OPERATION OF THE NATIONAL AND FEDERAL RESERVE BANKING SYSTEM WEDNESDAY, MARCH 30, 1932 UNITED STATES SENATE, COMMITTEE ON BANKING AND CURRENCY, Washington, D. C. The committee met at 10.30 o'clock a. m. in room 303, Senate Office Building, pursuant to adjournment on yesterday, Senator Peter Norbeck, presiding. Present: Senators Norbeck (chairman), Brookhart, Goldsborough, Townsend, Walcott, Fletcher, Glass, Wagner, Barkley, Bulkley, and Costigan. The CHAIRMAN. The committee will come to order. Senator GOLDSBOROUGH. Mr. Chairman, if it is in order, I should like to present for the record at this time the following telegram [reading]: PHILLIPS LEE GOLDSBOROUGH, Senate Office Building: BALTIMORE, MD., March 22, 1932. At a meeting held this date of all members of Federal reserve system in Baltimore, it was the unanimous opinion that the enactment of the proposed Glass bill is most inadvisable and highly undesirable at this time. CHARLES E. RIEMAN, President Baltimore Clearing House. Also a letter from Charles E. Rieman, president of the Western National Bank of Baltimore [reading]: Senator PHILLIPS LEE GOLDSBOROUGH, MARCH 22, 1932. United States Senate, Washington, D. C. DEAR SENATOR GOLDSBOROUGH: There is so much in the bill introduced by Senator Glass, of Virginia, as a revised edition of his earlier bill Senate 4115 that it is impossible to thoroughly trace out its consequences if enacted, so I can only attempt to present some of the salient features for your consideration. I wish to say, however, that this afternoon I called a meeting of the banks in Baltimore, which are members of the Federal reserve system, and the provisions of the bill were reviewed, with the result that, by unanimous opinion, it was held that it would be ill advised and undesirable to enact the bill at this time. I am inclosing you a copy of the resolution. Every phase of banking is sensitive enough now without imposing regulation by statute on banking practices, which are part of our national development and sound if not overdone or abused, but, when entirely prohibited by law, destroys the exercise of good judgment so needed to extricate the banking situation from its present condition. I refer to the new limitations on loans to the public and accommodations from the reserve banks; and, further, the drive in the bill against loans secured by stocks and bonds will surely depress the market for securities, if it becomes law. No matter what the ultimate aim of the provisions of the bill may be, values and credits are too sensitive 439 now to attempt radical regulations in our banking practices. (This does not preclude constructive legislation.) To refer specifically to the bill, I wish to say first that I have always admired Senator Glass in his determined stand for protection of the Federal reserve system, but he now offers numerous amendments to the Federal reserve act to use the Federal reserve system to correct evils which have been practiced by some member banks, but many have not. The bill contains no provisions to encourage membership in the Federal reserve system or check the tendencies which lead to loss in membership. From March, 1929, to December 31, 1931, the system lost 1,509 member banks, and if I am not greatly mistaken some of the regulations in the proposed act will accelerate the loss in membership and resources. All that part of the bill dealing with affiliates appears very complete to render them harmless, but it may be better simply to prohibit member banks from having affiliates at some future date when the country emerges from this present depression. The amendment to the Federal reserve act by inserting the new section 12–B, which creates the Federal liquidating corporation, I believe to be a very unwise provision. Such a corporation as it creates should not be incorporated into the Federal reserve system, and there are many provisions in connection with this that certainly are very undesirable on the part of well managed member banks. Section 24 regulates the amount of interest to be paid on deposits and this will absolutely work against the best interests of member banks. While the rates allowed appear to be ample at this time, yet the competition between State bank institutions and member banks have savings departments which pay over 3 per cent interest, and if the rate were cut to 3 per cent, millions of deposits may be expected to go over to the State nonmember banks, and this is no time for wholesale shifting of deposits; besides, the rate of interest on deposits is largely an administrative matter and not one to be incorporated into law. The amendment to section 24 of the Federal reserve act in reference to realestate loans and controlling the amount of investment in the banking premises, of course, has its merit for the future, but there are member banks at this time which would be very much embarrassed by this amendment, owing to the amount invested in their banking premises, and the effect would be very disastrous, as there is a very thin market everywhere in the country now for real estate of any size. The amendment to national bank act, section 5138, requiring national banks to place their shares on $100 par value within the period of two years is uncalled for now. While I believe the practice of splitting the par value of shares up for the purpose of advancing prices is wrong, yet the damage has been done in this respect, and the amendment should only prohibit reducing the par value of shares below $100 in the future. There are many national banks having shares of a par value of $10, $20, $30, and $40 which have been outstanding for over 50 years, and it would be very disturbing to the stockholders of these banks to make an adjustment, and many would be forced to sell their small holdings. The amendment to section 13 of the Federal reserve act discriminating against 15-day loans of member banks will be a great hardship on member banks for quick short-time loans for daily