If I could pass to 1 or 2 questions which I believe have not been covered in respect of your recommendations-I refer to recommendation 51, I believe it is, that every class A, B, and C director must be a resident of the district for which he is appointed and must cease to be a director if he moves out of the district.

I would like to raise a question as to why that recommendation is made and why you put such a heavy dependence upon residence rather than the principal place of business.

I come, as you know, from the metropolitan area where a great many people have their residence in the outlying contiguous counties or districts but come into New York for their business, and there are other areas of the same character throughout the country. I am just wondering if you would care to clarify that or comment upon that.

Mr. ROBERTSON. Yes, I would be very glad to.

We recognize that there are some inequities and some undesirable features in using a residence requirement. On the other hand, you have to find some sort of a guide to use, and in thinking about this question we couldn't think of a better one than residence, although we are perfectly amenable to any change which would take care of particular kinds of situations such as you refer to in New York. We realize that it does exist there, but we do think that it would be inappropriate to have a statute which would authorize someone whose principal business is in New York but who lives in Florida to be a director of a Federal Reserve bank, for example, in New York City because he couldn't be there often enough.

If some better means than residence can be devised as a guide, we would be in favor of it.

Mr. McCLOY. Perhaps our committee may be able to give thought to this and make some suggestions in respect of drafting, and there are some other elements of drafting in respect of that provision, but I won't take the time to talk about them.

Mr. ROBERTSON. I would be amenable to anything which would accomplish the purposes of the act.

Mr. McCLOY. The question about what constitutes a quorum-I think that was recommendation No. 66-on the part of the Board of Governors dealing with specific subjects.

As I read that recommendation, it would simply require a simple majority of a quorum of the board to deal with any subject that may come before the Board.

Mr. ROBERTSON. That is right.

Mr. McCLOY. You referred to the fact that there were some very substantial questions which now came before the Board which would only require a bare majority and not a particular number of members of the Board. Couldn't the argument be used as well the other way? Why not increase the number of members of the Board that are necessary to pass on serious and substantial questions, perhaps such as the open market policies?

Why would you feel that you have to reduce the number to deal with serious subjects rather than increase it?

Mr. ROBERTSON. Well, No. 1, it would seem to us a little ridiculous to require that a majority of seven members of the Board should be obliged to pass upon certain phases when just a majority of the quorum would be adequate for other purposes equally as important.

If it was decided by the Congress that there should be five in any event who should pass upon these matters before they are changed, then I would agree with you that even those that are now subject to a majority of the quorum ought to be put in that same category.

But that would mean that you are deviating from the general rule with respect to majorities and quorums and requiring in the event we had only 5 members-and for a long period of time we had only 5 members of the Board-every single one of them to be there at every single meeting, which seems to me to be a little unfortunate because there are occasions when members of the Board ought to be out in Federal Reserve banks, for example, and are necessarily away from the city.

Even take the matter of illness. If we had only 5 members and 1 was away ill, you couldn't do any of these things. Well, that we think would be unfortunate.

Furthermore, we dont' quite see the need for the safeguard, if that is what it is called, of having a requirement that there be a majority of all the members of the Board instead of a simple majority of a

quorum.

Mr. McCLOY. I think that question is posed whether or not there are such elemental, fundamental matters as would affect the country that perhaps ought to be passed on by more than 3 men rather than to reduce the requirement in respect to all subjects to 3.

Mr. ROBERTSON. It is a matter on which there can be very different opinions.

Mr. McCLOY. In respect of the recommendations that you made with regard to the requirement of the Federal Reserve banks to pay and transfer a portion of their net earnings into the United States Treasury and the question of the exemption of dividends from taxation-recommendations 54 and 56-the Federal Reserve stock was purchased, as, of course, you know, by some of the banks prior to the Public Debt Act of 1942, and dividends on that stock, as you have indicated, are tax free. There would be a constitutional question presumably as to whether they would be taxable at this stage as well as a question of policy. But assuming that it should be determined that the dividends on the Federal Reserve bank stock issued prior to 1942 should be taxable, shouldn't the stockholders be entitled to the intercorporate dividend deduction which I understand they are not now entitled to inasmuch as it is not considered that the franchise tax is an income tax?

Mr. ROBERTSON. Mr. McCloy, I am not an expert on taxation, and I couldn't answer that question. The basis on which we made our recommendation was that we couldn't come to a conclusion that there was justification for a difference as to dividend tax as between banks which came into the system prior to 1942 and those which came in after 1942 insofar as the Federal Reserve stock was concerned, and that is all.

Now we don't care anything about this taxation except we think it should be equitable as between banks, and that is our whole basis. If there is a reason for a different view on the basis of some other tax laws, I don't know.

Mr. McCoy. It may be on the basis of the Constitution.

Mr. ROBERTSON. We have studied it from the basis of the Constitution, and we came to the conclusion that a constitutional question was probably not involved, but there again there would be different views.

Mr. McCLOY. In regard to your recommendation, I believe it is No. 58, with respect to this matter of reports, you suggest that the authority of the Federal Reserve Board in this respect be broadened and clarified so that particularly it can prescribe different types of reports for different banks and different situations. I believe you also suggest you be given the authority to publish, which you may not have at the moment, and also to take some sampling reports.

I have heard some of the members of my committee are somewhat disturbed about that provision. They are somewhat fearful that if you have a sort of a heterogeneous type of reporting, one, that you would perhaps have room for discrimination, if not a deliberate discrimination one which might result in being an inequitable discrimination as between reporting for various banks; secondly, that there are a number of economists and research students who are dependent upon the continuity of method in terms of reporting of bank statistics and the concept of a sampling or the concept of varied types of reporting subject to the will or the whim of the Federal Reserve Board from time to time would destroy a very valuable economic source. I just wondered whether that was taken into consideration by you in connection with this recommendation.

Mr. ROBERTSON. Oh, yes. We are quite aware of all of those points. Our feeling about it is this: No. 1, let me say we would not want this statute changed unless the statutes relating to the national banks were also changed because it would be very unfair for us to act in this manner with respect to State member banks if the Comptroller acted differently with respect to national banks.

But assuming it were made applicable to all the banks, these were the things which we had in mind: As of today, we are obliged to have three calls for reports of condition per year. There are occasions when we think that is unnecessary. We would always want to have two. And if this proposal were amended to provide that there shall be a year-end and a midyear call report, we would agree with that completely because we would expect to have it.

We want to maintain the kind of statistics which people use, experts use, with respect to the banking system as a whole over a long, continued period of time. It would only be the spring and fall call reports that we might wish to omit.

Now with respect to those, if we call for a report today, we have to call for it from all the banks. Well, that isn't necessary on a spring and fall report. All you need to do is to get a trend. You can get that from those banks for which submitting the information is not really a burden, but in order to do it we have to get it from the banks where it is a burden. We would like to reduce that burden. We would like the power to weigh the requirement of publication on those special occasions simply because we don't think there is any need for those banks to have to publish that information on those spring and fall reports.

We also ask-and one which members of your committee will probably fuss with the most-for the power to require publication of earnings and dividends reports. There you will find a very great disparity of opinion between banks. The vast majority would probably say

that it would be unwise to require publication of earnings and dividend reports, and I suspect most agencies of the Government would take the same position.

We take the position that today in order really to understand a report of condition of a bank, you must have information with respect to its earnings and dividends just as you have to have in the case of an outside corporation, a nonbanking corporation.

Therefore, our judgment leads us to conclude that this recommendation with respect to the publishing of earnings and dividend reports is a sound one, though we can see the defects on the other side.

We think on balance the better judgment is that which we espouse with respect to the waiver of publication and with respect to the power to get sampling reports from a few of the banks without having to go to all the banks in order to get them.

Mr. McCLOY. There may be some counterconsiderations that I'm sure could be adduced in this connection, but I don't believe at this point it's desirable to bring them out or necessary to bring them out. Mr. ROBERTSON. Yes, sir.

