Evening star., 1932-12-25
The Glass Banking Bill


on February IA, one week after the Is
suance of the boards public warning
asked permission to increase the re-
discount rate from to 6 per cent. The
board refused to grant the permission.
Although the New York bank made 10
different applications to the board for
permission to advance its rate to 6 per
| cent during the period from February
! IA to May %, adverse action was taken
each time by the board. Finally,
months later, on August 9, the board
approved 6 per cent rate, not with a
view to curbing speculation. but rather
as part OF an easing policy.
When the crash came in october,
1929, the Federal Reserve system fig
ured in the effort to prevent a complete
collapse of the security markets. With
the withdrawal of brokers' loans, espe-
cially by the corporations which had
contributed to the unusual volume Of
sO-Called loans for account Of Others I"
1t was necessary for the banks to come
to the rescue to protect stocks in which
| they were themselves interested. The
/ Federal Reserve banks were called
upon to furnish the funds for the
banks. Besides advancing large sums
to the member banks the Federal Re-
! serve banks provided new credit by
purchasing Government securities. The
| purchases between October, 1929, and
December, 1880, totaled S560,O0 900,
! the largest amount ever involved in
open market operations up to the time
! OF the credit expansion program of
last Spring when more than billion
dollars worth Of securities was pur-
! chased.
From the experiences OF the Federal
] RpcnrVa a haf r, ,ic
! subcommittee nearly two years ago.
| Senator Glass and his associates were
convinced that Tightening of control
over speculative credit was necessary.
The original act prohibited the use Of
| funds of the system for speculative
purposes but it lacked penalties to
make the prohibition effective. Sec
ton 13 Of the act in connection with
authority given to Federal Reserve
banks to rediscount various classes OF
eligible paper of member banks under
| definitions and regulations drawn up
! by the Federal Reserve Board. stipulated
| that such definition shall not include
notes, drafts or bills covering merely
investments or issued or drawn for the
purpose Of carrying or trading in
stocks, bonds or other investment Sc
curities. except bonds and notes of the
Government of the United States" 1t
was an easy matter for the banks, how
ever. to borrow from the Reserve banks
to finance ordinary commercial trans
actions. diverting other available funds
into speculative channels.
Protested First Draft.
The first draft Of the Glass bill as
introduced in the Senate in January,
1882. contained such variety of Sc
strictions aimed at the use of funds OF
the Federal Reserve System for specula-
tive purposes as to cause banking in
terests throughout the country to pro-
test. 1t was asserted that there were
many def1ationary provisions which
would tend to nullify progress made to-
ward business recovery. A second
draft of the Glass bill, which was Of
fered in March, proved scarcely less ac-
ceptable in the opinion of the bankers
who were heard before the full Bank
ing and Currency Committee. third
draft. introduced in April, and reported
favorably by the full committee to the
! Senate, omitted most of the so-called
dehationary provisions and in the main
satisfied the bankers. 1t represented a
compromise between Senator Glass or
iginal proposals and alternative sug-
gestions offered by Gov Eugene Meyer
on behalf of the Federal Reserve Board,
whose members were almost as critical
Of the first two drafts of the bill as
were bankers.
Senator F. c. Walcott. Connecticut,
Republican. recognized as the admins
tration spokesman on the Glass sub
committee, is given a large measure
OF the credit for evolving a bill which
fulfilled the desires of Senator Glass.
conformed to the views of the manage
of he
time was not highly Objectionable to
the bankers. Senator Walcott also has
been active, since President Hoover. in
his annual message to Congress, urged
banking legislation at the present short
session. in negotiations looking toward
the adoption of further amendments
before the bill is passed by the Senate.
In its form as approved by the Sen
ate Banking and Currency Committee
last Spring. the bill gives the Federal
Reserve Board greater control over
speculative credit and bestows power to
impose penalties upon member banks
which make improper use of the funds
OF the system. One Of the chief pro-
visions along this line is one which
authorizes the board to suspend from
the use of the credit facilities of the
system any member bank which, de-
81
standing collateral loans while obtain
ing l5-day advances from a Federal
Reserve bank on its promisory note, Sc
cured by eligible paper or Government
bonds. The revised bill does not es-
tabllsh penalty rate for the 15-day
advances on promisory notes as did the
earlier drafts.
Restrictions Imposed.
Restrictions are imposed upon deal
ings in and loans on investment securi-
ties by commercial banks, although in
much less severe manner than the Or
iginal proposals, which were interpreted
as requiring the liquidation of a large
volume Of such holdings. Data as
sembled by the Glass subcommittee
showed that security investments of
national and State banks and trust
companies increased by SO per cent in
amount from 1921 to 1880 and that Sc
curity loans increased by more than so
per cent. Security investments and
loans together represented Al per cent
of the total banking resources of the
United States in 1880. If Senator
Glass could have his way he would
completely divorce investment banking
from commercial banking and the re-
strictions in the bill are intended as a
step in that direction.
Security afhliates Of banks are
brought under supervision and their
separation from the parent institutions
within three years is ordered, loans by
the banks to the afiliates being subject
to restrictions in the interim. This
provision is one of those which remains
distasteful to many bankers. In justi-
f1cation of the proposal its sponsors
point to the testimony of Adolph c.
Miller. economist member of the Fed
eral Reserve Board whose influence in
the drafting of the legislation has been
pronounced, to the effect that some
Of these affiliates have been little more
than market operators" and that IF
we had not had these affiliated inSti-
tutions in 1928 and 1929 we should not
have had as bad q situation, specula.