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FEDSE&L RESERVE BAM

OF BOSTON

Frede r ic H. Curt iss

Chairman January 29, 1932

Hon. Eugene Meyer, Governor,

Federal Reserve Board,

Washington, D. C.

Dear Governor Meyer:

Following your request "by telegram I am giving herewith my views on the

proposed Bill

(S . 5215)

introduced

"by

Senator Glass.

I may say a t th e

"beginning that

I am

wholly

i n

sympathy with

t h e

purposes

of

th is Bi l l

and tha t my suggestions o r c r i t i c i s ms are to "be accept ed from th at poi nt

of

view.

1 . I have no comment to make on Section 2 .

2 . I t

would appear

to me

tha t Section

3 i s too

i n e l a s t i c

i n i t s

provis ion.

As

long

a s

s e c u r i t i e s

and

co l l a te ra l loans

a r e

allowed

i n t h e

National Bank

Act as

proper investments

f o r

National "banks,

and

a l so

i n

State laws

f o r

State banks, t h e Federal Reserve Bank should not "be prevented from giving

ass i s t ance i n reasonable ins tances . F o r instance, when a member bank had

heavy withdrawals of depos i t s , i t i s inportant that i t should be enabled

t o borrow pending liquidation o f i t s s e c u r i t i e s o r co l l a te ra l loans . I

bel ieve t h e same purpose could be accomplished i f th at s ec ti on should read

a s fol lows:

"The

Federal Reserve Board shal l presc rib e regula t ion s f ur th er de fi n-

ing and r e g u l a t i n g t h e u s e of t h e c r e d i t f a c i l i t i e s o f the Federal

Reserve System within t h e l i m i t a t i o n s of t h i s Ac t , and espec ia l ly

with t h e view t o t he improper use of such cred it f a c i l i t i e s extended

t o member banks f o r t h e purpose of making o r carrying loans covering

t h e investments o r f a c i l i t a t i n g t h e carrying o f , o r t rad ing i n ,

stocks, bonds, or other investment securities other than obligations

of the

Government

o f the

United States."

3 . I t would appear to me tha t t h e danger that Section 4 proposes t o cover

i s no t only remote b u t i s provided f o r i n Section 11 (f ), which provides that

t h e

Federal Reserve Board

may

remove

any

d i rec to r

of any

Federal Reserve Bank.

4 . Section 5 a s a t p re se nt drawn would appear to be an emergency measure t o

meet tiie present condition. As now drawn i t would tend t o weaken t h e Federal

reserve banks. (The Federal Reserve Bank of Boston h a s been obliged t o draw

o n i t s surplus account t o meet dividends t h e past two yea rs , and similar

condit ions exis t i n other Fede ral re se rv e ban ks.) Under t h e proposed plan

a Federal reserve bank could no t bu i ld up any surplus from now on . I would

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t 5 9

Hon. Eugene Meyer * Governor,


Washington,

D. 0.

X-7077

a - 1

2 -

suggest therefore ,

i n

l i e u

of

Section

5, The

f i r s t paragraph

of

sect ion

7 of the Federal Reserve A c t ,

a s amended, toe amended t o read a s follows:

"After a l l necessary expenses of a Federal reserve bank shall have

been paid o r provided f o r , th e stockholders shall be e n t i t l e d t o

rece ive an annual dividend of 6 p er centum on the pa id- in cap i ta l

stock, which dividend shall

b e

cumulative. Af te r

t h e

a foresa id

dividend claims have boon fully mot the ne t earnings, beginning

with t h e n e t earnings f o r t h e year ending December 31 , 1932 , shal l

b e

paid

t o t h e

Federal Liquidating Corporation provided

f o r i n

Section 12B of t h i s Ac t , and s h a l l b e used b y t h e said corporation

f o r carrying ou t t he purposes of such se ct io n, except th at t h e

whole

of

such

n e t

earnings shall

be pu t

in to

a

su rplus fund un t i l

i t shall amount t o 100 pe r centum of the subscr ibed capi ta l o f t he

bank."

5 .

Section

6 . I

would suggest

t h e

omission

of

l i n e s

4 and 5 on

page

7 ,

which re ad s "They s h a l l a ls o comply wi th a l l t h e requirements of t h i s A c t " .

I think i f t h e power i s c iv en to t he . Federal Reserve Board t o handle this

pa r t i cu l a r s ec t i on

i t

would

be an

advantage.

On t h i s same page 7 , l i n e 22 and 23, I should omit "during t h e per iod of two

years" .

I se e no

reason

why

this provision should

no t

begin

a t

once

and be

continuous.

6 . Section 7 . I th ink i t would be an advantage t o have an uneven number

of

members

of the

Federal Reserve Board.

I

also wonder

i f i t

might

not

r e l i e v e

t h e

burden

of the

Comptroller

o f t he

Currency

i f he

were

not a

member

ex

o f f i c i o .

7 . Section 8 . I approve i n p r inc ip l e .

8 .

Section

9 .

While

I am

sympathetic with

t h e

purposes which this section

endeavors t o meet, I think during t h e past year or so I have come to the

conclusion that i t i s t h e volume of c red i t i n u s e ra ther than t h e character ,

not the way in which credit i s extended. I do not believe that this will

meet t h e par t icular purpose f o r which i t i s designed. On t h e one hand, i t

would prevent a bank extending collateral loans f o r u s e i n commercial

purposes,

o n t h e

other hand,

i t

might tend toward

t he use o f

single-named

notes t o be used f o r speculat ive purposes . Th e pro vis ion that loans to an

individual should no t be in excess of 10 p er centum of the unimpaired capital

an d surplus of such bank i s i n accord with other s imilar res t r ic t ions c o n -

ta ined i n t h e present Nation?. Bank A c t .

9 . Section 10 . I suggest that l ines 15 and 16 be changed t o read "upon

unanimous consent

of

members

of the.

Ted era l Reserve Board pres en t

and

no t

less than f ive

( 5 ) "

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Hon, Eugene Meyer, Governor,


Washington,

D. C. •* S

X-707^

a - 1

Page

14#

l i n e s

3 and 4 . I

suggest that

t h e

following cb&nge

be

made

-

omit "with a su i t ab le t ru s t ee" and subst i tu te therefor "wi th t h e Federal

Reserve Bank". P p . 14Lines 8,9,10,11 and 12, omit "one-half of 1 p er

centum

a

month

f o r t h e

f i r s t pe r iod

of

ninety days

o f t he

l i f e

of

such

advance, and t h e r e a f t e r t h e r a t e of i n t e r e s t s h a l l b e increased by

one-fourth of 1 p er centum a month f o r each succeeding period of

ninety days o r f r a c t i on the reo f . " In se r t i n place thereof "1 pe r

centum above discount rate."

1 0 . Section 1 1 . Lines 15 and 16, omit " a t t he time of making t h e loan

of a t

l e a s t

20 pe r

centum more"

and

i n s e r t

"a 20

percent margin shall

b e maintained of a t l e a s t 20 percent during t h e l i f e of such loan.

1 1 . Sec tio n 12A(a)Lines 6 , 7 and 8, omit "of the Governor of the Federal

Reserve Board and as many additional members a s there a r e " a n d inser t

"one r ep re se nt at iv e from each Federal Reserve Bank".

Line

1 0 .

Insert after 9member"

"and an

a l t e r n a t e " .

Lines 17,18,19 and 20, omit " I n t h e absence o r i n a b i l i t y of

t h e Governor of the Federal Reserve Board to a c t a t such mee tings the

Board shall designate t h e vice governor or some other member of the

Board

t o a c t i n

p lace

of the

governor",

an d

i n s e r t

"The

Federal Open

Market Committee shall elect annually one o f i t s members a s a Chairman

and one of i t s members a s a Vice Chairman."

Section 12A.(b) Line 23 a f t e r "committee" in se rt " a nd the approval of

t h e Federal Reserve Board.

Sect ion

12A ( d ) . I

bel ieve

i f t he

Federal Reserve System

i s t o

work

a s a system, every Federal reserve bank should b e obliged t o accept

t h e conclusions o f t he Fe de ra l Open Market Committee. That each

Federal reserve bank should share

i n t h e

gains

or

losses

on

some

p r o

r a t a bas i s to be f ixed b y t h e Fede ra l Open Market Committee on every

open market operation, t o include bankers' acceptances, Government

s e c u r i t i e s , and advances t o other central banks.

1 2 .

Sect ion

1 2 B ( c ) .

Line

1 ,

page

19

omit "one-fourth

of th e

surplus

of

such bank on December 3 1 , 1931", an d i n s e r t "any surplus over and

above 100 per centum of i t s c a p i t a l a t t he date of the passage of this

Act and any

additional earnings before provided

f o r i n

t h i s

A c t . "

1 3 . Section 13. I recommend th at t hi s e n t ir e se ct io n b e omi tte d. This i s

l a rge ly

an

operating matter

and

would work hardship

on th e

member banks

and Federal reserve banks, and would accomplish l i t t l e .

14.

Sect ion

14 . I

have

no

comments.

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L 6

X-7077

Hon. Eugene Meyer, Governor, a - 1


Washington, D. C. - 4 -

1 5 . Sect ion 1 5 , Page 3 0 , l ines 20,21,22 and 23 "(except promissory notes

of member "banks acquired under t h e provis ions of the seventh para-

graph of such section 13 secured "by the deposi t o r pledge of "bonds

or

notes

o f t he

United States).

1 1

I

bel ieve this provision should

"be

oni t t ed

a s i t

would seri ousl y in te rf er e with

t h e

Treasury financing

and dangerously res t r ic t t h e issuance of Federal reserve notes a t

t h i s t i n e . I t might be advisable i f th i s sec t ion i s continued t o

add "except with th e permission o f t he Federal Reserve Board."

1 6 . Sect ion 16 , (1 ) and (2) I bel ieve very strongly i n t h e general

p r i n c i p l e s of d e f i n i t e l y s p e c i f y i n g t h e types of d e p o s i t s , of demand,

time, savings a n d t h r i f t , a nd t he segregat ing of a s s e t s a proper one .

One r e se rve f o r demand and time deposits would b e d e s i r a b l e , as i t i s

l e s s l i a b l e

t o

evasion.

On th e

other hand

t h e

provis ions

f o r i n -

creasing reserve requirements

a r e t o o

v io len t

and

would therefore

ac t a s a

deflat ionary measure

f o r t h e

years speci f ied

f o r

adjustment.

I would prefer t h e formula developed b y t h e Committee o f t he Federal

Reserve System, b u t i n lieu thereof suggest that t h e p r inc ip les l a id

down by t hi s b i l l f o r t h e des ignat ing of cer ta in charac ters of deposits

b e adopted without any change i n t h e r es er ve re qu ir em en ts , member banks

being given a reasonable time t o make changes i n t h e charac ter of such

deposi t s , poss ibly a yea r , and that then t h e Federal Reserve Board b e

requi red t o f i x a percentage of reserve against such dep osi ts , so that

t h e ent ire reserve required would be a less burden than immediate

adjustments would entail .

S e c . 16 . ( e ) page 3 8 , l ines 10,11,12,13,14,15,16,17,18,19, omit

"unless t h e F edera l Reserve Board sh al l have f i r s t au tho rize d b y

general order t h e making of such sales o r t ransfers within such

d i s t r i c t o r between such distr ict and another Federa l reserve dis t r ic t ,

but no such sale o r t r ans fe r sha l l b e made by any such bank without

f i r s t cha rg ing and reserving a f e e t o be f ixed by t he Federal Reserve

Board on t he b a s i s of the r a t e of discount then charged upon ninety-

day

paper

by t he

Federal reserve bank

of the

d i s t r i c t

i n

which

t h e

bank

malting such sale o r t r a n s f e r i s loca ted , " Inse r t i n place thereof

" i f

sa id s e l l i n g member bank

i s

indebted

t o t h e

Federal reserve bank."

1 7 .

Section

17 . Ho

comment.-

1 8 .

Sect ion

1 8 .

Page

43

Lines

17 to 21,

omit

"nor

s h a l l

t h e

total amount

of the

s e c u r i t i e s

so

purchased

and

held

fo r i t s ow n

account

a t any

time exceed 1 5 p e r centum of the amount of the capi ta l s tock of such

associa t ion ac tual ly pa id in and unimpaired and 25 pe r centum o f i t s

unimpaired sur pl us fu nd ." This would pla ce a serious handicap on

banks i n t h i s d i s t r i c t ,

1 9 . Section 19 . Ho comment.

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Hon. Eugene Meyer, Governor,


Washington, D. C.

- 5 -

X-70

a^-1

2 0 .

Sect ion

20 . No

comment.

2 1 . Section 2 1 . Line 8 , i n s e r t a f t e r t h e word "officer" "except a d i rec tor"

2 2 .

Sections

22, 23 , 24, 25, 26, 27, 28, 29, 30 and 31 . No

comment.

23 .

Sect ion

3 2 .

Page

59

l i n e

7 ,

omit "That during

t h e

period

of two

years".

24 .

Sect ion

33 . No

comment.

This Bill

i s

very long

and

complicated,

a nd the

time that

I

have

ha d to

analyze

i t s

provisions

h a s

been very limited.

I

trust, however,

tha t

t h e

suggestions that

I

have made will

b e

h e l p f u l .

I am,

Very truly yours,

(S ) Frederic H. Curt iss

Federal Reserve Agent.

FHC/D

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C O P Y X-7077^

8t-2

FEDERAL EEdEEVE BANK

& &CST0#

Eoy Ai Yotmg

Governor January 29 , 1932.

Hon.

Eugene Meyer, Governor,


Washington,

D. C.

Dear Governor Meyer:

I n rep ly t o your wire of January 26 reques t ing me to study

thoroughly and carefu l ly Senate Bi l l No. 3215 introduced "by Senat or Glass

on January 21 , 1932, I advise that I have attempted t o d o s o t u t t h e b i l l

covers so many things that I f e e l I should have more time "but inasmuch a s

your telegram requests that a reply "be in your hands n o t later than three

o'clock Washington time tomorrow, I am o f f e r i n g t h e fol lowing:

Pages 1 , 2 , 3 and 4 up t o l i n e 7 ha s t o do with t h e d e f i n i t i o n

of af f i l ia tes , ho ld ing companies and subs id i a r i es a nd the meaning of the

word "commerce". I have no ob ject ion t o o f f e r t o these sect ions.

Sub-sect ions f , g and h on page 4 , l i n e s 7 to 17 inc lu s ive ,

define demand, time and t h r i f t d e p o s i t s . I f reserve requirements a r e

going t o b e based upon t h e percentages provided f o r i n t h e proposed Glass

b i l l , I have no ob jec t ion t o o f f e r t o these de f in i t i ons .

Lines 21 to 24 , page 4 , suggest t h e fol lowing addi t ion t o Section

4 - "bu t only i f such di sc ou nt s, accommodations and advancements a r e intended

f o r t h e accommodation of commerce, industry and ag ri cu l t ur e" . From a

pract ica l s tandpoin t I do not bel ieve that th is i s po ss ib le . From my ex-

per ience i n lending credi t f o r a Federal reserve bank, I have found that i n

pract ica l ly every case cred i t i s advanced t o individual member banks because

of a reduct ion i n d e p o s i t s , and f r equen t ly t h e c red i t i s re t i red because of

an increase i n de po si ts . When the re i s a reduct ion i n dep osi ts , temporari ly

a t l e a s t , t h e banks borrow. Under th es e co nd it io ns , i t i s impossible t o

state whether o r no t t he proceeds a r e used f o r t h e accommodation of commerce,

indust ry o r a g r i c u l t u r e . I , therefore, would also b e opposed to the

addi t ional p rov is ion s tar t ing wi th l ine 24 , page 4, and ending with t h e word

"Sta tes" on l i n e 7 page 5 .

I have no ob ject ion t o t h e addi t ional language star t ing on l i n e 7

and ending with t h e words "action i n t h e matter" on l i n e 1 4 , page 5 .

I am

opposed

t o t h e

d iscre t ionary penal ty permi t ted s tar t ing

on

l i n e

14 and

ending

on

l i n e

18 on

page

5 .

Lines

19 to 25 on

page

5, and

l i n e s

1 to 6 on

page

6 ,

would

prohibit member banks owned by holding companies o r a f f i l i a t e s from vo t ing

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X-707?

" I

Hon. Eugene Meyer - 2 - January 29, 1932.

I assume

f o r d i r e c t o r s i n a Fede ral res erv e "bank. This pr ov is io n/ is put in to

prevent any one holding company o r a f f i l i a t e from secur ing a majori ty

rep resen ta t ion on the

1

"board c f d i r e c t o r s o f a Federal reserve bank. I t

seems to me that where t h e Federal Reserve Board appoints three of the

d i r e c t o r s of eac h Fe der al re se rv e "bank, and a small $25,000 "bank ha s a s

much of a vote as a t |en million dollar "bank, t h e chances f o r group control

a r e very remote. I therefore fee l that th i s p rov is ion i s unnecessary and

to o severe on certain member "banks even i f they a r e owned "by a f f i l i a t e s .

Furthermore, i t seems; to me that this provision would make t h e e lec t ion

of directors cumbersome and f i l led with confusion.

Lines

7 t o : 1 8

inclus ive

on

page

6 has to do

with

t h e

payment

of

dividends

t o

member banks

and, to a

degree, provides

f o r

funds

f o r a

Federal Liquidating C6rporation.

The

language

o f t he

proposed amendment

el iminates that part

of the

sect ion

o f t he

Federal Reserve

Act now

c r e a t -

i ng a

su rp lu s ,

and as f a r a s I can

observe

no

prov is ion

i s

made

in any

other part o f t he proposed bi l l f o r t h e further accumulat ion of a surplus.

I assume that this was an oversight .

F or many years t h e member banks have f e l t tha t th ey were e n -

t i t l e d t o a larger d iv is ion of the earnings o f t he Federal reserve banks

a s , when and i f earned. I have leaned strongly that way f o r t he past

two or three years and I think my views a r e shared by many associated

with t h e System a nd , o f course, by the great majori ty of our member banks.

I be l i eve a n amendment t o t h e a c t permit t ing larger dividends t o member

banks a s , when a nd i f earned, should b e recommended.

The c rea t ion of a Federal Liquidating Corporation i s o f fe red i n

l i e u of payment of addi t ional dividends and I do not bel ieve that th is wil l

prove a n incen t ive f o r state banks t o j o i n t h e System o r f o r present member

banks t o continue membership. The c rea t ion of a Federal Liquidat ing Cor -

pora t ion may have some merits bu t a rough estimate convinces me that t h e

l iquidat ing value a t t h e present time o f t he amount involved i n closed

banks i s f a r i n excess of what t h e System could do under t h e proposed legis

l a t i o n , and someone would h#ve to go without . Therefor e, i f a Federal

Liquidating Corporation j . s des i r ab le i t would b e f a r b e t t e r t o permit a

l iqu idat ing corporat ion t o purchase t h e claim of a deposi tor a gainst the

Receiver of a closed bank rjather than attempt t o d o i t c o l l e c t i v e l y . A

comparison by specific example of what t h e Glass bill proposes and an

al ternate p roposal wi l l b r ing ou t t he reasons for my suggestion:

( 1 ) Glass proposal. A bank cl ose s wi th a mi l l ion do l lars of depos i t s . A

committee s e t u p b y t h e Liquidating Corporation determines that $600,000

can be recovered o n t h e asse t s of the bank within a reasonable length c f

time, making due allowance f o r i n t e r e s t on th e advances, they would give

t h e Receiver $500,000 i n cash. The Receiver i n turn would dist r ibute the

funds so received t o t h e de pos it or s. Commercial de po si to rs a nd the needy

could a nd , o f course, would u s e t h e money so received b u t inasmuch a s the

major i ty of deposi t s i n closed banks rep re sen t savings de po si ts , the se

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X-7077

8r- 2

Hon. Eugene Meyer - 3 - January 2 9 , 1*32if

persons would have

no

need

f o r t h e

money "because that

was why

they were

savings depositors

i n t h e

f i r s t pla ce . When they rec eiv ed

t h e

money from

t h e Receiver they would invest i t , deposi t i t i n another bank o r hoard i t .

