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Tovbe released on next . m _ ? Thursday, June 24th. |$j \^JT ' This is the first general convention of the bankers of the State of_Kew York since the es tablishment o f the Federal Reserve System, and, therefore, the first opportunity to address all of the bankers o f the state in regard to the work which has been done by the Federal Reserve Bank and in regard to some of the larger aspects of the system. Your President has asked me to refer to our plan for collecting checks and to the new regu lation regarding state banks, but I want f ir s t to b r ie fly review some of the work that has been ac complished by the bank since its organization last November. On October 26th, 1914, it was decided by the Secretary of the Treasury that the situation brought about by the war in Europe necessitated the immediate organization of the Reserve Banks, and November 16th was fixed as the date when they should open for business. $ 3 ,3 2 1 ,9 5 0 . On November 2nd, of gold was received from the member banks of this district in payment of the first in stalment of our capital. On the morning ox the 16th of November, an organization, largely temporary, consisting of seven o fficers and eighty-five clerks had been assembled, and on that day $ 9 9 ,6 1 1 ,6 7 0 of re serves were transferred to the bank by 'iiie member banks. We had been successful in renting satisfact ory offices already equipped with the furniture and fixtures necessary for our accommodation* Our tem porary organization has since been gradually conver ted into a permanent organization, consisting now of five officers and fifty-two clerks, including stenog raphers, messengers, watchmen and porters. Two additional instalments of capital have "been received, making the present paid in capital $ 9 ,9 6 1 ,6 5 0 , being 50$ of the statutory amount. Recip rocal accounts have been established with the other eleven reserve banks for the purpose of h a n d l i n g i n 3 ter-bank transactions, such as collections and in vestments. Through these accounts, the Federal Reserve Bank o f New York has up to this time handled $ 4 2 6 ,3 0 0 ,0 0 0 . of exchange and $ 2 5 ,0 0 0 ,0 0 0 of cur rency shipped to us to create exchange. have fluctuated widely, Balances the net amount due the New York bank at times exceeding $20,000,000- On May 19, 1915, for the purpose of fa c ilita tin g prompt settlement of these balances at minimum cost, there was deposited in Washington by a l l the Reserve Banks, and placed under the control of the Federal Reserve Board, a fund of gold sufficient to enable them to effect settlements between themselves with out transferring any currency and simply by exchange of telegraphic advice. These settlements are at present made weekly, but i f a larger volume of transactions makes it necessary, the fund can be increased and the settlement effected daily . After some months of study by the Federal Reserve Board and the officers of a l l the reserve 4 banks, the Federal Reserve Bank of New York, in common with the other banks, has taken the first step toward the creation of machinery for collec ting checks for its member banks within its own d is t r ic t . Plans for establishing a system of bank transfers have been agreed upon by a ll twelve of the reserve banks and will shortly be placed at the dis posal of the member banks, to enable them to effect prompt and economical transfers to all parts of the country. This system w ill be gradually developed and enlarged. Service o f this character is made possible largely through the establishment of the Gold Fund in Washington, by means of which bate. nces between the reserve banks created as a result of these transfers will also be settled. In the first seven months of our business the New York Reserve Bank has discounted for its member banks 1 .5 0 1 notes, amounting to $ 8 ,2 8 4 ,3 4 9 .7 0 . It has also purchased in the open market 387 accep tances of a total value of $ 9 ,3 1 5 ,1 5 8 ., and it has 5 made forty-one investments in short time municipal warrants of a total value of $11,160,000- In ad dition to the investments made for its ov/n accoxmt, it has purchased $ 2 3 ,6 9 7 ,5 0 8 .9 3 of acceptances and municipal warrants for account of eight of the other reserve banks, on their instructions. From these discounts and investments, the "bank has to date made gross earnings of $158,710- 58, its current expenses have "been $ 1 1 6 ,9 4 8 .8 4 , leaving $ 4 1 ,7 6 1 .5 4 of net earnings, which w ill be applied to organization expenses amounting to $ 1 8 1 ,6 5 4 .3 6 ’ These are partly made up of the cost of in it ia l purchases of necessary supplies and fixtures, and making changes in our o ffice. $ 3 5 ,4 2 4 .1 8 how ever, consists of the assessments levied against the bank for its proportion of the expenses of the Federal Reserve Board and $ 9 8 ,1 8 0 .9 8 represents the actual cost of preparing Federal reserve notes issued and to be carried in stock. The directors of the bank have authorized the preparation of a total of $ 3 0 0 ,0 0 0 ,0 0 0 . of notes of vaxiov-S denom inations, determined by experience gathered from a ll sources available as to the demand for currency. This w ill involve a considerable outlay by the bank, but the assurance to the member banks that we have or hand at a ll times not less than $ 2 5 0 ,0 0 0 ,0 0 0 of cur rency available against emergencies, w ell ju stifie s the cost. There is at present on hand over $ 1 8 3 ,7 4 0 ,0 0 0 of notes and the supply is being in creased so as to complete the amount in a few weeks. To this date there has been issued $ 3 4 ,6 0 0 ,0 0 0 in de nominations of $5 to $100 inclusive, of vshich amount $ 3 4 ,4 2 0 ,0 0 0 now outstanding are covered by a like amount of gold deposited with the Federal Reserve Agent. Of course the a b ilit y of the reserve banks to increase their gold reserves, beyond t e amount of the member banks* deposits, is dependent upon their a b ilit y to issue notes against deposits of gold, Thir process is now in successful operation, the New York 7 bank alone having issued, as stated, $ 3 4 ,9 2 0 ,0 0 0 of notes against a like amount of gold