The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
EXTRACT
CONFERENCE
FROM
O F GOVERNORS
O F THE
FEDERAL R E S E R V E B A N K S
DISCUSSION with MR. N E W T O N D . BAKER
t#
x
General Files
eLibrary
m
|
LERAgentss
e
l
i
F
selstow
,#
When initialed
bythose indicated.
TREASURY B U I L D I N G +
W A S H I N G T O N , D. C.
2 McConkey - 4 Ra eae
PiWhite Ti d a s
MARCH 23, 1926
PlGilmore_<gi_____.
Oo "Adaths
7 AG 9ES |Rig k e r e
C]Stewart
PyNovy c
a
e
ea
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
WALTER S. COX, S H O R T H A N D REPORTER
472 Louisiana Avenue, Northwest W a s h i n g t o n , D. C.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
192
(Governor Orissinger, Vice-Governor Platt, Messrs.
Hamlin, miller, James, Cunningham,
o f t h e Federal Reserve
Board, e n d wr. Newton D. Baker, o f Cleveland, Qhio,
entered t h e Conference room, a n d the following nroceedings
were had:)
Governor Crissinger, M r . Baker i s here a t the request o f t h e Governors,
t o g i v e a n account
o f the G r i m
alfalfa case, a s t o the effect i t might have uvnon the re—
discount operations o f the Federal Reserve Banks.
Baker w i l l e x p l a i n t h e s i t u a t i o n
M r ,
t o you.
Mr. Baker. G o v e r n o r Crissinger, a n d gentlemen, t h e
Grimm-alfelfa case i s largely a lawyer's brief t o me.
So far as that particular case i s concerned I confess 1
thought the Supreme Court would hear i t o n a writ o f
°
certiorari, because I
believed t h e n a n d believe n o w that
while it does not change the lew, thet it is a misapplication o f the l a w t o the facts i n that particular case.
aly h o p e w a s t h e t t h e G i o r e n 3 C o u r t o f t h e U n i t e d S t a t e s
would regard the legal orincivles i n that c a s e a s s o vital
to the business o f the country that t h e y would not b e
willing t o let that case stand with the possibility o f
the confusion that i t might cause throughout t h e Federal
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Reserve System. I
suspect t h a t t h e s u p r e m e C o u r t
cluded i t f o r t w o reasons.
et o f t h e C o u r t
e x
I n the first place t h e d o c k —
i s very heavy a n d they a r e excluding
all cases that t h e y can.
I t was easy f o r them t o exclude
this c a s e because i t i s a question which arises more o n
a determination o f the facts i n the lower court t h a n d e —
termination o f principles o f law,
I f one takes t h e
opinion o f the Circuit Court o f Anpeals a n d takes t h e
statement o f l a w made b y i t n o particular exception c a n
be taxen t o what they state the law to be, with the
single exception t h a t i n the. ovinion written b y Jydge
Rodman they d o say t h a t t h e Federal Reserve B a n k wittingly o r u n w i t t i n g l y b e c a m e p a r t y t o a
fraud w h i c h w a s c o m -
mitted b y the S tanrod Bank, which was the member bank
in the case.
B u t i f you read t h e rest o f the Judge's
opinion, a n d o f course t h e Supreme Court did, i t seems
fairly clear that t h e y held that there were facts e n ough
to g o t o the j u r y o n the question o f fraud.
Now ‘vith regard t o the Grimn-Alfalfa case, taking
it altogether, I think it is fair to say this: T h a t the
trial Judge, with great respect t o him, flouncered a
good d e a l
i n t h e t r i a l o f t h e cause,
T h e case involved
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
194
some d r a f t s w h i c h h a d b e e n d e p o s i t e d w i t h t h e S t a n r o d
Bank b y t h e G r i m m - A l f a l f a A s s o c i a t i o n a n d a
deposit l i a b —
ility created f o r the proceeds o f those drafts i n favor
of the Grima-Alfalfa Association,
T h o s e drafts h a d beén
discounted a t the Federal Reserve Bank, e n d when s u i t
was b r o u g h t a f t e r t h e S t a n r o d B a n s closed, t h e r e w e r e s i x
causes
o f action, b a s e d w n o n t h e t h r e e d r a f t s
i n question.
The odd-numbered ones, 1 , 3 and 5, applicable t o separate
drafts, rather irregularly charged the insolvency o f the
Stanrod Bans a t the time that t h e y were devosited there
and inferentially charged, t h o u g h they d i d not directly
do it, the pleadings were not clear, t w o things: T h a t
the drafts were only deposited for collection p u r p o s e s —
and a l s o t h a t t h e r e h a d b e e n a
fraud u p o n t h e G r i m m - A l
falfa Association i n the creation o f a deposit liability
ane h e acceptance o f that devosit after t h e imsolvency
of t h e S t a n r o d B a n k w a s ‘ n o w n t o i t s officers,
a n d that
the F e d e r a l R e s e r v e B a n k « n e w t h a t also,
The e v e n n u n b e r e d d r a f t s w e r e dismissed.
up c a u s e s o f a c t i o n o n another theory,
T h e y set
t h e y were
ultimately a n d did. not figure i n t h e law suit.
+o b e brought
e e e
T h e Judge
o n the s i x
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
195
causes o f action, a n d allowed all the evidence t o go before t h e jury, s a y i n g that h e did not xcnow whether h e
should t r y t h e c a s e i n e q u i t y o r a t law, t h a t i n s t e a d
of
trying t o decide that question, which would have cleared
the decxs,
h e decided h e would t r y i t both ways; t h a t
if i t was a law question t h e verdict o f the j u r y would
stand a s a law verdict, a n d i f i t was a n equitable quées—
tion h e would regard t h e jury a s having b e e n empaneled
as a n a i d t o the Chancellor i n detzrmining t h e question
of facts; t h a t h e would adont t h e decision o f the j u r y
on the question o f fact a s the Chancellor's decision,
Judge Rodman i n the Circuit C o u r t o f Appeals s a i d that
he was inclined t o think that t h e case w a s a t law, b u t
that i t wasn!+ n e c e s s a r y t o decide. that, s i n c e t h e d o u b l e
cour.se which the Chancellor h a d taxen w a s enough t o justify
the fudgmemt i f i t ~ould s t a n d o n other grounds.
Out o f thet somerhat.confused situation i n the lower
courts, caused b y the determination o f ths Trial Judge not
to decide exactly what kind o f case h e had, i t was v e r y
aifficult
t o conduct t h e c a s e a n d i t i s v e r y d i f f i c u l t
aoply f a c t s t o t h e law.
N
o
w the n e t result
to
o f all o f
that i s this, t h a t t h e Circuit Court o f Appeals h e l d that
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
196
a jury having passed o n the question t h e o n l y thing t h e y
would cetermine w a s whether there was enovgh evidence t o
zo t o the jury o n the question o f eithér4a tort o r a
fraud,
o r a tort i n the nature o f a fraud, a n d they de.
cided that there was enough evidence.
N o w that evidence
which t h e Circuit Court o f Appeals reviews,
i s based o n
r three things. First, t h e application that was made
discount o f this paper a t t h e Fed>ral Reserve Bank o f
Francisco,
o n which w a s t h e letter "D", which i n d i
cated t o everybody i n the Federal Reserve System,
far a s I
so
x n o w t h e o r i g i n o f t h e paver, t h a t i t h a d c o m e
from a depositor.
T h a t fact g o t twisted around ultimate—
ly a n d t h e C o u r t o f Eppeals t h o u g h t t h e t i t b e l o n g e d
to
spositor instead o f belonging t o the Federal Reserve
immortant, therefore,
action,
i n your
t o clarify t h a t misunderstanding
and @ither sxlain i t on the avnlication o r take out of
the Goaliceticn
able i n t o a
designation
o f ownershin, t h e r e b y o v e r c o m i n g
that difficulty.
-‘The next thing that f
Avoeals commented
on w a s t h e f a c t t h a t t h e S t a n r o d P a n k h a d e n d e a v o r e d
t o
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
197
borrow money f r o m t h e Federal Reserve B a n k o f San Francisco
and h a d b e e n t o i d b y t h e F e d e r a l R e s e r v e B a n k t h a t t h e y
their directors
must p u t i n sane money t o get t h e *
o u t o f its difficul—
ty; t h a t t h e y must h a v e a statement signed b y every menber
of the board o f directors t h a t t h e y would reform their
conduct, a n d growing o u t o f that transaction there w a s
the
corréspondencs between/Utah branch o f the Federal Reserve
Bank o f San Francisco a n d the Stanrod Bank which indicated
to t h e C o u r t o f A v p e a l s ‘ n o m l e d g e
o n the part o f t h e U t a h
branch o f the condition o f the Stanrod Bank.
Then there w e r e o n e o r two other transactions, o n e
the failure o f the Stanrod Bank t o vay a
been p r e s e n t e d
draft which h a d
t o i t f o r paynent u o o n w h i c h i t h a d failed
to nemit, a n d which fact w a s within t h e c«nowledge o f the
Federal Reserve B a n ,
A l l o f those things nut together,
the Court o f Apozals held, constituted some evidence, a n d
enough evidence t o < o t o the jury, e n d the j u r y having
determined the facts, they ~ould not disturb i t a s a
question o f fact.
So m u c h f o r t h e G r i m m - A l f a l f a c a s e a s @ case.
e t
thins i t lsaves t h e l a w exactly where i t h a s always been,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
which y o u gentlemen « n o w a s e l l a s I, a n d that i s this:
When a
bank i s i n f a c t i n s o l v e n t a n d i s ‘cnown b y i t s
officers a n d directors t o t e insolvent, t h e creation o f
deposit liability b y that bank, w i t h <cnovledge o f its
condition o n the nart o f the officers and directors, i s
a f r a u d o n t h e dsvositor,.