I t

would

be my

guess th at

t h e

major i ty

of

them would hoard

i t

under

conditions that exist a t t h e present time.

(2 )

Al ternate p lan .

The

same

a s

above except

t h e

Liquidating Corporation

would n o t advance $500,000 i n cash in one lump sum to th e Receiver b u t

would

s a y t o

anyone that

had a

claim against

t h e

Receiver that

i t

would

advance 5 0 p e r cent o f t h e claim upon proper assignme nt, co ll ec t 6 pe r

cent during

t h e

period

of

l i qu ida t ion ,

and

agree

t o

r e t u r n

t o

them every-

thing over this amount a t time of f ina l l i qu ida t ion . The commercial d e -

pos i to r s

an d t h e

needy would

of

course accept

t h e

proposal

bu t i t i s my

guess that

t h e

great majori ty

of

savings depositors would

n o t

because

when they

a r e

given

t h e

assurance

b y a

def in i te o f fer f rom

a

r e l i a b l e

source that their deposit

i s

worth

a

certain amount

and

probably more,

i t

wil l a l lay thei r fears and they will feel their money i s j u s t a s sa fe i n

t h e

Receiver ' s t rus t

a s i t

would

b e

anywhere else,

a n d f o r t h e

fu r the r

f a c t tha t they would n o t care t o p ay 6 p e r cent t o g e t a p a r t o f i t . To

b e

concise, this alternate proposal would

in my

opinion take

f a r

less

money, result

i n

less hoarding,

and

everyone would

b e

b e t t e r s a t i s f i e d .

I

have

no

ob ject ion

t o t h e

language star t ing with l ine

19

page 6 and ending on l i n e 18 page 7 , except lines 4 and 5 on page 7 which

contain

t h e

foll ow in g sen ten ce : "They s ha l l al so comply wi th

a l l t h e

requirements of t h i s a c t appl icable t o Na tio nal Banks". This would re qu ir e

a

more careful study with legal assistance before making

a

commitment.

I

have

no

ob ject ion

t o t h e

language starting with l ine

18

page

7, and ending on l i n e 7 page 9 , except t h e following which appears on

l i nes

22 and 23,

page

7s "

during

t h e

period

cf two

years af te r th i s

sect ion a s amended t akes e f fec t , . . . . " . I t seems to me th at th is should

b e

permanent.

I

have

no

ob ject ion

t o t h e

language star t ing

on

l i n e

7 ,

page

9

an d

ending

on

l i n e

6 ,

page

12 . In

making this statement,

I am no t

unmind-

f u l o f t h e fact that a t one time I vigorously advocated t h e continuance

of the

Secretary

o f t h e

Treasury

a s a

member

o f the


My reason for now agreeing t o h i s e l iminat ion i s because t h e Secretary of

t h e

Treasury

i s an

extremely busy

man and

unable

t o

a t tend

t h e

Board meet-

ings regular ly , a n d f o r t h e further reason that f o r a long time I have

fe l t t ha t

t h e

Board should

b e

composed

of an odd

rat her than

an

even number.

I

cannot approve

o f the

language star t ing

on

l i n e

6 and

ending

on l i n e 16 on page 1 2 , u n t i l t h e question of reserves h a s been set t led.

I

object

t o

everything star t ing with l ine

17 on

page

12 and

ending

on

l i n e

1 1 ,

page

1 3 , f o r t h e

reasons already furnished.

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X-7077

a—2 ^

Hon. Eugene Meyer ' - 4 - January 29 , 1932 .

The amendment suggested between line 15 on page 13 and l ine

2 3 , page 14 , I be l i eve to "be a step i n t h e r ight d i r ec t ion . Persona l ly ,

a s t h e

Board already knows,

I

would prefer

to go

f u r t h e r

b u t a t t h e

same

time this should b e h e l p f u l . I do no t bel ieve that a def in i t e h igher

rate should b e f i xed by law and , fur thermore, I do not be l i eve in a

progressive prov is ion . Provis ion f o r a higher rate seems to me to be

s u f f i c i e n t . I also bel ieve that i t would b e f a r b e t t e r t o change t h e

language so tha t a reserve bank could accept t h e secured note of a member

bank guaranteed b y t h e group rather than accept t h e unsecured joint note

of a group.

I do not

believe that acceptances should

b e

included

i n t h e

t e n p e r cent limit provided f o r i n t h e amendment starting on l i n e 24,

page 14 , and ending on l i n e 2 5 , page 15.

I am opposed t o t h e suggested amendment starting with line 1

on page 16 and ending with line 25 on page 1 7 , because I be l ieve tha t i f

Section

14 i s

amended

aa

suggested

b y t h e

Glass bi l l s tar t ing wi th l ine

39

on

page

28 and

ending with line

25 on

page

2 8 ,

such

an

amendment would

c l a r i f y

any

misunderstandings there have been

i n t h e

pas t

a s t o t h e

Board's

au thor i t y

and

veto power over open market op era tio ns , pa r t i c u la rl y

i n

re fe rence to U. S. government bonds. The open market policy committee

could continue a s a voluntary organizat ion, t h e autonomy o f the several

reserve banks would b e maintained, and there would be no question about t h e

Board 's vet o power. Furthermore, di sc lo su re of t ransac t ions tha t a r e

extremely confidential would not by law be made a matter of public record.

As

s t a t ed ea r l i e r

i n

t hi s l e t t e r ,

I am no t

e n t i r e l y

i n

accord

with

t h e

c r ea t i on

of a

Federal Liquidating Corporation

a n d ,

t h e r e f o r e ,

a t

th i s wr i t ing

can no t

approve

o f the

proposals contained

i n t h e

language

s t a r t i ng w i th l i ne

1 on

page

18 and

ending with line

10 on

page

27.

I am opposed t o t h e proposed amendment t o Sect ion 1 3 , s t a r t i ng

with l ine 14 on page 27 and ending with line 1 3 , page 2 8 , f i r s t because I

object t o t h e o ne p e r cent highey rate and second, because I do not believe

tha t t h e making of cer ta in co l la te ra l loans by a member bank should b e

dependent upon what t h e member bank owes a Federal reserve bank on a 15-day

co l l a t e r a l no t e . I f i t i s des i r ab l e t o curb speculative loans, i t seems t o

me t ha t i t would b e much better t o apply t h e brakes t o t h e member bank

rather than attempt

to do i t i n a

c i r cu i t ous

way

through

t h e

Federal reserve

bank.

As previous ly s t a ted I approve of the proposal contained i n

l i ne s 19 to 25 on page 28.

I

object

t o t h e

amendment proposed starting with line

4 on

page

29 and

ending with line

7 on

page

30

because

i t

takes

t h e

ini t ia t ive power

away from

t h e


and

provides

f o r

r e s t r i c t i o n s t h a t

f o r

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X-7077

Or- £ *•

5 _

Hon.

Eugene Meyer Ja nuar y

29 , 1932 .

a l l practical purposes would make negotiations impossible. The amendment

suggested "by Senator Glass t o Section 1 4 i t seems to me, gives t h e Board

a l l t h e

supervisory powers that

a r e

necessary.

I n t h e

amendment proposed starting with line

11

page

30 and

ending on l i n e 2 , page 34, I am opposed t o t h e provision which excludes

promissory notes

of

member tanks secured

"by U. S .

government obligations

a s

e l i g i b l e

f o r

co l l a t e ra l secu r i ty

f o r

Federal reserve notes.

I am

al so opposed

t o t h e

change suggested

i n

l i n e s

18 and 19

on

page

31

which reads

a s

fo l lows: " . . . no t o f f se t

by

gold

o r

lawful

money deposited with t h e Federal Reserve Agent''.

The

amendment suggested starting with line

5

page

34 and

ending

with l ine

22

page

37 , has to do

with reserves.

I

l i k e

t h e

idea

of

eventu-

ally having demand deposits

and

time deposits carry

t h e

same: re se rv es

and

I would even g o s o f a r a s t o include th r i f t deposi t s so that there woul.d

b e a

f l a t r e se rve

f o r a l l

de po si ts , with some di sc ri mi na ti on between

Federal res erv e bank c i t i e s , branch bank c i t i e s , other reser ve c i t i e s

and

others .

I

also believe that further consideration should

b e

given

to the

formula developed b y t h e reserve committee o f the Federal Reserve System.

The

prov is ions s t ar t in g wi th l in e

6

page

38 and

ending with

l i n e

5

page

3 9 ,

have

to do

with dealings

i n

Federal reserve funds

and

while

I can not

agree with

t h e

suggested amendments, because

I

bel ieve

them

t o b e t o o

severe

i n

normal t imes, nevertheless

I

have felt that

deal ings

i n

Federal reserve funds might some

day

become

a

menace.

I

therefore bel ieve

I

would

b e

wi l l i ng

t o

give further considerat ion

to an

amendment that would give power

t o t h e

Federal Reserve Beard

t o

deny

t o

certain specif ic banks

t h e

r igh t

of

deal ing

i n

Federal reserve funds.

Start ing with l ine 18 on page 39 and ending with line 25 on

page

4 1 , t h e

b i l l r e l a t e s

t o

real estate loans

and the

segregat ion

of

assets against t ime

o r

t h r i f t d e p o s i t s .

I am no t i n

agreement with

t h e

sentence

-

l i n e s

6 t o 10 on

page

40 -

which reads

a s

fo ll ow s: "Such

valuat ions shal l b e rev ised bjr the Comptroller o f the Currency a t t h e time

of each examination o f t h e bank making t h e loan and he shall have power

t o

order changes therein

and to

requi re

t h e

adjustment

of

loans

t o

such

rev ised valuat ions" .

I t

seems

to me

that th i s

i s

imprac t i ca l .

I f a

bank

made

a

farm loan

f o r

f ive years

i n

accordance with

t h e

terms

o f the ac t

and two years la te r t h e value o f the farm land back o f t h e secu r i ty d e -

precia ted say f o r t y p e r cen t , I do no t se e how th e bank could adjust t h e

loan because

i t i s n o t du e f o r

three years,

an d t h e

bank would have

no

legal demand

o n t h e

maker.

The

only thing

t h e

Comptroller could

do

would

b e

determine whether

o r no t the

loan

w as

good

and i f not

entirely good,

what proportion of i t was good, and request t h e bank t o charge o f f accord-

ingly. Under t h e present law he now has ample authority t o follow this

procedure.

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X-7077 .

a - 2 %

Hon. Sugene Meyer - 6 - January 29, 1932

I am n o t

thoroughly convinced that

t h e

segregat ion

of

assets

against cer ta in deposi ts i s a good thing where a bank does both a commercial

a n d

savings bu si ne ss . Obviously

i t

works

t o t h e

advantage

o f

those having

time deposits an d a t t h e same time i s a disadvantage t o t h e commercial

deposi tor

i n t h e

event

o f

f a i l u r e

o f t h e

bank. Perhaps th a t shoul d

b e

so in so f ar as the t h r i f t depos i t o r i s concerned, b u t when a corporation

deposi ts a large amount with a bank that h a s t h e customary 60-day clause,

I do not be l ieve tha t t h e corporation should receive a preference over

another corporation that possessed

a

demand deposit.

I f

$5000

i s to be

t h e l im i t on t h r i f t depos i t s i t seems to me tha t t h e same limit should

apply on t ime deposits.

The amendment suggested starting with line 1 page 42 and ending

on l i n e 10 page 4 2 , might make i t impossible f o r a state member bank to

comply a t t h e same time with t h e provis ions o f i t s Sta te law and of this

sec t ion i f there were a conflict between the two laws. F o r instance,

i n Massachusetts a trust company i s requi red to segregate assets against

savings deposits b u t n o t against certain other t ime deposits.

I have no objec t ion t o t h e wording o f t h e proposed amendment

s t a r t i n g on l i n e 1 4 , page 42 and ending with line 15 on page 4 4 , except

t h e following which starts on l i n e 24 on page 43 and ends on l i n e 4 of

page 4 4 , which reads a s fol lows: "Ho such association shall purchase o r

hold

any

obl iga t ion

of any

corporation unless such corporation

and any

predecessor thereof earned f o r each o f t he five years preceding such p u r -

chase

a t

l e a s t

4 p e r

centum upon

t h e

outs tanding capi ta l s tock

of the

corpora t ion" . I f I understand th is c orre ct ly , i t would mean that a

national bank would b e prohibited from buying bonds of a corporation that

was no t earning; 4 p e r cent on a very heavy capi ta l izat ion b u t might b e

earning i t s i n t e r e s t cha rges many times over on a very small bonded

inde bte dne ss. This seems to o severe and I will recommend that this

clause b e el iminated.

I am in agreement w&th t h e amendment suggested starting with

l i n e

19 on

page

44 and

ending vkth line

7 on

page

45.

I am

somewhat

i n

sympathy with

t h e

suggestions contained

i n t h e amendment starting with line 10 on page 45 and ending with line

7 on page 46 , bu t do no t be l i eve t h e present t h e opportune time f o r i t s

adoption.

I am somewhat sympathetic with t h e language which starts on

l i n e

8 o f

page

46 and

ends with

t h e

word "business"

on

l i n e

14 of

page

4 6 , b u t p r e f e r to have more time to consider before making a d e f i n i t e

committal.

I f t h e

succeeding language which reads that

. n o

national

bank o r member bank shall perform t h e func t i ons o f a correspondent bank

on

behalf

of any

such individual , copar tnership, unincorporated associa-

t ion o r corporation" means that they could n o t even accept dep os it s, I

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Hon.

Eugene Meyer

- 7 -

X-7077

a - 2

January

29, 1932

am

very much opposed

to

this proVidlodi

.$he

la s t c lause s t ar t i ng

on

l i n e

17 and

ending

i n

l i n e

21 I do not

understand.

The language o f t h e proposed amendment

s t a r t i n g

on

l i n e

24 of

page

46 and

ending with line

8 on

page

52

places

cer t a in l imi t a t ions

an d

r e s t r i c t i o n s

on

vo t ing pr iv i leges

o f

share-

holders o f na t io na l "banks which, in my opi nion , would te mpo ra ri ly depri ve

cer ta in ind iv iduals , a f f i l i a t e s , ho ld ing companies

an d

other corpora-

t ions f rom ju s t i f ie d vo t ing pr iv i le ges

and

eventually make

i t

impract ic-

able

f o r

a f f i l i a t e s , c o r p o r a t i o n s

and

holding companies

t o

continue

a s

stockholders i n member banks. I t seems to me the enactment o f th is

amendment would have

t h e

e f f e c t

o f

driving

a

vast number

of

both national

an d

state member banks

o u t o f t h e

System

and I am

opposed

t o i t .

The amendment suggested starting with line 11 on page 52 and

ending with line

13 on

page

53 ha s to do

with

t h e

establishment

o f

branches

b y

national banks.

I

bel ieve th is

to be a

step

i n t h e

r igh t d i rec t ion

b u t i f I understand t h e language o f t h e amendment correctly i t would

only permit national banks

t h e

extended privi leges

of

es t ab l i sh ing

new

branches outside

o f the

c i t y

o f t h e

parent office where

t h e

S ta te

law

permits i t an d inasmuch a s there is no amendment to Section 9 of th e

Federal Reserve

Act in t he

Glass b i l l , St at e member banks alt houg h

p e r -

mit ted

b y

S ta t e

law to

e s t a b l i s h

new

branches outside

o f the

c i t y

in

which

t h e

parent State member bank

was

located could

not now

es t ab l i sh

them and continue a s members under Section 9 .

I

also want

t o

throw

o u t t h e

suggestion that

no

branches

should

b e

established anywhere except with

t h e

approval

o f t h e

Federal

Reserve Board

i n

addi t ion

to

that

o f t h e

Comptroller

o f t h e

Currency.

The amendment suggested starting with line 16 on page 53 and

ending with line

9 on

page

54 h a s to do

wi th in t ere s t ra t es that

a

national bank

may

charge

and I see no

ob ject ion .

Lines

10 to 24

inclus ive

on

page

54

have

to do

with

t h e

ra te

o f

interest which

a

national bank

may pay

deposi to rs .

I am

opposed

t o

a l l o f

these res t r ic t ions because

I am

convinced that

no

national bank

could compete with other insti tutions.

I

would want more time

t o

study

t h e

amendment suggested

s t a r t i n g on l i n e 4 page 55 and ending on l i n e 6 , before making a

definite commitment,

but my

impulsive thought

i s

that

i t i s t o o

severe.

The suggested amendment to Section 52 s t a r t i n g on l i n e 9 of

page

52 and

ending with line

20

d iscr iminates

i n

speci f ic cases

as to

t h e

amount that

may be

l en t

by a

national bank under

t h e

various excep-

t ions to Section 5200 and with United States Government bonds a s

secu r i ty ,

and i f I

have interpreted

i t

co r rec t ly

i t

discriminates

against certain l ivestock loan companies.

I am,

th er ef or e, opposed

to

this sect ion.

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X-7077

a - i ;

Hon.

Eugene Meyer

- 8 -

January

29, 1932

The

amendment suggested starting with line

24 on

page

55

an d

ending

on

l i n e

8 on

page

56

appears

to be to

severe.

The proposed amendment starting on l i n e 9 , page 55, and

ending with line 19 , I do n o t thoroughly underst and and I cannot com-

ment upon i t a t this time.

I am opposed t o t h e language t o t h e amendment starting on

l i n e 20 of page 55 and ending with line 4 on page 5 7 , f o r t h e reasons

given previously under comments on sub-sect ion M. I approve of the

language o f the proposed amendment starting on l i n e 8 , page 57 and

ending on l i n e 1 5 page 58 . I am opposed, however, t o t h e language

s t a r t i n g on l i n e 15 on page 58 and ending on l i n e 3 o f page 59 because

I be l i eve i t i s j u s t a s unreasonable t o publ i sh t h e p o r t f o l i o of an

a f f i l i a t e a s i t would be to require national bank t o pub l i sh i t s

p o r t f o l i o .

The language o f t h e proposed amendment starting on l i n e 7

o f page 59 and ending with line 2 on page 60 provides f o r examining

a f f i l i a t e s w h i c h I favor and I bel ieve that cer ta i n pe na l t ie s should

b e r e so r t ed to in the event o f r e f u s a l t o permit such examinations.

I am opposed, however, t o au thor iz ing t h e Comptroller o f t h e Currency

t o publ ish report o f h i s examinations of any national banking association

o r a f f i l i a t e under any condi t ion.

The proposed amendment starting with t h e language on l i n e 8

o f page 60 would, in my opin ion, pr oh ib it many de si ra bl e peo ple from

being d i rec tors i n national banks b u t would apparently permit t h e

same people to be d i r e c t o r s o f a State member bank.

The language i n t h e proposed amendment starting on l i n e 16

o f page 60 and ending on l i n e 24 on page 60 i s d i f f i c u l t t o i n t e rp re t

b u t i f i t means, f o r example, that t h e Canadian Bank o f Commerce c a n -

n o t lend on a promissory note secured by co l la te ra l payable i n

American dollars i n this country, or i f a corporation cannot lend i t s

own employees, secured b y i t s stock, on a part ial payment plan, I b e -

l i e v e t h e language o f t h e proposed amendment to be too severe.

The language o f t h e proposed amendment starting on l i n e 1

on page 61 and ending with line 12 on page 61, i f I i n t e r p r e t i t

cor rec t ly , would pr oh ib i t a corporation from deposit ing with a pr iva te

banker, o r a country elevator company from carrying an unsecured credit

balance with a city elevator company, o r a corporat ion o r bank from

car ry ing a deposit with a foreign bank o r other corporat ion, e t c . I ,

t he r e fo re , am opposed t o t h e amendment.

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X-7071

a-2

Hon.

