Doctor WILLIS. Yes, sir; I have devoted rather extensive attention to that. I have so much to say that I was reluctant to bring that to the attention of the committee because it seemed a little off the track.

The CHAIRMAN. I wanted to be sure if you had taken that into account.

Doctor WILLIS. I have an elaborate chapter on that and I had access to figures obtained by the Bureau of Economic Research in New York which has been making a very elaborate study of the business cycle and in that study they have obtained about all there is to be had on business failures abroad. The study shows a rather close correlation of bank failures with business failures and with what is called the business cycle.

The CHAIRMAN. You would expect these periods of cyclical depressions, as they call them, to be marked by failures in all lines of business?

Doctor WILLIS. They are.

The CHAIRMAN. So it is a little difficult to attribute bank failures to banking methods in force at the particular time because, I suppose, the business failures occurred in spite of the best business methods.

Doctor WILLIS. I do not think I could quite agree with that, Senator. That is a theoretical question, however. It seems to me banking is a kind of governor or controller on business and I believe the accepted theory of commercial crises and depressions now is that credit plays an effective and controlling part in dictating the expansion or contraction of business.

Senator GLASS. It seems to me that the distinction made by Senator Pepper, if I may say so, is subject to this modification, that much depends upon the character of banks that fail; in other words, whether those banks that fail are such institutions as would essentially be enabled to resist a business depression, and whether those banks that stood, were institutions that habitually do resist business depressions.

The CHAIRMAN. All that I meant to say was that if you have banks that were serving a community as, for instance, in the anthracite region during the strike, and a condition of prostration affects the whole community, the banks, sooner or later, will feel it and may even go under, and yet it would be a difficult thing to attribute that collapse to any defect in the management of the bank. It was, in fact, overcome by a sort of tidal wave of disaster.

Doctor WILLIS. I have no doubt there are cases of that kind. In a general way I believe wise banking prevents business from reaching the peaks, but smooths out the cyclical curve and maintains it on normal or level bases.

Senator GLASS. But even so, the small bank and the branch bank would be very much more likely to succumb than the larger bank and the better managed bank.

The CHAIRMAN. I can see that very clearly.

Doctor WILLIS. Before we leave the subject of branch banking, I should like to make an answer to a question raised by Senator Edge, who is not here.

The CHAIRMAN. I shall direct his attention to it when he comes.

Doctor WILLIS. He asked for the figures on the number of branches in the United States, and in this volume 6 of my report, there are given the full tables originally prepared by the Federal Reserve Board, and also the tables of my own, which are rather more up to date. However, taking the figures furnished by the board for June, 1924, it appears that the number of banks operating branches at that time, were 681 banks and that the total number of branches operated at that time was approximately 2,233, which I think is the question he asked for.

I now pass on to the third major point I mentioned in the beginning, and the last one, and that is the provisions of H. R. 2 which have to do with the use of savings deposits, the broadening of the real-estate loan power and the introduction of a legalized investment security business.

On that point may I say that I took a rather serious view of the effect of H. R. 2, and I take that view not merely because of the contents of H. R. 2 at all, but because H. R. 2 seems to me to represent the culmination of a very bad tendency in our banking legislation, a tendency I view with deep regret and for which I believe the Federal reserve act was responsible.

In the Federal reserve act, permission was given banks to accept savings deposits or time deposits subject to a reduced reserve, and that was brought about under the argument of necessity; namely, you have to do it to meet the competition of State banks similarly favored.

The CHAIRMAN. What do you mean by the expression "accept savings deposits or time deposits subject to a reduced reserve"?

Doctor WILLIS. In the reserve banks we had reserves running up to 18 per cent and in the savings deposits it was cut to 5 and later to 3 per cent by subsequent legislation. So, it was very profitable for a bank to shift as many of its commercial deposits as it could, into the savings class in order to obtain the advantage of the reduced reserve requirements.