A n y body that taxes evidence
by which that fraud w a s nossible t o b e committed, l i k e
the paver that w a s denosited a n d sold t o the Stanrod
Bank,
a n d takes
i t with cnowledge
o f t h e condition
of
the bank, a n d elso o f the fact that the officers and
directors o f that oank itself had *novledgs o f its inperty t o the fraud.
solvent condition, becomes a
That
has always beenthe lewand is still the law, as stated
tn t h e G r i m - — A l f a l f a c a s e ,
a
y judgnent t h e r e f o r e i s ,
as. I said a t the outset, that the Grimn-Alfalfa case
hue o o t cheng3d t a e l a w and w e must meet t h e question
you h a v e raised,
siderations.
i t seems t o 16, f r o m another s e t o f con-
T h e G r i a m A l f a l f e c a s e m a y b e quoted here-
after i n sone cases lize it, o u t i t i s not strong enouzh
in itself t o the change the very authoritative opinion
of the Supreme C
t
h
e United States i n favor o f t h e
to you; t h a t is, t h a t mere sus—
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
picion i s not enough, a
condition-of insolvency i n a
bank o r a condition o f suspicion i n a bank which i s bad
enough t o challenge t h e suspicion a n d alertness o f the
Federal Reserve Bank, will not b e enough, T h e r e mist b e
actual insolvency a n d i t must b e brought h o m e t o the Fed.
eral Reserve B a n k i n order t o create Liability:
T h e
Grimi-Alfalfa case, while i t may be cited t o a e that a
less decree o f *nowledge t h a n h a s heretofore b e e n supposed
to be, enough t o charge a
. ledge,
Federal Reserve B a n k with ‘now.
i s not enough t o overcome a n oft—reveated decision
of t h e S u p r e m e C o u r t o f t h e U n i t e d S t a t e s
I: think t h e n e x t t i m e a
case arises
o n that subject,
i n any o f the
Federal Reserve Bansxs which involves this guestion i n
any o f its forms, t h a t i t ought t o b e regarded a s —
no
matter i n what f o r m i t arises o r where i t arises ~ — i t
ought t
o be regerded a s a n oovortunity t o bring about a
conference
o f latyers r e p r e s e n t i n g t h e banks,
a n d should
become, i f I may maxe a suggestion, what I think you would
' call a system matter, s o that from its inception clear
through t o t h e e n d i t c a n h a v e t h e a t t e n t i o n o f t h e e n .
tire system with a view o f getting,
i f y o u can ger, a
decision f r o m some other Circuit Court o f Appeals which
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
200
will clarify the atmosphere,
T h e decision i n the Grima-
Alfalfa case has n o t i n any decree affected t h e integrity
and validity o f those well established principles o f l a w
which I
think t h e Grimn-Alfalfa c a s e does n o t undertake
to alter, but may b e regarded a s having altered the s i t u a
tion o f the anplicationof those nrincioles t o these facts,
so I would sugcest t h a t t h e v e r y next time a
anywhere
case arises
i n t h e S y s t e m t h a t i n v o l v e s t h i s question,
that
it be made a System matter, a n d that from the very out—
set t h e Roane w e l d e d with a
view o f presenting i t t o the
last court that will hear it, the Circuit Court o f A p
peals,
o r the Suprene Court,
a s the case m y be,
T h a t
this precise question be extracted and made as much an
issué a s possible i n the case i n order that w e will g e t
an authoritative determination o f it.
ig not with the GrimnmAlfalfa case,
T h e difficulty
I t i s t h e difficulty
inherent i n the system, T a x i n g the law as I heve stated
it t O you, where a Federal Reserve Bank hes actual xnowledge o f the insolvency o f a nenber bank, i t takes b y
discount paper f r o n that bans, i t incurs liability.
Now that i s t o b e said o n the question o f a statute
giving t h e Federal Reserve Ban’ t h e right t o examine t h e
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
201
member bank a n d t o become acquainted w i t h t h e concition
of the meaber bank, a n d where t h e Fedsral Reserve banks
have access t o examinations m a d e b y the Comotroller a n d
by S t a t e b a n k examiners,
e v e n worsing
those examining bodies i n maxing a
i n concert w i t h
joint examination?
Does that attrbbute «xnowledge o f the condition o f a bank
to the Federal Reserve S y s t e m o f a xind that c a n b e vleaded i n a suit o f this sort? I
difficult and, perhaps, a
question w e s n o t r a i s e d
think that raises a
very parlous question.
very
That
i n t h e G r i m n - A l f a l f a case.
There
Was n o suggestion i n that record, o r i n any of the briefs,
that t h e Federal Reserve B a n o f San Fyancisco h a d a n y
‘cnowledge o f the condition o f the Stanrod Bank b y reason
of a n y examination i t had ever made,as a mere examination, T h e y attributed t o i t «xnowledge growing o u t o f
transactions w h i c h i t h a d with t h e Stanrod Bank but i t
never attributed t o i t a n y <novledge growing o u t o f its
function a s a n examiner, o r the fact that i t had examined
the bank, T h a t question i s going t o b e raised some time.
A suit i s going t o b e filed i n which t h e Federal Reserve
Ban's will b e held accountable »by reason o f the fact that
it has xnowledge which i t has gained through a n examination
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
of a bank, o r that i t ought t o have h a d it.
t h a t is,
thet i t ought t o have h a d knowledge i f i t had examined
the bank a s i t h a d power t o do. T h a t i s going t o make
it mare difficult. I
be conclusive. I
d o not mean t o sey that that would
think i t w o u l d n o t b e conclusive.
a
b
think i t is going t o make i t more difficult t o get b y a
court o n a motion t o arrest t h e case from t h e jury o n
question
evidence w h i c h w o u l d j u s t i f y s u b m i s s i o n o f t h e
to t h e jury.
C o u r t s a r e g o i n g t o raise t h e q u e s t i o n a s
to whether there i s n o t always s o m e evidence o f knowledge
on t h e p a r t o f a
Federal R e s e r v e B a n k w h e r e a
Federal
Reserve B e n k h a s b e e n e x a m i n i n g a n d h a s h e d t h e f r u i t s
of the examinetion made b y t h e Comptroller o r the State
bank examiners, as, the ease may be. W h e t h e r there i s
anything y o u could d o t o moderete t h e responsibility I
do not know.
T t i s a c u r i o u s k i n d o f responsibility.
You have t h e power t o examine a n d o b viously y o u have t h e
duty t o examine,
b u t y o u h a v e n o visitorial p o w e r i n t h e
sense that y o u c a n close t h e bank.
Y o u c a n expel i t f r o m
the Federal Reserve System i f i t fails t o live u p t o its
to
condition o f m e m b é r s h i p b u t y o u a r e n o t g i v e n p o w e r
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
203
y reason o f any condition disclosed b y such
close v a n k s b
an examinetion o n your part.
Y o u r power a s examiners
falls short o f being a visitorial nower, a n d yet i t i s
a Dower that i s very essential t o you i n order t o enable
you t o help banks f o r o n e thing a n d t o deal safely w i t h
banks f o r another thing.
You have that o w e r u n d e r t h e statute, I
44 w o u l d b e u n d e s i r a b l e
should think
t o s u r r e n d e r t h a t power, a l t h o u g h
it increases your difficulty i n defense w h e n y o u are
charged with heaving «knowledge i n any situation where yos-
session of m o vledge imposes liability. N o w , I am not
a oractical banker. I
can merely state t o y o u what t h e
orinciples o f l a w are,
A s I have tried t o think i t over
it seems t o m e that t h e only answer that there could b e
would b e t o p u t a
red ticket
every b a n x a n e x a m i n a t i o n
i n your o w n banks w o o n
o f ‘which, e i t h e r
b y the C o m p
troller o r b y the Federal Reserve Bank o r State Examiner,
or because o f the condition o f its reserve account, show.
ed that the bank was extended and i n trouble, a n d that
of
in dealing with a n y such institution a n abundance
offered
caution s h o u l d b e u s e d w i t h r e g a r d t o p a p e r
then f o r discount
o r a s collateral
by
t o the Federal Reserve
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Bank, T h a t i s a statement o f principle which i s very
easy t o mace a n d very difficult t o apply.
T h e »yroblem
you h a v e o f c o u r s e i s whether y o u s h o u l d p l a y h i g h e x e -
cutioner t o a bans that i s i n trouble —
a n d i s not i n -
solvent, but i s i n trouble ~~ but may get out o f trouble,
and m a k e a
catastrophe b e c a u s e
o f your xnowledge
o f the
bank b y closing its doors and refusing t o hely it. I
not t h i n k t h e r e i s a n y s e t r u l e y o u c o u l d apply,
do
Y o u have
got t o exerciss j u s t human judgement i n each o n e o f those
cases a n d continue constantly t o exercise t h a t judgment,
Doubtless i t may mean some losses t o the Federal Reserve
Bank, b u t those loses will b e moderated a n d m i n i m i s d f
i
care i s used,
I n m y judgment i t would b e very much b e t _
ger T o r y o u t o t a k e sgotie risks ¢
o s e s o m e monsy than
it w o u l d b e t o p u t t h e Fe@beral R e s e r v e B a n k i n a @ s i t u a
tion o f rigidity with regard t o bance that are i n trouble.
I should b e very happy t o answer any questions.
Governor Crissinger.
to b e insolvent,
I
n a
case w h e r e a @ bank p r o v e s
a n d there h a s deen indication a l l t h e
time that something i s going wrong, a n d the Federal Reserve B a n k neglected t o supervise t h e examination, w o u l d
you tell u s what position y o u would get into?
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
205
I thins failure t o examine i s just a s
bed a s that <ind o f examination. T h a t i s to say, where
you h a v e t h e » o w e r a n d d o n o t u s e i t I
think y o u w o u l d
be charged with responsibility j u s t a s though y o u aid
have cnowlecge.
Vice Governor Platt.
T o u l d that avoly t o your Nation-
al Banks a s well eas your State banks?
Governor Crissinger.
R i g h t i n the beginning o f the
Statute t h e Statute says i t i s for the purvose o f creating
a better supervision o f banking a n d a better system o f
banxing, o r something o f that cind. ,
Vice Governor Platt, Y e s , i t docs s a y that.
wir. Baker. I
would n o t s a y that i t wes t h e duty
of the Federal Reserve B a n s
aminations, a
t o conduct indevendent e x -
t h a t t h e y w o u l d b e held t o responsibility
for n o t doing that where examinations a r e veing made b y
others i f they are perfectly f r e e t o taxe those exanina¢iond. x
t h i n t h e statute gives y o u that ower.
Vice Governor Platt. Y e s , i t does,
S o that ‘there a Federal Reserve B a n k
iir, Baker,
relies u n o n Santee
office, t h e n I
e e
a n d revoft o f the Comotroller's
think y o u w o u l d w a v e a
nerfectly g o o d
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
alioi.
Governor Crissinger. A s s u a i n g that t h e renort o f
the Comptroller o n one o f these examinations does s h o w
a lax banking system i n the bank, a n d does s h o w that
thers are things going o n that are being criticised,
would i t b e the d u t y o f the Federal Reserve B a n k t o take
notice o f that fact?
‘ir, Baker. Obviously I think where you find i n the
Comotroller's report o r the Exsminer's report such conditions a s would put a n ordinarily prudent m a n o n guard,
that y o u are t h e n cherged w i t h a n y knovledge that y o u
might discover b y an independent examjnation.
Governor Calxins. I
would like t o ask a question
with n o regaré t o the cxind o f exanination y o u were just
speaking of. Inasimich as the Federal “eserve Banks o r
the F e d e r a l R e s e r v e B o a r d h a v e t h e v o v e r
t o accept t h e
examinations o f State and National devart-nents, a r e they
not charged ~ith responsibility o f determining whether
those examinetionsa are sufficient o r not, a n d whether t h e y
are a c c e p t a d l e e x a m i n a t i o n s ?
