Mr. PETERS. The State law permits us to count as cash reserves deferred credits and the Federal reserve system does not permit us to count as our reserve any of our deferred credits, and that is where the difference arises. Mr. APPLEBY. I have introduced a bill increasing the dividends to the member banks-national banks and State banks. It is now 60 per cent, you know. The bill I have introduced calls for division after all expenses on a 50-50 basis, thereby increasing the dividends of the local bank probably from 6 to 10 per cent. Would not that have a tendency to get more of the State banks and trust companies who are out in the system if they received a better return for their money?

Mr. PETERS. I think that that would be an incentive to the larger banks in the city to join. I dare say it would not have much influence on the smaller banks in the country.

Mr. APPLEBY. Do you not think, as a matter of good banking, that a greater percentage than 25 per cent of all the banks in the country-that is, the number that has now joined-should join; do you not think it would be a good proposition if practically all of the banks were members of the Federal reserve system? Would not that have a tendency to strengthen the system and put you all on the same basis, provided the national laws are amended to meet the peculiar banking laws of the States? In other words, I have an idea as a bank director of a State bank in my home town that the Federal reserve system has never been sufficiently attached to get a majority, at least, of the banks to come in. Would not the system be better if the majority were in, rather than 25 per cent carrying the load?

Mr. PETERS. That is possibly true. It might be possible to amend the Federal reserve system so as to make it attractive enough for a large percentage of the country banks to join.

I want to add in that connection that the paramount reason in the minds of the country banks throughout the country for not joining the system, if you take them as a whole, is this: It is the fear of supervision.

Mr. APPLEBY. What have they to fear from supervision?

Mr. PETERS. You know the way the country banks were treated in 1920 in the matter of par clearance. The Federal Reserve Board said that-and I am not speaking with reference to the merits of it at all, but merely the means that were used to enforce it: "We are going to have par clearance throughout the country; it is the law, and we are going to have it." And they proceeded along that line, and I do not think there is any question but what they used methods to enforce par clearance throughout the country that were coercive, that were arbitrary, and it did a great deal to alienate the good will of the country banks toward the Federal reserve system. It is a scar that is going to take a long time to erase.

Mr. LAWRENCE. And is it not a fact now they do not have par clearance? Mr. PETERS. We are not having par clearance now.

Mr. LAWRENCE. The fact is that the Federal Reserve Board requires all the remittances to the Federal reserve banks to be without exchange. But the Federal reserve banks at the same time defer the credits, so as to get an interest charge really on the country banks?

Mr. PETERS. That is true.

Mr. LAWRENCE. So that it is not par clearance after all?

Mr. PETERS. There is now not par clearance.

Mr. APPLEBY. Then, on the other hand, from an agricultural standpoint there has been a great demand for a dirt farmer to become a member of the Federal Reserve Board. This committee passed out such a bill and it became a law, and a dirt farmer has been appointed a member of the Federal Reserve Board. Will that have a good effect on the rural communities?

Mr. PETERS. That will probably have a tendency to increase the confidence of the farmers throughout the country in the Federal reserve system.

Mr. STEVENSON. Right there, before you close, what reason has the farmer for being suspicious of the Federal reserve system? I am a farmer; my people are farmers; and it is the only thing in the world that saved us. Member banks of the Federal reserve system were able to rediscount when we were in a terrible fix, and the reason they should be suspicious is hard to understand, except a lot of loud-mouthed "hot air" has been sent around by a lot of people who do not know anything and who do not care whether they tell the truth. Some of these banks that have had trouble and par clearance may have had a grievance, but so far as the farmers are concerned they have not had any.

Mr. LAWRENCE. What I said I did not intend to be as a criticism of the Federal reserve bank at all. There are some things that ought to be remedied. Mr. BLACK. We all agree that they made mistakes.

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Mr. PETERS. I want to say with particular reference to that that I have been connected with the par clearance fight from the beginning. I was chairman of the committee that brought the first litigation in the Atlanta district; it is not a case of sour grapes with me. I have nothing to criticize the Federal reserve system for except the things they did which they ought not to have done. It is a human organization, and they made some mistakes. However, there are some press agents throughout the country who are trying to lead the country to believe that the Federal reserve system saved everybody, but I want to tell you that the little country bank saved the farmer in our section and he saved him without the aid of the Federal reserve system.

You may say we got the benefit of it indirectly. I suspect we did get indirect benefit from it. But, nevertheless, we are the people who stood by the farmers. Mr. BLACK. Most of the banks in my country are national banks; and if they have not been dealt leniently with by the Federal reserve system, they could not have survived.

