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should be federally chartered; now part are so chartered and part are chartered by the State. You could make it any kind of system you want.

You could make it unit banking or state-wide banking. If the Federal Government were supervising and organizing the banking of the country, so far as commercial banking was concerned, it could determine what kind of banking system you should have. As it is now, it is determined by the Federal Government and 48 States, each determining for itself what it wants to have.

Mr. GOLDSBOROUGH. Governor Meyer, this bill probably amended

in certain ways, is going to be considered in executive session by the pe subcommittee and acted upon, and also acted upon by the full com

mittee. It makes no difference what our report is the full committee will take its action on that report.

Now, we are extremely anxious in writing the mechanics of the bill if we decide to report it, to make it as effective as possible, and we would like to have the benefit of any suggestions you can give us?

Governor MEYER. If I can think of any suggestions by way of modification or amendment or otherwise I will communicate with you, Mr. Congressman, I do not like to offer off-hand suggestions for legislation.

Mr. GOLDSBOROUGH. Yes. The other day--I do not know who it was-showed me a typewritten statement about that long (indicating] which involved a change in the reserves of member banks, which changes depended upon the change in the deposits' condition and the rapidity of circulation?

Governor MEYER. That is the report I gave you this morning.

Mr. GOLDSBOROUGH. And it might be in carrying out the purpose of this legislation a section of that kind would be very helpful.

Governor MEYER. I told you this morning, Mr. Chairman, that I thought serious consideration of that report would be worth while as one of the things to help achieve what you have in mind, stability; because if it should work as it is expected and intended, it would have the value of checking undue expansion and undue contraction automatically in so far as it can be done through monetary means. An automatic device working in the right direction will be helpful in not having to depend entirely on the exercise of human judgment.

Mr. GOLDSBOROUGH. That is what we think-to give some direction to the Federal Reserve Board which we feel would be helpful. Have you any plan which you would prefer to this, assuming that Congress is going to adopt or attempt to adopt a stabilization plan? Have you anything in mind which you prefer to this?

Governor MEYER. Well, only the things about which I spoke this morning, Mr. Congressman--a better banking structure, an improved method of reserves and better banking supervision, examinations, which could be accomplished with a unified system and better men in public service.

Mr. Busby. You are introducing more uncertainty to our already uncertain status.

Mr. GOLDSBOROUGH. In closing, I would like to say this: That we do not have in mind that any human institution can act perfectly, and we realize fully that you will have the difficulties that you have spoken of and possibly difficulties that you have not thought of and can not visualize at this time. There are spiritual difficulties always to confront, because human selfishness is operating all the time and

we are confronted with that. But this is one thing we hope may asse: in restraining human selfishness and promote justice as between different classes of society. That is the purpose of it, and we becere also that any legislation that is passed will be sympathetically administered by those in charge of it. There is just one question that has been suggested to me. Has it been necessary to invoke the more liberal rediscount powers of the Glass-Steagall bill yet?

Governor MEYER. You mean section 10a and 10b. There have been a few applications under 10-b. In most cases banks that woud have borrowed under 10-b are using the Reconstruction Finance Corporation. There have been a few cases where loans have beeg obtained under 10-b, but not many.

I thank you very much for your courtesy to me here.

Mr. GOLDSBOROUGH. We appreciate very much your kindness in this discussion, which has been very interesting, and I think it will be of help to us.

Governor MEYER. I am afraid I have not been able to contribute : much as I would like to contribute.

STATEMENT OF E. A. GOLDENWEISER, DIRECTOR OF DIVISION

OF RESEARCH AND STATISTICS, FEDERAL RESERVE BOARD

Mr. GOLDSBOROUGH. The subcommittee understands that you are on the staff of the Federal Reserve Board, and do not care to discus its policies, and we think that is proper. We will direct our disa sion only to factual matters for that reason. I, as one member of the subcommittee, would like to have explained the plan for changing the method of reserves for member banks.

Mr. GOLDENWEISER. I shall be very glad to give you some explanation of it. I was a member of the committee and have some fancia iarity with it.