‘ Y e believe t h a t w e are. I
think i n reviewing the reports o f examinations that come
to us, mainly from State departments, a n d possioly i n
some cases from the National department, that we are
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
207
charged with responsibility o f determining whether t h e
examination i s a sufficient examination, whether i t i s
a dependable examination, a n d whether w e c a n accept i t
or not...
l s that your 26ea7
thin:
air. Baker. I
i n view o f the fact that t h e
statute gives y o u t h e option t o decice whether y o u will
reky u p o n t h e e x a m i n a t i o n
o f others, t h a t i t a l s o i m o o s e s
L
an obligation o n you t o determine whether that examina- |
tiln i s reliable, o r one that you can rely on.
Governor Gelxins. T h e other question that I have i n
mind, a n d I would appreciate i t very m u c h i f you would
elucidate i t for m y benefit, i s thse question o f how, previous t o the decision i n the GrimaAlfalfa case, insol-—
vency might b e determined o r should b e determined;
i n
other words, w h a t a r e the determining elements o r factors,
by which insolvency w a s determined i n the absence o f
the actual closing o f a n institution?
Mr. Baker.
O
f course t h e l a w i s verfectly e a s y t o
state, b u t t h e avplication i s egain difficult.
I n the
this
Grimn-Alfalfa case there never was, and has not t o
was
date been, a n y determination t h a t the Stanrod Bank
a n y determinainsolvent. T h e r e never h a s been t o this hour
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
tion that t h e Stanrod Bank was insolvent.
W h a t took
nlace there was t h e bans closed i t s doors; I
think i t s
elderly o r e s i d e n t g o t s c a r e d a n d i t s orincipal d i r e c t o r s
got t o g e t h e r
o n Thanxsgiving Day, t h e y decided t h a t t h e
situation was nretty dangerous, they did not want t o d o
anything wrong and they closed the doors, T w o or three
months after that had taxen place, when their assets had
obviously lost a great deal o f value, a schedule o f their
assets, with the appraised values then fixed, was exhibited
in the case and i t showed,
o n the basis o f the valuation
made t w o months after t h e banc closed i t s doors, t h a t
the bank could b e inferentially regarded a s having been
insolvent a t the time i t did close i t s doors.
B u t they
never d i d determine t h e insolvency o f the bank a s o f t h e
date when those drafts were deposited i n the bank,
Governor Calins. I
had i n mind, ir. Beker,
think y o u missed t h e voint I
I n practice w e may s a y that a
ban i s insolvent under t w o conditions,
F i r s t when i t
has committed t h e unmistakable a c t o f insolvency b y being
unable t o meet t h e cemands o f its devositors, A
bank
that cannot meet t h e current a n d local demands o f i t s
depositors i s an insolvent institution i n practice.
Secondly,
i t may b 2 Aetornined b y conetituted authority,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
209
such a s the Comptroller o f the Currency o r the State superi_ntendent o f banking,
t o b e insolvent,
to banks f r o m a practical point o f view I
B u t a s applied
do not xcnow o f
eny other kind o f bank insolvency excent those t w o kinds.
iy. Baker. I
would p e r h a p s
a bans
be a
think there i s a third sind, which
rare o c c u r r e n c e ; m b u t
y o u can imagine
i n such a n extended condition t h a t e v e r y member
of the board o f directors w o u l d feel hopeless about being
able t o rescue i t and yet b e unwilling t o face t h e music;
where y o u would s a y there w a s nothing t o d o but close
the doors, and they would s a y we know we have t o do i t
but w e are not going t o do it, w e just cannot face the
wrath o f this co:mminity.
W e will not d o i t today. M a y b e
something will happen tomorrow.
When a
bank i s i n a n
obviously hovelessly insolvent condition a n d yet they
adopt a Micawber attitude toward it, and put off the
evil d a y hoping t h a t something will happen, t h e n I think
you k n o w that b a n s i s insolvent.
Govermor drissinger. ‘ T h a t would y o u s a y a s t o the
effect o f evidence against a bank which “emanded and was
receiving a
large amovnt o f excess collateral f o r loans?
Would n o t t h a t b e a
fact t h a t w o u l d b e t a k e n a s c h a r g i n g
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
the bank with xnowledge there was something wrong?
Mir. Baker, W e l l , i t does not seem 6 0 t o me, vir. Orissinger,
I t may b e perhaps that I do not aovly that a s I
ought to,
Governor Crissingsr. I
criticism, through a
mean a bans that «cnows of
National B a n k Sxaminer,
o f that i n -
stitution, k n o w s i t i s very much extended, a n d because o f
that fact demands a large amount o f excess collateral, i n
order t o mace the oank a nreferred creditor? A r e n ' t
those some facts that would g o t o a jury t o determine the
question O f whether t h e ban’: i s o n notice?
wt. Beker,
J I shoul¢ thinz s o i f that were a n excen-
tional case; i f you made a n excention o f that dank a s
against o t h e r oan's.
Govermor Crissinger. T h e y a r e not exceptional cases.
There are a zreat many cases o f that kind, where the
Federal “eserve Banks d o *no™ that those banzs a r e largely
extended and, f o r t h e vurpose o f trying t o null t h e m
through t h e condition i n which they f i n d then, t h e y demand
large excess collateral, sometimes a l l o f t h e resources
of the dans, t o secure the dendihg
of the things —
s o a r
t h a t one
a t least i t i s s0 down i n Chio, i f I re-
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
ell
menber i t correctly — - which would reflect u n o n t h e ques—
tion o f xnowledge o f that bank's insolvency o r solvency?
bir. Baker. I
think i t would be, although a s I un-
derstand i t the Federal Reserve Banks, when they d o get
marginal o r excess collateral, g e t i t not o n l y t o secure
the existing obligations b u t future obligations a s well.
I think i f w e were arguing t o a jury w e might well s a y
that t h e reason f o r t h e excess collateral w a s not t o take
care o f this varticular claim, but that the Federal Reerve Bank w a s more o r less a
continuing creditor o f t h e
oank i n question, e n d the excess collateral w a s deposited
for that »uroose a s well, I
understand, f r o m something
wir. Mason said t o me, that banks very often, o f their
ow motion, deposit excess collateral a s convenience
for themselves,
s o that I
should think that was a more
or less equivocal circumstance i n eny varticular c a s e
where excess collateral was demanded, unless i t was done
regularly i n regard t o a bank o f which y o u otherwise h a d
snowledge o f its extended condition.
Governor Seay.
I t has really become a
banxing prac-
tice,
Governor sicDougel. R e q u i r i n g additional collateral
igs comnon banxing vractice.
I
t has always b e e n required
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
2l3
by commercial banks, which have required a large margin
of collateral,
i n connection with advances t o other banks,
Governor Crissinger. I
understand that, but I am
inquiring about this because there are cases, about which
you gentlemen o f the Northwest ‘now, where nearly all
the p a p e r o f t h e b a n s h a s b e e n t a k e n b y t h e F e d e r a l R e serve Ban‘c, a t l e a s t v a p e r t h a t i s w o r t h anything,
and
yet that banc i s vermitted t o r u n and receive devosits.
ify. Baker.
is a
O f course, Governor Crissinger, that
different c a s e f r o m t h e o n e I
was discussing.
H e r e
are a
hundred m e a b e r banks.
comes
t o t h e c o n c l u s i o n t h a t B a n A , o r No. J , i n t h a t
hundred,
T h e Federal R e s e r v e B a n k
i s i n a different situation f r o m all t h e other
99 banks,
I t - says t o Bante A , " Y o u M u s t p u t u p m o r e c o l —
Lateral than anybody else i n this whole list o f a hundred banks,
i n or oportion t o the service that y o u get f r o m
this bank." I
thins that olaces you i n a prejudicial
position a n d I think i t would b e vrejudicial t o argue i t
to a n y jury,
Nom the condition o f the reserve account o f menber
banks i s a circumstence t h a t y o u are soing t o have t o
face before juries.
T h e statute makes i t obligatory t o
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
213
maintain those reserves, a n d a bank which over any sub—
stantial p e r i o d o f t i m e i s l o w i n i t s r e s e r v e s a n d s o m e -
times has a n overdraft i n its reserves, creates a situation that challenges the attention o f the Reserve Bank t o
the condition o f that bank, a n d i n some suit that w e are
soing t o have t o face some d a y w e are going t o have t h e
lawyer o n the other side g e t u p a n d produce i n court t h e
state o f the reserve o f the dank i n question a n d the
oyroumstance which w e ought t o have taxen notice o f
which ought t o have o u t u s o n our guerd,
The Chairman.
O f course t h e reserve banks a r e loan-
ing a hundred million dollars a n d i t i s natural I
think
for every banxing officer i n the Reserve System t o feel
safe i n observing t h e rules which have always aoplied t o
the loaning o f noney i n commercial banks.
W e have n o w
learned that those rules d o not aoply t o the Reserve
Banks because w e are charged w i t h certain special k n o w
which t h e c o m m e r c i e l b a n k n e v e r r e c e i v e s f r o m i t s
ban'csing customers,
a n d therefore
r e have z o t t o c o n
sider t o w h a t extent, u n w i t t i n g l y ,
up e v i d e n c e
~ e my
b e building
i n our o r m transections a n d i n our method
of conducting them which, even under the most excessive
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
care, w i l l ceuse loss 3
which would n o t
& couwlercial v a n s a tall,
y n a t I nove would
from the m s e t i n g h e r s t o d a y i s s o m e t h i n g l i x -
Here i s the question o f the @
Very: carefel. to-nave
WLLL n o t buildings
w w evicence arainst o u r -
Taen comes t h e question o f
reoort,
W
e
Giscussion a n d
to <vuide u s i n dseling vith thCigclosec. that
would n u t u s t o s o m e é x t e n s
o n notice o f
ties o f the ban,
additional collateral, “here
additional c o l l s t e r a l a b o v < e
f a c e amount
o f t h e vaper
Giscountsd, w h e r e i t rould aonsar t h a t v e a r e mating
by giving excsytional treat
Under t h e sen+ral f o r m o f
which many o f the banks have,
leteral
collateral
o n one loan must serve a s
o n other loans which they m a y inaxs, a n d
wnich maces securities h e l d i n custody f o r a nenbear ovank
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
in effect o f those securities f o r loans.
is a difficult question a s t o information disclosed
in connection “ i t h collections w e are making f o r
banks,
i n cases w h e r e ;
Gifficult t o get
paic, a n d which sometimes a r e held up. I
have a feeling
that w s have g o t t o have a V5T} w r e t u l r e v i e w f
o the
of reserve banxs 6
t o safeguard ourselves
rainst+ mMasing unnecessary records a g a i n s t ourselves.