Eagene Mayer

- 9 -

January

29, 1932

As

s t a t e d

i n t h e

opening paragraph

of my

l e t t e r ,

I

feel that

I should have h a d more time and ass i s t ance in analyzing this proposed

b i l l

or to

appraise

t h e

u l t imate ef fect

o f

many

o f i t s

p rov i s ions ,

and

such views a s I have expressed a r e the refor e necess ar i ly sub ject to

such revision a s a further s tudy of the b i l l may suggest to me.

Yours respectful ly ,

(Signed) R. A. Young

B. A. Young,

Governor.

7/17/2019 frsbog_mim_v36_0058.pdf


0 P Y

X-7077

c - 1

FEDERAL RESERVE BANK OF MlMDELFHlA

| ,

T E L E G R A k

Phi lade lphia 11 : 20 A Ja n 30

Governor Meyer: Washington .

I n Governor Morris

1

absence I am replying t o your inquiry concerning

t h e Glass Bil l .

Th e t i l l p rov ides so many radical changes affecting current practices

an d r e l a t i o n s o f "banks and other corporat i ons, t hat I hope a l l o f i t s

provis ions

can "be

subjected

t o

fur ther careful s tudy

by

f i nanc i a l

exper ts .

Fe de ra l re serve member banks could ha rd ly compete wi th nonmember banks

i f t h e provis ions of the Act were p u t i n to e f f ec t .

The r e s t r i c t i o n s on a f f i l i a t e s a s def ined might great ly dis turb useful

corporat ions whose act ivi t ies a r e beyond cri t icism.

I t s l i m i t a t i o n s on advances and discounts f o r member banks might b a r

many members doing a conse rvat ive banking bus ine ss from exe rci sin g th ei r

p r i v i l e g e s i n providing funds t o res tor e the i r l ega l reserves .

Many

o f th e

powers conferred

on the

Reserve Board

an d t h e

Comptroller

o f t h e

Currency appear

t o b e

extreme

and

threa tening .

Many bankers would look upon many

of i t s

provis ions

a s

unreasonable

r e s t r i c t i o n s t o a legit imate banking business.

The recommendations o f t h e Federal Reserve System's committee on legal

reserves should be s u b s t i t u t e d f o r t h e plan i n t h e b i l l .

State bank members would object t o being subjected to examinations

b y t h e Comptroller.

The provis ion o f a Federal l iquidating corporation seems admirable, bu t

would i t n o t b e b e t t e r t o provide funds i n some ot he r way than cutt ing

in to t h e Federal reserve surpluses ? The surplus of Federal reserve banks

should b e p ro t ec t ed , an d removing a large sect ion o f i t by l eg i s l a t i on

would raise

a

quest ion

a s t o

whether

i t

w i l l

n o t b e

followed

by

other

government actions t o u s e these funds which have been n o t t o o l a rge i n

o u r

r ecen t f i na nc i a l s t r a i n s .

Questions will arise

a s t o

whether

an

official whose appointment

i s

generally looked upon a s po l i t i ca l should head t h e corporat ion.

The provis ions o f the b i l l a ga in st making advancements t o member banks

on t h e i r f i f t e e n day notes seem t o have unnecessary res t r ic t ions.

The prevent ion o f t h e f r e e u s e o f member bank balances i n reserve banks

will meet with objections.

The provis ion f o r t h e va lua t ion o f s e c u r i t i e s a t t h e market va lu e seems

unnecessar i ly severe, and we do not see how a change i n t h e s i t ua t i on

of

propert ies securing mortgages,

b y t h e

Comptroller,

ca n

accomplish

any

useful purpose.

Many w i l l qu es tio n

t h e

d e s i r a b i l i t y

o r

f a i r n e s s

of

requiring banks

t o

r e - e s t a b l i s h a one hundred dollar p a r value f o r thei r s tock.

The provision whereby stockholders should be prevente d from vot ing t he ir

shares might throw t h e cont ro l of a corporat ion t o a minori ty, an d th i s

provision might raise serious legal questions.

7/17/2019 frsbog_mim_v36_0058.pdf


L 7 3

x-707?

c - 1

2.

Federal Heserve Bank of Phi lade lphia - Telegram.

Many be li ev e t ha t branch banking wi th in st a t e l in es i s n o t logica l

b u t tha t i t would be b e t t e r t o make any d iv i s ion l ines o n t h e basis

of trade areas o r Federal reserve d i s t r i c t s . Segregation o f cap i t a l

i n t h e separate branches does n o t appear feas ib le . The provis ion

f o p a d i f f e r en t s e t -up and method o f operat ions of the open market

committee does

n o t

appear

t o

represent

t h e

a t t i t u d e

o f the

banks

toward this function. I would especially call your at tention to the

provis ion that a reserve bank may have th ir t y days i n which t o make

a dec i s ion a s t o p a r t i c i p a t i o n .

The

proposed discrimination against making advances

t o a

member

bank o n i t s f i f t e e n day notes secured by Government obligations o r

e l ig ib le paper , r r i l l d i s turb a convenient an d desirable method of

accommodation an d t h e provis ion t o b a r such notes co l l a t er al ed by

bonds

o r

notes

o f t h e

United States,

a s

s ecu r i t y

f o r

Federal reserve

notes, might b e r e g r e t t e d a t some time when there may no t be s u f -

ficient commercial paper available t o support t h e volume o f

Federal reserve notes that might be needed.

HUTT

llUUam

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I 74

C O P Y X-7077

c-2

FEDERAL RESERVE BAiK

OF

PHILADELPHIA

T E L E G R A M

FEDERAL RESERVE SYSTEM

(Leased Wire Service)

Received

a t

Washington,

D. C.

55COT

Ph il ad el ph ia , Penna. 1210PM Janu ary 30 1932

Governor Meyer,

Washington

In compliance with telegram of 26th submit result of study of Glass Bill

and our views regarding i t .

I n r e Glass Bill S 3215

Pages 1, 2, 3. and par t of 4 general ly refer t o a f f i l i a t e s . The

problem of a f f i l i a t e s i s a very large one . As we have had l i t t l e con tac t

with them, we fee l tha t we should make more of a study of them and thei r

relations with member banks before criticizing t h e provis ions o f t h i s b i l l .

Some of i t s prov isio ns seem un fa ir to stockholders of banks and possibly

would endanger control o f such ba nk s. Would i t n o t b e b e t t e r t o t r e a t the

matter of a f f i l i a t e s i n a separate bil l?

Section 3> pages 4 and p a r t of 5» control l ing appl icat ion o f proceeds

of r ed is co un ts . Borrowings from Fed era l Reserve Banks la rg el y a r e t o make

good deficiency

i n

reserves ,

t o

l i m i t

t h e

appl ica t ion

of the

proceeds

to the

accommodation of commerce, industry and ag r i cu l t u r e and prevent th ei r u s e i n

any way f o r th e carrying o f , o r f a c i l i t a t i n g t h e carrying o f , o r t rading i n

s e c u r i t i e s , by implication would prevent any bank, holding any loans c o l -

la teral ly secured by investment o r speculat ive se cur i t i es , f rom rediscount-

in g with i t s Federal Reserve Bank. We think th is sec tio n should b e omitted.

Section 7 page 9» This appear s to omit t h e secretary of the Treasury as a

member o f th e Federal Reserve Board. Fo r one, I se e not the least objection,

b u t rather advantages, i n having t h e Secretary o f t h e Treasury a member of

t h e Board, so be li ev e th at t h i s amendment i s undesi rable .

Sect ion 8 ; page 1 1 . This, a nd a l l other sections of t h i s b i l l , a f f e c t -

i n g reserves , we think should b e omitted. The provis ions of the B i l l p r e -

pared b y t h e Federal Reserve Board, based upon t h e f indings o f i t s committee

on reserves , a r e f a r super ior t o t h e provis ions i n t h e Glass b i l l re fe rr in g

t o t h e same subject. We would favor st ri ki ng o u t a l l reference t o reserves

i n t h e Glass Bill and subs t i t u t i ng t h e Board 's bi l l .

Sect ion 9 page 1 2 . This cla use of the Bi l l suggests that th ere h as

been abuses

i n t h e

past

b y t h e

banks generally,

i n

t ha t they used

t h e p r o -

ceeds

of

red i scounts

t o

make loans

to

stock exchange houses.

I f t h e

power,

which

i s

proposed

to be

given

t o t h e


by

this section,

can prevent i n t h e f u t u r e any improper use o f Federal Reserve funds, this

provis ion i s des i rable , bu t i t so l i m i t s t h e operat ions o f the banks, that

one f e e l s such a provision would b e vig oro usly opposed, and i f enacted,

probably would drive a great many insti tutions out of the system.

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k 75

- 2

X-7077

c -2

Section 1 0 . Seems

to

provide

a

sa t i s fac to ry way

f o r

enlarging

t he

loaning powers of Federal Reserve 3an?r.s i n times o f emergencies without

a general increase i n t h e kinds o f paper o r loans e l ig ib le f o r rediscount .

I t i s unlikely that groups of banks would b e organized t o a s s i s t one or

more of their members except i n times of c ri se s, when unusual measures t o

meet such crises would

b e

J u s t i f i e d ,

bu t one

f e e l s tha t

t h e

bank

to be

benef i ted

by the

emergency loan should deposit with

t h e

group

i t s

note,

secured b y s a t i s fa c to ry col la ter a l , which note and col la tera l could b e

used a s co l l a t e ra l secur i ty f o r t h e group's obligation, which t h e Federal

Reserve Bank presumably would b e authorized to take i n making advances t o

t h e

group.

Sect ion 12 A. Recognizes t h e open market committee a s s e t u p a t

present

a s

sa t i s f ac t ory . Proper not ice

t o t he


and

t h e

banks

o f t he

d i scuss ions

and

ac t ions

of the

committee

i s

necessary.

The 30 day

option

t o a n y

Federal Reserve Bank

to

determine whether

o r no t

i t wanted t o p a r t i c i p a t e i n any o f t he committee's operations probably

would cause delays that many times would prevent t h e committee's action

being ef fec t ive .

Sect ion 12 B. The Federal Liquidating Corporation, a s proposed,

should b e able t o o p e r a t e e f f i c i e n t l y an d accomplish a good purpose, b u t

we

fee l th a t , poss ibly ,

a n

organiza t ion

f o r

each Federal Reserve District

might

b e

bet ter than

one

la rge organiza t ion.

I t i s a

question whether

o r

n o t i t i s

wise

to p u t a l l t h e

surplus earnings

o f t h e

Federal Reserve Banks

into t h e cap i t a l of this corporat ion, a s proposed i n Section 5 . A reason-

able amount of capital should b e provided f o r i t , a n d provision made f o r

c a l l i n g on Federal Reserve Banks f o r addi t ional capi ta l an y time such

addit ional capital might

b e

necessary.

Sect ion 1 3 ; page 27 . The reason f o r charging o n e p e r cent higher

f o r loans on 15 day notes than f o r rediscounting paper i s hard t o under-

stand. The us e o f t h e 15 day note i s he lp fu l t o t h e member banks and to

t h e

Reserve Banks,

and we see no

necess i ty

f o r

e s t ab l i sh ing

a

higher rate

of

d iscount

f o r

such obligat ions;

we

think

i t

would

be

contrary

t o

good

banking pract ice.

The provision contained i n l i n e s 1 to 18, page 28, seems to be a

f u r t h e r e f f o r t t o cont rol and l i m i t t h e loans of member banks on investment

and o ther secur i t ies , t h e necess i ty and a d v i s a b i l i t y o f which i s n o t p la in t o

us . We fe e l tha t t h e member banks would n o t consent t o i t , a n d i t s enact-

ment would result

i n

t roub le

f o r t h e

system.

Section 15 page 3 0 , l i n e s 20 to 24 . Eli min at es member ba nk 's 15 day

notes, secured

b y

United States government bonds

o r

notes,

f o r u s e b y a


a s

secur i ty

f o r

Federal Reserve notes issued

t o i t .

There does

n o t

seem

to be any

good reason

f o r

t h i s ;

t h e

bonds secur-

i n g such notes a re in no way permanently deposited a s secur i ty f o r c i r -

cula t ion, b u t constant ly a r e be ing re t i red by the banks and so withdrawn

a s secur i ty f o r currency. The e l a s t i c i t y o f t h e currency i s in no way

impaired b y the i r u s e ; they in no way make Federal Reserve currency less

responsive t o t h e requirements of business.

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»

I • 7 6

- 3 -

x-7077

e - 2

Page 3 1 l i n e 1 7 , provides f o r gold deposited with t h e Federal Reserve

Agent

a s

s ecu r i t y

f o r

no te i ss ue s only "being used

a s a n

o f f s e t a g a i n s t

o u t -

s tanding notes

and no t a s a

p a r t

o f t h e

Bank's gold reserve,

a s a t

presen t .

This provision would reduce available gold reserves i n every Federal Reserve

hank

i n a n

amount equal

t o 60 p e r

cent

o f the

no tes

so

o f f s e t .

I f

applied

t o

this bank today

i t

would

b e

below

i t s

lega l rese rve ,

a n d i f

appl ied

t o

t h e whole system, i t would have l i t t l e reser ve i n excess o f i t s requirements .

The

r e s u l t s

o f

such

a

provision would

b e

very d i sas t rous

a t

this t ime.

Page 3 8 l i n e s 6 to 19 , f o r b i d d i n g t h e t r a n s f e r o f excess Federal R e-

serv e Bal ance s, seems most ob j ec t io n ab l e. What could hamper ban kin g ope ra-

tions more,

o r

make funds

o f

Federal Reserve Banks l e s s de si ra bl e, than

a

provis ion that deprives a bank of handl ing f r ee ly i t s own funds . B u t th i s

provision would

n o t

prevent

a n y

Federal Reserve Bank from transferring

a t

any

time

a n y o f i t s

require d res erve balan ces .

The

proposed remarketable

provis ion only appl ies

t o

excess ba la nc es. Section

24

page

40

l i n e

6 ,

would

give

t h e

comptrol ler

o f the

Currency

t h e

r i g h t

t o

adjust mortgage loans

t o

comply with

h i s

v a l u a t i o n

of

p r o p e r t i e s .

We

th in k t h i s would

b e

impract icable .

An

amount

o f

.real es ta t e loans, equal

to one

ha l f

o f a

ban k' s t ime

a n d

t h r i f t

depos i t s ,

a s

proposed

i n

l i n e s

10 to 22 , in

many inst ance s , es pe ci al ly

i n

country banks, would b e t o o much. Time a nd savings deposi ts i n many such

banks equal

60 to 70 p e r

cent

of

t he i r t o t a l depos i t s .

A

maximum invest-

ment

a t any one

t i n e

o f a sum n o t

more than

2 5 p e r

cent

o f t h e

t ime

and

t h r i f t

deposits would b e s a f e r . The i nc lu s ion o f t h e investment i n bank premises

among r e a l es t at e loan

i s a

good provision.

Sec t ion 19 page 4 4 l i n e 19 . One supposes this i s a proposal t o l imit

t h e

amount

of any

bank ' s depos i t s

to a sum

equal

t o

about seven times

i t s

ca pi ta l fu nd s. Many th in k th at

t h e

amount

of

depos i t s tha t

a

bank could

carry should b e l im i t ed b y t h e amount o f i t s c a p i t a l a nd surp lus b u t o u r

f e e l i n g

i s

t hat de po si ts equal

t o t e n

times

t h e

amount

of a

bank ' s cap i ta l

and

surplus would

b e a

reasonable pro vis ion . Page 4 4 , l i n e 1

t o

5 .

To

forbid

banks

t o

hold

any

o b l i g a t i o n

of any

corporation, which

h a d n o t

earned

f o r

five years preceding such purchase, a t l e a s t 4 p e r cent upon t h e outs tanding

capi ta l s tock

o f t h e

corporation, apparently would prevent banks from invest-

i n g i n a n y

s e c u r i t i e s

o f

newly formed corporations.

Sec t ion 21 page 4 6 , Seems very d r a s t i c an d would unduly interfere with

t h e

ope ra t i ons

of

many ins t i tu t ions

and

corpora t ions ,

t h e

ope ra t i ons

of

which

are now

pro per ly conducted .

Sec t ion

2 5 ,

page

5 2 ,

Proposing

t o

extend

t h e

r i g h t

of

National Banks

t o

es tab l i sh branches .

To

r e s t r i c t such branches

t o t h e

s t a t e

i n

which

t h e

parent bank i s loca ted wi l l n o t ena ble those banks t o serve pro per ly th ei r

communities, which very o ft en exten ds beyond s t a t e l i n e s .

We

think banks

should

b e

authorized

t o

e s t ab l i sh branches within th ei r t rade area ,

a s p r o -

posed b y t h e comptrol ler o f the Currency, or any where within i t s own Federal

Rese rve D i s t r i c t .

I t h a s

been suggested that,

i n

a d d i t i o n

t o t h e

minimum

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cap i t a l

o f

$1,000,000 which

i t i s

proposed that

a

bank mast have

t o

establ ish branches, f o r every branch estab lis hed t h e cap i t a l o f t he

parent bank should b e increased, sa y $50,000 to $100,000...

Sect ion

25

page

5^» We

question

t h e

wisdom

of

speci fy ing

a

maximum

r a t e of interest that banks may pay on t i ne depos i t s . We think i t wonld

b e a very serious mistake t o fo rb id t h e payment of any i n t e r e s t on demand

deposi t s that successfu l ly h a s been done here f o r y e a r s . I f such a law

were enacted,

we

f e e l th er e would

b e a

f l i g h t

of

banks fron

t h e

system.

Sect ion 8 -A page 6 0 , We quest ion th e p rop r i e ty of p roh ib i t i ons

contained i n paragraphs 1, 2, and 3 und er th i s s ec ti on. . Thgr impro perly

would interfere with t h e r igh t s of corporat ions and ind iv iduals t o p u r -

sue

their business operat ions.

R L Austin,

133P

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X-7077.

t 7

C O P Y

d - 1

Fed era l Hes erve Bank

of Cleveland

* January 29, 1932.


Washington, D. C.

Gentlemen;

This l e t t e r se t s for th th e substance of object ions raised "by o f f i c e r s

of the


of

Cleveland

to the

proposed amendments

to the

Federal Reserve Act in the Glass Bil l , a s requested i n t h e Board's telegram

o f

January

2 6 .

Cr it ic is ms have "been li mi te d la rg el y

t o

proposals with which

we are e n t i r e l y o u t o f sympathy. Where sugg es tion s have "been o f f e r e d , they

may be accepted a s i nd i ca t i ve of our approval o f the proposals i n p r i nc ip l e ,

but no t o f the

sec t ions

i n t h e

form

i n

which they

a r e

drawn. With re fe re nc e

to sections where no comment i s made, i t i s n o t neces sa r i l y to be assumed

tha t we accept t h e proposed amendments i n to to .

Se c . 3 . Our objec t ion t o this paragraph i s based

primarily upon

t h e

fac t tha t

i t

grant s

t o t h e

Federal

Reserve Board powers which i t should n o t exe rc i s e . I t

would tend

to

make

t h e

Reserve Board

an

operat ing rather

than a supervisory body. We be l ieve tha t d i s c ip l in ing

member banks, when necessary, i s c l ea r l y t h e funct ion

o f each individual Federal Reserve "bank. I t would be

next to impossible to carry o u t t h e provis ions of the

proposed

l a w ,

which,

i f

ca r r i ed

o u t ,

would inevitably

r e s u l t i n withdrawals from t h e system o f state banks

and the

conversion

of

national banks

to

state banks

t o

escape their obnoxious features. In the p r e sent s i t u -

a t ion t h e enforcement o f these provisions would result

i n

suspending

t h e u s e o f

Federal Reserve cre di t f a c i l i -

t i e s to every member bank i n t h e City o f Cleveland.

Se c . 5 . I f a l iquida t ing corpora t ion o f t h e kind

provided

by S. 3215 is to be

e s t ab l i shed ,

we

bel ieve

tha t i t should be accomplished through special legisla-

tion such a s that proposed in S . 2810 . We ar e no t p a r -

t i c u l a r l y f r i e n d l y t o t h e idea o f member bank subscrip-

t ions

t o

s tock

i n an y

such l iquidat ing corporat ion

a t t h e

present t ime.

