beginning, reserve bank examiners have been under the necessity of giving very considerable attention to the working of this phase of the Reserve Act. They have especially been called upon to report difficulties arising out of resistance on the part of member banks, and to investigate the basis for refusal to join actively in the work of clearing and collecting items under the rulings of the Board. All this has introduced an element of discussion which usually does not figure in the examination report, particularly as the examiners have from time to time had to report fully on the question of "float."

Future of the System

The question whether the examination system as now practiced is not unreasonably elaborate and might not be improved by combining its elements under the sole direction of the Federal Reserve Board, so far, at least, as national banks are concerned, has often been discussed. The Comptroller of the Currency has no means of enforcing his decisions or orders except by asking for the revocation of a bank's charter, or by beginning a prosecution against officers, directors, or employees who may have been guilty of a violation of law, or of obvious negligence in connection with the management of the bank. These remedies are far more useful in securing punishment and in assigning responsibility-occasionally in recovering funds to make up losses than they are preventing danger, sacrifice, or bad banking. Experience has shown that the proper method of repressing bad banking is to nip it in the bud by applying proper remedies before the evil has advanced very far. This is not easy to do except where the examining authority is in quite constant, and very close, touch with the bank. The well-managed Federal reserve bank is far more nearly able to apply that kind of supervision and to administer correctives when they are needed than the head of an examining force no matter how efficient and faithful he may be. There is an undoubted growth of opinion in favor of the transfer of bank examination to Federal reserve banks.

Bank Reports

Besides being subject to examination by the Comptroller, under the amendment of 1877 national banks were required to furnish each year not less than five reports to his office. The amendment of December 28, 1922 reduced the minimum number to three. At the Comptroller's direction, a report as of a specified date must be made within five days under penalty of fine. This report must be attested by the president or cashier and signed by three directors, while the general balance sheet alone must be published in a local newspaper in the

place in which the bank is situated. At the time of declaration each bank also reports dividends declared as well as the amount of net earnings in excess of dividends upon a form provided for that purpose, while the Comptroller may require special reports on various topics relating either to some feature covering banking in general or to the condition of a particular institution.

State members of the Federal Reserve System make not less than three reports a year (on Form 105) on call of their Federal reserve bank upon dates fixed by the Board. These reports are required within ten days under penalty of fine. In addition, the members make semiannual reports of earnings and dividends on Form 107, and furnish the district reserve bank a special notification on Form 107a of dividends declared from time to time. The Board has tended to fix the report dates on some of the dates set by the Comptroller, so that a complete statement of member bank conditions on a certain date will be afforded. Likewise, bank supervisors in leading states have tended to make the dates of their calls coincide with those of the Comptroller. Prior to the amendment of June 21, 1917, the state member banks' reports were to be made to the Comptroller, as in the case of national banks.

These reports obviously represent an important adjunct to the examinations in supplying information with respect to the condition. of a given institution. While their purpose is broadly the same as that of the examinations, they are made at more frequent intervals, although offsetting that advantage is the fact that no such close scrutiny of the conduct of the banks is possible through them, and little opportunity is given for detecting internal frauds which an examination might reveal.

CHAPTER XXVII

THE CLAYTON ACT

THE duty of determining eligibility of directors in member banks was placed upon the Federal Reserve Board by the Kern Amendment of May 15, 1916, to the Clayton Act of October 15, 1914. The latter enactment forbade interlocking directorates in banks organized or operating under the laws of the United States if their aggregate capital, surplus, undivided profits, and deposits were in any case above $5,000,000.1 It forbade a private banker or director of a state bank or trust company of that size from becoming a director in a bank organized or operating under the laws of the United States. It further prohibited an officer, director, or employee of a bank organized or operating under the laws of United States in a city of 200,000 population 2 from serving as an officer, director, or employee in another bank or trust company existing in the same place. The purpose of the amendment already referred to was to afford a somewhat greater degree of latitude of action. The amendment itself authorized any officer, director, or employee of a member bank, to serve as officer, director, or employee of not more than two other banks, banking associations or trust companies, when organized under the laws of the United States or any state, if such other bank, banking association, or trust company should not be in substantial competition with such member bank. It was made necessary, however, to obtain the assent of the Federal Reserve Board in order to continue this kind of relationship with other banks. The amendment of May 26, 1920, further authorized the Board to permit private bankers to serve not more than two such banks.

