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Speech delivered before
Michigan Bankers Association Convention
uacki'nac Island, Michigan
June 27, 1936 / . - !

. I i . Chairman and Ladies and Gentlemen: I did not know until just,
the day before yesterday that I would be here this morning. I got in .
touch with Mr. Brundage, and told him that inasmuch as a member of the
Board was expected here, we felt it our duty to send someone. After I
returned from the Coast, where I had spoken in Seattle, Spokane, Portland
and other places, I was the one chosen, and it has given me much pleasure
to come. I am :glad to be with you this morning, but I am sorry I cannot
stay with you. throughout the day, tomorrow aid the day folldwing, but have
to return immediately to the East,
It is important for members of the Board to attend conventions, especially a Jubilee Convention. It is important for members of the Board
to meet with bankers, as well'as businessmen and industrialists. It is
important for us to -bet information directly, so that vie might be able to
prepare ourselves for the various tasks which confront us in Washington
from day to day, principally on matters of regulation. It is difficult
to adopt regulations of one kind or another in Washington after a law has
been passed by Congress, unless one knows something of the actual conditions which face bankers, businessmen, industrialists and farmers throughout the country., That is the reason that we find it necessary, and also
very pleasant, to come out and meet you, talk to you and get from you
whatever information we can, and take it back to Washington.
There is not anything in what I shall say this morning that will make
a front page story. 1 will express no opinions whatsoever. I shall be
purely factual in what I have to say.
.It is important likewise for us not only to discuss the different '
matters that confront us from time to time, but it is important for us "
also to meet you here, not only you individually, but to hear the other
speakers on your program, because in that way we get something of existing ideas ,and conditions throughout the country, and we are able to adjust ourselves to them.
• •
You know after being in Washington for a certain pericd of time, one
is apt to think or feel that because the laws are made there, and because
regulations are adopted there, perhaps we are a sort of a power in ourselves. We are not. Whatever we do must be based upon what you do.
Therefore, it is important for us to know what you are doing. Very frequently, too, we hear frank discussions, which are very important for; us
to hear.
We are much in.the position of the fellow who went back to his home
town, down in Indiana, after he had served two or three years in Washington, in the Cabinet of the President of the United States, many years ago;
and after arriving in his home town, he naturally looked for ;some of the
people that he had known when he had lived there. He saw an old character

coming down the street, and walked up to him and said, "Do you remember
me?" The chap said, "Sure, I remember you; you are Mr. So-and-So." "You
remember that I left here many years- ago?" He said, "Yes, many,
about three years ago you left here." "Well, do you know where I am now?"
This fellow said, "Yes, you are in Washington." "Well, do the people out
here know that I am in Washington?" "Yes, the people here know that you
are in Washington." "Do they know that I am the Attorney-General, in the
Cabinet of the President of the United States?" "Yes, they know that.
They all know that." "Well, what do they say about it?" This man looked
at him and said, "Oh, they just laugh, that is all."
That is about the size of it.
I have not had time to prepare a speech. I shall, therefore, discuss with you, not off the record, but extemporaneously, the provisions
of the Banking Act of 1935.
I am sorry that Er. Miller is not here to speak to you on "Money."
He would have delivered a very fine address on that subject.
Now, if I repeat some of the things that you already know about the
Banking Act of 1935, I shall have to ask you to pardon me. But if I
mention some of the other things that perhaps you do not recall at the
moment, then I do so for the purpose of keeping them in mind constantly.
In the preparation of our regulations, one must remember that we do
no prepare them because we want to bind the bankers in their operations.
We get out regulations simply because we have to. The laws are passed by
Congress, and not by the Board. After they are passed by Congress, we
naturally have to send out to the bankers, to member banks, something
that is of a specific nature, and has to do with the administration of
that particular law. Frequently, therefore, in order to cover nearly
every imaginable case that might arise under that law, the regulations
are rather lengthy and appear to be complicated, and it is not so pleasant for a banker to have a very lengthy and very complicated regulation.
But the regulations cover many possible emergencies that might or might
not arise under the lav/.
On the other hand, if you adopt a regulation that is short, simple,
and broad, it, of itself, of course, brings into Washington a great many
requests for interpretation, ^s each case arises, there is a request for
interpretation of that particular part of the regulation. So rulings are
sent out through the Federal Reserve banks to the member banks, and the
shorter the regulation, the more numerous the rulings under the regulation;
so- that whether you begin with a long regulation in the first place, or
whether you begin with a short regulation in the first place, you finally
end up with about as many provisions either in the regulation, or in the
form of rulings. In each section of the Act we have different conditions,
and different practices, and in order to meet these different conditions
and these different practices, different interpretations of the regulations are necessary.
Now, that is v.hy it is so important for us to keep daily in touch,
through the Federal Reserve banks, with the practices of the member banks,


and the non-member banks, for that matter. That is why the Federal Reserve Bank of Chicago has present here in this room the president of thai
bank, Mr. Schaller, the Assistant Federal Reserve Agent, now vice president of the" Federal Reserve Bank of Chicago, Mr. Young, and Mr. Dillard,
also a vice-president of the Federal Reserve Bank'of Chicago-. I would
just like in passing to introduce these gentlemen, Mr. Schaller, Mr.
Dillard, Mr. Young; and over to the left of Mr. Dillard is Mr. Buss, the
manager of the Detroit branch of the Federal Reserve Bank of Chicago.'
Also present here this morning is Mr. Geery, of-the Federal Reserve Bank
of Minneapolis. There are others o f the Federal Reserve present, that I
have not seen up to this moment. They are here for the purpose of hearing you, and talking to you about these different matters that arise froi
time to time, and getting from you directly whatever you may have in youi
minds, and giving to you directly whatever information they have available, so that our relations with you may be as effective as possible, and
so that we may all work together for the common good.
In the Banking Act of 193$, there were two principal ideas. The >
first was to place responsibility more definitely upon a group of men,
for the monetary control, or the credit control of the country. And so
the Banking Act of 1935 made new provisions for open market operations,
which were not specifically referred to in the original Federal Reserve
Act. Originally the open market operations of the Federal Reserve Syster
were by each Federal Reserve Bank independently of the other
Federal Reserve Banks; and principally for the profit of each Federal
Reserve Bank.
It was soon recognized that these operations had effects upon the
credit condition of the country, because as the Federal Reserve Banks
purchased large-amounts of securities in the open market, they naturally
supplied the country;with a large.amount of credit or funds, and as they
sold large amounts of securities, they naturally received from the banks
the funds with which the securities were purchased. The operation of
buying tends to make money or credit more available; and the operation
of selling tends to make money, less available. The operation of buying
tends to ease the money market as it were, and the operations of selling
tends to harden the money market.
Open market operations soon became so important that in 1922 a committee was organized for the purpose of unifying the operations of the
Federal Reserve Banks. After adopting the policy, this committee would
refer it to the Board in Washington, and the Board would either approve
or disapprove it. After this action, each Federal Reserve Bank could,
if it wished, proceed with the operation, taking its share of securities,
or selling its share of sepurit.ies; or it had the choice of not participating.
In other words, there, were three principal bodies in each and every
open market operation. First, there were the twelve Governors of the'
Federal Reserve Banks. Second, there were the eight Board members in
Washington. Third, there were the nine Directors of each Federal Reserve
' .


Nov;, it was soon learned- that when a certain operation was considered
advisable, and a certain policy was adopted, it required a certain amount
of time under this form of procedure to consummate the action, and when
finally the thing was done, it might be found that the result intended was
"not obtained, because of the time that had elapsed.
' The Banking Act of 1933 gave specific authorization for the Federal
Open Market Committee and adopted the following statement of the purposes
of open market operations :
"The time, character, and' volume of all purchases,
and sales of paper described in section lh of this Act as
eligible for open-market operations 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."
The Banking Act of 1935 made further reference to the Federal Open
Market Committee and its powers. It provided that the seven members of
the Board of Governors of the Federal Reserve System should be members of
the committee and that there should also be five members representative of
the 12 Federal Reserve Banks. One of these five representatives is elected
by the Federal Reserve Banks of Boston and of New York. Another, is elected
by the Federal Reserve Banks of Chicago and of St. Louis. The third is
elected by the Federal Reserve Banks of Cleveland and of Philadelphia. The
fourth is elected by the Federal Reserve Banks of Atlanta, Richmond, and
Dallas. The fifth is elected by the Federal Reserve Banks of Kansas City,
Minneapolis, and San Francisco. In this connection I should mention the
fact that the Banking Act of 1935 also changed the name "Federal Reserve
Board" to "Board of Governors of the Federal Reserve System," and made the
Board consist of 7 members in place of 8. The Board formerly had two ex
officio members, the Secretary of the Treasury and the Comptroller of the
Currency, but now all seven of its members are appointive. The 7 members
of the Board in addition to the 5 representatives of the banks make 12 members of the Federal Open Market Committee in all.
The Federal Open Market Committee meets in Washington at least four
times a year. Frequently, of course, it meets upon call, v.hen there is a
condition that must be met immediately.
There is an Executive Committee of five, which has power to do certain things in the absence of the members of the full Committee. They
initiate the open market operations. Purchases and sales are principally
of Government securities; the Reserve Banks now have about two billion four
hundred million dollars of Government securities.
Having decided upon its policy, the Open Market Commttee communicates
its decision to the twelve Federal Reserve Banks. The Banking Act of 1935
now provides th„t no Federal Reserve Bank can engage in open market operations except in accordance with the regulations of the Open. Market Committee.
The Reserve Banks purchase or sell in accordance with the policy adopted.
In other words, they do not have the choice they had previously, either to
join with the other banks, or refuse to join with the other banks in following
any particular policy.