settlements, and it will also handicap the banks in participating in future Government issues. The amendment to section 19 of the Federal reserve act altering the rate of reserves against deposits certainly is one which deserves more study, and the regulation affecting the transfer of credits with reserve banks may serve a purpose at certain times and in certain localities, but ordinarily to handicap a bank in the free use of its excess funds at the seserve banks will unquestionably disrupt long-established practice between banks in settling their debits and the accommodation to their customers. The amendment to national bank act, section 5255, in reference to branch banking does not go far enough. If it is desirable that national banks can have state-wide branch banking in one State, it applies to all States, and if there ever was a need for branch banking it is now, which should be developed under Federal laws and not under State laws. This is the one item in the whole bill that is in the nature of constructive legislation but falls short of nationwide benefit. All of the above points will go a long way to discourage membership in the Federal reserve system, and all those requirements in respect to loans secured by stocks and bonds will have a serious effect, as stated above, on the market value of the securities. (The mere consideration of this bill has, no doubt, had an effect on the market.) The enactment of the regulations in this bill would cause such a disturbance in the banking relations at this time, when everything is at a high tension, that the effect would be very unfortunate. The inclosed resolution shows you how the Baltimore bankers regard the enactment of this bill at this time, and I trust that you will use your utmost efforts to prevent its passage. Very truly yours, CHARLES E. RIEMAN, President. BALTIMORE, MD., March 22, 1932. At a meeting held this date of all members of Federal reserve system in Baltimore it was resolved that it was the unanimous opinion that the enactment of the proposed Glass bill is most inadvisable and highly undesirable at this time. CHARLES, E. RIEMAN, President Baltimore Clearing House, Acting Chairman. Banks present: National Central Bank, National Marine Bank, First National Bank. Western National Bank, Balto-Commercial Bank, Baltimore Trust Co., Maryland Trust Co. Also a letter from Mr. Waldo Newcomer, of Baltimore [reading]: MARCH 21, 1932. Hon. P. L. GOLSBOROUGH, United States Senate, Washington, D. C. DEAR SENATOR GOLSBOROUGH: I thank you for the copy of the revised Glass bill, which I have read and think it is an improvement over the original. I would, however, like to call your attention to a few details, which may be all right in the bill, but I think should be checked. Page 7, lines 24 and 25: Should the words "or affiliate" be added? Page 31, line 3, section (f): What effect will this have on the practice in Baltimore where banks who are members both of the clearing house and of the Federal reserve clear for nonmembers of the clearing house and for clearing house members who are not members of the Federal reserve system? Page 32, lines 16 to 20: It looks to me like this provision was extremely wide. It would allow a Baltimore bank to make loans on real estate in South Carolina. Was this intended? Very truly yours, WALDO NEWCOMER. The CHAIRMAN. Our first witness this morning will be Mr. James Francis Burke, general counsel of the Pittsburgh Clearing House Association and a former member of the House Committee on Banking and Currency. STATEMENT OF JAMES FRANCIS BURKE, GENERAL COUNSEL OF THE PITTSBURGH CLEARING HOUSE ASSOCIATION, PITTSBURGH, PA., AND A FORMER MEMBER OF THE COMMITTEE ON BANKING AND CURRENCY OF THE HOUSE OF REPRESENTATIVES Mr. BURKE. Mr. Chairman and gentlemen of the committee, I wish first to present the formal resolution adopted by the Pittsburgh Clearing House Association on Monday, March 28, 1932, and ask that it be made a part of the record [reading]: Resolved, That we convey to the Banking and Currency Committee of the United States Senate and to the Members of the Senate and House of Representatives our earnest protest against the approval and enactment of Senate bill 4115, known as the Glass banking bill, upon which hearings are now being held by said committee. For the following and many other reasons we regard its enactment at any time, and particularly at this time, as unwise and unnecessary: First. The present agitation or enactment of legislation based upon the theory that our banking system is so defective in structure or so weak in resources as to justify the radical changes proposed in this bill, is certain to create apprehension at a time when assurance and encouragement are most needed. Second. The dissemination of any such disturbing theory during the present period of earnest effort upon the part of the Government and the business world to reestablish stability and confidence can not fail to nullify to a large extent the beneficial results of recent legislation brought about by the commendable cooperation of the executive and legislative branches of the Government and both political parties in the Congress and its prompt acceptance and approval by the banking and business world generally. Third. One of the fundamental purposes of the Federal reserve system being to decentralize authority and impose regional responsibilities upon those whose duty it is prudently to administer the banking business throughout the country, we believe it unwise to deprive the directors in the various Federal reserve districts of discretion and responsibility to the extent that this bill would do so. Fourth. We are convinced also that the unprecedented centralization of authority in the Federal Reserve Board at Washington is certain to weaken, rather than strengthen, the banking structure, in addition to being in direct conflict with the constantly increasing opposition of the American people to the further absorption of