It seems i n cases o f failed Danks o r where w e have e a r n
estly endeavored t o hely a member bank a t times, t h a t
our v e r y e f f o r t s
is a
i n that r e c t i o n m a x é u s Liable.
1 %
case o f where o u r liability increases w i t h t h e d e -
with ~ h i c h w
e concuct our dusiness increases,
so to speak,
w
e d o business blindly, without a n y
knowledge o f the condition o f the bank, a n d loen money
to ‘it, w e e
safer t h a n w e a r e i f w e x n o w all about it.
lie. Baker,
I s i t nossibdle t o ses difficulties a r i s —
ing o u t o f another situation t h a n ths crsation o f deposit
Llianility?
m e a ,
csemendsd e x c e (
f o r instance this: f
(
i
> p o s 8 42
y o u have
° c the
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
knowledge o f t h e extended condition o f the bank t o
Which you were giving accommodations was indicated b y
vour ¢emand f o r excess collateral, a n d were assisting
in c o n t i n u i n g t h a t f a i l e d b a n p e y o n d a
should have continued,
noint w h e r e i t
t o the orejwiice o f the general
ereiitors, w h o could thus assert their right t o the collateral held i n preference t o youe I
do not know whether
that i s a practical oroposition, b u t perhaps i f i t i s you
bankers have met it.
The Ohairman. 2
ur, Wyatt.
should think that i t would arise,
T e have a suit o f that xind now pend
Governor Harding. I
would l i k e t o a s k a
with r e c a r d t o t h i s e x c e s s collateral.
question
T h e banks
in
Aykoostook County, Maine, “hich i s ourely a n
section, producing o n e crop, potatoes,
u p t o last fall
were i n a very badly extended condition and had veen
for about f i v e ysars.
T h e Federal Reserve Bank o f
Boston, ever since 1919, which wes the last good year
hat they had, carried those banks along, a t times
carrying them for a s much a s @ million dollars, f o r those
little banks,
W e t o o k e x c e s s collateral,
They
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
OL?
managed t o get those loanc down, i n 1925, t o $750,000.
But i n 1 9 2 4 t h e y w e r e u p again, c a u s e d b y a
crop o f
potatoes t h e prices f o r which were a s l o w a s 6 0 cents
a barrel.
T h e condition o f those banks o a year a g o was
such that i f they h a d had another l o w priced c r o p o r
a very short crop those banks would. have been insolvent,
In other words, there was n o actual insolvency a t the
time, b u t t h e r e w a s p r o s p e c t i v e i n s o l v e n c y i f t h o s e
adverse conditions continued, F o r t u n a t e l y t h e y sold
their c r o p a t $ 6 a barrel, t h e y have all paid out, their
deposits h a v e i n c r e a s e d 5 0 p e r c e n t a n d t h e a u t o m o b i l e
agents a n d radio agents a r e traveling u p through there
and selling t h e m stuff.
T h o s e banks will certainly
be back s o m e time this sumner f o r more money. T h e y dontt
any o f them ove anything n o w , b u t I havé made u p m y mind
when t h e y c o m e b a c k t
w e will take excess collateral
right f r o m the start i
while t h e y are i n perfectly g o o d
condition, b u t while w e ere i n a position t o point o u t
that while w e d o not neec i’ ~
that they a r e liable
+o have a repstition o f that eaime thing
some b a d years, a n d those people m a y g o
Spend t h e money that they have made. I
want t o establish
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
als
@ precedent b y demanding excess collateral right a t
the start.
I
f there i s a n y objection t o the demand
for excess collateral against rediscounts w e will just
payable, a n c they c a n make » 15-day
paper a n d »,ut u p collateral
o n the basis o f one a n d a
half for one, o r something o f that. sort.
ur. Backer. I n order to get my own mind clear, the
excess collateral y o u are n o w speaking o f i s a n excess
of paper?
Governor Harding.
wie, Baker,
Yes.
O n the theory that i f hard times come
up there again you will have established the precedent?
Governor Harding.
I f the 1924 conditions had con—
s4inued t h o s e v a n k s w o u l d h a v e a l l b e e n i n s o l v e n t
b y this
time. Theyr liabilities were s u c h that t h e y could not
possibly h a v e n u l l e d through,
hice Baker.
Y o u would make this distinction:
I f
they offered Government bonds a s collateral y o u would
not want a n y excess.
Mr. Harding. W o , not o n Govemment bonds, but they
do not have Government bonds, A l l they h a v e g o t a r e t h e
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
notes
o f
f a r m e r s .
T h e farmers
Then your question comes d o m t o this:
o
any impute
t
growing o u t
h
Th
eral o f t h e k i n d
a
f ‘“<norLedgs against your b a n k
t v o u demand excess collat—
hich expsrience hes shown you
tendency t o get frozen f r o m seasonal causes?
I n answer
i s n o imputation
question T would s a y no, t h e
I think t h e »ropsr administration o f
your S a n k would require y o u
m
o
r
e o f that x i n d
of collateral, w h e n i t depends w o n anvthing a s seasonal
as t h e
success o f the votato c r o p i n Aroostook County,
Maine.
Governor
s
money not a g
a orao that
n the South, when danks lend
I
e croo,actually made b u t against
h
h o p e i s going t o b e made, t h e y always
Raker,
ie
S S
T h e y demand t h a t excess collateral b e -
nature
o f t h e colletsral r a t h e r t h a n t h e
*
condition o f the ban‘,
Governor “erding. H e r e i s another situation, a n c
nractical case,
T h e
of P u t n a m ,
@
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
230
donnscticut, got i n trouble i n Ausust o f 1924.
O n Wed-
5
nesday a f t e r n o o n t h e Bxanins
7
: ae
h
e previous
e x
aminations h a d
but t h e reserved were always cerried intact a n d the
paper
i t h t h e F e d e r a l R e s e r v ? S a n z w a s satisfactory,
it turned out + 0 b e good vaper because w e collected
practically a l l o f it. W h e n t h
they found that his weoulations, e s at f i z t h o u g h t
were about $40,000 and the National Bant-Zxaniner stated
thet a s far as he snev the oanc w e s solvent; that the
lossés that they h a d “is e r e d w e r e about $40,000, which
was i
t i e n e r e d b v ths surplus profit.
T h e checks
were beginning t o come i n through the Boston Bans t o b e
men dorvn thers s o
to bina. T h e Tiret d a y they
checxs o n @& ban’
they: had a n account,
i n Boston where
T h e second d a y they dicnit
money i n any b a n : account t o pay the checks with.
cheexs came i n i n increasing volume.
hac’ ¢ sinand p a y n e n t
tested non-payment,
morning.’
Y o u can see i f we
i n cash f o r those checks e n d p r o
~ e oulc have
e c . the ban’s wionday
T h e Banx Exeminer steted the i
h a d dis—
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
e321
covered losses amounting t o a hundred a n d twenty thous—
and dollars, but they still thought the bank was solvent,
He said they were going t o get t h e directors together
do somsthing. T h a t d a y w e had $43,000 worth o f checks
the bank which w e sent d o r m there.
W e had o u r agent
cars o f the checks
we had them
them/send i n some vaper, n o t b y way o f excess collateral,
but merely paper that ~ e could p u t t o their credit i n
case w e needed t h e funds t o p e y these current checks
that were coming in. T h e p o i n t Iwant t o >ring o u t i s
this:
T h e paper w e took was not paper that the bank
had taken a
day o r two before t h e y finally closec;
it
was n o t sight draft o r demand craft, b u t i t was paper
of the manufacturing c o n c e m w h i c h they h a d there f o r
over two months, a n d was renewal o f paper that they had
been carrying f o r a year o r 80.
W e toox care o f those
chects a n d finally o n Tuesday t h e bank directors closed
the vant.
W e had n o trouble w i t h the checks that w e got
on Monday oecause o u r
L
and they were sent back,
o
v h e r e protested t h e m all
T h e moins w a s thet w e had
@ little disoute trith the pecoxrle whose note w e had dis—
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
3
counted o n this iionday, They claimed that our discount
had Geprived them of their right o f offset; that they
hed a
deposit o f $4500 i n the Putnam Bank and that w e
had tacen $15,000 worth o f their paper; t h e y said i f
we had not taten the naper they woulc have had a n off
set against that bani: of $4500 that thet bank owed them,
y said our taxing t h e paper deprived t h e n o f this
right o f offset.
W e temporized with t h e m b y telling
that i f we aanaged t o collect our dest i n other
we would b e glad t o release the paper.
The
finally adjusted and we came out without a n y
loss,
i
t was a very ticklish situation,
A s I under-
stand i t , in the Grimm Alfalfa case the discounts were
demand drafts.
Yes,
Governor Hardin. T h e discount h e r e w a s not a
sight
ox demand draft but nart o f a customer's regular line
of paper. T
he bank h a d this varticular paper i n its
possession f o r o v e r t w o m o n t h s a n d i t w e s a
renewal
of
a loan that the dank hed been carrying for several months,
or pSérhens years.
tTconfess t h a t I. do not s e e any spe-
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
2235
cial differsnee between the two casés, that i s to say,
you believed that this particular ban’t was insolvent
time y o u w e r e taxcing i t s vaper.
Governor Harding.
insolvent o r not.
W e dic not xnow whether i t was
W e were i n a bad fix, because the
. not n o w , T h i s m a n d i c not c e s a n y books
of these transactions, o u t a s cashier h e received deposits a n d nut t h e n i n his pocket a n d they were n o t s h o m
on t h e books.
T h e bans had a
liability w h i c h w a s n o t
shown o n its books.
Mr, { B a k e e
I
t i s ea difficult question.
elements aecessary for liability;
t
The
i F i r s t , the
bank must i n fact b e insolvent; second, i t s own officers
and Girectors must know it i s insolvent, o r believe i t
to be; third, y o u m s t knov both that the bank i s insolvent a n d that i t s officers x<now it.
I n the case y o u
officers and Girectors o f tne bank itself did not
cnor that i t was insolvent, d i d not believe i t was insolvent, but belisved otherwise.
Governor Zarding, T h e o n l y m a n who ‘cnew i t was i n solvent h a d s h o t h i m s e l f
i n the head a n d was then i n a
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
comatose condition.
Wir. Baker,
T h e case that y o u put plainly w a s not
the tind o f knowledges, a s a matter o f abstract law, that
covers,
fore a
B u t i f that case h a d ever gotten be.
jury, a n d they h a d had a l l the xnowledge produced
before them which you had, whether o r not t h e y would have
taxen the position that you should have know,
i s a ques—
tion that deals w i t h t h e human element a n d which n o one
can a n s w e r ,
Governor Harding,
O n t h e q u e s t i o n o f excess c o l .
lateral, i f a bans i n an agricultural region takes excess collateral o n a, farm crop which i e not produced,
why i s not t h e Federal Reserve B a n k clearly entitled t o
take excess collateral f r o n the bank whose entire loans
are with those farmers o n their crops?