Mr. PETERS. How about State banks?

Mr. BLACK. We do not have very many State banks in my section.

Mr. STEVENSON. Our large banks are State banks and member banks, and there were some 12 or 14 little ones. Ours is a large county, and they were scattered all over the county, and all of them were dependent on these two large State banks and national banks in my town; and you say they took care of the farmer without the help of the Federal reserve system. They put their paper through the Federal reserve system, right through the three large banks, member banks, in my town, and at least three of them would have gone into the hands of a receiver if they had not done it.

Mr. PETERS. I said indirectly we no doubt got benefits.

Mr. STEVENSON. They come mighty near getting it directly.

Mr. BLACK. One more question, Mr. Peters: If Congress in its judgment should see fit to amend the law so as to require the Federal reserve banks to accept these items and give credit for them the same day that they received them and count as part of reserve, that would help the situation very considerably, would it not?

Mr. PETERS. I do not know of anything that you could do that would be more attractive to the country banks than to abolish deferred credits.

Mr. STEVENSON. Then what suggestion have you to make as to what should be done to stop this par-clearance trouble? What legislation would be feasible in that line? That has been the worst sore spot of all.

Mr. LAWRENCE. Mr. Stevenson, would not that very fact cure most of the par-clearance trouble?

Mr. STEVENSON. It might.

Mr. LAWRENCE. The banks would be willing to accept checks at par if they were credited in the Federal reserve at par.

Mr. NELSON. That is the crux of the whole thing. I will tell why. We had that situation absolutely in our State from the fact that the First Wisconsin National Bank of Milwaukee has the system of taking everything at par and crediting it immediately; and if a check for any reason is not paid, it is simply charged back when it comes there; and in that way it becomes really a par system and many of the banks of the Federal reserve system in our State will send their deposits through the First Wisconsin National Bank at Milwaukee, and then when they need to replenish their deposits with the Federal reserve system they send a check.

Mr. LAWRENCE. My experience with the Federal reserve system has been this-we are a national bank and a member of the Federal reserve system. We make all our deposits with Kansas City and St. Louis regular commercial banks, and then when we want to build up our deposits with the Federal reserve system we send a check on those banks, which is credited that day.

Mr. PETERS. In further reference to the country banks joining the Federal reserve system, let me bring another idea to your mind, gentlemen. The benefits that have come to the city banks through membership in the Federal reserve system have been the savings they have been able to put into effect by placing the cost of clearing out-of-town items entirely in the Federal reserve banks. That is a very heavy expense to the city banks.

Mr. NELSON. The committee will now stand adjourned subject to call. (Thereupon, at 12.45 o'clock p. m., the committee adjourned to meet at the call of the chairman.)

COMMITTEE ON BANKING AND CURRENCY,
HOUSE OF REPRESENTATIVES,
Friday, February 16, 1923.

The committee met at 10.30 o'clock a. m., Hon. Louis T. McFadden presiding. The CHAIRMAN. This is a continuation of the hearings on the Capper bill, S. 4280. Senator Harris, of Georgia, is present and desires to make a statement in connection with some legislation relating to rural credits, and we would be glad to hear the Senator now.

STATEMENT OF HON. WILLIAM J. HARRIS.

Senator HARRIS. Mr. Chairman and gentlemen, I will take just a moment of your time. I am on the Appropriations Committee and Senator Warren put me on more subcommittees than anybody else, and I have been working all the time, and I have not had time to be in the Senate as much as I would have liked.

When the Capper bill passed, I supported it, and I did not notice the provision about the admission of the small banks to the Federal reserve system. You gentlemen have a bill that I sent over here some months ago in regard to that, and I want to ask you to-day if you would please ignore my bill, and then change the Capper bill

The CHAIRMAN. What page is that on?

Senator HARRIS. It is on page 37, section 206. The Capper bill provides that any place the population of which does not exceed 6,000 inhabitants, a bank may, within the discretion of the Federal Reserve Board, be admitted to membership if it possesses a paid-up unimpaired capital of at least $30,000; and then in towns of less than 3,000, the $15,000 bank shall be admitted on the same terms, provided they will increase the capital stock to $25,000 or to $50,000 within three years.

The only difference between that and mine in that regard is this: My bill leaves it to the Federal Reserve Board to decide when a bank shall come in, but it forces the banks to add to their capital account each year 20 per cent of their earnings.