deposited with the Federal Reserve Agent, and a ll twelve of the reserve banks show $ 5 8 ,2 9 1 ,0 0 0 of gold so held. The New York Clearing House Association has admitted the bank to limited month c.rship, there by giving us fa c ilit ie s for cloaring checks without imposing lia b il it ie s which assume; wp are not authorized to and in a l l matters pertaining to our or ganization and the development of our business, the clearing house has given us loyal cooperation. The work of the bank is being carefully departmentalized under the direction of experienced men. Owing to the simplicity of the work to be performed and the machinery for handling i t , I am confident that in due time the bank w ill be more economically managed than any other bank of its size in the world. Sim p l if ie d methods of bookkeeping, and permanent sta tistic a l records, are being studied and adopted without, however, attempting to burden the organi- 6 zation with unnecessary d etail. Credit file s have been started to record the condition oi our member banks, as well as information gathered in regard to paper offered for discount by Those banks which avail of our fa c ilit ie s . In time this rec ord w ill be one of the bank's most valuable assets, enabling it to promptly and safely meet unusual de mands that may be made upon its members. This b r ie f review of the past seven months' work must not give the impression that it has been an easy task or accomplished without arduous labor. Everything pertaining to the organization has been new and untried. It may be said that on October 26th the bank's equipment consisted of lit t le more than a printed copy of the Federal Reserve Act; whereas, to-day, i t is a fu lly equipped bank with an organi zation perfectly capable of meeting any emergency, and is promptly transacting the business entrusted to its care. 9 Any sound system of banking reform for oiu councry involves assembling our gold reserves. By that means the foundation is la id for a f l e x i ble note issue, and by that means the assets of the member banks are made liq uid and convertible in time of need. The reserves so assembled must in part be those formerly held in bank vaults, but must also largely consist of those formerly rede posited w it& other banks in the reserve centers. Of course there w ill be no d iffic u lt y with the re serves which have heretofore been held in the vaults of the member banks. But a differen t question arises with respect to those that have been on de posit with reserve agent banks, which have been used as the basis for check collection services by the agent banks. Two years hence a s t il l larger pro portion of these reserves w ill have been transferred to the reserve bank, and the problem of check 'collec tions w ill beeome acute for the small country bank unless it is in process of solution prior to that time. Consequently the country bankers should now face that issue squarely, and unless you are w illin g at the outset to agree that fa c ilit ie s for collec ting checks must be created by the reserve banks before the reserve balances have been entirely trans ferred, it w ill be hopeless to erpect you to view this matter from a judicial and far sighted point of view. Please, therefore, consider that the work planned by the reserve bank, after conscientious study of the problem, is undertaken with the object of performing a necessary service for the member banks, and not with the object of depriving them of legitimate revenues. The chief d iffic u lt ie s to be overcome may be summarized under three heads: F irst, the so-called " f l o a t ." Second, the possible duplication of re serves, or necessity for excess 11 reserve balances, for collection puriooses. Third, the lore of revenue from exchange charges. F irst, as to the "f l o a t :* 1 the Federal Reserve Act is silent as to the method which the country banks shall follow in computing deposited reserves. Theoretically, these reserves have in the past been cash balances in bank; in fact, they have not been real cash balances to a considerable eirtent. By the old practice, which has always been permitted, the country bank each day remits a cash letter to its collecting agent in a reserve city, and on that day charges the amount of that cash letter to its reserve agent and considers it a cash balance, and part of its reserve. These checks in transit to the reserve agent constitute the real ''f l o a t ." agent, After they reach the reserve they become a reserve balance, because the 12 reserve agent advances the amount of the checks, for which it gives immediate credit and allows in terest on the balance after deducting the time es timated for collecting the checks. The Federal Reserve Act provides that the member banks shall "establish and maintain" reserves on deposit with the Federal reserve banks; it does not say that the reserves so "established and maintained” shall consist partly, of cash and partly of these uncollec ted checks, which are in the post office on the way to the bank. Stated differently, I think it means that the reserves to be deposited in the reserve banks shall be as shown on the books of the reserve banks, and not as shown on the books of the member banks. I f this were not so, the amount of reserves to be maintained on deposit in the reserve banks would not be as stated in the law, but would be those amounts, less the amount cf all the checks in the mail, on the way to the reserve banks from all the member banks. 13 Now, i f the old method of handling checks should he adopted by the reserve banks, instead of the one proposed, these reduced reserve balances would be further reduced by advances of the amount of checks received by them for collection, as is now done by the reserve agent banks, thereby fu r ther depleting the resources of the reserve banks by the amount of checks sent out for collection for the reserve banks themselves. Such a re serve situation would be absolutely unsound. The resources of the reserve banks would be too largely invested in uncollected checks, and the reserve balances of the member banks would be too largely paper balances. This new definition of what con stitutes a deposited reserve is in reality the cor rection of a banking abuse in the use of checks as reserve, which should have been corrected before it reached the present unsafe proportions. It is, in fact an unavoidable consequence of the trans fer of reserves now being made, unless the reserve 14 provisions of the act are to be ignoredSo suranarize, therefore: The difficn-.ty in respect to the "flo a t " is that the member banks after two years w ill be obliged to calculatc their reserves as shown on the books of the ressrve tanks In the case cf member banks of this district, they w ill not, after two years, be able to count a oKsh letter as a cash reserve with the reserve bank until the letter reaches the bank and the checks are cleared, which means one day's time only, I f this is a hardship, as it doubtless a p p e a r sto be, let me remind you that it is also a hardship for tho victim of a drug habit to give up the use ox drugs. As to the second point of excess reserves: The situation appears to be as follows: The country banker requires and w ill continue to require certain services of its correspondent, which at the present time, the reserve bank is unable to perform. The correspondent is compensated for the performance of 15 these services by a profitable balance* The member bank fears that while it must carry a large reserve with the reserve bank without interest, it must also carry other balances at 2$ interest with its old correspondents in order that it may have these ser vices performed. There are, I think, the follow ing services performed: 1s t: The collection of a l l checks drawn on non-member banks and on points outside of the d ist ric t, which the reserve bank is not now able to handle. 2nd: The checking, purchase and co llec tion of commercial paper. 3rd; Investigation, purchase, custody and sale of bonds. 4th: Making general inquiry regarding banks and other credits. 5th: Loaning surplus funds on collateral security on the New York Stock Exchange. 6th: The collection of notes. 16 Many of the services above enumerated can. in time, be performed by the reserve banks, and I believe with such care and intelligence as w ill make the service satisfactory to the member banks. For example, when as a result of the establishment of the reserve system a true discount market is created with a large volume of b i l l s accepted by banks of fir s t credit, there w ill be lit t l e d ifficu lty in ar ranging, i f necessary, for the reserve banks to pur chase b i l l s for its members and such b ills can be held in portfolio as a secondary reserve available at any time for rediscount in case of need. They should in time, to some extent, take the place of call loans and purchased commercial paper. And it must not be forgotten that the Federal Reserve Bank of New York at present has only 479 accounts requiring such services and when New Jersey adds it s quota, 610 accounts. With this small clientele, there should be l it t l e d iffic u lt y in making the ser vice the promptest and most effic ie n t that can be 17 rendered for a bank correspondent. The necessity for a considerable ar.cess balance, however, grows out of the present in a b il ity of the reserve banks to handle checks payable outside of the district or those drawn on non-member banks. The development of the inter-district col lection plan w ill come along in due time so that you may send us checks on member banks located in the other eleven d istric ts, and the machinery for handling these items can be made to reduce the transit time m aterially. It ha§ been estimated that over 50$ of the the checks handled by the country banks are drawn on banks not now members of the reserve system and our members have assumed, without good cause, that the reserve banks vail never be able to handle these items. This is a pretty broad assumption. The problem may solve it s e l f through the admission of a great body of state banks to membership in the system. F a ilin g that, however, if the interests Id of the member banks demand that they should be per mitted. to send their items drawn on state banks tc the reserve banks, I think you may assume that every effort w ill be made to enable them to do so. I even doubt whether this would involve any amendment to the law; but shoulct this be possible only by an amendment, you can be assured that the Reserve Bank of New York w ill endeavor to have the law amended. This statement must not be understood to mean that our collection fa c ilit ie s w il l be developed for the benefit of customers of banks which do not join the system. I f the state banks do not take membership, under terms which are fa ir and equitable, and the member banks find that they w ill require the services of the reserve bank to effect economical collection of non-member checks, the terms upon which this ser vice is performed ought to afford some advantage to the member banks. But, in my opinion, no attempt of this character should be made until the basis of memb-ereirip for sxat-e banks has been so f a ir l y and 19 justJy established that no criticism can possibly arise as a result of preferences shown to tue banks which are members. For many member banks, it w ill be no hard ship to carry balances with their old correspondents, which w ill not count as reserves. It has been a more or less general practice, and w ill doubtless continue. The reports of the Comptroller rarely show reserves held by the national banks, to be less than $ 2 4 0 ,0 0 0 ,0 0 0 above those required by law. They have fluctuated from $ 2 4 2 ,0 0 0 ,0 0 0 in 1900 to $ 4 3 5 ,0 0 0 ,0 0 0 e::cess in 1911 and <1p734,0 0 0 ,0 0 0 on March 4th la st. Such excess reserves can be made the basis for the perfornBnce of such services as the reserve banks may not be «.ble at fir st to errfcend to their member banks. Every effort w ill be made to avoid the necessity for carrying e::cess balances with the re serve bank merely in order to meet unexpected charges. We have suggested that this may be accomplished by 20 arrangements with us and with other correspondent banks in Hew York City, to make regular transfers in order to reduce or restore balances