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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,

Federal Reserve Board,

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,

Federal Reserve Board,

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

Federal Reserve Board,

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,

Federal Reserve Board,

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,

Federal Reserve Board,

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

  Federal Reserve Board.

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

  Federal reserve bank

  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.

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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.

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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

  Federal Reserve Board

  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

  Federal Reserve Board

  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

Federal Reserve Bank

  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.

Federal Reserve Board,

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

  Federal Reserve Bank

  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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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

  Federal Reserve Board

  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

FEDERAL RESERVE SYSTEM

(Leased Wire Service)

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,

Federal Reserve Board,

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

  Federal Reserve Banks

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

  Federal Reserve Banks

  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

  Federal Reserve Board

  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

  Federal Reserve Board,

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

  Federal Reserve Board,

  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

Federal Reserve Board

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

  Federal Reserve Board

  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

  Federal Reserve Board,

  b u t

  that they

should

  b e

  sub ject

  to

  removal

  f o r

  just cause

  by the

  Federal Reserve Board.

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

Liquidating Corporation.

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FEDERAL RESERVE BANK

  OF

 ATLANTA X-7077

f k 8 9

Federal Reserve Board

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

  Federal reserve bank

  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

Federal Reserve Board

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

Federal Reserve Board

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

Federal Reserve Board,

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

Federal Reserve Board

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

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- 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

FEDERAL RESERVE BANK

  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

  Federal Reserve Bank

  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

  Federal Reserve Bank

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

  Federal Reserve Board,

  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

FEDERAL RESERVE SYSTEM

(Leased Wire Service)

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

  Federal Reserve Board.

  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

  Federal Reserve Board

  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

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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