Would it be reasonable, therefore, to assume that it would do otherwise or have the same solicitude for the welfare of the general depositor that the Comptroller of the Currency would have? The first duty of the Federal Reserve Bank would naturally be to itself. That bank would have no concern for the general depositor until after its own claim upon the insolvent institution should have been fully satisfied.
What would have been the effect upon the interests of depositors if a national bank had failed under such conditions as those described as having prevailed in Iowa, Montana, Texas and in other sections of the country, and the bank had been liquidated under the supervision of the Federal Reserve Bank? What would have remained for the depositors after the Federal Reserve Bank, in satisfying its claim, had disposed of not only the eligible paper which it held as security, but as much, if not all, of the ineligible paper and securities which it also held as collateral to the eligible paper? It is not difficult to imagine.
A preferred creditor of an insolvent national bank, holding security for his claim, is entitled to prove the claim against the bank for the full amount of the debt and, at the same time, to receive thereon any dividends that may be declared until the amount of the dividends and the collections from the collateral held are sufficient to discharge the debt in full.
There is no question in connection with the liquidation of insolvent banks that arises more frequently and is contested more warmly than that of preferential claims of creditors. There is no general or definite rule for determining the right of a creditor to a preference. The question always has been determined in each case by the Comptroller of the Currency himself, upon a full and clear statement of the facts submitted to him by the receiver or by the courts on appeal. Comptrollers have been so careful to prevent favoritism of any kind in allowing preferences that even the receivers of insolvent banks never have been permitted to decide these questions upon their own judgment.
The procedure of placing a preferred creditor in charge of an insolvent national bank who holds as security for his loan the very best paper of the bank, or any creditor or debtor of the institution, for that matter, is without precedent in the history of the office of the Comptroller of the Currency.
The liquidation of an insolvent bank should be under the immediate supervision of a wholly disinterested Government official, such as the Comptroller of the Currency. Neither the Federal Reserve Bank nor the Federal Reserve Board should have any voice in the settlement of the affairs of such banks.
The national banking system has been in operation for nearly fifty-nine years. Its principal defects and weaknesses, which existed and were fully recognized for so long a time, were practically cured by the enactment of the Federal Reserve Act, which materially enlarged the scope of powers of the banks, and afforded them the means of obtaining additional credits to meet the needs of their respective communities. Under the leadership of the Comptroller of the Currency the national banking system has successfully stood the tests of time and safely weathered the financial storms and business depressions of every character and severity which it has encountered during the more than half century of its existence.
The experience of the past is always a safe guide in determining the course of the future. The best interests of the national banking system and of the banks would not be benefited by such a convulsive and experimental change as the abolition of the office of the Comptroller of the Currency and the transfer of the Comptroller's duties to the Federal Reserve Board or to the Federal Reserve Banks, as is proposed. The duties of the Comptroller and the business of the Comptroller's office can be more efficiently, economically and advantageously administered separately than by uniting the two bureaus, and more satisfactory results will accrue to the banks and the banking public by their continued operation apart, as they have been.
The stability and continued success of the national banking system depends wholly upon the confidence of the depositors in the security of their deposits and an impartial and conservative execution of the banking laws. Any change that will have a tendency to jeopardize the safety of deposits or impair confidence in the supervisory authority will have an injurious effect upon the system as a whole.
Any supervisory authority which the Federal Reserve Board may possess should be limited to the regulation of the Federal Reserve Banks and the restriction of the activities of these banks to the discharge of the duties for which they were expressly created, namely: to supply the member banks in times of urgent need with funds, by means of rediscounting their eligible paper in amounts sufficient to enable them to meet the demands of creditors and of legitimate business in their respective communities.
Closer supervision of the Federal Reserve Banks by the Federal Reserve Board and more uniformity of regulations in regard to the management and methods of these banks would appear to be very necessary in the light of developments and disclosures hereinbefore referred to. The frequent encroachments of some of the Federal Reserve Banks upon the jurisdiction of the Comptroller of the Currency and their unauthorized and unwarranted interference with the Comptroller's functions have been productive of more or less confusion of understanding and conflict of instructions, difficult to reconcile or correct. This has been notably the case in connection with matters involving the interpretation of provisions of the banking laws by giving information or advice in conflict with the rules of practice established and followed by the Comptroller's office. Instead of referring the banks, as they should have done, to the Comptroller of the Currency for information or instructions on all such subjects, some of the Federal Reserve Banks in numerous instances have undertaken to interpret the law, instruct the banks, or answer the inquiries according to the judgment of the particular individual to whom the inquiries were submitted, and almost invariably the instructions or information given was in conflict with the position of the Comptroller's office on the same subject and with that of the national bank examiners.
To avoid conflicts of this nature, therefore, and resulting confusion the Federal Reserve Board should assume active supervision of the Federal Reserve Banks, restrict the activities of these banks to the discharge of the duties for which they were created, as hereinbefore explained, and leave the supervision of the national banks exclusively to the Comptroller of the Currency. The duties and powers of each branch of the system are well defined by law, and if each branch will attend strictly to its own business and not encroach upon or interfere with the duties of the other there is no good reason why the three branches of the Federal Reserve System should not function harmoniously, effectively and successfully, and the system, as a whole, be a worthy successor, as it was intended it should be, of the national banking system. Unless this is done, more or less confusion, conflict and dissatisfaction will be the inevitable consequence.
The knowledge that the system as a whole is working harmoniously, that the principal imperfections of the national banking laws have been corrected or removed and its deficiencies supplied should, and no doubt, will, so increase public confidence in the stability and safety of the improved system, as a whole, as to insure its satisfactory and successful perpetuity through the years to come.