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Doctor WILLIS. This gives the tabulated results of some of the studies of foreign bank failures. I simply submit it for what it is worth, merely illustrating the point I have just made that in branchbank countries you do not have the evil that we have here.

Mr. Chairman, that brings me practically to the close of what I have to say on the subject of branches. I have dealt merely with a few points that I think are rather essential, and I have omitted the discussion of the number of branches, the laws on the subject, etc., all of which, however, is contained in these volumes here.

The CHAIRMAN. Before you take up another point--I am very much interested in what you say about chain banks. Apparently those things have come into existence in response to a feeling of need?

Doctor WILLIS. Yes.

The CHAIRMAN. They are an evil and consideration ought to be given to the possible checking of them.

Doctor WILLIS. Yes.

The CHAIRMAN. And if so, what could possibly be done in that direction?

Doctor Willis. Well, since you ask me a plain question, I will give you a plain reply. I think properly regulated, controlled branch banking is the remedy for chain banks, just as I think the proper supervision of the drink evil is the remedy for that rather than prohibition.

The CHAIRMAN. At this point the committee will take a recess until 1.45 o'clock.

(Accordingly, at 12.05 p. m., the committee took a recess until 1.45 p. m.)


The hearing was resumed at 1.45 o'clock p. m., at the conclusion of the recess.


The CHAIRMAN. Mr. Willis, we will resume our hearing.

Doctor WILLIS. Mr. Chairman and gentlemen, before leaving the subject of branch banking, which was my second point, there is one matter that I should like to refer to with special reference to that portion of H. R. 2, which has to do with the control or regulation of branches.

The CHAIRMAN. Before you go into that, I should like to say just this, that a number of gentlemen here, when we took our recess, expressed to me a desire, from time to time, to ask questions in reference to the policy and development of whatever subject you were touch

ing upon.

Doctor WILLIS. Yes.

The CHAIRMAN. And if it is not disagreeable to you, I would suggest to those present that if, at any stage of the testimony, any of you gentlemen have any questions to ask, simply step forward and touch me on the shoulder and I will see that the questions are asked.

Doctor Willis. I shall be glad to answer any questions..

The CHAIRMAN. Sometimes, if you can congregate the facts, when you come to read the record, it is a great deal easier than to have them scattered through separate pages.

Doctor Willis. Decidedly. I was saying, gentlemen, before leaving the subject of branch banking, I wish to refer to that portion of the McFadden bill which has to do with the establishment or rather with the admission of banks into the Federal reserve system. As you know, in the original bill, provision was made—and I believe is still made in the form in which the bill recently passed the House for enabling the Federal Reserve Board to refuse membership to applying banks on the strength of their branch policy, and that is defended

or warranted on the ground that a certain regulation of the Federal Reserve Board, known as regulation 8, has established that policy and that the Federal Reserve authorities conceive that it is essential to the maintenance of their general point of view in regard to the matter and for the maintenance of their proper control over the membership.

I believe that the Association of State Bank Supervisors, to which some reference has been made here this morning, requested the insertion of the following in H. R. 2:

The Federal Reserve Board, subject to the provisions of this act and such conditions as it may prescribe pursuant thereto, may permit the applying bank to become a stockholder of such Federal reserve banks: Provided, however, That such conditions or regulations shall not limit or impair the charter or statutory rights and powers of such bank, nor shall the Federal Reserve Board,

And so forth. Now you will notice that the essential effect of that amendment, had it been made and by the way I do not present it in any official way in behalf of the State bank authorities; I merely pick it up, I think in a correct form, but simply on my own authority, for the purpose of discussion-you will notice that that provision essentially states that the Federal Reserve Board, in admitting banks to the Federal reserve system, shall do it pursuant to the provisions of this act.

In the form in which H. R. 2 first appeared in the House of Representatives, shortly after the opening of the present session, an amendment was inserted designed to meet the wishes of the State bank authorities, but that amendment omitted the words "subject to the provisions of this act,” so that the language with which they were not satisfied simply gave to the board the right to regulate the admission to the Federal reserve system, subject to such conditions as it might prescribe.

I shall not attempt to discuss in any detail the question whether any administrative board should ever have given to it the right to prescribe regulations on such an important subject that are not pursuant to the provisions of some act of Congress.

Senator Glass. That is what the board has done. : Doctor WILLIS. Yes, sir.

Senator Glass. It has usurped the legislative functions of Congress.

Doctor WILLIS. It is proper for you to use that expression, but perhaps not for me, here. I merely state that that is what it has been doing; it has been making regulations not pursuant to the provisions of the act.

I did not want to address myself primarily to that, but the argument has been made that, of course, it is necessary for the board or some similar board to do that, inasmuch as banks would otherwise exercise unusual powers, such as engaging in the operation of


sawmills, in the conduct of breweries, and the operation of water systems, etc.

Right there I want to call attention sharply to this point, that the function of the Federal Reserve Board or any similar board is essentially an individual function; it must have the power to say to any given bank, "you shall not come into the Federal reserve system unless

you do so and so; unless you do so and so you are not a desirable member of this organization.” Undoubtedly it must have that power. But that is a far different thing from enabling the board to say to a large group of banks, “You shall not come into this system unless you, ipso facto, abandon your charter powers in an important

In the latter case the power is legislative in character. Senator Glass. You mean charter powers in reference to banking and not in reference to sawmills, breweries, etc.

Doctor Willis. In other words, it is not deciding whether a given bank is or is not desirable; it is deciding that all banks of a certain class can not come into the system, which is a legislative power.

As to operation of the Federal Reserve Board, I should unhesitatingly say, of course, this board can not exercise any control unless it has full authority to say to banker A, B, or C, “You can not come into this system,” and furthermore, if they say, We do not want you to come in because we do not like your branch banks," that is all right; but to say, “You can not come in”- say it to all banks—"because you have branch banks," in defiance of the State authorities under which those banks operate or under which such banks have been chartered, and without any reference to an act of Congress, that is something else. It is essentially not necessary that the board should exercise any such power in the interest of good banking, and, as I say, there is no legal warrant for it in any way.

That is an important matter to consider in connection with the whole question because it has been so earnestly said if the board has not this power it could not keep out unworthy banks. Of course it can, and they should be permitted to keep out unworthy banks. If there are banks, as there are, in some States, which operate branches without any authority of law at all; simply subject to prevailing custom or official sanction, and if the board, on looking at them at the time they apply, should say, "We do not think your branch policy is right or wise,” who would object?

Senator GLASS. Or if they find they have an unsafe banking business in any respect, they have the right to exclude them.

Doctor WILLIS. Yes, but that is different from allowing the board to say to all banks, without distinction, as it does, in regulation 8, “You shall not come in if you have branches,” etc.

That, then, is a problem that has been festering along a great deal in the Federal reserve. It was constantly in discussion when I was connected with the board in an executive capacity, and that has continued to be a crucial question straight along from that time to this. It is not desirable that the board shall have that authority. That is a function which should be reserved, as it is reserved, to Congress, and it is not desirable that the words, “Pursuant to the provisions of this act”.

Senator EDGE. How could Congress control the situation as to whether a bank was or was not guilty of unsafe practices ?

Doctor WILLIS. In this way: If Congress says no bank shall come in if it has branches

Senator EDGE. I thought you were recommending some discriminatory powers.

Doctor WILLIS. I was recommending that the board be allowed to make regulations, subject to the provisions of this act. Those words were in the original Federal reserve act.

Senator GLASS. They were dropped out inadvertently. Certainly without the knowledge of some of us who were very careful about it.

Doctor WILLIS. Can there be anyone who will contend it was wrong to put into the act that the board should conduct itself

pursuant to the provisions of this act? If it could conduct itself otherwise, what is the use of the act at all?

I think there is no doubt at all that those words should be put in there and if Congress wishes to leave to the board wide latitude to do as it pleases, then it should specifically, state that the board may exercise its powers without reference to this act.

Senator EDGE. Did I not understand you to say or rather approve the policy which permits someone—I think you did not state who, the comptroller or someone—to decide whether the branch-bank policy on the part of some bank was absolutely wise?

