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OPERATION OF THE NATIONAL AND FEDERAL RESERVE
WEDNESDAY, MARCH 23, 1932
UNITED STATES SENATE,
Washington, D. C. The committee met, pursuant to call at 10.30 o'clock a. m. in its committee room in the Senate Office Building, Senator Peter Norbeck, presiding.
Present: Senators Norbeck (chairman), Brookhart, Goldsborough, Townsend, Walcott, Couzens, Fletcher, Glass, Barkley, Bulkley, Gore, and Costigan.
The CHAIRMAN. The committee will come to order. We have met this morning for the purpose of a hearing on S. 4115, a bill introduced in the Senate on March 14 by Senator Glass, which bill will be made a part of the record :
[S. 4115, Seventy-second Congress, first session]
A BILL To provide for the safer and more effective use of the assets of Federal reserve
banks and of national banking associations, to regulate interbank control, to prevent the undue diversion of funds into speculative operations, and for other purposes
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That the short title of this act shall be the “Banking act of 1932."
SEC. 2. As used in this act
(a) The terms “bank,” “national bank," “national banking association," “member bank,” “board,” “ district,” and “reserve bank ” shall have the meanings assigned to them in section 1 of the Federal reserve act, as amended.
(b) The term “affiliate” includes a trust company, a finance company, securities company, discount or acceptance company, investment trust, or other similar institution, or a corporation
(1) Of which a national bank or member bank, directly or indirectly, owns or controls either a majority of the voting shares or more than 50 per centum of the number of shares voted for the election of its directors, trustees, or other managing officers at the preceding annual meeting, or controls in any manner the election of a majority of its directors, trustees, or other managing officers; or
(2) Of which control is held, directly or indirectly, through stock ownership or in any other manner, by the shareholders of a national bank or member bank who own or control either a majority of the shares of such bank or more than 50 per centum of the number of shares voted for the election of directors of such bank at the preceding annual meeting, or by trustees for the benefit of the shareholders of any such bank; or
(3) Of which either a majority of the members of its executive committee or a majority of its directors, trustees, or other managing officers are directors of a national bank or member bank; or
(4) Which owns or controls, directly or indirectly, either a majority of the shares of capital stock of a national bank or member bank or more than 50 per centum of the number of shares voted for the election of directors of such
bank at the preceding annual meeting, or controls in any manner the election of a majority of the directors of such bank; or (5) For the benefit of whose shareholders or members all or Substantially all the capital stock of a national bank or member bank is held by trustees. SEC. 3. The fourth paragraph after paragraph “Eighth " of section 4 of the Federal reserve act, as amended, is amended by inserting before the period at the end thereof a comma and the following: “but only if such discounts, advancements, and accommodations are intended for the accommodation of Commerce, industry, and agriculture, The Federal Reserve Board may prescribe regulations further defining and regulating the use of the credit facilities of the Federal reserve system within the limitations of this act. Such facilities shall not be extended to member banks for the purpose of making or carrying loans covering investments, or facilitating the carrying of, or trading in, stocks, bonds, or other investment securities other than obligations of the Government of the United States. Each Federal reserve bank shall keep itself informed of the loan and investment practices of its member banks and the uses made by them of the credit facilities of the Federal reserve system. The chairman of each Federal reserve bank shall report to the Federal Reserve Board any undue, unauthorized, or improper use of such credit facilities, together with his recommendation for remedial action in the matter. The Federal Reserve Board may, in its discretion, Suspend for not more than one year from the use of the credit facilities of the Federal reserve system any member bank making undue, unauthorized, or improper use of such facilities.” SEC. 4. The twenty-fifth paragraph of section 4 of the Federal reserve act, as amended, is amended by inserting before the period at the end thereof a colon and the following: “Provided, That no such vote shall be cast by or on behalf of any member bank, if a majority of its stock shall be held or owned by any affiliate, or other corporation, which is in fact one of a chain, or of a jointly controlled group of banks, controlled by an individual, or if its stock is in the hands of a voting trust, or if in any other way such bank is prevented from acting subject to the uncontrolled decision of the general body of stockholders of such bank locally resident in the town or city in which such bank is established.” SEC. 5. The first paragraph of section 7 of the Federal reserve act, as amended, is amended to read as follows: “After all necessary expenses of a Federal reserve bank shall have been paid or provided for, and provision shall have been made, when necessary, for restoring the surplus of the bank to its position as of December 31, 1931, the stockholders shall be entitled to receive an annual dividend of 6 per centum on the paid-in capital stock, which dividend shall be cumulative. After the aforesaid dividend claims have been fully met, the net earnings, beginning with the net earnings for the year ending December 31, 1932, shall be paid to the Federal Liquidating Corporation provided for in section 12B of this act and shall be used by the said corporation for carrying out the purposes of such section.” SEC. 6. Section 9 of the Federal reserve act, as amended, is further amended by inserting between the fifth and sixth paragraphs thereof the following new paragraph : “Each affiliate of a bank admitted to membership under authority of this section shall make and furnish to the president of the bank, for transmission by him to the Federal Reserve Board, not less than three reports during each year. Such reports shall be in such form as the Federal Reserve Board may prescribe, shall be verified by the oath or affirmation of the president or such other officer as may be designated by the board of directors of such affiliate to verify such reports, and shall cover the condition of such affiliate on dates identical with those fixed by the Federal Reserve Board for reports of the condition of the member bank. Each such report of an affiliate shall be transmitted to the Federal Reserve Board at the same time as the corresponding report of the member bank, except that the Federal Reserve Board may, in its discretion, extend such time for good cause shown. Each such report shall exhibit in detail and under appropriate heads, the holdings of the affiliate in question, their cost and present value, the expenses of operation for the preceding year, and the balance sheet of the enterprise. It shall be the duty of the president of such member bank to satisfy himself as to the correctness of the report before transmitting the same to the Federal Reserve Board. Any affiliate which fails to make and furnish any report required of it under this section, and any member bank whose president fails to transmit, as required
by this section, any such report furnished to him, shall be subject to a penalty of $100 for each day during which such failure continues."
SEC. 7. (a) The first paragraph of section 10 of the Federal reserve act, as amended, is amended to read as follows:
"A Federal Reserve Board is hereby created which shall consist of seven members, including the Comptroller of the Currency, who shall be a member ex officio, and six members appointed by the President of the United States, by and with the advice and consent of the Senate. In selecting the six appointive members of the Federal Reserve Board, not more than one of whom shall be selected from any one Federal reserve district, the President shall have due regard to a fair representation of the financial, agricultural, industrial, and commercial interests, and geographical divisions of the country, and at least two of such members shall be persons of tested banking experience. The six members of the Federal Reserve Board appointed by the President and confirmed as aforesaid shall devote their entire time to the business of the Federal Reserve Board and shall each receive an annual salary of $12,000, payable monthly, together with actual necessary traveling expenses, and the Comptroller of the Currency, as ex officio member of the Federal Reserve Board, shall, in addition to the salary now paid him as Comptroller of the Currency, receive the sum of $7,000 annually for his services as a member of said board."
(b) The second paragraph of section 10 of the Federal reserve act, as amended, is amended to read as follows:
“The Comptroller of the Currency shall be ineligible during the time he is in office and for two years thereafter to hold any office, position, or employment in any member bank. The appointive members of the Federal Reserve Board shall be ineligible during the time they are in office and for two years thereafter to hold any office, position, or employment in any member bank, except that this restriction shall not apply to a member who has served the full term for which he was appointed. Upon the expiration of the term of any member of the Federal Reserve Board in office when this paragraph as amended takes effect, the President shall fix the term of the successor to such member at not to exceed twelve years, as designated by the President at the time of nomination, but in such manner as to provide for the expiration of the term of not more than one member in any two-year period, and thereafter each member shall hold office for a term of twelve years. Of the six persons thus appointed, one shall be designated by the President as governor and one as vice governor of the Federal Reserve Board. The governor of the Federal Reserve Board, subject to its supervision, shall be its active executive officer. Each member of the Federal Reserve Board shall within fifteen days after notice of appointment make and subscribe to the oath of office."
(c) The fourth paragraph of section 10 of the Federal reserve act, as amended, is amended to read as follows:
“No member of the Federal Reserve Board shall be an officer or director of any bank, banking institution, trust company, or Federal reserve bank or hold stock in any bank, banking institution, or trust company; and before entering upon his duties as a member of the Federal Reserve Board he shall certify under oath that he has complied with this requirement and such certification shall be filed with the secretary of the board. Whenever a vacancy shall occur, other than by expiration of term, among the six members of the Federal Reserve Board appointed by the President, as above provided, a successor shall be appointed by the President, with the advice and consent of the Senate, to fill such vacancy, and when appointed he shall hold office for the unexpired term of the member whose place he is selected to fill.”