The next thing of importance in the Banking Act of 1935 has to do
, with the discount rate. Discount rates are dependent upon one particular thing that open market operations are not dependent on; .that is, the^
are dependent on the banks borrowing at the Federal Reserve Bank,.whereas
open market operations fire not dependent upon anybody else initiating
anything. They are dependent on the Board, or the Committee, to be ini1
tiated and carried through. •
. .
Discount rates presume that member banks are borrowing at. the Federal Reserve Bank, and when they are borrowing, of course, discount rates
have some meaning. The lower the rate, naturally tfce easier it is to
borrow, and the more funds are supplied to the public, through the membej
'banks, and through,the non-member banks. The higher the rate, the more
difficult it is to borrow, and, therefore, the less funds are made avail;
ble through the banks to the public.
But banks are not apt to borrow unless they have to. Originally it
was not thought that that would be the case when the Federal Reserve Act
was passed; it was thought that the banks would borrow, as a regular
thing, at the Federal Reserve Bank, and, therefore, discount rates had
more meaning, and the rate was the thing that everybody watched for. Today the rate only means that that is the cost of money, and little more.
It has some further meaning only when banks borrow at the Federal
Reserve Bank, and banks do not borrow at the Federal Reserve; Bank unless
they have to. When they have an excess reserve, they naturally will not
borrow at a Federal Reserve Bank. When their reserves are just above,
they will not borrow, but when they get down to the point where they are
below the 13 percent or the 7 percent, or whatever it is, why,'then they
begin to watch the discount rate. So then your rate does have some effect upon the credit conditions of the country.,
The Banking Act of 1935 now provides that the directors of each Federal Reserve Bank shall adopt a discount rate every fourteen days. That
is a new requirement. This must be done every .fourteen days, and the
rates submitted to the Board in Washington for approval.
Now, the purpose of this is, I think, that they iray be in constant
touch with the rate in each Federal Reserve Bank, so that if conditions
change, the rate will be changed as frequently as necessary. The rate
will not be allowed to run 'for an indefinite period of time without reconsideration both by the Reserve Bank directors and by the' Board of
Governors in Washington.
In addition to that, there is another very important part of the
Banking Act of 1935 that I should like to mention here this morning. It
has to do with credit control. That is the power to establish an increas
of the reserve requirements, and it is pretty important, principally today.
. .
I have just returned from the Coast, where X spoke to
of Washington, Idaho, and Oregon. Six or eight months ago
speaking to them, the^ were in favor of an increase in the
quirement. But, today, I understand, they are not so much

the bankers
when I was
reserve rein favor of it.

