mss52019_121_010.pdf

Tile Papers of Eugene Meyer (mss52019)

121 10 001- Subject File, Federal Reserve Board, Unified Banking Report, Clippings,1933

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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See previous files co:Aaining testimony before

congressional committees in favor of unified

bankig.


CONSTITUTIONALITY OF LEGISLATION

PROVIDING A UNIFIED COMMERCIAL

BANKING SYSTEM FOR THE

UNITED STATES

OPINION OF GENERAL COUNSEL OF THE

FEDERAL RESERVE BOARD

REPRINTED FROM FEDERAL RESERVE BULLETIN

MARCH 1933

UNITED STATES

GOVERNMENT PRINTING OFFICE

WASHINGTON : 1933


CONSTITUTIONALITY OF LEGISLATION PROVIDING A UNIFIED COMMERCIALBANKING SYSTEM FOR THE UNITED STATES

The Federal Reserve Board, at the time ofthe appearance of the Governor of the Board.on March 29, 1932, before the Senate Commit-tee on Banking and Currency in connectionwith the Glass bill (S. 4115), which was thenunder consideration by the committee, wasrequested to suggest a constitutional methodof creating a unified banking system in theUnited States. In accord with this request,the General Counsel of the Federal ReserveBoard prepared an opinion, which was trans-mitted to the Chairman of the Senate Com-mittee on Banking and Currency. The textof the opinion is published below:

CONSTITUTIONALITY OF LEGISLATION PROVIDINGA UNIFIED COMMERCIAL BANKING SYSTEMFOR THE UNITED STATES

To the Federal Reserve Board:Senate Resolution 71, adopted on May 5,

1930, directed the Committee on Banking andCurrency to conduct an investigation and rec-ommend legislation "to provide for a moreeffective operation of the national and Federalreserve banking systems of the country."Following extensive hearings by a subcommitteeof which he was chairman, Senator Glassintroduced Senate bill 4115, Seventy-secondCongress. At a hearing on the bill before theCommittee on Banking and Currency onMarch 29, 1932, Governor Meyer presented aletter expressing the unanimous views of themembers of the Federal Reserve Board, whichcontained the following statement:

It should be recognized that effective supervision ofbanking in this country has been seriously hampered bythe competition between member and nonmemberbanks, and that the establishment of a unified systemof banking under national supervision is essential tofundamental banking reform.

Bankers had testified that certain provisionsof the bill would make it difficult for memberbanks to compete with nonmember banks andwould cause defections from the Federal reservesystem and the national banking system; andduring his testimony Governor Meyer calledattention to the statement quoted above andstressed the fact that "effective supervisionof banking in this country has been seriouslyaffected by competition between member andnonmember banks," and that "competitionbetween the State and national banking systems

has resulted in weakening both steadily."Thereupon Senator Glass requested GovernorMeyer to "suggest to us a constitutionalmethod of creating a unified banking system inthis country."In view of the circumstances under which

this request was made, the history of ourbanking system, and the provisions of SenateResolution No. 71, it appears that, by "cre-ating a unified banking system," is meant bring-ing all commercial banking business in theUnited States into a single banking systemsubject to effective regulation and supervisionby the Federal Government.

Congress has already created the nationalbanking system and the Federal reserve system;and the problem is how to achieve uniformityof corporate powers, regulation and supervisionwith respect to banks engaged in the commer-cial banking business and to provide for theirsafe and effective operation, by eliminatingthe existing competition between the FederalGovernment and the 48 States for the privilegeof granting charters to banks transacting thattype of business.

Since commercial banking necessarily in-volves the receipt of deposits subject to with-drawal by check, Congress can achieve thatresult if it can enact legislation which will havethe effect of confining the business of receivingdeposits subject to withdrawal by check tonational banks, which have uniform powersunder the national bank act, are subject toeffective regulation and supervision by theFederal Government, and are required to bemembers of the Federal reserve system.The question presented, therefore, is whether,

in order to provide for a more effective opera-tion of the national banking system and theFederal reserve system, Congress has the powerunder the Constitution to restrict the businessof receiving deposits subject to withdrawal bycheck to national banks.A consideration of the decisions of the Su-

preme Court of the United States leaves noroom for doubt that this question must beanswered in the affirmative. While numerousauthorities supporting this conclusion are citedand discussed below, the principal reasons maybe stated concisely as follows:

• 1. The power to create the national bankingsystem and the Federal reserve system as use-ful instrumentalities to aid the Federal Govern-

I Reprinted from Federal Reserve Bulletin for March, 1933, pp. 166-186.

(1)


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ment in the performance of certain importantGovernmental functions includes the power totake such action as Congress may deem neces-sary to preserve the existence and promote theefficiency of those systems. McCulloch v.Maryland, 4 Wheat. 316; Farmers and Me-chanics National Bank v. Dearing, 91 U. S. 29;WesYall v. United States, 274 U. S. 256.

2. Having provided the country with anational currency through the national bankingsystem and the Federal reserve system, Con-gress may constitutionally preserve the fullbenefits of such currency for the people by ap-propriate legislation. Veazie Bank v. Fenno,8 Wall. 533; Legal Tender Cases, 12 Wall. 457.

3. The existence of a heterogeneous bankingstructure in which there have been more than10,000 bank failures during the past 12 yearsconstitutes a burden upon and an obstructionto interstate commerce; and Congress mayenact appropriate legislation to correct this con-dition. United States v. Ferger, 250 U. S.195; Stafford v. Wallace 258 U. S. 495; Boardof Trade v. Olsen, 262 U. S. 1.Any one of these grounds standing alone

would be a sufficient constitutional justificationfor the enactment of legislation restricting theconduct of the commercial banking business tonational banks; and, when all three grounds areconsidered together, there can be no doubtthat such legislation would be not only consti-tutional but also entirely appropriate and inaccordance with a proper division of authoritybetween the Federal Government and theStates.Having the power to confine the commercial

banking business to national banks, Congresscan exercise that power in any manner which itdeems appropriate and adequate for its pur-poses. It is not necessary that the legislationassume the form of a revenue act or an act toregulate interstate commerce, though either ofthese means would be appropriate.

I. THE POWER TO CREATE AND MAINTAIN A

BANKING SYSTEM

Ample authority for the first conclusionstated above is contained in the opinion ofChief Justice Marshall in the case of McCullochv. Maryland (1819), 4 Wheat. 316, 4 L. Ed.579, wherein the Supreme Court of the UnitedStates established the following principles:(1) Congress has the power to create banks as

convenient, appropriate, and useful instrumen-talities to aid the Federal Government in theperformance of its functions.

(2) This power is derived from a group ofgreat powers, including the powers to lay andcollect taxes, to borrow money, to regulatecommerce, to declare and conduct wars, to raiseand support armies and navies and, "To makeall Laws which shall be necessary and proper forcarrying into Execution the foregoing Powers,and all other Powers vested by this Constitu-tion in the Government of the United States, orin any Department or Officer thereof."(3) If the end be legitimate and within the

scope of the Constitution, all the means whichare appropriate, which are plainly adapted tothat end, and which are not prohibited, mayconstitutionally be employed to carry it intoeffect.(4) If a certain means to carry into effect any

of the powers, expressly given by the Constitu-tion to the Government of the Union

' be an

appropriate measure, not prohibited by theConstitution, the degree of its necessity is aquestion of legislative discretion, not of judicialcognizance.(5) The States have no power by taxation or

otherwise to retard, impede, burden, or in anymanner control the operation of the Constitu-tional laws enacted by Congress to carry intoexecution the powers vested in the FederalGovernment.(6) The Constitution and laws of the United

States are the supreme laws of the land; and"it is of the very essence of supremacy to removeall obstacles to its action within its own sphere."Applying these principles, Congress has

created the national banking system and theFederal reserve system, which are now recog-nized as appropriate, if not indispensable,agencies to assist the Government in the per-formance of certain essential Governmentalfunctions. The States have no legal power toretard, impede, burden, or in any manner con-trol the operation of these agencies; and Con-gress clearly has the right to enact such legis-lation as it may deem necessary to "remove allobstacles" to their safe and effective operation.If it deems it necessary to prevent banks organ-ized under State laws from engaging in the com-mercial banking business in order to accomplishthis object, Congress may lawfully do so.

Since the decision of the Supreme Court inMcCulloch v. Maryland is the legal foundationstone upon which our national banking system,our Federal reserve system and our Federalfarm loan system have been built and theirconstitutionality sustained, that case should beconsidered in more detail. The essential factsgiving rise to the decision were as follows:

•••

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The Bank of the United States was granted aspecial charter by the act of Congress approvedApril 10, 1816, and was authorized to establishbranches throughout the United States. Itestablished its head office in Philadelphia and abranch in Baltimore, Md. The Legislature ofthe State of Maryland enacted a statute taxingall banks or branches thereof in the State whichwere not chartered by the State and prescribinga penalty to be collected from the officers ofany bank that failed to pay the tax. TheBank of the United States did not pay thistax on the transactions of its Baltimore branch,and a suit was brought against McCulloch, thecashier of the branch, to recover the penalty.McCulloch defended on the ground that the

State law was unconsititutional and void be-cause it was in conflict with a valid Federalstatute. The State contended that the act ofCongress chartering the Bank of the United.States was unconstitutional and that, there-fore, the State statute was valid. By a unan-imous opinion, the Supreme Court of the UnitedStates held that the act of Congress charteringthe Bank of the United States was valid andthat the State law purporting to tax the bankwas invalid.The following quotations from the masterful

opinion rendered by Chief Justice Marshall willillustrate the profound reasoning upon whichthe court's decision was based (4 Wheat. 407,411, 415, 421, 422, 424):

Although, among the enumerated powers of govern-ment, we do not find the word " bank " or "incorpora-tion," we find the great powers to lay and collect taxes;to borrow money; to regulate commerce; to declare andconduct a war; and to raise and support armies andnavies. The sword and the purse, all the external rela-tions, and no inconsiderable portion of the industry ofthe nation, are entrusted to its Government. It cannever be pretended that these vast powers draw afterthem others of inferior importance, merely because theyare inferior. Such an idea can never be advanced. Butit may with great reason be contended, that a govern-ment, entrusted with such ample powers, on the dueexecution of which the happiness and prosperity of theNation so vitally depends, must also be entrusted withample means for their execution.

But the Constitution of the United States has notleft the right of Congress to employ the necessarymeans for the execution of the powers conferred on theGovernment to general reasoning. To its enumerationof powers is added that of making "all laws which shallbe necessary and proper, for carrying into execution theforegoing powers, and all other powers vested by thisConstitution, in the Government of the United States,or in any department thereof."

To have prescribed the means by which Governmentshould, in all future time, execute its powers, wouldhave been to change, entirely, the character of the in-

strument, and give it the properties of a legal code. Itwould have been an unwise attempt to provide, by immuta-ble rules, for exigencies which, if foreseen at all, must havebeen seen dimly, and which can be best provided for asthey occur. To have declared that the best means shallnot be used, but those alone without which the powergiven would be nugatory, would have been to deprivethe legislature of the capacity to avail itself of experi-ence, to exercise its reason, and to accommodate itslegislation to circumstances.

We admit, as all must admit, that the powers of theGovernment are limited, and that its limits are not tobe transcended. But we think the sound constructionof the Constitution must allow to the national legislaturethat discretion, with respect to the means by which thepowers it confers are to be carried into execution, whichwill enable that body to perform the high duties assigned toit, in the manner most beneficial to the people. Let theend be legitimate, let it be within the scope of the Consti-tution, and all means which are appropriate, which areplainly adapted to that end, which are not prohibited, butconsistent with the letter and spirit of the Constitution, areconstitutional.

If a corporation may be employed indiscriminatelywith other means to carry into execution the powers ofthe government, no particular reason can be assignedfor excluding the use of a bank, if required for itsfiscal operations. To use one, must be within the dis-cretion of Congress, if it be an appropriate mode ofexecuting the powers of government. That it is a con-venient, a useful, and essential instrument in the prose-cution of its fiscal operations, is not now a subject ofcontroversy.

After this declaration, it can scarcely be necessary tosay that the existence of State banks can have no possibleinfluence on the question. No trace is to be found in theConstitution of an intention to create a dependence ofthe Government of the Union on those of the States,for the execution of the great powers assigned to it. Itsmeans are adequate to its ends; and on those meansalone was it expected to rely for the accomplishment ofits ends. To impose on it the necessity of resorting tomeans which it can not control, which another govern-ment may furnish or withhold, would render its courseprecarious; the result of its measures uncertain, andcreate a dependence on other governments, whichmight disappoint its most important designs, and isincompatible with the language of the Constitution.But were it otherwise, the choice of means implies a rightto choose a national bank in preference to State banks, andCongress alone can make the election. [Italics supplied.]

