Mr. Du Bois. That is very true. That part of the testimony is written by Mr. Gregory, and he has had the experience in St. Louis with a situation like that. We wrote this jointly.

Senator FLANDERS. At the time of the banking troubles in the thirties, there was a good deal of criticism of the weakness of the small country banks and suggestions were fairly common that if we had an extensive branch banking system in place of the innumerable small country banks that they would have weathered the storm more successfully.

Do you feel that the small banks are in a better position now than they were then to weather any storm?

Mr. Du Bois. I think at the present time the small banks are in a very enviable position. They can weather anything as of today, but if I go back a little further, these so-called holding-company devices and some branch bank systems in the thirties, referring you back to Detroit

Senator FLANDERS. There were some bad cases there. What are the changes that have taken place since the thirties that led you to feel more confidence in the situation?

Mr. Du Bois. Well, Senator, frankly a good many of us got badly burned back in the thirties. We have not forgotten it. We are becoming better bankers because we have to be better bankers.

Senator FLANDERS. Are the young men in the business also indoctrinated?

Mr. Du Bois. They are being preached to by the older ones. I have a son in my business, and I show him a graph of our economy since away back in 1879. I said look at that once a week at least. It can repeat. And then there is another thing. Back in the twenties, especially, we were overbanked in this country. Half of the banks disappeared. I think the situation is in excellent shape now.

Then another thing, the Government direction has been helpful to us. I dislike to be too complimentary of Leonard Townsend's organization, the Federal Reserve System, but in my State, I find that I have a great source of information at the Federal Reserve bank. I am not a member of the System, but I take what I can get without paying for it.

Then during this period when deposits rose rapidly, and the only place that they could be invested was in governments and most of the banks carrying plenty of bills and certificates, we are in an impregnable position right now, sir.

The CHAIRMAN. Any other questions?

Thank you.

Mr. Du Bois. Thank you.

The CHAIRMAN. I will now call Mr. Huntington; he represents the

Morris Plan banks.

You have a very well prepared brief here. I take it it is not your intention to read that.

STATEMENT OF ELLERY C. HUNTINGTON, JR., PRESIDENT, MORRIS PLAN CORP. OF AMERICA, NEW YORK, N. Y.

Mr. HUNTINGTON. No, sir; it is not.

The CHAIRMAN. I was going to suggest that I know it will be read by each of us, and to put it in the record.

(The statement referred to is as follows:)

STATEMENT OF ELLERY C. HUNTINGTON, JR., BEFORE THE BANKING AND CURRENCY COMMITTEE, UNITED STATES SENATE, IN OPPOSITION TO BANK HOLDING COMPANY BILL (S. 829), JUNE 2, 1947

(Corrections, May 31, 1947)

My name is Ellery C. Huntington, Jr., and I am president of the Morris Plan Corporation of America, which will be referred to throughout my statement as the Morris Plan Corporation.

I emphatically oppose the enactment of S. 829, which is a concealed bid by the Board of Governors of the Federal Reserve System for autocratic powers.

I shall first give a short description of the business of the corporation of which I am president, because in setting forth my views on this proposed legislation I must necessarily have in mind its effect on Morris Plan institutions everywhere— whether or not the Morris Plan Corporation is a stockholder thereof.

MORRIS PLAN HISTORY AND BUSINESS

Morris Plan institutions have generally been known as banking offices for the man of moderate means who could furnish no security except character and earning power. The name has come, by common usage, to express a method of industrial banking, so generally recognized as to have a place in the dictionary.

The Morris Plan Corporation owns a majority stock interest in 17 relatively small banks located in 24 cities in 8 States and the District of Columbia, and owns varying minority interests in approximately 26 other banks or companies located in various parts of the country-a part of some 89 banks and companies in the United States which are identified as Morris Plan institutions. The Morris Plan Corporation also holds a majority of the stock of Bankers Security Life Insurance Society (an insurance company engaged in writing term insurance on the lives of borrowers from banks), and all the stock of National Industrial Credit Corporation, a corporation organized for the purpose of developing, through its subsidiaries, plans designed to aid banks in their installment financing programs).

The Morris Plan Corp. and its predecessors were organized and have operated primarily for the purpose of putting into effect the Morris Plan system of banking which was conceived and developed by Arthur J. Morris, the originator of "consumer credit" in this country. In this capacity it has been a pioneer and an important factor in the democratization of credit.

