STOCK EXCHANGE PRACTICES TUESDAY, FEBRUARY 6, 1934 UNITED STATES SENATE, SUBCOMMITTEE OF THE COMMITTEE The subcommittee met at 10:30 a.m., pursuant to adjournment on Friday, February 2, 1934, in room no. 301 of the Senate Office Building, Senator Duncan U. Fletcher presiding. Present: Senators Fletcher (chairman), Adams, and Couzens. Present also: Ferdinand Pecora, counsel to the committee; Julius Silver and David Saperstein, associate counsel to the committee; and Frank J. Meehan, chief statistician to the committee. The CHAIRMAN. The subcommittee will come to order. You may proceed, Mr. Pecora. Mr. PECORA. Mr. Mills. TESTIMONY OF WILSON W. MILLS, GROSSE POINTE FARMS, DETROIT, MICH-Resumed Mr. MILLS. Mr. Chairman, at the last session of the committee I was asked how frequently the First Wayne National Bank, subsequently the First National Bank in Detroit, had had a shortage of reserves during the year 1932; or, to put it mildly, I think the intimation was made that there was a shortage of reserves with the Federal Reserve bank in June of 1932. Immediately upon my return to Detroit I took the matter up with the Federal Reserve Bank of Chicago, Detroit branch, and with your permission I should like to read a letter from the managing director: DETROIT BRANCH, FEDERAL RESERVE BANK OF CHICAGO, Mr. WILSON W. MILLS, Grosse Pointe, Mich. DEAR MR. MILLS: In accordance with your today's telephone request the following information is submitted from our records in connection with the reserves of the First Wayne National Bank, Detroit, and the First National Bank, Detroit, for the year 1932. On January 31, 1932, a charge was made to the First Wayne National Bank, Detroit, of $67.76 for a reserve deficiency of $149,912. Our records further indicate there was a deficiency of $504 for the period ending February 19, 1932, on which no penalty was assessed because of the small amount. For all other periods during the year 1932 the First Wayne National Bank, which in October 1932 was named the First National Bank, carried excess reserves. You will find attached to this letter a copy of the Federal Reserve Board's regulation D, which has to do with reserves of member banks and which gives authority for computing reserves on the average daily net deposit balances Covering semiweekly periods. Yours very truly, WM. R. CATION, Managing Direotor. Also another letter from Mr. Cation, bearing the same date, as follows: With further reference to my today's letter in connection wtih the reserves of the First Wayne National Bank, Detroit, and the First National Back, Detroit, for the year 1932, you have inquired with respect to the reserves of the First National Bank for the year 1933. Our records indicate that during the year 1933 the First National Back Detroit, carried excess reserves for all periods up to the date the bank is taken over by the receiver. Very truly yours, WM. R. CATION, Managing Director The CHAIRMAN. They may go into the record, and you have alres ly read them. Mr. MILLS. May I make one more short statement: When Jud Murfin was on the stand last week--and he has been excused as understand it-it was stated, or at least I understood the stateme! to be made, that if Mr. Sweeny would authenticate any statem that he desired to make with reference to the charges that had be made against him, the committee would be glad to receive same here I have two authenticated statements by Mr. Sweeny, one rath long and in detail, composed of some 12 pages, and the other in ver much briefer form, composed of some three pages, both of wh at his request, I should now like to offer to this committee. A I am further authorized to state that Mr. Sweeny's health is so what better, and his doctor feels that a deposition might readily taken, in bed, as he is still in bed, at any time so long as he is t given more than an hour period daily. Senator COUZENS. Mr. Chairman, I move that the two authe cated statements be received. The CHAIRMAN. Have those statements been sworn to by Sweeny before a notary public? Mr. MILLS. They are sworn to before a notary public, with se yes, Mr. Chairman. Senator COUZENS. Mr. Chairman, I move that they be received i the consideration of the committee. The CHAIRMAN. They may be received and marked for ident tion, and the committee will later determine about offering them evidence. (The 12-page statement, dated Jan. 27, 1934, was marked "C mittee Exhibit No. 136 for identification, Feb. 6, 1934 ", and w held by the subcommittee for further determination.) (The 3-page statement, dated Feb. 3, 1934, was marked "Com tee Exhibit No. 137 for identification, Feb. 6, 1934 ", and will be by the subcommittee for further determination.) Mr. PECORA. Mr. Mills, do you want the committee to underst on the basis of the advices that you have read into the recor having been received by you from the Federal Reserve Bank of cago, Detroit branch, that the First Wayne National Bank of Detr did not have a deficiency in its reserves with the Federal R bank on the 30th day of June 1932! Mr. MILLS. The statements are self-explanatory. In accor with the regulations of the Federal Reserve Board there w deficiency. Senator COUZENS. Mr. Mills, that does not answer the question, because the records of your own bank show that it was deficient in a sum of over $11,000,000 as of that date. Mr. MILLS. I have no knowledge who made such record. They have not been produced. I do not know who made the record because it has not been brought here. All that I know is that under the regulations of the Federal Reserve Board there was no deficiency. Mr. PECORA. The managing director says there was no deficiency on 3-day periods. Mr. MILLS. And that is how they are computed under the law and the regulations. Mr. PECORA. I have asked you if it is a fact that on June 30, 1932, the bank had created a deficiency in its reserve with the Federal Reserve bank on that date. Mr. MILLS. Not under the law and regulations. Mr. PECORA. What do you mean by "not under the law "? Mr. MILLS. And the regulations. Mr. PECORA. The regulations you have reference to are regulations for assessing penalties for the establishment of a deficiency during 3-day periods, aren't they? Mr. MILLS. They are also regulations for the maintenance of reserves. Mr. PECORA, Aren't they regulations of a character that require daily reserves, or reserves on the daily balances? Mr. MILLS. The regulations provide for a semiweekly average of balances. Mr. PECORA. Will you read that letter again that you read into the record? Mr. MILLS. Yes, sir. Mr. PECORA. Or let me have it and I will get right to the point I have in mind. Mr. MILLS. All right. Here they are [handing to Mr. Pecora the two letters he had already read into the record]. Senator ADAMS. Mr. Mills, while Mr. Pecora is looking over the letters let me ask you: The statutes require certain mathematical reserves on certain types of deposits, don't they? Mr. MILLS. Yes, sir. Senator ADAMS. They must have a certain percentage of reserves for deposits of different kinds? Mr. MILLS. Yes. Senator ADAMS. As I gather, your theory is that the Federal Reserve Board, or the Federal Reserve Bank of Chicago, has seen fit to interpret those reserve requirements in terms of averages and that it does not require that they shall maintain those reserves on each day. Mr. MILLS. That is correct. And the statute, I am informed, gives that authority to the Federal Reserve Board-to make those regulations. Senator ADAMS. Your understanding of the statute is that it authorizes such action? Mr. MILLS. Yes, sir. Senator ADAMS. Have you the statute here? Mr. MILLS. And the regulations themselves say that under the authority vested in it by section 19 of the Federal Reserve Act they may make regulations; and these are the regulations [holding up a printed pamphlet], and it is in section (d) of the Federal Reserve Board. The CHAIRMAN. What is that regulation, section (d)? Federal Reserve Board. Reserves from banks. Regulation (d). This regulation as printed herewith is in the form as amended October 2, 1930. The CHAIRMAN. What part of it covers this point? Mr. MILLS. It reads: SEC. 4. Penalties for deficiencies in reserves.-Inasmuch as it is essential that the law with respect to the maintenance by member banks of the required minimum reserve balances be strictly complied with, the Federal Reserve Board, under section 19 of the Federal Reserve Act, hereby prescribes the following rules governing the interpretation of reserves under the basic penalty: (1) Deficiency in reserve balances of member banks in cities where Federal Reserve banks or branches thereof are located And there is a branch in Detroit and in such other reserve cities as the Federal Reserve Board may designate from time to time, will be computed on the basis of average daily net deposit balances covering semiweekly periods. Senator ADAMS. Well now, then, your understanding is that if on Monday, say, a bank had no reserves in the Federal Reserve bank. but on Tuesday it had double the required amount, they would have complied with the law, is that it? Mr. MILLS. Under the law and regulations, certainly. Mr. PECORA. That is, that no penalty could attach for causing the reserve to fall below the requirement? Mr. MILLS. But I called to your attention, and we are in a legal discussion here, that section 4 has penalties for deficiencies in re serves, and if there is no deficiency, why, it necessarily follows that the necessary reserves are present. Mr. PECORA. I asked you if there was a deficiency on a particular date, that particular date being June 30, 1932. Mr. MILLS. My answer is Mr. PECORA (continuing). On that date did the bank have its required reserves at the Federal Reserve bank? Mr. MILLS. To answer that question I must say that it had its legal reserves, in my judgment; yes, sir; it had its legal reserves. Mr. PECORA. What was the legal reserve it was required to maintain on that date? Mr. MILLS. The only way that question can be answered is: A computed on a 3-day average, on a semiweekly average. That is the only way it can be done. The form attached to the managing director's letter shows the form that they use, and the only way we can report to the Federal Reserve bank. Senator ADAMS. If you can refer to the statute that authorizes that type of regulation, I should like to see it. Mr. PECORA. There is nothing in the statute so far as we can find about that. Mr. MILLS. Mr. Long is here, and probably he could Mr. PECORA (interposing). These 3-day periods and weekly periods seem to have been established for the purpose of determining the penalty, and that alone. And it does not relieve banks from the duty of maintaining daily its legal reserve. Senator COUZENS. There is quite a distinction between the method of assessing a penalty and the keeping of the required reserve. Senator ADAMS. I can readily understand, Mr. Pecora, that they might avoid the fixing of a penalty because for a particular date, by reason of excessive withdrawal, they might be below the required reserve temporarily and say: "If it is maintained on the average, we will not penalize you." But I do not see they can escape the interpretation that they were below the required reserves on that day. Mr. PECORA. That is the point at issue between the witness and myself. Senator COUZENS. It is perfectly apparent, Senator Adams, that on June 30, 1932, the record showed that this bank was 112 million dollars below its required reserves. And, obviously, if it had not increased its balance on July 1, which it did, it would have been assessed a penalty. But that does not obviate the fact that on June 30, 1932, they were below their required reserves by about 111⁄2 million dollars. Mr. PECORA. I think the regulation which is known as "section 4" was simply adopted by the Federal Reserve Board as a matter of convenience in determining the imposition of penalties for deficiencies. Senator COUZENS. There is nothing in what Mr. Mills read to indicate that the required reserve was waived on any specified date. All that it states is that it was computed on a 3-day average in the matter of assessing penalties. Mr. MILLS. It says " required reserve ", I believe, Senator Couzens. Mr. PECORA. Mr. Mills, you have referred this committee to a certain provision of section 4, being subsection (d) of the regulations of the Federal Reserve Board. Section 5 of the same regulations, which is entitled "Loans and dividends while reserves are deficient ", provides as follows: It is unlawful for any member bank, the reserves of which are at any time deficient, to make any new loans or to pay any dividends, unless and until the total reserves required by law are fully restored, and the payment of penalties for deficiencies in reserve does not exempt member banks from this prohibition of law. Mr. MILLS We did not pay any penalty. We were within the law. Mr. PECORA. Even if you had paid a penalty would it exempt you from this prohibition of not making new loans, or of not paying any dividends at any time when you had fallen below the required reserves? Mr. MILLS. No. But if we had been low we would have paid a penalty, but we were not low and we paid no penalty. Mr. PECORA. You were not low on the basis of the period for which a penalty might be imposed. This section 5 (d) further provides: As provided above, penalties for deficiencies in reserves are computed on the basis of the average reserve balances for semiweekly, weekly, or semimonthly periods. But this prohibition applies whenever the reserves are deficient for |