that there be some interrelation or fusion, because the banks have far more funds than can
possibly be employed commercially.
Senator GLASS. Right now?
Dr. SPBAGTJE. Or at any time.
They had far more funds in 1928 than could be employed in that
fashion.
I t is possible to reduce that total sum, under the influence of those
provisions that empower the Reserve Board to fix the maximum rate
of interest that a bank may pay upon deposits; and that should tend
t o force people to do more of their own investing—which would be
all to the good.
I n the 1920's banks were paying 4 and 5 percent for the time
deposits—giving us a call on dollars, and paying us 5 percent, or so,
for those funds.
And they had such a volume of funds that they could not possibly
employ, even in a liquid fashion.
I t would have been far better for the community, if ten or twenty
billions of those funds had been invested by their owners, thus taking out of the situation ten or twenty billions of a call on dollars. _
Senator GLASS. D O you think it at all feasible to establish a uniform rate of payment on time and savings deposits throughout the
United States?
Dr. SPEAGUE. I think it might better be by districts than for the
entire country; just as I feel that it is a desirable feature of the
Federal Reserve Act, that we may have differential rates of discount in different parts of the country.
Senator GLASS. Precisely; and there is no more reason why there
should be a uniform rate of payment on time deposits than on other
deposits.
Dr. SPEAGUE, Precisely; and the modification of variation by districts might be a desirable addition to the Federal Reserve Act.
Senator GLASS. The Federal Reserve Act provides that now,
Doctor.
Dr. SPEAGUE. B y districts?




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Senator GLASS. But it has not been followed.
Dr. SFRAGTJE. I t has been done generally.
Well, there we come to something that I want to take up a little
later—that there is not much use giving powers to an agency if those
powers are unlikely to be used because of the character or personality of the people making up that agency.
You can very easily give people powers that are so great that they
are terrified when they come to use them.
But that is at the end of my story.
Senator GLASS. It i& easy enough to give them powers that will
terrify everybody else, if they are used, is it not?
Dr.

SPRAGUE.

Yes.

Senator MCADOO. Quite right.
Doctor, let me take you back for a moment, to this question of
rates of interest in different districts of the country.
There are many of our States which have a legal rate of interest,
established more than 100 years ago, and the same rate prevails
today.
Dr.

SPRAGUE.

Yes.

Senator MCADOO. Those rates are fixed without any reference
whatever to the economic conditions prevailing in the different
States. And they are purely arbitrary prices established by law
for the use of money. Some have legal rates as high as 7 percent.
Senator GLASS. Some are as high as 10 percent.
Senator McAix>o.Well, I do not recall, at the moment, airy as high
as 10 percent.
But they are as high as 10 percent, by contract.
Senator GLASS. Well, they are as high as 18 percent, by contract.
Senator MCADOO. In some States; yes.
Now, I think that constitutes a real abuse, and I think that is a
field for reasonable reformation.
Of course, the Federal Government woidd have the power to establish the legal rate only as respects national banks. But would you
consider it wise, for instance, for the Federal Government to legislate with respect to the legal rate of interest to be charged by the
national banks throughout the United States?
Before you answer, I should like to say that, of course, this suggestion presents this situation: The State banks, you may say. would
of course be able to charge a higher rate, and therefore they would
be having an advantage over the national banks. But as a matter
of fact, the national banks would have the advantage, because they
would be charging a reasonable rate for money; and the State banks
would have to come to it.
So I think it is advisable to establish a reasonable charge, here,
provided we do not go so low as to be beneath a reasonable price
for money.
Senator GLASS. The existing law provides that a national bank
may prescribe the same rate as the State bank.
Senator MCADOO. Yes.

But, as it stands today, if a State has a legal rate of interest
which is excessive, or unjustified, rather, by the economic situation—
either the established legal rate, or a rate which may be made by
contract between the parties—why, the national bank is permitted
to charge the same rate as that established in that State.



BANKING ACT OF 1 9 3 5

217

If, on the other hand, there were a Federal law restricting the
national banks to charging a reasonable interest charge, regardless
of the State law, then the question is whether or not. in your opinion, that would be a desirable reform?
Dr. SPRAGTJE. I should hesitate to answer that question, Senator,
without a good deal of reflection. It is something about which I
have not thought.
Senator MCADOO. I t requires study, of course.
Senator GLASS. Before answering, let me point out to the Senator
from California, just one difficulty with a suggestion of that sort:
The State capital requirements vary greatly among the States,
and afford such a departure from Federal capital requirements, that
there are hundreds, if not thousands, of communities which cannot
afford a national bank. And in those communities, the State law
will prevail.
Senator MCADOO. That is true in any ca^e, of course.
But the question is whether or not an effective measure of that
kind would not benefit the general economy to such an extent that
it would be justified.
Xow, I am not proposing this; I am merely suggesting it as a subject for exploration.
Dr. SPHAGTTE. I should not wish to answer it at the moment.
However, I am prepared to say that interest rates are undesirably
rigid, and that a lowering of interest rates, very generally, would,
1 think, be a contribution to a trade recovery, if it could be brought
about.
But I should look for it to be brought about, more, through, the
moderate rate of interest that the banks may pay on deposits, and
through the accumulation of funds seeking investment.
Whereas, a change such as you suggest, although it might prove
desirable, I should suppose would be very difficult to carry out.
And I should suppose t h a t it might affect public sentiment rather
unfavorably, during its early stages of operation.
So that I would not regard it—though I am speaking quite offhand—as very helpful.
Senator MCADOO. YOU reserve judgment?
Dr.

SPRAGTJE.

Yes.

Senator MCADOO. May I say, Doctor, with reference to your statement, that you know that Congress has, by law, prohibited the national banks and the member banks of the Federal Reserve System,
from paying interest on demand deposits. I think that was a very
effective reform.
Dr.

SPRAGTJE.

Yes.

Senator MCADOO. And I think that has relieved them from heavy
charges, and has stopped abuses of a very grave character in our
banking system.
Dr.

SPRAGTJE.

Yes.

Senator MCADOO. NOW, in consideration of that, they might very
well reduce the price of money to borrowers. But wherever a high
legal rate of interest prevails-^-as in most of the States, regardless of
economic considerations or situations—the legal rate is alwavs
required.




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BANKING ACT OF

1935

Dr. SPEAGUE. I think it might be desirable for some of the States
to lower their usury rate, which was established many years ago.
But that is something about which I do not feel qualified to express
a definite opinion.
Senator GLASS. Here is a very simple question that you ought tofeel qualified to answer: If we should persist in the original purpose
of the Banking Act of 1933, and require all State banks, the deposits
of which are insured, to become members of the Federal Reserve
Banking System, could not that matter be better adjusted in t h a t
way, if at all?
Dr. SPEAGUE. That would affect at least a very large amount of
funds—those funds that are employed by banks.
I t would not affect all funds that are lent, of course. But it would
go a long way in that direction.
Senator GLASS. I n other words, would it not be within the power
of the Federal Reserve Board to make regulations with respect to
interest charges of member banks?
Dr. SPEAGUE. Not unless the power were given. I do not think
it exists, under the existing law. A t present, their power relates
entirely to the rate of interest that the banks may pay to depositors.
Senator MCADOO. On time deposits?
Dr. SPEAGUE. On time deposits.
Senator MCADOO. There is no provision, as I understand it, by
which the Federal Reserve Board could regulate the rates of interest
charged to borrowers.
Senator GLASS. I understand t h a t thoroughly.
But if you wished to authorize all the banks of the Federal
Reserve System to do that, that would undoubtedly be a constitutional act.
Senator MCADOO. YOU are quite right. I t could be reached
through that method, and effectively.
Dr. SPEAGUE. I wish to make one suggestion about the section
relating to real-estate loans: I think that real-estate loans ought to
be limited to loans within the district, or at least within 100 miles
of the district, in which a member bank is situated.
I do not believe that a member bank in Massachusetts is ordinarily in a position intelligently to make real-estate loans in Kansas
or in I d a h o ; nor do I believe t h a t a bank in those States is in a
position intelligently to make them in Massachusetts.
Senator MCADOO. But do you think that they could intelligently
make them in California?
Dr. SPEAGUE. I picked my States.
Senator GLASS. D O you think that any bank could intelligently
make a real-estate loan under existing conditions, when the Government, itself, has gone into the real-estate business ?
Dr. SPEAGUE. I take it that that is a rhetorical question.
Senator GLASS. N O ; it is a very practical question.
Senator TOWNSEND. May I ask if you would p u t any limitation t o
the character of real-estate loans? Is there not a great deal of
difference, in real-estate loans, as to whether the loan is on a theater
or on a hotel, or on a house, where the loan runs more or less in
perpetuity ?
Dr. SPEAGUE. There is; but you must leave something to the judgment of the lender.



BANKING ACT OF

1935

219

A n d I should despair of attempting to safeguard, by legislative
provisions, the particular type of loans that might be regarded as
fairly safe, and those that might not be so regarded.
Senator MOADOO. You do not believe that, by legislative action,
you can invest the human being with intelligence ?
Dr. SPRAGTTE. Only in a very broad fashion.
Senator GLASS. Under the decision of the Supreme Court, in the
Minnesota case, do you think any real-estate Joan of a bank, or
anybody else, is very secure?
Dr. SPRAGTTE. Oh, they are in business, and will make loans of one
sort or another, in any event.
So far, I have considered only changes in the statute, that may
have some effect on the immediate situation. That influence is so
slight that legislation along the lines of title I I does not seem to me
to be urgently needed at this session of Congress. Now, I come to
provisions of title I I that are significant only in the long run.
The first of these about which I should like to say a few words, is
that relating to collateral behind Federal Reserve notes.
Senator MCADOO. Will you state the page and line, Doctor, if
vou have it? Are you dealing with the House bill or with the
Senate bill?
Dr. SPRAGTTE. Well, the two bills are similar, as regards the changes
regarding Federal Reserve notes.
Senator MCADOO. Yes.

Senator GLASS. P a g e 46.
Senator MCADOO. I n the Senate bill, or in the House bill ?
Senator GLASS. I n the Senate bill, page 46.
Senator MCADOO. Very well.
Dr. SPRAGTTE. The provisions of the Federal Reserve Act relating
to Federal Reserve notes were apparently designed to limit, in certain
ways, the total amount of credit that might be extended by the Federal Reserve banks. There was the general limitation, which is
retained in this new bill, of a 40-percent gold reserve; and then there
was the - additional provision that the remaining 60 percent must
consist of rediscounted paper, or in its absence, the place must be
taken by gold.
Now, there is not any particular relationship between the amount
of rediscounts granted by Federal Reserve banks and the desirable
amount of notes in circulation. Under our system of the use of
checks, the amount of notes in circulation, or the total amount of
money in circulation, is an incidental result of the level of prices,
the activity of trade, and our habits in making payments, whether
by check or by actual currency.
I t does not seem to me that in the operation of the Federal Reserve
System these special restrictions on note issue have had any practical
effect, whatever.
They finally were modified to permit Government bonds to be used
as collateral back of the Federal Reserve notes, because it became
clearly evident that the total requirements for currency could not
very well be met if the original restrictions were maintained. We
would practically have been in the situation of meeting the increased
currency requirements by the issue of what would have been little
more than a gold certificate—virtually the situation we were in
before the Federal Reserve Act was established.



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BANKING ACT OF 1 9 3 5

On the whole, I am inclined to think that a large proportion of
the total circulating medium of the country can be issued against
the Government securities, as backing—always provided you do not
attempt to use the note-issuing power as a means of financing Government requirements.
Obviously and quite clearly, there is need in this country for 4 or 5
billions of currency. I t is inconceivable that we should ever drop
down to 2 billions of currency in use.
Senator MCADOO. Doctor, just at that point. How do you establish
in your mind the desirable amount of circulating notes required to
meet the needs of business ?
Dr. SPRAGTJE. I n just about the same way that you determine the
amount of subsidiary silver. If there is more subsidiary silver than
is required under given circumstances, it comes drifting into the
banks. They find that they have more on hand. They ship it to the
Federal Reserve. And the Federal Reserve ships it to Washington.
The same is true of currency?
Senator MCADOO. They get currency for it?
Dr. SPRAGUE. N O ; they get deposits, rather than currency.
Senator MCADOO. Yes.

Dr. SPRAGUE. Similarly, in the matter of currency. If there is an
excess, outstanding, relative to the activity of trade, and all the rest,
the banks all over the country will find that they are receiving more
currency over the counter than they are paying out over the counter;
and it will, be shipped to the Federal Reserve, to strengthen the
balances of the shipping banks.
The active factor in determining the circulation or the total of
the purchasing medium comes through the demand for loans which,
initially, will take the form of deposits.
If business becomes more active and borrows more from the banks,
in the first instance, that will take the form of balances against
which checks are drawn. And then, as more labor and materials are
employed, there may be increased requirements for more currency.
But the initiating force or process is through bank loans—taking,
initially, the form of checking balances.
Senator MCADOO. Of course, Doctor, we all realize that, under our
system in this country, the bank check constitutes the largest p a r t of
our circulating medium. The great bulk of the business of this
country is done on bank checks. And, of coxxrse, when you get a
contraction of credit in banks, you get a contraction of the bankcheck circulation.
Dr. SPRAGTJE. That is followed by the contraction of the currency
circulation, after a bit.
Senator MCADOO. Exactly; it has a relation.
Now, this is a theoretical question. We have outstanding in the
country today, I think, about 4% billion dollars in circulation—in
notes of all kinds; that is, bank circulating medium.
Dr.

SPRAGUE.

Yes.

Senator MCADOO. I am asking a hypothetical question, merely
because I have an object in view. Would you say it would be inflationary to add a billion dollars to our circulating medium today?
Dr. SPRAGUE. It would depend upon the reaction of the community thereto.




BANKING ACT OF 19 3 5

221

Senator MCADOO. YOU mean, of the country?
Dr. SPRAGTJE. Of the country.
If in the future, it did not at all affect confidence in the money
of the counrty, that additional currency, after making 1 or 2
payments, would drift into the banks, and then to the Federal Reserve, increasing the balances of the member banks.
If it excited a fear of inflation, then the outcome would be different; because people all over the country might then begin to fly
from currency, to buy tangible things—5 acres and a mule, or
what not; and you would get an upward movement of prices,
through fear.
There are two kinds of inflation, as I see it: A business inflation
and a fear inflation. You cannot get a business inflation except
when that is initiated by the process of securing loans.
Senator BTJLKLEY. Are you ready to predict what would happen,
right now, if we should put out a couple of billion dollars of currency, to pay the bonus?
Dr.

SPRAGTJE. Why,

no.

I might be willing to put it in this way: That if it were done
grudgingly by the administration, and if everyone knew that it
was distasteful to the administration, and that the administration
was disposed to offset it, to some extent, then no fear inflation would
follow.
Senator MCADOO. Suppose an amortization provision were made
t h a t would retire it, over a period of years?
Dr. SPEAGUEJ. There, again, that is in the same line.
On the other hand, if a bonus were paid in currency, as just one
of a succession of devices designed to force, through expansion, an
upward movement of prices, then I think a fear inflation would
develop.
Senator MCADOO. D O you think a people, as a whole, would be
concerned, one way or the other, about an addition of 2 billion
dollars to the currency? Do you think that would create apprehension among the people of the country?
Dr. SPRAGTJE. A S I said a moment ago, if it were regarded as a
succession of steps, so that if that does not work in the direction of
price increase, some other payments will be made for some other
purposes, then I think that you—again at some stage which is difficult to predict—induce a fear of inflation.
U p to the present time, our policy has been that of endeavoring,
by one means or another, to induce a more active business demand
for credit. I t has not come yet; and when it will come, I do not
pretend to know.
Senator MCADOO. We are just issuing 4 to 5 billion dollars of
bonds—which, of course, have a decided inflationary tendency, and
are bound to create inflation, eventually.
Dr. SPRAGTJE. I do not agree to that, Senator.
Senator MCADOO. Don't you?
Dr.

SPHAGTJE. N O ,

sir.

Senator MCADOO. I should think that we would get a very large
measure of inflation.
Dr. SPRAGTJE. I am afraid that I differ from my sound-money
friends, on that point. You can increase the Government debt,
129688—35—PT 1




15

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BANKING ACT OF 19 3 5

without inflation, so long as the increase does do no more than absorb
current savings. You can increase the Government debt to the
point at which the people begin to be doubtful of the credit of the
country. But that is a point that is far away, of course.
But the mere increase of $4,000,000,000 of Government debt, in
itself, is no more inflationary than a similar increase of private
investments arising out of an increase in the bonds and shares of
stock of industrial companies all over the country.
Senator MCADOO. I am inclined to agree with you on that point.
I put the question that way because I wanted to get your view.
And I want to say that that is in line with the same doctrine
which you have just expressed—about an increase in circulating
medium; that is, the fear that something more might be done.
The same kind of fear might be induced by increased governmental indebtedness; and the same consequences might follow.
Dr. SPEAGUE. I am willing to say that if a year hence the situation is such that you need to borrow even more than was borrowed
this year for work relief and other purposes, and if at that time
we see no light at the end of the tunnel and no date at which these
needs will diminish, then I think you get into a situation in which
Government credit may be weakened and in which a fear inflation
might start.
I n other words, while you might go up to $50,000,000,000 of
Government debt, it seems to me that the process will be very different if, for example, next year you had to increase the debt a
billion dollars over the debt increase this year, and the year after
that, two billions more than this year.
Whereas if you have by next year evidence of an improvement,
so that the deficit will naturally decline somewhat, then you can
go on with that deficit for quite some longer time. Because it will
be at a diminishing rate of increase.
Senator MCADOO. Doctor, I was interested in your observations that
if we created a fear inflation by the issuance of a billion or more of
irrency the people would be disposed to take their savings and invest
-nem in 40 acres of land and a mule.
Now, that is one of the things that some people here are anxious to
see done. Would that not have a generally stimulating effect upon
the real-estate situation of the country that might be of value in
rendering liquid a vast mass of stuff which is now hopelessly frozen ?
Dr. SPRAGTTE. I t is the same kind of liquidity which, it seems to me,
was present in brokers' loan and stock-exchange securities in 1928 and
1929—a liquidity which presupposes an indefinite continuance of the
upward movement.
I do not believe that that kind of fear inflation would land us in a
condition under which we could go forward in a sound and healthy
fashion.
Senator MCADOO. Of course, you understand that, for the purpose
of discussion, I am merely putting hypothetical questions; I am not
expressing views.
Senator BULKLEY. D O I understand you to say that to put out, say,
a quarter of a billion dollars of Treasury notes to pay the bonus would
not necessarily result in an increase of the price level ?
Dr. SPEAGUE. Not much more than resulted in the previous bonus.




BANKING ACT OF 1 9 3 5

223

Senator BULKLEY. W h a t do you mean by " the previous bonus " ?
Dr. SPRAGUE. That of 1930 or 1931.
Senator BULKLEY. T h a t was simply an increase in the loan value.
Dr. SPRAGUE. Well, it created a large amount of additional funds.
Senator BULKLEY. But not any new Treasury notes; there was no
new issue as a result of it.
Dr. SPRAGUE. But it does not seem to me that the new issues promise anything permanent in the way of a price change. They either
do or do not induce a fear inflation. If they do not, and do not
induce a business inflation of a continuing sort, then the Treasury
notes drift back to the banks and increase excess reserves of member
banks.
So that you might have, as a result, 3 billions or more of excess
reserves rather than the 2 % or 2 ^ that we now have. But if it were
simply regarded as the first of a series of measures that were goin<;
to be pursued until there was some action in the line of a price
advance, then I think you could have the fear inflation begin, with a
more or less early collapse.
I do not know t h a t I need to go further into this change in Federal
Reserve notes. F o r I do not believe that it would make any great
practical difference in the functioning of the Federal Reserve System.
Now we come to open-market operations.
Senator GLASS. Before you start to discuss open-market operations,
Doctor, I have a question about the increased currency medium.
What is the existing capacity of the Federal Reserve banks to
afford credits in new issues for legitimate business transactions?
Dr. SPRAGUE. Why, they can, I should say, increase by something
like three billions of dollars, in granting credit to member banks,
or in buying bills or in buying " governments."
They have plenty of funds. And that is true, whether the existing arrangements about Federal Reserve notes are retained, or not.
If, however, you eliminate, or wish to lessen, the power of the
Federal to grant credit, you could do so by eliminating the provision
allowing them to use " governments " as cover for Federal Reserve
notes. That would absorb quite a tidy portion of the gold certificates
that the banks now hold.
Senator GLASS. And that are not worth more than the paper they
are printed on, so far as redemption is concerned.
I am not talking about limiting the powers of the Federal Reserve
System to meet the requirements of business. What I am trying to
bring out, for the record, is that the Federal Reserve banks have
ample facilities to meet all of the requirements of legitimate business.
Dr. SPRAGUE. Quite.
Senator GLASS. I S that not so?
Dr. SPRAGUE. T h a t is true. They have them, with or without this
change in Federal Reserve notes.
Senator GLASS. I t may be a matter of interest to the record hereafter to state that the authority to loan on United States " governments ", instead of on commercial paper, was granted upon the
distinct understanding and repeated assertion that it never would be
utilized.
Dr. SPRAGUE. NOW, going on to the matter of open-market operations : They obviously are of no consequence at the present time for




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BANKING ACT OP 19 3 5

the purpose of extending credit, for the reason that we have in the
United States Treasury a situation which is unique, so far as I am
aware, in the history of governments—since our Treasury has honestto-goodness physical cash available for use amounting to something
like 3 billion dollars.
The ordinary position of a government treasury is that it has a
moderate working balance, and is obliged to go into the market and
borrow if its needs increase over and above current revenue.
Our situation is unique, and will continue, I suppose, for a good
many years, until the Treasury gradually has transferred to the
Federal, in the form of gold certificates, the equivalent of the gold
which it now holds.
B u t that places the responsibility for the conduct of our affairs,
more largely than is normally the case, with the Treasury Department.
Since the revaluation of the dollar, a year or more ago, the Federal
has been quiescent in the matter of open-market operations, the increase in member-bank reserves being brought about as a result of
gold imports and the deposit of gold certificates by the Treasury
with the Federal Keserve banks.
Senator MCADOO. This 3-billion balance, Doctor, in the Treasury.
to which you now refer, consists largely of the results of the devaluation of gold, does it not?
Dr. SPRAGUE. Yes; quite.
Senator MCADOO. Almost wholly, is it not?
Dr. SPRAQUE. Almost wholly, two billion eight.
Senator MCADOO. That was my recollection.
Dr. SPKAGUE. Some of it is being employed in connection with the
retirement of the national-bank notes.
Senator GLASS. I am glad that you did not make the mistake of
calling it profit; you called it the result of the devaluation and not
profit.
Senator MCADOO. I wished to be meticulous about it.
Dr. SPRAGUE. The time may come when there will be general agreement that expansion has been such that restraint may be desirable.
And with our existing set-up it will be necessary, if restraint is to be
exercised, that it be through close cooperation between the administration, the Treasury Department, and the Federal Keserve System.
I think that it is possible to prevent the development of an excessive
business demand for credit, if there should be close cooperation
between those two agencies—but hardly otherwise.
Senator GLASS. D O you know of any failure on the part of the
banks to cooperate?
Dr. SPRAGUE. I do not. But I simply bring out this point to emphasize the point that the open-market changes are not of a type,
under existing circumstances, that possibly could have any important
bearing upon the situation.
Senator MCADOO. H O W about the future? We are talking about
this from a long-range standpoint, as you expressed it.
Dr. SPRAGUE. That is what I am constantly trying to emphasize:
T h a t I am judging this bill from the long-range point of view.
Senator MCADOO. From the long-distance point of view, do you
think that change is desirable, or not ?




BANKING ACT OF 1 9 3 5

225

Dr. SPBAGUE. NOW, that brings us to the real heart of the problem.
All of these changes—that relating to the open market, and those
relating, I should say, to real-estate loans, and the provision relating
to the power of the Federal Reserve Board to change reserve requirements of member banks—all enormously increase the power of
the Federal Reserve Board. There has been a decided tendency for
the power of the Federal Reserve Board to be increased—certainly
ever since the death of Governor Strong. I t is probably inevitable,
and for this reason: The major function of a central banking organization is to influence the supply and cost of credit.
Now, 11 of the Federal Reserve banks cannot greatly increase the
cost and supply of credit. Their business, in the main, is that of
meeting, or not meeting, the requests for accommodation, on the
part of the individual member bank.
The activities of the Dallas Reserve Bank, or the Minneapolis Reserve Bank, are not different, in essence, from those which were performed, before the Federal Reserve System was established, by certain city banks with numerous country correspondents—banks like
the First National and the Continental in Chicago. The Federal
very likely does it better; but in essence, the business is similar in
character.
If you are going to influence the cost and supply of credit throughout the country, it can only be done through open-market operations;
and those open-market operations must necessarily be executed
almost entirely to New York.
All over the world the tendency is for central banks to make use,
more and more, of open-market operations in the execution of their
policies. Now, this is the reason why the New York bank has been
far more important than all the other Federal Reserve banks put
together.
One of the hopes of some of the proponents of the original Federal
Reserve Act was that the System would serve to decentralize many
things.
Well, it has not and cannot. I t is inevitable that there be a central
money market in every country, the place where idle funds go and
where business goes, that is susceptible of contraction or expansion
under the impact of changes in interest rates.
Now, the Federal Reserve Board has tended—and I think will
tend—to receive more power and more authority, because, apparently,
the people of this country are not willing that the central banking
business be conducted primarily by a New York institution.
I think, then, on the whole, that it is probably inevitable that the
Federal Reserve Board acquire more and more power in the conduct of
the Federal Reserve System.
If one admits that, it would seem to me to follow that it is of vital
consequence that the Congress establish a Federal Reserve Board that
shall have independence of the administration in a large degree—as
large a degree as is practicable.
I t cannot be expected that it shall have that degree of independence that is possessed by the United States Supreme Court. The
final decision must necessarily be made by the government that is in
authority, on matters of monetary policy. That is true in every
country. The Bank of England, for example—which, perhaps, en-




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BANKING ACT OP 19 3 5

joys greater independence and prestige than any other central bank—
cannot veto a definite decision reached by the British Cabinet, and
supported by the British Parliament; but it is unthinkable that any
important monetary action could be taken, in that country, without
thorough-going consideration of the matter with the authorities at
the Bank of England.
Now that, we do not have. Decisions have been made in this
country, without anything that you can style thorough-going discussion of the proposal or the policy with either the Federal Reserve
Board or with governors of the Federal Reserve banks. And that,
as it seems to me, is the central question raised by this bill.
Senator MCADOO. YOU speak of its independence, Doctor. How
would you make it independent to the degree that you have in mind,
as against the way in which the Board is now constituted?
Dr. SPRAGUE. In the first instance, I would not include the Secretary of the Treasury as a member of the Board. The Secretary
of the Treasury will always be in position to exert an influence and
to secure cooperation from the Federal Reserve Board.
This is not a new thought of mine; I have been urging it for a
great many years.
Senator MCADOO. My recollection is that you were opposed to the
inclusion of the Secretary of the Treasury, in the original Federal
Reserve set-up.
Dr.

SPRAGUE. I was,

sir.

Senator GLASS. Oh, yes; I had considerable correspondence with
you on that subject.
Dr. SPRAGUE. I do not know of any specific instance in which
the Treasury influence has been exerted to secure action of a desirable sort, that would not have been taken by the Reserve Board,
of its own initiative.
I do know of a number of instances in which the Treasury influence has been exerted in directions which seem to me to have been
shown, by what happened, to have been regrettable.
I also believe that you can secure better men, as members of the
Board, if the Secretary of the Treasury is not included in the membership.
I would also take the Comptroller's office out from the Treasury
Department, and make the duties of the Comptroller of the Currency the duties of one designated member of the Board.
Those changes would seem to me to be calculated to give the
Board somewhat of a more independent status than it now has.
Senator MCADOO. Am I correct in understanding your suggestion
to be that the Comptroller of the Currency, as such, and his office, as
such, should be taken out of the Treasury ?
Dr.

SPRAGTJE.

Yes.

Senator MCADOO. And should become a bureau—so to speak—or a
department of the Federal Reserve Board?
Dr. SPRAGUE. Yes.
Senator MCADOO. And

the Comptroller to sit as a member of the
Board, in that capacity?
Dr. SPRAGUE. Yes; and in no sense be a subordinate of the Secretary of the Treasury.
Senator GLASS. A S a matter of fact, Doctor, the Comptroller of the
Currency is not, in the sense that you indicate, subordinate to the



BANKING ACT OF

1935

227

Secretary of the Treasury. He does not even have to make a report
to the Secretary of the Treasury; he is required, by law, to make
his report to the Congress of the United States. And his term
usually overlaps that of the Secretary of the Treasury.
Senator MCADOO. A S a matter of f^ct, Mr. Chairman, if you will
permit me to interject this thought here: He is a pure subordinate of
the Secretary of the Treasury because no Comptroller of the Currency can hold his office against the wish of the Secretary of the
Treasury and the President of the United States.
Senator GLASS. Neither can any member of the Federal Reserve
Board.
Senator MCADOO. I think that the Comptroller of the Currency is
perhaps more subordinate to them.
Senator GLASS. I think that the present Comptroller of the Currency has been less subject to that domination.
Senator MCADOO. I- think that is true. We are not speaking of it
from the viewpoint of domination, but from the aspect of influence.
Senator GLASS. YOU are a little more diplomatic than I am.
Dr. SPRAGUE. I am not thinking of it with respect to its effect on
the Comptroller, but with regard to the influence on the public:
That we need to establish a board that has such prestige and status
that it will be regarded by the public, as the appropriate agency
with which the administration will consult, in taking any important
monetary action.
And that, it seems to me, would be somewhat improved if the
board ceased to have any direct relations with the Treasury Department.
Senator GLASS. Doctor, for the last half hour, you have proceeded
upon the theory that the Federal Reserve System is a central banking
system, and t h a t the New York Federal Reserve Bank is the whole
thing.
If we must have a central bank, to be owned by the Government
and managed by the Government, that is one thing; I can readily
understand how one might advocate that. Many persons regarded
as experts in the banking business, have advocated that.
B u t why should we have a central bank, not managed by bankers,
in which the Government owns not a dollar of proprietary interest,
and assumes no single dollar of responsibility, but is managed by
the Government?
Dr. SPRAGUE. Well, it does not seem to me that that is in the essence
of the problem.
Senator GLASS. T h a t is the problem that we have, right now.
Dr. SPRAGUE. I t seems to me that the fact that the banks provide
the capital, is a minor factor in the functioning of the System.
The capital is reasonably secure. I t has a limited dividend; and
the surplus, practically speaking, is available for proper public use,
and is in no sense available to shareholders, on liquidation.
I prefer to consider it a type of institution that will have the confidence of the public and which may be expected to be managed with
a fair measure of efficiency.
My first point is t h a t even if no further powers are granted the
Federal Reserve Board than those which they now possess, their
power has increased so largely since 1914 that we need, even more




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BANKING ACT OF 1 9 3 5

than ever before, a body composed of independent-minded people—
capable of cooperating, of course, with the Government—but with a
standing with the public that will make their opinions weighty with
the Government, as well as with the people outside.
Now I come to the specific, provisions of the bill relating to the
Board and to the Reserve banks.
And in this connection, I should like to call to your minds something that was said by the President in his fireside chat last Sunday—to the effect that it was very difficult for people stationed in
Washington to sense public opinion and really to know what was
going on all over the country.
Well, that is a difficulty that is bound to present itself if we place
more and more power with the Federal Reserve Board situated here
in Washington. I t would be different if the capital of this country
were in New York.
We do need a very close relationship between the Federal Reserve
banks and the Federal Reserve Board; and in the Federal Reserve
banks we need competence and also status, lest the management of
the Federal Reserve banks become nothing more than branch
managers. For in that event you will not secure the same quality of
person as those who have been secured in the past in the service of
numbers of the Federal Reserve banks.
I t is from that viewpoint that I think the change proposed about
the governor and chairman of the respective Federal Reserve banks
should be considered: Will the governor, under the new proposal,
have a sufficiently independent status and sufficient authority so that
you can attract to those posts first-rate men ?
JNow, as the bill was originally introduced, I should say that
the answer was clearly in the negative, for it provided that the governor of each Federal Reserve bank should be subject to approval,
or renewed approval, or disapproval, by the Federal Reserve Board
every year. That has been changed in the draft of the bill that is
now before the House, and it now provides that after the initial approval of the governor selected by the directors of a Federal Reserve
bank the board may not have a chance to say anything definite about
it for a period of 3 years. On the whole, that seems to me to be a
desirable change. Whether that period should be lengthened to 5
years
Senator GLASS. Or 12 years.
Dr. SPRAGTTE. Or 12 years is, I think, an important question for you
to consider.
But the object should be that of giving that post sufficient influence
and power so that it shall be attractive to first-rate men.
I t is suggested that in concentrating the powers of the chairman
with that of the Governor, something is done to make the post more
attractive. I do not think that that carries very far. W h a t will be
important is whether the Governor of a Reserve bank is " his own
m a n " , or whether he is completely subordinate to the Federal
Reserve Board.
Now, much has been said, in hearings before the House, about the
need of securing cooperation. But I do not think the best way to
secure cooperation is to have people constantly under your control,
as your docile subordinates.