Mr, Baker, I
think i t is. I
think wherever t h e
Cenand f o r excess collateral i s due t o the character o f
collateral that you are perfectly within your rights
and there i s n o indication o f «nowledge i n that demand
for excess collateral.
The Onairman.
I f i t were possible —
I
do not k n o w
whether i t would be,because practices o f reserve banks
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
differ cuite aaterial
t
h
deal differ i n the d i f
\ i s t r i c t s
were »~ostlidls t o p r e p a r é a
e situati
i
n which they
b u t if i t
statement w h i c h w o u l d m a k e
fairly clear what t h e »ractices o f each Federal Reserve
on these various noints, i f that could b e
in. £
shan:
i
t woulda d e illuminating
danger, a n y special danger t o b e guarded
against,
d o y o u t h i n s i t w o u l d b e possible f o r y o u t 9
review all o f them and give u s some sort o f suggestion
course?
seway o f a question
naire?
M r .
WA
2
things,, a
n
d if they ¥
some time with them. I
3 practical
G a n e
t h e s e
e n t t o him he and I could s e n d
think h e would d e glad t o d o
that,
The Qnairnan. T h a t i s exactly what I
had i n mind:
That w e arrange a t this meeting some scheme b y which
each F e d e r a l R e s e r v e B a n k c o u l d s u b m i t
accurate statemer
t o My. W y a t t
an
t h e i r attitude o n these matters,
how t h e y h a n d l e t h e n i n t h e ban'cs, a n d i n f a c t g e t t h e
saformation u o i n intelligible f o r m s o that y o u would
not have t o g o over a mass o f papers. I
was wondering
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
226-4227
whether ir, Wyatt a n d yourself micht n o t advise a l l o f
the Reserve Banks i n this natter.
I an wondering, a n d I a m willing t o
think o u t l o u d a b o u t i t , a n d s o m e o f t h e q u e s t i o n s I
ask M a y b e very foolish t o you practical benkers, b u t I
am wondering whether i t would b e »vossible t o nut i n the
pplication a certificate t o b e signed b y the avplying
anz that i t was t h e o m e r o f the paper.
The Cheirman. quite possible.
iit. Baker.
T h a t avoids t h e question a s t o whether
the paper i s there f o r collection o r whether i t i s »vaper
that i s owned b y the bank.
I n this case, f o r instance,
ifthe Grimm-Alfalfa paper had been sent to the Stanrod
Bank and the Stanrod Bank had Sent i t t o the Federal
Reserve B a n k with a statement o n the application that
it was the omer o f that paper, i t would have eliminated
half a
dozen confusing questions f r o m the case when i t
came t o b e tried.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
;:
nese M a t t e r s ,
BWorks pide CSens
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
200
Bans t o a
nenber b a n k w h i c h i s c l o s e t o t h e p o i n t o f i n -
solvency a n c vet i t b e a n incividual l o a n i n the sense
that
i t i s well s s c u r e d
have n o logs.
D o e s this m e a n that s u c h l o a n Shall b e
Made t o a bank which i s not safe, although the indivi-_
Cual loan may >
eserve B
a
D
o
n t’ sm a
:
u kme a
e
s i t mean that t h e Federal
loan,
o r according
t o the lan-
ge i n t h e Act, s h a l l e x t e n c t o 6 e c h imeinber b a n k s u c h
ts, a n d s o forth, a s may v e safely made? T h e
question t h a t i t raises i n m y mind is, under t h e various
circumstances t h a t l e a d t h e m e m b e r b a n c s
t o come t o @
Federal Reserve B a n s f o r accommodation, w h a t constitutes
a safe l o a n ?
Governor Strong,
with f r a u d w o u l d n o t b e
ofWa) this Grimm Alfalfa case eoplied they were
| with xnowledge that i t was cistinctly unsafe, t h e
Statute would not imoose any mandatory obligation t o make
@ loan u n d e r t h o s s circumstances.
wonder w h e t h e r t h e r e i s a n y t h i n g
Mr. Miller. I
mandatory there.
Mr, Baker.
n
i
_ T h a t statute has t o be
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Bok
read a c though i t was turned about, that the Federal
Reserve Banl’* s h a l l n o t refuse t o extend t o a menber
dation
ieee j
bank a m y discount o r advancement
o f accoumo/ o n any
other ground than that i t i s not safe o r reasonable.
The mandate i s that you are t o assist the Dank where 1 %
can s a f e l y a n d r e a s o n a b l y
b e dons, b u t y o u a r e n o t u n d e r
mandatory obligation t o assist bansxs i n all cases.
W h a t d o y o u s e y a s t o the distinction
oir. Mgller.
between a
Laan thet i s safe a n d a bans that i s not safe?
wr. Baker. I
do not think thet distinction i s there.
I think t h e reasonableness o f the extension o f the dis.
the advancement o f the accommodation h a s t o d o
condition o f t h e bank.
Willer.
ir. B a k e r
W i t h t h e c o n d i t i o n o f t h e bank?
Y e s . Obviously
that t h e y should accept a
i t w o u l d never b e
piece o f naper that w a s not i n
itself safe.
Wir, Miller.
O f course that i s done, t h e paper i s
not safe i n the sense that i t unquestionably will Ligqui-
Gate itself a t maturity, a n d the Reserve Bank therefore
demands woat i s called excess collateral, because
doubt a s to that paper.
I n addition t o that, ir, Baker,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
BoB
in connection w i t h this intsrpretation, a l l o f the paper
from a Meader b a n k comes i n
the wenber banx!'s endorsement, a n d the
minute i t exacts excess collateral docs n o t that s u g _
gest a question i n the mind o f the Fedsral R e
safety o f that banc?
Eotains 20%,
stiller,
Mr. Baker. &
not necessarily. I
Y o u thins, not?
think i t might i n certain cases, b u t
think G o v e r n o r C a l z i n t s o r o s o s i t i o n
illustrates t h e situation.
H i s Utah banx had
the center o f the district whsre everything w e s
and e v e r y t h i n g frozen,
a n d t h e d u t y o f t h a t Dans, u n d e r
this A c t a s a part o f the gencral fiscal agency o f the
Government, s e e m s t o a e t o have deen that o f ticing o v e r
het situation i n the national interests.
is the first duty o f that bank.
[ I think that
I t is a duty that car-
rics with i t the regoonsibility and lixelinooc o f loss,
and such loss a s the Federal Ressrve Benk o f San Francis—
co hés suffered b y reason o f
soread situation affecting that section,
seems t o m s a
;
it
that i s expected b y. the statute t h a t
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
. Reserve
B e n should
A
yh
m o s t that the
with t h a t s i t u a t i o n
reasonableness,
freasonable!
Fortun.
a s well
a s
any facts that Governor Cal<sins coulc s h o w
that t h e situation that havops L
in t h e Midcle West that
happened i n such and such a year, that t h e situation had
Changed favorably a n d h e could o n past history anticipate
a sufficiently favorable c h a n g e i n the situation t o j u s t
ify the extension o f credit, then I think that history
of what h a d happened i n the past w o u l d impose that
liability u p o n hin.
Governor Calzins. w i r , Bakor, I would lice t o say
vou t a l k a s i f y o u h a d b e e n r u n n i n g t h e F e d e r a l R e -
San Francisco curing t h e period t o w i c h
referred.
Y o u have stated t h e volicy followed
in that situation almost
actly. However, I
e x
would l i s t o return t o the c x rucial
question with which w e are dealing, a n d that i s what i s
ound upon which y o u must determine tna s o l v e n c y
or insolvency o f a member bank.
T h i s Grimm Alfalfa
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
*
case, a n c the other cases w e
hinged entirely u p o n the question
question w a s s o l v e n t
o r insolvent
at a
csrtain moment,
Now, Istated m y two causes for, o r my two cinds o f insolvency, a n d you added one more, I
that. I
o
realize satoree
f
am wondering i f you will under
Ban
insolvency under certain conditions a s you escribed, a n d
for the purpose o f illustration, I woulc like to say this:
We have another bank, a n d this i s a good illustration
of the point I a m trying t o mae,
i n the same t o m i n
which
which the Stanrod Bank i s located, t h e officers o f
were desparately incompetent. T h e bank was i n a terribly
over extended condition, i n fact i t found itself i n almost t h e same difficult situation i n which t h e Stanrod
president
Ban found itself, B u t i t happened that the
of t h i s ovank, a
man 8 6 y e a r s o l d ,
fortume, a n d that man said, "This |
close; I
is a
%
man w i t h a n ample
i s not going t o
have sufficient fortune t O ] g i e s
t
I
protect ell o f its depositors a n d stoczholders,
o
will
that I have
pledge, without a n y reservation, everything
+
this bank. "
o
f
depositors
and
creditors
the
to orotect
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
B25
Anc h e dic tha
T h a t bank tocay i s i n first class con-
dition a n d coesn!t o w e a cent t o anybody,
the condition o f a cank, t h e xnorledge o f
had, that ban't was
as truly insolvent a s the Stanrod Bank ever was, a n d yet
was insolvent.
T h i s i s a crucial question i n our
the member banks i n extended condition.
is i n a dangerous c o n -
dition first, because then we must
a d d i t i o n a l :
caution, a n d second, what puts u s o n notice that a a bank
is insolvent, because then w e must stop Mating a n y f u rre)
ther advances t o it. T h e whole thing boils itself dom,
in m y opinion,
this:
i n these cases a n d c o m e r a d l e cases t o
W h a t facts m a y w e apply t o A
or m o r e p a r k i c u l a r l y t h e insolvency,
I go bvack and s a y t h a h e r e a
aeons
o f a
t h e solvency,
meaber d a n k ?
w o < i n d s o f bank in-—
solvency known t o those w h o practice banxing,
insolvency a s e v i d e n c e d
O n e is
b y a n act o f insolvency a n d
second i s insolvency because o f t h e declaration o f
constituted authority, s u c h a s the Comptroller o f
Currency o r the superintendsnt o f banking, t h a t a
bank i s insolvent.
I a m still somewhat a t a
loss t o find
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
some Cebatable ground woon which w e may determine
a vanz i s insolvent,
£ do not t h i n
c a n b e any answer
there
each c a s e h a s t o s t a n d o n i t s
own facts.
I t i s just a
question o f exsrcising sound
judgment w i t h r e g a r d t o e a c h case.