Sec. 8. Subsection (m) of section 11 of the Federal reserve act, as amended, is amended to read as follows:
"(m) Upon the affirmative vote of not less than six of its members the Federal Reserve Board shall have power to fix from time to time for any member bank the percentage of the capital and surplus of such bank which may be represented by loans protected by collateral security. Any percentage so fixed by the Federal Reserve Board shall be subject to change from time to time upon ten days' notice, and it shall be the duty of the board to establish such percentages with a view to preventing the undue use of bank loans for the speculative carrying of securities. The Federal Reserve Board shall have power to direct any member bank to refrain from further increase of its security loans for any period up to one year, Any violation of this subsection may be penalized by suspension of all rediscount privileges at Federal reserve banks."
SEC. 9. No national banking association and no member bank shall (1) make any loan or any extension of credit to any affiliate organized and existing for the purpose of buying and selling stocks, bonds, real estate, or real-estate mortgages, or for the purpose of holding title to any such property, or (2) invest any of its funds in the capital stock, bonds, or other obligations of any such affiliate, or (3) accept the capital stock, bonds, or other obligations of any such affiliate as collateral security to protect loans made to any person, partnership, or corporation, if the aggregate amount of such loans, extensions of Credit, investments, and acceptances of collateral security in the case of any Such affiliate, will exceed 10 per centum of the outstanding capital stock and surplus of such national banking association or member bank. Each loan made to an affiliate within the foregoing limitations shall be Secured by stocks or bonds listed on a stock exchange which have an ascertained market value at the time of making the loan of at least 20 per centum more than the amount of such loan, or shall be secured by notes, drafts, bills of exchange or acceptances, eligible for rediscount at Federal reserve banks, or by bonds or other obligations eligible for investment by savings banks in the State in which the association or member bank making the loan is located. A loan to a director, officer, clerk, or other employee of any such affiliate shall be deemed a loan to the affiliate to the extent that the proceeds of such loan are transferred to the affiliate. SEC. 10. The Federal reserve act, as amended, is amended by inserting between sections 12 and 13 thereof the following new sections: “SEC. 12A. (a) There is hereby created a Federal Open Market Committee (hereinafter referred to as the “committee"), which shall consist of the governor of the Federal Reserve Board and as many additional members as there are Federal reserve districts. Each Federal reserve bank by its board of directors shall annually select from among the officers of the said bank one member of said committee. The meetings of said committee shall be held at Washington, District of Columbia, at least four times each year. Additional meetings may be held elsewhere upon the call of the Federal Reserve Board, either upon the motion of the board or at the request of any three members of the committee. In the absence or inability of the governor of the Federal Reserve Board to act at such meetings the board shall designate the vice governor or some other member of the board to act in place of the governor. “(b) No Federal reserve bank shall engage in open market operations described in section 14 of this act except after approval and authorization by the committee. The committee shall discuss, adopt, and transmit to the several Federal reserve banks resolutions relating to all matters affecting the open market transactions of such banks and to all matters affecting the relations of the Federal reserve system with foreign central or other banks. Every such resolution shall be reported within three days to the Federal Reserve Board and shall be subject to its approval. The board shall annually include in its report to the Speaker of the House of Representatives a review of the decisions of the committee for the preceding year and an explanation of the reasons for such decisions and the results thereof, so far as they may be ascertained, “(c) The time, character, and volume of purchases and sales in the open market shall be governed with a view to accommodating commerce and business and with regard to their bearing upon the general credit situation of the country. Such purchases and sales shall include all paper described in section 14 of this act as eligible for open market operations. “(d) The conclusions and recommendations of the committee when approved by the Federal Reserve Board shall be submitted to each Federal reserve bank for determination whether it will participate in any purchases or sales recommended. If any Federal reserve bank shall decide not to participate in the open market operations so recommended, it shall file with the chairman of the committee within thirty days a notice of its decision. “SEC. 12B. (a) There is hereby created a Federal Liquidating Corporation (hereinafter referred to as the “corporation'), whose duty it shall be to purchase, hold, and liquidate as hereinafter provided, the assets of banks which have been ordered closed by the Comptroller of the Currency or by vote of their directors, and the assets of member banks which have been ordered closed by the appropriate State authorities. “(b) The Comptroller of the Currency and the members of the Federal Open Market Committee created by section 12A of this act shall constitute the directors of the corporation. The Comptroller of the Currency shall be the chairman of the board of directors of the corporation.