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Operation of the National and Federal Reserve
Banking Systems

HEARINGS
BEFORE THE

COMMITTEE ON BANKING AND CURRENCY
UNITED STATES SENATE
SEVEXTY-SECOXI) CONGRESS
FIIIST SKSSION
ON

S. 4115
A

BILL

TO

PROVIDE

FOR

THE

SAFER

AND

MORE

EFFECTIVE USE OF T H E ASSETS OF FEDERAL RESERVE
BANKS AND OF NATIONAL BANKING ASSOCIATIONS, TO
REGULATE INTERBANK CONTROL, TO PREVENT

THE

UNDUE DIVERSION OF FUNDS INTO SPECULATIVE
OPERATIONS, A N D FOR OTHER PURPOSES

PART 1
MARCH 23 TO 25, 1932

Printed for the U J of the Committee on Banking and Currency
M

UNITED STATES
GOVERNMENT HUNTING OFFICE

inn:




WASHINGTON : 1032

COMMITTEE ON BANKING AND CURRENCY
PETER NOR BECK, South Dakota, Chairman
SMITH W. BROOKHART, Iowa.
DUNCAN U. FLETCHER, Florida.
PHILLIPS LEE GOLDSBOROUGH, Maryland. CARTER GLASS, Virginia.
JOHN G. TOWNSEND, JR., Delaware.
ROBERT F. WAGNER, New York.
FREDERIC C. WALCOTT, Connecticut.
ALBEN W. BARKLEY, Kentucky.
JOHN J. BLAINE, Wisconsin.
ROBERT J. BULKLEY, Ohio.
ROBERT D. CAREY, Wyoming.
CAMERON MORRISON, North Carolina.
JAMES E. WATSON, Indiana.
THOMAS P. GORE, Oklahoma.
JAMES COUZENS, Michigan.
EDWARD P. COSTIGAN, Colorado.
FREDERICK STEIWER, Oregon.
CORDELL HULL, Tennessee.




JULIAN W . BLOUNT,

Clerk

C O N T E N T S

Statement of—
Allendoerfer, G. W., vice president First National Bank of Kansas
City, Mo
Edwards, George W., New York City
Haas, Harry J., president American Bankers' Association, vice president First National Bank, Philadelphia, Pa
Hawes, Richard S., president St. Louis Clearing House Association ;
senior vice president First National Bank of St. Louis, St. Louis,
Mo
Johnston, Percy H., president Chemical Bank & Trust Co.; chairman
banking and currency committee of Merchants Association of New
York, New York, N. Y
Lord, Robert O., president Guardian Detroit Union Group and Guardian National Bank of Commerce, Detroit, Mich
Mills, Wilson W., Detroit, Mich., chairman of the board of directors
of the First Wayne National Bank of Detroit
Pope, Allan M., president Investment Bankers' Association of America, Boston, Mass
Wolfe, Edmund S., president First National Bank, Bridgeport, Conn.




m

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200
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193

OPERATION OF THE NATIONAL AND FEDERAL RE8ERYE
BANKING SYSTEMS
W E D N E S D A Y , M A R C H 23, 1932

UXITED STATES SENATE.
COMMITTEE ON BANKING AND CURRENCY,
Washington,
D.

C.

The committee met, pursuant to call at 10.30 o'clock a. m. in its
committee room in the Senate Office Building, Senator Peter Norbeck. presiding.
Present: Senators Norbeck (chairman), Brookhart. Goldsborough,
Townsend, Walcott, Couzens, Fletcher, Glass, Barkley, Bulkley,
Gore, and Costigan.
The CHAIRMAN. The committee will come to order. We have
met this morning for the purpose of a hearing on S. 4115, a bill
introduced in the Senate on March 14 by Senator Glass, which bill
will be made a part of the record:
[S. 4115, Seventy-second Congress, first session]
A BILL To provide for the safer and more effective use of the assets of Federal reserve
banks and of national banking associations, to regulate interbank control, to prevent
the undue diversion of funds into speculative operations, and for other purposes

lie it aiaeted hy the Senate and House of Representative# of the United
states of America in Congrc** assembled, Tliat the short title of this act shall
he the " Banking act of 1032."
SEC. 2. As used in this act—
(:i) The terms "hank," "national bank,** "national hanking association/'
" member bank."9 " board/' " district," and " reserve bank" shall have the
meanings assigned to them in section 1 of the Federal reserve act, as amended.
<b) The term "affiliate" includes a trust company, a finance company,
securities company, discount or acceptance company, investment trust, or other
similar institution, or a corporation—
(1) Of which a national bank or member bank, directly or indirectly, owns
or controls either a majority of the voting shares or more than 50 per centum
of the number of shares voted for the election of its directors, trustees, or other
managing officers at the preceding annual meeting, or controls in any manner
the election of a majority of its directors, trustees, or other managing officers: or
(2) Of which control is held, directly or indirectly, through stock ownership
or in any other manner, by the shareholders of a national bank or member bank
who own or control either a majority of the shares of such bank or more than
50 per centum of the number of shares voted for the election of directors of
such bank at the preceding annual meeting, or by trustees for the benefit of the
shareholders of any such bank; or
(3) Of which either a majority of the members of its executive committee
or a majority of its directors, trustees, or other managing officers are directors
of a national bank or member bank; or
(4) Which owns or controls, directly or indirectly, either a majority of the
shares of capital stock of a national bank or member bank or more than 50
per centum of the number of shares voted for the election of directors of such




1

3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

bank at tlic preceding annual meeting, or controls in any manner the election of
a majority of the directors of such bank; or
#
(5) For the benefit of whose shareholders or members all or substantially
all the capital stock of a national bank or member bank is held by trustees.
SEO. 3. The fourth paragraph after paragraph " Eighth " of section 4 of the
Federal reserve act, as amended, is amended by inserting before the period at
the end thereof a comma and the following: " but only if such discounts, advancements, and accommodations are intended for the accommodation of commerce, industry, and agriculture. The Federal Reserve Board may prescribe
regulations further defining and regulating the use of the credit facilities of the
Federal reserve system within the limitations of this act. Such facilities shall
not be extended to member banks for the purpose of making or carrying loans
covering investments, or facilitating the carrying of, or trading in, stocks,
bonds, or other investment securities other than obligations of the Government
of the United States. Each Federal reserve bank shall keep itself informed
of the loan and investment practices of its member banks and the uses made
by them of the credit facilities of the Federal reserve system. The chairman
of each Federal reserve bank shall report to the Federal Reserve Board any
undue, unauthorized, or improper use of such credit facilities, together with
his recommendation for remedial action in the matter. The Federal Reserve
Board may, in its discretion, suspend for not more than one year from the
use of the credit facilities of the Federal reserve system any member bank
making undue, unauthorized, or improper use of such facilities."
• SEO. 4. The twenty-fifth paragraph of section 4 of the Federal reserve act,
as amended, is amended by inserting before the period at the end thereof a
colon and the following: "Provided, That no such vote shall be cast by or on
behalf of any member bank, if a majority of its stock shall be held or owned
by any affiliate, or other corporation, which is in fact one of a chain, or of a
jointly controlled group of banks, controlled by an individual, or if its stock
is in the hands of a voting trust, or if in any other way such bank is prevented from acting subject to the uncontrolled decision of the general body
of stockholders of such bank locally resident in the town or city in which such
bank is established."
SEC. 5.' The first paragraph of section 7 of the Federal reserve act, as
amended, is amended to read as follows:
"After all necessary expenses of a Federal reserve bank shall have been paid
or provided for, and provision shall have been made, when necessary, for restoring the surplus of the bank to its position as of December 31, 1931, the stockholders shall be entitled to receive an annual dividend of 6 per centum on the
paid-in capital stock, which dividend shall be cumulative. After the aforesaid
dividend claims have been fully met, the net earnings, beginning with the net
earnings for the year ending December 31, 1932, shall be paid to the Federal
Liquidating Corporation provided for in section 12B of this act and shall be
used by the said corporation for carrying out the purposes of such section."
SEC. 6. Section 9 of the Federal reserve act, as amended, is further amended
by inserting between the fifth and sixth paragraphs thereof the following new
paragraph:
* Each affiliate of a bank admitted to membership under authority of this
section shall make and furnish to the president of the bank, for transmission
by him to the Federal Reserve Board, not less than three reports during each
year. Such reports shall be in such form as the Federal Reserve Board mav
prescribe, shall be verified by the oath or affirmation of the president or such
other officer as may be designated by the board of directors of such affiliate
to verify sucli reports, and shall cover the condition of such affiliate on dates
identical with those fixed by the Federal Reserve Board for reports of the
condition of the member bank. Each such report of an affiliate shall be transmitted to the Federal Reserve Board at the same time as the corresponding
report of the member bank, except that the Federal Reserve Board may. in its
discretion, extend such time for good cause shown. Each such report shall
exhibit in detail and under appropriate heads, the holdings of the affiliate in
question, their cost and present value, the expenses of operation for the preceding year, and the. balance sheet of the enterprise. It shall be the duty of the
president of such member bank to satisfy himself as to the correctness of the
report before transmitting the same to the Federal Reserve Board Any
affiliate which fails to make and furnish any report required of it under this
section, and any member bank whose president fails to transmit, as required



3.6 NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
by this section, any such report furnished to him, shall be subject to a penalty
of $100 for each day during which such failure continues." .
SEC. 7. (a) The first paragraph of section 10 of the Federal reserve act, as
amended, is amended to read as follows:
"A Federal Reserve Board is hereby created which shall consist of seven
members, including the Comptroller of the Currency, who shall be a member
ex officio, and six members appointed by the President of the United States,
by and with the advice and consent of the Senate. In selecting the six appointive members of the Federal Reserve Board, not more than one of whom
shall be selected from any one Federal reserve district, the President shall
have due regard to a fair representation of thefinancial,agricultural, industrial, and commercial interests, and geographical divisions of the country, and
at least two of such members shall be persons of tested banking experience.
The six members of the Federal Reserve Board appointed by the President
and confirmed as aforesaid shall devote their entire time to the business of
the Federal Reserve Board and shall each receive an annual salary of $12,000,
payable monthly, together with actual necessary traveling expenses, and the
Comptroller of the Currency, as ex oflicio member of the Federal Reserve
Board, shall, in addition to the salary now paid him as Comptroller of the
Currency, receive the sum of $7,000 annually for his services as a member of
said board."
(b) The second paragraph of section 10 of the Federal reserve act, as
amended, is amended to read as follows:
" The Comptroller of the Currency shall be ineligible during the time he is in
office and for two years thereafter to hold any office, position, or employment in
any member bank. The appointive members of the Federal Reserve Board shall
be ineligible during the time they are in office and for two years thereafter to
hold any office, position, or employment in any member bank, except that this
restriction shall not apply to a member who has served the full term for which
he was appointed. Upon the expiration of the term of any member of the Federal Reserve Board in office when this paragraph as amended takes effect, the
President shall fix the term of the successor to such member at not to exceed
twelve years, as designated by the President at the time of nomination, but in
such manner as to provide for the expiration of the term of not more than one
member in any two-year period, and thereafter each member shall hold office for
a term of twelve years. Of the six persons thus appointed, one shall be designated by the President as governor and one as vice governor of the Federal
Reserve Board. The governor of the Federal Reserve Board, subject to its supervision, shall be its active executive officer. Each member of the Federal Reserve
Board shall withinfifteendays after notice of appointment make and subscribe
to the oath of office."
(c) The fourth paragraph of section 10 of the Federal reserve act. as amended,
is amended to read as follows:
" No member of the Federal Reserve Board shall be an officer or director of
any bank, banking institution, trust company, or Federal reserve bank or hold
stock in any bank, banking institution, or trust company; and before entering
upon his duties as a member of the Federal Reserve Board he shall certify under
oath that he has complied with this requirement and such certification shall be
filed with the secretary of the board. Whenever a vacancy shall occur, other
than by expiration of term, among the six members of the Federal Reserve Board
appointed by the President as above provided, a successor shall be appointed by
the President, with the advice and consent of the Senate, to fill such vacancy,
and when appointed he shall hold office for the unexpired term of the member
whose place he is selected to fill."
SEC. S. Subsection (IN) of section 11 of the Federal reserve act, as amended,
is amended to read as follows:
"(m) Upon the affirmative vote of not less than six of its members the Federal
Reserve Board shall have power to fix from time to time for any member bank
the percentage of the capital and surplus of such bank which may be represented
by loans protected by collateral security. Any percentage sofixedby the Federal
Reserve Board shall be subject to change from time to time upon ten days' notice,
and it shall be the duty of the board to establish such percentages with a view to
preventing the undue use of bank loans for the speculative carrying of securities.
The Federal Reserve Board shall have power to direct any member bank to
refrain from further increase of its security loans for any period up to one year,
Any violation of tlii< subsection may be penalized by suspension of all rediscount
privileges at Federal reserve banks."




3.6

NATIONAL AND FEDERALRESERVEBANKING SYSTEMS

SEC. 9. No national banking association and no member bank shall (1) make
any loan or any extension of credit to any affiliate organized and existing for
the purpose of buying and selling stocks, bonds, real estate, or real-estate mortgages, or for the purpose of holding title to any such property, or (2) invest any
of its funds in the capital stock, bonds, or other obligations of any such
affiliate, or (3) accept the capital stock, bonds, or other obligations of any
such affiliate as collateral security to protect loans made to any person, partnership, or corporation, if the aggregate amount of such loans, extensions of
credit, investments, and acceptances of collateral security in the case of any
such affiliate, will exceed 10 per centum of the outstanding capital stock
and surplus of such national banking association or member bank.
Each loan made to an affiliate within the foregoing limitations shall be
secured by stocks or bonds listed on a stock exchange which have an ascertained market value at the time of making the loan of at least 20 per centum
more than the amount of such loan, or shall be secured by notes, drafts, bills
of exchange or acceptances, eligible for rediscount at Federal reserve banks,
or by bonds or other obligations eligible for investment by savings banks in
the State in which the association or member bank making the loan is located.
A loan to a director, officer, clerk, or other employee of any such affiliate shall
be deemed a loan to the affiliate to the extent that the proceeds of such loan
are transferred to the affiliate.
SEC. 10. The Federal reserve act, as amended, is amended by inserting
between sections 12 and 13 thereof the following new sections:
"SEC. 12A. (a) There is hereby created a Federal Open Market Committee
(hereinafter referred to as the "committee"), which shall consist of the
governor of the Federal Reserve Board and as many additional members as
there are Federal reserve districts. Each Federal reserve bank by its board
of directors shall annually select from among the officers of the said bank one
member of said committee. The meetings of said committee shall be held at
Washington, District of Columbia, at least four times each year. Additional
meetings may be held elsewhere upon the call of the Federal Reserve Board,
either upon the motion of the board or at the request of any three members
of the committee. In the absence or inability of the governor of the Federal
Reserve Board to act at such meetings the board shall designate the vice
governor or some other member of the board to act in place of the governor.
"(b) No Federal reserve bank shall engage in open market operations described in section 14 of this act except after approval and authorization by
the committee. The committee shall discuss, adopt, and transmit to the several
Federal reserve banks resolutions relating to all matters affecting the open
market transactions of such banks and to all matters affecting the relations of
the Federal reserve system with foreign central or other banks. Every such
resolution shall be reported within three days to the Federal Reserve Board
and shall be subject to its approval. The board shall annually include in its
report to the Speaker of the House of Representatives a review of the decisions
of the committee for the preceding year and an explanation of the reasons for
such decisions and the results thereof, so far as they may be ascertained.
"(c) The time, character, and volume of purchases and sales in the open
market shall be governed with a view to accommodating commerce and business and with regard to their bearing upon the general credit situation of the
country. Such purchases and sales shall include all paper described in section
14 of this act as eligible for open market operations.
"(d) The conclusions and recommendations of the committee when approved
by the Federal Reserve Board shall be submitted to each Federal reserve bank
for determination whether it will participate in tiny purchases or sales recommended. If any Federal reserve bank shall decide not to participate in the
open market operations so recommended, it shall file with the chairman of the
committee within thirty days a notice of its decision.
" SEC. 12B. (a) There is hereby created a Federal Liquidating Corporation
(hereinafter referred to as the • corporation'), whose duty it shall be to purchase, hold, and liquidate as hereinafter provided, the assets of banks which
have been ordered closed by the Comptroller of the Currency or by vote of their
directors, and the assets of member banks which have been ordered closed by
the appropriate State authorities.
"(b) The Comptroller of the Currency and the members of the Federal Open
Market Committee created by section 12A of this act shall constitute the directors of the corporation. The Comptroller of the Currency shall be the chairman
of the board of directors of the corporation.




3.6 NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
44(c) The capital stock of the corporation shall be divided into shares of
$100 each. Certificates of stock of the corporation shall be of two classes,
class A and class B. Class A stock shall be held by member bunks only and
shall be entitled to prior payment of dividends out of net earnings, to the extent
of 30 per centum of such net earnings in any one year, after payment of all
expenses of the corporation, but such stock shall have no vote at meetings of
stockholders. Class B stock shall be held by Federal reserve banks only and
shall not be entitled to the payment of dividends. Every Federal reserve bank
shall subscribe to shares of class B stock in the corporation to an amount equal
to one-fourth of the surplus of such bank on December 31, 1931. and its
subscriptions shall be accompanied by a certified check payable to the Comptroller of the Currency in an amount equal to one-half of 1 per centum of such
subscription. The remainder of such subscription shall be subject to call from
time to time by the board of directors upon ninety days' notice and annual
subscriptions to such stock shall be made by each such bank in an amount
equal to one-fourth of the annual increase of such surplus.
"(d) Every member bank shall subscribe to the class A capital stock of the
corporation in an amount equal to one-half of 1 per centum of its total net
outstanding time and demand deposits on the last call date in the year 1931.
One-half of such subscription shall be paid in full within ninety days after
receipt of notice from the chairman of the board of directors of the corporation;
and the remainder of such subscription shall be subject to call from time to
time by the board of directors of the corporation.
"(e) The amount of the outstanding class A stock of the corporation held by
member banks shall be annually adjusted as hereinafter provided as member
banks increase their time and demand deposits or as additional banks become
members, and such stock may be decreased in amount as member banks reduce
their time and demand deposits or cease to be members. Shares of the capital
stock of the corporation owned by member banks shall not be transferred or
hypothecated. When a member bank increases its time and demand deposits,
it shall at the beginning of each calendar year subscribe for an additional
amount of capital stock of the corporation equal to one-half of 1 per centum
of such increase in deposits. One-half of the amount of such additional stock
shall be paid for at the time of the subscription therefor and the balance shall
be subject to call by the board of directors of the corporation. A bank applying
for stock in the corporation at any time after the organization thereof shall be
required to subscribe for an amount of class A capital stock equal to one-half
of 1 per centum of the time and demand deposits of the applicant bank, paying
therefor its par value plus one-half of 1 per centum a month from the period of
the last dividend on the class A stock of the corporation. When the capital
stock of the corporation shall have been increased, either on account of the
increase of the time and demand dep< sits of member banks or on account of
the increase in the number of member hanks the board of directors of the corporation shall cause to be executed a certificate to the Comptroller of the
Currency showing the increase in capital stock of the corporation, the amount
paid in, and by whom paid. When a member bank reduces its time and demand
deposits it shall surrender, not later than the 1st day of January thereafter, a
proportionate amount of its holdings in the capital stock of the corporation, and
when a member bank voluntarily liquidates it shall surrender all its holdings
of the capital stock of the corporation and be released from its stock subscription
not previously called. The shares so surrendered shall be canceled and the
member bank shall receive in payment therefor, under regulations to be prescribed by the Federal Reserve Board, a sum equal to its cash-paid subscriptions
on the shares surrendered and its proportionate share of earnings not to exceed
one-half of 1 per centum a month, from the period of the last dividend on
such stock, but not above the book value of such earnings, less any liability of
such member bank to the corporation.
" ( f ) If any member bank shall be declared insolvent, the stock held by it in
the corporation shall be canceled, without impairment of the liability of such
bank, and all cash-paid subscriptions on such stock, with its proportionate
share of earnings not to exceed one-half of 1 per centum per month from the
period of last dividend on such stock but not above the book value of such
earnings, shall be first applied to all debts of the insolvent bank to the corporation, and the balance, if any, shall be paid to the receiver of the insolvent
bank. Whenever the capital stock of the corporation is reduced, either on account of a reduction in time and demand deposits of any member bank or on
account of the liquidation or insolvency of such bank, the board of directors




3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

shall cause to he executed a certificate to the Comptroller of the Currency
showing such reduction of capital stock and the amount repaid to such bank.
«( g ) When the minimum amount of class A and class B capital stock required
by this act shall have been subscribed and paid for by such banks, the Comptroller shall designate five reserve banks to execute a certificate of organization,
and thereupon the banks so designated shall, under their seals, make an
organization certificate which shall specifically state the name of the corporation
and the city and State in which the corporation is to be located, the amount
of capital stock and the number of shares into which the same is divided, the
name and place of doing business of each bank executing such certificate and
of all banks which have subscribed to the capital stock of such corporation,
the number of shares subscribed by each such bank, and the fact that the
certificate is made to enable the banks executing the same and all banks which
have subscribed or may thereafter subscribe to such capital stock to avail
themselves of the advantages of this section.
"(h) Such organization certificate shall be acknowledged before a judge of
a court of record or a notary public and shall, together with the acknowledgment thereof authenticated by the seal of such court or notary public, be
transmitted to the Comptroller of the Currency, who shall file, record, and
carefully preserve the same in his office.
- "(i) Upon the filing of such certificate with the Comptroller of the Currency as aforesaid, the said corporation shall become a body corporate and as
such shall have power—
" First To adopt and use a corporate seal.
" Second. To have succession for n period of twenty years from its organization unless it is sooner dissolved by an act of Congress, or unless its franchise becomes forfeited by some violation of law.
" Third. To make contracts.
"Fourth. To sue and be sued, complain and defend, in any court of law or
equity.
" Fifth. To appoint by its board of directors such officers and employees as
are not otherwise provided for in this section, to define their duties, require
bonds of them and fix the penalty thereof, and to dismiss at pleasure such
officers or employees.
" Sixth. To prescribe by its board of directors, by-laws not inconsistent with
law, regulating the manner in which its general business may be conducted,
and the privileges granted to it by law may be exercised and enjoyed.
" Seventh. To exercise by its board of directors, or duly authorized officers or
agents, all powers specifically granted by the provisions of this section and
such incidental powers as shall be necessary to carry out the powers so granted.
" ( j ) The board of directors shall administer the affairs of the corporation
fairly and impartially and without discrimination in favor of or against any
member bank or banks and shall, subject to the provisions of law and the
orders of the Federal Reserve Board, extend to each bank which is ordered
closed by the Comptroller of the Currency, or by vote of its directors, and to
each member bank which is ordered closed by the appropriate State authorities, such accommodations as may be safely and reasonably made with due
regard for the claims and demands of other member banks.
"(k) Whenever any national bank shall be declared insolvent or placed in
the hands of a receiver it shall be the duty of the Comptroller of the Currency to appoint a valuation committee of three members which shall include
the receiver of such bank, a member to be named by the board of directors of
such bank, and a person to be chosen by the receiver and the member named
by the board of directors. The receiver shall be chairman of the committee,
and the committee shall at once proceed to make a preliminary valuation of
the assets of the bank. Thereupon the receiver shall notify the Comptroller of
the Currency of the valuation agreed upon and the comptroller shall make a
formal tender of such assets to the corporation which may purchase the same
in whole or in part as its board of directors may determine. It shall be the
duty of the corporation to proceed to realize as rapidly as possible, having due
regard to the condition of credit in the district in which such bank is located,
the assets so purchased, and if the amount realized from such assets exceeds
the sum paid therefor, the corporation shall make an additional payment to
the receiver of the bank equal to the amount of such excess, if any, after
deducting a liquidation fee of 6 per centum of the sum thus realized. Money
belonging to the corporation over and above such funds as mav be reauired




3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

for current operating expenses shall be kept invested in the assets of insolvent
or closed banks or in securities of the Government of the United States.
"(1) The corporation may, in its discretion, purchase tlie assets of bank* in
the hands of receivers 011 the date of its organization, lint on the same conditions and terms as are applicable in tlie case of assets of banks which may
fail or be closed after such date. Nothing herein contained shall lie construed
to prevent the corporation from making hums to banks ordered closed by the
Comptroller of the Currency or by vote of their direc tors, or to member banks
ordered closed by the appropriate State authorities, or from entering into
negotiations to secure the reopening of sucli banks.
"(m) Member banks organized under the law of any State which are now or
may hereafter become insolvent or suspended shall be entitled to offer their
assets for sale to the corporation upon receiving permission in accordance with
law from the banking superintendent or commissioner of the State, under the
same conditions as are applicable to the sale of assets of insolvent or suspended
banks under the law of the State in which such member bank is loc ated.
**(n) For a period of not to exceed two years after this section takes effect
the corporation is authorized to purchase and for a period of live years thereafter to hold and liquidate tlie assets of closed State banks, to make loans to
such banks, and to enter into negotiations to secure the reopening of such banks
under the same terms and conditions as are applicable in the case of national
banks and member banks; except that (1) 110 such purchase or loan *lmll be
made and no such negotiations shall be entered into unless it is permitted under
the laws of the State in which such State bank is located, and (2) the amount
realized upon the sale of the assets of any such State bank in excels of the
amount paid for such assets by the corporation shall, after deducting the
amount of the liquidation fee authorized to be charged by the corporation under
paragraph (k), be paid into the Treasury of the United States as miscellaneous
receipts. For the purpose of carrying out the provisions of this paragraph,
there is hereby authorized to be appropriated the sum of *2<I0.<MMUMM), which
shall be paid by the Secretary of the Treasury to the corporation in such
amounts and at such times as the board of directors thereof may require. The
sums so paid to the corporation shall be used exclusively for such purposes. As
used in this paragraph the term ' State bank' shall include any savings hank,
trust company, or other banking institution, authorized to accept deposits,
organized under the laws of any State, and which is not a member of the Federal
reserve system.
41 (0) The corporation is authorized and empowered to issue and to have outstanding at any one time in an amount aggregating not more thau four times
the amount of its capital, its notes, debentures, bonds, or other such obligations,
to be redeemable at the option of the corporation before maturity in such
manner as may be stipulated in such obligations, and to bear sucli rate or rates
of interest, and to mature at such time or times as may be determined by the
corporation: Provided, That the corporation may sell on a discount basis shortterm obligations payable at maturity without interest. The notes, debentures,
boncK and other such obligations of the corporation may In* secured by assets
of the corporation in such manner as shall be pi escribed by its board of diuvtors. Such obligations may be offered for sale at such price or prices as the
corporation may determine. The corporation is further authorized and empowered to dispose of any promissory note of any receiver evidencing loans
made by the corporation, and to pledge such receivers* notes and any of the
corporation's assets as collateral security to the corporation's promissory notes,
under such terms and conditions as may be agreed upon by the corporation,
provided that the obligations so incurred, together with ail other outstanding
obligations of the corporation, shall not be in excess of four times the amount
of its capital.
"(p) All notes, debentures, bonds, or other such obligations issued by the
corporation shall be exempt, both as to principal and Interest, from all taxation (except estate and inheritance taxes) now or hereafter imposed by the
United States, by any Territory, dependency, or possession thereof, or by any
State, county, municipality, or local taxing authority. Tlie corporation, including its franchise, its capital, reserves, and surplus, and its income, shall he exempt from all taxation now or hereafter imposed by the United States, by any
Territory, dependency, or possession thereof, or by any State, county, municipality. or local taxing authority, except that any real property of the corporation "shall be subject to State, Territorial, county, municipal, or local taxation
to the same extent according to its value as other real property is taxed.




3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

"(q) In order that the corporation may be supplied with such forms of notes,
debentures, bonds, or other such obligations as it may need for issuance under
this act, the Secretary of the Treasury is authorized to prepare such forms as
shall be suitable and approved by the corporation, to be held in the Treasury
subject to delivery upon order of the corporation. The engraved plates, dies,
bed pieces, and other material executed in connection therewith shall remain
in the custody of the Secretary of the Treasury. The corporation shall reimburse the Secretary of the Treasury for any expenses incurred in the preparation, custody, and delivery of such notes, debentures, bonds, or other obligations."
SEC. 11. The seventh paragraph of section 13 of the Federal reserve act, as
amended, is amended to read as follows:
"Any Federal reserve bank may make advances to its member banks on their
promissory notes for. a period of not exceeding fifteen days at rates to be established by such Federal reserve bank, which rates shall in all cases be at
least 1 per centum higher than the rediscount rate then in force at such reserve bank, subject to the review and determination of the Federal Reserve
Board, provided such promissory notes are secured by such notes, drafts, bills
of exchange, or bankers* acceptances as are eligible for rediscount or for pur-,
chase by Federal reserve banks under the provisions of this act, or by the
deposit or pledge of bonds or notes of the United States. If any member bank
to which any such advance has been made shall, during the life or continuance
of such advance, and despite an official warning of the reserve bank of the
district or of the Federal Reserve Board to the contrary* increase its outstanding loans made upon collateral security, or made to the members of any
organized stock exchange, investment house, or dealer in securities, upon any
obligation, note, or bill, secured or unsecured, for the purpose of purchasing
and/or carrying investment securities (except obligations of the United States),
such advance shall be immediately due and payable and such member bank
shall be ineligible as a borrower at the reserve bank of the district upon
fifteen-day paper lor such period as the Federal Reserve Board shall determine. The Federal Reserve Board shall have power from time to time in. its
discretion by unanimous vote of its members to suspend the provisions of this
paragraph in whole or in part, whenever in its opinion the public interest
shall call for such action. Each such suspension shall be for a period of ninety
days and may be renewed for one additional period of ninety days upon unanimous vote of the members of the board."
SEC. 12. Section 14 of the Federal reserve act, as amended, is amended by
adding at the end thereof the following new paragraph:
"(g) Subject to the powers conveyed to and bestowed upon the Federal Open
Market Committee by section 12A of this act, the Federal Reserve Board shall
exercise special supervision and control over all relationships and transactions
of any kind entered into by any Federal reserve bank with any foreign bank
or banker, or with any group of foreign banks or bankers, and all such relationships and transactions shall be subject to such regulations, conditions,
and limitations as the board may prescribe. No officer or other representative of any Federal reserve bank shall conduct negotiations of any kind with
the officers or representatives of any foreign bank or banker without first obtaining the permission of the Federal Reserve Board. The Federal Reserve
Board shall have the right, in its discretion, to be represented in any conference or negotiations by such representative or representatives as the board
may designate. A full report of all conferences or negotiations, and all understandings or agreements arrived at or transactions agreed upon, and all other
material facts appertaining to such conferences or negotiations, shall be filed
with the Federal Reserve Board in writing and signed by all representatives
of the Federal reserve bank attending such conferences or negotiations regardless of whether or not the Federal Reserve Board shall be represented
at such conferences or negotiations."
SEC. 13. Section 10 of the Federal reserve act, as amended, is amended to
read as follows:
"SEC. 19. (a) 'Demand deposits' within the meaning of this act shall
comprise all deposits payable within 30 days, and 4 time deposits' shall comprise all deposits payable after 30 days, all savings accounts and certificates
of deposit which are subject to not less than 30 days' notice before payment,
and all postal-savings deposits.
"(b) Every bank, banking association, or trust company which is or which
becomes a member of any Federal reserve bank shall establish and maintain
reserve balances with its Federal reserve bank as follows:



3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

" (1) If not in a reserve or central reserve city as now or hereafter defined,
it shall hold and maintain with the Federal reserve hank of its district an
actual net balance equal to not less than 7 per centum of the aggregate amount
of its demand and time deposits: Provided, That the said net balance maintained against time deposits shall be 3 per centum during tlie calendar year
1932, and shall be increased at the rate of four-lifths of 1 per centum on the
1st day of January in each calendar year thereafter until it shall equal 7 per
centum as hereinbefore prescribed.
" (2) If in a reserve city as now or hereafter defined it shall hold and
maintain with the Federal reserve bank of its district an actual net balance
equal to not less than 10 per centum of the aggregate amount of its demand
and time deposits: Provided, That the said not balance hereinbefore required to
be maintained against time deposits shall be 3 per centum during the calendar
year 1932, and shall be increased at the rate of 1% per centum on the 1st day
of January in each calendar year thereafter until it shall equal 10 per centum
as hereinbefore prescribed: Provided further, That if located in the outlying
districts of a reserve city or in territory added to such a city by the extension
of its corporate charter it may, upon the affirmative vote of live members of
the Federal Reserve Board, hold and maintain the reserve balances specified
in paragraph (1) hereof.
"(3) If in a central reserve city as now or hereafter defined it shall bold and
maintain with the Federal reserve bank of its district an actual net balance
equal to not less than 13 per centum of the aggregate amount of its demand and
time deposits: Provided, That the said net balance hereinbefore required to be
maintained against time deposits shall be 3 per centum during the calendar
year 1932, and shall be increased at the rate of 2 per centum on the 1st day
of January in each calendar year thereafter until it shall equal 13 per centum
as hereinbefore prescribed: Provided further, That if located in the outlying
districts of a central reserve city or in territory added to such a city by the
extension of its corporate charter it may, upon the affirmative vote of five
members of the Federal Reserve Board, hold and maintain the reserve balances
specified in paragraphs (1) and (2) hereof.
"(c) No member bank shall keep on deposit with any State bank or trust
company which is not a member bank a sum in excess of 10 per centum of its
own paid-up capital and surplus. No member bank shall act as the medium or
agent of a nonmember bank in applying for or receiving discounts from a Federal reserve bank under the provisions of this act except by permission of the
Federal Reserve Board.
"(d) No member bank shall act as the medium or agent of any nonhaitkiiu;
corporation or individual in making loans protected by collateral security; and
no member bank shall make loans or discount paper for any corporation or
individual if the proceeds of such transaction are to be used directly or indirectly for the purpose of making loans protected by collateral security in favor
of any investment banker, broker, member of any stock exchange, or any dealer
in securities. Every violation of this provision by any member bank shall be
punishable by a fine of not less than $100 per day during the continuance of
such violation, but it shall be a good defense that the borrower at the time of
obtaining such loan or discount from n member bank made a sworn statement
that the proceeds of the transaction would not be used for such purpose.
"(e) The required balance carried by a member bank with a Federal reserve
bank may under the regulations, and subject to such penalties as may be prescribed by the Federal Reserve Board, be checked against and withdrawn by
such member bank for the purpose of meeting existing liabilities: Provided,
however, That no bank shall at any time make any new loans or shall pay any
dividends unless and until the total balance required by law is fully restored.
" ( f ) No member bank shall sell or transfer to another member bank, or to
a nonmember bank, private banking house, or banker, any balance standing to
its credit upon the books of the Federal reserve bank of its district in excess
of the balances required by this section unless the Federal Reserve Board shall
have first authorized by general order the making of such sales or transfers
within such district or between such district and another Federal reserve district, but no such sale or transfer shall be made by any such bank without first
charging and reserving a fee to be fixed by the Federal Reserve Board on the
basis of the rate of discount then charged upon ninety-day paper by the Federal
reserve bank of the district in which the bank making such sale or transfer
is located*



3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

14(g) The Federal Reserve Board shall have power to suspend all dealings
in reserve balances for such period as it may deem best In estimating the
reserve balances required by this act, the net difference of amounts due to
aud from other banks shall be taken as the basis for ascertaining the deposits
against which required balances with Federal reserve banks shall be determined ; and the liability created by every repurchase or other similar agreement
entered into by a member bank shall be added to such net difference as ascertained under the provisions of this paragraph.
*Mh) National banks, or banks organized under local laws, located m Alaska
or in a dependency or insular possession or any part at the United States outside the continental United States may remain nonmember banks and shall
in that event maiutain reserves and comply with all the conditions now provided
hv law regulating them; or said banks may, with the consent of the board,
become member banks of any one of the reserve districts and shall in that event
take stock, maintain reserves, and be subject to all the other provisions of
this act.
SKO. 14. Section 24 of the Federal reserve act, as amended, is amended to read
as follows:
* SKC. 24. Any national banking association may make loans secured by first
•
lien upon improved real estate, including improved farm land, situated within
its Federal reserve district or within a radius of one hundred miles of the
place in which such bank is located, irrespective of district Hues. A loan secured
by real estate within the meaning of this section shall be in the form of an
obligation or obligations secured by mortgage, trust deed, or other such instrument upon real estate when the eutire amount of such obligation or obligations
is made or is sold to such association. The amount of any such loan shall not
exceed 50 per centum of the actual value of the real estate offered for security,
hut no such loan upon such security shall be made for a longer term than five
years. Sudi valuations shall be revised by the Comptroller of the Currency
at the time of each examination of the bank making the loan and he shall have
power to order changes therein and to require the adjustment of loans to such
revised valuations. Any such bank may make such loans in an aggregate sum,
including in such aggregate any such loans on which it is liable as indorser or
guarantor or otherwise, equal to 15 per centum of the amount of the capital
stock of such association actually paid in and unimpaired and 15 per centum
of its unimpaired surplus fund, or to one-half of its time deposits, at the
election of the association, subject to the general limitation contained in section
52(H) of the Revised Statutes. Investments in bank premises and unsecured
loans whose eventual safety depends upon the value of real estate shall be
counted for the purposes of this section as real-estate loans. Every such bank
may apply the moneys deposited therein as time deposits to the loans herein
aurhorized and the balance of such time deposits shall be invested in property
and securities in which savings banks may invest under the law of the State
where such national bauk is situated, or where there is no such law relatiug to
investments by savings banks, in such property and securities as may be
specified by the Comptroller of the Currency: Provided, That every member
bank shall be required to report its investments in, or holdings of, any such
property and securities at an aggregate valuation which shall not exceed the
aggregate market value thereof at the time such reports to the comptroller
or to the Federal Reserve Board are made: Provided further, That the reserve
against time deposits required by section 19 of this act shall be counted as
a corresponding part of such investments. All the property of any insolvent
national bank acquired under this section shall be applied by the receiver
thereof in the first place ratably and proportionately to the payment in full of
its time deposits. Such banks may continue hereafter as heretofore to receive
time deposits and to pay iuterest on the same, but the rate of interest which
such banks may pay upon such time deposits or other deposits shall not exceed the maximum rate authorized by law to be paid upon such deposits by
State banks or trust companies organized under the laws of the State wherein
such national banking association is located.
"Every national banking association and every member bank which is in
existence at the date this section as amended takes effect shall be required,
within a period of two years from such date, to comply fully with the provisions of this section, and every national banking association hereafter
organized and every State bank or trust company hereafter becoming a member of the Federal reserve system shall comply with the provisions of this sec-




3.6 NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
tion from tlie date of its organization or admission to membership, as the case
may be."
SEC. 35. Paragraph "Seventh" of section 5130 of the Revised Statutes, as
amended, is amended to read as follows:
" 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 011 the business of banking; by discounting and negotiating promissory
notes, draft*, bills of exchange, and other evidences 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; and generally by engaging in all forms of
banking business and undertaking all types of banking transactions that may,
by the laws of the State in which such bank is situated, be permitted to banks
of deposit and discount organized and incorporated under the laws of such
State, except in so far as they may be forbidden by the provisions of the
national bank act, as amended, the Federal reserve act, as amended, or any
other laws of the United States. The business of purchasing and selling investment securities shall hereafter be limited to purchasing and selling such
securities without recourse, solely upon the order, and for the account of,
customers, and in no case for its own account, and no such association shall
underwrite any is«ue of securities; except that any such association may purchase and hold for its own account investment securities to such an amount and
of such kind as may be by regulation prescribed by the Comptroller of the
Currency, but in no event shall the total amount of such investment securities
of any one obligor or maker held by such association exceed 10 per centum of
the total amount of such issue outstanding, nor shall the total amount of the
securities so purchased and held for its own account at any time exceed 15
per centum of the amount of the capital stock of such association actually paid
in and unimpaired and 25 per centum of its unimpaired surplus fund. Except
as hereinafter provided or otherwise permitted by law, nothing herein contained shall authorize the purchase or hold incr of any shares of stock of any
corporation by any such association. The limitations herein contained as to
the purchasing and selling of investment securities shall not apply to obligations of the United States, or general obligations of any State or of any political
subdivision thereof, or obligations issued under authority of the Federal farm
loan act: Provided, That in carrying 011 the business commonly known as the
safe deposit business 110 such association shall invent in the capital stock of a
corporation organized under the law of any State to conduct a safe deposit
business in an amount in excess of 15 per centum of the capital stock of such
association actually paid in and unimpaired and 15 per centum of its unimpaired surplus."
SEC. 16. Section 5138 of the Revised Statutes, as amended, is amended to read
as follows:
"Sec. 513S. After this section as amended takes effect, no national bank*
ing association shall be organized with a less capital than $100,000, except that
such associations with a capital of not less than $.'0,000 may be organized in any
place the population of which does not exceed six thousand inhabitants, and
except that such associations formed for the purpose of succeeding to the business of an exi>tinsr bank may. in the discretion of the Comptroller of the Currency, be organized with a less capital than $50,000. but in no event less than
$25,000. No such association shall be organized in a city the population of
which exceeds fifty thousand persons with a capital of less than $200,000, except
that in the outlying districts of such a city where the State laws permit the
organization of State banks with a capital of $100,000 or less, national banking
associations now organized or hereafter organized may, with the approval of the
Comptroller of the Currency, have a capital of not less than $100,000."
SEC. 17. Section 5310 of the Revised Statutes, as amended, is amended to read
as follows:
" SEO. 5139. After this section as amended takes effect, the capital stock of each
association shall be divided into shares of $100 each and be deemed personal
property and transferable 011 the books of the association in such manner as
may be prescribed in the by-laws or articles of association; and any such
association which has certificates of stock outstanding on the date this section
as amended takes effect which do not comply with the provisions of this section
a«; amended shall, within two years after such date, issne new certificates in
compliance with such provisions. No certificate repre>«enting the stock of any



3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

such association shall represent the stock of any other corporation, nor shall
the ownership, sale, or transfer of any certificate representing the stock of any
such association be conditioned in any manner whatsoever upon the ownership, sale, or transfer of a certificate representing the stock of any other corporation. Every person becoming a shareholder by transfer as permitted by
this section shall in proportion to his shares succeed to all the rights and liabilities of the prior holder of such shares, and no change shall be made in the
articles of association by which the rights, remedies, or security of the existing
creditors of the association shall be impaired."
SEC. 18. From and after January 1,1933, no director, officer, or employee of
any national bank or member bank shall be (a) an officer of any unincorporated
association or corporation engaged primarily in the business of purchasing, selling, or negotiating securities, or (b) an employee of any such unincorporated
association or corporation, or of any individual or partnership engaged in such
business, or (c) a director, officer, or employee of a corporation organized for
any purpose whatsoever which shall make loans secured by collateral to any
corporation other than its own subsidiaries, or to any individual, association,
or partnership; and*no national bank or member bank shall perform the functions of a correspondent bank on behalf of any such individual, partnership,
unincorporated association, or corporation; and no such individual, partnership,
unincorporated association, or corporation shall perform the functions of a
correspondent for any national bank or member bank or hold on deposit any
funds on behalf of any national bank or member bank.
SEC. 19. Section 5144 of tlie Revised Statutes, as amended, is amended to
read as follows:
4 SEC. 5144. In all elections of directors and in deciding all qestions at meet4
ings of shareholders, each shareholder shall be entitled to one vote on each
share of stock actually owned by him as the result of bona fide purchase, gift,
or inheritance and no shareholder who shall become such through nominal
transfer, or ownership on behalf of another, shall cast such vote. No corporation, association, or partnership which is the owner of more than 10 per
centum of the stock of any such national bank and no officer, director, or
employee of such corporation, association, or partnership, shall cast a ballot
in such elections or meetings either on shares of stock owned by the corporation or by such officer, director, or employee. Shareholders may vote by proxies
duly authorized in writing; but no officer, clerk, teller, or bookkeeper of such
bank shall act as proxy; and no shareholder whose liability is past due and
unpaid shall be allowed to vote."
SEC. 20. Notwithstanding the provisions of section 5144 of the Revised
Statutes, as amended by this act, any affiliate, or any association, corporation,
or partnership other than an affiliate, which owns or controls shares of stock
in any national bank may make application to the Federal Reserve Board for
a voting permit entitling it to cast one vote at all elections of directors of
such national bank on each share of stock actually owned or controlled by it.
The Federal Reserve Board may, in its discretion, grant or withhold such
permit as the public interest may require but no such permit shall be granted
except upon the following conditions:
(a) Every such affiliate, association, corporation, or partnership shall, at the
time of making, the application for such permit, enter into an agreement with
the Comptroller of the Currency (1) to receive at such periodical intervals as
shall be prescribed by the comptroller, on dates identical with those fixed for
the examination of national banks, examiners representing and acting for the
comptroller who shall make an examination of its financial condition with
the same degree of care as in the case of an examination of a national bank,
such examination to be at the expense of tlie affiliate, corporation, association, or partnership so examined; (2) that the report of the examiner shall
set forth all the facts ascertained by the examination and shall include a
statement of the name, location, capital, surplus, and undivided profits of each
bank in which the applicant owns stock, the number of shares so owned, the
par and book value of such shares, the number of shares of bank stock acquired
and sold since the last examination, and other assets of such affiliate, cor-,
poration, association, or partnership (including under separate headings obligations of the United States, and the value and nature of other securities
owne<3); and (3) that the comptroller may examine each national bank owned
or controlled by such affiliate, association, corporation, or partnership, both
individually and in conjunction with others so owned or controlled, and may




3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

require publication periodically of individual or consolidated statements of
condition of such bank;
(b) Every such affiliate, association, corporation, or partnership shall hold
free of any lien or claim thereoli obligations of the United States in an
amount equal to 10 per centum of the total of capital stock owned by it in
any national bank and shall agree (1) that in the event of failure of any
national bank in which it shall hold stock the stockholders' liability accruing
on account of such stock shall be a first lien upon the obligations so held, and
(2) that any deficiency in such obligations due to tlieir use in meeting claims
under (1) above shall be made up within ninety days after such deficiency
occurs;
(c) Every such affiliate, association, corporation, or partnership (1) shall
possess at the time of the issuance of such voting permit, and shall continue
to possess during the life of such permit, free and clear of any lien, pledge, or
hypothecation of any nature, assets other than bank stock which, together with
the amount of the obligations of the United States hereinbefore required to be
held, shall not be less than 23 per centum of the aggregate par value of bank
stocks held or owned by such affiliate, association, corporation, or partnership
(but sums advanced during the years 1031 and 1032 for the replacement of
capital in banks owned by such affiliate, association, corporation, or partnership. or for losses incurred or eharge-offs made by it during those years, may be
counted, up to 10 per centum of the aggregate par value of bank stocks held
or owned by it, as a part of such assets); and (2) shall reiuvest in assets other
than bank stock all net earnings over and above 0 per centum per annum on
the book value of its own shares outstanding until such assets shall equal
the outstanding par value of bank shares owned by it: Provided, That from
and after January 1, 1933, the 23 per centum requirement hereinbefore provided for shall be increased by not less than 2 per centum per annum, but at
no time shall the assets held to meet any future stockholders' liability be less
than the total assets held by such affiliate, association, corporation, or partnership on January 1,1032;
(d) Every officer and employee of such affiliate, association, corporation, or
partnership shall be subject to the same penalties for false statement as are
applicable at the time of making su<h statement to the officers and employees
of national banks; and
(e) Every such affiliate, association, corporation, or partnership shall, at the
time of application for such voting permit, (1) file a statement with the Comptroller of the Currency that it does not own, control, or have any interest
in, or is not participating in the management or direction of, any affiliate
formed for the purpose of, or engaged in, the issue, flotation, underwriting,
public sale, or distribution at wholesale or retail or through syndicate participation of stocks, bonds, debentures, notes, or other securities of any sort, and
that during the period that the permit remains in force it will not acquire any
ownership, control, or interest in any such affiliate or participate in the management or direction thereof, or (2) asree that if at the time of filing the
application for such permit it owns, controls, or has tin interest in. or is participating in the management or direction of. any such affiliate, it will, within
two years after the filing of such application, divest itself of its ownership,
control, and interest in such affiliate and will cease participating in the management or direction thereof, and will not thereafter, during the period that
tiie permit remains in force, acquire any further ownership, control, or interest
in any such affiliate or participate in the management or direction thereof,
and (3) agree that thenceforth it will declare dividends only out of actual net
earnings as indicated by the last preceding examination made by the
comptroller.
The Federal Reserve Board may, in its discretion, revoke any such voting
permit after giving sixty days* notice by registered mail of its intention to
the affiliate, association, corporation, or partnership. Whenever the Federal
Reserve Board shall have revoked any such voting permit, no national bank
whose stock is owned in whole or in part by the affiliate, association, corporation, or partnership whose permit is so revoked shall receive deposits of United
States moneys, nor shall any such national bank pay any further dividend to
such affiliate, association, corporation, or partnership upon any shares of such
bank owned or controlled by Mich affiliate, association, corporation, or partnership.
1111G1—32—PT 1




2

3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

SEC. 21. Paragraph (c) of section 5155 of the Revised Statutes, as amended,
is amended to read as follows:
"(e) A national hanking association may* with the approval of the Federal
Reserve Board, after the date this paragraph, as amended, takes effect, establish and operate new branches within the limits of the city, town, or village,
or at any point within the State in which said association is situated, if such
establishment and operation are at the time permitted to State banks by the
law of the State in question: Provided, That, if by reason of the proximity of
such an association to a State boundary line, tlie ordinary and usual business
of such association is found to extend into an adjacent State, the Federal Reserve Board may permit the establishment of a branch or branches by such
association in an adjacent State but not beyond a distance of fifty miles from
the seat of the parent bank. No such association shall establish a branch outside of the city, town, or village in which it is situated unless it has a paid-in
and unimpaired capital stock of not less than $500,000. The aggregate capital
of every national banking association and its branches shall at no time be less
than the aggregate minimum capital required by law for (lie establishment of
an equal number of national banking associations situated in the various places
where such association and its branches are situated."
SEC. 22. Sections 1 and 3 of the act entitled "An act to provide for the consolidation of national banking associations," approved November 7, 191S, as
amended, are amended by striking out the words "county, city, town, or village " wherever they occur in each such section, and inserting in lieu thereof
the words " State, county, city, town, or village."
SEC. 28. The first two sentences of section 5197 of the Revised Statutes are
amended to read as follows:
"Any association may take, receive, reserve, and charge on auy loan or discount made, or upon any notes, bills of exchange, or other evidences of debt,
interest at the rate allowed by the laws of the State, Territory, or District
where the bank is located, or at a rate of 1 per centum in excess of the discount rate of the Federal reserve bank in the Federal reserve district where
the bank is located, whichever may be the greater, and no more, except that
where, by the laws of any State, a different rate is limited for banks of issue
organized under State laws, the rate so limited shall be allowed for associations organized or existing in any such State under this title. When no rate
is fixed by the laws of the State, or Territory, or District, the bank may take,
receive, reserve, or charge a rate not exceeding 7 per centum, or 1 per centum
in excess of the discount rate of the Federal reserve bank in the Federal
reserve district where the bank is located, whichever may be the greater, and
such interest may be taken in advance, reckoning the days for which the note,
bill, or other evidence of debt lias to run."
SEC. 24. No national banking association or member bank shall promise or
pay to its depositors as a consideration for the maintenance of deposit balances
or accounts a rate of interest in excess of one-half the rate of interest specified
in section 5197 of the Revised Statutes, as amended, and whenever such deposi-'
tors are bankers who maintain balances with other banks, no such association
or member bank shall promise or pay for the maintenance with it of such
bankers' balances a rate of interest in excess of tlie current rate of discount
of the Federal reserve bank of the district in which tlie depositary bank is
located, or in excess of 2*£ per centum per annum, whichever rate shall be the
smaller.
SEC. 25. (a) The second sentence of the first paragraph of section 5200 of
the Revised Statutes, as amended, is amended by inserting before the period
at the end thereof the following: "and shall include in the case of obligations
of a corporation all obligations of all subsidiaries thereof."
(b) Paragraph (8) of section 5200 of the Revised Statutes, as amended, is
amended by inserting before the period at the end thereof a colon and the
following: " Provided, That no obligation of a broker or member of any stock
exchange or similar organization, or of anyfinancecompany, securities company,
investment trust, or other similar institution, or of any affiliate, shall be entitled
to the benefits of the foregoing exceptions, but such obligations shall in every
case be subject to the limitations of 10 per centum hereinbefore set forth in
this section; except that the total obligations of an affiliate shall in no case
exceed the said 10 per centum limitations, or the amount of the capital stock
of said affiliate actually paid in and unimpaired, whichever may be the smaller."
(c) Section 5200 of the Revised Statutes, as amended, is further amended
by adding at the end thereof the following new paragraphs:



3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

"The aggregate amount of the obligations (including repurchase agreements)
of all the affiliates of a national banking association shall not at any time exceed
10 per centum of the capital stock of such association actually paid in ami
unimpaired and 30 per centum of its unimpaired surplus fund: Provided. That
loans col la tora led by Government bond.-, or by bonds issued by the State in
which such bank is situated, or issued by any political subdivision of Mich
State, shall not be included within the foregoing limitations if actually owned
by the borrower from such bank.
"Within three years after this section as amended takes effect every affiliate
shall be capitalized through the sale of it-* own stock, which shall be paid for
in full in cash upon the same terms and conditions as provided in section 5140
of the Revived Statutes, as amended, in the case of national bank stock; and
no national bank shall establish or capitalize an affiliate through cash or stock
dividend declarations made from its surplus or from undivided profits. No
affiliate shall at any time during swli three-year period hold, or lend upon,
more than 10 per centum of the shares of the capital stock of the parent
institution."
SKC. 2<>. Nothing in sec tion H200 of the Revised Statutes, as amended, shall
be construed to permit a member bank to lend to any individual or corporation
upon collateral security an amount in excess of 30 per centum of its capital
stock actually paid in and unimpaired and 10 per centum of its unimpaired
surplus fund, or an amount in excess of the percentage of such capital and
surplus fund as shall from time to time be designated by the Federal Reserve
Board in accordance with subsection (m) of section 18 of the Federal reserve
act, as ameneded, whichever is the smaller.
SEC. 27. Section 5231 of the Revised Statutes, as amended, is amended by
adding at the end thereof the following new paragraph:
"Each affiliate of a national banking association shall make and furnish
to the president of the association, for transmission by him to the Comptroller
of the Currency, not less than three reports during each year, in such form
as the Comptroller may prescribe, verified by the oatli or affirmation of the
president of such other officer as may be designated by the board of directors
nf such affiliate to verify such reports, coveriim the condition of such affiliate
on dates^identical with those for which tlv comptroller shall during such year
require the reports of the condition of the association. Each such report of
an affiliate shall be transmitted to the comptroller at the same time as the
corresponding report of the association; except that the comptroller may. in
his discretion, extend such time for good cause shown. Each such report shall
exhibit in detail and under appropriate heads, the holdings of the affiliate in
question, their cost and present value, the expenses of operation for the preceding year, and the balance sheet of the enterprise. It shall l>e the duty of
the president of such association to satisfy himself as to the correctness of the
report before transmitting the same to the comptroller. The reports of its
affiliates shall be published by the association tinder the same conditions as
govern its own condition reports. The comptroller shall also have power to
call for special reports with rcspect to any such affiliate whenever in his judgment the same are necessary in order to obtain a full and complete knowledge
of the conditions of the association with which it is affiliated. Any affiliate
which fails to make and furnish any report required of it uuder this section,
and any assocation whose president fails to transmit as required by this section
any such report furnished to him, shall be subject to a penalty of $100 for each
day during which such failure continues: Provided. That every affiliate which
shall be indebted to any bank or banks to an amount exceeding 5 per centum of
the capital and surplus of its parent bank shall publish its entire portfolio at a
date and in a manner to be prescribed by the Comptroller of the Currency but
not ofrener than once annually, and every affiliate which shall be so indebted
to an amouut in excess of 10 per centum of the capital and surplus of its parent
bank shall be required to publish its portfolio in at least one daily newspaper
issued in the place where such bank is located within ten days after receiving
notice therefor from the comptroller, but such publication shall not be considered as a substitute for the annual publication hereinbefore required."
SEC. 28. The first paragraph of section 5240 of the Revised Statute, as
amended, is amended by inserting before the period at the end thereof a
colon and the following proviso: "Provided, That during the period of three
years after this section as amended takes effect, in making the examination
of any national bank or of any other member bank, the examiner shall inclu V



3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

an examination of the affairs of all affiliates of sueli bank, and in the event
of the refusal to give any information required in the course of the examination of any such affiliate, or in the event of the refusal to permit such examination, all the rights, privileges, and franchises of the bank shall be thereby
forfeited, if a national bank, and if a bank or trust company organized under
the law of any State, membership in the Federal reserve bank of its district
shall be forfeited and no notice of the termination of such membership shall
be required. The Comptroller of the Currency shall have power, and he is
hereby authorized, to publish the report of his examination of any national
banking association or affiliate which shall not within one hundred and twenty
days after notification of the recommendations or suggestions of the comptroller, based on said examination, have complied with the same to his satisfaction. Ninety days' notice prior to such publicity shall be given to the bank
or affiliate."
SEC. 20. Whenever, in the opinion of the Comptroller of the Currency, any
director or officer of a national bank, or of a bank or trust company doing business in the District of Columbia, or whenever, in the opinion of a Federal
reserve agent, any director or officer of a member bank of his district (other
than a national bank) shall have persistently violated any law relating to such
bank or trust company or shall have continued unsafe or unsound practices in
conducting the business of such bank or trust company, the comptroller, or the
Federal reserve agent, as the case may be, shall certify the facts to the governor of the Federal Reserve Board. Thereupon the governor of the Federal
Reserve Board shall serve notice upon such director or officer to appear before a
committee consisting of the governor, the Comptroller of the Currency, and the
Federal reserve agent of the district in which such bank or trust company is
located to show cause why he should not be removed from office. If upon such
hearing the committeefindsthat such director or officer has persistently violated
any such provision or has been responsible for the continuance of any such
unsafe and unsound practices the committee may, in its discretion, by a majority vote order that he be removed from office. A copy of each such order
shall be served upon such director or officer and upon the bank, or trust company of which he is a director or officer. Any such director or officer upon
whom any such order has been served as herein provided and who tkfciTsafter
participates in any manner in the management of such bank or trust company
shall be fined not more than $5,000 or imprisoned not more than five years,
or both.
SEC. 30. The right to alter, amend, or repeal this act is hereby expressly
reserved. If any clause, sentence, paragraph, or part of this act shall for any
reason be adjudged by any court of competent jurisdiction to be invalid, such
judgment shall not affect, impair, or invalidate the remainder of this act, but
shall be confined in its operation to the clause, sentence, paragraph, or part
thereof directly involved in the controversy in which such judgment shall have
been rendered.

The CHAIRMAN. The first witness will be Mr. Pope, president of
the Investment Bankers' Association of America. If Mr. Pope will
come around to the committee table and take a seat opposite the
committee reporter we will be glad to hear him.
STATEMENT OF ALLAN M. POPE, PRESIDENT INVESTMENT
BANKERS' ASSOCIATION OF AMERICA, BOSTON, MASS.

Mr. POPE. Shall I proceed, Mr. Chairman ?
The CHAIRMAN. Just give your name, address, and business for
the purpose of the record.
Mr. POPE. I am speaking as the president of the Investment Bankers' Association of America. My name is Allan M. Pope, and I am
executive vice president of the First National-Old Colony Corporation of Boston.
The CHAIRMAN. D O any members of the committee desire to ask
Mr. Pope any questions?



3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator GLASS. Wore you heard at the prolonged hearings held
by a subcommittee of the Committee on Banking and Currency last
spring?
Mr. POPE. Yes, sir. I should like if possible to make a statement
at this time.
Senator GORE. Might I suggest, Mr. Chairman, that the witness
be permitted to first make his own statement in his own way, and
then the members of the committee will ask him questions I
The CHAIRMAN. Very well. Proceed.
Mr. POPE. I should like to state in part that I am here as a representative of the Investment Bankers' Association of America. That
association is composed of approximately 500 members engaged in
the investment banking business of the country. The investment
banking business of the country is the medium providing long-term
credits to States, municipalities, public utilities, railways, and to
industry in the same way that
Senator BROOKILAKT (interposing). And how about agriculture?
Mr. POPE. TO agriculture also.
The CHAIRMAN. You may continue.
Mr. POPE. In the same way that commercial bankers provide shortterm credits.
The mechanism and organization of the Investment Bankers'
Association was the same means by which at the time of the
World War the Liberty loan bonds were sold. The success of the
floating of those loans was in a measure provided by the members
of this association placing at the disposal of the authorities their
entire organization in most cases.
Investment bankers it should l>e understood are not primarily, and
in fact very few of them are members of any stock exchange.
Those that are members of a stock exchange have" that part of their
business separate and distinct from that classed as investment
banking.
The investment banking business is not that of trading on an
exchange, but is the distribution of securities, some of which, and
in some cases many of which, are listed on an exchange, but the
dealing is not on an exchange but off or over the counter.
I recently made a trip as president of the Investment Bankers'
Association of America to 11 or 12 of the largest cities of the country,
at which time I was privileged to talk to several hundred members
of the Investment Bankers' Association, as senior executives and
in some cases junior executives: and in the most of those cities with
the presidents and other officials of commercial banks.
Because of the fact that the bill known as S. 3215. which was introduced by Senator Glass in January, was very much in the minds
of investment bankers, it was discussed with all those whom I met.
I am obliged to say that without a single exception each one of
those gentlemen, numbering several hundred, was without question
opposed to the bill at the present time, on the ground that we are
at the moment engaged in an attempt to stem tlie tide of deflation,
that we have emergency legislation enacted for that purpose, and
that the results of that bill were diametrically opposed to such legislation because of the extreme deflationary character or the general
character, I might say, of that bill.



3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator FLETCHER. HOW does that bill differ from S. 4115 which
we now have before us?
Mr. POPE. The present bill is in its general character so like so
far as it affects the situation, meaning the deflationary character of
the bill, that the same attitude of investment bankers is directed
toward this bill, S. 4115.
In addition to the fact of its extreme deflationary character, which
makes it essential for the best interests of the country that the general principles of banking be not thus changed to-day, there is in the
present bill, at least as we consider it, four sections and probably
more in wluch there is such discrimination against national banks
the we are of opinion it might be the natural result that such banks
would be obliged to surrender their national charters and become
State banks. This would so alter the character of the banking
system of the country as to be considered decidedly dangerous.
Senator GLASS. In this connection in order that we may judge
whether history will repeat itself, may I remind you that we were
confronted with that threat by nearly all the national banks of the
country when we adopted the Federal reserve act?

Mr. POPE. Investment bankers I should like to bring to your attention recognize very clearly, and have for some time, certain defects
in the present banking system. Some of the executives of the Investment Bankers9 Association of America testified at the hearings
held by the subcommittee in relation to the bill S. 3215, and in their
testimony they recommended an examination of bank affiliates, reports by bank affiliates, limitation of borrowing power of bank
affiliates from parent institutions, both separately and in the aggregate; and they have also recommended that loans for the account
of others be discontinued.
There are certain sections which affect the Investment Bankers'
Association of America included in this bill which I should 'like
now to recite by sections. There are many sections in the bill which
either are of no importance to investment bankers as a whole or are
technically commercial banking problems with which investment
bankers do not feel capable of giving opinions.

In section 2 the definition of affiliates is too broad. It would
require reports and examinations, for example, of any corporation
of which stockholders of the bank hold 50 per cent of the stock.
That would mean that in many cities and in many towns of this
country where influential citizens are stockholders of banks and who
in the total as stockholders own more than 50 per cent of purely business corporations, those business corporations would have*to be
examined by the examiners of the ^Federal reserve system.

Also in this section in certain instances very large corporations
are placed in the category of affiliates because of their ownership of
a majority of the stock of small banks which they have taken over
by force of circumstances to aid the industrial and banking situation*
I know of at least one instance where one of these corporations, and
one of the largest corporations in the United States I might say,
would have to be examined and make reports as a banking affiliate
for that reason.




3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator COUZENS. Right there let me ask you: Could vou name
that institution?
M r . POPE. I p r e f e r not to d o so.

Senator COUZENS. I wish you would so that we might have the
information.

Mr. POPE. I might recite this without any consultation or direct
knowledge of the facts and only from information which I have
received: I understand that in one instance, or more, the Bethlehem
Steel Corporation for the purpose of protecting tlie interests and
deposits of their employees were obliged to take over the stock of a
bank. By owning the stock of that bank you would make the Bethlehem Steel Corporation a bank affiliate.
Senator BARKLEY. Right there let me ask vou: If the majority
of the stock is owned by the Bethlehem Steel Corporation and is
controlled by it, why shouldn't it be considered an affiliate i
Mr. POPE. I am not questioning as to whether or not it is an
affiliate, but I do question the fact as to whether it is necessary or
practicable for the examiners of the Federal Reserve System to
examine at stated intervals a corporation of the size of the Bethlehem Steel Corporation and should require them to make the same
reports that are required to be made under this bill. I can not see
how they would want it to be an affiliate.
Senator COUZENS. Does not that seem to be stretching the point
when the stockholders of the Bethlehem Steel Corporation or the
officers of the Bethlehem Steel Corporation could easily dispose of
their bank stock to outside interests?
Mr. POPE. I am not prepared to state what the Bethlehem Steel
Corporation could do.
Now, as to section 3 of the bill: If properly interpreted, we say it
makes provision prohibiting the undue, unauthorized, or improper
use of credit facilities by Federal reserve member banks, and a^ such
investment bankers or anyone else I take it would agree. But investment bankers do not agree with the broad general statement, the
intent of which is carried through this bill, and this bill is designed
to carry out this statement and is a most deflationary measure, certainly to the detriment of the best interests of the country to-day.
Invesment bankers do not agree with this statement, which" is really
he general purport of the bill as is understood by us. that credit
facilities shall not be extended to member banks for the purpose of
making or carrying loans for investment or facilitating the carrying
of or trading in such securities other than Government obligations.
Senator BULKLEY. What are you reading from ?

Mr. POPE. An extract from a paragraph in the bill, found on page
3 at line 19.
Senator GLASS. YOU. of course, are aware that that is the exact
prohibition of section 13 of the Federal reserve act and has been for
18 years.
Mr. POPE. Yes. but it is not the question of what that statement
is. I did not state that that was what was objected to. I said it
was the method in this bill which corrected or carried out those
statements, first, that was objected to.
Senator BULKLEY. Then you do not object to the statement itself?
Mr. POPE. No, sir; but this is what I say




20

3.6 NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator BARKLEY (interposing). You do not mean to say that you
object to the provision, but you do object to its enforcement?
Mr. POPE. The type of its enforcement.
Senator GLASS. And I might say for your encouragement that
it has not been enforced but lias been utterly ignored.
Mr. POPE. I do not say tlie type of enforcement as it stands to-day,
or as it might be provided, but I say the type of enforcement as
)rovided in the paragraphs and only the paragraphs which I shall
ater refer to. And perhaps I might better enlighten you as to our
objection as I go along.
Senator FLETCHER. Does it provide for the imposition of penalties?
Mr. POPE. Not in every case. But I will explain that as I go
along.
Senator BULKELY. I should like to get this clear: Do you really
mean that you do not think this should be enforced ?
Mr. POPE. NO, sir; but I mean to say
Senator BULKLEY (interposing). Then you think it should be
enforced?
Mr. POPE. I think it is possible to enforce it, but I think the means
taken at this time, and you will understand that I am saying at this
time; that the means taken are.such as to cause sudden deflation in
the country and that this is not the time to undertake it.
Senator BULKLEY. I want to press my inquiry further in fairness
to you, so that your views may be fairly on our record and we may
know what you really have said: Are you or are you not opposed to
the enforcement of this policy as stated at the point where you
read?
Mr. POPE. I am not opposed to the statement as written in the
bill, but
Senator BULKLEY (interposing). Nor to the enforcement of it?
Mr. POPE. I am not opposed to the enforcement of it, but as to the
enforcement of it as provided in this bill.
Senator BULKLEY. Which you are going to develop for us later.

f

M r . POPE. Y e s , s i r .
Senator BULKLEY. All right.
Mr. POPE. We are not opposed to
Senator BULKLEY (interposing). I

want you to make that clear to
us. I think it might now be in the record in a position to be unfair
to you.
Sir. POPE. Certainly no one, or speaking more directly, no investment banker had any quarrel whatever with the statement prohibiting undue, unauthorized, or improper use of credit facilities.
Senator BARKLEY. That still does not cover the situation. You
say unauthorized or undue use of credit facilities by a Federal
reserve member.
Mr. POPE. Undue does cover it.
Senator BARKLEY. Where will you draw the line between authorized and unauthorized use, or due or undue use of credit facilities on
the part of a member bank?
Mr. POPE. I think that is a matter of judgment in the particular
case. I am going to go along with that further, and I think you will
find that I will cover the most of the points.
Senator BARKLEY. All right.



3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. PorE. This does not mean that investment bankers are in favor
except in emergencies such as cited in the Glass-Steagall bill of
Federal reserve credit being extended directly to borrowers from
member banks. It is only an emergencj' measure.
Now, as to section 6 of the bill: Investment bankers approve of
reports by bank affiliates. But on account of the broad definitions
referred to above, these reports will undoubtedly be required of a
very great number of industrial concerns, which" appears not to be
advisable or necessary and probably not practicable.
In section 8 of thelbill
Senator GORE (interposing). As to this investment by the Bethlehem Steel Corporation, would it put an end to its payment of
such large bonuses, as have been reported, made against the interests
of its stockholders ? Isn't that a good idea to stop that ?
Mr. POPE. I haven't any ideas on that subject, sir.
Now, as to section 8 of the bill: This provides that members of
the Federal Reserve Board can limit the percentage of capital and
surplus which any member bank can loan if such loans are protected b}T collateral security. This may require an investment
banker to pay off his loan on 10 days' notice, as provided in the
provisions of this bill. And this might cause and probably would
cause many bankruptcies, not only by investment bankers but
other corporations and individuals.
This section also provides that the board can prevent a bank from
making any security loans. This appears to me to place directly
upon the Federal Reserve Board the responsibility for the conduct
o± all loaning officers of member banks.
As to section 9 of the bill: This section limits loans to national
banks and member bank security and real-estate affiliates to 10 per
cent of the capital and surplus of its parent bank. This eliminates
the present provisions of the law permitting such affiliates to borrow in excess of such percentage in case of bankers' acceptances and
Government bonds and certain other eligible securities, which is
highly desirable in the development of the Government bond market and the bankers' acceptance market, for at times there is required a policy of large portfolios in order to properly conduct the
business.
This section puts a premium on listed securities which, in the
opinion of investment bankers, has in some instances been derogatory to their value. I will not go into the technical part of that, but
I can show you that that has been the case.
It requires a 20 per cent margin—I mean it is required in this section—on all collateral loans, the collateral of which must be listed
on a stock exchange. On certain classes of eligible paper, bonds
legal for saving banks, no margin is specified.
Now, as to securities legal for savings banks, and it varies in practically every State, this provision makes it possible, for example,
for a bank*to be authorized in some States to borrow on foreign
securities without any collateral at all. But it makes it impossible,
absolutely impossible, to make a loan in many States, and New York
State is one of them, with the exception of one of the Federal Land
Banks, as I say makes it impossible to borrow on Federal Land
Bank securities* at all. It makes it impossible to borrow in some



3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

States, in fact, in many States, on railroad equipment securities.
And I think probably to-day there might be legislation passed making them legal, but to-day I do not believe in any State they could
borrow on Reconstruction Finance Corporation bonds.
Senator GORE. Who do you mean could borrow?
Mr. POPE. NO one; no bank could make collateral loans on those.
Senator FLETCHER. Did you say borrow on foreign securities?
p 01 . E As collateral.
Senator FLETCHER. DO you mean the securities of foreign governments?
.
MR. POPE. Yes, sir; foreign countries securities can be borrowed
on without margin under this provision in certain States, and Connecticut is one of them, and New Hampshire is one of them, and
others. Now, might I correct that statement? I was too broad in
it. That applies to affiliates of member and national banks and not
to other dealers.
Now as to section 11 of the bill: This section raises the rate on 15day advances to banks, on borrowings from the Federal reserve
banks. This is a highly deflationary measure and therefore at this
time is considered to be extremely dangerous. And it is particularly unwise at this time because of the necessity on the part of the
Government of floating large loans. # This section would depreciate
the value of every Government security to-day.
Senator GLASS. Did it do it before it was put into the bill?
Mr. POPE. HOW was that?
Senator GLASS. The system operated for more than two years
without that section.
Mr. POPE. I can not recall the market at that time, but I am talking about the change from one rate to another. If the carrying cost
of a Government bond which would be under this provision to-day, 4
per cent in New York, which is the lowest of any discount rate, tor
it is 4% per cent in most other cities, it is not possible certainly to
make money. Certainly it is not possible to invest for the purpose
of doing so, and it is not of interest to increase the investment in
securities of the United States Government which are sold at the
{>resent time, the highest coupon rate being Z% per cent for 1-year
oans.
Senator GLASS. Do you favor the immediate retirement of nabank circulation?
Mr. POPE. I am not prepared to answer that question. That is
a purely commercial banking matter which I have not given attention to.
Senator GLASS. But you are discussing the general problem of
deflation. Would that result in deflation?
Mr. POPE. You would have to give me some time to answer that
question because I am not prepared to do so offhand.
Senator GLASS. With the retirement of nearly $800,000,000 of
national-bank circulation can't you say whether or not that would
involve deflation or not?
Mr. POPE. AS I say, you are asking me on certain technical points
in that matter with which I am not familiar.

Senator GLASS. Well, it is not a technical but a very simple
proposition.




3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. POPE. I am not prepared to answer that question, sir.
Senator GLASS. Well, on this problem of deflation, what was the
peak of loans for others during the riot of stock speculation ?
Mr. POPE. I have not thefiguresbefore me, but I should say somewhere in the fall of 1929.
Senator GLASS. But what was the peak figure, approximately?
Sir. POPE. I have not the figures.
Senator GLASS. It was many billions of dollars?
Mr. POPE. Yes, sir; probably so.
^Senator GLASS. Yet you are in favor of cutting those loans out.
Would you regard that as deflationary?
Mr. IropE. Those loans are practically cut now.

Senator GLASS. I know, but they may be cut in again.
Mr. POPE. As long as they are out now that does not affect the
present status. If they were in now and were to be taken out that
would be one problem, but they are out now.
Senator GLASS. The purpose of this bill is to avert a repetition of
the present status. You say you are in favor of cutting out loans for
others, which reached a peak of some eight billions of dollars during
the riot of stock speculation. You say you are in favor of cutting
them out. Wouldn't you regard that as deflationary?
ilr. POPE. I would if they were in. But they are not in.
Senator GLASS. But they might come in again.
Mr. POPE. I do not think they will.
Senator GLASS. There isn't anything in this bill that deflates anything right now, except stock gambling which has abated tremendously. You are criticizing this bill as extremely deflationary, and
yet as it seems to jne you are advocating policies here before the committee that would be* more deflationary than anj'thing contained in
this bill.
Mr. POPE. I do not think there is anything deflationary in continuing something that exists to-day. It would be if cutting out
something that existed to-day.
Senator GLASS. They are out because nobody is loaning money for
speculation in stocks, but they may come in again to-morrow if the
people want to make loans.
Mr. POPE. The clearing-house regulations in New York prohibit
those.
Senator GLASS. Yes; but they may be changed to-morrow if they
are pleased to do so.

Mr. POPE. I am not able to say what they might do.
what they have done.

I only say

Senator BARKLEY. They only changed them because they wanted
to, and they might change back again. There is no law that prevents it. It was a voluntary action on their part.
Mr. POPE. I think that is true. But on that I am in favor of legislation as I have stated.
Senator GLASS. Then, as I understand it, you are in favor of deflationary legislation in that respect.
Mr. POPE. The effect is not deflationary at the present time.
Senator G L A S S . It is very restrictive, isn't it?
Mr. POPE. I do not know what you mean by restrictive in this
case.
Senator GLASS. Oh, well. Never mind.



3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator BROOKHART. Your theory is that it is already deflated on
that point and you just want to keep that part of it deflated.
Mr. POPE. Yes, sir. As I stated before, the question of stopping
deflation was of no moment at that time. Investment bankers have
no objection to the provisions of this section.
Senator FLETCHER. DO you mean section 10?
Mr. POPE. Section 11. It provides that a member bank shall not
make any security loans while borrowing from the Federal reserve
bank after warning. But the Investment Bankers' Association of
America is opposed to the principle of this bill, which indicates that
a member bank could not make any collateral loans while so operating, as a general principle.
Now, section 13: While the Glass-Steagall bill makes provision to
permit adequate currency in circulation in spite of unusual gold
withdrawals, this section, which increases the reserves on time deposits of banks, is particularly unfortunate at this time, as it has
the equivalent effect of gold exports to an estimated figure of—and
I am only giving this as a pure estimation—of something like over
$100,000,000 a year for five years. This is particularly untimely as
the measure is in addition highly deflationary.
Xow, section 15
Senator GORE (interposing). Will you explain that point a little
more for me?
Mr. POPE. Well, when you take the reserves of time deposits and
increase them so that an additional amount is not available for credit,
it acts in the same way that a dollar does when it leaves the country*
Senator GLASS. Isn't it a fact, according to the testimony that
we took last spring and according to our general information, that at
least 80 per cent of the banks of the country have so manipulated
their demand and time deposits as to reduce very much the general
average of reserves behind deposits?
Mr. POPE. I understand, although I am not entirely certain because I am not familiar with the details, that that is correct. I
want you to understand that in this case I am only saying why at
this time it is particularly difficult, because it has the same eifect
as nullifying what was attempted to be clone in the Glass-Steagall
bill, in a certain degree at least.
Senator GLASS. Have you noted the fact that we expand this operation over a period of five years, that it does not immediately take
effect?
Mr. POPE. I understood that it was to take effect at once to the
extent of something like $100,000,000 a year for five years.
Senator GLASS. That depends on the" basis of estimate. Some
figures make it only $70,000,000 a year for five years. And you
understand that that provision of^ the bill is intended to correct
the illicit practices of bankers themselves.
Mr. POPE. I am only stating it as being unfortunate at this time.
Senator GLASS. Well, it was unfortunate that they should have
been guilty of this manipulation at any time, wasn't it?
Mr. POPE. I am not prepared to agree with you on the exact
phraseology, you see, because I don't know.
Senator GLASS. Well, I might call it by a politer name, but I
am not noted for doing that, I am sorry to say.




3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator BULKLEY. YOU note that it does not have any effect until
next January, do you not?
Mr. POPE. Yes, sir. , Now I will take up section 15 of the bill:
This section limits national banks to the business of buying and
selling investment securities solely on order and for the account
of others, and as such is discriminatory, as it is only directed toward
national banks.
The effect of this section is also
The CHAIRMAN (interposing). Might I ask you a question right
there?
Mr. POPE. Certainly.
The CHAIRMAN. Have you any figures showing the amount of
securities that have been sold by national banks during the last four
or five years ?
Air. POPE. I have not.
The CHAIRMAN. The country has been flooded with them. I wish
some one of the witnesses would be able to give us those figures
during our present hearings.
Senator GLASS. We have from the State Department, have we not,
in the recent investigation an approximate estimate of the foreign
securities that have been sold, and I believe the sum was approximately $12,000,000,000.
The CHAIRMAN. Over how long a period ?
Senator GLASS. Sold to and by national banks.
Mr. POPE. YOU mean distributed by national banks and others.
The CHAIRMAN. I meant both.
Mr. POPE. I can not give you the figures.
The CHAIRMAN. I have in mind that this country has been flooded
with more of these securities than it has been able to absorb. Maybe
that is a part of our trouble.
Mr. POPE. I can not give you those figures at the moment. The
effect of this section 15 is also highly deflationary. That is, it would
require the immediate sale of probabty—and as to this, on account
of lack of time which I had to prepare for this hearing is only an
estimate—that it would require the sale of several billions of dollars
of securities now held by national banks. Now, gentlemen of the
committee, that would mean that the mere fact that thejr were
obliged to sell would depress the market to an extent no one can
foresee, thus decreasing the assets of national and member banks
throughout the United States to a degree that would be certainly
highly dangerous.
Senator COUZENS. Would you suggest any effective date for that
provision to go into effect?
Mr. POPE. I should state that the date certainly should be—well,
I am not stating anything as to the provision of the bill, either pro
or con, in that respect—but I certainly would say the date ought to
be set for any provisions that are deflationary as of a time when the
liond market can stand it without ruining banks, individuals, or
corporations.
Senator COUZENS. Could anj'tliing be written into this paragraph
to make it effective at a date some time in the future?
Mr. POPE. Well, I do not know when the business of the country
"would be normal, or when this present economic situation will be
corrected.



3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator BARKLEY. And who would be the judge of when that time
arrives ?
Mr. POPE. I think there are perhaps hundreds of investment and
commercial bankers, and Members of Congress for that matter, who
would recognize that time.
Senator BARICLEY. I know; but you can not submit it to a plebiscite. You must have some one in authority to handle it.
Mr. POPE. I do not think the objection from the standpoint of
being purely deflationary would be raised by anyone at a time when
the country is not in a state of deflation.
Senator COUZENS. Would you be agreeable to leaving the time to
the Federal Reserve Board?
Mr. POPE. I should consider from what I know of the Federal
Reserve Board that they are in touch with the investment and commercial banking interests of the country, and as such certainly
should be able to determine when such a period arrives.
Senator COUZENS. Would you be willing to have written into the
bill that the Federal Reserve Board might decide when this provision should become effective ?
Mr. POPE. If this provision is to be a provision, and it is put on
a deflationary status, I should think that might be a very helpful
situation. But I am not certain, although I think it would.
Senator COUZENS. Well, we do not all admit your premise, but it
might be desirable to let some one set the date in the future.
Mr. POPE. I can only say that it seems to me that the Federal
Reserve Board, being in touch with banking and commercial and
industrial interests of the country, should be able to determine that.
Senator FLETCHER. What is the process in that section which
makes it so deflationary in your opinion?
Mr. POPE. It is the limitation of the percentage of holdings by
national banks of securities, dividing them into two classes, general
securities and Government securities.
Senator FLETCHER. But the limitations do not apply to Government obligations nor to obligations of any State or political subdivision or the farm land banks.
Mr. POPE. In the case of several billions of dollars it is based on
the estimate that it does not apply to United States Government
securities. But under that provision in that section, according to the
actual interpretation of the section as I understand it, it does apply
to Governments as well as other securities. Whether it was so
intended or not I do not know.
Senator TOWNSEND. Where is that found in the bill?
Mr. POPE. On page 36, line 11, and continuing down to the foot of
the page. It says certain provisions for buying and selling securities
by national banks, and then it states certain provisions for purchasing and holding by national banks, meaning the securities they have
in their own portfolios. Now, at the bottom, where the exemption is
made, it again refers to buying and selling, and the same phrase as
used in the preceding, to buying and selling for the account of
others. A strict interpretation of that section means, in our opinion,
that the restrictions or limitations would apply likewise to Government securities. It would mean millions and millions of dollars
worth of Government securities sold to-day.




3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

The CHAIRMAN. Would you be satisfied if the language were more
clarified so as to put Government securities in a separate class?
Mr. POPE. This measure would be so deflationary, even if corrected
as you suggest, that it would certainly be so highly detrimental to the
investment market to-day as to unquestionably "affect in a ruinous
manner the banks throughout the country as well as investment
bankers.
Senator BULKLEY. Are you referring to the restriction on page 36,
line 15?
Mr. POPE. I am not sure of the line, as I have not the bill before
me, but I understand it is on page 36, down to line 22.
Senator BULKLEY. It says treading]:
The limitations herein contained as to the purchasing and selling of investment securities shall not apply to obligations of the United States.

Is that what you mean?
M r . POPE. Y e s , sir.
Senator BULKLEY. And

you say that that would be interpreted so
that it would apply to the holdings.
Mr. POPE. Yes, sir; because above there it says holdings of banks,
and then refers to purchasing and holding of securities. And where
it refers to buying for the account of others it says purchasing and
selling. ^ The exception of Government securities later on refers to
purchasing and selling, which applies to doing business for the account of others. The phraseology there is the same.
Senator GLASS. Government and State securities, and securities
of political subdivisions, are generally excepted as to that whole
provision.
Mr. POPE. The point we were just speaking of here is that, and
what the intent was I do not know, but our interpretation of the
section is that the exemption you just spoke of applies to the purchasing and selling of securities^ which is the phraseology used in
purchasing and selling securities for the account of others, and not
purchasing and holding for the account of the bank.
Senator BULKLEY. You are afraid that that exception does not
apply to this limitation up here on line 14 [reading]:
Nor shall the total amount of the securities so purchased and held for its
own account at any time exceed 15 per centum of the amount of the capital
stock.
M r . POPE. Y e s , s i r .
Senator BULKLEY.

I see your point there. Now, I want to ask
you about that restriction: Is that the restriction that you say is so
deflationarv?
Mr. POPE. The restriction, even though it were intended for the
exception of holdings—;—
Senator BULKLEY (interposing). Assuming that we do except
Government securities.
Mr. POPE. The amount of the securities, and this is purely an
estimate, because I have not had time to get the facts, but it is an
estimate made by a person in whom I have confidence as to his ability—the estimate that it would cause the sale of several billions of
dollars of securities to-day, even though with the wording as you
think it was intended.




3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator BULKLEY. About how many billions of dollars do you
think?
Mr. POPE. I think it is probably safe to say a billion or two billion
dollars.
Senator BULKLEY. A billion or two of dollars?
Mr. POPE. Possibly $2,000,000,000.
Senator BULKLEY. Or possibly from one to two billion dollars?
M r . POPE. Y e s , s i r .
Senator BULKLEY. And

that?

you think it would probably be more than

M r . POPE. Y e s , s i r .
Senator COUZENS. What

would you say to putting a proviso in
there that this does not affect securities already held by these banks?
Mr. POPE. That would nullify the deflationary part of the bill and
correct the point I am trying to bring out, that this is not the time
to enact anything that is deflationary.
Senator COUZENS. Wouldn't that proviso correct the deflationary
part ?
M r . POPE. Y e s , s i r .
Senator BULKLEY. I

want to be quite sure of what you have said,
that this section would cause the immediate sale of securities now
held by banks for their own account, to the extent at least of
$1,000,000,000 and probably to more than $2,000,000,000. Is that
your statement?
Mr. POPE. That is my estimate based on figures which I have not
prepared myself.
The CHAIRMAN. You may proceed with your statement.
Mr. POPE. NOW as to section 18 of the bill: This section prohibits,
for example, men in the investment banking business becoming directors of member banks. It is considered that the Clayton Act
sufficiently protects banks in such instances, and it would cause the
removal from directorates of many men with investment and commercial banking experience, which would seriously hamper the activities of member banks.
This section prohibits interlocking officers between the parent bank
and affiliates. The only particular objection that the investment
banker would have to this section is in the case of smaller affiliates
of banks. In that case there are many where the size of the affiliate
is not great, but there is required a successful, careful, and shrewd
man to operate the affiliates. On account of size it is not practical
in the case of some of the smaller affiliates to hire a man and put him
on a salary such as the man could demand. For that reason to give
such a man the duty of performing the functions of an officer of the
bank as well as of the affiliates would be highly beneficial, especially
in the case of the smaller affiliates.
Senator GLASS. I might say that it is because some shrewd men
have operated these affiliates and involved the parent national bank
in great difficulties that we undertook to prevent interlocking directorates:
Mr. POM. I think.possibly I may have used the word "shrewd"
without intending to give it the meaning which you perhaps apply
to it.
Senator GLASS. It had a very pertinent application, I might say.



3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. POPE. That was not the application, however, that I intended
to impress you with, because I did not intend to do that.
Senator COUZENS. Would there be any great difficulty for these
banks to get rid of their affiliates, which in many cases I think they
should get rid of?
Mr. POPE. I should like to bring that up later.
Senator GLASS. What were the affiliates organized for? Weren't
they organized to do a class of business that the resources of the
parent national bank under the national bank act prohibited?
Mr. POPE. You ask me to make a statement in regard to bank
affiliates in general, which would require on my part intimate knowledge with all bank affiliates. But if you should like to have me do
so, I can explain the case of one with' which I am entirely familiar.
Senator GLASS. All right.
Mr. POPE. In that case it is the First National-Old Colony Corporation of Boston. I should like to ask your indulgence in saying
that as long as this has been brought up liere I am stating this personally, that I am stating these as personal facts and not as the president of the Investment Bankers' Association of America. It is not
my function to speak in that way as such officer, and I would ask
the courtesy of the press not to embody these remarks on the First
National-Old Colony Corporation as a part of my remarks as the
president of the Investment Bankers' Association of America.
The First National-Old Colony Corporation was organized for
the purpose of assisting in the missionary work necessary to sell
bankers' acceptances, which were at that time comparatively new in
this country. The country had no knowledge of them at all. We
had to go to banks throughout the country and explain what they
were.
Those banks, at a time when bankers' acceptance rates became prohibitive for them to satisfactorily invest in them, turned to this cor])oration and said, "Could you iiot sell us Government securities? "
Tor that reason we were drawn into the Government-security business, supplying them to banks, corporations, and others.
When tlie situation arrived where Government securities were
reaching a low point and banks demanded other securities, because of
interest rates or for other reasons known to themselves, this corporation was drawn into the sales to institutions largely, the sale of securities to institutions other than governments and bankers* acceptances. It was entirely an evolution.
In order to continue the sale of securities which institutions
wanted, it was necessary to take participation, and eventually in
some cases, to originate new issues of securities. Otherwise we could
not distribute them.
Senator COUZENS. What year did that begin ?
Mr. POPE. In 1918. There was no motive then, such as Senator
Glass referred to, in the case of this corporation. This corporation
to-day has 21 offices in the United States. It has !>een expanding
continuously each year since it was organized, including the present
year. It has three offices in Europe, where it sells American dollar
securities. It has an office in Buenos Aires, where it sells in South
America these American securities.
1111(11——PT 1




8

3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Every one of the 21 offices of this corporation has made money
every year, and is making money this year, in the three months of
this quarter.
This corporation has a department called the investment-supervision department, in which there are security holdings of—well, it
goes up each day, so I could not give you the last figures, but probably 600 banks of the country, many large corporations, and some insurance companies call on us, and we are asked by these corporations
and banks to supervise their securities in order that they may act
in their wisdom on the information which we, through our broad
expanse of knowledge, are able to furnish.
We have had presidents of banks to come to this corporation and
say that bank examiners have told them if they did not take our
advice in security matters it would probably be necessary to close
their banks.
We do probably the largest Government-security business in the
country, our transactions in Government securities running into the
billions of dollars a year. The total number of transactions in one
day has reached $500,000,000, and one or two davs it has run more
than $300,000,000.
During time of stress of banks this corporation has been called
upon and lias functioned to the extent of taking as much in two
instances I can recall of $40,000,000 from banks which had to have
the cash immediately. And I can recall numbers of instances where
we were called upon to take as much as $10,000,000 from these banks.
Senator FLETCHER. What are your charges ?
Mr. POPE. We make no commission charges whatever. The basis
oil which we operate is the difference between the bid and . asked
prices of securities, which is in general regulated by the market
itself.
Senator GLASS. Why might not your affiliate be operated in the
same way as an independent corporation?
• Mr. POPE. I think that without any question this corporation's
activities, which now cover over a billion dollars, and $100,000,000
was bought in before I left—I say considerably more than a billion
dollars of securities to supervise for banks to-day, that that was
brought about by the fact that it was a bank affiliate. 1 do not
think it could be done by any other private corporation in the same
way that it was done by the First National-Old Colony Corporation. And I think it is unique in that respect so far as the particular
matter of distribution is concerned.
However, there are many affiliates. The officer of one of the
principal affiliates in the Middle West, Mr. Ferris, past president
of the Investment Bankers' Association of America and president
of the First National Co. of St. Louis, is present to-dav. He can
give you the type of national bank affiliate investment seciiritv, which
does a different type of business, but is equally effective in the proper
distribution of securities to small dealers! small individuals, as
well as large investors.
Senator FLETCHER. Are those securities listed?
Mr. POPE. There are a great many securities which are listed, and
many which are not. Farm-loan securities are not listed.
Senator FLETCHER. Securities only?




3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. POPE. Many of them are listed. But I should like to explain
that if you were to attempt to-day, and on many days, to sell securities on the board, meaning on the stock exchange, you are very apt,
Jnirticularly now, to depress the market several points, even if a very
ew bonds. The off-the-board market provides a medium of finding
buyer and seller, and therefore has not the effect in larger blocks
of depressing the market. That is the purpose of this First Xational-Old Colony Corporation.
Senator G O R E / I did not quite follow you there. Has not the
effect of what?
Mr. POPE. On the stock exchange. The principle is that you
have something to offer, for example, and tnere is to be found a
buyer or bidder. In the case of over-the-counter business the principle under which we, for example, operate is this: AVe find a
buyer when we know there is a seller.
Senator COUZEXS. Using " shrewd " in the sense that you u>ed it
a while ago. isn't it a fact that shrewd lawyers have devised many
of the^e affiliates of banking groups for the purpose of evading the
inhibitions of the law i
Mr. P(.PE. I can not conceive that to be a fact, but I am not familiar with the'details of any other affiliate. I have too much to do
to run mv own business.
Senator COUZENS. Speaking of it from the standpoint of wide
experience, you must nave observed that many of these affiliates
have been, iii banking groups, devised by shrewd lawyers to evade
compliance with State and Federal laws. Isn't that a fact ?
Mr. POPE. I would not say it was as the initial reason for their
being. I do not say that there are no exceptions, and that there is
not in the investment banking business as well as in other businesses,
men who are not sound in their judgment or entirely honest. That
is probably true of any business.

Senator'CouzENs. I did not say they were dishonest. I was using
the word " shrewd " in the sense' that you used it a while ago.

Mr. POPE. I did not use it in that sense.
Senator COUZENS. Not in the sense that you suggested Senator
Glass used it.
Senator GLASS. How does anybody know in what sense I used it ?
Senator COUZENS. I was putting the interpretation on it that the
witness did.
Senator GLASS. I conceive that Mr. Pope has perhaps described
an ideal and virtuous affiliate. It might be a little distressing to
describe here one of an utterly different type, which lost to its
stockholders $57,000,000 in one year.
The CHAIRMAN. Yes; and they are now asking that we not interfere with them because of the" condition of the times.
Senator GLASS. Just to get back to the proposition discussed a
while ago. I should like to call Mr. Pope's attention to the fact
that there is not a sentence in this section that requires the immediate disposal of any securities held by a bank. The section very
distinctly provides that the business of purchasing and selling investment securities shall hereafter be limited, and so forth. It does
not require any bank to immediately dispose of its holdings.




3.6 NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

32

The

fully

CHAIRMAN.

While you are going into your own business quite
,

.

.

Mr. POPE (interposing). I think if I might say it, m response to
Senator Glass's question, that our interpretation was the hereafter
meant as soon as the law was put in force it would take effect.
Senator GLASS. Oh, no. It means purchasing and selling hereafter.
The CHAIRMAN. Under that interpretation Mr. Pope does not object to it. Is that it?
M r . POPE. Y e s , s i r ; I d o .
Senator GLASS. For one I

would be obliged to Mr. Pope if he
could supply us with language that would make it clearer. But
that is my interpretation of it.
The CHAIRMAN. Then you and Mr. Pope agree on what should
be clone on that?
Senator GLASS. AS to what the intent is; yes.
Mr. POPE. I do not know just what you mean to say in regard to
an agreement between us. My statement still stands, that this is
not the time, on account of deflation, to sell securities, and therefore
it is not the time to enact this legislation.
The CHAIRMAN. But Senator Glass says this bill does not compel
the selling of securities. If that is correct in the matter of the interpretation of this section of the bill, then you have no objection to
that provision of the bill ?
Mr. POPE. If it does not require the sale of securities, they would
have no objection from the standpoint of deflation.
Senator FLETCHER. That is in reference to section 15 of the bill?
Senator GLASS. Yes.
The CHAIRMAN. Mr. Pope, you went into your own business quite
fully. These securities are recommended by you, or at least that is
the impression carried to the public when they are sold by you, is
it not?
Mr. POPE. Information regarding the value of securities is given,
and then our customers have to make up their own minds on the
information so given, as to whether the securities suit them for the
purpose of purchase or not.
The CHAIRMAN. Your experience is that the buying public having
confidence in you buy them very freely?
Mr. POPE. Naturally so, if people have confidence in us.
The CHAIRMAN. Aiicl you have been more careful in the sale of
stocks. You have discriminated carefully, and to such an extent
that bank examiners, as you have said, have recommended to banks
that you are fully advised. Did I understand you on that point
correctly ?
Mr. POPE. In at least one or two instances.
The CHAIRMAN. NOW, tell us something about the rise or fall of
securities that you have sold?
Mr. POPE. Every security that I know of has depreciated in value.
And it is impossible for securities in view of the universal drop in
commodity values the world over, with the exception perhaps of
very marked exceptions, to hold the values they had a year or two
ago.
The CHAIRMAN. Have you sold foreign bonds?
M r . POPE. Y e s , sir.




3.6NATIONALAND FEDERAL RESERVE BANKING SYSTEMS

The CHAIRMAN. What is the average value of tlio«e bonds now as
compared to the time when you sold them, just in a general way,
I mean?
Mr, POPE. I can not tell you. But I did see a compilation which
was made by some one and which stated approximately that the
average fall in commodity prices was virtually the same as the average fall in foreign securities.
The CHAIRMAN. What percentage was that, about?
Mr. POPE. I don't remember that.
The CHAIRMAN. Was it 30 or 40 per cent ?
Mr. POPE. I should say yes, But I should also say
The CHAIRMAN (interposing). Then people who bought from you
lost somewhere near half the money they invested.
Mr. POPE. So far as I know in the case of anybody who has purchased almost anything, it is a fact that it has' not the same value
to-day as it had then.
The CHAIRMAN. But bank examiners have told banks that your
advice was a good basis for the investment of their depositors7
money.
Mr. POPE. It was a good basis, sir.
The CHAIRMAN. Of foreign securities?
Mr. POPE. Well, sir, to-day the purpose of any well-organized
banking and investment house is to endeavor to place their customers, which in the case you are referring to is banks, in the best
position under the circumstances. And the question as to whether
they should hold this or buy that is a question of circumstances. It
is not a question of previous value.
The CHAIRMAN. Oh, well, I will admit that. But the point seems
to be that the advice they got was not the kind of advice they
thought they were getting. In other words, the average buyer of
securities has come to realize that the advice he paid for in the higher
places was no better than his own judgment; and that if lie had invested his money at home or in other places he would not have fared
any worse than to take this valuable advice.
Mr. POPE. I do not agree with you, Mr. Chairman, but unless you
want me to do so I will go on with the discussion of the bill. Or I
can go ahead and give you what I think are perhaps practical ideas
on this subject.
The CHAIRMAN. Oh, well. Never mind.
Senator COUZENS. Are anv securities that vour house sold now in
default?
Mr. POPE. There is only one issue: I mean that this corporation
issued as originating house* that is in default, of foreign securities.
And that has sufficient money, and it has presented that amount of
money to purchase the gold necessary to pay their interest, but when
presented at the bank of the nation which had the gold it was finally
refused on the ground that that particular locality should not be
given an advantage over others that were unable to pay sufficient
internal currency to purchase gold.
Senator COUZENS. Does that apply to both principal and interest,
when you say that is the only default?
Mr. POPE. Well, to interest and principal, but I am not sure
whether there is any case where a sinking fund is temporarily sus


34

XATIO^AL AND FEDERAL RESERVE BANKING SYSTEMS

pended. But as to a case of bonds due or overdue it applies, that
there is none.
Senator BARKLEY. Neither your house nor any other house that is
reputable is willing to handle any bondj or suggest the purchase
of any bond, that it does not think sound, is it?
Mr" Pope. It does not recommend the purchase of any bond that
it thinks is not sound, is that your question?
Senator BARKLEY. Yes.
Mr. POPE. Certainly not.
Senator BARKLEY. YOU may not recommend a particular type of
bond to a customer, but regardless of the type of bond any customer
might want you certainly would not put your house, in a position' of
handling it or recommending it unless you thought it was a sound
maturity, would you?
M r . POPE. Certainly not.
Senator BARKLEY. And in

that sense the mere fact that you are
handling a bond, being the president of a reputable investment bank,
carries with it certainly the guarantee that it is sound, does it not?
Mr. POPE. It certainly does not carry any guarantee. But people
have learned to respect our judgment because it has been proven to
be correct over a period of 13 years.
Senator BARKLEY. I did not mean that you guaranteed the payment of anything.
M r . POPE. XO.

Senator BARKLEY. But you do put your reputation as an investment house against anything that you handle?
M r . POPE. Y e s , s i r .
Senator BARKLEY. And

the mere fact that you handle a type of
bond is of itself a recommendation, is it not?
Mr. POPE. I think it has come to be so,.but not merely because we
are an affiliate of a bank, but because of our reputation plus the fact
of the reputation of the parent institution.
Senator GLASS. Right on that point, Mr. Pope: You loan the name
and prestige and tradition of vour national bank to your affiliate.
Is your national bank responsible for all losses that may occur in
the"operation of your affiliate?
M r . POPE. N o t "at a l l .
Senator GLASS. Don't

you think it ought to be ?

Mr. POPE. I should not think so. We do not intend'it to be so.

Senator GLASS. You loan to your affiliate, as I say, the prestige
and tradition of your sound national banking institution. People
buy its investment securities perhaps largely on that basis, and yet
if a failure should come—and I am as gratified as you are perhaps
that no failure has come except the one you said—it seems to me there
ought to be some responsibility on the part of the bank. Evidently
you did not write any of those letters in Scape Goats, did you?
Mr. POPE. I have never read the book.

Senator

GLASS.

Perhaps it would be of interest if you did read it.

Senator BROOKHART. When did you begin selling Government
securities or handling them in your affiliate F

Mr. POPE. I think approximately two vears after it was founded,
%
I think»in 1920 or 1921.
*
'




3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator BROOKHART. Wheti <lid you begin handling securities of
private corporations and institutions?

Mr. POPE. Probably a year or so after that.
Senator BROOKHART. Jfow, we will say that governments were at
par when you began, were they not ?
Mr. POPE. NO, sir. Long-term governments were selling tit 85.
Senator BROOKHART. That is, they had been deflated in 1920?
M r . POPE. Y e s , s i r .

Senator BROOKHART. But when the Government handled them itself and sold them they all sold at par?
M r . POPE. Y e s , sir.

Senator BROOKHART. And then after your affiliate institution got
charge of them they depreciated?

Mr. POPE. When our affiliate got charge of them they went up
some 30 or 40 points.

Senator BROOKHART. When did they next depreciate ?
Mr. POPE.' Well, I can not recall the date of the present movement.

Senator BROOKHART. They did not go up or down, either one, as
long as the Government itself handled them.
Mr. POPE. The Government, except incidentally, has. nothing to
do with the handling of Government securities after the initial distribution, except as the Federal reserve in the open market purchases
them. It is all in the hands of investment bankers.
Senator BROOKHART. The big issues were Government sales and
there was no gambling in them, but they were sold to the people of
the country at par. ^
M r . POPE. Y e s , s i r .

Senator BROOKHART. And after the banks and their affiliates got
hold of them by calling loans of people who borrowed money to
buy those securities, then they depreciated?

Mr. POPE. They did depreciate, but not because they were bought
by those people, but because of the conditions in the country in 1920.
" Senator BROOKHART. XOW, let us see about the conditions of the
country. I remember what happened to agriculture in 1920, but
following that time for every other business there was a great revival
generally, I mean in everything except agriculture.
Mr. POPE. JTO, sir; and the reason they went down was because
of money rates. Money in 1921 caused the Government to pay 6
per cent for short-term credit because money rates of the country
were so high. X can not recall, exactly but the Federal reserve rates
in Xew York were frequently 6 per cent, and money at times in New
York reached 20 to 30 per cent on call. .
Senator BROOKHART. Yes; I remember about that, too. You continued to sell these securities in 1926,1927, and 1928?
M r . POPE. Y e s , s i r .
Senator BROOKHART.
M r . POPE. Y e s , sir.

And in 1929 up to October?

Senator BROOKHART. And you advised that thev were sound and
good investments, in the same way that you had given advice all
the time?

Mr. POPE. Senator Brookhart, the task of taking securities from
banks in that deflationary period you refer to was a stupendous
problem. It takes the very best



3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator BROOKHART (interposing). I am not talking about the
deflationary period, but the inflationary period.
Mr. POPE. I thought you asked me if we still recommended them
when they were going down.
Senator BROOKHART. N O ; while they were going up.
Mr. POPE. We did not have to recommend Government securities
as a credit, and we never prophesy whether they are going up or
down. We don't know.
Senator BROOKHART. In 1929, before the 24th of October, when
this thing blew up, you continued to sell and to give your usuaL
assurance of recommendation, whatever it was, up to that date,,
didn't vou?
Mr. ] O E The usual assurance; yes, sir.
P P.
Senator BROOKHART. That is what I say.
Mr. POPE. But that is not
Senator BROOKHART (interposing). You had not detected up to
that time that things were inflated to the bursting point or anything
of the kind, had you? .
Mr. POPE. I can not recall what our attitude on Government bonds
was at that time.
Senator BROOKHART. And as to other bonds you were still sellings
them up to October of 1929 ?
Mr. POPE. If you mean by your, question that we did not know
the date when the deflation would take place, I will answer, no.
Senator BROOKHART. And you sold to vour clients and. to peoplegenerally just as though that highly inflated period was perfectly
sound? You continued your business just the same as at any other
time?
Mr. POPE. I can not recall exactly what our sales were at that time..
Senator BROOKHART. Well, anyhow they continued a good deal,
better than they are now?
Mr. POPE. Last year we had the largest volume of sales of any
year in our history.
Senator BROOKHART. And vou had a good volume of sales up toOctober of 1929?
M r . POPE. Y e s , s i r .
Senator BROOKHART.

Then your knowledge and your advice in
the situation did not at all detect the enormous inflation of things
that burst on the 24th of October, 1929?
Mr. POPE. I said we were not sufficient prophets to determine the
date on which that would take place; no, sir.
Senator BROOKHART. Your sound, judgment was not deep enough
to see that or to understand it at all?
Mr. POPE. I object to the words " understand it at all" part of it,
because I
Senator BROOKHART (interposing). I am trying to find out the
facts, whetheryou did detect it before it happened.
Mr. POPE. We were not cognizant of the date when deflation would
take place, nor were we as cognizant of the extent of it as we are
to-day.
Senator BROOKHART. YOU did know that deflation would take
place at some time?
Mr. POPE. We thought it might be possible, but did not know.



3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator BROOKHART. And knowing that you still continued to
advise the public and to sell to the public tliose inflated bonds and
securities?
Mr. POPE. I think it is probable that we: bought bonds from them
rather than selling them, although I am not sure.
Senator COUZENS. What is the name of your bank affiliate ?
Mr. POPE. The First National-Old Colony Corporation.
Senator COUZENS. What is the name of your institution that
you have been referring to?
'Mr. POPE. I am referring all the time to that same institution.
Senator COUZENS. What is your bank affiliate ?
Mr. POPE. Our bank affiliate is the First National-Old Colony Corporation, and the parent is the First National Bank of Boston.
Senator COUZENS. I wondered why you made the name so much
like the parent in organizing your corporation.
Mr. POPE. I do not know, sir. The name was originally the First
National Corporation, before I joined it in 1019. And the reason it
is the First National-Old Colony Corporation now is because the
First National Corporation was merged with the Old Colony Corporation and the two names were linked together.
Senator COUZENS. Isn't it significant that many of these affiliates
carry the same name as the parent national bank? For example,
there is the National City Bank and the National City Co.
Mr. POPE. The significance of what ?
Senator COUZENS. What is the purpose of having these names so
alike?
Mr. POPE. I shouldn't think there was anything in it. At least it
is nothing significant to me. I do not know what you mean by
" significant."
Senator COUZENS. It seenis to me the significance to the public
vould be that there was very close affiliation.
Mr. POPE. They are affiliates.
Senator COUZENS. And that the responsibility of both organizations was back of them.
Mr. POPE. Well, sir
Senator COUZENS (continuing). I mention that because I think the
public has ofttimes been misled, because even in my own city we did
have the First National Bank and the First National Co.*, the inference being very plain to the public that thev were so close to each
other that the responsibility of each corporation was back of anything that either did/
Mr. POPE. Well, I think I now see what you mean. But I do not
think the significance was anything that was to be concealed. Certainly it was not in our own instance, nor was there any intention to
mislead anyone.
Senator FLETCHER. In the case of your own institution, do your
national bank and your affiliate have the same directors?
Jlr. POPE. NO, sir. There are some that are, but there are others
that are not on both boards.
Senator FLETCHER. There are some directors of the First National
Bank of Boston who are directors of the affiliate?
Mr. POPE. Yes, sir; some of them are.
Senator BROOKHART. DO you transact any of your business on the
stock exchange?



38

3.6 NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. POPE. We have to protect our customers if the market for a
security is only on the stock exchange. But we make no profits from
such transactions.
9
Senator BROOKHART. HOW do you mean, to protect your customers i
Explain that.
Mr. POPE. Well, if we receive an order to sell securities at the
market for a customer, if the market is both on the exchange and oft'
the exchange, it is possible that a bid for the securities would be received first on the exchange. If so the customer should have the
advantage of that. We pay a commission the same as any individual
would pay for the transaction on the exchange. And we do not
charge the customer for that service.
Senator BROOKHART. YOU sell it for him on the exchange, you
mean by that?
M r . POPE. Y e s , s i r .
Senator BROOKHART.

Without charge, but you sell at what it is
bid and not what is asked ?
Mr. POPE. Well, whenever a transaction is quoted the highest bid
is what receives the securities, if it is acceptable to the seller.
Senator BROOKHART. And a seller would sell at the asked price, I
presume, and you would get the best you could for your customer?
Mr. POPE. Yes, sir; the best I can for the customer?
Senator BROOKHART. If you are buying you do it the other way;
buy at what is bid?
Mr. POPE. Yes, sir. You become the bidder if you are buying,
and you become the seller if you are selling.
Senator BROOKHART. What proportion of your business is that
kind of business?
Mr. POPE. A S little as possible 011 the stock exchange.
Senator BROOKHART. What I should like to know, if you can give
us some idea of what proportion of it represents that " as little as
possible " that you refer to?
Mr. POPE. I can not give you the percentages, but it is a very
small proportion.
Senator BROOKHART. It is only occasionally that it happens?
Mr. POPE. It is every day, but with transactions of several billions
of dollars a year you can see that several transactions a day might
be a very small proportion of a day's business.
Senator FLETCHER. What amendment would you suggest to section
18 of the bill, or do vou think it ought to be stricken out entirely?
Mr. POPE. I feel that the section should, as well as the others I
have referred to, be deleted at the present time. I can not see how
it is possible for this section, or the others, to be included in a bill
carrying out the purposes of this bill without affecting detrimentally
the present status of the country. Now, in going over it I will say
further as to the section
Senator BROOKHART (interposing). One other matter about deflation : About what was the average level of security values in 1929,
before the deflation, as compared to present values ?
Mr. POPE. I can not give you that. I suppose it has been determined, but I can not give it to you.
Senator BROOKHART. I S there any way to get that information?
Mr. POPE. I imagine the statistical services have it.



3.6 NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator BROOKHART. But you have no idea how much these securities have been deflated since the peak of 1929 ?
Mr. POPE. I can not give it to you definitely.
Senator BROOKHART. You do not handle stocks at all. but bonds?
Mr. POPE. We handle preferred stocks, and in some cases bank
stocks buying and selling.
The CHAIRMAN. Has the shrinkage in bank stocks been greater
than the shrinkage in other securities?
Mr. POPE. I am only hazarding a guess, but I shouldn't think there
was much difference on the market.
The CHAIRMAN. DO you sell your own bank stock on the market ?
Mr. POPE. If anybody asks us for it we try to obtain it.
The CHAIRMAN/What was the peak price of your bank stock?
Mr. POPE. I think something about $200.
The CHAIRMAN. And what is the present quotation on it, or is it
a listed stock?
Mr. POPE. It is not listed: no, sir. I can not offhand tell you.
The CHAIRMAN. What are present sales on it ?
Sir. POPE. Forty of fifty, I presume.
The CHAIRMAN. Other securities have not suffered as bad as that,
have they?
Sir. POPE. Yes, sir; many securities have suffered much more.
Senator BROOKHART. But the average of them is a good deal more
than that?
Sir. POPE. I would not attempt to say exactly how much more.
There are many that are more.
Senator BROOKHART. Take the National City Bank of New York,
and it has suffered a good deal more than yours.
Sir. POPE. I am not offhand familiar with their high or low._
Senator BROOKHART. And the Chase National Bank of New York
the same way.
Sir. P O P E / I would answer in the same way on that.
Senator GORE. Are you speaking of First National Bank stock?
Sir. POPE. Yes, sir; First National Bank of Boston.
Senator GORE. IS there any other stock that they hold, such as the
First National-Old Colony concern, that is on the market ?
M r . POPE. NO, sir.
Senator GORE. It is owned entirely
Sir. POPE. It is a part of the First

by the First National Bank?
National group, also the Old

Colony Trust Co.
Senator GORE. Does the First National Bank own all the stock
of the First National-Old Colony Corporation i
Sir. POPE. NO. sir: it does not own any of it at the present time.
Senator GORE. IS the stock held in the company?
Sir. POPE. It is held by the same stockholders as the First National Bank of Boston.
Senator GORE. That was what I was getting at.
Senator GLASS. Your bank owns the entire capital stock of its
affiliate, does it ?
Sir. POPE. NO, sir; it does not own any of it.
Senator GLASS. It does not own any of it?
S i r . POPE. NO, sir.
Senator GLASS. Very
The CHAIRMAN. You




well.
may proceed with your statement.

3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. POPE. Further as to section 18 of the bill: This section prevents any member bank from being a correspondent of any other
bank or security dealer. That is the interpretation given to that
paragraph. Such a provision would practically stop the security
and industrial business of the country. It is possible that that is
not the intention of the section, but
Senator GLASS (interposing). What section is that?
Mr. POPE. Section 18. The word M correspondent" used in that
section is not defined in law. I am quite naturally taking the general
interpretation on the street of the meaning of the term. This appears to mean, however, that no bank could have deposits with any
other bank or security dealer as it is worded. I do not know -what
the intention was. But I assume certainly that the probable intention was that securities could not be delivered in various parts of the
country through any bank because security dealers could not have
correspondents. Therefore dealers would be prohibited in the matter of using them and it would mean the mechanism of distributing
securities throughout the country almost impracticable.
In the matter of section 21, the Investment Bankers Association
of America did not feel they are familiar enough with the commercial banking business to pass on it, but they have no objection to the
paragraph which permits branch banking. But, as I say, they are
not qualified to discuss that subject.
Now, as to section 25: This section restricts the aggregate of all
loans to all dealers to 10 per cent of the capital and surplus of banks,
and in some cases less to bank affiliates. This reduces the present
amount dealers can borrow against Government securities and bankers' acceptances, which would make it difficult for them to properly
handle the business.
I will say that this whole section is highly discriminatory as it
does not apply to State banks.
This section appears to be intended to divorce all affiliates of
national banks within three years. It is not possible for us to
determine the exact meaning *of that section, but we judge it to
mean as stated. If it does
Senator GORE (interposing). Let me ask you a question right
there: You stated that the stockholders in the* First National Bank
owned the stock in the First National-Old Colony Corporation.
Mr. POPE. NO, sir; I said it did not own it.
Senator GLVSS. YOU said the bank did not own it?
M r . POPE. Y e s , sir.
Senator GORE. But you said the stockholders did.
M r . POPE. Y e s , sir. *
Senator GORE. Are they at liberty to sell or withdraw that stock?
Mr. POPE. The stock is trusteed tor the benefit of the stockholders

of the First National Bank.
Senator GORE. Then it is really bound up. If they sell their stock
in the First National Bank of Boston they must dispose of their
stock in the First National-Old Colony Corporation?
Mr. POPF. I should think you are correct.
Senator GLASS. YOU say tfiis section would circumscribe the holdings of Government securities by banks 10 per cent.
M r . POPE. Y e s , sir.




3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator GLASS. Have you read this provision?

[Reading:]

Provided, That loans, collateraled by Government liomR or by bonil^ issued
by the State in which such bank is situated, or issued by any political subdivision of .such State, shall not be included within the foregoing limitations.

Mr. POPE. Without the bill in front of me, I will say that the
exception is in the case of affiliates to which I refer.
Now, this section is intending also to divorce, as I have said, the
affiliates of national banks within three years. This would mean,
of course, the disintegration, probably, of such institutions at once.
If it does, it eliminates some of the largest distributors of securities
in the country to-daj\ And in some of the large cities of the country it reduces the distributing power in those cities to a very large
extent, to a substantial extent.
Senator BROOKHART. If these large distributors, like yourself, in
1929 kept distributing tliis stuff at the inflated values, isn't it about
time they ought to be-eliminated?
Mr. POPE. "Well, perhaps you will think I am not answering your
questions', but I can only say that the people of the country in u general way buy whatever they want to buv. and if the demand is great
for securities from dealers, members of stock exchanges, affiliates of
member banks, they would sell such.
Senator BROOKHART. YOU think, then, that the salesmanship part
of it has no effect ? You put all of it on the board I
Mr. POPE. I do not think it is all on the board, but I say that is a
fact. If they want the securities they will be purchased.
Senator BROOKHART. If these big distributors are not going to

find out the honest and reliable course of values so the public can
rely on them in the matter of making investments, they might better
be abolished entirely than to be used in the way thev were used in

1929.
Mr. POPE. Of course you are referring to affiliates as having done
that: I can tell you only from the figures of the Investment Bankers' Association of America, but the affiliates are a little less than 25
per cent of the total number of investment banking members.
Senator BROOKHART. Then let us put only 25 per cent of them in
it. Did they only handle 25 per cent of the" business i
Mr. POPE. I can not tell you.
Senator BROOKHART. Let us only put on them the proportion of
the business they handled. If they put out 25 per cent of it, then
it is a big item, isn't it ? And in being affiliated with the big banks
probably they handled more than 25 per cent.
Mr. 3?OPE. 'Possibly.
Senator TOWNSEND. WHAT effect, if anv, would this provision have
upon national banks becoming State banks? Would there be a
tendency toward a change from national to Stale banks?
Mr. POPE. Of course, I can not answer for any national bank, but
it is the opinion of investment bankers that the important provisions of this bill are so discriminatory that it would certainly necessitate some change of national-bank charters into State-bank charters. But that is only an opinion.
Senator TOWXSKXD* Consolidation or the reverse.
Mr. POPE. It would certainly not do the reverse in any circumstances.



3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator GLASS. Mr. Pope, you seem to be in disagreement with the
vice chairman of the First National Bank of Boston, Mr. B. W.
Trafford, whom we regarded as a man of such experience and good
judgment that we called him down here before the subcommittee.
I believe that he was in favor of complete separation of national
banks and their affiliates.
Mr. POPE. Do you mean when you say complete, by not ha\mg
_ ,
,
interlocking directors?
x
Senator GLASS. Well, I do not know what he meant. I do not
undertake to interpret what he meant.
Mr. POPE. That is what I think he meant.
Senator GLASS. Here is what he said. After agreeing with certain restrictions which we have embodied in this bill, that should
be put upon affiliates, he was asked [reading]:
Would you place any further restrictions on them in order to get a more
complete separation between the bank and the affiliate?

And then he answered [reading]:
Well, I would try completely .to separate them. I would try to have the
funds that support the security business segregated from the commercial hank.

Then he was asked [reading]:
How would you do that?

And he answered [reading]:
By putting the stock in the hands of trustees for the benefit of the stockholders of the bank and let the affiliate have its own capital and stand on. its
own feet.

That is what we have undertaken to do in this bill.
Mr. POPE. I have suggested exactly that, to the best of my ability.
I have stated that they should trustee the stock and have the corporation stand on its own feet, and that is exactly what this corporation I have described does.
Senator GLASS. Well, but you not only do not want complete separation. but you want the officers of the bank to be the managers of
the affiliate.
Mr. POPE. NO, sir. The recommendation by many bank affiliate
officers who appeared here I believe from the testimony, if I recall
it as given before your subcommittee, recommended that the directors be different: and certainly as far as we are concerned and as
far as many others I know of' are concerned, the question of interlocking officers is of no degree of importance.
Senator GLASS. In order that it may be in the record and in order
to show that the subcommittee had not acted in a whimsical way
but has for weeks after weeks gone over these matters with the utmost
care and sought the advice of experienced and tested bankers and
experts, I want to read into the record what was said bv Mr.
Broderick, the superintendent of banks in New York, with re>pert lo
affiliates [reading]:
With reference to affiliate companies, we are recommending that
of any bank be pctmittcd to be an officer of any affiliate or holding
that the stock of the affiliate or holding company be represented bv
certificates and not coupled in any way with the certificates of the

no officer
company i
individual
bank.

He recommends also a blanket provision as to the limiting to 10
per cent of the capital stock of a banking institution for all loans



3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

made to a company of its affiliates, investments in stock, and the like,
so that the aggregate of all shall not exceed 10 per cent of the
capital and surplus of such institutions.
I also at this point want to put in the record the testimony of
Mr. Owen D. Young, who I think is a director in the New York
Federal Reserve Bank, who said [reading]:
I am clear that the ownership of the security companies and of the bank
should be identical.

In other words, I take it that he meant that the bank should be
responsible for the operations of the securities company, which is
just the contrary to what you said in response to a question from me
a while ago, that it had no responsibility in the matter. He said
[reading] :
No other kind of affiliate should be permitted. If there is a divided iutt»re>t
then I think it would be better to prohibit alllliates altogether.

And further, Mr. Young insisted that there should be public statements of their condition by affiliates, to which I understand you to
object, Mr. Pope.
M r . POPE. NO, sir.
Senator GLASS. Oh, yes.
Mr. POPE. DO you mean in the previous testimony ?
Senator GLASS! Yes.
Mr. POPE. If I did, and I think I did say it at that time.
Senator GLASS. Well, that is what I am talking about.
Mr. POPE. I am not objecting to that now.
Senator GLASS. Well, you are making a sweeping objection

to this
provision, and it requires publicity and examination.
Mr. POPE. Not to-day, Senator. X have stated just the opposite
to-day.
Senator GLASS. All right. And I hope to-morrow you will change
your mind about some of the other provisions of the bill.
Mr. POPE. That was a technical situation in regard to a public
statement or not, which made me change my mind.
Senator GORE. YOU stated that the officers of the First National
Rank of Boston owned stock in the First National-Old Colony Corporation. Will you put in the record the exact reasons why the
bank organized this alter ego or double instead of endeavoring to
transact the same business itself? Was it because under the law
affiliates could do some things a bank could not do, or that the bank
could shift the responsibility to the affiliate? Or what was the
reason ?
Mr. POPE. I can not tell you. The question of the legal matters
coming up on consolidations'are very difficult to follow. And I was
not even in Boston at the time it was done. But I can assure you it
was not done for the purpose of evading any law or as a subterfuge.
However, I can not tell you the technical legal reason why the exact
method was employed.
Senator GORE. You admit it has been employed pretty generally
over the country in late years, however?
Mr. POPE. I think there are a great many, not identical though.
There are some small differences in each case, but such affiliates do
exist.



3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator FLETCHER. What other section do you wish to speak on?
Mr. POPE. I will now come to section 20. This limits the borrowino> of an individual or corporation on loans of collateral security to
loTper cent of a member bank's capital and surplus. It thus repeals,
all exceptions in section 5200 of the Revised Statutes, which section
is particularly severe, and I only bring this to your attention, particularly severe on bankers7 acceptances. Government bonds, and on
industry and agriculture, to the extent that it restricts loans secured
by shipping documents.
Section 27 provides for reports of national bank affiliates. In general this report is in accordance with recommendations made at
hearings of the subcommittee and as such is in accordance with the
opinion of investment bankers. However, the requirements that an
affiliate publish its holdings if borrowing over 5 per cent of the
parent bank's capital and surplus from any bank or banks is not
only against the best interests of the affiliate but is derogatory to the
investment market.
It discloses, for example, if the report occurred on the date of issue
of securities, it would then undoubtedly show that the entire participation of the affiliate was held by the affiliate. The report going out
a few days later would give to the public the impression that the
affiliate had been unable to sell those securities; the impression would
be that they were not satisfactorily taken by the public, and the
public would start to sell them. This would hurt the affiliate and
would hurt the bond market.
Senator BICOOKHART. Upon that proposition let me ask you: If
that is what would happen, isn't the public entitled to know it?
Mr. POPE. NO, sir; because it is not a fact.
Senator BROOKHART. It would be if the securities did not move.
Mr. POPE. But I did not say that. I say when they are purchased
it may take two or three days for them to be sold, but the payment
on them frequently does not occur and usually does not occur for
at least 10 days in the case of new issues.
Senator GLASS. After all the committee was not so much interested in the effect upon the public as in the effect upon the bank and
the management itself. However, the fact that the bank would be
required to do this would operate as a deterrent, wouldn't it, on reckless management ?
Mr- POPE. Well, sir, the question would seem to me to be that the
publication of a portfolio of an affiliate was no more important than
the publication of a portfolio of the bank, the parent institution.
Senator GLASS. Well, that takes us back to the original inquiry,
why the affiliate? Why not organize on its own basis and responsibility and conduct the business of investment banker rather than
hooking up with a commercial bank, or rather than have a commercial bank institute an affiliate to do what the national bank act
prohibited it from doing?
Mr. POPE. NOW section 28: This section requires examination of
all bank affiliates. This section is in general in conformity with
the general feeling among all affiliate officials, and is' highly
recommended.
I have nothing further to say.



3.6 NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator BULKLEY. We have talked quite a little bit about deflation. I should like to inquire if you intend to imply that deflation
is a bad thing in itself ?
Mr. POPE. Well, sir, it depends upon when you apply deflation
as to whether it is good or bad.
Senator BULKLEY. Very well. Will you elaborate a little to show
just what you do meani
Mr. POPE. I mean that 1 think deflation is bad as we see it to-day
because it is excessive and has brought commodity, real estate, and
security values to a point probably and in the opinion of myself
far below intrinsic values. And when the spirit of the people'gets
to the point of thinking in terms of deflation, which means pessimism, the only thing to be said is that deflation in such cases is
certainly bad. And a certain measure of inflation to stop the deflation appears from the standpoint of economics to be essential.
Senator BULKLEY. When you say that prices are below intrinsic
values, what is your measure of intrinsic values I
Mr. POPE. There is no measure. The measure of intrinsic values
is a question of judgment, which always makes it difficult.
Senator BULKLEY. When we say that prices are below intrinsic
values we can only-guess about them ?
Mr. POPE. Yes, based on facts.
Senator BULKLEY. What would be your measure, then I
Mr. POPE. Aj^plying the facts to the future.
Senator BULKLEY. Can vou tell us just what you mean? How
would you apply the facts to the future t
Mr. POPE. The value of anything is what to-morrow it can be sold
for presumably. The only measure you have are the facts concerning values to-day. You have to guess what the result will be on
those facts to-morrow.
Senator BULKLEY. YOU said something about intrinsic values,
which I take it are distinguishable from market values.
M r . POPE. Y e s , s i r .
Senator BULKLEY. And I

was trying to get what you meant by
intrinsic values.
Mr. POPE. For example, they are based upon this situation. The
stock of a corporation might be selling at 10, we will say. The actual
liquidating value of that corporation if completely wiped out and
liquidated might be 20. Certainly the basis of intrinsic value then
would be rather on the basis of liquidating value than on the basis
of the market.
Senator BULKLEY. Liquidating value based upon present market
for its shares, do you mean i
Mr. POPE. Well, based on your judgment as to what those assets
could be sold for; yes, sir, ii they are salable assets. It might be
casll#
• •
i - t
Senator BULKLEY. SO that your measure of intrinsic value is the
present market value of the sum of all the assets minus whatever
liabilities the corporation has.
Mr. POPE. I do not quite follow you there. But I will say
J31161—3*2—pt l
1




3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator BULKLEY (interposing). I am trying to trace out what
intrinsic value means. I am trying to get your statement fairly into
our record.
. .
Mr. POPE. Perhaps I can explain it in this way: Intrinsic value to
me means the real value, and not the value based on the market for
securities.
Senator BULKLEY. Well then, I will have to ask you: What is the
test of real value ?
Mr. POPE. It is the real value, rather, based on the facts, which can
be determined to prove the value in terms of to-day. If it is cash
value it would be exactly the amount of cash.
Senator BULKLEY. Well, if it is something else you have to guess
what real value is.
Mr. POPE. After all you might not have to guess because you
might have a bid for the assets.
Senator BULKLEY. HOW is it as distinguished from market value ?
Mr. POPE. Market value is entirely based upon the judgment of
the public or other folks concerning the market, effected by such
as pressure for sale of too great an amount of that security on the
market, and other factors.
Senator BULKLEY. Well, Mr. Pope, I am very frank to say that
you have not entirely satisfied me as to the distinction between intrinsic or real value and market value. But if we can not arrive at
it any better than that I am ready to go on to the next question.
Senator GORE. YOU admit that there is such a thing as intrinsic
value from an economic sense, do you not ?
. Mr. POPE. I would not dare say what economists would say in
regard to that. But it is an expression frequently used and which
means something to me.
Senator BARKLEY. If any individual is confronted with a proposition to buy anything at its market value or at its intrinsic value
he buys it at the cheaper price, does he not i
Mr. POPE. If a man has information that the intrinsic value is
greater than the market value he would presumably be interested in
the security at the market value.
Senator BARKLEY. And he would go out and buy it on the market.
But he would not pay more for it if he could get it for le^s.
M r . POPE. XO, sir.
Senator BARKLEY.

So that really intrinsic value vanishes in the
mind of the man going out to purchase?
Mr. POPE. It vanishes in the mind of the man who is thinking in
terms of stock but not of the real value of the property representee!
by the stock.
'Senator BARKLEY. I understand, but when he can get the same
thing at two different prices, according to your theory, he is going
to buy it at the cheaper price.
Mr. POPE. Intrinsic value has a very definite bearing upon the
price of a stock, but it does not control it.
Senator BARKLEY. It probably ought to but it does not always
do it, is that it ?
M r . POPE. X o , s i r .




3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator BULKLEY. "Will you please define deflation in tlie sense
that you used the word this morning I
Mr. POPE. Deflation is a j>retty broad question to ask me for an
answer at the moment.
Senator BULKLEY. I understand, but if you will explain it we will
understand your testimony better.
Mr. POPE. It means to me a situation brought about by the selling
of commodities, real estate, and securities in excess of demand, so
much in excess of demand that it has recently brought about a very
drastic drop in all such values.
Senator GLASS. With respect to what commodities? Do you mean
a drop not in intrinsic values but a drop from the peak to which
these various things were extended or inflated ?
Mr. POPE. Any reduction in values I think would be deflation
whether it came from a peak or anywhere else. That would be the
degree of deflation.
Senator GLASS. Of course it has decreased in the matter of open
market value. What I am trying to arrive at is the cause of the
deflation. What do you mean by deflation at the present time?
Whether it is deflation from the peak of the inflation, from the
point of the exaggerated prices induced by the fever of gambling,
or do you mean deflation from the more or less stable and normal
prices of commodities and securities over a series of years ?
Mr. POPE. I mean just in general, and I am not prepared to say
that my answer is very carefully thought out. But my impression
would be, or rather I mean when prices of things arc below the cost
of production, that then you have serious deflation. I am not
referring to the drop from peak prices.
Senator GLASS. IS that true of anything except commodities?
Mr. POPE. I am not sure that it is, but by being true of commodities it affects all bonds practically.
Senator GLASS. Mr. Chairman, at this point I would ask leave to
place in the record a table prepared by one of the outstanding business authorities of this count rv, whose name I am not right now at
liberty to give, but he is associated with one of the greatest business
corporations in the country and which statement (if accurate as I
have no doubt the figures are) indicates that there has been no deflation whatsoever, but an advance in security prices, that there is
to-day an advance over the years 1920 and 1921, and a very material
advance, and that credit facilities are, relatively speaking, far
greater now than then.
The CHAIRMAN. If there is 110 objection on the part of the committee, it will be printed in the record.




48

3.6 NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Some aspects of growth of United States banking and businets, 1920. 1021,
and 1931
{Value unit $1,000,000,000; most data as of June 30]
Per cent increase
J 920

Papulation (1,000,000)
Wholesale price level (U. S. B. L. S. average for year
1926—100;, per cent
Physie.il production index (manufacturing and mining) average for year, per cent
Number of banks
Total banking resources
Per capita (dollars)
Per capita equivalent at 1920 price level
Total loans and discounts
Per capita (dollar*)
Per capita equivalent at 1920 price level
Index of loans and discounts per unit of physical pro*
duction, per cent
Indcf equivalent at 1920 price level, per cent—
Total loans and discounts and investments
Per capita (dollars)
Per capita at 1920 price level
Individual deposits
Per capita (dollars)
Per capita equivalent at 1920 price level

106.5

1921

108.2

154
87
30,139
$53.1
499
499
31.4
295
295
100
100
$42.8
402
402 ,
37.8355 i
355

1931

1931 from 1931 from
1920
.
1921

124.1
71

S
I

67
30,812
$49.7
459
721
29.0
26S
421

22,071
$70.2
566
1.22S
35 2
284
616

120
188
$40.4
373
5S6
35.5
328
515

121
262
$55.3
446
967
51.6
416
902

17 ;

-54
-7 i

2•

32 ;
13 1
146 '

1 ,
2

-4 |
109 I

21 !_
162
29
11 i
140 ,
36
17 1
154

-28
2
1
—27
41
23

T
O
2
1
6
46

39
37
19
65
4o
27
76

Senator BROOKHART. In that connection I will say that I have
similar information to what Senator Glass has just offered. I should
like to insert some tables to show that commodity values are much
below what they were.
Senator GLASS. This table shows that.
Senator BROOKHART. It shows commodities and securities, both
of them.
Senator GLASS. Not commodities separately, but the commodity
level is shown as 28 minus now as compared with 1920-21.
Senator BROOKHART. But securities are higher.
Senator GLASS. Very much.
Senator BROOKIIART. Commodities are much lower and securities
are much higher. On that proposition I should like to ask Mr.
Pope this question: If that is true shouldn't there be some further
deflation of these deflated securities? Doesn't that indicate that
they are still enormously inflated?
Mr. POPE. NO, sir. the cause of the difference is unquestionably
due to the fact that in 1921 money was extremely tight and to-dav
it is extremely easy, and the difference is represented in the value
of securities then and now.
The CHAIRMAN. And isn't the commodity market influenced bv
them ?
Mr. POPE. Yes, sir. But the difference between these two prices
can to a very large extent be accounted for, if not practically entirely, by the difference in the value of money to-day and then."
The CHAIRMAN. DO you mean that the value of'monev does not
affect securities and commodities alike?
Mr. POPE. To a degree it does, but it is certainly more in the
case of securities.



3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator BROOKHART. That is because securities are inflated and
have been put on a false basis.
Mr. POPE. NO, sir. It is because securities represent investment
money, and money is invested according to demand and supply.
Senator BROOKHART. Yes; but let us get back to intrinsic values
a little further. As long as there is a demand for a commodity its
value is not at the intrinsic value.
Mr. POPE. It might not be.
Senator BROOKHART. Even though there is a demand for its use.
M r . POPE. Y e s , s i r .
Senator BROOKHART. It might not have any value at all.
Mr. POPE. It might not.
Senator BROOKHART. Although I can not conceive of that.
Mr. POPE. I can not either, as a matter of judgment, but

it is a
fact.
Senator BROOKIIART. The real intrinsic value that you hinted at a
moment ago is cost of production and you would say plus a reasonable profit, or at least you would figure a reasonable profit in the
cost of production.
5lr. POPE. I did not say that.
Senator BROOKHART. I know that you did not say that, but 3'OU
mentioned cost of production in connection with the matter of values
a moment ago.
Mr. POPE. I do not recall that, but I may have done it.
Senator BROOKHART. Wouldn't that be as near as you could figure
oujt just the intrinsic value of things ?
Mr. POPE. That is a pretty hard thing to say, because you arc
asking me, we will say, the intrinsic value of potatoes and the question of the value of potatoes is usually based on the question of price.
Now, what is the intrinsic value of an article that is to be eaten ?
Senator BROOKHART. You drew the distinction yourself between
price and intrinsic value, and I think rightly.
Mr. POPE. When I am talking of intrinsic value I mean value
not of a commodity but of an industrial concern, or a concern in
which there are various parts which are tangible and which have
a reason for value.
Senator BROOKIIART. YOU would not call the inflated values of
stocks and bonds in 1029 intrinsic values, would you?
Mr. POPE. Will you repeat that question?
Senator BROOKHART. YOU would not call the high prices, the inflated prices of 1929, before the panic, the intrinsic value of securities,
would you?
Mr. POPE. I would say undoubtedly 110 in view of the results. But
I think many people thought they had.
Senator BROOKHART. The fact of the matter is that the way our
stock and bond markets are run now these values are just gambling
values, what you can get somebody to gamble on, rather than intrinsic value?
Mr. POPE. NO, sir; I think in the investment market there is very
little gambling. You are confusing it with the trading market,
and I am an investment banker.
Senator BROOKHART. Then you think the stock exchanges are
mostly for gambling, and the investment bankers are mostly actual
investors?



3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

MR POPE. NO, sir; I do not think so. I do not doubt that the stock
exchange can be used as a medium for gambling, but I do say
Senator BROOKHART (interposing). Are not the most of its transactions merelv gambling?
Mr. POPE. I should sav decidedly not.
Senator BROOKHART. Then if it sells the same thing over and over
again that is not gambling?
Mr. POPE. Of course I would have to guess, because I can not give
vou figures of any value as to stock exchange transactions, but my
impression is that there are thousands of issues of investment securities sold on the stock exchange that have values, and that parties
purchasing them make their purchases as investments and are not
gambling.
Senator BROOKHART. This gambling as I call it, or whatever vou
may call it, that takes place 011 the stock exchange, affects the investments in your investment business, does it not I
Mr. POPE. Yes, sir; very often it does.
Senator BROOKHART. It also affects the price of commodities, does
it not?
Mr. PorE. It affects the prices of commodities very indirectly
and sometimes directly.
Senator BROOKHART. It puts the prices of securities up and the
prices of commodities down.
Mr. POPE. You are getting pretty deep into the reasons for the
depression, Senator Brookhart, and I am not capable of answering
the question offhand.
Senator GLASS. We have a great variety of opinion. By reference to the files of that Xew York paper which takes most pride in
claiming it is the representative of the vested interests, it will beseen that in 1929 this journal stated textually that operations on
the stock exchange for the preceding week had been as much in the
nature of gambling as betting on the arrow of the roulette wheel,.
90 per cent, it said. Xinety per cent of the operations for the
preceding week on "the stock exchange had been as much in the
nature of gambling as betting on the arrow of a roulette wheel.
Senator BROOKHART. Have you the date of that issue?
Senator GLASS. I think it was around January or February of
1929. If it is desired, I can look up the record and have an extract
from the paper put into our hearings.
Senator BROOKHART. If it was true in that week it was more true
during all the rest of the weeks up to October of 1929.
The CHAIRMAN. Mr. Pope, or any other representative of the investment group present here in the room, our attention is called to
the comparative value of securities, now and previously, and noone has so far in any of our hearings, or at least so far as I know,
suggested what difference there may be in the physical value of
properties. During the last 10 or 12 years listed stocks have accumulated earnings that have gone into properties, or the other
way that earnings sometimes go. We can not get at the value of
property by simply noting the market quotation. We have to go
deeper into it. I am suggesting to Mr. Pope that before this hearing is over that he or some one of his group furnish us something
along that line if he can. If a concern goes ahead and earns 25




3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

per cent from 1920 on and puts it into surplus, they are entitled to
a higher value to-day.
Senator BROOKHART. Unless they issued more stock, Mr. Chairman.
Senator GLASS. Again, Mr. Chairman, that it may not be imagined your subcommittee has dealt whimsically or inadequately
with these problems, I want to put into the record the view of Mr.
Davison, the president of the Central Hanover Bank & Trust Co.
of New York, and one of the outstanding bankers of the country, as
to the undesirability of commercial banks having affiliates. Mr.
Davison at our previous hearing disagreed with the statements several times made here by Mr. Pope, that there should be no legislation in this respect, and he indicated that in his view there should
be legislation and that national banks should not be permitted to
have affiliates. He points out that they are the subject of very
critical abuses and says [reading] :
The Bank of the United States shows what can happen wjien they are
abused. It is a very glaring example, especially when dealing in their own
securities!.

Then he was asked [reading] :
And there are some other hanks that at least might he pla<vd under the
same criticism, might they not?

And he answered [reading] :
It lias possibilities of abuse and of danger.

It was then pointed out to him that we had in contemplation the
requirement of examination and of publicity, to which Mr. Davison responded [reading]:
And a prohibition certainly of dealing in their own stocks.

And he went further. I quote these statements hurriedly taken
here. There are many others that were made by experienced and
practical bankers before our subcommittee, in order to show that we
have not idly thrown together the provisions of this bill.
Senator BROOKHART. In view of that statement I should like to ask
why it is, after Senator Glass's subcommittee gave such a thorough
investigation of all this, that we are investigating it again now.
Senator GLASS. Well, some gentlemen desired to be heard.
The CHAIRMAN. Some changed their minds, and some disagreed
with the amended bill, and some object to being restricted.
Senator GLASS. Mr. Pope, do I get an accurate view of youi
general criticism of the bill to the effect that you think now is an
inopportune time to have any banking legislation at all?
Mr. POPE. I think now is an inopportune time to have any legislation which acts, as I am using the word again, in a manner to increase the present deflation; I mean at this time as this bill does.
Senator GLASS. YOU have spoken of section 11 of the bill dealing
with 15-dav paper as deflationary. I take it. then, you would not
be willing "to see a deflation in stock speculation on the exchange.
Mr. POPE. DO you mean at the moment I
Senator GLASS. There is no stock speculation at the moment to
speak of, or at least I think not. We have frightened off the bears,
temporarily, and the bulls do not »eem to be quite active.



52

3.6 NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. POPE. YOU are asking me a question now?
Senator GLASS. Yes.
Mr. POPE. What is it?
Senator GLASS. Isn't the real purpose of this bill, among other
things, to avert a repetition of this situation by forbidding people
to use the facilities of Federal reserve banks to inflate prices on the
stock exchange to almost an inconceivable degree, and then have the
whole business of the country collapse in consequence of that sort
of speculation? I take it that you think now is an inopportune time
to express the view of the Congress, if it should take that view, that
we should not permit that sort of thing to occur.
Mr. POPE. It is an inopportune time now.
The CHAIRMAN. The Senator from Virginia (Mr. Glass) will
recall that in the spring of 1928 this committee spent a great deal
of time on that question, and that we were told then was an inopportune time, and that was a year and a half before this whole thing
blew up.
Senator BROOKHART. Is it the purpose of these hearings to prevent
any legislation on this subject?
The CHAIRMAN. These hearings were called at the request of leading bankers and business men, who felt that there were things in this
bill adverse to their interest, or to the welfare of the country, and so
they asked to be heard, and the request for a hearing was granted.
Senator BROOKHART. I take it, then, the primary purpose is to
prevent any legislation.
Senator JBULKLEY. Mr. Pope, do you mean to imply that prices
are now deflated too much?
Mr. POPE. Well, that is a general statement. My impression is
to that effect, and I am only conversant with security prices.
Senator BULKLEY. I refer to them.
Mr. POPE. My impression is that security prices are depressed too
much, and it is bonds that I am talking about. I am not referring
to stocks. I am in the investment banking business and am not
interested from a stock standpoint.
Senator BULKLEY. A little while ago you expressed the view that
the thing that might have been deflationary a while ago is not
deflationary now on the ground that deflation has already happened.
If deflation has happened, why can not we go ahead and do the
sound thing?
Mr. POPE. Which would be what?
Senator BULKLEY. YOU were asked about stopping the practice
of loans for others, and you said you were satisfied to stop it now
because the deflation had already occurred.
Mr. POPE. All right.
Senator BULKLEY. Doesn't that argument apply all along the line ?
Mr. POPE. The question of values is not brought out in the question
reguarding loans for account of others; I mean so far as they are
affected, because loans for account of others were some months ago
given up, and therefore the fact
Senator BULKLEY (interposing). We are free to fix that matter
now and do the sound thing, aren't we?
M r . POPE. Y e s , s i r .
Senator BULKLEY. Why




does not that apply to other things?

NATIONAL AND FEDEIIAL RESERVE BANKING SYSTEMS

53

Mr. POPE. Because you now, by applying sections of this act which
continue to cause deflation, whereas stopping loans for account of
others does not continue deflation.
Senator GLASS. HOW do we continue it any more than a law that
has prevailed for 18 years which prohibits the use of Federal reserve
bank facilities for investment and stock speculative activities ?
Mr. POPE. Because in my opinion the method by which this section implies that would be done by way of punitive or other methods
would necessitate the immediate sale of securities and it would cause
excessive deflation, extremely dangerous deflation.
Senator GLASS. Of course, we disagree on that interpretation of
the law. What you really mean to say is, and have said, as the
record will show, that this provision of the law that has been in
effect for 18 years has been a dead letter, and now because we propose to make it effective by a penalty you think it ought not to be
done.
Mr. POPE. I did not say that either at the outset or since, but I
brought out certain points regarding the measure which I disagreed
with.
Senator GLASS. YOU said the law had been inoperative.
Mr. POPE. I said that this particular bill was inadvisable at this
time.
Senator GLASS. N O ; but when I read to you the provision of the
existing law, which has been a provision since the Federal reserve
act was first enacted, you said it had been inoperative, and that we
know.
Mr. POPE. I do not remember saying that.
Senator GLASS. NOW, we want to make it operative. And you
think it is an inopportune time to make it operative ?
M r . POPE. Y e s , s i r .
Senator GLASS. It is

there but you do not think it should be
obeyed, is that the idea ?
M r . POPE. NO, sir.
Senator GLASS. Well,

yon do not think it should be obeyed if
you object to our making it operative, do you ?
Mr. POPE. If a law is a good law I can not see how anybody could
say they would object to its being obeyed. I certainly do not.
Senator GLASS. You said it had been inoperative, and that we
know.
Mr. POPE. I do not remember using that expression, saying it was
inoperative. I think you said that.
* .
Senator GLASS. Of course I said so, and that is the very purpose
of our provision in this bill.
Mr. POPE. I do not know the extent it has been inoperative. That
is a commercial banking matter, presumably.
Senator BROOKHART. If it has been inoperative it wouldn't hurt
anything to have it enforced now. It would not change the law,
but we would make it operative.
Mr. POPE. If it is in the law it is in operation.
Senator BROOKHART. If it is not enforced it would not be.
M r . POPE. NO, s i r .
Senator GLASS. Would




it hurt anything to provide a penalty?

54

3.6 NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. POPE. At this time if the penalty would require an excessive
sale of securities, to the extent of jeopardizing institutions and others
in the market, I think, and have said, it is not a time to so legislate.
Senator GLASS. There is 110 sentence in that section of the bill that
requires a sale of securities.
Mr. POPE. I think many provisions of the bill require the sale of
securities.

Senator GLASS. I am talking about the 15-day paper provision.
Mr. POPE. That would, in my opinion, immediately drop the 3%
per cent 1-year Treasury certificates that were issued a few weeks ago
half a point certainly and probably more.
Senator GLASS. That provision of the bill has been suggested since
June 17, 1930, and I have not observed that it caused a drop in any
Government securities.
M r . POPE. I t i s n o t t h e l a w .
Senator GLASS. NO ; it is not law
Senator BULKLEY. YOU are now
M r . POPE. Y e s , s i r .
Senator BULKLEY. Would it be a

now.
referring to the penalty.

good idea to reduce the rate so as
to increase the price of securities ?
Mr. POPE. If you reduce the discount rate; yes.
Senator BULKLEY. Then why not discount them free so that we
would have a better market for Government securities?
Mr. POPE. Well, the present rates, and I am only familiar with the
Federal reserve bank which operates in securities which we have and
sell, although I presume it applies in other instances; but that rate,
if it is set to-day, applies in the open-market purchase rate.
Senator BULKLEY. I just want to know how far Mr. Pope would
go in supporting the market for governments. Would you like to
increase the price of them, and instead of emphasizing penalty and
rate together, have a premium against borrowing for Government
securities; would that be a good way ?
Mr. POPE. I wouldn't think the Government's market to-day needed
assistance.
*
•
Senator BULKLEY. It may a little later on.
Mr. POPE. A S far as the operations in governments to-day are concerned, of coupe nearly everyone who owns a Government bond has
seen it depreciate in the last year. But if you mean with artificial
means to stimulate supply and demand for bonds, I clo not know
exactly what provisions you would apply.
Senator BULKLEY. But what artificial means do you refer to?

Mr. POPE.

I

am not asking any change at all.

Senator BULKLEY. But we are contending with disobedience of
the present law as the cause of an artificial situation.
Mr. POPE. Well, I do not think so.
Senator GLASS. Suppose we were to omit the peremptory requirement of 1 per cent increase in loans against Government securities,
would you still object to that provision of the act which gives the
Federal Reserve Board authority after due warning to suspend a
bank from rediscount privileges if it persists in it.
Mr. POPE. It has been stated in the last hearings that it was not a
question of preventing a bank from borrowing after due warning
that we objectecfto.




3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator GLASS. Well, you agree to that provision, then, that the
Federal Reserve Board may be authorized to suspend a bank from
the privileges of the system after it has been warned that it is
making excessive loans for stock speculation.
Sir. POPE. DO you know what section that is?
Senator GLASS. Section 11.
Sir. POPE. I said in regard to that that the Investment Bankers'
Association of America has 110 objection to the provisions of this
section, which provides that a member bank shall not make any
security loans'while borrowing from the Federal reserve bank after
a warning, but it is opposed to the principle of this bill which indicates that a member bank could not make any collateral loan while
so borrowing.
Senator GLASS. Of course, collateral loans there mean stock loans,
speculative loans. You think, then, that a member bank should be
permitted to extend its speculative loans to any extent it pleases and
recoup itself by rediscounting with a Federaf reserve bank?
Sir. POPE. Frankly, it seems to me that every time you mention
loans you bring in a word that I do not mean" to employ in there
in my endeavor to answer your question. You employ the word
speculative " and we feel tliat these are not speculative
Senator GLASS (interposing). There is not a sentence in this bill
which the subcommittee has intended to apply to legitimate investment loans. The whole purpose of it where it relates to collateral
loans is well, understood and accepted to mean loans on the open
stock exchanges. The whole purpose of it is to prevent a repetition
of the thing that we witnessed in 1928 and 1929.
Sir. POPE. Well, of course in this term " collateral loans " there
are billions of dollars of high-grade bonds which are also applicable
to that general statement. It is the general statement that we object
to. You include them all.
Senator GLASS. The law itself excludes investment loans from
Federal reserve bank rediscounts, and it ought to because it is a commercial banking system we are setting up. It is not an investment
banking system. People who want an investment banking system
are at liberty to organize one and have organized one. The Federal reserve svstem is a commercial banking system. Its assets should
be liquid. It should be amply able and cheerfully willing at any
time to respond to the demands of agriculture, commerce, and industry. and that can not be if it is going into the investment banking
business. You know that.
Sir. POPE. Well, sir, I can only say that if, for example, in times
of tight money vou restrict borrowing against a perfectly legitimate
expansion of capital investments in industrial or public utility concerns, that require long-term credit, and if the receptivity of the
market should happen at the time of issue to be nonreceptive, it
would require the carrving over of the time of the loan of a bank,
then as to the legitimate long-term borrowings of such public utility
or corporation, vou just keep them from borrowing.
Senator GLASS. Under the provisions of this bill, any national
bank may gamble its head off if it wants to with its own assets,
with the monev of its depositors. It is not affected by this bill in
doing that, but it is prevented in that circumstance from coming



3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

and recouping itself at a Federal reserve bank in order to expand
and exploit that sort of operation. Don't you think that ought to
be done?
Mr. POPE. I think, of course, that is a commercial banking matter. I am presenting this situation to you on general terms as an
investment banker.
Senator GLASS. But I am asking you now as to that specific provision of the bill. Do you think that a commercial bank, a member
bank of the Federal reserve system, should be permitted—and it
is not permitted by law now—to. have access to the rediscount facilities of the Federal reserve bank for speculative purposes?
Sir. POPE. When you say " speculative purposes " I answer I am
not enough familiar with the speculative interests to answer you*
If you mean speculative from the pure sense of being bad, why, I
think it is right if it is bad. I do not know exactly what speculation means.
Senator GLASS. DO you think we should distinguish in the law
between bad and good speculation ? Do you think we could do that ?
Mr. POPE. If in the matter of investments it is the hope of having
a fellow give up his speculation, then I think there is included in
the provisions a blocking of the legitimate long-term borrowing of
industry.
Senator GLASS. DO people invest for an hour? Do they invest for
any period of time that requires them to stand at a ticker and ascertain the state of the market at any 15 or 20 minutes thereafter? Do
you call that investing?
Mr. POPE. I wouldn't think that investing; no.
Senator GLASS. Well, I don't think so, either.
Senator BULKLEY. Did you tell us how many members of your
association there are?
Mr. POPE. Approximately 500 members. That does not include
the additional number of branch offices, but the principal offices.
Senator BULKLEY. The members are institutions and not individuals?
Mr. POPE. They are not individuals—yes, I think there are individuals. They may be either so long as they are qualified under
the by-laws of the Investment Bankers' Association of America—
partnerships, corporations, affiliates, or individuals.
Senator BULKLEY. They are units in the form that they do business.
Mr. POPE. In the form that they do business, and according to the
character of their operations, and the personnel and size of their
organization.
Senator BULKLEY. Can you tell us how many of these members
are either commercial banks or affiliates of commercial banks?
Mr. POPE. Well, I can not tell you exactly.
Senator BULKLEY. Give it to us approximately.
Mr. POPE. Approximately 110 that are either bank affiliates or
commercial or national or member banks or bond departments of
banks.
Senator BULKLEY. That is what I mean. About a quarter of them.
M r . POPE. Y e s , s i r .




3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator BULKLEY. Could you tell us what that proportion would
be as relates to the importance of their business? Would the bank
members be more than a quarter based on the amount of business
they do?
Mr. POPE. I should think without having any compilation of it
that it would be much more.
Senator BULKLEY. More nearly half?

Mr. POPE. I should think it might be possible, because the capitalization of bank affiliates is in many cases larger than others.
Senator BULKLEY. Exactness is not necessary. I only wanted an
idea of it.
Mr. POPE. Possibly one-half.
Senator BROOKHART. Are there other institutions outside similar to
your organization, or is everybody in your organization who is in
this kind of business?
Mr. POPE. Everybody in the association is in the investment-banking business.
Senator BROOKHART. But I mean are there other companies outside
that are not in your association?
M r . POPE. Y e s , sir.
Senator BROOKHART.

Have you any idea how many of those there
are?
Mr. POPE. NO, sir; I have not.
Senator GORE. What is the capitalization of the First National
Bank and its affiliate?
Mr. POPE. The First National Corporation is capitalized and has
a surplus of $25,000,000.
Senator GORE. HOW much is it capital?
Mr. POPE. It is $16,000,000.
Senator GORE. What is the capitalization of its affiliate?
Mr. POPE. Which one? That is, the First National-Old Colony
Corporation is the one I am talking about
Senator GORE. What is the capitalization of the First National
itself?
Senator TOWNSEND. DO you refer to the bank?
Senator GORE. Yes, sir. *
Mr. POPE. It seems that I should know definitely, but I can not
recall the exact figures. The capital and surplus of the First National IBank of Boston, I think, is approximately $70,000,000.
The CHAIRMAN. Is there any further statement you would like
to make, Mr. Pope?
M r . POPE. N o , sir.
The CnAiRMAN. The

committee will now stand m recess until 3
o'clock this afternoon, when it will reconvene in the hearing room of
the Interstate Commerce Committee on the gallery floor of the
Capitol. The first witness at that time will be Harry J. Haas,
president of the American Bankers' Association. Is he here?
A. VOICE Yes» sir.
The CHAIRMAN. And we will try to hear Doctor Edwards if we
^Thereupon, at 1.10 p. m. Wednesday, March 23, 1032, the committee recessed until 3 o'clock p. m. of the same day.)




3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
AFTERNOON SESSION

Pursuant to the expiration of the noon recess, the committee reconvened at 3 o'clock p. m.
,
,
mi
The CHAIRMAN. The committee will come to order. The first
witness will be Harry J. Haas, president of the American Bankers
Association.
STATEMENT OF HABRY J. HAAS, PRESIDENT AMERICAN BANKERS' ASSOCIATION, AND VICE PRESIDENT FIRST NATIONAL

BANE, PHILADELPHIA, FA.

The CHAIRMAN. Give your full name and address and official position, Mr. Haas.
Mr. HAAS. Mr. Chairman and gentlemen. I represent the American Bankers' Association, representing 16,000 banks. My name is
Harry J. Haas, president of the American Bankers' Association, and
vice president First National Bank, Philadelphia, Pa.
The CHAIRMAN. DO any members of the committee want to ask
any questions, or let him go ahead and make his statement?
Senator TOWNSEND. Have you a prepared statement, Mr. Haas?
Mr. HAAS. Yes, sir; I have*. If I may read just a short statement
I have here, Senator.
The CHAIRMAN. YOU may proceed.
Senator TOWNSEND. YOU have read the bill ?

M r . HAAS. Y e s .
Senator TOWNSEND.
M r . HAAS. Y e s .
Senator TOWNSEND.

And you are familiar with it?

Are you making comments on the bill, as to
how it should be improved or changed?
Mr. HAAS. NO, Senator; we have had an analysis made, an analysis has been completed, but we have not had it typed to this moment,
out we expect to have it ready this evening.
Senator TOWNSEND. That will include both your criticisms and
the constructive side of your argument as well?
Mr. HAAS. Yes; and with your permission we would like to have
that put into the record before you finish these hearings, if that is
agreeable to you.
The CHAIRMAN. HOW long a statement is it 1
Mr. HAAS. That is a full analysis of the bill.
The CHAIRMAN. If there is no objection
Senator GLASS (interposing). By whom is it made?
Mr. HAAS. We have all been working on it, Senator; we have all
sat around with the interim committee of the American Bankers*
Association. We have had some other people working on it.
Senator GLASS. Can you tell us who they are?

Mr. HAAS. We have Mr. Edwards. Mr. Edwards is here to TEStify this afternoon, from the College of the Citv of New York. And
a Mr. Willard.
Senator COUZENS. Mr. Chairman. I do not think we ought to have
that put in the record. I think it ought to be read before the committee, so we can ask questions. I hope that it will be arranged
so that the criticism will be read before the committee.
Mr. HAAS. Whatever you wish, Senator.



3.6

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator COUZENS. IS that agreeable, Mr. Chairman?
The CHAIRMAN. Certainly. It will not be printed unless it is
unanimously agreed upon by the committee. I share with the Senator from Michigan the view that it had better be read, so that we
will know what it is. But you say it is not ready yet; is that it?
Mr. HAAS. NO; that is not ready yet, Senator.

The CHAIRMAN. We will be here next week. It can be presented
by some members of your committee next week?
M r . HAAS. Y e s .
Senator GLASS.

We should have as little duplication as possible.
If Mr. Edwards is to appear in person, may he not state his view?,
and present facts here so that he may be interrogated upon it?
Mr. HAAS. All right, Senator. We thought you might like to
have it.
Senator TOWNSEND. Mr. Haas, you are aware under the resolution that the hearings close on Thursday?
Mr. HAAS. Yes; we are aware of that, Senator.
Senator FLETCHER. Bid you appear before the subcommittee, Mr.
Haas?
Mr. HAAS. No; I have not.
Senator FLETCHER. None of these gentlemen you mentioned were
heard by the subcommittee?
Mr. HAAS. They have not been heard.
Senator GLASS.*OH, the President of the American Bankers' Association at that time was heard, and the chairman of the legislative
committee at that time was repeatedly invited to be heard. So that
we do not want to get the impression in the record that we had a
private conference over the matter, and did not give them opportunity to be heard.
Mr. HAAS. What the Senator says is correct, Mr. Chairman.
The CHAIRMAN. Seven volumes of testimony were taken.
Mr. HAAS. That was under a former administration of the American Bankers' Association. Our administration changes the first week
in October.
Senator FLETCHER. When did you become president ?
Mr. HAAS. The first week in October.
Senator FLETCHER. Of last year?
Mr. HAAS. Of last year; yes.
Senator FLETCHER. I think it would be all right for him to make
his statement.
Mr. HAAS. The statement I have is very brief.
The CHAIRMAN. YOU may proceed.
Mr. HAAS. Thank you.
We have carefully analyzed the provisions of S. 4115. section by
section, and after due deliberation the interim committee of the
American Bankers' Association has, by resolution, registered its
opposition to the bill.
We are of the opinion that it would be a serious mistake to pass
a bill at this time, having so many provisions of a deflationary and
regulatory nature which would, in our opinion, cause the withdrawal
of a considerable number of members of the Federal reserve system.
We believe that its effect would be injurious, not only to the member
banks, but to the business interest of the country.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 63

There are certain provisions of this bill which directly affect the
interests of particular classes of bankers who are members of our
association. These special matters will be presented later by representative bankers who will show how certain provisions of this bill
affect them.
I wish in my presentation to indicate to you some of the broader
aspects of the bill which affect all bankers and also the general public.
I will therefore submit the effects of this bill on the following:
1. Federal reserve system.
2. The Treasury of the United States.
3. The member banks.
4. The securities markets.
5. General business.
FEDERAL RESERVE SYSTEM

One of the fundamental principles of the Federal reserve act was
the rejection of the European plan of central banking and the adoption of the American policy of regional or local banking. The act
did not set up a single central bank, but, instead, 12 banks, and so
gave full recognition to the principle of local independence and
decentralization.
The proposed bill in various sections (see sec. 12-A, 11, 8 and
12-g). departs from this regional principle by centralizing powers
in the Federal Reserve Board and by impairing the autonomy
which each of the 12 Federal reserve banks have so far possessed.
THE TREASURY OF THE UNITED STATES

The Federal reserve act wisely provided that the reserve system
should act as fiscal agent for the Government, and should facilitate
the marketing of United States obligations. In the coming years
the volume of such Federal financing is bound to be heavy.
The proposed bill would seriously interfere with such Treasury
financing, by checking the ready marketing of United States issues.
In section 11 the proposed bill places a penalty on the holding of
such securities by member banks which are the most important buyers
of United States bonds.
MEMBER BANKS

We, as bankers, fully realize that-our business is quasi public in
nature and therefore Government supervision is necessary. For
this reason, Congress in the past has developed the national bank act
and the Federal reserve act, with its numerous amendments, but all
this legislation has accepted the fundamental principle that final
responsibility for bank management and bank policy rests with the
individual banker himself.
The proposed bilHransfers some of this responsibility to the Federal Reserve Board at Washington. We are of the ^opinion that
such banking powers were not intended, under the Federal reserve
act, to be conferred on the Federal Reserve Board, but that the board
was intended to be an organization to exercise supervisory powers
and not to control banking operations.



61 NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS
SECURITIES MARKET

There have been four outstanding national movements inaugurated by a nonpartisan movement which were intended to arrest
the progress of extreme deflation and to stabilize conditions. We
refer to the organization of the National Credit Corporation and
the citizens' reconstruction organization. Also the passage by Congress of the Reconstruction Finance Corporation bill, and the GlassSteagall bill. We are fearful that the proposed bill will, to a large
extent, nullify these efforts by causing a further liquidation of securities which would decrease their market value at a time when the
owners are not able to withstand further losses.
Senator BLAINE. Mr. Chairman, is there any objection to interrupting there?
The CHAIRMAN. I would just ask—would you rather finish the
statement first?
Mr. HAAS* As you please, Senator.
The CHAIRMAN. GO ahead and ask the question.
Senator BLAINE. What I was interested in was not an academic
discussion of this whole field, because that has been covered by Senator Glass.
M r . HAAS. Y e s .
Senator BLAINE.

But with respect to the specific thing you have
just read, will you point out what is in the bill that you fear will
do the thing that you fear will be done?
Mr- HAAS- This particular point I had in mind is section 15. I
spoke to Doctor Willis about it, and he has corrected me on a matter
here in section 15 on page 36, the ratio of " 15 per cent of the amount
of the capital stock of such association actually paid in and unimpaired and 25 per cent of its unimpaired surplus fund."
I had in mind that it referred to the aggregate securities which a
bank might hold in its portfolio, but the doctor corrected me on
that—and I think the people generally believed that. That is the
reason I quoted it, because I understood it in that way, and perhaps
the wording of it might be more explicit if it referred to only one
security, and I am now told that that is what it means.
Senator BROOKHART. The governments, you mean?
Mr. HAAS. NO, outside of governments; other securities.
Senator GLASS. NO; "governments" are expressly excluded.
Mr. HAAS. Are excluded; yes. [Reading:]
The business of purchasihg and selling investment securities shall hereafter
be limited to purchasing and selling sueli securities without recourse, solely
upon the order, and for the account of, customers, and in no case for its own
account, and no such association shall underwrite any issue of securities; except that any such association may purchase and hold for its own account
investment securities to such an amount and of such kind as may be by regulation prescribed by the Comptroller of the Currency, but in no event shall the
total amount of such investment securities of any one obligor or maker held
by such association exceed 10 per centum of the total amount of such issue
outstanding, nor shall the total amount of the securities so purchased and held
for its own account at any time exceed 15 per centum of the amount of the
capital stock of such association actually paid in and unimpaired and 25 per
centum of its unimpaired surplus fund.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 62

I think people generally think that that means the total amount
of securities which they hold.
Senator FLETCHER. It says distinctly.
Senator GLASS. " One obligor."
Senator FLETCHER. " Total amount of such investment securities
of one obligor or maker."
Mr. HAAS. That referred to the 15 and 25 per cent.
Senator FLETCHER. I do not know if there is any other provision
in there
Senator GLASS (interposing). I may say to Mr. Haas that I was
interrogated on that point by one of the New York newspapers immediately after the first print of the bill came out, and I gave out a
statement in which I undertook to point out that it referred to any
one obligator. I am rather surprised to be told that people generally
think it means something different.
Mr. HAAS. I am expressing, Senator, the views that we had in our
meeting, and I do not think any of us really got that point until I
talked to Doctor Willis about it to-day.
Senator GLASS. That is not our fault.
Mr. HAAS. NO ; that is not your fault. I am perfectly willing to
change that on the information which I have gotten here.
The Reconstruction Finance Corporation seeks to enable .banks to
carry investments which are sound but temporarily unmarketable except at a substantial loss.
Senator BULKLEY. That would not be applicable.
Mr. HAAS. That would not be applicable. I am very glad to have
that straightened out, Senator.
Senator GLASS. You ought to be given an opportunity to rewrite
that statement.
Mr. HAAS. I will be glad to eliminate that, Senator.
Recent national movements have recognized that business recovery
can not come about through decreasing the value of investments and
commodities, but rather by stabilizing the prices of investments and
commodities at somewhere near their real value. This desired condition can not be brought about by reducing the volume of credit, but
rather by increasing the amount of available credit.
The Glass-Steagall bill very wisely provided for the release of
approximately seven hundred million in gold to secure Federal
reserve notes. The enactment of this bill would have just the opposite effect and cause an increase of approximately $227,500,000 in
gold reserve through the increase in reserve requirements against
time deposits.
I am told that that figure—the sum is quite different, but I have
quoted it. I took my figures from a statement which I saw of the
amount of deposits afrected, and figured 7 per cent on those deposits,
and the 35 per cent gold reserve, and got this figure. Their figure
is somewhat higher, 1 think over a hundred millions a year, one hundred and twenty-five millions a year for the year, I believe.
Senator GLASS. Our figures based on one set of estimates were
seventy millions a year.
Senator BULKLEY. What did you say it should be ?
Mr. HAAS. My figure was made up "from the figures which I saw
in a newspaper article, the effect of the deposits and the amount of



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

63

reserve that would be increased from the savings reserve to the com*
mercial reserve, and figured the gold back of it, the gold back of the
deposits with the Federal reserve bank. In other words, as you
increase the reserve fund deposits, the only reserve we have now is
the reserve carried at the Federal reserve bank, and if the Federal
reserve banks deposits increase, their deposits increase, and they have
to carry 35 per cent gold, and this 35 per cent gold is represented by
my figures $227,500,000.
Senator GLASS. That is not necessarily gold. They can carry 35
per cent lawful money. It does not involve any intrenchment upon
the free gold. The whole matter can be adjusted by rediscounts.
Mr. HAAS. But it does increase the deposits of the Federal reserve
bank to that extent, that the member banks have to carry additional
reserve, and the Federal reserve bank must carry its reserve against
it*
Senator BROOKHART. Suppose of those reserves the surpluses were
deposited in some other bank instead of the Federal reserve bank;
would it not have the same effect?
Mr. HAAS. Well, you would be multiplying the deposits. You
would carry reserve. If they deposit with another bank. That bank
would have to carry the reserve.
Senator BROOKHART. You say they deposit in a Federal reserve,
and that it increases their reserve they must carry. But if you
redeposit in a New York bank, would that not have the same effcect
up there?
Mr. HAAS. Yes; just pass it on. #
Senator BROOKHART. BO that is just as broad as it is long.
Mr. HAAS. Yes; but if we carry
Senator BROOKHART. If you kept it in your own bank, it would
make your own reserve that much bigger, would it not?
Mr. HAAS. In case we pass it on to another bank, Senator, we
would deduct it from our gross deposits before calculating reserves.
You see, the net deposits is the figure that is calculated.
Senator BROOKHART. Yes; but if you deduct it, they add it in.
Mr. HAAS. They would have to add it to their deposits, but we
could deduct it from our gross deposits before calculating our
reserves. If the bank is a member of the Federal reserve bank system, they would have to carry a reserve on it. That is, the Federal
reserve bank would have to carry gold or legal against it.
Senator GLASS. The very simple meaning of this reserve provision
of the bill, as I stated this morning, is that every time we have undertaken to adjust reserve requirements of the banks we have been confronted with hostile comments, as my colleague. Senator Bulkley,
will recall, because to him was confided the reserve section of the
original Federal reserve act. We were told at that time that it was
impossible to make the proposed readjustments within a 3-year
period. As a matter of tact, the first adjustment was made, is I
recall, in 11 months. We were told at the time that the banks had
not the resources to comply with the law within three years, and
they complied with it in much less time. We reduced the reserves
from around 25 per cent to 18, and then to 13 per cent, releasing
an immense amount of credit for investment banldng purposes.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 64

Then not so very long ago we reduced the reserves behind time
deposits to 3 per cent, and the testimony and information secured
by a subcommittee all is to the effect that at least 80 per cent of the
banks of the country have engaged in the practice of so manipulating their demand and time deposit accounts as to take advantage
of this low reserve until the average reserve at the banks is ridiculously too small.
,.
i i i
Mr. HAAS. Senator, may I say—speaking for my own bank and
mv own experience in the bank, we have never
"Senator GLASS (interposing). Just let me finish that right there.
Now, then, what we are proposing here is not anything of a revolutionary nature. We are simply proposing to restore
Mr. HAAS (interposing). I know what you mean.
Senator GLASS. Behind time deposits the reserve that was required
until very recently, in order that this manipulation of reserves shall
not longer be resorted to. And we do not do it immediately; we do
it over a period of five years. We give the banks five years in which
gradually to readjust themselves to this situation.
Mr. HAAS. Senator, I have in mind a report of the committee
appointed by the Federal Reserve Board to endeavor to find a scientific reserve on the activities of the account, and not on the amount
of the balance, and I am just wondering whether you have given
that any consideration.
Senator BULKLEY. DO you like that?
Mr. HAAS. I think it is all right, Senator. I think that the bank
that has the active deposits and the bank that has the big turnover,
certainly should carry a larger reserve than the bank that does not
have the turnover. Doesn't that sound sensible and reasonable?
Senator BULKLEY. That is what I think; yes.
Senator GLASS. I think that, and our committee thought that.
Now, let me ask you one practical question: That proposition is
revolutionary, is it not?
M r . HAAS. Y e s .
Senator GLASS.

Suppose we were to undertake now to embody
it in this bill. What do j^ou think would happen?
Mr. HAAS. It would be a campaign of education.
Senator GLASS. There would be a campaign against this bill—isn't
that a fact?
Mr. HAAS. I think it would be a campaign of education.
Senator GLASS. I say
Mr. HAAS (interposing). I think you have an argument there.
I think you can go right before the public and you can educate them
to the activity of the account as a scientific means of carrying this
reserve.
Senator GLASS. YOU do not require any education to follow this
readjusting of the reserves here?
Sir. HAAS. NO ; they are accustomed to them.
Senator GLASS. We maintain the existing form, and we simply
restore the reserve to avert a continuance of this manipulation, and
there is not a country banker in the United States to-day that cannot understand this instantly.
Sir. HAAS. They understand this method; that is right.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

65

Senator GLASS. NOW, suppose we introduce into this bill this
revolutionary theory of velocity reserves. Do you think it would
be instantly and cheerfully accepted by the banks of the country?
Already the New York banks have bitterly protested against it f
Mr. I-IAAS. Senator, I will answer your question in this way: X
will remind you of something that happened a good many years ago,
probably you remember when you were Secretary of the Treasury,
when you were discussing the Liberty loans, and Mr. Crosby said,
" I wonder if Tiffany woidd understand this. I wonder if Tiffany
will understand this." Finally, Mr. Warburg said, " What has
Tiffany got to do with this? He is a jeweler in New York." Mr.
Crosby said, " No, not my Tiffany. My Tiffany is a country banker,
and if he understood it, I am sure everybody on the committee would
understand that." Do you remember "that ?
Senator GLASS. Yes. Don'ft you wonder whether the average
country banker will understand your proposed velocity theory? I
am not dissenting from it.
Mr. HAAS. Yes; I think it would bo a campaign of education.
This is the easiest thing to understand.
Senator GLASS. I know, but we haven't got time to carry on a
campaign of legislation before Congress with a very short while
of this session.
Mr. HAAS. Senator, it would be consistent with my position, because I am urging delay.
Senator GLASS. YOU do not want any legislation now, do you?
Mr. HAAS. It would be consistent with my position.
Senator GORE. I would like to ask a question there, because I want
to get educated myself. Do some of the banks how favor this
velocity theory?
Mr. "HAAS. I think some of them do, some of the larger ones,
except this one thing, Senator: I do not think it would be fair to
figure in that velocity reserve disbursement checks. For instance,
we have several large corporations, and probably the day before the
close of the month they bring us a large check, and then they check
out their dividend checks, and they come in straggling along, many
of them come in in about two daj's, but some of them are outstanding
a longer time.
If you exempt those disbursement checks, I think it is perfectly
fair. I think it is right that a bank having a heavy turnover,
should carry reserve according to the turnover. But I would not
consider that a turnover.
Senator GORE. Just one other question: Would it be feasible to
apply this theory to the bank who desired it, or is it necessary to have
a uniform system?
Mr. HAAS. I think you would have to have a uniform system.
Senator GORE. I was going to ask whether you would not prefer
the Federal Reserve Board or the Comptroller" to have the power to
use discretion there.
Mr. HAAS. Well, I think there is something in that, Senator.
Surely there is an idea; yes. Certainly the city banks, having a
large turnover, would be more familiar with that, but you would
have to educate the country banks.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 66

Senator GLASS. And yet the New York banks came out instantly
against it as soon as it was proposed.
Air. HAAS. If you made disbursements
. , . .
Senator GLASS (interposing). You know, we embodied it in one
print of the bill. We embodied it in one print of the bill, and gave
a period of five years to establish it, and we finally concluded that
some of us need not bother with what is going to happen five years
from now. Some of us will not be here then.
Air. HAAS. I hope so. [Laughter.]
Senator GLASS. And therefore we struck it out.
Mr. HAAS. May I just correct a remark of Senator Bulkley through
you?
The CHAIRMAN. GO ahead.
Air. HAAS. YOU are quite familiar with this reserve. What would
you think of eliminating disbursement checks if you should adopt
the activity reserve?
Senator4 BULKLEY. I have not heard the suggestion before. It
strikes me favorably. I would like to consider it a lJttle more.
Air. HAAS. It hardly seems fair.
Senator BULKLEY. I see your point.
Air. HAAS. That is not a turnover; that is a temporary disbursement, and when those dividend checks are deposited by the customer
and he checks against that, then it does represent a business transaction.
Senator BULKLEY. Yes; I see the distinction.
Senator GLASS. Aly reaction to that is just this: You note this
point of objection in this intricate, technical proposition; some
other banker will note another point, and some other banker still
another, and interminably so. Therefore, it has seemed to the subcommittee that we had better adhere to the simple form and put a
stop to this manipulation of deposits. Five years from now you may
prevail. Go ahead, sir.
Air. HAAS. It is quite possible that under the provisions of this
bill, commercial business not entitled to bank credits on its singlenamed note might not be able to get accommodation on good marketable securities, if its depository bank had already reached the limit
of Federal loans as provided by this bill.
I have in mind. Senator, in our city, a very large substantial bank
or banks. They are members of the Federal'reserve system really as
a patriotic duty. They do not do a commercial business. They loan
on collateral practically entirely, and if there is a limit fixed on their
collateral loans by the Federal Reserve Board, and a customer of
their bank comes in and wants some money on good marketable collateral and they are up to their limit as fixed by the board, they
would be really subject to criticism from their board of directors
and their officers about belonging to the Federal reserve system.
They do not have commercial paper. I think one of them, with
total deposits of around a hundred million dollars, has about $1,000,000 in paper. They do not separate their classification of loans, but
1 do know the nature of their business, and it is practically all collateral business.
Senator GLASS. That seems to be an exceptional case. Upon the
official report of the extent of banking operations of the Federal



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

67

reserve system, I gave the figures for the whole country, showing
that the member banks of the system at that time had eight and a
half billion dollars of usable paper and were discounting to the
extent of less than half a billion.
Mr. HAAS. Senator, probably the reason for that is that it is so
much more convenient
Senator GLASS (interposing). I am not talking about the reason
for not rediscounting; I am saying that according to this official
report there was an abundance of eligible paper, and in conversation with this very official night before last, he still insists that there
is an abundance of eligible paper generally.
Mr. HAAS. Of course^ there may be a bank here and there that
is not supplied with eligible paper, and that deficiency may arise
from various causes.
Senator FLETCHER. What percentage would you suggest, Mr.
Haas?
Mr. HAAS. Beg pardon?
Senator FLETCHER. What percentage woidd vou suggest?
Mr. HAAS. Senator, I do not know, really. 1 think the bank must
govern its business according to its needs, as long as they are legitimate needs and they are legitimate customers. These banks that
I have in mind, that is their legitimate business, and their customer
wants to borrow and he has good collateral, and they are in shape
to loan it to him; they certainly want to make him the loan.
Now, take our case, a commercial bank of our nature, our own
securities and our own collateral loans will fluctuate witn seasonal
requirements. If business is active, we have more customers' notes
in the making that can be used at the Federal reserve bank. If
business is quiet, we do not have the making of those notes, and
naturally we have to use our money some way "in order to get a revenue out of it, and we make the investments that we can make at
that time, but those investments go down
Senator GLASS (interposing). Have you any reason to suppose
that the Federal Reserve Board would not administer the provisions
of the law with good banking judgment?
Mr. HAAS. I have no reason to think that they
Senator GLASS (interposing). It is left within the discretion of
the board to make these adjustments.
Mr. HAAS. Except that it does centralize authority. If it centralizes authority 1 think it would be more in keeping with your
establishment of the Federal Reserve System with 12 banks in place
of a central bank, without doing a central bank business.
Senator GLASS. The Federal Reserve Board was .established here
at Washington expressly for the purpose of supervisory control of
the Federal reserve banking system. It is an altruistic board, no
member of which is permitted to have any banking interest whatsoever, and the theory was that it would be a board composed of
experienced, discerning, disinterested persons, who would administer
the banking system in a practical and a fair way to all the member
banks of the system, and what I am asking now" is, if you have any
reason to suppose, this matter being left to the discretion of the
Federal Reserve Board, that it would not fix a percentage that would
enable every bank within reason to operate in this particular matter?



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 68

Mr. HAAS. Senator, I have no reason, except this, that the Federal
Reserve Board is an appointive board, and the boards of the 12 Federal reserve banks are largely elective. Somehow, I lean to an
elective board, rather than to an appointive board for the regulation.
Now, I assume that when it says the Federal Reserve Board shall
fix a percentage of the maximum loan on collateral they mean not
in excess of a hundred per cent. I may be wrong. There is nothing
in there to give me a cue about that. I may be wrong, but I am assuming that it is a hundred per cent that they may loan on collateral, and that in a number of banks that I know about, it would
be a very unfortunate thing.
Senator GLASS. Would it not be a very unfortunate thing for the
depositors in some banks if the hundred per cent should be exceeded?
Mr. HAAS. Well, I would not say any well-managed bank, Senator, that it would be
Senator GLASS (interposing). Oh.
Mr. HAAS. Any difficulty.
Senator GLASS. Have you come to the conclusion that all banks are
well managed ?
Senator BULKLEY. I think it is perfectly clear that that is not
limited to a hundred per cent. In fact, in one draft of the bill
that we had, some words were in there that I think should have
stayed to make that clear.
Mr. HAAS. What was it in there for?
Senator BULKLEY. Simply put in there whether a hundred per cent
or more, whether more or less than than a hundred per cent.
Mr. HAAS. More or less?
Senator BULKLEY. Yes.
Mr. HAAS. Well, if it were more or less
Senator GLASS (interposing). These words were stricken out because we assumed that is what was meant.
Senator BULKLEY. I think it is meant, but I think you wrote those
words in there to make it clear. Mr. Haas has developed my thought
for me by misunderstanding it again.
Mr. HAAS. It saj-s a percentage of the capital or surplus. You
naturally assume that it is restricted
Senator BULKLEY (interposing). I find a good many do assume
that, and that is the reason that those other words should be in
there, but it certainly is not the intent of the language to confineit to a hundred per cent.
Mr. HAAS. I have but very little more, Mr. Chairman, if I may
read it.
We believe that the ground work has been laid for an improvement in business.
Many large business concerns have mapped out plans for the
expenditure of large sums in the employment of labor and the
purchase of materials, but we sincerely "believe that their plans
will be interrupted or held in abeyance* should they be fearful of
legislation affecting their business adversely.
We believe that the enactment of this bill making sweeping
changes in the National Bank act; the Federal reserve act; concentrating additional powers in the Federal Reserve Board; and in the
Federal reserve banks, and the control provided for the adminis


NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

69

tration of member banks, would be most harmful to the Federal
reserve system, member tanks, and to business in general at this
particular time.
The CHAIRMAN. IS that all?
Mr. HAAS. That is all
# Senator BROOKHART. YOU mentioned something about some securities being restricted or reduced by this bill. Can you give us any
specific lines?
Mr. HAAS. That is the part that we are going to delete. Senator,
the 15 and 25 per cent. It refers, as I understand it now, to one ibstie,
and not the entire holdings of the banks. I do not recall any other
section.
Senator BROOKHART. YOU think that is a high enough percentage of
any one issue ?
Mr. HAAS. For one issue?
Senator BROOKHART. Yes.
Mr. HAAS. Well, in my bankinsr experience I have not handled
anything quite as large as that. We are rather modest.
Senator BROOKHART. What I meant is. notwithstanding that correction in the meaning of it, you have still said in conclusion that it
is going to hamper certain business and employment of labor. You
did not say anything about the price of farm" products, whether it
would reduce them any lower or not. I would like to know now
what these lines are that it is going to interfere with.
Mr. HAAS. The lines of credit?
Senator BROOKHART. Yes.
Mr. HAAS. Senator, we tried to codify the Pennsylvania bank laws,
and we tried to make restriction in the Pennsylvania bank laws, and
we just could not get it over in Pennsylvania ; V o just could not do it.
We had some institutions that handled whole issues, and they said
they could not do it, and would not ride along.
Senator BROOKHART. DO you remember a particular line that was
developed because of that situation?
Mr. HAAS. The line of business?
Senator BROOKHART. Yes .
Mr. HAAS. In these particular cases they did handle them. They
handled them and sold them, and they are perfectly good securities.
The one I had in mind was a very excellent steel company. No reason why they should not handle those securities. The public bought
them.
Senator BROOKHART. And then they have depreciated like all other
securities since ?
Mr. HAAS. I suppose so.
Senator GLASS. Did you ever hear of a security that was not perfectly good, that somebody wanted to borrow money on it?
Mr. HAAS. Yes; technically, Senator, I have seen a lot of them, but
we did not take them.
Senator GLASS. Practically you have seen more than you have seen
technically: at least, some banks have.
Senator BROOKHART. We have had a good deal of evidence and
testimonv that there has been an overdevelopment, not only in railroad equipment, but in manufacturing and other lines. That means




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 70

that there have been a lot of issues put out that never ought to have
been put out.
M r . HAAS. Y e s .
.
.
.
9
Senator BROOKHART. Don't you think that is the situation i
Mr. HAAS. Well, I can not imagine that any reputable house

would
knowingly and willingly put out anything that did not have fair
prospects. Something might happen later on that would change the
picture, as it does happen.
Senator BROOKHART. You as a banker advise your clients about
buyincr stocks and bonds from time to time, do you not?
Mr. HAAS. Well, let me say this, Senator: Many times they come
in and ask you for your opinion, and they do not want your opinion
at all: they just want vou to agree with them.
Senator BROOKHART. And you agree with them, do you, as a matter of. course?I d o n o t .
M r HAAS.
Senator GLASS. Unhappily, some bankers do.
M r . HAAS. I d o n o t .
Senator BROOKHART.

t

In 1929 you would advise the buying of those
stocks and bonds at those high prices, would you not, before the
panic ?
Mr. HAAS. Senator, I do not know anyone that I advised at that
time to buy any securities.
Senator BROOKHART. Did you warn them that a panic was ahead
and that they were overinflated?
Mr. HAAS. I did not say on such and such a day there was going
to be a panic or anything of that sort.
Senator BROOKHART. Well, you did not say there would be at any
time, did you?
Mr. HAAS. But there are a lot of people that we advised to lighten
their loads.
Senator BROOKHART. YOU know that everything practically was
overinflated at that time, do you not—or did you see that ?
Mr. HAAS. There are enough statistical services that pointed that
out, but you know the
Senator BROOKHART (interposing). Most of the statistical services
said that we had reached a new economic era, a new economic level,
and most of the financial experts sized it up that way, did they not?
Mr. HAAS. Yes; they said with our Federal reserve system we were
never going to allow a panic like we had before.
Senator GLASS. Well, you never have?
Mr. HAAS. NO money panic.
Senator GLASS. Oh, well, then. The reserve system did not undertake to guarantee good bank management to prevent the failure of
banks that engaged in wild speculation.
Senator BROOKHART. Wasn't this enormous inflation due to the
advice of the banks and investment companies for the marketing of
those inflated securities?
Mr. HAAS. I would not want to say, Senator. I would not want
to go on record as making that statement.
Senator BROOKHART. YOU do not want the banks to take their
share of the blame, then, for that?



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

71

Mr. HAAS. I think anybody who made a mistake ought to take a
share of the blame, but I would not want to make a broad statement
of that land.
Senator BROOKHART. Further, are not those values still inflated?
Are they not still too high?
Mr. HAAS. I do not want to be a prophet or the son of a prophet
and say what is going to happen to these securities.
Senator BROOKHART. If they are some 40 per cent above 1914 and
commodity prices are below, there is still something out of joint, is
there not?
Mr. HAAS. There is quite an economic question there that is quite
a difficult question to answer.
Senator COUZENS. Has that anything to do with this bill that we
have before us, Senator?
Senator BROOKHART. I do not know whether it has or not, and I
do not know whether any of these questions have.

Mr. HAAS. The suggestion has been made to me regarding page
43, section—oh, this is a different one. [After a pause:] Mr. Chairman, it has been suggested to me that on line 18, page 30, of the
March reprint of the act, after the word " securities " there be added,
" of any one obligor."
Senator GLASS. What section?
Mr. HAAS. This is section 15, Senator, on page 36 of the March
issue, line 18.
The amount of the securities so purchased—tlie amount of the securities
of any one obligor so purchased and held for its own account at any one time
exceed 15 per cent of the amount of the capital.

The CHAIRMAN. Mr. Haas, it is possible you have the older print.
Mr. HAAS. I have; yes, sir. In the latest print, it is line 15, page
36.
Senator FLETCHER. Line 15, after the word securities," of any
one obligor."
Mr. HAAS. That is line 15, " the amount of the securities of any
one obligor so purchased and held for its own account." That is a
little more enlightening.
Senator GLASS. Well, that is what it means.
Senator BROOKIIART. If that is put in, do you still insist, as you
did in the conclusion of the statement, that it is going to restrict
business and injure the production and development i
Mr. HAAS. The amount of any one obligor?
Senator BROOKHART. Yes.
Mr. HAAS. I have not given enough consideration, Senator, to
just how much they ought to loan. Personally, I want to keep pretty
close to shore on the amount that I would want to loan to any one
obligor.
Senator GLASS. HOW can it depress business, or have any effect
upon existing holdings, when the bill states explicitly that hereafter
this may happen?
Mr. HAAS. Speaking of the " one obligor "?
Senator GLASS. N O ; not of the one obligor.
Mr. HAAS. Or of the whole bill?




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 72

Senator GLASS. YOU say this thing would depress business and
cause banks to unload their securities on the market at a loss. It
does not require that at all. It says, " Hereafter."
Mr. HAAS. Where is that ?
Senator GLASS. "The business of purchasing and selling investment securities shall hereafter be limited to purchasing and selling
such securities."
Senator COUZENS. At the top of page 6, line 3.
Mr. HAAS. What I have in mind is this: It says " hereafter."
But a business is growing, and how are they going to regulate the
future volume of their business, by a new restriction, or by the old
system? If they are just a stationary
"Senator GLASS (interposing). If that bill becomes a law, they
regulate their banking activities by the requirements of this act.
Mr. HAAS. If their business was stationary, and they had this ratio
all right, but their business probably is going to grow and develop;
I am speaking of collateral loans, now, Senator.
Senator COUZENS. IS there any difficulty in dividing up tlie business between different banking interests, if what you say would be
the case ?
M r . HAAS. XO.
Senator COUZENS. Why is this such an
Mr. HAAS. I do not say il is, Si-nator.

obstacle ?
I really haven't any defi-

nite percentage in miricl."
Senator COUZENS. That is what I understood you said, that this
bill was an obstacle. I do not see any objection, if business expands
in the future, to dividing up the business between several banking
institutions, and still live within the law.
Mr. HAAS. I probably did not make myself clear on that. My
thought is this, that a bill of this kind that makes so many changes
in the bank act and in the Federal reserve act and shifts additional
powers to the Federal Reserve Board and additional powers to the
Federal reserve bank and more detailed regulation of the Federal
bank, would be most unfortunate at a time like this, when business
is trying to get under way. There are certain plans, large plans,
of large organizations that are willing to spend considerable money
to endeavor to build up business, and start the wheels going.
Senator BULKLEY. Will you name some one plan as an example
that you think will be interfered with by this bill?
Mr. HAAS. Well, I might say that certain lines would feel uncertain about the future.
Senator BULKLEY. What one would be?
Mr. HAAS. I might say the automotive business. I am just throwing that up in the airSenator COUZENS. That is where it is already.
Mr. HAAS. I saw an editorial this morning in a Washington paper
which mentioned
Senator COUZENS (interposing). Which said, " Kill the bill."
Mr. HAAS. That the automotive industry had certain plans to
progress.
Senator COUZENS. Y es; but I think that they are well within their
facilities, though.



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

73

Senator BLAINE. I might say that there is always danger of quoting an editorial from the Washington Post.
Mr. HAAS. Yes; well, I was not initiated.
Senator BULKLEY. Did that really make an impression on your
mind, Mr. Haas?
Mr. HAAS. I read it, yes; but I had a report of the automotive
industry before that.
Senator BULKLEY. Will you tell us just how this would disturb
the automotive industry?
Mr. HAAS. I think any industry that contemplates spending a lot
of money for development and trying to sell their product, would
want to see stable conditions.
Senator BULKLEY. YOU do not think this bill tends toward stabilize
ing conditions?
Mr. HAAS. I would not think right now. I think it disturbs them.
We have had a terrific wallop over this periocl of the mental attitude
of people.
Senator BULKLEY. YOU think any effort to avoid a recurrence of it
would be disheartening?
Mr. HAAS. N O ; I would not say any effort to avoid a repetition
of it.
Senator COUZEXS. What would you suggest to avoid it, then?
Mr. HAAS. A repetition of—-—
Senator COUZENS. A repetition of what Senator Bulkley is talking
about. If you do not want this, what do you suggest ?
Mr. HAAS. I would say if we were given a rest for a while, it
would help a lot.
Senator GLASS. DO nothing?
Mr. HAAS. We have had the National Credit Corporation, which
temporarily had a very fine effect on the banks. It stopped bank
failures for a while, and then they started in again.
Senator GORE. Which do you refer to now, this voluntary
Mr. HAAS (interposing). The National Credit Corporation. That
was the 1st of October last.
Senator GORE. How long did it stop those suspensions?
Mr. HAAS. I do not just recall, but immediately there was a reduction in the number of bank failures. I do not have the figures.
Senator GLASS. I would bo glad to have you point out any single,
solitary provision of the Federal reserve act as it exists in this bill,
that would discourage General Motors or any other industrial enterErise, or any other commercial or agricultural enterprise from doing
usiness. I have had the conception that the Federal reserve act
as it exists, and particularly under this bill, as an addendum to it,
offers every safe, and almost every conceivable, opportunity to business. Business paper may be rediscounted without any limitation.
Mr. HAAS. Well, perhaps people in a different period, where their
mind was more at ease and more at rest and had not gone through
an experience like they have gone through in the last couple of years,
might look at things more calmly.
Senator GLASS. We want to avoid a repetition of that experience.
That is what we are trying to do.
Senator. BARKLEY. When is the best time to treat a patient, when
he is sick, or wait till he gets well again?



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 74

Mr. HAAS. It all depends on whether you want to operate, or give
him medicine.
Senator BARKLEY. Regardless of whether it is an operation, or
whether it is a medical treatment, you know that old couplet about
" When the devil is sick he is a saint; and when the devil is well,
he is a devil."
Mr. HAAS. NO ; I had forgotten about that.
Senator BARKLEY. If we wait until we get back to our prosperous
times, we will forget all about this, and we will not want to do anything because it will put us back where we are now. So when do
we want to operate ?
Mr. HAAS. Well, I say it would be an ideal situation if we could
level the peaks of prosperity and fill up the valleys of depression,
but I do not know the saint that could do it.
Senator GLASS. We are extending increased opportunities to business here, and we authorize national banks to engage in all forms of
banking business and undertake all types of banking transactions
that under the laws of the State in winch that bank is situated may
be permitted, that are not contrary to the existing laws, and I would
be obliged to you, Mr. Haas, before you conclude, if you would indicate what provisions of this bill specifically or incidentally restrict
the operations of the Reconstruction Finance Corporation or of the
banks under the so-called Glass-Steagall bill.
Mr. HAAS. What I have in mind, Senator, is this, that if there is
anything to depress the values of the assets of banks under their
present value we are going to have more trouble.
Senator GLASS. DO you think that anything could possibly happen
that would disturb the situation any more than the things that have
happened and which we are now seeking to prevent happening
again ?
Mr. HAAS. Well, I should hope that they would not be as bad as
they have been, and with all the reconstruction propositions, and
rehabilitation of this, that, and the other thing, it certainly has improved the situation, and we have not had the bank failures. But
if something is going to depress the security market, the bonds of
banks, and the investments of banks, they are going to have to have
help again.
Senator BULKLEY. DO you suppose that it could be possible that
there would be a bank depositor in the United States that thinks
there is something wrong with banking practice and that something,
perhaps, should be done to correct it ?
Mr. HAAS. Well, you have 48 States—48 different State laws. You
have the national bank act; Federal reserve act, for the national
banking business. I think to a large extent you have to know each
banker and the type of banker you are doing business with. If he
is a good banker you will have a good bank. If he is not a good
banker you will no have a good bank, no matter what your law is.
Senator BROOKHART. Do you think all of these banks that have
failed, the failures were due to the fact that the bankers were not
good bankers?
Mr. HAAS. Well, now, I would not want to go on record on that.
Senator BULKLEY. I certainly know lots of bankers that I regard
as good bankers and I am very much afraid of the state of mind of
their depositors to-day.



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

75

Mr. HAAS. I will say this, Senator, it is so much easier to run a
good bank than it is to run a poor bank.
Senator BROOKHART. IS it not true that most of these banks have
failed because of economic conditions that were forced on them ?
Mr. HAAS. Many of them have in certain sections of the country
where they have had unusual conditions, like drought and crop failures, and things of that kind.
Senator BROOKHART. In the agricultural States, they said to the
bankers, " Lay off of farmers' loans. They are not sound. They are
not liquid. Buy these long-time bonds." About 5,000 banks were
closed with farmers5 frozen paper. And then they loaded up with
the long-time bonds, and then in 1929 they came along and they were
deflated more than the farmers' paper, and now they are being closed
because thev have got the bonds.
Senator COUZENS. Are you going to have any more witnesses this
afternoon, Mr. Chairman?
The CHAIRMAN. There will be another witness.
Senator FLETCHER. HOW do you account for the fact that there
were only nine bank failures in Canada last year?
Senator GLASS. Last year?

Senator FLETCHER. Last year.
Senator GLASS. NO ; they have not had but one bank failure since
1914.
Senator FLETCHER. I understand there were nine.
Mr. HAAS. Their system is very flexible.
The CHAIRMAN. When one fails that means 500 fail, does it not, or
a thousand, or two thousand ?
Senator FLETCHER. Five of these paid the depositors in full, and
only four did not.
Mr. HAAS. There have been no failures recently, Senator.
Senator BULKLEY. Mr. Haas, aside from the advisability of acting
at this time, or the inadvisability of it, is there anything in this bill
that is unsound in itself?
Mr. HAAS. Unsound theory?
Senator BULKLEY. Yes; is there anything in the bill that is affirmatively bad, leaving aside the question of whether it is wise to do
it now or some other time?
Mr. HAAS. Well, I would say that there are certain provisions,
as I have tried to outline here, in the bill that would be detrimental
of the interest of some of the member banks, because of the character of their business.
Senator BULKLEY. YOU mean the instance where you have a hundred million dollar institution with a million dollars worth of rediscountable paper? Is that the sort of example you mean?
Mr. HAAS. I do not think that I understand you.
Senator BULKLEY. YOU gave an instance of a great institution.
M r . HAAS. Y e s .
Senator BULKLEY. Is that what you mean
Mr. HAAS. Take the collateral loans in our

by your statement?
bank, if we have a commercial demand for money, we are an active bank, we take care of
our commercial demand. That is our first job.
Senator BULKLEY. Yes, sir.



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 76

Mr. HAAS. If we have money left over we have to use it in some
way to produce an income for the bank.
During this easy-money period, we could have increased the deposits of our bank millions of dollars, but we would not take the
money, because we could not do anything with it, they wanted a high
rate of interest, and we refused to pay it, and if we had taken it and
paid the rate of interest and put it into the kind of securities and
investments that would have enabled us to pay that rate of interest,
we would have lost a great deal of money.
Senator BULKLEY. What is there in this bill that makes that any
worse?
Mr. HAAS. The collateral loans.
Senator BULKLEY. DO you mean the possibility that they might restrict your percentage of collateral loans? Is that what you mean?
M r . HAAS. Y e s .
Senator BULKLEY.

The possibility that it might be restricted unwisely?
Mr. HAAS. Yes; that is right.
Senator COUZENS. What would you say to Congress fixing the
amount instead of leaving it to the Federal Reserve Board?
Mr. HAAS. I do not know whether you can fix it, Senator, under
any percentage or any yardstick. I think the bank has to regulate
its loans according to its business needs at that time.
Senator COUZENS. What is your experience over these three kinds
of periods that you just spoke of, bad times, fair times, and good
times? What does your experience indicate that the percentage of
deposits was invested in security loans?
Mr. HAAS. Well, they have gone up when the commercial demand
was low, and there was an active demand for money on collateral.
On brokers' loans we never lost a dollar.
Senator COUZENS. But what percentage of your loans?
Mr. HAAS. I do not recall, Senator.
Senator COUZENS. Don't you have an idea how far you went up at
any time?
Mr. HAAS. Not just offhand.
Senator COUZENS. You haven't the slightest idea?
Mr. HAAS. Oh, I have an idea, yes; but whatever I would give you
would simply be a guess.
Senator COUZENS. That is what I am asking you, to give us a guess
so that we could get some light on it.
Mr. HAAS. I would say 10 per cent.
Senator COUZENS. Of your deposits?
Mr. HAAS. Of our gross deposits.
Senator COUZENS. Then during the demands for your customers,
how low would you go down, or would you wipe that out entirely?
Mr. HAAS. N O ; we would not wipe them out entirely. It is necessary to have some money that you can call and get quickly as a
secondary reserve in the shape of collateral loan, that you can immediately call, that you do not have to wait for the maturity of an
obligation but can call immediately.
Senator GLASS. DO you know of a panic we have ever had in this
country that did not result from the call system, call-loan system?



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

77

Mr. HAAS. YOU mean, Senator, that all of them have been caused
by call loans?
Senator GLASS. Yes; in one way or another.
Mr. HAAS. Well, I have not analyzed all of them just to see
whether that is the cause. I am wondering whether it is the cause or
the effect, Senator. Now, you take
Senator GLASS (interposing). Is it not a fixed system of the average bank to maintain what it calls its standard rate of discount,
never giving to the commerce or industry of the community the advantage that ought to ensue from easy money and easy credit, but
bundling it up—I think that was under the old system before the
adoption of the Federal reserve act—bundling it up and sending it
to the money centers to be loaned on call at a nominal rate of
interest?
Mr. HAAS. Well, of course, the corporation business or the private
business that has been sent to the money centers to be loaned on call
has taken care of itself by the clearing houses that have passed their
own particular rules.
Senator GLASS. I am not talking about loans now for others; I
am talking abou£ the banks themselves.
Mr. HAAS. The clearing houses have themselves passed rules prohibiting the members from making loans for account of others.
Senator GLASS. Oh, yes; and may rescind them day after to-morrow for that matter, if we do not put a provision in the statute. But
I am not talking about loans for others; I am talking about the banking system itself. Generally, do not the banks of each community
have what they call their standard rate of interest from which they
are always reluctant to depart, no matter what the condition of the
money market is?
Mr. HAAS. I will say that the customer of a bank gets a rate of
interest commensurate with the type of account which he carries.
Naturally, the customer that carries a very good balance in the bank
and you analyze his account find it profitable. He would expect the
very lowest rate which you could possibly give him.
Senator GLASS. But what I am asking is: Do many banks give a
rate below their standard to the average borrower, no matter how
easy money is?
Mr. HAAS. Well, Senator, many country banks, you know, have a
standard rate, and that is 6 per cent.
Senator GLASS. That is what I am saying—or more, I say " or
more."
Mr. HAAS. I am talking about Pennsylvania particularly. The
country bankers get generally 6 per cent.
Senator FLETCHER. IS that the legal rate in Pennsylvania?
Mr. HAAS. Yes; except by contract.
Senator BROOKHART. HOW about city banks? Do thev have a
standard rate, too?
Mr. HAAS. NO. What I meant, Senator, in explaining that, is
that the rate is based on the character of the man's account, the
amount of balance he carries, whether the account is profitable,
how much work you do for him. Take, for instance, one with a
large balance carried in a city bank. If you look at it and on the
face of it you might think that it is profitable: you would think that
1111G1—32—PT 1




6

NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 78

you could give that man a low rate for money; but when you analyze
that account you find that the activity of the account does not give
you any profit. You can not even pajr him interest on his account.
Senator BROOKHART. There is a certain portion, though, of surplus
credit that you send to New York particularly, even from Philadelphia, is there not?
Mr. HAAS. Yes, Senator.
Senator BROOKHART. From all over the# country?
Mr. HAAS. "We have not had a New York loan for ages. We happen to have one loan in Chicago, and that was simply because we
had a customer there.
Senator BROOKHART. I mean to send to New York banks for redeposit.
Mr. HAAS. We would not do that, Senator, just to carry balances
there and just to carry money there. We do that for the service
which they render us. For instance, we have many thousands of
coupons that are payable in New York, and we have to send them
to some one in New York.
Senator BROOKHART. You maintain a balance there all the time?
Mr. HAAS. We maintain a balance there?
Senator BROOKHART. You get an interest on that?
Mr. HAAS. Yes; according to the clearing-house rule.
Senator BROOKHART. What is that rate now ?
Mr. HAAS. One-half of 1 per cent.
Senator BROOKHART. The banks out in our country, when they
have a surplus they charge a farmer 7 or 8 per cent and business 6 or
7 per cent. The eastern part of the State is lower than the rate
in the western part, but they send surpluses down to New York for
this one-half of 1 per cent in order to maintain that standard rate.
Is that not the pretty general custom over the country?
Mr. HAAS. Well, I would hate to accuse them of doing that,
Senator, just to get a half of 1 per cent. I think they send it down
to have it available when they want it.
Senator BROOKHART. Most of the time they have got a higher rate
than that, have they not?
Mr. HAAS. In New York?
Senator BROOKHART. Yes; since the Federal reserve act went into
effect.
Mr. HAAS. Over a long period of time now we have had a very low
rate. As a matter of fact, they were considering
Senator GLASS (interposing). Yes; but prior to the adoption of
the Federal reserve act the normal commercial rate was 2 per cent,
was it not?
M r . HAAS. Y e s .
Senator GORE. Why

do you pick on this one-half of 1 per cent
in New York? You say they do not pay any attention to the Volstead Act there anyway.
Senator BROOKHART. I made a comparison of it once, and I found
it was 1% per cent for quite a long time after the Federal reserve act,
and I think it got up once to 2%, which was the highest, I believe!
that they ever paid on that money.
Mr. HAAS. Yes; I would say that is right.
Senator BROOKHART. Since the panic it has gone back down to
this one-half of 1 per cent.



