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INQUIRY ON MEMBERSHIP IN FEDERAL
RESERVE SYSTEM

JOINT HEARINGS
BEFORE THE

COMMITTEES ON BANKING AND CURRENCY
CONGRESS OF THE UNITED STATES
SIXTY-EIGHTH CONGRESS
PURSUANT TO

PUBLIC ACT No. 503
AN ACT TO PROVIDE ADDITIONAL CREDIT FACILITIES
FOR THE AGRICULTURAL AND LIVESTOCK INDUSTRIES
OF THE UNITED STATES; TO AMEND THE FEDERAL FARM
LOAN ACT; TO AMEND THE FEDERAL RESERVE ACT; AND
FOR OTHER PURPOSES, APPROVED MARCH 4, 1923

OCTOBER 2, 3, 4, 5, 9, 10, 11, AND 12, 1923

PART 1

107G79




WASHINGTON
GOVERNMENT PRINTING OFFICE
1926

CONGRESS OF THE UNITED STATES
JOINT COMMITTEE OF INQUIBY ON* MEMBERSHIP IN FEDERAL RESERVE

SYSTEM

LOUIS T. McFADDEN, Pennsylvania, Chairman
HOUSE MEMBERS

SENATE MEMBERS

PORTER H. DALE, Vermont.
JAMES G. STRONG, Kansas.
OTIS WINGO, Arkansas.
HENRY B. STEAGALL, Alabama.

GEOROE1 P. MCLEAN, Connecticut.
O. E. WELLER, Maryland.
CARTER GLASS, Virginia.

P. G. THOMPSON, Secretary

II




CONTENTS
Page,

Hon. D. R. Crissinger, Governor Federal Reserve Board, Washington,
D. C
2
Mr. Walter Wyatt, general counsel, Federal Reserve Board
41
Letter from—
Gov. W. P. G. Harding, Federal Reserve Bank of Boston
47
Deputy Gov. J. H. Case, Federal Reserve Bank of New York
50
Gov. George W. Norris, Federal Reserve Bank of Philadelphia
54
Gov. E. R. Fancher, Federal Reserve Bank of Cleveland
56
Gov. George J. Seay, Federal Reserve Bank of Richmond
57
Gov. M. B. Wellborn, Federal Reserve Bank of Atlanta
61
Gov. J. B. McDougal, Federal Reserve Bank of Chicago
63
Gov. D. C. Biggs, Federal Reserve Bank of St. Louis
64
Gov. R. A. Young, Federal Reserve Bank of Minneapolis
66
Gov. W. J. Bailey, Federal Reserve Bank of Kansas City
70
Gov. B. A. McKinney, Federal Reserve Bank of Dallas
71
Gov. John U. Calkins, Federal Reserve Bank of San Francisco
72
Federal Reserve Board's memorandum and survey of general situation
73
Hon. Edmund Platt, vice governor Federal Reserve Board, Washington,
D. C
118
Hon. Henry M. Dawes, Comptroller of the Currency, Washington,
1). C
131,154
Mr. Charles W. Collins, Deputy Comptroller of the Currency, Washington, D. C
154
Hon. C. S. Hamlin, member Federal Reserve Board, Washington, D. C
174
Hon. Eugene Meyer, jr., managing director War Finance Corporation
189
Mr. Levi L. Rue, chairman Federal Advisory Council, Federal Reserve
Board, Philadelphia. Pa
226
Hon. Paul M. Warburg, member Federal advisory council, Federal Reserve Board, New York, N. Y
252
Hon. John M. Miller, jr., Richmond, Va
274
Mr. Waldo Newcomer, president National Exchange Bank of Baltimore,
Md
289
Report of economic policy commission, American Bankers' Association
291
Mr. Oscar Wells, vice president American Bankers' Association, Birmingham, Ala
325
Mr. E. A. Onthank, Fitchburg, Mass
334
Mr. Arthur M. Heard, Manchester, N. H
338
Mr. Alfred L. Aiken, chairman National Shawmut Bank, Boston, Mass
344
Mr. R. S. McNally, Association of Reserve City Bankers, St. Louis, Mo__ 349
Mr. Frederick A. Delano, Federal Reserve Bank of Richmond, Va
364
Mr. Western Starr, national committee, Farmer-Labor Party, Washington. D. C
380
Mr. Frank P. Bennett, jr., United States Investor, Boston, Mass
390
Mr. F. R. Jones, County Bankers' Association of Georgia, etc., Atlanta,
Ga
397
Decisions of Supreme Court, United States, in Atlanta and North Carolina Par Clearance cases
426
Excerpts from Congressional Record of the Sixty-fifth Congress, first session, vol. 55, pts. 2 and 4 (May 10 and June 12, 1917)—" Hardwick
amendment "
467
Mr. J. H. Tregoe, secretary-treasurer National Credit Men's Association
613, 621
Mr. W. W. Orr, National Association of Credit Men, New York, N. Y
637
Mr. Edward Bains, National Bank of North Philadelphia, Philadelphia,
Pa
639
Free Service noncash items, Federal reserve system
648
Hon. R. A. Cooper, Federal Farm Loan Board, Washington, D. C
647
Hon. Merton L. Corey, member of Farm Loan Board, Washington, D. C_ 660
Mr. B. C. Powell, Little Rock, Ark
664
Mr. Benjamin C. Marsh, Farmers' National Council, Washington, D. C
675
Mr. Thomas Atkeson, the National Grange, Washington, D. C
695




III

INQUIBY ON MEMBERSHIP IN FEDERAL RESERVE
SYSTEM
TUESDAY, OCTOBER 2, 1923
CONGRESS OF THE UNITED STATES,
J O I N T COMMITTEE ON INQUIRY
ON MEMBERSHIP I N FEDERAL RESERVE SYSTEM,

Washington, D. C
The joint committee met at 10.30 o'clock a. m., Hon. Louis T.
McFadden (chairman) presiding.
The CHAIRMAN. This is a meeting of the Joint Committee of
Inquiry on Membership in the Federal Reserve System. The authority for the creation of this joint committee is found in public
law No. 503, Sixty-seventh Congress—that is, the agricultural credits act—passed in the closing days of the last session of Congress:
The joint committee is authorized to inquire into the effect of the present
limited membership of State banks and trust companies in the Federal reserve
system upon financial conditions in the agricultural sections of the United
States; the reasons which actuate eligible State banks and trust companies
in failing to become members of the Federal reserve system; what administrative measures have been taken and are being taken to increase such membership ; and whether or not any change should be made in existing law, or in
rules and regulations of the Federal Reserve Board, or in methods of administration to bring about in the agricultural districts a larger membership of
such banks or trust companies in the Federal reserve system.
The committee is authorized to sit at any time during the sessions or recesses
of the Congress; to conduct its hearings at Washington or at any other place
in the United States; to send for persons, books, and papers; to take testimony ; to administer oaths. * * *

The committee has a tentative list of people who are to be heard.
For the purposes of the record I will put this list in at this point.
I might also say that the present schedule of hearings runs up to and
including October 12; and there is no definite time for the closing
of the hearings. It may develop that at the end of this tentative
schedule the committee will consider the matters that have been
presented of sufficient importance to warrant later hearings either
here in Washington or elsewhere.
(The schedule of hearings referred to is as follows:)
Tuesday, October 2 : Governor of Federal Reserve Board, 10.30 a. m.
Wednesday, October 5: Comptroller of the Currency, 10.30 a. m.; Secretary
of Agriculture, 2.30 p. m.
Thursday, October 4: War Finance Corporation.
Friday, October 5: Chairman Advisory Council, Federal Reserve Board, 10.30
a. m.; Farm Loan Board (Cory and Landis), 2.30 p. m.
Tuesday, October 9: C. B. Hazlewood, Association of Reserve City Bankers,
10.30 a. m.; American aBnkers' Association, 2.30 p. m.; New England Federal
Reserve Banks. 2.30 p. m.
Wednesday, October 10: Frederic A. Delano, 10.30 a. m.; United States
Chamber of Commerce, 2.30 p. m.; Country Bankers' Association of Georgia,
3.30 p. m.
1




2

INQUIRY ON MEMBERSHIP IX FEDERAL RESERVE SYSTEM

Thursday, October 1 1 : National Credit Men's Association, 10.30 a. m.; Frank
P. Bennett, United States Invester, 11.30 a. m.; A. T. Richard. 2.30 p. m.;
Richard Charles, 3.30 p. m.
Friday, October 12: Gray Silver, American Farm Bureau Federation, 10.30
a. m.; T. H. Atkeson, National Grange, 2.30 p. m.; Benjamin C. Marsh. Farmers'
National Council, 3.30 p. m.

The CHAIRMAN. In connection with the duties which devolve upon
this committee, we will be glad at this time to hear Mr. D. R. Crissinger, governor of the Federal Keserve Board; and when he has
completed his statement other members of the board who are present
may be heard.
Governor, you may proceed in your own way. You are familiar
with the purposes of this committee, and I will suggest that you
proceed as to you seems best, and if you do not care to be interrupted
as you go along the committee, I know, will be very glad to accede
to your wishes.
STATEMENT OF HON. D. R. CRISSINGER, GOVERNOR FEDERAL
RESERVE BOARD, WASHINGTON, D. C.
Governor CRISSINGER. The first thing that I notice in your
program is the effect of the present limited membership of State
banks and trust companies in the Federal reserve system. I would
say, in general, the limited membership has not particularly affected
the Federal reserve system as a system. It does affect the system
in this way: The nonmember bonds have to rely on credit facilities
that are distributed through correspondent banks; nonmember
banks must secure credit facilities through the larger member banks.
Limited membership has the effect of piling up the credits in member banks, and greatly over extending them, as shown in the last
crisis in the case of many of the national banks and quite a few
of the State banks. I think the State banks have all had ample
credits as well as the national banks.
In discussing the matter, it would seem that you would have to
take into consideration and remember that one-third of the member banks neither borrowed nor discounted paper during this stringency and inflation and deflation period; about one-third of them
rediscounted or borrowed to what I would say was a reasonable
amount, probably up to the amount of their capital; and one-third
of them became greatly overextended. The one-third of the banks
that did not borrow or rediscount carried very large amounts in
cash and bank balances running as high as, I think, 40 per cent.
So you can readily see what condition that would bring about in
a community where one bank carried all of the reserves, and another bank was rediscounting and borrowing to accommodate the
community. That resulted, as I say-, in a great many overextended banks.
If there was an increased membership there would be a broader
market for credit; there would be more avenues, and it would not,
to my mind, accumulate and pile up in the central reserve cities
and in the big banks. There has been much criticism, of course,
about some of the banks having an overline of credits, but that
has been largely due to the fact that they have been accommodating
in a great many cases the nonmember banks that have refused to
become members, or neglected for various reasons to become members, of the Federal reserve system.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

3

I think that if all of the eligible banks were to become members
under the law now, it might have some results that we probably
do not think about; it probably would cause, as the bank operations department shows, the borrowing probably of $346,000,000
from some source, ultimately from the Federal reserve bank, in order to pay their capital and provide their reserve for the system.
At the suggestion of the chairman, I had the bank operations department look up the effect it would have upon the reserve ratio,
and if the committee is interested in the figures I have them here,
The CHAIRMAN. We would be very glad to have that in the record
at this time.
Governor CRISSINGER. Would you want it read, or did you just
want it handed in?
The CHAIRMAN. We would like to have you read it.
Governor CRISSINGER (reading):
The present reserve deposits of member banks amount to $1,872,733,000.
If all banks in the country eligible for membership were admitted, total reserve
deposits with the Federal reserve banks would amount to $2,292,773,000.
The total reserves of the Federal reserve system at the present time amount
to $3,187,665,000 and their ratio to the deposit and note liabilities combined
is 75.9 per cent. If the deposit liability of the reserve banks was increased
to $2,292,773,000 as the result of the admission of all eligible nonmember
banks, and no change was had in the Federal reserve note liability, the ratio
of the present reserves of the Federal reserve banks to deposit and note
liabilities combined would amount to about 70 per cent. If, however, the system
should lose say, $1,000,000,000 of reserve gold through exports., the ratio
of reserves to deposit and note liabilities combined would be reduced to
about 47 per cent.

Mr. WINGO. If I may ask you right there, Governor, so I may follow you: I have been looking into that question. You have the
total amount of deposits to capital stock and surplus of the member
banks. Does that show in the statement—the total amount of the
deposits, the capital stock and surplus of member banks ?
Governor CRISSINGER. It does not show in this statement, but
I can get it for you.
Mr. WINGO. Will you please at the proper place insert that in
the hearing?
Governor CRISSINGER. Yes.
In response to this request there is given below a statement showing (1)
number, capital, surplus, and total deposits of all member banks in the
United States as of .Tune 30, 1923; (2) number, capital, and estimated surplus and deposits of nonmember banks eligible for membership on the basis
of the present capital stock requirements of the Federal Reserve Act as of
June SO, 1922. the latest date for which such inform a tion is available.
Number
of banks

Total
(2) Eligible nonmember banks June 30, 1922:
Banks eligible prior to March 3, 1923...
Banks made eligible by Agricultural
Credits Act
Total

..

^Estimated.




.

Surplus

Total deposits

8,236
1,620

$1,328,141,000
670,154, 000

$1,070,026,000
561, 676,000

$16,890,406,000
10,162, 796, 000

9,856

(1) Member banks, June 30, 1923:
National banks
State banks and trust companies

Capital

1,998, 295, 000

1, 631, 702, 000

27. 053. 202. 000
i 7, 252,000

9,678

760, 695,000

448, 420,000

4,203

96, 418,000

i 46,113, 000

1 867,000

13,881

857,113, 000

494, 533,000

i 8,119,000

4

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Mr. WINGO. Now, then, the total capital stock and surplus and
deposits of nonmember but eligible banks—have you ever compared
that ?
Governor CRISSINGER. I think we have something right here maybe
that will answer that.
Mr. WINGO. DO the statistical tables that you have show, then,
what would be required in the way of reserves if all nonmember
eligible banks came in?
Governor CRISSINGER. Yes, sir; it does.
Mr. WINGO. Does it show where you are going to get that reserve'(
Governor CRISSINGER. It does not show where we are going to get
that reserve. I do not know where we would get it.
Mr. WINGO. YOU do not have any idea yourself, do you ?
Governor CRISSINGER. I beg your pardon.
Mr. WINGO. Just assume, for the sake of argument, that every
eligible nonmember bank to-morrow joined the system. Where
would you figure out that you would get the reserve ?
Governor CRISSINGER. We would have enough reserve now, provided we do not lose a billion dollars.
The CHAIRMAN. YOU are speaking of gold reserve?
Governor CRISSINGER. Yes; I am speaking of gold reserve.
Mr. WINGO. I am talking about total reserves required.
Governor CRISSINGER. Probably then you would have to borrow.
I think the statement here shows we would have to borrow $340,000,000.
Mr. WINGO. YOU see what I am driving at ? I am figuring out the
logical conclusion of the theory that every eligible nonmember bank
ought to be in.
Governor CRISSINGER. Yes; I see.
Mr. WINGO. And if it did get them in, I would want to know about
total reserves required.
Governor CRISSINGER. I think we have some figures here that will
show that. This is the effect on Federal reserve banks of admission
to membership of all eligible nonmember banks. Do you want it
read ?
The CHAIRMAN. Yes.
Governor CRISSINGER.

This is from Mr. Smead, of the bank operations department. It has occurred to us that it might be of some
interest, in connection with the congressional inquiry on membership
in the Federal reserve system, to have figures showing the effect upon
each Federal reserve bank if all nonmember banks eligible for membership were admitted to the system. Accordingly we have prepared
the following table, on the basis of data already available, which
shows what the approximate increase would be in the paid-in capital
and reserve deposits of each Federal reserve bank in case all nonmember banks eligible for membership on the basis of capital requirements joined the system.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

5

(The statement submitted by Governor Crissinger is as follows:)

Federal reserve district

Boston.
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago

_

Estimated
increase in
paid-in
capital
stock of
Federal
reserve
bank

Estimated
increase in
reserve
deposits

I $1,500,000 $15, 200,000
__.[ 4,300,000 54,200,000
4, 500,000 37, 900,000
4,100,000 40, 200,000
4,100,000 36,900,000
| 2,300,000
18, 900, 000
! 7,600,000 80,100, 000

Federal reserve district

St. Louis
Minneapolis...
Kansas City—.
Dallas.
San Francisco .
Total.

Estimated
increase in
Estimated
paid-in
increase in
capital
reserve
stock of
deposits
Federal
reserve
bank
$3, 200,000
2,000,000
2, 700,000
1,300,000
2,900,000

$33,000,000
21,100,000
29,900,000
11,200,000
43,400,000

40, 500,000

422,000,000

In arriving at the above figures we used (1) reports received from the
Federal reserve banks showing the capital, surplus, and total resources of
nonmember banks which were eligible for membership on June 30, 1922, and
(2) reports received from the Federal reserve banks showing the number and
capital of additional nonmember banks which became eligible for membership as a result of the reduced capital requirements approved in the agricultural credits act. It was necessary to estimate the net deposits of these
banks, as these figures were not reported. This was done by first determining the ratio of capital and surplus to deposits for national banks of similar
size, and then applying the same ratio to the capital and surplus of eligible
nonmember banks, except in the case of the large banks where the estimates
of deposits are based on a percentage of total resources.
It will be noted that for the system as a whole the paid-in capital of the
Federal reserve banks would be increased by about $40,000,000, and reserve
deposits by about $420,000,000, if all nonmember banks eligible for membership on the basis of capital-stock requirements were admitted to membership.
In order to determine the effect upon the system, if all eligible nonmember
banks were to join, it is necessary to know the character of funds the newly
admitted banks would use to build up required reserve balances, and to pay
for their capital-stock subscription. These payments apparently could be made
with checks on other banks, in cash, or by borrowing from the Federal reserve
banks. If payment were made by checks on other banks, the banks on which
drawn could likewise make payment with a check on some other bank, but
ultimately payment would have to be made in cash or by borrowing from the
Federal reserve banks. If the payments were made by borrowing from the
Federal reserve banks, earning assets would be increased by about $460,000,000,
which at 4y2 per cent would produce an annual income of about $20,000,000.
As bearing on the question as to whether nonmember banks would be able to
make their payments in cash and if so to what extent, we have prepared the following figures showing demand and time deposits and cash holdings, and
the percentage of cash holdings to demand and time deposits for the various
classes of banks, as of June 30, 1922:
Per cent
of cash in
vault to
demand
and time
deposits

Demand and
time deposits

Private banks

All banks

107679—26—PT 1




2

$13, 264, 366, 000

$326,181,000

2.5

8,166, 992,000
9, 838,275, 000
5, 779, 506, 000
145,179, 000

138,466,000
316,198,000
44, 883, 000
4,164, 000

1.7
3.2
.8

37,194, 318,000

National banks
State banks, stock savings banks, and loan and trust companies:
Members
Nonmembers
Mutual savings banks

Cash in
vault

829,892,000

2.2

2.9

6

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

From this it will be noted that all nonmember State banks, including stock
savings banks and loan and trust companies, carried $316,000,000 cash in
vault, which was 3.2 per cent of their total demand and time deposits. If
this total were to be reduced to 2y2 per cent, which was the percentage carried by national banks, it would be possible to release seven-tenths per cent of
$9,838,000,000, or $70,000,000 of cash.
The low percentage of cash in vaults shown for State bank and trust-company members is due to the fact that the greater number of them are large
institutions located in Federal reserve bank and branch ciries, and consequently
they are able to get along with a lower percentage of cash than are smaller
banks located in rural sections. If the smaller banks were to join the system
they might find it possible to accumulate a certain amount of cash from current operations and to use it in payment of their capital stock and reserve
balance requirements at the Federal reserve banks. The total amount of
cash to be withdrawn from circulation, however, would be relatively small,
probably not in excess of $50,000,000, and this amount added to the $70,000,000
which could possibly be spared from their vaults would make available about
$120,000,000 in cash, which could be used in making payments to the reserve
banks. This amount deducted from the total payment on account of capital
stock and reserve balance requirements, estimated at $460,000,000, would still
leave approximately $340,000,000 to be borrowed from the Federal reserve
banks.

The CHAIRMAN. Governor, in connection with taking in these nonmember banks and trust companies, the plan you have outlined
there would necessitate a close scrutiny of the reserves other than
cash now on deposit?
Governor CRISSINGER. Yes.
The CHAIRMAN. In other words, the same situation exists as regards State banks and trust companies as existed before the establishment of the Federal reserve system in that reserves are pyramided ?
Governor CRISSINGER. Yes.
The CHAIRMAN. And that if they came into the Federal reserve
system, what is now counted as legal reserves to State banks and
trust companies would not be accepted as legal reserves in the Federal reserve system?
Governor CRISSINGER. Yes.. It is correct; they would not.
The CHAIRMAN. In other words, I understand that correspondent
reserve banks accept from member banks checks and other items
and give them immediate credit. So there would be an ironing out
of reserves there to some extent, would there not ?
Governor CRISSINGER. I think there would be. I think you can
not get at any real accurate estimate.
The CHAIRMAN. And, in addition to the cash you refer to that is
already in the vaults of the member banks they would probably
extract from the reserve banks a portion of the cash to go into the
Federal reserve system?
Governor CRISSINGER. I think that is true.
The CHAIRMAN. Have you any thought on the question of reserves of nonmember banks ? The general effect it has, for instance,
in direct opposition to the plan of Federal resrve system. They
do carry as a reserve what is called "float." They also carry in
their reserve Federal reserve notes and national bank currency.
Have you any thought as to what effect that might have on our
general situation?
Governor CRISSINGER. Well, my opinion about that would be if
they were all to come in that would iron itself out. I do not think
that would materially affect the situation.




INQUIRY ON MEMBEBSHIP IN FEDERAL RESERVE SYSTEM

7

The CHAIRMAN. But, under its present operation, do you think it
has any effect on our general credit situation?
Governor CRISSINGER. They have a large reserve in the Federal
reserve banks.
The CHAIRMAN. Does the fact that State banks and trust companies carry Federal reserve notes and national bank currency as a
reserve affect the retirement of Federal reserve notes?
Governor CRISSINGER. It would to a certain extent, I would think.
If they may keep them and stack them up as reserves.
Mr. WINGO. Governor, the statistics you just put in the record,
covering the question of reserves of these nonmember banks that
are eligible—those statistics are based upon what they carry as
their present reserves regardless of whether it is gold or lawful
money, or pyramided banks deposits with their correspondents,
does it not?
Governor CRISSINGER. It is based upon the records as they are
returned by the various State departments, I presume.
Mr. WINGO. That is the point. I do not know whether I am
making myself clear. In other words, where a nonmember bank
claims to have certain reserves, both in its vault and in the hands of
a correspondent reserve agent, you count that as reserve, whether
it is gold or lawful money, or whether it be pyramided items of
of gold and lawful money, or whether it includes bank credits?
Governor CRISSINGER. Yes. I am not familiar with how these
statistics are made up in the bank operations department, but I
would think that we would have no way of telling just how they
do make up their reserves.
Mr. WINGO. That is the point I want to get at.
Governor CRISSINGER. Mr. Smead is here. Pie might know about
that.
Mr. WINGO. I presume that he has treated the reserve on the
basis that it is proper reserve?
Governor CRISSINGER. I would think so. You would treat as
proper reserve whatever you have shown?
Mr. SMEAD. SO far as this paper you have read, Governor, is concerned it has no bearing upon reserves nonmember banks carry
with correspondents or in vaults. The reserves nonmember banks
carry, of course, made up of cash in vault, float, and amounts
due from banks.
Mr. WINGO (interposing). As I understand this statistical paper,
then, it is an estimate based upon its present deposits and based
upon their meeting their requirements as they come in and having
reserve of gold and lawful money.
Mr. SMEAD. Reserve balance in the Federal reserve banks.
The CHAIRMAN. What would be considered as reserve in the
bank vault? Would that include all kinds of money?
Mr. SMEAD. This statement Governor Crissinger read purports to
show what amount the nonmember banks would have to deposit
with the Federal reserve banks to make up capital and reserve
requirements, and then it purports to show how they would get
funds to build up reserve balances. Undoubtedly some banks
would draw checks on their city correspondents.
Those checks
would be deposited in Federal reserve banks and would build




8

INQUIRY ON MEMBERSHIP IX FEDERAL RESERVE SYSTEM:

up the reserves of country banks joining the system. But in order
to pay those checks the city banks would undoubtedly have to borrow
from the Federal reserve banks, unless they could turn over cash,
which they probably could not do.
Mr. WINGO. As a matter of fact, even on the figures you put in,
those reserves would not necessarily in actual practice ever be gold
or lawful money, would they?
Mr. SMEAD. NO; because there is not sufficient gold and lawful
money in circulation to transfer.
Mr. WINGO. As a matter of fact, it would not consist of gold and
lawful money, but it would consist of balances with the Federal
reserve bank. That has the same legal affect under your present
operations and would meet the reserve requirements ?
Mr. SMEAD. That is right. The cash held by nonmember banks
which could be transferred is relatively small, because they do not
hold a much larger percentage in their vaults than member banks do.
Mr. WINGO. What do you regard as lawful money, Governor?
Governor CRISSINGER. Gold, Federal reserve notes, and Government greenbacks—they are all lawful money.
Mr. WINGO. YOU say Federal reserve notes? They are lawful
money, are they, secured by gold or redeemable by gold?
The CHAIRMAN. YOU do not mean Federal reserve notes are lawful reserves in member banks ?
Governor CRISSINGER. Oh, no.
The CHAIRMAN. In nonmember banks, but not in member banks.
Mr. WINGO. I am speaking about the standpoint of the Federal
reserve system or national bank act. What do you include in the
legal phrase lawful money ?
Governor CRISSINGER. Lawful money really is gold, I would presume, when you get down to the essence of it. Of course, you can
take all the rest of it and get gold for it; that is all.
Mr. WINGO. A mighty good authority on February 15, 1917,
ruled that United States notes, Treasury notes of 1890, silver dollars and silver certificates, fractional silver coins, gold coins and
gold certificates, gold certificates payable to order, and clearinghouse certificates, under section 5192, were lawful money.
Governor CRISSINGER. They are all lawful money.
Mr. WINGO. SO the common acceptation even among the bankers—I am not saying this to reflect upon you—I asked a very noted
expert that in 1913, and he had to get a ruling in order to answer
me—the common acceptation in the banker's mind, even, says that
lawful money is either gold or the equivalent of it. Do you not
find that idea prevalent ?
Governor CRISSINGER. That is pretty prevalent, I guess.
Mr. WINGO. SO whenever the suggestion is made that you have
not got actually enough gold to create the reserve, that overlooks
the fact lawful money is legal reserve?
Governor CRISSINGER. It is just suggested by the department that
lawful money is carried in the weekly statement right along.
You have here "Federal reserve system reasons which actuate
eligible State banks and trust companies in failing to become members of the Federal reserve system."




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

9

There are a great number of reasons why State banks: do not become members; that is, they are given as reasons. Whether they
are reasons or not, I am not going to say. One reason is that
they do not draw interest on their reserves in the Federal reserve
banks; another is that the system does not pay a sufficient dividend;
and the resources of the nonmember banks are not such as would
be eligible to permit them to become members; and they have a
theory that there is too much red tape connected with the bank
examinations of the Federal reserve system, though most of them
are just excuses, probably.
The CHAIRMAN. Are there any applications to join on file?
Governor CRISSINGER. We have had one application since this
new legislation was passed, if I remember correctly, and I do not
think that ever went through.
The CHAIRMAN. Have there been many applications refused for
membership?
Governor CRISSINGER. Not one that I know of, unless it was due
to the fact that their assets were improper or ineligible.
The CHAIRMAN. Comparatively few in number?
Governor CRISSINGER. I do not know of any. There is not any
application for membership to be refused. They have just one excuse after another. I know very many State banks that would
make good members, but they do not come in,, because they say,
"Let George across the street do it." They would let the National banks carry the load.
You ask what administration measures, if any, have been taken
and are being taken to increase such membership.
The Federal reserve banks have what they call bank relations departments, the members of which go out among the banks and solicit
and talk to them, and try to persuade them to come in, and full
information is given to any bank that wants to seek a membership.
But we do not have any banks seeking membership from the outside. There is an effort being made constantly by the Federal reserve banks to secure State banks to come in, but with very little
success.
The CHAIRMAN. That is an organized effort?
Governor CRISSINGER. That is an organized effort operating all
the time.
The CHAIRMAN. With each one of the small banks?
Governor CRISSINGER. Each one of the Federal reserve banks has
a bank relations department whose representatives do nothing but
go around to see banks, both member banks and nonmember banks,
eligible ones, to try to get them to come in and they try to show
them the importance of being members, but it does not prevail.
The CHAIRMAN. This act specifically directs us to inquire as to
what effect the present limited membership has on the operations
of the system. Does the fact that the banks do not come in have
a tendency to impede the service that is supposed to be rendered
through the Federal reserve system?
Governor CRISSINGER, It does not impede the system. It, in a
measure, does impede the service, getting out to the users of credit.
It does, in this way: A nonmmber bank borrows of a correspondent
bank or rediscounts with a correspondent bank. The correspondent




10

INQUIRY OX MEMBEESHIP IX FEDERAL RESERVE SYSTEM

bank gets its rediscount with the Federal reserve bank at 4J per
cent now. The nonmember bank probably pays 6 or maybe 5£;
that is, 1 per cent additional; and then when it gets down to the
borrower he has to pay 2 per cent on top of that. Whereas if
there should be a direct contact of the nonmember bank in the
Federal reserve system they could get it with one commission. So
it does retard the issue oi credit to the man or corporation that
wants it.
The CHAIRMAN. Then, indirectly, the Federal reserve system is
furnishing relief to the nonmember bank in rediscount privileges of
credits extended to them?
Senator GLASS. And at the expense of the borrower ?
Governor CRISSINGER. At the expense of the borrower, absolutely.
Senator GLASS. Why does not the deserving nonmember banker
himself see that he could get this rediscount facility at a less rate
from the Federal reserve bank than from his correspondent bank?
Governor CRISSINGER. They, I think, do see. But, as I said before,
their banks are not in condition to come into the system, a very great
many of them; and a large number of them do not want to come in
on account of various State laws that give them privileges that the
Federal reserve system probably woulct not permit, the privilege of
loans on real estate and things of that kind. But it is at the expense
of the fellow who is down in the country and borrowing the money
of the banks that do not come in; that is the truth about it.
Senator GLASS. Has your observation convinced you that the three
major reasons why eligible nonmember State banks do not become
members of the system are, first, that they prefer not to impound
their reserves with the Federal reserve banks without interest, when
they may obtain nominally 2 per cent interest from their correspondent bank; second, that they prefer not to endure the overhead cost
of the system, and they think they may indirectly obtain ample
facilities acting through their correspondent banks; and, third, that
they do not want to be harassed by the severe scrutiny and examination of the comptroller's office?
Governor CRISSXNGER. Well, they would not be examined by the
comptroller's office, these State banks; they would be examined by
the Federal reserve banks themselves. Those are all given as major
excuses, that is true.
Then we are further handicapped by many of the big banks in the
city going out and telling the little nonmember banks, " You do not
need to become a member, for we can give you better service than
the Federal reserve system."
Senator GLASS. That is what I say, that they think they can really
get the facilities of the Federal reserve system operating through
their correspondent banks who are members?
Governor CRISSINGER. The banks are very much handicapped by
some of the member banks that are in the Federal reserve system
doing that very thing. In other words, they are the obstructions to
the Federal reserve system and the banks are the member banks,
though not all banks do it.
Senator GLASS. They persuade the smaller banks that they give
them these facilities at a less charge and more readily than they
might obtain from the Federal reserve banks ?




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

11

Governor CRISSINGER. The big banks of the commercial centers
are all very favorable to the Federal reserve system, but they want
to use the Federal reserve system in a way that is most beneficial
to them, and that is by building up big deposits from nonmember
banks.
The CHAIRMAN. Then to the extent that they have these deposits
which are secondary reserves they are defeating the real intent and
purpose of mobilization of reserves contemplated under the Federal reserve system?
Governor CRISSINGER. Absolutely. If a country bank has to carry
$10,000 with them, they put up 13 per cent of it in one of these
reserve cities, and it is only $1,300 instead of $10,000 if the bank
was in the Federal reserve system. So the very purpose of mobilization is defeated by the big banks themselves.
The CHAIRMAN. Of course, in addition to that they render many
services to the member banks in the way of checking paper and collection of items of different sorts?
Governor CRISSINGER. That is very true.
The CHAIRMAN. Caring for securities?
Governor CRISSINGER. The Federal reserve banks are doing that.
That is one free service they are rendering—collecting and making
what they call collection of " noncash items," at great expense to
the system. All those things are being done by the Federal reserve
banks.
Mr. WINGO. Jujst what items do you refer to, Governor ?
Governor CRISSINGER. Such as notes and time drafts and various
items you would send through that would not be a check.
Mr. WINGO. IS not that one of the objections the country banker
raises now that the Federal reserve banks are requiring them to collect without any renumeration drafts which come in with bill of
lading attached?
Governor CRISSINGER. NO; our information is that the country
banks are rather in favor of the Federal reserve bank handling these
matters for them, because they do it without expense to them, and
if they went through regular banking channels there would be some
expense.
Mr. WINGO. But I am talking about country banks out where
carload commodities are sent to a small retail village merchant,
and through the Federal reserve bank a draft is drawn on the
merchant with bill of lading attached ?
Governor CRISSINGER. It would not be drawn through, the nonmember bank; it would go through some correspondent bank.
Mr. WINGO. NO ; it goes through the Federal reserve system in the
case I am talking about. In other words, say, a First National Bank
in Kansas City, on a shipment from Mr. Strong, is the bank for the
distributer of Kansas hay. He sends a carload of hay to a man
he is not willing to trust in Missouri or Arkansas or some other
point and then this distributer draws a draft through his bank with
bill of lading attached on that merchant in the country town and
the country bank is expected to make the collection. But the country
banker objects to handling that business and making that collection
without charge. Is not that one of the objections the country banker
makes to the board ?




12

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Governor CRISSINGER. If the draft is sent down from the Federal
reserve bank to a country bank %
Mr. WINGO. It goes through the regular system, just like clearing
a check; that is, it comes through along with cash items.
Governor CRISSINGER. I believe that a member bank or nonmember bank could charge for a collection of that kind.
Mr. WINGO. I am not talking about the merits of the transaction.
I am asking whether that criticism is not made, whether founded on
fact or not.
Governor CRISSINGER. The criticism may be made, but, as a matter
of fact, they do charge and are paid for it. It is only checks you
refer to?
Mr. WINGO. The country bank presents a draft to the merchant ?
Governor CRISSINGER. And he charges for it, or can charge for the
collection.
Mr. WINGO. And turns the bills of lading over to him and remits.
You say now he is permitted to charge exchange on that?
Governor CRISSINGER. Yes; that is a collection.
Mr. WINGO. YOU have investigated that recently ?
Governor CRISSINGER. I think that is the rule.
Mr. WINGO. YOU say the St. Louis and Kansas City banks permit
that to be done if it is a member of the par collection ?
Governor CRISSINGER. If it is a mere collection.
Mr. WINGO. I am not arguing the merits of the matter. Whether
there is any reason for it or not, is it true that some banks do contend
that because they are a member of the par group, they have agreed
to remit at par on checks?
Governor CRISSINGER. That is not a check.
Mr. WINGO. But that is a draft. Is it not charged—I am not asking you if it is true—by some country banks that if they went into
the system or went into that par system that when they got a draft
for $600 for a car load of commodities shipped to a merchant in
their town, they would be required to present the draft, making the
collection and remit in full without exchange.
Governor CRISSINGER. They may be offering that as an excuse,
but that is not true in practice.
Mr. WINGO. Have you heard of that ?
Governor CRISSINGER. Yes; I have heard of that, but that is not
true. Some banks collect these drafts and waive the collection
charge, but they have the right to charge.
Mr. WINGO. Your answer to that is that they are misinformed ?
Governor CRISSINGER. Yes; they are. However, if a Federal
reserve bank makes the collection itself, it makes no charge.
Mr. WINGO. YOU said awhile ago something about the expense.
Is it contended—I am not talking about whether it be right or
wrong—as one of the reasons why these nonmember banks do not
want to come into the system, that there would be such an expensive
amount of detail work added to their institution in handling rediscounts, to use the expression of one, on at least seven-eighths of
their paper, that it makes it burdensome, and they could not stand
the expense necessary to furnish all the detailed information about
these small loans. One banker referred to the loans of $300 down
as constituting seven-eighths of his portfolio.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

13

Governor CRISSINGER. They claim it is red tape.
Mr. WINGO. So, as a matter of fact, they claim they would have
an additional expense that they are not required to meet when they
do business through their correspondent banks; that is the contention of some country banks, is it not?
Governor CRISSINGER. Yes, sir.
Mr. WINGO. It is also true that some of the correspondent bankers
who are members of the Federal reserve system encourage these nonmember banks in staying out of the system and telling them it is
too much expense for them to comply with all requirements, and
saying, " We know you; we will take care of you."
Governor CRISSINGER. There is no doubt but what that is being
done.
Mr. WINGO. That is not just simply an isolated instance?
Governor CRISSINGER. Oh, no.
Mr. WINGO. That is too general to be appreciated by you, is it
not?
Governor CRISSINGER. Many of the larger banks of the cities are
doing that in order to build up their deposits by reserve balances of
these little banks.
The CHAIRMAN. IS that confined to the national banks ?
Governor CRISSINGER. That applies to big banks, both State and
National.
The CHAIRMAN. State banks and trust companies that are members of the Federal reserve system equally?
Governor CRISSINGER. Oh, sure.
Mr. WINGO. I am not favoring that practice. However, some of
the worst enemies of getting in nonmember banks that really ought
to be in are member banks already in, acting as correspondents for
them, keeping their balances, clearing their items, and, of course,
doing it at a profit, or they would not do it.
Governor CRISSINGER. I think that is one of the things that has
done more to keep out State banks than anything else.
The CHAIRMAN. My understanding is that it is the practice now
of the Federal reserve system that that little bank in Missouri that
has a hay draft for collection has a perfect right to charge exchange
for the collection of that item; that if such item is charged for, the
Federal reserve bank charges it back to the party from whom
received.
Governor CRISSINGER. Yes, sir.
The CHAIRMAN. It is absorbed from the man who drew the draft ?
Governor CRISSINGER. Absolutely; and the little country bank is
really in favor of having that done, because it gets it done through
the Federal reserve bank for nothing.
The CHAIRMAN. There is no objection made by any Federal reserve
bank about the charge that Missouri bank might make on the
collection ?
Governor CRISSINGER. Not to my knowledge.
The CHAIRMAN. They simply charge it back to the parties from
whom they received the draft?
Governor CRISSINGER. There are some objections by clearing houses
and some of the larger banks in several of the cities to that practice




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

of the Federal reserve bank. They think the Federal reserve bank
ought to get out of that business and turn it over to the banks of the
cities. In other words, they claim it is getting the Federal reserve
bank into the banking business of collecting drafts and noncash items.
The CHAIRMAN. That is particularly important, for instance, in
the automobile industry. They have a large number of drafts to
collect in all parts of the country, and heretofore those drafts have
largely been sent for collection direct to the local banks, whereas now
they are collecting them through the Federal reserve banks and the
little country bank, in some instances, feels that its functions have
been encroached upon.
Governor CRISSINGER. Yes. I might say that the sentiment is
about equally divided, so far as I have seen it come to the office.
About half of the banks want the noncash item business done by the
Federal reserve banks discontinued, and the other half want it continued. So it is about equally divided, just about as near as it could
be. Some of the clearing houses are in favor of it and some are
against it.
The CHAIRMAN. NOW, you may proceed.
Governor CRISSINGER. I think that there are some recommendations
the board might make for slight changes to be made in the law in
certain respects.
The CHAIRMAN. Would you care to state those now?
Governor CRISSINGER. Some of the bills have been introduced in
Congress. We have them here indicating legislation needed. I will
take them up a little later.
The CHAIRMAN. All right. Suit your own convenience.
Governor CRISSINGER. The last question you ask: " If you have any
suggestions of change in method of administration to bring about in
the agricultural districts a larger membership of State banks and
trust companies in the Federal reserve system." The only thing that
I could suggest would be the building up of a department in the
Federal Reserve Board here in the way of a bank relations organization that would go out and try to show these bankers that they are
wrong in a lot of the excuses they give for nonmembership.
Mr. STEAGALL. I think I understood you to say jusi: now, Governor,
that you already had similar agencies?
Governor CRISSINGER. The banks themselves have, but we have no
department here in Washington of that kind.
Senator GLASS. What you suggest is a department established here
by the board that would relieve the banks of the duties they fail to
perform now?
Governor CRISSINGER. I say that is about the only thing I could
suggest.
The CHAIRMAN. That would be a centralization here?
Governor CRISSINGER. That would be a centralization here; that
would be a department of the board.
The CHAIRMAN. In that connection there is some question whether
it is desirable to have all of these additional State banks and trust
companies come in. There are some of them, however, which it
would be desirable to have in.
Governor CRISSINGER. I want to be frank about it. So far as I
am myself concerned, there are a great many banks out of the system that ought to stay out.




INQUIRY OX MEMBERSHIP IX FEDERAL RESERVE SYSTEM

15

Senator GLASS. YOU think they would weaken the system rather
than strengthen it?
Governor CRISSINGER. I think they would be harmful rather than
helpful.
Mr. WINGO. Have you made any estimate of the number of banks
that you think, from your viewpoint of the soundness of the system
and the benefit of the system from the public viewpoint that it would
be wise to bring into the system?
Governor CRISSINGER. There were in round numbers about 9,000
eligible banks prior to this legislation. State banks and trust companies that are not in. Of course, anything I would say about it
would be merely a guess. I would say not over half of them could
pass the necessary examination to get in.
Mr. WINGO. Have you ever undertaken to make a preliminary
survey of that proposition and estimate for the satisfaction of yourself or the board what per cent of the nonmember banks are really,
from your viewpoint, eligible to come in?
Governor CRISSINGER. NO. It has never been determined, since I
have been here.
Mr. WINGO. Have you heard any complaints from these nonmember banks that they are afraid to come into the system, for the lack
of better words, that they would be committing themselves to unfriendly espionage or something that might be embarrassing?
Governor CRISSINGER. I have heard some talk of that kind. But
instead of that being true, the banks that are in. I think, are greatly
pleased with the supervision they get.
I want to give you an illustration, so you will understand what
is meant by that. We had some controversy about paying for
the examinations that are made by the Federal reserve banks. Heretofore they have not been charged for. In other words, it was a
service that the banks were rendering to the State banks and trust
companies without pay. We recently issued an order requiring
them to pay for these examinations where they were ordered by
the banks or the board. Well, it happens that over in one of the
districts nearly every State bank that was being examined for nothing has asked that this examination be continued; and they are willing to pay for it, showing that the kind of help that they get from
the examining force or the supervisory force of the Federal reserve
banks is such as to be of value to them—more so than the supervision and examinations they get from the State. The fact about
the matter is that there are States in the Union that do not have
scarcely any examinations of State banks.
Mr. WINGO. Have you heard the criticism of these nonmember
banks that if they came in they would be in the same position as
member banks, and therefore consider it unwise to make any complaints with reference to their treatment for the fear that they would
be the subject of reprisals with reference to accommodations and
other facilities?
Governor CRISSINGER. I have never heard anything of that kind;
in fact, so long as I have been on the board there has never anything
of that kind taken place.




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Mr. WINGO. Do you say that no complaint of that kind has ever
been made to you by any bank?
Governor CRISSINGER. Nothing in reference to reprisals.
Mr. WINGO. There has not been any complaint made that they
fear that?
Governor CRISSINGER. I have never heard of any such complaints.
Mr. WINGO. Have there been any complaints made of favoritism
in handling of loans secured by Government bonds?
Governor CRISSINGER. Favoritism shown, you say ?
Mr. WINGO. Yes.
Governor CRISSINGER. None to my
Mr. WINGO. Has it been directed

knowledge.
to your attention that at least
one Federal reserve bank would permit one banker to carry a larger
amount than anyone else on his Liberty bonds and at the same time
refuse equal accommodations to other bankers holding Liberty
bonds?
Governor CRISSINGER. There has never been any complaint that
I know of come to me as comptroller or governor, nor have I seen
it before the Federal Reserve Board.
Mr. WINGO. Have you ever heard of that criticism?
Governor CRISSINGER. 'NO, sir; I never heard of it.
Mr. WINGO. Have you heard of the criticism that one bank permitted one fellow, who actually boasted about it, to carry his bonds,
that they not only carried them, but that he made profit of some
$30,000. Has that case ever been brought to your attention; have
you ever heard anything about it ?
Governor CRISSINGER. It has not been brought to the attention of
the board that I know of; it has not been discussed in the board.
Mr. WINGO. Have you ever heard any complaint from them when
they did make complaints either of espionage or of confidential information submitted by them given to Members of Congress?
Governor CRISSINGER. NO such complaint has ever been filed with
us.
Mr. WINGO. Have you ever heard of that criticism ?
Governor CRISSINGER. NO, sir; I have never heard of the criticism.
Mr. WINGO. Since you have been a member of the board has any
confidential information been furnished to a Member of Congress
with reference to any complaining bank ?
Governor CRISSINGER. Not to my knowledge, there has not been.
Mr. WINGO. YOU say you have not heard of it ?
Governor CRISSINGER. I have not heard of information being
furnished.
Mr. WINGO. YOU are not keeping up with criticism made at public
meetings of bankers' associations, I presume?
Governor CRISSINGER. I has seen some of that.
Mr. WINGO. Have you read any of the answers of bankers to our
questionnaires which the committee sent out?
Governor CRISSINGER. I have not seen them.
Mr. WINGO. What reason have you to suggest, other than the general lassitude that is always to be expected when questionnaires are
sent out that such a small percentage of answers have been received ?
What would be your opinion, judging from your experience in
association with bankers?




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

17

Governor CRISSINGER. I would think if they had not answered it
they were probably satisfied to let well enough alone.
Mr. WINGO. You would not think any of them were a little bit
fearful of making answers?
Governor CRISSINGER. There is not any occasion for anybody to be
fearful.
Mr. WINGO. DO you think there is a spirit, whether it be well
founded or not, of fearfulness?
Governor CRISSINGER. There might be that feeling; that might
be so.
Mr. WINGO. Has the board investigated that feeling and tried to
remove it?
Governor CRISSINGER. There is nothing to fear from being frank.
We try to remove every feeling that there is unfairness on the part
of the board or the banks, and if we find that there has ever been an
intimation of a bank being unfair, we call their attention to it and
look into it, but I have not yet found any unfairness.
Mr. WINGO. YOU have never seen any charges of unfairness ?
Governor CRISSINGER. AS Comptroller of the Currency
Mr. WINGO (interposing). You say you have not had these matters
called to your attention; you have not heard of them?
Governor CRISSINGER. We can not investigate them unless somebody brings them to us.
Mr. WINGO. If you heard a criticism along the line I have mentioned, you would feel like it was a wise thing, from the standpoint
of the board, to see that any misunderstandings were cleaned up ?
Governor CRISSINGER. We would immediately write them.
Mr. WINGO. Have you discussed this question of coming into the
system of many country banks and nonmember banks ?
Governor CRISSINGER. ISTO ; I can not say that I have personally
discussed it myself.
Mr. WINGO. HOW many eligible State banks are there in the State
of Ohio, other than national banks, which are not members of the
Federal reserve system; do you recall?
Governor CRISSINGER. I think there are 60 per cent, if I remember.
We have a chart here that shows that. I think 60 per cent of the
State banks in Ohio are outside.
Mr. WINGO. Have you discussed with any of those country State
bankers why they do not come into the system, any larger number
of them ?
Governor CRISSINGER. NO ; I have not.
Mr. WINGO. Have you discussed with any of them ?
Governor CRISSINGER. In my own locality, I have discussed it with
them.
Mr. WINGO. Just what reasons do they give ?
Governor CRISSINGER. Most of them feel they can make more
money out of the system than in it, and have more liberality.
Mr. WINGO. They feel that they can get interest on reserve balances and they get* accommodations in the way of rediscounts and
they get immediate credits on items sent in, and all those different
service matters?
Governor CRISSINGER. I have never specifically discussed those
things with them: but I know that they have more liberal super-




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INQUIRY ON MEMBERSHIP IX FEDERAL RESERVE SYSTEM

vision; that is, they are not kept checked up like the national bank
is. That has a lot to do with it.
The CHAIRMAN. Right in that connection I would like to read one
of the replies that came into the questionnaries sent out.
Senator GLASS. Let me ask one question before you read that.
Would you recommend a modification of the law so as to make your
examinations more liberal and less exacting in order to get these
banks to come in?
Governor CRISSINGER. If I had my way with the examinations I
would make them more rigid. That is the salvation of the banking
system of this country—better examinations.
Mr. STEAGALL. I understood you to say a moment ago that the
reason assigned by some of the banks in Ohio eligible for membership, who have not joined, was because of their dread of the additional supervision.
Governor CRISSINGER. That is offered as an excuse.
Mr. STEAGALL. But, if I understood you a few moments ago, you
said there are quite a number who had joined the system who were
delighted to have the double examination and pleased also with the
fact that a charge is now levied.
Governor CRISSINGER. Let me tell you why: They get something
for their examination; they get a real searching into their banks.
Mr. STEAGALL. I was just a little bit surprised at your statement
that banks were inclined to welcome dual examination and dual
expense.
Governor CRISSINGER. I do not think it is violating any secret,
and I will tell you and you can call the bank, and that is in your
own district, Mr. Chairman.
Mr. WINGO. Your opinion is that there is not any general complaint on that score; that most bankers, while they do not like the
expense and trouble of examination, yet most bankers are glad to
have strict supervision, are they not ?
Governor CRISSINGER. Absolutely. I think all good bankers welcome it.
Mr. WINGO. The big majority of reputable banks do not object
to very strict supervision, so as to maintain the integrity of the
system ?
Governor CRISSINGER. NO, sir.
The CHAIRMAN. The replies received to questionnaires indicate
that these banks are not objecting to strict supervision, but to dual
supervision and the hardship of furnishing data required to be prepared by the banks.
Senator GLASS. YOU are authorized to accept examinations of
State authorities, where you have reason to believe they are adequate ?
Governor CRISSINGER. Where they are good; yes.
The CHAIRMAN. It might result, however, in a later examination
by the Federal reserve examiners.
Governor CRISSINGER. Absolutely, because in some places these
State bank examinations are not very useful.
The CHAIRMAN. YOU do not have examinations like the Comptroller of the Currency, but accept statements and reports ?
Governor CRISSINGER. In many cases the good bankers themselves
say that their State examinations are worthless, and they want a
real examination.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

19

The CHAIRMAN. The letter I referred to says:
We have your circular letter dated April 30, in which you ask banks eligible
for membership in the Federal reserve system to give reasons why they have
not considered it advisable to become members.
We have the required capital and are otherwise eligible to join the system.
In fact, we did belong to it for two years. Largely through patriotic motives,
and for the good of the cause we joined the system in July, 1918. We remained in it until July, 1920, feeling that the emergency which prompted us
to join was over with. You may judge for yourself from the fact that we
left the system after being in it that it was not altogether satisfactory. In the
first place we did not feel that we were in the proper district. Wisconsin, as
you know is cut in two, part of it in the Chicago district, the remainder in
the Minneapolis district. Our section of the State is in the Minneapolis district. Our railroad connections and the trend of our business are all in the
direction of Chicago and have very little business with Minneapolis. Our business is created, and such commercial paper as we buy practically all originates
in the Chicago district. We are acquainted there and feel as if we belong
there, and are strangers in Minneapolis.
The nature of our business is such that we seldom, if ever, need to rediscount or borrow money. At the time we belonged, it was necessary for us to
carry an average balance with the Federal Reserve Bank of Minneapolis of
about $75,000 on which, of course, we received no interest. That is a fixed
amount which can not be drawn upon, so it was necessary to maintain with
our Chicago and Milwaukee correspondents about the same reserve that we
had been carrying before to give us a working balance. In short, it meant
the tieing up of about $75,000 on which we received no earnings without any
compensating benefit in our case. We figured that it cost us at least $3,000 to
$4,000 a year to belong to the reserve system and on our capital of $100,000 that
meant 3 per cent to 4 per cent less in earnings.
We see no good reason why the usual 2 per cent, or thereabouts, on daily
balances should not be paid by the Federal reserve bank to its member banks.
The earnings have been enormous and in the natural course of things a large
part of those earnings will be frittered away in excessive salaries, palatial
bank buildings, and other unnecessary expenses, and the banks who furnish
the working capital get nothing. We believe that is one of the main reasons
why State banks hesitate to join the system. It costs them too much money.
Another reason which has created a prejudice against the Federal reserve
banks is the practically compulsory handling of all checks at par. It seems
to us that the Federal reserve bank could function very nicely without acting
as a general clearing house. Methods used to force small country banks into
line in the parring of checks have been entirely uncalled for and it is some of
those things which have created the feeling against the reserve system which
now exists. The same result might have been accomplished in some other
way and the good will of the banks retained.
Another objection is the dual system of examination which may be enforced.
As a general thing it is rather difficult to serve two masters. Many times the
Federal Government regulations and the State banking laws conflict and make
it awkward for a State bank belonging to the reserve system. We concluded
at the time we withdrew from the system that should we ever again consider it desirable to become members that we would go in as a national bank.
During the time of our membership we found that matters of business were
handled arbitrarily according to the rule laid down and that our relations
with the Federal reserve bank were not nearly as satisfactory as with the
ordinary city bank correspondent. There are times when certain matters
should be left to the discretion and judgment of the officers of the Federal
reserve bank, even though it does not comply strictly with a rule laid down.
It is not always policy to be overtechnical. The Federal reserve bank could give
us nothing which we could not get from our city correspondents and we always
much preferred to deal with a bank other than the Federal reserve bank, as
our wants and needs seemed to be better understood and looked after. In
short, we felt relieved when we finally surrendered our stock and withdrew
from the system.
One question he raises there is an interesting one, and it has not
been brought up here; that is, if they again came into membership
they would first become a national bank. In connection with that




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

suggestion, has it occurred to you that the requirement of all banks
to join the national bank system, if they maintain membership in the
Federal reserve system, ought to be considered?
Governor CRISSINGER. For myself, I thought that was the weakest
thing Congress did when they permitted the State banks to come in
the system and bring with them all the rights and privileges guaranteed by the State law. It makes the Federal reserve system execute
48 different State banking laws.
Senator GLASS. Suppose you would deprive them of that right,
how many do you think would remain in the system ?
Governor CRISSINGER. I think there would be quite a number of the
big banks which would come right back into the national system.
As the law now is drawn, it is an encouragement for the big national
banks to get out of the system and go into the State system, because
of the liberal State laws and because they can do a great many things
that they can not do as national banks.
Senator GLASS. But the intent of the law was to prevail on State
banks to come into the system ?
Governor CRISSINGER. Yes, sir; that was the intent of the law—
to prevail upon State banks to come into the system, but it was by
giving them a great many advantages over the national banking
system; and it is wrong fundamentally, and, in my opinion, it ought
to be changed absolutely. If it is not changed, the national banking
system upon which you have superimposed the Federal reserve system
will, so far as the big cities are concerned, be a thing of the past in a
few years. The only reason the national banking system has been
able to hold together as well as it has in the last three or four years
is because several States have had the State guaranty law. Take
Oklahoma, which has driven into the national banking system, I
think, something like 100 banks within the last 18 months; Texas
has driven into the national banking system quite a few banks. Take
the State of Massachusetts, where we have been getting several big
State banks, because of the bad supervision that permitted a half
dozen of the big trust companies to fail up there. So that it made the
national system very popular in Massachusetts, and we have grown
there. But in New York we are now, I am told, about to lose one of
the big national banks because interlocking directors are denied it.
On one side of the street we have a system of big State banks and
trust companies that have interlocking directorates in the Federal
reserve system, and on the other side of the street a national bank
that can not have a director in two banks.
Senator GLASS. Yes. But there a question arises as to whether
you had not better lose that national bank than permit the old
vicious system of interlocking directorates and thus use the banks
in big industrial enterprises.
Governor CRISSINGER. I am in favor of the law against interlocking directorates but it ought to be made applicable to State
banks that come into the system.
The CHAIRMAN. In many States they are now interlocking?
Governor CRISSINGER. Yes; absolutely.
Mr. STRONG. AS a matter of fact the State bank gets more privileges than the national banks?




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

21

Governor CRISSINGER. The State bank gets a great many more
advantages.
Mr. STEAGALL. HOW many national banks are going out? You
say they are being driven in in Texas, Oklahoma, and Massachusetts, and you name one in New York that is going out.
Governor CRISSINGER. We have lost four big national banks in
New York.
Mr. STEAGALL. That is four you have lost as against a hundred
that have come in in one State, so that it does not seem to bear out
your fear that the national banks will be driven out of existence.
Governor CRISSINGER. Whenever the States do away with the foolish idea of the guaranty of bank deposits, as they had down in
Oklahoma, it will not be that way; that is all.
Mr. STEAGALL. YOU expressed fear just now that the national
banks will ultimately go out of the Federal reserve system; but
you followed that up by saying that in one State a hundred came in,
that in Oklahoma they were coming in mighty fast that in Massachusetts they were coming in, and only four were going out. What
have you lost?
Governor CRISSINGER. We have lost in the State of California, I
suppose, 40 big national banks in the last 18 months. The only
reason we got these banks from these six or seven States is because
of the guaranty system. In New York we lost one bank the resources of which would amount to probably as much as all the
banks in Oklahoma put together.
Mr. STEAGALL. IS not this true, Governor, that the States are
inclined more and more to tighten up their restrictions and examinations and supervisions, and are they not really inclined to pattern after the Federal system; is there not improvement going on
all the time ?
Governor CRISSINGER. There are improvements in a few States.
Let me give you an illustration in one State. We have in that State
what is considered a pretty good banking department, but when
they come to examine one of the big trust companies with branches,
I asked them what they do, and they say they " do the best they
can.7.' There is one trust company in that State with over 50
branches, and I asked them what they did when they made an examination of that big trust company, and they said they did the best
they could. That is the way such examinations get by until something happens, just like it did over in Boston, and then they begin
to wake up to the necessity and the advisability of having good
banking examination and good supervision.
Senator GLASS. Governor, as pertinent to this letter read by the
chairman, may I ask you how many State banks are members of
the par collection system?
Governor CRISSINGER. HOW many State banks? Approximately
17,000 State banks are remitting at par; there are 181 affiliated
banks, I think.
Senator GLASS. HOW many State banks are members of the Federal reserve system?
Governor CRISSINGER. One thousand six hundred and fifty, I
think, or about that.




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INQUIRY ON MEMBERSHIP IX FEDERAL RESERVE SYSTEM

Senator GLASS. Then how can it possibly be, as this gentleman
suggests in this letter, that par collection keeps State banks out of
the system when there are 17,000 State-bank members of the par
collection system and only 1,600 members of tlie Federal reserve
system ?
Governor CRISSINGER. I do not think his conclusions are correct.
Mr. WINGO. You have heard, have you not, Governor, that a great
many of these State nonmember banks went into par collection systems because they felt like they were compelled to?
Governor CRISSINGER. Yes.
Mr. WINGO. That is a fact, is it not?
Governor CRISSINGER. That is a fact. But let me give you an
illustration of just what happened lately: A bank down in the St.
Louis district wrote in to the Federal reserve bank and did not want
to be put on the par list because they thought they were being
forced on the par list. When the St. Louis bank wrote back to the
bank and said, " You are not being forced. You can be on the par
list or the nonpar list," he said, " Then, if I am not forced I want
to be on the par list."
Senator GLASS. Governor, right there: Suppose a State banker
feels that he has been forced—morally forced, not legally forced—
to become a member of the par collection system. The fact that he
is a member of the par collection system by moral force does not
keep him out of the Federal reserve system, does it?
Governor CRISSINGER. Not at all.
Mr. WINGO. Governor, you say that this Federal reserve bank
was told they would not have to belong to it, and then they staid in ?
Governor CRISSINGER. That is what they wrote back, that " if
there is no force about it we want to be in."
Mr. WINGO. I want to relate a short incident and ask you if the
same situation existed there: There was a planter in one of the cotton States who was OR trial before the Federal judge for preventing
a negro from voting, and the negro's memory got a little bit weak,
and he did not testify on the direct examination to what he testified
in the grand-jury room. Finally the judge, who happened to belong
to the Hebrew faith, had the old darkey to tell just exactly what
he did that whole day and led him up to the mouth of the lane that
led down to the schoolhouse where the polling place was; and the
old darkey admitted that the defendant was sitting on the stump
with a Winchester across his lap, and he accosted the old darkey
and asked him where he was going. He replied, " Just strolling
around." He said, "Don't you want to vote?" "No, sir; I just
want to stroll around a little bit." "Yes, you old rascal; you do
want to vote. Go on down there and vote." He said, " Judge, I
did not vote; I went on back home." Do you not think possibly
there is about the same feeling?
Governor CRISSINGER. YOU understand the banks have the option
to par.
Mr. WINGO. Whether they do right or wrong—I am not discussing that; I am trying to avoid the merits of controversial questions—but it is a fact that a great many of these nonmember State
banks went into the par collection because they were coerced, and
that the methods that were being adopted just made it suicidal for




INQUIRY OX MEMBERSHIP IX FEDERAL RESERVE SYSTEM

23

them not to go in. Is not that the contention of a great many of
them?
Governor CRISSIXGER. I think that is their contention.
Mr. WIXGO. Of course, your contention is that they are in error
about that. But that is one of the criticisms of the system?
Governor CRISSIXGER. It has been, I think, and is one of the criticims. They feel that when the Federal reserve bank throws their
check out that that is a reflection on their banks.
Mr. WIXGO. In other words, they feel they have to do some things
the law does not compel them to do, and they are left with no alternative ?
Governor CRISSIXGER. They can not compete with other member
banks across the road that has to do it or does do it, and in order
that their customers who do business with them do not go over to the
other bank that does business that way they are, of course, obliged
to come in and do it.
Mr. WIXGO. And do they not also have to present their checks in
person in large volume ?
Governor CRISSIXGER. They did do that, but do not do it now.
Mr. WIXGO. That has been removed?
Governor CRISSIXGER. That has been removed.
Mr WIXGO. There is another criticism I want to draw to your
attention, and it affects agricultural banks, and that is primarily in
the law that our chief investigation shall be in these agricultural
States; there has been contention made by banks either in the Wheat
Belt or Cotton Belt that they were compelled to make their farmer
borrowers pa}^ up on wheat or cotton in the warehouse, and then
when the farmer through that forced distress sale sold his cotton to
the cotton factor or his wheat to the elevator man the cotton factor or
elevator man went to his bank and got credit, and his paper was
carried in the Federal reserve system to carry the same cotton or
wheat. Has your attention been directed to that ?
Governor CRISSIXGER. ISTo; my attention has not been directed to
that.
Mr. WIXGO. Have you investigated any alleged cases of that kind?
Governor CRISSIXGER. I have not investigated any alleged cases
of that kind, but I presume that there is more behind a contention
of that kind than the mere fact of making one fellow pay up and
letting another borrow the money.
Mr. WIXGO. Has your attention been called to the fact that th©
Federal reserve banks specifically still say that if this is the same
cotton the note will not be renewed? They find out it is the same
cotton, and then the cotton factor grabs up that cotton, goes to his
banker and gives another note and keeps it in the same warehouse and
gets another receipt and uses that for the speculator to carry that
loan.
Governor CRISSIXGER. I do not know of that.
Mr. WIXGO. Did you know that that was pretty generally charged
by many small bankers in the Cotton Belt?
Governor CRISSIXGER. It has never been brought to the attention
of the Federad Reserve Board, if that is true. I have been here
nearly three years, and I went through pretty nearly the worst of it.




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INQUIRY ON MEMBERSHIP 1I\ FEDERAL RESERVE SYSTEM

Mr. WINGO. Have you ever read of it in the papers?
Governor CRISSINGER. I have read of a lot of stuff in the papers,
but it really does not come to the department.
Mr. WINGO. Have you ever been present here in this committee
room when members of this committee would call attention to the
effect of that state of things ?
Governor CRISSINGER. This . is possible, but it has never been
brought before the board or the comptroller's office while I was
comptroller.
Mr. WINGO. I S there any distinction in your mind—please state
this, so that the country bankers who read the hearing may know
your opinion—between the liquidity of the asset after the commodity gets into the hands of the cotton factor than in the hands
of the planter?
Governor CRISSINGER. I would not think there was any difference
in liquidity.
Mr. WINGO. Any Federal reserve bank doing that has not been
doing it on account of any instructions by the Federal Reserve
Board?
Governor CRISSINGER. I have never seen any such, instructions as
that, and I do not think the Federal Reserve Board ever made any
such instructions. It has not while I have been here, and I have
attended pretty nearly every meeting.
Mr. WINGO. YOU are not accountable, then, for the mistakes Governor Harding made ?
Governor CRISSINGER. I am not responsible for anybody's mistakes. I make enough of my own.
Just at this point, here is a check of the Wabash Valley Mercantile Cooperation, " Pay to the order of R. Tuttle & Co. $128.75 for
account to date." It is signed by the treasurer of this company,
and across that check is stamped, " This check is void if indorsed by
the Federal reserve bank." It seems to me that raises a very pertinent question for Members of Congress to consider.
The CHAIRMAN. YOU may have referred to that before, but it is
not clear to me. Is that an attempt on the part of a State bank and
trust company to break down the par collection system?
Governor CRISSINGER. Oh, yes. This is a photostat copy. It is
my notion that banking is a national function, and I do not believe
the State banks ought to be permitted to do such things.
Mr. WINGO. AS a general proposition you think citizens of the
country should look into the causes of such banks and then rush to
Congress immediately for relief?
Governor CRISSINGER. NO, sir. I am just offering this as showing
just how it is being done.
Senator GLASS. This is an attempt to break down the par collection
system ?
Governor CRISSINGER. That is it, of course.
Mr. WINGO. YOU think, then, a man ought not to be permitted to
draw that kind of a check ?
Governor CRISSINGER. I think a man can draw that kind of a check
if he wants to, but I say that banking is a national function and one
of the things Congress ought to control.




INQUIRY OX MEMBERSHIP IN FEDERAL RESERVE SYSTEM

25

Mr. WINGO. Banking is a national function ?
Governor CRISSINGER. Yes, sir; and not a State function at all.
That is my personal view. Maybe some of the board would not agree
with me.
Checks are much the same as a secondary currency in this country.
Mr. WINGO. And you believe that because checks float as currency
that the Federal Government through national laws ought to control it?
Governor CRISSINGER. Yes, sir.
Mr. WINGO. That is an old quarrel, is it not ?
Governor CRISSINGER. Yes, sir; that is an old quarrel, and I do
not want to get into it now.
(Thereupon, at 12.40 o'clock a. m., the joint committee took a
recess until 2 o'clock this afternoon.)
AFTER RECESS

The joint committee reconvened at the expiration of the recess.
STATEMENT OF HON. D. R. CRISSINGER—Resumed
Governor CRISSINGER. Before passing to another subject I want to
further answer the question that the Congressman asked about the
cotton factor and the farmer who had money borrowed on cotton.
In a great many cases the local banker is in need of or has no money
to loan, and he lays it to the Federal reserve bank or the board. He
passes the buck. In order to show that his bank is not in trouble or
to relieve that impression he says that the Federal Reserve Board
is responsible, when very frequently it is his bank that is in need of
funds and is doing the pressing for payment. We have had numerous
cases of that kind, where the local banker puts whatever responsibility there is for any failure of credit, or the rate of interest or
something of that kind, back on the Federal reserve bank. We just
recently had a case in Iowa which Mr. Cunningham brought up to
the board. The banker out there was about to loan a farmer some
money, probably to buy cattle. The banker said he could not loan
the money himself out of the bank, but that he could get it out of
the Federal reserve bank if the farmer would sign a note to the
Federal reserve bank at 8 per cent, and pay the bank 2 per cent commission. That transaction was all put on the Federal Reserve Bank
at Chicago, whereas it was the local banker. The Federal reserve
bank rate on all classes of paper is now 4^2 per cent.
And I am saying this to you, because I have heretofore stated that
the enemies of the Federal reserve system are largely, not intentionally so, within the banking fraternity itself, because a great many of
the banks have repeatedly passed the " buck " for all the ills of the
community for which they themselves were responsible to the Federal Eeserve Board or the Federal reserve bank. I just want to say
that to you, because it is so prevalent throughout the West, the
Southwest, and in the South.
There is another thing I want to explain further, and that is
your inquiry as to whether I or the board had made any investigation as to the nonmember banks that would be eligible. The only




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INQUIRY ON MEMBERSHIP IX FEDERAL RESERVE SYSTEM

way that could be done would be by examination to ascertain
whether they could pass the requirements, and we have no power to
make such an examination. We could not in any other way determine the eligibility of these banks. They may be eligible on the basis
of capital, but their resources are not of the Federal reserve bank
standard.
Mr. WINGO. What is your judgment, Governor, about these small
banks coming in—those that were declared eligible under the agricultural credits act? Do you think that was a wise proposition or
not?
Governor CRISSINGER. I think that they are not going to come in r
whether it is wise or not. If they were in and had eligible assets,,
they would 1)s serviceable to the community up to the extent of their
eligible psiper.
The CHAIRMAN. AS I understand you, Governor, none of those
banks has made application for membership in the system ?
Governor CRISSINGER. Not one.
Mr. WINGO. Has there been any rush on the part of these banks
to get in?
Governor CRISSINGER. Not a single one of them has made application. The door is open, and they are welcome, but none have come.
Mr. WINGO. SO that those who decided it might be better to
treat that as an abstract question, to permit them to come in, were
not fax wrong?
Governor CRISSINGER. They were not far off at all. We have, as
I believe, had but one inquiry. I think we had an inquiry from some
bank in Texas, but outside of that there has not been a ripple on the
surface.
Now, take up a further question of branch banks and how it affects
the Federal reserve system.
Senator GLASS. I was a few minutes late in coming in. I inferred
from what I heard that you were referring a moment ago to the
last act of Congress reducing the minimum requirement of capital
to $15,000; and you say that not a single bank has joined under
that?
Governor CRISSINGER. Not a single bank has been admitted or
attempted to be admitted. One bank made an inquiry about it.
Although the board made a regulation giving them five years in
which to make up the balance of their capital, not a bank has come in.
Senator GLASS. I am glad to know I was a prophet. I said it
was foolish and never would be availed of.
Governor CRISSINGER. Under the amendment to the Federal reserve act, which permitted State banks to come in and retain all
their rights and privileges under the State statute, we have encountered a great deal of difficulty, not only in the comptroller's
office, but we are encountering some difficulty in the Federal Keserve Board and banks. It is particularly acute in California,
and we have some places in the South where it is inclined to develop;
and also in Ohio, Michigan, New York, and various other places.
It is not confined to any particular spot. There are 23 States in
the Union that have permitted or authorized State banks to maintain branches, offices, or agencies.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

27

I have with me charts that I want to show the committee, because I think they will help the committee to visualize what has
taken place in some localities. These are records I compiled while
I was comptroller, and they are very illuminating. I am not going to introduce them in the record, because it would be expensive,
and probably not warranted. Here is Buffalo [indicating]. The
reds are the State banks with the branches, the triangles are the
branches; and four yellow stars, with one branch, are national banks.
It just gives you an idea of how the privilege which the Federal
reserve bank can not control very well at least, works out. We have
not succeeded very well at it, and this shows how it is affecting
the national banking system, upon which you have founded the
Federal reserve system.
Senator GLASS. YOU said a while ago that you believed in the
national banking system.
Governor CRISSINGER. Yes, sir; I do.
Senator GLASS. YOU went so far as to say that it was your individual belief that it ought to be one great system.
Governor CRISSINGER. N O ; not that; a uniform system of banking.
Senator GLASS. DO you think a national system should be discriminated against in this way?
Governor CRISSINGER. I do not.
Senator GLASS. DO you not think that within a State where large
State banks are permitted to have branches, national banks should
be put on the same competitive footing?
Governor CRISSINGER. Absolutely; and I am in favor of the McFadden bill for that reason. It may need some modifications, but,
generally speaking, I am in favor of it.
Here is the city of Detroit [exhibiting chart to the committee],
3 national banks, with 1 branch; and 14 State banks with 189
branches, in a city like Detroit.
Mr. WINGO. Do you think, Governor, that branch banking is
sound?
Governor CRISSINGER. I am opposed to State-wide branch banking, and I have voted against it on the board. I think it perfectly
sound in municipalities; indeed, I think it is sounder than small
individual banks in municipalities.
Mr. WINGO. But as a general proposition the distinctive feature of
the American banking system and that which has enabled it to
develop credit agencies to the extent it has and contribute, as every
student knows, to the wonderful industrial development in this country, has been the independent banking system, has it not ?
Governor CRISSINGER. I think that is true.
Mr. WINGO. The logical effect of a bank branching system is to
destroy the small independent banks and to have fewer of the banks,
is it not?
Governor CRISSINGER. I think that has been the result in California ; that is my judgment about it.
Mr. WINGO. IS it not only the experience in other countries, but is
not that the logical theory?
Governor CRISSINGER. I think that is true, but when you get into
a municipality it is different, and I want to tell you why I think it is
different.




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Senator GLASS. Before you proceed let me get this logic of the
situation: Is the logic of the situation of advantage or disadvantage
to the man who has to borrow money?
Governor CRISSINGER. Well, there is a difference of opinion about
that so far as I have seen it developed here in this country.
Senator GLASS. Why does a branch banking system drive out an
independent bank?
Governor CRISSINGER. There are various reasons why that is so.
Senator GLASS. What is the primary, the essential, reason?
Governor CRISSINGER. They claim to offer cheaper rates of interest,
but I think we have demonstrated that that is not always true.
Senator GLASS. IS it usually true?
Governor CRISSINGER. I do not think so.
Senator GLASS. Then, how does it succeed in driving out the independent bank?
Governor CRISSINGER. They do it by going into the communities
where the national banking system is suffering from it, and also
more or less the State systems, and buy up the stock of these good
banks and then convert them into a branch of the parent bank in
these communities.
Senator GLASS. But that is an extraneous activity altogether.
Governor CRISSINGER. I know it is, but it is going on to a tremendous extent and more than you have any idea of.
Senator GLASS. I want to get at the logic of the branch banking
system. I want to determine why it is to the advantage of the borrowing public.
Governor CRISSINGER. I do not say that it is to the disadvantage
of the borrowing public. It maybe to the advantage of the borrowing public, but ultimately it may result in a great harm to the
borrowing public.
Senator GLASS. We charter banks not primarily, certainly not
solely, to make money ?
Governor CRISSINGER. NO.
Senator GLASS. We charter banks to minister with facility and
surety to the commerce of the country, to the public. Why is it the
logical conclusion that a branch banking system does not do that?
Governor CRISSINGER. That it does not administer?
Senator GLASS. Yes.
Governor CRISSINGER. Well, take it in Canada, for instance, where
they have branch banking systems; and I think if you would go
among the merchants in western Canada, they would say to you that
they do not have the same credit facilities as are afforded at the
parent bank.
Senator GLASS. Why?
Governor CRISSINGER. Because they claim their money is taken
east to the bigger centers. I had a Canadian tell me that the other
day.
Senator GLASS. DO not the big banking centers have branches in
the western part of Canada?
Governor CRISSINGER. Oh, yes; they do that.
Senator GLASS. IS not the real fact this: That a branch banking
system can do a business in a small community at less overhead
charge than an independent banking system can?
Governor CRISSINGER. I would not think so.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

29

Senator GLASS. Then, how do they drive out the independent
banks ?
Governor CRISSINGER. I do not think that is always true; it is not
true in California.
Senator GLASS. I am not talking about " always." There are exceptions to all rules.
Governor CRISSINGER. I was speaking about our own experience.
Senator GLASS. If branch banks are upon the same basis of expense or operating cost, why can not the independent bank exist ?
Governor CRISSINGER. YOU should have been at a hearing we had
the other day. That hearing developed a situation of this kind:
Testimony was offered that the branch bank wanted to* acquire another independent bank and had gone out and bought up $68,000
worth of checks and pass books and took them in and laid them down
on the counter and demanded payment. They were paid.
Senator GLASS. That is not an essential part of branch banking.
Governor CRISSINGER. I know; but that is the way they drive out
an independent bank. That is what the testimony shows was done.
In that hearing it developed that at times they lowered the rate of
interest and at other times they followed the same rate that was
prevalent in the community with the first bank. But on the whole,
I take it, that the branch banking system is dangerous because you
are unable to supervise it. We have not any laws for that purpose.
Senator GLASS. YOU have no laws—at least, I think you have no
laws—authorizing branch banking, but you can very readily make
laws.
Governor CRISSINGER. Yes; you can make them, of course. There
are a lot of State laws that do permit it.
Senator GLASS. Yes; we have branch banks in my State, and if
they engage in any illicit practices, even involving duress, coercion,
or wreckage activities, such as you have recited here, we would undertake to control them.
Governor CRISSINGER. And of course it does make a bank monopoly if they get all the banks; and there is nothing to prevent them
after they have the monopoly from raising the rate and doing whatever they please.
Senator GLASS. DO you think there is a likelihood that any one,
two or three or four, a dozen or score of banks in this country
could acquire a monopoly of the credit facilities of the country ?
Governor CRISSINGER. They could not do it in this country, because each State limits the banking to their own State and excludes
outside banks.
Senator GLASS. Exactly.
Governor CRISSINGER. We have 22 or 23 States that permit or
directly authorize branch banking.
Senator GLASS. But they do it under limitations, and there never
has been a proposition presented to the Congress of the United
States that did not have the severest sort of limitations.
Governor CRISSINGER. Yes.
Senator GLASS. For instance, as I recall the last bill introduced
on the subject and reported by the House Banking and Currency
Committee that was passed by the Senate, the limitation was as to
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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

the population of a city that might have branch banking—no city
under 100,000 population, and no bank should have a branch that
did not have a capital of $1,000,000. So that we are not discussing
wide open branch banking; we are discussing branch banking with
limitations.
The CHAIRMAN. In California you have a situation of four banks
with approximately 200 branches, which is State wide.
Governor CRISSINGER. Which is State wide, and they still want it
to grow.
Senator GLASS. That is a State proposition.
Governor CRISSINGER. But you have here a national proposition.
Senator GLASS. And you have tied the hands of the national banks
in the State of California—I do not mean you have, I mean the failure of Congress to act has done it?
Governor CRISSINGER. Absolutely that.
Senator GLASS. Has absolutely tied the hands of the national banks
in California so that they can not compete with this system?
Governor CRISSINGER. Absolutely.
Mr. WINGO. In other words, because Congress has not adopted an
evil that the California Legislature has adopted, certain results
Governor CRISSINGER (interposing). Would you put it that way
or not—would it not be a greater evil if the national banking system
goes out of existence in California?
Mr. WINGO. I would rather put it this way, that it is not—
national banks complain of competition with State banks.
Governor CRISSINGER. I am willing to assume that state-wide
branch banking in the United States is wrong and will ultimately
be dangerous to the States that adopt it. But you have that system,
and it has grown up, because Congress has permitted it to grow
up through the Federal reserve act. You have authorized us to take
into the system these banks, and six banks out there practically have
one-half of the banking resources now of the State of California.
We have no way of examining through the Federal reserve bank,
and the State of California has no way of examining, and the
people of California are made to believe that they are under proper
supervision, and I contend that they are not. I contend that California has no moral right to institute a system of banking that they
themselves can not properly control.
Senator GLASS. DO you think the Congress of the United States
could by law prevent that?
Governor CRISSINGER. By law you could prevent the Federal
reserve bank from taking them in as members.
Senator GLASS. YOU mean you would exclude them from membership in the Federal reserve system ?
Governor CRISSINGER. I am not fighting the State banks; remember that.
Senator GLASS. That would be fighting them with a vengeance if
you would exclude every State bank from the system that had a
branch.
a Governor CRISSINGER. If you approve State branch banking, then
give the national banks the same opportunity.
The CHAIRMAN. Suppose we should pass a bill to permit branch
banking only within certain cities of certain populations; if we




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

31

should*pass such a law, that would deal directly with the California situation, because it would forbid the continuance of branches
outside of certain city limits.
Governor CRISSINGER. YOU could do that, and then modify the
Federal reserve act to cover that situation; and then you will have
it secured.
Mr. WINGO. Those who advocate this from the standpoint that is
opposed to branch banking, those who advocate that because the
States have permitted an evil Congress should authorize the same
evil to be indulged in by the national banks, assume that that is
the only action that can be taken. I can appreciate the fact that
you do not care for obvious reasons to suggest possible actions
Congress might take, but there are actions Congress could take that
instead of surrendering to that evil would eradicate it in a very short
time. As a matter of fact whatever may be the theory, experience
has been that human nature in the branch-banking business asserts
itself just like a monopoly in the oil business or anything else.
Governor CRISSINGER. I would think it would.
Mr. WINGO. That has been the experience in every country where
it has been tried. Senator Glass asked you why it is, other than the
instruments and the methods you suggested, that an independent
bank is driven out by a branch bank, notwithstanding the fact that
the branch bank by experience does not give the facilities to the local
community that the local independent bank does. You overlook this
factor that human nature seems to be that whenever you have a
branch bank of a big bank in the city down here they will lead a
great many people to believe that you had better do business with the
branch bank instead of with this small bank over here, and they do
not realize what a fix they will be in when they chuck down and destroy the local institution.
Governor CRISSINGER. The big branch banking system goes into
the community and skims the cream off the banking business of the
community, and the little country bank has to take what is left.
Mr. WINGO. And human nature exists itself on the same theory that
the housewife will order an article from a big mail-order house and
pay a bigger price than she would from a local merchant; and when
they try to convince her that she has been skinned, she gets indignant.
Senator GLASS. Has Congress passed any laws to prohibit the use
of the parcel post to the mail-order houses of the United States?
Why not, if it is an evil ?
Mr. WINGO. Congress is not going into the question of authorizing
any evil or aiding any evil. We are talking about not surrendering
to an evil that will destroy the independent banking system.
Senator GLASS. Here is a difference of opinion whether branch
banking is an evil. Governor, we are charged here with the duty
of devising ways and means, if we may, if anything has been left
undone, to bring State banks into the Federal reserve system.
Governor CRISSINGER. And to keep the national banks in the
system.
Senator GLASS. YOU are proposing a way now to exclude State
banks from the system because they have branches?
Governor CRISSINGER. NO ; I am not. You asked me what should
be done. I was saying that could be done.




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Senator GLASS. But that would not bring State banks into tlie system ; it would exclude them.
Governor CRISSINGER. But you have got to put the national banks
on an equality with the State banks.
Senator GLASS. I say so.
Governor CRISSINGER. That is my idea; I am not fighting the State
banks.
Mr. WINGO. Suppose the Government to-morrow would authorize
State banks to establish branches. Just as soon as the legislatures in
the remaining States could meet, every State in the Union would
adopt this evil.
Governor CRISSINGER. That is not the way I would do it.
Senator GLASS. My colleague means every State in the Union
would adopt this economic system.
Mr. WINGO. I am not4 going to quarrel with history. In the light
of experience in his own State, when he says branch banking is a
good thing I am not going to quarrel with him.
Governor CRISSINGER. The national bank at the present time has
not the same opportunity. I would adopt the McFadden bill, which
would limit branch banking to the localities in which it is now
operating.
Mr. WINGO. YOU are pretty familiar with political influences.
Banks influence men at the head of them, and they generally shape
banking legislation, do they not ?
Governor CRISSINGER. They do to a certain extent.
Mr. WINGO. And if you said a national bank in a State where
State laws authorized banking might do branch banking, then there
might be an inducement to the national banker to get the State law
amended to have the law come under the scope of the McFadden
bill. There would be that inducement to the national banker who
wanted branch banking?
Governor CRISSINGER. Yes; to operate under the national law.
Mr. WINGO. If the McFadden bill became a law, if there wertr
national bankers who wanted to establish branches, they would then
bring their influence to bear to get the State law amended. Do you
not think that is what would happen ?
Governor CRISSINGER. That is human nature.
Senator GLASS. Usually, how many State banks are there to a
national bank?
Governor CRISSINGER. There are a little over two to one.
Senator GLASS. In that circumstance could not the State banks
control the situation?
Governor CRISSINGER. They have done so. I do not know wheether
they would nor not. I will just give you another picture of a city
of a million people. I might say to the committee that there are
some of the members of the board who do not agree with me about
branch banking.
Mr. WINGO. The committee understands the board is divided on
that.
Governor CRISSINGER. Yes. Here is the city of Cleveland, with
three national banks. The other banks have been gobbled up by a
trust company, with 54 branches.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

33

The CHAIRMAN. Three national banks ?
Governor CRISSINGER. One being the Brotherhood of Locomotive
Engineers Cooperative National Bank.
Senator GLASS. IS Cleveland suffering for credit facilities in consequence of the establishment of these banks ?
Mr. STEAGALL. First, let us see how many banks they have got
there.
The CHAIRMAN. There are 4 national banks, 180 State banks,
and 750 bank branches, and the present national banks have 2 additional offices.
Senator GLASS. NOW, let me repeat my question: Do you think that
the credit facilities of Cleveland are circumscribed by reason of these
many branch State banks, or do you think that credit facilities would
be amplified if the four national banks were given the privilege to
establish branches ?
Governor CRISSINGER. I am going to answer in this way, from an
experience which was told me by one of the very best banking heads
of a certain State. He said this was what was actually taking place
in the district: A big concern was needing a lot of credit; it was
good in every respect, yet the trust company that had this business,
because the corporation borrower needed the credit very much,
started out to require a bond issue of this industrial plant and then
handle the bonds, which would be, to my mind, a limitation upon
credit that ought not to be permitted. It was turning a good commercial loan into a bond issue to earn the brokerage and attorneys'
fees, etc.
Senator GLASS. But does that arise?
Governor CRISSINGER. It arises from the fact that one bank
controlled practically the banking situation in that city; that is the
reason it arises.
Senator GLASS. Does it arise from the establishment by that bank
of branches?
Governor CRISSINGER. They took in all the national banks and
took in a lot of State banks as branches. Of course, it controls the
credits.
Senator GLASS. Then, you think that would be removed by still
depriving the national banks of the right to establish branches ?
Governor CRISSINGER. NO ; I do not say that. I should say that a
national bank ought to have the right, and if they had the right the
big national ban,ks would be there instead of one State bank that
restricts credit. As it is, they are out of the system—that is, they
are out of the national-banking system and are in the State system.
Senator GLASS. They are in the State system because the State
system is put upon a basis of competition that the national bank is
not put upon.
Governor CRISSINGER. Yes. They have liberality in the State laws
in the management of the bank that can not be otherwise than destructive to the national banks.
The CHAIRMAN. I recall distinctly hearing before this committee
when the vice president of the trust company in question was present,
and he was asked the reason why they went under the State system
instead of under the national system, and he said it was because of
the limitations on the national bank laws.




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INQUIRY OX MEMBERSHIP IX FEDERAL RESERVE SYSTEM

Mr. WINGO. He said that was one of them.
The CHAIRMAN. And limitation of charter.
Mr. WINGO. YOU remember there were some other reasons he did
not care to give publicly, and I think they were the controlling:
reasons.
"•
•
The CHAIRMAN. DO you care to say what those were ?
Mr. WINGO. Oh, no; because we got it in confidence.
Governor CRISSINGER. That is an illustration of why all the
credits should not be confined or given to three or four banks in a
community of that size; I think it is a very wonderful illustration
of it myself.
Senator GLASS. Yes; but it is not an argument against branch
banking.
Governor CRISSINGER. 1 am not speaking against that. For myself
I am in favor of the big banks in the city having branches or offices,
and I am going to tell you why—because I think it is fundamental.
I knowT of several States where they permit State banks to start
in a city of 500,000, say, with a capital of $25,000. I know a city that
has 38 of those banks—$25,000 to $50,000; and last year the clearing
house association told me that 14 of them were insolvent. What
that does is to compel the poor man out in the community to do his
business with a little bank that is absolutely unsafe, whereas if a
big bank were permitted to put a bank out there his funds would
be secured. That is my reason for being in favor of a National or
State bank having city offices or branches. It is absolutely true, because these fellows who start these little banks start them with the
purpose, first, of making places for themselves, very often; and
when they get them started and get their furniture and pay a
year's salary, they have used up their capital, and probably started
on the road to insolvency at the end of the first year.
Mr. WINGO. Why does not that argument apply to a village, or
small town? Why distinguish between the city and the country
towns ?
Governor CRISSINGER. Because it is the biggest thing in the village. The $25,000-bank in your village is all right, because it is the
biggest thing there, and it is controlled usually by the best men
there, with a small overhead expense.
Mr. WINGO. AS a matter of fact, the strength of the independent
local bank in that its directors, for selfish reasons, are made up of the
strongest and best business men of the community, who are more eminently acquainted with the credit reasons and needs of the community than anybody else, and they have a selfish reason for maintaining that information, have they not ?
Governor CRISSINGER. Yes; that is true. I am rather of the
opinion that we ought not to put all of the banking under a State
system.
Senator GLASS. I am not going to argue here for or against a
branch banking system. What we are charged with finding out is
how we can get State banks to come into the Federal reserve system,
and I submit we can not get them to do it by denying a right to
establish branches.
Governor CRISSINGER. That is probably true.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

35

Mr. STEAGALL.. If we follow the States in policy at that point, are
we not rather magnifying the State's power and authority?
Governor CRISSINGER. YOU are.
Mr. STEAGALL,. Then, that is what we do if we adopt the policy
of allowing the national banks to have branches in States where
State banks are allowed to have them; we are letting the States set
the pace.
Governor CRISSINGER. YOU are surrendering the controlling power
that you ought to have over the Federal reserve system to the 48
States.
Here is Los Angeles [exhibiting chart to the committee], with a
hundred branches.
The CHAIRMAN. I noticed recently as I went around New York
City that many branch banks have opened across the street from oldestablished institutions. For example, I noticed the other day that
the Chase National had established a bank across the street from the
Bowery Savings Bank, which is one of the old institutions. What
effect does the establishment of a branch bank across the street have
on the old institution; have you observed anything about that ?
Governor CRISSINGER. NO ; I have not made any particular observation of it nor had any complaint about it.
Mr. WINGO. Have you talked to any people here in the city of
Washington where they are available and asked them, " Just why
have you changed from your local bank here over to this branch of
one of the larger banks ? ? ' You will find it is quite interesting, if
you want to understand why it is that the branch bank of a big bank
can drive a neighborhood community bank out of business.
Governor CRISSINGER. I assume they can do it because they think
the big bank can extend to them greater facilities and a safer place
to deposit savings.
Mr. STEAGALL. YOU have heard complaints here in Washington ?
Governor CRISSINGER. Yes; I have had a great many letters
about it.
Mr. WINGO. Suppose you had charge of a bank. I am not using
this illustration for an invidious reason. I am not interested in this
row. I am simply using it because I signed security for a lame duck.
Suppose you were managing one of the branch banks that had just
been established across the street from one of the older banks in the
city and you were out getting business and going to the local shops,
you would naturally say, " I am manager of the big branch bank.
I have no fight on these other people over here, but here we can give
you greater facilities. It is worth more to your credit standing to
have your banker and have your wholesalers see your checks come
on a big institution." You would use that argument, would you not;
that would be perfectly legitimate ?
Governor CRISSINGER. It may be used.
Mr. WINGO. DO you not think you would use that argument %
Governor CRISSINGER. That might not be considered an ethical
method.
Mr. WINGO. YOU might not use it quite as boldly, but the man
would get that idea. Suppose you were one of those little merchants. You would reason that out possibly, " I like this bank, but




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

maybe it will sound a little bit better if I am a depositor and do
business with the big institution."
Governor CRISSINGER. But there are reasons why you should have
service banks.
Mr. WINGO. I am not talking about the reason; I am talking
about human nature and what takes place, whether wise or unwise;
that does take place ?
Governor CRISSINGER. It does take place.
Mr. WINGO. IS not that the reason the local bank is raising sand
about it?
Governor CRISSINGER. I have not had any complaint about it, but
that might have taken place.
Mr. WINGO. I was under the impression you had had some complaint.
Governor CRISSINGER. NO ; I have not had that complaint. I have
had a good deal of complaint because one office was established, but
it was not put upon such basis as that.
Mr. WINGO. I suppose the only complaint would be that they
take away the customers.
The CHAIRMAN. AS a matter of fact, in that one bank the deposits have increased rather than decreased?
Governor CRISSINGER. Both banks have increased their deposits.
You take the office out at Park Eoad. There was an old bank there,
just as you speak about, and they thought it was going to hurt that
bank tremendously, but the branch that was taken used to be the
Hamilton, which was taken over by the Eiggs—we might as well
mention the names. And I think they have something like $900,000
deposits in this little branch, while the bank across the street has
increased something like $400,000 or $500,000. So it has created a
banking center there, and the people instead of coming down town
to get their money in a bank are going where it is more convenient,
where they can drive up with an automobile, which you can not do
down town here at all.
Mr. STRONG. What is the necessity of having branch banks?
Governor CRISSINGER. It is claimed that down town people can
not get up to the banks with their automobiles, which is true.
Mr. STRONG. DO you mean to say that the branch banks are being
established to accommodate the people or to accommodate the banks?
Governor CRISSINGER. They are being established for both purposes, to serve the people and to accommodate the banks as well. But
1 have a map here which I. want to show you and give you a statement of one of the biggest bankers in New Orleans.
Mr. WINGO. Before you do that, I think we ought to at least make
reference to another aspect of this question, not what pleases or
displeases the little independent bank, but what pleases the people
who borrow from banks, who have to have business transactions
with banks. Have you had any complaints from people like myself, who have to go and transact business with a bank and borrow
money from them, that they have had ready access to these banks by
reason of the establishment of the branch banks; have you had any
complaints from the borrowers of money, because, perhaps, they
can get these loans at a lower rate of interest than they could get it
from some other bank before the establishment of these branches?




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

37

Mr. STRONG. YOU do not mean that a man who wants to borrow
money would have to own and park an automobile in order to get in
and borrow it?
Mr. WINGO. No; I am talking about the man who has not an automobile to park, but who can go across the street a block away, instead
of having to pay even a street-car fare or hire a taxicab to come away
down to the Riggs Bank to borrow money.
Governor CRISSINGER. T think it is unquestionably true that the
little banks and offices of big banks in the community centers have a
tendency to make for greater security and for more bank deposits
than would be the case if they had to come down to the big banks
in the center of town.
Mr. WINGO. This is no new question. It is the same old argument
that was indulged in, and it was the contention that the Standard
Oil Co. being a bigger concern would go in and drive out the independent fellows and immediately the little independent oil fellows
complained; and, of course, the community did not grasp the fact
that after the independents were driven out, which was like the scriptural admonition which said the last shall be worse than the first.
Governor CRISSINGER. I do not think there is any doubt that by the
establishment of these service stations, or whatever you would call
them—offices or branches or agencies
Mr. WINGO (interposing). Do not misunderstand my altruistic
motive.
Governor CRISSINGER. There is an effort to make money and to
serve at the same time.
Mr. WINGO. I do not believe if I were at the head of one of these
big banks I would do it from altruistic impulse; I think I would do
it for cold-blooded profit.
Governor CRISSINGER. And to serve the people.
Mr. WINGO. I think it is not to the credit of the big banker to drag
the independent out and make the public suffer. It is a reflection on
the big banker. He knows it is to his interest to get control out there.
Mr. STRONG. It is to give the big banker control.
Mr. WINGO. If I were a banker I would be in favor of branch
banks.
Governor CRISSINGER. I do not think it is for the purpose of getting
control.
Mr. STRONG. It is for the purpose of getting control of the business.
Governor CRISSINGER. Very well, let us assume that is true. Then
why should the State bank have all the control; that is what I am
trying to get before Congress; that the national bank ought to have
equal opportunity.
Mr. WINGO. Why should a branch bank controlled by somebody in
another community be more liberal in dealing with me, a poor Congressman and the poorly paid Senator from Virginia than my local
neighbor would?
Governor CRISSINGER. He probably would not be.
Mr. STRONG. YOU eliminate all such element when you do business
with the branch bank controlled by those whose interests are far distant.
Mr. WINGO. I can get better accommodation from my neighbors
than from people who do not know me.
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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

The CHAIRMAN. Governor, have you observed in the operation of
these branches any tendency to centralization? In other words, in
many of the places where these branches are started there is an oldestablished institution which serves in that neighborhood as much
as if the bank was located in some country district. Its stock in
many instances is owned by local people. A branch comes in. Does
that branch serve as well in that locality, or is there a tendency to
take the money that has been accumulated in that locality in the
local institution and lend it under rules and regulations which might
in some instances prevent those local people being served as well as
by the big bank ?
Governer CRISSINGER. I think under those circumstances banking
is under such great competition now that the local institution serves
as well as the big bank.
Mr. WINGO. You do not know what will happen in another generation ?
Governor CRISSINGER. I do not want to be in the banking business
in another generation.
Mr. STRONG. I have talked to some of these gentlemen who are running branch banks on the Pacific coast in the last 60 or 90 days.
They tell me that under the arrangement they have they do not have
much use for the Federal reserve system; in fact, they are talking
about getting out of it. They said, " We have 12 crops and a branch
bank in each community, where they are raising walnuts, strawberries, pears, cantaloupes, and citrus fruits, and this, that, and the
other tiling, and we just pass our credits around from bank to bank.
We do not need the Federal reserve system "; and they said, " When
we get stronger we can do without the Federal reserve system." It
seems to me if you go ahead and build up a great bank, if you have
a branch in each town you are going to eliminate the Federal reserve system; you are going to let the big fellows gobble up the
little ones.
Governor CRISSINGER. I am talking about evils of state-wide
branch banking. I am not advocating that.
Senator GLASS. That happens to be a system not established under
Federal statute. It is a State system with which Congress has
nothing to do, because while Congress might pass a law excluding
them from membership in the Federal reserve system, I do not think
that is our mission. I think we were to try to find out how to get
them in instead of how to get them out.
Governor CRISSINGER. I want to give you another illustration.
Here is a map of New Orleans, with one national bank [exhibiting
map to the committee], and the president of one of the largest State
banks down there told me that they succeeded in weathering the
. storm in 1920 by reason of having these branches out in communities where the savings were gathered in.
Mr. STRONG. They have a little Federal reserve system of their
own.
Governor CRISSINGER. There is one national bank, as illustration
of how national banks are being replaced by State banks, because of
the dissemination of Congress in favor of State banks.
I want to show you what has just started in Cincinnati. Here is
Cincinnati, which used to be one of the prize cities for national




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

39

banks, with nearly all national banks, which is now starting out with
the system of branches to these State banks, and the biggest bank in
Cincinnati is now threatening to go out of the Federal reserve
system because it can not compete with the State banks that are
favored by the Federal reserve act and friendly State laws.
Here is Dayton that is starting off on its branch banking system
also. Here is Savannah, Ga., without a national bank in it—all
State banks and branches. Here is the city of Nashville [exhibiting
maps to the committee].
Mr. STRONG. Why will the State banks do that ?
Governor CRISSINGER. Why will they do it?
Mr. STRONG. Yes.
Governor CRISSINGER.

Because they have no supervision comparable with the national banking system, and they go out and can do
more business and more different kinds of business, doing everything
from raising the pig to promoting the biggest concern in the world
under State laws. Nashville, with four national banks, is starting
out on a branch banking system.
Here is Richmond [exhibiting chart to the committee).
Mr. WINGO. You have no charts showing branch banking in
Canada, have you ?
Governor CRISSINGER. NO; I have not. Here is Baltimore, which
is starting out with a lot of State banks. You can see the result
here, little banks and branches, great numbers of them, while the}
have but 12 national banks [exhibiting chart to the committee].
Here is Atlanta:—and since this was made up we have lost one of
the biggest national banks there. We have lost the Lowry National
Bank, which was recently taken over by a trust company. So we
have three national banks down there.
Mr. STRONG. I S there any way to fight the evil?
Governor CRISSINGER. I am leaving it to Congress to find a way
to do it.
Mr. WINGO. Governor, if you will permit me, I know some Members of Congress have not yet recovered their breath in connection
with your incumbency as comptroller.
Governor CRISSINGER. I think that ruling is right; I am willing
to stand for it.
Mr. WINGO. Congress blundered along in its ignorance and come
to find out we did not have any law at all.
Governor CRISSINGER. YOU Know you have to do things to waken
people up. Here is Boston [exhibiting chart to the committee]. As
I say, Boston is on the upgrade in the national banking system.
There are still State banks there that have branches.
The CHAIRMAN. That does not apply to New England generally,
does it?
Governor CRISSINGER. NO ; only to the city of Boston. It was due
to the fact that they had a great many trust companies fail, and the
State trust company failure caused a lot of distress.
Here is the District of Columbia, and, my dear Mr. Congressman,
they had a lot of branch banks before I came here.
Here [exhibiting chart to the committee] is Oakland, Calif., with
two or three little national banks. The rest of them have been




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INQUIRY ON MEMBERSHIP IX FEDERAL RESERVE SYSTEM

bought up. It is the practice in California for the big banks to go
out and buy our national banks and make branches of them.
Here is the city of Fresno; and here is San Francisco, which has
practically gone to the State system, and one of the big banks is just
liquidating now and becoming a member of a State trust company.
Here is Sacramento with four national banks left.
Mr. WINGO. I gather, then, from your statement that you are in
favor of branch banking in cities, but not in the country.
Governor CRISSINGER. I want to be perfectly frank about it. I
have voted against state-wide branch banking since I have been here,
and as comptroller have encouraged the national banks to have
additional offices in the same city as the head office and under the
control of the head officers of the bank.
Senator GLASS. Governor, just exactly what do you mean by
voting against branch State banks?
Governor CRISSINGER. In the California situation the board, prior
to my coming here, had made regulations and conditions that there
should not be any branches taken on by any of the banks that were
coming in as members without the approval of the Federal Reserve
Board. So that whenever they want to take on a new branch or buy
a national bank or State bank they make application through the
Federal Reserve Board for permission to buy and make a branch of
it, and on these questions I have been voting against the state-wide
branches.
Senator GLASS. The board thinks it has power to exclude from
membership any State bank that has a branch?
Governor CRISSINGER. The board is divided on that. We think we
have the power under the Federal reserve act to stop any system of
banking that might become a danger to the system, which might
involve a liability, under the power to regulate.
Senator GLASS. I thought the law prescribed certain exact qualifications of membership for State banks in the Federal reserve banking
system ?
Governor CRISSINGER. It does.
Senator GLASS. DO you mean to say that the board goes further
than that?
Governor CRISSINGER. The board under the power to regulate laid
down certain regulations and imposed certain conditions to which
these banks of California, in coming into the system had to abide
by. I think I am stating it correctly. If they attempted to start a
branch, they would have to make application to the board, and you
can see why the board should properly impose the conditions.
Senator GLASS. No; I do not. I am not a lawyer, and it is a
great assumption to say so.
Mr. WINGO. I think you are overlooking the law.
Governor CRISSINGER. Subject to such conditions and regulations
as the board may prescribe the applying bank may become a stockholder of such a Federal reserve bank.
Senator GLASS. Subject to such conditions, which means such conditions as the law provides. It does not mean the whim of the
board of the prejudice of any member or collective number of
members on the board.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

41

Governor CRISSINGER. Let me be frank about the matter. There
are certain members of the board that take the position you do about
that, that we have no right to stop them bringing in branches.
Mr. STEAGALL. It would certainly seem to me that it is imposing
very clearly conditions not contemplated by the original Federal
reserve act.
Senator GLASS. AS a matter of fact, if you turn to the provisions
of the law there, State banks are made eligible ?
Mr. STEAGALL. Absolutely.
Senator GLASS. Upon specific terms, and among other things it
provides that they shall retain all of the rights and franchises
which their State charter gives them; and if the State of California
charters a bank and gives it a right to establish a branch, it seems
to me an extreme proposition if the Federal Reserve Board, under
existing law has a right to exclude it from membership.
Mr. STEAGALL. Was not that whole question of whether or not
the State banks be made eligible for membership in the Federal
reserve system fought out here with all those details at the time the
Federal reserve act was passed?
Senator GLASS. Oh, yes.
Mr. STEAGALL. And the act was passed without any such authority,
and without reference to it.
Mr. WINGO. I suppose the governor is a lawyer. But whenever
you said " conditions," all the rest of it was just an expression of
congressional idea, a kind of French suggestion. Whenever you tell
a board it may do anything upon conditions named by them, they
can name any conditions they think proper to carry out the
original purpose of that act.
Governor CRISSINGER. The solicitor is here who was present when
that regulation was drawn. Probably you would like to hear him
express an opinion upon it.
The CHAIRMAN. I think it would be interesting. Please give your
full name to the stenographer.
STATEMENT OF WALTER WYATT, GENERAL COUNSEL FOR THE
FEDERAL RESERVE BOARD

Mr. WYATT. There has been a suggestion made that the State
banks retain all of the rights granted to them by the State law when
they join the Federal reserve system. As a general rule, that is
true; but it is subject to two qualifications.
In one part of section 9 of the Federal reserve act, it says:
Subject to the provisions of this act and to the regulations of the board
made pursuant thereto, any bank becoming a member of the Federal reserve
system shall retain its full charter and statutory rights as a State bank or
trust company, and may continue to exercise all corporate powers granted it
by the State in which it was created.