Having announced that it was "the unani-mous and decided opinion" of the court thatthe act to incorporate the Bank of the UnitedStates was a law made in pursuance of the Con-stitution, and was a part of the supreme law ofthe land, the Chief Justice proceeded to con-sider the question whether the State could taxthe bank (4 Wheat. 426, 427, 436):

This great principle is, that the Constitution andthe laws made in pursuance thereof are supreme; thatthey control the Constitution and laws of the respectiveStates, and can not be controlled by them. From this,which may be almost termed an axiom, other proposi-


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tions are deduced as corollaries, on the truth or error ofwhich, and on their application to this case the causehas been supposed to depend. These are, 1st. That apower to create implies a power to preserve. 2d. That apower to destroy, if wielded by a different hand, is hostileto, and incompatible with these powers to create and topreserve. 8d. That where this repugnancy exists, thatauthority which is supreme must control, not yield to thatover which it is supreme.

* * * It is of the very essence of supremacy to removeall obstacles to its action within its own sphere, and so tomodify every power vested in subordinate governmentsas to exempt its own operations from their own influence.This effect need not be stated in terms. It is so in-volved in the declaration of supremacy, so necessarilyimplied in it, that the expression of it could not makeit more certain. We must, therefore, keep it in viewwhile construing the Constitution.

The court has bestowed on this subject its mostdeliberate consideration. The result is a convictionthat the States have no power, by taxation or otherwise,to retard, impede, burden, or in any manner control theoperations of the constitutional laws enacted by Congressto carry into execution the powers vested in the generalgovernment. This is, we think, the unavoidable conse-quence of that supremacy which the constitution hasdeclared. [Italics supplied.]

In the case of Osborn v. United States Bank(1824), 9 Wheat. 738, 6 L. Ed. 204, substan-tially the same questions as had been consid-ered by the Supreme Court in McCulloch v.Maryland, were presented in substantially thesame form. Yielding to the request of counsel,the whole subject was reexamined and theprinciples announced in McCulloch v. Marylandwere restated and upheld.

Considering more fully the question of thepossession by the bank of private powers asso-ciated with its public authority and meeting thecontention that the two were separable andthat the public power should be treated aswithin, and the private power as without, theimplied power of Congress, the Supreme Courtexpressly held that the authority of Congresswas to be ascertained by considering the bankas an entity, possessing the rights and powersconferred upon it, and that the lawful power tocreate the bank and give it the attributes whichwere deemed essential should not be renderedunavailing by detaching particular powers andconsidering them alone and thus destroying,the efficacy of the bank as a national instru-ment.The ruling of the court, therefore, was to the

effect that, although a particular character ofbusiness might not, when considered alone, bewithin the implied power of Congress, yet, ifsuch business was appropriate or relevant tothe banking business, the implied power wasto be tested by the right to create a bank andthe authority to attach to it that which was

relevant in the judgment of Congress to makethe business of the bank successful.In rendering the opinion of the court, Chief

Justice Marshall said (9 Wheat. 860-863):* * * That the mere business of banking is, in itsown nature, a private business, and may be carried onby individuals or companies having no political con-nection with the Government, is admitted; but thebank is not such an individual or company. It wasnot created for its own sake, or for private purposes.It has never been supposed that Congress could createsuch a corporation. The whole opinion of the court,in the case of McCulloch v. The State of Maryland, isfounded on, and sustained by, the idea that the bank isan instrument which is "necessary and proper forcarrying into effect the powers vested in the Govern-ment of the United States."

* * * Can this instrument, on any rational calcula-tion, effect its object, unless it be endowed with thatfaculty of lending and dealing in money which is con-ferred by its charter? * * * The distinction be-tween destroying what is denominated the corporatefranchise, and destroying its vivifying principle, isprecisely as incapable of being maintained as a distinc-tion between the right to sentence a human being todeath, and a right to sentence him to a total privationof sustenance during life. Deprive a bank of its tradeand business, which is its sustenance, and its immortal-ity, if it have that property, will be a very useless attri-bute. This distinction, then, has no real existence.To tax its faculties, its trade and occupation, is to taxthe bank itself. To destroy or preserve the one, is todestroy or preserve the other.

* * * The operations of the bank are believed notonly to yield the compensation for its services to theGovernment, but to be essential to the performance ofthose services. Those operations give its value to thecurrency in which all the transactions of the Governmentare conducted. They are, therefore, inseparably con-nected with those transactions. They enable the bank torender those services to the Nation for which it was created,and are, therefore, of the very essence of its character, asnational instruments * * [Italics supplied.]

The charter of the Bank of the United States,having expired in 1836, the country was leftto depend for its currency on a multitude ofState banks which sprang up under numerousdifferent State laws, most of which containedeither no provisions or inadequate provisionsregarding capital, reserves, and supervision.Having experienced the difficulty of conduct-

ing the War of 1812 without the aid of a Federalbanking system, however, Congress, during theCivil War enacted the national bank act onFebruary 25, 1863, and revised it on June 3,1864. This time it did not undertake to createa single bank with branches throughout theUnion, but provided for the creation of numer-ous local banks each independent of the otherbut all operating under a single banking lawand under the supervision of the TreasuryDepartment of the United States Government.

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In the case of Farmers and Mechanics Na-tional Bank v. Dearing (1875), 91 U. S. 29, 23L. Ed. 197, the Supreme Court applied thedoctrines of its earlier decisions to nationalbanks organized under the national bank act of1864. The case involved the question whetherState usury laws were applicable to nationalbanks; and, in holding that they were not, thecourt said (p. 33):The constitutionality of the act of 1864 is not ques-

tioned. It rests on the same principle as the actcreating the second bank of the United States. Thereasoning of Secretary Hamilton and of this court inMcCulloch v. Maryland (4 Wheat. 316) and in Osbornv. Bank (9 Wheat. 738), therefore, applies. The nation-al banks organized under the act are instruments designedto be used to aid the Government in the administration ofan important branch of the public service. They aremeans appropriate to that end. Of the degree of the neces-sity which existed for creating them, Congress is the solejudge.

Being such means, brought into existence for thispurpose, and intended to be so employed, the Statescan exercise no control over them, nor in any wise affecttheir operation, except in so far as Congress may seeproper to permit. Anything beyond this is "an abuse,because it is the usurpation of power which a singleState can not give." Against the national will "theStates have no power, by taxation or otherwise, toretard, impede, burthen, or in any manner control theoperation of the constitutional laws enacted by Con-gress to carry into execution the powers vested in thegeneral Government." Osborn v. Bank, supra; Weston,and Others v. Charleston, 2 Pet. 466; Brown v. Mary-land, 12 Wheat. 419; Dobbins v. Erie County, 16 Pet.435.

The power to create carries with it the power to preserve.The latter is a corollary from the former. [Italicssupplied.

In Davis v. Elmira Savings Bank (1896), 161U. S. 275, 16 Sup. Ct. 502, the same questionarose in another form. The Legislature of theState of New York provided by law that asavings bank organized under the laws of thatState should have a preference as a depositorin other banks in case of the insolvency of thelatter, and it was sought to apply this provisionto the case of a deposit by a savings bank in anational bank which had b ubsequently becomeinsolvent. The Supreme Court of the UnitedStates held that such a provision of a State lawcould not apply to national banks, because itwas in conflict with that provision of thenational bank act which requires the assets ofan insolvent national bank to be distributedratably among its creditors. In so holding, thecourt said (p. 503):

National banks are instrumentalities of the FederalGovernment, created for a public purpose, and as suchnecessarily subject to the paramount authority of theUnited States. It follows that an attempt by a State todefine their duties or control the conduct of their affairs isabsolutely void, witrever such attempted exercise of author-ity expressly conflicts with the laws of the United States,

and either frustrates the purpose of the national legislationor impairs the efficiency of these agencies of the FederalGovernment to discharge the duties, for the performance ofwhich they were created. These principles are axiomatic,and are sanctioned by the repeated adjudications of thiscourt. [Italics supplied.]

In Easton v. Iowa (1903), 188 U. S. 220, 23Sup. Ct. 288, Easton, the president of anational bank was convicted in the State courtunder a State law making it a crime to receivedeposits while the bank was insolvent. Onappeal, the Supreme Court of the United Statesheld that the State law had no application to anational bank. In so holding, the court said(pp. 290, 293):* * * the Federal legislation creating and regu-

lating national banks * * * has in view the erectionof a system extending throughout the country, and inde-pendent, so far as powers conferred are concerned, ofState legislation which, if permitted to be applicable,might impose limitations and restrictions as various andas numerous as the States. Having due regard to thenational character and purposes of that system, we can notconcur in the suggestions that national banks, in respectto the powers conferred upon them, are to be viewed assolely organized and operated for private gain. Theprinciples enunciated in McCulloch v. Maryland, 4Wheat. 316, 425, and in Osborn v. United States Bank,9 Wheat. 738, though expressed in respect to banks incor-porated directly by acts of Congress, are yet applicable tothe later and present system of national banks.

Our conclusions, upon principle and authority, arethat Congress, having power to create a system ofnational banks, is the judge as to the extent of thepowers which should be conferred upon such banks, andhas the sole power to regulate and control the exerciseof their operations; * * * that it is not competent forState legislatures to interfere, whether with hostile orfriendly intentions, with national banks or their officersin the exercise of the powers bestowed upon them by thegeneral government. [Italics supplied.]

Having been denied the right to imposelimitations and restrictions upon nationalbanks, the States have granted increasinglyliberal powers to competing State banks and,in many instances, have subjected them tofewer restrictions and less effective regulationand supervision. This has led Congress tomodify the safeguards contained in the originalnational bank act, in order to enable nationalbanks to compete with State banks and thus topreserve the existence of the national bankingsystem. Such competition between the Fed-eral Government and the various States has ledto more and more laxity in bank regulation andsupervision.Moreover, when Congress has undertaken to

enact legislation designed to "provide for thesafer and more effective use of the assets ofnational banking associations" it has been toldthat the proposed legislation would make itdifficult for national banks to compete with


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State banks and would cause national banks toreorganize as State banks.Sincenot competent kr State legis-

latures to interfere * * * with nationalbanks or their officers in the exercise of thepowers bestowed upon them by the generalgovernment they can not do so indirectlyby granting State banks competitive advan-tages; and, if the competition of State banksinterferes with the safe and effective operationof national banks, Congress can put an end tosuch interference with the national purpose bypreventing State banks from competing withnational banks kr commercial banking bness.

First National Bank v. Lnion Trust Co.(1917), 244 U. S. 416, 37 Sup. Ct. 734, turnedupon the constitutionality of section 11 (k) ofthe Federal reserve act, which granthd tonational banks the right to act, in certaincircumstances, as trustees, executors andII ministrators. It was contended that, unlikethe business of banking, there was no naturalconnection or relationship between acting inthese capacities and carrying on the fiscaloperations of the Federal Government andthat, moreover, the legislation constituted adirect invasion of the sovereignty of the States,which control not only the devolution of theestates of deceased persons and the conduct ofprivate business within the States, but as wellthe creation of corporations and the qualifica-tions and duties of such as may engage in thebusiness of acting as trustees, executors andadministrators. The Supreme Court of theUnited States, however, took cognizance ofthe fact that Congress had authorized nationalbanks to act in these capacities M order toenable them to compete with State corpora-tions which were authorized to transact suchbusMess in connection with their bankingbusiness; and, therefore, the court sustainedI. constitutionality of the law.In rendering the opinion of the court on this

question, Chief Justice White reviewed theearlier decisions of the Supreme Court in thecases of McCulloch v. Maryland and Osborn v.Bank and said (p.

* * * what those cases established was thatalthough a business was of a privMe nature and sub-ject to State regulation, if it was of such a character asto cause it to be incidental to the successful dischargeby a bank chartered by Congress of its public functions,it was competent for Congress to give the bank theII wer th exercise such private business in cooperationwith or as part of its public authority. Manifestlythis excluded the power to the State in such case,although it might possess in a general sense authorityto regulate such business, to use that authority toprohibit such business from being united by Congress

with the banking function, since to do so would bebut the exertion of Stath authority IIIhibit Congressfrom exerting a power which, under the Constitution,it had a right to exercise. From this it must alsofollow that even although a business be of such acharacter that it is not inherently considered susceptibleof being included by Congress in the powers conferredon national banks, that rule would cease th apply if, byState law, State banking corporations, trust com-panies, or others which, by reason of their business, arerivals or quasi rivals of national banks are permitthdtI carry on such business. This mat be, since theState may not by legislation create a condition as to aparticular business which would bring about actual orpotential competition with the business of national banks,and at the same time deny the power of Congress to meetsuch created condition by legislation appropriate to avoidthe injury which otherwise would be suffered by thenational agency. [Italics supplied.]

Likewise, the States may not, by granting M-creasMgly liberal powers to State banks andtrust companies, create a competitive situationthat makes it impossible kr Congress to pre-serve the existence of the national bankingsystem without removing the safeguards neces-sary to makesafe and effective system andat the same time deny the right of Congress tomeet the situation by putting an end to suchcompetition.In the case of State of Missouri v. Duncan

(1924), 265 U. S. 17, 44 Sup. Ct. 427, theBurnes National Bank of St. Joseph, Mo., beingduly authorized to act as executhr by a permitissued by the Federal Reserve Board under theprovisions of section 11 (k) of the Federalreserve act, was named as executor by a citizenI f Missouri who died leavin.g a will. The bankapplied to the probate court kr letters testa-mentary but was denied appointment on thegrouIS that national banks were not permittedto act as executors under the laws of Missouri.Thereupon, the national bank applied to thesuI'll. court of the State for a writ of man-damus to require the judge of the probate courtto issue letters testamentary. The SupremeCourt of Missouri denied a writ of mandamusand an appeal was taken to the Supreme CourtI f the United States, which reversed the opinionof the State court and held that the probatecS urt had no right to deny the national bankletters testamentary.

After quoting the second paragraph of section11 (k) of the Federal reserve act, as anaended bythe act of Septhmber 26, 1918 (40 Stat. 967),the Supreme Court said, through Mr. JusticeHolmes (pp.* * * This says in a roundabout and polite butuIII. takable way that whMever may be the Statelaw, national banks having the permit of the FederalReserve Board naay act as executhrs if trust companiescI mpeting with thena have that power. The relathrhas the permit, competing trust companies can act as

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executors in Missouri, the importhnce of the powers tothe sustaining of competition in the banking businessis so well known and has been explained so fully here-thfore that it does not need to be emphasized, and thusthe naked question presented is whether Congress had thepower to do what it tried to do.

The States can not use their most characteristicIS''' to reach unconstitutionM results. WesternUnion Telegraph Co. v. Kansas, 216 U. S. 1. PullmanCo. v. Kansas, 216 U. S. 56. Western Union TelegraphCo. v. Foster,105, 114. There is nothingover which a State has more exclusive authority thanthe sdiction of its courts, but it can n a escape itscIS. titutional obligations by the device of denyingjurisdiction to courts otherwise competent. Kenneyv. Supreme Lodge of the World, 252 U. S. 411, 415.So here—the State can na lay hold of its general controlIf administration to deprive national banks of theirpovver th compete that Congress is authorized th sus-tain. [Italics supplied.]

Nor would it seem that the States, throughtI' exercise of their power to charter banks,can maMtain a situation which impairs theefficiency of the national banking system andthe Federal reserve system. The power tocreate these systems mcludes the power topreserve them; and Congress can eliminatethe ruinous compeon that now exists betweenthe national banking system and the 48 Statebanking systems if it finds it necessary to do asa means of preserving the efficacy of its owninstrumentalities.In Westfall v. United States

256, 47 Sup. Ct. 629, the defendant, who wasnot even an official of any member bank of theFederal reserve systhm, was indicted kr aidingand II I' a branch manager of a Statebank which was a member of the Federalreserve system to misapply the funds of thebank in violation of a provision of section 9 ofthe Federal reserve act. He attacked theconstitutionality of the Statute on the groundthat Congress had no power to punish offensesagainst the property rights of State banks andthat the statute is so broad that it covers suchI' enses when they would not result in any lossto the Federal reserve bank. The SupremeCourt of the United States, however, held thattI'- tatute was constitutional and said* * * And if a State bank chooses th come into thesysthm created by the United States, the Unithd Sththsmay punish acts injurious th the system, Mthoughdone th a corporation that the State Mso is entitled toprotect. The general proposition is tho plMn to needIII' than statement. That there is such a systemand that the reserve banks are interested in the sol-vency and financial condition of the members also istho obvious to require a repetition of the carefulanalysis presented by the Solicithr General. The onlysuggestion that may deserve a word is that thestatute applies indifferently whether there is a loss ththe reserve banks or not. But every fraud like the onebefore us weakens the member bank and therefore weakens

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the system. Moreover, when it is necessary in order toS revent an evil th make the law embrace more thanthe precise thing th be preventhd, it may do so. Itmay punish the forgery and utterance of spurious inter-stath bills of lading in order th protect the genuinecommerce. United States v. Ferger, 250 U. S. 199.See further Southern Ry. Co. v. United States,20, 26. ThM principle is settled. Finally Congressmay employ State corporations with their consent asinstrunaentMities of the Unithd States, C/a am Countyv. United States, 263 U. S. 321, and may make fraudsthat impair their efficiency crimes. United States v.Walter, 263 U. S. 15. [Itidics supplied.]

If Congress can go to that length in order toprotect the Federal reserve system from arelatively minor danger, it can relieve themember banks of that system of the competitionof nonmember banks kr commercial bankingbusiness, in order to protect the Federal re-serve system from the greater danger of havingthI' fficiency and safety of its operations im-paired by such competition. If, in order toaccomplish this object, it deems it appropriatetI restrict the transaction of a commercialbanking business to national banks, which arerequired to be members of the Federal reservesystem, Congress clearly has the right to do so.A brief review of the history of Federal

banking legislation will disclose that Congressalready has naade two attempts to create aunified banking system for the Unithd Statesand that, in the language of Mr. Justice HolmesiI State of Missouri v. Duncan, "The nakedS uestion presented is whether Congress has thepower to do what it tried to do."When it 'II 'I the national bank act,

Congress recognized that banking is a Matter ofnational public interest and attempted tocreate a unified banking system under Federalsupervision. As will be shown in more dethilhereinafter, the act of March 3, 1865, whichimposed a prohibitive tax on the circulatingnotes of State banks, was intended not only toprovide a uniform currency but also to compelState banks to convert into national banks. Itsucceeded M eliminating State bank currencyand almost succeeded in eliminating Statebanks; but the State banks overcame the handi-cap of not being able to issue currency andI ultiplied in number until, by 1910, theirnumI' r was almost twice that of national banks.By the enactment of the Federal reserve act

I f December 23, 1913, Congress made anotherattempt to create a unified banking system, byrequiring all national banks in the continentalUnited States to become members of the Federalreserve, system and inviting State banks to doso voluntarily. This object was recognized bythe Federal Reserve Board in a circular issuedII June 7, 1915, and published M the, FEDERAL


8

RESERVE BULLETIN for July, 1915, at page 145,wherein the board said:A unified banking system, embracing in its member-

ship the well-managed banks of the country, small andlarge, State and national, is the aim of the Federalreserve act. There can be but one American creditsystem of nation-wide extent, and it will fall short ofsatisfying the business judgment and expectation ofthe country and fail of attaining its full potentialitiesif it rests upon an incomplete foundation and leaves outof its membership any considerable part of the bankingstrength of the country.

When we entered the Great War, however,only 53 State banks with resources aggregating$756,000,000 had become members of theFederal reserve system; and, in order to induceadditional State banks to become members,so that the financial resources of the Nationmight be mobilized for the great struggle thenconfronting it, Congress made a number ofconcessions which materially diminished itsown control over State member banks of theFederal reserve system.By the act of June 21, 1917 (40 Stat. 232), it

eliminated the requirements of the originalFederal reserve act that State member banksmust comply with the loan limitations of thenational bank act and must be examined atleast twice a year by the Comptroller of theCurrency and provided that, subject to theprovisions of the Federal reserve act and theregulations of the Federal Reserve Board madepursuant thereto, such banks should retaintheir full charter and statutory rights as Statebanks or trust companies and might continueto exercise all corporate powers granted by theStates in which they were created.On October 13, 1917, the President of the

United States appealed to the State banks andtrust companies to become members of theFederal reserve system for patriotic purposes,saying that, "The extent to which our countrycan withstand the financial strains for whichwe must be prepared will depend very largelyupon the strength and staying power of theFederal reserve banks." (Ann. Rep. F. R.Board, 1917, p. 9.)

Notwithstanding these concessions by Con-gress and this appeal of President Wilson,however, there were only 936 State memberbanks with resources aggregating $7,338,813,000in the Federal reserve system on January 1,1919. Only 11 per cent of the State banks hadbecome members of the Federal reserve sys-tem, and these banks held only 54.5 per centof the resources of all State banks and trustcompanies in the country. (Ann. Rep. F. R.Board, 1918, pp. 26 and 27.)

Moreover, at the peak of State bank member-ship, which occurred on June 30, 1922, therewere only 1,648 State banks and trust com-panies which were members of the Federalreserve system out of a total of approximately20,000 State banks and trust companies in thecountry; and the member State banks andtrust companies held only 51 per cent of thetotal resources of all State banks and trustcompanies. (Ann. Rep. F. R. Board, 1922,p. 29; Ann. Rep. Comp. Cur., 1931, pp. 3, 5.)And on June 30, 1932, there were only 835State member banks and trust companies inthe Federal reserve system.Furthermore, the amendments of June 21,

1917, which were enacted in order to induceState banks to become members of the Federalreserve system voluntarily, had greatly weak-ened the control of the Federal Governmentover State member banks; the successiveamendments to the national bank act, whichwere intended to enable national banks to com-pete more effectively with State banks, hadmaterially lowered the standard previouslyset by the national bank act; the "bettersupervision of banking," which is one of themajor purposes of the Federal reserve act, hadbeen seriously impeded; and the 10 years 1921to 1931 witnessed numerous failures of Statemember banks and a larger number of failuresof national banks than had occurred previouslyin the entire history of the national bankingsystem from 1863 to 1921.Mr. Eugene Meyer, then managing director

of the War Finance Corporation, made thefollowing statement on January 31, 1923, intestifying before the Committee on Bankingand Currency of the House of Representatives(Hearings on S. 4280, 67th Cong., Pt. I, p. 56):

There are necessarily many difficulties involved inour dual system of banking. We have a State bankingsystem, a national banking system, and a Federalreserve system, the latter having a membership derivedfrom both the State and the national systems. TheState banking departments supervise the State banks,and the Comptroller of the Currency supervises thenational banks, while the Federal reserve system hasa supervision of its own for the member banks, andthere has been at times some disposition to competi-tion between the State and the national bankingsystems.The State banking laws frequently permit practices

which national banks can not legally engage in. Thisis creating competition between the two systems whichcan not be regarded as wholesome and may lead to thegradual weakening of both. * * * The competi-tion that exists at the present time between State andnational banks can not fail to remind one of the com-petition that prevailed a generation ago among thevarious States seeking to become domiciles for corpo-rations—a competition that was based upon the

9

laxity of the laws governing incorporation. Nothingcould be more disastrous than competition between theState and national banking groups, based upon competi-tion in laxity. [Italics supplied.]

In testifying before the Committee on Waysand Means of the House of Representatives onApril 27 and 28, 1932, in his capacity asgovernor of the Federal Reserve Board andchairman of the board of directors of theReconstruction Finance Corporation and in thelight of his experience as managing director ofthe War Finance Corporation, Mr. EugeneMeyer discussed this subject again. (Hearingsre payment of adjusted service certificates, 72dCong., 1st sess., pp. 631, 642, 643). Histestimony was, in part, as follows:

Personally I feel, as I stated to a subcommittee of theBanking and Currency Committee the other day, thatwe will never have a satisfactory banking system in theUnited States until banks of deposit, commercial banks,can be gathered under one chartering, supervising,and regulatory power. The constant competion be-tween State and national banking systems has resultedin a weakening of the laws and the safeguards of bothsystems which I think contributed in no small degreeto the excesses of the inflation period and to the suffer-ing of the deflation period. The minds of the com-mittees charged with banking and currency responsi-bilities are engaged in studying this problem.

I am entirely in favor of maintaining State rights tothe extent that they can properly be maintained. Butthere are various functions over which the FederalGovernment has had to assume jurisdiction. We havethe Postal Service and have had it since the beginning

•of the Government. As other activities becomenational and interstate on a greater scale, I feel thatwe must take account of these changed conditions.We must have elasticity in our conception of decentrali-zation and the advantage of local control when thereare vital changes in financial and economic conditions.

This subject was also discussed by Mr. OwenD. Young, deputy chairman of the FederalReserve Bank of New York, in his testimonybefore the subcommittee of the Senate Com-mittee on Banking and Currency on February.4, 1931. (Hearings pursuant to Senate Resolu-tion No. 71 of the 71st Cong., pp. 353 et seq.)He said:I want to say, first, Mr. Chairman, * * * that

all commercial deposit banking in the United Statesshould be carried on under one law, that examinationsof banks and their control should be under one authori-ty. Their reserves should be mobilized in the Federalreserve system. Then we could develop for the countryas a whole a sound banking system, and definitely fixresponsibility. That would mean that all banks ofdeposit, as distinguished from savings, should benati

banks are chartered both by thesonaitl s banks.w, s

National Government and by each of the 48 States.They are in competition, each endeavoring to offerthe most attractive charters and the most liberal laws,to say nothing of the liberality of administrative

officials in interpreting the laws. The national bankingact has to compete not only with the most conservativeStates but the most liberal ones. Consequently,there has been a constant tendency to liberalize bankinglaws and to weaken their administration. In suchcases the argument is always made that it is desirableto liberalize the law so as to enable the banks to be ofgreat service to borrowers.The first question always regarding banks doing a

demand deposit business should be the safety of thedeposits and the ability of the bank to return them todepositors instantly on request, unless they be timedeposits. No thought of service to borrowers shouldbe permitted to impair the safety and security of de-posits. Banks of deposit are, after all, primarily cus-todians of liquid funds. Only such use of such fundsshould be permitted as may be consistent with theinterests of the depositors.In the early years of our Government, our business

was largely done by currency moving from hand tohand. It was felt at that time, and properly so, thatwe should have a national and uniform currency.Consequently, Congress was given power to coin moneyand regulate the value thereof. This power was madeeffective as to paper money by the national bank act.Now our business is carried on mostly by transfers ofbank deposits, currency forming only a small part ofour money transfers. If control of our currency werenecessary in the beginning by the Federal Government,control of our bank deposits by it now would seem de-sirable. We have transferred, either affirmatively orby acquiescence, many powers to the Federal Govern-ment which ought not to be there. I am bitterly op-posed to the impairment of the rights of the States intheir appropriate field. It does seem strange, how-ever, that in the face of such gravitation toward Federalauthority, we should have retained divided rather thanunified power over our deposit banking system.Except for the currency in our pockets, our banks of

deposit hold the liquid capital of the people of theUnited States. The transfer of this capital from oneof us to another, promptly and safely, should be facili-tated. That means, however, that every bank of de-posit is truly engaged in a national business. Its sound-ness and safety is of concern to our people everywhere.Our business of deposit banks is not local in character;it is, and should be, national. Therefore, in my judg-ment, it should be governed by the national law.

I should hope, sir, that you might find a way to bringall State banks holding themselves out to do a nationalbusiness and carrying demand deposits into the Federalreserve system by compulsion.

Having failed to accomplish fully its purposesby creating the Federal reserve system andinviting State banks to become membersvoluntarily and by modifying the safeguardscontained in the national bank act and theFederal reserve act, in order to encourage theorganization of national banks and to induceState banks to become members of the Federalreserve system, Congress may resort to othermeasures. It can abandon inducement andresort to compulsion. In other words, it canprevent the transaction of a commercial bank-ing business except by national banks, whichmust be members of the Federal reserve system.


10

That Congress has the power to adopt thismeans to accomplish its great objects followsnecessarily from the fundamental principlesestablished by the Supreme Court of theUnited States in its decision in the case ofMcCulloch v. Maryland and the other casesdiscussed above; but there are also other rea-sons and additional authorities for this conclu-sion.

II. THE POWER TO PROVIDE A NATIONAL CUR-

RENCY

A separate and independent ground for theabove conclusion and an effective method ofbringing all commercial banking into the nation-al banking system sSund m the measuresadopted by Congress th provide a nationalcurrency for the Nation and in the decisions ofthe Supreme Court regarding the constitution-ality of such measures.By the act of March 3, 1865 (13 Stat. 484),

later reenacted as the Act of July 13, 1866(14 Stat. 146), Congress imposed a tax of 10 percent on the circulating notes of State bankspaid out by National or State banks. Theavowed pui.pose of this legislatkn was to createa uniform currency by driving the circulatingnotes of State banks out of existence and, ifnecessau, by driving all State banks inth thenational •:s is' system; and the SupremeCourt of the United States upheld its constitu-tknality. Veazie Bank v. Fenno (1869), 8Wall. 533,19 L. Ed. 482.How near this legislation carae to creating a

uned banking system is indicated by the factthat up th November 15,1864, there were only584 national banks with capital aggregating$81,961,450 and, by October 1,1865, there were1,566 natknal banks capitalized at $276,219,450.In 1862, prkr to the passage of the nationalbank act, there were .1:5 ks; inJuly, 1864, there were 467 natknal banks and1,089 State banks; in 1865, there were 1,294national banks and 349 State banks; in 1866,there were 1,634 national banks and 297 Statebanks; and by 1868, the number of State banksfell to 247, the lowest figure kr any time since1857. (Report, Natknal Monetary Commis-sion, vol. 5, pp. 22,103; Annual ''sort Comp

It is appropriate, therekre, to examine inthis ••• •5 not only the legal basis kr thedecision of the Supreme Court in the case ofVeazie Bank v. Fenno, but also the circum-stances giving rise to that opinion. While thesituatiSi then confronting Congress assumed adifferent krm, the problem of the Sixties and

the method of its solution fuimish a guide tothe method of dealing with the problem ofeffecting desirable reforms in our present bank-ing system.

In. his report to Congress dated November 28,1863, (p. 57) the Comptroller of the Currencysaid:* * * The idea that the national banks can not

supersede the State banks without breaking them downand ruining their stockholders is an erroneous one, andcan only be honestly entertained by those who havenot carefully considered the subject or noticed theprocess of conversion, which has changed some banksin the West, and is changing others in the East, fromone system to the other. No war is being waged, or isintended to be waged, by the national system uponState institutions. So far from it, it opens the way bywhich the interests of stockholders caails atthe same time that the character of their organizationsis changed.* * * The amount of losses which the peopde

have sustained by insolvent State banks, and by thehigh rate a exchanges—the result of a depreciatedcurrency—can hardly be estimated. That some of thenew States have prospered, notwithstanding the viciousand ruinous banking systems with which they havebeen scourged, is evidence of the greatness of theirresources and the energy of their people. The idea hasat last become quite general among the people that thewhS. system of State banking, as far as circulation isregarded, is unfitted for a commercial country like ours.The U0ed States is a nation as well as a union ofStates. Its vast railroad system extends from Maine0 Kansas, and will soon be extended to the PacificOman. Its immense trade is not circumscribed byState lines, is subject 0 State laws. Its internalcommerce is national, and so should be its currency.At present some 1,500 State banks furnish the peoplewith a 5:5. as circulation. This circulation is notconfined to the States by which it is authorized, but iscarried by trade or is forced by the banks all over theUnion. People receive it and pay it out, scarcelyknowing from whence it comes or in what manner it issecured. Banks have bmn organized in some Stateswith a view to lending their circulation to the people ofothers. Probably not one-quarter a the circulation ofthe New England banks is needed or used in NewEngland—the balance being practically loaned to otherStates. The national currency systena is intended tochange this state of things, not by a war upon the Statebanks, but by providing a means by which the circula-tion which is intended for national use shall be basedis national securities through associations organized

under a national law. [Italics supplied.]

In his report of November 25, 1864, (p. 54)the Comptroller of the Currency said:

As long as there was any uncertainty in regard to thesuccess of the national banking system, or the popularverdict upon its merits and security, I did not feel atliberty to recommend discriminating legislation againstthe State banks. It is for Congress 0 determine ifthere is any longer a reasonable uncertainty on thesepoints, and if the time has not arrived when all theseinstitutions should be compelled to retire their circula-tion. It is indispensable for the financial success ofthe Treasury that the currency of the country should beunder the mntrol of the Government. This can notbe the case as long as Stat,e institutions have the right

Ii

11

to flood the country with their issues. As a systemhas bmn devised under which Sthte batiks, or at leastas is of them as are needed, can be reorganized, sothat the Government can assurne a rightful controlover bank-note circulation, it could hardly be con-sidered oppressive if Congress should prohibit thefurther issue of bank notes not authorized by itself,and compel, by taxation, (which should be sufficient 0effect the object without being oppressive), the with-drawal of those which have been already issued. Myown opinion is, that this should be done, and that thesooner it is done the better it will be for the banksthemselves and for the public. As long as the twosystems are contending for the field, (although the resultSf the contest can be no longer doubtful), the GovernmentcS n not restrain the issue of paper money; and as thepreference which is everywhere given to a nationalcurrency over the notes of the State banks indicateswhat is the popular judgment in regard 0 the meritsof the two systems, there seems to be no good reasonwhy Congress should hesitate to relieve the Treasuryof a serious embarrassment, and the people of anunsatisfactory circulation. [Italics supplied.]

The circumstan.ces giving rise to the enact-ment of the act of March 3, 1865, and thepurposes sought to be accomplished therebywere graphically described by Senator Sher-man, Chairman of the Finance Committee,when he reported the bill to the Senate SiFebruary 27, 1865. His entire speech isworthy of careful study; but the knowingIS) tions will suffice. (Congressional Globe,38th Cong., 2d Sess., pp. 1138,1139.)The people of the Unithd States having definitely de-

termined to prosecute war, it only remained for Con-gress to provide the ways and means to carry it on

* * I still think that with parsimonious economyanS heavy taxes from the beginning, we might haveborrowed money enough on a specie basis to haveavoided a suspension of specie payments; but when itcame we were without a currency and without a systemof taxation. IS disappeared and was hoarded bybanks and individuals. It flovi-ed in a steady streamsail ountry. By the Sub-Treasury act we could

not use the irredeemable bills of State banks, and withthe terrible lessons of 1815 and 1837 staring us in theface, no one was bold enough to advise us to make as astandard of value the issues of 1,500 banks founded uponas many banking systems as there were States. Underthese circumstances we had but one resource.We had to borrow vast sums, and as a means to do it

we had to make a currency. This was done by theissue of United States notes. Subsequently, to unitethe interests of private capital with the security of theGovernment as a basis of banking, we established asystem of national banks, and upon this currency, as amedium for collecting taxes and borrowing money, havewaged a war unexampled in the grandeur of its opera-tions, and, as I trust, soon to be crowned with uncondi-tional su:cess.

A still naore important feature of this bill is the section to compel the withdrawal of State bank notes. Asthe volume of currency affects the price of 0 commodi-ties, I have no doubt the amount of such paper moneynow outstanding adds to the cost of our purchases850,000,000. The refusal of Congress, at the lastsession, to pass restrictive naeasures to compel its re-

demption has seriously affected the value of our cur-rency. The national banks were intended to supersedethe State banks. Both can not exist together; yet, whilethe national system is extending, the issues of Statebanks have not materially decreased. Indeed, manylocal banks have been converted into national banks,anS yet carefully keep out their State circulation.They exact interest from the people on this circulation,and yet avail themselves of the benefits of the new sys-tem. They transfer their capital to national banks,issue new circulatkm upon it, and yet studiously keepout the old. They issue two circulations upon thesame capital. It is far better at once to abandon thenational banking system than 0 leave it as a cloak foroutstanding State issues.

If the State banks have power enough in Congress toprolong their existence beyond the present year, wehad better suspend the oronization of national banks.As the first friend of this measure in the Senate, I wouldvote is: for its repeal rather than allow it to be theagency under which State banks can inflate our cur-rency. And the power of taxation can not be more wiselyexercised than in harmonizing and nationalizing andplacing on the secure basis of national credit all the moneySf the country. [Italics supplied.]

The various legislative steps leading up tothe passage of the act of July 13, 1866, werestated as follows in the opinion of the SupremeCourt in the case of Veazie Is v. Fenno byMr. Chief Justice Chase, who had been Secre-tary of the Treasury during the events related(8 Wall. 536-540):

At the beginning of the rebellion the circulating me-dium consisted almost entirely of bank notes issued bynumerous independent corporations variously organ-ized under State legislation, of various degrees of credit,and very unequal resources, administered often withgreat, and not unfrequently with little skill, prudenceanS integrity. The acts of Congress, then in force, pro-hibg the receipt or disbursement, in the transactionsof the National government, of anything except isanI. ilver, and the laws of the States requiring the re-demption of bank notes in coin on demand, preventedthe disappearance of gold and silver from circulation.There was, then, no national currency except Sithere was no general regulation of any other by nationallegislation; and no national taxation was imposed inany form on the State bank circulation.The first act authorizing the emission of notes by the

Treasury Department for circulation was that of July17, 1861. The naes issued under this act were treas-ury notes, payable on demand in coin. * * *On the 31st of December, 1861, the State banks

suspended specie payment. Until this time the ex-penses of the war had been paid in coin, or in the de-mand notes just referred 0; and, for some time after-wards, they continued to be paid in these noths, which,if not redeemed in coin, were received as coin in thepayment of duties.Subsequently, on the 25th of February, 1862, a new

policy became necessary in consequence of the suspen-sion and of the condition of the country, and wasadopted. The notes hitherto issued, as has just beenstated, were called Treasury noths, and Were payable ondemand in coin. The act now passed authorized theissue of bills for circulation under the name of UnitedStates notes, made payable 0 bearer, but not ex-pressed to be payable on demand,


12

This currency, issued directly by the Governmentfor the disbursement of the war and other expendi-tures, could not, obviously, be a proper object of taxa-tion.But on the 25th of February, 1863, the act authoriz-

ing national banking associations was passed, in which,for the first time during many years, Congress recog-nized the expediency and duty of imposing a tax uponcurrency. By this act a tax of 2 per cent annually wasimposed on the circulation of the associations author-ized by it. Soon after, by the act of March 3d, 1863, asimilar but lighter tax of 1 per cent annually was im-posed on the circulation of State banks, in certain pro-portions to their capital, and of 2 per cent on the excess;and the tax on the national associations was reduced tothe same rates.

At a later date, by the act d June 3d, 1864, whichwas substituted for the act a February 25th, 1863,authorizing national banking associations, the rate oftax on circulation was continued and applied to thewhole amount of it, and the shares a their stockholderswere also subjected to taxation by the States; and afew days afterwards, by the act a June 30, 1864, to pro-vide ways and means for the support a the Govern-ment, the tax on the circulation a the State banks wasalso continued at the same annual rate d 1 per cent asbefore, but payment was required in naonthly install-ments of one-twelfth of 1 per cent with monthly reportsfrona each State bank of the amount in circulation.

It can hardly IIIubted that the object of IIIo-on was to inkrm the proper authorities of the exact

amount of paper money M circulation, with a view to itsregulation by law.* * * The act just referred to was * * *

Mowed some naonths later by the act of March 3d,1865, amendatory to the prior internal revenue acts, thesixth section of which provides, "that every nationalbanking association, State bank or State banking associ-ation, shall pay a tax of io per centurn on the anaountof the notes a any State bank, or State banking associa-tion, paid out by them after the 1st day of July, 1866."The same provision was "18 'I with a more

extended application, on the 13th a July, 1866, in thesewords: " Every national banking association, Statebank, or State banking association, shall pay a tax of 10per centuna on the amount of notes of any person, Statebank, or State banking association used for circulatkn,and paid out by them after the first day of August, 1866,and such tax shall be assessed and paid in such rnanneras shall be prescribed by the Commissioner a InternalRevenue."The II' II; of this last proviskn i$ now

drawn in question, and this brief statement of therecent legislation of Congress has been made for thepurpose a placing in a clear light its scope and bearing,especially as developed in the provisions just cited.It will be seen that when the policy a thxing bankcirculation was first III 'I in 1863, Congress wasinclined 113scrirdnate for, rather than against, thecirculation of the State banks; but that when thecountry had been sufficiently furnished 5203 nationalcurrency by the issues of United States II 'I and ofnational bank notes, the discrimination was tumed,and very decidedly turned, in the opposite direction.

Let us consider the present problem in theligI t of past experien.ce: By the revenue actSf 1932, approved June 6, 1932, Congressrecently imposed a tax of 2 cents on each

check, without a: as any distinction betweenchecks drawn on State banks and those drawnon. national banks. Is there any reason whyCongress could not increase this tax to 10 percent of the amount of each check but exempttherefrom the checks drawn upon nationalbanks and Federal reserve banks, the in.stru-mentalities which it has created to aid theGovernment in the perkrmance of certain

as :0 functions?While there are other grounds kr holding

that Congress could do so, adequate groundsfor such a conclusion are contained in thereasons given by Mr. Chief Justice Chase krthe court's decision in the case of VeazieBank v. Fenno.

After disposing of the contentions that thetax was a direct tax and had not been appor-tioned among the States, as req.uired by theConstitution, and that the act imposing thetax impaired a franchise granted by the State,which it was urged Congress had no right toas he stated and disposed of the principalquestion as follows (8 Wall. 548-550):

It is insisted, however, that the tax in the case beforeus is excessive, and so excessive as to indicate a purposeon the part of Congress to destroy the franchise of thebank, and is, therefore, beyond the constitutionalIS''' r a Congress.The first answer to this is that the judicial can not

prescribe to the legislative departments of the Govern-ment limitations upon the exercise of its acknowledgedpowers. The power to tax may be exercised oppres-sively upon persons, but the responsibility of the legisla-ture is not th the courts, but to the people by whona itsII' mbers are elected. So if a particular tax bearsheavily upon a corporation, or a class of corporations,it can not, kr that reason only, be pronounced contraryto the Constitution.But there is another answer which vindicates equally

the wisdorn and the power of Congress.It can not be doubted that under the Constitution

the power IIIvide a circulation of cdn is given toCongress. And it is settled by the unikrm practiceof the Government and by repeated decisions, that Con-gress may I. 53 authorize the emission ofbills of credit. It is not ISIS 35 here th decidewhether the quality of legal tender in payment ofII., can be constitutionally impart'ed th these bills;it is enough to say, that there can be no question a theS ower of the Government to emit them- th make thernreceivable in payment a debts th itself; to fit themfor use by those who see fit th use them in all the trans-actions of commerce; IIIovide kr their redemption;th naake them a currency, uniform in value and descrip-tion, and convenient and useful kr circulation. Thesepowers, until recently, were only partially and occasion-ally exercised. Lately, however, they have been calledIS full activity, and Congress has I' 8._I thsupply a currency for the entire country.The methods adopted kr the supply of this currency

were briefly explained in the first part a this opinion.It now consists of coin, of United States ndes and ofthe notes of the national banks. Both descriPtions ofnotes 153y 1e properly described as bill21f credit, kr

13

both are furnished by the Government; both are issuedon the credit of the Government; and the I' II' isresponsible for the redemption of both; primarily as tothe first description, and IS 13 upon default ofthe bank, as th the second. When these bills shall bemade convertible into cdn, at the will of the hdder,this currency will, perhaps, satisfy the wants of thecommunity, in respect th a circulating medium, asI' rfectly as any mixed currency that can be devised.Having thus, in the exercise of undisputed constitu-

tional powers, undertaken to provide a currency for thewhole country, it can not be questioned that Congress may,constitutionally, secure the benefit of it to the people byappropriate legislation. To this end, Congress hasdenied the quality of legal tender to foreign coins, andhas provided by law against the imposition a counter-feit and base cdn on the community. To the sarne end,Congress may restrain by suitable enactments, thecirculation as money of' any notes not issued under itsown authority. Without this power, indeed, its at-tempts th secure a sound and uniform currency for thecountry must be futile.

Viewed in this light, as well as in the other light of aduty on contracts or property, we can na doubt theconstitutionality of the tax under consideration.[Italics supplied.]

Likewise, having undertaken to provide anelastic currency kr the country. by enactingthe Federal reserve act, which authorized theissuance of Federal reserve notes througli theFederal reserve banks, Congress may constitu-tionally securebenefit of that currency tothe people byappropriate legislation.Federal reserve notes are secured by the

assets of Federal reserve banks; and theFederal reserve banks depend largely upon theirmember banks to furnish the assets requiredkr this purpose. They derive all their capitalfrom subscriptions by member banks to theircapital stock and most of their deposits consistO f the legal reserves deposited with them bytheir member banks.In normal times, Federal reserve notes are

secured largely by eligible paper acquired bythe Federal reserve banks from their memberbanks, and, as pointed out by the FederalReserve Board in the circular quoted in partabove, the Federal reserve act contemplatedthe creation of 353nking system which wouldiI clude most, if not all, of the commercial banksin the country.

This result not having been accomplished bythe methods heretofore adopted, it Would seemclear that Congress has the is to enactappropriate legislation in order to preserve krthe Nation the full benefits of the flexible cur-rency which it undertook IIIovide by theenactment of the Federal reserve act. If itfinds that, in order to accomplish this purpose,it is necessary to prevent the transaction of acI mmercial banking business except by nationalbanks, which must be members of the Federal

reserve system, Congress may constitutionallyadopt this means and the courts will not inter-fere; because the degree of the necessity for theenactment of such legislation is a question oflegislative discretion, not of judicial cogni-zance. McCulloch v. Maryland.At one time it VatS contended that Congress

is not authorized 555ovide the people of theUnited States with a national currency, that theII' power of this general character granted toit was the as to coin money and regulatethe value thereof, and that this power is con-fined to matters pertaining to metallic money.Such an argument was answered, however,

iI the decision of the Supreme Court of theUnited States in the Legal Tender Cases (1871),12 Wall. 457, 20 L. Ed. 287, wherein theSupreme Court upheld the validity of certainacts of Congress making United States notesand Treasury notes legal tender kr the paymentof debts. In that case, the court, speakingthrough Mr. Justice Strong, said (544-546):

It is not easy to see why, if State bank notes can betaxed out of existence for the purposes of indirectlymaking United States notes more convenient and usefulfor commercial purposes, the same end may not besecured directly by making them a legal thnder.* * * The Constitution was intended 0 frame a

government as distinguished from a league or compact,I f,' rnment supreme in some particulars over States andpeople. It was designed 0 provide the same currency,having IS uniform legal value in all the States. It was forthis reason the power 0 coin money and regulate its valuewas conferred upon the Federal Government, while thesame power as well as the power to emit bills of credit waswithIS wn from the States. The States can no longer de-clare what shall be money, or regulate its value. What-ever power there is over the currency is vested in Congress.If the power to declare what is money is not in Conress,it is annihilated. * * * it naight be argued withnauch krce that when it is considered in what brief andcomprehensive terms the Constitution speaks, howsensible its framers must have been that emergenciesI ight arise when the precious metals (then more scarcethan now) might prove inadequate to the necessities ofthe Government and the demands of the people—whenit is remembered that paper rnoney was almost ex-clusively in use in the States as the medium a exchange,and when the great evil sought to be remeffled was thewant a unikrmity in the current value of money, itII' ht be argued, we say, that the gift of power to coinmS ney and regulate the value thereof, was understood asconveying general power over the currency, the powerwhich had belonged 0 the States, and which they sur-rendered. [Italics supplied.]

In a separate concurring opinion, Mr. JusticeBradley said (p. 562):

Another ground of the power to issue Treasury notesI r bills is the necessity of providing a proper currencykr the country, and especially of providing for thefS ilure or disappearance of the ordinary currency intiI.. a financial pressure and threatened collapse ofcommercial credit. Currency is a national necessity.The operations of the Government, as well as private trans-


14

S ctions, are wholly dependent upon it. The Stategovernments are prohibited from making money orissuing bills. Uniformity of money was one of theobjects of the Constitution. The coinage of money andregulatiS n of its value is conferred upon the GeneralGovernment exclusively. That Government has alsothe power th issue bills. It follows, as a matter ofS. cessity, as a consequence of these various provisions,that it is specially the duty of the General Governmentto provide a national currency. The States can not doexcept by the charter of local banks, and that remedy, ifstrictly legitimate and constitutional, is inadequate,fluctuating, uncertain, and insecure, and operates withall the partiality to local interests, which it was thevery object of the Constitution to avoid. But regardedas a duty of the General Government, it is strictly inaccordance with the spkit a the Constitution, as wellas in line with the national necessities. [Italicssupplied.)

The tax imposed by the act of July 13, 1866,accomplished the object of eliminating thecirculating notes of State banks and thus givingus a national currency of unikrm value; butit has not accomplished the object of eliminat-ing the competition of State banks and thuscreating a unified commercial banking system asa basis kr that currency.

Prior to the Civil War, banks derived most oftheir profits from the issuance of circulatingnI• s and relied to a much lesser extent thantI• y do now on deposits as a source of earningpower. In fact, the amount of their circulatingII' s frequently exceeded the amount of theirdeposits. (Rep. National Monetary Commis-sion, vol. 5, pp. 16, 27.) It was expected, there-kre, that the imposition of a prohibitive tax ontheir circulating notes would cause all Statebanks either to convert into national banks or togo out of business.A way was soon kund, however, to conduct a

profithble banking business without issuing culating notes. It was through the develop-ment of the use of checks in lieu of currency as aI'31 s of payment. This was convenient todepositors and profitable to the banks, since thelatter could enjoy the use of the money pendingits withdrawal and even while the checks werein process of collection; and the practice wasencouraged by national banks as well as Statebanks. Moreover, arrangements facilitatingthe easy flow of checks throughout the countrymaI'''II' cks so popular that it hasbeen estimated that, at the present time, morethI n 90 per cent of all payments are made bymeans of checks.Checks, therekre, have to a very large extent

tI ken the place of currency as a medium of pay-ment; and State banks, operating under lawsallowing a greater latitude and requiring lessrigorous supervision and regulation than thenational bank act, have grown in number until,

in the peak year of 1921, there were 20,349State banks (other than mutual savings banks)compared with 8,154 national banks and, in1931, there were 13,728 State banks comparedwitI 6,805 national banks. The reduction intI' number of banks of both classes resultedprincipally from failures and consolidations.(Ann. Rep. Compt. Currency, 1931, p. 3.)

Moreover, with the return of the predom-inance of. State banks, many of the disadvan-tages of a heterogeneous banking structurehave reappeared in another form; and checks,which have replaced currency as the principalI' dium of payment, frequently prove to be anineffective medium. Checks go unpaid becausethe banks upon which they were drawn havefailed. Balances against which depositorsexpected. to draw checks in settlement of theirS usiness transactions are unavailable kr thatpurpose, because the banks have closed theirdoors.Not only has the effective operation of the

national banking systhm and the Federal re-serve system" been seriously impaired by the"competition in laxity " of bank regulation andsupervision, described in the statements ofGovernor Meyer and Mr. Owen D. Youngquoted above, but the proportion of nationalbanks to the total number of commercial banksiO the country has fallen from 87 per cent in1868 to 33 per cent in 1931 and only 38 percent of all the commercial banks were membersof the Federal reserve system in 1931. A mate-rial portion of commercial banking business,

I erefore, is conducted outside of the Federalreserve system and contributes nothing to thebasis for our currency.The tax on circulating notes having become

S.; evea a result of the use of checks inlieu of currency, Congress has the right tobring the act of July 13, 1866, up to date bymaking the tax applicable to checks drawn onState banks.

III. THE POWER TO REGULATE AND PROTECT

INTERSTATE COMMERCE

Either one of the two grounds discusseda,bove is sufficient to sustain the conclusionherein reached; but there is still another sep-arate ground upon which the same conclusioncould be sustained independently. The rightto enact legislation to make banks more reliableinstrumentalities of interstate commerce isincluded in the power granted to Congress bysection 8 of article 1 of the Constitution, "Toregulate commerce with foreign nations, andamong the several States, and with the Indiantribes."

15

In a long series of decisions, this clause of theConstitution has been held 0 give CongresscII trol OVer all phases of 5' 8' commerce,as well as over all other raatters so connectedwith interstate commerce as to require Con-gressional control over them in order to makeeffective the control over such commerce itself.The rule of these decisions is that "commerce"OS' s not include merely the transfer of goods,O ut that the proper regulation of cOMMereemust include the regulation of all aspects ofcIII erce and of all instrumentalities uponwhich the carrying on of commerce depends.Moitdou v. New York, New Haven, awl Hart-ford R. R. Co., 223 U. S. 1, 32 Sup. Ct. 169.Since the transportation system of the countyis regarded as an essential instrumentality 0tS is end, it has, under the commerce clause,II subjected to Congressional regulation ona vast scale. Railroad cars not used in inter-state commerce, but which may be placed in thesame tram with those that are, must conformto the Federal safety appliance act. SouthernRailway Co. v. United Sides, 222 U. S. 20, 32Sup. Ct. 2. Intrastate freight rates are sub-jected to Federal regulation when they interferewith interstate rates. Railroad Commission ofWisconsin v. Chicago, B. & Q. R. R. Co., 257

563, 42 Sup. Ct. 232. The issuance offraudulent bills of lading is punishable under aFederal statute, even when they cover no inter-state 05 'I United States v. Ferger, 250

199, 39 Sup. Ct. .Ickyad although engaged in dealing locally in livestock,are subjected to Federal control, because theyare essential cogs in the machinery of interstatecommerce. Stafford v. Wallace, 258 U. S. 495,42 Sup. Ct. 397. The same is true of the prin-cipal grain markets. Board of Trade of City ofChicago v. Olsen, 262 U. S.Sup. Ct. 470.The decisions contain many other examples of asimilar nature.

Although the courts have held that the pow-ers of Congress under the commerce clauseextend to a great variety of matters related tocommerce--from the quality of radio broad-casting stations to the criminality of trafficiO certain articles—no judicial interpretationnor any extension of the literal terms of thatclause is necessary to make it include the veryessentials of commerce, i. e., the acts of trans-ferring the goods and of transmitting the con-sideration kr them. The one is as essentialas the other. A breakdown in the means ofpayment would be as disastrous as a break-down in the means of shipment, since virtuallyevery commercial transaction requires the

services of a commercial bank kr its consum-mation.That the power to regulate commerce among

the several States includes the power to removeobstructions and impediments to such com-merce and 0 regulate the instrumentalities aswell as the articles of that commerce sIS wellsettled by numerous decisions of the SupremeCourt to require argument. No attempt willbe made, therefore, to review the multitude ofdecision.s of the 053I ,3 regardina theextent of this important power. A few6lead-ing cases will suffice.The scope of the power of Congress over

iI terstate commerce was stated concisely bytI' Supreme Court in Monc/ou v. New York,

R. R Co.32 Sup. Ct. 169, wherein the court sustainedtI' validity of the Federal employees' liabilityact and reaffirmed the power of Congress todetermine the necessity kr, and to enact,uniform national legislation to replace thevariant State legislation governing the samesuS. ct (pp. 173, 174):The clauses in the Constitution (art.

clauses 3 and 18) which confer upon Congress the power"to regulate comnaerce * * * .IS the severalStates, and "th make all laws which shall be necessaryand proper" for the purpose, have been considered bythis court so often and in such varied connections thatsome propositions bearing upon the extent and natureof this power have come t50.1 firmly settled as nolonger to be open th dispute, among them being these:

1. The term "commerce" comprehends more thanthe mere exchange of goods. It embraces commercialintercourse in all its branches, including transportationof passengers and property by common carriers, whethercarried on by water or by land.

2. The phrase "among the several States" marks thedistinction, for the purpose of governmental regulation,S. tween commerce which concerns two or more Statesand commerce which is confined to a single State andIS'' na affect other Statese power to regulate theformer being conferred upon Congress and the regula-tion of the latter renaaining with the States severally.

3. " To regulate," in the sense intended, is to foster,protect, control, and restrain, with appropriate regard forthe welfare of those who are immediately concernedand of the public at large.•

4. This power over commerce among the States, so con-ferred upon Congress, is complete in itself, extends dentally to every instrument and agent by which suchcS mmerce is carried on, may be exerted to its utmostextent over every part of such commerce, and is subject tono limitations save such as are prescribed in the Con-stitution. But, of course, it does not extend to anymatter or thing which does not have a real or substan-tial relation to some part of such commerce. [Italicssupplied.]

That these considerations IS as much totI' instruments as to the agents of such com-merce, is shown by the brilliant passacre whichimmediately kllows in the opinion


16

As is well said in the brief prepared by the late Solic-itor General: "Interstate commerce—if not always, atany rate when the commerce is transportation—is anact. Congress, of course, can do anything which, inthe exercise by itself of a fair discretion, may be deemedappropriate to save the act of interstate commercefrom prevention or interruption, or to make that actmore secure, more reliable, or more efficient. The actof interstate commerce is done by the labor of men andwith the help of things; and these men and things arethe agents and instruments of the commerce. If theagents or instruments are destroyed while they aredoing the act, commerce is stopped; if the agents orinstruments are interrupted, commerce is interrupted;if the agents or instruments are not of the right kind orquality, commerce in consequence becomes slow orcostly or unsafe or otherwise inefficient; and if the con-ditions under which the agents or instruments do thework of commerce are wrong or disadvantageous, thosebad conditions may and often will prevent or interruptthe act of commerce or make it less expeditious, lessreliable, less economical, and less secure. Therefore,Congress may legislate about the agents and instruments ofinterstate commerce, and about the conditions under whichthose agents and instruments perform the work of inter-state commerce, whenever such legislation bears, or, in theexercise of a fair legislative discretion, can be deemed tobear, upon the reliability or promptness or economy orsecurity or utility of the interstate commerce act."[Italics supplied.]

If banks are destroyed, commerce is stopped;if banks are suspended, commerce is inter-rupted; if banks are not of the right kind orquality, "commerce in consequence becomesslow or costly or unsafe or otherwise ineffi-cient"; and if the laws, regulations, and super-vision under which banks perform theirfunctions are wrong or inadequate, "these badconditions may and often will prevent orinterrupt the act of commerce or make it lessexpeditious, less reliable, less economical, andless secure." Therefore, it would seem thatCongress may legislate about banks as agentsand instruments of interstate commerce andmay prescribe the conditions under which banksperform the work of finally consummatingtransactions in interstate commerce, "wheneversuch legislation bears, or, in the exercise of afair legislative discretion, can be deemed tobear, upon the reliability or promptness oreconomy or security or utility" of the act ofinterstate commerce.The fundamental incentive for interstate

commerce is profit; and no transaction in inter-state commerce is finally consummated untilpayment has been received for the goods whichhave been sold and shipped. In many in-stances, the very act of shipping goods ininterstate commerce is inseparably connectedwith the forwarding, through a series of banks,of bills of lading attached to bills of exchangewhich must be paid or accepted before the goodsare = released. The ultimate payment which

constitutes the object and the final act ofnearly every transaction in interstate commerceis made by means of a check drawn upon a bankin one State in favor of a payee in anotherState; and such checks are forwarded for col-lection through a series of banks scattered overat least two, and frequently more, differentStates. Banks, therefore, are essential instru-mentalities of interstate commerce.Nearly every bank failure delays or prevents

the final consummation of numerous transac-tions in interstate commerce by preventing ordelaying the payment of the checks given insettlement therefor; and Congress clearly wouldbe justified in finding that a heterogeneousbanking system in which there have been morethan 10,000 suspensions involving depositsamounting to nearly $5,000,000,000 since 1920,is a burden upon and an obstruction to inter-state commerce.

Since "Congress * * * can do any-thing which, in the exercise by itself of a fairdiscretion, may be deemed appropriate to savethe act of interstate commerce from preventionor interruption, or to make the act more secure,more reliable, or more efficient," it would seemclear that Congress can create a unified bankingsystem in order to remove such an obstructionand burden to interstate commerce.In Houston, etc. R. Co. v. United States

(1914), 234 U. S. 342, 34 Sup. Ct. 833, whereinthe Supreme Court sustained the validity of anact of Congress regulating purely intrastatefreight rates when such rates were found by theInterstate Commerce Commission to interferewith interstate rates, the court said (p. 836) :It is unnecessary to repeat what has frequently been

said by this court with respect to tho complete andparamount character of the power confided to Congressto regulate commerce among the several States. It isof the essence of this power that, where it

exists, it domi-

nates. Interstate trade was not left to be destroyed orimpeded by the rivalries of local government. The pur-pose was to make impossible the recurrence of the evilswhich had overwhelmed the Confederation, and to pro-vide the necessary basis of national unity by insuring"uniformity of regulation against conflicting and dis-criminating state legislation. By virtue of the compre-hensive terms of the grant, the authority of Congress is at alltimes adequate to meet the varying exigencies that arise;and to protect the national interest by securing the freedomof interstate commercial intercourse from local control.[Italics supplied.]

It has been recognized that one of the princi-pal reasons for subjecting interstate commerceand matters related to it to national rather thanlocal regulation is the fact that interstate com-merce "is of national importance, and admits andrequires uniformity of regulation." Walton v.Missouri (1876), 91 U. S. 275.

