Section 4. The provisions of the "Administrative Procedure Act" have been deliberately omitted:

As has been pointed out no Federal court is likely to deny those who have just. grievances the right to be heard. Nor is any such court likely to refuse to review the facts where this is necessary or advisable in the interest of justice.

The omission of all reference to the Administrative Procedure Act is mentioned, therefore, only because it is symptomatic of the philosophical background against which the bill was evidently framed and because the act is not self-operative. If the public is to have the protection Congress intended, the act must be specifically included.

Section 5. Denial of the right to refrain from testifying on the ground of selfincrimination is in contravention of American tradition:

No one would oppose the right of a purely investigatory body to demand all the facts. It is difficult to imagine on the other hand, how anyone-even the most rabid of bureaucrats-would, as yet, dare suggest that the defense of selfincrimination may not be interposed before a tribunal from whose decision there is no appeal. Exactly this, however, is the effect of the measure under consideration (sec. 11).

Article B. The bill attempts to nullify contractual rights of third parties

Under section 9, as originally drawn, it is provided that a reserve fund be established by holding company entities for the protection of bank assets. In the case of corporate holding companies the reserve fund is to be established by application of net income in excess of 6 percent of the par value of the outstanding stock of holding companies. With respect to individuals and other noncorporate holding companies, the Federal Reserve Board can direct the accumulation of this protective fund in any manner it may desire.

This section of the bill highlights the sly concealment which is typical of this astounding document.

It will be observed that the section was drafted to make it appear as if the existing law (R. S. 5144) were being followed. In point of fact there are two outstanding though cleverly concealed-differences:

(1) R. S. 5144 provides for the accumulation of a reserve fund out of earnings in excess of 6 percent of the book (asset) value of outstanding holding company shares; and

(2) The compulsion with respect to the establishment of the reserve fund under existing law is against majority owners (Banking Act of 1933, sec. 2), whereas, under the bill, minority stockholders become the guarantors against loss.

The clear purpose of the accomplished draftsman of this measure was to make it impossible for holding companies to comply with statutory and contractual obligations to creditors and stockholders, except as the consent of the Federal Reserve Board can be obtained.

In the case of the Morris Plan Corp. of America, for example, its preferred stock has $1 par value, a liquidating value of $50 and a dividend requirement of $2.25. Under the bill as proposed, the Morris Plan Corp. would be obliged to accumulate, for reserve fund purposes, all earnings above 6-cents per share. This is, indeed, abrogation of contractual obligation and statutory rights by bureaucratic fiat. It represents a long step along the road to absolutism.

It

Not only would stockholder claims to dividends be thus affected (by sec. 9) but other claims of stockholders and obligations to creditors as well. The Morris Plan Corp., by way of illustration, has outstanding commitments under which it must provide for debt amortization and preferred stock retirement. is the purpose of the Federal Reserve to destroy the rights which have been vested in third parties under these commitments. This is government by edict with a vengeance.

The important fact is that it took deliberate and skillful action to alter the word "book" to "par" and bring about the results which have been indicated.'

2 Mr. Eccles, on May 26, 1947, submitted an amendment substituting the word "book" for "par." This amendment was not suggested by the Federal Reserve Board but by others.

While this amendment appears to have been a concession of the part of Mr. Eccles this is really not the case. Sec. 9 remains a perfect example of the vicious effect of legislation such as this which is designed to increase bureaucratic power as any cost.

The fact remains that there is still a vast difference between sec. 9 and the existing law (R. S. 5144) in that today reserve funds are required only of majority stockholders since (Banking Act of 1933, sec. 2) only majority stockholders (50-percent ownership) are recognized as bank holding company entities. This is realistic although still inequitable, since 6 percent on book value is too low an exemption for practical

purposes.

Senate bill 829, of course, imposes this drastic obligation of guaranty on minority stockholders because minority stockholders will be bank holding companies (sec. 3). Small wonder Mr. Eccles was willing to make the modest change to which he has agreed.

Section 9 is also objectionable for other reasons. While it is made to resemble the existing law (R. S. 5144), its effect is totally different. For Revised Statutes 5144 must be related to section 2 of the Banking Act of 1933 under which only majority (50-percent ownership) stockholders are required to insure other stockholders and creditors against loss. This is by reason of the fact that_holding companies are therein defined as majority (50 percent) stockholders. The proposed measure imposes this obligation on minority stockholders who must now insure the majority because holding companies may be and under the standards of the bill actually will be, minority stockholders.