That subjects them to regulations made pursuant to the terms of
the act, and which are intended merely to interpret and carry out
the specific provisions of the act.
But, in addition to that, you will find in the first paragraph of
section 9 a provision that, " the Federal Reserve Board, subject to
such conditions as it may prescribe, ma}^ permit the applying bank
to become a stockholder of such Federal reserve bank." The Federal




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INQUIRY ON MEMBERSHIP IX FEDERAL RESERVE SYSTEM

Reserve Board has discretionary power under this provision to
admit or decline to admit any eligible State bank applying for admission; and if it admits a particular State bank, the board is
authorized to admit it " subject to such conditions as it may prescribe." Under the original act the board was granted discretionary
power to admit or decline to admit them, without any specific authority to impose conditions. It was thought then that the discretionary power to admit them carried with it the power to admit them
on such conditions as the board might prescribed; and the board
provided in its early regulations that the banks would be admitted
subject to such conditions as the board might prescribe at the time
of their admission. The board assumed it had that power under
the original act, and that power was confirmed by Congress later
at the same time that it passed this provision preserving their
rights under State laws.
Senator GLASS. I do not agree with you at all. It says that such
rules and regulations may be adopted by the board which link
themselves specifically to the sanctions of this act.
Mr. STEAGALL. Conform to it?
4
Senator GLASS. Yes.
Mr. WYATT. In addition to that, when Congress amended the law
so as to preserve their rights under State laws, it also recognized
the pre-existing power of the board to impose conditions of membership at the time the bank came in. It recognized it by inserting
this language which was not in the act prior to that time:
The Federal Reserve Board, subject to such conditions as it may prescribe,
may permit the applying bank to become a stockholder.

There is certainly a distinction between conditions and regulations.
Senator GLASS. Such conditions that are not inconsistent with this
act.
Mr. WYATT. It does not say that here.
Senator GLASS. According to your interpretation of that segregated sentence, the other provision of the act that enables a State
bank to exercise all of the functions which its State franchise gives
it would be just simply worthless.
Mr. STEAGALL. Just a word right there. If that interpretation is
to be placed on that language, it means that every right granted
under this act insuring the eligibility of State banks for membership
in the Federal reserve system is subject to the limitation of this language and any provision of the act can be qualified by the board or
set at naught.
Senator GLASS. The interpretation here given to that segregated
clause means the other thing is not worth anything, and that the
board itself may determine, regardless of the provisions of the Federal reserve act, regardless of a State franchise, whether or not a
bank shall come in.
Mr. WYATT. I desire to call attention to a practical distinction.
The regulations of the board may be amended from time to time
after a bank comes into the system. The banks were afraid of
amendments to the regulations which would additionally curtail
their powers after they joined the system. They wanted protection
against that, and they got it. This power to impose conditions, as
distinguished from regulations, does not enable the board to change




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

43

the conditions under which any particular bank comes in. When a
bank applies for membership the board says, "We will admit you
on the following conditions," and it defines the conditions which it
considers applicable to that particular case. The bank then has the
option of either accepting those conditions and joining the system
or rejecting those conditions and staying out of the system. If it
accepts those conditions, it comes into the system with the understanding that it will comply with those conditions; but those conditions' can not be changed thereafter as applicable to that bank.
Senator GLASS. My contention is that the Federal Reserve Board
has no right under the sun to prescribe conditions that are not
authorized by law. It certainly has no right to prescribe conditions
that vitiate one of the major provisions of the Federal reserve act.
Mr. WINGO. May I say this from a legal standpoint? The State
banks are authorized to come in solely upon conditions to be prescribed; and this; isolated provision that the Senator refers to, he
said if you took that it nullifies all the rest of them ?
Mr. WYATT. Yes, sir; that is his contention.
%
Mr. WINGO. Of course, the well-known provision is that if Congress were passing on this power the first thing they would say is
that " we are required to give some meaning and force to this
thing"?
Mr. WYATT. Absolutely.
Mr. WINGO. In other words, they were given the right to exercise
every bit of .their franchise power if they came in, subject to certain
conditions, and those were the conditions the Federal Reserve Board
might fix. For illustration, the board had the power—I am not
talking about the wisdom of the statute—to say, " We will not permit
any State bank to come in with branches, because we can not examine
them as closely as we think necessary." The board might say, " We
will not permit a bank to come in, even if it is able to comply with
the reserve requirements, if we think the conditions both of the
management and the condition of its paper indicates it is unsound
we do not want it in the system." What other interpretation could
you give to the language if you did not give it the one you did ?
Mr. WYATT. In my opinion, you can give it no other interpretation.
Mr. STEAGALL. That can not be true at all.
Mr. WINGO. Suppose you were a judge, what would you say?
Mr. STEAGALL. Here is exactly what I would say: I would give
that phrase in which the language " Upon such conditions as the
board may prescribe " is used—I would find a meaning for it, but I
would not find a meaning for it that abrogated the other express
provisions of the act, which upon all rules of interpretation should
take precedence over it, because it is the subject matter of the enactment of the Congress itself, which should have more weight than the
provision for the exercise of discretion by a board created by Congress. All these provisions set forth in the specific language of the
act prescribing eligibility for the entrance of State banks into the
Federal reserve system are set forth very clearly. But it was the intention, as clearly appears from this other language that the Federal
Eeserve Board should work out all details, prescribe rules and regulations and conditions upon which this former enactment should be
carried out and put into execution, and there are many instances,




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

whether I could enumerate them now or not, that might arise which
would be covered by the language " upon conditions to be fixed by
the Federal Reserve Board," that would conform with the other provisions of the statute without abrogating them or setting them aside.
Mr. WINGO. Will you please point out the other conditions that
it abrogates? That is the statute now. Is not the basis upon which
they could come in, this, that the capital requirement must be considered ?
Mr. STEAGALL. Yes: but if your contention is true and the Federal
Reserve Board saw fit as a condition upon which they should enter
the Federal reserve system that those requirements should be more
than fixed in the statute, under your contention they would have a
right to do it. There is specific provision that they come in with all
powers vouchsafed to them by their States.
Mr. WINGO. It says, " subject to the provisions—that the Federal
Reserve Board, subject to such conditions as it may prescribe, may
permit." It does not say " shall come in." All these provisions are
the requirements they shall make on them after they come in. Maybe
it is unwise, but I think the gentleman is right in his legal interpretation.
Governor CRISSINGER. Evidently, from what we hear it needs some
elucidation by Congress.
In handing you these maps showing you the conditions under
which national banks are operating, I want to call attention to the
McFadden bill. I have not a copy of it here, I thought I had. It
authorizes national banks to have branches, offices, or agencies where
State banks and trust companies have the right and no place else.
Mr. STRONG. If that bill was passed, immediately every national
bank who wanted a branch bank would go to their legislature and
have a law passed to permit State banks to have branches.
Governor CRISSINGER. There are so few national banks in your
State it would hardly be worth while. You would not feel that the
national banks were getting a fair, square deal under the present
arrangement. If it is not possible to curtail branches, then you
must take care of the national banks. Are you not a national
banker ?
Mr. STRONG. NO ; I have never owned any bank stock.
Governor CRISSINGER. I thought you were a national banker.
Mr. STRONG. I have paid a great deal of interest to banks, but
they always credited on my notes.
Governor CRISSINGER. There is one other question I want to call
you attention to, that greatly handicaps national banks, not only in
California, but in New York and other points.
Mr. STRONG. DO you not think that under the branch banking
system as being carried on in California those fellows are soon going
to be in a position where they will not need the Federal reserve
system ?
Governor CRISSINGER. I do not know. They are trying to build
up a little one of their own. I think they will need the Federal
reserve system worse when they get fully going.
Mr. STRONG. I pointed out to one of those big bankers that the
great number of branch banks they had in California would soon
give them a small reserve system of their own, and he said " that is
what we are expecting to have."




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

45-

Governor CRISSINGER. Let something go wrong some day, and
they will be very anxious to have the Federal reserve system.
Mr. WINGO. In other words, when the storm comes they will run
to the city of refuge?
Governor CRISSINGER. They will get under the tent.
The other handicap is the savings department or the departmental
banking that is authorized by various States. Take California for
an illustration, because I think they probably have the best law on
the segregation of assets of any that have come to my observation.
The savings of the State banks are segregated and invested separately, and if the bank gets into trouble the assets are taken to
liquidate the savings departments, whereas under the national bank
system the savings accounts in a national bank are subject, of course,
to the same rule of 30 days notice, and such notice, if it is given,
ties up the savings of the poor man, and they are used to liquidate
i^he commercial accounts; an$ when the bank fails the savings depositors are left to hold the sack, as we call it. They are left with
the bad assets to make their deposits good.
It seems to me that the national banks ought to be permitted to do
this kind of departmental banking, and with a leeway of giving them
more opportunity to invest in real estate loans for the savings department only. That is one of the handicaps of the national banking
system in California, and I think in other States.
Mr. WINGO. Would you say that a national bank can engage in
the same kind of business that a State bank is authorized to do by
the law in the State in which located ?
Governor CRISSINGER. I would not put it that strong, but I think
some amendments could be made that will be very helpful to the
national banking system along sound principles. You know there
has not been much, if anything, done to the national banking act
since it was passed.
Senator GLASS. YOU are trying to tell us how to keep the national
banks in the system and not to get the State banksin.
Governor CRISSINGER. A bill was introduced in the Sixty-sixth
Congress on that subject, Senate bill 4721.
Now, we have something that is real aggravating, and I think it
should be stopped. I think we will all agree to this. Here we have
a bank down at Cincinnati that is not even a member bank, advertising " 6 per cent loans under Federal reserve system on city or
farm property. Keserve Deposit Co., Keith Building, Cincinnati,
Ohio."
Here is another bank that is not in the system that is advertising
"Federal reserve bank protection." It is not a member of the
system, and we have a great number of violations of that kind. It
would seem to me that the Federal reserve system ought to be protected by some provision or enactment of Congress that would prohibit a banker from advertising improperly.
Mr. WINGO. What is the matter with the State courts?
Governor CRISSINGER. The State courts do not look after national
bankes very well.
.
Mr. WINGO. They have a statute against that in JNew York btate.
Do you say that is Ohio ?
.
Governor CRISSINGER. One is in Ohio and one m Wyoming.




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Mr. WINGO. If they have not a statute, under the common law
they could reach them.
Governor CRISSINGER. I do not know whether they could or not.
Mr. WINGO. I S not that false advertising ?
Governor CRISSINGER. It is very false. It is a fraud upon the
people; it is against the national interest.
Mr. WINGO. YOU are a lawyer, Governor. Do you not think if
you were district attorney or county attorney you could stop that,
if you wanted to? You can walk down here and see genuine briar
pipes advertised at 25 cents, and genuine mahogany tables at $35.
Governor CRISSINGER. It would seem to me that you have one
section which authorizes bringing an action for anybody using the
word " national " in connection with a national bank.
Senator GLASS. YOU would not prevent the use of the words " Federal reserve " ?
Mr. WINGO. I think we have a Federal statute.
Governor CRISSINGER. If you do, I think it is being violated every
day. The solicitor says there is no such provision.
Mr. STEAGALL. Experience develops the necessity for amendments
to every statute.
Mr. WINGO. I venture the assertion, if the solicitor will look it
up—because this act has been codified—that the words "Federal
reserve" are protected.
Mr. WYATT. I have looked it up, and they are not protected.
Mr. WINGO. The Senate may have killed it.
Mr. WYATT. There has been a bill introduced to protect it—H. EL
12649 of the Sixty-seventh Congress.
Mrr WINGO. It was included in some bill that passed the .House
that the word " national" and the words " Federal reserve " are both
protected.
Governor CRISSINGER. It never has passed.
Senator GLASS. It was in the bill; it may have been eliminated.
Governor CRISSINGER. I feel this is a child of Congress an# it
ought to be protected.
Mr. Chairman, I told you we were getting letters from each of
the governors of the Federal reserve banks giving their views of
what might be done and what amendments might be helpful to the
system. I have these letters here.
The CHAIRMAN. T^e will place them in the record at this point.
Mr. WINGO. Mr. Chairman, why not have these men come here so
that we can examine them and find out?
The CHAIRMAN. This occurs to me, and I was going to suggest it
to the committee: I understand that the governors and the chairman of the board have a quarterly meeting or some kind of a meeting the middle of next month, and if our hearings proceed it might
be advisable to have those men here at that time instead of having
them come especially for this hearing.
Governor CRISSINGER. I think it would be well to have this in the
record for the consideration of the committee.
There is a synopsis, and they can go in together.
(The letters from the governors of the Federal reserve banks and
digests of the same submitted by Governor Crissinger are as follows:)




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

47

FEDERAL RESERVE BANK OF BOSTON,

September 10, 1923.
DEAR GOVERNOR CRISSINGER : I acknowledge receipt of your letter X-3883,
dated September 8, 1923, with which you inclosed copy of letter from Hon. L. T.
McPadden, chairman of the congressional Joint Committee of Inquiry on
Membership in the Federal Reserve System. I note your request that I furnish
the board with answers which I would individually make to the questions propounded by the committee, and in accordance submit the following:
1. Effect of the present limited membership of State banks and trust companies : I do not regard the limited membership of these institutions as being
altogether unfortunate. Quality should always be considered in the membership
of the system, and I have no doubt that there are some undesirable members.
It is equally true, however, that there are many nonmember banks wThose acquisition would be desirable. I believe that there is a gradually developing
sentiment among Dank depositors throughout the country that the safest and
most reliable depositaries are the member banks. This sentiment ebbs and
flows but gains additional strength whenever clouds appear upon the financial
horizon. In my opinion, the influence of the Federal Reserve Board and the
respective Federal reserve banks should be exerted upon the member banks in
such a away as to justify and foster the faith of the public in member banks.
2. Advisability of attempting to increase the membership of the Federal
reserve system : I doubt the wisdom of undertaking a systematic campaign along
revival or camp-meeting lines to increase the membership. The reasons which
actuate desirable nonmember banks to remain aloof should, however, be carefully
analyzed, and if any of these reasons are well founded, steps should be taken
either by appropriate changes in the regulations of the board or by amendment
of the Federal reserve act to remove any valid objections which may be heard,
and you will notice that I shall discuss this feature further on and will make
a pertinent suggestion.
3. Advice on the present financial conditions in the agricultural sections
of the United States: I have already forwarded to the board a report on
conditions in the most distinctive agricultural section of this district, viz.
Aroostook County, Me. I do not know of any especial agricultural credit
problems elsewhere in New England. The legislation of 1922 is, in my
opinion, an admission on the part of Congress that the administration of the
Federal reserve system under the law as it stood in the years 1920-21, was
not in any way responsible for the adverse conditions in agricultural sections, and I do not know of any further amendments to the Federal reserve
act with respect to the agricultural credits that are either necessary or desirable. Time should be allowed for testing the efficacy of the amendments
already made.
4. Reasons which actuate eligible State banks and trust companies in failing to become members of the Federal reserve system; what administration
measures, if any, have been taken and are being taken to increase such membership ; and whether or not any changes should be made in the existing
law or in the rules and regulations of the Federal Reserve Board. * * *
Interest on daily balances of the Federal reserve system, conflict and competition now existing between National and State banking laws: In this district there is little, if any, disposition to criticize the Federal Reserve Board
or the administration of this bank, and, except in the State of Connecticut,
local laws do not operate against State banks' membership in the system.
In Connecticut, however, the law requires specific reserves to be carried by
State banks and trust companies and does not admit of any modifications in
favor of State bank members. Therefore, the few State banks and trust
companies in Connecticut which are members of the system, work under the
handicap of carrying double reserves in order to meet the requirements both
of the Connecticut law and the Federal reserve act. Efforts have been made
repeatedly to induce the Connecticut Legislature to make the same concession
as has been made in other States in favor of State bank membership, but
due to the efforts and influence of one individual, the president of a trust
company, who is also a State senator, and chairman of the finance committee
of the Connecticut senate, these efforts have been unavailing. Further attempts will be made in the succeeding sessions of the Connecticut Legislature,
which I hope will ultimately be successful.
During the early weeks of my incumbency here I found that there was a
strong sentiment among many of the member banks, as well as the non-




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

member banks, that the Federal reserve bank should pay Interest on deposits.
I took some pains to point out, however, that in order for the bank to pay
interest it must increase its earnings very considerably and that in order to
increase its earnings it would be obliged to engage so extensively in open
market operations as to put it in active competition with member and nonmember banks, and that such a policy would also destroy its character as a
reserve bank, for by having its assets actively employed at all times it would
have no means of assisting member banks in times of emergency. These arguments have proved effective and for some months past I have heard of no
sentiment in favor of interest on deposits.
There is, however, a feeling that the reserve bank is distinctly a Government institution and that the member banks have no actual part or interest
in its affairs. No interest is taken in the election of class A and class B directors, and there is absolutely no feeling of proprietorship on the part of
member banks.
Quite recently the Boston Clearing House has inaugurated a movement to
bring about a closer contact and keener interest on the part of member banks,
believing that it is useless to attempt to bring in nonmember banks and Statebanks as long as there is an aloofness and lukewarmness on the part of member
banks. Enthusiasm is contagious and whenever member banks become active*
partisans of the system, State banks will apply for membership.
It has been suggested that at the next annual meeting of the New England
Bankers Association one session be set aside for a meeting of the stockholders
of the Federal reserve bank. This meeting will elect its own chairman and
will call for such information as stockholders usually receive at meetings,
and will also elect for the term of one year an executive committee of seven..
This committee wil receive complaints or suggestions from member banks and
will take them up with officers and directors of the Federal reserve bank. Being representative of the stockholders, conversations can be held with this
committee by the officers of the reserve bank on questions of mutual interest
without fear of the imputation of favoritism, which might be the case at
present if the opinions of officers of two or three banks were sought. In view
of the fact that the New England aBnkers Association does not meet until
next June, the Boston Clearing House lias requested the president of the
bankers' association of each State in New England to appoint one member of
a committee to serve until the stockholders' meeting next June. The president
of the Massachusetts Bankers' Association has appointed two members of the
committee, and one member has been or will be appointed from each of the
other New England States. This committee is expected to meet in the near
future and will probably have some suggestions to make to the board before
the meeting of Mr. McFadden's committee in October.
I may say that there is a general feeling among the New England bankers
that section 7 of the Federal reserve act should be amended; not with the view
of depriving the Government of revenue but rather with the idea of making
the system a mutual one. It is argued that as section 7 now stands there is
no reason why member banks should take any particular interest in the system.
The* dividends on their stock at 6 per cent per annum are cumulative and are
a fixed charge on the net earnings, but the Government gets all the rest. Even
the surplus will go to the Government in the event of final liquidation. It has
been pointed out that Congress has been more liberal in this respect to the farm>
loan banks than it has to the Federal reserve banks, for the capital of the
farm loan banks was supplied originally by the Treasury of the United States,
although the joint stock land banks have now relieved the Treasury of by far
the larger part of its stockholdings in the farm loan banks. Farm loan banks
are exempt from all taxes except as to real estate owned; their bonds as well
as those of the joint-stock land banks are exempt from income taxes, and the
earnings are applied to the payment of dividends to stockholders, to the creation of a surplus, and the remainder is distributed to borrowers as a rebate of
interest.
In the case of the Federal reserve banks the capital was supplied entirely by the member banks, which also furnish the deposits. The Government's
sole contribution was $100,000, which was appropriated to pay the expenses
of the organization committee, of which amount $17,000 was turned back into
the Treasury. The Government has received so far $135,000,000 from the
Federal reserve banks as franchise taxes, and it has also had the benefit of
their services as fiscal agents, the value of which would be hard to estimate.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

49

It is argued that the only real contribution that the Government makes to the
Federal reserve banks is the Federal reserve note, and that is a contribution
only to the extent to which the Federal reserve note is not specifically covered
by a gold reserve.
There is undoubtedly a strong feeling throughout New England that there
should be an equitable division of the profits, if any, of the Federal reserve
banks. It has been pointed out that in the summer of 1913 the original Glass
bill as it passed the House of Representatives provided for 5 per cent cumulative dividends to member banks, the creation of a surplus equal to 20 per
cent of the capital stock, and the division of any additional earnings between
the Government and the Federal reserve banks in the proportion of 60 per cent
to the Government as a franchise tax and 40 per cent to the reserve banks to be
distributed by them to their stockholders in proportion to the average reserve
balances carried during the year. The Owen bill, as it passed the Senate, provided for 6 per cent cumulative dividends, the creation of a 40 per cent surplus,
and th payment of 50 per cent of any earnings remaining as a franchise tax
to the Government, and the setting aside of the other 50 per cent as a trust
fund for the payment of claims against insolvent member banks. This introduced the principle of a guaranty of deposits and would have tended to put all
member banks on the same footing. Bankers generally protested and the House
conferees would not agree to this provision, The differences between the
Senate and the House were compromised by the conference committee and the
bill as reported by that committee, and which finally became a law, provided
for 6 per cent cumulative dividends, the creation of a surplus of 40 per cent,
and the payment of all additional earnings to the Government as a franchise
tax.
In 1919, section 7 was amended so as to provide for a surplus equal to 100
per cent of the subscribed capital and the retention by the banks as a further
addition to surplus of 10 per cent, the remaining 90 per cent to be paid to
the Government as a franchise tax. The surplus created, however, under the
present law, goes to the Government when the banks are finally liquidated.
I* have made no effort to influence banking sentiment in this district but have
taken some pains to ascertain just what the sentiment is. There is no disposition to change the character of the Federal reserve banks; in fact, most of
the banks are anxious that they should be continued as reserve banks and not
as competing banks. There is no longer any general sentiment in favor of
Interest on deposits, but there is a strong feeling that member banks should be
accorded the benefits which usually accrue to stockholders
I think that banking sentiment in New England is in favor of an amendment
to section 7 which would provide, first, for the payment to the Government of a
specific tax by Federal reserve banks-—a tax based upon the uncovered portion
of Federal reserve notes outstanding, which, after all, is the Government's real
contribution to the system. I have heard suggestions made that this tax be
fixed at 2 per cent, which is the same as national banks pay, and it has been
pointed out that with this tax in effect in 1919, 1920, and 1921 the Government
would have received a large return from it, and the Federal reserve banks
would have been well able to pay it. In 1922, when the reserves were large, the
earnings were small, and the tax would have been small. I believe that New
England bankers generally would like to see the 6 per cent cumulative dividends
continued with no further additions to surplus, and that they would like to have
excess earnings, if any, after payment of taxes and dividends, distributed to
member banks in proportion to their reserve balances. This principle was recognized by the Glass bill, which passed the House of Representatives in 1913.
I again repeat that I have heard of no disposition whatever to seek to interfere with the administrative and regulatory powers of the Federal Reserve
Board, and that banking sentiment here is not actuated by a desire for the
actual profit but rather by a feeling that the present provisions of section 7 are
not equitable in that the nonborrowing bank gets no direct benefit, while its
reserve is used often at a profit by the banks which are borrowers.
I have been interested in reading the discussion of this matter in the last two
issues, September 1 and September 8, of the United States Investor, written by
Mr. Frank P. Bennett, who tells me that he made the suggestions contained
therein after discussing the matter with many bankers throughout New
England.
5. Par collections: I have not heard of any sentiment whatever in this district
.against the par collection system, and everything that has been reported to me
foy our field representative indicates a favorable sentiment.




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

I am also advised that there has been no general sentiment in favor of abolishing the office of Comptroller of the Currency since March, 1921.
There does not appear to be any desire on the part of any New England bank
to establish branches outside of its own town or city. In metropolitan Boston
which embraces several municipalities, there are two or three national banks,
as well as several trust companies, which have branches in various parts of the
city and in the suburbs. The national banks which have branches have
acquired them either by establishing them while they were operating under
State charters as trust companies or else through merger with converted national banks which had established branches while they were trust companies.
One or two other national banks are considering the question of establishing
branches, but if they do will probably acquire them through mergers. So far
I have heard of no talk of any national bank surrendering its charter for the
purpose of establishing branches as a State institution, although it is probable
that one large national bank would have surrendered its charter had it been
unable to establish branches in the manner above described. In many large
cities it appears that the establishment of suburban branches is becoming more
and more a necessity for a down-town bank.
Very truly yours,
W. P. G. HARDING, Governor.
Hon. D. R. CRISSINGER,

Governor Federal Reserve Board,
Washington,

D. G.

FEDERAL RESERVE BANK OF N E W YORK,

September 22, 1923.
SIRS : We have received and have given careful consideration to the board'sletter of September 8, 1923 (X-3883), which requested our views on the subject matter of the inquiry by Congress into the question of membership in
the Federal reserve system.
The matters suggested for discussion seem naturally to fall into two classifications, viz:
1. What is the effect of the present limited membership?
2. Why do not more eligible banks become members?
With respect to the first, we submit the following:
The proportion of membership in this district is relatively high. Out of
a total of 1,183 banks, 830, or TO per cent, are members of the Federal reserve
system. The division by States is as follows:
Member
banks

Total
banks

Percentage of
membership

f

New York (entire)
New Jersey (12 counties)
Connecticut (1 county)
Total

(114
204
12

. . . .
. ..

870
283
30

71
72*
40-

830

1,183

70-

With this high proportionate membership, and partly because of it, the
banks of this district were not affected by the adverse economic conditions
of 1920 and 1921 to the same extent as were the banks in parts of the country
where membership was less general. There were in fact no instances of bank
failure during this period which could be attributed to general banking or economic conditions. A substantial number of banks temporarily affected through
the dereliction of officers r.r from other causes were able to meet demands;
upon them through their relation to the Federal reserve system, together with
the assistance of National or State banking departments. This is a condition,
which has been more or less general in Federal reserve districts having a large
proportion of member banks.
The question, however, can not be answered from the limited experience of
one district. In the country as a whole one-third of the banks belong to the
Federal reserve system. But this one-third represents approximately two-




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

51

thirds of the total banking resources of the country; membership has appealed
more generally to the larger city banks. Hence the Federal reserve system
has been able to exercise its influence more generally in the centers of population than in the rural communities. In those States where membership was
proportionately smallest it was natural that the credit-making power of the
Federal reserve system should be least available to the public. Nevertheless
it can not be doubted that even in those regions where the Federal reserve
system was unable to exercise a direct influence nonmember banks secured
benefits indirectly through correspondent member banks.
An indirect influence is never as effective as a direct influence. * From the*
standpoint of the Federal reserve banks, misinterpretations of the acts and
purposes of the system have been most general in those regions where its influence was felt indirectly; and from the standpoint of the nonmember banks
the indirect relation has limited their ability to adjust themselves to varying
economic conditions. If the influence of the Federal reserve system is to be of
maximum effect and benefit indirect relations must yield to direct relations
and the proportion of membership must increase.
The system is bound to move in one direction or another; its membershipwill increase or decrease. Any large decrease will impair its ability to serve
the credit needs of the country, not only because the member banks, which
are the principal means for making Federal reserve credit available to the
country, will become fewer, but because the credit-making powers of the
Federal reserve banks themselves will be lessened.
Individually both member and nonmember banks will benefit from an extension of membership. In a crisis the member banks now have to provide
credit for many nonmember banks, which may involve additional expense to
the latter and possible danger to both.
Outside but expert testimony on the benefit of a wider extension of membership is furnished in a resolution adopted by the directors of the National
Association of Credit Men on September 20, 1923:
" The Federal reserve system has saved the country from several panics,.
and if the present membership has rendered so great a service to the country
no stretch of imagination is required to appreciate how very safe we would
be if every qualified bank were to enter the system."
A larger membership would make credit more generally available not only
because the Federal reserve banks would have added credit-making power, but
because that credit would reach the users of credit more directly. This would:
result to the special advantage of those regions where membership is now less
general, and where in emergencies credit is inadequately supplied.
2. The reasons given by nonmember banks in this district for not joining the
Federal reserve system may be summarized as follows, in the order of their
importance:
A. Cost, because of the loss of interest on balances, inability to cpunt cash
in vault as reserve, and limited dividends.
B. Ability to secure benefits from correspondents without membership, and
disinclination to sever these relationships.
C. State laws, prescribing reserve requirements at variance with the
requirements prescribed by the Federal reserve system.
D. Inconvenience of further examination and supervision.
A. Cost: Of these three considerations the argument of cost is most often
encountered. Yet the officers and other representatives of the bank, who are
most closely in contact with member banks, have found that in most cases
membership in the Federal reserve system involved no, or very little, additional
expense. It does not appear, generally speaking, that membership has resulted
in reduced profits to State banks either through loss of interest on reserve
balances formerly kept with city correspondents, or through loss of exchange on
checks; where earnings have been reduced in one direction they have been
increased in others. The special services afforded by the system and the
earmark of security which membership gives is usually regarded as ample compensation for any added expense incurred.
Few country bankers have a cost-accounting system which enables them to
compute precisely the cost of membership. The most obvious factor as an
active deterrent to membership is the loss of the interest which the country
banker has been earning on his reserve balance with his city correspondent.
Under the Federal reserve act country member banks are obliged to keep 7
per cent of their demand deposits as reserve, wholly with the Federal reserve
bank. Under the national bank act a country national bank had to keep 6




52

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

per cent in vault, and was permitted to keep an additional 9 per cent on deposit
in a reserve or central reserve city, making a total reserve requirement of 15
j>er cent. Superficially the reserve requirement for country member banks
under the Federal reserve system is 7 per cent, as compared with 15 per cent
formerly required under the national bank act But actually there should be
added to the 7 per cent which country banks are required, to keep on deposit
with the Federal reserve banks the following amounts, which are not counted as
reserve
Cash in vault, about 3 per cent; float, about 2*£ per cent; balances with city
correspondents, about 2 per cent; total, about 7% per cent.
Thus the reserve actually required of country national banks is very close
to the reserve previously required, and the amount on which interest is earned
is much reduced. In the case of New York State country banks, for which
the State law requires only a 10-per cent reserve, the loss in interest on reserve
deposits is even more pronounced.
It has been observed, however, that country bankers are now thinking less and
less about the loss of interest on reserves. They recognize the fact that if the
Federal reserve banks in seasons of slack credit demand, as well as in seasons
of active credit demand, were obliged to pay interest on deposits, they would be
obliged at all times to invest their funds freely, and in consequence would
necessarily compete with banks everywhere. They recognize also that such
action by the Federal reserve banks would create forced inflation with all the
•evils appertaining to it. Latterly the country banker in this district has argued
rather that his participation in the earnings of the Federal reserve bank should
not be limited to 6 per cent on his stock ownership, and that in years when
Fereral reserve profits warranted the member banks should share somewhat
more largely in those earnings.
The loss in exchange on checks is not at present a factor of importance in
this district, since all banks, whether member or nonmember, pay their checks
at par! This is a question which may well be argued on its own merits, quite
apart from membership in the Federal reserve system. Because of the check
collection system now operated through the Federal reserve banks and
the absorption by the latter of costs formerly held to justify the charging of
exchange, the exchange charge has become obsolete and unnecessary. Appended
hereto is a memorandum prepared for another purpose which discusses the
Tarious objections to the payment of checks at par.
In summary of the foregoing there are certain tangible losses which country
ftanks in this district may have to incur if they join the Federal reserve system.
Balanced against these are intangible benefits derived from the services rendered by the Federal reserve banks, the advertising value attaching to membership, and added insurance in times of severe credit demand. These benefits, if
fully taken advantage of, permit the country banker to operate more effectively,
and therefore more profitably.
B. Ability to secure benefits from correspondents: Many country bankers
"believe that through their city correspondents they can obtain many of the
benefits.of membership indirectly and at the same time secure from their city
correspondents advantages and services which the Federal reserve banks are
not in a position to give. It is undoubtedly true that certain of the services
performed by city banks for their country correspondents enn not be performed
by the Federal reserve banks. The latter have confined themselves to giving
mechanical services as distinguished from such services as giving information
and advice on securities, lending money on call or time, affording participations
in loans and syndicates, purchasing commercial paper, etc. These and other
similar services the city banks can and do render to their country correspondents, and in consideration of them many country banks maintain balances with
one or more city correspondents.
The services which the Federal reserve banks render are of a nature consistent with the purposes of the Federal reserve system and include the supplying
of currency and coin, the collection of checks, the collection of noncash items,
the safe-keeping of securities, the purchase and sale of securities on instruction,
the transfer of funds by wire, etc. Many of these services are interrelated with
other operations of the reserve banks and tend to give the country member
banks a participation in the benefits of the system equal to those enjoyed by
city member banks Many of them are of such a character that they can not be
carried on as expeditiously by city correspondents or in the gross so economically
as by the Federal reserve banks.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

53

These services are important factors in insuring the permanency of the
Feleral reserve system, because through them the Federal reserve banks are
constantly in contact with the member banks, and without them contact with
member banks, particularly country member banks, would be impaired. To
most State banks the value of these services, rendered directly and without
cost, constitute a benefit which considerably offsets the expenses involved in
membership. To country national banks, whose membership is compulsory as
long as they remain in the national system, the services are often important
considerations in determining* their continuance as national banks.
Further, the services tend to make the Federal reserve system a living bank
organization, because efficiency of operation can not be effected on an emergency basis. The services are sufficiently continuous to insure the maintenance
of a well-knit organization, available for use at all times, emergency or otherwise. A Federal reserve system regarded solely or mainly as a means to
supply currency and credit in emergencies is a Federal reserve system frozen
and without human relation.
No correspondent brnk can give the snme services as the Federal reserve
bank as directly or as fully, and when the city correspondent serves as the
medium through which these services are rendered expense of handling is
incurred, and that expense naturally falls upon the user of the services, namely
the country banker.
Most of the Federal reserve banks maintain limited organizations which maintain, by visit and otherwise, relations with member banks. Their main function has been to ascertain and eliminate the difficulties which country banks
have met in their various dealings with the reserve banks. They have also
informed the country banks how to make most effective use of Federal reserve
services. They have done much to place country banks on a parity with city
banks in their relations to the Federal reserve system.
C. State laws: In the States of New York and New Jersey State reserve
requirements are no longer effective on member banks; on the contrary, a State
bank becoming a member of the Federal reserve system becomes subject to
the reserve requirements of the Federal reserve system only. In the State of
Connecticut, however, State reserve requirements are still effective against
member banks. There State laws require the retention of a certain amount
of cash in vault and specify the type of, security in which savings deposits
may be invested. Thus upon Connecticut State banks which join the Federal
reserve system two sets of reserve requirements are effective, those of the State
and those of the Federal reserve banks, and in every item the more stringent
of the two sets of regulations prevail. Consequently State banks which become members of the Federal reserve system are often in unfavorable competition with both national banks and State banks. Therefore many State
banks are deterred from becoming members. This, bank, however, is affected
only to a limited extent, because only the westernmost county of Connecticut is
in this district.
D. Inconvenience of further examinations and supervision: In times past
there has been considerable complaint of the number of reports required by the
Comptroller of the Currency and reserve banks, and particularly of " interference in banking methods " on the part of bank examiners. Recently there have
been fewer complaints of tins character. Many of these complaints were based
upon misunderstanding and in general may be regarded as an unimportant
factor in restraining banks in this district from joining the system.
A more positive deterring influence has been a reluctance on the part of State
banks to submit to an examination preparatory to entrance into the reserve
system. These cases have resulted usually from the possession of slow or
doubtful assets which might be criticized, and discussion of this as a restraining
factor may therefore be dismissed.
Possible remedies.—There are four ways, among others, to encourage increased membership in the Federal reserve system:
1. To compel membership by Federal law and undergo the test of the courts
on the question of constitutionality. A possible precedent was the taxing out
of existence of State bank currency when the national banking system was established. Such a plan would lead to endless controversy and to a type of unwilling membership of doubtful benefit.

2. To secure uniformity of reserve requirements for banks, both State and
national. This means a modification of many State laws and possibly a modification of the Federal reserve act itself. The effect of such legal changes, how-




54

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

«ver, would remove the penalty now attaching in some States to State banks
becoming members of the Federal reserve system.
3. To educate systematically all eligible nonmember banks upon the value
of membership, appealing both to their self-interest and to their public spirit.
This would result in a voluntary membership of joint benefit to the banks and
the system. It is necessarily a long process, but in certain districts has been
successfully pursued.
4. To make membership more attractive financially. Should this prove to be
possible, it would remove the main obstacle in the way of an enlarged membership of State banks of this distrct in thje Federal reserve system. But any plan
so designed should be framed so as to preclude the chances of inflation Two
of the plans sometimes proposed would lead inevitably to inflation in greater
or less degree:
(a) Payment of interest on reserve deposits. This presupposes greatly enlarged earnings by reserve banks in years of any but the most intense credit
demand. At all times, slack or active, the reserve banks would have to keep
their funds very generally invested . The result would be that the reserve
banks would have to initiate competition with national and State banks,
interest rates would be cut and business be unhealthily stimulated as inflation
advanced. It should be borne in mind that an investment by a reserve bank
corresponds to the interjection of fresh gold into the money market, and funds
so invested provide additional reserve upon which member banks can build
deposits. In other words, an investment by a reserve bank is likely to be multiplied in the loan accounts of banks generally. And excessive investment would
lead to excessive multiplication of bank loans.
(&) Reduction of the reserve requirements for country banks. To reduce
reserves releases funds not previously available for investment. Unless the
revised reserve requirements represented a fair average of all reserve requirements now effective on country banks, both State and national, and unless
there was fair assurance that a great majority of banks in States where reserve
requirements are now lowest would apply for membership in the system and be
admitted, a large volume of fresh funds would be released for investment. Or
funds so released would be available as reserve for additional deposits. In
^either case inflation would result. When reserve requirements have been reduced in this country heretofore, loan expansion has followed.
A third plan may or may not be open to a similar objection, depending on
how it is framed:
(c) Payment of additional dividends upon Federal reserve bank stock when
:and if earnings warrant. Such a plan would result in a closer relationship
between the member banks and the reserve banks and no doubt also in a fuller
attention on the part of the member banks to the operations carried on by
the reserve banks. But if from such a plan pressure resulted upon the reserve
banks to make earnings, it would lead to inflation. In years of quiet credit
demand the reserve banks are unlikely to earn more than their expenses, and
in that case under the present law no return to the Treasury results. In years
of larger credit demand, if additional dividends to the batiks are to be allowed
and if pressure to make large earnings are resisted, the return to the Treasury
would be less than under present law. In other words, some of the funds now
derived by the Treasury would be shared with the banks.
The foregoing views are offered for your consideration.
Very truly yours,
J. H. CASE, Deputy Governor.
FEDERAL RESERVE BOARD,

Wasliinfftoit, I). C.

FEDERAL RESERVE BANK OF PHILADELPHIA,

September 10, 1923.
IHon. D. R. OJUSSINGEII.
Governor Federal Reserve Board,
Washington, 1). C.
MY DEAR GOVERNOR CRISSINGER : In response to your letter of the 8th instant

(X-3883) I beg to reply as follows, all statements of fact and expressions of
-opinion, except where otherwise specified, being applicable only to the third
Federal reserve district:




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

55

Assuming that it was the intention of the framers of the Federal reserve act
to create a genera! banking system for the United States in which all of the
national banks and most of the State banks would be included, it is regrettable
that this expectation has not been fully realized. Aside from that general
consideration, however, I can not see that the fact that the number of State
banks which have availed themselves of membership in this district is comparatively small has had any distinct effect upon financial or business conditions.
For the purpose of doing what lies in our power to carry out the assumed
intention of the Congress, we have always been alert to increase the membership of the system, but we have always done this quietly and without admitting any great interest in the matter. We believe that this is the proper
policy and shall continue to follow it unless directed to the contrary. We
think that any concerted and public attempt to increase membership would be
a mistake. In the first place, we doubt whether it would be as effective as the
methods which we are now following. In the second place, it would be regarded
as a confession of weakness or failure, or at least a dissatisfaction with present conditions. In the third place, if it had any result at all, the result would
probably be to bring in applications from institutions which would be the
least desirable members. It would be difficult to refuse their applications
in the face of a campaign for additional membership, and such refusal might
have serious results to them.
The eligible State banks which fail to become members of the Federal
reserve system belong in almost every case to one or more of the following
-eight classes:
1. Those whom it would not pay to lose interest on their cash reserves.
2. Those whose affairs are not in such condition that they care to submit
to examination.
3. Those who feel that they obtain most of the advantages of membership
through a correspondent bank or banks. •
4. Those who have an idea that membership would subject them to some
sort of Federal control or restriction.
5. Those which have among their officers or directors one or two old-fashioned men who are constitutionally prejudiced against " new things," and
whose prejudices the majority do not care to override.
fi. Those who are merely ignorant and uninterested.
7. Those who have been advised against membership by State officials or
by their correspondent banks.
8. Those who have little or no paper eligible for discount.
We are not clear as to Mr. McFadden's meaning in asking " What administration measures * * * are being taken to increase such membership? " Assuming that it is intended to mean " What efforts, if any, are
we taking to get new members? " I would say that we have constantly' in
mind those institutions which it would be most desirable to secure as members.
When the traveling representatives of our bank-relations department are
in a town, they always call upon the nonmember as well as upon the member
institutions. The officers of this bank seek contacts wTith the officers of
these desirable institutions at conventions, group meetings, or other visits
to their neighborhood. We avail ourselves of every opportunity to show
them any courtesy, and whenever the opportunity offers, without seeming
to unduly press the matter, we talk membership to them. We believe that
if a large number of small or undesirable institutions became members it
would have little or no effect—possibly a bad effect—upon the larger and more
desirable institutions, but each time that we get an institution of the latter
class it makes it easier to secure ultimately such as we want of the former
•class.
The above report covers all the information which it occurs to me that it
is within my power to give to the board on this subject. I shall, of course,
be pleased to cover any other points desired, or to make more clear anything
that may be obscure in what I have said. I am,
Very truly yours,




GEO. W. NORMS, Governor.

56

INQUIRY OX MEMBERSHIP IN FEDERAL RESERVE SYSTEM
FEDEKAL RESERVE BANK OF CLEVELAND,

September 25, 1923.
Hon.

D. R. CRISSINGER,

Governor Federal Reserve Board,
Washington, D. C.
DEAR SIR : This is to acknowledge the board's letter of September 8, X-3883 ?
subject, " Congressional inquiry on membership in the Federal reserve system,"
inclosing copy of the letter addressed to the board by the chairman of the
Joint Committee of Inquiry, and indicating a desire to be informed with respect
to the following:
1. Why more eligible State banks and trust companies do not become members of the Federal reserve system.
2. What measures, if any, are being taken to increase such membership; and
3. Whether any change should be made in the existing law or in the rules
and regulations of the Federal Reserve Board.
There are a number of reasons advanced by the eligible State banks in this
district for not becoming members of the Federal reserve system, the principal
ones being:
1. Nonpayment of interest on reserve balances.
2. Inability of the Federal reserve bank to collect at par all of its cash items.
3. Fear that membership will mean the preparation and filing of numerous
reports.
4. Fear that a certain amount of red tape is required in dealings with the
'Federal reserve bank.
5. Fear of Government control.
The last three reasons are assumed and can be met readily.
In attempting to offset the first two reasons by explaining the advantages
which would accrue through membership in the system, we are often confronted by what, to us, appears to be one of the principal reasons why moreeligible State banks are not members of the Federal reserve system; that is,
that we have in our present membership too many banks that are "passive"
rather than " active " in the support of the system.
We have found on numerous occasions, when discussing membership with a
State bank or trust company, that they had been advised by representatives
of the larger banks, with whom reserve balances were maintained, not to
become members; that their needs had been provided for in the past; that
they would be taken care of in the future; that the larger banks were equipped
to extend many services that could not be extended by the Federal reserve
bank; and that the smaller bank was not manned to furnish the numerous
reports and certain other requirements of the Federal reserve bank with
respect to sorting of checks and currency.
In the smaller towns when a prospective member consulted with a neighboring member we have found that very often no enthusiasm over membership was displayed.
The greatest aid in obtaining new members would be the active cooperation
of a satisfied membership. Consequently, any amendments to the Federal
reserve act that would make membership more popular would help solve the
problem.
The greatest degree of dissatisfaction exists with banks located outside the
centers. Many of this class of banks feel that the banks in the centers enjoy
advantages and profit through membership to a greater extent than they. Onething that might be done to meet this objection is to permit a more liberal
basis for computation of reserves on the part of the 7 per cent reserve bank by
allowing this class of banks to deduct from their deposits'the amount of cash
items for collection in the hands of the Federal reserve bank before computing
their reserves.
National bank members complain about the limitations imposed in making
mortgage loans, and their enthusiasm for the system would be increased if
they were permitted to lend a greater proportion of their time deposits on
mortgage security of the same kind and under the same conditions as are permitted to State banks. This complaint and request comes principally from the
7 per cent banks.
Another objection that is raised is lack of participation in the earnings of
the Federal reserve bank. Many banks feel that something more than, a 6 per
cent dividend on their capital payment is due them.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

57

The principal industry in the fourth Federal reserve district is not agriculture, although the district ranks high in the value of its agricultural products.
It is our opinion from close observation during the stress of times in 1920 and
1921 that the legitimate credit needs of agriculture in the fourth district were
well provided for, so that the necessity for stimulating membership in this district to provide additional resources as a basis of additional credit for agriculture is not as great as in some of the other districts.
While we have no one actively engaged in direct solicitation of membership,
our officers and our field men of our member bank relations department do not
overlook an opportunity to develop prospects or to take advantage of inquiries
from eligible banks to explain the various benefits of the system.
Very truly yours,
E. R. FANCHER, Governor.
FEDERAL RESERVE BANK OF RICHMOND,

September 22, 1923.
Subject: Congressional inquiry on membership in Federal reserve system.
MY DEAR GOVERNOR CRISSINGER : Referring to the board's letter of September

8 (X-3883), under the above caption, I submit the following observations on
the letter of Hon. L. T. McFadden, chairman, etc., addressed to the board, under
date of September 6, in which it was indicated that comment or opinion would
be desired by congressional committee upon the following points:
1. The effect of the present limited membership of State banks and trust
companies in the Federal reserve system; whether or not it is advisable to attempt to increase the membership of the Federal reserve system.
2. The present financial conditions in the agricultural sections of the United
States.
3. Federal reserve system reasons which actuate eligible State bank and trust
companies in failing to become members of the Federal reserve system.
4. What administration measures, if any, have been taken and are being taken
to increase such membership.
5. Whether or not in the opinion of the Federal Reserve Board any change
should be made in the existing law or in the rules and regulations of the Federal Reserve Board.
6. Suggestions of changes in the method of administration to bring about in
the agricultural districts a larger membership of State banks and trust companies in the Federal reserve system.
Incidental to comments or opinions on the foregoing, consideration appears to
be invited by Chairman McFadden to the following matters, which are specificially mentioned in his letter as being necessarily involved:
(a) Branch banking.
(b) Par collections.
(c) Abolishment of the office of the Comptroller of the Currency.
(d) Administrative practices and policies of the Federal reserve system.
(e) Administrative practices and policies of the office of the Comptroller of
the Currency.
(/) Interest on daily balances of the Federal reserve system.
(g) Conflict and competition now existing between national and State banking laws.
COMMENTS

1. The abstract of conditon reports of State bank and trust company members and of all member banks, compiled by the Federal Reserve Board as of
June 30, 1923 (Report No. 21), showed that the aggregate resources of all
member banks of the Federal reserve system were $33,795,000,000. The report
of the Comptroller of the Currency as of June 30, 1922, showed that the aggregate resources of all reporting banks in the United States and inland possessions were $50,425,000,000. Assuming that the aggregate was practically the
same on June 30, 1923, the resources of the members of the Federal reserve
system constituted 66 per cent of all banking resources of the country.
The comptroller's report of June 30, 1922, showed the aggregate resources of
18,232 State (commercial) banks in the country to be $13,064,000,000 and the
resources of 1,550 loan and trust companies to be $8,553,000,000, so that the
aggregate resources of 19,782 commercial State banks and loan and trust companies combined were $21,617,000,000. The aggregate resources of 1,620 State




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INQUIRY OX MEMBERSHIP IN FEDERAL RESERVE SYSTEM

bank and trust company members of the Federal reserve system, as shown in
the board's Report No. 21 on June 30, 1923, were $12,293,000,000, so that theFederal reserve system embraced about 60 per cent of the aggregate resources*
of all commercial State bank and trust companies, although it embraced but
little more than 8 per cent in the number of such commercial State bank and
trust companies.
Furthermore, taking the aggregate resources of the commercial State banks
and loan and trust companies as of June 30, 1922, amounting to $21,617,000,000,
and addng to that sum the aggregate resources of national banks, as shown by
the comptroller's report on April 3, 1923, $21,612,000,000, making the total resources of commercial State banks, loan and trust companies, and national
banks $43,229,000,000, it will be seen that the Federal reserve system comprises
about 78 per cent of the total commercial banking resources of the country,
although it comprises only about one-third of the number of all such banks and
trust companies; that is, 1,620 State banks and trust companies and 8,236
national banks, out of a total of 29,724 of all commercial banks and loan and
trust companies. It is to be taken into account that a very considerable number
of State banks are not eligible for membership. The board is probably in
position to determine the number of eligible State banks out of this total.
It is apparent that the Federal reserve system embraces a sufficiently large
proportion of the volume of commercial banking resources of the country to
render its credit power and influence thoroughly effective, as proved during the
war period, when the demands upon it were probably greater than will ever
again be the case. The effect of the present limited membership of State
banks is, therefore, clearly negligible or limited when we consider whether
the credit and currency issuing power of the system is adequate for the commercial needs of the country. This has been proven.
Whether it is advisable to attempt to increase the membership of the Federal reserve system, therefore, must be considered from the point of view
of whether the system can be made of greater usefulness through increased
membership, regardless of whether the acquisition of a large number of State
bank members would strengthen the system. It is the usefulness of the system
to the banks and the public rather than the strengthening of the Federal
reserve system which is the issue. As to the enlarged usefulness of the system,
to the public and the banks through increased State bank membership, it
is to be considered whether the State banks now out of the system do not
derive all practical benefits possible through the present membership of the
system. As bearing upon one feature of this question, it is pertinent to state
that at the height of credit expansion in 1920 our member banks were lendingabout one-third of all the funds which they were borrowing from us to nonmember banking institutions. At the present time nonemember banks enjoy,
indirectly through member banks, practically all of the advantages of the credit
and collection facilities of the Federal reserve system.
The effect of this is to divide banks into two classes, one class contributing
to the resources for the maintenance of the Federal reserve system and bearing
whatever burdens may be incident to the creation and existence and operation
of the system and the other class enjoying the fruits thereof and the protection
without any contribution. Thus member banks which solicit and cater to the
accounts of nonmember banks are accustomed to offer all the credit and conveniences and facilities, practically, which the Federal reserve banks could
offer, although they are able to offer these privileges to a very material extent
only because of their membership in the Federal reserve system. At least
membership in the system gives them such a feeling of strength and security
that they are in a better position to offer such facilities to nonmember banks?
than before the organization of the system.
A very large number of member banks, however, do not carry the accounts
of other banking institutions, and it is such banks which naturally feel that
they are contributing the means of protection which is being accorded to nonmember banks of the system and bearing burdens incident thereto. This
would naturally engender a feeling of discontent. The feeling is intensified
in many cases by the fact that nonmember banks can collect checks on them
through the Federal reserve system free of charge, while they must bear in
many cases the expense of collecting on those nonmember banks; either they
are compelled to pay a direct exchange charge or compelled to keep a larger
compensating balance.
It appears to be desirable that all eligible commercial banking institutions
should be included in, or contribute to, the maintenance and operation of,




INQUIRY ON MEMBERSHIP IN FEDERAL. RESERVE SYSTEM

59

the Federal reserve system, if only to equalize the burden which is necessary
to be borne in order that the system may be maintained. When the word
" burden " is used, it is in a comparative sense; for it is easy to demonstrate
that, notwithstanding any specific burden, the advantages to the banking
business of the country overwhelmingly outwe'^h the cost of any contribution
made by members to the maintenance of the system. To prove this, it needs
but to be stated that the banking business of the country, measured by the
volume of resources of the banking institutions, has grown as much, or practically as much, during the eight years of operation of the Federal reserve
system as it grew from the foundation of the Republic up to that time.
2. The financial conditions in the agricultural sections of this district give
evidence of material improvement. The money outcome of current crops will
add to this improvement, and a large volume of liquidation is expected from the
sale of this year's crops. Generally speaking, the recovery from distressing
conditions has been more rapid than could have been anticipated. The losses
of certain individuals and certain communities were, of course, heavier than
the losses of others, and the recovery in such cases will be slower. This
opinion is confined to this district.
3. The answer to this query has been in large part covered by the answer
to query No. 1. A very large part of State banks remain out of the system
from selfish regard for immediate profits; all other reasons are wholly subordinate to this one.
State banking laws in many States permit a greater freedom of operation
and do not impose in some cases that reasonable and wholesome restraint which;
should be exercised by law over all banking institutions. Supervision of
banking practices in many States is not as thorough as membership in the
Federal reserve system would necessarily entail. It is possible and probable
that this greater freedom of action influences a certain number of banks..
Many banking institutions combine a commercial banking business (requiring,
according to experience, the maintenance of proper reserves) with business of
other character, and they desire to be free from the burden of maintaining
a specified reserve. This applies to a considerable number of trust companies:
It is undoubted that the facilities offered to nonmember banks by those banks
within the system constitute a very powerful reason for their remaining out
of the system.
There is believed to be a very strong undercurrent of feeling that the Federal
reserve act is not sufficiently liberal to member banks in fundamental principles. The member banks provide the capital' and the deposits of reserve banks.
While these contributions are not the only source of earning power of Federal
reserve banks—the issue of currency being a material source of earning power—
the member banks are believed to feel that they are entitled to a greater
degree of ownership in Federal reserve bank assets and earnings than they are
accorded by law.
If it were possible to pay member banks interest on their reserve deposits,
as correspondent banks pay interest on their deposits, it is believed the way
would be open for the entrance of a large number of State banks, and the feeling of dissatisfaction would be removed in the case of a very considerable
number of member banks. The payment of interest on deposits, however, is
not desirable nor is it possible. It would impair or undermine the usefulness
and integrity of the reserve system. Member banks are called the stockholders of the Federal reserve banks, but their ownership and power are
limited in all directions. When reserve banks were organized it was not expected that their earnings would ever excite the cupidity of member banks,
or that there would be any room for participation in earnings beyond the
dividend provided by law. There is undoubtedly a widespread feeling among
member banks that they should have a greater participation in earnings and a
greater ownership in accumulated and undistributed earnings. It is possible
to liberalize the law in this respect without injury to the fundamental structure
of the Federal reserve system.
With or without justification, there appears to be a feeling, at least on the
part of some member banks—and that to a considerable extent—that the Federal reserve banks are more governmental banks than is justified by their
inherent structure; that is, justified by the fact that the resources of the member banks only render the existence of the reserve banks possible. It is not
intended to imply in the foregoing the belief that the management of reserve
banks could safely be left to member banks. The experience in bringing about
the enactment of the reserve act and the long delay required are proof con-




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INQUIRY ON MEMBEESHIP IN FEDERAL RESERVE SYSTEM

elusive to the contrary. Since popularity of the reserve system is partly
involved in its membership, it is pertinent to allude to a feeling that is believed
to exist; that the structure of the reserve act invites, in some respects, political
interference to a greater degree than is wholesome or safe.
4. Recent amendments to the Federal reserve act materially reduce the
capital requirements of State banks. In this connection it is pertinent to
point out that State banks have all the advantages of national banks as members of the Federal reserve system, in addition to the broader privileges sometimes granted by a State charter. The matter of capital of the smaller banks
is one of these, but it is one which the State banks have no right to! feel
strengthens their position. Beyond doubt there are too many small banking
institutions—many of them not qualified by experience, or otherwise, for the
proper conduct of the banking business. This is not intended to be the advancement of a theory but a statement of fact.
It is not believed to be desirable to directly and indiscriminately solicit
membership of State banking institutions, but rather to set forth, as well
as may be done, the advantages of membership in the system, the protection
which the system affords to the banking business in general, and the vital
necessity for the maintenance of the system for the conduct and growth and
preservation against disaster of the banking business of the country, leaving
the invitation to all qualified and eligible banks to enter the system.
If it is possible, it should be brought about that it be not made to the special
interests of member banks to keep State banks out of the system on account
of the value of their reserve accounts. All Federal reserve banks, or most
of them if not all, maintain special departments to cultivate the good will
and understanding of all banks with which they come in contact (whether
members or nonmembers) and to spread an understanding of the operations
and benefits of Federal reserve banks. Further than this—which, indeed, is
an important feature of the conduct of the Federal reserve banks—no administration measures in this bank have been taken to increase membership. Many
State banks, at least in this district, while eligible so far as capital requirements are concerned, are far from eligible because of other conditions surrounding their management. It would be a considerable tibe before all State
banking institutions, technically eligible for membership, could be admitted
into the system.
5. Suggestions are given in the foregoing comments of changes in law and
administration which might possibly be made and which, if made, might result
in a considerable increase in the membership of the Federal reserve system.
It is believed to be a fact that in some sections of the country a number of
State banks have remained and are remaining out of the system because if
they became members they would have to give up exchange charges. It is
probable that any plan which would result in making par clearance general
and settle the question finally and forever would result in considerable addition
to the membership of the Federal reserve system. This, perhaps, is another
indication of selfish regard for immediate profits which tends to keep State
banks out of the system.
6. There are no comments other than contained in the foregoing with respect
to changes in the method of administration to bring about in the agricultural
districts a larger membership of State bank and trust companies. The trust
companies, as a rule, are located in the larger cities, although these cities may
be in a region whose chief interest is agriculture, and no provisions of administration conceived in the interests of agriculture would be any particular
inducement to trust companies so situated. It is probable that recent provisions
of law involved in so-called rural credit acts rather tend to keep State banks
in agricultural sections or rural communities out of the system than to bring
them in.
(a) Branch banking is a very vexing subject, but a very vital one to the
Federal reserve system so long as membership in the system consists chiefly
of national banks. It has been pointed out that State bank members of the
Federal reserve system have privileges more than the national banks because
of the greater liberality or flexibility of State banking laws. If State laws
encourage branch banking in their own State banking institutions, then the
situation must permit equal or like privileges to national banks in such States;
otherwise there would be offered an inducement to surrender national-bank
charters and take out State charters, even while retaining membership in the
Federal reserve system. It will be recalled that the privilege of withdrawal




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

61

from the system, which a national bank does not possess, is accorded the State
bank.
(b) The collection system is believed to be essential to the efficient operation
of the Federal reserve banks in the service of the public. The bulk of the
exchanges of the country is conducted and settled through Federal reserve
banks, and the final adjustments between districts in the ebb and flow and
seasonal operations of trade are made by Federal reserve banks through the
instrumentality of the gold-settlement fund. The expenses of these operations
are borne by the Federal reserve system, which under the present practice is
the real maker of exchange, the benefit of which is realized by nonmember and
member banks alike, as well as by the public. There is no just reason, in
view of this gratuitous service performed by Federal reserve banks, for the
existence of exchange charges by any banking institution. The universal, or
country-wide, par collection system would facilitate the entrance of State
banks into the reserve system.
(c) It is, of course, well understood that the Federal reserve banks are
brought into very intimate relation with member banks, especially at times
when the banks are borrowing, and supervision of the management and practices, particularly of the country member banks, has been proved by experience
to be necessary on the part of the Federal reserve banks. In the case of a very
considerable number of member banks, a Federal reserve bank will be possessed
of more intimate knowledge as to condition and management than the comptroller's office will often possess. It is believed that a close and cordial cooperation
should exist between the comptroller's office and Federal reserve banks and
between the examining forces of the comptroller and those of the Federal
reserve banks, and that if this can not be assured at all times because of separate organizations and functions supervision over member banks should be
lodged in the Federal reserve system.
(d) The administrative practices and policies of the Federal reserve system
have been developed by experience, and this experience during the major part
of the existence of Federal reserve banks has been highly intensive. These
practices and policies can only be developed and become more scientific and
effective—flexible where flexibility is needed and rigid where requirements of
law are at stake—in the course of time. It is believed that the highest ability
and experience should be an essential requirement in reserve bank administration and that inducements and rewards should be sufficient to attract and retain
men of such capacity. Continuity of administration is vitally necessary to
maintain efficient and satisfactory management of reserve banks.
The opinions here expressed are personal.
With these comments I am sending, for what they may be worth, issues of
the United States Investor, published in Boston on September 1 and 8, con*
taining an article on " Improving the Federal reserve act."
Very truly yours.
GEO. J. SEAY, Governor.
Hon. D. It. CRISSINGER

Governor Federal Reserve Board, Washington, D. G.

FEDERAL RESERVE BANK OF ATLANTA,

September 12, 1923.
FEDERAL RESERVE BOARD,

Washington, D. G.
DEAR SIRS: I have the honor to reply to your letter of September 8, 1923,
requesting my views in the matter of limited membership of State banks in the
Federal reserve system. Since the Federal Reserve Board promulgated its
rules and regulations for the admission of State banks to the system our bank
has pursued an active policy, endeavoring to persuade and induce State banks
in our district which are eligible to become members. We have had some success along these lines, but not as much as we expected and should have had,
in view of the credit conditions existing in the district. At this date there
are 1,680 State banks in the sixth (Atlanta) Federal reserve district. Of
these, only 147 are members. There are 148 State banks ineligible for membership on account of having a capital of less than $15,000, about 100 of them
being in Tennessee and the balance of 48 scattered throughout Alabama,
Mississippi, and Louisiana.
107679—26—PT 1
5




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INQUIRY 01$ MEMBERSHIP IN FEDERAL RESERVE SYSTEM

We have tried in various ways to obtain a larger membership of State banks.
The officers of our bank regular each year attend the various group meetings
and State conventions of bankers and have always in their addresses and in
personal contact with State bank officials discussed with them the advisability
of becoming members. On several occasions we have sent officers from our
bank to make a direct canvass of the State banks which we thought could be
induced by the proper presentation of the matter to become members. I will
say, however, these methods have proven only partially successful.
What we have said and written may have put some of them to thinking,
which later on bore fruit in the membership that we have obatined. I would
say that a large majority of those who have joined our system have done so
through imperative necessity to avail themselves of the rediscount privilege.
Some few have joined primarily for the protection it offered and for advertising
purposes.
As to my opinion on whether or not it is advisable " to attempt to increase
the membership of the Federal reserve system," I think it is advisable to increase the membership of the system, and that we should continue our work on
the same line as in the past. I think it desirable for the reason that in times
of financial stress we are practically forced to indirectly care for the needs
of the nonmember State banks, who borrow heavily from their correspondents
who are members of the system, and ultimately we have to carry the load. If
such State banks were members and carried their reserves with us, our lending
power would consequently be increased.
In reply to your inquiry as to the reasons which actuate eligible State banks
and trust companies in failing to become members of the system, my observation and experience in this district is that the main objection of a large number
of State banks is based on purely selfish grounds, they believing that the benefits accruing from membership would not compensate them for the losses sus!
tained on reserve deposits without interest and the remittance of checks without exchange. In other words, a great many State banks, in my opinion, feel
that they get a substantial benefit from the system through their correspondents without having to contribute anything material to it.
Another reason why many country State banks remain out of the system is
that they are discouraged from joining by their city correspondents, receiving
the assurance from them that they can take care of their requirements.
It seems to me that the Federal Reserve Board has been very liberal in
their rules and regulations favorable to the admission of State banks. I have
no suggestions to offer as to altering or changing the existing rules and regulations. However, there is one feature in this connection that may be stated.
It is that State banks as well as member banks feel that under the provision
of the Federal reserve act, in the distribution of the profits of the reserve
banks, that they are not treated fairly in such distribution. In other words,
they think too great an amount of the earnings goes to the Government, while
the member banks contribute fully or more than their share in furnishing capital to the reserve banks to operate upon. Along this line, my suggestion would
be to amend the Federal reserve act so that after the expenses of operation and
losses are charged off and the 6 per cent dividend paid to the stock-holding
banks, that the net profits then be divided one-half to the Government and onehalf to the member banks, provided that the 6 per cent dividend to member
banks would be considered as a part of the 50 per cent; of profits which they
would receive. As an example of this contention, the Federal Reserve Bank
of Atlanta paid to its member banks in dividends for the year 1921 the sum of
$245,861.62 and paid into the United States Treasury $4,480,251.19. If a more
equitable division of the profits were given to the member banks I feel that a
long step would be taken in gaining membership of good State banks.
In conclusion I may add that nearly all of the large State banks and trust
companies in this district have become members of the Federal reserve system.
They felt the necessity of it on account of having so many country correspondents, thus needing the protection of the Federal reserve bank, and being
able to obtain the privilege of rediscounting in order to take care of their
country bank customers.
Very truly yours,




M. B. WELLBORN, Governor,

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

6$

FEDERAL RESERVE BANK OF CHICAGO,

September 18, 1923.
FEDERAL RESERVE BOARD,

Washington, D. G.
(Attention Hon. D. R. Crissinger, governor.)
DEAR SIRS : In further reference to the subject matter in your letter (X-3883)*
and in response to your request for an expression of my individual views relating to the questions asked by the Joint Committee of Inquiry on Membership in the Federal Reserve System as set forth in the letter addressed to
you by Hon. L. T. McFadden, chairman of the committee, I am pleased to
advise you as follows:
Question. What is the effect of the present limited membership of State
banks and trust companies in the Federal reserve system?
Answer. At the present time approximately 10,000 banks, national and State
institutions, are members of the Federal reserve system, and including that
class of banks made eligible for membership under the terms of the recent
agricultural credits act, there are approximately 13,800 eligible banks which
are not members of the system.
The most important result ensuing from the limited membership is that
eligible nonmember banks are sharing in the benefits while making no contribution in support of the system. This I believe to be true notwithstanding
the provision contained in the Federal reserve act designed to prevent the extension of credit to eligible nonmember banks through the medium of member
banks.
Question. Is it or is it not advisable to attempt to increase membership in
the Federal reserve system?
Answer. My answer is in the affirmative.
Since, as above stated, eligible nonmember banks are receiving benefits^
it would seem advisable that such institutions should become members.
Question. What are the present financial conditions in the agricultural
sections ?
Answer. While, generally speaking, the available supply of credit throughout this district appears to be ample for legitimate purposes, many banks are
still suffering from the effects of overextension during the inflation period,
this being evidenced by the fact that they are possessed of an unduly large
proportion of unliquid loans. This, I believe, is particularly true with respect
to many banks operating in the agricultural sections.
Question. What are the Federal reserve system reasons which actuate
eligible State banks and trust companies in failing to become members of the
system?
Answer. 1. Loss of interest on reserve deposits.
2. Prejudice unfavorable to membership created by long continued agitation
on the part of a small minority of the banks throughout the country hostile
to the par collection system.
3. Belief on the part of many eligible nonmember banks that membership
in the system would afford no additional facilities beyond those which they
nowT receive from correspondent banks located in the financial centers.
4. In considering the large number of eligible nonmember banks and their
reasons for not joining, it should be borne in mind that the character of the
business conducted by many of these institutions and the nature of their loans
and other assets are such as would make it impossible for them to avail themselves of the credit facilities of the system to any material extent.
Question. What administration measures, if any, have been taken or are
being taken to increase such membership?
Answer. The bank relations department of the Federal Reserve Bank of
Chicago with an experienced manager and a number of field men visits all
member banks from time to time and, moreover, has at all times endeavored
in so far as possible to keep eligible nonmember banks informed with respect
to the facilities of the system, to answer all questions arising relating to
prospective membership, and where called upon, has endeavored to explain
just how membership in the system would affect each individual institution.
Question. Should any change be made in the existing law or in the rules
and regulations of the Federal Reserve Board?
Answer. I have no suggestions to offer.




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Question. Have you uny suggestions of change in method of administration
to bring about in the agricultural districts a larger membership of State banks
and trust companies in the Federal reserve system?
Answer. While, as stated above, this bank'has consistently endeavored to
inform eligible nonmember banks with respect to the benefits of membership,
for two and perhaps three years we have not carried on an aggressive campaign
of solicitation. I believe that interest in membership can be stimulated and
the membership increased by educating banks and the general public as to
what the Federal reserve system is and what it is not. This, in my opinion,
is an important and necessary preliminary worthy of consideration.
Respectfully submitted.
J. B. MCDOUGAL, Governor.
FEDERAL REVSERVE BANK OF ST. LOUIS,

September 20, 192S.

Subject: Congressional inquiry on membership in the Federal reserve system.
FEDERAL RESERVE BOARD, Washington, D. G.
GENTLEMEN: Replying to your letter of the

8th (X-3883) in regard to the
above subject, my views in connection with the questions contained in the
letter from the chairman of the congressional Joint Committee on Inquiry on
Membership in the Federal Reserve System are as follows:
The " effect of the present limited membership of State banks and trust
companies in the Federal reserve system " has been indirectly to throw the
credit burden of nonmember banks on the Federal reserve system without
their contributing anything to its support. In the majority of instances nonmember banks are accommodated through correspondents which are members
of the Federal reserve system. This is practically true even though the paper
of nonmember banks is never rediscounted with member banks.
Under normal conditions this perhaps has little effect in the communities
served by nonmember banks, but during such a time as the latter part of
1920 it has meant that communities served only by nonraember banks were
nothing like as well cared for as the communities served by member banks.
This, however, is not the fault of the system, as it can do nothing if nonmember banks do not exercise their option to join. If the communities thoroughly understood the situation they undoubtedly would force the banks to join.
Gradually they are beginning to see the necessity of the S3rstem. It, however,
is a slow process, but one that the congressional committee can help along by
the proper publicity.
In considering the advisability of attempting to increase the membership
of the Federal reserve system, one must bear in mind that the Federal reserve
banks now hold the bulk of the gold reserve of this country; that further
membership on the part of State banks does not necessarily result in any
increase in the gold holdings of the reserve banks, but dees result in an increased responsibility on the part of the reserve banks. This responsibility is
one to be gravely considered in view of the fact that State banks are under
State examination and supervision, and the character of this service varies
greatly in the different States. In some States it is good, in others it is very
lax, due to lack of proper appropriation for the procuring of competent examiners, political control, and, in some instances, inadequacy of the State law
itself under which the State banking department operates. A careful plan will
have to be devised on the part of the Federal reserve system in order that it
may keep in accurate touch with the condition of many small State banks in
order that the system may not be weakened by their membership rather than
strengthened.
In the eighth Federal reserve district, aside from the fac:; that weather conditions have been adverse for the past few weeks, the agricultural situation is
not bad. There is little or no reason why the credit needs of any community
in this district served by a well-managed bank, either member or nonmember,
should not be taken care of adequately.
The officers of the Federal Reserve Bank of St. Louis have always ma'de
it a practice to, whenever called upon or whenever the opportunity was presented, explain the operations of the Federal reserve system, with the object of




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

65

aiding prospective members in determining the question of membership. Care
has been taken to have the prospective member thoroughly understand what
membership in the system means from every angle, and to enable it to come
to a correct conclusion as to membership. The officers have not, however, at
any time urged banks to act contrary to their own views in the premises.
In my judgment, the principal reasons which result in eligible State banks
and trust companies failing to become members of the Federal reserve system,
are, in the order of their importance, as follows:
(1) No interest paid on reserve balances. At least this is the reason most
often given. From the viewpoint of both the prospective member and the member bank this loss is something tangible, and it is rather difficult for the average
banker to get a clear idea of the offsetting advantages of membership, which
require explanation, arid unless the banker is well skilled in banking he can
not comprehend them at a glance as he can the loss of interest.
To pay interest on reserve balances would necessitate increased revenue on
the part of Federal reserve banks in times of easy money. This would easily
easily result in active competition between Federal Reserve Banks and member
banks. It is wrong in principle to pay interest on reserves, and, as a rule, member banks appreciate this when the matter can be fully explained to them.
(2) Lack of knowledge of the system.
Lack of knowledge of the system is gradually being overcome, although it
is a slow process, as it is educational in its nature. It applies to both members and nonmembers, although naturally to a greater extent to the latter.
This bank from the opening of its doors has tried to meet this problem and
has done and is doing everything in its power to have member banks, nonmember banks, and the public understand the system.
(3) No difficulty in obtaining necessary accommodation through correspondents, and knowledge that the majority of the facilities of the system can be so
obtained.
This requires little further elaboration except to add that many banks have
had relations with correspondents of long standing and they hesitate to take
any steps that may interfere with such relations even when they realize that
membership in the system does not necessarily interfere with the relations already established. They seem to be afraid that it may have a tendency that
way. Correspondent banks have not always encouraged them to think otherwise.
(4) Requirements in respect to paper offered for rediscount.
The requirements in respect to eligibility of paper are now extremely liberal,
and about the only States that this applies to are those where the individual
loan limit is considerably in excess of 10 per cent.
The requiring of financial statements of customers comes under this heading. In fact wherever the requirements raise the standard of banking there
is liable to be the unfounded objection of " red tape."
(5) Needs of community or policy of bank does not make rediscounting
necessary.
(6) Objection to par clearance of checks.
The objection to par clearance of checks, so far as this district is concerned,
is, in my judgment, of minor importance.
(7) Propaganda of those opposed to the system.
Propaganda of those opposed to the system has undoubtedly created a certain amount of distrust on the part of some bankers as to the motives and purposes of the Federal Reserve Board and the management of the Federal reserve banks. It takes time to cure such matters. A more thoroughly informed
understanding of the system and a word from a satisfied member will accomplish more than anything else.
Before further legislative or administrative action is taken, it would, in my
judgment, be better to devote our efforts to creating, a better understanding on
the part of the bankers, as well as the general public, of the purposes, the
activities and the accomplishments of the Federal reserve banks.
Yours very truly,




D. C. BIGGS, Governor.

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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM
PKDERAI* RESERVE; BANK OF MINNEAPOLIS,

September 26, 1023.
FEDERAL RESERVK BOARD,

Washington, D. C.
(Attention Gov. D. R. Crissinger.)
GENTLEMEN : This will acknowledge receipt of your letter No. X-3883 dated
September 8, 1923; also, copy of a letter from Congressman L. T. McFadden,
chairman of the Joint Committee of Inquiry on Membership in the Federal
Reserve System, dated September 6, 1923, No. X-3883a. The following are replies to the inquiries made of you by Congressman McFadden:
1. Is it advisable to attempt to increase the membership of the Federal
reserve system?
We believe that it is and that the campaign of the system should be confined
entirely to well-managed, solvent institutions.
2. Present financial conditions in the agricultural sections of the United
States.
While this district has many industries, primarily, our prosperity depends
almost entirely upon the success of the agricultural and livestock industries.
Many of our farmers rely entirely upon small grain. In the sections where
the people have relied upon small grain, conditions are not good, either because
of drouth, grasshoppers, unsatisfactory yields, or because the price received
for small grain does not bear a fair relation to the prices the farmers must
pay for the actual necessities of life. In sections where farmers have resorted to diversification, principally the dairy cow, conditions are better and,
generally speaking banks are not in such an overextended condition and the
business of manufacturers, jobbers, wholesalers, and retailers is fair. In the
sections where beef cattle are raised conditions are only fair, and some of the
cattle people are having a very difficult time, largely because of the great
burden of debt that was thrown upon them on account of the unfortunate
conditions that existed during the winter of 1919 and 1920. The sheep raisers
are in a little better position than cattlemen, and, while the winter of 1919
and 1920 left them with burdens not unlike the cattlemen, still at the same time
the satisfactory prices received for the past two years have improved their condition very materially.
el Reasons which actuate eligible State banks and trust companies in fail3ng to become members of the Federal reserve system.
See memorandum attached.
4. What administration measures have been taken and are being taken to
increase membership?
This r>ank has made an active campaign through the agent's department, also
the otficers of the bank, for membership. This campaign has covered personal
letters, circulars, booklets explaining the advantages of membership, and personal calls of our officers upon State banks that are eligible for membership.
We believe that the campaign should be continued but do not know of anything else that we could do in procuring desirable members than we have
already done.
5. Should any change be made in the existing law or in the rules and regulations of the Federal Reserve Board?
We do not think so. The present law is very liberal and the regulations of
the Federal Reserve Board are such that any good, sound, well-managed institution can obtain membership without difficulty.
(». Any suggestions of change in the method of administration to bring about
in the agricultural districts a larger membership of State banks and trust companies in the Federal reserve system.
We do not know of anything but would be glad to consider any suggestions.
While we have enumerated many of the reasons that are given for failure to
become members of the Federal reserve system, we are satisfied that the real
objection seems to be centered on the one question—reserves upon which they
•do not receive interest for daily balances. We have a number of State banks
in this district that have been conducted in an unusually conservative manner
for a number of years, banks whose liquidity, as well as their solidity, is of
the highest type. Because of these factors in their management they have been
able for the past four strenuous years to rely entirely upon their own resources
without seeking outside assistance, or, if they found it necessary to seek outside assistance, because of their high standing and character of their paper,
they had no difficulty in procuring such assistance through correspondents in




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

67,

the larger centers. The result of our inquiries as to why these banks do not
join the Federal reserve system seems to be all centered upon the amount of
reserve that they are required to carry with us upon which they do not receive
interest for daily balances. They feel that the reserves which are carried with
city correspondents upon which they receive interest for daily balances are just
as good as any reserves which they might carry with the Federal reserve
system. Because of this loss of interest on reserves and because our gratuitous services do not offset these losses they feel that membership is just an additional expense, without a corresponding amount of benefits. There are, however,
a number of State banks in this district that are members of the Federal reserve system, that are in good liquid condition and that have never used our rediscount facilities. We believe that the active officers in charge of these institutions have looked upon the Federal reserve bank and their membership in
a broad way, arriving at the conclusion that any loss in interest that they might
take upon the reserve because of membership, is more than offset by the indirect benefits they obtain because of support of the system.
There are also a number of banks in this district at the present time that
are in an overextended condition, but not in a particularly precarious condition.
We belive that these banks realize what has been done for their competitors
who are members of the Federal reserve system, and that as soon as their house
is in order they will seek membership in the Federal reserve system, and when
they do, they will disregard any loss of interest that they will have to take on
account of reserve balances, and become members because they believe it is a
good insurance against possible emergencies that may arise in the future.
There are also a number of State banks in this district that are technically
eligible for membership, but we question very much whether an examination
would disclose a condition that would permit the board to act faovrably upon
their application.
Yours respectifully,
R. A. YOUNG, Governor.
FEDERAL RESERVE BANK OF MINNEAPOLIS,

September 19, 1928.
Memorandum for Governor Young.
From: Harry Yaeger, assistant deputy governor.
Subject: State member banks.
Referring to copy of a letter from the chairman of the Congressional Joint
Committee of Inquiry on Membership in the Federal Reserve System, addressed
to Hon. D. R. Crissinger, governor of the Federal Reserve Board at Washington, under date of September 6, it seems to me that it is decidedly advisable
to attempt to increase the membership of the Federal reserve system from
eligible State banks which are in a satisfactory condition and which are managed by conservative officers and directors, to the end that the Federal reserve
banks as a whole may, by the increase of their capital stock and deposit of
reserves, be the better able to more effectively serve the productive business
of the country as a whole, whether it be in commerce, industry, or agriculture.
Analysis has shown that there are numerous ably managed State banks in the
ninth Federal reserve district, which are eligible from a capital standpoint
The letter from the chairman of the Congressional Joint Committee of Inquiry requests, among other things, reasons which actuate eligible State banks
and trust companies in failing to become members of the system.
These reasons are mainly selfish. I have found in many instances that the
officers of such banks are interested in private business or enterprise; that to
finance such business or enterprise they use the club of their reserve account
with their city correspondent bank to borrow for such business directly on
its obligation or directly themselves, collateraled by the obligation of the
enterprise. They fear that any reduction of their reserve balance deposited
with such city correspondent, by carrying the portion of reserve with us as
required by the Federal reserve act, they might not be able to procure a
continuance of such accomodations. The compensation generally paid officers
of country and small city banks is not sufficient, together with the income derived from dividends on their stock in such bank, to enable them to assume
the position in their several communities which they think is necessary
or desirable, and, actuated by the natural impulses, increase their income by




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INQUIRY ON MEMBERSHIP IN FEDERAL BESERVE SYSTEM

engaging in outside business activities, either insurance, real estate, mercantile
business, and very generally in the automobile business. Their connection
with such outside business enterprises is not generally known. I have found
many responsible bank directors in my discussions with State bank boards
and directors, who are financially responsible and who appreciate the advantages of membership, but the cashier or managing officer generally throws a
monkey wrench into the machinery because of his personal outside business,
by way of various criticisms of our activities. This is not a theory—this is
an actual fact, and I have repeatedly seen where the substantial director, not
being conversant with banking practices, unconsciously assumes the attitude
of the objecting officer.
Another reason for failure to apply for membership is ::ound in the absolute
lack of information concerning the rights of a State bank to operate under the
Federal reserve act. They do not know that, by the provisions of section 9,
they retain, subject to the provisions of the Federal reserve act and to the
regulations of the board made pursuant thereto, their full charter and statutory rights as a State bank or trust company and may continue to exercise
all complete powers granted them by the State in which they are created.
They do not realize that they will be entitled to all of the privileges of member banks. They are also fearful of supervision by the Comptroller of the
Currency, and not being acquainted with the provisions of the section of the
act which absolutely eliminates his supervision of such State member banks,
they confuse the comptroller's office with the Federal reserve bank. Confidentially, in my opinion, the banking departments of many of the States lack
both the power and disposition to enforce proper banking methods, as well as
the laws of the State. They realize the power of the Federal Government and
feel that they would be, not only subject to the additional costs of such examination, but might also be compelled to more rigidly conform to conservative
banking practices.
Another reason is found in the fact that the laws of several States permit
State banks to make loans to individuals, partnerships, or corporations in an
amount greater than they would be permitted to rediscount with the Federal
reserve bank. They feel that this class of loans includes what they term their
best paper. While they generally feel that this class of paper is of a high
quality, more generally the carrying of such loans is the result of very active
competition. I have found on numerous occasions in suspended member banks
that the carrying of this class of loans is one of the causes of suspension,
because the losses therein, if any, are usually of such an amount as to materially impair, if not wipe out, the bank's capital. These bank officers feel
there would be an unwarranted supervision of their affairs if they attempted
to loan one of their good customers more than 10 per cent of their unimpaired
and fully paid in capital and unimpaired surplus. They fear that they would
lose business if compelled to carry such loans at a io per cent limitation.
They do not realize or appreciate that they may lawfully loan good customers
the amount permitted by the State statutes. They always Insist that as these
loans are among their best they should be permitted to offer for rediscount
the paper of such borrowers up to 10 per cent of their capital and surplus
and make such other and additional advances as may be required by the
borrower, up to the percentage amount permitted by the Statte statutes.
They feel, no matter how lengthy or complete may be the explanation to
the contrary, that in rediscounting paper they will encounter much of the
so-called red tape—comparing their offerings for rediscount, if they should
make them, with other activities with different bureaus of the Government.
Each and all of them have at some time had some transaction of a business
nature with Government departments and have felt that they were abused,
that they were delayed, and that the requirements were entirely too technical.
I am not arguing as to the justice of their claims, but only to disclose one of
the reasons whey they do not apply for membership.
They all invariably complain about failure to pay interest on their balances,
and even when it is pointed out to them that such interest at 2 per cent on
the amount they would carry with us in many, many instances would not
amount to even a dollar per day for the year, nevertheless this loss is magnified to a point beyond its real dimensions. This is usually the first criticism
offered. Actuated by selfish motives, they prefer the old system of counting as
reserve such items as they may send their city correspondent banks, which




INQUIRY ON MEMBEESHXP IN FEDERAL RESERVE. SYSTEM

69

<*re immediately charged on their books to the account of such city bank, even
though the amount is nothing but float; and under the old system they were
paid interest on these amounts from the date of receipt by the city correspondent bank, even though it had not collected such items. The interest on
this float was considerable. While the city correspondent banks are now
generally paying interest on balances, including funds actually collected, the
smaller bank feels that it can draw its drafts against such balances more
readily than they could against their reserve account with us, and that they
would not be penalized for any deficiency in such reserve. They generally are
not inclined to pay much attention to the State statutes which provide' that
they may not make new loans when their reserve is impaired, and then to add
a penalty to that feature they feel that the outlay is an actual cost.
Many banks complain about our par clearance activities. With this you are
very familiar, and I do not go into details other than to show that numerous
small country banks have in the past been able to procure a substantial portion of their dividend from the aggregate of such charges heretofore made.
They feel that if this par clearance activity is pursued to its fullest extent, it
is but an entering wedge into the supervision and control of their other activities which result in a profit to their institutions, and that these other
actvities may suffer a similar fate and they will be deprived of what they claim
is just remuneration for their services.
In the rediscount of paper they were encouraged by their city correspondent
banks, before the collapse of 1920. to just send in their note or certificate of
deposit to such correspondent with collateral attached. This method of borrowing received a severe setback in 1910 to 1922, because of the condition of
such city banks. Since the correspondent banks in the cities have bettered
their financial situation they are again suggesting to the country bank that it
may obtain more readily and quickly such funds as it requires for its business
by borrowing as formerly. They do not appear to be very much concerned
with the statement that, if their seasonal rediscounts are normal in amount,
they are not compelled to put up additional collateral. They say they might
just as well put up $100,000 worth of notes selected at random to secure a
$50,000 debt as to carefully select $50,000 of paper and offer it for rediscount
to be accompanied by certified copies of signed financial statements, certified
copies of chattel mortgages, and otherwise comply with our rediscount requirements. The difference in the rate, being not greater than 1 per cent, if the
borrowing of the last amount named was not longer than six months, would
amount to but $250, and that this would not be sufficient inducement to them
to change their relationships.
They feel that because of their past relations with their correspondent banks
they can more easily and readily deposit their valuable papers, such as Liberty
loan bonds (including similar valuable papers of their customers), with their
correspondent bank and would not be subjected by their city correspondent
bank to what they term red tape in procuring a release of such valuable papers
held for safe-keeping, as they think would be imposed upon them should they
deposit such valuable papers with us.
They are not at all impressed with the rate of dividend on their capital
stock investment
They are not at all impressed with the privilege of making telegraphic or mail
transfers, even without cost to themselves, intimating that the regulations
incident to advices regarding transfers, drafts, etc., are too cumbersome and in
event of failure to properly advise, they feel the draft might be dishonored.
They are not at all impressed with the ability to procure new or fit-for-use
currency without cost to themselves. They say they can procure such money
as they require from their city correspondent banks, which in turn call upon
us for the same.
They are not at all impressed with the fact that they may properly reduce
the amount of actual money on hand, thereby using a portion of the amount
usually carried for reserve purposes (as to which portion, of course they are
not now receiving interest because it lies in their vaults) and thereby lessening
the cost of insurance protection and lessening the liability for holdup. I have
repeatedly discussed this matter with eligible State banks and found from an
examination of their books that they are at all times carrying in their vaults
from two to four times the amount of actually necessary funds to handle
their daily transactions.
107679—26—PT 1
6




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Lastly, the real main reason, in my judgment, for failure on the part of
eligible State banks to join the Federal reserve system is found in the fact that
supervision by State banking departments is more or less lax, is more or less
under political control, on account of which the managing officer of a large
number of such State banks, having in mind the alleged pressure of Federal reserve banks exerted on national member banks during the collapse of 1920, 1921,
and 1922, are possessed of unwarranted fear that if they became members of
this system they would be compelled to conform more rigidly, not only to the
laws of the State under which they operate, but to the regulations of the Federal Reserve Board and Federal Reserve banks. Because of their lack of knowledge and the desire to manage their institutions as they see fit, having listened
to demagogic misstatements and having received a lot of misinformation, even
from member bank officers who were justly subject to criticism, these State
bank officers prefer to continue along the lines of least resistance, following
their oldtime practices.
The main reason for failure to join are really but three: First, the fear
last above referred to; second, the fear of inability to finance their private
enterprises for personal gain, if their reserves with city correspondent banks
are lessened; third, failure to receive interest on their reserve accounts with
Federal reserve banks.
All of the other reasons suggested above are merely smoke screens to hide
the real purpose mentioned in the first and second conclusions herein set forth.
HARRY YAEGER.
FEDERAL RESERVE BANK OF KANSAS CITY,

September 19, 1923.
FEDERAL RESERVE BOARD,

Washington, D. C.
(Attention Governor Crissinger.)
GENTLEMEN : We have given careful consideration to the matter suggested in
your letter under date of September 8 (X-3883). I submit the following as
the outstanding reasons why, in my judgment, State banks are slow in joining
the Federal reserve system:
First. The outstanding reason seems to be that they receive no interest on
their reserve balances.
Second. The State laws are much more liberal in their administration of the
State banks than those acting under national charter. In most States in the
tenth district a State bank is permitted to loan to one person 20 per cent of
their capital and surplus, whereas a national bank can only loan 10 per cent.
Third: The national banks are under a more rigid surveillance than are the
State banks. State bank examinations are less thorough, all of which appeals
to the average State banker. The State laws generally allow them to loan a
very much larger percentage on real estate than the national banks.
As a result of this looser administration, I will use the State of Kansas as an
example: During the last year we have not had one national bank failure in
Kansas, and we have had 28 State bank failures, which is a complete answer to
the question, " Which is the better system?" I think it is due very largely to
want of understanding of the benefits to be derived from membership in the
system. This bank has tried in every way to educate the nonmember banks to
the advantages of the system, and in our conversations with many of them
they recognize all we tell them, but will turn around and say, " We are getting
all the benefits of the system without having to pay any of the expense," ana
we are conscious that a good many member banks, especially those in the large
commercial centers, have advised against the average country bank joining the
system, saying, " We are able to take care of you," undoubtedly the member
bank fearing that if one of its customers should join the system it would lose a
part, at least, of his deposits.
This, to me, covers very largely the reasons why we do not have more State
bank members of the Federal reserve system. I think that paying interest on
deposits would be impractical.
After careful investigation of the whole situation, we here feel that the
above reasons practically cover the grounds contemplated by Congress in appointing a committee to investigate.
Yours very truly,




W. J. BAILEY, Governor.

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

71

FEDERAL RESERVE BANK OF DALLAS,

September 20, 1923,
FEDERAL RESERVE BOARD,

Washington, D. C.
(Attention Governor Crissinger.)
GENTLEMEN : I have given careful consideration to the board's letter of
September 8, 1923 (X-3883), in which request is made for me to give
my individual opinion as to the answers which should be made to the questions
asked by the congressional Joint Committee of Inquiry on Membership in the
Federal Reserve System, and I am pleased to submit my views in connection
therewith. It will be understood, of course, that my discussion of the various
points raised by the congressional committee is made in the light of conditions
and experience in this district.
I. Effect of the present limited membership of State banks and trust companies in the Federal reserve system.
The effect of the present limited membership of State banks and trust companies in the Federal reserve system has been to deprive production interests
and commercial business of the benetits that would accrue by reason of a higher
standard of banking and business practices made possible by a unified and
uniform banking system under which many unsound and hurtful practices could
be more effectively dealt with and possibly ultimately eliminated. The
mobilization or concentration of the total banking reserves of the district
under one agency would work for the good of the entire banking system and
the public generally, and credit could be more equitably distributed and better
controlled than under the present divided system of banking.
There are at the present time 1,060 nonmember State banks in this district,
of which 739 are eligible for membership in the Federal reserve system, 608
of these banks being in the state of Texas. The aggregate capital stock of these
739 banks amounts to $30,983,000, while their aggregate resources total
$257,883,000.
II. Is it advisable to attempt to increase the membership of the Federal
reserve system?
It is my judgment that every proper and legitimate effort should be put
forth to increase membership in the system. A systematic educational campaign should be conducted, designed to acquaint non-members with the advantages of membership. Such a campaign would have a wholesome effect upon
the banking situation in general, to say nothing of its tangible results as
measured by the number of banks added to the system.
III. Present financial conditions in agricultural sections.
Generally speaking, agricultural communities in the eleventh Federal reserve
district are at present experiencing a most satisfactory harvest season, with a
corresponding volume of liquidation that is going far toward restoring business
and industry in this section to a normal condition. This is principally due
to the exceptionally favorable outcome of the 1923 cotton crop in this section,
and, to a lesser degree, to the more economical and energetic methods that
have been used by the cotton producers during the past growing season.
In a few isolated instances, however, there are small areas in the agricultural
sections of the district, which due to successive crop failures over a period
of several years, have suffered to such an extent that their banks are now in a
rather serious condition; although it should be noted that this unfortunatesituation has been aggravated, not by the lack of adequate credit, but, to
the contrary, by the excessive or injudicious use of credit. In other sections
of the district where the livestock industry predominates conditions have become even more acute than those in the farming sections referred to above, due
largely to conditions beyond human control. But here again, as many of theproducers freely admit, the too free use of credit in previous years has in
many instances been a large factor in bringing about the present unfortunate
situation. It is my belief that in no instance has an agricultural community
in this district ever suffered from being denied credit when applied for by
borrowers who were entitled to it for a proper purpose.
IV. Federal reserve system reasons which actuate eligible State banks and
trust companies in failing to become members of the Federal reserve system.
I suggest the following as some of the most important reasons which move
eligible nonmember banks to remain out of the system:
(a) The fact that balances carried with Federal reserve banks are not interest bearing.




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INQUIRY ON MEMBERSHIP IN FEDERAL BESEBVE SYSTEM

(b) Limited participation by member banks in the earnings of reserve banks
to 6 per cent per annum on their investments in the capital stock of the reserve
banks, as now provided by law.
(c) Elimination of the opportunity afforded by State laws to use float as
reserve, and the requirement of immediately available funds in payment of
cash items cleared through the Federal reserve banks.
(d) Erroneous idea that transactions incident to membership involve too
much " red tape," and in a general way ignorance of the requirements of
membership.
(e) The fact that officers of many nonmember banks, for whom correspondent
banks are carrying personal or individual loans against balances maintained
by their banks, might experience some difficulty in floating their paper in the
event their institutions were forced by membership in the system to concentrate their reserves with the Federal reserve bank.
(/) A disinclination on the part of many nonmember banks, in this district
at least, to submit their affairs to examination by representatives of the
Federal reserve system because of their fear that their assets will not be
found in such condition as will entitle them to membership, together with an
exaggerated idea of Federal supervision which member banks believe is involved in membership in the system.
(g) Prejudice on the part of nonniembers resulting from propaganda and
misinformation promulgated by critics of the system.
V. What administrative measures, if any, have been taken and are being
taken to increase membership?
Some years ago this bank waged an intensive membership campaign, both
through the mails and by means of our traveling representatives. This resulted
in a substantial increase in our membership. Following the war, however,
when many of our nonmember banks, as well as member banks, developed a
rather extended condition, our activity in the solicitation of nonmembers somewhat abated. At the present time it is our policy to maintain through our
member bank relations department and otherwise a relation of friendly contact
with nonmember banks, taking advantage of every opportunity to educate
them to a better understanding of the system and the advantages of membership generally.
VI. Should any change be made in the existing law or in the rules and
regulations of the Federal Reserve Board?
While several amendments to the Federal reserve act have been passed recently making membership in the system more attractive and no doubt even
further changes will be made or additional facilities provided as future operations and progress call for them, I can not propose at this time any specific
amendment which would be economically sound and at the same time make
membership in the system more attractive; except that it is my judgment that
the present law should be modified by eliminating the requirement that member
State banks bear the cost of examinations by Federal reserve examiners. In
this district we have already had a number of complaints concerning this extra
expense to which member State banks are subjected and a few are reported to
be seriously considering withdrawal from the system, giving the expense of our
examinations as one of the principal reasons for their dissatisfaction.
VII. Changes in method of administration to bring about in the agricultural
districts a larger membership of Slate banks and trust companies in the Federal
reserve system.
I have no changes in administrative methods to suggest. As a matter of fact
I do not believe that any of our member banks have had at any time just
cause to criticize our administrative methods so far as they relate to the needs
and demands of agriculture.
Respectfully yours,
B. A. MCKINNEY, Governor.
FEDERAL RESERVE BANK OF SAN FRANCISCO,

September 21,1923.
The Hon. D. R. CRISSINGER,

Governor Federal Reserve Board, Washington, D. C.
SIR: In compliance with letter X-3883, dated September 8, inclosing copy
of letter received by the board from the Hon. L. T. McFadden, chairman of the
joint comittee of inquiry on membership in the Federal Reserve System, I beg
to inclose herewith some observations in response to the inquiries indicated in
that letter.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

73

Inasmuch as a discussion of the question asked, and particularly suggested,
directly and by implication would involve a very comprehensive discussion
of the organization and operation of the system and prove much too voluminous for the board's use, I have confined myself to brief observations, which,
of course, are merely individual opinions.
It appears to me that great benefit might result from the careful formulation of a program of inquiry to be followed by this committee in obtaining
information which they are to seek, and that the brief paragi'aph in the act
is not adequate for this purpose.
Yours very truly,
JNO. 17. CALKINS,

Governor.
MEMORANDUM IN KESPONSE TO FEDERAL RESERVE BOARD'S X-3 883, DATED SEPTEMBER;
8, 1923

Subject: Congressional inquiry on membership in the Federal reserve system.
Effect of present limited membership of State banks and trust companies
in the Federal reserve system: The limited number of State banks and trust
companies in the Federal reserve system has been seriously detrimental to the
proper distribution of credit, particularly in some agricultural sections, where
had a larger proportion of the banks had access to the Federal reserve banks,
credit could have been better applied and in many cases embarrassment of borrowers and failure of banks avoided.
Whether or not it is advisable to attempt to increase the membership of the
Federal reserve system: Increased membership in the Federal reserve system is desirable and would benefit the banks as well as the commerce of the
country. The operation of the system has appreciably improved banking practice and member banks, and this influence should be continued, developed, and
applied to as many of the banks of the country as possible.
Advice upon the present financial conditions in the agricultural sections of
the United States: Indications are that conditions agriculturally on the whole
are better to-day than they have been in the twelfth district for three years.
In the State of Washington there has been distress in grain sections in the
eastern counties, but almost everywhere in those counties indications point to
abundant crops this year. Banks which have been in a badly extended condition
for the past three years have the fullest anticipation (and it appears justified)
that liquidation arising from the 1923 crops will at least place them in an easy
condition, and, although they may not fully liquidate their borrowings, they
will be able to face the future with confidence.
In other areas in the eastern counties in which the banks became and were
left extended as the result of their 1922 operations, a measure of liquidation
is anticipated which will allow them to proceed into the 1924 farming operations
without a carried-over borrowed indebtedness.
In the entire eastern portion of Oregon, which is largely a grain and livestock country, the banks have suffered quite severely during the past three
years. However, almost everywhere 1923 crops have been excellent, and sufficient liquidation therefrom is expected by all of the banks to justify the belief
that they will become extricated from their difficulties. Those banks which
have a large cattle clientele are not anticipating any material liquidation this
year. However, the number of such banks is small and we feel confident that
ultimately even those banks will be able to get on a firm basis.
In California there is no unusual strain on credit in any of the rural communities.
In Arizona, there are no financial centers with resources adequate to finance
the cotton crops and the livestock industry, both of which are large as compared with Arizona's banking resources. However, financial aid (particularly
for the financing of the cotton crop) has been made available when necessary
through banks in Los Angeles, Calif.
Generally speaking, the member banks in Arizona have been able to function normally during the past 12 months. However, there are several isolated
cases of banks which became dangerously extended during the period in which
cotton values diminished very appreciably. Those banks which have not yet




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INQUIRY ON MEMBERSHIP IN FEDERAL RESEEVE SYSTEM

fully recovered should be able to obtain liquidation from this year's crop
sufficient to restore them to sound condition.
Utah: For the most part, the banks in Utah, outside of those situated in
the cattle areas, have operated normally in the financing of the 1922 and 192&
crops. There are only a few banks which are in an extended condition, and
even those banks should get on a firm footing after the marketing of the 1923
crops. The extended banks which are principally serving cattle clients are
marking time, and it will depend on the future of the stock-raising industry
whether or not they can survive.
Nevada: In Nevada there seems to be adequate financial resources to finance
agriculture and the livestock industry, of which the latter predominates.
Nevada possesses a number of very large livestock concerns which do not rely
solely on Nevada's banking resources for financial credit. Generally speaking,
the banks of Nevada have kept themselves remarkably clean during the past
three years without withholding from agriculture (including livestock) credit
for operating purposes.
Idaho: The northern section of the State (which is situated in the Spokane
branch territory) has fared very well during the past few years. Grain crops
have yielded sufficient returns to enable the banks generally to avoid becoming*
in an extended condition.
In southeastern Idaho (which territory is affiliated with the Salt Lake City
branch) a very different situation has existed during the past few years. The
.area referred to is that along and tributary to the Snake River. The gravest
banking problems in this area can be attributed mainly to two causes, improvident banking and misfortune. In 1920 crop failures were very general.
In 1921 disastrous deflation in commodity values left debts unliquidated. In
1922 some crops were failures either from the standpoint of yield or returns,
and other crops were lost. Bank failures naturally brought deposit withdrawals, and in many cases the banks' resources were so depleted that very
extensive borrowing was necessary. Due to the weakened condition of many
of the banks, and the depleted resources of their agricultural customers, it has
been difficult for the banks to produce paper which would form an acceptable
basis for obtaining credit either from the Federal reserve bank or elsewhere.
A very large proportion of the paper which the Federal reserve bank now
holds from banks in that section has been carried from two to three years.
For the production of the 1922 and 1923 crops, farmers generally have found
it difficult to obtain additional credit; first, because their financial resources
have been practically exhausted as the result of several consecutive years of
crop failure or ruinous prices, or both; second, because outstanding debts to
their banks were already overbalanced; and third, because many of the banks
themselves had exhausted their ability to obtain further credit. The banks in
southeastern Idaho experienced a more general and more drastic shrinkage
in deposits than anywhere else in the district. This shrinkage in deposits not
having been accompanied by an offsetting liquidation of receivables, left the
banks without recourse except to realize on their receivables at the Federal
reserve bank or elsewhere, so far as it was possible to do so. In some cases
failure was avoided only by recourse to heavy assessments of or contribution
by stockholders. In others, where this was impossible, failure followed. Nevertheless, the situation in Idaho is improving, and it is anticipated that, after
returns from the 1923 crops have been received, the banks in southeastern
Idaho will be in better condition than they have been for three years. 1923
crops have been exceedingly abundant, and returns therefrom should liquidate
some portion of the farmers' borrowings carried over from unsuccessful years.
Reasons which actuate eligible State banks and trust companies in failing to
become members of the Federal reserve system:
1. Belief that membership would be unprofitable.
2. Apprehension of more " Government supervision" and curtailment of
operations permitted by State laws.
3. Unwillingness to disturb or discontinue long-established and comfortable
relations with correspondents and depositaries.
4. Belief that membership would subject them to supervision and restriction
by Comptroller of the Currency.
5. Lack of real understanding of the provisions of the law and operation of
the Federal reserve banks and reluctance to investigate and thoroughly consider
advantages, largely due to prejudice and influence of antagonistic publicity.




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75

6. In the case of many banks, some very large, whose business is mainly or
largely savings business, the conviction that membership entails no advantages
not obtainable from depositary banks, which pay liberal interest on balances.
In some cases this conviction is not due to prejudice or disapproval, but is based
on careful calculation and consideration.
7. In some agricultural communities bankers are influenced by the allegation
that the Federal reserve system is responsible for the farmers' distress or by
the fact that their farmer clients believe that allegation.
Administrative measures which have been taken or are being taken to increase State bank membership:
During the latter part of 1919 and the early part of 1920 a very exhaustive
campaign for State bank membership was carried on in the twelfth district.
The managers of the five branches visited the State banks in their respective
communities and attended meetings of bankers for the purpose of explaining
the workings of the Federal reserve system and the advantage of membership
therein. In addition to the work of the branch managers there was employed
at the head office for the period of one year an experienced man, who not only
cooperated w'tli the branch managers but covered the banks in the home office
territory as well as visiting many of the banks in other parts of the district.
Being an experienced lawyer also, he reviewed the laws of the various States
with the idea of having enabling leg'slation enacted making it possible or more
desirable for State banks to join the system. It was only after the enactment of these laws that banks in California—which now have resources aggregating $1,125,000,000—were able advantageously to become members.
Whether * * * any change should be made in the existing law or in the
rules and regulations of the Federal Reserve Board.
EXISTING LAW

The existing law should be carefully revised for the purpose of clarifying
its provisions and removing uncertainties and ambiguit : es and rendering it
easily understandable and its application certain. This would involve no radical
revision of underlying principles and should make it possible to minimize the
regulations of the board, inasmuch as if the provisons of the law were clear
and ambiguous, much of what is now necessary in the way of interpretative
regulation would be unnecessary.
The act should be amended to make provision for exam'nation of all member banks by the Federal reserve banks without charge to the banks examined,
except in those cases where it is necessary to make frequent examination, when
the bank examined should be penalized by a charge.
The provision of the act governing reserves as applied to savings or time
deposits should be amended for the purpose of making its intent clear.
The provisions of the act governing branch banking by member State banks
should be amplified so that this subject might be fully covered by the law
rather than by regulation.
REGULATIONS OF THE BOARD

The regulations of the board should be condensed and minimized. With
proper clarification of the law this could be accomplished, with resulting improvement in operation of banks, as well as satisfaction to member banks, who
find it difficult to follow the ramifications of more or less frequently changed
regulations.
Suggestion of change in method of administration to bring about in the
agricultural districts a larger membership of State banks and trust companies
in the Federal reserve system.
So far as our experience goes in this district, no change in administration
would result at this time in larger membership in agricultural sections unless
such change resulted in practices not contemplated in the act or consistent with
sound banking practice.
A summary of State bank membership and a list of banks in each of the
seven States in this district, showing number of State member banks, eligible
nonmember banks, and noneligible banks, together with percentage of number
of member banks and percentage of resources of member banks to the total
eligible, is attached hereto.




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

DIGEST OF REPLIES OF GOVERNORS OF FEDERAL RESERVE BANKS TO INQUIRIES OF
JOINT CONGRESSIONAL COMMITTEE ON MEMBERSHIP IN FEDERAL RESERVE
SYSTEM
I. IN GENERAL

The following is a digest of the replies submitted by the governors of the
respective Federal reserve banks to the inquiries of the Joint Congressional
Committee on Membership in the Federal Reserve System. For convenience
these replies have been grouped under 15 topics, and under each topic the
replies of the various governors have been arranged in the numerical order
of their respective districts.
II. EFFECT OF LIMITED MEMBERSHIP OF STATE BANKS AND TRUST COMPANIES

1. Harding, Boston: I do not regard the limited membership of these institutions as being altogether unfortunate. Quality should always be considered
in the membership of the system, and I have no doubt that there are some
undesirable members. It is equally true, however, that there are many nonmember banks whose acquisition would be desirable. I believe that there is a
gradually developing sentiment among bank depositors throughout the country
that the safest and most reliable depositaries are the member banks. This
sentiment ebbs andflows,but gains additional strength whenever clouds appear
upon the financial horizon. In my opinion, the influence of the Federal Reserve Board and the respective Federal reserve banks should be exerted upon
the member banks in such a way as to justify and foster the faith of the public
in member banks.
2. Case, New York: The proportion of membership in this district is relatively high. Out of a total of 1,183 banks, 830, or 70 per cent, are members
of the Federal reserve system. The division by States is as follows:
Member
banks
New York (entire)
New Jersey (12 counties)
Connecticut (1 county)
Total

.

..

.
_

614
204
12

Total
banks
870

283
30

Percentage of
membership
71

72

4a

1,183

With this high proportionate membership, and partly because of it, the banks
of this district were not affected by the adverse economic conditions of 1920 and
1921 to the same extent as were the banks in parts,of the country where membership was less general. There were, in fact, no instances of bank failure
during this period which could be attributed to general banking or economic
conditions. A substantial number of banks temporarily affected through t h e
dereliction of officers or from other causes were able to meet demands upon
them through their relation to the Federal reserve system, together with t h e
assistance of national or State banking departments. This is a condition
which has been more or less general in Federal reserve districts having a large
proportion of member banks.
The question, however, can not be answered from the limited experience of
one district. In the country as a whole one-third of the banks belong to t h e
Federal reserve system. But this one-third represents approximately two-thirds
of the total banking resources of the country; membership has appealed more
generally to the larger city banks. Hence the Federal reserve system has been
able to exercise its influence more generally in the centers of population than in
the rural communities. In those States where membership was proportionately
smallest it was natural that the credit-making power of the Federal
reserve system should be least available to the public. Nevertheless it
can not be doubted that even in those regions where the Federal reserve
system was unable to exercise a direct influence nonmember banks secured
benefits indirectly through correspondent member banks.
3. Norris, Philadelphia: Assuming that it was the intention of the framers
of the Federal reserve act to create a general banking system for the United




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77

States in which all of the national banks and most of the State banks would be
included, it is regrettable that this expectation has not been fully realized.
Aside from that general consideration, however, I can not see that the fact that
the number of State banks which have availed themselves of membership in
this district is comparatively small has had any distinct effect upon financial
or business conditions.
5. Seay, Richmond: The abstract of condition reports of State bank and
trust company members and of all member banks compiled by the Federal
Reserve Board as of June 30, 1923 (Kept. No. 21), showed that the aggregate
resources of all member banks of the Federal reserve system were $33,795,000,000.
The report of the Comptroller of the Currency as of June 30, 1922, showed that
the aggregate resources of all reporting banks in the United States and island
possessions were $50,425,000,000. Assuming that the aggregate was practically
the same as of June 30, 1923, the resources of the members of the Federal reserve
system constituted 66 per cent of all banking resources of the country.
The comptroller's report of June 30, 1922, showed the aggregate resources of
18,232 State (commercial) banks in the country to be $13,054,000,000 and the
resources of 1,550 loan and trust companies to be $8,553,000,000, so that the
aggregate resources of 19,782 commercial State banks and loan and trust companies combined were $21,617,000,000. The aggregate resources of 1,620 State
bank and trust company members of the Federal reserve system, as shown in
the board's report No. 21, on June 30, 1923, were $12,293,000,000, so that the
Federal reserve system embraced about 60 per cent of the aggregate resources of
all commercial State bank and trust companies, although it embraced but little
more than 8 per cent in the number of such commercial State bank and trust
companies.
Furthermore, taking the aggregate resources of the commercial State banks
and loan and trust companies as of June 30, 1922, amounting to $21,617,000,000,
and adding to that sum the aggregate resources of national banks, as shown
by the comptroller's report on April 3, 1923, $21,612,000,000, making the total
resources of commercial State banks, loan and trust companies, and national
banks $43,229,000,000, it will be seen that the Federal reserve system comprises
about 78 per cent of the total commercial banking resources of the country,
although it comprises only about one-third of the number of all such banks
and trust companies; that is, 1,620 State banks and trust companies and 8,236
national banks out of a total of 29,724 of all commercial banks and loan and
trust companies. It is to be taken into account that a very considerable
number of State banks are not eligible for membership. The board is probably in position to determine the number of eligible State banks out of this
total.
It is apparent that the Federal reserve system embraces a sufficiently large
proportion of the volume of commercial banking resources of the country to
render its credit power and influence thoroughly effective, as proved during
the war period, when the demands upon it were probably greater than will
ever again be the case. The effect of the present limited membership of State
banks is, therefore, clearly negligible or limited when we consider whether
the credit and currency issuing power of the system is adequate for the commercial needs of the country. This has been proven.
6. Wellborn, Atlanta: Nearly all of the large State banks and trust companies in this district have become members of the Federal reserve system.
They felt the necessity of it on account of having so many country correspondents, thus needing the protection of the Federal reserve bank and being
able to obtain the privilege of rediscounting in order to take care of their
country bank customers.
7. McDougal, Chicago: At the present time approximately 10,000 banks,
National and State institutions, are members of the Federal reserve system,
and including that class of banks made eligible for membership under the
terms of the recent agricultural credits act there are approximately 13,800
eligible banks which are not members of the system.
The most important result ensuing from the limited membership is that
eligible nonmember banks are sharing in the benefits while making no contribution in support of the system. This I believe to be true notwithstanding
the provision contained in the Federal reserve act designed to prevent the
extension of credit to eligible nonmember banks through the medium of member
banks.




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

8. Biggs, St. Louis: The " effect of the present limited membership of State
banks and trust companies in the Federal reserve system" has been indirectly to throw the credit burden of nonmember banks on the Federal reserve
system without their contributing anything to its support. In the majority
of instances nonmember banks are accommodated through correspondents
which are members of the Federal reserve system. This is practically true
even though the paper of nonmember banks is never rediscounted with member
banks.
Under normal conditions this perhaps has little effect in the communities
served by nonmember banks, but during such a time as the latter part of 1920
it has meant that communities served only by nonmember banks were nothing
like as well cared for as the communities served by member banks. This,
however, is not the fault of the system, as it can do nothing if nonmember
banks do not exercise their option to join. If the communities thoroughly
understood the situation, they undoubtedly would force the banks to join.
Gradually they are beginning to see the necessity of the system. It, however,
is a slow process, but one that the congressional committee can help along by
the proper publicity.
11. McKinney, Dallas: The effect of the present limited membership of
State banks and trust companies in the Federal reserve system has been to
deprive production interests and commercial business of the benefits that
would accrue by reason of a higher standard of banking and business practices made possible by a unified and uniform banking system under which
many unsound and hurtful practices should be more effectively dealt with
and possibly ultimately eliminated. The mobilization or concentration of the
total banking reserves of the district under one agency would work for the
good of the entire banking system and the public generally, and credit could
be more equitably distributed and better controlled than under the present
divided system of banking.
There are at the present time 1,060 nonmember State banks in this district,
of which 739 are eligible for membership in the Federal reserve system, 608
of these banks being in the State of Texas. The aggregate capital stock of
these 739 banks amounts to $30,983,000, while their aggregate resources total
$257,883,000.
12. Calkins, San Francisco: The limited number of State banks and trust
companies in the Federal reserve system has been seriously detrimental to
the proper distribution of credit, particularly in some agricultural sections
where had a larger proportion of the banks had access to the Federal«reserve
banks credit could have been better applied and in many cases embarrassment
of borrowers and failure of banks avoided.
111. ADVISABILITY OF INCREASING

MEMBEESH1P

1. Harding, Boston. I doubt the wisdom of undertaking a systematic campaign along revival or campmeeting lines to increase the membership. The
reasons which actuate desirable nonmember banks to remain aloof should, however, be carefully analyzed, and if any of these reasons are well founded, steps
should be taken either by appropriate changes in the regulations of the
board or by amendment of the Federal reserve act to remove any valid objections which may be heard.
2. Case, New York. An indirect influence is never as effective as a direct
influence. From the standpoint of the Federal reserve banks, misinterpretations of the acts and purposes of the system have been most general in those
regions where its influence was felt indirectly; and from the standpoint of
the nonmember banks the indirect relation has limited their ability to adjust
themselves to varying economic conditions. If the influence of the Federal
reserve system is to be of maximum effect and benefit, indirect relations must
yield to direct relations and the proportion of membership must increase.
The system is bound to move in one direction or another; its membership
will increase or decrease. Any large decrease will impair its ability to serve
the credit needs of the country, not only because the member banks, which
are the principal means for making Federal reserve credit available to the
country, will become fewer, but because the credit-making powers of the
Federal reserve banks themselves will be lessened.
Individually both member and nonmember banks will benefit from an extension of membership. In a crisis the member banks now have to provide




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

79

credit for many nonmember banks, which may involve additional expense
to the latter and possible danger to both.
Outside but expert testimony on the benefits of a wider extension of membership is furnished in a resolution adopted by the directors of the National
Associat'on of Credit Men on September 20, 1923:
" The Federal reserve system has saved the country from several panics,
and if the present membership has rendered so great a service to the country
no stretch of imagination is required to appreciate how very safe we would
be if every qualified bank were to enter the system."
A larger membership would make credit more generally available, not
only because the Federal reserve banks would have added credit-making
power but because that credit would reach the users of credit more directly.
This would result to the special advantage of those regions where membership is now less general, and where in emergencies credit is inadequately
supplied.
3. Norris, Philadelphia. For the purpose of doing what lies in our power
to carry out the assumed intention of the Congress, we have always been
alert to increase the membership of the system, but we have always done
this quietly and without admitting any great interest in the matter. We believe that this is the proper policy, and shall continue to follow it unless
directed to the contrary. We think that any concerted and public attempt
to increase membership would be a mistake. In the first place, we doubt
whether it would be as effective as the methods which we are now following.
In the second place, it would be regarded as a confession of weakness or
failure, or at least a dissatisfaction with present conditions. In the third
place, if it had any result at all, that result would probably be to bring in
applications from institutions which would be the least desirable members. It
would be difficult to refuse their applications in the face of a campaign for
additional membership, and such refusal might have serious results to them.
5. Seay, Richmond. Whether it is advisable to attempt toj increase the
membership of the Federal reserve system, therefore, must be considered from
the po?nt of view of whether the system can be made of greater usefulness
through incrased membership, regardless of whether the acquisition of a
large number of State bank members would strengthen the system. It is the
usefulness of the system to the banks and the public rather than the strengthening of the Federal reserve system which is the issue. As to the enlarged
usefulness of the system to the public and the banks through increased State
bank membership, it is to be considered wThether the State banks now out
of the system do not derive all practical benefits possible through the present
membership of the system. As bearing upon one feature of tlvs question, it
is pertinent to state that at the height of credit expansion in 1920, our member
banks were lending about one-third of all the funds which they were borrowing from us to nonmember banking institutions. At the present time, nonmember banks enjoy, indirectly through member banks, practically all of the
advantages of the credit and collection facilities of the Federal reserve system.
The effect of this is to divide banks into two classes, one class contributing
to the resources for the maintenance of the Federal reserve system and bearing
whatever burdens may be incident to the creation and existence and operation
of the system, and the other class enjoying the fruits thereof and the protection
without any contribution. Thus member banks which solicit and cater to the
accounts of nonmember banks are accustomed to offer all the credit and
conveniences and facilities, practically, which the Federal reserve banks could
offer, although they are able to offer these privileges to a very material extent
only because of their membership in the Federal reserve system. At least,
membership in the system gives them such a feeling of strength and security
that they are in a better position to offer such facilities to nonmember banks
than before the organization of the system.
A very large number of member banks, however, do not carry the accounts
of other banking institutions, and it is such banks which naturally feel that
they are contributing the means of protection which is being accorded to
nonmember banks of the system and bearing burdens incident thereto. This
would naturally engender a feeling of discontent. The feeling is intensified
in many cases by the fact that nonmember banks can collect checks on them
through the Federal reserve system free of charge, while they must bear in
many cases the expense of collecting on those nonmember banks; either they
are compelled to pay a direct exchange charge or compelled to keep a larger
compensating balance.




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

It appears to be desirable that all eligible commercial banking institutions
should be included in, or contribute to the maintenance and operation of, the
Federal reserve system, if only to equalize the burden which is necessary to
be borne in order that the system may be maintained. When the word
" burden " is used, it is in a comparative sense; for it is easy to demonstrate
that, notwithstanding any specific burden, the advantages to the banking business of the country overwhelmingly outweigh the cost of any contribution
made by members to the maintenance of the system. To prove this, it needs
but to be stated that the banking business of the country, measured by the
volume of resources of the banking institutions, has grown as much, or
practically as much, during the eight years of operation of the Federal reserve
system as it grew from the foundation of the Republic up to that time.
6. Wellborn, Atlanta: I think it is advisable to increase the membership
of the system and that we should continue our work on the same line as in
the past. I think it desirable for the reason that in times of financial stress
we are practically forced to indirectly care for the needs of the nonmember
State banks who borrow heavily from their correspondents who are members
of the system, and ultimately we have to carry the load. If such State banks
were members and carried their reserves with us, our lending power would
consequently be increased.
7. McDougal, Chicago: My answer is in the affirmative. Since, as above
stated, eligible nonmember banks are receiving benefits, it would seen advisable that such institutions should become members.
8. Biggs, St. Louis: In considering the advisability of attempting to increase the membership of the Federal reserve system, one must bear in mind
that the Federal reserve banks now hold the bulk of the gold reserves of this
country; that further membership on the part of State banks does not necessarily result in any increase in the gold holdings of the reserve banks, but
does result in an increased responsibility on the part of the reserve banks.
This responsibility is one to be gravely considered in view of the fact that
State banks are under State examination and supervision, and the character
of this service varies greatly in the different States. In some States it is
good, in others it is very lax, due to lack of proper appropriation for the
procuring of competent examiners, political control, and, in some instances,
inadequacy of the State law itself under which the State banking department
operates. A careful plan will have to be devised on the part of the Federal
reserve system in order that it may keep in accurate touch with the condition of many small State banks, in order that the system may not be weakened by their membership rather than strengthened.
9. Young, Minneapolis: We believe that it is and that the campaign of the
system should be confined entirely to well-managed solvent institutions.
11. McKinney, Dallas: It is my judgment that every proper and legitimate
effort should be put forth to increase membership in the system. A systematic educational campaign should be conducted, designated to acquaint nonmembers with the advantages of membership. Such a campaign would have
wholesome effect upon the banking situation in general, to say nothing of
its tangible results as measured by the number of banks added to the system.
12. Calkins, San Francisco: Increased membership in the Federal reserve
system is desirable and would benefit the banks as well as the commerce of
the country. The operation of the system has appreciably Improved banking
practice and member banks, and this influence should be continued, developed,
and applied to as many of the banks of the country as possible.
IV. PEESE^NT FINANCIAL CONDITIONS AND AGBICULTURE

1. Harding, Boston: I have already forwarded to the board a report on conditions in the most distinctive agricultural section of this district, viz, Aroostook County, Me. I do not know of any special agricultural credit problems
elsewhere in New England. The legislation of 1922 is, in my opinion, an admission on the part of Congress that the administration of the Federal reserve
system under the law as it stood in the years 1920-21 was not in any way
responsible for the adverse conditions in agricultural sections, and I do not
know of any further amendments to the Federal reserve act with respect to the
agricultural credits that are either necessary or desirable. Time should be
allowed for testing the efficacy of the amendments already made.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

81

5. Seay, Richmond: The financial conditions in the agricultural sections of
this district give evidence of material improvement. The money outcome of
current crops will add to this improvement, and a large volume of liquidation
is expected from the sale of this year's crops. Generally speaking, the recovery
from distressing conditions has been more rapid than could have been anticipated. The losses of certain individuals and certain communities were, of
course, heavier than the losses of others, and the recovery in such cases will be
slower. This opinion is confined to this district.
7. McDougal, Chicago: While, generally speaking, the available supply of
credit throughout this district appears to be ample for legitimate purposes,
many banks are still suffering from the effects of overextension during the
inflation period, this being evidenced by the fact that they are possessed of an
unduly large proportion of unliquid loans. This, I believe, is particularly true
with respect to many banks operating in the agricultural sections.
9. Biggs, St. Louis: In the eighth Federal reserve district, aside from the
fact that weather conditions have been adverse for the past few weeks the
agricultural situation is not bad. There is little or no reason why the credit
needs of any community in this district served by a well-managed bank, either
member or nonmember, should not be taken care of adequately.
9. Young, Minneapolis: While this district has many industries, primarily
our prosperity depends almost entirely upon the success of the agricultural and
livestock industries. Many of our farmers rely entirely upon small grain. In
the sections where the people have relied upon small grain conditions are not
good, either because of drought, grasshoppers, unsatisfactory yields, or because
the price received for small grain does not bear a fair relation to the prices
the farmers must pay for the actual necessities of life. In sections where
farmers have resorted to diversification, principally the dairy cow, conditions
are better, and, generally speaking, banks are now in such an overextended condition and the business of manufacturers, jobbers, wholesalers, and retailers
is fair. In the sections where beef cattle are raised conditions are only fair,
and some of the cattle people are having a very difficult time, largely because
of the great burden of debt that was thrown upon them on account of the
unfortunate conditions that existed during the winter of 1919 and 1920. The
sheep raisers are in a little better position than cattlemen; and while the
winter of 1919 and 1920 left them with burdens not unlike the cattlemen, still
at the same time the satisfactory prices received for the past two years have
improved their condition very materially.
11. McKinney, Dallas: Generally speaking, agricultural communities in the
eleventh Federal reserve district are at present experiencing a most satisfactory harvest season, with a corresponding volume of liquidation that is going
far toward restoring business and industry in this section to a normal condition. This is principally due to the exceptionally favorable outcome of the
1923 cotton crop in this section and, to a lesser degree, to the more economical
and energetic methods that have been used by the cotton producers during the
past growing season. In a few isolated instances, however, there are small
areas in the agricultural sections of the district which, due to successive crop
failures over a period of several years, have suffered to such an extent that
their banks are now in a rather serious condition, although it should be noted
that this unfortunate situation has been aggravated not by the lack of adequate credit but, to the contrary, by the excessive or injudicious use of credit.
In other sections of the district where the livestock industry predominates conditions have become even more acute than those in the farming sections
referred to above, due largely to conditions beyond human control. But here
again, as many of the producers freely admit, the too free use of credit in
previous years has in many instances been a large factor in bringing about the
present unfortunate situation. It is my belief that in no instance has an agricultural community in this district ever suffered from being denied credit when
applied for by borrowers who were entitled to it for a proper purpose.
12. Calkins, San Francisco: Indications are that conditions agriculturally
on the whole are better to-day than they have been in the twelfth district for
three years.
In the State of Washington there has been distress in grain sections in the
eastern counties, but almost everywhere in those counties indications point
to abundant crops this year. Banks which have been in a badly extended
condition for the past three years have the fullest anticipation (and it appears
justified) that liquidation arising from the 1923 crops will at least place them
in an easy condition, and, although they may not fully liuqidate their bor-




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

rowings, they will be able to face the future with confidence. In other areas
in the eastern counties in which the banks became and were left extended as
the result of their 1922 operations, a measure of liquidation is anticipated
which will allow them to proceed into the 1924 farming operations without
a carried-over borrowed indebtedness.
In the entire eastern portion of Oregon, which is largely a grain and livestock country, the banks have suffered quite severely during the past three
years. However, almost everywhere 1923 crops have been excellent, and sufficient liquidation therefrom is expected by all of the banks to justify the belief
that they will become extricated from their difficulties. Those banks which
have a large cattle clientele are not anticipating any material liquidation this
year. However, the number of such banks is small and we feel confident that
ultimately even those banks will be able to get on a firm basis.
In California there is no unusual strain on credit in any of the rural communities.
In Arizona there are no financial centers with resources adequate to finance
the cotton crops and the livestock industry, both of which are large as compared with Arizona's banking resources. However, financial aid (particularly
for the financing of the cotton crop) has been made available when necessary
through banks in Los Angeles, Calif. Generally speaking, the member banks
in Arizona have been able to function normally during the past 12 months.
However, there are several isolated cases of banks which became dangerously
extended during the period in which cotton values diminished very appreciably.
Those banks which have not yet fully recovered should be able to obtain liquidation from this year's crop sufficient to restore them to sound condition.
Utah: For the most part the banks in Utah, outside of those situated in the
cattle areas, have operated normally in the financing of the 1922 and 1923
crops. There are only a few banks which are in an extended condition, and
even those banks should get on a firm footing after the marketing of the 1923
crops. The extended banks which are principally serving cattle clients are
marking time, and it will depend on the future of the stock-raising industry
whether or not they can survive.
Nevada: In Nevada there seem to be adequate financial resources to finance
agriculture and the livestock industry, of which the latter predominates.
Nevada possesses a number of very large livestock concerns which do not rely
solely on Nevada's banking resources for financial credit. Generally speaking,
the banks of Nevada have kept themselves remarkably clean during the past
three years without withholding from agriculture (including livestock) credit
for operating purposes.
Idaho: The northern section of the State has fared very well during the past
few years. Grain crops have yielded sufficient returns to enable the banks
generally to avoid becoming in an extended condition. In southeastern Idaho
a very different situation has existed during the past few years. The area
referred to is that along and tributary to the Snake River. The gravest banking problems in this area can be attributed mainly to two causes, improvident
banking and misfortune. In 1920 crop failures were very general. In 1921
disastrous deflation in commodity values left debts unliquidated. In 1922
some crops were failures either from the standpoint of yield or returns, and
other crops were lost. Bank failures naturally brought deposit withdrawals,
and in many cases the bank's resources were so depleted that very extensive
borrowing was necessary. Due to the weakened condition of many of the
banks, and the depleted resources of their agricultural customers, it has been
difficult for the banks to produce paper which would form an acceptable
basis for obtaining credit either from the Federal reserve bank or elsewhere.
A very large proportion of the paper which the Federal reserve bank now holds
from banks in that section has been carried from two to three years. For the
production of the 1922 and 1923 crops, farmers generally have found it difficult
to obtain additional credit, first, because their financial resources have been
practically exhausted as the result of several consecutive years of crop failure
or ruinous prices, or both, second, because outstanding debts to their banks
were already overbalanced, and, third, because many of the banks themselves
had exhausted their ability to obtain further credit. The banks in southeastern
Idaho experienced a more general and more drastic shrinkage in deposits than
anywhere else in the district. This shrinkage in deposits not having been
accompanied by an offsetting liquidaton of receivables, left the banks without
recourse except to realize on their receivables at the Federal reserve bank or




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83

elsewhere, so far as it was possible to do so. In some cases failure was avoided
only by recourse to heavy assessments of or contribution by stockholders. In
others, where this was imposible, failure followed. Nevertheless, the situation
in Idaho is improving, and it is anticipated that, after returns from the 1923
crops have been received the banks in southeastern Idaho will be in better condition than they have been for three years. Nineteen hundred and twenty-three
crops have been exceedingly abundant, and returns therefrom should liquidate
some portion of the farmers' borrowings carried over from unsuccessful years.
V. REASONS

WHICH

ACTUATE. ELIGIBLE STATE
MEMBERS

BANKS

IN

FAILING

TO BECOME

1. Harding", Boston: During the early weeks of my incumbency here I
found that there was a strong sentiment among many of the member banks,
as well as the nonmember banks, that the Federal reserve banks should pay
interest on deposits. I took some pains to point out, however, that in order
for the bank to pay interest it must increase its earnings very considerably and
that in order to increase its earnings it would be obliged to engage so extensively in open-market operations as to put it in active competition with member
and nonmember banks, and that such a policy would also destroy its character
as a reserve bank, for by having its assets actively employed at all times it
would have no means of assisting member banks in times of emergency. These
arguments have proved effective, and for some months past I have heard of
no sentiment in favor of interest on deposits.
There is, however, a feeling that the reserve bank is distinctly a Government
institution and that the member banks have no actual part or interest in its
affairs. No interest is taken in the election of Class "A" and Class " B " directors, and there is absolutely no feeling of proprietorship on the part of member
banks.
Also suggests that member banks should receive a large share of the profits
of Federal reserve banks.
2. Case, New York: A. Cost.—Because of the loss of interest on balances,
inability to count cash in value as reserve, and limited dividends, the argument
of cost is most often encountered. Yet the officers and other representatives
of the bank who are most closely in contact with member banks, have found
that in most cases membership in the Federal reserve system involved no, or
very little, additional expense. It does not appear, generally speaking, that
membership has resulted in reduced profits to State banks either through loss
of interest on reserve balances formerly kept with city correspondents or
through loss of exchange on checks; where earnings have been reduced in one
direction they have been increased in others. The special services afforded by
the system and the earmark of security which membership gives is usually regarded as ample compensation for any additional expense incurred.
Few country bankers have a cost-accounting system which enables them to
compute precisely the cost of membership. The most obvious factor as an active
deterrent to membership is the loss of the interest which the country banker
has been earning on his reserve balance with his city correspondent. Under
the Federal reserve act country member banks are obliged to keep 7 pr cent of
their demand deposits as reserve wholly with the Federal reserve bank. Under
the national bank act a country national bank had to keep 6 per cent in vault
and was permitted to keep an additional 9 per cent on deposit in a reserve or
central reserve city, making a total reserve requirement of 15 per cent. Superficially the reserve'requirement for country member banks under the Federal reserve system is 7 per cent, as compared with 15 per cent formerly required under the national bank act. But actually there should be added to the 7 per cent
which country banks are required to keep on deposit with the Federal reserve
banks the following amounts, which are not counted as reserve:
Per cent.
Cash in vault, about
3
Float, about
2V2
Balance with city correspondents, about
2
Total, about
7%
Thus the reserve actually required of country national banks is very close
to the reserve previously required, and the amount on which interest is earned
is much reduced. In the case of New York State country banks, for which the




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

State law requires only a 10 per cent reserve, the loss in interest on reserve
deposits is even more pronounced.
It has been observed, however, that country bankers are now thinking less and
less about the loss of interest on reserves. They recognize the fact that if the
Federal reserve banks in seasons of slack credit demand, as well as in seasons
of active credit demand, were obliged to pay interest on deposits, they would
be obliged at all times to invest their funds freely and in consequence would
necessarily compete with banks everywhere. They recognize also that such
action by the Federal reserve banks would create forced inflation, with all the
evils appertaining to it. Latterly the country _ banker in this district has
argued rather that his participation in the earnings of the Federal reserve bank
should not be limited to 6 per cent on his stock ownership, and that in years
when Federal reserve profits warranted the member banks should share somewhat more largely in those earnings.
The loss in exchange on checks is not at present a factor of importance in
this district since all banks, whether member or nonmember, pay their checks
at par.
In summary of the foregoing, there are certain tangible losses which country
banks in this district may have to incur if they join the Federal reserve system.
Balanced against these are intangible benefits derived from the services rendered by the Federal reserve banks, the advertising value attaching to membership, and added insurance in times of severe credit demand. These benefits if fully taken advantage of permit the country banker to operate more
effectvely and therefore more profitably.
B. Ability to secure benefits from correspondents.—Many country bankers
believe that through their city correspondents they can obtain many of the benefits of membership indirectly and at the same time secure from their city
correspondents advantages and services which the Federal reserve banks are
not in a position to give. It is undoubtedly true that certain of the services
performed by city banks for their country correspondents can not be performed by the Federal reserve banks. The latter have confined themselves to
giving mechanical sevices as distinguished from such services as giving information and advice on securities, lending money on call or tme, affordng participations in loans and syndicates, purchasing commercial paper, etc. These
and other similar services the city banks can and do render to their country
correspondents, and in consideration of them many country banks maintain
balances with one or more city correspondents.
The services which the Federal reserve banks render are of a nature consistent with the purposes of the Federal reserve system and include the supplying of currency and coin, the collection of checks, the collection of noncash
items, the safe-keeping of securities, the purchase and sale of securities on
instruction, the transfer of funds by wire, etc. Many of these services are
interrelated with other operations of the reserve banks and tend to give the
country member banks a participation in the benefits of the system equal to
those enjoyed by city member banks. Many of them are of such a character
that they can not be carried on as expeditiously by city correspondents or in
the gross so economically as by the Federal reserve banks.
These services are important factors in insuring the permanency of the
Federal reserve system, because through them the Federal reserve banks are
constantly in contact with the member banks, and without; them contact with
member banks, particularly country member banks, would be impaired. To
most State banks the value of these services rendered directly and without
cost constitute a benefit which considerably offsets the expenses involved in
membership. To county national banks whose membership is compulsory as
long as they remain in the national system the services are often important
considerations in determining their continuance as national banks.
Further, the services tend to make the Federal reserve system a living bank
organization, because efficiency of operation can not be effected on an emergency basis. The services are sufficiently continuous to insure the maintenance
of a well-knit organization available for use at all times, emergency or otherwise. A Federal reserve system regarded solely or mainly as a means to
supply currency and credit in emergencies is a Federal reserve system frozen
and without human relation.
No correspondent bank can give the same services as the Federal reserve
bank as directly or as fully, and when the city correspondent serves as the
medium through which these services are rendered, expense of handling is




INQUIRY ON MEMBERSHIP IN FEDERAL RE'SERVE SYSTEM

85

incurred, and that expense naturally falls upon the user of the services,
namely the country banker.
Most of the Federal reserve banks maintain limited organizations which
maintain, by visit and otherwise, relations with member banks. Their main
function has been to ascertain and eliminate the difficulties which country banks
have met in their various dealings with the reserve banks. They have also
informed the country banks how to make most effective use of Federal
reserve services. They have clone much to place country banks on a parity
with city banks in their relations to the Federal reserve system.
G. State laws.—In the States of New York and New Jersey State reserve
requirements are no longer effective on member banks—on the contrary, a
State bank becoming a member of the Federal reserve system only. In the
State of Connecticut, however, State reserve requirements are still effective
against member banks. There State laws require the retention of a certain
amount of cash in vault and specify the type of security in which savings
deposits may be invested. Thus upon Connecticut State banks which join the
Federal reserve system two sets of reserve requirements are effective, those of
the State and those of the Federal reserve banks—and in every item the more
stringent of the two sets of regulations prevail. Consequently State banks
which become members of the Federal reserve system are often in unfavorable competition with both National banks and State banks. Therefore many
State banks are deterred from becoming members.
D. Inconvenience of further' examinations and supervision.—In times past
there has been considerable complaint of the number of reports required by the
Comptroller of the Currency and reserve banks and particularly of " interference in banking methods" on the part of bank examiners. Recently there
have been fewer complaints of this character. Many of these complaints were
based upon misunderstanding and in general may be regarded as an unimportant factor in restraining banks in this district from joining the system.
A more positive deterring influence has been a reluctance on the part of State
banks to submit to an examination prepartory to entrance into the reserve
system. These cases have resulted usually from the possession of slow or
doubtful assets which might be criticized, and discussion of this as a restraining
factor may therefore be dismissed.
3. Norris, Philadelphia: The eligible State banks which fail to become members of the Federal Reserve System belong in almost every case to one or more
of the following eight classes:
1. Those whom it would not pay to lose interest on their cash reserves.
2. Those whose affairs are not in such condition that they care to submit to
examination.
3. Those who feel that they obtain most of the advantages of membership
through a correspondent bank or banks.
4. Those who have an idea that membership would subject them to some
sort of Federal control or restriction.
5. Those which have among their officers or directors one or two old-fashioned men who are constitutionally prejudiced against " new things " and whose
prejudices the majority do not care to override.
6. Those who are merely ignorant and uninterested.
7. Those who have been advised against membership by State officials or
by their correspondent banks.
8. Those who have little or no paper eligible for discount.
4. Fancher, Cleveland: There are a number or reasons advanced by the
eligible State banks in this district for not becoming members of the Federal
reserve system, the principal ones being —
1. Nonpayment of interest on reserve balances.
2. Inability of the Federal reserve bank to collect at par all of its cash items.
3. Fear that membership will mean the preparation and filing of numerous
reports.
4. Fear that a certain amount of red tape is required in dealings with the
Federal reserve bank.
5. Fear of Government control.
The last three reasons are assumed and can be met readily.
In attempting to offset the first two reasons by explaining the advantages
which would accrue through membership in the system we are often confronted
by what, to us, appears to be one of the prniciple reasons why more eligible
State banks are not members of the Federal reserve system; that is, that we




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

have in our present membership too many banks that are " passive" rather
than " active " in the support of the system..
We have found on numerous occasions when discussing memoership with a
State bank or trust company that they have been advised by representatives of
the larger banks with whom reserve balances were maintained not to become
members; that their needs had been provided for in the past; that they would
be taken care of in the future; that the larger banks were equipped to extend
many services that could not be extended by the Federal reserve bank, and that
the smaller bank was not manned to furnish the numerous reports and certain
other requirements of the Federal reserve bank with respect to sorting of
checks and currency.
In the smaller towns when a prospective member consulted with a neighboring member, we have found that very often no enthusiasm over membership
was displayed.
The greatest aid in obtaining new members, would be the active cooperation
of a satisfied membership. Consequently, any amendments to the Federal reserve act that would make membership more popular would help solve the
problem.
The greatest degree of dissatisfaction exists with banks located outside the
centers. Many of this class of banks feel that the banks in the centers enjoy
advantages and profit thorugh membership to a greater extent than they. One
thing that might be done to meet this objection is to permit a more liberal
basis for computation of reserves on the part of the 7 per cent reserve bank by
allowing this class of banks to deduct from their deposits the amount of cash
items for collections in the hands of the Federal reserve bank before computing their reserves.
National bank members complain about the limitations imposed in making
mortgage loans, and their enthusiasm for the system would be increased if
they were permitted to lend a greater proportion of their time deposits on
mortgage security of the same kind and under the same conditions as are permitted to State banks. This complaint and request comes principally from the
7 per cent banks.
Another objection that is raised is lack of participation in the earnings of the
Federal reserve bank. Many banks feel that something more than a 6 per cent
dividend on their capital payment is due them.
5. Seay, Richmond: A very large part of State banks remain out of the
system from selfish regard for immediate profits; all other reasons are wholly
subordinate to this one.
State banking laws in many States permit a greater freedom of operation
and do not impose in some cases that reasonable and wholesome restraint which
should be exercised by law over ail banking institutions. Supervision of banking practices in many States is not as thorough as membership in the Federal
reserve system would necessarily entail. It is possible and probable that this
greater freedom of action influences a certain number of banks. Many banking
institutions combine a commercial banking business (requiring, according to
experience, the maintenance of proper reserves) with business of other character, and they desire to be free from the burden of maintaining a specified
reserve. This applies to a considerable number of trust companies. It is undoubted that the facilities offered to nonmember banks by those banks within
the system constitute a very powerful reason for their remaining out of the
system.
There is believed to be a very strong undercurrent of feeling that the Federal
reserve act is not sufficiently liberal to member banks in fundamental principles.
The member banks provide the capital and the deposits of reserve banks. While
these contributions are not the only source of earning power of Federal reserve
banks—the issue of currency being a material source of earning power—the
member banks are believed to feel that they are entitled to a greater degree
of ownership in Federal reserve bank assets and earnings than they are accorded
by law.
It is believed to be a fact that in some sections of the country a number of
State banks have remained and are remaining out of the system because if they
became members they would have to give up exchange charges. It is probable
that any plan which would result in making par clearance general and settle
the question finally and forever would result in considerable addition to the
membership of the Federal reserve system. This, perhaps, is another indication of selfish regard for immediate profits which tends to keep State banks
out of the system.




INQUIRY OS MEMBERSHIP IN FEDERAL RESERVE SYSTEM
iT

87

With or without justification, there appears to be a feeling, at least on the
part of some member banks—and that to a considerable extent—that the Federal
reserve banks are more governmental banks than is justified by their inherent
structure; that is, justified by the fact that the resources of the member banks
only render the existence of the reserve banks possible. It is not intended to
imply in the foregoing the belief that the management of reserve banks could
safely be left to member banks. The experience in bringing about the enactment of the reserve act and the long delay required are proof conclusive to the
contrary. Since popularity of the reserve system is partly involved in membership, it is pertinent to allude to a feeling that is believed to exist; that the
structure of the reserve act invites, in some respects, political interference to a
greater degree than is wholesome or safe.
6. Wellborn, Atlanta: My observation and experience in this district is that
the main objection of a large number of State banks is based on purely selfish
grounds, they believing that the benefits accruing from membership would not
compensate them for the losses sustained on reserve deposits without interest
and the remittance of checks without exchange. In other words, a great many
State banks, in my opinion, feel that they get a substantial benefit from the
system, through their correspondents, without having to contribute anything
material to it.
Another reason why many country State banks remain out of the system is
that they are discouraged from joining by their city correspondents, receiving
the assurance from them that they can take care of their requirements.
7. McDougal, Chicago: A. Loss of interest on reserve deposits.
B. Prejudice unfavorable to membership created by long-continued agitation
on the part of a small minority of the banks throughout the country hostile
to the par collection system.
C. Belief on the part of many eligible nonmember banks that membership in
the system would afford no additional facilities beyond those which they now
receive from correspondent banks located in the financial centers.
D. In considering the large number of eligible nonmember banks and their
reasons for not joining, it should be borne in mind that the character of the
business conducted by many of these institutions and the nature of their loans
and other assets are such as would make it impossible for them to avail themselves of the credit facilities of the system to any material extent.
8. Biggs, St. Louis: A. No interest paid on reserve balances. At least this is
the reason most often given. Prom the viewpoint of both the prospective member and the member bank this loss is something tangible, and it is rather
difficult for the average banker to get a clear idea of the offsetting advantages
of membership, which require explanation, and unless the banker is well skilled
in banking he can not comprehend them at a glance as he can the loss of
interest.
To pay interest on reserve balances would necessitate increased revenue on
the part of Federal reserve banks in times of easy money. This could easily
result in active competition between Federal reserve banks and member banks.
It is wrong in principle to pay interest on reserves and, as a rule, member banks
appreciate this when the matter can be fully explained to them.
B. Lack of knowledge of the system. Lack of knowledge of the system is
gradually being overcome, although it is a slow process, as it is educational in
its nature. It applies to both members and nonmembers, although naturally
to a greater extent to the latter. This bank from the opening of its doors
has tried to meet this problem and has done and is doing everything in its power
to have member banks, nonmember banks, and the public understand the
system.
C. No difficulty in obtaining necessary accommodation through correspondents, and knowledge that the majority of the facilities of the system can be so
obtained. This requires little further elaboration except to add that many
banks have had relations with correspondents of long standing and they hesitate to take any steps that may interfere with such relations, even when they
realize that membership in the system does not necessarily interfere with the
relations already established. They seem to be afraid that it may have a
tendency that way. Correspondent banks have not always encouraged them
to think otherwise.
D. Requirements in respect to paper offered for rediscount. The requirements in respect to eligibility of paper are now extremely liberal, and about
the only States that this objection applies to are those where the individual
loan limit is considerably in excess of 10 per cent.




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

The requiring of financial statements of customers comes under this heading.
In fact wherever the requirements raise the standard of banking there is liable
to be the unfounded objection of " red tape.'"
E. Needs of community or policy of bank does not make rediscounting
necessary.
F. Objection to par clearance of checks. The objection to par clearance of
checks, so far as this district is concerned, is, in my judgment, of minor importance.
G. Propaganda of those opposed to the system. Propaganda of those opposed
to the system has undoubtedly created a certain amount of distrust on the
part of some bankers as to the motives and purposes of the Federal Reserve
Board and the management of the Federal reserve banks. It takes time to cure
such matters. A more thoroughly informed understanding of the system and
a word from a satisfied member will accomplish more than anything else.
9. Young, Minneapolis: These reasons are mainly selfish. I have found in
many instances that the officers of such banks are interested in private business
or enterprise; that to finance such business or enterprise they use the club of
their reserve account with their city correspondent bank to borrow for such
business directly on its obligation or directly themselves, collateraled by the
obligation of the enterprise. They fear that any reduction of their reserve balance deposited with such city correspondent, by carrying the portion of reserve
with us as required by the Federal reserve act, they might not be able to procure a continuance of such accommodations.
Another reason for failure to apply for membership is found in the absolute
lack of information concerning the rights of a State bank to operate under
the Federal reserve act. They do not know that by the provisions of section
9, they retain, subject to the provisions of the Federal reserve act and to the
regulations of the board made pursuant thereto, their full charter and statutory rights as a State bank or trust company and may continue to exercise
all complete powers granted them by*the State in which they are created.
They do not realize that they will be entitled to all of the privileges of member
bunks. They are also fearful of supervision by the Comptroller of the Currency,
and not being acquainted with the provisions of the section of the act which
absolutely eliminates his supervision of such State member banks, they confuse
the comptroller's office with the Federal reserve bank. The banking departments of many of the States lack both the power and disposition to enforce
proper banking methods, as well as the laws of the State. They realize the
power of the Federal Government and feel that they would be not only subject
to the additional costs of such examination, but might also be compelled to
more rigidly conform to conservative banking practices.
Another reason is found in the fact that the laws of several States permit
State banks to make loans to individuals, partnerships, or corporations in an
amount greater than they would be permitted to rediscount with the Federal
reserve bank. They feel that this class of loans includes what they term
their best paper, while they generally feel that this class of paper is of a high
quality, more generally the carrying; of such loans is the result of very
active competition.
They feel, no matter how lengthy or complete may be the explanation to
the contrary, that in rediscounting paper they will encounter much of the
so-called red tape—comparing their offerings for rediscount, if they should
make them, with other activities with different bureaus of the Government.
Each and all of them have at some time had some transaction of a business
nature with Government departments and have felt that they were abused,
that they were delayed, and that the requirements were entirely too technical.
They all invariably complain about failure to pay interest on their balances,
and even when it is pointed out to them that such interest at 2 per cent on
the amount they would carry with us in many, many instances would not
amount to even a dollar per day for the year, nevertheless this loss is magnified to a point beyond its real dimensions. Actuated by selfish motives, they
prefer the old system of counting as reserve such items as they may send
their city correspondent banks, which are immediately charged on their books
to the account of such city banks, even though the amount is nothing but
float; and under the old system they were paid interest on these amounts
from the date of receipt by the city correspondent bank, even though it had
not collected such items. The interest on this float was considerable. While
the city correspondent banks are now generally paying interest on balances,
including funds actually collected, the smaller bank feels that it can draw its




INQUIRY ON MEMBERSHIP IK FEDERAL RESERVE SYSTEM

89

drafts against such balances more readily than they could against their reserve
account with us, and that they would not be penalized for any deficiency
in such reserve. They generally are not inclined to pay much attention to the
State statutes which provide that they may not make new loans wiien their
reserve is impaired and then to add a penalty to that feature, they feel that the
outlay is an actual cost.
\
Many banks complain about our par clearance activities. Numerous small
country banks have in the past been able to procure a substantial portion
of their dividend from the aggregate of such charges heretofore made. They
feel that if this par clearance activity is pursued to its fullest extent, it is
but an entering wedge into the supervision and control of their other activities which result in a profit to their institutions, and that these other activities may suffer a similar fate and they will be deprived of what they claim
is just remuneration for their services.
In the rediscount of paper they were encouraged by their city correspondent
banks, before the collapse of 1920, to send in their note or certificate of
deposit; to such correspondent with collateral attached. This method of borrowing received a severe set back in 1919 to 1922, because of the condition of
such city banks. Since the correspondent banks in the cities have bettered
their financial situation they are again suggesting to the country bank that it
may obtain more readily and quickly such funds it requires for its business
by borrowing as formerly. They do not appear to be very much concerned
with the statement that if their seasonal rediscounts are normal in amount
they are not compelled to put up additional collateral. They say they might
just as well put up $100,000 worth of notes selected at random to secure a
$50,000 debt, as to carefully select $50,000 of paper and offer it for rediscount,
to be accompanied by certified copies of signed financial statements, certified
copies of chattel mortgages, and otherwise comply with our rediscount requirements. The difference in the rate, being not greater than 1 per cent, if r the
borrowing of the last amount named was not longer than six months, w ould
amount to but $240, and that this would not be sufficient inducement to them
to change their relationships.
They feel that because of their past relations with their correspondent banks
they can more easily and readily deposit their valuable papers, such as Liberty
loan bonds—including similar valuable papers of their customers—with their
correspondent bank, and would not be subjected by their city correspondent bank
to what they term red tape in procuring a release of such valuable papers held
for safe-keeping as they think would be imposed upon them should they deposit
such valuable papers with us.
They are not at all impressed with the rate of dividend on their capital-stock
investment.
They are not at all impressed with the privilege of making telegraphic or
mail transfers, even without cost to themselves, intimating that the regulations
incident to advices regarding transfers, drafts, etc., are too cumbersome, and in
event of failure to properly advise they feel the draft might be dishonored.
They are not at all impressed with the ability to procure new or fit-for-use
currency without cost to themselves. They say they can procure such money
as they require from their city correspondent banks, which in turn call upon us
for the same.
They are not at all impressed with the fact that they may properly reduce
the amount of actual money on hand, thereby using a portion of the amount
usually carried for reserve purposes—as to which portion, of course, they are
not now receiving interest, because it lays in their vaults—and thereby lessening the cost of insurance protection and lessening the liability for holdup.
The main reason for failure on the part of eligible State banks to join the
Federal reserve system is found in the fact that supervision by State banking
departments is more or less lax, is more or less under political control, on
account of which the managing officer of a large number of such State banks,
having in mind the alleged pressure of Federal reserve banks exerted on
national member banks during the collapse of 1920, 1921, and 1922, are possessed of an unwarranted fear that if they became members of this system they
would be compelled to conform more rigidly, not only to the laws of the State
under which they operate but to the regulations of the Federal Reserve Board
and Federal reserve banks. Because of their lack of knowledge and the desire
to manage their institutions as they see fit, having listened to demagogic misstatements and having received a lot of misinformation, even from memberbank officers who were justly subject to criticism, these State-bank officers




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prefer to continue along the lines of least resistance, following their old-time
practices.
The main reasons for failure to join are really but three: First, the fear
last above referred to; second, the fear of inability to finance their private
enterprises for personal gain if their reserves with city correspondent banks
are lessened; third, failure to receive,interest on their reserve accounts with the
Federal reserve banks. All of the other reasons suggested above are merely
smoke screens to hide the real purpose mentioned in the first and second conclusions herein set forth.
While we have enumerated many of the reasons that are given for failure
to become members of the Federal reserve system, we are satisfied that the
real objection seems to be centered on the one question—reserves upon which
they do not receive interest for daily balances. We have a number of State
banks in this district that have been conducted in an unusually conservative
manner for a number of years, banks whose liquidity, as well as their solidity,
is of the highest type. Because of these factors in their management they have
been able for the past four strenuous years to rely entirely upon their own
resources without seeking outside assistance, or, if they found it necessary to
seek outside assistance, because of their high standing and character of their
paper they had no difficulty in procuring such assistance through correspondents
in the large centers. The result of our inquiries as to why these banks do not
join the Federal reserve system seems to be all centered upon the amount of
reserve that they are required to carry with us upon which they do not receive
interest for daily balances. They feel that the reserves which are carried with
city correspondents, upon which they receive interest for daily balances, are
just as good as any reserves which they might carry with the Federal reserve
system. Because of this loss of interest on reserves and because our gratuitous
services do not offset these losses they feel that membership is just an additional expense without a corresponding amount of benefits. There are, however, a number of State banks in this district that are members of the Federal
reserve system, that are in good liquid condition, and that have never used our
rediscount facilities. We believe that the active officers in charge of these institutions have looked upon the Federal reserve bank and their membership in
a broad way, arriving at the conclusion that any loss in interest that they
might take upon the reserve because of membership is more than offset by the
indirect benefits they obtain because of support of the system.
There are also a number of banks in this district at the present time that are
in an overextended condition but not in a particularly precarious condition.
We believe that these banks realize what has been done for their competitors
who are members of the Federal reserve system, and that as soon as their
house is in order they will seek membership in the Federal reserve system;
and when they do they will disregard any loss of interest that they will have
to take on account of reserve balances and become members because they
believe it is a good insurance against possible emergencies that may arise in
the future.
There are also a number of State banks in this district that are technically
eligible for membership, but we question very much whether an examination
would disclose a condition that would permit the board to act favorably upon
their application.
10. Bailey, Kansas City: First. The outstanding reason seems to be that they
receive no interest on their reserve balances.
Second. The State laws are much more liberal in their administration of the
State banks than those acting under national charter. In most States in the
tenth district a State bank is permitted to loan to one person 20 per cent of
their capital and surplus, whereas a national bank can loan only 10 per cent.
Third. The national banks are under a more rigid surveillance than are the
the State banks. State banks examinations are less thorough, all of which appeals to the average State banker. The State laws generally allow them to loan
a very much larger percentage on real estate than the national banks.
As a result of this looser administration, I will use the State of Kansas as
an example: During the last year we have had one national bank failure in
Kansas, and we have had 28 State bank failures, which is a complete answer to
the question, "Which is the better system?" I think it is due very largely to
want of understanding of the benefits to be derived from membership in the
system. This bank has tried in every way to educate the nonmember banks
to the advantages of the system and in our conversations with many of them
they recognize all we tell them, but will turn around and say, " We are get-




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91

ting all the benefits of the system without having to pay any of the expense,"
and we are conscious that a good many member banks, especially those in the
large commercial centers, had advised against the average country bank joining the system, saying, " We are able to take care of you," undoubtedly the
member bank fearing that if one of its customers should join the system, it
would lose a part, at least, of his deposits.
11. McKinney, Dallas: (a) The fact that balances carried with Federal
reserve banks are not interest bearing.
(b) Limiting participation by member banks in the earnings of reserve banks
to 6 per cent per annum on their investments in the capital stock of the reserve banks, as now provided by law.
(c) Elimination of the opportunity afforded by State laws to use float as
reserve, and the requirement of immediately available funds in payment of
cash items cleared through the Federal reserve banks.
(d) Erroneous idea that transactions incident to membership involve too
much " red tape " and in a general way ignorance of the requirements of membership.
(e) The fact that officers of many nonmember banks, for whom correspondent banks are carrying personal or individual loans against balances maintained by their banks, might experience some difficulty in floating their paper
in the event their institutions were forced by membership in the system to
concentrate their reserves with the Federal reserve bank.
(f) A disinclination on the part of many nonmember banks, in this district
at least, to submit their affairs to examination by representatives of the Federal
reserve system because of their fear that their assets will not be found in such
condition as will entitle them to membership, together with an exaggerated
idea of Federal supervision which many member banks believe is involved in
membership in the system.
(g) Prejudice on the part of nonmembers resulting from propaganda and
and misinformation promulgated by critics of the system.
12. Calkins, San Francisco: 1. Belief that membership would be unprofitable.
2. Apprehension of more " Government supervision" and curtailment of
operations permitted by State laws.
3. Unwillingness to disturb or discontinue long established and comfortable
relations with correspondents and depositaries.
4. Belief that membership would subject them to supervision and restriction
by Comptroller of the Currency.
5. Lack of real understanding of the provisions of the law and operation of
the Federal reserve banks, and reluctance to investigate and thoroughly consider advantages, largely due to prejudice and influence of antagonistic publicity.
6. In the case of many banks, some very large, whose business is mainly or
largely savings business, the conviction that membership entails no advantages
not obtainable from depositary banks, which pay liberal interest on balances.
In some cases this conviction is not due to prejudice or disapproval, but is
based on careful calculation and consideration.
7. In some agricultural communities bankers are influenced by the allegation that the Federal reserve system is responsible for the farmers' distress or
by the fact that their farmer clients believe that allegation.
VI. ADMINISTRATIVE MEASURES TAKEN TO INCREASE MEMBERSHIP

1. Harding, Boston: Quite recently the Boston clearing house has inaugurated a movement to bring about a closer contact and keener interest on the
part of member banks, believing that it is useless to attempt to bring in nonmember banks and State banks as long as there is an aloofness and lukewarmness on the part of member banks. Enthusiasm is contagious, and whenever member banks become active partisans of the system State banks will
apply for membership.
It has been suggested that at the next annual meeting of the New England
Bankers' Association one session be set aside for a meeting bf the stockholders
of the Federal reserve bank. This meeting will elect its own chairman and
will call for such information as stockholders usually receive at meetings, and
will also elect for the term of one year an executive committee of seven. This
committee will receive complaints or suggestions from member banks and will




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

take them up with officers and directors of the Federal reserve bank. Being
representative of the stockholders, conversations can be held with this committee by the officers of the reserve bank on questions of mutual interest without fear of the imputation of favoritism, which might be the case at present if
the opinions of officers of two or three banks were sought. In view of the
fact that the New England Bankers' Association does not meet until next
June, the Boston clearing house has requested the president of the bankers'
association to serve until the stockholders' meeting next June. The president
of the Massachusetts Bankers' Association has appointed two members of the
committee, and one member has been or will be appointed from each of the
other New England States. This committee is expected to meet in the near
future and will probably have some suggestions to make to the board before
the meeting of Mr. McFadden's committee in October.
3. Norris, Philadelphia: We have constantly in mind those institutions which
it would be most desirable to secure as members. When the traveling representatives of our bank relations department are in a town they always call
upon the nonmember as well as upon the member institutions. The officers of
this bank seek contacts with the officers of these desirable institutions at conventions, group meetings, or other visits to their neighborhood. We avail ourselves of every opportunity to show any courtesy, and whenever the opportunity
offers, without seeming to unduly press the matter, we talk membership to
them. We believe that if a large number of small or undesirable institutions
became members it would have little or no effect—possibly a bad effect—upon
the larger and more desirable institutions, but each time we get an institution
of the latter class it makes it easier to secure ultimately such as we want of
the former class.
4. Fancher, Cleveland: While we have no one actively engaged in direct
solicitation of membership, our officers and our field men of our member bank
relations department do not overlook an opportunity to develp prospects or to
take advantage of inquiries from eligible banks to explain the various benefits
of the system.
5. Seay, Richmond: Recent amendments to the Federal reserve act materially reduce the capital requirements of State banks. In this connection it is
pertinent to point out that State banks have all the advantages of national
banks as members of the Federal reserve system in addition to the broader
privileges sometimes granted by a State charter. The matter of capital of
the smaller banks is one of these, but it is one which the State banks have no
right to feel strengthens their position. Beyond doubt there are too many
small banking institutions—many of them not qualified by experience or otherwise for the proper conduct of the banking business. This is not intended to
be the advancement of a theory but a statement of fact.
It is not believed to be desirable to directly and indiscriminately solicit
membership of State banking institutions, but, rather, to set forth as well as
may be done the advantages of membership in the system, the protection which
the system affords to the banking business in general, and the vital necessity
for the maintenance of the system for the conduct and growth and preservation against disaster of the banking business of the country, leaving the invitation to all qualified and eligible banks to enter the system.
If it is possible, it should be brought about that it be not made to the special
interests of member banks to keep State banks out of the system on account
of the value of their reserve accounts. All Federal reserve banks—or most of
them, if not all—maintain special departments to cultivate the good will and
understanding of all banks with which they come in contact (whether members
or nonmembers) and to spread an understanding of the operations and benefits
of Federal reserve banks. Further than this, which, indeed, is an important
feature of the conduct of the Federal reserve banks, no administration measures in this bank have been taken to increase membership. Many State banks,
at least in this district, while eligible so far as capital requirements are concerned, are far from eligible because of other conditions surrounding their
management. It would be a considerable time before all State banking institutions technically eligible for membership could be admitted into the system.
6. Wellborn, AtKmta: Our bank has pursued an active policy, endeavoring to
persuade and induce State banks in our district which are eligible to become
members. We have had some success along these lines, but not as much as we
expected and should have had, in view of the credit conditions existing in the
district. At this date there are 1,680 State banks in the sixth (Atlanta) Fed-




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93

era! reserve district. Of these only 147 are members. There are 148 State
banks ineligible for membership on account of having a capital of less than
$15,000, about 100 of them being in Tennessee and the balance of 48 scattered
throughout Alabama, Mississippi, and Louisiana.
We have tried in various ways to obtain a larger membership of State banks.
The officers of our bank regularly each year attend the various group meetings
and State conventions of bankers, and have always in their addresses and in
personal contact with State bank officials discussed with them the advisability
of becoming members. On several occasions we have sent officers from our
bank to make a direct canvass of the State banks which we thought could be
induced by the proper presentation of the matter to become members. I will
say, however, these methods have proven only partially successful.
What we have said and written may have put some of them to thinking,
which later on bore fruit in the membership that we have obtained. I would
say that a large majority of those who have joined our system have done so
through imperative necessity to avail themselves of the rediscount privilege.
Some few have joined primarily for the protection it offered and for advertising
purposes.
7. McDougal, Chicago: The bank relations department of the Federal Reserve Bank of Chicago, with an experienced manager and a number of field men,
visits all member banks from time to time, and, moreover, has at all times
endeavored in so far as possible to keep eligible nonmember banks informed with
respect to the facilities of the system, to answer all questions arising relating to
prospective membership, and, where called upon, has endeavored to explain
just how membership in the system would affect each individual institution.
8. Biggs, St. Louis1. The officers of the Federal Reserve Bank of St. Louis
have always made it a practice to, whenever called upon or whenever the opportunity was presented, explain the operations of the Federal reserve system,
with the object of aiding prospective members in determining the question of
membership. Care has been taken to have the prospective member thoroughly
understand what membership in the system means from every angle, and to
enable it to come to a correct conclusion as to membership. The officers have
not, however, at any time urged banks to act contrary to their own views in the
premises.
9. Young, Minneapolis: This bank has made an active campaign through the
agents' department, also the officers of the bank, for membership. This campaign has covered personal letters, circulars, booklets explaining the advantages
of membership, and personal calls of our officers upon State banks that are
eligible for membership. We believe that the campaign should be continued,
but do not know of anything else that we could do in procuring desirable
members than we have already done.
11. McKiimey, Dallas: Some years ago this bank waged an intensive membership campaign, both through the mails and by means of our traveling
representatives. This resulted in a substantial increase in our nonmember
banks as well as member banks, developed a rather extended condition—our
activity in the solicitation of nonmembers somewhat abated. At the present
time it is our policy to maintain through our member bank relations departmentand otherwise a relation of friendly contact with nonmember banks, taking advantage of every opportunity to educate them to a better understanding
of the system and the advantages of membership generally.
12. Calkins, San Francisco: During the latter part of 1919 and the early
part of 1920 a very exhaustive campaign for State bank membership was
carried on in the twelfth district. The managers of the five branches visited
the State banks in their respective communities and attended meetings of
bankers for the purpose of explaining the workings of the Federal reserve
system and the advantage of membership therein. In addition to the work
of the branch managers there was employed at the head office for the period
of one year an experienced man who not only cooperated with the branch
managers but covered the banks in the home-office territory, as well as visiting
many of the banks in other parts of the district. Being an experienced lawyer
also he reviewed the laws of the various States, with the idea of having
enabling legislation enacted making it possible or more desirable for State
banks to joint the system. It was only after the enactment of these laws that
banks in California (which now have resources aggregating $1,125,000,000)
were able advantageously to become members.
107679—26—PT 1




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM
VII. SUGGESTED CHANGES IN LAW AND REGULATIONS

1. Harding, Boston: I may say that there is a general feeling among the
New England bankers that section 7 of the Federal reserve act shoud be
amended; not with the view of depriving the Government of revenue but
rather with the idea of making the system a mutual one. It is argued that
as section 7 now stands, there is no reason why member banks should take any
particular interest in the system. The dividends on their stock at 6 per cent
per annum are cumulative and are a fixed charge on the net earnings, but the
Government gets all the rest. Even the surplus will go to the Government in
the event of final liquidation. It has been pointed out that Congress has been
more liberal in this respect to the farm-loan banks than it has to the Federal
reserve banks, for the capital of the farm-loan banks was supplied originally
by the Treasury of the United States, although the joint-stock land banks
have now relieved the Treasury of by far the larger part of its stock holdings
in the farm-loan banks. Farm-loan banks are exempt from all taxes except
as to real estate owned; their bonds as well as those of the joint-stock land
banks are exempt from income taxes, and the earnings are applied to the payment of dividends to stockholders, to the creation of a surplus, and the remainder is distributed to borrowers as a rebate of interest.
In the case of the Federal reserve banks the capital was supplied entirely
by the member banks, which also furnish the deposits. The Government's
sole contribution was $100,000 which was appropriated to pay the expenses
of the organization committee, of which amount $17,000 was turned back
into the Treasury. The Government has received so far $135,000,000 from the
Federal reserve banks as franchise taxes, and it has also had the benefit of
their services as fiscal agents, the value of which would be hard to estimate.
It is argued that the only real contribution that the Government makes to the
Federal reserve banks is the Federal reserve note, and that is a contribution
only to the extent to which the Federal reserve note is not specifically covered
by a gold reserve.
Inhere is undoubtedly a strong feeling throughout New England that there
should be an equitable division of the profits, if any, of the Federal reserve
banks. It has been pointed out that in the summer of 1913, the original Glass
bill as it passed the House of Representatives, provided for 5 per cent cumulative dividends to member banks, the creation of a surplus equal to 20 per cent
of the capital stock, and the division of any additional earnings between the
Government and the Federal reserve banks in the proportion of 60 per cent to
the Government as a franchise tax and 40 per cent to the reserve banks to
be distributed by them to their stockholders in proportion to the average
balances carried during the year. The Owen bill as it passed the Senate
provided for 6 per cent cumulative dividends, the creation of a 40 per cent
surplus, and the payment of 50 per cent of any earnings remaining as a franchise tax to the Government, and the setting aside of the other 50 per cent
as a trust fund for the payment of claims against insolvent member banks.
This introduced the principle of a guaranty of deposits and would have
tended to put all member banks on the same footing. Bankers generally protested and the House conferees would not agree to this provision. The differences between the Senate and the House were comprised by the conference committee and the bill as reported by that committee, and which finally became
a law, provided for 6 per cent cumulative dividends, the creation of a surplus
of 40 per cent, and the payment of all additional earnings to the Government
as a franchise tax.
In 1919, section 7 was amended so as to provide for a surplus equal to 100
per cent of the subscribed capital and the retention by the banks as a further
addition to surplus 10 per cent, the remaining 90 per cent to be paid to the
Government as a franchise tax. The surplus created, however, under the present law, goes to the Government when the banks are finally liquidated. I
have made no effort to influence banking sentiment in this district but have
taken some pains to ascertain just what the sentiment is. There is no disposition to change the character of the Federal reserve banks; in fact most
of the banks are anxious that they should be continued as reserve banks
and not as competing banks. There is no longer any general sentiment in
favor of interest on deposits but there is a strong feeling that member banks
should be accorded the benefits which usually accrue to stockholders.




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95

I think that banking sentiment in New England is in favor of an amendment
to section 7 which would provide: First, for the payment to the Government
of a specific tax by Federal reserve banks—a tax based upon the uncovered
portion of Federal reserve notes outstanding, which after all is the Government's real contribution to the system. I have heard suggestions made that
this tax be fixed at 2 per cent, which is the same as national banks pay, and
it has been pointed out that with this tax in effect in 1919, 1920, and 1921,
the Government would have received a large return from it, and the Federal
reserve banks would have been well able to pay it. In 1922 when the reserves
were large the earnings were small, and the tax would have been small. I
believe that New England bankers generally would like to see the 6 per cent
cumulative dividends continued with no further additions to surplus, and that
they would like to have excess earnings, if any, after payment of taxes and
balances, distributed to member banks in proportion to their reserve balances.
This principle was recognized by the Glass bill which passed the House of
Representatives in 1913.
2. Case, New York: There are four ways, among others, to encourage increased membership in the Federal reserve system:
1. To compel membership by Federal law and undergo the test of the courts
on the question of constitutionality. A possible precedent was the taxing
out of existence of State bank currency when the national banking system
was established. Such a plan would lead to endless controversy and to a type
of unwilling membership of doubtful benefit.
2. To secure uniformity of reserve requirements for banks, both State and
National. This means a modification of many State laws and possibly a modification of the Federal reserve act itself. The effect of sucli legal changes,
however, would remove the penalty now attaching in some States to State
banks becoming members of the Federal reserve system.
3. To educate systematically all eligible nonmember banks upon the value
of membership, appealing both to their self-interest and to their public spirit.
This would result in a voluntary membership of joint benefit to the banks
and the system. It is necessarily a long process, but in certain districts has
been successfully pursued.
4. To make membership more attractive financially. Should this prove to
be possible, it would remove the main obstacle in the way of an enlarged
membership of State banks of this district in the Federal reserve system. But
any plan so designed should be framed so as to preclude the chances of inflation. Two of the plans sometimes proposed would lead inevitably to inflation
in greater or less degree.
(a) Payment of interest on reserve deposits. This supposes greatly enlarged
earnings by reserve banks in years of any but the most intense credit demand.
At all times, slack or active, the reserve banks would have to keep their funds
very generally invested. The result would be that the reserve banks would
have to initiate competition with National and State banks, interest rates would
be cut, and business be unhealthily stimulated as inflation advanced. It should
be borne in mind that an investment by a reserve bank corresponds to the
interjection of fresh gold into the money market, and funds so invested provide
additional reserve upon which member banks can build deposits. In other
words, an investment by a reserve bank is likely to be multiplied in the loan
accounts of banks generally. And excessive investment would lead to excessive
multiplication of bank loans.
(b) Reduction of the reserve requirements for country banks. To reduce
reserve releases funds not previously available for investment. Unless the
revised reserve requirements represented a fair average of all reserve requirements now effective on country banks both State and National, and unless
there was fair assurance that a great majority of banks in States where
reserve requirements are now lowest would apply for membership in the
system and be admitted, a large volume of fresh funds would be released for
investment. Or funds so released would be available as reserve for additional
deposits. In either case inflation would result. When reserve requirements
have been reduced in this country heretofore, loan expansion has followed.
A third plan may or may not be open to a similar objection, depending on
how it is framed.
(o) Payment of additional dividends upon Federal reserve bank stock, when
and if earnings warrant. Such a plan would result in a closer relationship




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

between the member banks and the reserve banks, and no doubt also in a
fuller attention on the part of the member banks to the operations carried
on by the reserve banks. But if from such a plan pressure resulted upon the
reserve banks to make earnings, it would lead to inflation. In years of quiet
credit demand the reserve banks are unlikely to earn more than their expenses,
and in that case under the present law no return to the Treasury results. In
years of larger credit demand, if additional dividends to the banks are to be
allowed, and if pressure to make large earnings is resisted, the return to the
Treasury would be less than under present law; in other words, some of the
funds now derived by the Treasury would be shared with the banks.
6. Wellborn, Atlanta: It seems to me that the Federal Reserve Board has
been very liberal in their rules and regulations favorable to the admission of
State banks. I have no suggestions to offer as to altering or changing the
existing rules and regulations. However, there is one feature in this connection that may be stated. It is that State banks as well as member banks
feel that under the provision of the Federal reserve act, in the distribution
of the profits of the reserve banks, that they are not treated fairly in such
distribution. In other words, they think too great an amount of the earnings
goes to the Government, while the member banks contribute fully or more
than their share in furnishing capital to the reserve banks to operate upon.
Along this line, my suggestion would be to amend the Federal reserve act so
that after expenses of operation and losses are charged off, and the 6 per cent
dividend paid to the stock-holding banks, that the net- profits then be divided
one half to the Government and one half to the member banks, provided that
the 6 per cent dividend to member banks would be considered as a part of
the 50 per cent of profits which they would receive. As an example of this
contention, the Federal Reserve Bank of Atlanta paid to its member banks
in dividends, for the year 1921, the sum of $245,861.62, and paid into the
United States Treasury $4,480,251.19. If a more equitable division of the
profits were given to the member banks, I feel that a long step would be taken
in gaining membership of good State banks.
8. Biggs, St. Louis: Before further legistative or administrative action is
taken it would, in my judgment, be better to devote our efforts to creating
a better understanding on the part of the bankers, as well as the general
public, of the purposes, the activities, and the accomplishments of the Federal
reserve banks.
9. Young, Minneapolis1: Should any change be made in the existing lawT or
in the rules and regulations of the Federal Reserve Board? We do not think
so. The present law is very liberal and the regulations of the Federal Reserve
Board are such that any good, sound, well-managed institution can obtain
membership without difficulty.
11. McKinney, Dallas: While several amendments to the Federal reserve
act have been passed recently making membership in the system more attractive, and no doubt even further changes will be made or additional facilities
provided as future operations and progress call for them, I can not propose at
this time any specific amendment which would be economically sound and at
the same time make membership in the system more attractive; except that it
is my judgment that the present law should be modified by eliminating the
requirement that member State banks bear the cost of examinations by Federal
reserve examiners. In this district we have already had a number of complaints concerning this extra expense to which member State banks are subjected, and a few are reported to be seriously considering withdrawal from the
system, giving the expense of our examinations as one of the principal reasons
for their dissatisfaction.
12. Calkins, San Francisco: The existing law should be carefully revised for
die purpose of clarifying its provisions and removing uncertainties and ambiguities and rendering it easily understandable and its application certain.
This would involve no radical revision of underlying principles and should
make it possible to minimize the regulations of the board, inasmuch as, if the
provisions of the law were clear and unambiguous, much of what is now necessary in the way of interpretative regulation would be unnecessary.
The act should be amended to make provision for examination of all member
banks by the Federal reserve banks without charge to the banks examined,
except in those cases where it is necessary to make frequent examination,
when the bank examined should be penalized by a charge.




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The provision of the act governing reserves as applied to savings or time
deposits should be amended for the purpose of making its intent clear.
The provisions' of the act governing branch banking by member State banks
should be amplified so that this subject might be fully covered by the law,
rather than by regulation.
The regulations of the board should be condensed and minimized. With
proper clarification of the law this could be accomplished with resulting improvement in operation of banks, as well as satisfaction to member banks,
who find it difficult to follow the ramifications of more or less frequently
changed regulations.
VIII.

SUGGESTED CHANGES IN METHOD OF ADMINISTRATION

I. Harding, Boston: I have heard of no disposition whatever to seek to interfere with the administrative and regulatory powers of the Federal Reserve
Board, and that banking sentiment here is not actuated by a desire for the
actual profit but rather by a feeling that the present provisions of section 7
are not equitable in that the nonborrowing bank gets no direct benefit while
its reserve is used often at a profit by banks which are borrowers.
5. Seay, Richmond: There are no comments other than contained in the
foregoing with respect to changes in the method of administration to bring
about in the agricultural districts a larger membership of state bank and
trust companies. The trust companies as a rule are located in the larger cities,
although these cities may be in a region whose chief interest is agriculture,
and no provisions of administration conceived in the interests of agriculture
would be any particular inducement to trust companies so situated. It is
probable that recent provisions of law involved in so-called rural credit acts
rather tend to keep state banks in agricultural sections or rural communities
nut of the system than to bring them in.
7. McDougal, Chicago: While as stated above this bank has consistently
endeavored to inform eligible nonmember banks with respect to the benefits of
membership, for two or perhaps three years we have not carried on an aggressive campaign of solicitation. I .believe that interest in membership
can be stimulated and the membership increased by educating banks and the
general public as to what the Federal reserve system is and what it is not.
This, in my opinion, is an important and necessary preliminary worthy of
consideration.
II. McKinney, Dallas: I have no changes in administrative methods to
suggest. As a matter of fact I do not believe that any of pur member banks
have had at any time just cause to criticise our administrative methods so far
as they relate to the needs and demands of agriculture.
12. Calkins, San Francisco: So far as our experience goes in this district,
no change in administration would result at this time in larger membership
in agricultural sections, unless such change resulted in practices not contemplated in the act or consistent with sound banking practice.
IX.

BRANCH BANKS

1. Harding, Boston: There does not appear to be any desire on the
part of any New England bank to establish branches outside of its own town
or city. In metropolitan Boston which embraces several municipalities, there
are two or three national banks, as well as several trust companies, which
have branches in various parts of the city and in the suburbs. The national
banks which have branches have acquired them either by establishing them
while they were operating under State charters as trust companies or else
through merger with converted national banks which had established branches
while they were trust companies. One or two other national banks are considering the question of establishing branches, but if they do, will probably
acquire them through merger. So far I have heard no talk of any national
bank surrendering its charter for the purpose of establishing branches as a
State institution; although it is probable that one large national bank would
have surrendered its charter had it been unable to establish branches in
the manner above described. In many large cities it appears that the establishment of suburban branches is becoming more and more a necessity for
a down-town bank.




98

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

5. Seay, Richmond: Branch banking is a very vexing subject, but a very
vital one to the Federal reserve system so long as membership in the system
consists chiefly of national banks. It has been pointed out that State bank
members of the Federal reserve system have privileges more than the national
banks because of the greater liberality or flexibility of State banking law.
If State laws encourage branch banking in their own State banking institutions,
then the situation must permit equal or like privileges to national banks
in such States; otherwise, there would be offered as inducement to surrender
national bank charters and take out State charters^ even while retaining
membership in the Federal Reserve System. It will be recalled that the
privilege of withdrawal from the system which a national bank does not
possess is accorded the State bank.
X. PAR COLLECTION

1. Harding, Boston: I have not heard of any sentiment whatever in this
district against the par collection system, and everything that has been reported to me by our field representative indicates a favorable sentiment.
5. Seay, Richmond: The collection system is believed to be essential to
the efficient operation of the Federal reserve banks in the service of the
public. The bulk of the exchange of the country is conducted and settled
through Federal reserve banks, and the iinal adjustments between districts
in the ebb and flow and seasonal operations of trade are made by Federal
reserve banks through the instrumentality of the gold settlement fund. The
expenses of these operations are borne by the Federal reserve system, which
under the present practice is the real maker of exchange, the benefit of which
is ralized by nonmember and member banks alike, as well as by the public.
There is no just reason, in view of this gratuitous service performed by Federal reserve banks, for the existence of exchange charges by any banking
institution. The universal or country-wide par collection system would facilitate the entrace of State banks into the reserve system.
XI. ABOLISHMENT

OF COMPTROLLER

1. Harding, Boston: I am advised also that there has been no general sentiment in favor of abolishing the office of Comptroller of the Currency since
March, 1921.
5. Seay, Richmond: It is, of course, well understood that the Federal reserve banks are brought into very intimate relation with member banks, especially at times when the banks are borrowing, and supervision of the
management and practices, particularly of the country member banks, has
been proved by experience to be necessary on the part of the Federal reserv
banks. In the case of a very considerable number of member banks, a Fedral reserve bank will be possessed of more intimate knowledge as to condition
and management than the comptroller's office will often possess. It is believed that a close and cordial cooperation should exist between the comptroller's office and Federal reserve banks and between the examining forces
of the comptroller and those of the Federal reserve banks, and that if this
can not be assured at all times, because of separate organizations and functions, supervision over member banks should be lodged in the Federal reserve
system.
XII. ADMINISTRATIVE PRACTICES AND POLICY OF SYSTEM

5. Seay, Richmond: The administrative practices and policies of the Federal reserve system have been developed by experience, and this experience
during the major part of the existence of Federal reserve banks has been
highly intensive. These practices and policies can only be developed and
become more scientific and effective—flexible where flexibility is needed and
rigid where requirements of lawT are at stake—in the course of time. It is
believed that the highest ability and experience should be an essential requirement in reserve bank administration, and that inducements and rewards
should be sufficient to attract and retain men of such capacity. Continuity
of administration is vitally necessary to maintain efficient and satisfactory
management of reserve banks.




INQUIRY ON MEMBERSHIP IN FEDERAL: RESERVE SYSTEM

99

XIII. ADMINISTRATIVE PRACTICES AND POLICIES OF THE OFFICE OF THE COMPTROLLER
OF THE CURRENCY

None of the governors expressed any opinions on this subject.
XIV. INTEREST ON DAILY BALANCES

5. Seay, Richmond: If it were possible to pay member banks interest on
their reserve deposits, as correspondent banks pay interest on their deposits,
it is believed the way would be open for the entrance of a large number of
State bunks, and the feeling of dissatisfaction would be removed in the case
of a very considerable number of member banks. The payment of interest on
deposits, however, is not desirable nor is it possible. It would impair or undermine the usefulness and integrity of the reserve system. Member banks are called
the stockholders of the Federal reserve banks, but their ownership and power
are limited in all directions. When reserve banks were organized, it was not
expected that their earnings would ever excite the cupidity of member banks,
or that there would be any room for participation in earnings beyond the
dividend provided they should have a greater participation in earnings and a
greater ownership in accumulated and undistributed earnings. It is possible to
liberalize the law in this respect without injury to the fundamental structure
of the Federal reserve system.
XV. CONFLICT AND COMPETITION BETWEEN STATE AND NATIONAL BANKING LAWS

1. Harding, Boston. In this district there is little, if any, disposition to
criticize the Federal Reserve Board or the administration of this bank, and
except in the State of Connecticut local laws do not operate against State
banks' membership in the system. In Connecticut, however, the law requires
specific reserves to be carried by State banks and trust companies, and does
not admit of any modification in favor of State bank members. Therefore, the
few State banks and trust companies in Connecticut which are members of the
system work under the handicap of carrying double reserves in order to meet the
requirements both of the Connecticut law and the Federal reserve act. Efforts
have been made repeatedly to induce the Connecticut Legislature to make the
same concession as has been made in other States in favor of State bank
membership, but due to the efforts and influence of one individual, the president
of a trust company, who is also a State Senator, and chairman of the finance
committee of the Connecticut Senate, these efforts have been unavailing. Further attempts will be made in the succeeding sessions of the Connecticut Legislature, which I hope will ultimately be successful.
Mr. WiNGO. Is it your Idea and the idea of the board that the
Federal reserve banking system has the powers and the duties that
have always been attributed to a central bank?
Governor CRISSINGER. I do not think the board has that notion; I
have not had that idea.
Mr. WINGO. Is it your idea that it is part of your duties, as well as
your powers, to regulate the price level through rediscounts?
Governor CRISSINGER. Absolutely not; that is not my idea about it.
Mr. WTNGO. I notice a leading New York City socialist has expressed himself, and one of the criticisms he makes and lists as what
might be one of the possible failures of the system is that you have
not exercised the underlying functions of the central bank. Do you
think it is any function of your board to undertake to keep a stable
market in this country for a crop such as wheat or cotton?
Governor CRISSINGER. I do not think any man or set of men in the
world can do it.
Mr. WINGO. Do you think any man of the superior wisdom that
might be upon the board could survey daily and weekly all the
different industries, such as automobiles, steel, cotton, wool, and




100

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

wheat and parcel out the credit that is necessary and arbitrarily
allot it; do you know of any supermen like that in existence?
Governor CRISSINGER. I do not think there are any, and I know of
none trying to do it.
Mr. WINGO. You have no ambition to try that?
Governor CRISSINGER. I should say not.
Mr. WINGO. For your information I will state that in the original
draft of the Federal reserve act it was intended that the Federal
reserve system should undertake to control and maintain a stable
price level, but Congress refused to permit that.
Governor CRISSINGER. I think Congress was wise.
Mr. WINGO. This gentleman wanted us to do that and we refused,
and in spite of the refusal of Congress to legislate! that superpower
as a governmental power he says, " You ought to have gone ahead
and done it anyway."
Governor CRISSINGER. I do not think that would last long in the
United States.
Mr. WINGO. YOU, as a matter of fact, do not believe in any financial socialism any more than you do in commodity socialism, do you ?
Mr. STRONG. I understood you to say awhile ago when speaking
of the branch banks here in Washington that where the branch banks
have been established out in the suburb near the old bank that they
both were benefited in matter of deposits ?
Governor CRISSINGER. They both gained in deposits; yes, sir.
Mr. STRONG. DO you think that the establishment of branch banks
will not be a menace to the small independent bankers?
Governor CRISSINGER. I think not in the cities. I only advocated
it for the cities.
Mr. STRONG. YOU are going to seek to give the national banks
in the cities the right to have branches, but not in the country ?
Governor CRISSINGER. I think the national banks in the cities
should have the right to have branches, but there is no occasion for
branches in the country.
Mr. STRONG. Would not the banks in the county seats be benefited
by establishing branch banks around the country ?
Governor CRISSINGER. I do not know whether they would or not,
Mr. Strong; I really have my very serious doubts about it.
Mr. STRONG. Will not that be the next demand if you open it up
in the big cities ?
Governor CRISSINGER. I think not. I think if Congress amends the
law that it should be very specifically stated that it is limited.
Mr. STRONG. Out in our State the city bank would be seeking to
establish a lot of little banks.
Governor CRISSINGER. Those are chain banks. You understand
that chain banks are a hundred times worse than branches. Chain
banks are the most dangerous kind of banking; they are entirely
different, sir.
Mr. STRONG. It may be if I was a big banker I would want branch
banks, but being a borrower only I am not in favor of them.
Governor CRISSINGER. YOU now have them in 22 or 23 States.
Mr. STRONG. DO you not really believe if we should pass the McFadden bill permitting the national banks to have branches in the




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

101

States which permit State banks to have branches that very soon all
the States would permit State banks to have branches?
Governor CRISSINGER. I think it would work just the other way
if Congress especially limits it to the States which have such arrangements.
Mr. WINGO. I have just been reminded of an objection one banker
raised as to why they did not go into the system, being prohibited to
handle paper that was based on speculative stocks.
Governor CRISSINGER. Did what?
Mr. WINGO. That while the law prohibits you making rediscounts
on paper based on speculative stocks and bonds, etc., that indirectly
the resources of the country were being used for the same old vicious
purpose, as he expressed it, and that he did not care to come in and be
a party to legalize one of the very evils which he said the Federal
reserve system was created to eradicate. What have you got to say
about that? Is there no indirect violation of the statute by Federal
reserve banks in these centers financing stock speculations ?
Governor CRISSINGER. I think not.
Mr. WINGO. While technically the paper they took is eligible, yet
the proceeds of it, as a matter of fact, were used indirectly for the
purpose of financing speculations on the stock market.
Governor CRISSINGER. That might be true of the country bank.
You can not follow the use of the money, after you rediscount a little
piece of paper, what is going to become of it.
Mr. WINGO. This gentleman said the board knew about it, because
he pointed to the fact that the speculative market was running away
with itself in New York, and Governor Harding went up there and
produced a mild panic telling them they should have to stop financing
these stock speculations.
Governor CRISSINGER. It is possible that money that is secured on
eligible paper may ultimately be used in stock speculation, but I do
not know how the board could know about that.
Mr. WINGO. Has the board made investigations to ascertain if
there is any basis for that charge ?
Governor CRISSINGER. There is an examination of these banks
right along, twice a year.
Mr. WINGO. If that is true, is it not possible to decide and try to
find out, and if it is true to rectify it by examination of the banks
whether or not they are taking up eligible paper for the purpose of
getting funds to loan to people to speculate on the stock exchange
with?
Governor CRISSINGER. They could start an examination of that
kind, but I am satisfied that if any governors of Federal reserve
banks or Federal agents knew that that was being done they would
not issue the notes.
I want to say, before I put these documents in, that the board has
authorized me to state to the committee that they would furnish a
man at any time to help your secretary arrange these exhibits, so that
you will have them in proper order if you so desire.
I was asked to furnish these statements, and I am handing to the
stenographer the following statement entitled " Earnings of Federal
reserve banks from discount and other operations during 1922, and
disposition made thereof."
107679—26—PT 1




8

102

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Earnings

of Federal reserve hanks from discount and other
1922 and disposition made thereof
Earnings on—

Federal reserve
bank

Discounted
bills

All
j Total
other
gross
PurUnited earnings earnings
chased
States
bills I securities

Net
earnings

operations

Paid to
United
DiviTransStates
dends
ferred
Governpaid to
to
ment as
member surplus
franbanks
account
chise
tax i

$1,543,539 $591,647 $1,391,691 $14,436'$3, 541, 313 $1,097, 402 $481,951
Boston
L 619,5121 5,227,488 524,109|l 1,341, 319 3, 721, 593 1, 652,138
,
3,970,
New York
26,437 4,251,950 2, 236,876 541, 552
Philadelphia-_. 2, 393, 673 712,383! 1,119,457
55,941 4,994,282 2, 268, 688
2, 247, 667 743,759| 1,946,915
Cleveland
93,024i 2,832,944
95, 378
Richmond
_ 2, 569, 887 74,655|
867, 448 333,321
1, 951, 695 164, 704|
40, 947 2, 352, 736 672, 730 256, 618
189, 390
Atlanta
3,862, 291 547,339, 2,081,340 257, 893 6, 748, 863 1, 405, 215 876,203
Chicago
1, 303,808 255, 7501
64, 720 2, 456, 447 647, 572 283,166
832,169
St. Louis
1,451, 659 .._
Minneapolis
i 383,531 134, 058 1,969. 248 782, 695| 213, 774
1, 492, 657
8,828! 1,408.738 184, 437 3,094, 660 783, 036| 275, 655
Kansas City
1, 609,383 197,994
83, 349 2,085, 775 354,1251 251,915
195,049
Dallas
San Francisco.. 2,126, 654 712,385 1,811,317 170, 846 4,821,202 l,660,356| 448,306
Total
1

during

$76,568 $538,883
206, 946J 1,862, 509
839,960' 855, 364
861,264 714, 988
"•' " "
53,413 480, 714
41,611 374, 501
52,901 476, 111
276, 450' 87,956
56,892 512,029
50, 738 456,643
102,210!
'_._.
121,2051,090,845

26, 523,123 5, 628,956;16, 682,463 1, 656,197 50,490, 739 16, 497, 736;6, 307,035 2,740,158 7,450,543

Exclusive of $3,400,062 charged to surplus and paid as franchise tax for prior years.

I am handing you now a statement of " Daily average member
banks reserve deposits of Federal reserve banks during 1922, interest
thereon at 2 per cent, and net earnings of Federal reserve banks
after paying dividends and making transfers to surplus authorized
by the Federal reserve act." It shows that it would cost the system
$35,622,440 to pay 2 per cent interest on reserve deposits of member
banks.
Daily average member banks reserve deposits of Federal reserve banks during 1922, mterest thereon at 2 per cent, and net earnings of Federal reserve
banks after paying dividends and making transfers to surplus authorized by
the Federal reserve act

Daily average member
banks'
reserve
deposits

Boston
New York
PhiladelphiaCleveland
Richmond
Atlanta
Chicago
St. Louis..
Minneapolis. . .
Kansas City...
Dallas
San Francisco..
Total

Interest at
2 per cent

Net earnings after
paying
dividends
and making transfers to
surplus 1

$118,563,000
698,991,000
105,795,000
139, 725,000
56,155,000
47,930,000
254,867,000
64, 994,000
44,599,000
76,938,000
47,665,000
124,900,000

$2,371,260
13,979,820
2,115,900
2, 794, 500
1,123,100
958, 600
5,097,340
1,299,880
891,980
1, 538, 760
953,300
2,498,000

$538,883
1,862, 509
855,364
714,988
480,714
374, 501
476, 111
87,956
512, 029
456,643

1,781,122,000

35,622,440

7,450,543

1,090,845

1
Represents the amount paid to the Government as a franchise tax in accordance with the provisions of
the Federal reserve act.

The next is " Number of member banks in each Federal reserve district accommodated through discount operations, number not borrowing from the Federal reserve bank, and the number borrowing




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

103

in excess of basic discount line." This is a very illuminating statement and it would answer Governor Strong's question, It shows
that during 1920 and 1921 there were 2,688 banks in the system that
did not borrow any money from the Federal reserve banks and
that in 1921 there were 2,426 that did not borrow any money, or
about one-third. It is significant, if you will look at this statement, that a large number of banks that did not borrow anything
were in the distressed districts in the United States during 1920 and
1921, which is a very wholesome observation.

pt<

O

tf

536
531

484
509

450
509

1920. _
1921_
Number borrowing in excess of
basic discount line during 10day period e n d i n g June 30, 1920
Sept. 30, 1920
Dec. 31, 1920
Mar. 31, 1921
June 30, 1921 i.
Sept. 30, 1921 i
Dec. 31, 1921 i_

94
95

247
269

214
195

55
40
54
58
62
53
50

108
95
92
88
92
74
93

144
115
108
112
139
133
138

1

<

O

m

437
494

372
444

1,124
1,191

386
390

704
765

421
375

173
132

90
71

297
252

185
198

41
33
34
22
50
91
117

232
?,37
218
258
280
252

m

162
236
255
256
282
306
294

369
439
582
579
596
534
558

126
149
152
133
149
175
168

hie

34?
341

S
3

c

all

Number of member banks accommodated during—
1920
1921
Number not borrowing from
Federal reserve bank dur-

%

Francisco

Zj

o
o
P
Q

neapolis

eland

o
p

CP

a

York

hil adelphia

A r.mher of member banks in each Federal reserve district accommodated through
discount operations, number not borrowing from the Federal reserve bank,
and number borrowing in excess of basic discount line

PI

'M w

Q

CO

826
920

702
704

578
617

6,941
7,415

305
259

261
183

148
157

253
240

2,688
2,426

212
319
203
349
442
492
406

237
326
380
348
327
305
359

262
401
408
411
448
448
349

218
262
264
272
309
299
192

2,161
2, 647
2,769
2,846
3,154
3,190
2, 976

o

1

15-day period ending on the date shown.
NOTE.—Figures shown in the first two lines represent the number of different member banks which
borrowed from the Federal reserve banks during the year. Those in the second two lines represent the
number which did not borrow at any time during the year. Therefore, on any given date the number o i
borrowers would be less than the figures shown in the first two lines, while the number of nonborrowers
would be correspondingly greater than the number shown.

Here is the " Franchise tax paid to the United States Government
by the Federal reserve banks.'' The table shows that the banks have
paid $135,387,941; it also shows the surplus account of each Federal
reserve bank up to October 9, 1923, which amounts to $218,369,000
in round numbers.
Franchise tax paid to the United States Government by the Federal reserve
banks
1917
1919
1920
1921
1922

$1,134, 234
2, 703, 894
60, 724, 742
•_ 59, 974, 466
10,850,605
Total




135, 387, 941

104

INQUIRY OX MEMBERSHIP IX FEDERAL RESERVE SYSTEM
Surplus account of each Federal reserve bank, October 9, 1923

Federal reserve bank:
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

$16. 312, 376
59, 799, 523
18, 748. 740
23, 493, 543
11, 288, 078
8, 941, 553
30, 398,177
9, 664, 673
7, 472. 947
9, 488, 300
7, 496, 307
15, 263, 332

Total

218, 369, 549

I next submit a statement of " Gross earnings of the Federal reserve banks from the opening for business on November 16, 1914, to
June 30, 1923." It shows the total of those earnings from the discount operations, open market operations, and all other as
$572,959,319.
Earnings of the Federal reserve banks from the opening for business on
November 16, 1914, to June 30, 1923
Earnings from—
Discount
operations
1914 (from Nov. 16)
1915
1916
1917
1918
1919
1920
1921
1922...
1923 (to June 30)...
Total

Open market
operations

All other
earnings

T o t a l gross
earnings

$62,883
1,155,633
1, 025, 675
6,971,479
48, 343, 853
80, 768,144
149,059,825
109, 598, 675
26, 523,123
14, 247,906

$107
907,077
3, 678, 829
7,681,038
16,055,125
19, 750, 518
29,160, 773
11,490, 300
22,314, 984
10, 253,034

$155
47, 397
513, 433
1, 475, 822
3,185,439
1, 861,921
3,076, 740
1, 775, 630
1, 652, 632
321,169

$63,145
2,110,107
5, 217,937
16,128,339
67, 584, 417
102,380, 583
181, 297, 338
122, 864, 605
50, 490, 739
24, 822,109

437, 757,196

121, 291, 785

13,910, 338

572,959,319

Senator GLASS. Are these earnings calculated as the earnings of a
national bank are?
Governor CRISSINGER. They are the actual earnings for each year.
Here is a statement of " Current expenses of the Federal reserve
banks, also expenses of the fiscal agency departments reimbursable
by the Treasury Department." It shows the current expenses for
the whole period of the system's existence to have been $153,406,791.
This is exclusive of the reimbursable fiscal agency department expenses shown in the last three columns, which amounted to
$47,357,724.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

105

Current expenses of the Federal reserve banks, also expenses of the fiscal
agency departments reimbursable by the Treasury Department
Reimbursable fiscal agency department expenses

Current expenses 1

Salaries
1914 (from N o v . 16)
1915.
1916
1917
1918
1919.
1920.
1921.
1922.
1923 (to J u n e 30)
Total
1
2

All other

$101,721
858,277
1,108,464
1,886,250
4, 768,449
9,897,002
15,383,535
19,478,250
18,812,640
9,583,971

$271,711
1,103, 505
1,350,975
3,579,406
7,409,489
10,444,796
14, 505, 772
16, 587,815
10, 746, 703
5, 528,060

81,878,559

71, 528, 232

Total

Salaries

$373,432
1,961,782
2,459,439
5,465, 656
(2)
12,177,938 $5,614,863
20,341,798
7,204,102
29,889,307
4,142,643
36, 066, 065
1,840,889
29, 559,343
699,144
15,112, 031
915, 056
153,406 791

All other

$10,641,826
9,421,914
2,072,713
768,865
484,671
456,288

Total

$3,094,750
16,256,689
16,626,016
6,215,356
2,609,754
1,183,815
1, 371,344
47,357,724

Exclusive of reimbursable fiscal agency department expenses shown in the last three columns.
Separate figures not available.

I would like to say to this committee on this item that the board
has been advised recently that in the last appropriation act there was
no appropriation made for the fiscal operation of the Government.
This will require that the expenses of these operations for the Treasury Department be paid out of the earnings of the Federal reserve
system, which, to my mind, is fundamentally unsound and amounts
to pretty much the same as issuing German marks to run the Government. The last appropriation bill omitted the item.
Senator GLASS. DO you want the banks to do that work for the
Government for nothing?
Governor CRISSINGER. They take the position that the banks are
making a lot of money.
Senator GLASS. If the banks are making a lot of money—that is,
the banks do not belong to the Government of the United States?
Governor CRISSINGER. NO ; and it is the wrong principle to ask the
banks to pay these charges and not be reimbursed for them, because
it would be fundamentally unsound.
The CHAIRMAN. Does this come to the Congress through the
Budget Committee?
Governor CRISSINGER. N O ; I think it comes through the Appropriations Committee.
The CHAIRMAN. I t is reported by the Budget Committee or by the
Appropriations Committee. What is the amount involved there,
Governor ?
Governor CRISSINGER. This year it will be, in round numbers,
two millions. There have been as high as $16,000,000 spent.
Senator GLASS. On that theory, if the banks should happen not
to earn their dividends, the member banks owning these banks would
not get any return upon their investment?
Governor CRISSINGER. It would be imposing an expense that might
deprive the banks of dividends.
In order that the committee may have a general idea of the scope
of the fiscal agency operations and the extent to which the expenses
of carrying on such operations are now being absorbed by the
Federal reserve banks, I am handing you the following statement




106

INQUIRY OS MEMBERSHIP IN FEDERAL RESERVE SYSTEM
JT

outlining the policy which has been followed in handling the expenses of fiscal agency operations:
REIMBURSABLE AND NONREIMBURSABLE EXPENSES OF THE FISCAL AGENCY DEPARTMENTS OF FEDERAL RESERVE BANKS

The Federal reserve banks were appointed depositaries and fiscal agents of the
United States by the Secretary of the Treasury on January 1, 1916, in accordance with the provisions of section 15 of the Federal reserve act. Their operations in these capacities were, however, of a relatively small volume until the
entry of the United States into the world war in 1917, and for that reason
they were conducted by the Federal reserve banks without expense to the
Treasury Department. After the Government began to issue certificates of
Indebtedness and Liberty bonds in order to finance the war, fiscal agency department expenses increased very rapidly, and provision was therefore made
in 1917 for the reimbursement by the Treasury Department of practically all
expenses incurred by Federal reserve banks in the performance of their fiscal
agency functions. Federal reserve banks did not request nor have they ever received reimbursements for expenses incurred in the discharge of their depositary
functions, which expenses now amount to about $750,000 yearly. This arrangement was continued until June 30, 1921, the amount of expenses directly chargeable to fiscal agency operations, incurred up to that date (all reimbursable)
being as follows:
1917
$3, 094, 750
1918
16, 256, 689
1919
16, 626, 016
1920
6, 215, 356
1921 (to June 30)
2,360,509
Following a joint conference between the governors of the Federal reserve
banks and the Treasury Department in the spring of 1921, the Federal reserve
banks agreed not to ask for reimbursement on account of fiscal agency expenses
during the fiscal year ending June 30, 1922, except for such expenses as were
incurred directly in connection with the sale of new issues of Government securities. It was agreed that the cost of conducting all other fiscal agency operations would be absorbed by the Federal reserve banks during that period.
This arrangement was a direct result of views then frequently expressed in Congress to the effect that in view of the large earnings of the reserve banks, Congress should not be asked to appropriate money to reimburse the banks for
fiscal agency operations. The Federal reserve banks understood that the arrangement was of a temporary nature, and that they would be free at a later
time to ask reimbursement for all fiscal agency expenses, should the exigencies of
the situation make it advisable; and this understanding was confirmed by the
Undersecretary of the Treasury. The same arrangement was continued during the fiscal year ended June 30, 1923, and it is in effect during the current
fiscal year, 1924.
The Treasury Department has an indefinite appropriation, based on a percentage of the new securities issued, which enables it to reimburse Federal reserve banks for all expenses incident to new issues of securities. As to general
fiscal agency work, however, which is not especially connected with new issues,
the Treasury depends upon an annual appropriation from Congress for the support of the public debt service. The appropriation for the current fiscal year
(1924) is covered by an act of Congress passed before the expiration of the
last Congress on March 4, 1923. It is a limited amount, sufficient only to
cover operations at the Treasury in Washington, and beginning with the fiscal
year 1922 Congress has made it clear that it did not intend the Treasury to use
any of this appropriation for making reimbursement to the Federal reserve
banks. As a consequence, the Treasury has no funds at present from which to
reimburse Federal reserve banks for conducting any fiscal agency work except
that pertaining directly to the issue of new securities. All other fiscal agency operations, such as the redemption, exchange and conversion of securities, are conducted at the expense of the Federal reserve banks. This is in addition to the
duties performed in their capacity as depositaries which, as already stated,
have always been performed without expense to the Treasury Department.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

107

The following statement shows the total fiscal agency expenses incurred by
the Federal reserve banks from July 1, 1921, to June 30, 1923, the amount ol
such expenses reimbursable by the Treasury Department, and the amount not
reimbursable:
I Total fiscal
I agency dej partment
expenses
1921 (July 1 to Dec. 31)
1922 (Jan. 1 to Dec. 31)
1923 (Jan. 1 to June 30)

|

$1,495,184
2,714,366
2,013,278

Amount
reimbursable
$249, 245
1,183,815
1, 371, 344

Amount not
reimbursable
$1,245,939
1, 530, 551
641, 934

The situation with respect to earnings of Federal reserve banks has changed
materially since 1921, when the Federal reserve banks agreed to absorb the
greater part of fiscal agency expenses, as will be apparent from the statement
below:
Gross
earnings
1921
1922
1923 (to June 30)

$122,864,605
50,490,739
24,822,109

Current
expenses
$36, 066,065
29, 559, 343
15,112, 031

Current net
earnings
$86, 798, 540
20, 931,396
9, 710,078

Below is given a detailed statement of the operations conducted by the
fiscal agency departments of the Federal reserve banks for which reimbursement is not received from the Treasury Department:
1. Denominational exchange of coupon bonds.
2. Exchange of temporary for permanent bonds.
3. Exchange of interim receipts for permanent bonds.
4. Conversion of 4 per cent bonds into 4% per cent bonds.
5. Interchange of coupon and registered bonds.
6. Telegraphic transfer of securities.
7. Forwarding of registered bonds to the Treasury for transfer.
8. Shipment of canceled securities to the Treasury.
9. Redemptions of called or matured securities.
10. Government deposit accounts with depositary banks.
11. Custody of securities.
12. Purchase and sale of Government securities for Treasury account.
In addition, all Federal reserve banks act as depositaries for the general
funds of the Treasury, and for this work they have never requested or received
reimbursement. In this capacity, the reserve banks are required to perform
the following operations:
1. Pay Government checks and warrants, rendering voluminous records of
alJ transactions.
2. Pay coupons from Government securities.
3. Transfer funds by telegraph.
4. Withdraw Government deposits from banks in the district.
5. Collect checks and noncash items.
6. Lend clerks to collectors of internal revenue at the time that the quarterly
installment of income and profits taxes are paid.
7. Carry on former subtreasury operations.

I was requested to give you the cost of bank buildings and grounds
at the present time, and this exhibit will give the cost of bank
premises of Federal reserve banks and branches to June 30, 1923,
which amounts to a total of $63,636,088.
Senator GLASS. Paid out of the surplus?
Governor CRISSI^GER. Paid out of the surplus.




108

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Cost of bank premises of Federal reserve banks and branches to June 80, 1923
Cost to
June 30,
1923, of Total cost,
buildings exclusive
in course of furniture
of construc- and fixtures
tion or
completed

C 0 S t Of

Federal reserve bank or branch

—ng

Boston
_.
New York:
Banking house
Annex building
No. 10 Gold Street.
Philadelphia
Cleveland
Cincinnati
Pittsburgh
Richmond
Baltimore
Atlanta
Jacksonville
Nashville
New Orleans
Chicago
Detroit
St. Louis
Little Rock
Louisville
Minneapolis
Helena
Kansas City
Denver
Oklahoma City
Omaha
Dallas*
El Paso..._
Houston
San Francisco.-.
_.
Salt Lake City

$1,246,726

$4,204,760

1 $5,451,486-

4,850,210 I
7,944,950
12, 795,160
592,679 I
1, 467, 220 1 2, 059,899
2 91,715 !
$11,847
1 103, 562
2 607, 501
1, 520, 333
1 2,127,834
920,490
8,056,88a
7,136, 393
380, 744
2 380, 744
* 515,000
1 996,454
481, 454
202, 025
2,441,854 1 2, 643,879
a 452, 216
452, 216
283, 000
1,451, 980
1, 734,980
45,827
71,923
117,750
83,704
201,013
1 284, 717
201, 250
676,443
877, 693
2, 963, 548
7,493, 684 1 10,457, 232
650,000
* 650,000
1, 286,088
200, 668
1,486, 756
85,007
98,365
13, 358
202, 877
560
203,437
600, 521
1, 586,496
985,975
2
1
15, 000 !
177, 399
162, 399
495,300
"4," 169," 042 1 4,664, 342
4
101, 263
101, 263
65,021
508,872
443, 851
1
2165, 602
205, 350
;9, 748
181,120
1,490, 430 1 1, 671, 550
1,003
119, 204
1 158, 207
66, 312
342,005
1 408,317
417,181
2,405,376
3,061,170
238,613
114,075
* 114,075

Total..

— 17,921,005

2,454,954

43,260,129

63,636,

1
Construction or remodeling had been completed.
2
Including building.
3
Including building; also site for proposed new building.
4
Building site only.
6

Exclusive of remodeled building sold in April, 1922.

I was also asked to furnish this statement, " Number of State banks
and trust companies in each Federal reserve district on June 30,1923,-'
connected in any way with the Federal reserve system..
Number of State banks and trust companies in each Federal reserve district
on June 30, 1923
Non member banks
Federal reserve district

Boston
New York
Philadelphia...
Cleveland _.
Richmond
Atlanta
Chicago
_
St. Louis
Minneapolis...
Kansas City...
Dallas
San Francisco..
Total




Total

Member
banks

267
493
555
1,201
1,574
1,651
4,610
2,736
2,876
3,144
1,267
1,169

37
142
60
117
69
147
374
124
131

21,543

1,644

40
199
204

On par list—

Total

With
clearing

230
351
495
1,084
1,505
1,504
' 4,236
2,612
2,745
3,104
1,068
965
19,8

Without
clearing
accounts

Not on
par list

230
337
495
1,083
932
375

4,229
2,389
2,550
2,929
1,002
857
181

17, 408

573
1,124
159
187
174
65
28
2,310

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

109

The statement shows a total of 21,543 banks, of which 1,644 are
member banks and 181 are what they call affiliated banks carrying
balances to offset items in transit held for their account b}^ the Federal reserve banks.
Mr. WINGO. In other words, it shows the actual number of the
banks, and then shows affiliated nonmeinber State banks?
Governor CRISSINGER. Yes; and it shows the number of nonaffiliated State banks to be 17,408.
And at this point I would like to call your attention to a statement
often made that these par clearing banks other than those 181
have to carry funds with the Federal reserve banks, which is not true.
They make no deposite at all. There are only 181 State banks, nonmember banks, that carry any funds with the Federal reserve bank.
There was a total of 2,310 banks on June 30, 1923, that were not on
the par list.
In the following exhibit you will find the total amount of
money deposited with the Federal reserve banks by the 181 affiliated
banks, amounting to $21,663,648, of which one bank in Cleveland
Mr. WINGO (interposing). What district now are those banks in?
Governor CRISSINGER. Well, sir, Boston has no affiliated bank; New
York has 14, with $15,937,782; Philadelphia has none; Cleveland has
one, with $1,029,479 of deposits. They carry it across the road and
leave it.
The CHAIRMAN. Most of those deposits are for safe keeping?
Governor CRISSINGER. NO. They are funds deposited by nonmember banks under section 13 of the act to offset items in transit
held for their account by the Federal reserve bank.
Bichmond has none; Atlanta has 5; Chicago has 7, with $259,000,
in round numbers. St. Louis has 64, with $508,000 in round numbers;
Minneapolis has 8; Kansas City, 1; Dallas, 1; and San Francisco 80,
with $3,687,000 in round numbers.
Balances

maintained

by nonmeinber banks having clearing account® with
Federal reserve banks

Federal reserve bank

Nonmember banks maintaining clearing accounts with Federal reserve banks on June 30.
1923
Number
of banks

New York
Cleveland..
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Total

Amount of
balances

14
1
5
7
64
8
1
1
80

$15,937,782. 29
1,028,478. 70
16,873. 26
259,208. 27
508,104. 36
198,898.81
10,649. 98
16,400.48
3,687,251.85

181

21, 663,648. 00

Mr. WINGO. You say that is a district. All of them are really in
cities, are they not?
Governor CRISSINGER. Oh, yes; practically all of them, I suspect.
I really do not know where they are, but I think they are largely
city banks.




110

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

We were requested to get you a statement showing how the net
earnings of the Federal reserve banks during 1922 would have been
distributed if member banks had been entitled to dividends at the
rate of 9 per cent instead of 6 per cent, which shows that the net
earnings for distribution are $16,497,736; the 9 per cent dividend
would have amounted to $9,436,805. The transfers to surplus funds
would have amounted to $2,295,723, leaving a net balance of
$4,765,208 this last year to be paid to the Government as a franchise
tax. I t would have been just that close, while at 6 per cent the
Government got as a franchise tax $7,450,543.
Of course, it shows pretty conclusively the necessity of going slow
in loading upon the Federal reserve banks additional burdens in
the way of costs. The Dallas Federal Eeserve Bank, as you will
note, did not have sufficient net earnings to pay 9 per cent dividends.
Statement
showing how the net earnings of Federal reserve banlcs during
1922 would have been distributed if member banks had been entitled to
dividends at the rate of 9 per cent instead of 6 per cent
Amount which would
have been—
Net
earnings

Dividends
at 9 per
cent

$722, 927
2,478, 207
812,328
1,038, 654
499,981
384,927
1, 314,305
424, 749
320,661
413,482
i 354,125
672,459

Boston
New York
Philadelphia
Cleveland
i
Richmond.
-• Atlanta
Chicago
St. Louis
Minneapolis..
Kansas C i t y . .
Dallas
San Francisco..

I $1,097,402
| 3,721,593
\ 2,236,876
I 2,268,688
'
867,448
672, 730
1, 405, 215
647, 572
782,695
783,036
354,125
1, 660, 356

Total
Actual distribution of net earnings

I 16,497,736 I 9,436,805
i 16, 497, 736
6,307,035

Transferred
to
surplus

$52,470
124, 339
812, 883
«26, 642
36, 747
28, 780
9, 091
222, 823
46, 203
36, 955

Paid
United
States
Government as
franchise
tax
$322,005
1,119,047
611,665
403, 392
330, 720
259,023
81, 819
415,831
332,599

98, 790

19,107

2, 295, 723
2, 740,158

4, 765, 208
7, 450, 543

i Only 8.43 per cent on average paid-in capital as net earnings were $23,748 less than.the amount required
to pay dividends.

We were requested to furnish statements showing interest which
would have been paid on member banks reserve deposits if Federal
reserve banks had paid the Government 2 per cent interest—this is
made up at 3 per cent, but you can very readily see what it would
have been at 2 per cent—on paper-secured Federal reserve notes in
circulation in lieu of a franchise tax; that is, on Federal reserve
notes not covered by gold. I t shows that during the year 1922 we
would have been able with a 3 per cent tax on these notes to have
paid thirty-seven one hundredths of 1 per cent, or a little over onethird of 1 per cent. If it was based on 2 per cent tax it would have
amounted to approximately four-tenths of 1 per cent. I had it
figured for you. This is for 1922. I had the computation made up
for the year 1921 also. In that year on the same basis the banks
would have received 2% per cent on their deposits in the Federal




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

111

reserve banks paying $20,000,000 to the Government and $4=0,000,000
to the member banks. So it pretty clearly shows that even that is a
very dangerous experiment. The tables are accompanied by a
memorandum prepared by our division of bank operations which
has not been considered by the board.
(The memorandum and the two tables are as follows:)
On reading the letter received from Chairman McFadden of the Congressional
Joint Committee of Inquiry on Membership in the Federal Reserve System, I
note that one of the matters mentioned for consideration is the payment of
interest on daily reserve balances of member banks. We have given some
thought to what could be done along this line and have compiled certain
tables which may be of interest in connection with the hearings before the
committee.
If the note issuing function is assumed to be the prerogative of the Government and the notes are to be obligations of the United States Government, as
is the case with Federal reserve notes, it would seem that the Government
should receive a reasonable return on credit extended through note issues;
i. e., through the issue of notes against eligible paper instead of against gold.
The tables prepared- therefore, show the amount which would be available for
interest on reserve deposits1 of member banks during 1921 and 1922, if instead
of the present franchise tax the Federal reserve banks had been required to
pay the Government an interest charge of 3 per cent on uncovered Federal
reserve note circulation (i. e., on the amount of Federal reserve notes in circulation in excess of gold available as collateral security or as reserve for
notes nftev setting nsieV the 'egal reserve of 35 per cent required against
deposits).
In general it may be said to be inadvisable to permit reserve institutions'
enjoying the not issuing privilege to pay interest on deposits, primarily for the
reason that a desire to pay a reasonable rate of return on deposits might lead
the reserve bank officials to force out more credit through their open market
ovfrnflrrr,^ fiy\n iv^3 np^|;1 j]^ I'eqnmvl for the transaction of the business of
the country.
To allow each of our Federal reserve banks to distribute its excess earnings
to its own member banks would result in the reserve banks paying widely
differing rates of interest. This would certainly create dissatisfaction among
member banks, and the officials at those reserve banks with relatively lowT
earnings would be stronarly tempted to force out more credit than was needed
in order to enable their to pay their own member banks as large a return on
deposits as that paid by other banks with larger earnings.
It seems, therefore, if excess earnings of the reserve banks were to be distributed to member banks, that all excess earnings should be paid to the
Federal Reserve Board and distributed by the board to all member banks in
proportion to the average daily reserve balances maintained by them with
their local reserve bank. This would result m the same rate of return being
paid to each member bank whether in the Dallas district, which has not accumulated a surplus equal to 100 per cent of its subscribed capital, or in any
other district. If this method of distributing excess earnings were adopted
and the open market operations under section 14 of the act were controlled
largely by the Federal Reserve Board, there should be little danger of the
system permitting its credit operations? to be influenced by any desire to make
sufficient earnings to pay what might be considered a reasonable rate of return
on reserve deposits of member banks.
It will be noted from the attached tables that the amount of earnings available for interest on deposits, after making allowance for the payment of 3
per cent interest to the Government on paper-secured Federal reserve notes,
would have amounted to approximately 2.5 per cent for all banks combined
during 1921 and about thirty-sven one hundredths of 1 per cent during 1922.
with a maximum for any bank of 4.72 per cent in 1921 and of 1.15 per cent in
1922, In general it may be said that in normal times when discount accommodation is on a relatively low level, the rate of interest that could be
paid by the 12 banks combined would undoubtedly be substantially under 1 per
cent, although in times cf heavy demands for credit the return might be very
materially higher.




112

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Statement showing interest which could have been paid on member banks' reserve deposits if Federal reserve banks had paid the Government 3 per cent
interest on paper-secured Federal reserve note circulation in lieu of franchise
tax, year 1921
[Amounts in thousands of dollars]
Daily averagefigureso—
f

Gold
Federal reserve bank available
against
Federal
reserve
notes i

Boston
New York
Philadelphia
Cleveland.
Richmond
Atlanta...
Chicago
St. Louis . _
Minneapolis
Kansas City
Dallas
San Francisco
Total

Federal reserve
note circulation

Total

Excess
over gold
available
against
notes

3 per cent
interest
Interest
on paperrate
Daily
secured Franchise Available average which
Federal
could
interest
reserve actually on reserve members, have been
reserve
notes
paid deposits 2 deposits 3 paid on
shown in
reserve
preceding
deposits
column

$245,950
703, 566
227,302
260,822
125,312
145,447
454,093
108, 574
62, 557
83,320
50, 317
235,187

$28,209
76,266
59, 551
38,188
66,419
80,127
130,338
32,480
33,037
32,631
28, 479
58, 766

$846
2,288
1,787
1,146
1,993
2,404
3,910
974
991
979
854
1,763

$3,036
20,702
3,887
3,295
3,378
4,480
11, 576
1,639
2,451
2,301

2, 037, 856 2, 702,347

664,491

19,935

59,975

$217, 741
627,300
167,751
222, 634
58,893
65,320
323,755
76,094
29, 520
50,689
21, 738
176,421

3,230

$2,190
18, 414
2,100
2,149
1,385
2,076
7,666
665
1,460
1,322
(*)
1,467

$109,754
656,141
101, 205
138,326
53,477
43,987
238,223
62,143
42,168
70, 817
112, 529

40,894 1,628,770 I

Per cent
2.00
2.81
2.08
1.55
2.59
4.72
3.22
1.07
3.46
1.87
1.30
2.51

1
2

After setting aside a 35 per cent reserve against total deposits.
If 3 per cent interest had been paid on paper-secured Federal reserve note circulation in lieu of franchise
tax.
8
Based on weekly statement figures.
* Bank has a surplus of less than 100 per cent of subscribed capital.
Statement showing interest which could have been paid on member* banks' reserve deposits if Federal reserve banks had paid the Government 3 per cent
interest on papersecured*Federal reserve note circulation in lieu of franchise
tax, year 1922
[Amounts in thousands of dollars]
Daily averagefigureso—
f
Gold
Federal reserve bank available
against
Federal
reserve
notes 1

Boston
NewYork_
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco..
Total

$175,355
869,148
186,525
208,262
79,222
109,060
425,273
80,241
54,924
60, 580
31,193
214,381

Federal reserve
note circulation

Total

$173,443
617,372
189,954
208,123
90,924
116,453
379,472
80,163
52,772
63,008
32,443
222,100

2,494,164 2,226,227

1
2

Excess
over gold
available
against
notes

3 per cent
interest
Interest
on paperrate
Daily
secured Franchise Available average which
for
tax
Federal
could
interest
reserve actually on reserve members, have been
reserve
paid deposits2 deposits paid on
notes
shown in
reserve
preceding
deposits
column
Per cent

$539
1,863
855
715
481
374
476
88
512
457

$539
1,863
752
715
130
152
476
38
512
384

$118,563
698,991
105,795
139,725
56,155
47,930
254,867
64,994
44, 599
76,938

.45
.27
.71
.51
.23
.32
.19
.14
1.15
.50

859

124,900

.69

6,470 1,733,457

.37

$3,429

$103

11,702
7,393

351
222

2,428
1,250
7,719

73
37
232

1,091

33,921

1,018

7,451

After setting aside a 35 per cent reserve against total deposits.
If 3 per cent interest had been paid on paper-secured Federal Reserve note circulation in lieu of franchise tax.
3 Bank has a surplus of less than 100 per cent of subscribed capital.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

113

I think that if the committee would go over the tables they would
then see some questions that they would want to ask in the future
about it.
The CHAIRMAN. I will say to the governor that the committee
will go over them, and if they want to have you later to analyze
these documents they will call you.
Governor CRISSINGER. I am also submitting herewith, at the committee's request, a copy of the board's weekly press statement showing the condition of the Federal reserve banks at close of business
on October 3, 1923.
CONDITION OF FEDERAL KESEKVE BANKS

Further increases of $19,700,000 in the holdings of discounted bills, of
$3,300,000 in United States securities, and of $800,000 in acceptances purchased in open market are shown in the Federal Reserve Board's weekly consolidated bank statement issued as at close of business October 3, 1923.
Federal reserve note circulation increased by $24,500,000 and deposit liabilities
by $6,200,000, while cash reserves show a further decrease of $4,700,000. The
reserve ratio declined from 76.4 to 75.8 per cent.
The Federal reserve banks of Chicago, St. Louis, Kansas City, and Atlanta
report increases of $18,200,000, $4,100,000, $3,700,000, and $3,600,000, respectively, in their holdings of discounted bills. Decreases of $7,200,000, $3,600,000,
and $3,300,000 are shown for Philadelphia, Cleveland, and Dallas, and smaller
changes for the five remaining banks. Paper secured by United States Government obligations decreased by $2,000,000 during the week, the total holdings
on October 3 being $400,200,000. Of this amount $254,700,000 was secured by
United States bonds, $129,400,000 by Treasury notes, and $16,000,000 by certificates of indebtedness.
All Federal reserve banks except those of Philadelphia and Cleveland report
increased Federal reserve note circulation, the largest increases, by $5,500,000,
$5,100,000, $5,100,000, and $4,400,000, being shown for New York, Dallas,
Boston, and Richmond. The Cleveland bank reports a decrease of $6,200,000
in its note circulation, more than offsetting the increase of $5,300,000 shown
for the preceding week.
Further decreases of $800,000 are shown in gold reserves, of $3,900,000 in
reserves other than gold, and of $1,900,000 in nonreserve cash. The Federal
Reserve Banks of Philadelphia, Minneapolis, and Richmond report increases of
$9,100,000, $4,200,000, and $3,300,000, respectively, in gold reserves, while
decreases of $6,800,000, $4,800,000, and $4,700,000 are shown for Chicago,
Atlanta, and New York. Of the remaining banks four show increases in their
gold reserves aggregating $3,500,000, and two a combined reduction of
$4,600,000.
A summary of changes in the principal assets and liabilities of the reserve
banks as compared with a week and a year ago follows:
Increase (+) or decrease
(—) in millions of dollars since—
Sept. 26,
1923
Total reserves
Gold reserves.
Total earning assets
Discounted bills, total
Secured by United States Government obligations
Other bills discounted
__
Purchased bills
United States securities, total
Bonds and notes
United States certificates of indebtedness
Total deposits
Members' reserve deposits
Government deposits
Other deposits
Federal reserve notes in circulation




Oct. 4, 1922

-4.7

-25.0
+26.6
-3.0
+447. 5
+243. 9
+203.6

-.8

+23.7
+19. 7
-2.0

+21.7

1
O
-p. O

— OZ. D

+3.3
+1.9
+1.4
+6.2
+32.3
-26.2
+.1

-388. 2
-163. 4
-224. 8

+24.5

+58.5
+41.5
+15.2
+1.8
-2.3

114

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM
Resources and liabilities of the 12 Federal reserve banks combined
[In thousands of dollars]
Oct. 3,
1923

357,185
643, 374

Sept. 26,
1923

359, (564
641, t'A7

Oct. 4,
1922

Gold and gold certificates
Gold settlement fund—Federal Reserve Board Total gold held by banks...
Gold with Federal reserve agents .
Gold redemption fund

1,001,059 j
2,055,Cf3 !
59,10" :

1,001,311
2 0^9

Total gold reserves
Reserves other than gold

3,115,830
72,160

3,116,604
76,094

3,089,230
123, 725

Total reserves .
Nonreserve cash

3,187,990
72,354

3,192, 698
74, 248

S, 213, 005

400,158
481, 503
172, 902

402,141
459, 867
172,124

156,318
277, 878
235,458

Total bills on hand
United States bonds and notes
United States certificates of indebtedness
Municipal warrants..

1,054,563
89,628
5,514
317

1,034,132
87,737
4,148
317

669, 654
253,042
230,299''
15

Total earning assets _ _
Bank premises
5 per cent redemption fund against Federal reserve bank notes
Uncollected items

1,150,022
55,173
28
663, 548
13,116

1,126, 334
55,023
28
616, 211
13,717

1,153, 010
44, 522
3,852631,701
14, 604

5,142,233

5, 078,259~

5,060,694

109. 669
218,369

109, 657
218, 369

106,220
215,398

Deposits:
Government
Member bank—reserve account _
Other deposits

30,065
1,884,046
22,126

56, 279
1, 851, 790
22,004

14,901
1,842,508
20,288

Total deposits
Federal reserve notes in actual circulation
Federal reserve bank notes in circulation—net liability _
Deferred availability items
All other liabilities

1,936,237
2,272,308
485
583,742
21,423

I, 930,073
2,247, 830
492
550, 527
21,311

1, 877, 697
2,274, 651
44, 726
518,334
23, 668

Total liabilities
Ratio of total reserves to deposit and Federal reserve notes liabilities
combined
Contingent liability on bills purchased for foreign correspondents...

5,142,233

5,078,259

5,060,694.

75. 8%
34,276

76.4%
33, 794

Bills discounted:
Secured by United States Government obligations.
Other bills discounted
_
Bills bought in open market...

Total resources .
Capital paid i n .
Surplus

i Not shown separately prior to January, 1933.




270,158
568, 2 4 r
2,194,932
55,949

(0

77.4%
31,966

Resources and liabilities of the Federal reserve banks as at close of business, October 3, 1928
[In thousands of dollars]
RESOURCES
Boston
Gold and gold certificates
Gold settlement fund, Federal Reserve
Board
.
__
_.
Total gold held by banks
Gold with Federal reserve agents
Gold redemption fund. . -_. _
Total gold reserves
Reserves other than gold

-.

_.

.

Total reserves
Nonreserve cash
Bills discounted:
Secured by United States Government obligations
Other bills discounted _ Bills bought in open market

New York Philadelphia

Cleveland

Richmond

Atlanta

Chicago

St. Louis

Minneapolis

Kansas
City

Dallas

San Francisco

Total

20,547

171, 075

36, 564

13,159

11, 596

6,296

48, 477

4,436

8,587

3,423

11.752

21, 273

68,882

159, 252

37, 556

95, 482

38, 213

13, 368

95, 508

18, 551

23, 401

34,190

16. 821

42, 650

643,874

89, 429
192, 325
11,431

330, 327
634,833
8,418

74,120
171, 268
8,308

108, 641
207, 619
4,197

49, 809
28, 006
3,714

19, 664
71,830
3. 575

143, 985
401, 380
3,679

22, 987
35,171
4,031

31, 988
38, 692
1, 840

37, 613
42, 085
4,576

28, 573
26, 455
2,248

63, 923
205,999
3,091

1, 001, 059
2, 055, 663
59,108

293,185
3,558

973, 578
16,834

253, 696
12, 080

320, 457
3,787

81, 529
2,190

95, 069
4,304

549, 044
8,740

62,189
9,241

72, 520
917

84, 274
2,542

57, 276
6,131

273, 013
1,836

3,115,830
72,160

296, 743
14, 266

990, 412 ! 265, 776
10, 819
2. 099

324, 244
4,529

83, 719
1, 566

99, 373
10. 602

557, 784
6,600

71, 430
6,795

73, 437
1,157

86, 816
4,486

63, 407
1,814

274, 849
7,621

3,187, 990
72,354

357,185

M'

19,489
34,522
8,021

136, 459
67, 517
22, 357

33, 442
18, 396
18, 888

29, 044
22, 732
30,002

28, 925
47,120
495

17, 332
53, 545
9,108

53, 002
52, 284
40,188

23, 250
52, 507
7

7,584
20, 841
50

20, 465
30, 042.
2,247

4.067
22, 803
28,470

27, 099
59,194
13, 069

400,158
481, 503
172, 902

Total bills on hand
United States bonds and notes
United States certificates of indebtedness.
Municipal warrants

62, 032
3.657
903

226, 333
10, 424
3,150

70, 726
17, 367
41

81, 778
9, 953
336

76, 540
1,341

79, 985
222
53
51

145, 474
6,826
853

75, 764
3,668

28, 475
13, 617

52, 754
11,588
178
266

55, 340
1,780

99, 362
9,185

1, 054, 563
89, 628
5,514
317

Total earning assets
Bank premises
- 5 per cent redemption fund against Federal reserve bank notes
Uncollected items
All other resources

66, 592
4,434

239, 907
13, 396

88,134
744

92, 067
9,676

77, 881
2,617

80, 311
2,818

153,153
8,715

79, 432
1,155

42, 092
1,755

64,786
4,970

57,120
1,952

108, 547
2,941

1,150, 022
55,173

61, 769
174

147,181
1,061

61, 496
274

63, 802
303

63, 237
478

_
24,953
674

82,114
484

37, 672
104

15, 672
2. 399

35, 247
637

28
30, 854
2,838

39, 551
3,692

28
663, 548
13,118

443, 978

1, 402, 776

418, 523

494, 621

229, 498

218,731

808, 850

196, 588

136, 512

196, 942

158, 013

437, 201

5,142, 233

Total resources




g

Resources and liabilities

of the Federal reserve hanks as at close of business,

October 3, 1923—Continued

LIABILITIES
Boston
Capital paid in
Surplus
Deposits:
Government
Member bank—reserve account
Other deposits

PhilaNew York delphia

Cleveland

Richmond

Atlanta

Kansas

Chicago St. Louis Minneapolis

City

Dallas

San
Francisco

Total

7,867
16, 312

29,289
59,800

9,865
18, 749

12,242
23,495

5,734
11,288

4,428
8,942

15,195
30,398

5,018
9,665

3,521
7,473

4,560

4,189
7,496

7,761
15, 263

109,669
218,369

2,083
129,472
169

8,155
700,065
13, 037

1,232
119, 909
273

1,530
157,165
1,296

500
62, 637
149

2,359
52, 083
126

8,218
268,229
1,109

1,833
65, 957

1,080
48,101
376

1,036
79,500
596

1,499
53,633
241

540
147, 295
4,156

30,085
1,884,046
22,126

Total deposits
Federal reserve notes in actual circulation
Federal reserve bank notes in circulation—net liability
Deferred availability items
All other liabilities

131, 724
229, 712

721, 257
474,894

121, 414
213,198

159, 991
241, 581

63, 286
92, 738

54, 568
131,892

277,556
415,011

68,388
74, 717

49, 557
59,219

81,132
63,063

55,373
56, 737

151,991
219, 546

1,936, 237
2, 272, 308

57, 392
971

113,384
4,152

53, 611
1,686

55, 509
1,803

55,107
1,345

17,616
1,285

68,672
2,018

37,471
1,329

15, 238
1,504

37,653
1,046

485
31, 541
2,192

40, 548
2,092

485
583, 742
21,423

Total liabilities
Ratio of total reserves to deposit and
Federal reserve note liabilities combined, per cent
_
Contingent liability on bills purchased
for foreign correspondents

443,978

1,402,776 | 418,523

494,621

229,498

218, 731

808,850

196, 588

136, 512

196, 942

158, 013

437, 201

5,142, 233

60.2

56.6

74.0

75.8

1,165

1,474

1,234

2,337

34, 276

2, 736, 500
464,192

82.8

79.4

80.7

53.7

53.3

80.5

49.9

11,950

82.1

2,949

3,703

1,783

1,406

4,766

1,509

W

I

FEDERAL RESERVE NOTES OUTSTANDING AND IN ACTUAL CIRCULATION
Federal reserve notes outstanding
__
_
Federal reserve notes held by banks
Federal reserve notes in actual
circulation




245,463
15, 751

730,173
255,279

232, 776
19, 578

270, 232
28, 651

99,815
7,077

147,128
15,236

461,423
46,412

91,626
16,909

62, 898
3,679

73,129
10, 066

61, 574
4,837

260, 263
40, 717

229, 712

474,894

213,198

241, 581

92, 738

131,892

415,011

74,717

59, 219

63,063

56, 737

219, 546 | 2, 272, 308
i

fed
m
xn

Distribution of bills. United States certificates of indebtedness and municipal warrants by maturities
Within 15
days
Bills d i s c o u n t e d
Bills b o u g h t i n o p e n m a r k e t
U n i t e d States certificates of i n d e b t e d n e s s
Municipal warrants _ _ _ _ _

585, 560
57,237
4,053
_

_

_

16 to 30
days
85,064
32, 222

.

31 to 60
days
117,004
39,403

From 91
days to 6
months

61 to 90

days

80,435
39, 500
361

266

Over 6

months

13,337
4,540
1,100
51

261

Total
881,661
172, 902
5,514
317

d

a

Federal reserve agents' accounts at close of business, October 3, 1923
[In thousands of dollars]
Richmond

San
Francisco

Total

25, 774
61, 574

67,600
260,263

861, 504
2, 736,500

3,725
38,3G0

7,391
3,564
15, 500

15,226
190, 773

320, 534
114, 668
1,620,461

24, 206
2,912

31,044
21, 630

35,119
19,769

54,264
44,125

680,837
333,959

226, 914 1 138, 793

203, 701

168, 691

632, 251

6, 668,463

116,016

72,983

108, 942

87,348

327,863

3, 598,004

401,380
145,392

35,171
75, 727

38, 692
27,118

42,085
52, 674

26,455
54,888

205, 999
98,389

2,055, 663
1,014, 796

1,124,535

226,914

138, 793

203, 701

168,691

632,251

5,668,463

Boston

New York

Philadelphia

Cleveland

92,950
245,463

313,260
730,173

47,000
232,776

31,420
270,232

23,150
99,815

73,722
147,128

35,300
14,025
143,000

235,531
28,302
371,000

7,000
12,879
151,389

8,780
13, 839
185,000

4,211
23, 795

2,400
4,430
65,000

53,138
8,894

95,340
103, 581

61, 508
1,281

62,613
18, 960

71, 809
3, 584

75,298
4,602

9,736
391, 644
60,043
85,349

592,770

1,877,187

513,833

590,844

226,364

372, 580

1,124, 535

338,413

1,043,433

279, 776

301,652

122,965

220,850

577, 763

192,325
62,032

634,833
198,921

171,268
62,789

207, 619
81, 573

28,006
75,393

71,830
79,900

592,770

1,877,187

513,833

590,844

226,364

372, 580

Atlanta

Chicago

St. Louis

Minneapolis

Kansas
City

24, 390
91, 626

10,085
62, 898

35,813
73,129

11,080
2,091
22,000

13,052
2,640
23, 000

56, 455
19, 272

Dallas

RESOURCES

Federal reserve notes on hand
Federal reserve notes outstanding
Collateral security for Federal reserve
notes outstanding:
Gold and gold certificates
Gold redemption fund
Gold fund, Federal Reserve Board.
Eligible paperAmount required
Excess amount held
Total

116,340
461, 423

50
Zfl

3

CD

LIABILITIES

Net amount of Federal reserve notes
received from Comptroller of the
Currency
Collateral received from Federal reserve bank:
Gold .Eligible paper
Total




CD
CD

tei

g

118

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Governor CKISSINGER. I was also requested to furnish the violations of the use of the word " Federal " and the word i; reserve " the
other day, and I forgot to hand it in, and I am just handing you
that now. There is a list of them that came through the legal
department.
The CHAIRMAN. We will now hear Vice Governor Platt.
STATEMENT OF HON. EDMUND PLATT, VICE GOVERNOR FEDERAL
RESERVE BOARD
Mr. PLATT. I want to say that I agree absolutely with what the
Governor has said about the necessity of giving national banks
the same privileges the State banks have in relation to branches in
cities. The showing made on these maps, it seems to me, is absolutely convincing.
The CHAIRMAN. DO I understand you are in favor of a statewide system of branch banking?
Mr. PLATT. YOU are getting into a question of disagreement. A
minority of the board believes very much as Senator Glass stated,
that in making conditions for State banks to join the system we
have authority to make conditions with relation only to banking
conditions and not with reference to whether we think branch banking is wise or unwise; and our idea is that we ought not to nullify
State laws by preventing soundly managed banks from opening
branches if the people of the State want them..
The CHAIRMAN. Your idea is that branch banking is wise?
Mr. PLATT. I think it is more economical and serves both depositors and borrowers better than independent unit banks, as a rule.
Mr. WINGO. As I recall, you believe in branch banking sincerely?
Mr. PLATT. I do.
Mr. WINGO. Your judgment tells you it is the best?
Mr. PLATT. I think it is, generally speaking, the better

system. I
do not believe we should have nation-wide branch banking.
The CHAIRMAN. DO you think it would eventually interfere with
the operations of the system?
Mr. PLATT. I do not. I think that if branch banking were confined to neighborhood groups or something of that sort it would be
best. Many States already have it: that is, allow neighborhood
branch banking. A few permit state-wide systems. I think it would
make the Federal reserve system easier to work, because it would
do away with the tremendous inequality between banks. Now, we
have banks with $25,000,000 capital and other banks with $25,000
capital. There is no competition between them whatever and the
policies that fit the big banks often do not work well with the
small banks. In fact, there is no competition in this country between banks except in little groups, except for the big borrowers.
Sears-Roebuck and Montgomery-Ward, the packers, the big millers,
and others of that kind who keep accounts in New York, Chicago,
and Boston, for example, can borrow in one city or in another where
rates are lower. They can also sell their notes through brokers
to many banks, but the small borrowers can not do that.
Mr. WINGO. Did I understand you to say there would be no
competition if the bank with $25,000,000 capital were to put a branch




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

119

across the street from a bank with $25,000 capital in a small community ?
Mr. PLATT. NO ; I said there is no competition now. There would
be under those conditions.
Mr. WINGO. You believe in putting that branch there for the
benefit of the borrowers'
Mr. PLATT. I think if it was put there under proper limits it
would be a good thing.
Mr. WINGO. Your theory is that it would benefit the borrower if
you permitted this larger $25,000,000 bank to put a bank across the
street in a small village from the $25,000 bank?
Mr. PLATT. I think in many cases it would. In fact, it has been
shown in California the branch banks reduced rates of interest from
8 per cent to 7 per cent in many places. There is some dispute about
how far they did it. Local banks, however, have advantages not
only in neighborhood support and loyalty, but they have the lower
reserve requirement.
Mr. WINGO. What distinction do you make between chain banks
and branch banks?
Mr. PLATT. Chain banks are organized as separate corporations,
but with one control. I think chain banks are much more dangerous
than branch banks, because they have all the disadvantages of branch
banking without the advantages and responsibilities.
Mr. WINGO. Chain banks have to keep a local director?
Mr. PLATT. They have local directors. There are probably thousands of chain banks in this country and they have evidently been
organized because of the prohibition of branch banking.
Mr. WINGO. Have you investigated what happened to the interest
rate after the little bank quit business?
Mr. PLATT. The thing has not gone far enough to make it possible
to investigate that very far, but it appears that where the rate has
been put down it has never been put back again. People will tell
you that branch banking results in collecting money in the country
where there is no overabundance of funds and loaning it in the
cities where money is plenty and the rates lower. That is not common sense. Why would bankers try to collect money where the rates
are higher and loan it in the cities where the rate is lower. In my
neighborhood, up in the Hudson River Valley in New York, we have
low money rates, because there is more money deposited than can
be loaned, and it is loaned outside, some of it, so far as they can do
it, without the branch system. The most of the surplus, I think, is
sent to New York to be ioaned on Wall Street,
Mr. WINGO. DO these large banks put out branches for the altruistic purpose of aiding the community?
Mr. PLATT. Absolutely not.
Mr. WINGO. What benefit do they get out of the interest on those
loans ?
Mr. PLATT. Take California, which is the storm center. Los
Angeles is one of the greatest depositing neighborhoods in the United
States, next to the Hudson Valley and Boston. People flock into
Los Angeles from all over the country, bring their money with them
and deposit there. It can not all be loaned there, and they loan it
out among the citrus fruit growers and other similar agricultural




120

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

activities. The branch banking people showed us that they have
larger loans in town after town that the total deposits in those towns.
No independent banking system can do that.
Mr. WINGO. You think the fears of these local independent banks
are unfounded; that is, their fears of the effect of competition of the
branch banks?
Mr. PLATT. Why, it is partly unfounded; but if the branch banks
give better service they might absorb them in the course of time.
Mr. WINGO. In your opinion, why do these small bankers object
to big banks placing branches across the street?
Mr. PLATT. Take the Northwest Savings Bank here in the city, for
instance
Mr. WINGO. I am not talking about the city. Let us get out in the
country. Go out to Kansas or California.
Mr. PLATT. The independent bank fears the competition of the
larger bank; there is no doubt about that.
Mr. STRONG. If you had spent 25 years building up a business in
a bank in a reasonably fair sized town or city, would you want the
Government to permit the big bank down town to put a branch
alongside of you and go out to your customers and say, " We can
give you better service, because we have a big bank " ?
Mr. PLATT. I certainly would not; but the interest of the community is of some importance. The fight is between the bankers.
The people have never been consulted in the matter. If you go to
the people of California, particularly the cooperative marketing
associations, and ask them about it they would tell you that branch
banking has been beneficial to them.
Mr. STRONG. After the big banks wipe out all the little independent banks, they are going to control the banking system from down
town, and eventually you will have a monopoly of the banking system of the country in the hands of a few big bankers.
Mr. PLATT. Not unless you permit it.
Mr. STRONG. HOW can you get around it if you keep extending
the branch system all the time ?
Mr. PLATT. In California, for the sake of argument, there are 79
banks with 449 branches. Certainly no monopoly there yet. There
is no competition now in the neighborhoods where there are only
neighborhood banks, except between those small banks and such
competition rarely, if ever, lowers interest rates.
Mr. STRONG. If those 79 fellows wanted to get together and say,
"We will just squeeze the people" they could do it mighty easy?
Mr. PLATT. That could be prevented. They do not do it. Look
at Scottland, which has the best banking system in the world, perhaps.
Mr. WINGO. Your theory is that the large bank has the smaller
overhead and that it can still with profit extend privileges to those
communities that the local independent bank can not; is that your
idea?
Mr. PLATT. That is, of course, true.
Mr. WINGO. Just what are the elements in that?
Mr. PLATT. Of course, the large bank gives its depositors not a
guarantee of a capital $25,000 but a guarantee perhaps of $25,000,000
capital. His deposit is that much safer; and the}7 have the larger




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

121

loaning limit. Every country town has some men who can not
borrow at the local bank because the local bank has not the loaning
power to accommodate them.
Mr. WINGO. You say they loan at a lower rate. Why are they
enabled to do that?
Mr. PLATT. Because they gather money where it is deposited in the
cities, and they can spread it around and keep it employed all the
time, instead of sending it to Wall Street. A local bank can not
even safely loan all its deposits in the neighborhood.
Mr. WINGO. Is it not comparable to this, or is there the same element—I am not trying to controvert; I am just trying to analyze
the elements that enter into your argument—we will take a large
wagon factory or automobile factory. Henry Ford has a lower
unit of cost than a plant that turns out a smaller quantity, does he
not?
Mr. PLATT. He does, undoubtedly.
Mr. WINGO. Does that enter into banking plants, too—larger
capital and larger banks have lower units of cost because the operation is less and therefore they can make a profit on narrower margins ?
Mr. PLATT. It does if they do not go too far in competion with
each other. With an equal number of officers the overhead of branch
banking is much less than the overhead of unit banking. They have
not so many officers to pay and they have fewer employees.
The CHAIRMAN. YOU cite the California situation as providing
more loans for the locality than the deposits that are received. Is it
not true that in some instances branches are established for the principal purpose of getting the deposits ?
Mr. PLATT. In the city; 3^es.
The CHAIRMAN. In that locality, and transferring them to another
locality where they have more demands for loans ?
Mr. PLATT. There is more money deposited in Los Angeles than
can be loaned there, except possibly on real-estate development, and
instead of sending the surplus to New York and San Francisco they
loan it out in the country through their own branches. Your bank
probably loans money in the country, but it is harder to do it when you
can not have a local agent to look after it.
Mr. WINGO. At Little Rock there was a large bank, and they had a
branch established at my town. Your theory is that in addition to the
deposits in the locality they would send down deposits and swell the
loans in that community ?
Mr. PLATT. Their loans would not be limited to the deposits of
that locality at all.
Mr. WINGO. IS not that true of the independent bank; does it not go
out and get rediscounts for the purpose of getting additional capital?
Mr. PLATT. Yes, but it has to pay a rate of interest.
Mr. WINGO. For that reason it has to charge a higher rate; is that
one of the elements ?
Mr. PLATT. That is undoubtedly one of the elements.
Mr. WINGO. If you were a merchant in one of these small communities, you would naturally go to the branch bank that charged a
lower rate of interest, would you not ?




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INQUIRY ON MEMBERSHIP IK FEDERAL RESERVE SYSTEM

Mr. PLATT. I think probably I would. They do not always do
that, and the independent bank is not going to be driven out of business under any circumstances right away.
Mr. WINGO. What fixes rates ?
Mr. PLATT. Competition and the supply of money.
Mr. WINGO. DO you think the average bank is any more altruistic
than anybody else, and if he could get 6 per cent fie would'not let
money go at 5 ?
Mr. PLATT. I think not.
Mr. WINGO. If a merchant can sell shoes at $5, he is not going to sell
them at $4, is he?
Mr. PLATT. I think not.
Mr. WINGO. The altruistic merchant does not last very long, nor
does the altruistic banker, and the natural tendency of human nature
is to take all the traffic will bear.
Mr. PLATT. With due regard to future customers, etc.
Mr. WINGO. In other words, selfish interest will load the traffic as
much as can be done not inconsistent with keeping the business going.
The banker is not any more altruistic than anybody else.
Mr. PLATT. Not a bit.

Mr. WINGO. DO you think a big banker would be any more altruistic
than a small one ?
Mr. PLATT. I think not.
Mr. WINGO. YOU think if the competition of the local banker is
removed he would still give the lower city rate in that community
that had scarcity of capital ?
Mr. PLATT. He might not if you had only oi ^ ban]-: with branches.
But, as a matter of fact, you have more competition under branch
banking than under independent banking.
Mr. WINGO. General banking with branches has driven out and
decreased the number of independent banks wherever it has been
tried?
Mr. PLATT. Generally speaking, yes; so far mostly by purchase
or consolidation.
Mr. WINGO. Wherever in any country or community they tried
branch banking it has had a tendency to centralize and make larger
units and decrease the number of banking units, has it not?
Mr. PLATT. Yes.

Mr. WINGO. That is one of the economies claimed for the branchbanking system, that it does away with useless organization and
works out in the economy of having a large central organization—
smaller units with less overhead.
Mr. PLATT. That is undoubtedly true.
Mr. WINGO. IS not that the reason why wherever they have tried
branch banking it has destroyed independent banking?
Mr. PLATT. That is undoubtedly true.
Mr. WINGO. DO you not think the banker's opinion, based upon
the experience of other people, is entitled to considerable respect?
Mr. PLATT. I do. But I think that the depositor and borrower
are also entitled to consideration.
Mr. WINGO. That is the argument that was used in permitting the
Standard Oil to go into independent oil territory and by reason of
lower overhead and by reason of being able to recoup loss at one town




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

123

in another town thus was enabled to drive the independent man
out, because he said he was giving lower-priced gasoline. You expect
the price of gasoline in the Northwest to rebound after the tumult
and the shouting dies ?
Mr. PLATT. I think that probable; but if you want to know how
branch banking works where it has been going* a great many years
all you have to do is to go to Scotland and Canada and Australia
and other countries.
Mr. STRONG. DO you think the borrower has the same personal
and sympathetic relations with the manager of the branch bank
that he would have with the manager-owner of the local bank ?
Mr. PLATT. NO; I do not; I think the local bank has the advantage in that respect.
Mr. STRONG. Then why is it not a good thing for the borrower to
patronize the local bank?
Mr. PLATT. Sometimes it is and sometimes it isn't. I once lived
out in the West. I knew the local banker. He was a personal friend
of mine. He said: " You come in and borrow some money. Why
do you not borrow some money and buy some of this real estate?
Everybody else is making money in real estate." I held off a good
while, but finally concluded to borrow some money and make a first
payment on a piece of real estate. I did so, and I have that real
estate yet, and it took me nearly 10 years to pay off that loan, and I
do not think that banker was doing me any favor.
Mr. STRONG. Suppose you were not buying real estate but were
borrowing some money to buy cattle to feed. Suppose some fellow
would say to you like they did in 1920, " We can not loan money
for people to buy corn to feed cattle. You sell the cattle unfinished
and sell your corn for 28 cents." That is what they said to us in
1920 in Kansas.
Mr. PLATT. That was done in the middle West by independent
banks; it was not done in California, by branch banks, so far as I
know.
Mr. WINGO. May I take you from Kansas back to Canada You
remember the disastrous bank failure *up there not so very long ago,
do you not—in the last few years, where they had a big failure in a
bank that had numerous branches?
Mr. PLATT. There has not been until this year a failure in Canada
for, I think, 10 years.
Mr. WINGO. It was last winter. Did they not have a big failure
up there?
Mr. PLATT. One or two banks were absorbed by other banks but
nobody lost anything except the stockholders. Depositors lost nothing and knew nothing about the difficulties until the consolidation
had been made. If the stockholders lose money, what difference does
that mean to the average man or the community. I will say there
has not been a failure in Canada since 1913 (except this year in
August—the Home Bank failure) in which depositors have lost anything or even had their money tied up.
Mr. WINGO. I think there was a failure.
Mr. PLATT. My recollection is that something over a year ago the
Merchants Bank of Canada was absorbed by the Bank of Montreal
and several months later—rather recently—the Bank of Hamilton,




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

whose reserves were impaired, was taken over by the Canadian Bank
of Commerce. Such consolidations to avoid failure or closing are
much more common in our own country, and I do not know how many
of them are in progress now. There have been eight bank failures
in Canada since 1895, and according to the record I have here depositors have been paid in full in all cases except that of the Bank of
Vancouver,5 which occurred in 1913, and is marked still " in course of
liquidation. ' How the recent Home Bank failure .will come out remains to be seen. The preliminary statement just made seems to
show the liabilities more than two million greater than the assets,
with capital and surplus wiped out.
Senator GLASS. Mr. Platt, as a general proposition, I might say
in 99 cases out of 100, is a bank loan sympathetic or acquisitive? A
bank loans, does it not, because it wants to make a profit ?
Mr. PLATT. Certainly, it wants to make a profit.
Senator GLASS. The argument made here awhile ago was in favor
of the independent local bank because it would be sympathetic with
its customers.
Mr. PLATT. Once in awhile that is so. But I think that sympathy
isn't often a factor in banking.
Senator GLASS. I want to ask you a question while you are here,
because you are not a lawyer and I am not a lawyer. We are both
newspaper men. But I did have something to do with the construction and passage of the Federal reserve act, which you are charged
with the duty of interpreting. Your counsel, as I understood him—I
may have misunderstood him—undertook to base the right of the
Federal Reserve Board to exclude from the system a State bank
having branches upon this provision of section 9 of the act:
The Federal Reserve Board, subject to such conditions as it may prescribe,
may permit the applying bank to become a stockholder «of such Federal reserve
bank.

That taken and interpreted by itself might mean just that; but
the law provides that such banks and the officers, agents, and employees thereof shall also be subject to the provisions of and to the
penalties prescribed by section 5209 of the Revised Statutes, and it
shall be required to make reports of condition and of the payment
of dividends to the Federal reserve bank of which they become a
member.
Not less than three such reports shall be made annually—

Those are the expressed requirements of the statute. Do you
think under this first sentence I read the Federal Reserve Board
would have any authority to prescribe a condition which would be contrary to the language that " such banks and the officers, agents, and
employees thereof shall also be subject to the provisions of and to
the penalties prescribed by section 5209 of the Revised Statutes "
Mr. PLATT. I think certainly not.
Senator GLASS. Then, if it has not any right to do that, what
right has it, in the face of this provision of the statute to exclude a
State bank because it has branches ? Under the same section I read:
Subject to the provisions of this act and to the regulations of the board
made pursuant thereto, any bank becoming a member of the Federal reserve
system shall retain its full charter and statutory rights as a State bank or
trust company, and may continue to exercise all corporate powers granted it by
the State—




INQUIRY OF MEMBERSHIP IK FEDERAL RESERVE SYSTEM

125

If the State of California or State of Virginia or any other State
in the Union in its charter of a State bank gives it "the right to
establish a branch bank, what right has the Federal Reserve Board
to take it away?
Mr. PLATT. The act says the Federal Reserve Board " may," does
it not ? I do not think it says " must."
Senator GLASS. I am not a lawyer; but all lawyers know it means
" shall."
Mr. PLATT. I believe the board has no right to deny a branch if
the bank is in sound condition.
Senator GLASS. If it does not mean "shall" the statute is not
worth the paper it is printed on.
The CHAIRMAN. What have you to say with regard to the Clayton
Act—that is, the Kern amendment to it—about interlocking directorates ?
Mr. PLATT. YOU know that is a national bank proposition more
than anything else, because State banks can be in the system and
can have such interlocking directors as the State laws allow. If
you Lring in one national bank, then you may have to break up the
directorate, which is sometimes a serious matter. We have had
some trying conditions where if we enforced the law as literally as
we apparently have the power to do we would actually penalize
competition, which is exactly what I think Congress did not want
us to do.
There are trust companies in Philadelphia which before the war
did no commercial business whatever. For patriotic reasons during
the war they came into the Federal reserve system and bought some
commercial paper, so as to have something they could rediscount if
they had to rediscount. Then they were gradually forced to take
up certain lines of commercial business. People were seeking credit
wherever they could get it. That, theoretically, brings them in competition with the national banks. These trust companies, some of
them, were founded by the national banks, and evidently the directors representing the national banks had not prevented competition.
It was perfectly clear whatever competition there was was not
restricting credit. Yet, if we enforced the law literally, we could
take the national bank directors out of the trust companies and
break up the boards of directors of the trust companies or force
their directors to leave the national banks. The law does not require
us to do that where permission has already been given, but it gives
us the power. It has been the cause of a certain amount of friction.
We have allowed men to serve where they have been serving, but
we apparently have no power to allow new men to come in, which
seems inconsistent. If the law could be amended so as to define the
words " substantial competition," it would help greatly.
The board believes the law should be amended so that we could
grant permission for interlocking directors in not to exceed three
banks where there was no evidence of restriction of credit. I t certainly can not do any harm where there is no evidence of restriction
of credit, and I will say that so long as I have been in the Federal
Reserve Board I have not heard any complaint of restriction of
credit in any of the hundreds of cases submitted to us for permission
to serve more than one bank.
107679—26—PT 1




9

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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

The CHAIRMAN. YOU are familiar with the Kern amendment to
the Clayton Act and the proposed amendment to it. Does that cover
the situation?
Mr. PLATT. Yes; the proposed amendment I think very desirable.
If you will pass that bill, it will prevent injustice and help in the
enforcement of the law, and I believe if you explained it to the
House there would not be much trouble passing it. The Clayton
Act committee of the board made a report recommending the amendment which the commission may have if desired.
I do not know that there is anything further I can say, except
this: On the main subject of the inquiry, why more State banks do
not join the reserve system. There are a certain number of States
which keep their States banks out of the system. Connecticut is
one of them.
Senator GLASS. We can not affect that situation.
Mr. PLATT. But we can, through our reserve banks, continue to
use such arguments as we can to get those State laws changed.
A great many of them have been changed. There are, I believe,
some 18 State laws yet that interfere considerably, but Connecticut,
I think, is one of the worst. Gradually, I think, those laws will be
changed.
Then it ought to be recognized, I think, that there are a certain
number of State banks that have no very good reason for joining.
They do mostly a trust or an investment business. They are on the
border line, where it is pretty hard to see why they should join.
For example, there was a bank in California that came in during the
war. It was mostly a savings bank. There was no particular reason why it should be in the Federal reserve system, and it has since
withdrawn.
If you will look the map of the country over, you will see that
most of the bank failures, where most of the trouble with agricultural credit has existed, occurred where the least number of State
banks are in the system.
The CHAIRMAN. Reports made by the War Finance Corporation
indicates that 80 per cent of their loans were made to nonmember
State banks and trust companies in the agricultural sections of the
country where the greatest hardships prevail, and only 20 per cent
to national banks?
Mr. PLATT. Yes.
The CHAIRMAN. DO

you think if those State banks and trust companies had been members of the Federal reserve system they would
have been in a stronger position to take care of the situation ?
Mr. PLATT. Undoubtedly they would. Here is another point that
you will find among the statements of the reserve bank governors
that were put in by Governor Crissinger. One of the banks makes
the point that if we had more State banks in the system there would
be a higher standard of banking. The standard of banking among
some State banks is low. If we could have them in the Federal reserve system it would mean that we would visit them and require them
to have paper that is eligible, which means that some of them
would have to stop loaning all their money on demand notes and
get their business in some sort of shape so that some of it will be
liquid. If we get more State banks in it means a higher standard
of management in making loans.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

127

Mr. WINGO. I wonder why they do not fail.
Mr. PLATT. They do fail. A thousand of them failed in three
years, and a great many of them failed by bad management.
Mr. WINGO, What particular bank—what was the particular fault
of management that ran through these failures ?
Mr. PLATT. Excessive loans to officers and directors; loans on real
estate during real estate booms, loans on " blue-sky stocks," and various kinds unsound loans, besides the legitimate loans on produce
that fell in price. Sometimes State banks have had loans away off
from their neighborhood.
Mr. WINGO. YOU do not object to that, do you, as a banker?
Mr. PLATT. Not necessarily, but the small banks often have no way
of knowing whether they are good or not. If you could look over
the bank statements you would see what I refer to.
Mr. WINGO. If that condition prevails, you do not want to amend
the system, but you would have to reform them after you got them in.
Mr. PLX\TT. AS Governor Crissinger says, if all State banks were
to present themselves for admission, we would find a great many
we could not admit immediately. We would find in their statements
a whole lot of excess loans. Many States allow 20 per cent of the
capital and surplus to be loaned to one individual, and sometimes we
find loans as high as 40 per cent.
The CHAIRMAN. If all these banks come in, do you think the Federal reserve system could function better in taking care of the needs
of the public than it now does ?
Mr. PLATT. SO far as the system is concerned it doesn't need them,
and I think it is almost an even question as to whether all of them
ought to come in. I believe that a good many of the very small
banks are probably better off outside, but I do think that in many of
those communities they might have larger banks by moderate consolidation, and then if they did join the system they would borrow
directly instead of having to take several jumps through city correspondents.
The CHAIRMAN. DO you view with concern the statement that
national banks are believed to be going out of the system because of
keen competition of State banks?
Mr. PLATT. With some concern; yes. I think that so far as possible the national bank act ought to be amended so as to give the
national bank privileges so far as they are sound which are as good
as those accorded State banks. Governor Crissinger has told you
that the national bank act has been very little amended. We have
amended it a little, but not much.
The CHAIRMAN. DO you think it will be possible, with the amendment which you would approve to the Federal reserve act and the
national bank act to make it so attractive that those banks would
stay in, when you take into consideration the fact that State banks
and trust companies have grenler advantage in the matter of reserves and several other things which many of us feel should not
be given to the national banks ?
Mr. PLATT. I suppose as long as some States allow unsound reserves to be kept, the national banks will be at a disadvantage in
those States, and we can not help it. That, for instance, was one of
the things Mr. Hazelwood spoke of in Atlantic City. One thing




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IKQtTIRY OX MEMBERSHIP IX FEDERAL RESERVE SYSTEM

that keeps banks out of the Federal reserve system Is State laws,
not only State laws like that obtaining in Connecticut, but State
laws which are unsound. I do not believe that we should ever amend
the national bank act to compete with that sort of thing, but I believe
personally in what Governor Crissinger recommended very strongly,
a sort of departmental banking. It seems to me that Is one thing
in the California act, by the way, that is rather superior to the national banking law. They require savings deposits to be segregated
and to be invested in a certain way, separately from the commercial
department investments. Then, after being so segregated, you can
loan a larger percentage on real estate with safety, on mortgages
and bonds, etc.
Mr. WINGO. Have you talked pretty strongly to nonmembers in
order to find out what their objections are to coming in?
Mr. PLATT. I have talked to a good many of them.
Mr. WINGO. In what part of the country?
Mr. PLATT. In all parts of the country, to people who have been
drifting in to see us, as well as on railroad trains, etc.; many of them
are very friendly to the system, but they simply do not think it
would pay them to go in.
Mr. WINGO. Has the board here agreed on the regulations covering par collections and the decisions of the Supreme Court ?
Mr. PLATT. Practically.
Mr. WINGO. When do you think you will get out the changed
regulations ?
Mr. PLATT. Probably in a few weeks. We put out a few weeks ago
some regulations which we think are sound, but perhaps a little
too stringent and have suspended a part of them. As a matter of
fact, we are not collecting checks over the counter.
Mr. WINGO. I have not gone into that, because I thought it was
better to wait until you get out the new regulations and then see
where we are.
Mr. PLATT. But, as Senator Glass says, inasmuch as nearly all
the State banks are remitting for their checks at par, those same
banks remitting at par can not give that as a reason for not poming
into the system. Membership would make no difference in that
respect.
Mr. WINGO. Are there any steps which have been taken by the
board regarding par collections?
Mr. PLATT. We have gone into that more or less.
Mr. WINGO. We have not got par collections; we have par remittance.
Mr. PLATT. The law, of course, allows charges for collections.
We think they are too high in some parts of the country.
Mr. WINGO. The collection charge is larger than it used to be,
it has been my experience, because there is not any par collection;
it is par remittance.
Mr. PLATT. Oh, yes; there are par collections. You ordinarily
are not charged collection on checks. If you have a bank account in
Washington, you could take most any check and deposit it and
they would collect and not charge you for collecting. I do not know
whether the great majority of checks are collected without charge,
but very many are.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

129

Mr. WINGO. You know the reason? The reason they give is that
under the old system they had correspondents who gave them
immediate credit. " We could cash your check, then, as a matter
of accommodation, because we immediately got credit, but," they
say, " Mr. Wingo, it takes three days now on your4 check and it is
practically a loan." I am not complaining. My bank has to remit
at par, but I have to pay for the cashing of the check, whereas
before I did not have to pay.
Mr. PLATT. I do not think I have paid a charge on any check.
I think outside of cities where the clearing houses compel it, it is
not a very general practice, unless it is in the case of a stranger.
Of course, if a stranger comes in and has to be identified and he
has not an account, a charge may be made.
Mr. WINGO. I know a case where a president of a bank lost a
good hat on a wager. He said, " It is all right; I know this gentleman." And he was charged 25 cents by the paying teller on a $25
check; and so the Member of Congress won a hat off of the president of the bank.
Mr. PLATT. It is done, but it is not universally done.
Mr. WINGO. The reason he gave was that the Federal reserve par
collections compelled the bank to do it. He said he was not entitled
to immediate credit.
You have talked to a great many country bankers, and you know
a great many of them think they ought to have immediate credit.
That is one of the bones of contention.
Mr. PLATT. SO far as the checks they send to the Federal reserve
bank for collection are concerned, most of us are rather inclined to
think that the country banks might be allowed to deduct them from
deposits before they reckon the amount of reserve required, but " immediate credit" means a reserve of float and is certainly unsound.
Mr. WINGO. They say our correspondents always carried it before
the Federal reserve system was established and our correspondents
are carrying it now, and we do not understand why. Can you tell
them why, so that an ordinary statistician can understand?
Mr. PLATT. If they will look at the size of the figures of the float
they will see what the result would be if it was all put in as reserve.
Mr. WINGO. HOW do you know what it would do if you never tried
it out ?
Mr. PLATT. We have the figures right there. We have the " deferred availability " item in our statement every week—$550,000,000
on September 26.
Mr. WINGO. HOW do these correspondent banks afford to do it?
Mr. PLATT. What they simply do is to make the country bank carry
enough balance to make it profitable., If the city bank pays exchange to the country bank, it makes it keep a bigger deposit, and if
it carries float for a country bank the deposit must be large enough to
make it pay.
Mr. WINGO. What I am trying to get at is the altruism of those
country banks.
Mr. PLATT. The city banks do not do it for nothing.
Mr. WINGO. They pay interest on the balances ?
Mr. PLATT. On collected balances, but not on uncollected balances,
as a rule.




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INQUIRY ON MEMBERSHIP IN FEDEEAL RESERVE SYSTEM

Mr. WINGO. The answer was given just now that they require the in
to keep balances. They pay interest on the balances ?
Mr. PLATT. On the collected balances, yes; but it is pretty small
interest compared with what the city banks can loan the" money
out for.
Senator GLASS. AS a matter of fact, does any bank transact business for philanthropic considerations?
Mr. PLATT. Certainly not.
Senator GLASS. Does not every well-conducted bank—95 per cent
would be well within the limit, I assume—require its borrowers to
keep a certain percentage on deposit, most of them 20 per cent of
their borrowings?
Mr. PLATT. DO you mean individual borrowers?
Senator GLASS. I mean, if I am a business man in my town and
if I keep an account with my bank, and I want to borrow $10,000,
do they give it all to me at once; do they not require me to carry 20
per cent of it as deposit in the bank?
Mr. PLATT. Some banks may do that.
Senator GLASS. Ninety-five per cent of them do it.
Mr. WINGO. The thing I can not understand is why it is impossible
for the Federal reserve to carry the float and the corresponding bank
carries the float. They do it for profit, because 95 per cent are in
it for the profit.
Mr. PLATT. The deposits in the reserve bank are supposed to be
actual gold or lawful money reserve, and they are not allowed to do
business for profit.
Mr. WINGO. We have made a collection agency out of them. We
have turned them from what the original philosophy of the Federal
reserve act was, that they should be cities of refuge in time of financial distress, and a rediscount market that was more or less open and
which would mobolize the reserve for service.
The CHAIRMAN. The joint committee will recess, until to-morrow
morning at 10.30 o'clock, when we will have before us the Comptroller
of the Currency.
(Thereupon, at 4.35 o'clock p. m., the joint committee adjourned
to meet to-morrow, Wednesday, October 3,1923, at 10.30 o'clock a. m.)




INQUIBY ON MEMBEESHIP IN FEDEBAL EESEEVE
SYSTEM
WEDNESDAY, OCTOBER 3, 1923
CONGRESS OF THE UNITED STATES,
JOINT COMMITTEE OF INQUIRY
ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM,

Washington, D. C.
The joint committee met at 11 o'clock a. m., Hon. Louis T. McFadden (chairman), presiding.
The CHAIRMAN. Mr. Dawes, we will hear you now. As indicated
in the invitation which I sent you, this committee is engaged in an
inquiry as to why more State banks and trust companies are not
members of the Federal reserve s}^stem and what effect this has on
the agricultural sections of the country, etc.
I understand you want to proceed without interruption?
STATEMENT OF HON. HENRY M. DAWES, COMPTROLLER OF THE
CURRENCY

Mr. DAWES. I would appreciate it very much if I could. I have
picked out the two things that I am more competent to speak about,
and they are highly controversial subjects.
The CHAIRMAN. If any members of the committee desire to ask
you questions, I suggest that they make notes and ask them when
you have completed your statement.
Mr. DAWES. I would appreciate that very much. I want to get
the whole argument, and particularly with reference to branch banking questions, before you, and because I have tried to articulate it
very closely I would like very much to discuss it without interruption.
The CHAIRMAN. YOU may proceed in your own way.
Mr. DAWES. I am afraid it is a little bit long.
You have invited me to express my views to your committee, doubtless for the reason that as Comptroller of the Currency I have general supervision over the national banks. I wish to state clearly at
the outset that the statements which follow are made by me solely
upon my responsibility as Comptroller of the Currency. They are
not intended in any way to represent the views of the Federal Reserve
Board, of which I am a member ex officio.
With your permission I shall confine my discussion primarily to
the subject of branch bankings—the outstanding problem in our
banking system today. On the side of the National Government
this question is simultaneously before the Federal Reserve Board




131

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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

and the comptroller; before the board in the matter of the extension
of branch banking by the State member banks in certain States and
before the comptroller as a question of preserving the integrity of
the national banking system in those States. Since the national
banks constitute the backbone of the Federal reserve system, it becomes necessary, therefore, for me as comptroller, in this discussion,
to refer to the situation before the Federal Reserve Board.
The organization of the Federal reserve system was possible because of the power of the National Government to enforce the cooperation of the national banks. At its inception it was primarily an
instrumentality of coordination, imposed upon the existing national
system. At the present time, of the 31,000 banks in the United
States, 9,916 are members of the Federal reserve system, and of the
members of the Federal reserve system, 8,292 are national banks.
The assets of the national banks as of June 30, 1923, were $21,511.766,000, as compared with the assets of the State member banks
amounting to $12,293,124,000.
The national bank act does not permit national banks to engage
in the exercise of general banking functions beyond the limits of the
municipalities in which they are located. They can not, therefore,
enter the general field of branch banking.
These elementary facts are stated in order to bring out the obligation of the Federal reserve system to the natinoal banks, and the
extent to which the Federal reserve system is dependent upon the
national banking system. Except for the national banks the Federal
reserve system could not have been organized, and if a condition is
permitted to develop which would seriously and permanently cripple
the national banking s}^stem it would be a direct and possibly fatal
blow to the Federal reserve system.
The development of the American banking system has been an
evolutionary process, and the preeminent strength which it possesses
in the world finance at the present time is in large measure due to
the fact that it took its form in a gradual and orderly way, meeting
by practical adjustment conditions as they developed. It is distinctly
not an adaption of any foreign system, nor is it a structure conceived and built by any individual or group of individuals at a given
rime involving the rigid enforcement of a ready-made theoretical
plan. Under our system of banking, the most stable and most rapid
economic development that the world has ever seen, has taken place.
From time to time efforts have been made to substitute for the
old machinery a system wThich might seem to be theoretically and
technically more perfect. The frontal attacks of the proponents of
foreign banking systems have invariably broken down without,
in any substantial manner, permanently modifying or affecting the
general principles of American banking. The genius of the American people for independence in matters of local self-government is
thoroughly ingrained and will never succumb in any clean-cut issue
where the choice rests between centralized control and personal and
community independence.
At the present time no direct or open attack is being made on
these traditional principles. The danger which confronts our present banking system lies in an insidious and gradual undermining
influence which is not so much the outgrowth of a conscious effort
to introduce a new system] as it is the result of a natural desire




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to secure temporary benefits for particular individuals and banking institutions without consideration being given as to1 the ultimate effects on the highly complicated and efficient machinery of
American finance and exchange. It is peculiarly a time when these
indefinite tendencies should be precipitated into their essential elements.
If a new system and theory of banking is in progress it should
be determined whether or not it is a desirable system, and if a
desirable system it should be encouraged, fostered, and put into
effect as rapidly as possible. If it is not a desirable system that
fact should be deyeleoped and steps should be taken now to eradicate
it before a condition has developed which would involve a great
national disturbance and injustice to individuals and communities.
The above remarks are intended to apply to the general subject
of branch banking. By branch banking I mean an association of
banking nouses operating in one or more cities or towns but all
under the discretionary control of the board of directors of a
parent bank and upon the capital of such parent bank.
Unless the State member banks enter into branch banking there
is in my judgment no material divergence of interests between the
State and National banks. If, however^ State member banks engage in unlimited branch banking it will mean the eventual destruction of the national banking system and the substitution for
it, and eventually for the Federal reserve system, of a privately
owned and highly centralized financial control of the banking machinery of the United States.
It is this belief which impels me to discuss at some length present
tendencies in branch banking, and if the interest of your committee
is largely centered on the status of nonmember banks it is proper
to say tliat these nonmember banks are almost entirely independent
unit banks and any substitution for the present system would have
as vital an effect on their future as it would have upon the member
banks and on the old independent unit banking operations of the
national banking system.
In support of the general contention that the principle of branch
banking has been carried to such an extent as to constitute a definite trend in certain localities the following facts are submitted:
Branch banking is permitted with various modifications in the
following 18 States: Arizona, California, Delaware, Georgia, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, New
York, North Carolina, Ohio, Oregon, Rhode Island, South Carolina,
Tennessee, and Virginia.
The laws of some of these States restrict the establishment of
branches to the city or county of the location of the parent bank,
while others permit branches to be established in any part of the
State. In California, for example, 82 of the State banks are operating a total of about 475 branches. In that State, one bank operates
28 branches, one bank 19 branches, another about 71 branches in 48
different cities, another about 72 branches. Four banks in California operate a total of 190 out of the 475 branch banks in the
State. In the State of Massachusetts, chiefly in the vicinity of
Boston, State banks and trust companies are operating several hundred branches. In the State of Michigan upward of 300 branches
107679—26—PT 1




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

of State banks are in operation. In the city of Detroit 14 banks
are operating about 200 branches and there are in Detroit only three
national banks left in operation. In the State of New York about
251 State banks are operating branches. In the United States to-day
it is reported that 517 State banking institutions have in operation
1,675 branches.
The figures used above are not intended to be authoritative or
complete, and are used only for the purpose of illustration. They
are, I believe, sufficient to indicate that the issue has long since passed
the theoretical stage and has reached the status of a practical condition.
Granting that a State legislature may properly enact legislation
permitting the local State banks to engage in branch banking, the
larger questions remain, first, as to the effect of such legislation upon
the national banks operating in such States under the national bank
act as administered by the Comptroller of the Currency and, second,
the effect upon the Federal reserve system of admitting to or retaining in membership such State banks engaged in branch banking.
In view of the facts stated above I may safely say that branch
banking already exists in the United States, and that it is distinctly
a practical and not a theoretical issue.
The discussion of branch banking seems naturally to divide itself
into three main questions:
First, is a reserve system, either governmentally or privately controlled, necessary?
Second, can the present Federal reserve system survive the imposition upon it of large and powerful chains of branch banks which,
in practice as well as in theory, are privately owned and privately
controlled reserve systems?
Third, can a general system of branch banks exist simultaneously
with a system of independent unit banks ?
If it should be concluded in the consideration of these questions
that the Federal reserve system is necessary and that it can not survive the strain upon it of systems of branch banks, and that branch
banks will mean the elimination of independent banks, it will then,
I believe, be a logical and necessary conclusion that the issue is a
clean-cut one as to whether the country prefers a system of privately
owned branch banks or a reserve system under Federal control.
As to the first question, namely, the necessity for a reserve system,
it seems hardly necessary, in view of the record of the existing
organization, to enter into any extended arguments, but it would
perhaps be well to state some of the basic considerations on account
of which it was given its present form. The principle of a central
bank has been a controversial one for over a century. In deference
to the widespread and thoroughly American distrust of the centralization involved in a single Government bank 12 banks were established in different sections of the country in order to secure the
closest possible contact with the local member banks and a thorough
understanding and adaptability to community conditions. Through
the operations of the 12 individual units a proper sympathy with
and understanding of local conditions and needs is secured; while
at the same time, through the Federal Eeserve Board, a liaison
between the districts is secured and the detachment necessary for a




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proper compromise between local interest and national policy.
Through the Federal reserve system the transfer of funds from
points of surplus to points of deficit is accomplished with the primary purpose of promoting the best interests of the whole country
and not with a view to enabling individuals or sections to reap a
financial advantage at the expense of others. If it were assumed
that the instrumentality for the transfer of funds could be provided
by a private reserve system, such as a branch banking institution, it
could hardly be fairly contended that the controlling influence
would be other than profit. Necessarily, in adjustments of this kind
the interests of a branch bank or individuals must be private profit
and not public welfare.
The whole Federal reserve system bears a very striking analogy
to the general principles which underlie the American Government,
being founded upon a system of checks and balances calculated to
preserve local independence under centralized and coordinating control. It would be so distinctly a step backward and so manifestly a
dangerous proceeding to destroy the regulated cooperation of banking facilities that it seems to me entirely unnecessary to discuss further the necessity for some sort of a reserve system; and the issue
is, Should it be done by governmental coordination or private centralization ?
The second point referred to, as to the ability of the Federal
reserve banks to survive the imposition upon the system of large
privately controlled reserve systems, is a practical one which at the
present moment faces the Federal Eeserve Board. The question as
to the duties and rights of the board to interfere in the extension of
a system which in the opinion of many might contain the seeds of a
development which will mean the eventual destruction of the Federal reserve system is by no means a simple one, either legally or
from the standpoint of policy. The board, however, clearly has the
moral and legal right to refuse admission to the system of any institution which either because of its financial condition or the method
of its operation is unsound, and it has the same right to deny the
privileges of the Federal reserve system to a member bank under
similar conditions. It is reasonable to assume that a bank, for
administrative purposes, might safely control 10 branches; but the
same bank under American conditions might not, in safety to its
depositors and general creditors, operate a thousand branches.
If the Federal Eeserve Board takes a neutral position on the general issue of branch banking and refuses to sanction the admission
to the system or request the withdrawal of banks which are operating more than a safe number of branches they will be faced continually with decisions of a highly controversial nature, and which are
not susceptible of reduction to elemental formulae. Perhaps I
should clarify that. I mean by that that if in the handling of the
branch banking situation they consider the establishment of each individual branch as a separate question, they will then be faced with
this situation: They will have to investigate the local situation, the
personal equation, the temporary financial conditions, and a thousand
and one conflicting influences will have to be balanced and considered in every application for a branch. However wise their decisions
the board will, of necessity, frequently appear to be arbitrary and




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improperly partisan. The publication of their reasons for action in
particular cases would frequently be productive of injustice to the
individual applicant and disturbance to the financial community.
If the reasons for decision in these matters were not made public,
in my opinion, the system would be subjected to such attacks and
insinuations as would eventually seriously impair its standing and
be destructive of its dignity and influence. In order to avoid these
consequences the board has it in its power to adopt a general policy
of clarification and control.
The elementary considerations which I have stated above and purpose to elaborate further seems to me to justify a decision on the
part of the authorities to limit definitely the extent to which member
banks may indulge in the establishment of branch banks.
As a practical consideration, aside from the broader aspects of the
case, it must be constantly borne in mind that the Federal reserve
system can only be successfully maintained if the administrative
authorities have an adequate knowledge of the conditions of the
member banks. This necessitates examination, which, in the case
of the national banks, is provided by the Comptroller of the Currency. National banks cannot engage in banking beyond the limits
of the city in which the institution is located. In the examination
of State banks the Federal reserve system is compelled to rely on
its own examiners and of course the State examiners and such incidental and voluntary assistance as it can secure from the various
State officials.
The examination of an institution with branches and subsidiaries
is a very difficult one. The interdepartmental relationships vastly
complicate it. It is more difficult to examine ten institutions of a
given size which are associated in a branch banking system than it
would be to examine 10 independent institutions, as all of the transactions between the different branches have to be investigated and
eliminations and adjustments made to produce a composite picture
and prevent the improper manipulation or shifting of assets. This
can not be done satisfactorily without a simultaneous examination of
parent bank and each one of the branches. This may be construed
as an ex parte statement, but it bears the weight not alone of my
individual opinion but of the employees of the comptroller's office
who have been engaged in the examination of banks for many years.
Bank examination involves very much more than a mere scrutiny of
figures. Questions of moral character, of local reputation, of Valuations of securities, of conformity to local laws and rulings—these
and many other elements enter into a proper examination. In the
case of the examination of a very large bank, say with 75 to 100
branches, it would be impossible to mobilize a force of examiners of
the ability to make an intelligent analysis of the situation in each
individual community even if it is to be assumed that the character
of the banker is not a factor in the condition of the institution.
The last stated considerations are incidental as compared with
the more important one which involves the ability of the Federal
reserve bank to meet the mobilization demands of an association of
institutions under the control of a single interest having the power
to concentrate the requirements of all of the separate institutions
into one demand. This demand might be made practically without




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notice in a period of stress on account of necessity or perhaps with
a desire to produce a certain condition in the community which
might be opposed to the general interest, but, of course, favorable
to that of the particular institution. To say that if a large proportion of the banking interests of a State are centralized in the hands
of five or six or a dozen branch banking institutions and that these
institutions will not combine, either as a result of direct conferences
or agreement or of mutuality of interests, is to ignore the fundamental basis of human action. If any lessons are to be drawn from
the development of large industrial enterprises in the United States,
it is that the principle of centralization when once inaugurated will
proceed, unless interfered with by governmental action, to a point
of complete concentration in an individual or a group dominated by
an individual. Should a situation of this kind develop in any Federal reserve district, the Federal reserve bank would either be eliminated as a factor in the financial community or be virtually under
the control of such a group.
As to the question of whether or not it is possible for independent
unit banking systems to exist and operate in conjunction with a
branch banking system, very definite conclusions may be drawn from
the results of the operations of branch banking systems in other
countries.
Branch banking is in vogue in England, Scotland, Ireland, Canada,
Australia, New Zealand, France, and other parts of continental
Europe. I understand it is also in operation in the Latin American
countries. According to figures published in the Bulletin of the
American Institute of Banking for July, 1923, in 1842 there were
in England 429 banks and in 1922 only 20 banks. Of these 20 banks
5 controlled practically all of the banking of the nation. There
are about 7,900 branches in operation. In Scotland there are only
about 9 banks, with about 1,400 branches, and in Ireland about 9
banks, with about 800 branches.
In 1885 in Canada there were 41 independent banks. Under the
operation of branch banking the number was reduced to 35 by the
year 1905. I am informed that in Canada to-day there are only 14
banks, operating about 5,000 branches. There are no independent
unit banks in western Canada; in fact, none west of Winnipeg.
Banking control through the branch banking system is concentrated
in the cities of Montreal and Toronto.
It has been authoritatively stated that there are only 6 unit banks
in New Zealand and 20 in Australia. (See Statesman Year Book
for 1923.)
Experience in other countries definitely indicates that independent
unit banks do not exist parallel with branch banks. As indicating
that this is not necessarily due to conditions which exist abroad but
might not exist in the United States, the following points are adduced, which to my mind show that there are such inherent antagonisms between the two systems that they could not under any
circumstances long survive together in the same country.
Branch banking is, in its essence, monopolistic. The financial
resources of a number of communities are put under the control of a
single group of individuals. Funds liquidated in one community
may be used to develop other communities at the discretion of




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

the officers of the central bank. The economic development, therefore, of a given territory under the control of a branch would
depend upon the policy of the bank. The bank would have the
power to retard or to encourage the development of a given community or individual enterprise. In this connection it has been
well said that if the sudden creation of great branch banking systems shall result in withdrawing funds from the support of rural
communities in order that they may be invested in self-liquidating
commercial paper originating elsewhere, then it will be true that
sound abstract banking principles will have been applied, but at a
cost to the future development of the rural communities that will
far outweigh any advantages that may be gained.
In a system of independent unit banks the bank which best serves
the community is the bank which is most certain to live the longest
and be the most profitable to its stockholders. Since the type of man
who starts a bank in a small community is essentially constructive,
his natural associations and sympathies are with men of constructive
type, and he extends the facilities of the bank most liberally to them.
His loans take into account as a first consideration character and
moral responsibility. He is naturally inclined to encourage young,
aggressive, and enterprising individuals who will, in the course of
time, bring business to the institution as he succeeds, and will develop commercial and industrial enterprises and be a factor in the
creation of corporate and private undertakings, all of which will be
feeders to the bank. As this type of individual is usually not the
possessor of high-class collateral at the beginning of his career,
the banker is dependent in a large measure on the character, of
which he can only be sure by personal contact and acquaintance.
The distinctive accomplishment of the banking system of the
United States is its contribution to enterprise and its stimulation of
growth; its criterion is service. The European standard is safety
first, last, and all the time.
It can well be said that the rapid economic development of America has been largly due to the policy of the pioneering unit banks
which recognized this principle of service. It is inconceivable that
the representative of a nonresident board of directors should be
granted the authority and the discretion to make a type of loan
which is based on character, knowledge of local conditions, and ultimate benefits to be realized by the community and by the banks.
While it requires a high order of ability to make this class of loan,
the banking history of the United States would show, in the main,
a surprisingly small mortality. These loans, however, on account of
their small size in individual cases, and difficulty of ascertaining their
intrinsic value, do not afford a basis for discount with other banks
in case of stress, and no bank could exist if it were dependent entirely upon them. If across the street from the unit bank making
this sort of loan were the agent of a great branch banking institution, this agent would very quickly acquire the larger and from the
narrow banking standpoint the desirable business of the town. This
he could do by offering lower rates of interest on loans and higher
rates on deposits than local conditions would ordinarily justify, and,
in the nature of the case, all of these advantages would probably be
withdrawn as soon as the independent unit banks of the town were




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finally eliminated. This is a process which has been pursued in the
evolution of our great industrial enterprises, which have had to be
curbed by the action of the Sherman antitrust law and other governmental action.
The opportunities for coercion on the part of large institutions
with branches scattered over a whole State are very great. This
coercion might take any one of a number of forms. The connection
of the branch banks with out-of-town customers of the institutions
of a community permits of pressure being readily brought.
Under the Federal reserve system and through his relations with
his correspondents the competent unit banker is able to secure for
the larger customers of his town facilities which are beyond the
abilities of his own institution to grant. The branch banker can,
in the case of very large customers, grant these facilities more directly and to that extent is rendering a special service to the community, but the ultimate result of these influences is to give the
easiest obtainable and most desirable business to the branch bank,
leaving the unit bank to take care of the enterprises of the town
which have not already reached a condition of independence.
The expression has been used as applied to one State where
branch banking exists on a large scale that the branch banks skim
the cream and the unit banks are left with the skimmed milk, the
result being that the unit banks have gone out of existence and the
borrower, who is a good moral risk but can not produce a certain
form of collateral, is left to depend on the good graces of a representative of a branch bank, who is frequently the possessor of all the
discretionary powers of the local railroad agent and no more.
One of the monopolistic influeces exerted by the branch banker is
the ability to secure, by the payment of higher salaries, the transfer
to other points of the efficient employees of the unit banks. A general procedure in the creation of branch-banking systems in one of
our American States has been the absorption of local unit institutions.
During the first few years the operations of these local unit institutions have in many cases been sucessful because the enterprising and
pioneering talent that created the absorbed bank is still retained in
an official capacity; but men of this type will not long consent to
hold positions which are in their essence merely advisory, and there
is soon substituted therefor the type of employee who must be
bound by rigid instructions and is capable of interpreting them in
only a mechanical way. In case of an acute financial disturbance
demanding immediate action it is necessary for the representative
of the branch bank to refer back to the head office for instructions
as to his course of action, and a delay is occasioned by red tape,
which frequently makes it impossible for them to help in an emergency, even when they have the desire.
The relations of the national bank to operations in branch banking
have been the subject of a very widespread misunderstanding. In
order that the situation might be clarified and defined, the present
comptroller requested through the Secretary of the Treasury an
opinion of the Attorney General, which has just been handed down.
A previous opinion given by Attorney General Wickersham was to
the general effect that a national bank might not de novo establish
a branch bank. The present opinion from the Attorney General




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

makes it clear that none of the major or important incidental functions of a national bank may be exercised beyond the limits of the
city in which the parent institution is located. This opinion also
indicates that certain functions of a national bank incident to the
banking business may be carried on at fixed points within the city
limits and outside of the four walls of the banking institution.
This opinion is not inconsistent with that of Attorney General
Wickersham, and the practical application which will be made of it
will be that certain national banks will be permitted to establish
what are virtually tellers' windows in places more or less removed
from the banks, but in the city limits, where they may take deposits
and cash checks. The discretionary powers which are inherent in
such transactions as making loans, purchasing securities, and similar
activities will not be permitted to be carried on in such offices located
at a distance from the parent institution.
It seems to me unnecessary at the present time to do more than
make the above bare reference to the legal situation. The force of the
opinion of the Attorney General just handed down as a practical
matter removes the national banks from the branch-bank controversy, since a national bank can not engage in the banking business
outside of the city limits of its location, and inside of the city limits
it may under certain conditions perform only limited functions at
a distance from the banking house.
I am of the opinion that the comptroller could not properly permit
the establishment of these outside activities by a national bank, such
as tellers' windows, in any locality where the State laws or practices
prohibit the State banks from rendering similar services.
Authorization to national banks to establish such additional offices
will be of great advantage in certain localities where the State banks
are already extending their services in this manner. In such cities
as New York, Cleveland, Detroit, and California, the national banks
will be able to reach their customers in the matter of making deposits and cashing checks in the same way that their competitors do
in this single important aspect of the banking business. At the
present time in the city of Cleveland there are only three national
banks and in the city of Detroit only three. This will enable the
national banking system to really enter these two great cities, from
which they have previously been excluded, perhaps not on equal
terms, but at least on a living basis.
It is my opinion that the major question of branch banking is
not in any way affected by this differentiation of the functions of
the tellers' windows except to mitigate the handicaps that at present
exist in some great cities and that it can not by any possibility be
used for the extension of the principle of branch banking. The
banking arrangements of any individual city are distinctly a matter
for local determination. When the extension of branches passes the
city lines and becomes State wide a condition such as I have previously described is created, under which the whole balance of the
Federal reserve and unit banking system of a large section of the
country is disturbed and the fire will, in my opinion, very quickly
jump over State lines.
If the branch banking movement can not use the Federal reserve
system as an instrumentality for its extension, it will, in my opinion,
never become a great menace, and with the national banks extended




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a reasonable measure of facilities for self-protection within the limits
of the municipalities in which they operate the national banking
system and the Federal reserve system can be mantained in their
present status.
The office of the Comptroller of the Currency is one of the most
independent in the Government service. It is a part of the Treasury
organization, but the comptroller reports directly to Congress, and
his appointment is made by the President on the recommendation
of the Secretary of the Treasury, to be confirmed by the Senate,
and his term is not necessarily or usually concurrent with that of the
Secretary of the Treasury. This arrangement was made with the
obvious purpose of protecting the national banks with a leadership
which would be independent of undue "influence from other governmental authority. The Comptroller of the Currency should, in the
governmental organization, be the representative and, in my opinion,
the partisan of the national banks.
The suggestion for the abolition of the office of the Comptroller
of the Currency or the transfer of the essential functions of that
office to the control of the Federal Keserve Board would at one
stroke deprive the national banking system of its independent representation in the fiscal plan of the Government. In spite of the fact
that in the number of banks and in total assets the Federal reserve
system is more National than State, and the fact that the compulsory
membership of the national banks was the basis for the organization of the Federal reserve system, it is now proposed to deprive
them entirely of their independent status.
The operation of the national banking system is under the most
rigid supervision. When a group of individuals subject themselves
to this strict supervision and to the laws requiring a rigid observance
of fixed principles, it is to be presumed that they should receive some
compensating advantages and that such privileges as they receive
should be of a permanent nature and not be taken away from them in
a summary manner. The independent representation in the Government fiscal scheme by the national banks was part of the original
contract, and while, for the good of the country at large, the compulsory entrance of the national banks into the Federal reserve system
can be justified, nothing can justify their reduction from their
former independent status to one of complete subserviency to an
institution which is, in its nature, part privately and part governmentally controlled. The honor of the Government is involved in
the observance of all of the implications of any contract which it
makes.
Assuming that the powers of the Comptroller of the Currency
should be transferred to the Federal reserve board, or that the comptroller or some one acting in a similar capacity should be under the
direction of the board, the anomalous condition would be immediately created by which a trustee relationship would be entered
into in which the trustee would have a preferential claim
against the trust which was administered. With the powers of the
Comptroller of the Currency exercised under the direction of or by
the Federal Reserve Board we would have a Federal reserve system
composed of one group, the State banks, entirely relieved of super-




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visory regulation, and another group, the national banks, subjected
to the supervisory regulations of its principal creditor.
With his present independent status the Comptroller of the Currency has a primary duty toward the national banks. If he were
under the direction of the Federal Eeserve Board he would be obliged
to direct the operation of the national banks in the interests of their
greatest creditor. The national banks would be compelled to carry
on their affairs under the supervision of this sort of a creditors' committee, while their competitors, the State banks would operate independently. While the whole principle is wrong, the discrimination would be so unfair and so vicious that the only possible way to
restore equity as between the. two types of banks would be to subject
State banks to the same supervisory regulation as the national banks.
This would probably be impossible for legal reasons, and if legally
possible, would result in the withdrawal of the State banks from
the system.
In addition to the injustice of the violation of the direct implication of a contract and the unfair discrimination as between the two
classes of banks, this proposal would violate the fundamental principle of trusteeship, which is that a trustee must not have interests
which conflict with the interests of his trust, neither must he have
conflicting duties as between different classes of interests.
The authority and powers of the Comptroller of the Currency
over national banks is both judicial and supervisory, and if he were
under the control of the Federal Reserve Board, in passing judgment and directing operations he would do so in the position of one
who had an interest apart and often opposed to the interests of the
institutions under his direction. He would be under constant pressure to direct the operation of the national banks in the interest of
the Federal reserve banks, which are their potential and usually
actual creditors.
As the Comptroller of the Currency has responsibility for putting
banks into the hands of a receiver and for the operations of the
receiver, a dual relationship between the insolvent banks and the
Federal reserve banks would be even more impossible and reprehensible than in the case of operating institutions:. The Federal
reserve banks are in most cases the secured creditors of banks which
fail. They have a claim on the selected paper of the bank, and their
interest would be to press this paper for payment as rapidly as possible, regardless of the effect which such action would have upon
the depositor, who is a general creditor. In many cases it is found
that the Federal reserve bank has practically all of the good assets
and some of the doubtful ones to secure its claim. Quick action frequently destroys equities which are very valuable to the depositors
and to the other subordinate creditors.
Bankers of the United States are trained to the point of view of
proper administration of trusteeship. It is, to my mind, incon- >
ceivable that they should for one moment without protest permit a
relationship to develop which would clearly result in the creation of
a trustee who would not only have a dual relationship toward his
trust, but a dual relationship for obviously conflicting interests. It
would be a national calamity to the depositing classes of the United
States if their interests were not to be represented by authority




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independent of their greatest preferred creditor, the Federal reserve
banks.
The nnadvertised but chief function of the office of the Comptroller of the Currency is keeping banks from failing, and not
operating receiverships. To accomplish this the Federal reserve
S3'Stem is the most valuable instrument conceivable, but to use this
instrument for the protection of the banking situation the comptroller personally and through his examiners frequently approaches
the Federal reserve banks as an applicant for the extension of credit.
Can the comptroller in this situation successfully sit on both sides
of the counter and represent the needy bank and protect the assets
of the Federal reserve bank from which he is trying to borrow ? It
may be possible to find a few men who are of such a judicial nature
that they can fight aggressively on both sides of an issue of this
kind; and if so, they could satisfactorily fill this position, but it is
my observation that the type of good fighting examiner who saves
banks which are in difficulty is not always judicial as regards the
protection of creditors of the institution which he is struggling to
save. In my brief tenure of office I have found that this situation
often produces conflict between the representatives of the comptroller's office and the representatives of the Federal reserve bank.
I am glad that this is so. Each has interests to protect, which interests are not absolutely identical. The results of this healthy partisanship have been good. Any troubles that have grown out of it
are incidental and minor as compared with what would happen if
the Federal Eeserve Board were charged with entire responsibility
of relieving distress and conserving the assets without the stimulating pressure of independent governmental influence. Where
effective cooperation between the examiner and the Federal reserve
bank is not established under the present method it is, to my mind, a
justification for the removal of either the comptroller or his examiner, or of the responsible official of the Federal reserve bank. The
present relationship is healthy and natural and would not be improved by the type of hybrid comptroller that would be under the
orders of the Federal Eeserve Board.
The principal arguments adduced in favor of the abolition of the
office of the Comptroller of the Currency are that duplication would
be avoided and that a force of examining all of the member banks
would be more economically administered than one force under the
comptroller, examining the national banks, and another under the
Federal Reserve Board examining the State banks. It should be
thoroughly understood that under the present arrangement the examination of the Comptroller of the Currency is for supervisory
purposes as well as for credit purposes. Examination of the State
member banks by the Federal Eeserve Board is necessary for credit
purposes primarily. The reports of examinations of national banks
are available at the present time to all Federal reserve banks, and
while I naturally think they are good, I also believe that by consultation and cooperation with the officials of the Federal Eeserve Board
and banks it will be possible to effect material improvement along the
line of credit information and promoting the general liaison between
the member banks and the Federal reserve banks. It is quite possible
that the large organization now maintained in the office of the Comp-




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INQUIRY OX MEMBERSHIP IX FEDERAL RESERVE SYSTEM

troller of the Currency might be increased so that it could, with
economy and perhaps equal efficiency, carry on the credit investigations and examinations now being conducted by the Federal reserve banks. I do not, at the present time, advocate this, but it would'
effect the desired economies with much less violence to the fundamentals of the American banking system than would the abolition
of the independence of the Comptroller of the Currency. This
would possess the advantage of an examination which would be very
independent, but it would possess the disadvantage of depriving the
individual Federal reserve banks of control and knowledge of local
conditions through their direct representatives.
At the present time the most cordial relationship exists between
the office of the Comptroller of the Currency and the management
of the Federal reserve banks. The Bureau of the Comptroller of the
Currency is, in times of emergency, always anxious to assist the
Federal reserve banks by the loan of examiners or otherwise, and
meets with complete reciprocity from them.
The assumption in the above is that the Federal Reserve Board
would possibly appoint, and certainly have under its control, a
single individual exercising powers to a certain degree analogous
to those at present attaching to the office of the Comptroller of the
Currency. An arrangement of this kind seems to me the only one
which is conceivably practical. The suggestions, however, usually
take the form of having the Federal Reserve Board, as a board,
assume the functions of the Comptroller of the Currency. All of
the arguments against the type of comptroller who would act in such
a capacity would apply with equal force if the board attempted, as
such, to perform these duties. There are, however, additional
reasons why it would be impossible for the board, either directly or
through a subcommittee, to act in this capacity. The office of the
Comptroller of the Currency has been in existence for 60 yearsr
with all of the responsibilities and duties vested in a single person.
Around this office have grown up traditions, customs, and precedents
based upon rulings and decisions. These have become so fundamentally integrated with the operation of national banks and with
the person of the comptroller that it would be impossible, as a practical matter, to attach them to the board or to a committee of the
board. Many of the precedents have been established through
opinions of the Supreme Court of the United States.
The court has referred to the comptroller as a person possessing a
quasi judicial status. What would become of these precedents and
decisions if the office of the Comptroller of the Currency were
abolished ? In other words, if the opinions of the Supreme Court and
the rulings of the comptroller's office are based on the general theory
that the comptroller is a single person exercising quasi judicial as well
as executive powers, and it were attempted to transfer those powers to
a board, would not these precedents and rulings be destroyed ? Whoever takes over the powers and duties of the Comptroller of the Currency must, as a legal and administrative necessity, also take over the
status of the comptroller as evolved by customs and precedents and
as interpreted by the courts. This can only be done by an individual.
The office itself, therefore, could not be abolished or be transferred to
a group of individuals without repealing the fundamental purpose of




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

145

'the national bank act and thereby* disrupting the national banking
system.
The office of the Comptroller of the Currency has to be organized
for quick and summary decisions. A mob of depositors is never complacent enough to await the deliberations of a town meeting. If the
Federal Reserve Board is composed of the type of men of ability and
force of character that has typified this board in the past, each member, in self-respect, will insist on expressing himself and impressing
his personality on any proposed methods for relief, and the fire wagon,
if it arrives at all, will approach in orderly and dignified fashion long
after the last wisps of smoke have floated away and the ashes cooled.
Please understand that this statement would still be made if absolute
assurance could be given that the ablest men in the world would
always sit on this board. " Boards is boards/'
I can not resist a feeling little short of resentment that so many
suggestions and so many tendencies seem directed along lines prejudicial to the national banking system. If we are to have a national
banking system over which the Government exercises supervisory control, that control must be in the hands of an independent executive
and not the representative of a preferential creditor. The only fair
and only logical thing to do is either to continue the present system
with an independent comptroller or abolish the system entirely. A
man can not serve two masters, and a trustee who will act for two
•conflicting interests is ipso facto incompetent either mentally or morally.
This committee, of course, is sitting primarily to discuss the
reasons why nonmember banks do not voluntarily join the Federal
reserve system, and my expressions have been largely confined to the
relationship of the national banks who are compulsory members of
the system rather than to the direct objects of your investigations.
I am convinced that this committee would not, in pursuit of its more
direct purpose, desire to take any action which would place improper
burdens upon the national banks or leave undone any possible measure
for their protection. On this account it has seemed to me necessary
that this somewhat negative presentation should be made. No
measure which injures the national banks can be essentially helpful
to the Federal reserve system.
The general conclusions which I should like to have drawn from
my arguments are:
First, that the development of branch banking, unless curbed, will
mean the destruction of the national banks, and thereby the destruction of the Federal reserve system and the substitution of a privately
controlled reserve system for a governmental system of coordination.
Second, that if the Federal Reserve Board has not the power to
refuse the admission of institutions engaged in general branch banking and to curb the further extension of this principle by member
banks, they should be given that power.
Third, that the abolition of the office of the Comptroller of the
Currency would destroy the independent status of the national
banking system in governmental finance, and that the real issue
presented by this movement is the abolition of the national banking
system, as it can not be subjected to the supervisory regulation of an




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

interested creditor. If the natioilal banks are not entitled to independent supervision, they should not be supervised at all.
Senator GLASS. Mr. Dawes, it might interest you to know that the
most bitterly contested proposition, and the question at last decided
at 4 o'clock in the morning by the conferees of the two Houses of
Congress to reconcile the disagreeing votes, was this very question
that you have last discussed, of the membership of the Federal
Reserve Board ex officio of the Comptroller of the Currency and
the practical abolition of the office of the Comptroller of the Currency and the consolidation of his duties with those of the Federal
Reserve Board. As I have indicated, it was the very last question
determined, and we were from early in the afternoon of one day to
4 o'clock in the morning of the following day determining the question, the House having made the Comptroller of the Currency a
member ex officio of the board in its bill and the Senate having
eliminated him, and but for the secrecy of that conference I would
imagine that you had plagiarized my speech in conference.
Mr. DAWES. I thank you for the compliment.
The CHAIRMAN. Mr. Dawes, I am going to suggest that you place
a copy of the opinion of the Attorney General on this branch-bank
question in the record. Can you do that ?
Mr. DAWES. Yes. I have not got it yet; it has just been rendered.
The CHAIRMAN. If you will furnish that, it can be incorporated
in the record of the hearing.
Mr. DAWES. Yes; I can get it in a day or so. The Secretary of
the Treasury has it now, I suppose.
(The opinion referred to was subsequently submitted by Mr.
Dawes and is as follows:)
DEPARTMENT OF JUSTICE,

Washington, October 3, 1923.
SIR : I have your letter of August 30, 1923, requesting my opinion on the
power of national banking associations to open and operate offices at places
other than their banking houses for the performance of such routine services as
the receipt of deposits and cashing of checks for their customers. You request
to be advised whether—
(1) Assuming that a national banking association is without power to establish and maintain a branch bank for carrying on a general banking business,
has it the corporate power to open and operate an office or offices at a place or
places other than its banking house, for the performance of such routine services as the collection of deposits and cashing of checks for its customers V
(2) If a national banking association has the corporate power to open and
operate such an office or offices, must they be located within the city limits of
the place designated in the organization certificate of the association as the
place where its operations of discount and deposit would be carried on?
The statutes relating to national banking associations, so far as they are
material to our present inquiry, are sections 5133. 5134 (par. 2), 5138 (pars. 6
and 7), and 5190, R. S. The material parts of said statutes read as follows:
" SEC. 5133. Associations for carrying on the business of banking under this
title may be formed by an number of natural persons, not less in any case than
five. They shall enter into articles of association, which shall specify in general
terms the object for which the association is formed, and may contain any other
provisions, not inconsistent with law, which the association may see fit to adopt
for the regulation of its business and the conduct of its affairs."
" SEC. 5134. The persons uniting to form such an association shall, under
their hands, make an organization certificate, which shall specifically state—
*
*
*
*
*
*
*
" ' Second. The place where its operation of discount and deposit are to be
carried on, designating the State, Territory, or district, and the particular
county and city, town, or village.'




INQUIRY ON MEMBERSHIP "IN FEDERAL RESERVE SYSTEM

147

" SEC. 5136. Upon duly making and filing articles of association and an organization certificate, the association shall become, as from the date of the
execution of its organization certificate, a body corporate, and as such, and in
the name designated in the organization certificate, it shall have power—
*
*
*
*
*
*
*
" ' Sixth. To prescribe, by its board of directors, by-laws not inconsistent
with law, regulating the manner in which the stock shall be transferred, its
directors elected or appointed, its ofiicers appointed, its property transferred,
its general business conducted, and the privileges granted to it by law exercised and enjoyed.
" ' Seventh. To exercise by its board of directors, or duly authorized officers
or agents, subject to law, all such incidental powers as shall be necessary to
carry on the business of banking; by discounting and negotiating promissory
notes, drafts, bills of exchange, and other evidence of debt; by receiving deposits; by buying and selling exchange, coin, and bullion; by loaning money
on personal security; and by obtaining, issuing, and circulating notes, according to the provisions of this title.'
" SEC. 5190. The usual business of such national banking associations shall
be transacted at an office or banking house located in the place specified in
its organization certificate."
The provisions of section 5190 R. S., as to the place at which the usual business of the bank shall be transacted, refers to the city or town in which the
bank is located and not the particular place within the city. (McCormick v.
Market National Bank, 165 U. S. 538, 549.)
National banks have only those powers specified in the national banking
acts, and such other powers as are necessarily incidental thereto. (McBoyle
v. Union National Bank, 122 Pa., 458; First National Bank v. National
Exchange Bank, 92 U. S. 122, 127; Logan Co. National Bank v. Townsend,
139 U. S. 67, 73; Bullard v. Bank, 18 Wall, 589, 593.)
In Bullard v. Bank, supra, the Supreme Court said:
" The extent of the powers of national banking associations is to be
measured by the act of Congress under which such associations are organized."
In Logan Co. National Bank v. Townsend, supra, the court said:
" It is undoubtedly true, as contended by the defendant, that the national
banking act is an enabling act for all associations organized under it, and
that a national bank can not rightfully exercise any powers except those
experssly granted by that act, or such incidental powers as are necessary
to carry on the business of banking for which it was established."
It is to be observed that section 5190, R. S., relates to the " usual business"'
which, in my opinion, is to be construed the general banking business usually
conducted by national banks. There is no statutory requirement that all the
business of a national bank shall be transacted at the general office or banking house of the association.
In my opinion, a national banking association may establish in the city or
place designated in its certificate of organization an office or offices for the
transaction of business of a routine character, which does not require the
exercise of discretion, and which may be legally transacted by the bank
itself. It may not, however, establish a branch bank to do a general banking business such as is usually done by national banks. The establishment
of such a branch would be illegal, and subject the offending bank to the
forfeiture of its charter. (29 Op. 81.)
It seems to be the intent of the national banking act that the business of
banking ordinarily transacted by a national banking association shall be performed in the city or place designated in its organization certificate.
It has been held that a national bank can not make a valid contract for
the cashing of checks upon it, at a different place from that of its residence,
through the agency of another bank. (Armstrong v. Second National Bank,
38 Fed. 883,886.)
While national banking associations may exercise all the powers expressly
given them by the statute, and such additional powers as may be necessary
to carry on the business of banking, the manner in which the powers may be
exercised are subject to the supervision of the Comptroller of the Currency.
Should the comptroller, in the exercise of his supervisory powers over national
banks, ascertain that the directors or officers have knowingly violated, or are
violating the national banking laws, he may proceed against such association,




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INQUIRY ON MEMBERSHIP IX FEDERAL RESERVE SYSTEM

its officers and directors as provded by section 5239, II. S., which reads aw
follows:
" If the directors of any national banking association shall knowingly violate,
or knowingly permit any of the officers, agents, or servants of the association
to violate any of the provisions of this title, all the rights, privileges, and
franchises of the association shall be thereby forfeited. Such violation shall,
however, be determined and adjudged by a proper circuit, district, or territorial court of the United States, in a suit brought for that purpose by the
Comptroller of the Currency, in his own name, before the association shall be
declared dissolved. And in cases of such violation, every director who participated in or assented to the same shall be held liable in his personal and
individual capacity for all damages which the association, its shareholders,
or any other person, shall have sustained in consequence of such violation."
Answering your specific questions I have the honor to advise you as follows:
First. National banking associations have the power to open and operate
offices at places other than their banking houses, within the place specified
in their organization certificate, for the performance of such routine services
as the receipt of deposits and the cashing of checks for their customers.
Second. National banking associations have no authority to open offices for
the purpose of receiving deposits, paying checks, etc., outside of the limits of
the city or place designated in the organization certificate as the place of its
operations of discount and deposit.
Respectfully,
H. M. DAUGHERTY, Attorney General.
The

SECRETARY OF THE TREASURY.

Senator GLASS. Just for information, do you recall whether the
Attorney General in his opinion undertook to exactly describe what
activities of a national bank might be performed within the city
In which it was located and what activities would be excluded?
Mr. DAWEIS. I believe, Senator, that I had better get Mr. Collins
to answer that. I am not a lawyer.
Senator GLASS. Neither am I.
Mr. DAWES. I might give you what I wanted, rather than what
it was; and so I will get Mr. Collins to answer that question.
Mr. COLLINS. I have just glanced over the opinion; and my impression is that the Attorney General there made a distinction between the discretionary powers of the bank as exercised by the
board of directors and certain incidental powers which a bank
would have, which were necessary to carry on the banking business. These incidental powers, since they do not involve the exercise
of discretion, might be exercised away from the banking house.
The CHAIRMAN. That would be by the receipt of deposits and
the payment of checks almost exclusively, would it not?
Mr. COLLINS. Yes; I think so.
Mr. DAWES. That is our inference from it. I think that is what
he said.
Senator GLASS. Yes. I would like to see the opinion, because it
is inconceivable to me that the Attorney General would undertake
to say that a national bank might, through the medium of a
branch, exercise a particular function and be denied the right of
another particular function—the legal right, I mean, and not the
administrative regulation of the comptroller.
Mr. COLLINS. I think the distinction was that a national bank
could not operate more than one bank under the same board of
directors.
Mr. WINGO. In other words, Mr. Collins, the Attorney General
made the distinction between having an outlying office for purely
administrative actions, and the exercise of discretionary banking




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149

powers that are incident to the primary operations of a national
bank?
Mr. COLLINS. Yes.

Mr. WINGO. In other words, the purely administrative acts that
do not call for discretionary powers and decisions that are incident
to the parent institution?
Mr. COLLINS. That is, they are denied the right to have a branch
bank as an institution capable of carrying on a general banking
business coordinate with the parent bank.
Senator GLASS. Well, I still find myself confused in the matter.
The comptroller in his very strong argument in opposition to branch
banking has explicitly said that it is impossible for a branch bank
to effectively perform discretional powers. At all events, I would
be glad if the opinion of the Attorney General was put into the
record, so that we may see what it is.
Mr. STEAGALL. I do not see how a distinction can very well be
made between the collection of checks and the receipt of deposits
and any other function of banking, and any exercise of power by
the officials of the bank. If they open an office in one corner of
the town simply to take deposits and to pay checks, it will be banking in all its greatest essentials.
Mr. DAWES. I would not call it the greatest essential.
The CHAIRMAN. A decision was made in Pennsylvania along that
line; because I remember when the first downtown bank in Philadelphia opened uptown offices, they were confined to that very proposition.
Senator GLASS. Were they confined to it by statute, or were they
confined to it by the banking authorities of the State ?
The CHAIRMAN. My understanding is that it was an opinion of the
banking commission of the State.
Mr. Dawes, I thought we all recognized the fact that there is a
complicated situation to deal with on this question of branch banking, as it has grown up or been permitted to develop. I judge from
what you have said here that you have a pretty definite idea as to the
future of this situation, if the Attorney General's opinion holdsgood ?
I do not think that the opinion of the Attorney General has*
an}7 great bearing on the great question of branch banking,,
except just this: That in some of the great cities—I have mentioned
in my statement Detroit, Cleveland, New York, and some California
cities—the national banks are being put out of business because they
can not get to their depositors. I do not want to make too broad a
statement; but my conclusion from what the best bankers have told
me is that they do not like the branch banking idea; and that the
bankers of New York, Detroit, and Cleveland do not want to go into
branch banking; that they do not want to have the discretionary
powers of banks extended outside their banking houses even in the
city limits. They do not want such a thing to happen as I heard
of in one case: An individual went down to the parent institution,,
and made an application for a loan of $40,000, which was refused by
the officers of the bank. He got in his car and drove to the branch
of that bank in the same city, applied for the $40,000 loan there, got
the $40,000, and the bank lost $40,000.




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Now, that is the difference between a branch bank and an agency.
But I think that in those towns where they have that congestion, on
account of the automobiles and the topography of the country, they
simply want to get places at which theier depositors can get to them
easily to make deposits and cash checks. And I do not think that
that can be used for the extension of branch banking, so long as it
is perfectly clear that they can not extent those facilities beyond
the city limits—I do not think that can possibly be used as an entering wedge to go into the branch banking business; but I do think
it will preserve the national banks from extinction in those cities
where the State laws permit branch banks. But as I have said, I am
not a lawyer
Mr. STEAGALL (interposing). Let me ask you a question right
there: How can the opinion of the Attorney General limit the rights
of national banks to establish branches, within the purview of his
opinion, in States where State laws allow State banks to have
branches, and not permit national banks to have that right in all
the States? If the national banking law carries with it the power
to organize branches, they must have that power in every State of
the Union, regardless of what the States do. That seems to me clear.
Mr. DAWES. I am glad you asked that question, because I was going to answer it; but that clarifies the situation.
This right that the Attorney General recognizes is only a minor
incidental right of a bank to exercise certain limited functions where
they are necessary. It is based on the incidental functions necessary
to the operations of the bank. Now, if anybody can tell me why it
should be necessary for a national bank in—well, I will name Kansas
City; I do not think the issue is up there—why it should be necessary
for a national bank to establish these branches there, where none of
the State banks find it necessary to do so, and where the State laws,
perhaps, forbid it, I would like to know about it. I can not see how
it possibly could be necessary.
Mr. STEAGALL. I should say that clearly they might desire to extend their branches for the purpose of accommodating their customers, as well as for the purpose of meeting competition. It
would certainly not be a violent assumption that the banks would
be actuated by a purpose to accommodate their patrons as well as
to meet the situation from the standpoint of competition.
Mr. DAWES. Yes, certainly; but somebody
Mr. STEAGALL (interposing). I can not for a moment see how it
would be anticipated that the exercises of this right; would be limited to States where State banks are doing this. If it is recognized
that they have the right to do it at all, it would seem to naturally
follow that in any large city where it would be necessary in order
to accommodate their customers, they would resort to that method.
Senator GLASS. I believe it has been testified here that there is
but one national bank nemaining in the city of New Orleans. If
that bank should deem it necessary to its very existence to establish
branches in that city, do you take it that it would, be prohibited
from doing so by the opinion of the Attorney General?
Mr. DAWES. NO; I think the Louisiana laws permit the establishment of branches. I think in that particular case the State law
would permit it.




INQUIRY OS MEMBERSHIP Us FEDERAL RESERVE SYSTEM
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151

Senator GLASS. Well, the State law can not permit the establishment of a branch of a national bank?
Mr. DAWES. No. I would like to take another shot at it, because
I think none of you have got my point,
The Attorney General says that a national bank—that is my construction of his opinion—that a national bank may exercise certain functions which are incidentally necessary operations, beyond
the walls of the bank; and I would assume that if those functions
were not necessary they would not be legal; they could be stopped.
Mr. STEAGALL. But you assume that they will not be necessary, or
will not be deemed necessary, except in States where the State law
permits State banks to establish branches. Whereas, it seems to me
that it would quite naturally follow that a national bank, regardless
of what the State law provided, in any large city might very readily
conclude that it would meet the requirements of their customers to
have branches.
Mr. DAWES. YOU can state my position, and you can state the answer to it very easily. I will re-form that statement
Mr. WINGO (interposing). I presume, Mr. Comptroller, that your
statement of what the Attorney General decided is purely your first
impression; but your final conclusion as to what you can permit
under the law and the opinion of the Attorney General would be
reached only after close scrutiny of the law and the opinion, and
after considering what your legal advisers informed you was the
legal effect of the opinion.
Mr. DAWES. I think I might go a little further, Mr. Wingb, and
that I can make it clear that the power to exercise any of these
functions outside of the walls of the bank is due entirely to the fact
that these functions must be incidental and that the necessity must
exist. Now, if the necessity exists in Kansas City, all right. But
I do not think, Mr. Steagall, that very many Comptrollers, or very
many courts, would hold that it was necessary for a national bank
to do a thing of that kind in a city where none of the State banks
did it, and where their State laws did not permit it.
Senator GLASS. Well, but necessity and legality are two separate
propositions.
Mr. DAWES. I do not think they are.
Senator GLASS. Well, I do. I may think a thing was very necessary, but the court might say it was illegal.
Mr. DAWES. That discretionary power in all other cases, and I
suppose in this, is with the comptroller.
Senator GLASS. Yes; that is just what I am trying to do, Mr. Comptroller, to separate what you may do administratively from what
the Attorney General says may legally be done; that is what I am
trying to do. If it is legal to establish a branch of a national bank
in one city, it is obliged to be legal to establish a branch of a national
bank in another city.
Mr. STEAGALL. Absolutely.
Mr. DAWES. I do not think so.
Senator GLASS. It may be that the comptroller in his discretion—
and he has a discretion by law—might say that it is necessary to establish a branch of a national bank in one city, and it is not necessary




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to establish a branch of a national bank in another city; but that is
a entirely different problem.
Mr. DAWES. Well, I will repeat again: I want to give it exactly
as I read the opinion. In the first place, the comptroller has great
discretionary powers, I am quite certain, along those lines.
Senator GLASS. Yes.
Mr. DAWES. The opinion is, I think, based on precedent, and the
law that the comptroller may exercise discretion in the decision as to
wyhat are necessary incidental functions.
Mr. WINGO. I think there is no question but that Senator Glass
has expressed, in very happy language, the legal principle. If the
First National Bank of New Orleans has the right to do a thing in
the city of New Orleans, every other first national bank, and every
other national bank anywhere has the same right.
Mr. DAWES. Under the same conditions.
Mr. WIISTGO. No—the power. We are not talking about the conditions
Mr. WINGO. The power, rather. As to your discretion—-I think
possibly there is where you are about to fall into error, and I want to
correct you. I think in the main you are going to' adopt the common sense view, and the fundamental principle view, instead of
yielding to expediency and necessity. I do not want you to go off
into that. Necessity knows no law, and the law does not know
necessity. It is either the law or it is not.
Now, your discretion will have to be exercised within the confines of the law that has been laid down; and I think that on mature reflection and examination, you will find that there is nowhere
any decision that it would be legal for a national bank in one city
to do something that it will be illegal for a national bank in another
city to do, even though the conditions might be different. I think
you will find that, however desirable it might be.
Now, if it is desirable to do that, I think there will have
to be a clear, explicit authority of law to permit you to meet
the conditions, which are purely based upon the old expediency
argument of meeting competition. If it is necessary for the life of
a national bank that discretionary powers should be lodged with the
comptroller to permit branch banks to meet competition in certain
cases, I think that power ought to be given to you. I do not think
there is any question but that Senator Glass has explained clearly the
legal principle: It is either the 1Mw or it is not; and if it is the
law for one bank, it is the law for all of them.
Mr. STEAGALL. And if it is the law in one State, it must be the
law in all States, regardless of State enactments.
Mr. WINGO. And may I suggest this to you ? That this whole controversy arises out of the fact that at the time the national banking
act was enacted—and the courts will try to arrive at what the intent
of the legislative body was in reaching a decision—at that time using
the expression " exercising certain powers as might be necessary ' r
was merely intended to cover powers which it was necessary to have
and as the}^ are declared by law; and it was in the light of conditions
that existed at that time that it is to be construed; and no legislative
body contemplated that a situation might arise where it would be wise




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153

to authorize discretionary powers to be exercised purely as a competitive club.
For illustration, in the tariff laws, Congress had to tell the customs
authorities that they might use the reciprocity principle. The Secretary of the Treasury had no authority, in order to protect American
trade, and to build up American commerce, to say, " I will make reciprocity agreements with other countries," however desirable he
might think it to be. That question was one for the legislative body
to decide.
And I think that is an illustration that is comparable to the
power of the comptroller here. It may be desirable. But I want to
repeat—I am one who is very happy to find that you in your position
are one who is going to go back to the fundamentals and the principles, and not yield to expediency, and rule that you can do as you
please to meet a situation that might arise in one locality and not
arise in the other. I think you would get yourself into trouble if you
started on that road.
Mr. DAWES. I tell you, Mr. Wingo, that we have studied this question all the summer; and I think we have some pretty good attorneys.
I would like to have Mr. Collins, who is a very good attorney, give you
his views about that.
Mr. WINGO. DO not misunderstand me. I want to express great
appreciation of what you have said this morning. I have been delighted with your expressions. We find many witnesses who do
not give us any information whatever, even with considerable pumping. You have made a very gratifying witness to me personally,
whether we agree with you or not—which we are not always sure of
as to other gentlemen who have been before our committee in the
last three or four years.
The CHAIRMAN. Would you like Mr. Collins to make a statement,
Mr. Dawes?
Mr. DAWES. I would like Mr. Collins to make a statement, because
I have made a very poor effort to explain the legal situation.
Senator GLASS. The opinion of the Attorney General, if put into
the record, will be conclusive of all of this discussion.
Mr. WINGO. Yes; and I do not think you have made a poor argument, Mr. Dawes. As I said a moment ago, you have simply given
your first impressions of the opinion. I have an idea that a man
of your mental processes, as indicated by what you have just read,
when you have scrutinized that opinion closely—and you will probably call upon Mr. Collins and your legal advisers several times
for their views in order to enable you to arrive at a conclusion of
what your powers are under the opinion of the Attorney General—
will reach the correct decision.
Mr. DAWES. AS I have said, we have studied this thing ever since
I have been in office and we have reached our conclusions after
mature deliberation. So we have considered it in all its aspects.
This opinion is no surprise to me. I would be very glad, however,
to have Mr. Collins give his views on the question.
The CHAIRMAN. We will be very glad to hear from Mr. Collins.
What is your full name, Mr. Collins ?




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STATEMENT OF MR. CHARLES W. COLLINS, DEPUTY COMPTROLLER OF THE CURRENCY
Mr. COLLINS. My name is Charles W. Collins.
The CHAIRMAN. Just what is your position ?
Mr. COLLINS. Deputy Comptroller of the Currency.
The point presented is whether, even though it were legal for a
national bank to establish an agency of this kind, it could be established without the approval of the comptroller—whether, in theexercise of his discretionary powers, his general power of supervision
over the national banks, he could pass upon the question of the
necessity for the particular exercise of this incidental power in each
instance.
That is to say, whether the discretion rested solely in the board
of directors to say whether it was necessary for a particular bank to
open up this office in this locality, or whether it had to go one step
further and involve the authority of the comptroller to pass upon
the question of the necessity.
Now, the comptroller's position is that the act is not complete
until he has passed upon the question of the necessity for each particular operation.
Senator GLASS. Well, nobody questions that. That is not in controversy at all. It is legal to establish a national bank, but it is
not legal to establish a national bank simply because somebody wants
to establish it; it can not be established unless the comptroller assents.
Mr. COLLINS. Well, then, Senator, a national bank in a city makes
application for one of these offices to the comptroller
Senator GLASS (interposing). And the comptroller has to pass
on it?
Mr. COLLINS. He has to pass on it.
Senator GLASS. Well, nobody questions that for an instant.
Mr. COLLINS. He may disapprove it.
Senator GLASS. Well, nobody questions his right to do that.
STATEMENT OF HON. HENRY M. DAWES, COMPTROLLER OF THE
CURRENCY—Resumed
Mr. DAWES. Well, Senator, this has brought out just what I
thought. You have misunderstood me. I do not take the position
that because a State law does not permit branch banking I could
not grant a right to a national bank; but a condition will be produced by the lack of State laws—or the State law forbidding a
thing—which would, in my opinion, in every case I could conceive
of, make it unnecessary to have a branch bank there. That is just
what I meant.
Senator GLASS. Well, Mr. Comptroller, in my humble judgment
all of this is perfectly extraneous and foreign to the purpose of this
committee. I think you yourself in your statement recognized the
fact that your very forceful argument against the establishment of
branch banking institutions and your, in my judgment, conclusive
argument against the abolition of the office of the comptroller are
not the things that this committee was instituted to determine.




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Mr. STEAGALL. I think. Senator, that this much is pertinent, however, as you will agree: Yesterday we had a statement to the effect
that some State banks had been denied admission to the Federal
reserve system.
Senator GLASS. Yes; that is what I am coming to.
Mr. STEAGALL. Because of the fact that they do have branches; on
that account it was deemed unwise to admit them into the Federal
reserve system. Now, that part of the discussion would all be pertinent for us to deal with.
Mr. STRONG. We had a lot of argument for branch banks also.
Senator GLASS. Yes. Having that in mind I want to ask the
comptroller this question bearing immediately upon our mission, and
that is, Mr. Comptroller, whether you think the enactment of a law
by the Congress giving the Federal Eeserve Board the right to
exclude from membership in the Federal reserve system a State
bank having branches would result in excluding more State banks
than it would bring in ?
Mr. DAWES. In the first place, I am not sure, Senator, that I
exactly understand your question.
Senator GLASS. Let me repeat it, then: Should Congress empower
the Federal Reserve Board to exclude from membership in the Federal reserve system State banks having branch banks, what would
be the effect of that upon the Federal reserve system ?
Mr. DAWES. I do not know the exact facts; but my impression is
that there would not be so very many State banks with branches
that are not in the system now. I do not think there are.
Senator GLASS. Well, would not all of those banks immediately
retire from the system ?
Mr. DAWES. YOU mean a law which would compel the withdrawal
of banks with branches ?
Senator GLASS. Well, practically that.
Mr. STEAGALL. N O ; he means a law which would authorize the
board so to rule and regulate.
Senator GLASS. Well, if we were to enact a law explicitly that
State banks having branches are not eligible to membership in the
Federal reserve system, would not all the State banks now in the
Federal reserve system which have branches immediately withdraw?
Mr. STRONG. They would have to do so.
Senator GLASS. And would any of the larger State banks which
have or might contemplate having branch banks join the Federal
reserve system ?
Mr. DAWES. I will have to split that question: First, I think the
great big banks with branches would withdraw. Personally, if you
want my opinion, I would not favor any legislation which would
compel the withdrawal of any of these banks which are in now; but
I would favor some act to stop the extension of branch banking right
here. I am not talking about intracity arrangements, but when
they go outside of the city where their banking house is.
Senator GLASS. Well, would such an act conduce to bringing State
banks into the system, or repel them ?
Mr. DAWES. I do not think it would have any effect. I think that
if the policy of the Federal reserve system were to stop right here




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

<>n this branch banking, you would not lose any banks. At least the
issue would be precipitated.
The CHAIRMAN. Would it be fair to stop there and permit some
banks to maintain branches and others not to do so? Would not
that be an inequitable proposition? It would be a preference to
those banks that are already in, would it not?.
Mr. DAWES. I do not think it would work any hardship. They
had an opportunity to go into the system and they have not done so.
I would not worry very much about that. It is unwise, considering
the general good of the country. I would consider that as only an
incidental question. I think the greatest chains of branch banks
in the country would talk about withdrawing from the system if
they were compelled to limit their extensions, but I do not think
they would actually withdraw.
Mr. WINGO. Well, on the proposition of that being pertinent to
this inquiry, may I suggest that one State banker not only gave as
his reasons for not coming into the system but has reasons for even
declining to answer our questionnaire. In a personal and confidential talk with one member of the committee, he said, " I am not
going into the Federal reserve system, because it is dominated by
men who are in favor of the extension of the branch banking system,
and that the leader of that movement is one of the dominating members of the advisory council;" and he says " I do not propose to put
my head into the lion's mouth."
So I think it is very pertinent. I think this drive for the purpose
of destroying independent banking and substituting a branch banking system, such as that of Canada and England, is one thing that
is keeping State banks out, because they believe that the Federal
reserve officials are leaders in this branch bank movement.
Mr. DAWES. Well, all of them are not. [Laughter.,]
Mr. WINGO. Yes; I have discovered that.
Senator GLASS. Well, suppose all of them are. Suppose you were
to reverse your position on branch banking, and all other members
of the board regularly appointed, or ex officio, would be in favor of
branch banking. How could this banker who stays out improve his
condition by staying out? He would not prevent branch banking
by staying out, nor could he secure branch banking by coming in.
What has that to do with it?
What we are trying to find out, Mr. Comptroller, is why State
banks do not join the Federal reserve system, and what may be
done to induce them to join. We are not trying to find out exactly
whether branch banking is the right thing or whether the independence of the comptroller's office ought to be maintained. I agree
that it ought to be maintained. I do not know whether branch
banking is a good thing or not. But what I want to know is why
State banks do not come in, and what we can do to induce them to
come in?
Mr. DAWES. Well, I do not know, Senator; and perhaps I am
getting away from what you want here
Mr. SEAGALL (interposing). Before we leave the branch banking
question, let me ask this question. I thought if the comptroller was
oing into a general discussion, before he left the question of branch
anking, I would like him to answer one question.

f




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157

Mr. DAWES. It will not take me one minute to finish. All I want
to humbly do is to suggest that you do not pay too high a price to
get some of these nonmember banks into the system.
Senator GLASS. But what we want you to tell us is what to do to
get them in?
Mr. WISTGO. Well, if some of the State banks will come in if you
stop this branch banking business, that will appeal to you as a
pertinent proposition, will it not?
Mr. DAWES. Yes; I think we would get as many as we would lose.
Mr. WINGO. Take the State of Missouri, for instance: I know there
are some State banks out there that have great respect for the members of the advisory council in Missouri—and he is a leader in the
branch bank movement. Are you familiar with the litigation that
arose out there?
Mr. DAWTES. Yes.
Mr. WINGO. And

they are not going to come into the Federal
reserve system because they think it is dominated by the branch bank
leaders; and they frankly say so.
I happen to know this by personal conversations, in Missouri.
Mr. STRONG. It may be true of the bankers of Kansas also.
Senator GLASS. Well, sir, it may be stupid. But I would like for
the comptroller to tell me how coming into the system or staying
out of the system because of branch banking effects the banking business of the man who refuses to come in and insists upon staying out ?
Mr. DAWES. YOU mean the individual?
Senator GLASS. Yes.
Mr. DAWES. Well, I will tell you: Take the individual out in
California who feels that the individual unit national bank is slipping; he feels that he is slipping
Senator GLASS (interposing). The national banker?
Mr. DAWES. The national banker; and I presume the independentunit State bank also. And please do not forget the national bank,
because he has got to do what you tell him to.
Senator GLASS, Well, but would the independent State banker slip
any farther if he should become a member of this system—of the
Federal reserve system? Would he slip any more quickly? Would
he relieve himself of the competition of the branch banks or would
he incur it more ? Would he slip any faster ?
Mr. DAWES. Yes; he would ruin himself.
Senator GLASS. If he would come into the Federal reserve system ?
Mr. DAWES, I will have to answer the whole question. I can not
answer that categorically.
Senator GLASS. All right.
Mr. DAWES. If the independent-unit State banker will join the
Federal reserve system, and all of them in the country join, and the
Federal reserve system permits branch banking, yes, he is ruining
himself. They see that in the offing. They feel that they are fighting for their lives in one State, and they do not want to connect
themselves with an organization which will help the general system
of branch banking. Now, you want to get them in. They will not
be convinced by generalities; but they want to know that they would
be joining a system that would be comfortable for them, and they
feel that a system with branch banks is working against them.
107679—26—PT 1




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Senator GLASS. Mr. Dawes, can Congress prevent State banks from
establishing branches?
Mr. DAWES. I do not think it can. But I do not think that is necessary for Congress to take action. If the Federal reserve system is
not used as an instrumentality for establishing branch banks, I
think you will find that the States will drop it.
Mr. STEAGALL. I want to ask you a question right there: Do you
hold that under the Federal reserve act the Federal Reserve Board
has a right to exclude a State bank from membership in the Federal
reserve system because of the fact that the State bank is engaged in
branch banking?
Mr. DAWES. Mr. Wyatt is here. He is the counsel of the Federal
Reserve Board. I do not know whether he wants to express himself
on that point,
Mr. STEAGALL. Well, I am asking you that question.
Mr. WINGO. Well, let us have the whole thing. That question was
raised yesterday in Mr. Dawes's absence. There was a controversy
among the members of the committee as to whether or not the language used in the act with reference to the admission of State banks
upon conditions fixed by the Federal Reserve Board gave the board
the power as one of the conditions to say, " You shall not engage in
branch banking," or, " We will not admit you because you have got
branch banks." Now, one group contends that under the law, the
language used—but you may not remember it, so that I will read it
to you.
Here is the language in controversy, so that you can answer the
question fully. It says:
Subject to the provisions of this act and the regulations of the board pursuant
thereto, any bank becoming a member of the Federal reserve system shall retain
its full charter and statutory rights as a State bank or trust company, and may
continue to exercise all corporate powers granted to it by the State in which it
was created, and shall be entitled to all the privileges of such bank.

And that condition clause is this:
The Federal Reserve Board, subject to certain conditions as it may prescribe, may permit the applying bank to become a stockholder in such Federal
reserve bank.

Now, the isue is over the interpretation of that language. And
Mr. Steagall wants to know your opinion on that issue—as to the
legal effect of that language?
Mr. DAWES. My opinion is that the Federal Reserve Board can
exclude the State bank having branches. But I think you will find
very much more competent witnesses to advise you on that. That is
a legal question.
Mr. STEAGALL. The reason I am asking you the question is, not
only because I have a respect for your opinion, but because you are
one of the men who are exercising the power on that point; and it is
well for Congress to know where we are with reference to that provision of the Federal reserve act.
Mr. WINGO. It is not a question of the wisdom; it is a question ot
the power.
Mr. DAWES. Well, Mr. Wyatt is here, and he knows about that.
Senator GLASS. Mr. Wyatt gave his opinion yesterday.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

159

Mr. STEAGALL. I asked you because you are one of the members
of the Federal Reserve Board. And your attention has been directed to it.
Mr. DAWES. From the analysis I have seen of the thing, and from
what I have read of the law, I think they have the power.
Senator GLASS. Then is it your opinion, Mr. Dawes, that under this
language of the Federal reserve act, "The Federal board, subject to
such conditions as it may prescribe," may or may not admit an applying bank to membership in the Federal reserve system—that the
board can prescribe a condition under that language which would be
absolutely contrary to the specific provisions of the law ?
In other words, the law says now:
All banks admitted to membership under the authority of this section shall
be required to comply with the reserve and capital requirements of this act.

Suppose the board under this broad grant, "Subject to such conditions as may be prescribed by the board," were to prescribe a condition that a bank might be admitted that did not have the capital
requirements: Would that regulation be valid?
Mr. DAWES. I should think not, if I understood you correctly. You
were asking me
Mr. STEAGALL (interposing). Senator, suppose you read him the
other language in the act?
Senator GLASS. Very well, then. Here is another provision that
says:
Subject to the provisions of this act, and to the regulations of the board
made pursuant thereto, any bank becoming a member of the Federal reserve
system shall retain its special charter and statutory rights as a State bank or
trust company, and may continue to exercise all corporate powers granted to
it by the State in which it was created.

Do you think the Federal Eeserve Board has a right to make a
regulation that would nullify that provision of the act ?
Mr. WINGO. Well, Senator, have you read any provision on branch
banks ?
Mr. DAWES. YOU are stating the question and reading sections of
the law, and then asking me if I think the Federal Eeserve Board
has a right to break the law. ISfo, I do not think it has.
Senator GLASS. Neither do I ; but your lawyer does. [Laughter.l
Mr. WINGO. May I ask you a question there, Mr. Comptroller?
May I present the other side, in fairness to you, so that your opinion
will not appear to be predicated upon an error ?
Mr. DAWES. I do not set up for a lawyer.
Mr. WINGO. I know that. The Senator called your attention to the
provision with reference to reserves. The law fixes the reserve requirements ?
Mr. DAWES. Yes.
Mr. WINGO. So the

board has no discretion with reference to the
amount of reserves, and can not include the amount of reserves in
its conditions
Senator GLASS (interposing). And so the law fixes what a State
bank may do with respect to the exercise of its State franchise when
it becomes a member




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Mr. WINGO (interposing). Will you permit me to finish my
question ?
Senator GLASS. Yes; certainly.
Mr. WINGO. I challenge the Senator to show me one single provisiqn of the law on branch banking. It is not in there. So if the
board should rule that a State bank could not come into the system
if it is a bank that has branches, it would not be contrary to law,
because the law has said they might prescribe conditions. Those
conditions can not nullify the law; but if the law has not undertaken to cover any question, then it is within the discretion of the
board to prescribe conditions covering the things not covered by
express statute or by reasonable interpretation of the statute.
I presume, in fairness to the Senator's position, that he considers
that this provision, that after they become members they may exercise all their franchises and rights as a State corporation, permits
them to establish branch banks.
But Congress has said, as a condition precedent to a State bank
coming in, that " subject to the provisions of this act and to the
regulations of the board made in pursuance thereto."
And what are they? " Made pursuant thereto," by fixing conditions. Conditions to do what ? To do something covered by express
provisions or reasonable interpretations of the statute—a power that
is expressly given or that is carried by reasonable interpretation of
the statute?
No. Nowhere did Congress cover the branch-banking question.
It did not say whether they should be admitted if they had branches
or how many branches.
But this exercise of franchise power is not an absolute power.
The grant of Congress with this condition precedent is to be construed so that they can exercise these powers, subject not only to the
law but to the regulations and the conditions that are laid down.
That is a legal proposition, and I am sure the legal mind of my
friend, the Senator from Virginia, will readily grasp it.
Mr. STEAGALL. " Conditions and regulations made in pursuance of
this act." What does this act say? That when they come in they
shall exercise all the powers and rights given them by the States to
do business.
Senator GLASS. Mr. Dawes, the State of Viriginia and the State
of California by law give to their State banks a corporate franchise
and charter to exercise certain corporate powers. Among those corporate powers and rights granted by the State of Virginia and the
State of California to their State banks is the right to establish
branch banks.
This Federal statute says:
Subject to the provisions of this act and to the regulations of the board made
pursuant thereto, any bank becoming a member of the Federal reserve system
shall retain its full charter and statutory rights as a bank or trust company.

Do you think that the Federal Reserve Board has a right to make
a regulation imposing upon the State banks of Virginia, or of
California, a condition that they shall not have branch banks, in
order to become a member of the Federal reserve system? And if
it may establish a regulation denying the right of the Virginia or
California banks to establish branches, which is among their corpo-




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

161

rate powers granted by their respective States, has it the still further
right to deny the Virginia and California banks the privilege of
exercising any other or all other corporate rights granted by the
State of Virginia and the State of California ?
Mr. DAWES. Well Senator, may I ask you a question ?
Senator GLASS. Yes; if it will illuminate this subject.
Mr. DA WES. Suppose it were to be conceived that the development
of branch banks meant the destruction of the Federal reserve system?
Senator GLASS. Suppose it should what ?
Mr. DAWTES. Suppose we were to conceive—suppose some of us
believed that it would mean the destruction of the Federal reserve
system, is the Federal reserve system then compelled to invite into
it—it is a voluntary system—people who were going to operate in
such a way as to result in its eventual destruction ?
Senator GLASS. I w^ill answer you in this way: The Federal reserve
act provides that Federal reserve banks shall not pay interest on
deposits, does it not ?
Mr. DAWES. I do not know. I think so. I will take your word
for it.
Senator GLASS. Well, you understand that the Federal reserve
banks are not permitted to pay interest on deposits ?
Mr. DAWES. Yes.
Senator GLASS. That

was the judgment of Congress, enacted into
law. Suppose your Federal Eeserve Board were to conceive (as is
not without reason) that the refusal to pay interest on deposits by
Federal reserve banks w7ill ultimately destroy the system. Do you
hold that the Federal Eeserve Board may defy the judgment of
Congress and substitute its own judgment for the judgment of
Congress ?
Mr. DAWES. Certainly not.
Senator GLASS. But that is what you propose here.
Mr. DAWES. NO, Senator; I do not propose anything of the kind.
I do not see just how to make this plain. I say, if you have got
a condition here, and the condition which you describe is such as
will result in the destruction of the Federal reserve system, then I
say it behooves Congress to
Senator GLASS (interposing). Oh, if you talk about what Congress
can do, that is a different question. But I am talking about what
must be done under the existing statute. Suppose it should be the
judgment of the Federal Eeserve Board, as it is the judgment of
some of the most experienced bankers and scientific authorities in
this country, that State banks should not be permitted to become
members of the Federal reserve system. You would not contend that
under this particular language here the Federal Eeserve Board
could make a regulation that would exclude State banks from membership in the Federal reserve system, would you ?
Mr. DAWES. NO, Senator; I would never contend that the Federal
Eeserve Board or an}^ other board should break the law or go contrary to the law. I am simply making a plea against the branch
banking system now. What is the feasible way or the possible legal
way to get at that I am not entirely competent to say. From reports
that I have received of the legal situation I am inclined to think that
the Federal Eeserve Board can legally take such action as would
prevent the establishment of any more branches by member banks




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Senator GLASS (interposing). Well, do you think, then, that the
board could establish a regulation
Mr. DAWES (interposing). I would like to answer one question at
a time.
Senator GLASS (continuing). Do you think that the board could
establish a regulation that would take away from an applying State
bank any other corporate power that its franchise may give it and
all others—because if it may take away one it may take away all.
If it may pass a regulation that a State bank shall not exercise this
specific corporate power granted to it—if it has authority to do that, it
has authority to pass a regulation that a State bank may not exercise
any of its corporate powers, and therefore will not be admitted as a
member bank at all—make it impossible ?
The CHAIRMAN. Pardon me, Senator, but would that act on the
part of the Federal Reserve Board have the effect of depriving that
bank of membership ? It would simply apply for membership into
the Federal reserve system. The Federal Reserve Board would not
have the power of removing from that bank the right to continue
any of those franchise powers, would it?
Senator GLASS. NO ; but it would deny the State bank the right of
admission to the Federal reserve system.
The CHAIRMAN. Yes.
Senator GLASS. And what

we are here for is to devise ways and
means of having them become members of the Federal reserve system
and not to repel them.
Mr. DAWES. Well, Senator, I take it that you are asking questions
that you would like to have me express an opinion about. I certainly do not believe in the board breaking the law. I am not competent to pass on laws.
Senator GLASS. Neither am I ; I am not a lawyer. But there is the
English language; I do understand that.
Mr. DAWES. But I do want to say this, which I should have said
before: I think that almost every bank that has come into the system
has voluntarily signed the agreement to let the Federal Reserve
Board pass on the establishment of any branches.
Senator GLASS. Well, they may have volunteered to let the Federal
Reserve Board do anything; but I am talking about what the Federal Reserve Board has a right to do under the law.
Mr. DAWES. That is a practical consideration. I do not know
what the limits of the rights of the Federal Reserve Board are. If
they have a right to stop the branch banks, I should like to see them
stopped.
Senator GLASS. It never was intended to give that right. That
language was put into the law to induce State banks to join the system, in order that the Board might be enabled to say to State banks:
"We are not going to interfere, and can not under the law interfere, with any of your corporate rights." It was not put in there
to enable the board to practically nullify the laws of the States under
which State banks operate.
Mr. DAWES. Well, I would like to give my own feeling on the matter : If the board is not authorized to take that action, I would like
to see them given that power.
Senator GLASS. Well, that is different. Perhaps I might agree
with you; I do not think I would.




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TXT 11
Mr. ^
- , that is all I have contended for.
Senator GLASS. I am always open to conviction.
The CHAIRMAN. Mr. Comptroller, is it clear in your mind that
it is of particular advantage to the State banks to become members of the Federal reserve system?
Mr. DAWES, I think it is. I do not know that it is to the advantage of particular individuals who control those banks.
The CHAIRMAN. DO you think it is necessary to the successful
operation and continuance of the Federal reserve system that State
banks and trust companies be members of that system?
Mr. DAWES. My feeling about that, Mr. Chairman, is that it is
more or less of a local issue. I think in a great! many localities
the facilities of the Federal Keserve Board get to all of the banks
in a way that is reasonably satisfactory, through their corresponding member banks. There are some sections of the country where
I do not think saturation is sufficiently complete to get that service.
The CHAIRMAN. DO you think it is fair to the national banks,
that they shall maintain a system here for the protection of all the
banks in the country, and not share with others the expense and
responsibility of the upkeep of that system ?
Mr. DAWES. I do not think it is; and that is why I am making
a pleai that nothing should be done which would diminish the
rights of the national banks at the present time—the privileges
of the national banks at the present time.
The CHAIRMAN. There is now strong competition between the
State banks and trust companies and the national banking system—that which you have indicated. Does not the membership in
the Federal reserve system of the State banks tend to strengthen
their position in competition with national banks ?
Mr. DAWES. It does; I think it does, that is the reason why a
great many of them join.
The CHAIRMAN. Then do you think that in this controversy the
Federal reserve system should continue to take into that system
these banks
Mr. DAWES (interposing). Who are exercisingThe CHAIRMAN (continuing). Who are exercising these powers
which are in competition with national banks ?
Mr. DAWES. I think you will weaken your system if you supbject
the national banks to the competition of State banks which have
special facilities that the national banks have not got, and then
let them use the Federal reserve system as a means by which they
can increase the difficulties of the national banks. In other words,
if you are going to establish the branch banking system—if you
are going to allow the Federal system to be used to help* the
further extension of this branch banking system, I think you are
going to ultimately destroy your national banks.
The CHAIRMAN. Well,' when the Federeal reserve system was
organized, the question of reserves was made a paramount issue—
and that they should be real reserves. Do you care# to express
your views about the kind of reserves which are maintained by
State banks?
Mr. DAWES. NO ; I really ought to study that situation more than
I have before I can say anything that would be of value to you.




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Mr. WINGO. Mr. Chairman, I was called out of the room; while
you were discussing this section 9 of the act, and the question of
the power of the board on admitting members; and I would like
to have the record also show another provision in that same section 9.
You understand that I am not taking any position with reference
to the wisdom of the law. It is what the law is'. In the same
section 9, second paragraph, Senator.
Senator GLASS. I have read that. I am perfectly familiar with it.
Mr. WINGO. It says:
On said application the Federal Reserve Board shall consider the financial
position of the applying bank, the general character of its management, and
whether or not the corporate powers exercised are consistent with this act.

If the Federal Reserve Board believed that the exercise of the
corporate powers of a State bank to have a branch bank is not consistent with the purpose of the Federal reserve act, then not only
have they the power but fr would be their duty to deny membership
to that bank, would it not?
Mr. DAWES. I should think so; yes.
Senator GLASS. Can you point out anything in any section of this
act—any provision or any sentence in it—that would indicate that
branch banking is inconsistent with the provisions of this act?
Mr. DA WES. I think the general provisions of the act are to build
up and fortify the American banking system.
Senator GLASS. Yes.
Mr. DA WES. And I think that the system of branch banks that we
have now is contrary to our whole theory of banking under the
Federal reserve law.
Senator GLASS. There is not any provision of this act which says
anything about building up the American banking system. What I
asked you to do—or ask anybody to do—is to point to a single provision of the Federal reserve act that intimates any antagonism to
branch banks.
Mr. DA WES. I feel perfectly safe on the general tenor of the act
and the intent of the act. As to whether they have embodied it in a
special provision, I do not know.
Senator GLASS. AS a matter of fact, there is a provision that indicates that it believes in branch banking
Mr. WINGO (interposing). I would like to resume, Senator, when
you get through.
Senator GLASS. I supposed that you were through.
I call your attention, Mr. Comptroller, to the fact that the act
specifically authorizes the . establishment of branch banks of the
Federal reserve banks and of branches in foreign countries.
Mr. WINGO. I believe I stated a while ago—and agreed with the
Senator—that there is absolutely no question of any specific provision in regard to branches of member banks, which, of course, is a
different thing from branches of the Federal reserve banks.
Now, the point I want to get at is that Congress did, by clear, specific provision—which I think unwise, but it is there—say, as a condition precedent, that you could pass upon the exercise of a corporate
power that a bank had under State laws, a State bank. You have




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165

no right to change the State law. You have no right to deny a
State bank the exercise of any corporate power.
But the board does have the power—and it is expressly provided
that it can do so—to say that you will not admit a State bank that
is exercising corporate powers under a State franchise that that
board in its judgment believes is inconsistent with the purposes of
the Federal reserve act. In other words, Congress did clearly lodge
with the board the discretion to say that in admitting these State
banks, if they under the charter of their States and under their
corporate powers have the right to do certain things that the Federal
Eeserve Board believes are contrary to the purposes of the Federal
reserve act, then you have a right to absolutely shut the door in
their faces, which is clearly a different thing from controlling them
in the exercise of their power if they get in. If they let them get
in, they have got to let them do everything that they have permitted
them to do under the conditions that were laid down on their admission, conditions both of express statute and of the rules and regulations of the Federal Eeserve Board, which is a clear distinction.
I want the record to show the legal proposition, because I suspect
that there will be some legislation. I think there ought to be some
legislation. I do not think that power should be lodged there.
But I thought your legal adviser was correct as to the power—not
the wisdom—of that; and I as one member of the committee believe
that branch banking is inimical to the very fundamental purposes
of the Federal reserve act.
Mr. DAWES. I do not know that it is inimical to any specific provision of the act; but I feel very strongly that it is inimical to the
purposes of the act.
Mr. WINGO. The national banking system is the backbone of the
Federal reserve system. And I think our intention in letting in the
State banks was that we recognized that the State banks are a part
of the general banking system of the country; and one of the primary
purposes of the Federal reserve act was to coordinate the general
banking of the country—to impound the general banking reserves in
a safe reservoir, and to have free rediscount markets, that were proof
against panics; and we thought that purpose would be carried out
by admitting State banks into the same privilege as we did national
banks.
But if by admitting State banks that have branches, you believe
that branch banking s}^stem will destroy the basis of the Federal
reserve system—to-wit, the national banks—then you, in the discharge of your duties, would feel bound to try to keep them out?
Mr. DAWES. I would. I believe it would destroy the national
banking system and the Federal reserve S}^stem also.
Senator GLASS. The Federal reserve act, in its numerous provisions, indicates its own purposes; it does not leave them vague or uncertain.
To give a single example, it would be inconsistent with the purposes of the act—or would have been until recent action by Congress—to admit into the system a State bank with a capital of less
than $25,000, although the State might authorize such a bank to do
business within the State. That would be something inconsistent
with the purpose of this act, because the act itself says the State
107679—26—PT 1




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

bank must have a minimum capital equal to the minimum requirements of the members of the Federal reserve bank.
And in provision after provision, the purpose of the authors of
this law, and the intent of Congress, is disclosed by the provisions
of the act itself. Although branch banking in States was existent at
the time of the enactment of this law, there is not an intimation in
the law anywhere that such a corporate power was inconsistent with
the spirit and purposes of the Federal reserve act. We were aware—
the Congress was thoroughly well aware—of the fact that, in many
States at that time, branch banking was permitted and prevailed
to a great extent; and if it had been the intent of Congress to declare
that branch banking was inconsistent with the purposes of this act,
why it would have so specifically declared.
Mr. DAWES. I think, Senator, that there has been a great change
in the branch banking situation in the last two or three years. I
think there has been such a development of it that the conditions
that exist now had not manifested themselves then—or tendencies
had not manifested themselves then as they have now.
Senator GLASS. That may be true. I think that is true. But you
can not relate that back to the purposes of Congress in 1913.
The CHAIRMAN. Mr. Dawes, one of the practical considerations in
deciding this matter, as I understand, is the question of the examination of these branch banks.
Suppose there was in New York City a State bank, and it had
2,000 branches, and that State bank made application to the Federal
Reserve Board for admission. Do you not think the Federal Reserve Board would be justified in refusing the admittance of the
bank on the ground that you would have to revamp your whole examining force if you admitted it ?
Mr. DAWES;. 1 do not think you can make an intelligent examination, a thorough examination, unless it is a simultaneous examination:
and that would require a great many very high class men. I have
tried to elucidate that in what I have written; and, I think, as a
practical matter, you would not be able, in the case of branch banks,
to make that examination. If it were a question of going to the
tellers' windows, it would be possible; but if it were a question of
examining all the branch banks, it would be impossible, if there
were 2,000, to give them a simultaneous examination. You see, on the
question of interrelations, with the examination of securities
The CHAIRMAN (interposing). The point I raised is: Would not
that be a situation that would require discretion on the part of the
Federal Reserve Board, and would not they have the power to deal
with a situation of that kind, without coming to Congress?
Mr. DAWES. I do not think there is any question about that.
Senator GLASS. There is a very great question about it. For an
hour I have been raising the question. There is a very great question whether the board has the authority. Just because the situation
exacts more work on the part of the board and requires it to employ
more examiners, and requires those examiners to work harder—does
that afford a substantial basis for the board to exercise a power that
the law does not confer upon it ?
Mr. DAWES. Not as you state it; no. But if a situation develops
where you have got to maintain a force of 20,000 or 30,000 examiners




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

167

in this country, then it has got to the practical situation where it is
impossible to do it.
Senator GLASS. Well, take this bank referred to by the chairman:
Would your examiners have to examine the parent bank and all of
its activities, or would it have to examine each individual branch
unit %
Mr. DAWES. They would have to examine every department of
the bank—all at the same time.
Senator GLASS. Every department of the bank, yes; but would
they have to physically go and examine every branch office of the
bunk?
Mr. DA WES. Yes, sir; every branch bank that was operating. Because. Senator, you see they could shift their assets. If it were not
done simultaneously, you could take the same one dollar bill and
circulate it around through all of your branches, and count it a thousand times. It is the same way with your securities.
I would like to ask Mr. Pole a question about that, if you do not
mind. He is one of our oldest national bank examiners, and his
opinion about that would be of value. I do not think there is anybody in the country that knows more about that as a practical question than he does.
Senator GLASS. Well, I think it all leads up to the question of
the existing power of the Federal Reserve Board. The board either
has under the law or it has not the power to exclude a State bank
upon the ground that it has branches. If it has not that power, it has
no right to exercise it. If it is desirable for it to have that power,
that is a different proposition, which Congress would have to consider.
Mr. DAWES. Well, Senator, it has the power to exclude any bank
that is not properly conducted, has it not?
Senator GLASS. Undoubtedly. The law gives it that power.
The CHAIRMAN. In that case
Mr. DAWES (interposing). Pardon me, Mr. Chairman. Then I
contend—I may be wrong in my opinion; but it is my opinion—that
it is possible for a bank to have such a number of branches that it
can not be properly conducted.
Senator GLASS. Well, of course, if the bank is unsound and is not
properly conducted, the board is explicitly authorized by law to
exclude it from membership, and you as Comptroller of the Currency,
if it is a national bank, are authorized by law to close it up.
Mr. DAWES. Well, if a bank with 2,00(fbranches were to apply for
membership, we should exclude it, not because I knew that that bank
was not in bad condition, but because I did not know that it was in
good shape. Now, I could not find out: with 2.000 branches scattered
all over the United States, nobody would know.
The CHAIRMAN. Take another instance. In Pennsylvania some of
the old charter rights of trust companies and State banks permit
them to do almost anything. For example, there are same charters
of State banks in Pennsylvania which would permit them to run a
sawmill or a water power or a railroad. Suppose some of those
institutions having a charter right like that should enter the Federal
reserve system, and should so divert their line of business that, while
they were members of the system, they were running the sawmill or




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INQUIRY OX MEMBERSHIP IX FEDERAL RESERVE SYSTEM

the water power, and doing no banking business. Do you think it
would be proper to continue an institution of that kind in the Federal
Reserve Board, and would not the Federal Reserve Board have the
power to exclude that institution from membership?
Mr. DAWES. I should say it was contrary to the purpose of the act
and impossible.
Senator GLASS. I should say so too.
Mr. DAWES. Another thing which may have a practical bearing
on the situation is that I understand that in California, where they
have a great many State banks, the State bank examiners have discontinued simultaneous examinations, on account of the difficulty of
making simultaneous examinations.
The CHAIRMAN. Mr. Comptroller, I suggest that it is now 1 o'clock,
and if you will come back we will recess now. Mr. Strong desires to
ask you some questions, and there may be other questions to be asked
by members of the committee; and I suggest that we recess until
2'o'clock or 2.30.
Mr. WINGO. Mr. Chairman, it is possible that I may not be able to
be here this afternoon. May I ask the comptroller some questions
predicated on the thought that some nonmember banks may read the
record of this hearing, and some of them may decide not to come in
because of reading certain views of certain members of the board as
to the powers of the board and of the system?
Some of the State banks that are speaking out think that the board
has an idea that it is part of their function and duties to untertake
to parcel out credit. In other words, if they think the price of cotton
or potatoes is a little too high and there is too much speculation in it,
(hat they will tighten up on credit so as to stabilize the price level—
on that socialistic theory that some man here has made up.
What is your view about that, Mr. Dawes? Do you think it is a
part of the function of the Federal Reserve Board or the Federal
reserve banks so as to regulate the volume of credit as to maintain
prices at a high or a low lever or any level at all ?
Mr. DAWES. That is a question that is hard to answer categorically.
No; I do not think so. I do not think that the Federal reserve banks
should be used as an instrumentality for the maintenance of prices or
for the reduction of prices.
Mr. WINGO. I intended to bring wTith me a letter that I had from
one of the State bankers upon this subject.
He says that there are two theories with reference to the Federal
reserve system. One is that it was created for the purpose of coordinating the banking business of the country and to provide safe
reservoirs for the reserves and a rediscount market, and to serve the
banking system; that is, the individual member banks of the system.
The other theory is that it was to consist of a group of supermen,
first at Washington and then at each reserve reservoir, who would
sit on a watch tower and survey the field of business—automobiles,
steel, cotton, wheat, potatoes, etc.—and parcel out the volume of credit
that they thought was necessary. If they thought potatoes or wheat
was going too high, they would say, " Well, we will by the exercise of
our powers sqeeze that down. We wTill undertake to control the business of this country through the credit agencies."




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

169

And that gentleman has an idea that the board as at present constituted was wedded to what he calls the "Lenin and Trotski view;"
and he said that he did not propose to go into a system of that kind.
Now, to which school of thought do you belong?
Mr. DAWES. I belong to the coordinating school.
Mr. WINGO. I thought so.
Senator GLASS. Well, the Lenin and Trotski view is not confirmed
to Lenin and Trotski; but it permeates Germany and, to a lesser extent, some of the other European countries; under that theory, all
you have to do to furnish credit is to keep the printing presses going.
Mr. WINGO. But there are some men in this country, for whose
financial opinion I have great respect, who really believe it is wise
to have a Government-controlled agency to fix the price of wheat
and the price of cotton and everything else; in other words, destroy all individual initiative, not only 7of the manufacturer, but the
banker and everybody else—in other w ords, a happy state in which
everything will be run public^ and human judgment will be absolutely correct.
Mr. DAWES. And the law of supply and demand will be repealed.
Mr. WINGO. They think the law of supply and demand is a mere
incident, when you run up against it.
Senator GLASS. I am sorry my colleague from Arkansas has any
respect for the financial opinion of such men as that.
Mr. WINGO. Well, I am compelled to have, because he comes here
with such high indorsements—especially 10 years ago, when I first
came here to try to find out what the Federal reserve act was.
[Laughter.]
(Thereupon, at 1.05 o'clock p. m., the committee took a recess until 2 o'clock p. m.)
AFTER RECESS

(The joint committee reconvened at the expiration of the recess.)
The CHAIRMAN. NOW, Mr. Dawes, Mr. Strong has some questions
he wanted to ask you.
Mr. STRONG. One of the principal objections brought out here to
the State banks coming into the system is the matter of the reserves
on which they draw no interest. A banker was in town this morning
and came in to see me and that seemed to be his principal reason he
advances. He said that in figuring up what reserve he would have
to place with the Federal reserve system it would be a loss to him
of about $72,000, and he wondered why the reserves in his bank that
he had to keep there all the time, about $40,000, could not be deducted from these reserves. He wondered wThy it was necessary to
keep $40,000 reserve from his deposits in his own bank and deposit
$72,000 in the Federal reserve system, making a loss of $132,000
from his interest acount. Now, we all know that the requests of
some of the bankers, for interest on the deposits can not be complied
with. But, could not the amount of reserves be cut down? Could
not a part of the reserves required to be carried by the banks be carried by the banks be considered a part of the required reserve of the
Federal reserve system?
Mr. DAWES. It seems obvious that the amount of the reserves in
the banks is based on the assumption that these other reserves would




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INQUIRY Oi; MEMBERSHIP IN FEDERAL RESERVE SYSTEM

be carried in their vaults so that is virtually equivalent of asking
that the total reserves be cut.
Mr. STRONG. Yes. And lessen the piling up of immense reserves
with the system, which takes the money out of the small communities and little banks.
Mr. GLASS (interposing). Ma}^ I call your attention to a fact you
can consider: That when we created the Federal reserve, system, in
fixing the reserves in the Federal reserve act we very materially
reduced the reserve requirements.
Mr. DAWES. Having this in mind.
Mr. GLASS. Yes; and that is one of the reasons, as I recall it, that
ultimately at that time we reduced the amount of reserves. Whether
or not your banker can tell you how much reserve he would have had
to have kept under the old system, even if he had been permitted to
keep half in vault, would be interesting to know. Would he not still
have to put in more in the Federal reserve bank than the law now
requires if we had not lowered the reserve ?
The CHAIRMAN. Under the latter amendment we took into consideration particularly the local requirements, leaving it optional
with the bank to act.
Mr. STRONG. What I am after is information as to whether this
objection made by the State banks can not be met. This, frankly,
was stated to be one of the reasons why this banker would not come
into the Federal reserve system: That he loses so much interest on
his deposits, and the question is whether the amount of the reserves
could not be cut down to the extent of considering the reserve on
hand in the bank part of the Federal reserve system requirement.
The CHAIRMAN. The reserve requirement of many of the States
is much more favorable for their own banks than is the Federal
reserve system, because in keeping their reserves they can get immediate credit. That is, the banks give them immediate credit and
thereby create a more favorable condition, whereas the Federal reserve system is in itself a real reserve, while much of the reserves
maintained by State banks and trust companies are what you might
call " foam "—checks in process of collection.
Mr. GLASS. In other words, your friend wanted to know why you
can not count as reserve a certain portion of reserve kept on hand
in his bank instead of requiring all the reserve to be kept with the
Federal reserve local bank ?
Mr. STRONG. Yes. He wants to know why it would not be proper
to count the reserves he is required to keep in bank as part of the
requirement of the Federal reserve system, and instead of putting in
the $72,000 they require to keep $40,000 in his bank and only keep
$32,000 with the Federal reserve system. I would like to know what
objection there would be to that.
Mr. DAWES. It would simply reduce the resources of the Federal
reserve bank by that much.
Mr. STRONG. But if the State banks all came in, would it not
make up the deficiency ?
Mr. DAWES. I do not think it would.
The CHAIRMAN. There would be this danger: If you should permit the reserve vault cash to be considered as legal reserve some
banks might keep all of the reserves in cash in their vaults and would
not have any reserves on deposit with the Federal reserve system.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

171

Mr. WINGO. The result would be to demobilize this mobilization of
our reserves to the extent you cut it down.
Mr. STRONG. Yes; it would reduce the amount of reserve held in
the reserve bank centers and increase the amounts held in the country banks.
Mr. WINGO. And decrease the capacity of the Federal reserve system to render the services for which it is established.
Mr. STRONG. Would it embarrass the system?
Mr. WINGO. If this is a country bank
Mr. STRONG (interposing). This is not a country bank I speak of.
Mr. WINGO. I am glad to see that you are interested in that sized
bank.
Mr. STRONG. It is not my bank I am talking about or any that I
have an interest in. Would it encourage State banks to come into the
Federal reserve system if this modification, as suggested, were
brought about?
Governor CRISSINGER. That was up before the board.
Mr. WINGO. Yes: that is the old question and I think the net answer
was based on the things involved, namely the proposition that if you
keep a certain percentage of the reserve in the till of the bank you
demobolize your reserve to that extent and decrease the capacity of
the reserve reservoir to perform the prime function for which it was
created, namely, to safely keep the reserves and have them ready to go
to the rescue of those and other banks.
Mr. STEAGALL. What is contemplated is that this reserve would
Mr. WINGO (interposing). I think if you would call the attention
of the bankers to the fact that if we had not reduced the reserve requirement a considerably larger sum would be demanded of them for
reserve and, ultimately, if you are going to have a reservoir for the
reserve and have it mobolized, then, in theory, you ought to have all
of it.
Governor CRISSINGER. The banks hold all the reserve.
Mr. STRONG. The State banks feel they are paying too large a
premium to get into the Federal reserve system. Can the amount
be reduced in this way I have suggested or in any other way, without endangering the system?
The CHAIRMAN. It would reduce their ability to serve the public
in times of crises if the reserves are reduced, for the reserves, primarily, are for emergency purposes.
Mr. STRONG. DO they now equal the proper amount of reserves required for handling the business of the country, or are the amount
of reserves too great ?
Mr. WINGO. There are two schools of thought on that subject.
Some think that Congress acted unwisely in cutting too closely when
they reduced the amount of required reserve; there are others who
favor the cutting of the reserve requirement materially, but the system we are setting up, and the reserves, is measured and fixed under
the law and the reserves become real reserves whereas before there
were a great many fictitious reserves and there was the pyramiding
of reserves and the burden was no greater; the reserves were no less
in fact and the burden was apparently a great deal less on the
banks. Of course the whole proposition of




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INQUIRY ON MEMBERSHIP IX FEDERAL RESERVE SYSTEM

Mr. STRONG (interposing). But the reason it was cut down was to
make it a workable institution?
Mr. WINGO. If you reduce the amount of reserve held by the reserve bank 50 per cent you reduce the capacity of that bank to grant
relief to the extent of 50 per cent.
Mr. STRONG. Will the reserves held by the .Federal reserve bank
stand that or any reduction at the present time ?
Mr. WINGO. In the last analyses, reserve requirements were made
for two purposes: One reason why they were made was to take care
of the imprudent banker and the other was to guard against the
banker that is lacking in integrity. The wise banker will keep the
reserve he thinks his business, as a banker, requires, and I think
you will find a great many bankers actually carry a great deal more
reserve than the law requires because, in their judgment, their business requires that.
The CHAIRMAN. It has been stated that the Federal reserve system
is serving, indirectly, all banks in the country in times of emergency.
If the Federal reserve system now has sufficient resources to take
care of the demands of all the banks, and if more State banks and
trust companies would join and increase the reserves, it might be
possible to reduce the reserve requirements. That is something
that has to be worked out very carefully, but I think here is an
opportunity to get consideration of the possible lowering of reserve
requirements to all banks if all banks come in.
Mr. STRONG. That is my friend's proposition. He thinks the bankers in the Federal reserve system are required to maintain too large
a reserve, so that small banks can not afford to join the system. If
we could get the State banks in by lowering the requirements, he
thinks they would join.
Mr. WINGO. I am not opposed to the proposition. I just am stating to you the elements going into it and I state them in the hope
that the committee will consider the elements I suggested.
The CHAIRMAN. Did you say the board had that up recently, Mr.
Dawes ?
Mr. DAWES. The governor said that.
Governor CRISSINGER. On application, which was duly made, an
application of some kind—I do not know what it was—the matter
came before the board and the board declined to do this on the
ground that these reserves were fixed liens and the law would not
permit them to do it.
Mr. WINGO. I understand, then, that the matter was considered
by the board ?
Governor CRISSINGER. Yes.
Mr. WINGO. I would like to have the viewpoint of Senator Glass
on that question. He, I understand, studied it closely.
Mr. STRONG. This committee is formed for the purpose of trying
to devise ways for the State banks to come into the Federal reserve
system. They say first that we require them to put too much in
reserves. Is there any way in which we can overcome that objection ?
Mr. WINGO. The actual fact is that they want to be permitted to
carry the reserve in their own vaults. The argument is: "What's
the difference ? " The reserve is to be held, and what is the difference whether it is all held by the regional bank or part held by the




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

173

regional bank and part in the local vault? I just can not understand the difference.
Mr. STRONG. The only difference is, if we compel this gentleman—
take his case for an illustration: His is a western bank and he said,
" If we join the Federal reserve system we would have to put up
$72,000 with the Kansas City Bank. We have to keep $40,000 in
gold, currency, and silver at home with which to do business." It
feels that requires him to keep too large a reserve in Kansas City.
Why can not the law be changed so that he would put up the $72,000
less the amount he is required to keep at home ?
Mr. GLASS. The law was that and he did not join.
Mr. STRONG. This man was not a banker at that time; he was a
Member of Congress and, of course, did not have any money.
Mr. GLASS. Perhaps he overlooked another thing: If it is a real
reserve, what difference does it make where it is locked up?
Mr. STRONG. He thinks the reserve required is too large.
Mr. GLASS. He can not use his reserve as till money. He can not
use his reserve except at the penalty of being called to toe the line
about it. The comptroller would immediately direct him to replace the reserve money that he was using for till money.
Mr. WINGO. The net result is that he wants the reserve requirement reduced?
Mr.

STRONG. Yes.

Mr. GLASS. It does not make any difference where it is kept. If
he wants the reserve requirements changed, that is different.
Mr. STRONG. They do not come in because they are required to
put up too much in reserve funds.
Mr. GLASS, I would ask Mr. Strong to call attention of his banker
friend to the fact that we have already reduced the reserve requirement; call attention to that, and ask him how much he was
required to keep in reserve under the old system. If Mr. Strong
called attention to that and to the fact that his banker friend would
get off lighter now, I think his problem would be in part solved.
Under the present system he is required to carry one-half of 1 per
cent less than before.
Mr. STRONG. One-half of 1 per cent does not represent much to
our banks.
The CHAIRMAN. What is troubling your friend is that he would
have that much tied up without drawing interest while he has it now
at the reserve center and at no loss of interest.
Mr. STEAGALL. The average country banker can take the difference
in the amount of reserve required and instead of getting 2 per cent
he will loan it at home at from 6 to 8 per cent.
Mr. WINGO. I thought the discussion would get around on that.
What they want is interest on their balances.
Mr. STRONG. He feels the amount required in the Federal reserve
system is too great a tax on his business and he wants it reduced
or he does not feel he can come in.
Mr. GLASS. At bottom it means that he follows the practice of
most interior country bankers. In the lax period he takes all his
surplus and shoves it off to New York at 2 per cent to be used in
stock speculation.




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Mr. STRONG. The whole thing revolves about the question whether
^r not the amount the reserve bank takes from the banks of the
country can be reduced. I do not know if it can or not.
Mr. GLASS. I would ask this gentleman if he had not overlooked
the fact that he can not treat his reserve really as till money. Maybe
he thinks " reserve ?? means nothing as a statutory word, and he does
not keep a reserve as a matter of fact, but uses his reserves all the
time.
Mr. STRONG. I do not think so.
The CHAIRMAN. If you have no further questions for the comptroller, we will excuse him.
Mr. STRONG. NO; I have nothing further, except I want to thank
him for his splendid argument against branch banks. The bankers
of my district and State will be interested in it.
The CHAIRMAN. Have you any further statement to make, Mr.
Dawes ?
Mr. DAWES. NO.
The CHAIRMAN. Have

any of the members of the committee anything further to ask? If not, we will excuse you, Mr. Dawes, with
the thanks of the committee.
The committee will now hear from Mr. C. S. Hamlin, of the Federal Reserve Board.
STATEMENT BY HON. C. S. HAMLIN, MEMBER OF THE FEDERAL
RESERVE BOARD

Mr. HAMLIN. Mr. Chairman, gentlemen, first a word as to one of
the problems before this committee:
There are in the United States 23,773 eligible banks with resources
of $41,000,000,000. Of these. 8,244 are national banks and 15,529
are State banks. There are 9,892 member banks in the United
States, of which 8,244 are national banks with resources of $20,000,000,000; 1,648 are State banks with resources of $11,000,000. The
9,892 member banks, State and National, comprise in number 41
per cent of all the eligible banks of the United States, but they hold
in resources over 75 per cent of the total resources of all eligible
banks in the United States.
Of the 15,529 eligible State banks, 1,648 are member banks and
13,881 are nonmember banks. The 1,648 member State banks are
only about 12 per cent in number of all the eligible State banks, but
they hold about 52 per cent of the resources of all the eligible State
banks. The 13,881 nonmember banks constitute 58 per cent in number of all the eligible banks, but hold only about 25 per cent of
the resources of all the eligible banks.
Now, we have this condition: Although the 13,881 nonmember
banks comprise about 58 per cent in number of all the eligible banks
of the country, their resources are only 24 per cent or 25 per cent.
In this case, however, it seems to me that numbers are of great importance because each individual bank is a tap line leading directly
to the Federal reserve bank, if it is a member.
It seems to me, at the outset, a strange condition that 58 per cent
in number of all the eligible member banks are not member banks
of the system. All of these banks, however, with a very few exceptions (a couple of thousand) are on the par list to-day.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

175

It is another significant fact that the percentage of banks in number that are member banks is very much smaller in the agricultural
districts than in the industrial districts. For example: In North
Dakota only 23 per cent of the banks are member banks, while in
New Hampshire 81 per cent are member banks. In South Dakota
only 22 per cent are members, as contrasted with Massachusetts, 72
per cent of which are members. In Kansas only 21 per cent are members, contrasted with 71 per cent in New York. In Tennessee 20
per cent are members, contrasted with 69 per cent in New Jersey,
In Wisconsin there are 19 per cent, contrasted with 67 per cent in
Rhode Island. In Louisiana and North Carolina there are 18 per
cent, contrasted with 59 per cent in Pennsylvania; in Nebraska there
are 17 per cent, contrasted with 58 per cent in Vermont. In Minnesota there are 12 per cent, contrasted with 57 per cent in Maine.
While in Missouri there are 11 per cent contrasted with 41 per cent
in Ohio. These are only a few examples I take at random to bring
out the percentage.
Mr. STRONG. What reasons have you as to whether these facts are
due to
Mr. HAMLIN. I am going to try to state these reasons in a minute.
It is my persona] opinion that all eligible banks in the United
States that are fit to join ought to join the Federal reserve system
not so much for any good it might do the Federal reserve system,
because that system is amply able to take care of all its member
ha,nks—it is further able, as experience has shown, to take care practically of all the banks in the United States, directly or indirectly—
but I think that they ought to join, those of them that can satisfy
the Federal reserve banks that they are in proper condition, I think
they ought to join for their own sake to relieve them of the necessity of dependence on their correspondent banks.
Now, as to the reasons some give for not joining the Federal
reserve system:
They believe, mam* of them (many of them have told me), and
they state it very frankly, that their correspondent banks can and
do take care of them. There is much truth in that belief, of course,
in normal times, but the correspondent banks had some difficulty in
taking care of them in 1893, very much more difficulty in taking
care of them in 1907, and, of course, they had some difficulty in
caring for them in 1920-21. In fact, you might say that the test of
any banking system is not made during quiet, normal times, but
when the stress comes, and it was the stress and the absolute inability
of correspondent banks to care for their correspondents in crises
that started the agitation which led to the passage of the act establishing the Federal reserve system. I believe that the stress will
be very much less in any future abnormal times if, at least, the
best of these eligible banks are brought into direct relationship with
the Federal reserve bank rather than depending upon assistance
through their correspondent banks, which latter can only give them
the assistance they demand by means of rediscounting with the
Federal reserve banks.
Many other bank officials have told me very frankly that they
would like to join, but have various objections. One reason is this:
They believe that in any future crisis the Federal reserve system




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

oan not afford to have them suffer, and that it must come forward,,
directly or indirectly, and give them the assistance they need.
Now, undoubtedly, there is truth in that belief, and that truth is
based on past experience. We have given very great assistance to
eligible nonmember banks in the past. During the war the Federal
Reserve Board permitted member banks to act as the agent or
medium of nonmember banks for discounting paper secured by Liberty bonds, but that was done rather to help the purchase and sale
of Liberty bonds than to help the banks. Later, on July 27,1921, the
board made a general regulation permitting members banks to act
as a medium or agent for discounting practically all the paper offered
by State banks. That was done because we felt it was absolutely
necessary for the country that these banks be helped in every way
possible at that time. Very recently, in 1923, early this year, the
board revoked that general permission to member banks; but that
does not mean that an eligible State bank can not make application
in exceptional circumstances, and we have in fact granted our permission in cases where we think that such permission ought to be
given. We have taken away merely the general permission to member banks to act as medium or agent of nonmember banks.
As you know, section 19 of the Federal reserve act provides that
no member bank shall act as medium or agent of a nonmember bank
in securing discounts without the permission of the Federal Reserve
Board.
It is true that in the past we have helped these nonmembers materially. What, however, is going to happen if we should ever have
another period of troublesome times? Of course, as the joint agricultural committee of inquiry pointed out, every time we discount
paper for nonmember banks we are encroaching on reserves contributed by member banks for their own benefit. 7The committee
very emphatically referred to that, although the} expressed no
opinion as to what should be the future policy of the Federal Reserve
Board.
There is one significant fact, however, that in the agricultural
credits act Congress provided that although Federal reserve banks
can discount paper offered by Federal intermediate credit banks, yet
they are forbidden to discount for such banks any paper which
bears the indorsement of an eligible nonmember bank. It thus is
evident that there was a feeling on the part of Congress that eligible
nonmember banks should contribute their share toward the resources
of a great system when they expect to come to it, and do come to it,
to ask for its assistance. It seems to me that these eligible banks, or
those that can satisfy the Federal reserve banks that they are fit to
join, ought to be made to see that it is to their best interest and is
right and just that they should be part of the system when at any
time they can come to it and be saved from disaster. The attitude
of some of these banks is like that of a man who owned a house in
the middle of a block, but had not taken any insurance to cover his
house on the belief that the fire insurance company, having insured
all the surrounding property, would have to see that any fire in his
house was put out in order to protect the other property. That is
just the situation. These eligible banks, at least those of large capitalization, ought to come in, and I believe it is possible to induce
many more of them to come in than are now in.




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177

A great many banks bring up the fact—and I think it is perhaps
a fundamental objection—that they will lose interest on their reserve balances. Undoubtedly this committee will hear that objection
placed before them a great many times. I earnestly hope that if
any bank presents figures to show that loss you will ask that bank
to make proper allowances for the lowered reserve requirements
brought about by the Federal reserve act. The lowered reserve requirements under the act amounted, I believe, to at least six or
seven hundred millions of dollars. If you compare the reserve requirements of the present day with those that obtained before the
passage of the Federal reserve act it would be considerably over a
billion of dollars. I am, however, taking the time when the act
went into effect. If you compute that and take the vault cash the
bank carries and compute the released reserve, you will see that,
except in a few exceptional cases, they have not lost a dollar. Our
board has made a computation as to that, and if you would like it
we Avould be pleased to place it in the record.
The CHAIRMAN. We would like that in the record, if you please.
Mr. STRONG. Yes; whether these reserves can be reduced; what
have you to say to that? Could the reserves be safely reduced?
Mr. HAMLIN. I will say, very slightly, if the committee will adopt
the amendment that I will speak of in just a moment, permitting
the banks to deduct from gross deposits their checks in process of
collection. The large city banks have large amounts owed to banks
thftt constitute a definite liability. The Federal reserve act permits
them to deduct from these amounts due to banks the outstanding
checks in process of collection before they determine their reserve
requirements. That is all right for the city banks, but very few
country banks have large amounts due to banks and therefore they
have little or nothing from which to deduct their checks in process
of collection. A committee of the Federal reserve agents has strongly
recommended that you change the law so as to permit this deduction
from gross deposits. That would reduce the reserve requirements
only inrmitesimally. The city banks enjoy this now because they
have large amounts due to banks; but the country banks, speaking
generally, have few amounts due to other banks, so there is practically nothing from which to deduct checks in process of collection.
Mr. STRONG. Then it would offer no inducement to the country
banks ?
Mr. HAMLIN. It would be a very strong inducement, because they
would need to carry a slightly lower reserve, if they could deduct
the checks in process of collection from their gross deposits; that
is the only thing they have to deduct from. The city banks have
this privilege, practically, now. It is legitimate and fair that the
country banks should be given that permission, but we would be glad
to submit a memorandum to your committee on that question.
Mr. STRONG. I wish you would.
Mr. HAMLIN. I shall be glad to. Of course, it is not logical to
pay interest on reserve balances. No bank gets interest on the reserve
it carries in vault and it seems to me the banks are not entitled
to interest on the reserves they carry in the vaults of the Federal
reserve bank. I think there is not a single central bank in Europe
that allows interest on these balances. To-day there are deposited
•with the Federal reserve banks $1,800,000,000 of reserve balances,




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

and to earn 2 per cent on that would take $38,000,000 or $39,000,000
a year, which would mean that the Federal reserve banks would
have to invest over $800,000,000 as earning assets to earn that amount,
and that would tend to bring Federal reserve banks into sharp competition with their member banks.
Mr. GLASS. Would not the net result be that each bank would
suffer?
Mr. HAMLTN. That might well be.
Mr. STRONG. It would be a good thing to put into the record
the amount of deposits now in the Federal reserve system and, too,
the amount of earnings.
Mr. HAMLIN. We will. We will be very glad indeed to do that.
Mr. STRONG. In order that we may explain to the banks asking
a return on their reserves that the earnings are insufficient to warrant
the same.
Mr. HAMLIN. We have a table which we will send to the committee
showing these things.
Mr. GLASS. Does your statement which you propose to put into the
record point out that if the earnings of the Federal reserve banks
should be calculated by the same process that applies to the earnings
of an individual bank there has been a great misconception as to
what the earnings of the Federal reserve banks have been ?
Mr. HAMLIN. We have already made that public, but we will be
glad to include that in this memorandum.
The CHAIRMAN. YOU would also take into consideration the
franchise tax?
Mr. HAMLIN. That, in another moment, I was coming to.
Now, the loss of interest on reserve balances and the loss of this
so-called " exchange," certainly if it were a grievous loss, would have
shown itself in the earnings of the small banks and we have a chart
showing earnings of national banks of $25,000 capitalization, from
the date of the Federal reserve act, revealing a normal, healthy increase and if these two items were as serious as banks think, it
certainly would appear in the earnings. That is also tabled, and
we will gladly send the table to this committee.
Among other reasons very often advanced by nonmember banks is
the fact that they are afraid that if they join the Federal reserve
system their right to establish new branches may be interfered with.
That, of course, is an acute fear in California. Certain recent rulings of the board have made some State member banks feel that
they must consider seriously whether or not it would be better to
withdraw from the system. I want to say in fairness that, to me,
at least, no bank has advanced that as a threat. It has been a fairly
thought out, heart to heart statement made to the members of the
board. Some of the leading State banks—I speak now of California—before they entered the system were very much afraid of
what the board might do by regulations and were seriously pondering what would happen if our board were to pass a set of regulations and later the membership change and other radically different
regulations were to be passed, and they were very apprehensive,
especially as to their right of entering the system with branches.
In the early days of the system, one of the members wrote a note,
by authority of the board, to the State banks, in response to their




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

179

fear, saying, as well as I can remember, that the board would not
oppose the entrance of State banks with their branches, nor would
it oppose the admission of branch banks after entrance; that the
prime consideration the board would give would be an examination
of the condition of the parent bank and the branches and an ascertainment as to whether or not that branch could healthfully be
carried by the parent bank and whether the financial condition of
the whole outfit was proper and safe, and my recollection is that on
that assurance these banks entered the system.
The Federal Reserve Board early established as a condition of
these banks' entrance that they could establish no new branches
without securing the assent of the Federal Reserve Board, and I
heard some discussion in the committee yesterday as to the validity
of that condition. The general counsel of our board has rendered an
opinion, a veiy able opinion, in which he takes the position that that
condition is valid, and I agree with that, speaking personally, absolutely.
Congress gave in the act express power to the board to establish
conditions on the admission of State banks, and if the board hud no
power to establish such a condition, you could easily see that while
the branches in existence when the parent bank entered might be all
right, we soon might be loaded up with many branches and we could
not tell until the next examination, after they were in the system,
whether they were fit to be there. It seems to me that that condition
is perfectly sound and legal. The only question that arises is how is
the board to determine whether or not it shall give or refuse its
assent to the establshment of a new branch. That is a question on
which some of the board differ from others, and I can hardly say that
that question, even now, can be finally said to be settled.
The CHAIRMAN. YOU speak of an opinion of counsel. Can that be
put in the record?
Mr. HAMLIN. Yes; certainly. A copy of the opinion will be provided.
Within a year the policy of the board, as reflected in a few decisions, has radically changed, and I think that a majority of the board
feel that they can do something more than merely ascertain the
financial condition of the parent bank and proposed branch. In
speaking about differences in the board it seems to me a source of
great gratification that there have been differences of opinion on
almost every question that has come before this board since I have
been a member of it, and out of that discussion and interplay of
opinions the board usually has reached, some very satisfactory result,
so when I allude to differences of opinion I welcome any such differences, to the end that in the long run we can work out what we
believe to be for the best interest of the system. I am free to say
that conditions have materially changed since the board laid down
its original policy. At that time there were very few branches of
these large State banks and now the branches have so multiplied
that I think one bank has about 75 branches, among which, however,
are quite a number of receiving stations, so called. Undoubtedly
conditions have changed. The branch banking proposition is a much
more serious proposition than it was when the board first fixed its
policy.




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INQUIRY ON MEMBERSHIP IX FEDERAL RESERVE SYSTEM

The CHAIRMAN. YOU speak of local receiving stations. What do
you mean?
Mr. HAMLIN. The stations spread over the city where they merely
receive deposits, collect for the parent bank, etc. There are a good
many of those in Los Angeles. They pay checks and have a loan
limit of, I think, $500 usually. I count these all in the aggregate
number of branches without distinguishing the two, although I
think there is a fair distinction.
The CHAIRMAN. Are there many of these already established ?
Mr. HAMLIN. Yes. I should say in Los Angeles the Pacific Southwestern, a member bank, for instance, has 25, and the California
Bank, a nonmember bank, has 28.
The CHAIRMAN. The reason I ask is that there is quite a similarity
in that situation to the recommendation of the comptroller, or an
opinion from the Attorney General, in what to class the establishment of tellers' windows.
Mr. HAMLIN. We used to call them tellers' windows, too. I think
it is the same thing.
Governor CRISSINGER. It is controlled by the home office.
Mr. GLASS. Before you get away from that point, if you are getting away from it, did I understand you to say that you thought
the board has a legal right to adopt a regulation for the admission of State branches involving the vitiation of the permission
granted by the statute itself ?
Mr. HAMLIN. Oh, no. I had not finished with that, sir. I simply
said that I thought a condition imposed by the Federal Reserve
Board that a bank must secure the assent of the Federal Reserve
Board before establishing a new branch, is valid. I said I thought
that condition was legal. The important question is, however, on
what considerations shall the board give or withhold its assent?
Mr. GLASS. Right on that point of the legality of the proposition
that the board by regulation may control the number of branches
that a State bank which has become a member of the system may
have. Do you say that it has the legal right to exercise such control?
Mr. HAMLIN. Oh, I do not think it has any such right. I simply
say the board has a right to impose the condition that it must give
its assent before a new branch is taken into the system, but in giving
or withholding that assent it can not withhold its consent for any
reason not absolutely found in the Federal reserve act or absolutely
by implication, derivable from that act. Under the law to-day,
differing as I do, with all respect, from counsel, I believe that the
board can only refuse its assent if it finds that, from the examination of the condition of the parent bank or branch bank, its condition
is such as not to warrant its being taken into the Federal reserve
system.
Mr. GLASS. Exactly.
Mr. HAMLIN. That is the limit. What did Congress mean when
it gave to the board powers to impose conditions? I claim it did
not give our board the dispensing power. We can not say, for example, that only a man of a certain age can come in with his bank,
or only a man with certain colored hair. I think it is also perfectly
clear we are not vested with authority to decline to admit a branch
bank because we simply do not like the system of branch banking on
theory.




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181

The CHAIRMAN. DO I understand that once a State bank has been
admitted into the Federal reserve system, if that main bank is in
a fit condition, they should be granted the right to have an additional branch whenever they wanted it ?
Mr. HAMLIN. Speaking of California, whenever the people of
California have given their banks the right to establish branches. If
the bank or proposed branch is in bad condition, then and then only
we have the right to say " No." That is the argument I make.
Mr. GLASS. YOU have that right by reason of the fact that the lawT
gives you that right?
Mr. HAMLIN. Because it gives us the right, naturally, by giving
us the right to impose these conditions. We admit the original bank
under conditions and we likewise decline or admit the branch bank
under similar conditions.
Governor CRISSINGER. What right will the Federal reserve bank
"have to determine whether or not the bank shall take on more
branches, in view of the fact that the Federal reserve bank is not
equipped to supervise or examine such a system ?
Mr. HAMLIN. I should say that if the board is not equipped, it has
power to and should equip itself.
Governor CRISSINGER. If it does equip itself, as you say, at whose
expense will it do so? Who will pay it? The banks will refuse to
pay. They have already refused.
Mr. HAMLIN. The statute says that wherever we examine a State
bank, the bank will pay for it.
Governor CRISSINGER. Yes; but only one bank has paid in two years.
Mr. HAMLIN. There are other lawful conditions, clearly; for example; we say that a bank shall not change the character of its
assets or business. It seems to me that is a clear case of a valid condition. Often State banks are chartered with very extensive corporate powers. One of the leading banks of New York was chartered
as a water company originally, and its banking functions were a
small part of its powers. We frequently have banks apply for admission with powers, for example, to give bonds, fidelity bonds, for employees of corporations and we have imposed condtions limiting the
exercise of these powers which we believe are not consistent with the
purposes of the Federal reserve act. But the only power we have, I
believe, to say to a bank or a branch that it shall not come in must
be based on some definite condition of the bank or branch itself or
upon some expressed or necessarily implied provision of the act. The
people of the State of California have given a charter to every bank
and branch that exists in the State. We have nothing to do with
that. They have to go before their bank superintendent and obtain
a certificate of public necessity showing that the community needs
other branches. This certificate is laid before us, and I simply say
that while Congress, of course, could change the law, but as I read
the law, our power is limited as I have stated.
The CHAIRMAN. DO you think it desirable that Congress should
change the law forbidding banks with branches?
Mr. HAMLIN. NO. In discussing the scope of the power of the
board, counsel has rendered a very able opinion and I think it is
a very carefully thought out opinion and for a long part of the
way, personally, I am very glad to follow him, but toward the




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

end—I have known of cases of lawyers disagreeing or differing
from one another—I have to differ with him. Counsel, for example, in one part of his opinion has advised the board that the
board "may base its judgment on the ground that an unlimited
number of branches is inconsistent with the independent! system
of banking which was the basis on which the Federal reserve system was founded." I feel strongly that the Federal reserve system
was not founded on any basis of independent unit national banks.
There was a suggestion at the outset that it should be confined to
national banks, but the Federal reserve system is now based on
the dual system of unit national banks and State banks, many of
whom have large and powerful branches. I do not see, furthermore,
how you can say that any State has given an unlimited right to
create branches. Every State has to act through its superintendent
of banks and he is the one to decide whether public necessity or
convenience demands a new branch, and all the cases coming to'
us come to us with a certificate from the superintendent of banks
showing a public necessity for the establishment of such branches.
It seems to me clear, furthermore, that a State bank with branches
is certainly not inconsistent with any part of the Federal reserve
act. When the Federal reserve act was passed the State banks
had large numbers of branches—I think one had 10 or 12 branches
Section 8 of the Fedral reserve act gives! the State banks the
right to convert into a national bank, presumably with their
branches; they could not convert otherwise. But what is more to
the point is section 5155 of the United States Revised Statutes,
which reads as follows:
It shall be lawful—

This was passed in 1865—
It shall be" lawful for any bank or banking association organized under
State laws and having branches, the capital being joint, and assigned to and
used by the mother bank and branches in definite proportions, to become a
national banking association in conformity with existing laws, and to retain
and keep in operation its branches or such one or more of them as it may
elect to retain.

I do not think anyone can say, reading that statute, that a member State bank with branches is inconsistent either with the Federal reserve act or the national banking system. There are national banks now in existence with branches; there is the bank of
California, which has three branches in different States.
The CHAIRMAN. The Chatham & Phoenix Bank has six branches-,
Mr. HAMULIST. That is a State bank converted into a national bank.
The Comptroller of Currency has frequently given charters to such
banks, so I do not think that you could say that the existence of
branches in the Federal reserve system is inconsistent with either
the Federal reserve act or the National banking act.
As I have said, the whole question of branches depends on the
law of the State, and where the State has given the right to a bank
to establish branches section 9 of the Federal reserve act says that
that bank may come into the Federal reserve system and retain its
full charter and statutory rights as a State bank or trust company
and may continue to exercise all corporate powers granted it by the




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

183

State in which it was created and shall be entitled to all privileges
of member banks.
Now just a word as to the merits of branch banking—it is, as you
know, a complicated question. I think I have read every article I
could beg, borrow, or steal on the subject. I can not resist the
feeling that the system of branch banking is a good system, at least
for the people of California, although it may be that there may be
a difference in policy demanded in other States. California, as you
know, is a State of enormous area, and it has a wonderful diversity
of peaks of credit. These State banks and their branches collect
deposits, all they can get, and have created a revolving fund to meet
the conditions as they appear in different parts of the State at different periods of credit demand, and I wish this committee would ask
the board to furnish it with the testimony of Mr. Stern, of the
Pacific Southwest Trust & Savings Bank, and Mr. Bacigalupi, the
vice president of the Bank of Italy, on this subject as well as that
of other bankers opposed to branch banking. It is most interesting
and will afford the committee much valuable data and information.
The CHAIRMAN. IS that available?
Mr. HAMLIN. We are having it printed. I think it may now be
available; but if not, it will be in a very short while.
The CHAIRMAN. If it is available I will ask that it be placed in
the record. We would like to have it for the use of the committee^
Mr. STRONG. DO you mean that the Federal Reserve Board will
circulate it?
Mr. HAMLIN. Yes. It was a hearing held by the board.
Mr. STRONG. I wish they would also circulate the comptroller's
letter against branch banking.
Mr. HAMLIN. This was a hearing we had two months ago. There
are, in California, unit banks and branch banks side by side and we
tried to ask all the various witnesses who appeared before the board,
some in favor of them and others opposed to the system, what the
effect of the branch banking system was as to discount rates, and the
universal testimony was that, except at the outset in pioneer districts, rates are probably not reduced.
Mr. STRONG. IS that because of the large deposits of money of
wealthy people going to California ?
Mr. HAMLIN. Yes; and these bankers all say that the fact that they
had this system of branch banking by which they could collect all
these deposits and send them in a revolving fund of credits, that that
fact kept money in California that otherwise would have gone to
Wall Street.
Mr. STRONG. Then they have a reserve system all their own ?
Mr. HAMLIN. YOU might call it so.
Mr. STRONG. They have these banks in the different producing
centers and they pass their reserves around as each crop is marketed ?
Mr. HAMLIN. They can make large loans to the agriculturalist.
He might have need for a large loan and often could not get it, if he
was doing business with a national bank. But he can get it under
the branch banking system. That is a great advantage. I know> of
no testimony that was given to us of absolute injury to a member
bank. There was fear expressed that ultimately the branch banks
might injure the national banks, and I think there may be some




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

ground ultimately for that fear, but the testimony given before us
did not show that there was keen competition which resulted in
lowering discount rates except in the pioneer banking districts at
the outset. I believe, personally, that we ought to give more power
to the national banks. I believe they ought to be given the right
to establish branches. If you can not give it in the county, give it in
the town or city, and that privilege will help them very much in
the competition which must go on with the branch banks in the same
town or city.
Mr. STRONG. Have you any suggestion as to how to stop branch
banking by State banks ?
Mr. HAMLIN. That is a question of State legislation. I simply
want to state that, as Mr. Platt said yesterday, this is a controversy
between the national banks on the one side and State banks with their
branches on the other side. I feel our board should go deeper than
that: They should go to the borrower and see what is for his best
benefit. It should be determined whether or not it is to the best interests of the borrowers to have this State system of branch banks
side by side with national banks in California and other States.
The CHAIRMAN. YOU believe that the real question is, " What is
to the best interest of the borrowers, those who need credit in the
State?"
Mr. STRONG. Have you found any great demand from the borrowers for branch banking ?
Mr. HAMLIN. I remember two applications, one in Porterville, and
the other in Yuba City, Calif., in which it was said that the public
favored our granting the application.
Mr. STRONG. Said by who? The banker?
Mr. HAMLIN. By the banker. There was a national bank also
there. There was no opposition.
Mr. STRONG. It was the banker that wanted the branch bank ?
Mr. HAMLIN. Side by side, The national bank officers said they
would be willing to have the branch bank applications granted.
Mr. GLASS. May I ask you if you had protests against the establishment of branch banks from borowers?
Mr. HAMLIN. I have yet to hear of one.
Mr. STRONG. Of course the borrower does not dare protest.
Mr. HAMLIN. That is all I have to say on that question.
The CHAIRMAN. I rather gained from your discussion of this
Californian situation, and you point out the interesting fact that
the money follows the trade channels. Does your observations show
that these banks loan all the money locally or a greater portion of it ?
Mr. HAMLIN. I should say they did.
The CHAIRMAN. And they are serving that community to the full
extent of deposits?
Mr. HAMLIN. Yes, whereas the national bank during these various peaks of credit demand might have to loan at a long distance
from its home office, where the loans might not be safe to make, the
national banker not knowing the local conditions. The branch
banks, on the other hand, tell us that they take residents of the locality and make them officers and directors of the branches becauseof their knowledge of local conditions.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

185

The CHAIRMAN. Then these retired wheat farmers are really helping to finance California through this branch system of banks ?
Mr. HAMLIN. Yes.

Mr. STRONG. We do not send profits from our wheat out there
because wheat is too low?
Mr. HAMLIN. Yes; now, I have nothing specially to say on the
par collection system except that the Board has in its possession a
memorandum prepared by various officers of the Federal reserve
banks, which, however, the board has not yet considered.
The CHAIRMAN. Will you supply that for the record ?
Mr. HAMLIN. I shall be pleased to do so.
Mr. STRONG. I wTould like to ask if these bankers are members of
the Federal reserve system?
Mr. HAMLIN. Yes.
Mr. STRONG. They contemplated getting out?
Mr. HAMLIN. I would not say, precisely, that

they contemplated
getting out. I would not say that. They discussed the whole question fairly and frankly.
Mr. STRONG. I was told two months ago that there was some question about their staying in. One of these bankers said he w^as in
favor of staying but that the Bank of Italy contemplated going out.
Mr. HAMLIN. I will say this: these large State banks almost never
discount with us. Consequently their large contributions in the
shape of capital and reserve deposits, are at the beck and call of the
other member banks, National and State, in crises. They stay in, I
think, because they believe on general principles that it is better to
be affiliated with the Federal reserve system. They have practically
never discounted with us except perhaps during the War a little on
Government paper. I think three or four of these State banks in
California contribute 25 per cent of the capital and reserve deposits
of the Federal reserve bank of San Francisco and that if they should
withdraw it would be injurious to the system.
Mr. STRONG. I think they dare not get out. The bigger they are
the more they need the insurance of the Federal reserve system.
Mr. HAMLIN. They contribute large sums all the same, and almost
never rediscount. The committee has asked as to new administrative
measures with a view to having eligible banks come into the system.
During the war we appealed through the President of the United
States to the patriotism of the member banks. A large number,
probably a majority, of the banks came in originally through patriotism. We also publish a Federal reserve bulletin, which has a
large circulation, the Federal Eeserve Board publishes a monthly
survey of business conditions, and each Federal reserve agent once a
month publishes a survey of business conditions in his district.
The CHAIRMAN. Are they sent out generally to the public ?
Mr. HAMLIN. Only to member banks.
The CHAIRMAN. DO the nonmember banks get this publication or
do they get either of them ?
Mr. HAMLIN. Only if .they subscribe. Then we have member
bank relations departments in the various banks. That has cost very
little money, because they have utilized men with other work to do.
They have done a good deal of successful work. That is one point,
I believe, where the board can bring in a good many eligible banks




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

that we ought to have in the Federal reserve system. I think we
should develop the member bank relations work much further than
in the past and bring the system not only to the banks but to the
people behind the banks and let them see the benefit that will accrue
to them if their banks join the Federal reserve system.
Personally I believe we ought to have some one appointed to take
immediate and direct charge of this work. There are many of these
banks, technically eligible, which probably can not show they are
in condition to come in, and there are a large number of nonmember
banks which have not the capital essential to establish a national
bank and therefore can not come in, at least without ultimately
increasing their capital. I believe it would be most advisable if we
could make some change in the law to make——
Mr. GLASS (interposing). You have reduced the requirement to
fifteen thousand. What is a bank ?
Mr. HAMLIN. I refer to banks of larger capital.
Mr. STRONG. Why can not they come in ?
Mr. HAMLIN. Because of the proportion of capital to population.
There are many banks of large capital, but not large enough to make
a national bank of them. I favor a change in the law.
[Mr. Wyatt pointed out that the agricultural credits act amended
section 9 of the Federal reserve act so as to provide for this class of
State banks, but Mr. Hamlin stated that ultimately these banks
would have to increase their capital and that it gave no relief to
those who might wish to charter new national banks of the same
capital.]
Governor CRISSIXGER. World not that be a handicap to the national banks?
Mr. HAMLIX. NO; I would give them the same privilege.
Mr. GLASS. Would you modify the law so as to reduce the minimum requirement in certain places?
Mr. HAMLIN. Yes; both as to State and national banks.
Governor CRISSINGER. I do not understand you to be in favor of
capitalizing at $25,000 either a State or a national bank in a city of
four or five thousand?
Mr. HAMLIN. NO. The country is full of that kind of nonmember
banks.
Mr. STRONG. Why would you not be in favor of it?
Mr. HAMLIN. I think that that capitalization is too small.
Mr. STRONG. Why?
Mr. HAMLIN. I think the overhead expenses are too large for a
bank with such a small capital. I think Governor Crissinger can
answer that better than I can.
Mr. STRONG. YOU think that where an expensive home is required
and salaries are high the overhead also is high, and that amuont of
capital is too small?
Mr. HAMLIN. I do, speaking generally; yes.
Governor CRISSINGER. I had a man in my office this morning from
a city of three or four hundred thousand where the State permits State
banks to open with $25,000 capital. He told me that there were 38 of
this kind of banks in that city, of which, he was very well satisfied,
there were 14 in a very precarious if not insolvent condition right now.
The trouble with that situation is that your bank has such great




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

187

overhead, high salaries, and so forth, that by the time it gets its
furniture and fixtures with which to do a banking business, it has
expended its capital largely in the process of opening and accumulating enough deposits to make it self-sustaining, and really does
absorb most of its capital, so that the bank has not enough capital
with which to do Tbusiness. If it had, say $200,000 capital, it would
have something w ith which to pay its expenses until it got into operation and could afford some protection to the depositor. I think we
ought to look after the depositor some.
Mr. STRONG. That certainly is a good thought in banking.
Mr. HAMLIN. NOW, as to the question of proposed amendments:
I merely suggest certain amendments that have been before the board.
I do not understand that the board has reached any definite conclusion on them. One is to give member banks a larger share in the
profits of the Federal reserve banks, over the the 6 per cent cumulative dividend. There was one bill introduced by Mr. Lenroot which
contained that suggestion. That bill did not pass, I believe. Another
suggestion has been made to you, that the Government impose a tax
of 2 per cent on Federal reserve notes uncovered by gold, just as it
taxes a national bank note, and make that a prior lien before dividends could be declared, and after that give the banks participation
in the extra dividends or earnings over the 6 per cent dividends.
These are now before you and are being considered by the committees
of the board, and possibly the board will communicate with the committee on these at a little later date. I have already spoken of the
desirability of deducting checks in process of collection from the
gross deposits. The governor also spoke of the desirability of establishing savings departments of national banks.
Then there is the question of liberalizing the Clayton Act. Mr.
Platt spoke to the committee about this. Originally Congress thought
it desirable when banks were in competition to stop interlocking directorates. They decided, however, that where there was no substantial competition they could have interlocking directorates. In
many of these banks the interlocking directors have not restricted
competition. On the contrary, many banks originally not competing
have gone ahead and competed vigorously, one with the other, and
it seems rather hard to have to say to these directors, " Now, you have
permitted your banks to compete, and you have to go off the board."
I question whether the board has not some power without any change
in the law, but we prepared a draft of law which Mr. McFadden
introduced in Congress. I leave that in your hands, Mr. Chairman.
I think there is nothing else except the matter of the abolition of
the office of comptroller. I think that was one of the questions that
was directed to our board or to the comptroller; I am not sure. In
any event, I would like to be excused on that question, until, at least,
I have read the testimony of the comptroller.
The CHAIRMAN. The comptroller entered an able defense this morning.
If there is nothing further to come before the committee at this
time, the committee will stand adjourned until 10 o'clock to-morrow
morning.
(Thereupon, at 4 o'clock p. m., the committee adjourned until 10
o'clock a. m., Thursday, October 4, 1923.)




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE
SYSTEM
THURSDAY, OCTOBER 4, 1923
CONGRESS OF THE UNITED STATES,
JOINT COMMITTEE ON INQUIRY ON MEMBERSHIP
IN THE FEDERAL RESERVE SYSTEM,

Washington, D. C.
The joint committee met at 10.30 o'clock a. m., Hon. Louis T.
McFadden (chairman) presiding.
The CHAIRMAN. Mr. Meyer, this is the joint committee appointed
by the last Congress to inquire into the question of nonmembership
of State banks and trust companies in the Federal reserve system.
The joint committee is authorized to inquire into the effect of the
present limited membership of State banks and trust companies in
the Federal reserve system upon financial conditions in the agricultural sections of the United States; the reasons which actuate eligible
State banks and trust companies in failing to become members of the
Federal reserve system; what administrative measures have been
taken and are being taken to increase such membership; and whether
or not any change should be made in existing law, or in rules and
regulations of the Federal Reserve Board, or in methods of administration, to bring about in the agricultural districts a larger membership of such banks and trust companies in the Federal reserve system.
The chairman is not unmindful of the fact that about a year ago
you presented some facts before this committee based on the operations of the War Finance Corporation; and probably as a result of
that presentation this act followed and the committee would like to
hear what you now have to say on this subject. You can proceed in
your own manner.
STATEMENT OF HON. EUGENE MEYER, JR., MANAGING DIRECTOR
WAR FINANCE CORPORATION, WASHINGTON, D. C.
Mr. MEYER. The work of the War Finance Corporation during the
past two years naturally brought us into close contact with the
banking situation throughout the country, particularly in the agricultural sections of the West and South, and gave us an opportunity
to study, not only individual banks on a very large scale, having made
loans to more than 4,200 banks, but also the situation from the general point of view.
When I had the pleasure of appearing before the Banking and
Currency Committee last January, in connection with the legislation
then under consideration, I presented, as the chairman has stated,
certain facts which I think are pertinent to the investigation you are
107679—26—PT 1




13

189

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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

making. I called your attention then to the fact that 83 per cent of
our bank loans represented advances to State institutions, while 17
per cent represented advances to national banks; and that, in dollars,
$135,400,000, or 80 per cent of the total amount, was advanced to
State banks, and only $32,800,000, or 20 per cent, to national banks.
The amounts advanced to State and National banks since I made that
statement naturally has increased, but the percentages remain approximately the same.
I think these figures show conclusively that, in times of stress the
nonmember banks in the country districts are in great need of access
to a central reservoir of credit; and I felt then, and feel now, that the
failure of the Federal reserve system to recruit to its membership a
larger number of the well-managed country banks which were eligible
to join the system was a fundamental factor in the difficulties of
1920-21.
Senator GLASS. Mr. Meyer, do you know what the total of loans of
all the banks in the United States is ?
Mr. MEYER. I do not have the figure in mind.
Mr. STRONG. Mr. Meyer, could you tell us what per cent ?
Mr. MEYER. YOU mean the loans of the War Finance Corporation ?
Senator GLASS. NO; I mean the loans of all the banking institutions in the United States, loans of the State banks and trust companies and the loans of the national banks.
Mr. MEYER. The tables which I incorporated in my testimony
before the Banking and Currenc}^ Committee show separately the
total resources, which would, of course, include the loans of national
banks, State member banks, eligible nonmember banks, and ineligible
banks.
Senator GLASS. What I had in mind was the total loans of all
State banks and all national banks for the period that the War
Finance Corporation made the $135,000,000 of loans to State banks
and $32,000,000 to national banks. ^
Mr. WINGO. Did your investigation at that time disclose the extent of agricultural loans?
Mr. MEYER. NO; but perhaps some informatiorf along that line
may be available in the report or hearings of the Joint Commission
on Agricultural Inquiry.
Mr. WINGO. NO ; they counted everything, including packing-house
paper and country merchants loans for overhead, where there were
no sales, and they had not carried in their organization overhead,
and also cotton-factor paper, for the purpose of carrying cotton for
the distressed farmers.
Mr. MEYER. I have had no occasion to make a survey of that kind.
Mr. STRONG. YOU have just given us the percentages and number
of loans made to the State banks and to the national banks ?
Mr. MEYER. Yes.

Mr. STRONG. And you told us about what proportion of those
loans were made in Western agricultural States ?
Mr. MEYER. All the loans were made in the agricultural and livestock States, because they were made only for agricultural and livestock purposes.
Mr. STRONG. Then, is it not true that the reason there is such a
large percentage of State banks borrowing was because in the agricultural States State banks very greatly outnumber the national




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

191

banks; for instance, in my own district I will presume to say there
are from six to eight State banks to every national bank.
Mr. MEYER. Let me give you the figures, then, from this point of
view: Our loans to national banks, all of which are, of course, members of the Federal reserve system, and to State member banks aggregated only 22y2 per cent of the total, while the loans to eligible nonmember banks and ineligible banks aggregated 77% per cent of the
total. I place, as you will note, the member banks in one group and
the nonmember banks in another.
Mr. STRONG. Your conclusion was that the remedy might be for
the banks to join the Federal reserve system, and they would not
need so much money ?
Mr. MEYER. I believe a good deal of the trouble would have been
avoided if a larger number of the eligible nonmember banks, whose
condition was satisfactory and whose management was sound, had
been members of the Federal reserve system.
Mr. STRONG. Of course, a great number of the State banks are outside of the Federal reserve system.
Mr. MEYER. That is true, but the resources of the eligible nonmember banks constitute the greater part of the banking resources
outside of the system.
Mr. STRONG. But the point I was making was that in the percentage—the greater number of the State banks being outside—if they
had all borrowed equally, of course, a greater amount of money
would be borrowed by the nonmember banks.
Mr. MEYER. The situation we came across when we began making
loans for agricultural purposes on a Luge scale was that the eligible
nonmember banks were borrowing heavily from their correspondent
member banks, thus having contact only indirectly with the Federal
reserve system. I believed then, and I believe now, that direct contact with the system would have been more advantageous to them
and to the agricultural interests they serve, and that such contact
would have resulted in a much better situation so far as the permanent banking structure of the country is concerned.
Mr. STRONG. That is what we are here for, to bring about some
means to encourage the entry of those banks into the system.
Mr. MEYER. Exactly.
Mr. STEAGALL. Mr. Meyer, while you are on that, what percentage
of the national banks refused or failed to avail themselves of the use
of the Federal reserve system during this time?
Mr. MEYER. I do not have those figures.
Mr. STEAGALL. It would be very desirable to have all the national
banks make use of the Federal reserve S}^stem?
Mr. MEYER. They are all members of the Federal reserve system
by law.
Mr. STEAGALL. I say, make use of it.
Mr. MEYER. I do not think there is any obligation on a member
bank to borrow money from the system unless the needs of the community warrant it. That is the only basis for borrowing from the
system. If a bank has ample funds and is serving its community
fully, I would say it is unnecessary and inadvisable for it to borrow
from anybody.
Mr. STEAGALL. What I am talking about is this, Mr. Meyer: That
is all indisputably true. But is it not true that until now7, and during




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INQUIRY OX MEMBERSHIP IX FEDERAL RESERVE SYSTEM

the period of depression, about which we have all been so much concerned, large numbers of national banks declined and failed to do
business with the Federal reserve system ?
Mr. MEYER. I think most of the national banks were borrowing
from the Federal reserve system at that time.
Mr. STEAGALL. But, it is true
Mr. MEYER (interposing). As a matter of fact, during the war
practically all the national banks became borrowers from the Federal
reserve system, and, generally speaking, they did not cease borrowing
from the system until well along in 1921. I think that, on the whole,
they borrowed enough.
Mr. STEAGALL. IS not this true, that a great many borrowed too
much and some did not borrow at all; is not that the way it was?
Is it not a fact that a large number of national banks did not participate in the effort to relieve the struggle by utilizing the Federal
reserve resources ?
Mr. MEYER. I do not believe I would be justified in saying that a
large number did not. Some of them probably did not borrow, but
I think the number was relatively small. In fact, I doubt if there
were many banks of importance in the agricultural sections of the
country that did not, at one time or another, borrow from the Federal reserve system.
Mr. WIXGO. The cold statistics show that one-third of tlie member
banks during the time of greatest stress did not have a single piece
of paper rediscounted at the Federal reserve bank. I have never
been able to get an explanation of that.
Mr. STEAGALL. Mr. Wingo is making the statement I hesitated to
make, because I did not know whether it was accurate.
Senator GLASS. YOU need not hesitate on that account, because it
has been testified to here.
Mr. STEAGALL. I was not absolutely sure, and that is why I wanted
to elicit that statement from Mr. Meyer.
Senator GLASS. And I might add that to the extent of $8,000,000 it
was true in the State of Alabama. There were national banks in the
State of Alabama which had a basic line of credit with the Federal
reserve bank of their district aggregating $8,000,000 that did not
borrow a dollar.
Mr. MEYER. I had this matter in mind about a year ago, when I
addressed a communication to the president of the American Bankers'
Association, calling attention to the fact that a number of member
banks were advertising that they were not borrowing from the Federal reserve system, as though that were proof of their soundness.
I do not think the absence of borrowings is proof of either soundness or of service. And I do not think we are in a position to! form
any judgment as to what the failure to borrow means unless we
analyze the condition of the bank concerned as well as the conditions
prevailing in the community served by it.
Mr. STEAGALL. Was not this true, that you find varying conditions
even in the same community; that is, you would find one bank trying
to take care of the needs of the community badly overextended and
perhaps another member bank not availing itself of the resources of
that system.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

193

Mr. MEYER. There are public-spirited people in every community,
but in some places the number may be greater than in others.
Senator GLASS. But you know perfectly well that Congress can not
pass any law compelling a bank to either borrow or loan money.
Mr. MEYER. I do not know how it could be done, Senator.
Mr. STEAGALL. I do not think that there would be any law compelling a change of those conditions, but I do think this, that if there
is anything in the law that may be corrected, that will tend to prevent a recurrence of a situation like that, where only a portion of the
member banks carry the burdens of the stress and storm while others
stay out—if it is due to any objections to the system, I think we
ought to try to remove them if we can.
Senator GLASS. YOU are a lawyer, and you know Congress can not
pass any law to make the banks borrow money or loan money.
Mr. MEYER. I think that for the most part the bankers of the country endeavored to stand by the situation to the best of their ability.
I am not criticizing bankers as a whole, because I think the larger
number of them acted in a very public-spirited way. There may have
been exceptions; naturally there are exceptions in the banking profession, just as there are in other professions.
Mr. WINGO. Mr. Meyer, that being true and the fact that under
a system that whatever may be its defects or whatever mistakes may
have been made in the administration during abnormal times, it is
confessed to be a great system and a liberal system, the fact that onethird of the member banks in that time failed to take advantage of
their rediscount privileges indicates that those bankers, responsible
to their stockholders and their depositors, presumably men of business intelligence and yet responsive to the needs of their community,
that there must be something that would cause them to not avail
themselves of these privileges. That is one of the things we want to
get at. Is it a misapprehension upon their part? Are they led to
believe that there are things in the regulations or in the law that
makes it unwise for them to avail of the privileges? Is there any
ground for their misapprehension; is there any change that ought
to be made either in regulations or in law, or is there any change
that can be made that is sound and consistent and sensible that
can be made? Those basic facts challenge the attention of thoughtful men. What is the situation? The presumption, as you said, is
that there are no more bad bankers than there are bad lawyers, bad
merchants, or anything else, and it is unreasonable to think that a
banker would not naturally want to aid his own community; he
would be shortsighted if he did not do it and did not take care
and increase the business and increase the profits by aiding his own
community. Now, if there is something^ either misrepresentation of
a fact or if there is a fact existing that caused one-third of them
to hesitate to take advantage of the benefits of the system that has
been created for their benefit and for the benefit of the public through
them, what is the trouble? Can you throw any light on it? What
is your opinion about it?
Mr. MEYER. It seems to me that, in the first place, you should
investigate your premise before you reach a conclusion. Do you
think, for instance, that in 1921—are you speaking of 1921 ?
Mr. WINGO. Well, 1920 or 1921; that was the storm time.




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INQUIRY ON MEMBERSHIP IX FEDERAL RESERVE SYSTEM

Mr. MEYER. Let us say 1921, because the operations of the War
Finance Corporation with respect to advances for agricultural and
livestock purposes began in August, 1921. I can not imagine any
reason why a member bank in Massachusetts—and the membership
is strong in that State—should have borrowed from the Federal
reserve system at all.
Mr. WINGO. I think you will find
Mr. MEYER (interposing). Therefore, when you say a third of the
member banks did not borrow, I think you should, first of all, locate
the third—find out where they are.
Mr. STEAGALL. I think we can locate them now, because you have
mentioned the fact that in the very same communities there were
banks borrowing and overextended while there would be others doing
business in the same community that did not avail themselves of the
privilege.
'
Mr. MEYER. But I did not understand you to say that those banks
.comprise one-third of all the member banks of the country.
Mr. STEAGALL. I do not say that the total of the third is made
up of that kind.
The CAIRMAN. Allow me, in that connection, to suggest that you
may find in some communities an old-established bank, which has on
its directorate and associated with it men who represent the borrowings of that community. You may take a new bank that is located
there that has none of those connections, and it has few if any borrowers in the local community and it is loaning money outside. It
has not the demand the old bank has. The old bank may be rediscounting, yet there may be money from that community going outside.
Mr. WINGO. Here is what I want to get at: I am not thinking
about these prosperous centers like that which Mr. Meyer suggested.
Your activities have been confined largely to agricultural States,
where are located the wheat, cotton, rice, and the cattle business,
Out in that territory I do not know what part of it constitutes this
one-third we were talking about. The statement has been made here
repeatedly since 1921 that there were numerous banks—it was not
just an isolated instance—member banks, who did not avail themselves at all of the rediscount privileges. Now, in your operations—
in your taking care of this class of business out there, have you run
across any fact or any viewpoint of those bankers that you can give
to this committee to explain why it was in that time of stress and
storm they did not come to this city of refuge for one single dollar ?
Mr. MEYER. While I have not had occasion to study the situation
from that point of view, personally I should doubt whether one-third
of the member banks in the agricultural and livestock sections in
wThich we operated, failed to borrow from the Federal reserve system
at one time or another during the period of stress.
Mr. WINGO. I did not say one-third. I said there were numerous,
not isolated, cases; and I think if }Tou will look into the statistics
you will find that is true.
Mr. MEYER. I have not investigated the facts to which you refer.
Mr. STEAGALL. Senator Glass has called attention to the fact that
in Alabama were communities where it is well known those conditions
existed.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

195

Senator GLASS. Might not this well have been the case, that those
banks felt that they T
had sufficient resources of their own to make
all desirable loans, w hereas other banks had not? That would explain the difference right away. Here is one bank in a given community and its resources are ample to take care of all loans which
in the judgment of its board of directors should be made. A bank
right across the street might be a weak bank with limited resources,
and it would have to resort to the Federal reserve bank to enable it
to make loans.
Mr. MEYER. Mr. Chairman, may I, in a general answer to Mr.
Wingo's question, say this? In our work through 33 agencies, which
are in charge of committees composed of representative local bankers
in the different agricultural and livestock territories, I never discovered any failure on the part of the bankers to respond to a request
from the War Finance Corporation. In fact, their cooperation with
the corporation has been a very agreeable and remarkable demonstration of the willingness and readiness of bankers generally to cooperaate in the public interest, whenever that public interest is presented
to them fairly and squarely.
The CHAIRMAN. Are your committees made up of bankers ?
Mr. MEYER. Yes; to a large extent. Let me illustrate: Before the
corporation was authorized to make advances for agricultural purposes, and while I was not connected with the Government in any
way, I came to Washington to attend the meeting of the American
Bankers Association. That was in the fall of 1920, when cotton was
in great distress, distress which perhaps was greater than that which
affected any of our other important commodities. I suggested to the
bankers from the South, wTho held a meeting to discuss the matter
with me, that they should organize a bank under the Edge law to aid
in relieving the cotton situation. And it is a very significant fact
that, at a time when the cotton situation was at its worst, 1,40,0 banks
in the South subscribed $7,000,000 to the capital of an Edge law bank.
That institution has been extremely helpful and is now functioning
with marked success, selling its acceptances without difficulty all over
the United States and Canada.
Let me go further: About two weeks after the passage of the agricultural credits act of August 24, 1921, I made a trip through the
West to confer with our local committees and to get an accurate picture of agricultural and livestock conditions. I pointed out to the
bankers and business men in Utah, in Wyoming, in Montana, in Colorado, in Nebraska, and later in Texas, New Mexico, and Nevada, that
some new livestock loan companies, with fresh capital, through which
we could aid the livestock industry on a sound, safe, and businesslike basis, were urgently needed; and in those territories where the
distress was very great, where money was unbelievably scarce, and
where confidence was exceedingly low, they subscribed to the capital
of these companies an amount which, in the aggregate, exceeded the
capital of all the loan companies in existence prior to October 1, 1921.
In Fort Worth, for example, they provided $1,000,000, in Cheyenne,
$1,000,000; in Denver, $500,000;'in Oregon, $400,0,00; in Montana.
$250,0.00; in Nebraska, $250,000; and in Salt Lake City, which at that
time was as hard hit as any community in the whole country, because
all the important industries upon which it depended—livestock, sugar
beets, and mining—were, so to speak, down and out, they were the




196

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

first to organize a new company, with a capital of $250,000. The
bankers did that, and I think they are entitled to fair recognition for
their public-spirited attitude.
Mr. WINGO. Mr. Meyer, you seem to miss my point altogether. I
was not criticizing bankers. I said I was assuming that all of
them, with no larger percentage among them than any other profession or business, were responsive to every need.,
Mr. MEYER. That is right.
Mr. WIKGO. Yet, based upon that assumption, why was it that
such a large number of them were willing to do what you said in
the territory—and I suspect you will find every territory, and I
should not be surprised if you will find some of the bankers you
referred to who took part in these extraordinary organizations—
their bank systems would show, and at least one of them in the
very territory you referred to has boasted to one of the members
of the board that his reserve was 40 per cent above that required,
and he did not have a single cent of rediscount.
The point I am trying to get at is, why is it? Why did these
men, anxious and willing to do everything that is proper to meet
the situation in their community, so many of them would not avail
themselves of the privilege? Did they think that the loans that
were offered were not sound? Did they think the conditions of
banks around them established by the Federal reserve banks were
not fair or right or sound? Just what reason do they give for it?
There ought to be a reason for it. It is either that they thought
the loans offered to them were bad, and they did not need the
rediscount or anything else. There was something in the rediscounting process they did not like, or something in the law or
regulations. Just what was it. That is what I want to get at. I
have heard a hundred and one different reasons given. I have
heard so many people say everybody was passing the buck. I
want to know what is the basis for it. Is there any remedy that
Congress can give that will be consistent with the philosophy of
the Federal reserve act and consistent with sound banking that
we can do; or is the situation helpless and hopeless? In your investigation and your experience I thought you might be able to
throw some light upon what is the reason for this failure.
Mr. MEIYER. All I can say is that we have always succeeded in
getting the cooperation of the bankers when we have asked for it.
I do not know that we could have expected them, operating as
they do in a limited territory, to conceive of the larger problems
over the whole country. Of course, local jealousies here and there
might prevent concerted action in some cases, whereas a request
coming from the United States Government, with no local interests, would bring about united, harmonious, and public-spirited
effort.
Senator GLASS, Mr. Meyer, do you not know perfectly well that
there is a very large number of bankers, and always has been, which
regard rediscounting as a weakness rather than an indication of
strength ?
Mr. MEYER. Under normal conditions I imagine that is so. But
certainly, Senator, you know that, when you were Secretary of the
Treasury and when the financial strain in 1919 was considerable,
there was no general complaint on your part, as head of the eoun-




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

197

try's finances, that the bankers would not cooperate when called upon
to do so in the public interest. On the contrary, I think you found
just what I found—that they were ready and willing to cooperate.
Senator GLASS. A S a matter of fact, the available statistics show
beyond any dispute that the bankers in most of the agricultural districts—I have in mind South Carolina—and I would like anybody to
produce a single bank in South Carolina, member of the Federal
reserve system, that did exceed its basic line all the way from 100
to 1,700 per cent with the Federal reserve system; and in your State
of Alabama, with the exception of the strong, big banks in Birmingham and other populated centers, there was scarcely a bank in the
State of Alabama that did not borrow away beyond this basic line
from the Federal reserve bank. That was also the situation in North
Carolina.
The CHAIRMAN. Mr. Meyer, just a moment, if you please. I have
been very much interested in your statement regarding the relief
furnished to banks in these distressed agricultural sections, and I
know that the operations of the War Finance Corporation bear you
out fully in that respect. It is indicated by j^our statement that banks
in those sections did get relief indirectly through the Federal reserve
system. Have you any information which indicates that the members
of the Federal reserve banks, to whom those banks applied for loans,
refused to grant rediscounts to them?
Mr. MEYER. There was at the time a certain pressure by the correspondent banks in the big cities for liquidation from the country
banks that were borrowing from them, and I claim that if the nonmember banks, eligible for membership in the Federal reserve system, had had direct, rather than indirect, contact with the system,
the pressure would have been lessened to a considerable extent.
The CHAIRMAN. That probably was evidenced through a higher
rate of interest exacted from them, which made a correspondingly
higher rate of interest to the borrowers. But has that experience
convinced nonmember banks in those districts of the advisability of
joining the Federal reserve system, or has it been through their indirect connections with the Federal reserve system that they can take
care of the interests of their customers under stress conditions?
Mr. MEYER. Let us analyze the facts that controlled the situation
two and a half year^ ago. I will use the State of South Dakota as an
example. At that time the deposits in the State totaled $300,000,000,
but within a year they had been drawn down to about $200,000,000.
A certain seasonal liquidation of loans was going on through the
shipment of grain and livestock to market in the normal course.
But the decline in deposits was so rapid that a very large part of the
withdrawals had to be borrowed, and, as a matter of fact, the War
Finance Corporation made loans in South Dakota totaling nearly
$15,000,000. Since then there has been further liquidation of commodities resulting from the natural processes of production and marketing, and operation of these processes, as you know, ordinarily
brings about an increase in deposits in most of the agricultural States.
The CHAIRMAN. Does a careful analyses of the use to which loans
made by you were put indicate that a large portion of that money
was to liquidate loans through other banks?
Mr. MEYER. Some of it was so used: some of it was used to make
new loans; some of it was even used to liquidate borrowings from the
107679—26—-PT 1




14

198

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Federal reserve banks; and the effect, of course, was to ease conditions generally. Senator Glass referred to the aggregate of our loans,
and inquired about the total bank loans in the United States. Of
course, our total loans seem very small in comparison with all the
loans made by all the banks of the country. But when there is pressure, a very small percentage of the whole may, and ordinarily does,
determine the entire situation with respect to prices and credit conditions. It is the empty house in the row that determines the rental
level.
Mr. STRONG. That is certainly not true in Washington. [Laughter.]
Mr. MEYER. I was not referring to local conditions; I was talking
about conditions in the agricultural territory.
Mr. STRONG. All right.
Mr. MEYER. There was a confused situation. There is no use disguising the fact that different bankers operate differently. Some are
courageous and some naturally become frightened, just as some
people in other lines of activity become frightened in times of difficulty and stress. It may have been fear that governed the actions
of some bankers, and not the lack of intelligence. The emotional
factor in a panicky situation controls the actions of a great many
people.
The CHAIRMAN. I have been very much interested in your apparent ability to secure the cooperation of the State banks and trust
companies that were not members of the Federal reserve system, and
I wonder whether you have any practical suggestions to make to
this committee as to how to get those banks to join the system, inasmuch as they are not cooperating now by joining the Federal reserve system.
Mr. MEYER. A question like that reminds me of the man who said
to another: " Tell me how to play the piano." " I may know how
to play the piano," replied the man to whom the request was addressed, " but
"
The CHAIRMAN (interposing). In this case you know how to play
the piano.
Mr. V/INGO. We have given a piano, and they do not use it. What
is the use of giving out any more pianos ?
Senator GLASS. In plain language you think it is largely a matter
of administration rather than law ?
*
Mr. MEYER. I do. I stated in my testimony before the Committee
on Banking and Currency last January that it is primarily a matter
of administration rather than of law.
Senator GLASS. Exactly.
Mr. STEAGALL. If you can point out anything that will help cure
the difficulty we have in mind it will be appreciated. This committee first wants, according to the letter of our authority, increased
membership in the Federal reserve system. That embraces the
fundamental idea of an increasing use of the Federal reserve system.
So we want any suggestions that will tend to induce the banks to
join that are eligible, and likewise we would like to induce those
who are members to use the system.
Mr. MEYER. If it were my job to increase the membership of the
Federal reserve system, I would certainly meet the parties in interest
and discuss it with them first.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

199

Mr. STRONG. We have had a lot of propaganda against our meeting them.
Mr. MEYER. I would discuss the matter with the American
Bankers' Association in the first place, and find out whether that
association, as a national organization, is in favor of having the
eligible nonmember banks which are well managed and in satisfactory condition become members of the system. I would get in touch
with the State banking associations and the State banking departments of every State in which this situation is important, and I
would canvass it thoroughly with them.
Mr. STRONG. That certainly would be a businesslike way to go
at it; but we have had a lot of propaganda to prevent us from
doing it.
Mr. MEYER. I say that those whose business it is to get the eligible
nonmember banks into the system must come in direct contact with
those who are able or unable, willing or unwilling, to bring it about.
Mr. STRONG. Amen!
Mr. MEYER. We have had very fine cooperation from the banking
superintendents in most of the States. But we obtained that cooperation because we got in direct contact with them. With reference to
getting the well-managed eligible nonmember banks into the Federal
reserve system, I would ask for an expression of policy on the part
of the American Bankers' Association, on the part of the State
bankers' associations, on the part of the State banking superintendents, and I would also seek out and determine the attitude of large
banks which are, to some extent at least, short circuiting the system
and using its resources to establish a subsidiary and, I claim, inferior banking rediscount system for their country correspondents.
I have not considered it to be my duty to take that job upon myself,
although I may do some things which are not strictly my business.
But I have asked one or two of the large commercial banks, which
rediscount on a large scale for eligible nonmember banks, where they
stand on the proposition, and they have replied that, if the public
interest demanded it, they would do all they could to induce their
correspondents to become members of the Federal reserve system!
I sometimes think that we here in Washington make a mistake
by failing to go out into the various sections and request that cooperation in the public interest which I claim the bankers and other
large groups are ready to give when the matter is properly presented to them—properly explained and justified.
If you want an expression of opinion from me. that is all there is
to it. When that is fully realized, we will not need to waste much
time in discussing the matter.
I fell that, 9 times out of 10, the failure to obtain satisfactory cooperation is due to the failure to call upon, in the right way, the
large number of patriotic and public-spirited people who are interested in the particular matter or situation involved. If the War
Finance Corporation has succeeded, in reasonable measure, in its
efforts to do what you gentlemen expect us to do, as some of you
were good enough to suggest when I last appeared before you, it
was because we went out and met the people interested and sought
their cooperation. I am more than ever convinced that if the Government wants to accomplish something, it can best be accomplished




200

INQUIRY ON MEMBERSHIP RT FEDERAL RESERVE SYSTEM

by seeking the cooperation of the people in interest, putting it right
up to them, and discussing it to a finish.
Mr. STRONG. YOU are talking about the Federal Reserve Board or
about Congress?
Mr. MEYER. Anybody whose responsibility it is. You have a committee here to find out how it can be done.
Mr. STRONG. Suppose we determined to start out, we would be
immediately accused by the muckrakers of going off on a junket.
Mr. MEYER. If we had been influenced in our work by veiled innuendo, I do not think we would have accomplished very much.
Mr. STRONG. We are now sitting around here talking to men whose
opinion we knew already.
Mr. MEYER. I have given my opinion, and I think you ought to
know it by this time.
Mr. STRONG. Who do you mean ought to go out—this committee
ought to go out or the Federal Reserve Board ought to go out ?
Mr. MEYER. That is for you to decide. You are conducting an
investigation.
Mr. STRONG. DO you really not mean the Federal Reserve Board ?
Mr. MEYER. If you insist, I think it is the job of the Federal
Reserve Board.
Mr. STRONG. YOU think it is the job of the Federal Reserve Board
and of the officers of the Federal reserve banks in their respective
districts ?
Mr. MEYER. That is exactly what I mean.
Mr. WINGO. You think Congress having created these boards to
represent the public in the only representation they legally have, we
ought to sit around here and wait for them to do that?
Mr. MEYER. YOU can discuss that with; them. You have the governor here, I suggest that, after you get through with me, you
might ask him whose business it is.
Mr. WINGO. Who do you mean?
Mr. MEYER. The governor of the Federal Reserve Board.
Mr. WINGO. We had him here.
Mr. MEYER. He is here now. You can settle with him whose business it is. I claim that our experience justifies me in saying that the
situation would be better now, as well as in the future, if the properly managed eligible banks were members of the Federal reserve
system and were not compelled to rely upon indirect discounts
through their correspondent member banks in the large cities.
Mr. WINGO. Will you please tell us what these member banks out
yonder that this committee is not in touch with and have not got in
here—what reasons they have given why they do not join the system?
Mr. MEYER. I shall have to ask you to excuse me on that question,
as I do not consider that I am competent to give you a full analysis
of the situation. I have been too busy with the work of the War
Finance Corporation to conduct questionnaires on the subject,
Mr. WINGO. YOU are not competent to tell this committee ? What
reason have these country bankers given you ?
Mr. MEYER. I have not conducted an inquiry on the matter.
Mr. WINGO. DO you mean to tell this committee no country banker
has told you why he did not go into this in these agricultural States?
Mr. MEYER. I have not discussed it.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

201

Mr. WINGO. I say, no country banker has ever volunteered to tell
you in all your operations in the rice, cotton, and wheat belt why
it is?
Mr. MEYER. I can not recall a single country banker with whom I
have discussed the reason why he believed, or did not believe, that he
should join the system.
Mr. WINGO. SO there is absolutely nothing so far as the activities
of this committee are concerned that you can throw some light on, is
there?
Mr MEYER. I tried to throw a little light on the problem of how to
bring about an increase in the membership of the Federal reserve
system.
Mr. WINGO. About what ?
Mr. MEYER. Additions to the membership by meeting the people
directly concerned and interested.
Mr. WINGO. Who meeting?
Mr. MEYER. The Federal Reserve Board and the Federal reserve
banks.
Mr. WINGO. But you know a majority of the Members of Congress
feel that we have been created to investigate this, and the presumption is for such a committee to undertake to inquire into why things
do not happen.
Mr. MEYER. That question \erges on the functions of this committee, and I do not think it is within my province to determine what
they should be. I think the matter is one for the committee to settle.
The CHAIRMAN. I might say, in that connection, that we have
coming before the committee to-morrow the chairman of the advisory council of the Federal Reserve Board; and Tuesday next wTe
have a committee representing the American Bankers' Association.
We also have a committee representing the Reserve City Bankers'
Association, which is an adjunct to the American Bankers' Association.
Mr. MEYER. They are, of course, representative organizations and
should be able to give the committee some helpful information.
The CHAIRMAN. They are speaking for the banks on the different
subjects embodied in this inquiry. A committee from the New England Federal reserve banks will be here; also the United States
Chamber of Commerce, the Country Bankers' Association, and the
National Credit Men's Association are each to be represented.
Mr. MEYER. YOU are getting in contact with very representative
organizations.
The CHAIRMAN. And some of the farmers' organizations will present their views.
In addition to that, I assume there will be expressions—it has been
indicated to me there will be—from some of the State bank associations, who will present their views on these different subjects.
So far as the committee on inquiry is concerned, it is a rather delicate task to extend invitations. This committee is ready to
hear any person or group of bankers who will present information
to them that will be helpful. It may be necessary before we are
through, if we do not receive the information we desire and it is
available, to go into some of the districts and get the information
first hand.




202

INQUIRY OX MEMBERSHIP IX FEDERAL RESERVE SYSTEM

Mr. MEYER. I have some statistics here which I think will be
interesting to the committee: The average capital and surplus of the
national banks, all of which are members of the Federal reserve
system, is $285,000, while the average capital and surplus of the
member State banks is $692,700. Now, it has frequently been made
to appear that the eligible nonmember banks are a lot of small institutions of no great importance. But the figures for the average
capital and surplus of the eligible nonmember banks—9,678 in all—
indicate clearly that there is a large number of very substantial
banks which could, with great advantage to the general strength of
the system as well as to themselves and the communities they serve,
be added to the membership. The average capital and surplus of
the whole 9,678 is $125,000. I do not have the exact figures; but I
imagine there are at least three or four thousand banks with an
average capital and surplus equal to the average capital and surplus
of the national banks—that is, $285,000—which would add to the
strength of the system if they were members of it.
In the States where we have loaned large sums during the past
two years there are. unquestionably many banks which are well managed and in good condition and which are eligible for membership.
In my statement before the House Committee on Banking and Currency last January I presented a series of tables regarding the national banks, the member State banks, the eligible nonmember
banks, and the noneligible banks, aild called attention particularly
to the fact that in the six great Corn Belt States—Iowa, Illinois,'
Indiana, Missouri, Nebraska, and Ohio—there were 3,621 banks having a total capital and surplus of $315,000,000 and aggregate resources of $2,554,000,000 which were eligible for membership in the
system but which had failed to join.
The tables to which I refer analyze the whole banking structure
of the country from the point of view of membership or nonmembership in the Federal reserve system. So far as I was able to discover
when the tables were prepared, some of the figures included in them
had never been compiled or presented in the way in which they are
set forth here. If you like, I would be glad to have the tables incorporated in the record of this hearing, because it does not seem to me
that the question can be properly understood unless the facts regarding membership and nonmembership in the system are thoroughly
considered.
Senator GLASS. Are they in that public document ?
Mr. MEYER. They are available in the record of the hearings last
January before the House Committee on Banking and Currency on
agricultural credits; but they are buried away there, and a good
many people who have never seen that document and who will never
see it are going to read the report of your committee. I have no
desire, however, to load down the record with unessential material;
but I do want to say that the tables contain information about the
banking structure of the country which, so far as I know, had not
been published anywhere prior to last January. We spent six weeks
in compiling and analyzing the figures, and I think they are very
interesting.
(The tables referred to and submitted by Mr. Meyer are here
printed in full, as follows:)




TABLE I.—Consolidated statement showing, by States, number, capital and surplus, average capital, and resources of national banks, as of
September 15, 1922; of State banks and trust companies, members of the Federal reserve system, as of June 30, 1922; and of State banks
and trust companies eligible for membership in the Federal reserve system but which had not joined on June 80, 1922
Total member and eligible banks

Number

National banks

Capital
and
Resources Num(000
surplus Average
capital omitted) ber
(000
omitted)

Eligible nonrnember State banks

8

Capital
Resources
and
(000
surplus Average
capital omitted)
(000
omitted)

o

g
Alabama
Arizona
Arkansas
California. _,
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
Idaho
Illinois
Indiana
Iowa
,
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
__,-_




$232,883
$35,026 $136,290
79,911
9,012 140, 810
29,311 104, 680
199, 301
229, 668 352,790 2, 507,484
31,651 137,020
321,425
55, 885 494, 560
396,328
11,751 317, 590
79,599
31,072 1, 294, 670
210, 909
22, 284 131,860
203, 768
69,423 153, 930
394,035
79,110
12, 024
97,247
369, 674 227,210 3,465,310
793,154
95,440 118, 710
89,420
918,197
107, 213
83,010
364,826
48,148
160,450
54, 553
387, 642
46, 653 254,930
414,914
19, 609 186, 750
225,105
72, 650 419,940
535, 751
199, 832 805,770 1, 796,108
139, 568 278, 580 1, 352,492
845,199
90,165 127,170
160,065
21,084 109,810
145, 686 230,880 1, 210, 535
82, 230
184,121
24,092
78,490
424,722
49, 214 130, 580
4,309 165,950
36, 947
10, 787
80,900
118,316 325, 940 1,303, 667
82,160
61,905
8,216
937, 216 1,157,060 9, 743, 566
161,120
358,638
48, 657

107
22
85
281
144
64
18
15
61
99
79
501
251
351
267
136
34
60
86
158
119
342
32
134
131
182
11
56
228
45
504
87

$20,823 $194,610

2,884
10,916
99,475
21,903
36, 606
3,102
13, 575
12,228
27, 236
7, 525
159, 390
46, 316
41, 365
27, 675
29,470
13, 948
11,931
33,999
121,891
38, 536
60,484
7, 234
61, 393
11,889
27, 293
2,058
9,656
57, 825
4,967
483,581
21, 754

131,090
128,420
354.000
152,100
571,970
172, 330
905, 000
200,460
275,110
95, 250
318,140
184, 530
117, 850
103, 650
216, 690
410,240
198,850
395, 340
771,460
323, 830
176, 850
226,060
458,160
90, 760
149, 960
187, 090
172, 430
253, 620
110,380
959,490
250,050

$140, 243
29,165
77,516
985, 809
215, 765
235,150
20, 111
121,593
126,076
173,381
64, 874
1, 505, 871
384, 596
362, 747
228, 633
232, 676
116,403
117,488
261,256
1, 035, 307
430, 516
583, 921
56, 635
562,469
95,094
247, 331
15, 927
65, 740
622, 922
41, 536
4,946, 492
170, 685

25
4
37
48
3
4
1
14
82
41
89
23
108
7
11
16
3
8

30
165
34
7
43
58
15

$49,959
$5, 582 $223, 280
125
10,695
1,145 286, 250
38
55,060
7,152 193,300
158
322
6i, 785 1, 349, C90 857,441
84
24, 586
1,790 j 596,670
44
33, 225
4,600 920,000
15
27,905
3,955 988, 750
8
5,041
1,100 1,100,000
19, 383
2, 930 209,290
94
20,269 247,180
108, 223
270
2,835
32
69,150
17, 588
101,190 1,136, 970 1, 050,412 1,037
6, 665 289, 780
56, 506
530
13, 675 126, 620
118, 609
740
873 124, 710
6,301
306
5,263 478,450
48, 310
193
18, 338 1,146,130
170, 914
133
1,825 608, 330
26, 705
42
5,290 661,250
45, 859
79
55, 590 1,853,000
563, 819
60
70, 318 426,170
687, 221
217
5,187 152, 560
51, 974
333
1, 269 181, 290
9,852
153
42, 741 993, 980
454
373, 378
5,826 100,450
104
44,190
55, 330
830
7,017
430
22
9
30,066
668,130
90
331, 631
49
411
68,500
3, 333
212
340, 299 J3, 620, 200 3, 937, 083
199
7, 240 I 452, 500
55, 584

1

$8,621
$68,970
4,983
131,130
11,243
71,160
65, 408
203,130
7,958
94,740
14,679
333,610
4, 694
312,930
16,397 2,049, 630
75,810
7,126
21.918
81, ISO
1,664
52, 000
109, 094
105,200
42,459
80,110
52,173
70, 500
19, 600
64, 050
19,820
1026, 90
14, 367
108,020
5,853
139,360
33, 361
422, 290
22, 351
372, 520
30, 714
141, 540
24, 494
73, 560
12, 581
82, 230
41, 552
91, 520
61, 320
6,377
49, 050
21, 091
2,251
102, 320
125, 670
1,131
338, 060
30,425
57,920
2,838
534,600
113, 336
98, 810
19,663

$42, 681
40,051
66, 725
664,234
51,074
127,953
31, 583
84, 275
58,309
112,431
14,785
909,027
352,052
436, 841
129,892
106,656
137, 597
80,912
228,636
196,982
234,755
209,304
93, 578
274, 688
44,837
170, 374
21,020
15,160
349,114
17,036
859, 991
132,366

to

W
M

i—I

CO

<

j

w
H

fcO

o

CO

TABLE I.—Consolidated statement showing, by States, number, capital and surplus, average capital, and resources of national banks, as of
September 15, 1922; of State banks and trust companies, members of the Federal reserve system, as of June 30, 1922; and of State banks
and trust companies eligible for membership in the Federal reserve system but which had not joined on June SO, 1922—Continued
Total member and eligible banks

National banks

Eligible nonmember State banks

Member State banks

t—i

I

Capital
Capital
Capital
and
and
and
Num- surplus Average Resources Num- surplus Average Resources N u m - surplus
(000
(000
ber
capital omitted) ber
capital omitted) ber
(000
(000
(000
omitted)
omitted)
omitted)

Capital

and
Average Resources Num- surplus
(000
capital omitted) ber
(000

omitted)

I

North Dakota
Ohio
Oklahoma.
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas.
Utah..
Vermont
Virginia.
Washington
West Virginia
Wisconsin
Wyoming

581
197
1,357
26
312
350
301
1,168
104
77
334
258
320
574
91

$16,021 $52,020
253,110 284, 710
44,313
76, 270
28,640 145,380
635,726 468,480
31,368 1, 206,460
39,810 127, 600
19,436
55, 530
48, 840 162, 260
156, 764 134,220
16, 967 163,140
11,707 152,040
80,114 239,860
35,881 139, 070
48, 764 152, 390
74,290 129,430
8,780
96,480

Total, United States. 19,561 4,698,720




$138,793
2,159,016
423,113
265,464
4,132, 724
280, 256
237,332
208,750
367,983
1, 071,918
130,950
106,159
501, 983
359, 270
372,345
710,305
73, 506

183
372
449
97
867
17
83
133
101
559
24
49
177
111
121
155
47

$10, 744 $58, 710
$97, 877
111,479 299, 670
884,322
377,105
85, 500
18,178 187,400
173, 855
316, 523 365, 080 2, 466, 734
10, 365 609, 710
68, 807
224, 650
120, 696
9,243 69,500
95, 272
24,675 244,310
195,218
107,486 192, 280
808, 547
6,314 263,080
49, 699
7,872 160, 650
56,079
50, 360 284, 520
360,105
23, 457 211,320
266, 588
21, 745 179, 710
183,039
37, 736 243,460
352,295
125, 490
56, 693

240,210 40,926, 521 8,235 2,348,038

ReAverage sources
capital
(000
omitted)

w
o

g
5
87
11
36
65
3
18
20
16
187
34

$203
$40,600
92, 454 1, 062, 690
550
50,000
5,079
141, 080
130, 488 2, 007, 510
19,000 6, 333,330
3,120
173, 330
1,631
81, 550
8,550
534, 380
18,069
96, 630
5,652
166, 240

7,767
5,789
4,575
9,320
281

285,130 20,916,859 1,648 1,141,567

517,800
107, 200
305,000
258, 890
70, 250

$1,456
863,625
5, 352
53,909
625,094
194, 739
17,175
20, 638
73,060
100, 332
45, 512

120
430
121
64
425
6
211
197
184
422
46

.1

35, 755
49,156
32,460
108, 537
1,478

184
383
40

$5,074
49,177
5,374
5,383
188, 715
2,003
18,044

8,562
15, 615
31,209
5,001
3,835
21,987
6,635
22,444
27, 234
2,601

692,700 11,026,082 i9,678 1,209,115

$42,280
114,370
44,410
84,110
444,040
333,830
85, 520
43,460
84,860
73,950
108, 720
136, 960
154,840
71,340
121,980
71,110
65,030

$39,460

411,069
40, 656
37,700
040,896
16, 710
99, 461
92,840
99, 705
163,039
35, 739
50,080
106,123
43, 526
156,846
249, 473
15, 335

124,930 8,983, 580

g
w
w

w
I—!

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

205

TABLE II.—National hanks showing capital, surplus, and resources on September
15, 1922, classified by States
Surplus
Number Capital (000 (000 omitomitted)
ted)

Alabama
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of ColumbiaFlorida
Georgia
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
...
Mississippi
Missouri...
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
_-.
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
„
Texas
Utah
Vermont
Virginia
Washington
:_
West Virginia
Wisconsin
Wyoming
Total, United States.




107
22
85
281
144
64
18
15
61
99
79
501
251
351
267
136
34
60
86
158
119
342
32
134
131
182
11
56
228
45
504
87
183
372
449
97
867
17
83
133
101
559
24
49
177
111
121
155
47

$12,890
1,900
7,573
63,455
12,375
21,607
1,160
7,677
7,695
15,230
5,340
90, 680
30, 712
26,100
17,923
16,691
8,700
7,245
17,929
63,693
23,625
37,436
4,535
42, 775
7,990
17, 245
1,460
5,365
29,762
3,210
228,474
13,340
7,245
65,425
29, 010
12, 364
136,988
5,570
12, 305
6,215
15,659
69, 300
4,200
5,410
28,168
16, 380
12, 261
24,885
3,195

$7,933
984
3,343
36,020
9,528
14, 999
1,942
5,898
4,533
12,006
2,185
68,710
15, 604
15,265
9,752
12, 779
5,248
4,686
16,070
58,198
14, 911
23,048
2,699
18,618
3,899
10,048
598
4,291
28,063
1,757
255,107
8,414
3,499
46,054
9,379
5,814
179, 535
4,795
6,341
3,028
9,016
38,186
2,114
2,462
22,192
7,077
9,484
12,851
2,703

8,235

1, 306, 372

1, 041, 666

Resources
(000 omitted)

i
!
i
I
I

$140,243
29,165
77,516
985,809"
245,765
235,150
20, 111
121, 593
126,076
173,381
64,874
1, 505,871
384,596
362, 747
228,633
232,676
116,403
117,488
261,256
1,035,307
430,516
583,921
56,635
562,469
95,094
247,331
15,927
65, 740
622,922
41, 536
4, 946,492
170,685
97,877
884,322
377,105
173,855
2,466, 734
68,807
120,696
95,272
195,218
808,547
49,699
56,079
360,105
266,588
183,039
352, 295
56,693
20,916,859

206

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

TABLE III.—State banks and trust companies members of the Federal reserve
system on June 30, 1922, classified by States
Surplus
(000 omitted)

Number

Alabama
Arizona.—
Arkansas
California
Colorado
_
Connecticut
_
Delaware
District of Columbia
Florida
Georgia
Idaho
Illinois
Indiana
Iowa
Kansas
_
Kentucky
Louisiana.
Maine
Maryland...
Massachusetts
Michigan
Minnesota
Mississippi...
Missouri
Montana.
_
Nebraska
New Jersey.
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island.
_
South Carolina
South Dakota
Tennessee
Texas
Utah
Virginia.
_
Washington
West Virginia
Wisconsin
Wyoming

_

_

_.

_

Total, United States




25
4
37
48
3
5
4
1
14
82
41
89
23
108
7
11
16
3
8
30
165
34
7
43
58
15
45
6
94
16
5
87
11
36
65
3
18
20
16
187
34
15
54
15
36
4

Resource
(000 omitted)

$3,108
838
5, 334
46,972
1,025
2, 7.50
2,150
1, 000
2,320
12, 036
2,095
53,075
4, 793
9,171
600
3,646
11, 500
1,000
2,9,80
27, 306
37,658
3, 550
800
24,82a
4,105
640
17,67£
295
168, 630
5,050
175
57, 580
465
3,410
36,273
8,000
1,988
1,355
5,850
12, 732
3,855
4,800
4,378
2,103
5,657
215

$2,474
307
1,818
17,813
765
1,850
1,805
100
610
8,233
740
48,115
1,872
4,504
273
1,617
6,838
825
2,310
2&284
32,660
1,637
469
17, 918
1,721
190
12,391
116
171, 669
2,190
28
34,874
85
1,669
94, 215
11,000
1,132
276
2,700
5,337
1,797
2,967
1,411
2,472
3,663
66

$49,959
10,695
55,060
857,441
24,586
33,225
27,905
5,041
19,383
108,223
17,588
1,050,412
56,506
118,609
6,301
48,310
170,914
26,705
45, 859
563,819
687.221
51, 974
9,852
373,378
44,190
7,017
331,631
3,333
3,937,083
55,584
1,456
863,625
5,352
53,909
625,094
194, 739
17,175
20,638
73,060
100,332
45,512
35, 755
49,156
32,460
108, 537
1,478

605, 761

535,806

11,026,082

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

207

TABLE IV.—State banks and trust companies eligible for membership in the
Federal reserve system, but ivhich had not joined on June 30, 1922, classified
by States1
Surplus
Number Capital (000 (000 omitomitted)
ted)

Alabama
Arizona.
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia.
Florida
Georgia
Idaho
Illinois
Indiana.._
Iowa. _
Kansas
Kentucky
Louisiana
Maine.
Maryland
Massachusetts..._
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire.
New Jersey
New Mexico
New York
North Carolina-_
North Dakota. __
Ohio.
Oklahoma
Oregon
Pennsylvania...
Rhode Island...
South Carolina.
South Dakota...
Tennessee
Texas
Utah...
Vermont
Virginia
Washington
West Virginia...
Wisconsin
Wyoming
Total, United States.
1

125
38
158
322
84
44
15
8
94
270
32
1,037
530
740
306
193
133
42
79 ,
60
217
333
153
454
104
430
22
9
90
49
212
199
120
430
121
64
425
6
211
197
184
422
46
28
142
93
184
383
40

$6, 262
3,296
7,918
45, 661
5,510
8,580
3,297
10, 734
5,295
15,346
1,298
77, 204
30,928
36, 375
13,796
12, 381
10, 009
3,405
17,172
12, 688
20, 503
17, 937
8,721
28, 815
5,145
16, 537
1,716
630
16, 475
2,265
46,908
14, 096
3, 945
29, 567
4,532
4,060
92, 842
1,175
12, 598
6,710
11, 507
24, 656
3,396
2,051
14, 663
5,444
14,137
20, 594
1,915

9,678

760, 695

$2, 359
1,687
3,325
19, 747
2,448
6,099
1,397
5,663
1,831
6,572
366

31, 890
11, 531
15, 798
5,804
7,439
4,358
2,448
16,189
9,663
10, 211
6,557
3,860
12, 737
1,232
4,554
535
501
13, 950
573
2 66,428
5, 567
1,129
19,610
842
1, 323
95, 873
828
5,446
1,852
4,108
6,553
1, 605
1,784
7,324
1,191
8,307
6, 640
448,420

Resources
(000 omitted)
$42,681
40,051
66, 725
664, 234
51, 074
127, 953
31, 583
84, 275
58, 309
112,431
14, 785
909,027
352,052
436, 841
129,892
106, 656
127, 597
80,912
228,636
196,982
234, 755
209, 304
93, 578
274, 688
44, 837
170,374
21, 020
15,160
349,114
17, 036
859. 991
132,369
39, 460
411, 069
40, 656
37, 700
1,040,896
16, 710
99.461
92, 840
99, 705
163,039
35, 739
50, 080
106,123
43, 526
156, 846
249, 473
15, 335
8,983, 580

Eligibility is based on capital stock requirements. List does not include mutual savings banks without
capital stock and private banks which are not eligible for membership in Federal reserve system.
2
Includes undivided profits.




208

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

TABLE V.—Consolidated statement shoiving State banks and trust companies 1not
eligible for admission to the Federal reserve system under existing laiv
[Compiled from July, 1922, Rand-McNally Bank Directory]
Number
Alabama..
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia. _
Idaho-Illinois-.
Indiana.. _
Iowa__
.__
Kansas
Kentucky
Louisiana
Maine—
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada__
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
_
Oregon.._
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
_..
Vermont
Virginia..
Washington
West Virginia
Wisconsin
_
Wyoming..

_.

Total, United States.

Paid-up
capital

85
14
205
39
146
34
2
28
104
221
48
305
258
571
762
257
81
10
60
27
266
787
135
1,016
101
542
1
6
44
9
66
277
542
204
347
79
186
4
135
344
271
420
18
10
171
133
29
422
57

$1,440, 300
355,370
3,156, 825
3, 070, 000
3,911,500
3, 088, 700
36, 000
2, 683,156
2, 575, 000
5,164, 666
874,500
20,160, 550
9,479,037
11,952,000
12,421, 000
5,489,200
1,529,800
720,400
1, 988, 725
3,490, 000
5, 232,475
14,137, 000
2, 560,600
20,365, 400
2, 075,000
10,478,100
20,000
350, 000
5, 614,000
315,000
5,484,250
4,165, 326
7,114, 500
9,999, 320
5,086, 650
1,794, 500
18, 718, 257
405, 200
2, 998,838
4,925,200
5,493,690
9, 559,148
606, 930
440, 000
4,555,629
2,891,000
2,308,460
9,022, 550
905,000

9,879

251,128, 752

Surplus and
profits
$852,110
171,920
1,457, 780
2, 387, 260
2,191,100
3, 214,330
23, 300
1, 546,160
1,114,890
3, 233, 550
441, 560
8,383,740
5,138, 010
8, 260, 500
10, 730,730
4,924,650
1,294, 600
1, 088, 000
2, 561,910
3,241,930
3,204,480
7, 587,110
2,198, 540
15,487,990
715,380
4,856,250
7,200
347, 900
7,457,910
143,740
5,389, 390
3,450, 550
3, 645, 700
8,603,353
1,735,860
644, 510
25, 081,920
362,070
2,122,830
3,254,030
3,373,660
4,292,190
228,180
901,920
3,584,610
1,585,050
1,771,590
4, 725, 760
648,000

Deposits
$9,405,640
2, 615, 450
20, 546, 760
32, 755,130
37,022, 810
38,962, 670
264, 650
27, 042, 340
29,919,275
26,892, 520
7,222,330
167, 654, 670
101,150,960
149,844, 610
132,832,432
59, 002,330
14,917, 260
17,138,240
39, 093,020
67,166,850
62,123, 850
172,896, 020
34, 024, 000
196, 700,380
10,077,960
100,435, 540
68, 070
2, 002,480
109, 285,480
1,889, 260
75,914,820
49, 201, 070
67,608,810
139,971,140
51j 128, 690
17, 361,160
255,891,870
5,945,420
32,797,220
61,201,105
56,227,120
55, 665,000
3,821,210
14,677,100
38,422,480
35,042,010
24,594, 070
112,964,420
9,132,030

Resources
$11, 744, 410
3, 356,890
26.026, 710
37,069,080
42, 598,180
45,906,110
318, 880
31,068,890
32, 749,860
37,872,855
8, 690,810
195, 327, 530
118,651,75G
174, 721, 500
153, 015,730
68, 791,570
18,088,280
19,707, 060
43, 785,860
72,906,620
70, 934,420
193,584,410
38,732,460
238,469,170
13, 982, 370
114, 773,150
97,950
2, 775,620
122,894,290
2,333, 540
87, 560,280
58,455,215
84,931,880
157,122,750
57,163,840
19,498,870
301,617,610
6,736,430
39, 528,650
71, 295,470
65,935,930
68,749,560
5> 413,170
16,257,330
48,213,040
38,998,800
28,683,780
128,688,325
10,583,340

179,665,703

i This statement does not include 167 banks, having an aggregate capital of $6,430,360, for which information regarding surplus and profits, deposits, and resources is not given in the Rand-McNally Bank Directory; nor does it include 623 banks, mostly mutual savings banks, having surplus and profits aggregating
$554,910,458, deposits aggregating $5,588,071,855, and resources aggregating $6,072,648,160, for which no
capital is shown in the directory.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

209

TABLE VI.—State hanks and trust companies located in places the population of
ivhich exceeds 50,000 inhabitants and which do not possess a capital of at
least $250,000 *
[Compiled from July, 1922, Rand-McNally Bank Directory]
Number
Alabama ._
Arkansas
California
Colorado
Connecticut
District of Columbia
Florida...
Georgia
Illinois
Indiana
Iowa
Kansas...
Kentucky
Maine
Maryland . .
Massachusetts
Michigan
Minnesota .
Missouri
Nebraska
New Hampshire
New Jersey
New York
Ohio
Oklahoma
Oregon
.._.
Pennsylvania
Rhode Island
South Carolina
Tennessee
Texas
_. __
Utah
Virginia.
Washington
West Virginia
Wisconsin

_ _ _.

__

Total, United States

_

Paid-up
capital

Surplus and
profits

Deposits

Resources

20
16
12
23

$150,000
300,000
2,007, 000
1, 900, 000
2, 229, 000
2, 683,156
700,000
1,388, 350
15,323, 550
4, 582, 267
2, 523,000
1,035,000
920,000
300,000
1,130, 225
3,115,000
300, 000
3,430, 000
6, 235,000
1, 785, 300
225,000
5, 350,000
5,136, 500
6, 202, 700
45,000
715,000
16, 609,137
355, 200
972, 318
1, 944,432
2, 790, 430
227, 000
2.149, 069
972, 000
1, 625,000
2,190, 000

$493, 440
$14,050
$697,160
1,475,930
65, 050
1,849,010
20, 880,970
1, 563,180
23, 642,130
18, 490,920
742,070
21,113, 360
29, 458, 220
2, 610, 200
34, 543,860
27,042,340
1,546,160
31,068,890
6,046, 840
225, 430
6, 899,990
5,441,880
656, 540
8,454, 040
123, 324,070
6,123,120
144, 660,870
50, 384, 870
2, 524, 530
58, 796,970
34, 807, 200
1, 747, 300
41, 560, 260
16, 457,010
790,510
18, 440, 580
11,450,180
720,010
13,161, 530
3,176, 390
260, 570
3, 910,260
21, 588, 620
1,135, 690
23, 750,970
61, 349, 430
2,901,970
66,379,150
5,115,830
249, 280
5,663, 250
45,120, 550 . 49, 489,990
1,854, 600
66, 856, 230
3, 550,810
77, 747,860
694,620
17, 082,440
19, 507, 570
330,970
269, 580
927, 550
105, 366,010
7,132, 000
118,359,030
68,029,170
4, 755, 630
78,-975,120
85, 315, 660
5, 215, 750
97, 934, 810
13,960 i
622,300
686,880
6, 591, 700
146, 930
7, 451, 210
220,121, 390
21, 780, 350
260, 585, 630
4,031, 880
4, 724, 630
263, 810
15, 745, 200
896,440
18,147,140
30, 801, 500
1, 336, 740
35,040, 930
19,658, 560
1,087, 610
24, 307, 350
319, 050
29, 730
1, 382, 690
17, 032, 870
1, 762, 440
22,165,680
12, 668,060
679,130
14,340, 760
1,011,340
14, 747, 620
17,435, 640
26, 363, 790
1,068,930
29,476, 510

939

99, 545, 634

77.426,060 11,193,789,090

2
2
16
11
17
28
6
20
103
51
36
26
9
2
11
19
5
65
63
18
3
38
48
55
2
10
138
3
11
23
25

1, 383, 279, 260

i This statement does not include 39 banks having an aggregate capital of $4,010,120 for which information regarding surplus and profits, deposits, and resources is not given in the Rand-McNally Directory,
nor does it include 235 banks, mostly mutual savings banks, having surplus and profits aggregating
$443,019,278, deposits aggregating $4,406,944,420, and resources aggregating $4,769,635,860, for which no
capital is shown in the directory.




210

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

TABLE VII.—State banks and trust companies located in places having a population of from 6,000 to 50,000 inhabitants and which do not possess a capital
of at least $100,0001
[Compiled from July, 1922, Rand-McNally Bank Directory]
Number
Alabama
Arizona...
Arkansas..
Califor nia.
Colorado
Connecticut- _
Florida
Georgia
Idaho
Illinois _. .
Indiana
i.
Iowa
Kansas _
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan .
Minnesota
Mississippi .
Missouri
Montana
Nebraska
New Hampshire..
New Jersey
New Mexico
New York
North Carolina.
North Dakota
Ohio... .
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utal .
Vermont
Virginia . .
Washington
West VirginiaWisconsin.
Wyoming

.

. __

_
. __
...

Total, United States
1

Paid-up
capital

Surplus and
profits

Deposits

Resources

3
2
8
13
8
14
9
20
4
51
55
45
50
19
7
7
5
8
12
43
17
49
4
26
3
4
3
8
30
6
43
19
2
40
1
11
9
8
22
2
7
8
10
11
37
5

$135,000
120,000
385, 000
790, 000
370, 000
704, 700
440, 000
898, 246
197,000
2, 545, 000
2, 725, 820
2,135, 000
2,185, 000
811, 000
370, 000
395,400
200, 000
375, 000
550, 000
1,885,000
805,000
2,070,000
125, 000
1,148,000
125,000
200, 000
150,000
175,950
960, 729
260, 000
2,143,100
765,000
100, 000
1,932,800
50,000
342, 525
410, 000
279, 200
1,204,220
51, 600
350,000
314,960
425,000
531, 460
1,707, 500
260,000

$87,620
10,660
158,480
486, 390
486, 240
474,130
263, 000
927, 060
124,420
1, 652,310
1,449,330
1, 536, 240
1, 730,160
879, 790
385, 440
771, 280
208,940
339,960
459, 760
990,620
805,190
1,360,070
18,930
313, 280
78, 320
255,910
43,850
349,410
1,050,540
38, 540
1,892, 873
199,160
50,180
3, 111, 800
98, 260
178, 500
193,710
260,000
315,240
25, 720
747,550
110,900
275,920
612,080
1,028,820
245, 690

$1, 332,160
646, 570
3,008, 820
8, 747,900
5, 654, 020
8,416, 710
9,089, 210
6, 759, 060
1, 233, 420
29, 563, 920
27, 432, 290
29, 452,840
24, 887,180
10, 949, 730
5,168. 280
13, 541, 560
3, 233, 030
5, 817, 420
8,105, 510
20, 634, 400
12, 969, 410
21, 248, 570
599, 670
10,416,350
1, 671, 510
2,867, 730
995, 630
3, 320, 690
12, 517, 610
1, 871, 500
29, 965, 220
9, 592,700
1, 670,040
33,404, 980
1,913, 540
3, 717,650
5,193,960
2, 262, 980
7, 531, 760
394,150
12,431,550
1, 742, 460
6,676, 530
7, 075,490
21, 858,250
3, 573,640

$1, 537,130*
854, 310
3,465, 090
9, 859, 440
6, 446, 770
10, 686,940
9, 742,140
9, 058, 570
1, 575, 820
33,477, 700
33, 215, 520
33, 796,160
27, 818, 850
12, 578,970
5, 935, 250
15, 294,840
3, 594, 650
6, 527,470
9,362,420
23,198,450
14, 743,490
25, 340, 630
755, 340
11,496,120
1,848, 070
3,456, 400
1,192, 560
3, 675, 790
14, 392,075
2, 224,170
31, 956, 820
10, 328, 650
1, 792,390
38,279,100
2,011,800
4, 293,490
6,128,000
2,913,920
9,136,020
467,890
13,741,380
2,119,500
7,088,310
8, 264,190
25, 212, 555
4,059, 940

768

35, 204, 310

27,082, 273

441,157, 600

504, 345,090

This statement does not include 21 banks, having an aggregate capital of $971,040, for which information regarding surplus and profits, deposits and resources is not given in the Rancl-McNally Bank Directory; nor does it include 218 banks, mostly mutual savings banks, having surplus and profits aggregating
$86,044,610, deposits aggregating $929,223,470, and resources aggregating $1,025,539,860, for which no capital:
i s shown in the directory.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

211

TABLE VIII.—State banks and trust companies located in places having a population of from 3,000 to 6,000 inhabitants and which do not possess a capital
of at least $50,000 1
[Compiled from July, 1922, Rand-McNally Bank Directory]
Number
Alabama
Arizona..
__
Arkansas
California
Colorado
Connecticut
Florida
Georgia—
Idaho
Illinois
Indiana
Iowa
Kansas___
Kentucky
Louisiana
Maine
Maryland
Michigan
Minnesota
Mississippi
Missouri..
Montana
Nebraska
New Jersey
New Mexico
_
New York
North Carolina
North Dakota.
Ohio
Oklahoma
Oregon
Pennsylvania
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
_
Washington
West Virginia
Wisconsin

$80,000
135,000
150,000
273,000
105, 000
75,000
110.000
178,000
130,000
235,000
616, 500
906,000
730,000
152,500
125,000
25, 000
160,000
320, 000
250, 000
230,000
730, 000
30,000
272, 000
64, 000
165,000
105, 000
291,300
115, 000
947, 500
380, 000
70,000
122, 500
229,200
80,000
312, 500
280,000
185,000
90,000
80,000
175,000
152,000
508,000

_._
__

_

Total United States

Paid-up
capital

363

9,920,000

Surplus and
profits
$56, 540
128, 700
47, 830
337, 690
39,780
130,000
38,700
116, 350
79,910
151, 700
335, 340
658, 530
149, 850
214,150
56,150
223, 340,
241, 340
121,470
226, 690
650,110
27,000
96,970
70,000
99,890
220,310
120, 370
48,410
443,080
140, 470
58,960
77, 200
114, 560
50, 580
119,890
202, 300
104,350
154,370
81, 760
124,630
148,170
321,860
7,498,160

Deposits
$716,940
1,479, 780
1,179, 540
3,126,260
935, 500
1,087, 740
1,887, 615
986, 830
1,041, 780
3, 293, 420
7,034,410
13, 578,200
8, 664, 830
1, 241, 800
1,901, 520
420, 290
3, 051,440
4, 566,850
3, 284, 560
3, 840, 250
8,603, 720
200, 000
2,188, 670
1,051,740
893,630
3, 561, 720
3, 057, 590
493,630
8,498,960
5,494,000
172,150
1,339,000
2,461,630
1, 316,870
2,094, 410
3,411,290
2,027,840
2,245, 550
1,267, 510
2,991,030
2,770,960
7,681,080
127,142, 535

Resources
$764, 270
1, 725, 740
1,277,730
3, 567, 510
1,063,730
1,275,210
2,038,050
1, 380, 890
1,453, 590
3,638,950
8, 034,130
14, 837,160
10,002,120
1, 689,950
2,226, 290
501,960
3,325,530
5,135, 770
3,710,920
4, 210, 310
10,099, 600
251,890
2, 516, 200
1,078,860
1,140,980
3,764,990
3,439, 310
699,910
9,209,680
5, 817,960
227,980
1, 557,450
3,029,420
1,370, 700 •
2, 583,150
3,899, 700
2, 239, 320
2, 515,950
1.440,330
3,316,320
2,983,950'
8, S30, 780
143,874,340

i This statement does not include 9 banks, having an aggregate capital of $171,000, for which information
regarding surplus and profits, deposits and resources is not given in the Rand-McNally Bank Directory; nor does it include 70 banks, mostly mutual savings banks, having surplus and profit aggregating,
$14,338,480, deposits aggregating $142,875,120, and resources aggregating $156,995,980, for which no capital,
is shown in the directory.




212

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

TABLE IX.—State banks and trust companies located in places the population of
which does not exceed 3,000 inhabitants and which do not possess a capital
of at least $25,000*
[Compiled from July, 1922, Rand-McNally Bank Directory]
1
Number
Alabama.
Arizona
._
Arkansas
_
Colorado
Delaware
.
Florida
Georgia
_
Idaho
Illinois
Indiana
Iowa
. _.
Kansas
Kentucky
Louisiana . .
._
Maryland
Michigan
Minnesota
Mississippi
Missouri . .
Montana
Nebraska
Nevada
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
South Carolina
South Dakota
Tennessee
Texas...
Utah
Virginia .
_
Washington
Wisconsin
Wyoming

_

_
. .

_.

.

_.

. _
.

Total, United States

_
_
_
--

Paid-up
capital

Surplus and
profits

Deposits

77
7
189
123
2
85
175
40
143
130
455
661
223
70
37
239
669
110
875
96
488
1
6
236
532
89
311
65
4
103
332
229
363
7
141
100
344
52

$1,075,300
100, 370
2,321,825
1, 536, 500
36,000
1, 325, 000
2, 700, 070
547, 500
2,057, 000
1, 554,350
6, 388, 000
8,471, 000
3, 605, 700
1,034, 800
498, 500
4, 062,475
8, 572, 000
1, 525, 600
11, 330, 400
1,920, 000
7, 272,800
20,000
66,800
2, 913, 297
6, 739, 500
1,156, 020
3,896, 650
909, 500
53, 820
1,454, 795
4,435, 200
2,857, 558
5,284,498
143, 330
2, 011, 600
1,319, 000
4, 617,050
645, 000

$693,900
32, 560
1,186, 420
923, 010
23,300
587, 760
1, 533, 600
237, 230
456, 610
828,810
4,318,430
7,541,200
3,175, 000
695, 010
993, 940
2, 254,100
4,620,420
1,166,660
9,927, 000
669, 450
3, 751,380
7,200
64,040
2, 279,640
3, 558, 750
1, 051, 650
1,382, 270
388,440
112, 570
933,330
3, 009,740
1, 657, 030
2,687,040
68,380
1,629, 510
505,370
2, 306,150
402,310

7,809

106, 458, 808

67, 659, 210 1,016, 430, 507

$6,863,100
489,100
14,882,470
11, 942,370
264, 650
12,895, 610
13, 704,750
4,947,130
11,473, 260
16, 299,390
72,006,370
82,823, 412
35, 360, 620
7,847,460
11, 219,930
44,335,660
103, 856, 510
17,214, 340
99,991,860
9,278, 290
70, 748,080
68,070
1,003, 240
33, 625,870
65, 243, 680
16,191, 300
35, 419, 690
8,927,270
1,026, 500
10, 872, 740
54,690, 275
21, 068, 230
25,063,390
1, 080,170
18,379,640
12, 706, 390
57,061, 300
5, 558,390

Resources
$8,745,850
776,840
19, 434, 880
13,974, 320
318, 880
14,069,680
18,979,355
5, 661,400
13, 550, 010
18,605,130
84, 527,920
96, 754,180
41,361,120
9,926,740
13,114,710
50, 772,980
117,185,050
19, 778,660
125,281,080
12,975,140
81,253, 260
97,950
1,144,380
40,623,830
82, 007,800
18,021,440
40, 330, 350
10,027,290
1,195,430
14,058,600
63,796,770
25, 397,930
31,406, 490
1,323,270
22,487, 530
14,253,410
65,168, 480
6, 523,400
1,204,911,535

1
This "statement does not include 98 banks, having an aggregate capital of $1,278,200, for which information regarding surplus and profits, deposits and resources is not given in the Rand-McNally Bank Directory, nor does it include 100 banks, mostly mutual savings banks, having surplus and profits aggregating
$11,508,090, deposits aggregating $109,028,845, and resources aggregating $120,476,460, for which no capital
is shown in the directory.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

213-

TABLE X.—State banks and trust companies located in places having a population of from 3,000 to 6,900 inhabitants and which do not possess a capital of
at least $30,0001
[Compiled from July, 1922, Rand-McNally Bank Directory]
Number
Alabama. _
Arizona.-Arkansas
CaliforniaColorado.-Connecticut
Florida
Georgia
Idaho
Illinois
Indiana
Iowa-__
Kansas'.
Kentucky
_.
Louisiana
Maine
Maryland
Michigan
Minnesota.
Mississippi
Missouri
Nebraska
New Jersey
New Mexico
New York
North CarolinaNorth Dakota. _
Ohio
Oklahoma..
Oregon
Pennsylvania.._
South Carolina..
South Dakota....
Tennessee

Total, United States..

Surplus and !
profits I

Deposits

10

$50, 000
65, 000
30, 000
200, 000
45, 000
75, 000
50, 000
65, 000
50, 000
125, 000
296, 500
545, 000
320, 000
115, 000
25, 000
25, 000
160, 000
125, 000
250, 000
115, 000
365, 000
127, 000
64, 000
100, 000
75, 000
186,300
40, 000
300, 000
275, 000
25, 000
50, 000
159, 200
50, 000
162, 500
150, 000
90,000
50,000
140,000
152,000
220, 500

$33, 590
53, 260
13,660
282,930
7,500
130, 000
15,100
82, 000
30, 550
72,190
224,450
408, 060
344, 530
71,460
71, 040
56,150
223, 340
103, 240
121,470
91, 530
391, 950
28,170
70,000
87, 270
146, 060
83, 460
29, 320
283, 710
119, 820
6,960
63,050
70,400
45, 000
83, 550
87,170
38, 290
129,370
114, 630
148,170
182, 720

$534,660
1, 019, 780
301,290
2,086, 880
235, 000
1, 087, 740
672,615
400, 500
432,280
1, 720,540
4, 407, 900
8, 264, 250
4, 851, 220
881, 800
459, 460
420, 290
3, 051,440
1, 662,160
3, 284, 560
1, 596, 090
5, 662, 210
683,140
1, 051, 740
574, 040
2,843,320
1,984,300
175,150
4,950, 000
4, 259, 750
172,150
1, 075, 220
1, 246, 760
1,102,000
1, 263,990
1, 531, 790
950,140
1, 595, 550
2, 741,030
2,770,960
3,453, 830

238

5, 513,000

4, 645,120

77, 457, 525

Texas

Utah
Vermont
Washington
West Virginia
Wisconsin

Paid-up
capital

Resources
$564,550
1,160, 240
329,950
2,482, 630
293,460
1, 275, 310
751, 700
736,780
509, 660
1, 869, 280
4,962, 800
9,119, 580
5,468, 320
1,189,950
556, 500
501, 960
3,325, 530
1,884,170
3, 710, 920
1, 868, 940
6,448,140
841, 720
1, 078, 860
756, 780
2, 925,100
2,138,940
284, 470
5, 374, 340
4, 509,180
194,980
1,195, 280
1,617,130
1,104,000
1, 529, 650
1,836, 570
1,089, 210
1, 865, 950
2,991, 320
2, 983, 950
3, 897, 000
87, 224,800

i This statement does not include 9 banks, having an aggregate capital of $171,000, for which no information regarding surplus and profits, deposits, and resources is given in the Rand-McNally Bank Directory;,
nor does it include any of the banks, referred to in the note under Tables V and VIII, for which no capital,
is shown in the directory.




214

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

TABLE XI.—State banks and trust companies located in places the population of
which does not exceed 3,000 inhabitants and which do not possess a capital
of at least $15,000x
[Compiled from July, 1922, Rand-McNally Bank £>iiectory]
Number

Paid-up
capital

Surplus and
profits

Deposits

Resources

Alabama
Arizona
_.
Arkansas
Colorado
Georgia
_..
Idaho
Illinois
Indiana.
_
Iowa
Kansas
Kentucky
Louisiana
Maryland
_
Michigan
.
Minnesota.
Mississippi
Missouri..
_.
Nebraska
New York
«
.
North Carolina
North Dakota
Ohio
...-.
Oklahoma
Oregon
Pennsylvania
South CarolinaSouth Dakota.
Tennessee
Texas.
.._
Virginia
Washington
Wisconsin
Wyoming

30
1
125
75
6
19
42
98
211
407
2
21
21
55
416
53
565
173
4
156
317
62
190
20
1
47
140
147
154
67
47
186
37

$309,700
10,000
1, 209, 675
760, 500
48, 750
192, 500
413, 000
1,015, 500
2,138, 000
4,145, 500
20, 500
219,440
212, 500
434, 695
4, 251,000
558,700
5, 737,000
1,728, 300
31, 800
1, 461,900
3,186, 500
669,850
1,885,650
203, 500
1,000
444, 560
1, 282, 200
1, 453, 238
1, 585,298
701,950
479,000
1,895, 500
370, 000

$231,040
2,780
620,390
531,850
18, 850
96, 410
101, 990
578, 690
1, 592, 280
4, 382, 750
21, 290
206,060
531, 360
283,170
2,479,690
327,400
5, 696,920
1,352, 570
39,140
1,311,000
2,335,160
608,450
778,400
140, 500
11,900
311, 700
1, 686,820
936,810
943,920
643, 540
206, 630
1,023, 360
300, 340

$2,367,340
13,790
7, 841, 570
6, 317, 570
128,020
1, 935, 650
2, 513, 360
11, 502,460
26, 520, 580
44, 215,010
91,330
2,303, 960
5,117, 000
6, 471, 220
51, 834, 470
6,031,960
52,750,000
19, 687,850
685,240
18,156,240
36,922, 520
10,815,420
17,303,020
3,360,290
207, 370
4,028,400
21,490,805
12,033,750
7,421, 280
7,320,770
5, 523,470
23, 210,000
3, 618,160

$2,946,790
26, 570
10,116,020
7, 428, 700
188, 520
2, 227,960
3,032,750
13,087,940
30, 204, 500
51,486.190
129, 300
2, 796, 540
6,199, 840
6, 506, 510
58,253,480
7,072, 870
66,396, 660
22,466,850
861,480
21,792,560
45,834, 620
12,082,420
19,735,040
3, 508,880
220, 270
5,186,460
24,944,770
14,293, 680
9,755, 570
8,993, 530
6,214,510
26,935, 560
4,264,020

Total, United States.

3,895

39,087, 206

30, 333,160

419,739, 875

495,191, 360




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

215

TABLE XII.—State banks and trust companies ivhich are not eligible for admission to the Federal reserve system- under existing laiv but which would be
eligible under the Capper-McFadden agricultural credits bill (S. 4280)1
[Compiled from July, 1922, Rand-McNally Bank Directory]
Number
Alabama
Arizona
Arkansas
California
Colorado
Delaware
Florida
Georgia
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maryland
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Mexico
New York
North CarolinaNorth Dakota-.
Ohio
Oklahoma
Oregon
Pennsylvania
South Carolina..
South Dakota...
Tennessee
Texas
Utah
Vermont
Virginia
Washington
Wisconsin
Wyoming
Total.
1

48
2
50
2
87
172
23
104
41
255
266
222
52
16
189
253
60
320
97
319
1
2
3
83
217
32
124
46
5
58
193
86
213
10
1
76
54
166
15
4,039

Paid-up
capital
$795, 600
160, 370
1, 232,150
73,000
836,000
36,000
1, 385,000
2, 764, 320
435,000
1, 724,000
858, 850
4, 611,000
4, 735, 500
3, 622, 700
915, 360
286, 000
3, 822, 780
4, 321, 000
1,081, 900
5, 958,400
1, 950,000
5, 689, 500
20,000
65, 000
65, 000
1, 556, 397
3, 628, 000
683, 670
2,116, 000
751,000
125, 320
1, 080, 235
3,183, 000
1, 554, 320
3, 829, 200
238, 330
40, 000
1, 389, 650
875, 000
3, 009, 050
275, 000
71, 778, 602

Surplus and j
profits
$485, 810
105, 220
600, 200
54, 760
423,440
23,300
611, 360
1, 549,100
190,180
434,130
361,010
2,976, 620
3,482, 780
3, 232,100
632,060
462, 580
2,109, 030
2,140, 730
974,

420

4, 488, 240
696, 450
2,467, 610
7,200
12, 620
99,150
1, 005, 550
1, 242, 680
602, 570
624, 520
299, 940
114,820
665, 790
1, 328, 500
756, 560
1, 858, 250
134, 440
25, 000
1, 067,730
308, 740
1, 421,930
101, 970
40,179, 090

Deposits
$4, 678,040
935, 310
7, 919,150
1,039, 380
6, 325, 300
264, 650
14,110, 610
14,163,060
3, 620, 980
10 532,780
7, 423, 440
50,799,740
42, 422, 012
35, 629. 290
6, 985, 560
6,102, 930
40, 769,130
52,022, 040
13, 426, 540
50,183, 370
9, 478,290
52, 565, 760
68, 070
319, 590
1, 036, 400
16, 542, 920
28, 639, 640
8, 924, 840
19, 350, 920
5, 566, 980
1,082, 910
8, 059, 210
33, 414, 340
9, 854, 900
19, 521, 610
2,157, 870
650, 000
12,326,380
7,432, 920
38, 078, 550
1,940,230
646, 375, 042

This statement does not include any of the banks referred to in the note under Table V.




Resources
I
$5, 998, 780
1, 315, 770
10, 266, 640
1,084, 880
7, 315,890
318,880
15, 356, 030
19,434,945
4, 377, 370
12, 286,930
8, 588, 520
60,041,000
49, 801, 790
41, 731,820
8,799,990
6, 914, 870
47, 518,070
58, 931, 570
15,047,160
62, 535,880
13, 227,030
60,460, 890
97, 950
384,200
1,122, 790
20,13], 640
36, 588, 620
9, 774, 360
21, 904, 090
6, 551,410
1, 337, 330
10, 284, 430
39,118, 700
12,157, 750
23, 714, 050
2, 473, 380
650,000
14,934, 330
8, 363, 900
43,166, 700
2, 259, 380
.6, 369, 715

216

INQUIRY ON MEMBERSHIP IX FEDERAL RESERVE SYSTEM

TABLE XIII.—State banks and trust companies which are not eligible for admission to the Federal reserve system under existing law and which would not
be eligible1 under the terms of the Capper-McFadden agricutural credits bill
(8. 4280)
[Compiled from July, 1922, Rand-McNally Bank Directory]
Number
Alabama
Arizona.
_
Arkansas
_
California
._
Colorado
Connecticut
District of Columbia
Florida...
Georgia
Idaho
Illinois
Indiana
Iowa,.
Kansas
Kentucky
Louisiana
Maine
M aryland
Massachusetts—
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
New Hampshire
New Jersey.
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode I s l a n d . . .
South C a r o l i n a . . . . . .
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Total

137
37
96
34
28
17
49
25
201
217
316
496
35
29
10
44
27
77
534
75
696
4
223
6
44
7
63
194
325
172
223
33
181
4
77
151
185
207
95
79
29
256
42
5,840

Paid-up
capital

$644, 700
195,000
1,924, 675
2,997, 000
3, 075, 500
3, 008, 700
2, 683,156
1,190,000
2, 400, 346
439, 500
18,436,550
8, 620,187
7, 341, 000
7, 685, 500
1, 886,500
614,440
720,400
1, 702, 725
3, 490, 000
1,409, 695
9,816,000
1,478, 700
14,407,000
125, 000
4, 788, 600
350, 000
5, 614,000
250, 000
5,419,250
2,608, 929
3,486, 500
9, 315, 650
2, 970, 650
1, 043, 500
18,592, 937
405, 200
1, 918, 603
1, 742, 200
3, 939, 370
5, 729, 948
368,600
400,000
3,165, 979
2,016,000
2,308,460
6,013, 500
630,000
179,350,150

Surplus and
profits
$366,300
66,700
857, 580
2, 332, 500
1, 767, 660
3, 214, 330
1, 546,160
503, 530
1, 684, 450
251,380
7,949, 610
4, 777, 000
5, 283,880
7, 247, 950
1,692,550
662, 540
1,088, 000
2, 099, 330
3, 241, 930
1,095,450
5,446, 380
1,224,120
10,999, 750
18,930
2,388,640
347,900
7,457, 910
131,120
5,290, 240
2,445,000
2,403, 020
8, 000, 783
1,111,340
344, 570
24,967,100
362, 070
1,457, 040
1, 925, 530
2, 617,100
2,433, 940
93,740
876, 920
2, 516, 880
1, 276, 310
1, 771, 590
3, 303,830
546,030

Deposits
$4, 727, 600
1, 680,140
12,627,610
31, 715, 750
30, 697,510
38,962, 670
27, 042, 340
15,808, 665
12, 729,460
3, 601, 350
157,121, 890
93, 727, 520
99, 044, 870
90,410,420
23,373, 040
7, 931, 700
17,138, 240
32, 990, 090
67,166,850
21, 354, 720
120, 873, 980
20, 597, 460
146, 517,010
599,670
47, 869, 780
2, 002, 480
109, 285,480
1, 569, 670
74,878,420
32, 658,150
38, 969,170
131, 046, 300
31, 777, 770
11, 794,180

Resources

254, 808, 960
5, 945, 420
24, 738, 010
27, 786, 765
46, 362, 220
36,143, 390
1, 663, 340
14, 027,100
26, 096,100
27,609,090
24, 594,070
74, 885, 870
7,191,800

$5, 745,630
2, 041,120
15, 760,070
35,984, 200
35,282,290
45,906,110
31, 068,890
17,393,830
18,437,910
4, 313,400
183, 040, 600
110, 063, 230
114,680,500
103,213,940
27, 059, 750
9, 288, 290
19, 707, 060
36,870,990
72,906, 620
23,416,350
134, 652,840
23, 685, 300
175,933, 290
755, 340
54, 312, 260
2, 775, 620
122,894,290
1,949, 340
86, 437, 490
38,323, 575
48, 343, 260
147,348,390
35, 259,750
12, 947,460
300, 280, 280
6, 736, 430
29, 244, 220
32,176, 770
53, 778,180
45, 035, 510
2, 939, 790
15, 607,330
33, 278, 710
30, 634, 900
28, 683, 780
85, 521, 625
8, 323,960

139,486, 613 2,132,144,090

2, 470,040, 510

i This statement does not include any of the banks referred to in the note under Table V.
NOTE REGARDING TABLES X I I AND XIII.—When these tables were prepared,

the provision in the Capper-McFadden bill regarding eligibility for membership in the Federal reserve system read as follows:
" No- applying bank shall be admitted to membership in a Federal reserve
bank unless it possesses a paid-up, unimpaired capital sufficient to entitle
it to become a national banking association in the place where it is situated
under the provisions of the national bank a c t : Provided, however, That an
applying bank organized in a place the population of which does not exceed
six thousand inhabitants may, in the discretion of the Federal Reserve Board,
be admitted to membership if it possesses a paid-up, unimpaired capital of
at least $30,000; and if the application is accompanied by adequate undertakings of such bank and of its principal stockholders, that the capital of
such bank will within three years be increased to $50,000: And provided further,
That an applying bank, organized in a place the population of which does
not exceed three thousand inhabitants, may, in the discretion of the Federal
Reserve Board, be admitted to membership if it possesses a paid-up, unimpaired capital of at least $15,000, and if it is accompanied by adequate




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

217

undertakings of such bank and of its principal stockholders, that such capital
will within three years be increased to $25,000. If any such undertakings
have not been fulfilled within three years the Federal Reserve Board may
forbid such bank to enjoy any of the privileges of this act and may require
it to withdraw forthwith from membership in the Federal reserve system."
This provision was subsequently changed, and, as embodied in the agricultural credits act of 1923, is as follows:
"No applying bank shall be admitted to membership in a Federal reserve
bank unless (a) it possesses a paid-up, unimpaired capital sufficient to entitle it to become a national banking association in the place where it is
situated under the provisions of the national bank act, or (b) it possesses
a paid-up, unimpaired capital of at least 60 per centum of the amount sufficient to entitle it to become a national banking association in the place
where it is situated under the provisions of the national bank act and, under
penalty of loss of membership, complies with rules and regulations which the
Federal Reserve Board shall prescribe fixing the time within which and the
method by which the unimpaired capital of such bank shall be increased
out of net income to equal the capital which would have been required if
such bank had been admitted to membership under the provisions of clause
(a) of this paragraph: Provided, That every such rule or regulation shall
require the applying bank to set aside annually not less than 20 per centum
of its net income of the preceding year as a fund exclusively applicable to
such capital increase."

Senator GLASS. HOW many of these nonmember banks do you
think it is desirable to get in ?
Mr. MEYER. All of them whose management and condition is
satisfactory.
Senator GLASS. YOU were in favor of lowering the capital requirement. Will vou tell us how many of them are taking advantage
of it?
Mr. MEYER. I do not know. In any event, I do not think that is
important compared to getting into the system a substantial portion,
at least of the 9,678 banks which could come in without any reduction in the capital requirement. The provision lowering the capital
requirement, to which you refer, specifically requires an increase in
the capital within a short period.
Senator GLASS. I thought you regarded it as important last
winter, when we had our Banking and Currency Committee sitting
around here. Everybody said it was very necessary.
Mr. MEYER. I stated frankly that I considered it a matter of
minor importance in comparison with that of getting the 9,678 banks
into the system, but, at the same time, as an expression of attitude
on the part of the Congress, I thought it might be helpful and that
it might encourage small banks to increase their capital.
Senator GLASS. Did you expect very many of them to come in ?
Mr. MEYER. I did not have any expectations about something that
I did not consider very important. When I discovered there were
nearly 10,000 banks which were already eligible for membership and
which had not joined the system, I knew there was something more
important that the size of the capital that was keeping them out.
Mr. WINGO. That is a very wise discovery for you. But it is not
original with you.
Mr. MEYER. We all learn. I say it is desirable to determine the
attitude of the Federal reserve system—whether or not it wants tc
<ret these banks in.




218

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Mr. WINGO. Do you know what their attitude is ?
Mr. MEYER. I do not. I have heard that some of the officials of
the Federal reserve banks do not feel that it is important. I think
the Federal Reserve Board, judging from informal discussions I hate
had with individual members, believes it to be desirable to bring in
a considerable number, at least, of the eligible non-member banks,
but as they are all here in Washington, you can get their views
directly from them. I think their attitude in the matter ought to
be definitely determined.
Mr. WINGO. YOU have not been here during these examinations
that have been held ?
Mr. MEYER. NO. If the member banks in the large cities do not
want their country correspondents to join the Federal reserve system,
their position ought to be defined and made clear. If they are willing to have them join, I think that likewise ought to be defined and
made clear and their cooperation sought.
Mr. WINGO. What do you mfcan by "defined and made clear"?
Defined by whom?
Mr. MEYER, By the Federal Reserve Board of by any one else
whose responsibility it is.
The CHAIRMAN. Through the activities of these reserve city
bankers who have accounts with country bankers, which are secondary reserves, they are defeating the real intent and purpose, to a
certain extent, of the Federal reserve system?
Mr. MEYER. Some of them certainly are, in my opinion. I can not
imagine, Mr. Chairman, that Congress would have made 9,678 banks
eligible for membership if it did not feel that it was in the public
interest for them to join. If it was in the public interest at the time
the Federal reserve act was passed, I think it is even more so under
present-day conditions.
The CHAIRMAN. There are many things that cause that situation.
In the first place, the reserve city banks want the accounts and
balances which the country bankers give them. They render them
services and make much of the offering of those services, and the
country banks are getting services which they believe—whether made
to believe it or whether it is a fact—they could not get through the
Federal reserve system. Whether or not it is their aim to get those
favors—you may term them " favors"—from the correspondent
banks, it has no bearing on the entry of the banks into the system.
So long as the offer is made by the city correspondent banks to these
country banks to take care of all their needs in a better manner than
the Federal reserve system can, they apparently see no-necessity of
joining the Federal reserve system. It presents a rather difficult
situation.
Mr. MEYER. It is not only a very difficult situation; it is a very
big situation and a very important situation.
The CHAIRMAN. I have discussed this matter with some of these
reserve city banks and have mentioned that the committee was going
to hold hearings, but I find a reticence on th§ part of many of these
bankers to have anything to do with it, and for that reason they are
selfish, as any banker is, perhaps, of his own business, the volume of
which he wants to maintain.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

219

Mr. WINGO. I do not agree with you. I think these correspondent
bankers have advised these country bankers. I think they were
prompted by high motives for public good. [Laughter.]
The CHAIRMAN. That is putting it facetiously.
Senator GLASS. Your testimony is that it is the business of the
Federal reserve banks and Federal Reserve Board to get into intimate contact with these country banks and to convince them that it
is not to their advantage to deal with the correspondent banks, but
is to their advantage to deal with the Federal reserve system.
Mr. MEYER. I think it is their business primarily. I think also
that a good deal more might have been done in this matter during
the past years. It involves, gentlemen, a very big question—the
whole banking structure of this country. We are getting a more
complicated, a more scattered and divided, system of financial institutions all the time. The Federal reserve system, among other
things, was intended, as I understand it—correct me if I am wrong,
Senator Glass, as you were closely in touch with all the steps leading
up to its creation—the system was intended, as Chairman McFadden
states, to mobilize the reserve banking resources of the Nation, so
that they might be available to meet the needs in various parts of
the country at changing periods and under changing conditions.
Senator GLASS. And to free the country banks from the tyranny
and whims of the big correspondent banks ?
Mr. MEYER. Yes; and it has succeeded in a great many respects.
I feel, however, that the failure to add to the membership so large a
number of banks that ought to be in the system, or at least that Congress contemplated would be in the system, is fundamental.
Mr. WINGO. Would you suggest any amendment of law that would
correct the condition?
Mr. MEYER. I think it is largely a matter of administration.
Mr. WINGO. On that very point, what regulations, if any, of the
Federal Reserve Board that operates to compel banks to come into
the system, and what changes would you make?
Mr. MEYER. I am not prepared at this time to make specific recommendations regarding amendments in the law or regulations. I
think that, after they have sifted that question, if they deem it
desirable to add to the membership of the system a large number
of the eligible nonmember banks, it is up to them to make appropriate recommendations to congressional committees, if congressional
action is necessary.
Mr. WINGO. What I wanted was what suggestions, if any, would
you make with reference to this administration policy. I think you
are right about it. I agree with you and Senator Glass. I think
it is more a matter of administration. What suggestion would you
make with reference to the policy of the Federal reserve system ?
Mr. MEYER. I would get in direct contact with individuals and
large groups which represent the banking system of the country,
such as the American Bankers' Association, the State Bankers' Association, the superintendents of banks in the various States, and
others, with the view to finding out the very things you are asking
me. As I have had no opportunity to do this, I am not in position to
suggest concrete changes in the policy of the Federal Reserve Board.




220

INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

The CHAIRMAN. Frequently bankers claim that in case their necessities required them to borrow from the Federal reserve system, they
might not be able to borrow as much as they need and they can make
use also of their correspondent city banks upon whom they look as
additional safeguards.
Mr. MEYER. There is no reason why they should give up their accounts with the city banks.
The CHAIRMAN. One banker told me of a condition of stress in his
locality, where he was borrowing from the Federal reserve system in
excess of the amount he was entitled to, that when making application to the reserve city for additional funds he was told that the
bank would be granted the loan, but in nowise was it to be used for
the purpose of liquidating the loan at the Federal reserve bank.
Mr. MEYER. Yes.
The CHAIRMAN. That presents
Mr. MEYER. Yes. The banker

another situation.
wanted to see that the money was
used only in connection with the regular business of the borrowing
bank, and not for the business of the Federal reserve bank. Under
present conditions, we might refuse to grant a loan through the War
Finance Corporation to pay off a loan from the Federal reserve bank.
The liquidation of a Federal reserve loan at this time would be of
no advantage to the agricultural interests we are trying to serve.
Helping agriculture and strengthening the whole banking structure
of the country was one united problem two years ago; it is not now.
Mr. WINGO. Do you know how much of your funds were used for
liquidation loans of the Federal reserve banks?
Mr. MEYER. NO, but the loans we made to banks in the agricultural
and livestock districts enabled them to give the farmers and stockmen longer time, relieving them of the feeling that they would have
to liquidate in 90 days. That factor was of tremendous importance
in giving confidence to bankers in making advances to farmers.
Mr. WINGO. I am somewhat surprised that you do not know what
went with the proceeds of these loans.
Mr. MEYER. We could not trace them all the way down the line.
Mr. WINGO. Why could you not? A banker usually knows what
is done with the proceeds of a loan.
Mr. MEYER. The funds we advanced were used, in numerous instances at least, to make new loans to farmers. On the other hand,
some of them may have been used to take up paper at the Federal
reserve banks or to pay off deposits.
Mr. WINGO. What do you mean by " pay off deposits " ?
Mr. MEYER. It is generally known that when we began to make
advances for agricultural purposes deposits were rapidly declining,
and some banks may have borrowed from us to pay their deposits.
Mr. WINGO. YOU mean the banks borrowed from you to pay deposits?
Mr. MEYER. TO pay deposits and to make new loans.
Mr. WINGO. YOU made no investigation to ascertain how much of
those funds were used to pay off deposits and how much to pay off
former loans?
Mr. MEYER. I do not see how you could accurately determine what
became of the prceeds of a $50,000 loan to a bank which was doing




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

221

business every day. Some of it may have been used to increase reserves in order to comply with the law; some of it may have been used
in connection with renewals and extensions of notes of farmers who
could not pay them and whose products were liquidated later at better prices. The general effect was the important thing we were seeking to accomplish, and that was the stabilization of the whole banking and agricultural situation.
Senator GLASS. Banks, as well as farmers?
Mr. MEYER. We could not save farmers by allowing banks in the
agricultural districts to go broke. It is a real misfortune for a bank
in an agricultural community to go broke, and that is especially true
when the bank is the only one in the community.
Mr. WINGO. Do not misunderstand me. I stated very frankly
that I thought the greatest practical relief was going to come from
the War Finance Corporation loans to the banks, which would kind
of break the jam in those banks, and that that would be of service,
because by breaking the jam and freeing some of their frozen assets
that they then would be in position to extend further credits to the
farmers, and that the farmers would get indirect benefit that way.
Mr. MEYER. That is true, and still I do not think that was the
biggest end of it. The biggest end of it, in my opinion, was this:
A very large number of banks throughout the country were in a precarious position, resulting not from unsound banking necessarily,
although there was much of that, but more particularly from a rapid
decline in deposits coupled with a sudden drop in the prices of the
commodities upon which their loans were based—cotton, tobacco,
corn, hogs, cattle, and, in fact, practically all agricultural products.
In many communities there were strong banks as well as weak
banks—I say " weak " without any reflection on the banking management in many cases—and when a strong bank saw that a neighbor
across the street was in danger owing to the withdrawals of deposits
and inability to liquidate its loans because prices and markets were so greatly demoralized the strong bank began to pull in its money,
would not make any more loans, and sat still fearful of what was going to happen to its neighbor, which in turn might precipitate a run
on it. We were able to strengthen hundreds of weak banks with
ample funds and liberal terms as to time, and this gave the strong
banks assurance to go ahead and function normally, with the feeling
that there was no danger to the general situation, as the weak banks
were being taken care of. In that way millions and hundreds of
millions of dollars which otherwise were being hoarded in bank
vaults were loosened and made available for useful purposes in the
agricultural districts, and that, in my opinion, was the biggest thing
we accomplished.
Mr. WINGO. YOU could have appreciation of the country bank who
saw deposits dwindling and his securities shrinking and pressure
being brought on him to liquidate.
Mr. MEYER. I think we appreciated the situation, Mr. Wingo, as
that is what we have been working on for two years. If you find
it strange that we did not analyze just what became of every dollar,
all I can say is that the making of loans to an average of 80 to 100
banks a day through the 33 agencies all over the United States, with
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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

an organization that had to be created almost overnight, was enough
to occupy all our time and a little more besides.
The CHAIRMAN. As I recall the war finance act, the banks which
obtained money from the War Finance Corporation were permitted
to charge a slight advance in interest?
Mr. MEYER. Not more than 2 per cent above the rate at which we
loaned.
The CHAIRMAN. Did you find any of the banks to whom you made
loans taking advantage of the borrower in the way of excessive interest ?
Mr. MEYER. Every application contains an agreement on the part
of the bank that the money advanced by the corporation will not be
reloaned at a rate greater than 2 per cent above our rate. Our rate
is 53/2 per cent.
The CHAIRMAN. Did you, on the other hand, find a marking up of
interest rates on the part of these banks?
Mr. MEYER. NO; but we found considerable marking down. In
many States, as you know, the law restricts the banks to 6 per cent,
as in North Carolina.
The CHAIRMAN. Then you did not find any exploitation on the
part of these banks?
Mr. MEYER. NO. We secure from each borrowing bank a written
statement that they have complied with the law in that respect, and
our agents in the various districts are instructed and, in fact, have
been repeatedly reminded that they are to enforce strict compliance
with the limitation. As a matter of fact, we stated that if there were
any failure to comply we would place the matter before the authorities entrusted with the enforcement of the law.
The CHAIRMAN. The reason 1 mention that is due to the fact that
the case was presented to me wherein a bank that had, I will say
offhand, a $50,000 loan from the War Finance Corporation represented to the borrower that he was using War Finance money, and
therefore must have a higher rate of interest on all loans.
Mr. MEYER. What was he charging on his other loans?
The CHAIRMAN. He was charging the normal rate of 6 per cent,
but he took advantage of the fact that he was getting money from
the War Finance Corporation and marked up the general rate of
interest on all his loans.
Mr. MEYER. That is the first case of the kind I ever heard of.
I do know that in a large number of cases we brought about a reduction in the rates of interest. Is there anything further?
The CHAIRMAN. Have you anything further you would like to
present ?
Mr. MEYER. NO, Mr. Chairman; I think I have covered all that
I desire to say at this time.
The CHAIRMAN. I might say here that the Secretary of Agriculture was invited to appear before the committee, but the chairman
has received advice that he will not be able to appear nor will he
send a representative to appear before the committee on this question.
Mr. STRONG. At no time, or only the present ?
The CHAIRMAN. The message that came to me indicates that he
does not feel that he would be able to offer anything that would be




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

223

of enlightenment; also that he does not contemplate sending anyone
else.
Mr. WINGO. Do you know of anyone else who is willing to come
to-day and give any information that he thinks we can appreciate
and comprehend?
The CHAIRMAN. I do not happen to know of anyone.
Mr. WINGO. Or do you think all of them take the view that it is
none of our business; that it ought to be left to the Federal Eeserve
Board to work out ?
The CHAIRMAN. I would suggest that the committee now adjourn
until 10.30 o'clock to-morrow morning, when the chairman of the
advisory council of the Federal Reserve Board and other members
of the board will be present.
(Thereupon, at 12.30 o'clock p. m., the joint committee adjourned
to meet to-morrow, Friday, October 5,1923, at 10.30 o'clock a. m.)




INQUIKY ON MEMBEESHIP IN FEDEEAL EE8EEVE
SYSTEM
FBIDAY, OCTOBER 5, 1923
CONGRESS OF THE UNITED STATES,
J O I N T COMMITTEE OF INQUIRY ON
MEMBERSHIP I N FEDERAL BESERVE SYSTEM,

Washington, D. O.
The joint committee met at 10.30 o'clock a. m., Hon. Louis T.
McFadden (chairman) presiding.
The CHAIRMAN. I will place in the record at this point the letter
which the chairman wrote to Mr. Levi L. Rue, chairman Federal
advisory council, Federal Eeserve Board, Philadelphia National
Bank, Philadelphia, Pa., advising that these hearings were taking
place and that the committee would be very glad to hear from him
and one or two other members of the council of the Federal Reserve
Board if they cared to present something to the committee on the
subject of the inquiry. Mr. Rue and other members of the board
are here this morning; and I might say to you, Mr. Rue, that so far
as the committee have gone we are trying to confine our hearings
strictly to the law, with which you are familiar. While there has
crept in at different times collateral issues, some of which might not
have been exactly pertinent, the committee have been very generous
in that respect, though we would like to confine ourselves, so far as
possible, to the subject of the inquiry.
(The letter of September 7, 1923, to Mr. Levi L. Rue, submitted
by the chairman, is as follows:)
SEPTEMBER 7, 1923.
Mr. LEVI L. RUE,

Chairman Advisory Council, Federal Reserve Board,
Philadelphia National Bank, Philadelphia, Pa.
MY DEAR MR. R U E : In pursuance of the provisions contained in the agricultural credits act of 1923. passed by the Sixty-seventh Congress, Public Law
No. 503, a copy of which is inclosed, a joint conimittee, consisting of three
members of the Banking and Currency Committee of the Senate and five members of the Banking and Currency Committee of the House of Representatives,
has been appointed.
It Is the purpose of the committee to start formal hearings along the lines
of authority conferred upon them by the act, beginning on Tuesday, October 2,
1923. when the different Government departments will be heard.
The committee will be pleased to hear you and one or two other members of
the council of the Federal Reserve Board who can speak with authority for
the advisory council on the several subjects enumerated in the act creating
this committee, on Friday, October 5, at 10.30 o'clock in the morning, in the
House Banking and Currency Committee rooms in the Capitol Building.
Yery truly yours,




L. T. MCFADDEN, Chairman.

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INQUIRY OX MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Mr. WINGO. May I inquire at this particular place, Mr. Chairman,
how many members of the council are here?
The CHAIRMAN. Mr. Rue, will you inform the committee who of
your council are present ?
STATEMENT OE MR. LEVI I . RUE, CHAIRMAN FEDERAL ADVISORY COUNCIL, FEDERAL RESERVE BOARD, PHILADELPHIA,
PA.

Mr. RUE. Mr. Warburg, of New York, vice president of the council, and Mr. John Miller, of Richmond, Va., are here. We had expected that Mr. Mitchell, of Chicago, would also be present, but he
was taken with a very severe cold, and his doctor would not permit
him to come East. We also tried to get Mr. Wade, of St. Louis, so
that wTe would have a representative of the West here, but the notice
was too short for him to reach here. In addition to that, we tried
to get Mr. Prince, of Minneapolis, but the president of his bank was
absent and he could not leave.
The CHAIRMAN. Mr. Wade, of St. Louis, is another member of the
council, is he not ?
Mr. RUE. Yes, sir; he is a member of the council, but, as I say,
notice was so short he could not possibly arrange it. Mr. Swinney, of
Kansas City, has been ill with pneumonia, and he could not come.
We tried to get Mr. Gobel, but again Mr. Gobel could not come here.
The CHAIRMAN. I presume, inasmuch as you have a prepared statement, you would probably want to proceed without interruption.
Mr. RUE. Yes; it wTill not take me very long to say what I have to
say.
The CHAIRMAN. I would suggest to the committee, then, that you
proceed, and when you have finished, any questions that the committee want to propound can be asked.
Mr. RUE. The act of Congress creating your committee authorizes
it to inquire into the following:
First, the effect of the present limited membership of State banks
and trust companies in the Federal reserve system upon financial
conditions in the agricultural sections of the United States.
The failure of State banks and trust companies to join the Federal
reserve system prevents the mobilization of their reserves in the Federal reserve banks/ which mobilization would result in increased
loaning power of the Federal reserve banks. It also prevents these
nonmember banks and trust companies from having available the rediscount facilities of the Federal reserve system. Of course, it should
be borne in mind in this connection that many State banks and trust
companies possess little if any paper which is eligible for rediscount.
Second, the reasons which actuate eligible State banks and trust
companies in failing to become members of the Federal reserve system, in my opinion, are as follows:
1. The most important reason is probably the loss of interest on
the reserve balance which must be kept with the Federal reserve
bank. Most State laws permit State banks and trust companies to
keep the larger part of their reserve with other banks, chiefly city
correspondents, on which balances interest is usually paid. ' State




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

227

banks further object to not being able to count cash in their vaults
as part of their reserve, which is permitted under many State laws.
2. The absence of any particular advantage to be obtained through
membership in the system. A large number of State banks find that
all their normal needs can be taken care of by their correspondents.
Furthermore, the assets of many of these State banks, because of the
nature of their customers' business, consist of securities and receivables which are ineligible for rediscount with the Federal reserve
bank.
8. Membership in the system on the part of State banks makes it
necessary for them to render reports both to National and State authorities, which, particularly to the smaller banks, involves considerable trouble and labor. State banks now under the examination
of State authorities object to the additional examination by the
examiner of the Federal reserve system.
Third. What administrative measures have been taken and are
being taken to increase such membership? It is my understanding
that the Federal reserve banks employ representatives to solicit constantly the nonmember State banks, explaining the many advantages
of membership and endeavoring to persuade them to join the system.
Fourth. Whether or not any changes should be made in existing
law or in rules and regulations of the Federal Reserve Board or in
methods of administration to bring about in the agricultural districts a larger membership of such banks and trust companies in the
Federal reserve system:
With regard to the changes which should be made in the existing
law or in the rules and regulations of the Federal Reserve Board or
in the methods of administration to bring about in the agricultural
districts a larger membership of State banks and trust companies in
the Federal reserve system, it is doubtful whether any additional
efforts should be made to persuade nonmembers to join. Certainly, no
undue pressure should be brought to bear upon them to do so. Time
will demonstrate to these nonmember banks the advantages of the
system, if any, to them. Where the character of their business is
such that the facilities of the Federal reserve system would prove of
little benefit, largely because of the ineligibility of most of their
assets, it can hardly be expected that these banks would join the
system.
Then, Mr. Chairman, there is another reason which I have not
written down, which I think is quite an important one in the minds
of the management of many of these State banks. As you know,
their relations with their correspondents have been of years standing,
and the personal equation enters in very largely. The officers of
these State banks and trust companies are personally acquainted with
the management of these city banks; they come to them for advice on
matters of business, and the}^ ask them for all sorts of facilities, and
they find a very sympathetic ear from managers of these city banks
whom they know so well, know the caliber and character of the men
and the nature of their business which they do in their communities,
and they will loan them money and grant them facilities where the
Federal reserve bank might not or could not do so.
The Federal reserve bank, in the nature of things, is a semi-Governinent institution, and the management of it can not know in the same




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

personal way as the management of a city correspondent can know
these men, and I think that has a deterrent influence on a great many
of these smaller State banks. They feel they can have a more sympathetic ear from the management of the city correspondents which,
as I say, has known them for years, knows all about them, the make-up
of their institution and character of business. I think that has considerable influence.
There is one other matter I would like to bring before you. It is
simply my own idea, probably, not brought out by your questions,
but I think it highly important: Unless something is done to equalize
the privileges enjoyed by national banks with those of State banks
and trust companies, the disintegration of the national bank system by
the withdrawal of banks from the national system is likely to take
place. There is little, if any, advantage now for a bank to operate
under a national charter, and when subjected to competition from
State banks and trust companies having greater privileges and located
in the same community their position becomes more and more difficult,
and only sentiment holds many of them to-day in the national s}^stem.
Mr. STRONG. YOU mean the privileges should be extended wherever the State banks have branches ?
Mr. RUE. I do not say in the States, but my own judgment is that
branches should not be state-wide. I think that should be confined
to the community or city or town, but I would confine them to cities.
Mr. STRONG. That would not meet the situation in California where
State banks have state-wide branch banking.
Mr. RUE. I know; the California situation is peculiar. Of course,
that State is an empire in its vastness, and I know that the bank of
Italy—I presume that is what you had in mind ?
Mr. STRONG. That and the Southwest Trust Co.
Mr. RUE. Both have branches over the State, and it may be necessary in California; I do not know. But I think that is an exception.
The CHAIRMAN. Mr. Rue, forgetting for a moment that you are
here representing the advisory council, suppose you resolve yourself
into president of the Philadelphia National Bank ?
Mr. RUE. Yes.
The CHAIRMAN. Your bank has a large number of country-banking
accounts. The suggestion has been made here that the tendency on
the part of reserve-city bankers is to foster or continue accounts
with country banks, which is one of the great impediments of membership of the State banks and trust companies in the system. In
other words, that practice is looked upon as a sort of secondary
reserve, for as some have put it, it tends to defeat the original purpose of mobilization of reserves which is contemplated in the FecJeral reserve act. Would you care to enlighten the committee on that
situation ?
Mr. RUE. DO I understand from your question—I think I saw it
stated in the paper; I do not know whether correctly stated or not—
that some of the larger banks in the cities were persuading State
banks to stay out from selfish motives ?
The CHAIRMAN. Yes, and that has been suggested; an4 we would
like to have you express your opinion about it.
Mr. RUE. I think that if that occurs—I know of no case, though
there may be some isolated cases of that kind; but I can not imagine




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

229

the management of a big city bank being so narrow, so small as
that. I think from our own experience, Mr. Chairman, we have a
number of bank accounts from institutions that are members of the
Federal reserve system, that keep, as you say, sort of secondary
reserves with us, entirely a voluntary act. But there are things they
want us to do that the Federal reserve bank can not do for them.
For instance, some come and borrow from us on bonds. A great many
of them keep their bonds on deposit with us, and they borrow on those
bonds for a day or two; or they may telephone to us " I find I need
maybe $50,000 or $100,000. May I draw on you for that? " And
they may say, " Credit my account $50,000 or $100,000," whatever
the amount may be—" I have securities on deposit with you." And
they can get service of that kind, which does not compete with the
Federal reserve system in any sense. They still keep reserve accounts
in the Federal reserve bank, but a sort of secondary reserve, as you
have just cited, with the city correspondent. But I do not consider
that that would in any way keep these banks out.
The CHAIRMAN. I infer from your statement that the country
banks feel they would rather have two strings to their bow than
one; that is, while they could borrow on the eligible paper they
might have, a great many of them have paper noneligible with the
Federal reserve system, but on which the reserve city banks will
make loans to them in cases of emergency.
Mr. RUE. I think that is undoubtedly so.
The CHAIRMAN. Of course, I think it is only fair to say of the
reserve city banks, that they are anxious to get deposits and to keep all
accounts they have that are worth while.
Mr. RUE. But, I do not think the reserve city banks are discouraging their correspondent banks from entering the system.
The CHAIRMAN. YOU do not think there is an organized effort by
the city banks in that direction?
Mr. RUE. SO far as I know, I do not think so, by no means. As
I say, there may be a few isolated cases, but I do not think it is in
any way general I think the reserve city banks are in hearty accord
with the Federal reserve system and strong advocates of it, believe
in it, and want to see it strengthened in every way. I do not think
for a moment they are trying to influence any banks to stay out.
The CHAIRMAN. What would be the effect on the Federal reserve
system if the national banks should retire from the system ?
Mr. RUE. I think the probabilities are that if the national banks
should retire, most of them would probably remain in the system
as State institutions, but they would enjoy broader facilities. You
see we have now, the State banks and trust companies as a system—
of course, it varies in the different States according to the laws of
those States. Then we have the national banking system; we have
also the Federal reserve system. Of course, the Federal reserve system is, as it states, a reserve system. You can not have the State
banking system and the national banking system growing side by
side and each retaining its position, with either one or the other
systems having superadvantages over the other. One or the other
will have to disappear. There is no doubt about that. That is true
in States particularly where the State laws are almost equal to the
national laws. Take my own State. There is no advantage there
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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

at all in holding a national charter. There is no reason why my bank,
the Philadelphia National Bank, should stay in the national system.
We have no advantage over those which we would have if we had
a State charter. In fact, we would have more advantages as a State
bank. But it is sentiment that keeps us in. If competition becomes
too strong from the State banks because of the privileges they have,
I think sooner or later you will find, as I mentioned before, that
many national banks will surrender their national charters.
Mr. WINGO. That being true, if Congress should try to retain the
national bank system, it would then be the part of wisdom to consider laws that would give the national banks such preferences as
would make it more profitable to have a national bank charter than
State bank charter.
Mr. RUE. Either preferences or certainly equal privileges—not
necessarily preference—so that they could meet on common plane of
competition.
Mr. WINGO. Which do you think would be the wiser policy, to
undertake to compete with the State legislatures in granting advantages, or undertake to shape the privileges of the Federal reserve
system and of the national banking laws so as to make it more
attractive for the State banks to come into the national system
instead of making it more attractive for the national banks to go into
the State system?
Mr. RUE. By all means; I am in favor of the national system, because that is a unified system. The State system varies in different
States.
Mr. WINGO. What, in your judgment—I know you must have
given a good deal of thought to it—could we do that would be sound
and practicable with reference to privileges of the Federal reserve
system that would have a tendency to make the national bank charter
more attractive to the State banlks? For illustration, but to use a
crude example, without saying I would favor it, suppose we should
undertake to say that the privileges of the Federal reserve system
would be denied the State banks. That will illustrate the point I am
driving at, though I am not advocating that.
Mr. RITE. I can not imagine for a moment that you would advocate it.
Mr. WINGO. Some laws that would be comparable, though not in
the extreme effect of that.
Mr. RUE. I think Congress has already taken steps in that direction. You have granted the national banks the privilege of acting
as trustees and executors, and so on.
Mr. WINGO. But that is now competing with the State. Is it not
possible, for illustration, in the law as originally framed, when a
State bank comes up and asks for membership in the Federal system,
the board has to determine several things. First it determines
whether or not the statutory requirements are met; that is, with
reference to reserves and other things ?
Mr. RUE. Yes.
Mr. WINGO. Next, they have got to determine the soundness of thatparticular institution. Then, next, under the law—although there
is some dispute about that>—whether or not they are willing1 to
comply with certain conditions laid down. Then, there is another
provision of the law that the board must determine whether or not




INQUIRY ON MEMBERSHIP IN FEDEEAL RESERVE SYSTEM

231

the exercise of certain corporate powers that a State bank has under
the State law is contrary to the general purposes of the Federal
reserve act.
Now, if the law was made more specific upon that particular
point, and the law regarding the corporate powers that a State
bank might exercise if it came into the Federal reserve system, would
that not have a tendency to strengthen and standardize the member
banks of the country ? For illustration, we will say, " We will permit you "—of course, we can not control them. Suppose we should
close the doors of the Federal reserve system, except to banks of
that standard, and that standard should include doing a certain
character of business in a certain way. Would not that have a tendency to build up the national banking system? That, of course, is
based upon the theory that the Federal reserve system is attractive
and its benefits make it attractive to banks to become members. Do
you think it possible for us to frame some statute of that kind?
Mr. KITE. Mr. Wingo, the functions of these State banks which
they are performing are very necessary to every community and to
the business of the country, and if you make it impossible for them
to continue to function that way in order to become members of the
Federal reserve system, I am not sure it would be a good thing to
do, because you would be taking away from the community facilities
which these State banks are now performing.
Mr. WINGO. For instance, some States authorize State banks to do*
some things that really are foreign to banking. There is a dividing'
line—we might differ about it; and there would be a wide difference
of opinion with reference to the granting of franchise rights under
some of the States, but 1 think 1 can assume that you and I and possibly everybody else would agree, as every sane, .sensible man would
agree is no part of the banking function, and if the major part of the
activities of such a bank were along that particular line it has got no
business in banking of any kind; for instance, in souse States a bank
may engage in the mining business, operating a saw mill or general
mercantile store, and I think you will .find in one State they might
be permitted to go into any kind of business they saw fit. They
might undertake to manufacture fertilizer.
Mr. RUE. Certainly that would be unsound.
Mr. WINGO. If you sat down as a practical banker to frame such a
law, one of the conditions you would put down would be that no
State bank should be a member that was not willing to relinquish
its franchise right to engage in a business other than the banking
business; then you might take up the different branches of banking
and determine whether or not the preponderance of that particular
bank's business along a line that might be very necessary to its community, but which is not so intimately interwoven with the commercial fabric of the country as to really make it properly a part
of this coordination of commercial banks of the country; and you
would cut that off. Do you not think it is possible by a wise study
of that to undertake to gradually narrow it so thai we would have JI
tendency to standardize the banks of the country instead of making
a crazy quilt out of them by entering into competition with every
State legislature that saw tit, for reasons that you and I understand—
we have both observed legislatures granting privileges.




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Mr. RUE. I think probably that is possible, but I do think this;
I think you have to guard against lowering the standard of the
Federal reserve system.
Mr. WINGO. That is the point I am making.
Mr. EUE. To bring in all these outside banks.
Mr. WINGO. I say, instead of lowering the standard, would you not
strengthen the national system. If we raise the standard of membership in the Federal reserve system that, of course, is all predicated
upon the theory that the Federal reserve system is a wise thing and
that it is of benefit to the bank to be a member of it.
Mr. RUE. In that system now the standard is high. It might be
broadened in certain particulars so that some State banks could come
in without any great disadvantage to themselves, but I do not think
the standard of the system should be broadened or lowered so as to
make it possible for almost all State banks to come in.
Mr. WINGO. YOU and I can readily understand that even now there
are some banks that, especially under the last amendment we made,
technically are eligible to come into the system; and that even from
their own standpoint and from the standpoint of the system, too, it
would be a negligible proposition, of no benefit to them, and they are
much better off in pursuing the policy that you suggested awhile ago
of being attached to a strong bank that knows the officers and knows
their particular community business and the personal equation enters
into that, where that particular correspondent bank with perfect
safety, with its superior knowledge could grant accommodations upon
paper that technically is not eligible with the Federal reserve bank,
and even if the eligibility of the paper could be demonstrated, the
necessary procedure might require such a length of time to execute
as to fail utterly to meet the needs of the particular little bank. That
is true, is it not ?
Mr. RUE. Yes; it is possible.
The CHAIRMAN. I might inject this letter from a Philadelphia
banker, which came to me this morning. It is quite pertinent here,
and I just want to read it. After the introduction:
Mr. STRONG. He does not want to raise the salaries of the members
of the Reserve Board ?
The CHAIRMAN. He raised that question, and because it is a frequent expression I thought it well to get it in.
Mr. WINGO. For his information, I will state that the letter you
just read and the one you are going to read now are not isolated instances. I am not undertaking to pass upon the merits of the proposition.
Mr. RUE. NO; I understand.
Mr. WINGO. But what I want to impress upon you gentlemen is
that whether it be right or wrong, there is an undercurrent of resentment that runs through that letter and runs through the letter the
chairman is going to read that is prevalent in every State in which
I have had opportunity to have confidential talks with the small
bankers. They may be wrong. I am not talking about that.
Mr. RUE. Nonmember banks ?
Mr. WINGO. Both. They are irascible and irritable. I do not
want you to think this is some man who has got sore about something.
If it was some particular soreness on some particular transaction




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

233

it would, perhaps, not be worthy of noticing, but the system has been
unfortunate in a very wide territory.
The CHAIRMAN. The committee, as you are aware, sent out questionnaires last spring, and we have received a great many replies. I
will put into the record, with the permission of the committee, a
letter from practically each one of the States, setting forth the
objection of the bankers as these replies have been received. They
will be a matter of record, and I will not bother to read them all.
But here is a typical letter that comes to me.
Senator GLASS. Before you read that, I understand that Philadelphia correspondent complains that the officials of the Federal
reserve banks are not paid sufficient salaries. The impression is produced in the country that they are paid higher salaries than officials
of member banks. But, as a matter of fact, that is not true. The
officials of member banks in all important centers range from 10 to
100 per cent more than the officials of the Federal reserve banks in
the centers. But this banker complained that the salaries of the
Federal reserve bank officials are too low. Is not that unique in your
experience and observation?
The CHAIRMAN. Yes; to get a criticism like that openly.
Mr. WINGO. I will state, Mr. Chairman, as possibly the Senator
has not heard it, that one of the most conservative and wealthiest
leaders of the House jumped on our committee over on the floor of
the House because we had incurred this extravagance.
Senator GLASS. I venture that he did not spend five minutes to find
out what was the relative salary of the Federal reserve bank officials
as compared with the salaries of the member bank officials in the
larger communities in the reserve centers. He could not with any
degree of sanity or justice jump on anybody.
Mr. WINGO. The fact is he is worth a few million dollars that he
has made in business, which indicates he is not a failure as a business
man.
Mr. STEAGALL. YOU would not think it policy that the salaries
paid officials of the Federal reserve system should necessarily be
governed by salaries paid by other banks, would you, for the reason
that in the other instances many times the men who receive these
salaries own stock in the banks. It is their own business; they are
paying themselves to a large extent, whereas the official of the Federal reserve system is in a different situation with reference to that.
Senator GLASS. For that reason they ought to receive more; they
have not any private investments.
Mr. WINGO. That is really an argument in favor of paying higher
salaries to the officials of the Federal reserve.
Mr. STEAGALL. Not unless deserved.
Senator GLASS. I say, as a matter of practical fact, from which
there is no escape, in employing efficient men to conduct the business
of the Federal reserve banks, the Federal reserve banks must compete with the great commercial banks in getting the right sort of
talent. You can not take a blacksmith to run a bank or a wood
sawyer; you have got to get a banker to run a bank, and when you
go out in the open market to hire talent you have got to compete
with commercial banks.
•




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Mr. STEAGALL. That presupposes that talent is limited, whereas,
as a matter of fact, they take up and train in the banking business
such additional numbers of young men as the business requires.
Senator GLASS. N O ; as has already been testified here, they could
not keep their help because it is employed by the commercial banks
after they are trained, the salaries being more inviting.
The CHAIRMAN. I would just like to observe that this is directly
about salaries paid officers of Federal reserve banks. I would like
to contrast salaries that are paid to the officers of Federal reserve
banks with the salaries paid to members of the Federal Reserve
Board. They are not at all in keeping, and I am perfectly willing
to go on record that I think the members of the Federal Reserve
Board are underpaid. I think their salaries should be increased.
The restrictions that surround membership on the Federal Reserve
Board prohibit men who would otherwise be of advantage to the
system going on the board.
I will read this other letter here, because it is pertinent to the
subject which you members of the advisory council are going to
discuss. It is a typical letter. It is dated October 2. [Reading:]
DEAR SIR : I received a letter from you some months ago, in which you asked
me five questions.

I t shows this banker has been deliberating on this proposition for
some time.
In answer to the first, I wish to state that there are a good many reasons
why we do not care to belong to the Federal reserve, but I would prefer to
talk them, rather than put them on paper.

Senator GLASS. If he talks here they would go on paper and into
print, too. [Laughter.]
The CHAIRMAN (reading) :
One reason, however, is that we get interest on our deposits which are
placed in New York, Philadelphia, or any other city bank. Then another
reason is that in the beginning we were told that if we did not remit our checks
at par they would be passed through the express company and a notary public
would present them for payment, and if we did not pay cash they would be
protested. By holding our checks for three or four days they might cause us
a great deal of trouble. We were told that it did not make any difference
about any injury we received from their actions, we would have to comply
with their wishes. We have been complying with their wishes ever since,
with a loss of between $4,000 and $5,000 a year.
If a man living at my city to-day should buy goods of any description in
New York and send his check to the firm that he purchased them of, and they
did not carry with their bank there a sufficient balance, he would be charged
a collection fee. Then if they should put the check in the Federal reserve
bank and send it to us our correspondence clerk would have to give his time,
furnish a New York draft—which costs 4 or 5 cents—and our postage and
stationery and remit it for nothing. So, you see, if the man in New York or
Philadelphia carries a balance sufficient to have his check collected at par
they do so, and if not they charge him.
Then, again, most State banks I have talked with about this subject feel that
they are better off as they are. The system is not a friend to the State bank.
The Government of the United States does not allow a postmaster to deposit
funds in a State bank. At the same time, a national bank is not restricted
from receiving funds of the State for deposit. Day after day we pay the
Federal reserve bank at par, but if a draft is presented on an individual who
might be a customer of ours, his draft will be sent to a member bank and collection charged.
A country bank such as ours needs this collection fee, as we have thousands
of young people—boys and girls—to whom we are giving bank books and check




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235

books and teaching them to become familiar with the banking business. The
city bank does not take an account where the balance is less than $200. we
understand, and if the balance is not kept at that amount there is a charge
for taking care of it.
I would like to ask you a question. Is it not a notorious fact that the Federal reserve bank is drifting into politics the same as the old United States
Bank? To increase the circulation of the country, based upon gold, is a fine
proposition, but to control the banking business of the country and to stifle
individual effort is not to be commended. Why would it not be well, if everything is so grand in reference to this system, to have the Government and
States abolish the National and State systems and let the Federal reserve
bank have branches and run the whole thing? Isn't it, in a measure, drifting
that way? Fifty-three per cent of the people in this country live in the cities
and suburbs. This system certainly favors the city banks, and some day the
country bankers will be calling for help like the farmers are to-day.

This is from a central New Tork State bank.
Senator GLASS. I think that man ought to be made governor of
the Federal Reserve Board and paid a high salary.
Mr. WINGO. I am glad, Mr. Chairman, that you called attention
to the fact that that came from the great State of New York and
not from the West and South.
Mr. RUE. That is but one case, however. I suppose you would get
several hundred from New York State that would not condemn the
system.
The CHAIRMAN. Yes, no doubt.
Senator GLASS. YOU will observe from this map that the board
has sent out that New York State has 100 per cent membership in
the par collection system.
Mr. WINGO. There has been a complaint prevalent among the
farmers of the West that the farmers of New York have been given
preference in the system.
Mr. STRONG. YOU called attention to what you said was a fact,
that the State banks and trust companies have but little eligible
paper.
Mr. RUE. Some of them, in the smaller communities.
Mr. STRONG. But is not that paper good enough so that the city
bank accepts it and discounts it?
Mr. RUE. Yes.
Mr. STRONG. Then he city bank itself borrows from the Federal
reserve system?
Mr. RUE. On eligible paper.
Mr. STRONG. Or what is termed eligible paper. Does the trouble
come from the fact that the paper is not the best of paper or because the Federal reserve rules of discount are so strict that they
debar a lot of eligible paper?
Mr. RUE. NO; I think they are very proper regulations which the
Federal Reserve Board and which the Federal reserve system have
laid down for eligible paper for rediscount, because you must consider that currency is issued against that paper by the Federal
reserve bank. It is supposed to be self-liquidating paper. That is
the purpose and one of the fundamental principles of the system,
the. elasticity of the currency. Paper may be good in a country
bank and is perfectly good, but it has to be carried at the convenience of the maker by that little country bank, and the country
bank has discounted that kind of paper with its city correspondent
and it can have the indulgence of the city correspondent to pay it a3




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

convenient. But when you put it into the Federal reserve bank and
have it rediscounted and have currency issued against it, it is a
different proposition.
Mr. STRONG. One of the complaints out our way that regulations
regarding what is eligible paper established by the Federal reserve
bank is based upon city buiness and is not based upon the principal
business of the West or the agricultural business of our country,
which is the principal business in States like Kansas, Nebraska, and
Missouri.
Mr. RUE. Has not the law been broadened in that respect? I
understand it has been. But I do think there must be lots of paper
not only in your country but in the State of Pennsylvania that is
perfectly good paper, perfectly safe, that my bank, for instance,
would be glad to rediscount for a country correspondent; but I do
not think that that is the kind of paper, while it might be good in
itself, that should be discounted by the Federal reserve bank, inasmuch as currency is issued against it, because it is not self-liquidating, as we term it, and the currency would not contract or expand
as the country requires.
Mr. STRONG. YOU admit this paper is good ?
Mr. RUE. Yes.
Mr. STRONG. But the regulation of the Federal Reserve Board
bars it; yet it is good enough for your bank to lend money on?
Mr. RUE. Yes.
Mr. STRONG. HOW are you going to encourage these nonmember
banks to come into the system if you make these regulations so strict
that they can not do business in it?
Mr. RUE. I do not think it is too strict. I do not think that the
Federal reserve regulations and the system should be lowered, because these banks that you have described can get all the accommodations they want from their city correspondents. You take the
War Finance Corporation, which loaned these banks and communities a great deal of money. The character of the loans which the
War Finance Corporation made was perfectly sound and good for
the War Finance Corporation, but a great many have not been
liquidated, and they would not have been proper loans for the
Federal reserve bank to have taken and issued currency against them.
Mr. STRONG. But that is their argument. Is it not evidence why
these banks do not come in ?
Mr. RUE. NO doubt.
Mr. STRONG. Because you want to maintain the kid-glove description of paper on which they borrow money.
Mr. RUE. I do not think the expression " kid glove " is correct.
Mr. STRONG. But the farmer of the West can not come to this
source of supply of money, because you say his paper, though good,
is not within your requirements, and he has got to go elsewhere, and
you can not get them in.
Mr. RUE. That is quite possible.
Mr. STRONG. Then you do not want them in?
Mr. RUE. I did not say that.
Mr. WINGO. As a matter of fact, in your judgment the restrictions
on the eligibility of paper in the Federal reserve bank
Mr. RUE (interposing). Are sound?




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237

Mr. WINGO. Are sound and should not be lowered ?
Mr. EUEI. Not very materially.
Senator GLASS. And the reason you give for that is that the currency of the country is based upon it.
Mr. RUE. That is just what I say.
Senator GLASS. The security and the liquidity of that paper.
Mr. RUE. The elasticity of the currency would be lost.
Senator GLASS. If I would bring my individual note to your
bank, you may discount, because of your reliance on my integrity
and, nevertheless, my note is not receivable across the counters of
banksi throughout the United States. But a Federal reserve note
issued upon the basis of the eligible paper is receivable throughout
the country.
Mr. RUE. A note which will liquidate itself under short term.
That was the very purpose, Senator, as you know, of the Federal
reserve system, that we should have an elastic currency. If you are
going to have a currency issued against paper that runs one, two,
and three years, you lose the elasticity of the currency.
The CHAIRMAN. Note the connection, Mr. Rue. Just one question. It may not be pertinent to this. There are still outstanding some two and a quarter billion Federal reserve notes. Money
is apparently easy throughout the country. At the peak in 1920,
I think, September 1st, there were approximately $3,485,000,000 01
Federal reserve notes outstanding. Does the continuance of the
outstanding amount of the Federal reserve notes tend to liquidity
or just what is that situation?
Sir. RUB. I think that is governed entirely by the activity of
business and high prices. The industrial pay rolls were never as
large throughout the country as they are to-day. It requires a great
deal of currency for the daily business of this country, and high
prices and high values throughout the country
The CHAIRMAN. The needs of the country require keeping out
this two and a quarter billion?
Mr. RUEI. I think it does. A large part of this currency is now
out against Treasury obligations, but I think the majority of
banks, for instance take those in our own State, are borrowing
comparatively small sums of money. However, they can go to the
Federal reserve bank any day, if the great mercantile or manufacturing interests require more currency than is available, and
obtain currency.
The CHAIRMAN. Of course, there is a large amount of those notes
outstanding, where the full amount of gold is back of them?
Mr. RUE, I understand, Mr. Chairman, too, there are a great
many Federal reserve notes abroad which therefore do not come
in for redemption.
The CHAIRMAN. I have been trying to get some information on
that subject, and I understand the amount is something like
$750,000,000.
Mr. RUEI. I have no doubt of it.
The CHAIRMAN. Federal reserve notes abroad in other countries?
Mr. RUE. They would not come in for redemption; that are held
there.




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

The CHAIRMAN. And I suppose also a large amount of those Federal reserve notes are held by State banks and trust companies as
reserves ?
Mr. RUE. That is, in their vaults.
The CHAIRMAN. SO I would imagine there is a billion and a quarter
or a billion and a half of those Federal reserve notes outside of the
country and held by State banks and trust companies as legal reserves that are not in circulation?
Mr. RUE. That are not in actual circulation among the people.
The CHAIRMAN. DO you think we should continue to keep two
and a quarter billion of Federal reserve notes in circulation?
Mr. RUE. I think that we should continue two and a quarter
billion in circulation if the country needs it. Take some of the industrial concerns. Their pay rolls are almost double what they were
in times of normal business, because of high wages and there is an
immense amount of currency required for the daily business of the
country.
Mr. WINGO. Is it not true that the test of inflation is not the
volume outstanding, but what is back of it. If the bona fide legitimate transactions for which the currency is acting as a practical,
sound exchange, instrument, then the large volume indicates a healthy
business condition. A smaller volume under different conditions
might have a greater amount of inflation than a larger amount?
Mr. RUE, That is possible.
Mr. WINGO. In other words, the test is not by the volume. There
is a clear distinction between the legitimate, healthy and to-beboasted of expansion of business, represented by a large volume, and
that which is represented by purely speculative but nonliquid issues.
Mr. RUE. I think we must not lose sight of the factors which the
chairman has brought out. There is a great deal of this Federal
reserve money which has gone into the vaults of State institutions,
who keep it there as part of their cash reserves; and then there is a
large sum abroad. But the currency will retire very quickly. The
actual currency may not come in, but the liquidation will go on by the
banks paying off their loans with the Federal reserve bank, and as
soon as that currency gets into a Federal reserve bank it can not be
reissued.
The CHAIRMAN. DO you think the rediscount rate of the Federal
reserve banks has an effect on this situation?
Mr. RUE. Which way. You mean the law or
The CHAIRMAN (interposing). Yes.
Mr. RUE. I do not see any occasion to change the Federal reserve
bank rate. While in the theory, it might be desirable and I believe
it is desirable to have the Federal rediscount rate above the open
market rate, I do not think it would be wise now, because it would not
be understood.
Senator GLASS. It has never been the case in the Federal reserve
system that the rate is above?
Mr. RUE. NO ; Senator, you know there were reasons why.
Senator GLASS. While it has always been the case with the Bank
of England, the Bank of France and the Reichsbank?
Mr. RUE. Here we have Government financing.
Senator GLASS. I understand that, but I am talking about the theory of the thing. The scientific theory is that the central bank or




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

239

reserve bank rate should be a shade above the market rate, though
as a matter of fact it has never been the case since the establishment of
the Federal reserve system?
Mr. RUE. I do not recall an instance when it was so.
Mr. WARBURG. It was so in the beginning?
The CHAIRMAN. IS the Federal reserve rate affected now by the
•'Government's requirements ?
Mr. EUE. Not so much.
Mr. WINGO. As a matter of fact, there can not be any stabilization
along that line until there is a practical, stable, fixed refunding entered into on a permanent basis of our public debt, can there?
Mr. RUE. I did not quite catch the first part of that question.
Mr. WINGO. There can not be any stable basis arrived at along that
line, until there is a fixed, permanent, stable refunding of our public debt, can there?
Mr. RUE. I am not so sure we ought to have a stable, fixed rate.
Mr. WINGO. In other words, that the Government financing will
affect this?
Mr. RUE. Certainly.
Mr. WINGO. Will affect the commercial rates of discount until the
Government financing is put on a fixed, permanent, refunding basis?
I am not saying that for the purpose of undertaking to approve or
criticize the present operations, but I am talking about the effects.
Mr. RUE. We find there are a large number of corporations and
individuals who buy these Treasury certificates for short-term investments. If those Treasury certificates were not offered in the
market then money of the purchasers would probably remain in
their banks as balances.
The CHAIRMAN. That does then affect the rates ?
Mr. RUE. Oh, it does, but it is not as great as it used to be.
The CHAIRMAN. Does this fluctuation of the bank rediscount rate
-affect the issuance and retirement or increase the circulation of the
Federal Reserve notes?
Mr. RUE. Just let me hear that again, please ?
The CHAIRMAN. Does this fluctuation of the Federal reserve bank
rediscount rate affect in any manner the amount of outstanding Federal reserve notes?
Mr. RUE. Probably it would. If the Federal reserve rate was
raised the banks who are now borrowing would no doubt pay off
their loans, which would have a tendency to retire Federal reserve
notes.
Mr. WINGO. What effect would that have on the commodity price
level?
Mr. RUE. I think we must not confuse commodity price level with
interest rates. I do not understand or believe the Federal Reserve
Board (I have been identified with it as a member of the Federal
-advisory council since the system was started) ever, to my knowledge,
changed the discount rates with any idea of affecting commodity
prices,
Mr. WINGO. I was not asking that in the spirit of controversy.
Mr. ROE. I understand.
Mr. WINGO. I was just asking for your judgment as an experienced mam. What in your judgment would be the effect on the com-




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

modity prices if the thing was done that you have just suggested;
that is, raising the discount rates, and the bank then automatically
coming in and retiring its indebtedness and the volume of Federal
reserve notes? In other words, what would be the effect on the
commodity price level if there was a reduction of the volume of the
Federal reserve notes outstanding in an appreciable amount?
Mr. RITE. It of course depends how marked the rate increase
was. If it was increased to an abnormal rate, in the first place, T
think it would frighten the people, and probably would have its
effect in lowering commodity prices, at least temporarily, because
people who were carrying merchandise would probably throw it
over and realize on it.
Mr. WINGO. Suppose there was an orderly reduction in an orderly
manner that would not arouse any public apprehension at all. The
general public would not appreciate it at all and the public misapprehension or apprehension would not enter into the factor. Suppose there was a steady appreciable decline in the volume of the
Federal reserve notes outstanding, say, to the extent of about 25 per
cent in two months' time. What, in your judgment, based on your
experience and observation, would be the effect on the commodity
price level ?
Mr. RUE. Well, there are too many other things that affect the
commodity price level besides the volume of 'Federal reserve notes.
Mr. WINGO. DO you think these other things would all remain
balanced as they are in the beginning?
Mr. RUE. I do not believe if there was a small increase, as you say,
a very gradual increase, it would have any marked effect.
Mr. WINGO. I am talking about a decrease in the volume.
Mr. RUE. A decrease in the volume of Federal reserve notes while
business is active, as at present, would only be brought about by an
increase in the Federal discount rate.
The CHAIRMAN. Suppose there were $750,000,000 of the notes held
abroad. Suppose they should be accumulated and presented here
and gold demanded. What effect would that have on prices ? Would
it change our situation?
Mr. RUE. TO the extent of $750,000,000. But the Federal reserve
system is so strong that it could stand the withdrawal of $750,000,000.
And, what will they do with the gold? Of course, they might need
it over there. How can they withdraw it? They are not going
to send the notes over for redemption and obtain the gold, except
for a purpose.
Mr. WINGO. Mr. Chairman, if you will permit me on that. You
may not have got what I was driving at. You never did answer'
the proposition. Supposing all other elements remain the same
that affect price levels, and there should, during the period of the
next 12 months, be a gradual reduction of the volume of the
Federal reserve notes, say, to the extent of 25 per cent. What effect
would that have on the commodity price level ?
Mr. RUE. Mr. Wingo, I would like to ask you how you would bring- •
about that reduction of 25 per cent—by increasing the discount rate
or what process?
Mr. WINGO. Suppose first that we should increase the reserve discount rate.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

241

Mr. RUE. Of course, I think the probabilities are it would have
some effect, because, as I say, it would reduce the borrowings from
the Federal reserve banks, and probably make the banks who have
been borrowing from the Federal reserve banks call in some loans.
They must liquidate somewhere and to that extent it might affect
A, B, or C and cause him to realize on his merchandise to pay his
debts to his bank.
Mr. WINGO. In theory, the volume of currency has something to
do with commodity prices?
-Mr. RUE. It has some effect.
Mr. WINGO. I know that is the theory.
Mr. RUE. I think it has some effect.
Mr. WINGO. If all other factors remain the same, and affect the
price level, and you had a reduction in the volume of Federal reserve notes outstanding, then if the theory worked there would be
a reduction in the commodity price level.
Mr. RUE. It might, if other factors were not operating in a different direction.
Mr. WINGO. But just assume that every other factor remained the
same that affect commodity price levels, and you had a reduction of
volume of currency. In theory that reduces the price level ?
Mr. RUE. In so far as the reduction of the volume of currency
produced liquidation; yes. But if it did not; no.
Mr. WINGO. That brings me to the next question I want to ask
you: Then the effect of that would largely depend upon whether or
not the volume of currency outstanding represents in its entirety a
legitimate financing of self-liquidating business transactions, would
it not?
Mr. RUE. Of course, you know and 1 know that a bank may borrow to-day from the Federal reserve bank, and the Federal reserve
bank officers may go to the Federal reserve agent and obtain Federal
reserve notes.
In a few days, the bank being able, will pay the loan. The bank
has paid its indebtedness, but the notes are still outstanding. But
the notes will not come in for redemption simultaneously with the
liquidation of the loan. They will continue to stay out in circulation even though the bank's loan is paid to the Federal reserve bank.
You can not tie the two transactions together. The paying off of
the loan does not mean the immediate redemption of the notes.
Mr. WINGO. I want to get at the factors and the facts: If every
dollar of Federal reserve notes outstanding is properly out, based
upon a sound theory of the Federal reserve system—that is, now,
the legitimate demands of the trade and commerce and the exchanges
of the country, facilitating the transition from the raw state down
to the final consumer. Assume that every dollar of the outstanding
Federal reserve notes was a perfectly proper transaction. Then if
you did curtail it, that would be a checking and choking down of
legitimate business transactions, would it not?
Mr. RUE. But it would be a gradual and orderly process. As I
say, you can not match up one against the other, because the currency goes out in the hands of the people.
Mr. WINGO. I am afraid you did not catch me.
Mr. RUE. Maybe I did not.




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Mr. WINGO. If there is not any inflation, if it is a bona fide, legitimate expansion, based upon a to-be-boasted-of business activity.
Then you undertook to take away from those exchanges, based upon
bona fide trade in commerce, these United States exchange instruments, you would necessarily check up the machine of trade and
commerce, would you not, to that extent ?
Mr. EUE. Yes; but, as I say, the raising of a discount rate would
not at once be effective in that direction, because the member banks
might retire their loans without immediately curtailing the volume
of currency. For instance, supposing my bank had $5,000,000 boi^rowed from the Federal reserve bank and the discount rate should
be raised one-half of 1 per cent, or even 1 per cent, and we should
conclude it was no longer profitable for us to keep $5,000,000.
Mr. WINGO. I am not talking about the method by which you do
it. Whatever the operation was, it did actually reduce the volume.
Mr. RUE. I am leading up to that, sir. If for the reason that the
discount rate was raised to the point it was unprofitable for the bank
to keep out that loan, we would pay that discount off. The Federal
reserve bank's loans, of course, would decrease proportionately, but
the currency which might have been issued against that discount
has gone out and still remains in the hands of the people. It will
not come in for redemption until business generally reaches a point
where there is an excess of currency for legitimate business needs.
Mr. WINGO. That is where you reduce your loan other than by
sending in Federal reserve notes?
Mr. EUE. Certainly.
The CHAIRMAN. But, Mr. Eue, right there—is it the practice to
renew the substitute collateral back of the loans that are used as the
basis of issuance of Federal reserve notes?
Mr. EUE. I do not know. The Federal reserve banks handle that.
I am not a member of the Federal Reserve Board; I do not know
what their process is.
Mr. WINGO. There are two contentions. There is a contention
among some gentlemen—I do not know whether they are Tight or
wrong. One is that there is not a surplus of Federal reserve notes
outstanding; that every bit of it is sound, and at the bottom there is
a healthy business condition in the country, and that the needs of the
business and the changing basis of trade and commerce require these
notes outstanding. There is another school of thought that says
that we have still got some so-called inflation and that that is bottomed upon this; that instead of these notes representing liquid
loans that there is a very general question in respect to most of the
Federal reserve notes to substitute collateral and make renewals of
loans, and that there is a large volume of practically permanent loans
choking down the Federal reserve system. Have you looked into
that?
Mr. EUE. I have not. I have no knowledge of such a condition
existing, and my own judgment is that there is not a superabundance
of currency outstanding for the needs of the country.
Mr. WINGO. YOU believe sound business requires this volume ?
Mr. EUE. I do. Our bank is going to the Federal reserve bank to
get the currency continually.




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243

The CHAIRMAN. Of course, there are people who contend, in line
with what Mr. Wingo says, that the present outstanding Federal
reserve notes are much in the same position as the outstanding national bank notes. In other words, it is a frozen issue. It is not
elastic. The fact that it remains out and that renewals of notes are
put in back of it make it almost as rigid as are the national bank
notes secured by Government bonds?
Mr. RUE. I do not believe any such thing. There may be some isolated cases of the kind you describe.
Mr. WINGO. The fact that you paid off some of your loans would
not necessarily mean the retirement of Federal reserve notes ?
Mr. RUE. Yes; that is beyond our control.
Mr. WINGO. That is the contention of these gentlemen, that there
is not the automatic reduction.
Mr. RUE. Mr. Wingo, you did not complete the sentence as I
stated it.
Mr. WINGO. I beg your pardon.
Mr. RUE. I did say that we would do that, but that that currency
had passed out into the circulation of the country, and it will only
remain out as long as there is a legitimate need for it for business
purposes, because as soon as it comes into a Federal reserve bank the
notes can not be reissued. If a member bank has a superfluity of
currency, the Federal reserve notes can not count as reserve. What
are they going to do with them. They are going to put them into
the Federal reserve bank. If to-day our bank should have $500,000
of surplus Federal reserve notes, we will turn it into the Federal
reserve bank. Automatically that reduces circulation.
Mr. WINGO. That brings up one thing I want to get into the record.
Then, according to your statement, the automatic reduction of the
loans of the Federal reserve bank does not necessarily mean an
immediate like reduction of the volume of Federal reserve notes, does
it?
Mr. RUE. AS I understand the process, that is so.
Senator GLASS. Mr. Rue, will you be good enough now to tell me
how many State brniks all this will brine* into the system or how
many it will repel?
Mr. RUE. What will? This hearing?
Senator GLASS. This process that you have just been going
through.
Mr. RUE. HOW many State banks it will bring into the system?
Senator GLASS. Yes.
Mr. RUE. I would not hazard a guess. I do not believe it is going
to change the situation, Senator, at all.
Mr. WINGO. YOU do not think that you can remove the misapprehension of nonmember banks as to the conditions that I have referred
to with reference to the system that would bring any of them in?
Mr. RUE. Mr. Wingo, I do not think there are many State Banks
that have very much misapprehension of the system.
Mr. WINGO. YOU just think they are misled?
Mr. RUE. I do not say that. Some may have misapprehension.
The CHAIRMAN. TO get back to the question of reserves of State
banks and trust companies, which seems to be one of the collateral
issues here: Do you think the fact that State banks and trust com-




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

panics hold and are permitted to hold Federal reserve notes and national bank currency as legal reserves, tends to make a sound reserve?
Mr. EUE. I think it does. Why not? A Federal reserve note
ought to be sound reserve for a State bank.
The CHAIRMAN. One of the other questions collateral to that is
the fact that the reserves of State banks and trust companies are
partly made up of checks in process of collection. In other words,
State banks and trust companies get immediate credit, where the
Federal reserve s}^stem does not permit it?
Mr. EUE. Yes.
The CHAIRMAN. That is certainly not a sound reserve, is it, to permit that float to be counted as reserve ?
Mr. EUE. NO. Of course, the argument on the other side, Mr.
Chairman, of the State banker, is that he will be permitted by his
city correspondent to draw immediately against that float, if you
please, and therefore for him it is legitimate reserve, because it is
immediately available to him.
The CHAIRMAN. DO you think it would be policy to so modify the
reserves of the Federal reserve system as to meet that competition?
Mr. EUE. DO I understand by that question that you mean there
should be made available to the member banks all the noncollectible
items in the Federal reserve system ?
The CHAIRMAN. Yes.

Mr. EUE. NO; I do not think so. I think it would weaken the
Federal reserve system.
The CHAIRMAN. DO you think the regulations of the Federal reserve system could be modified in any way to meet that competition?
Mr. EUE. May I ask Governor Platt as to the plan under which
they work? Do you permit a member bank to-day to draw against
uncollected items and charge them interest for that? Do you know?
Mr. PLATT. In the Federal reserve banks?
Mr. EUE. Yes; for instance, if my bank should have two and a
half million dollars of uncollected items in process of collection,
would the Federal reserve bank permit us to draw against that and
charge us interest?
Mr. PLATT. NO; it would not. The Federal reserve bank does
not credit you until those items are collected. They credit you on
the time schedule, of course.
Mr. WARBURG. It is deferred credit.
Senator GLASS. Mr. Eue, do you think that a promise to pay is
a good primary reserve?
Mr. EUE. I do not recall ever having said that. It depends on
who the promisor is. If the promisor is the Government; yes.
Senator GLASS. Are we on a gold basis in this country ?
Mr. EUE- I should think so. You can get gold.
Senator GLASS. IS not gold the primary reserve and only gold?
Mr. EUE. I think the Federal reserve note is a good reserve.
Senator GLASS. It is a promise to pay, is it not ?
Mr. EUE. One moment. Is my balance in the Federal reserve
bank a promise to pay?
Senator GLASS. Yes.
Mr. EUE. Well, that is a promise to pay; that is good reserve.
You count it so, do you not? Our bank to-day may have $6,000,000




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

245

or $7,000,000 in the Federal reserve bank at Philadelphia. That
is a promise to pay by the Federal reserve bank in Philadelphia.
Senator GLASS. But every note issued upon that has a primary
gold reserve of 40 per cent, has it not?
Mr. RUE. Against my deposit, there is a primary gold reserve
of 35 per cent.
Senator GLASS. And against the note issue there is a 40 per cent
reserve ?
Mr. RUE. Yes; there is a 5 per cent difference in the promise to
pay.
Mr. WINGO. In one instance there is a 60 per cent basic promise
and in the other 65 per cent?
Mr. RUE. Well, of course, none of us questions the integrity of
the Federal reserve system. I think a Federal reserve note is good
reserve.
Mr. WINGO. I think a Federal reserve note is the best piece of
paper money ever issued.
The CHAIRMAN. DO you think it is incumbent upon the Federal
reserve system to furnish the money which the State banks and trust
companies can carry as reserves in idle money ?
Mr. RUE. It is not incumbent upon you, but you can not help it.
The CHAIRMAN. In other words, the only way they can control it
is; by interest rates and by the presentation of gold to pay them ?
by i
Mr. RUE. YOU can not dislodge those notes in the State bank except by State law making them ineligible for reserve.
The CHAIRMAN. What other method is there for the retirement
of Federal reserve notes other than the one you have mentioned?
Mr. RUE. That is the only one I know of.
Senator GLASS. YOU could put a tax on them, could you not ?
Mr. RUE. Yes.
Senator GLASS. The law expressly provides you may put a tax
on them.
Mr. WINGO. He was talking about the present taxes.
Mr. RUE. I thought you meant the practice to-day.
The CHAIRMAN. That was the point.
Mr. WINGO. In practical working, how are the Federal reserve
notes automatically retired ? I mean according to present practice,
not according to theory of law.
Mr. RUE. AS I told you, I am not a director of a Federal reserve
bank, and I am not even an officer of a Federal reserve bank.
Mr. WINGO. YOU are the head of the Sanhedrin?
Mr. RUE. NO ; I am looking at him now.
Mr. WINGO. YOU are looking at me and not the Senator from
Virginia. [Laughter.]
Mr. RUE. NO, sir. As I understand it, Federal reserve notes are
retired from circulation when a bank pays off its notes which it has
had under discount or pledged to the Federal reserve bank.
To put it somewhat differently, when the loan is paid off the
Federal reserve agent releases the collateral to the governor of the
Federal reserve bank or the deputy governor, and he in turn delivers
it to the member bank retiring its loan. The money which has been
paid releases the obligations, and the Federal reserve notes are then
retired as fast as they come in; is that correct ?
Mr. PLATT. Yes.




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Mr. WINGO. Do you not have to send the notes in ?
Mr. RUE. NO. The loan can be charged against balances which
may be the result of checks collected.
Mr. WINGO. Suppose you owed the Federal reserve bank $100,000,
Federal reserve notes having been issued in the first instance, and
you have a balance of $200,000 on hand.
Mr. RUE. With the Federal reserve bank?
Mr. WINGO. With the Federal reserve bank; and you tell them to
charge off your loan and charge it against your balance. How would
the $100,000 Federal reserve notes be retired in that case?
Mr. RUE. They will not come in, as I said in my previous statement.
If they are out in circulation and those Federal reserve notes come
into the hands of another Federal reserve bank, they are bound, as I
understand the process, to send them into the Federal reserve bank
of issue and they are retired automatically. I may pay off my loan
to-day. The notes which were issued against that loan may stay out
for a year if business requires. Otherwise, if the banks of the country should suddenly retire all their loans, you would have a violent
contraction of currency.
Mr. WINGO. Suppose that all the Federal reserve notes outstanding
were in the possession either of the vaults of State banks, located
there as reserve, or they were in the vaults of some foreign institution holding them, and every loan of the Federal reserve system was
paid off, you would not have any reduction ?
Mr. RUE. NO ; you would not have any reduction theoretically.
Mr. WINGO. That is a violent assumtion?
Mr. RUE. Those notes themselves would not conie in. You must
remember, Mr. Wingo, that in this process of the reduction of the
currency is continual; that is, going on continually.
Mr. WINGO. Yes.

Mr. RUE. NOW, if the member banks of the country do not rediscount or make any loans, or call for any new currency, while there
may be certain amount in State banking institutions' vaults, and a
certain amount, as the chairman said, possibly $750,000,000—I do not
know how many—abroad, that particular money will not come in.
But other circulating notes that are continually coming into the
hands of the Federal reserve banks will gradually and automatically
be retired, and you will have a gradual reduction of the currency;
while the specific notes I obtained against my discount would not
come in, some other notes would.
Mr. WINGO. I find a good many country bankers, like a great many
other people, understand that whenever you go down to the Federal
reserve bank and get $100,000, that means $100,000 more Federal
reserve notes put out; and that when you go down and pay off that
loan automatically those Federal reserve notes are retired. When I
tell them that is not true, I am no authority, but when a man like Mr.
Crissinger, Mr. Warburg, or yourself says that is not true, that is
authority.
Mr. RUE. It is an exception when our bank goes to a Federal reserve bank to borrow $1,000,000 or $2,000,000 that we obtain currency. What we want is a credit on the books of the Federal reserve
bank for the amount. It is to make good our reserves. We simply
get a credit.




INQUIRY 01* MEMBERSHIP IN FEDERAL RESERVE SYSTEM

247

Mr. WINGO. It does not mean that every time there is a loan increase, there is automatically an increase in Federal reserve notes?
Mr. KITE. It does not mean an increase in circulation.
Mr. STRONG. The thought I had in asking the question awhile ago
was this: If your position is correct that the Federal Reserve Board
or the Federal reserve system ought not to liberalize the rules under
which the discount paper
Mr. RUE (interposing). I do not think I stated that.
Mr. STRONG. Well, if they should keep them as they are now, in
what you call paper that is self-liquidating, it would practically
confine the notes that they rediscount to paper generally considered
city paper ?
Mr. RUE. No; I do not think so. I do not think the records prove
that.
Mr. STRONG. Well, it would not permit the rediscounting of what
we call farm credits.
Mr. RUE. I will not admit that.
Senator GLASS. AS a matter of fact, the law actually gives advantage to the country paper. If I am a city merchant I can not get
a credit longer than 90 days in the Federal reserve bank through my
member bank. But if I am a farmer I can get it for nine months.
Mr. RUE. Yes.
Mr. STRONG. But the requirements of paper rediscounted in the
Federal reserve system is such that very little comes in apparently
from the country as compared with that which comes in from the
towns. So that, as I understood you, awhile ago, but little of the
State bank or trust company paper is eligible.
Mr. RUE. I did not say that.
Mr. STRONG. Did you not say that very little of the State bank or
trust-company paper was eligible paper?
Mr. RUE. I said some of it: I did not say all of it.
Mr. STRONG. I do not mean all of it; I mean the majority of it.
Mr. RUE. There may be the majority in number, but I do not think
as to the assets; no. I think a great many of the State banks and
trust companies are doing a regular commercial business.
Senator GLASS. The amount differs in different States; it depends
on the law of the States.
Mr. RUE. I say, I do not know what the law of j^our State is.
Your banks probably do a commercial business. If they do, your
State bankers certainly have eligible paper.
Mr. STRONG. A great deal of our paper is not eligible for rediscount
in the Federal reserve banks ?
Mr. RUE. IS it paper that would be liquidated or is it paper you
have to renew continually ?
Mr. STRONG. Lots of our paper liquidates itself and lots of it
has to be renewed. One-third in all lines of business is what you
call self-liquidating paper: and two-thirds of it, the loan itself, is
renewed.
Mr. RUE. That may be, but you can take any other eligible piece
of paper and substitute for it. Your bank could do that.
Mr. WINGO, In answer to our questionnaire there is the answer
of a very capable country banker, calling attention to the fact
that seven-eighths of the notes in his portfolio are small notes,




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INQUIRY OX MEMBERSHIP IN FEDERAL RESERVE SYSTEM

that are perfectly gilt-edge, but technically, for illustration, onename paper. They are not eligible.
What I suppose Mr. Strong is driving at is that there are now
a great many country bankers who rely upon the personal equation
you have just talked about that exists between the State banks
and trust companies and their correspondent city banks. That connection enters into the relations between the nonmember bank and
his customer. Here will come in a man, and he will make a note
that is perfectly sound and safe, and the experience of that nonmember bank shows that business is sound and safe, and yet technically that is not eligible?
Mi\ RUE. Why not?
Mr. WINGO. One-name paper is not eligible.
Mr. RUE. Why not, if the man will make a statement?
Mr. WINGO. I provoked the answer I thought I would. In the
next paragraph this man said in order to take that class of paper
in we would have to go through so much red tape and expense
we could not afford to do it.
Mr. RUE. That is another story. But the fact that it was singlenamed paper would not debar it, as I understand it. You take a
little merchant in a country town who offers a note for $2,000>
$3,000, or $5,000. That note is eligible, if it is not over 90 days.
The Federal reserve bank may say, "We want a statement from
that man." That man can make a statement, though he may not
be able to make a statement as a certified accountant.
Mr. WINGO. There really is a misapprehension among the people
as to the eligibility of paper?
Mr. RUE. I think so.
Mr. WINGO. There is the notion on their part that the bulk of
their paper, seven-eighths of this being of that character that
would require a very detailed statement. The transaction on its
face would appear to* be one that a Federal reserve bank official
under regulations and what he thinks is proper would say is eligible.
But they contend that the bulk of their paper being or that character, requiring voluminous statements and a lot of expense that
for all practical purposes all the paper is ineligible. That is their
contention.
Mr. RUE. I think what they do is this: I t is human nature for
a State banker to follow the line of least resistance. If he can r
you say, without going through these requirements of filing statements of his customer, just call up his city correspondent over the
telephone and say, " I find I want $35,000. I am sending you down
a batch of paper. Can I get it? " They say, "Certainly."
Mr. WINGO. The Federal reserve bank is not, I say, a commercial
bank?
Mr. RUE. NO ; it ought not to be.
Mr. WINGO. And the Federal reserve bankers, by the law itself, is
r
required to do business upon a different basis to what you might do
with your customers, whose daily life you are acquainted with. You,
like every banker, place a higher value upon the character than collateral. But necessarily the Federal reserve bank looks upon the
statement that comes in as of prime importance and upon character
as one of the incidental elements that enter into it.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

249

Mr. RUE. They can not be expected to know the individual to the
same degree of intimacy that we would.
Senator GLASS. They do not deal with the individual; they deal
with the bank.
Mr. RUE. They wTere not expected to deal with the individual.
Mr. WINGO. And yet you find a great number of these nonmember
banks that are making this complaint. They are basing it upon the
theory from their viewpoint that the Federal reserve system ought
to be run on the same basis as the commercial bank.
Mr. RUE. I think a great many have that misapprehension.
Mr. STRONG. But if it is true that State banks and trust companies
have little eligible paper, and it is not proper to change the rules so
as to make much of that paper eligible though good, then those banks
are not coming into the Federal reserve system, and we can not get
them in because they have got to do business with the city bank that
will accept their paper for rediscount. That is the point I am driving at.
Mr. RUE. I think that is quite likely so.
Mr. STRONG. Then, what is our hope of getting them in ?
Mr. RUE. I think a great many of them never will come in.
Mr. STRONG. That is one of the things for which this committee
was created, to find out why they do not come in.
Mr. WINGO. In your opinion is it advisable to get them in?
Mr. RUE. In my opinon it is not advisable to so lower the standards of the Federal reserve system that it will weaken it to get anybody in. They should come up to the standard and not the standard be lowered to them.
Senator GLASS. DO you think we raised the standard of the Federal reserve system when we reduced the minimum requirement to
$15,000?
Mr. RUE. I do not think you did.
Senator GLASS. HOW many banks have we gotten in?
Mr. RUE. I do not know, but I think few.
Mr. WINGO. HOW many State banker's did you bring in then ?
Senator GLASS. I did not bring in any.
Mr. WINGO. AS a matter of fact, in your judgment, there are a great
many nonmember State banks that there is no advantage either to
them or to the system that come in; is not that your judgment?
Mr. RUE. That is my judgment.
Mr. WINGO. And your viewpoint?
Mr. RUE. And my viewpoint with quite a number of State banks.
Mr. STRONG. Then we ought not to criticize the city bank that is
encouraging these banks to stay out of the system by sending them
the accommodations they need.
Mr. RUE. I do not think a city banker should ever work against the
Federal reserve system. I think every bank that is eligible should decide for itself, and it is up to the individual officers of the State bank
and its board of directors to determine whether it is to the best interest of the bank and community to stay in or out.
Mr. WINGO. It is not the function of the Government to grasp anybody by the nape of the neck and chuck them in ?
Mr. RUE. NO. I do not think that is the province of the Federal
reserve system or Government to try to force them. They know their
own business.




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Mr. STRONG. Then, there is no way of making the system available
to the country banker ?
Mr. RUE. It is extremely so now i
Mr. WINGO. Except by whipping the devil around the stump by
permitting rediscounts with a city bank, and then taking other money
to loan country banks.
Mr. RUE. That is not whipping the devil around the stump; that is
a legitimate process.
Mr. STRONG. That is whipping something around the stump,
whether it is the devil or not.
Mr. RUE. It depends upon whether you see the stump or not; I do
not see the stump.
Mr. STRONG. The stump is the city banker.
Mr. WINGO. That brings me now to another question I wanted to
ask: There are some members that are criticizing this procedure.
They say that even under your present ruling that you will not accept from member banks paper from a member that is indorsed by a
nonmember bank for rediscount.
Mr. RUE. That is the Federal Reserve Board; it is not our ruling.
Mr. WINGO. That is the present arrangement.
Mr. RUE. Yes; as I understand it.
Mr. WINGO. But, as a matter of fact, they are still aiding these nonmember banks indirectly by taking their paper up. The effect is
really just the same as if they permitted the nonmember paper to
come in. It is contended that by permitting that kind of an operation we are doing this: We are enabling that nonmember bank to get
the benefits of the Federal reserve system without assuming any of its
burdens, to wit, such as putting up reserves to the Federal reserve
banks and subscribing to the capital stock, etc. Have you any suggestion as to what might possibly be done by regulation or law to
check that, or is it wise to check it?
Mr. RUE. My own judgment is that it is unwise to check it. I
do not see anything illegitimate or any impropriety in a member
bank that has relations with a Spate bank, that has a deposit account
from it discounting its paper, nor is it very greatly different from a
mercantile firm that has a deposit. It is a depositor and as a depositor it is entitled to certain considerations from that member
bank.
Mr. WINGO. I am talking about the wisdom of it.
Mr. RUE. I see nothing wrong whatever in that member bank
granting accommodation to that State bank because of a deposit
balance which it keeps with it, using its own resources or its own
eligible paper and getting discounts. It may not loan that actual
money, it probably does not, to that State bank; it loans its own
reserves and rehabilitates its reserves through the rediscount.
Mr. WINGO. In your judgment it is perfectly wise and it is a
proper accommodation to continue to have these larger correspondent
banks that are correspondents with these smaller banks that are nonmember banks to continue to act as a kind of reserve agent for these
banks and then have the Federal reserve system carry the loan
through the member bank?
Mr. RUE. If the correspondent banker carries it, it is, yes; I think
it is perfectly legitimate.




INQUIRY ON MEMBERSHIP IX FEDERAL RESERVE SYSTEM

251

Mr. WINGO. I mean State banks?
Mr. RUE. Both proper and wise, because I do not think it would
bo wise to bring the Federal reserve system down to the level to
reach in and help these banks, when they can not come up to the
standard. They can receive the assistance which they need and the
rediscount privileges which they need from their city correspondents.
Mr. WINGO. IS not that the main reason they do not come in ?
Mr. RUE. I think it is.
Mr. WINGO. Because they have a system of their own, they can
satisfy their requirements with?
Mr. RUE. Yes.
The CHAIRMAN. Then, as a matter of fact, the thing which many
banks felt at the time of the organization of the Federal reserve
system is not carried out in operations to-day; in other words, the
banks who felt they had to go and get on their knees to a city correspondent bank to get money
Senator GLASS (interposing). And could not get it by getting on
their knees sometimes.
The CHAIRMAN (continuing). iSfow feel that is a proper connection, and that the voluntary system where they can walk up as a
matter of right is not sufficient to offset that.
Mr. RUE. I think, Mr. Chairman, some of them are operating
both ways.
The CHAIRMAN. Yes.

Mr. RUE. I know of a number of State banks and trust companies
that are not members of the system and some that are members of
the Federal reserve system. They keep accounts with their city
correspondents, and borrow preferably from them, even if they have
to pay a little more interest.
Senator GLASS. The paper is not eligible.
Mr. RUE. That is it, .Senator; and then they leave with a city
correspondent a lot of bonds and securities, and they get the city
bank to buy commercial paper for them. We get every day requests
from country correspondents, " Please buy $50,000 or $100,000 commercial paper, and enter collection for our account," the next week they
find they have a little less money than they need, and they just tell us,
;i
Make us a loan against that paper." In a day or two they pay it
off by getting in deposits. That is a facility they do not want to
lose, but at the same time they do not want to lose membership in
the Federal reserve system, and they maintain them both.
Mr. STRONG. AS I understand the proposition, it is perfectly safe
for a city correspondent bank to buy this ineligible paper, but it would
not be safe if they come into the Federal reserve system, which
brings about a system; by which a few banks can take their paper to
the Federal reserve system and * get currency, and that naturally
forces the State bank or trust company to do business with the city
bank.
Mr. RUE. YOU say, " A few." What do you call " a few?" As I
understand it, there is 75 per cent of the assets of the country represented in the Federal reserve system. That statement, therefore,
does not seem to be accurate.
Mr. STRONG. I said, " A few banks." I was not talking about the
aggregate.




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Mr. RUE. HOW many banks ?
Mr. STRONG. There are not half of the banks in the Federal reserve
system of the country, are there, or a third of them?
Mr. RUE; It is estimated that there are 78 per cent of the resources
of all eligible banks and 63 per cent of the total banking of the
country's resources are included in the system.
Mr. STRONG. I am talking about the number of banks.
Mr. RUE. HOW many banks are there in the Federal reserve
system ?
Mr. CRISSINGER. Nine thousand and six hundred.
Mr. STRONG. That is about 25 per cent of the banks in the country.
Mr. WINGO. That is in number; not assets.
Mr. RUE. They are probably not eligible.
Senator GLASS. We have made every pawn shop in the United
States eligible, pretty nearly.
The CHAIRMAN. AS it is now 12.30 I suggest the committee recess
until after luncheon.
(Thereupon, at 12.30 o'clock p. in. the committee took a recess
until 1.30 o'clock this afternoon.)
AFTER RECESS

The committee reconvened at the expiration of the recess.
The CHAIRMAN. Mr. Warburg, the committee will now be glad
to hear you. I assume that you want to proceed for a time without
interruption. At least, the committee will give you that opportunity.
STATEMENT OF HON. PAUL M. WARBURG, MEMBER ADVISORY
COUNCIL, FEDERAL RESERVE BOARD, NEW YORK CITY

Mr. WARBURG. Mr. Chairman, I have not prepared any notes. I
thought Mr. Rue would make a full statement, and he did. I agree
fully with the replies he made in reply to the questions germane to
the investigation of your committee.
I would like, however, to say just one word with regard to the
eligibility of paper eligible for rediscounts by country banks. I
think the people believe, and it was assumed here this morning, that
the country banker when presenting paper for rediscount has got
to present a statement of his borrower even when the borrower
borrows as little as $10. The regulations of the board provide quite
specifically that for any loan below $5,000 no statement is required.
If the country banker knows his borrower personally he can come
in and present that paper for rediscount without having the farmer
prepare and attach a statement concerning his condition. We discussed that at the time these regulations were originally formulated
in the board. We discussed it quite fully. We were leaning over
backward to be liberal with the little fellow.
I think what the committee wants to bear in mind is the difficulty
involved in writing a regulation that fits a $100,000,000 bank and at
the same time the $25,000 bank; that fits a note for $500,000 secured
by Treasury certificates and a $10 note made by a farmer. If the
Federal Reserve Board liberalized, as was recommended this morning, the requirements, there would result very serious complaints just
on account of would-be transactions of large borrowers. You remem-




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

253

ber that when the Federal reserve act was under discussion it was
claimed as the greatest danger that people would borrow money
from the Federal reserve banks on paper which might not be legitimate. It was argued that for financing speculation in Wall Street
or elsewhere paper would get into the Federal reserve banks, and
to safeguard against any such possibilities it was necessary by regulations to make a very distinct description of what paper should be
eligible.
You can not eliminate these precuations without subjecting the
system to very great dangers, both as to liquidity and as to its existence, because it is not only in the much-dreaded New York, but I
think the danger is just as great in other cities that paper would
creep in which might be speculative or illiquid. That is what must
be avoided at all hazards; and I do believe that the standard which
is laid down for rediscount must not be lowered, but be kept high.
The question is: Can you afford to lower the standards of the
Federal reserve system far enough to attract these recalcitrant country banks, and if you succeeded in drawing them in would that
really help the farmer as much as you think it might ? The country
banker does not come in first of all because he does not wish to invest
a beggarly $500 or $1,000 in Federal reserve bank stock at 6 per
cent. In the case of the small banks, the largest contingent in number, that is the entire amount involved. Five per cent of the capital
and surplus may be less than $1,000, and only half of that is actually
paid in. To endanger the whole system because such country banker
would want 7 per cent on his $500 or $1,000 stock would be ridiculous.
The next condition is that he would want interest on his reserve
deposits with the Federal reserve banks. If that were done, it would
force the Federal reserve banks to put out its reserve money, because
you can not pay 2% per cent on reserve deposits and keep them idle
unless you want to lose the whole 2% per cent. As a result the
Federal reserve banks would therefore no longer have any reserves.
The system would be ruined.
My feeling is that if you would look into the statement of these
small banks you would find that many of them are overloaned most
of the time. A bank with a capital of $25,000 or $15,000 can not go
very far. If it has loans of $30,000 to $50,000 from its correspondent,
that is about as much as it can afford. So that if the farmer comes
in and says, " I want more money," that little banker will say that
it is the unwillingness of the Federal reserve bank that stands in
the way, while it is not the Federal reserve system but his own
overloaned condition or the unsatisfactory condition of the farmer
that prevents him from going any further.
My own feeling is that Congress should not be impatient with
that situation. It is useful to remember how in the early days of
banking reform the big banks said it was unnecessary to have the
Federal reserve system and that the national-bank system was good
enough as it was. Since then they have learned to take a different
point of view. Later on it was the big State banks that said they did
not want to come in; that there was no necessity for them to have any
Federal reserve facilities. You could not get them out to-day if you
tried. All this talk about State banks leaving the system is fool107679—26—PT 1




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

ishness. Do not pay any attention to it. The}^ can not afford to
do it.
So it will be with the small banks. By and by you will find that
the stronger ones amongst them will come in, and when the stronger
comes in the weaker neighbor has got to come in, because he
could not afford to stay out. Give them time. As a matter of fact,
viewed purely from the point of view of the strength of the system,
the weak brothers better stay out, because the fact that they would
be members would not substantially contribute to the loaning power
of the system.
The system is not helped by their coming in, but quite the contrary. The problem becomes more complicated by their inclusion.
I do not know whether I should pass on to some other things or
whether you want me to proceed with the further discussion of this
phase of the problem.
The CHAIRMAN. AS I understand you, Mr. Warburg, you do hot
think it is essential, then, to the Federal reserve system to have an
increased membership of these small country banks ?
Mr. WARBURG. I think purely from the point of view of the
strength of the Federal reserve system it is stronger without them.
The CHAIRMAN. That is to say, you think the present membership
of the national banks and those large State banks and trust companies who find it of interest to come in is sufficient to maintain a
reserve requirement to take care of any emergency that might arise
in the country ?
Mr. WARBURG. Amply.
The CHAIRMAN. And it is probably better for those small banks
and trust companies to get their relief through the secondary banks
in case they require additional loans ?
Mr. WARBURG. They are taken care of to-day, and it would probably be better for them if they had two strings to their bow. I think
we ought to try to do our best as far as we safely and consistently can
do so to open the door wide for them to come in, and by regulation
and in every other way try to make it possible for them to come in,
even if it is a burden upon the system. That has been the policy of
the board in the past. The burden involved is greater than the
advantage for the Federal reserve system, because the examination
of a small bank takes as much time as the examination of a big bank,
and the correspondence and the amount of labor involved is the
same whether you get a hundred checks of $5 each or checks of
$100,000 each.
But no matter what the burden may be, that is what the Federal
reserve system is there for, to be the servant of those who wish to
come in and are in a condition to be admitted.
The CHAIRMAN. YOU do not think it would be advisable, then, to
amend the law to meet the source of competition that has been permitted to go on under the broadening of the State laws, etc.; the payment of interest on balances and the question of meeting the reserve
requirements to conform to those laws of the States as to the reserve
requirements and those many little incidental things?
Mr. WARBURG. I do not think we ought to do it, and I do not
think it would help. I believe that even though you permitted those
small banks to come in without making them subscribe at all to the




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stock of the Federal reserve banks (which amounts in any case are
trivial), even though you permitted every bank below $50,000 to become a member by agreeing to maintain the required reserve balance
and to submit to examinations, these little fellows would not come
in, because most of them will not stand examination and they do not
want to subject themselves to any restrictions on their operations.
I think the Federal reserve system has done all it can to get them in
and I believe that gradually the better ones will come, i
The CHAIRMAN. Would you care to express an opinion as regards
enlarging the law on the question of permitting national banks to
have branches?
Mr. WARBURG. I think that unless national banks in cities where
the State law permits branch banking get the same privileges in this
regard as the State banks, that it is inevitable that the national banks
will gradually go in to the State bank system. They do not want
to do it, because they are sentimentally strongly attached to the
national bank system. Moreover, I have never been able to understand why Congress should be so obstinate in conserving a condition
which is plainly ridiculous, viz: That a national bank can come in
by the back stairs by acquiring or organizing a State bank with
branches, and then by taking over or merging with such State bank
could lawfully operate a national bank with branches. But that
when it wants to reach the same result by a direct process it would
commit an unlawful act; why Congress should persist in conserving
so anomalous a state of things and to create a condition which
plainly puts the national banks at a distinct disadvantage, I could
never understand.
Mr. STRONG. If Congress should continue to fail to permit national
banks in the States where State banks have branch banks to have
branch banks, what do you think of the suggestion that has been
made to pass a law providing the State banks that do have branch
banks should not continue in the Federal reserve system or should
not be admitted in the Federal reserve system?
Mr. WARBURG. Well, it would be turning the clock backwards,
and it would create a great deal of harm all over the country and
really for no good purpose.
Mr. STRONG. If Congress decides not to permit the national banks
to have branch banks, and the national bank system is threatened
with destruction because the State banks, in States where they do
have the right to have branch banks, drive national banks out of
business—it is suggested as the only remedy, that the State banks who
do have branch banks should not be admitted to the Federal reserve
system ?
Mr. WARBURG. I doubt whether Congress would do that, because
many Congressmen come from States where there would be a howl
of protest if such a thing should hapeen. It is more reasonable to put
the clock forward than it is to put the clock backwards.
Mr. STRONG. HOW many States permit State banks to have
branches ?
Mr. WARBURG. Some twenty or so.
Mr. CRISSINGER. I think there are 23 that either permit or have
especially authorized it.




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Mr. STRONG. That leaves the majority of the States against the
proposition of State branch banks?
Mr. WARBURG. If you wished to carry out so drastic a plan, you
would have to go much further, because if the State banks would
not convert into national banks because they would not give up their
branches they might prefer to leave the Federal reserve system and
make arrangements to work with the Federal reserve system through
a member bank. You would then have to legislate against all indirect rediscounts, etc.
Mr. STRONG. That has been suggested at these hearings.
Mr. WARBURG. On the Federal Eeserve Board when we started out
we had months and months—even more than that—several years of
discussions, whether that would be the happy thought; that is to
say, try to cripple the State banks, so that they would then go into
the more restricted banking system or whether we should start with
the policy of rather liberalizing the national banks so as to make
them compete on even terms with the State banks as long as these
terms were reasonable. It was never suggested that we should follow any State into competition that adopted unsound policies. There
are, in fact. States which guarantee deposits and do other undesirable things, and the first consideration should always be that a State
should have a safe and sound banking system. If such a banking
system permits branch banks, I think then that in cities where the
State permits branch banks, national banks ought to have the same
privilege.
Mr. STRONG. DO you not think the recent ruling of the Attorney
General permitting national banks to have stations where they can
receive deposits and pay checks will practically take care of the
situation ?
Mr. WARBURG. I do not know. By indirection, I believe that a
good deal more than receiving deposits and paying checks will, of
course, be done in those stations. You can not prevent somebody
being near that teller's window and saying, " I am the representative of the down-town head office. I do not belong to this receiving
station, but if you wish to do business I will telephone and see if
it can be arranged. I will transmit the message to the head office."
That again brings about a perfectly ridiculous condition, a difference between a straightforward permission and all this indirect and
undignified roundabout procedure, I think it so slight that really it
would be much better for Congress to do the straightforward thing.
Mr. WINGO. They either ought to have permission to have
branches outright, or not at all—financial comfort stations do not
amount to anything.
Mr. WARBURG. I t amounts to providing a certain comfort
[laughter], but I think Congress wants to do more than provide
these stations this
Mr. WINGO (interposing). I am inclined to think, as one who believes in either doing a thing or not doing it, the sound philosophy
would be to permit them to have branches outright or not at all. I
do not know just exactly how to separate these different functions,
what could be done at these stations and what could not. I am somewhat confused by the Attorney General's opinion.,
Mr. WARBURG. I am.




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257

Mr. WINGO. Do you understand what he has ruled ?
Mr. WARBURG. NO, sir; I can not understand what he has ruled,,
but I think I can see what he means.
Mr. WINGO. YOU understand what he is driving at, but you do
not know what the legal effect is?
Mr. WARBURG. Yes, sir.
Mr. WINGO. YOU know this

matter has been up to my knowledge
personally for 10 years, and at one time Representative Madden and
I got together on a compromise bill that I think passed the House,
but I do not think it passed the Senate. So this is no new question.
We have been proceeding on the misguided theory from the standpoint of the Attorney General that the law was settled, and that
Congress did not authorize this thing, and we woke up one morning
and our friend over here announced we were all wrong.
The CHAIRMAN. I gather from your answers to Mr. Strong's
questions the impression that you think it most unfortunate that any
retaliatory legislation be enacted toward State banks in order to
force them into the system?
Mr. WARBURG. Indeed I would.
The CHAIRMAN. I think the State banks and State banking commissioners, too, would look upon such legislation as Mr. Strong has
suggested as coercive methods, would they not?
Mr. WARBURG. They would.
Mr. STRONG. Please do not quote me as suggesting that. I only
say it has been suggested.
Mr. WARBURG. YOU see the alternative that all national banks in
such States might convert into State banks is a very serious one.
Of course, I should prefer the national bank system to survive because, as Mr. Rue says, it is a unified system and for many other
reasons.
Mr. WINGO. I can not conceive with my limited intellect of a
theory of a law^ for a national bank in one State that would not apply
in another. If branch banking is sound why should not every
national bank be permitted to indulge in it; if it is unsound, why
should we yield to an unsound theory in order to meet temporary
competition? Is it not better philosophy that on matters affecting
national interests that the States yield to Federal authority, or shall
Congress use its own judgment. Will we surrender to the judgment
of these legislatures, or shall we say that the expediency and not
sound financial operation shall govern. If branch banks is right,
why not say to every national banker, " You can have a branch " ?
If it is wrong, why authorize any of them to compete in wrong?
Mr. WARBURG. It is a question not of philosophy but of conditions that actually exist. If we were not hampered by these conditions we would of course want to go the whole length in mapping
out an independent policy for the national banks. But as conditions
are you would encounter a determined resistance on the part of the
States. Your desire to live up to the highest philosophy would therefore prevent you from undoing the injustice that is now being perpetrated upon the national banks.
Mr. WINGO. YOU are a practical man and you have observed the
practical workings of practical politics. There is not any doubt in
your mind that if Congress would authorize the national banks to




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

have branches in those States where States authorize branch banks
that the number of States that authorized that would probably increase and ultimately all States would authorize it?
Mr. WARBURG. I do not know whether that would follow.
Mr. WINGO. Would not that be the natural tendency ?
Mr. WARBURG. It might increase the tendency, but would not of
necessity break down the dislike of a State of branch banking where
such dislike is firmly rooted.
Mr. WINGO. Would not the national banks in a State who desire
branch banking and who believe in branch banking then join their
forces with the larger and more influential State bankers in having
the legislatures to authorize the State banks to have branches,
whereas the very moment the State bank goes to the legislature and
asks the legislature to authorize State banks to have branches the
national banker's influence is trained against that? But you are
authorized by blanket law national banks in States that authorized
State banks to have branches, then you increase the influence in favor
of branch banking in every State lobby in the Nation. I have been
a member of a State senate and I know something about the influence
of bankers.
Mr. WARBURG. Would not that be a misfortune?
Mr. WINGO. I suspect you believe in branch banking.
Mr. WARBURG. I believe in branch banking only in cities; I do not
believe in State-wide branch banking.
Mr. WINGO. Let us see. If those States are wise and Congress
has been unwise, then it should apply to all of them, because if it is
wise, it is wise; and if a national bank in a State that does not
authorize its State banks to have branches—if it is a good thing for
that bank to have it, it is a good thing whether the State authorizes
it or not.
The CHAIRMAN. We have a practical situation now in St. Louis,
Mo., and in Minneapolis and St. Paul, Minn., where it is very acute.
Both of those States prohibit branch banking within the States,
and we have national banks there, and by force of competition they
think they are in a serious position. Some of them are threatening
to leave the system unless they have the right to establish branches.
Mr. WINGO. And still old-fashioned enough to believe that we
should better proceed with legislation that affects public welfare
along sound lines. Whenever you go to floundering around in expediency you meet yourself coming back.
Mr. WARBURG. I agree that this would be the better way, if you
could have it; but I am convinced that you will not be able to get
it in the near future. Pending that, if you do not go the other way
which we have discussed—admitting it to be only 50 per cent of the
ideal—you are bound to see a period when the national banks are
going into the State system.
The CHAIRMAN. YOU mean that the political situation is such that
there would be much opposition from those States ?
Mr. WAEBURG. Yes; of course, you are the better judge of that
than I. I only know that when we tried it before it was just the
kind of argument that Mr. Wingo brings that blocked our attempt to
pass legislation authorizing national banks to have branches in
States where branch banking is allowed.




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259

Mr. WINGO. Unless there is a very marked change in the next
Congress, I think there will be a deadlock on the proposition. I
think we might be able to work out something in the House, and I
think that those who control the viewpoint of the Senate are going
to be opposed to that of the House. The whole thing is going to be
permitted to flounder along in a very unsatisfactory condition, and
I am afraid the opinion of the Attorney General is going to make
confusion worse confounded. That is my opinion, as one who likes
to see orderly, settled conditions existing between the State banker
and the national banker, with no more friction than ordinarily arises
between two legitimate high-minded competitors.
The CHAIRMAN. Unless members of the committee have some further questions, you may proceed.
Mr. WARBURG. I would like to say a word about the question of the
note issue. This morning the note issue was discussed as if the entire volume of outstanding Federal reserve notes have been issued
against commercial paper; as if that entire volume were elastic.
Now, as you all know, Federal reserve deposits and notes are to-day
covered by something like 76 to 78 per cent of gold; and only the
top, the 22 to 24 per cent, are covered by paper and are what is
termed elastic. The Federal reserve system altogether shows to-day
investments of about $1,000,100,000. The capital and surplus of the
Federal reserve banks amount to $300,000,000. That capital and surplus represents their own resources.
There is no liability against that, and you may deduct these $300,000,000 and figure in a very rough way that $800,000,000 out of
deposits and note issue has been invested. There you have then
what as a maximum the Federal reserve system, as such, may be held
to have added to the circulation. People who talk about terrific inflation which came from the Federal reserve note issue forget how
much of the Ftederal reserve notes were issued against gold.
Until a few years ago a large portion of our circulation were gold
certificates which the Treasury paid out every day. Since 1916 the
new gold certificates were impounded in the Federal reserve banks
and Federal reserve notes were put into circulation.
So that when we say to-day there are 2,200,000,000 of Federal
reserve notes outstanding, it is really largely a substitution for our
old gold circulation.
The CHAIRMAN. Eight there, Mr. Warburg, it is not clear in my
mind: Is the 70-odd per cent reserve Federal reserve notes, or does
that include a deposit?
Mr. WARBURG. To-day the gold reserve covers both deposit and
note issue to the extent of about 77 per cent. Let us call it 75 per
cent, which makes it easier to figure. There would then be 25 per
cent not covered by gold. Say there is a note issue of 2,200,000,000,
and assume we wanted it all covered by gold. Twenty-five per cent
of the note issue would roughly be $550,000,000. If you took those
out of the gold reserve and put them all behind the notes, you
would still have some 45 per cent of the deposits covered in gold,
while the limit on deposits is 75 per cent. And that would be on
the basis of a 100 per cent gold circulation.




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

One has to bear these conditions in mind in order to realize that the
circulation that we have to-day is not an inflated circulation; quite
the contrary. What the circulation is to-day one might well consider
as the approximating fairly healthy and normal requirement of the
country.
Senator GLASS. Substituted circulation and substitution of the
Federal reserve notes for gold certificates?
Mr. WARBURG. Exactly; excepting the aggregate amount of the investments from deposits and circulation, about $800,000,000. But
even there the question arises how much the circulation of the United
States would have normally increased with or without the Federal
reserve system, because the population and their requirements grew
as they always did. I do not believe that by any stretch of imagination the Federal reserve system to-day could ever entirely liquidate
all its investments unless new machinery were designed to furnish
reserve money and circulation. It could not be done, because the
aggregate reserve balances of the member banks which form the basis
of the credit structure which meanwhile has been placed on it, are
partly furnished by the investments of the Federal reserve banks,
and I think as years run along you will probably find that the reserve
system's to-day's investment will prove to be about its normal minimum investment for some time to come.
If it tried, as suggested, to liquidate, it might contract a little bit.
It would be different if we had inflated conditions; then it could
shake out a good deal. If, in fairly healthy conditions, it violently
tried to liquidate very much more than the situation would stand, you
would get the country into trouble, because the banks then could not
pay off the Federal reserve banks without drastically contracting
their entire loan structure. In that case they would continue to rediscount at higher rates, but the total investments of the Federal
reserve banks would not contract materially. Now, it has been said
that if one bank liquidates, such liquidation would at once contract
its circulation. But it is the essence of the Federal reserve system that
not all member banks borrow at the same time. Mr. Rue's bank may
liquidate, but Mr. Miller's bank might borrow that day. Liquidation
does not always automatically affect circulation.
As far as prices are concerned, I for one do not believe at all that it
is the note issue that makes prices; much rather I believe that in
healthy economic conditions, where budgets and note-printing presses
have not run amuck, prices affect the volume of note issues. You
can readily see that when you examine what happened during the
whole period of Federal reserve bank operations. You found that
during the war prices rose first, and several months later loans and
circulation began to rise. Why ? Because the man in the street who
buys food, transportation, pr a suit of clothes needs more money every
day, because prices have risen and more circulation is required, particularly because wages have risen. You see that same phenomenon
on the down-hill line of prices. You find that the fall of prices preceeded for several months the contraction of loans and circulation.
It is a most dangerous doctrine to say that the Federal reserve system
arbitrarily can affect prices because it regulates circulation. Circulation adjusts itself according to the interplay of many economic
forces. The Federal reserve system, within certain limits, ,can affect




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

261

its loans, and by contraction of loans it can attempt to give a certain
direction—no more than that—to the general trend of the attitude of
the banks, so that they may feel they ought to go slow instead of
going fast. But the decisive effect on circulation is exercised by the
greater or smaller intensity of consumption and production, domestic
and foreign, and their effect on the movement of prices.
The CHAIRMAN. The arbitrary fixing of rates and discounts in a
condition like that would affect circulation up or down, would it not ?
Mr. WARBURG. TO a certain extent it would affect loans and through
that it might affect circulation, but you can not tell how much, because that depends on surrounding circumstances, as described.
Then, you see, there is another phenomenon, and that is that loans
and circulation may in effect contract without the outstanding volume of the circulation being affected. It w^ould be the gold cover
underneath that would go up and down. This is more readily understood if you contemplate the inverse process. Assume that to-day
that we lost $600,000,000 of gold—we could take that out and send
it to Europe, and our circulation need not be affected at all, but our
reserves would decline.
The CHAIRMAN. I forget whether you stated what is the amount of
gold exchanged for Federal reserve notes outstanding.
Mr. WARBURG. YOU can not tell exactly how much is exchanged, because note issue is not separated that way, If you take our aggregate of Federal reserve notes outstanding and ascertain how much
they are secured by gold and commercial paper, YOU get some indication.
The CHAIRMAN. I remember that during the r tress period of the
war gold was contributed by the New York banks in exchange for
Federal reserve notes, dollar for dollar. That was what I had particular reference to.
Mr. WARBURG. YOU can get at it negatively; you can say that if
only $800,000,000 are secured by commercial paper that all the rest
certainly is against gold, which would mean at this time about a
billion and a half.
The CHAIRMAN. Of course, that applies after the gold is once in
the system. I realize that it is placed with the Federal reserve
agent as security for note issues and commercial paper is also placed
there.
Mr. WARBURG. I think you have in the Federal reserve banks about
one billion eight hundred million dollars deposits, and we have in the
system about three billion three hundred million gold. You see, you
get the same result. So that withdrawn from circulation, there
would be about one and a half billion. I assume the Federal Reserve Board has better ways of approach to this question.
Mr. WINGO. Do you think that the discount rate has the same effect and the same precision as with the Bank of England ?
Mr. WARBURG. NO.
Mr. WINGO. Our experience

has been that different factors and
conditions here make it work differently.
Mr. WARBURG. We have entirely different factors.
Mr. WINGO. SO with the rediscount rate here we can not have the
same effect and the same precision that the Bank of England does
with its discount rate?
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Mr. WARBURG. We have the same effect, but not the same precision;
that is right. It does not respond as readily, because our system is
somewhat differently construed, particularly because our open market transactions, which means our discount market, are not as well
developed as they are in England.
Mr. WINGO. And the reason for such precision over there is because their market is so fully developed—much more so than ours?
Mr. WARBURG. Yes. And there are other conditions, too, that play
into it. It is too complicated a question to answer with yes and no.
The CHAIRMAN. DO you think if our Federal reserve discount rate
were above rather than below the market rate, it would have a tendency to retire the note issue?
Mr. WARBURG. That all depends at what time you increase or decrease the rediscount rate. Take present conditions: We have commercial paper selling at about 5*4 to about 5% per cent, and our
Federal reserve rediscount rate is 4%, which is very low. We have
an open market of 4% for bankers' acceptances, and that is about the
same rate the open market sets for short Treasury certificates—four
and an eighth to four and a quarter. If you consider this rate as
the open-market rate governing short-term Treasury certificates and
bankers' acceptances, because mat is what the banks are satisfied .to
receive from guaranteed liquid investments not involving a credit
risk, and if you compare with that the rate of 5% to 5% per cent,
which is the rate for unguaranteed papers involving a credit risk, you
find a differential of about 1 to iy2 per cent, and that is approximately the level and where the rediscount rate for commercial paper
should be. We could, to-day, advance our rediscount rate to 5 percent and in the operations of the Federal reserve banks it would probably not make any difference at all. The effect would be one of
sentiment.
As Mr. Rue said this morning, the people might get into their head
that something was about to happen. In other words, raising a
rate which is so far below the market when borrowing at that rate is
moderate will not in itself have an important effect. Even if you
went to 5% per cent it would have mainly a sentimental effect
where people might take a more serious view of the situation, though
in actual operation I do not think it would make much difference, because the borrowing that takes place just now from the Federal reserve banks would likely be about the same as it would be at the lower
rate.
The CHAIRMAN. AS I recall, the Federal reserve banks can buy
paper in the open market at any time ?
Mr. WARBURG. Yes.
The CHAIRMAN. And

they can use that as security back of note

issues?
Mr. WARBURG. Yes.
The CHAIRMAN. SO that

the Federal reserve banks can at any time
they see fit go into the open market and buy paper if they have the
gold, put it up with the Federal reserve banks, and secure Federal
reserve notes?
Mr.

WARBURG. Yes.

Mr. WINGO. Which operates with greater influence, the open
market rate or rediscount rates?




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263

Mr. WARBURG. In a paper which I read about a year ago I used a
simile. I said that the Federal reserve system is the anvil when it
comes to the rediscount operation; it is the hammer when it operates in the open market. In other words, when you fix your discount rate you have to wait until a member bank feels like coming into
the Federal reserve bank for credit. But the Federal reserve bank
in rediscount operations can not take the initiative. In the open
market the Federal reserve bank can take the initiative without
changing rates; that is what the Bank of England does.
Mr. WINGO. That is the point I am getting at. As a matter of
fact, the open-market operations of the Federal reserve bank affects
the credit world and the market more than the rediscount rate, does
it not?
Mr. WARBURG. That depends. It acts this way: Assume that the
Federal reserve bank has acquired $10,000,000 of Government certificates or $50,000,000 of bankers' acceptances, and it felt that there
is a speculative tendency all over the country and that loans are
rising too fast and too much. Assume that they do not want to increase rates, but they want to exercise an influence of applying the
brakes. The Federal Eeserve Board might say to the Federal reserve banks: " Try to get out of the open market, try to reduce your
holding of certificates and not to replace bankers' acceptances as they
fall due." Then the reserve position of the banks as a whole as
against the Federal reserve banks—I do not know whether I am making myself quite clear—gets somewhat crowded; and if the banks
of the country can not sell their paper or certificates to the Federal
reserve banks they would have to sell them something else in order
to keep their reserve balances intact. In other words, taking the
banks as a whole, they would begin to rediscount. When they are
forced to rediscount, the rediscount rate becomes effective, which
up to then was only an anvil position, not a hammer position, and
from that moment the Federal reserve bank rediscount rate is effective, and if it should be raised the market will be all the more responsive to it.
The CHAIRMAN. A S a matter of fact, Mr. Warburg, it has quite a
stabilizing influence if the Federal Eeserve Board can buy bankers'
acceptances in the market and also short-term certificates ?
Mr. WARBURG. Certainly; because the Federal reserve banks
thereby can do both; they can arrest excessive speed by withdrawing,
but they can also give relief by going into the market and buying. You
may have a condition when you do not want to decrease rates but
still want to ease a situation, which can be done by increased openmarket purchases. In other words, the object may be attained and
minor fluctuations may be met without being forced to change rediscount rates.
Mr. WINGO. The open-market operations act with more certainty
and more promptness than any rediscount operation?
Mr. WARBURG. Quite right, and that is why some of us have always
claimed that a reserve system acting with promptness, smoothness,
and precision can only be brought about when our open market is
further developed; in other words, when you get a country-wide and
reliable discount market.




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Senator GLASS. Mr. Warburg, you are an experienced international
banker. Do you think it would be the part of wisdom for the Congress to modify the Federal reserve act and reduce the standard of
the Federal reserve system in order to get some State banks to join
the system?
Mr. WARBURG. I stated before you came in, Senator, that I thought
it would be wrong in the extreme to do that. I think that the
standard of the Federal reserve system should be preserved at all
hazards.
Senator GLASS. DO you think that the perpetuity of the Federal
reserve system depends largely upon standards of banking that it
maintains ?
Mr. WARBURG. Yes, sir.
The CHAIRMAN. Mr. Warburg,

it has beer, insinuated that perhaps many of the larger national banks who are now members
of the system might be, because of this competition, forced to leave
the Federal reserve system; while as a matter of pride and the
public interest and partiotism involved in it are compelled to stay
in, the actual dollars' value to them would force them out of the
system. Suppose a large number of the big national banks, as many
of them have already, should leave the system and many State
banks and trust companies remain in the system, would that interfere with the continuance of the Federal reserve system ?
Mr. WARBURG. When you say that national banks would leave
the system, you mean the national banking system?
The CHAIRMAN. Yes.
Mr. WARBURG. But as

they leave the national bank system they
would remain members of the Federal reserve system as State
banks ?
The CHAIRMAN. Yes.

Mr. WARBURG. I do not think the Federal reserve system would
be affected by it at all.
The CHAIRMAN. YOU think their coming in in a voluntary way
under the laws we have, finally broadened to permit them to come
in, would be as satisfactory in the maintenance of the Federal
reserve system as if they remained as national banks?
Mr. WARBURG. I can not see that any bank of standing can afford
to leave the system, whether national bank or State bank.
Senator GLASS, YOU see, if we should exclude State banks from
the system purely because they may be permitted by their respective States to have branches
Mr. WARBURG. NO ; I do not.
Senator GLASS. DO you think

it would be feasible and to the
advantage of the system to give national banks the same right
that State banks have to establish branches in States where the
State banks have the right to establish branches?
Mr. WARBURG. In cities, yes; not state-wide Except that I
always thought it would be a useful thing to agricultural counties,
not in the cities, if banks were permitted to club together. In
other words, that instead of having 10 weak; banks with a capital
of $15,000 each, you would have one bank with a capital of $150,000, which would have a stronger loaning and borrowing power.
I think that some of the complaints that we are getting right




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265

along are not directed against the reserve system, but against the
fact that in agricultural communities there are these very small
banks which you called "pawn shops," and that if they are permitted within certain limits, to consolidate into stronger institutions I think it would be to the advantage of the borrowers.
The CHAIRMAN. YOU think such a branch bank as you suggest,
then, is not in contravention to the Federal system?
Mr. WARBURG. Properly restricted as outlined it would not be.
The CHAIRMAN. In the limited manner which you suggested of
counties and cities?
Mr. WINGO. The other method, then, is to have a bank in ea.ch
county or large unit similar to a county and let it have branches ?
Mr. WARBURG. Yes.
Mr. WINGO. YOU would

not confine it to these " comfort stations "
referred to in the Attorney General's opinion ?
Mr. WARBURG. N O ; the banks would be doing the same business
as before, but instead of these little stations—small counters with
small men behind them—you might secure a larger point of view, and
you might find that there was a possibility of getting these larger
concerns into the system and giving the farmer the better facilities
he wants.
The CHAIRMAN. The central county bank would answer the same
purpose and occupy the same position as a city bank does, not confined to any one county but throughout the State.
Mr. WARBURG. Yes, sir. And similarly you would not have a
president in each county branch, but probably a vice president or
cashier. I think it would be a more economic proposition and would
result in lower charges.
Mr. WINGO. That has been tried in some States in America ?
Mr. WARBURG. I do not know. The intermediate-credit banks have
been organized to do the same thing to a certain extent; that is,
substitute a larger credit power for the insufficient loaning power of
the small country banks.
Mr. WINGO. I am under the impression that the plan you suggest
has been tried out, except that they had a State central bank that
was the parent bank and the county bank, and then had branch
offices over the county. My recollection is that it did not prove very
satisfactory—in fact, that it was disastrous.
Mr. WARBURG. I am not familiar with that.
The CHAIRMAN. Have you some further thoughts to give us ?
Mr. WARBURG. I have some notes which I made concerning this
morning's discussion. There is one question which was touched
upon concerning which I should like to say a word, and that is about
salaries of Federal reserve bank officers. 1 can tell a good deal about
that, because I was one of those who as a member of the first Federal
Eeserve Board used all my powers of persuasion on some of the men
who are still in the system in order to have them come into the
system and give up positions where they had much larger salaries.
They came in, responding to the plea that they would be rendering a
public service; and a good many are still there and in that same
spirit and position. Of course, the danger of losing them is getting
greater every day, because they have shown themselves able men—
hey have made reputations for themselves in their communities—




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

and others want to get them; and the greater danger is that in
present conditions they are getting very tired of serving, and they
want to get out. Every now and then one of them comes to me and
says, " Am I not a fool to stay in a position where I get a smaller
salary than I can get elsewhere and where all the advantage I have
is that I am being roasted ? " That is a thing which—I hesitate to
state it here—Congress ought to bear very seriously in mind. These
men have been attacked very unfairly. They serve under conditions
which are less favorable than what they could get outside, and
still they are being held up every now and then on the floor of Congress and outside for being overpaid and the system as being terribly
extravagant. These men are underpaid, and there is grave danger,
unless the Federal reserve system is treated with a little more kindness and its servants are given a little more consideration, that the
good men will leave. I think there is a great danger in that.
The CHAIRMAN. In that connection, you are aware what Congress
did in the last session so far as Federal bank buildings are concerned? It put a limitation upon them. It was also discussed that
inasmuch as the Government gets a residue in the form of a franchise tax that perhaps they should also undertake to fix the salaries
of the officers of the Federal Reserve Board and the banks. What
is your thought on that?
Mr. WARBURG. I think it would be fatal. The more you destroy
the feeling of these men that they are doing work in a spirit of rendering a public service the more you interfere with their getting a
reasonable compensation without being subjected to all kinds of
governmental red tape, examinations, investigations, and insinuations, the more you are likely to drive away men that are worth
while. In their place you will get fat job seekers if you go that way.
Senator GLASS. Mr. Warburg, outside of the franchise tax that
the Federal Government derives from the Federal reserve, does it
own a dollar of proprietary interest in these banks?
Mr. WARBURG. NO, sir.
Mr. GLASS. Did it ever
Mr. WARBURG. Never.
Mr. GLASS. Has it ever

put a dollar in them ?

put a dollar in these banks, or does it own
a dollar of proprietary interest in the banks aside from the franchise tax it derives?
Mr. WARBURG. Not one cent.
Mr. GLASS. Let me say something about the excise tax right there:
The Government of the United States derived as a franchise tax
from the national banks of the United States in the aggregate at one
time as much as $4,000,000 or a little less. One year it derived from
the operations of the Federal reserve system $60,000,000. So that if
anybody has been profiteering in this matter it has been the Government of the United States, representing the taxpayers of the United
States, which does not own a dollar of proprietary interest in the
Federal reserve banking system.
Mr. WARBURG. That is the thought I would like to suggest on the
question of the excise tax. Originally it was imposed not for the
purpose of raising a tax, the name was taken in order to give it a
name, but the true object of this provision to safeguard against the
Federal reserve banks being operated for profit. That is why thf




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267

stockholders' return was limited to 6 per cent; and I might say in
parenthesis that I am opposed to any suggestion to increase that
return, because I think if you increase those dividends you would
make the Federal reserve banks targets for being profiteers, and you
would also give them an incentive to try to make more money, which
they should not. The writer of the law sits right across the table
from me, and he was aware of the fact that somewhere—if you wish
to take away these excess earnings from the banks these excess profits
had to be put somewhere.
So naturally it was thought, "Let the Government have everything that the stockholders earn in excess of 6 per cent." It was not
the idea of developing a tax or of getting revenue for the United
States, but it was sought to devise ways and means by which the
stockholders should not get more than 6 per cent. Now, the thing
is being turned around, and when these banks go ahead and do their
business in a businesslike way—and the whole structure of the Federal reserve banks rests on the thought that the banks ought to be
business concerns, owned and directed by directors appointed by the
member banks, with their directors appointed by the Government—
then the Government steps in and says, " These are my creatures
and my banks, and every cent that they spend ought to be controlled
by me, because the residuary earnings are mine as the excise tax."
Senator GLASS. Although it has not a dollar in them ?
Mr. WARBURG. Yes.
Senator GLASS. I S it

not a fact that the large gross earnings of
these banks was caused by an inconceivable expansion of the business,
due to war activities?
Mr. WARBURG. Certainly.
Senator GLASS. And not to the increase of the rediscount rate?
Mr. WARBURG. That is right.
Senator GLASS. DO you conceive that any of the Federal reserve
banks ever increased its rediscount rate with the idea of making
profits; as a matter of fact, the net result of that was to reduce
profits in the gross, was it not ?
Mr. WARBURG. Naturally. As a matter of fact, they do not fix the
discount rate; in the final analysis they are determined hj the board.
The CHAIRMAN. A S a matter of fact, there are two interests to
this accumulation of profits outside of the Government—the borrowers in the country and the stockholders in the member banks ?
Mr. WARBURG. Eight.
The CHAIRMAN. The demand has been presented to Congress frequently, and is expressed in these answers to inquiries, that there
should be a larger distribution of the earnings to the member banks.
What is your thought on that ?
Mr. WARBURG. I just mentioned before that I think it would be a
mistake. I do not think that the earnings of the member banks
ought to be increased, not that they may not be entitled to it; that is
not the question. But even as the system stands at present, where
the member banks got only 6 per cent, and where all these large
revenues Senator Glass refers to went to the Government, still the
charges were raised that the Federal reserve system was profiteering
for the benefit of the banks.




