Each of these propositions will be discussed briefly in order: 1. As shown above, these conditions of membership are not at all new, but are conditions which the Federal Reserve Board has for years customarily prescribed for State banks upon their admission to the Federal reserve system. The only thing new about the situation is that for the first time the board has set forth these conditions in its printed regulations for the information of the State banks, so that they may know and understand in advance of applying for membership what conditions they will be required to agree to if they are admitted to the Federal reserve system. 2. The assumption that the board has, or thinks it has, the right to change its conditions of membership at any time is also equally erroneous. The board always has considered conditions of membership analogous to contracts or agreements between the board and each individual State bank admitted to membership in the Federal reserve system, and has always adhered to the view that they are not subject to change except, of course, by the mutual consent of both parties. When an application for membership is received from a State bank and the board is inclined to approve it, the board notifies the bank that it is willing to approve the application provided it will agree to be bound by certain definite conditions of membership set forth in the notice. If the bank is willing to accept these conditions of membership, it so notifies the board, whereupon the board's conditional approval of the bank's application for membership becomes effective, and the bank is admitted to the system. The conditions of membership applicable to that bank are thereby fixed for all time and can not be changed except by the mutual consent of the board and the bank. The board does not have, nor has it ever claimed to have, the right to change a condition of membership subsequent to the admission of a bank without the consent of such bank. In practice, there have rarely been any changes in the conditions prescribed upon the admission of a bank; and in the few cases where such conditions have been changed, they have almost invariably been changed at the request of the member bank. 3. The assumption that conditions of membership prescribed by the Federal Reserve Board discriminate against State banks and in favor of national banks is equally erroneous. The board never has prescribed any condition of membership for a State bank which restricts the operations of such bank to a greater extent than national banks are restricted by the provisions of the national bank act. On the contrary, the board always has endeavored to permit State bank members of the Federal reserve system as much freedom as is consistent with membership in the Federal reserve system, even though this results in their exercising much more liberal powers than those enjoyed by national banks. It is the policy of the Federal Reserve Board to make the system as attractive as possible to State banks and not to restrict their operations within the system to any greater extent than is absolutely necessary for the preservation of a high standard of membership. State banks, however, operate under the laws of 48 different States, many of which are more or less inadequate to provide for a proper supervision and regulation of the banking business; and in many instances it is absolutely necessary to prescribe conditions of membership for State banks in order to maintain a high standard of membership in the Federal reserve system. The only other alternatives would be to exclude such State banks from the Federal reserve system or lower the standard of membership. When a State bank has once been admitted to membership in the Federal reserve system it can not be required to withdraw from the system unless it violates some condition of membership or some specific provision of the Federal reserve act. NO VIOLATION OF STATE RIGHTS It has been argued that when the Federal Reserve Board prescribes a condition of membership requiring a State bank to agree not to exercise a certain one of its corporate powers while it remains a member of the Federal reserve system, this violates the public policy of the State under whose laws that bank was incorporated and infringes the rights of the State; but this is not so. The board does not attempt to say to any State what corporate powers it shall or shall not confer on banks created by it. It only says that if a State bank applies for membership in the Federal reserve system and has certain powers inconsistent with membership in the Federal reserve system, it must agree not to exercise those powers while it is in the system. The fact that a particular State grants unusual powers to banks created by it does not necessarily mean that the policy of the State requires the exercise of such powers by State banks, nor that such powers actually will be exercised. The State laws do not require but merely permit the organization of banks and trust companies; and even when they are organized State banks and trust companies are perfectly free to abstain from exercising certain powers granted to them by the laws of their creation. Thus, the laws of Pennsylvania authorize all trust companies organized thereunder to transact a title insurance, fidelity insurance, and surety business; but many of the trust companies of Pennsylvania have never exercised this power. It is no violation of the policy of the State of Pennsylvania, therefore, for the board to require a Pennsylvania trust company which never has and never will wish to exercise these powers to agree that it will not do so as long as it remains a member of the Federal reserve system. PROPOSED AMENDMENT HARMFUL TO STATE BANKS AND TRUST COMPANIES The general banking laws of a number of the States confer on every bank or trust company organized thereunder certain unusual powers which are inconsistent with membership in the Federal reserve system and the inevitable result of the enactment of this proposed amendment would be to exclude every such bank or trust company from membership in the Federal reserve system, even though they should have no desire whatever to excricise these unusual powers. At present such banks are admitted to membership in the Federal reserve system on condition that they will not exercise the objectionable powers so long as they remain members of the system. If the power to prescribe such conditions of membership is taken away from it, the board will have no alternative but to deny membership in the Federal reserve system to all State banks or trust companies possessing such powers, because there will be no way in which the board can assure itself that they will not undertake the exercise of such powers. Even where banks applying for membership in the Federal reserve system have no corporate powers inconsistent with membership, it is often found that their management or financial condition is such that they can not properly be admitted to the Federal reserve system unless they will agree as a condition of membership to improve the character of their management or their financial condition within a specified time. In such cases the applying banks will have to be denied membership in the Federal reserve system if the board is deprived of the power to admit them subject to appropriate conditions designed to bring them up to the proper standard of members of the Federal reserve system. Instead of benefitting the State banks and trust companies, therefore, the enactment of the amendment proposed by the National Association of Supervisors of State banks will in many cases work an actual hardship on them. CONCLUSION In conclusion I wish to say that the board has no desire to be autocratic or unreasonable in this matter and is always willing to hear and give due weight to the views of State banks and State banking authorities with reference to the expediency and reasonableness of its regulations and the conditions of membership prescribed by it. The board, however, has found by experience that the power to prescribe conditions of membership governing State banks organized under the divergent laws of 48 different States is absolutely essential to the pres ervation of a high standard of membership in the Federal reserve system; and for this reason, the board is strongly opposed to the amendment proposed by the National Association of Supervisors of State banks or any other amendment which would take away or seriously impair the exercise of this power. The board, however, has no objection to an amendment such as that contained in section 10 of your bill (H. R. 2) as originally introduced, which would provide that the board "shall not prescribe any condition of membership which will prevent the applying bank from competing with national banks on a basis of substantial equality or which will subject the applying bank to any greater limitations or restrictions than those under which national banks shall operate"; because the board never has and never would prescribe any such discriminatory condition of membership. Respectfully, EDMUND PLATT, Vice Governor. HOUSE OF REPRESENTATIVES, COMMITTEE ON BANKING AND CURRENCY, Washington, January 25, 1926. Hon. D. R. CRISSINGER, Washington, D. C.. DEAR GOVERNOR CRISSINGER: Referring to the appearance of the committee representing the Association of State Bank Supervisors of the United States before the Federal Reserve Board on December 30 last the purpose of this meeting was to discuss a proposed amendment to section 9 of H. R. 2, on line, 21, as follows: "The Federal Reserve Board, subject to the provisions of this act and to such conditions as it may precribe pursuant thereto, may permit the applying bank to become a stockholder of such Federal Reserve Bank: Provided, however, That such conditions or rules or regulations prescribed shall not limit or impair the charter or statutory rights and powers of such banks nor shall the Federal Reserve Board impose any conditions or restrictions other than those under which national banks shall operate. The matter in italic is new. I gained the impression during the discussion of this subject that it was the view of the Federal Reserve Board that such a provision was undesirable, but apparently the committee representing the Association of State Bank Supervisors was not convinced of the soundness of the views presented to them by the individual members of your board who were present at this meeting, because their insistence on pressing their amendment is manifest. The purpose of this letter is to ask you if you will not kindly write me the board's objections to this amendment that I may present these views to the Members of the House in such opposition as I shall make to this proposal when it is offered on the floor of the House during the consideration of H. R. 2. I expect now that the consideration of this measure will be taken up by the House next Wednesday, January 27, and I believe that debate will be concluded on this bill and vote had on the following Wednesday. I am, therefore, hoping to have as early a reply from you as possible. Very truly yours, L. T. MCFADDEN. The CHAIRMAN. With gloved hands and grip of steel I am going to take charge of this situation and ask Mr. Willis to take the stand. STATEMENT OF HENRY PARKER WILLIS, PROFESSOR OF BANKING AT COLUMBIA UNIVERSITY, NEW YORK CITY Doctor WILLIS. Mr. Chairman ard members of the committee, the reason for my appearing here this morning is a two-fold one. I have been interested a long time with the subjects dealt with in H. R. 2, which is before you, and in a number of other bills that are now pending before one or the other Houses of Congress. I served for two years as expert economist for the House Banking and Currency Committee during the period of the preparation of the Federal reserve act. Then for four years I was secretary of the Federal Reserve Board, and for an additicral four years director of research of the Federal Reserve Board and then for a short time prior to my resignation from the system in 1922, I was consulting economist of the board. During that time the questions which are dealt with in the McFadden bill were almost continuously before Congress, and in one way or another before the Federal Reserve Board, so that I have for a long time had a very keen interest and some contact with those questions. The immediate reason for my appearing, however, is the fact that about eight months ago I was asked by a group of bankers to make a careful survey or investigation of the general contemporary banking situation in the United States as a whole. Since June, 1925, I have been actively engaged in making that inquiry, and during that time I have expended, in making this investigation, between forty-five and fifty thousand dollars, which has been supplied by the bankers who