carried with us. I f the member banks using the system are unable to send sufficient exchange to offset charges, we must, of course, consider wbether it may not also be necessary to restrict immediate credit of checks to those which come to us directly from banks that have adopted the collection plan and give deferred credit to those vfoieh come to us through clearing banks but in re ality for the benefit of banks which have not adopted the plan. This we would be most reluctant to do unless it was found necessary in the interest of those banks using our par service. To the e::tent that each member bank avails of our collection service, to just that extent will it be relieved of the necessity of carrying balances elsewhere for collection purposes, and as new members join in the plan the r e lie f in 12iis regard v4 11 show 21 almost geometrical progression. Now as to Exchange Charges: Undoubtedly the d iic f objection to the collecting plan for many banks of the district lie s in the third d iffic u lt y , that i s , charges." the loss of " exchange In view of this objection, and in order to avoid imposing hardship upon member banks, the intra district collection plan was made a purely voluntary matter. The changes which wc hope w ill result from the operation of this plan arc fundamental and can only be brought about gradually by patient e ffo r t . They in clude the correction of a number of abuses, such as crcossivc exchange chargcs, in some sections of the coun try, undue lengthening of transit time, circuitous rout ing of checks in order to avoid points where collection chargcs arc imposed, drawing against uncollected items and others with which you arc familiar* A large volume o f items is now handled by banks not located at natural exchange centers, which should go more directly to destination. Outside of the few sections of the country whore par collections have been brought about by the establishment of coun try clearing housos, false exchange points arc being created, giving rise to a species of in flation which is bad onough in it s e lf, and which also cncouragcs other abuses. Where abuse exists, it must gradually give way to better practicc. Where legitimate reven ues, however, arc in danger of bciig lost, wc must fin d means to avoid the losses or to create other sourcos of revenue which w i l l make them up. Through the courtosy of some of our ncmber banks, wc now have a st a ff of experts at work in their o ffic e s, making an analysis of their accounts in order to a ssist in a solution of this exchange problem. The plan contemplates ascertaining what is tho roal profit from cxchango, where those profits can bo nade up i f lo st, and what effect generally tho Reserve System w ill have on the earnings of member banks. It is the pur pose of the reserve bank to furnish c\cry member bank of this district with the best system which can to de- 23 vised for analysis of it s business and of the ac counts of its customers so as to determine where economies may he effected* losses avoided and new income created. The expense of making this study might be prohibitive to any one of the smaller banks and w ill be borne by the reserve bank for the bene f i t of all the country banks, who can well afford to cooperate in order to avail of the results. In this connection, I would like to ask the bankers from the central part of this state whether they make more money from exchange charges than they now lose by the payment of excessive rates of inter est on deposits. Too many bankers measure the pros- X>3rity of their banks .by the footing of the balance sheet, rather than by the annual turnover of p ro fit able business. I f you w ill examine the statements and annual reports of the great banks of Europe, you w ill fin d that the managers of those banks point with pride to the "turnover" and pay much ldss attention to th^ir "fo o t in g s .” You w ill find that they publish 24 elaborate lists in which are stated the amount of charges for a l l sorts of services performed for their customers. You will fin d that the interest which they allow on their deposit accounts is measured by the profit which they are able to make on the account, rather than by what some next door neighbor is w i l l ing to pay without regard to p ro fit. Exchange is not a matter that can be dealt with by general rule or regulation. CamiLitions in each bank and each district d iffe r . An analysis of the books of one bank may disclose that the loss of revenues from exchange can be made up by a more con servative policy in the payment of interest on deposits, In other banks, it may be found that customers re ceive accommodation and have services performed for which they do not pay adequate compensation. In s t ill other bonks, it may be found that abalances main tained for the purpose of collecting checks are unnec essarily large under the new conditions created by the Reserve System. Some part of the loss of exchange can be made up out of the use of reserves now re leased by the statute, and conditions as they now exist under the Federal Reserve System w il l enable the country bank to employ a maximum of its resour ces to meet the needs of it s own community and at the rates which there p revail, as it now has the means of immediately converting a large percentage of it s paper into a reserve balance at the reserve bank in^case of need. Many of the country banks receive savings deposits on which only 5% reserve is now required, and from which hereafter larger pro f i t s w ill be realized . The customer of a bank now enjoys the p r iv i lege of sending his checks to any part of the country in payment of b i l l s , and has used this p r iv i lege to the point of abuse. On the other hand, the charges imposed upon the payee of these checks are gradually arousing resentment from the public. It seems to me that we should be able gradually to change our system so as to eliminate abuses and 26 overcome complaint. Payments made to distant points should "be effected to a greater extent by bank trans fer checks and for this we shall gradually develop fa c ilities. Charges for handling checks sexlt to distant places should be borne by the person for whom the service is really ;erformed, that is , by the drawer of the check, and that w ill e.id in de veloping the use of bank transfer checks . Some of the xr esent revenue of the country bank from ex change charges, i f lost, should be replaced by a moderate charge for effecting transfers, and these charges should be more equitably based upon the cost of settling net exchange balances. Of the $ 1 5 2 ,6 2 1 ,0 0 0 . of resources of the Federal Reserve Bank of New York, only $ 1 1 ,2 7 4 ,5 0 0 . are contributed by the country banks of t h is state. While an improvement in our collection system may appear to benefit the banks of the reserve and cen tral reserve c it ie s , the plan now adopted aims par tic u la r ly to meet the needs of these country banks. 