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

79

Mr. HAAS. Senator, I would not like to say that a bank out in your
State sends money to New York to get that half of 1 per cent.
Senator BROOKIIART. Well, they had better get that than nothing,
had they not ?
Mr. HAAS. Oh, yes; rather than to—they would have to carry it
somewhere. They either carry it in some bank or cash.
Senator BROOKIIART. Would it not be better banking and better to
them if they would lower their interest rate at home clown to where
people coulcl afford to pay it and lend it at home?
Mr. HAAS. That is a matter for them to work out.
Senator BROOKIIART. Would not the whole banking system be
sounder if the interest rate were lowered all over the country so that
business could afford to pay it?
Mr. HAAS. Senator, if you were starting with a clean slate, if we
were trying to have an ideal banking situation and we started with a
clean slate of no interest on any kind of deposits, then, of course, we
could have saved 38 to 50 per cent of the banks' gross expense on
interest on deposits. Now, if we start with a clean slate, no interest
anywhere, neither State bank, national bank, or trust company pay
no interest, why, of course, we could afford to do business all along
the line on a lower basis of income.
Senator BROOKHART. YOU mean by that you start by paying too
high an interest rate to a depositor and then you collect off of the
public too high an interest rate to make it back?
Mr. HAAS. You have to govern the rate according to your business,
your cost. What is your cost? The cost of the banking business is
so much, and it takes" from 38 to 50 per cent of your gross income to
pay the interest which the banks pay on their deposits.
Senator BROOKHART. I do not know that that is particularly material to this bill, but I do think that interest rates charged by all the
banks and all the other lending companies are higher than the
American people can ever afford to pay, higher than American production can stand.
Mr. HAAS. Senator, I am just wondering—Senator GLASS (interposing). I am just going to say we are not
trying to restrict that in this bill.
"Senator BROOKHART. ]5"O; that is outside the bill.
Mr. HAAS. Just on your point. Senator, I am just wondering
whether you make a distinction between short-time money and longtime money?
Senator BROOKIIART. I think it is all too hiph, short and long and
the whole business, except these particular situations we have just
described in the New York bank. Thev are low enough.
Senator BULKLEY. Mr. Haas, I would like to go back to something
we were talking about a few minutes ago and see if we can understand it a little better. See if I understand you correctly. I think
you said your bank was refusing considerable sums on deposit because
you did not think it was wise to use the money on collateral loans at
this time and did not have any other use for it; is that right?
Mr. HAAS. NO. I would like to correct you on that. We did not
think we could handle it satisfactorily at a profit. In other words,
it was not permanent money.
Senator BULKLEY. Yes.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 80

Mr. HAAS. We could not employ it satisfactorily at a profit. At
that particular time call money was 1 per cent.
Senator GOLDSBOROUGII. That was the rate of interest required?
Mr. HAAS. It was higher than that. We would have to pay onehalf of 1 per cent for the services of lending that money; therefore,
we would have a loss. So why load yourself up with a lot of business that is going to give you trouble and make you lose money ?
Senator BULKLEY. You are assuming you are paying interest on
those deposits ?
Mr. HAAS. Yes. That is what they wanted.
Senator GORE. Where is this?
Mr. HAAS. The First National Bank of Philadelphia. They were
lending the money.
The CHAIRMAN. If we are through, I will call the next witness.
Senator GLASS. I would like to ask one more question and then
I will desist: Why do you think there should be a discrimination
against commercial loans which are restricted by the existing banking act and not authorize the Federal Reserve Board to determine
the volume of loans to any one person or concern on collateral
security? Why do you think collateral security should be favored
as against commercial?
Mr. HAAS. Senator, I did not mean to convey the idea about the
collateral security in regard to one loan. I meant in the aggregate;
the aggregate amount of the banks' loans on collateral, not to any
one person.
Senator GLASS. I understand. You did not mean that. You had
a misinterpretation of the law.
The CHAIRMAN. The next witness is Doctor Edwards.
STATEMENT OF GEORGE W. EDWARDS, HEW YORK CITY

The CHAIRMAN. How long a statement do you care to make?
Have you a statement prepared ?
Mr/EDWARDS. I have no statement prepared.
The CHAIRMAN. How long would you like to take to present what
you have to present?
Mr. EDWARDS. Less than half an hour.
The CHAIRMAN. Are ther any questions to be asked by the members? You may proceed.
Mr. EDWARDS. Mr. Chairman, I just thought in order to same time
I would like to express my opinion and answer some of the questions that were put this afternoon, with special reference to some
of the provisions of the act and the possible regrouping of some of
the provisions under certain special topics.
Senator BULKLEY. Excuse me. What is your banking connection?
Mr. EDWARDS. I have no banking connection. I am professor of
economics at the College of the City of New York.
First, on the point mentioned by Mr. Haas—the trend toward centralization of control in the act in reference to both the Federal
reserve banks and also the member banks—the bill provides that
the open market operations of the reserve banks should be controlled
by a committee of which each district appoints one member. That



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

81

is, section 10 on page 11, which really transfers the control from
each Federal reserve bank to the committee. And then a second
point, regarding the member banks already brought up to-day for
consideration: Section 3 on page 3 and section 8 on page 0 take the
investment credit operations of each bank, eacli individual member
bank, and put it under the control of the Federal Reserve Board.
The question was asked, Would the board be in a better position to
know the investment credit operations or the extension of investment
credit by individual banks? I would express my personal opinion,
I doubt it. I believe the member banks are closer to the investment
credit situation than the board. Of course, I am only expressing
my own personal opinion on that point.
Senator GLASS. With respect to your first proposition there:
What is your objection to the open-market committee established
by this act?
Mr. EDWARDS. That this should rest really with the bank than
with a separate committee, because certain districts have much larger
open-market operations than others.
Senator BROOKHART. Would not that centralize the control more?
Mr. EDWARDS. I mean the committee brings about
Senator BROOKHART. That comes from the banks. That decentralizes.
Mr. EDWARDS. At the present time each bank has its own openmarket policy.
Senator GLASS. I am astonished at any such statement as that.
There is an open-market committee.
Mr. EDWARDS. Yes; but I mean this really, in turn, gives each
bank only one vote on the entire committee.
Senator GLASS. Why should it have any more ?
Mr. EDWARDS. But should not each bank, Senator, if possible
Senator GLASS. What different operation does this statutory provision for an open-market committee have from the regulation now
m existence ^
Mr. EDWARDS. Would it not transfer more control from the banks,
from each individual bank, than at the present time, Senator?
Senator GLASS. Why, no; of course not.
Mr. EDWARDS. If that would not be the effect, I would not have
any objection to it.
.
Senator GLASS. It is just enacting into statute law a regulation
that the Federal reserve system has now.
.
Mr. EDWARDS. If it does not lead to more centralization, there
would not be any objection to it. Senator.
Senator GLASS. You ought to be sure it does lead to more centralization before you criticize it. Have you read that [offering copy of
^
^
Part I of the hearings] ?
Mr. EDWARDS. I have seen the act; yes, Senator. That is not as
important as the centralization of shifting investment credits from
the individual banks to the board. I think that, really, is possibly
more important. Answering your question before——
Senator GLASS. I did not address myself to that phase of your objection. I wanted to take the thing in order. You object to the
open-market committee that we provide here, which is simply a trans-




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 82

fer to statutory requirement. Under the existing regulation of the
board they have an open-market committeeM r . EDWARDS. Y e s .
Senator GLASS. One

member of which is selected by each Federal reserve bank.
.
Mr. EDWARDS. Mav I ask you a question, ]ust for my own information? What is the purpose of the committee as compared with
the present committee ?
Senator GLASS. It is exactly the same. It is just simply to legalize the thing. In other words, we are putting into the statute here
practically an existing process.
Mr. EDWARDS. Then, of course, there would not be any objection
to that.
Senator GLASS. I did not think there would be any. I thought it
would develop what objection you had. Now, as to the member
bank proposition, of course, there is a disagreement about that.
Mr. EDWARDS. That point was raised this afternoon—the question
of credit policy, and would it intensify deflation. I believe it would.
Senator GLASS. Why would it; for example, if the Federal Reserve Board would put no limitation upon the volume of security
loans that a member bank might make ?
Mr. EDWARDS. Because some of the security loans might be used
for a productive purpose and not for speculation.
Senator GLASS. I say, suppose the Federal Reserve Board should
put no limitation on it. That is a permissive provision of the bill.
It says the Federal Reserve Board may do this. Suppose it should
not do it. How would it be restricted? And suppose it would put
the limitation at a point where it would never be abused. Iiow
would there be any deflation \
Mr. EDWARDS. There would not be with that interpretation. But
there are certain sections that I believe. Senator, would lead to the
deflation at the present time. I am referring to some of the individual provisions.
Senator GLASS. Just point them out and state whether they do
or not.
Mr. EDWARDS. Section 11, page 25.
Senator GLASS. I am very familiar with that section. I have been
dreaming about that for the last 10 years.
Mr. EDWARDS. I still believe, Senator, there is a distinction which
could be drawn; but would not the effect of that, Senator—that
section 11 be to check Federal financing?
Senator GLASS. Not the least bit in the world. Let me ask you
right on that point, to show, as I conceive, the inconsistency of some
of the critics of this bill: Are you in favor of retiring at one fell
swoop all of the national bank speculation?
Mr. EDWARDS. No. You mean at one time?
Senator GLASS. Yes. Do you think that would have an adverse
effect upon Government securities, upon United States bonds?
Mr. EDWARDS. That would not; no.
Senator GLASS. Why not?
Mr. EDWARDS. Because you would issue other notes in its place,
probably.



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

83

Senator GLASS. You could issue an interminable number, just as
many bonds as Congress authorizes or certificates of indebtedness
as the Treasury may care to issue, despite anything in this bill,
ihe point you are hying to make now is that if the brokers are
denied the right to get unlimited access to the Federal reserve bank
on lo-day paper for their uses, that that would impair United States
securities. Is not that the point you are making?
Mr. EDWARDS. N O ; I would not make that point. That is not what
I want to make.
Senator GLASS. HOW would it impair Federal financing?
Mr. EDWARDS. In the first place, on the question of brokers, I find
myself in sympathy with any provision in that act.
Senator GLASS. Everybody is in sympathy with it. but nobody
wants to do anything to stop it.
Mr. EDWARDS. I believe, though, certain provisions could possibly
be changed. One way to attain your ideal, which certainty is necessary, is the checking of speculation.
Senator GLASS. I am interested to know right now, at this point,
in what way will that section 11 interfere with Federal financing?
Mr. EDWARDS. I would say, Senator, in this way: That particular provision adds a penalty of 1 per cent on the advances supported
by United States Government securities.
Senator GLASS. Not necessarily.
Mr. EDWARDS. IS that the intent of that clause, Senator?
Senator GLASS. GO ahead with that proposition.
Mr. EDWARDS. Therefore, the banks would be that much discouraged from buying securities, buying Government securities, because
they can not use them as freely as they can at present, because of
the high penalty.
Senator GLASS. Would not that be true in the case of the retirement of nearly $800,000,000 of national bank circulation? They
could not use United States bonds for speculative jmrposes ?
Mr. EDWARDS. Is that practical, though—the retiring of the national currency?
Senator GLASS. Let us ask the Secretary of the Treasury. He has
five times recommended it to Congress.
Mr. EDWARDS. But your banks do not want to give up their rights.
Senator GLASS. What?
Mr. EDWARDS. The national banks would not give up the right.
Senator GLASS. They would have to give it up if the Secretary of
the Treasury retires the national bank circulation. Whv would not
they?
Mr. EDWARDS. I mean without
Senator GLASS. I am asking you if, as a matter of fact, we should
withdraw national bank circulation based upon United States bonds,
would that have any effect upon the market?
Mr. EDWARDS. For United States Government bonds? I believe
it would.
Senator GLASS. That has been recommended by the very gentlemen who inspire this objection here to this proposition.
Mr. EDWARDS. I believe the retirements would have the very same
effect. This particular clause would in that way by that much
restrict the market for United States Government bonds.
Senator GLASS. GO ahead.



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 84

Mr. EDWARDS. Answering your question about the circulation
privilege: That gives the Federal bonds that much more market.
Senator GLASS. Of course, I know that. That is the reason I am
asking you if the withdrawal of the privilege would not affect
Federal financing.
Mr. EDWARDS. My answer is yes, Senator; by all means. I also
had down the section 15, which was reinterpreted.
Senator GLASS. IS that your only objection to section 11—the 1
per cent penalty?
Mr. EDWARDS. I have a second interpretation, Senator.
Senator GLASS. Eight on that point, before you leave it, I want
to call your attention to the fact that in the existing law the Federal
reserve bank is authorized, subject to review by the Federal Reserve
Board, to make that rate of discount anything it pleases. Would
not that tremendous power rather impair Federal financing?
Mr. EDWARDS. I would not like to see the board have the power.
Senator GLASS. Well, it has it, and it has had it ever since that
provision of the law was enacted. The Federal reserve bank, subject to review and determination of the Federal Reserve Board,
lias the right now, under existing law, and it has had it for 16
ears, to determine the rate of rediscount for 15-day paper sustained
y Federal reserve securities. That is a tremendous power, is
it not?
Mr. EDWARDS. Yes. I did not understand first your statement.
will change my answer.

I

On section 15, page 36, that point was cleared up to-day. It does
not refer to the total securities.
Senator GLASS. That is cleared up.
Mr. EDWARDS. Senator, if it does refer to individual security, I
believe that percentage is far too high. I mean, if the interpretation
of that particular clause means that a bank can put 15 per cent of
its capital and 25 per cent of its surplus in one issue
Senator GLASS. YOU think that ought to further deflate it ?

Mr. EDWARDS. That is not deflation, Senator. I would not call it
deflation. I am serious in that point. I would call that

Senator GLASS. A safeguard?
Mr. EDWARDS. Allowing them to have
Senator GLASS. YOU would call that a safeguard?
Mr. EDWARDS. I would call that permitting them to put too many
of their eggs in one basket.

A third point: Section—^—

Senator BLAINE. YOU might elaborate that proposition that the
percentage for these individual finances is too great.
Mr. EDWARDS. If it refers to the amount of securities, the amount

of funds which a bank could put in one issue, that percentage would
certainly be too high.
Senator GLASS. YOU think it is too high?

Mr. EDWARDS. If you could so interpret it as to refer to one particular issue.
Senator GLASS. Are you aware of this fact: That in the answers to
our interrogatories, our questionnaires sent out, it developed that
many of the banks are loaning immensely higher than this restrictive provision?



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

85

Mr. EDWARDS. That is certainly an error.
Senator GLASS. That you think is too high ?
Mr. EDWARDS. It is certainly an error.
Senator GLASS. They are committing a lot of errors, and a lot
of banks are committing them, too.
Mr. EDWARDS. If you take the restrictions laid down by some of
the States and the amount which they can lend to any one borrower,
the restrictions are far below even 50 or 25 per cent. That is merely
a side comment. It was just the interpretation referring to the
one issue.
Senator GLASS. We want it as one of your main comments, because
it is peculiar. Everybody else says that we are too restrictive, and
now you say we are not restrictive enough.
Mr. Edwards. Not if it refers to one issue, Senator.
Senator BROOKHART. IS not 10 per cent about the usual limit in
one issue in the State laws ?
Mr. EDWARDS. There are some exceptions in the case of local issues.
That is, if it is the holding of a bond of a city within that State,
they sometimes make an exception.
Senator BROOKHART. But this is about 15 per cent and even 25 per
cent of the surplus. That is too high.
Mr. EDWARDS. TOO high. That is it.
Senator BROOKHART. I am inclined to agree with you on that
myself.
The CHAIRMAN. Proceed. We want to close here at about 5
o'clock.
Mr. EDWARDS. The third point is section 26, page 49, referring to
national banks, repeals many of the exceptions to section 5200 of
the national banks act.
Senator BLAINE. YOU have a different citation. I do not see any
repealing provision in 49.
Mr. EDWARDS. Section 26, the bottom of page 49. That, I believe,
might be interpreted by the Federal Reserve Board and a ruling
made. It might discriminate against agricultural loans.
Senator BROOKHART. Are there any of those now ? Can a farmer
get a loan anywhere now that you know of ?
Mr. EDWARDS. I believe under the exceptions of section 5200 at
the present time he does.
Senator BARKLEY. Theoretically?

Mr. EDWARDS. I believe probably in practice he is receiving credit.
Senator BROOKHART. My understanding is he can not get any
credit.
Senator GLASS. DO you think the national banks are loaning in
large measure to farmers?
Mr. EDWARDS. Speaking of the banks themselves, Senator, fully
and certainly they are not.
Senator GLASS. What is the section you are referring to?
Mr. EDWARDS. Section 26, Senator, page 49.

Senator BROOKHART. The bottom of page 49.
Senator BLAINE. There is nothing in section 5200 of the Revised
Statutes that would permit you to construe it.
Mr. EDWARDS. I would say it may possibly. It would probably
depend on the Federal Reserve Board. I mean, it is one of the possible trends for deflation.



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 86

Senator BROOKHART. I can not see where it restricts farmers'
credit compared with what he is getting now, because he is not
getting 10 per cent, or 1 per cent, or one hundredth.
Mr. EDWARDS. Section 510 exempts certain types of borrowing
under the 10 per cent provision.
Senator BROOKHART. It says they may not lend in excess of 1 0
per centum of the capital.
Senator GLASS. That is the old question of collateral security.
That does not relate to commodity supplies. ^ It relates to collateral
securities, which has a very definite meaning in banking parlance.
The CHAIRMAN. And which has been the practice for a long, long
time.
Senator GLASS. Yes; certainly.
Mr. EDWARDS. Then, going back to section 13, page 28
Senator BLAINE. Which paragraph? Paragraph A and (2) and
(3) under B?
Senator GLASS. Is that the reserve section of your bill?
Mr. EDWARDS. Yes; the reserve section.
Senator GLASS. Very well.
Mr. EDWARDS. That raises the reserve question again. I just raise
the thought whether or not that particular section would bear down
heavily on the country banks because of their large amount of time
deposits, and, possibly, true savings deposits as against the time
deposits as it would in the case of city banks. My personal opinion
is that the first draft of the act, which drew a distinction between
time deposits and savings accounts, was one of the most important
sections in the first draft.
Senator GLASS. But we are talking about this draft.
Mr. EDWARDS. Coming back, if you take this section. I believe that
would hit the country banks and part of it would hit the city banks.
Also, as an effect on deflation, you mention, Senator, that it would
lead to the increase of nearly $70,000,000 a year.
Senator GLASS. Those were our figures, I think, were they not?
The CHAIRMAN. Let us get in the record the percentages gradually.
We are talking about sums of money here. What is it the first
year?
Mr. EDWARDS. Even at $70,000,000 a year it would.
Senator GLASS. The figure should be at the rate of four-fifths of
1 per cent.
The CHAIRMAN. Let us get this in the record. At the rate of fourfifths of 1 per cent the first year.
Mr. EDWARDS. Of course, the calculations may differ. The calculation that I made was a total of $650,000,000 over a 5-year period.
Of course, I may have made a broad interpretation. I think it was
$130,000,000 a year. That would, of course, result, that could only
be attained by liquidation of both commercial and investment loans
to meet those high requirements.
Senator GLASS. The increase would be met by the discounting, of
course.
Sir. EDWARDS. May I make one last point and hurry along!
The CHAIRMAN. GO ahead.
Mr. EDWARDS. The act does legislate against investment credit in
section 11, page 25, and in section 14, page 33.



87

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

There is one more point there I would like to bring out. In section 14, page 33, the investments of national banks are limited to
legal investments. I do not like to express a doubt on the value of
limiting investments to legal investments. There is no doubt that
there must be protection for savings, but whether it is wise to limit
it to legals, I doubt, because limiting investments to legals tends to
create a nonofficial market for those particular bonds and tends to
raise their price, at times, beyond their true value, as mentioned
this morning.
Senator BROOKHART. "What arc the legals and what are nonlegals
that you refer to? "What do you mean by those terms?
Mr. EDWARDS. In most States the savings banks can put their
funds only in certain types of investments.
Senator BROOKHART. That is, you do not want to limit this investment to what is authorized by State laws?
Mr. EDWARDS. Yes. I wonder if there could not be a better system; thai that provision could not be improved.
Senator BROOKHART. YOU would have to define the limit according to State laws.
M r . EDWARDS. Y e s .
Could not it be better defined?
Senator BROOKHART. The purpose of this, I take it,

was to make
the national bank system as liberal and equal with the State system
as possible.
Mr. EDWARDS. That is framed in accordance with that policy. It
may be a bad policy.
Senator GLASS. YOU want to make it more liberal?
Mr. EDWARDS. I think possibly sometimes less liberal.
Senator GLASS. Where would you lodge the discretion? Would
you state it in the law or would you lodge it altogether in the individual bank?
Mr. EDWARDS. X o . That discretion, of course, should be lodged in
Congress, not in the board.
Just one last point. Senator: Many of the provisions of the act,
as the Senator described this morning, legislate against investment
credit. I would like to suggest the distinction should be drawn between investment credit usecl for speculation and investment credit
used for productive purposes.
Senator GLASS. That is what we have tried to do.
Mr. EDWARDS. Would not you say that you could restrict the
amount?
Senator GLASS. Investment credit, you know, is restricted and has
been for 18 years, since the adoption of the Federal reserve act.
The soundness of security is not the only thing about banking business, you know, particularly about commercial banking business.
Mr! EDWARDS. The soundness of commercial paper as well.
Senator GLASS. I say the soundness of it is not the only thing.
The liquidity of it is a very vital consideration.
M r . EDWARDS. Senator
Senator GLASS. That being

so, the original act provides that access
to the Federal reserve system should be denied to investment secu-




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 88

rities. It has been there for 18 years, in section 13 of the act.
[Reading:]
And tlic Federal Reserve Board may make advances to its member banks on
paper defined as eligible by the Federal Reserve Board for collateral, commercial, and industrial purposes.

That is the affirmative statement. Then, the negative statement
is that [reading]—
Such definition shall not include notes, drafts, or bills covering merely investments issued or drawn for the purpose of carrying or trading in stocks,
bonds, or other investment securities except bonds of the United States.

That has been there for 18 years. Would you amend that? It is
true we were told this morning that it had been practically a dead
letter; it had not been in force. That is why we are here now, and
that is why the country is in this condition now.
The CHAIRMAN. Are you through?
M r . EDWARDS. Y e s .
The CHAIRMAN. I think

you said you felt the law would make investment credits difficult. Is not that the main trouble with this
country to-day—there has been too much of the money that should
be liquid that has gone into long-term investments?
Mr. EDWARDS. 1 make a distinction, Senator, between investment
credit applied to speculative purposes and investment credit applied
to productive needs.
The CHAIRMAN. But are we not limited in permanent investments
to the earnings of our people throughout the year, and if we exceed
that we get frozen assets?
M r . EDWARDS. Y e s .
The CHAIRMAN. And

is not that the trouble with us, or one of the
troubles with us?
Mr. EDWARDS. An excess of credit applied to speculative purposes.
The CHAIRMAN. But is there not also an excess of funds applied to
long-term securities that have become frozen so that commercial
credits and little loans that the average borrower could get are not
available any more?
Mr. EDWARDS. Banking houses have gone into long-term bonds and
the like of them.
Senator GLASS. Exactly. The claim that has been made to us most
persistently is that stoclc exchange credits are infinitely more liquid
than credits for productive purposes.
The CHAIRMAN. I want Doctor Edwards's view on that. He is
appearing here as an expert, connected with and representing banks'
credits.
Mr. EDWARDS. I am not representing a banking group.
The CHAIRMAN. YOU were brought here by them?
M r . EDWARDS. Y e s .
The CHAIRMAN. They testify
Mr. EDWARDS. I have not.
Senator GLA»S. I supposed

you have been representing them.

he was representing the American
Bankers Association.
Mr. EDWARDS. I would like to draw a distinction there. I deny
the claim of being an expert and also representing the American
Banking Association. I just would like to express, merely as a




89

NATIONAL AND FEDERAL RESERVE BANKING

SYSTEMS

student of banking, the one theory that I believe, that the act in that
particular respect, of checking the amount of investment credit
would, I believe, check business revival.
The CHAIRMAN. At the same time our difficulty is due to too much
of it. But you think if we do not have some more of it, we will go
still deeper ?
Mr. EDWARDS. I want to draw a distinction there. Here is the
difference I would like to make, between long-term credit applied to
a purely speculative purpose and that applied to a productive purpose: A speculative purpose is one trying to make a profit out of a
rise in the value of some commodity or in the value of a security.
Certainly Federal reserve credit should not be used for that purpose.
The CHAIRMAN. Certainly. We agree with you on that.
Senator GLASS. It was used chieflv for that purpose in 192S and
1929.
The CHAIRMAN. That is what we are trying to prevent. But even
going into the more legitimate lines of investment credit, leaving out
speculation, can you even get too much of it. then—too much of your
funds going into these long-term securities?
M r . EDWARDS. Y e s .
The CHAIRMAN. And

bring on a frozen condition, bring on the
very thing we have got nowf
Mr. EDWARDS. It certainly can if you have too much of it.
The CHAIRMAN. YOU do not think we have too much of it?
Mr. EDWARDS. We have had too much of it, unquestionably.
The CHAIRMAN. You think we ought to have some more?
Mr. EDWARDS. For investment credit for productive purposes,
I would say yes.
The CHAIRMAN. TO produce what? More automobiles or more
gasoline stations or more wheat?
Mr. EDWARDS. At the present time to produce more goods.
The CHAIRMAN. That can not be sold?
Mr. EDWARDS. That could be sold.
The CHAIRMAN. Name some of them.
Mr. EDWARDS. If the buying power were there.
The CHAIRMAN. Yes; but what goods?
Mr. EDWARDS. We need at the present time more credit.
The CHAIRMAN. Well, you say for the production of more goods?
M r . EDWARDS. Y e s .
The CHAIRMAN. What goods have you in mind?
Mr. EDWARDS. Those lines that have an insufficient supply.
The CHAIRMAN. There may be such lines. I have not found them.
Mr. EDWARDS. But there are such lines. May I make a little illus-

tration just to prove it ?
The CHAIRMAN. I wanted to get your opinion on that. We are
anxious to get that. We admit there is room for many views here.
Mr. EDWARDS. May I illustrate that one point of investment
credit?
The CHAIRMAN. Certainly.
Mr. EDWARDS. Here is a small business man that either can not get
credit at the present time or not sufficient credit. He holds securities. He is dealing in a business that does not produce a commodity.
He is dealing in service. He can use his securities to obtain a loan




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 90

for a business purpose, and I believe it would injure that type of
lender.
,, . .
, A
The CHAIRMAN. YOU mean what would injure, what provision m
this bill?
, , * , xi
Mr. EDWARDS. The general trend of the act would check the
amount of credit on investment securities.
The CHAIRMAN. There may be such an individual. I have been
trying to get in touch with business men. I am wondering whether
1 per cent of the business men are carrying these securities.
Senator BULKLEY. What operation have you in mind that would
have to be financed that way?
.
#
Mr. EDWARDS. Suppose you have a line that is not dealing in
commodities or is not dealing in finished goods.
Senator BULKLEY. Dealing in what, for instance?
Mr. EDWARDS. Let us take a firm, an architectural firm, to give
you one illustration, that does not deal in any commodity. It is,
possibly, a surveying company. It wants to raise money. It can
not get its own credit. It has to put up stocks and bonds to receive
credit.
Senator BULKLEY. What is to prevent it?
Mr. EDWARDS. I would say the general trend of the act is to limit
the amount of that credit winch can be extended.
Senator BULKLEY. You mean that they want to borrow more than
10 per cent of the capital and surplus of the bank?
Mr. EDWARDS. NO. The individual borrower would get no credit
whatsoever if he could not offer an investment security.
Senator BULKLEY. I do not quite see what this bill does to him,
how it makes it any worse.
Mr. EDWARDS. It tends to restrict the amount of credit which can
be loaned on investment security.
Senator BLAINE. Let me see if I understand you. You maintain,
Doctor Edwards, that before you can start business, start activities,
you must have a rise in the value of stocks and bonds at low dividends? Is that your theory?
Mr. EDWARDS. That would be the result.
Senator BLAINE. And that you have to have that before business
can start ?
Mr. EDWARDS. It needs more credit.
Senator BLAINE. I just wanted to get that. That is your theory?
M r . EDWARDS. Y e s .
Senator BLAINE. There

are a great many economists, of course,
who hold to that proposition, and also that in developing new business it is essential to provide for credit. Is that your theory?
Mr. EDWARDS. Yes; and also do it through investment credit applied for a productive purpose—I mean the act really accepts the
assumption that all classes of investment credit are bad. I believe
there are
Senator BULKLEY. Where did you find that all classes of investment are bad ?
Mr. EDWARDS. Because the act tends to restrict the amount of investment credit that the banks would lend.
Senator BULKLEY. If it is bad, would not the act prohibit it?
Mr. EDWARDS. I do not believe all classes are bad.



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

91

Senator BULKLEY. The act does not presume it, either, and could
only restrict the amount.

Mr.

EDWARDS.

It does not restrict the amount.

Senator BULKLEY. Certainly it does, no matter how good it may
be.
Mr. EDWARDS. Are you not hitting both the production uses of
investment credit and the purely speculative uses?
Senator BULKLEY. Aren't you going to refuse to distinguish between what is liquid and payable in a short term, sir, and what
is frozen ?

Mr. EDWARDS. I am distinguishing between investment credit used
for speculative purposes, where no wealth is produced, where you
simply are turning over commodity; values and society does not gain
from it, and investment credit which can be applied to productive
uses. As a matter of fact, that is the system under which we live
at the present time.
Senator BROOKHART. YOU are going to prohibit credit for speculative purposes?
M r . EDWARDS. Absolutely.
Senator BROOKHART. And use it for productive purposes?
M r . EDWARDS. Y e s .
Senator GLASS. But if it is a class of credit you can not realize

on,
that i& unliquid, if you choke up a Federal reserve bank with that
nature of credit, you circumscribe, you curtail its ability to respond
promptly and adequately to the current requirements of commerce.
Is not that so?
Mr. EDWARDS. I would say that that depends on how you define
liquidity. If you mean liquidity means marketability, I would say
no.
Senator BROOKHART. YOU want to prohibit speculative liquidity
as well as speculative freezing, do you?
Mr. EDWARDS. No; but I believe this: I believe that we have to
regard actual fact to-day. I mean we are living in a banking system
where the banks extend both investment and commercial credit.
That is the situation which was developed especially in the last
10 years.
This morning the Senator mentioned the fact that the committee
10 years ago—I mean in 1920—was considering the fact of this
trend. I believe had the Congress at that time taken action to
prevent that trend—from 1913 until that time—they could have
effected that result. Whether it was for good or bad, I do not know.
I believe if the act was passed to-day, the checking of that trend
of investment credit would intensify deflation.
Senator GLASS. There is no check upon investment credit. We
have in this country an investment banking system, the president of
which was before us this morning. Anybody is at liberty to organize all the investment banks that he wants to organize.
Mr. EDWARDS. But, Senator the investment dealer—I am not
speaking of affiliates; I am speaking of the investment dealer who
in the coming months must supply the country with investment
credit. He needs a certain amount of assistance from the commercial banks at the present time.
Senator BLAINE. Well, reducing your propositions to terms which
I may better understand than I do these other theories, you feel that



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 92

it is essential to have some element of inflation, whether in the credit
system or in the monetary system?
Mr. EDWARDS. I would again draw a distinction between production and nonproduetion inflation. Where you apply that money
Senator BLAINE. I recognize the distinction you make.
Mr. EDWARDS. Where you apply that money for purely speculative needs, where you are simply giving credit for the purpose of
raising security values, certainly, no. Where you apply credit
to-day for production purposes, to get people back to work, I can
not see any harm in it. I believe we need it.
Senator GLASS. Are not agricultural and commercial and industrial
activities productive of anything?
M r . EDWARDS. Y e s .
Senator GLASS. They

have free access to the Federal reserve banking system.
Mr. EDWARDS. But, Senator, those industries to-day need investment credit as well as commercial credit.
The CHAIRMAN. DO they need to enlarge their plants or do they
need some money for operating expense, or do they need some customers to buy the goods?
Mr. EDWARDS. All three.
The CHAIRMAN. The testimony we have had in this hearing is that
nearly every industry is overbuilt. The American milling industry
is overbuilt so that only half of it operates; the railroads do not get
enough business to keep going, and ships do not; hotels are not full;
and apartment houses are not full. We produce all the agricultural
products the country can use and then some. Where is it that we
need to expand?
Mr. EDWARDS. We do not need to at the present time. As you
know, in the banking situation, many of our corporations to-aay
need long-term and not short-term credit.
The CHAIRMAN. For expansive purposes, to enlarge their plants?
Mr. EDWARDS. N O ; to start industry. This is the point
Senator BLAINE. Let me say in that connection that that is the
complaint I received from industry respecting the Reconstruction
Finance Corporation.
Mr. EDWARDS. May I just bring out one last point, sir? I think
you have to realize tnat to-day our system of financing, especially in
the last decade, has changed. Where even 10 years ago we financed
through commercial credit, industry to-day finances through investment credit; and I do not believe the act recognizes that change.
Senator BROOKHART. IS it not a fact in this situation we have
underconsumption quite as much as or more than overproduction?
with seven or eight million men unemployed, they can not buy anything. Twelve million farmers are at the verge of bankruptcy,
with not enough to pay their interest and taxes. They can not buy.
Senator GLASS. The Farm Loan Board are feeding them. They
do not have to buy.
Senator BROOKHART. The Farm Loan Board is feeding I do not
know who. They are not feeding any farmers; I know that. Is
not the trouble that before we can increase this production we have
got to increase the buying power of these people?
M r . EDWARDS. Y e s , s i r .




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

Senator

93

far as the farmers are concerned, they
ears before they can buy what they ought

BROOKHART. SO

Mr. EDWARDS. That result may follow.
Senator BROOKHART. Yes; and so far as these laborers are concerned, they have got to have a job before they can buy anything,
is not that true?
Mr. EDWARDS. That is the first consideration.
Senator BROOKHART. If private business can not start in enterprises to do that, has not public business got to do it?
Mr. EDWARDS. I believe private business could, Senator, if it
received enough long-term credit.
Senator BROOKHART. But it had the full say-so and the full
credit of the country and the control of it and everything else; and
they led us into this and then they come down to Congress and ask
for $2,000,000,000 to start it up again.
The CHAIRMAN. And enforce it.
Senator BROOKHART. Yes; and that does not appear to be enough
to enforce it.
Senator BLAINE. I wanted to get to this proposition which the
witness has suggested and it may be a very practical^ thing: Have
you any suggestion by which the committee could distinguish between the two types of investments which you differentiate in, in
a law—that is, a practical proposition?
Mr. EDWARDS. I would say this, without being considered inconsistent in my remarks by the Federal Reserve Board: I would say it
could be put in the act and then so worded that the board can interpret that particular provision the same as it does by its rulings.
Senator GLASS. That would be centralization of power.
Mr. EDWARDS. I made the remark before that would be merely
giving the board the powers it has at the present time to interpret
the Federal reserve act.
Senator GLASS. YOU want the board to have that centralization
power,but nobody else, is that the idea?
Mr. EDWARDS. NO. It is giving the same power they have already.
Senator BLAINE. "Would you be kind enough to draft a provision
that would distinguish between the two types of investment?
Mr. EDWARDS. I would be glad to. I think it is important.
Senator BLAINE. I think it is a rather serious proposition.
' The CHAIRMAN. If there are no further questions, we will adjourn
until 10.30 to-morrow and meet in the Banking and Currency room in
the Senate Office Building.
(Whereupon, at 5.10 o'clock p. m., an adjournment was taken until
Thursday, March 24,1032, at 10.30 o'clock a. m.)
111161—32—PT 1




7




OPERATION OF THE NATIONAL AND FEDERAL RESERVE
BANKING SYSTEMS
THURSDAY, M A R C H 24, 1932
UNITED STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY,

Washington, D. 0.
The committee met at 10.30 o'clock a. m., pursuant to adjournment on yesterday, in its hearing room in the Senate Office Building,
Senator Peter Norbeck presiding.
Present: Senators Norbeck (chairman), Brookhart, Goldsborough,
Townsend, Walcott, Couzens, Fletcher, Glass, and Bulkley.
The CHAIRMAN. The committee will come to order. The first
witness will be Mr. Mills. Come around to the committee table
and take a seat opposite the committee reporter.
Mr. Mnxs. All right, Mr. Chairman.
The CHAIRMAN. We understood that you and Mr. Lord are here
from Detroit, and that you two together will have an hour. Is that
right?
Mr. Mnxs. That is correct, I believe.
The CHAIRMAN. Just go ahead and give your name, residence, and
business connection for the purpose of the record.
STATEMENT OP WILSON W. MILLS, DETROIT, MICH., CHAIRMAN
OP THE BOARD OP DIRECTORS OP THE FIRST WAYNE NATIONAL
BANK OP DETROIT

The CHAIRMAN. YOU may proceed if there are not any questions
at this time by members of the committee.
Mr. MILLS. Mr. Chairman and gentlemen of the committee, I have
not prepared a statement. I thought if it meets with your approval
I should like to discuss generally a few sections of the bill, b. 4115,
that do not to me at least appeal very much and which I think
would be very disadvantageous to banks, to the community, to business, and in general to the country. What I shall have to say
does not apply to the entire bill at all, but will apply to various
portions of it.
I think in the first place if it meets with your approval I should
like to discuss section 14, having to do with real estate and primarily
with mortgages. And in that connection if you will forgive me I
shall have to talk about our bank somewhat, because I think it is in
a somewhat unique position in that respect, and incidentally I know
more about it than I do about some others.




95

96

NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 96

This bill would limit the amount of real-estate mortgages that a
national bank or any member bank of the Federal reserve system
may hold to, in effect, 50 per cent of the time deposits.
Our bank in Detroit is a consolidation of five or six banks which
has taken place over a period of several years. Detroit is somewhat different from New York and other cities in that mortgages in
Detroit, and in Michigan, I might add, are held by banks for the
most part and not by outside companies. Insurance companies and
others, for instance, do not have large Michigan real-estate mortgages, and the mortgage companies as a rule are rather small institutions.
Under the proposed bill our bank would be permitted to hold. 50
er cent of its time deposits in mortgages, or $146,000,000, our time
eposits being twice that amount. That would be the maximum
amount we could hold.
In so far as our mortgages, generally speaking, are concerned, I
am proud of them, because in Detroit some seven or eight years ago
they instituted a system of requiring amortization of mortgages
every year. Mortgages now are reduced by all Detroit banks; that
is, they are required to be reduced at the rate of 10 per cent a year
on the principal, or 2y2 per cent quarterly.
I will say that our motgages, by and large, are in good shape. Of
course, we "have some foreclosures, there is no question about that;
but when a man has paid down a substantial amount of his mortgage, of course, that mortgage as it stands is still good; and
Senator BROOKHART (interposing). Are those mortgages that you
hold on farm or city properties ?
Mr. MILLS. We are a city bank and the mortgages that we hold
are largely city mortgages, on homes and improvements.
To show you our volume, I will say that we have over 53,000
mortgages, and that the average amount of each mortgage is less
than $3,000, or about $2,900. And I should say that around 95 per
cent of our mortgages are on residence properties in which the
people live.
Senator BROOKHART. DO you remember how much of those mortgages are on farms or agricultural properties?
Mr. MILLS. Very little. We are a city bank and operate in Detroit, and we have practically nothing on farms. In Michigan that
kind of mortgage goes to the local banks located in the farming
communities. We are in a manufacturing community and our mortgages are largely on homes.
Senator BROOKHART. Would you say that what you have said
about your city mortgages would apply to farm mortgages too, that
they are in about the same position ?
Mr. MILLS. I should say that they have about the same percentage
of farm mortgages throughout the State. But I think that all the
banks in Michigan have not insisted upon similar amortization payments.
Senator BROOKHART. YOU mean as to farm mortgages?
Mr. MILLS. Yes, sir. But on residential mortgages they have. At
the present time we have $155,000,000 of mortgages.
Senator FLETCHER (presiding). You may proceed.

S




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

97

Mr. MILLS. This bill goes on to provide that in addition to regular
mortgages; that is, those classified as such, that all real estate of a
bank is to be classified as mortgages: that is. not only its other
real estate it may have acquired, but also its bank premises and
offices.
Our bank has approximately 175 branches throughout the city of
Detroit. Michigan does not have state-wide banking, and branches
are limited to the city in which the bank is located. So, as I have
said, we have about 175 branches, and those branches——
Senator TOWNSEND (interposing). Are they all in the city of
Detroit?
Mr. MILLS. Yes, sir. The bill further goes on to provide that
loans shall be counted as mortgages and so classified where the ultimate payment of the loan is predicated upon the value of real estate.
In other words, as I read this bill it is intended to classify as mortgages any obligation founded upon or connected with real estate.
It might havel)een originally a collateral obligation or any other
kind of obligation, but if there is a guarantee signed by some individual whose worth is in real estate then immediately, as I read the
bill, it would classify that particular loan as a mortgage.
Senator FLETCHER "(presiding). What time do you generally allow
on mortgages?
Mr. MILLS. Mortgages have been made over a period of three
years, with the provision that 2*4 per cent is to be paid quarterly
on the principal. If those payments are made, then at the end of
the 3-year period we just continue the mortgage so long as the
mortgagor continues to make the same amortization payments upon
the principal. In other words, I mean we do not require a new
mortgage, because we think the old mortgage is better for all concerned.
Senator BROOKHART. Is that written into the terms of the mortgage, or is it merely a matter of policy?
Sir. MILLS. It has become a matter of custom. All banks in Detroit do the same thing after the 3-year period under the conditions
I have described.
Senator BROOKHART. But you could require a new mortgage for
any reasons you might think* proper, and require it be given at any
moment.
Mr. MH.LS. Yes. But we have not done it so long as the payments
are made, because we think the old mortgage better than to take a
new mortgage. It cuts off the possibility of any subsequent liens on
the property.
Senator TOWNSEND. Have you any suggestion to make to the committee that you think would meet your objection in this connection?
I mean anything that might be written into the bill?
Mr. MILLS. Might I come to that after I have made one more
statement?
Senator TOWNSEND. Certainly.
Mr. MILLS. The bill also provides that on each examination, and
in practice there have been two examinations a year, although it is
provided that there may be three, that every * mortgage shall be
appraised.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 98

With 53,000 mortgages held by our bank, and with an examination
to be made two or three times a year, you can see what it would
mean. And I do not believe that the value of real estate or the
condition of mortgages changes rapidly enough to warrant any such
. T
x u r r
examination.
. ,.
A n .
Coming down on the train this morning I was talking to Mr. J.
Walter Drake, who is the receiver of a closed trust company m
Detroit, and lie told me that they had two men appraising mortgages,
and they have some 300 of them, and that in order to make proper
appraisals of the properties would require 70 days.
Senator TOWNSIIND. In the case of something like 300 mortgages.
Mr. MILLS. Yes, sir. Under our present classification we have
actually 53.000 mortgages, and, if you were to add to that number
all of our bank premises, together with ail loans the payment of
which is predicated eventually upon real estate, it would mean about
80 per cent of our loans that would have to be examined at least
twice a year, which would mean an endless job.
My own view of this proposition, for what it may be worth, is
this: That it would be better in view of the bill permitting national banks in general to make mortgages, to put them to some
extent under State laws with a clause simply permitting national
banks to make mortgages under the same conditions as if they were
State banks in that particular State. It seems to me that would
meet the situation.
Senator BROOKHART. TO have State laws apply as to mortgages
in this connection.
Mr. MILLS. Yes, sir. It seems to me that would meet the situation, plus the fact that I do not believe it possible to appraise the
vast volume of mortgages such as exist in our case, as is proposed
in this bill. I will admit that our bank is somewhat unique along
that line, and it has probably more mortgages than any other bank
in the country, some 53,000 'mortgages without including the other
classifications*that seem to be provided here,
I think it would be wise to j>ermit State law to govern as to investments in mortgages. That is particularly true in our case. We
have this large amount of mortgages which have come along under
State law, and our bank is a system of consolidations of six or seven
different banks only one of which was a national bank, the others
being State banks.
The next item that I should hold forth on, with your permission,
is paragraph 13 on reserves.
Senator FLETCHER. Section 13 of the bill, you mean?
Mr. MILLS. Yes, sir. Under the present law members of the
Federal reserve system have to keep on deposit with Federal reserve banks in the case of country banks 3 per cent of their time
deposits and 7 per cent of commercial deposits.
Senator TOWNSEND. You mean under the present law?
Mr. MILLS. Yes, sir. In the case of reserve city banks still 3
per cent of its time deposits and 10 per cent of its demand deposits;
and in case of central reserve city banks 3 per cent of their time de?
posits and 13 per cent of their other deposits shall be held and
maintained with the Federal reserve bank of its district. No interest
of course is paid on these deposits to the member banks by the Federal reserve bank in which the deposit is kept.



99

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

This proposed bill leaves reserves on demand deposits where they
are, but it increases the reserves in the matter of deposits with the
Federal reserve bank of the district, in case of time deposits, from 3
per cent and 7 per cent to 10 per cent. There is the flat reserve requirement of 10 per cent on all deposits which is to be required under
the terms of this bill to be kept on deposit with the Federal reserve
bank.
Senator TOWNSEND. YOU are referring to city banks?
Mr. MILLS. NO ; I am referring to all banks. They have to keep
on deposit under the proposed bill over a period of time, and they
are given a short period of five years to step it up, but they are
required to keep 10 per cent of demand and time deposits with the
Federal reserve bank of the district.
Senator TOWNSEND. It says 7 per cent here in the bill.
Mr. MILLS. I owe you an apology. It is 7, 10, and 13 per cent, all
based on the same classification, without differentiation between time
and demand deposits. I personally do not follow the theory back
of that. I happen to have studied a report, which I presume has been
presented here, but if not I should like to present it for the record,
if it may be done—the report on bank reserves of the Federal reserve
system.
Senator GLASS. I will simply say to you that we sat up with that
for a month.
Mr. MILLS. Well, to me at least, Senator Glass, the provision which
they suggest is very sound, because when you take time deposits you
must remember that activity in time deposits is very small and not
general. It is nothing like as large as it is in the matter of ordinary
commercial deposits.
Senator GLASS. But when you transfer demand deposits to time
deposits and use them indiscriminately, as banks have been doing
ever since we reduced the reserve behind time deposits, you have
a situation in which the average reserves of a bank are drawn down
tremendously.
Mr. MILLS. The average of reserves have gone down, but the Federal Reserve Board has said that the present reserves are ample to
do all business they wish to do. This report sets forth that they
have no complaint against the total reserves on deposit; that they
give them ample working capital in order to conduct their operations.
This provision of the bill would not only increase—and this is
only an estimate, Senator Glass, because I have not been able to get
the figures on the three classes of reserve banks, country, reserve
city, and central reserve city—well, I do believe it would increase
the total reserves under the proposed bill by some 30 or 35 per cent,
which under the report of the committee on reserve banks of the
Federal reserve system is not at all necessary, because they have said
they have ample resources to conduct the business they wish to con*
duct and in the way they wish to conduct it.
To answer your observation, Senator Glass, to the effect that
banks transferred certain deposits which are really commercial or
demand deposits into time deposits in order to obtain the benefit of
lower reserves, if there is any activity in those accounts, and if the
activity approximates—or whatever it may be—the reserves would
still be computed on the daily charges to individual accounts.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 100

To me that is an automatic way of handling it, a simple way of
handling it, and does not penalize time deposits.
#
If you will take the case of our bank, we had on deposit with the
Federal reserve bank, on which we had no interest at all, something
over $22,000,000. That was our reserve deposit. In the case of the
proposed bill, that would be increased to $45,000,000. And again I
will say that I think we are in a somewhat unique position, because
we are primarily a savings bank, but our reserve deposits would be
increased to $45,000,000—something over 100 per cent.
Senator GLASS. YOU understand that we are simply returning
here to the requirements of the law before this recent change was
made in the matter of reserves.
Mr. MILLS. A S I read the report of the committee on reserves,
Senator Glass, that is not the case, because prior to 1917 and prior
to the enactment of the present reserve act, there was still a differentiation in favor of time deposits as against time deposits in the
way of reserves.
Senator GLASS. But when banks manipulate their time and demand deposits so as to take advantage of the lower reserves, what
are you going to do ?
Mr. MILLS. My answer about reserves is based on activity in the
main.
Senator GLASS. YOU are in favor of the velocity method of reserves.
Do you think the banking community generally, and particularly
country banks, would want that done?
Mr. MILLS. I think they would.
Senator GLASS. Which is revolutionary.
Mr. MILLS. I will grant you that it is very different.
Senator GLASS. We have been told by those who have already
appeared before us that we ought not to do anything to disturb
existing conditions, not even this simple method of returning to the
former reserve requirements under the existing form of counting
reserves. Now if we were to adopt this revolutionary proposition,
do you think the banking community would not be disturbed by it
at all?
Mr. MILLS. NO. Taking all of the banks in the country the result
would be
. Senator GLASS (interposing). Not the result but the reaction on
the minds of the bankers of the country in general.
Mr. MILLS. That is why I have to speak of the result. The result
for the country at large would be about the same reserves that they
have now. I should say there would be no difference. Some banks
that have a very large turnover in their accounts would not like it.
But I think the very fact that there is that heavy turnover in accounts is a reason which points to having the reserves computed in
that way.
If you will take a savings account that has no activity in it at all
to speak of, two or three entries a year, I can see no justification
in the case of a reserve city bank ox requiring a reserve of 10 per
cent to be kept on that account. In other words, increasing those
reserves, as against that particular account; some 233 per cent. This
proposed bill does increase the reserve on time deposits from 133 per
cent to 333 per cent depending upon the location of the bank.



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

101

Senator GLASS. It simply restores the reserve to what it was
before the banks manipulated deposit accounts to such an extent as
to reduce the general average of reserves.
Mr. MILLS. The purpose of the reserve, in addition to enabling
a bank to have some control over its liquidity, is to furnish the Federal reserve with ample capital, and they say the present method does
give them ample capital.
Senator TOWNSEND. YOU mean ample resources or reserves and not
capital ?
Mr. MILLS. Yes; ample resources, in order to conduct their credit
operations. And this would increase the reserve of the Federal
Reserve System by a very substantial amount.
Senator BROOKHART. Would you suggest some appropriate definition or division of deposits so as to indicate what would be called
time deposits and what active deposits, in order to meet this situation?
Mr. MILLS. If you would call them active, I think the answer
would be, what is the actual activity in the account by the depositor?
If a depositor continues his account right along and checks it out
an average of once a week, that is an active account, and a high
reserve should be set up. But
Senator BROOKHART (interposing). Suppose he were to make a
deposit for six months and then were to check it out at the end of
four months.
Mr. MILLS. YOU have your activity based on your past record.
Senator BROOKHART. In other words, if the depositor checks it out
before it is due you would call it an active account.
Mr. MILLS. Well, I don't know that you could say that. It would
be based upon the previous experience over a period of three months.
You would have that experience to guide you on what your reserves
should be.
Senator COUZENS. IS there any way, when a depositor makes a
deposit, to tell whether it is a time deposit or demand deposit?
Mr. MILLS. Every deposit is made either as a time or a demand
deposit.
Senator BROOKHART. And if it is a time deposit he can not draw
it out until the time is up unless the bank consents to it.
Mr. MILLS. That is true, but a bank in nine cases out of ten will
consent to his withdrawing it ahead of time, and the only penalty
that that man pays is a reduction in the interest rate he would have
got for the longer period of time.
If you will permit me to again cite the case of our own institution,
if a man makes a deposit for three months it is a time deposit, and
he is entitled to 3 per cent. If he takes that money out within the
three months' period he does not get interest at the rate of 3 per
cent, but the deposit is considered a demand deposit upon which he
gets interest at the rate of one and a half per cent.
Senator BROOKHART. Why not figure it from that time on as an
active account?
Mr. MILLS. I think it would be figured as an active account. If
you should apply that rule it would cover the situation, and activity
of account is, I believe, the only fair one to be applied.
But if you take the method in the bill it would increase our reserve
to the Federal reserve bank by approximately $25,000,000, upon



102

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

which we are to get no interest from the Federal reserve system. In
order to make up for the loss of interest on $25,000,000 of funds so
held, I can see only three things we could do: We would have to
increase the rate we charge borrowers because of the fact that we
would be losing interest on an additional $25,000,000, and then we
would have to
.
,
#JS
Senator BROOKHART (interposing). You would say that if a depositor put money in as a time deposit and then proceeded to check
against it, the classification of that account ought to be corrected.
°Mr. MILLS. I think it should be, and I think it would be fully
corrected under this proposed velocity method.
Senator BULKLEY. If we adopted the velocity system of computation, then you agree that a distinction between time and demand
deposits could be fairly eliminated.
Mr. MILLS. Yes; because I think velocity is the total test of reserves. The only purpose in having a reserve is to have the money
when you want it, and the velocity test should be applied.
Senator TOWNSEND. Will you now go ahead and finish your three
thoughts that you started on?
Senator BLAINE. Mr. Mills, you were interrupted by a question
before you completed your statement. You said there were three
things that might happen. Will you now go ahead and state them?
Mr. MILLS. There are three things I will say that could be done
in order to compensate us for having to keep the extra sum of
$25,000,000 on deposit with the Federal reserve system without interest. Of course we would have to make up the revenue lost on it,
and the only methods I can see by which that might be done would
be: First, to increase the rate that we are now charging borrowers
on present and future loans. It would have to be raised from 6
to 7 per cent, or some other rate; and 7 per cent is our maximum rate
in Michigan.
Second. We would have to
Senator COUZENS (interposing). Of course you could decrease the
amount of interest paid by you.
Mr. MILLS. Yes; and that would include the other two things
that we might do. The other results that might be obtained would
be: To decrease the rate that we pay on commercial accounts; and,
next, to decrease the rate that we pay on time deposits.
If we wanted to put the burden where it would fall under this
bill, it would have to go to reducing the rate paid on savings deposits, because it is on them that we would have to keep the larger
reserve under the proposed bill. This would be unfortunate.
Senator TOWNSEND. What do you pay on savings accounts?
Mr. MILLS. Three per cent.
Senator FLETCHER. HOW do your deposits compare as between
time and savings accounts, or whatever your classifications may be?
Mr. MILLS. We consider all deposits of over 30 days as time
deposits, which are usually savings accounts. On straight savings
deposits—and we have also demand deposits as distinguished from
time deposits—we have $143,000,000 of demand deposits, and
$276,000,000 time deposits. So, as I have said, we are hit very
strongly by this proposed increase in the matter of reserve, which
must ultimately fall on somebody, and would be of no benefit to us



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

103

certainly, and so far as I can see, would be of 110 benefit to the
countiy.
I will say that the method I have suggested is not my own suggestion, as to the velocity system. It would increase our reserves
very considerably, but it would not increase them anything like 100
per cent.
Senator FLETCHER. It was testified here by one witness that we
would have to undergo a process of education in order to get that
plan accepted. What have you to say about that ?
Mr. MILLS. Well, it is a perfectly simple matter of operation.
The Federal reserve system has the figures and all they would have
to do would be notify the banks of the basis, and that would be based
on experience, as to what their reserve requirements are. I think it
is the most simple method of computing reserves I have ever seen.
Senator GLASS. But certainly it is not as familiar to the banking
community throughout the country as the reserve s\>tem that has
been in existence for 50 years.
Mr. MILLS. It is not as familiar as that: 110. But. after all, the
banks ought to know a good deal about collateral loan> now that the
bill proposes to stop some of that which has been done.
Senator GLASS. What we are proposing is simply over a period of
five years, which is a good long time, to add an almost inappreciable
percentage in order to restore the reserves to what they were formerly and not so many years back.
Mr. MILLS. There lias" always been a differentiation between time
and demand deposits:
Senator GLASS. Yes.
Mr. MILLS. And this bill wipes out that differentiation entirely.
Senator GLASS. And who is to blame for that i The manipulation by bankers in the matter of their time and demand deposits.
It never was intended that those deposits should be manipulated in
that way in order to give a bank the advantage of the reserve behind
time deposits.
Mr. MILLS. I do not know what the experience has been in other
parts of the country, but I do not know that in Michigan there has
been very little of that sort of manipulation. That is. >0 as to call
an account a time deposit when it is actually a demand deposit.
Take the case of our time deposits and they have been very constant.
They have gone off a little, it is true, but are quite constant. Our
demand deposits change. They are volatile accounts, upon which
there should be to my mind a inuch higher reserve than as against
time deposits. In the very nature of things there should be a much
higher reserve against demand deposits as distinguished from time
deposits.
Senator FLETCHER (presiding). You have a few minutes more, Mr.
Mills. Suppose you proceed with your suggestions.
Senator GLASS/ Mr. Willis, the technician of the committee, would
like to ask Mr. Mills some questions.
Senator FLETCHER (presiding). Doctor Willis may proceed.
Mr. WILMS. I want to ask a question or two about" the working of
this valuation matter you spoke of. You did not intend to express
the thought that the Comptroller of the Currency would have to
examine each of these mortgages if this bill were enacted into law
for the purpose of changing its worth, did you?



104

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. MILLS. The way I read the bill it provides that he shall
examine them.
_0
Mr. WILLIS. I see you are looking at the bill. Glance at page 66.
Mr. MILLS. On page S3, beginning on line 4, it says (reading):
Sucli valuations shall be revised by tlie Comptroller of the Currency at the
time of each examination of the bank making the loan and he shall have power
to order changes therein and to require the adjustment of loans to such revised
valuations.
Mr. WILLIS. Yes; but that does not mean that he has to order a

bank to dispose of the loan unless he chooses in an individual case.
Mr. MILLS. NO. But in order for the Comptroller of the Currency
to do that he would have to examine all mortgage loans.
Mr. WILLIS. Yes; but he would not have to have them examined
individually through a physical valuation obtained by visiting all
of the properties. From the answer you gave it occurred to me
perhaps you had that thought in mind.
Mr. MILLS. Well, if an examiner under the Comptroller of the
Currency is simply to take the valuations that are on the books of
the banlr, that is one thing. But certainly the wording of the statute
is wide enough and broad enough to require, in fact, I should say
that it does require, an examiner to make revised valuations.
Mr. WILLIS. It is left to the discretion of the Comptroller of the
Currency. He is to revise valuations as may be proper and necessary
according to his judgment, and will use his own Judgment in that
matter, and then will decide whether he will require a change to be
made.
Mr. MILLS. Yes. But if he is to revise valuations I should say
that he can not do it unless he makes examinations of the properties.
Mr. WILUS. Of course, he would do that as often as necessary.
But in a good many cities of the country, and in many farming
sections also, isn't it true that notable changes have occurred in real
estate values, perhaps because of some local condition that has
brought them down?
Mr. MILLS. Oh, yes. Like every other commodity the value of
real estate has come down.
Mr. WILLIS. Suppose that fact is well known in a given community, say. in Minnesota, so that it has become a recognized fact
that there has been a general decline in all land values as indicated
by recent sales, amounting to 10, 15. or 20 per cent. It would not
be necessary for the Comptroller of the Currency to visit every individual property covered by a mortgage in order to make sure of that,
would it ?
Mr. MILLS. He would not have to do it if they are all off in value.
But we find in addition to general conditions that there are many
considerations entering into any consideration of mortgages, such as
a change in a particular neighborhood. Values in that particular
neighborhood may be going down, and it may be true of only two
or three blocks in a city, and if a real-estate valuation is to be of any
benefit at all an examination would have to be made of those
properties.
Mr. WILLIS. That might be your judgment as to whether the valuation would be of any benefit or not. But I was trying to bring out
what is described here in this bill, which is, that the Comptroller




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

105

of the Currency shall look over the situation and revise values when
it seems to him wise to do so. Isn't that true ?
Mr. MILLS. NO. While it is true that he has to revise values and
change values if he sees fit, at the same time if he is to make any
definite revision of values he must sufficiently inform himself to do so.
Mr. WILLIS. Quite so. He has to have general information that
will enable him to revise valuations.
M r . MILLS. Y e s .
Mr. "WILLIS. NOW,

in that event he will simply be doing what he
does in reference to ordinary collateral loans.
Mr. MILLS. But there he has statements both as to the market for
the collateral and the financial responsibility and so on of the
borrower.
Mr. WILLIS. Precisely. So that this provision of the bill would
merely ask him to do for real-estate loans what he now has to do for
collateral loans.
Mr. MILLS. But there is quite a distinct difference in the methods
by which each may be done. In the one case an examiner will come
into the office and will be furnished with the necessary statements
and data upon which to base a judgment. While the other requires,
if it is to be done at all properly, and I will assume, of course, that
the Comptroller of the Currency would do it in a proper way, he
would have to appraise the properties.
Mr. WILLIS. We must assume that if he does it at all he will do it
in the proper way, or will at least do it as in the past.
Mr. MILLS. But in the past there has been no statute requiring
him to make revised valuations.
Mr. WILLIS. But he has had to do many other things in the past
without specific order.
M r . MILLS. Y e s , sir.

Mr. WILLIS. He does not go into the field in order to make a valuation of United States Steel or Bethlehem Steel.
Mr. MILLS. No, sir; for he knows the market value.
Mr. WILLIS. YOU mean the quoted value ?
Mr. MILLS. Yes, sir; he knows the market value.
Mr. WILLIS. The provision is intended to establish some kind of
control over real-estate loans and of land values as security for loans.
Mr. MILLS. The difference is simply this, that in the matter of
security loans you have a well-known place where you can go to
find market values.
Mr. WILLIS. Is it any more difficult in the one case than in the
other ?
Mr. MILLS. Yes, sir. The only way to find out in the case of realestate loans is to make an examination.
Mr. WILLIS. But the object is the same in both cases?
M r . MILLS. Y e s , sir.

Mr. WILLIS. Isn't it a fact that a great many banks at the present
time have a vast body of overvalued real-estate loans due to the
slump ?
Mr. MILLS. Yes; doubtless many are overvalued at this time in
that they are over 50 per cent of value.
Mr. WILLIS. Isn't it desirable to bring them down as soon as we
can by recognizing the fact that there is a necessary write-off there



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 106

although not by forcing it to be done in an uncomfortable or difficult
way?
Mr. MILLS. Yes. But under the figures that I have cited to the
committee in our own case, the maximum amount that we could have
under the proposed bill would be $146,000,000.
Mr. WILLIS. YOU mean $146,000,000 of what?
Mr. MILLS. Of mortgages.
Mr. WILLIS. TO be held by your bank—based on what?
Mr. MILLS. Based on our time deposits, under that provision of
this bill. It gives us $228,000,000.
Mr. WILLIS. In making loans is there anything to prevent a bank
from making them on the amortization plan so that the lender has
the power to reduce them?
Mr. MILLS. We alwajTs do that.
Mr. WILLIS. You have the power to compel a regular paying off if
you want to?
Mr. MILLS. Yes; and we have always done that.
Mr. WILLIS. XOW, about the time deposit situation: You are familiar with the reserve plan that you spoke of.
M r . MILLS. Y e s .
Mr. WILLIS. That fixes a maximum limitation.
Mr. MILLS. It does, 15 per cent.
Mr. WILLIS. DO you think that a good plan?

Would you keep
that in the bill?
Mr. MILLS. In reading that report I referred to I have understood that only two banks would be affected; that of all member
banks only two would obtain any benefit by keeping the maximum
of 15 per cent in.
Senator BULKLEY. Why should there be a maximum in the bill?
Mr. MILLS. I do not know what two banks are referred to in the
report, but I presume those two banks have some unusual circumstances whereby they know that funds are coming in. For instance,
I can understand it in the case of a bank that has only one or two
factories in the community. For instance, we have a town in Michigan—Marysville—where there are on or two factories, and I would
presume that a bank in that location, having nothing to support it
but the workmen and those one or two factories, would have an exceedingly high turnover of accounts.
M r . WILLIS. YOU s a y
Senator BULKLEY (interposing).

Mr. Haas suggested on yesterday
that we might put an exemption in this provision in favor of disbursements for pay rolls or dividends.
Mr. MILLS. Well, that would mean a deduction, but you would
still be penalizing, and that is the vice of the thing to my mind, the
time deposits
Senator BULKLEY (interposing). Wait a minute. What are we
talking about now? I am talking about a system that would not
penalize them.
Mr. MILLS. Then I beg pardon. I thought you said that what you
had done was not what the bill proposes but would be a thing that
does not penalize savings deposits.
Senator BULKLEY. I am talking about the velocity system that you
are advocating.



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

107

Mr. MILLS. The velocity system does not penalize regular time
deposits.
Senator BULKLEY. I did not see what you meant. I told you that
Mr. Haas suggested to us on yesterday that we make an exemption
in favor of disbursements for pay rolls.
Mr. MILLS. All right.
Senator BULKLEY. Can you give us your reaction to that? That
is an answer to the proposition you presented a minute ago about how
there might be exceptional circumstances.
Mr. MILLS. I think it might be proper to use that, and remove the
15 per cent maximum limitation that is proposed.
Senator BULKLEY. I will say that I do not like the 15 per cent
maximum limitation.
Mr. MILLS. I think that might do it. That is the only case where
I can see there might be a necessity for having a maximum limitation.
Probably if dividends and pay rolls were exempted they would relieve
any necessity for a maximum.
Mr. WILLIS. If that plan were to be adopted I understand you
would eliminate the maximum entirely.
Mr. MILLS. If pay rolls and dividends and that type of activity
were exempted we escape the situation which you suggested.
Mr. WILLIS. In other words, if we were to revise the whole thing
all the way through that would cover it.
M r . MILLS. Y e s , s i r .
Mr. WILLIS. But if you

had to take it as it stands, would you leave
the maximum in or not?
Mr. MILLS. Yes; and the reason I say that is that I have confidence in the gentlemen who made the report, of only two banks
being affected. And I have complete confidence in tjiose gentlemen.
Mr. WILLIS. Then you take it on faith.
Mr. MILLS. A S to these two cases, yes.
Mr. WILLIS. And if you had a maximum you would have no objection to having a minimum, would you?
Mr. MILLS. If the minimum is very small. I think that would
almost follow from the turnover in the accounts.
Mr. WILLIS. There is a minimum in the bill.
Mr. MILLS. YOU mean in the report?
Mr. WILLIS. YOU would be perfectly willing to add also a minimum figure, say, representing the present level of reserves now held,
wouldn't you?
Mr. MILLS. I would if that were applied with a differentiation of
time and demand deposits.
Mr. WILLIS. Quite so.
M r . MILLS. Y e s .

Mr. WILLIS. YOU noticed in the reserve statement that there is a
provision for counting Federal reserve notes in vaults as a part of
the reserve.
M r . MILLS. Y e s .
Mr. WILLIS. DO you favor that or not?
Mr. MILLS. Under the present law there

is counted as reserve only
money in Federal reserve banks. I personally think money in vaults
should be counted the same as money in reserve.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 108
MR. WILLIS. For long years national bank notes have not been
counted that way.
M r . MILLS. NO, s i r .
Mr. WILLIS. Would you differentiate between them?
M r . MILLS. NO, s i r .
Mr. WILLIS. YOU would not count reserve notes in vaults

of it?

M r . MILI^S. NO, s i r .
Mr. WILLIS. That would

as a part

make a pretty material alteration in the
working out of this provision.
Mr. MILLS. Yes, sir; and I think properly.
Mr. WILLIS. At the present time isn't it a fact that our reserves
have fallen to a very low level ?
Mr. MILLS. HOW do you mean?
Mr. WILLIS. I give this merely from memory and subject to correction—I do not think I had better give the name of the bank. But
I recall in a bank circular a couple of years ago the reserve was figured at about 6 per cent, computing cash held as a percentage of the
entire outstanding deposit liabilities of the country.
Taking this as a basis on which to figure reserves, say, 6 per cent
represents the real reserve power of the country as a whole. Would
you think that about right?
Mr. MILLS. My only answer to that is that this report to which I
have referred shows the average for the country as 8 per cent.
Mr. WILLIS. DO yoi; mean figuring it in that way or in some other
way?
Sir. MILLS. Under the present law the average for the country is 8
per cent.
Mr. WILLIS. .But if you take it the other way, which is intended
to represent a real relationship between outstanding deposits and
cash on hand, it gets down lower than that. I gave the figure
from memory, but I think it is 6 per cent. Figuring it the same
way for later dates you would get a still further reduction. Are
not reserves at the present time too low for safety?
Mr. MILLS. I think not. I do not know of any bank that has
failed on account of improper reserves. I know banks that have
failed for lack of liquidity, and so forth, but not on account of
improper reserves. I do not believe there is any longer any real
relationship between reserves and liquidity.
Mr. WILLIS. DO you think the banks at the present time have
plenty of rediscountable material?
Mr. MILLS. Well, I know that they have not got plenty on account
of the debates I have seen in the Senate.
Mr. WILLIS. I should rather have your experience as a banker.
Mr. MILLS. If you exclude, as I assume you do, securities which
may be eligible under the Glass-Steagall bill, and if by eligible
securities you mean those which in the ordinary and natural course
may now go to a Federal reserve bank, according to reports of
the last two call dates, I know the banks have not very much eligible
paper left to go to the Federal reserve system with.
This condition is due to two causes: First, corporations that have
ordinarily made that paper and borrow have liquidated their inventories into cash and they are not now borrowing. That paper is



109

NATIONAL AND FEDERAL RESERVE BANKING

SYSTEMS

nonexistent. Take practically all of the motor companies around
Detroit, and we have not any of that paper on account of the low
state of industrial activity.
Senator BULKLEY. YOU say there is not very much eligible paper
left. How much is there?
Mr. MILLS. Of course, it varies with the different banks.

Senator BULKLEY. I mean in the aggregate what does it amount
to as to paper that is eligible?
Mr. MILLS. I think that report which was given to the Senate—
and if you will bear with me one moment I will look it up for you.
Senator BULKLEY. All right.

Mr. MILLS. On September 29, 1931, and I am now quoting from
page 4341 of the Congressional Record, it appeared that there were
only 91 banks which at that date had exhausted their eligible reserves at the Federal reserve banks from eligible paper. Twenty
per cent of those banks had less than $10 of eligible assets for $100
of total loans. Two hundred and thirty-one banks on that date
reported that they were using 70 per cent or more of their eligible
assets to borrow. " They were in the danger zone.
Now, since that time deposits have declined. And here in this
debate, which was in early February of this year, it is shown to be
$2,250,000,000 or 11 per cent. So that in the period between September 29, 1931, and February of this year there has developed a very
much tenser situation. I have not the present figures but I know
in our own bank we perhaps have less than 5 per cent of our paper
eligible for rediscount.
Mr. WILLIS. Would your situation be exceptional?
Mr. MILLS. I do not believe that is exceptional in Michigan.
Senator GLASS. Let me say that in an interview I had with him as
late as last Saturday evening, the chief of banking operations in
the Federal reserve system stated to me that the banks had ample
eligible paper.
Mr. MILLS. Then I do not know where they get it ?
Senator BULKLEY. Did he say how much they have!
Senator GLASS. No.

He simply made that statement.

Mr. MILLS. We were discussing the 15-day loan proposition. At
the call date in September the banks were all asked to include an
estimate of what their eligible paper was. We made such an estimate. Likewise we were asked to do the same thing on the last day
of December, and we did it. In our own case we found it had
dropped very much. And I have been told by the State bank commissioner of Michigan that that situation is true throughout
Michigan.
Senator BULKLEY. A S I recall the situation it developed that there
was about three billions of dollars of eligible paper held by banks
and not rediscounted. That seemed quite inconsistent to mv mind
with your statement that there was only a small amount. I would
call it a substantial amount.
Mr. MILLS. YOU are referring now to the country as a whole?
S e n a t o r BULKLEY. Y e s .

, ^

.

Mr. MILLS. I do not know what that amount woukl be for the
country as a whole. But I can give you my belief that in Michigan
there is not more than 5 per cent of the paper eligible.
111161—32—ptI—8




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 110

Senator GLASS. The figures used in that debate were based upon
official reports, were they not?
Mr. MILLS. Yes, sir. There has been, of course, a great deal of
water over the dam since September. Deposits have gone oft and
industrial activitv has been curtailed^ and there is less borrowing
by industrial concerns whose paper is eligible than there was in
September.
Senator BULKLEY. I think it would be fair to expect an estimate
up to date to show less eligible paper at this time.
M r . MILLS. Y e s , s i r .
Senator GLASS. Very

_

..

likely, and also a greater volume of rediscounts. But, as to that, I do not know. I have not had any official
figures.
Senator BULKLEY. Bediscounts are going down.
Mr. MILLS. Mr. Chairman, my time is going down, and if I might
make one or two more statements I should like to do so.
Senator FLETCHER (presiding). The average reserve you have
given is now 8 per cent. Suppose this bill became a law, how would
that be affected, what would be the increase?

Mr. MILLS. It would be very considerably higher, because the
country bank reserve would be 7 per cent. Reserve city banks
would be 10 per cent. Central reserve city banks, which are the
largest banks of the country, would be 13 per cent.
Senator GLASS. They are now behind demand deposits.
Mr. MILLS. Yes; but I was speaking of all deposits. That meant
that all deposits would be raised probably close to 10 per cent on an
average. I would think it woiild be probably over 10 per cent,
because the large amount of deposits are in the larger* cities where
the reserve would be raised to the higher point.

Senator FLETCHER. You think that unnecessary for protection?
Mr. MILLS. I think it is unnecessary for the purpose of protection,
and that the results by way of increase of interest charges to borrowers, and decreased amounts by way of interest to deposits both
savings and time, would be disastrous.
Senator GLASS/ That would not be the immediate effect, but would
be over a period of five years.
Mr. MILLS. Yes. But to follow that up I will say, as these increased reserves were required to come into the Federal reserve bank
the only way member banks have of making up the loss on the
increased reserves would be through the three methods I have mentioned. If I know human nature, and I think I do. I will say that
just as sure as the sun will rise the banks will try to equalize that
loss in earning power.
Senator GLASS. Banks certainly have their share of human nature
because whenever they have appeared here they have wanted us to
reduce the reserves and we have done it. We have reduced the central bank reserves from 25 per cent to 13 per cent, and we have
reduced the country bank reserve from 12 to 7 per cent.
Mr. MILLS. Do you think it is fair, Senator Glass—and I realize
you are not a witness, but I am-H3till do you think it fair to go back
to reserve requirements prior to the Federal reserve act? There was
a reason then for a larger reserve, because there was no central bodv
to which banks could go for borrowings.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

111

Senator GLASS. Of course I have not suggested that or I would
not have agreed to reduce them.
Mr. MILLS. That is my point.
Mr. "WILLIS. You have noted the valuable provisions for profit
making given to member banks. Wouldn't those offset any expense?
Mr. MILLS. Do you mean the liquidating corporation?
Mr. WILLIS. Yes. And the fact that national banks have the
power of doing business on the same basis as State banks unless
specifically prohibited.
Mr. MILLS. Take the liquidating corporation, and I think opportunities for profit are questionable.
Mr. WILLIS. It depends on how they are managed.
Mr. MILLS. Yes; but that also requires an additional investment
being made in the corporation by banks, and profits on that are fixed
at 30 per cent of the profits in one year. As I read the bill there is
no guaranteed return in anywise from there. Profits are not cumulative.
Mr. WILLIS. If a bank gives up the stock it gets the benefit.
Mr. MILLS. It gets the oenefit to its assets. But there is a question whether there would be any benefit therefrom.
Mr. WILLIS. It also receives future earnings or balance of surplus.
Mr. MILLS. I think this is the way to answer that question: That,
if the bill should give an option to member banks to subscribe to
stock of a liquidating corporation, I doubt if any bank would exercise the option to subscribe, for the reason that the chances of profit
are speculative.
Mr. WHJJS. I suppose we have all refused to take advantage of
opportunities we ought to have taken advantage of.
Mr. MILLS. Yes; and likewise often have taken advantage of
what we thought were opportunities of which we should not have
taken advantage.
Senator GLASS. Your dividend under the law as it exists is specific.
That is, an opportunity to earn an increased dividend, is it not?
Mr. MILLS. Well, our dividend under the present law is C per cent.
Senator GLASS. That is what I say.
Mr. MILLS. But we do not get, as I read the proposed bill, any
0 per cent on anything else which is guaranteed.
Senator GLASS. YOU get whatever aividend is made.
Mr. MILLS. We get whatever is made on the operation of liquidating closing banks.
Senator GLASS. I say, this is an additional opportunity for an
increased dividend.
Mr. MILLS. It is an additional chance. I would not use the
word " opportunity," because I do not think it resolves itself into
that, Senator.
Senator GLASS. Do you think the proposed stock assessment there
would be a great hardship on the banks \
Mr. MILLS. No; I think after all the banks have to be somewhat
in the position of helping out each other, and I haven't any particular fault to find with the liquidating corporation.
Senator GLASS. YOU have got more sense than some of the witnesses we had.
Mr. MILLS. Well, that may be something against me, Senator.



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 112

Senator GLASS. We have had' witnesses to object to an assessment
of one quarter of 1 per cent on the individual banks to help themselves, and they had no criticism to make, apparently, of the larger
assessment made by this National Credit Corporation in New York.
Mr. MILLS. We all joined in the National Credit Corporation.
Speaking of the activities of the National Credit Corporation in
Michigan, with which I have been rather actively connected, that is
one reason that leads me to believe there will not be a great deal of
profit in this opportunity, as Doctor Willis has designated it, of
joining in this liquidating corporation. I do not believe there will
be a profit in that operation at all. I do believe, however, and the
National Credit Corporation has convinced me, that banks to a
certain extent have to and should help out each other. I think that
refers to anyone that is connected with the Federal reserve system. I
haven't any fault to find with it.
Senator GLASS. That is the real purpose of that, and then it is
protection to the depositors in member banks. It is an assurance to
them that they will get whatever money is coming to them within a
reasonable length of time and not be delayed by receiverships that
extend over very protracted periods.
Mr. MILLS. I think that is true. I do not want to get into a lot
of details in the wording of this, but I must say that in the subscription to the class B stock by the Federal reserve bank the total
amount subscribed by the Federal reserve bank, a quarter of the
surplus, I think, is generous. I haven't any complaint to find on
that. I do think that the amount that the Federal reserve banks,
have to pay in at the moment is rather small, and that amount
should be increased. In other words, the burden that the member
banks pay is far greater at the moment than the Federal reserve
banks pay. Eventually the Federal reserve banks pay a very substantial amount, which I think is probably proper enough.
I think, for instance, that the banks—I am not speaking of the
Federal reserve banks but the member banks—should be given a
similar opportunity to pay their subscription and not to pay their
one-half of 1 per cent within 90 days and the balance when called
for. That may be a little strong. Certainly, it is not right to have
the whole Federal reserve system only put up, as it stands here, the
figures I have, $136,000,000, when they can put up a great deal more
without really feeling the burden. I think that process is not rapid
enough; it hasn't enough velocity to get the funds from the Federal
reserve system.
Senator BULKLEY. I am particularly interested in your statement
that you do not believe the liquidating corporation will make any
money. Is it that you presume they will pay too high a price for
the assets of the closed banks?
Mr. MILLS. It all depends on the management.
Senator BULKLEY. Well, it does depend on the management, but
what is your presumption? Do you think that they would buy
them for reckless prices?
Mr. MILLS. N O ; I would not think that they would buy them for
reckless prices.
Senator BULKLEY. Then how can they fail to make money?




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

113

Mr. MILLS. It is a question of carrying the items for a very long
period of time. Some of these items will have to be carried 20
years, and I think as a banker I would prefer to have the profit that
a bank makes from its interest account than I would in making a
long-term investment.
Senator BULKLEY. Are you really sincere in your statement that
you would have to carry an asset 20 years I
Mr. MILLS. I think some of these assets will be absolutely unsalable. For instance, on some mortgages the real estate will liave to be
carried, because it is unsalable for any kind of a price.
Senator BULKLEY. Why should they pay a higher price than
anybody else who is buj'ing the same thing? *
Mr. MILLS. It gets back to the human judgment. Isn't that correct? If it did not, we would not be in the position we are in now.
Senator BULKLEY. Then you do assume that they will pav excessive prices?
Mr. MILLS. I do in some cases. They will exercise good judgment, but it will be mistaken judgment. No bank, Senator, as you
know, would make a bad loan if they thought it was bad at the time
that the}'" made it. That would fie precisely the case with this
liquidating corporation.
Senator BULKLEY. I think liquidators are a little different from a
going bank.
Mr. MILLS. Yes; they are different, but they also make mistakes—
I am not saying anything else but honest mistakes; mistakes in
judgmentSenator GLASS. We do not understand that you are particularly
opposed to the liquidating corporation.
Mr. MILLS. N O ; like everybody else, I think I can improve a
little bit on it, but I haven't any real objections to it. I think that
the amount to be contributed by the Federal reserve bank as such
should be stepped up more initially and the amounts to be computed by the member banks should initially be decreased. I have
no objection whatsoever with their total amounts.
Senator GLASS. It is one-quarter of 1 per cent. Do you think it
ought to be made less than that ?
Mr. MILLS. N O ; I haven't any objection to that, provided that you
increase the amount from one-half of 1 per cent of one quarter of
the surplus to be put up by the Federal reserve bank. That, I think,
is altogether too low.
Senator GLASS. When we hear from the Federal reserve banks we
will probably be told that it is altogether too high.
Mr. MILLS. Very likely. That, again, is human nature.
Senator BULKLEY. IS it not true that whatever is contributed by
the Federal reserve banks is an asset of the liquidating corporation
and presumably an earning asset, and the class B stockholders get
all the benefit "of it without any dividend to the Federal reserve
banks?
Mr. MILLS. That is true, except that the dividends are not made
cumulative in any respect. They get up to 30 per cent of the earnings in any one year. It is not cumulative.
' Senator" BULKLEY. But the amount of surplus is cumulative, so
that there is more and more paid in surplus?
Mr. MILLS. That is true. That accumulates.



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 114

Senator BULKLEY. And that becomes an earning asset?
Mr. MILLS. That presumably becomes an earning asset over a
period of time.
Senator GLASS. If they have the same number of bank failures
within the next few years that they had in the last few years that
corporation will be pretty active, will it not?
Mr. MILLS. They will be active, and you will not have anybody to
run it on that basis, Senator.
Senator FLETCHER. IS there anything else that you want to mention?
Mr. MILLS. I do; but I do not want to take Mr. Lord's time.
Senator FLETCHER. State the points rapidly that you want to
make. We had better go on and finish.
Mr. MILLS. Now, I realize I am getting on some pretty debatable
ground with you gentlemen, particularly Senator Glass. Our bank
happens to be a member of a holding company group, 110 other
banks of any large consequence in it except a trust company. We
have one state bank outside Wayne County that is owned by the
holding company. That is all that we have. Mr. Lord, who will
follow me, is also in the holding company.
In Michigan at least there are no banks which have been members
of holding companies that have closed their doors or had any moratoriums or anything ebe. except paid their depositors when they
wanted it. In Michigan we have had 112 banks closed during 1931.
Michigan does not permit its State banks to engage in banking
beyond'corporate limits.
My own view is that the drafters of this bill obviously believe in
wider than present banking limits. That is, the banking limits
should be wider than they now are. It even goes so far as, in certain circumstances, to permit banking to be done in two different
States.
Senator GLASS. Only to a very, very limited extent in extraordinary circumstances.
Mr. MILLS. Yes; in proper circumstances, but it at least generally
contemplates that banking will go to an extent of state-wide banking.
Senator GLASS. Yes.
Mr. MILLS. In our case in Michigan I can see no reason, if the
drafters of this bill are in favor of state-wide banking for not going
sled length and saying: "All right, every national bank can go sled
length." Certainly, the results in Michigan have been perfectly
splendid. There have been no failures of any banks in Michigan
that have been members of the group. There have been no moratoriums of any of those banks. Those banks have met their customers' demands when they have been made, as against the 112
banks that have been closed."
Senator GLASS. YOU would say that regardless of State laws on
the subject?
Mr. MILLS. I would, regardless of State laws, because if there is
strength, that would solve fully in Michigan, in my judgment,
Senator, all objection to group banking. There would not be any
group banks left. They will just go out of business.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

115

Senator GLASS. I understood the committee would sav that too.
and cheerfully, if they could get the bill through Congress.
Mr. MILLS. That is a matter that I can not judge.
Senator GLASS. Well, you may judge the future by the past. It
took us 16 months to get the limited branch banking facilities that
are granted in the McFadden bill.
Senator BROOKHART. Some of us think that was too quick.
Senator GLASS. Exactly.
Mr. MILLS. I wanted to make that statement. Now, the holding
companies—I know they have been damned up one street and down
the other, but all the holding companies in Michigan provide for.
double liability on the shares of stock of the holding company.
Senator GLASS. If that is true, there is no reason wliv tlie*holding
companies in other States should not be required to "have that, is
there?
Mr. MILLS. I do not know of any reason. We have done it voluntarily. Both holding companies in Michigan have done that voluntarily, and there is double liability on holders of stock of holding
companies.
Senator BROOKHART. The fact that your holding companies have
done well in Michigan does not mean that the}' have throughout the
United States?
Mr. MILLS. N O ; they have not. So I will say, Senator, I will
grant you that in some places they have not.
Senator BROOKHART. I was out in Louisville and waked up in
the morning and a group bank went down and also carried with it
100 or 150 banks.
Mr. MILLS. If the Congress of the United States had passed a
law to the effect that you could have had branch banking and
branch banking in the future, the provisions as set out by this bill,
by a national bank, irrespective of the State, I do not think that you
would have had many holding companies in existence at all. The
necessity for them would not have been there.
Senator BROOKHART. Of course, a holding company may have been
a little worse than a branch, but not much.
Senator GLASS. Oh, yes.
Mr. MILLS. They are open to certain abuses in certain cases that
others are not. Before I leave, I just want to make three statements
The CHAIRMAN. There have been some inglorious failures of
branch banks, too.
Mr. MILLS. There have been, but I think if you look over the
history of the failures you will find an infinite&imally small number
of failures of branch banks.
Senator BROOKHART. HOW many branches did the Bank of the.
United States have up in New York ?
Mr. MILLS. I can not answer that, but I would be surprised if they
had more than three or four branches in New York City. I do not
know. I would be surprised if there were more than that.
The CHAIRMAN. Our committee was informed some 50 or 60.
Mr. MILLS. I did not know that. I am not familiar. But I
would doubt if they had that number of branches.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 116

The CHAIRMAN. One fact was brought out rather strongly: The
money involved in bank failures in the State of South Dakota was
not much over $50,000,000, and we have been thoroughly advertised
for the large number of bank failures. Here is. this big branch
bank in New York that went down with over two hundred millions,
one single bank, dragged down four times as much as all the failures
in my State did. And still we are told we have a poor system out
there because we have so many bank failures.
Mr. MILLS. Well, taking your own statement, Senator, do you
think if the banks'there had united so that the strength of each
would have been the strength of the other—of course you would
liave had the weaknesses also—there would have been the same
number of failures?
Senator BROOKHART. Yes; with the price of corn and hogs and
wheat and oats the way they are.
Mr. MILLS. YOU would have had the failures anyway, it didn't
make any difference, is that it, Senator?
Senator BROOKHART. You are going to have failures of your combinations in Michigan, because they will quit buying Fords pretty
soon.
Mr. MILLS. The failures there had no relation to groups.
Senator TOWNSEND. Are there other provisions in the bill that
you oppose that you have not referred to?
Mr. MILLS. Yes; just two or three, if I may state them. I would
like to have them on the record, if I may.
I personally feel, and I feel strongly, that the Secretary of the
Treasury should be a member ex officio of the Federal Reserve Board.
I also believe that the open-market operations had rather be conducted by the banks than by the board. I also feel—I do not understand the reason for a higher interest rate on borrowings from the
Federal reserve bank where those notes are secured by Government
obligations than where they are secured by eligible pafier.
Senator GLASS. There is no difference except on 15-day notes.
Mr. MILLS. That is on the 15-day note, and there is a difference
of the differential of the interest rate of 1 per cent on that, although
those notes are backed by the obligations of the Government of the
United States, and, of course, the paper that is issued on it is backed
by an obligation as a whole of the 12 Federal reserve banks.
Senator GLASS. There is no difference between commercial paper
and Government securities, but on 15-day paper it is a special privilege.
Mr. MILLS. Yes; but if a bank comes in and simply rediscounts
eligible paper it has a preference rate of 1 per cent, rather than if it
comes in and borrows on Government paper.
Senator GLASS. For 15 days?
S i r . MILLS. Y e s .
Senator GLASS. Oh, no; not at all.
Mr. MILLS. I think so, Senator.
Senator GLASS. Well, look and see.
Mr. WILLIS. Page 25:
Any Federal reserve bank may make advances to its member banks on their
promissory notes for a period of not exceeding 15 days at rates to be established
by such Federal reserve bank, which rates shall in ail cases be at least 1 per




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

117

cent higher than the rediscount rate then in force at such reserve bank, subject
to the review and determination of the Federal Reserve Board, provided such
promissory notes are secured by such notes, drafts, bills of exchange, or
bankers' acceptances as are eligible for rediscount or for purchase by Federal
reserve banks under the provisions of this act, or by the deposit or pledge of
bonds or notes of the United States.

Senator GLASS. Well, what is the difference? That is a 1 per cent
higher charge upon 15-day notes of banks where those notes are
backed at least by obligations of the United States. Or eligible
paper.
Mr. MILLS. Or eligible paper, but in either case if the note itself
is increased by the 1 per cent there is a higher charge than if they
simply rediscount commercial paper.
Senator GLASS. On all 15-day paper?
Mr. MILLS. On all 15-day paper.
Senator GLASS. Direct promissory notes?

Mr.

MILLS.

Yes; direct promissory notes.

Senator GLASS. And yet there is no difference between the security?

Mr. MILLS. N O ; but why should a bank be penalized in borrowing
for 15 days, you say on Government paper, when it could obtain
those funds by talcing in and rediscounting customers' paper?
Senator GLASS. It is not under that section.
Mr. MILLS. I do not read it that way, Senator.
Senator BULKLEY. I think the answer to Mr. Mills9 question is
that fundamentally they ought not to have the right to borrow on
Government securities at all.
Mr. MILLS. If that is the case, then you reach the point where,
in my judgment, the operation of the Treasury Department of the
United States would be hampered. ^ It would just raise the devil—
pardon my language—with everything.
Senator BULKLEY. That is the question of the Treasury leaning on
the Federal reserve again.
Mr. MILLS. Yes; exactly, and I think it will have to lean on it.
Senator BULKLEY. We simply do not believe it. We believe the
Government is pretty good, whether there is a Federal reserve
system or not.
Mr. WILLIS. In some instances it is their practice to make Lombard loans.
Mr. MILLS. Yes; Lombard loans at higher rates. These are not
Lombard loans. The Glass-Steagall bill is the Lombard feature.
Mr. WILLIS. It is often contended that they are Lombard loans,
but in reality those of which we are speaking are much nearer the
true Lombard loan.

Senator GLASS. The question is putting into USE Federal reserve
facilities for stock-gambling purposes. That is the real purpose*
Mr. MILLS. Senator, I know that is the purpose. I think it goes
much further than that, and while I have no desire to use the Federal
reserve funds for stock-gambling, I think the medicine here is going
to cause another serious disease, Government financing. I feel that
very strongly.
Senator GLASS. Do you feel that the redibcounting provisions of
the Federal reserve act, which were intended to be the major provisions of the act, have simply been submerged by the open-market



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 118

operations of the Federal reserve banks, dominated by the New
York bank and by the stock-gambling use, with the 15-day paper for
stock-gambling purposes?
n
Mr. MILLS. They use the 15-day paper for many, many other
things, Senator.
Senator GLASS. Not for many other things.
Mr. MILLS. We have used that for the purpose of the 15-day period
to help the city of Detroit in its operations in order to lend money
to the citv of Detroit to enable it to meet payrolls, and all that kind
of things. We have had to use the 15-day paper on account of the
shortage of the other paper. We have had to use it. And I think it
is next to impossible to use the eligible paper, anyway. They have
a bunch of clerks over there that if the t " is not crossed they will
throw it back at you. It is so much easier to use the Government
erenator GLASS. Would you object to that provision if we should
eliminate the 1 per cent penalty?
Mr. MILLS. I think that would help it very much, with this proviso—I read in the morning paper
Senator GLASS (interposing). Before you leave that particular
point; you will note, of course, that under existing law the Federal
reserve'bank has unqualified right to put any penalty there it pleases.
M r . MILLS. Y e s .
Senator GLASS. Subject

eral Reserve Board.

M r . MILLS. Y e s , i t h a s .
Senator GLASS. So that

to review and determination of the Fed-

we give a stated percentage, but the Federal Reserve Board, under existing law, can not only name that
minimum percentage but they can name a higher percentage.
Mr. MILLS. That is true.
Senator GLASS. That has been true for 16 years, has it not?
Mr. MILLS. That is true. No question about that.
The only other thing I would like to state, Mr. Chairman, is this:
I saw in the morning paper—as I read this act there is this clause,
the investment clause, 15 per cent of investment capital from 25
per cent of surplus. The newspaper at least quoted, I think it was
Senator Glass and Doctor Willis, as stating that the intent was only
to have those provisions apply to the future and not the present.
The law as it reads clearly, in my mind at least, provides that the
excess securities would have to be disposed of. Tnat is in section 15,
I think, page 36. If the paper was correctly quoting, that this
statute was not intended to provide that any bank should have to
dispose of these tremendous quantities of securities of the reserve
accounts
Senator BULKLEY. It does not really mean any such thing.
Mr. MILLS. It says that, I believe.
Senator BULKLEY. I know it. I think the language is very unfortunate myself.
Mr. WILLIS. What language is there there that indicates the necessity of a sale, please? We might stick to that point and get your
view on that.
Mr. MILLS. " But in no event shall the total amount of such investment securities of any one obligor or maker held "—the words are
and held."



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

119

Senator BULKLEY. That means the one obligor, although I would
not have read it that way myself.
Mr. WILLIS. YOU see/Mr. Mills, the provision in lines 2 and 3
states that "The business of purchasing and selling investment securities shall hereafter be limited," and so forth. That qualifying
clause runs on down to the end of the sentence.
Mr. MILLS. We discussed this at a meeting we held in Detroit, and
that question was raided. I think the language is exceedingly blind
on it.
Senator BULKLEY. Yes; it ought to be changed.
Mr. MILLS. The language should be changed so as to make that
intent clear. Because, if that should stand, the results would be
terrible to the liquidations that the banks would have to make. If
it means only as to the future. I would like to ask this question:
If this change is to be made what is to happen to future purchases
until the portfolio gets in this new required shape? In other words,
the banks are holding in excess of the amounts permitted under this
particular section. I then take it that it is understood that they
are not required to immediately divest themselves of such holdings,
but in the future they can not go over
Mr. WILLIS (interposing). They are not to enter into any new
contract or make any new loan.
Mr. MILLS. And those provisos are limited and they are not to
make investments on tlie total portfolio of the bank but on the total
obligations that any one bank holds. Thank you, gentlemen. I am
sorry to take so much longer than I intended/
The CHAIRMAN. The next witness is Mr. Lord.
STATEMENT OF ROBERT 0. LORD, PRESIDENT GUARDIAN DETROIT
UNION GROUP AND GUARDIAN NATIONAL BANK OF COMMERCE,
DETROIT, MICH.

The CHAIRMAN. Give your full name and address and business
connections to the reporter.
Mr. LORD. Robert O. Lord, president of the Guardian Detroit
Union Group and also of the Guardian National Bank of Commerce,
Detroit.
Senator, Mr. Mills has covered in a general way the Detroit situation. I might, to get the picture in the minds "of this committee,
state that the Detroit Bankers Group, of which his institution is a
part, confines its activities to Wayne County. Our own group of
banks covers the industrial section of Michigan in the lower
peninsula.
If I may be privileged to do so, I think it might simplify the matter, on account of lack of time, if I read the statement that I have
and answer any questions that might be put.
Senator COUZENS. Have you had any experience, Mr. Lord, as a
bank examiner?
Mr. LORD. No, sir. I have had 26 years* experience in a bank.
Senator COUZENS. Yes: I was just "wondering what your experience
was.
Mr. LORD. The Guardian Detroit Union Group (Inc.) is a corporation organized under the laws of the State of Michigan. Its



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 120

principal assets consist of all or practically all of the capital stock,
except directors5 qualifying shares, of the following banks and trust
companies:
Guardian National Bank of Commerce of Detroit.
Union Guardian Trust Co.. Detroit.
Michigan Industrial Bank. Detroit.
Highland Park State Bank, Highland Park.
Highland Park Trust Co., Highland Park.
Bank of Hamtramck, HamtramcU.
Guardian Bank of Grosse Pointe.
Guardian Bank of Dearborn.
Guardian Bank of Royal Oak.
Guardian Bank of Trenton.
City National Bank & Trust Co., Battle Creek.
Union Industrial Trust & Savings Bank, Flint.
Grand Rapids National Bank.
Grand Rapids Trust Co.
National Bank of Ionia.
Union & Peoples National Bank, Jackson.
First National Bank & Trust Co., Kalamazoo.
Capital National Bank, Lansing.
City National Bank & Trust Co., Niles.
First National Trust & Saving* Bank, Port Huron.
Second National Bank & Trust Co.. Saginaw.

All of these institutions are located in the lower pellicula of the
State of Michigan. The banks of this group serve more than 400,000
depositors, offering them the complete protection that is demanded
in these times when large resources, liquidity, and directorates composed of men whose names are synonymous with honesty, integrity,
and high principles are necessary to convince depositors of complete
security. In spite of the fact that during the year 1931 112 banks
were compelled to close their doors in the State of Michigan alone,
all of our institutions successfully weathered the storm and no depositor in these institutions suffered any loss.
The group company does not own or control any banks, trust companies, or financial institutions located outside of the State of Michigan. The stock of the group company, consisting of 1,544,844 shares
of $20 par value, is held by upwards of 8,000 shareholders, and more
than 92 per cent of the shares outstanding is owned by residents of
the State of Michigan. Aggregate deposits of the institutions named
above totaled on December 31, 1931, $349,398,000, with total customers exceeding 400,000, as I have stated.
Senator GORE. HOW many different institutions? Pardon me.
Mr. LORD. Twenty-one banks and trust companies, Senator.
These banks and trust companies became a part of the guardian
group through the exchange of stock on an appraised book-value
basis. None of the institutions were bought for cash. The group or
holding company was organized in accordance with law and with
the full knowledge and approval of the State authorities.
In order to give to each local community management which has
a primary interest in the welfare of that community and in the prosperity of industry and of the individual there located, there was included in the by-laws of the holding corporation the following
Article V I :
"Whenever at any meeting of the stockholders of a bank or trust company of
which this corporation shall at the time own 75 per cent or more of the outstanding stock, an election of a board of directors is held, the shares of such



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

121

bank or trust company owned by this company shall bo voted in favor of the
election of a board of directors of which at least 75 per cent shall consist of
directors residing in the municipality where said bank or trust company is
located or within a radius of 50 miles thereof.

As a matter of fact, with the exception of 2 or 3 of the 21 institutions, or rather of the dozen or more institutions outside of the
limits of Detroit, we do not have representation of these boards.
Their own boards govern the banks entirely. Where we have members it has been at the invitation of the local institution.
While the lower peninsula of Michigan has excellent disersification
of agriculture, this district, and Detroit especially, is best known
throughout the world for the manufacture and distribution of motor
cars and automobile accessories, an industry which affects directly or
indirectly the welfare of more than 10 per cent of the population
of the United States.
Any legislation which adversely affects the banks in Michigan
will, in turn, affect the motor industry and will thus indirectly affect
a vast number of individuals throughout the entire nation.
As indicating the importance of the motor industry to this country
and to its other industries as well as to the farmer,"might I remincl
the committee that 10 per cent of all cotton, 14 per cent of all tin,
15 per cent of all finished steel, 15 per cent of all copper, 17 per cent
of all aluminum, 18 per cent of all hardwood lining, 30 per cent of
all nickel, 51 per cent of all upholstery leather, 68 per cent of all
polished glass, and 82 per cent o£ alf crude rubber goes into the
manufacture of motor cars and their accessories.
More than 58 per cent of the aggregate banking resources of Michifan are included in the two "banking groups—Guardian Detroit
fnion Group and Detroit Bankers Co. These two groups on December 31,1931, showed aggregate resources of their banks and trust
companies amounting to more than $1,090,000,000 of which about
$888,000,000 was in national banks, representing 83*4 per cent of the
national bank resources of the entire State of Michigan, more than
$84,000,000 was in State banks, and more than $118,000,000 in trust
companies.
Incidentally, these two groups, out of total subscriptions to the
National Credit Corporation from Michigan banks amounting to
$13,410,912.30, subscribed $7,752,553, or nearly 5S per cent
Senator GORE (interposing). How much did they pay?
Mr. LORD. Thirty per cent assessment, I think.
Senator GORE. That was paid
Mr. LORD. That was paid by all of the banks subscribing. I think
that is correct—the balance being subscribed by 293 other banks in
Michigan. Furthermore, neither of the?e groups nor any banks
Senator FLETCHER (interposing). May I ask you there what became of this National Credit Corporation ?
Mr. LORD. Still in operation.
Senator FLETCHER. Going ahead ?
Mr. LORD. They are making no new loans at the present time in
Michigan. I can not answer for the other districts.
Senator FLETCHER. They are unloading it onto the Reconstruction
Finance Corporation?
Mr. LORD. They are making no new loans but are renewing present
loans as they mature.



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 122

Furthermore, neither of these groups nor any banks in these
groups found it necessary to avail themselves of loans through the
National Credit Corporation. In other words, their resources were
contributed in substantial amounts for the protection of other Michigan institutions as well as other institutions throughout the country
making use of the facilities of the National Credit Corporation.
These two groups have been a bulwark of strength during the
financial hurricane of the past two and a half years. Speaking
only for the guardian group, our institutions alone, or jointly with
others, have been instrumental in protecting deposits in other banks
in aggregate amount of more than $65,000,000, with depositors numbering more than 150,000, located throughout the State. Without
such strength and such help there must inevitably have been tremendous losses to business and individuals.
The State of Michigan is just now beginning to show signs of
returning confidence in its banks and in its industries. Funds are
starting to come from safe deposit boxes and other places of hiding.
This may be attributed in large measure to the effective help, both
practical and psychological, of the national legislation by which
there was created the National Credit Corporation, the Reconstruction Finance Corporation, and also the Glass-Steagall bill. All of
these measures have been designed wisely to permit the proper expansion of credit, and to aid existing agencies in taking care of the
financial requirements of industry, commerce, and of the individual.
Unquestionably, during the years preceding 1929, many unsound
practices developed in certain phases of the banking business, as in
all business and industry, principally in respect to securities companies affiliated with banks. Such abuses can be eliminated or prevented without disturbances to the banking business, to the entire
industrial structure of the country, or to public confidence. Those
who are proposing remedies for past or present ills should bear in
mind that the patient, at least as we see it, is only now starting to
recover and that a major operation in the present state of financial
health of the patient may result in a relapse or even in the death of
the patient. Perfect rest and quiet with an occasional stimulant may
bring about the quickest and surest recovery.
Commenting generally upon this Senate bill 4115, many of the
provisions are sound and constructive, especially the establishment
of an agency for the liquidation of the assets of closed banks.
The provisions of the bill covering affiliates are presumably aimed
at securities companies. In the case of unit banks, there is no sound
reason why such banks, whether operating under national or State
charters, should not have as affiliates a trust company, a building
company owning the property in which the banking quarters are
located, or a safe-deposit company. In the latter case it is especially
desirable, as the liability of a safe-deposit company is impossible to
ascertain or to fully cover by insurance. Such affiliates have demonstrated in years past their usefulness and desirability.
If it is wise to eliminate security company affiliates, this can undoubtedly be done within a reasonable period of time. To attempt
to force them out of business immediately would result in further
liquidation at sacrifice prices that would affect the general public
even more than the securities companies themselves.



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

123

In that connection I might state that in our own group many
months ago we commenced liquidation and dismemberment of our
securities companies. The institutions at the present time are not
in the security business.
If branch banking is to be preferred to group ownership of banks
and trust companies, then the bill should either permit branch banking within State limits or other approved areas, regardless of the
laws of the State or States in question; or the bill should permit the
existing groups to consolidate their member banks into a single institution and operate such banks which are now members of a group
as branches, regardless of the law or the State or States in question,
with a further restriction if deemed wise that no new branches shall
be permitted except as the State laws may permit.
; Presumably, the purpose of section 20, subsections (b) and (c),
is to prevent the evasion of the double liability on bank stocks
through the ownership by a holding company of such bank stocks.
In the case of the Guardian Detroit Union Group, we recognized at
the time of our incorporation nearly four years ago that the double
liability protection to depositors should be preserved. Our charter,
and in fact our stock certificate itself includes the following provisions—I would like for the information of this committee to have
you see how that is worded [passing specimen stock certificates to
members of the committee^. There are some stock certificates, and
on the back is that provision, which is a part of the certificate.
That provision is as follows:
The holders of stock of this corporation shall be individually and severally
liable (in proportion to the number of shares of its stock held by them respectively) for any statutory liability imposed upon this corporation by reason of
its ownership of shares of the capital stock of any bank or trust company,
and the stockholders of this corporation by the acceptance of their certificates of stock of this corporation severally agree that such liability may be
enforced in the same manner as statutory liability may now or hereafter be
enforceable against stockholders of banks or trust companies under the laws
of the United States or the State of Michigan. A list of the stockholders of
this corporation shall be filed with the banking commissioner of Michigan and
the Comptroller of the Currency whenever requested by either of those
officers.

So long as this double liability is carried through to the holders
of the- stock of the group company, there is no more reason for a
group company to be compelled to carry a reserve to protect that
double liability than there is for the national or State banking
departments to require the individual holder of stock in a unit bank
to deposit cash or securities to cover his own personal double liability
in case his bank should become insolvent.
I am in hearty accord in permitting the proper authorities full
power to examine each and every corporation owned by a holding
company—and the holding company itself; and there should be no
objection to furnishing the authorities periodically with a complete
list of the portfolio of securities owned.
The bill includes restrictions against group banking which seem
to me to be both unnecessary and unfair, in view of the record and
standing of the group-banking institutions. None have failed to
my knowledge where they have been honestly and conscientiously
run. Dishonesty is just as responsible for the failure of unit banks
as it is for group banks or branch banks.



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 124

The existing groups have probably contributed vastly more to the
stability and safety of the smaller communities throughout this
country than have the unit banks, due to their financial strength
and to the confidence in which they are held by the public. According to the testimony of Governor Young of the Federal Reserve
Bank before the Banking and Currency Committee of the House
on March 19,1930, group banking at that time included 2103 banks,
or one-twelfth of the total number of banks in the country with
total loans and investments of about $11,200,000,000, or nearly onefifth of the aggregate loans and investments of all banks in the
United States.
.
It seems to me especially dangerous at this time to either destroy
or impair, by legislation, banking institutions representing so great
a percentage of the entire banking resources of this country. The
repercussion upon industry and the public would be far more serious
than the effect upon the banks themselves. The present is far too
critical a period in the financial and industrial life of this Nation
to enact legislation which does not have the fully approval of the
Treasury Department, the Federal Reserve experts, the department
of the Comptroller of the Currency, and the approval of the ablest
and soundest banking minds of the United States, as well as the
approval of this committee.
To refer to the bill itself and the specific provisions, I have a few
comments on some of the provisions.
Section 2 contains a definition of " affiliates " which seems to be
so broad as to include industrial corporations, the officers and directors of which might happen also to be either directors or officers
of local banks. That undoubtedly can be clarified either by ruling
or by change in the wording.
Section 3,1 think, is in the main constructive. The argument has
been made that it will force a vast amount of securities out of the
banks and onto a market which can not absorb them.
Senator FLETCHER. What do you think about having the Secretary
of the Treasury as a member of the board?
Mr. LORD. I see no reason why he should not be on the board,
Senator.
^ Section 3, as I read it, is so drawn that there are possibilities of
circumstances where a correspondent bank could not lend to its
country correspondent, which might be a savings bank or a small
country institution, even though such security as was presented was
entirety satisfactory, and even though the bank applying for the
loan might be having a serious time in the way or withdrawals.
I think that section could undoubtedly be clarified so as to prevent
such a situation. Section 4 prevents in our own case the institutions
which are members of the Federal Reserve Bank from voting for
a director of the Federal Reserve, of our own Federal Reserve Bank.
That is not to us particularly important, except as a matter of
principle. Section 5 seems to me satisfactory. Section 6 satisfactory.
I have no comment on section 7. Section 81 believe has been clarified
already by the testimony of yesterday with regard to this percentage
which a bank may loan of its capital and surplus. Section 9 is satisfactory and conforms to the practice which our own institutions have
been following ever since we started.



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

125

Section 10 has been discussed by Mr. Mills and he spoke of the
figures. It does seein to me that a good many institutions have done
their part in contributing to the liquidation of closed banks already.
In the case of the American State Bank of Detroit, which was taken
over by all of the other banks in Detroit, the cost of that is a great
deal more than we would have to contribute already. It is a great
deal more than our subscription to this new liquidating corporation. Our own group will have to stand the expense of about two
and a half million dollars to save the deposits of 150.000 depositors.
We are glad to do it.
Senator BROOKHART. Does that mean the rate of contributions is
too low in this bill ?
Mr. LORD. XO, sir: I think the rate of contribution of the Federal
reserve bank is too low. The proportion, as I figure it out, the
member banks would subscribe in round figures is $127,000,000, and
they would be asked to pay at once half of that, or $68,500,000. The
Federal reserve banks would subscribe $260,000,000, with $1,300,000
to pay in with their subscription, and the balance called for on 00
davs5 notice. They pay in a quarter of one per cent of their subscription, if I remember correctly, and the balance of their subscription, which is one-quarter of their surplus, is subject to call on
90 days' notice.
Section 11: You gentlemen have heard a great deal of discussion
as to the effect of the market value of the United States Government
bonds, and possible difficulties of the Government handling its
financing if that penalty rate of 1 per cent on 15-day loans on
governments is included/
Personally, I think it would be wise if Government securities were
eliminated from that, because, unquestionably, there must be a substantial amount of Government financing witliin the next two or three
years, either to meet maturities or to cover the deficit.
Then section 11 does not in any way increase the amount of eligible paper. It does put a premium* on eligible paper from the
standpoint of borrowing purposes if the paper is discounted rather
than used as collateral. In our own largest institution, the Guardian
National Bank of Commerce, located in a highly industrial city, with
total deposits of about 150.000.000, I do not believe that we could
pick out of our loans $5,000,000 of eligible papei. The primary industries in that community are not borrowers at any time.
Section 12 I have no comment on.
Section 13, which Mr. Mills discussed in full detail on the question of the reserve situation, I think does impose a hardship, and a
considerable hardship, on banks throughout tne country which have
a preponderance of savings deposits. In our own institutions, particularly the Guardian National Bank of Commerce of Detroit, we
have tlie smallest percentage of time deposits of any institution in
town. It would not seriously affect us, but with institutions which
have a vast amount of sayings as compared with their commercial
deposits or demand deposits, it would increase the reserve requirements very substantially and at considerable sacrifice. In our own
group our time deposits average only about one-third of our toistl
deposits.
311101—32—PT 1




9

NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 126

Mr. WILLIS. Do you recall the average amount of the time deposits
per depositor?
Mr. LORD. Excuse me!
.
Mr. WILLIS. D O you recall what the amount per depositor is—the
average amount?
Mr. LORD. I think our time deposits would be about 125,000,000T
and I can not tell you the number of our savings depositors; I
should say perhaps 325,000. So that you can figure it out that way.
Senator GORE. YOU have notfiguredout the average per depositor?
Mr. LORD. N O ; I have not, Senator.
Mr. Mills spoke also of section 14.
Senator GORE. Just one minute, please, sir. You say one-third
of your time deposits?
Mr. LORD. One-third time and two-thirds demand deposits.
As regards section 14, Mr. Mills spoke of the requirement, which
we both, I think, understood the same way, as to the appraisal by
the comptroller of property securing real estate mortgages, when
the comptroller makes his examination three times a year. In Detroit it would almost be a physical impossibility. Our own institution, that is the Guardian Jsational Bank, our biggest institution,
has about 5,000 mortgages, and I think the First Wayne National
Bank has 53,000, and for anybody to attempt to appraise those properties would be a continuous job and an impossible job.
Mr. WILLIS. YOU mean there it would be impossible to value if
the valuations were made by repeated visits of expert people to the
properties themselves?
M r . LORD. Y e s .
Mr. WILLIS. But

it would be entirely possible to give a comparative estimate of the average reduction in value which had taken
place, would it not, without any such elaborate visitation?
Mr. LORD. I think it would if you classified the properties.
1
1
9
Mr. Willis.
Mr. WILLIS. And there is nothing here, seriously, that would prevent the comptroller from requiring that, is there?
Mr. LORD. I think there is nothing to require an inspection of the
mortgage loans by the comptroller; no.
Mr. Wiixis. It would be feasible if it were done in that manner,
with that flexibility; that is, it would not have to be done three or
four times a year? There is nothing here to indicate he must do
that. He may revise the valuations in any way he mav choose—isn't
that true?
Mr. LORD. I think it is. Of course, the banks in Detroit, I think
very generally, have the amortization provision in all of their mortgages, so that every three months or every six months, as the case
may be, there is a payment on the principal as well as the pavment
1 J
of interest.
Mr. WILLIS. It seems to me, from what both vou and Mr. Mills
have said, in an institution managed as yours 'are. this would be
peculiarly easy to apply.
Senator GLASS. Would it help any to exempt the smaller mortgages
& *
from the operation of the law?
*
Mr. LORD. Senator, I do not know, because our average mort"a*e
in our own institution runs under $3,000, which shows how they
J
have been paid down.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

127

Senator GLASS. Well ; I say

Mr. LORD (interposing). You could pick out mortgages over
$5,000 or over $10,000 and have the comptroller check those or spot
check them. That could be done. I think it would make it simpler
at least; yes, sir.
Mr. WILLIS. IS it not true, Mr. Lord, that in a great many cases
where the banks have loaned on collateral security the examiners
have been rather severe in penalizing them, compelling them to mark
down bonds they held. It is taken for granted constantly that the
real estate stays right at the original loan value, so that those institutions maintain a considerably inflated asset value?
Mr. LORD. I think that is true to some extent, Doctor Willis, but
the requirement that the mortgage when made should not exceed
50 per cent of the valuation of the property I think was designed
to cover the fluctuation of property values. There is not any question that real estate values in Detroit and in every section of the
country have dropped. Nobody can deny that.
Senator GORE. In about the same proportion as securities ajid
commodities, would you say?
Mr. LORD. I should say that becurity values have dropped more
drastically and commodity values also. ^
-Mr. W I L U S . But the banking authorities are now engaged in having the security values marked off on a reasonable basis of adjustment?

Mr. LORD. That is true. Of course, it is a very difficult thing
to judge what the market value is of real estate. You or I may
have an opinion as to the value of real estate and our appraisal
may be perfectly sound, but to try to sell it at that price under conditions existing to-day may be impossible.

Mr. W I L U S . There is nothing here, according to your reading of
it, is there, that would enable the comptroller to require the immediate disposal of a loan; merely that he is allowed to revise the
valuation in order to bring out the fact that a given loan is undermargined?
Mr. LORD. Well, it was not clear in my mind, Doctor Willis, what
the comptroller might require; whether he would require you to write
a $5,000 mortgage down to $3,000 or $4,000, or whatever was in his
opinion a fair'amount on the valuation, or how it was done. I think
it would certainly be a help to have it clarified.
Senator COUZENS. Isn't the language too broad as it is in the bill ?
Mr. LORD. It is broad.
Senator COUZENS. That is my view. It is too broad, because, obviously, these small borrowers "can not put up additional securities
to make the loans good if they are deficient and found by the examiner to be so.
Mr. LORD. I think that would be almost impossible to carry out,
Senator, to go back to the man to whom you had made a mortgage
and ask him to put up $500 more or $1,000 more, especially if the
mortgage is in good standing, because you have a contract with
him; he agrees to pay interest and a certain amount of principal
Mr. WILLIS. YOU see, the point is this: In connection with the
other provisions of the bill the object is to arrive at what is the




128

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

valuation, and in order to get a correct valuation of the present
assets, the statements of the banks of the country at the present
time do not present a correct asset value of the holdings of the bank.
Mr. LORD. Don't you think, Doctor Willis, that the borrower on
a mortgage—we will say that the mortgage is in pretty good standing.
M r . WILLIS. Y e s .

Mr. LORD. At the time it was made it may have been a 40 or 50
per cent mortgage, and to-day it might be a 75 or 80 per cent mortgage.
M r . WILLIS. Y e s .
Mr. LORD. Don't

you think that some weight, some credence,
should be given to the personal, moral risk?
Mr. WILLIS. Absolutely.
Mr. LORD. And to the financial responsibility of the maker of
the mortgage, as well as on any loan?
Mr. WILLIS. Unquestionably it should be. It is merely the question, I think, to be decided, and it is always desirable to know what
collateral or supporting property there is there in the case of real
estate just as you want it in the case of a collateral loan, in order
that the bank itself may be apprised of its weaknesses and then
left to correct them in so far as they can be corrected.
Mr. LORD. I think, unquestionably, Mr. Willis, that the intention
of that provision is a good idea, and could be followed out perhaps
by changing the wording of that section and making it a little
more workable from the standpoint of the banks, either by banlcs
setting up reserves, as they do, to take care of losses, wlietfier they
are real-estate mortgages, or bonds, or commercial paper, with spot
check by the comptroller to know what condition they are in.
Mr. WILLIS. It is revaluations that are called for here, and it is
true that, according to the information available on the subject,
such work is now very much neglected in examinations of banks
throughout the country.
Mr. LORD. The examiners do, however, Mr. Willis, point out to
the banks and list the mortgages that are in default.
M r . WILLIS. Y e s .

Mr. LORD. Which immediately calls it to the attention of the board
of any bank.
Mrl WILLIS. Certainly.
Senator GLASS. IS the average bank examiner equipped with the
essential knowledge to determine the value of real-estate mortgages'
Mr. LORD. N O : I would say not. I think you would find it very
difficult to get men qualified to appraise real estate.
Senator FLETCHER. Does the law of Michigan require that you
should not loan over 50 per cent of the value?
Senator GLASS. Sixty per cent of the value.
Mr. LORD. We only loan 50 per cent.
Senator GLASS. The State law permits 60 per cent.
Senator FLETCHER. But your practice is to limit it to 50?
Mr. LORD. Yes, sir. I venture to say that we have many mortgages
that are over 50 per cent of the present valuation, that are in perfectly good standing.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

129

Senator FLETCHER. Yes; and you can have a bunch of real-estate
agents in your town or community examine a piece of property and
one of them may put a value of $50,000 and another a hundred
thousand.
M r . LORD. Correct.
Senator FLETCHER.

Appraisal is a matter of opinion.

Yes. I do not see how a bank examiner can
tell much about that, no matter how good an inspection he made of it.
Senator GLASS. "We have had that illustrated in my own town in
the last few months. A half a dozen real-estate agents were summoned before a commission or court to estimate the value of certain
properties to be condemned by the Government, ami not a one of
them agreed with another.
Senator BROOKHART. I think the bank examiners have agreed to
beat down the value of farm real estate everywhere.
ilr. LORD. It would apply just as much to farm mortgages as it
would to city mortgages. As that provision now stands in the
bill, to far as our own institutions are concerned, I would not
dare make another mortgage, because I do not want the responsibility
of going out to a man to whom we have loaned money on the mortgage and saving. " You must give us $5,000 more to protect the mortgage and keep it satisfactory for the comptroller/' We could not
do it.
Mr. Wnxis. May I bring out the point again—there is nothing
here to require vou'to do that, is there?
Mr. LORD. It is by inference.
Senator COUZENS. I would like to ask Mr. Willis what this!
language means, then, on page 33, where it says:
Such valuations shall be revised by the Comptroller of the Currency at the
time of each examination of the hank making the lonn. and he shall have
power to order changes therein aud to require the adjustment of loans to
such revised valuation*.

Mr. WILLIS. He has the power to do that in cases where the situation is such that it undoubtedly needs it.
Senator COUZENS. That is unreasonable power in the case of realestate loans.
The CHAIRMAN. Does he not have that now?
Mr. LORD. I doubt if he has if the mortgage is in good standing,
Senator. That provision would frighten me so that I would not
make any more real-estate loans in our bank, with that power on
the part of the comptroller.
The CHAIRMAN. The examiner can order you to charge off any
part, no matter how good a standing it is in, if in their opinion it is
not
Mr. LORD (interposing). But if it is in good standing you have
a pretty good argument, Senator.
The'CHAIRMAN. Oh, yes: you might have a good argument, but
paper could be kept in good standing that woulclnot be good paper.
Mr. LORD. I do not think the comptroller ever does that.
The CHAIRMAN. NO: I do not say he does it, but he could do it?
Mr. LORD. Yes; he could do it.
T h e CHAIRMAN. Y e s : in other words, he could now.
Senator BULKLEY. In other words, you would not

fear anything
that he would do under existing law, but you do fear some rash
action that might be taken if the law were changed?




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 130

Mr. LORD. I do. I fear it under the situation.
Senator COUZENS. May I ask Mr. Lord to look at page
ginning with line 21? It says:

32.

be-

A loan secured bv real estate within the meaning of this section shall be in
the form of an obligation or obligations secured by mortgage. tru«t deed, or
other such instrument, upon real estate, when the entire amount of such obligation or obligations is made or is sold to such association.

Would that prohibit any participation in a loan based upon real
estate?
Mr. LORD. It is not clear to me, Senator.
Senator COUZENS. I would like to ask Mr. Willis if he would not
so interpret it.
Mr. WILLIS. I beg pardon, Senator; I do not think I quite got the
question.
Senator COUZENS. With respect to that provision beginning on
line 21 of page 32. would that prohibit the participation of a bank
in a loan because it says the whole loan must be sold to the association?
Mr. WILLIS. I should not think so; no, sir. Not necessarily, no.
What it says is:
A loan secured by real estate within the meaning of this section shall be
in the form of an obligation or obligations secured by mortgage, trust deed, or
other such Instrument upon real estate when the entire amount of such obligation or obligations is made or is sold to such association.

That is to say, if the association is the only holder there it is to be
protected in that particular way. Now if it is a part holder, along
with, say, three or four other banks, in a large mortgage, the meaning I should think is that it might be protected in some other way.
That is to say, that a different kind o f protection could be used.
Senator COUZENS. That would have to be modified, because I could
not interpret it in any other way than I would have to buy the whole
obligation if I was buying one of those mortgages.
MI*. WILLIS. I do not think so, sir.
Senator COUZENS. It certainly would have to have a clearer interpretation if I were to follow It.
Mr. LORD. IS it not intended to mean that the total obligation or
obligations outstanding, and that whether you own a part of it or
own only a fraction, it shall not exceed 50 per cent ?
Senator COUZENS. But that limits the amount of the loan on the
property.
M r . LORD. Y e s .
Senator COUZENS.

Under any circumstances. But this provision
requires you to take the whole obligation, as I understand it, if I
read English correctlv.
Mr. WILLIS. I think the provision requires the banker who has the
obligation to have it secured in that way, but if he is lending with
others he can secure it in another way.
Senator COUZENS. There is no provision for that. It can not
possibly be construed that way, if I read English correctly. However
The CHAIRMAN. I would like to ask the witness a few questions,
but if you desire to complete your statement you may go ahead
with it/




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

131

Mr. LORD. I think I am practically through. We were discussing
section 14.
In section 15, as I understand it, the bank's portfolio is not limited, except to the extent of 15 per cent of the capital and 25 per
cent of surplus to any one borrower or obligor.. Sections 16, 17,
18, and 19 are satisfactory.
Section 20 I have already spoken about, and particularly paragraphs (b) and (c), which are very difficult from the standpoint
of our own group, and I think of most banking groups. We think
we have protected the depositor due to the double liability, which
was our own thought, not the thought of the banking department
in Michigan nor the attorney general.
Section 21 refers also to group and branch banking, and I have
already stated our position.
Senator COUZENS. In other words, you object to that whole provision limiting the voting power of the group; is that it?
Mr. LORD. Section 21, Senator, is in regard to branches, is it not?
Senator COUZENS. I mean there is a provision there regulating the
voting power of the group bank.
Mr. ]LORD. Senator Couzens, if the banks are permitted to vote
under certain provisions and subject to good behavior, I am not a
bit afraid of that. We will behave.
Senator GLASS. The purpose of that, as you know, was to prevent
the holding company from controlling completely the Federal
reserve bank itselx.
Mr. LORD. I understand that. I think that is perfectly proper,
that there should be a division so that they could not. In our own
district neither of our groups could control it, because there are
plenty of independent banks—I do feel, however, that if groups are
to be limited in any way as to their power to do a banking business
re got to have some place
memorandum, was that
Uess of the State laws, for
national banks^ or that the groups be "allowed to take their present
imits and organize them as branches with no powers of extension,
if it is thought wise, unless the State law permitted it.
Mr. WILLIS. A S national banks?
Mr. LORD. A S national banks; yes. sir.
Senator GLASS. I think you would not experience any difficulty
in convincing the subcommittee on that point if the subcommittee
could feel that it is possible to get such provisions through Congress.
Senator COUZENS. Would you be willing to abandon group banking
if branch banking was permitted throughout the State ?
Mr. LORD. Yes, sir; and we would put our banks into one institution, a national bank. Of our institutions the larger ones are all
national banks, but the Highland Park State Bank and the bank in
Flint and two or three small banks are State institutions. Most of
them are national institutions.
The CHAIRMAN. I am not sure that I understood what you meant
there. Of course, each bank is operating under its own charter?
Mr. LORD. Each bank is operating under its own charter* J2ach
bank, under the group company's by-laws, must have at least 75 per
cent of their directors local men.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 132

The CHAIRMAN. And how much of the stock is held by the holding
company in each instance?
.. .
Mr. LORD. Except for one case, we own all or practically all—in
most cases we own all except the directors' shares.
. . .
The CHAIRMAN. You protest against the suggested provision m
this bill of building up a reserve to protect stockholders' liability: is
that your feeling, that your stockholders are legally bound for double
liability at the present time?
Mr. LORD. Absolutely.
_,
The CHAIRMAN. Has this form of agreement that they signed been
submitted to the attorneys at the Comptroller's office to its binding effect?
.
_ , ,
Mr. LORD. I believe they have seen it, although the holding company is a State corporation. It was submitted to the attorney general of the State of Michigan and the banking department there, both
of whom approved it.
The CHAIRMAN. Both of whom held that they could hold them the
same as though they were stockholders in the bank?
M r . LORD. Yes, sir.
The CHAIRMAN. But your banks are not all in one State?
Mr. LORD. They are; all in Michigan.
The CHAIRMAN. They are all in Michigan?
Mr. LORD. We have no institution of anj kind outside of the State.
The CHAIRMAN. The liability of national banks would be en-

forced in the Federal court, and the others is the State courts, of
course?
Mr. LORD. Correct.
The CHAIRMAN. Should this not be a matter to be submitted to
the comptroller's office for their consideration?
Mr. LORD. Yes, sir. I think they do know about it, Senator.
Senator FLETCHER. A S a matter of fact, as stockholders in your
institution you own all the stock practically in all of those?
Mr. LORD. Yes; but the owners of the stock of the company that
owns these banks have that double liability through the provision
in our stock certificate. In other words, you not only have the individual double liability passed on the holders of stock in the holding
company, but in addition you have whatever other assets the holding company may have as protection. You have a greater protection than merely the double liability of a unit bank.
Senator FLETCHER. The double liability attaches to the stockholders of the holding company?
Mr. LORD. Of the holding companv; yes, sir.
The CHAIRMAN. Under a form of agreement that they sign and
that is indorsed on the certificate.
Senator GLASS. There is double liability in many of the unit banks
but it does not amount to much, does it?
Mr. LORD. That is very true these days, Senator Glass.
The CHAIRMAN. May I ask—there are* a dozen or so large groups
throughout the country, are there not?
Mr. LORD. Yes, sir; I think there are more than that.
• The CHAIRMAN. There is a larger number of large groups than
a dozen?
Mr. LORD. I do not think as large as we are. In our own State
there are the two principal groups, and I understand there are others



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

133

covering the northwest section, and there are the groups in Utah
and adjacent States, and there is the group in New York and also
other groups in the Southeast.
The CHAIRMAN. DO you know whether any other groups use this
form of certificate, bringing the stockholders in the holding companv
under the double liability ?
Mr. LORD. The Detroit Bankers, wliicli is in Michigan also, and I
believe Wisconsin Bank Shares Corporation. I do not know whether
others do or not, Senator.
The CHAIRMAN. In other words, so far as you know, there are
just a few of them that follow that.
Mr. LORD. I know that some do. Whether they all do, I can not
say.
The CHAIRMAN. You realize, of course, the effort of the committee to protect was due to the fact that the committee did not believe
that it was a general rule to hold the stockholders in the holding
company to double liability. In fact, some members of the committee believed the whole purpose of the organization was to evade
a good law that provided tor stockholders' liability.
Mr. LORD. That was not ours, because we put it in the charter
when we organized.
The CHAIRMAN. N O ; I see, because you stuck to it and carried it
through.
Senator FLETCHER. DO you object to these three reports a year?
Mr. LORD. It means a little more work, but we do not object to
anything along that line.
The CHAIRMAN. DO I understand that you feel it is absolutely
necessary for the affiliate corporation to own the bank building, the
safety deposit boxes, and other parts of the banking institution?
Mr. LORD. Institutions that are tied into the banking and trust
business pure and simple.
Senator GORE. Where it effects an economy m the operation of
the bank?
M r . LORD. Y e s . s i r .
The CHAIRMAN. DO

drastic in that respect?

you feel that the measure as drawn is too

M r . LORD. Y e s ; I d o .
The CHAIRMAN. Could

you suggest some wording that would
avoid that part of it and still accomplish the purpose aimed at by
the subcommittee i
.
#
Mr. LORD. I think I could if I were given a little time and I knew
the exact purpose of the subcommittee.
The CHAIRMAN. Will you confer with Doctor Willis about that?
Mr. LORD. I will be glad to.
,
Mr. WILLIS. You are aware there that in section 2 4 , 1 think it is,
the bank is allowed expressly to hold stock; that is to say, the
prohibition against their holding stock is limited by the statement
that those institutions that are specially provided for by law are
not included? You noticed that, did you not?
M r . LORD. Y e s .

Mr. WILLIS. Of course, that covers the safe-deposit company?
Mr. LORD. Yes, sir. But the definition in section 2 is too broad
to pick it out.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 134

Mr. WILLIS. Here you have a specific exemption, and with the
statement in section 4,1 think
Senator GORE (interposing). Would it be permitted, Doctor, for
the banks in the corporation to own the stock of the members who
owned the buildings?
Mr. WILLIS. The law permits that now under our regulations.
Senator GORE. Yes; would that be permissible under this law?
Mr. WILLIS. I said that in connection with the testimony yesterday, and then somebody suggested that we add the words " o r
regulation."
Senator GORE. There was an example of that in my State, where
there has been a large 32-storv building constructed there recently
by the First National Bank.' The man who wrote me about it.
thought that the bill as drawn would permit the bank to own the
stock.
Mr. WILLIS. IF we were to add the words " or regulation " where
the word " law " is used in the section relating to that, I think there
would be no danger that anything of the kind might be inferred.
Senator COUZENS. Just what is the necessity of organizing an
affiliate to hold safe-deposit stock and building stock? What is the
necessity for that?
The CHAIRMAN. The witness suggested something about that.
Mr. LORD. There maye be $1,000,000 in securities in the safedeposit boxes or $500,000,000, and there is no way that you can tell
what your liability is. because you do not know what" is in those
boxes. ^ We all carry tremendous blanket insurance. We carry, and
every institution in"our group, the big ones, up to $2,500,000."
Two and a half million dollars would not be a drop in the bucket
to the amount of securities that might be in your safety vaults, and
you have no way of knowing how much is in there. I do not believe
it is sound, from the standpoint of bank depositors or trust company
depositors, to tie that liability on an institution which has depositors9 funds in it. The man who puts his money in the safe-deposit
box realizes that liability. The depositor should not be asked to
take that risk.
Senator FLETCHER. Did you state how many stockholders you
have?
Mr. LORD. Over 8.000. Senator.
Senator GORE. The point made in this letter I had was that the
bank building was largely devoted to offices, used as an office build. ing. and the relationship"between the bank and its tenants or occupants. if the bank owned the building outright, might give rise to
irritation or friction that might be obviated if a different concern
owned the building.
Mr. LORD. I think that is true, Senator, from the standpoint of
operations.
Senator GORE. Yes; that was the point.
The CHAIRMAN. This 15-day provision has been the subject of
much controversy, and,there is a wide difference of opinion on it, and
an honest one, l am sure of that. Have you thought of making the
use of that provision subject to the approval of the Federal Reserve
Board and only using it for emergency purposes?
Mr. LORD. The 15-day loan?
T h e CHAIRMAN. Y e s .




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

135

Mr. LORD. If I understand your question correctly, we use the
15-day loan for borrowing from time to time, and use Government
bonds rather than put up eligible paper, because of the difficulty
of
The CHAIRMAN. The only difficulty that comes from it is from
some abuse, I think not from the provision itself, but it lends itself
so easily to certain abuses, such as the Wall Street boom, and I was
wondering whether this might be made more practical if we should
provide that it should only be used upon the approval of the Federal
Reserve Board and then could be used in every legitimate emergency.
Mr. LORD. May I answer your question by telling you how the
Federal Reserve Bank of Chicago handled just that situation during
a time of very high call money—and when other money rates were
high also. The banks in Detroit very generally were borrowing substantial sums of money, and they were using their Government bonds
and their eligible paper and anything they had. Mr. McDougall,
of the Federal Reserve Bank of Chicago, came to Detroit and warned
the banks there that they were not under any circumstances to
borrow money to loan on call in New York, regardless of the profit
they might make. In other words, the Federal reserve bank has in
the past brought pressure to see that it was not abused, and they can
step in to-day, under their powers, their broad powers, and tell a
bank that " We will not loan you on Government securities so long
as vou are lending money on call in New York."
Senator GLASS. But you will recall the fact that when the Federal Reserve Board, in an exceedingly mild or general way undertook to admonish the member banks in New York in 1929 against
excessive use of the Federal reserve facilities for investment purposes, perhaps the outstanding banker in New York City practically
told the Federal Reserve Board to go to hell?
Mr. LORD. I did hear something about it.
Senator GLASS. That he intended to rediscount to the extent of
$25,000,000 the next day and to loan it for stock investment purposes,
and that his obligation was to the market rather than to the bank
of which he was a sworn director; you recall that, don't you?
Now, with respect to that provision, if I have not already said
for the record, and maybe it can not too often be said, it has a history. When the Federal reserve system had been in existence two
and a half years without that provision, and when it was incorporated in the act as a war measure, avowedly, its purpose being to
prevent a bank from being suddenly embarrased overnight by any
extraordinary thing that might happen in war times, Europe then
being in the World War, and when it # was incorporated in the act
over bitter opposition, it was done with a gentleman's agreement
that after the war it should be eliminated.
And this significant fact attaches to the history of that act. At
that time the indebtedness of the United States, the bonded indebtedness of the United States, was less than a billion dollars, of which
amount the national banks owned $748,000,000 for circulation purposes, it was computed that fiduciary funds, estates and individuals
owned at the very least $150,000,000 of United States bonds.
So that at the time of the incorporation of this provision of the
bill in the act there were perhaps, it is fair to say, less than a




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS 136

hundred millidns of dollars of United States bonds available for this
purpose. And yet, over a given brief period during this riot of stock
gambling in New York, 10 of the New York banks alone borrowed
from the Federal reserve bank approximately a billion dollars on
15-day paper.
So that you may see from that statement, I think
Mr. LORD (interposing). I see what you intend.
Senator GLASS. I should discern from that statement that the
original purpose of that provision has been frightfully perverted to
an evil use.
Mr. LORD. Would it be possible, Senator Glassy to make that penalty subject to the discretion of the Federal reserve bank, if in tneir
opinion the borrowing facilities of the bank were being abused?
That would make it compulsory.
Senator GLASS. It was.made so for 16 years, and somebody, I do
not undertake to say who, had not courage enough to exercise the
power that the act gave him, even when the abuses were so frightful
as to have brought on the very situation that the country finds itself
in now.
Senator GORE. Mr. Lord, you did not quite finish your statement
as to why you used Government securities instead of commercial
paper.
Sir. LORD. When you rediscount eligible paper at the Federal reserve bank you must furnish statements. Our experience with the
bank is that they are supertechnical, and that it is a very difficult
thing to get eligible paper through the bank and get it approved
without going through a great deal of work, in our opinion unnecessary. Our credit files are available to them if they Want them.
It is so much simpler, when you are running short a million dollars,
or $5,000,000, or whatever the amount is, to leave your Government
securities there and borrow against thein. It may be only a question
of one day borrowing. It may have nothing to do with the lending
of money on securities.
Take our own institutions with these motor companies.
Senator GORE. It is just a question of the mechanics of it?
Mr. LORD. Senator, let me give you an example in connection with
the motor companies: The Ford Motor Co. carries accounts with
most of the banks in Detroit. We have one of their very active
accounts. The Ford Motor Co. pays its bills on the 20th of the
month. There have been times when thev would draw $35,000,000
m one day to pay their bills. The only way you can handle an
account of that kind is to carry a tremendous amount of Government securities or call loans/ There are just, two ways you can meet
a 35,000,000 withdrawal in one day and meet it properly, and we
find that the most satisfactory way to do it is to carry an extensive
amount of Government securities, so that if the Ford Motor Co.,
instead of drawing twenty or twenty-five million, as we might expect,
draws 35,000,000, we take our Government bonds to the Federal
reserve bank and borrow for a day, or two days, or a week, until the
balance is normal again.
'
Senator GORE. It is the mechanical facility of USIN^ it more conveniently, one kind of paper against the other?
ment'bonds

* ^




mechanics that makes

simpler to use Govern-

NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

137

Senator GLASS. Undoubtedly it is a question of that description,
and if it were used only for that purpose, why, perhaps there would
not be many valid objections to it.
Mr. LORD. Senator, supposing that you put a provision in that
so long as that bank was lending money on call in New York they
should be penalized 1 per cent? Don't you think that would cover
your point?
Senator GLASS. It might be so. "We might modify that 1 per
cent penalty, though you understand that the Federal reserve bank,
subject to review and determination of the Federal Reserve Board,
has that power now—but it is not exercised.
Mr. LORD. Can't they be persuaded to exercise it? Mr. McDougall exercised it in thediicago district.
Senator GLASS. LVE were actuated by the knowledge that they had
never exercised it, and therefore we put the penalty in there.
Senator FLETCHER. What does that amount to to these people that
are making 20 per cent, a 1 per cent penalty i
Mr. LORD. It is not that, Senator: it is the penalty of 1 per cent
against the people who are borrowing for legitimate purposes not
for the bank which is getting a big percentage on call.
Senator FLETCHER. 1 mean these people who use this for speculation.
Mr. LORD. If you mean that 1 per cent penalty to the banks when
they are lending on call to New York, I will agree to that. It would,
however, penalize the legitimate transaction.
Senator GLASS. YOU would have no objection, then, to that provision if we were to modify or eliminate that 1 per cent penalty?
You would have no objection to the requirement of the provision
that if, upon due notice and warning by the Federal lle^trve Bank
and Board, a bank persists in extending its loans on stock as collateral it should be penalized by suspension?
Mr. LORD. I would be perfectly willing to have that provision.
Senator GLASS. YOU think that is all right?
Mr. LORD. Absolutely, so far as our institutions are concerned.
Senator GLASS. Have vou any knowledge of any Federal reserve
bank ever buying a dollar of commercial paper in open-market
transaction ?
Mr. LORD. Ever buying a dollar?
Senator GLASS. Yes; of commercial paper. Has there ever been
any attempt since the institution of the system to create a market
for legitimate commercial paper?
Mr. LORD. Senator, I think since the organization of the Federal
reserve bank there has been such a tremendous amount of financing
done by corporations which has taken them out of the commercial
paper market that it is difficult to answer your question. Our own
institutions in times past, not in the last two or three years, have
been substantial buyers of commercial paper.
Mr. WILLIS. But the reserve banks?
Senator GLASS. I mean the reserve banks.
Sir. LORD. I think not.
Senator GLASS. In its open-market transactions?
]\Ir. LORD. NO. I do not know. I never heard of their doing it.
Senator GLASS. It has confined itself to purchasing collateral
securities rather than making a market such as the European market
for commercial paper?



