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Speech delivered before
Essex County Bankers Association
Newark, New Jersey
September 26, 1935

A little more than three months ago I had the privilege of speaking
before the New York Bankers Association at Lake George, and my subject
then was the same as it is today - The Banking Act of 1935. At that
time, however, the Act was not law. Today it is. Accordingly, it is
possible to discuss it again, but from a different point of view - to
speak not of what its provisions may be, but of what they are. I wish
first to take up the changes made by the Act in the general organization
of the Federal Reserve System, and then certain changes which most
directly affect your operations as bankers and as members of the Federal
Reserve System..
The changes that the law makes in the organization of the System may
be described as fundamental, but not revolutionary. They are changes
which closely follow the dictates of experience, and they are adaptations
to present day needs which are too well supported by realities to be
called experimental. Many conceptions which formerly prevailed have
undergone a great change as a result of what has happened in more than
twenty years of actual operation under the Federal Reserve System. In
consequence, Congress has amended the law and certain readjustments have
been made in the organization of the System. To make clear the purposes
behind these changes let me mention some of the things we have learned
from experience.
To begin with, we recognize today that the elasticity of the currency, while it is important, is not a governing factor in the supply of
credit. When people borrow they do not usually want currency, and when
they want currency they do not always borrow to obtain it. Fluctuations
in currency demand, except when there is hoarding, are largely seasonal,
and reflect seasonal changes in the volume of retail trade and of payrolls. To meet .currency requirements is not a major problem, for
deposits have largely taken the place of currency, and the duties of the
Federal Reserve System can not be regarded as entirely discharged merely
by supplying commerce, industry and agriculture with the cash they require for retail transactions and payrolls. That is merely a beginning.
The real tasks of the System are much greater and more complex.
Again, the idea that the Reserve banks lend to one bank the funds
deposited by another is now found .to be quite inaccurate. The lending
power of the Reserve banks does not arise from the receipt of member bank
deposits, except to the extent that those deposits consist of gold. On
the contrary, member bank deposits with the Reserve banks are created
by the Reserve banks. The reserve banksrediscount paper or purchase
bills or securities and enter corresponding credits to the accounts of
the member banks. The lending of funds and the creation of deposits is
not dependent, therefore, on the previous deposit of funds. It depends
upon the power of the Reserve banks to acquire assets by purchase or
discount, and their power to issue notes' or create deposits in payment
for those assets.


Furthermore, the idea was once^eld that a di s c o u n ^ t h e ^ e ^ a X

the credit of a "ember ban"enlarges its reserves by only that much but
it makes possible a much larger expansion of ".ember bank loans and de-

borrow only about one-fifteenth of what they create m
loans to their customers.

n e e d

deposits by

Again, there is no necessary, direct connection between any par-

fusing to discount the notes of speculators. Of course, that is very
far from the facts. In the first place, as I just said, you bankers
do not borrow at the Reserve bank in order to lend, and even if you
did" the kind of paper you borrowed on

b-ii^f asra srs

trary to general policy.
You are entirely familiar with these commonplace facts about your
own business ?or they have been repeatedly demonstrated in banking
operations as you have known them under the Federal Reserve System.
Rut thev are things that could not be seen so clearly until we had the
But they are things c.n
o f t h a t experience it was natural to
actual experience. In the absence 01 tn
i ••
Reserve banks,
suppose that member banks would t ^ i u n d s ^ n t h ^


that as



* „ ' f * r "^

of commerce and not for speculation.

m any

member banks would borrow

^St^^s^lr^f- - v f ^ over°a\ong
have demanded

s ! a f t h ^ r L f v i o l e n t break vath the past,
but in^bedienceTo economic'developments, have adapted the original
Reserve Svs tem legislation to the needs of the present, and aloO to
t h e n e e d s of the future, insofar as those needs can be foreseen.
effort has been to modify the mechanism so that itmayperformthe
f.mrtions which time and change have thrust upon it. It has been
recognized that in meeting the requirements of contemporary business


