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Branch, Chain, and Group Banking
HEARINGS
BEFORE THE
't)OMMITTEE on b a n k in g a n d currency
HOUSE OF REPRESENTATIVES
SEVENTY-FIRST CONGRESS
SECOND SESSION
U N D ER
H. Res. 141
AUTHORIZING THE BANKING AND CURRENCY COMMITTEE
TO STUDY AND INVESTIGATE GROUP, CHAIN
AND BRANCH BANKING
MARCH 25 AND 26, 1930
VOLUME 1
Part 5
UNITED STATES
100136
GOVERNMENT PRINTING OFFICE
WASHINGTON • 1930
COMMITTEE ON BANKING AND CURRENCY
LOUIS T McFADDEN, Pennsylvania, Chairman
JAMES G. STRONG, Kansas.
ROBERT LUCE, Massachusetts.
E. HART PENN, Connecticut.
GUY E. CAMPBELL, Pennsylvania.
CARROLL L. BEEDY, Maine.
JOSEPH L. HOOPER, Michigan.
GODFREY G. GOODWIN, Minnesota.
F DICKINSON LETTS, Iowa.
FRANKLIN W FORT, New Jersey.
BENJAMIN M, GOLDER, Pennsylvania.
FRANCIS SEIBERLING, Ohio.
MRS. RUTH PRATT, New York.
JAMES W DUNBAR, Indiana.
P h ilip
n
OTIS WINGO, Arkansas.
HENRY B. STEAGALL, Alabama.
CHARLES H, BRAND, Georgia.
W F, STEVENSON, South Carolina.
T, ALAN GOLDSBOROUGH, Maryland.
ANNING S. PRALL, New York.
JEFF BUSBY, Mississippi.
G. T h o m p s o n , Clerk
CONTENTS
Page
Yung, Hon. Roy A., Governor Federal Reserve Board, questioning of__ 535-55&
m
BRANCH, CHAIN, AND GROUP BANKING
TUESDAY, MARCH
25, 1930
H ouse of R epresentatives,
C ommittee on B an k in g and C urrency ,
Washington, D.
0.
The committee met in the committee room, Capitol at 10.35 o’clock,
p. m., Hon. Louis T. McFadden (chairman) presiding.
The Chairm an. The committee will come to order.
STATEMENT OF GOVERNOR ROY A. YOUNG—Resumed
The Chairman. Mr. Dunbar, I believe you had not finished with
your questions.
Mr. Dunbar. Governor Young, when we adjourned the other day,
we were talking about what inducements could be offered to national
banks so that they would remain within the Federal reserve system.
You stated that that was a very hard question to answer.
Now, the Federal reserve system is becoming to be controlled by
State banks and other institutions rather than the national banking
system—is that so? Has there not been a very great number of
national banks withdrawn from the Federal reserve system by rea
son of the forming of coalitions or absorptions of other banks oper
ating under State control?
Governor Young. That is correct.
Mr. Dunbar. How much do you believe that the Federal reserve
system should be under the control of the Federal Government by
reason of the affiliation with it of national banks rather than the
affiliation with it of State banks ?
Governor Young. Can I point out, Mr. Congressman, that a Fed
eral reserve bank, because of the nature of its directors, or the way
its directors are appointed, theoretically takes the actual control away
from the banking interests ? The banks elect three directors that may
be stockholders of banks. They elect three other directors that rep
resent business, that are not officers or directors of banks, although
they may be stockholders. The Federal Reserve Board appoints
three directors, two of which represent commerce and industry and
can not be directors, stockholders, or officers of any bank; so that,
theoretically, the control of every Federal reserve bank is in the hands
of business rather than the banking interests.
Now, in addition to that, the Federal Reserve Board is appointed
from various districts of the United States. No two members, except
the ex officio members, can come from the same district. They are
appointed to represent the industry of the country and, as I stated
the other day, the powers of the Federal Reserve Board, if they elect
535
536
BRANCH, CH AIN , AND GROUP BANKING
to exercise them, are very far reaching, in so far as the operation and
ipolicies of the reserve banks are concerned; so that I think I am safe
in saying that the possibility of State banks gaining control of the
reserve banks is very, very remote.
Mr. Dunbar. Even though most of our national banks would be
come State banks and withdraw from the national banking system?
Governor Young. No; I can not go that far.
Mr. Dunbar. Is not that the present tendency; is not the present
tendency in that direction ?
Governor Young. It is.
Mr. Dunbar. Is it not very much so ?
Governor Young. The national system has lost a great deal in the
last two or three years.
Mr. Dunbar. Does the Chase National Bank m New York remain
in the Federal reserve system?
Governor Young. I am informed they are going to continue under
a national charter.
Mr. D u n b a r . Then, according to your judgment, am I right in
presuming that if national banks would largely withdraw from the
Federal Reserve System, that the Federal Reserve bank could oper
ate and function with practically the same degree of efficiency and
economic requirements ?
Governor Young. Under war conditions, I would say it would
be very advantageous to have a large representation of the banking
strength of the country in national banks.
Mr. Dunbar. You spoke the other day about national banks with
drawing from the Federal Reserve System by virtue of State char
ters being more advantageous to them than operating under the
national banking system, and the subject was also discussed as to
what we can do to make national banks remain in the system.
Nothing can be done, as I understand it, that will not be applicable
to State banks.
Now, have you any plan or do you think any readjustment is
possible where greater inducement can be offered to blinks that re
main in the Federal reserve system and of those which remain out
of the system by reason of the present inducement, so we could draw
a number back and probably cause the greater number of our na
tional banks to remain in the system ?
Governor Young. I think that additional inducemement could be
offered to member banks, but, obviously, in so far as the Federal
reserve system is concerned, anything that would be done for a
national bank it would be necessary to do the same thing for the
State member banks. There is quite a feeling in the country at the
moment that the members of the Federal reserve system are entitled
to a larger return than the 6 per cent that they receive upon their
stock investment in Federal reserve banks. I am inclined to agree
with that view. Different proposals have been made.
I would not want to commit myself at the moment, but I lean very
strongly toward increasing the dividends that are paid member
banks.
One other suggestion has been made that would require a great
deal of thought and further investigation, and there might be legal
complications that would prevent it from being put into operation—
but the suggestion has been made that it would be for the best in
BRANCH, CH AIN, AND GROUP BANKING
537
terests of the country if all banks in the United States were required
to carry a portion of their reserve in the Federal reserve system,
regardless of whether they are members or not.
Mr. Dunbar. Is there any way possible by which the Federal Gov
ernment could require that?
Governor Young. That is a legal question, Mr. Congressman, that
I am not prepared to say yes or no on at this moment.
^
Mr. Dunbar. Each State exercises its sovereignty over the State
banks, so that any Federal laws can not extent to them and that seems
to be the weakness, in my opinion, of the present banking system of
the Federal Government.
Governor Young. Well, of course, the Federal Government
abolished the wild cat currency that existed, by a tax. Whether that
is applicable to checks or interstate transactions I am not prepared
to say.
Mr. Dunbar. Y ou would not like to give us your views on that
point ? I think you entertained the thought that such a thing is im
possible. Have you any other suggestion to make as to how the
Federal reserve system could be made so attractive that State banks,
as well as national banks, would become members of the Federal
reserve system?
I think you believe that if all belonged to the Federal reserve
system, much of our troubles and difficulties would disappear.
Governor Young. No; I can not say that, Mr. Congressman.
Membership in the Federal reserve system is not a guarantee of bank
deposits.
Mr. Dunbar. Is not a guarantee of banking deposits ?
Governor Young. Yes.
Mr. Dunbar. What I mean is the system has the bulk of the
deposits.
Governor Young. I did not understand that, Mr. Congressman.
Mr. Dunbar. You stated bank deposits were essential for the
transaction of the banking business of all banks. We all recognize
that. What is there in the Federal reserve system that would cause
the depositors in those banks to get away from the Federal reserve
banks ?
Governor Young. They can. A national bank can convert into a
State bank and withdraw from membership. A member State bank
can get out of the system on six months’ notice.
Mr Dunbar. Pardon me, I suspect I misunderstood you. I
thought you had reference to individual deposits in the banks which
are members of the Federal reserve system?
Governor Young. That is correct. We can not guarantee those
deposits.
Mr. Dunbar. N o ; you can not guaranty those deposits. They
are the result of the natural volition of the people, and I do not see
how the Federal reserve system can increase or decrease the deposits
in any particular bank except in so far as people found it advaitf
tageous to do busines with that bank.
Governor Young. That is correct.
Mr. Dunbar. A great many banks believe the Federal reserve
system should pay an interest on daily deposits, the same as other
banks do. What is your opinion with respect to that?
u s a n c e :,
c h a in
,
and
gboup
b a n k in g
Governor Y o u n g . I would be opposed to that. If that policy
were adopted, there would be great pressure upon the reserve banks
and the Federal reserve system, to earn good returns for their
members. The reserve system was not intended as a money-making
system. The Federal reserve system simply took the reserves held
by individual banks, and thus concentrated them in one general
gold reserve, which was the basis of the note issue and credit exten
sion for seasonal requirements and other emergencies.
If the reserve banks under certain conditions were required to earn
a return that would enable them to pay any rate of interest on de
posits, it would so upset the entire credit structure of the country
th$t the effects would be felt in all parts of the country.
Mr. Dunbar. What are the daily deposits of member banks in the
Federal reserve system?
Governor Young. Approximately $2,800,000,000. That varies
from day to day and according to seasons approximately $100,000,000 •
variation.
Mr. D unbar. The returns to the Federal Government last year
were around $3,000,000?
Governor Young. A little higher than that, I think. Y ou mean
the franchise tax?
Mr. D unbar. Yes.
Governor Young. $4,288,000.
Mr. Dunbar. $4,283,000?
Governor Young. Yes, sir.
Mr. Dunbar. D id that approximately represent all the profits of
the Federal reserve system ?
Governor Young. No, sir
Mr. D u n b a r . What were the profits of the reserve system?
Governor Young. Last year the dividends paid aggregated
nine million five hundred and eighty-three thousand and odd dollars.
Mr. D unbar. That was 6 per cent ?
Governor Young. Yes, sir. Transferred to surplus, $22,535,000;
franchise tax paid to the United States Government, four million two
hundred and eighty-three thousand and odd dollars. That is a total
net earning of $36,402,000 ?
Mr. Dunbar. If all that were paid for interest on daily deposits
of $2,300,000,000 in the Federal reserve system, it would amount to
about iys per cent; so that if you paid all of it for interest to the
depositors, it would not leave you any profit?
Governor Young. It would not leave any profit, and 1929 was
the highest year from the standpoint of earnings since 1921.
Mr. Dunbar. That year you paid a Federal Reserve tax of
$60,000,000?
Governor Young. In 1920 we paid a franchise tax of $60,724,000.
Mr. D unbar. Would it not be very advisable, if some system could
be conceived whereby interest on balances would be paid to the de
positors of the Federal reserve system? I think it would make the
system more popular than anything that could possibly be done,
and if it could be made more popular you would have more money
and you would retain your national banks as members of the system.
Now, you say the Federal reserve bank is not run for profits.
That is true, but it is necessary that the profits be such that they
BRANCH, CH AIN, AND GEOUP BANKING
539
can maintain themselves and I believe they could maintain them
selves by making the terms more attractive in order to retain the
national banks and the State banks, and that this, to a considerable
extent, would solve the problem of branch banking, group banking,
and chain banking?
Governor Young. I will agree with you, Mr. Congressman, except
as to the procedure. I should regret very much to see legislation
enacted that would compel the reserve banks to pay a fixed amount
of interest on deposit accounts.
I would, however, be agreeable to any equitable plan that would
permit more of the profits of the reserve system to be distributed to
the member banks, if earned. But I would not put the obligation on
the Federal reserve system of earning 1 per cent on deposit accounts,
one-half of 1 per cent on deposit accounts, or any other amount.
Mr. Brand. Will you yield to me for a question?
Mr. D u n b a r . Certainly.
Mr. Brand. Referring to your answer, Governor, about the Fed
eral reserve system, you say the Federal reserve system is not a
money-makmg system. I want to call your attention to the fact
that from 1914 to 1926 the gross earnings were $678,999,660. The
total expenses in this time were $257,144,956. The net earnings for
the 12 Federal reserve banks during that time, from 1914 to 1926,
were $421,854,704. Do you not think that was a pretty good money
making institution?
Governor Young. Very.
Mr. Brand. With very good net earnings?
Governor Young. Yes, sir.
Mr. Brand. Therefore, would you not say it was a money-making
institution ?
Governor Y oung . Yes, sir.
Mr. Brand. You spent nearly 25 per cent of that $678,000,000 on
expenses and yet you got nearly $422,000,000 net profits ?
Governor Young. Correct.
Mr. Brand. Then, it is a money-making machine?
Governor Young. Yes, sir; it has been making money.
Mr. Dunbar. You do not expect the Federal reserve system in the
future, as now operated, to make anything like that money?
Governor Young. It might or might not, but I would regret very
much if a policy were ever adopted by the Federal reserve system
which would be based upon earnings and not with the view of ac
commodating commerce and industry as the law now requires it.
Mr. Dunbar. I agree with you. 1 am not in favor of any legisla
tion that would compel you to pay interest on deposits. But I wish
you could voluntarily work out a plan to do this.
You may not believe it to be right, but I believe if the Federal
Reserve Board could work out some plan whereby it would pay inter
est on daily deposits, it would be the most popular thing to do and
would result in advantage m your operations.
Governor Young. Mr. Congressman, would it accomplish the same
results if it was paid in dividends on stock ?
Mr. Dunbar. I do not know.
Governor Young. Or if the earnings were paid above a certain
amount on the capital investment they had in the Federal Reserve
banks and the reserves they carry in the banks ?
540
BRANCH, CH AIN, AND GROUP BANKING
Mr. Dunbar. People like to receive a return for every specific act
and although some other plan might be devised which, in the aggre
gate, would pay more money, yet their return on single investments
seems to impress them more than the aggregate on the whole propo
sition, which would bring them more. Everywhere I go I find com
plaints because the Federal reserve system does not pay an interest
on daily deposits.
Governor Young. I can say, Mr. Congressman, that that question
has been referred to the Federal advisory council; has been referred
to a conference of the governors of the Federal reserve banks; has
been referred to a conference of Federal reserve agents, and I think
that they are practically unanimous—not quite unanimous—in be
lieving that the time has arrived when the member banks are en
titled to a larger return, on their stock investment in the Federal
reserve system.
Mr Dunbar. In your opinion that will make the system more pop
ular and will materially assist you in retaining banks in the system
which are now going out ?
Governor Young. I believe so.
Mr. Dunbar. The Massachusetts decision, and I believe the de
cision of the Supreme Court of New York, interfered very largely
with the successful operation of the McFadden Act, did it not?
Governor Young. In reference to fiduciary powers?
Mr. Dunbar. Yes.
Governor Young. Yes, sir; that is correct.
Mr. Dunbar. I s there any way the national bank act might be
amended, so as to permit national banks to exercise those powers?
Governor Yotjng. I do not think so. But if I may have the privi
lege of asking our counsel if he has any suggestions along those lines,
I should like to do so.
Mr. Dunbar, That is satisfactory to me.
Mr. W y a t t . I think the act could be amended so as to compel the
States to treat national banks exactly as they treat State institutions
in respect to that question. The case referred to did not deny the
right of national banks to exercise fiduciary powers, but dealth
simply with the question of whether a consolidated bank resulting
from the consolidation of a national bank with a State trust com
pany, succeeded automatically to the executorships and trusteeships
under which the trust company was acting, under wills, prior to the
consolidation, and the court held that where the State law did not
permit such a succession, the McFadden Act should not be construed
as requiring it.
In so holding, however, they called attention to the fact that the
McFadden Act was vqry careful to say that these consolidations
should not be in contravention of State or local law and the court
did not pass upon the question of whether Congress could pass an
act requiring that result in contravention of State law. That was
left open.
I feel certain, however, that Congress could pass a law compelling
State courts to treat national banks exactly as they treat State banks
in reference to recognizing a consolidated institution as a successor
to the constituent institutions; in other words, Congress could pro
vide that if, under State law, a consolidated institution, resulting
from the consolidation of two State constituent institutions is recog
BRAN OH, CHAIN, AND GROUP BANKING
541
nized as the same person and may be permitted to continue to execute
the trusts held by the constituent institutions, such States shall per
mit a consolidated institution consisting of a national bank and a
State institution, to do the same thing. I think that would be sus
tained by the courts.
Mr. Dunbar. Were these decisions by State courts?
Mr. W y a t t . The decision was of the Supreme Court of Massachu
setts, which was affirmed by the Supreme Court of the United
States, but on different grounds.
Mr. Dunbar. You believe it would be advisable to work out a plan
whereby a national bank and a State bank consolidate^, and the con
solidation does not continue as a member of the Federal reserve sys
tem, by reason of these decisions—do you believe that some plan
might be worked out whereby that consolidated institution would be
permitted to exercise all the powers that the State banks exercised
and still be retained as a member of the Federal reserve system?
Mr. W y a t t . I did not quite catch the question. I thought "you
said, in the first place, where they did not stay in the system.
Mr Dunbar, I will restate the question. Here is bank No. 1 m
Massachusetts, a national bank, and it consolidates with bank No. 2,
which is not a national bank, but by reason of the exercise of ex
ecutorships by bank No. 2 and other business in the nature of trusts*
they are not permitted to remain a national bank. That was true;
was it not ?
Mr. W y a tt, No, sir.
Mr. Dunbar. Well, what is the truth?
Mr. W y a t t : The situation is this, that a State trust company,
which was acting as an executor under a will, was consolidated with
a ijational bank under the charter of the national bank, so that the
consolidated institution was a national bank and remained a member
of the Federal reserve system, necessarily. This consolidated na
tional bank then attempted to file with the court, a final accounting
as trustee or executor—I forget which—in the case in which the
State bank had been appointed, and the court held that they could
not recognize that national bank as the executor because it was not
the executor named in the will and appointed by the court, but that
it was a different institution, a different corporation and a different
person; so, they said, the court would have to appoint another trustee
or another administrator.
Now, the practical effect is this; that where you have got a big
trust company, operating under the State law, and a national bank,
and the directors of the two institutions decide to consolidate, the
question always comes up whether the consolidated institution shall
be a national bank or a State bank and, on account of that decision,
they very frequently think it is safer to consolidate under State
charters so that there will be no question of their right to continue
the trust business under the consolidated State institution. Fre
quently the State banks have more trust business than the national
banks, because they have been exercising that function longer.
Mr. Stevenson. Did not the court hold that the national bank
could, by application to the local probate court or whatever court
handles probate matters, be appointed in place of the other ?
