reserves in the form of a reserve balance on deposit with the Federal reserve bank, and every other member bank shall maintain not less than two-fifths of its total required reserves in the form of a reserve balance on deposit with the Federal reserve bank. The remainder of the total required reserves of each member bank, over and above the amount required to be maintained in the form of a reserve balance on deposit with the Federal reserve bank, may, at the option of such member bank, consist of a reserve balance on deposit with the Federal reserve bank, or of cash owned by such member bank either in its actual possession or in transit between such member bank and the Federal reserve bank: Provided, That when, in its judgment the public interest so requires, the Federal Reserve Board may limit to an amount less than that permitted hereunder the amount of cash which any member bank or banks may count as reserve: Provided, however, That, in prescribing such limitations, the Federal Reserve Board shall be guided by the general principle that member banks should be permitted to count as reserve, within the limitations of this section, as much cash as they reasonably need in view of the character of their business and their degree of accessibility to the currency facilities of the Federal reserve banks

"(c) The term gross deposits', within the meaning of this section, shall include all deposit liabilities of any member bank whether or not immediately available for withdrawal by the depositor, all liabilities for certified checks, cashiers', treasurers', and other officers' checks, cash, letters of credit, travelers' checks, and all other similar liabilities, as further defined and specified by the Federal Reserve Board: Provided, however, That, in computing the amount of gross deposits', (1) amounts shown on the books of any member bank as liabilities of such bank payable to a branch of such bank located in a foreign country or in a dependency or possession of the United States, and (2) liabilities payable only at such a branch, shall be treated as though said liabilities were due to or payable at a nonmember bank.

"(d) The term 'net deposits', as used in this section, shall mean the amount of the gross deposits of any member bank, as above defined and as further defined by the Federal Reserve Board, minus the sum of (1) all balances due to such member bank from other member banks and their branches in the United States and (2) checks and other cash items in process of collection which are payable immediately upon presentation in the United States, within the meaning of these terms as further defined by the Federal Reserve Board.

"(e) The term 'average daily debits to deposits accounts,' as used in this section, shall mean the average daily amount of checks, drafts, and other items debited or charged by any member bank to any and all accounts included in gross deposits as above defined and as further defined by the Federal Reserve Board, except charges resulting from the payment of certified checks and cashiers', treasurers', and other officers' checks.

"(f) The term 'cash' within the meaning of this section, shall include all kinds of currency and coin issued or coined under authority of the laws of the United States.

"(g) The term reserve balances', as used in this section, shall mean a member bank's actual net balance on the books of the Federal reserve bank representing funds available for reserve purposes under regulations prescribed by the Federal Reserve Board.

"(h) The term 'vicinity of a Federal reserve bank or branch thereof,' as used in this section, shall mean the city in which a Federal reserve bank or branch thereof is located, until such term is otherwise defined by the Federal Reserve Board: Provided, That with respect to each Federal reserve bank and each branch thereof, the Federal Reserve Board, from time to time, in its discretion, may either (1) define a specific geographic area as comprising the vicinity of such Federal reserve bank or branch thereof, within the meaning of this section, or (2) compile a list of member banks which shall be deemed to be located in the vicinity of such Federal reserve bank or branch thereof, within the meaning of this section, and add banks to, or remove banks from, such list, from time to time: Provided, however, That, in defining such areas and compiling such lists, the Federal Reserve Board shall be guided by the general principle indicated in subsection (b) hereof.

"(i) With respect to each member bank, the term 'Federal reserve bank', as used in this section, shall mean the Federal reserve bank of the district in which such member bank is located.

175541-34-PT 16- -3

"(j) The Federal Reserve Board is authorized and empowered to prescribe regulations defining further the various terms used in this Act, fixing periods over which reserve requirements and actual reserves may be averaged, determining the methods by which reserve requirements and actual reserves shall be computed, and prescribing penalties for deficiencies in reserves. Such regulations and all other regulations of the Federal Reserve Board shall have the force and effect of law and the courts shall take judicial notice of them.

"(k) Subject to such regulations and penalties as may be prescribed by the Federal Reserve Board, any member bank may draw against or otherwise utilize its reserves for the purpose of meeting existing liabilities: Provided, however, That, whenever the reserves of any member bank have been continuously deficient for fourteen consecutive calendar days, the Federal Reserve Agent or Assistant Federal Reserve Agent of the district in which such member bank is located shall send to each director of such bank, by registered mail, a letter advising him of such deficiency and calling attention to the provisions of this subsection; and each director of such bank who after receipt of such a letter, assents to or acquiesces in the making of additional loans or investments by such bank before the reserves of such bank shall have been restored to the amount required by this section, shall be held liable in his personal or individual capacity for any and all losses sustained by such bank on any such loans or investments.

"(1) All penalties for deficiencies in reserves incurred under regulations prescribed by the Federal Reserve Board pursuant to the provisions of this Act shall be paid to the Federal reserve bank by the member bank against which they are assessed.

(m) No member bank shall keep on deposit with any State bank or trust company which is not a member bank a sum in excess of ten per centum of its own paid-up capital and surplus. No member bank shall act as the medium or agent of a nonmember bank in applying for or receiving discounts from a Federal reserve bank under the provisions of this Act, except by permission of the Federal Reserve Board.

"(n) National banks or banks organized under local laws, located in Alaska or in a dependency or insular possession or any part of the United States outside the continental United States, may remain nonmember banks, and shall in that event maintain reserves and comply with all the conditions now provided by law regulating them or said banks may, with the consent of the Federal Reserve Board, become member banks of any one of the Federal reserve districts, and shall in that event take stock, maintain reserves, and be subject to all the other provisions of this Act.

"(0) Notwithstanding the foregoing provisions of this section, the Federal Reserve Board, upon the affirmative vote of not less than five of its members and with the approval of the President, may declare that an emergency exists by reason of credit expansion, and may by regulation during such emergency increase or decrease from time to time, in its discretion, the reserve balances required to be maintained.

"(p) No member bank shall act as the medium or agent of any nonbanking corporation, partnership, association, business trust, or individual in making loans on the security of stocks, bonds, and other investment securities to brokers or dealers in stocks, bonds, and other investment securities. Every violation of this provision by any member bank shall be punishable by a fine of not more than $100 per day during the continuance of such violation; and such fine may be collected, by suit or otherwise, by the Federal reserve bank of the district in which such member bank is located.

"(q) No member bank shall, directly or indirectly by any device whatsoever, pay any interest on any deposit which is payable on demand: Provided, That nothing herein contained shall be construed as prohibiting the payment of interest in accordance with the terms of any certificate of deposit or other contract heretofore entered into in good faith which is in force on the date of the enactment of this paragraph; but no such certificate of deposit or other contract shall be renewed or extended unless it shall be modified to conform to this paragraph, and every member bank shall take such action as may be necessary to conform to this paragraph as soon as possible consistently with its contractual obligations: Provided, however, That this paragraph shall not apply to any deposit of such bank which is payable only at an office thereof located in a foreign country, and shall not apply to any deposit made by a mutual savings bank, nor to any deposit of public funds made by or on behalf

of any State, county, school district, or other subdivision or municipality, with respect to which payment of interest is required under State law.

"The Federal Reserve Board shall from time to time limit by regulation the rate of interest which may be paid by member banks on time depos.ts, and may prescribe different rates for such payment on time and savings deposits having different maturities or subject to different conditions respecting withdrawal or repayment or subject to different conditions by reason of different locations. No member bank shall pay any time deposit before its maturity, or waive any requirement of notice before payment of any savings deposit except as to all savings deposits having the same requirement. For the purposes of this subsection, the Federal Reserve Board is authorized to define the terms time deposits' and 'savings deposits.'

"(r) All acts or parts of acts in conflict with this section are hereby repealed only in so far as they are in conflict with the provisions of this section.'

There are hereby repealed the provisions of Section 7 of the First Liberty Bond Act, approved April 24, 1917, Section 8 of the Second Liberty Bond Act, approved September 24, 1917, and Section 8 of the Third Liberty Bond Act, approved April 4, 1918 (U.S. Code, Title 31, Section 771) which read as follows:

That the provisions of section fifty-one hundred and ninety-one of the Revised Statutes, as amended by the Federal Reserve Act, and the amendments thereof, with reference to the reserves requ.red to be kept by national banking associations and other member banks of the Federal Reserve System, shall not apply to deposits of public moneys by the United States in designated depositaries."

This section shall become effective on the first day of the seventh calendar month following the enactment of this Act.

Senator ADAMS. Senator Fletcher, may I ask a question? You made a statement a while ago about closing the hearings. Has that been the definite action of the committee?

The CHAIRMAN. Yes.

Senator TOWNSEND. There has nothing been taken definite before the committee?

The CHAIRMAN. It was taken up yesterday before the committee and that was the understanding.

Senator TowNSEND. I was not here.

Senator ADAMS. I was not here.

Senator TOWNSEND. Personally, I feel we ought not to foreclose somebody who wants to be heard myself.

The CHAIRMAN. Mr. Roosevelt and Mr. Gibbons are here, I believe. They wish to be heard this morning on the subject of municipals. Are they present? Mr. Roosevelt, we will hear from you now, and Mr. Gibbons.

