Central Bank

Central Bank

Strong, Benjamin, 1872-1928

WWP18420

1913 December 3

A proposal by Benjamin Strong Jr. for a central banking system.

Benjamin Strong Jr. Papers, New York Federal Reserve Bank

English

In order to place the question of a central bank properly before the Senate, it is essential that it be understood why a central bank has not been considered by the Democratic party at the present time. Has the establishment of a central bank been ignored because those on the House and Senate committees have been convinced that fundamentally it was wrong, and that economically it would not work in this country? No such reasons have ever been successfully advanced, and cannot be, because they do not exist. What then, has caused the central bank idea to be thrown upon the brush-heap? The Democratic platform that was written in Baltimore had as one of its provisions a plank opposing the Aldrich bill for a central bank, or possibly the Alrdrich bill or a central bank. No one in the Democratic party seems to know just which way the plank was intended to be drawn, and my worthy colleague from Oklahoma felt called upon, in making his presentation of the banking plan favored by him, to apologize for this lack of knowledge and to claim, but without proof, that his point of view, namely, that the plank opposed the Aldrich bill or a central bank, was the one really intended by those who drew up the platform. Upon what ground can a party which claims to desire direct primaries, even to the point of having the President of the United States elected by popular vote, uphold for one instant the forcing upon the people of a platform that they could take no part in constructing, that did not rest with a statement of general principles such as a platform is supposed to te:do: but, accepting for the moment, that the plank opposed a central bank that would seemingly tie the hands of Democratic legislators concerning a problem which had not been before the people, that they unquestionably knew nothing about, and that could not possibly have been considered in relation to its value to the country in the time taken by those who wrote the plank. The people of the United States, before whom this platform was presented, were in effect disfranchised, because, if they believed in a reduced tariff and a central bank, they were obliged to vote against either one or the other. They had no option in the matter. This being true, is it not fair and only right that the vote of the people which caused the election of our present Administration be analyzed in so far as possible, in order to find out whether the votes cast were for a reduction in the tariff or against a central bank? I do not believe that it is necessary to do more than sufggest this question, for I have no doubt that it will not be denied by Democrat or Republican that the uquestion of the tariff was the one upon which the people voted who cast their votes for the Democratic ticket. It may also be true that some voters were influenced by the plank opposing the Aldrich bill. But without regard to whether this plank opposed as well a central bank or not, the fact remains that this plank went out before the country in two ways, and more largely, as far as can be determined, in the form that did not oppose a central bank. It cannot be claimed, therefore, that the people who voted the Democratic ticket in November, 1912, opposed the central bank, even if it could be proved,- and apparently it cannot be, as only an apology is offered,- that the platform as written opposed a central bank, for the people, without consideration of the tariff for a moment, might have read the other version. This is a small part of the question, however, for what really concerns the people is whether a central bank is the thing that should be established in this country, or some other banking system: and I ask my Democratic colleagues, therefore, if they do not feel that their duty calls upon them to vote for a central bank for the United States of America, provided they are convinced in their own minds that such an institution is needed in this country, and that they should not allow themselves to be swayed by any juggling of a party plarform that may have been done, one way or the other, no one knows which, at some time during its prepafration. The question of a banking system in this country is not a party question, and should not be made a party question; and it is because I believe that the votes for a banking system will ultimately be based, not upon party prejudices or garbled platforms, but upon sound economic reasoning, that I have confidence in presenting a central bank plan that I am sure will convince all those who have studied this great subject sufficiently to understand it, that what this country needs, in order to accomplish all of the things outlined by the Senator from Oklahoma in his presentation of the bill which he favors, is a central bank.My confidence is the greater because the principles involved in a central bank plan are so thoroughly recognized by those who constructed the plan favored by the Democratic committee, that they have introduced into this plan the most extraordinary means of endeavoring to have a central bank without letting anyone know it that have ever been attempted in legislation. Some of these extraordinary measures I will call to your attention in detail later, and I think you will see that the plan recommended by the portion of the Banking and Currency Committee of the Senate headed by the chairman is nothing but a central bank with some of the most vital advantages of such an institution so bound up with red tape and what will prove expensive provisions, that it would faill down in its practical working and bring disaster upon the country.You will find, upon analysis of the bill, that the Secretary of the Treasury is given a power beyond that accorded the President of the United States, the King of England, or the Emperor of Germany, in his relation to the financial matters of the country. The Secretary of the Treasury, who is not elected by the people and whose personality is unknown to them when they elect the man who appoints him, is given such power that he could, of his own volition, in collusion with some banker, cause the failure of any regional bank, or of all of them, and could bring a panic upon this country, if he wished to abuse the power that he would have, such as has never been seen in the history of the world.We hear a great deal about how carefully the House went into this matter of examining bankers and others during a long period before the House bill assumed its final form. But it m,ust be borne in mind in this connection that all of those who testified before the House Committee were lead to believe and given to understand, either directly or indirectly, that whatever testimony they had to offer as to what this country might need, or as to what might be a desirable banking system, must not take into consideration the question of a central bank. This being true, is it any wonder that bankers who believe in a central bank and who know of nothing that could take its place, floundered around in their testimony and gave various and conflicting opinions in their attempts to think of something that might do in place of that which should be? Is testimony taken under such conditions of any value? As soon as the Committee in the Senate on Banking and Currency had shown, through their questions, a real desire to understand what the bankers thought might be best, and allowed them to freely state their opinions, even including a central bank, how quickly a central bank plan was developed, until. Even those on this Committee who seemingly still felt bound to pay attention to a party plank which was impossible of exact construction, attempted to build a central bank in such manner that no one would recognize it. They were unquestionably divided in their own minds between what they felt the country needed and what they feared their platform might have said. Therefore, with patriotism in their hearts, they endeavored to do the impossible, and embodiedy the principles of a central bank in a mongrel institution, rent within itself by regional competitive conditions.In the presentation of this bill reference is made to the Pujo investigation, which, on that account, needs brief consideration here. The Pujo investigation was a crime against the people of the United States, not because it was an investigation of those interests which were questioned, but because of the manner in which it was carried on. Never before in the history of this country has a Congressional committee deliberately muzzled itself in favor of any individual who was given such powers as were passed to the counsel for that committee. Such an investigation might have been made ewith the greatest of benefit to the country. Instead, as it was made it is a great disgrace. Our people were deliberately mislead into believing that conditions existed that were not proved, or attempted to be proved, and that they had no means whatever of checking up. The people of this land have a right to expect from Congress that only the truth shall be put before them as the result of Congressional investigations, and they are warranted in believing in the results of the investigations of Congress. Is it any wonder then that the people of the United States today feel the disgrace of such an investigation as was made by the Pujo committee? One man, not a member of Congress, was allowed to take testimony in an unfair way that would not be allowed in any Court of any civilized country in the world. The most brutal murderedr in the land, when on trial, can obtain a fairer hearing than was accorded any man who appeared before the counsel of the Pujo committee, even though such witnesses were supposedly there as citizens of the United States, called before their Congress in order to give information which might aid it in its deliberations, and nlot as criminals even by implication. No witness was allowed to answer any question beyond the point that the counsel for the cCommittee desired, so that no man who appeared before that counsel was able to make a presentation of any matter about which he was questioned that covered all of the facts, provided counsel for the committee did not wish all of the facts. One matter referred to by Senator Owen, that developed in this committee, was the question of interlocking directorates. There are such: there is no doubt of it. It may be a good thing fror the country that we have had interlocking directorates, or it may not. But counsel for the Pukjo committee did not attempt to prove a single case where interlocking directorates had worked hardship to any individual, and from the results of that hearing we do not know today, no matter what we may think, that the system of interlocking directorates as it exists in this country has worked to the detriment of the interests of the people. Instead, figures were placed before the country that fairly staggered those who saw them, and yet they were as far from giving a true conception of the facts as it was possible for them to be. Announcement was made far and wide that 180 men, through a system of interlocking directorates, controlled 39 billion dollars in values of the wealth of this country. Was the attention of the people called to the fact that many of these 180 men had never met and were unacquainted with each other? Was the attention of the people called to the further fact that there were between 1,700 and 1,800 other directors on the companies that these men were supposed to control? Was the attention of the people called to the fact that, of the companies supposed to be controlled by these 180 men, some of them were on the directorates in the relation of one to fourteen, or one to fifteen, or one to sixteen, or one to twenty, or two to sixteen, etc., etc., and that in those companies they had actually no control whatever? Was the attention of the people called to the fact that one director in a company, on a board with twenty directors, was claimed to control that board, not because he ever had controlled the board, not because he might have superior ability to the other members, not because he might have hypnotic power over the other members of the board, but merely because he happened to be a director orf some other company? The figures put out by the counsel for the Pujo committee were proved to be wrong in many instances, and in a way that was apparently intended to mislead the people. And yet this man, who in the name of Congress caused such false statements to be distributed to the people of this country, is even now being consulted as to what legislation shall be enacted. He was called to appear before the Senate cCommittee on Banking and Currency, after having brought disgrace upon the Congress of the United States, and asked to give testimony concerning legislation when he had forfeited his right to be given any consideration by the representatives of the people. His fitness to consider this banking matter was shown in his testimony, when he stated that, if the Bank of England wished to make its bank rate effective, it went out in the market and loaned money. Who ever heard of anything so absurd? Loaned money in the market in order to make it more scarce! Nothing further need be said about this matter. The investigation was full of fraud and unfairness, and it is referred to here because it seems to have had a bearing in the consideration of the banking and currency bill, judging from the remarks of Senator Owen in presenting the bill favored by his half of the committee.Before considering the caucus bill in detail, I will call your attention to some of the means that have been introduced in it in order to make it a central bank under cover, and to try to give it the effectiveness of such an institution, and will show you how childish and how futile they are, and how they can only result in needless expense and in surrounding our system with great and unnecessary dangers. Twelve regional banks (or possibly weight,- the number matters not) are to be established. This is the many-headed hydra that is going to prevent the people from finding out whetherthat the banking plank in the Democratic platform as construed by Senator Owen has not been lived up to. This hyrda is to defy all those who would claim that a central bank has been established. If in their efforts to bind these heads, those who drew up the bill had succeeded in making the animal as powerful for good and as economic as a central bank, I might vote for it. But, in spite of every endeavor to make the body run the heads, success has not attended their efforts; and therefore I oppose, in the interests of the people of the United States, the establishment of this creature of myth, and would let its bones rest in peace in the coming centuries behind us as aanother fairy story with its lessons to comigng generations.Before considering how these twelve regional banks are to be drawn togther, let us see what they would represent. We would probably have one in the manufacturinfg district of New England; another in New York City and its surroundings; one or possibly two in the cotton districts of the South; one or two, ofr more, in the wheat and corn districts of the middle west; and one or two on the Pacific Coast. No one of these regional banks could have a capital of less than $3,000,000, but altogether, based on the present National banking system, the capital is estimated to be $106,000,000. Equally divided among eight institutions, this wlould mean an average capoital of $13,000,000. But on account of the division of the banking capital of this country, the regional banks in the South would have a comparatively small capital, whereas those in New York and Chicago would have a much larger capital than the average. The regional bank situated in New Orleans might have a capital not to exceed $4,000,000 or $5,000,000, and yet it would be supposed to take care of a district in which cotton is grown, all of which matures within a few months, that would have a value of probably around $600,000,000. Is there any necesasity of showing by actual figures how impossible it would be for such an institution to protect its district to any appreciable extent? The figures speak for themselves. Money would have to be borrowed from other regional banks every season, and along lines that are not as truly economic as those which exist today. This regional bank wwhen borrowing from, say, the New York bank regional bank, would carry a more or less fictitious credit with it because of its being a regional bank, and it would be only natural that it should find itself able to borrow more from the New York regional bank than the average strength of its members might make reasonably safe. At present, individual banks in the South borrow of individual banks in the North, in order to market cotton. Loans are made, based upon the intimate relationships that have been established during years of mutual business. Loans made are based upon financial standing, personality, integrity and ability. The capital of the Southern banks is not sufficiently great to enable them to handle the immense values in cottomn that they are obliged to as a proper proportionate proposition. Consequently, it is only because of the close personal understandings between bankers in the South and in the North that it has been possible for them to obtain the credits necessary in order to protect the Southern people. There has been no discrimination on the part of the New York banks against Southern banks in the making of loans, except that ofdemanded by sound business judgment. If any system is established which makes such sound business judgment unavailable, it is going to result in disaster. Are the New York bankers going to be content to carry the reserves of their depositors, that they are now responsible for and will continue to be responsible for after the establishment of any regional banking system, in a regional bank in New York, knowing that such deposits may act as a base for the loaning of sums of money disproportionate to the substantial credit back of the collateral, upon the demand of a politically constituted board in Washington? It would not seem that any banker who appreciates his responsibility to his depositors could afford to take part in such a system. The viciousness of this proposition would be enhanced to a point where it might be justly claimed that New York bankers were not loving up to their responsibilities if they did become members of such a regional banking system, if the deposit insurance feature of the bill passes. Bankers would know that a false sense of security would necessarily surround such a system and that dishonest and incapable men would unquestionably enter the banking business, in the South as well as in other parts of the country, and they would know that many failures would result: and they could see that only a very small percentage of the liabilities of the failed banks might be met from the insurance fund, at least for many years to come. They would know that badly managed and dishonestly officered banks would be established almost immediately, in order to take advantage of the insurance sentiment, and that they would undoubtedly meet with disaster before the fund was built up sufficiently to be of any appreciavble protection. They would in effect be on notice that banks of that class would become members of the Southern regional bank, as well as other regional banks, that the paper taken by them would be held by the Southern regional bank, and that such paper would be turned over by this bank to the New York regional bank when the latter was compelled to loan to the Southern regional bank by the political board in Washington. And they would know that the New York regional bank might easily meet with tremendous losses if the Southern regional bank failed because of the bad banking that the insurance feature would encourage. What right would these bankers have to deliberately jeopardize the money of their depositors, in order to take part in a system in which they did not believe, even though they might for patriotic motives wish to be able to do so? Why is such a dangerous and incomprehensible system necessary? Only because the mobility that is inherent in a central bank could not be obtained in a system of regional banks unless some such power existed as that delegated to the Federal board, giving it authority to demand that one regional bank loan to another.It cannot be expected that eight regional banks, whose stock is owned by different interests, whose management has nothing in common, and whose business is confined to certain homogenous commercial territory, can be made to work together through the application of any superior power whatsoever with the same facility, smoothness and effectiveness that would be true in the case of a central bank with branches in the regional districts. It is inconceivable that it could be true, and the reasons why it cannot are almost too apparent to be worthy of consideration. Mobility of reserves does not mean bringing them together, but ability to transfer them, without loss of time or friction, from one part of the country to another. How can there be mobility of reserves between eight distinct institutions, each one of which must maintain its own reserve in its own vault, and which are situated in