Mr. W y a t t . They suggested that it could be appointed, but there
was nothing to control the action of the probate court.
542
BRANCH, CH AIN , AND GROUP BANKING
Mr. Stevenson. But it was eligible to be appointed, if they
applied ?
Mt. W y a t t . Yes, sir.
Mr W ingo. The decision specifically said so.
Mr. W y a t t . In a great many States they have considered it safe
to go ahead and take the national charter because they know the
probate courts will appoint the consolidated national bank or admin
istrator, except in cases where there are wills which have been exe
cuted, but where the testator has not died, they are afraid in some
States, that unless they can get a codicil or new will appointing
the new institution, there may be some difficulty about having the
new institution recognized under that will.
Mr. Stevenson. If a man appointed a State institution executor
and, before he died, that institution was consolidated and became
a national institution, the question is whether the national institution
can succeed to the right which was provided in that will ?
Mr. W y a t t . Yes, sir.
Mr. Dunbar. What suggestion have you to offer in the way of
Federal legislation that would make it easier for a bank, under those
circumstances, to remain in the Federal reserve system?
Mr W y a t t . They can all remain in the Federal reserve system.
They usually do, even where they take the State charter. A State
bank can be a member of the Federal reserve system.
Mr. Dunbar. This bank in Massachusetts did not remain in the
system ?
Mr. W y a t t . Yes, sir; as a matter of fact, it remained a national
bank. The effect of the decision was to discourage other national
banks from taking out the national charter instead of State charters
when they consolidate with State trust companies.
Mr. Dunbar. Have you any suggestion to make in reference to
legislation that might be recommended by the Committee on Bank
ing and Currency that would make it more attractive for banks to
remain as members of the Federal reserve system?
Mr. W y a t t . I think clearly the suggestion Governor Young made
would be very helpful, and there is another recommendation which
the Federal Reserve Board has made which I think would be helpful
in a way, and that is a recommendation that the board be permitted
to waive the cost of examining State member banks. At the present
time the law requires the expenses to be assessed against the State
member banks and they also have to pay for the examinations made
by the State authorities and that is not very attractive to them.
The Federal Reserve Board has recommended, in its last two
annual reports, that it be permitted to waive those costs.
Mr. Dunbar. That is more irritating than it is a question of great
expense ?
Mr. W y a t t . Nevertheless, the banks take serious exception to it.
Mr. Dunbar. I know they do. That is the reason I would favor
doing not only that, but granting the reserve banks interest qn
their deposits even though it might be only 1 per cent. I believe if
the Federal reserve system would work out such a plan, it would
remove a very irritating condition of mind among the banks who
are members.
We spoke the other day, Governor Young—and I will not take up
very much more time—or some members of the committee did—
BRANCH, CH AIN, AND GROUP BANKING
543
about your being able or it being advisable to restrict the interest on
call loans on the New York Stock Exchange, which went as high
as 24 or 25 per cent, and it was thought by my friend on my left
that if they could be restricted to 8 per cent, it would result in the
welfare of the country during hours of disturbance.
But now, would that have restricted or helped in any way to
have prevented the panic which we had last October ? If banks were
required by the board that controls the Federal reserve rates, to
loan money at 8 per cent, they absolutely would not have loaned it,
would they? They would not have had it to loan at those figures?
For instance, money was sent in from the interior to New York.
One of the banks in my part of the State sent in $100,000. They
would not have sent it in at 8 per cent ?
Governor Young. What price did they send it in for?
Mr. D u n b a r . I do not know
Governor Young. Eight per cent is a very attractive rate.
Mr. D u n b a r . It is an attractive rate.
Governor Young. And when you stop to consider that the banks
throughout the United States maintain rates to business at 6 per
cent and they have the option of placing their surplus funds in
United States Government bonds, and bankers’ acceptances at not
to exceed 5y2 per cent for the bankers’ acceptances or commercial
paper at 6 per cent or possible 6% per cent, there would have been
a strong desire to go to the New York call market at 8 per cent.
Mr. Dunbar. D o you believe that the fixing of the maximum rate
at 8 per cent by the three members of the stock exchange that fix
the rates for call loans, could be made effective?
Governor Young. I think there has been a great deal of mis
understanding about the three members who fix the call rates.
People seem to be under the impression they arbitrarily fix those
rates.
Mr. Dunbar. You explained the other day they do not.
Governor Young. They can not do that. If they fix the rate at
10 o’clock in the morning and it is not right, they have to change
it during the day. It depends upon the funds that come in and the
amount of money that is short in the market.
Now, the highest call rates, properly should have a restraining
influence on the borrower. In 1927, 1928, and 1929, they did not
seem to have a restraining influence. There is no specific evidence
of it. But ordinarily, that rate would have a very restraining in
fluence. Under the conditions that exist to-day, I think a 6 or 7
per cent call rate would have a restraining influence and a very
effective one.
Mr. Dunbar. You then would be inclined to adopt Mr. Seiberling’s
opinion on that?
Governor Y oung. Eight per cent?
Mr. D unbar. Yes.
Governor Young. I would not. I think that call rate had better
be open.
Mr. Dunbar. You said you believed an 8 per cent call rate would
have a very beneficial effect on business?
Governor Young. Under certain conditions, but I do not think
it would have had any effect in 1927, 1928, or 1929 the way the
American public felt about buying stocks.
544
BRANCH, CH AIN , AND GROUP BANKING
Mr. Dunbar. You do not think it would be a practical thing in
times of emergencies?
Governor Young. That is correct.
Mr. Dunbar. The people did have a speculative mania—there is
no doubt about that—and I suppose nothing would stop them. The
Federal reserve system did try to stop that speculative mania, did
it not?
Governor Young. It did.
Mr. Dunbar. I remember some people back home criticising the
Federal reserve system very severely because its policies interfered
with some of their transactions.
Governor Young. Yes.
Mr. Dunbar. It did have a restraining effect, did it not?
Governor Young. We think so, to some extent.
The Chairm an. Mrs. Pratt.
Mrs. P r a tt. Mr. Chairman, I am sorry I was not here on Friday.
It may be that some of the questions I may ask are already in the
record. If so, will you please advise me?
The Chairm an. Very well, Mrs. Pratt.
Mrs. P r a tt. During the course of the hearings, Governor Young,
a great deal has been said about the decentralization of credit. It
has been stated that part of the proposed legislation to permit branch
banking would be for the purpose of decentralizing credit and creat
ing, as I understood it, a greater number of large credit centers.
Is that inconsistent with approval of such mergers as we have seen
recently in New York?
Governor Young. May I answer that in this way: Let us take the
Federal reserve system, for example. It mobilizes credit, which
permits it to decentralize credit; in other words, the mobilization
of the credit at any one point permits you to put it into the districts
where it is needed and draw it from the districts where it is not
needed.
Now, it is'iioped—-and in my opinion, it would be a very short
sighted policy on the part of large groups, large chains, and even
of branch banking, if it is permitted, if that decentralization after
mobilization is not followed as a policy by these groups or chains.
Mrs. P r a tt. Now, to go to the subject of your paper: How does
the concentration of capital in banking compare with the concen
tration of capital in business and industry in general ?
Mr. Busby. Mr. Chairman, we can not hear, and we should like to
follow the examination.
Mrs. P r a tt. The question was, How does concentration of capital
in banking compare with concentration of capital in business and
industry generally?
Governor Y oung. I can not state accurately, but I would say that
up to 10 years ago, it lagged. Since then, consolidations, mergers
and developments of groups and chains have been quite rapid. What
relation that bears to business, I can not say. Can you tell us,
Doctor Goldenweiser ?
Doctor Goldenweiser. I would say it has not gone as far in bank
ing as in other business.
Mrs. P r a tt. That is the information I have. In your opinion,
*does the concentration in large communities, of the banking credits,
BRANCH, CH AIN, AND GROUP BANKING
545
make it more difficult for smaller communities having smaller busi
nesses, to secure accommodations and loans?
Governor You ng. I have seen no evidence of that to date.
Mrs. P r a tt. On page 29 of your statement, in the second para
graph, I was impressed with the number of agencies which have
been created for the relief of the farmer. Do you think the fact
that the farmers in Canada have lost nothing from their bank
failures, as compared with the losses of their near neighbors in the
States south of them, points to the possibility that the troubles in
our agricultural communities can be better solved by permitting
branch banking than by providing additional credit facilities, by
paternalistic methods which impose heavy drains upon the Treasury?
That is what happened when all these various agencies were insti
tuted after the war.
Governor Young. Well, that is a very strong argument, Mrs. Pratt,
for the branch banking system, in so far as the depositors are con
cerned.
I make that statement with a great deal of reluctance. I am a
country banker and was raised in a country bank. My association
has been with them for a great many years. I realize the difficulties
they have experienced. I am thoroughly familiar with their re
sourcefulness and sticktoitiveness, and my sympathies are with the
small country banker. I have the greatest admiration for those who
have been able to pull through this very unfortunate period that
we have had in the agricultural sections of the United States. I
have great admiration for even some of those who were unfortunate
enough to be compelled to close their institutions. But, I think, we
are faced with facts rather than sympathies in this present situation.
There has been a tremendous development of the group and chain
idea, which is branch banking in another form.
Mrs. P ra tt. You do feel, perhaps, that in many instances, the
losses that were sustained might be laid to duplication of facilities ?
Governor Young. I think so.
Mrs. P r a tt. Now, on page 61—and I shall try to concentrate the
questions so as to make them as brief as possible—it appears there
that the fundamental cause of bank failures, apparently, was the
lack of sufficient capital and the existence of more banks than could
profitably exist in many communities, especially in the small com
munities. Following that summary, the statistics indicate that the
largest proportion of failures occurred in communities of less than
1,000 population. From 1921 to 192?, 80 per cent of the banks failed
in communities of less than 2,500, and, during the last 9 years, 91.6
per cent were located in communities of less than 10,000 population.
I think that is correct, is it not ?
Governor Young. I think so.
Mrs. P r a tt Now, it was in those communities, particularly, that the
competition of facilities provided by the farm-loan system and later
the intermediate credit banks operated, which would seem to indi
cate that the efforts of the Federal Government to extend cheap credit
has produced harm rather than assistance and, as I intimated before,
these communities may have lost more from bank failures than they
gained through interest rate reductions.
Governor Young. I could not make that positive statement. I
think it can be stated in this way that the inauguration of the Fed
546
BRANCH, CH AIN, AND GBOUP BANKING
eral reserve system took away certain profits that the country bank
had in the past in the way of collection charges that were made on
checks. I think that the Federal land banks and joint-stock land
banks, took away certain profits that the banker had previously to
the enactment of those laws—profits which he received in handling
farm mortgages—so that these two agencies did interfere with his
profits. Does that answer your inquiry?
Mrs. Pkatt. I think I shall find that it does when I read it over.
I was not able to follow it very closely.
Now, referring to Professor Sprague’s statements quoted by you,
I think it was in the last part of this statement, page 6T, first para
graph, that Professor Sprague seemed to indicate that bank exami
nations have sometimes, prior to actual suspension, indicated in
creasingly unsatisfactory conditions. It might be giving too much
power to a single individual to permit the Comptroller of the Cur
rency, or a corresponding* official charged with the duty of making
such an investigation, to insist on a clean-up of the conditions com
plained of by the examiner; therefore—and this is a more or less an
academic question—would it be advisable to set up some kind of
banking board that would consider such questions as would arise
from impending insolvencies?
Governor Y oung. I do not think it necessary to set up such a
board.
Mrs. P katt. D o you think it is a good idea when they foresee an
insolvency is inevitable that the operation should be more rapidly
brought about rather than wait for the actual failure to occur?
Governor Young. I doubt it. I think the actions of the board
would be the same as the actions of the Comptroller of the Currency.
It is the ambition of everyone, the Comptroller of the Currency and
any board, to give the bank the advantage of the doubt and do
everything within their power to attempt to pull that bank through,
either through assessments, voluntary or legal, or assistance from
neighbors or consolidations or what not. The banking authorities,
in 99 cases out of 100, do everything they can before they permit
a bank to close. I think that any board that might be set up would
do the same thing, not in the interests of the stockholders of that
bank particularly, but in the interests of the depositors, in the inter
ests of the community, and, if you will, in the interests of some good
near-by banks. The closing of a bank has a far-reaching effect
upon institutions that are good and solvent.
Mrs. P ra tt, I was very much interested in the next paragraph
of Professor Sprague’s report. In reading it over the thought oc
curred to me that it apparently suggests the approval to all new
charters be withheld awaiting what we call—with respect to public
utilities—a certificate of public convenience and necessity and where
competition is not held to achieve a public benefit; in other words,
where it would be a mere duplication and would not be a benefit, it
seems to suggest the possibility of banks, as is the case with public
utilities, being required to present a certificate of public convenience
and necessity. Do you think that would be a bad proposition?
Governor Young. I think that is what is done in actual practice
to-day. I think previously to 1920, charters were granted rather
freely, both by the national department and also by the State depart
ments. After 1920 it was much harder to get a national charter,
BRANCH, CH AIN, AND GROUP BANKING
547
because the supervising authorities realized that there were too many
banks; so that, to-day, while the Comptroller of the Currency is
vested with the power of granting national charters, in the last five
or six years, I do not know of a national charter that was granted in
the United States that was disapproved by the Federal reserve bank
of the district.
Now there may be one or two exceptions, but I do not think so.
So the procedure followed by the Comptroller of the Currency, when
an application for a charter is made, is to refer that to the Federal
reserve bank in the district in which the bank desires to locate. It
is also referred to the chief examiner of that district and they both
made independent investigations and recommendations to the Comp
troller of the Currency to grant the charter, deny the charter, or with
hold the charter. That is what happens in actual practice.
You may have a Comptroller of the Currency that would disregard
that procedure and arbitrarily grant charters where he wanted to.
There has been a suggestion at different times that the approval
of the national charters might go a little bit beyond the Comptroller
of the Currency and include the Federal Reserve Board.
Mrs. P ra tt. You think, as a general principle, that the creation of
competition is better than the strengthening of the existing system?
Which has the better effect—competition or----- Governor Young. I should like to answer that both would be
beneficial, good competition and strengthening of the banking
structure.
Mrs. P r a tt. I have been away, Mr Chairman, and I should like
,to ask more questions later.
The Chairman. Mr. Steagall.
Mr. S te a g a ll. Governor Young, what is the total capital of the
Federal reserve banks ?
Governor Young. $172,245,000.
Mr. S te a g a ll. What is the present surplus of the 12 Federal
reserve banks ?
Governor Young. $276,936,000.
Mr. Strong. What is that surplus again ?
Governor Young. $276,936,000.
Mr. Strong. And what is the capital ?
Governor Young. $172,000,000 paid in.
Mr. S te a g a ll. Governor, you stated to Mr. Dunbar the amount
that would be paid to the member banks if the present earnings of
the system could be applied and distributed among the member banks
on a basis of their balances. What per cept did you say that would
have been last year?
Governor Young. Mr Dunbar figured it out.
Mr. Dunbar. One and one-third per cent.
Mr. S tea g a ll. Can you state what percentage it would be if dis
tributed on the basis of stock held by the member banks?
Governor Young. It would be almost 33 % per cent on the capital
stock, I think. Let me examine the figures; $22,000,000 was trans
ferred to the surplus account.
Mr S tea ga ll. I mean to include in that the amount paid to the
Government ?
1 0 0 1 3 6 — 3 0 — voi. 1
pt
5 -------- 2
548
BRANCH, CH AIN, AND GROUP BANKING
Governor Young. $26,000,000 that would be distributed on a capital
of $172,000,000. That is about 15 per cent or 16 per cent.
Mr. S te a g a ll. The Federal reserve banks have set aside a surplus,
down to this time, amounting to almost twice their capital?
Governor Young. Twice the paid-in capital. The subscribed
capital is-----Mr. S te a g a ll. You are going to continue to set aside 10 per cent
each year?
Governor Young. For those banks who have already accumulated
a surplus of 100 per cent of their subscribed capital.
Mr. S te a g a ll. That is what I mean. Well, they will do it any
how, will they not ?
Governor Young. They will take more into the surplus account-----Mr. S te a g a ll. At any rate, after seating aside the 100 per cent
they will continue to set aside 10 per cent after the earnings are
paid?
Governor Young. After the 6 per cent dividends are paid. The
dividends are paid first.
Mr. S te a g a ll. Do you think it advisable and wise that this law
operate perpetually under which the banks will continue to
increase their surplus ?
Governor Young. I think when the surplus gets to 100 per cent
it is plenty large enough.
Mr. S te a g a ll. We are still, nevertheless, paying the 10 per Cent?
Governor Y oung. Correct.
Mr. S te a g a ll. The member bank is arbitrarily held to 6 per cent
return on the capital stock and nothing upon balances or deposits?
Governor Young. Correct.
Mr. S te a g a ll. Your Federal reserve banks have paid into the
Treasury, since the inauguration of the system, approximately $150,000,000, have they not?
Governor Young. $147,000,000.
Mr. S te a g a ll. $147,000,000?
Governor Young. Yes, sir.
Mr. S te a g a ll. And during that time they have set aside $170,000,000, did you say ?
Governor Young. $276,000,000.
Mr. S te a g a ll. $276,000,000?
Governor Y oung. Yes, sir.
Mr. S te a g a ll. Surplus?
Governor Young. Yes, sir.
Mr. S te a g a ll. And this, of course, is exclusive of the varied and
extensive expense accounts that they have encountered in the way of
building-----Mr. Strong. And salaries.
Mr. S te a g a ll. And other things incident to the inauguration of
the Federal reserve system ?
Governor Young. Yes, sir.
Mr. S te a g a ll. Which, of course, would not be expected to con
tinue in the future ?
Governor Young. That is correct. I will correct that just a bit,
Mr. Congressman. The probabilities are, as time goes on, it will be
necessary to build more branch buildings.
BRANCH, CH AIN, AND GROUP BANKING
549
Mr. S te a g a ll. There will not be many more buildings, I take it ?
Governor Young. Not unless the branch system of the Federal
reserve system is extended.
Mr. S te a g a ll. Well, what would you suggest instead of a con
tinued accumulation of unnecessary surplus out of the earnings of
these banks ?
Governor Young. I would suggest these earnings over a certain
amount be paid to the stockholding member banks.
Mr. S te a g a ll. Governor Young, I have had some bills pending
before this committee for probably 10 years undertaking to enable
member banks to share in the earnings of the system. I first intro
duced a bill providing that there should be an administration upon
the assets of the Federal reserve banks after setting aside their
surplus, paying the 6 per cent earnings to their stockholders and
all expenses—that there should be an administration by the Federal
Reserve Board and the earnings returned to member banks upon
a basis of their daily balances and in proportion as those earnings
accrued by reason of the operations of the Federal reserve banks
with their member banks.
Governor Young. Not retroactive?
Mr. S te a g a ll. Not retroactive.
Governor Young. But from that point on?
Mr. S te a g a ll. Yes. Later I introduced the bill m a different
form, providing that the earnings distributed be paid up on the
basis of the capital stock held by the member banks, and I believe
you said that the latter, you think, would be preferable, if such a
law were to be passed.
Governor Young. If I did, I spoke a little too quickly I think,
and this is a rather impulsive thought, that returns should be paid
to member banks not alone on their stockholdings in the Federal
reserve system but also in proportion to the reserves they c a r r y ^ the combination of the two.
Mr. S te a g a ll. I appreciate very much, representing an agricul
tural section that is in considerable distress, not only as expressed in
banking facilities, but in a general way—I appreciate what you say
in reference to the country banks and small banks.
If these earnings should be distributed on the basis of stock held,
the proportion of help would be more favorable to the country banks
and smaller banks than would be the case if it were distributed on
the basis of daily balances; would it not ?
Governor Young. A slight preference, because the country banks
-carry lower reserves in proportion to the banks of the larger cities.
Mr. S te a g a ll. And the deposits run lower than is the case with
the larger banks in the larger cities ?
Governor Young. The difference would be very slight, Mr Con
gressman.
Mr. S te a g a ll. I want to ask you what portion of the earnings of
the Federal reserve banks result from the relations of the Federal
reserve banks with their member banks; in other words, what portion
of those profits come out of the member banks ?
Governor Y oung. I suspect, Mr. Congressman, that would be con
fined entirely to the amount we lend member banks in discounts. Is
that the way you want it divided ?
550
BRANCH, CH AIN, AND GROUP BANKING
Mr. S te a g a ll. I want you to put that m your own way, because*
you are better informed than I am and can tell me things about it
that, perhaps, I do not know.
Governor Young. Our profits come from three main sources.
First, there are the discounts received from member banks on the
paper that they rediscount with us; the second source of income is*
that received on Government bonds that we buy in the open market
and the third source are the discounts that we earn on bankers’ bills
that we buy in the open market. Dividing those, the profit we get
from member banks comes from the amount of paper that they re
discount. Then there are the bills that we buy and the Government
securities, and the income on those constitutes profit that we do not
get from the member banks.
Over the last 10 years, I would say on an average, and I am going:
to ask Mr. Smead to correct me if I am wrong, it has been just about
50-50.
May I insert this table in the record ?
The Chairman. Without objection the matter referred to will be
inserted in the record.
Governor Younq. Two-thirds of the earnings come from the paper
that is discounted with the member banks, approximately.
Mr. S te a g a ll. A s a matter of fact-----The Chairman. I am under the impression that this matter has
already gone into the record. Am I correct in that?
Governor Young. Not to my knowledge.
Mr. S tea g a ll. I was not here during all of this examination, and
I do not like to repeat, but this is information that I am anxious to
get into the record.
Governor Young. Can I give this information?
The Chairm an. All right; if you will read it into the record.
Governor Young. Total earnings in 1920, $181,000,000; earnings
on discounted bills, $149,000,000; on purchased bills, $22,000,000;
on United States Government securities, $7,000,000; and there was a
small amount of earnings coming from penalties on deficiencies in
reserve, only amounting to $1,500,000; miscellaneous other sources,
$1,500,000.
That was the year in which the banks were very heavily in debt
to the Federal reserve.
In 1921 total earnings, $122,000,000; earnings on discounted bills,
$109,000,000; on purchased bills, $5,000,000; on United States Gov
ernment securities, $6,000,000.
From 1922 on, the earnings, I would say, averaged about $43,000,000. The average return on bills discounted would amount to
about $23,000,000; the average earned on purchased bills, about
$8,000,000; the average on United States Government securities,
about $9,000,000.
Mr. S te a g a ll. Governor, the fact is, is it not, that the Federal
reserve banks get their money out of their member banks, even
their capital?
Governor Young. That is correct.
Mr. S te a g a ll. Your rediscounts, or discounts, whichever you call
them, are mainly with the smaller banks and the banks that are more
in need of sharing the earnings of the Federal reserve system?
BRANCH, CH AIN, AND GROUP BANKING
551
Governor Y o u n g . In number, Mr. Congressman, but not in
volume.
Mr. S t e a g a l l . Not in volume?
Governor Y o u n g . Oh, no.
Mr. S t e a g a l l . These investments that you make, other than loans
to member banks, are made out of your reserves and balances that
are obtained from the member banks ?
Governor Y o u n g . Yes, sir.
Mr. S t e a g a l l . And all of the profits that you make out of these
bills that you buy come out of the handling of the funds of the
member banks maintained by the Federal reserve bank?
Governor Y o u n g . Yes, sir.
Mr. S t e a g a l l . Governor, is it a true picture of that situation to
say that only two-thirds of the profits of the Federal reserve banks
accrue by reason of the relations of the Federal reserve banks with
their member banks?
Governor Y o u n g . N o ; that is not a fair statement.
Mr. S t e a g a l l . They make more than that out of the member
fcanks, do they not?
Governor Y o u n g . Y o u might just as well say that they make
-everything out of the member banks. I thought you were trying to
divide it.
Mr. S t e a g a l l . I wanted the whole picture, and you have answered
it fairly and have given the information I had in mind, and done it
in a comprehensive way, I think.
Governor Y o u n g . I want to correct that somewhat. The United
states Government has given the Federal reserve system a very
unusual franchise in its note-issue power. I think that there is no
doubt that that is one of the very valuable assets of the Federal
Teserve system, and I think it would be fair to say, Mr. Congress
man, that in view of the power given to the Federal reserve system
which enables it to issue an elastic and well-secured currency each
and every individual of the United States contributes to a certain
extent to the possibilities of profit of the Federal reserve system.
JMr S t e a g a l l . After all, the franchise granted the Federal reserve
banks by the Federal Government was in contemplation of an en
largement of the service of the banks already in existence and
already chartered?
Governor Y oung. Yes, sir.
Mr S t e a g a l l . And, incidentally, i t was an additional franchise for
their benefit?
Governor Y o u n g . I would say, a very important franchise, for
without it it would have been extremely difficult for the Federal
Reserve system to operate.
Mr. S t e a g a l l . It would require the enactment of legislation to
terminate the operation of the system under which the surplus is
•continually enlarged 10 per cent annually, would it not?
Governor Y o u n g . Yes.
Mr. S t e a g a l l . In your judgment, i f no other provision of law
is made for the redistribution of these earnings, you think some
legislation should be passed which would terminate the setting aside
of unnecessary surplus?
552
BRANCH, CHAIN", AND GROUP BANKING
Governor Young. Yes, sir. The Federal Reserve Board is making:
a recommendation to the Congress of the United States in its annual
report that a greater distribution of the earnings of the Federal
reserve system be made to the member banks. As to the details, the
board has not yet arrived at any conclusions, but it is satisfied that
it can eventually work something out after all plans and proposals
are considered.
Mr. S te a g a ll. The bill that I first introduced provides that the
Federal Reserve Board shall be directed to ascertain approximately
the proportion of the earnings that are made out of their member
banks, and to distribute to those banks that portion of those earn
ings and pay the balance into the Treasury as a franchise tax.
Would that be practical?
Governor You ng. Do you mean by that-----Mr. S te a g a ll. Here is what I mean, as suggested in your answer
to Mr. Dunbar as to the wisdom of attempting to set up a definite
percentage of return to the member banks: It readily occurs to*
anyone, of course, that a situation might exist where all banks would
not earn a sufficient amount to meet that requirement, and then, of
course, they would be driven to the practical necessity of undertaking
to^ make sufficient earnings to take care of that demand, or, failing
to do so, would be unable to pay-----Governor Young. That would be poor policy.
Mr. S te a g a ll. Yes; I agree with you, but under the bill that I
have suggested at the end of each fiscal year the Federal Reserve
Board would administer upon their earnings, and it would not mat
ter whether they had made large or small earnings; they would pro
ceed to cast up the account to ascertain what portion of those earn
ings accrued by reason of their relations with member banks, and
then base the returns to the member banks upon that calculation.
That would be practical, would it not?
Governor Young. Do you mean by that, Mr. Congressman, that if
you had two banks in the community, one that had not borrowed
from the Federal reserve system and the other that had borrowed
liberally for the entire year, that the profits would go back to the
borrower and not to the lender?
Mr. S te a g a ll. No, sir; I do not mean to carry it to that finality,,
but simply to base it either upon the stock held by member banks
or upon the stock plus daily balances as suggested by you.
What I am asking you now is for the practical way of going about
the plan that I have outlined, by which the board would undertake
to determine the amount of earnings that had accrued by reason
of operations with their member banks.
Governor Young. I can not give you the details at the moment*
but I am confident in my own mind that some equitable basis of
distributing earnings can be worked out.
Mr. S te a g a ll. Governor, do you think the small banks in the
smaller communities should not be permitted to impose charges for
the collection of checks?
Governor Young. Well, Mr. Congressman, that has been a de
batable question for a great number of years. The Congress of the
United States, I think, has answered that question.
Mr. S te a g a ll. And thereby hangs a tale, but I will not go into
that situation.
BRANCH, CHAIN, AND GROUP BANKING
553
Mr. Stevenson. That is the ultimate wisdom, of course.
Governor Young. I will answer it this way, that I think it is
extremely unfortunate that a State bank under certain conditions
is permitted to make those charges and the national bank is denied
that right.
Mr. S tea g a ll. That discrimination was brought about by those
who were responsible for the law or for the practices of national
banks, was it not? The system before it was disturbed gave the
same privilege to the national banks as to the State banks?
Governor Young. That is correct.
Mr. S te a g a ll. So that if there has been brought upon the national
banks a discrimination that is injurious, we have ourselves to blame
and not the State banks; have we not ?
Governor Young. That is debatable, whether it is injurious to
them or not.
^_
Mr. S te a g a ll. I am not saying it is; but if it is injurious, whoever
is responsible for that situation is to blame, and not the State banks.
If it is right for banks to charge for remitting checks from rural
districts to wholesale houses, the State banks are not to blame for
continuing to permit that to be done, are they ?
Governor Young. No ; you can not blame them.
Mr. S te a g a ll. And if it is a legitimate charge for the exercise of
a legitimate function of a bank, it also follows that we should not
have taken that right from the national banks; does it not ?
Governor Young. Well-----Mr. S te a g a ll. Anyhow, we did that; we took that right away—>
somebody did; I did not. At any rate, they got it taken away.
Are you familiar with the history of that legislation in Congress ?
Governor Young. Not entirely
Mr. S te a g a ll. Well, that is beside the question. That is one
instance in which the House of Representatives did something that
they did not want to do. They instructed the conferees not to agree
to the Senate amendment which took away that right, and they
brought in a report which did take it away, and the House ratified
the report; and that is how the national banks lost the right to
collect for remitting checks. It was an error of the head and not
of the heart. The House did not intend to do it.
(Thereupon, at 12 o’clock noon, the committee went into executive
session.)
BBANCH, CHAIN, AND GROUP BANKING
WEDNESDAY, MARCH 26, 1930
H ouse of R epresentatives,
C ommittee on B a n k in g and C urrency ,
Washington, D. G.
The committee met in the committee room, Capitol, at 10.30 o’clock
a. m., Hon. Louis T. McFadden (chairman) presiding.
The Chairm an. The committee will come to order.
Mr. Steagall, you were questioning the governor when we ad
journed yesterday.
STATEMENT OF GOVERNOR ROY A. YOUNG— Resumed
Mr. S teag all . Yesterday when we adjourned we were speaking o f
the discrimination against national banks in connection with making
a charge for remitting from some rural district to, say, a wholesale
house in a large center on checks drawn, and how that situation came
about.
Mr. McFadden, you are a little more familiar with that history
than I am. Will you state in your own language what took place in
connection with that legislation, in my time ? I can state it roughly,
but probably you have the identical language in mind in which that
amendment was expressed, and, if you have, inasmuch as we have
already referred to it, I wish you would do so.
The Chairman. I do not recall now just the language of the amend
ment. It was known as the Hardwick amendment. It was inserted
in the bill in the Senate and came over in a conference report to the
House. It gave the banks the right to make a minimum charge of
10 cents, I believe, on the collection of checks, and I made the motion
in the House to instruct the conferees to sustain the substance of the
Senate amendment. After about 60 or 90 days’ time, with great
propaganda carried on throughout the country—the National Credit
Men’s Association and other affiliated organizations being interested
in the collection of par checks—including the activities of the Fed
eral Reserve Bank of New York, the Federal Reserve Board, and the
administration generally, the matter finally came up for a vote; and,
as I recall, my motion was defeated by 2 or 4 votes. That would have
given the country banks the right to an exchange charge on the collec
tion of checks.
Mr. S te a g a ll. If you will pardon me, you have not expressed cor
rectly what took place in a parliamentary sense wijth reference to your
amendment. This is what occurred: You offered an amendment to
instruct the conferees on the part of the House to agree to the sub
stance of the Hardwick amendment—and I am going to ask the clerk
to insert in the hearings right here the original Hardwick amend
ment.
555
556
BRANCH, CH AIN, AND GROUP BANKING
(The amendment referred to is here printed in full, as follows:)
Provided, Such nonmember bank or trust company maintains with the Federal
reserve bank of its district a balance sufficient to offset the items in transit
held for its account by the Federal reserve bank • Provided further, That noth
ing in this or any other section of this act shall be construed as prohibiting a
member or nonmember bank from making reasonable charges, in no case to ex
ceed 10 cents per $100 or fraction thereof, based on the total of checks and
drafts presented at any one time, for collection or payment of checks and drafts
and remission therefor by exchange or otherwise.
Mr. S t e a g a l l . Continuing, this is what took place: You made a
motion to instruct the conferees to agree to the substance of the
Hardwick amendment. They reported the Hardwick amendment
with a proviso which nullified in effect the purpose of that amend
ment. A point of order was made in the House against that amend
ment, for the reason that the conferees had disobeyed the instruc
tions, and Mr. Clark ruled it in order, upon the statement from dis
tinguished Members of the House and members of the conference
committee that what the conference committee had done did not
amount to a violation of the instructions of the Houe but that the
changes incorporated in the Hardwick amendment by them were
simply designed to secure its practical operation, and, in short, that
they had obeyed the rules of the House, and upon that assurance
Speaker .Clark overruled the point of order and the House voted
upon the report of the conferees and sustained it, although it turns
out that that report was in violation of the specific instructions of
the House.
Now, the resolution offered by you to instruct the conferees was
adopted in the House-----The
C h a ir m a n . Y o u
are quite correct in that.
Mr. S t e a g a l l . That is the history of that transaction.
The C h a i r m a n . And an interval between that time and when the
matter was finally voted on of about 60 days elapsed, in which such
propaganda was spread throughout the country as I have never
seen before nor since, and it resulted, of course, in the defeat of the
right of banks to make that collection charge.
Mr. S t e a g a l l . And, as a matter of fact, this was a fight between
the large wholesale houses and the large banks in the larger cities,
on the one hand, and the small country bank, on the other; in short,
it was an effort to require the small banks to render for nothing the
service of collecting those checks and remitting on them.
Mr. S t e v e n s o n . And if you will allow me to “ butt in now, the
very same gang is endeavoring to get us to pass the Strong bill
here, to give them a preference, to make them preferred claimants
whenever they send a check to a bank to be collected for them for
nothing, and it fails before the remittance clears. That is just the
next step.
Mr. S t e a g a l l . I realize as a practical proposition that that fight
is lost, I suppose ; but it is just as well to let that history go into the
record, and I do it for this reason, that the taking away of the right
to impose charges for the collection of checks is one of the things
under which the small banks have suffered and which, in my opinion,
has contributed to their difficulties. If I am not in error in my
recollection, the proof before this committee showed, when we had
that matter under consideration, that it was not an unusual thing
for small country banks to be able to realize out of these charges for
BRANCH, CH AIN, AND GROUP BANKING
557
'collecting checks sufficient sums to meet the salary rolls of those
t>anks.
Mr. Stevenson. And they enforced it in a brutal way, too.
Mr. S tea g a ll. And there *were instances brought before this com
mittee-—I did not intend to refer to them, but I will—where the
Federal reserve banks, in cases in which the small banks had refused
to render this service for nothing and to remit these checks without
charge, started out with a practice of accumulating a number of
•checks and even sending them across the country with men on cars
armed with Winchesters and throwing an accumulation of those
checks on the windows of small country banks to be paid in cash—
and not pay, of course, such bank loans—have had to close their
•doors.
You need not shake your head, Governor; there was proof of that
before this committee. I am not censoring the present Federal
Reserve Board or the Federal Reserve Board at that time, because
I do not think they had any part in it, but it shows that Mr. Steven
son is not unjustified in saying that they went about it in a brutal
manner in some instances.
I do not say that that was a common practice at all, or that the
Federal Reserve Board was responsible for it.
Mr. Brand. You know that the Federal Reserve Board did take
-a part in it.
Mr. S tea g a ll. Not in that; they took part in putting over the plan
by which banks were denied the right to charge for remitting checks.
Mr. Brand. They were opposed to the paying of a collection
charge on these checks.
Mr. S te a g a ll. There is no question about that; but I am talking
about these instances when the Federal reserve banks, when the
little banks would not remit these checks for mothing, would accumu
late quite a number of them and send them across the county with
guards armed with Winchesters, an act, of course, calculated to
break such banks.
Mr. Brand. But they were not in favor of having the banks make
this charge.
Mr S te a g a ll. There is no question about that; that is another
matter entirely.
Mr. Brand. They probably would have succeeded in getting a little
benefit if it had not been for the Federal Reserve Board’s activity,
and the propaganda against it. Mr. S te a g a ll. I think the Federal Reserve Board had a large
share of the responsibility for taking away that privilege from the
little banks, but not the present Federal Reserve Board.
Governor Young. Is it not fair to say, Mr Congressman, that
the board was required to do that under the law ?
Mr. S te a g a ll. Oh^-do you mean the law as it finally passed?
Governor Young. Yes.
Mr. S te a g a ll. They had no authority to do it under the original
law. Of course, as the law finally passed, it was construed to give
them that authority.
Governor Young. Mr. Congressman, I would like to have Mr
Wyatt answer some of these questions, He is thoroughly familiar
with that matter.
Mr. S te a g a ll. I would be glad to have him do so, but my only
purpose in referring to it was to keep the record straight.
558
BRANCH, CH AIN , AND GROUP BANKING
Governor Young. I do not know but what it would be a good
thing to put into the record the history of the par collection of
checks, and the Hardwick amendment in particular— —
Mr. S tea g a ll. I have already asked that that be inserted.
Governor Y oung (interposing). As construed by the Federal Re
serve Board in the Pascagoula case, which I think is”a complete
history of it.
Mr. W ingo. No record would be complete without a copy of the*
statement that was made in the House at the time you brought m
the report, when the House was told that the banks would be per
mitted to make the specific charge provided by the Hardwick amend
ment and that it was not the intention of the Federal Reserve Board
to prevent the charge.
Mr. S te a g a ll. If we attempted to encumber this record with one
side of the argument in that controversy, to make it complete we
would have to go back and get the file on the other side.
Mr. Brand. That is res adjudicata.
The Chairm an. Governor, did you want Mr. Wyatt to make a
statement ?
Governor Y oung. Yes; I would like to have him make a statements
Mr. W y a t t . I would like to clear up two or three points about that.
In the first place, some reference was made to the propaganda
that went on during the time the bill was in conference, and there
was a lot of propaganda, but I would like to make it clear that the
Federal Reserve Board did not engage in that propaganda* That
was done by the National Credit Men’s Association, which was the
original proponent of par checks, and they fought that fight all the
way through.
The Chairm an In view of that statement, I will say that I knew
about some of the propaganda put forth, and I differ with you,,
particularly in regard to the Federal Reserve Bank of New York.
They were very active in this matter, as were certain members of
the Federal Reserve Board. The record is clear on that. ^
Mr. W in go. The record of this committee shows that at least twomembers of the Federal Reserve Board were very active.
Mr. Brand. Were you with the department at that time?
Mr. W y a t t , Not at the time the Hardwick amendment was:
passed.
Mr. Stevenson. Most of those fellows are gone. Let us draw the
veil and try to forget the things that are past and look forward to
doing something now. It does not seem to me that we are getting
anywhere in rehashing all of this stuff. Paul was a wise man, and
he said he believed in forgetting the things that are past.
The Chairm an. I think that is a good suggestion; but if Mr.
Wyatt wants to proceed, we will hear him.
Mr. W y a t t . I do not want to take up the time of the committee..
I think the suggestion made is a good one.
Mr. S te a g a ll. Governor, this kind of a
transaction took place in?
a small country State bank that is a member of the Federal reserve
system in my district not long ago. The bank was closed. My
information is that they owed only $48,000, and they had $50,000
capital and $50,000 surplus. They were ill a farming community.
I do not know the details or the merits of any controversy that they
may have had as to whether they should be closed or not except in
BRANCH, CH AIN, AND GROUP BANKING
559
a general way, when some transaction of this kind were called to my
attention: There were depositors in that bank who gave checks on
that bank in payment of obligations, and the payees deposited those
checks in another bank in the same county, which other bank was a
member of the Federal reserve system. That bank forwarded,
through their regular connections, these checks for collection to the
Federal reserve bank, and the Federal reserve bank sent them direct
to the bank on which they were drawn for collection. In the mean
time the bank on which they were drawn charged these checks to the
makers and surrendered them with a statement of their accounts and
remitted with its own check to the Federal reserve bank, and the
bank on which the checks were drawn, closed. The Federal reserve
bank held the notes of this bank, not then due, and they charged
these checks back against the bank from whom they received them.
They took the balances of the bank on which these checks were drawn
and applied them to the payment of notes not due, charged the
checks back against the banks that had sent them in, and the bank
that originally cashed the checks went back on the payees and re
quired them to refund the money. The payees of those checks did
not have the money and did not have the checks. They paid the
money back to the banks that had cashed the checks, and the man
who had drawn the checks originally had them in his possession
marked paid and surrendered by the bank on which they were
drawn.
What suggestion would you make with reference to a transaction
like that, or a situation where those transactions can occur?
Governor Young. I think the law holds that the drawer of the
check is out of the transaction; he has paid his bill as far as he is
concerned. Whether the reserve bank is liable or not would depend
on whether they were negligent m the presentation or collection.
The responsibilities beyond that would depend upon the terms of
their circular. Generally speaking, reserve banks handle those
checks as agents.
Now, there has been a recent decision of the Supreme Court of the
United States that has a bearing on this whole transaction, and I am
not an attorney, Mr. Congressman. It is rather difficult for me to
answer this. May I have Mr Wyatt answer it ?
Mr. S tea g a ll. Yes; I would be glad to have him discuss that.
Mr. W y a t t . I do not think the recent decision of the Supreme
Court in the case of Thomas A. Hurley, receiver, against the Fed
eral Reserve Bank of Richmond has any great bearing on the general
question except the fact that it definitely establishes the proposition
that the rights, responsibilities, and duties of a Federal reserve bank
in collecting checks are governed by the terms of their check col
lection circulars, which really constitute a contract between the
Federal reserve banks and the banks which send iji the checks.
Mr. S te a g a ll. In other words, the Federal reserve bank has con
tracted with its member banks along lines that relieves it of any
responsibility in this transaction, although it sends it direct to the
member bank for collection?
Mr. W y a t t . Of any responsibility except for their actual negli
gence and their liability as a guarantor of prior indorsements. The
reason for that, Mr. Congressman, is that the Federal reserve banks
handle such an enormous volume of checks that they simply could
560
BRANCH, CH AIN, AND GROUP BANKING
not undertake to guarantee or underwrite the safe collection of those*
checks. I think the amount of checks collected through the Federal
reserve system in one year runs like $300,000,000,000.
Mr. S te a g a ll. You do not mean that that is the amount of checks,
that went the rounds and ended like the ones I referred to?
Mr. W y a t t . No; I am telling you the amount that they actually
handle for collection. Under modern conditions it is physically im
possible to present out-of-town checks across the counter and de
mand payment in cash as you are required to do under the old common-law rules. As I say, it is physically impossible; there really
is not enough currency available to settle those checks every day, and
it would be physically impossible to present them across the counter
if you could get currency, and practically all the commercial banks,
that do not clear through the Federal reserve system have some such
procedure as was in effect before the Federal reserve system was in
operation.
Mr. Stevenson. Under the decisions, if they mailed it direct to the
drawee bank, and the remittance failed, they were held to have been
negligent in selecting that method of collection.
Mr. W y a t t . That was the old common-law rule, and it was so held
in the case of Malloy against the Federal Reserve Bank of Rich
mond in the Supreme Court of the United States, and in that same
case the Supreme Court said that these old common-law rules as to*
the duties of a collecting agent can be varied by contract, and they
have been changed by contract. The Federal reserve banks have
contracted for the right to present those checks through the mails
and accept a remittance draft in payment instead of presenting
them across the counter.
Mr. Stevenson. In other words, they held that they could con
tract against negligence of a certain kind ?
Mr. W y a t t . No, sir; that they could contract as to the method by
which they should collect the checks.
Mr. Stevenson. The reason they could not collect that way and
were held responsible was on the ground that it was negligence for
them to make the drawee bank send for a remittance and then allow
them by contract to excuse themselves for the negligence which had
been held by all the courts, from the sending direct to the drawee
bank for collection, but they held, further, that they could not con
tract against actual negligence if it was thought that the bank was in
a shaky condition and they still sent it there, that they could be
held.
Mr. W y a t t . On this last point, you are right; the Federal reserve
banks can not contract against liability for their negligence, and
they have never attempted to do so. The board’s regulations, and
their circulars, say that they assume no liability except for their
own negligence and for their own guaranty of prior indorsements
This loss that Mr. Steagall mentioned is a very unfortunate thing,
and I think it is unjust, but I do not think it results from the system
of collection or the method adopted by the Federal reserve banks.
I think the loss results from an unsound but, unfortunately, very
well-established rule of law, and that is the rule to the effect that a
check is deemed to have been good when it was charged to the de
positor’s account, even though the bank on wliich it is drawn never
remits to anybody, and when that check is presented to the bank on
BRANCH, CHAIN, AND GROUP BANKING
561
which it is drawn, the bank charges it to the drawer’s account, can
cels it and surrenders it, but never remits to anyone. Yet the courts
hold that so far as the drawer is concerned, that check is paid and he
is released, and I think that there is where the inequity comes in in
the case of a failed bank; that results m the drawer of that check
receiving his deposit in full to the amount of that check while the
other depositors have to share the losses.
Mr. Stevenson. That does not always follow that he gets it in
full; it depends on the law in the State where it happens.
Mr. W y a t t . Oh, yes.
Mr. Stevenson. In a national bank he does not get it in full.
Mr. W y a t t . I am talking about the man who drew the check; if
that check is canceled and is charged to his account, his deposit is
paid off to that amount and his account is reduced by that amount.
Mr. Stevenson. The banks in this city do not all recognize that
yet, because a year ago I sent a check to one of them for $1,000, and
it went down to the bank on which I drew it and was charged to my
account and remittance made, but the bank closed before it was
cleared—and it took them an unconscionable time to clear it—and
the Riggs Bank was holding me for the $1,000 just the same.
Mr. W y a t t . Was that your check?
Mr. Stevenson. Yes. I have been through that mill.
Mr. W ingo. You should have hired a lawyer. [Laughter.]
Mr. Stevenson. I did.
Mr. W y a t t . A s to this method of collection-----Mr. Stevenson. What I did was this: The State of South Caro
lina had passed a law that under those circumstances that was a
preferred claim and should be paid before they began to pay general
creditors, and I got it that way.
Mr. W y a t t . You filed a claim against the receiver of your bank?
Mr. Stevenson. Yes.
Mr. W y a t t . And got your check paid in full. I might say that
that rule has been adopted either by statute or by decision of the
court in quite a number of the States in the last six or eight years,
and-----Mr. Stevenson But the national banks do not always follow that
rule.
Mr. W y a tt, They can not, because the national bank act governs
the receiver in the liquidation of the affairs of an insolvent national
bank, and it says that the creditors shall be paid ratably and the
matter is handled in the Federal courts. The receiver acts under
the jurisdiction of a Federal court and those rules adopted by the
States have no application to the liquidation of a national bank.
Mr. Stevenson. I know it.
Mr. S tea g a ll. Governor Young, what would you suggest should
be done with reference to the practice in the system that makes this
kind of a thing come about?
Governor Young. Do you mean what the Federal reserve could
do?
Mr. S te a g a ll. What should be done by somebody ?
Governor Young. I do not know, Mr. Congressman, what could be
done.
Mr. W y a t t . May I answer that?
562
BRANCH, CH AIN, AND GROUP BANKING
The American Bankers’ Association has for the last two or three
years been advocating a uniform State law giving the holder of a
check that is canceled but for which no remittance is made a pre
ferred claim against an insolvent bank on which that check is drawn,
and such a statute has been passed in a number of States, and the
American Bankers5Association is trying to get it enacted in all the
States. If that is enacted in all the States, and, as I said a moment
ago, that rule has been adopted by the courts as a common-law
ruling in a number of States, that will very largely cure the situa
tion in so far as State banks are concerned, but it will not cure the
situation in so far as national banks are concerned, and I think it
would place the national banks at a disadvantage because, assuming
that this rule is adopted in all the States, it will mean that a person
having a check in a State bank will get his check paid in full if it is
charged off before the bank fails through having a preferred claim
or he will get his check back uncanceled and duly protested.
The C hairm an. Would that apply also to the collection of drafts ?
Mr. W y a t t . I think it will; yes, sir.
The C hairm an. T o any case covered by the Strong bill ?
Mr. W y a t t . Yes, sir; but if this State legislation goes through
and no similar national legislation is passed, a person holding a
check on a bank that fails after the check has been charged off would
be in a much better position if that bank is a State bank than he
would if it were a national bank, and people may get the impression
that it is safer to write checks on State banks than national banks.
Mr. Stevenson. Well, as I said a while ago, that saved me $1,000,
or at least whatever per cent I would have lost on that if I had been
one of the general creditors. At the same time, within my town, a
lady deposited a check that represented her husband’s life insurance,
$8,000, all she had. It went into the bank and the bank collected
it and then closed. In the first place, she has got to wait until
$90,000 of preferred claims growing out of that statute are paid in
full to the bankers and to all the other people, the big shippers and
all that, that are protected by it, and then take her pro rata of what
is left. There is a great deal of inequity in it, and I would not be
surprised if they repealed the law in South Carolina.
Mr. W y a t t . I think it is inequitable, and that is why I suggested
that the fair remedy would be to have the law changed so that a
check th&t is charged to the depositor’s account but for which no
remittance is made and for which nobody is ever paid will not be
deemed to have been paid, and the drawer of that check will not be
released, so that the holder of that check can go back against the
drawer. I think that would be the fair thing, but I do not believe
that Congress has any jurisdiction to correct that situation. It is a
matter of contract in commercial law, and you would have to correct
it by amendments to the State laws in all the different States.
Mr. W ingo. Some of us have difficulty enough paying our debts
once, but according to your rule we would have to pay twice.
Mr. W y a t t . Well, the man who is unfortunate enough to select
such a bank-----Mr. W ingo. You are overlooking the fact that the man who takes
the check has his remedy now. Do you want to make the drawer of
the check guarantee proper handling of his check and protect the
BRANCH, CHAIN, AND GROUP BANKING
563
man against his willingness to take a cheek, without failing to de
mand something better ?
Mr. W y a t t . Of course, when a man draws a check, he contracts
that that check will be paid.
Mr. W ingo. But he does not guarantee the method of payment; he
simply says that when the check is presented it will be charged to his
account.
Mr. W y a t t . And that the holder will be paid.
Mr. W ingo. If he had presented it in person across the counter, it
would have been paid and the payee would have gone out before the
bank failed.
Mr. W y a t t . That is right.
Mr. W ingo. But, for the convenience of the gentleman paid, he
turns it over to his agent, and he has a right to demand something
beside that check in the first instance if he wants to.
Mr. W y a tt. That is right.
Mr. W ingo. But for his convenience as much as for the convenience
of the drawer, he takes the check.
Mr. W y a t t . You have to recognize that, under modern conditions,
these checks could not be collected in the manner in which they are
now collected if you had to present them across the counter and de
mand cash. It would be so expensive and inconvenient that people
would not take checks as freely.
Mr. W ingo. Your suggestion is almost unanswerable not only
under modern conditions but also under the rules of law.
Mr W y a tt. May I make one further statement? And that is,
that all of this trouble grows out of failed banks, and if you can
stop bank failures you can stop this trouble.
Mr. Stevenson. And, according to the statement of the comp
troller, something like 7,000 banks failed in the last 9 years. You
said something about a man being unfortunate in the selection of
his banjt, and, it seems to me, that at the rate we have gone it takes
a man who is a good gambler to determine which bank is not going
to fail.
Mr. W ingo. Your remedy, to stop the banks from failing, is like
saying, you can enforce the eighteenth amendment by eliminating
the appetite for liquor.
Mr. S te a g a ll. We can all understand that transactions of this
kind evoke complaints, criticism, and irritation that should be
avoided.
Governor Young. Mr. Congressman, the law is so complicated in
various States that you can see there are difficulties with every sug
gestion that has been made.
Mr. S te a g a ll. Yes.
Governor Young. The United States Government enters into a
contract with anyone from whom it receives checks that they can
pass the check back to the drawer, and, if I remember correctly,
several of the large concerns have done that. That is the only
I'emedy that I know of.
Mr. S te a g a ll. Well, we will pass on from that.
In discussing the matter of permitting member banks to share
the earnings of Federal reserve banks, you said something about
requiring a law forcing State banks to carry balances with the
Federal reserve bank. Did I understand you right?
1 0 0 1 3 6 — 3 0 — VOL 1
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564
BRANCH, CH AIN, AND GROUP BANKING
Governor Young. I said that had been a suggestion.
Mr. S te a g a ll. What did you have in mind in that reference ?
Governor Young. On the theory or on the belief that we all think
that the Federal reserve system has been beneficial to the country
and it is quite necessary that it continue. Obviously, under the pres
ent conditions the nonmember bank can get many of the benefits
indirectly through its correspondent that the member bank can get
directly from the Federal reserve bank. In other words, I think
that you found in your investigation that the main reason why State
banks did not join the Federal reserve system was because they lost
the 2 or 2% per cent interest that they might be paid by a corre
spondent if they carried their reserve with the Federal reserve bank.
Mr. S te a g a ll. I can not agree with you that that was the main
reason, but that was one of the reasons.
Do you think that Congress would have any right to pass a law
requiring a State bank to deposit and maintain deposits in a Federal
reserve bank %
Governor Young. I do not know.
Mr. W ingo. Did you say “ right ” or “ power ” ?
Mr. S te a g a ll. Power.
Mr. W ingo. There is quite a difference.
Mr. S te a g a ll. I am not as good a lawyer as you are.
I meant to ask if Congress has such legislative power ?
Governor Young. I do not know, Mr. Congressman. That is
something for the lawyers to determine.
Mr. S te a g a ll. Governor Young, I am interested in all of these
various suggestions with respect to legislation, banking rules, and
everything else designed to protect bankers and banks in their trans
action with one another, and I think it should be done as far as it
can be wisely done by legislation, but this discussion leads up to
another suggestion. I am wondering what your views are upon the
question of the advisability of trying to protect depositors in banks
that are members of the Federal reserve system. I speak of that
as m my views of the matter we have no authority to touch the
question through legislation further than the Federal reserve system
or its member banks.
Governor Young. Well, of course, Mr. Congressman, I have given
very much thought to it.
Mr. S te a g a ll. I would like to hear your views upon it.
Governor Young. Better banking, of course, would be the quick
est and best solution of it.
Mr. S te a g a ll. No question about that. That is like Mr. Wingo’s
suggestion about the Volstead Act, that if we all quit drinking it
would be possible to enforce the law.
Mr. W in go. No; you said that, I did not. You know I do not
drink. I said if you killed the appetite. I am one of those fortu
nate individuals that has no appetite for liquor.
^Mr. B rand . Y ou are very fortunate.
Governor Y oung. I have given consideration
to the question of
the guarantee of bank deposits, and followed it in the various States
where it has been enacted, and it does not seem to be practical. I
have given some consideration to the segregation of certain specific
assets, against savings deposits, because that is really the depositor
that we want to protect more than anyone else, and I think there is
BRANCH, CHAIN, AND GROUP BANKING
565
some merit in that plan embraced in the laws of California, Mich
igan, and Maine.
Mr S te a g a ll. D o you think that the savings depositor has a fund
that is entitled to more consideration than that of the ordinary
citizen ?
Governor Young. From a legal standpoint, no; from a practical
standpoint, sympathetic standpoint, I would say yes.
Mr S te a g a ll. The savings deposit is more m the nature of an
investment, is it not? The savings depositor goes out for the pur
pose of making money, as an investor, and he puts his money where
it will bring him something. He does not contribute to the activities
of business, commerce, industry and agriculture, but he simply fol
lows what he thinks is the safe method of placing his money, where
he can get it back with interest. So I would not think that that
fund should be treated with more consideration than the fund of
a depositor who puts his money into banks that in turn put it into
the channels of trade and commerce.
Governor Young. The savings depositor is usually a time deposi
tor, and I suspect that in every instance in the United States before
he can draw his money in an emergency, when a bank is in difficulty,
he is required to give 30, 60, or 90 days notice* and during the interim
many of the good assets of the institution may be sold or disposed of
to pay the demand depositors, the business men, and others. Under
those conditions I think that the savings depositor is entitled to some
consideration.
Mr. S tea g a ll. What you mean is that the rules of banking should
be different in the effort to safeguard deposits of that character
from what they are as applied to ordinary demand deposits ?
Governor Young. I think so.
Mr. S te a g a ll. But you are not speaking of any effort to guarantee
either sort of deposits, are you ?
Governor Young. I am not.
Mr. S teagall. Y ou are merely speaking of the methods of
banking ?
Governor Young. That is correct.
Mr. S te a g a ll. But, getting back to the question of guaranteeing
deposits, I believe you said that you have studied this effort that has
been made in different States?
Governor Young. That is right.
Mr. S te a g a ll. Y ou do not understand that there is any essential
similarity between the effort of the State of Nebraska, for instance,
in imposing assessments against banks to take care of deposits and
the guaranty of deposits by the Federal reserve system? You would
not attempt to say that that would be a guide by which you could
ascertain whether or not the Federal reserve system could guarantee
its deposits, would you?
Governor Young. I think so.
Mr S tea g a ll. What are the assets of the Federal reserve system?
Governor Young. The member banks’ reserve deposits are about
$2,300,000,000; the capital is about $176,000,000; the undivided profits
are $278,000,000, I think, and there is a small surplus beyond that—
I have forgotten what it is—and there are some Government deposits
and some very small foreign deposits.
566
BRANCH, CH AIN, AND GROUP BANKING
Mr. S teagall . The Federal reserve system embraces how many
national banks and member banks ?
Governor Young. About 9,000—that is about right, is it not, Mr.
Smead ?
Mr. Smead. About 8,500.
Mr. S te a g a ll. Would you say that the Federal reserve system,
with all its resources and these 9,000 banks, should treat the experi
ments in Nebraska as a final determination of the question of what
the Federal reserve system could do toward protecting deposits or
guaranteeing deposits in member banks?
Governor Y oung. I think so, in proportion. You have to take
things in proportion. Let us take the Reserve Bank of Minne
apolis----Mr. S te a g a ll. The Federal reserve banks embrace the whole
United States, do they not?
Governor Y oung. Yes.
Mr. S te a g a ll. The United States is a unit. Do you not think that
that makes a great deal of difference, as between that and a small
State—not to call it backward, as some one has done—with a handful
of small State banks?
Governor Young. We have to take it in proportion, Mr. Con
gressman, and-----Mr. S te a g a ll. Is not this true also, Governor Young, that the
State banks are permitted to loan on real estate? Is not the trouble
with them in a great many instances that their loans rest upon real
estate and they can not realize them?
Governor Young. National banks are permitted to loan money on
real estate.
Mr. S t e a g a l l . But not like State banks, are they ?
Governor Young. Not to the degree that State banks are.
Mr. S te a g a ll. And we came along and liberalized the law, and
did it at the instance of men who were supposed to know all about
banking, to permit national banks to increase their loans on real
estate, and we made a mistake when we did it and added to their
difficulties and helped to bring on some of these failures which all
of us regret.
Governor Young. I think the difficulty with the small banks did
not come so much with loans on real estate as with loans that were
made where they had to take equities in real estate.
Mr. S te a g a ll. That is all very true, but you will find, I am sure—
and you are better informed than I am—that a great many of these
small national banks are banks that were members of the Federal
reserve system and found that a great part of their difficulty was due
to the fact that they got their loans tied up in real estate, out of
which they could not realize. Every time we read of one of these
banks failing we read headlines in the paper “ bank freezes,” and
in a large number of instances you will find that one reason for it
is that they have a good portion of their loans tied up in real estate.
Governor Young. Mr. Congressman, I am afraid you are under a
misapprehension. Under the old national bank act you were per
mitted to take a real-estate mortgage, a first mortgage, second mort
gage, or third mortgage, or anything you could get, for a debt pre
viously contracted, and I think if you would look into the difficulties
of the banks of the United States you would find that the reason
BRANCH, CHAIN, AND GROUP BANKING
567
they closed was not because of an original loan on farm land, but
it was because of taking an equity in the farm land.
Mr. S te a g a ll. I do not doubt that some of it is that way.
Governor Young. I was going to say that 90 per cent of it is that
way.
Mr. S te a g a ll. Anyhow, passing on from that-----Governor Young. May I ask Mr. Await if that is an accurate
statement ?
Mr. Awa lt . I do not know about the percentage, but that is true
as to a great majority.
Governor Y oung. Something that could have been done-----Mr. S te a g a ll. I propose to defer to Mr. Await and not to attempt
to pass judgment on that, but, at any rate, of course these State banks
are up against that difficulty to a much larger extent than the na
tional banks—that is, having their loans resting upon real estate
which is not liquid, and that being the case, that, of course, would
create-----Mr. Brand. He has not answered that.
Mi\ S te a g a ll. I think that is a matter of common knowledge.
Governor Young. I think it is the equity in real estate rather than
the direct-----Mr. S tea g a ll. You did not catch my question. I say that this is
true, that the State banks have had greater difficulty in connection
with loans on real estate because of the lack of the limitations as to
]oans on real estate that apply to national banks.
Governor Young. The limits are more liberal.
Mr. S tea g a ll. And, of course, in the case of State banks a larger
percentage of their difficulties is traceable to real-estate loans than
is the case with national banks.
Governor Young. I do not know as much about the State member
banks as I do about the national banks.
Mr. S te a g a ll. Let me ask you this : What have been the total
losses to depositors in national banks, and when I say national banks
I include all banks down to this time which are members of the
Federal reserve system. Do you know what the total losses of
depositors have been since the establishment of the national bank
system ?
Governor Young. I think that is covered in the comptroller’s state
ment before this committee, and I— Mr. S tea g a ll. I will say this to you—and I will be glad to have
you correct the figures if I am in error—that my information is
that down to 1925 depositors in national banks had sustained losses
totaling approximately $45,000,000, and, while we have not the exact
figures for the past five years, the comptroller’s report and testimony
show that insolvent banks have realized 79 per cent. Certainly
$1,000,000 a year, or very little more than that, would have taken
care of the losses to depositors in national banks from the beginning
of the national bank system down to now, would it not ?
Governor Young. I do not doubt that you are quoting accurate
figures, but I am trying to think of the ninth Federal reserve dis
trict alone. I am quite sure that the losses to depositors are beyond
Mr. S tea ga ll. That might be true.
Mr. F ort. I think they were put into the record in Mr. Pole’s
testimony.
568
BRANCH, CHAIN, AND GROUP BANKING
Mr. Stea g a ll. I think the comptroller’s figures show that the
maximum of losses to depositors from the foundation of the national
banking system to 1930 was around $80,000,000, which would be a
little over $1,000,000 a year, and I will say to the gentleman that
those are the figures, for I happen to be familiar with them, and
that is what the comptroller showed. That being true, the plain
fact is that the Federal reserve system, not counting its surplus,
which you think has now reached a larger sum than wisdom re
quires, and notwithstanding the absorption of the initial expense
of incorporating the federal reserve system and the building pro
gram carried out by the Federal reserve system, has paid into the
Treasury $150,000,000, a little under that, go that the franchise tax
paid by the Federal reserve system into the Treasury amounts to
substantially twice the sum that would be required to take care of or
to guarantee all the losses to depositors in the national banks since
the foundation of the system.
Governor Young. Mr. Congressman,, can we go a little further
with those figures, and assume-----Mr S te a g a ll. That would be the fact, would it not?
Governor Young. No; I am going to go a little bit further than
that.
Mr S te a g a ll. All right. Answer it in your own way, of course.
Governor Young. This figure of $80,000,000 total losses to na
tional banks covers a great number of years. What the actual losses
were, of course, is much beyond that. Many of those losses were
covered by voluntary assessments, and-----Mr. S tea g a ll. A voluntary assessment would not be a loss against
a depositor.
Governor Young. Yes; but, Mr Congressman, the point I am
bringing out is this, that if you had a guaranty of bank deposits by
the Federal reserve system, you would not be struggling with $80,000,000; you would be struggling with an amount much in excess
of that, because if the stockholders of a bank which got in bad con
dition knew that that institution was going to be taken care of by
the Federal reserve system they would pay their 100 per cent legal
assessment and that is all they would pay. As it is now, they pay
100, 200, 400, and even 500 per cent in certain cases. So these fig
ures of the Comptroller of the Currency do not tell the entire loss.
Mr. S tea g a ll. I beg your pardon; I do not think you should say
that. I am talking about losses to depositors.
Governor Young. You can see very readily that the amount that
the Federal reserve system would be required to guaranty would be
far in excess of this $80,000,000.
•Mr? S tea g a ll. Well, I am only offering you the figures to show
what the actual losses have been down to this time. You do not
apprehend that conditions are going to get worse with respect to
the solvency of the banks that are members of the Federal reserve
system, do you ?
Governor Young. With the guaranty of deposits by the Federal
reserve system every bank in the United States obviously would
attempt to join the Federal reserve system.
Mr. S tea g a ll. They would not have a right to join of their own
will. The Federal Reserve Board would, of course, pass on the wis
dom of taking them into membership.
BRANCH, CHAIN, AND GROUP BANKING
569
Governor Young. It would. But I think it is fair, Mr. Congress
man, that you take the entire loss of all the banks in the United
States into consideration with a guaranty such as you have in mind.
Mr. S te a g a ll. You do not proceed upon the idea that the Federal
Reserve Board would admit to membership all the State banks in
the United States, including those who are not in condition to make
them fit for membership in the Federal reserve system?
Governor Young. All right; let us go back to 1917, when the
^ppearan^e of all banks in the United States was good, even in the
agricultural section. Those banks under this guaranty obviously
would come to the Federal reserve system, and from what I know
of the conditions out there at that time the probabilities are that we
would have accepted a great majority of those banks for membership
in the Federal reserve system. Then came your great agricultural
crash throughout the United States. The losses would have been
just the same to the depositors from 1919 on clear through to 1925
and right up to the moment, and I think that when you advocate
any guaranty of bank deposits you have to take all those figures into
consideration as to what you may have to pay, and that is why I
say that you can take the State of Nebraska and the State of South
Dakota to determine whether the guaranty of bank deposits is a good
thing or not.
Mr. S te a g a ll. What I have in mind is this: I appreciate the force
of your suggestions and, of course, there will be some difficulties there,
but I can not for a moment anticipate that conditions in the banking
world are going to continue as they are or that they will fail to
improve or that the Federal reserve banks would admit to member
ship State banks upon terms that would constitute a partial attitude
on the part of the Federal Reserve Board toward State banks. My
impression has been up to now that the Federal Reserve Board was
inclined—and I will not say unfairly—to act more favorably with
national banks, which was a natural thing, and I am not finding
fault with them about it, but they have certainly been on their guard
with respect to the admission of State banks into the Federal reserve
system. I have known of such instances where I think they were
right about it, where they exercised exceeding care, and I should
think they would continue to do that.
Governor Young. Of course, we do do that, Mr Congressman, but
the Federal reserve banks and examiners, and the Federal Reserve
Board, are not infallible, as was conclusively shown by the fact that
we did admit many State member banks that subsequently had to
fail.
Mr. S te a g a ll. You have had much more trouble with them than
with the others, in proportion?
Governor Young. With the State member banks?
Mr. S te a g a ll. The Federal reserve system has not had any more
trouble with the State member banks than with the others, has it?
Governor Young. No.
Mr. S te a g a ll. S o that if they should exercise the same care in the
future that they have in the past, there is nothing to fear in that
connection, is there ?
Governor Young. For membership, no.
Mr. S te a g a ll. I mean in the developments after they are admitted
to membership. You have had just as fortunate results; in other
570
BRANCH, CHAIN:, AND GROUP BANKING
words, your member banks and State banks have succeeded as well as
the national banks in the Federal reserve system?
Governor Young. Generally speaking, yes.
Mr. S te g a ll. That being true, then, of course, you would exercise
the same wisdom in the future as ill the past, so that you would not
encumber your Federal reserve system with all of the weak State
banks throughout the country ?
Governor Young. Well, I am just trying to think, Mr. Congress
man, what the Federal Reserve Bank of Minneapolis Would have done
in 1917, if 3,000 member banks came to us for membership, because
of this guarantee of bank deposits-----Mr. S te g a ll. I agree they would come. It puts work on the Fed
eral Reserve Board, I am sure.
Governor Young. I dare say 2,500 would have been admitted from
what we knew about those banks at that time or thought We knew.
Mr. S te g a ll. Governor Young, is not this a fair statement: The
law contemplates and, in practical operation, the Federal Reserve
Board deals just as intelligently with State banks as with National
banks in the system?
Governor Young. That is true.
Mr. S te g a ll. And that would continue to be true ?
Governor Young. Always.
Mr, S tea g a ll. Governor Young, I was glad to have your state
ment that you thought it would be wise to distribute some of the
earnings of the Federal reserve banks to member banks instead of
paying it into the Treasury as franchise taxes. I appreciate your
views in that respect. It has occurred to me that the Federal Re
serve Board could be empowered by Congress to set aside a part
of the earnings of the Federal reserve system to build up a fund
to be placed m tne hands of the Comptroller of the Currency to
be used by him in undertaking to Work out the difficulties encoun
tered in administering upon insolvent banks and to use in the
purchase of assets where necessary and for the purpose of carrying
a bank along for a time as seasonal conditions made it desirable
to do so; to liquidate it in an orderly way and to conserve its re
sources and assets and within conservative and safe calculations to
build up a fund and have it in the hands and under the control of
the Comptroller of the Currency with which he would reimburse
depositors m national banks who incurred losses; not that the Fed
eral reserve system would attempt to say, “ We ate going to take
over the whole banking business of the United States and guarantee
all depositors,” but that the Federal Reserve Board should take these
earnings and begin to set aside this fund and establish rules by
which this fund should be devoted to the absorption of tliese losses
and the reestablishment of banks and assist the comptroller in the
orderly liquidation of banks that have to be closed, and if the fund
or* earnings in the future, as in the past, prove themselves more thaii
adequate to take care of these deposits, let that be done, and,/if
not, iet the comptroller be empowered to use it in so far as it could
be done, to take care of the conditions growing out of the distress
and failures that may be expected.
That certainly would be a very different thing from any guaranty
system that has been undertaken by a State, as a rule?
BRANCH, CHAIN, AND GROUP BANKING
571
Governor Young. Does not that come pretty close to the Nebraska
plan?
Mr S te a g a ll. No.
Governor Young. The Nebraska law, when they found a bank
tottering the commissioner took it over and assessed the other banks.
Mr. S te a g a ll. I would not favor that plan. I am not talking
about that. I should think that would be unsafe. I do not think
the Federal reserve system would be justified m attempting to levy
any charges on any bank or assess any bank or have them assess
themselves.
I am only making my inquiry in reference to what may be done
Out of the earnings of the Federal reserve banks which you say
come out of their member banks and, of course, the assets of the
member hank rest largely upon depositors and the only thought I
have is that a part of those earnings should be put into a fund which
would help in such situations and, if sufficient to do it, would take
<sare of the depositors. If not, the comptroller wouldt use it as
intelligently as possible and make it go as far as possible*
The record shows down to this hour they have made enough to
take care of‘the losses of all depositors.
Governor Young. I am convinced in the ninth Federal reserve
disl net from the year 1920 clear through to 1927 we could have given
the capital, surplus, and all earnings of the Federal Reserve Bank of
Minneapolis for that Very purpose and probably a good portion of
the reserves of the member banks.
Mr. S te a g a ll. I am not talking about any particular district*
What I have in mind is the disposition of the earnings of the whole
system that are now going into the Treasury; this $150,000,000 that
went into the Treasury came out of the small banks that are strug
gling and failing and would have paid the depositors of those banks
for 150 years from the passage of the national banking act based on
the developments down to this time. That is the thing I have in
mind. It is the matter of the distribution of those earnings; not
for the Federal reserve banks to undertake to do a certain thing,
anticipating ability they may not have when the time comes, but
simply disposing of their earnings which they now pay into the
Treasury
Governor Young. The difficulty with the whole program, Mr.
Congressman, is this: In Nebraska, if the fund had been large
enough, this would have carried through and would have been a
success, but the assessments got to a point where the good banks
knew they were carrying the poor banks, and the assessments which
were being levied against the good banks went beyond their ability
to pay.
Mr. S te a g a ll. I agree with you that----Governor Young. That is entirely possible with any plan which
is set up and, on top of that, your member banks now are asking
for more earnings and, in my opinion, justly so.
Mr. S tea ga ll. Well, that is what I am talking about; that we
devote a part of the earnings to the depositors instead of distributing
them to the stockholders.
Governor Y oung. If you state to member banks, “ We will give
you the earnings, but we will hold on to them and put them into a
pot to take care of your depositors,” that would not please the mem
ber banks.
572
BRANCH, CH AIN, AND GROUP BANKING
Mr. S te a g al l . Y ou mean the depositors?
Governor Y o u n g . The good member banks who feel that they do
not need this protection of the deposits.
Mr. S teag al l . I think we ought to look forward to the time
when the depositors of the Federal national banks can look at their
deposit slips as good to the last dollar, and when we pay out this
money that comes into the Treasury from these banks, I think we
should let some go to the protection of the depositors. I beg the
chairman’s pardon for taking so much time.
Governor Y o u n g . I think the large part of the earnings Mr. Con
gressman, come out of the large banks of the United Sixties. They
are the heavier borrowers.
Mr. S t e a g al l . I appreciate that fact, but the large banks ate
interested in the little banks and the little banks in the large banks
and the big towns ate interested in the little towns; or ought to be,
and vise versa. We are all one people. I would like to see it suc
ceed, and it is not succeeding now.
The C h a i r m a n . Will you yield to Judge Brand at this point?
Mi*. S t e a g al l . Certainly.
Mr. B r a n d . Mr. Chairman, I want to submit a request and then
I will yield to Mr. Stevenson who must leave to-morrow.