It is submitted that the differences between the existing law and the proposed section are, therefore, real and vital. It is also apparent that even the present statute (R. S. 5144) is unduly and unnecessarily harsh in that the base income exemption of 6 percent is much too low for reasonable operating requirements. Article C. The bill eliminates stockholders preemptive rights and prevents one segment of a common class of stockholders from exercising statutory and contractual purchase privileges which are given to other stockholders of such class

It is so clear that this would be the result under section 6 that the main point needs no comment.

There

One of the byproducts of this section, however, warrants discussion. will be many instances where the capital of nonmember State banks is required to be increased by order of State authorities or the Federal Deposit Insurance Corporation. The Morris Plan Corp. has, only recently, been asked by a State department for an increase in the capital of two banks and the Federal Deposit Insurance Corporation has suggested an increase with respect to a third bank. Is the Morris Plan Corp., then, to be placed in the position where it is, or certain banks in which it is interested are, to be in violation of the orders of other authorities simply because the Federal Reserve Board fails or refuses to act or does not agree with such authorities.

Another serious byproduct of this section is that the Federal Reserve Board is reserving to itself the power to change the ownership of banks. For, quite obviously, if bank holding companies are not permitted by the Federal Reserve Board to exercise their purchase privileges upon an increase of bank capital, bank ownership will pass into other hands. This is the result the Federal Reserve Board deliberately seeks to achieve in its effort at greater bigness. It is a result which it has already sought to achieve by other means (People's Bank of Lakewood, Calif.). It is a result which will not only act as a confiscation of investments but will also serve as a sellout of able managements who have come to rely on the support of a definite group of stockholders.3

POINT III. THE ASSUMPTIONS OF THE BILL ARE DANGEROUS AND ITS IMPLICATIONS UNWARRANTED

The major assumptions of the bill are:

A. That ownership of stock of more than one bank (whether minority or majority ownership) is, per se, in restraint of competition (secs. 2 and 3);

B. That dominant ownership of a single bank (no matter how large) does not lead to monopoly and undue influence (secs. 2 and 3);

C. That the dangers to other stockholders and to creditors from multiple bank stock ownership are intensified when coupled with an interest in any other activity than banking (sec. 5);

D. That dominant ownership of a single bank (no matter how large) when coupled with nonbanking interests (no matter how extensive) does not lead, has not led, and will not lead to depredations of any kind, either against bank assets or other stockholders (sec. 5).

The important implications of the bill are:

(1) That the evils of monopoly and bank holding company self-dealing are not now controlled or controllable by any law, body, or department-Federal or State (no mention of other authorities except under sec. 6).

(2) That the only agency capable of correcting these evils is the Federal Reserve Board; and

(3) That the Federal Reserve Board, itself, will be helpless to combat such evils unless this bill is enacted into law.

Mr. Eccles' ready acceptance of the amendment permitting majority stockholders to exercise purchase rights is a sly bit of bargaining. For "controlling" stockholders, under the bill can be "minority" owners. Does not the acceptance of this amendment indicate, too, an innate belief on the part of Mr. Eccles that the only real control of anything is majority control? Why, then, need the present holding company definition (Banking Act of 1933, sec. 2) be altered? Any businessman will testify that the only real control of corporate enterprises is through a majority coalition.

A discussion of the bill's implications will be included under subsequent points. Its assumption will be treated in part here and in part under such later points. Article B. The question of unrelated activities

The bill strikes out wildly against unrelated activities. The basis of the attack must be that the temptation of "dominant owners" is to assist the expansion of nonbanking businesses at the expense of bank subsidiaries. Just how this could be accomplished under existing statutes and decisions is difficult to understand as will be shown later on.

But the bill itself recognizes that certain activities (though not enumerated) are related (sec. 5). What are they and why cannot reasonable standards of determination be devised?

What is to happen, for example, to certain Morris Plan affiliates?

It was but natural that Morris Plan institutions, which had blazed the way in making credit avilable to the masses, should have striven, constantly, to extend the services offered their customers and friends.

One of the first developments in this direction was the setting up of the Morris Plan Insurance Society (now Bankers Security Life Insurance Society) to provide insurance on the lives of borrowers so that, in event of the untimely death of the obligator, his debt would be automatically discharged. While there is nothing compulsory about this insurance, insofar as the selection of the carrier is concerned, it has been extensively used. Since its organization in 1917, the insurance society has paid death claims aggregating $4,016,535. At an average of $277 a loan (the all time Morris Plan average through 1946) this has saved many thousands of widows and orphans of wage earners of this country from the burdens of inherited debt (exhibit 3-E).

It was inevitable, too, as the great national finance companies were organized (particularly those allied, financially, to automotive manufacturers), and quickly seized a major portion of all available time sales business, that efforts should be made by Morris Plan institutions and by the Morris Plan Corp. (and its predecessors) to provide means for meeting this competition on institutional terms. involved the establishment of adequate facilities for meeting the needs of distributors and dealers and for financing, under standard, countrywide plans, the ultimate purchase of consumer products of all kinds.