That process has been going on for a long time, and the result is seen to-day in the very unfortunate conditions in our banking system. At the present time our savings banks are certainly in difficult straits, not through any mismanagement on their part, but because, as a result of National and State banks obtaining legislative concessions, the savings banks are not able to attact to themselves the business that formerly they got; that is to say, they can not make and give inducements which the National and State banks can offer to depositors. Moreover, the savings banks, as you know, are carefully restricted as to their investments to protect the individual, as he should be protected-the true genuine depositor. As a result of that, the savings banks can not offer the same inducements as the commercial banks, and the commercial banker takes the savings deposits and invests them anywhere he pleases. He generally invests them in local enterprises, warehouses, etc., and allows himself to do as he likes with the funds thus committed to his charge.

The CHAIRMAN. I wish you would explain a point that is not quite clear to me. Having regard to the interests of the customer of the bank who is strictly a commercial customer and has a commercial account with the bank, how can he be accommodated if he is shifted over to the class of savings funds depositors?

Doctor WILLIS. Very simply. A has a balance, we will say, of $10,000, but his bank requires him to maintain a minimum balance of $2,000. Now, A is able to put some pressure on this bank and eventually the bank says, "Suppose you carry a portion of your account in the savings account; you get some interest and you need not carry a definite amount in the commercial account." In other words, he is induced to shift over and become a savings depositor in such proportion as they agree upon between them. In other cases, where the account is not very active, the individual attends to that and keeps his funds in the savings account, subject to the 3 per cent reserve, and on occasions draws them out, being careful to draw them out so as not to lose the interest on his deposits.

The CHAIRMAN. I can see, as an intellectual proposition, how that could work out. I am surprised that that should happen generally, because it seems to me it would not meet the needs of a commercial community.

Doctor WILLIS. I do not know how it does work out. I have been a director of a couple of banks, one a national bank and one a State bank, for several years, and we have found that a rather serious problem and we have found the competition of neighboring banks so severe as, according to one of our officers, to drive us to do the same thing, a thing I did not want to do.

But, be that as it may, what I can say with certainty is that the savings deposits are being shifted out of the savings banks and into commercial banks, both national and State, and as a result of that we are getting to a point where savings deposits are being tied up in commercial loans, which, in many cases, are of rather a doubtful variety.

I have stated the conclusions on that point as follows:

Within the past 10 years or more there has been a rapid drift of savings deposits out of mutual savings banks (relatively speaking) and into commercial banks. Since 1914 the national banks have increased the savings and time deposits held by them by about 300 per cent, while State banks and trust companies have had a parallel increase of 206 per cent, and mutual savings banks have increased only 83 per cent.

In a very large number of States it is now permitted to commercial banks to solicit, obtain, and hold savings and time deposits, sometimes under some other name, but in effect as such deposits. These deposits, when so received, are in a very large number of cases subject to no special protection, but are directly reinvested along with the commercial funds of the bank in the operations (or speculations) of the institution itself.

The

Thinking this was a serious situation, I obtained from the State banks, as far as possible, and did obtain three statements of banks prior to the time of failure, a statement of the bank at time of failure, and then analyzed these figures for the purpose of seeing what the effect of demand versus savings deposits protection was. figures are fully given in the volume relating to that matter, and they show that in about one-half of all the States examined there was a rapid decline of demand and commercial deposits prior to the failure, while the savings deposits remained about the same or actually increased in amount; in other words, the commercial depositor was able to protect himself by drawing out, while the savings depositors

were left to hold the bag, either through lack of knowledge or the 30-day clause had been enforced against him, so that the demand depositors became a preferred creditor, while the savings depositor was left with whatever remained to him after the demand depositor had been paid, and the city correspondent bank had taken its toll out of the securities in its possession and the reserve bank had taken its toll for the protected rediscounts which it had made. It is a situation that has caused a great deal of irritation, bad feeling, and popular unrest, particularly in the West.

The CHAIRMAN. You refer to the correspondent bank taking its toll out of the security it had exacted for the interbank advances? Doctor WILLIS. Yes, sir.

The CHAIRMAN. You mentioned that earlier in your statement. Doctor WILLIS. Yes, sir.

The CHAIRMAN. How general can you safely make your statement as to the existence of the practice of large city banks to exact collateral?

Doctor WILLIS. I should say it was very general, and, in substantiation of that, again refer to a study made by me in the years 1920 and 1921 and published in several installments by the Federal Reserve Board.