Governor Young, if it would not be too much inconvenience, I
should like you to put into the record the gross earnings, the ex
penses, and the net earnings of all of the 12 reserve banks in the
United States from 1912 down to and including the year 1929,
showing the gross earnings of each bank, the expenses of each bank,
and the net earnings of each bank during that period, which is for
15 years.
Governor Y oung. You mean since 1914 ?
Mr. B r a n d . Yes. I want the gross earnings for all, because that
will show when we get it for each one. Can you do that?
Governor Y o u n g . I have a report right here which has been pre
pared, Mr. Congressman, which shows the earnings and expenses of
each reserve bank, gross, net, dividends paid, transferred to surplus,
franchise tax paid the United States Government, for all of the 12
banks and for each individual bank.
Mr. B r a nd . Y ou have the expenses there, too?
Governor Y o u n g . The expenses would be the difference between
the gross and the net.
Mr. B rand. Of course. But for convenience though-----Governor Y o u n g . I can have Mr. Smead add those figures. It is
nothing but a case of subtraction.
Mr. B r a n d . For instance, the gross earnings o f the Federal reserve
bank at Atlanta is shown here as $31,712,460; the total expenses of
the Federal reserve bank at Atlanta are $12,526,915, and the net
earnings of the Atlanta bank are $19,185,545, from the years 1914 to
1926. I would like to have a list showing that for each of the banks.
Governor Y o u n g . It is all right here. This is to the close of busi
ness at the end of 1929.
The C h a i r m a n . Are you ready now, Mr. Stevenson ?
Mr. S tev e n s o n . Yes, sir.
The C h a i r m a n . Without objection, these matters Governor Young
submits will be inserted in the record at this point.
(The statistics referred to are printed in full as follows:)
573
BRANCH, CH AIN, AND GROUP BANKING
EARNINGS AND EXPENSES OF EACH RESERVE BANK
No. 79.—
G r o ss a n d N e t E a r n in g s o f E a c h F e d e r a l R e s e r v e
D i s p o s it io n M a d e o f N e t E a r n in g s , 1914-1929
Earnings
Federal reserve bank
Disposition of net earnings
Dividends
paid
All Federal reserve banks:
$2,173,252
—$141,459
$217,463
1914-15........................
2,750,998
1,742,774
1918...................... . . . .
5,217,998
9,579,607
16,128,339
6,801,726
1917 .
52,716,310
5,540,684
.
1918 .
67,584,417
78,367,504
5,011,832
191 9
...................... 102,380,583
5,654,018
181,296,711 149,294,774
1920.... .
82,087,225
6,119,673
1921............................. 122,865,866
16,497,736
6,307,035
1922............................... 50,498,699
12,711,286
6,552,717
50,708,566
192 3
6,682,496
3,718,180
38,340,449
41,800,706
6,915,958
9,449,066
1928.............................
16,611,745
7,329,169
47,599,595
1926.............................
43,024,484
13,648,249
7,754,539
192 7
32,122,021
8,458,463
1928.... .
64,052,860
36,402,741
9,583,913
70,955,496
1929...........................
T o ta l..................... 904,628,021 515,215,983 90,072,460
Boston:
-34,603 |
125,459
1914-15........................
295,935
249,735
490,888
1916— ........................
740,359
601,756
1,285,884
191 7
3,305,180
4,475,195
191 8
384,180
5,777,381
7,497,583
414,447
1919 . .......................
447.266
12,273,253 , 10,272,564
192 0
6,968,662 | 4,281,353
1921..... .
473,109
1,097,402
3,541,313
481,951
1922.. .
1,252,135
480.267
3,506,683
192 8
.................
470,422
2,559,016
477,798
192 4
502,648
1,140,581
3,288,546
192 5
1,156,873
525,023
3,319,077
1926.......... . ............
837,612
2,975,357
550,446
1927.. .
590,830
4,465,342
2,316,522
1928 . _______ _____
5,160,831
2,766,134
1929.
...................
634,112
61,9
35,675,850
6,813,568
Total.......................
New York:
-123,887
345,035
1914-15........................
414,064
127,113
971,026
191 6
3,078,481
1,942,819
4,929,214
191 7
21,662,917
1,195,026
25,314,736
191 8
27,959,619
1,291,047
35,332,412
1919.. .
........ ........
60,525,321
53,128,130
1,477,096
192 0
26,093,832
34,710,274
1,608,721
192 1
.
3,721,593
1,652,138
11.349.279
192 2
1,749,239
11,413,183
3,043,679
192 3 ......................
616,852
1,796,530
8,569,350
192 4
...........
1,888,196
3,103,298
10,217,174
1925...........................
2,100,191
3,749,748
10,600,968
1926.. . ....................
2,327,355
3,720,601
10,647,759
192 7
________
2,743,725
18,483,042
192 8 ................ .
11,018,433
12,263,224
3,544,314
19.314.279
1929.
.......................
Total....................... 262,723,052 173,450,584 25,443,510
Philadelphia:
113,972
-31,517 |
1914-15........................
249,941
448,180
1916.............................
1,095,540 1
753,875
623,603
191 7
2,972,089 ,
4,357,740
191 8
.....................
1919..... .
........
8,609,880 , 6,659,169
11,848,551
1
496,679
9,065,116
192 0
..........
8,008,095 I 5,339,454
517,663
192 1
541,552
4,251,950
2,236,876
1922 .
4,592,771
2,177,837
1923 .
747,092
2,915,846 i
615,135
1924.............................
3,135,550
1,078,120
1925 .
673,212
1,533,733
3,626,648
730,598
1926 .
.
1,176,469
781,540
1927.............................
3,363,626
3,282,641
5,394,546
1928................. .
................................................
843,755
6,076,048
3,801,988
938,312
192 9
...... ............
Total.......................
67,838,943
41,042,883
8,519,162
im ...........................
B ank, a]
Trans
ferred to
surplus1
Franchise
tax paid to
U S. Gov
ernment *
$1,134,234
48,334,341
70,651,778
82,916,014
15,993,086
-659,904
2,545,513
-3,077,962
2,473,808
8,464,426
5,044,119
21,078,899
22,535,597
277,433,949
$1,134,234
75,100
2,921,000
5,362,934
7,351,799
772,324
-170,782
77,187
-7,376
637,933
585,888
287,166
1,725,692
2,132,022
21,750,887
649,363
20,467,891
23,964, 678
12,332,523
3,782,671
-1,397,603
129,444
-1,179,678
1,215,102
1,649,557
1,393,246
8,274,708
8,718,910
50,000,812
2,608,344
6,196,789
8,204,775
935,239
803,594
1,178,588
131,957
404,908
803,135
394,929
2,438,886
2,863,676
26,964,820
2,703,894
60,724,742
59,974,466
10,850,605
8,613,056
113,646
59,300
818,150
249,591
2,584,659
4,283,231
147,109,574
75,100
Profit (+>
or loss ( —)
carried
forward
f 509,413
-1,158,715
-34,603
+46,200
-11,597
2,473,499
3,035,920
786,233
694,681
7,111,395
649,363
-123,887
+286,951
-163,064
2,763,894
39,318,511
20,702,440
3,467,058
1,164,996
68,006,2
-31,517
+121,483
+130,272
-220,238
363,662
3,886,552
891,730
416,957
..
..
..
I 5,558,901
i Amounts shown as transferred to surplus account for 1922 are net, L e., after the deduction of amounts
charged to surplus account on Dec. 31, 1922, and paid to the United States Government as franchise tax.
For prior years as follows: For 1920—New York, $270,389; for 1921—Boston, $247,350; New York, $1,334,160;
Philadelphia, $36,366; Richmond, $20,459; Atlanta, $213,629; Chicago, $710,190; Minneapolis, $52,423;
Kansas City, $208,170; San Francisco, $306,926; total, $3,129,673.
574
BRANCH, CH AIN, AND GROUP BANKING
No, 19 —
G r o s s a n d N e t E a r n in g s o f E a c h F e d e r a l R e s e r v e B a n k , a n d
D is p o s it io n M a d e op N e t E a r n in g s , 1914-192 9— Continued
Earnings
Disposition of net earnings
Federal reserve'bank
Cleveland:
1914-15..
191 8
191 9
192 0
1921.___
1922.......
1924..
1925..
1926..
1927„.
1928..
1929Total.,
Richmond:
1914-15..
191 6
191 7
1918.___
1919........
1920..__
192 1
192 2
1924...
1925...
1926...
1927...
1928...
1929. ...
Atlanta:
1914-15..
191 6
191 7
191 8
191 9
192 0
192 1
192 2
1924..
1925..
1926...
1927„_
1928..
$113,815
452,129
1,367,216
5,226,864
7,800,829
14,458,619
9.390,863
4,994,282
4,655,090
3,770,689
4,013,456
4,517,884
4,197,836
6,250,553
6,986,580
$55,774:
293,808.
753,682
135,796
093,785
820,031
284,383
$143,237
716,168
716,107
556,785
604,194
660,228
921,221
473,153
210,576
660,762
108,190
180,715
705,442
725,626
756,152
778,811
808,505
832,583
856,843
910,007
$3,552,000
5,537,000
11,215,837
2,329,442
861,264
195,595
-1,229.305
431*765
852,257
275,607
2,323,872
2,795,435
78,196,705
42,908,152
9,757,682
29,140,769
319,580
334,102
821,195
2,979,048
4,775,324
6,902,643
6,729,679
2,832,944
2,878,896
2.210,240
2,182,460
2,429,017
2,086,303
2,457,648
3,299,609
174,955
186,571
462,224
2,312,030
3,877,266
5,238,506
4,393,627
867,448
1,092,843
379,791
576,110
727,645
497,711
1,118,960
1,342,225
151,940
197,922
240,944
232,432
252,872
293,052
322,203
333.321
342,295
351,251
358,162
363,957
372,230
370,683
43,638,688
23,247,912
4,551,865
236,460
279,520
82,532
129,307
288,083
1,652,473
3,382,397
6,010,324
5,496,219
672,730
352,179
272,656
26,191
1,228,327
669,904
1,693,985
1,428,518
201,719
218,203
182,473
197,397
225,571
245,862
256,618
264,622
272,656
276,488
296,573
305,817
312,259
321,696
2,
4t lie ; 001
7,476,431
7,406,652
2,352, 736
2,682,314
1,907,121
2,072,378
3,045,867
2,067,839
3,578,156
4,116,049
Total...
44,520,371
3,577,954
Chicago:
1914-15..
191 6
191 7
191 8
191 9
192 0
192 1
192 2
192 3
192 4
192 5
192 6
1927.....
192 8
192 9
268,885
665,937
2,083,164
8,481,747
12,012.078
30,303,218
20,382,170
6,748,863
6,511,359
5,202,169
5,424,663
6,567,043
6,167,352
8,936,418
9,889,451
20,091
361,319
403,206
862,259
1,231,879
604,635
6,805,081
700,807
8,576,204
792,769
25,875,749
853, 785
14,505,117
1,405,215
876, 203
904,371
1,178,355
909,123
909,123
934,016
1,121,273
985,959
2,253,923 ,
1,927,645 I 1,029,990
4,763,420
1,099,761
1,170,363
5,424,665
T o t a l.......... ......... J 129,644,517
rSee note on p. 573.
Franchise
tax paid to
U. S. Gov
ernment i
Trans
Dividends
ferred to
paid
I surplus 1
76,400,955
12,085,360
116,472
2,079,59?
3,624,394
4,740,869
693,792
32,954
384,404
28,540
217,948
279,216
125,481
74,828
97,362
Profit ( + )
or loss (—)
carried
forward
-$55,774
+150,571
+37,514
-132,311
$3,294,713
714,988
4,009,701
+23,015
-11,351
-11,664
204,585
3,377,632
501,173
366,144
84,472
673,449
876,262
12,495,858
+82,532
-72,412
40,000
1.470.000
3.185.000
3,648,465
770,106
-172.018
8,756
-250,297
931,754
364,087
558,425
10,857,310
=1
=
40,000
-
10,120
2,136,288
4,480,251
588,130
78,801
>3,790
8,950,561
215,799
215, 799
6 200 446 i
7,875, 397
14,688, 500 I 10,394,480
2,075,
11,576,009
1,186,301
-657,
246,586
27,
, ,
187, 257 ....................
1,267, 964 ................. .
655 ....................
....... ..
3,663, 668 |
602,838
3,651, 464
40,093,582 ] 24,222,013
+20,091
+41,887
-61,978
575
BRANCH, CH AIN, AND GROTJP BANKING
No. 79.—
G r oss a n d N e t E a r n in g s o f E a c h F e d e r a l R e s e r v e B a n k , a n d
D is p o s it io n M a d e of N e t E a r n i n g s , 1914-1929— Continued
Disposition of net
Earnings
Federal reserve bank
I Dividends
| paid
Trans
ferred to
surplus i
Franchise
tax paid to
TJ. S. Gov
ernment 1
St. Louis:
1914-15..
191 6
191 7
1918.....
$86,833 ,
297,948
773,106
2,676,828 I
-$97,
141,
502,
1,777,
$31,100
284,566
404,838
$1,603,310
1919..
1920..
1921..
1922..
1923...
3,884, 478 '
7,180,117
5,166,315
2,456,447
2,753,435
2,355,
4,875,
2,951,
647,
1,182,
234,660
253,711
270,253
283,166
296,810
2,120,494
4,621,855
1,042,564
276,450
407,070
1924....... .
1925.... .
1928... .
192 7
192 8
192 9
1,688,143
2,055,637
2,511,509
2,228,079
2,901,925
203,937
-93,540
683,022
775,681
785,159
885,884
304,976
306,753
314,420
317,727
321,855
319,231
-101,039
-400,293
368,602
457,954
423,011
56,665
40,2
509,9
T otal...
39,908,736
17,576,338
(,944,066
10,876,643
2,755,6
Minneapolis:
1914-15.......
1916_____
1917.........
1918..........
100,112
255,177
672,799
2,049,954
-32,341 |
134,603
394,353
1,545,847 1
57,720
363,895
168,103
37,500
1,377,744
37,500
1919.............. ...I ......... I
1920.......... ...........
192 1 ............ .
192 2
192 3
3,007,041
5,307,381
..............
4,966,311
1,969,248
1,749,253
2,333,943
4,131,053
3,151,154
782,695
325,455
180,186
195,871
211,657
213, 774
212,733
2,153,757
3,410,948
488,530
4,469
11,272
524,234
2,450,967
564,452
101,450
192 4
192 5
192 6
192 7
192 8 ...
1929.......
1,609,070
1,438,341
1,622,333
1.390.031
1, 710.304
1.926.031 ,
12,628
4,139
26,043
11,535
43,350
61,073
113,646
37,255
234,381
103,816
390,151
549,659
329,102
234,954
448,033
296,077
614,704
794,762
202,828
193,560
187,609 ,
180,726 I
181,203 .
184,030
Total.
29, 773,386 I 15,484,394
2, 733, 895 I
City:
1914-15.....
191 6
191 7
191 8
.
102,474
-66,776
224,989
380,208 :
1,002,660 |
566,404
2,437,748
3,451,936
66,707
364,503
309,729
1919...
1920...
1921...
1922...
1923...
4,961,482
7,409,987
5,712,858
3,094,660
2,993,919
1924...
1925...
1926...
1927„_.
2,262,910
2,309,985
2,677,340
2,304,938
2,597,968
2,976,576
44,239,901
19,687,530
1628...
1929....
iSee note on p. 573
'
' 5,540,681
| 3,056,096
I
228,755
257,672
7, 642, {
Profit (+ )
or loss ( —)
carried
forward
-$97,169
+109,917
+217,590
-230,338
$1,639,109
87,956
478,283
-32,341
+76,883'
-44,542
5,107,511
-66,776
+158,282
+201,901
-293,407
2,421,426
347,711
275,655
275,313
3,694,607
3,042,781
486,918
—157,432
7,240
2,240,228
2,300,558
664,813
65,158
-253,182
282,921
756,469
414,726
659,760
1,013,585
265,697
258,426
252,764
252,753
253,254
256,549
-518,879
2,450
50,370
16,198
40,651
75,703
22,045
453,335
145,775
365.855
681,333
6,939,100
576
BRANCH, CHAIN, AND GROUP BANKING
No. 79.—
G r o ss a n d N e t E a r n in g s o f E a c h F e d e r a l R e s e r v e B a n k , a n d
D is p o s it io n M a d e o f N e t E a r n i n g s , 1914-1929— Continued
Earnings
Disposition of net earnings
Federal reserve bank
Dividends
paid
Gross
Trans
ferred to
surplus1
Franchise Profit (+ )
tax paid to or loss ( —)
U S. Gov
carried
ernment 1
forward
Dallas:
1014-15..
191 6
191 7
191 8
$244,666
326,372
621,970
2,089,526
$75,388
166,046
352,067
1,240,175
134,008
188,234
261,503
1919..
1920..
1921..
1922..
3,062,251
4,904,522
4,239,574
2,085,775
2,356,436
2,041,864
3,228,231
1,613,564
354,125
196,335
225,424
252,211
251,915
251,429
1,845,529
3,002,807
1,361,353
102,210
1924..
1925..
1926..
1927..
2,157,964
1,813,626
2,127,049
1,741,922
2,119,666
2,496,030
265,024
278,135
857,211
568,209
713,455
770,391
255,239
257,502
256,310
258,544
266,613
599,709
311,899
163,301
244,417
$291,610
259,361
12,856,167
], 370,579
8,934,617
550,971
4,187,785
-52,358
111, 511
456,044
2,869,164
43,736
394,776
497,675
2,448,174
7,021,224
12,706,668
..............
9,184,413
4,821,202
4,615,227
5,387,360
10,108,823
4,920,500
1,660,356
505,426
296,161
384,713
435,361
448,306
467,720
5,091,199
6,654,855
1,254,824
-185,721
37,706
3,487,931
3,848,890
4,554,860
3,853,442
4,757,292
5,466,076
250,516
490,447
1,555,999
1,055,424
1,974,258
2,205,922
480,561
490,447
506,068
547,062
625,751
670,085
1,049,931
508,362
1,348*507
6,288,422
19,513,629
Total..
n Francisco:
1914-15........
191 6
191 7
191 8
191
192
192
192
9
0
1
2
115,961
316,511
1
-
1924..
1925..
1926..
1927..
1928..
Total.........................
69,823,284
33,499,3
+19,805
+163,833
-205,736
$1,184,408
15,235
-52,358
+67; 775
+61,268
-76*685
3,069,255
3,230,315
1,397,771,
1, — —
7,697,341
» Bee note on p. 573
Mr. Stevenson. Governor Young, you were a practical banker
before you came on the board, were you not ?
Governor Young. Yes, sir.
Mr. Stevenson. What banks were you connected with ?
