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EDITORS: F ollow in g statem ent o f the N inth F ederal R eserve Bank is f o r p u b lic a t io n in AFTERNOON papers o f F rid a y , August i s l a n d MORNING AND EVENING papers t h e r e a fte r w ith ou t fu r th e r n o t ic e o f r e l e a s e ,un iess i t is countermanded. MELVILLE E STONE General Jfe-nager THE ASSOCIATED PRESS. Chairman John H. R ich o f the Federal R eserve Bank o f M inneapolis tod ay issu ed the fo llo w in g statem ent: "The f a c t that the Board o f D ir e c to r s o f the Federal Reserve Bank o f M inneapolis a t i t s reg u la r s e s s io n on August 8 th f a i l e d to red u ce the presen t r e d is c o u n t r a t e o f 6-| p ercen t should not be misunder s t o o d , as has a p p a ren tly been the case in some q im rte rs , by e ith e r the p u b lic or the b u s in e s s , a g r ic u lt u r a l and l i v e s to c k in t e r e s t s o f the d is tr ic t* I t should b e kept c le a r ly in mind that the purpose o f p ro ducing a low er le v e l o f bank r a te s to the borrow er can in no w ise b e serv ed e x ce p tin g in an extrem ely lim it e d way b y a lt e r a t io n s in the r e d isco u n t ra te s a t the Federal R eserve Banks The l a t t e r ra tes are the p r i c e o f c r e d i t to borrow in g member banks. These members are lim it e d in number and re p re s e n t on ly one in fo u r o f the banks in the d i s t r i c t . I t is t h e r e fo r e obviou s that the d isco u n t p o l i c y o f the Federal Reserve Bank c o u ld in no w ise a f f e c t e ith e r d i r e c t l y or in d ir e c t ly the ra te to the borrow er a t any o f the 3000 non-member banks in the d i s t r i c t . I t is u n lik e ly that i t would haVe anything more than a very lim it e d e f f e c t upon r a te s to the borrow er in the rem aining 1000 banks o f the d i s t r i c t w hich a re memberst s in c e n e it h e r the F ederal Reserve A ct or the r e g u la tio n s o f the F ederal R eserve Board g iv e the F ederal R eserve Bank o f M inneapolis any r ig h t or a u th o r ity w hatsoever to d i c t a t e , in t e r fe r e w ith , or c o n t r o l, the r a t e f o r borrowed money a t any member bank. U n ju s t ifia b le emphasis has been p la ced upon the re d isco u n t r a t e . The p u b lic has been in c lin e d to b e lie v e that i t is w ith in the power o f the Federal Reserve Bank to make money cheap or make money dear by sim ply r a is in g or low erin g the ra te* There is no ju s t ifi& a t io n e ith e r in law or in fa c t fo r th is b e l i e f , p r io r to the b eg in n in g o f the war the r e d is c o u n t r a te s o f the Federal R eserve Bank o f M inneapolis were v e r y low . They were s u b s ta n t ia lly low er than the average bank r a te in the N inth D i s t r i c t to borrow ers. The low r e d is c o u n t r a te was n o t r e f l e c t e d in a low er r a t e to the borrow er a t that tim e. That b e in g tr u e , there is no j u s t i f i c a t i o n f o r the argument that a h ig h er r e d is c o u n t r a t e a t t h is time fo r c e s a h ig h er r a te upon the b orrow er. The r a te to the borrow er in every case w i l l be c o n t r o lle d by the b o r r o w e r ’ s c r e d it sta n d in g -n d b y the degree in which p ressu re upon c r e d it e x is t s or does n ot e x i s t . For more than twenty months the p ressu re upon c r e d it in the N inth F ed eral R eserve D i s t r i c t has been v e r y s e v e r e . The loans o f a l l banks have s t e a d ily in cre a se d ,a n d during the p a st year there has been a t the same time a s e r io u s r e d u ctio n in t h e ir d e p o s it s . As a r e s u l t , they have been com pelled to borrow h e a v ily from th e ir corresp on d en ts ,and the F ed eral R eserve Bank, in ord er to tak e ca re o f the requirem ents o f business a g r ic u lt u r e and s to c k r a is in g . These borrow ings have not been accom panied in due time b y the a p p r o p ria te sea son a l liq u id a t io n ,w it h the result that - 2- loan s have remained h ig h , and as a consequence o f the continuous heavy borrow ing o f cu stom ers, banks have "been tinable to reduce t h e ir own o b lig a t io n s f o r money borrowed, to take care o f the excess load* Member banks in the F ederal B eserve System w i l l not o r d in a r ily r e d is c o u n t paper w ith the F ederal Eeserve Bank except to take care o f season al demands or unusual s t r a in such as t h is . They a re a f f e c t e d by the Federal E eserve Bark r e d is c o u n t r a te c n ly when th ey re d isco u n t paper w ith the F ederal E eserve Bank, and they pay the r a te on ly upon such amoiaits as they borrow fo r the accom odation o f th eir custom ers during p e r io d s o f s t r a in . At the p resen t time the excess lo a d in the Ninth D i s t r i c t is re p re s e n te d by borrow ings o f n e a r ly 85 m illio n d o lla r s a t the Federal E eserve Bank and by borrow ings b y member and non-member banks from oth er sou rces o f n o t le s s than 125 m i l l i o n d o l l a r s . This