(g) To require the writing off of doubtful or worthless assets upon the books and balance sheets of Federal reserve banks.

(h) To suspend, for the violation of any of the provisions of this act, the operations of any Federal reserve bank, to take possession thereof, administer the same during the period of suspension, and, when deemed advisable, to liquidate or reorganize such bank.

(i) To require bonds of Federal reserve agents, to make regulations for the safeguarding of all collateral, bonds, Federal reserve notes, money or property of any kind deposited in the hands of such agents, and said board shall perform the duties, functions, or services specified in this act, and make all rules and regulations necessary to enable said board effectively to perform the same.

(j) To exercise general supervision over said Federal reserve banks.

(k) To grant by special permit to national banks applying therefor, when not in contravention of State or local law, the right to act as trustee, executor, administrator, registrar of stocks and bonds, guardian of estates, assignee, receiver committee of estates of lunatics, or in any other fiduciary capacity in which State banks, trust companies, or other corporations which come into competition with national banks are permitted to act under the laws of the State in which the national bank is located. Whenever the laws of such State authorize or permit the exercise of any or all of the foregoing powers by State banks, trust companies, or other corporations which compete with national banks, the granting to and the exercise of such powers by national banks shall not be deemed to be in contravention of State or local law within the meaning of this act.

National banks exercising any or all of the powers enumerated in this subsection sha'l segregate all assets held in any fiduciary capacity from the general assets of the bank and shall keep a separate set of books and records showing in proper detail all transactions engaged in under authority of this subsection. Such books and records shall be open to inspection by the State authorities to the same extent as the books and records of corporations organized under State law which exercise fiduciary powers, but nothing in this act shall be construed as authorizing the State authorities to examine the books, records, and assets of the national bank which are not held in trust under authority of this subsection.

No national bank shall receive in its trust department deposits of current funds subject to check or the deposit of checks, drafts, bills of exchange, or other items for collection or exchange purposes. Funds deposited or held in trust by the bank awaiting investment shall be carried in a separate account and shall not be used by the bank in the conduct of its business unless it shall first set aside in the trust department United States bonds or other securities approved by the Fedrral Reserve Board. In the event of the failure of such bank the owners of the funds held in trust for investment shall have a lien on the bonds or other securities so set apart in addition to their claim against the estate of the bank.

Whenever the laws of a State require corporations acting in a fiduciary capacity, to deposit securities with the State authorities for the protection of private or court trusts, national banks so acting shall be required to make similar deposits, and securities so deposited shall be held for the protection of private or court trusts, as provided by the State law.

National banks in such cases shall not be required to execute the bond usually required of individuals if State corporations under similar circumstances are exempt from this requirement.

National banks shalll have power to execute such bond when so required by the laws of the State.

In any case in which the laws of a State require that a corporation acting as trustee, executor, administrator, or in any capacity specified in this section, shall take an oath or make an affidavit, the president, vice president, cashier, or trust officer of such national bank may take the necessary oath or execute the necessary affidavit.

It shall be unlawful for any national banking association to lend any oflicer, director, or employee any funds held in trust under the powers conferred by this section. Any officer, director, or employee making such loan, or to whom such loan is made, may be fined not more than $5,000 or imprisoned not more than five years, or may be both fined and imprisoned, in the discretion of the court.

In passing upon applications for permission to exercise the powers enumerated in this subsection, the Federal Reserve Board may take into consideration the amount of capital and surplus of the applying bank, whether or not such capital and surplus is sufficient under the circumstances of the case, the needs of the community to be served, and other facts and circumstances that seem to it proper, and may grant or refuse the application accordingly: Provided, That no permit shall be issued to any national banking association having a capital and surplus less than the capital and surplus required by State law of State banks, trust companies, and corporations exercising such powers.

(1) To employ such attorneys, experts, assistants, clerks, or other employees as may be deemed necessary to conduct the business of the board. All salaries and fees shall be fixed in advance by said board and shall be paid in the same manner as the salaries of the members of the board. All such attorneys, experts, assistants, clerks, and other employees shall be appointed without regard to the provisions of the act of January 16, 1883 (volume 22, United States Statutes at Large, page 403), and amendments thereto, or any rule or regulation made in pursuance thereof: Provided, That nothing herein shall prevent the President from placing said employees in the classified service.

(m) Upon the affirmative vote of not less than five of its members, the Federal Reserve Board shall have power to permit Federal reserve banks to discount for any member bank notes, drafts, or bills of exchange bearing the signature or indorsement of any one borrower in excess of the amount permitted by section 9 and section 13 of this act, but in no case to exceed 20 per centum of the member bank's capital and surplus: Provided, however, That all such notes, drafts, or bills of exchange discounted for any member bank in excess of the amount permitted under such sections shall be secured by not less than a like face amount of bonds or notes of the United States issued since April 24, 1917, for which the borrower shall in good faith prior to January 1, 1921, have paid or agreed to pay not less than the full face amount thereof, or certificates of indebtedness of the United States: Provided further, That the provisions of this subsection (m) shall not be operative after October 31, 1921.

(See amendment of Feb. 27, 1921.)

Gov. HARDING. You will notice that paragraph (a) provides that the Federal Reserve Board is authorized and empowered

(a) To examine at its discretion the accounts, books, and affairs of each Federal reserve bank and of each member bank and to require such statements and reports as it may deem necessary. The said board shall publish once each week a statement showing the condition of each Federal reserve bank and a consolidated statement for all Federal reserve banks. Such statements shall show in detail the assets and liabilities of the Federal reserve banks, single and combined, and shall furnish full information regarding the character of the money held as reserve and the amount, nature, and maturities of the paper and other investments owned or held by Federal reserve banks.

And then paragraph (b) provides:

To permit, or, on the affirmative vote of at least five members of the Reserve Board, to require Federal reserve banks to rediscount the discounted paper of other Federal reserve banks at rates of interest to be fixed by the Federal Reserve Board.

I may add here that this is the only direct and specific power given the Federal Reserve Board in the act in the matter of loans; that we may permit one Federal reserve bank to rediscount with another Federal reserve bank, or, by affirmative vote of five members of the board, we may require one Federal reserve bank or group of Federal reserve banks to rediscount the discounted paper of other Federal reserve banks at rates of interest to be fixed by the board.

Then paragraph (c) is the section which provides or authorizes the board

To suspend for a period not exceeding 30 days, and from time to time to renew such suspension for periods not exceeding 15 days, any reserve requirements specified in this act.

Then the proviso that the board—

Shall establish a graduated tax upon the amounts by which the reserve requirements of this act may be permitted to fall below the level hereinafter specified.

The graduated tax is described in this section. This graduated tax increases as the reserve drops down; with the further requirement that as these reserves diminish the Federal reserve bank shall add an amount equal to said tax to the rates of interest and discount

93141-22-vOL 2-18

fixed by the Federal Reserve Board. The other sections do not require special mention here, except paragraph (f):

To suspend or remove any officer or director of any Federal reserve bank, the cause of such removal to be forthwith communicated in writing by the Federal Reserve Board to the removed officer or director and to said bank.

Then paragraph (j), "To exercise general supervision over said Federal reserve banks."

I wish to point out that the word "control" does not appear in that paragraph. The words are "general supervision.'

Now, the other powers of the Federal Reserve Board appear in various sections of the Federal reserve act.

Senator LENROOT. Will you discuss later-I will not ask you now-your construction of the words "general supervision?" Will that come up later and will that be taken up later by you?

Gov. HARDING. I think it is different from "control," and I will explain that just as soon as I get to the powers of the Federal reserve bank directors. For instance, the Comptroller of the Currency has supervision over the national banks of the country, and the State bank superintendents have general supervision, where the law so provides, of the State banks. But he does not have control; the control of a bank is vested in its officers and directors.

Now, in section 13 the Federal Reserve Board is given power to determine or define the character of paper eligible for discount within the meaning of this act. The board is given no legislative powers whatever. Congress has legislated and has defined in a broad way eligible paper, but has given the board power, within the meaning of the act, to define more specifically the character of the paper eligible for discount.

În section 14 open market operations are defined.

Representative SUMNERS. Governor, what section did you refer to just a moment ago-just at this moment?

Gov. HARDING. Section 13. Now, open market operations are not obligatory upon the Federal reserve banks, because the permissive "may" is used. Section 14 begins:

Any Federal reserve bank may, under rules and regulations prescribed by the Federal Reserve Board, purchase and sell in the open market, at home or abroad, either from or to domestic or foreign banks, firms, corporations, or individuals, cable transfers and bankers' acceptances, etc.

Paragraph (b) of section 14-now, this is a very important paragraph. To keep the connection you should go back to the opening words of section 14. There are certain specified powers. So it would mean that any Federal reserve bank has power

to establish from time to time, subject to review and determination of the Federal Reserve Board, rates of discount to be charged by the Rederal reserve bank for each class of paper, which shall be fixed with a view of accommodating commerce and business.

The part I will read now is the amendment which was enacted in the early part of 1920, the progressive rate amendment, "and which. subject to the approval, review, and determination of the Federal reserve board may be graduated or progressed on the basis of the amount of the advances and discount accommodations extended by the Federal Reserve bank to the borrowing bank."

Senator HARRISON. When was that amendment made, Mr. Harding?

Gov. HARDING. Approximately in March or April, 1920. I do not think it was earlier than March, or later than April. I can give you the exact date. It was April 13, 1920.

Senator HARRISON. Of course, that was passed by Congress on the recommendation of the Federal Reserve Board?

Gov. HARDING. Yes; I will explain that later.

Now, I will ask the commission to turn for a moment to section 4 of the Federal reserve act. I said a moment ago that in law Federal reserve banks are private corporations incorporated under a special act of Congress. If you read section 4 and preceding sections you will see that this statement is true. The fiscal agency functions exercised by the Federal reserve banks are also exercised by national banks which are incorparated under acts of Congress, known as the national bank act. So, in like manner, the Federal reserve banks are organized under the Federal reserve act as private corporations having as stockholders all the member banks. [Reading:]

Upon the filing of such certificate with the Comptroller of the Currency as aforesaid, the said Federal reserve bank shall become a body corporate, and as such, and in the name designated in such organization certificate, shall have power

First. To adopt and use a corporate seal.

Second. To have succession for a period of 20 years from its organi ation unless it is sooner dissolved by an act of Congress, or unless its franchise becomes forfeited by some violation of law.

Third. To make contracts.

You will notice that all through the act where reference is made. to the various powers of Federal reserve banks almost invariably the qualifying clause follows, "subject to the approval of the Federal Reserve Board." In section 4 that qualifying clause is missing, except in one instance. [Reading:]

Fourth. To sue and be sued, complain and defend, in any court of law or equity. Fifth. To appoint by its board of directors such officers and employees as are not otherwise provided for in this act, to define their duties, require bonds of them and fix the penalty thereof, and to dismiss at pleasure such officers or employees.

Sixth. To prescribe by a board of directors, by-laws not inconsistent with law, regulating the manner in which its general business may be conducted, and the privilexes granted to it by law may be exercised and enjoyed.

Seventh. To exercise by its board of directors, or duly authorized officers or agents, all powers specifically granted by the provisions of this act and such incidental powers as shall be necessary to carry on the business of banking within the limitations prescribed by this act.

The eighth, it is not necessary to discuss here. But about the middle of paragraph 8, I want to call attention to this clause:

Every Federal reserve bank shall be conducted under the supervision and control of a board of directors.

Now, in section 11 relating to the powers of the Federal Reserve Board, the word "control" is lacking. Section 11 provides that the Federal Reserve Board shall have general supervision" over the Federal reserve banks. This section provides that "every Federal reserve bank shall be conducted under the supervision and control of a board of directors."

Representative TEN EYCK. That is, under its own board of direc

tors?

Mr. HARDING. Its own board of directors, chosen as I have already indicated.

Now, this section defines the functions of the board of directors [reading]:

The board of directors shall perform the duties usually appertaining to the office of directors of banking associations and all such duties as are prescribed by law.

You all know that in the case of a national bank, or in the case of a State bank, neither the Comptroller of the Currency nor the superintendent of the State banks has the right, under his power of supervision, to say, you must make such and such a loan, or you shall not make such and such a loan, if the bank has legal power to make it, and if in its opinion it is well to make it. I am emphasizing this because of the idea that seems to be generally prevalent all through the country that the Federal Reserve Board, sitting here in Washington, is a body which exercises vast powers over local institutions. I am not trying to minimize the powers which Congress has granted the Federal Reserve Board. I want to say that those powers, like all delegated powers, ought to be exercised with discretion and moderation and with all due regard to the opinions and judgment of those who are more directly in control of the banks over which the Federal Reserve Board has general supervision.

I do not think it will be contended that Congress, when it enacted the Federal reserve act, sought to establish a central bank. Of course, under the provisions of section 11, which I quoted awhile ago, the Federal Reserve Board can mobilize credits; if one Federal reserve bank in one section of the country is in need of credits for seasonal operations, or special emergencies, and other banks more fortunately situated in other sections of the country do not care to extend those credits, the Federal Reserve Board can force, by a vote of five members of the board, those other banks to extend credits where they are needed by other banks for seasonal operations or on account of special emergencies.

The CHAIRMAN. As a matter of practice, would that probably be done by the Federal Reserve Board, in the absence of a request from a bank?

Gov. HARDING. As a matter of practice, the Federal Reserve Board has never had to exercise that authority, because there is a spirit of cooperation among the 12 Federal reserve banks, and they extend those accommodations voluntarily.

The CHAIRMAN. Has the Federal Reserve Board ever been asked by one bank to require another bank to arrange credits?

Gov. HARDING. The board is asked frequently by a bank to arrange discounts for it; is asked frequently now, and all during 1920, and parts of 1919. There is nothing in the law to prevent officers of one Federal reserve bank taking up directly with the officers of another Federal reserve bank the matter of rediscounts. But the board requested, a number of years ago, that the banks should make these arrangements through the board.

Senator HARRISON. That is because of the spirit of cooperation? Gov. HARDING. No; but the board wants to know what the situation in each district is. We want to be able to allocate the reserves equitably. We do not want one community to be well supplied with credits and another community deprived of credits.

Representative TEN EYCK. In other words, you have better judgment of the entire situation than a particular bank would have?