If you will pardon me for a personal reference, in my State I was vice president of the Georgia Bankers' Association; I own a country bank, and I was a stockholder in 25 country banks, because my insurance company had stockholders and agents in all these banks, and I have been in touch with the bankers of the State for that reason; and I know that under the Capper amendment here, or that section, there is not one bank in ten almost that would taken advantage of that, whereas they would in my bill; and if you would consider adding to the Capper bill the provisions of mine here, that would allow them to increase their capital stock not less than 20 per cent of the earnings and leave it to the Federal reserve system.

The Senate Banking and Currency Committee added that provision to my bill originally, and I thought it was an excellent thing to do, and I have been very much interested in this. The Federal reserve system has not given the assistance to our people that it would have done if these 12 banks could have come in. During the last three years, for instance, under the Capper bill probably not one in ten, if they had been members, could have increased their capital; they would have had to have gone out.

Mr. WINGO. Judge Brand, of this committee, who has had this matter up with me before and I have compared the difference between the proposal you are discussing and the one that is in the Capper bill. As I gather, the principal difference is that you reach the same measure of capital stock for initial admission, but you provide that the Federal Reserve Board may make the rules and regulations which shall prescribe the fixing of the time within which and the method by which the unimpaired capital of such bank shall be increased out of its net income to equal the capital which would have been required if such bank had been admitted to membership under the preceding sections of the bill, whereas the Capper bill fixes an absolute three-year limit. You permit the department broader leeway, but you wind up with a proviso requiring at least 20 per cent a year to be added to the capital stock.

Senator HARRIS. You have stated it better than I did. I think Senator Capper would be very glad to accept mine. I have talked with him about it to-day, and I think when I show him how much better this will work in my section of the country that he will be glad to accept mine in lieu of his; and I thank you very much.

The CHAIRMAN. We are very glad to have had your statement.

Gentlemen of the committee, Mr. Clawson, of the Minneapolis Surety Co., is here this morning and would like to make a statement in regard to the matter that is under consideration here; that is, a collateral issue to rural credits, in connection with the insuring of warehouse receipts, representing grain or other commodities in storage and warehouses. Mr. Clawson, we will hear from you now. Please give the stenographer your full name.

STATEMENT OF MR. WILLIAM H. CLAWSON, MINNEAPOLIS SURETY CO., MINNEAPOLIS, MINN.

Mr. CLAWSON. I come from out in the Northwest, where we have a very vital interest in the proposed legislation to facilitate the credit to farmers, and there is a possibility of a feature being overlooked that may cause the actual putting of legislation into practice that will be somewhat difficult or which may possibly defeat the very ends that Congress desires to effectuate and that the people desire.

Most any legislation extending facilities of credit will undoubtedly authorize the Federal land banks and farm-credit departments of those banks to accept as collateral storage tickets, warehouse receipts, and things of that kind. I have particular reference to grain-storage tickets. We get to know a lot about those things up our way.

The grain-storage ticket, as a matter of fact, is worth no more than the credit of the particular little elevator that issued it. That may be very good and sound, and it may not be worth anything. As a matter of practice, you haul in a load of grain to my elevator and take a storage ticket for it. That grain does not stay there in my elevator, but I ship it right on out to the terminal and sell it and put the money away down in my pocket. There are several reasons for that, and one is that the average grain elevator throughout the grain belt is about 20,000 bushels' capacity. The primary purpose of the elevator is to buy and ship grain. The storage of grain is a collateral thing that is a necessary evil for the elevator man to handle, and if he were to keep in his elevator all of the grain that is brought in for storage it would not take long until his elevator would be running over and he would just have to quit business.

So he ships the stuff out and sells it and gets the money for it. He may use that money in his business or he may put it aside to meet those ticketswhich he does not do-or he may speculate with it, and when the time comes that that farmer comes in with his storage ticket for his grain, if the elevator man in the meantime has lost some money the farmer is out, except in so far as he is protected by the license bond of that warehouseman.

In North Dakota the warehouseman's license bond is $5,000, and in Montană it is the same; in South Dakota it varies a little and may be $5,000, $6,000, $7,000, or $8,000. In Minnesota it varies also. Just in the last year, since the 1921 session of the legislature, it is based upon the report of how much storage the man handled last year. But the license bond is almost invariably inadequate when a loss comes.