distinct districts many hundreds of miles apart? We have three central reserve cities under our present system, and in order to bring them together we are going to make eight central reserve cities. For business reasons, influenced by demand and supply and competition for profit, our three central reserve cities have been able to take care of the interests of this country under all normal conditions, even though at times there has been considerable strain. Because they have not been able to do so in times of stress, is one of the principal reasons why we need a new banking and currency system. Can it be expected that with eight central reserve cities, a politically constituted board can take the place of demand and supply and ordinary business reasons, and protect our commerce even in normal times? It is very doubtful whether such a transfer of natural power to unnatural power would work, even with our three present central reserve cities. It is unquestionably true, however, that, in order to even approach the mobility of reserves that exist in a cengtral bank, it is necessary to have some such binding force in the case of regional banks. This is the first of three great attempts to bind the regional banks into a central bank.The second is not as dangerous, but it is more pitiful. An advisory council is to be created, consisting of one member appointed by each regional bank. This council is to take the place of circulation in the hydra, and is to keep the Federal board in close touch will all of the business conditions that take place. It is to meet four times a year, so that its circulation may be said to be somewhat intermittent, even though letters and various information may be forwarded to the Federal board between meetings. Can it be expected that an advisory council so constituted, without power and without responsibility, can keep the a flow of information regarding conditions between the regional banks and the Federal board with sufficient understanding to be effective? Responsibility and power is what gives the necessary impetus to the human mind to make it comprehend conditions. Standing on the outside and hearing what is going on does not induce effective judgment. Its value might be likened to that of the man outside of the ball field, who sees the ball come over the fence and realizes that someone has made a home run, but his ability to stop the runner and save the game is not evident. In a central bank the arteries of information are the arteries of trade, of actual transactions, of daily contact with the business of the country, as seen through eyes which must render decisions based upon what transpires. The pulse of all the markets is felt at all times by those in charge, and not merely four times a year. There is no doubt but that some system of business information must be adopted in order to make it possible for a Federal reserve board in connection with regional banks to be able to operate at all, but how weak is any system in such connection in comparison with the information constantly before the board of a central bank, that is based upon actual commercial transactions and not upon casual conversations and maybe intermittent correspondence. The establishment of this advisory council, however, is merely ananother attempt to give the regional system one of the strong features of a central bank.The third great attempt to meet the requirements that would be covered by a central bank, is seen in the system of note issue. We are to have eight regional banks, each issuing circulating notes based upon their own standing. To be sure, these notes are to receive a fiat guarantee of the United States government,- fiat because the gold and collateral that the banks may hold against the notes does not belong to the Government,- and such guarantee is undoubtedly necessary in the case of a regional bank system. Some of these banks are going to have extraordinary demands made upon them at times, demands that they will have to meet, the way the law is drawn, whether they are able to do so or not, because every member bank will have the right to demand discounts up to a certain point, if it can put up the collateral, and, if the bank refuses to loan, the Federal board has the right, under the bill, to demand that the loan be made. These regional banks are to loan money, not upon business principles and needs, but based upon a percentage of stock owned by its member banks. This might be called a system of compulsory credit. Nothing like it exists in any civilized country of the world, nor ever has existed, so far as I know. There is abundant reason why the United States government should guarantee these notes under such circumstances. We cannot have the people discriminate against the bills of certain regional banks, as they surely would do if the guarantee Government did not guarantee them, even though such guarantee is a fiat guarantee that might require the making of a Government loan to carry out. In the case of a central bank, however, no such guarantee would be necessary. There would be no weak sisters. The reserves of its offices in every district would all count for the whole institution. They could be transferred from one branch to another to meet the requirements of trade, without influencing in any particular the reserve standing of the bank. TheAn attempt to bind the regional banks into some semblance of a central bank in relation to the note issues, lies in fact that the Federal board is to issue all of the notes and deliver them, through its agent, to each regional bank that requires them. In the case of a central bank, the circulating notes would be dealt out by the main office to its branches, and account kept of them. And tThis would seem to be the only reason why the Federal board is to pass over the notes to the regional banks. TheA central bank circulating note system is recognized as being economic and proper: thereforewhich is undoubtedly the reason there has been an attempt to copy it in respect to note issues: but this attempt has only been successful in name and not in effect. One of the greatest dangers of the whole system lies in this particular feature.and the way in which those who created the bill have endeavored to graft a central bank system upon the regional banks. To make this clear, consider the position of the chairman of a regional bank. He is directly interested in its management,- is, in fact, the active manager of a regional bank. He is largely responsible for the success of its operations, and its solvency must depend upon his ability and jusdgment. In order to bind this regional bank to the Federal board, in the regional bank system, this chairman is made the agent of such board. He has another office in his own regional bank, with possibly a vault in which he may hold gold and collateral, that, as chairman of the regional bank, he has turned over to himself as Federal agent for safe-keeping. He also has blank circulating notes uin this vault, which he is authorized, as Federal agent, to deliver to himself as chairman of the regional bank, when he, as chairman, hands to himself, as Federal agent, collateral that he has accepted as chairman and that passes his judgment as Federal agent.Suppose a man in the position aof chairman of a regional bank finds his institution in an insolvent condition. He would naturally be worried and fearful of the effect upon himself should the bank fail, as it would mean loss of position and loss of prestige. If he knew that in the course of a few days he had maturities that if paid would at least serve to tide him over for a while, he might be tempted to use the gold that he had under his control as Federal agent as security for the note issues of the regional bank, in order to hold up his bank. He might not have any more intent of defrauding thani is true in the case of so many who abuse trusts temporarily, with the full intention of making good later. If the gold so used did not serve to prevent the bank from going into bankruptcy, the United States government, having guaranteed the circulating notes, would be obliged to pay them, for the Federal reserve board, representing as it would a creature without assets or liabilities other than the gold and securities which its agents may hold for circulation, turned over by it, and bearing under the law absolutely no responsiblity whatever for its safekeeping, could not meet the notes. Such an occurence might distrupt the whole regional reserve system, for such confidence as the people may have had in them would be withdrawn at once. If during the operation of the system some credit had been built up among foreign institutions, it would be lost over night.These three attempts to make a regional bank system accomplish the things that are basic in a central bank would seem bound to fail and they are unsound in principle. Suppose a regional bank were called on by member banks for loans which they desired placed to their credit, that depeleted its reserve and made it necessary for the regional bank to make good its reserve. If it applied to the Federal board for circulating notes, how could it use these notes? The members who had borrowed of the regional bank did not ask for notes: they asked for credits. To be sure, they would undoubtedly draw drafts against these credits, and such drafts would be presented to the Federal reserve bank for payment. Could the Federal reserve bank meet drafts drawn upon it and make its settlements in the clearings, or direct, in Federal reserve notes? Even if it could do this, if those to whom the notes were delivered did not wish them, they could demand gold or lawful money of the regional reserve bank; so that the power to issue notes would be of no value to the bank under such circumstances.Having considered the three principal ways in which the regional banks have been drawn together for the purpose of endeavoring to give them the powers of a central bank, we will now turn our attention to another important feature of a central bank organization that there has been no attempt whatever to meet in the regional system. I refer to the ability of a properly organized central bank to protect the gold supply of a country. Regional banks may all engage in foreign exchange business. They may all have balances abroad, and may buy bills. They may all establish branches in foreign countries. Their division of standing and of power extends to the very last act possible in foreign exchange. And yet this is one of the most important functions of a public utility banking system. Has it been a mere oversight that this important feature of banking has not had attention? Very likely not. There is more reason to suppose that those who framed the regional bank system could not solve the problem, and consequently let it go by default. It is not to be wondered at that they did so, for there does not seem to be any way that the regional banks could be forced to deal with each other in foreign exchange that would be fair and satisfactory to them all, or that would give them the facility and power that would be true with a central bank. Even if some plan were thought out that would seem to make the transfer of foreign exchange, either purchased or held between institutions in times of stress, in such manner as would enable the exchange to be used for the protection of our gold supply, or to cause the import of gold, it would still be impossible to handle such balances economically and satisfactorily. The manager of the foreign department in each regional bank would naturally lay his plans to protect his own institution in so far as possible. He would have to regulate his own situation, based upon his ability to buy bills, his ability to carry them and dispose of them. With the managers of eight different regional banks in different parts of the country doing their foreign business along such lines, they might be using the best of judgment, as far as their own banks were concerned, and yet might be working against each other in such manner that, in case of emergency, the banks as a whole would be helpless. In a central bank, the manager of its foreign business could regulate his balances at all times as the occasion demanded, and could buy bills and hold them, and dispose of them, in an economic manner, and in a way that would serve to protect our gold supply to the greatest extent possible. Unquestionably the regional banks would make great losses in foreign exchange, if any way were found to force their foreign resources into one channel in case of emergency. It is hard to understand how it is possible for anyone who has studied the subject to favor regional banks over a central bank, for this reason alone. The value to the country in having a central bank that could operate intelligently and effectively in the international movement of gold, is almost inestimable.
In 1907 we wrere given to understand in this country by French bankers that the Bank of France would be glad to loan gold to this country if there were any way that it could do so. This meant that if we had had a central bank, the Bank of France would have loaned fgold to it direct. Not being able to do that, the Bank of France loaned gold to the Bank of England, and we then obtained gold from London,- a roundabout and expensive method, for the Bank of France had to have its interest, which was undoubtedly reflected in the Bank of England rate, which went up to 7%, and in the price of gold. Could it be expected that the Bank of France would have been any more willing to loan gold to regional banks that might have been established in this country, than to some of the great banks in New York, whose capital and standing were as great or greater than that of any regional bank would have been? Which regional bank would the Bank of France have picked out to whom to make the loan of gold? Undoubtedly the New York regional bank would have been selected, as that would have haved the largest capital and would apparently behave been the safest institution to deal with. But if the New York regional bank had been forced to make loans to other regional banks, the conservative men connected with the Bank of France would never have considered dealing with it in such manner. It would naturally be opposed to doing so in any event, for if our regional banks had eight offices doing businessi in Paris in connection with French banks, that it would recognize them only as competitors of regularly organized French banks and would naturally not feel disposed to help them out of difficulty. In following the operations of the eight branch regional banks, some of which would of necessity be picayune and not of a kind that would give them any standing, it would be quite natural that for the conservative French bankers to judge the regional banks by the weakest link in the chain, and particularly as they would know that the strongest regional bank could be forced to take l over the weakest in effect, should the political board so demand. As a matter of fact, this condition would probably already have developed before any necessity arose for borrowing the gold.It seems that great stress is laid upon the system of examinations that is to take place in keeping the regional banks up to a proper standard. There is no doubt that such examinations would be of value. But it must be remembered that an auditor can only examine transactions which have actually taken place in a bank. He can only be a human being and is not therefore possessed with of the power of foresight to determine what g transactions may be made in the future and rule against them. The day after an examination thea banker might consummate a transaction that would result in serious loss to the bank, and no system of examinations can be devised that could do more than discover the loss after it had been made. If an examiner were appointed to pass upon every transaction as it was being made, he would naturally become another officer of the bank in effect, and would lose his entire point of view as an examiner, for he would be passing judgment on new transactions instead of checking up old ones from an unprejudiced and impartial standpoint. We must not delude ourselves, therefore, with the idea that a regional bank can operate without loss, any more than is true in the case of any other banking institution.The system of publicity provided would very likely jeopardize the standing of certain of the regional banks occasionally, for it is required that they publish, not alone the ordinary matters that bankers are obliged to advertise, but as well the maturity of all their paper. If it so happened that such maturities at some certain period seemed to be too far into the future, the solvency of the bank might be questioned by the general public, even though the bank was in good condition. Now, if the general public did become frightened concerning the standing of a regional bank, what would be liable to occur? The first thing rthat they might do would be to draw their balances from member banks, because they would know that, under the law, the member banks couold not reduce their reserve with the regional bank and that if the regional bank failed, the member bank was certain to meet with a loss and, in any event, wlould have its fund tied up. With whom would member banks do business in case toa regional bank failed? Would they not be left helpless and entirely dependent upon their metropolitan correspondents, as at present? This being true, the relations between banks throughout the country and their metropolitan correspondents must be maintained as they are today, for member banks certainly could not expect to obtain discounts from correspondents with whom they had not maintained sufficient balances to warrant them in asking for accommodation. The ability of member banks to ask for accommodation under such circumstances would be weakened by the amount of money they had withdrawn from their metropolitan correspondents in order to place it with their regional bank. Under the law, in case of the suspension of a regional bank, all of the other regional banks would be obliged to open offices in that district. If they could do so in time to protect the community, which is doubtful, with which one of these regional banks would the member banks of the failed bank do business? And if member banks had borrowed of the failed bank regional bank, and had put up all of their commercial paper as collateral, how would they borrow from the new regional bank with whom they undertook to do business? Such borrowings would unquestionably have to be made to the full amount that the member banks were required to keep as reserve in regional banks before they could obtain any credits upon which to do their daily banking business. Nothing is stated in the bill as to where a member bank would stand in case of the suspension of a regional bank, which is a presumption that a settlement would have to be made as under the present law. But the disaster that would come to a district in case of the failure of a regional bank can easily be comprehended, particularly if any large proprortion of the banks in a district become member banks. Would this knowledge tend to increase the confidence of depositors in member banks? As already stated, the power to issue circulation might not help a regional bank at all, even in case of a condition of temporary insolvency that might develop because of slow assets. In case such a condition was brought about through actual losses sustained, nothing could help the situation.There need be no comparison made of this situation in the case of a central bank, because no such regional trouble could ever develop. With the insurance feature incorporated in the bill, there is a real probability that the capital of a regional bank might be entirely wiped out through losses made through the extension of loans to member banks organized by dishonorable men in order to obtain deposits, through the advertisement to the public that deposits made with them were insured. Suppose, for instance, that a case such as that of the failure of Knight, Yancey & Co., of Decatur, Alabama, should occur. It has been estimated that something like $30,000,000. of forged bills of lading were issued. Should the regional bank in the cotton district be loaded up with forged bills of lading, which might easily occur, its capital could be wiped out over night. The same wuould be true were forged bills of lading accepted in many other regional banks, for their capital would be extremely small in comparison with the business that would naturally go through them. Of course, if it is not expected that these regional banks will take any appreciable part in the business of the districts in which they are situated, this feature need not be considered; but in such case the regional banks would be of no value to the community and serve no purpose. This would undoubtedly be the case, in any event, for in many of the regional districts the member banks would have a larger capital thqan their regional bank, and they would unquestionably prefer to carry on their business themselves, in their own way, and continue their relations with their metropolitan correspondents. Of course, they would be obliged, if they became member banks, to curtail the value of their accounts with their metropolitan correspondents, which would be another reason why banks would hesitate to take part in the system.We will now consider the bill in detail.
Page 2, Line 25. In a regional reserve system it will very likely be necessary to readjust districts occasionally. Should this be done, what effect is it going to have upon the business of the communities? While the readjustment might benefit some certain posrtions of the districts, it would unquestionably injure others. Political pull might be exercised most powerfully in order to change these districts, as has been done in many States of the United States where gerrymanders have been made by legislators that have seriously affected the rights of the people. Such a condition could not exist under the organization of a central bank.
Page 3, Lines 8 - 12. Competition for the location of Federal reserve banks will inevitabluy arise, if it has not already. This will be peculiar to a regional bank system, where the location of regional banks may be expected to be permanent, as contrasted with the case of a central bank, where it may be expected that branches or sub-branches will ultimately be established in all cities and sections where branches are warranted.
Page 3, Lines 17 - 23. If every one of the eligible banks of the country is required to signify its acceptance, within sixty days, of the terms of the Owneen bill, it may be found that a large proportion of our National banks will elect forthwith to terminate their National bank charters and withdraw from the system. The consequences will be serious and may cause disaster. Every National bank, upon surrendering its charter, is required to deposit lawful money for redemption of its circulation. A considerable withdrawal by National banks will cause an instant withdrawal of lawful money from circulation, which may only be restored by the instant retirement of the bank notes, and as to the bank surrendering its circulation, the enforced contraction on its part may only be restored by the immediate sale of its Government bonds. With over $700,000,000. of the Government's funded debt pledged to secure bank notes, there is no means of measuring the extent to which the offering of Government bonds may not only impair their market value, but give rise to distrust and unsettle the country.There is very little probability that the organization committee can take the testimony authorized and make the examination necessary in order to determine a fair apportionment of districts throughout the country, within sicxty days after the Act is passed. National banks, therefore, will be obliged to determine whether they wish to become member banks of a regional system without knowing in what district they may be located, and it is conceivable that districts might be so determined upon that it would be a every serious matter to a bank as to which district it was in. This might be particularly true in the case of banks located neear the lines of demarkation of the districts. The fact that this could be true shows on its face that a regional system cannot be as fair a system for all banks as a central bank system.
Page 4, Lines 11 - 17. This provision is going to increase the liability of owners of National bank stock, without their consent. When an individual purchases National bank stock, he understands that it carries with it a double liability, and no more. To him it represents a contract, authorized and approved by the Government of the United States. He is now to be told that this contract will not be carried out and that he must possibly suffer serious loss because of being obliged to liquidate his bank before the termination of its charter, or assume not alone the unknown liabilities ythat may attach to an experimental system of banking, such as has never been tried in any country in the civilized world, but as well, his stock in effect will bear an additoional liability to the extent of 6% of its par value, plus 6% of the book value of the surplus of the bank in which he owns stock. In other words, he will have a double liability upon 94% of his stock, and a triple liability upon 6%, plus thea triple liability upon such further percentage of his stock as the proportion between the surplus of the bank and its capital. The conditions under which the stock of the regional bank is purchased are not such as prevail in the ordinary purchase of stock, because it cannot be sold, which means a permanently increased liability of the percentages mentioned until the bank is liquidated .
Page 4, Lines 18 - 22. The penalty for failure to signify acceptance of the Owen bill within sixty days is severe. No one of the banks in the fifty reserve and central reserve cities may retain the deposited reserves of other National banks, should it fail to formally accept the provisions of the Owen bill within sixty days of its passage. $535,000,000. of redeposited reserves are liable to arbitrary shift within ninety days, by virtue of this provision. What may we expect to occur to our credit situation, should any considerable portion of these reserves require to be shifted? The complications involved in this proposition are rather interesting, but, as uncertainty in business conditions ordinarily causes more friction than knowledge of really adverse conditions, this might be an extremely disturbing factor. For instance, suppose a National banker in a central reserve city agreed to become a member bank in a regional system before the expiration of the sixty days. He could not figure upon how much of his reserve deposits he might lose, because he would not know how many of the banks who maintained their reserves in his bank were going to join the regional system. Such of his depositors as did join the system would have to withdraw a portion of their funds from his bank. Those who decided not to join the system, but instead were going to take out State charters, might be able to continue their balances with him, having them act as reserve under the laws of the State in which the depositors were situated; or, such State law might not enable the State banks to count as reserve, deposits in his bank. He would have no means whatever of determining where he was going to stand or how his deposits were going to be affected. Again, suppose this banker did not wish to join the regional system, he could not even then figure out how his deposits would be affected, for he would not know how many of his depositors might become member banks in the district regional bank, nor how many might become State banks. If all of his correspondents hgave up their National charters, he might still retain his deposits, even though he refused to become a member bank.Then consider the position of a National banker outside of a reserve city. If he went into the system and his reserve agent did not, he would have to find a new reserve agent during the time that the transfer of all reserve deposits from reserve agents to the regional banks was being carfried out. He might not wish to open up an account with the particular banks in his reserve city who might have signified their willingness to go into the regional system. He would then lose the benefit of his years of connection with his reserve bank, or be obliged to transfer the whole of his reserve deposits to the regional bank at once. If he reorganized his bank as a State bank, he might be able to retain his account with his old correspondent and count his funds as reserve, without regard to whether that correspondent joined the system or not. This $535,000,000., therefore, would be subject to the most peculiar system of possible fluctuation imaginable. No reserve banker could tell, to save his life, how to handle his funds. His only safety would lie in immediately beginning to curtail his loans and get sufficiently strong in cash to enable him to meet any contingency that might arise. Under the central bank plan nothing of this kind could occur.
May we not likewise expect the withdrawal of some portion or all of the $90,000,000. of the general fund now held by Government depositaries, following their failure to comply within sixty days? Is it ist intended that the 7,500 National banks of this country, by a referendum, without means of united action, shall decide within sixty days whether $625,000,000. of credits in this country shall be arbitrarily shifted from one section to another, or one set of institutions to another: and what will be the effect of such a requirement as is contained in the bill?
Page 5, Lines 1 - 14. This penalty apparently not being severe enough, it is proposed that any National bank failing to comply with the provisions of the act within one year, shall forfeit its charter and be liquidated. The only relief afforded tlo the National bank so to be liquidated is in a determination by any Court competent for jurisdiction in a suit brought for the purpose of liquidation. May it be expected that any National bank subject to the opening and hazard of such a suit, will retain its deposits? Depositors are timid and at the first note or warning will withdraw their deposits. Such a proceeding would be the deathknell to the credit of any National bank.It is not clear that a National bank might not, under the terms of this Act, be sued at the end of the term of sixty days, if it did not signify its intention to become a member bank in a regional bank. If a thousand suits were started at the end of sixty days after the passage of the Act, who can estimate the result to the financial interests of this country?
Page 5, Lines 14 - 20. A careful reading of this provision would seem to make it impossible for a director in a national bank who had approved the action of his bank in agreeing to become a member bank under the provisions of the Act, from changing his mind without serious penalty, should the regional bank prove to be a failure before it was fairly organized, or should he decide for any other reason that it was not wise for the bank of which he was a director to become a member bank. The penalty would be esxactly as great if he were one of a majority of directors to vote to become a memberand one of a minority to vote against continuing as a member. If a director voted against becoming a member bank, and was outvoted, and then later the directory voted to cancel their assent regardless of consequences, and this director voted against such cancellation, but in the minority, he would be subject to penalty. There is no statement concerning the apportionment of any loss that might occur under this provision, and if all the directors in a bank except one refused to pay, would such director be asked for the total amount of loss incurred, or could the other directors be sued for their proportionate share? If one-sixth of the capital stock had been paid in before conditions developed that would make it seem wise for a National bank to withdraw, the directors would be personally liable for one-sixth of the capital stock. They would also be liable for any depreciation in the value of United States bonds that the bank might be forced to sell in order to place itself in a position to retire its circulation. It might be difficult to determine whether such depreciation should be figured from the price paid for the bonds, the value of the bonds at the time the law went into effect, or the par value of the bonds. It is a provision that is so indefinite and that might cover so many things, that it is questionable whether directors of National banks in this country would care to put themselves in any position where they can be asubjected to such liability. It is unfair and not right, and is breaking the contract that they made with the Government when they took their oateh of office. It is a moral breach of contract, without regard to whether the Courts would construe it as a legal breach of contract.or not. Could not it be reasonbly expected that many directors in National banks would resign rather than assume such liability?
Page 6, Lines 1 - 10. It is proposed that eligible banks who have signigfied their intention to comply with the Act, subscribe to stock of the regional banks of their various districts VOLUNTARILY (?). Should they fail to do so, the organization committee may offer it to the public. Damaged goods sell at bargain prices. If the bankers don't take it, who wants it? If the bankers did not take the stock it would unquestionably be because they did not think the system would be a success. What possible reason reason could induce the public to come in under such circumstances?
Page 6, Lines 18 - 24. The United States Government will take it. Purchase of the stock by the United States Government would not be as objectionable if the legislation proposed created an institution of a character whose success was fully assured. The terms of the bill indicate doubt as to the successful sale of the stock, consequent doubt of its value, and necessarily place the burden upon the Government to buy it. Were the legislation sound, the stock would command a ready sale and Government ownership be unnecessary.
Page 7, Line 4. Not satisfied that the Government should continue to own it, it is proposed that the Secretary of the Treasury shall have power to sell it in his unrestricted discretion, at such prices as he sees fit, not less than par, and apparently to anybody that wants it. Is this unrestricted authority warranted, when it might as readily be provided that the stock owned by the Government be sold to the highest bidder upon public offering, with no opportunity for discrimination of favoritism? This is another feature of the bill that adds to its liability to become a political plaything.
Page 7, Lines 15 - 18. The language, “The Federal reserve board is hereby empowered to adopt and promulgate rules and regulations governing- - - - - - - - - -exercise of the voting power thereon (the stock)” may be susceptible of exact interpretation by a competent Court. Whether the Federal reserve board may be able justly and intelligently to exercise this function will depend entirely up the object to be served.Here we have the formation of a voting trust, the principle of which was so severely criticized during the Pujo investigation, the findings of which have been so innocently accepted by the Senator from Oklahoma. Without regard to the general question of voting trusts, this voting trust certainly has lurking behind it unseen dangers. The Government, through this voting trust, might be able to absolutely control the selection of Class A and Class B directors on the natural formation of a regional bank. This might be serious, but it is not a circumstance to the further power that lies hidden in these words. There is in no place in the bill anything that confines the limit of the amount of capital of any regional bank to any stated sum. Suppose that every bank in a certain district complies with every provision of this act; that a regional bank be organized: that the business continues for a certain period until, under the tricks of politics or the accident of election, some irresponsible Administration steps into public office. This Administration could, under the terms of this Act, increase the capital stock of the regional bank under consideration, paying for it out of the Treasury of the United States, until the voting trustees representing the Government would have enough votes to elect the directors of the A and B classes. As the Federal board elects the C class directors, this irresponsible Government would be in position to elect every director of this regional bank. Where would the abuse of this power stop if this country were infortunate enough to have an Administration that would take advatntage of it?