t o t a l o f 205 m illio n d o lla r s o f bank o b lig a t io n s f o r money borrow ed f o r the use and b e n e f it o f t h e ir custom ers in d ic a te s the degree o f excess s t r a in upon the banks o f the Ninth D i s t r i c t . I t r e p re se n ts an amount that they have borrowed and a p p lie d to the requirem ents o f t h e ir custom ers a f t e r having extended to the same custom ers the b e n e f it o f th e ir f u l l normal lo a n in g power# As a r e s u lt o f the demands o f ap p roxim ately 85 m illio n d o lla r s upon the Federal Eeserve Bank from i t s 1000 members, i t has i t s e l f been o b lig e d to borrow and is indebted to oth er F ederal Eeserve Banks f o r more than 10 m i l l i o n d o lla r s fo r money brought in to the Ninth D i s t r i c t f o r the r e l i e f o f A g r ic u ltu r e and l i v e s to c k . I t s r e s e r v e s a r e low and i t has been com p e lle d to r e s o r t to t h is heavy borrow ing in .o r d e r to m aintain them a t the p o in t re q u ir e d by law. While th is heavy burden r e s t s upon a l l the ban ks, in clu d in g the F ederal Eeserve B a n k ,it feould be i l l o g i c a l and absurd to reduce the F ederal Eeserve Bank r e d is c o u n t r a t e , which cou rse-w ou ld n ot be j u s t i f i e d u n t il there has been s u f f i c i e n t liq u id a t io n to take the Federal Reserve Bank out o f the borrow in g c la s s and to remove t h is heavy burden f o r borrow ed money which now r e s t s upon the banks. The in t e r e s t r a t e is on ly a thermometer o f c r e d i t c o n d it io n s . I t s n a tu ra l co u rse is downward when money is easy and upward when c r e d i t is s c a r c e and f u l l y employed. The s h o r te s t way to e a s ie r money r a te s in the Ninth D i s t r i c t is through gen era l liq u id a t io n ,e a s in g the s t r a in upon each l o c a l bank and p e rm ittin g them to come in to p o s s e s s io n o f f r e e funds f o r lo a n in g p u rp oses, This w n be accom plish ed in o n ly two ways, nam ely, by the re d u ctio n o f the o b lig a t ions o f customers f o r borrow ed money,and by a s u b s ta n tia l improvement in custom ers b ala n ces which w i l l remove the handicap under which Ninth D is t r i c t banks have been s u ffe r in g by reason o f the r e d u c tio n in t h e ir depos it s . The a c t io n o f the Federal E eserve Bank o f Chicago in red u cin g i t s r e d is c o u n t r a te was j u s t i f i e d b y the f a c t that i t was b e n e fit e d p r io r th e re to b y an improvement to the ex ten t o f 10 p o in ts in i t s own r e s e r v e . The n o n -a g r ic u lt u r a l p o r tio n o f the cou n try has liq u id a t e d w ith the r e su l that money c o n d itio n s a re d e c id e d ly im proved. The N inth D i s t r i c t has n ot y e t come to the tim e when i t is a b le to market i t s c r o p s ,and the liq u id a t io n which should come is o n ly b eg in n in g a t t h is tim e. The thorough - 5- ness w ith which i t p roceed s and the r e s u lt that i t produces in red u cin g the burden which a l l "banks have c a r r ie d f o r so many months w i l l determ ine the co u rse o f the F ederal E eserve Bank as to i t s fu tu re d iscou n t r a t e s . I t is n ot to be assumed that the F ederal Eeserve Bank o f M inneapolis w i l l not respond prom ptly J.:o t>-© e f f e c t o f any s u b s ta n tia l l i q u i d a t i o n to any adequate improvement in i t s own r e s e r v e s , or to an a p p ro p ria te degree o f r e l i e f from the p ressu re w hich a l l banks f e e l so k e e n ly . The F ed eral E eserve Bank cannot o f i t s e l f produce liq u id a t io n nor have com mercial banks o f the d i s t r i c t th is power. I t is f a i r to say that the d i s t r i c t i t s e l f c o n t r o ls b oth the r e d is c o u n t r a te and the bank r a te s to b o r r o w e r s < s in c e i t is in c o n t r o l o f the p ro ce s s o f liq u id a t io n and can a c c e le r a t e i t or re ta r d i t as i t i s i r e s , PrSmpt and f u l l liq u id a t io n w i l l mean an e a r ly re tu rn to an e a s ie r r a te b a s i s , but no such retu rn is p rob a b le or p o s s ib le -until liq u id a t io n is gen era l and adequate, Therfe is no o c c a s io n fo r pessim ism as to the o u tlo o k , The c o n d itio n s which have brought about the heavy p ressu re upon c r e d i t , la r g e re d u ctio n s in d e p o s it s , and h ig h in t e r e s t r a t e s , a r e s lo w ly im proving,and from the p resen t date on u n t il the la t e f a l l , should improve a t a more r a p id r a t e . I t is to be hoped th at the Ninth D i s t r i c t is a t the turning p o in t , and that i t can break the continuous s t r a in on c r e d it which began in the f a l l o f 1919, and that b y reason o f the improved s it u a t io n o f a l l o f i t s ban ks, i t can hope f o r f r e e r c r e d it and b e t t e r ra te s a t a rea son a b ly e a r ly date* L iq u id a tio n is ,h o w e v e r, a c o n d it io n p reced en t to the accomplishment o f t h is hope.
@FedFRASER