local powers and the assumption of purely local responsibilities by the Federal Government. Fifth. We believe that the curtailment of the present privileges of banks to use their funds in connection with transactions in securities is not only in conflict with normal and well-established methods of sound banking but will inevitably affect the marketability and value of Government securities and ultimately compel banks, in order to subsist, to resort to higher rates of interest on loans and lower rates of interest on deposits, and thus adversely affect business generally. Sixth. We believe that the restrictions made possible under the provisions of this bill, in the matter of ownership of securities by member banks, regardless of the time limit within which divestment must be made, creates such apprehension and uncertainty as inevitably to compel the sale of large volumes of securities at a time when further enforced deflation would seriously retard business recovery. Seventh. The result of increasing the reserves of member banks beyond their normally safe requirements, while adding nothing to the soundness of member banks, can not fail to be detrimental to business generally. Eighth. To abruptly enforce complete separation of affiliates by member banks would result in widespread liquidation of securities at a time when the market is not prepared to absorb them. This, in turn, would impose unnecessary losses upon holders of securities throughout the country. Ninth. Furthermore, to enact a law which would create uncertainty as to when such separation might be required would have a tendency to undermine confidence among member banks and inevitably induce them to divest themselves of securities lest they be suddenly called upon to do so at a more inopportune time. Tenth. The limitation of the right of national banks to own real estate or make real-estate loans, would not only bar many member banks from making many legitimate and safe loans on real-estate securities, but where banks are undercapitalized or carry a small volume of time deposits, it would compel calling in the loans now outstanding, and in some cases actually require banks to sell their bank premises and acquire or rent others. This would work hardship upon stockholders and borrowers alike and induce further disastrous deflation of real-estate and security values generally. Resolved, That a copy of these resolutions be presented to the Banking and Currency Committee without delay. Mr. BURKE. Inasmuch as this resolution practically traverses the points that have been made here by various witnesses who have preceded me I will not trespass upon the time of the committee for any extended statement, but for a moment I should like to say a word on two phases of this proposed legislation: First, on the question of the necessity for any such legislation; and: Second, on the question of its timeliness. I have a very deep-seated interest in the Federal reserve system. I have just as deep-seated an interest in the reputation and distinguished record of Senator Glass, with whom I had the pleasure to serve for many years on the Banking and Currency Committee of the House of Representatives and during the time when we were framing the Federal reserve law; likewise with Senator Bulkley, of Ohio. Senator GLASS. And incidentally you opposed it. Mr. BURKE. I did not incidentally oppose it. I opposed it as a main fact. I did oppose the original Federal reserve bill that was sent to us as members of the Banking and Currency Committee of the House and upon which we held on hearings in the committee. Senator GLASS. Oh, we held hearings for three months. Mr. BURKE. Yes; of course, subsequently we did hold hearings. But I opposed it at that time because there were vital features of the bill which I regarded as not constructive, not helpful to the banking interests or the business interests of the country. Senator GLASS. And which were written into the bill and were never changed. Mr. BURKE. Senator Glass, it is very true that there were many features of the original bill which were retained. At the same time there were many features of the original bill that were stricken out, and I will say that that bill was seriously modified as a result of hearings held in this very room. Senator GLASS. There were not many changes made. There were some dotting of i's and crossing of t's, but not a fundamental provision of the bill was changed. Mr. BURKE. Well, of course that is a matter of opinion, and you are entitled to your opinion, and I have great respect for it. Senator GLASS. No; that is a fact. It is not a matter of opinion, but a matter of record. Mr. BURKE. Be that as it may, the Federal reserve system has been in vogue now for a period of 19 years. Now, as to the question of necessity. To my mind it has grown to be the most efficient banking structure in the world. At the issuance of the last statement it had $5,342,000,000 of reserves. And now taking your statement alone, Senator Glass, that it was given very mature consideration by the Senate and the House at the time of its original enactment, let me say that the bill subsequently was rewritten in certain measures in 1916, when the 15-day rule was written into it, and it was subsequently amended Senator GLASS (interposing). You do not mean that it was rewritten but that it was amended. Mr. BURKE. Well, let us call it that; and it was amended in 1917, when additional changes were made, with the result that the Federal reserve act of to-day is not the outgrowth of the single impulse and the limited thought that was given to the original measure, but is the result of the experience of years, and of the devoted study of gentlemen like yourself. Now, in addition to that, I will say that the Federal reserve system has justified its existence. It has been a matter of open boast before the public of this country by your friends, Senator Glass, that it piloted us through the World War, that it rendered |