Senator GLASS. Now, suppose we introduce into this bill this revolutionary theory of velocity reserves. Do you think it would be instantly and cheerfully accepted by the banks of the country? Already the New York banks have bitterly protested against it?

Mr. HAAS. Senator, I will answer your question in this way: I will remind you of something that happened a good many years ago, probably you remember when you were Secretary of the Treasury, when you were discussing the Liberty loans, and Mr. Crosby said, "I wonder if Tiffany would understand this. I wonder if Tiffany will understand this." Finally, Mr. Warburg said, "What has Tiffany got to do with this? He is a jeweler in New York." Mr. Crosby said, "No, not my Tiffany. My Tiffany is a country banker, and if he understood it, I am sure everybody on the committee would understand that." Do you remember that?

Senator GLASS. Yes. Don't you wonder whether the average country banker will understand your proposed velocity theory? I am not dissenting from it.

Mr. HAAS. Yes; I think it would be a campaign of education. This is the easiest thing to understand.

Senator GLASS. I know, but we haven't got time to carry on a campaign of legislation before Congress with a very short while of this session.

Mr. HAAS. Senator, it would be consistent with my position, because I am urging delay.

Senator GLASS. You do not want any legislation now, do you? Mr. HAAS. It would be consistent with my position.

Senator GORE. I would like to ask a question there, because I want to get educated myself. Do some of the banks now favor this velocity theory?

Mr. HAAS. I think some of them do, some of the larger ones, except this one thing, Senator: I do not think it would be fair to figure in that velocity reserve disbursement checks. For instance, we have several large corporations, and probably the day before the close of the month they bring us a large check, and then they check out their dividend checks, and they come in straggling along, many of them come in in about two days, but some of them are outstanding a longer time.

If you exempt those disbursement checks, I think it is perfectly fair. I think it is right that a bank having a heavy turnover, should carry reserve according to the turnover. But I would not consider that a turnover.

Senator GORE. Just one other question: Would it be feasible to apply this theory to the bank who desired it, or is it necessary to have a uniform system?

Mr. HAAS. I think you would have to have a uniform system. Senator GORE. I was going to ask whether you would not prefer the Federal Reserve Board or the Comptroller to have the power to use discretion there.

Mr. HAAS. Well, I think there is something in that, Senator. Surely there is an idea; yes. Certainly the city banks, having a large turnover, would be more familiar with that, but you would have to educate the country banks.

Senator GLASS. And yet the New York banks came out instantly against it as soon as it was proposed.

Mr. HAAS. If you made disbursements

Senator GLASS (interposing). You know, we embodied it in one print of the bill. We embodied it in one print of the bill, and gave a period of five years to establish it, and we finally concluded that some of us need not bother with what is going to happen five years from now. Some of us will not be here then.

Mr. HAAS. I hope so. [Laughter.]

Senator GLASS. And therefore we struck it out.

Mr. HAAS. May I just correct a remark of Senator Bulkley through you?

The CHAIRMAN. Go ahead.

Mr. HAAS. You are quite familiar with this reserve. What would you think of eliminating disbursement checks if you should adopt the activity reserve?

Senator BULKLEY. I have not heard the suggestion before. It strikes me favorably. I would like to consider it a little more. Mr. HAAS. It hardly seems fair.

Senator BULKLEY. I see your point.

Mr. HAAS. That is not a turnover; that is a temporary disbursement, and when those dividend checks are deposited by the customer and he checks against that. then it does represent a business transaction.

Senator BULKLEY. Yes; I see the distinction.

Senator GLASS. My reaction to that is just this: You note this point of objection in this intricate, technical proposition; some other banker will note another point, and some other banker still another, and interminably so. Therefore, it has seemed to the subcommittee that we had better adhere to the simple form and put a stop to this manipulation of deposits. Five years from now you may prevail. Go ahead, sir.

Mr. HAAS. It is quite possible that under the provisions of this bill, commercial business not entitled to bank credits on its singlenamed note might not be able to get accommodation on good marketable securities, if its depository bank had already reached the limit of Federal loans as provided by this bill.

I have in mind, Senator, in our city, a very large substantial bank or banks. They are members of the Federal reserve system really as a patriotic duty. They do not do a commercial business. They loan on collateral practically entirely, and if there is a limit fixed on their collateral loans by the Federal Reserve Board, and a customer of their bank comes in and wants some money on good marketable collateral and they are up to their limit as fixed by the board, they would be really subject to criticism from their board of directors and their officers about belonging to the Federal reserve system. They do not have commercial paper. I think one of them, with total deposits of around a hundred million dollars, has about $1,000,000 in paper. They do not separate their classification of loans, but I do know the nature of their business, and it is practically all collateral business.

Senator GLASS. That seems to be an exceptional case. Upon the official report of the extent of banking operations of the Federal

reserve system, I gave the figures for the whole country, showing that the member banks of the system at that time had eight and a half billion dollars of usable paper and were discounting to the extent of less than half a billion.

Mr. HAAS. Senator, probably the reason for that is that it is so much more convenient

Senator GLASS (interposing). I am not talking about the reason for not rediscounting; I am saying that according to this official report there was an abundance of eligible paper, and in conversation with this very official night before last, he still insists that there is an abundance of eligible paper generally.

Mr. HAAS. Of course, there may be a bank here and there that is not supplied with eligible paper, and that deficiency may arise from various causes.

Senator FLETCHER. What percentage would you suggest, Mr. Haas?

Mr. HAAS. Beg pardon?

Senator FLETCHER. What percentage would you suggest?

Mr. HAAS. Senator, I do not know, really. I think the bank must govern its business according to its needs, as long as they are legitimate needs and they are legitimate customers. These banks that I have in mind, that is their legitimate business, and their customer wants to borrow and he has good collateral, and they are in shape to loan it to him; they certainly want to make him the loan.

If

Now, take our case, a commercial bank of our nature, our own securities and our own collateral loans will fluctuate with seasonal requirements. If business is active, we have more customers' notes in the making that can be used at the Federal reserve bank. business is quiet, we do not have the making of those notes, and naturally we have to use our money some way in order to get a revenue out of it, and we make the investments that we can make at that time, but those investments go down

Senator GLASS (interposing). Have you any reason to suppose that the Federal Reserve Board would not administer the provisions of the law with good banking judgment?

Mr. HAAS. I have no reason to think that they

Senator GLASS (interposing). It is left within the discretion of the board to make these adjustments.

Mr. HAAS. Except that it does centralize authority. If it centralizes authority I think it would be more in keeping with your establishment of the Federal Reserve System with 12 banks in place of a central bank, without doing a central bank business.

Senator GLASS. The Federal Reserve Board was established here at' Washington expressly for the purpose of supervisory control of the Federal reserve banking system. It is an altruistic board, no member of which is permitted to have any banking interest whatsoever, and the theory was that it would be a board composed of experienced, discerning, disinterested persons, who would administer the banking system in a practical and a fair way to all the member banks of the system, and what I am asking now is, if you have any reason to suppose, this matter being left to the discretion of the Federal Reserve Board, that it would not fix a percentage that would enable every bank within reason to operate in this particular matter?

Mr. HAAS. Senator, I have no reason, except this, that the Federal Reserve Board is an appointive board, and the boards of the 12 Federal reserve banks are largely elective. Somehow, I lean to an elective board, rather than to an appointive board for the regulation. Now, I assume that when it says the Federal Reserve Board shall fix a percentage of the maximum loan on collateral they mean not in excess of a hundred per cent. I may be wrong. There is nothing in there to give me a cue about that. I may be wrong, but I am assuming that it is a hundred per cent that they may loan on collateral, and that in a number of banks that I know about, it would be a very unfortunate thing.

Senator GLASS. Would it not be a very unfortunate thing for the depositors in some banks if the hundred per cent should be exceeded? Mr. HAAS. Well, I would not say any well-managed bank, Senator, that it would be

Senator GLASS (interposing). Oh.