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

The CHAIRMAN. What would they say if the member banks got
more?
Mr. WARBURG. And, in addition to that, I do not believe it is a
good plan that the management of the Federal reserve banks should
get the idea into their heads that they should go and do business
for business sake, in order to earn a higher dividend. I think, for
the future of the Federal reserve system, it is a safer proposition to
leave it at 6 per cent.
The CHAIRMAN. I observe a great misunderstanding here in Congress as to just where the interests of the member banks end and
where the Government's interests begin on the question of profita
Two hundred million dollars is provided, of course, in case of liquidation for the building up of surplus accounts. The law provides in
case of liquidation any surplus which remains which are earnings
shall revert.into the Public Treasury. Many Members of Congress
have expressed to me the opinion that because of that fact, and because of the fact that they receive in the form of a franchise tax
the net income that is declared annually, the Government is interested in this subject, and therefore should direct the management
of the banks. That is misinformation, which is deeply imbedded
in the minds of many people. I think it is well to get that matter
clear.
Mr. WARBURG. It is not misinformation. It is correct that the
Government gets the surplus.
The CHAIRMAN. Not only that, but the fact that the Government
should take over and operate virtually the system. I can see the
tendency growing for the Government to first determine how much
money shall be spent for the buildings, and then fix the salaries for
the officers. It seems to me the next step would be to fix discount
rates; and when Congress steps in to regulate the actual operations
of the Federal reserve system, I personally can see danger.
Senator GLASS. Inasmuch as that would be taking property without due process of law, I think an act of that sort would be decided
invalid.
Mr. WARBURG. YOU might answer that, if the Federal reserve bank
should lose and the capital would be impaired, the surplus would
belong to the member banks until the capital should be restored.
So they are not entirely without interest in the surplus. The whole
thing is really comparable to somebody who has a very rich uncle
and who, because he knows he is going to get the inheritance when
the uncle dies, presumes to claim the right to " manage " the uncle
while he lives. [Laughter.]
Mr. WINGO. That, Mr. Chairman, leads me to the suggestion:
The logic of this discussion is that if a trustee is charged with extravagance and his answer is that the person making the charge has
no present or residuary estate it would acquit him.
Mr. STEAGALL. I want to say that it occurs to me that there should
not be any less concern in the successful and wise administration or
conduct of the "affairs of the Federal reserve system because of the
fact that the Government had no direct interest in it, and there
should be if that interest is held by the member banks.
Senator GLASS. IS not it held ? They do hold it.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

269

Mr. WINGO. The Government created certain trustees for certain
member banks in this Nation, and in the creation of that trust the
very exercise of the power carries with it the control. I am not
much of a lawyer, but I think on that basis a man who is a lawyer
might figure something that has not been touched on in this discussion.
Senator GLASS. A S a matter of fact, the Government does not
control; it never was intended that the Government should control.
It was intended that the Government should supervise.
Mr. WINGO. Well, " supervise." Is it logic that the Government
is an interloper?
Senator GLASS. Oh, no: the Government is not an interloper; the
Government is the very proper beneficiary of the system. It drew
down $60,000,000 franchise tax, which was never contemplated on
earth.
Mr. WINGO. IS that the reason we went in? To profit off of the
member banks created for public welfare and service of member
banks ?
Mr. WARBURG. Or for the people at large.
Mr. WINGO. Oh, the Government came in because it recognized
there was a public interest, just like the transportation merchants
under the commerce clause; that is the only justification we had and
the only constitutional right we had to go in.
Senator GLASS. Mr. Warburg, you had an intimate knowledge of
the discussions of this question when the Federal reserve legislation
was in the process of formulation and you had an intimate part in
the private personal discussions of these matters. Was it ever intended primarily that these banks should make money or that the
Government would have an}^ acquisitive interest in the operation of
these banks?
Mr. WARBURG. It was never intended that that should be the case.
As a matter of fact, when the Federal reserve system started there
was some doubt as to whether it would be able to earn its dividends,
you remember.
Senator GLASS. Mr. Mondell stated on the floor of the House that
it could not earn gas bills.
Mr. WARBURG. But the main thing, Senator, was that the law
quite clearly laid down the principles according to which the Federal
reserve banks should be kept out of politics; that is why no appropriation was made for the system. But the whole legislation was
drawn up so that it should be independent under very rigid Government supervision. If there is extravagance, if anything is wrong
with the system, naturally it ought to be found out and it ought to
be suppressed, because extravagance should not exist, but not for the
reason that the Government might get a dollar more or less. That is
entirely different. The Government is simply receiving an excise
tax in order to prevent the Federal reserve banks from becoming
money-making concerns. That is why the Government came in, and
you might just as well have written that law by providing that the
surplus should be given to somebody else. It might have been given
to China, for that matter. That would have had the same effect, as
long as member banks did not receive more than 6 per cent. The
main thing was that the system should not profiteer.




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Mr. WINGO. And if it had been provided that all of the surplus
earnings should have gone to China as a gift, it would not constitute
toy reason why the good citizens of the country and especially those
charged with the possibility of higher office, would not be interested
in the wise and proper conduct of the business.
Mr. WARBURG. That is right.
Senator GLASS. Of course, that is true.
Mr. WINGO. Of course, the parent of the child has a good deal to
do with the extent and character of its moral training.
Mr. WARBURG. I agree with it.
Senator GLASS. YOU may not know it, but my friend from Arkansas is the unsophisticated country boy on this committee, and I
am told that I am the representative of Wall Street.
Mr. WINGO. The unsophisticated country boy is simply sitting on
the side line.
Senator GLASS. While I am representative of Wall Street; I am
put in that class.
Mr. WARBURG. I am proud to hear it, but that is the first time I
learn of it.
Senator GLASS. I would like very much to get the usufruct of that
position, but I have three bull calves on my plantation in Virginia,
any one of which is worth more to me than all my banking interests
put together.
Mr. WINGO. That leaves me an opportunity to say that you not
only contribute to the financial success of the country, but to literature. You may not know, Mr. Warburg, but the Senator is the
author of a very fine literary gem entitled " The Tale of the Heifer."
Senator GLASS. Oh, no; "A Tale of Two Heifers." [Laughter.]
The CHAIRMAN. Mr. Warburg, have you any suggestion for constructive improvement in the Federal reserve system which you
would like to give to the committee at this time?
Mr. WARBURG. I would like, if I may mention one think that has
been in the mind of the board and several of us for many years,
and that is the question of whether the comptrollers office should
;not be brought under the auspices of the Federal Reserve Board.
I agree that there should be a separate office, that there should be
one man who is responsible, and who assumes all the duties which
are now exercised with respect to examinations and the winding up
of banks and all that, but I think it has been a deplorable condition
ever since the Federal Reserve Board began to function that there
were two officers on the same board which gave different rulings and
one delayed the other. We lost in the beginning of operations possibly two years. We might have done what we did in two years
instead of four if it had not been for the constant delay.
When we were ready to go one way we had to argue and plead with
the comptroller's office until he was ready to move the same way.
That was so in the question of the admission of State banks, the
question of examinations, and open-market operations, and so on.
And even to-day you have the same condition that a comptroller
may say, " I want to close branch banks; I do not believe in branch
banks." The board may believe in it. A comptroller some years
back went before Congress and urged the guarantee of deposits; the
board came out against it. It brings about absolutely deplorable




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271

conditions, and the member banks are exasperated because they do
not know where they stand. It is a case of two authorities trying
to run one system, which I think never works. I believe that those
two departments ought to be brought together. Not that the comptroller's office should not function as an entity in itself but that when
the board reaches rulings or interpretations that the comptroller, a
member of the board, should be included in it, and that there should
be one definite control over the whole matter.
The CHAIRMAN. The present comptroller presented an argument
against that plan the other day. His main argument, as I remember, was that frequently when national banks fail they owe the
Federal reserve banks money, and therefore the Federal reserve
Imnks are preferred creditors, and that it would not seem right to
him that a preferred creditor should also repay interest of the
depositors who are not preferred in national-bank failure.
Mr. WARBURG. I do not think that what I have in mind would
involve very much of a change of what exists to-day in this regard.
The comptroller is to-day a member of the Federal Reserve Board,
and as such he sits on the creditors' side to-day in case of foreclosures. But, as a matter of fact, the board does not actually deal
with individual cases; it is the local Federal reserve bank that does.
Moreover, the comptroller could exercise the same discretion as he
does to-day, with the difference only that the board would vest these
powers in this one member. But when it comes to matters of policy,
involving the unity of the system, it would rest with the board as a
whole, including the comptroller. I do not see what possible objection there could be against it.
The CHAIRMAN. The objection is also brought forward that if the
office of the comptroller is continued as at present, that that department should constitute the sole examining body. That would involve the examination of member banks by the 12 Federal reserve
banks or by the comptroller's office. Do you care to express an
opinion on that suggestion?
Mr. WARBURG. That is a question of preference. If it should be
felt that the examination should be carried on as heretofore from
Washington—and a great deal is to be said for that—that could be
done under the plan I have outlined. To-day the Federal reserve
banks have the right to examine any member, too; and they are entitled to the comptroller's reports, even though in our times we had
a hard time to get the report for the Federal reserve banks' use.
The Federal reserve banks may be the largest creditors and the
people rely on them to supervise the member banks, but there was
delay and red tape in their getting reports, and there were important
secret reports which in some years they never got unless they asked
for them. So you see the difficulties of this dual rulership. I think
you could have it both ways. Probably it would be just as well to
have the examinations directed from here in Washington, but naturally if the Federal Reserve Board and the comptroller were operating together as one, it would be natural that the Federal reserve
banks would get all the information more promptly and automatically without being dependent upon the good will of a comptroller.
The CHAIRMAN. My understanding is that they can simply go
out and get the information, but there is no appeal, so to speak; they




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

have no power to enforce any situation. It is just a matter of information with the board.
Mr. WARBURG. The power to enforce would be the refusal to rediscount. They have more power in that respect than the comptroller. The comptroller can only close up the bank, and that he
generally wishes to avoid.
The CHAIRMAN. That would mean practically the retirement of
the bank from the system.
Mr. WARBURG. Yes. And then there is this, too: When a bank gets
into trouble it is not a question of closing it up; it is much more important to keep it going, and in order to keep it going the Federal reserve bank has to cooperate. It is very easy to close it up but more
difficult to keep it going. It is important therefore that there should
be the most intimate cooperation between the comptroller and the
Federal Keserve Board and Federal reserve banks.
The CHAIRMAN. Of course, there has in the past been some conflict as to who was in control; whether the comptroller was in control or whether the Federal reserve bank was in control, and there
are instances, I believe, where some embarrassment has resulted to
the bank that was affected.
Mr. WARBURG. That is so. If you permit me I would like to add a
word about the future of the reserve system. There is grave danger
of its gradually going down, for the reason that the system is not
sufficiently protected by Congress. Congress takes a whack at it
every now and then, but, as I said before, it shows very little
concern to safeguard its integrity.
Take the Federal Reserve Board as such. In eight years there have
been six members that went out; which is a terrific turnover. A system
of that sort should have continuity, and the member banks and the
country at large would like to see continuity and they are entitled to
it. But what has happened Men who have made themselves unpopular with certain Senators could not be reappointed, simply because
they incurred the enmity of these men. At the meeting of the
American Bankers' Association at Atlantic City a few days ago there
was passed a resolution suggesting among other things whether it
would not be possible for Congress to trust the President in reappointing a Federal Eeserve Board member when once he had been
confirmed by the Senate at the time of his first appointment. You see
what is involved in that. It is all right for the first time when a man
is appointed to the board that he shall go through the whole process
of investigation, if that is desired. But once the Senate has been
satisfied that the man is all right he should not be exposed again to
this process of grilling or knifing, because, for one reason or another, he conscientiously could not make himself subservient to a
Senator.
Mr. WINGO. That would mean, permanent appointment at the will
of the Executive ?
Mr. WARBURG. Yes. I think the President ought to be trusted
with that responsibility.
Mr. WINGO. That would be the effect of it. A man could serve
during the pleasure of the Executive, with no power of the Senate
to reach him except at certain periods.
Mr. WARBURG. The President has the right to remove any member at any time.




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273

Mr. WINGO. In other words make the life employment subject
to the pleasure of the executive ?
Mr. WARBURG. NO, not at all, because I should think if a member
is not a good member and his term expires the President would not
reappoint him.
Mr. WINGO. A man might be a good Member of Congress, and yet
the voters desire to retire him. But, according to your theory, if a
man makes a good Congressman, the voters ought not to be given
the power to retire him.
Mr. STEAGALL. I think if you can extend your doctrine far enough
it will meet with great approval around the Capitol!
Mr. WINGO. AS a matter of fact, it is just as well to recognize the
tendency.
Mr. WARBURG. I assume
Mr. WJNGO (interposing). With the exception of one Member the
Senate of the United States has not been inclined to be that liberal.
Have you ever heard of the Senate giving up a prerogative ?
Mr. WARBURG. Not unless there was very strong public opinion
back of it. But I believe if the Congress saw this system headed for
the rocks, unless something is done for the Federal Reserve Board
g
Mr. WINGO (interposing). Suppose 3^ou could convince Congress
that that was wise, what kind of a propaganda would you get out to
convince the public?
Mr. WARBURG. 1 would not undertake any propaganda, but I
think the thing would unfortunately carry its own propaganda,
because if this tendency as it now exists continues it will be found
increasingly difficult to get good men to serve on the board and
by and by the system from top to bottom will deteriorate. Imagine
what it means to-day when any man going on this board knows
in advance that when his term expires unless he has complied with
certain things he should not comply with, he is exposed to that kind
of knifing. For a small salary a man is expected to give up his
career and undertake a public duty which he knows he can not conscientiously perform without becoming a helpless target of some
disgruntled Senator. I do not like to discuss this, but I think it is
my duty to do it since I have been on th board, since I am deeply
concerned in the future of the Federal reserve system, and since I
know what I am talking about.
Mr. WINGO. DO not misunderstand me. The discussion must nee
essarily be an academic discussion, because it is not in the realms o±
possibility.
Senator GLASS. YOU had just as well talk about the revolution of
the earth on its axis as to talk about the Senate giving up its prerogatives.
Mr. WARBURG. If this suggestion is academic, I think Congress
ought to study what other relief may be practicable. I think something ought to be done.
Mr. STEAGALL. All men who hold high positions in this country are
subject to criticism and are going to continue to be, whether officers
or private citizens or what not. Our theory of government is that
discussion and freedom of speech revealed the truth and no man
should dread it,




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Mr. WARBURG. Does it, though, Mr. Congressman? I think Senator
Glass will bear me out that the rights and chances for the use of the
freedom of speech are very unevenly divided in such cases and frequently there is not freedom of speech at all, because the subtle work
is done in the dark or behind closed doors. In any case the fact remains that service on the board in such conditions opens possibilities
so distasteful that men of independence and worth will hesitate more
and more to accept it.
Mr. WINGO. If you mean the United States Senate, that is the
only place I know of where there is freedom of speech.
The CHAIRMAN. The committee will now be glad to hear Mr.
Miller.
STATEMENT OF HON. JOHN M. MIILEE, JR., RICHMOND, VA.

Mr. MILLER. Mr. Chairman and gentlemen, so much has been said
that it is quite difficult for me to know where to begin, but it is well
for me to say that I am from Eichmond, Va., of the fifth district,
composed of Virgina, the two Carolinas, West Virginia, Maryland^
and the District of Columbia. The fifth district outside of the cities
of Baltimore, Washington, and Kichmond, is composed of what we
term country banks, and it seems to me that one of our first duties
ought to be to try to satisfy the country member banks of the systemThere is a very general feeling, I think, with a number of country
banks that they are not in close touch with the system; they do not
understand it; they are not at all enthusiastic, and to me it seems
that one of our first duties should be to make our banks enthusiastic
members of the system, thereby emissaries to bring into the fold other
banks who should be in the system.
I am of the opinion that where there are hundreds of banks we*
ought to have in the system there are probably thousands of banksthat are ineligible and will never come into the system. I think we
ought to address our work and thoughts largely to making more
enthusiastic members who will in turn help to bring in nonmembers
who are eligible and should be in the system.
The member banks are dissatisfied in many respects, and for various reasons. One of the chief objections of the average member
bank that has not studied the system as possibly some others have, is
that they get no interest on balances. I will not undertake to argue
that, because I think we all agree that interest on balances in the
reserve bank is absolutely unsound and should not be considered;
but they lose interest on balances, and that does not make them feel
good.
The CHAIRMAN. In other words, Mr. Miller, they have forgotten
the changes in the reserve requirement that came about with the
Federal reserve act, which was lowering the legal reserve requirements ?
Mr. MILLER. Yes; to a considerable extent they have. But liter on
I will undertake to show you that while although that reserve requirement has been reduced the average bank that I have investigated carries nearly as much working capital as it used to carry
under the old national banking act.
Another thing that does not appeal to the average country bank
is this, that no part of its actual cash in its vault counts as reserve.




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275

Another is that the city bank—that is, the bank located in the
12 Federal reserve cities and the branch bank cities—has some decided advantages over banks located in the country miles away from
the centers.
One of the obstacles to nonmember banks coming into the system
is the reputed action of the Federal reserve banks in forcing par collection, which the courts have ruled against, made a great many
enemies for the system.
A large majority of the nonmember banks—or, probably I should
say, practically all—want interest on their balances, which can not
be considered, but which we will talk about later.
Of course, the nonmember banks have the advantage of more liberality in the State charters. They can do a great many things under
State charters in a great niany States that can not be done under a
national charter. The nonmember bank objects seriously to the reserve requirements of the Federal reserve system; it objects to the
supervision. You know that numerous reports have to be made;
the fact that it can not make loans on real estate as freely, and
various other things. They speak of the ineligibility of their paper.
That can be corrected in a great many cases, as has been cited here
to-day. But do not let us overlook the fact that the country bankersy
I think, probably expanded in greater proportion during the past
few years than the city banks. I know we had many cases in the
fifth district, where practically all country banks were borrowing
from the Federal Reserve Bank of Richmond; some were borrowing
to the extent of five or six and seven times their capital.
Senator GLASS. In one case seventeen times.
Mr. MILLER. Was it that much? Now, they must have eligible
paper in pretty considerable proportions in order to get all of that.
The basic line did not apply in those cases.
The basic line at that time had to be waived to keep some of them
from failing. But I am not prepared to believe that the well managed country bank can not have enough eligible paper to give him
a pretty liberal line in the Federal reserve banks. That is evidenced
by the fact, that, as Senator Glass said, one bank got seventeen times
its capital.
Under the old national bank act, we were limited in borrowing
money to 100 per cent of our capital. The Federal reserve system,
in the mind of the average banker, meant an unlimited credit. I
have heard very intelligent men ask, " Why can not the Federal
reserve bank lend indefinitely ? "
We reached a point where we found we had to stop and a deflation
period came on. So, I think the ineligibility of the paper of the
country bank has been very much overrated, because that has been
proven by the fact that they have found eligible paper to the extent
of five or six times; and in one case seventeen times their capital
stock.
Let me get back to the question of payment of interest on balances, which is unsound and which should not be done, as more
profound bankers .than myself have said, but it does seem to me
entirely reasonable and proper that a member bank at the end of
the year, if there is any profits over and above proper taxes, dividends, salaries, etc., and overhead should share in it—that the mem-




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INQUIRY OK MEMBERSHIP IN FEDERAL RESERVE SYSTEM

ber bank who has contributed all of the capital to the system, with
the exception of $85,000 appropriated by Congress for organization
purposes—that, is all the Government, I think, ever put into it—it
does seem reasonable to me that at the end of the year, after proper
provision has been made for dividends, taxes and a certain proportion to the Government, that a certain percentage of the earnings
should be divided among the member banks in proportion to the
average reserve balances for that year.
I do not believe that thv.t would be an incentive to the directors
of the Federal reserve banks, or to the Federal Reserve Board, or
to the managers, to do an unwise and unsafe business for the purpose
of making profits. But the profits are incidental. If they are there,
I believe a certain proportion of them ought to go back to compensate these banks for the balances they have carried throughout
the year. I do not believe there is anything unsound in that, and I
believe that sooner or later something of that kind must be done to
hold these banks to the system.
The CHAIRMAN. What per cent of the earnings do you think
should be made applicable to that payment?
- Mr. MILLER. Mr. Chairman, I have not studied that out carefully.
But, first, I think the Government ought to be compensated with a
certain tax on its uncovered circulation. A 6 per cent dividend
ought to be paid on the stock. Profits over and above that—just
for illustration, I should say, might be divided equally between the
Government and the banks.
The CHAIRMAN. Based on the average balances?
Mr. MILLER. Based on the average balances.
The CHAIRMAN. YOU would consider that an-equitable distribution?
Mr. MILLER. I would consider it an equitable distribution. Every
dollar that was put into these banks, with the exception of that
original fund for investigation, location, etc., has been paid by the
banks.
The CHAIRMAN. YOU do not think that would be an inducement
or encourage the Federal reserve system to be a money-making
system ?
Mr. MILLER. I do not. I think you can always count on good men
on the boards, conservative business men to be elected by those
boards and to be appointed from Washington. The Federal Reserve
Board is appointed by the President. It seems to me that is all the
protection that a practical business man could expect to get from any
business organization.
The CHAIRMAN. YOU agree that the Federal reserve system should
not be placed in competition with other banks, do you not ?
Mr. MILLER. I certainly do. To pay interest on balances would
force the Federal reserve banks into competition with member banks;
it would force them to go ahead to make money to* pay the interest
and the overhead, etc. Interest on balances would defeat the purposes
of the Federal reserve system. You would not have any reserves at
the time when the strain came if they were in the money-making
business.
The CHAIRMAN. That would put the Federal reserve system in
straight competition with banks. In other words, they would have




INQUIRY OK MEMBERSHIP IN FEDERAL RESERVE SYSTEM

277

to go into the open market and buy paper or invest in securities to
get money enough to pay interest on those balances ?
Mr. MILLER. Certainly; that would put them in competition with
member banks. The theory I had in mind was something like a
mutual life insurance company. You pay a premium on your policy
of probably $50 a year. At the end of the year you get a dividend.
You do not know what that dividend is going to be. It may be
considerable; it may not be anything. But it is just excess profits
that are incident to the business that will come back to the member
banks in consideration of their balances which they have kept, and
it will, I believe, tend to offset this hue and cry for interest on
balances.
You will be surprised from where that demand for interest comes.
It comes from nearly everywhere, from people who have not studied
this system or understand it. It is easy enough to explain it to
them if you can reach them. But few are making it their business
to reach them on that point. There is something like $200,000,000
surplus in the Federal reserve banks. Who does it belong to•? Not
to the people who have contributed the capital. It is a dangerous
fund there to-day, in my opinion, and will grow more so year by
year. It belongs to the Government, and is a temptation to break
up this system when the charters expire, an awful temptation to
have probably half a billion dollars in the Federal reserve banks
that belongs to the Government. Why can not a number of statesmen come along and say: "We will break up this system, and we
will take the half billion dollars and cover it into the Treasury."
There is a great danger in building that fund up as property of the
Government.
Now, Mr. Chairman, I am going to make a suggestion which I
know will not meet with Mr. Warburg's approval. I do not know
whether it meets with Mr. Rue's approval or not. Those gentlemen
are scientific bankers, and I doubt if this proposition is scientifically
sound, but I believe it is practically safe. No part of the cash in
the vaults counts as reserve. I do not know what Senator Glass is
going to say. You have reduced the reserve requirements. I am
going to tell you about the bank I represent, the First National of
Richmond. Our reserve in the Federal bank, our cash in our vaults,
our balances due from Philadelphia, New York, Chicago, Boston,
Baltimore, and other banks necessitates our working capital to be
just about as much as it was under the old national bank act, and
possibly more; but it is about 25 per cent of our gross deposits.
Scientifically what I have got with the Philadelphia National Bank,
the National City Bank of New York, and the Continental-Commercial Bank of Chicago is not real reserve.
The CHAIRMAN. What you might call a working balance ?
Mr. MILLER. Yes. But practically it helps very much. The requirement in Richmond and Philadelphia is 10 per cent reserve in
the Federal reserve bank; in New York and Chicago it is 13; in
Danville and Lynchburg it is 7 per cent.
Philadelphia, New York, Chicago, and Richmond each have a
Federal bank in their city. We can conduct our business with a
very limited amount of cash. Why ? Because we can go across the
street to the Federal reserve bank and replenish it in 15 minutes.




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Danville and Lynchburg can not do that. They have to carry more,
because they are 24 hours away from the Federal reserve bank. In
Richmond we carry in our bank approximately $200,000 of cash.
Under the old system we carried $500,000 or $600,000. We carry a
limited amount of cash because we can replenish it, as I say, in a
few minutes. Lynchburg and Danville, in my opinion, can not conduct their business with the same proportion of cash in their vaults
that we can, because they are 24 hours away from the source of
supply. It seems to me that probably not exceeding 1 per cent, or
one-tenth of our reserve, in Eichmond or a Federal city might be
counted in the vault. New York and Chicago have 13 per cent
requirement; 1 per cent might be counted, which would be the onethirteenth of their reserve; in Eichmond, one-tenth; and Danville
and Lynchburg, one-seventh of their reserve. I think we shall have
to make the Lynchburg and Danville banks, just as an illustration,
feel that Eichmond will have no decided advantage over them from
a cash standpoint. There can be no better real reserve than lawful
money in your vault; that is 100 per cent reserve. In Eichmond if
our requirement was 9 per cent balance in the Federal reserve bank
and not exceeding 1 per cent in our vaults, we would be equally as
strong, although we would take from the Federal reserve bank 1 per
cent, or one-tenth of our average balance.
I say it may not be scientifically correct, but practically I believe it is absolutely safe.
I was talking a month ago with the president of a bank in
Chattanooga, and he said he had to carry just as much cash in
his vault as he did under the old national bank act. Why? Because he was probably 100 miles from the Atlanta Federal Bank..
The CHAIRMAN. Let me see if I get clearly just how you would
do that. You would allow a certain percentage of your total reserves to be kept in the vaults of your own bank?
Mr. MnjiEtR. Yes, sir.
The CHAIRMAN". In any kind of money known as cash?
Mr. MITX,FJR. Lawful money, we would call it, I would not say
Federal reserve notes, because that is scientifically, I judge, incorrect—but lawful money.
The CHAIRMAN. If you did not have a limitation on it, there are
(some banks that would keep all of their reserves in their own

vaults.

Mr. MiMiER. But, remember, I said 1 per cent of your net liabilities, but one-tenth of our Eichmond reserve. Let me illustrate that.
Our average reserve requirements in the Federal reserve bank is
$1,500,000. If that were changed we could keep $1,350,000, and
the other $150,000 in our own vaults, we might keep $300,000 or
$400,000 in our vaults, but should not be allowed to count over
$150,000 of it, viz, one-tenth of our total reserve.
In Danville, for instance, their requirement may be $700,000,
just to illustrate. They would carry $600,000 in Federal reserve
bank, and $100,000 in their vault. I assume that is about the proportion of cash they would have to carry, because they are 150 miles
from the Federal reserve bank.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

279

Mr. WINGO. In other words, you would permit a certain part
of the reserve to be made up of that particular part of lawful
money in your till?
Mr. MILLER. Yes.

Mr. WINGG. In other words, say a bank in Richmond had $100,000 in its reserve requirement, and for arbitrary illustration you
would say they might count $10,000 of lawful money in their till
as part of that reserve.
Mr. MILLER. Yes.
Mr. WINGO. Even

though they might have $100,000 till money,
but you just count a certain percentage of their reserve might include that amount that is in the till ?
Mr. MILLER. Yes.
The CHAIRMAN. That

would mean, then, simply a lowering of the
legal reserve requirements in the Federal reserve banks?
Mr. MILLER. Certainly it would, sir.
Mr. WINGO. Do you think that on the theory that the basis for
which reserves are maintained could be conserved in practice, though
not in theory?
Mr. MILLER. Yes.
Mr. WINGO. In other

words, reserves needed for such purposes,
ttnd as a practical matter you could meet those purposes with this
till money just the same as reserve balances?
Mr. MILLER. I do.
Mr. STEAGALL. YOU

say it would result in lowering the reserve
requirement. You do not mean that entirely. You would leave
the law exactly like it is. You would leave the requirement in the
law as it is, but you would let him count against that certain percentage carried in the vaults of the banks as lawful money, and that
at all times to be accounted for?
Mr. MILLER. It would reduce the amount of legal reserve in the
Federal reserve banks, but the total percentage of the legal reserve
would be the same.
Mr. STEAGALL. The total would be the same. So they would be
checked on it and required to maintain it as required by law?
Mr. MILLER. Yes.
Mr. WINGO. YOU

would not change the money segregated; you
would just allocate the amounts in point of segregation?
Mr. MILLER. Yes. In the case of Richmond 9 per cent would be
in the Federal reserve bank and 1 per cent could be carried in your
vault.
Mr. STEAGALL. And that you think would relieve the complaint
on the part of the banks removed from Federal reserve cities on
account of the advantages enjoyed by those competing ?
Mr. MILLER. I think it would go far toward it.
Mr. WINGO. In other words, that would equalize in actual practice
the difference in the till money that has actually to be carried ?
Mr. MILLER. Yes. Eight at that juncture I might say this, that
a bank located a hundred miles or two hundred miles from the Federal bank has one advantage over the member bank located in a Federal reserve bank city.
Mr. WINGO. That occurred to me awhile ago that there was an
advantage.




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INQUIRY ON MEMBERSHIP IN" FEDERAL RESERVE SYSTEM

Mr. MILLER. This is one advantage which is offset by another
which I shall mention later. The checks on the First National Bank
of Richmond in the hands of the Federal Reserve Bank of Richmond
are presented to us to-day and we pay them in cash. The checks
held by the Federal reserve bank today on Danville or Lynchburg
have to be sent to them by mail, and they have practically two days
in which to pay those checks, and they sen back the checks in payment to-morrow, to Richmond, and they really have that advantage
of two days.
To offset that, however, the items that we send to the Federal reserve bank for our deferred credit reach the Federal reserve bank
the same day, whereas those same checks sent by a Danville or
Lynchburg bank could not reach the Federal reserve bank until the
following day. They lose one day on that, but they beat us on the
paying, which more than offsets the advantage we enjo}^ and therefore I do not think there is any necessity for suggesting a change
in that.
Just one more practical suggestion, as I am talking purely from
the standpoint of practicability. It may not be scientifically sound*
but it is on this question of deduction from your total liabilities.
We have the country bank at a disadvantage; that is, the city banks
have. Under the present law due from banks
The CHAIRMAN (interposing). You are speaking now of the float?
Mr. MILLER. N O ; I am not talking about the float. I do not believe in the float as reserves. Under the present law and the old
national bank act, due from banks and checks on other banks in the
same city may be deducted from " due to banks " in figuring your
reserve. Let us see how that works. I hesitate to be talking about
the First National Bank of Richmond all the time, but I know more
about that than any other bank, and therefore use it as an illustration. We have about $7,000,000 due to country banks. On an
average every day we will have due from deferred Federal reserve
bank account, and due from New York, Baltimore, Philadelphia,
Chicago, and country banks an average of $4,000,000. In computing our reserve that $4,000,000 due from banks may be deducted from
that $7,000,000 due to banks, and our reserve requirements then is
on $3,000,000 of country bank deposits—the net amount—and not
on the total $7,000,000. That reduces our requirements very considerably, and it is a decided advantage.
The bank in Lynchburg and the bank in Danville, which I use
again as illustration, do not get that same advantage. Why? Because, we will say, they have comparatively small amounts due to
country banks. If the bank at Danville, for instance, owes to
country banks $100,000 and has due from its deferred account in the
Federal Reserve Bank of Richmond, from banks in New York, Philadelphia, Chicago, and other places, and checks on the other Danville
banks $400,000, they can deduct that $400,000 only from that $100,000, which leaves $300,000 that avails them nothing.
Due to banks and due to individuals, merchants or corporations is
actually the same liability. In the case of liquidation, they absolutely stand on the same footing. They both are liabilities, and
the bank in Danville or Lynchburg should, in my opinion, be permitted to deduct from the total of their liabilities their total due
from banks, etc.




INQUIRY OK MEMBERSHIP TN FEDERAL RESERVE SYSTEM

281

The CHAIRMAN. Or, in other words, from their regular deposits?
Mr. MILLER. From their regular deposits; they are all the same
liability. Why cut them out of an advantage we happen to have
simply because we have a large volume of country-bank balances ?
Mr. WINGO. That is for the purpose of figuring reserves.
Mr. MILLER. For the purpose of figuring on the reserves required.
The CHAIRMAN. I was interested in your suggestion on the other
matter of the exchange in reserves and the advantage that Eichmond
has over Lynchburg and Danville in that respect. Could you not
carry that still further if you applied your rule to the small country
bank in, say, a town of 5,000 or 10,000? In other words, if you
establish that, would not the banker in the small town of five or ten
thousand feel he was being discriminated against by the bank in
Danville or Lynchburg? Would it not accentuate that situation,
and would not it also necessitate lower reserve requirements in the
small country towns to meet that competition?
Mr. MILLER. The small country banker in the town of 5,000 or
10,000 population has a reserve requirement of 7 per cent, Danville
7 per cent, and Lynchburg 7 per cent. I am inclined to think that
is just about as low as you ought to go.
Before I came up here I correspended with a number of banks
scattered through Virginia, North and South Carolina, and West
Virginia, and as far as Chattanooga and Atlanta. I received various
ideas from them. But this suggestion as to a certain amount of
cash in the vaults being computed as reserve and this equalization
on account of deductions it seems to me ought to have consideration.
I repeat it may not be scientifically sound, but I believe it is absolutely and practically safe, and we should, I think, look at the practical, safe side of it.
Mr. MILLER. Just one more thought, about bringing member
banks closer to the administration of the Federal reserve banks.
There is undoubtedly a feeling of aloofness on the part of many
country banks. They do not understand the system thoroughly.
They do not meet the officers and managers of these Federal reserve
banks as we people in the same city with them have an opportunity
to know them and to become intimate with them and get their point
of view. There is a feeling of aloofness that ought to be overcome.
A Federal reserve bank is different from a commercial bank such as
I represent. The Federal Eeserve Bank of Kichmond has no competition, and in any line of business where you fail to have competition there is bound to grow up a feeling that there is autocracy or
arbitrary management in any concern of any kind or any men in any
line of business without competition. Therefore we should try
and overcome that in some way. We should try and bring these
member banks in close contact with the officers of the Federal
reserve banks, make them understand the system, explain things to
them, answer questions. Some of the questions that they will ask
may appear simple, but how can a man find out things without asking questions, and frequently apparently simple questions, when he
is not well informed. But they have a timidity about them and
must learn these things as we people do who come in close contact
with the problems.
The member banks own the Federal reserve banks under Government supervision. But they do not feel sufficient interest in the




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

management. What do you know about it? They have only a voice
in electing directors, but probably only half or two-thirds vote and
the others do not. They are more or less indifferent. They say,,
" It is going on anyhow. Let somebody else do it."
The CHAIRMAN. Let the correspondent banks run it?
Mr. MILLER. The correspondent bank as a rule is in closer touch,
and these people rely on the correspondent banks, as Mr. Rue said, for
a great deal of advice and suggestions. They ought to be brought
in closer contact with the reserve banks, and they ought to get into
gatherings, ask questions, and have the whole thing explained to
them, and make them feel they have a proprietary interest and have
a voice in the management and ought to take a more active part in
the management.
The CHAIRMAN. YOU think that might be brought about by a
different method in holding elections?
Mr. MILLER. I do not know. I had not thought of that. But hereis a thought I had in mind and I would not have you understand
that all these thoughts I am trying to express are original with me.
Very few of us have original thoughts. We get our thoughts from
reading and study, just like lawyers and statesmen, by collation of
what we have read and heard. But all of our five States and the*
District of Columbia have their banker's associations. I should say
that probably every member bank of the Federal reserve system in
the fifth district is a member of a State Banker's Association. At
least once a year member banks should have a convention. That convention could be held at the same time that the State banker's associations have their conventions, and a day set apart which would be
Federal reserve member convention day. A representative of every
member bank should be urged to attend that, and he would probably
be more careful to attend his annual convention if he knew that theFederal reserve system was going to be threshed out for a whole day.
There should be as large an attendance as we could get. We should
have the officers of the Federal Reserve Bank of Bichmond, we will
say, there to explain the system, to answer questions and hear criticisms, and to, if I may use the much used term, " sell the system "
more thoroughly to the member banks. Every State has its banker's
association; every State could have gatherings of that kind and in
that way enlighten their member banks.
Further than that, this work should be carried on throughout
the year. You know we have the advisory council that advises with
the Federal Reserve Board. That advisory council, as you gentlemen
know, is composed of one delegate from each of the 12 districts,
selected by the Federal reserve bank boards of those respective districts. They come to Washington and advise with these gentlemen
and help keep them in touch with conditions through their respective
sections. These banker's associations in each district ought to have
these annual meetings for this exchange of views. Each association
ought to have at least one member of the advisory council of that
district. That advisory council's duties should be very similar in
respect to the Federal reserve banks, as the advisory council of the
country is to the Federal Reserve Board, where they can meet four orfive times or oftener a year if advisable to-, get in touch with the
Federal reserve bank officials, bring to their attention criticisms, com-




INQUIRY ON MEMBERSHIP IN FEDERAL, RESERVE SYSTEM

283

plaints and suggestions, and in that way bring the member banks in
closer contact with the Federal reserve bank officers. There is an
ignorance of the Federal reserve system that I believe should be corrected and cured by educational methods, and I cannot think of any
better method of doing so than in this way.
The CHAIRMAN. In each one of the Federal reserve districts it has
been pointed out to this committee there is a bank relations department. Such a plan as you suggest here would naturally be worked
out through that, would it not, in cooperation with the State Banker's
Association ?
Mr. MILLER. I do not know much about the bankers relations department. What do you call it?
The CHAIRMAN. Member bank relations service.
Mr. MILLER. I am not familiar with it, I am from Eichmond;
and have not come in personal contact with it.
The CHAIRMAN. Some of the banks do maintain it.
Mr. MILLER. Doubtless they are doing educational work.
The CHAIRMAN. I know in my State, for instance, at our anual
State conventions usually the governor and the vice governor and
the officers of the bank are in attendance. Pennsylvania is divided
up into eight groups, and they have their group meetings at different
periods during the year, and there are always present representatives
from the Federal reserve bank who usually speak at these meetings.
That somehow answers your plan?
Mr. MILLER. I think undoubtedly the Federal reserve bank at
Eichmond is doing a lot of educational work.
Senator GLASS. By personal contact?
Mr. MILLER. By personal contact and otherwise.
An advisory council, it seems to me, from the various districts
should have about the same authority as the advisory council to the
board has to advise. But it cannot enforce any of its ideas upon the
board, only by moral suasion and influence, and giving the board
the status of what is going on in the territory and the complaints here
and there and helping them find a way to solve difficulties.
The CHAIRMAN. AS I recall it, the creation of the Federal advisory council was the answer which the framer of the law made to
the bankers who demanded representation on the board. They were
willing to have a man representing the interests of each district to
meet at certain periods in Washington with the board and present
the views of that district as regards the service and condition of that
district ?
Mr. MILLER. Sure.
The CHAIRMAN. That is really the function of the Federal advisory council, is it not ?
Mr. MILLER. Yes, sir. And therefore my idea is to apply that
same idea to the several districts. I can not speak for the Federal
Eeserve Board, but I believe the Federal Eeserve Board has a pretty
high regard and respect for the advisory council. I am a new
member, probably the newest on the council, but it seems to me—Mr.
Platt can correct me if I am wrong—that the Federal board has a
good deal of respect for the advisory council.
The CHAIRMAN. While you say that the Federal advisory council
has not any authority at all, it has come to my attention as presiding




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

officer of the Banking and Currency Committee during the past two
or three years that the Federal advisory council did during the deflation period remotely have some authority by way of suggestion.
Mr. MILLER. They have all sorts of power of suggestion, but then
it is entirely up to the board whether they will accept the suggestions. Some things we advised them to do they did not do.
The CHAIRMAN. Some people in the country think that the sudden
deflation was essentially a recommendation of the Federal advisory
council. I do not care to inject that into this discussion.
Mr. MILLER. I can not answer as to that.
Mr. WINGO. Your theory, then, is that there is a great deal of misapprehension even among banks already in as to the policy and
workings of the system and the real philosophy of the law, and that
that accounts for their restiveness and irritation that has been evident in some communications to us, and that it would be better for
the system if you had a more practical discussion in the organized
way you have suggested of the problems and the requirements of the
system, so that the system could be explained, its virtues pointed
out, and wherein it is of real value to them as well as to the public ?
Mr. MILLER. Yes. Mr. Chairman, I have a copy of a letter here
that I would like to read to you, but I have not the authority of the
writer of the letter to put it in the record.
The CHAIRMAN. Suppose we put it in the record without the name.
Mr. MILLER. The signature is not on the letter, and I hope you
will not ask me who wrote it.
The CHAIRMAN. We would not expect that.
Mr. MILLER. I want to say he is one of the brightest, most intelligent country bankers in our district and has an excellent bank, and
he is well educated, a good all-round man, that is far above the average for a bank of that size. This is addressed to me and dated
October 7. When I received your communication, I sent it to 15
or 20 banks to try to get some views on the subject from others. This
says:
DEAR MR. MILLER : On my return after several days absence I find your letter
of the 27th ultimo. I can not say that I feel qualified to answer your inquiry
in any comprehensive way, but it may be that some of the reasons, in our own
case, for not even considering coming into the Federal reserve system may be
of some use to you. You will recall that, armed with Federal authority, the
Federal Reserve Board, almost immediately after organization, launched into
an arbitrary and coercive policy toward all State banks. This instantly stirred
up a bitterness and prejudice that it will take years to overcome. Apparently
the Reserve Board sees the reaction that has strongly set in, and is now inclined to undertake to " lead " instead of " drive "—a far more effective way
of dealing with the average red-blooded American. While we regard the principle of par clearance as correct—having from the beginning and up to the
present time observed the par remittance rule—at the same time we frankly
confess that we strongly share the resentment of the methods above referrd to,
and with which you are perfectly familiar. In this connection I will say candidly that I do not believe that half of the national banks located in tife
smaller towns would be in the Federal reserve system to-day if they were not
compelled to be. I have heard no other expression from the many with which
I have come in contact. We may some day be "led" into the system but
" driven "—never. That is reason No. 1.
Then we balk at the requirement to carry 7 per cent of our gross deposits
with the Federal reserve without interest, and if half that is reported as the
enormous earnings of the Federal reserve banks is true, and as to the vast
sums they are spending for bank buildings, and extravagance of management,
it would seem that there is urgent need for modification of that regulation.




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We figure that it would cost approximately $5,000 a year to " belong," and, to
us, it is not worth the cost. Next in order, there is, we think, a growing revulsion against the ever-increasing tendency to " regulate " and " run " almost
literally everything from some " department" or " bureau " in Washington or
our State capitols, or both. We have, just as many yokes of this kind around
our necks now as we want, so why take on another ? Then this thing of having
to make endless " reports " on a prescribed set of blanks that do not fit in with
our records as kept (and which are entirely satisfactory to us) is to us one
of the most hateful things that comes along in our business experience, and if
further multiplied will make it absolutely necessary for the average bank of
any size to take on another man just to handle such stuff as that—
I think he has in mind the numerous reports we used to have to
make prior to Mr. Crissinger and Mr. Dawes as comptrollers.
As it has already become necessary for us to employ exceedingly high-priced
accountants to make up our tax returns, these should be simplified that any
man of ordinary intelligence and business experience could make up his own
returns and know that they were right when he sees it. I trust you will not
get the impression that your friend has taken on Bolshevik symptoms, but you
have held up before me a "red flag" when you ask me in your recent letter
what I think of these things. We are, it seems to me, on strange times, and
with an ever-increasing restlessness under the paternalistic governmental
" rules " and " regulation," an increasing disrespect for the courts and impatient
at its delays (often manipulated), and many other things that you and I never
expected to live to see in our day, and I sometimes wonder how long it will
be until something " breaks loose " somewhere in an inevitable adjustment to
saner conditions .
Let me add before closing that I do not for one moment overlook nor forget
the splendid service the Federal reserve system has rendered this country, and,
indirectly, the world, and some day hope to see this great system conducted on
such fair and reasonable basis that we will be eager to come into it.
Senator Glass over there questions the intelligence of that man in
some respects.
Senator GLASS. NO ; I do not question his intelligence. I think he
discloses a woeful lack of information.
Mr. MILLER. On some points.
Senator GLASS. One reason he gives for staying out of the Federal
banking system is that he has to pay an excess-profits tax and has
to have somebody to make it up for him.
Mr. MILLER. That is irrelevant, but the first part of that letter in
particular says he has not found a little country banker of his acquaintance that is at all enthusiastic.
Senator GLASS. Mr. Miller, in his exclusively expressed philosophy
there would not have been any Federal reserve system to-day. He is
opposed to the compulsion of a national bank by law to come in.
So that under his idea of the Federal banking system we would not
have any Federal reserve banking system at all.
Mr. MILLER. I realize !at, that he feels as a country banker he
is not enthusiastic. That is what we want to try to reach.
Senator GLASS. We ought to reach people like that and brush away
that misconception, explain to them that the things that they imagine
are visionary and that they do not exist, a great many of them—some
of them may.
Mr. STBAGALL. I think your suggestion very wise that you made at
the outset of your remarks as to the importance of enlisting the
hearty and enthusiastic sympathy of the member banks already in
the system.
Mr. MILLER. Yes; member banks.
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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Mr. STEAGALL. AS well, I suppose, relieving as :far as you can misapprehension and misinformation and objections on the part of those
eligibles that are not in the system.
Mr. MILLER. In other words, you agree with me that the proper
place to work is on the inside and from the inside out, do you not?
Mr. STEAGALL. Why, of course, I think that if every bank now in
the system had just the proper friendly attitude toward the Federal
reserve system, that the other difficulty would soon adjust itself.
Mr. WINGO. Mr. Miller, you have expressed the feeling that the
member banks have written the member banks to say as this man—
it is not a question of saying that they are wrong. If they are
wrong, then the condition is all the more distressing, because you
have got men upon whose good will the system has got to depend for
success and for harmonious working, with their judgment blinded
by a feeling of resentment that is going to take, I fear, a long time
to overcome. Just as long as they are absolutely wrong about their
criticism. My observation has been, especially on a two weeks' trip
I took on my own initiative, talking to country bankers in some
instances without their knowing who I was, I want to tell you I
am surprised to find how many feel just like that man.
I am a great believer in the system; I want to see it succeed. I
believe if carried out as originally intended on the original philosophy it means wonderful things to the business of the country. I
believe it can render as great service in time of peace as in time of
war, but I do not believe it can render great service with the feeling
of misunderstanding and with the feeling of restraint there is in the
minds of a lot of good men. I know some men who are as fine as
any in American, not Bolsheviks, yet when you go talking about the
Federal reserve system they get wrought up. I hope that you will
have your Federal reserve bankers down there pursue the policy you
have suggested—get out and reason with these men. If they are
wrong try to show them where they are wrong. If they are right
and some changes ought to be made in the regulations which can
be done sanely and consistently, let it be done. I believe that a
change of policy, not so much of eligibility of paper, but changing
the manner somewhat of doing business and a lot of other matters
that can relieve a great portion of the misinformation and misapprehension that exists in the minds of these country bankers. If
1 had my way about it, I would make every one of these members
of the Federal Reserve Board get out just like they do on the Chautauqua circuit and make talks to these country bankers.
Mr. MILLER. When Senator Glass and his associates were writing
this Federal reserve act, the vast majority of bankers, the most intelligent and best informed were opposed to it. Most of the wellinformed people have been converted, but the idea went out from
the beginning that this was not probably just what we ought to
have. I do not believe there has ever been as much talk since the
system was organized to correct those impressions and the false impressions and the misunderstandings as was the propaganda that
went out in the formative period. A lot of these people you talked
to in your travels I expect in nine cases out of ten are misinformed
and do not understand the system. But do not forget nearly every
one of them will tell you right off the bat that they can not afford




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287

to put their balances without interest, and we can not pay them
interest in the Federal reserve system.
Mr. WIKGO. Should not pay them.
Mr. MILLER. Should not pay them, I should have said. It would
destroy the system.
Mr. WINGO. One said, " I am not willing to buy membership by
doing anything that is unsound."
Mr. MILLER. We can not afford to weaken the system, but I can
not see any reason why that if there is profit at the end of the year,
after proper administration expenses, etc., is deducted, a part of that
profit should not go back to the people who contributed all the
deposits, capital, and business.
I have one letter in here from one of the ablest bankers I know
of. formerly of Lynchburg, who suggested we pay a quarter or onehalf per cent interest on these balances. That would be wrong in
principle and wrong from every standpoint, but if you can hold out
to the member bank in the event of a profit he is going to get back
a part, that would come near overcoming this interest on balances
that has kept out hundreds.
Mr. WIISTGO. I think your suggestions worthy of consideration,
but I do not believe either branch of Congress is going to be willing
to make any change in the law that is not sound and in keeping with
the original philosophy of the system.
Mr. MILLER. I hope they will not, if after consideration, they come
to the conclusion it is not sound. I do not believe in sacrificing
principle and soundness for expediency, but I believe in my suggestions, as practically safe.
The CHAIRMAN. Before the committee adjourns I want to suggest
that the committee when it does adjourn will adjourn until Tuesday, October 9, when the Association of Eeserve City Bankers have
a committee which want to appear, and there will be a committee
of the American Bankers' Association, and a committee from the
New England State Bankers' Association which will also be present.
On the program as it was outlined the representatives of the Farm
Loan Board were to appear to-day. A letter from the board which
I received a couple of days ago indicated they would like to appear
later on. I see Mr. Corey here, who is a member of the board now.
Is there any new thought on that ?
Mr. COREY. Not any. I doubt very much if we care to appear
at all.
The CHAIRMAN. That can be arranged later. I just wanted that
to go in as a part of the record.
The committee will now stand adjourned until Tuesday morning
next.
(Thereupon, at 4.50 o'clock p. m., the committee adjourned ta
meet Tuesday, October 9, 1923, at 10.30 o'clock a. m.)




INQUIKY ON MEMBERSHIP IN FEDERAL RESERVE
SYSTEM
TUESDAY, OCTOBER 9, 1923
CONGRESS OF THE UNITED STATES,
JOINT COMMITTEE ON INQUIRY
ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM,

Washington, D. C.
The joint committee met at 10.30 o'clock a. m., Hon. Louis T. McFadden (chairman) presiding.
The CHAIRMAN. The committee will resume its sessions. On the
program for the meeting this morning is the testimony of reserve
city bankers, representatives of the American Bankers' Association,
and the representatives of the New England banks. The committee
is willing to hear these gentlemen in any order that they may desire.
The suggestion was made that perhaps the representatives of the
American Bankers' Association would like to be heard first. If it
is agreeable to the reserve city bankers, that wTill be the order of
procedure.
STATEMENT OF MR. WALDO NEWCOMEK, PRESIDENT NATIONAL
EXCHANGE BANK OF BALTIMORE, MD.; CHAIRMAN OF COMMITTEE OF AMERICAN BANKERS' ASSOCIATION
The CHAIRMAN. Mr. Newcomer, will you please state your full
name and whom you represent?
Mr. NEWCOMER. I am president of the National Exchange Bank
of Baltimore and chairman of this committee of the American Bankers' Association.
Mr. Chairman, this is a small committee representing the American Bankers' Association, and we have recognized the difficulty of a
small committee attempting to present the views of the testimony of
22,000 members, among whom are very varying views.
The CHAIRMAN. Of course, Mr. Newcomer, you understand the
scope of the inquiry is covered by the law in the last agricultural
credits act.
We are authorized to inquire into the effects of the present limited
membership of State banks and trust companies in the Federal reserve system upon financial conditions in the agricultural sections of
the United States; the reasons which actuate eligible State banks and
trust companies in failing to become members of the Federal reserve
system; what administrative measures have been taken and are being
taken to increase such membership; and whether or not any change
should be made in existing law, or in rules and regulations of the
Federal Reserve Board, or in methods of administration, to bring




289

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INQUIRY ON MEMBERSHIP IX FEDERAL RESERVE SYSTEM

about in the agricultural districts a larger membership of such banks
or trust companies in the Federal reserve system.,
Of course, that brings in several collateral issues.
Mr. NEWCOMER. Yes.
The CHAIRMAN. When

the committee organized it sent out a questionnaire, I would like to repeat here, and in reply to this questionnaire the committee has received many replies from banks. The first
question was, " What reasons have made it seem inadvisable for your
bank to become a member of the Federal reserve system? " Second,
" What amendment of the law would you suggest to attract eligible
State banks? " Third, "What regulations, if any, of the Federal
Reserve Board or banks operate to repel eligible State banks, and
what changes would you make to insure membership of State1
banks ? " Fourth, " What suggestions, if any, would you make with
reference to the policy of the Federal reserve system, which, in your
belief, would induce State banks to become members? " Fifth, " In
your opinion, what service or benefit do you procure outside of the
system that you can not get by becoming a member ? "
I call those questions to your attention to give you an outline of the
scope of the inquiry, so you may have an outline of our purpose before
proceeding.
Mr. NEWCOMER. I take it, then, Mr. Chairman, you do not wish
any suggestions as to amendments to the reserve act—questions of
policy and general amendments?
I have here a report of the Economic Policy Commission, which
was adopted by the banks and which was the only official backing up
our opinion would have, and that takes up some questions regarding
the organization of branches and the appointment of members, qualifications for members of the Federal Reserve Board. That sort of
thing you wish to rule out ?
The CHAIRMAN. We have had before the committee some discussions on branch banks, etc.
Mr. NEWCOMER. I meant to say branch banks of the Federal reserve
bank. Do you wish any of that, or shall I rule that out ?
The CHAIRMAN. I would suggest that inasmuch as that is a report of
the committee of the American Bankers' Association it be put in
the record.
Mr. NEWCOMER. They start out by approving and affirming again
their complete adherence to the fundamental principles of the system
and their belief in the indispensability of this system to the health and
growth of America's industries, commerce, trade, and finance.
They look with disfavor on the authorization recently given by the
Federal Reserve Board to two Federal reserve banks to establish,
under the guise of agencies, organizations of their own in Cuba as
being a bad precedent, and suggest either the recinding of your ruling, or, failing that, that an amendment to the Federal reserve act be
sought, forbidding the establishment by any Federal reserve bank of
branches in foreign countries under the guise of agencies. That is
quite lenthily drawn.
The CHAIRMAN. I would suggest that the report in full be placed
in the record at this point.
(The report of the Economic Policy Commission to executive
council, of the date of September 24, 1923, submitted by Mr. Newcomer, is as follows:)




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

291

REPORT OF ECONOMIC POLICY COMMISSION TO EXECUTIVE COUNCIL SEPTEMBER 24, 192 3

The Economic Policy Commission of the American Bankers'
Association at a meeting held on July 12 and 13 devoted itself largely
to a consideration of the Federal reserve system and voted to affirm
again its complete adherence to the fundamental principles of the
system and its belief in the indispensability of this system to the
health and growth of America's industries, commerce, trade and
finance.
While your commission is unanimous in the belief that the Federal
reserve system during the period under review, has functioned in an
entirely satisfactory manner, there are two features in the system's
development that your commission observes with profound concern
and which it deems it its duty to bring to the attention of the council
of the association together with certain remedial suggestions.
First. The commission looks with disfavor upon the authorization
recently given by the Federal Keserve Board to two Federal reserve
banks to establish, under the guise of agencies, organizations of their
own in Cuba. It believes that the precedent thus established is
fraught with the most serious dangers, and it suggests that the
Federal Eeserve Board reconsider its policy adopted in this regard
or, failing that, that an amendment to the Federal reserve act be
sought, forbidding the establishment, by any Federal reserve bank,
of branches in foreign countries, under the guise of agencies.
Without asking to go into the question of whether or not the
language and meaning of the Federal reserve act, which does not
contain a clear and specific authority in this regard, could safely
be construed to confer upon the Federal Eeserve Board the farreaching power of establishing what are in effect Federal reserve
branches in foreign countries, your commission desires to point out
that all traditions and practices of central banks of other countries
confine such central note issuing institutions to establishments within
their own borders. Their outstanding duty is to provide currency
for and to protect the gold and credit structure of their own countries. While for such protection of the gold and exchange position
of their countries they may properly carry on certain well defined
transactions through foreign correspondents, whom, in given circumstances, they may designate more formally as their agents, they
carefully and wisely refrain from establishing in foreign countries
branch organizations of their own. It is unnecessary to emphasize
the danger of legal and political complications that may arise from
such governmental or semi-governmental institutions domiciling in
foreign territories. In addition, in order to lay bare the risks to
which central banks would expose themselves by venturing across
their own border lines, one need only point to the appalling losses
suffered by both European and American banks through operations
in foreign countries with uncertain credit and fluctuating exchange
standards. Moreover, operations in distant countries aggravate the
difficulties of proper supervision by the central office and enhance
the ever threatening danger of abuse and corruption.
Your commission is not unmindful of America's duties toward
Cuba and of our vast commercial and financial interests in that




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

island. But it believes that the object to be attained by the opening
of Federal reserve bank branches in Cuba could be accomplished
in other ways that would not create so fateful a precedent. Once
the principle involved is broken down, your commission fears there
is no telling whither, ultimately, the Federal reserve system may
drift, and your commission is alarmed, though not surprised, to learn
that proposals are already materializing designed to secure from the
Federal Reserve Board permission to operate similar branches in
other countries. Your commission deems it its duty to urge the
Federal Reserve Board carefully to reconsider the step taken; in the
commission's opinion the board has embarked upon a course fraught
with grave dangers.
Second. The Federal reserve system consists of 12 organically disconnected, autonomous Federal reserve banks. The only link tying
them together, assuring and directing effective cooperation amongst
them, is the Federal Eeserve Board. The task imposed upon the
board, remote as that body is from the actual operations of the districts, is, at best, a most difficut one. It requires intimate understanding of the Federal reserve banks' intricate problems and
expert knowledge of their technique. The first draft of the Federal
reserve act very wisely provided, therefore, that two of the members
of the board should be appointed by, or be representative of, the
Federal reserve banks. This provision was sacrificed, however, later
on in order to satisfy the apostles of the theory of absolute Government control, whose cooperation was indispensable if the Federal
reserve act was to be passed. Thus a compromise was reached by
which the duty to appoint the five members was vested in the President, while at the same time it was provided that at least two members of the board should be experts in banking. Since then an amendment to the Federal reserve act recently eliminated this provision
requiring the President to see to it that amongst the five appointed
members there should always be at least two Jbankers. As a consequence, amongst the appointed members, whose number has now been
increased to six, there is to-day not one who may be considered as an
expert banker by profession and training. Your commission does
not wish to indicate any doubt whatsoever as to the qualifications of
any single board member serving at this time. What your commission is discussing is the composition of the board as a whole. Your
commission does not believe in class representation as such. I t
believes that the first qualification of every member should be his
ability faithfully and effectively to serve the interests of the country
as a whole. But just as much as it disapproves of class representation, just as earnestly does it protest against class discrimination,
when plainly the best interests of the country would require the inclusion amongst the members of the board of men who could be recognized, both here and abroad, as experts in banking of national
reputation.
If the Federal reserve system is to survive, and if it is to render
the invaluable services which it can give if properly protected and
directed, it is imperative that the position of the Federal Reserve
Board be strengthened and that measures be taken which would
assure for it the continued service of the best men the country can
produce for the job.




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

293

There is no use blinking the fact that the whole trend of the history
of the personnel of the Federal Reserve Board has shown that there
has been hardly any continuity in service on the part of its members.
The record shows that valuable members resigned because they became disheartened or that they could not be reappointed on account of
objections of politicians, whose wishes or preferences they found it
necessary to disregard in the conscientious exercise of their duties.
Your commission believes that unless something is done better to
protect faithful servants and to enhance the standing and independence of the Federal Reserve Board a gradual independence or
deterioration of the entire Federal Reserve Board is inevitable. It
is unnecessary to elaborate the great danger that faces the country
if the Federal reserve system should step by step be dragged
deeper into politics and ultimately should be forced to envisage a
fight as disastrous in its consequences as that faced by the two banks
of the United States.
Your commission believes that this problem is worthy of the most
careful thought of this association, and that a dispassionate discussion
ought to be sought with leading Members of Congress with a view to
devising ways and means of avoiding the dangers for which the
system is now headed. The question ought to be examined whether
or not it would be possible in some way to revert to some scheme as
embodied in the first draft of the Federal reserve act or whether it
may not be possible to provide that members of the board, at the
expiration of their terms, might be reappointed by the President
without subjecting them once more to the hazards of a confirmation
by the Senate. The Senate would continue to pass upon the qualifications of board members at the time of their first appointment,
but by relinquishing their right of confirmation in case of reappointments the friends of the Federal reserve system in the Senate would
provide a most desirable protection for faithful and conscientious
board members. As it is nobody can blame men of worth for declining service on a board where, at the end of their term, duty courageously performed will inevitably deliver them to the knife of
politicians whose wishes a conscientious administration of their office
forced them to disregard.
Your commission is also of the opinion that service on the board
would prove more attractive if the board itself were permitted to
designate its governors and vice governors instead of haying the
President charged with the duty of promoting and demoting individual members according to his preference.
Furthermore, it may be worth while to amend the Federal reserve
act so as to make the governor the chairman of the Federal Reserve
Board, the Undersecretary of the Treasury becoming a member of
the board ex officio instead of the Secretary of the Treasury himself,
who naturally is generally so overburdened with other duties that it
is quite impossible for him to be a regular attendant at the board's
meetings.
Finally, your commission wishes to reiterate the recommendation
repeatedly made by this association that the major functions of the
Comptroller of the Currency be transferred to the Federal Reserve
Board with a view to bringing about a simplification and uniform
system of examination and rulings. The present system makes for
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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

costly duplication, and in the past has often led to unnecessary delay
and irritation. The Federal reserve system is one of the most
precious assets of our country. No effort should be spared to diagnose and remove in its very beginning any unhealthy growth that, if
left undisturbed, may sap the strength of the Federal reserve system
and undermine its integrity.
I t is my pleasure, Mr. Chairman; to move the approval and adoption of this report and the order of its publication.
The motion was seconded and carried.
Mr. STEAGALL. Let me say just a word there. The discussions here
so far have covered a pretty wide range, such as branch banking and,
in fact, nearly everything referred to in the special report to which
you have alluded, Mr. Chairman, and I think I speak for the committee when I say there is no objection to hearing you, Mr. Newcomer, further on any of those points as to which you have any views
that you desire to submit. The discussions up to now have covered
a pretty wide range on all those various lines, and we are willing
to get any information we can, really, and we do not mind hearing
you at length.
Mr. NEWCOMER. SO far as that report is concerned, I went over it
last night to see if I could condense it or simply express offhand some
of the things, and I find their reasoning is so clear and concise that
I could not improve upon it. If I did do anything I would rather
read a section from the report. I am speaking simply as our committee agreed last night to, without official backing up of the association we represent.
It has seemed to us that there were six considerations possibly
keeping the eligible nonmembers out. I speak strictly of eligible
nonmembers. I am not in favor of any particular efforts to try to
make more members eligible. In other words, we do not believe
it is of any great importance to get in the small banks, unless it was
practicable to get them all in in a body. If there could be an absolutely unanimous system, that would be of some advantage. But to
make concessions that would bring in 10 banks here and 10 banks
there among the smaller banks, we do not think it has any advantages, and in a sense question whether it was wise to make the concession that was made by permitting them to come in with smaller
capital and build the capital up.
The CHAIRMAN. I would say that none of them have made application to come in.
Mr. NEWCOMER. The things, however, that we do think are keeping out the eligible ones
The CHAIRMAN (interposing). Before you go into that: You say
it is not necessary to the successful operation of the Federal reserve system to give relief in times of stress or that all banks be
members thereof. Would you infer by that that possibly the system could be confined to membership to reserve depositors of the
so-called reserve city banks?
Mr. NEWCOMER. NO; I do not think that.
The CHAIRMAN. YOU would not attempt to confine it to that
class—I mean the larger reserve cities. In the mobilization of those




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reserves, perhaps, it was not necessary for small country banks to
join at all?
Mr. NEWCOMER. I did not quite mean that.
The CHAIRMAN. I did not mean to say that you did say that.
But other testimony before the committee indicates perhaps that
a drawing of the line
Mr. NEWCOMER (interposing). I said if it were practicable to get
all banks in I could see the advantage of it, but that to make
concessions in your law the result of which would bring in the
8 or 10 small banks here and 8 or 10 small banks there might
not help any with the present eligible banks. I do not think that
is going to improve your system particularly. Is that clear?
The CHAIRMAN. Yes; that is perfectly clear.
Mr. NEWCOMER. The six points that have seemed to us are keeping members out, reading them right off the bat, are: First, inadequate return on stock; second, lose of interest on reserve balances; third, lack of eligible paper in the applying bank; fourth,
the requirement of statements and other formalities that are not
required by their correspondents; fifth, the fact that they can secure
from their correspondents most of the advantages of the collection of checks and other facilities without corresponding obligations; and, sixth, a resentment of the apparent attempts to force
them in.
I was rather curious in looking over the record of the other
day to find that four of those things had been put before you by
another gentleman. I am not prepared, sir, to say that the change
of any of those would bring any material number of members in.
I t is one of the things where five or six things are acting together
and, as one of the members of our committee said to me last night,
"Do you think if you gave a man more on his stock it would
bring people i n ? " I said I did not know that people would come
in because of that particular thing, but it is one of the excuses
they give.
The CHAIRMAN. Might I insert here a section from a letter I
have received this morning on this subject? "As the capital paid
in is now idle, and is no longer and never will be needed for operating the Federal reserve system, why not return it to subscribers and
take in all new members without paying or owning any capital
stock, and agree as earnings (in the discretion of the board) justify
to pay interest on reserves ? "
Of course, the latter is an impossible proposition which I think
any banker would be able to figure out himself. A large surplus.
But what do you think of the suggestion of reducing the amount
of capital to banks? Of course, it could not be reduced entirely,
or there would be no method of electing, but if it wag reduced
down to the very minimum, instead of leaving their capital there,
what would be the result?
Mr. NEWCOMER. In general, Mr. Chairman, the amount that is paid
in is not a very serious item in the account of any one bank, as I see
it, in proportion to its capital—the refunding of 50 per cent would
undoubtedly please them. But it is not a very vital point.
Might I at this point inject a telegram we received this morning
from another member of our committee, who is unable to be here,




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INQUIRY ON MEMBEBSHIP IN FEDERAL RESERVE SYSTEM

which fits right in here?
Grand Rapids, Mich.:

This comes from Mr. Evans Woolen, of

Sorry unable to be with you. Principal reason for staying out of system is of
course cost of membership. This cost can not wisely be reduced by payment
interest on deposits or modification of reserve requirements, but can wisely be
reduced by division of earnings between Government and member banks.

He has somewhat that same idea in his mind.
It had occurred to me that the way in which some of these people
look at this is this, not that 6 per cent is insufficient return on investment, but they say, " We are compelled by law to invest in a stock,
and we are told when we do it that there is not any guaranty of any
return." Of course, the indications are now we will get a good return.
But should the earnings fall off and it does'not make 6 per cent we
do not get it; and yet, no matter how high they get we get no more,
and I am not at all sure but what a good deal could be accomplished
if the Government could safely guarantee the 6 per cent. If you feel
that the earnings are sure enough in normal times to do without
The CHAIRMAN (interposing). Do you think it would be a wise
policy if the Government should guarantee 6 per cent in a privately
owned system?
Mr. NEWCOMER. I S it privately owned?
The CHAIRMAN. I S it not?
Mr. NEWCOMER. Technically, yes.
Mr. WINGO. Do you not also overlook the fact that you are proceeding upon the theory that you are calling on these banks to do something for the Government benefit, and do you not overlook the theory
on which the system was established? Why was the system established?
Mr. NEWCOMER. It was established to get a liquid currency and
to stabilize and coordinate the reserve system for the general good.
I do not know that it was done for the particular good of the batiks
any more than they are a part of the country.
Mr. WINGO. It may be immaterial to you, but I think I have
struck pay dirt. You say you do not think this system was established for the good of the banks ?
Mr. NEWCOMER. I do not think that was the primary purpose. I
think it has been a benefit. I think our bank has benefited very
largely by it.
Mr. WINGO. YOU do not think we contemplated protection to the
banks as one of the basic reasons for establishing the system ?
Mr. NEWCOMER. I think the basic reason for establishing the system was for the protection of the currency and the reserves as they
would affect the general welfare of the country; and in suggesting
this guaranty I see the difficulty that it is not practicable for the Government. I am merely pointing out the technical suggestion that
it can be done in either of two ways: Either by guaranty of the 8
per cent, or a provision without any guaranty that when the earnings run above there should be some division of the earnings to a
limited extent.
Mr. WINGO. What part of the philosophy of the system did you
understand contemplated profits by those who established the system?
Mr. NEWCOMER. Profits above 6 per cent were all to go to the Government.




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297

Mr. WINGO. Was it your understanding that this system was established for profit ?
Mr. NEWCOMER. NO, sir.
Mr. WINGO. And yet your

suggestion is predicated purely upon
profitable return or investment return above the 6 per cent return of
the capital invested for the member banks and the capital stock of the
concern.
Mr. NEWCOMER. For the purpose of satisfying those who are keeping out and who are not willing to come in on the present basis.
Mr. WINGO. Of course, I can readily understand why it would occur to these member banks it would be a proper suggestion to have
the Government carry the loan and guarantee the profits. Since
everybody else is asking a guarantee from poor old Uncle Sam, I suppose it is natural for the banks to come in and ask him to guarantee
them something, too. Who is going to meet all these guaranties, if
you keep on. The farmer has got as much right to a guarantee as the
manufacturer and banker.
Mr. NEWCOMER. I do not suppose there would be a law passed compelling a farmer to invest in a bank and say to him that he will be
guaranteed a certain earning.
Mr. WINGO. We are not doing the Government any favor when we
permit a man to take out a national-bank charter. The presumption
is we are granting him a privilege.
Mr. NEWCOMER. With all due respect, we are not discussing the
national bank at this stage, because they are in already and are not
making any complaint. You are asking me how to get in the eligible nonmember banks ?
Mr. WINGO. YOU made the statement that we compelled the national
bank to go into this system.
Mr. NEWCOMER. Yes, sir; you did.
Mr. WINGO. We did not compel him.
Mr. NEWCOMER. Yes, sir; you did. He had

his charter and he had to
come in or give up his national bank charter.
Mr. WINGO. In other words, he had to forego the future privilege?
Mr. NEWCOMER. Yes.
Mr. WINGO. He was not
Mr. NEWCOMER. NO.
Mr. WINGO. Nobody has

giving up a vested right at all.

ever contended that the national banks had
a vested right in the laws that existed because Congress had specifically reserved the power to amend the terms of the franchise that
they gave them.
Mr. NEWCOMER. I am not pretending for one moment that as a
national banker I am not satisfied, because if I was not I could go
out at any minute. But you were trying to get in the member banks.
And you said to him, " If you come in you must take this stock," and
you were trying to get him in.
Mr. WINGO. Suppose we take the small banks. They are the ones
the trouble is caused by, those having from $25,000 to $50,000 capital
in a community. We will take a bank with say, $30,000 capital stock
and surplus. In the scheme you have just suggested what would
probably be their returns in a year's time ?
Mr. NEWCOMER. Very small.




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INQUIRY 0~N MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Mr. WINGO. Would it amount to as much as $100 ?
Mr. NEWCOMER. I forget right off what percentage he would have
in there.
Mr. WINGO. It is worth the time to just sit there and think of
your basis. You have a bank with a capital of $25,000 and a surplus
of $5,000, and it says, " I am coming into the system." How much
has it to subscribe?
The CHAIRMAN. Three per cent of its capital.
Mr. NEWCOMER. That would only be $900.
Mr. WINGO. If you guarantee 2 per cent additional on that $900,
how much would it get a year ?
Mr. NEWCOMER. $18.
Mr. WINGO. Does that appeal to you ?
Mr. NEWCOMER. NO, sir.
Mr. WINGO. DO you think any banker

who has enough sense to
run a bank can have his system overturned by $18?
Mr. NEWCOMER. NO, sir. I tried to say a moment ago that any one
of these questions when settled would not amount to very much, but
I am honestly trying to answer your questions as to the reasons that
are keeping them out.
Mr. WINGO. DO not misunderstand me that I am critical of your
viewpoint. You have not heretofore been before the committee, and
I am appreciating your viewpoint. I am just trying to sound the
depths of your views.
Mr. NEWCOMER. I will say frankly this does not mean anything to
me, and I do not think in itself it would amount to much to any banker,
but it is one of the six reasons, and I have tried to point out what might
be a possible way to improve. It is like a man who comes to you
with six arguments and you knock one of them out and he says, " I
have got five good reasons left."
Mr. STEAGALL. YOU are not urging this as a view of your own ?
Mr. NEWCOMER. Not at all.
Mr. STEAGALL. But you are

simply calling attention to the reasons
of others who are interested and attempting to help the committee
answer those arguments?
Mr. NEWCOMER. If the committee feels it should be made, there are
two ways of reasoning it.
Mr. WINGO. YOU are undertaking to cite what has been proposed
and showing how it might be met?
Mr. NEWCOMER. I have tried to find out the reasons. I have talked
to people in Baltimore, and I have read some of the arguments on it;
I have boiled it down and six reasons are all I can put my hands on.
Perhaps all of them are not worth anything.
Mr. STEAGAUL. It is true also that while the Federal reserve system
was not established as a money-making proposition, either for the
Federal reserve banks or for the member banks, the act contemplated
the profits should go to the Government. The law was subsequently
amended, was it not, in order to permit the Federal reserve banks
to accumulate a larger surplus, and, as a matter of fact, they have
made a great deal of money and have been spending a great deal,
and there has been a great deal of talk about their spending a great
deal of money. You know what I am talking about. Profits have
been made and there has been criticism. Maybe some of it is true




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299

and maybe some of it is not well founded. But a great deal of
criticism has been indulged in about the expenditures of the Federal
reserve banks, as well as what they have been accumulating.
The CHAIRMAN. Mr. Newcomer, it has been suggested to the committee by men who have preceded you, that perhaps the member
national banks themselves were not entirely solid on the Federal reserve system and that perhaps if they were enthusiastically for the
system that might encourage many of the other banks to become
members. Do you understand that all of the national banks, both
large and small, are favorably disposed to the Federal reserve system?
Mr. NEWCOMER. Mr. Chairman, I do not come in contact enough
with the small banks individually to answer that question. The national bankers with whom I have been able to talk are in the main
very friendly. I have heard comparatively little criticism from
them. But I do not meet the country banker and the men you are
trying to reach.
The CHAIRMAN. It occurs to me there have in the last two or three
years been many of the larger banks who have left the system due to
the fact they were not in accord with the Federal reserve system,'
or was it a matter of competition ?
Mr. NEWCOMER. I should say it was a matter of competition, and,
of course, that branch bank question has had a great deal to do with
it in a great many places. In other words, there were things that
State charters would allow them to do that a national bank could
not do.
Mr. WINGO. You think these men you have talked to do not take
the position that membership in the Federal reserve system is
onerous ?
Mr. NEWCOMER. NO, sir.
Mr. WINGO. They appreciate
Mr. NEWCOMER. I think they

the real benefits?
do. I do not get the country mem-

ber's viewpoint.
The CHAIRMAN. What does the larger bank, for instance, your
bank view as the best part of the Federal reserve system to your
institution ?
Mr. NEWCOMER. First of all—it is hard to tell any one thing—
the reduction in the reserve we have to carry over from what we had
to do under the old national bank act has set free more money for
lending purposes, so that the loss of interest of that balance is more
than compensated. Practically the discount privilege gives us a
much wider leeway than we had before. Before we always had good
credit with corresponding banks and always got everything we asked
for. But I would hate to ask correspondent banks for such an
amount as we required during the war, when the reserve banks took
care of us in splendid shape.
Then, of course, this collection matter is a great T?ig help to us.
Personally I am enthusiastic about the system. There are some details I might want to criticize, but they are details.
The CHAIRMAN. DO you believe, for instance, that the par clearance system is an essential and necessary part of the system that is
intended to mobilize the reserve funds of the country and keep them
liquid for use in the development of industry and commerce?




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Mr. NEWCOMER. I would not say it was an essential part of the
system, but I think it is a tremendous advantage to such banks
located as we are.
Mr. WINGO. I see a trend of argument in some of the literature
that is coming to me which if followed to its logical conclusion
means making legal tender out of checks. Just what is the philosophy of that?
Mr. NEWCOMER. I think it is a great mistake. I think a check
should get back and get canceled just as promptly as possible, and
that is one of the advantages of this present collection system.
Mr. WINGO. While you believe in having free play of banking
checks you do not agree in having them become legal tender?
Mr. NEWCOMER. I think it is dead wrong.
Mr. WINGO. There are some of our distinguished financiers who
think we should not make any distinction in that.
Mr. NEWCOMER. I do not claim they are wrong, but I simply say
I do not see it.
The CHAIRMAN. Assuming a bank credit has the same effect upon
• business in a crisis as a bank note, which some economists assert to be
a factor, do you believe unlimited credit is any less dangerous than
unlimited circulating notes?
Mr, NEWCOMER. I do not think I would be in favor of unlimited
credit, and I do not think we have it to-day. When a bank gets
up to the point of borrowing up to its capital and surplus, there
begins to be some little things put in there to stop it. First of all
it has got to put up marginal collateral for 100 per cent, and in the
time of the war when some of them got very high they put a progressive interest rate on them to stop it.
Mr. WINGO. YOU are speaking about extension of credit upon
which Federal reserve notes are based ?
Mr. NEWCOMER. Yes.

Mr. WINGO. I presume the chairman is speaking genet-ally of ex*
tension of bank credit, whether that credit is transferred to Federal
reserve banks or not?
The CHAIRMAN. It is interesting as to both.
Mr. NEWCOMER. Neither one is unlimited. For instance, take our
bank. We can not extend credit beyond what our resources justify,
except by rediscounting at the Federal reserve bank. We can only
discount with them to the amount of our eligible paper, and there
is a limit to that to start with, and if we have such a large amount
of eligible paper that we get to the danger point, the reserve bank
will stop us by making such a rate that it is not profitable.
Mr. WINGO. If you were really in need of funds, do you think a
little thing like a high interest rate would prevent you from borrowing?
Mr. NEWCOMER. It would prevent expansion. If I was in a hole
where I had to have $100,000 to keep my bank from going into receivership, I might pay 100 per cent over night—that would nofc
stop me. But if a man came into my office to borrow money and I
had to pay 8 or 10 per cent for that money, I would not likely do it.
Mr. WINGO. If the legitimate needs of your city required credit
facilities to an extent that you and your banks could not give and




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

301

you had already reached your limit, and you went to your Federal
reserve bank and could show that it was a bona fide need in order to
meet the legitimate exchange demand of trade and commerce, do you
believe trade and commerce ought to be penalized by a higher rate ?
Do you think it unwise? Do you think that extension of credit ought
to be refused regardless of rate, and the legitimate, necessary expenses ought to go without any theory of rate at all?
Mr. NEWCOMER. It is very difficult to draw that line, and I think
that the raising of the rate in general has the effect of stopping the
fellow who wants to extend for the purpose of profit.
Mr. WINGO. Right there on that point, if you will?
Mr. NEWCOMER. Yes,
Mr. WINGO. I want

sir.

to get your viewpoint on that, because we
frequently discuss that. As a matter of fact, in practical experience—you were^stating theory—in rediscounting or borrowing
from the Bank of England all they have to do is to automatically
raise the rediscount rate and you check things. In actual practice,
if you used the progressivet rate—I am not saying this in a controversial spirit—is not the speculative fellow about the only one
who feels like he can take advantage of it? Will not the legitimate
business that is figuring upon a narrow margin check its activities
and its expenses, ii the cost of that credit extension, including the cost
of financing, is greater than the possible return; will you not have
a tendency of checking legitimate expansion, and will not the speculative fellow, who is really gambling on the future of the country >
feel he can afford to pay the exorbitant rate because he sees the
possibility of exhorbitant profits—is not that the man who can take
advantage of the speculative rate.
Mr. NEWCOMER. I do not think, sir, that it would work that way
on the expansion that we had. I know when the rate in Baltimore
was raised to a higher point that our banks were guarding everything and making every customer explain why he needed that money.
and if it was for real legitimate needs, they would let him have it.
Mr. WINGO. Who should draw this line, the banker who knows the
needs of his particular customer or the Federal reserve bank?
Mr. NEWCOMER. I think the Federal reserve bank in a great many
cases has compelled a banker to draw it.
Mr. WINGO. I am talking about as a general rule.
Mr. NEWCOMER. Among 30,000 bankers there are some who are
improvident, some speculative, and some not particularly conscientious, and I think you would get into pretty big difficulty unless
there was a check put on the bank and let the bank decide how it
was going to stop it.
Mr. WINGO. In your experience do you think the rediscount rate
is going to check the improvident and crooked banker ?
Mr. NEWCOMER. TO some extent—it would not stop him entirely.
Mr. WINGO. If you were head of the institution that had to watch
that man—just bring it to the point of homely illustration, if you
had a customer that you doubted his ability—we will take the question of competency first—to handle his business, is the precaution
you are going to take one of the interest rate you charge him ?
Mr. NEWCOMER. Oh, no,




sir.

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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Mr. WINGO. Suppose you thought he was an unreliable man, would
you think that by penalizing his loans you would be protecting the
stockholders and depositors?
Mr. NEWCOMER. N O ; I would not want to deal with him at all.
Mr. WINGO. Is not that true of the Federal reserve banks? If
here is a banker who is improvident and who has got no business in
the banking business and his bank is in an unsound condition, is not
the remedy something other than penalizing his loan with an excessive rate?
Mr. NEWCOMER. Could a Federal reserve bank refuse to deal with
that fellow?
Mr. STEAGALL. SO the most that could be said for it is that it
would at least put the same penalty on the fellow who is trying to
meet the legitimate requirements of his community as it would put
on the speculator or the incompetent or the dishonest banker. Do
you think that would be fair?
Mr. NEWCOMER. Unless the banker makes the discrimination that
we can not take care of all of them, which should he take care of?
As a matter of fact, sir, am I not right in saying that through the
expansion period, when the Eeserve Board was so much criticized
for getting things done, the men who did most of that complaining
were men whose banks had borrowed to unsafe point, and unless the
Federal reserve bank had cut them down in some way there would
have been wholesale failures among the banks. They stopped them
from going too far. How else could they stop them ?
Mr. STEAGALL. My information is that the cases you have cited
were widespread; my information is that, as a matter of fact, some
of the Federal reserve banks were entitled to credit for having
recognized that by straining a point they could prevent some banks
from failing, and they did go to their rescue, even though such banks
were beyond their limit in loans.
Mr. NEWCOMER. That is true.
Mr. STEAGALL. And I think the banks should be commended for
that. In other words, they met the emergencies required and kept
a place to which banks in time of storm could have come as a
city of refuge. They said, " You are sound and we are going to see
that you ride the storm. We are going to protect you."
Mr. NEWCOMER. They undoubtedly did that.
Mr. STEAGALL. We are going to serve the public by serving you
and carrying you through the storm. The criticism has been that
they did not always do it.
Mr. NEWCOMER. The point comes back to my own case and our bank
with several customers. I have several customers now who can not
collect the money due them and who are borrowing all the money
they ought to borrow, if that fellow's assets are sound I am glad to
step over the line and lend him some money until he can get liquidated. But another fellow who gets that way by overtrading, I may
do him a great kindness by refusing to make a loan to him.
Mr. STEAGALL. DO you not think it would be better if the Federal
reserve banks used less theory and more horse sense and pursued the
same policy you have just suggested?
Mr. NEWCOMER. My experience with those I have dealt with has
been in the main they are pretty broad-minded.




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The CHAIRMAN. Mr. Newcomer, to get back to my question, assuming that the bank credit has the same effect on business in time of
crisis as does the bank note. You make a loan to a good customer
and you place that loan to the man's credit in your bank. In case you
need to have accommodations, you can take his note, if it is eligible, to
the Federal reserve bank and get credit. That can be used as the
basis of issuance of Federal reserve notes. What affect does that
operation have, or is it any different than the bank credit when you
get the issuance of Federal reserve notes? Is not that pyramiding?
Mr. NEWCOMER. I do not think, sir, it becomes a dangerous pyramiding or inflation, so long as the original note is based on a legitimate transaction. You are carrying on a perfectly legitimate transaction, and you are increasing the currency of the country as business
proves it needs. That is not an objectionable inflation.
The CHAIRMAN. DO you regard a bank credit in the same category
as a reserve note in that respect?
Mr. NEWCOMER. In its effect on prices?
The CHAIRMAN. Prices and business generally.
Mr. NEWCOMER. I presume a very large expansion of bank credit
would have some effect on raising prices, yes. But I do not know
that I quite understand you. In other words, it is one of those things
you have got to do normally and within certain limits.
The CHAIRMAN. YOU think an over issue of notes would affect
prices and business?
Mr. NEWCOMER. Undoubtedly. But they would correct themselves
by being automatically retired almost as the transaction for which
they were issued was concluded.
The CHAIRMAN. DO you think the present Federal reserve notes
are automatically retiring? If so, what is your opinion as to the
2,300,000,000 of them being outstanding at the present time?
Mr. NEWCOMER. What was the high point?
The CHAIRMAN. Three billion six hundred million or three billion
four hundred million.
Mr. NEWCOMER. I am not enough of an economist to say why they
have not gone farther down, except that I do not think this, that business is much more active in this country than many people realize,
and prices are high. How much of that is due to the expansion of
the currency and how much is due to increased business is something
you will have to get the opinion of an economist on.
Mr. WINGO. In dollars and cents the handling of a crop of the
same volume selling at $2 a bushel requires twice as much credit as
the same volume selling for $1.
Mr. NEWCOMER. I should think it would. I am not a political
economist
Mr. WINGO. And yet there would not be any inflation.
Mr. NEWCOMER. NO.
Mr. WINGO. YOU catch the point?
Mr. NEWCOMER. Yes.
Mr. WINGO. In other words, the

size and volume of credit outstanding as compared to another size at another period is not conclusive that there is inflation; the test is, are the instruments of credit
outstanding, whether they be book credits or whether they be credits
of whatever description, that are acting as legitimate exchange in-




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

struments to carry on the necessary business of the country, is not
the real test, have they actually got back of them bona fide, or, as
you bankers say, self-liquidating transactions that determine it; is
not that the real test?
Mr. NEWCOMER. I think so.
Mr. WINGO. With a large volume of notes outstanding, if there is
an increase in the volume of Federal reserve notes outstanding and
if at the same time they have been soundly and profitably issued, is
it not a case of congratulation on the expanding business of the
country, except the fear that maybe we are inflating a little bit ?
Mr. NEWCOMER. I think the business of the country has expanded
more than people realize and that there is more of a reason for those
outstanding notes than some people think.
Mr. WINGO. I find a whole lot of men whose theories for years I
have been almost worshiping as being absolutely sound, that they
get out a little glass and look at statistical figures, and because they
see an increase in volume of credit they immediately say, " There is
inflation," without trying to find out if there is an additional expansion of business and commerce that requires the additional credit.
Mr. NEWCOMER. I agree fully with you on that.
Mr. CHAIRMAN. We have been speaking of reserves and mobilization of reserves in the Federal reserve system, first, to bankers and
then to the commerce of the country. Do you believe it is the function of the Federal reserve to furnish capital in addition to the
temporary credits in order to develop and maintain a stable condition of business?
Mr. NEWCOMER. Furnish capital for business?
The CHAIRMAN. Yes.

Mr. NEWCOMER. No; I do not think so.
The CHAIRMAN. Of course, the Federal reserve system does to a
certain extent.
Mr. NEWCOMER. In what shape do you mean—in loans to the
farmers ?
The CHAIRMAN. Yes.

Mr. NEWCOMER. There have been a great deal of exceptions made
for the farmer that I better not discuss.
Mr. STRONG. What are some of these exceptions that have been
made for the farmer that you do not like to discuss ?
Mr. NEWCOMER. I am not speaking especially of the Federal reserve
system; I am speaking generally, the attempt to get special legislation for them, this immediate credit bill, for one thing, and various
propositions have been made in Congress, some of which have not
gone through, it is true, but there was a pretty strong attempt to
have some class legislation for the farmer.
• Mr. STRONG. There has always been an attempt made to get class
legislation for all classes.
Mr. NEWCOMER. There was one case that appealed to me, the intermediate credit bill, which I think was an unnecessary thing.
Mr. STRONG. Why was it unnecessary ?
Mr. NEWCOMER. DO you want to take the time for that ?
Mr. STRONG. Yes; I do.
Mr. NEWCOMER. I think

the farmer, say, was covered by the provision in the Federal reserve act which increased the length of




INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

305

time paper up to nine months, which was sufficient to take care of the
legitimate needs of the farmer.
Mr. STRONG. That was increased by the intermediate credit bill
up to nine months.
^Li\ NEWCOMER. That is a longer time; am I not right ?
Mr. WINGO. You are in error there. I do not think it is violating
any secrets when I say that the intermediate credit act possibly got
through on account of such provisions as that; in other words, the
pill was sugar coated.
Mr. STRONG. We never had a credit for the farmer beyond six
months before the intermediate credit act in the Federal reserve
system.
Mr. NEWCOMER. I think it could have been covered by giving
him nine months in the Federal reserve act, and not establishing
-a special Government agency for the purpose.
Mr. STRONG. But there was a good deal of opposition to extending
the length of credit he might have in the Federal reserve system, was
there not? That was one reason we considered putting it in another
system, because it was said that the Federal reserve system could
not extend to the farmers, loans for the length of time he needed
credit without endangering the system.
Mr. WINGO. It might interest you to know that frequently the
view of you gentlemen is wholly erroneous as to the motives that
prompt Congress. I do not think it is violating any confidence of
-either the men who are responsible in Congress or in this committee
to state that there were some gentlemen who swallowed some socialistic ideas in that bill that were advocated by the conservative financiers of the country, because as a friend of agricultural credits we
saw some practical nonsocialistic relief in the bill and around this
table we debated certain features that would never work and never
be taken advantage of, and so far that has happened.
Mr. STEAGALL. Mr. Wingo, Mr. Strong and I are supposed to be
.standing for the farmers here.
The CHAIRMAN. Why do you exempt the chairman? [Laughter.]
Mr. WINGO. The chairman's well-known standing as a dirt farmer
precludes any question of discrimination.
Mr. STEAGALL, We followed in that instance the lead of certain
men—the President of the United States, the steering committee of
the House, and some very well-known Senators who had a prominent part in the real work of drafting and shaping that legislation—
and such gentlemen as Mr. Wingo, Mr. Strong, and myself differed
from such men as Senator McLean, Senator Glass, and Senator
Pepper.
Mr. WINGO. It might interest you if you look up the files of some
of the conservative newspapers—for instance, the well-known court
organs here in the city—that WSLS a regular charter of liberty for
the farmer, and the same paper criticized a well-known railroad
minister who indulged in some horse-sense observations.
Mr. NEWCOMER. If I have said anything that reflects on any of
the distinguished Members of the Senate or House I withdraw it.
Mr. WINGO. I was just trying to give you a little enlightenment.
The conservative element of the.country pressed through Congress
the intermediate credit act that men like vo\i who throw out the




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

suggestion you did awhile ago was class legislation. The conservatives came down here, and, of course, unsophisticated country boys
like some of us thought surely it was unsound, but thought " far be
it from us " to question the wisdom of their philosophy.
The CHAIRMAN. The point I gained from what you have said that
you did not believe it is the function of the Federal reserve system
in addition to furnishing temporary credit to also furnish capital,,
etc., to maintain stable business.
Mr. NEWCOMER. N O ; I did
The CHAIRMAN. We have

not.

taken you far afield. Will you please
proceed with the balance of your statement?
Mr. NEWCOMER. I have disposed of one of my six points, Mr.
Wingo.
Mr. WINGO. I thought you had 14 points.
Mr. NEWCOMER. I do not belong in that category.
Mr. JSTEAGALL. I want to say right there, seriously, in connection
with what we have been saying lightly, that legislation passed here
at the last session of Congress was put together overnight at the
wind-up to take care of the drift and developments that were not
altogether removed from political considerations. But I have always
thought and was especially impressed with the fact in connection
with the history of that legislation that if the Federal Reserve
Board and the conservative bankers would welcome criticism and
attempt to deal with it wisely by liberal and thoughtful and wellworked-out legislation instead of stating their views autocratically
and winding up in the rush, we would act more wisely and get along
better in the long run. The legislation we passed at the closing
hours of the session was whipped into shape overnight because it
was thought that Congress had to do something before we adjourned.
Mr. STRONG. It was whipped into shape during a good many days
and nights.
Mr. STEAGALL. Not so many.
Mr. STRONG. I think we spent several weeks considering it and
whipping it into shape.
Mr. WINGO. Here is a question I would like to have answered for
my information, and I think there is another member of the committee that would like to have your views. You awhile ago suggested
that there was not any necessity for this intermediate credit act, and
there was something in your suggestion that the needs of the farmers
were already taken care of by the Federal reserve system. Do you
think that the intermediate-credit needs of the American farmer represented by their intermediate-credit paper are probably instruments
for the portfolios of the Federal reserve banks? That is the logic of
your statement awhile ago.
Mr. NEWCOMER. Yes.
The CHAIRMAN. That,

of course, is taking into consideration the
fact that some of your paper might be determined eligible to be used
as security for the issuance of Federal reserve notes ?
Mr. NEWCOMER. AS I understand it, the farmer's paper running
nine months payable out of his crop was, I should think, as selfliquidating as the average merchant's paper payable out of his merchandise.
.




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307

Mr. WINGO. There has been an arbitrary classification, not by me,
but by some of the more conservative Members of Congress, that
intermediate-credit paper is what might be classed one to three year
farm paper. In other words, do you believe that one to three year
farm paper is proper for Federal reserve portfolio ?
Mr. NEWCOMER. For three years?
Mr. WINGO. On to three years.
Mr. NEWCOMER. NO, I think not.
Mr. WINGO. As a banker, how would you take care of it?
Mr. NEWCOMER. I S not that taken care of by the land banks ?
Mr. WINGO. I am not talking about land credits; I am talking
about intermediate personal credit.
Mr. NEWCOMER. If it runs for three years that is not a personal
credit; would it not be a land credit?
Mr. WINGO. The farm-loan system, if conducted soundly, is supposed to take care of capital for the purchase of land.
Mr. NEWCOMER. Anything running a year or more, should not
that be taken care of in the land bank?
Mr. WINGO. Would you put into the Federal farm-loan system
cattle feeders' paper?
Mr. NEWCOMER. I am not familiar with those things.
Mr. WINGO. The point that I want to get out is, possibly you were
a little too sweeping in your statement.
Mr. NEWCOMER. It is possible.
Mr. WINGO. That the credit needs of the farmer be taken care of
in the manner you suggest; and you are liable to be called one of the
demagogues that want the Federal reserve system to take care of the
farmer. I was trying to give you an opportunity to retreat from
your position. Let us be frank. The theory of the Federal reserve
system is that into the portfolios of these banks should come nothing
but self-liquidating, prime commercial paper, including what is
called paper of commerce, industry, and agriculture—the shortterm, self-liquidating paper?
Mr. NEWCOMER. Yes.

Mr. WINGO. That is the theory of it. Now, the investment capital
that investment bankers take care of from industry does not go into
the Federal reserve system?
Mr. NEWCOMER. NO.

Mr. WINGO. The capital requirements of the farmer for purchasing land or for permanent improvements are comparable to the needs
of the railroad for permanent equipment, such as roadbeds or building or extensions. That requirement is supposed to be taken care of
by Federal land banks. What would you do with that other class
of credits for which no machinery has been created ? I am talking
about prior to the passage of the intermediate credit act. Would you
leave it without the same facilities that the other class of paper in
the country has? Would it be class legislation to give to that character of paper the Government-supervised machinery that was safe
and sound to meet its needs just like you have for the commercial
needs of the Nation? Is that class legislation to advocate that?
Mr. NEWCOMER. What does that paper consist of ? I did not think
even cattle paper ran such a long time.




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Mr. WINGO. Cattle paper runs from one to three years. In other
words, the thought I am trying to get at: It is called class legislation by some gentlemen who are just as conservative as you are,
who say that," Now, here, by the establishment of our National banking and the State commercial banking system, the Government,
whether it be Federal or State Government, has recognized the public interest in that matter and has given them a public charter and
subjected them to public supervision." But you have given to those
people a Government controlled and supervised agency that meets
their needs in a sound manner in establishing the land-bank system,
you are attempting to meet the needs of the farmer on his capital
land credit, and yet there are millions of paper each year that
are safe and sound that are known as intermediate farm-credit
paper that runs from nine months to three years. Where is there any
credit agency created by either State or Federal Government that is
comparable to either?
Mr. NEWCOMER. I should think the land bank could be extended to
take care of that, as between those two bodies, that were there a little
extension of the Federal reserve part that covers capital and things
self-liquidating, and a little broadening of the other to take care of
the other kind, a mortgage on land, or stock, I did not see why that
could not be covered.
Mr. WINGO. YOU would not, then, as a practical, conservative
banker, think it was class legislation if Congress contented itself
with providing a similar agency or class of machinery for this class
of intermediate credit paper that I have mentioned that it has for
all other classes of paper? That would not be class legislation; it
would be simply equality of payment, would it not ?
Mr. NEWCOMER. That is all.
The CHAIRMAN". Just this one additional thought: You were
speaking of nonmembership of State banks and trust companies and
the question of compulsory entry into the system of the national
banks. Now that the system has been established and has been
well under way, do you think compulsory membership on the part
of national banks is necessary to the successful operation of the
Federal reserve system?
Mr. NEWCOMER. No; I do not think it is. I do not think any
national bank that is in would want to withdraw. Again I say I
am not familiar with the small bank's position. I may misrepresent
them very much. Take the small bank in Missouri or anywhere or
any place else, I do not know how it looks at it. I only come in
contact with the city banks, and I think they are pleased with it and
would stay in.
Mr. WINGO. AS a matter of fact, the city banker is a very fine
credit agency. There is nothing comparable to it in any other
country on earth, is there ?
Mr. NEWCOMER. NO.
The CHAIRMAN. IS it

your observation that the criticisms of the
system which come to your attention deal with the fundamentals or
the administration of the Federal reserve act?
Mr. NEWXOMER. With the administration mostly.
The CHAIRMAN. YOU do not think they are fundamental at all ?
Mr. NEWCOMER. NO, sir. I think point No. 2 can be disposed of
very quickly, unless some of you gentlemen want to make it longer.




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309

The CHAIRMAN. All right; go ahead.
Mr. NEWCOMER. There is the suggestion I made of loss of interest
on reserve balances. I frankly do not see how that can be met. I
have talked with some of the larger financiers and best bankers of
the country, and they seem to be agreed it would be wrong or bad
policy to allow interest on reserve balances. I do not know that I
fully followed their argument, but it seemed to me it has been very
much opposed, and I can only pass it over as one of the reasons for
staying out without offering any suggestion.
The CHAIRMAN. It has been suggested that inasmuch as most oi
the Federal reserve banks simply keep Federal reserve requirements
with the Federal reserve system, that if the Federal reserve system
would pay interest on the excess reserves it might induce many men
to go in.
Mr. NEWCOMER. The diametrically opposite suggestion has been
made. Under your plan, when money was very easy and the banks
had no use for it they would flood the Federal reserve banks, and that
the proper thing is to allow 2 per cent on the legal balance alone and
refuse anything on the excess.
Mr. WINGO. Do not some of the gentlemen overlook the fact that
if you were to flood the Federal reserve banks with these funds that
as practical men they would go into the open market and use these
funds and compete with you in that field ?
Mr. NEWCOMER. On this question of excess reserve. I think possibly to keep their balances up to the legal reserve with no allowance
after that would be more conservative than the other.
Mr. STRONG. IS the Federal reserve system earning enough money
to pay on the legal reserves ?
Mr. NEWCOMER. I have not gone into the figures.
The CHAIRMAN. YOU spoke of the main advantage in membership
that the Federal reserve was to that proposition of lowering the legal
reserve requirements ?
Mr. NEWCOMER. Yes.
The CHAIRMAN. DO you

think that lowering of the legal reserve
requirement would compensate for the loss which the member banks
might sustain by the loss of interest on their reserve deposits %
Mr. NEWCOMER. It does in our case, sir. But the trouble comes;
it does not offset it in the case of State banks, where the State legal
reserve is not as high.
The CHAIRMAN. Many of the State requirements in regard to
reserves are much more liberal than was the Federal reserve system, I
would say.
Mr. NEWCOMER. Yes; and to them it is a loss.
The CHAIRMAN. The Federal reserve requirements of States forbid
the carrying of float. They compel banks to take credit immediately
for handling of checks, not taking into account the time necessary for
the return of those checks. So it is not as liquid reserve as it is in
the Federal reserve system.
Mr. NEWCOMER. I think it is objectionable reserve, but I am simply
coming to the point that it does mean to the State chartered bank this
sacrifice to come in.
The CHAIRMAN. That is one of the big objections that you find
among State banks and trust companies to coming into the system?
Mr. NEWCOMER. That is one of the objections.




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INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM

Mr. WINGO. They balance the benefits and the burdens, and they
say the burdens outweigh the benefits.
Mr. NEWCOMER. Yes, sir. The lack of eligible paper you have discussed over and over. You have to have those; you can not lower the
requirements. It simply puts into the record the reasons they have
given. It is not worth while to comment on them.
The CHAIRMAN. Mr. Newcomer, might I ask right there in connection with that: Another objection that is advanced by many
bankers is the fact that they are not permitted to carry vault cash as
legal reserve. Is there not a distinction between what is meant by
legal reserves on deposit with the Federal reserve system and vault
cash ? There is no question but what cash is a reserve, but it is not
the legal reserve that is intended u