17

In Mondou v. New York, N. H. & H. R. Co.,supra, the court said, (p. 175) :We are not unmindful that that end was being

measurably attained through the remedial legislationof the several states, but that legislation has been far fromuniform, and it undoubtedly rested with Congress todetermine whether a national law, operating uniformlyin all the States, upon all carriers by railroad engaged ininterstate commerce, would better subserve the needs ofthat commerce. [Italics supplied.]

Obviously the same principle applies tobanks or a banking system which Congress hascreated. See Easton v. Iowa, supra, whereinthe court said that the national bank legislation"has in view the erection of a system extendingthroughout the country, and independent so faras powers conferred are concerned, of Statelegislation which, if permitted to be applicablemight impose limitations and restrictions asvarious and as numerous as the States."It is not only within the power of Congress,

therefore, to create a unified banking systemin order. to remove existing impediments andobstructions to interstate commerce resultingfrom the existence of 48 different State bankingsystems, but it is also right, meet, and properfor Congress to do so, since the object is anational one which can be dealt with effectivelyonly by the national legislature.

This conclusion is not based upon the theorythat the banking business is itself commerce,but upon the fact that banks are instrumentali-ties of interstate commerce and that an un-sound and unsatisfactory banking system is aburden upon and an impediment to interstatecommerce.

If, therefore, Congress decides to solve thisproblem through the exercise of its powers overinterstate commerce and as a means to remov-ing an obstruction to interstate commerce, itneed not confine the legislation to transactionsof an interstate character, but may legislatefor the banking system as a whole; since everycommercial .bank actually functions as aninstrumentality of interstate commerce andevery failure of a commercial bank obstructsand impedes. the consummation of numeroustransactions in interstate commerce.The effective regulation of interstate com-

merce requires the regulation of some matterswhich in and of themselves are not interstatecommerce, but which have a direct relation-ship to such commerce. In other words, if thetransaction which is of itself purely intrastate isa vital part of interstate commerce, the regula-tion of that transaction may be undertaken byCongress under the commerce clause.

In Stafford v. Wallace (1922), 258 U. S. 495,42 Sup. Ct. 397, the court considered thevalidity of an act of Congress which, amongother things, provided for Federal supervisionand control of stockyards. The court foundthat, although many of their transactions arepurely local, the business of the packers and ofthe stockyards is an integral and essential partof the interstate commerce in livestock andmeat, and accordingly held the statute to be avalid exercise of the power conferred onCongress by the commerce clause.In rendering the opinion of the court, Mr.

Chief Justice Taft said (pp. 517, 521):* * * The only question here is whether the

business done in the stockyards, between the receiptof the livestock in the yards and the shipment of themtherefrom, is a part of interstate commerce, or is soassociated with it as to bring it within the power ofnational regulation. A similar question has beenbefore this court and had great consideration inSwift v. United States, 196 U. S. 375, 25 Sup. Ct. 276,49 L. Ed. 518. The judgment in that case gives aclear and comprehensive exposition, which leaves tous in this case little but the obvious application of theprinciples there declared.

* * * Whatever amounts to more or less constantpractice, and threatens to obstruct or unduly to burden thefreedom of interstate commerce is within the regulatorypower of Congress under the commerce clause, and it isprimarily for Congress to consider and decide the fact ofthe danger and meet it. This court will certainly notsubstitute its judgment for that of Congress in such amatter unless the relation of the subject to interstatecommerce and its effect upon it are clearly nonexistent.[Italics supplied.]

Two cases dealing with Congressional legis-lation regarding grain futures markets have animportant bearing not only upon the right ofCongress to regulate the commercial bankingbusiness in order to prevent an obstruction tointerstate commerce but also upon the propermethod of preparing such legislation.In the first of these cases, Hill v. Wallace

(1922), 259 U. S. 44, 42 Sup. Ct. 453, an act ofCongress designed to regulate the conductof business of boards of trade through theexercise of the power of taxation was held tobe unconstitutional. In Board of Trade v.Olsen (1923), 262 U. S. 1, 43 Sup. Ct. 470,however, the court upheld the validity of astatute having the same object, on the groundthat it was intended to remove an obstructionor interference with interstate commerce in theform of price manipulation and control in thesemarkets.

Unlike the statute held unconstitutional inHill v. Wallace, the statute which was sustainedas constitutional in Board of Trade v. Olsen


18

clearly stated its relation to interstate com-merce. It contained a recital and finding ofthe facts disclosed in the hearings and commit-tee reports, to the effect that transactions ingrain involving sales for future delivery ascommonly conducted on boards of trade areaffected with a national public interest andthat they are susceptible of speculation, manip-ulation and control resulting in fluctuations inprices which constitute an obstruction to anda burden upon interstate commerce in grain.With certain exceptions, the act forbade

boards of trade to use the mails or interstatetelephone, telegraphic, wireless, or other com-munication in offering or accepting sales ofgrain for future delivery or to disseminateprices or quotations thereof, unless such boardsof trade are located at terminal markets whichhave been designated by the Secretary ofAgriculture as contract markets, comply withcertain regulations and restrictions containedin the act, and submit to the supervision of theSecretary of Agriculture.In rendering the opinion of the court sus-

taming the constitutionality of the act, Mr.Chief ''Justice Taft said (262 U. S. 31-41, 43Sup. Ct. 475-479):

Appellants contend that the decision of this courtin Hill v. Wallace, 259 U. S. 44, is conclusive againstthe-constitutionality of the Grain Futures Act. Indeedin their bill they pleaded the judgment in that case asres judicata in this, as to its invalidity. The act whoseconstitutionality was in question in Hill v. Wallace wasthe Future Trading Act (c. 86, 42 Stat. 187). It wasan effort by Congress, through taxing at a prohibitiverate sales of grain for future delivery, to regulate suchsales on boards of trade by exempting them from thetax if they would comply with the congressional regu-lations. It was held that sales for future delivery wherethe parties were present in Chicago, to be settled byoffsetting purchases or by delivery, to take place there,were not interstate commerce and that Congress couldnot use its taxing power in this indirect way to regulatebusiness not within Federal control.

The Grain Futures Act which is now before us differsfrom the Future Trading Act in having the very featuresthe absence of which we held in the somewhat care-fully framed language of the foregoing prevented oursustaining the Future Trading Act. As we have seen inthe statement of the case, the act only purports toregulate interstate commerce and sales of grain forfuture delivery on boards of trade because it finds thatby manipulation they have become a constantly recurringburden and obstruction to that commerce. Instead, there-fore, of being an authority against the validity of theGrain Futures Act, it is an authority in its favor.

It is impossible to distinguish the case at bar, so faras it concerns the cash grain, the sales to arrive, andthe grain actually delivered in fulfillment of futurecontracts, from the current of stock shipments declaredto be interstate commerce in Stafford v. Wallace, 258U. S. 495, 42 Sup. Ct. 397, 66 L. Ed. 735. That case

presented the question whether sales and purchases ofcattle made in Chicago at the stockyards by commissionmen and dealers and traders under the rules of thestockyards corporation could be brought by Congressunder the supervision of the secretary of Agriculture toprevent abuses of the commission men and dealers inexorbitant charges and other ways, and in their rela-tions with packers prone to monopolize trade anddepress and increase prices thereby. It was held thatthis could be done, even though the sales and purchasesby commission men and by dealers were in and of them-selves intrastate commerce, the parties to sales and pur-chases and the cattle all being at the time within the cityof Chicago.

This case was but the necessary consequence of theconclusions reached in the case of Swift & Co. v. UnitedStates, 196 U. S. 375, 25 Sup. Ct. 276, 49 L. Ed. 518.That case was a milestone in the interpretation of thecommerce clause of the Constitution. It recognizedthe great changes and development in the business ofthis vast country and drew again the dividing linebetween interstate and intrastate commerce where theConstitution intended it to be. It rejused to permitlocal incidents oj great interstate movement, which takenalone were intrastate, to characterize the movement assuch. The Swift Case merely fitted the commerceclause to the real and practical essence of modernbusiness growth. It applies to the case before us justas it did in Stafford v. Wallace.

*In the act we are considering, Congress has expressly

declared that transactions and prices of grain in deal-ing in futures are susceptible to speculation, manipula-tion, and control which are detrimental to the producerand consumer and persons handling grain in interstatecommerce and render regulation imperative for theprotection of such commerce and the national publicinterest therein.

It is clear from the citations, in the statement of thecase, of evidence before committees of investigation asto manipulations of the futures market and their effect,that we would be unwarranted in rejecting the finding ofCongress as unreasonable, and that in our inquiry as tothe validity of this legislation we must accept the view thatsuch manipulation does work to the detriment of pro-ducers, consumers, shippers and legitimate dealers ininterstate commerce in grain and that it is a real abuse.

* * * The question of price dominates tradebetween the States. Sales of an article which affectthe country-wide price of the article directly affect thecountry-wide commerce in it. By reason and author-ity, therefore, in determining the validity of this act,we are prevented from questioning the conclusion ofCongress that manipulation of the market for futureson the Chicago Board of Trade may, and from time totime does, directly burden and obstruct commercebetween the States in grain, and that it recurs and isa constantly possible danger. For this reason, Con-gress has the power to provide the appropriate meansadopted in this act by which this abuse may be restrain-ed and avoided. [Italics supplied.]

Likewise, if Congress finds that our presentbanking system, which has given rise to morethan 10,000 bank failures since 1920, whichnecessarily have delayed and obstructed theconsummation of innumerable transactionsin interstate commerce, is a burden upon and

19

obstruction to interstate commerce, the Su-preme Court would not be warranted in reject-ing the finding of Congress as unreasonable orin concluding that legislation designed to correctthis situation and remove such an obstructionto interstate commerce is not a proper exerciseof the power to regulate commerce among theStates.

If the purchase and sale of cattle by commis-sion men, dealers and traders at the Chicagostock yards, and the sale of grain for futuredelivery on the Chicago Board of Trade andthe dissemination of prices and quotationsthereof, can be brought by Congress under thesupervision of the Federal Government, on theground that abuses in such business constituteobstructions to interstate commerce, it seemsclear that the transaction of a commercialbanking business, involving the payment ofchecks given in settlement of transactions ininterstate commerce and the handling ofinnumerable bills of exchange secured by billsof lading growing out of transactions in inter-state commerce, can also be brought under thesupervision of the Federal Government.Such cases as Hammer v. Dagenhart (1918),

247 U. S. 251, 38 Sup. Ct. 529, and Bailey v.Drexel Furniture Co. (1922), 259 U. S. 20,42 Sup. Ct. 449, need not be distinguished indetail; because they relate to Federal legisla-tion wherein Congress attempted to deal withpurely local questions having no essentialconnection with interstate commerce; whereascommercial banking is a matter of nationalrather than local concern and is essentiallyconnected with, and inextricably related to,interstate commerce.

Federal legislation to relieve interstate com-merce of the impediments and obstructionsresulting from a heterogeneous and inefficientbanking structure would not constitute aninvasion of the rights of the States; because itwould relate to a subject which the fathers ofthe Constitution clearly intended to intrustto the National Government, in order that wemight have a Nation and not a mere confedera-tion of States and in order that the free flowof commerce between the different parts of theNation might not be impeded by State legisla-tion.The importance of banking as an indispensa-

ble aid to commerce has already been recog-nized by the Supreme Court of the United Statesin the case of Noble State Bank v. Haskell(1911), 219 U. S. 104, 31 Sup. Ct. 186, whereinthe court said, through Mr. Justice Holmes(p. 188):

* * * Among matters of that sort probably fewwould doubt that both usage and preponderant opiniongive their sanction to enforcing the primary conditions ofsuccessful commerce. One of those conditions at the pres-ent time is the possibility of payment by checks drawnagainst bank deposits, to such an extent do checks replacecurrency in daily business. * * * Even the pri-mary object * * * is not a private benefit,* * * but it is to make the currency of checks secureand by the same stroke to make safe the almost compulsoryresort of depositors to banks as the only available meansfor keeping money on hand. * * * [Italics sup-plied.]

It is appropriate and in accordance with thefundamental principles of our Government forCongress to undertake the task of making "thecurrency of checks secure"; because it is essen-tial to the free and unhampered flow of com-merce between the States, the regulation ofwhich is intrusted to Congress alone by theConstitution.