BANKING ACT OF 1 9 3 5

229

Senator GLASS. I S not that what this bill provides, for the governor of the Federal Reserve banks ?
Dr. SPRAGTJE. That is what I fear, as the bill is set u p ; and as I
read the hearings of Governor Eccles, he seemed to me to think of
securing results, to an unduly great extent, by means of control.
Whereas I do not know of very many instances, in the functioning
of the Federal Reserve System, in which there has been an undesirable lack of cooperation. There have been some differences of
opinion; and people frequently speak of the Chicago case. But
whether the Chicago bank participated in open market operations,
or not, did not greatly matter. All that it meant was that the other
11 banks would have slightly more of the open-market purchases of
" governments."
The powers that the Federal Eeserve System has—and the even
greater powers that it will have, if this measure is passed—lead me
to feel that it is desirable that there, be a necessity for a certain
amount of give and take, and meeting of minds, and cooperation.
Smooth working, without friction, is not nearly so important as that
these matters of great moment be thoroughly threshed out, and that
the various people doing the threshing out, shall be independent
people, and not mere subordinates.
Senator MOADOO. May I interrupt you there, for an observation?
As I understand your testimony thus far, you believe that greater
power should be concentrated in the Federal Reserve Board, but that
it should be free, as much as possible, from governmental interferences, and from the exercise by the Government itself of any powerful influence on the Board.
Dr. SPEAGTJE. That is not my view at all. I would say: Do not
give the Reserve Board more power unless you can make certain
that it will possess greater independence than in the past.
Senator MCADOO. NOW, conceding that that power is given to the
Board, do you not necessarily make the governors of the various
banks subordinate to the Board and really subject to the compulsion
of the Board in carrying out the policies which may be determined
to be wise?
Dr. SPRAGTJE. I n the final show-down; yes. But there is a great
deal of difference between dealing with a person who is your subordinate and whom you may fire tomorrow morning, if you are so
inclined, as contrasted with people whose opinions you must respect,
and who will be there even though you have overruled them on an
important matter.
Senator MCADOO. Suppose you fix the time as 3 years: He has a
sword of Damocles hanging over his head.
Dr. SPEAGTJE. T h a t is why I think a longer period of time is desirable, and why I say—quite categorically—that no evidence has been
introduced, so far as I know, to show that the system has functioned
badly in important matters, because it is somewhat cumbersome, and
because of a lack of cooperation.
Senator MCADOO. Is not that statement of yours a negation of
what you are advocating in the way of extending powers to the
Board?
Dr. SPBAGUE. I extend the powers, partly because the public seems
to demand it, and because—as I said before—the Board here in
Washington, in a bit of a backwater in respect to the details and




230

BANKING ACT OF 193 5

the atmosphere and how things may be developing around the country, except as you get them from statistics and from people who
come in.
Senator GLASS. H O W do you arrive at the conclusion that the public is advocating it? The whole press of the country has been
against it.
Dr.

SPRAGUE.

Yes.

Senator MCADOO. That would make the public for i t !
Senator GLASS. Probably so.
Not only that, but 65 of the outstanding economists of the country
signed a protest against it. If my correspondence is any index at
all, thousands of bankers are against it.
Senator MCADOO. They were against the original Federal Keserve
Act.
Senator GLASS. So I am rather unable to see how you determine
that the public is in favor of it.
Dr. SPRAGUE. Well, because of the successive changes in the act,
made from time to time, which have tended to give more power to
the Reserve Board.
I do not think that this measure is urgent, but I am inclined to
think that, owing to the status of the New York bank as the operating factor in the system, it is likely to come about that more power
will be given to the Board, sooner or later.
And I am trying to set out—somewhat academically, I fear—the
conditions under which it seems to me reasonable that the Board
have more power, if it is concluded that a change in the system
is desirable.
Senator GLASS. Adding to the difficulty pointed out by the Senator
from California, this bill not only makes the Governor of each
Federal Reserve bank subordinate to the Board but it makes the
banks absolutely subordinate to the Board, in the matter of openmarket operations.
Under existing law, any one of the 12 banks may decline to participate in an open-market operation.
Dr.

SPRAGUE.

Yes.

Senator GLASS. Under this proposal, they will be compelled, by the
Board and in the judgment of the Board, to participate in any openmarket operation in which the Board wants them to participate.
Dr. SPRAGUE. I do not think that is necessary, because I know of
no instance in which the policy of the System has been unfavorably
affected because of the unwillingness of a particular bank to participate.
As I recall, the Boston bank at one time was indisposed to buy
either bills or " governments ", whichever it was. Well, that was
that. So some of the other banks bought rather more; it did not
affect the situation.
Senator GLASS. But let us assume that any one of the 12 banks—
the Boston bank, or the Chicago bank, or the Kansas City bank—
through its very carefully selected board, with 3 of the members
representing the banks of the district; 3 of the members actively
representing the commerce, industry, and agriculture of the district;
and 3 of the members anoointed by the Federal Reserve Board, here,
to represent the Government
Dr. SPRAGUE.

Yes.




BANKING ACT OP 1 9 3 5

231

Senator GLASS. And suppose the board of any Federal Reserve
district should determine that, in its judgment, it would not be warranted in participating in an open-market transaction—initiated, gay,
by the New York Federal Reserve Bank. Why should it be compelled
to do so?
Dr. SPRAGUE. T h a t is another case where I believe that cooperation
is what one should aim at rather than absolute control. I do not
think it is necessary for the functioning of the System. The general
policy might well be determined by the Board; but whether every
one of the banks shall come along I think might well be left to those
banks. Because if it is at all a reasonable policy, you may be pretty
certain that most, if not all, of the banks, in any given instance, will
join in as they have done in the past.
Senator MCADOO. Doctor, is it not conceivable, too, that in some
particular district prevailing conditions at the time may make it
unwise for that bank to participate in an open-market operation, as
ordered by the Board here ?
Dr.

SPRAGUE.

Yes.

Senator MCADOO. And is it not a larger measure of protection to
the System and to the general purposes for which it is designed to
serve, to allow a bank so situated to determine for itself whether or
not it shall participate ?
Dr. SPRAGUE. I think it is wise to do that; and those who make this
proposal ought to be able to present clear and definite situations in
which the lack of cooperation has been a serious matter in the functioning of the System.
Senator GLASS. I n any event, how may it reasonably be conceived
that a board here in Washington, may be better acquainted with the
requirements of any given Federal Reserve district, than the board
of directors of the bank of that district, who are in intimate contact
with all the business and banking interests of the district?
Dr. SPRAGUE. I suppose the answer would be made that these openmarket operations are largely handled through New York, and that
it comes up to the individual bank, mainly as an investment proposition.
I should rather p u t it on the ground that it is desirable, in view
of the size of this country, to endure a little friction, if you please,
and shoulder a little lack of cooperation at times, in order to make
certain that you are going to have competent governors and directors.
Because if the Reserve banks become nothing but the branches of
the Federal Reserve Board you will not get the same interest among
directors.
Senator GLASS. That is precisely what this bill makes.
Dr. SPRAGUE. And that is why I think it is desirable to modify
the open-market provision, with reference to taking out that " control
or compel" feature.
Senator GLASS. Let me interpose there: The existing law authorizes
the Board to adopt rules and regulations for the general policy of
open-market operations. And speaking of the New York bank:
The Banking Act of 1933 was designed to strip it of a great deal of
the authority that it had assumed without sanction of law.
Dr.

SPRAGUE.




Yes.

232

BANKING ACT OF 1 9 3 5

Senator GLASS. I n fact, no governor of a Federal Reserve bank
may even negotiate with a foreign bank, without the express authority of the Federal Reserve Board.
Dr. SPEAGUE. Yes.
Senator GLASS. You

know perfectly well that, theretofore, the
governor of the Federal Reserve bank did as he pleased, in such
matters.
Dr. SPEAGUE. Yes.
Senator GLASS. And

went ahead and not only had conferences, but
negotiated contracts and underwrote the indebtedness of foreign
banks.
Dr. SPEAGUE.

Yes.

Senator GLASS. And the Banking Act of 1933 stripped the Federal
Reserve banks of that authority; and they may not do any of that
sort of thing, without the sanction of the Federal Reserve Board.
Dr. SPEAGUE. NOW, there is one further feature about the local
banks, that I should like to mention: I t is proposed to eliminate the
chairman as a separate office, entirely, transferring his functions entirely to the governor. On the whole, I think the transfer of the
functions is unobjectionable. I should like to suggest, however, that
instead of making the governor the chairman of the board, that one
of the class C directors be designated, who, then, would have no
routine duties.
I think it would be highly desirable if, in each one of the Federal
Reserve districts, a man were to be secured as chairman of the board,
who drew no salary other than director's fees, but w r ho—occupying
an independent position and becoming, through being chairman,
fairly familiar with the functions and activities of his Reserve
bank—could make representations to the administration, to the
Federal Reserve Board, and to the appropriate committees in Congress, far more satisfactorily than any one else coming from the
various districts could be likely to do.
I n fact, I should be quite willing that such a group of these chairmen take the place of the Federal Advisory Council, which is composed mainly of bankers who do not have any very direct familiarity
with what is taking place in their respective Reserve banks.
I n each one of the 12 districts, I think, you could find an outstanding person to occupy the post of chairman.
Senator BULKLEY. D O you think that the governor of a Federal
Reserve bank ought to be a resident of the Federal Reserve district?
Dr. SPEAGUE. I do not think it is necessary. I n the case of Boston,
two governors of the Board have become governors of the Reserve
Bank of Boston—one coming from Alabama and the other from
Minnesota—with excellent results, in both instances.
I do not think that it is desirable that a sort of civil service of
governors be developed, making the governorship of Reserve banks
a career, with the governors moved about from one Reserve bank
to another. However, I do not know that that is implied in this
title I I .
Senator MOADOO. A S I understand, your suggestion about the
present chairman of the Board and the Federal Reserve agent who
does exercise quite limited functions, and is more or less a clerk,
and has no authority or cuts no figure in the management of the
bank, unless he is a strong man and, therefore, does exert the powers



BANKING ACT OF 19 35

233

which the law confers upon him; I mean that, in operation, it has
been just about what I described—at least it was while I was Secretary of the Treasury. H e is not a strong man, as a rule, and he does
not exercise a useful function to the extent that the law contemplated.
Dr.

SPRAGUE.

Yes.

Senator MCADOO. NOW, if I understand your suggestion, you
would change that?
H e now draws a salary, and is appointed by the Federal Reserve
Board, is he not?
Dr.

SPHAOTJE.

Yes.

Senator MCADOO. Your suggestion is that there be an independent
chairman—one of the class C directors, and therefore a Federal
Reserve Board appointee?
Dr.

SPKAGTTE.

Yes.

Senator MCADOO. That he draw no salary, and that he serve
purely for the honor of the position, is that your idea*?
Dr. SPKAGXJE. Yes. And then you could get the sort of men who,
for example, now are serving as chairmen of the various industrial
loan committees in each district.
Senator GLASS. Dr. Sprague is an idealist if he thinks that anything like that may be attained.
I n the first place, the chairman—and the agent appointed by the
Federal Reserve Board—is assumed, under the law, to be a man of
capable banking experience, who is obliged to know what is going
on in the Federal Reserve bank, because he has to pass upon all the
paper presented for discount.
And not only that, but he is charged with issuing to the bank the
notes that the bank may demand and the credits that the bank may
desire.
Dr. SPRAGUE. I am not suggesting that the existing chairmen are
not good men. But they are salaried men, giving all of their time
to their respective Reserve banks.
If the duties of the governor and the chairman are merged, then
there is no occasion for a salaried chairman. But I think it would
still be desirable that there be a chairman other than the governor
to bring into the bank one of the more distinguished men of affairs
in each district.
Senator MCADOO. Dr. Sprague, do you not think that there is something in the fact that the Chairman of the Board and the Federal
Reserve agent, who is the Government's representative, has been subordinated, in the public mind, to a position of inferiority, because
we permit the title of " governor " to be assumed by the man who
is selected by the board of directors to be the executive officer of the
bank?
I have always felt that if we had a governor of these banks, then
the present chairman of the Board, who is the Federal representative, should get the designation of " governor ", and the present
Governor of the bank should get some other title, say President, for
instance, because if you call a man " governor", he sometimes
begins to swell a little.
Would it not be better to call the chairman of the Board—equivalent to the executive officer of the bank—its " president" ?




234

BANKING ACT OP

1935

Then you would give him the dignity that I think he should have.
I n the eyes of the public, he would have the position he ought to
occupy with reference to the bank: I n other words, he is " carrying
the flag", so to speak.
Dr. SPRAGUE. With the governor simply serving in the fashion
that I have indicated.
Senator MCADOO. Yes. H e would have no salary, but he would
have a title. And then he would really occupy a commanding position, in the public mind, and he would be the governor's reprehentative.
As it is now, you call him a " Federal Eeserve agent, and chairman ", and the other man is called the " governor." And I think
that that is psychologically very bad.
Senator GLASS. YOU will recall, Senator, that the proponents of
the act, in the beginning, had expected that the chairman—designated by the Board, here—would be the chief executive officer of
the bank. But we also authorized the bank, without designating
any such officer as a governor, to select such officers as it thought
were required to carry on its business. And each bank selected a
man, and called him " Governor." And for a while, the governors
of the 12 Federal Reserve banks undertook to usurp the authority
of the Board, here in Washington. They had meetings when and
where they pleased; and but for Governor H a r d i n g calling a halt
on that sort of thing, and prohibiting them from assembling anywhere, except upon authority of the Board, they would have usurped
the authority of the Board here.
But the Board had sat here for 20 years—now going on 21 years—
and permitted that system to prevail.
Senator MCADOO. Governor H a r d i n g took t h a t action upon my
suggestion, when I was Secretary of the Treasury; and I think it
was done after consultation with you, as I recall.
Senator GLASS. Yes; but it has been going on for 21 years.
And I do not think that any of the governors of the Federal
Reserve banks have been discredited. If they have been, the Board
has lawful authority to remove them at any time. B u t it has never
removed one yet, that I know of.
So why interfere with a thing which has worked satisfactorily
for nearly 21 years? I t will be 21 years this J u n e .
Dr. SPRAGUE. Well, apparently, those who proposed this measure
are designing it to give the Board, or to restore to the Board, in part,
the power which you, Senator, suggest the Board had originally.
Senator GLASS. I did say so; yes.

Dr. SPRAGTJE. I am in favor or the maintenance of as high a degree
of autonomy in the existing Federal Reserve banks as is consistent
with a reasonable measure of efficiency in the conduct of business and
the determination of policy.
Senator GLASS. But under the pending bill they have no independence whatsoever. They are mere branches of a central bank, which
amounts to a central bank not conducted by bankers.
Dr. SPKAGTJE. I am prepared to suggest lengthening out of the term
of the Governor to 5 years, and modifying the open-market provision
in the direction of not compelling a member bank to participate.
Senator GLASS. That is a very material alteration in the proposition,
that confronts us.



BANKING ACT OF

1935

235

Dr. SPEAGTJE. I attach even more importance to this matter of
giving the Board, in the mind of the public, in the mind of the administration, and in! the mind of Congress, a high degree of dignity,
status, and independence.
Senator GLASS. Well, Doctor, we are greatly obliged to you for coming here and giving us the benefit of your advice, some of which I
am altogether disposed to take; and other parts of which I shall try
to consider fairly, as all of us shall.
As I have said, you are an idealist and I am an extremely practical
man, and perhaps I cannot reach up to your level in considering
these matters. Do you care to say anything further ?
Dr. SPRAGTJE. Well, I should like to conclude my remarks about
the status of the Board.
Senator GLASS. I apologize for interrupting.
Dr. SPEAGTJE. Perhaps I have said it already: There is not much
use in giving this Board—or any other agency—power, unless the
members of the Board are the type of people who will use it. Take
just one instance. There is a provision, in existing law, which is
greatly improved in this bill—about making changes in the reserve
requirements of member banks; for this proposed measure allows
the Board to make changes—not uniformly all over the country—
but by classes of banks. That is a desirable change, I think.
But you can well imagine a Board that would be afraid to exercise
that power; and it would be purely a dead letter.
Senator GLASS. But could you imagine a Board that would abuse
it?
Dr. SPRAGTJE. I can. But I can also imagine a Board which would
use it very seldom—but also use it on occasions when it would be
highly desirable.
I t would have been a very desirable thing in 1928.
Senator MCADOO. I t did not exist at that time.
Dr. SPEAGTJE,. N O ; but had it existed, what would have been the
result ? They did not use, in any effective fashion, the powers which
they then had. They did not adequately advance the discount rate.
Senator GLASS. They did not advance it- pt all for 7 successive
weeks, and they turned down the New York board's moves for
advancing the discount rate. And yet that is the board which we
propose to charge with the entire responsibility and power.
Dr. SPEAGTJE. If the Board would not advance the discount rate,
I cannot imagine it would jack up the reserve requirements of
member banks.
Senator MCADOO. YOU are getting down to the basic difficulty:
That you cannot always be sure of the responsibility or political
independence of any board, and therefore you have to take the chance
that the President will appoint men to this board of the character
and stamina to execute the law. Otherwise we should have to stop
legislating.
Now, have you any suggestion to make whereby we can secure
men of the right stamina?
Dr. SPEAGTJE. Well, write me a note when someone is up for
confirmation.
Senator GLASS. And you write him back that the Senate, under
the Constitution, is charged with just as much responsibility as the




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BANKING ACT OP 19 3 5

President of the United States in the selection of these people and
it never exercises it.
Dr. SPRAGUE. But it is the most important board—given all these
powers—next to the Supreme Court of the United States, I would
say.
(Dr. Sprague in reading over his testimony, amended his reply to
the following effect:)
I t is only in the event that it is possible to secure a Board that is
not subordinate to constant political control t h a t I am prepared to
favor such changes in the Federal Reserve Act as are embodied in
title I I . And I may further add t h a t even on the assumption of an
independent Board, I believe that title I I goes too far in subordinating the reserve banks to the Board.
Senator MCADOO. After all, it gets back to the matter of the men
who occupy public office—and that applies to the President, as well
as to the members of this board and the Members of the House and
the Senate. Under our democracy, we take the chance of sending
the best men, and you have to take the results as they come out of
the hopper.
Senator GLASS. We have gotten pretty good results.
Senator MCADOO. I think we have. The fact that the United
States has endured this long, is, I think, a tribute to the system.
Senator GLASS. Well, we are obliged to you, Dr. Sprague, for coming down and speaking to us; and we wish to thank you.
(Thereupon, at 12: 45 p. m., an adjournment was taken until Monday, May 6, 1935, at 10:30 a. m.)




BANKING ACT OF 1935
MONDAY, MAY 6, 1935
UNITED STATES SENATE,
SUBCOMMITTEE OF THE
COMMITTEE ON BANKING AND CURRENCY,

Washington, D. O.
The subcommittee met, pursuant to adjournment, at 10:30 a. in.,
in room 301, Senate Office Building, Senator Carter Glass presiding.
Present: Senators Glass (chairman of the subcommittee), Bulkley,
Couzens, and Townsend.
Senator GLASS. Mr. Graettinger, will you please take the witness
stand ?
The legislative committee of the American Bankers Association
requested us to hear you gentlemen on titles I and I I I of the bill.
Mr.

GRAETTINGER. Yes,

sir.

Senator GLASS. Will you be good enough to give your name and
position to the reporter, and then proceed to make any statement
that you desire.
STATEMENT OF M. A. GRAETTINGER, EXECUTIVE VICE PRESIDENT ILLINOIS BANKERS ASSOCIATION, CHICAGO, ILL.
Mr. GRAETTINGER. I shall make my statement brief, since the two
gentlemen who follow me, being practical bank officers, will go into
more detail.
I am appearing before you as a representative of the American
Bankers Association, as well as in my capacity as executive vice
president of the Illinois Bankers Association. I n the latter position I am a member of the Central States Conference, an organization consisting of the presidents, vice presidents, and secretaries of
the State bankers' associations in Arkansas, Illinois, Indiana, Iowa,
Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota,
Ohio, Oklahoma, South Dakota, and Wisconsin. This conference
some time ago appointed a committee on banking legislation, and
I have the honor to serve as chairman, together with the president
of the Missouri Bankers Association, Mr. W. W. Alexander, Trenton,
Mo.; the president of the Minnesota Bankers Association, Mr. Dan
J . Fouquette, St. Cloud, Minn.; the president of the Indiana Bankers
Association, Mr. M. J . Kreisle, Tell City, Ind.; and the executive
manager of the Michigan Bankers Association, Mr. Kay O. Brundage, Lansing, Mich. There are more than 8,000 banks located in the
territory represented by this conference, and this number is somewhat more than half of all of the banks in the United States.
237
3 29688—35—PT 1




16

238

BANKING ACT OF 19 3 5

I n general, these banks are in accord with titles I and I I I of the
bill, which your honorable committee has under consideration; and
we desire to see that much of the bill represented by titles I and I I I
enacted into law in order that there may be a certainty as to the
statutes under which the Federal Deposit Insurance Corporation
shall function. We favor the maximum amount of insurance on
each depositor's account being limited to $5,000, and that the temporary plan now in efEect become the permanent plan by June 30;
otherwise the permanent plan in the act of 1933 will become operative at that time.
Senator GLASS. YOU would like to see that done promptly, would
you not?
Mr. GRAETTINGER. I would.

Senator GLASS. I n order that due notice may be given to the
banks ?
Mr. GRAETTINGER. Yes; and that the banks may know that they
are going to proceed with the plan that is now practicaly in effect.
We realize that, in order that the Insurance Corporation may
properly carry on its functions and be placed on a sound basis, it
must be clothed with authority to protect itself against excessive
risks and have some discretion as to extending the insurance feature
to the banks now covered and those later applying for coverage.
We agree to the general plan of having each bank pay an annual
assessment on its total deposits to augment the funds of the Insurance Corporation and to provide a reserve. But, considering that
the earnings of the banks as a whole are now at a very low mark
and, in fact, that the losses and charge-offs more than take u p these
earnings, we believe that this assessment rate should be made as low
as can be reasonably done.
The bill before this committee provides a rate of one-twelfth of 1
ercent upon total deposits, although the board of directors of the
nsurance Corporation may from time to time fix a lower rate, but
not below 50 percent thereof. I n the bill now being considered by
the House, which was reported by the House committee, it is provided that this rate shall be one-eighth of 1 percent on the total
deposits, definite or mandatory.
If it is desired that a definite rate be made effective, we believe
that it might be better to start with one-sixteenth of 1 percent,
which would mean approximately $25,000,000 a year, so that the
banks in general would be able to conserve their earnings and contribute toward reserves which will help them to take care of such
losses as occur, make the banks stronger and, consequently, better
insurance risks for the Corporation.
Senator GLASS. W h a t would you say about the suggestion to have
the assessment, whatever it may be, stop after the $500,000,000 that
is required in the fund, and automatically resume when the fund
shall have been impaired by 25 percent?
Mr. GRAETTINGER. I should say, of course, t h a t there should be
a limit as to the amount that might be collected as a reserve, although
it may be that—I do not imagine it will happen, but it is conceivable—there might be a year when the fund would be drawn on quite
heavily, and it would take some time to bring it back.

E




BANKING ACT OF

1935

239

Senator GLASS. Well, the assessments would automatically be resumed, to bring it back.
Mr.

GKAETTINGEE.

Yes.

By one method, they may be assessed beyond their ability to pay—
which would contribute to their weakness, thus making them charges
on the Corporation; while the other method, by calling for a reasonable assessment, would be helpful under present circumstances,
and permit the banks to build up their strength for the benefit of
the Corporation. While the experience over the past years might
justify a higher rate of assessment, it is quite conceivable that with
proper supervision and authority lodged in and exercised by the
Federal Deposit Insurance Corporation, the rate suggested may be
sufficient to carry on its purposes. No actuarial basis can be provided
until an experience over a number of years and under varying conditions has been h a d ; and until then, and because of the circumstances cited, we feel that the statutory provisions should call for
the rate suggested until buch time as a correct assessment basis may
be determined.
There is one other provision in title I in the bill before this committee with which the nonmember State banks are particularly con• cerned, and that is section 23, page 37, which requires all banks
to become members of the Federal Reserve System before July 1,
1937, in order to continue as insured banks.
And on this point I wish to say that the banks in the territory
already referred to, whether large or small, national or State, are
practically unanimous in asking that this provision be eliminated
from the bill. I t would seem that State banks having the qualifications for insurance by the Insurance Corporation under subparagraph 2 of section 6, page 9 of the bill, having the capital requirements under the laws of the respective States in which located, being
acceptable to the Insurance Corporation as qualified insured banks
and being under supervision and authority of the Insurance Corporation as well as of the several State governments, should not also
be compelled to become members of the Federal Reserve System and
p u t under additional supervisory power and authority. Banks in
these States want to see the dual system and the right of States
to charter banks, in accordance with localized sentiment and conditions, retained, for they fear that the effect of the provision in the
bill will be the possible centralization of banking to which compulsory membership may lead. After all, the management is the
measure of success of any banking institution or of any kind or
form of banking, and, without question, there is just as efficient
management in the smaller unit banks as in the larger institutions,
which fact has been very definitely demonstrated during the recent
years.
Banks under State supervision have gone along year after year
serving not only their own communities but the country as a whole
and are responsible to a great extent for the development of this
country. The unit country bank, whether national or State, owned
and officered by men who have their homes in the community where
the bank is located, has been the greatest factor in building up t h a t
community. I t has prospered with the people and suffered with




240

BANKING ACT OP 19 3 5

them. These so-called " country banks " have gathered together the
savings of their communities and used them in a large measure to
build up their home towns and the country thereabouts. I t has been.
an ideal financial set-up both for the banker and the customer.
True, unit country banking has had its share of failures, but inno greater degree than was experienced in metropolitan centers,,
because people who owed the bank could not pay their obligations
on account of the world-wide economic conditions over which neither
they nor the bank had any control. All that is wanted by the State
banks is the opportunity to continue to be of service in their particular field. A closer adjustment to local problems can be had
under State laws. Therefore, there should be the alternative opportunities that now exist from which banking institutions and local
business interests may choose, so that they can function or conduct
their business relationships under that banking code which best meets
the conditions of the times and of the place, as they see them.
There are a number of these State nonmember banks which do
not have sufficient capital to meet the requirements for admission
into the Federal Reserve System; but in many instances the capital
structure is large enough in proportion to the liabilities to adequately
take care of the business entrusted to them, and these banks could
not profitably employ or meet the necessary capitalization increase
which would be required for membership. I s it not possible that,
with the changing trend of economic conditions in the smaller communities, this situation will take care of itself by the natural process
of evolution and adjustment, without the requirement of compulsorj^
membership, which appears rather repugnant to these smaller banks ?
I t is on behalf of all of the banks in the 14 States mentioned for
which I speak that we earnestly hope you will give favorable consideration to the request for the elimination of this one provision in
the bill.
As to title I I I , I wish to say that we are in substantial accord with
the provisions as printed in the bill and ask for your approval of thesame.
Senator TOWNSEND. I came in late. W h a t 14 States do you represent, Mr. Graettinger?
Mr. GRAETTINGER. Arkansas, Indiana, Iowa, Illinois, Kansas, Missouri, Michigan, Minnesota, Nebraska, Ohio, Oklahoma, North Dakota, South Dakota, and Wisconsin.
Senator TOWNSEND. YOU feel that those States are in accord with
the statement which you have made ?
Mr.

GRAETTINGER. I

do.

Senator GLASS. One critical difficulty that I may mention, is that
the President and then the Secretary of the Treasury, Mr. Woodin,
agreed to the insurance of the deposit provisions of the bill, only
upon representations that it would tend to bring about approximately
a unified banking system. And the President has twice said to me
that he would be disposed to disapprove any repeal of that provision.
So we must take that into account, in considering the problem.
Mr. GRAETTINGER. I understand, Senator.
Senator GLASS. The President may be induced to change his mind.
Such things have occurred.
Mr. GRAETTINGER. I t is my idea that with perhaps a liberalization
of the requirements, and with a campaign of education, on the part



BANKING ACT OP 1 9 3 5

241

(if the Federal Eeserve Board, perhaps these banks could be induced
and encouraged to go into the Federal Keserve System.
I t is just a question of their being compelled to go into the Federal
Reserve System. And I think fchat, during the years, that may
transpire.
Senator TOWNSEND. D O you have in mind any liberalization of
the Federal Eeserve that you think would be helpful?
Mr. GRAETTINGEB. Of course, the,re is the question of capital requirements. I n these smaller communities, there are many banks
that have sufficient capital to carry on their business. But it is not
enough to enable them to qualify as members of the Federal Eeserve
System.
Senator GLASS. The Governor of the Federal Eeserve Board, in
his testimony before the House committee, was quite unmistakable
in his advocacy of the provision.
Mr. GBAETTINGEB. Yes; I understand that.
Senator GLASS. But we shall be very glad to give due consideration
to the representation that you have made.
Mr. GBAETTINGER. Thank you.
Nevertheless, we should like to present our statement in regard to
that, and have you consider that.
Senator GLASS. Oh, yes; you are not obliged to agree with the
Governor of the Federal Reserve Board.
Mr. GBAETTINGEE. Thank you, gentlemen.
Senator GLASS. Mr. Allendoerfer, we shall be glad to hear from
you. I recall very pleasantly that you attempted the impossible
fask of giving us an acceptable definition of these banking auxiliaries
in 1933. We did not accept your definition, and the result is that
we have had a good deal of confusion in the administration of the
law.
We shall be very glad to hear from you, Mr. Allendoerfer, on such
subjects of the bill as you may care to discuss.
STATEMENT OF CARL ALLENDOERFER, VICE PRESIDENT, FIRST
NATIONAL BANK, KANSAS CITY, MO.
Mr. ALLENDOEEFEE. My name is Carl W. Allendoerfer. I am vice
president of the First National Bank, at Kansas City, Mo.
I wish to touch on titles I and I I I , and to discuss some things of
importance and some that are not so important, but perhaps are
worthy of some little discussion.
Senator TOWNSEND. Are you confining your remarks to title's I
and I I I ?
Mr. ALLENDOEEFEE. Yes, sir.
Senator TOWNSEND. All right.
Mr. ALLENDOEEFEE. I have written

what I have to say, with the
idea of saving the time of the committee. In my memorandum, I
have referred to certain pages and lines of the House bill 5357, which
I think is identical with the Senate bill, of which I had no copy.
Senator TOWNSEND. Well, it was originally identical.
Mr. ALLENDOERFEE. That is what I mean.
Having lived for many years in a State neighbor to Nebraska,
Kansas, and Oklahoma where the guaranty of deposits 'has been
tried, I cannot he]p having reservations and even doubts as to the




242

BANKING ACT OF 19 3 5

successful outcome of an attempt to insure bank deposits. But one
must readily admit the actualities of the case, which are that conditions practically demanded that the public be reassured as to their
deposits in banks. This could only be done by some form of insurance fund.
We have not yet had enough experience with the temporary fund
on which to base the formation of a permanent fund, but it is possibly necessary to relieve the uncertainty and anxiety of all banks as
to their assessments and make it possible for them to come to definite
decisions as to becoming or remaining members. Therefore, some
permanent fund should be established, even though it be with a
realization that it is experimental and may require change, as a result
of operating history.
Let me say first that I have a pet theory that under any insurance
principle the assessment should not be based on deposits, but on the
assets of the bank which expose the fund to risk; t h a t is, loans,
investments, real estate, and so forth; and secondly, that assessments
on total deposits, instead of on insured deposits, is at least a debatable proposition. But I recognize that legislation should not be
muddied by consideration of pet theories, even though they might
be found sound; and that if the Corporation is to be carried on at all,
the base on which assessments are levied must be very broad or the
rate will be so high as to put many banks out of business. However, there are some proposals in the bill which may be susceptible
of adjustment, and which I shall mention.
I n the order as they appear in the bill and not in order of importance, may I refer to items which seem to me worthy of consideration.
Page 4, line 9, and following, gives a definition as follows:
The term " deposit " means the unpaid, balance of money or its equivalent
received by a bank in the usual course of business and for which it has given
or is obligated to give unconditional credit to a commercial, checking, savings,
time, or thrift account, * * *.

I t seems to me that this definition is not particularly clear. The
reference to unconditional credit given, or which the bank is obligated to give sometimes, does not specify when the bank is obligated
to give it. It may be that those who drew that definition, have in
mind the same point that I have; but it just is not clear to me.
I n any event, I venture to suggest a substitute. Section 323 of
title I I I authorizes the Federal Reserve Board to define " demand
deposits ", " time deposits ", and so forth, and while the definition
there is for a different purpose, it would, of course, be well to attempt
to see that there is no conflict in definitions, and that the meaning of
the words " deposit" or " net deposit", used with reference to one
section, is not different from that when used in connection with a
different section.
However, for the purposes of this section, I should like to substitute this wording:
The term " deposit" means the credit balance in any commercial, checking,
savings, time, or thrift account held by a bank in the usual course of business,
less deposited items in process of collection, and so forth.

There is more to this definition, about certificates of deposit, and
so forth, in the same sentence, and in which I am not suggesting any




BANKING ACT OF 1 9 3 5

243

change. I t may be that that is what is meant by items for which it
has given, or is obligated to give, unconditional credit; I am not
sure.
My thought is t h i s : The unpaid balance on the books to the credit
of a customer may be a conditional balance in whole or in part, unless
the amount of items in process of collection is deducted. Items in
process of collection do not represent funds which could be employed
to earn the insurance assessment. Depositors may protect themselves, in case of the closing of the bank, by having payment stopped
on items in process of collection. If the items are returned unpaid,
they are charged back to the customer's account, and the liabilities
which must be met by the receiver are reduced by that amount. If
the items are paid, they provide the receiver with additions to the
funds available when he took charge.
The principle of deducting from ledger balances, items in process
of collection, is recognized when computing reserve requirements
with the Federal Eeserve bank. If the proportion of uncollected'
funds to total ledger balances were the same in all banks, this would
not be an important point, as the inclusion or exclusion of these
items would merely mean a change of the base and, consequently, of
the rate of assessment. However, the proportions are not the same
in different banks or classes of banks. I t is therefore respectfully
suggested that consideration should be given to basing the assessments on net realized deposits, as contemplated in computing Federal
Eeserve requirements, rather than on total ledger balances. I t may
be that that is what this means; I just cannot tell what is meant by
the paragraph, as now drawn.
I t may not be convenient to adjust it, but it seems to me that there
is an inequality in requiring the payment of the assessment levied on
secured deposits. I recognize that this is a subject which might be
discussed at very great length; but it seems to me to be particularly
apparent that the trust funds deposited by a national bank with its
own commercial department and secured under Federal statute by
collateral deposited with the trust department, constitute funds for
which complete security already has been provided under law, and
without the need of any additional insurance fund for which an
insurance premium or assessment should be paid.
Senator GLASS. That is true of the deposit of Federal funds in a
depository bank.
Mr. ALLENDOERFER. I do not want to take too much time on that
point. I t seemed to me t h a t there was a particularly outstanding
case where it was not necessary to provide insurance and to pay
assessments to take care of them.
Page 9, line 17 and following: This paragraph reads:
The factors to be enumerated in the certificate required under subsection (e)
and to be considered by the board of directors under subsection (f) shall be
the following: The financial history and condition of the bank, the adequacy
of its capital structure, its future earnings prospects, the general character of
its management, the convenience and needs of the community to be served by
the bank, and whether or not its corporate powers are consistent with the
purposes of this section.