Bank case.
do,
T a k e t h e Stanrod
Y o u recall t h e exact facts better than I
b u t someone
and dollars
sent
i n a
draft r
t o b e collected a n d +
ten
o r twelve t h o u s - ?
p r o c e e d s ranitted,.
They d i d not v e t t h e renittance
Governor Cglrins.
as would anpéal t o a jury a s
solvency b u t which,
as a
matt:
L
i
c n o t c o n s ti-
tute a n act o f insolvency, because a s you will recall,
was not yvaid was that a
junior
officer o f the Stanrod Bank h a c misapnliec t h e funds
provided t o meet the draft and the other officers held
back p a y m e n t
o f that draft i n orcer t o avply pressurs
to
the father o f the junior officer w h o h a d misapplied t h e
'
mace h i m c e t t h e m o n e y back.
That
was n o t i n fact a n act o f insolvency, b u t i t appeared
4o the jury a s such a n acte
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
While t h e exclanation
ressure veiling applied t
cord i n just that form, i t was a
a s t e n c e that was
known, b u t n o t n u t i n the record
aced facts that stood i n the
Circuit Court o f Appeals puts t h e m i n alongside o f o n e
draft f o r ten thousand dollars w a s sent t o
another s A
T h e trans—
the Stanrod Bank a n d n o remittance followed.
mitter o f the draft sent a
personal agent d o w n t o find
out w h y they didnit e e t their money.
T h e y were told
ould not
pay i t immediately b u t ~ould i n a fer cays,
I n a few days
But concurrently vith that, abouts the same
endeavoring to borrow $10,000
Court o f
meals n u t those t w o ‘ceirounss
att h e y were i n effect
the s a m e t i m e
the Federal’ Reserve Banx.
W h e n things
as that i t is n o t strange that a
as r e l a t e d t o o n e another.
m
e a
f o m a n e =
ju e g a r d s t h e m
I f y o u a r e unfortunate e n o u g h
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
4
to have those t w o things happen a t the
freedom o f y o u r j u d g m e n t
i s n o t a l w a y s eredited,
Governor Young. WNaturaliy Minneapolis i s very m u c h
interested
as w e l l a s w e c a n o u r s e l v e s
vent, b u t I thins I
reports
that I
W e attempt
t o work i t o u t
a s t o when a
bank i s i n s o l —
i n t h i s question.
can s a y with safety that s o far a s
o n National b a n k s a n d S t a t e b a n k s a r e c o n c e r n e d
have n e v e r s e e n o n e w h i c h s h o w e d a n insolvent
condition, even with 206 closed banks.
N o w that i s not
any r e t l e c t i o n
o n t h e Comotroller!s o f f i c e o r the National
Bank Examiner.
I t i s a n extremely difficult thing t o set
up l o s s e s
in a
bank unless t h e directors
o f that i n s t i t u
tion w a n t t o admit t h e losses.
ses,
S o f a r a s t h e Examiners!
r e o o r t s a r e concerned I
never
any
have/nad
think our bank could safely say that we
xnowledge
o f insolvency o f a n y o f t h e 2 0 6 banks t h a t h a v e
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
259-240
Let u s assume that a
man discounted a
note i n a
menber ban, vayable t o the bank, that they sent i t
we rediscounted it. 2
C
;
fense v e r y rell that h e had n i m
n o t e i n the
and could collect i t uvon himself,
far a s 9 9 yer cent o
é
up the
J I do not think, s o
notes that w e get a r e concerned
in the Ninth District, that we are assuming any liability.
But
Those veople have got to vay those notes. / in the transit
2
n
i
e tor T e y , a t t e n .
department
It think
there/bo liability.
Wir. Baker. I
c o not feel a s confident a s y o u seem
to feel ebout y o u r safety when i t i s a custo mer'ts o m
note that i s Cis counted.
Ssuopose h e has n o dealings w i t h
is simoly a
customer o f the bank
a negotiable instrument,
H e does n o t
Thet i s a cifferent question,
Governor Y o u n g ,
have t h e offset
anount t h a t
O n 9 9 » * r cent o f the notes t h e y
p
a
y down t o t h e
w e have
~josition where r e c a
s
h
e naper t o the Receiver
But
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
there i s another feature o f the situation that has
concerned u s a good deal,
W e are dealing w i t h a great
number o f banks t h a t a r e s l o w i n paying.
« I n the N o r t h
vest t h e grain trade i s financed b y the country elevators.
They d r a w a
draft
o n a
car o f w h e a t w i t h 6
bill o f l a d i n g
attached a n d send that i n t o u s for collection, t h e same
as i n t h e G r i m m A l f a l f a case.
T h e y d o not a s x f o r a n y
time credit, t h e y d o not a s c u s t o rediscount b u t simply
want u s t o prssent it, collect the nroceeds and place t o
their credit,
N o w i t seems
t o m e that there i s a
great
liability o n our part i n handling these non-cash items
and vassing credit t o a menber bank that v e are o n notice
is insolvent,
A m iI correct i n that?
wir. Baker. , Do y o u thins there i s a n y danger i f
you d o n o t v a s s c r e d i t
t o t h e menoer S a n k until after
tne collection i s made?
Governor Y o u n g . I
ITwould l i k e t o x n o w I
should t h i n k s o , T h a t i s w h a t
d o not x n o w whether
i t belongs
.
to the bank o r belongs t o the customer, H e r e i s a n insol—
vent ban< and w e have g o t t o find out t o whom i t belonged.
We are nandling millions o f dollars worth o f that every
day.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
B43
Mir. Baker, That does not seem to me to impose lia+
bility.
Y o u have d o n e what y o u were
are s e l e c t e d
a s t h e agent
t o collect t h e money,
Y o u have
turned t h e money o v e r t o the vernon y o u were authorized
I t certainly cainot
to t u r n i t o v e r to.
b e your d u t y
to g o t o the m a n w h o started that collection a n d tell h i m
that t h e agent t h a t h e vicked o u t a n d selected w a s not
worthy, t h a t y o u could not operave througan h i m and that
therefore y o u would have t o seex h i m out a n d turn 1 %
over t o him personally.
A n d there would b e n o liability i n
Governor Young.
that?
Mr. Baker. I
should n o t think so.
@overnor Young. ‘then I a m satisfied.
Mr. Beare. I
think i t would b e imoortant f o r y o u t o
get some concurrence,
i n m y judgment , I
to follow i t through a s y o u stated it. I
a m just trying
had not thought
of i t b e f o r e .
Governor Seay,
N o t t o multiply suppositious cases,
but along t h e lines o f Governor
L
k i n q u i r y as to
what definite thing constitutse notice o f insolvency,
as-—
when t h e Comotroller's examiner veports t h a t h e has
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
245
certained t h a t t h e d o u b t f u l v a p e r
i n the b a n k i s more
than sufficient t o wipe out the capital o f the bank,
and yet t h e Comptroller h a s taken n o steps t o close that
bank, w o u l d that constitute,
of insolvency,
i n your opinion, n o t i c e
o r merely evidence o f insulvency?
Mr. Baker. I
should think that t h e wiping o u t o f
the complets capital a n d surplus o f a vank would b e s o
striking a suggestion that i t rrould impose the duty
upon y o u o f a s s u r i n g y o u r s e l f
o f conditions
b y proper
do not think the impairment of capital
inquiry, I
would b e enough t o put y o u o n inquiry. I
a m surprised
that n o Comptroller's report ever showed that. W h e n you
speak o f never h a v i n g s e e n a
solvent condition,
report w h i c h s h o w e d a n i n -
i t seems t o m e o f course t h a t t h a t
is s o because i f t h e E x a m i n e r ' s r e o o r t s h o w e d i n s o l v e n c y
the C o m o t r o l l e r w o u l d c l o s e t h a t b a n k b e f o r e h e m a d e t h e
renort t o you.
Governor Y o u n g e G o v e r n o r S e a y w a s i n q u i r i n g a b o u t
doubtful paper. I
d o not k n o w whether y o u would b e justi-
fied i n calling i t doubtful paper, b u t much o f
the paver i n the Northwest i s paper that t h a t i s vory
to
adifficult/tell whether it is good or bad,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
It denends
Governor Young.
o n whose d o u b t
it
Y o u have t o wait t o s e e whether i t
is bad o r not bad. T y a t i s the only way y o u can deter—
mine whether i t i s good
denends
MT. B a k e r . i
o n whose d o u b t
it
is. C e r t a i n l y a Federal Reserve Bank i s not clothed
with such cnowledge o f the widespread clientile o f a
merber b a n < s u c h a s t o e n a b l e
i t t o assay a l l t h e c o m m e r
cial D a p e r t h a t i s vresented.
That is a
and y o u haventt t h a t information. I
human e l e m e n t
do not believe
the burden goes that fare Y o u r examination o f the bank
shows apparently g o o d paper a n d nothing about t h e paper
of
or nothing about t h e banks t o suggest t h e ~ossibility
I d o not think i t i s u p t o you t o
Es)
trace o u t each niece o f vaper a n d find out f o r yourself
it i s g o o d paver.
U n t i l y o u r attention
i s challenged
by something i n the bank which shows i t t o b e indulging
condition —
in a dangerous practice o r i s i n a n extended
are p u t
and i f that i s called t o your attention, t h e n y o u
on notice,
Governor Young,
department.
Y o u always have that i n the transit
Y o u cannot avoic notice.
I t i s right there.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
245
Governor M Dougal.
T h e practice established many
years a g o b y the Comotroller's Department, a n d I think
lixewise b y many o f the State departments,
t o determine
solvency o r insolvency, w a s first t o det«rmine a fair appraisal o f the assets a n d then t o find o u t whether those
assets, b a s e d o n that aopraisal, w e r e o f sufficiamt value
or,
known l o s s e s w e r e e q u a l
> ai
n o t h e r words,
i n amount
o r greater
i f
than
d e c l a r e d t o b e incapital a n d surplus then t h e | n k W y
N o w i t seems t o n e that a s the result o f this
solvent.
decision t h e F e d e r a l R e s
ibility t h a n e v e r b e f o r e
oredit
B a n k s have @
$
i n the
t o their m e n b e r oanks,.
I
e f
r e s p o n s —
extending
t seens t o m e also that
have b e e n
we o r o b a b l y h a v e g r e a t e r r e s p o n s i b i l i t y t h a n ‘ve
a n d insol—
aware o f i n the matter V e t e r m i n i n g solvency
vency, I
about
think w e ought t o have sole understanding
that constithat a n d I would Llixe t o get your views w o n
tutes insolvency,
T h e r e have been times w h e n a bank i n
able t o vay a t the
@ifficult c i r c u m s t a n c e s h a s n o t y s e n
later,
moment the checks that were oresented, b u t hours
t o vay t h e m
or possibly t h e next day, t h e y have been a b l e
constitute i n I have « n o m c a s e s o f that sort that might
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
246
solvency according
but I
would like
t o t h e decision quoted i n this oninion,
k n o w J
c o n s t i t u t e s insolvency
in your o w n mind, M r ,
ir. Baker.