Senator GLASS. You mean in bulletins?

Doctor WILLIS. Yes, sir. The Federal Reserve Board, before allowing it to be published, gave it careful thought and had it subjected to the scrutiny of several representative bankers. It shows that the situation is a general one.

I might go on with a great deal of statistical data and analyses on banking laws to illustrate the unsafe and unwise competition that is going on at the present time between our States and Congress in this matter of loosening up the protection to the savings depositors. What I want to say is this: The Federal reserve act made a bad start in doing that; in fact, the Federal reserve act was more unsatisfactory in that respect than it was in the matter of the extension of permission to national banks to engage in the performance of fiduciary functions.

It gave the power to national banks to carry on fiduciary functions, and I believe such powers have been granted in the case of more than 1,400 institutions. Perhaps you will be surprised to know I have here a complete list, furnished by the board, of those banks who received those powers. Perhaps you will be surprised to know that 200 of those banks are no longer in the national banking system or, if not, have relinquished their powers. It is an extraordinary thing to give a fiduciary power to a concern so small or weak as to be likely to go out of business, where it takes in a great many branches of business, like trust estates, etc.-that it goes out of business or at least transfers it to an equally strong institution. Senator GLASS. You mean an equally poor institution?

Doctor WILLIS. Well, to an equally poor institution or, at any rate, to another institution. We have been deteriorating both with respect to the trust function situation and the savings banks, and we have brought about this extraordinarily undesirable condition of affairs in both those instances, by this legislation letting down the bars.

Apropos of H. R. 2, is it desirable to make that situation worse, and does H. R. 2 do it? I say as to the first, no, and, in the second instance, emphatically yes.

In the first place, H. R. 2 recommends the practice of making real estate loans up to the amount of the demand deposits. It, however, makes no provisions as to segregation, and I understood the chairman of the committee to say that at this time such action would not be wise, that the time is not ripe.

It seems to me the time is overripe for that particular matter, and Congress will do a very wrong thing if it legislates on this subject without providing in some way for the better protection of savings deposits, and, if it is possible, for the better protection of the fiduciary depositors. It is very necessary that we have legislation at an early date for the purpose of correcting the provisions of the Federal reserve act, both as to fiduciary powers and savings depositors in order to put our banks on the best plane in regard to these matters, and in order that we may not have these growing or recurring failures; that people who have put their small savings in the banks do not find themselves simply left behind when it comes to a settlement, so that they are worse off than any other class of persons connected with the banksworse off, in many instances, than the stockholders.

I find fault with H. R. 2 in this respect, not merely in regard to the meaning of the provisions which I am willing to accept from the statement made this morning, but because of the effect of them.

One word needs to be said as to the remedy for that. I am not altogether clear at the present time that segregation of savings deposits would be the most immediate or most available way of meeting the situation the segregation of assets behind them, I should say. There are a variety of other ways whereby they may be perfected. Those I have had fully analyzed and set forth here by Dr. W. H. Steiner, who has made a dispassionate review of the various methods employed for the protection of these deposits, and he is perfectly clear-cut in his own thought, and I agree with him, in saying that reform is urgently called for, and there can be no doubt as to the direction it should take.

Now, the final point as to the real-estate provision which is contained there: As I understand H. R. 2, it allows real-estate loans to be made in the city and in the country up to the amount of 50 per cent of the savings or time deposits of the banks. As I read the act, it provides no basis whatsoever for the appraisal of the land. I was the economist or expert of the joint committee of Congress which prepared the Hollis-Bulkley bill, which became the Federal farm loan bank act, which is on the books to-day. At that time we made an elaborate study of appraisals and found it exceedingly difficult and trying. The question of appraisals is elaborately dealt with under the best State laws, and for Congress to enact a law in which it would permit loans to be made in this way, without any safeguards at all, is, to my mind, unthinkable. Perhaps the question may be raised, as it always is, in such cases, "Do you suppose that national banks want to throw their money away on bad loans; are they not the best protectors of their own funds? Do you think an examiner would be more apt to act wisely in that respect than they themselves?" The answer is found in the epidemic of bank failures, and those failures are due to frozen assets obtained by the banks through loans