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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 (1) Member banks, June 30, 1923: National banks State banks and trust companies Total (2) Eligible nonmember banks June 30, 1922: Banks eligible prior to March 3, 1923... Banks made eligible by Agricultural Credits Act Total .. ^Estimated. . Capital 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 1,998, 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: National banks State banks, stock savings banks, and loan and trust companies: Members Nonmembers Mutual savings banks Private banks All banks 107679—26—PT 1 2 Per cent of cash in vault to demand and time deposits Demand and time deposits Cash in vault $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, 318,000 829,892,000 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 14 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. 16 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- 18 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 20 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. 22 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. 24 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 26 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. 28 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 107679—20—PT 1 3 30 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. 32 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. 34 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 amT going to tell you why—because I think it is fundamental. I know 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 36 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. 107679—26—PT 1 4 38 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 40 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 42 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, 44 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. 46 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- 48 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. 50 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 58 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- 60 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 $15,000, about 100 of them being in Tennessee and the balance of 48 scattered throughout Alabama, Mississippi, and Louisiana. 107679—26—PT 1 5 62 INQUIRY 01$ 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. 64 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 forcer the banks to join. Gradually they are beginning to see the necessity of the S3 stem. 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. 66 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 68 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 70- 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. 72 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 74 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. INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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. 76 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 INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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. 78 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. 80 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- 82 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 INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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 84 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 86 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 OiST MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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. 88 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 90 INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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- INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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 92 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- INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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 7 94 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. INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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 96 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. INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 97 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 S3 c all Number of member banks accommodated during— 1920 1921 Number not borrowing from Federal reserve bank dur- % Francisco Zj o o PQ 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 1914 (from N o v . 16) 1915. 1916 1917 1918 1919. 1920. 1921. 1922. 1923 (to J u n e 30) Total 1 2 Salaries 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 OJST MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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, 399 495,300 342 "4," 169," 042 1 4,664, 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 inv excess of gold available as collateral security or as reserve for notes nfte 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 averagefiguresof— 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 members, have been reserve actually on reserve reserve 2 notes paid deposits on deposits 3 paid 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 averagefiguresof— Gold Federal reserve bank available against Federal reserve1 notes 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 members, have been reserve actually oninterest reserve reserve 2 paid deposits notes on deposits paid 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— 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 Sept. 26, 1923 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 O - p1 . 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 82.1 82.8 79.4 80.7 53.7 53.3 80.5 49.9 11,950 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 ? 122 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, 124 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 9 126 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 128 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. 130 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 131 132 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 INQUIRY 01ST MEMBERSHIP IN FEDERAL RESERVE SYSTEM 133 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 10 134 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 INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 135 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 136 INQUIRY OX MEMBERSHIP IX FEDERAL RESERVE SYSTEM 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 INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 137 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 138 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 INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 139 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 140 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 INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 141 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- 142 INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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 INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 143 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- 144 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 146 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, 148 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 INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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. 150 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 OJST MEMBERSHIP Us FEDERAL RESERVE SYSTEM 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 152 INQUIRY OX MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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 usingr the expression " exercising certain powers as might be necessary ' 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 INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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 ? 154 INQUIRY OX MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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. INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 155 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 156 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 INQUIRY OK MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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 11 158 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 160 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 162 INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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. INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 163 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. 164 INQUIRY ON MEMBERSHIP IX FEDERAL RESERVE SYSTEM 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 INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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 12 166 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 168 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 170 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 172 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. 174 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 176 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. INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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, 178 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. 180 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. INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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 182 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 184 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 186 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 13 189 190 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 192 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. 194 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 Thad 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 ber capital omitted) (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 1, 210, 535 145, 686 230,880 82, 230 184,121 24,092 78,490 424,722 49, 214 130, 580 4,309 165,950 36, 947 10, 787 80,900 940 1,303, 667 118,316 325, 82,160 61,905 8,216 937, 216 1,157,060 161,120 9, 743, 566 358,638 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 Num(000 surplus (000 ber capital capital ber ber (000 omitted) (000 omitted) (000 omitted) omitted) omitted) Capital and Num- surplus Average Resources (000 ber capital omitted) (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 (000 Surplus Number Capital omitomitted) (000ted) 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 (000 (000 omitNumber Capital omitted) 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 107679—26—PT 1 15 222 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. 225 226 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 toT come East. We also tried to get Mr. Wade, of St. Louis, so that w e 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 228 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 107679—26—PT 1 16 230 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. 232 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. • 234 INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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 INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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 236 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? INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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. 238 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- 240 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. 242 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. INQUIRY ON MEMBERSHIP IK FEDERAL RESERVE SYSTEM 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- 244 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 rates and by the presentation of gold to pay them ? by interest 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. 246 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, 248 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. 250 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. 252 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 casen of the small banks, the largest contingent in number, that is the e tire 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 17 254 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 INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 255 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. 256 INQUIRY OK MEMBERSHIP IX FEDERAL RESERVE SYSTEM 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. ton INQUIRY OK MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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 258 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. INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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. 260 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? 107679—26—PT 1 18 262 INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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? INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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. 264 INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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 INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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— 266 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 INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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. 268 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. 270 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 INQUIRY ON MEMBERSHIP IN ( FEDERAL RESERVE SYSTEM 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 272 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. INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM' 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 somethingg is done for the Federal Reserve Board 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, 274 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. INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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- 276 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. 278 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. 280 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 282 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 284 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. INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 285 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. 107679—26—PT 1 19 N 286 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 •INQUIRY OX MEMBERSHIP IX FEDERAL RESERVE SYSTEM 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 beT heard first. If it is agreeable to the reserve city bankers, that w ill 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 289 290 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, and1 what changes would you make to insure membership of State 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 292 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 107679—26—PT 1 20 294 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 INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 295 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, 296 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. INQUIRY ON MEMBEESHIP TN FEDERAL RESERVE SYSTEM 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. 298 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 INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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? 300 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. 302 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. INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 303 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- 304 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 306 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. . INQUIRY ON MEMBERSHIP IN FEDERAL RESERVE SYSTEM 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. 308 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
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