The question of member bank reserves has been one receiving studs in the Federal reserve system for a number of years, and there was a large amount of accumulated experience on it. Our committee, afier working on it for three months, found there were essentiells three features in it. The member banks, as you know, must hold all these legal reserves as balances on deposit with the Federal reserve banks and they must have 3 per cent on time deposits anywhere in the United States, and 7, 10, and 13 per cent on demand depuraits depending on whether the bank is located in a country district or in a reserve city, or in one of the two central reserve cities, New York and Chicago. This system has been in operation for a number of years, and it has not worked satisfactorily. The main point in wlach it has not been satisfactory are that, in the first place, the 3 per exul reserve on time deposits has encouraged a large amount of translers from demand deposits to time deposits, because it is advantageous to banks to have as large a part of their deposits on time as possible. since the reserves are smaller.

As Governor Meyer pointed out this morning, this has resulted in a competition for time deposits and increasing rates paid on time deposits, with the consequence that the banks were obliged to seek more and more profitable in vestments, and an increasing yield almost invariably carries an increased risk, so that the risk of the banking business increased. That was one factor in the situation-the

her

evasion of reserve requirements through the increased classification more

of deposits which were in fact subject to demand, as time deposits.

It made it possible for bank credits to grow without corresponding to growth in reserve requirements.

The other bad feature of existing reserve requirements was that

it was inequitably distributed between the member banks. These and)

inequalities grew up; they were not anticipated but experience has demonstrated them. There were primarily two of them. One of them arose from the fact that cash in vault did not count as reserves which resulted in a discrimination in favor of the banks located in & city where there is a Federal reserve bank or branch, because they could get along with a very small amount of cash since they could get cash at any time by messenger from the reserve bank; while the country banks where it took a day or two to get cash had to have a much larger amount of cash in vault in order to meet emergencies. Since this cash did not count as reserve, the consequence was that the actual reserve burden on the country banks was much greater than it was on the city banks, and that was not anticipated when in 1917 the law was passed which prescribed that nothing but balances in reserve banks should count as reserves it was assumed then that about 5 per cent would be kept in cash; and since this amount was not going to be changed it might as well be left out of the law. As å matter of fact, the amount has diminished tremendously, from about 5 per cent to about 2 per cent, and that decrease has not been equitably distributed. It has been a decrease in the Federal reserve cities where they have the facilities of Federal reserve banks, and not in the country banks. There has been as much as five or six hundred million dollars decrease in reserves as a result of diminishing the cash, and it has worked inequitably.

The other feature that has made our reserves work inequitably has been the method by which banks figure their net deposits against which they have to have reserved. They are permitted to deduct checks in process of collection and balances held with other banks only from amounts that other banks hold with them. As the law says it, they can only deduct "due from's" from "due to's.” The banks in the cities carry large balances for country correspondents and have plenty of “due to's" from which to deduct their “due from's." Country banks, on the hand, had balances with the city banks which they had to have as a matter of operation; but they had nothing from which to deduct their balances because no other banks deposited money with them. As a consequence that also worked against the country banks.

Now, these were the two principal features of inequality. In addition to that, and that is much more important, the part is that reserve requirements did not change with the conditions of business. Instead of increasing when business increased, they were likely to diminish when business increased, and instead of declining when business became slack they were likely to increase when business became slack. The reason for that was partly technical, because when business was slack the country banks would send their deposits to the city banks which would mean there would be a duplication of deposits, the deposit with the country bank by the customer and with the city bank by the country bank; and the latter reserve was in the 13 per cent class. So that while business would go down the volume

we are confronted with that. But this is one thing we hope may resist in restraining human selfishness and promote justice as between different classes of society. That is the purpose of it, and we believe also that any legislation that is passed will be sympathetically administered by those in charge of it. There is just one question that has been suggested to me. Has it been necessary to invoke the more liberal rediscount powers of the Glass-Steagall bill yet?

Governor MEYER. You mean section 10a and 10b. There have been a few applications under 10-b. In most cases banks that would have borrowed under 10-b are using the Reconstruction Finance Corporation. There have been a few cases where loans have been obtained under 10-b, but not many.

I thank you very much for your courtesy to me here.

Mr. GOLDSBOROUGH. We appreciate very much your kindnes in this discussion, which has been very interesting, and I think it wil be of help to us.