27 It gives the customer of the country bank the ad% vantages of having h is checks handled at par within the district as freely as the customer of a New York City bank; and it w ill m aterially strengthen our banking position by reducing the volume of floating checks heretofore considered as reserve balances. In concluding this part of my address, let me sin cerely urge upon the country banlcs that their co operation w ill enable us to perfect fa c il it ie s which w ill minimize loss and inconvenience that otherwise may be incurred when their reserve accounts are fin a lly transferred. A fair t r ia l of the plan w ill afford experience which w il l fa c ilit a te our e f forts to make i t satisfactory. One of the objects tV he accomplished by the Federal Reserve Act is "to establish a more e f fective supervision of banking in the United S t a t e s ,” and membership by state institutions was tiade a part r of the plan so that our whole system might be bound together for greater strength and protection. There 28 appears tc be a somewhat prevalent though erroneous b e lie f that the law le ft the whcle matter of state bank membership tc the discreticn • f the Federal Re serve Beard. Befcre considering the discretionary p wers dealt with by regulation, ycu shculd study these previsions cf the statute as tc which the Beard has nc discreticn. The act provides that any state bank has the right tc make application fcr permission to beccme a member bank, and it re quires the Board tc establish by-laws t. govern its action upon such applications. It sp e cifies the capital and reserve requirements which are made tc apply tc such state banks. It prohibits excessive loans, purchases cr leans by member benks of cr upcn their own stock, impairment cf capital cr payment of unearned dividends, and certain other transac tions, a ll cf which jvrar apply to the business of national banks. It authorizes the ccntinuance in part of existing reserve accounts fcr three years from the date -the reserve banks are established, 29 requires compliance with ruleB for examinations, but authorizes the acceptance of examinations made by * state authorities. The Act clenrly recognizes, afe we a ll do, that a stronger banking system and better banking methods can only be brought about by assem• bling reserves of bov t. national and state banks, and by more uniform methods of supervision and exr amination. To accomplish this, the Federal Reserve Board has so exercised the discrotion conferred by the statute that no state bank need hesitate in ap plying for membership i f it believes in the system, is in sound condition and its business complies with the law. The regulation just published w ill permit the kind of cooi>eration between the banking depart ment of this state, and the Federal reserve bank which should insure a munimum of expense and incon venience to state banks which become members. I hope to see arrangements made by which the regular examinations by the state examiners can be conducted jo in tly with those of the reserve bank. likew ise, it should be possible to have copies of the reports now regularly made to 12ie state banking department f il e d with the reserve bank and with very few, i f any modifications in the forms now used. In this connection it must be noted that the new banking law of this state adopted JLast year made express pro visio n for state banks and trust companies joining the reserve system- The procedure for admission in this state, where the examinations have been thorough and effective w ill be simple and prompt. The applying bank' should f i l l out the application blank and send it to the Federal Reserve Agent at our o ffic e . It would be desirable to have an o f fic e r personally explain its contents to our own examiner, to acquaint him in advance w ith the char* acter of the business conduct ed by the a p p lica n t■ Whatever examination is required by the Federal Re serve Board can then be made. In most cases, hope to have such an arrangement w ith the state I 31 banking department as would enable us simply to re view the last elimination made by the department, provided that w ill be authorized by the Federal Re serve Board. I f a special admission examination is made it should, i f possible, be made jointly at the time of the regular examination by the depart ment. The application and examiner's report w ill then be passed upon by a committee, composed of the Federal Reserve Agent, one other director, and the Governor of the Federal reserve bank. The director who serves on this committee shall in no case be an officer of a bank located in the same city or town, as the applying bank. A report by this committee w i l l then be transmitted to the Federal Reserve Board for fin a l action. The application and report of examination w ill be in tended to disclose the financial condition and char acter of the management of the applicant. They must show the nature of the powers exercised, and make claar that they are not inconsistent with mem 32 bership in the system or indicate in what respect they are inconsistent. The Board may impose con ditions i f thought necessary to insure compliance with the general standard of membership and to r e move any inconsistency. The Federal Reserve Board w ill then pass upon the application, and i f approved, issue its ce rtific a te , whereupon the ajjplicant is required