The new House bill, no. 7617, strikes out several of these factors.
They make it read:
The factors shall be the financial condition of the bank and the adequacy of
its capital structure.



244

BANKING ACT OP 19 3 5

I believe that some of these things which are stricken out are
considerations which the Corporation should have the power to pass
on, before admitting additional members to the fund; and I believe
that the original language should be restored. The safety of the
fund must be safeguarded by the fullest care in the acquisition of
new risks.
Senator COUZENS. Then, you favor the new language?
Mr. ALLENDOERFER. The old language. I favor the original language of bill no. 5357.
Senator GLASS. Which is also the language of the Senate bill;
they have altered it in the House.
Senator COTJZENS. Yes; but the Senate language is the same as
the old language. That is right.
Mr. ALLENDOERFER. Page 10, section 8 ( h ) , line 3, rate of assessment. I have had the pleasure of reading the brief prepared for
the benefit of this committee by Hon. Leo T. Crowley, chairman
of the Board of the Federal Deposit Insurance Corporation. Mr.
Crowley and his organization have done a superb job in creating
the machinery through which the temporary insurance fund was
set up and now operates. Their statistical department has made
available information not previously compiled with reference to
many points relating to the condition, earnings, expenses, and so
forth, of banks, members of the Corporation, and particularly with
reference to those banks which are members of the insurance fund
but not members of the Federal Reserve Bank.
Senator GLASS. I S that altogether true? Have not the statistics
been constantly compiled by the Comptroller of the Currency and
the Federal Eeserv'e Board, and they have simply been made available now, or made public, by the Federal Deposit Insurance Corporation ?
Mr. ALLENDOERFER. Senator, so far as I have been able to find, the
reports of the Comptroller and of the Federal Reserve Board have
included data with reference to member banks of the Federal Reserve System. The Federal Deposit Insurance Corporation now has
available only the recent data, and not the historical data, as to all
of the banks, members of the Federal Deposit Insurance Corporation, these being the former nonmember banks. And this information is quite helpful in many considerations.
However, even with their excellent work in the matter of data,
it must be admitted that the statistics are of relatively little help in
determining the losses which may be expected hereafter, and that the
total of future losses must be largely a guess. W h a t these losses will
actually be, is very greatly influenced by further supervision under
other additional powers granted by the Board of the Federal Deposit Insurance Corporation under sections of this bill. No one can
say with any certainty that an annual assessment of one-sixteenth
of 1 percent, or one-twelfth of 1 percent, or one-eighth of 1 percent of
total deposits is the amount which will be required. Actuarial
computations are dependable only on the assumption that facts
which have prevailed in the past will continue in the future. I t
is not reasonable to believe that the facts with reference to losses,
in recent years at least, will be continued. I t seems to me, therefore, that we should recognize t h a t whatever rate of assessment is




BANKING ACT OF 1 9 3 5

245

established at this time is purely experimental, and that it will take
a number of years to determine, with any degree of accuracy, the
required income to the insurance fund. Since this is true, we must
then have in mind, in fixing the rate of assessment for the immediate future, the capacity of the banks to pay that assessment; and
this should be the determining factor in arriving at the maximum
levy. If it is placed above the ability to earn and pay, the very
liability for such assessment will tend to reduce, and perhaps impair,
the solvency of many of the institutions, themselves.
Senator COTJZENS. Could we determine that, with any degree of
uniformity ?
Mr. ALLENDOERFER. NO ; not on any data that I have been able to
find.
Senator COTJZENS. S O that, in fact, you cannot determine, when
you draft this bill, whether the banks are going to be able to afford
this?
Mr. ALLENDOERFER. That is true; so that I feel that it should be at
a minimum. I cannot support my position by statistics, Senator.
But I do know it to be a fact that during the period since any statistics have been compiled and published, the earnings of banks have
continued to decline abruptly.
Senator COTTZENS. But they have also had substantial amounts of
money deposits.
Mr. ALLENDOERFER. I have a paragraph which I should like to
present on that, if I may, a little later in the hearing.
Senator COTTZENS. Very well; proceed.
Mr. ALLENDOERFER. W h a t is the capacity to pay, as it appears at
this time ? We are in a period of unequaled low earnings for banks.
There are no indications of an improvement in these earnings for
some time to come. The expenses of banks will be further increased
by the contributions to social-security funds which will be called
for by State or national legislation now under consideration, and
which, I believe, in some States is already enacted into law. No
saving in expense, which would impair proper banking service to the
public, in order that the insurance assessment can be paid, should be
permitted.
On page 23 of Mr. Crowley's brief he indicates a deficit in net
earnings of all national banks, reduced to an annual basis by computing from the results of the 6 months ending December 31, 1933.
This he shows to be $1.81 per $100 of total deposits.
The table on page 112 of the Federal Reserve Bulletin for February 1935 would indicate a still greater deficit for all banks, members of the Federal Reserve System. I have not been able to find
similar figures on all banks, members of the insurance fund; but it
is very doubtful whether the deficit for all such banks would have
been less than that just quoted. I t has been stated by public officials
that there are additional charge-offs which must be made, representing losses already recognized. I n addition to this, there will be the
inevitable current losses. The income of banks has been reduced
acutely and increasingly since the period on which Mr. Crowley's
figures are based. And in that situation, when we add the additional expenses which have been referred to, it must be inevitable
that the wisest course for the present is to make the assessment rate
at a low maximum and with some power in the board of the Federal



246

BANKING ACT OF 19 3 5

Deposit Insurance Corporation to give recognition to prevailing
conditions and adjust the rate below the maximum.
Senator TOWNSEND. Would you care to suggest the rate which you
think would be proper?
Mr. ALLENDOEKFEE. May I have just a minute? I do not mind
being interrupted, but perhaps that is better referred to a little later.
Senator TOWNSEND. All right; proceed.
Mr. ALLENDOEEFER. Whenever by reason of experience with a permanent fund, a higher rate of assessment is indicated as proper and
the earnings of banks have increased so that they can pay more, the
board of directors of the Federal Deposit Insurance Corporation
will, without doubt, present these facts to Congress and ask for an
increase in the maximum. The original bill fixed the amount of
the annual assessment at such part of one-twelfth of 1 percent as the
board of directors of the Federal Deposit Insurance Corporation
should consider necessary. The new House bill, no. 7617, fixes the
assessment of one-eighth of 1 percent, mandatory. Personally, I
believe the lower of these two figures will make it very difficult for
many banks; and I am in favor of making the rate as low as onesixteenth of 1 percent, if it must be mandatory. Certainly, the
mandatory rate of one-eighth of 1 percent is clearly excessive.
Answering your question, Senator Townsend, I think that onetwelfth of 1 percent, as the maximum, is the limit, on the maximum
side. If there must be a mandatory minimum expressed, instead of
leaving it entirely to the judgment of the directors of the Federal
Deposit Insurance Corporation, within the maximum, I should say
one-sixteenth of 1 percent mandatory, and up to one-twelfth of 1
percent maximum, in the discretion of the Board.
While referring to Mr. Crowley's brief, I should like to make a
comment on an incidental matter which I believe should be of interest. Without doubt, Congress had in mind, when the Banking Act
of 1933 was enacted, that by a provision eliminating interest on
demand deposits and establishing control for interest to be paid on
time deposits, it would save the member banks an amount of money
equal to that which they would be called upon to pay into the insurance fund. This provision about interest was a very wise one and
has been very helpful to the banks, particularly in the months immediately following the passage of the bill. I believe power should
be given to the Federal Deposit Insurance Corporation to control
the interest to be paid by the nonmember banks belonging to the
fund. As things have developed since the Banking Act of 1933 was
passed, it is apparent that the elimination of interest on demand
deposits and the reduction of interest on time deposits would have
been absolutely necessary even had there been no such legislation.
And progressively since that time, rates have, of necessity, been reduced and almost eliminated.
The particular point which I wish to make, however, is one which
I think may have been overlooked by some, in the consideration of
this subject. Banks carry accounts with other banks—the small
banks with those in larger cities, and those in t u r n with banks in
Keserve and central Reserve cities. When the payment of interest
on demand deposits was prohibited, the resulting saving to banks
was not paid by the general public alone, but was paid in a very
large amount by those banks which had balances with the larger



BANKING ACT OF 19 3 5

247

banks. I n other words, the showing of reduction of total interest
cost does not reflect the whole condition. On the other side of
the ledger is a very large reduction in the amount of income to depositing banks, which they formerly received on balances maintained with their city correspondents.
I put in Saturday morning trying to find data which I could give
you, which would give a proof of the amount of that. I could not
find i t ; perhaps I have not been to the right place.
But without giving you an accurate estimate of the proportion of
the total interest paid—which was, in turn, a loss to some other
bank—we can say t h a t it is a very substantial percentage of the
amount which is frequently spoken of as being a net saving to the
banking system as a whole. And the incomplete figures which I
have been able to get from the Federal Eeserve bulletins fully justify, I think, the assertion that at least 30 percent of the apparent
savings to banks have merely meant that another member of the
" family " did not get it; and therefore, it was not a net saving to
banks, as a whole.
Senator GLASS. I t seems to me that we have discussed this question
solely with respect to the loss of savings to the banks, themselves.
However, there are approximately 40 millions of depositors in
the time- and savings-deposits class. Do you not think they ought
to have some consideration? They are not primarily investors. A
very small percentage of them, if any at all, would know how to go
on the stock exchange and buy a share of stock—either railroads,
industrials, or any other description of stock. They merely deposit
their savings in their local banks, with the expectation that they
may draw them out at their convenience, when necessary. They are
not investors.
Now, it has seemed to me that to rather arbitrarily cut the rate of
interest to be paid to these 40 million depositors, is a matter which
needs to be carefully considered, in their interest as well as in the
interest of the banks.
Mr. ALLENBOEBFEE. Very well.
I t is in the interest of the banks, if their interest is protected,
Senator. And certainly the power of the Federal Eeserve Board
or the Federal Deposit Insurance Corporation, if granted to regulate rates of interest on time deposits, should be exercised only to
the point of restricting excessive rates, which lead to bad banking
practices.
Senator GLASS. And it has not been exercised either in the spirit
or the text of the law.
We discussed this matter in our subcommittee, and we talked of
it in our hearings on the Banking Act of 1933. And there was intended to be a uniform rate throughout the United States. We
came to the conclusion that there was no more reason to have a uniform rate of interest to be paid to depositors than there was to
have a uniform rate of discount throughout the United States.
Mr. ALLENDOEBFEB. I think that is perfectly true.
Senator GLASS. And I have not departed from that conclusion.
Mr. ALLENDOEEFEE. My expression here, as used in my memorandum and in my oral testimony, with reference to giving the power
to the Directors of the Federal Deposit Insurance Corporation, to




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BANKING ACT OF 1 9 3 5

fix maximum rates of interest on time deposits, is only with the
thought that that is a very important control over bad banking; in
paying excessive rates of interest in order to have funds to use is not
the best way for investment by the bank.
Page 10, line 24: A date to determine the deposits upon which
assessment is computed. The present act creating a permanent
fund, and the bills introduced in the Senate and House, set particular days which are to be used as a measuring stick of the deposit
liability of the bank on which its assessments are to be based. I t
seems to me clear that any predetermined date for this purpose is
a serious mistake. I t will either result in very great inequality bj
the dates being set, as they were set, at periods when certain banks
will have large amounts of temporary deposits placed with them
to meet dividend payments, payment of coupons, and so forth,, or
even if there is no attempt made by the banks themselves to control
their deposits as of date of assessment, inequality will result by reason of natural fluctuations making these days far from the proper
average deposits of particular banks. And the invitation is there
to all banks to attempt to control their deposits on those assessment
dates known in advance.
Senator GLASS. Just as there is a great temptation for the individual depositors, in States where a tax is levied against deposits,
to check out on the day before the date, and to redeposit on the day
after.
Mr. AiiLENDOEKFER. The methods possible in the use of these controls need not be discussed in detail, unless some member of the committee wishes it. The new House bill, no. 7617, makes some changes
in the date of assessment by saying that the total deposits for assessment purposes shall be determined as of the close of business on one
day in each of 3 or more months preceding J a n u a r y and July of
each year. I t seems to me that the ideal arrangement would be an
average of the total deposits shown by the daily statement book of
the bank over all the business days of each 6 months' period; and I
can think of no important reason why that method should not be
used. I t does not seem to me that the attempt to correct the matter,
as expressed in the new House bill, includes enough days on which
the average is to established. And if there are good reasons why
the average shall not be that of all the business days within the
period, then at least it should be based on the average of a considerable number of days. The same error of establishing a predetermined date occurs in a minor matter on page 11, line 24, where the
deposits of a bank becoming a new member of the fund are established, for the purpose of assessments, as being at the close of the
fifteenth day after it becomes an insured bank—a predetermined
date again.
On page 30, line 12 and following, is a provision under which a
depositor in a closed bank has only 1 year in which to claim his
benefits under the insurance fund. I believe this to be entirely too
short a time. The new House bill extends this to 18 months; and
it occurs to me that it might be made 24 months, as the assets of
the closed bank are not likely to be fully liquidated before that length
of time, and therefore those engaged in the liquidation of the bank
would have to keep their books open and might very properly give
all depositors the benefit of 24 months in claiming their benefits.



BANKING ACT OF 19 3 5

249

On page 34, line 13 and following, in the first sentence in that
paragraph is a provision that the board of directors of the Federal
Deposit Insurance Corporation shall gather information and data
and make investigations and reports upon " the organization, operation, closing, reopening, reorganization, and consolidation of banks,
banking practices and management, and the security of depositors
and adequacy of service to borrowers." The new House bill omits
both this sentence and the following sentence, which provides for a
report to Congress of the findings of the board of directors of the
Corporation. I t seems to me to be desirable that this Corporation
do gather information and data and make this available by the publishing of a report thereof.
Because, as we discussed a moment ago, that does not include data
concerning the banks not members of the Federal Reserve System,
on which we have not previously had consolidated information.
I would urgently recommend the omission of the words, however,
in the last of the original paragraph, " and the security of depositors
and adequacy of service to borrowers." The first phrase seems entirely unnecessary, as it covers only what is already provided for in
many other ways. And the last phrase, " adequacy of service to
borrowers ", seems to promise little which would be of substantial
good, but rather to call for inquiry which can do nothing more than
make mischief.
Senator COITZENS. How do you mean "make mischief"? How
would it make mischief?
Mr. ALLENDOERFER. Senator, we have had, during the last year,
inquiry of the adequacy of service to borrowers—these inquiries being of Federal agencies, that have made some reports, frequently of
minor importance. If any good has been accomplished by that investigation and report, I do not know what it is. That report simply brought to light whether or not banks were refusing loans, and
that recovery was being delayed because of their attitude.
I t was then thrown open so that the R. F . C , Mr. Jones' Corporation, and the Federal Reserve banks, themselves, could loan to borrowers who were not being taken care of by banks. And the extent
to which that has been found useful is not a very great proportion
of the needs of the borrowing public on the whole.
Senator COITZENS. Are not your conclusions rather based on an
unusual economic condition, rather than on a permanent law ?
Mr. ALLENDOERFER. I do not want to seem to express any dissatisfaction with the fact that it has been considered, and that the
agencies have been set up to take care of loans which banks were not
making. There has been a good job done on that.
But this requires that the Federal Deposit Insurance Corporation
shall gather information and data continuously, and shall publish a
report—make a report to Congress, which report shall be published.
Senator COTJZENS. But it does not mention any bank or any particular locality. I suppose it would be done in general terms, just
as the report of the Comptroller of the Currency is made in general
terms.
Mr. ALLENDOERFER. That would depend on whether or not the Corporation felt that this put a charge on them to make a report to
Congress regarding the adequacy of service to the public by banks.
I cannot feel that that is important.




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BANKING ACT OP 1 9 3 5

Senator GLASS. A S a matter of fact—and I am asking this question because I take infinite satisfaction in having once turned out to
be a prophet—were not the legitimate requirements of industry
vastly overestimated, for direct loans?
Mr. ALLENDOEBFEB. I think the record so shows.
Senator COUZENS. Let me ask this question: The restrictions for
opening up new banks are rather strict. And assuming that there
was only bank in a community, and that it was a monopoly, and
autocratic, so that the people of that particular locality had to go
to other cities to get their loans, because of the autocracy of the local
banks, or the undue rigidity of their requirements, might it n o t b e
well to have some information as to that? Because I can conceive
that, under the proposed law, there will be greatly increased restrictions on the opening up of new banks and the creating of
competition.
Mr. ALLENDOEBFEB. Senator, I still think that there is nothing but
mischief in a charge on the Federal Deposit Insurance Corporation
to investigate, continuously and annually, and to report upon the
adequacy of service of the banking system—as a whole, and including all members of the Federal Deposit Insurance Corporation—to
borrowers.
Senator COUZENS. Well, we do not have to decide that among ourselves.
Senator GLASS. After all, it is a matter of judgment. Some people think—and I do not mean anything personal—that the judgment of the Bureau, here in "Washington, is vastly superior to the
judgment of bank boards in the various localities throughout the
country—just as they think that when a dollar is taken from the
pocket of the taxpayer, and is brought here to Washington, it becomes most sanctified, and is multiplied to several dollars.
Senator COUZENS. I n view of what the Senator from Virginia
says, I suppose I shall have to engage in some further controversy:
I think that the fact that an industry was able to go out from its
community, and get the loan somewhere else, in some other community, would be almost prima facie evidence that the particular
bank refusing the loan was not supplying proper credit.
Senator GLASS. Suppose that the bank did not have the money to
lend ? I t is not loaning its money, but the money of its depositors.
Senator COUZENS. That can be determined.
Senator GLASS. How can a bureau, here in Washington, determine
that better than the people in the particular localities?
Senator COUZENS. We do not ask them to determine that. We ask
them to bring in a report of the facts, and then we can decide it.
However, we can decide that among ourselves.
Mr. ALLENDOEEFEE. Shall I go ahead?
Page 36, line 19 and following, reads:
Each insured bank shall provide such protection and indemnity against
burglary, fidelity, and other similar insurable losses as the board of directors
by regulation may require adequately to reimburse the bank for such losses.

The purpose of the paragraph is unquestionably sound. I t seems
to me that it is so worded that the directors of the Corporation have
a charge upon them which it is next to impossible to fulfill.
The carrying of insurance, which in all cases would adequately
reimburse the bank for losses, would mean the carrying of insurance



BANKING ACT OF 193 5

251

on all cash, all securities owned by the bank, all collateral held by
the bank to secure loans made by it—such insurance being against
burglary and robbery—and a fidelity bond on each employee of the
bank of such size as to unquestionably adequately reimburse the bank
for any possible defalcation, all of which would be so expensive as
to be entirely beyond the demands of good business. The new House
bill changes this sentence. Perhaps I should read that. The change
reads [reading] :
The Corporation may require any insured bank to provide protection and
indemnity against burglary, defalcation, and other similar insurable losses.

Reasons for the change of the word " fidelity " to " defalcation "
are obvious. I t is a grammatical proposition there. My proposal
for change in this wording, before I had read the new House bill,
was as follows [reading] :
Each insured bank shall provide reasonable protection and indemnity against
burglary, defalcation, and other similar insurable losses.

I prefer this to the language of the House bill, because it puts a
charge on the banks themselves to provide protection without waiting for a requirement from the Corporation. The next sentence
gives the Corporation power to see that this is done if they do not
do it of their own accord.
W i t h reference to title I I I , page 64, line 25, and following,
reads
Senator COTJZENS. YOU are not going to deal with title I I at all?
Is that it?
Mr. ALLENDOERFEB. N O , sir. I was under the impression that it
was not desired that those testifying today should touch on title I I .
The CHAIRMAN. I would put it a little differently from that. The
legislative committee of the American Bankers Association asked
the chairman to summon these gentlemen to testify on titles I and I I I .
Mr. ALLENDOERFEB. T h a t is a better expression of my understanding.
Page 64, line 25, and following, reads:
In estimating the reserve balances required by this act, member banks may
deduct from the amount of their gross demand deposits the amounts of balances due from other banks (except Federal Reserve banks and foreign banks),
including cash items with Federal Reserve banks and other banks in process
of collection, checks on other banks in the same place, and exchanges for clearing houses.

The new House bill changes the last clause to read:
and cash items in process of collection payable immediately upon presentation
in the United States, within the meaning of these terms as defined by the
Federal Reserve Board.

I have no choice between the two expressions. I know the subject has been up before, but I want to bring it up again with a suggestion that the deduction^ from gross demand deposits should
include the amount of United States currency and coin on hand in
the bank. There is some measure of unfairness to banks which are
not located in Federal Reserve cities by reason of the fact that they
must carry an amount of cash in their vaults for their daily needs,
quite in excess of the proportion necessarily carried by banks in
cities where Federal Reserve banks are located. Quite aside from
the point of unfairness, I know of no real reason why cash in the




252

BANKING ACT OF

1935

vault should not be qualified as a deduction fully as much as a
check on a remote bank, which is in the mails for collection.
On page 67, line 3 : This is p a r t of a long paragraph which gives
to the Federal Eeserve Board the power to limit by regulation the
rate of interest which may be paid by member banks on time and
savings deposits, and provides t h a t every bank whose deposits are
insured under the provisions of section 12B of this act (except
mutual savings banks and Morris Plan banks which are not members
of the Federal Eeserve System) shall comply with the provisions of
this paragraph and the paragraph immediately preceding and with
the rules and regulations prescribed by the Federal Eeserve Board.
I n this and some other sections of the bill and the present act it is
•exceedingly mystifying to me why mutual savings banks and Morris
Plan banks are put on a different basis from other banks.
I do not argue against the attempt to set up a preferential rate
or even a separate permanent insurance fund for mutual savings
banks, but I cannot see the logic of including Morris P l a n banks
in the Federal Deposit Insurance Corporation, and exempting them
from control as to the payment of interest on deposits. By the
way, incidentally although nearly every other character of bank is
specifically described in the early sections of title I giving definitions
of what is meant by a member bank, nonmember bank, and so forth,
there is no definition given of a " Morris P l a n bank." Perhaps
some members of the committee will understand better than I can,
why preference should be given to corporations of that character.
Since I have written that, I have searched again through this bill.
I may be wrong; it may be that if you got all of the clauses tied
together, the Morris Plan banks would be under control of the
Federal Deposit Insurance Corporation as to the rate of interest
to be paid on deposits if the Federal Deposit Insurance Corporation
is to be granted that power. B u t the clauses are just so confusing
to me that I decided I would read that even if my comment is
wrong, because this exception of the Morris P l a n bank business all
through here, I just cannot understand.
The CHAIRMAN. A S to the mutual savings banks, we need not
give ourselves any concern, because they en bloc have declined to
go into the Insurance Deposit Corporation, with a few exceptions.
Mr. ALLENDOERFER. I do not want to argue the matter of mutualsavings banks, but in these exceptions, they are spoken of in the
same breath all the way through.
The CHAIRMAN. I was not arguing the question; I was just stating
the fact. I never argue.
Mr. ALLENDOERFER. Page 67, line 8, and following: This paragraph
requires member banks to maintain the same reserves against deposits of public moneys by the United States as they are required
by this section to maintain against other deposits. A t this time
when all banks have an excess of reserves anyway, it does not matter
much whether there is a requirement that reserves be maintained on
Government funds or not. The present situation will not always be
true. I t does seem unnecessary to require that reserves be maintained against deposits by the Government with member banks
secured in full by the deposit of Government securities which are




BANKING ACT OF 1 9 3 5

253

readily marketable, or usable as collateral, in case it is necessary
to rely upon the securities to restore reserves when the deposit is
withdrawn. Perhaps it is not a matter to make a serious complaint
about, but it just seems to be an unnecessary and annoying requirement which could be very well foregone.
On page 69, line 12: This is to amend a subsection of the Federal
Reserve Act dealing with moneys borrowed by executive officers of
banks from their own institutions. I happen to have the good fortune not to be indebted to the bank with which I am connected, nor
have I ever been so indebted, and I speak without any personal or
selfish motive. I do know, however, many bank officers who have
been greatly worried and who have made substantial sacrifices in
an attempt to get their paper paid by June 16 of this year as required in the present act. The extension of the period during which
such loans must be retired seems to me to be a very wise one indeed,
and I hope this section at least can be hurried to enactment before
the deadline of June 16.
The subject has been mentioned by Mr. Graettinger, and I think
will be mentioned also by Mr. Andrew, as to the change proposed
in the new House bill which will eliminate the requirement that
State banks become members of the Federal Reserve System by 1937
or some other date, in order to become members or to remain members of the Federal Deposit Insurance Corporation. I do not wish
to speak on that paragraph.
Senator COUZENS. Why?
Mr. ALLENDOERFER. I t is 20 minutes of 12, Senator, and I believe
you adjourn at noon, and Mr. Andrew is to speak on that subject
following me.
Senator COUZENS. Have you any views about it yourself?
Mr. ALLENDOERFER. No views that I would wish to present to the
committee. If you are interested in my reasons, I will say to you
that I had undeistood all the while that they were obliged to become
members at some time of the Federal Eeserve System.
Senator COUZENS. I do not think that by July 1, 1937, they will.
Mr. ALLENDOERFER. I hope not. This new proposal that that
requirement be eliminated leaves me trying to think about whether
I am in favor of that, and I am confused about it, and so I do not
want to say anything in the record expressing an opinion about it.
Senator COTJZENS. You just said, " I hope not." So I thought
that was an opinion.
Mr. ALLENDOERFER. By 1937, I said. However, I mentioned that
because I do want to say that I believe that if the requirement of
membership in the Federal Reserve System is retained, then it is
proper to favor the modifications in requirements as to membership
in the Federal Reserve System on capitalization which are proposed
in this bill and practically modified in the House bill. I favor the
liberalization of the capital requirements of State banks becoming
members of the Federal Reserve System.
The CHAIRMAN. We are obliged to you, Mr. Allendoerfer.
(The witness withdrew from the committee table.)
129688—35—PT 1




17

254

BANKING ACT OP 1 9 3 5

STATEMENT OF L. A. ANDREW, FORMERLY SUPERINTENDENT OF
BANKS, STATE OF IOWA; RECENTLY PRESIDENT OF THE STATE
BANK DIVISION OF THE AMERICAN BANKERS' ASSOCIATION,
DES MOINES, IOWA
The CHAIRMAN. Mr. Andrew, we will be glad to have your views.
Mr. ANDREW. Mr. Chairman and members of the committee, we
wish to urge, first, the importance and the necessity of having legislation along the lines of titles I and I I I . I wish to speak particularly of the assessments on banks with regard to the F . D. I. C. fund.
The smaller State banks have had the same troubles as the national
banks in regard to earnings. At the present time the earnings of
all banks, both national and State, are practically negligible. The
State bank members and the banks not members, in 1934, after
charge-offs, showed a deficit in their undivided profit accounts. I n
the latest report of national banks for the 6 months ending December
31, 1933, covering 5,159 banks, the deficit was $154,988,000.
I t might be well to bring up at this time and press the importance
of the number of State banks not members of the Federal Reserve
System, their deposits, and the number of customers they have.
From the latest reports published, it is revealed that 7,683 insured
banks are not members of the Federal Reserve System. They have insured deposits of $3,580,000,000 and uninsured deposits of $1,363,000,000. The ratio of their insured deposits to total deposits is 72.43.
The depositors fully insured are 13,687,000. Nearly 14,000,000 people are doing business with banks outside of the Federal Reserve
System at. the present time. The ratio of fully insured deposits in
nonmember banks to their total deposits is 99.1.
The State banks not members of the Federal Reserve System and
their 14,000,000 customers are quite exorcised over the requirement of becoming members of the Federal Reserve System by the
set date. They feel that this requirement should be changed, either
eliminated entirely or put at a later date, say, 1940.
I wish to bring respectfully two points to your attention on this
subject. Those who have the best interests of the Federal Reserve
System at heart might think, perhaps, that the requirement of putting such a large number of banks into the System, particularly
with changed capital and other requirements, might not be of
advantage to the Federal Reserve System itself. With unification of our banking system wrorked oirt very satisfactorily
through the F . D. I. C , might it not be well, with the great changes
now being talked of in the Federal Reserve System itself, and probably put into legislation, to allow that to be worked out for a reasonable time before forcing nearly 8,000 banks into the System that
are now out ?
The CHAIRMAN. Abolish the Federal Reserve System and turn
them all over to the F . D. I. C ?
Mr. ANDREW. N O , Senator. Let each take its own place. The
F . D. I. C. has a great obligation in working out this insurance fund
s a t i s f a c t o r y . But here we have great changes proposed in the
Federal Reserve System, by attempting to compel some 8,000 more
banks to join the Federal Reserve System. A number of these banks,
say 2.500, cannot qualify and their closing would create considerable
disturbance in this country.




BANKING ACT OF 19 3 5

255

I want to call attention particularly to the kind of banks they
are. These are community banks. Their range of business seldom
extends beyond a T-mile limit. They are the lifeblood of the community in which they exist. They are just as important to Jonesville as the Chase or the National City Bank is to New York, and
they have the same relative importance to the people in the community. They have taken care of their communities perhaps better
than any other class of banks in the country. Although there was
quite a mortality among those banks, the total failures are no greater
in proportion than in national banks or even in Federal Reserve
banks.
As regards the total of deposits in the System and out of the System, the proposed material changes *as to the requirements for admission, particularly as regards capital, are certainly necessary, providing this compulsion is carried forward. But I think it would be
well worthy of consideration at this time to question whether it is
really necessary, with the other great changes going on, to force this
large number of banks, with only a small proportion of the total
business of the country, into what they consider an undesirable relationship.
The State banks already contribute 42 percent of the total assets
of the Federal Reserve System. They have done their full share
and will continue to join the System because, in our opinion, any
bank doing a commercial business having deposits of a million dollars should belong to the System. As to the amount of assessments,
with the large decrease in earnings it is going to be a great charge on
these banks to stand one-eighth of 1 percent annually. With a bank
of only $1,000,000 of deposits, this means $1,250. When 92 percent
of them are losing money, that is quite a charge. I t makes 2y 2
percent of the average capital of a bank of that size $50,000. We
believe that a limit of one twelfth of 1 percent annually would cover
the situation quite satisfactorily; probably collectible semiannually.
We believe in the building up of a substantial reserve fund;
$500,000,000 has been suggested—because it is very evident to those
of us who have worked in the regulation or supervision of bankthat there will be losses and substantial losses as years go on; and
if the F . D. I. C. is going to mean anything, it must mean the
prompt payment of all losses as they occur.
This brings up also the fact in our minds that the F . D. I. C.
board must be given greater powers in the regulation and supervision of the banks that are insured. Personally I am in favor of
the examination of these insured banks being on a very strict bntd.s.
Senator COTJZENS. You said a while ago that all banks with deposits of a million dollars ought to be members of the Federal
Reserve System. That is what you said, is it not ?
Mr. ANDREW. Yes.
Senator^ COXTZENS.

Would you approve of an amendment to (be
act requiring that?
Mr. ANDREW. Yes, sir. I think it might be a very good solution
of that question. As a suggestion only, a plan might be worked
out whereby insured State banks each having more than $1,000,000 in
deposits would be compelled to join the Federal Reserve System as
a condition of continued insurance in the Federal Deposit Insurance




256

BAN-KING ACT OP

1935

Corporation. This would bring into the Federal Reserve System
over 900 insured State banks with total estimated deposits of
$3,126,000,000. If such a plan should be followed it would eliminate
compulsory membership for about 6,600 insured State banks with
total deposits of approximately $1,800,000,000. The importance of
firm regulation and firm examination of insured banks is something
that cannot be overemphasized. Personally, I believe it should be
in large measure through the F . D . I . C.
There are one or two other small points that I wish to mention.
Section 314, page 59 of S. 1715, permits the payment of dividends
only after one-tenth of the net earnings for the preceeding half year
has been put into surplus. A large number of banks declare dividends annually, and by having only one-tenth of the net earnings for
6 months specified it would relieve them from putting aside onetenth of their earnings for the full 12 months which is covered by
the dividend. The wording might be changed to cover the period of
the dividend.
The provision of the bill on page 49 in regard to real estate does
not seem sound in a great many regards to those who have had experience in the supervision of banks, and it should be at least
restricted as regards territory.
I think that covers practically the suggestions that I wished to
make, particularly as regards the size of the assessment and the
necessity of the smaller nonmember banks being protected.
The CHAIRMAN. We are greatly indebted to you for your testimony, and I assure you that we will give it consideration.
The committee stands adjourned until 10:30 o'clock tomorrow
morning.
(Whereupon, at 12 o'clock noon, the committee adjourned until
tomorrow, Tuesday, May 7, 1935, at 10:30 a. m.)




BANKING ACT OF 1935
WEDNESDAY, MAY 8, 1935
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE ON
BANKING AND CURRENCY,

Washington, D. O.
The subcommittee met, pursuant to adjournment on Monday, May
6, 1935, at 10: 30 a. m., in room 301, Senate Office Building, Senator
Robert J . Bulkley presiding.
Present: Senators Glass (chairman of the subcommittee), Bulkley,
Bankhead, Couzens, and Townsend.
Senator TOWNSEND. Senator Bulkley, I have some bankers from
my State, who would like to give their views on S. 1715, the banking
bill.
Senator BULKLEY. Very well; we shall be glad to hear them.
Senator TOWNSEND. The first gentleman who, I think, desires to
give his opinion, is Mr. Evans.
Senator BULKLEY. Very well.
Mr. Evans, will you please give your name, and the name of your
connection, to the reporter?
STATEMENT OF ELWYN EVANS, KEPKESENTING THE CLEAKING
HOUSE BANKS, WILMINGTON, DEL.
Mr. EVANS. I am appearing for the clearing house banks, at Wilmington, Del.
Senator TOWNSEND. Y O U are appearing for the clearing house
banks of Delaware ?
Mr. EVANS. The clearing-house banks of Wilmington, Del.
Senator BULKLEY. Very well; we shall be glad to hear you.
Mr. EVANS. My associates, Mr. Ridgely and Mr. Hughes, and myself are appearing at the request and on behalf of a group of mediumsized banks in a medium-sized community, a group which has no
desire to absorb its rural neighbors and which, on the other hand,
does not desire to be absorbed by any metropolitan chain; a group
whose vital interests are against any greater centralization than the
irresistible exigencies of our times require, whether that centralization be localized in New York, Washington, or any other place. W e
honestly believe that we know the sentiments of that group and
their customers.
My feeling is that the attitude of this group is typical of the
attitude of the great majority of the banks of this country, outside
the metropolitan centers, because our fundamental interests are




257

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BANKING ACT OF 1 9 3 5

identical. But whether or not this feeling is justified, you are in a
better position to judge than I am. We purport to speak only for
ourselves.
Without exception, the severest criticisms which we hear are
leveled against those portions of title I I which may be said to increase political influence over the Federal Reserve System. I n order
to be specific I shall call your attention to those portions.
Section 201 (a) exempts the governors of the various Federal Reserve banks from the requirement that all class C directors '' shall
^ttvc beer* for at least 2 years residents of the districts for which
they are appointed." I n this provision our group sees the possibility
of regional banks being ruled by emissaries from Washington—they
may be good emissaries or they may be bad emissaries—but who, in
any event, need not be sympathetic or even conversant with the
needs and problems of the districts.
Section 201 (a) further provides that the governor of a Federal
Reserve bank's term as a class C director shall expire when he ceases
to be governor, and that the governor shall be chosen annually by the
board of directors, subject to the approval of the Federal Reserve
Board. I t also provides that the governor shall not be limited to two
consecutive terms of 3 years each, as in the case of the other directors.
Section 203 (3) contains similar provisions with respect to the Governor of the Federal Reserve Board, but goes even further, in that it
provides that his tenure of office shall be " until the further order of
the President."
Our group thinks that these provisions mean one thing, and one
thing only—which is that the key men of the Federal Reserve System,
the men upon whom the responsibility for its actual operation devolves, would hold office so long, but only so long, as they studied to
please whatever political group happened to be in power.
I t means not only a dictatorship over our whole banking and credit
system but a dictatorship by influences whose primary concern is—
and quite properly so—not banking but politics.
Having made certain this political dictatorship, the act then goes
on to broaden the Federal Reserve System's powers. Section 206
provides that " any Federal Reserve bank may make advances to a
member bank on its promissory notes secured by any sound
assets of such member bank." We may be pardoned if we inquire:
" What are sound assets? How are they to be recognized and determined? " Many people, including bankers, back in 1927 and 1928
invested in what were apparently sound assets, but which later turned
out to be anything but sound—whence comes many of our present
difficulties.
If this measure is enacted, there would be nothing to prevent any
Federal Reserve bank from accepting any asset wThich it may be under
pressure to accept—unless, indeed, it be a stubborn and, I might add,
highly unpolitical attitude on the p a r t of the Federal Reserve officials,
an attitude which the act does everything to discourage.
On the other hand, how are we, as practical bankers, going to
know positively which of our assets are going to be accepted without
question in the event of a crisis ?
Senator BTJLKUIY. H O W can you get away from the necessity of
determining, every day. as a matter of judgment, what assets are
sound and what are not sound?



BANKING ACT OF

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259

Mr. EVANS. There is no question about i t ; you do have to determine
that.
Senator BTJLKLEY. And how can you get away from it?
Mr. EVANS. There have to be checks and balances.
Senator BTJLKLEY. B u t it is still presumed that they are going to
be sound ?
Mr. EVANS. I t is still presumed that they are going to be sound.
But that is a very difficult problem to determine.
Senator BTJLKLEY. Of course.
B u t it also helps, as a matter of judgment, to determine i t ; and it
has to be exercised every day, does it not?
Mr. EVANS. There is no question about that.
B u t the trouble with this bill is that it makes too broad a classification. There ought to be some classification of what assets you can
accept.
Senator BTJLKLEY. A limitation as to the purpose for which the
loan is made does not make the assets any more sound, does it?
Mr. EVANS. Not the slightest.
B u t you can at least prescribe by law certain categories of assets.
Now, you can borrow from Federal Reserve banks secured by Government bonds. And that is all right.
B u t there ought to be some other categories prescribed and not
leave it wholly to the Federal Reserve Board to prescribe rules and
regulations, or leave it to the judgment of the officers of the Federal
Reserve banks.
I t is vitally important for us to know whether we can classify our
assets as rediscountable or acceptable.
Senator BULKXEY. But under existing law you can rediscount a
piece of paper that is based on a commercial transaction ?
Mr. EVANS. Right.

Senator BTJLKLEY. B u t it might be wholly unsound; and in that
case the bank could reject it.
Mr. EVANS. That is perfectly true.
Senator BTJLKLEY. Then there still has to be judgment about
whether or not it is sound ?
Mr. EVANS. Oh, judgment has to be exercised.
But this just opens wide the door and says,'' any sound assets."
Senator BTJLKLEY. I take it that we have always had the requirement of soundness, and that soundness is always a question of judgment, and as to which a banker may be wrong.
Mr. EVANS. There is no question about that.
However, this is just one of those provisions by which the powers
of the Federal Reserve System are widened, without any corresponding limitations put on them.
Now, there are other respects in which the powers are widened.
F o r instance, section 208 removes the safeguards against an overexpansion of Federal Reserve notes which are contained in section
16 of the Federal Reserve Act, and provides instead that Federal
Reserve notes shall be secured by a first and paramount lien on all
the assets of such bank. I t seems to us that this substitution of a
vague general lien for a specific pledge of assets makes it improbable
that the size of the note issue will have any relationship to the requirements of industry and commerce.




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BANKING ACT OF

1935

Section 208 further provides t h a t Federal Reserve notes shall be
issued and retired subject to such rules and regulations as the Federal Eeserve Board shall prescribe, and shall be legal tender for all
purposes. I do not need to dwell upon the limitless possibilities of
this provision as an easy and somewhat obscure method of financing
our ever-mounting budgetary deficits. I t is interesting to note, however, that even during the days of the inflation, the French Chamber
of Deputies thought it wise to impose some statutory limits upon
the note issues of the Bank of France.
Senator BTJLKLEY. I am interested in what you say about the Bank
of France.
May I ask if you are suggesting that there should be a limitation by
law as to the amount of notes to be issued by the Federal Reserve
banks?
Mr. EVANS. That is one device to prevent overissue.
They provide for a redemption fund of 5 percent. B u t the only
limitation here is 40 percent in gold certificates reserve behind the
note issue. Every other limitation is removed.
And Governor Eccles, in the statement that he has put out with
respect to this bill, himself acknowledges that we would be in a period
of dangerous inflation long before that limitation would be reached.
Then, take the matter of power to vary those member banks' reserve
requirements; why, the Federal Reserve Board would say that every
bank must maintain 100-percent reserves against all deposits. F o r
section 209 gives the Federal Reserve Board power to vary memberbank reserve requirements at will; there is no limitation. I t is even
possible to impose the most drastic requirement upon only one bank
or group of banks as a purely punitive measure. I t is needless to say
that if these possibilities are availed of it would mean the end of
banking as we understand it. Section 205 creates a Federal Open
Market Committee in such a way as to make certain t h a t it will not be
independent of political control, while section 207 removes all restrictions as to the kinds of Government obligations it can deal in.
The people of our community and State—bankers, business men,
and everyone else we know of—who have taken the trouble to become
informed about this bill, are practically unanimous in their condemnation of these unrestricted and sweeping powers. I cannot
say whether or not they would approve these if the element of political domination were removed from the bill. I suspect serious doubts
on their part as to the wisdom of granting such sweeping powers to
any group of men, however chosen, without the most effective scheme
of checks and balances.
Senator BTTLKLEY. W h a t is your suggestion as to this bill ?
Mr. EVANS. I have not worked out definite suggestions; but it
certainly ought to be easy to work out such limitations.
The expansion of powers is the least objectionable feature of the
bill.
I t seems to us, however, that a judicious system of checks and
balances ought to be worked out.
Senator TOWNSEND. D O you care to work out a definite proposal
along that line and submit it later?
Mr. EVANS. I have no objection to doing that.
Senator BTTLKLEY. I think t h a t we would be interested to know
what you think of as an acceptable alternative, inasmuch as you



BANKING ACT OF 19 35

261

think there should be some acceptable increase of the powers of the
Federal Eeserve Board.
Mr. EVANS. I think the element of political control is the most
vicious element. I think it is necessary to safeguard our banking
system by a judicious system of control.
Senator B U L K L E T . W h a t do you suggest as an alternative to what
you call " political control " ?
Mr. EVANS. The elimination of the provisions to which I called
attention: F i r s t of all, the approval by the Federal Eeserve Board
of the selection of the governors of the banks. I do not think that is
necessary; I think that is a key place where the political domination
from the head of the system is brought to bear on member banks.
Secondly, the Governor of the Federal Reserve Board practically
holds office at the pleasure of the President. And Governor Eccles
has pointed out, in this memorandum, a very interesting device that,
I confess, had not occurred to me before: That the President of the
United States, when he wanted to remove the whole Federal Eeserve
Board, could designate each member, in turn, as Governor of the
Federal Eeserve Board, and remove him tomorrow.
Governor Eccles says he does not think there is any danger of that.
B u t the bill does not provide that the member of the Federal Eeserve
Board must accept the appointment of Governor; but it simply says
that the President may appoint him—and then, the next day, the
President can remove him.
Now, I am fully aware that many of the proponents of this measure
will frankly admit all of the features of title I I to which we object,
and justify them as a necessary part of their political and economic
philosophy. The most intelligent expression of this viewpoint that
I have heard was made by Governor Eccles in his Lincoln's Birthday
speech to the Ohio Bankers' Association. He says—quoting from his
speech:
There is no political or economic power more charged with the general social
interest than the power to increase or decrease the supply of money. If the
sovereign authority delegates this power to a particular group or class in the
community, as it has done in large part in this country, it divests itself of a
part of its effective sovereignty. It is my personal conviction that our system of
broad political representation, faulty as it may be, constitutes a better guarantee
that the general interest will be served than would control by a group of individuals chosen, let us say. entirely by bankers or business leaders.
Senator BULKJUEY. D O you take issue with that ?
Mr.

EVANS. I

do.

I realize the futility of argument when it comes to any man's
broad philosophical viewpoint. I will say, however, that our group
does not believe that political dictatorship over banking and credit
is a good thing nor does it believe that the American people in the
long run will think it is a good thing.
Senator BTTLKXEY. I n your use of terms, now, is there a difference
between political dictatorship and governmental control?
Mr. EVANS. Yes; there is.
Senator BTXLKLEY. Will you develop that a little? I should like
to make sure of the particular sense in which you are using those
words.
Mr. EVANS. I should say that governmental control is the control
which is permanently resident in Congress. Congress can set up a




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BANKING ACT OP 1 9 3 5

system of central banks, or a Federal Reserve System, or whatever it
pleases, and can change it, constantly.
Senator BTJLKLEY. There is no question in your mind that Congress
is a political body, itself ?
Mr. EVANS. I t is; but it is constantly representative of the people.
Senator BTJLKLEY. Yes.
Mr. EVANS. And Congress, I take it, does not concern itself with
the actual operations of banking, or even with the Federal Reserve
System. Congress concerns itself when there is something wrong
with the system, and steps in. and tries to correct it.
But political control is executive control, wherein the daily operations of the banks and of the whole system of open-market operations and of note issue, and of the thousand and one highly technical
and complicated movements, are controlled by political controlled
people, who can be removed at will.
I am about to develop the theory and the difference as to what
sound and proper principles should be embodied in governmental
organization of the Federal Reserve System.
Senator BTJLKLEY. I t looks to me as though you are developing
the thesis that congressional control is apt to be on a higher plane
than Presidential control; and I am very much interested in that,
because many people have expressed the opposite view.
Mr. EVANS. I understand. And I think it is opposed to the general expression of opinion at the time.
But I think the bankers would rather have Congress step in and
study the System, when the Federal Reserve System is not working
and then prescribe the changes to be made so that it shall work,
rather than to have the daily supervision by the President or his
appointees.
Now, we believe in the fundamental ideas which were embodied in
the original Federal Reserve Act, and which were characterized by
Woodrow Wilson as a " democracy of credit." We believe in them
for the same reasons that we believe in democracy in government.
Conceding that dictatorship may be more efficient and more intelligent, we do not believe that any system of human organization has
yet been devised which will insure the continuity of a benevolent and
capable dictatorship or guarantee the removal of a stupid or corrupt
one.
" Democracy of c r e d i t " means, I take it, that the sole consideration for the extension of credit shall be the ability to repay—whether
you look at it from the standpoint of the direct extension of credit by
an individual bank, or the total volume of credit extended to an industry or to the country as a whole. I t has nothing to do with
purely personal considerations which must necessarily be the lifeblood of partisan politics. We think it is no insult to either, to say
that politics and banking do not mix. Their objectives and methods
are widely divergent. Politics necessarily involves doing the popular
thing; sound banking on the other hand frequently requires unpleasant and unpopular refusals.
I t has been said that the Federal Reserve System ought always to
be unpopular, in that it ought always to be counteracting, or at least
getting ready to counteract, the economic tendencies of the moment.
• When the mood is confident, it is the duty of the System to be




BANKING ACT OF 1 9 3 5

263

cautious; when the mood is fear, it ought to be more daring; it ought
always to be courageous.
I t has even been suggested that political domination over banking
may be as bad for politics as it is for banking. If the party in
power assumes absolute responsibility for the management of the
banking and credit system of the country, it might also have to
assume all the blame for a future financial crisis, even though it may
be the result of irresistible economic forces. I t has been somewhat
facetiously suggested that bankers might welcome the idea of the
Government being the only scapegoat of the next depression.
Senator BULKLEY. I S there any evidence of that sentiment?
Mr. EVANS. I t is perhaps a local one, and one not as well expressed.
But it is a dangerous thing for politics, as well as for banking, to
assume full responsibility for the banking system and to assume
daily control over it.
There is a wide-spread belief that the Federal Reserve System's
leal weakness lies in its lack of independence and, to a certain extent,
in its lack of power. I t is always dangerous to say what would or
would not have happened if someone in the past had done something
different, but there is a strong suspicion abroad that if the Federal
Reserve authorities, back in 1927 and 1928, had been less afraid of
political pressure from the vast public which was profiting from the
boom, they would have taken the unpopular steps necessary to check
the speculative madness which led to the collapse of 1929.
Senator BULKLEY. YOU do not think the Federal Reserve Board
lacked power?
Mr. EVANS. Yes; it did lack power.
Senator BULKLEY. I n what respect?
Mr. EVANS. I t had plenty of power at the time, within limits.
Senator BULKLEY. I t was lacking either in judgment or in nerve ?
Mr. EVANS. I n nerve; in independence.
My impression, from a study of the Federal Reserve reports at that
time, is that they knew pretty much that there was a dangerous overexpansion of credit.
Senator BULKLEY. W h a t do you think should have been done ?
Mr. EVANS. First of all, the Federal Reserve Board vetoed the
raising of the rediscount rates in Chicago.
Senator BULKLEY. You do not think they should have?
Mr. EVANS. I do not think they should have. Whether or nor, it
would have been effective, no man can say.
Senator BULKLEY. But it would have been helpful, in your judgment ?
Mr.

EVANS.

Yes.

And furthermore, the Federal Reserve Board vetoed the raising
of the rediscount rate in New York—vetoed it 10 times. And it is
my personal opinion that that would have been helpful.
Senator BULKLEY. Very well; proceed.
Mr. EVANS. We submit as our firm conviction that the future security of our banking system, if not our whole economic well-being,
lies in the direction of greater independence of our Federal Reserve
authorities. I t lies in a judicious broadening of the powers of the
system, subject, however, to carefully worked out checks and balances.



264

BANKING ACT OF 1 9 3 5

That is all I have to say, as a prepared statement.
Senator TOWNSEND. Would you care to comment on titles I and
II?
Mr. EVANS. I do not care to comment on those.
Senator TOWNSEND. You confine your remarks to titles I and I I I ?
Mr. EVANS. I do not care to comment, for the reason that I have
not explored the sentiment; but on title I I I have explored the unanimous sentiment of every banker in the State of Delaware. And on
titles I and I I I I have not explored t h a t sentiment, and would be
talking purely personally.
Senator BULKLEY. Assuming that we would agree with you that
the Federal Reserve Board missed a chance to save the situation just
before the great crash, what changes would you suggest in the Federal Reserve Board that would make it more likely to perform
satisfactorily in the future?
Mr. EVANS. Take the Secretary of the Treasury off and take the
Comptroller of the Currency off the Board. T h a t would be a step in
the right direction.
They represent the viewpoint of the administration at the moment.
W h a t we need is a Board of greater independence.
Senator BULKLEY. The question of removing the Secretary of the
Treasury from the Board has, as you know, had a great deal of
discussion and argument.
Mr. EVANS. Yes; it
Senator BULKLEY.

has.

There has not been so much said about the
Comptroller of the Currency.
Mr. EVANS. NO ; because he does not so directly represent the views
of the administration that happens to be in power.
Senator BULKLEY. D O you think he is a particularly dominating
influence in any event?
Mr. EVANS. I think he must be. The whole temper of the financial
condition of the country is his direct concern. H e has to float
Government bond issues.
Senator BULKLEY. YOU are speaking of the Secretary of the
Treasury ?
Mr. EVANS. Yes.
Senator BULKLEY.

I am speaking of the Comptroller of the
Currency.
Mr. EVANS. Well, of course, his influence is not so direct. B u t I
think he should be removed from the Board.
Of course, the Comptroller of the Currency is appointed by the
President.
Senator BULKLEY. I am inclined to agree with you that the Secretary of the Treasury should be off the Board. Do you think that
would be an adequate solution ?
Mr. EVANS. I t might not be. I am not prepared to say. This whole
subject requires a very intensive study. There are features in this
bill that just stand right out, t h a t are bad, and those where we have
tested the sentiment, we feel they are very bad, bad enough to make
us come down here and give our views on them, and they are the
unanimous views of all our people.
Senator TOWNSEND. D O you care, after you have given it further
study, to give us your views ?




BANKING ACT OF

1935

265

Mr. EVANS. I should be very glad to give them for whatever they
are worth.
Senator BTJLKLEY. Thank you very much.
Mr. Eidgely, do you want to come next ?
Mr. EIDGELY. Yes, Mr. Chairman.

Senator
nections ?

BULKLEY.

Will you give the reporter your name and con-

STATEMENT OF HENEY EIDGELY, PEESIDENT OF THE FAEMEES
BANK OF THE STATE OF DELAWARE, IN DELAWAEE
Mr. EIDGELY. My name is Henry Eidgely, president of the Farmers
Bank of the State of Delaware, in Delaware.
Shall I proceed?
Senator BTJLKLEY. Yes; please proceed, Mr. Eidgely.
Mr. RIDGELY. I take it that it is admitted that this bill would centralize and concentrate the control of money and credit in a little
group.
Senator TOWNSEND. May I interrupt you there ?
Mr. RIDGELY. Yes, sir.
Senator TOWNSEND. A r e

you confining your remarks also to
title I I ?
Mr. RIDGELY. To title I I .
Senator TOWNSEND. All right, sir.
Mr. EIDGELY. I t has been pointed out that this is susceptible of
partisan domination. Doubtless it is big with possibilities in that
direction. B u t I want to stress another and greater danger. Under
the power conferred by this bill, or, rather, the power conferred by
this bill could be used to commit this country to an economic policy
dictated by a small group. I t could be used to impose an economic
theory upon this Nation and its nationals, willing or unwilling. True,
Congress can do t h a t now; but at least it cannot be done quite overnight and without the knowledge and right of protest of our representatives from own own communities.
I n other words, this bill gives a chance for ex parte acts, whereas
under the existing law there must be at least a hearing, with a
right for each party to be present and attend. Ostensibly, or rather,
I think it is no answer to say that the Federal Eeserve Board is
amenable to Congress. Once started on an economic course, it is
tragically difficult to retrace steps. Business and industry cannot
make readjustment without breaking bones. Ostensibly, this bill is
in the interest of banks and banking. I fail to see how it is going
to improve the banking situation or strengthen the public confkler.ne
in banks.
I do see t h a t it could be used to compel banks to support a political
or economic policy. A good deal has been said in these days in
the way of a contrast of English and American banks to the disparity of the latter. So far as I know, there is nothing in this bill
t h a t is paralleled in the English system. I think its fundamental
idea is neither English nor American ; that it more nearly represents
the European idea, but not, I think, m such an open and forthright
avowal of its purpose. F o r this bill does not profess to set up a
central bank, and yet it confers the distinctive powers of central
banking.




266

BANKING ACT OF 1 9 3 5

If it is said that banks are withholding credit, I think we have
the right to ask for a bill of particulars. W h a t banks, and what
credits? So far as my State is concerned, I am confident that the
charge is unfounded. I am frankly skeptical that it is true anywhere. Certainly the banks—our banks—have done all reason could
ask in the way of helping Government financing. I think we can
show a very good comparison with the English banks in t h a t
particular.
I am not holding any brief for bankers. I think some of the
great bankers turned out to be pretty small. I am trying to speak
for the depositors. I t neems to me the dangerous thing is to vest
in any group the right to commit the country to some economic
course without a chance for the fullest, most complete hearing and
discussion and in a democratic assembly. We may or may not think
that Congress acts wisely or always acts wisely, but after all Congress still is democratic. I t still gives an opportunity just as you are
giving us here an opportunity to be heard.
If you were not in Congress and applied to some Government
board, you might find you would not always be granted that opportunity. I believe the American idea or theory is still worth holding
onto, that too great powers should not be placed beyond the reach of
the people in any one man or group of men.
Lord Macauley, I think, said somewhere that the despotic government or a perfect despotic government was the most perfect form
of government provided you could get a perfect despot.
This bill is not emergency legislation, but is proposed for the
banking system of this country. And Ave have to think, or should
think. I believe, not of particular individuals who may have the
carrying out of its provisions at the moment but the possibility of
what it would mean or what it opens the door to. After all, isn't the
whole theory of the American system of government that we had
rather be less efficient, provided we are in a position where we can
defend ourselves from encroachments? And is it true that the
present banking system is the cause for the present depression?
Frankly, I think it is rather ignorant to hold so. England would
not be in the depression if it was simply the American banking
system that caused it.
Speculation, gambling, if you please, that occurred in 1927, 1928,
and 1929 aggravated conditions, but did not bring them about.
Our position, then, is that in our opinion title I I should be dropped
from this bill.
As to titles I and I I I , frankly, I am not able to give an opinion
because I have not made a sufficient study of them.
But we believe that title I I should be dropped and that then full
consideration should be given to the question as to whether, and if so
how, the powers of the Federal Reserve Board should or may be
strengthened.
Senator BTJLKI/EY. Do you think there should be no change at all
in the requirements as to what is eligible for rediscount at the Federal
Keserve banks ?
Mr. EIDGELT. I think under the present law it could be left as it is
without doing any harm.




BAKKING ACT OP

1935

267

Senator BTJLKLEY. YOU feel confident that there is in existence
enough eligible paper to carry on if it is worked out all right %
Mr. RIDGELY. No, but we have also, have we not, the Federal Government bonds, as well as the commercial paper. Commercial paper
should not alone be sufficient; but with the Government obligations,
I think it should be both. Of course, there would be no harm that I
can see in widening, but even in the case—I think, Mr. Chairman, you
asked my associate whether or not in the case of sound assets, whether
it wasn't always a question of opportunity.
Senator BTJLKLEY. Yes; I did.
Mr. RIDGELY. Yes. Undoubtedly, but you can have your boundary
limits, just as you know we have statutory regulations as to the investment of trust funds. You can increase your catalog, but there ought
to be some sort of a catalog, it would seem to me.
Senator BTJLKLEY. Are you prepared to suggest what limit you
would state ?
Mr. RIDGELY. Well, in the firs* place, I would say Government
bonds, United States Governmert bonds, and the commercial paper;
I should think that would be sufficient, Mr. Chairman. I would be
willing to go further, however. I would be willing to go further
than that. I would be willing to take bonds of the States, under
certain prescribed conditions, just as our trust investment law has
those limitations.
I think it would be quite easy to enumerate a number of securities
or investments that could be used and still leave the question of their
soundness open.
Senator BTTLKLEY. D O you think it would be desirable to add such
a list to what is already eligible?
Mr. RIDGELY. Frankly, I don't think so; because so far as I know
it is not needed with the addition of the Government obligations.
Senator TOWNSEND. Are you familiar with what percentage of the
banks' assets in our State are invested in Government obligations?
Mr. RIDGELY. I am not, I am sorry to say; I am not familiar with
it.
'Senator BTJLKLEY. Well, it would seem
Mr. RIDGELY. Of course, all over the country there is a large number of Government bonds held in our banks.
Senator TOWNSEND. Yes.
Senator BTJLKLEY. I t would seem there is not likely to be any shortage of Government bonds.
Mr. RIDGELY. NO ; and that seems to me really like the answer to
his question.
Senator TOWNSEND. Well, that is what I was trying to develop.
Mr. RIDGELY. Yes. J u s t what the percentage is, I don't know.
I don't think there would be any trouble about that part of it,
Senator.
Senator TOWNSEND. Now, I understand that Mr. Hughes would
like to say a word, Mr. Chairman.
Senator BTJLKLEY. All right, Mr. Hughes, will you state your full
name and connection for the record?




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BANKING ACT OF 19 3 5

STATEMENT OF JAMES H. HUGHES, JR., DIRECTOR AND COUNSEL,
DELAWARE TRUST CO., WILMINGTON, DEL.
Mr. HUGHES. My name is James H . Hughes, J r . I am director
and counsel of the Delaware Trust Co., Wilmington.
Senator BULKLEY. All right, Mr. Hughes, will you state your
views ?
Mr. HUGHES. Mr. Chairman, I have not prepared a written statement of my views.
I have, however, read this bill and I think I know the sentiment
of our community and other communities of like character.
Senator BULKLEY. Are you talking about the whole bill now or
only title I I ?
Mr. HUGHES. I am talking particularly with reference to title I I .
I n reading a bill of this sort, there is bound to come to your mind,
" What is the purpose of this form of legislation ? " I t does not
appear to us to be emergency legislation in the sense of relief legislation. We do not admit for a moment that the banks as a whole
are responsible for the depression. We are willing to assume such
responsibility for the depression as is fair. B u t we do not admit
that the banks, the individual banks, are responsible, are in any
small degree responsible. We think that there is in the present
Federal Reserve Act, with which. I may say, we are in hearty
accord, with the theory and principle of the Federal Reserve Act.
There is ample authority in the Federal Reserve Board to control
credit to the extent of mitigating, ameliorating, or preventing crises
such as the 1929 crisis.
Senator BULKLEY. D O you think there is enough power there now ?
Mr. HUGHES. Yes, sir. I t was testified before this or a similar
committee, Senate committee, that the Federal Reserve vetoed 10
times an effort of the New York Reserve Bank to increase interest,
discount rates, and discouraged statements of that bank that we were
going into an inflation which could only result disastrously. That
attitude of the Board was distinctly political, as we see it. The Board
publicly so stated, that they feared it might precipitate a crisis, not
apparently realizing a crisis was coming insofar as heeding the warning of the New York and like banks.
Senator BULKLEY. Well, did not the New York bank contribute to
the situation by buying a large amount of bonds when credit generally
did not need that stimulation ?
Mr. HUGHES. I t might be that was brought about under the domination of the Board. I think few of the banks as banks can be
charged with that responsibility. They were acting under an assumed domination of the Federal Reserve Board, as I see it.
Senator BULKLEY. You think that was a mistake of the Federal
Reserve Board?
Mr. HUGHES. Yes; I think that that was clearly a mistake of the
Federal Reserve Board, and I think that Board was the responsible
body.
Now, that Board was apparently acting under domination of other
influences. I t was a matter of daily press comment, or almost daily
press comment, that things were fine, conditions were sound, prices
were going higher, and everybody rushed back to buying. Those




BANKING ACT OF

1935

269

statements were coming directly from Washington at the time. A
review of the press at the time will illustrate that.
Senator BULKLEY. Well, are you contending that the Secretary of
the Treasury was responsible for that ?
Mr. H U G H E S . Partially, yes. At any rate, I do not recall any
statement of the Secretary of the Treasury which supported the
sound Keserve banks, such as the New York bank, at that time seemed
to be.
Now, if this is not emergency legislation, and if my position is
correct that the Board at the present time has adequate authority to
control credit and to provide liquidity in member banks, then what
is the purpose of this legislation?
Senator BULKLEY. Well, Mr. Hughes, my own view is that the
Board has rather wide authority at this time, but I do not feel very
well satisfied with the way they have used it. Do you ?
Mr.

HUGHES.

No.

Senator BULKLEY. What are we going to do to improve that situation ?
Mr. H U G H E S . There is only one way, Senator Bulkley, that I know.
That is to remove political influence from that Board.
Senator BULKLEY. Well, specifically, now, you mean remove the
Secretary of the Treasury ?
Mr. H U G H E S . F o r one thing; yes.
Senator BULKLEY. W h a t other thing?
Mr. H U G H E S . I cannot answer. I would be glad to develop my
thought there. I must speak in generalities.
Now, we have other conditions or Government agencies from which
the political element has been practically emasculated. If the political influence on this Board could be eliminated so that they were
acting freely and were capable and free to use their own good judgment, I think they have ample authority.
Senator BULKLEY. Now, will you develop that thought a little
further, by way of illustration or otherwise, so that we will see more
clearly what you mean ?
Mr. H U G H E S . Well, the result I have told you, and I am speaking
of testimony before this or a similar committee, which sat I think in
1931, at which time I think an investigation of the 1929 break was
made.
The Interstate Commerce Commission, so far as I know, is practically free of political domination. Whether that is because political
domination is not attempted there, I don't know, but if as an ideal,
a board of this character could act as freely as Federal judges, or
as freely as another appointee so that they can and do act in such a
way as to use their own judgment and not an inspired judgment
Senator BULKLEY. Of course, Federal judges are made somewhat
independent by being appointed for life. Do you advocate Federal
Reserve Board members being appointed for life?
Mr. H U G H E S . I should much prefer that to any recall, which
strangles and stifles their own judgment. So long as the judgment
of a Federal Keserve Board member is strangled, then he is merely
a creature of some superior thought and knowledge, and unless he
can use his own judgment, he cannot and ought not to be held fully
responsible. Now, just how that is to be done, Mr. Chairman, I of
course, would not have the temerity to suggest to this committee.
1^96^8—35—PT 1




18

270

BANKING ACT OF

1935

Senator BULKLET. But you do say the Secretary of the Treasury
ought to be taken off the Board ?
Mr. HUGHES. I would think so.
Senator BULKLET. D O you care very much whether the Comptroller is taken off ?
Mr. HUGHES. N O .
Senator BULKLET. YOU do not think
Mr. HUGHES. I doubt that that is

that is important ?
important, because I do not

think the functions of the Comptroller
Sentaor TOWNSEND. Would you care, after careful study, Mr.
Hughes, to offer your further views in that matter?
Mr. HUGHES. I would be glad to.
Senator TOWNSEND. We would be very glad to have you do it.
Mr. HUGHES. Now, if my position, the predicate of this statement
is correct, that there is the authority, then why do we need title I I
of this bill? What is attempted here? I t is stated in the most
worthwhile criticisms that I have read from financial writers and
people who have thought this out that it is a measure which essentially seeks to manage the currency and money and credit of the
country. I n other words, we get back to the money-management
idea.
Now, frankly, we are just old-fashioned enough in my community,
and I think that is pretty generally true, to doubt and scout the
soundness and economic validity of a managed currency or managed
credit.
We cannot avoid the conviction t h a t the law of supply and demand
still applies and that is the paramount law both as to affecting
credit, money, and other economic influences. W i t h a distrust of the
managed currency we are distrustful of this title.
Senator BULKLET. Well, now, Mr. Hughes, the difficulty is, it is
conceded, that we got a tremendous inflation under the old system
and naturally some thought is being given as to how we are going
to chart our course better for the future.
Mr. HUGHES. Yes, sir. Well, I say we got into that credit inflation situation by reason of the sins of the Reserve Board, and they
are either traceable to the weakness of t h a t Board, which I do not
judge; but either that or to outside political influence. I suspect the
latter.
Senator BULKLET. Well, you mean that the whole trouble that we
got into was due to political causes ?
Mr. HUGHES. I suspect that that is the fact. T h a t is my view, that
when the credit inflation started in 1926 and 1927 and rolled u p in
1928, finally reached its apex in 1929, no one in high Government
position was willing, I suspect for political reasons, because the campaign was coming on, to tell the people t h a t they had better stop. On
the contrary.
Senator BULKLET. NOW, if you do not believe in the Government
control, what was there to do but to let things go as they were ?
Mr. HUGHES. If they had let things go and not give the hypodermics every time we seemed to go into a lull, and to use some judgment, get some common-sense view, the press was immediately full
of a new injection of it, which simply stimulated people to go forward, and the Government acted affirmatively. They did not let it




BAXKIX'i ACT OP

1935

271

go. But here is a governmental agency, this Board, and governmental agents, it must have been the design of the Federal Reserve
Act that it not only had the responsibility to free credit, but also to
limit credit. That power was given to it
Senator BULKLEY. There is no doubt but that the Federal Reserve
Board has more power than most people give it credit for and I
think
Mr. H U G H E S (interposing). Not the slightest doubt about that.
Senator BULKLEY (continuing). You agree with me?
Mr. H U G H E S . Yes.
Senator BULKLEY.