W o u l d y o u mind reserving that q u e s t i o n
until Governor Strong's suggestion i s carried out,
is that a n examination b e made o f the vractices o f all
the banks, w i t h a view o f inacing suggestions that will
protect t h e banks s o far a s they c a n b e protected i n
these situations? I
want t o include i n that t h e tradition-
al a n d e s t a b l i s h e d d e f i n i t i o n
o f insolvency a n d ascertain
if they apply t o the Federal Reserve Banks i n view o f
the facilities nlaced a t their disposal.
Governor wicDougal, T h a t would b e entirely satisfactory
46: We,
d s ehogla- Tike. t6.26..e Jittisc f u r t h e r a n d s a y
that m y experience o v e r a number d
years h a s been i n
accordance with that o f Governor Young. I
seen a
ed a
report
have never
o f t h e National B e n k Examiner w h i c h report—
case o f i n s o l v e n c y f r o m t h e s t a n d p o i n t t h a t I
have
pointed out, w i t h respect t o which w e have been called
wpon t o render a n y assistance, and, o f course, u n d e r
those circumstances, w e could not and would not d o it,
Governor Crissinger.
a n
b a n g o f that k i n d that
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
wes running along f o r t w o o r three years t o your xnowledge,
are a
i n a very extended condition; y o u know that things
little s l i p s h o d
i n t h e bank, a n d y o u m a k e n o effort
to a s c e r t a i n f r o m y o u r o v m e x a m i n i n g d e p a r t m e n t t h e c o n d i -
tion o f the bank, a n d don't y o u think y o u create liability
in that way?
wir. Baker.
Y o u cannot e s t a b l i s h i n s o l v e n c y
N o , y o u cannot, b u t y o u c a n
Governor Urissinger.
make y o u r s e l f n e g l i g e n t
i n that
i n n o t c h e c k i n g u p o n that bank,
can y o u n o t ?
Governor McDougal,
T h e r e a r e n o c a s e s o f that s o r t
where w e d o n o t c h e c k t h e m up.
Mr. Baker.
i
n t h e G r i m m Alfalfa c a s e w e were satis~
fied with the appraisal made b y the bank authoritieis —
Governor weDougal,
necessarily insolvency,
B u t i t does not constitute
A
hag demonstrated t h e fact,
s a
matter
o f fact experience
i n connection w i t h closed banks,
that their insolvency frequently i s not known before the
closing b u t c a n o n l y b e determined b y closing t h e bank
and t h e r e b y f o r c i n g t h e m t o maze
a n appraisal
o f the
assets o f the bank through a n outside authority, t h e b a n k
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
or somcbody
Vices Governor Platt,
is closed a n d they subsequently p e y ouly 4 5 t o 5 0 cents
on the dcliar, i t would seem t o indicate that the
must h a v e been insolvent f o r a
year, anyway, before i t
was closéd,
Governor wicDuvgal,
and directors themselves d o n o t admit insolvency a n d t h e
reoorts o f the Exeminers d o n o t s h o w insolvency.
Mr. willer.
D o e s i t not m e a n a little more than that?
Isn't insolvency something l i k e human death?
W e don't
have t o wait until somebody certifies t o t h e death o f a
man i n order t o satisfy ourselves that h e i s dead.
is a
question o f judgment
I t
o f value o f assets s e t elong-
side liability,
Mr. Baker.
I t i s a question o f judgment, u n t i l a n
act o f insolvency i s committed, a s Governor Calkins has
said.
Mr. Miller. I
rather refer t o your statement t o the
effect that a s the Federal Roserve banks legally a r e
equipped with t h e power t o inform theaselves a t first hand,
if they s o desire, o f the condition o f their member banks,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
BAD
they a r e i n a
position w h e r e t h e y c a n f o r m a
judgment
as
to whether o r not t h e bank i n question i s solvent o r insolvent,
o r ayproaching insolvency, a n d therefore t h e y
are not obliged t o wait until that fact i s declared b y
do not understand t h a t t h e declaration
some authority. I
+
of that fact b y a State superintendent o r b y the Comptrol—
ler o f the Currency makes a
bank insolvent.
I t i s simply
a public announcement o f the fact, m a d e u p o n his best
belief and judgment after a n examination o f the bank and
after certain facts have been brought
t o his attention,
or after s o m e a c t u a l a c t s h o r s t h a t t h e b a n k cannot v a y
its o b l i g a t i o n s a n d ,
as a
matter
o f fact,
i s insolvent,
think t h a t i s o e r f e c t l y true.
Mr. B a k e r . I
T h e
determination b y the Comotroller o r the State bank exam-
iner that a bank i s insolvent, m a y i n fact b e erroneous,
Mma gay lier, Y e s , i t may,
ir. B a k e r ,
B u t i t i s r a r e l y erroneous,
Governor S e a y ,
A j p u l d you thin
i t desirable
to
attemot b y statute t o define technical insolvency o f
a bank?
wie. Baker,
1 . do not think so. I
think t h e Supreme
Court o f the United States - - a n d I a m speaking n o w just
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
250
from general recollection —
h a s stated what constitutes
insolvency s o authoritatively, t h a s a statute could nowt
Clarify i t very much,
Governor Norris. ‘ T h e Federal Reserve Act, i n its
general title, states that there
supervision o f ban’cing, a n d then i t vrovides,
a s a condi-—
tion ‘of membership, that such bank shal]. likewise b e
ject t o e x a m i n a t i o n m a d e a t t h e d i r e c t i o n
o f the Fede
Reserve Board o r the Federal Reserve bank. T h e n as t o
orovides that w h e n t h e directors o f the
Federal R e s e r v e B a n k s h u l l a p v r o v e e x a m i n a t i o n s m a d e b y
State authorities, t h e y m a y b e accepted i n lieu o f examina-
tions made b y the examiner o f the Board.
Y o u do not think,
do you, that anywhere i n that act there i s any duty imposed u p o n us, o r even authority given t o us, i f we wanted
+o exercise,
t o constitute ourselves t h e pcwer a n d author—
ity t o d e t e r m i n e w h e n a
bank i s insolvent a n d t o t a k e s u c h
action a s would result i n closing that bank?
Mir. Baker, N o , c h i n k n e w x
was p l a i n l y p a s s e d f o r t h e p u r p o s e
exclude t h e banks f r o m the orivi :
system w h i c h d i a n o t l i
think thet statute
o f enabling youto
P f ments
i
p i n the
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
BOL
members; a n d when y o u have determined that y o u won't h a v e
a bank i n the System I think that i s a s f a r a s y o u c a n
gO,
T h e question o f determining t h e insolvency o f that
bank is, i n the case o f i+ n a t i o n a l b a n s placed u p o n t h e
Comptroller a n d i n the case o f a state bank upon the State
bank examiner,
b y authority o f Congress, a n d not u p o n
the Federal Reserve Bans.
Governor Norris.
O n e m o r e question,
a s t o banks
that are not o n the special examination list o f the C o m p
troller
o r o f t h e State departments T h e y certainly a r e e n -
titled t o a »presumotion o f solvency until they show some
evidence o f insolvency.
I f i n the course o f operations
of their transit department o r otherwise any suspicious
circumstances arise that give u s a doubt a s t o the condi-
tion o f a bank
2 t i s supposed t o be i n good condition,
we immediately request either the local chief examiner
or the State banking department t o make a special examina.
tion o f that bank; i f the circumstances that l e a d u s t o
Make that request a r e substantial,
while —
o r they think i t worth
i n fact, almost without exception they have
always made those examinations, t h e r e never h a s been a
case w h e r e s u c h
a n examination disclosed
t h e fact that t h e
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
252
bank w a s insolvent,
amount
o f pia: v e r
b u t i t shows that t h e r e i s a
3
i n which c e r t a i nP l o g s
certain
i s estimated,
d
o r
there i s a certain peper that i s slow, b u t the Comptroller
or the State department d o e s n o t regard that benk a s insolvent a n d does n o t make a n y objection t o the bank continuing i n business; t h e y m a y impose some conditions w i t h
regard t o a chenge o f officere o r a change o f policy o r
something o f that sort; b u t t h e y d o not report that b a n k
as insolvent, a n d i f that report appears o n its face t o
us t o b e a
authority,
fair a n d i n t e l l i g e n t r e p o r t , m a d e b y proper
a r e w e not absolutely justified
i n relying
o n
it?
Mr. B a k e z ,
E n t i r e l y so,
i n m y judgment.
Y o u have
met t h e e n t i r e b u r d e n b y y o u r action.
Governor Young.
I s m y interpretation o f the ruling
of t h e S u p r e m e C o u r t c o r r e c t , t h a t i n s o l v e n c y m a y b e d e termined b y t h e i n a b i l i t y o f t h e b a n k t o m e e t i t s d u e o b -
ligations?
Mt. B a k e r s
Y e s .
Governor Young.
T h a t i s correct?
Mx. Bexkers = Tere
Governor Young.
L e t u s assume that w e take t h e spe-
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
cific c a s e t h a t G o v e r n o r N o r r i s h a s cited. 1 E n e :
sume that w e find t h e assets o f the bank satisfa
but w e find that t h e bank h a s n o reserve, t h a t i t has
many c a s h i t e m s u n p a i d h i c h h a v e b e e n u n v a i d f o r s e v e r a l
days, haven't y o u got pretty good *xnowledge that that
bank i s insolvent f r o m a
words,
financial s t a n d o o i n t ?
I n other
y o u have g o t t o lend t h e m some m o n e y t o pay t h o s e
obligations.
The Chairman,
W o b a n k c a n p a y a l l o f i t s depositors
overnight i f they have a run.
Mr. weaker,
N o ,
i t is 2
look a t the bansx's assets;
question o f judgment,
y o u f i n c that those assets a r e
perfectly good according t o + t
ercise b u t the; c
Y o u
s
t judgment y o u c a n e x —
f i c i e n t l y f l u i d a n d flowing
+o meet t h e demands a s rapidly a s apolications a r e made,
then y o u can tide that b a n k over with perfect safety,
If you take a mistake where y o u have exercised reasonable
discretion, I
liability.
thins y o u have relieved yourself o f a n y
D o e s t h e t answer t h e question?
Governor Young, Y e s , I. thin i t does,
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Mr.