Governor MEYER. I am afraid I have not been able to contributes much as I would like to contribute.

STATEMENT OF E. A. GOLDENWEISER, DIRECTOR OF DIVISION

OF RESEARCH AND STATISTICS, FEDERAL RESERVE BOARD

Mr. GOLDSBOROUGH. The subcommittee understands that you are on the staff of the Federal Reserve Board, and do not care to disits policies, and we think that is proper. We will direct our die sion only to factual matters for that reason. I, as one member of the subcommittee, would like to have explained the plan for changing the method of reserves for member banks.

Mr. GOLDENWEISER. I shall be very glad to give you some explanstion of it. I was a member of the committee and have some familiarity with it.

The question of member bank reserves has been one receiving studs in the Federal reserve system for a number of years, and there was a large amount of accumulated experience on it. Our committee, site working on it for three months, found there were essentially caree features in it. The member banks, as you know, must hold all beis legal reserves as balances on deposit with the Federal reserve banka and they must have 3 per cent on time deposits anywhere in the United States, and 7, 10, and 13 per cent on demand depuisits depending on whether the bank is located in a country district or in a reserve city, or in one of the two central reserve cities, New York and Chicago. This system has been in operation for a number of years, and it has not worked satisfactorily. The main point in which it has not been satisfactory are that, in the first place, the 3 per cent reserve on time deposits has encouraged a large amount of transfers from demand deposits to time deposits, because it is advantageous to banks to have as large a part of their deposits on time as possibile since the reserves are smaller.

As Governor Meyer pointed out this morning, this has resulte! in a competition for time deposits and increasing rates paid on time deposits, with the consequence that the banks were obliged to *** more and more profitable in vestments, and an increasing yield almost invariably carries an increased risk, so that the risk of the bankiu? business increased. That was one factor in the situation-**

evasion of reserve requirements through the increased classification of deposits which were in fact subject to demand, as time deposits. It made it possible for bank credits to grow without corresponding growth in reserve requirements.

The other bad feature of existing reserve requirements was that it was inequitably distributed between the member banks. These inequalities grew up; they were not anticipated but experience has demonstrated them. There were primarily two of them. One of them arose from the fact that cash in vault did not count as reserves which resulted in a discrimination in favor of the banks located in & city where there is a Federal reserve bank or branch, because they could get along with a very small amount of cash since they could get cash at any time by messenger from the reserve bank; while the country banks where it took a day or two to get cash had to have 8 much larger amount of cash in vault in order to meet emergencies. Since this cash did not count as reserve, the consequence was that the actual reserve burden on the country banks was much greater than it was on the city banks, and that was not anticipated when in 1917 the law was passed which prescribed that nothing but balances in reserve banks should count as reserves it was assumed then that about 5 per cent would be kept in cash; and since this amount was not going to be changed it might as well be left out of the law. As a matter of fact, the amount has diminished tremendously, from about 5 per cent to about 2 per cent, and that decrease has not been equitably distributed. It has been a decrease in the Federal reserve cities where they have the facilities of Federal reserve banks, and not in the country banks. There has been as much as five or six hundred million dollars decrease in reserves as a result of diminishing the cash, and it has worked inequitably.

The other feature that has made our reserves work inequitably has been the method by which banks figure their net deposits against which they have to have reserved. They are permitted to deduct checks in process of collection and balances held with other banks only from amounts that other banks hold with them. As the law says it, they can only deduct "due from's" from "due to's.” The banks in the cities carry large balances for country correspondents and have plenty of "due to's” from which to deduct their “due from's." Country banks, on the hand, had balances with the city banks which they had to have as a matter of operation; but they had nothing from which to deduct their balances because no other banks deposited money with them. As a consequence that also worked against the country banks.

Now, these were the two principal features of inequality. In addition to that, and that is much more important, the part is that reserve requirements did not change with the conditions of business. Instead of increasing when business increased, they were likely to diminish when business increased, and instead of declining when business became slack they were likely to increase when business became slack. The reason for that was partly technical, because when business was slack the country banks would send their deposits to the city banks which would mean there would be a duplication of deposits, the deposit with the country bank by the customer and with the city bank by the country bank; and the latter reserve was in the 13 per cent class. So that while business would go down the volume

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