3

In this way, it became necessary for the Board to investigate the facts bearing upon the question whether the institutions in which an applicant might wish to retain directorship were or were not in substantial competition with the member bank in which such applicant was a director. The task of enforcing the law has gone on from year to year with comparatively little change in policy, so that the general

Taking the average shown in the official statements of the institutions, filed during the fiscal year preceding the annual election of directors. 1916 Bulletin, p. 523.

attitude adopted by the Board can be fairly clearly outlined as the consequence of a definite theory or set of principles. The Board first brought together its rulings in Regulation L, Series of 1920, which to date has merely been amplified on several points. The Board has received applications, as follows:

The applications are in addition to apparent violations reported by national bank examiners, which the counsel's office investigates. In the latter case, it may ask the person to resign or to file a formal application. A hearing is granted in case an application is refused, but in actual practice only a small number have been refused. In a good many cases, the directors affected saw that there was substantial competition and hence gave up one or more of their directorates, thereby conforming to the law.

General Policy of the Federal Reserve Board

The general policy of the Board in connection with the working out of the Clayton Act and the ascertainment of "substantial competition" has been largely of a technical variety, and necessarily so, in as much as a situation is often presented in which substantial competition has practically been eliminated before the matter comes to the attention of the Board at all. The character of competition really at issue (and that which it was sought to safeguard) is not adequately dealt with in the legislation, probably due to lack of definiteness and certainty on the part of the framers of the Act as to what they sought to correct, From the beginning, there has been doubt as to what was meant by substantial competition, and eventually the Board requested the Federal Advisory Council on September 20, 1922,* to advise it as to the meaning of this term. The answer of the Council was (as has often happened) very vague, merely stating that it would be unwise to attempt to have Congress amend the Clayton Act on account of the danger of "undesirable legislation." It was added that "the Board may well assume the responsibility of deciding what is substantial competition and each case should be determined upon its Ninth Annual Report, Federal Reserve Board, 1922, p. 412.

own merits." This was in spite of the fact that the Board in the preceding year had proceeded to recommend an amendment to the law, designed to remedy the situation, and urging the insertion of the words: "or if in the judgment of the Federal Reserve Board, no restriction of banking credit or lessening of competition will result," as a condition to the granting of permission to hold various directorates.

This was the outgrowth not only of experience but also of the work of a special committee of the Board which made a very careful survey of the experience under the Act. In as much as several years had elapsed since the enactment of the legislation in question, the Board in the autumn of 1920 undertook to review the entire situation with respect to interlocking directorates in order to reach a conclusion whether it ought not to revoke some of the permits which it had previously granted. While the Board was at work upon the situation, representations were made on behalf of some of the banks affected, that to revoke outstanding permits and break up outstanding rela

The report already referred to, filed with the Board by a special committee of its own under date of April 1, 1921, is still practically valid as a statement of the situation. The report said in part:

During the course of the Board's review of the situation, urgent representations were made on behalf of some of the banks involved that to revoke outstanding permits and break up long-standing relations would work hardship and injustice upon many banks and bank directors. It was argued that the intent of Congress in enacting the Clayton Act was to encourage competition between banks, and that where competition had sprung up between two banks while their directorates had been interlocked that intent was not being defeated by the existence of the interlocking directorate. There is no doubt of the soundness of this argument, and it emphasizes the fact, which had for some time been impressed upon the Federal Reserve Board, that section 8 of the Clayton Act as amended by the Kern amendment penalizes directors who have acted in accordance with the intent of Congress and have encouraged the growth of competition between the banks which they serve. When the work done in connection with the review of the interlocking directorates revealed to the Board how many instances there were in which a strict enforcement of the terms of section 8 of the Clayton Act would operate inequitably, the Board decided to consider the question of a further amendment to the Clayton Act to carry out more effectually the intention of Congress to promote and encourage competition. The matter was referred to the Board's committee on the Clayton Act, which, after making a careful study of the problem, with the assistance of counsel, rendered a report in which it recommended an amendment which would authorize the Federal Reserve Board to permit a person to serve not more than three competing banks, when the Board is satisfied that such interlocking directorates will not result in a restriction of credit or lessening of competition between the banks involved, the Board, however, to continue to have full power to revoke such permits at any time. The committee further recommended that existing permits previously granted by the Board be not disturbed until the probability of the enactment of such an amendment could be ascertained, and that the Board postpone final action on its review of the existing situation which had been scheduled for April 1. The Board adopted the recommendations of its committee on the Clayton Act and a bill amending the Clayton Act in this manner was drafted and submitted to the Senate and House