Bakor: But the question I want t o raise, e n d I want t o
do i t f o r m y o m m information,
i s a
practical question.
situation would arise lice that i n the case
Suppose a
of the Stanrod Bank, a n extended bank where, d u e t o the
view o f the Circuit o f Appeals, t h e Federal Reserve Bank
had xnowledge o f the perilous, i f not the insolvent condition, o f the Stanrod Bank, i s i t imprecticable for the
Federal Reserve Bank, which i s appealed t o for assistance,
to s a y t o t h e bank, w i t h r e g a r d t o t h e p a p e r mresented,
"Where did you get this; h o w did you come t o have it?
Was there a n y deposit liability created a t t h e time y o u
got it, which still omists?"
A
n
d t o taxe only paper
which d i d n o t c o m e c o n c u r r e n t l y w i t h t h e c r e a t i o n o f a
condition
devosit liability after t h e dangerous/of t h a t bank w a s
known ?
I
s that imoracticable?
Governor Seay,
A s t o the existing deposit liabil-
ity, I think that i s impracticable; b u t i t certainly
is not impracticable t o require a
statement that t h e
paver was discounted, because w e have already done that
and d o i t now.
W e d o require t h e statement that this
paper h a s b e e n d i s c o u n t e d f o r s o a n d so, b u t w e d o n o t
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
now, a n d never have, n o r d o I believe h e s a n y Federal
Reserve Banc, required a n y statement a s t o the contingent
Sep0sit liability o f the aoplying bank.
wir. Baker.
S u c h a statement required might b e help—
ful but i t would n o t b e conclusive.
T h e Stanrod Bank
would undoubtedly have told the San Francisco Bank that
it w a s t h e o w n e r o f t h a t paper.
Governor B a i l e y , D i d n ' t t h e e v i d e n c e s h o w t h a t t h e y
never lost title t o that paper until they actually g o t
the money? D i d n ' t they have that xind o f a n agreement?
afr. Baker,
There is a
statement
o f that k i n d i n t h e
opinion o f t h e C i r c u i t C o u r t o f Aopsals,
o r something
that looks i n that direction i n the evidence; b u t i t i s
also i n evidence i h that c a s e that t h e Grimm Alfalfa Assoclation c n e w that that never ~"as going t o the ban’ f o r
discount a n d had cone nothing t o out t h e Federal Reserve
Bank o n notice t h a t t h e y h a d a n y c l a i m t o t h e vaver.
Governor Young.
said before,
F r o m a practical standpoint,
as I
i n our district t h e offsets a r e f e w and f a r
betreen, because t h e borrowers a s a rule a r e not heavy
depositors. W h a t w e d o i s t o just get i t paid down t o
the offset, get the money and turn the balance o f it back
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
to the receiver,
i n cases where w e are n o t g0i
it vaid out i n full, W h e r e w e think w e have the right
to collect from the banker, which may involve a hundred
dollars o r two hundred dollars, a n d i t i s a question o f
paying
a n attorney a
thousand d o l l a i s
t o collect t h e
$200, w e just forget i t and ‘ceep o n forgetting it.
Governor Crissinger. ‘ T h a t i s rather hard o n the at—torneys.
My. Baker.
Y e
Governor Hardin;
i
t i s g o o d for the bank.
W i t h regard t o the Grimm Alfalfa
case, suppose instead o f drefts t h a t they h a d made their
fifteen d e y note a n d nut t h e diafis u p a s collateral
for t h e note; t h e n t h e note w i t h drafts attached was sent
to t h e F e d e r a l R e s e r v e Bank,
T h e bank could have collected
draft just t h e same, a n a i t seems t o m
t h a t they
would have been barred f r o m maxing t h e plea that t h e F e d
eral Reserve B a n k h a d 7iscounted a
note o f a n institution
that t h e y k n e w was insolvent» h e y could n o t have said
that t h e bank was o n notice +
Me, Baker.
W h y not?
h i s w a s their »roperty.
I n the case a s y o u put i t they
deposited t h e draft a s collatcral security.
Governor H a r d i n g ,
B u t i f t h e y rade their fifteen-day
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
258
vote t o the Stanrod Bank, which discounted the note and
gave.them credit f o r t h e proceeds, a n d put u p a s col—
lateral the drafts, then they would send the note with
drafts a t t a c h e d
t o t h e Selt L a k e C i t y oranch o f the R e -
serve Bank o f San Francisco, t h e Salt Lake City bank would
give the Stanrod Bank credit for the proceeds o f the note,
and then proceed t o collect t h e collateral.
Mir. Baker.
H o w ~ould t h e Stanrod B a n k get title
to t h a t collateral i t h t h e reserve bank?
Governor Harding. ‘ h e n they discounted the note
to which t h e drafts were attached a s collateral.
Mr. Baker.
T h e n the Grimm Alfalfa Association n o t e
is itself discounted with the Federal Reserve Bank?
Governor Harding, Y e s .
Mr. Baker.
A n d carries t h e collateral w i t h it.
Governor Seay,
T h e note o f the menber b a n k i s dis—
counted f o r the menber bank a n d carries t h e assignment
of the Grimm-Alfalfa Association.
Governor Harding,
I n s t e a d o f putting t h e draft u n
they g e t t h e Stanrod Bank t o take their n o t e f o r fifteen
dayse
Governor Zailey,
T h e Court went s o f a r as t o say
that the Stanrod Bank was not rich enough t o loan $30,000.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
I think implication o f xnorledge i n
very remote.
T h e Circuit C o u r t o f Appeals
edeval Reserve B a n c h a d knowledge o f the
that t h e Stanrod Bank could not have paid the note
because
i t didn't h a v e m o n e y e n o u g h t o v a y i t , a n d
think that i s going pretty far.
Governor Bailey. O r d i n a r i l y i f notes o f that x i n e
come t o our bank w e give t h e m credit, i f t h e y have drafts
attached o f that ‘ind, b u t ~ e don't pass t h e money over.
ir. Baker. ‘ t h e case which Governor Harding h a s put
I have n o t gotten straight i n m y head.
T h e Grimm Alfalfa
Association maxes its own note for $30,000?
Governor Harding.
And discounts that w i t h t h e Stanrod
Banik.
Governor Farding. -Yes.
I t taxes credit f o r i t a n d
secures that note w i t h these drafts.
Mr. Baker.
t h a t relation does t h e Stanrod Bank have
to the Federal Reserve Bank o f San Francisco?
Governor Yarding,
T h e Stenrod H a n would send that
collateral note — -
With the collateral, t h e note and the
collateral’?
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Governor Harding.
Y e s , t o the Federal Reserve Bank,
which would immediately p u t that colleteral i n nrocess
of collection, a n d when they collected the collateral
they would p a y o f f t h e note.
iir. Baker. I
don't quite see that the fact that i t
was t h e note o f t h e Grimm Alfalfa Association which w a s
discounted would make i t a n y d i f f e r m t f r o m the draft o f
Side party, beceuse the note i s a collectable note;
the Grimm Alfalfa Association would have t o pay that
note unless i t was naid o u t o f the collateral. I
do not
see that i t would make a n y substantial difference whether
it i 8 a note o r whether i t was a
draft endorsed b y it,
There may be something nractical that I have missed i n
it, but I do not see that i t would b e differmt,
Governor Harding. S u p p o s e i t had been a case o f
bonds; t h a t t h e y h a d the bonds i n the bank f o r safekeeping,
the bank h a d sent t h e bonds t o the Reserve Bank and borrowed money a n d sold t h e bonds t o the Reserve Bank? T h e n
the m a n could s a y "Those a
n o t t h e oroperty o f the
bank; t h o s e a r e m y bonds. I
hac t h e m there f o r safekeeping
end they h a d n o authority t o negotiate them,"
man h a s gone ahead a n d made a
B u t i f that
note a n d nut t h e bonis u p a s
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
261
barred
from showing
the bonds,
wr. Baker, Y e s , I think h e would b e barred from
that.
T h a t i s not quits t h e questi
G o v e Harding.
The question that f a c
first b a n k o f discount a n d the customer.
N o w i f those
relations a r e fraudulent a n d t h e Federal Ressrve B a n k
has xnowledge o f t h e fraud, t h e n that transaction i s a
thing that becomes infirm.
i f I g o t o a bans a n d give m y
note for $30,000 and deposit Government bonds t o secure
that note; t h e y discount i t a n d dlace t o m y oredit $30,000
and fahl t h e né
s y , a n d t n e w a t the t i m e that I put m y
note i n there a n d they vut that $30,000 t o m y credit a s
a depositor that they were going t o fail, a n d that t hey
were insolvent, t h a t i s certainly fraud.
Governor Harding. I
can s e e where y o u might raise
the question that the bank hed denrived you of your right
of offset,
Governor Crissinger.
soes t o a question o f fraud, + t i
ever passed.
n é d i t i o n that nothing
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
wir. Baker, N o t h i n g e v e r passed.
V h a t they a r e
entitled t o h a ew b e c k i s their note a n d their bond a n d
have the deposit cancelled as though it had never been
I f that n o t e a n d those bonds h a d gotten i n t o t h e
made.
hands o f the Federal Reserve B a n k with notice o f fraud,
then t h e y a r e entitled t o come back f r o m the Federal R e —
serve Bank. a n d i f the Federal Reserve Bank, with ‘cnowledge o f the fraud, h a s disyvosed o f those bonds a n d
changed that situation, t h e y a r e liable t o make good
out o f their o w n f u n d s t h a t i s d u e t o t h e d e p o s i t o r
by
reason o f their cnovledge o f a n d varticipation i n the
T h e a t i s the w a y t h e proposition works
original fraud.
Out.
Mr, s&ller, W h a t i s going t o havpen i n the Grimm
Alfalfa case?
I s i t going t o b e anpealed?
Mr. Batter,
W e tried t o get t h e Suoreme Court o f t h e
United States t o take i t in. G o v e r n o r Cal*ins d i d not
think they would. I
think I
t o l d Governor Calkins I
thought w e had a fifty-fifty chance -—- that w e had better
than a
fiftyefifty chance t o get i t i n and a fifty—fifty
chance t o reverse i t after w e got i t in.
ir. Miller.
O n what grounds d i d t h e y refuse?
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
2035
Mr. Baker.
T h e y never assign g r o u n d s w h e n they de-
cline a writ o f certicrari.
they t o o k t h
m
e
n
t
i d%
judgment i s that
w t e i n e d i n the opinion o f
the Circuit. Court o f Appeals, that the verdict o f the
jury was taken as a Special finding f a c t , and they
took that statement o f fact a s being some, evidence a n d
let i t g o o n the question o f fact.
Governor Crissinger.
you want t o bring u p a t this meeting?
I f not i t i s about
time t o adjourn f o r lunch.
(Whereupon, a t 12:50 o'clock ».m., the Conference
recessed until 2:30 o'clock p.m. o f the same ‘ay,)
the m e i t b e r s
o f t h e Federal Reserve B o a r d
retiring from the conference room.)
a n d ms. B a k e r
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis