Mr. ELLIOTT. Yes. You see, our theory is, Mr. Chairman, that we are one institution; it is a single corporation and it has only one reserve only one line of deposits.

The CHAIRMAN. What requirements do you have for the branches in the way of reserve? Is there any reserve balance required? Mr. ELLIOTT. They carry till money; that is all.

Mr. KING. Mr. Elliott, under the branch banking system would it not be possible to accelerate deflation of a community much easier than would be possible under the community bank?

Mr. ELLIOTT. How so, sir?

Mr. KING. Such deflation as occurred in 1920 when the loans were called all over the United States, and they were compelled to throw their stuff upon the market.

Mr. ELLIOTT. That was done by unit banks, and it came so quickly that, if the banks did it, I do not see how it could be done more quickly or efficaciously by a branch system.

Mr. STRONG. It was not done by the units: they claim it was done by the Federal Reserve Board.

Mr. WINGO. You have how much deposits?

Mr. ELLIOTT. $185,000,000.

Mr. WINGO. And you have only $12,000,000 of discountable paper? Mr. ELLIOTT. $4,000,000.

Mr. WINGO. Eligible for rediscount at the Federal reserve bank?

Mr. ELLIOTT. Yes; because we have about $50,000,000 of commercial funds.

Mr. WINGO. You have $187,000,000 deposits?

Mr. ELLIOTT. $185.000.000.

Mr. WINGO. You have about $50,000,000 of commercial funds? Mr. ELLIOTT. Yes: and the rest savings.

Mr. WINGO. You have $4,000,000 eligible paper for rediscountThe CHAIRMAN (interposing). Let me understand, Mr. Elliott. You speak of commercial funds. What do you mean by " commercial funds"?

Mr. ELLIOTT. Demand deposits. Those are the only ones that you can invest with us so that you may have rediscountable paper. Mr. WINGO. There is the point. I do not know much of law or of banking, but those figures are significant to me. I may be in error, but where is the rest of your $46,000,000 commercial funds? Mr. ELLIOTT. If a man comes in to borrow

Mr. WINGO. What is it in if it is not in eligible paper? You see what I am driving at.

Mr. ELLIOTT. You must take into consideration the character of the community in southern California, composed in very large part of men who have accumulated a fortune in the East, moderate or large as the case may be, or in the Middle West; and they have come to California, and they bring with them their stocks and their bonds. A note secured by stocks and bonds is not eligible for rediscount with the Federal reserve, thought the security may be the most adequate and instantaneously realizable. You could not discount the note secured by the United States Steel Corporation bonds or municipal bonds. You can borrow on United States Government bonds, but municipal bonds and State bonds, you can not rediscount paper secured by them.

So you see the character of our borrowing determines very largely the absence of our rediscountable paper.

Mr. WINGO. I am just wondering how long you are going to stay in the Federal reserve system.

Mr. ELLIOTT. As I say, we have debated that question ourselves for a year and a half or two years, and it was only by way of pointing out the fact that not only my bank but the other banks are put to face with the necessity of determining this question if this legislation is passed. We do not want to go out. But I fear I have taken more than my share of the time. Thank you.

The CHAIRMAN. Mr. Drum, we will now hear you.

STATEMENT OF MR. JOHN S. DRUM, PRESIDENT MERCANTILE TRUST CO., SAN FRANCISCO, CALIF.

Mr. DRUM. I have been very much interested in this discussion. When I came here I thought that it was more of a discussion of this bill along the lines as to the parity of relationship between the national banks and the powers and privileges of national banks, and the same powers and privileges of State banks, members of the Federal reserve system.

The CHAIRMAN. The committee will be very glad to hear you on this relationship.

Mr. DRUM. I think this has been a most enlightening discussion, and I should like to go a little bit into the elementals before we come down to the question of branch banking.

I do not believe that branch banking is the real fundamental thing that we have to discuss here this morning. But it is what is going to be the present and future growth of the Federal reserve system. That, to my mind, is the big, overwhelming question here. When I get through I should be very happy to go into complete discussion of branch banking in California, but to me it is merely one phase of the growth and development of this system.

The Federal reserve system was established by Congress, and its charter is for a limited number of years. Practically one-half of that period is over, and you only have to-day 1,625 out of the 23,000 State banks that are members of this system.

We, as American bankers, are all interested in the development and growth of this system. We believe that as Congress initiated this measure, so likewise the responsibility rests with the Congress for its growth and development.

We believe here that the real question before use, is, How are State banks going to be brought into this system and participate properly and add their reserves and add their strength to this common reservoir of credit? That is the question before us; and this branch banking in California is just as much a phase in the development of that larger question as the question as to the status of trust companies was a question here during the war in 1916, 1917,

and 1918.

Now, when all is said and done, we all express ourselves-we are all human beings according to our prejudicies. They may be sound and they may be unsound. Sitting around this table this morning we have had expressions from Congressmen about this "evil"; and about whether or not the branch banks of California

were about to absorb, or how long would it take them to aborb all of the outstanding new banks of the State. Those questions were asked, and I believe they should be answered; and I believe likewise we should go back to fundamentals.

I don't want to go back to the time preceding the Civil War, because the present status of banks in the United States practically began when, after a long discussion in Congress, they eventually passed, in 1863-nearly two years after the war began-a national bank act, the purpose of which was to finance the war and put the banks of this country, through the circulation privilege, in a position of advantage where banks, theretofore under the State system, would go into the national system. They succeeded up to a point during the war, where when the war was completed, just as now, the State banks have not gone into the system. They passed two bills that is, Congress passed two bills--to see that State banks went into the system, so as to add to the national strength, which was necessary then just the same as it is necessary now.

The Federal reserve system in its development is just as necessary to our country, and every bank that is eligible for membership should be to-day a participating part in that great system, if we are going to keep up in banking to an adequate extent with the development of American agriculture, American commerce, and American trade.

Congress passed two laws: One, in 1865, to invite those State banks into the system that had branches; the second bill in 1866, and that was for the purpose of taxing the circulation privilege away from the State banks so that there might be advantages under the system. What was the result? From one thousand five hundred and some odd banks existing in State systems, despite all the prosecution of the circulation privilege given during the years of the war, that number under the taxation of State circulation decreased to about 250 or 260 banks.

At the time that the State and National banking systems first came into competition there were about 250 or 260 State banks, and the rest were national banks. And what has been the progress in that time? I am going to make a rapid sketch, but I am coming down, when all is said and done, to the point that this question we are facing here to-day is just exactly the same question we face in any problem of human nature; that is, we compete according to what we believe is our service rendered to the public as against what the other fellow is giving in the way of service. If we compete successfully, we grow and develop; if we do not compete successfully, we either languish or we get an inferior position. From that little handful of two hundred and fifty-odd State banks there has developed the situation as between the national banking system and the State banking system. The national banking system went on through these years with its circulation privilege, which was a direct invitation to banks to become members, plus the very definite and splendid examination which took place. So that there was a sanction, there was a standing given a bank by reason of being a national bank. But despite that fact, because public service, public convenience, public necessity demanded in the development of this country banking facilities,

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particularly in the pioneer portions of this vast country, the little State bank began and it flourished and it developed in size and it developed in numbers; it developed in aggregate of capital, surplus, and deposits. They were small; they were reaching out into the extreme portions of this country. But they kept mounting higher and higher, until about 1895 or 1900 in numbers they were greater than the national banks; and as far as deposits were concerned, while they did not approximate them, at the same time they showed a very definite position.

So, likewise, in this discussion around this table this morning, particularly what was said here about the appeal that is made to the local man wanting to talk to his local banker, that is why the State system flourished, because the national banker was in the cities; he was not out in the small portions of the pioneer West, Southwest, and Middle West, developing his community. And, let me say right here, I am not talking with any criticism of banking systems or of banking individuals. I give full credit for sincerity of viewpoint, status, and everything else to the man who represents one system or represents another-I give the full credit to his position, and I say that there are many accomplishments and achievements in both systems, and there are many things which one system could learn from the other.