life the Federal Reserve System can not rely principally on the power
to furnish currency when it is needed and to retire it when it is not;
nor can it rely on discrimination against one class of paper or another when and if offered for discount - on the theory that by so doing it is
diverting credit away from speculative uses and toward commerce. It has
been recognized that the Federal Reserve System's power over credit lies
primarily not in the things I have mentioned, but arises chiefly out of
its ability to influence the total volume of bank deposits. And it has
been recognized that the System must not be thought of as waiting more
or less passively, like the fire department, until a crisis arises and
it receives an application for help. The Banking Act of 1935 is based
on a recognition of these facts. Perhaps the most important thing attempted in it is a more definite fixing of responsibility for the
country's credit policy. If the System is expected to act, it must be
given the power to act effectively. This principle has been followed
in the authorization of a new Open Market Committee.
Open Market Operations are, of course, not new, but they were not
of established or recognized importance when the Federal Reserve Act
was adopted. For years, ever since the war, they have had a powerful
and direct bearing on the volume and cost of money. They are the means
of controlling, in the mass and in the most practicable way, the credit
operations of the banks of the country. Until the new lav/ was adopted,
however, the machinery for the formulation and execution of open-market
policies was ineffective. The Open Market Committee, comprising representatives of the 12 Reserve banks, might propose purchases or sales of
United States Government securities in the open market, and the Board
might approve those proposals; but any Reserve bank might refuse to
participate in the proposed program. A policy might be adopted, but its
execution depended on the independent action of twelve boards of directors comprising in the aggregate 108 persons. Such an arrangement
was likely to result in delay and to afford opportunities for obstruction
in matters where prompt and decisive action was required in the public
Under the Act of 1935, beginning Liarch 1, 1936, authority over open
market operations will be vested in a new Open Liarket Committee consisting of the seven members of the Board of Governors of the Federal Reserve System and five representatives of the Reserve banks selected
regionally: one from the Boston and New York districts, one from the
Philadelphia and Cleveland districts, one from the Richmond, Atlanta,
and Dallas districts, one from the Chicago and St. Louis districts, and
one from the Minneapolis, Kansas City and San Francisco districts. The
Reserve banks will have representation on the Committee, but a majority
of the Committee m i l be made up of Board members. Open market transactions, as under the old Act, are to "be governed with a view to accommodating commerce and business and with regard to their bearing upon the
general credit situation of the country". The Committee, in the language
of the new act, is to "consider, adopt, and transmit-to the several Federal Reserve banks, regulations relating to the open market transactions
of such banks". Not only will Federal Reserve banks be forbidden to
engage in open market operations, except in accordance with the regulations of the Committee, but they also will be forbidden to "decline to
engage" in such operations except in accordance with the directions and
regulations of the committee. Open Market policy will now be determined,

therefore, by a responsible statutory body, able to give it the
siSency and definiteness that the importance of the function makes necessaryv,' • Tt is also reauired by the law that complete records be kept of the
action t a k e n by the Board a L by the Coranittee i n a l l matters of policy
These records are to show the underlying reasons for the action, and are
„'II S h u s h e d in the annua] reports of the Board. They will Give the
T u b l c an o Sorti nit;\rstudy t L decisions of the FederalReserve
ys em,
in much the same way that Supreme Court opinions may be studied. This op
nortunity should be extremely helpful in clarifying the public disc unions
of national credit policy. It m i l also ^ e e n t u a t e the ir.dividual sense
of responsibility, for members will be called on not only to take lirm
positions on matters of national policy, but to explain those positions
to the public. •


, .


In the matter' of discount rates, the law prescribes a new P r o c u r e
under which "tes must come up for consideration by the Reserve, banks and
in effect this mean, max.
h „ t h p R o a r d every fourteen days or oft'ener.
rates must be newly established every two weeks at least, though the new
rates may, of course, be the same as the old.
Under the new law, the authority of the Board to alter the amount of

the Board ^ c h a n g e retired reserves o n l y ^ e n an - r g e n c ^ e x i s e
result of credit expansion ;and the ^ o v a l cof th^Pie.>1 <en

the vote oi lour 01 ^






p * ™ *
can not
th6iny any n
GreaS6howd t0^

^TrSu^^^W^ "'


more than tvdce what they now are. .

Since the Board of Governors constitutes a majority of the Open MarI + rn
and ince it also has authority over discount rates, over

S S S ^ r b s u S z ^ v s z z z rsr

member ba^ks? Generally speaking, it l e a v e s the Reserve banks with
responsibility for member bank relations, and giVes theBoard.withthe
h e l p of representatives of the Reserve banks, responsibility for national
credit and monetary policies.