to subscribe for an amount of stock of the eaual reserve bank/bo 6 per cent of the a p p l ic a n t s capi tal stock and surplus, of which one-half is at pre sent required to be paid. It must also open and maintain with the reserve bank a reserve account equal to what is now required for national banks. Each institution applying for membership can be dealt with under the new regulation, with due re gard to the conditions surrounding the business of that institution ; its assets, its policy, the char acter of its management and its charter powers can a l l bo takon into consideration under joint or sepa rate o^catoination and as soon as mc’nbcrshi^ is 33 obtained, future uniformity of supervision is reasonably assured. This necessarily involves the sort of co operation between the federal and state authorities which has long been desired and which has been de veloping naturally, quite apart from the provisions of the Federal Reserve Act. As to investment and other charter powers: You w ill observe by the terms of the regulation that each applicant for membership must conform to cer tain statutory provisions made to apply to state institutions, and that complianco with further con ditions imposed by the Board w ill be determined only after cjsmination of the facts disclosed in the application for membership and in the report of the examination of the applicant. This loaves it to the discretion of the Board to determine in each case to what extent further restrictions authorized by the Act, should be imposed for tho general se curity of the Federal Reserve System. It is 34 clearly indicated that any such restrictions w ill bo based upon recommendations submitted by tho com mittee of the Federal reserve bank of each d istrict, such recommendations, of course, resulting from an examination, which w ill bring the officers of the reserve bank in touch with the officers of the applying bank and afford opportunity for a clear understanding of the business and the requirements of the applicant. Tho regulation does not contemplate sur rendering charter powers which are not inconsistent with membership and which are clearly incidental to tho business of banking. It docs involve protect ing the system against membership generally by in stitutions that are conducting a business involving special hazards and not incidental to banking. One effect of a large membership under the term of this regulation w ill be to gradually develop uniformity of methods in banking, tending to secur it y and sta bility . 35 Membership w il l , in time, comc to be r e garded as evidence of a standard of condition and management which w ill reflect crcdit on institutions enjoying it . The most important matter, however, the right of withdrawal, is not sp e cifica lly dealt with by the Act, but has been well covered by the regula tion. National banks have become involuntary statutory members of the system. In order to avoid or to abandon membership they must surrender their national incorporation and reincorporate under ciAatc laws. Very few of the national banks have done so, in fact no tendency in that direction has developed. State institutions, however, have hesitated to sub ject themselves to dual supervision, and to possible future regulations of the Reserve Board, the terms of which arc not yet disclosed, without some d e fin ite means of withdrawal, which would not involve their liquidation. They could not reincorporatc as state banks without abandoning powers and good - 36 w i l l of too groat importance to be jeopardized. This situation has incorrcctly been as sumed to bo an absolute bar to membership by state institution s. One of tho main purposes of the Federal Reserve Act, in fa c t , could not be properly accomplished wore state banks required to take mem ber ship without moans of withdrawal. On the other hand, the interests of existing members had to be regarded and no undue advantages extended to state banks which might operate to the disadvantage of the national banks. By tho terms of the regulation, a method of withdrawal is provided which should re lieve state institutions from doubt as to the effects of dual supervision or the offeet of future restric tive regulations. Its terms are sc conservative, however, as to protect tho interests of existing members nnd protect tho system as a whole against excessive reduction of it s resources as a result of indiscriminate withdrawals. The succcss of a banking institufc ion does 37 not depend solely upon the size of its capital, the amount of its resources or the character of its supervision. Its success re ally depends upon its a b ilit y to perform satisfactory service to its cus tomers and to maintain its credit unimpaired. This w ill apply to reserve banks as well as to a national or state bank. Every banker is conscious of the necessity of so managing his in stitution that he w ill keep his customers and add new ones. How, therefore, may the reserve system expect to succeed unless it is managed just as though all of its members were, in fact, voluntary members, notwithstanding what may havo been the terms of admission in the fir s t instance? I f the system is badly managed it w ill lose membership and f a i l , and i f it is well managed and performs valuable services to its stockholders and depositors, bership. it w ill succeed and increase its mem Upon this b a sis, are invited into membership, the state institutions as voluntary members, and upon this basis we o ^ o c t to retain our national 38 bank members, whose membership was involuntary. It may bo that the involuntary character of the national bank membership has been responsible for the prevalent feeling that these reserve banks are departments of the government. Such an a t t i tude on the part of member banks might lead them to disavow their responsibility for the managancnt of the reserve banks when, in fact, the primary re sponsibility for the character of their management rests upon the members, who own a ll the capital stock, and in fact a ll the assets of the reserve banks. Many members have not yet recognized the responsibility of ownership which properly rests ipon them. As stockholders, they