STATEMENTS OF ARCHIBALD B. ROOSEVELT, PRESIDENT OF ROOSEVELT & WEIFOLD, INC., DEALERS IN MUNICIPAL SECURITIES, NEW YORK, N.Y., AND GEORGE B. GIBBONS, PRESIDENT GEORGE B. GIBBONS & CO., INC., MUNICIPAL BOND DEALERS, NEW YORK, N.Y.-Resumed

The CHAIRMAN. Mr. Roosevelt, have you seen the proposed amendment to the bill?

Mr. ROOSEVELT. I have seen the new bill, but I have not seen any proposed amendment. That is H.R. 8720.

The CHAIRMAN. Yes; they were introduced before this committee. Mr. ROOSEVELT. There is no change since then?

Mr. Chairman and gentlemen of the committee, since I was last here I have made a little effort to find out some other aspects as to

how the bill affects not only us but other people. Obviously, I being merely a municipal bond dealer, I only know well the immediate effect it has on me and on my colleague, Mr. Gibbons here. But I took the opportunity in the last week to discuss the bill and talk over the bill with a couple of my friends who are in municipal and State government positions. They had no conception in two cases that the present bill had anything to do with anything except regulating the stock exchange, and did not realize that municipals were contemplated in any way.

I think it was Chief Justice Marshall who said that the "power to tax is the power to destroy." Well, I think you can go further than that and say that the power to restrict credit is also the power to destroy. And I feel very strongly that to turn over to seven appointees of the Federal Government the power to regulate to a certain extent at least-and it looks as though quite a lot-the credit of sovereign States and their subdivisions, is not intended by the legisl'ators and has not been contemplated, but under the present bill this would be the case.

Now, as I am not an expert in that end of the thing, I would strongly suggest that before making any decision on the municipal or State credit as it is affected by this bill the committee get before them as witnesses State and city officials to discuss how the bill affects their credit and affects the credit of the political localities.

Mr. Gibbons has touched some aspects of this and has a statement more or less prepared on this subject, and some comments on it, and he and I both want you to know we are not experts on the problems of the municipalities themselves, but are simply putting up something for you gentlemen to consider from that point of view, as well as certain things which we do know about in our own business, and I will ask Mr. Gibbons to go on with the testimony here. The CHAIRMAN. Proceed, Mr. Gibbons.

Mr. PECORA. May I ask a question of Mr. Roosevelt? I presume you are familiar with the observations that Mr. Gibbons is going to make. Might I ask if those observations would be necessary in the event that this bill were intended so as to put all State and municipal bonds in the exempt class of securities?

Mr. ROOSEVELT. No. If they were exempted from the bill entirely I do not see again, I am not a lawyer, Mr. Pecora, and you might be able to dig up things that did show it in the bill. Section 16 might. I am not sure about that.

Mr. PECORA. The provision that not only Government securities but securities issued by a State or any political subdivision of a State be exempted, as Government securities now are, would probably meet all the criticisms you are about to give expression to? Mr. ROOSEVELT. I think so, sir.

Senator GORE. Would not to include municipalities go too far? Wouldn't it include some that ought to be excluded?

The CHAIRMAN. That is a question for the committee, but what is your view about that?

Mr. ROOSEVELT. What was that? I did not get that, Senator Gore.

Senator GORE. The inclusion of municipalities just in general towns, wouldn't that include some that ought to be excluded, in

marize the reasons why in our opinion we think they should be exempted.

This bill apparently is designed to correct speculative abuses, particularly speculative abuses as they are believed to exist in trading on the stock exchanges; but it is also applicable to abuses in connection with securities issued by States and their subdivisions and agencies. They issue a class of securities regarding which the abuses which this bill is aimed to eliminate do not occur.

There is practically no speculation or market operations in municipal bonds. They are usually sold at public advertised sales, either to bond dealers or banks or local individuals. It is very difficult to speculate in them if you should wish to do so. Once a new issue is sold it is not again available for the purpose of speculation.

The purchasers of municipal bonds are quite different from those that buy stocks in many cases, and where they are the same purchasers they buy municipal bonds for a different purpose, and they are largely held by public institutions, insurance companies, savings banks and trust companies, and by corporations for their surplus account, against the time that they may need to sell them, and they are held by individuals for investment purposes. The ultimate purchaser of a municipal bond, excluding the dealer that buys them, very seldom buys them on margin, except possibly for a short period when he first purchases them, until he gets other funds in to complete payment.

It is almost impossible to effect wash sales of municipal bonds, and there would not be any object gained if you did effect a wash sale.

It is also practically impossible to sell municipal bonds short, except in the case of Government bonds, because there are not enough of them of any one particular interest rate and date of maturity and purpose. In other words, once you had sold a bond it would be very difficult to buy it back, so you could not sell it short.