This

These facilities have been provided, in one form or another, either by the banks and companies directly or through the parent company, since early in 1919. They are being provided today, on a strictly competitive basis, through American Installment Credit Corp. This corporation, incidently, is purely a service company. It is designed and equipped to assist any bank in the country-not Morris Plan institutions alone-in competing with other lenders for distributor and dealer business in whatever field.

By doing these things are the Morris Plan Corp. and its affiliates "restraining competition" or are they, on the contrary, aiding it?

It is scarcely arguable, certainly, that bank competition in the field of consumer financing is a wholesome influence. Why, then, should these frightening unrealted activities at which the bill is directed be looked upon with such horror? Is it that the Federal Reserve Board would like to clear the way for finance company monopoly or some acceleration in the business of "loan sharks"? Article C. What are the responsibilities of bank ownership and what are the possibilities for evil

The Federal Reserve Board in this bill is expressing the novel thought that American business corporations are run by people who own 10 percent or less of the stock of these corporations.

This, of course, is not a fact. Corporate enterprises are run invariably by managements; and these managements are supported by stockholders who, acting in concert, have the power to keep them there. These stockholders, working together, generally own sufficient stock to insure that necessary or advisable corporate action can be taken.

The amount of stock thus controlled is a majority or close to a majority, since at least a majority vote is required in every jurisdiction in the United States in connection with any proceeding involving stockholder action other than the election of directors. When any such group loses its majority ownership another majority coalition is likely to appear, bringing with it new management.

Minority stockholders, as a rule, are investors who follow management or controlling interests. They buy into a given situation, or sell out, depending upon their confidence in the ability of those who have the responsibility of direction.

The Morris Plan Corp. and its affiliates are not exceptions to the general rule and a good deal of light may, perhaps, be thrown on this bill-and its hidden potentialities-by a brief reference to Morris Plan practices.

Section 1. Morris Plan monopoly and undue influence:

There are some 89 institutions in this country operating under the aegis of a so-called Morris Plan franchise. This franchise, in effect, gives only a right to use the trade name and diamond and Morris Plan procedures. In only 18 of these banks and companies does the Morris Plan Corp. of America own a majority of the voting shares. It holds a minority position in 7 banks and some 21 companies. In none of these minority situations does the parent company, through stock ownership, or as a result of franchise contract, have the power to exercise the slightest authority over operations, programs, or policies. On the boards of only three of these minority institutions has the parent company a representative-and in each case only one and among the 168 majority directors, only 2 can represent the parent company. They, incidentally, are on the boards of the banks they serve, because the managements of such banks want them (exhibit 4-F).

The position of Morris Plan banks in the great field of finance is illustrated by the comparisons made in exhibit 3 (A) and (B) submitted herewith.

These statistics are particularly interesting in that they disclose, graphically, the relative economic power of a complete group of holding company banks as compared to single banks. They dispose, emphatically, of the demon of multiple ownership.

Life insurance company and national finance company statistics have been included for the reason that these enterprises, in their investment operations, compete directly with banks. Other lending units could, of course, also have been included such as: the fire and casualty groups, title and mortgage companies, small loan companies, and savings banks. The total resources of all possible bank holding companies (including the resources of the largest bank in the world) seem insignificant, indeed, when compared to the accumulated financial power with which banking is in constant competition (exhibits 3-A and 3-B). Section 2. The Morris Plan Corp. as a dominant stockholder:

Contrary to the evident belief of the Federal Reserve Board, the Morris Plan Corp, has found that its minority holdings bring no power, influence, or satisfaction. The fact is that the corporation receives nothing but public operating reports; is never consulted by management on policy or other matters; and hears from such management, for the most part, only when there is a need of more capital. This has been true where the ownership has been 10 percent and equally true at 25 percent or 36 percent. This is not a situation about which the corporation is complaining, however, since until S. 829 was read, it has always been recognized that the controlling stockholders, and the managements supported by such stockholders, would and should run the institutions they control as they might deem to the best interests of all concerned. It is somewhat ironical, indeed, that the corporation may now (under sec. 9 of the bill) guarantee these majorities against loss, even from their own malfeasance.

For the reasons stated most of the attention of the Morris Plan Corp. has been devoted to its majority owned banks. It has not overlooked its relationships with minority managements, of course. For example, where minority holdings have been sold it has invariably been with management knowledge and consent. There has always been recognition of the duty of common decency but never a desire even to advise where assistance was not wanted (see exhibits 4-A and B). Relationships with majority owned banks and their managements have been and are intimate and friendly and the responsibilities which have been accepted, and commitments which have been undertaken, have transcended any that would have been made in the case of less than majority ownership.