Mr. HAAS. Any difficulty.

Senator GLASS. Have you come to the conclusion that all banks are well managed?

Senator BULKLEY. I think it is perfectly clear that that is not limited to a hundred per cent. In fact, in one draft of the bill that we had, some words were in there that I think should have stayed to make that clear.

Mr. HAAS. What was it in there for?

Senator BULKLEY. Simply put in there whether a hundred per cent or more, whether more or less than than a hundred per cent. Mr. HAAS. More or less?

Senator BULKLEY. Yes.

Mr. HAAS. Well, if it were more or less

Senator GLASS (interposing). These words were stricken out because we assumed that is what was meant.

Senator BULKLEY. I think it is meant, but I think you wrote those words in there to make it clear. Mr. Haas has developed my thought for me by misunderstanding it again.

Mr. HAAS. It says a percentage of the capital or surplus. You naturally assume that it is restricted

Senator BULKLEY (interposing). I find a good many do assume that, and that is the reason that those other words should be in there, but it certainly is not the intent of the language to confine it to a hundred per cent.

Mr. HAAS. I have but very little more, Mr. Chairman, if I may read it.

We believe that the ground work has been laid for an improvement in business.

Many large business concerns have mapped out plans for the expenditure of large sums in the employment of labor and the purchase of materials, but we sincerely believe that their plans will be interrupted or held in abeyance should they be fearful of legislation affecting their business adversely.

We believe that the enactment of this bill making sweeping changes in the National Bank act; the Federal reserve act; concentrating additional powers in the Federal Reserve Board; and in the Federal reserve banks, and the control provided for the adminis

tration of member banks, would be most harmful to the Federal reserve system, member banks, and to business in general at this particular time.

The CHAIRMAN. Is that all?

Mr. HAAS. That is all

Senator BROOKHART. You mentioned something about some securities being restricted or reduced by this bill. Can you give us any specific lines?

Mr. HAAS. That is the part that we are going to delete, Senator, the 15 and 25 per cent. It refers, as I understand it now, to one issue, and not the entire holdings of the banks. I do not recall any other section.

Senator BROOKHART. You think that is a high enough percentage of any one issue?

Mr. HAAS. For one issue?

Senator BROOKHART. Yes.

Mr. HAAS. Well, in my banking experience I have not handled anything quite as large as that. We are rather modest.

Senator BROOKHART. What I meant is, notwithstanding that correction in the meaning of it, you have still said in conclusion that it is going to hamper certain business and employment of labor. You did not say anything about the price of farm products, whether it would reduce them any lower or not. I would like to know now what these lines are that it is going to interfere with.

Mr. HAAS. The lines of credit?

Senator BROOKHART. Yes.

Mr. HAAS. Senator, we tried to codify the Pennsylvania bank laws, and we tried to make restriction in the Pennsylvania bank laws, and we just could not get it over in Pennsylvania; we just could not do it. We had some institutions that handled whole issues, and they said they could not do it, and would not ride along.

Senator BROOKHART. Do you remember a particular line that was developed because of that situation?

Mr. HAAS. The line of business?

Senator BROOKHART. Yes.

Mr. HAAS. In these particular cases they did handle them. They handled them and sold them, and they are perfectly good securities. The one I had in mind was a very excellent steel company. No reason why they should not handle those securities. The public bought them.

Senator BROOKHART. And then they have depreciated like all other securities since?

Mr. HAAS. I suppose so.

Senator GLASS. Did you ever hear of a security that was not per fectly good, that somebody wanted to borrow money on it?

Mr. HAAS. Yes; technically, Senator, I have seen a lot of them, but we did not take them.

Senator GLASS. Practically you have seen more than you have seen technically; at least, some banks have.

Senator BROOKHART. We have had a good deal of evidence and testimony that there has been an overdevelopment, not only in railroad equipment, but in manufacturing and other lines. That means