Governor Y ou ng. I started with the First National Bank at Mar
quette, Mich.; later with the Marquette National Bank of Mar
quette, Mich.; later with the First National Bank of Lake Linden,
Mich.; later with the Citizens National Bank of Houghton, Mich.
Mr. Stevenson. In all those relations you had more or less deal
ings with what are known as country banks, did you not?
Governor Y ou ng. They were country banks.
Mr. Stevenson. Y ou learned something of their practical difficul
ties?
Governor You ng. Many of them.
Mr. Stevenson. What was the capital stock of the bank you were
with when you were appointed to the board ?
Governor You ng. $100,000. Pardon me, Mr. Congressman. You
asked when I was appointed to the board?
BRANCH, CH AIN, AND GROUP BANKING
577
Mr. S t e v e n s o n . Yes.
Governor Y o u n g . For 10 years I was governor of the Federal
reserve bank at Minneapolis.
Mr. S t e v e n s o n . When you became governor of the Federal Re
serve bank at Minneapolis, you came from a country bank?
Governor Y oung. Yes; a $100,000 bank.
Mr. S t e v e n s o n . Governor, reference has been made to the diffi
culties in the last 10 years of the banks and the failures. As a
matter of fact, from your observation, has not a great deal of that
come from the shrinkage in the values of the assets of the customers
of the banks, which has come about—I am not charging it was any
body’s fault—but has not a great deal of the difficulty resulted from
the shrinkage in value of real estate and other assets of the people
who dealt with the banks ?
Governor Y o u n g . It was a very contributing factor.
Mr. S t e v e n s o n . For instance, in my country, agricultural prod
ucts were high; agricultural lands were high, and the man who
owned 200 acres of land was considered a perfectly good risk for
a sizable loan anywhere from two to ten thousand dollars. When
the deflation, or whatever it might be termed, of 1920 came about,
the banks were full of paper of that kind. Men who were per
fectly good, as their assets stood prior to the beginning of the de
cline—this is my observation down there and I take it was so where
you were—the decline in the price of agricultural products (cotton
with us and various other things with you) rendered that fellow
unable to pay his debt, and the bank began to renew his paper.
By the next year they began to call for security and wanted a
mortgage on the land. That is the way a great deal of the mort
gages got into the banks with us. Is not that true in your section?
Governor Y o u n g . Yes, sir; that is true with us, and usually they
were second mortgages.
Mr. S t e v e n s o n . He would come up and say, “ I can not pay this,
but I have land worth $10,000. I can borrow $5,000 from the Fed
eral land bank and pay that to you and give you a second mortgage
for the balance.” That is about the history of things with us. They
did that and he farmed another year and they did that again. The
value of the land shrinks and he begins to fall down in his install
ments with the joint-stock land bank that he is dealing with and in
about a year they begin to foreclose and sell him out. The margin
the commercial bank has is wiped out. That is what happened with
us. Is that what happened in the Northwest?
Governor Y o u n g . That is an accurate description of what hap
pened in the Northwest.
Mr. S t e v e n s o n . Then he is out, barefooted and coat gone, and no
way to farm; and there are thousands of those fellows who were
that way, and it was the result of the collapse in agricultural values
that got so much frozen assets in the banks. They continued to carry
them. They could not do anything else. He, the farmer, did not
have the money. The land was mortgaged, so it could not be given
as further security.
Now, has there not been a great deal of this not due to any inef
ficiency m the system, in managing banks, but due to the conditions
that arose without anybody being able to forecast it, that has tom
down the country bank in this country ?
578
BRANCH, CH AIN, AND GROUP BANKING
Governor Y o u n g . It was a very contributing factor, Mr. Congress
man, if not the main factor, but on the other hand, in those same com
munities where banks did go down others stood up.
Mr. S t e v e n s o n . Yes.
Governor Y o u n g . Apparently they used more discretion in lend
ing their money, so that management must also be a factor in the
circumstances.
Mr. S t e v e n s o n . The judgment of management, of course, is the
final factor and that is so in all banking institutions.
Now, suppose we had had what we call a decentralized branch
banking system spread all over that country and dealing with the
same people, having the same character of Security, and that had *
occurred. Would there not have been great danger of a decentral
ized branch banking system getting into the same fix ?
Governor Y o u n g . It would be possible, but not as probable, in my
opinion. We can look across the border, and, if I am informed cor
rectly, the Canadian banks had losses in that same territory, but the
depositors did not lose. Now, the probabilities are that the Canadian
bank did not lend as indiscriminately as the American Unit bankers
did. That may have been for the good of the territory, as I believe
perhaps it was, so that when losses did develop with the man who
had to go through a drought of 3, 4, or 5 years in succession, his
losses were smaller and he was in better position to stand them than
the small-unit banker.
Mr. S t e v e n s o n . The advantage of a system of that kind, spread
over a large area, would be, according to my observation, that the
losses are somewhat local, sometimes.
Governor Y o u n g . Frequently.
Mr. S t e v e n s o n . And if you have them spread over a territory that
has very diversified industries, the losses of one industry would be
tided over by the success and prosperity of another. That is the
situation that I think would probably arise in the Federal reserve
district.
Governor Y o u n g . I think, Mr. Congressman, that there is one
thing I should mention before this committee. I have read very
carefully all these reasons for bank failures. I think one of the
things in the Northwest that caused as much trouble as anything,
was a lack of confidence in the local bank which resulted in tre
mendous loss in deposits, thereby crippling their earning power and
simultaneously putting them into a position where they could not
take hold of a situation and work a man out, as you know many of
these agricultural problems have had to be worked out with the aid
of the bankers.
Those banks that did retain the confidence of the public, and
had money to lend, accomplished more than those that lost deposits
rapidly.
Mr. S t e v e n s o n . They naturally held the best class of business and
best, class of deposit^ and the fellow who was wobbling was obliged
to take what the stronger banks left. That is about the size of it
with us, and, of course, they ultimately went down.
Now, I was going to speak of the fourth Federal reserve district.
I was not in Congress in those days when that matter was settled,
but there was a member of the commission in South Carolina that
appeared before the board before that district was established, and
BRANCH, CHAIN, AND GROUP BANKING
579
our position was that we wanted to be m this district because of the
diversification. If we were put m the Atlanta district, we were
afraid that Georgia and Alabama would borrow all the money. But
in this district we had wheat, coal, a diversity of livestock, and a
great manufacturing industry in North and South Carolina, and
then agriculture, and our belief was that when manufacturing and
coal and all that kind of thing were not borrowing, we would be,
and, in the fall of the year, when we had our cotton money then
would be the time they would need to borrow. That has worked out
very well. We got into the district after a fight, and I imagine
that a district-wide branch banking system would get more benefits
of that same thing; m other words, if they had losses in South
Carolina or slow paper in South Carolina, they would have paper
that was moving in Virginia, and West Virginia, and Maryland.
Would not that be an advantage of the proposed district-wide
branch banking system?
Governor Y o u n g . In m y opinion, it would be.
Mr. S t e venson . It would tend to stabilize it. But there is this—
and we are depending upon that in South Carolina—there are three
or four banks that have mighty near all the business in the State
from the branches of subordinates that has taken place and they are
exercising now a great deal more discretion about the loans they are
making. We are having a terrific holler from the general public
that they are choking business m the small towns. They have only
one bank in a small town and the folks there can not borrow. The
truth of the business is, probably, they have not the right kind of
security. But that builds up sentiment, where they holler “ mon
opoly.” They are beginning to do that now.
If there was money enough to establish independent unit banks,
they would be established, but everybody has been burned up on
bank stock and they are trying to give some of it away now. That
psychological condition is going to arrive when you establish a sys
tem of that kind. You will have all kinds of complaints about
monopoly.
What is the answer to that? You have to deal with these matters
as human questions. We have campaigns on now against chain stores
and against everything that is not centralized in the home
community.
Governor Y o u n g . There are still unit banks in your territory
Mr. S tevenson Yes, but mighty few of them.
Governor Y o u n g . Of course the unit bank has the opportunity to
diversify if it so elects. It can diversify through commercial paper,
through bonds, through United States Government’s and many in
vestments that are not dependent upon their own territory.
Mr. S t e v e n s o n . Then there is another great criticism which is
being made and being directed at the very moment that is on now,
and that is the deposits are collected and gathered and sent to New
York and put on call. They say that is absolutely safe, and they are
sure to get their money as they want it and get it at their profit
as they go along, and the cry is being raised already that that means
all money, instead of going to the development of local communities,
is being taken into New York and loaned on call,
Is there any way to prevent that ?
100136— 30— v o l 1
pt
5 -------- 4
]lfeQ
BRANCH, CH AIN, AND GROUP BANKING
Governor Y o u n g . I should think that those statements are over
statements, as I have looked into them, Mr. Congressman. I have
stated many times before the committee that I thought it would be
a very short-sighted policy for any group or chain or branch banking
system to neglect industry in its own territory. I do not believe
that they will do it and expect to continue in business in that
territory.
Mr. Smead, it seems to me I checked up, at one time, on the State
of South Carolina as to the amount of brokers’ loans that the banks
reported.
Mr. S t e v e n s o n . That is national*banks or member banks?
Mr. S m e a d . Member banks; yes.
Governor Y o u n g . And it aggregated $1,600,000. I do not know
what the total deposits of the State of South Carolina amount to*.
Mr. S t e v e n s o n . I do not remember either.
Governor Y o u n g . It is at least fifty times that amount.
Mr. S t e v e n s o n . At least that. I think, to be frank with you, that
some of the difficulty banks get into on that matter is due to the
officers of the banks getting into the market themselves. We had
a catastrophe down there with one of the best banks in town, in my
district. Less than three months ago, at Gaffney, the president of
the bank got killed accidentally—supposed to be, but no question
it was suicide—-and it turned out he was $130,000 short, and I think
tiiat pretty well ran back to the collapse in October on the stock
market.
That was not a bank lending its money on call, but the president,
an official of that bank, and a very efficient one, having gotten short
and using the bank’s money. Of course that is the personal element
that has to be dealt with there. No system can overcome that.
Governor Y o un g . Was that covered by bond?
Mr. S t e v e n s o n . Oh, a $25,000 bond. It was the First National
Bank, at Gaffney, and closed an affiliated bank with it. It was a
terrible catastrophe in one of the best banking towns in my district,
just a few miles out of Charlotte.
There was a discussion as to the Federal reserve system, and I
wanted to ask your opinion here on the question of whether the Fed
eral reserve system would continue if the national banks continued
to go out of existence. You would not have very much to stand on
when they got out, would you ?
Governor Y o u n g . If they all went out; no.
Mr. S te v b n so n . And there has been quite a movement to go out?
Governor Y oung. Well, while those national banks have given up
their national charters, Mr. Congressman, they still find it advan
tageous to retain membership in the Federal reserve system.
Mr. S tevu n so n . But after having given up the charter in such a
way, they could not, under the law, be in the system. Take the
national bank at Bock Hill, S. C., and the Columbia National Bank,
two of the feest banks in the State, the other day consolidated, mak
ing 2 branches 80 miles apart, They are not eligible under the
McFadden Act to be members of the system.
Governor Y o u n g . We are losing some members in that territory
now.
Mr. S tev e n so n . They could not be in the system. I have had an
idea that we might get rid of that trouble and all of this quarrel
BRANCH, CH AIN, AND GROUP BANKING
581
about whether the member banks were getting what they were en
titled to, by the Government simply putting up the capital, which is
only $107,000,000 for the Federal reserve batik. The surplus belongs
to the Government under the law. That could be done, and would
make them entirely independent of any banks—make them a Gov
ernment institution and let them serve all the banks that are worthy
of service. Have you ever thought of that way to solve that ques
tion ?
Governor Y o u n g . I have not.
Mr. S t e v e n s o n . It strikes me it is time for us to begin to consider
that. It is property that all belongs to the Government—everything
over and above the capital stock belongs to the Government. The
capital of $107,000,000 is all the banks have, except their equity in
the surplus, and on that equity they can not get over 6 per cent under
the present law. They would not be averse, if they were paid their
money back, to letting the Government man run the whole business.
I am personally in favor of some plan like that. Then you Would
not be subject to the varying whims of the banking world as to
whether they will be in or out.
Governor Y o u n g . I do not just understand your proposal. Will
you go into that in a little detail ?
Mr. S t e v e n s o n . My proposal is to do exactly what you are doing
with all banks you are prepared to accept as depositories and carriers
of their reserves, but do not require them to put up any of the capital.
Then, State and national banks both, when they were accepted as
members of the institution would have the right to use the facilities
of the Federal reserve bank and carry their reserves there, but they
would not be required to furnish the capital with which to do the
business. The Government naturally would select, then, the directors,
instead of the banks selecting them, as they select part of them now.
That is not now before this committee, but it is an idea I have
considered a great deal. I do not know when it will work out.
Now, you discussed the other day the election of directors. You
said there were so many selected by the banks—class A directors,
I believe. All directors are selected by the banks, but three are
bankers and three not—all except those selected by the board.
Governor Y o u n g . There are nine directors, of which six are se
lected by the banks.
Mr. S t e v e n s o n . Y e s .
Governor Y o u n g . And three appointed by the board.
Mr. S t e v e n s o n . Of those six selected by the banks, three are not
bankers; they represent industry and agriculture. Is not that true ?
Governor Y o u n g . That is correct.
Mr. S t e v e n s o n . S o that the majority of the whole business is
selected by the banks. The banks are in two classes, however, I
believe—class A directors are elected by one set of banks and class
B by the others.
Governor Y o u n g . I will correct that just a little bit. Banks are
in three groups in the district, according to the size of the banks.
Mr. S t e v e n s o n . Yes.
Governor Y o u n g . And each' group elects a class A and a class B
director, so that the little bank has the opportunity of electing one
class B director just as much as the other group has.
582
BRANCH, CHAIN", AND GROUP BANKING
Mr. S t e v e n s o n .. The banks all have a voice in the selection of six
directors, but they must select three who are not bankers ?
Governor Y o u n g . That represent industry.
Mr. S t e v e n s o n . That represent industry?
Governor Y o u n g . Yes, sir.
Mr. S t e v e v n s o n . N o w there was a discussion here during the ex
amination that has been going on about the amount of dividends
that has been paid. As I understood you, it was time when they
might pay the member banks a little more dividends on the capital
they have in?
G overnor Y o u n g . If earned.
Mr. S te v e n so n . I f earned ?
Governor Y o u n g . Yes, sir.
Mr. S t e v e n s o n . That, of course, should always be optional with
the Federal reserve bank or the Federal Reserve Board, because
you would always want to keep a check on it, so as not to deplete top
much your surcuus?
Governor Y o u n g . I would rather see it specified under the law
“ if earned.”
Mr. S t e ven so n . If earned; yes.
Governor Y o u n g . And not left to the discretion of anybody or any
board.
M r . S te v e n so n . Would you
Governor Y o u n g . I would
put a maximum limit on it?
like to have more time to work out
the details. We are making a recommendation to Congress that the
member banks participate to a large extent in the earnings. The
details we have not been able to work out yet.
Mr. S t e v e n s o n . Y ou spoke yesterday, I believe it was, of the
intermediate credit banks and land banks taking away a great
deal of the custom of member banks. As a matter of fact, they re
lieved the member banks of a great many customers who were
pretty slow, did they not? Did they not rath&r help than hurt?
Governor Y o u n g . What I had in mind, Mr. Congressman, was the
earnings of small country banks.
You know in the old days the country banker handled farm mort
gages for an insurance company or other investors, for which he
got a commission. When the land bank came in he could not get
that commission. That practically drove him out of the farmmortgage business, which was a source of his profit.
Obviously, the land bank did take over many of those loans and
relieved him after 1921, I think it was. You will recall that $he
tax clause of the land-bank bonds was not adjudicated until 1921,
so the land banks were not in the field in 1919 and 1920, when they
really should have been in the field.
Mr. S t e v e n s o n . They were also excluded from the field because
the Treasury Department was selling an enormous number of United
States bonds and did not want the competition of the land-bank
bonds. As a matter of fact, we appropriated $200,000,0.00 to buy the
first $200,000,000 of land-bank bonds, according to my recollection,
to keep them from interfering with the sale of Liberty bonds.
But those land-bank developments/really, in the end, have been
rather a source of weakness to the country banks, for the reason
that they got the first mortgage always and, in the decrease in the
BRANCH, CHAIN, AND GROUP BANKING
583
value of land which I referred to a little while ago, they got the
land. They have a great deal pf it now, by the way. But the
commercial banker, when his customer got on the rocks, lost. He
did not get anything out of that security, because the land banks
got the whole security. That has been the result in the country
districts.
Governor Y o u n g . The country banker usually ended up with a
$2,500 note of a farmer who owned 160 acres of land with an $8,000
mortgage ahead of the banker, and the only method he had o'f pro
tecting the $2,500 was to take up the first mortgage, but in many
cases it was not advisable to do that.
Mr. S t e v e n s o n . In the instance I mentioned of 7,500 acres of farm
land, that is what occurred as the result of that process.
You spoke also of the intermediate credit bank. I want to call
your attention to one difficulty about that institution which has not
made it a help. The rate of discount was limited to 7 per cent.
The intermediate credit bank would not handle any paper upon
which more than 7 per cent had been charged.
In the cotton country 8 and 9 per cent and, in some States, I
think 10 per cent is lawful as the contract rate. There is a bank
in my town, for instance, that has got some farm customers who
have raised $25,000 worth of cotton. They want to get advances
or get the advantage of the intermediate credit bank. They can not
go to their bank and give it their paper and let it take it to the
intermediate credit bank and rediscount it, because the bank can
not afford to break its discount rate. If it breaks the 8 per cent rate
for Jones, it has to break it for Smith. As the result, there is none
of that paper handled through the banks and the customers get
the money otherwise.
The result was disastrous, because it went through agricultural
corporations, and the agricultural corporation required them to take
10 per cent of their stock in that corporation and charged them 7
per cent, and in the fall of the year they would make losses enough
to lose the whole capital stock, and the man’s money cost 17 per
cent, and yet he was deprived of dealing through his own bank.
If the intermediate credit banks allowed the banks to handle that
paper in the usual way and take it to the intermediate credit bank
and rediscount it, whether 7 per cent or 8 per cent, the usual course
would have been followed and the fellow would have paid 8 per
cent. As it was, he paid 17 per cent and there have been worlds of
losses. There has been a great scandal over it. In one instance they
mortgaged a crop 3 miles down the road near Beaufort. When they
identified the land it was on a highway. I believe it is now United
States 29.
The intermediate credit bank, with that weakness, has not been
of much help. I imagine the Federal Reserve Board would not op
pose our amending that law so as to permit them to charge not over
the local rate of the State in which it is located.
