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STATEMENT OF JOHN S. DRUM, PRESIDENT, MERCANTILE

TRUST CO., SAN FRANCISCO.

Mr. DRUM. Mr. Chairman and gentlemen, I appear not only for the Mercantile Trust Co., and branch banks in California, but likewise for the Pacific

Trust & Savings Bank of Los Angeles, the Security Trust & Savings Bank of Los Angeles, and the American Bank of San Francisco.

I appeared at a Senate committee hearing last winter. At that hearing practically the same McFadden bill that had passed the House at that time is now before us. In the bill last winter, when the matter was considered, and the Senate committee discussed what if any suggested amendments they would make, both in the hearing, and I understand afterward in their conferences, they determined on two amendments; one was that they would eliminate by proper provisions the so-called Hull amendment. The other was that they would eliminate section 9 of the bill, which had reference to the State banks within the Federal system continuing to pursue their powers as branch banks under their State systems.

In the colloquy of last evening you, Mr. Chairman, outlined, when the Hull amendments were under discussion, that while you

believed intellectually that the Hull amendment should not be in the bill, that as a practical matter, due to the exigencies of the legislation and the admitted need of giving the national banks under the terms of the bill the privilege of establishing branches within the municipalities, that you intended to support the bill as it was written and passed in the House.

Senator GLASS. Unless he should change his mind.

Mr. DRUM. Yes. I therefore assume that with the amendment, which was the elimination of section 9, you would likewise share your views as to what likely you would feel justified in holding.

The CHAIRMAN. As far as I am personally concerned, my mind is entirely open as to section 9.

Mr. DRUM. Oh, yes; I understand.

The CHAIRMAN. As far as the whole amendment is concerned, the view I expressed yesterday is the inclination of my mind at the present time, for the reason I then suggested; and my recollection was that when we reported out the bill last year to the Senate we omitted section 9, but that we did retain a provision corresponding to the Hull amendment, namely, requiring that the legislation in a State authorizing branch banking must be legislation already on the statute books at the date of the enactment of the Federal bill; that is my recollection.

Mr. Drum. I did not so understand it, but it is not important. I want to say that as far as our banks are concerned we feel it as a duty which we owe the public of the country-because banking is a public or a semipublic function, and likewise to the Congrass of the United States and likewise to ourselves, that we should present this matter and present it fully.

The hearings, now, beginning in the House in the spring of 1924 have consisted of the following: One public hearing in the House in 1924; one public hearing in the Senate in 1925. As far as the arguments supporting the McFadden bill are concerned they are contained in the report or reports of the comptroller; I refer to his reports of

December, 1923, December, 1924, and practically a reaffirmation by the present comptroller of the contents of those two volumes in his report of December, 1925.

As far as the evidence is concerned, it consists of a written statement of Comptroller Dawes in 1924, the statements of certain unit bankers in California in 1924, and the material in 1925 before the Senate, which was entirely in opposition to section 9 and to section 5200. There was no affirmative evidence offered in support of the bill before the Senate as there was before the House the year previously.

In taking up the statement of the comptroller in 1924, one reading that statement itself--about 10 or 15 pages long--must be impressed with both the contents and likewise the purpose of those contents, as to the atmosphere desired to be initiated and produced as to the necessity for branch banking legislation in municipalities for the national banks. It practically takes this premise: First, that the national bank system is in danger; secondly, that the Federal reserve system is in danger, and an appeal thereby to the Federal power

that has the making of the laws pertaining to those two active functions and activities, that through a fear and by reason of those dangers, that a great emergency exists which must be taken care of and taken care of rigidly according to the provisions of the McFadden bill.

When that bill was introduced, and at the time of the hearing before the House committee, it was my thought and the thought of my associates that the bill was the bill of Congressman McFadden. time the bill was introduced the comptroller had written and circulated to the public press a very definite statement in support, indicating his fears, and commenting upon the fact that Congressman McFadden had performed a great service in recommending that bill to Congress as a necessary legislative matter. However, when it came to the report of the comptroller the following December, it was stated that the origin of that legislation should be explained; that its origin was due to the necessity which the comptroller felt existed in his interest in national banks to see that something was done to give the national banks those banking privileges which the State bank possessed.

He stated that he had taken the matter up with the national bank examiners about the country. He had likewise taken it up with prominent bankers about the country, and that the views of both were singularly uniform, and that therefore he had placed the matter in the hands of his deputy comptroller, Mr. Collins, to prepare a bill; that Mr. Collins had prepared that bill and that they had asked that the bill be introduced in the Congress.

Now I am reciting that not in any spirit of criticism but to show that this bill in its origin was a bill which the comptroller originated by reason of what he felt was his peculiar duty as the representative of the national banks. I want to say further that I have absolutely no quarrel with the national banks. We do not believe that the competition that exists between us is one that should cause heat, or one that should cause charges. We believe—and I will come to that later--that there are two systems of banking in this country and we believe that it is to the interest of American banking that sound competition and active competition should exist.

But, in coming back to the comptroller, he stated in his report of 1923, in very positive terms, that he regarded himself as a partisan of national banks; that he regarded himself as the champion of national banks, and it was his duty in the premises to see that that partisanship was expressed under his duties and under the law, in recommending to Congress from time to time the necessity of amending the national bank laws. With that right and privilege of the comptroller, we agree entirely, so far as the amendment of the national banking act is concerned. We do feel, however, that we have a perfect right and privilege to comment upon the fact that the Comptroller of the Currency is in a dual capacity, one a primary capacity and responsibility of the Comptroller of the Currency looking after the regulation of national banks, and the other due to the necessities of tying in the national banking system under the comptroller's operations, with the Federal reserve system, and by the Comptroller of the Currency sitting as an ex-officio member of the Federal Reserve Board.

We feel that when it comes to that second capacity, which is ex officio, and one as a member of the Federal Reserve Board, that a Comptroller of the Currency who has a primary duty, which is, as he describes it, the representative partisanship and the championship of national banks, should not be the Federal officer who should recommend to Congress and who should propagandize to the country the necessity of amending the Federal reserve system, particularly in regard to its operations and its contacts with State banks. We contend that the Federal reserve act when it was drawn very specifically stated that there was to be an opportunity to the Federal Reserve Board; that that board should truly represent the interestsfinancial, agricultural, and commercial-of the country. For that reason those appointive members of the board should come from different sections of the country, and while the language is not very clear, there is likewise the inference there that they should from time to time report to Congress what their observations and suggestions are, and as to the need of legislation in the interest of the Federal reserve system.

Now in this particular controversy, because it is a controversy, we contend that the Comptroller of the Currency-and I use the word not in a critical sense, but merely to describe the situation has in a measure usurped the duties of the appointive members of the Federal Reserve Board. I believe, and we believe, that in his zeal for the national banks, and we commend his zeal and agree with it fully, that he should have allowed the members of the Federal Reserve Board who represent the entire country to express their views to Congress as to what was the position of the board, whether it was a majority or minority or unanimous opinion, that the true function and duty to advise Congress resided with the Federal Reserve Board and not in the Comptroller of the Currency. That was not done. It has not been done. Some members of the Federal Reserve Board appeared before the House committee two years ago.

There was no hearing before the House committee before this bill was passed this session and is now before you.

We contend that by reason of that fact that it is very necessary legislation in the interest of the National banks, which has assumed a character of controversy, and has assumed a character of presentation which should be entirely lacking from any discussion as to the rights or the powers of the members of the National banking system as contrasted or compared with members of the Federal reserve system. We feel that when the act.itself provided for State bank members to come within this system, that we are Federal banks just as truly as National banks are Federal banks. We believe that there are in the banking system of America today, three classes of banks; one, National banks, operated under Federal law, and possessing Federal charters; two, State banks, possessing their powers from their respective States, and the third class, if you choose to call them so, Federal banks which are members of the Federal reserve system, and in which system there should be no discrimination whatsoever as between the status of the State banks as compared with the status of the National banks; that there was to be a true parity in both respects, first, in the administration of the Federal reserve system as such, and secondly, in regard to the powers possessed by the National banks, they should be able to go to their Congress to obtain what they believed was necessary legislation, and likewise the city banks had the privilege of going to their respective State legislatures.

I also desire to impress upon the committee the fact that while National banks are incorporated under a general National law, we have as a matter of fact in this country only State banks. While it is true the national banks are incorporated under the national legislature, at the same time their powers extend only to the State borders. There are, therefore, in a competitive sense, 48 national banks competing—that is, 48 different national bank organizations, existing in 48 States of the Union competing with the 48 State bank systems originated in the respective States.