elect two-thirds of the directors by whom the officers of the reserve banks are in turn appointed. It is clearly the duty of the member banks to elect competent direc tors and see that e ffic ie n t and reliable officers are appointed. They should feel free to make sug gestions and criticisms regarding the management of 39 tho banks and equally froo to make tho greatest pos sible use of th eir fa c i l it ie s . To those banks, has entrusted its crodit. the government in a sense They ore authorized to act as its fis c a l agents and through thorn arc issued notes which the government is obligated to rodocm in gold. The government should* therefore , assume a partial responsibility for their management and supervision. It appoints three of tho directors and a board of sovon mon to supervise the whole sys tem. Concerning this feature of tho Rosorvc Act, after experience with its operation, strong hopes. I entertain Herotoforo government regulating bodies have been brought too much into antagonism with the business interests which they arc appointed to supervise. In tho reserve banks, they arc brought into contact with tho member banks by p a r t i cipation in the actual management of the reserve banks. They share tho respo nsibility for their management. D iffic u lt ie s and difforcnces of opinion 40 can be discussed and composed, as would hardly otherwise bo possiblo. Whore in other cases of government supervision a line of clcava^c has de veloped between the interests of tho government and tho interests of business, in those institutions the point of contact w il l prove to bo a point of fusion. May not this provo to bo an entering wedge by which antagonism between government officers and business interests may ultimately be removed? In no other soction of tho country has this prejudice been so apparont as in Now York City, and i f a ll such prejudices, p o litic al and soctional, against New York and its bankers can be overcome by such measures as have boon adopted in tho Federal Reserve Act, I should fee l that the work now being done has been well repaid. I should not permit th is opportunity to ; ^ pass without referring to one feature of our bank ing situation of groat importance: The Reserve Act made careful provision for the gradual transfer of 41 rosorvos by tho mombor banks, but permitted tho roduction in required reserves to take offoot at once, so that at present largo excess rosorvos are hold by mombor bonks, a part of which within tho next two and ono-half years must bo transferred. Tho amount of those later transfers and t&o amount of funds required to eliminato tho "f l o a t ” from re serve balances, w ill make quite a hoi- in prosont excess rosorvos, and should bo allowed for in future calculations* Tho Federal Reserve Act on November 16th released cash and deposited rosorvos in tho national banks, amounting to $ 4 6 5 ,0 0 0 ,0 0 0 . Tho Comptroller*s report of March 4th, showing tho oonfe dition of national banks, disclosed that this oxcoss icserve had increased to $ 7 3 4 ,0 0 0 ,0 0 0 held by tho national banks alone. It may be assumed that an other very large excess rcsorvo, but probably loss than this sum, is also held by state institution s. There is , in fact, hold in trust by tho banks of this country a crodit of such vast proportion that its 42 custody and use impose a hugh responsibility. The situation is ono that might easily lead to a riot of speculation, inflation and exploitation, tho bankers wore so unwise as to permit i t . if We may, on the other hand, employ this vast credit to meet tho demands of the commerce of tho world at a time when wo alone, of a ll the groat nations, are able to f i l l the gap in the w orld's credit system which has boon created by the Europoan War. No banker at this time should undertake to prophesy what w i l l be the economic consequences of the War. The proportions of the conflict are so vastly greater than anything known in history that precedent a f fords lit t l e guide by which to measure its results. Study of trade roports, bank reserves and interest rates, govornmont borrowings and note issues, w ill only serve to indicate a tendency; close tho result. it w ill not dis What now soems to be taking place a ll over tho world is the gonoral m obilization of tho gold reserves by every effective means, so 43 that cach party to the conflict may with the great est dogrcc of security expand credits to tho great est dogroo po ssib le< Each nation should bo rogardod as a bank, and a l l the bank, commercial and govern ment obligations of the nation regarded as deposit and note l i a b i l i t i e s : the gold reserves of the banks should bo considered as an insurance fund es tablished to demonstrate tho a b ilit y of the debtor to pay in gold. By good fortune, due to tho pas sage of tho Reserve Act prior to tho outbreak of the war, this country has it s e l f mobilized some por tion of its gold reserves and tho m obilization pro cess is continuing at a satisfactory rate. Our re serves are likewise being augmented directly by gold imports and potentially by liquidation of our dobts to Europe. We arc therefore in positing to fo rtify ourselves against such developments as tho war may bring about. used. But those reserves must not be mis The tendency w ill lik e ly be for them to s t i l l further increase as a result of gold payments now 44 being made to us by debtor nations for the goods being exported to Europe at an unprecedented rate, and the temptation to expand w il l increase with the enlargement of our reserves. In our trade relations with the nations of Europe, it seems lik e ly that the settlement of balancos due us w ill bo effected by one or more of four methods* We are now probably purchasing and w ill continuo to purchase large amounts of our se curities held in foreign countries. This is one of the most natural and desirable processes. Wo may continuo making direct loans to foroign countries which to son^e esrtont w i l l offset our trade balances. To some e^rtent, also , wo are receiving payment in gold, $ 1 0 0 ,0 0 0 ,0 0 0 having come to our shores since the f ir s t of January. A ll three of those