For many years the functions of the Morris Plan Corp. and its predecessors were confined to enfranchising and organizing Morris Plan banks and companies and furnishing such banks and companies with auditing, advertising, advisory, rediscounting, and other services. In recent years, the Morris Plan Corp. has acquired a majority interest in several commercial banks, and the operations of most majority-owned Morris Plan banks have been broadened in scope to include most of the banking services ordinarily offered by commercial banks.

None of the banks of which the Morris Plan Corp. owns a majority interest is a member of the Federal Reserve System or a national bank. However, all of such banks either have, or have applied for, insured status with Federal Deposit Insurance Corporation and all are subject to examination and regulation by their respective State or district banking authorities.

Boards of directors of Morris Plan majority-owned banks are comprised, for the most part, of local businessmen. There are only two individuals who might be considered the direct representatives of the Morris Plan Corp. serving on the boards of any Morris Plan institution, whether minority or majority owned. Out of 168 individuals serving as directors of majority-owned banks, only 2 are the direct representatives of the Morris Plan Corp. On the boards of 7 of the 17 majority-owned banks, the Morris Plan Corp. has no representatives. (See exhibit 4 (F) submitted herewith.)

By virtue of ownership of a majority of its stock by American General Corporation, the Morris Plan Corp. is an affiliate of a registered investment company under the Investment Company Act of 1940, as administered carefully by the SEC. As such, Morris Plan and its banking and nonbanking affiliates, whether or not majority owned, are subject to close regulation and scrutiny by the Commission under that act. Under section 17 of that act, transactions in

volving the sale of property, loans, etc., between the Morris Plan Corporation and its banking and nonbanking affiliates, and between such affiliates, are subject to control by the SEC.

HISTORY OF THE BILL

Before stating my position in opposition to S. 829 I should like to outline its history.

No

The proposed bill represents the third attempt by the board of governors of the Federal Reserve System (which I will refer to as the Federal Reserve Board) to extend its powers over State banks which have elected not to join the Federal Reserve System through the device of regulating bank holding companies. On March 26, 1946 the Federal Reserve Board secured the simultaneous introduction of H. R. 2776 and S. 792, respectively known as the Spence and Wagner bills. congressional action was ever taken on those bills. They stirred up such a storm of criticism from banking interests and other governmental authorities charged with regulation of banking that the Federal Reserve Board withdrew the bills with the admission that the legislation was too "sweeping in its terms" (Congressional Record, April 30, 1946, p. A-2529). After withdrawing the Spence and Wagner bills, the Federal Reserve Board secured the introduction of H. R. 6225 which contained substantially the same provisions as S. 829. H. R. 6225 died in committee. This year the Federal Reserve Board has tried to resurrect H. R. 6225 in the form of S. 829 which is now before the committee. There are no differences of any moment between H. R. 6225 and S. 829 except some slight rewording of sections 7 and 9 and the section covering technical amendments. A marked copy of the bill is submitted herewith as exhibit 1, appendix A.

OBJECTIONS TO THE BILL

The proposed bill is objectionable on three grounds:

1. It constitutes an unwarranted extension of Federal and Federal Reserve Board authority over State banking, including State banks which have never elected to become members of the Federal Reserve System.

2. The legislation is unnecessary for the reason that most of the alleged evils attempted to be remedied do not exist and such evils as do exist or may exist in the future may be adequately dealt with under existing Federal and State legislation.

3. The bill is arbitrary in nature and designed to expand bureaucratic powers of the Federal Reserve Board.

Each of these objections will be explained in the order in which they are set forth above.

1. THE BILL CONSTITUTES AN UNWARRANTED ATTEMPT BY THE FEDERAL GOVERNMENT TO USURP THE JURISDICTION AND POWERS OF THE SEVERAL STATES OVER STATE BANKS

I doubt that many people realize the revolutionary nature of this proposed legislation. I doubt, too, that the Federal Reserve Board has ever stated in any of its communications to this committee or to the House committee, that this bill will, for the first time in the history of the Federal Reserve System, give the Federal Reserve Board the right to enter a field of banking heretofore reserved to the States. Yet, this bill represents a calculated, although concealed, attemptby indirection and under the guise of regulating holding ❤mpanies to enable the Federal Reserve Board to enter the field of State and local banking as to State banks which have intentionally stayed out of the Federal Reserve System.