Page 8, Lines 5 - 8. This appropriation is too small.
Page 8, Lines 10 - 12. No basis is stated for the establishment of branches. The provision is bare and unexplained, while the power exists to establish any number of branches. The provision in regard to their establishment is mandatory and inexact in stating their intention. One peculiar feature of this provision lies in the fact that, if any regional bank fails, all of the other regional banks must establish branches in the district of the failed bank. Which one of the regional banks would take precedence in the district of the failed regional bank, and how would member bahnks know with which foreign regional bank, so to speak, they could do business? As a matter of fact, under the law they are not specifically authorized to do business with any regional bank outside of their own district.
Page 9, Lines 7 - 9. The implication of the language is clearly that the establishment of a Federal reserve bank is dependent upon stock subscriptions by the banks of a given district. In what position will that district be if sufficient National banks withdraw from the National system under the mandatory provisions of this Act, so that the requisite amount of capital is not provided?
Might not a district failing to subscribe sufficient stock have either a publicly or a Government owned regional bank without clientele?How could a bank be organized if less than five banks accepted of the system in a district, and the balance of capital were subscribed by the public and or the Government?
Page 10, Lines 14 - 17. Should a regional bank become insolvent through no fault of its own and without in any manner violating the law, would its succession continue for a period of twenty years? The capital of a regional bank might be entirely dissipated through losses, and yet it might be able to maintain all of its reserves in accordance with law. Would this clause prevent the Federal reserve board from closing up the bank?
Page 10, Lines 19 - 20. Please refer to opinion of Thomas B. Paton in regard to the matter of jurisdisction. The language of the Owen bill is incomplete and would require Court construction to make certain where jurisdiction would lie. Please refer to J. DuPratt White's opinion in regard to the inconsistencies involved in State court jurisdiction.
Page 11, Lines 12 - 21. This seems to be a broad provision, giving any Federal reserve bank the right to issue an unlimited amount of notes, which are not sufficiently described. What is to be the form and character of these notes? How are they to be printed? How are they to be redeemed? Are they to be simply the obligation of the Federal reserve bank of the district, or are they to be the obligation of the United States Government? In other words, does not this bill provide for the issue of two forms of notes by every Federal reserve bank, and is this a necessary and wise provision? Does the limitation of the National Bank aAct apply to the volume of notes so that each regional bank may only issue notes to the amount of its capital? Does the provision of the Bank Act regarding the retirement of $9,000,000. a month apply to the retirement of these notes? This seems to be a piece of patchwork, introduced into the middle of the bill, without regard to existing law and open to all sorts of construction. I am not even certain that there would be authority in the Bureau of Engraving and Printing to print these notes.If every regional bank were limited in the amount of notes of this character that it might put out by its capital, the total amount that could be issued by all of the regional banks, based upon the present capitalization of the National banks of the country, would be $106,000,000., or roughly one-seventh of the total amount of National bank notes outstanding. There would seem to be no real object in arranging to refund this small portion of outstanding National bank notes, and it would appear, therefore, as though it might be intended that the regional banks take out the whole 700 odd million National bank note circulation. Should this be true, it would mean that if the regional banks took out such circulation in proportion to their capital, they would all have seven times as much circulation ouytstanding of this character as the amount of such capital. This would be a most unsafe condition, and one under which the banks could not exist very long, for they would be unable to redeem such notes as might normally be presented. If it is intended that the regional banks take or up the whole 700 olldd millions, then as the law is worded, any one of them could take the whole amount without regard to its capital with just as much authority as it could take thisits proportionate amount. The whole proposition seems absurd, for if the banks are limited to their capital, it is needless, and if not limited to their capital, it is impossible.
Page 11, Lines 22 - 24
Page 12, Lines 1 - 2. It is proposed in this paragraph of the bill that the Comptroller of the Currency, who is really a bureau chief under the control of the Secretary of the Treasury, shall be the final authority to decide whether a Federal reserve bank shall commence business. This vests in the head of a Department bureau, powers somewhat similar to those held by the Chancellor of the German Empire. Is this the proper place in which to vest the authority?
Page 12, Lines 8 - 15. This provision seemingly gives the Federal reserve board full power to run every regional bank to suit itself. It could even claim the power to demand that a regional bank loan money to a member bank whose collateral had been refused because the board of directors of the regional bank did not consider it proper collateral. Every member bank would seemingly have the right of appeal to the Federal board in case any loan which it had desired to make had been refused. All the talk about regional banks being of value to a community because that community would be in position to look after its own business in its own way, is made mere buncome by this provision. Those in a district might know that a certain banker was not handling his business properly,- and, under the insurance guarantee, such cases would probably be numerous,- and yet the Federal reserve board, being politically constituted, might be appealed to and might require a loan to be made to the bank claiming that it was a member bank and had the right to loans if it could put up the collateral, without regard to what other conditions might exist in the bank. If some strong political leader had established such a bank, he might bring very great pressure to bear upon the politically constituted Federal board. Every encouragement to a dishonorable and incapable banker to extend his operations is bad for the public. It only means that when such a banker does fail the losses are more severe and more people are involved. This is a vicious provision and might result in incalculable harm.Another feature of this provision is also unnecessary and incomprehensible, and is undoubtedly based upon lack of knowledge of how the banking business is carried on. Every member bank is supposed to have the right to certain proportion of the total discounts that a regional bank can extend. Every loan made by a regional bank must therefore be considered in the light of what other member banks have a right to ask for,- not on what they may desire, based on existing business conditions,- but what they have a right to ask for. A good banker always considers, when making loans, the question of whether his ability to protect the business of all his customers is being curtailed. But he realizes that, at a time when one set of customers may want a large amount of money, others may not wish any, and he is guided accordingly. Under this provision a regional banker might not be able to protect three-quarters of his member banks to the extent that they required, because he would have to save his loaning power for the other quarter who might not need it. While it is unquestionably true that, with a regional system, the great majority of member banks are going to require loans at the same time of year,- which, considering the purpose for which the banking bill is being enacted, is foolish,- yet there are going to be a number of institutions in each district whose business is somewhat different than that of their fellows and who may require discounts at other periods than the large majority. Even this small proportionate help to the regional bank is to be taken away from it. How could bankers be expected to place their reserves with a regional bank, knowing that their directors might be over-ruled and that bad loans might be made for political purposes upon the demand of the political board?Page 12, Line 16 to Page 14. Line 7. This relates to the method of selecting the local board. As to the three directors to be selected by the banks, there is a distinct invitation to the organization of bank politics, without any opportunity for choice of the best men for the position. Is this a safe method for selecting two-thirds of the board which is to conduct the important business of each bank?
The general scheme of the organization of the bank appears to be to lodge in a politically appointed board, one of whom shall be a member of the President's cabinet, power to appoint a minority of directors and the chairman of the board of each Federal bank, and to so extend the powers of the Federal board over the affairs of the Federal reserve banks as to make it possible, some time in the future, for an active Secretary of the Treasury to be a dominant factor in the monetary affairs of the country. The attempt to safeguard the system with the power of removal would operate to render the power of the political board more effective.
This provision contains some glaring inconsistencies that it is impossible to reconcile. In page 12, lines 22 to 25, it states specifically that Class B directors shall, at time of their election, be acticvely engaged in their district respectively ine commerce, agriculture, and in some other pursuit. The director who is supposed to be in some other pursuit may be a banker, under the terms of this paragraph: and yet it is rather implied in the bill that this should not be. There is no question, however, but that it is intended that the first two of Class B directors shall not be bankers. Bearing this in mind and following the development of the method of election, we find that certain electors are appointed, all of whom are directors of member banks, one from each: that a list is made of these elector directors, copies of which are forwarded to every other director: that the elector shall then make a cross opposite the names on this list of those for whom he wishes to vote as first, second, and other choices. The electors, therefore, are only authorized to vote for themselves or for electors whose names may be on the list, all of whom are bank directors. Consequently, Class B directors, who apparently are not supposed to be bankers, must all be selected from this list. If it is intended that Class B directors shall be chosen from the directors of member banks, how is there going to be any certainty, under the method of electing electors, that all three kinds will be upon the list: and, even if all three kinds of Class B directors were represented on the list, they might easily not be the ones that the electors would vote for. The chances are they would not be, under the form of election, and all three of Class B directors elected under this system might be bankers, or lawyers, or doctors. As there is no one to pass upon the qualifications of Class B directors, it would seem that if the line of procedure in the bill were carried out, whoever was elected would be able to qualify. If two men were elected, both of whom were engaged in commerce, which one would have to resign in favor of the other,- if any power could be found anywhere that would make it possible to pass upon their qualifications? One of these commercial directors would have been elected by one group of bankers, and another by another group. Which group takes precedence?
Page 13, Lines 7 - 14. This group division would of necessity give the smallest banks the greatest voice in the selection of directors, although the largest banks would be responsible to their depositors for vastly larger sums that they would have to carry with the regional banks. The unfairness of this system is too evident to need further consideration, for it would of certainty result in banks of $25,000 capital and small deposits, electing a director to pass upon the security of loans involving the deposits of institutions carrying millions of dollars in a regional bank. The deposits that one institution in the largest class might have to make with a regional bank might be greater than all the deposits of the small banks who elect one director.
Page 15, Lines 2 - 12. Here we have a most extraordinary attempt to try and link a regional bank system up in such manner as to enable it to serve as a central bank. The chairman of the board of directors of a regional bank, the responsible and acting manager, the man who could be held more largely accountable for losses and failure of the bank than any other one individual, is also the principal representative of the Federal reserve board, and has two offices in the same building. As chairman of the regional board, he is responsible to himself as Federal agent. As Federal reserve agent he is to have custody of the gold and collateral that he puts up with himself as chairman of the board, in order to act as security for the circulating notes that he desires to issue as chairman of the board of directors. Many occasions might arise where it would apparently be to the interests of such a chairman of the board of directors to loan himself some of the gold that he was responsible for as Federal agent, in order to temporarily tide himself over a tight place. This is the most extraordinary dual office that has ever been thought out by the mind of man, and it is as far from ordinary banking principles as exemplified in all existing banking systems as is possible to conceive.
Page 16, Lines 8 - 14. If twelve regional banks are organized, the organization committee will be charged with the duty of acting as chairman of the board or having the powers of the Federal reserve agent as to different institutions at widely separated points. This is temporary, but nevertheless impracticable for effective organization purposes.
Page 17, Lines 1 - 4. There is no provision that directors shall hold office until their successors are appointed.
Page 17, Lines 7 -12. The theory of ownership of stock of the Federal reserve banks by the member banks is certainly to maintain a reasonable proportion between the capital of the Federal reserve bank and the capital of the banks of the district. Under the plan provided in this bill, an unknown amount of stock may be held either by member banks, the public, or the Government. This provision in regard to to increasing the capital of the Federal reserve bank as member banks increase their capital of increase in number, is entirely illogical so long as all of the stock is not held by the banks of the district. The ratio is lost, and the advantage of a fluctuating capital disappears.
Page 17, Lines 12 - 14. Presumably, if the public subscribed to a large amount of Federal reserve bank stock, they might need to borrow on the stock from their banks. To the extent that the Federal reserve banks may acquire stock, either through loans of that character lor through purchases in the market, or for any reason, they will never be permitted to sell it. The sensible provision would have required each member bank to retain always the proportion of 6% originally subscribed: but there should be no limitation to its selling stock subsequently acquired without relation to the original subscription. Suppose the Government acquires a large amount of the stock and desires to sell it to the National banks. No National bank will buy it, as they would not be permitted to sell it again.
Pages 18 and 19. References to the adjustment of the dividends on stock are inexact. One-half of one per cent. per month will rarely exactly adjust accrued dividends. The stock of the bank is to be subscribed at par. When banks are organized in the districts having large banking capital, banking quarters, an expensive vault, stationery and supplies, and many preliminary expenses calling for the expenditure of a very large sum, will be required before the bank starts business at all, and it is a safe prediction that every Federal reserve bank will therefore start with its capital impaired at the outset.If it is a fact, as above suggested, that the issue of bank notes secured by Government bonds is covered by the provision of law, limiting the note issue to the amount of capital, how will the Federal reserve bank with fluctuating capital be able to handle its outstanding circulation under this provision? Furthermore, how will foreign creditors of these banks, some of which will be of comparatively small capital, regard the credit of a bank whose capital is liable to be arbitrarily reduced by the action of stockholders and without any control by its management? National banks liquidating or failing within a given district might automatically so reduce the capital of the Federal reserve bank of that district as to seriously impair its credit.The last paragraph of Section 2 provides that no Federal reserve bank shall commence business with a subscribed capital of less than $3,000,000. Under Section 6, however, this only specifically applies to the opening of business. The stock of a regional bank, therefore, might be reduced through the action of its member banks below $3,000,000., and the bank would still be able to continue business for its twenty-year period. The Government would, of course, be authorized under the law to step in and build the stock up, but would have to turn the voting power of such stock over to the voting trustees, which might be unfair to member banks who were still in the system and who had not taken part in reducing the capital stock of their regional bank.
Page 18, Lines 9 - 15. Member banks are authorized to reduce their stock in a regional bank if it reduces its capital. The stock allotted to member banks, however, is based upon a percentage of its capital and surplus. While a member bank, under this provision, can retire its stock if it reduces its capital, yet if it meets with losses or for any other reason reduces its surplus, it has no relief. Should a bank be required to reduce its surplus, it might need all the liquid assets it could obtain, and it would seem most desirable that it should be able to withdraw its proper proportion of the money it had invested in regional bank capital. It would seem as if a bank's only relief would be to put its surplus into undivided profits before it became a member bank, for the proportion of regional bank stock that it would have to purchase, based on its surplus, could never be recovered unless it went into liquidation.A number of bad National bank failures in a given district might seriously impair the capital and credit of the Federal reserve bank, unless the law gave them a first lien for the liquidation of the discounts of the failed banks. There is certainly the possibility that Federal reserve banks may have some of their funds tied up when their member banks fail. This should never be possible, and is unnecessary.
Page 19, Sec. 7. It is proposed to make this new system of banks the instrument for establishing an insurance fund for the deposits of National banks. By the terms of the bill, this fund accrues for the benefit of depositors in National banks only. This system is supposed to invite the co-operation of State bankers. If this provision means anything and is to accomplish anything, it will be a fine instrument for keeping State bankers out of the system.It would be well to enlarge upon this feature of the bill. It is an invitation to wildcat banking. Presumably, carried to its logical conclusion, by this plan any bank may be as good as any other bank, so far as the safety of depositors is concerned. The viciousness of the plan lies particularly in the fact that unscrupulous and unsafe bankers attract deposits by allowing high interest rates, and, in order to make profits, embark upon unsafe enterprises with their depositors' funds. Ultimately, the burden of such unsound banking is thrown upon the sound banks, and would in effect be a tax upon the system as a whole and would necessarily be charged against the customers of the banks. It is a scheme to distribute the losses of bad banking among the customers of good banks. The proposal in this bill is only the first step in developing a tendency which would ultimately become extremely dangerous. The language is so broad in giving to the Secretary of the Treasury unlimited power of management and regulation, as to make it possible for this fund to be used without control, in his sole discretion, and in itself develop dangerous administrative features. Suppose a bank fails today and its affairs are still unsettled at the time of another bank failure, the fund being insufficient to meet the losses to depositors in both. Shall the depositors in the bank first failing first receive the fund: or shall it be apportioned? How shall it be apportioned? It seems as though the Secretary of the Treasury had legislative authority under this section.
Page 20. Lines 3 - 12. It is provided that a portion of the surplus earnings and the surplus of the Federal reserve banks in liquidation shall be applied to the purchase of the Government debt, by the Secretary of the Treasury, without any restriction. He may buy from his friends, at any price that he fixes. This is an unwarranted, indiscreet delegation of authority to an officer of the Government, which even private corporations would not countenance today.
Page 20, Sec. 8. The provision for reincorporation of State institutions is unnecessary. The present law is sufficient.
Page 23, Lines 3 - 13. This section is badly drawn. No State bank or trust company would be authorized to participate in the plan without the passage of an enabling act by the legislature of the State of its incorporation. (Refer to text of the bill introduced by Senator Burton for what seems to be a logical and concise method of handling this feature of the plan.)Page 24, Sec. 10.The objections to the terms of office provided for the members of the Federal reserve board have been fully discussed. Unless the terms of office are such that no President in a single term of office, or preferably in two terms, can change the political character of the Board, the members of this board will become a part of the patronage system of the country, subject to the influences of partisan and political appointment, and independent character destroyed.It is easily conceivable that an unfortunate choice in a President might be made at some time in the future. He might do considerable harm with the power that he has at present. But, under the system of appointment of members of the Federal reserve board, together with the unexampled and unexplainable power that is being delegated to the Secretary of the Treasury, who would of course be an instrument of such a President, the whole banking system of this country might be disrupted,-even if the seemingly impossible happened and the regional bank system reasonably accomplished the purpose for which it is intended.
Page 26, Line 24. The language is bad. Menbers of the Federal reserve board should certify that they are eligible for appointment, and not that they have complied with requirements for appointment.
Page 27, Line 10. The paragraph should provide for continuing in term of office until a successor is appointed and confirmed.
Page 27, Lines 11 - 19. Simply another indication of the intention to make the Secretary of the Treasury the supreme authority in the monetary afafairs of the country. It certainly has the effect, in connection with other provisions referred to, of giving him absolute unrestricted control over the disgtribution of Federal funds. In 1907, the distribution of the general fund at the time of the panic was the subject of Congressional inquiry. Going back to the days of Andrew Jackson, “pet” banks have been a recurring cause of scandal. The present system is bad enough, and such bad features as it has will be magnified under the provisions of this bill.
Page 28, Lines 18 - 23. This is a dangerous provision, in so far as it applies to the advertising of the maturities of paper held by a bank. It is inevitable that at times such maturities will come together in such a way that the public, not understanding the banking business, might question the solvency of an institution, which might result in the starting of runs on member banks that might be hard to stop. During panicky periods, under our present system, many institutions, because of their well-known strength and the reputation of their officers for honesty and conservatism, are not subjected to runs, while at the same time their neighbors are having their deposits drawn out. Under this regional bank system, every member of the community would realize that the strnength of member banks would be seriously affected in case of the failure of a regional bank, and, instead of runs being confined to weak banks, they might extend to every bank taking part in the system in a district. This shows what we are subjecting ourselves to in case the people begin to fear as to the standing of a regional bank on any ground. The publishing of the maturities of paper, however, would have a tendency to make individuals who might study such statements and who were not familiar with banking methods, seriously wonder how a bank was going to keep on its feet i until its paper began to mature.
Page 28, Par. (b). The authority of the Federal reserve board to require DFederal reserve banks to rediscount paper of other Federal reserve banks has been discussed at length and should be fully enlarged upon. It indicates the weakness of the whole plan of regional banks, and is an unwarranted interference with the economic law of supply and demand. It simply indicates the acceptance of the principle of the central bank, and introduces an unworkable and unscientific method of applying the principles of the central bank to the regional bank system.Let us consider a region that might include the banks of Texas, Louisiana, Mississippi, Alabama, and Georgia, or large portions of these States. Annually the banks in these States are borrowing from $100,000,000. to $300,000,000. from New York and Chicago institutions. The regional bank in this district would have a capital not only measured by its member banks, but in reality a part of it, so that not one dollar of capital would be added.
(Note.- It may be that opponents may attempt to answer this proposition in part by stating that the banks in these States would withdraw from New York and Chicago and other Northern reserve cities, such portion of their balances now with these banks as was necessary to meet the reserve that they would require with the Federal bank. While this would undoubtedly be done to a certain extent, yet this amount would be much smaller than probably anyone realizes who has not actually figured it out: for while banks in the States mentioned, on August 9, 1913, had on deposit with reserve agents $29,244,000., yet the reserve cities in these States held reserve deposits amounting to $25,588,000. on the same date, and and a large part of the deposit with the regional bank for treserves would unquestionably be made up of withdrawals from the reserve banks in the district offrom this $25,000,000. The net amount of new capital that would be brought into this district from other districts would not be worthy of consideration, in comparison with the amount of money that is needed in order to finance the crops in these States.)
The deposits that the banks in these States now have in New York are not sufficient to enable them to move their crops, and they borrow from New York banks in round figures $200,000,000. more than such deposits. It would be impossible for a regional in such a district to look after the business of its members without borrowing from other regional banks. Instead, therefore, of this borrowing being exerted only in times of crises, it would have to be an annual operation, unless the member banks found that their regional bank could not handle theoir business, and continued their relations with their New York correspondents. Such relations. however, could not be as strong nor command as much accommodation if they made substantial withdrawals of their deposits for the purpose of depositing in their regional bank.
Page 29, Par. (c). The object of a tax is to restrain a tendency which will weaken the condition of a bank. The tendency which will weaken the condition of a bank is to expand discounts or circulation. Restraint in the shape of a tax is intended to apply to the person who is causing the tendency. By the provision of paragraph (c) the profits of the Government are taxed in order to restrain the member banks from increasing their discounts. Not only that, but presumably the manegement of the Federal reserve banks and the Federal reserve board itself will not be particularly interested in the profits of an institution in which they are not stockholders necessarily, particularly as the tax if paid to the Government would simply ;mean dividing the Government profit into two parts, one representing dividends and the other taxes. The bill does not provide who shall pay the tax, who it shall be paid to, or what use shall be made of it when paid.Of course, such taxes as might be collected from member banks would represent an additional profit to the Government, if it was intended to be paid to the Government, or to the regional banks if it intended to be paid to them, or to anybody who was supposed to receive the tax. However, it is not perfectly clear that any member bank would ever be obliged to pay the tax, from the way the provision is worded, as apparently only such member banks as are required to keep the same reserves as Federal reserve banks would be taxed, and there is nothing in the bill anywhere that would seem to require member banks to maintain any such reserve.
Page 29, Lines 18 - 23. Why should there be any distinction between reserve cities and central reserve cities, and any other cities? The only excuse for it would seem to be the fear, or knowledge, that a regional bank system would not answer the needs of the country as a central bank would, and that consequently those who drew the bill figure that it will continue to be necessary for reserve city and central reserve city banks to carry reserves for member banks throughout the country, even though they could not count such balances as reserves. If this is the reason, the system would seem to justify it. Under a central bank plan, however, it would not be necessary.
Page 29, Lines 24 - 25
Page 30, Lines 1 - 2. This seems to be another dangerous power to put into the hands of a political board. It is, of course, another attempt to follow the custom of a central bank, and if politics could not be introduced into the make-up of the Federal board it might not be a serious matter. It would seem better to limit the power of removal to the directors of a regional bank, and allow the directors full power to select their own officers. If some powerful politician should be connected with a bank that applied for a loan with a regional bank, and was refused for good cause, he could go over the heads of the directors of the bank who were entirely familiar with the ability of the officer who refused the loan, and through political pull obtain the discharge of such officer by the Federal board. It is all well enough to talk about such things in general as being not likely to happen, but every one knows beyond question of reasonable doubt that similar things are occurring continually in our political life.
Page 30, Lines 6 -9. Again, a board that may be politically constituted in case of an unfortunate selection for President, is given powers that might enable it to take over a Federal bank or every Federal bank, through trumped-up charges, particularly as there is apparently no one who can review its action, which seems to be final.
Page 30, Par. (k). Here again we have a most dangerous power given to the Federal reserve board. It would be dangerous without any question of such a board being possible to control politifcally, but under the circumstances, it should not be allowed, without regard to the unsoundness of the idea.Suppose a bank's reserves became deficient. Why may it not rediscount notes with the Federal reserve bank, and use the Federal reserve bank notes as reserve? That seems to be contemplated by the bill. Why go through the motions of rediscounting paper? Why not use the paper as reserves? The operation by which a member bank may restore deficient reserves through discounting should be confined to the withdrawal of lawful money from the bank, or gold, against its discounts, and thereby the Federal reserve board, by regulating the discount rate, can influence its own reserve position and indirectly the reserve position of member banaks. This provision opens the door to the eliimination of lawful money reserves by the member banks throughout the country. Carried to extremes, the possibilities of inflation are unlimited. All discounts with the Federal reserve banks might be represented in Federal reserve notes, which might ultimately comprise the entire case reserves of all member banks.It is difficult to see in what dangerous directions this tendency might not develop. State banks would not be permitted to use these notes as reserve money without passage of State enabling acts. National banks or member banks permitted to do so might gradually absorb a vast amount of the circulation of the Federal reserve banks as reserve money, so that there would be a minimum retirement. That is another possibility to be guarded against.
Page 30, Par. (1). This is a sort of legislative power extended to the Federal reserve board. Some National banks might be favored with this extreme power if State laws permitted, and others might not. If such a plan is contemplated, it should provide that all National banks may be vested with such powers not inconsistent with State laws, but so far as their membership in a Federal reserve bank is concerned, their qualifications under a State law should be subject to review by the Federal reserve board. May there not be some question as to the power of the board of directors of a banking institution to modify the powers of a National bank incorporated under the Bank Act in this broad or general way?
Page 30, Sec. 12. Page 31. It is difficult to understand what object is served by a Federal Advisory Council. No power is extended to this body. It is provided that it shall meet four times a year, or oftener if required by the Federal reserve board, and the only right which the law gives it is that of getting information and discussing matters with the Federal reserve board. It seems to be another attempt to make a central bank out of regional banks, but one that is powerless and superficial.
Page 31, Lines 16 - 21. There is apparently one attempt made in this paragrapgh to give the Federal Advisory Council something more than an ordinary name, by authorizing it to call for information. All of the other powers are such that the Federal board could comply through listening to conversation or receiving written memoranda, without giving them the slightest attention. But presumably it is intended that the call for information must be answered, for, while it is not so specifically stated, it would immediately cause suspicion if a call for information were ignored. This great power, however, that has been conferred upon the Federal Advisory Council would not practically amount to any more than the power to recommend, for if anything were wrong in the Federal board, the information asked for could be manufactured wholesale and the Advisory Council would have no means whatever of checking it up. If they accepted a false statement, however, as being true, it would certainly add a false sense of security to those to whom they might report.
Page 32, Lines 1 - 11. It is proposed that the Federal reserve banks may only receive deposits or collections drawn upon member banks. Before the member banks could make deposits, appropriate clerks for the purpose must examine every item with reference to the 7,500 members or more, to see whether it is eligible for deposit with the Federal reserve bank. It would also be necessary for every clerk in a member bank to make certain that every other member bank upon which the items were drawn that he was listing for deposit was solvent, and it would be necessary as well for every teller in a Federal reserve bank to check these items up, in order to see that the banks were solvent. It would be extremely difficult for clerks in member banks, or tellers in regional banks, to keep track of such failures as might occur in member banks throughout the United States; but it would be even more difficult and might almost be said to be impossible, for them to determine which banks were insolvent hthat had not yet signified their intention of being so by failing. Likewise, each teller in every Federal reserve bank must check up every deposit made, to see whether it was drawn upon a member bank.An examination of this operation of the giro system of the Reichsbank will indicate what an unwarranted limitation on the business transactions of members of the Federal reserve banks this is. The Federal reserve banks should be authorized to receive for deposit and for collection, all forms of items payable upon demand, no matter upon whom they are drawn. Furthermore, this bill should be so drawn as to provide a convenient method for the settlement of exchanges, whether charges are made or not. The discrimination against institutions or firms which are unable, under the provisions of the law, to become members is absolutely unwarranted. Is it intended that we shall have two systems for the collection of checks in this country,- one for those who are favored with membership in this system, and another for all who are unable or unwilling to join it? Millions of checks and demand items are drawn upon firms and institutions which cannot qualify for membership. This means that member banks must continue to collect all domestic exchange items which are not drawn upon member banks. Country bankers are complaining that their reserve balances which now bear 2% interest must hereafter, under this bill, be locked up in the Federal reserve bank without interest, but that they must still maintain balances with their reserve correspondents for purposes of credit and the effecting of exchange transactions. There is nothing in this section to indicate whether these items are to be received at par or not, nor is there anything to indicate whether the drafts of the Federal reserve banks themselves shall be received at par at other Federal reserve banks. Nor is there anything to indicate at what point of time items payable on presentation shall be counted as reserve for member banks. No mention is made of collection charges, nor when the proceeds shall be credited, nor is there any authority to impose charges.If the regional bank is limited in its collection function to items drawn upon member banks, might it not then require Clearing House privileges in the various cities? If so, no provision appears in the bill giving the Federal reserve board or the boards of the banks authority to clear through the Clearing House institutions.
Page 32, Lines 12 - 25.
Page 33, Lines 1 - 7. This discount provision is unlimited, and under it regional banks could loan member banks any amount that such member banks might desire, up to the extent to which they could furnish proper collateral. This would, of course, make it impossible for Federal banks to figure out how much any one member bank might be entitled to borrow, under the regulation on Page 12, Lines 8 to 15 ( ). While such a provision as that referred to is, of course, absurd, yet if it is to remain in the bill, the rest of the act should be devised to make it possible to do so. If members are to be allowed to borrow without any regard whatever to the size of their capital, it could not be determined, even approximately, to how much they were entitled, unless the regional bank was kept informed at all times of the amount of collateral available for discount that they had on hand.
Page 32, Lines 22 - 25. This language, under such construction as might be given by the Federal reserve board or the boards of the Federal reserve banks, might permit the use of funds of Federal reserve banks for speculation in commodities. A note secured by products in warehouse is certainly made eligible for discount. Farmers in the South and West could use the funds of the Federal reserve banks for holding their crops for market. The danger of any such system cannot be magnified. No such instrument for commodity speculation exists in any civilized country. The pressure in agricultural sections for the use of funds in this way would be irresistible. Not only that, but a dangerous overemployment of funds in any given locality for this purpose might well result in the necessary exercise of the mandatory powers of rediscount, to draw funds to that section from other regional banks.Page 33, Lines 1 - 7.This provides that the Federal reserve banks are prohibited from discounting notes, drafts or bills, issued or the proceeds used, for carrying or trading in stocks, bonds, or other investment securities; but on page 34, lines 23, etc., the Federal reserve board may, nevertheless, authorize the discount of such paper. These two sections together apparently indicate that the normal discount operation to which a member is entitled shall be confined to commodity bills, but that the Federal reserve board may, in special cases, authorize loans upon securities. There is no suggestion in the language of Page 34 that it is an emergency measure, nor is there any provision that an emergency rate shall apply. As introduced in the bill, the provision is dangerous in the extreme. Abuse of this power by the Federal reserve board would open the door to all sorts of speculative operations for the benefit of particular banks. It does not even indicate, as it well might, that this privilege of discount can only be exercised in an emergency or after the full line of normal discount has been exhausted.
Page 33, Lines 8 - 15. This provides that no Federal reserve bank may rediscount acceptances for an amount exceeding one-half of its paid-up capital stock and surplus. On Page 34, Lines 6 to 22, the liabilities of a National bank are limited to an amount not exceeding its capital stock, except for liabilities therein described. (See memo. under Page 34, Line 21 ( ).It is difficult to construe just how this will work, but presumably the total drediscounts of a National bank may never exceed the amount of its capital stock. Consequently, if a member bank has in its portfolio a large amount of bills which it desires to rediscount, and all of those bills should have bank acceptances on them, that member bank could only rediscount those bills to the extent of one-half of its capital and surplus, instead of 10% of its wcapital, because of the additional security of the acceptances. The limitation upon the amount of acceptances to be rediscounted is an unnecessary and unwise limitation upon the normal operation of the acceptance and discount market. The Federal reserve board should be free to use its judgment in regard to the character of this paper, subject to the limitation of liability and the amount of capital stock of any bank.
Page 33, Line 23, etc. National banks are authorized to accept drafts having six months sight to run, but only drafts of that character having a maturity within ninety days of the discount are permitted for rediscount
.Page 34, Lines 21 - 22. This provision is apparently clear and open only to one construction, which is that National banks may assume liabilities in excess of their unimpaired capital stock for any liability incurred under the Act. As this is the only provision that limits the liability that may be assumed by National banks, except where it is specifically stated, and as the borrowing of money by member banks is authorized under the Act, National banks certainly would not be obliged to consider the size of their capital when borrowing money from regional banks. If this construction had not been intended, the provision could easily have been worded in such manner as to leave no room for doubt.
Page 34, Lines 23 - 25.
Page 35, Lines 1 - 3. It is very likely that this provision was intended to be used in cases of emergency, and if only so used it might be valuable. On the other hand, with the possibility of having a politically constituted Federal reserve board, it seems a dangerous power to extend, as powerful politicians might use such provision in order to carry stocks through member banks which they might own or control, or where they might be doing business.
Line 35, Lines 4 - 8. Regulations which might be necessary in one regional district might not be workable in another. This would seem an unwarranted power to give to the Federal board, as the directors of the Federal reserve bank should be in position to make their own regulations in such matters. This provision, together with others, reduces the directors of a regional bank to mere figureheads.
Page 35, Lines 9 - 17. It is proposed that any Federal reserve bank may go into the open market and compete with member banks for the purchase of bills. It does not even limit the character of the bills, as it should, to those bearing the obligation of a member bank. It is unquestionably desirable that a Federal reserve bank should be authorized to conduct open market operations at rates different from its published rate of discount, but an unrestricted privilege would give rise to a character of competition inviting opposition and dissatisfaction on the part of members. This necessarily would require the establishment of a large credit bureau and the exercise of judgment far beyond what would be necessary if every obligation or investment of this character bore the acceptance or endorsement of a member bank and the Federal reserve bank had a first lien upon the assets of the member banks for claims due from them.Is it proper that a bank with the right of note issue, and whose notes are to be secured as to the Government by commercial paper, should be able to buy paper without restriction in the open market and use it as collateral to its notes? If that is the plan contemplated by this bill, possibly it is wise that the Government should add its obligation to the notes of the bank. The open market operations of a Federal reserve bank should limit the paper purchased by the bank to that bearing the endorsement or acceptance of members. The Fedderal reserve bank should not be permitted to buy commercial paper with entire freedom.There is no question but that regional banks should be able to use their funds abroad for the purpose of purchasing foreign bills drawn by foreign institutions upon other foreign prime banks, without the endorsement of member banks. At times this might be a most profitable and valuable way in which to carry funds abroad, in order to be in a position to buy gold, should it be possible to do so. The only doubt about the advisability of such authority lies in the fact that half a dozen or more regional banks might all be buying at the same time, and together they might get too much of one name. Of course, in the case of a central bank, no such danger would exist, as the manager would at all times know how much he had running, drawn on each institution. If the Federal board required all the branches of regional banks to keep each other informed of the amount of paper piurchased on each name,-which, being a valuable power, does not seem to have been extended to the Federal board, still there would always be the question as to which branch should be allowed to take the paper when there was not sufficient in the market, at profitable rates, to go around; or, in other words, when there was active competition by foreign institutions as well as our regional banks for such paper as there was in the market. One branch of a central bank in London, for instance, could operate for the benefoit of this country, upon instructions from the American manager of the foreign department of the central bank, much more safely, economically and effectively, than would be possible in the case of branches of several regional banks. There is no opportunity for argument at all concerning this matter
.Page 35, Lines 18 - 25. This provision starts off with the statemetnt “Every Federal reserve bank shall have power.” Under our present system, bankers engaged in foreign exchange operations each import or export gold in accordance with the market in connection with their own demands for foreign or domestic exchange. None of these institutions work together or can successfully work together, except in possible occasional joint account operations, but each must consider every action in relation to the movement of gold based on his particular needs, which are determined largely, if not entirely, by the element of profit. This method, while effective up to a certain point, has always been found wanting when conditions have made it advisable for the country at large to have our gold supply protected. One of the main reasons why a new banking bill is desired is to furnish some protection for our gold supply. That does not mean to surround it with barriers that would make it impossible for foreign interests to obtain it if we owed it to them, but to place us in a position to delay shipments until a possible turn of trade or until some crisis which is seemingly developing has passed by. In case of uneasiness in business the people, without knowing why possibly, watch the shipments of gold with the greatest concern, and it aggravates every feeling of uncertainty as to the business outlook. This country has never been in a position to protect itself, at such times, from an outflow of gold; neither has it been in a position to cause an influx of gold upon the first appearance of uneasiness, which might serve to stop immediately andy feeling of fear in the business world; but, instead, we have had to wait until the condition has become too serious for the effect of gold imports to prevent great financial disturbance. Eight or twelve regional banks, with the authority given in this provision, will of necessity be obliged to operate in the same manner as our present system of individual banks. There is no help for it, particularly because importations of gold before exchange conditions warrant entail loss, and no one regional bank is going to assume such losses voluntarily for the benefit of the rest. They will all be exactly in the position of other individual bankers dealing in foreign exchange. They cannot work in harmony, even if they would, for the demands upon them by member banks are going to vary, they will all have different capital and resources, and there is no way that they can work economically and effectively in conjunction with each other, even if the Federal reserve board were clothed with authority to demand it. Every regional bank will have to carry such foreign balances and such foreign bills as it can, dependent upon a present reserve position and future probabilities, and anymore who might be appointed, for instance, by the Federal board as a manager of the foreign exchange business of all of the regional banks, for the purpose of trying to make them as effective as a central bank, would be unable to operate in opposition to the requirements of each individual bank, as every effort to bring harmony out of such a system and to handle the matter without regard to cost for the benefit of the whole country would be defeated. His power to act would be subject to eight or twelve different conditions that might be existing in different regional banks and he would be in a most complicated position.Note.- It might seem wise not to develop the above for the benefit of Senator Owen, until after he has had an opportunity to answer the question bearing upon this subject.
Page 36, par (b). Permission for Federal reserve banks to purchase revenue notes of the various political subdivisions of the country puts the bank in direct competition with its members in a most important class of business, and will invite opposition and dissatisfaction instead of co-operation. Every bank throughout the country maintains, with scrupulous care and with pride, its relations with the municipality in which it has its office. The operation of credit between municipal governments and the banks should not be interfered with. This is simply the first step in the direction of making the Federal reserve banks the depositary of the funds of States, counties, cities, and municipalities, and should not be countenanced. Furthermore, if the Federal reserve banks are permitted to gradually accumulate paper of this character directly, may it not later open the door to use such paper without member's endorsement as security for note issues? While there might be no objection to the use of short revenue notes and bills secured by tax levies as collateral to the notes of the bank, if such municipal obligations were endorsed or guaranteed by member banks, it is nevertheless a dangerous tendency to introduce any form of securities to the assets of the bank, with the possibility that later they may be used as the basis for note issues.To what extent may not dangerous political tendencies develop from this plan? The Federal reserve board bank with a political management might well be influenced by political considerations in using its credit in the various political subdivisions of the country in this way. Page 36, par (d).The Federal reserve board is given the power to review and determine the rates of discount fixed by the Federal reserve banks in the various sections. The use of the word “discount” is inaccurate. Presumably it applies to the rate of rediscount by the bank. Another example of lack of knowledge.This is one other manifestation of the central bank idea engrafted upon a regional bank system. This may be construed as an admission that the economic law should not apply to the operations of this system, but a new character of law to be devised by the Federal reserve board. Supply and demand, which ordinarily fixes rates and prices, might not be satisfactory to the Federal reserve board as to some sections of the country, or, it might determine that when the economic law establishes a low rate of interest at one point in the country, another point 3,000 miles away should be given the advantage of that rate by a mandatory direction rather than by the natural flow of credit. The whole question of divergent rates of divergent rates of interest can better be left to readjustment by a natural process, with some moderate limitation upon the discount privilege such as is provided in Senator Burton's bill, rather than by review of a central board. It is to be presumed, from the wording of this provision, that all classes of paper that regional banks are to deal in are to be classified as to rates. There are certain classes of paper that could not possibly be bought in this manner, as the rates are subject to constant fluctuation, often during the same day, by influences that cannot be controlled, and by competition. As no class of bills is specifically mentioned in this provision, it must unquestionably be applied to all bills that the regional banks are authorized to buy. This would include foreign bills of exchange. The rates paid for such bills are based upon the private discount rates prevailing in the countries upon which the bills are drawn, and also upon the demand rate for the particular kind of foreign exchange involved at the point of purchase. In the case of the private rate of discount, different banks and discount companies brought into competition for bills often and usually offer different rates of discount on the same day. The demand rate of exchange, which is used as a base from which to figure the value of such foreign bills, fluctuates coninuously during the whole course of every business day over a large portion of the year. Can it be possible that it is supposed that the Federal reserve board could establish rates on foreign exchange and keep them stable? Such a consideration is too absurd to be thought of for a moment: but there is no question that foreign bills of exchange are one of the classes of paper that the regional banks are authorized to buy, and they are certainly not eliminated, by any wording in this clause of the bill, from being subject to fixed rates of discount. While rates of discount might be applied without any consideration of the exchange rate, yet they would be useless for the purpose of purchasing foreign bills of exchange, unless a demand rate of exchange were also established, from which to figure the discount rate.