opera tions together have been hardly sufficient, to effect payment of current accounts being created every day for purchases now being made. The fourth method of settlement depends upon the activity and enter- 45 priso of our largo tanks and is tho ono which I am most anxious to soo employed. Wo should at onco use a part of our groat credit power to finance our own world commerce, instead of continuing to en trust to others this manifest duty. Cur banks do not scom to realize that of our $ 4 ,0 0 0 ,0 0 0 ,0 0 0 of foreign eoinmerce, over 20$, that is , over $ 8 0 0 ,0 0 0 ,0 0 0 , i ^ conductod with tho republics to the south of us alone; and this great trade reprosonts 50 $ of a ll tho foreign trade of the Central and South American Republics. It has large ly boon conducted upon credits established in fo r eign lands with foreign banks. It is our trade, and v,ro should extend tho credit upon which its con tinuance depends. I f we do not do so, some part of that trade w ill surely be lo st. The same is truo with respect to a large part of our commerce with other parts of the world. This country's position, both domestic and international, would be vastly stronger were we able to omploy at once a large part 46 o f our surplus banking crcdit in financing our own foreign commerce. Our past dependence upon for- oign crodits is no longer as necessary as it was, and our customers have a right to ospect accommoda tion, new that wo can afford to extend i t . What is most needed is banking machinery and men of expert knowledge. Tho Federal Eeservo Act confers enlarged powers upon tho national banks to enable tho croation of this machinery#. I f tho powers thus permitted are not sufficient to enable it s prompt croation, tho member banks should point, out the deficiency, and effort should be made to sccuro any necessary amendments. Experienced mon. must be developed in the school of e;q?orle nco as promptly as possiblo. This subject must not bo viewed with a narrow vision. This country and it s bankers must not be considered to be engaged in an unlawful and underhanded competition in under taking at last to conduct the business vjhich belongs to i t . The extension of our commerce is as much a 47 duty to tho rest of tho world under conditions now oristing; as any duty that this country can ever per form. The extension of our banking credits is equal ly a duty, our existing commerce depends upon it , and wo should be about undertaking it. Tho Aldrich-Vreeland Act, after having per formed a sorvicc of value beyond any e ^ c c t a t io n , o:q?ircs in a few days. Under its protection our banking system last year withstood a serious shock, without disaster, largely because our national banks were able to promptly convert assets into currency. On’.y the resources of our own bnnks wore available, and they had to bo husbanded in order to pay foreign debit., while in former emergencies we had boon able to cuy or borrow gold abroad. After having shippod about $ 1 3 0 ,0 0 0 ,0 0 0 gold to Europe in the fir s t h a lf of 1914, we sent about $ 1 2 0 ,0 0 0 ,0 0 0 more after July 1st, and wore able to pledge a total of nearly $ 2 0 0 ,0 0 0 ,0 0 0 for payment of maturing foreign debts. Without the Aldrich-Vreeland Act this would not have 46 "been possible. Some doubt has occasionally bocn caressed as to the ability of tho Fedorrl Reserve Baziks to doal with •. similar situation should jt arise* These doab';0 may be disn’issc*?* The raachin- ory fcr issuing i-.lirj ch-Vraelaiid currcncy took tirco to prei>arc and start jn operation, no banking or cred it organizations vrore aetu&lly in existence for the purpose, and of course, tho associations ho-d no true banking reserves# . ih c reserve banks, however, have the facilities ana will require no further preparation. Their relations with tho member banks are established, credit information regarding their affairs is now being systematically assembled, and the Reserve Banks mill have constantly on hand and ready for prompt issue, an amount far in recess of the $500,000,OCX) of currency authorized by tho A1drich-Vree1.^•id Act* They :*ow hold in their vaults and with tL>- Federal Reserve Agents $300,000j000 of gold and $35*000,000 of law ful money, a practically untouched reserve* In ordinary times, tho value of this insurance for the stability of our 49 crodifc position would bo w ell worth tho cost of its establishment and maintenance. At the present time it s value cannot be estimated. To what extent may not the complaisancy with which our bankers are view ing possible consoquonccs of the war be due to the assurance that at last wo have at hand tho moans to protect our own banks without regard to a ffa ir s in foreign countries, - self-reliant and solf- sufficient? In that assurance lie s tho answer to those members whose allegiance to the system has been in doubt, and tho strongest argument for membersl&ij those who hesitate. to Most of the member banks of this d istrict I believe are giving us their loyal support. Some have withhold i t r as have tho state institutions up to this time. I have made an earnest effort to satisfy myself as to the cause of this a t titude, and now believe that there are but two reasons worth mentioning. As to the member banks, some of them fear losses growing out of the collection sys tem. As to the state institutions, most of them 50 want to see the system demonstrate it s value before becoming members. Both attitudos can be overcome. Neither one is sound i f confidence is felt in the a b ilit y and honesty of the nnnagers of the system. Lack of confidence in the management of the system indicates lack of confidence in your own a b ilit y to give the system good management - which I am sure none of you would admit. I can assure you, gentle men, that the management of the bank is working with an eye single to the strongest and broadest possible development of the system. But we need the activo and zealous support of our member banks to whom wo are responsible and wo neod the membership and sup port of our state institutions to insure the breadth and strength that mean success.
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