The commission houses in the terminal points of Chicago, Duluth, and Minneapolis almost invariably advance money to the little elevator out over the country with which to handle the grain business. They charge the elevator on their books with so much money advanced. A shipment of grain comes in and the credit is taken on the other side of the book, and the elevator draws again for some more money if it needs it; and finally, if the commission house gets the notion that the elevator man is not conducting his business along proper lines, or is about to fail, or anything else, they find it out first and they just refuse to honor a draft the next time, and the grain he shipped has all been credited up to money advanced; they have the grain and the money, and there stands the elevator man out in the country with an empty house, storage tickets, and no money.

When a failure of that kind comes it is almost invariably four or five times as much as the penalty of the license bond. I come to know that because I have the pleasure of paying those claims and endeavoring to figure out pro rata of those storage tickets, prorating the penalty of the bond amongst the holders of the tickets; and it has occurred to me that in presenting those storage tickets as collateral-they will be presented, of course, by the smaller banks-the farmer puts them up with his bank, and that bank will in turn endeavor to put them up as collateral to the Farm Credit Bureau; and when the bank presents

those the Farm Credit Bureau should be authorized by whatever law is enacted to require security in its discretion. If they are not satisfied that those tickets are absolutely worth par, they should require the bank that is offering them to give additional security; in other words, they should be authorized to do it if in their discretion they think best.

Now, if the bank presenting them presents with them a bond on a form approved by the Attorney General of the United States or the Federal Land Board, in a penalty which in the discretion of the Credit Bureau is sufficient to insure that that collateral will be worth par when it is necessary to call upon it, the Government is protected and the bank offering that stuff must furnish the bond. If there is any reason why the bank does not furnish the bond, if anybody thinks that the expense is too much, or if the bank does not agree that it ought to have to furnish it, the land bank is still at liberty to accept it without the bond or to decline it if they see fit. But if there is no provision for requiring additional security or requiring a bond of indemnity-guaranteeing that those storage tickets will be worth par, your Federal land bank in the exercise of a sound discretion in the protection of the Government is bound to turn down a very large portion of the loans presented; and oftentimes those are going to be loans turned down where they are needed most, where the purpose of this bill extending credit will be defeated, because your land bank is bound to turn down stuff which is guaranteed would be backed up and the money passed on to where it is needed.

The surety companies-and there are a great many of them acceptable to the United States Government-can take no longer chance than the Government ought to take. A surety company makes its money between two points-the possibility of loss and the probability of loss. The Government ought to be insured in so far as possible in the handling of this thing against the possibility of loss, and the surety companies can take the chance on the probability of loss, and if the surety company turns it down-and we do on the license bond-you would be surprised at the great number of elevators failing to secure license bonds which we turn down because we do not think they are financially sound, or we do not think the management is good, and sometimes we think the moral risk is bad. If the insurance company turns them down, your Federal landbank man is still at liberty to accept without bond, or he is at liberty to decline it.

Mr. MACGREGOR. What has the land bank got to do with it?

Mr. CLAWSON. I say "land bank "-whatever bureau or facility you have for distributing the credit that the Government is expecting to extend. I have not in mind any particular bill. I understand there are several bills here, but I understand that the purpose of all is to facilitate the extending of credit to the farmers, and that is always done through the farmer's local bank. The local bank takes his paper and passes it on, the same as they do in the War Finance Board.

The CHAIRMAN. Mr. Clawson, is it the practice of the insurance companies to issue these guaranties on these certificates of warehouses financed by national banks? Are the national banks insisting on that insurance or depending on the local bank?

Mr. CLAWSON. There is nobody insisting upon it. The only insurance that there is to those storage tickets now is simply the license bond. Nobody is insisting on it. But I am just suggesting it as being a thing that the agency of the Government-whatever you want to call it has discretion to require additional guaranty on those things if in its judgment such guaranty is necessary to protect the Government.

Mr. MACGREGOR. Are these storage tickets in the same class as warehouse receipts?

Mr. CLAWSON. Practically; they are warehouse receipts, is what they are. Mr. MACGREGOR. Is not your proposition covered by the bill here, which requires the Comptroller of the currency to determine whether the laws of such State afford adequate protection to advances made upon the security of warehouse receipts covering agricultural quantities.

Mr. WINGO. What section is that?

Mr. MACGROGOR. It is page 15, agricultural credits. That is, if the laws of the State of Minnesota are not sufficient to cover it, then it is up to the State to make them so, otherwise it would not be approved by the Comptroller of the Currency.

Mr. CLAWSON. And if that were true, I have an idea that the Comptroller of the Currency would find to his surprise that the laws of pretty nearly every