The law also makes important changes in the constitution of the
governing body of the Federal Reserve System, which is no longer known as
the Federal Reserve Board, but as the Board of p e r n o r s of the Fe<tar,a
Reserve System. The Secretary of the Treasury and the Comptroller of the
mrrencv cease to be ex officio members February 1, "36, and tttereaiier
S h e B o a r d is to consist of seven members appointed by the President.
of office is ?o be fourteen instead of twelve years. As at present,
not more than one member may be appointed from any one Federa Reserve
Hi qtrlct and the President, in selecting the members, is tp ''have due
regard to a l a i f representation of the financial a g r i c u l t i n d u s trial and commercial interests and geographical divisions oi the country


After March 1, 1936, the chief executive officer of each Federal
Reserve bank will be a "president", instead of a governor, and the title
"vice-president" will replace that of deputy governor.
I think I have covered sufficiently the more prominent changes
which the Banking Act of 1935 makes in the organization of the Federal
Reserve System. Those changes in general tend to place more definite
responsibility where it belongs. Changing conditions in our economic
life have thrown greater responsibilities upon the System; and in order
to meet those responsibilities in a direct and positive way, the
System's organization has been made more closely knit and more effective.
I wish to speak now of those features of the Banking Act of 1935
which more directly affect your individual operations as bankers.
The first of these is the broadened lending powers which the Act
gives you, both directly and indirectly.
Indirectly, the Act tends to broaden your powers by giving the
Reserve banks authority to make advances to member banks on any satisfactory security. The former provisions still stand as to the character
of paper that is eligible for discount - paper that must originate in
connection with industrial, commercial or agricultural transactions and they also still stand as to advances to member banks on notes
secured by Government obligations or by eligible paper. The new provisions do not alter the old ones, except by adding to them. The only
conditions aside from the requirement that advances under the new law
be secured to the satisfaction of the reserve bank, are that they bear
a rate of interest at least one-half percent above the Reserve bank's
discount rate and have maturities of not more than four months. At a
time like the present, when you have excess reserves, this new provision
in the law may not seem very important. But times may change. If they
do, this new provision means that, assuming your assets are good, the
Federal Reserve bank will be able to advance you money on them, no matter what the type of paper, or in what kind of transaction they originated. Borrowing from the Federal Reserve bank is now possible on other
than technical conditions of eligibility alone. And this is very important. Many banks in recent years would have had much less trouble if
they could have.taken to the Reserve bank some of their assets which were
good, but not legally eligible, instead of having to sacrifice them on a
demoralized market.
Apart from its practical bearing upon what paper individual banks
may use in borrowing at the Reserve bank, the new provision of the law is
significant in that it recognizes an actual condition of American banking. This is that American banks do not specialize in one type of credit
as against another. They deal in credit of all sorts. They combine
long term and short term functions. They cannot confine themselves to
short term commercial paper, for there is not enough of such paper to
fill more than a small part, of their portfolios. They accept the savings
and time deposits of their communities and under such circumstances it
must be expected that they will also hold the long term obligations of
their communities. To disregard these living facts of American banking
is futile; and the new provisions for eligibility simply make the. Federal

Reserve Act cognisant of the, realities and adapt, the powers of the Reserve
banks to those realities.
'•; "
• I; ..„• '
In a more direct way, the new Act broadens your powers'by liberalizing the conditions under which National: banks may make real estate loans.
The old stipulation that the real estate upon which, such loans are made
must be situated in the bank's Federal Reserve district or ^ t h i n a
Sundrel miles of the bank, is removed; and loans which, are amort wed^are
permitted in amounts up to 60 percent of the appraised value of the property and for as much as ten years, provided installment payments are sufficient to repay at least hO percent of the principal in ten years.
. The permissible aggregate of real estate loans which a national bank
may hold is changed by the new law from 25 percent of its capital and surplus or 50 percent of its savings deposits, whichever was greater to Jgo
percent oF n T c a p L t a l and surplus or 60 percent of its time and savings
deposits, whichever is greater.
.. ..
in general connection with this subject of enlarged lending powers
I wish to mention also the provisions of section 13b of the Federal Reserve Act relating, to loans which you may make for working capital purposes. This section is a year older than the new act but its provisions belong logically with these more recent ones I have just been
Under this section you may make loans with maturities not exceeding five years to establish industrial and commercial businesses in
need of working capital. These loans are eligible for discount at the
Federal Reserve Bank. Nor is that all. If you;wish to hold the loan
vourself but wish to be assured that, you can dispose of it at any time
f f T e e d be, you can procure a commitment binding the Federal Reserve
bank to take it off your hands. Moreover, if and when youdispose of
the loan you can do so without recourse for as much as 80 percent. In
other words you have a loan which is insured 100 percent as to liquidity
and 80 percent as to loss. This arrangement is not restricted to member
banks; it is open to nonmembers as well.
• • AS Of September 11, the Federal Reserve Dank of New York had received and acted on 881 applications for working capital loans aggregat?ng ,63,000,000. Of these, 330, aggregating
000,000 had been approved. Of the amounts outstanding, ,7,500,000 was in the form of
loans made by the Federal Reserve Bank itself direct to the industrial
o? commeroi al borrower, because you local bankers refused to make them.
Ther<Twas also outstankng about ,^10,000,000, which local banks and
other financing institutions in the Second Federal Reserve District had
•made, and which were protected by the commitments I have just described.
V • These loans have been made to all kinds of enterprises, industrial
and- commercial. In many cases they have been loans which bankers have
not been accustomed to making, and which would not be made were it not
?or the fact that the Reserve bank stands behind the bank which makes
. them. .' .But as it is, they constitute secure and liquid assets, yielding
' a good rate of interest.
Here again as in the case of the advances made by the Reserve