Up to the present time, the Federal Government has never attempted to control or regulate State banks, as such. Federal power has always been confined to supervision and regulation of national banks and State banks which have voluntarily become members of the Federal Reserve System. Insured banks under the Federal Deposit Insurance Corporation Act do, as a condition of membership, voluntarily submit to certain supervision and control of the Federal Deposit Insurance Corporation because of the benefits received from FDIC insurance. But the power of the several States over State banks has heretofore remained exclusive, unquestioned, and inviolate.

The bill now under consideration by the Committee will be the opening wedge by which the Federal Government, through the Federal Reserve Board, will enter and ultimately abolish the system of State banking. The only prerequisite to Federal intervention in the policies, practices, and activities of any bank is either the mere circumstance that one group of individuals or a partnership or coporation owns or controls 10 percent of the stock of that bank and one other bank, or,

in the alternative, a Federal Reserve Board determination, from which there is no appeal, that regardless of stock ownership, a group of persons, partnership, or corporation exercises a direct or indirect controlling influence over the management or policies of the bank in question and another bank.

Once this foundation is established, the Federal Reserve Board may embark on an unlimited investigation of the affairs of the State bank (sec. 11); regulate its relationships with its stockholders (secs 7, 8 and 9); forbid its investment in stocks of other banks (secs. 6 and 7 (a)); control its loans and the collateral it may receive therefor (sec. 7 (c)); control payment by it of service and management fees (sec. 8); forbid sale of its assets to, or the purchase by it of assets from, any bank (sec. 6); abrogate statutory and contractual rights and limit its ability to finance by subjecting its stockholders, if they are interested in any other bank, to unreasonable immobilization of their working capital in the form of a "reserve fund" (sec. 9) and to an arbitrary prohibition against investment in anything but bank stock (sec. 5).

The fact that all the consequences indicated above are imposed upon a State bank merely because of the ownership by a holding company of a fraction of its stock is not, in my opinion, merely a result of careless draftsmanship. A thorough study of the bill and reflection upon its consequences lead to a single conclusionthat the alleged purpose of controlling and regulating bank holding companies is simply a disguise for an undisclosed purpose. The real purpose is to obtain control over a great portion of the State banks which are not now members of the Federal Reserve System. (See opinion of the Federal Reserve Board General Counsel, Federal Reserve Bulletin, Mar., 1933, p. 166.)

The Federal Reserve Board now has supervision and control over State banks accounting for 69 percent of the deposits of all State banks by virtue of the membership of such banks in the Federal Reserve System.1 State banks representing the remaining 31 percent are free from control by the Federal Reserve Board simply because they do not choose to join the Federal Reserve System. Quite obviously, the Federal Reserve Board would like to obtain the right to control and supervise the remaining State banks but hesitates to ask Congress directly for such a drastic invasion of State banking powers. Instead, the Federal Reserve Board is attempting to enter the State banking field by the back door.

That the bill is not a bona fide attempt to regulate bank holding companies as such but rather an attempt to control additional State banks is clearly inferable from its broad, all inclusive definition of a "holding company". "Holding company", under the bill, would include any group of persons, partnership or corporation which owns or controls 10 percent or more of the capital stock of more than one bank, or which, regardless of stock ownership, the Federal Reserve Board, in its absolute discretion, determines to have a controlling influence on the investment policy or management of more than one bank.

It is significant that Congress has never before deemed it necessary to employ such a broad definition in legislation dealing with bank holding companies. Thus, in the Banking Act of 1933 (48 Stat. 162, 12 U. S. C. 221A) Congress defined a holding company of a member bank of the Federal Reserve System as including only a trust, association or corporation owning or controlling a majority of the capital stock of a member bank or more than 50 percent of the number of shares voted at the last election of directors of the bank, or a trust, association or corporation for whose benefit all or substantially all of the capital stock of a member bank is held by trustees. The Banking Act of 1933 was not only aimed at regulation of holding companies of member banks. It was also designed to divorce investment banking holding companies from ownership of member banks. If Congress did not deem ownership of less than 50 percent of a bank's stock sufficient to constitute the stockholder a holding company for the purpose of the Banking Act of 1933, why is it now necessary to constitute a 10 percent stockholder a holding company? Surely, it cannot be contended that the definition of a holding company in the Act of 1933 has restricted the Federal Reserve Board in exercising legitimate control and supervision over holding company affiliates of member banks or in divorcing investment banking from other banking functions. As I shall point out, the alleged purposes of the Bill are to correct certain alleged evils in the banking system. It is pretended that there are no effective means of controlling such evils. Actually, as I shall show, existing controls are entirely adequate to correct and prevent any depredations by bank holding companies. Therefore, I say, the conclusion is inescapable that the Federal Reserve Board, in sponsoring this bill, is not really seeking to control bank holding companies. 1 Thirty-second Annual Report, Federal Reserve Board, pp. 37-38.

The Board is actually attempting to extend its functions to non-member state banks under the guise of regulating their stockholders.

II. THE ALLEGED EVILS AT WHICH THE BILL IS AIMED EITHER DO NOT EXIST OR ARE ADEQUATELY CONTROLLED BY STATE AND FEDERAL AUTHORITIES

Even if it be assumed that the Federal Reserve Board is not proposing this bill as a vehicle for entering the State banking field field, the alleged reasons for which it is proposed are without foundation.

Customarily, when a drastic extension of powers is requested by a governmental agency, Congress is requested to make findings of fact in the preamble of the proposed legislation indicating the evils which the legislation seeks to correct. No proposed findings of fact are contained in this bill. Accordingly, it is necessary to speculate as to just what conditions the proposed bill purports to correct. From the preamble one would be led to believe that the following conditions exist:

(a) Banking has become a monopoly and competition between banks has been stifled by a concentration of ownership of banks in holding companies.

(b) Stock ownership in more than one bank has inevitably led to fraudulent practices and to unsound financial conditions in such banks.

(c) Existing controls are inadequate to control and regulate the activities of bank holding companies.

The common experience of the American businessman, whether or not he is engaged in banking, denies that the foregoing conditions actually exist.

(a) Bank competition in general

It must be a distinct surprise to the American banker and economist to learn that the Federal Reserve Board now contends that competition between banks is being stifled. For years the Federal Reserve Board has cried that there has been too much competition between banks, particularly between members of the Federal Reserve System and nonmember banks. It was on this theory that the Federal Reserve Board, in 1932, considered requesting Congress for authority to control all banking within the United States. (See Federal Reserve Bulletin, March 1933, page 166.) Needless to say, Congress did not grant such authority.

Efforts to achieve centralized control of banking and the elimination of competition between banks has characterized the history of the Federal Reserve Board. In this connection, I need only refer to the control the Board exercises over the lending ability of banks by fixing reserve requirements, the standardization of discount and rediscount rates, the restrictions on payment of interest on deposits, the various restrictions on loans, investments, and discounts imposed on all member banks and the Board's control over branch banking.

All of these controls have had the single purpose of forcing all member banks into the same mold rather than permitting free competition and development of individual initiative among banks. Thus, the very concept of the Federal Reserve System tends toward a concentration of resources in large city banks. (b) The Federal Reserve Board must share responsibility for the competitive restraints of which it complains

Since its formation in 1913, the Federal Reserve Board through jurisdiction over national banks and member banks has acquired regulatory powers over at least 86 percent of the bank deposits in this country (32d Annual Report Federal Reserve Board 1945, p. 37). This leaves banks having only 14 percent of the deposits of the country available for unregulated holding company acquisition. As a matter of fact only a fraction of this 14 percent is controlled by holding companies, and these are frequently subject to State controls over holding companies. Accordingly, if the Federal Reserve Board implies that a large percentage of bank deposits of the country are subject to unregulated control of bank holding companies, it must be an admission by the Board that it has inadequately exercised its powers under Revised Statute 5144. It is true that Mr. Eccles in his testimony on May 26, 1947, indicated a rather hopeless attitude toward Transamerica, and since after years of using all the present controls, the Federal Reserve Board apparently was unable to curb Transamerica in its alleged impositions on member banks and extension of monopoly control. Whether or not the Board has done all that it could under the manifold powers and authorities given it by Congress not only over holding companies but over banks, we cannot determine. Mr. Eccles did not state whether he had attempted to utilize the antitrust laws not did he state whether he requested the FDIC, which must have jurisdiction over most Transamerica member banks, to assist him in attempting to curb