If Congress should decide that more effectiveregulation and supervision of the commercialbanking business is desirable in order to makethe currency of checks secure, it is peculiarlyfitting and proper that Congress should under-take to provide that remedy; because the prob-lem is not a local one but relates directly tomatters of national concern which are expresslyintrusted to Congress by the Constitution.In the case of United States v. Ferger (1919),

250 U. S. 199, the Supreme Court of theUnited States sustained the constitutionalityof section 41 of the act of August 29, 1916 (39Stat. 538), which provides for the punishmentof any person who forges or counterfeits a billof lading, even though that section applies tocases where no shipment from one State toanother is made or intended. The court heldthat, in order to protect and sustain interstatecommerce, Congress may prohibit and punishthe forgery and utterance of bills of lading forfictitious shipments in interstate commerce.In delivering the opinion of the court, Mr.

Chief Justice White said (250 U. S. 203-205):* * * Thus both in the pleadings and in the con-

tention as summarized by the court below it is insistedthat, as there was and could be no commerce in a fraud-ulent and fictitious bill of lading, therefore the powerof Congress to regulate commerce could not embracesuch pretended bill. But this mistakenly assumes thatthe power of Congress is to be necessarily tested by theintrinsic existence of commerce in the particular subjectdealt with, instead of by the relation of that subject tocommerce and its effect upon it. We say mistakenlyassumes, because we think it clear that if the proposi-tion were sustained it would destroy the power of Con-gress to regulate, as obviously that power, if it is toexist, must include the authority to deal with obstructionsto interstate commerce (/n re Debs, 158 U. S. 564) andwith a host of other acts which, because of their relation toand influence upon interstate commerce, come within the


20

power of Congress to regu/ate, although they are not inter-state commerce in and of themselves. It WOUld be super-fluous 0 refer 0 the authorities which from the founda-tion of the Government have measured the exertion byCongress of its power 0 regulate commerce by the pciple just stated, since the doctrine is elementary andis but an expression of the text of the Constitution.Art. I, sec. 8, clause 18. A case dealing with a some-what different exercise of power, but affording a good illus-tration of the application of the principle to the subject inhand, is First National Bank v. Union Trust Co., 244

* * * That, as instrumentalities of interstatecommerce, bills of lading are the efficient means of creditresorted to for the purpose of securing and fructifying theflow of a vast volume of interstate commerce upon whichthe commercial intercourse of the country, both domesticand foreign, largely depends,matter of commonknowledge as to the course of busine,ss of which we maytake judal notice. Indeed, that such bills of ladingand the faith and credit given 0 their genuineness andthe value they represent are the producing and sus-taining causes of the enormous number of transactionsin domestic and foreign exchange, is also so certain andwell known that xve may notice it without proof.With this situation in mind the question therefore is,

Was the court below right in holding that Congress hadno power to prohibit and punish the fraudulent makingof spurious interstate bills a lading as a means of pro-tecting and sustaining the vast volume of interstatecommerce operating and moving in reliance upongenuine bills? To state the question is 0 manifest theerror which the court committed. * * * It pro-ceeds further, as we have already shown, upon theerroneous theory that the credit and conMence whichsustains interstate commerce would not be impaired orweakened by the unrestrained right to fabricate and circulatespurious bills of lading apparently concerning suchcommerce. Nor is the situation helped by saying thatas the manufacture and use a the spurious interstatecommerce bills of lading were local, therefore the powerto deal with them was exclusively local, since the prop-osition disregards the fact that the spurious bills werein the form of interstate commerce bills which in and ofthemselves involved the potentiality of fraud as farreaching and all embracing as the flow of the channelsof inthrstath commerce in which it was contemplatedthe fraudulent bills would circulate. As the power toregu/ate the instrumentality was coextensive with inter-state commerce, so it rnustthe authority 0 regulateis not 0 be denied, that the right 0 exert such au-thority for the purpose of guarding against the injurywhich WOUld result frona the making and use of spuriousimitations of the instrumentality must be equallyextensive. [Italics supplied.]

The reference to the court's decision in thecase of First National Bank v. Union Trust Co.,which appears at the end of the first paragraphquoted from the opinion in the Ferger Case, issignificant; because that is the case discussedelsewI. re m this opinion, wherein the SupremeCourt upheld the right of Congress to granttrust powers to national banks in order to enablethem to compete with State banks and trustcompanies. While that case dealt with asomewhat different exercise of power, the

Supreme Court recognized that it afforded agood illustration of the application of theprinciple to the subject dealt with in the FergerCase. Conversely, it would seem that the courtwould not hesitate to apply the principle under-lying its decision in the Ferger Case to thesubject of banking.

If bills of lading are instrumentalities of in-terstate commerce, so are checks and the banksupon which they are drawn, and if Congress hasthe right Illhibit and 555mish the fraudu-lent maldng of spurious bills of lading in order0 protect and sustain the vast volume of inter-state commerce operating and moving in reli-ance upon genuffie bills, then Congress musthave the right to enact legislation to safeguardthe use of checks in order to protect and sus-tain the vast volume of interstate commercewhich is consummated by payments made bymeans of checks. Since the safe use of checksdepends primarily upon the solvency of thebanks upon which they are drawn, Congressmust have the right to enact legislation to pro-mote the safer and more effective operation ofcommercial banks.Nor is Congress prevented from exercising

this power by the fact that part of the businessof commercial banks is purely local in charac-ter; but the power to regulate interstate com-merce "must include the authority to deal withobstructions to interstate commerce * * *and with a host of other acts which, because oftI. ir relation to and influence upon interstatecommerce, come within the power of Congressto regulate, although they are not interstatecommerce in and of themselves."

If Congress in its wisdom should find thatour heterogeneous banking structure, whichhas given rise to more than 10,000 bank fail-ures in the last 12 years, constitutes a burdenupon or an obstruction 0 interstate commerce,therefore, there can be no doubt that Congresshas the constitutional is to correct the situ-ation by bringing all commercial banking bness into a smgle system subject 0 effectiveregulation and supervon by the Federal Gov-ernment, to the end that the currency of checksupon which practically every transaction in in-terstate commerce depends for its consumma-tion may be made more secure.

IV. METHODS WHICH COULD BE ADOPTED

Having the power to enact such legislation,Congress could exercise the power in any man-ner which it deems appropriate and adequatefor this purpose. It is not necessary that thelegislation assume the form of a revenue act

21

or an act to regulate interstate commerce,though either of these means would be appro-priate. In the light of the decisions of theSupreme Court of the Uthted States in Staffordv. Wallace, and Board of Trade of Chicago v.Olsen, as'''r t wouM be desirable for suchlegislation to contain findings of fact and a re-cital of the national objects to be attained, asdid the grain futures act.Among the constitutional means which Con-

gress could adopt in order to accomplish theseobjects or to aid in their accomplishment arethe following:(1) It could forbid the receipt of deposits

subject to withdrawal by check by any indi-vidual, partnership, or corporation other thana bank organized under the laws of the UnitedStates and provide suitable penalties for viola-tions of this prohibition.(2) It could iinpose a prohibitive tax on all

checks and similar documents drawn on, orpayable at, banks not organized under the lawsof the United States.(3) It could forbid any officer of the United

States or any Federal reserve bank, nationalbank, Federal land bank, joint stock land bank,Federal intermediate credit bank, or Federalhome loan bank to receive in payment, on de-posit, for the puiposes of exchange or collection,or for any other purpose, any check drawnupon any bank not organized under the lawsof the United States.(4) It could forbid any bank organized under

the laws of the United States to make loans orextend credit to, or deposit any of its funds in,or permit the use of any of its facilities by, anycommercial bank not organized under such laws.(5) It could forbid the deposit of public funds

of the United States in any bank not organizedunder the laws of the Uthted States.(6) It could exempt all national banks from

taxation, State or Federal, except taxes on realestate.In order to be completely effective, the legis-

lation couM combine several of the measuressuggested above. Thus, a comprehensive bill onthis subject raight include the following:(1) A sac a' of facts by the Congress (on the

basis of evidence already obtained pursuant toSenate Resolution No. 71 and other evidencewhich may be produced) to the effect that, inorder (a) to provide for the safe and raore ef-fective operation of the national banking sys-tem and the Federal reserve system, (b) topreserve for the people the full benefits of thecurrency provided for by the Congress, and (c)

I'e interstate commerce of the burdensan obstructions resulting from the existingsituation, it is necessary to restrict the businessof receiving deposits subject to withdrawal bycheck to national banks and thereby to subjectall commercial banldng business to nationalregulation and supervon;(2) A prohibition against the receipt of de-

posits subject to withdrawal by check exceptby banks organized under the laws of theUnited States;(3) A prohibition against any officer of the

United States or any bank organized under thelaws of the United States receiving in pay-ment, on deposit, for exchange or collection, orfor any other purpose, any check drawn uponany bank not organized under such laws;(4) A prohibition against any bank organized

under the laws of the United States maldngloans or extending credit to, depositing any ofits funds in, or permitting the use of any of itsfacilities by, any commercial banking institu-tion not organized under such laws;(5) A provision imposing a prohibitive tax on

all checks or substitutes therefor drawn upon orpayable at any bank not organized under thelaws of the United States; and(6) A provision prescribing suitable penalties

for violations of the above provisions.If such legislation is enacted, its effective

date necessarily would have to be postponedd for

a sufficient length of time to avoid too sudenand revolutionary a change in our existingfinancial structure and to allow time for existingState banks to adjust themselves to the situa-tion, by converting into national banks ordiscontinuing the transaction of commercialbanking business.The time intervening between the enact-

ment of such legislation and the date when itbecomes effective could be devoted to the prepa-ration and enactment of additional legislationfor the purpose of providing further for themore effective operation, regulation, and super-vision of the national banking system a,nd theFederal reserve system, by repealing undesirableamendments to the national bank act andFederal reserve act which grew out of thecompetition in laxity, equipping the supervisoryauthorities with adequate powers to enable themto peform their functions more effectively, andadopting such other measures as might bedeemed appropriate.

Respectfully,

0

WALTER WYATT,Gineral Counsel.

WASHINGTON, D. C., December 5, 1982.


juff's VPINGgo

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This document is protected by copyright and has been removed.

Author(s):

Article Title: Bank Legislation Ahead – Glass Bill and Governor Meyer’s Plan Present Interesting Possibilities

Journal Title: United States Investor

Volume Number: XLIII Issue Number: 47

Date: November 19, 1932

Page Numbers: 1-4



Author(s):

Article Title: The American Banking System

Journal Title: New York Herald Tribune

Volume Number: Issue Number:


Page Numbers:



Author(s):

Article Title: Forty-Nine Banking Systems

Journal Title: Hartford (Conn.) Courant



Page Numbers:



Author(s):

Article Title: American Banking Reform

Journal Title: Asheville (N. C.) Citizen



Page Numbers:



Author(s):

Article Title: Need of the Nations is a Sound Banking Plan

Journal Title: Philadelphia Eve Public Ledger


Date: March 14, 1933

Page Numbers:



Author(s):

Article Title: Federal Control Desirable

Journal Title: Morgantown (W.Va.) Post



Page Numbers:



Author(s):

Article Title: Federal Banking Control and the Constitution

Journal Title: St. Louis Post-Dispatch



Page Numbers:



Author(s):

Article Title: Centralized Banking

Journal Title: New Haven (Conn.) Jl-Courier-Times


Date: April 3, 1933

Page Numbers:



Author(s):

Article Title: Second Crack at Jackson

Journal Title: Stockton (Cal.) Independent



Page Numbers:



Author(s):

Article Title: Toward Unified Banking

Journal Title: The New Republic


Date: April 19, 1933

Page Numbers: 269



Author(s):

Article Title: A Unified Bank System

Journal Title: Washington Post



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Author(s):

Article Title: One System

Journal Title: Auburn (N.Y.) Citizen Advertiser



Page Numbers:



Author(s):

Article Title: A Unified Banking System

Journal Title: Boston Christian Science Monitor



Page Numbers:



Author(s):

Article Title: Our Dual Banking System

Journal Title: Stamford (Conn.) Advocate



Page Numbers:



Author(s): Julius G. Berens

Article Title: America Needs Unified Banking System Under Strict Federal Control

Journal Title: Washington Herald


Date: February 28, 1933

Page Numbers:



Author(s):

Article Title: Banking Reform Favored

Journal Title: Barron’s



Page Numbers:



Author(s):

Article Title: Banking Reform

Journal Title: Boston News Bureau


Date: December 8, 1932

Page Numbers:



Author(s):

Article Title: Other People’s Money

Journal Title: Peoria (Ill.) Journal



Page Numbers:



Author(s):

Article Title: Unify the Banks

Journal Title: Barron’s


Date: April 3, 1933

Page Numbers:


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