Governor Y o u n g . There are difficulties in both ways, Mr. Con
gressman. It might end up in a rate of 6 per cent in Virginia and 10
per cent in South Dakota.
Mr. S t e v e n s o n . If they were permitted to discount paper on which
not over the contract rate in the State where it was located was
charged, that would relieve that situation, so whenever the man was
584
BRANCH, CH AIN, AND GROUP BANKING
located, he would simply pay the contract rate and could handle it
through his usual local bank. That has destroyed the efficiency of
the intermediate credit bank in our section.
Just one other question: I notice the comptroller recommends a
decentralized district-wide branch banking system. Can you give
me your idea of what that woult be ? The term “ decentralized ” is
attractive, but what does it mean? I can not follow the comptroller
in his reasoning on that, as to what would be decentralized, as con
trasted to a centralized bank. For instance, you have the bank in
Richmond given authority to place branches all over its Federal
reserve district, and you call it a decentralized bank. It is not
pretty considerably centralized if it has tenacles all over the
district ?
Governor Y o u n g . It would mobilize the credit.
Mr. S t e v e n s o n . I appreciate that.
Governor Y o u n g . And as you mobilized the credit, as you do
in the Federal reserve system, the decentralization comes afterwards,
or you put that credit where it is needed. I think that is what the
comptroller had in mind.
Mr. S t e v e n s o n . His view is that such regulations should be ap
plied as not to centralize the loans; in other words, to require them
to make a fair distribution of their loaning capacity.
Governor Y o u n g . It is to be hoped they would do that.
Mr. S t e v e n s o n . I do not know just how you could do that, be
cause the people who would handle a bank with a widespread busi
ness like that would have to be given the very widest discretion,
would they not ? If you would have it judiciously managed, you can
not interfere too much with the details.
Governor Y o u n g . N o ; I do not think you could regulate that.
Mr. S t e v e n s o n . The cry of centralization would naturally arise
from the communities that did not get as much money as they thought
they should have.
Governor Y o u n g . I did not know the Comptroller of the Currency
had specified any area.
Mr. S t e v e n s o n . I understood him here to say that he thought it
should be limited to the area of the Federal reserve district.
Governor Y o u n g . I thought it was the trade area.
Mr.. S t e v e n s o n . I got that from reading his report. I did not
hear him on three days.
Governor Y o u n g . I think his recommendation was trade area.
Mr. S t e v e n s o n . But he has that provision, that it should not go
beyond the Federal reserve district in which the parent bank is
located.
Mr. W in g o . I am not sure about this, but I think the comptroller
did, in his report, say the Federal reserve district. But I got the
impression, since then, he has come to the conclusion that it was not
necessary to confine it to the Federal reserve district, but to the
trade area. That is the impression that was left with me.
The C h a i r m a n , He did not define what was a trade area. As I
recall, he said Congress could define that. I understand the gover
nor’s expression on that was a little different. He wanted an elastic
area. Is that correct, Governor?
Governor Y o u n g . That is correct.
Mr. S t e v e n s o n . The comptroller’s report very distinctly intimates
the idea of areas not going beyond the limits of the Federal reserve
BRANCH, CHAIN, AND GROUP BANKING
585
-district. Now, I did not hear his statement here on that particular
•question. I have not had the opportunity of being here ail the
time. Those are going to be very intensely practical questions when
we come to write a bill, if we write one.
Governor Y o u n g . Very.
The C h a i r m a n . I think the comptroller did specify Federal re
serve districts, but in any particular trade areas where the Federal
reserve districts or State lines interfered, the trade area lines should
control rather than the Federal reserve district or State lines.
Mr. W i n g o . In other words, in the last analysis, the trade area
should be the controlling factor. For illustration, in my State, I
think I asked the comptroller about this. My recollection is that my
home town is in the Kansas City district Little Rock is in the St.
Louis district. I think we discussed it and I got the impression
from him that the trade area lines should be the controlling factor,
but they should stay within the Federal reserve district as far as
possible. The trade area district should be the dominant factor in
determining where the branches should be established.
Mr. S t e v e n s o n . The governor will see that is a very hard thing to
determine.
The C h a i r m a n Will you yield to me ?
Mr. S t e v e n s o n Yes.
The C h a i r m a n It is my recollection, back in 1912 and 1913 when
the Federal reserve act was passed, that the argument was made then
that the organization of the Federal reserve system would tend to
do the very things it is now proposed to do with the establishment of
branch banks in trade areas.
As you said a moment ago, the money would flow through the
Federal reserve system into those sections where it was needed.
Has the Federal reserve system failed in that respect in serving the
country through its system of banks ?
Governor Y o u n g . I would not say so, Mr Chairman. What I
said the other day was that it was not 100 per cent efficient. I do
not believe it will ever be 100 per cent.
The C h a i r m a n I s the Federal reserve system a branch banking
system ?
Governor Y o u n g . I would rather classify it as a group system*.
Mr. W i n g o . It might be well for you gentlemen to read the
1debates on why we established the Federal reserve system the way
we did instead of having a private branch bank system,
Mr S t e v e n s o n What I want to get is a practical definition of
trade area. We know what a Federal reserve district is. That is
fairly well defined, If Congress is going to define a trade area,
they will have to recast its legislation every few years, because busi
ness will develop and, for instance, oil will be discovered around
Little Rock, and we will have a big trade area where there is just
a bullfrog pond now, probably, and all that kind of thing. There
is not very much chart or compass to that designation ©£ a* trade
area. That is what I wanted to get at.
Governor Y o u n g . In reply to an inquiry from the chairman the
other day I said that that should be discretionary with tfc»* proper
officers as to what the trade area is, because it does change.
Mr. S t e v e n s o n Just as the board had wide discretion i n d^fming:
and limiting the Federal reserve districts.
Governor Y o u n g . Branch districts?
586
BRANCH, CH AIN, AND GROUP BANKING
Mr. S te v e n s o n . Yes. The Federal reserve districts were fixed by
the board and not by statute.
Mr. W i n g o . By a special committee.
Governor Y o u n g . We could change the territory in a district now
by giving it to another district. But I do not think we could change
the number of reserve banks.
Mr. S t e v e n s o n . The number of reserve banks was fixed, but the
committee—Mr. McAdoo, Mr. Williams, and Mr. Houston—they
delimited the districts and some have been changed since. I believe
it is within the power of the board to do that.
Governor Y o u n g . Yes, sir; that is within the power of the board.
Mr. S t e v e n s o n . What would you suggest, if this plan was adopted,
of having branch banks confined to trade areas ? What board would
you suggest should have authority to determine what would be the
trade area m which to put branches? Would the Federal Reserve
Board be given that power or would you establish a new board?
Just what is your suggestion about that?
If we are going to write a law, we want to get the combined wis
dom of the bankers in this country on how to apportion this thing.
Governor Y o u n g . Granting charters is now under the Comptroller
of the Currency.
Mr. S t e v e n s o n . Yes.
Governor Y o u n g . It seems to me if this trade area is to be deter
mined, it should be left to him.
Mr, S t e v e n s o n . In other words, when the bank desires to estab
lish branches it should make a showing before the comptroller as to
where they are to be put, and they could not do it without his ap
proval ; m other words, ne establishes the trade area in which that
particular bank would have a right to operate with branches ?
Governor Y o u n g , That is my idea.
^ The C h a i r m a n . Will you yield?
Mr. S t e v e n s o n . Y e s .
The C h a i r m a n . Would that be exclusive of the Federal reserve
banks?
Governor Y oung. It is now; yes.
The C h a i r m a n . Y ou think the comptroller should have the sole
power without consulting with the Federal reserve bank in that
district ?
Governor Y o u n g . He has that in the granting of chatters now
The C h a i r m a n . But there is a consultation* is there not, with the
Federal reserve agent ?
Governor Y o u n g . In actual practice it is referred to the Federal
reserve banks, It could, of course, be extended to the Reserve Board
and the Comptroller of the Currency.
Mr. S t e v e n s o n . Y o u have many member banks, and you would
have many more very large State-chartered institutions, over which
the comptroller would have no authority at all, who would probably
desire to be members of the Federal reserve system and desire to
have branches which would be in contravention of the McFadden
Act as it now stands.
*
The comptroller could not determine where those member banks
or those banks that desire to be member banks, who are under State
charters could put branches.
Governor Y o u n g . No.
BRANCH, CH AIN, AND GROUP BANKING
587
Mr. S t e v e n s o n . Y o u would have to have some machinery to take
care of that.
Governor Y o u n g . Yes. I am doing a great deal of thinking while
I am talking, and it would probably be better, under those circum
stances, under the Reserve Board.
Mr. S t e v e n s o n . Suppose some of these days we do write a law on
this matter: Regardless of the insurance of deposits, and other
things, the thing we need is information on where should we best
lodge the power, if we are going to give authority to do these things,
to work out the details. That is a very important subject that needs
to be elucidated, in my mind.
Governor Y o u n g . I realize that, Mr. Congressman. In my initial
statement before the committee, I stated that the board was not
prepared at the moment to make a recommendation; that they were
making a further study of this whole question, and that is why I
am unable to answer many of your questions as to details. I hope
that the work we are doing and the work this committee is doing,
will permit something to be worked out.
The C h a i r m a n . May I call your attention to the fact, Mr. Steven
son, that this Congress can not pass any legislation regulating where
State banks shall have branches, except as they become members of
the Federal reserve system.
Mr. S t e v e n s o n We have legislation that State banks that put
branches elsewhere than where they are or elsewhere than withm
the city where it exists, can not become members of the Federal
reserve system,
The C h a i r m a n That is right.
Mr. S t e v e n s o n . Of course, we will carry forward some legislation
on that subject, and many of those things—for instance, the one I
referred to a while ago; these two national banks in my State that
consolidated under a State charter under the terms of the McFadden
Act, are excluded from membership in the Federal reserve system.
Many of them would like to come in, and we should have some
authority to define within what area it should be allowed to operate
branches and under what conditions they should be allowed to
come in.
Of course, we could determine under the statute under what condi
tions they could come in. We could modify the statute.
That is all I wanted to add. I wanted to get the combined wis
dom of your board before I helped write a bill, if we ever do.
Governor Y o u n g . We will try to do that.
Mr. S t e v e n s o n . The practical thing in my mind is, first to what
-extent—within what areas can banks who are members of the Fed
eral reserve system have branches, and what authority shall deter
mine what their areas shall be? Those are two fundamental things
that have to be dealt with.
That is all I wanted to ask, Mr. Chairman,
The C h a i r m a n . Mr. Bland has left.
Mr. G o l d sb o r o u g h . Governor Young, I think you said the other
day that you thought the limits of these trade areas should be
flexible. Is that your present view ?
Governor Y o u n g . That is my present view I will put it this
ivay, Mr. Congressman, that the establishment of branches could
not be defined by law within certain territories, but should be left
588
BRANCH, CH AIN , AND GROUP BANKING
to the discretion of somebody—the Federal Reserve Board, if you
will.
In other words, they would have the right to permit branches tobe established.
Mr. G oldsbo ro u g h D o you believe that the body which has the
discretion, such as the Federal Reserve Board, or the Comptroller of
the Currency, would be any more able to control the boundaries of
these trade areas than the Comptroller of the Currency is now able
to control, as a practical proposition, mergers of enormous banking
institutions?
Governor Y o u n g . If Congress will give us that power; yes.
Mr. G o l d sb o r o u g h . Congress, of course, gives the Comptroller of
the Currency authority to permit or refuse authority to consolidate.
A few days ago, the Comptroller of the Currency gave authority
to the Chase National Bank, the Equitable Trust Co., and a smaller
bank to consolidate into an institution with resources of nearly
$3,000,000,000.
Do you believe, as a practical proposition, he could have avoided
granting that permission if he had felt himself it was an unwise
thing to do?
Governor Y o u n g . I am hesitating to try to think of what they
could do.
Mr. G o l d sb o r o u g h . What is that?
Governor Y o u n g . I am trying to work out what they could do
if he refused them.
Mr. G o l d s b o r o u g h . You do not catch the force of what I had in
mind. I mean, would not the pressure, political and otherwise, on
a Comptroller of the Currency, in a case of this kind, be so great
that he would practically be forced to grant it?
Governor Y o u n g . N o ; I do not think so. The practical side o f
it-----Mr. G o l d s b o r o u g h . I was not asking about the practical side. I
understand that. You can answer that way, if you wish.
Governor Y o u n g . In that case, Mr. Congressman, they could have
consolidated under a State charter and, under those conditions, the
comptroller would have had nothing to do with it.
Mr. G o l d sb o r o u g h . Of course; now, this term “ decentralization,”
I find—decentralized trade areas—is being used a great deal. I am
getting letters about it and bankers and individuals are talking to
me about it. I find it is a very attractive word.
But, is it any more valid than any other advertising slogan? For
instance, you see advertised the “ Sunkist ” orange, and I buy an
orange that is advertised as a Sunkist orange even if there is an
other orange right beside it that looks just exactly like it, because
the slogan is extremely attractive.
Again, one man in Congress may call his element the progressive
element and another element standpatters, whereas his opponets call
themselves conservatives and his group radicals; in other words,
does this word “ decentralized,” used in connection with this mqury,
mean anything at all except an endeavor to make a monopoly at
tractive ? Is not that all there is in it ?
Governor Y o u n g . Well, that is not my expression, Mr. Congress
man.
BRANCH, CH AIN, AND GROUP BANKING
589
Mr. Goldsborough. I did not intimate it was. But it was the
comptroller’s expression. According to his own statement, he is
more responsible than anyone else for this agitation.
Governor Young. Well, if it describes it accurately-----Mr. Goldsborough. Well, does it describe a monopoly accurately
to say it is decentralized?
Governor Young. I think what he has in mind is decentralization
from the very large centers within the United States—New York
and Chicago—where they have not gone into branch banking or
group banking.
Mr. Goldsborough. If these areas are made flexible in size, will
they not inevitably grow larger ?
Governor Young. In my opinion, yes.
Mr. Goldsborough. Which tends to the very centralization which
this proposed legislation is to do away with. Is not that true ?
Governor Young. That is true.
Mr. Goldsborough. Then, what is the use of starting here and
saying we are trying to fix trade areas which will decentralize
monopoly, when the inevitable drift, after we do it, is to go back
to the same condition we are trying to get away from?
Governor Young. In those circumstances, I would suggest placing
a limitation on it.
Mr. Goldsborough. I s not this whole thing, as a matter of fact,
simply an attempt to make universal branch banking—unlimited
branch banking—attraction, by starting it in a particular way?
Governor Young. I think that is what will eventually develop, but
I do not think this country is ready for that at the moment.
Mr. Stevenson. Mr. Goldsborough, there is one question I forgot
to ask. Will you yield to me now ?
Mr. Goldsborough. Yes.
Mr. Stevenson. Suppose it is a State member bank. Of course,
its charter would not extend beyond the limits of the State. There
fore, this trade area limitation would not authorize a State member
bank to put a branch in another State. There would have to be some
State action there, would there not?
Take, for instance, New York and New Jersey. That is a good
instance of it right there. A State bank in New York, chartered
by the State of New York, would not have the right, without the con
sent of the State of New Jersey, to run a branch in the State of New
Jersey?
Mr. W ingo. I think you are in error, there.
Mr. Goldsborough. 1 have but six minutes left, Mr. Stevenson.
Mr. Stevenson. I simply wanted to ask that question, but I do
not want to enter into a discussion about it.
Mr. Goldsborough. Governor Young, what I have in mind is, that
it seems to me in approaching this subject, we ought to do it with
our eyes open—and for the present I am not arguing against branch
banking, but am suggesting that Comptroller Pole’s proposal raises
clearly the issue as between monopolistic banking and unit banking.
* If it does, let us discuss it from that standpoint.
Mr. Pole has testified he does not think there should be universal
branch banking. He is advocating what he calls trade areas. That
is another attractive term. A trade area, within which everybody
can do business most conveniently, to a person who is not thinking
$R A
®<M, OBtAlfcP,
ASPto 4 3 B O W B A N K IH 0
about it, Sounds attractive, but it does not mean anythingespecially
when y6u say the size o f the area shall be discretionary w ith $ome
body. .
Governor Y o u n g . He did not say that. I said that.
S ir. G oldsbohough . I know , but it is all in the courge o f the discus
sion. I d id not say that he said that.
Ifow, Governor Young, Prof* John Dewey, who is certainly the
greatest modern philosopher and one of the most careful men I
know, in an article entitled 44Individualism, Old aiid New,” in the
New Republic, of January 27, makes this statement:
It was stated in a recent convention of bankers that 80 per cent of the
capitalization of all banks in the country Is now in the hands of 12 financial
concerns. It is evident that actual control of the other 20 per cent, except lor
neglibible institutions having only local importance, automatically ensues.
What do you think about the validity of that statement ?
Governor Y o u n g . I think the statement I left with the committee
the other day will show just the contrary. If I remember your
Statement correctly, 12 financial——
Mr.4G oldsbohough . Twelve financial concerns; yes.
Governor Y o u n g . Own 80 per cent of the banking capital of the
United States.
Mr. G oldsbohough. Yes ; that is the statement.
Governor Y o u n g . The figures we have prepared do not Show t o y
such conclusions.
Mr. G oldsborough . I will approach it from another point of view,
because the question of monopoly is the one I have in mind. I think
you said-, in your testimony, Governor, that the capital stock of the
banks of the country, roughly speaking, amounted to about
$5,000,000,000?
Governor
figui^.
Y oung.
:,v
I guessed at that. I have not checked jfcjiat
"
Mr. G oldsbohough . I remember you did not claim the statement
to be accurate.
*
1
Governor Y o u n g . Mr. Smead says probably around $4,OQ0,GOG;OGO.
J just took it roughly, one-tenth of the total banking resources;
Mr. G oldsbor;o u g h . N o w , the total capital of the banks, of Greater
New'York, alone, is $1,155,062,000, according to the figures furnished
to be my Mr. Smead, which would mean, of course, that more than
one-fourth of the total banking capital of the country is centered in
Greater New York alone.
The C h a i r m a n . It is now 1 o’clock.
G-overnor Y o u n g . Mr. Congressman, can I just get the'statement
again? Your statement was that the capital of the banks in the
city of Greater New York was $1,155,062,000?
Mr. G oldsbohough. Yes.
Governor Y o u n g . I have not that figure here, but that is approxi
mately correct.
Mr. Q o l d sb o r o u g ii . I will proceed a little further along that line
when we meet on Friday.
The C h a i r m a n . The committee will stand adjourned until Friday
at 10;30 o’clock.
(Whereupon, at 1 o’clock p. m. the committee adjfourned to meet
at 10.30 o’clock a. m. on Friday, March 28,1930.)
X
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