Se c. 6 . To require state bank members to comply with

a l l t h e requirements o f t h e National Banking A ct would b e

to

compel them

t o

re l inquish cer ta in char te r

a n d

s ta tu tory

rights which the law spe ci f i ca l l y provides that s ta te bank

members

a r e t o

r e t a i n .

In

view

o f the

t rend

o f

recent

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i

%

7 9

—2—

X-7077

4 - 1

years f o r important national "banks t o surrender their

char t e r s i n favor of s ta te char ters , t o enable them t o

take advantage o f the more liberal provisions o f the

l a t t e r ,

we

"believe that

t h e

e f f e c t s

o f

adopting this

s e c -

tion would

"be

f a r t h e r

t o

encourage this movement

and to

dr iv e s t a t e "banks which

now are

members

ou t o f th e

reserve

"bank system.

A

fur th er ob ject ion

i s

found

i n t h e

fac t

tha t

t h e

national "banks normally carry

t h e

"burden

of com-

mercial credits, whereas many state "banks engage

i n

"bank-

i n g

operat ions

o f a

nature which would work hardships upon

them were they compelled

to

meet

a l l t h e

requirements

and

r e s t r i c t i o n s

o f the

laws relat ing

to

national banks.

Se c. 8 , We do no t

bel ieve

i n t h e

arb i t rary des igna-

t ion o f reserve an d cen t ra l r ese rve c i t i e s . We hold th at

required reserves should

b e

measured

by

other standards.

We

approve

t h e

report recently made

b y t h e

Reserve

Com-

mit tee

o f the

System, which would render unnecessary

t h e

designat ion

o f

reserve

o r

cen t ra l reserve c i t ies .

Sec . 9 . In our

opinion this section

i s

thoroughly

object ionable a n d i t s conditions t o o d r a s t i c . We do n o t

bel ieve that any supervisory body should b e clothed with

such power.

I t

would conflict

i n

certain cases with

t h e

loan l imi ts es tab l i shed

f o r

s ta te-char tered banks .

I t

would

n o t b e

equi tab le

i n i t s

appl icat ion, because

a

Board order aimed

a t a

limited number

of

banks,

o r the

banks i n a c er ta in ci ty , would apply t o a l l other banks

i n t h e

d i s t r i c t i r r e s pe c t i v e

o f the

f a c t tha t they were

n o t

of fending .

In our

judgment,

t h e

enactment

of

this

section would result

i n t h e

withdrawal

o f

state banks

and

conversion

o f

national banks

to

i n s t i t u t i o n s c h a r t e r -

ed by the

s t a t es .

Se c. 10 . We

concur

i n t h e

idea that

t h e

Reserve

Act

should co ntain some emergency pr ov is io n, but we bel ieve

that a plan superior to that proposed could b e developed.

S i tua t ions o f t h e kind obviously contemplated b y th i s

section would probably originate a s a r e s u l t o f demands

f o r

cur ren cy. Since promis sory note s

o f t h e

groups

r e -

ceiving reserve bank funds would

n o t b e

e l i g i b l e

a s c o l -

l a t e r a l

f o r

Federal Reserve notes,

i t

w?uld pl ac e

a

further s t rain upon

a

reserve bank's gold;

an d

since

developments making borrowing

o f t h e

type described

seldom occur

a t

times other than periods

o f

unusual credit

s t r e s s ,

we

bel ie ve tha t

t h e

regional banks should

n o t

have

this added strain placed upon their gold reserves.

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~3~ X-7077

d - 1

80

Sec 12 . We do no t bel ieve that any necess i ty e x -

i s t s f o r t h e c rea t ion of a new Open Market Committee,

i n

view

o f t h e

fac t that

t h e

proposed committee does

n o t

d i f f e r mate r ia l ly f rom

t h e

present setup

o f the

System Policy Committee.

Se c. 13 . We a re

unalterably opposed

to any

propos-

a l t o

e s t a b l i s h

a

higher rate

o f

discount

on

member bank

col la tera l no tes than

on

other el igible paper offered

f o r

r ed i scoun t . We do n o t contemplate a l l co l l a t e ra l - secu red

loans

a s

represen t ing specula t ive t ransact ions .

We b e -

l i eve t ha t member banks

i n

discounting with their reserve

bank should have access

t o

r e s e r v e c r e d i t f a c i l i t i e s

i n

t h e manner which i s most convenient f o r t h e borrowing

bank.

I t i s

common p r ac t i c e

f o r

banks

to

borrow

on

thei r

own

co l l a t e ra l no tes

f o r

short periods

i n

preference

to

rediscounting customers' paper

t o

maturi ty .

Se c . 14 -b . We a re

opposed,

i n

p r i n c i p l e ,

t o an y p r o -

v i s ion

of law

which required

t h e


to

exercise CONTROL ove r

t h e

a c t i v i t i e s

o f

Federal Reserve

banks. We bel ie ve that t h e presen t law gives t h e Board

ample power

t o

supervise

th e

r e l a t ionsh ips r e fe r red

to in

this section through

t h e

regulations which

the law

au thor-

i zes

i t t o

promulgate.

Se c. 15 . We know of no more effect ive way to k i l l

t h e

system than

to

adopt this section.

Sec . 1 6 . I n o u r

opinion

t h e

r epo r t

o f t h e

System's

Committee on Reserves es ta bli sh es rese rve requirements on

a

thoroughly sc i en t i f i c bas is ,

and we

strongly urge

t h e

adoption

o f t h e

committee's report

a s a

subs t i t u t e

f o r

t h e

reserve requirement proposed

by the

Glass b i l l .

Se c . 16 -a , We

bel iev e that

t h e

Federal Reserve

Board should have authority

t o

regulate deal ings

i n

Federal funds, o ther than legi t imate t ransfers , with

a

view t o preventing abuses that may develop i n connection

wi th e i the r t r ans fe r s

o r

sa l es

of

excess balances*

S e c . 1 7 .

Most

o f the

prov is ions

of

th is sect ion

i n -

volve such ra di ca l dep art ure s from pre sen t banking pr ac -

t ice that

we

be li ev e they should

b e

subject

t o

f u r t h e r

study before enactment.

We

agree,

i n

pr i nci p le , with

the

idea

o f

specia l p ro tect ion

f o r

t h r i f t

and

savings deposits.

We do not bel ieve that a l l t ime deposits, i n view o f the

known nature

of

certain special time accounts, should

be

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X

" T I I 8 1

permi t ted

to be

invested und®*

1

t h e

provis ions

o f

this

sec t ion a s a t present draf ted |

With respect t o investments i n bank p r e -

mises

- in our

judgment this should

"be

t r ea t ed

as an

entirely separate proposal covered "by a separate s e c -

t i o n , and should s e t u p n o t only t h e l imi tat ions wi th

respec t

t o t h e

percentage

o f a

bank ' s capi ta l

an d

surplus

represented i n bank buildings o r real estate owned, b u t

should di f ferent ia te between bui ldings erected by banks

f o r

their sole occupancy

and

bui ldings erected

by

banks

p a r t s o f which a r e t o b e rented f o r o f f i c e o r commercial

uses .

Sec . 1 9 . Since t h e requirement of any spec i f i ed

percentage o f capi ta l funds t o d e p o s i t l i a b i l i t i e s i s

pure ly a rb i t r a ry , we recommend that farther study be

given

t o t h e

problem

t o

determine whether

t h e

f i f t e e n

p e r

cent requirement o f th i s sec t ion i s , on th e one hand

necessary, o r on th e other hand, adequate. I n e i t he r

event ,

we

suggest tha t ca pi ta l funds

f o r

this purpose

be

l imi ted t o c a p i t a l and surplus only, and t ha t i n t h e

event an y provis ion increasing t h e c a p i t a l - l i a b i l i t y

r a t i o b e enacted, ample time b e allowed f o r making t h e

adjustmai t .

Sec.. 28 . We a re i n sympathy with t h e proposal t o

es t ab l i sh l im i t s

t o t h e

r a t e

o f

i n t e r e s t pa id

by

banks

on dep osi t accounts, includin g dep osi ts of publ ic funds.

I n o u r opinion t h e sec t ion a s a t present drawn i s too

r e s t r i c t i v e , e spec i a l l y w ith r e spec t t o payment o f i n t e r -

es t o n

demand deposits.

To

p roh ib i t

t h e

payment

o f i n -

t e r e s t on depos i t s o f this type b y member banks would

place them a t a dis t inct disadvantage i n competing with

non-member institutions f o r ei ther bank balances or com-

mercial accounts.

While there a r e po in t s i n t h e b i l l which appeal to us as meri tor ious,

much

o f t h e

t ex t

i s s o

vagae

and

i n d e f i n i t e

a s t o

make

i t

d i f f i c u l t

o f

i n t e r p r e t a t i o n and a n a l y s i s , or so obviously impractical as to render i t

unworkable. I t appeals i n spots as an attempt t o deal with evils which we

do not

be l ieve exi s t

i n

f a c t .

I n t h e

main,

we

be l ieve tha t

t h e

great bulk

of our membership would oppose i t s r e s t r i c t i o n s and requirements and that

t h e e f f e c t s o f i t s passage would b e d i s a s t rous t o a continuance o f System

operat ions.

Comment upon questions

of the

bil l dealing with proposals which

a r e

more

of a legal char acter a r e being prepared by counsel f o r this bank and w i l l b e

communicated

t o

counsel

f o r t h e

Board

a t t h e

l a t t e r

l

s request .

Very truly yours,

(S) E. E. Fancher,

Governor.

(S) Geo. DeCanp,

Federal Eeserve Agent.

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i 82

V.

X

7

°I1

FEDERAL RES3RVE BAMK

0 ?

RICHMOND

T E L E G R A M



Received a t Washington, D. C.

B2KHEA

T

Richmond, Va. 850am J a n . 3 0 .

Governor Eugene Meyer,

F. R .

Board, Washn.

Your wire 26th st op Have st ud ie d "bill under hand icap of l imited

time stop Approve some poin t s stop Have always be li ev ed

i n i t i a t i v e i n open market operations and foreigii agreements

should be ves ted i n Federal Reserve Board stop Endorse h e a r t i l y

proposals r e branches of member banks stop be l iev e i n ass i s tance

t o

fa i led banks

b u t

think

i t

should

be

administered outside

system stop on l iqu ida t ing corpora t ions b i l l i s vague and

cont rad ic tory i n language stop re se rv e banks making loa ns °

groups of members i s wise emergency measure bu t I nope any proposal

t o legally introduce into Federal Reserve Banks paper no t

e l i g i b l e f o r note iss ue wi ll receive close scr uti ny stop

Approve some of provis ions as to a f f i l i a t e s , p a r t i c u l a r l y as o

their examination, provided there

i s

presented

a

reasonable

and

understandable conception of an a f f i l i a t e r h i c h i s lacking i n

th e b i l l s t op As to re se rv es much p r e f e r system committee plan^

t o t ha t i n b i l l s top t h e considerable increase i n rese rve requi re -

ments would curtail lending power of member banks and react

sharply upon borrowers i n ag r i cu l t u r a l d i s t r i c t s st op t o W

mind t h e de s i r ab l e i n b i l l i s f a r outweighed by the undesirable

stop

t h e

b i l l r ep re sen t s

oppressive

l e g i s l a t i o n

i n

ce r ta in

p rov i s ions pa r t i cu l a r ly i n those re la t ing t o co l la te ra l loans

and to depos i t s of corporations engaged i n commerce and to ny

mind i s de s t ruc t i ve i n tha t o u r good members will withdraw

leaving u s only those who cannot afford t o withdraw. I ep or e

even t h e b i l l ' s p u b l i c i t y a t this juncture when t h e message

vi ta l ly needed i s one which inspires hope and awakens courage.

HOXTOK

905a

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C O P Y

federal aesaAvk BABC

OF

RICHMOND

SUBJECT:

THE

GLASS BILL.

Honorable Eugene Meyer, Governor,


Washington,

D. C.

Dear Governor Meyer;

Answering your Trans.

1434 ,

sent

on t he

26 th , r e l a t i ve

to the

Glass Bi l l ,

I

have

t h e

following comments

t o

make, which

I am

sending

"by

l e t t e r s i nce

i t

will reach

you

p r i o r

t o t h e

time fixed

i n

your request,

namely, 3 o'clock Saturday afternoon.

The

legis la t ion proposed

i s o f

such far-reaching, experimental ,

and rad ica l natur e tha t the re should be no thought whatever o f passing

t h e

b i l l without giving hearing s

t o t he

banks

i n

every part

o f t he

country.

In

saying this ,

I do n ot

omit

to

bear

i n

mind

t h e

fac t tha t

t h e

b i l l

i t -

se l f

was

framed

a s a

r e s u l t

of

extensive hearings.

I t i s o n e

th ing ,

how-

ever, to frame a b i l l in tending to correct evi ls bel ieved t o exist, brought

o u t a t t h e

hear ings ,

and

quite another thing

t o

consider

t h e

b i l l intending

to

correct those evils.

In my

judgment, t he re

is no man

l i v i n g

who can

appra i se

t h e e f -

f e c t s

of

t h i s b i l l

i f

enacted into

l aw. The

consequences might

be — and

I

believe they would

b e —

ap pa ll in g. Moreover,

in my

judgment,

i t i s e x -

ceedingly unfortunate that

a

b i l l involving

a s

much controversy

a s

this

b i l l i s bound t o raise should come up a t t he very time when w e a r e seeking

to

a l l ay unres t

b y

remedial leg is la ti on without complic ations which proba-

b l y

can^be

p u t

int o immediate e f f e c t . Furthermore,

t h e

banks

o f t h e

coun-

t r y a r e t o o much occupied a t this t ime over thei r dis turbed affai rs to give

immediate study t o t he b i l l .

This b i l l should

b e

s p l i t

up

in to severa l b i l l s .

F o r

instance,

that provis ion

o f t he

bi l l which provi des

f o r

branch banking might with great

advantage

b e

taken from th is b i l l

and

passed sepa rate ly. Unless

I am

grea t -

l y mistaken, i t could b e passed without any great delay. I believe that

provis ion

t o be

imperatively needed

a t t h e

pr es en t time. There

a r e

many

communities

a l l

over

t h e

country which

a r e

pr ac t i c a l ly depr ived

of

banking

f a c i l i t i e s ,

a n d

al ready legis la t ive minds

a r e a t

work

t o

supply

t h e

need

with to ta l l y inadequate f a c i l i t i e s . Small banks a r e being proposed, which

in the end w i l l , o f course, have to go the way which other small banks

have gone.

X-707?

e -2

January 29 , 1932.

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I 8 4

C O P T X-70 77

e -2

Hdn» Eugene Meyer, Governor, Ja nu ary

29, 1932.

Federal Reserve Board, Page 2 .

Without attempting any de ta i led analys is o f t he b i l l , which I do

n o t

be l i eve

to be

wanted,

I

give

i t as my

opinion t ha t

i t

would cripple

t he

Federal Reserve System beyond repair. My b e l i e f i s tha t i t would re s ul t

in an exodus from t h e System of those large banking ins t i tu t ions i n which

t h e commercial business does n o t dominate, a n d i t wil l preclude get t ing into

t h e System very many bankin g i n s t i t u t i o n s which might adva ntag eou sly b e

included.

I t

will spur

t h e

competition

and

antagonism which already exist

between state banks and national banks, a nd i t will give state banks

immeasurably

t h e

advantage

i n

obta ining

t h e

deposi t s

o f t he

co un tr y. Even

i f i t should n o t b e f e l t immed iately, when bu si ne ss q ui et s down and assumes

i t s

customary aspect

th e

d i s i n t e g r a t i o n

o f t he

Federal Reserve System will

begin.

The cont rol o r censorship over loans on c o l l a t e r a l , b y which i t

i s assumed that stocks and bonds a r e meant (although i t i s nowhere stated

i n

the. .bill) , would

be an

in to le rab le p rov i s ion .

How

would

t h e

banks

len d th ei r fund s? There i s n o t sufficient commercial paper. I t i s

known

to

everybody

how the

corporations formerly accustomed

to

borrow

have provided themselves with working capital by t he i ssue of secur i t i e s .

There would remain then

f o r t h e

investment

of

banking ca pi ta l se cu ri t i es

o f a l l c l a s s e s a n d r ea l e s t a t e , and the b i l l seeks t o r e s t r i c t and

diminish loans

o f

th is charac ter .

The provision which penalizes the 15 day notes upon a l l classes

of co l l a t er a l , inc luding b i l l s rece ivable , would place a burden on t he

banks which t h e banks would not and could n o t to l e ra t e .

The provision which renders member bank notes secured b y

Government bonds ineligible

a s

c o l l a t e r a l

f o r

Federal Reserve notes would

inconvenience and r e s t r i c t t h e opera t ions of Federal Reserve Banks i n

supplying currency

i n a

manner which

a t

times might,

and

would, prove

d i s a s t r o u s . I f , a t t h e pr es en t time, paper secured b y Government bonds

discounted by t he Federal Reserve Banks were eliminated, i t would remove

about

450

mi l l ion dol lars

of

f ree gold .

The

b i l l t akes

f o r

granted,

of

cou rse , t ha t such no te s would b e replaced by t he discount o f ordinary

b i l l s rec eiv abl e. This might o r might no t be t he cas e. There a r e other

p r o v i s i o n s a f f e c t i n g t h e issuing powers of Reserve Banks adversely.

That provision o f t h e b i l l p r o h i b i t i n g t h e payment o f in t e res t

on

demand deposits

i s one of t he

provisions mentioned above which would

give state banks a tremendous advantage i n competition f o r deposi ts ,

which they would

no t be

slow

t o u s e .

The p rov i s ions o f t he b i l l f o r reserve requirements a re so

ra di ca l that they could

n o t

f a i l

to be

rebel led agains t .

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X-7077

e - 2

fen* Eugene Meyer * Governor# Ja nuary 29, 1932.

Federal Reserve Board, Page

3 .

That provision

o f the

bill which aims

to

form

a

l i qu ida t ing

corporation contains

i n i t t h e

germ

of a

good idea.

Bu t i t i s

such

an

innovation that i t needs to be thought of from a l l angles, a n d i t should

not "be

ha s t i l y passed un t i l

i t ca n "be

thoroughly digested.

The

provision

a s

drawn

h a s

such obvious defects that

i t

shows either

a

lack

of

under-

standing o r too great haste in prepara t ion . The l a t t e r i s bel ieved to

charac t e r i ze

t h e

e n t i r e b i l l .

The

provision

f o r t h e

l iquidat ing corpora-

t ion

a s

drawn would leave

no

excess earnings

of


t o increase t h e surplus, an d does n o t provide f o r making* £ocd depletion

of

sur plus from de fi ci en t earnings such

a s

tha t experienced l a s t year,

Another proposal

i n t h e

bill which contains

t h e

germ

o f a

good

idea,

in my

opinion,

i s

t ha t which pro vid es

f o r t h e

formation

of

groups

of

banks which

may ac t as

clearing houses have heretofore acted

i n

render-

i n g a id t o a bank in t rouble , an d which makes t h e obl igat ions created

thereby e l ig ib le

f o r

discount

by


b u t n o t

e l ig ib l e

a s

secu r i ty

f o r

Federa l Reserve not es . This needs

to be

thoroughly coin-

s ider

ed by

member banks themselves.

The

provision

o f the

b i l l which makes changes

i n t h e

manner

in which real estate loans a r e made i s bel ieved to be too complicated f o r

adminis t ra t ion

b y

country banks,

in

which

w e a r e

accustomed

to

f ind

t h e

greatest volume

o f

real estate loans, according

to my

experience.

The

f inal p rov is ion

o f t h e

b i l l , which pro hi bi t s corporat ions

o f

t h e

c ountry from dep osi ting t he ir funds with

an y b u t

inco rpor ate d banking

i n s t i t u t i o n s i s probably n o t enforceable an d would n o t b e t o l e r a t e d b y

t h e

country

I am

s"ure.

Those provisions o f the bill which tend to concentrate f a r

greater power

i n t h e


and to

make

t h e

Board

i n a l l

b u t d e t a i l s t h e opera tors of Federal Reserve Banks, appear to tend t o -

wards

a

great central banking system, which

I

believe could

n o t b e

operated

with success

i n a

country

of

this magnitude

and of

such diverse interests

and

such diverse customs

and

p r a c t i c e s

of

banking. Furthe rmore ,

i t

seems

t o

r e l i eve d i r ec to r s

of

Federal Reserve banking institutions

o f a

very

great par t

o f

t h e i r i n i t i a t i v e

an d

r e s p o n s i b i l i t y ,

an d

would certainly

I believe tend i n t h e course o f time, i f n o t immediately, to lower t h e

c a l i b r e

o f th e men who

would undertake

t o

occupy positions

o f

such re s t r i c t -

ed r espons ib i l i t y .

I

bel ieve that th i s b i l l wi l l

b e

torn

to

p ieces

b y t h e

banks

o f t h e

country,

a n d

that

i t

would

b e

almost

a

crime

to

attempt

i t s

hasty

passage.

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X-7C*7

6—2

Hon. Eugene Meyer, Governor, Ja nu ar y 29, 1932,

Federal Reserve Board, page

4 .

The

b i l l

i f

enacted into

law

will have

a

severely depressing

effect upon Government securities. The mere offer ing o f t h e b i l l may

have some adverse effect.

I t i s , o f course, a d ras t i c de f l a t ionary b i l l .

Very truly yours,

GJS-CGP

(S) George J . Seay

GEO. J . SEAY,

Governor.

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C O P Y

FEDERAL W&&V& BANK

X-7077

8 * 7

f - 1

OF ATLANTA

January

29, 1932.

M r.

Eugene Meyer, Governor,

The


Washington,

D. C.

Dear Governor Meyer;

Reference i s made to your telegram (Trans No. 1434), under

date

o f

January 26th, asking

my

views with respect

t o t h e

B i l l ,

S. 3215,

introduced

i n t h e

Senate

by

Senator Glass

on

January

21 , 1932 .

I

f i rmly bel ieve

i n t h e

Federal Reserve

A ct . I t i s my own

bel ief that

t h e

prese nt session

o f

Congress

i s n o t an

opportune time

f o r

a

thorough revision

o f t h e

Federal Reserve

A c t ,

because

o f t h e

great ly

disturbed banking conditions which

now

ex is t. While

I am

e n t i r e l y

i n

accord with t h e purposes o f t h e B i l l a s expressed i n t h e introductory,

I do not

favor en t i re ly

t h e

plans proposed

f o r t h e

enactment

o f

these

purposes. Although t h e importance o f t h e measures incorporated i n t h e

B i l l deser ves much more stu dy than

I

have been able

t o

give them

i n t h e

l imi t ed

a

time

a

copy

o f i t h a s

been avai lable

to me, I

shall express

my

views on such sections o f t h e B i l l a s I deem comment necessary.

SECTION'

3 OF THE

BANKING

ACT OF 1932,

amending paragraph

8

o f t h e

Federal Reserve

A c t .

I

bel ie ve tha t some r es t ri c ti on should

b e

p laced

o n t h e u s e

o f

Federal reserve credi t

f o r

speculat ive purposes,

b u t

t h a t

t h e p r o -

vis ions

o f

th is sect ion

a r e

e n t i r e l y

to o

d ras t i c .

SECTION

4 OF THE

BANKING

ACT OF 1932,

amending

t h e

25th

p a r -

agraph

o f

Section

4 o f t h e

Federal Reserve

A c t ,

with regard

t o t h e

e l ec -

t ion o f Federal reserve bank directors.

I am n o t in

favor

of

this amendment.

SECTION 5 OF THE BANKING ACT OF 1932, amending Section 7 of

t h e Federal Reserve A c t , r e l a t i n g t o earnings o f Federal reserve banks.

I am

opposed

t o

t h i s amendment

f o r t h e

reason that

i t

would

greatly weaken

t h e

Federal reserve banks.

I am

f i rmly

o f t h e

opinion

that there should

be no

change

i n t h e

prov is ions

o f t h e

presen t

l aw r e -

l a t i n g

t o t h e

d i s t r i b u t i o n

o f

earnings

of

Federal reserve banks.

SECTION 6 OF THE BANKING ACT OF 1932, provides for a new

paragraph between

t h e 5 t h a n d 6 t h

paragraphs

o f

Section

9 o f th e

Federal

Reserve

A c t ,

r e q ui r in g a f f i l i a t e s

o f a

bank admitted

to

membership under

au tho r i ty of Section 9 , during a per iod of two years af ter t h e section

a s

amended takes effect,

to

make

and

f u r n i s h

t o t h e

p res iden t

o f t h e

bank

f o r

transmission

b y h im to t h e


n o t

less than three

reports during each year,

e t c .

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x-7ofe

8 0

FEDERAL RESERVE BANK

OF

ATLANTA


Washington, D. C. - 2 - 1-29-32

I am in accord with this provision except that I do no t think

t h e period f o r which t h e r e p o r t s a r e t o b e rendered should b e l imi ted .

SECTION 8 OF THE BANKING ACT OF 1932, amending Section 11(e ) of

t h e Federal Reserve A ct r e l a t i n g t o t h e r e c l a s s i f i c a t i o n o f r ese rve c i t i e s .

Inasmuch

as I am

opposed

to

Section

16 of the

B i l l ,

I se e no

j u s t i f i c a t i o n f o r t h i s amendment.

SECTION

9 OF THE

BANKING

ACT OF 1932.

amending Subsection(m)

of

Section 11 of t h e Federal Reserve Ac t .

This amendment gives

t h e

power

to the


to

f i x from time to time f o r each Federal reserve dist r ict t h e percentage of

individual bank capital and surplus which may be represented by co l l a t e ra l

secured loans b y member banks within such district.

I am n o t in

favor

of

this amendment,

b u t

be l i eve

t h e

credi t

extension

and

co l la tera l requ i rements

of

member banks should

b e

allowed

to

remain with their managements.

SECTION

10 OF THE

BANKING

ACT OF 1932,

providing

for a new

sect ion H A o f t h e Federal Reserve Ac t .

This new section authorizes Federal Reserve Banks, with the

consent of the Federal Reserve Board, to make advances t o groups of member

banks wi th in the i r d i s t r ic t s , and provides that such loans a re not to be

e l i g i b l e a s c o l l a t e r a l s e c u r i t y to Federal re se rve not es . This appa rent ly

i s designed f o r a relief measure, and under t h e condit ions t h e Federal R e-

serve Bank of At lan ta h a s experienced a n d i s experiencing, t h e Atlanta r e -

ser ve bank, under sim il ar co nd it io ns , would

not be in a

p o s i t i o n

to

af ford

much,

i f a ny ,

r e l i e f

to any

bank under this provision

of law.

SECTION

11 OF THE

BANKING

ACT OF 1932

restricts member banks

i n

making loans to t h e i r a f f i l i a t e s , b o t h as to amount and as to kind of

co l l a t e ra l secu r i ty .

I am in accord with this provision.

SECTION 12 OF THE BANKING ACT OF 1932, enact ing a new section

12A of t h e Federal Reserve Ac t .

This section creates

a

Federal Open Market Committee.

I am in

accord with this provision

in the

B i l l

a s i t

r e l a t e s

to

System acc ount, except t ha t

I do no t

think that

t h e

members

o f t h e

committee

appointed

by the

boards

of

d i r e c t o r s

o f t he

Federal reserve banks should

b e

subject

t o t h e

confirmation

o f t h e


b u t

that they

should

b e

sub ject

to

removal

f o r

just cause

by the


SECTION 12B OF THE BANKING ACT OF 1932, es t ab l i sh ing t h e Federal

Liquidating Corporation.

7/17/2019 frsbog_mim_v36_0058.pdf



OF

ATLANTA X-7077

f k 8 9


Washington,

D. C . - 3 -

1-29-32

I am

un al te ra bl y opposed

to

th is provis ion

i n t h e

B i l l

f o r t h e

reason that

t h e

c a p i t a l

to be

furnished

t h e

corporat ion

f o r u s e i n

l iqu ida t ing

t h e

a s s e t s

o f

closed member banks

i s t o be

furnished

b y t h e

Federal reserve

banks a n d t h e i r members. Fed era l re se rv e banks would b e weakened by the

amount

o f t h e

capital subscript ion charged

t o i t s

surplus ,

a n d

under

t h e

provis ions

o f

Section

5 o f

t h i s B i l l ,

a l l

earnings

o f

Federal reserve

banks would b e pa id t o t h e Federal Liquidating Corporation. I n t h e event

a


had an

opera t ing def ic i t (deprec ia t ion

and

losses)

such defici t would necessari ly further reduce

i t s

surplus

an d

would make

necessary t h e postponement o f t h e payment of di vidends u n t i l such time

a s

they were ear ned . There

i s no

provis ion

f o r

r e s t o r i n g

t h e

surplus

o f

Federal reserve banks, either

b y

earnings

in

excess

o f

dividend requirements,

or by any

other method.

I am

opposed

to

th is sec t ion

o f t he

B i l l

f o r t h e

further reason

tha t

t h e

member banks

a r e

required

to

furnish capital equal

t o

one-half

o f

o n e p e r centum o f the i r to ta l outs tanding n e t time and demand deposits f o r

which they would receive stock

i n t h e

Federal Liquidating Corporation,

The

a s s e t s

of

th is corp orat ion would nec ess ari ly

be of a

slow nature,

a nd th e

member banks would, under t h e l a w , b e forced t o u s e their funds f o r a slow

investment.

I

be l ieve tha t th is provis ion

i n t h e

Bill would

b e

very object

t ionable

t o t h e

member ba nk s, even

t o t h e

ext en t tha t some would

b e

los t

t o membership i n t h e Federal Reserve System.

SECTION'

13 OF THE

BANKING

ACT OF 1932,

amending

t h e 7 t h p a r -

agraph

of

Section

13 of the

Federal Reserve

A c t ,

providing

f o r a one pe r

centum hig her r a t e than

t h e

rediscount ra te

on a

member bank's 15-day promis-

sory note, and p ro h i b i t i n g a member bank from increasing i t s c o l l a t e r a l

notes during

t h e

term

o f

such 15-day borrowings.

I am no t in

favor

of

this amendment

f o r t h e

reason that

l e -

gitimate business needs

o f t he

customers

o f t h e

member bank

who

w i l l

b e

able

t o secure their notes with investment stocks o r bonds a s co l l a te ra l , cou ld

no t be m e t by the

bank uqder provisions

o f

th is sec t ion.

I

would favor

a n

amendment

n o t

provided

f o r i n t h e

Bill permitting Federal reserve banks

to

discount direct notes of member banks secured b y e l ig ib le paper f o r a period

of

ninety days.

SECTION 14 OF THE BANKING ACT OF 1932, providing f o r addit ional

subsection o f Section 14 o f t h e Federal Reserve A c t , r e l a t i v e t o t h e r e l a -

t ionships

and

transactions between Federal reserve banks

an d

foreign banks.

I am in

accord with

t h e

purpose

of

this amendment.

SECTION

15 OF THE

BANKING

ACT OF 1932

amends

t h e

second, third

and

fourth paragraphs

of

Section

16 o f t h e

Federal Reserve

A c t ,

r e l a t i v e

to

t h e

issuance

o f

Federal reserve notes.

I am in accord with t h e proposed amendments t o this sect ion.

I

believe that eventually

t h e

promissory notes

of

member banks acquired under

t h e

p rov i s ions

o f

Section

1 3 ,

secured

by

depos i ts

o r

pledge

o f

bonds

of t he

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FEDERAL RESERVE BANK OF ATLANTA


Washington, D. C. - 4 *

United States should b e declared inel ig ib le a s c o l l a t e r a l s e c u r i t y to Federal

re se rv e no te s. However, in my opinion, th is exception i s n o t des i r ab le a t the

pr es en t time because o f t he unusual demands f o r currency which have recently

been in evidence, a nd f o r t h e reason that th e Government will require t h e fu l l

cooperation o f t h e member banks i n t h e f l o t a t i o n of large i ssues o f short

term Government securities

i n t h e

near future.

SECTION 16 OF THE BACKING ACT OF 1932, amending Section 19 of the

Federal Reserve

A c t ,

with respect

to

member bank reserve requirements.

The proposed Bill provides f o r a n increase of 10$, 7

s

b and 4$ in

t h e reserves requi red to be maintained with Federal reserve banks against

time deposits (exclusive

of

t h r i f t d e p o s i t s )

b y

banks located

i n

cen t ra l

r e -

se rve c i t i e s , r e se rve c i t i e s , and o ther c i t ie s , respe ct ive ly .

I am of th e opinion that any increase i n total reserves required

would be met with opposition from o u r member banks. I bel iev e that reserves

against t ime

an d

demand deposits should

b e

ca l cu la t ed

on the

same ba s is ,

b u t a t a rate which would produce a total volume of reserves approximately

equal to our member bank re se rv e de pos its under pre se nt requ irem ents .

I am in

accord with

t h e

prov is ions

of

th is s ect ion which

p r o -

h i b i t a member bank from acting a s t h e medium o r agent of any non-banking

corporat ion o r ind iv idual i n making loans secured by c o l l a t e r a l , a n d which

provide that no member bank shall make loans and discount paper f o r a n y

corporat ion

o r

individual

who

s h a l l ,

a t t h e

time

of

making

o r

renewing

any

such loan, have outstanding such loans secured by c o l l a t e r a l i n favor of any

investment banker, broker, member of any stock exchange, o r dealer i n

s e c u r i t i e s .

I do not

favor

t h e

amendment

i n

this section which requires

tha t a f e e b e charged f o r t h e sa le o r t r a n s f e r o f a member bank's excess

balance, a nd which also requires authority o f t he Federal Reserve Board f o r

such sale o r t r a n s f e r .

I am n o t i n favor of the provision tha t requ ire s t h e addi t ion

o f t h e l i a b i l i t y c r e a t e d b y repurchase o r other similar agreements to the

n e t d i f f e r e n c e o f amounts (hie to and from other banks, in computing reserve

requirements.

SECTION 17 OF THE BANKING ACT OF 1932, amending Section 2 4

of the Federal Reserve A c t with respect to re a l e s ta te loans , e t c .

I do not favor t h e prov is ion i n th is sect ion requi r ing t h e

Comptroller

of the Cur

render

a t t h e

time

of

each examination

o f a

bank

t o

r e v i s e

t h e

valuat ions

o f

real estate securing loans,

and to

r equ i re ad ju s t -

ments in the amounts of such loans according t o t h e revised valuat ions.

I am in accord with t h e prov is ion l imi t ing t h e aggregate amount

of

real estate loans

to 15$ of th e

amount

o f t h e

cap i ta l s tock actual ly

pa id in and unimpaired, a nd to 15$ o f i t s unimpaired surplus, or to one-half

o f i t s time an d th r i f t depos i t s .

I do not

think investments

i n

bank premises

and

unsecured

loans whose eventual safety depends upon t h e value of real estate should b e

counted a s rea l es ta te loans . I do, however, thi nk tha t some oth er li mi t at io n

should be made on investment in bank premises.

9 0

1-29-32

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, 9 1

FEDERAL RESERVE SANK

OF

ATLANTA X-707*7

f - 1

Federal Heserve Soar4

Washington,

D. Ci - 5 -

1-29-32

I n t h e

l imited t ime

I

have

ha d to

study

t h e

B i l l ,

I am n o t

prepared

to

express

my

views with r ef er en ce

to

tha t par t

of

this sect ion

author iz ing t h e balance of time and t h r i f t d e p o s i t s to be inves ted i n property

an d

s e c u r i t i e s

i n

which savings banks

may

invest under

t h e

S t a t e

law, and

t h e

requirement that

t h e

rece ive r

of an

insolvent bank apply

t h e

property

acquired under t h i s sec tio n ra ta bl y and p ropor t iona te ly t o t h e payment of

time

an d

th r i f t depos i t s .

SECTION 18 OF THE BANKING ACT OF 1932, amending paragraph 7

o f Section 5106 of t h e Revised Statutes, with respect to investment powers

of

national banks.

I do not

favor

t h e

amendment requiring

t h e

Comptroller

of the

Currency,

by

regu la t ion ,

t o

p r e s c r i b e

t h e

amount

of

investment securi t ies

tha t

a

national bank

may

purchase

f o r i t s own

account.

I

think this should

b e

determined

b y t h e

management

o f t he

bank . There does

n o t

appear

to

me to be any other provis ion i n this sect ion that i s ser ious ly objec t ionable .

SECTION

19 OF THE

BANKING

ACT OF 1932,

amending Section

5138

o f t h e

Revised Statutes ,

by

adding

a t the end a new

paragraph re l a t in g

to

t h e amount o f c a p i t a l o f national banks.

I am in

favor

o f

this amendment except that

I do not

favor

t h e

p e n a l t i e s

f o r

non-compliance,

a s , in my

opinion, they

a r e t o o

d ras t i c .

SECTION

20 OF THE

BANKING-

ACT OF 1932

provides

for

an

amend-

ment to Section 5139 of th e Revised Statutes, with regard t o t h e p a r value

of

c e r t i f i c a t e s

o f

s tock

of

national banks,

and

provides that

no

c e r t i f i -

cate representing

t h e

stock

of any

banking asso ciat ion sh all r epr esen t

the

stock of any other corpo rati on.

After careful s tudy

o f

these prov is io ns,

I am of t h e

opinion

that Section

5139 of the

Revised Statutes should

n o t b e

amended

a t

this

time.

SECTION

21 OF THE

BANKING

ACT OF 1932,

r e l a t i n g

to

o f f i c e r s

an d

employees

of

member

b a n %

serving

a s

o f f i c e r s

and

employees

o f a ny c o r -

pora t ion, assoc ia t ion, copar tnership ,

o r

individual, engaged

i n t h e p u r -

chasing, sel l ing, o r nego t ia t ing secur i t i e s .

In my

opinion

t h e

abuses aris ing

ou t o f

such relat ionships

a r e no t o f

enough importance

t o

jus t i fy th i s p rov i s ion .

SECTION

22 OF THE

BANKING

ACT OF 1932,

amending Section

5144

o f t h e Revised Statutes, with regard t o t h e vot ing o f stock.

This amendment

i s so

closely connected with Section

24 of

t h e

Bi l l tha t

my

views will

b e

expressed

i n

connection with that section.

SECTION

23 OF THE

BANKING

ACT OF 1932,

with regard

t o

oaths

o f

s tockholders .

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FEDERAL RESERVE BANK OF ATLANTA


Washington,

D. C . - 6 -

This amendment i s also so c los ely connected with Sec tion 24

of the Bi l l tha t my views will b e expressed in connection with that section.

SECT 1017 24 OF THE BACKING ACT OF 1932, r e l a t i v e to the voting

r i g h t s of nat ion al banks' stock held by a f f i l i a t e s .

The prov is ions of Sections 22-, 23 and 24 would, in my

opinion,

be so

o bj ec ti on ab le t ha t many na ti on al banks would conve rt into

non-member St a t e ban ks, the reb y weakening bot h

t h e

national bank system

a n d t h e

Federal reserve system,

and

state bank member would withdraw from

membership, thereby further weakening t h e System.

SECTION 25 OF THE BANKING ACT OF 1932, amending paragraph (c )

o f Section 5155 of t h e Revised Statutes with respect to branches of

national banks.

Because of the short time which I have ha d to study t h e

provis ions of th is sect ion , I am n o t prepared to express an opinion a t

presen t .

SECTION

27 OF THE

BANKING

ACT OF 1932,

amending

t h e

f i r s t

two

sentences

of

Sect ion

5197 of th e

Revised Sta tu tes re la t ing

t o

in t e res t

charged by national banks.

I am in accord with this amendment.

SECTION 28 OF THE BANKING- ACT OF 1932, l i m i t i n g t h e r a t e o f

interest which member ban?cs a r e permi t ted to pay on deposi ts .

I do not favor this amendment f o r t h e reason that member

banks come in competition with non-member State banks which a r e n o t s u b -

j e c t to such res t r ic t ions wi th regard to in t e res t pa id on deposi t s .

SECTION

29 OF THE

BANKING

ACT OF 1932,

amending Section 5200

of the

Revised Sta tu t es , re la t i ve

to

l i m i t a t i o n s

of

loans

of

nat ional

banks

to one

person.

I

have

n o t

studied this amendment sufficiently

to

express

an

opinion a t this t ime.

SECTION 31 OF THE BANKING ACT OF 1932, amending Section 5211

of the Revised Statutes, by adding a new paragraph requ ir in g rep ort s of

a f f i l i a t e s of national banks.

I am in favor of that par t of this amendment which requires

a f f i l i a t e s t o render reports t o t h e Comptroller o f t he Currency, bu t I

am n o t in favor of r equ i r ing an a f f i l i a t e to publ i sh i t s en t i r e po r t fo l io

when indebted

t o t h e

bank

in

excess

o f 5$ o f i t s

c a p i t a l

and

surplus.

SECTION 32 OF THE BANKING ACT OF 1932, amending Section 5240

of the

Revised Statutes,

by

adding

a

paragraph relat ing

t o

examination

of a f f i l i a t e s of na t iona l o r member banks.

X-7077

* - 1

1-29-32

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I 93

FEDERAL RESERVE

BAM OF

ATLANTA X-7077

f - 1


Washington,

D. C. - 7 -

I am in favor o f t h e amendment authorizing an examiner

i n

making

an

examination

of a

member hank

to

make

an

examination

of the

a f f a i r s

o f a l l

a f f i l i a t e s

of

such banks,

bu t I

be l i eve

the

pena l t i e s p resc r ibed f o r non-compliance a r e t o o severe.

SECTION 33 OF THE BANKING ACT OF 1932 provides f o r a d -

d i t i o n of another section 8A to th e Clayton Anti Trust Ac t .

I am n o t in

favor

of

this addi t ion

t o t h e

Clayton.

Ac t f o r

t h e

reason that,

in my

opinion,

i t i s

e n t i r e l y

to o

severe.

Yours very truly

(Signed) Oscar Newton

Federal Reserve Agent.

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t 95:

O P Y X-7077

g-1

FEDERAL RESERVE BANK OF CHICAGO

230 SOUTH LA SALLE STREET

January 25, 1932


Washington, D. C.

M r. Chester Mor ri ll , Secretary

Gentlemen;

I appreciate your promptness in sending u s copies o f the

Senate Bill l io . 3215, introduced by Senator Glass on January 21.

We a r e , o f course, disturbed by the p resen ta t ion of this

B i l l a t jus t th is t ime, par t icular ly wi th re ference t o t he radica l

changes which

i t

imposes upon

t h e

condit ions

of

membership

in the

Federal Reserve System

a nd i t s

reac t ion

on the

individual member

banks. The elimination from a pr ac t ica l s tandpoint of Government

bonds a s e l i g i b l e f o r borrowings from t h e Federal Reserve banks

alone seems very inopportune

i n

connection with

t h e

present Treasury

program, a s we a re convinced that a la rge proport ion o f the hold-

ings o f Government bonds b y banks a r e s o held because o f their

e l i g i b i l i t y .

We tr us t that act ion on th i s B i l l may be delayed until

a more opportune time and tha t t h e viewpoint of practical banking

may be heard.

Very truly yours,

(Signed) Eugene M. Stevens.

C h ,a i r m a n

EMS HH

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FEDERAL RESERVE RANK

OF

CHICAGO

k 95

TELEGRAM

240gb

Chicago J a n 29 252p

Meyer

Board Washington

Answering your request

f o r my

views

on

senate b i l l

521 5 my

primary

r e -

act ion

i s

that legislat ion proposing

so

much

of

radical changes

i n

conduct of banking structure i s exceedingly in-opportune during present

disturbed condit ions.

Believe i t wiser t o d e f e r any action whatever than insti tute fund-

amental changes just now. Applicat ion of theories proposed a r e so much a t

variance with actual and necessary pract ice i n operation growing out of

experience of practical bankers that would expect strong protest from

member banks everywhere

and

great ly lessen thei r des i re

t o

continue

mem-

bership i n system. Consider proposed b i l l would i n pract ice largely

des t roy ef f icacy

of

system

i n

what

i t wa s

es tab l i shed

t o

perform with

s t rong probabi l i ty of drastic weakening of national system by conversion

into state banks and otherwise minimizing i t s e f f i c i e n c y .

Believe passage would result i n p rac t i ce i n great contract ion i n

avai lab le fede ra l reserve cred i t and would be marked deflationary measure

a t th is t ime. Provi sion pr ohi bit ing making of collateral loans while bank

was borrowing on governments would i n practically every case completely

estop them from any use of such credit i n pr ac ti ce . Whatever may be

proper theory of bond secured currency, th e f a c t s a r e that p resen t ly and

usually, Federal Reserve credit

t o

members

i s

over

50

percent based

on

government bond borrowings.

Member banks have without question carried

th e

greater por t ion

of

th e

government fi na nc in g because

o f i t s

e l i g i b i l i t y

and if

dependent only

on

markets

f o r

l iquidity would without doubt greatly decrease their

present holdings. Furt her ,

by

reason

of

great amount

o f

public

f inancing

by

corporations since enactment

of Ac t ,

percentage

of

e l ig ib l e

paper offered t o member banks a nd in the i r po r t fo l io s h a s g r e a t l y d e -

creased. The f ive principal banks i n City of Chicago on last call showed

about 24% of deposits invested in U S bonds and l e s s than 6<f

0

thereof i n

el ig ib le paper and acceptances, and i t i s probable that average o f a l l

member banks i n this dist r ict would n o t b e over 10$ to 15 of deposits

i n e l ig ib le paper .

I n seek ing l iqu id i ty t o replace their government bonds, which

would become

i n

p rac t i ce ine l i g ib l e

a n d f o r

substitute employment

of

thei r

deposi t s ,

of

which

so

small

a

proport ion

i s

required

i n

commodity

tr an sa ct io ns , tempt ation would

b e

a lmos t i r r es i s t i b l e

t o

employ them

on

c a l l money markets aga ins t s e cu ri t i es , thus di re ct ly def ea tin g purposes

aimed

a t i n

proposed bi l l .

Prov is ion f o r t e n bank joint borrowing on ineligible paper would

only be used i n extreme emergency and in very few cases and trould not be

eff icacious except ing t o very limited degree i n extending federal Reserve

cr ed i t . More pr ac t i ca l extension of such credit i n emergency could b e

eff ect ed wi thout v io la t io n of p r i n c i p a l of e l i g i b i l i t y and bas i s of

currency issue by extending maturity of el ig ib le paper from nin ety days

t o s i x months, possibly with penalty rate, to banks individual ly as a t

X—7077

G-2

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— £

X-7077 , 9 0

G—2

presen t .

Bill seems

to be

drawn

on

assumption that

a l l

securi ty loans

a r e

specul at ive loans. Truth i s that very great proportion thereof a r e

ent irely legi t imate banking service with no relat ion whatever t o

speculat ive purposes. I n my per sona l opinion perhaps be st index of

s t r i c t ly specu la t ive loans a r e those made t o ind iv iduals b y stock brokers

through their margin accounts, which

i s a

form

of

banking business

in no

way under di r e c t government re gu la ti on . I f specu la tors ha d to make

th e ir in div idu al loans with th ei r banks di re ct in stea d

of

brokers,

speculative tendencies would b e greatly checked i n t imes of i n f l a t i o n .

Do not th ink essen t ia l s t rength o f federal reserve hanks should

b e

impaired

b y

co ntr ib ut ion s from surpl us

t o

l iqu idat ing corporat ion ,

n o r

t ha t t he i r e f f i c i ency i n their present responsible funct ions and thei r

standing i n communities which they serve b e impaired b y their undertaking

management

of

l i q u i d a t i n g

and

consequent forcing collection

of

a s s e t s

of

closed banks. Am i n sympathy with some regulation and examination of

a f f i l i a t e s and cu rb ing the i r ac t iv i t i e s i n merchandising of stocks bu t

consider proposed regulat ions al together

t o o

d r a s t i c

a t

th i s tim e. This

a lso appl ies t o certain regulations imposed on group and chain banking

systems. Consider fa vo ra bl y some re vi s io n

of

legal reserves

on

time

deposits upward b u t should be accompanied b y a carefu l considera t ion of

e f f e c t of increased aggregate reserve deposits i n federal reserve banks.

Without commenting specifically

on

other proposed changes from

pres ent r eg ul at io ns , recognize some provis ions worth favo rabl e consider a-

ti on . Also recogni ze attem pt t o apply certain economic theories b u t

strongly believe some

of

them

a r e n o t

only untimely

b u t

proposed methods

of app l i ca t ion a r e impract ica l i f n o t impossible.

Eugene

1,1.

Stevens.

427p

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FEDERAL RESERVE BJEK OF CHICAGO

I 97

TELEGRAM

X-7077

G-S

194gb

Chicago Jail 29 1255 p

Moyer

Board Washington

I n response t o t h e request contained i n your telegram 26th instant f o r

an

expression

of my

views concerning Senate b i l l

No 3215

upon

due con-

s ide ra t i on I submit t h e following:

The

provis ions

of

th i s b i l l would s t imula te d i ssa t i s fac t ion

on

th o pa r t of member banks, would result i n withdrawals from t h e system,

and

would remove

t o a

largo extent

t h e

incent ive

f o r

other banks

t o b e -

come members.

The

cap i t a l s t r uc tu re

o f the

Fe de ra l Reserve System would

b e

seriously impaired through t h e appl ica t ion o f 25% of i t s surp lus t o supply

cap i t a l f o r t h e suggested Federal Liquidating Corporation, and t h a t p r o -

vision under which future excess earnings of Federal Reserve Banks would

reve r t t o t h e sai d co rpo rat ion would leav e t h e Federal Reserve Banks

without

a n y

means

of

res t or in g th ei r surplus accounts : This

i n t h o

face

of poss ib le losses and other charges t o t h e surplus which in tho natural

course o f events a r c bound t o occur a s time goes o n . Without que sti oni ng

t h e neces s i t y o r a d v i s a b i l i t y of est ab lis hin g some orga niza tion of tho

character described I f i rmly bel iev e that i t would be a serious mistake

t o impose upon t h e Federal Reserve Banks t h e obl iga t ion t o supply an y part

o f t h e necessary capi ta l o r t h e respons ib i l i ty involved i n t h e management

and operat ion of any such corporation. The compulsory subscriptions f o r

t h e cap i t a l of tho proposed corporation imposed upon member banks would

na tu ra l l y b e resented.

The re s t r i c t io ns imposed on loans made by member banks, basis

co l l a t e r a l s ecu r i t i e s , impres s mo as unduly severe and would impose a n

i n j u s t i c e on a cl ientele which i s man i f es t l y en t i t l ed t o reasonable credit

acc ommodat ions•

Tho

b i l l express ly proh ib i t s

the use o f

member bank's promissory

notes secured by Government bonds a s c o l l a t e r a l f o r Federal Reserve notes,

and

t h i s

in my

opinion would ser io us ly impair

t h e

a b i l i t y

o f the

Federal

Reserve System t o func t ion i n t h e mat ter of meeting demands f o r currency.

The proposed penalty rate on loans t o member banks supported b y government

securities would impose an un jus t and serious hardship upon those member

hanks which, i n t h e absence of an adequate supply of el igible paper, have

purchased government bonds f o r t h e express purpose of borrowing on them

i f

necessary.

I

be l i eve

t h o

Federal Reserve Banks should

no t be

denied

t h e

r ight , wi th in reasonable l imi ta t ions , t o engage i n open market operations,

which would

n o t b e

permissible under

t h e

sweeping provisions embodied

i n

th e b i l l .

There

a r e

some other objectionable features which would make

f o r

dissat isf ied membership, and al so some fav ora ble pr ov is io ns . Viewing the

b i l l a s a whole, i f enacted into law, I be l ieve t h e results would bo

des t ruc t ive ra ther than cons t ruc t ive .

The

a b i l i t y

o f tho

Federal

Reserve banks t o funct ion, even i n normal times, would b o s e r i ous ly im -

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L

- 2 -

%-70?7

G-3

paired

a n d i t

would

bo

impossible

f o r

thorn

t o

copo with serious

emergencies,

as and

when they arise.

Under a l l circumstances, I f . o l tha t i t would bo extremely

unfor tunate

i f t h e

b i l l

a s

written should become

the l a w .

IicDougal, Governor.

234p

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X

" T l 1 9 9

federal Reserve Bank of S t . Louis

S t . Louis Jan 29

Telegram

Meyer - Washington

Experience shows that a s a ru l e "bad times make bad laws a n d i t i s des i r ab le to

make drastic changes only after most careful and unhurr ied consi dera tion , except

so f a r a s a n

emergency e x i s t s . Therefore

i t i s

suggested tha t only po rt io n

of

Glass b i l l re qui rin g immediate at te nt io n i s sect ion 12 "B" c rea t ing a Federal

l iq uid at ing corpo rat io n. This should b e covered i n a separa t e b i l l so that u n -

hurried considerat ion can be given to other port ions of b i l l . I t seems unwise

and u n f a i r t o weaken Federal Reserve System to requi re n e t earnings i n accord-

ance section 5 b e paid t o Federal Liquidating Corporation and have government

furn ish funds t o take care non member state banks. I t would seem better t o

have government furnish entire amount a nd no t c a l l on member banks f o r subscr ip t -

ions. As th is sect ion now wr i t t en , i t i s i n nature o f guarantee of bank

depos i t s , pu t t i ng on good banks t h e burden of car ry ing the ba d ones. Section 12

"A" creating federal open market committee and sect ion 14 proposing changes to

sect ion 14 o f Federal Reserve Act take away independent character o f twelve F e d-

eral Reserve Banks

and

make

a

central bank

of the

System.

I t

changes character

of

Federal Reserve Board from advisory

and

supervisory body

and

puts upon

i t t he

r e s p o n s i b i l i t y

o f

opera t ing

and in so

doing

i s

l i a b l e

t o

impair

i t s

jud ic i a l

balance. Section 1 7 , i nco rre ct l y p r in t ed sect ion 19 in senate b i l l , would i n -

crease th e amount of r ese rves tha t p rac t i ca l ly a l l banks would have to carry and

r e s u l t i n con t rac t ion of c r e d i t . I t would result i n a confusion o f t h e reserve

problem rather than helping i t s solu t ion . Sect ion 1 3 , placing higher rate on

15 day c ol la te ra l note s would work gre at ha rdship on many banks, large an d small,

who

have found

i t

more convenient

t o u s e

this method

o f

borrowing

f o r

agricul ture?

and

commercial purposes, especially

i n

emergencies when under this method

o f b o r -

rowing, they c a n forward t o Federal Reserve Bank and p ledge e l ig ib l e co l la te ra l

and then a s emergency develops send in 15 day note f o r such funds a s needed,

which we can sh ip by a i rp l ane o r method best suited to meet emergency. In st ea d

o f pena l i z ing 15 day note would be des i r ab le to au thor ize co l la tera l no tes of not

to exceed 90 days maturi ty . I n t h i s d i s t r i c t 15 day notes have enabled us to

render assistance i t would have been difficult to render i f l imi t ed en t i r e ly to

rediscount operat ion.

At

t hi s t ime pena l ty rat e

on

government securit ies

and

sect ion

1 5 ,

proh ib i t ing co l la tera l no tes secured

by

government bonds

a s

securi ty

f o r federal reserve notes, unfortunate a s i t will discourage purchase o f govern-

ments, a s wel l a s reducing note issuing power of re se rv e bank. Third parag raph

sect ion 15 and fourth paragraph same section would seem to l i m i t u s e o f gold a s

reserve. Sect ion 19 forcing nat ional banks t o have capital setup n o t less than

15 percen t o f t h e i r d e p o s i t l i a b i l i t i e s i s good pro vis io n. This b i l l a s i t stands

might force so many member banks, national and s t a t e , o u t o f t h e system that the

system would cease to e x i s t . I t i s a deflat ionary measure.

Martin

203p

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1

FEDERAL RESERVE BAtiK OF ST. LOUIS

X^-7077

TELEGRAM H - 2

214&>

S t .

Louis

Ja n 30 1216p

Meyer

Washington

Generally

t h e

l oca l r eac t i on

t o

g l a s s b i l l

h a s

been unfavorable .

I t i s

bel ieved

t h e

i n t e n t

o f the

b i l l

i s

good

and

t ha t

th e

committee

was

prompted

by a

des i r e

t o

keep

t h e

f ed er al res erv e banks l i q u i d , improve

t h e managements o f t h e member banks and make funds of depos i tors sa fe .

The fundamental error of committee lies i n i t s seeming be li ef th at a

l eg i s l a t i ve formula w i l l i n i t s e l f produ ce good bank management# There

must

b e a s

many good bank management

a s

there

a r e

banks, otherwise banks

will continue t o close and deposi tors wi l l cont inue t o lose money. The

b i l l

h a s n o t

at tempted

i n a

d e f i n i t e

way to

provide

f o r

removal

of bad

bank

managements, Se ct io n thr ee docs charge Fe de ra l Reserve Banks wit h infor m-

i n g themselves a s t o loan and investment policies of member banks and em-

powers Federal Reserve Board t o suspend o ff en di ng members f o r o ne year from

t h e u s e o f c r e di t f a c i l i t i e s of syste m. This h a s value b u t w i l l n o t r e su l t

i n permanent change of bad p o l i c i e s . The only way to change bad po l i c i e s

i s t o change management. Power should bo lodged i n some body, either

Federal Reserve Board o r some special group t o remove b ad management p r o -

vided bank directors cannot b e persuaded t o remove them st op Se ct io ns f i v e

and twelve B should b e el iminated an d t h e organizat ion of federa l l iquida t ing

corporat ion handled separately a s emergency legis la t ion. Any such a i d a s

proposed should b e extended b y government both a s t o t h e member and non-

member banks step t h e s ec t i ons r e l a t i ng t o cont ro l of a f f i l i a t e s a r e i n a

number o f respec t s imprac t ica l . I n some respects they a re a l l r i g h t . The

comptroller should b e given power o f supervi s ion over na t iona l a f f i l i a tes

and of co r r ec t i on i n t h e same degree a s I n case of Nat ion al Banks. Fed eral

Reserve Board should b e given t h e same power i n r e spec t t o state members

except correction could only extend t o f o r f e i t u r e of membership i n System.

Investment af f i l i a t e s have su ffe red such lo ss i n prest ige that thei r value

t o thei r banks h a s been gr ea tl y decreased stop Section s i x requi res

state members t o comply with a l l t h e requirements o f t h e a c t appl icable

t o Nati ona l Banks. Might t h i s b e construed t o include examinations b y

National Bank Examiners thereby nullifying exception provided i n paragraph

seven Section nine o f t h e a c t stop Sec tio n eig ht should b e discarded stop

Soction nine i n i t s pr es en t form would re nd er i t d i f f i c u l t f o r a member bank

t o func t i on i n a ce nt ra l reserve ci ty s top Sect ion t e n should b e discarded

s top Sec t ions th i r t e en and f i f t een d i sc r imina t e un jus t l y aga ins t a proper

farm of member bank borrowing. P r a c ti c al ly a l l o f t h e reserve ci ty banks i n

e i g h t h d i s t r i c t v o l u n t a r i l y u s e co l l a t e r a l no t e f o r borrowi ng bo th with

Governments and e l ig ib le paper a s c o l l a t e r a l . Also many coun try member banks

f ind

i t a

more convenient form

of

borrowing.