Page 36, par (e). Every Federal reserve bank, possibly twelve in number, may be permitted to establish branches or agencies in foreign countries. There might thereby be established twelve separate agencies of Federal reserve Bbanks in all important foreign cities. How could such a system be made to serve a uniform purpose in connection with international exchange, either normally or in time of strain? If the Federal reserve board exercises its authority and requires all twelve Federal reserve banks to utilize one agency in a foreign country, again we come back to the central bank plan,- an admission of the weakness of this plan. By the provision of this paragraph, free competition with American institutions is permitted through foreign agencies. An American firm or institution is just as free to deal with the Federal reserve bank, in paper authorized by the bill, in Europe as it would be at home. If a number of Federal reserve banks establish agencies abroad, they will be brought together in the same banking field in competition with each other. All of the large advantages of foreign agencies would be lost, should this occur. Furthermore, how will the bankers of London regard the invasion of their banking field by agencies of twelve semi-Government American banks? Certainly, in dealings with foreign bankers, the agencies of the Federal reserve banks would find that European bankers would discriminate between different agencies as to their strength. It might result in the agency of the New York bank getting all the business.
Page 37, Sec. 15. The Secretary of the Treasury is placed in unrestricted control of over $200,000,000. of Government funds to be deposited with the Federal reserve banks, of which $90,000,000. ias now on deposit with National banks. He may say where it shall be so deposited, or whether it shall continue to be deposited in National banks or held in lawful money in the Treasury. No single officer of the Government should have this power. As stated above, the exercise of the power now vested in the Secretary of the Treasury, whether lawful or not, is unwise. This will simply make it worse. Favoritism to localities is possible. The use of the Government's funds for political otr partizan purposes as to sections of the country is possible. No such construction could enter into the handling of the Government's deposits with a central bank.The Secretary of the Treasury would have a power, under this provision, that would make it possible for him to nullify sound banking in the regional banks and make it dangerous banking. By being in a position to transfer such large sums from one regional bank to another and from one part of the country to another, he could upset all of the arrangements of any or every regional bank. If the Federal reserve board would not yield to his demands because they did not agree with his opinions, which, while entirely honest might be dangerous to the country, he could carry out his opinions in spite of it. For instance, suppose the Federal reserve board, of which the Secretary of the Treasury was a member, feeling that a certain regional bank district was unduly inflated and that it should not be allowed to borrow from other regional banks, but should be forced to curtail its operations, and every member of the board with the exception of the Secretary of the Treasury so voted, this majority opinion could be rendered void through the action of the Secretary of the Treasury in transferring balances of the Government in other regional banks to the regional bank under criticism. If this particular regional bank happened to be situated in a district strongly of the political belief of the Secretary of the Treasury, great pressure could be brought to bear upon him. Again, if such regional district happened to be a crucial one, as far as its votes for President were concerned, the pressure might even be stronger to help it out. It has been admitted by those favoring this bill, that the present power of the Secretary of the Treasury in being able to deposit money with such National banks as he might see fit is subject to abuse, and it has been claimed in some quarters that this power has been abused. The extent of such abuse, however, at present is limited in the case of each favored institution. to its capital and the security it can put up, and no such extraordinary amount can be placed with one bank as will be possible in the case of a regional bank, where the Secretary of the Treasury could, if he wished, place $200,000,000. with a bank having a capital of $3,000,000. Every change of administration involving a large difference in policies, strongly affects business. How much greater will such changes of policy influence business if any system is grafted upon this country that will subject our whole banking system to action based upon the whims of one individual?
In order to extend the mandatory provisions of the Act to State institutions, it provides that the funds of the Postal Savings banks shall be withdrawn from any bank which does not become a member of the system. State institutions, which now very largely hold these funds, are not today able to comply with the provisions of the bill. State law does not permit it, and the operation of this bill will automatically require the State institutions to at once surrender their Postal Savings deposits. Were it possible for a State institution to legally indicate its intention at this time to join the system, there might be as much justification for this provision as there is for the provision as it applies to National banks: but it is quite unjustified as to institutions which have no power at tghis time to go into the system. Postal savings deposits in the hands of State institutions are secured by approved collateral, which has been purchased largely by State institutions for the purpose of securing these deposits. It is difficult to see what fair object is served by this mandate.
Page 37, Sec. 16 Reference can be made to separate memoranda regarding the obligation of the Government being attached to these notes. Something, however, can be stated in regard to the historical and economic features relating to the issue of Government paper money. The claim that these notes are fiat money has been combatted upon the upon the theory that they are secured by collateral and that a redemption fund is provided. This is untenable. Neither the gold reserve segregated by banks nor the collateral set aside for security of the notes is the property of the Government, nor has the Government any legal title thereto. Its obligation is a fiat obligation, unnecessary in connection with a central bank note, but necessary to cure the defects of a regional bank system. The function of the Government should be limited to that recognized by all civilized countries; namely, the coinage of metal money, of a fixed standard of weight and fineness, and the protection of its businesscitizens thereby, andfrom the imposition of pimproper standards of values. The function of the bank should be to issue a credit instrument, redeemable in coin of the standard established and protected by the Government. If a committee of Congress today arbitrarily fixes 100% of discounted paper and 33-1/3% gold as safe protection, how do we know that ten years hence Congress may not decide that municipal and State bonds, or real estate mortgages, or any kind of bonds, or even stocks, will afford adequate protection, and how do we know but that Congress will be satisfied with a ten per cent. gold reserve, or with none at all? The natural and necessary safeguard against either an over-issue of bank notes or a reduction in their credit value, is the judgment of the people who are called upon to use it in trade. They will daily decide whether a bank note is adequately protected by collateral, and whether it will be redeemed in gold upon presentation. The responsibility of maintaining the credit cvalue of the note should rest upon the management of the bank, and thereby the public is assured, through the management, in the maintenance of parity of gold and bank notes.Page 37, Lines 24 - 25.Here is another evidence of the circumlocution necessary in order to try and give the regional bank system the safety of a central bank. The Federal reserve board, which as a body has absolutely no financial standing, is given control and custody, through its agent, of circulating notes ready for issuance. In a central bank, of course, such notes would go immediately into the control of a bank of large capital and financial standing. It seems a rather extraordinary responsibility to place upon men who may, before their appointment, have been entirely without such responsibility. Page 38, Lines 1 - 9. It would apparently not be possible for regional banks to pay out their notes in exchange for balances against them that might occur in a Clearing House in which they might take part, or otherwise, and it would appear as if it would be of no value to them to be able to do so in any event, where the parties to whom the notes were offered did not wish them. Such parties, after having received the notes in settlementi of differences due them, could immediately turn around and demand gold or lawful money from the bank in exchange for the notes. Such being the case, how would the note issue work in case loans had been made to member banks which they desired to have credited to their account and which were withdrawn by checks to third parties, when such checks were presented for payment at the regional bank and at a time when the regional bank was being forced under its reserve, because of the borrowings of member banks? It must be remembered that these regional banks have not the strength of the combined regional banks, even if they can borrow from each other, for each must maintain its own reserve, which is a dissipation of reserves, exactly in line with that which is being criticized in our banking system and has caused so much concern to bankers throughout the country. It would seem as though an extended explanation of how this would work should be made. In a central bank, all of the free reserve held by the bank would be at the disposal of any branch that might require it, due to local stress or emergency. Page 39, Lines 19 - 24. It is clear that if regional banks received notes of other regional banks that they cannot pay them them out, but must either return them to the Treasury of the United States for redemption or to the regional banks which issued them. Such being the case, who is to pay the transportation charges? The regional bank receiving the notes, or the regional bank upon whom they are drawn? It would appear as though the notes might go to a discount in outlying districts, unless the regional bank on whom they were drawn was obliged to pay such transportation charges. It would seem that this matter should be covered specifically.
Page 41, Lines 1- 7. The most careful reading of this Section fails to disclose how the note provisions of the bill will work. Why is it proposed that a rate of interest will be paid upon notes advanced by the Government? How is the rate calculated? Why is a rate of interest provided at all? Does it operate as a restraint, and isf so, upon whom? If the Government gets the surplus earnings, it certainly will afford no restraint. To the extent that the earnings fgo into a deposit and insurance fund, it impairs the value of the fund. Who gets the interest, and what becomes of it? We have here the extreme situation that the Government is to issue its notes, for a purpose in which the Government has no direct interest, and charge a rate of interest upon the issue of such notes. It is difficult to understand the theory upon which this transaction is based.If there is any way in which this interest proposition can be worked out, it should be charged only upon such amount of circulating notes as are outstanding, otherwise unnecessary costs would be incurred. For instance, suppose a regional bank took out $200,000 of circulating notes to distribute among its branches, to be paid by them on discounts.demand. Probably every branch would have to carry a certain amount of the notes on hand at all times in order to meet emergencies. If the regional bank had to pay interest upon such notes, it would seem as though it would unnecessarily curtail their use and availability.
Page 41, Lines 14 - 17. This provision is a further statement of the powers and responsibility of the Federal reserve agent, who is also chairman of the board of a regional bank.
Page 41, Lines 23 - 24
Page 42, Lines 1 - 5. This is only a continuation of the dual power of the Federal reserve agent and chairman of the board.
Page 42, Lines 18 - 23. This provision requires circulating notes, after preparation. to be deposited in the Treasury and to be held “subject to the order of the Comptroller of the Currency for their delivery as provided by this act.” The act does not specifically give anybody authority to order the Comptroller of the Currency to make delivery. As after printing they are especially consigned to his care, it would seem as though he should have some authority to deliver them. This may not be of sufficient importance to be worthy of consideration, but as it is an evident lapse it seems best to call attention to it.
Page 44, Lines 7 - 13. According to this provision it would seem as through Federal reserve banks could only receive on deposit from member banks, checks and drafts drawn upon depositors of the Federal reserve bank. If this were true, such Federal reserve bank would never receive any checks on deposit that were drawn upon member banks of other Federal reserve banks, consequently it would never be in position to forward checks or drafts to other Federal reserve banks, in accordance with the latter part of this provision. On the other hand, on Page 32, Lines 1 to 11 () Federal reserve banks are authorized to receive from member banks checks or drafts upon any solvent bank in the Federal reserve system. We may consider, therefore, that a Federal reserve bank can receive from its member banks checks or drafts drawn upon member banks of other Federal reserve banks. This being true, the second part of the provision, namely, that Federal reserve banks may receive from other Federal reserve banks drafts drawn by any depositor on any other Federal reserve bank or member bank, could be taken advantage of. The natural result of this provision would be to delay the collection of items; and one feature of our present system that has been very generally criticized is specifically authorized in this paragraph; namely, the roundabout routing and collection of deposit items. For instance, suppose that member banks in a regional bank situated in Chicago should deposit items drawn upon member banks in the regional bank situated in New Orleans. And suppose that the Chicago reserve bank needed New York exchange, and did not need New Orleans exchange. The New York regional bank would be authorized, on Page 32, Line 7 ( ), to accept such deposits “solely for exchange purposes.” The Chicago regional bank could therefore forward these items to New York for credit to its account, in order to make New York exchange. Then, if the New York regional bank needed St. Louis exchange, it could forward such items to the St. Louis regional bank. This bank, needing Chicago exchange more than New Orleans exchange, could forward the items to Chicago for its credit. This circle might be kept up during the whole time that New Orleans exchange was at a discount. Such a procedure might seem absurd, if it were not exactly in accordance with the way such items are being handled today and if the question of cost were not involved. For instance, if New Orleans exchange were at a discount in Chicago, the Chicago regional bank naturally would not see any reason why it should assume the loss. If New Orleans exchange were at a discount in New York, the New York regional bank would not deliberately take the loss when it needed St. Louis exchange and was authorized to use such items in order to make St. Louis exchange. Again, why should the St. Louis regional bank assume the loss, if New Orleans exchange were at a discount in St. Louis and Chicago exchange were at a premium. Of course, in the case of a central bank, this question would never arise, for the Chicago branch would forward the items to the New Orleans branch for collection, as it would be more profitable for the central bank to collect the items immediately than to send them around the country from one branch to another and be out the use of the funds. This is another instance of where the regional system retains the defects of our present system, where a central bank would not.Transfers of funds, for exchange purposes, would be much more expensive between regional banks than between branches of a centrqal bank. For instance, we will suppose that during a period when New York exchange was required by those in the West and South, in order to pay for goods purchased in the East, funds were deposited in, say the Chicago regional bank, to be transferred to New York. The Chicago regional bank would have its deposits piling up in Chicago, and its deposits in New York would be falling off. The New York regional bank would be losing deposits, and its reserve might be going down. The Chicago regional bank could only make such transfers without shipping currency, for such periods of time as its balances in New York would enable it to do so. The same condition would therefore edxist as is true at present; namely, that New York exchange would go to a premium, requiring shipment of currency from Chicago to New York, and later, some months or weeks, when seasonal demands changed in accordance with the actual trade currents that have been clearly outlined for years, the currency would have to be returned by the New York regional bank to the Chicago regional bank. In the case of a central bank such transactions could be made with the greatest possible economy, for money could be deposited in the Chicago branch and paid out by the New York branch without changing the reserve of the central bank one dollar. The result would be that this process could undoubtedly be kept up until ythe exchange position turned, without any shipment of currency whatever. This would be true throughout the whole United States. In other words, with the regional bank system, we would have no greater mobility than we have under our present system, for the natural flowing of exchange would be between districts, and the only difference between our present system and the regional system would be that a larger portion of this might go through a single institution in the district than direct from member banks, but the lack of mobility would exist to exactly the same extent. In the case of a central bank, of course, perfection of mobility would be reached in this matter of exchange, exactly as it would in the matter of reserves, for they go hand in hand.
NOTE. Page 44, Lines 22 - 25. The opponents may endeavor to answer this latter proposition by stating that the Federal reserve board could promulgate rules and regulations that would prevent delayed collection of items. If they do offer any such siuggestion, you can easily show that, even if they did so, and thus stopped roundabout collection, it would not prevent the loss that the regional banks would meet with in being obliged to make exchange that was at a discount. While they might charge such exchange to their patrons, yet it is all adding an unnecessary expense that would not exist in the case of a central bank. Even if items were not collected and were handled as exchange back and forth, the country as a whole would have to stand the loss of interest entailed, even though it might not appear in any individual institutions instance. This can be more clearly understood in considering the reason why a central bank would prefer to collect at once instead of having items floating around without collection, from one branch to another.
Page 44, Lines 17 - 21. We find, in the Section relating to note issues, a provision that the Federal reserve board may fix charges for the collections made by Federal reserve banks which are described in Section 13, page 32; also various provisions in regard to rules for further reserve banks to act as clearing agents. This is all out of place in the bill, and another illustration of its poor arrangement and language. Presumably, the clearing functions are limited to the handling of items between the member banks alone. If the Federal reserve banks intend to assume clearing functions, they would be incomplete and quite ineffective as to the convenience of the country, if those functions were limited to items drawn upon members. Instead of having an inexpensive and efficient system of clearing, we would have two systems, neither of which would be efficient or complete.
Page 45, Sec. 18. Under existing law, it would seem as though these operations could be carried out only at the rate of $9,000,000. a month, unless such provision were specifically repealed.Page 45, Lines 21 - 25.Might not the Federal board seriously discommode the banking operations of a regional bank, through the exercise of this power? Active managers of banks are obliged to look ahead and figure upon the probable future needs of their customers in connection with their maturing paper.? The Federal reserve board would only see what had transpired. They could not be kept informed of the opinions of the managers of the regional banks regarding the trend of business in such banks, for such matters change to a certain extent daily, dependent upon the business that develops, and the opinions of bankers are necessarily based upon the sub-conscious reasoning that leads to judgment that cannot possibly be explained in words. To be sure, such Federal reserve banks could take out circulating notes equal to the amount of the National bank notes, but they might not be able to use such circulating notes, for they could only put out these notes when they were required.
Page 46, Lines 3 - 13. Presumably the Treasurer of the United States would have authority to deposit such lawful money with the regional banks, even though it does not state so specifically in connection with such funds. It is conceivable that, as this proposition might work out, each regional bank would take bonds offered by its member banks. Such member banks might withdraw lawful money from the regional bank in order to deposit it with the Treasurer. The Treasurer, in his discretion, might then deposit such lawful money,- if it is to be presumed that he may redeposit it,- with any regional bank. This adds another string to his already too powerful bow, for it would add to his power to transfer the Treasury fund from one regional bank to another, or to withdraw them from any or all, of such amounts of lawful money deposited by National banks in retiring circulation. Such funds would amount to an unknown portion of seven hundred odd million dollars annually.
Page 47, Lines 4 - 5. If these notes are issued upon the same terms and conditions as National bank notes, it will not be necessary for the Federal reserve banks to maintain any reserve against them. This would mean that the capital and surplus security that is now required of National banks before they can take out circulation, would be depleted 94% and the Federal reserve banks would ultimately have outstanding in this class of note seven times the amount of their capital, provided every National bank came into the system.
Page 47, Lines 5 - 9. This provision states that United States bonds bought by a Federal reserve bank against which there are no National bank notes “may be exchanged,” etc. The use of the word “may” in this provision undoubtedly refers back to Page 11, Sec. 8, L 12-21, where regional banks are authorized to take out circulation against any bonds deposited with the United States. In this connection it might be well to notice again the wording of this authority, which is as follows: “Upon deposit with the Treasurer of the United States of any bonds of the United States, in the manner provided by existing law relating to National banks,” etc., etc. The manner of deposit clearly refers to the existing law. The kind of bonds that may be deposited is not referred to existing law, but any bonds of the United States may be so deposited. This would increase the possibilities of such note issue from $743,000,000. to $966,000,000.
Page 47, Lines 14 - 17.“ Lines 22 - 24. Why is it necessary to require banks to maintain reserve against deposits which may not mature until after a period of thirty days? The only object in making time deposits is to obtain a higher rate of interest than would be justified by a demand deposit, the principle involved being that a banker, knowing that he is going to have the use of the money for sixty or ninety days, or a longer period, is able to make loans extending over such periods with similar maturities. He is therefore able to pay higher rates of interest on such deposits. There is absolutely no excuse for requiring the maintenance of reserve against such deposits, for at the same time that they are received, loans may be made maturing at the same time or just before them, so that payment of such deposits can be arranged for the full lenhgth of time before their maturity. What possible principle can be involved, therefore, in requiring banks to hold a reserve against such deposits? It It simply makes such deposits of less value to bankers, and consequently they will not be able to pay as good rates to their customers; so that the public in reality will be losing a profit that they might otherwise have through the tying up of funds in reserve unnecessarily. It would seem far more reasonable to require time deposits to be invested in loans specifically maturing with, or just before, such time deposits. But the banker should be allowed to use his judgment in such matters, for it is only by doing so that he can handle his business economically and in a way that will give the public the best value for its money.Page 48, Lines 3 - 25.Page 49, Lines 1 - 21.In the case of a cerntral bank, the country banks, reserve city banks, and central reserve city banks, would all be on a par as far as reserve requirements were concerned, with the exception of the possible necessity of the country bank being required to maintain a slightly larger cash reserve, because it could not always have a branch of the central bank in its town, from which money could be obtained if suddenly needed. The reserve city and central reserve city banks, having branches of the central bank in their cities, would be able to obtain further cash at a moment's notice, if transactions during the day made more till money necessary than had been figured upon. In the case of regional banks, there might be some question as to whether banks in central reserve cities and reserve cities would always be able to obtain money immediately, because some banks in such cases would have small vcapital and curtailed facilities. Even though this were true, however, the fact that country banks might have to wait a day, before being able to replenish their till money, would seem to require that they maintain a greater reserve than bankers in reserve and central reserve cities, if there is to be any difference at all
.Page 49, Lines 22 - 25. This is a most extraordinary provision. Member banks are authorized to deposit commercial paper for one-half of the amount of the reserve to be maintained with a Federal reserve bank. This deposit is not in the nature of a loan,to and member banks are to pay no interest upon it, and it amounts merely to the segregation of a portion of their portfolio amounting to one-half of the amount of reserve that they are required to keep, with the Federal bank. Why should not every bank deposit paper for this purpose, and keep half of its reserve indefinitely in such paper? Proper banking would require that member banks rediscount eligible paper and have the proceeds placed to their credit in the Federal reserve bank, which sum could then be counted as reserve. If this were done, the banks would not carry paper as reserve unless it were of sufficient value to them to do so to justify the payment of interest. As the provision stands, it would actually reduce the amount of cash in bank reserves required of member banks. If this reduction is justifiable, why not reduce the percentage of reserve required to be held?Page 50.Various objections appear to the provisions on this page as to State bank reserves and deposits. It would be far wiser to leave the readjustment of the various State requirements to the various State legislatures, who by enabling acts, very simple in character, can make the reserve requirements of the States conform to the reserve requirements of this Act as to those institutions who become members thereof
.Page 50, Lines 10 - 13. not only would prohibit State banks and trust companies from keeping the redeposited reserve now required as prudent by various State laws, but would have the unfortunate effect of restricting the foreign operations of such State institutions so that they might be seriously embarrassed in transactions necessary for the conduct of our foreign commerce.Large institutions doing a large share of the business of international exchange, which is a required and necessary facility in connection with our commerce, might be absolutely prohibited from participating in the plan by the provisions in this section of the bill. It would affect the large and small alike, but the influence would be stronger upon the large institution which is performing services of the greatest value, because the business would proportionately be of greater value to that institution and it would naturally be unwilling to surrender it. Instances can be cited where this would be an actual prohibition of this character.
Page 50, Lines 13 - 16 .The language here might be construed to prohibit a member bank from rediscounting bills which it had discounted for a non-member bank. Furthermore, any member bank which is discounting bills with the Federal reserve bank and at the same time extending credit or facilities to a non-member bank, might be held as violating this provision of the bill. The consequences of a construction of this paragraph applied for the purpose of forcing membership in the association are too serious to contemplate. The benefits of this system are supposed to be extended when possible to State institutions. Does this intend that within sixty days all State institutions, whether the law permits them to become members or not, shall signify their intention of becoming members as soon as the State law permits them to do so, one or ten years hence, and bind themselves irrevocably to the vissitudes of this plan, under penalty of being deprived of freedom of doing business with member banks? May not this be made the instfrument of enforcing a contest between State institutions and National banks? The unrestricted power of construction of the meaning of language of this character, in this and other instances in the bill, will naturally raise doubt in the minds of many bankers as to whether it is safe to submit themselves to the jurisdiction of this board.
Page 51, Lines 1 - 9. The provision that banks in Alaska or anywhere outside of the Continental United States may become members of any Federal reserve district, is an attempt to cure the defects of a regional system as to our insular possessions and territories, which would not be necessary with a central bank. Agencies or branches could be established at these points which would meet all the requirements of each situation. It is extremely doubtful whether it is a wise provision to extend the operations of this Federal reserve regional bank system, without restriction, into these far distant sections.
Page 51, Sec. 20/. This is another attempt to enforce compliance with the terms of the bill by National banks. It is unnecessary, as the other measures to enforce compliance atre amply effective. This provision will work most unfairly to banks in this country, even if all of them become member banks. Different National banks hold varying amounts of circulation in proportion to their deposits. Such circulation has been taken out under the present law. No one can determine how soon they will be able to retire their circulation from the provisions of this bill. Nothing justifies the passage of this unfair provision, which will operate against banks which have taken out circulation, many times against their better judgment, because they have felt that the country needed the extra circulating medium. Such banks are being deliberately legislated against, in favor of those who have simply taken out the amount of circulation required by law and have preferred not to run the risk of loss in Government bonds that they would have to purchase in order to increase their circulation.
Page 51, Sec. 21. This section does not seem to have been drawn with careful regard to the provisions of existing law with respect to bank examinations. As to special examinations, it places the Comptroller of the Currency under the direction of the Federal reserve board, although he is now by law subject to the direction of the Secretary of the Treasury. As the Secretary of the Treasury, under Page 27, Lines 11 to 19 ( ) is authorized to act in opposition to any provision of this act which might curtail his existing rights, he would, under this provision, again be able to overrule the Federal reserve board if he so desired. The Comptroller of the Currency is placed at the service of the Federal reserve board and the power is apparently given to them to require such examinations. If six members of the Federal reserve board voted to have any special examination made, and the Secretary of the Treasury voted against it, he would be able to prevent the examination, as his instructions to the Comptroller would be greater authority than those of the Federal board
.Page 54, Lines 6 - 14. This language can be construed as to so restrict the dealings of business men with banks of which they are directors, as to impose great hardship upon banks in country districts. This may also prove a serious impediment to banks, particularly in country districts, from obtaining the services of business men as bank directors.
Page 55, Lines 5 - 165. The language here would imply that any stockholder in a National bank who sold his stock at any time, feeling dissatisfied with the management of the bank, would still be liable to the extent of 100% of the par value of his stock for the debts of the bank.
Page 55, Sec. 24. National banks should not be encouraged to make fixed investments. Their deposits are subject to withdrawal on demand, and the demand for accommodation of this character by farmers can better be met by the creation of a new class of institutions which will bring the farmers into contact with investors, rather than by employing bank capital in the making of mortgage loans.
Page 56, Sec. 25. This section proposes that National banks desiring to establish branches abroad, shall set aside and appropriate a sufficient amount of capital for that purpose. It is impossible to establish branches upon any such basis, unless an entirely separate institution is incorporated. A foreign branch of a National bank, by reason of its drafts and transactions, may at times have all of its capital and, to the extent that it uses credit, not alone that segregated capital but a considerably larger sum, obligated for payments at any point at which these drafts are made payable. Unless this plan contemplates the separate investment of a separate amount of capital and the lodging of this investment in unliquid form in the city in which the branch is located, the so-called segregation of capital for this purpose is perfectly ineffective. Any bank which establishes a branch in a foreign country and conducts business there, should be liable, at home and abroad, for all of its debts, and all of its capital should be pledged for that purpose.
Page 58, Lines 5 - 6. We have here another provision which, while entirely proper and right in connection with the business of the United States that has to be carried on by the Secretary of the Treasury, is wrong and unjustifiable in relation to the banking system proposed.
Page 59, Sec. 29. This would appear to be the most necessary and satisfactory provision in the bill.

Miscellaneous