position of the commercial department of the bank, or when they might be deposited in another bank, certainly the persons that are beneficially interested in those funds should be entitled to protection, and certainly also they become deposits just like all other deposits in the bank, and they are used as such.

Mr. HANCOCK. That is all.

Mr. GOLDSBOROUGH. Mr. Hollister.

Mr. HOLLISTER. With respect to the issue of notes and debentures of the Corporation, the existing law provides that they may issue two or three times the amount of the capital.

Mr. BIRDZELL. Yes.

Mr. HOLLISTER. They are not guaranteed by the Government, although they are tax exempt.

Mr. BIRDZELL. Under the proposed law they would not be.

Mr. HOLLISTER. Is that in the proposed law?

Mr. BIRDZELL. Yes; that is in the proposed law, although I did not cover it.

Mr. HOLLISTER. That is what I thought, that there is no guarantee whatsoever of that kind, either in the existing law or in the new law. Mr. BIRDZELL. But the Treasury is authorized to purchase them. Mr. HOLLISTER. The Treasury is authorized to, but the Treasury might not purchase them. But there is no guaranty by the Government of those debentures?

Mr. BIRDZELL. You are correct.

Mr. HOLLISTER. Under the existing law, where there is a provision that three times the amount of capital may be issued in bonds and debentures, those debentures can be sold to better advantage because of the unlimited assessment provision, for as long as losses may be assessed continually against the banks, there can always be built up a protection in the Corporation for those who buy the debentures. Mr. BIRDZELL. That is correct.

Mr. HOLLISTER. But under the proposed law, with a limitation of one-twelfth of 1 percent a year, it is difficult for me to see the possible market of those debentures outside of the Treasury. Here you have a debenture that is not guaranteed by the Government, even though it is nontaxable. Under a set of disastrous circumstances your capital aud surplus might be completely wiped out.

Mr. BIRDZELL. There is a further market provided for those debentures, the Reconstruction Finance Corporation, to the extent of $250,000,000.

Mr. HOLLISTER. Yes; but that would require action by the Government. I am not saying that it is wrong, but I am merely trying to get at the change in the whole idea. The original idea was a debenture which was a sound proposition for private capital, because of the fact that it had behind it the whole banking system of the country, under the unlimited assessment idea. Now you have a debenture which it seems to me has no private market whatsoever, but is solely valuable insofar as the Reconstruction Finance Corporation or the Treasury would care to invest.

Is not that the case?
Mr. BIRDZELL. Yes.

Mr. HOLLISTER. It really ceases to be a private obligation to be sold in the market.

Mr. CROWLEY. It is true that if we had to issue debentures to private borrowers up to three times the capital, undoubtedly the condition would be such that you could not find a ready market. It might be possible that you had $300,000,000 in securities and that you might only want to borrow $50,000. Of course, you could sell debentures on that kind of a collateral provision.

Mr. HOLLISTER. Of course, the theory in selling debentures would be to get additional funds in order to satisfy the demands of the Corporation, and if conditions should arise where it would appear to be necessary for the Corporation to sell debentures, under the new law it seems to me that the average private investor, when he would realize that the only thing back of these debentures is the possibility of collecting one-twelfth of 1 percent annually, would say, withstanding the nontaxable feature, that is hardly a thing that I am interested in."

"Not

Mr. CROWLEY.. That is true if you had a critical situation. Mr. HOLLISTER. But would you be selling them unless you had a critical situation?

Mr. CROWLEY. No; unless you would be doing it for some shortterm borrowings. Suppose that you had $3,000,000 in securities and the market might be temporarily down. That would not affect your borrowing as long as you had adequate collateral. However, if we got to a point where we had an emergency, and we had to issue 4 or 5 million dollars of debentures at that particular stage, I do not believe that the open market would absorb those debentures unless you had the Government guarantee. The fact that the Secretary of the Treasury would come to our rescue if we had that kind of a condition, however, gives us some confidence.

Mr. HOLLISTER. I am not presenting the view that it is wrong. I am merely trying to bring out that, after all, if such debentures under the new law should be issued, some kind of governmental agency, the R. F. C. or the Treasury, would have to take them.

Mr. CROWLEY. We have $250.000.000 that the R. F. C. have earmarked for our corporation.

Mr. HOLLISTER. On page 5, in section 11, as to obligations payable outside of the United States, that affects only a few banks and is put in there because of the foreign competitive situation, is it?

Mr. BIRDZELL. It affects banks that have European branches, or branches in outlying possessions, like Puerto Rico.

Mr. HOLLISTER. Was that not included in the bill that passed the House last year, but which never got through the Senate? Mr. BIRDZELL. No; that is the old law. Mr. HOLLISTER. Section 11, on page 5?

Mr. BIRDZELL. Where is the provision that you are referring to? Mr. HOLLISTER. The proviso at the bottom, which reads:

Provided, That any obligation of a bank which is payable only at an office of the bank located outside the States of the United States, the District of Columbia, and the Territories of Hawaii and Alaska shall not be a deposit for purposes of this section or be included as a part of tocal deposits or of an insured deposit.

Mr. BIRDZELL. That was in the omnibus bill, which did not get through.

Mr. HOLLISTER. And that is there because, if they had the cost of the insurance to add to their operating cost, they would be in a bad competitive situation in a foreign country?

Mr. BIRDZELL. Yes; that is the purpose of that, if I understand your question, and that provision there is consistent with the provision in last year's omnibus bill.

Mr. GOLDSBOROUGH. Mr. Williams.

Mr. WILLIAMS. To my mind. there are two very fundamental things in this bill.

First, I am thinking about what you are going to do with some 8,000 nonmember banks that are not in the permanent insurance plan, and which will not be under the provisions of this bill.

In the second place, there is the question of a limited liability. Now, it is not contemplated, is it, that there will come a time when these insurance deposits will not be paid in full?

Mr. CROWLEY. You mean that these funds will not be sufficient? Mr. WILLIAMS. Yes.

Mr. CROWLEY. It is my honest judgment that if you will give to this Corporation the supervisory powers that we have asked for, that this Corporation should be able to keep itself solvent, barring unforeseen accidents.

If this country cannot operate a banking system so that the depositors will not suffer losses that may break this Corporation, then there is something distinctly wrong with your banking system and your monetary system. That calls for a corrective measure far beyond the powers of the Federal Deposit Insurance Corporation. Now, I believe that this Corporation can operate and pay to depositors their losses with any kind of normal conditions.

Mr. WILLIAMS. That is perhaps true.
Mr. CROWLEY. I hope it is true.

Mr WILLIAMS. I am not so much concerned with the power of the Board to reduce this assessment as I am with the power to raise it in case it is necessary, in order to take care of the liabilities of the Corporation.

Mr. CROWLEY. You understand that while the Corporation would look with favor on all of the revenue that you can give us, nevertheless you cannot have an unlimited liability or a liability so large that in times of stress you may weaken your entire banking structure. Mr WILLIAMS. Then your whole system, at the very time that it is needed the most by the depositors of the country, breaks down? Mr. CROWLEY. I think that is where supervision comes in-to prevent that.

Mr. WILLIAMS. You have the supervision which will do it.
Mr. CROWLEY. Correct.

Mr. WILLIAMS. But why not, if you say that you can administer the law in such a way as to prevent those losses by the discretion and the power that is in the Board, increases the assessment in case it is necessary?

Mr. CROWLEY. I think that there is a danger that deposit insurance might break down the private initiative of men who are trying to operate these institutions. We have a great many banks that we are insuring almost 100 percent. Men operating these banks will not have the same incentive as those which are operating banks only 5, 10, or 15 percent insured.

Mr. WILLIAMS. Of course, you agree that we do not need any insurance as long as there are no bank failures.

Mr. CROWLEY. I think that you will always have a certain number of bank failures, but it is like anything else-like your hospitals or your railroads or anything. If you have an epidemic in Washington where everyone in Washington is sick, your hospitals are not large enough to care for them. You cannot build this fund large enough to pay out 16 or 19 billion dollars overnight.

Mr. WILLIAMS. Then it is based upon the idea that you may have a condition where you could not pay out?

Mr. CROWLEY. I think everyone will agree that we could not pay out our entire liability at one time.

Mr. WILLIAMS. What other contingent funds have you in mind if the assessment fails? What else would you do?

Mr. CROWLEY. We have our right to borrow from the Treasury. That is all we have.

Mr. WILLIAMS. You are assuming, now

Mr. GOLDSBOROUGH. You do not mean the right to borrow? You mean that the Treasury is authorized to loan if necessary?

Mr. WILLIAMS. You mean that under this act the borrowing power is confined to the Treasury Department alone?

Mr. CROWLEY. And to the $25,000,000 from the R. F. C.

Mr. WILLIAMS. Under this act, are private individuals permitted to lend you money on your debentures?

Mr. CROWLEY. Yes; they are permitted to do it.

Mr. WILLIAMS. If they want to?

Mr. CROWLEY. Yes; if they want to?

Mr. WILLIAMS. If there is a private field for the investment, they are permitted under this law to invest in your debentures?

Mr. CROWLEY. That is correct.

Mr. WILLIAMS. You have that power?

Mr. CROWLEY. That is right.

Mr. WILLIAMS. What is the purpose of allocating the capital struc

ture of that institution to surplus?

Mr. CROWLEY. I do not think that allocation of capital has anything to do with the right of borrowing.

Mr. WILLIAMS. It is the intention to use that in case of need to pay the losses?

Mr. CROWLEY. Yes. We may take-

Mr. WILLIAMS. The idea back of it is that the money that is received from the Federal Reserve banks and from the Treasury should be used as a reserve fund to pay these losses, rather than from the banks themselves?

Mr. CROWLEY. That is correct.

Mr. WILLIAMS. Now

Mr. CROWLEY. Let me answer that. I think the Government, when it licenses a bank and establishes a banking system, assumes a responsibility to the depositors, and when it created this Corporation I think that it assumed a responsibility for the protection of the depositors. I do not believe that any man argues that we should continue to permit losses to occur as has been the case in the last 12 years.

Mr. WILLIAMS. Nobody will contend that, I think, but you expect, by reason of your regulatory powers, and by reason of reports made to you, and your inspections, to regulate, within reasonable grounds, the banking activities of the country and to prevent these failures?

Mr. CROWLEY. But, Congressman, we do not guarantee to prevent failures entirely. We hope to reduce the number of failures.

Mr. WILLIAMSs. That is so, and the very purpose of all this insurance, according to my idea, should be to guarantee, in case of failure, the payment of the depositors in full.

Mr. CROWLEY. I think that is correct, but I do not see any way in the world that you can draft a bill or that you can give us sufficient funds, so that you could say that at all times, regardless of whether you have a complete collapse of your banking system, this Corporation could pay the losses of all depositors.

Mr. WILLIAMS. Could you conceive of a complete collapse in the banking system of this country now, under the supervision of your Corporation and of the Federal Reserve system?

Mr. CROWLEY. All that I can say to you is this: I believe that under our rebuilding program, the banks as a whole are in the best shape that they have been in a great many years. With the proper kind of supervision we should not have the losses that we have had in the past. Mr. WILLIAMS. Now, merely to furnish a factual background, there are about thirty-six billion and a half in deposits now, are there not? Mr. CROWLEY. That is correct.

Mr. WILLIAMS. What part of that is in time deposits?

Mr. GOLDSBOROUGH. Would it be agreeable for you gentlemen to come back tomorrow morning?

I want to say to the members of the committee that there is a gentleman here from California who has to go back tonight, and he and Mr. Ford have both asked that he be allowed to put a statement in the record.

Mr. Adams, will you come up here, please?

It is very important, Mr. Adams, that the members of the committee get to the floor of the House as quickly as possible, and I am wondering if you could limit your statement to 10 minutes, and then give to the members of the committee the written statement which you left with me the other day.

STATEMENT OF EDSON F. ADAMS, PRESIDENT FARMERS AND MERCHANTS SAVINGS BANK, OAKLAND, CALIF.

Mr. ADAMS. I think that I would have to read the statement, Mr. Chairman, in order to make it clear. If I did not do that, I do not think that they would grasp it.

Mr. GOLDSBOROUGH. You will proceed, then.

Mr. ADAMS. It appears quite necessary at this time that the Banking Act of 1933 and Federal Deposit Insurance Act be amended covering certain important matters as they now injuriously affect banks doing a strictly savings bank business and, also, mutual savings banks of the Middle Western and Pacific States which are not numerous enough to protect themselves by establishing a savings-deposit guarantee under State authority, as has been done in the State of New York.

Briefly, the main changes requested in the present laws are as follows: