Mr. LORD. If you are speaking of the Federal reserve banks themselves

Senator GLASS. Yes.

Mr. LORD. They have confined themselves, as I understand it, to the purchase of Government securities, notes, Treasury certificates, bankers' acceptances, and the acceptance and rediscount of commercial or eligible paper that the bank might have.

Senator GLASS. But they have never undertaken to make a market for current commercial transactions?

Mr. LORD. Not to my knowledge; no, sir.

Senator GORE. Mr. Lord, you stated that two-thirds of all of your deposits were demand deposits. Could you state or estimate what proportion of your demand deposits represent deposits of actual cash or cash items distinguished from credit, so to speak, resulting from your loan-discount operations?

Mr. LORD. I think that would be a very difficult thing to judge, Senator, because

Senator GORE (interposing). You could not approximate it?

Mr. LORD. I might answer the question by saying that we do not like to take new accounts that open with a loan, as a matter of policy. We prefer that the deposit be made in cash or checks rather than by credit on a loan, even though the depositor is entitled to have credit granted.

Senator GORE. Less than half would probably represent actual cash. The other is

Mr. LORD (interposing). No; I should think a good deal more than half would represent actual cash deposits, because, while I am sure we have a good many small depositors who might not represent deposits in cash, the larger amounts, the deposits of the big corporations, are in cash rather than by credit. It is not a question of credit with them.

Mr. WILLIS. By cash there you mean cash or by check?

Mr. LORD. Yes.

Senator GORE. Cash or equivalent of cash?

Mr. LORD. Yes.

Mr. WILLIS. May I ask you one further question, Mr. Lord? Mr. LORD. Yes.

Mr. WILLIS. You notice in the latter part of this bill a plan for removal of officers of banks who in any way are responsible for unsafe or unsound practices.

Mr. LORD. I am also in favor of it.

Mr. WILLIS. In favor of it?

Mr. LORD. If you do not remove them we will.

Mr. WILLIS. But, in general, do you think there is any unfairness or hardship?

Mr. LORD. No objection at all.

The CHAIRMAN. Your suggestion as to the groups would be this, that they would be regulated but not extended? Is that your thought?

Mr. LORD. Unless the State laws permit it. I think the provision you have in as to that territorial provision is excellent. I think that is fine. The objection I have to the bill as it stands to-day is that there is no branch banking permitted except in States where the laws of those States permit it.

The CHAIRMAN. Would you override the sovereignty of the State in a matter of this kind? Is there not a great deal of danger in doing that?

Mr. LORD. Perhaps.

The CHAIRMAN. Are you not getting centralized too much now and taking this power and that power away from the States?

Mr. LORD. I am in favor of doing it for the national banks. The States have no control over national banks now.

Senator GLASS. Now that the exceedingly conservative chairman of this committee suggests an objection of that sort, just what sort of objections may we encounter from the radical members? [Laughter.]

Senator GORE. When the reds get after it?

Mr. LORD. Senator, the question of branch banking is a very interesting one, and I think that, frankly, it is the ultimate solution of our banking troubles. If it can be handled in such a way as to prevent a centralization of power in one place I believe it would be the solution.

The CHAIRMAN. Well, I think your "if" is the main part of your

statement.

Mr. LORD. All right; supposing that the directors of a bank permitted to have branch banking within the limits of the State must be 90 per cent residents of that State?

The CHAIRMAN. Well, I certainly share your view that it should not be located outside the State but should be owned by the people of the State, if you want to avoid centralization.

Mr. LORD. Of course, you can not prevent ownership of stock passing from one locality to another, but you can prevent a directorate living in New York or San Francisco and attempting to operate a corporation elsewhere.

The CHAIRMAN. We all know that directors are sometimes just dummies. They are just representatives of some one who lives at a distance.

Senator GORE. Would it be feasible to prevent stockholders who live outside of the State from voting? You know that that was done in United States banks.

Mr. LORD. I think it would. That is a legal question. But that would answer your question as to the directors being dummies. Senator GLASS. The subcommittee would not go into mourning altogether if you were to prevail upon Congress to take that view of it. I would not.

Mr. LORD. Can you prevail upon Congress to take that view, Senator?

Senator GLASS. I do not know. It seems that I can not prevail upon the Banking Committee to let us pass a reform banking bill.

The CHAIRMAN. If that is all, we will close the hearings for to-day and there will be no further hearings until to-morrow at 10.30 in this room. We had two other witnesses on for to-day but they are not here.

(Whereupon, at 1.05 o'clock p. m., the committee adjourned to meet again at 10.30 o'clock a. m. of the next day, Friday, March 25, 1932.)

OPERATION OF THE NATIONAL AND FEDERAL RESERVE

BANKING SYSTEMS

FRIDAY, MARCH 25, 1932

UNITED STATES SENATE,

COMMITTEE ON BANKING AND CURRENCY,

Washington, D. C.

The committee met, pursuant to adjournment on the previous day, in the committee room, 303 Senate Office Building, at 10.30 o'clock a. m., Senator John G. Townsend presiding, in the absence of the chairman.

Present: Senators Townsend (presiding), Walcott, Carey, Watson, Fletcher, Glass, Wagner, Bulkley, Morrison, Gore, and Hull.

Senator TOWNSEND (presiding). The committee will be in order. Senator Norbeck has requested that I preside for a moment. The first witness will be Mr. Percy H. Johnston, New York.

STATEMENT OF PERCY H. JOHNSTON, PRESIDENT CHEMICAL BANK & TRUST CO., CHAIRMAN BANKING AND CURRENCY COMMITTEE OF MERCHANTS ASSOCIATION OF NEW YORK, NEW YORK, N. Y.

Senator TOWNSEND (presiding). Mr. Johnston, will you take a seat there and give your name and address to the reporter?

Mr. JOHNSTON. Percy H. Johnston, president of the Chemical Bank & Trust Co., New York, an institution owned by 14,000 stockholders, domiciled in every State in the Union. Also as representing the Merchants Association of New York, as chairman of their banking and currency committee, which is the largest business organization in any city in America, with some seven or eight thousand business memberships.

Senator TOWNSEND (presiding). Mr. Johnston, have you a written statement?

Mr. JOHNSTON. Yes, sir; I have.

Senator TOWNSEND (presiding). You may proceed.

Mr. JOHNSTON. Mr. Chairman and gentlemen, I should like to say first that I have much sympathy in any measure that is propounded to strengthen the general banking situation. I spent I think six of the best years of my life in the Treasury Department as a national-bank examiner and national-bank examiner at large, trying to bring those conditions about over the country. I am somewhat familiar with many of the weaknesses that the Government has been confronted with and that the various supervising boards and superintendents of banks have met with.

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Speaking now of the proposed Senate bill 4115, the passage of this bill at this time would destroy all effect of the remedial measure looking to an ending of deflation. It would bring about a large deflation for the following reasons:

The security business is made outlaw and credit can not come from banks to carry on this business. The bill is aimed to break up the distribution of long-term securities, through its limitation on the extension of bank credit against collateral. This would prevent refunding of municipal, railroad, or industrial loans.

Banks may not use the Federal reserve to facilitate carrying bonds. So practically banks could not borrow from the Federal reserve at all and have a bond account.

This would force further liquidation of all bonds except United State Government.

The penalization of 15-day borrowings would make United States bonds less desirable, would handicap the United States Treasury in its necessary financing, and would increase the rate on Governments, and thereby the interest rate on all classes of securities, and depreciate the market price of all existing securities. The 15-day borrowing is essential in periods of depression where eligible paper is not available for rediscount.

The requirement for revaluation of all real estate owned by banks and real estate loans to market value would render many banks insolvent and compel their closing. Has real estate any "market value "to-day?

The prohibition against banks owning more than 10 per cent of any particular issue of securities would compel the dumping of large holdings of inactive bonds on the market.

The provision segregating the best assets of a bank for its time deposits would, in the case of many banks having a large proportion of time deposits, likely frighten demand depositors in those banks and bring on large withdrawals of demand deposits. This would be particularly felt by the country banks.

Authority of Federal Reserve Board 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 is a power that should not be vested in any governmental body. It destroys the free functioning of the banks and robs directors and owners of their rightful privileges.

The compulsory requirement of member banks to supply capital for the Federal Liquidating Corporation is essentially unfair. It forces member banks to supply capital and take risks with no hope of gain other than receiving 6 per cent interest, if the corporation should earn it. There will be heavy losses, which in the last analysis are forced on member banks. It is just as logical to require good industrials, insurance companies, and other lines of business to bail out the failed ones in their respective fields, as it is to ask the member banks to do so.

Restricting the sale or purchase of Federal funds would seriously interfere with free operation of member banks, would decrease their earnings, and would accomplish no good purpose.

It is too much to hope that good banking can be brought about by legislation. After 35 years of banking experience, six years as national-bank examiner, I am convinced more laws will not effect a