SPECULATION CHECK

Evening Post, Volume CX, Issue 73, 23 September 1930, Page 9

SPECULATION CHECK

LEGISLATION PROPOSED

Fear of such a crisis prompted Senator Carter Glass, of Virginia, one of the authors of the Federal Keserve Act and Secretary of the Treasury in the "Wilson Administration, to introduce in the Senate a Bill to prevent speculation in the stock market, and to reviso the National Bank and Federal Reserve. Acts so as to give the Eeservo • member banks a greater profit from -fho earnings'of .the federal Eeservo Bank. , ■„ _ The Senator's BUI appearod in Juno last, just as the stock market was undergoing another decline, such as originally inspired him to suggest the" need o£ more stringent tanking laws to make it more difficult for banks to lend money on securities, and thereby lessen speculation. Ono of its important provisions was that removing the Secretary of the Treasury from membership of tho Federal Eeserve Board. ' Senator Glass called his Bill of over 3500 words the "Banking Act of 1930 and said its purpose was "to provide for tho 6afer operation and more effective use' of .the assets of national banking associations, to regulate inter-bank control, to prevent undue diversion of funds iato speculative operations, and for other purposes." Senator Glass proposed to give national banks the same powers enjoyed " l>y State banks; restrict chain banks, but authorises State-wido branch banks and increase the interest rate that «-ould bo charged by national banks to the legal rate of the State, or 1 per cent, greater than the Federal Keserve Bank discount rate. A system was proposed to restrict loans that might he made by national banking associations to brokers and members of tho Stock Exchange. IMMEDIATE ACTION. Another section set up a plan, by which the earnings of the Federal Re- '' servo System would be distributed to ya greater/degree than 6 per cent, to i the member banks, and a portion of ' the surplus of the system would go ' into the Federal Treasury as an additional franchise tax. • Senator Glass issued a statement explaining the Bill's twelve provisions. He said he did not expect any action; during. the past session, but hoped to make it the chief banking legislation ' in the short session next winter. The'subject will be brought bofore the American public by the investigation of the Federal Eeserve System by a special Senate Committee recently authorised by Senator; Glass's resolution. ."This sub-committee of the Banking and Currency Committee, consisting of -Senators Glass, Walcott, Townsend, Brattbn, and Norbeck, will begin hearings early in December, and, as . the result of evidence then obtained, Senator Glass believed, the situation would: be prepared for action on his Bill:? ' ■ ' ' „ '.'., ■ : Of the various sections, Senator . Glass said:-r- ; . - "The first gives the titlo of the Act. Section 2 undertakes to give the jiational bank the same general powers as are eXercised by State banks, except •where experience has limited them by lav as expressly sot forth in the ■National Bank Act and the Federal Eeserve Act and amendments thereto. Public opinion seems now to sanction the giving to all banks the same powers, and restricting the use of banking powers which have proved to be dangerous, or which aro likely to prove so. .;,..;,. "Section 3 undertakes to restrict chain banking by a prohibition upon

the right-of any corporation, association, or partnership, or an attache of any such corporation, association, or partnership to vote: the shares at the election of officers' or in the decision of questions by bank directors. This is an entirely new proposition, and may encounter: resistance in the Courts; Irat it has been submitted to very able legal authority-and approved.

STATE-WIDE BANKING-.

"Section 4 is intended to authorise State-wide branching by national banks; but restricts the privilege to those States which authorise State banks to engage in branch banking within the State. :