With that premise, I want to go on to what happened next. The development of the larger State banks in the cities, particularly possessing powers other than mere commercial privileges, possessed powers beyond those to which the national banks were limited. The result was in the late nineties and in the first decade of this century trust companies grew up all over this country. They gave a definite and they gave a decided service to the people, not only in the cities but the people throughout the States, with the result that the trust companies became the largest and most powerful competitors of the national banks. That situation of competition went on. The national banks sought in 1900, and Congress by giving a little more definite circulation privilege and by reducing the amount of capital of the national banks-Congress sought to make that competition less marked, and Congress did wisely. But Congress did not-Congress has not, either before the adoption of the Federal reserve bank system, since, or now-and I am taking the exact language of the Comptroller of the Currency that the national bank act, nevertheless, needs general revision-I start with that premise as far as national banks are concerned. But now must stop for a moment to consider the question as to reserves.

(Thereupon a recess of five minutes was taken.)

Mr. DRUM. I was coming down, at the time of recess, to the point of competition that had grown up and developed between the national bank system operating under a uniform law in each of the 48 States and 48 separate and distinct banking systems.

I am now going to touch on the part of reserves. While we talk about the unit bank, while we talk about the fact that each bank is separate and independent, at the same time from the beginning of the national bank act and continuing through the growth and development of every State banking system, there was and necessarily had to be the relation between the so-called unit or independent

bank and its city correspondent in the reserve city, and then on into the financial centers of the country-New York and some of the eastern cities. That relationship grew up and developed with the growth and development of banks. As a result of that, there was under the law not only the reserves of the little unit bank in the farthermost outer part of the United States, but those reservestheir surplus was if not constantly for the condition of doing business, but seasonal in building up balances-from that outermost point that reserve was taken from that little bank and put into this reserve city bank and put into this New York bank; and what was the result? In American banking there grew up the pyramiding of reserves.

While every bank complied fully with the law, both national and State, as far as its reserves are concerned, nevertheless, first of all, we realize what that pyramiding meant in the panic of 1893. The panic of 1893 showed that there was not enough money to do business when the country all at one time needed its own special reserves for its own special purposes. The banking system broke down. We talk of the warning of 1893. At that time A. Barton Hepburn, one of the greatest bankers ever produced in this country, then talked to Congress, and I might say just in passing that he spoke about the possibility of a branch bank system doing a service to the country in a similar emergency.

Mr. Eckels likewise spoke and said that something must be done. Nothing was done. And we went then from 1893 down to the panic. of 1907. What did the country do in that panic? The banks themselves in every city, under the directions of their clearing houses, started in to manufacture money by the million, and that was the way we got through the panic of 1907. But the country was aroused at that time-it was stirred up-and as a result of that panic they passed, in a temporary way until they could in a larger and more substantial way take care of the needs of this country, a bill which merely legalized the clearing house procedure of 1907. But they did a bigger thing; they created the Monetary Commission that sat from 1908 or 1909, whenever it was, down to the time when the Federal reserve act was finally adopted in December, 1913. During all that period the Monetary Commission not only went out over the entire world seeking the advantages of banking systems throughout the world but they called experts before them; they took advice from financial, from banking, from economic experts; and you know the proceedings of the National Monetary Commission constitute the greatest moument in the way of investigation of banks and banking systems that was ever gathered together. But they did all of that for one primary purpose: How was the question of the reserves to be taken care of so that there should in some way be a governmental control and agency that would not only in times of stress but in all times take care of the needs of the country, whether they were seasonal or whether they were in time of crisis and stress?

And now in doing that what did they do? It was something new in this country and for a long time this country did not acquiesce I mean Congress did not acquiesce in the scheme set out in the original report of the Monetary Commission. Every system in the world had a government reserve, a common reservoir of credit,