The Banking Act of 1935 gives the Board of Governors power to increase, when necessary, the reserve requirements,, and thereby to check at
any time an excessive use of credit. For example, the requirements may be
doubled if necessary, the 13 percent becoming 26, or any point between,
and the' 10 percent becoming 20, if necessary, or any point between 10 and
20, for Reserve city banks, and the 7 percent becoming II4 percent, if necessary, for other banks, known as country banks, or any point between 7 and
lit, and the 3 percent on time savings deposits becoming 6, or any point between 3 and 6. Reserve requirements may be increased for the purpose of
taking action against the possible excessive use of credit, all over the
country, if necessary.
Of course, the thing that worries the average banker, as I see it,
is that power. Perhaps the average banker would not worry so much about
the power if the law were very specific about it, stating very definitely
that we must readjust our reserve requirements, and, therefore, in place
of 13 percent on demand deposits in central Reserve cities, from now on it
would be 26, or, let us say 1 0 more, making it 2 3 , or any point within that
figure of 1 3 and 26.
What worries the average banker is that perhaps if the Board should
increase reserve requirements from 13 to, say, in the central Reserve cities,
up to 20, or from 13 to 15, making it less than 20, then perhaps in a short
while there would be another increase. That pubs the average banker in a
position of uncertainty.
We have at present about three billion dollars excess reserves — when
I left Washington it was about two billion six hundred million. In spite
of the fact that we- have the largest amount of excess reserves in the history of this country, certainly no one will say that there is an excessive
use of credit. We might say, however, that there is a possibility of excessive use of credit should this money once begin to flow into agriculture,
into commerce, into industry, and especially if it should begin to flow into
speculative channels.
The Federal Reserve Act originally contemplated that paper eligible
for discount v^uld'be paper that is called commercial paper, 30, 60 and
90-day paper, and the thought was that the money that originally was loaned
on that paper would go back into the same channels when it was rediscounted,
but we found that that was not the case. The money may go back into commerce, industry and agriculture, or it may go into speculative channels,
nobody knows.
So, therefore, action for the purpose of making an adjustment that
is more or less stable, might be considered. But whatever is done naturally
must be based on the information we obtain from banks, from business, commerce, agriculture and industry, and from what we see is going on in the
speculative market.
We are constantly in touch, through our Federal Reserve Banks, as you
know, with the general credit conditions of the country. We have charts
supplied us by the Federal Reserve Banks' statistical departments, and we
have our own department in Washington, one of the best in 'the country, which
presents the facts and the figures constantly, so that we know what is going
on.- We also obtain information directly wherever we can.


.We have, as you know, one of the best publications of its kind, and
that is the Federal Reserve Bulletin, which has all of these facts, all
of these figures and trends from day to day, from week to week, and from
month to month, and from year to year. . We have these not only in respect
to the United States, but in connection with foreign countries, because
we have to reckon with conditions that are not purely domestic, as you
know* We have to reckon with conditions that exist in Europe. We do not
know from day to day what will happen in France, for example, We do know
that certain amounts of gold have come into the United States from France
and from England. We do know that certain amounts of gold are still flowing into the United States, There was a time when these amounts were very
large, and they are not as large now. We do not know what will happen in
Europe. We do not know what negotiations may be going on, as far as relations between foreign countries are concerned. We have no control over
those conditions, as you know.
The monetary situation of the country is a factor in the credit condition of the country. The issuance of silver certificates by the Treasury is a factor in the credit condition of the country. Knowledge of the
fact that the Treasury itself has a very large stabilization fund that it
can use at almost ary time to affect a certain credit .condition that might
exist, makes us the more careful, because whatever we mete out in that
direction may be offset by action taken by the Treasury with its stabilization fund. All of these facts must, therefore, be taken into consideration, and it is very important that the members of the Board and the officers of the Federal Reserve Banks keep an open mind constantly on matters
of that kind.
We have refrained, therefore, from expressing opinions on things that
we do not know about, and we are quite frank to say that we do not always
•know what we shall do until the condition faces us at the particular moment. Then when"we do it; we must do it because its effectiveness in operation is dependent upon the action that is taken. We depend upon the
facts and figures that we have at the particular moment.
The next important thing in connection with monetary control, is the
policy of warning banks not to conduct certain operations, or engage in
certain credit practices, and asking them to limit the amount of money
that they lend for certain purposes, particularly speculative purposes,
to certain customers. If they continue to engage in practices about which
they have been warned, there is power given to the Board to stop further
extension of credit to the bank concerned. And if they still engabe in
those operations, even after that, there is power granted to effect the
removal of the officers who are responsible. •
Now, of course, that is something that no Federal Reserve Bank, and
no Board of Governors wishes to do, but it is a very direct means of acting in the situation which might arise in a particular bank.
There is still another means of credit control that I must tell you
about. It has to do with lending money on registered securities, by
brokers, dealers, and by member and non-member banks.
When the Securities Exchange . i t was passed, power was given the
Board of Governors of the Federal Reserve System to regulate the amount