138

NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

Mr. LORD. If you are speaking of the Federal reserve banks themselves
Senator GLASS. Yes.
Mr. LORD. They have confined themselves, as I understand it, to
the purchase of Government securities, notes, Treasury certificates,
bankers' acceptances, and the acceptance and rediscount of commercial or eligible paper that the bank might have.
Senator GLASS. But they have never undertaken to make a market
for current commercial transactions?
Mr. LORD. Not to my knowledge; no, sir.
Senator GORE. Mr. Lord, you stated that two-thirds of all of your
deposits were demand deposits. Could you state or estimate what
proportion of your demand deposits represent deposits of actual
cash or cash items distinguished from credit, so to speak, resulting
from your loan-discount operations?
Mr. LORD. I think that would be a very difficult thing to judge,
Senator, because
Senator GORE (interposing). You could not approximate it?
Mr. LORD. I might answer the question by saying that we do not
like to take new accounts that open with a loan, as a matter of policy.
We prefer that the deposit be made in cash or checks rather than by
credit on a loan, even though the depositor is entitled to have credit
granted.
Senator GORE. Less than half would probably represent actual
cash. The other is
Mr. LORD (interposing). No: I should think a good deal more
than half would represent actual cash deposits, because, while I am
sure we have a good many small depositors who might not represent
deposits in cash, the larger amounts, the deposits of the big corpora*
tions, are in cash rather than by credit. It is not a question of credit
with them.
Mr. WIIXIS. By cash there you mean cash or by check?
M r . LORD. Y e s .
GORE. Cash or equivalent of cash?
M r . LORD. Ye<.
Mr. WILLIS. May I ask you one further question, Mr. Lord I
M r . LORD. Y e s .
Mr. WILLIS. You notice in the latter part of this bill a plan for

Senator

removal of officers of banks who in any way are responsible for
unsafe or unsound practices.
Mr. LORD. I am also in favor of it.
Mr. WILLIS. In favor of it?
Mr. LORD. If you do not remove them we will.
Mr. WILLIS. But, in general, do you think there is any unfairness or
hardship?
Mr. LORD. NO objection at all.
The CHAIRMAN. Your suggestion as to the groups would be this,
that they would be regulated but not extended? Is that vour
thought?
Mr. LORD. Unless the State laws permit it. I think the provision
you have in as to that territorial provision is excellent. I think
that is fine. The objection I have to the bill as it stands to-day
is that there is no branch banking permitted except in States where
the laws of those States permit it.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

139

The CHAIRMAN. Would you override the sovereignty of the State
in a matter of this kind? Is there not a great deal of danger in
doing that?
Mr. LORD. Perhaps.
The CHAIRMAN. Are you not getting centralized too much now
and taking this power and that power away from the States?
Mr. LORD. I am in favor of doing it for the national banks. The
States have no control over national banks now.
Senator GLASS. NOW that the exceedingly conservative chairman
of this committee suggests an objection of that sort, just what sort
of objections may we encounter from the radical members?
[Laughter.]
Senator GORE. When the reds get after it?
Mr. LORD. Senator, the question of branch banking is a very
interesting one. and I think that, frankly, it is the ultimate solution of our banking troubles. If it can be handled in such a way as
to prevent a centralization of power in one place I believe it would
he the solution.
The CHAIRMAN. Well, I think your " if " is the main part of your
statement.
Mr. LORD. All right; supposing that the directors of a bank permitted to have branch banking within the limits of the State must
be 90 per cent residents of that State?
The CHAIRMAN. Well, I certainly share your view that it should
not be located outside the State but should be owned by the people
of the State, if you want to avoid centralization.
Mr. LORD. Of course, you can not prevent ownership of stock
passing from one localityto another, but you can prevent a directorate living in New York or SanFrancisco and attempting to operate
a corporation elsewhere.
The CHAIRMAN. We all know that directors are sometimes just
dummies. They are just representatives of some one who lives at a
distance.
Senator GORE. Would it be feasible to prevent stockholders who
live outside of the State from voting? "You know that that was
done in United States banks.
Mr. LORD. I think it would. That is a legal Question. But that
would answer your question as to the directors being dummies.
Senator GLASS. The subcommittee would not go into mourning
altogether if you were to prevail upon Congress to take that view
of it. I would not.
Mr. LORD. Can you prevail upon Congress to take that view,
Senator?
Senator GLASS. I do not know. It seems that I can not prevail
upon the Banking Committee to let us pass a reform banking bill.
The CHAIRMAN. If that is all, we will close the hearings for to-day
and there will be no further hearings until to-morrow at 10.30 in this
room. We had two other witnesses on for to-day but they are
not here.
(Whereupon, at 1.05 o'clock p. m., the committee adjourned to
meet again at 10.30 o'clock a. m. of the next day, Friday, March
25,1932.)







OPEBATION OF THE NATIONAL AND FEDERAL BESEKVE
BANKING SYSTEMS
F R I D A Y , M A R C H 25, 1932
UNITED STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY,

Washington,

I ) . (7.

The committee met, pursuant to adjournment on the previous day,
in the committee room, 303 Senate Office Building, at 10.30 o'clock
a. m., Senator John G. Townsend presiding, in the absence of the
chairman.
Present: Senators Townsend (presiding), Walcott, Carey, Watson,
Fletcher, Glass, "Wagner, Bulkley, Morrison, Gore, and Hull.
Senator TOWNSEND (presiding). The committee will be in order.
Senator Norbeck has requested that I preside for a moment. The
first witness will be Mr. Percy H. Johnston, New York.
S T A T E M E N T OF PERCY H . JOHNSTON, PRESIDENT CHEMICAL B A N E
& TRUST CO., C H A I R M A N B A N K I N G A N D CURRENCY COMMITTEE
OF MERCHANTS ASSOCIATION OF N E W Y O R E , N E W Y O R K , N. Y .

Senator TOWNSEND (presiding). Mr. Johnston, will you take a
seat there and give your name and address to the reporter?
Mr. JOHNSTON. Percy H. Johnston, president of the Chemical
Bank & Trust Co., New York, an institution owned by 14,000 stockholders, domiciled in every State in the Union. Also as representing
the Merchants Association of New York, as chairman of their banking and currency committee, which is tHe largest business organization in any city in America, with some seven or eight thousand
business memberships.
Senator TOWNSEND (presiding). Mr. Johnston, have you a written
statement?
Mr. JOHNSTON. Yes, sir; I have.
Senator TOWNSEND (presiding). You may proceed.
Mr. JOHNSTON. Mr. Chairman and gentlemen, I should like to
say first that I have much sympathy in any measure that is propounded to strengthen the general banking situation. I spent I
think six of the best vears of my life in the Treasury Department as a
national-bank examiner and national-bank examiner at large, trying to bring those conditions about over the country. I am somewhat
familiar with many of the weaknesses that the Government has been
confronted with and that the various supervising boards and superintendents of banks have met with.
111161—32—PT 1




10

141

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NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

Speaking now of the proposed Senate bill 4115, the passage of
this bill at this time would destroy all effect of the remedial measure
looking to an ending of deflation. It would bring about a large
deflation for the following reasons:
The security business is made outlaw and credit can not come
from banks to carry on this business. The bill is aimed to break up
the distribution of long-term securities, through its limitation on
the extension of bank credit against collateral. This would prevent
refunding of municipal, railroad, or industrial loans.
Banks may not use the Federal reserve to facilitate carrying
bonds. So practically banks could not borrow from the Federsu
reserve at all and have a bond account.
This would force further liquidation of all bonds except United
State Government.
The penalization of 15-day borrowings would make United States
bonds less desirable, would handicap the United States Treasury in
its necessary financing, and would increase the rate on Governments,
and thereby the interest rate on all classes of securities, and depreciate the market price of all existing securities. The 15-day
borrowing is essential in periods of depression where eligible paper
is not available for rediscount.
The requirement for revaluation of all real estate owned by banks
and real estate loans to market value would render many banks insolvent and compel their closing. Has real estate any " market
value " to-day ?
The prohibition against banks owning more than 10 per cent
of any particular issue of securities would compel the dumping of
large holdings of inactive bonds on the market.
The provision segregating the best assets of a bank for its time
deposits would, in the case of many banks having a large proportion of time deposits, likely frighten demand depositors in those
banks and bring on large withdrawals of demand deposits. This
would be particularly felt by the country banks.
Authority of Federal Reserve Board to fix from time to time
for any member bank the percentage of the capital and surplus of
such bank which may be represented by loans protected by collateral
security is a power that should not be vested in any governmental
body. It destroys the free functioning of the banks and robs directors and owners of their rightful privileges.
The compulsory requirement of member banks to supply capital
for the Federal Liquidating Corporation is essentially unfair. It
forces member banks to supply capital and take risks with no hope
of gain other than receiving 6 per cent interest, if the corporation
should earn it. There will be heavy losses, which in the last analvsis are forced on member banks. It is just as logical to require
good industrials, insurance companies, and other lines of business to
bail out the failed ones in their respective fields, as it is to ask the
member banks to do so.
Restricting the sale or purchase of Federal funds would seriously
interfere with free operation of member banks, would decrease their
earnings, and would accomplish no good purpose.
It is too much to hope that good banking can be brought about
by legislation. After 35 years of banking experience. sbTvears as
national-bank examiner, I am convinced more laws will not effect a




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

143

cure. Strict rules and careful discrimination in the granting of
charters will go a long way. We have had too many banks ana too
few bankers.
Better standards of supervision and examination will be helpful
in bringing about better conditions.
Now, if I may have the privilege of speaking on one or two of
these paragraphs that I have mentioned.
Senator TOWNSEND (presiding). You may proceed.
Mr. JOHNSTON. I should like to say that in making these remarks
very little of it is applicable to my "own institution of which I am
the president. As far as 15-day borrowing is concerned I do not
know that we ever made a 15-day loan. We used the Federal reserve
bank in the year 1931 three days; in the year 1932 we have not used
it a day, and in 1930 we used it seven (Jays, and during the boom,
when money was 15 and 20 per cent, we made no use of the Federal
reserve to borrow money to reloan on stock-exchange collateral.
Senator GLASS. If you could exist in such a solid state without
the use of the 15-day paper, why would it destroy the balance of the
banking community?
Mr. JOHNSTON. Many banks. Senator, haven't other paper that is
eligible for rediscount. They are forced to borrow on their Government bonds. As you probably know, most of the banks carry large
amounts of Government bonds at the Federal reserve bank. I think
the real reason that most banks prefer to borrow on Government
bonds is in convenience. It is very easy to send over their note and
ask them to attach so many Government bonds or set them aside for
the protection of their note.
Second, notwithstanding that we have tried in the Federal reserve
to make borrowing more popular in member banks, or rediscounting,
there has always existed a prejudice among banks from having to
borrow on bills payable or rediscounts. Most bankers do not want
to take their customers* paper out of their files, indorse it over to the
Federal reserve bank, and then take it up later and take it back to
the bank, and when the customer has paid off his notes he discovers
that he has had his paper pledged to the Federal reserve bank.
Senator GLASS. Then do you think the Federal reserve system is
totally inacceptable or undesirable?
Mr, JOHNSTON. NO, Senator; I think it is a very desirable set-up.
Senator GLASS. That is what it was meant for, to rediscount paper
of a customer of an individual bank?
Mr. JOHNSTON. Yes; but you can not overcome prejudice, Senator.
Senator GLASS. Well, if "prejudice exists to such an extent that
rediscounting gets to be an inappreciable function of the bank, what
is the use of the Federal reserve system at all ?
Mr. JOHNSTON. I think its principal use is in the time like we had
in the war: I mean in a time of great stress.
Senator GLASS. Then, you want us to have another war in order
to make it available ?
Mr. JOHNSTON. No; I would not saj- that. The tiling I am saying
is this, that banks as a class—I think over 90 per cent of them—
would prefer to borrow on their Government bonds than to take
their paper out and rediscount it, due to the fact that there has
always been a prejudice among bankers against rediscounting paper.




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NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

Senator GLASS. But you know very well, Mr. Johnston, that at
the time of the adoption of the Federal reserve act there were not
any United States bonds to borrow on ?
Mr. JOHNSTON. That is true.
Senator GLASS. Then, you think it was futile to set up the Federal
reserve system because you did not have United States bonds to
borrow7 on ?
M r . JOHNSTON. N o t at all.
Senator GLASS. Well, I just do not get your logic.
Mr. JOHNSTON. I just do not get yours, sir, if you will pardon me.
Senator GLASS. Mine is that we set up a system to enable member

banks of that system to rediscount their eligible paper when they
had exhausted their ability to respond to the demands of commerce
and of agriculture, so that they might continue to respond.
Mr. JOHNSTON. They do that now, Senator, but they use their
Governments first.
Senator GLASS. But I say, at the time the Federal reserve act
was enacted, there were not any Governments for this use.
Mr. JOHNSTON. That is true."
Senator GLASS. Then, do you think it was futile to have set up
the Federal reserve act ?
Mr. JOHNSTON. Not at all; but we live in a changing world, and
we have issued a large amount of Government bonds in this country,
and we have made them eligible for borrowing at the Federal reserve
banks, and the banks would rather borrow on the Government bonds
than on the eligible paper.
Senator GLASS. At the time we instituted the Federal reserve bank
there wrere less than a hundred million dollars of United States
bonds available for this 15-dav provision of the bill, which was not
in the original act. What is the significance of the fact that over a
very limited period in 1029 10 banks in New York alone borrowed
nearly a billion dollars in United States bonds under the 15-day
provision ?
Mr. JOHNSTON. It is very easy to explain. There was a large
amount of money loaned in New York over the country, and when
the panic came they became frightened and they all asked to have
the money called within 48 hours.
Senator GLASS. It had no relation to the stock exchange transactions, you think?
Mr. JOHNSTON. The money had been loaned to Wall Street brokers.
Senator GLASS. Yes.
Mr. JOHNSTON. And the banks called it over the country. The
New York banks stepped in and took it all up and borrowed enor?
mous amounts, as you know, of the Federal reserve, which were very
quickly wiped out* in a few'days, because the people that called the
money left it to their credit in banks in New York as a rule.
Senator GLASS. But these borrowings were not overnight; they
extended over a period of six months, when we had the riot of stock
speculation in New York.
Mr. JOHNSTON. Not those loans that you refer to as having been
a billion dollars made overnight.
Senator GLASS. Yes; just those loans. That represented the
transactions of the first six months of 1929.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

145

^ Mr. JOHNSTON. I do not think the record would bear that out,
Senator.
Senator GLASS. I have the record right here.
Mr. JOHNSTON. All right, sir. I served on the New York Clearing House committee, and 90 per cent of those loans were washed out
within 30 days.
Senator GLASS. In January, 1929, $270,000,000 were borrowed under the 15-day provision.
M r . JOHNSTON. Y e s , s i r .
Senator GLASS. In February, seventy-nine million.
Mr. JOHNSTON. We are speaking, though, Senator,

of after the
panic.
Senator GLASS. In March, one hundred forty-eight million. In
April, one hundred five million. In May, ninety million. In June,
eighty-two million.
MR JOHNSTON. Y e s .
Senator GLASS. That was not overnight; that was over
Mr. JOHNSTON (interposing). I do not believe we are talking

about
the same thing.
Senator GLASS. Well, I can not help that. I know what I am talking about.
Mr. JOHNSTON. Yes, sir. I credit you with that fully. But I
understood you to say that banks in New York borrowed a billion
dollars.
Senator GLASS. Approximately that.
Mr. JOHNSTON. And carried it for six months.
Senator GLASS. NO ; I did not say they carried it for six months;
I said over a period of six months.
Mr. JOHNSTON. And the answer I made was that 90 per cent of
it was paid off in less than 30 days.
Senator GLASS. What would have happened in circumstances of
that sort if there had been no United States bonds, as there were
not when we adopted the Federal reserve act?
Mr. JOHNSTON. Why, the stock exchange would probably have
closed and there would have been a moratorium.
Senator GLASS. Then you do think the Federal reserve system is
of some account?
Mr. JOHNSTON. I do not see how you draw any contrary conclusions from any remarks I made, Senator.
Senator GLASS. Well, then, unhappily, I do.
Senator BULKLEY. Mr. Johnston, apart from the prejudices of
the bankers as to what collateral they would prefer to offer, which,
as you say, is merely a matter of prejudice, what is the sound thing
to be recliscounted at the Federal reserve banks? What is the sound
thing on which to judge it ?
Mr. JOHNSTON. I think commercial paper, without a question.
That is what the law was based on.
Senator BULKLEY. Certainly it was. Why shouldn't we restrict
borrowings on bonds or any other capital asset as distinguished from
commercial paper? How are you going to keep your system pure
and right if you do not maintain the principles it is based on ?
Mr. JOHNSTON. Well* you.know it is pretty hard to purify a
household when it is on fire.
Senator BULKLEY. The fire has pretty well died down now.



146

NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

Senator GLASS. YOU do not want it to burn up twice, do you ?
Mr. JOHNSTON. I hope not.
Senator BULKLEY. I can not think of any better time to purify.
Have you any suggestion about what would be a better time to
purify "than right now, and why?
Mi\ JOHNSTON. I think any major changes in the Federal reserve
would be much better if they can be made in some normal time. I
do not think the country is entirely over its fright. I think any
important changes we make—I am* speaking of the 15-dav provision; I ain not speaking at all because I haven't any personal interest
whether you have that lo-dav or not—but I know the situation in
many banks. Many of them have not the eligible paper to any
extent.
Senator BULKLEY. HOW many?
Mr. JOHNSTON. A very large amount. I should like to say this
Senator BULKLEY (interposing). How many do you think are
out of eligible paper in the New York district, say ?
Mr. JOHNSTON. Well, they have very little. I could not say they
were entirely out. I should like to give you an illustration of our
own institution.
Senator GLASS. The chief of the banking operations of the Federal reserve system on last Saturday evening told me they had ample
eligible paper.
Mr. JOHNSTON. YOU mean in the whole system?
Senator GLASS. Yes; in the whole system. He had particular
reference to New York. And the official figures were put in the
record when I made my speech on the so-called Glass-Steagall bill,
showing that they had" nearly $3,000,000,000 of eligible paper and
were discounting only about* a half billion—live hundred million.
Mr. JOHNSTON. Fifteen years ago 90 per cent of the business of
the bank of which I am president was commercial business and 90
per cent of our income came from those accounts. We have always
been a commercial bank. We are not a Wall Street bank and never
have been a Wall Street bank. The trend of business in the last
12 or 15 years has been commercial business down, down, down,
and last year only 22 per cent of our income came from the commercial business; 28 per cent came from loans on securities, bonds,
and stocks—I do not mean speculative loans; 21 per cent came from
investments, municipal, State bonds, and things like that; 49 per
cent of our revenue came from a class of income that is going to
be largely prohibited under this act.
Senator GLASS. IS not the reason of that that the Federal reserve
system has been transformed from a commercial banking system
largely into an investment banking system?
Mr. JOHNSTON. I do not think so.
Senator GLASS. And has favored bonds and securities rather than
commercial paper?
Mr. JOHNSTON. I do not think so. I think it is just the nature of
what is happening in the country; that the big corporations that
used to borrow money from us do not borrow. They are lending
money.
Senator GLASS. Well, ought they be permitted to lend money?
M r . JOHNSTON. N o ; I a m




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

147

Senator GLASS (interposing). They are not chartered for that
purpose, are they?
Mr. JOHNSTON. NO ; I am glad they are not permitted. You probably, of course, know that the associated banks in New York have
declined to do it for them by resolution.
Senator GLASS. Yes; I know they did, after I embodied in a proposed bill here a prohibition against it—and the day after to-morrow
when this bill is beaten, if it is beaten, they may change their regulation. may they not?
Mr. JOHNSTON. I do not think so.
Senator GLASS. YOU do not think they may do that?
Mr. JOHNSTON. I do not think there is any likelihood of it. I
do not think they did that for any fear of anybody, Senator.
Senator GLASS!! Oh, I do not apprehend they are afraid of me.
Mr. JOHNSTON. I spent six years
Senator GLASS (interposing). And I hope I am not afraid of
them.
Mr. JOHNSTON. NO, sir; they do not give you
Senator GLASS (interposing). Never have been yet.
Mr. JOHNSTON. The majority of these banks—they are honorable
men. I examined 1,180 of them, in over half of the States in this
Union, and I came out firmly convinced that the men in the banks
are men of honesty and their integrity is as high as anyone, not
even barring the pulpit.
Senator GLASS. Yes; but their judgment is not infallible?
M r . JOHNSTON. NO.
Senator GLASS. Because

the last man of them, almost, opposed the
enactment of the Federal reserve act. I have letters here, just picked
out from my correspondence this morning hurriedly, five or six of
them; one from a country banker, a bank that has $200,000 capital,
calling attention to the iact that he attended the October meeting
in 1913 in Boston, which almost unanimously denounced the enactment of the Federal reserve bill and came near to throwing out bodily
one of the members of the association that ventured to speak a word
on behalf of it, howled him down, would not let him speak.
Senator BFLKLEY. YOU recall that, Mr. Johnston, do you not ?
M r . JOHNSTON. Y e s , s i r .
Senator BULKLEY. And there

is no question but that the majority
of the banks were opposed to it ?
Mr. JOHNSTON. Yes, sir; they were, because they did not like the
.compulsory feature. That was the principal reason—like they do
not like the compulsory feature in this Federal liquidation
proposition.
Senator GLASS. N O : but they voluntarily subscribed 10 per cent
of their capital and surplus to your Federal Finance Corporation
Mr. JOHNSTON. National Credit Corporation.
Senator GLASS. In New York, and this is one-quarter of 1 per
cent.
Mr. JOHNSTON. I would not just exactly say, Senator, that they
voluntarily did it, because I happened to be in the conference over
at Mr. Mellon's home that night when the President of the United
States asked us to do it. He said they talked to the leaders on both
sides of the Congress and that, as soon as the Congress reassembled,




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

they would form the reconstruction corporation and take us out of
this position.
And then not only that; even assuming that we did voluntarily
form it, we elected the board and we supplied the management.
Senator GLASS. Yes.
Mr. JOHNSTON. And that is what we think stockholders ought to
have the right to do. We believe that is inherent in our Constitution, that the people that own the property ought to have some
say so in the running of the business.
Senator GLASS. DO not the member banks have some say so in
running the Federal reserve system? They elect six of the nine
directors of each Federal reserve bank.
Mr. JOHNSTON. I do not see that we have very much voice when
we furnish the capital and we are limited to 6 per cent interest, with
no hope of anything else, and when we have to furnish the capital,
whether we want to or not, and that is what we have to furnish in
this.
I do not say that maybe some of these measures are not good,
but I say just do not pick 011 one class of people to furnish the sinews
of war.
Senator GLASS. The sinews of war are to be devoted to the service
of that particular class of people. They are given 30 per cent of
the profits of the liquidating corporation. The point I am making
is that there was no outcry in the banking community against furnishing subscriptions of 10 per cent of their capital and surplus to your
Federal Credit Corporation in New York.
Mr. JOHNSTON. Half the banks of the country did not subscribe.
Senator GORE. Those that did paid how much ?
Senator GLASS. "Well, I think much more than half of the banks
of the country subscribed. I grant you they were coerced, but
they subscribed. You note the difference between one-quarter of
1 per cent subscription of half of the banks and the requirements of
the corporations.
Mr. JOHNSTON. I think it was 2 per cent of our deposits that we
subscribed to the national credit.
Senator GORE. And how much did you pay in ?
Mr. JOHNSTON. We were called for, I think it was G per cent of
O
the subscription, Senator.
Senator GORE. DO you know how much that was ?
Mr. JOHNSTON. About one hundred eighty-five or ninety million
dollars.
Senator GORE. I mean your bank.
Senator GLASS. YOU only subscribed that, I understand you to
say, because you were assured by high authority that the" whole
thing would be taken over by a new organization ?
Mr. JOHNSTON. We were asked to do it on that basis, as a quick
stop-gap, and we did it.
Senator GORE. HOW much did your bank put up ?
Mr. JOHNSTON. Five millions.
Senator GORE. YOU mean you subscribed that much or paid in
that much?
Mr. JOHNSTON. We subscribed five millions and paid in I think it
was three millions, Senator. Now they are going to pay back 15 per
cent of the amount on this coming Monday.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

149

Senator GORE. Did it render very much service?
Mr. JOHNSTON. Oh, I think it did, without any question. Yes, sir;
I think it did fine work. Part of it was psychological.
Senator GORE. It saved two or three pretty important banks?
Mr. JOHNSTON. It did, yes, sir; more than that.
Senator GLASS. We have made three efforts, psychologically, to
save the country. Now I want to make one, practically, to save it.
Mr. JOHNSTON. Senator everybody believes that. I do not believe
there is a man in the banking business that does not believe that
about you. The thing is, we differ with you.
Senator GLASS. Yes.
Mr. JOHNSTON. Of course, that being the case, one of us has got
to be wrong, one side.
Senator GTLASS. That is right. I was right once and I hope I am
right again.
M r . JOHNSTON. Y e s , s i r .

I haven't anything more to say, Senator, unless you want to ask
questions.
Senator TOWNSEND (presiding). Are there any further questions
the Senators would like to propound to Mr. Johnston ?
Mr. JOHNSTON. I would like to say this further thing: We are not
interested in time deposits, the saving business. I am not speaking
of that on my own account.
Senator GLASS. I would like to ask you, Mr. Johnston, do you
favor the affiliate banking system?
Mr. JOHNSTON. Probably the best thing I could say to you, Senator, is that we had one of those institutions and we voted in January
to turn it into the bank. It has never been really active. That is,
we never offer securities to the public other than Government bonds
and municipals, and it was not serving any purpose, and it looked
like it was out of style, and for many reasons we turned it in. I
do think there is a place for it. Some of the institutions have built
up very large ramifications, and it would be very disturbing in these
ramifications to unscramble.
There is another thing I would like to say: I wish very much
that your measure about $100 par bank stocks had been passed 15
years'ago.
Senator GLASS. I wish all of it had been passed 15 years ago.
Mr. JOHNSTON. We were one of those foolish virgins that split our
stock up. But now we have got 14,000 stockholders, and how are
we going to get units of $10 back into the whole? How are we
going to force the stockholders to bring it in ? I believe if that was
passed, not to be retroactive but to become active with the passing
of any measure, I think all of the big banks would just as soon as
the}7 could unscramble the situation, because we have got to. Now it
is just impossible, because you have a whole multitude of people who
are not interested in your bank but they have got stock in half a
dozen banks. We thought it was going to bring more customers.
We were wrong about it: it did not bring more customers.
But I think it would be a great hardship on us if we are going
to try to unscramble this stockholding proposition, because I do not
see how you can force a man to turn in his multiple shares of stock
so that he can get the less number. I just do not see how you can
force him to come in and buy another share or do something Vitli it.



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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator GORE. YOU can not arrange to buy his nine shares, for
example, that he has?
Mr. JOHNSTON. Suppose he does not want to sell it?
Senator GORE. YOU could not make him do that?
Mr. JOHNSTON. NO, sir. We have in our bank 9,000 stockholders
that own less than 100 shares. We have over 3,000 that own less
than 10. I do not know how I am going to get those 3,000 to bring
that stock in and put it all in the pot. I wish I could.
Senator GLASS. IS it not being done by the large corporations of
the country to a considerable extent?
Mr. JOHNSTON. Some of them are doing it in capital adjustments
where they are wiping out losses.
Senator GLASS. TO get back to the affiliate question, Mr. Johnston,
if the affiliate system is to persist do you think it ought to go unrestricted as at present?
Mr. JOHNSTON. I think it ought to have the same supervision that
the parent institution would have, same examination and supervision.
Senator GLASS. And no limitations upon the character of its business ?
Mr. JOHNSTON. I do not think it should be entitled to borrow from
the parent institution any more than any other customer could, on
any different basis from any other customer. In other words, I do
not think the parent institution should furnish its capital or its
capital assets to its affiliate. I do not think that is sound. Of
course, in the period that we have been through, a period of seven
or eight years boom, you might say, many abuses have crept in.
That is human nature.
The thing I want to point out is, after my long experience of governmental service—I have examined banks" in more States, I think,
than any other examiner ever examined, because I was young and
could take more punishment—I say the majority of the banks are
honest; that they are honest at heart; they want to do right.
Senator GLASS. Nobody doubts that. .
Mr. JOHNSTON. And I am just fearful this bill, Senator, is going
to make it very difficult for them to operate. I do not know what
our bank is going to do with 49 per cent of its investments already
in a class, in a field, that this bill practically outlaws.
Senator GORE. Most of that is Government bond investments?
Mr. JOHNSTON. In loans on bonds and stocks and securities.
Senator BULKLEY. Will you develop what you mean by saying it
" outlaws " them ?
Mr. JOHNSTON. Well, we can not loan on those and borrow at the
Federal reserve bank if the Federal reserve's agent says we should
not, unless it is in some emergency. This bill practically outlaws it.
Senator GLASS. YOU can not borrow on them at the Federal reserve
bank under existing law, and could not for the last 18 years. It outlaws, if you call it that, investment loans for rediscount purposes.
Mr. JOHNSTON. We do not borrow on them, Senator; never have;
do not want to.
Senator GLASS. Yes; but you say we are outlawing them here, and
that has been the provision of the Federal reserve act for 18 years,
Mr. Johnston.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

151

Mr. JOHNSTON. Yes; but in this bill here, as I read it, we just can
not do any security business or loan them money, people who are
doing security businesses.
Senator GLASS. I think you will have to read the bill again. Let
me call your attention
Senator BULKLEY (interposing). Where do you find that, Mr.
Johnston?
Mr. JOHNSTON. Well, now, here is one, section 8 :
Upon affirmative rote of not less than six of its members the Federal
Reserve Board shall have power to fix from time to time for any member bank
the percentage of the capital and surplus of such bank which may be represented by loans protected by collateral security.

Senator GLASS. Why would you say that that outlaws your collateral now? You say the bankers are honest. Do you think the
members of the Federal Reserve Board are honest?
Mr. JOHNSTON. We do, but we. do not want to give that power
to anyone. We do not want to give any more power—I do not think
any corporation would want to give any more power to anybody
but to the people who run their business. We might have a set o£
men at one time that are very favorable, and we might have another
set of men at another time later on that are unfavorable.
Senator GLASS. Do you think the banking business of the country
ought to be left wide open to do as it pleases without legislative
restriction ?
Mr. JOHNSTON. I think it would be a lot better. It is in England
practically without any restriction, and they have had no failures.
Senator GLASS. There are a good many things here that are not
in England.
Mr. JOHNSTON. And the same in the Canadian system; it is pretty
much the same way. I am sure that no restriction whatever would
be much better than too much restriction. We ran 93 years at the
Chemical Bank and did not have a set of by-laws and accidentally
fouiid it out, although every examiner had said in his report in
answer to the question By-laws satisfactory/'
Senator GLASS. Would you like to introduce the English system
here of periodical settlements on the stock exchange?
Mr. JOHNSTON. I do not know that that would be a very bad
thing. I have often thought it probably would be a good thing to
have the periodical settlements.
Senator GLASS. We would not have a repetition, then, of such
riots of stock gambling as we had in 1928 and 1929. would we ?
Mr. JOHNSTON. I think it would help lessen that.
Senator MORRISON. Mr. Johnston, what control under the present
law has the Federal Reserve Board of the loans and securities that
the banks in the system may accept?
Mr. JOHNSTON. I do not think they have any. I do not think they
should.
Senator MORRISON. I agree with you very heartily.
Mr. JOHNSTON. I do not think tliey should. I was this way when
I was in the Government service: I wanted more power to administer these banks, although I was in the supervising service. That
is the history and trend of our Government.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator MORRISON. Under the present law and for some time the
Federal reserve bank, until this 15-da^ provision was put in it, discounted notes of a character described in the act ?
M r . JOHNSTON. Y e s , s i r .
Senator MORRISON. And
M r . JOHNSTON. Y e s , s i r .
Senator MORRISON. And

that is about all they did, was it not ?

the purpose for which the note was discounted controlled its eligibility?
Mr. JOHNSTON. That is right.
Senator MORRISON. And as to the rest of the bank's funds, why.
they were administered under the laws of the States when tliev were
State banks who had become members of the system, or under Federal law that controlled the banking system, and they hud no right
to dictate to the bank how it should invest its funds at a\l.
Xow you think under this law that they would have such power?
Mr. JOHNSTON. Why, certainly. I do not know how we can operate under it.
Senator MORRISON. YOU are acquainted with the banking conditions in the States where there are not big cities, are you not ?
M r . JOHNSTON. Y e s , s i r .
Senator MORRISON. For instance, North Carolina ?
Mr. JOHNSTON. I grew up in one of them, on a farm.
Senator MORRISON. I know you do lots of business

State, your bank does.

down in my

M r . JOHNSTON. Y e s , s i r .
Senator MORRISON. DO you

think these new provisions giving this
control would be helpful or hurtful to the type of banking done in a
State like North Carolina ?
Mr. JOHNSTON. I think it would hurt it.
Senator MORRISON. The banks in such areas of the country as that,
the percentage of their business, generally speaking, is nothing like
so large in the character of paper eligible for discount as in the
larger cities, is it?
Mr. JOHNSTON. That is true.
Senator MORRISON. DO jrou think they could run a bank in a State
like North Carolina with the towns and cities and the general type of
business there purelv upon commercial paper?
Mr. JOHNSTON. Tney would starve to death.
Senator MORRISON. They do not do it, do they?
M r . JOHNSTON. NO, s i r .
Senator MORRISON. And

in your opinion it would perish them if
they undertook it? And this" law seeks to regulate not only what
they will discount but that they will not discount eligible paper
unless the bank is run according to the provisions of this act, or may
not do it?
Mr. JOHNSTON. That is right.
Senator MORRISON. And you do not think that would help us?
Mr. JOHNSTON. NO, sir: i do not think it would help anyone. I
do not think it is right or fair. "These banks belong to their shareholders. I assume that they have been classified as a semi or quasi
institution receiving deposits. It is no more than-any other large
company in a semi condition. But I think there are inherent, under
our law and our Constitution, property rights. I do not think there




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

should be any more systems set up in Washington or any other place
that are going to have the right to dictate to the boards who are
elected by the shareholders of a bank as to the type of business that
they should do.
Senator MORRISON. YOU do not imply by that that they should not
have laws regulating honesty and preventing rascality and all that,
when you say they should not be allowed to control the business part
of the bank?
Mr. JOHNSTON. Unfortunately, you can not prevent rascality.
Senator MORRISON. Well, you can pass law condemning it.
Mr. JOHNSTON. Yes, you can, but we have got to remember that
banking is like life—it is the law of averages. Among the 12
Apostles there was one Judas, and you find them creeping into the
banks, and now we should not punish the bankers who want to run
their banks honestly, who believe that they know how to run them.
They do not want to be punished by having to ask somebody in
Washington just what they can do.
Senator MORRISON. Well, I think I agree with you; with what I
think you mean. But you do not mean that you do not think there
ought to be laws regulating the integrity of officials of banks?
Mr. JOHNSTON. Yes: there should be—just as few as we can have.
Senator MORRISON. But you mean that as to how they
Mr. JOHNSTON (interposing). Invest their money.
Senator MORRISON. Administer their funds.
Senator GLASS. DO you think that the national bank act should
be repealed ? It undertakes to do that. It undertakes to determine
what classes of loans national banks should make. Do you think
that should be repealed ?
Senator MORRISON. Senator, would you just let me get through
with him, please, sir? It is disagreeable to you. May I?
Senator GLASS. Oh, you have the same privilege here that I have.
I ventured to ask a question, but you can go ahead.
Senator MORRISON. What I mean by that, I was asking him some
and just about through with what I wanted to ask him.
There is no law now regulating the right of a member of the
Federal reserve bank to make any loan which it deems wise to make,
except such criminal laws as regulate the dishonesty of it, is there ?
Mr. Johnston. There are limitations.
Senator Morrison. A Federal bank can not loan money on real
estate ?
M r . JOHNSTON. Y e s , s i r .
Senator MORRISON. They

had that, which they wisely changed.
But they can and have been administering their assets subject to
criminal laws ?
M r . JOHNSTON. Y e s , s i r .
Senator MORRISON. Demanding

with a free hand, have they not?
M r . JOHNSTON. Y e s , s i r .
Senator MORRISON. DO you

honesty and integrity and so on,

think it would serve any good purpose to clothe a lot of officers here in the country with the right
to say to these banks that " If you run your banks in such and such
a manner then we will not discount your otherwise perfectly eligible
notes"?




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NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

Mr. JOHNSTON. I do not think it would. We have clothed a lot
of officers in a certain branch of supervising in connection with
what is known as the eighteenth amendment, and I am very sorry to
say that it certainty has not been effective. I do not believe it would
be very much more effective. I am afraid not, in the banking business. I just do not believe we can have six or eight men prescribe
how twenty-live or thirty thousand banks are going to run over the
country.
Senator MORRISON. DO you think if they exercised the power
in that act on a bank in North Carolina it could profitably transact
the banking business?
Mr. JOHNSTON. It could not.
Senator MORRISON. It could kill it if they wanted to, absolutely,
could it not?
M r . JOHNSTON. Y e s , s i r .
Senator MORRISON. That is
Senator WATSON. DO you

system?

M r . JOHNSTON. NO.
Senator WATSON. DO
M r . JOHNSTON. NO.
Senator WATSON. DO

all.
want to abolish the Federal reserve

you want to amend it?

you want to let the thing run along just
as it is?
Mr. JOHNSTON. At present.
Senator WATSON. YOU would not abolish the system of Government inspection ?
Mr. JOHNSTON. NO. I could not say that even if I wanted to,
because I spent six years doing it.
Senator WATSON. I know, but maybe you found out something
about it in six years. Do you want to?
Mr. JOHNSTON. N O ; I think it is a good system of inspection.
Really, it should be better fortified.
Senator WATSON. Is it helpful or harmful ?
Mr. JOHNSTON. It is helpful, of course. All those are.
Senator WATSON. HOW far would you go with governmental
supervision ?
ilr. JOHNSTON. Give them plenty of authority to examine; see
that the}'' live within the statutes under which they operate. I would
give them no power whatever of operation. It is dangerous when
you put the power of operating in the hands of governments.
Senator MORRISON. That is the point exactly.
Senator WATSON. Are there any features of this bill that you
would pass if you had your way about it ?
Mr. JOHNSTON. There probably are; yes. sir.
Senator WATSON. What are they?
Mr. JOHNSTON. I have to go over it. I have only pointed out—
I did not aim to come here to pick this bill to pieces. I have only
aimed to take out some of the essential things, and I hope Senator
Glass will realize that I have not done that. Senator, I have a very
high regard for you.
Senator GLASS. And I have for you, Mr. Johnston.
Mr. JOHNSTON. And I am not actuated by anv selfish motive in
this.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

155

Senator GLASS. I have always judged you as a banker of great
ability. The fact that you have dispensed with your affiliates answered my objection to the affiliate, for that matter. But I do not
exactly bring myself to agree with you on the contention that there
should be no restrictions upon the operations of the individual banks.
You, then, would repeal that provision of the national bank act which
prescribes that not more than 10 per cent of the capital of a bank
should be loaned to one individual borrower?
Mr. JOHNSTON. You refer to the provision that says no more than
10 per cent of the capital and surplus shall be loaned to any one
institution?
Senator GLASS. Yes.
Mr. JOHNSTON. I think that is a sound provision.
Senator BULKLEY. But it ought not to be a matter of law ?
Senator GLASS. NO.
Senator BULKLEY. IS that what you mean—it ought not to be a
matter of law? It is already there, I know; but you would like
to repeal it, would you not?
Mr. JOHNSTON. lSro.
Senator BULKLEY. It is inconsistent with your theory that there
should be no regulation.
M r . JOHNSTON. NO.
Senator MORJRISON. I
Senator GLASS. If I

do not think it is, the police regulations.
may, with the permission of the Senator
from North Carolina, I would like to continue my inquiry.
Senator MORRISON. If the Senator from Ohio will let you, I am
willing.
Senator GLASS. Then you would repeal that provision of the law
that undertakes to put a limitation upon real estate loans by a
national bank?
Mr. JOHNSTON. I think all those provisions are sound.
Senator GLASS. "Well, but not according to your theory. A bank
should be left to do as it pleases; it ought not to be subject to any
supervisory power, Mr. Johnston—that is the record that you have
made here.
Mr. JOHNSTON. There is quite a difference between supervising
and administration.
Senator BULKLEY. What do you mean by that? What is in the
bill that makes that distinction?
Mr. JOHNSTON. That some board in Washington can tell us just
what we can do with our funds.
Senator GLASS. They do not undertake to tell you just what you
can do with your funds. Would you repeal this provision of the
Federal reserve act which confides to the Federal Reserve Board
here at Washington the exclusive right to define eligible paper,
and says, "but such definition shall not include notes, drafts, or
bills covering merely investments or issued or drawn for the purpose
of carrying or trading in stocks, bonds, or other investment securities. except United States bonds?" Would you repeal that?
Mr. JOHNSTON. I do not think so. It is quite different when
you
Senator GLASS (interposing). You said so.
Mr. JOHNSTON. It is quite different when you propose to say to us,
" Because you happen to have a certain per cent of your capital



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NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

funds or your depositors' funds loaned on a certain class of securities that may not suit us, you can not use the Federal reserve bank
of which you are a member unless you regulate that amount to just
what we think is proper and right." That is the difference. That
is administration; that is not supervision.
Senator GLASS. In other words, then, do you think a member bank
may loan if it pleases every dollar of its depositors' money 011 speculative securities, and then go, as of right, to the Federal reserve
bank and recoup itself out of the resources of the Federal reserve
bank, and that nobody in control should have the right to say you
can not do that ?
Mr. JOHNSTON. Of course, that is a pretty broad statement.
Senator GLASS. That is stating it.
Mr. JOHNSTON. TO say a bank would take all its money and loan
it on speculative securities and then go to the Federal reserve to
recoup.
Senator GLASS. Well, but you said the bank should be permitted
to operate without any restraint at all.
Mr. JOHNSTON. I say I think it would probably be just as well if
it had less restraint, because good banks are going to run right
whether you have any laws or not, and poor banks, you can not get
enough policemen to make them; badly managed banks, you can not
get enough policemen to make them run right.
Senator GLASS. That is what I say; you think the banking business of the country should be left to the judgment of those who have
money invested
Mr. JOHNSTON (interposing). I11 the main I would say yes. I
would say that the stockholders elect board of directors, and they
should manage it within the laws that we have in the various States
and the Federal reserve system.
Senator GLASS. Why any laws in the States at all? If there are
to be no Federal laws to put limitations upon national banking,
why any laws in the States to put limitations upon State banks?
Mr. JOHNSTON. We already have limitations of laws.
Senator GLVSS. I know, but why have them?
Mr. JOHNSTON. It is a question of degree. It is a question how
far you want to go.
Senator GLASS. We do not think we have gone very far in this bill.
Senator WATSON. Has governmental inspection and supervision
up to the present time done more harm than good?
Mr. JOHNSTON. Oh. it has done more good.
Senator WATSON. More good ?
Mr. JOHNSTON. Why, certainly.
Senator MORRISON. Mr. Johnston, don't you think there are other
types of credit that ought to be recognized in our banking system
besides these particular types mentioned in the Federal reserve act
and made eligible for discount ?
Mr. JOHNSTON. Of course, that is a question that many people
have given serious thought to. Many people think that municipal
securities or State securities should. I think that the theory of the
Federal reserve system was that the paper should be self-liquidating.
Senator MORRISON. Exactly, but there was no effort in it to dictate
to banks what they should do about individual credits.
M r . JOHNSTON. N o , s i r .




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

157

Senator MORRISON. Or other types of credit; but as to that particular type of credit that that reservoir was put up and to be always
open and ready to furnish currency on such paper as that, but there
was not any provision then to dictate what the banks should do
with other funds, was there?
Mr. JOHNSON. N O ; not that I know of.
Senator GLASS. YOU will concede that in section 5200 of the Revised Statutes there is an attempt to dictate to the national banks
the classes of credit that they may accord, will you not?
Mr. JOHNSTON. That is ever increasing in governments and in
central banking. The history of central banking
Senator GLASS (interposing). Well, but there are provisions in the
Revised Statutes that undertake to restrain the operations of national
banks, are there not?
Mr. JOHNSTON. They limit them under the law as to the tpyes
and amount of investments and certain things that they may do.
Senator GLASS. That is what I am saying.
Mr. JOHNSTON. Yes, sir; it is in the national bank law.
Senator GLASS. YOU think they ought to be repealed, do you ?
Mr. JOHNSTON. I would not say so, but I would not want to give
the power to the Comptroller of the Currency to say just how much
any national bank would have, or any other body in Washington,
or anywhere else.
Senator GORE. Mr. Johnston, there was a good deal of opposition
on the part of the banks to the Federal reserve act when it was
pending, was there not?
Mr. JOHNSTON. Yes, sir; there was.
Senator GORE. A good deal of that opposition was unjustified, as
events have proven?
Mr. JOHNSTON. I think that is true, Senator.
Senator GORE. Don't you think a good deal of the opposition was
due just to the instinct of conservatism and the fear of change, and
not to any well-grounded opposition to the bill itself?
Mr. JOHNSTON. I was strongly in favor of the Federal reserve
system. In fact, I wrote the first book that came out on it, most
•copies of which I have withdrawn from circulation that I could get
my hands on.
"Senator GLASS. You mean after it was adopted?
Mr. JOHNSTON. NO, sir; just about simultaneously with it. I
followed the legislation. I was here and I was very strong for it.
Senator GORE. Did you retire those books from circulation?
Mr. JOHNSTON. Yes; as fast as I could get my hands on them.
Senator GLASS. I would like to have discovered you at that particular time.
Senator WATSON. Perhaps he will send you one of his books.
Mr. JOHNSTON. Senator, I do not want to be construed as saying
that I wrote an explanation of what the Federal Reserve might do.
Senator GLASS. I understand what you want to say.
Mr. JOHNSTON. I do not mean that I had anything to do with the
act. I think the banks' prejudice against the measure was largely
one that thev were compelled to do this. You know, we American
people are independent people. We do not like to be told we just
have to do things.
111101—32—FT L




11

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NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

Senator GORE. Oh, I get your reaction 011 that. You do not like
to be made to do what you have to do.
Mr. JOHNSTON. Yes; they would probably have come in, Senator,
if there had been a free-will affair, if they had the choice.
Senator GLASS. .Yes; like the Aldrich bill that was unanimously
approved at New Orleans before it had ever been read, and that was
very much more compulsory in its provisions than the Federal
reserve act ever was. The Federal reserve act was not compulsory.
It did not compel a national bank to come in. It might surrender
its charter and transform into a State bank if it wanted to.
Mr. JOHNSTON. YOU would not call that compelling them?
Senator GLASS. NO. Just as the Aldrich bill provided that if they
did not come in under the Aldrich system, which was to be controlled
absolutely by the banking community, practically their holdings of
United States bonds would be dreadfully depreciated.
Mr. JOHNSTON. Senator, I would say, just as a different point of
view, that is very much like a farmer that says to his son, " Unless
you plow that field up over there you have got to move out of here
and go somewhere else to live."
. Senator GORE. That is what I think.
Senator GLASS. Yes; and under the Aldrich bill, " If you do not
plow that field out there, we will take your horses and plow away
from you." That is what the Aldrich bill provided, and you swallowed that without a grimace. Yet you opposed the Federal reserve
act.
Mr. JOHNSTON. When you say we swallowed
Senator GLASS (interposing); Not you, but the American Bankers5 Association.
Mr. JOHNSTON. The American Bankers' Association; yes.
Senator GLASS. Yes.
Senator GORE. What I was trying to get at is how much of your
present condition is due to the instinct of conservatism and how
much to the fear or fact that this might aggravate the deflation.
Mr. JOHNSTON. I am sure it is going to make conditions much
worse in the bond market than the deflation. If I am prejudiced,
I do not know it. I do not suppose anyone knows when he is prejudiced, anyway. So I may be wrong on that.
Senator MORRISON. Mr. Johnston, is not the effect of the Federal
reserve system, as they are administering it and as they interpret
it, to depreciate the desirability of all oflier types of credit except
those enumerated in that act? I want you to get this: I am not
so much concerned about whether you all are in favor of it or not or
how it will affect you, although I would not want to do you any
harm, any injustice. But upon the whole country, and especially
the section of country that I in part represent here, will not this
law, these amendments that we are proposing to make to it, further
tend to depreciate the desirability of all other types of credit except those short-term, business-in-process credits therein enumerated?
Mr. JOHNSTON. That is my belief
Senator MORRISON. Of every type?
M r . JOHNSTON. Y e s , s i r .




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

159

Senator-MORRISON. And your opinion about that is based on an
actual business contact with the banking life of the whole country,
is it? Your bank is doing business in most of the States?
Mr. JOHNSTON. In every State.
Senator MORRISON. Ancl your opinion is that it would further depreciate all other types of credit except those few types enumerated
in there ?
Mr. JOHNSTON. I think so. I do not know how
Senator MORRISON. And do you think that it would be a good
thing for the whole country to do that?
Mr. JOHNSTON. I think it would be a bad thing.^
Senator MORRISON. I agree with you most heartily.
Senator GLASS. What additional classes of paper does this bill
exclude from rediscounting operations more than the existing law?
Mr. JOHNSTON. I do not think it makes any change in the classification of paper to be rediscounted.
Senator GLASS. Of course not, but you have just said—;—
Senator MORRISON (interposing}. But it does make a difference in
the power given these people to dictate to the banks what they shall
do on the other credits?
M r . JOHNSTON. Y e s .
Senator ^MORRISON. That

is the big thing in the whole business,
is it not, in the new law, that it gives them authority to say to
banks, " I f you make these other loans then you can not have the
benefit of discounting the paper which otherwise would be eligible? "
Mr. JOHNSTON. That is true.
Senator MORRISON. And indirectly control the administration of
the whole aspects of the banks that belong to it; and in the small
towns and cities of the country I believe you have stated that you
thought if that power was exercised they could perish the bank to
death, or make it impossible to profitably do business ?
Mr. JOHNSTON. I think that is true, and I think it would have a
very disastrous effect on the Federal reserve system.
Senator MORRISON. And on the whole country?
Mr. JOHNSTON. I sincerely say that. I think it would have a very
disastrous effect on the entire system.
Senator GORE. NOW, Mr. Johnston, I want to get back to your
theory and philosophy of this business. You say that your stockholders have invested their capital in the bank and you think they
ought to be allowed to run it ?
Sir. JOHNSON. Yes. They ought to be allowed to elect their board
of directors who select the officials to operate the bank. I think that
is inherent.
Senator GORE. What is the ratio between your capital and surplus
and your total deposits ?
Mr. JOHNSTON. Our capital and surplus are sixty-five millions
and our total deposits two hundred and seventy-five or three hundred
million.
Senator GORE. And you make most of your money out.of your depositors' money, do you not ?
M r . JOHNSTON. NO, s i r ; w e d o n o t .
Senator GORE. A considerable portion




of it?

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NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

Mr. JOHNSTON. We make some of it; we make about 1 per cent
on our depositors' money. Our income last year averaged on all
our funds 3.73 per cent.
Senator GORE. One per cent on deposits?
Mr. JOHNSTON. About 1 per cent was made on deposits.
Senator GORE. What I was trying to get at? since your stockholders
derive their profits largely from the deposits, money put in your
bank by your depositors
Mr. JOHNSTON (interposing). Partly, Senator, if I may interrupt.
I think it is about 50-50 from all capital funds and from our profits
on our depositors.
Senator GORE. Of course, the interest from your depositors represents quite as much as the capital invested by your stockholders?
Mr. JOHNSTON. Their deposits, of course, is their money, that we
have to stand ready to give back to them at any time. That is
an entirely different relation from the stockholders' relation.
Senator GORE. Of course, when they deposit it, it becomes yours
instead of theirs?
Mr. JOHNSTON. I do not think so. We are only holding it for
them. If you put wheat in the warehouse, I do not think it belongs
to the warehouse man.
Senator GORE. I think the deposits, when they are placed in the
bank, become the property of the bank. They have a right to draw
it out, but you have a right to spend it and use it.
Mr. JOHNSTON. I could not agree with you on that, Senator.
Senator GORE. Yes; well, that is immaterial anyway.
M r . JOHNSTON. Y e s , sir.
Senator GORE. It makes

the point I am getting at even stronger.
You say the money is still the depositors' money. What additional
guaranty do you think ought to be erected to protect that depositor
and see that lie gets liis money out of your bank, if it is his property
and not yours?
Mr. JOHNSTON. I do not see why he should have any guaranty at
all, because he still retains title to it.
Senator GORE. YOU think the stockholders, though, having the
property interest, ought to be allowed to run the bank in which his
property is, and yet you think the depositors who put their money in
your hands in trust, according to your theory, ought not to have any
right at all.
Mr. JOHNSTON. He has the right, because he can draw his money
out if he wants to.
Senator GORE. Yes; but suppose it fails?
Mr. JOHNSTON. If he puts it in a bad bank and it fails he will not
get his money out.
Senator GORE. NO ; but ought there not be some guarantee that he
will?
Mr. JOHNSTON. I do not think so, unless AVE are going to guarantee
all elements of society against misfortunes and evils of all kind.
Of course, if we are going to have socialistic government, then we
ought to guarantee everybody against all manner of things.
Senator GURE. But you are making your point now that stockholders, having invested their capital in your bank, ought to have
a property right and it ought not to be interfered with.
Mr. JOHNSTON. I did not say that.




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator GORE. That is your general theory.
Mr. JOHNSTON. I say they ought not to ask any Government board
in Washington
Senator GORE (interposing). You said that it ought to be like in
England.
Mr. JOHNSTON. I think it would be better if it was like that. I
did not say I thought it ought to be.
Senator GORE. 1 ou mean you think the stockholders ought not to
be regulated in the use and administration of their property and
property rights, and yet yon think a depositor, who puts his property
m your keeping, ought not to have any particular guarantee further
than you state?
Mr. JOHNSTON. I could not say that I do. Senator. We have been
doing that for 108 years successfully, and if we had had to pay for
the fellow that has not been doing it successfully these 108 years, we
would have had to pay a very large sum.
Senator GORE. I agree with that. I think the banks ought not to
guarantee everybody's debts. I think that is what it amounts to.
But what about the depositors being required to put up a sort of
an insurance on the stock—they are the ones that take out the policy ?
Mr. JOHNSTON. Of course, some of them do that now, you know.
The Ford Motor Co. operates that way in many of its banks and
pays that premium itself. Other companies do that. I am told. We
have no business of that nature. We have never had anyone who
wanted to put money with us on that basis; only on our long record
of honesty and integrity. We do not want it.
Senator GORE. DO you pay interest on commercial deposits ?
Mr. JOHNSTON. Yes; we pay interest of 1 per cent.
Senator GORE. What proportion of your deposits are demand
deposits ?
Mr. JOHNSTON. Practically all of them: 90 per cent.
Senator GORE. And could you make an estimate of what proportion of demand deposits result from the actual deposit of cash and
cash items and what results from loans and discounts, credit transactions?
Mr. JOHNSTON. Oh, the great bulk of deposits come from the
deposit of checks and cash.
Senator GORE. NO cash items
Mr. JOHNSTON. There is practically no borrowing. Our borrowing is down to 20 per cent. It has just disappeared. They are not
borrowing. We want more business. We would like to take on
$50,000,000 of it to-day if we could find it over the country.
Senator WAGNER. Is it that there is no borrowing because there
are no loans being sought or because loans are being sought but are
being refused by the banks?
Mr. JOHNSTON. NO, sir; they are just not borrowing.
Senator WAGNER. That question has been the center of much controversy in the Senate.
Mr. JOHNSTON. These companies all raised their capital during
our hectic days.
Senator GORE. HOW is that?
Mr. JOHNSTON. The companies during the boom period from 1922
on up to 1929, many of them, increased their capital and took in so




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NATIONAL.

AND FEDERAL R E S E R V E BANKING SYSTEMS

much money on capital funds that they do not have to use the
banks.
,
Senator GLASS. And loaned a good deal of it on the stock exchan"e ?
]SIR. JOHNSTON. Many of them did; yes, sir; took it out of the #
banks and did that, and they got frightened in '29 and asked us
to pay it back to them, and that is when we went to the Federal
reserve and borrowed that huge sum of money for a very short time.
Senator MORRISON. NOW, Mr. Johnston, if this law were passed
like it is would it not be necessary for most of the banks in the South
and the agricultural sections of the country, where there are not large
cities, to collect largely their present credits and reinvest them or
lose their right to discounts under the Federal reserve system?
Mr. JOHNSTON. Unless the big banks in the centers would supply
them.
Senator GLASS. What provision of the bill requires that?
Senator MORRISON. The provisions in which
Senator GLASS (interposing). I am asking Mr. Johnston what
provision of the bill requires that.
Mr. JOHNSTON. Well, it is in the limitation of the type of business
that they can do.
Senator GLASS. What is the limitation on their rediscounts in this
bill ( What limitations are different from the existing law ?
Mr. JOHNSTON. I do not know that there is any limitation, but
there is a threatened limitation that you can not borrow at all
unless you do to suit some board here in Washington.
Senator GLASS. I am asking you to point to that provision of the
bill that requires the country banks to dispose of all of their loans
and collateral before they can get accommodations at the Federal
reserve bank.
Mr. JOHNSTON. Well, under this correspondent bank provision in
this bill where it says that you can not have a correspondent if you
do not do certain things, I take it to come under there.
Senator GLASS. YOU think that that provision of the bill requires
all of the banks throughout the country to dispose of all of their
collateral loans before they can get accommodation at the Federal
reserve bank ?
Air. JOHNSTON. T think many of them. As I read it and study
it, it would seem to me that we are going to have to abandon a
great deal of our business in many of the States. Many of our
customers, for example, many mortgage bond companies, that we
have been doing business with, many agencies that we have supplied
credit during two or three months while they were collecting these
loans, the large life insurance companies—all those are going to be
classes of securities that are going to be taboo here for us to have.
Senator MORRISON. What I am driving at is that if the bank is
now in that condition, if they are, and then apply for discounts of
notes, then they can refuse to discount it, if the bank is in the condition condemned by that act. And I ask you if it is not a fact
in your opinion that most of them are now in that very condition.
Senator BULKLEY. What provision? I would like to know what
it is.
Senator MORRISON. That they have got loans other than eligible
paper, real-estate mortgages, individual loans secured by stock or




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

163

good notes without any security at all. There are lots of them
in that condition all over the country.
Mr. JOHNSTON. They are usually the best, in my estimation.
Senator MORRISON. Yes; all those types of loans. If the bank had
such an assortment of that sort of credit as was condemned by this
new law, then it would be necessary for it to collect those credits
and change them into the uncondemned character. Don't you think
that that would tear the South all to pieces, if that were undertaken
at this time ?
Mr. JOHNSTON. I am afraid it would. I hope it does not happen.
We are very large lenders of money in the South, as you know,
Senator.
Senator GLASS. Mr. Johnston, do you think that is true? Do
you think there is any provision of this bill that requires that ?
Senator MORRISON. I do.
Senator GLASS. I did not ask the Senator from North Carolina.
Senator MORRISON. I answered you, though.
Senator GLASS. I asked the witness on the stand. Again, I would
like you to point to the provision that requires that.
Mr. JOHNSTON. I am fearful that is a tendency of the legislation;
Senator.
Senator BULKLEY. In what provision, Mr. Johnston?
Mr. JOHNSTON. Well, let me get the section here. Of course, I am
not quite as familiar with these sections, as to the numbers, as you
are.
Senator BULKLEY. We would like to know where you got that
impression.
Senator GLASS. While you are looking it up you might incidentally
answer this question, Mr. Johnston: Do you not know that power
is lodged in the Federal reserve bank now to refuse all rediscounts?
Mr. JOHNSTON. Yes, sir. I think, Senator
Senator GLASS (interposing). Tremendous power, is it not ?
Mr. JOHNSTON. If you will permit nje to say, I think you have all
the power now. I think you had it in precise terms.
Senator GLASS. That is an immense power, is it not?
Mr. JOHNSTON. I say I think you had the power that you are
really seeking to correct this stock and bond matter
Senator GLASS (interposing). It has not destroyed the banking
system, though, has it?
Mr. JOHNSTON. Oh, no; but I think the Federal reserve could have
cured it by raising the discount rate, which the Federal Reserve
Board did*not do. They did it finally, after the horse had gotten
out of the barn.
Senator GLASS. DO you think the board has had this power all
along?
Mr. JOHNSTON. I think the power to raise the discount rate
Senator GLASS (interposing). Do you think it has the power to
cure this situation?
Mr. JOHNSTON. TO cure the speculative situation by raising the
discount rate.
Senator GLASS. It did not destroy the banking situation because of
that?
M r . JOHNSON. NO.




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NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

Senator GLASS. Well, I say, to cure the situation
Mr. JOHNSTON (interposing). I think that is a power that belongs to the board, in the Federal reserve bank. I really think it
belongs to the Federal reserve banks.
Senator GLASS. The Federal reserve banks have complete power
to decline any loan that they please; isn't that true ?
M r . JOHNSTON. Y e s , sir.
Senator GLASS. Exactly. Courts have decided that.
Senator BULKLEY. I would like to see that language that

is going to " ruin the South."
Mr. JOHNSTON. Senator, you are speaking from it.
asked me a question.
Senator MORRISON. Section 8, it says:
Subsection (m) of section 11 of the
amended to read as follows:
" Upon the affirmative vote of not less
Reserve Board shall have power to fix
bank the percentage of the capital and
represented by loans protected by " —

you think
You have

Federal reserve act, as amended, is
than six of its members the Federal
from time to time for any member
surplus of such bank which may be

Not stock exchange collateral or speculative collateral but "collateral security."
And the spirit behind this bill and all of it makes it very clear
to me that the whole purpose of it is to see to it that these banks
do not invest extensively except in the character of the paper
favored by the gentleman behind the legislation. It will give them
that power, and there it is, and if they should condemn the types
of credit come to be called " frozen " and all that simply because it
is not payable in 90 days or 6 months and commercial business-inprocess, they could make every bank in the country reform the investment of its securities to meet with their demands, and under
it, if they carry it out, the spirit that they have radiated from there
all the while, all over this country, why, the banks could not loan
on anything but those types of security that the gentleman behind
this bill seems to have exalted into the only important credit in this
country. That power would give them the power to practically break
up banking in my section of the country and make it worthless to
the people.
Now, why couldn't they do it under that?
Senator BULKLEY. I do not want to argue the question at this
time. I am trying to find out the witness's views about this.
Senator MORRISON. Neither do I wish to argue it, but you and
Senator Glass seem to wipe the face of those of us that do not agree
with you about this, with your ideas on it and all that, and I simply
give you my retort.
Senator BULKLEY-. I am sorry the Senator construed it that way.
I surely did not address any remarks to him.
Senator MORRISON. I heard theni.
Senator GORE. DO you think it is wise to change the provision
prohibiting the national banks making loans on real estate?
Senator MORRISON. Let us get his answer to that.
Senator BULKLEY. Yes; I want to get his answer to it.
Senator MORRISON. Why can't they under that power regulate the
collateral security, say how they shall invest all of their funds
where they had collateral?




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

165

Mr. JOHNSTON. That is a question that many people differ about.
Everyone knows that real-estate loans in periods of depression
are slow loans, the most difficult to dispose of. Part of our great
trouble now that is going on over this Nation is our real-estate
situation.
^ Senator GLASS. Everybody knows that existing law put the limitation upon real-estate loans.
Mr. JOHNSTON. Yes. And I am not certain that it was a wise
provision. Senator, to permit national banks—we should not overlook the fact
Senator MORRISON (interposing). Mr. Johnston, I asked you a
question: Why under that law—it is not a question of the wisdom
of doing it or not doing it—would not they have the power to make
a bank reform its loans according to
Mr. JOHNSTON (interposing). To what they thought was
Senator MORRISON (interposing). Wise? Now, the question of
what is wise or not you and I might disagree about, or the rest of
us, but that does give them that clear-cut power, does it not ?
Mr. JOHNSTON. I think so.
Senator MORRISON. And under it they could absolutely control
what percentage would be loaned on any kind of collateral/
Mr. JOHNSTON. I do not want to give anybody that power.
Senator MORRISON. I do not either.
Mr. JOHNSTON. I would rather go back to farming in Kentucky
than to operate a bank under that.
Senator GLASS. Mr. Johnston, has not the board of directors of
every individual bank that power?
Mr. JOHNSTON. Yes; they should.
Senator GLASS. YOU do not want to give it to anybody.
Mr. JOHNSTON. They should. They are the owners of the bank—
the stockholders—and the directors are selected by the stockholders.
That is quite different from giving it to some Government official.
I do not think the banks need policemen. That is the thing. I just
don't think they need policemen.
Senator GLASS. I say you think the banking business ought to be
done without restraint?
Mr. JOHNSTON. No; I would not say without any restraint.
Senator GLASS. Without legislative restraint?
Mr. JOHNSTON. There should be limitations on everything, but I
think most of the bankers are going to continue this business honestly, whether there is ever any reserve act or any Federal reserve
bill or not, and there are going to be great periods of depression and
great periods of deflation of values. I do not think we are going to
find any cure in any legislative action for those things.
Senator CAREY. Don't you think there is danger that this is going
to drive a lot of them out of the Federal reserve system that are
now members ?
Mr. JOHNSTON. Yes; there is no question about that.
Senator GLASS. Oh, yes; there is a question about it. We think it
will bring many in. So there is a question about it.
Mr. JOHNSTON. NO question in my mind.
Senator CAREY. Mr. Johnston, don't you think the present restrictions have had the effect of keeping a good many out?




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NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

Mr. JOHNSTON. I think it prejudices the Federal reserve system.
I think that prejudice exists to-day.
Senator GORE. What is the amount of your deposits?
Mr. JOHNSTON. About $300,000,000.
Senator GORE. I mean the average deposit is how much? How
many depositors have you?
Mr. JOHNSTON. About 35,000.
Senator GORE. I was wondering what you would think about a
small tax on depositors to guarantee small deposits, say deposits of
less than $2,500; not a tax on the bank but a tax on the depositors.
Mr. JOHNSTON. Voluntary or involuntary ?
Senator GORE. Well, I have been considering both. At least one
bank, say, in every community mandatory, but others come in or not.
If it is true—and I may be wrong—that the runs on banks are
generally started by the rather small depositors who put actual cash
in the bank, put money in the bank
Mr. JOHNSTON (interposing). That is not true, Senator.
Senator GORE. Isn't it?
Mr. JOHNSTON. The smart fellow gets out first and he is the big
depositor. What we call the national money, the big chain stores
and tobacco companies and that type of people, they get out first,
long before the little fellow ever hears of it.
Senator GORE. Are they the ones that take—it is the psychology
I was trying to get at. The man who understands the situation is
not disposed to take to panic; it is the little fellow that does not
know much about it that kind of gets stampeded and rushes to the
bank and demands his money. Am I wrong about that?
Mr. JOHNSTON. Yes; I think you are. You see him walk in the
door to get his money. You do not see the large depositor that checks
his out that goes through the clearing house.
Senator GORE. But most of these banks that I have in mind are
not in these cities like New York and these five or six big cities.
I think there was only one big one that failed in New York. But
take it out over the country and these four or five thousand banks,
of course they have not all been preceded by runs, but there have
been runs. Were those runs not generally started by small depositors who did not know much about the situation?
Mr. JOHNSTON. Well, now, in the smaller banks, of course, that
would be true, because they have not any large depositors.
Senator GORE. Yes.
Mr. JOHNSTON. And these people hear rumors and they get uneasy
and a bank has failed over in some neighboring town.
Senator GORE. And some friend has lost money.
Mr. JOHNSTON. And some fellow has lost money, and they think
they had better take theirs out and put it in a safe place.
Senator GORE. NOW, the depositor who does that is the man who
has put money in the bank, is it not?
M r . JOHNSTON. Y e s , s i r .
Senator GORE. Not the man

who has deposited under a loan. What
I was trying to get at, this proposition would prevent him from
starting a stampede in the first instance. I think the depositor ought
to pay for it just like any policyholder ought to pay his premium.
Mr. JOHNSTON. I think that theory is sound. If a man is asking
for protection he ought to pay the premium.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

167

Senator GORE. I think, just like life insurance companies, the
policyholder ought to be made to pay the premiums.
Mr. JOHNSON. I do not think the good banks ought to be assessed
to pay for the bad ones.
Senator GORE. I do not think any of the banks ought to be assessed.
I think the depositors who have the advantage of the insurance ought
to pay for it.
Mr. JOHNSTON. YOU speak of the people becoming frightened.
There was a woman that had a cook, and she sent her 011 a little trip
somewhere and while she was gone she concluded she would fix the
room up, she had been there so long, and when she threw the mattress out she found $3,000 under the mattress, so when the cook came
back she made her go and put it in a bank, and a week later that bank
failed and the woman went in and told the cook how sorry she was
that she had lost her money, and she said, " You needn't to worry.
I went down the next day and took it out."
So that is the psychology of a lot of people. They are just frightened in times like this and they take out their money.
Senator GORE. I think about a hundred banks failed down in
Mississippi .and it probably started in a garage where some man
said that such and such a bank was going to fail and he was going
to take his money out, and his neighbor told it to somebody else, and
they went and took their money out, and so did everybody else, and
broke the bank.
AIR. JOHNSTON. The reason that banks failed was their lack of
liquidity. TTe could not have kej>t the banks of this country liquid
and built this great Nation. It just can not be done. The banks
have served a wonderful place in this Nation. I grew up in one of
them. I know the good they are doing in the community. Those
banks can not be liquid. The man that is loaned the money can
not pay it back until he has an income somewhere from farm products or something else, and most of those loans are not liquid loans,
and when the time comes that depositors want to take their money
out the only place they have to go is to their Federal reserve bank
or to their correspondent bank.
Senator MORRISON. NOW, Mr. Johnston, generally speaking—and
I suppose we could get the figures—what percentage of the credits
of the member banks of the Federal reserve system are in eligible
paper, eligible for discount?
Sir. JOHNSTON. Of course, I do not know. Senator Glass has
the figures here, the amount. ' I do not believe the banks of die country have an average of over 15 per cent of paper that is eligible for
rediscount.
Senator MORRISON. And in the small towns and smaller cities and
agricultural sections of the country the percentage is much less I
Mr. JOHNSTON. A S a rule they have less.
Senator MORRISON. And there is not enough of that paper to run
the bank on, is there?
Mr. JOHNSTON. NO. There is if people would just be steady,
would not come in and get frightened. In the old davs. normal
times, you take when I was an examiner, 190T, 1908,1909. 1910,1911,
1912, why, a bank would run on 15 per cent reserve very comfortably
and nobody was frightened. But




168

NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

Senator MORRISON (interposing). I mean-tliey could not run a
bank on that type of credit alone?
Mr. JOHNSTON. Oh, no. Of course, the banks closed down—take
thfese big failures, sometimes with 50 per cent liquidity.
Senator MORRISON. Don't you think some consideration should be
given in the law to the type of credits in which the banks under the
law, and even those members of the Federal reserve system, invest
the larger part of their capital?
Senator GLASS. Mr. Johnston, would you say there is less restraint
upon State banks than upon national banks ?
Mr. JOHNSTON. I think so.
Senator GLASS. In matters of discretion of that sort i
Mr. JOHNSTON. Yes, sir; I think there is less restraint upon the
State banks than on the national.
Senator GLASS. Has that anything to do with the fact that of the
4,000 banks which have failed within the last two years five to one
are State banks ?
Mr. JOHNSTON. I do not think so much, Senator. I think the fact
that the State banks are so much smaller, I mean smaller per unit
average, that they have not been able to get the management.
Senator GLASS. YOU do not think the character of their portfolios
has anything to do with their failure at all ?
Mr. JOHNSTON. I think that is responsible for the failure, but then
the character of the portfolio is due to the management.
Senator GLASS. Why, of course.
Mr* JOHNSTON. The small banks can not get the management.
They can not pay for the type of management. It takes just as
much intelligence to manage a $500,000 bank as a $500,000,000 bank,
and I know what I am speaking of.
Senator GLASS. I understand; and not having that wise tvpe of
management, they prefer to fill their portfolios with unliquicf assets
and when the trouble comes, they crash—isn't that true?
Mr. JOHNSTON. TOO late, you mean—yes, sir; that is correct.
Senator FLETCHER. Isn't that bank failure proposition largely due
to lack of confidence in banks? Haven't we got to do something
to build up confidence in the banks?
M r . JOHNSTON. Y e s , s i r .
Senator FLETCHER. TO get

rid of this fear and apprehension.
That is the thing to do. You do not think it ought to be done by
any system of guaranty, but something must be done to restore
confidence in the banks-^-isn't that true?
Mr. JOHNSTON. Yes. I just do not know exactly what is the best
thing to do, either.
Senator FLETCHER. Yes.
Mr. JOHNSTON. Of course, the Reconstruction Corporation and the
National Credit have done a great deal of good.
Senator FLETCHER. If you can throw around the banking system,
not so far as the laws are concerned, as we are trying to do here,
but to establish confidence in the banks, assure the people that banks
will be safely conducted—that is what they want; they want safety?
Mr. JOHNSTON. Yes; but I do not think this will do it. I think
it will make it worse.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

169

Senator MORRISON. NOW, Mr. Johnston, when these larger banks
have broken, they have usually carried down a string of little ones
with them, nave they not, and one reason there were so many more
little ones was because one, when it broke, would break and topple
over about 10 of its connections?
M r . JOHNSTON. Y e s .
Senator MORRISON. Don't

you think if we had had the Glas*Steagall bill that we have" recently passed, giving the Federal
reserve system larger instead of less rediscount power," many of those
banks that did break would have been saved ?
Mr. JOHNSTON. I think that is true.
Senator MORRISON. And they would have not only been saved
themselves but would have saved dozens of little ones that went
down with them?
M r . JOHNSTON. Y e s .
Senator MORRISON. And

that the banking trouble was due not to
loose laws so much as the lack of rediscount power anywhere for
the character of securities which the banks had?
Mr. JOHNSTON. Due to that and the banks were not liquid. There
have been lots of good, perfectly solid, banks that have had to
close their doors, in my opinion, any number of them.
Senator MORRISON. They were not liquid because they did not
have enough paper eligible for rediscount?
Mr. JOHNSTON. That is right.
Senator MORRISON. And yet their paper was good and if they
could have found some rediscount power, as the Glass-Steagall biil
now gives
Mr. JOHNSTON (interposing). It would have saved many of them.
Senator MORRISON. Many of them?
M r . JOHNSTON. Y e s , s i r .
Senator MORRISON. Your

National Credit Association saved a great
many of them that would have gone, did it not?
M r . JOHNSTON. Y e s , s i r .
Senator MORRISON. I know

down in my State you kept them from
absolutely being wrecked.
Mr. JOHNSTON. We are familiar with what you did there.
Senator MORRISON. Yes; you put about $11,000,000 in there, with
all the fun being made of it.
M r . JOHNSTON. Y e s .
Senator MORRISON. And

saved bank after bank that is now on its
feet and going.
Mr. JOHNSTON. Not only the National Credit but the large banks
that joined with them. You know that. They were fifty-fifty.
Senator MORRISON. SO our trouble was not less rediscount power
but a lack of adequate rediscount power, was it not?
. Senator TOWNSEND (presiding). Are there other questions from
Senators?
Senator BULKLEY. Yes; I still want to know whether Mr. Johnston says that it is this section 8 that is likely to " ruin the South."
Mr/JOHNSTON. I would not put it that strong.
Senator BULKLEY. I thought you did put it that strong.
Senator GLASS. If Virginia is classified as a southern State. I have
renounced that proposition altogether.




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NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

Senator BULKLEY. Just a minute. If that was not Mr. Johnstons
statement I certainly misunderstood him. I thought he made a very
alarming statement.
Mr. JOHNSTON. The Senator asked me a question if I thought
this was going to seriously interfere with the operation of those
banks in North Carolina and I said, " Yes; I do."
Senator BULKLEY. And I think you said it would ruin the banks
in North Carolina.
.
Mr. JOHNSTON. I could not make a statement that anything
would ruin the banks.
Senator BULKLEY. YOU do not mean that!
Mr. JOHNSTON. I did not mean that. If I made it I should like
to correct it.
Senator CAREY. YOU feel that the way it would be administered,
not the act itself, if the Federal Reserve Board would classify such
^ Jir. JOHNSTON (interposing). I would not want to take that chance
with such a board.
Senator GLASS. YOU know it requires six members of the board
to take that action?
Mr. JOHNSTON. Yes. sir; I see that. I would not want to take
it even if it required nfty. I would not want to give anybody that
power.
Senator GLASS. You do give somebody that power. You give the
board of directors of each unit bank that power.
Mr. JOHNSTON. Yes, sir. The stockholders give them that* The
stockholders have that right. There is quite a difference in what
the stockholders choose to do with their property and what some
legislative body chooses to do with it.
Senator GLASS. A S a matter of fact, the stockholders do not
manage the bank; the directors manage it}
Mr. JOHNSTON. They elect the board, of course. They can not
manage it.
Senator TOWNSEND (presiding). Senator Bulkley, do you want to
ask a question?
Senator BULKLEY. Yes; I want to get back to Mr. Johnston's statement about the tendency of this bill to outlaw the lending on collateral security. Did you really mean that it will " outlaw"' it?
Mr. JOHNSTON. Yes. I do not know what we are going to do with
$200,000,000 of assets that are in our bank under this law.
Senator BULKLEY. Will you explain that, please, what it will do
to you and under what provision? I would like to correct that if it
is as bad as that.
Senator GLASS. Yes. All of lis would. [After a pause:]
Senator FLETCHER. Section 15,1 expect it is. If you do not object,
may I ask Mr. Johnston in that connection, not interrupting Senator
Bulkley?
Senator BULKLEY. I do not think you can ask any questions now
without interrupting me.
Senator FLETCHER. Then I do not interrupt. Go ahead and finish. I will take my own time. I thought you were not asking any
question and I would put in one on the side.
Senator BULKLEY. NO; that is all right.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

171

Senator GLASS. DO you mean the section on pa^e 37, section 15, at
the bottom of the page, " The business of purchasing and selling
investment securities "1
Senator FLETCHER. Page 3 6 , 1 think it is.
Senator GLASS. " Shall hereafter be limited to the purchasing and
selling of such securities," and so forth?
Mr. JOHNSTON. Section 8 confers too much power on the Federal
Reserve Board. It appears from the language used that the board
may restrict within its discretion all loans made by member banks
which may be secured by any type of collateral. The Federal Reserve Board may, also, by direct action prohibit any member bank
from increasing " loans protected by collateral securities " upon pain
of suspension for one year from all Federal reserve rediscount privileges. It gives the Federal Reserve Board power to fix from time
to time for any member bank the percentage of capital and surplus
of such bank which may be represented by loans protected by collateral security.
Senator BULKLEY. NOW, Mr. Johnston, we have just been over
that. Surely you do not mean that that outlaws maiding collateral
loans?
Mr. JOHNSTON. I think it would.
Senator BULKLEY. Outlaws it?
M r . JOHNSTON. Y e s .
Senator BULKLEY. TOU

could not make a collateral loan under
that section?
Mr. JOHNSTON. I think we could make them, but I think we might
find ourselves herded up within two or three weeks by some body
or Government official that would say, " Don't you have this. We
do not like some portions of that."
Senator GLASS. What " some body," what " Government official,"
and under what process?
Mr. JOHNSTON. The board, the Federal Reserve Board.
Senator BULKLEY. Will the members of the board make an improper ruling?
Mr. JOHNSTON. I know, after
Senator BULKLEY (interposing). I want to know if that is what
you mean by saying it " outlaws collateral loans."
Mr. JOHNSTON. Absolutely.
Senator BULKLEY. All right, that is something I can understand.
Mr. JOHNSTON. We do not want to give that power to any board.
Senator BULKLEY. That is a different statement from saying that
it " outlaws collateral loans."
Mr. JOHNSTON. In effect, I think that is what it does.
Senator BULKLEY. All right; I want to know if there is anything
else that outlaws collateral loans.
Mr. JOHNSTON. I think there is a lot in here. There is a tendency
to do it.
Senator BULKLEY. Well, I would like to see what it is.
Mr. JOHNSTON. Senator, this bill, as I read it, gives the power, as
I have said a number of times here, that we do not think any bank
should give to any Government agency.
Senator BULKLEY. Yes; I understand your view about that."




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NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

Mr. JOHNSTON. And tliat gives you that power in relation to that
amount of collateral loan—that is, the Federal Reserve Board—gives
it carte blanche. Senator BXJLKLEY. I just want to know if you think that that particular provision justifies your statement that collateral loans are
outlawed.
Mr. JOHNSTON. I think the whole tendency of this is to outlaw that
type of business.
Senator BULKLEY. Yes. Well now, some of my colleagues here
suggest the meaning of the word 44 outlaw," that it gives the board
the right to compel them to dispose of certain loans. I take it that
the word 44 outlaw " means something entirely different from that
and means that you are prohibited from making collateral loans at
all.
Mr. JOHNSTON. No. The word 44 outlaw " just means that those
loans are just out. It would be just out of the law, you see.
Senator BULKLEY. YOU mean that it prevents you from making
any collateral loans at all?
Sir. JOHNSTON. It might. I do not say it does. It rests entirely
with some other board and not with the owners of the bank. We
do not want to give that power.
Senator BULKLEY. I appreciate the viewpoint, that you do not
want to give the power, tnat is perfectly understandable; but I am
trying to understand your statement about outlawing collateral
loans. You do not mean that it puts you out of making any collateral loans?
Mr. JOHNSTON. I think we can make some. I do not know how
many we could make, do not know how many it would be safe
to make. I do not know what some board in its wisdom some day
would say we should make. I would be afraid to run that risk. I
should like to have a very early determination if we were faced
with it, because you know it is very easy to make loans, not always
easy to get themback in.
Senator GORE. YOU have noticed that?
Mr. JOHNSTON. Yes, sir. I think everybody appreciates" that. I
do not think there would be any argument on that, Senator.
Senator BULKLEY. Your objection should stand on that section?
M r . JOHNSTON. Y e s , s i r .
Senator BULKLEY. YOU

do not mean anything else. All ri
;
statement here concerning 4 me
lg more than 10 per cent of any
#
articular issue of securities would compel the dumping of large
oldings of inactive bonds on the market," can you tell us how
much they would be compelled to dump?
Mr. JOHNSTON. N O ; but I know there are quite large amounts,
Senator.
Senator BULKLEY. What would be your definition of "large
amounts "?
Mr. JOHNSTON. Oh, running into many millions.
Senator BULKLEY. 44 Many " meaning three millions or a hundred
million?
Mr. JOHNSTON. Probably two or three hundred.
Senator BULKLEY. Probably two or three hundred millions?

P




173

NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Mr. JOHNSTON. I do not know how much, but I do know there
are banks that got caught in this avalanche with a large holding
of these securities. We have helped many of those people, some
in your district, you probably know. We haven't any ourselves.
We would not put more than 10 per cent in any one security in any
one State, Senator, Kansas or the State of Kentucky, for instance.
Senator BULKLET. I want to get your opinion of how much this
matter would affect the whole market, and I would like for you to
give me a combined view on the two limitations. There is a limitation of not more than 10 per cent of any one issue and that the
amount shall not exceed 15 per cent of the capital and the 25 per
cent of the surplus of the bank itself.
Mr. JOHNSTON. I think that 10 per cent of any one issue is a very
safe measure. I doubt the wisdom of putting it in now and throwing these bonds on the market.
Senator BULKLEY. If it did not mean that, if it only meant with
respect to future underwritings, your objection would be removed!
Mr. JOHNSTON. I think it would. I think it would be very safe.
Senator BULKLEY. And both limitations would be sound on that
basis?
Mr. JOHNSTON. YOU probably know that what caused a great deal
of trouble is the constant forcing on the market of bonds. You
probably know the Government has opened at the Federal reserve
bank in New York a big agency to dispose of these bonds of failed
banks. The thing is to get somebody to buy them. If we throw
a lot more on the market at this time
Senator BULKLEY (interposing). Yes; but right there I am trying
to get your idea of how many would be thrown on the market. We
want to analyze the effect of this thing.
Mr. JOHNSTON. I could not tell you how many, but I think it
would be a very substantial amount.
Senator BULKLET. You think the two limitations together might
force the sale of five hundred millions?
M r . JOHNSTON. Y e s ; I d o .
Senator BULKLET. Maybe more than that?
Mr. JOHNSTON. Maybe more.
Senator BULKLET. YOU think it might be

dollars?

as high as a billion

M r . JOHNSTON. Y e s .
Senator BULKLEY. YOU think it might
Mr. JOHNSTON. I thought probably it

be as high as a billion?
might. I certainly would
want to give some time on that. If that was going to be enacted
I would certainly give them two or three or four years so that they
could market those bonds, without taking very heavy losses.
Senator BULKLET. But if it only relates to future acquisitions it is
all right?
. . .
Mr. JOHNSTON. I would not have any objection to it personally.
Senator GLASS. That is what it relates to, if you will just read
the bill
The business of purchasing and selling investment securities shall hereafter
be limited to purchasing and selling—

111161—32—FT 1




12

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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

It does not require you to unload a dollar.
Mr. JOHNSTON. What page is that on, please, Senator?
same print of the bill that I have.
Mr. JOHNSTON. It says here—
but in no event shall the total amount of such investment securities of any one
obligor or maker held by such association exceed 10 per cent.

Senator GLASS. " Hereafter—hereafter to be held."
Mr. JOHNSTON. I do not see any 64 hereafter " here.
Senator GLASS. The "hereafter'' relates to the whole paragraph,
Mr. Johnston.
Mr. JOHNSTON. What line, Senator, please, is the word "hereafter "on? Maybe I have a different copy.
Senator GLASS. It is on your print, page 36, line 3 , " The business
of purchasing and selling investment securities shall hereafter be
limited to purchasing and selling
"
Senator BULKLEY. In fairness to the witness, I would like to say
that I do not think that that is as clear as it ought to be myself.
Mr. JOHNSTON. I see now, Senator, what you mean, and it is
probably what you intended. I am very frank to say that it has
fooled all of us—I mean the language has. We did not understand
it that way. It has fooled some oi the best lawyers that we have
been able to employ—Bushmore, Bisbee & Stern, counsel for the
clearing house committee. Mr. Hartfield, I think, it has fooled.
Senator GLASS. I am simply indicating what was the purpose of
the committee.
Mr. JOHNSTON. Then we are together on it.
Senator BULKLEY. Now, Mr. Johnston, I would like to say just
one more thing in reference to your general statement about the
banks having a free scope to do as they please on the basis of the
stockholders owning them. Senator Gore has pointed out the investments that are made by the banks are probably 7 to 1 other people's
money as against the stockholders' money. That is one thing.
M r . JOHNSTON. I s a y 5 t o 1.
Senator BXTLKLEY. Well, 5 to

1. You yourself in the early part
of your testimony advocated a careful restriction of who should
go into the banking business, and that has got to be done by Government authority, and you know that a bank charter is a valuable
franchise, and when x>eople accept a bank charter or any other
public franchise they expect a measure of public regulation, and
you know that there is not a bank stockholder living in the United
States that bought his stock with the idea that a bank was entirely
free to go its own way. Everyone expected reasonable regulation
from Government agencies, and I do not think you really believe
what you intimated here in the first part of your statement.
Mr. JOHNSTON. I think you refer to the fact that I said that
the British banks had been very successful with practically no
regulation.
Senator BXTLKLEY. If we start an argument on the British banking system we get into so many ramifications that I do not think
it would be profitable. I am talking about American experience and
tradition as long as America has existed.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

175

Mr. JOHNSTON. America is under even more regulation than probably all of the rest of the banks in the world and has not done very
well, because it had too many banks.
Senator GLASS. DO you think there is an intelligent stockholder
of a national bank who would be willing to accept the stockholders'
double liability if he supposed the bank would be operated without
restraint or restriction olany sort?
Mr. JOHNSTON. Lots of them.
Senator GLASS. Intelligent stockholders?
M r . JOHNSTON. Y e s , sir.
Senator GLASS. They are not stockholders; they are gamblers.
Mr. JOHNSTON. I would much rather—well, say it is gamblers—I

would much rather bet on the management than
Government supervision—and I have been on both
Senator TOWNSEND (presiding). Thank you, Mr.
Senator MORRISON. One minute, Mr. Johnston.
terpret section 9:

I would on the
sides of it.
Johnston.
How do you in-

. No national banking association and no member bank shall make any loan
or any extension of credit to any affiliate organized and existing for the purpose of buying and selling stocks, bonds, real estate, or real-estate mortgages,
or for the purpose of holding title to any such property, or invest any of its
fands in the capital stock, bonds, or other obligations of any such affiliate.

What do we mean by that?
Mr. JOHNSTON.- I think if you had a mortgage company connected
with your bank, building and loan company, or anything else that
was affiliated with you in some way, it would take them all in—a
security company or any kind of company.
Senator MORRISON. HOW much affiliate? Is there danger in that
word tt affiliate " there?
Mr. JOHNSTON. I think it ought to be made very clear.
Senator GORE. It is defined in the early part of the bill.
Senator MORRISON. They have a definition of it in there.
Senator FLETCHER. Mr. Johnston, may I ask you now, if I am not
interrupting anybody, is it not a fact that the banks of the
country
Senator MORRISON (interposing). Senator, would you let me get
through with mine i
Senator FLETCHER. I am through entirely. I quit.
Senator MORRISON. Well, sir, all right.
44 The term c affiliate,'" it says here. * includes a trust company, a
*
finance company, securities company, discount or acceptance company. investment trust, or other similar institution, or a corporation,"
but does not anywhere say " in which they own a certain interest,"
and the word " affiliate," it seems to me. there would mean anybody
that you were doing business with, under that definition of it.
Mr. JOHNSTON. It is very broad language, and I think should be
clarified as to what it really means. I do not know just exactly what
it means. It just covers everything, it seems to me.
Senator MORRISON. And it does not require you to own any interest
in it at alL
Mr. JOHNSTON. I f you are affiliated with it you can not do any
business with it.




176

NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

Senator TOWNSEND. Thank you, Mr. Johnston.
Mr. JOHNSTON. Senator, I am very appreciative of your lettingme loose.
Senator TOWNSEND. Well, we have Mr. Hawes, from St. Louis,
here, but he will probably require an hour. What is the pleasure of
the committee? Shall we continue now or recess until 2 o'clock?
Senator WAGNER. Recess until 2 o'clock.
Senator TOWNSEND. Then, the committee will stand in recess until
2 o'clock, and we shall hear Mr. Hawes and two other gentlemen.
But there will be no meeting of the committee to-morrow.
(Accordingly, at 12.30 o*clock p. m., a recess was taken until 2
o clock p. m. of the same day.)
AFTER RECESS

The committee resumed at 2 o'clock p. m., at the expiration of the
recess.
The CHAIRMAN. The committee will come to order. Is Mr. Hawes,
of St. Louis, here?
Mr. HAWES. Yes; Mr. Chairman.
The CHAIRMAN. Take a seat at the committee table opposite the
committee reporter, please. Now, you may go ahead and give your
name, residence, and Dusiness.
STATEMENT OF RICHARD S. H A W E S , PRESIDENT ST. LOUIS CLEARING HOUSE ASS0CIAT0N, SENIOR V I C E PRESIDENT OF T H E F I R S T
NATIONAL B A N E OF ST. LOUIS, ST. LOUIS, H O .

The CHAIRMAN. You may proceed with your statement*
Mr. HAWES. Mr. Chairman and gentlemen of the committee, I appear before you as a representative of the St. Louis clearing house,
an association representing the banks of St. Louis, and probably a
great many banks in the Mississippi Valley, because of our connection with them.
Let me prefix anything I may say by the statement that we feel
this bill was introduced with the thought of having a constructive
and effective measure of bank regulation, and that while we may
disagree with you as to some of the provisions contained therein,
and do in fact disagree, yet we realize the spirit which inspired
the bill.
We feel, however, inasmuch as this legislation is probably of more
far-reaching character than any that has been introduced in the
Congress since the Federal reserve act, and to which Senator Glass
gave then such outstanding service to the country by having it enacted, that this bill should not at this time be given right of passage.
The country is going through a period just at present which is trying
the nerves and the stamina of the bankers of the Nation. We are
going through a period unprecedented in the history of finance, or
at least that is true in my judgment, and therefore to enact legislation which will so violently change the method of operation of banks,
during any such period as the present, appears to me to be unwise.
We are hopeful, therefore, that your committee will consider these
facts and will give due thought to whether this legislation should not
be laid over until a more propitious time is evident.




national, and federal reserve banking systems

177

With these brief preliminary remarks, I should like to turn, if I
may, to several sections of the bill and make comment thereon. And
I will say quite frankly that if my interpretation is incorrect I shall
be happy to be set right, but the interpretation that I place upon the
bill, as evidenced in the memorandum which I have before me and
which I shall not take any longer time in presenting to you than you
gentlemen desire.
Senator TOWN SEND. Before you make your statement let meask
you a question: Do you think it would be unwise to have any legislation affecting bankmg just now! Is that your feeling about the
matter?
Mr. HAWES. Just at this time, yes; that is my feeling.
Senator TOWNSEND. That is all I wish to ask at this time.
Senator WALCOTT. I should like to ask you a question along that
line: Have you studied the bill with the idea of picking out the
good in the bill, or have you only confined your attention to what
you think are the faults of the bill? In other words, is there not
m your opinion a large proportion of this bill which is not only
useful but important constructive legislation.
Mr. HAWES. I shouldn't say there was a large proportion. There
are certain features of the bill which are constructive, but not a
large portion of it.
Senator WALCOTT. Could you give us in the course of the hearing
and at your own convenience a reference to those portions of the
bill you substantially agree with?
Mr. HAWES. I probably could, but that would necessitate my going
over the bill again and studying it. I have merely made a memorandum of those features which I think might be destructive or
hurtful. And this is not done just as a matter of criticism, but
in a spirit of trying to present constructive thoughts by way of
amendments of certain sections so as to make them less hurtful
than I think apparently they are as now presented in the bill.
The CHAIRMAN. Tou may proceed now with your statement.
Mr. HAWES. My first reference is to section 8 of the bill," Limitations on Security Loans " : In my judgment collateral loans should
be more clearly defined in that section. How far-reaching is this
section? Does this prohibition against security loans include loans
on commodities or real estate pledged by a corporation or individual?
This clause confers upon the Federal Reserve Board new powers
of direct action of great consequence. The board may restrict within
its discretion all loans by member banks, which may be secured by
any type of collateral. The Federal Reserve Board may also, by
direct action, prohibit any member bank from increasing " i t s security loans" upon penalty of suspension for one year from all
Federal reserve rediscount privileges.
This section also by indirection repeals all of the exceptions to
section 5200 of the Revised Statutes which governs the amount
which a national bank may lend to a single customer and makes the
absolute limitation of 10 per cent of capital and surplus apply to
all classes of loans including those secured by warehouse receipts,
bills of lading and other such documents.
This section is designed toward further deflation and it is estimated $1,841,000,000 in securities would have to be sold, and the
intent of it is to penalize banks which lend upon collateral security.



178 national. and federal reserve banking systems
Senator GLASS. Mr. Hawes, you heard the testimony given here
this morning. Do you persist in that view that that is a requirement of that section of the bill in spite of what was said here this
morning?
Mr. HAWES. That is my view of it, Senator Glass. That is, unless
it is changed or modified.*
Senator TOWNSEND. You have no language to suggest that you
think might be put in that section which would make it satisfactory
to YOU, have you?
Mr. HAWES. Well, a clear definition of security loans might be
made so as to include, in event it is the desire of the committee to do
so, what are known as so-called call loans on Wall Street
Senator TOWNSEND. Would it be satisfactory to you if that
language were nut in there and this section were so clarified?
Mr. HAWES. Wo, sir; it would not.
Senator GLASS. Air. Hawes, what is the ordinary meaning in
banking parlance of collateral security?
Mr. HAWES. It means security of any kind held on a note of an
individual or corporation. That security may be stocks, bonds,
wheat, corn, tobacco, or any other commodity, and it may be real
estate.
Senator GLASS. Do you mean to say that you would call corn,
wheat, and tobacco a collateral loan?

Mr.

HAWES.

Absolutely.

Senator GLASS. That is, do you mean that corn, wheat, or tobacco
would be collateral security i
M r . HAWES. Y e s , sir.

The CHAIRMAN. I take it that Mr. Hawes means warehouse receipts for those commodities.
Senator GLASS. Oh, is that it ?
Mr. HAWES. Why, of course that is what I mean.
The CHAIRMAN. YOU may proceed with your statement, Mr.
Hawes.
Mr. HAWES. NOW, I will take up section 8, " Collateral loan limitations of member banks."
We feel this section confers too much power on the Federal Reserve
Board. It appears from the language used that the board mav
restrict within its discretion all loans made by member banks whicn
may be secured by any type of collateral. The Federal Reserve
Board may. also, by direct action, prohibit any member bank from
increasing " loans protected by collateral securities " upon pain of
suspension for one year from all Federal reserve rediscount privileges. It gives the Federal Reserve Board power to fix from time
to time for any member bank the percentage of capital and surplus
of such banks which may be represented bv loans protected by collateral security. W e feel that tne power given the Federal Reserve
Board is not of a specific nature. We would assume from the wording that a member bank can not exceed 100 per cent of its capital
ana surplus in loans protected by collateral security. Quite a large
number of member banks have legitimate commercial and individual
loans secured by collateral which would be affected by this provision,
hence, in order to comply with this section, it would result in either
these banks withdrawing from the Federal reserve system if such




179

national and federal reserve banking systems

loans are in excess of the limit fixed by the Federal Reserve Board,
or in the liquidation of the loans, as it regulates loans of this nature
even when the bank is not borrowing from the Federal reserve
system.
W e believe that section 8 gives to the Federal Reserve Board unnecessary powers of control over the policy management of member
banks much are nonborrowers and who are making loans to their
customers without the use of Federal reserve credit. We believe
that section 3, with the amendments we have suggested, gives proper
and sufficient protection to the membership of the syrtem and to
the public*
Next is section 9, " Laws to aid investments in affiliates."
This section provides that a member bank can not loan more than
10 per cent of its capital and surplus upon loans or extensions of
credit to anv affiliate organized for certain purposes or invest in the
securities of such affiliate or accept the obligations of such affiliate as
security where the aggregate of such loans, extensions of credit, investments, and acceptances exceeds 10 per cent of capital and surplus. This is a serious impairment to the competition which any
member bank may have with a nonmember bank and will discourage
real estate loans and farm mortgages now handled by such affiliates
'to the detriment of agriculture, home building, and industrial construction.
There are many affiliates of member banks which confine them*
selves to the handling of real estate mortgages and this prohibition
would impede^ their activities and make competition with nonmember
banks almost impossible.
May I take the liberty of referring to my own institution? We
have a mortgage company affiliate connected with us. In that we
handle no stocks of any character. W e make loans on real estate,
handle Government and municipal bonds and industrial bonds based
on real estate. That affiliate would have to go out of business in
my judgment, if this bill should be enacted into law, and yet we
render a very distinct service to our community through that affiliate*
It makes it possible for us to compete with our trust companies and
State banks who have that privilege under the State laws.
Line 20 on page 10 requires that loans to affiliates shall be secured
by stocks and bonds listed on the stock exchange, with a margin of
20 per cent, and shall be secured by paper eligible for discount or
legal investment for savings banks in the State m which the association or member bank making the loan is located.
This prohibits affiliate companies who deal solely in real estate
mortgages or farm loans from using such collateral to borrow from
the parent bank. It is further discriminatory in that in certain
States investments eligible for savings banks include real estate mortgages. This section, > y virtue of this discrimination against real
estate mortgages, would bring about a decided deflation.
Have the members of the committee any questions on that matter?
Senator BROOKHART (presiding). I believe not. You may proceed in your own way.
Mr. HAWES. Section 11, " 15-day reserve loans."
W e believe that the penalty of 1 per cent higher than the rediscount rate on 15-day advances will work a hardship on the member




180

NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

banks of the system. It must be taken into consideration that outside
of the banks in the large commercial centers other member banks
in the United States have little or no eligible paper for rediscount.
This has been occasioned by the changed form ox financing bv corporations through the issuance of preferred and common stocks, so
that there is not at the present time the volume of eligible commercial paper which can be offered for rediscount. Consideration must
also be given at the present time to the fact that the quality of the
paper offered has changed to the depressed conditions in agriculture,
industry, and commerce.
We realize it is the intention of the framers of the original Federal
reserve act that Federal reserve credit facilities were to be used only
upon commercial and agricultural paper. Members of the committee
will recall that conditions incident to the World War and Governmentfinancingmade necessary the acceptance by the Federal reserve
banks of Government bonds as collateral on 15-aay notes.
This has resulted in a majority of the member banks building up
a secondary reserve of Government securities in order that they
might avail themselves of the credit facilities of the Federal reserve
banks and to assist in Government financing.
We believe that this provision is aimed to prevent the excessive
use of Federal reserve facilities for stock-market operations and
therefore a penalty rate is added. W e believe that discrimination
should be nyide between the use of investment credit for purely
speculative purposes, as compared with investment credit used for
productive purposes'or for refunding operations, and therefore we
feel that the penalties in this section can well be left to the discretion
of the Federal reserve banks with the approval of the Federal
Reserve Board under such rulings as they may make.
Any questions on that?
Senator GLASS. Suppose we should strike out the 1 per cent privilege, would you favor the balance of the provision?
M r . HAWES. N o , sir.

Senator GLASS. Then you would not put any legislative restraint
at all upon the use of the Federal reserve facilities for stockgambling purposes?
Mr. IIAWES. No, sir; but let me explain. I would not put any
restraint on it for stock-gambling purposes because I do not believe
the average bank uses its funds for that purpose.
Senator GLASS. But that provision would apply only in case they
do?
Mr. HAWES. Yes: but it goes much further than that.
Senator GLASS. HOW much further?
Mr. HAWES. Well, the very definition that you provide in the
matter of secured loans is a bar to the situation.
Senator GLASS. But that definition is in the existing law.
Mr. HAWES. I understand that very clearly, but
Senator GLASS (interposing). Yes. So why do you object?
Mr. HAWES. Does the fact that the Federal Reserve Board may
come into our bank and say, * You can lend so much money on a
secured basis and over and above that you are ineligible"; doesn't
that show you what it would do?
Senator GLASS. But it does not say that.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

181

Mr. HAWES. It does say that in another section.
Senator GLASS. Why. Mr.*Hawes, you may loan every dollar of
your money to a broker, and if the Federal'reserve bank thinks you
are too far extended in that direction it will say; to you," If you are
going to increase these loans you can not get facilities of the Federal
reserve bank for that purpose." That is all that it says.
Mr. HAWES. But I do not think that is all that it says.
Senator GLASS. Well, what does it say any more than that?
Mr. HAWES. I do not think that is the intent of the law.
Senator GLASS. Well, I know that it is the intent of the bill.
Mr. HAWES. I beg your pardon. I meant to say that as I read
that section I do not tnink it in fact says that.
Senator GLASS. Well, it is plain enough English. Let me read it
to you. [Reading:]
Any Federal reserve bank may make advances to its member bank* on their
promissory notes for a period of not exceeding 15 days at rates to be established by such Federal reserve bank.

You know that is a special privilege.
M r . HAWES. Y e s .

Senator GLASS. That is not the ordinary rediscount privilege.
That is borrowing money, a special privilege.
Mr. Hawes. Yes, sir.
Senator GLASS. Under the existing statute a Federal reserve bank,
subject to the ruling and determination of the Federal Reserve
Board, 1ms unrestricted power to make that rate anything it pleases,
not only 1 per cent higher that we provide, but 2 per cent or 10 per
cent. 2t has that power now, as you can see, very definitely.
M r . HAWES. Y e s .

Senator GLASS. I continute to quote that section.

[Beading:]

Which rates shaU in all cases be at least 1 per cent higher than the rediscount rate then in force at such reserve bank, subject to the review and determination of the Federal Reserve Board, provided such promissory notes are
secured by such notes, drafts, bills of exchange, or bankers' acceptances as are
eligible for rediscount or for purchase by Federal reserve banks under the
provisions of this act, or by the deposit or pledge of bonds or notes of the
United States.

Mr. HAWES. Any addition to the penalty I object to.
Senator GLASS. I continue reading. [Beading:]
If any member bank to which any such advance has been made shall, during
the life or continuance of such advance, and despite an official warning of the
reserve bank of the district or of the Federal Reserve Board to the contrary,
increase Its outstanding loans made upon coUateral security, or made to the
members of any organized stock exchange, investment house, or dealer in
securities—

What about that!
Mr. HAWES. Yes: that the penalty shall apply.
Senator GLASS, In other words, a concrete example would be that
a given bank in Sew York may have $50,000,000 of brokers9 loans
outstanding, and this provision does not undertake to interfere with
that status. It may apply with eligible paper to the reserve bank
for additional accommodation. This simply gives the bank the
right to say: Well, we will rediscount your paper upon the condition that you do not extend that $50,000,000 of outstanding loans for
stock operations.




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NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

Mr. HAWKS. Haven't you overlooked one very important line in
that paragraph you read?
Senator GLASS. No; I think not.
Mr. HAWES. I refer to this line [reading]:
Increase its outstanding loans made upon collateral security.

Senator GLASS. Yes; I read that.
Mr. HAWES. Then it goes on and mentions bankers' loans. In
other words, it includes all collateral loans.
Senator GLASS. Well, we wont discuss the matter of definition of
collateral loans. I thought every banker understood, and I thought
I understood what in banking nomenclature collateral loans meant.
Mr. HAWES. Well, Mr. Senator, I do not think any practical
banker in the world will define collateral loans as being only loans
to stock exchange members or investment bankers.
Senator GLASS. Here is one important section that you ignore,
found on page 25 of the bill, beginning on line 23. [Reading!]
For the purpose of purchasing and/or carrying investment securities (except
obligations of the United States)—

And so on. In other words, it is literally the language used in
fhe text of the existing law, which precludes rediscounts upon notes,
bills, and other bank paper drawn for the purpose of purchasing
or carrying investments.
Mr. HAWES. If you are going to put that provision in, WHY don't
you just deliberately say: Call loans are loans to brokers and investment bankers, instead of penalizing all collateral loans?
Senator GLASS. I do not know of any section of any statute where
there is the expression " call loans."
Mr. HAWES. I do not, either. I do not know of any statute either
where it says that collateral loans are only loans secured by collateral
of stocks and bonds.
Senator GLASS. I can read you a provision of the existing Federal
reserve act which is just exactly in accord with that provision,
section 13 of the act, which confers upon the Federal Reserve Board
the right to define eligible paper, and says [reading]:
But such definition shall not include notes, drafts, or bills covering merely
investments or issued or drawn for the purpose of carrying or trading in
stocks, bonds, or other investment securities.

Mr. HAWES. That is all right* But that does not talk about it
as collateral security. That specifies what it is as I understand it.
Senator GLASS. Isn't that collateral security?
M r . HAWES. Y e s , sir.

Senator GLASS, investment securities?

M r . HAWES. Y e s , sir.

Senator GLASS. And that is what this says.
Mr. HAWES. Yes; but there are other securities that are collateral
securities.
Senator GLASS. For the purpose of purchasing or carrying investment securities, it says.
Mr. HAWES. But it must not increase its outstanding loans made
on collateral securities.
Senator GLASS. Y e s .

Senator BROOKHART (presiding). But for this limited purpose.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

183

Mr. HAWES. Yes, sir; and in that way it is penalizing all collateral loans.
Senator BROOKHART. I do not think so. I think it restricts collateral down to this purpose.
Mr. HAWES. Well, any two of us are liable to disagree in the
matter of interpretation of the section.
Senator TOWNSEND. Lawyers certainly do that.
M r . HAWES. Y e s .
Senator GLASS. Suppose

we could better define the meaning of
collateral loans, as meaniug loans for purchases on the stock exchange, would you still want to eliminate that provision of the bUl
that would impose a penalty in case of violation of the law?
Mr. HAWES. Yes, sir. I think it puts too strict and heavy police
power in the hands of a few men.
Senator GLASS. All right. I have nothing further to say on that
Senator BROOKHART (presiding). You may proceed with your
statement, Mr. Hawes.
Mr. HAWES. I now turn to section 10, subdivision 12-OB, Federal
Liquidating Corporation:
This section covers the organization of the 'Federal Liquidating
Corporation and there can be no Question but what some method
of orderly liquidation of closed banks and early payment of money
to depositors should be found. We feel that this matter is of such
urgency that a separate measure should be introduced in (Congress
for that purpose. The measure, as now drawn, seems to be in unfair
ratio to the banks, as it requires the banks shall subscribe one-half
of 1 per cent of time and demand deposits and increase subscriptions
as said deposits grow. Based on a rough estimate, this would require a capital subscription from member banks of approximately
$150,000,000, or an immediate payment of approximately $75,000,000.
Senator GLASS. You are mistaken in the matter of the amount.
The first caU is for one-quarter of 1 per cent.
Mr. HAWES. Well, I stand corrected in that. In spite of this large
investment the banks are given no voice in the management. The
stock they buy has no voting power whatever. On the other hand,
the Federal reserve bank subscribes one-fourth of their surplus, ox
which one-half of 1 per cent is payable immediately, an estimated
amount of $1,500,000, the balance being subject to call on 90 days9
notice and complete control of the corporation is vested in them.
Paragraph M sets aside $200,000,000 from the Treasury of the
United States, which shall be used for the purchase of assets of
closed nonmember banks.
As I read the law that would, as I think, be a discrimination in
the use of the taxpayers' money in favor of one class of banks.
Senator GLASS. TLOU would like to see that provision stricken out
of the biU, "would you?
Mr. HAWES. NO. I should not like to see it stricken out, but I
think this Federal Liquidation Corporation can take care of the
whole proposition if you organize it. Certainly $200,000,000 of the
peopled money should not be set aside for nonmember closed banks.

Paragraphs O, P, and Q have the possibility of the issuance of
practically a billion dollars of new tax-exempt securities, reducing
thereby the revenues of the Government.




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NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

Senator GLASS. Are you opposed to tax-exempt securities?
Mr. HAWES. I am opposed to any great increase in them.
Senator GLASS. I am opposed to any of them for that matter. I
wanted to know whether you and I were in agreement on that matter.
Mr. HAWES. Yes, sir; we are fairly in agreement on that.
Sow, are there any questions on that section?
Senator BROOKHART (presiding). No. You may proceed.
Mr. HAWES. I now come to section 13, ( A ) and ( B ) .
This increases the reserve requirement on time deposits to equal
those on demand deposits in five years. This means an increase of
$130,000,000 a year or $650,000,000 in five years additional reserve
which must be carried by the member banks with the Federal re*
serve banks against which the Federal reserve banks must carry
their own reserves of 35 per cent in gold or $227,500,000 in gold for
five years. But that has been modified since by the Glass-Steagall
bill.
To this extent tiiis section of the act nullifies the release of gold
reserve provided by the Glass-Steagall bill. We do not see the
necessity of increasing the amount ot reserve carried with the Federal reserve banks by reason of the fact that at no time since the
creation of the Federal Reserve System has the entire system been
unable to meet the credit.needs of its members. As a practical
matter the so-called secondary reserves (reserves by cash, Government bonds, and eligible paper) of a member bank is in reality the
primarv reserve which would be used, when necessary, for the purSose oi building up deficits in reserves and meeting decreases in
eposits; the reserve carried with the Federal reserve bank being
a sum which decreases only fractionally in proportion to the decline
in deposits of the member banks, and can only be withdrawn under
severe penalties for reserve deficiency. This section, if enacted into
law, would work a particular hardship upon the banks of the country
located in cities where there is not a Federal reserve bank or branch
bank, particularly in the rural sections. We believe that this would
cause a withdrawal from membership of this type of bank through
its inability to compete with nonmember banks whose legal reserve
requirements are such as to make their reserves more readily available to them at all times.
Senator GLASS. HOW many of them withdrew before we reduced
that reserve behind time deposits to 3 per cent?
Mr. HAWES. Well, a very considerable number of them withdrew,
but I do not know the exact number.
Senator GLASS. Of national banks, do you mean ?
Mr. HAWES. No; nonmember banks; State banks. National banks
can not withdraw.
Senator GLASS. Oh, yes: they can. They can change their charter.
Mr. HAWES. Yes: tliey can go out of existence as national banks
and do that, of course: but the average national banker does not
want to do that. He is rather proud of the national bank system.
Senator GLASS. Some are rather proud of the Federal Reserve.
System, too.
' M r . HAWES. I f o r o n e a m .
Senator BROOKHART (presiding).

statement.




You may proceed with youi

NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

185

Mr. HAWES. TO the extent that member bank reserves are increased against savings deposits and not protective of income, to
that same extent are the bank's earnings affected. The banks would
of necessity be obliged to reduce the amount paid in interest, which
action would have a material effect upon the millions of savers in
the country. In other words, if you increase the reserve requirements of savings banks, we can not afford to pay the higher rate of
interest on that kind of deposit.
Senator TOWNSEND. What is your rate of interest in St. Louis on
that kind of deposit?
Mr. HAWES. In St. Louis it is 3 per cent. It just means the differ*
ence of having invested funds and being able to invest at 97 per
cent, as against 93per cent as would be the case under this bill.
Senator GLASS. T O what extent did State banks withdraw from
the system before we cut the reserve behind-time deposits to 3
per cent, and what percentage of them have withdrawn since we cut
the reserve?
Mr. HAWES. I have not those statistics. I do not know. But I believe that would be the effect of the bill.
Senator GLASS. YOU are suggesting now that if we restore the
reserve behind-time deposits, banks will withdraw from the system,
and I am trying to develop how many withdrew from the system
before we reduced the reserve, and how many have withdrawn from
the system since we reduced it.
Mr. HAWES. I do not know. Can you tell me?
Senator GLASS. NO. But I wanted to know upon what you based
your broad statement that banks would withdraw if we raised the
reserve.
Mr. HAWES. I did not base it on what you have stated, but I based
it upon what is in bankers' minds as to' increased cost of handling
depositors' money.
Senator GLASS. And I am trying to develop what happened under
the two conditions I have mentioned. Until recent years the reserve
behind-time deposits was 7 per cent. Then we reduced that reserve
to 5 per cent. I think it would be interesting to ascertain how many
banks withdrew from the system on account of the 7 per cent requirement, and how many have withdrawn from the sjTstem since we
reduced it to 3 per cent.
Mr. HAWES. 1 think that would be interesting. However, all banks
did not withdraw because
Senator GLASS (interposing). If you had these statistics it might
furnish a basis for apprehension that a restoration of the reserve
would cause banks to withdraw from the system. But my information is that more banks have withdrawn from the system during
the period of a lower rate of reserve than did at the higher rate.
Senator BROOKHART (presiding). You may proceed with your
statement, Mr. Hawes.
AIR. HAWES. Consideration should be given to the use of till money
as reserve, particularly as it affects thousands of member banks not
located adjacent to Federal reserve banks or branch banks. This
principle is recognized by the Federal reserve committee making
recommendations for change in reserve requirements, which provided
that in the case of banks not located in cities where there is a Fed-




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NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

eral reserve bank or branch bank, a large percentage of their legal
reserve may be carried in currency or so-called till money.
Senator GLASS. Are you in favor of the velocity reserve proposition?
Mr. HAWES. Yes, sir: I think it would be sound.
Senator GLASS. Well, I don't doubt it would be sound, but do you
think banks generallv would like to see it immediatelv made effective?
Mr. HAWES. NO, sir: I don\ think they would. But from my own
personal viewpoint I would not object to it particularly.
Senator BROOKHART. Does the term "velocity reserve" have any
well-understood meaning in banking circles?
Mr. HAWES. NO, sir; it is a new term.
Senator BROOKHART. What does it mean?
Mr. HAWES. It means volume of business handled on any day. It
is the velocity of ins and outs, of deposits and withdrawals.
Senator BROOKHART. Suppose this law should make 30 days the
dividing line between time and demand deposits, then would that
be the way you would determine velocity?
Mr. HAWES. If an account turns within 30 days, it would be a
matter in terms of velocity whether it would apply on a demand
account, and then in ratio to savings accounts.
Senator BROOKHART. Would it be counted for reserve in the matter
of the definite turnover on demand accounts?
M r . HAWES. Y e s , sir.
Senator BROOKHART. SO

that one month there would be a larger
reserve than there would be another month.
M r . HAWES. Y e s , sir.
Senator BROOKHART. HOW

are you going to regulate that matter
in advance?
Mr. HAWES. YOU can not regulate it in advance under the velocity
method. You regulate it day by day.
Senator BROOKHART. Well, suppose you are caught with a short
reserve, what would happen to you then?
Mr. HAWES. Well, you would have to watch yourself pretty closely,
I should say.
*
" •
Senator BROOKHART. Then you have to estimate it in advance at
least, don't you?
Mr. HAWES. Well, as Senator Glass has said, it is rather a revolutionary suggestion. I said I did not object to it and I do not, because, speaking very frankly, from a personal standpoint, it would
reduce the reserves our bank would have to carry.
Senator BROOKHART. Suppose we were to take time accounts and
say if they were disturbed within 30 days we would put them into
demand accounts and make that the rule,"how would that work?
Mr. HAWES. I do not believe I follow you.
Senator BROOKHART. Well, say here is a time account of 60 days,
but the depositor checks it out or checks on it within 25 days.
Bankers I believe say they always honor any demand for them even
though they are not required to do so under the terms of the account.
Mr. HAWES. Well, I do not think that is generally true. My bank
does not do that We do not waive the 31-day notice for depositors
if they want their money. On a five or six months' certificate we
require them to carry it on through.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

187

Senator BROOKHART. But other bankers have said they do honor
them universally, and thereby save to themselves paying the 3 per
cent interest.
Mr. HAWES. They might also have to withdraw their investments
drawing 5 or 6 per cent interest.
Senator BROOKHART. Perhaps. But I was trying to figure out
some way to define the difference between time and demand accounts.
Mr. HAWES. I think you have it pretty fairly defined in your
Federal reserve act and m your provision here.
Senator BROOKHART. Thirty days?
Mr. HAWES. Yes, sir; 3 0 days.
Senator BROOKHART. Suppose a time account were drawn out
within 30 days would that cnange it to a demand account?
Mr. HAWES. Well, if it is withdrawn it goes out immediately and
it is not in the reserve at all.
Senator GLASS. A great many banks have changed demands into
times, haven't they?
Mr. HAWES. Well, now, Senator Glass, I can't speak for other
banks, but
Senator BROOKHART (interposing). The complaint has been made
that they have changed demand accounts into time accounts in order
to get the benefit of the difference in reserve.
Mr. HAWES. Yes; I understand that there has been some such contention made here, but I do not think that has been the rule at all.
Of course, one might say that there will always be bankers who
will evade the rules and the law, but I think bankers will generally
recognize that if there is to be a 31-day notice given, it will be
required to be done that way. I know that if we have a certificate
of deposit requiring 31 days' notice called, we put it in our demand
deposits. And I think that is the custom in all well-regulated banks.
Senator GLASS. The testimony we had last spring before our subcommittee was to the effect that a very large number, if not—well,
to be more specific, we were told that 80 per cent of the banks manipulated their deposit accounts so as to take advantage of the 3 per
cent reserve.
Mr. HAWES. Welij Senator Glass, of course I do not know who
testified that way, but I doubt it very much myself.
Senator GLASS. All right.
Senator BROOKHART (presiding). You may continue your statement.
Mr. HAWES. These provisions increase the cash liquidity, particularly of the country banks, thereby releasing funds for loaning purposes and giving better recognition to the savings accounts than
the proposed bill through the increase of reserves would do to
activity:
Now we come to section 13 ( D ) : This refers to what is termed
as u loans for account of others." A number of clearing houses have
already passed resolutions forbidding their members from making
loans of this character. We understand, however, that it is the
intention of the framers of the act to prevent a recurrence^ of the
practice of placing loans on call for nonbanking corporations or
individuals.
I think it is wise.




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NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

Senator GLASS. Well, we will just frame that provision if JOIL
think it is wise. Some of .your confreres do not think it is wise,
but we are glad to know that you do, Mr. Hawes.
Air. HAWES. Thank you.
Senator BROOKHART (presiding). You may go ahead.
Mr. HAWES. Section 1 3 ( F ) : The practice of buying and selling
Federal exchange has led to a difficult situation in that the Federal
reserve bank can not keep account of the borrowings of the bank.
This section refers to the purchase and sale of excess Federal reserve
funds. The purchase of these funds, in reality, constitutes a loan.
This section provides that under regulations of the Federal Reserve
Board, a fee must be charged, based upon the rate of discount, then
charged upon 90-day paper of the Federal reserve bank of the district in which the bank making such sale or transfer is located.
I think that is a wise recommendation.
Senator GLASS. I thank you.
Mr. HAWES. Senator Glass, I assure you that I am not trying to
be always critical. I am trying to give you my thoughts on these
matters as I am best able to see them.
Senator GLASS. I am sure of that.
Mr. HAWES. Section 13 ( g ) : This refers to the Federal reserve
power to suspend all dealings in reserve balances for such period
as it may deem best. It also refers to the net differences in amounts
due to and from banks before calculating reserves. Reserves would
include all repurchase agreements. We believe that the provision
adding repurchase or similar agreement entered into by a member
bank to the base for the purpose of computing reserve balances is a
proper one, and that the general practice of repurchase agreements
between banks should be penalized.
Section 14: This section refers to real-estate loans made by national banks, also the segregation of time deposits and the investment of a percentage of those deposits in real estate and the balance
in legal investments. The percentage of real-estate loans is limited
to 15 per cent of capital stock and 15 per cent of surplus, or one-half
of its time deposits.
This provision is discriminatory as between national banks and
other member banks for a period of two years, during which time
much harm might be done to national banks. It also imposes upon
the Comptroller of the Currency as impracticable burden of revising
and reappraising at each examination each real-estate loan made by
a national bank and also by each State member bank.
We consider it unsound to require investment in bank premises to
be carried as real-estate loans, and to be held as security for time
deposits. As practical bankers it is almost impossible to define unsecured loans whose eventual safety depends upon real-estate values.
And we have in our bank hundreds of loans that eventallv might
depend upon real-estate values, and yet we did not think so when
we made the loans. It is a realized sound principal that banks
should be limited to a certain degree in their investment in banking
premises.
That provision requiring segregation of assets behind time deposits will show necessity for two fundamental effects. First, it
will drive from ten to twelve billion in money now used for com-




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

189

mercial purposes out of that avenue of activity, and, secondly, it
will encourage individual commercial concerns to place their time
deposits into time money so as to get additional security as against
the open account upon which they have no preferential' position.
The provision requiring an aggregate valuation not to exceed the
aggregate market value in reports to the Comptroller of the Currency is impracticable of operation.
The new provision that the required reserve against time deposit
shall be counted as a corresponding part of such investments is unbound as a reserve is a reserve against deposits and is not an investment.
The provision of properties and securities of any insolvent national
bank held against time deposits be applied by the receiver thereof in
the first place ratably and proportionately to the payment in full
of its time deposits is another form of guaranty of deposits. That
is, securing one depositor against another—which has proven unsound in practice in many States—which is intended to repeat
what has already been said, toward the decrease of open accounts
and the reduction of investment funds available to banks and at the
same time invest the funds of savings depositors in what are commonly known in commercial banks as nonliquid assets. We do not
.believe that this provision is necessary, as in our judgment the existing law is adequate and carries the proper regulations.
Any questions!
Senator BROOKHART (presiding). No, you may continue your
statement.
Mr. HAWES. XOW we will take up section 1 5 : That provision referring to banking conducted under the laws of the various States
will make it difficult for the comptroller to handle the national
banks as he would have to be thoroughly conversant with the laws
of the 48 States.
The provision that in no event shall any bank purchase investment securities in excess of 10 per cent of total amount of any issue
outstanding will be a serious detriment to necessary financing by
many small corporations for protective purposes and will work a
greater hardship on industry than on banking.
I think the language from line 7 on page 36 to line 2 on page 37
should be revised and clarified as to the intent of the act, as the
present wording is subject to misconstruction. A reading of this
section creates the impression that while a national bank could
purchase and hold 10 per cent of any one issue of one obligor, lines
14 to 19 on page 36 convey the impression that the total investment securities which a national bank may hold could not exceed
15 per cent of its capital and 25 per cent of its surplus. If this were
true it would, if enacted into law, cause tremendous deflation through
the forced sale of an estimated amount of $2,500,000,000 investment
securities now held by national banks. It is not admitted that the
percentages set forth in the bill are sound for bank operation, and
conservative bankers would hardly view as sound the purchase of
issues of one obligor to an amount which might be considered excessive.
TTe understand from the reading of line 22 on page 36 to line 2
on page 37 that a national bank is not to be limited oy any of the
111161—32—ptI




13

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NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

investment securities regulations contained in section 15 # as to
purchase, sale, and/or holding for its own account obligations of
the United States or general obligations of any State, or of any
political subdivision thereof, or obligations issued under authority
of the Federal farm loan act and in order that this may be accomplished this clause should be amplified.
Any questions?
Senator BROOKHART (presiding). It seems not. You may continue.
Mr. HAWES. We now come to section 18, which seems to be very
drastic. This section, it would seem to me, would be very injurious
to investment bankers. As I read it, it would affect not only investment bankers but business at large, in that it has the effect of prohibiting the acceptance of deposits, the making of loans, or handling
any transactions of a credit nature; that is, of any individual, partnership, unincorporated association, and corporations which deal in
securities. This might work a great hardship upon the bill market,
where it is necessary for the dealer to purchase at once large blocks
of bills which must be cleared through banking transactions.
This section also prohibits any investment bankers from being
directors or officers of any national or member bank, thereby depriving the member bank of valuable counsel and assistance. It would
probably nullify section 8 of the Clayton Act, as amended, which
permits that any private banker may be an officer, director, or employee of not more than two banks, if the Federal Reserve Board
shall issue its permission.
In other words, as I read that section—and I should be glad to be
corrected if my interpretation is not true—no member bank could
accept a deposit from an investment banker or broker or handle their
affairs at all. Nonmember banks only would be allowed to handle
the business of investment bankers.
Any questions?
Senator BROOKHART (presiding). It seems not. You may proceed.
Mr. IIAWES. We now come to sections 10 and 20 dealing with the
voting power of holding company, and holding company examination.
Section 19 prohibits any corporation, association, or partnership
holdin gmore than 10 per cent of the stock of any national bank from
voting without permit, as provided in section 20, covering all elections of directors. ^
Section 20 provides a number of conditions which must be complied with in order to obtain such voting permit.
Assuming that "affiliates" are defined as in section 2 with the
elimination of the words " or a corporation," we believe that subsection A of section 20 providing for examination by and reports
to the Comptroller of the Currency is a proper procedure.
Subsection B and C of section 20 requires an affiliate holding an
amount of more than 10 per cent of the capital stock of a national
bank to set up specifically reserves so as to protect double liability
of stock in that it must hold 10 per cent of the par value of the
bank stock owned in Government bonds and 15 per cent in investments other than the bank's stock; furthermore, this amount so held
must ultimately be brought up to 100 per cent of national bank stock
owned.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

191

This provision is definitely intended to strike at holding companies of bank stocks, but it is so far reaching that in a number of
mg as a division of national banks, who hold substantial stock in
cases it would create a serious situation, and trust companies, operatsuch national bank and are conducted purely as fiduciary institutions, might impair their soundness and service to estates and individuals. The amount of free assets required is so excessive as possibly to require the dissolution of holding companies—their embarking
on an investment trust business.
But, of course, you gentlemen are familiar with the details. I
should like to ask if this section would have the effect stated on the
affiliate that we have in connection with our institution? In 1929,
three banks in St. Louis were consolidated into the First National
Bank of St. Louis, and in the set-up there is the St. Louis Union
Trust Co., which has one-third of our stock.
I should like to explain that the St. Louis Union Trust Co. does
nothing but a fiduciary business, accepts no deposits. It does not
deal in stocks. It does not deal in oonds, mortgages, or stocks.
It is a purely fiduciary trust company, acting in that capacity.
As I read this bill the St. Louis Union Trust Co., in order to have
a voting privilege in our bank would have to get a permit, and
would further have to set up 10 per cent of its capital as a reserve
for the double liability of our stock. And furthermore, this amount
would have to be built up ultimately to the 100 per cent of the
bank stock it owned.
Now, gentlemen of the committee, there is an affiliate that has
i,o connection whatever with stocks or bonds of anything but is
doing a purely trust company business. At the same time it now
owns 31 per cent of the stock of our bank. Would that section
apply to such a case?
Senator GLASS. That section was intended to prevent holding
companies from controlling Federal reserve banks? In the Minneapolis district that may be done now, holding companies may elect
six of the nine directors.
Mr. WILLIS. I think, Mr. Hawes, that your question would be
answered by referring to the definition of affiliate on page 2.
Mr. HAWES. I have been over that.
Mr. WILLIS. It calls there for a majority. I understand that your
trust company holds a third of the stock of your bank.
Mr. HAWES. Yes. But it also goes on to say in paragraph 3
[reading]:
Of which either a majority of the members of its executive committee or a
majority of its directors, trustees, or other managing officers or directors of
a national bank or member bank.

Mr. WILUS. Well, Mr. Hawes, you did not mention anything about
that point. Perhaps you would enlighten us on it.
Mr. HAWES. I am sorry I did not mention it, but practically 90
per cent of their directors are also our directors.
Mr. WILUS. That would evidently bring you under section 2 as
an affiliate, but not, I think, as the kind oi affiliate you spoke of
first. You there seem to identify yourself with so-called group
banking as described in a later section.




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NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

Mr. HAWES. I might say that our bank owns no stock in any
other bank whatsoever, nor has it any interest in any other bank.
Senator GLASS. This provision is intended to apply to group
bankers.
Mr. HAWES. Would it apply to my case?
Senator GLASS. Not as you described it.
Mr. HAWES. It would not even if the directors were the same ?
Mr. WILLIS. It would not fall under the head of group banking,
no. sir. In a case of that kind you would be an affiliate, very
distinctly.
Mr. HAWES. Then they would have to set up those reserves?
Mr. WILLTS. N O ; I think not. Of course, one would want to have
all the details before giving a positive answer.
Mr. HAWES. While we are on that, Senator Glass, I <4o not want
to sail under false colors. I said we have no interest in any other
bank except we do operate the First National Co., which deals solely
in mortgages, Government bonds, municipal bonds, and real-estate
bonds, it handles no stocks whatsoever.
Mr. WILLIS. It might do so, however, if you so choseMr. HAWES. It might do so. It never has, however.
Mr. WILLIS. The control of that is specified by a paragraph right
here.
Mr. HAWES (reading):
SEC. 20. Restrictions on loans to affiliate*.—This section extends tlie 10 per
cent limit on loans to corporations to include all obligations of all subsidiaries.

Therefore how shall subsidiaries be defined, and how far is this
provision to be carried?
Senator GLASS. We think we give a pretty comprehensive definition of affiliates in the bill.
Mr. HAWES. It covers the corporations in there. In other words,
would that cover a 10 per cent limit on a corporation that owned
half a dozen other corporations or one corporation that owned the
stock of two other corporations? Does this limit mean that we could
only lend 10 per cent to the parent company and nothing to their
affiliates?
Senator GLASS. Well, I would think so; yes.
Mr. WILLIS. What provision is that, Mr. Hawes? I have lost
track of it.
Mr. HAWES. That is section 2 0 , division (a). That is all I have,
Mr. Chairman.
Senator BROOKIIART. Any ciuestions?
Senator GLASS. I do not wish to ask any.
Senator MORRISON. In this definition of an affiliate here, at the
end of it it says " or a corporation." Is it not attended with some
possible difficulty? It might mean just any sort of little business
enterprise.
Mr. HAWES. Yes, sir: I think it is.
Senator MORRISON. " O r a corporation." That might be an investment company or a bonding company; it might be a manufacturing enterprise or a store or anything that a bank had to take over
for a debt.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

193

. Mr. HAWES. That is correct, and that is the reason I asked the
question, how are subsidiaries to be defined?
Senator MORRISON. The definition of " affiliate" is described ai
the last by saying " o r a corporation" without any modification
whatever.
Mr. HAWES. I agree with you, Mr. Senator. I want to thank you
gentlemen for your courtesy.
Senator BROOKHART. Mr. Wolfe.
STATEMENT OF EDMUND S. WOLFE, PRESIDENT FIRST NATIONAL
B A N E , BRIDGEPORT, CONN.

Senator BROOKHART. YOU may proceed.
Mr. WOLFE. Mr. Chairman and gentlemen of the committee, as
former president of the national-bank division of the American
Banking Association, and as president of a bank in Bridgeport,
Conn., in a manufacturing community, and as representing a State
in which we have, unfortunately, but few members of the Federal
reserve system, we have been somewhat concerned with the general
effect that the bill has had. Not only are we afraid that we shall
have further deflations—deflation from the system, but any opportunity we had of adding State member banks to the system lias almost
passed. There are three main objections that banks* of our type find
to the bill, and I am going to confine mv remarks, first, in the form
of a written statement, to those three sections.
The sections are: first, section 8, relating to collateral loan limitations; section 13, dealing with reserve requirements: and section 14,
providing for segregation of time deposits.
I feel that section 8 confers too much power on the Federal Reserve
Board in that it appears from the language that the board may
restrict, within its discretion, all loans made bv member banks which
may be secured by any type of collateral. If the bill were specific,
naming the percentage of capital and surplus that could be so
invested, the banks would feel more assured regarding the wording
of this section, which now seems dangerous and uncertain. If. in
naming a specific percentage, it were low it would have the same
objection as naming no percentage. The power thus given the board
is not of a specific nature. Quite a number of banks have legitimate
commercial and individual loans secure by collateral, which would
be affected by this provision; and in order to comply with the section
it might result in these banks having to withdraw from the Federal
reserve system.
Senator COUZENS. What percentage would you suggest not to make
it too low and at the same time not to make it too high ?

Mr. WOLFE. Senator, not under 500 per cent of capital and surplus.
Senator COUZENS. What percentage of the deposits?
Mr. WOLFE. Well, the limitation has been with reference to capital
and surplus. It has not been with reference to deposits.
Senator COUZENS.^ It occurs to me it would be better to have the
percentage on deposits rather than on capital and surplus.
Mr. WOLFE. That may be true.
Senator COUZENS. If so, what percentage would you say?

# Mr. WOLFE. That would be difficult to say, except at the present
time, unfortunately, a large percentage of our loans have drifted




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NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

into just that collateral loan because of lack of eligibility loans and
other exorbitant types.
Senator COUZENS. Would you'say 10 per cent was a reasonable percentage of the deposits?
Mr. WOLFE. That is entirely too low, I would say.
Senator COUZENS. If that is entirely too low, what would you say
would be right?
Sir. WOLFE. There is no intention to evade entirely. To be helpful in answering your question direct, I could answer it more by
saving what I thought was too low rather than expressing an
opinion as to what 1 think would be the proper percentage. At
the present time, as much as 50 per cent.
Senator COUZENS. Is not that too high?
Mr. WOLFE. Under some circumstances, yes; depending on the
tvpc of bank. I think the type of bank and the management of
the bank would have a lot to do with it and the character of the
loans.
Senator COUZENS. We can not write into the law specifying the
type of management, can we?

Mr. WOLFE. Well, you are trying to get authority for the Federal
Reserve Board to control the management so the management has
but little discretion. That is what rather alarms us.
Senator COUZENS. I rather object to that myself. I was trying
to get at some reasonable method whereby we could take that control
out of the board.
Senator GLASS. YOU see. the section relates itself wholly to the
carrying of speculative securities; that is, stock-exchange securities,
and then places that under the discretion of the membership of the
board, dehning what they shall be. I have been a little puzzled
sitting here, Mr. Wolfe, hearing objections to giving the federal
Reserve Board authority in these matters. I pick up the existing
law—the provision as to national bank collection in the Federal
reserve act—and note in scores of instances, where just as much
power is given the board in other matters, and the bank itself, as
decided by the courts, has unlimited right to refuse to rediscount
for a member bank altogether if it pleases. This power is conservatively comparable, I think, to many other powers of the board
by the existing act, and this particular provision, subsection M of
section 8 of the bill, relates itself altogether to carrying speculative
securities.
Mr. WOLFE. Senator, in that
Senator GLASS. Other people call them speculative. I sometimes,
unhappily, use the term '* gambling." Maybe that is not that. But
is there any good reason to suppose that we could be wiser in fixing
legislatively the percentages better than the Federal Reserve Board
may do it? The whole implication of this provision is that the
board may not do it except when circumstances themselves require
that it should do it; and that provision requires-that there shall be
concurrence of at least six of the seven members of the* board to
do it.
Mr. WOLFE. That is i>erfectly true, Senator Glass; but I knpw we
in Connecticut rather view with alarm the unfortunate tendency to
lowering of our holding of eligible paper, and the banks can not




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

195

escape the large holding they have as security loans. So to say what
the percentage i& to be is to say that our section would be the same as
any other section of the countrv and to have the Federal Reserve
Board say a particular percentage would apply right straight
through, and it does not work out that way.
Senator GLASS. No; it does not necessarily imply, and certainlv
does not require, that the board shall pass a general regulation, it
says " for anv member bank." In other words, the situation would
present itself that here is a member bank carrying such a high percentage of speculative loans that it might be that six of the seven
members of the Federal Reserve Boara would deem it desirable to
call upon that bank to change the percentage of its speculative loans.
Mr. WOLFE. I think the banks as the}7 view the regulation as now
drawn would feel far safer if some percentage were put in there, and,
as previously remarked, that percentage not seemingly too low as to
work a hardship. That might withdraw any objection to that particular section. But as it is now, it is left so open that even though
it might be applied to only one member bank, conceivably it could
be applied to all member banks and voting for it would make that
possible.
Senator GLASS. It could be that the member banks were making
extensive speculative loans, yes, and it might be that the board would
enact a general regulation b^sed upon its intimate observation and
experience with the member banking business that would put a safe
limitation upon it; and it occurred to the subcommittee that we
coulcl better rely upon the board to do that intelligently than by
the committee or by the act itself.
Mr. WOLFE. Talang our own specific bank and answering Senator
Couzens direct: Our collateral loans at the present time are 50 per
cent of our total loan portfolio. They were, at that figure, about
two and a half times our capital and surplus.
Senator COUZENS. What is it of your aggregate deposits? What
percentage of your deposits ?
Mr. WOLFE. About 8 5 per cent of our deposits. Our deposits are
about $17,000,000. About $6,000,000 collateral loans.
Senator COUZENS. DO you consider the Federal Reserve Board has
functioned properly up to date?
Mr. WOLFE. That is a rather broad question. I would rather not
answer.
Senator COUZENS. I understand that the reason some of these restrictions are placed in the bill is because there is a conviction in
some parts of Congress, at least, that the Federal Reserve Board has
not functioned properly. I assume that you are afraid you might
be penalized if you would answer in the affirmative.
M r . WOLFE. N o t a t a l l .
Senator GLASS. I think Mr. Wolfe has given us a sufficient answer.
Senator COUZENS. I think he has, too.
Senator BLAINE. Does not the Federal Reserve Board claim that

it has not certain powers it seems to have?
Senator GLASS. The Federal Reserve Board claims that under existing law—I do not agree with it, I may say—but it does claim that
under existing law its powers in this respect are not definite enough,
and the board itself asks us to make them definite.
Senator BLAINE. That is my understanding.



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NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

Senator COUZENS. There is plenty of authority in the bill that has
not been exercised.
Mr. WOLFE. That may be true of the authority under the present
bill.
.
Senator COUZENS. I say, under the present bill it has not been
exercised, and we had a distinguished witness here yesterday or
the day before yesterday who thought it ought not to be exercised,
that the law should not be enforced.
Senator BROOKHART. Proceed.
Mr. WOLFE. Quite a number of banks have legitimate commercial
individual loans secured by collateral which would be affected by
this provision, and in order to comply with this section it might
result in these banks having to withdraw from the Federal reserve
system. The effect on the banks not borrowing from the system is
practically the same as that on the banks who do borrow, for they
must keep in condition to use the rediscount privileges. I believe
that section 8 gives the Federal Reserve Board unnecessary power
of control over the policy management of member banks which are
nonborrowers.
With regard to section 13, I believe that the increase in reserve
requirements on time deposits as provided in the bill is an unnecessary burden on the banks. Experience has shown that the Federal
reserve banks have had ample funds to meet all member-bank requirements, and this additional reserve burden draws from the
working funds of the member banks and transfers unneeded
deposits to the Federal reserve banks. This section, if enacted into
law, would work a particular hardship upon the banks located in the
cities where there is not a Federal reserve bank or a branch bank,
particularly in the rural sections. It could not result otherwise than
m a withdrawal from membership of this type of banks through
its inability to compete with nonmember banks whose reserve requirements are not so burdensome. Consideration should be given
to the use of till cash as reserves. *
Senator GLASS. D O you think, really, that the reserve requirements of the existing law are very burdensome?
Mr. WOLFE. Not the existing law. I think they may prove to
be in the proposed bill, that increases them.
Senator GLASS. Were they so regarded before we made this one.
alteration as to time deposits? You know, since the enactment, or
beginning with the enactment of the Federal reserve act, we have
constantly reduced the reserves of the banks. We have never increased them. This rejection of reserves held behind time deposits
to 3 per cent was made, not because it was generally thought that a
reserve was burdensome, but more to encourage time deposits; and
instead of doing just exa.ctly that the information that we have got
from our questionnaires and from our previous hearing and inquiries
was to the effect that the demand deposits and reserve deposits
had been so manipulated as to take advantage of the 3 per cent for
demand deposits.
Mr. WOLFE. IS that true? A deliberate shifting to time and segregated deposits.
Senator GLASS. Yes, sir.
Mr. WOLFE. I would like to report I do not believe that has been
the practice in my section of the country. We are only fearful as to



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

197

just what else mav be behind the increase in reserve on segregated
savings funds; whether putting them all on the same basis with
regard to reserves is not, after all, a merging, a gradual doing away
with the type of deposits which banks in communities such as ours
can not escape. We have a lot of funds that, owing to customers
requirements, have drifted into time deposits. The bank tries to
avoid that because it means increased interest rate paid 011 them, and
the loss in that respect is much higher than the additional reserve
requirement on demand deposits.
Senator GLASS. Have you considered the question, and would
you like us to incorporate in this bill immediately the proposed
velocity method of computing reserves?
Mr. WOLFE. We were rather impressed with the report that that
special committee made. We think that is the scientific way of establishing reserves—the activity of deposits or reserves as against
deposits, in relation to their activity.
Senator GLASS. YOU think it would readily be preferred by the
banking community generally throughout the United States and
would create no confusion?
Mr. WOLFE. I think there has been a very favorable reception to
that report, particularly among those who are technically informed
of the reasons for that iorm of computation.
Senator GLASS. YOU would think the New York banks should be
technically informed, would you not? The reaction there was very
antagonistic. I did not mean to interrupt you.
Mr. WOLFE. YOU did not. Consideration should be given to the
use of till cash as reserves. This principle is recognized m the report
of the committee on reserves, which provides that in case of banks
not located in cities where there is a Federal reserve bank or branch
bank a fair percentage of their legal reserve might be carried in
currency on hand.
The other subsections of section 13 do not concern the type of
bank that I referred to, and consequently I will not refer to them.
With regard to section 14, I believe there will be much hardship
worked on banks in the rural districts having time deposits, ana
restriction on the investment of these funds has been so narrowed
that it can not help but hinder the bank in its work. While the national banks are the backbone of our commercial activity, nevertheless in the rural sections there does come the necessity of making
real estate loans. Under the bill the investment in bank premises
and the attempt to define unsecured loans whose eventual safety depends upon real estate value and reserve against time deposits, all
classified as real estate loans, will absorb much of the funds that
otherwise might so into legitimate real estate loans for the account
of customers. The requirement that the Comptroller of the Currency revise and reappraise real estate loans at each examination
seems impossible of satisfactory administration, for 110 asset of a
bank is more difficult of appraisal than a real estate loan. It is fair
to assume that large amount of funds now in commercial use in our
banks will be transferred to time deposits because of the security
afforded and also time deposits in excess of real estate collateral,
which deposits are now in commercial use and must be diverted to
eligible securities.
Senator BROOKHART. Have you any questions?



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NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

Senator FLETCHER. Have you any suggestions of any amendments
by which you could make this bill more acceptable?
Mr. WOLFE. On the particular clauses that I have mentioned,.
Senator?
Senator FLETCHER. Yes.
Mr. WOLFE. I would rather have the present bill let alone than
attempt to change it in the manner that you have
Senator GLASS. YOU mean the present law?
Mr. WOLFE. The present law. Pardon me.
Mr. WILLIS. I notice you use the word " collateral/' Mr. Wolfe,
frequently in your testimony. In what sense do you use it there?
Mr. WOLFE. Depending on the section, Mr. Willis. Which one did
you refer to?
Air. WILLIS. YOU were speaking of it right along.
Mr. WOLFE. As collateral loan?
Mr. WILLIS. Section '8. You spoke of your bank as having a
large percentage of its loans in the form of collateral loans. In
what sense do you use the word there?
Mr. WOLFE. Listed bonds, stocks, and other securities.
Mr. WILLIS. You do not lend much to farmers on warehouse
receipts?
Mr. WOLFE. Practically none. We are not a rural community.
We are a manufacturing community.
Mr. WILLIS. SO that m your sense " collateral loan " means loans
on stocks and bonds?
Mr. WOLFE. Generally listed securities.
Senator WALCOTT. DO you carry any foreign securities?
Mr. WOLFE. Very few.
Mr. WILLIS. In connection with what you say of the change in
reserves there, I notice you say you think till cash should be given a
status as reserves. In the plan that you referred to suggested by the
Reserve Committee, that till cash is made to include national-bank
notes and Federal reserve notes, you remember?
M r . WOLFE. Y e s .
Mr. WILLIS. Does

that seem to you right, or not, to include those
in the till cash?
Mr. WOLFE. I see no objection to it. The percentage of them
would be so low it would have no appreciable effect.
Mr. WILLIS. It seems to me one ought not to take a hypothesis of
that kind. Suppose your percentage would be beneficial—we are
making a general rule that applies to cases where they are both large
and small.
Mr. WOLFE. I would say I see no objection.
Mr. WILLIS. NO matter how large they were. There has been
some difference of opinion. I should like to know what you thought
on that.
Senator BROOKHART. If you count the till cash as reserve, that
would reduce the reserves in the Federal reserve bank?
Mr. WOLFE. In the Federal reserve bank.
Senator WALCOTT. Mr. Wolfe, with reference to affiliates, have you
given any particular thought to the question of regulating the
affiliates ?




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

199

Mr. WOLFE. Senator Walcott, we have been a little selfish in
that. Our bank has an affiliate but it is merely a holding company
and not a marketing or underwriting company.
Senator WALCOTT. I understand, but 1 was anxious to get your
individual opinion as to the advisability of regulating affiliates along
the lines outlined by this bill.
Mr. WOLFE. If I do not answer your next question21 would like
to say I think they could bear some moderate regulation.
Mr. WILLIS. About this reserve question, Mr. Wolfe—am I interrupting you, Senator?
- Senator WALCOTT. NO; I had finished.
w
"
>u regard reserves at the present time as too
Mr. WOLFE. Not as a hardship, Mr. Willis.
Mr. WILLIS. Not as a hardsnip, certainly; but if you were establishing reserves, would you establish them about where they
are now, or larger or smaller?
Mr. WOLFE. About where they are now; and I only have our own
experience in our own type of bank.
Mr. WILLIS. Under any new plan, such as this one we speak of,
would it not be well to have a minimum requirement that they should
not be less than they are now, for example i The plan contains a
maximum requirement, as you remember.
Mr. WOLFE. Yes; I remember.
Mr. WILLIS. Would it be well to go so far as to take it without
either maximum or minimum?
Mr. WOLFE. Well, obviously it would be -fair for both the maximum and minimum.
Mr. WILLIS. If you had one, you would have the other?
Mr. WOLFE. Yes. It would naturally follow.
Mr. WILLIS. If you were going to put in a minimum, would you
think it would be fair to put the two at the existing level ?
Mr. WOLFE. I think so; again speaking from our own experience
only, because it strangely works out there is no hardship, and it
meets our wishes very well.
Senator WALCOTT. May I insert a question there? Would it in
your city be safe or advisable to have a minimum expressed without
a maximum?
Mr. WOLFE. I see no objection to that. Senator Walcott. I car
not see how there would be any hardship in that.
Senator GLASS. Would it be wise to have a maximum expression
without a minimum?
Mr. WOLFE. YOU have done that.
Mr. WILLIS. I notice in your testimony you use the word " segregate" assets behind savings deposits. That is merely colloquial,
is it not? That is, you do not think this bill does any segregation?
Mr. WOLFE. It s a y s , i n liquidation."
Mr. WILLIS. It simply gives a prior lien on certain assets after
the other assets have been exhausted.
Mr. WOLFE. But it does specifically say " in liquidation." Those
time deposits shall be paid out of that. ^
Mr. WILLIS. It says these shall be a prior lien for certain deposits.
Mr. WOLFE. I do not see anything else to that but segregation.
Mr. WILLIS. There is nothing? You do not think



200

NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

Mr. WOLFE. NO segregation in a physical sense, but a form of securitv.
Mr. ViLLis. In the event of liquidation only ?
M r . WOLFE. Y e s .

,

,

*

.

.

.

Al

.

Mr. WILLIS. But you do not gather there is anything here that
compels the investment of any special amount in various kinds of
Mr. WOLFE.. Except as regulated by one-half.
Mr. WILLIS. It is permissible, though*
, ,
#
Mr. WOLFE. Yes; but the percentage of any investment—and I
think the bill is unfortunate in that respect-4hat is a capital investment—the percentage in loans whose final payment is realized
on real-estate security, would be the hardest problem any bank would
have to determine.
Mr. WILLIS. That is all permissive, however.
Air. WOLFE. That is perfectly true; but about that it must go into
acceptable securities up to one-half of your deposits.
Mr. WILLIS. It is not compulsory in any case, you understand.
Mr. WOLFE. If you are going to invest it
Air. WILLIS. YOU can g o on generally as y o u d o n o w .

Mr. WOLFE. YOU see, we have the problem in Connecticut, particularly germane to us, where we do nave segregation of practical
guarantee of savings in time deposits of our commercial banks, and it
is quite a problem with us.
Mr. WILLIS. But under this if you wanted to do so, of coursp, you
could go on using your funds largely as you do now, could you not!
This is simply a permissive limitation.
Mr. WOLFE. Yes; but in liquidation it is
Mr. WILLIS. A prior lien?
Mr. WOLFE. A prior lien; and it tends to drive your commercial
deposits to your time deposits, for two reasons: First, in liquidation
they would be obviously apparently security; secondly, there would be
a higher rate of interest.
Air. WILLIS. Other witnesses have testified about the prospect of
driving them in the opposite direction. .
Mr. WOLFE. There would be some portion of them that would be
driven away.
Mr. WILMS. SO if you get them too high, you would have to contrive some way to force them back.
Mr. WOLFE. 1 would have to get a pencil and paper and figure
that.
Senator BROOKUAKT. IS that all? Thank you, Air. Wolfe.
The next is Air. Allendoerfer.
STATEMENT OF 0 . W . ALLENDOEBFEB, V I C E PRESIDENT OF T H E
FIBST N A T I O N A L B A N E OF K A N S A S C I T Y , MO.

Air. ALLENDOERFER. Gentlemen, I expected to be called for tomorrow's hearing and to prepare a statement to-night after having
learned something about the methods of the hearing. Since there is
to be no hearing to-morrow and I have no prepared statement, if I
may, I will speak from some notes.
' I represent the Alissouri Bankers' Association. I was reared in
a country bank. Our bank in Kansas City is the correspondent for




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

201

a large number of country banks, with whose relations with our
bank I have a great deal to do; and what I have to say will be from
the standpoint of an interior banker with the thought of his country
constituents very close to his heart. The First National Bank, of
which I am vice president, has a capital of $2,000,000 and a surplus
and undivided profits of $3,600,000; total deposits, $54,000,000: and
$10,000,000 time deposits. The bank is 46 years old, 45 of which
have been under its present management, during all of which time
there have been no consolidations. Our bank has no affiliates. We
are not interested in branches or groups. We do not sell bonds or
real-estate loans. Our par value is $100, and we expect to remain
an independent unit.
Senator GLASS. That is a pretty nice bank.
Senator WALCOTT. A real commercial bank.
Senator FLETCHER. It sounds like a real bank.
Mr. ALLENDOERFER. Yes, sir. I have had no opportunity since
the call to come down here was made to confer with
Senator COUZENS. Who called you to come down here?
Mr. ALLENDOERFER. The officials .of the American Bankers Association, and particularly the president of the Missouri Bankers Association. I have had no opportunity to talk with officers of that
association or officers of our own bank. What'I will say will be my
own thinking on this subject.
I have, of coiirse, known of Senator Glass for many years and
know of his wonderful work in the Federal reserve act and his hand
in recent legislation has been very apparent, and it has been with
much gratitude in my heart that I have known that in his position
we have a man so zealous for the preservation of the integrity of
our banking and currency system. It is, therefore, with a great
deal of diffidence that I appear in opposition to any bill which he
has submitted. If I guess properly the intent behind many of the
1provisions of the bill, I am in sympathy with the purposes aimed at,
rat the general situation of the country is such that I do not believe
the bill m its present form and at this time should be passed. We
are just beginning to recover confidence, both the public and the
bankers. This bill contains matters of so much importance and so
difficult to understand quickly that I believe that the bankers and
the public alike will be stunned and that fear of its effect will cause
hesitation and set back our recovery. In my judgment the bill
should be broken up and presented as several' subjects so that the
particular features of each part may be concentrated on and given
serious and long consideration. I Relieve some of them should be
reintroduced and acted on by the Senate: others, if held for a few
weeks or a few months for further consideration, would, I believe,
be somewhat changed before they were presented to the Senate.
Some of them I think could be held for as long a period as two years
without doing any serious damage.
I will not speak on the sections dealing with affiliates, groups, or
branches or capital stock, as others are much better qualified to speak
on those things. The matters about which I will speak are in a
measure details. Some of them I think are quite important and are
mentioned largely for the purpose of bringing to your attention the
fact that a number of these provisions need ftiller and more serious
consideration before going to the Congress,



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NATIONAL. AND FEDERAL RESERVE BANKING SYSTEMS

I mention first, in a general way, that the words "collateral
security " should nave some definition.
Senator FLETCHER. Will you refer to the sections!
Mr. ALLENDOERFER. I will, except that "collateral security"
appears in so many sections that it is general.
Senator BULKLEY. Will you tell us what is your definition of
collateral security?
Mr. ALLENDOERFER. Well, collateral security in its general acceptance would include, for example, things which I think you do not
mean to include in that, which I am about to speak of.
Senator BULKLEY. Give us some examples, if you will.
Mr. ALLENDOERFER. Collateral security as generally accepted would
include warehouse receipts covering commodities. I think it is not
the intent of the bill to prevent or to hold down the loaning of a
bank in an agricultural community on warehouse receipts secured
by commodities. In our relations with country banks, even some
member banks, we have as collateral to their bills payable their customers' notes, a large part of which would be eligible for rediscount
at the Federal reserve bank, but you call it none the less collateral
security. It is collateral security. That word is generally accepted.
Senator BULKLEY. Would the phrase " security collateral" mean
anything different from " collateral security "?
Mr. ALLENDOERFER. I am afraid I can not furnish the definition,
but I think one should be provided.
Senator BULKLEY. YOU think it should be put right in the act?
Mr. ALLENDOERFER. I do not see how you are going to get around
having it to some extent defined in the act.
Senator GLASS. If a highly intelligent and long-experienced banker
of your type can not define it for us, it leaves us with an almost
impossible task, does it not?
Mr. ALLENDOERFER. I believe that the experts who drew this bill,
if it is reconsidered and a definition sought for, will be able to find
words which will express just the type of collateral security they
had in mind in drawing these sections.
Senator GLASS. My dear sir, I can say to you that we have done
everything but sleep" with experts, and I have dreamed about them,
and other members of the committee have eaten with them. I have
not.
Mr. ALLENDOERFER. IS it in order for me to ask questions, Senator?
May I ask, then, whether you have found that a difficult thing to
define ?
Senator GLASS. I know very definitely, sir, what I mean by that.
I do not mean warehouse receipts for commodities at all. I mean
more or less speculative transactions represented by the market. I
mean paper defined by the existing act as ineligible for rediscount
by the Federal reserve bank.
Mr. ALLEXDOKRFER. Would it be, as a suggestion, possible to work
that out by exclusion and say that collateral securitv consisting of
warehouse receipts, bills payable secured bv eligible paper or by
Government securities would not be classified as collateral securitv ?
Mr. WILLIS. May I call your attention, Mr. Allendoerfer, to section
5200 of the Revised Statutes, in which warehouse receipts are men-




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203

tioned? They are not described there as collateral. The term "collateral " is not so used there, as you recall.
. Mr. ALLENDOERFER. NO; I did not recall that.
Mr. WILLIS. Is there not danger that if you introduce a definition
of " collateral" here it will bring you into conflict with the word
as used elsewhere in the Bevised Statutes.
Mr. ALLENDOERFER. Just on the theory of being safe I would like
to see some of these things excluded from the possible classification
as collateral security.
Mr. WILLIS. I agree with you.
Senator GLASS. Yes. We want to be safe.
Senator FLETCHER. Do you think this definition of collateral
security excludes those that were specified in section 5200, that Mr.
Willis mentions I
Mr. ALLENDOERFER. In the general acceptance of the words, " collateral securitv " notes secured by warehouse receipts on wheat would
be in a classification which I do not think the purpose of this bill
intended.
t
Senator FLETCHER. It is expressly provided for in that section
5200.
Mr. ALLENDOERFER. Yes. Now, in some matters to which I will
call your attention I hope that I may not seem to be nagging. I do
not mean to be. I am going to speak of some points which I think
are not clear here, and if I seem to be silly—I know that they ought
to be clear to me—and they do not do the committee any good, perhaps the record will help some others who are trying to get this
through their heads and understand it a little better.
I will refer now to page 5 of the act, beginning with line 7. This
is in connection with the subscription to the stocky of the Liquidating
Corporation by the Federal reserve banks (reading):
After the aforesaid dividend claims have been met, the net earnings beginning with the net earnings for the year ending December 1, 1932, shall be paid
to the Federal Liquidating Corporation provided for in section 12-4) of this
act and shall be used by said corporation for carrying out the purposes of said
section.

On a first reading of that—and a second and third in my case—it
would appear that the surplus funds of the Federal reserve banks
were being fixed at the figure at which they were on December 31,
1931, which could not be increased by earnings because these would
go into the capital stock of the Liquidating Corporation; which I
object to, first, on the theory that more surplus funds would not hurt
the Federal reserve banks; second, because that limiting of their surplus funds may result in the dividends to member banks being
deferred from time to time instead of being paid annually as was
probably intended. And, furthermore, in a general way, the effect*
of that is to divert Government money which otherwise goes into
the general revenue into another arm of the Government without
appropriation. Now, I know that has been done.
Senator BULKLET. That is the point. It is in no sense Government money. These banks are owned by the member banks and not
by the Government, and it goes, not to another arm of the Government, but into another corporation owned by the member banks and
for their benefit.




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NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

Mr. ALLENDOERFER. Yes, Senator. This takes away that part of
the earnings of the Federal banks which has in the past been paid
as a franchise tax to the Government; as we think, rather unjustly.
Senator GLASS. Yes. We think that the Government really ought
to restore to the system the 147 millions of dollars it has already
gotten out of the system.
Mr. ALLENDOERFER. I will not dispute that with you at all. The
point I am setting at is this: Hie capital of this corporation is really
to be provided out of Government mcome to a considerable extent,
if it is considerably Government funds anyway
Senator BULKLEY. I do not think that is a fair statement. We
do not conceive any of this as Government funds. We are simply
deciding that the Government shall stop taking that which in fairness does not belong to it.
Senator GLASS. We think, sir, that the 12 Federal reserve banks
in their essential operation do an unrequited service to the Government that a long way more than compensates the banks for any
privileges they get from the Government. The fact of the business
is that all of the liberty loans and* the Victory loans and the placing
of the Treasury certificates was done largely through the organization
of the Federal reserve banks for the Government without any compensation at all. .
Mr. ALLENDOERFER. Senator,-I quite-agree with you about that.
Senator -GLASS. And 1 may say to you, right on that point, that
as that section was originally drafted by me, before we agreed to
this liquidation corporation, 1 was proposing to distribute a greater
share of the earnings of the banks to the member banks direct.
Mr. ALLENDOERFER. The fault that I am poorly expressing is that,
indirectly at least, the Government is getting some of the money
which it formerly did receive into the stock in this corporation.
Senator GLASS. No; the Government is not getting it there. We
have stopped paying that money to the Government and are taking
it for another purpose of the member banks.
Mr. ALLENDOERFER. May I reread part of the sentence I just read,
in order that what I am driving at may be clear? [Beading:]
After the aforesaid dividend claims have been fully met, the net earnings
beginning with the net earnings for the year ending December 81, 1032, shaU
be paid to tlie Federal liquidating Corporation, provided for in section 12-D.

Senator GLASS. Before you leave that
Mr. ALLENDOERFER. I am not leaving it. Senator.
Senator GLASS. Well, right on that point, you did suggest that it
might be inadvisable to retain Federal reserve bank surplus at the
existing figure.
Mr. ALLENDOERFER. I would rather not have it fixed at that minimum figure.
Senator GLASS. Well, what I want to say in that connection is,
the Federal Reserve Board after a long experience with the system
recommended to Congress to authorize a surplus of 50 per cent fixed
and definite. Congress went along and went beyond that, and
authorized a surplus of 100 per cent and an annual surplus thereafter of 10 per cent, and it seemed to the committee that that surplus
was adequate.




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205

Mr. ALLENDOERFER. The point that puzzles me about the% wording
of that which I have just read, is tying in with section 12-B, page 14,
beginning with line 13. This provides for the payment of the remainder of the subscription of the Federal reserve bank based on
their present surplus. [Beading:]
The remainder of such subscription shall be subject to call from time to time
by the board of directors upon 00 days* notice, and annual subscriptions to
such stock shall be made by such bank in an amount equal to one-fourth of
the annual increase in such surplus.

Section 5 says that " the earnings " shall be paid in. This section
says that one-fourth of the increase in surplus shall be subscribed.
Now, it may be intended there the increase of surplus earnings out
of additional memberships.
Senator GLASS. That is one way the surplus could be.
Mr. ALLENDOERFER. The only way it could be.
Senator BULKLEY. I do not think that is quite accurate, and I
do think you have made a criticism there that needs a little fixing
because, as I conceive it, the surplus is none the less increased because the amount of it is paid from the Liquidating Corporation.
The stock of the Liquidating Corporation is acquired for it, and it
increases the surplus just the same.
• Mr. ALLENDOERFER. Well, it does seem it might need a little
smoothing.
Senator BtXKLEY. I think it does.

I think you are quite right.,

Mr. ALLENDOERFER. While we are on* section 12: The provision
is that the directors of the Liquidating Corporation shall be the
members of the Federal open-market committee. I just can not see
why the members of the Federal open-market committee should
be selected to handle a liquidating corporation. It is assumed that
the members of the Federal open-market committee are men who
are specialists in that field, and why those men also fit over into a
liquidating corporation instead of the selection of any other men
does not occur to me.
Senator GLASS. It avoids a multiplicity of activities, a multiplicity of committees and boards in the system.
Mr. WILLIS. IS it not a fact that the persons who managed the
open-market operations in the past have not been experts in that
field at all, but have been officials of reserve banks who got their
information from persons more or less expert? Is it not also
a fact that when acting as directors of this Liquidating Corporation
they would not do the work themselves, but that they would employ
qualified men for the work of a $218,000,000 corporation so that
they would simply act in the same way that directors of banks act?
Surely their judgment would be good on banking customs in general.
Mr. ALLENDOERFER. Well, at any rate they are operating officers of
the Federal reserve banks and they are the directors of the Liquidating Corporation. It seems to me that they are very likely to be in
rather a bad situation. In the first place," the failed bant is likely
to be a debtor to the Federal reserve bank. They are officers of the
Federal reserve bank that lends them the money, and they are the
officers of the Liquidating Corporation that works out the security
of the makers of the notes. The Liquidating Corporation is certain
not to be a very popular proposition. To tie the Liquidating Corpo311161—32—ptI




14

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NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

ration closely with the operating officers of the Federal reserve
banks, it seems to me to be rather bad psychology as to those debtors
who are being forced to liquidate to pay their obligations held by
the Liquidating Corporation. There is likely to be a feeling, it
seems to me, that There is the Federal reserve bank set up to save
us. Now this other arm makes us sell the old homestead in order
to pay that loan." »
Senator GLASS. It would not be any worse psychology than the
receiverships that have been extending over a prolonged period of
time. I had a letter only the day before yesterday from a man from
your State of Missouri*'claiming that tlie bank in which he was a
depositor had been in the hands of a receiver for six years, and the
man who had manipulated the whole transaction is a very nigh official in the Federal Government here in Washington now andne has
not got a cent of his money in the whole six years. You could not
imagine any worse psychology than that. And when I was Secretary of the treasury my attention was called to the fact that a bank
out in Montana. I think it was, had been in the hands of the receiver
23 years and had not been closed.
Mr, AIXENDOERFER. The thought I have, Senator Glass, is the idea
of tying this liquidating corporation and its necessary functions,
identifying them so closely with the Federal reserve bank, which is
supposed to be and is, of course, doing work of a most constructive,
beneficial nature.

Senator GLASS. That is not an unreasonable comment.
Mr. ALLENDOERFER. I am afraid you will find a good many of
mine unreasonable.
Going down on page 14, a very minor matter, in line 22, reference
is made to the last call date of the year. The call date of the comptroller and the call date of the commissioners where the members
are State banks mav not be the same—there would be a little confusion as to which call date is meant. That follows on through, onto
page 15, line 6 and line 11. Where banks are called on to increase
the amount of their holding of stock in the corporation by reason of
an increase in their time and demand deposits, it says that this shall
be increased annually. I presume it means that last call date of the
year, though it is not so indicated.

In line 22 on page 15 we have about the same tiling again: That
when new banks go in they are required to subscribe for a proportion of their time and demand deposits. It does not say as to what
date their time and demand deposits shall be taken, whether the
date of the last call or the date of their application for entrance.
That also carries over onto page 16, line 7, where a member bank's
time and demand deposits are decreased: That it shall surrender
part of its stock. It does not say there the decrease shall be on some
certain date. If that date is the last call of the vear and approximates December 31. I think it would be physically impossible for
that bank not later than January 1 thereafter to surrender a portion
of its stock.
Back on page 15, line 9, is a provision that the shares of the
capital stock of the corporation owned by member banks shall not
be transferred or hypothecated. I can think of some very good
reasons that probably actuated the writer of this bill to put that in.
The elFect of that, however, is to make that an absolutely frozen



NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

207

asset. No matter how good, the bank owning it positively can not
use it for any purpose. Banks get plenty o f frozen assets without
setting one up bv legislation.
Mr. WILLIS. Could they not borrow on it at the reserve bank?
Mr. ALLENDOERFER. I would say no. It can not be transferred
or hypothecated. It seems to me that might be modified without
destroying the purpose for putting it in, by something along this
line; that it might be hypothecated with another member bank, the
Federal reserve bank or the Reconstruction Finance Corporation,
provided that the transferee can not surrender that stock for cancellation unless the bank to which it is issued has gone into liquidation.
On page 20 are the provisions with reference to the purchase of
the assets of closed banks by the liquidating corporation. I think
it begins on line 13. It seems to me that it will be next to impossible
for the liquidating corporation to purchase all of the assets at an
upset price without danger of loss to itself. It would be almost
impossible to value in a short period the total assets of an institution. Now, if they are going to purchase for less than they think
it is worth, even though the excess which they receive is afterwards
turned over to a receiver, it looks like rather strange way to handle
it. But what I am leading to is, if they do not purchase all, but
purchase part, you then have left a portion of the assets of that
bank being liquidated by the liquidating corporation and a portion
of it being liquidated by the receiver. If it is a Federal receiver,
you have the comptroller sitting in two jobs, which might not be
too great a conflict, but if the receiver is acting under State laws
as a receiver of a State bank, also a member bank, there is a conflict there, the answer to which I do not try to give you, but I believe
there might be some improvement made m that section of the bill.
Senator BROOKHART. On that proposition: This whole liquidating
idea is somewhat the idea of the cooperative banking system, and
in order to carry that out in a sound way, the proper way to do it
would be to take over all the assets at a price where it would be sure
to be exceeded and then return it back in a trade dividend.
Mr. ALLENDOERFER. Well, if that is to be done, then the provisions
for loans to the receivers which occur all through the same section
here are superfluous, because if you are going to take it over in
full by purchase with the excess afterwards returned to them, there
is no occasion for making loans to the receiver.
Senator BROOKHART. Perhaps that is true. I did not write this
section. It had no cooperative ideas in it.
Mr. ALLENDOERFER. Gentlemen, these suggestions are not intended
to be pin pricks and nagging. What I am trying to get at is that
there are in several of these sections points which I think require
some mature and more detailed consideration before the whole bill
goes through as it now is.
Mr. W I L U S . What would happen in this case: Suppose that the
tender of assets was made to the liquidating corporation. It, of
course, would look over the ground pretty carefullv before it would
buy a lot of assets of that kind at an upset price. ^Perhaps it would
reject a certain portion of them. Would that not result in a second
Digitized for tender of them to it so that it would eventually buy all of them?
FRASER


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NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

In other words, have you not got to give it a little bit of a bargaining power in order to afford some self-protection to the concern?
Mr. ALLENDOERFER. I think so. As I see it ; though, you get into
conflict with two different groups of people liquidating part of the
bank's assets.
Senator BLAINE. I would like to ask you a question. As I read this
law, does it not establish two agencies to handle closed banks—the
receiver on one hand and this board on the other ? Who is in charge ?
Mr. ALLENDOERFER. The receiver is in charge. Of course, if a
corporation bought a portion of the assets, they would own those
assets and would liquidate them as they thought best, with the restriction that it must be with due regard to the condition of credit
within the district.
Senator GLASS. And the purchase would enable the receiver
promptly to pay depositors in the failed bank whatever may be
coming to them.
. Mr. ALLENDOERFER. Yes. I am quite in favor of the liquidating
corporation. I think it is an essential thing, and one of the early
things that should be done. I am talking away here, trying to
have you see that there may be thoughts on these provisions which
are worth some further consideration.
Senator GLASS. We are glad to have them.
Mr. ALLENDOERFER. Which might result in this being taken out
and put through instead of being left a part of the whole bill.
Senator GLASS. YOU want to take out the popular provisions of
the bill, do you, and let us have our bitter fight over those that certain
interests do not want? Is that the idea?
. .
Mr. ALLENDOERFER. No. I know that question is asked-in a goodnatured spirit, Senator.
Senator GLASS. Oh, yes.
Mr. ALLENDOERFER. On page 2 0 — w e are still talking about this
liquidating corporation—in line 20 it says [reading] :
The corporation after it has realized on the assets shall make an additional
payment to the receiver of the hank equal to the amount of such excess, if any,
after taking a liquidation fee of 6 per cent of the sum thus realized.

Senator FLETCHER. That is page 21, not 20. You said on page 2 0 .
Senator GLASS. He has a different print there, perhaps.
Mr. ALLENDOERFER. It is on page 20 of the copy that I have.
Senator FLETCHER. That is right. I beg your pardon.
Mr. ALLENDOERFER. The question is coming to my mind on that:
I take it that that 6 per cent is on the total amount of assets which
are liquidated into cash.
Senator BROOKHART. That is on the cash realized.
Senator BULKLEY. On the total amount realized.
Mr. ALLENDOERFER. I would take it so. Now, then, are any of the
costs of liquidation to be deducted from this excess,- and is any deduction to be made for interest on the advances made by the liquidating corporation during the time that they are carrying this
advance and before they have been reimbursed ? I f that is not contemplated it seems to me that it is impossible for this corporation
to have any net income out of which to pay any dividends and to pay
its expenses and interest cost on its debentures and so forth for 6 per




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

209

cent of the total amount the collection of which might extend over
a period of several years. It just won't work.
Senator BULKLEY. YOU are not forgetting that it owns assets outright and would be entitled to any earnings that might be made on
those assets?
%
Mr. ALLENDOERFER. That is what I want to know; whether it
means that. It owns them outright. But it says that the entire
amount recovered in excess of that paid shall be turned over.
Senator BULKLEY. The question now is whether earnings on the
purchased assets would be part of the amount recovered. I should
think not, but perhaps you have raised a fair question.
Mr. WILLIS. May 1 say just by way of interest: We originally had
that much higher, and the reduction to 6 per cent was made after
various computations and data furnished by some of those who had
been engaged in liquidating closed banks. I think it is a very low
figure, 6 per cent.
Mr. ALLENDOERFER. Unless some of the cost of liquidation or earnings on assets while in liquidation may go to the corporation
Mr. W I L U S . If the corporation bought certain stocks and bonds,
they would belong to it and, obviously, the earnings on those would
apply to the person that bought them.
Senator BULKLEY. Jfo doubt they wrould apply to him.
Air. ALLENDOERFER. The point I would like to make in reply is, if
they apply to them, they would not figure here at all but they would
be earnings on something they owned. If they realized an excess on
it, they would have to turn itback to the receiver.
Senator BULKLEY. YOU can see the income was on a given number
of shares of stock that they bought, and under this language in your
opinion they have figured that as a part of the amount from which
the 6 per cent would be taken ?
Mr. ALLENDOERFER. It should not, but I think it is not at all clear.
Senator FLETCHER. It says: " If the amount realized on the assets
so purchased exceed the sum paid therefor, the receiver is to pay
over this last 6 per cent on the amount realized."
Mr. ALLENDOERFER. Well, the amount received on the assets—shall
we say the principal amount received on those assets? Income will
be received on them in the meantime. Does the corporation retain
the income?
Senator FLETCHER. I mean the amount received on the assets
should be in one fund, and then, if that exceeds what it costs, then
you deduct 6 per cent.
Senator BROOKHART. I think there is no distinction between principal and interest. It is all realized into the corporation there.
Air. ALLENDOERFER. It seems to me there is a point; that the intent
should be expressed a little more clearly.
Senator BULKLEY. That is right.
# Air. ALLENDOERFER. With that thought in mind, that the corporation may not make any money and, therefore, no dividends, the next
a u e s t i o n becomes quite silly. * But on page 14 the provision is that
be class A stockholders sliall receive dividends to the extent of 30
per cent of net earnings in any one year. Class B stockholders get
no dividends. The life of the corporation is 20 years. It may "be
liquidated sooner by act of Congress. If it is liquidated at the" end




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NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

of 20 years or sooner, who gets the 70 per cent of the earnings that
has not been paid out ? These stockholders I Class A stockholders?
Senator BROOKHART. That would all go, by the franchise tax, to
the Treasury.
Mr. ALLENDOERFER. "When it goes to the, Government, what becomes of it?
Mr. WILLIS. It seems to me it is clear what becomes of it.
Mr. ALLENDOERFER. Would vou mind telling me what becomes
of it?
Mr. WILLIS. It would be distributed to the owners of the stock of
the corporation.
Mr. ALLENDOERFER. The Federal reserve banks get no dividends.
M r . WILLIS. NO.
Mr. ALLENDOERFER. Would they share in this dividend?
Mr. WILLIS. Evidently, unless you have some other provision,

they would do so.
Mr. ALLENDOERFER. Perhaps so. On page 2 3 there is a provision
for loans to receivers of banks. I have had no opportunity to look
at the law, but I recall that in the Reconstruction Finance Corporation the law specifically gives the receivers of failed national banks
the right to borrow from the Reconstruction Finance Corporation,
evidently under the assumption that they do not have a general right
to borrow money. If there is anything in that thought, then this act
should also include authority for a receiver of a national bank to
borrow money.
Mr. WILLIS. There has been testimony on both sides before the
committee, both that you do and that you do not have* to do that.
Mr. ALLENDOERFER. It would not hurt to have it in, would it? In
the matter of the debentures of the liquidating corporation it seems
to me that the only market for those debentures is going to be the
banks. They will not be of a character which the public will purchase. Now, if the market for those debentures is with banks and
the need for money from the sale of debentures comes at a time,
naturally, when the banking situation is bad, then where are the
debentures going to be sold?
Senator GLASS. My presumption was that none would be sold; that
it would not be necessary to sell any.
Mr. ALLENDOERFER. Let us hope that is true, Senator.
Senator GLASS. Unless we are going to have another era of numerous bank failures, which I hope we are not ever going to have again.
Mr. ALLENDOERFER. Well, I would not advocate that these debentures be eligible for purchase by the Federal reserve banks or the
Treasury; but if they are not and the bill does not make them so
eligible, then there is no certainty that funds will be available
through the sale of debentures for the liquidation in large percentage
of bank failures such as you had last October.
Senator GLASS. There is no certainty of it, no. My surmise is they
will never have to sell a dollar of those debentures.
Mr. ALLENDOERFER. I hope not*
Senator FLETCHER. If they are tax exempt, do you not think the
public might take them?
Mr. ALLENDOERFER. I think not. That leads me to this




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NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

Senator GLASS. If WE have another era of bank failures such as
we have now, the public will not buy anything, because it will not
have anything to buy anything with.
Mr. ALLENDOERFER. Let us suppose that there may be a limitation
on the amount available for the liquidating corporation with which
to pay out the deposits of closed banks. J T w the experience has
No ,
been that the wave of bank suspensions begins in the northeast section of the country, exclusive of New England, and rather spreads.
That is a section where the bank units are large. If the funds of
this corporation are going to be limited, I do not contemplate with
pleasure the idea that that section of the country, with its large
units, may have failures and that the funds of this corporation will
be paid out in large percentage of liquidation of those banks that
failed first, and when the banks out our way begin to fail, as they
do later, as is usual in those waves, that the funds of the corporation will be exhausted.
Senator BROOKHART. The first wave was an exception to that rule.
In these last waves we have had the failures began out our way.
Mr. ALLENDOERFER. They have not. During my lifetime ail major
waves of bank suspensions have come from the Northeast out
toward us.
Senator BROOKHART. One of the first was the United States Bank
failure in Louisville.
I think it hits the agricultural section first, and that starts the
failures in the agricultural section of the country.
Senator BLAINE. You believe that the early failures will get all
the money?
Mr. ALLENDOERFER. Yes. What I am getting at is, if there is
not to be a market provided for these debentures and the amount of
money available for liquidation is to be limited, whether there should
not be some allocation of the funds available into Federal reserve
districts, based on capital participation and ownership of debentures or something of that kind.
Senator GLASS. Some persons who have been interested in the passage of this bill have expressed the hope that this revolving fund
will so accumulate as eventually to enable lis to insure deposits in
banks, to guarantee deposits in banks. I do not apprehend that it is
going to be so meager that it can not take care of the bank failures
of the entire country and we could not divide it up geographically.
Senator BROOKHART. If I remember, in 1920, when the representative of the Federal reserve system allocated $36,000,000, or rediscount privileges to the State of Iowa—well, even in starvation times
they have $600,000,000 of crop production out there, and I remember
the deflation that so-called allocation brought on. Would this plan
of yours be somewhat similar to that?
Mr. ALLENDOERFER. YOU will recall that this has reference to the
amount of liquidation which depositors will get from closed banks
by the use of available funds in the hands ot this corporation.
Senator GLASS. Senator Brookhart gave the Federal reserve system the compliment of saying
Senator BLAINE. We have nad two periods of bank failures within
10 years.
M r . ALLENDOERFER. Y e s .




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NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

Senator BLAINE. DO you think this fund would be sufficient within
a 10-year period?
Senator GLASS. Senator Brookhart gave the Federal reserve system the compliment of saying that its rediscounts in that period in
the State of Iowa were twenty-six times greater than the rediscounts
of all the national banks in the United States put together before
the adoption of the Federal reserve system.
Senator BROOKHART. Even if that were true, they were very small
compared to our needs at that time in the crops.
Senator GLASS. I am talking about what the Federal reserve banks
did.
Senator BROOKHART. They made this allotment, and I heard them
say it. I know they said it.
Senator GLASS. YOU went far above the allotment.
Senator BROOKHART. We had $91,000,000 at that time, and they
were calling us for that $55,000,000.
Senator GLASS. YOU went far above the allotment in one southern
State.
Senator BROOKHART. There is no authority in the law.
Senator GLASS. No; but it was a practical proposition, and in
one Southern State, whose Senators were more vociferous than any
other Senators at all, they exceeded the allotment all the way. No
member bank in the State was less than 50 per cent over its allotment, and several banks were 1,700 per cent over the allotment.
Senator BROOKHART. There was not any authority in the law for
an allotment. That was a violation of the law.
Senator GLASS. It was not in violation of law. It was just a
practical thing. The system wanted to prevent a few banks from
u hogging55 it all.
Senator BROOKHART. I have never seen the necessity of the Senator from Virginia defending that act of the Federal Reserve Board,
because he has criticized them on other acts.
Senator GLASS. I would not. I was not defending the Federal
reserve system. I was just telling you that the Federal reserve
system gives you twenty-six times more credit than all the national
banks in the United States combined have heretofore.
Senator BROOKHART. Yes. I saw letters early in 1919 from the
Federal reserve system soliciting rediscounts and stating that we
were not availing" ourselves of the privilege in the Federal reserve
system; that we ought to send more paper to rediscount. Then a
year later, after we had done that, they were calling that paper and
it put us into the worst deflation in the latter part of 1920 that agriculture has ever known in the West or anywhere else. I do not
know this debate ever will end between Senator Glass and me.
The CHAIRMAN. We will continue it at some other time, Senator
Brookhart. The witness may go on.
Mr. ALLENDOERFER. I should like to speak a word on section 11,
page 25, which has reference to the discounting of the 15-day notes
by member banks. I think I may suspect why this section was
drafted, but it seems to me that as it is written it makes the normal
operation among member banks pay a penalty. I do not just see
why we should pay 1 per cent above the rediscount rate simply
because we want to borrow for only a day or two or three days if




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

213

our bills payable are secured by eligible paper or by acceptances
that are eligible.or bonds of the United States. Why do we need
to avoid paying that 1 per cent penalty rate by discounting a lot of
notes to maturity and then have them taken up before maturitv and
refund of interest paid and all that kind of business?
Senator BULKLEY. Would it satisfy you to make the penalty apply
only to loans secured by Government bonds and not to the loans
secured by eligible paper?
Mr. ALLENDOERFER. Well, now, I have a suggestion on it which
I will come to if I may in a moment.
Senator GLASS. Before you do that, let me supplement Senator
Bulkley's question with this question: Would you agree to the balance of the section if you were to eliminate the penaltv of 1 per
cent altogether?
Mr. ALLENDOERFER. I might answer indirectly by suggesting an
amendment to it. I am quite sure yes or no is not the right answer
to that question. I do know that as the bill now stands it will have
the effect of making holdings of Government bonds by banks tremendously less desirable than they are at present, for the reason that
they may have to pay that penalty rate if they want to borrow.
Senator GLASS. They can rediscount with tlie support of United
States bonds without paying the penalty.
JLR. ALLENDOERFER. Rediscount with the Federal reserve bank
bonds?
Senator GLASS. They are available as security; yes. They may be
used to strengthen eligible paper—United States'bonds.
Mr. ALLENDOERFER. Without paying a penalty?
Senator GLASS. Yes.
Mr. ALLENDOERFER. But for a longer period than 15 days?
Senator GLASS. Yes.
Mr. ALLENDOERFER. Well, over on page 2 6 is a provision that the
board may suspend this penalty provision, and so on for 90 days
at a time and may renew that suspension for one 90-day period. I
take it that that is aimed at an abuse of this 15-day discount period.
Would it not accomplish the purpose that you wish, if instead of
putting the penalty in, with the board having a right to suspend it,
the penalty were not retained but the board were authorized to make
a penalty for 15-day notes secured by Government bonds if desired
and to allocate such temporary provision to specific districts if
necessary?
Senator GLASS.'Would you be astonished if told that the board
has had that power for 16 years and has never exercised it?
Mr. ALLENDOERFER. I am astonished to know it.
Senator GLASS. That is a fact.
SIR. ALLENDOERFER. I am just a country boy. I am no expert
on it.
Senator GLASS. That accounts largely for this provision here in
the act.
Air. ALLENDOERFER. That is a thought, then, Senator, to make
the board do something that they had authority to and have not
done for 16 years?
Senator GLASS. Why, certainly, it is a law, has been a dead letter,
and it has been ignored, and tliat is the reason why a prominent




214

NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

banker in New York ventured to tell the board to go to hell, that
he would not do anything they told him to do.
Mr. ALLENDOERFER. May I ask, then, about this additional period
of 90 days, how long would it be before they could make another suspension? If it can only be renewed for 90 days, can you at the end
of one renewal then make a new suspension?
Senator GLASS. NO. The intention there was to permit an extension of only six months periodically.
Mr. ALLENDOERFER. One hundred and eighty days. In the meantime, the normal operation of that which is convenient and safe and
sound, I think, is interfered with in order to prevent the abuse of
it, which could be done, it seems to me, by action of the Federal
Reserve Board, putting the cart after the horse, instead of the
order in which it is.
Senator GLASS. Will you pardon me if I explain again? Perhaps
you did not hear the two other explanations or have not read them.
What was the intent of the law that the normal operation under
that section should be? It is just as clear as the day what the
intent was. That 15-day provision was put into the act after the
Federal reserve system had been in existence for two and a half
years. It was not in the original act. It was put in there as a
war measure, and its normal operation was intended to be to
prevent a bank from being suddenly embarrassed overnight by
any phases of the war activities. It was apprehended at the time,
ancl accurately apprehended, that' this country would get into the
World War-^it had not then gotten in—and that provision was
put there then.
I remind you that at the time there were perhaps less than
$100,000,000 of United States bonds that were available for this
purpose, the balance of the less than a billion dollars of United
States bonds being held by national banks for circulation purposes
and by fiduciary funds, estates, and individuals.
So that there was that hundred million dollars that might be
used for what was intended to be the normal operation of this provision. You can judge from that that it was not intended to be
used in a frantic and riotous way for stock speculation purposes.
A i r . ALLENDOERFER. I d o .
Senator GLASS. YOU can

readily observe that it would have been
impossible for us to have conceived at that time, for the Congress
to have conceived at that time, that over a brief given period of six
months that provision could be used for approximately one billion
of dollars by as few as 10 New York banks alone. That is why it
was put there.
Mr. ALLENDOERFER. I thought so.
Senator GLASS. And the normal use of it was so designed and
it has been perverted.
Mr. ALLENDOERFER. I thought that was the intent. I thought it
could be accomplished without interfering with the normal operation
by reversing the order of the prohibition.
Senator GLASS. Well, I grant you that it might be accomplished
without interfering with the legitimate and normal operation of
the law, if we were to expunge the 1 per cent penalty. I am not'
saying that that would be in accord with my own judgment or under-




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

215

taking to forecast what the action of the committee or the Congress
would he, but that might be accomplished in that way. So that when
the provision gets beyond the realm of legitimate transaction, and I
mean by^legitimate transaction commercial uses, and is being adapted
to frantic stock speculation, certainly it ought to be provided that
npon warning from a Federal reserve bank and the board a bank
that persists in that practice may be by order of the board suspended
from the privileges of the Federal reserve bank. At least, that is
my view.
111'. ALLENDOERFER. I am not arguing that point.
Senator GLASS. YOU can not argue it. You can talk about it.
Mr. ALLENDOERFER. I could not argue it. All I have tried to get
at is that as so set up it does interfere, it seems to me unnecessarily,
with normal operations.
Senator GLASS. It interferes with what lately have been normal
operations.
Mr. ALLENDOERFER. I do not want to trespass on the committee too
long.
Senator GLASS. We are glad to hear you. At least I am sure I
am, and I feel that I voice the opinion of the other members.
Mr. ALLENDOERFER. I have heard the discussion of Mr.- Wolfe on
the matter of reserves, and will omit that.
On page 31, line 8, in connection with the provision " for the sale
and transfer of Federal funds," I think I know what you are getting at there. I think as written now it prevents normal transactions, which are not aimed at. The word " transfer " in its ordinary
acceptance would cover such a situation as this: Our country correspondent member bank at Topeka, Kans., wishes to restore their balance with the Federal reserve bank, writes or wires us to charge
their account, transfer to the Federal reserve bank, $10,000, $100,000,
out of realized funds that they have with us.
Can it be the intent of this section that it covers a transaction of
that kind?
Mr. WILLIS. Certainly not. Mr. Allendoerfer. because, as you say
here, the words in line
" unless the Federal Reserve Board shall
have first authorized by general order the making of such sales or
transfers within such district/9 and so forth, and it is to be assumed
as soon as this provision goes into effect, if it ever does, you woidd
have circulars of the Reserve Board specifying exactly how these
transfers should take place. Is that not a reasonable assumption?
Mr. ALLENDOEFER. "ies; if the Federal Reserve Board does it.
But why not put it in here, that ; ; other than balances to the credit
of the transferring bank on the books of the member bank.5'
. Mr. W I L U S . Where would you put that in?
Mr. ALLENDOERFER. I think you could put it at the beginning of
the paragraph, that " except for balances to the credit of the bank
asking for transfer, on the books of a member bank."
Senator FLETCHER. What page is that I
Mr. ALLENDOERFER. Page 31, line 3Mr. WILLIS. It seems to me just offhand that that is not at all
touched by this.
Mr. ALLENDOERFER. It says "any transfer." That is a transfer
on the ordinary banking—-




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NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

Mr. WILLIS (interposing). Xo transfer of any balance standing
upon the books of the Federal reserve bank—is that what you mean!
Mr. AIXENDOEFER. NO, no: on the books of the bank making the
transfer.
Mr. WILLIS. Then I do not quite understand you. The language is:
No member bank shall sell or transfer to another member bank or to a nonmember bank, private banking house, or banker, any balancc standing to its
credit-

That is, to the credit of the member bank.
M r . ALLENDOERFER. Y e s .
Mr. WILLIS (reading):
upon the books of the Federal reserve bank of its district.

Mr. ALLENDOERFER. The language that I am clumsily presenting
as a revision is that u except balances to the credit of a'bank on the
books of a member bank, no member bank shall sell or transfer to
another member bank.5'
Mr. WILLIS. I do not see how you bring this in as being already
included. I am not trying to make difficulties or mere argument.
Mr. ALLENDOERFER. Well, I may not understand and perhaps I am
all wrong. As I read it, it says that—
No member bank shall sell or transfer to another member bank or to a nonmember bank, private banking house, or banker, any balance standing to its
credit—

That is, the member bank's credit—
upon the books of the Federal reserve bank of its district in excess of the
balance required by this section, unless the Federal Reserve Board shall have
tirst authorized by general order the making of such sales or transfer.

Now, why need an order of the Federal Reserve Board for us to
transfer to the Federal reserve bank $10,000 of the balance of First
National Bank of Topeka, Kans.. with us to their credit?
Mr. WILLIS. Perhaps you mean to say that if you already have
on the books credit of $10,000 that you want to be able to transfer it
to them.
Mr. ALLENDOERFER. That is right.
Mr. WILLIS. There is no reason why you should not be allowed
to give that in exchange for the S10.000 on the books of the Federal
reserve bank.
M r . ALLENDOERFER. Y e s .
Mr. WILLIS. I do not see

any reason why you should. It seems
to me the board in making the' regulations "would cover that under
this language.
Mr. ALLENDOERFER. It would seem to me so. In that same connection, at the bottom of page 31, line 23
Senator GLASS {interposing). The way the thing has been operated the reserve with the Federal reserve'bank has been reduced to a
minimum.
M r . WILLIS. Y e s .
Senator GLASS. We
Mr. ALLENDOERFER.

tried to avoid that.
I am not getting at that point. Line 23:

and the liability created by every repurchase or other simUar agreement
entered into by a member bank shall be added to such net difference as ascertained under the provisions of this paragraph.




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

217

Does that "repurchase or other similar agreement" there have
reference to dealings in Federal balances?
Mr. WILLIS. NO ; no reference to the Federal balance.
Mr. ALLENDOERFER. Then does that have reference to a situation
where, if the First National Bank of Topeka—and there is no such
bank—had sold us $200,000 worth of Government bonds at par and
interest with their agreement to repurchase same; does that have to
enter into figuring amount of our deposits?
Mr. WILLIS. Yes; if either bank had incurred a liability to repurchase anything, that is treated then as equivalent of a deposit.
Mr. ALUBNDOERFER. If we are holding United States Government
bonds which Topeka has agreed to repurchase from us, we are to
regard that as a balance due us from the Topeka bank?
Mr. WILLIS. If I understand you correctly.
Mr. ALLENDOERFER. The situation is just this: The First National
Bank of Topeka owns $200,000 of Government bonds. They want
to use some money temporarily. They sell us those bonds at par
and interest, with an agreement on their part to repurchase those
at par and interest on demand.
M r . WILLIS. Y e s .

Mr. ALLENDOERFER. Where does such a transaction, which is apparently described in this wording, affect the amount of reserve
which we have to have?
Mr. WILLIS. It leaves one bank liable for the putting up of the
funds that it has agreed to supply, does it not? As you know,
that repurchase idea has been very extensively availed or in recent
years for the purpose of making a different appearance in an
accounting way from that which would otherwise be made.
Air. ALLENDOERFER. I can not get that, but I just do not see where
that transaction has anything to do with our reserve requirements.
Perhaps it does.
On page 33, if I may skip along a little, on line 17, referring to
real-estate loans in connection with this investment in real-estate
securities by national banks, it says:
Investments in bank premises and unsecured loans whose eventual safety
depends upon the value of real estate shall he counted for the purposes of this
section as real-estate loans.

Now, in Senator Brookhart's State and in every Western State
where a large part of loans are made to farmers, they are made to
product! crops. The maker will pay if he raises a crop, will pay this
year. If he raises no crop or gets no price, he will pay next year.
Senator BROOKHART. The last few years that has been turned
around in our country. They said to them to " lay off these farmers.
They can not produce anything in three or six months, the limits of
the loans. You buy New York bonds, listed bonds." That is what
they said.
• Senator GLASS. Oh, we gave you farmers six and nine months.
Senator BROOKHART. But it takes three years to produce a steer,
you know.
Mr. ALLENDOERFER. Those loans really depend upon real estate.
Mr. WILLIS. YOU call a farm real estate?
Mr. ALLENDOERFER. Yes; I would call a farm real estate.




218

NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

Mr. WILLIS. Why is the word always repeated then in addition
to farm loans?

Mr. ALLENDOERFER. Beg pardon?
Mr. WILLIS. I say, why do we distinguish between them here in
the law ?
Mr. ALLENDOERFER. I do not know.
Mr. WILLIS. Well, it is not fair to assume that where the two
words are used in one place while in another one is used alone there
is a difference between the meaning.
Senator FLETCHER. It may be farm loans on crops.

Mr. ALLENDOERFER. If real estate does not include a farm, why,
I have said all I have to say on that.
Now, I would like to refer a little more to this savings matter,
on page 33, line 20. For quite a while I have been very much interested in the tiling that this is aimed at, I believe, and that is the
safety of a savings depositor who, by reason of the possible requirement" of notice on his balances, may not be permitted to withdraw
from banks, whereas the customers in the commercial department
get all of the money before the bank closes. There is a little argument in favor of it being left as it is, in that the savings customer
gets a preferred rate of interest, and therefore gets compensated for
his risk in that.

Senator GLASS. Largely that is not a fact, is it, that he gets a
preferred rate?
M r . ALLENDOERFER. Y e s .
Senator GLASS. DO not the

big borrowers get a rate on their bank
balances that approximate the rate on time deposits?
M r . ALLENCOERFER. NO, s i r .

Senator GLASS. They do not?

Mr.

ALLENDOERFER.

Xot in our country.

Senator GLASS. They do not i

Mr. ALLENDOERFER. But I do not oppose teetotally the idea of
segregation of assets as against savings deposits. I submit that it
is awfully hard to do a good job of legislation in that respect at this
time. In the first place, you are setting up there as assets to protect
saving deposits 50 per cent of it in real-estate loans, possibly at
least. Now, nothing could have been more unliquid during the last
few months than real-estate loans, and yet I am perfectly willing
to say that I have not lost my faith in real-estate loans. Some of the
best performances that we have had for trust fimds have been by
the real-estate loans. But we are going through a time now where
real-estate loans may justify themselves or may have additional
reproach against their record. It can not be seen just yet.
Senator BROOKHART. YOU mean farm loans or city real estate?
Mr. ALLENDOERFER. Well, I will say both, Senator. I have faith
in both and they are both making their record.

Senator BROOKHART. YOU mean there is security in a farm loan
when farmers are getting 3 cents a pound for hogs and 25 cents for
corn?

Mr. ALLENDOERFER. Yes.
estate loans.

I still have some faith in those real-

The CHAIRMAN. IS your hope based on any hope in the commodity
price, or is it the hope that a farmer can produce hogs at 3 cents a
pound?




NATIONAL, AND FEDERAL RESERVE BANKING SYSTEMS

219

Mr. ALLENDOERFER. NO; it is based on experience. I know a
number of farm loans which have been foreclosed on during the last
few months, and the foreclosed property has been sold for cash for
enough to pay the holder of the mortgage.
Senator BROOKHART. But he probably had a pretty low mortgage.
Mr. ALLENDOERFER. It was a good mortgage.
Senator BROOKHART. The joint-stock land banks are foreclosing
those farms out in your country and mine now, selling them for
little or nothing and buying in enough of bonds at 30 to 40 cents
on the dollar and balancing their books.
Mr. ALLENDOERFER. A S a class, I do not think that we should say
that real-estate loans just ought not to be good assets for savings
deposits.
Senator BROOKHART. I think real-estate loans ought to be as they
were for 55 years, the best security we had in the world.
Mr. ALLENDOERFER. I still think that.
Senator GLASS. Yes; but for 55 years, under the national bank
system, in fact until the Federal reserve act was passed, no national
bank was permitted to have a real-estate loan.
Senator BROOKHART. That is true, and I think we got along until
the Senator's Federal reserve bank came along with some of this
deflation policy and things like that.
Senator GLASS. NO.
Mr. ALLENDOERFER. NOW, as to the rest of the investment of assets
to be segregated for savings accounts, I would say this: The State
of Missouri has a savings bank law under which very few banks have
ever been organized, I think almost none operating, at this time.
It is totally antiquated. I presume your answer to that is, Missouri
ought to pass a new savings bank act. Whose act shall they adopt?
What savings bank act is satisfactory? New York State's is an
.excellent act. There have had to be suspensions, modifications, exceptions in it during the last year, due to the uncertainty of payment
of securities which were eligible, and because of the failure of corporations to earn the amount which is required in order to make
their securities eligible.
Senator BROOKHART. The Bowery Savings Bank was down here
before this committee and claimed to be the biggest savings bank in
the world, and it is organized almost as a cooperative. Some features are not cooperative. It has no capital stock. But through all
of this, it has been prosperous and is rather more prosperous to-day
than it has ever been.
Mr. ALLENDOERFER. An excellent bank.
Senator BROOKHART. And it has charged a low rate of interest
and everything.
Mr. ALLENDOERFER. But the law governing their investments had
to be waived this past year. I do not know whose savings bank
law the State of Missouri could copy after.
Senator BROOKHART. I do not know whether it was stated or not,
that the law had to be waived or whether securities were sold that
took care of all their withdrawals without any trouble at all.
Mr. ALLENDOERFER. It was not the condition of that bank. What
I mean is that the savings-bank law had to adjust requirements about
their investments.




220

NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

Senator BROOKHART. I think any cooperative idea makes for stability in the banking system, for that matter.
Mr. ALLENDOERFER. The requirements which they had in that law
had to be waived this year. I do not see how anybody can write
at this time a proper description of investments for savings accounts.
Senator FLETCHER. HOW do you operate your savings accounts?
Mr. ALLENDOERFER. They are merely part of the general assets
of the bank and the general liabilities of the bank. There are no
assets segregated to the savings liability. This act seeks to do that.
What I am trying to say is that I do not see how they can write
such a law defining the assets that may be segregated for the benefit
of the savings customers at this time. That is one of the things I
should like to have left for a period of two years, until there has
been a better demonstration of the results of assets which are eligible
for investment of "savings funds in such States as New York.
Senator FLETCHER. Would this law interfere with your operation
at all ?

M r . ALLENDOERFER. O h , y e s .
Senator FLETCHER. In what way?
Mr. ALLENDOERFER. It interferes

in this way: We will have to
segregate assets to meet our sayings deposits. "Those assets which
we set over to meet those deposits may be 50 per cent in real-estate
loans and the remainder may be in such assets as are permitted for
the investment of savings banks in our State. Our law does not
amount to anything in that. The answer is, you should have a new
law. I do not know who can write that new law. There is not any
savings bank act that I know of which can be taken as a perfect
model at this time.
Senator FLETCHER. YOU are simplv free to operate without regard
to that?
"
Mr. ALLENDOERFER. N O ; we are not. We have a law limiting the
investments of savings banks in Missouri, but that law is so antiquated that it is impossible to act under it.
Mr. WILLIS. DO I understand you to think that on this page 33,
line 20, and the following, it does not meet that situation?
M r . ALLENDOERFER ( r e a d i n g ) :
Every such bank may apply the moneys deposited therein as time deposits
to the loans herein authorized and the balance of such time deposits shall be
invested in property and securities in which savings banks may invest under
the law of the State where such national bank is situated, or where there is
no such law relating to investments by savings banks, in such property and
securities as may be specified by the Comptroller of the Currency.

Mr. WILLIS. That would not meet your case, you say?
Mr. ALLENDOERFER. NO; we have a law, a savings-bank law. Banks
have never operated under it. It is still in existence.
Mr. WILLIS. Would that be regarded as a law actually in effect,
then?

Mr. ALLENDOERFER. It is in effect. It is on the statute books.
Senator BROOKHART. DO you ignore it ?
Mr. AIXENDOERFER. If the law should'be amended how should it
be amended? Whose savings act of what State should it be copied
after?
Mr. WILLIS. I think the thing to do would be to repeal it in that
1
case.




national and federal reserve banking systems

221

Mr. ALLENDOERFER. Well, maybe that is it. On page 36. line 16,
this 15 or 25 per cent which seems so confusing, I believe, has been
clarified in some manner, I do not know just how.
The CHAIRMAN. What page?
Mr. ALLENDOERFER. Page 36, line 15, where it says:
nor shall the total amount of the securities so purchased and held for its own
account at any time exceed 15 per centum of the amouiit of the capital stock
of such association actually paid in and unimpaired and 25 per centum of its
unimpaired surplus fund.

The CHAIRMAN. I do not think that any of the witnesses here
found any fault with the intent of the bill. They wanted it clarified.
M r . ALLENDOERFER. Y e s .

On page 39, line 16:

No national bank or member bank shall perform the functions of a correspondent bank on behalf of any such individual, partnership, unincorporated
association, or corporation—

Is it the intent by the words " perform the functions of a correspondent bank " to mean that we may not receive the deposits, pay
checks, and handle the account in the ordinary course?
Mr. WILLIS. I do not so understand it; no.
Mr. ALLENDOERFER. It is a little vague to me just what it means.
Mr. WILLIS. What would you say was the difference between a
correspondent bank and a depositary bank?
Mr. ALLENDOERFER. I do not know.
Mr. WILLIS. You never use the word " correspondent"?
Mr. ALLENDOERFER. " Correspondent" in our lingo refers almost
exclusively to where we act as a depositary bank for another bank,
and does not refer to where we act as depositary for fc corporation,
association, individual, and so forth.
Mr. WILLIS. Is not a correspondent in that case one who performs
all banking functions for you in another city, as, for example, your
New York correspondent?
Mr. ALLENDOERFER. Yes; that is right.
Mr. WILLIS. Performs all your banking functions that you have
to perform in New York?
M r . ALLENDOERFER. Y e s .
Senator BROOKHART. If you

have correspondents, then, in Kansas
City you perform the same functions for them that New York does
for you?
Mr. ALLENDOERFER. Yes; that is true. Does it mean that we can
not handle the ordinary transactions?
Mr. WILLIS. If you were carrying a deposit account now for yourself in one of the New York banks would you refer to that bank as
your correspondent in New York?
M r . ALLENDOERFER. Y e s .

Mr. WILLIS. Or would you refer to it as your depository bank in
New York?
Mr. ALLENDOERFER. Correspondent.
Mr. WILLIS. That is a usage that is hardly in line with custom.
Is not a correspondent bank a bank, or that acts for another bank,
that perforins xull banking functions in another city ?
Mr. ALLENDOERFER. Well, perhaps it is, but in our western language correspondent bank'' does not mean just what it does in
your thinking.
111161—32—Frl




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NATIONAL.

AND FEDERAL RESERVE BANKING SYSTEMS

Mr. WILLIS. IS there not a sharp distinction between "correspondent bank " and " depositary bank "?
Mr. ALLENDOERFER. Not in our parlance.
Mr. WILLIS. It certainly is in the usage in this part of the country.
M r . ALLENDOERFER. I see.

Mr. WILLIS. But, of course, if there is a difference in usage anywhere, since this is a national statute, the language ought to be made
clearer.
Mr. ALLENDOERFER. I thought it would be misunderstood over
larae sections of the country.
' l a m only going to mentimi one other thing. That is on page:48,
line 7.
Mr. WILLIS. Before we leave that, may I ask you one further
question about that?
M r . ALLENDORFER. Y e s .

Mr. WILLIS. During the recent difficulties, you noticed, I presume, the cases in which it turned, out now and then .that , a bank
failure had occurred in one of our cities where investigation showed
that it had a number of national banks as.correspondents, although
it itself was in some cases a private bank—an unincorporated private
bank. Offhand would you think that that was a desirable situation
or not, that a private banker, say, in New York, largely engaged in
security dealings, should be the correspondent of a national bank?
M r . ALLENDOERFER. NO.
Mr. WILLIS. YOU agree

entirely with the purpose of this provision?
Mr. ALLENDOERFER. Yes; but it does not say that to me. On page
48, line 7, the provision—
and shall include in the case of obligations of a corporation aU obligations
of aU subsidiaries thereof.

I do not believe that that is a proper test of banking credit. Perhaps I can without offense point to a particular instance. If the
General Motors Corporation should be a borrower from our bank
and at the same time the General Motors Acceptance Corporation,
a subsidiary connection with separate assets, also carrying an account with us, should borrow money from us, I should think it
would not be a violation of- good banking and good banking credit
if we loaned both of them.
Mr. WILLIS. Of course, it probably would not, but in many
instances you know from your large banking experience that it
would be?
Mr. ALLENDOERFER. Where it should not be?
Mr. WILLIS. Yes-; where the subsidiaries are organized for the
purpose of obtaining larger credit?
Mr. ALLENDOERFER. Yes. But I do not believe that that is in
here.
Mr. WILLIS. What would you suggest in place of that?
Mr. ALLENDOERFER. I do not have an offhand suggestion. I think
it is improper to take the time of the committee while I fumble about
for it. If you care to try me cm guessing outside, I will be glad to
do it.




NATIONAL AND FEDERAL RESERVE BANKING SYSTEMS

223

The CHAIRMAN. Would you submit a draft of your suggestion that
will cover that?
Mr. ALLENDOERFER* I will be glad to.
Senator GLASS. Yes, sir; we are not immune, sir, to good suggestions.
Mr. ALLENDOERFER. May I take your time for a second only to say
that I have presented all of these things, some of them minor, some
of them I think highly important, with the idea of stressing the need
for more considerate thought on many of the provisions of this bill
before it goes to Congress.
Senator GLASS. I would not like the implication to be that every
provision of the bill has not had prolonged and critical consideration.
Mr. ALLENDOERFER. I am sure, Senator, you know there was no
reflection, no intent to reflect, in my remarks. ' *
Senator GLASS. NO; there has not been any haste about it. There
has not been any lack of care about it. It has been gone over and
over and over again by a variety of experts.
Mr- ALLENDOERFER. The consideration by the general banking
public has been'very brief. I only got a copy of this a day or two
ago.
Senator GLASS. My dear sir, a bill containing almost every single
fundamental provision of this bill, with the exception of the liquidating corporation perhaps, and the last provision giving the Comptroller of the Currency authority to impose an intermediary penalty
upon offending banks, was introduced by me on June 17,1930.
The CHAIRMAN. That will soon be two years.
Senator GLASS. And it has been discussed ever since.
The CHAIRMAN. And seven volumes of hearings have been sent out
to all who were interested in it. We have been at it a year now.
Senator GLASS. I can take you around to my office and show you a
pile that high [measuring] of answers to questionnaires, operations of
short sales, of long sales too, for that matter, speculative activities
of the banks, every conceivable phase of banking.
Senator FLETCHER. That is to encourage you in the belief that all
you have suggested will be complied with.
Senator GLASS. NO£ will be complied with; will be very respectfu"
So that will be all until
Monday, 10.30 Monday.
(Thereupon, at 5.10 o'clock p. m., the committee adjourned, to
meet again at 10.30 o'clock a. m. on Monday, March 28,1932.)

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