There is a thought that is very freely expressed,
that credit is sure to be controlled t-omewhere, and if the Government
does not control it. somebody else will. What do vou think about
that?
Mr. HUGHES. 1 don't think that is true. If it is true, I think it is
bound to be controlled more safely in the long run by the law of
supply and demand forces than by purely artificial dictation.
Senator BULKLEY. You do not think that the Government ought
to be in control at all? Would you reduce the power of the Federal
Reserve Board to control ?
Mr. HUGHES. N o ; I would not. I am entirely in favor of the
Federal Reserve Act and what is was designed to do. Its great
function was to democratize, or to make credit available to more
people. Now, that is all good, that is a good theorj r , as I say, a good
banking principle. But I certainly would not go to the extent of
permitting such an agency of governmental control of money entirely
to the point that this act seems to go, and that is what we are distrustful of. We don't think we need it. We have history in support
of our position. This effort, as I see it, Mr. Chairman, is nothing
more nor less than a revivification of the old Bank of the United
States.
Now, almost exactly a hundred years ago the Bank of the United
States was dissolved, and it was dissolved for the same reason that
we feel is present, the thing we feel may be present here. There was
in t h a t situation a consolidation of control of currency, credit, and
so forth, which was felt to be dangerous, and the people as a whole
thought it was dangerous. Therefore, the bank was done away with.
Now, the country has grown in this 100 years. Credit has not been
lacking. T h a t is obvious. Else the country could not have grown.
The lawful play of supply and demand of credit has been the background of the growth of the country.
If this title I I does not have within it the seeds of a new Bank of
the United States, it hasn't anything.
NOWT, what has hapened, we say, in the hundred years that indicates that our forefathers were wrong 100 years ago and that therefore we must go back and pick up their error and attempt to supplant it? All the things that we criticize here were the subject of
criticism of that old bank charter, that old situation. We are distrustful of this sort of aggregation of power because we cannot keep
politics out of it. I t couldn't be done when the country was much
simpler. W h y do we think it could be done now ? And if political
domination of credit and currency was bad then, why is it to be good
now?




272

BANKING ACT OP

1935

Senator BULKLEY. NOW, is political domination synonymous in
your mind with governmental control?
Mr. HUGHES. N O .
Senator BULKLEY.

Will you draw t h a t distinction a little bit
clearer, and tell us how you make a distinction between political
domination and governmental control ?
Mr. HUGHES. I agree with Mr. E v a n s ; I think the two terms are
not synonymous, although there is some similarity between them,
and sometimes they seem to be the same thing. The Federal Reserve Act provides a large amount of political control, or governmental control, but that does not mean that t h a t is political domination and it doesn't follow that this agency is thereby used as a
political football, or to be converted to solely political ends.
Senator BULKLEY. Of course, all these words are used from time
to time to express different shades of meaning, so that we have a
difficult task to express exactly what we do think.
Mr. HUGHES. That is quite true.
Senator BULKLEY. But I am sure that unless we can draw some
distinction between political domination and governmental control,
we are going to get into a bad dilemma, I am sure, where the only
alternative is between Government control and private banking control, because in that event I am afraid we have got to take the Government control with whatever disadvantages it may have.
Mr. HUGHES. Well, I have said, and I repeat that we are not
quarreling with the Federal Eeserve theory. We think that the act
is sufficient as it stands. Now, that provides governmental control.
I t does not necessitate political control. We are unable to see how
title I I , if it is enacted, with the tremendous power that is carried
there, political control of the governmental function is to be avoided.
Senator COUZENS. You say that the Federal Eeserve is governmentally controlled now; is that your conclusion ?
Mr. HUGHES. I t is a Government agency; yes, sir.
Senator COUZENS. And it is Government-controlled?
Mr. HUGHES. I n the sense that it is an agency created by the Government, yes, but only that.
Senator COUZENS. I t certainly is not controlled to the same extent
that the Interstate Commerce Commission controls the railroads, is
it?
Mr. HUGHES. I should think pretty much the same, sir, because the
Federal Reserve now, the Federal Reserve Board and banks set the
rates very much as the Interstate Commerce Commission sets freight
rates and so forth. I think it is quite a parallel.
Senator COUZENS. I hardly think that is quite a correct answer,
because the Interstate Commerce Commission undertakes to see that
there is justice between communities, there is no discrimination, that
the rates are uniform for a like service; and that is certainly not a
part of the functions that have been exercised by the Federal Reserve
Board, is it ?
Mr. HUGHES. The Federal Board fixes discount rates very much as
the Interstate Commerce Commission fixes freight rates. I n t h a t
sense, I think—and after all, probably that is the greatest power t h a t
the Interstate Commerce Commission has—the other things, all these
other things of fairness and justice between communities, of discrimi-




BANKING ACT OF 1 9 3 5

273

natory rates and so forth flow from the fixation of the rate, that the
rate cannot be discriminatory.
Senator COUZENS. Well, but the Federal Eeserve Board does not fix
the rates for loans.
Mr. H U G H E S . I n discounting paper they do.
Senator COUZENS. N o ; I am talking about loans. I am not talking
about the discounting of paper. That is a secondary step; but I am
talking about the original step. Certainly the Federal Reserve Board
does not attempt to fix the rates that the banks may charge.
Mr. H U G H E S . NO ; if I go to a bank to borrow money, I make my
own terms, naturally.
Senator COUZENS. That is true if you go to a bank and borrow
money, but it is not true of a carload of freight.
Mr. H U G H E S . No. But if I take that paper, a bank takes that
paper, the Federal Eeserve fixes that discount rate.
Senator COUZENS. B u t that is done by districts.
Mr. H U G H E S . I n their district.
Senator COUZENS. Yes. So that in fact the Federal Reserve does
not fix it in all the districts; that is, the same rate for all districts?
Mr. H U G H E S . There are differences, but if the difference is too great
you have the flow of paper from one district into another.
Senator COUZENS. D O you discern any difference between Government control and political control in the Interstate Commerce Commission ?
Mr. H U G H E S . Well, I should say that is Government-controlled.
Senator COUZENS. Have you considered that political-controlled ?
Mr. H U G H E S . N o ; I can't say that I have.
Senator COUZENS. Well, is it not possible, then, under a Federal
Reserve Board, to have Government control without political control ?
Mr. H U G H E S . I maintain that the present Federal Reserve Board
is susceptible to political control, which was the thing I have just
said.
Senator, I beg your pardon for not acknowledging you when you
oame in, but I stated
Senator COUZENS. I do not want you to repeat that. I will read
it in the record.
Mr. H U G H E S . Yes; I maintain that there is ample authority and
power, Government control in the present act, and if that Board can
and will exercise the authority which it has, there is the governmental control.
Senator COUZENS. Do you think it has exercised the control it has ?
Mr. H U G H E S . N o ; I do
Senator COUZENS. The
Mr. H U G H E S . I do not.
Senator COUZENS. H a d

not.

power it has ?

you been a member of the Federal Reserve
Board, would you have voted differently, would you have done differently than the Federal Reserve Board did?
Mr. H U G H E S . Senator, if you ask me now, I should be inclined to
say " Yes." I f it was 1929, of course, that is hindsight, but I am
rather influenced, however, by what they did in overruling the New
York bank ten times, did what we must now, what now seems to have
been a very unwise thing, and they did that, according to the testimony before this committee.




274

BANKING ACT OF 1 9 3 5

Mr. Evans just suggested on this question of Government control,
the members of the Board are appointed by the President, which
appointment must be ratified by the Senate, and removal is only
for cause, not removal at the pleasure of either the Senate or of the
Executive without cause. I think that is a Government control and
I don't think that needs to be political control.
Senator BULKLEY. But do you think that political control has been
exercised through the Federal Reserve Board?
Mr. HUGHES. Undoubtedly.
Senator COUZENS. How would you prevent it?
Mr. HUGHES. Senator, that is rather a large order. I will undertake to answer that if I may give it thought. I know I am quite
clear as to what I should like to see. How we can do that is a very
different matter.
Senator TOWNSEND. Senator, Mr. Hughes has agreed to submit,
after careful thought, to the committee some ideas along that line.
Mr. HUGHES. What I should like to see, Senator, is that the Federal Reserve Board be given absolute freedom of action and responsibility for its duties, without fear of removal or influence. I think
if they had been in that position in 1929 they would not have overruled the reserve banks as they did.
Senator COUZENS. Well, what control were they under in 1929 that
prevented them from free action?
Mr. HUGHES. Well, they were under—" control " may be too strong
a word. I t must have been under influence. I suspect that they were
under the influence of the then administration which refused to take
the responsibility for stopping the credit inflation and the rising
stock prices.
Senator COUZENS. NOW, can Congress enact any law or draft any
sort of legislation which may not be influenced by individuals or
power* that be?
Mr. HUGHES. Well, I would think so. J u s t how they are going to
go about it, how it would be phrased, I would not be prepared at
the moment to say. I haven't thought that out. I think the present
act, the danger of the threat of a managed currency, and further
political domination, which this bill carries, which is necessarily
inherent in this bill, can be avoided.
Senator COUZENS. You think title I I ought not to be considered
at all?
Mr. HUGHES. I think title I I ought to be eliminated entirely. I
do not believe the people of this country want t h a t ; I don't think
the bankers want it, and I don't think the depositors want it.
Senator BULKLEY. D O you think there is any occasion for liberalizing the rules for eligibility of paper for rediscount?
Mr. HUGHES. Senator, I think probably that as the banks under
the insurance deposit plan join the System, there will be some regulations, some quite careful consideration of Avhat is to be accepted
to entitle them to join, which will take care of that situation.
Senator BULKLEY. D O you agree with your colleagues here, that
title I I goes too far in that respect ?
Mr. HUGHES. I beg your pardon ?
Senator BULKLEY. D O you agree with Mr. Evans and Mr. Ridgely
that title I I goes too far in that respect?
Mr. HUGHES. Yes; I do, indeed.



BANKING ACT OF

1935

275

Senator BULKLEY. Can you suggest to us what liberalization you
think would be proper ?
Mr. H U G H E S . I would hesitate to state at the moment, sir. Mr.
Ridgely has suggested that there might be some parallel definition
of eligible securities paralleling what we call regulations.
Senator BTTLKLEY. I understood Mr. Ridgely to say that we did
not need any liberalization at all.
Mr. H U G H E S . Do you think so, Mr. Ridgely ?
Mr. RIDGELY. My own thought is that we have got along now, in
addition to Government bonds, with long-term bonds.
Mr. H U G H E S . By 1937 it would seem to me that any bank ought
to be prepared to qualify. That is, they have 2 more years, and
if Government bonds would be accepted, as I take it they must be
under the present law, that should be, I should say, adequate time
to permit them to exchange current holdings for an adequate amount
of any form of security.
Senator COUZENS. W h a t are the current holdings you refer to that
they might exchange? I mean just give me the general character
of the securities.
Mr. H U G H E S . All the things that a country bank loans on, chattel
mortgages, real-estate mortgages, and two-name paper largely. A
great many of the country banks loan on a different sort of things
than a city bank does.
Senator COUZENS. Where could they get rid of that? You said it
would enable them to get rid of the current holdings and take Government bonds. Where would they get rid of those holdings ?
Mr. HUGHES. Some of the present loans would be paid and they
would invest their funds in Governments. There is hardly a sound
bank in our community that could not liquidate a certain amount of
its outstanding loans and convert them into cash and buy Governments.
Senator TOWNSEND. As a matter of fact, as far as you know, every
bank has plentj 7 of Governments ?
Mr. H U G H E S . Yes; at the time of the bank holiday, all of our Wilmington or local banks could have qualified on the basis of either
cash or Governments. We had a million and a half dollars of
currency at that time in Wilmington.
Senator TOWNSEND. All right.
Mr. Chairman, that concludes—Mr. RIDGELY. I would like to say just one thing.
Senator BULKXEY. Yes; come back, Mr. Ridgely.
FUETHEE STATEMENT OF HENEY EIDGELY, PEESIDENT OF THE
FAEMEES BANK OF THE STATE OF DELAWABE
Mr. RIDGELY. I want to say a word about the question of the Federal Reserve Board suggesting inflation. Speaking for myself alone,
I think that if you are trying to devise a bill of that kind, you are
trying to find a way to the moon.
Senator COUZENS. That is what the bankers did in 1929, was it
not?
Mr. RIDGELY. Not simply the bankers.
Senator COUZENS. Well, they provided the roadway for it.




276

BANKING ACT OF 1 9 3 5

Mr. RIDGELY. I think it is very easy to get up, of course, and
preach against not all, but some of the bankers, but I think it would
be just as easy to get up and preach against the statistical investment services, the economic experts, and the college professors. I t
happened that T made a speech in 1928 before a group of bankers, in
which I said that I questioned whether we were not in fact going
entirely too far with the question of inflation of credit, and I was
followed by a college professor who demonstrated that I was ignorant because we were on a new era. T h a t is what you heard constantly, that we were on a new era.
Senator COUZENS. And the bankers fell for it.
Mr. RIDGELY. The bankers were human, but I don't believe the
bankers fell for it any more than anyone else fell for it.
Senator COUZENS. N O ; I am not charging that, but as I said before, the bankers had the roadway, they had the vehicle by which
the people could travel to the moon and they permitted the investors
and the professors and all those others to start the public on the
pathway to the moon which the bankers established.
Mr. RIDGELY. But, Senator, what would you do if you were president of a bank or were on a bank board and you were approached
by a citizen who was a perfectly respectable citizen and he asked
you to loan him some money and he offers you collateral for it?
Now, what are you going to do in that case ? If you have a suspicion
that he is going to invest, just exactly what is your idea of the duty
of the banks and of the bankers ?
Senator BULKLEY. Is there not something in this, Mr. Ridgely,
that the banker would look to the quoted prices of the securities
offered, as quoted on the stock exchange, and disregard any consideration of intrinsic values?
Mr. RIDGELY. Well, of course they took the market in many instances as the test of the values.
Senator BTJLKLEY. Without looking very much further, did they

not?

Mr. RIDGELY. Yes. Of course they did not stop simply at the
market quotations; they had those statistical services. I guess every
bank has them, and you may recollect, if you looked over them at
all, that some of them made the statement that in the early p a r t of
1929 or perhaps even the middle of 1929, t h a t stocks looked high,
but as a matter of fact in 5 years we would be looking back at them
and saying how cheap and low they are.
Senator COUZENS. NOW, why did the bankers fall for that after
all the long experience they have had ?
Mr. RIDGELY. Because, frankly—I will tell you why. I think they
fell for it for this reason: I think they got it into their heads that
we were on a new era, and I think the cause of the trouble was the
great war. That started, accelerated everything, the people simply
lost their judgment. You cannot kill millions of people and destroy
billions of capital and let loose our passions without disarranging
economic conditions and also clouding judgments, and I think t h a t
they believed, a good many of them, that we were on a new era.
You take the question of real estate. Of course, real estate values
fell in certain sections quite as much as stocks did. How were you
going to judge the value of real estate ?




BANKING ACT OF

1935

277

I am not trying to make a brief for bankers. I do not feel that
I am defending them. I am not called on to defend the profession,
because banking is not my real profession. I got caught in it.
E was asked to take a position in a bank on the eve of the 1929
collapse, and I have been held there against my will, wanting to
get out. So I am not trying to defend bankers. I have it in for
some of the bankers, but I also know that it has been rather—well,
what shall I say?—a little nauseating to see everybody trying to
load his own mistakes on somebody else's back. As a real matter
of fact, the whole country was swept by inflation, and I don't believe, no matter what kind of a board you set up, when that thing
strikes again, and it will—those of us who are old enough to have
gone through these things before don't believe that we are getting
to any millennium where any act of Congress can stop them
Senator TOWNSEND. Well
Mr. RIDGLEY. Well, I was just going to say, I don't believe you
can stop it. That does not mean you ought not to use all possible
means, if you can, to check it. But my point is, the point I am
trying to make is, t h a t t h a t is not going to be done completely by
vesting the great power or great powers in a particular board or
group. T h a t is not going to insure it against such conditions.
I do believe in eliminating, so far as we can—I would use the
word " partisan " instead of the word " political "—the possibility
of partisan domination. I should think that might be helped by
removing any particular political nominee that was on the Federal
Eeserve Board, and making the term a longer term. You might
give to the members of the Board 12 years, say, or something of that
kind, and let it go at that. I think you would come closer in
that way than by this bill.
The question was also asked as to whether Government control
wouldn't be political control. Well, I make the distinction between
Government regulation and partisan control. I think we ought to
have a board. I think it is good to have a board for Government
regulation, and by Government regulation I don't mean partisan
regulation. I simply mean it is a board set up by the Government,
or I mean it is a part of the Government, not set u p by the Government, a part of the Government. And when you place in that board
a power to commit the country to some political or economic theory
or philosophy or policy, that is where, I think, control comes in.
Senator TOWNSEND. I think the bankers of Delaware can be very
proud of their record, because I think the record of the bankers of
Delaware stands out as about the best of any State in the Union.
Senator COTJZENS. NOW, do not start that, because I would have to
bring in Michigan, and you know what that would mean.
Senator TOWNSEND. I think that concludes our testimony, Mr.
Chairman.
Senator BTTLKXEY (presiding). We will adjourn to 10:30 o'clock
F r i d a y morning. May 10.
(Thereupon, at 12:10 p. m., an adjournment was taken to Friday,
May 10. 1935. at 10: 30 a. m.)







B INKING ACT OF 1935
F R I D A Y , M A Y 10, 1 9 3 5
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE
ON BANKING AND CTJKBENCY,

Washington, D. 0.
The subcommittee met, pursuant to adjournment, on Wednesday,
May 8, 1935, at 10:30 a. m., in room 301, Senate Office Building,
Senator Carter Glass presiding.
Present: Senators Glass (chairman of the subcommittee), Bulkley, McAdoo, Townsend, and Couzens.
STATEMENT OF MARRINER S. ECCLES, GOVERNOR OF THE
FEDERAL RESERVE BOARD
Senator GLASS. Governor, the Senate committee fortunately has
available in print your testimony before the House committee, but it
occurred to me that you might care to make a supplemental statement, and we would be very glad to have you do that if you desire.
Governor ECCLES. I would like to make a statement before this
committee, and for that purpose have prepared one, and I should
like to read that statement and then file it with the committee.
[Reading statement.]
I n discussing the proposed banking bill of 1935 before your committee, I should like to present a statement of some of the fundamental issues that are raised by the proposed legislation, and then
to outline the proposals in title I I of the bill, section by section,
with such modifications as I should like to recommend in the text
as introduced.
Character of proponed! legislation.—-The amendments to the Federal Reserve Act proposed in this bill are important and are urgently needed at the present time. Their general objective is to
improve the administrative machinery of the Federal Reserve System, to determine more clearly the distribution of authority and
responsibility between the Federal Reserve Board and the Reserve
banks, and to eliminate unnecessary restrictions on the Reserve
banks and the member banks that have proved to be ineffective in
preventing disaster and are now hampering economic recovery.
Senator TOWNSEND. Governor, do you mind being interrupted?
Governor ECCLES. N O .

Senator TOWNSEND. Are you familiar with the recommendations
of the special committee of the American Bankers' Association on
the proposed Banking Act of 1935?
Governor ECCLES. I am.

Senator TOWNSEND. D O you approve the changes in the act as
recommended by the American Bankers' Association?




279

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BANKING ACT OF 193 5

Governor ECCLES. I do not know what you specifically have in
mind, Senator.
Senator TOWNSEND. Well, the suggestions as outlined by the special committee, I refer to.
Governor ECCLES. Most of the suggested amendments which they
propose to the act, as introduced, were recommended by me in the
hearings before the House committee. There was a difference in the
recommendations which I made before the House committee and
the recommendations which they made with reference to the Open
Market Committee.
Senator TOWNSEND. Well, I will not ask you that question now.
I have one other question I want to ask you when you nave finished,
about that.
Governor ECCLES. I believe that was about the only change.
Senator TOWNSEND. Then you practically agree with their recommendations ? Is that what I am to understand ?
Governor ECCLES. Yes; that is right.
Senator TOWNSEND. All right.
Governor ECCLES (continuing statement). The proposals made in
this bill are definite and limited in scope and arise out of the experience of the past 20 years. They are not revolutionary; they do not
alter the fundamental character of the Federal Reserve System, or
the regional nature of its organization, and they do not, as has been
asserted by critics, make the Federal Reserve System a football of
party politics or an engine of inflation.
Need, for public control of monetary policy.—The most wide-spread
criticism of the bill has come from those who see in it an attempt
to subordinate the Federal Reserve System and, through it, the country's banking system, to political control. On this subject there
appears to be much misinterpretation of what the present bill provides, coupled with a lack of clear understanding of existing law
and of the proper relationship between the Reserve System and the
Government. This bill aims to clarify the powers and responsibilities
of the Reserve Board in matters of national monetary policy and at
the same time preserves and increases the regional autonomy of the
Reserve banks in matters of local concern. There is nothing in this
bill that would increase the powers of a political administration over
the Reserve Board.
That matters of national credit and monetary policy should be
under public control has been recognized since the System was first
proposed. For example, in the report of the Senate Committee on
Banking and Currency in 1913 on the original Federal Reserve
legislation there is a statement to this effect:
The function of the Federal Reserve Board in supervising the banking system
is a governmental function in which private persons or private interests have
no right to representation, except through the Government itself. The precedent of all civilized governments is against such a contention.

The statement by President Woodrow Wilson before the Congress
in joint session on June 23, 1913, is even more decisive. On that
occasion President Wilson said:
The control of the system of banking and of issue which our new laws are
to set up must be public, not private; must be vested in the Government itself,
so that the banks may be the instruments, not the masters, of business and of
individual enterprise and initiative.




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281

The necessity of placing the regulation of monetary policy under
Government control, which was clearly recognized by the proponents
of the Federal Reserve Act in 1913, is the guiding principle of the
legislation which is now under consideration by your committee.
Senator GLASS. Well, of course, Governor, that is your peculiar
interpretation of the language of the report. You do not emphasize the important word there, " supervisory." I n other words, the
Federal Reserve Board Avas to be a supervisory censor body, altruistic in its nature, totally devoid of any acquisitiveness, to supervise the administration of the law.
Senator COTTZENS. D O you see a distinction there, Governor ?
Senator GLASS. Evidently not; but I do, a very grave distinction.
Governor ECCLES. Of course, there is a distinction between the
use of the word " supervisory "—I suppose you would have to read
the entire
Senator COUZENS (interposing). Report.
Governor ECCLES (continuing). The entire report.
Senator GLASS. Inasmuch as I wrote the report, I know what
*' supervisory " means.
Governor ECCLES. The reading of the statement of President Wilson here [reading] :
The control of the sjstem of banking and of issue which our new laws
; re to set up must be public, not private
>

Senator COTJZENS. Did you write that, Senator?
Senator GLASS. W h a t ?
Senator COTTZENS. Did you write that, too?
Senator GLASS. N O . Woodrow Wilson wrote that. Nobody ever
wrote anything for him that I know of. Nobody ever wrote anything for me.
Governor ECCLES (continuing reading) :
must be vested in the Government itself, so that the banks may be the instruments, not the matters, of business and of individual enterprise and initiative.
Senator GLASS. I agree to all that. Pardon me for the interruption. Go al'end.
Governor ECCLES. T h a t is all right. [Continuing statement:]
The need for public control of the function of supplying the medium of exchange to the people of the United States, both by issuing
currency and by regulating the volume of bank deposits, seems to me
to be almost a noncontroversial matter. I t is in direct recognition
of the constitutional requirement that Congress shall coin money
and regulate the_ value thereof. I n delegating this power Congress
has chosen, and, in my opinion, always will choose, to delegate it, not
to private interests but to a Government body like the Federal Reserve Board, created by Congress to serve as its own agency in
discharging its responsibility for monetary control.
I might quote in this connection a statement by the late P a u l
W'arburg, who said on November 12, 1910:
The management of the central reservoir must be absolutely free from the
dangers of control by politics and by private interests, singly or combined.

Senator GLASS. W h a t do you conceive Mr. Warburg meant by the
" central reservoir " there ?
Governor ECCLES. I think he meant the use of reserves.




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BANKING ACT OF

1935

Senator GLASS. Well, he meant a central reservoir in the respective
Federal Reserve districts. There was no other central reservoir.
The Federal Reserve Board had no reservoir. I t has none now.
Governor ECCLES. H e is speaking, of course, of the control of the
reservoir of bank reserves. [Continuing statement:]
Public—not political-—control.—The necessity of public control,
as I have said, can hardly be questioned. Apprehension can only be
expressed against the dominance in the Federal Reserve System of
political, and particularly of partisan, control as distinguished from
public control. On this point I wish to emphasize that the bill, far
from proposing an increase in the powers of a political administration over the Federal Reserve System, contains provisions intended
to increase the independence of the Federal Reserve Board. For
this purpose the bill provides that members of the Board shall be
well qualified by education or experience, or both, to participate in
the formulation of national economic and monetary policies. I recognize that the requirement of such qualifications cannot insure that
only qualified persons will be appointed to the Federal Reserve
Board, but it is a step in the direction of strengthening the tradition
that members of the Federal Reserve Board must be qualified to
carry the responsibilities which their duties entail. The bill also
provides for more adequate compensation for Board members and
for pensions when they retire. These provisions would further add
to the independence of the Board members.
I notice that the House of Representatives did not adopt our
recommendations for an increase in the salaries and for pensions for
Board members. I believe that these provisions are an essential
part of the bill. They are an important means of increasing the
Board's independence, as well as making the positions on the Board
more attractive in the future to outstanding men who may not have
independent means.
There is in the bill a much misunderstood provision which was
introduced for the purpose of making the position of Governor of
the Federal Reserve Board more attractive to competent men with
banking experience. This provision states that, when the Governor
is no longer designated as Governor by the President, he shall no
longer be a member of the Federal Reserve Board and shall be considered to have served out his term. This would make it possible
for a Governor, if he be drawn from the banking field, to reenter
the banking business without having to wait for a 2-year period
when he is no longer designated as Governor.
There has been a great deal of discussion about the fact that this
makes the Board a more political board. You know, gentlemen, as
well as I do that no man would stay on the Board if the President
of the United States wished to appoint someone else in his place.
The present act provides that the President shall designate one of the
appointive members as Governor of the Board, and this has been
consistently interpreted to mean that the Governor serves as such at
the pleasure of the President. I t seems to me to be immaterial
whether a Governor has or has not a technical right to stay on the
Board, if the President prefers to have someone else as Governor,
because no person who is qualified for that position would choose to
remain in these circumstances.




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283

The bill as reported in the House has modified this provision so
that the Governor could retain his position on the Board, if he were
not redesignated, but if he resigned, he would be permitted to resume
his banking connection without the 2 years' delay.
Recognition of the fact that control over money is a matter of
national concern that must be retained by the sovereign power or
delegated by it to an agency of its own creation is as old as government itself. The change that has occurred in the past quarter of a
century has been in the nature of adaptation of an ancient idea to
modern conditions. The change has arisen out of a growing recognition of the fact that monetary control must not be confined to
control of currency because, to an ever increasing extent, the bank
check has taken the place of currency. I n this country fully ninetenths of all payments are made by check rather than in cash. Control over the supply of money, therefore, involves under existing
conditions a control over the volume of bank deposits and bank
credit.
The statutes of all the newer central banks of the world recognize
the necessary relationship between the Government and the central
bank. T h a t it is not clearly recognized in the charters of some of
the older central banks is due primarily to the fact that the relationship between central banking, commercial banking, and the money
supply has been a gradual development and the responsibility of
public control over deposit banking has only been gradually appreciated. There is in the world today no central banking institution, whatever the facts as to stock ownership or the legal provisions
of its charter, which is not subject to control by government. This
is just as true of the Bank of England, which is commonly cited as
an example of a completely independent central bank, as it is of any
other central banking system.
Senator GLASS. On the contrary, I heard a very well-informed man
in New York, thoroughly familiar with the laws and practices of the
Bank of England, say that the Chancellor of the Exchequer would
not dare tell the Bank of England what it must do, but the Bank of
England very frequently told the Chancellor what he should do.
Governor ECCLES. I think there is, of course, a very responsive
relationship between the Bank of England and the Chancellor of
the Exchequer.
Senator GLASS. They have concord; yes. But the Parliament does
not pretend to direct the activities of the Bank of England. I t sometimes enacts a law sanctioning the action of the Bank of England in
exceeding its reserve requirements or, rather, in falling below its
reserve requirements, when the exigencies of a particular policy
suggest.
Governor ECCLES. I think there is a very responsive cooperative
relationship between the Chancellor and the Bank of England. Mr.
Goldenweiser has just handed me a statement by Mr. Snowden that
I might read in that connection [reading] :
The relations between the Bank of England and the Treasury are most intimate. No important departure in policy is ever taken hy the bank without consultation with the Treasury. The Treasury has assumed functions in recent
years which were formerly discharged by the Bank of England. Under the last
( 1 uuency Art the Treasury can decide, within limits, the amount of the currency
issue. Under the gold standard the maintenance of the par value of the pound




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BANKING ACT OF 1935

was automatically regulated. Now when we have no exchange standard the
Treasury tries to control the exchange in some mysterious way by the use of an
exchange equalization fund of £350,000,000.
I do not see that it could make any difference to the management or policy
of the Bank of England if it were nominally made into a State Bank—for all
practical purposes it is that now. Mr. Lloyd George does not propose that it
should become a Government department like the Treasury. It would be X'atal
to bring the bank under political control. (Viscount Snowden, " Mr. Lloyd
George's 'New D e a l ' " , pp. 41-42.)

Senator MCADOO. I S that equalization fund there, the amount in
pounds or dollars?
Governor ECCLES. Pounds; 350,000,000 pounds is the amount.
[Continuing statement.]
The necessity of Government control arises from the fact t h a t
governments are largely instruments for the formulation and execution of economic and financial policies. Since changes in the
supply of means of payment, both in the form of currency and in
the form of deposits, are an important and at times a determining
factor in economic changes, a central bank, if it chose to pursue an
antagonistic policy, could greatly hinder a government in achieving
its objective. Since central banking institutions derive their power
from the Government—are in fact creatures of the Government—
they do not, and in the nature of things, cannot work at cross purposes with the Government, particularly a t times of emergency.
Hence, in one form or another there must be cooperation between
the Government, which determines economic policies, and the bank
of issue which determines monetary policies.
Senator GLASS. Are you in favor of a Government central bank?
Governor ECCLES. N O ; not in the sense that we should transfer
the ownership of the stock of the Reserve banks to the Government
and create one bank.
Senator GLASS. W h y not? Are you in favor of Father Coughlin's bank bill?
Governor ECCLES. N o ; I am not.
Senator GLASS. W h y not ?

Governor ECCLES. Well, I do not think it is a practical arrangement. I t seems to me that the question of the ownership of the stock
in and of itself is not the vital matter; whether the Government
owns the stock or the private banks own the stock, there must be
management; there must be provision for the selection of directors
of the respective banks. I t seems to me that the powers t h a t are
given those charged with the responsibility for management is the
important matter, rather than the question as to who may own the
stock.
Senator GLASS. Well, is it not important that a central bank
should have a propriety interest—indeed, own the assets of the
bank?
Governor ECCLES. I do not understand your question, Senator.
Senator GLASS. Well, I mean if it is a central bank it ought to be
a bank which
Governor ECCLES. Yes.

Senator GLASS (continuing). Ought to own its own assets, ought
it not?
Governor ECCLES. That is correct.




BANKING ACT OF 19 3 5

285

Senator GLASS. And it ought to have a proprietary interest, I
would say an exclusive proprietary interest in the money that is
to be loaned to business, of whatever nature; is that not so ?
Governor ECCLES. T h a t is correct.
Senator COUZENS. Governor Eccles, assuming that your bill had
been in force in 1928 and 1929, what procedure would you have
taken ?
Governor ECCLES. I am unable to answer that, Senator. That is
rather a broad question.
Senator COUZENS. Well, is that not important, though, in determining whether or not we should change the functions of the Federal Keserve Board ? I n other words, it seems to me that there was
a lot of criticism of the Board during those years and subsequent
years, and I would like to know in what manner this bill of yours
would correct that.
Governor ECCLES. I think that the Banking Act of 1933, giving
to the Board control over speculative activities of the banks would
h i v e been more effective in 1928 and 1929, probably, than the provisions of this bill.
Senator GLASS. This bill destroys that control, does it not?
Governor ECCLES. The control over margin requirements and over
brokers' collateral loans would seem to me to deal directly with the
problem of speculation.
Senator COUZENS. Well, as a matter of fact, then, your answer
indicates that most of the trouble that occurred in those years has
been remedied by the 1933 Banking Act; is that correct?
Governor ECCLES. Well, so far as the question of speculation
itself is concerned, I think the Banking Act of 1933 enables the
Federal Reserve Board to meet that effectively. My statement covers
the specific reasons for the proposals in the present bill.
Senator COUZENS. D O you not have them in mind ?
Governor ECCLES. W h a t is it?
Senator COUZENS. D O you not have them in mind ?
Governor ECCLES. Well. I can recite them, I can give them to you,
but
Senator COUZENS. Yes: but what I am trying to find out is how
this bill of yours effectually changes existing conditions so there
would be no future evils arise, which it is alleged did arise as a result of the activities of the Federal Keserve Board under the old
act.
Senator MCADOO. May I interrupt, Senator?
Senator COUZENS. I would like an answer to my question, first.
Senator MCADOO. I beg your pardon, but I wanted to ask him
whether or not, before he attempts to answer your question, he has
the answer in the statement he has prepared. If so, perhaps it would
be better to get it in the logical form he is presenting it than to ask
the question.
Governor EOCLES. I would prefer to finish the statement, and then
I would be glad to answer any questions that you may desire to ask
that I am able to answer.
Senator GLASS. Well, you may do that, so far as I am concerned,
except that I would like to supplement the question that the Senator
from Michigan asked. H e asked what you would have done
Governor ECCLES. Yes.
129688—35—FT 1




19

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BANKING ACT OP

1935

Senator GLASS (continuing). I n 1928 and 1929. I would like to
ask what the Federal Keserve Board did do in 1928 and 1929, because you propose now to charge it with supreme authority in this
matter. What did it do in 1928 and 1929 ?
Governor ECCLES. I do not know that I can tell you exactly what
they did, Senator.
Senator GLASS. The record is perfectly clear.
Governor ECCLES. Yes.

Senator GLASS. I assume that you do not know. If you do not r
you will find it in your own records t h a t the Federal Reserve Bank
of New York for, I think four consecutive weeks, proposed an appreciable raise in the rediscount rate, and that the Federal Reserve
Board, I think for the same number of weeks, positively refused t o
sanction that action.
Now state what you would have done.
I do not know, but I do know what the Federal Reserve Board
did do.
Senator COUZENS. Of course, if Governor Eccles does not want t o
answer this, I submit in all humility to the two former Secretaries
of the Treasury and will let them run the meeting.
Governor ECCLES. I would prefer to read this and I would be glad
to answer the questions later.
Senator GLASS. I do not want to run the meeting, but as a member
of this committee, I am going to take the privilege of asking questions.
Senator COXTZENS. I asked a question and did not consult the chairman or the Senator from California, but an effort was attempted to
estop an answer to my question at the moment because of the austerity of the two former Secretaries of the Treasury.
Senator GLASS. A S a matter of fact, so far from attempting to
estop an answer to your question I supplemented your question so
that the answer might be more complete.
Senator MCADOO. I may say for the record that I had no thought
of preventing an answer to the question of the Senator from Michigan. My only purpose was to expedite the hearing, perhaps, by
allowing him to complete his statement and then have him answer
the question. I have no objection to his answering the question.
Senator COTTZENS. The Senator from California knows that after
the reading of a long statement many of the thoughts and questions we desire to have answered are forgotten by the time the statement is completed. If the Senator from California does not want
me to interrupt, I will not interrupt any more.
Senator MCADOO. I do not care, but I think, and I am quite sure
that the Senator from Michigan underrates his mental processes if
he cannot retain in his memory the questions he wanted to ask until
after the statement is concluded.
Senator GLASS. Proceed, Governor. Or if you prefer, answer the
question by the Senator from Michigan, and my supplemental question.
Senator TOWNSEND. I think the Senator from Michigan is entitled
to an answer to his question, if the Governor is prepared to answer.
Senator MCADOO. Certainly he is. I only made the suggestion for
the purpose of trying to expedite the testimony.
Governor ECCLES. Will you repeat the question ?



BANKING ACT OF 1 9 3 5

287

Senator COUZENS. YOU are proposing a new form of activities and
procedures of the Federal Reserve Board. I asked if this act you
are now proposing had been in effect in 1928 and 1929 what you
would have done under this proposed act.
Governor ECCLES. Of course, the bill is not proposing any new
activity.
Senator COUZENS. W h a t is the purpose of it, then ?
Governor ECCLES. I t is placing the responsibility for the three instruments of monetary control in the Federal Reserve Board. The
most important of those three instruments, that of open-market operations, the initiation of them, is in the hands of an open-market
committee. The matter of the discount rate is now in the hands of the
Board. The increase in reserve requirements was provided for in the
Thomas amendment to the Agricultural Adjustment Act, with the consent of the President, by declaring an emergency. What the bill proposes to do is to recognize the three principal functions of monetary
control which I have just enumerated, and to place the responsibility
for the exercise of these monetary control functions in the Federal
Reserve Board, and to provide for a committee of five representatives
of the Federal Reserve banks to be selected by the 12 governors, t o
be an advisory committee to the Board in the exercise of all three
functions. I will not go into extensive detail, because if I do there
would be no occasion to read this statement which covers that point
fully, but
Senator TOWNSEND. Are the five advisory members permitted to
vote?
Governor ECCLES. They are not in the proposal here. The American Bankers' Association have submitted a suggested amendment
providing that the five members be added to the Board for that purpose. The five members of the advisory committee in my proposal
are given the power to initiate. The Board is required before taking 1
action to give this committee of governors a hearing, an opportunitv
to express their views, so that both the Board and the committee
would have the power of initiative.
The Board, however, in the final analysis, is charged with whatever responsibility is taken.
Of course, I recognize that in monetary control alone, that is.
in attempting to increase or diminish the supply of money through
monetary action, there is no solution for all of our economic problems, and as I said before the House committee, I do not believe
that through monetary action alone the difficulties that confronted
this country in 1928 and 1929 could have been entirely avoided. I
believe that the question of distribution of income is a very important factor because it tends to affect the velocity of money. So, I do
not believe that purely through monetary control we could have
avoided the depression.
Senator COUZENS. I am indebted to the Governor for his statement, but I still have not got an answer to the question as to what
he would have done in 1928 or 1929 under the conditions as they
then existed.
Governor ECCLES. YOU mean what Federal Reserve policy I would
have adopted?




288

BANKING ACT OF

1935

Senator COTJZENS. Yes; that is what we are talking about; is it
not?
Governor ECCLES. Of course, I feel that instead of reducing income
taxes during that period they should have been increased.
Senator COTJZENS. I will agree with t h a t ; but the Federal Reserve
Board could not do that.
Governor ECCLES. That is right; and as I say, there was a limitation as to what the banking system could do toward maintaining
stability, business stability.
Senator MCADOO. A S I understand, the Senator from Michigan
Senator COTJZENS. J u s t a minute. The Senator will pardon me.
I am still insisting upon an answer to that question, please. I f this
bill had been a law, what should the Federal Reserve Board have
done; what would they have done t h a t was not done in 1928 and
1929?
Governor ECCLES. I could not answer that, Senator.
Senator COTJZENS. Well, just why this bill, if you do know what
is going to happen?
Governor ECCLES. Well, I think it is a very difficult thing to say
what you are going to do at any given time, until you know what
the problem is.
Senator COTJZENS. We will assume
Governor ECCLES. I have not analyzed the problem of 1929 with
the idea of seeing how this bill would apply if it had been in
existence. One cannot express an opinion on a subject as important
as that. I t would be like
Senator COTJZENS (interposing). Well, it will be some time, I guess,
before we pass this bill, and would the Governor mind going back
and assuming, for example, that this bill was a law in 1928 and 1929,
and come back and tell us what he would have recommended to do
during that period had this law been in effect or this bill been in
effect?
Governor ECCLES. I will be glad to.
Senator MCADOO. And if he had been in charge of the administration of the act?
Senator COTJZENS. Yes.
Senator MCADOO. Of course, he cannot assume what other men
might have done, but what he would have done if he had had the
responsibility, and the law was in effect as it is suggested.
Senator COTJZENS. I n other words, he might have done as the Senator from California recommended, paying all of our bills by printing-press money, and if he would recommend that, I should like to
know that.
Senator MCADOO. I think the Senator from Michigan does not
know what printing-press money is.
Senator COTJZENS. N O ; I confess I have expressed my humility to
being inferior to the Senator from California.
Senator MCADOO. That is certainly a gratifying announcement.
Senator TOWNSEND. Governor, while we are on this subject, what
would be the result if there was created the Federal open-market
committee, consisting of the entire Federal Reserve Board and five
governors of the Federal Reserve banks, each member of the said
open-market committee having a vote in the deliberations of the com-




BAN KINO ACT OF 19 3 5

289

mittee, and should make the changes, namely, first, open-market
policy; second, the change in the discount rate; and, third, a change
in the member bank reserve requirements ?
Governor ECCLES. W h a t would be the objection, is that your
question ?
Senator TOWNSEND. Yes; or the result.
Governor ECCLES. I do not believe there is a very great difference
in the proposed bill and that proposal from the standpoint of its
practical operation. I t is true the five governors, as proposed in the
t i l l passed by the House, do not have a vote. I believe the suggested
proposal would be a very big improvement over the present set-up.
I believe that it is the best compromise, if there is to be a compromise,
between what is proposed in the bill and some other proposals that I
have heard. I have made certain recommendations before the House,
and am making them before your committee, and they express my
views of the most desirable arrangement. Next to this arrangement
the proposal t h a t you have just read would be the most acceptable
to me.
Senator TOWNSEND. Thank you.
Senator GLASS. Governor, if I may venture to ask a question, do
you discover any difference between a real central bank which has a
proprietary interest in its own funds and may manage its own loans
of its own funds and the central bank which has exclusive control of
the funds belonging to other people and directing the manner in
which and the extent to which the funds belonging to other people
may be loaned?
Governor ECCLES. I cannot conceive of a central bank except
it be a bank that handles the funds of others. Every central bank,
I think, in the world is nothing more nor less than a banker's bank.
I t is a bank that holds the reserves of the private banking system.
Senator GLASS. I t is a bank of deposits?
Governor ECCLES. T h a t is right—a bank of deposits for the banks.
The ownership varies in different countries. The organization varies
from institutions owned entirely by the Government to institutions
owned entirely by the public. I n the case
Senator GLASS. B u t the stockholders of a central bank of that description have a responsibility to the depositors, have they not?
Governor ECCLES. Yes; whether they be private stockholders or
whether the Government be the stockholder, I would say they have.
Senator GLASS. Yes; but the Federal Eeserve Board has no responsibility to the depositors in the various banks, member banks of
the country, has it?
Governor ECCLES. Only to the extent that it is given responsibility for monetary action, monetary control, and responsibility
for making rules and regulations that would affect the depositors.
To that extent it would have responsibility.
Senator GLASS. Well, of course, the statute now and the rules and
regulations of the existing Federal Keserve Board charge it with
that responsibility; but that is a very different matter from determining to whom and to what extent the deposits in the various banks
may be loaned.
Governor ECCLES. There is nothing in this bill that does that,
Senator Glass.




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BANKING ACT O r

1935

Senator GLASS. Well, you may not have discovered it.
Governor ECCLES. I have not. There is nothing in this bill that
prescribes how the Federal Reserve banks shall loan their funds.
The responsibility for credit extended to member banks by Reserve
banks rests with the Reserve banks. The Board may make certain
rules and regulations governing the basis upon which credit could
be extended to member banks.
Senator GLASS. Not inconsistent with the statute itself.
Governor ECCLES. That is right. That is correct.
Shall I proceed?
Senator GLASS. You may proceed.
Governor ECCLES (continuing statement) : Limitations
and objectives of monetary control.—Recognition
of the importance of
monetary control and of cooperation between the Government and
the bank of issue is not based on the belief that all economic ills can
be cured by monetary action alone.
I t has been asserted that the proponents of this bill, and I in
particular, hold such a belief. Speaking for myself alone, I am
keenly aware of the limitations of the influence of monetary measures on economic conditions. I realize that without a properly
managed plan of Government expenditures and without a system of
taxation conducive to a more equitable distribution of income, monetary control is not capable of preventing booms and depressions.
The volume and cost of money are important, however, and are the
particular responsibility of the Federal Reserve System. T h a t is
the reason why our immediate concern in this legislation is to make
the machinery of regulating the volume of money as efficient as
possible so that the system may exert its influence toward the
achievement of the desired objective.
This objective, in my opinion, should be more clearly defined than
is the case in existing law. F o r the somewhat indefinite phrase of
" accommodating agriculture, commerce, and i n d u s t r y " , I would
suggest the substitution of a definite mandate that the Federal Reserve Sytem shall exert such powers as it has toward promoting
business stability and moderating fluctuations in production, employment, and prices, insofar as that can be accomplished within the
scope of monetary action and credit administration.
Senator TOWNSEND. Would you care to clarify that by an example ?
Senator GLASS. You would not care to usurp the authority of the
Department of Agriculture and its A. A. A. provisions that require
the plowing under of so many crops, and how otherwise would you
control production ? You could not produce crops or things of that
sort when you would have to plow them under or rent the land and
pay a subsidy ?
Governor ECCLES. Only as the monetary policy induces inflation
or deflation.
Senator COTTZENS. Have you studied the conditions sufficiently in
1928 and 1929 to have reached a conclusion as to how the monetary
policy might have been controlled at that time to have prevented the
killing of pigs and plowing under of crops?
Governor ECCLES. I do not know that I have. I may have some
views on the subject, but I would not want to pose as an authority.
Senator COTTZENS. Would you mind giving them, because it might
exert a great influence upon the distinguished committee ?



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291

Governor ECCLES. I think that could possibly be answered in connection with the question you asked a little while ago. I think it
would be closely related to the whole subject.
Senator COTTZENS. You say you think you would like to report later
on that?
Senator GLASS. H O W would you correct that vice of Congress,
with apologies to these Members of the Senate, of appropriating hundreds of millions of dollars to prevent overproduction, and then appropriating hundreds of millions of dollars to reclaim swamp lands
and irrigate deserts to increase production?
Governor ECCLES. Well, that is a
Senator GLASS. If you can do that, I am in favor of electing you
to the United States Senate.
Senator COTJZENS. That would not be enough, because there are
too many other questions.
Senator MCADOO. Perhaps that is the last thing that he wants to
happen.
Governor ECCLES. You are right.
Senator GLASS. All right, Governor, go ahead. We simply want to
point out some of the difficulties you would encounter when you
propose that.
Governor ECCLES. I am quite aware of them. I am quite aware of
the limitation of monetary policy alone. [Continuing statement:]
This objective, which is similar to the one recently adopted for
the Bank of Canada, states the aims that must guide the Federal Reserve Board in the formulation of its policy and at the same time
clearly recognizes the limitations of its power. I believe that the
Federal Reserve Board will be in a position to exercise its powers
more effectively if it is given a more definite indication by Congress of
the broad objectives of monetary policy. I t will also increase the
Board's power to resist political pressure for the use of its authority
for purposes inconsistent with the maintenance of business stability.
Senator MCADOO. Let me interrupt you there, Governor. I am
violating the suggestion I made to the distinguished Senator from
Michigan, when he lectured me so effectively a moment ago, but I
should like to ask at this juncture just what you mean by political
influence. Do you think it has been exerted on the Federal Reserve
Board heretofore, and if so, when? Have you information?
Senator COTTZENS. I think I can answer that one—when you were
Secretary of the Treasury.
Senator MCADOO. YOU could not, because you did not know anything about it at that time.
Senator COTTZENS. Well, we can read history, you know.
Senator MCADOO. YOU do not mean it is history, do you ?
Senator COTJZENS. Oh, yes. You made an historical speech on the
floor of the Senate. T h a t will go down in history.
Senator MCADOO. I hope so. Let us hope so. I t had nothing, however, to do with the consideration of this question.
Senator COTTZENS. Oh, yes; it has to do with monetary policies.
I t is very important.
Senator GLASS. I should like to compose the austerities of this
committee.




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BANKING ACT OF 1 9 3 5

Senator COT/ZENS. Well, I must confess that I am terribly disturbed when two distinguished former Secretaries of the Treasury
take opposite positions.
Senator MCADOO. Well, we have not taken any opposite positions.
W e are asking for information.
Senator COTJZENS. I observed the Senator from Virginia did not
vote for the printing press money the other day.
Senator GLASS. Gentlemen, gentlemen.
Governor ECCLES. I don't believe I can answer that question as to
when political influence may have been exercised, Senator.
Senator MCADOO. YOU referred to it, and I wanted to learn when
t h a t had been effective.
I n connection with this printing-press money that seems to disturb
the Senator from Michigan so much, I remember hearing my distinguished colleague, the Senator from Virginia, present upon the
floor of the Senate a bill and ask what it was. H e did not so express it, but the others knew that it represented at the moment printing-press money and nothing else. I t is a felony to take the money
and convert it into gold.
Senator GLASS. Well, the money that we once had was not printing-press money. I t took it away from those who had it.
Senator MCADOO. That is what I mean.
Senator GLASS. I t took it away from those who had it. I t has as
much right to take your shirt as to take your gold.
Senator MOADOO. I am very thankful mine was not taken. I do
not know how I could replace it.
Senator GLASS. If I had more shirts than gold, I would say that.
Senator MCADOO. I may say that I think I understand the goodnatured observations of my good friend from Michigan. I know the
spirit in which he made them.
Governor ECCLES (continuing statement) : Increased regional autonomy.—An important feature of the proposed legislation is t h a t
it clarifies and increases regional autonomy of the Reserve banks in
matters of local concern. This is contrary to the contention of
critics who allege that the bill would abolish local autonomy and
inaugurate completely centralized control over the Federal Reserve
System. In its proposals along this line the bill follows the principles laid down in 1913 by the House Banking and Currency Committee in its report on the original Federal Reserve legislation, in
which it was stated:
Local control of banking, local application of resources to necessities, combined with Federal supervision, and limited by Federal authority to compel
the joint application of bank resources to the relief of dangerous or stringent
conditions in any locality are the characteristic features of the plan as now
put forward.

Recognition of the necessity of striking the proper balance between
national and regional considerations in the organization and operation of the Federal Reserve Systenij therefore, dates back to its
origin. The principle is that responsibility for policies of national
scope and purpose shall be lodged in the Federal Reserve Board and
t h a t actual banking operations and all activities or policies of local
concern shall rest with individual Reserve banks, subject only to the
necessary degree of coordination.




BANKING ACT OF 19 3 5

293

The proposed bill, as already stated, strengthens the regional
autonomy of the Reserve banks. A t present the Reserve Board
appoints three directors of each Federal Reserve bank, including
the chairman. Under this bill the Board will appoint at the most
two and possibly only one director. The governor, who will be a
class C director, and the vice-governor, who may also be a class C
director, will be appointed by the local directors, subject only to
the Federal Reserve Board's approval. I n the bill as introduced,
annual approval by the Board is prescribed. I believe that one
approval of the governor for the period of his 3-year term as a
class C director would be sufficient, and I consequently recommend
such a change in the bill.
Senator COTIZENS. May I ask at that point just why the Federal
Reserve Board wants the power to approve the appointment of these
directors ?
Senator MOADOO. YOU mean the governor?
Senator COTTZENS. Yes.
Governor ECCLES. The Board now appoints the chairman, who is
the—well, I think this next statement answers your question. As
I go on here I think t h a t it explains the advisability of combining the offices of chairman and governor. (Continuing statement:)
A t the present time the Reserve agent is by law the Board's
representative at the Reserve bank
Senator MCADOO. H e is the chairman as well as the agent?
Governor ECCLES. T h a t is right [Continuing statement:]
And maintains an office of the Reserve Board on the premises of
the Reserve bank.
Now, I do not know whether that answers your question or not.
Senator COTJZENS. I n other words, you are just substituting a
governor for an agent and it is your opinion because the appointment of the agent must be approved you would approve the appointment of the governor?
Governor ECCLES. The Board appoints the agent. We appoint the
agent and hig entire staff. We believe that it would be a better
organization, that it would make for better coordination to have one
head of the bank, by combining the office of the governor and the
agent, and it is felt that inasmuch as the Board no longer would
appoint the chairman who, as I understand it, was expected to be
the executive head of the bank, that they should have the approval
of the governor and chairman at least each 3 years, when the term
as a class C director would expire. I n other words, a person occupying that position should be a person agreeable both to the local board
and the Board here for the purpose of having proper coordination
and cooperation.
Senator MCADOO. Then what you do is this—pardon me.
Senator COTTZENS. I was going to say, have you any figures as to
the number of employees each 1 of these 12 Federal banks have ?
Governor ECCLES. Yes. I do not have them in mind. I think we
have a total of something like 12,000, as I recall the number.
Senator COTJZENS. Divided among 12 banks?
Governor ECCLES. Yes.

Senator
bank?

COTJZENS.




Will you furnish the number that is in each

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BANKING ACT OF 1 9 3 5

Governor ECCLES. Yes, s i r ; I shall furnish you the number of people in both the agents' division and the governors' division.
Senator GLASS. Was that included in your testimony before the
House ?
Governor ECCLES. N O , it was not, Senator; it was not requested.
Senator TOWNSEND. Will you also furnish the number that will be
in the new set-up ?
Governor ECCLES. There will not be any more. I t is impossible to
furnish what that would be.
Senator GLASS. I t will not be any more? There will just be one
less?
Governor ECCLES. There should be more than one less.
Senator MCADOO. I n order to make perfectly clear what j^ou are
detailing there, I want to know if 1 understand you correctly; under
the present law, nine directors are chosen for each Federal Reserve
bank ?
Governor ECCLES. That is right.
Senator MCADOO. Divided into classes. Now, of the 9, 3 are
class C directors, and they are appointed by the Government; that
is, by the Federal Reserve Board?
Governor ECCLES. Yes.

Senator MCADOO. Acting for the Government; and one of those
is now designated as chairman of the Board and Federal Reserve
agent ?
Governor ECCLES. Yes.

Senator MCADOO. And he has certain functions to perform; he
has to attend the meeting of the Board, and his business is to see to
the issue of currency and to provide for the necessary collateral to
protect that currency issue, as well as perform certain other functions ?
Governor ECCLES. Yes.

Senator MCADOO. NOW, the nine members of the Board select the
governor, and since the banks control six of the directors, the banks,
or the stockholders, I mean, who own the stock, it being owned by
the bank that selected the governor, and he is the chief executive of
the bank and directs its affairs. Your proposal is to merge the chairman of the Board and the Federal Reserve agent and the governor
into one, is it not ?
Governor ECCLES. That is right.
Senator MCADOO. And you require the selection of one of the class
C directors as a governor?
Governor ECCLES. NO ; whoever is selected as governor by the local
board and approved by the Board will be a class C director.
Senator MCADOO. Well, then, the Government has two directors
under your plan, only?
Governor ECCLES. That is right.
Senator MCADOO. Because you are caused to accept, then, the
nominee of the bank, or the stockholders ?
Senator GLASS. Or disapprove.
Senator MCADOO. Or disapprove.
Governor ECCLES. Yes.

Senator MCADOO. One or the other. B u t you can never have the
third class C director a governor unless the Board approves it?
Governor ECCLES. That is right.



BANKING ACT OF 1 9 3 5

295

Senator MCADOO. The effect of it is really to put the selection of
the governor in the control of the Board and, really, that is the
effect of it, is it not ?
Governor ECCLES. Well, no; we cannot designate the governor
at all.
Senator MCADOO. "Well, you can continue to disapprove until you
get one whom you are willing to accept, which is in effect the same
thing.
Senator COTJZENS. Well, hardly, because we have that same thing
in the confirmation of an appointee by the President. We cannot
select him, but we can confirm or disapprove. All we can do is to
approve or disapprove.
Senator GLASS. Yes; but we always confirm.
Senator MCADOO. Yes; as a rule we do.
Governor ECCLES. Well, possibly.
Senator MCADOO. NOW, you think that by the consolidation of these
two offices into one, and having the Board practically select the
governor, that you get better administration ?
Governor ECCLES. I do.

Senator MCADOO. Can you give us particular reasons for that as a
matter of organization?
Governor ECCLES. That is explained here.
Senator MCADOO. All right, go ahead.
Governor ECCLES. I am quite sure if I could read this it would
answer a good many questions that are being asked.
Senator GLASS. GO ahead, sir.
Governor ECCLES (continuing statement) : At the present time the
Reserve agent is by law the Board's representative at the Reserve
bank, and maintains an office of the Reserve Board on the premises
of the Reserve bank. Not only is he himself directly appointed by
the Board, but the appointment of his entire staff, including bank
relations and economic services, is subject to approval by the Board.
Under the proposed bill the agent's department would be abolished
and its functions and personnel brought directly under the governors of the Reserve banks. The proposed change concerning eligibility requirements for discount and the proposed elimination of the
collateral requirements for Federal Reserve notes will likewise increase local discretion and autonomy. The Reserve banks will under
these provisions have increased responsibility in dealing with member banks. The power of the Federal Reserve Board to delegate
some of its functions to its representatives will also enable the Board
to authorize Reserve banks to handle many administrative matters,
which under present law must be passed upon by the Federal Reserve Board as a whole. These matters may include passing on
applications for membership, granting of voting permits for holding
companies, and many others.
I t is apparent that the present proposals will not destroy the regional character of the system, but, on the contrary, will carry to
its logical conclusion the principles which were in the mind of President Wilson and of proponents of the original act, namely, the
granting of wide discretion and autonomy to the Reserve banks in
local matters and the concentration in the Reserve Board of authority
over national monetary policies.




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BANKING ACT OP 19 35

Senator GLASS. But there was another thing in the mind of President Wilson and of the proponents of the Reserve Act, and it is reflected textually in the statute itself, and t h a t is that the facilities
of the Federal Reserve System should not be used for speculative
purposes. The Board is authorized to make its own definitions of
eligible paper, but it is distinctly prohibited from including in its
definition speculative investment transactions.
Now, is it not possible that under your proposed alteration of the
law member banks might engage in speculation to their heart's
content ?
Governor ECCLES. I do not think so. I think that
Senator GLASS. Evidently the counsel to the Board do not think
that the chairman knows an}Tthing about the Federal Reserve Act,
but the chairman thinks he does.
Governor ECCLES. This proposed bill would not change the law
with reference to the member banks' loaning activities, except by
liberalizing the real-estate loan provisions.
Senator GLASS. Yet you propose to permit them to loan on any
sound asset and the brokers testified before our committee that the
soundest asset upon which loans were ever made were brokers' loans.
Governor ECCLES. We do not permit the member banks to loan
upon sound assets. They are already permitted to loan on sound
assets. The proposal is to permit the Reserve banks to lend to the
member banks on sound assets.
Senator GLASS. That opens the facilities of the Federal Reserve
banks for speculative investments.
Governor ECCLES. Sound assets do not necessarily mean speculative investments. If banks must confine all their lending to what
is known as " commercial paper ", with the present business structure, with the structure of business for a number of years, there will
not be enough commercial credits or commercial lending to go
around.
Senator GLASS. So, if we keep on spending, there will not be any.
Governor ECCLES. The total amount of commercial paper in the
banking system today which is considered to be eligible by the member banks is less than 8 percent of their total loans and investments.
Senator GLASS. Well, is that not because of this unprecedented
depression in business ?
Governor ECCLES. I n 1929, Senator, the total was only between 12
and 13 percent.
Senator GLASS. After the crash ?
Governor ECCLES. N O , before the crash; and it has declined from
a little over 4 billions to approximately 2 billions.
Senator GLASS. H O W many banks in the system are without eligible
paper for rediscount?
Governor ECCLES. I could not answer that. I would say that most
of the banks would have some eligible paper. I t would vary. Most
of the eligible paper, however, is held by the larger banks because
the commercial credit seeks the lowest money market. Particularly
is that true with large concerns that are able to sell their paper in
the market. So that the larger banks would have the greater amount
of what would be known as " strictly commercial" or " eligible"
paper. The rates on paper of that sort at the present time are
extremely low.



BANKING ACT OF 1 9 3 5

297

Senator MCADOO. Governor, could you have put in the record
here, later, as a supplement to your statement, the testimony you are
now giving, some figures to show for a few consecutive years before
and since the panic of 1929 just what percentage the eligible paper
is of loanable assets that the banks held in the various Federal
Reserve districts ?
Governor ECCLES. By districts, you mean?
Senator GLASS. A t this time?
Senator MCADOO. N O ; I say for a few years preceding 1929, and
a few years following.
Governor ECCLES. The total was between 12 and 13 percent.
Senator MCADOO. Of loanable assets?
Governor ECCLES. Yes.

Senator MCADOO. What of the deposits, related to deposits?
Governor ECCLES. T h a t would be a different figure. I think the
total is 12 to 13 percent of the loans and investments. Now, it would
make a lower percentage.
Senator MCADOO. Of course.
Governor ECCLES. Based on other resources. Now, as t o what the
figures are by districts. I couldn't say. W e can get those figures.
Senator MCADOO. That information is available ?
Governor ECCLES. Yes.

Senator BTJLKLET. Governor, you do not contend that there is any
shortage of eligible paper in the Federal Reserve banks today, do
you?
Governor ECCLES. N O .

Senator

BTLKLEY.

Together with Government bonds?

Governor ECCLES. N O .

Senator MCADOO. The point I Avanted brought out is that you are
proposing here the broadening of requirements for eligible paper in
the Reserve banks.
Governor ECCLES. Yes, sir.

Senator MCADOO. And these figures would be of value, in enabling
us to judge whether or not such an enlargement would be of value.
Senator GLASS. And expunging the requirement t h a t they shall
relate themselves specifically to commerce, industry and agriculture.
Senator MCADOO. Well, I would not expunge that.
Senator GLASS. But I say the proposal is to expunge.
Senator MCADOO. The proposal here is. but I am preserving the law
in that respect as it was.
Senator GLASS. At least, I think that is the present provision.
Maybe counsel for the Federal Reserve Board can tell us better than I .
Governor ECCLES. I will proceed, if I may.
Senator MCADOO. Mr. Chairman, may I ask, please, is it your intention to continue the hearing? I myself am obliged to be at the
session.
Senator GLASS. Well, I am content to continue.
Very well, go ahead.
Senator MCADOO. I will have to ask you to excuse me.
Governor ECCLES [continuing statement] :
Summary of reasons for proposed changes.—Perhaps the best way
to explain the reasons for the changes proposed in this bill is t o ask
you to consider what kind of a system would be devised, if a plan




298

BANKING ACT OF 1 9 3 5

for such a system were to be formulated at the present time. I t
would be considered desirable that all banks carrying deposits subject to check be members of the system. I t would also be deemed
desirable that the banks be supervised, but in a country the size of
ours it would be undesirable to centralize in Washington all operations pertaining to individual banks.
Senator GLASS. The House does not agree with you on that, does it?
Governor ECCLES. NO ; they do not.
Senator COTJZENS. Neither do I.
Governor ECCLES (continuing statement). W h a t would be done is
to provide for regional Keserve banks with a large degree of local
autonomy in dealing with their local member banks. I t is equally
clear that national monetary policies would have to be under public,
not private or banker, control. Such policies would be placed under
a body appointed by the President and confirmed by the Senate.
Provision would be made to insure as far as possible t h a t the controlling body be composed of the best talent available and that it be
in a position to resist pressure to pursue policies for undesirable purposes. To this end both authority and responsibility would be concentrated in that body; its members would be made financially independent ; high qualifications for membership and an objective toward
which policy should be directed would be laid down. That body
would be entrusted with sufficiently effective instruments of policy to
make the system responsive to changing conditions, and would be
given discretion in the regulation of bank operations.
The system, which I have ventured to suggest would be established if a new plan were now being formulated, differs little from
the Federal Keserve System with the changes proposed in the banking bill of 1935. We propose to facilitate entrance of nonmember
banks into the Federal Reserve System. We propose to increase the
regional autonomy of the Reserve banks in matters pertaining to
local credit administration. W e propose to increase the authority
and responsibility of the Federal Eeserve Board in matters pertaining to national monetary policies; to lay down new qualifications
for future Federal Reserve Board members; to grant to future
members pensions and higher salaries. I n these ways we hope to
make a position on the Board more attractive to outstanding men.
We suggest a specific objective of monetary policy. We propose
that the system's organization be made more amenable to Federal
Reserve Board policy; that the banking system be made more responsive by making it safe for the banks to meet the changing nature
of the community's requirements for loans, and by liberalizing the
provisions in respect to real-estate loans; and, finally, we propose
the removal of various impediments to effective policy, such as collateral requirements for notes.
Proposed for a commission.—Opponents
of this legislation have
proposed the creation of a commission of experts which would review the whole field of banking legislation at leisure and would then
make a report to serve as a basis for reform.
Senator GLASS. Would not you like to modify that by saying
" some of the opponents " ?
Governor ECCLES. I am willing.
Senator GLASS. Not all of them, by any means.




BANKING ACT OP 1 9 3 5

299

Governor ECCLES. I am willing to modify it to that extent. I
think that is more nearly correct, Senator. [^Continuing statement:]
A proposal for a commission is not infrequently made as a means
of gaining time in order better to organize opposition to undesired
legislation. I t is not infrequently advocated by persons who are
opposed to a measure and think that the first and easiest step is to
prevent its immediate passage by proposing a commission for the
study of the subject.
I n my opinion the public interest will be best served through the
adoption of banking measures in the order of their urgency and in
accordance with our capacity to formulate concrete conclusions. The
Banking Act of 1933 was such a measure. I t did not cover the whole
field of our banking problems, but dealt primarily with the specific
problems concerning the speculative use of credit and the relations
of investments to commercial banking on the basis of our experience
in the years immediately preceding the depression. I t is gratifying
to have this law on our statute books and to feel that there are adequate means at our disposal through that act and the Securities
Exchange Act to prevent the occurrence of another speculative orgy
like that of 1929.
Similarly the provisions of the present bill are based on the actual
experience of the Federal Reserve System for the past 20 years and
particularly on its experience during this depression. They were
prepared in the light of past events and in consultation with persons
who have worked in the System for many years. Statements that
have been made to the effect that the bill was hastily drafted without
competent advice do not correspond to the facts. The proposals in
this bill are simple and concrete; without modifying the essential
nature of the Federal Reserve System, they strengthen its power to
meet future emergencies, and increase the ability of member banks to
facilitate recovery.
The argument that an elaborate study should be made before any
banking legislation is enacted ignores the fact that committees of
both Houses of Congress have been studying the subject for years and
that there is a vast volume of material available in the hearings and
reports of these committees. I t also ignores the fact that the Federal
Reserve System, commercial bankers, and other agencies have been
almost continuously studying the problem in recent years.
I t is my conviction that the measures proposed in this bill would
not be greatly modified by additional years of study, and that in the
meantime the banking system would not be in so advantageous a
position for contributing its share toward recovery, and the Federal
Reserve System would not be well equipped to cope with inflation
if it should develop.
Differences of opinion on the proposals contained in title I I of
this bill are not the kind that can be resolved by study. They represent fundamental differences of approach to economic problems.
Proponents of this bill are irrevocably convinced of the necessity
of public control of national monetary and credit policies. Opponents believe in a minimum of Government supervision and represent
two different points of view: One believing that monetary control
should be left with the private banks that own the Federal Reserve
System; the other holding the opinion that no control at all is neces-




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BANKING ACT OP

1935

sary, that the free play of natural economic forces will result in the
monetary system functioning for the public welfare. These divergent points of view cannot be reconciled by argument, nor can they
be clarified by further study. They call for a decision by the Congress of the United States.
Summary of provisions.—A brief discussion of the provisions of the.
bill, section by section, may be appropriate at this point and may be
helpful in indicating what was intended to be accomplished by the
proposals.
Section 201 proposes that the offices of governor and chairman of
the Federal Reserve banks be combined.
This proposal is in recognition of the situation that has developed
in the banks. I t gives the governors of the Reserve banks a status
in the law and combines their office with t h a t of the chairmen of the
boards of directors. I t is, of course, essential that the holders of
these combined offices be approved by the Federal Reserve Board.
I n this proposal there is no encroachment on the autonomy of
individual Reserve banks. I t merely reestablishes the original plan
of the Federal Reserve Act that the Federal Reserve Board, which
has responsibility for national policies and for general supervision
over the Reserve banks, shall be a party to the selection of the active
heads of the 12 Reserve banks. This change will work toward
smoother cooperation between the Board and the banks and will
establish within the banks a greater unity of administrative control
than now exists. I t will also result in considerable saving through
the elimination of one of the two highest officers in each Federal
Reserve bank.
Section 201 also provides that directors of Federal Reserve banks
shall not serve more than 6 consecutive years. This is proposed to
avoid the crystallization in the boards of directors of the influence
of any one individual or groups of individuals. T h a t such a policy
is desirable is evidenced by the fact that it has already been adopted
in some of the Federal Reserve districts.
Section 202 would give the Federal Reserve Board authority to
waive capital requirements for membership for insured nonmember
banks joining the System prior to J u l y 1, 1937, when all insured
nonmember banks are required by law to become members of the
System. This proposal is for the purpose of making it possible for
numerous nonmember banks with small capital to join the Federal
Reserve System and thus not lose their privilege of belonging to the
Federal Deposit Insurance Corporation. I n providing that insured
banks must become members of the Federal Reserve System by J u l y
1, 1937, the Banking Act of 1933 took an important step in the
direction of unified banking which is universally admitted to be
desirable.
Senator GLASS. Well, it is not universally admitted, because the
House has vitiated the whole thing.
Senator TOWNSEND. Have you a record of how many State banks
and nonmember banks have come into the System since t h a t time ?
Governor ECCLES. N O . I could get t h a t for you. I do not have
it in my mind, but I can get it for you.
Senator GLASS. What do you think would happen to the insurance
fund if the action of the House should be confirmed by the Senate ?




BANKING

ACT

OF

19 3 5

301

Governor ECCLES. Of course, it would depend to what extent power
to admit banks to the insurance fund was given to the Federal Deposit Insurance Corporation and what powers they have of examination and expulsion of members from the fund and how well they
administer the powers that are given them.
Senator TOWNSEND. W h a t powers are given in the House act?
Governor ECCLES. I do not recall just how the act was finally
passed. As I understand it, as I recall, the powers that were asked
by the Federal Deposit Insurance Corporation were not all given to
them, and I think it is very essential that they certainly be g ven
adequate power to determine what banks shall be admitted to n.i mbership, and also power over examinations, and power to expel for
cause. I n connection with this same matter I have something to say
here about it. [Continuing statement:]
This provision of the present bill is designed to facilitate the process
of unification. I wish, however, to recommend a modification of the
section in the bill as it was introduced which I recommended to the
House; that is with reference to the phraseology of the provision providing for the admission of nonmember banks, giving the Board
certain powers to waive requirements. I shall include this proposed
modification with others that I wish to recommend.
I should like to call attention to the fact that the bill as reported
by the Banking and Currency Committee of the House eliminated
from this proposal the limitation that it shall continue in fore*
only up to July 1, 1937. The House committee also made a change
in title I of this bill and amended the Banking Act of 1933 to
eliminate the requirement that all banks that are members of the
Federal Deposit Insurance Corporation shall become members of
the Federal Reserve System by July 1937. This change appears
to me undesirable. I t is generally agreed that unification of banking under national supervision is desirable and that the conflict
of jurisdiction and authority over banks which has prevailed has
been a source of weakness in the banking system. There ought to
be national control of charters granted to banks, and there ought
not to be unfair competition between member and nonmember banks
in regard to interest on deposits and other matters. I n case, for
example, the Federal Reserve System should find it necessary to raise
reserve requirements, as it has authority to do under the law, the
fact t h a t a substantial group of banks would not be affected would
be a distinct limitation on the effectiveness of the measure.
F o r these reasons, it would be in the public interest to bring about
as rapidly as possible a unification of the banking system. At the
same time it is recognized that there are many small banks that
would find it difficult to join the Federal Reserve System even under
the liberalized provisions proposed in this bill. F o r one thing,
many of these small banks derive a considerable proportion of their
income from exchange charges which they would have to abandon
if they joined the Federal Reserve System. I t has occurred to me,
therefore, that the situation might be met by a proposal—and it is a
suggested compromise proposal—that all insured banks with deposits
of $500,000 or more shall join the Federal Reserve System within
a year after they become members of the Deposit Insurance Corporation. That would apply to new banks or within a year after
129688—35—PT 1




20

302

BANKING ACT OP

1935

their deposits reach $500,000 or more. Banks of this size do not
have to depend on exchange charges for their earnings and should
be in a position to qualify for membership in the Federal Reserve
System in other respects. Under this proposal smaller banks would
have the option of joining the Federal Reserve System if they
wished. I should like, however, to provide that any new bank
chartered after the passage of the banking bill of 1935 be required
to belong to the Federal Reserve System, if it joined the Federal
Deposit Insurance Corporation.
Senator GLASS. YOU, of course, know that the exchange question
has been one of the most bitterly controverted problems with which we
have had to deal. I t has entailed a considerable amount of litigation, it has gone through court stages u p to the Supreme Court, it
has saved, it is computed, the businss interests of the country, t h a t is,
the existing law has, approximately $250,000,000 a year. The existing
law, as you know, provides that these banks may charge the actual
cost of exchange transactions, but nobody has ever been able to find
an actuary or in accountant who could estimate the positively inappreciable loss to the banks. So that banks t h a t want to get exchange
want to get something for nothing.
Governor ECCLES. Continuing on this question [continuing statement] :
I am informed that there are 5,644 State nonmember banks belonging to the Insurance Corporation whose deposits are $500,000 and
under, and 2,038 whose deposits are over $500,000, so t h a t roughly
three-fourths of the insured nonmember banks would not be obliged
to joint the Federal Reserve System, if my suggestions were adopted,
and only one-fourth, representing the larger banks, would be required to join. This would not deprive the small banks of the earnings from exchange charges. A t the same time it would not seriously
interfere with the system's monetary policies, because the banks with
deposits of over $500,000, which would have to join the system, hold
77 percent of the total deposits of all insured nonmember banks.
This would mean that although in numbers less than two-thirds
of all the banks of the country would be members of the System, if
banks with deposits under $500,000 were left out, t h a t we would have
more than 95 percent of the deposits of the banking system in member
banks.
Another important advantage of this proposal, as compared with
the House proposal, would be that the larger banks that are now
members of the Federal Reserve System would not be free to retain
the benefits of deposit insurance and at the same time to leave
the system whenever it suited them. T h a t is a matter of vital importance, because the right of member banks to free themselves
from regulation by the System by giving up membership might at
any time limit the System's ability to make its monetary and credit
policy effective.
Section 203 deals with qualifications for membership on the
Board
Senator GLASS. Before you get to that, Governor, and adverting
to the question of the small banks, do you believe in branch banking?
Governor ECCLES. I do.

Senator

GLASS.




State-wide?

BANKING ACT OP 1 9 3 5

303

Governor ECCLES. Either state-wide or regional, trade area. I
believe in the extension of limited branch banking.
Senator GLASS. D O you think that would in a large measure solve
the problem of the small banks?
Governor ECCLES. I do.

Senator

TOWNSEND. I S

that provided for in this bill ?

Governor ECCLES. I t is not.

Senator TOWNSEND. Would you favor putting it in the bill?
Governor ECCLES. Not at the present time. I am expressing, of
course, a personal opinion, and I recognize how controversial the
question is, the question of State's rights that arises in connection with
giving national banks the right to establish branches in States where
branch banking is not permitted. The problem raises an issue which
I think sooner or later must be met.
Senator GLASS. Does that mean to suggest that you do not mind
controverting the judgment of the Senate but you do not like to
undertake to controvert the judgment of the House?
Governor ECCLES. N o ; I would not say that. I do not want to
consider too many controversial questions. I t seems to me that there
have already been introduced sufficient, possibly, for one
Senator GLASS. I s not t h a t a vital problem ?
Governor ECCLES. I t is a vital problem, and it is a problem that
must be met. I personally have been, in favor of the unification of
banking and branch banking and have recognized the need for a good
number of years.
Senator GLASS. "Well, we have been studying that problem, to my
personal knowledge, for 35 years. Why need we study it any further? W h y not act?
Governor ECCLES. Well, of course, there has been progress in the
development of branch banking in the last few years. Even the
States have taken some initiative and leadership; and the bill that
was passed in 1933 permitting national banks t o establish branches
in those States where States permitted it was a step in the right direction. Progress is being made, I think, in that regard.
Senator GLASS. Yes; but you do not want any more made right
now; is that your idea?
Governor ECCLES. Well, I can
Senator GLASS. YOU want it made, but you do not want a controversy ?
Governor ECCLES. I , personally, am in favor of it, because I believe
it is constructive. I think it would serve the public interest. I think
it would strengthen the banking system.
Senator COTJZENS. I think you would find a very considerable
diversity of opinion on that.
Governor ECCLES. I recognize that. I think that is one reason it
may be well to consider it at some other time. I feel, however, that
branch banking should be limited in its scope; and I also feel that
where there are communities, small communities, that have banking
service, t h a t it should not be
Senator GLASS. T h a t is provided in existing law.
Governor ECCLES. Yes. That a bank should not be permitted to
go in and establish a bank and drive out an existing bank that is
already there and established.




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BANKING ACT OF 1 9 3 5

Senator GLASS. Your ideas are more liberal than mine. You want
it regional, and I think it ought to be confined to the States.
Governor ECCLES. Well, I have thought of it in connection with
Federal Reserve district branch areas, from the standpoint of administration, because the banks carry their reserves, and bank examinations
are conducted from that area, and it is a logical business unit, it
seems to me.
Senator GLASS. I do not disagree there, but right at that point I
join you in not wanting too much controversy.
Govei-.or ECCLES. I think it would be
Senator GLASS. I want to get rid of this talk about States' rights.
The States have no rights left, so far as that is concerned^ but I
would like to get rid of that much of it.
Senator COTTZENS. May I ask, leaving aside for the moment the
public benefit, if by having a unified banking system—can you, in
a brief way, state to me the advantages of an independent bank,
well financed, becoming a member of the Federal Reserve System?
Governor ECCLES. YOU mean the advantage to the bank?
Senator COTTZENS. Yes.
Governor ECCLES. Or an advantage to the public?
Senator COTTZENS. I said, leaving aside the public advantage of a
unified banking system, and considering the question of just what
advantages a bank may have in becoming a member of the Federal
Reserve System.
Governor ECCLES. Why, I think that the rediscount privileges, the
opportunity to borrow funds, and the clearing facilities that it gets
through the Reserve System are very important elements. The safekeeping service that it gets
Senator COTTZENS. Safe-keeping service of what?
Governor ECCLES. Securities. I t is my experience in the banking
business; from the very beginning of the organization of the Federal Reserve, I have always felt that it was to the interest of the
bank to be a member of the Reserve System.
Senator COUZENS. I know that is the general conclusion, but I was
trying to get the details of why you thought it was better.
Governor ECCLES. There is a certain amount of public confidence
as a result of membership, and that is given largely through the
access to Federal Reserve facilities.
Senator COTTZENS. I think you had better check up on that answer
and see how many banks there are with signs on the window, " Federal Reserve System", that closed and have not paid out their
depositors.
Governor ECCLES. There is no question that there were closed banks
in all classes, national member banks, State member and State nonmember banks, but the figures will show t h a t the State nonmember
bank mortality and loss of deposits far exceeded those of the banks in
the System. The shrinkage of deposits and the bank mortality were
very much greater than for the member banks.
Senator COTTZENS. Have you ever heard of the criticism t h a t exists
among the ordinary depositors of the fact that they felt t h a t when
they saw " Federal " on these windows t h a t they felt t h a t they were
guaranteed and taken care of by the Federal Government?
Governor ECCLES. I haven't heard that.




BANKING ACT OP 19 35

Senator

COTJZENS.

305

Never heard that?

Governor ECCLES. N O .

Senator COTJZENS. I have had a number of letters to that effect.
Senator TOWNSEND. You have heard of criticism of the names of
banks, for example, the United States Bank?
Governor ECCLES. Y e s ; I have; I have heard that criticism, but
never of the Federal Eeserve System.
Senator TOWNSEND. Well, they were a member of the Federal Reserve System.
Governor ECCLES. Yes; but I have not heard of cases where people
felt, simply because a bank was a member of the Federal Eeserve
System, that it was a Government-owned bank. I have heard of cases
where people thought that a first national bank was Government
owned; but those cases, I think, are quite remote. I will continue.
Senator GLASS. Well, is it not a very vital consideration, in banks
which are not even members of the Federal Eeserve System, that we
no longer have currency panics in this country ?
Governor ECCLES. Well
Senator GLASS. I n other words, history shows that almost decennially we have had in this country, or we did have in this country
prior to the enactment of the Federal Eeserve System, currency
panics when banks would be compelled to close; banks with ample
assets could not get a dollar, and they would have to issue clearinghouse certificates instead of currency. That has never occurred since
the adoption of the Federal Eeserve System, and the Federal Eeserve
System, as it seems to me, is an insurance against its ever occurring
again.
Governor ECCLES. T h a t is correct. As long as a bank is a member
of the Eeserve System and has reserves, that bank is solvent; or so
long as a member bank has assets on which it can borrow from the
Eeserve System, as far as that bank is concerned and its depositors,
they are always able to get currency. There is an elastic currency
created as a result of the Federal Eeserve System, because they can
create currency based upon the call for currency by their members,
so long as those members have reserves with the Eeserve System.
Senator GLASS. Yes.

Senator TOWNSEND. A n d there is no urgent demand for printing
more currency ?
Governor ECCLES. N O ; not at all. You couldn't keep it out if you
printed it. You just could not get it out.
Senator COTJZENS. Well, if you put the Patman money out, that
will not mean anything, will it?
Governor ECCLES. I t will not mean that you will increase the
amount of money in circulation, because the Patman money would
displace some of the existing currency, but the total amount of currency that will be in circulation as a result of paying the $2,000,000,000 bonus would not be increased any more than by putting out
$2,000,000,000 of Government bonds.
Senator GLASS. I n other words, the Patman currency would signify just an easy way to pay the Government's indebtedness by
running the printing presses, but the possibility is that the Bureau of
Engraving and Printing would be kept busy hereafter doing the same
thing?
Senator TOWNSEND. Because it is a payment of the debt.




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BANKING ACT OF 1 9 3 5

Governor ECCLES. Mechanically the Government can create money
by the issuance of currency and by using t h a t currency to pay its
debts or to take care of appropriations that Congress makes, or it can
finance the deficits which such appropriations create through a sale
of its obligations, Government bonds, in the market. Now, in either
case, whether it is through a bond issue or through a currency issue,
you increase the means of payment by that amount. The difference
Senator GLASS. And if you keep it up, you make your currency
worthless.
Governor ECCLES. Yes; there is no question about that.
Senator GLASS. I have got right here in my pocket now a practical
illustration of that. I have got a hundred-million-mark note here
that was once worth—what ?—$46,000; and now it is not worth carrying around in my pocketbook except to exhibit it as a curiosity.
Governor ECOLES. Of course, Congress would have to appropriate
the funds that would create the deficit.
Senator GLASS. There would not be any difficulty about that. We
have not experienced any so far.
Senator TOWNSEND. Well, of course, by issuing that money we
would have a certain degree of inflation, would we not?
Governor ECCLES. NO more inflation than by issuing the same
amount of Government bonds to take care of a deficit, from a purely
mechanical standpoint. From a psychological standpoint, there is
always a possibility, when financing is done by currency issues rather
than bond issues, of creating a certain fear psychology that would
cause a rapid velocity of funds, which would tend to bring about a
degree of inflation; and, if kept up long enough, it would decrease
the value of money roughly according to the total mediums of payment that was created.
Senator GLASS. When the money was on a sound money basis, there
was a vast deal of difference between bond issues and the issuance of
currency. One is a demand obligation, and the other usually has a
long time in which to mature, and the practice with respect to bonds
has always been a refunding practice. Whereas the issuance of an
immense amount of demand currency, if we were on a sound money
basis, would simply wipe out the entire gold reserve.
Senator TOWNSEND. Well, as a matter of fact, the bonds that we
issue without the protection of a sinking fund, in providing for the
interest charge, is inflation, is it not ?
Governor ECCLES. T O the extent that they create a deficit.
Senator TOWNSEND. That is right.
Governor ECCLES. But no more of an inflation than the same
amount of credit expansion by the banking system. I n other words,
a deficit financed by Government bond issues of $4,000,000,000 will
add, if those bonds are taken by the banking system, $4,000,000,000
of deposits to the banking system. The deposits will first go to the
Government, the Government spends the funds, and they come to the
banks as deposits of individuals and corporations.
Senator GLASS. Yes; but if the bonds are taken by individual
investors ?
Governor ECCLES. I n that case it increases velocity without changing the volume of deposits. I n other words, it makes use of existing
deposits; the depositors in a bank draw those deposits out and buy




BANKING ACT OF

1935

307

Government bonds. The Government spends that money, and the
deposit goes right back in the bank in the account of somebody else,
so that the person or corporation that has bought the bond has simply
changed its money for bonds. I t does not mean a change in the
amount of money, and from the standpoint of money it is not
inflationary.
To the extent that banks buy the bonds, it has the same effect as
extending credit and is inflationary.
Senator TOWNSEXD. W h a t percentage of the bonds now are being
taken by the banks ?
Governor ECCLES. I think it is just a rough guess. About 44 percent of the Government obligations outstanding today are held by
the Reserve and member banks. I think that the proportion that is
currently taken by the banks today would run larger than that. I
think that may run as high as 60 percent. Of course, you are speaking of new issues, rather than refunding?
Senator TOWN SEND. Well, I was speaking of both, really.
Senator GLASS. Well, go ahead.
Senator COTJZENS. There is one question I want to ask. There is a
famous columnist that keeps asking in his column what is the difference between an issue of a Government note—demand note, which
is simply a promise to pay back—and a Government bond bearing
interest, with a promise to pay at a specific time? He keeps asking
that question, and I have never happened to have seen the answer,
and so I would like an expert to answer it.
Senator GLASS. I am not an expert, but I gave the answer to the
question as to the difference between a demand obligation and a
Government bond a few moments ago. The whole history of the
financing of the Nation shows that the time obligation is usually
refunded, whereas the demand obligation, if we are on a soundmoney basis
Senator COTJZENS. Well, we are not on a sound-money basis, and
I want him to answer it under the situation as it now exists, not if
we were on a sound-money basis. I do not want any " ifs " in it at
all. But what is the difference between a Government issue of a
note without interest and a note with interest?
Governor ECCLES. I will be very glad to give you my view, my
interpretation, of the difference. The Government issues its bonds.
The bonds have a definite maturity date, and they bear a definite,
fixed rate of interest. And the banks buy those bonds.
Senator GLASS. W h y restrict it to the banks ?
Governor ECCLES. I am going to say there is a different situation
between the banks buying the bonds
Senator COTJZENS. I am not talking about the banks. I am talking about the public. I am asking as to the difference t h a t would
exist between a demand note without interest and a bond with interest, in the public hands.
Governor ECCLES. I will explain the difference, but I have to go
through this to make the distinction.
Senator COTJZENS. All right.
Governor ECCLES. The banks buying the Governments debit the
asset account when they buy the Governments, and they credit the
deposit account to the Government. That money is spent and comes
back in and hence increases the deposits of the banks by that amount.




308

BANKING ACT OP 1 9 3 5

T o the extent that the public buys the Government bonds, it in no
way changes the volume of money. I t does affect the velocity of
money because the individual buying the bond draws the money to
buy the bond, the money is transferred to the Government and then
the Government spends it. I t in no way changes the volume of
money in the System when the individuals and corporations buy the
bonds, but when the banks buy bonds i t does make a difference. To
the extent that the deposits are increased by the banks purchasing
bonds, the excess reserves of the banks are reducd by 10 percent.
I n other words, if the banks buy a billion dollars of Government
bonds, the deposits of the banks as a rule are increased by a billion,
and the average required reserve is increased by $100,000,000. Therefore, if the banks have a 1-billion-dollar excess reserve and they buy
a billion dollars worth of Government bonds and increase the deposits
a billion dollars, the excess reserve is reduced to $900,000,000. I f they
bought 20 billions of Government bonds, the banks would increase
the deposits in the banks 20 billions and their excess reserves would be
entirely wiped out through that operation.
Now, let us take cash and currency.
Senator BULKLEY. You are speaking of surplus ?
Governor ECCLES. N O ; I am speaking of excess reserves.
Senator COUZENS. While your discourse is very interesting, you
have not yet told me the difference.
Governor ECCLES. I am going to.
Senator COUZENS. I t is not necessary to go through the banks. I
am not talking about the banks. Here is a Government bond bearing a 3-percent interest rate, with a specified maturity. Here is a
Government note without any specified maturity, and no interest.
Governor ECCLES. Yes.

Senator COTJZENS. What is the difference in the value of those ?
Governor ECCLES. The bond might fluctuate in total value, depending on its maturity and interest rate, based upon the market
for money at that time. The note will not fluctuate.
Senator COUZENS. I am not talking about fluctuation. I am talking about the value of it. I t is strange I cannot get a straight
answer.
Governor ECCLES. The value to whom?
Senator COUZENS. The owner. I n other words, the Government
bond has a promise to pay.
Governor ECCLES. Yes.

Senator COUZENS. A t a specified time, not in gold.
Governor ECCLES. That is right.
Senator COUZENS. And here is a hundred-dollar bond, baby bond,
for example, and all it is is a promise t o pay. Here is a hundreddollar note, a note without any maturity, simply the Government's
promise to pay. I ask you what the difference is in the security of
those two?
Governor ECCLES. There is no difference in the security.
Senator COUZENS. That is answered.
Governor ECCLES. There is no difference in the security. There
may be a difference in the value, but no difference in the security.
Senator COUZENS. I am talking about the security. I am not talking about the value of it. I n other words, if the Government issues




BANKING ACT OF 1 9 3 5

309

P a t m a n money, and promises to pay it. the person v/ho has it is just
as secure as though he had bonds ?
Governor ECCLES. Y e s ; there may be a difference in the value,
depending on the market at the time.
Senator COTJZENS. I am talking about the security. So I am just
as secure when I take a Government note with a promise to pay as
I am with a bond with a promise to pay. I am just as secure in
money ?
Governor ECCLES. Yes.

Senator GLASS. You are not secure in either case.
Senator COTJZENS. I am not talking about that. This famous columnist is quite correct in his contention, then, that there is just as
much security behind a Government note as there is behind a Government bond t h a t bears an interest rate ?
Governor ECCLES. That is right.
Senator GLASS. And you cannot get the security on either proposition. They p u t you in jail if you do.
Senator COTJZENS. Then I want to ask another question. I s there
not automatically an estoppel on a bond, on the issuance of bonds,
dependent upon the people's willingness to buy, while there is no
estoppel anywhere on the issuance of notes whereby people have to
take the notes in payment of debts ?
Governor ECCLES. I think that is possibly correct, that
Senator COTJZENS. I n other words, if the Government issues a billion of bonds and there are no buyers, buyers have lost confidence,
they do not buy, and so we cannot sell them, therefore the Government cannot spend any more. Their credit is gone. If, however, they
issue a billion dollars' worth of notes, without interest and without
maturity date, and they pass them around to pay their debts to all
their employees, including Senators and all others, we have got to
take them, haven't we ?
Governor ECCLES. That is right.
Senator COTJZENS. S O is it not a fact that there is an automatic
estoppel upon the sale of bonds, while there is no automatic estoppel
on the issuance of notes; is that correct ?
Senator COTJZENS. I S that correct?
Governor ECCLES. I do not know t h a t there is an automatic
estoppel on the sale of bonds; at least, I do not know where it is.
Senator COTJZENS. A t least, it is when the people stop buying them ?
Governor ECCLES. Yes, sir.

Senator BTJLKLEY. I S not what the Senator from Michigan has
said a good deal mitigated when you can make the member banks
buy bonds?
Because, of course, they can get the currency on the bonds after
they have bought them.
Governor ECCLES. Congress can appropriate money and can find
means of either raising it through bond issue or, failing to do that,
they could raise it through the issue of currency.
Now, with reference to the Reserve banks and the member banks
buying Government bonds, the indication or the inference has been
made, at different times, that they are being forced or that pressure
has been brought t o bear to support the Government credit.




310

BANKING ACT OF

1935

As a matter of fact, the amount of bonds held by the Reserve
System has not increased since November 1933, and the total interest
paid by the Government on its indebtedness today is less than at any
time between 1919 and 1925.
Senator BULKLEY. I think that is very interesting and very encouraging.
B u t my question was purely a theoretical one. As to whether the
force of Senator Couzens' distinction was not in large measure arrested, so long as the Government can p u t pressure on the banks to
buy bonds, and the member banks, in turn, can get currency against
the bonds as needed.
Governor ECCLES. Of course, if the Government can put pressure
on them, that is true.
But there is nothing in the law that gives to the Government the
power—either in the proposed legislation or in existing legislation—
to require the Federal Keserve banks to buy Governments.
Senator BULKLEY. NOW, let us see about the proposed legislation; I
am inclined to think there is. Is there any doubt that the Federal
Keserve Board can require the banks, through the open market committee, to buy any securities that they see fit ?
Governor ECCLES. Government bonds, you mean ?
Senator BULKLEY. Government bonds or any other securities.
Governor ECCLES. The Federal Reserve Board, under the proposal
here, is charged with the responsibility of carrying out a monetary
policy which deals with open market buying and selling of bonds,
with discount rates, and reserve requirements, and is directed to
use these instruments toward a condition of business stability, and
so forth.
The power is given to the Board to require the Keserve banks to
purchase or sell Government bonds.
Senator BTTLKLEY. Within what limits ?
Governor ECCLES. There is no limitation.
Senator BULKLEY. That is what I thought.
Governor ECCLES. That is right; there is no limitation.
However, at the present time, of course, the Treasury is a monetary authority on its own account, to quite an extent, with a stabilization fund the size that it is, and with the balances that it carries in
the member banks, from one to two billion dollars, and with the
very large amount of trust funds, which include Postal Savings and
F . D. I. C. and others; and it is in a position to exercise very great
influence over the money market.
Senator BULKLEY. All of which reinforces what I am saying: That
the distinction that Senator Couzens makes is not very material, if
we should enact this law.
Governor ECCLES. I think that is correct.
The danger in issuing currency is t h i s : I t does not diminish the
reserves at all. The banks get an increase in deposits, the same as
when bonds are issued. But it all goes in to increase the excess
reserve.
A $2,000,000,000 currency issue would increase the present excess
reserve from about $2,000,000,000 to nearly $4,000,000,000, while the
same amount, financed bv Government bonds, would decrease the excess reserve by $200,000,000.




BANKING ACT OF 1 9 3 5

311

That seems to me to be an important difference.
Senator TOWNSEND. What percent of the stabilization fund was
invested in Government bonds?
Governor ECCLES. That is a question that I should prefer you to
ask the Secretary of the Treasury.
I have no responsibility in connection with the handling of that
fund.
Now, I am going to skip some of this statement here, inasmuch as
we have discussed it.
Senator GLASS. If it conforms to your convenience, Governor
Eccles, we shall have you back on Monday morning, if you please.
Governor ECCLES. I shall be glad to be here at the convenience of
the committee.
Senator GLASS. Very well; we shall adjourn for today.
(Thereupon, at 1 p. m., an adjournment was taken until Monday,
May 13,1935, at 10:30 a. m.)







BANKING ACT OF 1935
MONDAY, KAY 13, 1935
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE ON
BANKING AND CURRENCY,

Washington, D. C.
The subcommittee met. pursuant to adjournment on Friday, May
10, 1935, at 10: 30 a. m.. in room 301, Senate Office Building, Senator
Carter Glass (chairman of the subcommittee) presiding.
Present: Senators Glass, Bulkley, Townsend, Bankhead, Couzens,
and McAdoo.
Senator GLASS. Governor, you had not quite finished with your
statement ?
Governor ECCLES. Yes; that is correct.
Senator GLASS. We would be glad to have you proceed and conclude.
STATEMENT OF MARRINER S. ECCIES, GOVERNOR OF THE
FEDERAL RESERVE BOARD—Resumed
Governor ECCLES. All right. I didn't conclude the prepared statement at the hearing on Friday, and I will omit a portion of it and
then file the statement for the record, if that is all right, in order
to save time.
Senator GLASS. T h a t will be entirely satisfactory.
Governor ECCLES. There are, however, certain sections of it which
I would like to read.
Senator GLASS. Very well.
Governor ECCLES (continuing statement) : Section 203 deals with
qualifications for membership on the Board, provision for a more
adequate salary and a pension system, and also with the matter of the
Governor's appointment, wThich I have already discussed.
Section 204 would authorize the Board to assign duties to designated Board members or its representatives and thus would enable
it to be relieved of a mass of administrative detail and to give its
time to the study of policy matters.
Section 205 of the bill would provide for an open-market committee to consist of the Governor and two members of the Board,
elected annually by the Board, and two governors of the Federal
Reserve banks, elected annually by the governors of the Federal
Reserve banks. I t would be the duty of this committee to formulate
the System's open-market policies which would be binding on the
Federal Reserve banks. The committee would also make recommendations about discount rates.




313

314

BANKING ACT OF

1935

A change in the provision about open-market policy is necessary
in order to place definite responsibility on a national body with a
national viewpoint.
Under the present law, open-market policies are formulated by
the Federal Open Market Committee, which consists of the governors of the 12 Federal Eeserve banks. The recommendations of
the committee have to be approved by the Federal Eeserve Board,
and the boards of directors of each Federal Eeserve bank retain
the authority to refuse participation in the policy adopted. I t
would be difficult to conceive of an arrangement better calculated
than this for diffusing responsibility and creating an elaborate system of obstructions.
I n my opinion, however, the proposal in the bill as introduced
would not be a satisfactory solution of the problem. I recommended
before the House, and I wish to recommend; instead, a provision
clearly vesting in the Federal Eeserve Board full power and responsibility to initiate, adopt, and enforce open-market policies for the
Federal Eeserve System, after consulting with an advisory committee consisting of 5 representatives of the Federal Eeserve banks
selected annually by the governors of the 12 Federal Eeserve banks.
The Board should be required to consult this committee before adopting an open-market policy, a change in discount rates, or a change in
member bank reserve requirements.
Such a provision would eliminate conflicts of jurisdiction and
policy and at the same time would preserve the participation of
Federal Eeserve bank governors in the deliberations leading to the
adoption of open-market policies.
Senator GLASS. Do you know of any conflict that has happened?
Governor ECCLES. Between the governors and the Board?
Senator GLASS. The Federal Eeserve Board and the Open Market
Committee ?
Governor ECCLES. N O ; I don't know of any.
Senator GLASS. The Secretary of the Treasury does not know of
any himself, because he told me explicitly that the Treasury has
had 100 percent, to use his exact language, cooperation from the
present Open Market Committee.
Governor ECCLES. S O far as I know, that is correct. [Continuing
statement:]
Open-market operations might be initiated by either the committee or the governors or by the Board, but the ultimate responsibility for making a final decision and the power for adopting and
carrying out national policies would be centralized in one place
and in one body, as they should be.
Open-market operations as a means of credit control in this country
are a post-Avar development. They were not regarded as a major
instrument of policy when the original Federal Eeserve Act was
passed. From small informal beginnings, whose significance was not
fully appreciated, open-market operations have gradually come to be
recognized as the principal instrument of credit control. At first the
individual operations of the separate Eeserve banks were designed
merely to equalize the earnings of these banks in periods when rediscounts were diminishing; then, as their effect on bank reserves and
the volume of member bank credit was realized, operations were con-




BANKING ACT OF 1 9 3 5

315

ducted at first by a self-appointed committee of the governors of the
eastern Reserve banks and later by the same committee after approval
by the Reserve Board. Owing largely to the circumstances of their
origin, these operations, though they have come to be the most important features of our monetary policy and are definitely national rather
than regional in purpose and in effect, still remain chiefly under the
control of the regional Reserve banks.
Local, or regional, control of open-market policy is, in fact, impossible, because the effects of such policy cannot be restricted geographically. Local control has been tried and voluntarily abandoned. The
question, therefore, is merely where the national control shall be
lodged. I n my opinion it should be lodged in the Federal Reserve
Board, which has the responsibility for other instruments of monetary policy through discount rates and changes in reserve requirements.
I am recommending an amendment to the bill to carry out this
proposal.
Section 206 proposes that the Federal Reserve banks, under regulations by the Federal Reserve Board, be authorized to make advances
to member banks on the basis of any sound asset. This proposal
arises out of the experience of the Federal Reserve System.
The view on which the original eligibility provisions of the Federal Reserve Act were based was that bank assets should be selfliquidating. This view rests on the theory that member banks should
engage in purely commercial banking; such a view, however, is not
realistic in a situation where only 8 percent of bank assets consist of
presumably self-liquidating paper. The banking system cannot subsist on the $2,000,000~,000 of eligible paper that is available; particularly since this paper is largely concentrated in the financial centers.
Furthermore, in an emergency it does not remain self-liquidating.
The banking troubles of this country in 1919 to 1921 were based to a
considerable extent on the frozen condition of what was considered
self-liquidating assets.
I n an emergency no type of bank asset is liquid, and it is the function of the central banking institution to provide such liquidity, subject only to the requirement that the assets shall be sound. There is
not and can never be a substitute for soundness, which must be based
upon the competent exercise of banking judgment. The present provision would introduce into the Federal Reserve Act for the first time
the express requirement of soundness of assets as the fundamental
and single requirement for eligibility for borrowing from the Reserve
banks. If the Reserve banks are to give genuine assistance to the
commercial banks, they must serve in an emergency as an agency for
liquefying all sound assets. During the depression many banks were
forced into bankruptcy not because their assets were bad but because
they could not meet the narrow and essentially unrealistic eligibility
requirements, and it became necessary, by the Glass-Steagall Act of
February 1932, to pass emergency legislation permitting the member
banks to borrow from the Reserve banks on sound assets.
I t has been suggested that the proposed amendment would impair
the assets of the Reserve banks themselves. The implication is that
the Reserve banks would lose their judgment of the soundness of bank
assets. That this fear is fanciful would seem to be indicated by the




316

BANKING ACT OF 19 3 5

fact that under the Glass-Steagall Act the Reserve banks made loans
of this character amounting to over $300,000,000 and that of this
amount all but about $1,500,000 had been repaid at the beginning of
this year.
Section 207 makes provision for placing securities guaranteed as
to principal and interest by the United States Government on the
same basis in regard to eligibility for purchase by the Reserve banks
as direct obligations of the United' States Government. There seems
lo be no reasonable ground far discrimination against these guaranteed obligations.
Section 208 provides for eliminating collateral requirements for
Federal Reserve notes. The requirement for segregation of collateral
against Federal Reserve notes adds nothing lo the quality of the
notes, which are a prior lien on the assets of the issuing Reserve
banks, and an obligation of the United States Government. Being a
prior lien, the notes are secured in effect by the best assets that the
Reserve banks have. They cannot be issued except in return for
assets that the Federal Reserve banks are permitted and willing to
acquire.
The complex machinery of providing for special segregation of
collateral behind Federal Reserve notes is not in conformity with
the fact that there is nothing more sacred in the note liability than
in the deposit liability of the Federal Reserve banks. The deposits
are the reserves of our banking system and, therefore, are back of
all the deposits of all the depositors in all the member banks. These
deposits surely deserve the same degree of protection as do Federal
Reserve notes. The proposal does not go this far but merely places
Federal Reserve notes on a basis of equality with deposits so far as
collateral is concerned, without making any change in reserve requirements. I t would preserve their status as paramount liens on the
assets of the issuing banks and as obligations of the Government,
and would have no effect either on the quality of the notes or on the
elasticity of our currency. I t would result in a simplification of the
machinery of currency issue and in considerable economy for the
Federal Reserve banks.
While these collateral requirements are not a protection for Federal Reserve notes, they have at times been the cause of serious difficulty for the Federal Reserve System. A t a time when the System
was pursuing an easy money policy through the purchase of Government securities there developed a shortage of eligible paper, with
tne consequence that it was necessary to impound a large amount
of gold as collateral against the notes over and above the 40 percent
reserve requirement. Such a situation prevailed in the early months
of 1932. when the Federal Reserve banks, because their gold reserves
were impounded behind the Federal Reserve notes, were unable to
pursue a policy that would tend to arrest the deflationary process.
At that time it became necessary for Congress to pass the GlassSteagall Act, which authorized the use of Government securities as
collateral for Federal Reserve notes. This law has since been extended, but it expires in March 1937.
I t is proposed here to do away with collateral requirements altogether. They serve no useful purpose, they are expensive and
cumbersome, and at times result in danger to the country's financial
structure.




BANKING ACT OF 1 9 3 5

317

Section 209 is designed to clarify and expand somewhat the power
of changing reserve requirements, provided in the so-called Thomas
Amendment. I t would permit the Board to change reserve requirements without declaring the existence of an emergency and without
the necessity for obtaining the approval of the President. This is
one of the ways in which the bill would diminish political control
over the Federal Reserve Board.
I wish to recommend that the bill be modified so as to limit the
power of the Board to change reserve requirements to two groups
of banks, central reserve and reserve city banks and all other banks,
and not to permit changes for individual Federal Eeserve districts.
There is urgent need for the authority to change reserve requirements, in view of the large amount of excess reserves now available
to member banks and the possibilities of further additions to these
reserves.
Section 210 would liberalize the provisions for real-estate loans.
The modifications here proposed include an increase in the total
volume of such loans that a bank may make, an increase in the proportion of the value of real estate that banks may lend, and provision for amortized loans with longer maturity.
Upon further consideration of this matter I wish to suggest that
the section be modified to give the Federal Eeserve Board power
to regulate real-estate loans, subject to the limitation that new loans
shall not exceed 60 percent of appraised value of the real estate.
This is the amendment that was proposed to the House and is included, with some changes, however, in the House bill.
As you know, real-estate loans are not a new form of investment
for our commercial banks. They have been lending on real-estate
mortgage security for decades. Liberalization of the real-estate loan
provisions, combined with the broadened eligibility requirements for
borrowing at the Federal Eeserve banks, may encourage activity
in the construction industry, which is essential to recovery.
Criticism of these provisions has come largely from those who
believe in the separation of savings banking from commercial banking. Whatever may be said in favor of such a separation as a desirable thing in theory, it is not feasible so long as we have thousands
of small banks that cannot operate profitably on the basis of their
-demand deposits alone. The member banks have $10,000,000,000 of
time deposits which represent the people's savings. So long as they
have time deposits for which they must pay interest, they of necessity must participate in financing long-term undertakings that will
yield enough to pay for doing the business. The law places no limits
on what the banks may do in the purchase of bonds or of other longtime paper; there is no reason for singling out real-estate loans for
special restrictions.
Our banks have been losing a large part of their business to the
government, which has sold its bonds to the banks and has used the
funds to make mortgage and other loans, many of which the banks
should be in position to make themselves. Unless the banks regain
some of the business which has been taken over by the Government
credit agencies, there will not be sufficient business to support the
banking system. There will also be great pressure for a constantly
growing public debt incurred in part in taking over business that
could be done by the banks.
129688—35—PT 1


21

318

BANKING ACT OF 1 9 3 5

I note that the Banking and Currency Committee of the House in
reporting out the bill has made two changes in the recommendations
which we made with reference to real-estate loans. I n the first place
a limitation has been inserted t h a t aggregate real-estate loans shall
not exceed 100 percent of the capital and surplus or 60 percent of savings deposits, whichever is the greater. I think this rigid limitation
is undesirable. I t would be much better to leave this matter to the
discretion of the Federal Reserve Board because the aggregate
amount that may be safely loaned on real estate varies with banks,
localities and periods of time.
The second change in the bill as reported by the House Committee
is the elimination of the provision applying the regulations on realestate loans to State member banks, as well as to national banks.
This is a serious omission, because under it national banks would be
at a competitive disadvantage as against State member banks, many
of which are under little or no limitation in regard to their realestate loans. Furthermore, the Federal Reserve System, which has
a vital interest in the solvency of State member banks, would be
given no authority over real-estate loans t h a t the State member banks
may make. This is inconsistent with provisions in the Banking Act
of 1933 which in dealing with investment securities placed State
member banks on the same basis with national banks. One of the
important advantages in having State banks members of the Federal
Reserve System would be lost if there were no uniformity in such
matters.
Senator GLASS. Of what advantage to national banks is a national
charter with a right of circulation withdrawn ?
Senator BANKHEAD. I could not hear that statement.
Senator GLASS. I say, of what advantage is it to national banks
to remain in the System with the circulation privilege withdrawn?
Governor ECCLES. I never considered the circulation privilege of
very great value to national banks. Particularly has that been
true the last year or so, where banks had excess reserves. Many of
the banks, I think, up to the extent of about $200,000,000, deposited
funds with the Treasury to offset their circulation. I n other words,
so long as they had the excess funds, they could not afford to pay the
tax for the privilege of circulation. There is some small earning
that accrues to national banks through the circulation privilege under
conditions where they do not have excess reserves.
Senator GLASS. Well, what other distinctive privilege will a national bank have over a State bank in the event the circulation
privilege is canceled as is now proposed ?
Governor ECCLES. They will not have any.
Senator GLASS. Exactly.
Governor ECCLES. They will not have any.
That is one of the
dangers.
Senator GLASS. Exactly.
Governor ECCLES. Yes.

Senator GLASS. Then, will there be any particular reason why
national banks should not convert into State banks and enjoy the
peculiar privileges that the various States offer?
Governor ECCLES. There is likely to be reason for conversion.




BANKING ACT OP

1935

319

Senator GLASS. Well, I did not mean to interrupt you there.
Senator BANKHEAD. I S there not an element of confidence in national banks ?
Senator GLASS. What is that ?
Senator BANKHEAD. I am asking if there is not an element of confidence in national banks, generally speaking, as distinguished from
State banks, growing out of the system of examination, and so forth ?
Governor ECCLES. The record of the national banking system has
been much better t h a n the record of the State banking system as a
whole—but with the Federal Deposit Insurance Corporation insuring
the deposits of not only national and State member banks but also
State nonmember banks, it seems to me that that element of advantage and confidence is pretty largely wiped out.
Senator GLASS. Well, go ahead, Governor.
Governor ECCLES (continuing statement) :
Reccommended modifications in the proposed bill.—Following is
a brief summary of the modifications in the bill that I wish to
recommend. These are the same modifications that I recommended
to the House Banking and Currency Committee when I testified
before it. A detailed statement of the verbal changes that would be
necessary to incorporate these recommendations will be furnished
to the committee.
1. Section 201. The appointment of governors and chairmen and
of vice governors of the Federal Reserve banks shall be approved by
the Federal Reserve Board every 3 years rather than annually, so
that their terms in these offices may coincide with their terms as
class C directors.
2. Section 202. On the admission of insured nonmember banks,
the Board shall have authority to waive not only capital requirements, but all other requirements for admission, and the Board
shall be permitted to admit existing banks to membership permanently with capital below that required for the organization of national banks in the same places, provided that their capital is adequate, or is built up within a reasonable time to be adequate, in relation to liabilities to depositors and other cerditors.
3. Section 203 (2). The pension provision shall be modified so that
any member of the Board, regardless of age, who has served as long
as 5 years, whose term expires and who is not reappointed, shall be
entitled to a pension on the same basis as though he were retired
at 70. T h a t is, he is to receive a pension of $1,000 for each year of
service up to 12.
4. Section 204. I t shall be the duty of the Federal Reserve Board
to exercise such powers as it possesses in such manner as to promote
conditions conducive to business stability and to mitigate by its influence unstabilizing fluctuations in the general level of production,
trade, prices, and employment, so far as may be possible within the
scope of monetary action and credit administration.
5. Section 205. Authority over open-market operations shall be
vested in the Federal Reserve Board, but that there would be created a committee of 5 governors of Federal Reserve banks, selected
by the 12 governors of the Federal Reserve banks, and the Board
shall be required to consult this committee before adopting an open-




320

BANKING ACT

OF

193 5

m a r k e t policy, a change in d i s c o u n t r a t e s , or a c h a n g e in m e m b e r b a n k reserve requirements.
6. Section 209. T h e B o a r d shall n o t h a v e t h e p o w e r t o c h a n g e
reserve r e q u i r e m e n t s by F e d e r a l Reserve d i s t r i c t s , b u t only by classes
of cities. F o r t h i s p u r p o s e b a n k s s h a l l be classified i n t o t w o g r o u p s :
one c o m p r i s i n g m e m b e r b a n k s i n c e n t r a l reserve a n d reserve cities,
a n d t h e other all other m e m b e r b a n k s . C h a n g e s in reserve r e q u i r e ments, t h e r e f o r e , would h a v e t o be e i t h e r for t h e c o u n t r y as a whole
or for t h e financial centers, or for t h e c o u n t r y d i s t r i c t s .
7. Section 210. T h e conditions u n d e r w h i c h r e a l - e s t a t e l o a n s m a y
be g r a n t e d b y m e m b e r b a n k s s h a l l be left t o t h e discretion of t h e
F e d e r a l Reserve B o a r d to be d e t e r m i n e d b y r e g u l a t i o n . N o realestate loan hereafter m a d e shall exceed 60 p e r c e n t of t h e a p p r a i s e d
value of t h e p r o p e r t y ; b u t t h i s s h a l l n o t p r e v e n t t h e r e n e w a l or
extension of loans heretofore m a d e .
I n closing, I s h o u l d a p p r e c i a t e i t if a n o p p o r t u n i t y w e r e g i v e n
t h e B o a r d ' s counsel to p r e s e n t t o t h e c o m m i t t e e a n u m b e r of m i n o r
a m e n d m e n t s , in t h e n a t u r e of d r a f t i n g c h a n g e s , t h a t h a v e been
perfected since t h e bill was i n t r o d u c e d .
S e n a t o r GLASS. H e can file t h a t , e i t h e r w i t h t h e c h a i r m a n of t h e
committee or w i t h t h e clerk.
[ T h e a m e n d m e n t s referred to b y G o v e r n o r Eccles are h e r e w i t h
p r i n t e d in full.]
AMENDMENTS PEOPOSED BY GOVEBNOB ECCLES TO TITLE II OF S.
SECTION 201

1715

(A)

Page 39, line 14, change the comma following the word " directors " to a period, strike out everything thereafter through and including the period following the word " bank " in line 18, and substitute the following:
" His first appointment shall be subject to the approval of the Federal Reserve
Board. He shall not take office until approved by the Federal Reserve Board
and thereupon he shall become a class O director of the bank for the unexpired
portion of the term held by his predecessor as chairman of the board of directors or, if such term was completed, then for the next regular term of three
years At the expiration of such term as a class C director, and of each
term of three years thereafter, his continuance in office shall be subject to the
approval of the Federal Reserve Board, and he shall cease to be Governor at
the expiration of any such term unless his reappointment be approved by the
Federal Reserve Board. Upon such approval he shall become a class C director
for the ensuing term of three years."
Page 40, line 2, after the period following the word " bank'', insert a new
sentence reading as follows:
" His appointment and reappointment shall be subject to approval by the
Federal Reserve Board in the same manner as that of the Governor."
Page 40, strike out the sentence commencing in line 14 and substitute the
following: "All duties prescribed by law for the Federal Reserve agent shall
be performed by the Governor of the bank or by such other person or persons as
he may designate."
SECTION 201 (B)

Page 41, between line 4 and line 5, Insert a new paragraph reading as
follows:
(c) The paragraph of such section 4 which commences with the words " Such
board of directors shall be selected" is amended by striking therefrom the
words " holding office for three years, and ".




BANKING ACT OF 1935
SECTION

321

202

Page 41, strike out all of lines 5 to 20, inclusive, and insert in lieu iheieof the
following:
" SEC. 202. Section 9 of the Federal Reserve Act, as amended, is amended by
inserting after the tenth paragraph thereof the following new paragraph:
" Upon application to the Federal Reserve Board at any time prior to July 1,
1937, by any nonmember bank which at the time of such application has been
admitted to the benefits of insurance by the Federal Deposit Insurance Corporation under section 12 B of this Act. the Federal Reserve Board, in its discretion, in order to facilitate the admission of such bank to membership in I he
Federal Reserve System, may waive in whole or in part the requirements of
this section relating to the admission of such bank to membership: Provided,
That, if such bank is admitted with a capital less than that required for the
organization of a national bank in the same place and its capital and surplus
are not, in the judgment of the Federal Reserve Board, adequate in relation to
its liabilities to depositors and other creditois, the Federal Reseive Board may,
in ils discretion, require such bank to increase its capital and surplus to such
amount as the Board may deem necessary within such period prescribed by
the Board as iu its judgment shall be reasonable in view of all the circumstances: Provided, however, That no such bank shall be required to iiuvease
its capital to an amount in excess of that required tor the organization of a
national bank in the same place."
SECTION

203

(2)

Page 42. before the word " retirement" in lines 19 and 23, insert the word
"annual"
Pa^'o 43, line 2, strike out the words " after he reaches the age of 65."
Page 43, line 5, change the period following the word "paragraph" to a
comma and insert the follows: " except that, if his term expire before he reaches
the age of sixty-five and he decline to accept reappointment, he shall not receive
any retiiement pay."
Ppge 43. line 8, insert before 1he quotation marks the following: "Nothing in
this section shall prevent the President from reappointing any member of the
Federal Reserve Board holding office on July 1, 1985."
SECTION 2 0 3

(4)

Page 43, between lines 21 and 22. insert the following new paragraph:
(4) By adding at the end of the second paragraph the following: "Upon the
expiration of their terms of office, members of the Federal Reserve Board shall
continue to serve until their successors are appointed and have qualified."
SECTION

204

Page 43, line 22. immediately before the word "subsection" insert " ( a ) . "
Page 44, line 1, strike out the word " such" and insert before the comma
following the word " regulations" the words " prescribed by the Board."
Also on page 44, line 2, before the word " duties" insert the words " any of
its '"; after the word " services ", insert a semicolon; and strike out the words
" so specified " and: the comma following such words.
Page 44. between lines 7 and 8, insert a new paragraph as follows:
(b) Section 11 of the Federal Reserve Act, as amended, Is amended by adding
at the end thereof a new subsection as follows :
"(c) It shall be the duty of the Federal Reserve Board to exercise such
powers as it possesses in such manner as to promote conditions conducive to
business stability and to mitigate by its influence unstabilizing fluctuations in
the general level of production, trade, prices, and employment, so far as may be
possible within the scope of monetary action and credit administration."
SECTION

205

Page 44. Strike out everything commencing with line 11 through and including line 17 on page 45 and substitute the following:
"SEC. 12 A. (a) There is hereby created an Open Market Advisory Committee (hereinafter referred to as the 'Committee'), which shall consist of




322

BANKING ACT OF 1935

five representatives of the Federal Reserve banks. The members of the Committee and an alternate to serve in the absence of each of them shall be
elected annually by the governors of the twelve Federal Reserve banks in accordance with procedure prescribed by regulations of the Federal Reserve
Board. Vacancies shall be filled in the same manner. The terms of the members of the Committee shall expire at the end of each calendar year, and a
person elected to fill a vacancy shall serve for the remainder of the terms of
his predecessor. The Committee shall elect its own chairman. Meetings of
the Committee shall be held from time to time upon the call of the chairman or
upon the call of the Governor of the Federal Reserve Board. Meetings shall
be called whenever requested by a majority of members of the Committee or by
a majority of the members of the Federal Reserve Board.
"(b) The Committee shall consult and advise with, and make recommendations to, the Federal Reserve Board from time to time with regard to the openmarket policy of the Federal Reserve System. The Committee shall also aid in
the execution of open-market policies adopted from time to time by the Federal
Reserve Board and shall perform such other duties relating thereto as the
Federal Reserve Board may prescribe. The Federal Reserve Board shall consult the Committee before making any changes on its own initiative in the
open-market policy, in the rates of interest or discount to be charged by the
Federal Reserve banks, or in the reserve balances required to be maintained
by member banks.
"(c) After consulting with and considering the recommendations of the
Committee, the Federal Reserve Board, from time to time, shall prescribe the
open-market policy of the Federal Reserve System. Each Federal Reserve
bank shall purchase or sell obligations of the United States, bankers' acceptances, bills of exchange, and other obligations of the kinds and maturities
made eligible for purchase under the provisions of section 14 of this Act to
such extent and in such manner as may be required by the Federal Reserve
Board in order to effectuate the open-market policies adopted by the Board
from time to time under the provisions of this section, and each Federal
Reserve bank shall cooperate fully, in every way, in making such policies
effective.
"(d) All transactions of Federal Reserve banks under authority of Section
14 of this Act shall be subject to such regulations, limitations, and restrictions
as the Federal Reserve Board may prescribe."
SECTION

206

Page 47, line 21, immediately before the word " upon ", insert: " Notwithstanding any other provision of law."
SECTION 208

(1)

Page 46, line 21, after the word " retired", insert the words " by Federal
Reserve banks."
Page 47, line 22, after the words " Comptroller of the Currency ", insert a
comma and the following: " under the direction of the Secretary of the
Treasury."
Page 48, line 5, strike out the word " n u m b e r s " and substitute the word
" letters."
Page 48, line 11, strike out the words " by the Federal Reserve banks."
SECTION 208 (2)

Page 48, line 15, strike out the words " and also " and the word " and " and
insert commas in their places.
Page 48, line 18, change the period following the words " Federal Reserve
agent" to a comma and add the following: " the words ' or any Assistant
Treasurer ', the words ' or Assistant Treasurer', and the words ' by the Treasurer at Washington upon proper advices from any Assistant Treasurer that
such deposit has been made.'"
SECTION 209

Page 49, commencing with the words " by member banks ", in line 1, strike
out everything through and including the quotation marks at the end of line




BANKING ACT OP 1935

323

3 and substitute the following: " by member banks in reserve and central reserve cities or by member banks not in reserve or central reserve cities or by
all member banks."
SECTION 210

Page 49, strike out everything commencing with line 7, through and including line 8, on page 51, and substitute the following:
" SEO. 24. Subject to such regulations as the Federal Reserve Board may prescribe, any national banking association may make real-estate loans secured by
first liens upon improved real estate, including improved farm land and improved business and residential properties. The amount of any such loan hereafter made shall not exceed 60 per centum of the appraised value of the real
estate; but this limitation shall not prevent the renewal or extension of loans
heretofore made and shall not apply to real-estate loans which are insured under
the provisions of title I I of the National Housing Act. The Federal Reserve
Board is authorized to prescribe from time to time regulations defining the
term ' real-estate loans' and other terms used in this section and regulating
and limiting the making of real-estate loans by member banks, with a view of
preventing an unreasonably large proportion of each bank's assets from being
invested in real estate and real-estate loans, preventing such loans from exceeding a reasonable percentage of the appraised value of the real estate in view
of the circumstances existing at the time, and otherwise requiring the banks
to conform to sound practices in making real-estate loans. On and after the
date on which the regulations first adopted under this section shall become
effective, no State bank or trust company which is a member of the Federal
Reserve System shall make new real-estate loans except to the same extent and
under the same regulations and limitations as national banking associations
are permitted to do so."
Section 210 alternative amendments, if foregoing substitute not adopted:
Page 50, line 8, change the first word to " of."
Page 50, line 12, strike out the words " second or subsequent."
ADDITIONAL SUCTION TO BE ADDED TO TITLE HI

The second paragraph of section 9 of the Federal Reserve Act, as amended,
is amended by striking out the period at the end thereof and adding thereto
the following words: " except that the approval of the Federal Reserve Board,
instead of the Comptroller of the Currency, shall be obtained before any State
member bank may hereafter establish any branch and before any State bank
hereafter admitted to membership may retain any branch established after
February 25, 1927, beyond the limits of the city, town, or village in which the
parent bank is situated."
[NOTE.—The sole purpose and effect of the above amendment is to correct a
technical error in the Banking Act of 1933 which results in State member banks
being required to obtain the approval of the Comptroller of the Currency,
instead of the Federal Reserve Board, before establishing out-of-town branches
or retaining such branches upon admission to the Federal Reserve System, if
they were established after February 25, 1927. It would neither enlarge nor
diminish the right of State banks to establish or retain branches, but would
merely require them to obtain the approval of the Federal Reserve Board
instead of the Comptroller of the Currency.]

Governor ECCLES. The committee requested certain information
on Friday with reference to the number of employees in Federal
Reserve banks and the paper eligible for rediscount with Federal
Reserve banks as reported by member banks. The latter statistics
were prepared for selected call dates from 1928 to 1934, and include
the total amount of eligible paper from that date, from 1928 to
1934, as well as the ratio of eligible paper to total loans and investments, by Federal Reserve districts.
Senator GLASS. Just file that with the reporter. Mr. Smead gave
me that a month ago.
(Paper submitted by Governor Eccles, entitled, " Paper Eligible
for Rediscount with Federal Reserve Banks as Reported by Member
Banks on Selected Call Dates ", is as follows:)



Paper eligible for rediscount with Federal Reserve banks as reported by member banks on selected call dates, Oct. S, 19Z8 to Dec. SI, 1984
[In thousands of dollars]
Federal Reserve District
Call date

Total, all
districts
Boston

June
June
June
Dec.

Philadelphia

Cleveland

Richmond

304,300
272,383
253,586
226,847

252,135
263,789
237, 517
196,059

210, 598
210,474
191,961
155,905

221, 689
234,465
196,266
140,852

615,802
634,105
570, 820
386,962

221,978
196,331
199,531
163,827

174,477
177,119
179,398
177,621

252,840
275,890
250,202
205,650

190,603
159,204
110,487
129,492
147, 769 '106,388
145,498
99,127

112, 237
73,858
87,479
96, 253

95,629
65, 747
77,445
116,148

233,616
252, 786
201,467
194, 708

103, 211
67,197
61.146
87,001

125, 640
101, 951
106,810
108, 514

153, 798
119,641
124, 337
124, 739

121,730
96, 750
93,129
103,590

1,301,316
1,352,130
1, 096,224
1,003,659

2, 427, 959
1,977, 459
'2,058,907
2,144,381

30, 193230,1933 '
30, 193431,1934-

275,804
250,909
229,645
177,123
155, 741
130,490
155, 567
147, 498

814, 581
721,286
772, 883
771,243

Atlanta

Chicago St. Louis

Kansas
City

San Francisco

244,467
238,833
218,977
173,203

4,368,094
4, 389,8S3
3,904,968
3,197, 984

Oct. 3,1928—
June 29,1929June 30, 1930June 30, 1931-

Minneapolis

New York

Dallas

RATIO ( P E R C E N T ) OF ELIGIBLE P A P E R TO TOTAL LOANS AND I N V E S T M E N T S
12.51
12.29
10.95
9.43

June
June
June
Dec

30,1932
30, 1933
30,1934
31,1934
1




10 66
9.60
8.86
7.21

12 02
11.48
8.85
8 61

11 30
10.05
9 35
8.14

8.67
7.98
7.68
7.62

Oct. 3,1928
June 29, 1929
June 30, 1930
June 30, 1931

7.76
7.12
8.23
7.83

8.49
7 56
7.67
7.55

7.85
6 34
6 90
6 65

Beginning June 30,1933, figures are for licensed banks only.

7 36
7.56
6.83
5.82

15 73
15.84
15 94
13.66

18.67
19.93
18 53
14.71

11.98
12 55
11.57
8.63

15 85
14.64
15 48
13.53

18 80
19.20
20 61
21 14

20 36
22.24
21.73
18.67

25.46
24.96
25.18
21.57

9.15
9.13
9.03
6.29

5
5
4
4

11.35
8 94
8 78
9.09

11.17
9.27
9 54
13.34

6.97
10.72
7.00
6 19

10
8
6
9

17.10
16 38
15.64
15.53

16 61
14.66
13.74
13.04

18.13
15.78
13.63
14.28

5.87
4.08
4 26
4 83

80
42
61
19

98
99
97
32

' Revised since publication of Member Bank Call Report.

GO

to

BANKING ACT OP

1935

325

Governor ECCLES. The number of employees of the System is
11,789. Five hundred and seventy-five is the number in the agents'
departments, engaged in the issuance of Federal Reserve notes, in
bank examinations, the statistical and analytical work, and the
Securities Exchange units.
Two thousand three hundred and forty-one is the number in the
fiscal agency, custodianship and depositary departments. That includes the number in the Treasury Department, Reconstruction Finance Corporation, F a r m Credit Administration, Public Works Administration, and the Home Owners' Loan Corporation units.
There are 8,873 in the banking departments, all other units of the
banks, including auditing. I will file these figures.
That concludes my statement, Senator.
Senator GLASS. We are very much obliged to you, Governor, for
giving us that statement. Unless there are questions to be asked
Senator COTTZENS. I suppose the Governor will come back at the
first opportunity and answer the question I asked last week.
Governor ECCLES. All right.
Senator COTJZENS. Because I want that as a matter of record. I
am anxious to have it in the record.
Governor ECCLES. I think, Senator Glass, in connection with your
statement, you also asked that I state what the Federal Reserve
Board did.
Senator GLASS. Well, you need not do that. I know very well what
they did do, and the Senator from Michigan seems to think t h a t my
supplemental question, which was designed to aid him, was in some
sense an antagonistical question. So you need not answer my question, because I know it.
I am much obliged to you, Governor.
Governor ECCLES. I have some copies of that, if any of the members
of the committee want an}'.
Senator MCADOO. I would be glad to have a copy of it, Governor.
Governor ECCLES. Thank you.
(The information supplied is as follows:)
Average number of officers and employees of the Federal Reserve hanks during
the last 6 months of 19SJt
Total

F e d e r a l Reserve a g e n t s ' d e p a r t m e n t s (Federal Reserve note Issues, bank
examination, statistical a n d analytical, and securities exchange u n i t s ) .
Fiscal agency, custodianship and depositary departments ( T r e a s u r y
Department, 1 Reconstruction Finance Corporation, F a r m Credit Administration, Public W o r k s Administration, and Home Owners' L o a n
Corporation u n i t s )
B a n k i n g d e p a r t m e n t s (All o t h e r units of t h e banks, including a u d i t i n g ) .

11,789

575

2,341
8, 873

Senator GLASS. Professor Kemmerer.
STATEMENT OF EDWIN WALTEE KEMMERER, WALKER PROFESSOR OF INTERNATIONAL FINANCE, PRINCETON UNIVERSITY, PRINCETON, N. J.
Senator GLASS. Professor, just give your name and occupation to
the official reporter.
1
Except certain depositary operations such as maintenance of the Treasurer's general
account for which separate figures are not available.




326

BANKING ACT OF 1 9 3 5

Professor KEMMERER. My name is Edwin Walter Keramerer. I
am Walker Professor of International Finance at Princeton University.
Senator GLASS. Doctor, have you had any experience in the setting
up of banking systems in this country and abroad?
Professor KEMMERER. I have had considerable.
Senator GLASS. And if so, briefly state what it has been.
Professor KEMMERER. I have had considerable experience abroad
and have cooperated from time to time in this country; but my work
in this connection has been largely abroad. I was currency and
banking expert of the Philippine Government from 1903 to 1906, and
at that time was the adviser in the inauguration of the gold standard
and drafted first hand, or with the assistance of others, a good deal
of the banking legislation of that time.
I n 1917 I was currency expert to Mexico. I n 1918, in the summer,
I was with the Federal Keserve Bank of New York, assisting in the
preliminary work of the establishment of their statistical department.
I n 1919 I was financial adviser to Guatemala, and I went down there
on a second mission sometime later; the first one was a Government
mission, and the second one was under private auspices but as a friend
of the Government.
I n 1922, I was a trade commissioner-at-large, and spent a greater
p a r t of the year traveling in South America studying banking and
currency problems.
I was president of the American Commission of Financial Advisers
to Colombia in 1923.
Senator BTTLKLEY. Was that a United States Government position?
Professor KEMMERER. I t was. T h a t was a dollar-a-year job.
Senator BULKLEY. Under what department?
Professor KEMMERER. Department of Commerce. I was a freelance but I had the official job of going down there to secure information in reference to the conditions down there.
Senator BULKLEY. I n what year was that?
Professor KEMMERER. 1922. I n 1923, I was president of the
American Commission of Financial Advisers to the Republic of
Colombia. And in that connection we drafted the legislation that
established the central bank of Colombia, the Bank of the Republic,
p u t the country back on the gold standard after many years of paper
money, drafted the general banking legislation, and so on, which
is still in operation. We covered other fields, including taxation,
accounting, tariff administration, and credit policy.
Then ; later, I was currency expert to the Dawes Committee in
connection with the German banking and currency reorganization.
I n 1925,1 was chairman of the American Commission of Financial
Advisers to Chile. We drafted plans for the almost complete reorganization of the currency, banking, and auditing and accounting
laws of Chile. There, we established the Central Bank of Chile,
helped get the country back on the gold standard, drafted legislation
for the general banking law, and so on.
I n 1927, I was chairman of Commissions of Financial Advisers
of Ecuador and Bolivia, which did much the same things in those
countries.




BANKING ACT OP

1935

327

I n 1926 I was chairman of a similar commission to Poland, in
which we—among other things—drafted plans for revising the Cent r a l Bank of Poland, and for getting the country back on the gold
standard. I n 1924 I was—along with Girard Vissering, the president of the Bank of The Netherlands—currency expert to the Union
of South Africa. We went down there and worked out a plan for
the return of South Africa to the gold standard before Great Britain
came back.
I had a commission as financial adviser to China in 1929. We
spent practically the entire year there, and our work covered the field
of currency, banking, taxation, auditing, accounting, public credit,
financial administration, and railroad finance.
I had a second commission to Colombia in 1930, similar to the first
one, in which we followed up and tried to perfect and improve our
original work.
Last year I was invited to Turkey and assisted in carrying out
what was known as the " Hines-Kemmerer Economic Survey of
Turkey." I n connection with our work there we worked out plans
for helping in the monetary stabilization and the reorganization of
banking.
Senator COTTZENS. Would you kindly tell us who paid your expenses
and salary at the time you went to Turkey ?
Professor KEMMEREK. Who paid my expenses?
Senator COTJZENS. And salary?
Professor KEMMEEER. Mr. Walker D. Hines was invited to make
an economic survey of Turkey and he associated with himself a group
of experts, who went out there. He had a financial arrangement
with the Government for the work. I t was continued for sometime,
and Mr. Hines became ill. They wanted to get someone who had
been familiar with this field to assist in carrying on that work. So
they asked me if I would be willing to cooperate, and I said " yes."
I got a group of people who were interested in that sort of thing and
we cooperated with the original group, with Mr. Hines' group. Mr.
Hines died shortly afterward, but we carried on from this end, and
those in Turkey did likewise.
W e finished the main report in May of last year, but did not finish
the work on currency and banking until late summer, for I was
unwilling to make any definite recommendations in that field until I
had been on the scene in Turkey for 6 weeks.
Senator GLASS. Until what?
Professor KEMMERER. Until I had been on the scene, been out
there. I went out there with a couple of assistants last summer, was
there for 6 weeks and finished that work.
Mr. Hines' law firm made the arrangements with the Government
of Turkey, and his firm paid me my expenses and honorarium. I had
no negotiations in that case directly with the Government. I n my
Peru commission my negotiations and work were directly with the
Keserve Bank of Peru, but it was work for the Government.
Senator COTJZENS. While you are on that subject, you have mentioned many times the fact that you were an expert. So that us
laymen understand just what an " e x p e r t " means, would you kindly
define an " expert " ?
Professor KEMMERER. Well, a popular definition of an expert is,
"A guy who is long ways from home." To be serious, however, the



328

BANKING ACT OF 1 9 3 5

word " e x p e r t " is one that is bandied around a great deal. I don't
know any definition of an " expert " that is entirely satisfactory. All
I can say is that, from my point of view, an expert in a field would
be a man who had made a careful study of that field and because of
that study and perhaps also, though not necessarily, but desirably,
because of experience in that field, had accumulated a certain amount
of knowledge in it that would qualify him to speak with more
authority than people who had not had such experience and made
such studies.
Senator COUZENS. I understand your interpretation of the word
" expert ". Is it possible for a man to become an expert by training
and actual experience, activities—rather than book learning—to
become an expert?
Professor KEMMERER. I should think it is.
Senator COTJZENS. So, in effect, you admit that there are two
kinds of experts. One is your kind, where you fie yourself, as you
say, by studying, and then there is the other kind of expert, who
gathers experience over a long period of years, and he, I assume,
under your interpretation, is also an expert?
Professor KEMMEHER. Well, I think there are a great many varieties of experts. I should think that a man could become an expert
in a field by experience; but I think when it comes to fields of this
kind it is highly desirable that an expert should have been a student
of the scientific development of the subject, of the history of the
development of thought in the subject, should know the theory and
should have had practical experience as well. T h a t is, he should
have roots as well as flowers. A good many people, I think, may, by
individual study, without university work, have qualified for that
sort of thing, but I believe that a fair grounding in the theory and
principles and the history of the thought on the subject, and the
experience in our own country and other countries, is desirable for
an expert.
I know some pretty well-qualified men in some fields who have had
only part of the things I have mentioned.
Senator COT/ZENS. SO, in fact, some of them are a