Mr. McCLOY. I was anxious to see whether these thoughts had come to you and whether you had given them full consideration.

Mr. ROBERTSON. Yes.

Mr. McCLOY. In respect to recommendation 69, that the Board of Governors be authorized on the complaint of the Comptroller to revoke the trust powers of national banks if it's determined after a hearing that such powers are being unlawfully or improperly exercised, there were some members of my committee that were concerned about this, and the question raised is: Is not the grant of permission to national banks to exercise such trust powers really an extension of power of such banks and not merely a revocable license? In respect to some of these banks it's a very important, perhaps the major aspect of their business. To have the subject treated as if it were a revocable license to be sure after a hearing is such a drastic step that it would perhaps seem a little too harsh and that it ought to be treated as revocation or nullification of one of their fundamental powers with all of the procedures which protect an institution against such a revocation. Mr. ROBERTSON. I would agree with you that it's very drastic. And in the case of a large institution where the trust functions are really significant, the better way to do it would be to take the appropriate measures to forfeit the charter of the institution itself.

But we are thinking in terms not of that sort of a situation but of one where you have an otherwise sound institution which has been granted trust powers but is too small to really employ the kind of people who ought to operate a trust department. In that sort of a situation it seems to me that there should be ways and means of terminating the trust activities of that institution without jeopardizing the institution as a whole.

How you go about it I don't care. I'm willing to have any safeguards that are desirable, but I think the power ought to exist in someone, either in the Federal Reserve System or, if these powers are transferred to the Comptroller, in the Comptroller to see to it that a bank is actually able to carry on these trust functions even though at the time the powers were granted it was able to do that-if the people who then were in the picture are now gone and the people the bank

has now are not competent to carry on that trust business. The institution should not have any irrevocable license to continue.

Mr. McCLOY. You would not object per se then to some suggestions that might perhaps throw a greater protection around the maintenance of this power?

Mr. ROBERTSON. None whatsoever.

Mr. McCLOY. I won't go any further into recommendation No. 77, this rather controversial issue of par and no par. I was hoping that you would express your preference one way or another on that. But, as I understand, on that you plead for uniformity no matter what it may be? I'm talking about the absorption of exchange and interest and so forth.

Mr. ROBERTSON. Well, but I think I did express my preference for a specific prohibition.

Mr. McCLOY. A specific prohibition? I didn't understand that. Mr. ROBERTSON. In each statute.

Mr. McCLOY. I didn't understand that.

Mr. ROBERTSON. I think that's much more desirable than giving to the Board the power to define interest or giving the FDIC power to define interest.

Mr. McCLOY. I see.

I think I understood you to say that you were quite prepared to see the abolition of section 13 (b)?

Mr. ROBERTSON. Yes; I did.

Mr. McCLOY. In regard to this matter of officers' loans, you suggest you would recommend an increase from $2,500, as I understand, to $5,000?

Mr. ROBERTSON. We have no pride in that figure. It just seems to us that

Mr. McCLOY. This is a subject which I've been rather interested in and one with which we have been dealing in the State of New York to some degree. I believe the New York Clearing House Committee is considering a rather broad treatment of this whole subject, and they are not disposed to make a particularly rigid rule in terms of a specific amount for all banks but to vary it in accordance with the size of the bank and perhaps other considerations that may be involved, particularly the type of loan.

For example, a loan which involves the construction of a home or a mortgage or improvements on a home might very well go beyond $5,000, the thought generally being that probably it's good public policy to have the officers of a bank able to borrow money so that they don't get into a situation by outside borrowing which might compromise them financially.

Do you have a really strong feeling that the amount should not exceed $5,000? Or would you be prepared to look with some sympathy upon a wider treatment of this subject?

Mr. ROBERTSON. I would be prepared to look with sympathy on a wider treatment of this subject, but I would want to warn you in advance that I believe that very little difficulty has been encountered throughout the banking industry by virtue of the rigid limitation which exists there today.

As you know, the officers of banks today are prohibited from borrowing from their own institutions, which I think is a fairly sound rule. The $2,500 that's in the statute today is sort of an exception.