The Morris Plan Corp. has thought that its majority ownership imposed duties which do not attach to minority investments and has followed its own peculiar programs in discharging these duties. They were not programs designed by the Federal Reserve Board nor compelled by bureaucratic decrees but they have been original, and reasonably successful.

One reason why these programs have succeeded and will continue to succeed, unless stifled by bureaucracy, may be found in the philosophical approach of those who made the Morris Plan possible. The predecessors of the Morris Plan Corp., and the banks in which it is interested, guided by Arthur Morris, the author of Consumer Credit in this country (Professor Seligman on Installment Finance, page 43) were organized, and they and their successors of today have been operated, in a belief in the principles of an economy which the people of the United

States outside the confines of bureaucracy-accept and understand. For Morris Plan institutions this belief has been translated into principles of security and democratic service.

In the early days of Morris Plan development, banking facilities for the "little fellow" were limited. There were few, if any, sources from which-except at loan shark rates-the man on the street could hope to borrow for his pressing needs. It was the purpose of those who sponsored this great idea that the Morris Plan should fill this gap. So much, in fact, was the principle of service to the masses stressed in those first years, that the boards of directors of early Morris Plan institutions read like a Who's Who of the great philanthropists and business leaders of that time; Julius Rosenwald, Henry Davidson, Alfred E. Smith, Henry Towne, Charles Sabin, Bernard Baruch, Clark Williams, Vincent Astor, Coleman du Pont, Chief Justice Harlan Fiske Stone, Dr. Nicholas Murray Butler, Louis Liggett, Willard Straight, Joseph P. Kennedy, Gates McGarrah, George Wharton Pepper and many others (exhibit 3-F (omitted)).

These and others like them, were the men who founded and "controlled" and "dominated" the Morris Plan. Most of these outstanding figures have passed on, to be sure, or are no longer active. But their younger successors-present directors and managements-are their appointees and, through them, the traditions of the Morris Plan are carried on.

The oldest (including predecessors) of the Morris Plan institutions, among the 18 banks in which the Morris Plan Corp. now has a majority stock interest, is nearly 40 years of age. Most of the other Banks of Morris Plan origin have been in existence for about three decades. During all of this time they have been controlled, directed, and managed much as they are today. Form and custom have altered; but fundamental relationships have remained the same.

These banks are currently operated by officers and staffed by employees who have been with them for a business lifetime. There has been much the same continuity of service among the several boards of directors. This management and these directors, without exception, have been intent on carrying forward the ideals and concepts upon which, and in furtherance of which, the Morris Plan was founded.

The existing 18 banks have an aggregate of approximately 1,529 employees and 168 directors (exhibits 3-D and 4-F). Among these directors are two who might be considered "representatives" of the Morris Plan Corp of America. There may have been occasions, in years gone by, when the parent company actually had "majority" representation on some of the boards. This is not true today. In no case does the parent company nominate more than a minority of the directors; with respect to 7 out of 18 banks the parent company has no direct representation whatsoever; and on every board all representatives serve at the specific request of management.

The word "direct" has been used advisedly. Relationships between the Morris Plan Corp. and the managements of the banks are such that there are no conflicting interests. These managements look to their majority stockholder for financial aid when needed and for advice when this is requested. This majority stockholder, in turn, relies on managements for operational results. If the Federal Reserve Board had taken the trouble-which quite patently it has not-to inquire of any of the enumerated officers, directors or employees, of majorityowned Morris Plan institutions, it would have found no single instance in which the will of the majority owners has been imposed on management. This has been equally true in the case of minority ownership (exhibits 4-A and B).

And, in all reason is this not typical of investor-management relations throughout America? The Federal Reserve Board evidently assumes that the Morris Plan Corp would deem itself astute in deliberately pursuing a policy calculated to antagonize and alarm the communities in which its banks are located. The board must also believe that the handful of officers and employees of the Morris Plan Corp are possessed of the conviction that they have the time, the energy and the experience with which to operate these banks more effectively than those who live in the communities in which the banks are situated and have made the successful operation of these banks their life work. It is only necessary to make these statements to illustrate the folly of the Federal Reserve Board's basic postulations.

The historical facts are that Morris Plan experience and practice are a complete refutation of the basic assumptions of this bill. Strange and unbelievable as it may seem to the Federal Reserve Board, the Morris Plan Corp., as a dominant owner, has preferred to cooperate and build rather than destroy. It has felt that there was satisfaction as well as profit to be gained from the loyal support of operating organizations—and only loss involved in arrogant ingratitude.