of credit that would be extended on registered securities by brokers and
dealers, and by banks, bo their customers, as they come into the bank to
borrow money. This is covered by Regulation U.
Now, the principal .purpose of Regulation U is to limit the percent
of the-current market value of the securities that can be loaned by the
bank to the customer,. 'Then the customer says that he is borrowing, the
money, in order to purchase the securities, and is pledging the securities
that he is purchasing with as collateral, the banker proceeds under present, limitations l 5 percent of the current market value.
That is for the purpose of purchasing. If a customer borrows for the purpose of carrying the securities, the same principle applies.
The question arises,- if the customer does not submit the security
that he purchases with this money, is the-banker still compelled to loan
him only 16 percent of the current market value of the security? The
answer is, no. Of course, in practice, in ninety-nine cases out of a hundred, the banker will certainly request the security th^t the man purchases
' with the money that he borrows from the bank. There are very few cases
where the banker will say, "Now, you can go ahead and purchase this security*
and you do not need to brin & in the collateral."
But suppose this man does, not bring this collateral in, or, suppose he
brings in a certain collateral, and when the.banker looks at it, it is not
the registered security in question, and he borrows the m^ney not for the
purpose of purchasing that particular security, but he borrows the money
for the purpose of building a house. Now, does the banker need to loan him
only US percent? Does he come under the regulation? The answer is, no.
It is only for the purpose of purchasing or carrying registered securities,
and only when those securities are the collateral put up behind that particular note.
Now, that, in' general, is Regulation U, as it affects the banker. It
has to do with a specific means of control and with a certain particular
type of credit which does not affect commerce, industry or agriculture. It
is a means by which the use of bank credit for speculation is checked. It
necessitates our keeping in touch with the Securities Exchange Commission.
It is a very important thing, especially at this time.
Well, that much for monetary control. The Banking Act of, 1935, therefore, places that responsibility principally in the Board of Governors in
Washington, including the Open Market Committee, which consists, of the Board
of Governors in Washington and five representatives of the twelve Federal
/Reserve Banks. • That is one sectior^ of the Banking Act of 1935. The other
section of the Bankinb Act of 1935, has to ,do w.ith the liberalization of the
\ credit basis upon which member banks may obtain money or funds from the
Federal Reserve Bank. As you know, there is a provision in the Banking Act
of 1935 that permits a member bank to borrow at the Federal Reserve Bank
for a period not to exceed four months on any sound collateral, - not merely
on eligible paper, but on any sound collateral. The question does not arise
anymore as to the particular paper. It is just a question of soundness.
Therefore, the loan may be made for a period of four months on any sound
collateral, at a rate not less than one-half percent higher tha'n the discount
rate at that bank at the moment of signing the note. That is important only
when banks are borrowing at the Federal Reserve Bank.


There is another important matter which has to do with the extension
of credit; that is the power given National Banks to make mortgage loans
up to fifty percent of the appraised value of the mortgaged property, or
sixty percent of the appraised value, if the loan is for a period of ten
years, and. forty percent is to be amortized during the period of ten years.
Those, in general, comprise the essence of the Banking Act of 1935.
There are several other things of minor importance.
There is another matter that I forgot to tell you about. The Federal Reserve Banks are prohibited from purchasing Government securities
directly from the Treasury. All purchases of Government securities by the
Federal Reserve Banks must be in the open market, and never from the Treas
ury directly. That is very important.
I am very happy to have been with you this morning, and I wish that
I could stay longer, but my 'plane is waiting to take me back. I think
that our presence here indicates how much we are interested in what you
are doing and saying. I personally do not come far from this particular
point, as I hail from Chicago, and I am very much interested in Michigan,
naturally, because I expect to be back here again some day. An understanding of the things that we are trying to do is the important thing,
and not so much v;hat I have tried to say to you here, because if you do
understand them, it is so much easier; if you understand our problems, and
we understand yours, it is so much easier to work together, because, after
all, we are not trying to work against each other, but we are trying to
work together, and the more we understand each other, the easier it is,
because, as Kipling wrote,
"It ain't the individual, nor .the army as a whole
But the everlasting teamwork of every blooming soul."
I thank you very much.