I f

permit ted

f o r

ni ne ty days with e l i g i b l e pape r most member banks would p r e f e r i t stop

Sect ion f i f teen contains reserve requirements

f o r

Federal Reserve notes

th at would unduly r e s t r i c t currency opera tions stop Sectio n six te en

i s a

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101

- 2 -

X—7077

H-2

disappointment i n i t s f a i l u r e t o attempt t o sc ient i f i ca l ly change reserve

requiremen ts sto p Sect ion Seventeen attem pts

t o

make r e a l e s t a t e loan s

s a f e r f o r member banks b u t i t s provis ions a r e s o involved a s t o render t h e

s e c t i o n d i f f i c u l t f o r prac t i ca l opera t ion i n member banks. I t i s quest ion-

able i f commercial bank s shou ld b e permitted t o make real estate loans.

I t

might

b e i n t h e

i n t e r e s t

o f

safer banking

t o

withdraw

t h e

p r i v i l e g e

and

permit banks a per iod o f say three t o f ive years t o dispose of such loans

now held stop Sec tio n nin ete en might i n t h e i n t e r e s t of l i b e r a l i t y t o

smaller unit banks be changed from fifteen pcrcentum t o twelve and one

half percentum.

Wood

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C 0 P Y

FEDERAL RSSESVE BAM OJ* MllfiTBAPOLIS

T E L E G R A M

213gb

Minneapolis Jan 29 1230p

Eugene Meyer,

Washington

After personal ly s tudying S F 3215 in d e t a i l and analyzing i t

paragraph b y paragraph i n conference with o ur o f f i c e r s we are of

t h e opinion that t h e bill would b e des t ruc t i ve o f the membership

of this bank f o r reasons here inaf te r c i t ed .

With

t h e

c r i t i c i s m s

and

comments

i n t h e

ana lys i s

of Mr.

Walter

Wyatt,

we

unanimously

an d

emphatically agree,

b u t

des i r e

to add

t h e following supplementary comments.

The burdensome capital stock and reserve requirements could

not be met by the

rural members

of

this bank

who are

numerically

i n t h e

great majori ty, without heavy sell ing

of

governments

and

o the r s ecu r i t i e s

t o t h e

i n ju ry

o f th e

bond market.

The

provis ions

f o r t h e

increase

o f the

gold cover

f o r

federal

reserve notes

i s a

fur ther def la t ionary inf luence .

Section

3 i s

impract ical

and so

r e s t r i c t i v e t h at

i t

would

drive

o ur

more important member banks

out of

membership.

Section

4 i s

highly dangerous

and

u n f a i r .

I t s

p r ac t i ca l

effect would

be to

deprive

one

t h i r d

o f t h e

member banks

in our

d i s t r i c t h o l d i n g

two

t h i r d s

o f the

t o t a l member banks depos it s

from voting i n t h e e lec t ion of di rectors , whi le a t t h e same time

compelling them to remain stockholders.

Section

9 i s

ambiguous

and

unsound

an d

would work hardship

on

member banks while permitting discrimination between reserve

d i s t r i c t s .

I n

t h i s

and

other sect ions

t h e

word

11

Collateral

11

i s

very

loosely used

and

should

b e

spec i f i ca l l y de f i ned .

In

t h i s d i s t r i c t

collateral means warehouse receipts

on

a g r i c u l t u r a l

and

other

commodities, bi l ls

of

lading, chattel mortgages

on

l i v e s t o c k

and

a s

writ ten this section would seriously injure important l ive-

s tock and ag r i c u l t u r a l i n t e r e s t s .

Section

10 i s

unworkable

and we

doubt

t h e

neces s i t y

o r

d e s i r a b i l i t y of any such group action.

In

regard

t o

sect ion

12,. we

recommend that there

be no

change

i n t h e

procedure

o r

operat ions

o f tho

present open market committee.

Section

12 B i s

impractical , unwieldy, unfair

t o

member banks

an d

would involve

t h e

system

i n t h e

l i qu ida t i on

of non

member banks

over which

i t h a s n o

j u r i s d i c t i o n .

I n t h e

l i g h t

of our own

experience

we

doubt

t h e

a b i l i t y

of

such

an

organiza t ion

to

make

a

p r o f i t

or of

member banks to obtain any re turn on their stock investment under a

l iquidation charge which i s l imi ted t o s i x percent and i f i n t en t of

t h e

sec t ion

i s

s t r i c t ly fo l lowed.

X-7077'

± 0 2

1 - 1

7/17/2019 frsbog_mim_v36_0058.pdf


- 2 -

x

7

n 103

We "believe a l l t h e ob j ec t s of this sect ion can h e be t t e r

a t t a i n e d b y t h e reconstruct ion corporat ion al ready s e t u p .

We s t rongly object t o sect ion 13 which would handicap this

bank

in

many cases where

i t

much p re fe rs

to

take

t h e

promissory note

o f a

member bank

t o

red i scount ing

i t s

paper.

As to

sec t ion

14 G> we

bel ie ve that

a l l

agreements, formal

o r informal, between any Federal Reserve Bank o r banks and any

foreign bank o r bankers, should b e under t h e control o f t h e Federal

Reserve Board and that there should b e a provis ion of law to th i s

e f f e c t , b u t a s wr i t t en , t h e sec t ion i s r e s t r i c t i v e t o t h e po in t o f

absurdi ty.

We disapprove o f t h e amendments o f sec t ion 15 and sec t ion 16

of the Federal Reserve A ct which would increase t h e gold cover f o r

Fed era l Reserve no te s, which under pr es en t co nd it io ns would

b e

embarassing.

We are

strongly opposed

t o

provis ions

o f

sec t ion

16

r e c l a s s i f y -

i n g

member bank deposits

and

increas ing

t h e

provis ion

f o r

reserves

a a unduly burdensome upon member banks, e spec i al ly under pr e se nt

condi t ions , and l i k e l y t o force many o f them out of membership.

Section 17 i s very unfai r and dangerous t o country banks

long on farm re al es ta te loans and discriminates against them and

i n favor o f competing non member banks. I t evident ly intends to

throw safe-guards around t h e segregat ion o f t h r i f t an d time deposits,

b u t a s drawn i s incomplete and ambiguous an d would result i n great

confusion in case of inso lve nci es. This sec tio n would li mi t t h e

investment i n l o t an d bu i l d ing of a new bank to 15 percent o f i t s

c a p i t a l

and

surplus .

Section

18 i s

very object ionable

i n

tha t

i t

bars loans,

a s

well

a s

investments,

o f a l l new

corporat ions

f o r

f ive years

o f

the i r

exi s tence ,

and to any

exist ing corporation which during

t h e

f ive

years previous

h a s n o t

been able

to

consis tent ly maintain earnings

of

four percent

o f i t s

cap i t a l .

I t i s

impossible

t o

determine

t h e

percentage

o f

earnings upon

t h e

outs tanding capi ta l s tock

of a

corporation whose stock

has no

p a r value.

The provis ions of sec t ion 19 would require an unnecessary

increase o f approximately 35 percent o f t h e member bank capital in

t h i s d i s t r i c t , an amount impossible f o r them t o raise under present

con di tio ns. This would p u t many o f them ou t o f business o r force

them ou t o f membership an d with such increased capital large numbers

of

banks

now

experiencing very unsatisfactory earnings would

b e

p u t i n

such

a

pos i t i on

as to be

unable

t o

make

an

adequate return

on

t he i r cap i t a l .

The

provis ions

of

sect ion

2 0 a r e

unnecessary.

We

would

b e

concerned about

t h e

adoption

o f

sect ion

24 (B)

and {C)

because many

o f o ur

member banks

a r e

" a f f i l i a t e s " ,

a s

that

term

i s

used

i n t h e ac t , an d we

be li ev e tha t the se para grap hs would

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X-7077 1 0 4

1 - 1

r e s u l t

i n

these banks leaving

t h e

national banking system

and i% the

case o f state banks, membership i n t h e Federal Reserve System.

The b i l l i s very loosely drawn, contradictory i n some respects,

and as to some o f i t s provisions there i s serious doubt of thei r

c o n s t i t u t i o n a l i t y .

As to

sections regarding which

no

comment

i s

made, we a re in accord with Mr. Wvatt's comments and c r i t i c i s ms .

Mitchel l , and Geery.

333p.

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1 0 5


OF

KANSAS CITY

TKtBGftAM X-7077

J - l

278

Governor Meyer

Washington

I n response t o your telegram of the 26th th e following comments on Senate

B i l l

5215 are

submitted

as our

views, formulated after

t h e

necessar i ly

hurried study

of the

b i l l

and

af ter consu l ta t ion wi th o ther o f f icers

of

t h e

bank

and

with

o u r

counsel .

We ar e no t

making comments

on

those

p r o -

visions o f the proposed bill i n which we concur or to which we s e e n o p a r -

t i cu l a r ob jec t ion

a t

t h i s tim e. Throughout

t h o a c t i t

should

b e

made plain

just what

t h e

meaning

is of

such terms

a s

"Collateral loans" "Loans

on

c o l l a t e r a l "

e t c

sec t ion

3 :

We

bel ieve that

t h e

making

of a

normal volume

of

loans

on

stock

and

bond col lateral

i s a

perfect ly legi t imate banking

func t ion ,

and

that this fact should

be

recognized

by any law

designed

t o

curb t h e improper u s e o f member bank o r Fe de ra l Reserve Bank c r e d i t . This

section appears

t o

unduly res t r ic t

t h e

exercise

of

such fu nc ti on . Imprac tical

f o r


t o

keep currently informed

a s t o

loan

and

investment practices of member banks.

Section

4 : We a re i n

sympathy with such r e s t r ic t i on s

a s may b e

necessary

t o

prevent substan t ia l con t ro l

of


d i rec to r s b y branch, group o r chain bank Systems, but we do not believe

there should

b e

such

a

broad denial

of

r ep resen ta t ion

i n

e l ec t ions

o f

Federal Reserve Bank directors.

Sect ion

5 :

Such

a

d i spos i t i on

of

Federal Reserve Banks earnings

i s

contrary

t o t h e

s p i r i t

and

i n t e n t ,

o f the

Federal Reserve

Act , and

would,

i n

theory

a t

l e a s t , c u r t a i l

t h e

a b i l i t y

o f

Federal Reserve banks

t o extend credit i n time of need, and reduce t h e a b i l i t y t o p ay

dividends

t o

member banks during years when there

a r e n o

Federal Reserve

Bank profi ts .

Sect ion 8 : We thin k that o u r banking system, a s developed with

t h e

Federal Reserve System,

h a s

made obsolete

the o ld

plan

of

reserve

c i t y c l a s s i f i c a t i o n s #

We

bel ieve

th e

recommendations

b y t h e

Committee

on Bank Reserves should b o followed.

Sect ion 9 : This provi sion place s t o o much sjtmer and responsi -

b i l i t y

i n t h e


and

contains elements

of

danger

t o

t h e

system.

We

think

an y

legal provision

of

this kind should make

i t

plain

that there wi l l be no interference with any member bank which i s carrying

f o r i t s

customers

n o t

more than

a

normal amount

of

loans secured

b y

stocks

and

bonds.

I n

this connect ion,

we

think

i t

wel l

t o

mention that

t h e

proceeds

of

some loans

s o

secured

a r e

used

f o r

commercial purposes,

an d

tha t

t h e

proceeds

of

some loans, unsecured

o r

secured

b y

other

co l la tera l than s tocks

and

bonds,

may be

used

f o r

specu la t ing

i n

stocks

and bonds.

Sect ion 1 0 : We think i t i s wrong i n p r inc ip l e t o make Federal R e -

serve credi t avai lable

f o r

inelgiblo purposes

and on the

bas is

of

frozen

c o l l a t e r a l .

In any

event such

a

provision should

b e

safeguarded

b y

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106

~ 2 -

X—7077

J - l

l imi t a t ions

a s t o

amount

and

durat ion

of

advances

an d

provision that

the

Fed era l Reserve Board sh a l l have f u l l informa tion

a s t o t h e

purpose

o f

advance

a n d

nature

and

value

o f

c o l l a t e r a l

to be

pledged

b y

individual

banks before consent

i s

given.

We do n o t

believe that operations under

sueh

a

prov is ion

of law

would prove

to be o f

pract ica l value .

Sect ion 1 1 : Wo bel ieve t h e co l la tera l permi t ted f o r loans t o

aff i l ia tes under th i s sect ion should b e made more inclusive and should

sp ec if ic a ll y include conforming re a l est at e mortgages. I n this connection

some

of the

s t a t e s

d o n o t

s p e c i f y

t h e

character

of

investments which

may

b e

made

b y

savings banks.

Sect ion

1 2 : A : I t

occurs

t o u s

that in order

t o

f a c i l i t a t e

emergency action,

an

executive committee

o r

some smaller body than

t h e

whole committee should have power

t o a c t .

Th ir ty days app ear s

unnecessarily long period f o r Federal Reserve Banks t o accep t par t ic ipat ion .

Sect ion 12 : B: As stated under sect ion 5 , we ob ject t o t h e

pr inc ip l e

o f

such

an

employment

of

Federal Reserve Banks resources.

We

bel ieve fur ther that

t h e

Federal Reserve Bonks,

a s

managers

o f the

l iqu idat ing corporat ion

and as

c red i to r s

of

suspended banks would

be

placed

in an

anomalous position,

and

t h a t

i f

such

a

corporat ion

i s

establ ished

i t

should

b e

en t i r e ly separa t e

an d

apart from

th e

Federal Reserve System.

We

fu rt he r be li ev e t ha t compulsory assessment

of

member banks

f o r

stock

i n t h e

corporat ion

i s

improper

and

will tend

t o

drive members from

system.

Sect ion 15 : See no reason f o r a n y d i f f e rence i n r a t e o r other

d i f f e r e n c e s ,

i n

extending credit

on

member bank notes secured

b y

e l ig ib le

paper

and

extending credit flspugh. rediscount

o f

e l ig ib le paper .

As t o

member bank notes secured

b y

governments,

we

bel ieve

a

higher rate

p r o -

vis ion

i s

ob ject ionable

a t

this part icular t ime

and so

long

a s

banks

a r e

encouraged t o a s s i s t i n Treasury f inancing. The other provisions of this

sec t ion , i f taken l i t e r a l l y , would ser ious ly in te r f er e wi th a member

bank's normal

and

proper loaning operations,

an d a r e

much more drastic than

they need

b e t o

prevent abuse

of

Federal Rqserve Bank credit.

Sect ion

1 5 :

Beliovo

t h e

provision

of

this section making member

bank notes secured

b y

Government securit ies ineligible

a s

c o l l a t e r a l

t o

Federal Reserve notes

i s

ob ject ionable

a t

th is par t icu lar t ime

and so

long

a s

member banks

a r e

encouraged

t o

a s s i s t

i n

Treasury financing,

and

t ha t t h e provision l imit ing acceptances el igible a s c o l l a t e r a l t o Federal

Reserve notes t o those made against shipment of goods actually sold i n

t h e

fore ign t rade

c f the

United States

i s

also object ionable.

Sect ion

1 6 : We

bel ie ve that

any

r ev i s ion

o f the

reserve requi re-

ments should

b e a

complete revision which

i n o u r

judgment should

b e

based

on the

p r inc ip l es ca l l ed a t t en t ion

t o i n t h e

r epo r t

o f t h e

committee

on

bank reserves.

I t i s

pa r t i cu la r ly des i r ab le tha t

t h e

reserve requi re-

ment make proper allowances

f o r

cash

i n

v a u l t ,

t o

eliminate many

inequ i t i e s

now

existing between banks

i n

Federal Reserve

an d

branch

c i t i e s and banks located elsewhere.

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X-7077 1 0 7

J - l

The prov is ions o f paragraph C a r e n o t readi ly understandable * I f l i n e s 10 to

14 ,

page

3 7 ,

mean that

a

member bank shall

n o t

loan

to a

customer

who i s a t

t h e same time borrowing from an investment banker, broker, e t c , such a r e -

s t r i c t i o n

i s

unwarranted from

any

viewpoint.

I f

t h i s wording means th at

a

member bank da a l l n o t loan to a customer who is a t th e same time loaning to

an investment banker, broker, e t c , t h e prov is ion i s t oo a r b i t r a r y and compre-

hensive, since

n o t a l l

loans

to

investment bankers, brokers,

e t c , a r e

made

t o

f a c i l i t a t e s p e c u l a t i o n o r a r e o f such a nature that payment thereof can be

had on demand. Ce rt ai nl y a member bank should no t be requi red to take a

sworn statement every time

a

loan

i s

made

o r

renewed,

i n

order

to

avoid

a

v i o l a t i o n o f l a w . Paragraphs E and J a r e not cl ea r, Ihere should be no in -

terference whatever with t h e t r a n s f e r o f member bank balances through t h e

Federal Beserve Banks,

so

long

a s

such t ransfers

a r e i n t h e

usual course

of

business . The r e fe rence t o purchase o f other similar agreements should b e

ampl i f ied by definiSiba# I n this connection, i t might be advisable t o i n -

clude in the law t h a t a resource item representing a sa l e o f Federal Reserve

exchange shall

be

c l a s s i f i e d

a s a

loan.

Section 1 7 : There should be no f u r t h e r r e s t r i c t i o n of total amount

of

real estate loans which

a

member bank

may

make

and

such loans should

be

confined t o conforming re al e st at e loan s. To include bank premises and unse-

cured loans based on the value of r ea l e s t a t e would pl ac e many banks in a

position where necessary adjustments could

no t be

made within

two

years .

The p resen t l imi t a t ion s on conforming real estate loans t o five year terms and

to f i f t y p e r cent o f market value a r e such safeguards that there should be no

requirement

f o r

per iod ic revaluat ion

and

adjustment .

The

prov is ion

f o r

segre-

gat ing asse ts i n which time and t h r i f t d e p o s i t s a r e invested i s unsound in our

opinion. The prov is ions o f this section would, we be l i eve , be det r imenta l t o

t h e national banking system and force th e withdrawal of many member banks.

Section

18: The

provis ion l im it i ng investments

i n

bonds

and

secu r i -

ties other than governments and municipals to f i f t ee n percen t of c a p i t a l and

twenty five p e r cent of surplus would prove a tremendous hardship on many

member banks,

a n d i s , i n o u r

opinion,

an

unnecessar i ly

lo w

l i m i t .

The

p rov i -

sion that no member bank shall purchase o r hold any ob l iga t ion of any corpora-

t i o n f a i l i n g to earn four p e r cent on cap i ta l s tock f o r each of the preceding

five years

i s

a r b i t r a r y

and

unwarranted.

The

word "Ob lig ati on"

i n

t h i s

p r o -

vision might be held t o include current notes of the corporation, under a

s t r i c t i n t e rp re t a t i on . Far the r poss ib l e e f f ec t o f t he prov is ion i s t o deny

c r e d i t f a c i l i t i e s

o f

national banks

to new and

worthy corporations.

Section 1 9 : There i s such a v a r i a t i o n i n t h e s i ze of banks and the

nature o f bus ine ss handled, bot h between ind ivi dua l banks and between d i f -

feren t sect ions

o f t he

country, that

we do not

be l i eve

an

a r b i t r a r y r a t i o

of

capi tal funds to depos i t s can be made a p r a c t i c a l or an equi table provision

of law . In small and medium size banks operating expenses, including taxa-

t ion

on

bank shares,

a r e so

high

i n

r e l a t i o n

t o

maximum earning capacity that

a high rat io of deposi t s to capi tal funds i s necessary to a proper return on

t h e c a p i t a l . A l i m i t a t i o n o f th is k ind , cer ta i n ly one of f i f t e e n p e r cent ,

would

be a

decided hardship

on

many member banks

and

would undoubtedly bring

about withdrawals from t h e national banking system.

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• 108

- 4 " X-7077

j - 1

Soction

20 : We se o no

objec t ion

t o

permitt ing bank shares

t o

represent a proportionate ownership i n a f f i l i a t ed co rpora t i ons .

