Statement on Financial and Economic Problems.

OWING to the prolonged business depression, the succession of events abroad, the failure of banks in constantly increasing numbers, and the destruction of confidence and increasing fear throughout the country, a situation exists which calls for concerted action on the part of our leading bankers and strong banks to avert a possible threat to our entire credit structure.

You know the picture better than I do, but it may be worth while to review it briefly.

1. Since January 1st, 1,215 banks, involving $967,000,000 deposits, have closed their doors. Of this number, 698 have suspended since June, involving $792,000,000 deposits. These failures follow 1,345 bank failures in 1930, involving $864,000,000 deposits. Thus, in the course of nineteen months, no less than $1,831,000,000 have been tied up through bank suspensions; and if to this be added some $800,000,000 of cash withdrawals for boarding purposes, it is perfectly apparent that these events have resulted in pressure which must of necessity not only have affected prices, and restricted business activity to a very severe extent, but which also has severely impaired the confidence of the public and bankers as well. But what we are concerned with tonight is the threat to the banking structure.

2. The obvious method followed by a bank threatened with pressure from its depositors is to meet its obligations either by recourse to its Federal Reserve Bank or its city correspondent, by the sale of securities, or by the disposition of other liquid assets. There is no need of emphasizing the effect which the sale of securities has on the security markets, both in the case of banks seeking to make themselves liquid, and in the case of banks that have been closed and that are being liquidated either by the Comptroller or the State banking authorities. In any event, the process has been going on and is going on in this country until every bank is seeking to increase its liquidity and to the extent that the strong banks are succeeding in doing so, to that extent they are making less liquid their weaker brethren. This process is well illustrated by the fact that the Clearing House banks in New York, I am informed, are on the average 60% liquid, whereas nothing like this degree of liquidity is true of banks in most other sections of the country. Such a process obviously cannot be continued indefinitely.

Prior to the establishment of the Federal Reserve Bank system, it would probably have been met in large measure through the relationship between the banks in the principal centers and their out of town correspondents, but, with the establishment of the Federal Reserve System, there grew up a tendency to feel that it was to the Federal Reserve System rather than to the banks in central reserve cities that all banks should look. This supposition in times like these is faulty in two respects, first, the number of State Banks that are members of the Federal Reserve System is comparatively small in number, and, second, the amount of eligible paper held by banks which may be perfectly solvent but which are, nevertheless, threatened, may be totally inadequate to meet immediate emergencies. One way to meet this handicap would be to extend the eligibility provisions of the Federal Reserve Act, but that obviously would require time. This, therefore, must be considered in the light of a future possibility rather than as a program available to meet our immediate needs. If, however, in carrying out the obligation of the strong banks in the principal financial centers to the banks throughout the country, we could set up one or more central organizations which would furnish rediscount facilities to banks throughout the country on the basis of sound assets not legally eligible for rediscount at the Federal Reserve Bank, we would not only restore liquidity to solvent institutions, but, what is even more important, we would at once tend to restore confidence now sadly lacking among all classes of bank depositors in all sections of the country. There would be no danger to the banks in the principal financial centers not only because of their existing liquidity but because of their ability to get exceptionally large accommodations from the Federal Reserve Banks which are in an unusually strong position.

3. I have, therefore, asked you to come here to make the definite suggestion to you that you proceed to the creation of such an organization, and make available to it such resources as will insure its adequate functioning. I am not concerned with the precise form which it should take, whether you should create a central organization or local organizations acting through the various Clearing Houses, but I do say that I consider some such program essential in the public interest, and that the carrying out of such a program does not admit of delay. I am confident that the Secretary of the Treasury and the leaders of the Federal Reserve System will cooperate with you in every way in the working out of such a program. If present tendencies are allowed to continue unchecked, there is no telling where the movement will stop.

4. The problem created by the vast sums tied up in closed banks is also one that should also be dealt with, not only in the interests of millions of depositors, who in times like these are faced with unusual hardships because of the tie-up of their savings, but because in the general interest it is essential to arrest this process of deflation and to restore public confidence in our banks. I would, therefore, suggest that another organization be set up that would as promptly as possible make available to depositors some reasonable percentage of the amounts due them on the basis of assets selected in accordance with sound business judgment.