Doctor WILLIS. Absolutely so.

Senator Glass. Not necessarily the policy of the branch bank, but the process pursued by a particular bank.

Senator EDGE. That goes naturally without saying:

Doctor WILLIS. I have one more point before leaving the branchbank matter.

The CHAIRMAN. This thought occurs to me, that the policy which you think was improvidently or without legal authority represented by the regulation of the Federal Reserve Board-that policy would be crystalized into law by an act of Congress if this bill or some modification of it were to become effctive, would it not?

Doctor Willis. Except this bill, in the proposed section 9, leaves it to the board to make such regulations as it sees fit and expressly leaves out, as I have explained, the words "pursuant to the provisions of this act.”

The CHAIRMAN. That is the provision which I think Senator Glass either did propose or was about to propose to the Senate bill last

year. Doctor WILLIS. And which your committee recommended. Senator Glass. Which I did propose and the committee adopted it.

Doctor WILLIS. It is contained in the official draft and I highly approve of the substitute which your committee recommended.

Senator Glass. It was in the original Federal reserve act and how it got out I do not understand.

Doctor WILLIS. Put those words in there and it will be impossible for the Federal Reserve Board to put banks out of the system because they have branch banks.

I have one more point before leaving the subject of branch banks. It is often stated that the branch bank system is very inimical to the existence of the central bank system and particularly to the existence of the Federal reserve system. It might be sufficient to answer that by stating that the central bank or reserve bank system did not originate in the United States but originated in European


countries, all of which have branch bank systems. They have not found the branch bank incompatible with the central bank, nor is there any reason whatever why our district system of reserve banks in this country should be inconsistent with the central bank. That argument should be laid aside.

Along with it, however, has been urged an objection and contention like this: Where you have a highly developed branch bank you have a system in which the reserve bank is greatly weakened, because with the widened diffusion of assets, with sudden drafts on the reserve bank at unexpected times, there is a large matter upon which we can not make absolute pronouncement, but I have much data here which I obtained from the Federal Reserve Bank of San Francisco. The data compares the relative borrowings of two large branch banking systems in California---and I took the figures from California not on account of any special regard for the situation there but because you have there the best illustration of widespread branch banking-and compared with these figures are the borrowings of seven unit banks which have substantially the same combined resources. The two branch banking systems had combined resources of $495,000,000, and the seven-unit banks had combined resources. of $491,000.000.

The two branch banking systems, as of January 31, 1922, had outstanding loans aggregating about $5,000,000. That of course varies somewhat as follows: $7,000,000, $2,000,000, $500,000, $2,000,000, and so on down, the highest figure being $16,000,000. The smallest was zero.

During the same period the seven-unit banks were consistently higher. For the first month they had $12,734,000, as against $5,000,000 for the two branch banking systems. Then, at the highest point, where the two branch banking systems had $17,000,000 in borrowings, the seven-unit banks had about $20,000,000, and the next month. it was $27,000,000 as against $6,250,000 or so.

The lesson of that, so far as it goes—it is merely an isolated example—is to show that the branch bank does not bring a heavier strain to bear upon the central bank system, but quite to the contraryand that is merely illustrative of the experience abroad, where the central banking system is not confined to rediscounting, but principally operates in the open market and regulates the discount rate.

That brings me to the end of my discussion on those particular points

The CHAIRMAN. You spoke a moment ago of European countries with branch banks and mentioned, I believe, the low countries

Doctor WILLIS. Yes, sir.

The CHAIRMAN. My recollection is that you did not mention the Scandinavian countries. It has been my impression that Norway's experience with branch banks has been rather unfortunate.

Doctor WILLIS. I have the Swedish figures here and will file them. I think the Norwegian experience has not been very successful because, I think, of foreign exchange questions.

The CHAIRMAN. In discussing bank failures through a period of time, I suppose we have to consider the economic background against which those failures are drawn. Has your study taken account of the curves which, if properly plotted, would show the rise and fall of failures in business other than banking?

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