requested me to make the inquiry. That investigation was made at their request as a general study without instruction as to what to look for, and, of course, without indication as to what they wanted to have found. Nevertheless, as I say, the inquiry has been carried on at their cost, and I wish to make a record of that at the outset, and to say that of course the vouchers, checks, etc., with respect to the expenditure of money are at the service of the committee if they desire to see them. In the course of the investigation we have had the services of a capable academic staff, including a considerable number of well known economists. Among them are Mr. B. H. Beckhart, Columbia University; Mr. J. R. B. Byers, College of the City of New York; Mr. J. Ray Cable, Washington University, St. Louis; Mr. J. M. Chapman, Columbia University; Mr. Roth Clausing, University of Rochester; Mr. George Filipetti, Columbia University; Mr. F. L. Garlock, Iowa Agricultural College; Mr. Alexander Gourvitch; Mr. H. H. Preston, University of Washington; Mr. R. W. Roby, University of Rochester; Mr. W. F. Spafford, University of Vermont; Mr. W. H. Steiner, College of the City of New York; Mr. C. A. Stocking, Columbia University; Mr. A. H. Stockder, Columbia University; and Mr. C. E. Warne, University of Denver. My effort was, as far as possible, to obtain the assistance of capable men in different parts of the country in order that there might be a sympathetic investigation of the conditions made by men on the spot who were known, in some measure at least, to the banking people with whom they came in contact. In addition to that, I have been able to make some study of foreign conditions with the assistance of Dr. E. H. D. Arndt, Pretoria, South Africa; Mr. W. F. Crick, London, England, formerly of the University of London; Mr. Poul Glindeman, Copenhagen, Denmark, student employee at the National City Bank, New York; Dr. F. A. Hayek, Vienna, Austria, of the University of Vienna; Dr. A. M. de Jong, Amsterdam, Holland, of the Netherlands Bank; Dr. R. J. Lemoine, Brussels, Belgium, of the Ecole Superieure de Secretariat; Mr. Hilding Melin, Stockholm, Sweden, of the Intecknings Garanti Aktiebolag; Mr. Henry T. Ross, Toronto, Canada, Secretary, the Canadian Bankers Association, and Mr. Harold Swenson, Oslo, Norway, student employee at the National City Bank, New York. From these sources and through the agency of these gentlemen, a fairly complete study has been made of the contemporary banking conditions. A substantial part of the time has been given to the study of bank failures and bank failure statistics and cost thereof, and in getting these figures it was necessary, of course, to rely entirely on official sources. So that in every case we have sent a man to the capital of each and every one of the States with the request that he either communicate with the superintendent of banking or the supervisor of banking, according as he might be called to explain to him the object of the investigation and obtain his aid, as far as practicable. In substantially every case we have had the whole hearted cooperat tion of these State superintendents of banking. In a few cases the superintendents of banking have undertaken the direct compilation of figures as to failures and liquidations themselves, at their own expense. In the majority of cases they have allowed those members of the staff to organize small local staffs made up from their own personnel and put on an overtime basis to collect figures at my expense and in a few cases where they felt that their files were not to be approached by any outsider, they have collected the figures themselves and have sent me a bill for the work, that simply covered the Since the compilations have been completed I have taken pains to send a copy of them, in each and every case, to the commissioner of banking to whose affairs they relate, and I have not yet heard from all of them, but substantially or practically all of them, approving the work that has been done, some of them incorporating it already into their own annual report, and one or two having already published reports which contain these figures while others state that they will do So. In the case of two States exception was taken to the figures; those, I believe, are Texas and Illinois, on the ground that our definition of bank failure which I shall explain a little later-had been too broad, and that therefore the number of failures given was larger than it should be. There was no objection to the figures as given; on the con+ trary they were accepted by those States, as elsewhere, as having been correct. But it was suggested that their definition of failure was narrower than mine. So that, summing up the matter, the investigation carried on by this staff of capable investigators, has had hearty cooperation of State commissioners on banking, and has had the services of the local staff provided with their assistants. So that we have had at times from 100 to 150 persons in different parts of the country engaged in collecting the data. Now that investigation, as I have outlined to you, covers a large variety of subjects, which of course it would be quite beside the mark for me to try to discuss here. I understand that the business before the committee is simply with respect to H. R. 2, and therefore, as to that, I wish to ask your permission to present to you the bearings of this inquiry, extensive as it is, upon that particular bill. It seems to me that H. R. 2 contains an unusually great number of important topics of discussion, any one of which, if thoughtfully acted upon, would merit attention in a separate act of legislation. Nevertheless, there are three outstanding points at which, it seems to me, H. R. 2 should receive unusually careful analysis. Those three points are the points in which H. R. 2 touches the public in terest. While I have followed with the attention and interest the discussions on this subject, both at the last session and this, so far as they have gone, it has seemed to me that an undue amount of importance was given to the competitive aspect of H. R. 2 in the bearing that it had upon the welfare of conflicting groups of banks. I believe that the most that has been said has had to do with the alleged fact that national banks would go out of the national system if they did not receive the latitude that is given H. R. 2, while in the other case |