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"A Legal History of Federal Regulation of Payments of Interest Or Deposits

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A ci LEGAL HISTORY OF THE FEDERAL RESERVE SYSTEM General statement of purpose and plan, l»#«f to review discuss the la gal aspects of the origin and developiaent, both fimetloaallgr «ad atruetwatllyi of System including refMrtnofis to oourt of the AttoMt^y Q*n*raljt ^^^ regulatioaa^ rulings, intaiTpretatic^ia of tfet Boards with refer^nets to political and economic aspects limited to a minimum. A* Background diacmstioti of first and Bm®m& banks of th# United States> National Bank kct, and possibly ®m® reference to foreign central banks* General indication of defects of the banking system before the Federal Reserve Act, i.e.> ismiastle mtrrnmy} laote of r©s#rroir of r#0arw®t etc* B* Early Psroposals studies of National Monetary Cormnission and Pujo Coiroittee, with some discussion of pioposals of Aldbplohf Willis, Waxfeurg* C» I^gislati1^ Blstoxy Diaoission of wijor points of eontroirwsyj dtbatas C reports of c^i»dtt0#sf etc. D# fhm Origiiial Act Osi^ral amimary of pswisions B« Iiagal Basis —some disc- sslon of court decisions m to constitutionality of F©d@ral regal/itlon of banking # 11. A* Central Ctatlint itatt^iut of priBeipal changti in ttit Sjrstfn both functional and structural} shifts in eicphasis, etc* Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 1# fhe Cwreiicy Funotion 1* Federal Reserve notes status (b) froosdwt for issuance (c) (k&lateral requirements shift 1» saphasls {#) Redemption (f) Interest *—hoif ttoiy have bt#n n»M in llea of fr&n&faise tsx 2t fisdersl Reserve Mmk not#§ (m) 1913 provisions (b) 1933 iwrgeney pi^viadons 3* Thomas Amendment -"•legal tender* etc* h* §oM Reserve let -*- effect on Federal Easerro Boak# and the Discounting Ftuaetion 1* Original eow^pt 2* Qeneral nmWm «-dncluding dlscsretlonarj natiare 3» Sllglbllltgr r#quir«itntt U« Bankers9 acetptmnets ««thelr purpose and. developisscit Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Ju Agrloultortl eredite —the 1923 lot, ete« 6* Emergency advances to nonmember banks and corporations ?• Shift in —1935 Biuaking Act} see* 10(b)| adiranees om Government operations} 1955 revision of Regulation Aj 8, Business loans -—sec. 13b, its Purpose, early use, mud subsequent decline f • Discount rates liifttory* wi^ ptrtioular rtf#f#iae# to legal qoestione whidi iuvre !Bie Stipervltoxy . !• Oaneral omtlins 2« Admission to membership g csonditione * Village caeef eto* 3» feaalnmtions and reports It* Capital reqairwexxbe S* Branches -—showing changes in the law and emphasis both as to domestic and foreign branches 6# Heeetrrae (a) Shift in ooneept (b) »dapoelt liabilitiee91 CiCKHpositioii of Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis (d) Amount (e) Reserve and central rtstrre cities (f) Proposals fbr changes in law ?• Interest on deposits (a) PUPOM of 1933 not (b) Meaning of *iat*rtst* -^including som# discmssioa of absorption of exchanre charges (e) Tlas deposit§ ~inaximuirt rates and payment before maturity (d) Sailings deposits 8« Loans and Investments (a) Original provisions (b) Bffset of 1933 Baking Aot (c) Investment securities ani corporate stocks (d) Loans to affiliates (t) Loans to exteBM^w officers (f) Loans on stock and bond collateral (f ) Real estate loans 9» Bsslations with otfaar Institiitio&s (a) Xntarlooking dlrsetoratss (b) Ssoixrltlss Co) Other affiliates (d) Bank holding Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 10, Mergers and consolidations 11, Tmst povfers of national banks 12m Foreign bmidrijag eorporations 13» EnfarGeaw&t aaaaoraa —rawvml of dirtetora mni aagnilaloii from lit. Relation with other bank supervisory agencies 1* The Collection Function 1« Origin al proirlttiont 2, Status of Reserve Banks in collecting checks 3* Par W. tha Hi§ !• Early developuient 2« V-loans 3# Otter prtitut aetlvltlta U« E©3jttion witfe Dmasory ?• fhe Crtdit COBITOI Fimotion 1* Discount rates 2* Open market operations (a) Early mat (b) Qtomttis of Federal Open Market Committee (o) RaXationa 3* Tim wmmtm (a) 1933 mBibwiiy to (b) Qrowlii of !!§« for artdit tl* Special measures (a) Margin requirements Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis (to) Go&suMer eredlt (e) Heal estate credit WS9SWVKS3R A* Qemril concept* atxture of govsraaftii&tl aod private interests, etc. f # ^>ari of Governor* 1. Mature -^•oFigiisal purpose ®M deveXopmut sinoe 2* Composition and qualifications k* Operations !• Status 2* 3* BeXaticm to Federsl lti#n^ Banks 1* 8ature —as instrumentality of United States, State tms^ltiOE^ etc* 2* Organisation 3* Braaehe* k* Elation to 5* Fai#ral liiifii ipiats B* Member Banks of a took owner ship* Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis •7- F. Federal Advisory Council IT?. LKJAL STAWS OF THE STSffiK IN WE G07EHI1IEST A. Board of Governors B. Open Market Committee C. Federal Reserve Banks BBRije Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Committee on the History of the Federal Reserve System nflTF 2/18/56 ATTACH TO HACKLEY MEMO FROM REMARKS This is a memo written for inside circulation in the *>oard of Governors of the Federal Reserve °"stem. It was given us as a ionstration of the kind of work to be expected, and may serve as a section of the projected legal history• MA Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis X^.*"- *._ ~*?#tory °* — «j&e Co^ii t: ^ ^.;^J System AttUrc^ 4 <st *L U<S t&e jfeaor^u .u-** ___ - NOT FOR PUBLICATION A Legal History of Federal Regulation of PAYMENT OF INTEREST ON DEPOSITS BY MEMBER BANKS Howard H* Hackley Page I, INTRODUCTION • ........... 1 II* THE BANKING ACTS OF 1933 AND 1935 2 III, THE .DIFFERENT TYPES OF DEPOSITS: (A) Demand Deposits .••*.••....*.••.•.••..••• k (B) Time Deposits . .... *.•......• f> (C) Savings Deposits . •. • 8 IV* THE MEANING OF "INTEREST" ..... lU V. ABSORPTION OF EXCHANGE CHARGES 18 VI. INTEREST ON TIME AND SAVINGS DEPOSITS: (A) Maximum Rates ....... 21 (B) Determination of Applicable Maximiom Rate. 2i| (C) Computation of interest *••.....•.•...•., 25 VII. WITHDRAWAL RESTRICTIONS: (A) Payment of Time Deposits before Maturity. 27 (B) Waiving Notice of VJithdrawal of Savings Deposits 28 VIII. EXCEPTIONS FROM THE STATUTE 30 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis September 30, 1955. A Legal History of Federal Regulation of PAYMENT OF INTEREST OH DEPOSITS BI MEMBER BANKS I* INTRODUCTION The original Federal Reserve Act contained relatively few provisions circumscribing the banking practices of member banks of the Federal Reserve System* It did not, for example, attempt in any way to restrict payment of interest on bank deposits. In 1927, Congress prohibited national banks from paying interest on time and savings deposits at a rate higher than that authorized by State law to be paid by State banks? ^ but this restriction was intended simply to avoid giving national banks an undue advantage over competing State banks and was not for the purpose of preventing unsound banking practices* It was not until the enactment of the Banking Act of 1933 that Congress undertook to impose restrictions on the payment of interest on deposits by member banks for supervisory reasons* That Act was a comprehensive measure designed to prevent the recurrence of banking crises like that of the early 1930 !s» To that end, it provided not only for the insurance of bank deposits but also for the regulation of certain practices which, in the judgment of Congress, had involved abuses that had contributed to the banking crisis. Among these practices was the payment of in­ terest on deposits. In the early 1930 fs, there had developed a feeling that the payment of interest on deposits by member banks of the Federal Reserve System should be subject to some regulation under Federal law. In com­ peting for the deposit balances of country banks, some of the large city banks had been paying high rates of interest on such balances, thereby attracting an increasing volume of the surplus funds of the country banks. It was supposed that this practice had been partly responsible for the large number of bank failures which followed the 1929 market crash* Senator Carter Glass declared that "the payment of interest on demand deposits has resulted for years and years in stripping the country banks of all their spare funds, which have been sent to the money centers for stock speculative purposes*f,3 1 Act of Feb, 25* 1927 (hk Stat. 1232). This provision, which has not been changed, is contained in section 2U of the Federal Reserve Act (12 U«S»C# 371)• The provision was merely an incident to an amendment the principal purpose of which was to confirm the right of national banks to operate savings departments. 2 Approved June 16, 1933 (U8 Stat. 162)• 3 77 Cong. Record, Pt. h9 pp. 3729, 1*165, Ul66. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis -2- In the early part of 1932, Senator Glass introduced a bill which, among other things, contained provisions relating to the payment of interest by member banks, not only on demand deposits but also on time deposits* That bill^ would have prohibited member banks from paying interest on time deposits of other banks at a rate in excess of 2-1/2 per cent or the current Federal Reserve Bank discount rate, whichever was less, and on other time deposits at a rate greater than one-half the interest rate permitted to be charged on loans by na­ tional banks. Although it met with some objections, the Glass proposal, in a modified form, was incorporated in the Banking Act of 19336 in the following year* II* THE BANKING ACTS OF 1933 AND 1935 The Banking Act of 1933 added two new paragraphs to section 19 of the Federal Reserve Act, a section previously dealing chiefly with member bank reserve requirements.
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