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"THE BANKING ACT OF 1935" ADDRESS OF HONORABLE M. S. SZYMCZAK NEW YORK BANKERS' CONVENTION LAKE GEORGE, NEW YORK SATURDAY - JUNE 8 , 1935. Release f o r p u b l i c a t i o n June 8 , 1935. Afternoon papers X-9229 I t . i s the p o l i c y o f the Federal Reserve Board not t o have i t s individual Members speak p u b l i c l y except when t o speak p u b l i c l y i s a d u t y i n the i n t e r e s t o f f u r t h e r i n g t h e purposes f o r which the Federal Reserve System was c r e a t e d . That p o l i c y i s a l s o my personal p o l i c y adopted f i r m l y vthen I became a BJember o f the Federal Reserve Board two years ago. I take it, t h e r e f o r e , t h a t i t i s my d u t y t o speak here p u b l i c l y on t h e s u b j e c t o f the Banking Act o f 1935. I t i s , o f course, a pleasure f o r me t o see you and be w i t h you. L e t me s t a t e a t t h e o u t s e t t h a t I speak here not f o r Governor E c c l e s , nor f o r the Federal Reserve Board - I speak o n l y f o r m y s e l f . w r i t e , nor d i d I h e l p w r i t e the Banking Act o f 1955. make no attempt t o discuss the philosophy o f the A c t . I d i d not I s h a l l therefore However, I s t u d i e d the b i l l w i t h i t s s p e c i f i c amendments, and a f t e r a complete study o f t h e s e , I expressed my o p i n i o n t o t h e Senate Sub-committee o f t h e Banking and Currency Committee on l a s t Monday - June 3 r d , 1935• I s a i d t h a t i t i s e s s e n t i a l t o preserve our r e g i o n a l Federal Reserve System, which c o n s i s t s o f twelve Federal Reserve banks w i t h nine d i r e c t o r s i n each Bank, together w i t h a Federal Reserve Board i n Washington. I n t h i s p a r t i c u l a r r o s p e c t , our System i s d i f f e r e n t from t h a t o f most c o u n t r i e s because o f our extensive a r e a , and because o f our p o l i t i c a l and economic s t r u c t u r e of s t a t e s and d i s t r i c t s - based upon i n d u s t r i a l , a g r i c u l t u r a l , commercial and f i n a n c i a l c o n d i t i o n s and needs which are w i d e l y d i f f e r e n t i n the v a r i o u s p a r t s o f the U n i t e d S t a t e s . The System i s composed o f separate e s s e n t i a l p a r t s . These p a r t s , however, must be cohesive f o r t h e best f u n c t i o n i n g o f the System. To make f o r an e f f i c i e n t a d m i n i s t r a t i o n o f t h e Act by the - 2 tem and t o a r r i v e a t t h e - X-t9229 f o r which t h e Act was J«fessa£ by Congress, i t appears necessary f o r the Federal Reserve Board t o have a more d i r e c t c o n t a c t w i t h t h e v a r i o u s sections o f our extensive area. ^Fo be e f f e c t i v e , the whole Federal Reserve System must be one* T h i s end i s n o t d i f f i c u l t t o a t t a i n : personal contact o f the members o f t h e Board w i t h the d i r e c t o r s o f the twelve F e d e r a l Reserve Bonks seems one o f t h e b e s t d i r e c t avenues. "Bank powers o f the boards o f d i r e c t o r s o f t h e twelve F e d e r a l Reserve banks should be r e t a i n e d , and i n some r e s p e c t s , increased and extended, a t l e a s t by r e g u l a t i o n o f the Federal Reserve Board. W h i l e , o f course, i t i s sound t o have t h e Federal Reserve Board end i t s p r i n c i p a l o f f i c e s i n Washington, and w h i l e i t is sound f o r t h e Board t o h o l d i t s meetings i n t h e c a p i t a l because o f t h e n a t i o n a l scope o f i t s c o n s i d e r a t i o n s , y e t i t would be d e s i r a b l e from a p r a c t i c a l s t a n d p o i n t f o r t h e F e d e r a l Reserve Board t o meet a t l e a s t f o u r times a year i n a t l e a s t f o u r p a r t s o f the country - t h e East, West, N o r t h and South - t o meet w i t h and understand b e t t e r t h e d i r e c t o r s o f the Federal Reserve banks and t h e i r o f f i c e r s i as w e l l as t h e c o n d i t i o n s and needs o f commerce, i n d u s t r y , a g r i c u l t u r e and f i n a n c e i n t h e r e s p e c t i v e D i s t r i c t s . I t would a l s o seem wise t o p r o v i d e by law t h a t each Member o f t h e Board should be assigned by t h e F e d e r a l Reserve Board t o the t a s k o f keeping h i m s e l f e s p e c i a l l y f a m i l i a r w i t h c o n d i t i o n s i n a t l e a s t two o f t h e Federal Reserve D i s t r i c t s each y e a r , i n o r d e r t h a t he might a c t as a l i a i s o n o f f i c e r between t h e Federal Reserve banks, t h e i r d i r e c t o r s and o f f i c e r s , the r e p r e s e n t a t i v e s o f commerce, X-9229 - 37 - i n d u s t r y , a g r i c u l t u r e and f i n a n c e , on the one hand, and the Federal Reserve Board i n Washington, on t h e o t h e r hand. P r o v i s i o n could be made t o have Members o f t h e Board r o t a t e i n t h e i r D i s t r i c t a s s i g n ments, so t h a t e v e n t u a l l y each Member o f the Board would have covered by d i r e c t c o n t a c t a l l o f t h e sections o f t h e country and would know t h e i r needs t h o r o u g h l y . Without t h i s , i t i s n e x t t o impossible f o r the Board Members t o a p p r e c i a t e f u l l y t h e needs and requirements o f the Federal Reserve banks and o f t h e country as a whole; w i t h o u t t h i s , the Federal Reserve Board i n c l i n e s t o o much t o theory and bureaucracy; and w i t h o u t t h i s t h e r e i s bound t o be misunderstanding between t h e Federal Reserve banks and t h e Federal Reserve Board l e a d i n g t o d i f ferences o f o p i n i o n on a u t h o r i t y ; and w i t h o u t t h i s a c r y i s heard on the one hand t h a t t h e p r i v a t e i n t e r e s t s wish t o c o n t r o l the System and d i r e c t i t s o p e r a t i o n s f o r t h e i r own s e l f i s h purposes; and t h a t on the other hand, p o l i t i c a l i n t e r e s t s wish t o c o n t r o l the System and d i r e c t i t s o p e r a t i o n i n accordance w i t h t h e i r own p o l i t i c a l a m b i t i o n s . Members o f the Board, when assigned by t h e Board t o s e v e r a l d i s t r i c t s , would keep p e r s o n a l l y i n touch w i t h t h e boards o f d i r e c t o r s and the o f f i c e r s o f t h e Federal Reserve banks i n those d i s t r i c t s . They would thus become f a m i l i a r w i t h t h e management o f such Federal Reserve banks, w i t h t h e i r v i e w p o i n t s , and w i t h t h e problems o f t h e i r districts. They would a l s o know men i n t h e i n d u s t r i a l , a g r i c u l t u r a l and f i n a n c i a l f i e l d s o f t h e d i s t r i c t s . commercial, They would n o t be compelled t o depend e n t i r e l y on t h e Board's s t a f f f o r i n f o r m a t i o n having t o do w i t h the i n t e r n a l management o f t h e banks, as w e l l as w i t h the general a g r i c u l t u r a l , commercial, i n d u s t r i a l and - 4 - X-t9229 f i n a n c i a l and banking c o n d i t i o n s o f t h e d i s t r i c t s ; thus t h e r e would be a b e t t e r o p p o r t u n i t y f o r sound and p r a c t i c a l r u l i n g s of the Board on a l l questions when they are presented by the banks t o the Federal Reserve Board under t h e l a w . I t i s s p e c i f i c a l l y s t a t e d i n t h e Act t h a t t h e Federal Reserve Board has general s u p e r v i s o r y r e s p o n s i b i l i t i e s , b u t i n order t o supervise, one must be i n d i r e c t contact w i t h those supervised. Otherwise, one i s compelled t o a c t upon i n f o r m a - t i o n obtained from other sources. Of coarse, i n a l l cases, t h e Board, as a whole, would a c t o f f i c i a l l y on a l l these m a t t e r s , b u t t h e Board would have the b e n e f i t o f the i n f o r m a t i o n obtained by t h e i n d i v i d u a l Member assigned t o t h e specific district. I t would a l s o seem d e s i r a b l e t o have t h e boards o f d i r e c t o r s o f the Federal Reserve banks meet once every year w i t h the Federal Reserve Board i n Washington, or i f t h i s could n o t be accomplished ? d t h the d i r e c t o r s who are f a r t h e r removed from Washington, t h e Federal Reserve Board could arrange t o meet them a t a p o i n t more a c c e s s i b l e a t l e a s t once every two years t o d i s c u s s f r a n k l y and completely matters p e r t a i n i n g t o t h e o p e r a t i o n o f t h e i r banks and t h e c o n d i t i o n s i n t h e i r d i s t r i c t s , as w e l l as problems o f a n a t i o n a l character. The execution o f many o f t h e powers vested i n t h e Federal Reserve Board c o u l d , under t h e p r o v i s i o n s o f t h e Banking Act o f 1955, be d e c e n t r a l i z e d under r e g u l a t i o n s o f t h e Federal Reserve Board so t h a t they could be c a r r i e d i n t o e f f e c t by the Federal Reserve banks w i t h o u t the r e f e r e n c e o f many i n d i v i d u a l matters t o Washington, and thus o b t a i n d e s i r a b l e and e f f e c t i v e a d m i n i s t r a - X-92S9 -5- tion. This w i l l be f a c i l i t a t e d by the p r o v i s i o n i n the bill a u t h o r i z i n g the Board t o delegate i t s powers t o i n d i v i d u a l Members or other representatives. To make f o r a constancy and a permanency o f the work of the Board by i t s i n d i v i d u a l Board Members, I recommend t h a t t h e r e be a s p e c i f i c requirement i n t h e law t h a t the Board assign i t s work t o i n d i v i d u a l Board Members, each Board Member t o have a s p e c i f i c task assigned on which he i s t o s p e c i a l i z e and through which he i s t o keep i n touch w i t h the Federal Reserve banks and the c o u n t r y , and on which he i s t o r e p o r t t o the Federal Reserve Board w i t h recommendations. This seems t o me t o be v e r y i m p o r t a n t , from the standpoint o f good a d m i n i s t r a t i o n . This b i l l provides f o r that. On the other hand, i t has been my experience t h a t the Federal Reserve Board does not w i s h t o , nor should i t , assume any more powers than i t can p r o p e r l y use f o r the e f f e c t i v e a d m i n i s t r a t i o n of the System, and whenever powers are granted t o the Federal Reserve Board having t o do w i t h matters t h a t could be handled b e t t e r by the d i r e c t o r s ana o f f i c e r s of the Federal Reserve banks, the Federal Reserve Board should be a b l e t o give the twelve Federal Reserve banks .the power o f d e t e r m i n a t i o n of many i m p o r t a n t m a t t e r s . I t i s good o r g a n i z a t i o n f o r the Federal Reserve Board t o recognize t h i s f a c t and t o a v a i l i t s e l f o f the commercial, agricultural, i n d u s t r i a l and f i n a n c i a l experience o f the d i r e c t o r s o f the twelve Federal Reserve banks, as w e l l as the t e c h n i c a l and banking experience of t h e i r o f f i c e r s , who are the v e h i c l e s t h r o u g h which the p o l i c i e s o f the system are executed. -6- X-9229 'There are many powers now i n the Federal Reserve Board, however, which i n my o p i n i o n should be placed, now or l a t e r , i n the r e g i o n a l Federal Reserve banks. This would expand the a u t h o r i t y and r e s p o n s i - b i l i t y o f the d i r e c t o r s o f each Federal Reserve bank and mak^ f o r more prompt and e f f i c i e n t a d m i n i s t r a t i o n o f the Federal Reserve System. The general s u p e r v i s i o n should bo r e t a i n e d , b u t the d i r e c t and u l t i m a t e a c t i o n i n these matters should be taken by the d i r e c t o r s and o f f i c e r s of the Federal reserve bank3. The d e t a i l e d matters which might be delegated t o the f e d e r a l Reserve banks ( o r the Federal Reserve Agents, i f t n o i r o f f i c e s are not abolished) i n c l u d e the f o l l o w i n g ; 1. Admission c f rotate banks t o membership i n the Federal Reserve System. 2. Expulsion of such banks from membership f o r v i o l a t i o n s o f the law or the Board ! s r e g u l a t i o n s . Z, Waiver o f 6 months f n o t i c e of v o l u n t a r y w i t h d r a w a l o f .State banks from membership. 4. The g r a n t i n g of v o t i n g permits t o h o l d i n g company a f f i l i a t e s of member banks. 5. The r e v o c a t i o n of v o t i n g p e r m i t * f o r v i o l a t i o n s o f the law or the r e g u l a t i o n s . The issuance and r e v o c a t i o n of permits r a i t h o r i z i n g o f f i c e r s , d i r e c t o r s and employees of mombjr banks t o serve not more than two other banks ( i f the p r o v i s i o n f o r i n d i v i d u a l permits i s n o t repealed as proposed i n the b i l l . ) 7. The issuance and r e v o c a t i o n of p e r m i t s f o r o f f i c e r s , directors -7- X-9229 'atul managers of s e c u r i t y companies t o serve as o f f i c e r s and d i r e c t o r s of member banks ( i f the p r o v i s i o n f o r i n d i v i d u a l permits i s not r e pealed as proposed i n the b i l l . . ) 8. The g r a n t i n g o f t r u c t powers t o n a t i o n a l banks. 9. The c a n c e l l a t i o n o f such powers a t the request of n a t i o n a l banks. 10. Approval of r e d u c t i o n of c a p i t a l stock by n a t i o n a l banks (if the requirement o f the Board's a p p r o v a l i s n o t repealed as proposed i n the b i l l . ) 11. Tho g r a n t i n g o f permission f o r member banks t o i n v e s t amounts exceeding t h e i r c a p i t a l stock i n bank premises or i n the stock o f c o r p o r a t i o n s h o l d i n g t h e i r bank premises. 12. The approval o f the establishment o f branches by s t a t e member banks ( i f t h i s power i s t r a n s f e r r e d from tho Comptroller of the Currency as proposed i n the bill.) 15. A u t h o r i z i n g n a t i o n a l banks t o e s t a b l i s h f o r e i g n branches. 14. A u t h o r i z i n g n a t i o n a l banks t o i n v e s t i n the stock of banks or c o r p o r a t i o n s p r i n c i p a l l y engaged i n i n t e r n a t i o n a l o r f o r e i g n banking. 15. P e r m i t t i n g i n t e r l o c k i n g d i r o c t o r a t e o between member banks and f o r e i g n banking c o r p o r a t i o n s i n u h i c h they own s t o c k . 16. Approval o f compensation o f o f f i c e r s and employees of Federal. Reserve banks. I n a d d i t i o n t o the above, where a c t i o n by the Board i s r e q u i r e d under the law, numeroua matters arc presented t o t h e Board f o r c o n s i d e r a t i o n i n connection w i t h banking s u p e r v i s i o n and r e q u i r i n g X-9229 - 8 - a c t i o n on i n d i v i d u a l casesj f o r example, r e d u c t i o n s o f c a p i t a l stock o f State member banks, c o n s o l i d a t i o n s o f S t a t e member banks w i t h other banks, and whether or n o t i n d i v i d u a l banks should i n c r e a s e the amount o f t h e i r c a p i t a l and s u r p l u s i n r e l a t i o n t o t h e i r d e p o s i t liabilities. I n some cases o f t h i s c h a r a c t e r , the Board has a l r e a d y a u t h o r i z e d the F e d e r a l Reserve Agents t o a c t on i t s b e h a l f i n the i n d i v i d u a l cases w i t h i n c e r t a i n p r e s c r i b e d l i m i t a t i o n s • Some, o r perhaps a l l , o f the powers enumerated above, and perhaps o t h e r s t o o , i t seems t o me, should be vested d i r e c t l y and u l t i m a t e l y i n the Federal Reserve banks. T h i s would make f o r e f f i c i e n c y and good r e l a t i o n s between the Federal Reserve*Board and the Federal Reserve banks. I t i s q u i t e n a t u r a l t h a t the F e d e r a l Reserve banks know more about t h a t s u b j e c t - m a t t e r because they are d i r e c t l y and c o n s t a n t l y i n c o n t a c t w i t h i t . I t i s also n a t u r a l , however, t h a t t h e Federal Reserve Board should supervise and c o o r d i n a t e and b r i n g t o the a t t e n t i o n o f the Federal Reserve banks any i n c o r r e c t or improper a d m i n i s t r a t i o n o f these powers. This would make f o r -unity« I also stated that; I can understand t h a t t h i s Banking Act o f f e r s much o p p o r t u n i t y f o r extreme i n t e r p r e t a t i o n . However, w i t h the amendments o f f e r e d , i t seems t o me t o meet e x i s t i n g c o n d i t i o n s and t o serve a d e f i n i t e purpose w i t h o u t b e i n g extreme i n e i t h e r d i r e c t i o n • l e a s t having each s e c t i o n considered on i t s m e r i t s . I t deserves a t I t seems t o serve the d e f i n i t e purpose o f a b e t t e r a d m i n i s t r a t i o n o f the Federal Reserve A c t . X-92S9 - 9 - Now t o proceed, I have been taught t h a t t o know a t h i n g one must know the p a r t s of which i t i s composed. L e t u s , t h e r e f o r e , take t h i s b i l l a p a r t and l o o k a t the p a r t s s e p a r a t e l y . Section 202 o f the Banking Act o f 1935 i s r e l a t e d t o a s e c t i o n i n the Banking Act o f 1933, which provides t h a t a l l i n s u r e d nonmember banks s h a l l become members of t h e F e d e r a l Reserve System by J u l y , 1937. This p r o v i s i o n o f the Act o f 1933 was repealed i n the House b i l l , b u t i t should be r e s t o r e d because i t i s o f g r e a t importance t h a t a l l banks which are i n s u r e d be s u b j e c t t o F e d e r a l * s u p e r v i s i o n . I t i s a step i n the d i r e c t i o n o f u n i f i c a t i o n o f bank s u p e r v i s i o n which i s an e s s e n t i a l t o the proper d i s charge o f the r e s p o n s i b i l i t i e s o f b o t h the F e d e r a l Deposit Insurance Corporat i o n and the F e d e r a l Reserve System. I t has been s a i d t h a t the p r o v i s i o n f o r g i v i n g the Board a u t h o r i t y t o waive requirements f o r admission under t h i s b i l l would lower the standards o f t h e F e d e r a l Reserve System and t h a t i t might be b e t t e r t o r e t a i n those standards and have t h e Federal Deposit Insurance Corporation b r i n g the banks up t o t h e standard b e f o r e they are a d m i t t e d . The weakness o f t h i s argument i s i n t h e f a c t t h a t t h e Federal Reserve banks and member banks are a f f e c t e d by c o n d i t i o n s t h a t develop i n nonmember banks. An unsound banking s i t u a t i o n a f f e c t s the entire? community, and s i n c e the Federal Reserve System has t o stand the consequences o f unsoundness i n nonmember banks, i t should have a u t h o r i t y t o admit a l l i n s u r e d banks and g r a d u a l l y t o b r i n g them up t o i t s standard. The suggestion thevb has been made t h a t banks w i t h d e p o s i t s o f l e s s than §500,000 be p e r m i t t e d t o remain o u t s i d e o f the System, even though t h e y are i n s u r e d , may be a reasonable compromise because i t would b r i n g - 10 - X-t9229 i n t o the Federal Reserve System about 97 percent of a l l the deposits and would leave outside only such small banks as may f i n d i t d i f f i c u l t to earn expenses without charging f o r exchange, which the Federal Reserve System does not permit. This compromise would also provide for keeping within the System banks with |S500,000 or more of deposits that are now members. I t would no doubt be better to have a l l the banks come into the System, but the compromise would be an important step i n that direction and would appear to be the minimum of what ought to be required a t t h i s time. Section 203 of the proposed b i l l provides t h a t members of the Federal Reserve Board s h a l l be persons w e l l q u a l i f i e d by education or experience, or both, to p a r t i c i p a t e i n the formulation of national economic and monetary p o l i c i e s . which reads: This i s a change from the existing requirement of law "In selecting the s i x appointive members of the Federal Re- serve Board . . . the President s h a l l have due regard t o a f a i r representat i o n of the f i n a n c i a l , a g r i c u l t u r a l , i n d u s t r i a l and commercial interests and geographic divisions of the country." This enumeration of interests does not give the President any d e f i n i t e directions and does not appear t o be the proper principle on which Board members should be selected. I t would seem t h a t they should be selected on the basis of t h e i r q u a l i f i cations to perform the functions that the Board i s required to perform rather than on the basis of representing certain i n t e r e s t s . The worst composition of a Board would be i n the nature of a group of representatives of special interests who might be a t odds w i t h each other. I t i s vastly better to say that Board members shall be q u a l i f i e d to do t h e i r work. While t h i s i s not a guarantee of the appointment of e f f i c i e n t Board members, i t may exert an influence i n that direction and make i t d i f f i c u l t to appoint persons without appropriate training or experience. - 11 - X-t9229 I t has been said that under the proposed b i l l the President w i l l have the power to appoint a l l the members of the Board from one d i s t r i c t , but there is nothing i n the b i l l to j u s t i f y t h i s statement. The requirement that not more than one member be from the same d i s t r i c t i s retained, with only the exception that i t need not apply to the Governor of the Board. The reason for that i s that the President ought not to be prevented from appointing as Governor a man preeminently qualified for the position, merely because some other member of the Board may be from the same d i s t r i c t . While i t would seem that the proposed qualifications of Board members are desirable, i t might be wise i n addition to provide that at least two of them shall have had experience as executive officers i n a Federal Reserve bank or a commercial bank. There was a provision requiring two trained bankers i n the original act, but i t was repealed i n 1923. In view of the necessity of deciding many technical banking problems, and particul a r l y technical Federal Reserve banking problems, i t might be a useful i n dication to the President to say that at least two members shall have had that background. I t may also be desirable to say that the Board members shall be qualified by education or experience to participate i n the formulation of national economic, monetary and banking policies. The addition of the words "and banking" would be a recognition of the numerous duties of the Federal Reserve Board that deal with technical banking problems and of the general responsibility of the Board for doing what i t can to maintain sound banking conditions. There has been a good deal of criticism of the^provisions relating to the position of the Governor of the Federal Reserve Board. This c r i t i - cism has been directed at provisions that exist i n the present law as much as at those i n the proposed b i l l . The President always has had the power - 12 X-t9229 - t o designate a member o f t h e Board as Governor and t o t e r m i n a t e t h i s designation. I n d r a f t i n g the b i l l t h i s power o f t e r m i n a t i n g t h e d e s i g n a t i o n has been s t a t e d a l i t t l e more c l e a r l y . I n the b i l l as o r i g i n a l l y introduced the President was given the power t o remove t h e Governor n o t only from t h e Governorship, b u t a l s o from aember s h i p on t h e Board, This has been changed i n t h e b i l l as i t passed t h e House, a change which would seem t o be d e s i r a b l e . I n t h e form i n which t h e b i l l passed t h e House t h e r e i s no increase o f t h e power o f the President over t h e Governor o f the Board, and the o n l y change i n t h e matter i s t h a t a Governor, who r e s i g n s , upon n o t being redesignated as Governor, would n o t be o b l i g e d t o s t a y out o f the banking business f o r two y e a r s , b u t wo\ild be p e r m i t t e d t o resume i t a t once. This i s d e s i r a b l e i n t h e i n t e r e s t o f o b t a i n i n g s u c c e s s f u l men from the banking f i e l d as Governors of t h e Federal Reserve Board, I n view of a l l t h e o u t c r y a g a i n s t t h e proposed increase of political domination o f t h e Federal Reserve System, i t i s worth r e p e a t i n g t h a t t h e p r o v i s i o n about the Governor i n t h e b i l l as o r i g i n a l l y i n t r o d u c e d was the only shadow o f an excuse f o r t h i s c r i t i c i s m , and t h a t w i t h the e l i m i n a t i o n of t h i s p r o v i s i o n , which was n o t .intended t o increase p o l i t i c a l power, b u t could be so i n t e r p r e t e d , t h e r e i s n o t h i n g i n t h e b i l l t h a t i n any way i n creases tbe.power o f t h e A d m i n i s t r a t i o n over t h e Federal Reserve Board, There i s , on t h e other hand, a g r e a t d e a l t h a t increases t h e Board's i n dependence - increased s a l a r i e s , r e t i r e m e n t allowances, d e f i n i t i o n of q u a l i f i c a t i o n s , w i t h other amendments o f f e r e d such a s : removal only by impeachment, appointment f o r a term longer than 12 y e a r s . A l l these and others add t o t h e p o s s i b i l i t i e s of having an independent Board i n law as w e l l as i n f a c t . I n a d d i t i o n t o t h a t t h e Board i s given a d e f i n i t e o b j e c t i v e , - 13 - X-t9229 and this increases the Board1s power to r e s i s t p o l i t i c a l pressure because this pressure i s l i k e l y to be exercised i n a direction that i s not consistent with the objective to be prescribed by law as a guide to Federal Reserve policy* Other very goal amendments to make the Board independent i n law have been offered to the Senate Sub-committee. A l l of the Federal Reserve Board Members have t e s t i f i e d before the Senate Sub-committee of the Banking and Currency Committee. Certainly no one can say that they did not show independence. Section 204a of the Banking Act of 1935 provides that the Federal Reserve Board may assign to i t s members or i t s representatives the performance of such of i t s duties as do not involve the formulation of national policies* On the face of i t t h i s i s a minor provision, but i t has important consequences, because i t w i l l enable the Board to be relieved of a large amount of routine duties which do not permit i t to give i t s entire time to the study of economic conditions and the formulation of credit policies. I t is expected that this provision would help to make the Board more of a policy making body and less of an administrative organization. I t w i l l also enable the Board to delegate duties to the Reserve banks and thus to increase t h e i r responsibility and independence i n local matters. Section 204b of the Banking Act of 1935 provides the .objective towards which the powers of the reads as follows: M Federal Reserve Board shall be used. This objective I t shall be the duty of the Federal Reserve Board to exercise such powers as i t possesses i n such manner as to promote conditions conducive to business s t a b i l i t y and to mitigate by i t s influence unstabilizing fluctuations i n the general l e v e l of production, trade, prices, and employment, so far as may be possible within the scope of monetary action and credit administration. 11 X-9229 - 14 - I recommended the s t r i k i n g out o f the f o l l o w i n g : " t o promote c o n d i t i o n s conducive t o business s t a b i l i t y and" The wording o f t h i s o b j e c t i v e i s n o t n e c e s s a r i l y the b e s t t h a t can be devised. The g e n e r a l purpose o f i t , however, i s c l e a r l y i n l i n e w i t h what every o t h e r c e n t r a l bonk does, what the more r e c e n t ones are being r e q u i r e d t o do by t h e i r c h a r t e r s , and what the Federal Reserve System has t r i e d t o do without specific l e g i s l a t i v e d i r e c t i o n . The c r i t i c i s m t h a t has been made o f t h i s o b j e c t i v e has been e n t i r e l y u n j u s t i f i e d . There i s n o t h i n g i n i t that w i l l g i v e the Board any power t o l i m i t the amount o f c r e d i t t o be extended t o any one i n d u s t r y or t o expand i t f o r another i n d u s t r y . The a u t h o r i t y o f the Board over t h e l o a n i n g a c t i v i t i e s o f t h e member banks w i l l n o t be i n any way affected. Tho o b j e c t i v e i s merely a statement o f a d i r e c t i o n by Congress t h a t t h e Federal Reserve Board must do what can be done through i t s powers towards b r i n g i n g about a sounder and more s t a b l e c o n d i t i o n o f business. has a l s o been suggested t h a t the o b j e c t i v e should be m o d i f i e d t o read: It "It s h a l l be t h e duty of the Federal Reserve Board t o e x e r c i s e such powers as i t possesses t o r\d i n t h e maintenance o f sound banking c o n d i t i o n s and business s t a b i l i t y and t o m i t i g a t e by i t s i n f l u e n c e i n j u r i o u s fluctuations i n the general l e v e l o f p r o d u c t i o n , t r a d e , p r i c e s , and employment, so f a r as may be p o s s i b l e w i t h i n the scope o f monetary a c t i o n and c r e d i t a d m i n i s t r a tion." The purpose o f t h i s change i s t o i n t r o d u c e i n t o the o b j e c t i v e the requirement t h a t the Federal Reserve System s h a l l work towards sound banking c o n d i t i o n s as w e l l as towards business s t a b i l i t y . This has always been one of the f u n c t i o n s o f the System, and w h i l e i t v/ould be understood t o continue t o be one w i t h o u t being i n c l u d e d i n tho o b j e c t i v e , i t should be s t a t e d explicitly. - 15 Section 205 of the Banking - X-8E29 Act of 1955 provides for giving the Federal Reserve Board f u l l authority over open-market operations a f t e r consultation with a committee of f i v e governors of the Federal Reserve banks, elected by the twelve governors. This provision has been subjected to severe criticism on the ground that i t increases the powers of the Board as against the powers of the Reserve banks. I t i s true that this proposal adds open- market operations to the instruments of monetary policy, which are now possessed by the Federal Reserve Board. This i s done on the theory that the three principal instruments, namely, raising or lowering of the discount rate, changes i n reserve requirements, and open-market operations should a l l be i n one body that i s clearly defined and that has inescapable responsib i l i t y for the policies i t adopts. There has been criticism of this provision on the ground that the Federal Reserve Board, which has no financial interest i n the Reserve banks, w i l l by this provision acquire control over t h e i r funds. This would seem to be a good argument for those who advocate having the Government buy the stock i n the Federal Reserve banks. I t could be argued t h a t , i f an investment of #146,000,000 with an assured 6 per cent return entitles the member banks to have a dominant say in the formulation of national monetary policies, then the only rational conclusion would be that they must not be permitted to hold the stock. While this i s not my argument, nor am I using i t , i t i s nevertheless an argument that i s used by those who advocate the Government purchasing the stock i n the Federal Reserve banks from the member banks. At the time the Federal Reserve Act was enacted, the conception of money was largely limited to currency, and over currency the Federal Reserve X-9229 -16- Board was g i v e n complete c o n t r o l . This conception has since had t o he ex- panded t o i n c l u d e bank d e p o s i t s as money, and the Board f s power t o r e g u l a t e the volume o f d e p o s i t s i s i n harmony w i t h i t s power over currency i s s u e s . The f a c t i s t h a t i t was intended i n 1955 t o g i v e the Board t h i s power, but i n the course o f l e g i s l a t i o n the s e c t i o n d e a l i n g w i t h t h i s matter was d i s t o r t e d and there was created what appears t o be an impossible s i t u a t i o n where the governors on the Open Market Committee are the o n l y ones who can i n i t i a t e , an open-market policy. The Board has t h e power t o approve or disapprove o f the p o l i c y , and the p o l i c y a f t e r having been recommended by the governors and approved by the Board may s t i l l be n u l l i f i e d by r e f u s a l o f the d i r e c t o r s o f the Reserve banks to p a r t i c i p a t e i n i t s execution. A t present t h e f o l l o w i n g are included i n the open-market o p e r a t i o n s o f the Federal Reserve System: 1) The twelve Governors o f t h e twelve F e d e r a l Reserve Banks 2) The e i g h t Federal Reserve Board Members a t Washington 5) The 108 d i r e c t o r s i n each o f t h e twelve d i f f e r e n t Federal Reserve banks o f the c o u n t r y . I n a matter which i s o f v i t a l n a t i o n a l importance and i n which t i m e l i n e s s and speed may be d e c i s i v e , i t i s o b v i o u s l y u n d e s i r a b l e t o have a complicated machinery c a l c u l a t e d t o b r i n g about d e l a y j i t i s b e t t e r t o have a c l e a r - c u t f i x a t i o n o f r e s p o n s i b i l i t y on a n a t i o n a l body appointed f o r t h a t purpose. There has been c r i t i c i s m on the ground t h a t t h i s b i l l would g i v e the Board the r i g h t t o a u t h o r i s e or even compel the Reserve banks t o buy o b l i g a t i o n s d i r e c t l y from the United States Government. That i s another l i n e o f c r i t i c i s m t h a t i s not i n any way r e l a t e d t o t h e b i l l . There i s n o t h i n g i n the b i l l changes the s i t u a t i o n i n t h i s r e s p e c t . Government now e x i s t s : that The power t o buy d i r e c t l y from the i t has been used r e g u l a r l y but never f o r extended p e r i o d s . There i s n o t h i n g i n the proposed b i l l t h a t would change %he l e g a l s i t u a t i o n i n t h i s respect. I f t h e c r i t i c s wish t o p r o h i b i t d i r e c t borrowing, they should o f f e r an amendment t o the Federal Reserve Act t o t h a t e f f e c t . -17- I t i s g e n e r a l l y assumed t h a t sponsible f o r open-market p o l i c i e s . X-9&29 f e d e r a l Reserve Board i s r e Few people, even t o d a y , are aware o f t h e f a c t t h a t t h e present Open Market Committee c o n s i s t s o f twelve men who represent t h e twelve Federal Reserve banks, and t h a t the Federal Reserve Board merely approves o r disapproves, but does n o t i n i t i a t e open-market p o l i c i e s . Few people a l s o r e a l i z e t h a t each Federal Reserve bank has t h e r i g h t t o r e f u s e t o p a r t i c i p a t e i n an open-market o p e r a t i o n a f t e r i t has been adopted by the twelve Governors and approved by the Federal Reserve Board. I t may be contended t h a t the Federal Reserve Board should not have t h i s power because i t i s in Washington - the Government's c a p i t a l - and because i t s members are appointed by the President w i t h the advice and consent of t h e Senate. I t may be s a i d t h a t p o l i t i c a l pressure might be used a g a i n s t the Board and t h a t the Board might be i n f l u e n c e d by such pressure i n i t s monetary c o n t r o l . On t h e other hand, i t i s argued t h a t the Governors are appointed by t h e d i r e c t o r s o f t h e F e d e r a l Reserve banks, s i x o f whom are e l e c t e d by member banks, p r i v a t e i n t e r e s t s , and t h a t such Governors may be guided i n determining open-market p o l i c i e s by the p r i v a t e i n t e r e s t s o f the member banks, and not by n a t i o n a l needs and requirements o f the c o u n t r y . Both views are most extreme. must be vested where r e s p o n s i b i l i t y r e s t s . Authority That i s l o g i c a l . Since open-market p o l i c y i s a n a t i o n a l q u e s t i o n , a u t h o r i t y as w e l l as r e s p o n s i b i l i t y f o r t h i s p o l i c y should be l o c a t e d i n one p l a c e , and i n t h e Federal Reserve Board, which i s a n a t i o n a l body. This seems t o be i n t h e essence of the purposes o f a Federal Reserve Board, This seems t o be the s u r e s t way o f e s t a b l i s h i n g t h e f a c t whether the Digitized System for FRASERor t h e Board i s , or i s n o t , f u n c t i o n i n g i n accordance w i t h X-9229 -18- the purposes f o r which i t was c r e a t e d . I t removes t h e o p p o r t u n i t y f o r excuses. Of course, t h e Board would f e e l t h a t i t s own research organizat i o n should be extended and strengthened and given more a c t i v e f u n c t i o n s t o perform and the membership o f the Board would f e e l the need o f keeping more c l o s e l y i n touch w i t h c u r r e n t developments which might a f f e c t open-market p o l i c y and the i n t e r p r e t a t i o n t h e r e o f , but the Board would be i n f a r b e t t e r p o s i t i o n t o determine when and i n what circumstances t o i n i t i a t e an open-market p o l i c y on the basis o f a coordinated view o f a l l the f a c t o r s e n t e r i n g i n t o t h e monetary s i t u a t i o n - reserve requirements, d i s c o u n t r a t e s , lendings o f member banks, the Government's f i s c a l p o l i c i e s , e t c . , - and could take a c t i o n promptly on i t s own r e s p o n s i b i l i t y i n whatever d i r e c t i o n seemed b e s t t o meet the needs o f t h e s i t u a t i o n a t t h e t i m e . However, t o make t h e p a r t s o f the System more cohesive a p r o v i s i o n might be made f o r a s u f f i c i e n t r e p r e s e n t a t i o n o f t h e Regional Banks on t h i s committee f o r the sake o f u n i t y i n the System so long as the tendency i s i n the d i r e c t i o n of making t h e System one and not two. I n the i n t e r e s t o f u n i t y , the Open Market Committee might c o n s i s t of the s i x a p p o i n t i v e Members o f t h e Board and f i v e Governors - and f i v e Governors are t o be designated by the twelve Governcr s o f t h e twelve Federal Reserve banks and t o be chosen from f i v e s e c t i o n s o f t h e country - namely - the N o r t h , South, E a s t , Middle West and t h e Far West. While the Secretary o f the Treasury and the Comptroller o f the Currency might continue as Members o f the Board t h e y should have no vote on Open Market Committee p o l i c i e s . T h e i r membership on the Federal ^19- X-S229 Reserve Board i s v a l u a b l e i n many r e s p e c t s , e s p e c i a l l y a t t h i s t i m e , but the Act might provide t h a t they have no power o f a vote on open market o p e r a t i o n s , b u t might be c a l l e d by the Open Market Committee f o r i n f o r m a t i o n t h a t the Committee might wish t o have i n the c o n s i d e r a t i o n o f adopting open market p o l i c i e s . I so t e s t i f i e d before the Senate Sub-committee l a s t Monday. Section 206 o f the Banking Act o f 1935 r e l a t e s t o e l i g i b i l i t y o f paper f o r discount a t the Reserve banks. I n place o f e l a b o r a t e l y d e f i n e d and r e s t r i c t i v e r u l e s p r e s c r i b e d by law about the c h a r a c t e r and m a t u r i t y o f paper a v a i l a b l e f o r d i s c o u n t , the b i l l proposes t o give power t o the Reserve Board t o p r e s c r i b e by r e g u l a t i o n the k i n d of commercial, a g r i c u l t u r a l and i n d u s t r i a l paper t h a t w i l l be e l i g i b l e f o r r e d i s c o u n t by a member bank w i t h the Reserve banks and a l s o a u t h o r izes a member bank, s u b j e c t t o t h e Board's r e g u l a t i o n s , t o make advances t o any member bank on a promissory note secured by any sound asset o f such member bank. This proposal i n some respects' represents the g r e a t e s t departure i n the b i l l from the conceptions t h a t p r e v a i l e d a t the time t h a t the Federal Reserve Act was adopted i n 1913. Even though t h e r e i s considerable m e r i t t o t h i s amend- ment, y e t because i t i s so r a d i c a l a departure from the Federal Reserve Act as o r i g i n a l l y w r i t t e n , and because i t a f f o r d s an element t h a t n i g h t tend toward an extreme ? which perhaps would be u n d e s i r a b l e , I made the f o l l o w i n g recommendation to the Senate Sub-committeei " N o t w i t h s t a n d i n g any o t h e r p r o v i s i o n of l a w , when i t deems i t i n the p u b l i c i n t e r e s t , a Federal Reserve bank may recommend, and by an a f f i r m a t i v e vote o f n o t l e s s than f i v e o f i t s appointive Members, the Fedex%al Reserve Board may a u t h o r i z e any Federal Reserve bank, f o r l i m i t e d periods t o be recommended by the Federal Reserve bank and p r e s c r i b e d by the Board, b u t which may be extended by the Board from time t o time upon a p p l i c a t i o n o f the Federal Reserve bank, X-9229 - n 20 - t o make advances t o member banks which have no f u r t h e r e l i g i b l e and acceptable assets a v a i l a b l e t o enable them t o o b t a i n adequate c r e d i t accommodations through r e d i s c o u n t i n g a t t h e Federal Reserve bank or by any o t h e r method provided by t h i s A c t . Such advances may be made on t h e promissory notes o f such member banks secured t o the s a t i s f a c t i o n o f the Federal Reserve bank, and s h a l l be s u b j e c t t o such r e g u l a t i o n s and s h a l l bear such r a t e s o f i n t e r e s t as may be p r e s c r i b e d from time t o time by t h e F e d e r a l Reserve Board upon recommendation o f t h e Federal Reserve bank." My recommendation places i n the F e d e r a l Reserve banks t h e power o f making the r e q u e s t • S e c t i o n 208 o f the Banking Act o f 1955 deals w i t h the q u e s t i o n o f c o l l a t e r a l a g a i n s t Federal Reserve n o t e s . I t f o l l o w s the example o f p r a c t i c a l l y a l l c e n t r a l banks, except the Bank o f England, i n p r o v i d i n g t h a t a l l t h e assets o f t h e Federal Reserve brinks s h a l l be t h e c o l l a t e r a l hack o f a l l o f i t s l i a b i l i t i e s . The s e g r e g a t i o n o f c o l l a t e r a l a g a i n s t notes has n o t served a u s e f u l purpose and so f a r as one can p r e d i c t never w i l l , because i t becomes r e s t r i c t i v e o n l y a t a time when r e s t r i c t i o n i s h a r m f u l and does n o t i n any way r e s t r i c t a t a t i m e when r e s t r i c t i o n may be d e s i r a b l e . I t has, t h e r e f o r e , a perverse r e s t r i c t i v e e f f e c t . The reason f o r t h a t is t h a t a t a time when c r e d i t expansion i s proceeding a t a r a p i d r a t e t h e r e i s p l e n t y o f commercial paper a v a i l a b l e as c o l l a t e r a l , because the banks are borrowing h e a v i l y from t h e Reserve banks. do n o t r e s t r i c t . T h e r e f o r e , c o l l a t e r a l requirements A t a t i m e , however, when the Reserve bonks are pursuing a l i b e r a l p o l i c y o f purchases i n the open market, i n order t o prevent def l a t i o n , as was the case i n 1951, a p o i n t i s soon reached where t h e r e i s a shortage o f c o l l a t e r a l and g o l d has t o be impounded back o f Federal Reserve X-9229 - 21 - n o t e s , and then the d e f l a t i o n a r y process i s aggravated by t e c h n i c a l r e s t r i c t i o n s on the Reserve banks. That i s e x a c t l y what had happened p r i o r t o February 1952, when t h e Congress had t o adopt t h e G l a s s - S t e a g a l l Act which p e r m i t t e d t e m p o r a r i l y t h e use o f Government s e c u r i t i e s as c o l l a t e r a l against Federal Reserve n o t e s . be a b o l i s h e d . C o l l a t e r a l requirements a g a i n s t Federal Reserve notes should I f i t i s t h e wish o f Congress t o r e s t r i c t the amount o f Govern- ment s e c u r i t i e s t h a t Federal Resei^ve banks may purchase, t h a t should be done d i r e c t l y , as i s done i n some o f the f o r e i g n c e n t r a l banks. To aim a t it through . i n d i r e c t i o n by r e q u i r i n g commercial c o l l a t e r a l or g o l d a g a i n s t Federal Reserve notes works a t the wrong time and i n the wrong circumstances. It does not p r o t e c t t h e Reserve bank a g a i n s t excessive h o l d i n g s o f Government s e c u r i t i e s , and does prevent them from doing t h e i r share i n f i g h t i n g a d e f l a t i o n a r y movement. Section 209 o f tho Banking Act o f 1955 c l a r i f i e s the power o f the Reserve Board t o r a i s e or lower reserve requirements o f member banks. This power was granted t o the Reserve banks under the Thomas amendment t o the A g r i c u l t u r a l Adjustment Act o f 1935, b u t under tho p r o v i s i o n s o f t h a t a c t the Reserve banks can change reserve requirements o n l y when the President proclaims an emergency and g i v e s h i s approval t o the a c t i o n . To p r o c l a i m en emergency i n banking, as Mr. Owen D. Young s a i d the o t h e r day, i s t o b r i n g about an emergency. I t should n o t be necessary t o p r o c l a i m one. I t i s , t h e r e f o r e , b e s t t o g i v e the Board a u t h o r i t y i n the matter and t o make t h a t a u t h o r i t y as e l a s t i c as p o s s i b l e by p e r m i t t i n g changes i n reserve requirements i n f i n a n c i a l centers alone when a s p e c u l a t i v e s i t u a t i o n may develop t h e r e w i t h o u t having developed i n the c o u n t r y d i s t r i c t s . - 22 - X-9229 F a n t a s t i c i n t e r p r e t a t i o n s o f t h i s reserve requirement p r o v i s i o n have been made by opponents. Some b e l i e v e t h a t t h i s i s a move t o e s t a b l i s h a 100 percent reserve p l a n w i t h o u t d i r e c t a u t h o r i z a t i o n by Congress, A 100 percent reserve p l a n i s an absolute i m p o s s i b i l i t y w i t h o u t a very l a r g e amount o f readjustment i n a g r e a t many l i n e s o f banking l e g i s l a t i o n and the danger o f i t being i n t r o d u c e d s u r r e p t i t i o u s l y by t h i s p r o v i s i o n i s p u r e l y imaginary. L i m i t a t i o n s on the e x t e n t t o which the Reserve Board could r a i s e or lower these requirements may be devised and have been p r o posed, I f e e l t h a t some c e i l i n g should be e s t a b l i s h e d . I t would be r e - assuring. On March 4 , 1935 t h e demand p l u s time d e p o s i t s , c a l c u l a t e d i n accordance w i t h t h e p r o v i s i o n s o f Section 324 o f House B i l l 7617, v*ere a p p r o x i mately t w e n t y - n i n e b i l l i o n , f i v e hundred m i l l i o n d o l l a r s . I f the maximum l i m i t a t i o n were f i x e d a t , say 25%, the r e q u i r e d reserve would work out a t about seven b i l l i o n , f o u r hundred m i l l i o n d o l l a r s , which i s about f i v e and one h a l f b i l l i o n d o l l a r s more than the e x i s t i n g reserve requirements. Others f e e l i t would be b e t t e r t o have no such l i m i t a t i o n s , however, because i n t h e f a c e o f t h e enormous p o s s i b i l i t i e s o f expansion on t h e b a s i s o f e x i s t i n g excess reserves and p o t e n t i a l a d d i t i o n s t o them, the amount by which reserve requirements may have to be r a i s e d t o combat i n f l a t i o n i s hard to predict. I t may be b e s t t o leave the matter f l e x i b l e i n the hands o f the Federal Reserve Board, My p o s i t i o n i s c l e a r - I p r e f e r a formula o f some k i n d , or a t l e a s t a c e i l i n g . There has a l s o been t h e theory expressed t h a t through t h i s method o f i n c r e a s i n g reserves t h e Reserve Board may acquire the power t o t e l l the member banks how t o i n v e s t t h e i r d e p o s i t s . This statement i s based on a complete misunderstanding o f our f i n a n c i a l mechanism. h eFRASER present s i t u a t i o n . The member banks Digitized tfor http://fraser.stlouisfed.org/ excess r eofsSt. e rLouis v e s . I f t h e Federal Reserve Federal Reserve Bank Take, f o r example, have about $2,400,000,000 o f Board should decide t h a t reserve X-9229 requirements be increased by t h a t amount, then these reserves i n s t e a d o f beirjg excess reserves would become r e q u i r e d r e s e r v e s . This would i n no way change the Reserve banks 1 a b i l i t y t o d i s c o u n t paper or purchase Government s e c u r i t i e s . The proposals about r e a l e s t a t e loans are i n t h e nature not o n l y of l i b e r a l i z a t i o n , but a l s o o f increased f l e x i b i l i t y by p e r m i t t i n g t h e Federal Reserve Board t o p r e s c r i b e r u l e s and r e g u l a t i o n s under which r e a l estate loans may be made. This proposal i s i n l i n e w i t h the proper f u n c t i o n i n g o f our banking system. The r e a l e s t a t e p r o v i s i o n s o f t h i s b i l l appear t o be c l e a r l y i n the r i g h t d i r e c t i o n and would serve the p u b l i c good. More s p e c i f i c a l l y they might c o n t r i b u t e t o r e v i v a l i n t h e b u i l d i n g i n d u s t r y , which a t t h i s time i s a fundamental r e q u i s i t e o f r e c o v e r y . Because t h e r e are so many wrong impressions on t h i s p a r t i c u l a r amendment, l e t me read i t as i t now appears i n the House B i l l t h a t has been passed. "Subject t o such r e g u l a t i o n s as the Federal Reserve Board may p r e s c r i b e , any n a t i o n a l banking a s s o c i a t i o n may make r e a l e s t a t e loans secured by f i r s t l i e n s upon improved r e a l e s t a t e , i n c l u d i n g improved farm l a n d and improved business and r e s i d e n t i a l p r o p e r t i e s . The amount o f any such loan h e r e a f t e r made s h a l l not exceed 60 per centum o f the appraised value o f the r e a l e s t a t e ; but t h i s l i m i t a t i o n s h a l l not prevent the r e newal or extension o f loans h e r e t o f o r e made and s h a l l not apply t o r e a l e s t a t e loans which are insured under t h e p r o v i s i o n s o f T i t l e I I o f the N a t i o n a l Housing A c t * No bank s h a l l make such loans i n an aggregate sum i n excess o f t h e amount of the c a p i t a l shock o f such a s s o c i a t i o n paid i n -24- X-9229 and unimpaired plus i t s unimpaired surplus f u n d , o r i n excess o f 60 per centum of the amount o f i t s time and savings d e p o s i t s , whichever i s the greater. The Federal Reserve Board i s a u t h o r i z e d t o p r e s c r i b e from time t o time r e g u l a t i o n s d e f i n i n g the term ' r e a l e s t a t e loans 1 and o t h e r terms used i n t h i s s e c t i o n and r e g u l a t i n g and l i m i t i n g the making o f r e a l e s t a t e loans by member banks, w i t h a view t o p r e v e n t i n g an unreasonably l a r g e p r o p o r t i o n o f each bank's assets from being i n v e s t e d i n r e a l e s t a t e and r e a l e s t a t e l o a n s , p r e v e n t i n g such loans from exceeding a reasonable percentage o f the appraised value of the r e a l e s t a t e i n view o f the circumstances e x i s t i n g a t the time and otherwise r e q u i r i n g the banks t o conform t o sound p r a c t i c e s in making r e a l e s t a t e l o a n s . " Because t h i s p a r t i c u l a r amendment has r e c e i v e d more a t t e n t i o n from Governor Eccles than from anybody else r e s p o n s i b l e f o r the w r i t i n g of the B i l l , and because you were e x p e c t i n g t o hear Governor Eccles here today, I should l i k e , w i t h your p e r m i s s i o n , t o quote Governor Eccles 1 testimony on t h i s amendment before the Senate Sub-committee o f the Banking and Currency Committee: "As you know, r e a l e s t a t e loans are n o t a new form o f investment f o r our commercial banks. f o r decades. They have been l e n d i n g on r e a l e s t a t e mortgage s e c u r i t y L i b e r a l i z a t i o n o f the r e a l e s t a t e l o a n p r o v i s i o n s , combined w i t h the broadened e l i g i b i l i t y requirements f o r borrowing a t the Federal Reserve banks, may encourage a c t i v i t y i n the c o n s t r u c t i o n i n d u s t r y , which i s e s s e n t i a l to recovery. " C r i t i c i s m o f these p r o v i s i o n s has come l a r g e l y from those who bel i e v e i n the s e p a r a t i o n o f savings banking from commercial banking. Whatever may be s a i d i n f a v o r o f such a s e p a r a t i o n as a d e s i r a b l e t h i n g i n ory, i t i s not Digitizedt h foreFRASER f e a s i b l e so l o n g as we have thousands of small banks t h a t X-9229 - 25 - cannot make a l i v i n g on the b a s i s o f t h e i r demand deposits a l o n e . The member banks have 10 b i l l i o n d o l l a r s o f time d e p o s i t s which r e p r e s e n t the people's savings. So l o n g as they have time d e p o s i t s f o r which they must pay i n t e r e s t , they o f n e c e s s i t y must p a r t i c i p a t e i n f i n a n c i n g l o n g - t e r m undertakings t h a t w i l l y i e l d enough t o pay f o r doing the business* The law places no l i m i t s on what t h e banks may do i n the purchase o f bonds or o f o t h e r l o n g - t i m e paperj t h e r e i s no reason f o r s i n g l i n g out r e a l e s t a t e loans f o r s p e c i a l r e s t r i c t i o n s . "Our banks have been l o s i n g a l a r g e p a r t o f t h e i r business t o t h e Government, which has s o l d i t s bonds t o t h e banks and has used the funds t o make mortgage and o t h e r l o a n s , many o f which the banks should be i n a p o s i t i o n t o make themselves. Unless the banks r e g a i n some of t h e business which has been taken over by the Government c r e d i t agencies, t h e r e w i l l n o t be s u f f i c i e n t business t o support the banking system. There w i l l a l s o be g r e a t pressure f o r a c o n s t a n t l y growing p u b l i c debt i n c u r r e d i n p a r t in t a k i n g over business t h a t could be done by t h e banks. " I note t h a t the Banking and Currency Committee o f the house i n r e p o r t i n g out the b i l l has made two changes i n the recommendations on r e a l estate l o a n s . I n the f i r s t place a l i m i t a t i o n has been i n s e r t e d t h a t aggregate r e a l e s t a t e loans s h a l l not exceed 100 per cent o f the c a p i t a l and surplus or 60 per cent o f savings d e p o s i t s , whichever i s the g r e a t e r . I think t h i s r i g i d l i m i t a t i o n i s undesirable. I t would be much b e t t e r t o leave t h i s matter t o the d i s c r e t i o n o f t h e Federal Reserve Board because t h e aggregate amount t h a t may be s a f e l y loaned on r e a l e s t a t e v r r i e s w i t h banks, l o c a l i t i e s and periods o f t i m e . "The second change i n t h e b i l l as r e p o r t e d by the House Committee i s - 26 - X-9S29 "the elimination of the provision applying the regulations on r e a l estate loans to State member banks, as well as to national banks. This i s a serious omission, because under i t national banks would be a t a competitive disadvantage as against State member banks, many of which are under l i t t l e or no l i m i t a t i o n i n regard to their r e a l estate loans. Furthermore, the Federal Reserve System, which has a v i t a l interest i n the solvency of State member banks, would be given no authority over r e a l estate loans that the State member banks may make. This i s inconsistent with provisions i n the Banking Act of 1935 which i n dealing with investment securities placed State.member banks on the same basis with national banks. One of the important advantages in having State banks members of the Federal Reserve System would be l o s t i f there were no uniformity in such matters." When I undertook just two or three days ago the duty and the pleasure of coming here I did so frankly, not only to do what appears to be my duty but to have the pleasure of meeting you and hearing you. I have already met and listened to a great many of you - I hope to l i s t e n to more of you before I leave this convention this afternoon. I have been frank - I have t r i e d to speak dispassionately and, of course, objectively - as dispassionately and objectively as one can speak when one i s an interested part of the System affected by the proposals discussed. I repeat, therefore, that on the whole, there i s nothing extreme i n this b i l l with these amendments. I t i s a b i l l that provides for a definite allocation of responsibility and therefore a better administration of the Federal Reserve Act of 1913. I t deserves consideration. discussed almost everywhere, and that i s as i t should be. for sound l e g i s l a t i o n . I t i s being Discussion makes
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