banks on any good assets, and as in the case of real estate loans, the
present legislation recognizes two important principles. One is that
the local bank may be called on to meet the general credit needs of the
community; the other is that the assets the local bank acquires should
meet the general criterion of soundness, rather than technical limitations as to maturity, origin, and nature of the underlying transaction.
I think I have now covered the changes of most general interest,
that have been brought about by the- Banking Act of 193b, but there are
numerous other provisions that it may be worth while to run through even
though you may be familiar with them.
First there is the matter of deposit insurance, which is continued
on what was originally intended as the temporary plan. Insured banks
are subject to an annual assessment at a fixed rate - one-twelfth of 1
percent of deposits - instead of being under an unlimited liability as
would,have been the case under the old permanent plan. Insurance covers
deposits up to ,^,000 for any one depositor, instead of ^10,000, as the
old permanent plan contemplated.
After July 1, 191*2, no state bank with average deposits of
-il,000,000 or more may be an insured bank without becoming a member of
the Federal Reserve System. This postpones required membership for
seven years. In this connection the term "state banK" does not include
mutual savings banks or Morris Plan banks.
The former prohibition against a member bank's purchasing and holding more than .10 percent of a particular issue of investment securities
has been eliminated, but the total of the obligations of one obligor
which may be purchased and held by a member bank is reduced from 15 percent of the bank's capital and 25 percent of its surplus to 10 percent
of its capital and surplus. Banks are not required to dispose of securities lawfully held at the time the law was enacted. It is also made
clear, in conformity with previous rulings of the Board and of the
Comptroller of the Currency, that member banks may purchase and sell
stocks for the account of their customers. They may not purchase and
sell stocks for their own accounts.
There are several important provisions in the new Act with respect
to affiliates and holding company affiliates. These modify considerably
the original requirements. When the first legislation defining affiliates and requiring reports of them was adopted in the Banking Act
of 1933, it was undoubtedly directed primarily at securities affiliates
and affiliates formed for the purpose of engaging in activities in which
member banks were not authorized to engage or for the purpose of supplementing the activities of member banks. The definitions, however,
were made extremely comprehensive, and as a result a very large number
of organizations were caught in a net that was never intended for them.
It frequently happened, that banks were surprised to discover that under
the law they had "affiliates", when as a matter of fact no such idea
was in their minds. A bank might find that it had as an affiliate a
corporation which belonged to an estate of which it was trustee; or it
might find that it had as an affiliate a corporation whose stock was
accidentally owned by the bank's own stockholders. There might be no
financial connection between the two and yet at every call date a

report would have to be procured.-from the affiliate and published. The
original purpose of the-law'had been accomplished so far as securities
affiliates were concerned, for they all disappeared, but the number oi
other affiliates reported to the-Board was increasing - not because banks
were forming new affiliations, but because u n k n o w n and. unintended^affiliations, quite' accidental in.fact, were constantly coming to light.
The effect of the new provisions of the law will be to exclude a large
number.of such organizations from the requirement imposed originally. #
The Board and the Comptroller of the Currency are now authorized to waive
reports which are not necessary to disclose fully the relations between a
member bank and its affiliate, and the effect thereof upon the affairs of
the bank, and the conditions of waiver have been announced, Roughly speaking,' organizations which are affiliates under the terms of the law need
not submit reports unless they are indebted to the affiliated member bank
or unless the member bank owns their stock or other obligations. Reports
of affiliations which have arisen as a result of ownership or control of
an organization's stock by a member bank in a fiduciary capacity are also
waived. This, it is believed, will be welcome news to many banks.
In addition, organizations which own or control the stock of a bank,
but are found by the Board of Governors of the Federal Reserve System not
to be engaged as a business in holding bank stock, 'are exempted by the
new law from the requirements imposed on holding company aifiliates except as to indebtedness of affiliates to member banks. Thi* provision
makes possible a distinction between holding companies organized for the
purpose of holding bank stock, and companies which happen to own control
of a bank, though their real business lies in a different field.
' The Banking Act of 193$ ended double liability on National bank
stock issued after June 16, 1933. Under the new Act National banks are
permitted to terminate the double liability on stock issued prior to
that date. After Julyl, 1937, therefore, it is possible that all
shareholders of active National banks may be relieved of-'personal
liability on their shares. -At the same time National'banks are required
to accumulate a surplus equal to the amount.of their common capital.
This change should be better both for bank shareholders and for the public. Personal liability for bank shares has never been a satisfactory
protection to depositors, and it has placed a burden on shareholders of
banks not borne by shareholders of other corporations.
There are several provisions which are',of importance in connection
with deposits and the interest: payable thereon.' In the first place, the
rate-of interest paid by the ..Postal Savings system is not to exceed that
paid on savings deposits by member banks, in the same place; and postal
savings depositories may deposit .funds on time with member banks subject
to the provisions of the Federal Reserve Act and regulations of the Board
•of Governors of the Federal Reserve System regarding payment of interest
on time deposits. In addition,..the Federal Deposit Insurance Corporation
is required to forbid the payment-of interest on demand deposits by insured non-member banks, and to regulate the rate of interest paid on time
and savings deposits by'insured non-members. This provision explicitly
gives the Federal Deposit Insurance Corporation authority similar to that
which the Board of Governors of the Federal Reserve System has. In the
same general connection, the definitions of deposits in the old Act are
atricken out and the Board of Governors is authorized to define various


types of deposits, and to determine what is to be deemed a payment of interest. For purposes of computing the reserves member banks are required
to carry, amounts due from other banks (except Federal Reserve banks and
foreign banks) and certain cash items in process of collection may be deducted from gross demand deposits. Formerly amounts due from other banks
could be deducted only from amounts due to other banks. This will place
country banks which have no balances of other banks, on a basis of
equality in this respect with city banks that carry a large volume of
bank balances.
I think it is not necessary to go further into details of the new
banking legislation. I have described the major changes effected in the
organization of the Federal Reserve System and I have mentioned certain
provisions which affect you most directly as bankers.
You will realize from this partial account that a large number of
changes have had to be made in the Board's regulations. This work has
been pushed as rapidly as possible, but it will be some weeks before the
Board will be able to complete the publication of all regulations in
revised form.
Personally I feel that the new Act places us on a better footing
than we have ever been on before. To be sure, it involves many points of
compromise, as is inevitable in a democracy, and no two people will agree
( that it is perfect. Moreover, it is to be expected that unforeseen problems will arise, and that our resources and ingenuity will be taxed to
meet them. But perhaps the greatest virtue of the Banking Act of 1935 is
\ that it confers more definite responsibilities and more flexible powers.
We are better prepared than in the past to meet the unexpected.
In particular I trust that membership in the System will be more
valuable to you bankers under the new Act and more highly esteemed by
you than ever before. I trust that you will'find yourselves better able
to meet the credit needs of your communities, and better able to maintain
profitable operations. The new Act, as I have described it, should make
that easier to do. The Federal Reserve Bank has broader powers than ever
before to discount your paper and to lend to you. In the case of industrial loans for working capital purposes authorized by Section 13b it
has the very unusual power to grant you commitments under which you may
be assured of the perfect liquidity of your loan and have it virtually
guaranteed up to 80 percent. I suggest that, considering the idle funds
you have, you fully acquaint yourselves with what the Federal Reserve
Bank is able and glad to do in cooperation with you, and that you canvass
your territories for loans which you might formerly have felt were outside your field, but which you may now make with safety and profit. I
thank you for this opportunity to discuss with you measures and matters
of such moment to us all.