Now the first question in regard to our status in the national bank banking system, or Federal banking system, is did the Federal Government want the State banks in as members of the Federal reserve system or not? When that matter was discussed before the passage of the Federal reserve act, it was discussed very definitely pro and con. It was discussed naturally selfishly because, while we try to be unselfish human beings, nevertheless we are all selfish human beings; it was discussed from the viewpoint, would that give the State banking systems an undue advantage over the national banking system, due to the fact that many forward looking States had conferred upon their State banks powers which seemed to give those State banks advantages. Would it not therefore be the case that those State banks, acting within the Federal reserve system, would obtain benefits which the national banks could not have, and Congress was ready and willing to give them like powers? The result of that debate was this, that while it was believed that there was some warrant and merit for the assertion of those who so claimed, at the same time the good of the American public was better served by creating a central reservoir of credit as a discount market for the United States, that the credit dollar on deposit coming from the State bank was just as valuable in the Federal reserve sense as the national bank dollar. It was therefore concluded that the greater issue was to give to this country a more comprehensive credit system and a larger credit system, upon which the growth and development of the country could rely for credit and money resources.

It was therefore determined to include, in the adoption of the Federal reserve act the right of State banks to come within the system. It was also at that time realized that the national banks had proceeded from their origin in 1863 down to the present time as the chief commercial source of commerce and trade in this country. They were using the commercial banks. It was likewise understood that the city banks, particularly in the large cities, possessed largely the fiduciary savings functions which apply not so much-although the city banks had the privilege of commercial banking—but it was the bank which pertained to the majority of the people as such; whereas the national bank pertained to the persons, firms and corporations engaged in the commerce and trade of the country.

It was naturally felt that the National banks should have the same privileges as the State banks, both in the performance of trust functions and likewise in the deposits of time or savings accounts, and there was for both functions a very sketchy provision in the original Federal reserve act. When the first Federal Reserve Board organized in 1914, the first endeavor was to get the State bank into the system so as to give the system the credit of the entire banking system of the country, State as well as national banks. The Federal reserve board in its report to Congress of 1914:

From the opening of the new banks the Federal board has been keenly anxious to settle the conditions upon which State banks may be admitted into the system. The Federal reserve act especially provides for such admission, and it has been supposed in many quarters that the process of admission would involve few difficulties. Investigation has shown that owing to the differences in State laws, the comprehensive character of the charters enjoyed by some State banks, and the complex conditions of competition between such institutions and their national competitors, the determination of these conditions was far from being easy if an equitable adjustment was to be found. The problem of somewhat similar difficulty was presented by the provisions of the Federal reserve act authorizing the board to make regulations under which the national banks might exercise the functions of trustee, executor, etc. Both these subjects have been and are under a very careful investigation, and conferences have been had with both national and State bankers, while competent legal advice has also been sought. It is expected that at least a tentative solution of the problem at issue may be arrived at in the near future.

It was therefore one of the first problems of the Federal Reserve Board, and it continued to be on into the beginning of the war. Just prior to the war the Federal Reserve Board reported as followsthis is December, 1916:

Many apprehensions previously entertained by nonmember banks have been shown to be groundless, and the attitude of the board toward State banks as members is better understood. The public, moreover, is beginning to realize that its interests will be best served by the amplification and fullest development of the Federal reserve system.

In July last the board advised the representatives of certain State banks and trust companies, which were apprehensive that membership in the system might involve an undue restriction of their corporate activities as a result of the future regulations of the board, that he did not understand that it was incumbent upon it to undertake to impose upon the activities of member banks any restrictions that are not contemplated by the act, but only to prescribe such regulations as are designed to carry out the purpose of the act. The board does not feel that it is one of the functions to undertake to restrict State banks or trust companies in the exercise of banking or trust company powers as defined by the laws of the State in which they are created. In passing upon the applications of State banks and trust companies, however, the board holds that it is its duty to admit only those institutions which are solvent and sound and whose membership will not constitute an element of weakness in the system.

Then they went on between 1916 and 1917—the large State banks and trust companies not then being members of the system-to

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