Sect ion 21 : The provis ion that an o f f i c e r of a member bank shall

not bo an

o f f i c e r

o r

employee

of a

se c u r i t i e s company should

be

qua l i f i ed

by except ing aff i l ia ted companies . Tho provis ion prohib i t ing a member

bank from performing t h e func t ions of a car responde nt bank on behalf

of securities companies should n o t prevent a member bank from accepting

deposi ts and performing ordinary bank services f o r such companies.

Sect ion 2 2 : Depriving a corporat ion o r holding company owning more

than t e n percent o f the s tock of a national bank of r i gh t to vote such

shares might drive a number o f national banks out of the system,

par t i cu la r ly where

a

ma jo r i t y

o f the

s tock

of

such bank

i s

owned

b y

hol din g company. This se ct io n

i s

also objected

to on the

ground that

i t

would deprive a t r u s t e e o r o ther f iduc ia ry of tho r i g h t t o vote stock

held

i n

t r us t e s t a t e .

Sect ion

2 3 :

Bel ieve

t h e

provis ion

i s

objec t ionable

i n

t ha t

i t

applies only t o sh ar eh ol de rs becoming such a f t e r March 1 , 1934 , a s share-

holders pr ior t o that date may continue ownership of stock of a f f i l i a t e

t h e

d i scr imina t ion

a s

against subsequent shareholders

n o t

based

on any

r a t i ona l d i s t i nc t i on .

Sect ion 24 : Our views a s t o th i s sec t ion a r e r e f l e c t e d i n

comments

on

Sect ions

22 and 23.

We consider a l l of t h e condit ions s e t f o r t h i n t h i s s ec t i on , f o r

obtaining a permi t , a r e proper, with t h e exception of subdivis ion E , which

appears t o o d r a s t i c .

Sect ion

2 8 :

Pr oh ib it in g payment

of

i n t e r e s t

on

deposi ts subject

t o check, which would apparently include bank balances, would place

member banks under a tremendous handicap i n comparison with nonmcoiber banks.

Member banks would

b e

prevented from ac ti ng

a s

depos i t a r i e s

f o r

s t a t e s

and

mun ici pal i t i es where s ta tu tes provide

f o r

payment

of

i n t e r e s t .

Soction 2.9: Paragraph A - Such a n arbi t rary provis ion does not

prescr ibe

a

proper tes t

f o r

c redi t r i sk .

Paragraph

B — Tho

a c t i v i t i e s

of on.

indiv idua l

o r

corporation other than

an a f f i l i a t e s h o u l d n o t deprive t h e individual o r corporat ion of the

b e n e f i t s of the exceptions t o soction 5200, i f they a r e otherwise

e n t i t l e d

t o

such benef i t s .

Paragraph C - The second paragraph of th i s subsec t ion i s ambiguous i n i t s

present form. See no reason why cash dividends should n o t b e used f o r

c a p i t a l i z i n g

an

affi l iate, with unanimous consent

of

s tockholders .

Sect ion 30 : Our views with reference t o t h e l a t t e r p a r t of th i s

sec t ion a r e contained i n comments concerning section 9 .

Sect ion

31 : Wo a re i n

sympathy with having re po rt s f i l e d

b y

a f f i l i a t e s , b u t b eli eve tha t th is provi sion would plac e na ti on al banks a t

a disadvantage a s compared with state member banks.

Sect ion

3 2 : We

think examination

of

a f f i l i a t e s

i s

d e s i r a b l e ,

bu t

question t h e reason f o r timing t h e per iod to two years .

Sect ion 33 : The provis ions of this sect ion appear to us t o be to o

f a r

reaching

an d

unreasonable

i n

th e ir terms. Some lo ss st ri ng en t

p r o -

vision should serve t o cor rec t t h e abuses aimed a t .

Hamilton and McClure

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1 0 9

C O P Y X-7077

FEDERAL HlSHRVH £AJ£ OP DALLAS k - 1

T 3 L E G JR A U



Received a t Washington, D. C.

209gb

Da l l a s 1201 p J a n . 30

Meyer

Washington

I n

compliance your wire January

26 we

have given

a s

carefu l cons idera-

t ion a s time would permit t o senate "bill 3215 and submit t h e fo l lowing. We

favor i n principle some o f th e purposes sought to be accomplished "by th i s

M i l ,

such

a s a

more effect ive control

of

sp ecula tion , "better sup erv isi on

and r e g u l a t i o n of a f f i l i a t e s , f i x i n g t h e p a r value o f member "bank s t o ck a t

one hundred dol lars e t c , b u t t h e b i l l appears t o u s t o b e loosely drawn and

ambiguous, entirely to o d r a s t i c i n i t s p rov i s i ons and ca l cu l a t ed t o dr ive

member banks from

t h e

system, thus jeo par diz ing both

t h e

r e se rve

and

nat ional

bank systems.

We

be l i eve

i t

should undergo ca re fu l con sid era tio n

and

over-

haul ing before i t i s enacted into l a w .

Sect ion 3 : We a r e i n sympathy with t h e pr in ci pl e t hat advances should

b e

made

f o r t h e

accommodation

o f

commerce, industry

and

a g r i c u l t u r e

b u t i n

o u r

judgment this section provides

f o r a n

unwarranted interference

an d

super-

v i s i on o f t h e a f f a i r s o f member banks. The sentence beginning on l i n e 7

page 5 and ending on l i n e 10 c a l l s f o r a procedure that would b e v e r y d i f f i -

cu l t f o r reserve banks t o succe ss fu l ly fo l low.

Sect ion

4 ;

While

t h e

general purpose

of

th is se ct io n racy

n o t b e u n -

des i r ab l e , i t would b e v e r y d i f f i c u l t f o r Federal Reserve Banks t o proper ly

construe a n d a c t under t h e l as t phrase o f the secti on extending from li ne s

two to s ix on

page

s i x .

Sect ion 5? Under ter ms of th i s sec t ion no federa l reserve b an ] : whose

surplus i s now or becomes below t h e statutory amount through t h e payment of

expenses and dividends o r l o s se s i n opera t ion and wri teoffs would ever b e

able

t o

r e s t o r e

i t . T he

surplus would become

a

d imini sh ing

sum and co n-

ceivably over a period of time t h e capi ta l s tock of a Federal Reserve Bank

could become impaired n o t t o mention t h e passing of d iv idends to member

banks,

Sec t ion 6 : Page I n l i n e s 4 and 5 member s t a t e banks a r e required

t o

comply with

a l l t h e

requirements

o f the

f ede ra l r e se rve

a c t

appl icable

t o national banks. In e f f e c t i t r epea l s t h e present provis ion o f the

Federal Reserve A ct that permits member state ornks t o re ta in the i r char te r

r i g h t s and statutory powers, such a s f iduciary powers . We doubt i f i t i s

intended

t o

deprive member state banks

o f t he

concessions which

a r e

permitted

than under t h e present l a w , b u t such appears t o b e t h e e f f ec t , neve r the l e s s .

There a r e other changes i n this section which we think should b e made b u t

we w i l l n o t burden this message with them.

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- 2 - x -770 7

11

Sect ion

9«

This

i s

p a r t i c u l a r l y

an

unwarranted effort

to

control

t h e operat ion of member banks . Reasona ble cor rec t iv e measures can "be in-

augurated and enforced without re so rt in g to this proposed drast ic regulat ions.

There a r e many member "banks y e t throughout t h e country that a r e ably officered

and supervised by capable boards of di re ct or s. These in st i t u t io ns would

resen t t h i s e f fo r t to thus regula te thei r af fa i rs end probably seek relief

by withdrawing from t h e system. I n this paragraph an d other sect ions of the

b i l l

t h e

word "Collateral"

i s

used

a s a

synonym

f o r

inves tment secur i t ies .

Inasmuch a s the re a r e many di f fe r en t kin ds of co l la tera l that fo rm t h e basis

of bank loans that a r e non speculat ive i n cha rac ter , such a s f o r example, .

b i l l s

of

la din g, warehouse re ce ip ts , ch at te l mortgages

and

other instruments

commonly hypothecated with banks to finance movements of crops and merchan-

dise, we think t h e b i l l should be corrected so as to c l e a r l y se t ou t t he

par t icu lar type

of

c o l l a t e r a l

t h e

f ramars

o f t he

b i l l

had in

mind.

Sect ion

10 : We do n o t

bel ieve that

any

necess i ty ex i s t s

f o r t h e

enactment of th is sect ion of the b i l l , Sit uat ion s demanding concert of

act ion

o n t h e

pa r t

of

banks

to

save

a

l oc a l i n s t i t u t i o n

can

best

b e

handled

by them i n t h e i r own way with such assistance as may be rendered by the

reserve bank of the d i s t r i c t i n accordance with existing law . The f a c t that

t h e note o f t h e group banks would n o t b e secured a nd no t e l i g i b l e a s c o l -

l a t e r a l

f o r

Federal reserve notes

i s a

fur ther ob ject ionable fea ture because

of the shortage of eligible paper which reserve banks now f r equen t ly e x -

perience.

Section

12 A: We s e e no

reason

f o r

snaking

a

legal body

ou t o f t h e

open market committee and hedging i t about with th o provisions contained i n

th i s sect ion . We bel ieve that th e a c t a s now in force gran ts t o t h e Federal

reserve board sufficient supervisory power i n that connection, a . t t he same

time reserving to the several federal Reserve Banks sufficient autonomous

powers to pr ot e ct them aga ins t any plan o r policy inaugurated b y t h e open

market committee which they may f e e l no t i n t h e i r own i n t e r e s t o r f o r t h e

welfare

of

the i r r espec t ive d i s t r i c t s .

Sect ion 12 B: While we apprecia te t h e motive ref lected i n t h i s s e c -

t ion an d o ther b i l l s hav ing substan t ia l ly t h e sane purpose, i t i s o u r f e e l -

i n g that the re i s no j u s t i f i c a t i o n f o r t h e creat ion of a l i qu ida t ing

corporat ion

in any

form.

The

deposi t s

of a

fai led bank

a r e

invested

in the

notes and o ther asse ts of that corporat ion . The l i q u i d a t i o n of these d e -

p o s i t s i n t h e long run can come only from collection o f t he a s s e t s and only

t o t h e

extent that they

may be

converted into cash.

The

a r b i t r a r y a n t i c i -

pat ion o f t h e co l l ec t ion of the a s s e t s by bringing funds from t h e outside

would tend t o create an a r t i f i c i a l o r in f la t ionary s i tuat ion local ly , wi th

poss ib le in jury to the community when t h e funds a r e withdrawn a s t h e asse ts

a r e

reduced

t o

ca sh . Furt hermore, when

t h e

proposed corporation lends

to

t h e receiver what would probably b e t h e maximum c o l l e c t i b l e valu e of the

assets , both t h e r ece iver a nd the community would r e la x t h e i r di li ge nc e i n

enforcing payment

of the

fai led banks notes.

I n

many instances depositors

committees have been of a s s i s t a n c e to r ece iver s i n c o l l e c t i n g a fai led ban: : ' s

paper. I n add i t ion t o t h i s , we do no t think that congress should attempt

to

force member banks

t o

make loans

and

inve st me nt s. Member banks

a r e

privately owned and should b e supervised b u t n o t d i r e c t e d i n their investment

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- 3 -

X-7077

k - l

111

p o l i c i e s .

We

bel ieve,

t o o ,

that

i n so f a r a s

Federal reserve "banks should

h e required t o subscribe t o t h e cap i ta l s tock o f the l iquidat ion corpn

i t would he an un jus t i f n o t unconst i tu t ional conf i scat ion of thei r

property

and a

step

i n t h e

d i r ec t ion

of

f r eez ing

u p

t h e i r

own

a s s e t s

and

impair ing their usefulness

a s t h e

r ese rvo i r s

of the.

reserves

of

t h e i r

d i s -

t r i c t s .

The

proposal hears some recemblence

t o t h e

guaranty

of

deposi t s .

Again, i t carries some o f t h e ev i l s of deposi t s i n a going hank, against

surety bonds of outsi de pu bl ic funds which a r e loaned local ly and which

when withdrawn often wreck both bank

and

community. Moreover,

t h e

measure

seems

t o

contemplate that

we ar e to

cont inue indef in i te ly

t o

have bank

f a i l u r e s

as we

have experienced them

i n

re ce nt months: whereas,

we

hope

and

expect that t h e t ime will f oon come when a suspension i n this country will

be an

unusual

and

ra re happening . Even

i f

th is sect ion

i s

sound

i n

pr inc ip l e

and

should

b e

enacted into

l a w i t

should

b e

r ewr i t t en, c l a r i f i ed

and

made more workable.

Sect ion 1 3 : There i s no j u s t i f i c a t i o n , in our opinion, f o r applying

to f i f t e e n d a y notes a r a t e of interest higher than t h e rediscount rate a t

t h e

res erv e bank.

The

best member banks

i n

t h i s d i s t r i c t

g e t

temporary

accommodation from

u s

under

a

f i f t e e n

d a y

note,

and we

have regarded t h i s

p rac t i ce

on

the i r pa r t

a s

evidence

of

conservatism

and

l i q u i d i t y

a s

well

a s c lose a t ten t ion t o t h e i r own a f f a i r s . We do n o t think that an y member

bank should

b e

required

to

borrow money

f o r a

longer period

of

time than

i t

reasonably needs

i t .

Sect ion

l 4 B: We

recognize

t h e

fac t that

t h e

federal reserve board

i s t h e counterpart i n this country a s near ly a s may b e of a foreign central

bank, and we agree that a l l r e l a t i o n s and t ransact ions o f t h e system and the

several federal reserve banks with foreign bancs should

b e

under

t h e

super-

vision

o f t h e

Board;

But we

wonder

i f t h e

amendment proposed does

not go

t o o f a r ,

with

t h e

re su lt th at fo rei gn banks would h e s i t a t e

t o

p a r t i c i p a t e

i n nego t i a t ions and conferences with t h e frankness and thoroughness that i s

desi rab le .

Section

1 5 : I t

would

b e

un fo r tuna te

a t

th is time par t ic u la r l y

i f

promissory notes

of

member banks secured

by

government obligations would

b e made inel igible a s c o l l a t e r a l to secure- fed era l re se rve notes. I n

recent months

t h e

Federal reserve banks have been noticeably short

on

col la tera l which

may be

pledged withthe agent,

ant

1

, t h e

el iminat ion

o f the

obligations mentioned would

add to

t h o i r d i f f i c u l t i e s .

The

recent expansion

in

fe de ra l re se rv e note s, inc re as in g about $1,200,000,000 over

t h e

amount

outstanding

a

year

a g o , h a s

shown that

t h e

demand

f o r

currency

i s n o t

always accompanied by corresponding demands f o r addi t ional reserve cred i t .

Sect ion

l 6 : F o r

some time

we

have f e l t t hat

no

di st in ct io n should

be

made

i n t h e

reserve requirements

a s

between tine

a n d

demand deposits,

and

the re fo re

we do not

d is favor that fea ture

of

th is sect ion :

But we do

think that a n y change i n t h e reserve requirements of member banks should b e

made only after thorough consideration

b y

proper committees

i n

congress

of

t h e

report recently made

b y t h e

special reserve committee

of the

system.

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x-7077

k- ,1

± 1 2

Section l 6 - C : Member banks a r e ju s t i f ie d f rom t ime t o time i n

making stock c ol la te ra l loan s

to

some

of

their customers, even

i n

talcing

u p loans previously held "by brokers and o thers end in l ine with our com-

ment upon other provisions

of the

b i l l

we

fe e l t ha t

t h e

in f l ex ib le ru le

s e t

f o r t h

on

page

37»

l i n e s

10 to 15 , i s an

unwarranted limitation upon

t h e

control

of a

bank

by i t s

o f f i c e r s

and

d i rec to rs .

I n

conclusion,

we may say

tha t

t h e

b i l l r ep resen t s

an

e f f o r t

t o

control member banks through detailed statutory regulations and evidently

grows

ou t of a

chapter

i n o u r

f i n a n c i a l

and

credit history which

may not

b e

repeated

f o r

many yea r s ; Rath er than

t o t r y t o

cover every feature

of

banking

by

s t a t u t e ,

we

th ink

a

much better plan

i s t o

c lo the

t h e

Federal

Reserve Board with

a

proper measure

of

general

and

f l e x i b l e d i s c r e t i o n a ry

powers which will enable i t t o meet t h e changing nature of our economic d i s -

turbances without imposing undue hardships

and

unwarranted super visio n

and

limitations upon member banks.

McKinncy,

and

Walsh

237P

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C O P Y

FEDERAL RES23VE BAM OF DALLAS

T E L E G R A M

65 gb

Dallas

Fe b. 2, 1025 a .m .

Meyer

Washington.

Supplementing

o u r

message

of

January thi r t ie th regarding Glass bi l l

we recommend th at se ct io n t h i r t y two page f i f ty n ine b e amended t o

provide

f o r

examination

of

a f f i l i a t e s

o f

state member banks

by

examiners appointed

o r

approved

by


The

b i l l

a s i t now

s tands apparent ly l imi ts

t h e

r i gh t

o f

examination

of

a f f i l i a t e s

t o examiners appointed b y comptroller of currency whereas i n ou r

opinion there would

b e

many cases

i n

which

i t

would

b e

des i r ab l e

and

impor tant tha t a f f i l i a tes o f member state banks b e examined by

Federal Reserve examiners. We the ref ore suggest tha t sect ion th i r t y

two be

amended

b y

i n se r t i ng

t h e

following clause

in

parenthes i s

immediately following

t h e

word examiner

i n

l i n e

t e n

quote Whether

he be an examiner appointed by t he Comptroller of Currency or an

examiner appointed

b y t h e


o r a

Federal Reserve

Bank unquote.

We

beli eve t hi s change high ly des ira ble

i n

order

to

expressly clothe Federal Reserve Banks with

t h e

power

to

examine

a f f i l i a t e s

of

both nat ional

and

member state banks.

McKinney, and Walsh.

X-7077

k-2

I204p

7/17/2019 frsbog_mim_v36_0058.pdf


1 1 4

FEDERAL RESERVE BAKE 0 ? SAN FRMCISGO

X-7077

TELEGRAM L ~ 1

236gfa

San

Francisco

J an 3 0

1234pm

Governor Meyer

Washington

Pending presentation other comments banking act of 1932 I would like t o

br ing

t o

your a t tent ion Sect ion

17

which

i f

adopted would se ri ou sl y a f f e c t

c redi t of Nat io nal Banks, Oste nsib ly purpose i s t o give preference t o

time

and

thrift depositors over commercial depositors

an d

other credi tors

of same bank# Unless d e f in i t e li mi ta ti on s a r e placed on ex tent t o which

such depositors may be preferred commercial depositors naturally would be

r e luc t an t

t o

patronize bank

s o

organized. Inte nt io n

i s t o

secure savings

deposi tors wi th capi ta l assets and commercial depositors with l iquid assets.

Under California Departmental la w t h i s i s ca r r i ed out by c rea t ing i n e f f ec t

under

one

cha r t e r

tw o

banks

one

engaging

i n

commercial banking having

separa te capi ta l and one engaging i n savings banking l ikewise capital ized

and

wi th r e s t r i c t i o n

a s t o

charac te r

of

assets which

c a n b e

ca r r i ed

i n

savings department, each department maintaining separate s e t o f books. I n

event of l i q u i d a t i o n no encroachment by c r e d i t o r s of one department can be

made upon ot he r depa rtment except th at re si du e

in one

depar tment , af ter

credi tors c la ims a r e s a t i s f i e d i s appl ied t o claims against other depart-

ment before any r e t u r n i s made t o s tockhol ders . Credi to rs of separate

departments a r e o n equi table basis wi th a l l o ther c redi tors of same

department just a s though, on e bank only ex is te d. Should se ct io n 17 become

e f f e c t i v e i t would seriously impair value of a national bank endorsement

which would result

i n

cur tai lment

of

amount

of

credi t obtainable

and

more

severe tes t appl ied t o paper which a national bank may o f f e r f o r discount

a t reserve bank o f correspondent bank. Pro vis ion s o f s ec t i on 17 also

would unfavorably react upon acceptances

of a

national bank.

Calkins

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