"Very likely this restriction will be Removed ao as to permit- national banks to engage in State-wide branch banking, regardless of the requirement of States. This'is a matter which has been vigorously litigated; but the decisions of the Supremo Court of the United States appear to authorise such privilege to national banks as agencies of the Federal Government. 1 "Section 5 is intended to liberalise ths provision with respect to interest pates to be charged by national banks. 'It permits snch banks to charge interest either (1) at the rate allowed by existing law, namely, the rate allowed by the law of the State where the bank is located, or (2) at a rate 1 per cent. above the Federal Eeserve Bank discount rate in the Federal Eeserve district where the bank is located, whichever is the greater. ' '. ." t "If ho rate is fixed by the law of the jurisdiction where any such bank is located, then it may charge a rato not in excess, of 7 per cent., or'l per cent, above the Federal Eeserve Bank discount rate, whichever is the greater. "The reason for this change is that in periods of actual distress, when credits and currency are in eager demand, the discounting is actually precluded for all the member banks of thirty-five States, except at a distinct loss to the member: banks. "For example, thirty-five States limit by law the rate of discount to_ 6 per cent, or less. When the exigencies of the case demand an increase in tho Federal Eeserve Bank rate to 6 per cent, and sometimes 7 per cent, tho .member banks of these thirty-five States are unable to rediscount their eligible paper at the Federal Beservo "banks except at a loss. A MAEGIN.

"This -proposed amendment would giT* thß member banks a margin of s& least 1 per eewk. a* all thnes. This'

is rather opposed to the , long-time theory of. the Bank of England to tlie effect that the rediscount rate should always be a shade above tho market rate; but England does not have to contend with the dual system of banking which afflicts this country. "In this connection it may be said that it clearly, if not avowedly, was never tho intention of Congress that tho rediscout rate of the Federal Reserve Banks should bo uniform throughout the country, ainco credit demands and conditions in various States and sections are by no means'in accord. "The rediscount rates, it is urgently contended by the beat economists as well as experienced practical bankers, should be somewhat governed in the several regions by the varying conditions and by the rate of discount pormitted to bo charged by member banks, but the administrative authorities of the Federal Eoserve System have persistently ignored this important consideration which Congress clearly had in mind when the law was enacted. "Section 6 restricts the amount of loans by a national banking association to brokers, members of the Stock Exchange, finance companies, investment trusts, or similar institutions and to the affiliates of such associations, to 10 per cent, of the paid-in and unimpaired capital stock of the association and 10 per cent, of its unimpaired surplus funds. . . /" "Under existing law, loans1 upon certain typos of obligations (including those drawn in good faith against actually existing values and secured by goods or commodities and those arising out of the discount of commercial paper actually owned by the person negotiating tho same) are not subject to any limitation based upon the capital and surplus of the association.

WOULD NOT APPLY.

"Under the proposed amendment, these provisions would no longer apply to loans made to the persons and corporations above enumerated. In the case of affiliates, Avhich include moneyed corporations and others owned or controlled by tho association or by tho shareholders of tho association who own or control a majority of its capital stock, Section 6 imposes a further limitation —namely, that tho total obligations of tho affiliates to tho association shall not exceed the 10 per cent, limitation mentioned, or the amount : of their paid-in and unimpaired capital stock, whichover may bo smaller. "Section 7 requires afiiliatcs of national banking associations to make and furnish to tho Controller of tho Currency reports of the condition at tho same time similar reports aro submitted by the associations, in ordor that a more complote knowledge of the affairs and operations of the associations may be obtained. >

"Section 8 proposes a different distribution of the earnings of the Fed-

KESERVE BANK.

"Section 10 simply eliminates the Secretary of the, Treasury as a member ex officio of the Federal Reserve Board. It has become evident that the Treasury Department, without any essential reason, is exercising a disproportionate, if not dominant, influence on the policies of the Federal Reserve Board. This was uovor intended to be tho ease. ■ ,

"Section 11 undertakes to prevent member banks from borrowing on their diree't note at Reserve banks or thoir lending funds to brokers for speculative purposes. : Banks may continue to borrow on their straight commercial paper, and ro-lend to brokers; but this evasion of the spirit of the Federal Eeserve Act cannot be averted except by a repeal of the provision of the Federal Reserve Act, which permits borrowing on. the. direct note of member banks. This may later be proposed if the frightful abuses which have hitherto occurred shall. persist. -It very likely Trill" bo proposed iv any events ■. '■■'■■'■■■.■■(■■-'■'•'■■■:- ■■ ••■ ■ /;■ ■ ■-.■

"A PRIOR MEN."

"Section 12 seeks to give savings deposits a prior lien on a part of the assets of nationals, and these banks are required to hold savings bank securities up to an amount equal to the amount of such savings."